Commerce EM PDF

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in
GOVERNMENT OF TAMILNADU
COMMERCE
HIGHER SECONDARY FIRST YEAR
Untouchability is Inhuman and a Crime

A publication under Free Textbook Programme of Government of Tamil Nadu
Department of School Education

www.tntextbooks.in
Government of Tamil Nadu
First Edition - 2018
NOT FOR SALE
Content Creation
The wise
possess all
State Council of Educational

Research and Training
© SCERT 2018
Printing & Publishing
Tamil NaduTextbook and Educational

Services Corporation
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CONTENTS
COMMERCE
UNIT I FUNDAMENTALS OF BUSINESS

Chapter 1 Historical Background of Commerce in The Sub-Continent 01
1.01 Introduction
1.02 Barter System
1.03 Hindrances of Commerce
1.04 Elimination of Hindrances of Business
Chapter 2 Objectives of Business 10
2.01 Introduction
2.02 Types of Economic Activities
2.03 Characteristics of Business
2.04 Objectives of Business
Chapter 3 Classification of Business Activities 17
3.01 Industry
3.02 Commerce as an Economic Activity
3.03 Trade
UNIT II FORMS OF BUSINESS ORGANISATION
Chapter 4 Sole Proprietorship 23
4.01 Introduction
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4.03 Characteristics
4.04 Advantages and Disadvantages
Chapter 5 Hindu Undivided Family and Partnership 30
5.01 Introduction to HUF
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Chapter 6 Joint Stock Company 47
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6.02 Types of Companies
6.03 Memorandum of Association
6.04 Articles of Association
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Chapter 7 Cooperative Organisation 60

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7.03 Features of Cooperatives
7.05 Types of Cooperatives
Chapter 8 Multi National Corporations (Mncs) 70
8.03 Examples of MNCs
Chapter 9 Government Organisation 76
9.01 Meaning and Features of Departmental Undertaking
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9.05 Meaning and Features of Government Company
UNIT III SERVICE BUSINESS - I
Chapter 10 Reserve Bank of India 86
10.01 Need for the Study on Service Business
10.02 Banking Service
10.03 The Historical Development of Banks in India
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10.06 Origin of RBI
10.07 Organisational Structure of RBI
10.08 Functions of RBI
Chapter 11 Types of Banks 97
11.01 Introduction
11.02 Types of banks
Chapter 12 Functions of Commercial banks 106
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12.02 Secondary Functions
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12.04 Electronic Banking Functions
12.05 Functions of All Commercial Banks in Totality
Chapter 13 Warehousing 118
13.01 Meaning of Warehouse and Warehousing
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13.03 Types of Warehouses
13.04 Functions of Warehouses
13.05 Advantages and Drawbacks of Warehousing
13.06 Warehousing Documents
13.07 Warehousing in India
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Chapter 14 Transportation 127

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14.02 Types of Transport
14.03 Recent Trends in Transportation
14.04 Documents Used in Transportation
14.05 Common Carrier
Chapter 15 Insurance 139
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15.03 Types of Insurance
15.04 Insurance Regulatory Development Authority of India (IRDAI)
UNIT IV SERVICE BUSINESS - II
Chapter 16 Emerging Service Business in India 152
16.01 Franchising
16.02 Factoring
16.03 Logistics
16.04 Outsourcing
16.05 E-Commerce
UNIT V SERVICE BUSINESS - II
Chapter 17 Social Responsibility of Business and Business Ethics 169
17.01 Concept of Social Responsibility
17.02 Need for Social Responsibility
17.03 Arguments For and Against Social Responsibility
17.04 Kinds of Social Responsibility
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Chapter 18 Business Ethics and Corporate Governance 179
18.01 Concept of Business Ethics
18.02 Key Elements of Business Ethics
18.03 Code of Business Ethics
18.04 Corporate Governance
18.05 International Benchmarking
UNIT VI BUSINESS FINANCE
Chapter 19 Sources of Business Finance 188
19.01 Meaning and Nature of Business Finance
19.02 Sources of Business Finance
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19.04 Savings - Importance of Savings
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Chapter 20 International Finance 202
20.01 Introduction
20.02 Foreign Direct Investment and Institutional Investors
20.03 International Capital Market
20.04 Global Depositary Receipt (GDR)
20.05 American Depository Receipts (ADR)
20.06 Foreign Currency Convertible Bonds (FCCB)
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Chapter 21 Micro, Small and Medium Enterprises

(MSME) and Self Help Groups (SHGs) 209
21.01 Micro, Small and Medium Enterprises
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21.03 Contribution of MSMEs to Indian Economy
21.04 MSME Sector in Tamilnadu
21.05 Self Help Groups
UNIT VII TRADE
Chapter 22 Types of Trade 217
22.01 Trade-Meaning
22.02 Features of Internal Trade
22.03 Foreign Trade
Chapter 23 Channels of Distribution 222
23.01 Meaning
23.02 Types of Channel of Distribution
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23.04 Middlemen
23.05 Kinds of Mercantile Agents or Agent Middlemen
23.06 Wholesaler
23.07 The Characteristics of Wholesalers
23.08 Retail Trade - Meaning
23.09 Characteristics of Retailers
23.10 Distinction between Wholesaler and Retailer
Chapter 24 Retailing 239
24.01 Introduction
24.02 Types of Retailers
24.03 Role of Chamber of Commerce and Industry Associations
UNIT VIII INTERNATIONAL BUSINESS
Chapter 25 International Business 250
25.01 Nature of International Business
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25.03 Method of Conducting International Business
25.04 Features of International Business
25.05 Rationale Behind International Business
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Business
25.07 Types of International Business
25.08 Advantages and Disadvantages of International Business
Chapter 26 Export and Import Procedures 261
26.01 Export Trade
26.02 Import Trade
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Chapter 27 Facilitators of International Business 282

27.01 World Trade Organisation (WTO)
27.02 World Bank
27.03 International Monetary Fund (IMF)
27.04 South Asian Association for Regional Cooperation (SAARC)
Chapter 28 Balance of Trade and Balance of Payments 292
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28.02 Balance of Trade (BOT)
UNIT IX THE INDIAN CONTRACT ACT
Chapter 29 Elements of Contract 297
29.02 Essentials of a Valid Contract
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Chapter 30 Performance of Contract 304
30.01 Introduction
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Chapter 31 Discharge and Breach of a Contract 310
31.01 Discharge of Contract
31.02 Remedies for Breach of Contract
UNIT X DIRECT AND INDIRECT TAXES
Chapter 32 Direct Taxes 315
32.01 Meaning of Tax
32.02 Income Tax
Chapter 33 Indirect Taxation 322
33.01 Meaning of Indirect Tax
33.02 Goods and Services Tax (GST)
33.03 GST Council
E-Book Assessment Digi -Link
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Dear Students!
There is a wonderful treasure on your hands now in the form a text book, which is going to make you a really resourceful
and an able person in future. You have to believe it first so that you can develop a multi-dimensional personality in your
own self with a thorough knowledge in Commerce.
This is for you to know, how you could make use of the book for the best understanding of various useful and valuable
knowledge sources hidden within the text. These tips would certainly make a difference in you while learning the units,
lessons and relevant concepts thereof.
Actually the book is divided into 10 Units, 33 Chapters where in there are several sections are written in a student
friendly way. An attempt is made here to explain how to use them for a better learning experience.
The units are broad heading of the book which contains several
Chapters in each of them so that you can understand the section
specific knowledge in various parts of Commerce Education.
This is the usual way of learning. There are three Chapters, for
UNITS example, in Unit I, which gives you the basic and introductory
aspects of Commerce Education. Similarly the remaining
Units give you the specialized knowledge on the different Unit
headings so required at the level of Eleventh Standard. Omission
any unit may lead to loss of knowledge continuity.
All the 33 Chapters in the book are a real treasure for one who
wants to learn the theory and practice of Commerce today. So
you have to look into these chapters as useful, informative and
CHAPTERS capacity building capsules in any individual student who wants
to learn the elements and fundamentals of Commerce. Omission
HOW TO USE of any Chapter would lead to loss of knowledge in real terms and
other related benefits.
THE BOOK
These headings are given for you to remember the major
divisions of a chapter with conceptual clarity and information
sequence in an orderly manner so as to arrange your learning
SUB-HEADINGS method made easy. So you have to learn the subject content of a
chapter, mainly based on the ‘sub-headings’ of a chapter. This is
the simple way of learning.
This section of the Chapters in general would give you various

tips on the present or past events or bits of useful information
in the field of Commerce so relevant to the subject matter
discussed in a specific Chapter, of course in almost all Chapters.
This section is an attempt to explain you how some people or

organisations have been able to grow from nothing to top today
and those who set an example by their way of becoming the
SUCCESS STORY role models. You can understand the way of growing and also
you can follow such role models for achieving your own future
ambition.
This section is given to test your ‘applied knowledge’ on the

subject matter of a Chapter or Chapters wherein you have to
think and analyze about the case and give your best ability to
understand the situation and explanation thereof / relevant
answers so as to depict yourself as a student with practical
Case study
knowledge or applied knowledge on the chosen case study.
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This is an exercise given to you to do either class work or home

work on the chosen theme or subject matter in each Chapter
or chapters. Commerce Education is required to have practical
PROJECT WORK exposure to various forms of business organizations around the
world. Project work will ensure your ability to bring about a
solution to present crisis in an organization or give plans for future
development of the same.
There is an useful section in all chapters for ‘ your own thinking

‘ either with some meaning of concepts or practical situation for
your understanding. Repeated thinking of these aspects would
ensure your ability to understand developments in Commerce and
FOR OWN THINKING capacity to do your own business in future.
This section is attempted to make the students to learn about

necessary concepts or section of Commercial knowledge by doing
home work or by doing further study through browsing or learning
FOR FUTURE LEARNING from reference books.
Students are expected to be thorough about certain concepts which

are chapter specific and related to the knowledge dealt in that
KEY TERMS chapter. This would enable the students to be clear about various
concepts which is essential for clarity of thought and able learning
about the subject matter.
As you are aware of, this section is essential to evaluate your ability
to answer specific questions, may be long answer or short answer
or fill in the blanks or choosing the correct one from among the
multiple-choice of answers. Scoring high marks is an indicator
of your knowledge level for higher studies and hence you need
QUESTIONS to prepare for these questions well in advance to the schedule of
examination time-table. You can try to find answers before your
teachers direct you to answer them. Prevention is better than cure.
This is an interesting section of many a chapter in the book

wherein you can have the learning experience through the online
support, using an Android phone with applied QR Code app.
You can listen to short lectures or demonstrations by experts or
experienced teachers. Of course this is mostly home work or leisure
time exercises, unless or otherwise the class teachers wanted to
display them in class-rooms during working hours.
This is a section ear-marked for your food for thought wherein

you can try to understand the major concepts used in the book.
This will help you understand the overall subject matter from the
GLOSSARY collection of terms placed in an order for cross examination of your
memory and recalling the meaning of various concepts studied in
the book.
We wish you a meaningful and successful learning and at the same time we want to remind you that HARD WORK
ALONE LEADS TO COMPLETE SUCCESS.
Team of Authors.
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SCOPE OF “COMMERCE” EDUCATION

“Commerce” as a field of knowledge is all pervasive in nature. It offers
enormous opportunities for higher education and employment both in India
and abroad. The scope after higher secondary programme in Commerce is
given below:
EDUCATIONAL OPPORTUNITIES
Any of the following Degree Any of the following Any of the following Any of the following Any of the Research
Programmes can be pursued professional courses/ programmes in India or professional courses/ Programme after a
by the students both on programmes. abroad after a Formal Degree programmes after Formal Post Graduation
Regular mode and Distance Programme. Anywhere a Formal Degree in Commerce/
Education mode. in colleges. Universities Programme
or Indian Institute of
Management (IIM)
• B.Com., Bachelor of • C.A., Chartered • M.Com., • Chartered • M.Phil., (Commerce)
Commerce (General) Accountant as Master of Commerce. Accountancy Master of Philosophy
• B.Com., (Hons.) an Integrated • M.Com., • Cost and • Ph.D., (Commerce)
Programme. (Accounting and Finance) Management Doctor of Philosophy
• B.Com., (Accounting &
Finance) • CMA(ICWA) • M.Com., (International Accounting (ICWA) • D.Litt., (Commerce)
• B.Com., (Corporate • ACS Business and Banking) • Associate Company Doctor of Letters
Secretaryship) • B.L., Bachelor of Law • M.Com., (Computer Secretary • UGC – National
• B.Com., (Computer – Five year Integrated Applications) • Bachelor of Loss Eligibility Test (NET)
Application) Programme. • M.Com., (Co operative (LLB) • SET – State Eligibility
• B.Com., (International • B.Com., (LLB) Management) • Union Public Sercice Test
Business) Bachelor of Law – • M.B.A., Master of Business Commission (UPSC) • B.Ed., (Bachelor of
Five year Integrated Administration • Indian Administrative Education) and followed
• B.Com., (Bank Management) Programme in India
• M.B.A., (Finance) Service (IAS) by
• B.B.A., (Bachelor of Business or Abroad
Administration) • M.B.A., (Marketing) • Indian Police Service • M.Ed., (Master of
• CIMA (Chartered (IPS) Education) Programmes
• B.B.M., (Bachelor of Bank Institute of • M.B.A., (Human Resource
Management) Management Management) • Indian Foreign • Any PG Diploma
Accountants (UK)) Service (IFS) programme offered by a
• B.A., (Co-operation) • M.B.A., (Advertisement and standard Institute
• ACCA (Association Salesmanship) • Indian Revenue
• M.Com., (Master of Service (IRS)
Commerce – Five year of Chartered Certified • M.B.A., (Hospital
Integrated programmed) Accountants (UK)) Management) • Indian Audit and
• CPA (Certified Public Account Service
• Any Diploma Programme • MHRM (Master of Human (IA&AS) etc.
offered by a Standard Institute Accountant (USA)) Resource Management)
• MLM (Master Labour
Management)
EMPLOYMENT OPPORTUNITIES
a) For self employment there are a number of Enterpreneurial Development and Training Programmes sponsored by District Industries
Centres (DIC) throughout Tamil Nadu. Any Higher Secondary student can approach DIC in their own District Headquarters to train
up themselves to start their own Agri-business, small trade, Self Help Group, Departmental stores or any General Mercantile Shop.
b) After gaining a Formal Degree Programme, the commerce graduate can gain access to Bank Finance or Institutional lending for
business start-up
c) After Higher Secondary Course, the students can appear for Group IV and after formal degree programme, they can appear for
Group I and Group II for Govt Postings through TNPSC/UPSC, including services in police to postal departments, besides bank
employees in public sector.
d) Commerce graduates can become Income Tax practitioners and GST consultants with due qualifications.
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SCOPE ABROAD
The commerce students have a wide range of scope abroad as listed below.
1. The Bachelor Degree holders in commerce can join MBA in any university in developed countries like England. The USA, Australia
and so on.
2. The commerce graduates with ‘Tally’ Accounting package can get employed in any part of world as Accountants in business
enterprises.
3. The Master Degree holders in commerce can join Ph.D. Programmes in any foreign University with fellowships abroad.
4. B.Ed/M.Ed/M.Phil/Ph.D holders in commerce can gain teaching jobs abroad both in schools and colleges (This is not only for younger
but also those who are retired from service in India)
5. Commerce graduates are permitted by foreign governments to start-up export business ventures in their respective Nations, If their
projects are valid.
6. Commerce graduates can become foreign exchange dealers through proper and authorised certification by the respective National
Governments in various countries.
7. Commerce graduates can become bank employees abroad after a formal selection by them. Based on required qualification.
8. Commerce graduates have great scope for Management consultancy/Export and Import consultancy/ Clearing and Forwarding
agencies/Economic Advisories/ Project consultancies/planning divisions/ share market speculators/security brokers/portfolio advisors/
Insurance advisors/ Advertisement agencies/ Secretariats of Business Tycoons/ Board personnel /Financial Advisors/Associates of Tax
consultancies/Treasury Management/Scrap Dealers/ Bullion Trader/ Advisors to various purchase committees.
SCOPE OF AREA OF
RESEARCH
• Marketing
• Management
• Finance
• Human Resource Management
• Entrepreneurship
• Retailing
• Supply Chain Mangement
• Logistic Mangement
• Financial Services
• Financial Markets
• Services Industries
• International Business
• Organisational Behaviour
• Digital Marketing
• Taxation
Institute of Chartered
Accountants Of India
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CHAPTER
HISTORICAL BACKGROUND OF
1 COMMERCE IN THE SUB-CONTINENT
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Couplet:
The true merchandise of merchants is to guard and do by the things
of others as they do by their own.
Learning Objectives
in need or countries in demand and over
To enable the students to a period of time barter economy took the
i. gain knowledge about the historical dimension of monetary economy where
background of commerce in the sub money was used as a medium of exchange
continent of goods and services.
ii. learn the hindrances to commerce
and trade The growth of civilization witnessed the
iii. know about the features of barter rise and fall of many dynasties, but still the
system course of commerce activities continued
further and further, not only within a
country, but also between nations of the
world. However Tamil Nadu remained to
1.01 Introduction be the founder of trade and commerce both
within and outside as evidenced in various
Commerce has been in practice since time ancient literatures like Sangam.
immemorial. It is part and parcel of human
life, whether it is a king or a common man. The whole of commerce activity emerged
It emerged as an economic activity, mainly from barter system into a multi dimensional
as barter system which means exchange of and multifaceted scientific system
goods for goods. It was so comfortable for consisting of courses like Monetary system,
neighbouring villages, states, even countries Mail-order business, Hire purchase system,
to practice barter in the absence of a medium Instalment purchase system and so on. In a
of exchange in the form of money today. technology driven society today again the
However, the concept of money occupied course of commerce activities is heading
its predominance when scarce resources for a cashless system through e-commerce,
were to be either exchanged between parties which means business activities enabled
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through electronic modes like Online

trading, Mobile banking and e-marketing.
In this context, it is all the more important

for any student to learn the historical
background of the growth and development
of commerce in the country in general and
in Tamil Nadu in particular. An attempt
is made in this chapter to explain such a
history so as to ascertain the magnitude of
commerce today. The important trade routes of the silk
and spices, blocked by the Ottoman
The earliest trading population of India Empire in 1453 with the fall of
was Indus valley people, who used the word Constantinople and the Byzantine
‘trade’. The word vaniyam or vanipam Empire, led to the search for a sea route
would have had a Dravidian origin. The across the Atlantic skirting Africa.
early Tamils produced their products and
goods in their lands and bartered their
surplus and that is how trade came into
existence. The word ‘Vanigam’ has been for a certain period. There was dependence
widely used in sangam literature like and interdependence among the people
Purananuru and Thirukkural. The Tamil in matters of trade and commerce. Barter
– Brahmi inscriptions from Alagarmalai, system cemented their relationship
Pugalur, Mangulam and Sri Lanka illustrate internally while coins were used later for the
the fact that trade in gold, oil, plough, cloth purpose of exchange of goods in external
etc.was conducted during the early age. trade.
Trade in Sangam period was both internal Trade and Traders in The Pandiya
and external but it was conducted by means Dynasty
of barter (pandamattru) Trade was one of the Trade and commerce was so common to
major means of linking various regions in Pandiya Dynasty. Information collected
the medieval period. Sangam work refers to from the diaries of foreign travellers,
great traders, their caravans, security force, voyagers, mariners and adventurers of the
markets, marts and guilds of such great ancient world highlighted the prosperity of
traders. The important articles which the trade in the Pandiya country. The Hebrew
then hilly tribes offered to their neighbours and Latin literature, archaeological remains
in exchange were honey and roots and fruits in Aden, Alexandria, Java, Sumatra and
while pastoral people offered cattle, milk even China add support to the fact of
and milk products. Cattle served as money existence of trade network in the Pandiya
for sometimes during the same period. country. Trade in copper, cloth, salt, flower,
Most of the inland trade was done in salt as sandal wood, fish, paddy, cereals, pearls,
a medium of exchange under barter mode. etc flourished during their period. The
Paddy too served as a medium of exchange place where the goods were sold was called
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‘Angadi’ in their period. Day market was pearls, and conches and produced salts and
called as Nalangadi while the night market built ships. Boats like ‘Padagu’, ‘Thimil’,
was called as Allangadi according to Saint ‘Thoni’, ‘Ambu’ ‘Odampunai’ etc… were
Poet Ilango in Silapathigaram, Madurai– used to cross rivers for domestic trade while
Kanchi. He described Madurai as iruperu Kalam, Marakalam, Vangam, Navai etc..
neyamath meaning sleepless city due to were used for crossing oceans for foreign
round the clock business activities. trade.
Coastal Trade in Ancient Role of the Government during

Tamil Nadu Ancient Tamil Nadu
Big cities like Poompuhar had the Foreigners who transacted business were
‘Maruvurappakam’ (inland town) and known as Yavanars. Arabs who traded with
‘Pattinapakkam’ (coastal Town), had market Tamil were called ‘Jonagar’. Pattinappalai
and bazaars where many merchants met one praised Kaveripumpattinam as a city where
another for the purpose of selling or buying various foreigners of high civilization
different kinds of commodities and food speaking different languages assembled to
stuff. Port towns like Tondi, Korkai, Puhar transact business with the support of the
and Muziri were always seen as busy with then Kingdom.
marts and markets with activities related
to imports and exports. In such a brisk The role of the State in trade related to two
trade, people of the coastal region, engaged aspects namely adequate infrastructure
themselves in coastal trade and developed to sustain the trade and administrative
their intercontinental trade contacts. They machinery for taxation. During the Sangam
were engaged in different kinds of fishing period, the main trade routes were passing
through thick forests over western ghats.
Important Ancient Trade Centres In The State protected the merchant caravans
Tamilnadu on these trade routes from robbers and wild
i. Alagankulam (Ramanathapuram)
ALAMBARAI
ii. Mylarphan (Mylapore, near Chennai),
iii. Keberis (Kaveripumpattinam),
iv. Poduke or Poduce (Arikamedu,
Puducherry),
v. Soptana (Marakanam),
vi. Nikam (Nagapattinam),
vii. Periyapattinam, Location: Situated 20 kms south east of
Maduranthakam in Kanchipuram District.
viii. Kayalpattinam,
ix. Colchi (Korkai) Significance: It was once a flourishing
place of commerce. A mint also existed.
x. Comari (Kanyakumari)
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life. Main roads known as Peruvali were the chief controllers of State Trading. The
built for surface transportation. Besides profit margin allowed for traders ranged
state expanded infrastructure for shipping between 5 per cent for indigenous goods
such as ports, lighthouse, warehouse etc.. to and 10 per cent for imported goods.
promote overseas trade. Many such ports Import of foreign goods was encouraged
were developed during the Sangam period. to enhance the standard of living of people.
Kaveripumpattinam was the chief port of Kautilya gave importance for the State in
the Kingdom of Cholas while Nagapattinam, relation to treasury, taxation, industry,
Marakannam, Arikamedu etc. were other commerce, agriculture and conservation
small ports on east coast. Similarly Pandiyas of natural resources. Arthasathra focused
developed Korkai, Saliyur, Kayal, Marungaur on creation of wealth as the means to
pattinam and Kumari for foreign trade.
The State Govertments installed check posts
to collect customs along the highways and
the ports.
Contribution of ‘Kautilya’ to Trade

‘’Kautilya’s Arthasastra” describes
economy in Mauriyan time. This brought
out history of marketing practised some
2000 years ago. According to Kautilya,
trade in Medieval India was centralized.
Since the commodities produced could
not be sold in the location of production,
the state designated certain places for ALAGANKULAM
selling the commodities. It levied duties Location: A village situated on the east
on goods brought into the city and could coast of Bay of Bengal – Ramanathapuram
be sold after payment of duty. Only district. Attankarai – confluence of river
certain merchants were authorized to Vaigai situated near Sri Lanka
engage in trade to sell at prices fixed by
Significance: Findings - large number of
potsherds of mediterranean origin
Important Ancient Trade Centres In
The Coastal Regions Of Tamil Nadu
Roman coins of Valentine II, Arcadius &
1. Alambarai Theodosius II Pot sherds with Roman ship
2. Alagankulam graffiti. Sherds with two lady figurines
identified with Egyptian origin. Tamil
3. Pumpuhar
brahmi sherds with Ceylon brahmi scripts
4. Marakkanam are found in an ancient Roman port. The
5. Vasavasamudram department carried out excavations in
eight seasons and the collected artefacts
6. Mylapore
revealed Indo-Roman trade contact.
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promote the well being of the state. He dense forest and helped traders and their
advocated maintenance of perfect balance commercial caravans to move from one
between State management and people’s market place to others. Alauddin Khilji
welfare through trading activities. brought the price to a very low ebb. He
encouraged import of foreign goods from
Commerce and Trade in North
Persia and subsidised the goods. Arabs
India
were dominant players in India’s foreign
India was prosperous even during the trade. They never discouraged Indian
medieval period from 12th to 16th centuries traders like Tamils, Gujaratis, etc.. The
despite political upheavals. Balban was Trade between the coastal ports were in
the first sultan who paved the way in the the hands and Marwaris and Gujiratis.
The overland trade with central and west
Asia was in the hands of Multanis who
were Hindus and Khurasanis who were
Afghans, Iranians and so on. During
Sultanate period, trade flourished due to
the establishment of currency system based
on silver and copper. Moorish traveller
described the teeming market of big cities
in the Gangetic plains, Malwar, Gujarat
and South India. The important trade
centres were Delhi, Mumbai, Ahmedabad,
POOMPUHAR Sonar, Sonargoon, Jaunpur, Lahore and
so on. The burgeoning foreign trade led
The southern Coromandel Coast mostly
to the development of market place in
within the territory of Tamilnadu state is
the towns and villages. India’s handicraft
thick with history.This history is not only
commanded a good foreign market. India
of the European colonization but goes
imported horses, dry fruits, precious
back to the ancient times when many
stones, glassware, high grade textiles, raw
places along the coast were centres of
silk, corals, scented oil, velvets, etc.. from
international trade. One such place which
Kabul, Arabia, Europe, West Asia and
is said to have flourished from 200 BC
China. Indian products were exported to
onwards is Poompuhar. The seaside town
East Africa, Malaya, China and Far East.
which was once the second capital of the
Trade was conducted through overland
Chola Dynasty and a major centre of
roots with Afghanistan, Central Asia and
international trade with both eastern and
Persia India conducted foreign trade via
western people. Silk appears to be a major
land route with Quetta, Khyber pass, Iraq
item of exports from here. The ancient
and Bukhara. The traders of Malabar,
port as destroyed and is now found by the
Gujarat and foreign settlers in the ports
archaeologists submerged off the coast for
of Calicut, Khumbat and Mangalore
up to 5 km. Erosion of land or a Tsunami
controlled a major business sector in port
was cited as possible causes.
cities.
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Trade with Rome, China and handicrafts, to Great Britain. Between early
Europe 1600 and mid – 19th century, the British
Roman and Greek traders frequented the East India company led establishment and
ancient Tamil country and forged trade expansion of foreign trade all over Asia.
relationship with ancient Kings of Pandiya, Although initial interest of the East India
Chola and Chera dynasties. Cholas had a Company was aimed at reaping profits, their
strong trading relationship with Chinese single minded focus was on establishing a
Song Dynasty. The cholas conquered the Sri trade, monopoly throughout Asia Pacific
Vijaya Empire of Indonesia and Malaysia to made them heralding agent of British
secure a sea trading route to China. Colonial Imperialism.
1.02 Barter System

During the 16th and 18th centuries, India’s
overseas trade expanded due to trading Goods were exchanged for goods prior to
with European companies. The discovery invention of money. Barter system worked
of new all - sea routes from Europe to India on certain conditions mentioned below.
via Cape of Good Hope by Vascoda Gama
1. Each party to barter must have surplus
had far – reaching impact on the civilized
stocks for the trade to take place.
world. The arrival of Portuguese in
2. Both the buyers and sellers should
India was followed by the advent of other
require the goods each other desperately
European communities. India’s maritime
i.e., double coincidence of wants
trade was a monopolized one over
3. Buyer and seller should meet personally
Europeans and at one stage the global trade
to effect the exchange.
share of India was 55 per cent which is just
2 per cent in 21st century. The European
merchants who came to India were not only Constraints in Barter System
individual merchants but also represented The barter system envisages mutual
their respective governments. They gained exchange of one’s goods to other without
a strong foothold in India’s maritime trade the intervention of money as a medium of
by virtue of their strong naval power. In exchange. It imposes certain constraints in
course of time their commercial motives the smooth flow of trade as explained below.
turned into territorial ambition like the 1. Lack of double coincidence of Wants
East India Company which became the
British Empire here. Unless two persons who have surplus have
the demand for the goods possessed by
Textiles and ship building earned name each other, barter could not materialize. For
and fame in the 17th and 18th centuries. instance ‘A’ is having a surplus of groundnut
Britishers gradually abolished Princely and ‘B’ is possessing rice in surplus. In this
order in the Indian territories. Thus the case A should be in need of rice possessed
demand for Indian goods declined during by B as the latter should desperately
the British rule. Britishers put in place need groundnut possessed by A. If this
policies prohibiting the export of some of “coincidence of wants” does not exist, Barter
the popular goods like Indian textile goods, cannot take place.
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2. Non – existence of common measure variety of services to ensure that the passage
of value of goods and services between the two, is
Barter system could not determine the value completed without any let or hindrance.
of commodities to be exchanged as they Accordingly, commerce may be defined as
lacked commonly acceptable measures to “the organized system for the exchange of
evaluate each and every commodity. It was goods and services between members of
difficult to compare the values of all articles industrial world.” It comprises all forms
in the absence of an acceptable medium of of trade, wholesale, retail, import, export
exchange. and entrepreneurial services which aid and
assist the trading activities such as banking,
3. Lack of direct contact between
transport, warehousing, insurance, and
producer and consumers
advertising.
It was not possible for buyers and sellers
to meet face to face in many contexts
1.04 Elimination of Hindrances of
for exchanging the commodities for
Business
commodities. This hindered the process of
barter in all practical sense. Business consists of all industries and
commerce. It serves to remove several
4. Lack of surplus stock
hindrances and solve many problems while
Absence of surplus stock was one of the facilitating the production and distribution
impediments in barter system. If the buyers of goods. The various hindrances removed
and sellers do not have surplus then no by business are as follows
barter was possible.
1. Hindrance of person
Invention of Money
Manufacturers do not know the place and
All the aforesaid constraints were addressed
face of the consumers. It is the retailer who
by the invention of money as medium
knows the taste, preference and location of
of exchange. Besides there are other
the consumers. The chain of middlemen
hindrances in the smooth exchange of
consisting of wholesalers, agents and retailers
goods from the place of production to the
establish the link between the producers and
place of consumption like place, time, risk,
consumers.
knowledge, finance and so on. These are
addressed by various mechanisms in detail 2. Hindrance of place
in the subsequent sections of this chapter.
Production takes place in one centre and
1.03 Hindrances of Commerce consumers are spread throughout the country
Production of goods and services for the and world. Rail, air, sea and land transports
satisfaction of human wants is the main bring the products to the place of consumer.
objective of an industry. Reaching those
goods and services to the people for where 3. Hindrance of time
these are produced is the object of commerce. Consumers want products whenever they
Commerce serves as a valuable link between have money, time and willingness to buy.
the producer and the consumer. It renders a Goods are produced in anticipation of such
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demands. They are stored in warehouses in which can satisfy the specific wants of
different regional centres so that they can be consumers and thus improve the standard
distributed at the right time to the consumers. of living of the people.
4. Hindrance of risk of deterioration in 10. Hindrance of both selection and

quality delivery at doorsteps
Proper packaging and modern air E-Commerce enables the consumer to select
conditioned storage houses ensure that there the product in the website, place online
is no deterioration in quality of products. orders and make payment after receiving
Goods are protected against insects, rats, the product at the door step.
evaporation etc.
5. Hindrance of risk of loss

Key Terms
Fire, theft, floods and accidents may
bring huge loss to the business. Insurance Vanigam Nalangadi
companies serve to cover the risk of such Allangadi Hindrances
losses. Barter system
6. Hindrance of knowledge
Advertising and communication help in
announcing the arrival of new products and Exercise
their uses to the people.
7. Hindrance of exchange I. Choose the Correct Answer

Money functions as a medium of exchange 1. The place where the goods are sold is
and enable the buying and selling of any _____
product or service by payment of the right
a) Angadi
price.
b) Market
8. Hindrance of finance c) Nalangadi
Producers and traders may not have the d) Allangadi
required funds at the time of their need.
2. Hindrance of place is removed by ______
Banks and other financial institutions
provide funds and help in transfer of funds a) Transport b) Warehouse
to enable the functioning of business c) Salesman d) Insurance
smoothly. 3. Who wrote “Arthasasthra” ?
9. Hindrance of developing the exact a) Kautilya
product b) Chanakiya
Research and development helps in c) Thiruvalluvar
developing the exact product or service d) Elangovadigal
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4. Trade and Commerce was common to III. Short Answer Questions

_______ Dynasty.
1. Explain the meaning of the term
a) pallava
“Vanigam”.
b) Chola
2. State the meaning of Maruvurapakkam
c) Panidya
and Pattinapakkam.
d) Chera
3. What is the role of Sangam in trade
5. _______ was first sultan who paved way development of ancient Tamilnadu?
in the dense forest and helped traders to
move from one market place to others 4. What are the ports developed by Pandiya
place for their commercial caravans. kingdom?
a) Balban 5. What was focused in Arthasasthra about
b) Vascoda Gama creation of wealth?
c) Akbar
IV. Long Answer Questions
d) Alauddin Khilij
1. What are the hindrances of business?
Answers 2. State the constraints in barter system.
1. a 2. a 3. a 4. c 5. a 3. Explain the development of Commerce
and Trade in North India.
II. Very Short Answer Questions 4. Briefly explain the coastal trade in
1. What is meant by Barter system? ancient Tamilnadu.
2. What is meant by Nallangadi? 5. What do you know about the overseas
3. What is meant by Allangadi? trading partners of ancient Tamilnadu?
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CHAPTER
OBJECTIVES OF BUSINESS
2
Learning Objectives
To enable the students to
i. know the meaning of human activities
and its kinds
ii. learn the Economic Vs Non-Economic
Activities
iii. know the types of Economic Activities
Employment, Profession and Business
iv. understand the concept of business
v. explain the characteristics of business
activities
vi. analyse the objectives of business
vii. elucidate the comparison of business,
profession and employment
2.01 Introduction Examples:
i. Production of goods by manufacturers

Human Activities ii. Distribution of goods by wholesalers
Human activity is an activity performed by iii. Selling by retailers
a human being to meet his/her needs and iv. Medical advice rendered by physicians
v. Accounting practice by chartered
wants or may be for personal satisfaction.
accountants
Human activities can be categorised into
economic and non-economic activities. II.Non-Economic Activities
The chart below gives a snapshot of human
Activities undertaken to satisfy social
activities. and psychological needs are called non-
I. Economic Activities economic activities.
Activities undertaken with the object Examples:

of earning money are called economic i. Cooking food for family
activities. ii. Celebrating festivals
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Economic Activity Vs. Non-Economic Activity
Economic Activities Non-Economic Activities
1. Definition: Economic activities are those Non-economic activities are those activities which
activities which are undertaken to earn are undertaken for the sake of pleasure, performed
money or financial gain for livelihood. out of love, sympathy, sentiments etc.
e.g., Fruit seller selling fruits e.g., Mother cooks for her family
2. Motive: Sole motive is to earn money or Undertaken for satisfaction of social,
financial gain. psychological or emotional needs.
e.g., Working as a lawyer. e.g., Visit to a temple
3. Money Measurement: All economic Non-economic activities cannot be valued in
activities can be valued in monetary terms. monetary terms. These are an expression of a
e.g., Doctor charges ₹500 as consultation fee. thought, feeling or a gesture.
e.g., An NGO distributes free clothes to poor
children
4. Relationship: Economic activities are Non-economic activities do not create wealth.
related to creation of wealth. e.g., Money received as donation is spent on
e.g., Ram saved part of his salary to purchase charity work.
a house of his own.
5. Outcome: All economic activities result in The end result of a non-economic activity
production, procurement, distribution and is the mental, emotional or psychological
consumption of goods and services. satisfaction of the person doing the activity.
e.g., Nokia produces cell phones and sells e.g., Sona enjoys teaching orphans in an
across India through its distributors. orphanage.
6. Duration: Economic activities are Non-economic activities may not be
repetitive. They are done on a regular basis undertaken regularly. Usually they are done
to earn a living. during free time.
e.g., Kulfi ice cream seller sells ice creams e.g., Sankar visits orphanage in his free time.
every evening.
7. Source of Initiation: Economic activities Non-economic activities are initiated to
are initiated to satisfy human needs and wants. satisfy emotional or sentimental pleasures.
iii. Watching movies in a theatre said to be engaged in their occupation.

iv. Doing meditation Occupations may be classified into three
categories based on the following:
2.02 Types of Economic Activities
Economic activities are undertaken to earn A. Employment
money. Generally, people engage themselves B. Profession
in such activities on a regular basis and are C. Business
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A. Employment C. Business
It refers to the occupation in which people Business refers to any human activity
work for others and get remuneration in the undertaken on a regular basis with the object to
form of wages or salaries. The one who is earn profit through production, distribution,
employed by others are called employees purchase and sale of goods and services.
and the one who employs others is called
employer.
Business may be defined as “an activity
Managers, Clerks, Bank officials, Factory involving regular production or purchase
workers etc., are examples of employees. of goods and services for sale, transfer and
exchange with an object of earning profit”.
Characteristics
There is a contract existing between the According to James Stephenson business

employer and the employee. Employee refers to “Economic activities performed
performs according to assigned task. for earning profits.”
Remuneration is given to employees for According to H.Haney, “Business may
delivering value of services. An employee be defined as a human activity directed
must abide by the rules and regulations of towards producing or acquiring wealth
the organization. through buying and selling of goods”.
B. Profession
Professions are those occupations which Business activities are connected with
involve rendering of personal services of a raising, producing or processing of goods.
special and expert nature. A profession is Industry creates form utility to goods by
something which is more than a job. It is a bringing materials into the form which is
career for someone who is competent in their useful for intermediate consumption (i.e.,
respective areas. It includes professional further use of material in order industry) or
activities which are subject to guidelines or final consumption by consumers.
codes of conduct laid down by professional &ODVVL¿FDWLRQ
bodies. Those engaged in a profession are
Business activities are classified on the basis
called professionals and they earn income
of size, ownership and function.
by charging professional fee.
1. Activities on the Basis of Size
Characteristics
On the basis of size, business activities may
There should be a systematic body of be broadly grouped into two categories.
knowledge. There should be formal
acquisition of knowledge by the members. a. Small Scale
There should be a code of conduct governing Small scale units require less capital. They
the conduct and behaviour of professionals. employ small number of workers and
Service motive should be uppermost in the produce the goods on small scale. Example:
minds of people rendering professional Manufacturing textiles in handlooms or
service. power looms.
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(i) Extraction of edible oil from seeds like (iii)Government Company - State
groundnut, sesame, through treditional Trading Corporation (STC)
wooden churner.
c. Joint Enterprises
b. Large Scale An enterprise is said to be a joint enterprise
Large scale units require huge capital. where it is owned, managed and controlled
They employ large number of workers and by Government and private entrepreneurs.
produce the goods on large scale. Example - Maruti Suzuki
Examples 3. Activities on the Basis of Function
(i) Manufacturing Textiles in a large On the basis of functions, business activities

Textile mill. Example. Raymonds, may be broadly grouped into two categories.
Ramraj Cotton a. Industry
(ii) Extraction of edible oil from oil
Industry includes all those business activities
seeds in oil mills. Example. Suffola,
which are connected with raising, producing
Sunflower
or processing of consumer goods. Example -
2. Activities on the Basis of Ownership bread, butter, cheese, shoes, or capital goods
On the basis of ownership business activities like machinery.
may be broadly grouped into three categories. b. Commerce
a. Private Enterprises It establishes a link between the producers

and consumers of goods and maintains a
An enterprise is said to be a private enterprise
smooth and uninterrupted flow of goods
where it is owned, managed and controlled
from producers to consumers.
by persons other than Government.
2.03 Characteristics of Business
(i) Sole proprietorship. Example - Sundar
Stationeries The essential characteristics of business are
as follows:
(ii) Partnership firms. Example - Ramesh
i. Production or Procurement of Goods
Bros.
Goods must be produced or procured in
b. Public Enterprises
order to satisfy human wants.
An enterprise is said to be a public enterprise
ii. Sale, Transfer or Exchange
where it is owned, managed and controlled
There must be sale or exchange of goods or
by Government or any of its agencies or
services. When a person weaves cloth for
both. Public enterprises may be organized
his personal consumption, it is not business
in several forms such as,
because there is no transfer or sale.
(i)Departmental undertaking - Public
iii. Dealing in Goods and Services
Works Department (PWD)
Goods produced or procured may be
(ii)Public Corporation - Oil and Natural consumer goods like cloth, pen, brush,
Gas Corporation (ONGC) bag etc., or producer-goods like plant
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Comparision of Business, Profession and Employment

Business Profession Employment
1. Mode of Establishment: Membership of a Service contract or letter of
Promoter’s decision registration professional body or appointment
and other formalities as certificate of practice
prescribed by law
2. Nature of Work: Goods and Personalized service of Performing work assigned
services provided to the public expert nature by the employer
3. Qualifications: No minimum Education and training in Minimum qualification is
qualification is essential specialized field essential
4. Basic Motive: Earning profits Rendering service Earning wages or salary by
by satisfying needs of society serving the employer
5. Capital: Capital investment Limited capital necessary No capital required
required as per size of the firm for establishment
6. Reward: Profits Professional fee Salary or wages
7. Risk: Profits are uncertain Fee is regular and certain, Fixed and regular pay, no
and irregular never negative risk
8. Transfer of Interest: Transfer Not possible Not transferable
possible with some formalities
9. Code of Ethics: No specific Professional code of ethics Rules and regulations of the
code of conduct, moral and employing organization
ethical dealings only
and machinery. Services refer to activities in fact, the attraction of profit which spurs
like supply of electricity, gas or water, people to do business.
transportation, banking, insurance etc. vi. Element of Risk
iv. Regularity of Dealings The profit that is expected in a business is
An isolated dealing in buying and always uncertain because it depends upon
selling does not constitute business. The a number of factors beyond the control
transactions must be regular. For example, of the businessman. For example, change
if a person buys a scooter for his use and in consumer preference, shortage of raw
later on disposes it of at a profit, he cannot materials, transport bottlenecks, power-
be said to have been engaged in business. crisis etc., may upset business calculations
The buying and selling must be recurrent to and result in loss. That is why profit is said to
constitute business. be reward for risk-taking. Thus any business
activity includes an element of risk too.
Y3UR¿W0RWLYH
An important feature of business is profit 2.04 Objectives of Business
motive. Business is an economic activity by Every business enterprise has certain
which human beings make their living. It is, objectives which regulate and generate
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its activities. Objectives are needed in satisfaction of employees and development

every area where performance and results of human resources.
directly affect survival and prosperity of a
E. National Objectives
business. Various objectives of business may
Being an important part of the country, every
be classified into five broad categories as
business must have the objective of fulfilling
follows;
national goals and aspirations. The goal of
A. Economic Objectives the country may be to provide employment
Economic objectives of business refer to opportunity to its citizen, earn revenue
the objective of earning profit and also for its exchequer, become self-sufficient in
other objectives that are necessary to be production of goods and services, promote
pursued to achieve the profit objective, social justice, etc. Business activities should
which includes creation of customers, be conducted keeping these goals of the
regular innovations and best possible use country in mind, which may be called
of available resources. national objectives of business.
B. Social Objectives
Social objectives are those objectives of Key Terms
business, which are desired to be achieved Human Activities
for the benefit of the society. Since business Economic Activities
operates in a society by utilizing its scarce Non-Economic
resources, the society expects something Activities
in return for its welfare. No activity of the Business
business should be aimed at giving any kind Profession
of trouble to the society. Employment
C. Organizational Objectives
The organizational objectives denote For Own Thinking
those objectives an organization intends
to accomplish during the course of its Do you know that there are white
existence in the economy like expansion collar, blue collar, pink collar jobs?
and modernization, supply of quality goods Collect the information and discuss.
to consumers, customers’ satisfaction, etc.
D. Human Objectives
Human objectives refer to the objectives Exercise
aimed at the well-being as well as fulfillment
of expectations of employees as also of I. Choose the Correct Answer
people who are disabled, handicapped 1. The Primary objective of a business is

and deprived of proper education and a. Making Profit
training. The human objectives of business b. Not Making Profit
may thus include economic well-being of c. Special skill
the employees, social and psychological d. None of the above
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2. Occupation of a Doctor is III. Short Answer Questions

a) Employment 1. What do you mean by human activities?
b) Business Explain.
c) Profession
2. Write short notes on:
d) Sole Proprietor
3. The following does not characterize a) Business b) Profession
business activity? 3. Explain the concept of ‘Business’.
a) Production of goods and services 4. Briefly state the human objectives of a
b) Presence of Risk business.
c) Sale or exchange of goods and services
d) Salary or wages
1. Explain the characteristics of Business
4. Activities undertaken out of love and
2. Compare business with profession and
affection or with social service motive
employment
are termed as:
3. Discuss any five objectives of business
a) Economic activities
b) Monetary activities 4. Distinguish between economic and non
c) Non Economic Activities economic activity.
d) Financial Activities
Reference
Answers 1. Gupta C.B, Business Organization and
Management, Sultan Chand & Sons,
1. a 2. c 3. d 4. c
Education Publishers, New Delhi.
II. Very Short Answer Questions
2. Balaji C.D, and Prasad G., Principles
of Commerce, Margham Publications,
1. Define Economic Activities. Chennai.
2. What do you mean by Business? 3. Sundar. K 2017, Business Organisation,
3. Define Profession. First Edition, Vijay Nicole Imprints Pvt
4. What do you mean by Employment? Ltd., Chennai.
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CHAPTER
CLASSIFICATION OF
3 BUSINESS ACTIVITIES
ܶ‫ܱܥ‬ᾞ῀‫ܛ‬ᾞ‫ܪܱܛܲܭ‬Ά‫ܱܤܶܠܲܧܤܸܲܭ‬ᾌ‫ܗ‬ᾸᾐΆ
ܑᾞ῀‫ܕܨܳܢ‬ᾶ‫ܲܡ‬ᾲܶ‫᾿ܧܝ‬. -Fws;; 675
Couplet:
Do an act after a due consideration of the (following) five, viz. money, means, time,
execution and place.
3.01 Industry
Learning Objectives
Industry refers to economic activities, which
are connected with conversion of resources
i. describe the classification of business
into useful goods. The production side of
activities
business activity is referred as industry.
ii. understand the meaning of Industry:
Generally the term industry is used for
iii. classify the industries into primary,
activities in which mechanical appliances
secondary and tertiary industries
and technical skills are involved. These
iv. compare industry, commerce and
include activities relating to producing or
trade
processing of goods as well as breeding and
v. explain the auxiliary activities in
rising of animals.
commerce
The term industry is also used to mean group
of firms producing similar or related goods.
Introduction
For example, cotton textile industry refers to all
The manufacturers produces the goods manufacturing units producing textile goods
for the consumers at one point of location. from cotton. Similarly, electronic industry
They distribute the goods to final consumer would include all firms producing electronic
through intermediaries like wholesaler, goods, and so on. Further, in common
retailers, distributors and the like. All parlance, certain services like banking and
these process taking place from the point insurance are also referred to as industry, say
of production to the point of consumption banking industry, insurance industry etc.
are collectively called as business activities.
All business activities can be classified into Kinds of Industries
two broad categories i.e., Industry and Industries may be classified into two broad
Commerce. categories,
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INDUSTRY
ON THE ON THE
BASIS OF BASIS OF
ACTIVITY SIZE
Primary Secondary Tertiary
1.Micro
2.Small
i) Extraction i) Manufacturing ii) Construction 3.Medium
Industry 4.Large
ii)Genetic
Industry a. Analytical
b. Synthetical
c. Processing
A) On the Basis of Activities and

B) On the Basis of Size
A) On the Basis of Activities
Industries may be divided into three wide
categories namely 1. primary industries,
2. secondary industries and 3.tertiary
industries.
supply some basic raw materials that are
1. Primary Industries
mostly products of geographical or natural
Primary industry is concerned with environment. Products of these industries
production of goods with the help of are usually transformed into many other
nature. It is a nature-oriented industry, useful goods by manufacturing industries.
which requires very little human effort, Important extractive industries include
For example Agriculture, farming, forestry, farming, mining, oil drilling, hunting and
fishing, horticulture, etc. These industries fishing operations.
may be further sub divided as follows:
(ii) Genetic Industries
(i) Extractive Industries
These industries remain engaged in
These industries extract or draw out products breeding plants and animals for their
from natural sources. Extractive industries use in further reproduction. The seeds,
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c. Processing Industry which involves

successive stages for manufacturing
finished products, as in the case of sugar
and paper.
d. Assembling Industry which assembles
different component parts to make a
new product, as in the case of television,
car, computer, etc.
nursery companies, poultry, diary, piggery,
hatcheries, nursery, fisheries, apiary etc are (ii) Construction Industries
classic examples of genetic industries. These industries are involved in the
2. Secondary Industries construction of building, dams, bridges,
roads, as well as tunnels and canals.
These are concerned with using the materials
which have already been extracted at the 3. Tertiary industries or Service
primary stage. These industries process industries
such materials to produce goods for final
They do not produce goods. These
consumption or for further processing by
industries produce utility services and sell
other industrial units. For example mining
them at a profit. They help trade, industry
of an iron ore is a primary industry, but
and commerce. This term also includes
manufacturing of steel by way of further
auxiliaries to trade like banking, insurance,
processing of raw irons is a secondary
warehouse, advertisement etc.
industry. Secondary industries may be
further divided as follows: &ODVVL¿FDWLRQRI7HUWLDU\LQGXVWULHV
(i) Manufacturing Industries i. Personalised service: Individuals and

private institutions selling their services
These industries are engaged in producing
to others. E.g. plumber, servant maid,
goods through processing of raw materials
etc.
and thus creating form utilities. They bring
ii. Public Service: Government hospitals,
out diverse finished products, which we
schools, police, Government offices,
consume or use, through the conversion of
etc. provide services to the people on
raw materials or partly finished materials
behalf of the Government without profit
in their manufacturing operations.
motive.
Manufacturing industries may be further
iii. Distributive Service: Transportation,
divided into four categories on the basis of
warehousing, logistics, salesmanship,
method of operation for production.
etc. come under this type of service.
a. Analytical Industry which analyses and iv. Financial Service: Banking, factoring,
separates different elements from the same accounting, and insurance, etc. are
materials, as in the case of oil refinery. grouped under this type of service.
b. Synthetic Industry which combines v. Quaternary Service: Professional or
various ingredients into a new product, specialised skills and high technology
as in the case of cement. are used to provide this type of service.
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E.g. Software development, Auditing, or users. Therefore, one who buys and
Research and Development, etc. sells is a trader. A trader is a middleman
vi. Quinary Service: New ideas are between the producer and the consumer.
generated, new technologies are evolved, Trade may be classified into internal
new policies are implemented by selected trade and external trade, wholesale trade
individual experts. Their decisions or retail trade.
influence nations, international
institutions, etc. i.e., Inventors. ii. Transportation
Selling all the goods produced at or near
B) On the basis of Size the production place is not possible.
On the basis of size or scale of operations Hence, goods are to be sent to different
industries may be classified as follows places where they are demanded. The
medium which moves men and materials
1. Micro Industries from one place to another is called
2. Small Industries transport.
3. Medium Industries and iii. Banking
4. Large Industries
Now-a days we cannot think of business
3.02 Commerce as an Economic
without bank. To start the business or to
Activity run it smoothly we require money. Banks
supply money. Business activities cannot
Commerce refers to all those activities
be undertaken unless funds are available
which are necessary for bringing goods
for acquiring assets, purchasing raw
from the place of production to the place
materials and meeting other expenses.
of their consumption. According to Evelyn
Necessary funds can be obtained from
Thomas, “Commercial operations deal with
bank. Thus, banking helps business
the buying and selling of goods, the exchange
activities to overcome the problem of
of commodities and the contribution of
finance.
finished products”. Commerce includes not
only trade but also services such as transport, iv. Insurance
warehousing, packaging, insurance, banking Business involves various types of risks.
and sales promotion which are incidental Factory building, machinery, furniture
or auxiliaries to trade. Refer to chapter 2. etc, must be protected against fire, theft
Commerce includes the following activities and other risks. Materials and goods
as briefly explained below held in stock or in transit are subject to
the risk of loss or damage. Employees
3.03 Trade are also required to be protected against
the risks of accident and occupational
i) Trade
hazards. Insurance provides protection in
Trade is an essential part of commerce. all such cases. On payment of a nominal
The term ‘trade’ is used to denote buying premium, the amount of loss or damage
and selling. It helps in making the goods and compensation for injury if any, can be
produced available to ultimate consumers recovered from the insurance company.
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Comparison between Industry, Commerce and Trade

INDUSTRY COMMERCE TRADE
1.Meaning: Extraction, reproduction, Activities involving Purchase and sale of goods
conversion, processing and distribution of goods and services
construction of useful products and services
2. Scope: Consists of all activities Comprises trade Comprises exchange of
involving conversion of materials and auxiliaries to trade goods and services
semi-finished products into finished
goods.
3. Capital: Generally large amount of Need for capital is Small capital is needed
capital is required comparatively less to maintain stock and to
grant credit
4. Risk: Risk involved is usually high Relatively less risk is Relatively less risk is
involved involved
5. Side: It represents supply side of It represents demand It represents both supply
goods and services side of goods and and demand
services
6. Utility creation: It creates form It creates place utility It creates possession utility
utility by changing the form or shape by moving goods from through exchange
of materials producers to consumers
v. Warehousing
Usually, goods are not sold or consumed
immediately after production. They are
held in stock to make them available as and Exercise
when required. Special arrangement must
be made for storage of goods to prevent loss I. Choose the Correct Answer
or damage. Warehousing helps business
1. The industries engaged in extraction of
firms to overcome the problem of storage
iron ore are known as
and facilities the availability of goods when
a. Construction Industries
needed. Prices are thereby maintained
b. Manufacturing Industries
at a reasonable level through continuous
c. Extraction Industries
supply of goods.
d. Genetic Industries
Key Terms 2. Auxiliaries to trade is also called as

a. Trade
Industry
b. Advertisement
Commerce
c. Warehousing
Trade
d. Aids to Trade
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3. Production which involves several stages II. Very Short Answer Questions:
for manufacturing finished products is 1. Define commerce.
known as 2. What do mean by industry?
a. Analytical Industry 3. What is trade?
b. Synthetic Industry 4. Write a short note on transportation.
c. Processing Industry
III. Short Answer Questions:
d. None of the above
1. Distinguish between Extractive
4. Normally high level risk involved in industries and genetic industries.
a. Industry 2. What do you mean by tertiary industries?
b. Commerce 3. Write any three characteristics of commerce.
c. Trade 4. Narrate commerce with an example.
d. All of the above
IV. Long Answer Questions:
5. Commerce is mainly concerned with
1. Explain the various kinds of industries
a. Connecting producer and consumer on the basis of size.
b. Pricing of Goods 2. Compare industry, commerce and trade.
c. Buying and Selling of goods 3. What are the characteristics of commerce?
d. Manufacturing of goods
4. Write short notes on:
a. Analytical industry
Answers b. Genetic Industry and
c. Construction Industry
1. c 2. d 3. c 4. a 5. a
5. Briefly explain the auxiliaries to trade.
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UNIT II FORMS OF BUSINESS

ORGANISATION
CHAPTER
SOLE PROPRIETORSHIP
4
‫ܕ‬ᾶ‫ܲܡ‬ᾷᾐ‫ܛܛܲܡ‬ᾞ‫ܦ‬Ᾰᾐ‫ܲܡ‬Ᾰ‫ܲܥܢ‬Ᾱ
‫ܕ‬ᾶᾎ‫ܦܶܭ‬Ᾱ‫ܲܢܥ‬ᾨᾰᾁ Fws;
Couplet:
Consider, and then undertake a matter; after having undertaken it, to say “We will
consider,” is folly.
Learning Objectives
According to Wheeler, “a business under-
To enable the students to understand
taking is a concern, company or enterprise
i. the Forms of Business Organisation
which buys and sells, is owned by one person
ii. the meaning of a Sole Trader,
or a group of persons and is managed under
Characteristics, Advantages and
a specific set of operating policies”.
Disadvantages
All business undertakings are directly
or indirectly engaged in the transfer or
4.01 Introduction exchange of goods and services for value.
They deal in goods and services on a regular
A business organisation is an organisation
basis. Their main motive is to earn profits
which is engaged in some industrial or
and they are exposed to various types of
commercial activity. It represents an
risks.
institutional arrangement for carrying on
any kind of business activity. It may be Sole Trading Business
owned and controlled by a single individual
or by a group of individuals who have Sole Proprietorship is a form of business
entered into a formal or informal agreement organisation in which an individual
to jointly conduct the business. introduces his own capital, uses his own
skill and intelligence in the management
Every business undertaking is a separate of its affairs and is solely responsible for
and distinct business unit. It has its own the results of its operations. The individual
identity and separate ownership. It can be alone may run the business or may obtain the
distinguished from other undertakings on assistance of employees. It is the first stage
the basis of its ownership, management and in the evolution of the forms of organisation
control. and is, thus, the oldest among them.
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Forms of Business
Organisation
Non-Corporate Corporate
Enterprises Enterprises
Sole Trading
Government Private Cooperative
Concern
Partnership
Firms Public Joint stock
Undertakings Companies
Joint Hindu
Family Business Public
Utilities
It is also known as individual

“Sole proprietorship is that form
entrepreneurship. To raise the required
of business organisation which is
capital the individual may depend mostly
owned and controlled by a single
on his own savings, or else, he may borrow
individual. He receives all the
part or whole from his friends or relatives or
profits and risks all of his property
financial institutions. The business may be
in the success or failure of the
started either in a portion of the proprietor’s
enterprise”.
own house or in a rented premises. There
are no legal formalities to be gone through - Wheeler
except those required for a particular type of
business. For example, if one wants to start 4.03 Characteristics
a restaurant has to obtain a license from
the Health Department of the Municipal The following are the characteristics of a
Corporation. Sole Trader.
i. Ownership by one man
'H¿QLWLRQRI6ROH7UDGHU This is owned by single person. The sole

trader contributes the required capital. He is
“Sole trader is a type of business unit not only the owner of the business but also
where a person is solely responsible manager of the entire affairs.
for providing the capital, for bearing
ii. Freedom of work and Quick Decisions
the risk of the enterprise and for the
management of business” Since the individual is himself as a owner,
he need not consult anybody else. Hence he
- J.L.Hansen
can take quick decisions.
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iii. Unlimited Liability

Success story of Murugappa Group
When his business assets are not sufficient
The Murugappa Group is
to pay off the business debts he has to pay
an Indian business
from his personal property.
conglomerate, founded,
LY(QMR\LQJ(QWLUH3UR¿W managed, and largely
He strives tirelessly for the improvement owned by the Murugappa
family. The group has 28
and expansion of his business and enjoys all
business concerns including eleven listed
the benefits of his hard work.
companies traded on the National Stock
v. Absence of Government Regulation Exchange of India and the Bombay Stock
A sole proprietor concern is free from Exchange. Headquartered in Chennai, the
Government regulations. No legal major companies of the group include
formalities are to be observed in its Carborundum Universal Ltd,
Cholamandalam Investment and Finance
formation, management or in its closure.
Company Ltd., Cholamandalam MS
vi. No Separate Entity General Insurance Company Ltd.,
The sole trading concern comes to an Coromandel International Ltd.,
Coromandel Engineering Company Ltd.,
end with death, disability, insanity and
EID Parry (India) Ltd., ParryAgro
insolvency of the individual.
Industries Ltd., Tube Investments of India
vii. Maintenance of Secrecy Limited, and Wendt (India) Ltd., and
Shanthi Gears Limited (Coimbatore).
Since he/she manages all the affairs of the
business, the secrecy can be maintained They have presence in several
easily. segments including abrasives, auto
4.04 Advantages and components, bicycles, sugar, farm inputs,
Disadvantages fertilizers, plantations, bioproducts
and nutraceuticals, the group has
Advantages
forged strong alliances with leading
The following are the advantages of a Sole international companies like Groupe
trader. Chimique Tunisien, Foskor, Cargill,
Mitsui Sumitomo, Morgan Crucible
i. Easy Formation and Sociedad Quimica y Minera de
No legal formalities are required to initiate a Chile (SQM). The Group has a wide
sole trading concern. Any person capable of geographical presence spanning 13 states
entering into a contract can start it, provided in India and five continents around across
he has the necessary resources for it. the globe.
ii. Incentive to Work hard
Brands like BSA, Hercules, Ballmaster,
There is a direct relationship between effort Ajax, Parry’s, Chola, Gromor and Paramfos
and reward. The fact that the entire profit are from the stables of Murugappa. The
can be taken by himself without sharing organisation has a workforce of over
with anybody else induces him to work 32,000 employees.
ceaselessly.
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iv. Credit Standing

Success story of TVS Group
Since his private properties are held liable
for satisfying business debts, he can get
more financial assistance from others.
TVS Motor Company is the third largest v. Personal Contact with the Customers
two-wheeler manufacturer in India, with Since sole proprietor knows each and every
a revenue of over 13,000 Cr ($2 billion)
customer individually he can supply goods
in 2016-17. It is the flagship company of
according to their taste and preferences.
the ₹40,000 Cr ($6 billion, in 2014-15)
Thus he can cultivate personal relationship
TVS Group. The company has an annual
with the customers.
sales of 3 million units and an annual
capacity of over 4 million vehicles. TVS vi. Flexibility
Motor Company is also the 2nd largest
The sole trader can easily adjust himself to
exporter in India with exports to over
the changing requirements of his business.
60 Countries. TVS Motor Company Ltd
(TVS Motor), member of the TVS Group,
Disadvantages
is the largest company of the group in
terms of size and turnover, with more The following are the disadvantages of a
than 3 Cr (30 million) customers riding Sole Trader.
a TVS bike.TVS was established by Mr i. Limited Capital
TV Sundaram. He began with Delhi first
Since the capital is contributed by one
bus service in 1911 and founded T.V.
individual only, business operations have
Sundaram and Sons Limited, a company
in the transportation business with a necessarily to be on a limited scale.
large fleet of trucks and buses under the ii. Limited Managerial Skill
name of Southern Roadways Limited. Single person’s intelligence and experience
When he died in 1955, his sons took the may not help him beyond a certain stage.
company ahead with several forays in
Since he has to focus on each and every
the automobile sector, including finance,
activity, his managerial ability is bound to
insurance, two-wheelers/ three wheelers,
be limited.
tyres and components, housing, aviation,
logistics etc. The group has managed iii. Unlimited Liability
to run 97 companies that account for
The creditors have the right to recover their
a combined turnover of nearly US$6
dues even from the personal property of the
billion.
proprietor in case the business assets are not
sufficient to pay their debts.
iii. Small Capital iv. Lack of Specialisation
Small capital is an important as well as Since the business unit is small and the
specific advantage of sole proprietorship. financial resources are limited, experts
Sole proprietor can start business with small in different fields cannot be employed to
capital. secure maximum advantages.
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v. Hasty Decisions
Sole proprietor is more likely to take hasty For Future Learning

decision as he need not consult anybody
else. a. Mahesh is a young graduate who has
inherited a sum of ₹1,00,000 by way
Key Terms of family savings. He also has a family
Business Organisation house to which he has sole title as the
Sole Proprietorship only son of his father. He is thinking
Unlimited Liability of starting a small factory for the
Managerial Skill manufacture of plastic toys. What form
Legal Entity of ownership organisation will you
Credit Standing advise him to choose?
b. Amar started a business on his own.
He has his father helping him with the
For Own Thinking
accounts and his brother helps him
with looking after customers in the
i. How to start a snacks evening. Amar pays a monthly salary
manufacturing unit at home? to his father and brother. Identify the
ii. Dried Fish – Trading Explain. form of business organisation.
iii. Individual – Independent software
companies run by New graduates
Case Study
Rajendran has done his B.Com., Exercise

this year. He wants to do some good
business now. Kesavan, his father, is I. Choose the Correct Answer
a Sole-proprietor of a small Banian- 1. Which is the oldest form of Business
manufacturing plant in Salem and ask organisation?
Rajendran to join business with him a. Sole Proprietorship
as a partner. However, Rajendran likes b. Partnership
to go in for an independent venture. A c. Co-operative Society
discussion follows between them on this d. Company
issue. Meanwhile Mr.Arul, an advocate
and friend of Rajendran’s father, comes 2. In which form the owner, establisher and
there and gives comments on both of manager is only one?
them. Assume the role of Rajendran, a. Joint Enterprise
Kesavan and Arul and state and defend b. Government Company
your positions. c. Co-operative Society
d. Sole Proprietor
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3. A major disadvantage of sole proprietor- III. Short Answer Questions

ship is ______ 1. How is it possible to maintain secrecy in
a. Limited liability
sole proprietorship?
b. Unlimited liability
2. What is unlimited liability?
c. Easy Formation
3. Write any three characteristics of Sole
d. Quick decision
Proprietorship.
4. From the following which one is Non- 4. Give some examples of Sole trading
corporate form of business? business.
a. Joint stock company 5. Define Sole trading business.
b. Sole trading business
c. Government company IV. Long Answer Questions
d. Co-operatives
1. Explain the characteristics of Sole trading
business.
Answers
2. What are the advantages of Sole trading
1. a 2. d 3. b 4. b business?
3. What are the disadvantages of Sole
II. Very Short Answer Questions trading business?
1. Who is called a Sole Trader?
Reference
2. What are the Non-corporate enterprises?
3. What are the Corporate enterprises? 1. Kathiresan & Radha - “Business
Organisation”, Tenth Edition, Prasanna
4. For which of the following types
Publishers, Chennai.
of business do you think a sole
proprietorship form of organisation 2. Subhanjali Chopra - Business
would be more suitable, and why? Organisation and Management
a. Grocery store b. Medical store
c. Craft centre d. Legal consultancy
e. Internet cafe
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ICT CORNER
CREATE YOUR OWN MIND MAP
Create your
own Mind Map
STEPS:
• Open the Browser and type the URL given (or) Scan the QR Code.
• EDRAW Mind Master Download page will open. Click on Download and Install
the software.
• After Installing in your Computer open it and select one of the “templates” given
and click “Create”. You will get the required Mind Map page.
• It will show “Main Idea” box. Enter the main topic. When you move the cursor
over this box “+” sign will appear. If you Click on “+” sign next branch will open.
Similarly, you can create branches wherever you want. Now type the relevant
titles on the boxes. Now your Mind Map is ready. Simple example is shown. If
you click on “–“ you can Hide the Branch and “+ “ will appear. If you click “+”
the branch will appear again and “ – “ will appear.
• You can change colour, Background and the text style. You can save and edit later
as HTML format with show hide features. you can save this as pictures to use in
any document.
• Explore more and make it beautiful.
Step1 Step2 Step3
URL:
https://www.edrawsoft.com/download-mindmaster.php
Alternative: Android Play store app-
*Images are indicative only
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ORGANISATION
CHAPTER
5 HINDU UNDIVIDED FAMILY

AND PARTNERSHIP
ܑ‫ܭܑ᾿ܱܤܢܑܤܸܢ‬ᾹᾙᾊᾰᾁΆ‫ܕ‬Ᾱ‫ܱܩ‬ᾼᾸᾐ
܏‫ܭ܏ܤܸܢ‬Ᾱ‫ܛ‬ᾶ‫ ᾿ܠܲܭ‬ - Fws; 517
Couplet:
‘This man, this work shall thus work out,’ let thoughtful king command;
Then leave the matter wholly in his servant’s hand.
5.01 Introduction to HUF

Learning Objectives The Joint Hindu Family Business is a
To enable the students to distinct form of organisation peculiar to
i. understand the meaning of Joint India. Joint Hindu Family Firm is created
Hindu Family business, characteristics by the operation of law. It does not have any
ii. know the meaning of Partnership, separate and distinct legal entity from that
characteristics, advantages and of its members. The business of Joint Hindu
disadvantages Family is controlled under the Hindu Law.
iii. learn partnership deed and its The membership in this form of business
contents organisation can be acquired only by birth
iv. describe the rights and duties of or by marriage to a male person who is
partners already a member of Joint Hindu Family.
v. know the types of partnership, types Meaning of HUF
of partners “When two or more families agree to live
vi. understand the procedures for and work together, invest their resources
registration, drawbacks of non- and labour jointly and share profits or
registration, dissolution of losses together, then this family is known as
Partnership composite family or HUF”
Example: C.Roy & Co (a chartered
Hindu Undivided Family
accountant firm)
There are two schools of Hindu Law-one is

Dayabhaga which is prevalent in Bengal and
Assam and the other is Mitakshara prevalent
in the rest of the-country. According to
Mitakshara law, there is a son’s right by birth
in the property of joint family. It means,
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when a son is born in the family, he acquires existence of the business of Joint Hindu
an interest in the property jointly held by the Family. The family goes on doing its
family. Today Hindu succession Act 2005 is business.
applicable to all male and female members
vi. Implied Authority of Karta
of a HUF.
In a joint family firm, only Karta has the
Characteristics implied authority to enter into a contract
The main characteristics of Joint Hindu for debts and pledge the property of the firm
Family Business are given below: for the ordinary purpose of the businesses
of the firm.
i. Governed by Hindu Law
vii. Minor also a co-parcener
The business of the Joint Hindu Family is
controlled and managed under the Hindu In a Joint Hindu Family firm even a new
law. born baby can be a co-parcener.
ii. Management viii. Dissolution
All the affairs of a Joint Hindu Family are The Joint Hindu Family business can be
controlled and managed by one person dissolved only at the will of all the members
who is known as ‘Karta’ or ‘Manager’. The of the family. Any single member has no
Karta is the senior most male member of the right to get the business dissolved.
family. The members of the family have full
faith and confidence in Karta. Only Karta
is entitled to deal with outsiders. But other
members can deal with outsiders only with
the permission of Karta.
iii. Membership by Birth
0HDQLQJDQG'H¿QLWLRQRI
The membership of the family can be Partnership
acquired only by birth. As soon as a child
Introduction
is born in the family, that child becomes a
member. Membership requires no consent Partnership form of organisation is an
or agreement. extension of the sole proprietorship. It has
already been explained that a sole proprietary
iv. Liability form of organisation suffers from several
Except the Karta, the liability of all other drawbacks such as limited capital, limited
members is limited to their shares in managerial ability, concentrated risk and
the business. The amount of debt can be less chances for expansion and growth etc.
recovered from his personal property also. With the result, the sole trader is compelled
to seek the co-operation of others so that he
v. Permanent Existence
can meet the changing situations effectively.
The death, lunacy or insolvency of any Generally when a sole trader finds it
member of the family does not affect the difficult to handle the problems of growth
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and expansion, he takes a partner. Thus it

represents the next stage in the evolution of
business organisation.
The persons who enter into partnership are

individually called ‘Partners’ and collectively
known as ‘Firm’. According to Section 4
of the partnership Act, 1932. “Partnership
is the relation between persons who have
agreed to share the profits of a business
carried on by all or any of them acting for
all”.
'H¿QLWLRQRI3DUWQHUVKLS
According to Prof.Haney, “The

relations which exist between persons, two. Maximum is restricted to 10 in the case
competent to make contracts, who of banking business and to 20 in all other
agree to carry on a lawful business in cases.
common with a view to private gain”.
iii. Existence of business
According to Spriegal, “Partnership The partnership agreement must be to carry
has two or more members each of on lawful business or a profession. If there is
whom is responsible for the obligatory no business there can be no partnership. In
requirements of the partnership. Each other words, partnership is not a club or a
of the partners may bind the others charitable association.
and the assets of the partners may be
taken for debts of partnership”. LY6KDULQJSUR¿WV
The business must be carried on with a

view to earn profit and share it among all
Characteristics
the partners. An agreement to undertake
The main characteristics of partnership are
philanthropic activities does not constitute
given below:
partnership because profit motive is
i. Contractual Relationship completely absent.
Partnership is the result of an agreement,
v. Mutual Agency
which may be oral or written. Consequently
persons not competent to contract (for In fact, mutual agency is the essence of
example, minors) cannot form it. partnership. Since the business is to be
carried on by all or any of them acting for
ii. Plurality of persons
all, each partner acts simultaneously as a
Since partnership is the outcome of an principal and an agent. To the outsiders, he
agreement, the minimum number of is a principal while to the other partners he
persons required to form a partnership is is an agent.
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Advantages v. Reduced Risk
The main advantages of Partnership are The risk of each partner is reduced
given below: considerably since the loss sustained by the
firm is shared by all the partners.
i. Easy formation
vi. Unlimited liability and credit standing
The formation of partnership firm requires
fulfillment of lesser legal formalities than other The liability of a sole trader is unlimited.
types of organisation. What required is just Since, apart from his business assets, even
an agreement, which can be oral or written. his private properties are also available for
Registration of partnership is optional. Further, satisfying the claims of creditors. Hence,
even if a firm wants to get itself registered, the creditors may give more loans because they
registration process is very simple. can get back the loan from the personal
properties of sole traders. Thus high credit
ii. Availability of larger resources rating helps sole trader to borrow more
funds from suppliers and banks.
The combined capital of all the partners
and the greater borrowing capacity make vii. Safeguard of the Minority Interest
available larger financial resources. New
partners can also be taken into partnership For all the vital matters unanimous
to secure more capital. As a result, expansion consent of each partner is required. If
of the business unit becomes feasible. there is no unanimity, such decisions are
not accepted.
LLL%HQH¿WRIFRQVXOWDWLRQ
viii. Easy Dissolution
Two heads are better than one. Wise decision
The dissolution of the partnership is also
can be possible when the issues and subject
very simple. In the case of partnership at
matters are thoroughly discussed. There is
will, a 14 days notice by a partner in this
no place for hasty decisions.
connection is enough. No legal hurdle is
there for dissolving the firm.
iv. Division of Work and greater
PDQDJHULDOH໥FLHQF\
The staggering load of management work can Disadvantages

be judiciously distributed among the partners The main disadvantages of Partnership are
according to their experience, knowledge given below:
and taste. For example, one partner can look
after purchases, another sales, yet another i. Lack of harmony
accounting etc. Thus when the burden is After a few years of working, friction and
lightened, supervision by each partner over disharmony may creap in. Each partner vies
the allocated area of management becomes with one another in dishonest dealings. This
effective and efficient. This ensures greater mutual conflict and lack of team spirit pave
managerial efficiency. the way for the dissolution of the firm.
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ii. Absence of Legal Status and drafted partnership deed helps in ironing
Instability out differences which may develop among
The partnership firm has no separate legal partners and in ensuring smooth running
existence. It is inseparable from the partners of the partnership business. It should be
composing it. As a result it is terminable on properly stamped and registered.
the death or insolvency of a partner.
Contents of Partnership Deed
iii. Limited Resources
i. Name of the Firm
The maximum number of partners in a
partnership firm is 10 in the case of banking ii. Nature of the proposed business
business and 20 in other cases. In actual iii. Duration of partnership
practice the number will be well below this Duration of the partnership business
maximum because of the need for ensuring whether it is to be run for a fixed
harmonious working. In view of this, only period of time or whether it is to
limited resources are available. Modern be dissolved after completing a
large-scale enterprises which require huge particular venture.
capital outlay cannot be started.
iv. Capital contribution
iv. Limited Risk-taking The capital is to be contributed by the
In view of the danger of unlimited liability, partners. It must be remembered that
the partners tend to be overcautious. So, capital contribution is not necessary
normally they do not want to assume risks to become a partner for one who
starting new ventures. contributes his organising power,
business acumen, managerial skill etc.,
v. Risk of implied authority
instead of capital.
Every partner can bind the firm and his
other partners by his acts. Therefore all other v. Withdrawal from the firm
partners become liable to a greater extent The amount that can be withdrawn from
because of the folly and fraud committed by the firm by each partner.
a fellow partner. vi. Profit/loss sharing
YL/DFNRISXEOLFFRQ¿GHQFH The ratio in which the profits or losses
are to be shared. If the profit sharing
As its accounts need not be audited and
ratio is not specified in the deed, all the
published, it lacks public confidence.
partners must share the profits and bear
5.03 Partnership Deed and its the losses equally.
Contents vii. Interest on capital
Though a partnership agreement need not Whether any interest is to be allowed on
necessarily be in writing, it is important capital and if so, the rate of interest. If the
to have a written agreement in order to deed is silent on interest on capital, the
avoid misunderstandings; it is desirable rules for interest on capital in partnership
to have a written agreement. A carefully act will take effect.
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viii. Rate of interest on drawing Format of Partnership Deed

Whether any interest is to be allowed
on drawing, the rate of interest is to be
specifird
ix. Loan from partners
Whether loans can be accepted from
the partners and if so the rate of interest
payable thereon.
x. Account keeping
Maintenance of accounts and audit.
xi. Salary and Commission to Partners
Amount of salary or commission payable
to partners for their services. (Unless
this is specifically provided, no partner
is entitled to any salary).
xii. Retirement
Matters relating to retirement of a
partner. The arrangement to be made for
paying out the amount due to a retired or 5.04 Rights and Duties of Partners
deceased partner must also be stated.
The mutual rights and obligations are
xiii. Goodwill valuation usually stated in the partnership deed. In
Method of valuing goodwill on the the absence of any deed, the provisions of
admission, death or retirement of a the partnership Act as stated below will
partner. apply.
xiv. Distribution of responsibility 1. Rights of a Partner
The work that is entrusted to each
i. Right to take part in business
partner is better stated in the deed itself.
Every partner has a right to take part in
xv. Dissolution procedure the management of the business.
Procedure for dissolution of the firm
ii. Right to be consulted
and the mode of settlement of accounts
Every partner has the right to be
thereafter.
consulted in all the matters concerning
xvi. Arbitration of dispute the firm. The decision of the majority
Arbitration in case of disputes among will prevail in all the routine matters.
partners. The deed should provide the But, where the matter is of fundamental
method for settling disputes or difference importance such as admission of a new
of opinion. This clause will avoid costly partner, change in the nature of business
litigations. etc., decision must be unanimous.
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iii. Right of access to books, record and expelled except in accordance with the
document Partnership Deed.
Every partner has the right of access to
2. Duties of Partner
all records and books of accounts, and to
examine and copy them. i. Duty to carry on business
Every partner has to carry on the business
iv. Right to share profit of the firm to the maximum advantage of
Every partner is entitled to share the all the partners.
profits in the agreed ratio. If no profit-
sharing ratio is specified in the deed, ii. Duty to be true
they must be shared equally. Every partner must be true, just and
faithful to one another. There must be
v. Right to receive interest utmost good faith and fair dealings.
A partner has the right to receive interest
iii. Duty to render true accounts
on loans advanced by him to the firm
A partner is bound to keep and render
at the agreed rate, and where no rate is
true and full accounts of the partnership.
stipulated, interest @ 6% p.a. allowed.
He must produce relevant vouchers for
vi. Right to be indemnified the expenses incurred by him and hand
Every partner has the right to be over to the firm all amounts which have
indemnified by the firm for all acts of come into his hands as a partner.
other partners in the ordinary course of iv. Duty to indemnity the firm
the business. He has a further right to Every partner must indemnify the firm
receive back any amount spent by him for any loss caused by his fraud or willful
on behalf of the firm. Only thing is he negligence in the conduct of the business.
must have acted prudently.
v. Duty to share the loss
vii. Right to use partnership property for Every partner is bound to share the losses
the business in the agreed ratio in the absence of an
Every partner has the right to use agreed ratio, it must be borne equally.
partnership property for the purpose of
the partnership. vi. Duty to claim remuneration
No partner, including a managing partner
viii. Right to retire is entitled to any remuneration (salary
Every partner has a right to retire as or commission), for the work done by
per the terms of the deed or with the him, unless there is an agreement to the
consent of the other partners. In case of contrary.
partnership at will, he can retire at any
vii. Duty not to use firm’s property for
time by giving prior notice to the other
personal use
partners.
The partnership property belongs to all
ix. Right to continue partners. But a partner should not use
Every partner has the right to the partnership property for his private
continue in the firm. He cannot be purposes.
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viii. Duty not to carry on competing Types of Partnership

business
No partner can carry on a competing
Partnership
business. If he does so, he should at will
surrender to the firm all profits earned

by him in such business. No partner is
allowed to earn secret profit. Limited
Liability Types of Partnership for
Partnership fixed period of
ix. Duty to act within scope of his authority (LLP)
Partnership
time
A partner must act within the scope of
his authority.
x. Duty to consult other partners before Particular

partnership
assigning or transferring his interest in
partnership
No partner can assign or transfer without
i. Partnership at will
the consent of all other partners his
Partnership formed to carry on
interest in the firm to any other person
business for an undefined period is
so as to make him a partner thereof.
called partnership at will. In other
3. Liabilities of Partner words, no time-limit is specified for
i. Joint and Several liabilities the continuance of the firm. It is to be
Every partner is jointly and severally dissolved when a partner gives notice of
liable for all acts of the firm. It means his intention to dissolve the partnership.
that in case the assets are inadequate for Thus this type of partnership continues
meeting the claims of creditors, even its business activities as long as there
their personal properties should be made is mutual cooperation and confidence
available. The creditors can recover their among partners. Since it comes to an end
claims from all the partners. at the will of any partner on his giving
notice, it is called partnership at will.
ii. Liable for any loss to third party
ii. Partnership for a fixed term
The firm is liable for any loss caused
Where a partnership is formed for a
to a third party because of a wrongful
definite period of time, it is known
act done in the ordinary course of
as partnership for a fixed term. The
business. It means that every partner is
partnership for a fixed term comes to
liable.
an end on the expiry of the stipulated
iii. Liability to third party to make good period. But if the business is continued
the loss even after the original fixed period, it
Where a partner receives money or automatically becomes a partnership at
property from a third party on behalf of will. As such it will be terminated at the
the firm and misappropriates it, then the will of any partners, giving notice of his
firm is liable to make good the loss. intention to do so.
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iii. Particular partnership iv. Limited Liability Partnership (LLP)

When a partnership is formed to carry Limited Liability Partnership is very
on a particular venture or a business of popular in the service sector and in the
temporary nature, it is called particular small scale business enterprises. Limited
partnership. Such a firm lasts so long as liability partnership means for paying
the business agreed upon is not completed. the debts of the firm only the assets of
In other words, it comes to an end on the the business will be utilized and not
completion of the particular venture. If the personal properties. It is prevalent
such a firm is not dissolved and it begins among popular professionals such as
to undertake new activities not originally Cost Accountants, Company Secretaries,
contemplated, the rights and obligations Chartered Accountants, Lawyers,
of the partners continue to be the same Architects, Engineers and Doctors.
as in the original partnership and it will Limited Liability Partnership is available
continue till a partner gives a notice of in countries like U.S.A, Singapore,
his intention to dissolve the firm. Thailand and U.K. It came into existence
in India since 2008.
5.05 Types of Partners

Limited Liability Partnership i. Active Partner
(LLP) Act, 2008 A partner who takes an active part in
In India “The Limited Liability the conduct of the partnership business
Partnership (LLP) Act, 2008” was is known as an active partner. Though
published in the Official Gazette of India every partner is entitled to manage its
on January 9, 2009 and has been notified affairs, all may not do so.
with effect from 31st March 2009. The ii. Sleeping Partner or Dormant Partner
first LLP was incorporated in the 2-4- Such a partner contributes capital and
2009. shares in the profits or losses of the firm
At present, there are about 10,000 LLPs but does not take part in the management
formed and registered under the Limited of the business. He may not be known as
Liability Partnership Act. a partner to the outsiders; yet he is liable
to third parties to an unlimited extent as
Being the separate legislation (i.e.,LLP any other partner.
Act, 2008) the provisions of Indian
Partnership Act, 1932 are not applicable iii. Nominal Partner
to an LLP and it is regulated by the Such a partner neither contributes any
contractual agreement between the capital nor is he entitled to manage the
partners. Every Limited Liability affairs of the business. He only lends his
Partnership shall use the words “Limited name to the firm because on the strength
Liability Partnership” or its acronym of his name and reputation, the firm
“LLP” as the last words of its name. may attract additional business and raise
funds easily. A nominal partner, however,
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Sleeping
Partner
Active Partner Nominal
Partner
Types
Secret
Minor Partner of Partner
Partners
Partner by Partner in
Holding out profit only
Partner by
Estoppel
is liable for all the acts and debts of the Such a partner cannot deny his liability,
firm as if he were a real partner, though if outside party lends money to the firm
he does not get any share in the firm’s supposing him to be a partner.
profit. vi. Partner by Holding out
iv. Partner in Profits only When a person is declared as a partner
and he does not deny this even after
When a person joins a firm as a partner
becoming aware of it, he becomes liable
on the condition that he is entitled to a
to the third party, who lends money or
specified share of the firm’s profit only, credit to the firm on the basis of such a
he is called a partner in profits only. It declaration.
means that he will not be called upon to
bear any portion of the losses sustained. vii. Secret Partner
He will, however, be liable to third A secret partner is one whose association
is not known to the general public. Other
parties for all the debts of the firm like
than this distinct feature, he is like rest of
any other partner. Such partners usually
the partners in all respects.
do not take part in the management of
the business. viii. Minor Partner
Under the Indian Majority Act, person
v. Partner by Estoppel
who has not completed 18 years of age
In case, a person represents himself/ is a minor. However, he will continue
herself by words or actions or has allowed to be a minor till he completes 21 years
him to be represented as a partner of the if a guardian has been appointed to the
firm, even though he is not a partner, he minor. He can be admitted to the benefits
is called partner by estoppels. of partnership.
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Partnership arises as a result of contract. example, no court of action is possible to

But a minor has no contractual capacity. recover debts from third parties. It has
Though a partnership cannot be created no right even to demand a set-off in any
with a minor as a partner, a minor can be suit filed by its creditors.
admitted to the benefits of a partnership
ii. Right to sue for right arising
which is already in existence. The
However it can sue others for enforcing
consent of all partners is a ‘must’ for such
rights arising otherwise than out of a
admission.
contract. For example, it can bring a suit
Registration of Partnership for wrongful infringement of trade mark
of patent.
The Indian Partnership Act does not
make the registration of a partnership iii. Right of third parties to sue the firm
compulsory. Registration is optional. But The rights of third parties against the
the disabilities of non-registration virtually firm are not affected by non-registration.
make it compulsory. It means that they can sue the firm or any
of its partners.
5.06 Procedure for Registration
A partner of an unregistered firm
A statement should be prepared stating the cannot sue the firm or other partners
following particulars. for enforcing his rights under the
partnership deed.
i. Name of the firm.
However, his right to sue for the
ii. The principal place of business.
dissolution of the firm or for the accounts
iii. Name of other places where the firm
of a dissolved firm or for his share in the
carried on business.
assets of a dissolved firm is not affected
iv. Names and addresses of all the partners.
by non-registration.
v. The date on which each partner joined
In short, non-registration does not affect
the firm.
the following rights:
vi. The duration of the firm.
i. Suit not exceeding ₹100
This statement signed by all the partners
ii. The rights of firm or partners of a firm
should be produced to the Registrar of Firms
having no place of business in India.
along with the necessary registration fee.
iii. The power of an official assignee or
Any change in the above particulars must receiver to realise the property of an
be communicated to the Registrar within 14 insolvent partner.
days of such alteration. iv. Suit arising otherwise than out of
contract as explained above.
5.07 Drawbacks of Non- v. The rights of third parties against the
Registration of Partnership firms or any of its partners.
i. No right to file suit against others vi. Suit by a partner for the dissolution of the
An unregistered firm cannot file a suit to firm or for accounts of a dissolved firm
enforce its claims against third parties, or for a share in the assets of a dissolved
if such rights arise out of a contract. For firm as stated above.
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Registration can be effected at any time. All business. If ‘A’ retires, ‘B’ and ‘C’ can continue
the disabilities automatically disappear as the business which is known as dissolution
soon as the firm is duly registered. of partnership.
5.08 Dissolution of Partnership The various circumstances leading to

Dissolution of Partnership is different from dissolution of partnership firm can be
the dissolution of partnership firm. It is due summarised by taking the first letters used
to the fact that when the relation present in the term “Dissolution”.
between all partners, comes to an end, it
D - Death of partner
is known as dissolution of firm. When any
one of the partners become incapacitated, I - Incapacity of a partner
then the partnership comes to an end, but S - Stipulated period of partnership
the firm may continue to operate, if new completed in the case of particular
partnership is arranged among the other partnership
partners. S - Serious misconduct of a partner
a) Dissolution of firm O - Object is completed (Particular
partnership)
Dissolution of firm means dissolution
of partnership. On dissolution of firm, L - Lunacy of a partner
partnership business comes to an end. Its U - Unavoidable continuous loss
assets are realised and the creditors are paid T - Transfer of interest of the firm
off. The business cannot be continued after
I - Insolvency of a partner
dissolution of partnership firm. For example
A, B and C are partners in a business. If all O - Objectionable unlawful objectives
the three partners decide to dissolve, it is N - Notice of dissolution by a partner.
known as “dissolution of the firm”.
The fundamental difference between the
b) Dissolution of partnership dissolution of partnership and dissolution
Dissolution of partnership means the of the firm is that when the partnership is
termination of the original partnership dissolved, there is no other dissolution, but
agreement. A partnership is dissolved by when the firm is dissolved, partnership too
insolvency, retirement, expiry or completion comes to an end.
of the term of partnership. The business will Dissolution of Partnership can take
continue after dissolution of partnership. the following forms
For example: A, B and C are partners in a
i. Change in the existing profit sharing
ratio
ii. Admission of a Partner
iii. Retirement or Death of a Partner
iv. Insolvency of a partner.
v. Expiry of the term of the partnership.
vi. Completion of the specified venture.
vii. Dissolution by agreement.
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Mutual
Agreement Insolvency of all
except one
Compulsory partner
Without order
Dissolution Business
of count
becoming
On the
unlawful
occurrence of
contingencies
By notice
Dissolution
of Insanity
firm
Permanent
Incapacity
Misconduct
Breach of
By order agreement
of count
Transfer of
Interest
Perpetual
Losses
Any other just
and equitable
ground
L'LVVROXWLRQRIDSDUWQHUVKLS¿UPLV ii. By insolvency of all the partners but

taken place in two ways.
one
a. without the order of the court and If any of the partners adjudged an
b. By order of the court. insolvent (or if all the partners become
a. Without the order of the court
insolvent) it is necessary to dissolve the
firm.
i. By agreement or mutual consent
A firm may be dissolved when all the iii. When the objective becomes illegal
partners agree to close the affairs of the When the business carried on by
firm. Just as a partnership is created by the partnership becomes illegal, the
contract, it can also be terminated by partnership firm is automatically
contract. dissolved.
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iv. By notice of dissolution

In the case of partnership at will when
any partner gives in writing to all the
other partners indicating his intention
to dissolve the firm, the firm will be
dissolved.
v. On certain contingencies:
Dissolution of partnership itself may involve
the dissolution of the firm unless parties
agree to continue it otherwise, it will take
place.
i. On the expiry of a specified period in
A success story of Fourrts India
case of partnership for a fixed term.
Pvt Limited
ii. On the completion of a particular
(Partnership Firm grown into
Company)
adventure for which it has been formed
in case of particular partnership.
Fourrts was founded in 1977 with a iii. On the death of a partner.
strong commitment to the society to
iv. On the retirement of a partner.
deliver quality health care. Fourrts
v. On the insolvency of a partner.
with its impressive standing in the
Pharma Industry for the last 35 years is In all the above cases if the business is
committed to excellence in health care. not continued by the remaining partners,
The dedicated approach of Fourrts has dissolution of the firm takes place
made available a range of innovative, automatically.
value added, evidence based products for
b. Dissolution through court
the ailing patients. Fourrts head quarters
is in Chennai. The court may order dissolution of a
firm at a suit of a partner in any of the
Fourrts’ products have found following circumstances.
immediate acceptance by practicing
doctors both in India and Abroad. a. When a partner becomes insane
At present Fourrts products are b. Permanent incapacity of any partner
spread all over India and over more c. Misconduct of any partner
than 40 countries around the world.
Fourrts is one of the fast growing d. Breach of agreement which makes the
pharmaceutical companies in India. business impracticable
Today Fourrts is backed by a dedicated e. Transfer of interest to third person
team of over 1500 professionals, who f. Continued loss
are well trained in every aspect of
pharmaceutical Industry. g. When the court finds that it is just and
equitable to dissolve the firm
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Key Terms
For own thinking
Karta Mitakshara Law
Dayabhaga Law Coparceners i. Write any 2 HUF run Hospitals in
Separate Legal Entity Dissolution your nearest place.
ii. How will you run a HUF for export
business?
iii. How will you run a HUF Bus operating
business?
For Future Learning iv. How will you organise a partnership
business with your friends according
to a law?
a) Raman with members of his extended
v. Name a Partnership firm in your town
family established a Joint Hindu
(Nearest).
Family business of Handicrafts. Raman
being the head of family controlled the
business as ‘Karta’. He had authority
to take all decisions for the business. Case Study
Many times, he sold goods for cash
without informing other members of a) A father had self acquired agricultural
the family business. This resulted in land. He transferred the said land
lesser profits. He also sold one of the in the name of his three sons. The
family properties and gave money to revenue records reflect the names
of the three sons with 1/3rd share
his daughter as a wedding gift. What
against each name. Father died
values did karta ignored in the above
recently. However physical partition
case?
of the said land amongst the three
brothers has not been done as they
b) Palani is an Electronics Engineer. have mutually decided against it.
He has met two businessmen who Eldest son has started managing
wish to enter into a partnership the land since fathers demise. Is the
with him for the manufacture of land in question ancestral property
tape-recorders. They are prepared of the three brothers ? Can the three
to make the investment and offer brothers claim to a HUF? If yes, then
a fourth share in profits to Palani. since when are they HUF – after
Would you have any special words fathers demise or since the date land
of advice for Palani? transferred in their names?
b) Draw a family tree diagram as you
think. Just imagine you are running
a business under the Joint Hindu
Family system.
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8. The partnership deed also called ______

Exercise a. Articles of Association
b. Articles of Partnership
I. Choose the Correct Answer
c. Partnership Act
1. The firm of Hindu Undivided d. Partnership
Family is managed by whom?
a. Owner b. Karta 9. A partnership is registered with _______
c. Manager d. Partner a. Registrar of Companies
b. Registrar of Co-operatives
2. In the firm of Hindu Undivided Family,
c. Registrar of Firms
how one gets the membership?
d. District Collector
a. By Agreement
b. By Birth
Answers:
c. By Investing Capital
1. b 2. b 3. b 4. b 5. a
d. By Managing
6. b 7. a 8. b 9. c
3. The members in the joint hindu family
are called ______ II. Very Short Answer Questions
a. Karta b. coparceners 1. Who is called KARTA?
c. generations d. partners 2. What are the two schools of Hindu law?
4. ‘Only the male members in the family 3. Who is a called a Partner?
get the right of inheritance by birth’ as 4. Who is a Sleeping partner?
____ 5. Who is a Minor?
a. Hindu law b. Mitakshara Law 6. How many types of Dissolution?
c. Dayabhaga law d. None of these
III. Short Answer Questions
5. A partnership is formed by _______
a. agreement 1. What is the meaning of Joint Hindu
b. relationship among persons Family Business?
c. the direction of government 2. Write any 3 features of HUF.
d. Friendship 3. Explain the nature of liability of karta.
4. What is the meaning of Coparceners?
6. Registration of partnership is ______
a. compulsory b. optional 5. Define Partnership.
c. not necessary d. none of the above 6. What is the minimum and maximum
number of members in the partnership
7. A temporary partnership which is
concern?
formed to complete a specific job doing a
7. What is the meaning of Partnership
specified period of time is called ______
a. Partnership-at-will Deed?
b. Particular partnership 8. Who is called a Secret partner?
c. Limited Partnership 9. What is meant by Joint and Several
d. Joint Venture Liability?
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IV. Long Answer Questions Reference
1. What is the implied authority of Karta? 1. Bhushan,Y.K, 2013, Business

2. Can a minor is admitted in the Joint Organisation and Management
Hindu Family business – Why? 2. Sundar,K 2017, Business Organisation
3. What are the contents of Partnership 3. Sherlekar,S.A., Sherlekar,V.S, Business
Deed? Organisation and Management
4. Explain the types of dissolution of 4. Rao,V.S.P,2012, Business Organisation,
partnership firm. 5. https://in.kompass.com
5. Write any three differences between
Dissolution of Partnership and
Dissolution of Firm.
6. Write the procedure for Registration of a
Firm.
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ORGANISATION
CHAPTER
JOINT STOCK COMPANY
6
times. Therefore joint stock company form

Learning Objectives of organisation came into existence.
To enable the students to understand The joint stock companies in India are
i. the meaning of Joint Stock Company governed by The Companies Act 2013 (earlier
ii. the characteristics, advantages, one was, The Companies Act 1956). The new
disadvantages Act has been divided into 29 chapters with
iii. the types of companies 470 sections.
iv. the Memorandum of Association and The Act came into force on 12 September
its contents 2013 with few changes like earlier private
v. the Articles of Association and its companies maximum number of members
contents was 50 and now it will be 200. A new class
vi. the Prospectus and its contents of company is of “One Person Company”
is included in this Act that will be a private
limited company.
0HDQLQJDQG'H¿QLWLRQRID
Company 'H¿QLWLRQ
A joint stock company is a distinct type of

“A company is an association of many
business organisation evolved to overcome
persons who contribute money or money’s
the limitations of sole trader and partnership
worth to a common stock and employ it in
concerns. The advancement in science and
some trade or business, and who share the
technology and the impact of industrial
profit and loss (as the case may be) arising
revolution have all necessitated a large
there from.”
amount of capital investment and highly
- James Stephenson
sophisticated managerial skill for running
a large-scale industry. Partnership with “A company is an artificial person created
limitations of its capital and managerial by law having a separate entity with a
ability and with the added risk of unlimited perpetual succession and a common seal”.
liability has been found unsuitable for - Sec 2 of Companies Act 2013
running a large-scale industry in modern
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Characteristics
A company as an entity has many distinct
features which together make it a unique
organization. The essential characteristics
of a company are as follows:
i. Separate Legal Entity
Under Incorporation a company becomes

a separate legal entity as compared to its
members. The company is distinct and
different from its members. It has its Formation of a Company
own seal and its own name, its assets
and liabilities are separate and distinct
from those of its members. It is capable
of owning property, incurring debt, and
borrowing money, employing people,
having a bank account, entering into Highlights of Companies Act, 2013
contracts and suing and being sued • The Act, of 2013 has 470 sections as
separately. In short, it is considered as an against 658 Sections in the Companies
artificial person created by law. Act, 1956
ii. Limited Liability • The entire Act has been divided into
The liability of the members of the 29 chapters.
company is limited to contribution to • Many new chapters have been
the assets of the company upto the face introduced such as Registered Valuers
value of shares held by him. A member (ch.17); Government companies
is liable to pay only the uncalled money (ch. 23); Companies to furnish
due on shares held by him. If the assets information or statistics (ch. 25);
of the company are not sufficient to pay Nidhis (ch. 26); National Company
liabilities, the personal properties of the Law Tribunal & Appellate Tribunal
shareholders are not held responsible. (ch. 27); Special Courts (ch. 28).
iii. Perpetual Succession • The Act is forward looking in its
A company does not cease to exist unless approach which empowers the Central
it is specifically wound up or the task for Government to make rules,etc.
which it was formed has been completed. through delegated legislation (section
Membership of a company may keep on 469 and others).
changing from time to time but that does • The Companies Act, 2013 is the
not affect life of the company. A company result of detailed consultative process
is created by law and it can be windup adopted by the Government
only through legal process.
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iv Separate Property authentic and may not have any legal

A company is a distinct legal entity. A force.
member cannot claim to be owner of the vii. Capacity to Sue and being sued
company’s property during the existence
of the company. A company can sue or be sued in its own
name as distinct from its members.
v. Transferability of Shares
viii. Separate Management
Shares in a company are freely transferable.
When a member transfers his shares to A company is administered and managed
another person, the transferee steps into by its managerial personnel i.e. the Board
the shoes of the transferor and acquires of Directors. The shareholders are simply
all the rights of the transferor in respect the holders of the shares in the company
of those shares. There are restrictions and need not necessarily the managers of
in the transferability of shares in case of the company.
private companies.
ix. One Share-One Vote
vi. Common Seal The principle of voting in a company is
one share-one vote i.e. if a person has 10
shares, he has 10 votes in the company.
This is in direct distinction to the voting
principle of a co-operative society where
the “One Member - One Vote” principle
applies i.e. irrespective of the number of
shares held, one member has only one
vote.
Advantages
A joint stock company has many

advantages. These are given below:
A company is an artificial person and
does not have a physical presence. Thus, i. Large Capital
it acts through its Board of Directors for A company can secure large capital
carrying out its activities and entering compared to a sole trader or partnership.
into various agreements. Such contracts Large amount of capital is necessary for
must be under the seal of the company. conducting business on a large scale.
The common seal is the official signature For e.g. Reliance has invested more than
of the company. The name of the company ₹25,000 crore in its telecom venture.
must be engraved on the common seal. Raising such huge amount of funds
Any document not bearing the seal of would be utter impossible in a sole-
the company may not be accepted as tradership or partnership.
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ii. Limited Liability

Example of Limited liability
The liability of a shareholder is limited.
Shyam is a share holder in a company
In the case of a company limited by
holding 500 shares of ₹10 each, on which
guarantee, his liability is restricted to
he has already paid ₹7 per share. In the
the amount that he has guaranteed to
event of losses or company’s failure to pay
contribute in the event of winding up of
debts , Shyam is liable to pay only ₹1,500.
the company.
(i.e.,the unpaid amount of ₹3 on 500
iii. Transferability of Shares shares)
Transaction of Shares between two
individuals is easy. So there is liquidity of two-wheelers, manufactures motorbikes
investment. Any shareholder can easily on a large scale and is able to enjoy cost
convert his shares into money by selling efficiency.
his shares. viii. Economic Development
iv. Perpetual Succession Joint stock company system has been
A company has perpetual or continuous responsible for the rapid growth of
existence. Members may go or new industries and trade in many countries.
members may come in, but the company Since Joint Stock Companies have large
continues to exist. This ensures continuity financial resources, they are able to
in operations and the company can undertake large scale production, satisfy
undertake long term investments. the needs of more number of consumers,
create large scale employment
v. Promotion of Saving and Investment
Habit
opportunities, promote balanced
regional development and contribute
Joint stock company system encourages substantially to the government by way
people to save. Even small amount can be of taxes.
used for the purchase of shares. A person
can buy even one share of a company. Disadvantages
vi. Risk Bearing Capacity The following are the disadvantages of
The loss of the company is distributed company form of organization
over a large number of shareholders. L &RVWO\DQGGL໥FXOWWRIRUP
So each shareholder bears a very little Number of legal formalities must
amount of loss. Hence the company form be observed in the formation of the
of organization has risk bearing capacity. company. To observe these legal
vii. Economies of Large-scale Operation formalities, promoters have to spend
much time and money.
A joint stock company can undertake
business on large scale. As a result it can ii. Scope for dishonest and
unscrupulous management
derive all the advantages of large scale
production. For e.g. Hero Moto Corp The directors manage the company
Ltd. 2015, the world’s largest seller of with the help of paid officers. If the
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directors are dishonest, they may form of organization there is lack of

make personal gain at the expense of personal contact between owners and
the company. They may misuse their workers. As a result, there is scope for
power and position. more industrial disputes in a company
form of organization.
iii. Management oligarchy
vii. High taxation
A few rich persons may secure control
over the affairs of the company. Thus, the Joint stock companies have to pay tax at
management of a joint stock company higher rates compared to other forms of
might become oligarchic in character. organizations.
(Oligarchy means a small group of
people havimg control) 6.02 Types of Companies
iv. Speculation &

ODVVL¿FDWLRQRI&RPSDQLHVRQ
the Basis of Incorporation
A few individuals may corner the shares
to gain control over the company. a. Chartered Companies
v. Lack of interest Chartered companies are established by
The officers of the company do not have the King or Queen of a country. Powers
incentive to work hard. They are not and privileges of chartered company are
usually inclined to take risks. They lack specified in the charter. Power to cancel
initiative. the charter is vested with King/Queen.
Examples: East Indian Company, Bank
vi. Lack of good labour relations of England, Hudson’s Bay Company. The
In sole trading business personal Companies Act does not apply to them.
supervision is possible. But in company Such companies cannot be started in India.
CLASSIFICATION
OF
COMPANIES
Member Nationality
Incorporation Membership Control
Liability
Chartere d Public Limited by Government Domestic

compan y shares compan y compan y
Statutor y Limited by Holding Foreign

Private compan y
compan y Guarantee compan y
Association not Unlimited Subsidiar y Multinational

for profit liability compan y compan y
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b. Statutory Companies &ODVVL¿FDWLRQRI&RPSDQLHVRQWKH

Companies are established by a Special basis of Membership
Act made in Parliament/State Assembly. a. Private Company
Constitution of company is specified in
Private limited company is a type of
the Memorandum of Association (MOA).
company which is formed with minimum
Rules relating to day-to-day management
two shareholders and two directors, The
of statutory companies are specified in
minimum requirement with respect to
the Articles of Association (AOA). Audit
authorised or paid up capital of ₹1,00,000
of statutory company is conducted by
has been omitted by The Companies
Comptroller and Auditor General of India
(CAGI). The report of CAGI is placed in (Amendment) Act, 2015 w.e.f. 29th of May,
Parliament/State Assemblies concerned. 2015. Another crucial condition of a private
Examples: Food Corporation of India, LIC, limited company is that it by its articles of
GIC, RBI, SBI, IDBI, Railways, Electricity, association restricts the right to transfer its
ONGC. Statutory companies enjoy shares & also prohibits any invitation to the
autonomous status. It need not use the word public to subscribe for any securities of the
‘Limited’ next to its name. company. Maximum of 200 persons can
become shareholders in a private company.
c. Association Not for Profit The name of private company should be
According to Section 25, the Central suffixed with pvt ltd or (p) ltd. Ex. Scientific
Government may, by license, grant that an publishing services private Limited,
association may be registered as a company Chennai. A private Limited company can be
with limited liability, without using the formed in three variations.
words ‘limited’ or ‘private limited’ as part
of its name. The license will be granted only (a) as a private limited company; (b) As a
in the case of ‘association not for profit’. In small private limited company; (c) As a One
other words, the Central Government will Person Company (OPC).
grant the license only if it is satisfied that:
b. Public Company
(i) The association about to be formed as a
Public Company means a company which
limited company aims at the promotion
is not a private company. A public company
of Sports, Commerce, Art, Science,
may be said to be an association which
Religion, Charity or any other useful
object. (i) consists of at least 7 members.
(ii) It intends to apply its profits, if any, for (ii) has a minimum paid-up capital of
promoting its objects. ₹5,00,000 or such higher paid up capital
(iii)It prohibits the payment of dividend to as may be prescribed.
its members. (iii) is a subsidiary of a company which is
Such companies may be public or private not a private company.
companies and may or may not have share (iv) does not restrict the right to transfer its
capital. shares.
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(v) does not prohibit any invitation to Religion, Charity or any other useful object.
subscribe for any shares or debentures of The companies limited by guarantee may
the company. be either private companies or public
(vi) does not prohibit any invitation or companies.
acceptance of deposits. (The name of c. Unlimited Company
public company should be suffixed with
ltd. Ex.National Aluminium company An unlimited company is a company in
Limited, Chennai ) which the liability of its members is not
limited by its Memorandum. In other words,
&ODVVL¿FDWLRQRI&RPSDQLHVRQWKH the liability of members is unlimited i.e.,
basis of Liability there is no limit on the liability of members.
The members of such companies may be
a. Company Limited by Shares
required to pay company’s losses from their
A company limited by shares is a company personal property. Because such companies
in which the liability of its members is have separate legal entity, its creditors cannot
limited by its Memorandum to the amount file a suit against the members directly. The
(if any) unpaid on the shares respectively creditors will have to apply to the court for
held by them. The companies limited by the winding up of the company and then
shares may be either public companies or the liquidator will direct the members to
private companies. If a member has paid the contribute to the assets of the company to
full amount of shares, then his liability shall pay off its liabilities.
be nil.
Thus two main features of a company &ODVVL¿FDWLRQRI&RPSDQLHVRQWKH
Basis of Control
limited by shares are as follows:
a. Government Companies
(i) The liability of its members is limited to
the amount (if any) remaining unpaid on A public enterprise incorporated under
the shares held by them. the Indian Companies Act, 1956 is called
a government company. These companies
(ii) Such liability can be enforced either
are owned and managed by the central or
during the lifetime of the company or
the state government. Section 617 of the
during the winding up of the company.
Companies Act, 1956 defines “Government
b. Company Limited by Guarantee Companies” as any company in which not
less than 51% of the [paid-up share capital]
A company limited by guarantee is a
is held by.
company in which the liability of its members
is limited by its Memorandum to such an 1. The Central Government; or
amount as the members may respectively
undertake to contribute to the assets of the 2. Any State Government or Governments;
company in the event of its being wound up. or
Such companies are generally formed for 3. Partly by the Central Government and
the promotion of Commerce, Art, Science, partly by one or more State Governments.
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A subsidiary of a Government company (ii) exercises or controls more than one-

shall also be treated as a Government half of the total share capital either at its
company. These companies are registered own or together with one or more of its
as private limited companies though their subsidiary companies:
management and their control vest with the
Examples: H Ltd., holds more than 50% of
government. This is a type of organization
the equity share capital of S Ltd. Now H Ltd.,
where both the government and private
is the holding company of S Ltd., and S Ltd.,
individuals are shareholders. Sometimes
is the subsidiary of H Ltd.
these companies are called as a mixed
ownership company. &ODVVL¿FDWLRQRI&RPSDQLHVRQWKH
Basis of Nationality
Examples: Steel Authority of India, Indian
Oil Corporation, Oil and Natural Gas a. Domestic Companies
Corporation, Bharath Heavy Electricals. A company which cannot be termed as
foreign company under the provision of
b. Holding Companies
the Companies Act should be regarded as a
As per Section 2(87) “subsidiary company” domestic company.
or “subsidiary”, in relation to any other
company (that is to say the holding b. Foreign Companies
company), means a company in which the A foreign company means a company
holding company— which is incorporated in a country outside
India under the law of that country. After
(i) controls the composition of the Board of the establishment of business in India, the
Directors; or following documents must be filed with the
(ii) exercises or controls more than one- Registrar of Companies within 30 days from
half of the total share capital either at its the date of establishment.
own or together with one or more of its
(i) A certified copy of the charter or
subsidiary companies:
statutes under which the company is
Provided that such class or classes of holding incorporated, or the Memorandum and
companies as may be prescribed shall not articles of the company translated into
have layers of subsidiaries beyond such English.
numbers as may be prescribed. (ii) The full address of the registered office
of the company.
c. Subsidiary Companies
(iii)A list of directors and secretary of the
“Subsidiary company” or “Subsidiary”, in
company.
relation to any other company (that is to say
the holding company), means a company in (iv)The name and address of any person
which the holding company. resident of India who is authorised to
accept, on behalf of the company, service
(i) controls the composition of the Board of of legal process and any notice served on
Directors; or the company.
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(v) The full address of the company’s company to define its relationship with
principal place of business in India. shareholders. It reveals what powers it has
and what activities the company is permitted
c. Multi National Companies to undertake. Any act of the company outside
A Multi National Company (MNC) is a huge the scope outlined in its memorandum is
industrial organisation which, said to be ultra virus and is not binding on
it. It is the constitution of the company in its
(i) Operates in more than one country relation to the outside world. It is a public
(ii) Carries out production, marketing and document and any person dealing with the
research activities on international Scale company is presumed to have sufficient
in those countries. knowledge of it. It is the primary document
(iii)Seeks to maximise profits world over. of a company.
A domestic company or a foreign company Contents

can be a MNC.
1. Name Clause
Examples: Microsoft Corporation,
The name clause requires to state
Nokia Corporation, Nestle, Coca-Cola,
the legal and recognized name of the
International Business Machine, Pepsico,
company. The company name is allow
Sony Corporation.
to be registered if it does not bear any
similarities with the name of an existing
6.03 Memorandum of Association company. companies only.
A Memorandum of Association (MOA) is a
legal document prepared in the formation 2. Situation Clause
and registration process of a limited liability The registered office clause requires to show
the physical location of the registered office
of the company. It is required to keep all
the company registers in this office. The
registered office should be established prior
to commencing business activities.
3. Objective Clause
The objective clause requires to summarize
the main objectives for establishing the
company with reference to the requirements
for shareholding and use of financial
resources. It is required to state the ancillary
objectives; that is, those objectives that are
required to facilitate the achievement of the
main objectives. The objectives should be
free of any provisions or declarations that
continued... contravene laws or public good.
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4. Liability Clause containing rules and regulations for the

internal management of a company. A
The liability clause requires to state the extent company which does not have separate
to which shareholders of the company are AOA may adopt Table A.
liable to the debt obligations of the company
in the event of the company dissolving.
There are companies limited by shares and Contents
limited by guarantee. (i) Amount of shares, capital, value and
5. Capital Clause type of shares
The capital clause requires to state the (ii) Rights of each class of shareholders
company’s authorized share capital, the regarding voting, dividend, return of
different categories of shares and the capital
nominal value (the minimum value per (iii) Rules regarding issue of shares and
share) of the shares. It is also required to list debentures
the company’s assets under this clause.
(iv) Procedures as well as regulations in
6. Association Clause respect of making calls on shares.
The association clause confirms that (v) Manner of transfer of shares

shareholders bound by the MOA are (vi) Declaration of dividends
willingly associating and forming a
company. It is required seven members to (vii) Borrowing powers of the company
sign an MOA for a public company and not (viii) Rules regarding the appointment,
less than two people for a MOA of a private remuneration, removal of directors
company. The sighing must be done in the
(ix) Procedure for conducting proxy,
presence of witness who must also append
quorum, meetings etc.,
his signature.
(x) Procedures concerning keeping of
6.04 Articles of Association books and audits
The Articles of Association (AOA) is a (xi) Seal of the company
document that contains the purpose of (xii) Procedures regarding the winding up
the company as well as the duties and
of the company.
responsibilities of its members. It is an
important document which needs to be
6.05 Prospectus
filed with the Registrar of Companies.
These are the bylaws of a company According to Section 2(36) of the Companies
that defines the mode and manner in Act, any document inviting the public to
which the company’s business is to be buy its shares or debentures comes under
carried on. In the Companies Act, Table the definition of prospectus. It also applies
A Prescribes model for the articles of to advertisements inviting deposits from the
the companies. Table A is a document public.
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Contents (x) The estimated amount of preliminary

A prospectus is “the only window through expenses.
which a prospective investor can look into (xi) Name and address of the auditors,
the soundness of a company’s venture”. bankers and solicitors of the company.
Hence it must specify at least the following (xii) Time and place where copies of balance
matters as per Schedule II: sheets, profits and loss account and the
auditor’s report may be inspected.
(i) The prospectus contains the main
(xiii) The auditor’s report so submitted
objectives of the company, the name
must deal with the profit and loss of the
and addresses of the signatories of the
company for each year of five financial
Memorandum of Association and the years immediately preceding the issue of
number of shares held by them. prospectus.
(ii) The name, addresses and occupation of (xiv) If any profit or reserve has been
directors and managing directors. capitalized, the particulars of such
capitalization will be stated in the
(iii) The number and classes of shares and
prospectus.
debentures issued.
(iv) The qualification share of directors and

Key Terms
the interest of directors for the promotion
of company. Guarantee
Memorandum of Association
(v) The number, description and the
Prospectus
document of shares or debentures which
Common seal
within the two preceding years have been
Perpetual succession
agreed to be issued other than cash.
Artificial person
(vi) The name and addresses of the vendors
of any property acquired by the company
and the amount paid or to be paid.
(vii) Particulars about the directors, For Own Thinking

secretaries and the treasures and their 1. Name any 2 Government owned Joint
remuneration. Stock Company.
(viii) The amount for the minimum 2. Name any 2 Joint stock company with
subscription. private ownership.
(ix) If the company carrying on business, 3. Name any 2 Private ownership with
the length of time of such businesses. Foreign participants.
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For Future Learning Should they set up a public limited

company for the purpose? If so, how
should they go about it? If not, what
Collect advertisements of three alternative would you suggest? What
different companies inviting the public formalities will be required of Ashok
to subscribe their shares. Compare their and his associates if they choose the
contents regarding following points alternative form of organization
Company Company Company suggested by you?
Articles
A B C
Name
Case 2: Collect any 10 items of daily
Objectives use (Packed items) and list the names
Types of of the companies manufacturing those
shares to be items. Classify those companies as
subscribed public and private limited companies.
Total Which of them are Multinational
amount of
Companies?
issue
The issue
price of
each share
Case Study
Exercise
Case 1: Ashok is an industrial I. Choose the Correct Answer

designer by training. He had the
1. The relationship between outsiders and
opportunity to learn the technology
the company is defined in ______
of fibre glass manufacture while he
was in Germany for his training. a) Prospectus
He plans to set up a plant for the b) Articles of Association
manufacture of fibre glass in India c) Memorandum of Association
and is able to interest some financiers d) Certificate of Incorporation
and technologists. It is estimated that
the initial investment in the plant 2. Table A of the Companies Act is a ______
will be of the order of ₹50 lakhs. a) Model minutes book
Ashok and others decide to set up a b) Model form of Balance Sheet
company for the purpose. c) Model of AOA
d) Model of MOA
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3. Which of the following is created by 3. What is meant by Government

a Special Act of Parliament or in State Company?
Assemblies? 4. What is meant by Foreign Company?
a) Chartered company
b) Foreign company IV. Long Answer Questions
c) Government company 1. What are the contents of Memorandum
d) Statutory company of Association?
4. The Board of directors of a company is 2. What are the contents of Articles of
elected by _____ Association?
a) Creditors 3. What is meant by Prospectus?
b) Debtors 4. What is meant by Multi National
c) Debenture holders Company?
d) Share holders (members) 5. What is meant by Holding and Subsidiary
company?
5. Companies established as a result of a
charter granted by the King or Queen of Reference
a country is called _________ 1. Sundar, K 2017, Business Organisation
a) Chartered companies 2. www.company-formation.co.in
b) Statutory companies
c) Registered companies
d) Foreign companies
Answers
1. a 2. c 3. d 4. d 5. a
1. What are the different types of

companies?
2. Define a Company.
3. What is meant by Limited liability?
4. Explain any two characteristics of a
company.
5. What is meant by Chartered Company?

1. What are the advantages of Companies?
(Any 3)
2. What is meant by Private Company?
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ORGANISATION
CHAPTER
COOPERATIVE ORGANISATION
7
Learning Objectives Cooperatives were useful for promoting

the interests of the less powerful members
To enable the students to understand of society. Farmers, producers, workers,
i. the meaning of Cooperatives, and consumers found that they could
ii. the characteristics, advantages and accomplish more collectively than they
disadvantages, could individually.
iii. the principles of Cooperatives, Although people have been working together
iv. the types of Cooperatives. for their mutual benefit throughout human
history, the cooperative form of business
organization began during the Industrial
0HDQLQJDQG'H¿QLWLRQ Revolution. At first, the cooperative
A cooperative is a private business movement was started by Robert Owen,
organisation that is owned and controlled in the year 1844. He formed a consumer’s
by the people who use its products, supplies cooperative society in England with 28
or services. Although cooperatives vary in workers as members, called “Rochdale
type and membership size, all were formed Society of Equitable Pioneers”. This gradually
to meet the specific objectives of members, led to world-wide movement of organising,
and are structured to adapt to member’s cooperatives in various fields of economic
changing needs. activity such as credit, farming, marketing,
processing, housing, transport, insurance,
fisheries, poultry, dairying, etc., The main
object of the cooperative movement was
In 1844,in England, to bring solace and comfort to the needy
28weavers (Rochdale persons by pursuing common economic
Pioneers) started the interests through cooperative trading. Profit
first ever Cooperative is not a main objective.
Society.
Cooperatives are formed by individuals who

coordinate among themselves (horizontal
coordination) to achieve vertical integration
in their business activities.
60
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'H¿QLWLRQ with the cooperative rather than on the

capital invested.
Cooperation is a form of organization iv. Autonomy and Independence
in which persons voluntarily associate
together as human beings on the basis Cooperatives are autonomous, self-help
of equality for the promotion of the organizations controlled by their members.
economic interests of themselves. If the co-operative organisation enters into
- H.Calvert agreements with other organizations or
raises capital from external sources, it is done
Cooperation is “better farming, better so based on terms that ensure democratic
business and better living” control by the members and maintains the
- Sir Horace Plunkett cooperative’s autonomy.
v. Education, Training, and Information
Examples of a Cooperative Society:
Cooperatives provide education and training
(i) Indian Coffee House
for members, elected representatives,
(ii) Mother Dairy managers and employees so they can
(iii) Shri Mahila Griha Udyog Lijjat Papad contribute effectively to the development of
(iv) Indian Farmers Fertilizers Cooperative their cooperative. Members also inform the
Limited general public about the nature and benefits
(v) The Indian Airlines (Cargo) C.G.H.S.Ltd. of cooperatives.
vi. Cooperation among Cooperatives
7.02 Principles of Cooperation
Cooperatives serve their members most
i. Voluntary and Open Membership
effectively and strengthen the cooperative
Cooperatives are voluntary organizations, movement by working together through
open to all people able to use its services local, national, regional and international
and willing to accept the responsibilities of structures.
membership, without gender, social, racial,
vii. Concern for Community
political or religious discrimination.
While focusing on member needs,
ii. Democratic Member Control cooperatives work for the sustainable
Cooperatives are democratic organizations development of communities through
controlled by their members—those who policies and programs accepted by the
buy the goods or use the services of the members.
cooperative—who actively participate in
setting policies and making decisions.
iii. Member’s Economic Participation
Members contribute equally to, and

democratically control, the capital of the
cooperative. This benefits members in
proportion to the business they conduct
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7.03 Features of Cooperatives L['LVWULEXWLRQRI3UR¿W

The following are some of the important The profit can be distributed among the
principles of co-operative societies. members according the cooperative act.
i. Voluntary Membership One fourth (1/4) of the profit can be kept
in reserve. Then (10%) of the profit can
Any person can become the member of the
be used for providing facilities to the
society and can leave it any time.
members.
ii. Equal Rights
x. Self Service
Each member of the society has an
All the business activities are conducted by
equal right to vote and ownership. Each
the members themselves. All are the owner
shareholder has one vote.
and all are the consumers. So self service
iii. Democracy rule is employed in the organization.
The principle of democracy is adopted while 7.04 Advantages and
making the decisions. The decision of the Disadvantages
majority is honored.
Advantages
iv. Honesty
The following are some of the important
It is the basic principle of this society. Its
advantages of co-operative societies.
members should be honest. Selfish people
can not run the business of cooperative i. Voluntary organization
society. The membership of a cooperative society is
Y0XWXDO&RQ¿GHQFH open to all. Any person with common interest
can become a member. The membership fee
The foundation of Cooperative society is
is kept low so that everyone would be able to
laid on mutual confidence. Members of the
join and benefit from cooperative societies.
society should trust each other and work
At the same time, any member who wants
like a team.
to leave the society is free to do so. There are
vi. Welfare Main Objective no entry or exit barriers.
Its main objective is to provide goods and ii. Easy formation
services to its members at lower price.
Cooperatives can be formed much easily
vii. Cash Payment when compared to a company. Any 25
Credit team is prohibited and goods are members who have attained majority can
supplied to its members on cash payment. join together for forming a cooperative
society by observing simple legal formalities.
viii. Economy
iii. Democracy
The member of the society should act upon
the principle of economy. They should not A co-operative society is run on the principle
misuse capital of the society and always of ‘one man one vote‘. It implies that all
keep in view best interest of the society. members have equal rights in managing
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the affairs of the enterprise. Members ix. Government support

with money power cannot dominate the The government with a view to promote the
management by buying majority shares. growth of cooperative societies extends all
iv. Equal distribution of surplus support to them. It provides loans at cheap
interest rates, provides subsidies etc.
The surplus generated by the cooperative
societies is distributed in an equitable x. Elimination of middlemen
manner among members. Therefore all Cooperatives societies can deal directly
the members of the cooperative society with the producers and with the ultimate
are benefited. Further the society is also consumers. Therefore they are not
benefited because a sum not exceeding 10 dependent on middlemen and can save the
per cent of the surplus can be utilized for profits enjoyed by the middlemen.
promoting the welfare of the locality in
which the cooperative is located. xi. Tax concessions
To promote the co-operative movement and

v. Limited liability
also because of the fact that it is a non-profit
The liability of the members in a cooperative enterprise, government provides various
society is limited to the extent of their capital exemptions and tax concessions.
contribution. They cannot be personally
xii. Rural credit
held liable for the debts of the society.
Co-operative societies have contributed
vi. Separate legal entity significantly in freeing villagers from money
A cooperative society enjoys separate lenders. Earlier, money lenders used to
legal entity which is distinct from its charge high rates of interest and the earnings
members. Therefore its continuance is of the villagers were spent on payment on
in no way affected by the death, insanity interest alone.
or insolvency of its members. It enjoys
Co-operatives provide loans at cheaper
perpetual existence.
interest rates and have benefited the rural
vii. Each for all and all for each community. After the establishment of co-
operatives, the rural people were able to
Co-operative societies are formed on the
come out of the grip of money lenders.
basis of self help and mutual help. Therefore
members contribute their efforts to promote Disadvantages
their common welfare. i. Limited funds
viii. Greater identity of interests Co-operative societies have limited
It operates in a limited geographical area and membership and are promoted by the weaker
there is greater identity of interest among sections. The membership fees collected is
members. Members would be interacting low. Therefore the funds available with the
with each other. They can cooperate and co-operatives are limited. The principle of
manage the activities of the society in a one-man one-vote and limited dividends
more effective manner. also reduce the enthusiasm of members.
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They cannot expand their activities beyond v. Inadequate rural credit

a particular level because of the limited Co-operative societies give loans only for
financial resources. productive purposes and not for personal
or family expenses. Therefore the rural poor
ii. Over reliance on Government funds
continue to depend on the money lenders
Co-operative societies are not able to raise for meeting expenses of marriage, medical
their own resources. Their sources of care, social commitments etc. Co-operatives
financing are limited and they depend on have not been successful in freeing the rural
government funds. The funding and the poor from the clutches of the money lenders.
amount of funds that would be released by
vi. Lack of managerial skills
the government are uncertain. Therefore
co-operatives are not able to plan their Co-operative societies are managed by
activities in the right manner. the managing committee elected by its
members. The members of the managing
iii. Imposed by Government committee may not have the required
In the Western countries, co-operative qualification, skill or experience. Since it
societies were voluntarily started by has limited financial resources, its ability
the weaker sections. The objective is to compensate its employees is also limited.
to improve their economic status and Therefore it cannot employ the best
protect themselves from exploitation by talent. Lack of managerial skills results in
businessmen. But in India, the co-operative inefficient management, poor functioning
movement was initiated and established and difficulty in achieving objectives.
by the government. Wide participation vii. Government intervention
of people is lacking. Therefore the benefit
of the co-operatives has still not reached Co-operative societies are subject to
many poorer sections. excessive government regulation which
affects their autonomy and flexibility.
LY%HQH¿WWRUXUDOULFK Adhering to various regulations takes up
much of the management’s time and effort.
Co-operatives have benefited the rural
rich and not the rural poor. The rich viii. Misuse of funds
people elect themselves to the managing If the members of the managing committee
committee and manage the affairs of the are corrupt they can swindle the funds of
co-operatives for their own benefit. The the co-operative society. Many cooperative
agricultural produce of the small farmers societies have faced financial troubles and
is just sufficient to fulfill the needs of their closed down because of corruption and
family. They do not have any surplus to misuse of funds.
market. The rich farmers with vast tracts
L[,QH໥FLHQFLHVOHDGLQJWRORVVHV
of land produce in surplus quantities
and the services of co-operatives such as Co-operative societies operate with limited
processing, grading, correct weightment financial resources. Therefore they cannot
and fair prices actually benefit them. recruit the best talent, acquire latest
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technology or adopt modern management members which may lead to disputes. Such
practices. They operate in the traditional disputes affect the functioning of the co-
mold which may not be suitable in the operative societies.
modern business environment and therefore
xii. Limited scope
suffer losses.
Co-operative societies cannot be introduced
x. Lack of secrecy
in all industries. Their scope is limited to only
Maintenance of business secrets is the key certain areas of enterprise. Since the funds
for the competitiveness of any business available are limited they cannot undertake
organization. But business secrets cannot large scale operations and is not suitable in
be maintained in cooperatives because all industries requiring large investments.
members are aware of the activities of the
enterprise. Further, reports and accounts 7.05 Types of Cooperatives
have to be submitted to the Registrar of Co- The Cooperatives can be broadly classified
operative Societies. Therefore information into two viz., Credit Cooperatives and
relating to activities, revenues, members etc Non- Credit Cooperatives. The credit
becomes public knowledge. cooperatives can be further classified into
Agricultural credit and non-Agricultural
[L&RQÀLFWVDPRQJPHPEHUV
credit coopertives. However for beginners
Cooperative societies are based on the the coopertives are classified as follows.
principles of co-operation and therefore Types of
Cooperatives
harmony among members is important. But
in practice, there might be internal politics, Consumer Producers Marketing Credit Housing Farming
Cooperatives Cooperatives Cooperatives Cooperatives Cooperatives Cooperative
differences of opinions, quarrels etc. among Societies
A. Consumers Cooperatives
Consumer cooperatives are organized by
consumers that want to achieve better prices
or quality in the goods or services they
purchase. In contrast to traditional retail
stores or service providers, a consumer
cooperative exists to deliver goods or
services rather than to maximize profit from
selling those goods or services. They also
supply essential commodities through Public
Distribution System (PDS). Nationally, the
most widely used cooperative form is the
credit union, with some 90 million members.
Credit union assets have grown a hundred-
fold in three decades. Credit unions are
essentially cooperatives of people that use
banking services.
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Students’ cooperative stores, Cooperative Agriculturists, artisans, industrial workers,

provision stores and supermarkets set up on salaried employees, etc., form these credit
cooperative societies of India are examples societies. Being unable to obtain financial
of this type. accommodation from banks they are at
the mercy of money-lenders who charge
B. Producers Cooperatives exorbitant rates of interest. Ending this
exploitation and encouraging thrift among
Producer cooperatives are established and
members is the objective of these societies.
operated by producers. Producers can decide
Credit societies may be agricultural credit
to work together or as separate entities to
societies or non-agricultural credit societies.
help increase marketing possibilities and
production efficiency. They are organized
to process, market, and distribute their own
products. This helps lessen costs and strains
in each area with a mutual benefit to each
producer.
Example,
Cooperative weavers’ societies, Cooperative
carpenting units, Cooperative match
factories.
C. Marketing Cooperatives
Cooperative marketing societies are
associations of small producers formed for
the purpose of marketing their produce.
The marketing cooperatives perform
certain marketing functions such as
grading, warehousing, advertising etc.,
They secure better prices for their members
by transporting goods even to distant
markets. Advance is also given to members
against produce deposited with the society.
Thus they are a boon to agriculturists, small
producers and artisans, who in the absence
of these cooperatives would be forced to sell
at low prices to middlemen.
D. Credit Cooperatives
Cooperative credit societies are those
formed for the purpose of providing short-
term financial help to their members.
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E. Housing Cooperatives Key Terms

These cooperative housing societies are Voluntary Association
meant to provide residential accommodation
Voting Rights
to their members on ownership basis or on
Service Motto
rent. People who intend to build houses of
Limited capital
their own join together and form housing
societies. These societies advance loans Consumers Cooperatives
to members, repayable over a period of 15 Marketing Cooperatives
to 20 years. Housing building societies, on Housing Cooperatives
the other hand, construct houses for their Credit Cooperatives
members instead of granting loans to them.
These are house construction societies
which acquire land, construct houses and For Future Learning
rent them to members. The member-tenant,
however, can own the houses after paying a) A group of mechanical and
the cost. automobile engineers join hands to
F. Cooperative Farming Societies set up a Cooperative for assembly
of scooters. How can they go about
When various farmers in a village pool their it? What principles would you like
land together and agree to treat the pooled them to keep in mind? How can they
piece of land as one big farm for the purpose augment their financial resources
of cultivation, purchase the necessary inputs and how should they organise the
for the cultivation, and market the crops marketing effort?
jointly, they are assumed to have formed a
cooperative farming society. Such a society, b) Now a days we all live in High rise
for its proper working elects its office bearers flats. These are either constructed by
on the basis of one member-one-vote. builders or built by group of people
as a society. Work in groups and
The office bearers look after the proper collect information regarding any
cultivation of new farm that emerges after two cooperative housing societies in
the land of various farmers has been pooled. your neighbourhood.
The ownership of the land still lies with the
respective members of the society and they Collect information for the following:
withdraw from the society whenever they so Name of the society; Certificate of
like. registration; Process of registration the
Besides land the farmers also contribute society had to follow; the manner in
various productive assets as well as their labour which the managing body is elected;
for the purpose of cultivations. Whereas they what functions do they perform; what
get rent for their land and productive assets, kind of legal formalities they need to
they get wages, for their labour. complete or any other information you
may find relevant.
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Case Study Exercise
I. Choose the Correct

Chandru, a trade union activist, lives Answer:
in a Workers’ colony in the city of
Chennai. He is a devoted leader for the 1. Membership in a
cause of workers’ welfare. For the last cooperative
many months he has been observing organization is:
that the local vendors of commodities a) Not open to all b) Selective
of daily use have been making huge c) Open to all d) None of them
profits by charging high process from
workers. He cannot tolerate all this 2. Cooperative fails because of
and thinks of the idea of opening a a) Unlimited membership
consumers’ cooperative store in the b) Cash trading
colony. He calls a few elderly workers
c) Mismanagement
of the locality, tells them about
d) Loss-making
their exploitation by merchants and
discusses with them all his plans to 3. All cooperatives are established with
solve the problem. Merchants and a) Philanthropic motive
discusses with them all his plans to
b) Service motive
solve the problem. While some of the
c) Profit motive
workers welcome the scheme. Others
express their genuine doubts about its d) Reform motive
feasibility and success. Take the roles of
4. Consumers Co-operation was first
these workers and list out the possible
successful in _____
arguments among them.
a) England b) USA
c) Swiss d) India
5. Rochdale society of equitable pioneers

For Own Thinking
was started by ____
1. List out any 2 Co-operative a) Robert owen b) H.C.Calvert
institutions.
c) Talmaki d) Lambert
2. Name any 2 district level cooperative
organisations.
Answers
3. Mention any 3 village level primary
cooperatives in your area? 1. c 2. c 3. b 4. a 5. a
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II. Very Short Answer Questions IV. Long Answer Questions

1. What do you mean by cooperative 1. What are the principles of cooperatives?
organization? (Any 5)
2. Define cooperatives.
2. What are the advantages of cooperative
3. What is Credit cooperatives? society?
4. Is low taxes possible in Cooperative
3. What are the types of Cooperative
society?
society?
5. Who are Rochadale Pioneers?
4. Write a note on Consumer cooperative
III. Short Answer Questions society.
1. What are the disadvantages of 5. Whether misuse of funds is possible in
Cooperatives ? (Any 3) co-operatives.
2. Write a note on Housing cooperatives. Reference
3. What is meant by Producers cooperative 1. Haney, L.H, Business Organisation
society?
2. Krishnamoorthy,O.R, Fundamental of
4. Write a note on cooperative forming Cooperation
societies.
3. https://accountlearning.com
5. Write a note on industrial cooperatives.
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ORGANISATION
CHAPTER
MULTI NATIONAL
8 CORPORATIONS (MNCs)
Learning Objectives A multinational corporation is known by

To enable the students to understand various names such as: global enterprise,
i. the meaning of a Multi National international enterprise, world enterprise,
Corporations, transnational corporation etc.
ii. the advantages, disadvantages,
'H¿QLWLRQRI01&
iii. the examples of MNC
“A multinational corporation owns
and manages business in two or more
countries.”
- Neil H.Jacoby
A multinational company is one which is
incorporated in one country (called the “MNC is defined to be an enterprise
home country); but whose operations operating in several countries but
extend beyond the home country and managed from one country”
which carries on business in other
countries (called the host countries) in
addition to the home country. Oligopoly: It is a market condition
where there are very few sellers in the
It must be emphasized that the headquarters
same product line.
of a multinational company are located in
the home country. Global enterprises are the business
organisations which operate in more
than one country. Since they operate in
more than one nation they are also called
as Multi National Companies.
8.02 Advantages and

Disadvantages
Advantages
i. Low Cost Labour
MNC set up their facilities in low cost
countries and produce goods/service at
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lower cost. It gains cost advantage and sells vii. End of Local Monopolies
its products and services of good quality
The entry of MNCs leads to competition
at low cost. This is not available to smaller
in the host countries. Local monopolies of
companies which operate at regional level.
host countries either start improving their
ii. Quality Products products or reduce their prices. Thus MNCs
The resource, experience and expertise put an end to exploitative trade practices of
of MNCs in the sphere of research and local monopolists. As a matter of fact, MNCs
development enables the host country to compel domestic companies to improve
establish its research and development their efficiency and quality.
system which helps it in producing quality In India, many Indian companies acquired
goods and services at least possible cost. ISO-9000 quality certificates, due to fear of
iii. Proper Use of Idle Resources competition posed by MNCs.
Because of their advanced technical

viii. Improvement in Standard of
knowledge, MNCs are in a position to properly Living
utilise idle physical and human resources of
the host country. This results in an increase in By providing super quality products and
the National Income of the host country. services, MNCs help to improve the standard
of living of people of host countries.
iv. Improvement in Balance of
Payment Position
ix. Promotion of international
MNCs help the host countries to increase brotherhood and culture
their exports. As such, they help the host
MNCs integrate economies of various
country to improve upon its Balance of
nations with the world economy. Through
Payment position.
their international dealings, MNCs
v. Technical Development promote international brotherhood and
MNCs carry the advantages of technical culture; and pave way for world peace and
development 10 host countries. In fact, prosperity.
MNCs are a vehicle for transference of
technical development from one country Disadvantages
to another. Because of MNCs poor host
i. Danger for Domestic Industries
countries also begin to develop technically.
MNCs, because of their vast economic
vi. Managerial Development
power, pose a danger to domestic
MNCs employ latest management industries; which are still in the process of
techniques. People employed by MNCs do development. Domestic industries cannot
a lot of research in management. In a way, face challenges posed by MNCs. Many
they help to professionalize management domestic industries have to wind up, as a
along latest lines of management theory result of threat from MNCs. Thus MNCs
and practice. This leads to managerial give a setback to the economic growth of
development in host countries. host countries.
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ii. Transfer of Outdated Technology YLLL6HO¿VK3URPRWLRQRI$OLHQ

Culture
Where MNCs transfer outdated technology
MNCs tend to promote alien culture in
to host nation, it serves no purpose.
host country to sell their products. They
LLL1R%HQH¿WWR3RRU3HRSOH make people forget about their own
MNCs produce only those things, which cultural heritage. In India, e.g. MNCs
are used by the rich. Therefore, poor people have created a taste for synthetic food,
of host countries do not get, generally, any soft drinks etc. This promotion of foreign
benefit, out of MNCs. culture by MNCs is injurious to the health
of people also.
iv. Danger to Independence
Initially MNCs help the Government of the ix. Neglect of Industrial and
host country, in a number of ways; and then Economic Growth of Home
Country
gradually start interfering in the political
affairs of the host country. There is, then, an An investment in host countries is more
implicit danger to the independence of the profitable, MNCs may neglect home
host country, in the long-run. countries industrial and economic
development.
v. Deprivation of Job Opportunity of
Local People 8.03 Examples of MNCs
MNCs may not generate job opportunities List of Indian subsidiary companies
to the people of home country. of Foreign MNCs
vi. Misuse of Mighty Status

Indian
Foreign Company
MNCs are powerful economic entities. Affiliate /
Multinational Logo
They can afford to bear losses for a long Subsidiary
while, in the hope of earning huge profits-
once they have ended local competition and Bata
Bata India
achieved monopoly. This may be the dirty Corporation
marketing strategy of MNCs to wipe off
local competitors from the host country. Colgate
Colgate India
Palmolive
vii. Careless Exploitation of Natural
Resources
Sony
Sony India
MNCs tend to use the natural resources of Corporation
the host country carelessly. They cause rapid
depletion of some of the non-renewable Maruthi
Suzuki
natural resources of the host country. In Suzuki
this way, MNCs cause a permanent damage
to the economic development of the host Timex Timex watches
country.
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List of Indian Multinational

Companies and their Logo (Do you For Future Learning
know?)
Company Multinational companies establish

Company Headquarter
Logo themselves in developing countries to
enjoy huge profits by selling consumer
Micromax
Gurgaon goods or luxury items. They start
Informatics
business by offering wide variety of goods
at prices cheaper than local retailers
Hero
New Delhi offer. But once they are established they
Motocorp
increase prices.
a. State the values the government of

Bajaj Pune
a developing country ignores while
allowing MNCs to establish in their
country.
Britannia Bengaluru
b. What value do the MNCs violate?
TVS Chennai
TATA Mumbai
Case Study
INFOSYS Bengaluru
Public enterprises are established to
achieve the goal of economic and social
development of the country. They are
Key Terms managed and controlled by Central or
Oligopoly Global Enterprises State Governments through ministers
Exploitation Host Country or government officials. Many times
Domestic industry their poor performance i influences the
policy formulation and running of the
enterprise into loss. Even the big business
houses use their influence and get the
For Own Thinking
policies formulated in their favour. State
1. Name any 2 Indian Multinational the role of ministers or government to
Companies in abroad?
frame the policies for the success of
2. Name any 2 Foreign Companies in
public enterprises.
India?
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Exercise 1. Define Multinational Company.
I. Choose the Correct Answer 2. Write any two advantages of MNC.
3. Give two examples of MNC.
1. A Multinational Corporation can be
4. Name the type of business enterprise
defined as a firm which
which operates in more than one country.
a) is beyond the control of any
government III. Short Answer Questions
b) is one of the top 200 firms in the world 1. What are the advantages of MNC’s?
c) owns companies in more than one 2. What are the disadvantages of MNC’s?
country
d) All the above Reference
2. Centralised control in MNC’s implies 1. Mathur, B.S, Business Organisation

control exercised by 2. Shukula, M.C. Business Organisation.
a) Branches b) Subsidiaries
c) Headquarters d) Parliament
3. Enterprises operating in several countries
but managed from one country is termed
as _____
a) Government company
b) Multinational Company
c) Private company
d) Joint Venture
4. Dispersal of decision making power to
branches/affiliates/subsidiaries by head
office represents ______
a) Centralisation b) Decentralisation
c) Power d) Integration
5. Coca-Cola company is an example of
______
a) MNC
b) Government company
c) Joint Venture
d) Public company
Answers
1. c 2. c 3. b 4. b 5. a
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ICT CORNER
CHECK THE LOGOS OF GIVEN ORGANISATIONS
Identify the logos of

organizations
STEPS:
• GeoGebra Work book called “COMMERCE” will appear. In this several work
sheets for Commerce are given, Open the worksheet named “check the logos of
given organisations”
• Click on the boxes before the organisation names.
• Logos of respective organisations will appear as above.
Step1 Step2 Step3
URL:
https://ggbm.at/b9jZFxRE
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ORGANISATION
CHAPTER
GOVERNMENT ORGANISATION
9
Learning Objectives The Government thus, can own and control
industry and business in two ways:
To enable the students to understand
i. the meaning of Departmental i. By starting a new unit
undertaking, features, advantages and ii. By taking over an existing industrial
disadvantages or commercial unit owned by private
ii. the meaning of Public Corporation, persons.
features, advantages and disadvantages
iii. the meaning of Government
9.01 Meaning and Features of
Company, features, advantages and
Departmental Undertaking
disadvantages
Department form of organisation of
Introduction managing state enterprises is the oldest
form of organisation. In those days, no
Public enterprise, as a form of business distinction was made between the routine
organization gained economic importance functions of the Government and that of
in most of the countries of the world in the public enterprises. Therefore, most of
recent years. During the twentieth century, the early state owned enterprises were the
various Governments started participating best examples of the departmental form
in industrial and commercial activities. of organisation.Under departmental form
Previously, the role of Government was of organisation, a public enterprise is run
limited only to the maintenance of law as a separate full-fledged ministry or as a
and order. Industrial revolution helped major sub-division of a department of the
all-round growth of industries. Private Government.
entrepreneurs worked, only for the profit
motive. The exploitation of consumers and For example, the Indian Railways are
workers by private entrepreneurs was very managed by the Ministry of Railways.
common. The development of industries Post and Telegraph services are run
was left to the judgement of private as a department, under the Ministry
enterprises. Therefore, Government of Communication. The Delhi Milk
intervention became necessary to Scheme, All India Radio, Doordarshan
safeguard the interests of the public, even are other examples of departmental
in developed countries like USA and UK. undertakings.
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Features of 9.02 Advantages and

Departmental Undertaking Disadvantages
The salient features of a departmental Advantages
undertaking are as follows: Following are the advantages of the
departmental undertaking.
i. Ultimate Responsibility
The ultimate responsibility for the i. Easy Formation
management of a departmental undertaking It is easy to set up a departmental
lies with the minister concerned; who undertaking. The departmental undertaking
is responsible to the Parliament or State is created by an administrative decision
of the Government, involving no legal
Legislature for the affairs of the departmental
formalities for its formation.
undertaking. The minister, in turn, delegates
his authority downwards to various other ii. Direct and Control of Parliament or
management levels, in the departmental State Legislature
undertaking. The departmental undertaking is directly
responsible to the Parliament or the State
ii. Governmental Financing
legislature through its overall head i.e. the
The departmental undertaking is financed minister concerned.
through annual budget appropriations by
the Parliament or the State Legislature. The iii. Secrecy Maintained
Strategic industries like defence and atomic
revenues of the undertaking are paid into
power cannot be better managed other than
the government treasury.
government departments. Department
iii. Accounting and Audit undertakings can maintain secrecy in their
The departmental undertaking is subject working.
to the normal budgeting, accounting and iv. Lesser Burden of Tax on Public
audit procedures, which are applicable to all Earnings of departmental undertaking are
Government departments. entirely paid into Government treasury,
resulting in lesser tax burden on the public.
iv. Managed by Civil Servants
The departmental undertaking is managed v. Instrument of Social Change
by civil servants, who are subject to same Government can promote economic
service conditions as applicable to civil and social justice through departmental
servants of the Government. undertakings. Hence, a departmental
undertaking can be used by the Government,
v. Sovereign Immunity as an instrument of social change.
A departmental undertaking cannot be vi. Lesser Risk of Misuse of Public Money

sued anybody, without the consent of the As the departmental undertaking is
Government. subject to budgeting, accounting and audit
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procedures of the government; the risk of v. Government Interference

misuse of public money is relatively less. There is an excessive government
interference and control in department
vii. Guided by Rules and Regulations of
organisation. These undertakings are not
the Ministry
given freedom to decide their own policies.
The officers of the departmental undertaking Centralised control leads to delay in action.
are under the supervision of the direct Red-tapism and bureaucracy have become
administrative control of the ministry. They the limiting features of these organisations
are guided by the rules and regulations of
the ministry, framed with a focus on public vi. Lack of Professional Management and
welfare. Fear of Criticism
A departmental undertaking is managed
Disadvantages by civil servants, who do not possess
Following are the major limitations of the professional management skills. Moreover,
departmental undertaking. these managers could not afford to be
innovative, because of a fear of criticism by
i. Red-tapism the minister or the Parliament.
There is too much of procedures which
results in delay. Commercial organisation vii. Financial Dependence
cannot afford delay in taking decisions. A departmental undertaking is
economically and financially dependent on
ii. Incidence of Additional Taxation the Government’s budgetary allocations. As
Losses incurred by a departmental enterprise such, it cannot have its own independent
are met out of the treasury. This very often long range investment decisions, which
necessitates additional taxation the burden may bring enormous prosperity to the
of which falls on the common man. undertaking.
iii. Lack of Competition 9.03 Meaning and Features of

Civil Servants are given control of these Public Corporation
undertakings who may not have business A public corporation is that form of public
outlook or commercial experience. So, they enterprise which is created as an autonomous
run the undertaking in their own fashion unit, by a special Act of the Parliament or
without considering the sovereignty of the the State Legislature.
consumers.
Since a public corporation is created by
iv. Casual Approach to Work a Statute; it is also known as a statutory
As officers of a departmental undertaking corporation.
are subject to frequent transfers; they
The Statute defines the objectives, powers
develop a sense of casual approach to work.
and functions of the public corporation. Life
As a result, the operational efficiency of the
Insurance Corporation of India, the Indian
undertaking suffers a lot.
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Airlines, the Air India International, Oil iv. Financial Autonomy

and Natural Gas Commission etc. are some A public corporation enjoys financial
examples of public corporations in India. autonomy. It prepares its own budget;
List of Indian Departmental and has authority to retain and utilize its
Undertaking and their Logo earnings for its business.
Company v. Management by Board of Directors
Company Headquarter
Logo
Its management is vested in a Board of
Directors, appointed or nominated by the
Indian Railway New Delhi Government. But there is no Governmental
interference in the day-to-day working of
the corporation.
Department
of Food YL2ZQ6WD໤
New Delhi
and Public
A publication corporation has its own
Distribution
staff; whose appointment, remuneration
Tamilnadu and service conditions are decided by the
Police Chennai corporation itself.
Department
vii. Service Motive
The main objective of a public corporation is

Features of Public Corporation service-motive; though it is expected to the
i. Special Statute self-supporting and earn reasonable profits.
A public corporation is created by a special viii. Public Accountability
Act of the Parliament or the State Legislature.
A public corporation has to submit its annual
The Act defines its powers, objectives,
report on its working. Its accounts are audited
functions and relations with the ministry
by the Comptroller and Auditor General of
and the Parliament (or State Legislature).
India. Annual report and audited accounts
ii. Separate Legal Entity of a public corporation are presented to the
A public corporation is a separate legal entity Parliament or State Legislatures, which is
with perpetual succession and common entitled to discuss these.
seal. It has an existence, independent of the 9.04 Advantages and
Government. It can own properly; can make Disadvantages
contracts and file suits, in its own name.
Advantages
iii. Capital Provided by the Government
i. Bold Management due to Operational
The capital of a public corporation is Autonomy
provided by the Government or by agencies A public corporation enjoys internal
controlled by the government. However, operational autonomy; as it is free from
many public corporations have also begun Governmental control. It can, therefore,
to raise money from the capital market. run in a businesslike manner. Management
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can take bold decisions involving by the Government. As such, there is lesser
experimentation in its lines of activities, likelihood of exploitation of any class of
taking advantage of business situations. society, by the public corporation.
ii. Legislative Control vii. Reasonable Pricing Policy

Affairs of a public corporation are subject A public corporation follows a reasonable
to scrutiny by Committees of Parliament pricing policy, based on cost-benefit analysis.
or State Legislature. The Press also keeps Hence, public are generally satisfied with
a watchful eye on the working of a public the provision of goods and services, by the
corporation. This keeps a check on the public corporation.
unhealthy practices on the part of the
management of the public corporation. Disadvantages
i. Autonomy and Flexibility, Only in
LLL4XDOL¿HGDQG&RQWHQWHG6WD໤ Theory
Public corporation offers attractive service Autonomy and flexibility advantages of
conditions to its staff. As such it is able to a public corporation exist only in theory.
attract qualified staff. Because of qualified In practice, there is a lot of interference
and contented staff, industrial relations in the working of a public corporation by
problems are not much severe. Staff has a ministers, government officers and other
motivation to work hard for the corporation. politicians.
iv. Tailor-Made Statute ii. Misuse of Monopolistic Power

The special Act, by which a public Public corporations often enjoy monopoly
corporation is created, can be tailor-made in their field of operation. As such, on the
to meet the specific needs of the public one hand they are indifferent to consumer
corporation; so that the corporation can needs and problems; and on the other hand,
function in the best manner to achieve its often do not hesitate to exploit consumers.
objectives.
iii. Rigid Constitution
Y1RW$໤HFWHGE\3ROLWLFDO&KDQJHV
The constitution of a public corporation is
Being a distinct legal entity, a public very rigid. It cannot be changed, without
corporation is not much affected by political amending the Statute of its formation.
changes. It can maintain continuity of policy Hence, a public corporation could not be
and operations. flexible in its operations.
vi. Lesser Likelihood of Exploitation LY/RZ0DQDJHULDO(໥FLHQF\
The Board of Directors of a public corporation Quite often civil servants, who do not
consists of representatives of various interest possess management knowledge and skills,
groups like labour, consumers etc. nominated are appointed by the government on the
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Board of Directors, of a public corporation. Central Government may direct that any of
As such, managerial efficiency of public the provisions of the Companies Act shall
corporation is not as much as found in not apply to a Government company or
private business enterprises. shall apply with certain modifications.
v. Problem of Passing a Special Act List of Public Corporations and their
Logo
A public corporation cannot be formed
without passing a special Act; which is a time Company Headquarter Company Logo
consuming and difficult process. Hence, the
Food
scope for setting up public corporations is Corporation of New Delhi
very restricted. India (FCI)
vi. Clash of Divergent Interests
In the Board of Directors of public

ONGC New Delhi
corporation, conflicts may arise among
representatives of different groups. Such
clashes tell upon the efficient functioning of
the corporation and may hamper its growth. Tourism
Corporation of New Delhi
India
9.05 Meaning and Features of
Government Company
ii. Executive Decision of Government
A “Government company” is defined under
Section 2(45) of the Companies Act, 2013 A Government company is created by an
as “any company in which not less than executive decision of the Government,
51% of the paid-up share capital is held by without seeking the approval of the
the Central Government, or by any State Parliament or the State Legislature.
Government or Governments, or partly by iii. Separate Legal Entity
the Central Government and partly by one
or more State Governments, and includes a A Government company is a legal entity
separate from the Government. It can
company which is a subsidiary company of
acquire property; can make contracts and
such a Government company”.
can file suits, in its own name.
Features of Government Company iv. Whole or Majority Capital Provided by

Government
i. Registration Under the Companies Act
The whole or majority (at least 51%) of
A Government company is formed through the capital of a Government company
registration under the Companies Act, is provided by the Government; but the
1956; and is subject to the provisions of this revenues of the company are not deposited
Act, like any other company. However, the into the treasury.
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v. Majority of Government Directors management skills, technical know-

Being in possession of a majority of share how and expertise of the private sector
capital, the Government has authority to and foreign countries. For example, the
appoint majority of directors, on the Board Hindustan Steel Limited has obtained
of Directors of a government company. technical and financial assistance from
the U.S.S.R., West Germany and the U.K.
YL2ZQ6WD໤ for its steel plants at Bhilai, Rourkela and
A Government company has its own staff; Durgapur.
except Government officials who are sent
to it on deputation. Its employees are not iv. Easy to Alter
governed by civil service rules. Objectives and powers of the Government
Company can be changed by simply altering
vii. Free from Procedural Controls
the Memorandum of Association of the
A Government company is free from company, without seeking the approval of
budgetary, accounting and audit controls, the Parliament.
applicable to Government undertakings.
v. Discipline
viii. Accountability to the Parliament/ The Government Company is subject to
State Legislature
provisions of the Companies Act; which
The Annual Report of a Government keeps the management of the company
company is placed before the Parliament or active, alert and disciplined.
the State Legislature.
vi. Professional Management
9.06 Advantages and A Government company can employ

Disadvantages professionally qualified managers; because
it has its own personnel policies.
Advantages
vii. Public Accountability
i. Easy Formation
The Annual Report of a Government
A Government company can be easily
company is presented to the Parliament/
formed under the Companies, Act, just by
State Legislature. These reports can be
an executive decision of the government.
discussed and debated there.
ii. Internal Autonomy
Disadvantages
A government company can manage
i. Board of Directors Packed with
its affairs independently. It is relatively ‘Yes-Men’
free from ministerial control and
On the Board of Directors of a government
political interference, in its day-to-day
company, there are Government appointed
functioning.
directors (Government being the major
iii. Private Participation shareholder); who are ‘yes-men’ of the
Through Government company Government. They are unable to run the
device, the government can avail of the company, in a businesslike manner.
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ii. Autonomy Only in Name

Tamil Nadu
Independent character of a Government State Transport Chennai
company exists only in name. In reality, Corporation Ltd.
politicians, ministers, Government officials,
Gas Authority of
interfere excessively in the day-to-day New Delhi
India Limited
working of the government company.
iii. A Fraud on Companies Act and
Constitutions
v. Lack of Expertise in Deputationists
A Government company is criticized as being
The key personnel of a Government company
a ‘fraud on the Companies Act and on the
are often deputed from Government
Constitution. This criticism is valid on the
departments. These deputationists generally
ground that the Government can exempt
lack expertise and commitment; leading
a Government company from application
to lower operational efficiency of the
of several provisions of the Companies
government company.
Act. Again, the Parliament is not taken into
confidence, while creating a Government YL6HO¿VK)XQFWLRQLQJ
company. The Government Company works neither
iv. Fear of Exposure for the government nor for the public at
large. It serves the personal interests of
The annual report of the government
people who work in the company and who
company is placed before the Parliament/
dictate policies of the company.
State Legislature. The working of the
company is exposed to Press criticism:
Therefore, management of the Government Key Terms
Company often gets demoralized and may
Departmental Undertaking
not take initiative to come out with and
implement something innovative. Public Corporation
Government Company
list of Government Company and Nationalisation
their Logo
Company
Company Headquarter
Logo
For Own Thinking
1. Name any two examples of
Coal India Ltd Kolkata Departmental undertaking business.
2. Name any two examples of Public
corporation.
Steel Authority 3. Name any two examples of
New Delhi
of India Ltd Government Company.
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Case 2: Mr.Sudhan is studying in B.Com,

For Future Learning
1st year. His father, Mr.Somu is a leading
(a) Organise a debate in your class on the businessman in Chennai. Somehow,
motion “Public Enterprises in India Mr.Sudhan does not know anything
have failed to achieve their objectives”. about utilities. But he is to prepare a
Select a few good speakers for the lesson for his class in this topic. He
purpose. State the points for and request his father for help. His father tells
against the motion. Mr.Sudhan that Public utilities are no
(b) Recently a discussion on “The different from his own business except
objectives of Public sector undertakings that these are controlled by Government
was organised by the Friends Circle, a instead of private people. Meanwhile,
private cultural organization of the city Mr.Chandrasekaran a friend of Mr.Somu
of Chennai. One of the participants, comes there. Mr.Chandrasekaran is an
Mr.Ramesh happened to be a social employee of Chennai Electricity Supply
worker. He observed, “the objective Undertaking. Mr.Chandrasekaran
of Public Enterprises is to serve intervenes in the conversation going on
the Society and not to earn profits”. between Mr.Somu and his son and hold
Mr.Deepesh, an advocate, objected to that Mr.Sudhan is not correct; there are
Mr.Ramesh’s statement and gave his other special features of public uutilities,
own view point. Thus continued the too. Perform the characters of Mr.Sudhan,
discussion.If you have participated in Mr.Somu and Mr.Chandrasekaran and
that discussion, what should have been state your positions.
your stand and why?
Exercise
Case Study I. Choose the Correct Answer

1. The share capital of the
Case 1: You are a newly appointed MD government company
of a foreign sector tourist Bus transport must not be less than
company. The management of the bus a) 49 % b) 51 %
Transport undertaking of your city finds c) 50 % d) 25 %
that its buses are not able to attract very
many tourists. Private Mini-Buses are 2. Airport Authority of India is a public
seen to be preferred by people on certain enterprise. Identify the form of
routes. As a result, the undertaking is organisation
incurring losses. Therefore, management a) Statutory Corporations
wants to reformulate its price policy. As a b) Departmental Undertakings
CEO or MD what advice can you give to c) Multi-National Corporations
it? Explain.
d) State Owned Company
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3. The oldest form of organisation in public III. Short Answer Questions

sector 1. List the areas where the state or central
a) Public Sector Undertakings ownership is a preferred form of business
b) Departmental Undertakings organisation. Justify your choice of areas.
c) Multi National Corportions 2. What are the different kinds of
organisations that come under the public
d) Statutory Corportion
sector?
4. A Government company purchases 3. List the names of some enterprises under
shares in the name of the public sector and classify them.
a) Prime Minister 4. Define Departmental undtertakings.
b) President 5. What is meant by Government
Company?
c) Chief Justice of India
d) State Chief Minister IV. Long Answer Questions
5. The primary objective of the state 1. What are the advantages and
enterprises is to ______ disadvantages of Departmental
undertaking?
a) Earn profit
2. What are the features of Public
b) Provide Employment
corporation? (Any 5)
c) Serve the People
3. What are the Features of Government
d) All the Above company? (Any 5)
Answers 4. What are the advantages and
1. b 2. b 3. b 4. b 5. c disadvantages of Public corporation?
5. What are the features of Departmental
organisation? (Any 5)
1. State the different types of public sectors Reference

enterprises.
1. Bhushan,Y.K, Business Organisation and
2. What is the basic feature of a Management
Departmental undertaking?
2. Sundar,K, Business Organisation
3. Give two examples for each of the
following:
(i) Private sector enterprises (ii) Global
enterprises
(iii) Public enterprises
4. State the form of public enterprises which
is most suitable for projects related to
National Security.
5. The Industrial Policy Resolution 2001
exclusively reserved for few industries for
the public sector. Name these industries.
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CHAPTER
10 RESERVE BANK OF INDIA
10.02 Banking Service

Learning Objectives
Banking service is the nerve center of
To enable the students to industry and commerce in a country. It
i. understand the meaning of central plays a vital role by providing the money
bank required for their regular functioning and
ii. gain knowledge about the origin of development. The word Bank, normally
the Reserve Bank of India refers to commercial bank. There are many
iii. describe the functions of the RBI types of banks rendering different types of
services. Central Bank is the most important
one among them.
10.01 Need for the Study on Every nation has one central bank. It is
Service Business
owned by the Government of the country.
Educational, medical, hospitality and The control over the entire banking system
the like service business existed for of a country is vested with this apex bank.
centuries. Its prominence in the global Central banks are known by different names
trade is of recent origin i.e., after 1970. in different countries. Their functions also
“The services sector has emerged as vary from country to country. A Central
the most dynamic sector of the world bank is set up as an autonomous or quasi-
economy, contributing almost one-third autonomous body. Stability and growth of
of world gross value added, half of world the country’s economy are the main goals of
a Central bank. In India the Reserve Bank of
employment, one-fifth of global trade
India (RBI) is the central bank.
and more than half of the world foreign
direct investment flows. It remains the 10.03 The Historical
key driver of India’s economic growth, Development of Banks in
contributing almost 66.1 per cent of its India
gross value added growth in 2015-16” - i. Bank of Hindustan was the first bank in
quotes the Indian Budget Estimate for India established in 1770 and was closed
2015-16. in 1932.
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These Presidential Banks were amalgamated

Banking in ancient India
into the Imperial Bank of India on 27 January
Rudimentary banking activities were 1921. It confined its operations to the urban
carried out in India 3500 years ago sector and rural sector was completely
(1500 CE). Interest earning and usury neglected in those days. Therefore, after
(unreasonable interest) were prevalent Independence, an Act was passed in
during the Vedic period. 1200 years Parliament to take over the Imperial Bank
before (8th century CE) the following of India by the Government and State Bank
concepts were in practice in Tamil Nadu: of India came into being on July 1, 1955.
Patru-debit, Varavu-credit, Selavu-
expenditure, Laabam-profit, Nashtam- Stamp of Imperial Bank of India
loss, which all collectively known as

‘Iynthogai’-trial balance-. ‘Peredu’
referred to Ledger
Bronze coins used during Raja Raja Chola %DQN'H¿QLWLRQ

Period 985-1014 CE
According to Banking Regulation Act
1949, “Banking means the accepting for
the purpose of lending or investment
ii. The General Bank of India was of deposits of money from the public,
established in 1786 and was also repayable on demand or otherwise and
liquidated in 1791. withdrawable by cheque, draft, pay order
iii. Bank of Calcutta was the first joint stock or otherwise”.
bank established in 1806. It was renamed
as the Bank of Bengal in 1809.
iv. Bank of Bombay in 1840 and Bank of
Madras in 1843 were established.“These
banks are called Presidential
14 Banks were nationalised in India in
Banks”(Bengal, Bombay and Madras
the year 1969
only)
6 Banks were subsequently nationalised
1881witnessed the birth of ‘Audh Bank’ , in India in the year 1980
which was later renamed into Punjab NABARD stands for .........................
National Bank in 1894 (19-05-1894).
87
TYPES OF BANKS
DEVELOPMENT MULTILATERAL COOPERATIVE CREDIT PAYMENTS

CENTRAL COMMERCIAL SMALL FINANCE LOCAL AREA
BANKS DEVELOPMENT INSTITUIONS (95,487) BANKS
BANK BANKS BANKS(9) BANKS (3)
BANKS
Private Sector
Scheduled Industrial Paymets
Non Agricultural Urban Cooperative Rural Cooperative
Commercial Development Bank (3)
Scheduled banks Developmen t Banks (1574) credit institutions (93,913)
banks Banks
Banks
India Post
IDBI, ICICI Short Term Long Term Payments
Indian Foreign Banks (42) NABARD IFCI (722) (Public sector)
(93,191)
Banks
Scheduled Non Scheduled
UCBs (52) State Cooperative
UCBs (1522) SCARDBs
banks (32)
(20)
Public Se ctor Private Se ctor
banks Banks Multi State Single State Distrct/Central
Multi State PCARDBs
(20) (1502) coperative (702)
88
(31)
Banks (370)
Old Private
State bank of
Sect or Banks (13)
india Primary Agriculatural
Single State Multi Single Creidt Societies
(21) District District (92,789)
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Nationalised New Private Se ctor

Banks (19) Banks (8)
Unit UCB
Regional Rural
banks (56)
Non Unit
IDBI Bank UCB
Limited
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'H¿QLWLRQRI&HQWUDO%DQN
1. “A central bank being generally
recognized as a bank which
constitutes the apex of the monetary
and banking structure of its country
and which performs as best as it can,
in the national economic interest.”
- De Kock. He gave a list of seven
functions of central bank which are
accepted by majority of economists.
2. “It may be defined as an institution
charged with the responsibility
of managing the expansion and
contraction of the volume of money
in the interest of the general public After independence, the Government of
welfare.” - Kent. India passed Reserve Bank (Transfer to
Public Ownership) Act, 1948 and took over
3. “A Central Bank is the bank in any
RBI after paying appropriate compensation
country to which has been entrusted
to the private shareholders. From January
the duty of regulating the volume of
1, 1949, RBI started functioning as a
currency and credit in that country.”
government owned central bank of India.
- Bank of International Settlement
It had three departments. The RBI was the
(BIS).
central bank of Burma until 1947, and the
central bank of Pakistan until June 1948.
10.06 Origin of RBI
The Imperial Bank of India carried out
the note issue and other functions of the Emblem of RBI
central bank. In 1926 the Hilton-Young
Commission or the Royal Commission on
Indian Currency and Finance (J. M. Keynes
and Sir Ernest Cable were its members)
made recommendation to create a central
bank. As a result, the RBI Act 1934 was
passed and RBI launched in operations from
April 1, 1935. RBI was established with a
share capital of ₹5 crores divided into shares
of ₹100 each fully paid up. The entire share
capital was owned by private shareholders.
Its head office was in Calcutta and moved to
Mumbai in 1937.
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10.07 Organisational 1. India’s Representative in World

Structure of RBI Financial Institutions
The head office of the RBI is situated
In order to maintain consistency and
in Mumbai. This central office has 33
harmony with international banking
departments in 2017. It has four zonal
standards the RBI is associated with Basel
offices in Mumbai, Delhi, Calcutta and
Committee on Banking Supervision (BCBS,
Chennai functioning under local boards
Switzerland) since 1997. RBI represents
with deputy governors as their heads. It also
Government of India in International
has 19 regional offices and 11 sub-offices
Bank for Reconstruction and Development
(2017). The RBI is governed by a Central
(IBRD i.e. World Bank) and International
Board of Directors. The 21 member board
Monetary Fund (IMF) in which India is a
is appointed by the Government of India. It
member since December 27, 1945.
consists of;
2. Regulator and Supervisor of Indian
a. one governor and four deputy governors
Banking System
appointed for a period of four years,
The broad guidelines for all banking
b. ten directors from various fields operations in the country are formulated by
c. two Government officials the RBI. The RBI has power to issue licenses,
control and supervise commercial banks
d. four directors - one each from local under the RBI Act, 1934 and the Banking
boards. Regulation Act, 1949. It conducts inspection
of the commercial banks and calls for
10.08 Functions of RBI returns and other necessary information
The functions of the RBI can be grouped from them.
under three heads. 3. Monetary Authority
A. Leadership and Supervisory Functions The RBI formulates, implements and
B. Traditional Functions and monitors the monetary policy of the
C. Promotional Functions. country in order to maintain price stability,
controlling inflationary trends and
A. Leadership and Supervisory economic growth. It provides advices to
Functions
the Government concerning agricultural
India being the fastest growing economy in finance, resource mobilization for
the world, India is expected to play a major implementing plans and legislation affecting
role in the world affairs by many countries. banking and credit and international
RBI being the banking institutional head of finance.
India has to be a part of global institutions.
It has to transform the quality and size 4. Closely Monitoring Economic
of banks in India to the level of banks in Parameters
developed countries. Such functions get Broad economic parameters such as
prominence in current scenario. employment level, price levels and
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production levels, trade cycles, foreign 2. Monopoly of Note Issue

investment flows, balance of payments, The RBI is the sole authority for the printing
financial markets, etc., are closely monitored and issue of all currency notes in India except
by the RBI in order to achieve economic one rupee note. It is the duty of the RBI to
stability and growth. The Board of Financial ensure that sufficient number of good quality
Supervision (a committee of the Central currency notes is available to the public. It
Board of Directors) of the RBI meets exchanges currency and coins not fit for
at least once in a month (at times every circulation. One rupee note and all coins are
day) to closely monitor all these current issued by the Ministry of Finance. Currency
developments in the country. notes are printed at Nasik, Dewas, Salboni,
Mysore and Hoshangabad. (Currency notes
5. Promptly Responding to New are never printed outside India).
Challenges
3. Banker’s Bank
Whenever challenges arose before Indian
The relationship between RBI and other
Banking System, RBI promptly attend
banks in the country is just like the
them by issuing Master Circulars and by
relationship of a commercial bank with its
organising committees to analyse, review customers. The RBI maintains the current
and strengthen Indian Banking. A wealth accounts of all commercial banks in the
of information can be found in every country. All scheduled banks should deposit
Master Circular or committee report. a percentage of cash reserve with RBI.
Example: Gopalakrishnan Committee on All banks can receive loans from RBI by
“Information security, Electronic Banking”, rediscounting of bills and against approved
April, 2010 securities.
B. Traditional Functions
4. Controller of Credit and Liquidity
1. Banker and Financial Advisor to the
Government Controlling the credit money in circulation
and the interest rate in the country is a
The RBI accepts money into the Central major function of RBI. For this purpose,
and State Governments’ accounts and the RBI uses quantitative and qualitative
make payments on their behalf. It manages methods of credit control. Ensuring the
Government debt and is responsible for availability of sufficient cash and credit
issue of new loans. It advises the government (liquidity) for business transactions and
on the quantum, timing and terms of investment purposes in the economy is the
new loans. It provides ‘ways and means responsibility of RBI.
advances’ to the Governments to tide over
temporary financial needs. It takes up the 4.1 Quantitative Methods of Credit
responsibility of investment of the surplus Control
Government funds. Inter Government and The methods which influence the total
inter departmental account adjustments are volume of credit in Indian economy are
carried out by the RBI. called quantitative or general methods. An
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increase in the first three measures will ii. Marginal Requirement: It refers to the
reduce the volume of money in circulation percentage of the value of securities
in India and vice versa. submitted before issue of loans.
i. Bank Rate Policy: Bank rate refers to iii. Direct Action: The RBI takes corrective
the rate at which the RBI rediscounts the actions on any bank or banks that does
bills given by the Scheduled banks. not follow its guidelines. It is called direct
action.
Repo rate is the repurchase rate at which iv. Moral Suasion: The RBI puts pressure
the RBI repurchases the Government
on the banks towards liberal or restricted
securities (other securities also) from
lending during certain periods.
the Scheduled banks and gives loans.
Reverse repo rate is the rate at which the 5. Lender of the Last Resort
RBI borrows money from Commercial
banks by giving back those Government In times of emergency any bank in India can
securities. approach RBI for financial assistance. RBI
provides them credit. When other sources
ii. Cash Reserve Ratio (CRR): It is the ratio of getting credit are exhausted, all banks can
of Cash reserves with the RBI kept by obtain loan from RBI and hence it is called
Scheduled banks in proportion to the lender of last resort.
total Time and Demand Liabilities with
6. Clearing House Services
them.
RBI acts as clearing house and maintains
iii. Statutory Liquidity Ratio (SLR): It is the
ratio of money and money equivalents a clearing system for all commercial banks
kept within the bank in proportion to the in India. The aggregate amount of cheques
total Time and Demand Liabilities with presented by a bank on other banks
them. represents the claim by that bank on other
banks. Similar claims are made by all the
iv. Open Market Operations: The RBI
banks on every other bank in the clearing.
directly buys or sells the securities and
A net settlement is arrived at the clearing
bills in the money market either to
house and accordingly the debit or credit
decrease or to increase the total volume
entry is made in their current accounts.
of money.
The cash reserves kept by the banks with
4.2 Qualitative Credit Control Measures: RBI is utilised for this purpose. Clearing
system saves time and eliminates paperwork
These methods influence the volume of
and other difficult (otherwise tasks) tasks
money in selected or particular sectors of
involved in inter-bank settlement. Though
the economy.
the RBI maintains the clearing house system
i. Rationing of credit: Maximum limit is only 14 clearing houses are owned by the
fixed for lending to certain sectors or RBI, 840 are managed by SBI and 6 by
specific purposes. nationalised banks (total 860).
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7. Custodian of Foreign Exchange Reserves in order to include more people to avail

The RBI maintains a reserve of gold and banking services. It has also taken up the task
foreign currencies. When foreign exchange of extending the banking system territorially
reserves are inadequate for meeting balance and functionally to the unbanked areas.
of payments problem, it borrows from the
2. Grievance Settlement Measures
International Monetary Fund (IMF). It
also administers exchange control of the RBI has appointed 20 (up to 2017)
country and enforces the provisions of Banking Ombudsman in 20 state capitals.
Foreign Exchange Management Act, 1999. Banking Ombudsman Scheme is a speedy
Development and maintenance of foreign and inexpensive forum for resolution of
exchange market in India is also the function customer complaints relating to certain
of RBI. services rendered by banks in India.
8. Maintenance of Foreign Exchange Rate 3. Agricultural Development

The RBI manages the exchange value of the Agriculture industry is specified as priority
rupee in order to facilitate India’s foreign sector by the RBI. The loans of all scheduled
trade and payments. It ensures that normal banks should consist of a percentage of
short-term fluctuations in trade do not loans to priority sector. It works in close
affect the exchange rate. association with NABARD to develop
agriculture in India.
9. Collection and Publication of Authentic
Data 4. Promotion of Small Scale Industries
It has also been entrusted with the task of Micro Small and Medium Enterprises are
collection and compilation of statistical included in the priority sector. All scheduled
information relating to banking and other banks are required to open separate
financial sectors of the economy. RBI branches to specialise the financing of these
monthly bulletin, annual report and various industries.
committee reports contain treasures of
authentic data. 5. Facilitates Foreign Trade
The RBI has simplified the rules for credit to
C. Promotional Functions
exporters, through which they can now get
The RBI performs a wide range of long term advance from banks.
promotional functions to support national
objectives. 6. Supports Cooperative Sector
It helps cooperative banks by relaxing rules
1. Nurturing Banking Habits among the
and providing indirect financing.
Public
It is the responsibility of RBI to maintain the The rupee symbol was changed from Rs.
public confidence in the banking system. It to “ ` ” by the Government of India on July
protects the depositors’ interest and aim at 15, 2010. This became necessary since other
providing cost-effective banking services countries Indonesia, Mauritius, Nepal,
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Achievements of the RBI Key Terms

1. RBI is one of the best central banks in Amalgamation
the world. RBI took proactive measures Lender of last resort
during global economic slowdown in
Clearing house
2008-09 to save Indian economy.
Banking ombudsman.
2. National Bank for Agriculture and
Rural Development (NABARD) was
once a subsidiary of RBI. It is the first
of its kind in the entire world. For Own Thinking
3. The demonetisation in 2016-17 was a A Debate on demonetisation and
grand success because of the leadership remonetisation
role of the RBI.
Pakistan and the Seychelles also called their

currencies rupee. Among global currencies For Future Learning
Indian rupee is given the code INR (Indian
Rupee) by the International Organisation
for Standardisation. 1. Know the Central Banks of Some other
Countries
The Central Bank of Russia is the Bank
of Russia
The Central Bank of Sri Lanka is the
Central Bank of Sri Lanka
Demonetisation and
Remonetisation ■ The Central Bank of the USA is
__________________________
Government of India on the recommendation ■ The Central Bank of Pakistan is
of the RBI carried out demonetization __________________________
on November 8, 2016 in order to; a) to
crack a whip against black money, b) drive 2. Mention the names of Central Banks
out counterfeit currency in circulation, in three other countries
c) formalization of cash dependent business, i…………………
and d) dismantling the financial strength of ii…………….……
terrorism and naxalism. There were ` 17,118 iii…………….……
billion value of ` 500 and `1000 currency 3. Understand the concepts monetary
notes in circulation before demonetisation. authority, banking system, financial
They consisted of around 2,203 crore pieces system
of notes. Of these 98.96% notes were returned
to the banks. Subsequently remonetisation 4. Collection of names of RBI Governors
was carried out by issuing new ` 2000 and 5. Collection of photo copy of currencies
` 500 currency notes. and coins in India.
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4. Bankers are not only dealers of money

but also leaders in
Case Study
(a) Economic development
1. Take up a recent newspaper clipping (b) Trade development
about RBI such as the measures taken (c) Industry development
to reduce NPA. etc.
(d) Service development
2. Arrange for a group discussion on
customer grievances and the cases 5. Which of the following is not a function
settled by Banking Ombudsman of a central bank?
offices. (a) Guiding and regulating the banking
3. Visit the RBI website www.rbi.org.in system of a country
to read and have a discussion on any
(b) Deal with the general public
annual report, etc.
(c) Acts essentially as Government
banker
(d) Maintains deposit accounts of all
Exercise other banks
Answers
1. (a) 2. (d) 3.(b) 4.(a) 5. (b)
1. Which bank has the
power to issue bank notes?
(a) Central bank 1. What are the services included in Service
(b) Commercial bank businesses?
(c) Co-operative banks 2. Write the meaning of ‘Bank.’
(d) Foreign banks 3. Briefly explain about Central Bank.
2. The Central bank of India is III. Short Answer Questions

(a) PNB 1. Mention the importance of banking
(b) SBI services.
(c) ICICI 2. Explain the origin of RBI.
(d) RBI 3. Who are the persons involved in RBI
administration?
3. The Reserve Bank of India commenced
its operations from April 1, IV. Long Answer Questions
(a) 1936 1. Classify the various functions of Reserve
(b) 1935 Bank of India.
(c)1934 2. Explain the organizational structure of
(d) 1933 RBI.
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Reference
1. Gordon E and Natarajan. K, 2013,
“Banking Theory, Law and Practice”,
23rd ed., Himalaya Publishing House
Private Limited, Mumbai-4
2. Kandasami K. P. and others, 2016, “
Banking Law and Practice”, S. Chand &
Company Pvt. Ltd., New Delhi-55
3. Machiraju. H. R, 2013, “Indian Financial
System”, 4th ed., Vikas Publishing House
Pvt. Ltd., New Delhi-14
4. Indian Institute of Banking and Finance,
2015, “Principles and Practices of
Banking”, 3rdedn. Macmillan Publishers
India Private Limited, Chennai-2
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CHAPTER
TYPES OF BANKS
11
Learning Objectives
agriculture, industries, transport, etc. in
To enable the students to order to earn profit. Their lending is in
i. understand the various types of banks comparatively small amounts and mostly
ii. describe the activities of various types for short and medium period. They also
of banks provide other services like remittance of
iii. compare one type of bank with funds, safe keeping of valuables, collection
another one of cheques, s, issue of letters of credit, etc.
They operate with a head office and a
network of branch offices spread throughout
11.01 Introduction
the country. They also issue guarantees
There are different types of banks to businessmen. When a businessman or
performing different sets of functions. industrialist buy machinery on credit or
Though all types of banks deal in money, apply for a big contract bank guarantees that
each type cater to the needs of different in case the customer fails the bank will make
sectors. Therefore a study of all these types the payment.
of banks is essential. Different types of banks
can be understood by a glance at the chart Examples:
given in the chapter 10.
i. State Bank of India
11.02 Types of banks ii. Karur Vysa Bank
iii. Standard Chartered Bank
Banks can be classified as follows.
3. Development Banks
A. Based on the functions of banks
Huge finance required for investment,
B. Based on the status given by the RBI -
expansion and modernisation of big
Reserve Bank of India
industries and others are granted by a
C. Based on the ownership pattern separate type of banks called development
Banks. They are also called industrial banks.
A. Based on the functions of banks The objective of development banks is not
1. Central Bank – Refer to Chapter 10 profit. Their aim is to develop the country
and create employment opportunities.
2. Commercial Banks
Finance is provided by them for medium
Banks which accept deposits from the public and long terms ranging from five to twenty
and grant loans to traders, individuals, years. Development banks do not accept
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deposits from the public. They subscribe and agricultural development and not
the shares and debentures of the industries. profit earning. They are set up in towns and
They provide technical and managerial villages rather than cities. Compared to the
consultancy services to industrialists. IDBI commercial banks they offer less variety
Bank established as the apex development of services as the bye laws do not permit
bank in I964 and was transformed into public all commercial bank activities. National
sector commercial bank in 2004. Currently Cooperative Development Corporation
it performs both development bank and (NCDC) established in 1963 is providing
commercial bank functions. Its name loans and grants to State Governments
changed into IDBI Bank Limited in 2008. for financing cooperative societies.
When a development bank is established NCDC concentrates on projects like water
for the development of agriculture industry conservation, irrigation, agri-insurance,
it is called agricultural development bank. rural sanitation, etc.
National Bank for Agriculture and Rural
Development is such a bank Examples:
Examples: i. National Agricultural Cooperative

Marketing Federation of India Ltd.
i. Industrial Finance Corporation of India (NAFED) was set up in 1958 and
- IFCI registered under the Multi State Co-
ii. Small Industries Development Bank of operative Societies Act.
India -SIDBI ii. Tamil Nadu State Apex Cooperative
iii. MUDRA bank (for the development of Bank - Head Office, Chennai
micro industries)
iii. Madurai District Central Cooperative
4. Cooperative Banks Bank Ltd.
All cooperative banks in India are owned by v. Batlagundu Cooperative Urban Bank
its customers or members who are farmers, Ltd. Dindigul District
small traders and others. Cooperative banks
in India are either urban based or rural 5. Foreign Banks
based. Rural cooperative banking structure Banks which have registered office in a
in India has three tier structure for short foreign country and branches in India are
term loans and two tier structure for long called foreign banks. These banks open
term loans (refer chart). For both these their offices in big cities and port towns
structures the apex body is National Bank only. Mostly they serve the interests of
for Agricultural and Rural Development - the multinational companies, employees
NABARD. All cooperative banks in Tamil and other business institutions. Their
Nadu are registered under Tamil Nadu profitability is higher than Indian banks. In
Cooperative Societies Act 1983. They 2017, there were 42 Foreign Banks in India
are controlled by both RBI and the State and all of them were scheduled banks. They
Government. Their foremost objective is have to oblige both their home country
providing service to its members for rural banking regulations and the RBI regulations.
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Examples:
All about LDBs and Cooperative
Credit Societies i. Bank of America - The USA
1. In 1920, first Land Mortgage Bank ii. Barclays Bank - The UK
(LMB) was established in India. Land iii. Deutsche Bank - Germany
Mortgage Act was passed in 1930. 6. Regional Rural Banks - RRBs
These banks provided long term loans
The RRBs were formed under the Regional
to farmers mainly for redemption
Rural Bank Act 1976, jointly by the
of debt. After 1960 LMBs started
Central Government, State Government,
financing productive projects like and a sponsor bank. Their share capital is
digging of wells, installation of pump contributed by these sponsors in the ratio
sets, etc. Thereafter they were called of 50:15:35. They are established as low cost
Land Development Banks. In view of institutions in rural areas. Their objective
the broader role of LDBs they are now is to develop rural economy and play
known as SCARDBs. Under the RBI supplementary role to cooperative societies.
control there is no land development They mobilise deposits from the rural public
in India today. and provide finance to rural artisans, small
entrepreneurs and farmers and try to avoid
2. First Cooperative Societies Act
their dependency on money lenders. As on
was passed in 1961 by Tamil Nadu 31.3.2016, there were 56 RRBs in India with
Government. In 1983, it was repealed 14,494 branches. They are regulated and
and a new Act was passed. All supervised by NABARD.
Cooperative banks in Tamil Nadu are
controlled by this Act. Examples:
3. If the area of operation of the bank i. Pallavan Grama Bank, Salem,

extends to two or more states, they Tamil Nadu
are registered under Multi State ii. Pandian Grama Bank,Thirumangalam,
Cooperative Societies Act, 2002. Madurai Dirstict, Tamil Nadu
4. Primary Agricultural Credit Societies iii. Vallalar Grama Bank, Chidambaram,

(92,789 - refer chart) in India do not Cuddalore District, Tamil Nadu
carry the name banks and they are not iv. Paduvai Bharathiyar Grama Bank,
recognised by the RBI as banks. These Villiyanur, Puducherry.
societies should not receive deposits
from the public. Insurance cover 7. Specialised Banks
provided by the RBI to deposits are not Some banks are created for special purposes
available for them from the Deposit by the Government. Export and Import
Insurance and Credit Guarantee Bank of India was set up through Export-
Corporation. Import Bank of India Act, 1981. Its main
objective is to facilitate international trade of
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Indian businessmen. EXIM Bank provides Deficiencies are found in the original
finance for import of technology, export model of LABs. There are practical
product development, pre-shipment and difficulties in the operation of these
post-shipment and overseas investment. banks. Even after 20 years (1996-2017)
National Housing Bank was established LABs could not make an impact in rural
under the National Housing Bank Act, 1987. development. Therefore further licensing
It is a wholly owned subsidiary of the RBI. to LAB has been stopped.
The objective of NHB is to promote housing
9. Small Finance Banks
finance institutions at local and regional
levels in India. Small Finance Banks (SFBs) are private sector
banks set up in unbanked and underbanked
Example: regions of the country to achieve financial
(i) Export - Import Bank of India inclusion. Their objectives are;
(EXIM Bank) a. mobilising rural savings (accepting
(ii) National Housing Bank (NHB) deposits) and
b. providing credit to
8. Local Area Banks
Local Area Bank (LAB) scheme was i. small and marginal farmers
introduced by the RBI in August 1996. LABs ii. to micro and small industries and
are small private sector banks established iii other unorganised sector entities.
in rural and semi-urban areas. Each bank In September 2015, RBI granted
serves two or three adjoining districts only. provisional licenses to 8 Non-Banking
Their main objective is to mobilise rural Finance Companies (NBFCs) already
savings (accept deposits) and invest them engaged in microfinance to be converted
in the same areas. They have to follow the into SFBs and 2 others. SFBs are low cost
priority sector lending targets, including structure banks. They are formed under
the targets on loans to weaker sections. section 22 of the Banking Regulation
RBI received 227 applications for setting Act 1949.
up LABs. 10 were considered for approval
and six were given license under Section 22 Examples:
of the Banking Regulation Act, 1949. Only i. ESAF SFB, Thiruvananthapuram,
three LABs are functioning now. Kerala.
Exmaples: ii. Ujjivan SFB Limited, Bengaluru,

Karnataka, (has 10,000 employees)
i. Coastal Local Area Bank, Vijayawada,
iii. Fincare SFB, Ahmedabad, Gujarat, has
Andhra Pradesh.
25 branches spread over several states.
ii. Krishna Bhima Smruddhi Local Area Bank,
Mahabubnagar, Telangana. 10. Payment Bank
iii. Subhadra Local Area Bank Limited, Payment banks are formed to widen
Kolhapur, Maharashtra. the spread of payment and financial
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Indigenous bankers, Money lenders, Chit funds and Nidhi companies

1. Manusmriti, the ancient legal text reveals that different rates of interest existed during
2nd century BCE. Certain community based businessmen provided loans for interest in
different parts of India. Today any individual as well as institution lend money in rural,
and urban areas. All of them are called indigenous bankers and money lenders. They are
not bankers at all. The report of the study group of RBI released in 2002 concludes that
the loans from money lenders constitute 25.7 percent of the loans of farming household
at all India level and 53.4 percent at Tamil Nadu level. The reasons for their indispensable
existence are: a. They disburse loan at doorstep at any time of the day with or without
security. b. They provide the required amount and at the required time. c. Very less
documentation and procedures. d. Banks are not willing to advance loans to farmers or
labourers with less income levels.
Many lenders charge exorbitant rates as high as 20 percent per day. (1216 percent per
annum). It is called ‘kandhuvatti” or ‘flight vatti” in Tamil. Such money lenders exist
in other states of India and other countries also. The Usurious Loans Act 1918 of the
Government of India and the Tamil Nadu Prohibition of Charging Exorbitant Interest
Act 2003 prohibit charging such interest rates.
2. Under Tamil Nadu Money Lenders Act, 1957 license is issued by Tahsildars for money
lending business. Pawn brokers obtain license under Tamil Nadu Pawn Brokers Act,
1943.
3. Chit Fund Act 1982 is applicable to chit funds (a type of savings scheme) throughout
India. They are regulated by State Governments and not by the RBI.
4. Nidhi Companies promote thrift and savings habit among members and they are
registered under Companies Act, 2013. Only Nidhi companies fulfilling certain norms
are registered and regulated by the RBI. Others not regulated.
All the above are not banks recognized by the RBI as such and do not come under strict
controls of the RBI.
services to small businesses, low-income Examples:

households, and migrant labourers. These i. Airtel Payment Bank Limited
banks should be fully networked from the
ii. Paytm Payment Bank Limited and
beginning. They offer doorstep banking
iii. India Post Payment Bank Limited -
payment for a small fees prescribed on
IPPBs (Public Sector Bank).
the basis of the amount. They issue ATM/
debit cards, internet banking and third 11. Multilateral Development Banks -
party fund transfers. They can’t lend MDBs
money and issue credit cards. In August A Multilateral Development Bank is
2015, the RBI gave ‘in principle’ licenses formed by the Governments of a group of
to Payment Banks. countries.
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The member countries consist of developed in India. There are five Urban Cooperative
donor countries and borrower countries. Banks and three Local Area Banks which
International Bank for Reconstruction and function as non-scheduled banks in India.
Development, Asian Development Bank, Small Finance Banks and Payments Banks
African Development Bank, and European have not been licenses under Section 22 of the
Investment Bank are some of the MDBs. Banking Regulation Act, 1949.
B. Based on the Status given by the C. Based on the Ownership Pattern

RBI
Any bank in which not less than 51 percent
Scheduled Banks and Non Scheduled of shares are owned by the Government
Banks are called Government banks or public
All banks which satisfied the norms and sector commercial banks (Total 21). All
included in the Second Schedule to the RBI nationalized banks (19 banks, in 2017), SBI
Act, 1934 are called scheduled banks. Such and IDBI Ltd. are public sector commercial
banks are given financial accommodation banks. All of them are joint stock company
and remittance facilities at concessional type banks. There are corporation type
rates by the RBI. banks. Each corporation type bank is
established by a separate Act of Parliament
There is no non-scheduled commercial bank and is fully owned by Government of India.
(private sector, public sector and foreign banks)
Examples:
IFCI, SIDBI, EXIM Bank, etc.
India needs Large Sized Banks
Industrial and Commercial bank of China All banking companies owned by private
is the first ranked bank in the world with an people are called private sector commercial
asset size of USD 3,893.23 billion. Punjab banks. All cooperative banks are owned by
National Bank, the largest nationalised its members from the public.
bank in India has an asset base of USD 1n 1969, there were 14 private banks which
100 billion and its rank is 717. SBI a public were concentrated in cities and towns.
sector bank merged with its five associates Their objective was to earn more profits.
and BharatiyaMahila Bank with effect In order to channelize the funds with
from April 1, 2017 and after merger its these commercial banks towards national
asset size is USD 573 billion (₹37 trillion). priorities and to develop agricultural and
This will boost it among the top 50 banks rural sector nationalization of banks was
(SBI earlier rank 272). National Bank of undertaken. Government paid the share
Australia has an asset base of USD 578.46 capital of those banks to the private owners
billion and it’s rank is 49. To compete with and took over as Government banks. This
large sized banks in the world India needs is called nationalization of banks. 6 more
more large sized banks. Therefore merger banks were nationalised in 1980. New
of many nationalised banks is under Bank of India one of the nationalised bank
consideration. merged with Punjab National Bank in 1980
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Banking Correspondents
and today there only 19 nationalised banks
(2017). Examples:
Banking Correspondents (BCs) are retail
agents engaged by banks for providing a. Nationalised Banks: Indian bank,
banking services at low cost in locations Indian Overseas Bank, Oriental Bank of
other than a bank branch/ATM. They are Commerce.
not separate banks recognized by the RBI. b. Public Sector Banks: State Bank of India,
BC model was introduced by the RBI in IDBI Bank Ltd. and all nationalised
2006 to provide services at door steps. banks
Non-Governmental Organisations or
individuals like ex-serviceman can apply c. Private Sector Banks: Lakshmi Vila
for BCs. The banks engaging BCs are Bank, Karur Vysya Bank, Kotak
responsible for their functioning. A bank Mahindra bank.
in a country can appoint another bank in Note: Bharatiya Mahila Bank was established
a foreign country to act as correspondent on 19, November 2013 to serve exclusively
bank. women members of the public was merged
with SBI on 31 March, 2017.
Banking Systems A detailed study on the functions of

commercial banks is given in the next
1. There are several types of banking
chapter.
systems which can be combined by
any of the above banks. They are: On the basis of organisation the banking
Unit banking, branch banking, retail may be unit banking or branch banking.
banking, merchant banking, universal On the basis of lending practices, it may
banking, relationship banking, be pure banking or mixed banking. On
wholesale banking, pure banking, the basis of their products it can be retail
mixed banking, chain banking, banking or wholesale banking. On the basis
group banking, green banking and of activities undertaken it may be narrow
so on. These are not separate banks banking or universal banking. From the
recognised as such by the RBI. ownership point of view it can be chain
2. Islamic banking is a system of banking banking or group banking. There are some
based on Islamic principles of banking peculiar types of banks such as investment
or Sharia. It is based on two principles. banking, Islamic banking, etc. In modern
First no interest is charged on loans times virtual banking or internet banking
and no interest is given ondeposits. and mobile banking are very popular.
The business firms which received
Key Terms
loans from banks will give a share of
profit to the banks and banks will give Nationalisation
a share of profit to the depositors. It Banking correspondent
is practiced in UAE, Qatar, Pakistan, Indigenous Banker
Kuwait, Bahrain, etc. Multilateral Development Bank
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For Own Thinking Exercise
1. Debate about the benefits of various I. Choose the Correct Answer

banks
1. Which bank is not a Industrial Bank?
2. Bank visit - write an essay about the (a) ICICI (b) HSBC
bank you visited
(c) SIDBI (d) IDBI
3. When you want loan how will you get
2. The Local Area Banks are promoting
the loan from bank?
(a) Rural savings
(b) Business savings
(c) Industrial development
(d)Agricultural development
For Future Learning
3. Foreign banks are begun their operation
since
1. Mention the names of Commercial
(a) 1978 (b) 1979
Banks, Industrial Banks, Co-operative
(c) 1980 (d) 1981
Banks and Foreign Banks in your
areas ……………………………. Answer
2. Collection of pictures related to 1. (b) 2. (a) 3. (c)
different types of banks
1. Give the meaning of Commercial Banks
2. What do you mean by Industrial Banks?
Case Study
3. Briefly explain about Correspondent
Banks?
1. You are the Agricultural bank manager;
a farmer approaches you for loan from 4. What are Foreign Banks?
your bank for purchasing a tractor and
other farm equipment.How would you III. Short Answer Questions
sanction the loan? 1. Write a short note on Local Area Banks,
2. Due to natural calamities, the farmer Give two examples.
could not repay the loan. He has no 2. What are the objectives involved in
other way to repay the loan. How to Regional Rural Banks?
collect loan from the farmer? 3. Mention the purposes of Agricultural
and Co-operative banks
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1. Explain the various types of banks based
on organization with examples
2. Explain the types of banks based on
ownership pattern.
Reference
1. Natarajan. S and Parameshwaran. R.,
2004, “Indian Banking”, S. Chand &
Company Ltd. Publications, New Delhi.
2. Dharmaraj. E. 2005, “Banking Theory,
Law and Practice”, Scitech Publications,
Chennai.
3. Agarwal O. P, 2012, “Modern Banking
in India”, 2nd ed., Himalaya Publishing
House, Mumbai
4. Muraleedharan D, 2013, “Modern
banking”, 3rd ed., PHI Learning Private
Limited, Delhi-92
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CHAPTER
FUNCTIONS OF COMMERCIAL
12 BANKS
A. Demand Deposits
Learning Objectives
These deposits are repayable on demand on
To enable the students to any day. This consists of savings deposits
i. understand the primary and secondary and current deposits.
functions of commercial banks
ii. explain the diversified banking 1. Savings Deposits
services
iii. describe the uses of debit, credit and General public deposit their savings into
smart cards this account. This account can be opened
in one individual’s name or more than one
name. Section 25 companies also can open
Functions of Commercial Banks savings accounts. Business firms are not
permitted to open savings account. The
They render many valuable services. The
rate of interest allowed on this deposit is
important functions of the Commercial
lower than fixed deposits. Interest is paid
banks can be explained with the help of the
following chart on the basis of the amount and number
of days the amount remains credited in
12.01 Primary Funtions the account. The bank provides facilities
The primary functions of a commercial like cheque book, ATM (Automated
bank are of three types. They are: Teller Machine) card etc. There is limit
on number of ATM card withdrawals
I. Accepting Deposits from other bank ATMs only. A minimum
II. Granting Loans and Advances. balance should be maintained in this
III. Creation of Credit deposit account. Otherwise penal interest
is charged. Beyond a number (20 or 60
I. Accepting Deposits leaves) cheque book is available for a fee.
The basic deposit accounts offered by Nomination can be registered. Salary
commercial banks are listed below. In these account is a type of savings account offered
days banks compete with each other to to salaried employees in which zero
attract customers by adding facilities to these balance is permitted. Some banks offer
deposit accounts. Broadly deposit accounts overdraft facility. An account inactive
can be classified into demand deposits and for a long period will become dormant
time deposits. account.
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2. Current Deposits of interest is higher than savings account.

This account is suitable for business On the date of maturity the principal along
institutions. Individuals too can open this with interest for the fixed period is paid.
account. A higher minimum balance should A customer can obtain loan by depositing
be kept in this account. If not penal interest FDR. Pre-mature withdrawal of cash is also
is charged. No interest is paid for the balance allowed for payment of penal charges and
in this account. Some banks have started it carries no interest. Partial withdrawal
offering interest on these account balances. also allowed. Fixed deposit period can be
Banks may collect bank charges on this 1 month to 10 years. FD is also called term
account. Overdraft (short term unsecured deposit
loan) facility is available to current account 2. Recurring Deposits (RD)
customers. There is no limitation on
deposit of cheques or withdrawals from Certain sum is deposited into the account
this account. Credit worthiness of current every month for one year or five years or
account business customers are shared the agreed period. Interest rate is more
among banks. than savings deposits and almost equal to
fixed deposits. At the end of the period the
B. Time Deposits deposited amounts along with interest are
They include fixed deposits and recurring returned to the customer. Premature closing
deposits which are repayable after a period. is allowed with a charge or deduction. It is
ideal for persons having regular income to
1. Fixed Deposits (FD) save and receive a lump sum. Any institution
Certain amount is deposited for a fixed can open RD account. Minors or students
period for a fixed rate of interest. FDR (fixed also can open this account. Loan against
deposit receipt) is given to the depositor. Rate this deposit is also provided by some banks.
Know Your Customer (KYC) Norms

KYC means “Know Your Customer”. It is the general rule to be followed by banks to get
information regarding the identity and address of the customers. This rule helps to ensure
that banks’ services are not misused. The KYC process is to be completed while opening
accounts. These details should be updated periodically. A person willing to open a bank
account, should submit a ‘proof of identity and proof of address’ together with a recent
photograph.
Six documents have been notified by the Government of India as ‘Officially Valid Documents’
(OVDs) for the proof of identity. They are Passport, Driving Licence, Voters’ Identity Card,
PAN Card, Aadhar Card issued by UIDAI and NREGA Job Card. The person should submit
any one of these documents as proof of identity. If such documents also contain his/her
address details, then it will be accepted as ‘proof of address’. If not, then another officially
valid document which contains address details need to be submitted.
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II. Granting Loans and Advances 3. Discounting of Bills

The second primary function of commercial Business customers approach banks to
banks is lending money in order to earn discount the commercial bills of exchanges
interest income. Banks provide specific and provide money. It is a short term credit
sums as loans which are repayable along instrument. Banks deduct the discount
with interest. Demand loans should be (interest) for the period mentioned in the
repaid whenever demanded. Term loans can bill and release the balance amount to the
be repaid after the agreed period. Advances traders. If the bill is dishonoured, the bank
are credit facilities provided for short period can recover the amount from the customer.
(within a year) to business community. But It is a form of unsecured credit.
both terms are used interchangeably.
B. Loans
A. Advances Short term and medium term loans are
1. Overdraft provided by commercial banks against
eligible collaterals to business concerns. It is
It is a credit facility extended mostly a definite sum of money lent for a definite
to current account holding business period. It is repayable in one lump sum or
community customers. It is an arrangement in instalments. Interest is payable on the
reached between the banker and the credit entire loan amount. Every bank in these
worthy customers. Such customers are days design new methods of advancing
allowed to overdraw (when there is no loans to find more ways of learning income.
balance money in the account) up to a Generally commercial banks provide the
certain amount usually for 3 months period. following loans.
It may be extended for further periods. Only
on the withdrawn amount of credit interest 1. Housing Loan
is charged and not on the maximum limit Taking the title deeds of the house as
allowed. It is an unsecured credit. Secured collateral security, based on the monthly
overdraft against the security of financial income of the borrowing customer, banks
instruments is also provided by some banks. advance medium and long term loans. The
It is repayable on demand. customer repay the loan in equated monthly
instalments (EMI consists of principal and
2. Cash Credit interest). This is a boon to the middle class
salaried employees who cannot afford to
It is a secured credit facility given mostly pay the full price of a house in a lump sum.
to business institutions. Stock in hand,
raw materials, other tangible assets, etc. 2. Consumer Loans
are provided as collateral. A certain sum is Consumer durables like refrigerator, air
allowed as credit for a short period. Interest conditioner, laptop, washing machine,
is payable on the actual amount withdrawn television, etc. can be purchased by
and not on the entire credit facility. . It is customers with consumer loans from banks.
repayable on demand. The product purchased is hypothecated
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(secured loan arrangement where the III. Creation of Credit

movable asset remains with the borrower) Apart from the currency money issued by
as security for the consumer loan amount. the RBI, the credit money in circulation
The customer pays in equated monthly created by commercial banks influence
instalments for a specified period. economic activities of a country to a large
extent. Credit money of commercial banks
3. Vehicle Loans
is far greater in volume than the currency
Two wheelers, cars, buses and other vehicles money. The volume, the purposes and the
can be purchased by individuals as well as sector to which this credit money is to be
institutions obtaining vehicle loans from channelised - all these are implemented by
the banks. Vehicles are hypothecated to the commercial banks under the guidance of
bank until the entire loan amount is repaid. the RBI.
Vehicle registration book is deposited with
the bank and on full payment of loan amount According to 2011 data, the credit created
it will be handed over to the customer. by all Indian commercial banks was 75.1%
of GDP. It was 233.3 % in the USA, 145.5%
4. Educational Loan
in China, and 340.9% in Japan.
Loan is provided by banks to students for
studying undergraduate, post graduate or 12.02 Secondary Functions
professional courses. Loan may be received
Apart from the basic or primary functions
in instalments to pay the educational fees
commercial banks render various other
every year. After completion of the course
services which are known as secondary
one year is allowed for the student to get functions. These services can be broadly
employed. Afterwards, the student should classified into agency services and general
repay the loan with interest for the entire utility services.
period. Interest is charged from the date of
first instalment of loan amount payment. I. Agency Functions
Banks act as agents of customers and provide
5. Jewel Loan
certain services. They are called Agency
Customers pledge their gold jewels and Functions which are as follows:
obtain loans from banks. The margin
(percentage of value per gram that can be 1. Transfer of Funds
given as credit) requirement is fixed by the Banks issue demand drafts, bankers’ cheques,
RBI. Interest should be paid every month. travelers’ cheques, etc. and help in transfer of
Otherwise interest on interest is charged. funds from one place to another. Customers
Within 12 months the customer can redeem need not carry cash. They can just forward
or else can re-pledge. Jewels not redeemed the draft issued by the bank to the receiving
even after reminders are sold in auction by institution. A small commission is collected
banks to recover their dues. by banks for this service.
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2. Periodic Payment of Premiums, Rent, etc. account should be linked with savings
After instruction from the customers, bank account by the customer. Then the
banks undertake the monthly payment of customer can ask the bank to conduct
insurance premium, rent, telephone bill, online purchase or sale of securities, on
etc. from the accounts of customers. Now behalf him.
a days these payments are made through
6. Preparation of Income Tax Return
electronic clearing system facility offered
by the banks. Banks prepare the annual income tax return
on behalf of the customers and provide
3. Collection and Payment of Cheques income tax related advices to them.
On behalf of customers bank collect the
7. Dealing in Foreign Exchange
cheques deposited into the accounts of
customers from other banks and deposit cash Banks buy and sell foreign currencies on
in the customers’ accounts. Similarly cheques behalf o customers.
issued by a customer is honoured and the
8. Acting as Correspondent
amount paid as directed by the customer.
Banks act as correspondent of customers
Definition of Cheque: According to and receive travel ticket, passport, etc.
Negotiable Instruments Act 1881, “cheque
II. General utility functions
is a bill of exchange drawn on a specified
banker payable on demand”. In addition to primary, secondary and
agency functions, commercial banks
Crossing of Cheque: Drawing two offer some services for the general
parallel transverse lines on the left top of welfare of the customers. They are
the cheque. It implies that the money will called general utility services. They are
not be paid over the counter but through as follows.
bank account only.
1. Issue of demand drafts and bankers’
4. Acting as Executors, Trustees and cheques
Attorneys Demand drafts and Bankers Cheques
Banks act as executors of will of the are issued to public and customers as
customers and implement their will after well. Instead of sending money they can
their death. As a trustee a bank takes care attach these instruments for payment of
of the funds of the customers. Banker educational fees, etc.
signs transfer deed of the properties of the
2. Accepting Bills of Exchange on behalf of
customers in the capacity of attorney to
customers. Customers
Banks accept bills on behalf of customers
5. Conduct Share Market Transactions and make payments to the foreign exporter.
A Demat account should be opened with Afterwards, the banks collect from the
Depository Participant and that demat customers.
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3. Safety lockers services. Providing all such banking and

Valuable documents, jewels, etc. can be kept other financial services is also called
safely in a vault provided by bank for a rent. universal banking. Such services are as
These vaults room is called ‘Strong Room”. follows:
4. Letters of credit 1. Bank Assurance

This document is given by bank on behalf It refers to the offering of insurance policies
of importing customer to the exporter or products by a bank in association
guaranteeing payment for the imported with another insurance company. Banks
goods. It is a very important document in should follow Insurance Regulatory
international trade. and Development Authority of India
(IRDA) regulations in addition to RBI
5. Travellers cheques regulations. Corporation Bank, Oriental
Customers need not carry cash during Bank of Commerce and Vijaya Bank has
travel in India or abroad. The denomination tied up with Life Insurance Corporation
and words are printed in the cheque. It is of India. SBI has joined hands with BNP
accepted as money in shops, hotels, travel Paribas Cardif - a French company to sell
agencies, etc. insurance products.
6. Gift cheques
2. Merchant Banking
These denomination printed cheques are
Merchant banks do not provide regular
available in attractive design so that it can
banking services. A commercial bank
be presented during wedding, birthday
or its subsidiary merchant bank may
functions, etc.
offer services like project counselling,
7. Reference service underwriting, etc. required for starting a
company. It is called merchant banking.
Business firms can give their bank’s name as
They are mostly stock market related
reference to the new business institution with
services. Merchant Banks are controlled
which they want to establish commercial
by Stock Exchange Board of India (SEBI)
relationship. Banks willingly act as referees
regulations also.
and provide information about the financial
standing of their customers.
3. Retail Banking (Personal Banking)
'LYHUVL¿HG%DQNLQJ It refers to mass market banking which
Functions reaches out to large number of individual
Competition in the banking industry end customers. Apart from accepting
has reduced their profits. Therefore the deposits, their services include personal
commercial banks started identifying and loans, vehicle loans, consumer durable
offering new and diversified financial loans, loans against equity shares, debit and
services. They are purely other than banking credit cards, mortgages, etc.
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4. Housing Finance 1. NEFT - National Electronic Funds Transfer

Housing finance is provided against the This was launched by the RBI in 2005.
security of immovable property of land and Under this electronic funds transfer
buildings. Many banks such as SBI, Bank system, bulk transfer of transactions are
of India, etc, have set up housing finance settled in batches during specific timings
subsidiaries. across India. Individuals and institutions
which maintain accounts with a NEFT
5. Mutual Fund
enabled bank branch are eligible for
It is a financial intermediary that pools the using NEFT. Transactions do not occur
savings of investors for collective investment under real time basis. Once in every
in diversified portfolio securities in the half hour from 8.00 am to 7.30 pm. 23
capital market and money market. Many settlements are allowed in a day.NEFT
banks like SBI, Indian Bank, etc, have set up transfers are not allowed on Sundays and
mutual fund subsidiaries. bank holidays. Both NEFT and RTGS use
IFSC (Indian Financial System Code) - a
6. Venture Capital Fund
11 digit alphanumeric code, to identify a
Venture capital fund provides start-up bank branch. IFSC is provided by IDRBT
share capital to new ventures of little (Institute for Development & Research on
known, unregistered, risky, young and small Banking Technology), Hyderabad.
private business, especially in technology
oriented and knowledge intensive business.
2. RTGS - Real Time Gross Settlement
Many commercial banks like SBI, Canara
Systems
Bank, etc. have set up venture capital fund
subsidiaries. It was launched by the RBI in 2013. The
transactions are settled on real time basis.
7. Factoring Gross settlement means the transaction is
Factoring is a continuing arrangement settled between one bank and another bank
between a financial intermediary (factor) without adding any other transactions.
and a business concern (client) whereby RTGS facility is available between 9.00 am
the factor purchase the clients’ accounts to 4.30 pm on weekdays and up to 2.00 pm
receivable. Banks like SBI and Canara Bank on Saturdays. In one day the RTGS routes
have established subsidiaries to provide about 60,000 transactions worth about
factoring services. ₹2,700 billion and covers over 52,000 bank
branches located in 10,000 cities and towns.
12.04 Electronic Banking RTGS transfers are not allowed on Sundays
Functions
and bank holidays. Minimum limit for
This reduces cost and time and makes RTGS transaction is 2 lakhs.
banking service convenient to the customers.
It is operated through internet. This service 3. Electronic Clearing Services (ECS)
is a substitute for drafts, cheques and other ECS was launched by the RBI in 1995. It is
paper based transfer of funds. an electronic method of fund transfer from a
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bank to another bank. ECS credit can be used anywhere. This service is known as mobile
to credit salary, dividend, interest, pension banking.
etc. and ECS debit is used to debit monthly
telephone bills, electricity bills, equated
7. Automated Teller Machine (ATM) and
monthly installments (EMI) payments. For
CDM Facilities
this purpose the account holding individuals
and institutions concerned should fill up A customer can withdraw money anytime,
certain forms and submit to the banks. ECS anywhere in India from the ATM machine
transactions between banks are settled in the using the ATM card given by his/her
current account maintained in the clearing bank. The machine also shows the balance
house. available in the customers’ account, provides
statement print of the few past transactions,
4.CORE Banking Solutions
etc. Withdrawal of money in other bank
‘CORE’ stands for ‘Centralized Online ATMs is restricted and will be charged
Real time Exchange’. In the centralized beyond the specified number of usage. Cash
server of the bank, all the details of all the Deposit Machine Facility is useful to the
accounts of all the branches of the bank public as well as customers to deposit cash
are available. A customer can withdraw into the account anytime. Similarly there
money through cheque at any branch are cheque deposit machines which receive
of that bank throughout the world. cheques at any time.
Similarly anyone can deposit money into
the account. Entry of the transactions is
recorded in the centralized server of the 8.IMPS - Immediate Payment Service
bank in real time and can be seen in all the IMPS was launched by the National
branches of the bank. This facility is called Payments Corporation of India in
core banking solutions. November 2010. IMPS allows funds transfer
5. Internet Banking or Virtual Banking through mobile phone or internet banking
by banking customers and approved non-
Internet banking refers to performing banking partners. Its transactions are on
banking operations through internet, using real time basis. The current maximum limit
computers and mobile phone. This can be
is `. 2 lakhs. It made India a leading country
done by a customer from home or office or
in the world in real time payments in retail
any part of the world and all 24 hours of 7
sector.
days.
6. Mobile Banking 9. Funds Transfer Through SMS

Most of the commercial banks have *99# is the number for the funds transfer
designed computer programs called apps from any mobile phone. It was launched
which can be downloaded in smartphones. in 2014. Every common man in India can
With this app in the smartphone a customer transact banking transactions from any
can operate his account transactions from corner of India.
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NACH, BBPS, BHIM

National Automated Clearing House
founded in 2008 is a web based solution to
facilitate interbank high volume electronic
transactions which are repetitive and
periodic in nature. It will be helpful for
banks, financial institutions, Corporates 11. Credit Cards
and Governments. It is a centralised
system that aim at consolidating multiple Banks issue credit cards to customers and
ECS systems running across the country other eligible persons. With this card, the
and removing local barriers. holder can purchase goods and services on
credit at any shop in India. If the dues are
Bharat Bill Payment System is a RBI guided paid within the stipulated time no interest
system operated by National Payments is charged. The credit limit is fixed by the
Corporation of India from August 2016. issuing bank based on the income of the
It is a one stop payment platform for all cardholder.
bills providing anytime anywhere bill
payment service to all customers across
India with certainty, reliability and safety
of transactions.
Bharat Interface for Money is an app that

lets a bank customer make simple, easy
and quick payment transactions using
Unified Payments Interface (UPI). A bank 12.05 Functions of All Commercial
customer can make instant bank to bank Banks in Totality
payments and pay and collect money All commercial banks put together perform
using just mobile number or virtual certain functions to the development of the
payment address (VPA). It was launched country’s economy.
in December 2016.
1. More production and economic growth
These banks supply the vitamin money
10. Debit Cards to all sectors of the economy including
ATM card is also called debit card. This manufacturing sector. As a result all the
card is more useful in purchase of goods sectors produce more.
and services anywhere in India, if the shop
maintains a swiping machine facility. VISA 2. Capital formation
card and Maestro card services are offered Banks encourage savings habit among
by Visa Corporation and Mastercard both people and accumulate their small dormant
from the USA. RuPay cards services were savings. These funds can be fruitfully
launched in March 2012 by the National channelized for productive purposes of the
Payments Corporation of India. economy.
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3. Consortium finance through the network of branches. Broad

Thousands of crores required to establish a guidelines or rules of the Government for
mega factory is not available from a single the monetary sector of a country cannot be
source. Banks join together and provide applied without such banks.
consortium finance in such cases. 9. Encourages export and international
4. Service coverage to non-monetised trade
sector Banks open foreign branches or establish
Branches of the banks are opened in rural correspondent relationship with banks
and village areas so that the non-banking in foreign countries to help exporters.
areas are provided banking services. Instruments like letters of credit and
international factoring services are
5. Balanced regional development undertaken to help exporters and importers.
Banks transfer funds from surplus areas 10. New entrepreneurs and employment
and make them available in scarce districts opportunities
or areas for the formation and operation
of business institutions. Even growth of Entrepreneurs obtain project loans and
different regions can be achieved through establish new business houses. By providing
this function. the required credit banks generate more
economic activities and new employment
6. Smoothing of trade and commerce opportunities.
For the efficient functioning of all traders
and business institutions in a country, safe Key Terms
keeping of their funds, transfer of funds,
payment and collection of funds when and Deposits, Loans, Electronic, Debit card,
where needed is very much necessary. Banks Credit card, Smart card, Core banking
perform this function.
7. Development of industry, agriculture,

MSMEs and SHGs For Own Thinking
Banks design methods and instruments
In all ATM Centers, there are one or
of financing each sector differently. They
two machines, sometime it may be four
provide finance for small farmers, medium
or five. All ATM machines have some
traders as well as industries. For example
amount of money inside the box. In this
banks allow micro credit to SHGs, overdraft
way lot of currency notes are locked day
to traders and issue Certificate of Deposits
by day. Think about the alternate way for
to finance industries.
avoiding this locking of currency notes.
8. Implementation of monetary policy
Debate about the security problem in
Banks have established customer relationship E-Banking system of services.
with all public and business institutions
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4. In which kind of account, it is compulsory

For Future Learning to deposit certain amount at certain
time?
Field visit - nearest -collect information (a) Saving deposit
about rate of interest payable on Savings (b) Fixed deposit
deposit, Fixed deposit, Current deposit (c) Current deposit
and Recurring deposit.
(d) Recurring deposit
Collect photo copies of the various cards
5. Which of the following is not a type of
used in our day- to-day life.
advance provided by commercial bank?
Nowadays debit card, credit card, smart (a) Collecting and supplying business
cards and other cards are used for day to information
day purposes. In future how many cards (b) Overdraft
we may use for our purposes.
(c) Cash credit
(d) Discounting of bills
Answers
Case Study 1. d 2. c 3. b 4. d 5. a.
A person forgot his password of

Debit card, How to get password?
Give guidelines to him.
Exercise
1. What is Mobile Banking?
1. Electronic banking can be done through
2. Briefly explain the need for Debit card.
(a) Computers (b) Mobile phones 3. Briefly explain the term - Credit card.
(c) ATM (d) All of the above 4. What do you mean by ATM?
2. Minimum how much amount can be 5. Write a note on - ECS.
transferred through RTGS?
(a) Any amount (b) 50,000
1. What is E-Banking?
(c) 2 lakh (d) 5 lakh
2. Write a short note on - RTGS.
3. The largest commercial bank of India 3. Briefly explain the Diversified banking
(a) ICICI (b) SBI services of commercial banks.
4. Explain - NEFT.
(c) PNB (d) RBI
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5. What do you mean by Core Banking

Solutions?

1. Discuss the various primary functions
performed by the commercial banks.
2. Explain the various secondary functions
of commercial banks.
Reference
1. Balaji. C.D. and Prasad. C. 2016, “Principles
of Commerce”, Margham Publications,
Chennai
2. Natarajan. S and Parameshwaran. 2014,
“3. Indian Banking”, S. Chand & Company
Ltd. Delhi
3. Dharmaraj. E, 2005, “Banking Theory -
Law and Practice”, Scitech Publications
4. Selvaraj. M. 2014, “Modern Banking” -
Bavani Pulications.
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CHAPTER
WAREHOUSING
13
Warehouses are designed depending upon
Learning Objectives the nature of the products to be stored.
To enable the students to For example, to keep perishable items like
i. know the meaning of warehouses fruits and vegetables, cold storages are
and warehousing. required. Certain pharmaceutical products
ii. explain the different types of are to be kept under suitable temperature.
warehouses. Liquids like petrol, oil molasses need tanks
iii. describe the functions of warehouses. while grains like barley, pulses, etc. need
iv. know about the various warehousing ventilated halls.
documents.
According to J. Stephenson, “a warehouse
in an establishment for the storage or
accumulation of goods”.
Introduction
The term “Ware” means products or goods. Warehousing
“Warehousing” generally means storage It is an arrangement by which goods are
place or godowns which is located near a stored when they are not needed immediately
factory to keep the raw materials and finished and are kept in such a manner so as to
products. Storage is only a holding place of protect from damage or deterioration.
goods. Whereas a warehouse is located near
the market to perform the other marketing “A warehouse is a commercial building for
functions such as grading, standardization, storage of goods. Stored goods can include
blending, mining packing, etc. The any raw materials, packing materials,
development of science and technology has spare parts, component or finished goods
improved the ways and means of storage. It associated with agriculture, manufacturing
removes the hindrance of time. and production”.
'L໤HUHQFHVEHWZHHQ
13.01 Meaning of Warehouse and
Warehouse and Warehousing
Warehousing
Warehouse is a place where goods are
Warehouse stored for future use whereas, warehousing
It is a place where goods are stored for is an arrangement of goods. Warehouse
future use and act as distribution centres. is to hold goods for storing purpose only.
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Warehousing object is to preserve and (e) Proximity to production centers

protect the goods from deterioration in Productions of goods at specific centers
quality and quantity. need to be supplied in time and without
Need for Warehousing interruption to consumers throughout
the country. For this purpose goods are
(a) Mass production regularly fed to the warehouses situated at
Production is based on the anticipated different market areas.
demand for goods. Mass production
of goods takes place by establishing big 13.03 Types of Warehouses
factories and modern production. The Warehouses can be classified as follows:
market for such goods is spread all over
the country. Therefore, warehouses are A. On the Basis of Ownership
to be built at different places to store these (a) Private Warehouses
products and provide prompt supplies when (b) Government Warehouses
demanded. (c) Public Warehouses
(b) Nature of commodities (d) Co-operative Warehouses
Some goods are perishable in nature and (e) Bonded Warehouses
therefore it should be consumed in time (f) Institutional Warehouses
to avoid deterioration. Storing them in (g) Distribution Centre Warehouses
cold storages can extend the life of the
goods. B. On the Basis of Commodities Stored
(c) Seasonal production but regular (a) General Warehouses

consumption (b) Special Commodity Warehouses
The farm products such as wheat, sugar, (c) Cold Storages or Refrigerated
pulses, etc. are produced only in seasons. Warehouses
But the consumption of these products are (d) Climate Controlled Warehouses
evenly spread throughout the year. If proper
storage facilities are not provided, the quality A. On the Basis of Ownership
of these goods deteriorates and may become a. Private Warehouses
not usable.
Private warehouses are built and owned
(d) Regular production but seasonal by private business enterprises in order
consumption
to store the products produced by them.
Certain goods are produced regularly They are exclusively for their use and are
throughout the year. Bu they are demanded not meant for other manufacturing or
in seasons only. For example, rain-coats, business units.
blankets, umbrella, etc. require storage for
whole year. They can be released in large b. Government Warehouses
quantities to meet the heavy demand in They are created and operated by
rainy and winter seasons. the Government to implement the
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programmes of the Government. Their be undertaken in the warehouse

services mostly available to government itself. Bank loans can be obtained by
only. A detailed study on all the above submitting the receipt issued by these
warehouses is given at the end of this warehouses as collateral security. Strict
chapter. supervision and control is imposed by
custom authorities on their operation
c. Public Warehouse
and functioning.
It is open for public at large. Most of the
business organisations, especially small f. Institutional Warehouses
and medium scale units cannot afford Different institutions and bodies have
to have their own warehouses. They their own warehouses on account of
may be owned by an individual or some the nature of their operations. For
agency. These warehouses operate as per example, Banks, Railways, etc, have their
the rules and regulations formed by the own warehouses for conducting their
Government. activities. Various transport agencies
also maintain warehouses for storing the
d. Co-operative Warehouses goods which are to be despatched and
There are warehouses owned and received.
managed by the marketing co-operative
g. Distribution Center Warehouses
societies or agricultural co-operative
societies. They are set up to provide Goods which need to be temporarily
warehousing facilities to their members. stored for one or two days so that they
Example, National Co-operative can be distributed to other offices or
Development Corporation (NCDC). customers are stored in Distribution
Centers. They are owned by the
e. Bonded Warehouses manufacturer or wholesalers.
Bonded warehouses are those B. On the Basis of Commodities Stored
warehouses, which are licensed by
a. General Warehouses
the government to accept storage of
imported goods which are not cleared They are ordinary warehouses which are
due to non-payment of customs useful for storing most of the dry food grains,
duty by the importer. Branding can fertilisers, etc. Protective measures against rat,
insects, etc. are undertaken by them.
Village Storage or Warehouse

Underground storage structures are used by farmers in villages to store food grains. They
are safer from threats from various external sources of damage, such as theft, rain or wind.
Separate peripheral structures with mud are erected as surface storage structure for food
grains. PAU bin, Pusa bin, HapurTekka, etc. are used for small scale storage of grains. Cap
storage, Silos, etc, are used for large scale storage of food grains.
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b. Special Commodity Warehouses at a time. Inside the warehouse premises

These warehouses are specially constructed physical distribution activities are carried
for storing specific type of commodities like out by moving product filled pallets (i.e.
tobacco, cotton, wool etc. These warehouses platforms that hold large amounts of
reduce loss of quality and quantity to a great product). It requires huge investment, latest
extent. Storage of petrol and oil requires special technology and large turnover of goods.
type of vertical, cylindrical storage tanks.
13.04 Functions of Warehouses
c. Cold Storages or Refrigerated
Warehouses render invaluable services to
Warehouses
the society by performing the following
Goods are transported in refrigerated functions:
containers and stored in refrigerated
(i) Storage
warehouses. These warehouses are used
for storing perishable goods like fruits, There is a time gap between the time of
vegetables, eggs, butter, fish, meat, etc. production and the time of consumption
Goods stored in cold storages without and a gap between demand and supply. The
deterioration in quality, can be made surplus goods are stored properly for the
available throughout the year. purpose of supplying them at right place
and the right time.
d. Climate Controlled Warehouses
(ii) Price Stabilization
The controlled climate environment can
Warehousing ensures price stabilization by
reduce the rate of metabolism in fruits
supplying goods as and when demanded. It
and vegetables. Humidity controlled
acts as a cushion to absorb price fluctuations
environments for delicate products such
and supplies the goods at more or less
as flowers in dirt-free facilities in these
uniform prices throughout the year.
warehouses.
(iii) Equalization of Demand and Supply
e. Automated Warehouses Warehousing equalizes the demand and
Automated facilities which can handle supply of goods by storing thee goods when
several hundreds of kilograms of product they are not demanded and releasing them
Warehousing Development and Regulatory Authority(WRDA)

To develop and regulate the warehousing industry in India, Warehousing Development
and Regulatory Authority was established under the Warehousing (Development and
Regulation) Act, 2007. Its objective is to improve the storage capacity in the country and
also help producers, farmers and consumers get a better deal by cutting the intermediaries
and wastages.
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when there is a demand. Thus the consumers of inspection by prospective buyers.

get the commodities regularly even during
13.05 Advantages and Drawbacks
the off-season periods.
of Warehousing
(iv) Business Finance
Advantages
Based on the goods deposited in a warehouse,
1. It safeguards the stock of the merchants
the depositor can get finance from banks
who do not have storing place.
and other financial institutions by showing
the receipt issued by the warehouse keeper. 2. Warehouses reduce distribution cost of
the traders by storing the goods in bulk
(v) Risk bearing and allow the trader to take the goods in
In case of damage to the goods, warehouse small lots to his shop.
keeper compensates the loss caused to the 3. It helps in selection of channel of
owner of the goods. Thus, warehouses bear distribution. The producer will prefer
the loss of risk involved in storage of goods. whether to appoint a wholesaler or
retailer.
(vi) Preparation for sale
4. It assists in maintaining the continuous
Modern warehouses undertake the functions
sales and avoids the possibilities of “out
of sorting, packing and labelling for the
of stock” position.
purpose of making the goods suitable for
marketing. Hence warehousing is needed 5. It creates employment opportunities for
for making the goods suitable for sale. both skilled and unskilled workers, to
improve their standard of living.
(vii) Widening the marketing area
A manufacturer can sell the goods to Drawbacks of Warehousing
different marketing areas by establishing
Warehousing is not effective because of the
branch warehouses or taking the service of
following reasons:
rental warehouses at the required places.
Thus warehousing widens the market for 1. There are no adequate transport
the goods. facilities between the place of
production and warehouses.
(viii) Value added services
2. Lack of sufficient storage facilities for
Warehouses also provide certain value added
different commodities such as perishable
services, such as in transit mixing, grading,
and non-perishable commodities.
packaging and labelling. Sometimes, goods
are repacked and labelled again at the time 3. Complicated formalities are to be
fulfilled at the warehouses. The illiterate
What is in Transit Mixing?
and innocent farmers are not able to
It refers to a function in which warehouse cope with these procedures.
receives products from different plants
4. Complicated process of Barcode
and mix and repack them as per client’s
technology can reduce the storing of
requirement.
goods by some producers.
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5. Unavoidable delay for obtaining financial c) Dock Warrant

assistance may cause loss to the owner of Dock is a place in the harbor where the
goods. goods are kept for loading into the ship.
Dock warrant is a document of title of goods
13.06 Warehousing Documents issued by dock authorities. This document
The following documents are used in certifies that the dock authorities hold the
connection with the warehousing. goods. To take delivery of the goods this
certificate should be given back to dock
a) Warehouse Warrants authorities. The right of getting delivery of
It is a document issued in favour of the owner goods can be assigned to third parties too.
or depositor of goods by the warehouse
d) Dock Receipt
keeper. This is a document of title of goods
and can be transferred by simple endorsement Dock receipt is an acknowledgement of
and delivery. To transfer all the goods the receipt of goods issued by dock authorities
warehouse warrant is sufficient. If only a to the owner of the goods. It is not a
part of the goods are to be transferred then document of title of goods. Therefore, the
delivery order is needed. The delivery order is right of taking of delivery of goods cannot
to be accompanied by the warehouse warrant. be transferred.
b) Warehouse Keeper’s Receipt e) Delivery Order

It is a document issued by the warehouse This is a document through which the
keeper, which acknowledges the receipt of depositor directs the warehouse keeper to
goods from the depositor of goods. It also deliver the specified goods either to the party
shows the existence of an agreement to mentioned in the document or to the bearer.
keep the goods in the warehouse subject to The warehouse keeper delivers the goods as
certain conditions. This is not a document per the instruction. Transfer of ownership
of title of goods and is not transferable. takes place through this document.
Differences between Warehouse Warrant and Warehouse Receipt

Warehouse Warrant Warehouse Receipt
1.It is a document of title of goods It is not a document of title of goods
2. It is not only an acknowledgement for the It is only an acknowledgement for the receipt of
receipt of goods but also gives an authority to goods.
get delivery of goods by the owner orby third
party.
3. It can be negotiated or transferred to others. It cannot be transferred to others
4. It can be given a collateral security for getting It cannot be given as collateral security.
financial assistance
5. Delivery of goods effected by surrendering Delivery is effected by surrendering this receipt
this warrant with endorsement with letter from depositor.
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13.07 Warehousing in India Main Warehousing Agencies in the

Public Sector
India is an agrarian country but the
importance of warehousing was not felt till The three main agencies in the public
1950. Agriculture contributes 16 percent sector engaged in providing large scale
of the overall GDP and accounts for warehousing facilities are:
employment of approximately 52 percent of
A. Food Corporation of India (FCI)
the Indian population. It is estimated that
more than 40 percent of our agricultural It provides storage facilities for food grains.
productions wasted due to poor storage Food Corporation of India also hires
facilities. storage capacity from other sources such
as Central Warehousing Corporation, State
On the recommendation of the All India Warehousing Corporation and private
Rural Credit Survey Committee, the parties. The available storage capacity of
Agricultural Produce(Development and Food Corporation of India is 74.6 million
warehousing) Corporation Act enacted tonnes. (August 28, 2013 Government told
in 1956, authorized the Government in Lok Sabha). The FCI was set-up under
to setup National Co-operative the Food Corporation Act 1964, in order to
Development and Warehousing Board fulfil following objectives of the food policy:
to develop agricultural Co-operatives
and warehousing. i. Distribution of food grains throughout
the country for public distribution
system.
ii. Effective price support operations for
safeguarding the interests of farmers.
iii. Maintaining satisfactory level of
operational and buffer stocks of food
grains to ensure National food security.
B. Central Warehousing Corporation

(CWC)
It was established in 1957. The available
storage capacity of Central Warehousing
Corporation is 11.17 million tonnes and
with the operation through 464 warehousing
centers across the country. (as on 30th
September, 2017).
Functions of Central Warehousing

Corporation:
1. To provide agency services for scientific

storage of agricultural produce, seeds,
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manures fertilizers, agricultural

implements and other notified For Future Learning
commodities.
2. To issue a negotiable warehouse receipt The warehouse of the future: How will it
for procuring credit to the owners of impact efficiency?
goods. From 2019, new technology could be
3. To preserve the produce deposited with revolutionary and improving efficiency in
care and protect against insects and warehouse by Warehousing Management
various pests and deterioration due to System (WMS). Technologies including
moisture and dampness. artificial intelligence, 3D printing and
4. To act as an agent of the government self-driving vehicle could be more widely
for the purchase and sale, storage and used in warehouses everywhere sooner
distribution of specified commodities than you think. By 2030, warehouses will
and transport to and from warehouse. be a part of initiative to achieve Zero net
energy.
5. To reduce the cost of storage and facilitate
the marketing of produce through proper Warehouse buildings will operate
grading. 24X7X365 and be designed with
C. State Warehousing Corporation (SWC) sustainability. By creating strategies,
warehouse will save costs and prevent
Every state government is given power to harmful emissions. Solar panels will
establish its own Warehousing Corporation become the main sources of energy for
after getting approval from the CWC. 50% of warehouses.
the capital is contributed by the CWC and the
balance 50% contributed by State Government.
D. Tamil Nadu Warehousing Corporation

(TNWC)
It was established in 1959. The available
storage capacity of TNWC is 6.83 Lakh MT
with 7 Regional offices and 256 Godowns
across the state. It is one of the biggest public Exercise
warehouses operating in the state, offering
logistic services to a diverse group of clients.
I Choose the Correct Answer
Key Terms 1. Warehouses remove the hindrance of

________
Warehouse, Warehousing, Bonded
warehouses, Warehouse warrant, a) Person
Dock warrant. Dock receipt, Food b) Time
Corporation of India, CWC – Central c) Risk
Warehousing Corporation.
d) Knowledge
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2. A warehouse holds goods as a Answers

__________ center.
1. b 2. c 3. d 4. a 5. c 6. c 7. c
a) Marketing b) sorting
c) distribution d) selling
II Very Short Answer Questions
3. ________can be given as a collateral
security for getting financial assistance 1. What is Warehouse?
from bank. 2. List the various types of Warehouses.
a) Dock warrant 3. Give any three functions of Warehouses.
b) Warehouse receipt 4. Tabulate the three differences between
c) Dock receipt warehouse warrant and warehouse
d) Warehouse warrant receipt.
5. Give a note on FCI.
4. ____ warehouses are licensed by the
government and are permitted to accept III Short Answer Questions
the goods on bond.
1. Differentiate the warehouse warrant
a) Bonded b) Cold Storage from the warehouse receipt.
c) Public d) All the Above 2. Comment on cold storage warehouse.
5. _________ warehouses are used for
storing perishable goods like fruits,
vegetables etc. 1. Explain the different types of warehouses
a) Bonded b) Private 2. Explain the advantages of warehousing
functions.
c) Cold storage d) Co-operative
6. The document which authorizes to Reference
deliver the goods either in part or full is
1. Kapoor. N. D., Principles of Commerce.
called ______
2. GulshanS. S. & M.P Gupta, Elements of
a) Warehouse warrant
Commerce.
b) Dock Receipt
3. Bhushan. Y. K. Fundamentals of Business
c) Dock warrant d) None of these Organisation and Management.
7. The Institutional warehouse started
with the support of the government is
_______
a) Bonded Warehouse
b) Public Warehouse
c) Food Corporation of India
d) Custom Bonded.
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CHAPTER
TRANSPORTATION
14
Learning Objectives and when they are wanted. Transport is an
To enable the students to integral part of Commerce. It is a means
i. understand the different types of to carry men and materials from one place
Transport (production) to another resulting in creation
ii. explain the services of transport to of place and time utilities. It removes the
business hindrance of place.
iii. know the documents used in
According to K.K. Sexena, ”the transport
transport
system acts with reference to the area it
iv. know about Common Carrier
serves in the same way as a candle does in a
dark room”.
Introduction 14.02 Types of Transport

Transport service facilitates the smooth Transport system can be classified in
carriage of goods from the place of producer different ways depending on the types of
to the place of consumer. Transport also transport, the ways and means of transport
facilitates travelling of people from one and also the motive power used in transport.
place to another place. The different types A. Surface Transport
of transport are given below.
Transport of people and goods by land
vehicles is known as Surface transport. It is
also called as ‘Land Transport’.
1. Pack Animals
Animals like horse, mule, donkey camel,
and elephant etc., are used for carrying small
0HDQLQJDQG'H¿QLWLRQRI loads in backward areas, hilly tracks, forest
Transport regions and deserts known as pack animals.
The term ‘transport’ includes all the clerical, Generally, the pack animals serve areas
mental and manual occupation involved in which are inaccessible to modern means of
the operation of road, rail, canal, sea and transport. Animal transport has also played
air transport. Goods have no use unless a significant role where there is no road and
they are made available at a place where railway transport.
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2. Bullock Carts
It constitutes the predominant form of rural
road transport in India for goods traffic and
to some extent for passengers’ traffic. It
links up the villages with the nearby markets
and railway stations. It carries the produce
for sale to the market and consumer goods
to the villages.
Pack Animals
Pathways Transport
It is the oldest form of transport found
in hilly areas, forest areas and in remote
places. These are used by human beings
for transport.
3. Road Transport Bullock Carts

Road Transport is one of the most promising
and potent means suitable for short and 5. Tramways
medium distances. It provides the basic It made their appearance in the 19th century
infrastructure for bringing the majority of as a form of transport suitable for big cities.
the people who are living in far-off villages Tramways were initially horse drawn
into the mainstream of nation like by later steam-powered and now electrically
connecting them to different places. It offers operated. Its carrying capacity is large. They
a number of advantages such as flexibility, are able to cope up with the peak hour traffic
reliability, speed and door-to-door service, in big cities with the greater popularity of
besides supplementing and increasing the motor buses, tramways slowly declined.
efficiency of the other modes of transport. Madras city had tramways till 1933.
4. Motor Lorries and Buses 6. Railway Transport
From the dawn of civilization, people have The invention of steam engine by James
been endeavoring to form roads and use Watt, revolutionized the mode of transport
wheeled vehicles to facilitate transport all over the world. Railway, as a mode of
of men and materials. The credit of transport is the most organized transport
revolutionizing the road transport and undertaking all over the world. Railways
introducing the elements of speed and are the cheapest and quickest means of
greater carrying capacity into the system goes transport for carrying heavy goods over
to motor lorries and buses. Introduction of long distance.
petrol engine and later diesel engine vehicle
has been offering good competition to the Railways render an essential public service.
railways. It requires a huge capital outlay for laying
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There are three types of tracks that are in

operation. They are (I) Meter gauge (ii)
Broad gauge and (iii) Narrow gauge
Advantages of Railway Transport

1. Railways are well suited for carrying
heavy and bulky goods over long
Tramways distances.
2. It can provide long distance travel
throughout the day and night with
unbroken services.
3. It can provide better production and
safety to the goods than motor transport.
The goods generally carried in closed
wagons are not exposed to sun, rain etc.
4. Though initial investment is large, in the
long run the operating expenses will be
Railways very low in railways and it will prove a
cheaper mode of transport.
It requires less time than motor transport
Indian Railway is the largest Railway for carrying goods over long distance
Organization in the world. The Indian with greater speed
Nationwide network, the 4th longest
5. It has regular schedule of timing and is
in the world, is owned and operated
available throughout the year.
by State-Owned Indian Railways and
includes an operating route length of 6. It provides unaffected services whether
more than 65,000 Kms. The network rainy or shinny weather conditions.
carried about 8 billion passengers (the
highest in the world) in 2013. Disadvantages of Railway Transport
1. Railway rates are relatively higher than
motor transport for transporting light
of tracks, construction of bridges, purchase weight articles over short distance.
of locomotives etc. Railways are among
2. It is inflexible, as it is operated to a
the biggest public utilities of a country.
particular track which cannot deviate
Rail transport is a means of transferring of
from the set routes.
passengers and goods on wheeled vehicles
running on rails (tracks). Rail transport 3. In rural areas, it cannot offer adequate
stated to be important in the Industrial traffic because of uneconomical
Revolution. operating cost.
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4. It requires heavy investment for

installation of tracks and maintenance
that increases its fare on the users.
5. If railways are not fully utilized and if
wagons and coaches are to half empty to
its capacity, a heavy financial burden will
be cast on the railway.
14.03 Recent Trends in

Metro Rail
Transportation
a) Metro Rail
Metro Rail is a Mass Rapid Transport System
(MRTS). It is a convenient, fast, efficient,
reliable, comfortable mode of urban
transport. Rapid transit also known as heavy
rail, metro, subway, tube or underground
is a type of high capacity public transport
generally found in urban areas.
Monorail
b) Monorail
A monorail is like a train, but instead of d) Pipeline Transport
having two sets of wheels that balances on
It is the mode of transportation of goods
a railway track, the monorail is balanced on
or materials through pipe. Liquids and
top of one rail. Monorails are often used to
gases are transported in pipelines. Pipeline
transport people around large cities. Some
exist for the transport of crude and refined
monorails utilize magnets to hover on their
petroleum, fuels such as Oil, Natural gas
rails, reducing friction between the train and
and Bio-fuel etc., and other fluids including
the rail. The first monorail was invented in
sewage, slurry and water. It requires heavy
the 19th century.
investment to install.
c) Bullet train
High-speed rail is a type of rail transport e) Conveyor Transport
that operates significantly faster than It is the broad category of transport mode
traditional rail traffic, using an integrated that includes modes developed from the
system of specialized rolling stock and idea of a conveyor belt. Examples include
dedicated tracks. The first such system began Conveyor belt, two or more Pulleys with
operations in Japan in 1964 and was widely a continuous loop of material that rotates
known as the bullet train. High-speed trains about them, Escalator, Elevator which
normally operate on standard gauge tracks is used carrying people among floors of
of continuously welded rail. building, etc...
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f) Ropeway Transport
A Ropeway is another means of transport in
naval lifting device. It can be operated in the
place where road construction is impractical
and costly. Certain limit of goods or people
can be transported with the help of (naval
lifting device) electricity. In the hilly remote
Bullet Rail areas ropeway system of transport may be
suitable means of transport.
g) Hyper loop Transport

Hyper loop is a proposed system of
transport that would see pods or containers
travel at high level speed through a tube that
has been pumped into a near vacuum. The
train pods would either float using magnetic
Pipeline Transport levitation technology or float using air caster
“Skis”, similar to how pucks travel across an
air hockey table. With so little friction in the
tunnel, the pod would be able to travel at
immense speed with projected top speeds of
760 mph. Hyper loop is a futuristic transport
system. Tunnels for the Hyper loop would
be built either above or below ground, at
only around 3 meter in diameter, lacking up
a smaller ground footprint than traditional
rail or road. Elon Musk an entrepreneur had
proposed this mode of transport as a “fifth
Ropeway Transport mode of transport” in 2012.
B. Water Transport
“Water is a free gift of nature’. Human
civilization through gradual application
of science and technology, have utilized
water resources for economic, political
and military activities. Remarkable
advancements are taking place in water
transport due to considerable improvement
in the construction, design motive power,
Hyperloop speed and safety of ships and boats.
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Water transport is the process of moving Advantages of inland waterways

people, goods etc. by barge, boat, ship or a) It is considered as the cheapest mode
sailboat over a sea, ocean, lake, canal, river, of transport among the other modes of
etc. This category does not include articles transport.
on the transport of water for the purpose of
consuming the water. Water Transports are b) It carries goods smoothly due to the
of two types absence of shaking and jolting during
transit. It is eminently suitable for the
(i) Inland Waterways ii). Ocean Waterways carriage of fragile goods like glassware,
earth ware etc., without causing damage.
(i) Inland Waterways
c) It is most suitable for heavy loads.
Inland Waterways comprise of rivers, canals
and lakes. It is also known as internal d) There is lesser pollution in water
water transport. Rivers that are naturally transport.
navigable are called natural waterways. e) Initial investment on river services as
Canals and canalized rivers belong to the well as expenditure on their maintenance
category of ‘Artificial Waterways’. Generally is much lesser as compared to road and
small boats and steamers are operated rail transport.
on rivers to transport people and goods. Disadvantages of inland waterways
Where rivers are deep enough, large ships
can also ply on them. Canals are man- a) It is the slowest means of transport. As
made waterways, constructed for the twin compared to this, railways are quicker,
purposes of navigation and irrigation. safer and cheaper means of transport.
b) Floods caused during rainy season, lack
of flow of water during summer season
affect to ply boats and steamers.
c) Sometimes rivers also change their way.
It leads to stoppage and uncertainty in
usage of this means of transport.
(ii) Ocean or Sea Transport
Ocean transport has been playing

Boat-House a significant role in development
of economic, social and cultural
relations among countries of the world.
International trade owes its growth to
ocean transport. Ocean transport enjoys
a pride of place in aiding international
trade. Cheapness is its great virtue. In the
transportation of low-grade, bulky goods
among the countries, the role of ocean
Yatch transport is commendable.
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Types of Ocean Transport trade of a country is reserved for national

Ocean transport may be divided into two shipping. In India, Coastal shipping trade
broad categories. is now exclusively reserved for Indian ships.
a) Coastal shipping b) Overseas shipping
Coastal shipping constitutes an important It means the passengers’ and goods have to
means of transport in all countries having cross ocean. Example India export goods to
a long coastline. It is a cheap means of America.
transport for the movement of bulky Ocean going ships may also be divided
cargoes like coal, iron ore etc. to domestic into two, namely Liners and Tramps:
ports of country. Usually, coastal shipping
(i) Liner
An ocean liner is a passenger ship primarily
used as a form of transportation across seas
or oceans. Liners may also carry cargo
or mail, and may sometimes be used for
other purposes (e.g., for pleasure cruises
or as hospitals ship). They sail to schedule,
whether they have a full load or not. They
follow defined routes with fixed places and
times of call. Regularity of service, god sped
and luxurious facilities to passengers are the
specialties of liners.
There are two types of liners, namely,

Passenger liners and Cargo liners.
(ii) Tramps
Tramps are essentially cargo vessels. See
the picture above. They have no set routes.
They do not follow any timetable. They sail
only when they get sufficient load. They sail
at any time and carry cargoes for almost any
ports.
International shipping Vs Overseas shipping
International shipping can be between countries that are connected by land. For Example,
Foreign trade between India and Bangladesh. Overseas shipping means the package has to
cross ocean. For Example, International trade between India and South Africa.
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The following is the major types of Air transport is a form of travel in vehicles
commercial ships such as helicopters, hot air balloons, blimps,
1. General cargo ship 2. Bulk carriers 3. gliders, hang gliding, parachuting, airplanes,
Container ships 4. Auto carrier 5. Tankers jets or anything else that can sustain flight.
6. Fishing vessels 7. Oil vessels 8. Passengers 'RPHVWLFDQG,QWHUQDWLRQDOÀLJKWV
ships 9. Ferryboats 10. Tow and tug boats
Air travel can be grouped into two general
11. Specialized ships
classifications: national/domestic and
C. Air Transport international flights. Flights from one
point to another within the same country
Air transport is the fastest and the costliest
are called domestic flights. Flights from a
mode of transport. Commercial air
point in one country to a point of different
transport is now one of the most prominent
country are known as international flights.
modes of overseas transport.The modern air
Travelers can use domestic or international
transport has its growth with the invention
flights in either private or public travel.
of Airplane by Wright Brothers.
Advantages of Air Transport
a) It provides a regular, convenient, efficient

and quick service.
b) Perishable goods like fruits, vegetables,
egg, meat, etc., can be transported
quickly.
c) It does not require huge investment for
construction and maintenance of track
like railways.
d) They provide comfortable services for
passengers and safety for their goods.
e) It can be used to move goods to areas,
which are inaccessible to other means of
transport.
f). It is very much helpful for flood or
landslide and war rises to the occasion to
save human life from danger.
“Air Rescuers” was established in the year 1999 for superior patient transfer through Air
Ambulance and an elevated standard of care and management through Air Ambulance
India. The Air Ambulance services are available in Delhi, Mumbai, Kolkata, Hyderabad
and Chennai.
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Disadvantages of Air Transport due to unsuitable natural conditions.

a) It is a very costly mode of transport. The Without adequate and effective
rates and fares charged by which are transport, goods cannot be had either in
beyond the reach of common people. the quantities or varieties required in a
complex economy.
b) Air craft are not quite suitable for
carrying heavy loads and weights.
c) It develops and expands the market
c) It is not dependable because of
The primary function of transport is to
unfavourable weather which may disturb
enable the physical distribution of goods at
the air service suddenly.
global level. The distribution of goods must
d) The construction and maintenance take place easily, economically and speedily.
of aerodromes involve a huge capital It provides the chance of expanding national
expenditure. land international market.
e) Every country controls the air space above
its territory. Therefore, an aeroplane d) It helps in price stability by distributing
cannot fly over another country without goods all over the country
obtaining its prior permission to concern
authority. e) It aids to economic growth
The movement of raw materials, fuel,
Services of Transport to Business labour and finished products and the
The growth and development in the means mobility of capital and technical know-how,
of transport over the past two hundred transport playing a remarkable role in the
years have produced significant economic growth of all industries from agriculture to
effects and has revealed how important are manufacturing.
the services of transport. It creates place
and time utility. f) It helps in specialization and mass
production
a) It increases the efficiency of production Specialization means the division of complex
process of production into a number of
The object of production is consumption.
separate processes so that each person or
Effective transport system creates time and
group specializes in each and every process.
place utilities and thereby influences the
It has been extended to international level
demand for goods and the value of goods.
too.
Thus, transport makes production efficient
and purposeful. g) It encourages innovations in product
production and designing
b) It stimulates wants by increasing It provides plenty of opportunities to the
quantity and variety of consumer goods producers to produce their product in
It helps in getting commodities, which innovative and creative way, to catch up the
cannot be had or produced in a region wider market and reap more profit.
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14.04 Documents Used in charters. The charter becomes responsible

Transportation to the third parties for the acts of the master
and crew of the ship.
a) Way Bill
The way bill is an acknowledgement of d) Bill of Lading
receipt of goods for transport by the carrier. Bill of Lading is a document containing
The carrier, accepting goods for transport, the terms and conditions of the contract
issues waybills in the name of the consignors of carriage. It is issued by the shipping
or consignees. It serves as an evidence of the company and signed by the captain of the
contract of transport. It is also a document ship. It acknowledges the receipt of the
of tittle of goods. The ownership of goods goods described in it on board the ship. It
represented by a waybill can be transferred also serves as an official receipt of goods. It
by endorsement and delivery of the waybill. is a document of title of goods. The main
If a waybill lost, the consignee will be allowed contents are: Name of Exporter, name of the
to clear the goods from the carrier after he ship, place of loading, particulars of goods
executes an indemnity bond. shipped, port of destination, freight paid
or to be paid, person to whom delivery of
b) Railway Receipt
goods is to be made, date etc.
Railway Receipt is an acknowledgement
of receipt of goods by the railway for If the condition of the packages is good,
transporting. It serves as a document of a clean bill of lading is issued. If some of
title of goods, viz., it shows the title of its the packages are found damaged, a foul or
holders of the goods. It may be issued in the clause bill of lading is issued.
name of the consignor or consignee. Only
on presentation of the railway receipt the e) Air Consignment Note or Airway Note
railways will deliver the goods. If railway It is a document prepared by the consignor,
receipt is lost, the consignees can obtain which is handed over to the carrier of goods,
the goods from the railway by executing an while transporting goods through Airways.
indemnity bond. Ownership of the goods Air Consignment Note is made out in
can be transferred by endorsement and three original parts. One is signed by the
delivery of the receipt. consignor and marked for the carrier. The
second is signed by both the consignor and
c) Charter Party
the carrier and marked for the consignee
When goods are to be consigned in large (intended to accompany the goods) and the
quantity, it is advantageous to hire the third is signed by the carrier and handed
whole or substantial part of the ship. The back to the consignor after the goods have
document through which this contract is been accepted.
made is known as ‘Charter Party’ may also
be known as ‘Voyage Charter’ or ‘Time 14.05 Common Carrier
Charter’. The person who hires the ship is A common carrier is a person who is
known as ‘Charter’. The charter party brings engaged in the business of carrying goods
the vessel and crew under the control of the for hire indiscriminately for all persons.
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There are organizations transporting goods

on designated routes according to a fixed
regular schedule, offering to transport
goods for hire for all people without
discrimination. Railways and Sea transport
do not come under common carrier because
they are covered by separate Acts. The
liability of common carrier is governed by
Carriers Act 1865.
The technological advancement will make
For example, city buses are a common carrier.
the transportation highly sophisticated
Under common law rules, a common carrier
with greatest speed in future. Transport
is generally liable for all losses which may
plays a predominant role in the economic
occur to property entrusted to his charge in
development of a country by helping the
the course of business.
business community and public in an
enormous way.
Air consignment note

Key Terms
Consignment Note, Bill of
Lading, Liner, Tramps
For Own Thinking
Geographical separation between

producer and consumer – Comment.
Importing Crude oil from foreign

country to Petroleum refineries –
transporting through Truck tankers or
Pipelines – Suggest with reason.
Bill of lading
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Exercise 1. Define transport.
2. State any two services rendered by
I. Choose the Correct Answer transport.
1. Transport removes the hindrance of 3. Write any two advantages of water

transport.
a. Time
b. Place III. Short Answer Questions
c. Person 1. What is bill of lading?
d. Knowledge 2. What is charter party?
2. Air consignment note is prepared in IV. Long Answer Questions
_____ forms
1. Explain different types of transport.
a. One
2. Discuss the advantages of transport.
b. Two.
c. Three Reference
d. Four 1. Mitra. J. K.Principles of Commerce, ABS
Publishing House.
3. ____ is a document acknowledging the
receipt of goods by a carrier 2. GulshanS. S. & M.P Gupta, Elements of
Commerce.
a. Waybill
3. Bhushan. Y. K. Fundamentals of Business
b. Consignment note
Organisation and Management.
c. Charter
d. Bill of lading
4. Which is the fastest means of transport?

a. Rail
b. Road
c. Sea
d. Air
Answers
1. b 2. c 3. a 4. d
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CHAPTER
INSURANCE
15
Learning Objectives 0HDQLQJDQG'H¿QLWLRQRI
Insurance
To enable the students to Insurance is a contract between the insurer
i. learn the concept of Insurance and the insured under which the insurer
ii. understand the meaning and undertakes to compensate the insured for
principles of Insurance and its types the loss arising from the risk insured against,
iii. know various risks in business in consideration the insured agrees to pay
iv. legal protection through IRDA premium regularly. The person whose risk
insured is called the insured or assured. The
person who agrees to compensate the loss
arising from the risk is called the insurer or
Introduction assurer (or underwriter)
“Uncertainty is inherent in human life” Insurance is a means of providing
Every business is exposed to different types monetary coverage against loss caused by
of risks such as fire, theft, accident etc. Some natural or man-made factors
of the risks can be transferred to specialized
'H¿QLWLRQ
institution known as Insurance Companies.
Insurance substitute this uncertainty “Insurance is a plan by themselves which
by providing financial compensation. large number of people associate and
Insurance is nothing but socialization of transfer to the shoulders of all, risk that
risks. Insurance companies indemnify the attacks to individuals”
loss of the insured. - According to John Merge
15.02 Principles of Insurance

Insurance concept was started to distribute
risk among group of people. Co-operation
is the basic principle behind every Insurance
contract. The following are the important
principles of Insurance
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1. Utmost Good Faith 3. Indemnity

According to this principle, both insurer Indemnity means security or compensation
and insured should enter into contract against loss or damages. In insurance, the
in good faith. Insured should provide all insured would be compensated with the
the information that impacts the subject amount equivalent to the actual loss and
matter. Insurer should provide all the not the amount exceeding the loss. This
details regarding insurance contract. Both principle ensures that the insured does
the insurer and the insured should display not make any profit out of the insurance.
good faith towards each other in regard to This principle of indemnity is applicable to
the contract. property insurance alone.
Example: Mr. M is a heart patient. But he Example: A businessman gets his sock of
hides this fact to the LIC while taking a life goods insured for ₹ 5,00,000. If the goods
policy. On his death due to a heart attack, are destroyed by the fire, the insurance
LIC can refuse to pay compensation to his company will be liable to pay compensation
legal representative because a material fact for the loss caused to the insured. However,
was not disclosed by the insured. maximum compensation shall be ₹5,00,000
even if loss is more than this.
2. Insurable Interest
The insured must have an insurable interest “The principle of indemnity is not applicable
in the subject matter of insurance. Insurable to life insurance because one cannot estimate
interest means some pecuniary interest in the loss due to the death of a person”
the subject matter of the insurance contract. 4. Causa Proxima
The insured must have an interest in the
preservation of the thing or life insured, The word ‘Causa proxima’ means ‘nearest
so that they will suffer financially on the cause’. According to this principle, when the
happening of the event against which they loss is the result of two or more cause, the
are insured. proximate cause, i.e. the direct. The direct,
the most dominant and most effective cause
Example, a businessman has insurable of loss should be taken into consideration.
interest in his stock of goods. The insurance company is not liable for the
remote cause.
Material Fact
A material fact is one which goes to the root of the insurance contract i.e., a fact is material
if it can influence the insurer in accepting or declaring the risk or in fixing conditions of
insurance or rate of premium.
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In the previous example,where ‘fire’ is accident. He gets the insurance claim and
accepted as the proximate cause of loss and if gets the damaged parts replaced with new
there is no fire and goods are destroyed due ones. In this case the damaged parts will
to excessive heat, the insurance company be taken by the insurance company. The
would not be liable to pay compensation. insured has no right over the damaged parts
since they had already got compensation for
5. Contribution the damaged parts.
The same subject matter may be insured
with more than one insurer then it is known 7. Mitigation
as ‘Double Insurance’. In such a case, the In case of a mishap, the insured must take
insurance claim to be paid to the insured off all possible steps to reduce or mitigate
must be shared on contributed by all the loss or damage to the subject matter of
insurers in proportion to the sum assured
insurance. This principle ensures that the
by each one of them. It may be noted that
insured does not become negligent about
in case of multiple insurance, the insured
the safety of the subject matter after taking
can claim the loss from any of the insurers
the insurance policy. Insured is expected to
subject to the condition that the insured
act in a manner as if the subject matter has
cannot recover more than the amount of
been insured. If appropriate steps are not
actual loss from all taken together.
taken to save the property then the insured
Example: A businessman gets his factory may not get the full compensation from the
insured against fire for ₹10,00,000 with insurer.
insurer A and ₹5,00,000 with insurer B. Due
to fire, a loss of ₹1,50,000 occurred. Then, Example: When a factory is insured against
insurers A and B will contribute the loss in fire and theft by insured, insured must take
the ratio of 2:1. A will pay ₹1,00,000 and B all possible precautions and steps to prevent
will pay ₹ 50,000. those from the risk.
6. Subrogation
15.03 Types of Insurance
Subrogation means ‘stepping the shoes on
others’. According to this principle, once Insurance covers different types of risks.
the claim of the insured has been settled, All contracts of insurance can be broadly
the ownership right of the subject matter classified as follows:
of insurance passes on to the insurer.
1. Life Insurance (or) Life Assurance
Otherwise, the insured will realize more
than the actual loss which goes against the 2. Non-life Insurance (or) General
principle of Indemnity. This is because the Insurance
insured cannot make any profit by selling It can be further classified into: (i) Fire
the damaged property Insurance; (ii) Marine Insurance; (iii)
Example: Mr. B gets his motor car insured. Health Insurance and (iv) Miscellaneous
Some of its parts got damaged at a road Insurance.
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1. Life Insurance fixed period, the policy will continue till the
Life Insurance may be defined as a contract death of the assured.
in which the insurance company called ii) Endowment Life Assurance Policy
insurer undertakes to insure the life of a
person called assured in exchange of a sum Under this type of policy, the insurer
of money called premium which may be undertakes to pay the assured a specified
paid in one lump sum or monthly, quarterly, sum, on the attainment of a particular
half yearly or yearly and promises to pay a age or on his death, whichever is earlier.
certain sum of money either on the death of In case of death of the assured before
the assured or on expiry of certain period. he attains the specified age, the sum is
payable to his legal heir or the nominee.
Importance of Life Insurance Otherwise, the sum is paid to the assured,
when he attains a particular age. Thus, the
a) Life insurance provides protection to
endowment policy matures after a limited
the family at premature death of an
number of years.
individual.
b) It gives adequate amount at an old age iii) Joint Life Policy (JLP)
when earning capacities are reduced. The policy is taken up jointly on the lives
c) Life insurance is not only a protection of two or more persons is known as Joint
but is a sort of investment because a Life Policy. On the death of any one person,
certain sum is returnable to the assured the assured sum or policy money is paid
at the time of death or at the expiry of a to the other survivor or survivors. The
certain period. premium is paid jointly or by either of them
in installments or lump sum.
Types of Life Insurance Policies
Usually this policy is taken up by husband
Life insurance policies are of many kinds. and wife jointly or by two partners in a
Some of them are given below: partnership firm, where the amount is
payable to the survivor on the death of either
i) Whole Life Policy
of the two.
In this kind of policy, the sum insured is
payable only on the death of the assured iv) Annuity Policy
to the beneficiaries or heir of the deceased. Under this policy, the assured sum or
The premium is payable for a fixed period policy money is payable in monthly or
(20 or 30 years) or for the whole life of the annual instalments after the assured
assured. If the premium is payable for a
Life Insurance should more properly be called as “Life Assurance” because the risk insured
here is certain and natural. Only the tie of occurrence is uncertain.
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attains a certain age. In this case, either 2. Non – Life Insurance

the whole amount of the premium is paid It refers as the insurance not related to
once or premium is paid in instalments human but related to properties.
over a certain period. This policy is useful
to those who prefer a regular income after (a) Fire Insurance
a certain age. Fire insurance is a contract whereby the
insurer, in consideration of the premium
v) Children’s Endowment Policy
paid, undertakes to make good any loss or
This policy is taken to provide funds for damage caused by a fire during a specified
the education or marriage of children. For period upto the amount specified in the
example, Jeevan Anurag Policy. In this policy.
policy, the amount is payable by the insurer
when the children attain a particular age. A claim for loss by fire must satisfy the
The premium is paid by the person entering following two conditions:
into the contract. However, no premium will
(i) There must be actual loss; and
be paid, if he/she dies before the maturity of
the policy. (ii) Fire must be accidental and non-
intentional.
Essential elements of Fire Insurance
Contract
1. The insured must have insurable interest

both at the time of insurance and at the
time of loss.
2. The contract is based on the principle of
utmost good faith.
3. It is based on the principle of strict
indemnity.
4. Fire must be the proximate cause of
damage or loss.
(b) Marine Insurance
Marine insurance is a contract of insurance

under which the insurer undertakes to
indemnify the insured in the manner and
to the extent thereby agreed against marine
losses. The insured pays the premium in
consideration of the insurer’s (underwriter’s)
guarantee to make good the losses arising
from marine perils or perils of the sea.
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Marine perils can be collision of ship with known as freight insurance. The shipping
the rock, fire, ship attacked by the enemies, company is mainly interested in freight,
etc. These perils cause damage, destruction which it gets either in advance or on the
or disappearance of the ship and cargo and arrival of goods. However, it will not get the
non-payment of freight. Through marine freight, if the goods are lost during transit.
insurance policy, the insurer undertakes to So, to insure the freight, it takes freight
compensate the owner of a ship or cargo for insurance.
complete or partial loss at sea.
A contract of marine insurance covers the
Essential elements of Marine Insurance ship, cargo and the freight.
Contract
(c) Health Insurance
1. It is based on the principle of indemnity In mid 80’s, most of the hospitals in India
2. The contract is based on utmost good were government owned and treatment
faith. was free of cost. With the advent of
Private Medical Care, the need for Health
3. The insurable interest must exist at the
Insurance was felt and various Insurance
time of loss.
Companies introduced Health Insurance
4. The principle proximate cause will apply as a Product. Presently the health
to marine loss only. insurance exists primarily in the form of
‘Mediclaim policy’.
Types of Marine Insurance Policies
The three different types of marine insurance Health insurance policy is a contract
policies are: between an insurer and an individual
or group, in which the insurer agrees to
provide specified health insurance at an
1. Hull or Ship Insurance:
agreed upon price (premium).Disability
When a ship is insured against any type of resulting from illness or accident may be
danger, it is known as hull insurance. This peril to family because it not only cuts
policy is taken to indemnify the insured for off income but also creates large medical
losses caused by damage to ship. expenses. Health insurance is taken as
safeguard against rising medical costs. It
2. Cargo Insurance:
provides risk coverage against unforeseen
When a marine insurance policy is taken by health expenditure that may result in
the cargo owner to be compensated for loss financial hardship.
caused to his cargo during the Voyage, it is
Types of Health Insurance
known as cargo insurance. The cargo to be
transported by ship is subject to many risks, There are mainly three types of Health
like risk of theft, loss of goods in voyage, etc. Insurance covers:
3. Freight Insurance: 1. Individual Mediclaim

When a marine insurance policy is taken to It covers the hospitalization expenses for an
guard against non-recovery of freight, it is individual up to the sum assured limit
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2. Family Floater Policy There are two ways by which health

It covers the hospitalization expenses for insurance claims are settled:
entire family up to the sum assured limit. a. Cashless: The claim amount needs to be
3. Unit Linked Health Plans approved by the TPA and the hospital
settles the amount with the TPA. (TPA
This policy combines health insurance with or Third Party Administrator is a
investment and pays back an amount at the middleman between Insurer and the
end of the insurance terms. Customer)
Health Insurance provides following types b. Reimbursement: The insured avails
of coverage: himself or herslef of the treatment
and settles the hospital bills directly at
Medical expenses – It covers the expenses the hospital. The insured can claim
of hospitalization/nursing home bills and reimbursement later on by submitting
doctors’ services. relevant bills/documents for the claimed
Disability income – It replaces the income amount to the TPA
lost while the insured is unable to work. (d) Miscellaneous Insurance
Claims Settlement (i) Motor Vehicle Insurance

This is also known as ‘Auto Insurance’. This
policy comes under General Insurance. This
insurance has become very popular and is
gaining importance. In motor insurance the
owner’s liability to compensate people who
were killed or injured through an accident
is passed on to the insurance company.
The premium rate under this policy is
standardized.
(ii) Burglary Insurance

This policy comes under the category of
insurance of property. Any loss of damage
CASCO INSURANCE
The motor casco is a voluntary insurance. It covers the motor vehicle against various risks
such as fire, natural disaster, theft of the motor vehicle or the equipment installed therein,
a breakdown as a result of collision with another vehicle or object on the road etc.
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due to theft, larceny, burglary, house- (iv) Crop Insurance

breaking and acts of such nature are covered This policy is to provide financial support
by this policy. Compensation of actual loss to farmers in case of a crop failure due to
is done. drought or flood. It generally covers all risks
i) Insurable interest need not exist at the of loss or damages relating to production of
time of policy but should be present at rice, wheat, millets, oil seeds and pulses etc.
the time of theft. (v) Sports Insurance
ii) The principle of causa proxima is also This policy is a comprehensive cover for
applied to it. The insurance company amateur sports persons regarding their
would pay only if the proximate cause sporting equipment, personal effects, legal
falls under the policy liability and personal accident risks. If
(iii) Cattle Insurance desired it can also be extended to a named
This is a bond in which a sum of money is member of the insured’s family but it is not
secured to the insured in case of an event of available to professional sports person. The
death of animals like bulls, buffaloes, cows cover is generally for following sports or
and heifers. The cause of death may be an more: Angling, badminton, cricket, golf,
accident, disease or pregnant condition, etc. lawn tennis, squash and use of sporting
The insurer normally agrees to pay excess in guns.
case of loss. (vi) Amartya Sen SikshaYojana
The General Insurance Company offers
to secure the education of dependent
children under this policy. If the
assured parent/legal guardian goes
through any bodily injury resulting
solely and directly from accident due
to external, violent and visible means
and if such injury shall within twelve
calendar months of its occurrences be
the only direct cause of his/her death or
permanent total disablement, the insurer
shall indemnify the insured student in
respect of all covered expenses to be
incurred from the date of occurrence of
such accident till the expiry of policy or
completion of the duration of covered
course whichever occurs first and such
indemnity shall not exceed the sum
assured as stated in the policy schedule.
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(vii) Rajeswari Mahila Kalyan Bima insurer to insure the whole or a part of risk
Yojana covered by the first insurer. It happens when
This policy envisages to provide relief to an insurance company feels that it cannot
the family members of insured women in bear the entire risk alone by itself. In such
case of their death or disablement due to case, it transfers a part of the risk to other
insurance companies.
any kinds of accidents and/or death and /
or disablement arising out of other factors
iv. Double Insurance
incidental to women only.
When more than one insurance policy is
Terms used in Insurance taken to cover the same subject matter i.e.
risk, then it is known as Double Insurance.
I. Nomination
BUSINESS RISKS
According to Sec 39 of the Insurance
Act, 1938, nomination is the process of Insurance covers various risks of traders and
appointing or nominating a person or others. Therefore the concept of risk need to
persons by the insured, to receive the be studied. The term ‘business risk’ refers to
payment of the policy, in the event of death. the possibility of inadequate profits or even
The person who is authorized to receive the losses due to uncertainties or unexpected
payment of the policy is called nominee. If events. Risk is different from uncertainties.
the policy matures by expiry of time, the Nature of Business Risks
policy amount is payable to the insured
himself and not to the nominee. Business risks can be understood in terms of
their peculiar characteristics:
ii. Surrender Value
(i) Business Risks Arise Due to Uncertainties
The surrender value is the cash value of the
policy which is payable to policyholder if Uncertainty refers to the lack of knowledge
he decides to terminate the contract. This about what is going to happen in the future.
Natural calamities, change in demand
surrender value is usually obtained from the
and prices, changes in government policy,
paid-up-value by applying a percentage factor.
improvement in technology, are some of the
This percentage factor will vary according to
examples of uncertainty which create risks
the plan of assurance, the original term of
for business because the outcome of these
the policy and the duration elapsed since the
future events is not known in advance.
commencement of the policy. The surrender
value signifies the amount of premiums paid
which is returned to the policyholder at the (ii) Risk is an Essential Part of Every
time of surrendering the policy. Business
Every business has some risk. No business
iii. Re-Insurance can avoid risk, although the amount of risk
It is a contract of insurance, in which an may vary from business to business. Risk
insurer enters into a contract with another can be minimized, but cannot be eliminated.
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(iii) Degree of Risk Depends Mainly Upon ii) Pure Risks

the Nature and Size of Business Pure risks are the type of risks where business
Nature of business (i.e. type of goods suffers loss only if the risk occurs. Non-
and services produced and sold) and size occurrence of such risks leads to absence of
of business (i.e., volume of production loss.
and sale) are the main factors which Example: Business may suffer loss only if
determine the amount of risk in a fire, theft or strike occurs.
business. For example, a business
dealing in fashionable items has a high iii) Insurable Risks
degree of risk. Similarly, a large-scale Insurable risks are the type of risks where
business generally has a higher risk than business can insure the probable losses by
what a small scale business has. paying a predetermined premium to an
insurance company. At the time of loss the
(iv) Profit is the Reward for Risk Taking: insurance company pays compensation on
the basis of agreed terms and conditions.
‘No risk, no gain’ is an age-old principle Loss arising from natural and physical risks
which applies to all types of business. Greater can be insured as the probability of risk can
the risk involved in a business, higher be determined.
is the chance of profit. An entrepreneur
undertakes risks under the expectation of Example: Company can insure its stock
higher profit. Profit is thus the reward for against fire or theft and if it loses its stock
due to fire or theft in office, the insurance
risk taking.
company pays compensation only upto a
Types of Business Risks extent of the value lost.
The business risks may be classified as iv) Uninsurable Risk
Losses arising from unforeseen natural
i) Speculative Risks
events, political changes or trade cycles
Speculative risks are the kind of risks are called uninsurable risks. Loss due to
which have the possibility of gain as well earthquake or flood or cyclone cannot be
as the possibility of loss. Such risks are the estimated and their probability cannot
result of market conditions. Favourable be calculated. Government directly takes
market conditions result in gains whereas care of the affected persons. Losses to
unfavourable market conditions result in businesses due to policy decisions of
losses. ruling political parties in a country, or
due to economic depression cannot be
Example: Use of better technology helps to insured. These uninsurable risk events
produce better quality products at cheaper are called uncertainties. The concept of
prices. This may increase the demand and risk is different from uncertainty. During
thus result in higher profits. uncertain events decisions cannot be taken.
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Causes of Business Risks bursting of boiler, fluctuations in exchange

Business risks arise due to a variety of causes, rates, etc. which lead to the possibility of
which are classified as follows: business risks.
(i) Natural Causes 15.04 Insurance Regulatory

Human beings have little control over Development Authority of
India (IRDAI)
natural calamities like flood, earthquake,
lightning, heavy rains, famine, etc. These IRDAI – Insurance Regulatory Development
result in heavy loss of life, property, and and Authority of India is the statutory,
income in business. independent and apex body that governs,
regulates and supervises the Insurance
(ii) Human Causes Industry in India. It was constituted in
Human causes include such unexpected the year 2000 by Parliament of India Act
events like dishonesty, carelessness or called IRDAI Act, 1999. Presently IRDAI
negligence of employees, stoppage of headquarters is in Hyderabad.
work due to power failure, strikes, riots,
management inefficiency, etc. Organisational Setup of IRDAI
IRDAI is a ten member body consists of

(iii) Economic Causes
These include uncertainties relating to demand i. One Chairman ( For 5 years & Maximum
for goods, competition, price, collection of age – 60 years)
dues from customers, change of technology or ii. Five whole-time Members (Not 5 years
method of production, etc. Financial problems and Maximum Age – 62)
like rise in interest rate for borrowing, levy of
higher taxes, etc., also come under this type of
causes as they result in higher unexpected cost
of operation of business.
(iv) Other Causes 1. Employee Group Insurance in India.
These are unforeseen events like political 2. Passengers (All transport)
disturbances, mechanical failures such as the Insurance Scheme.
For future Learning
David beckham, the famous football player from the UK first insured his legs for about
100 million pounds. as he became one of the most populous soccer players in the world, he
insured his whole body for $195 million to cover the risks of injury, illness, and disfigurement.
This policy would cover him financially if he were to lose any of the endorsements that
depended on his looks. $195 is approximately equal to $12,337.65 million.
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iii. Four part-time Members (Not more than vii. It also ensures the maintenance of
5 years) solvency margin (company’s ability to
iv. The chairman and members of IRDA are pay out claims) by insurance companies.
appointed by ;the Government of India
Key Terms
Objectives of IRDAI Uberrimaefidei, Indemnity, Causa
1. To promote the interest and rights of Proxima, Subrogation, Mitigation,
policy holders. Surrender value
2. To promote and ensure the growth of
Student Activity
Insurance Industry.
3. To ensure speedy settlement of genuine a) Sanjana insured her factory for ₹5 Lakh
claims and to prevent frauds and against fire. Due to fire she suffered a
malpractices loss of ₹2 lakh. How much amount
she can recover from the insurance
4. To bring transparency and orderly company? Why?
conduct in financial markets dealing
with insurance. b) A factory owner gets his stock of
goods insured, but he hides the fact
Section 14 of IRDAI Act, 1999 lays down the electricity board has issued him
the duties and functions of IRDAI: a statutory warning letter to get his
i. It issues the registration certificates to factory’s wiring changed. Later on, the
Insurance Companies and regulates factory catches fire due to short circuit
them. of wiring. Can he claim compensation?
ii. It provides license to insurance to
intermediaries such as agents and
brokers after specifying the required
qualifications and set norms/code of
conduct for them.
iii. It promotes and regulates the professional
organizations related with insurance
business to promote efficiency in Exercise
insurance sector
iv. It regulates and supervises the premium I. Choose the Correct Answer
rates and terms of insurance covers.
1. The basic principle of insurance is
v. It specifies the conditions and manners, ________
according to which the insurance
a) Insurable Interest
companies and other intermediaries
have to make their financial reports. b) Co-Operation
vi. It regulates the investment of c) Subrogation
policyholder’s funds by insurance
d) Proximate causa
companies.
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2. ______ is not a type of general insurance II. Very Short Answer Questions
a) Marine Insurance 1. List any five important type of policies.
b) Life Insurance 2. What is health insurance?
c) Fidelity Insurance
d) Fire Insurance
1. Define Insurance.
3. Which of the following is not a function 2. Give the meaning of crop insurance
of insurance? 3. Write a note on IRDAI
a)Lending Funds
b) Risk sharing
1. Explain the various types of Insurance
c) Capital formation
2. Explain the principles of insurance.
d) Protection of life
3. Discuss the causes of risk.
4. Which of the following in not applicable
in insurance contract? Reference
a) Unilateral contract 1. Kapoor. N.D. Principles of Commerce,
b) Conditional contract 2. Nael G. Bunni, Risk and Insurance.
c) Indemnity contract
d) Inter-personal contract
5. Which one of the following is a type of
marine insurance?
a) Money back
b) Mediclaim
c) Hull insurance
d) Corgo insurance
Answers
1. a 2. b 3. d 4. c 5. d
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UNIT IV SERVICE BUSINESS - II

CHAPTER
16 EMERGING SERVICE
BUSINESS IN INDIA
Learning Objectives As explained in Wikipedia, franchising is

“the practice of the right to use a firm’s business
To enable the students to model and brand for a prescribed period of
i. gain knowledge on franchising business time. ... For the franchisor, the franchise is
ii. learn about factoring and its importance an alternative to building “chain stores” to
iii. study the fundamentals of logistics distribute goods that avoids the investments
iv. be aware of the outsourcing business and liability of a chain”.
7KHUH DUH WZR SDUWLHV WR D IUDQFKLVLQJ

DJUHHPHQW
16.01 FRANCHISING
Franchisor: The owner of a business who
$0HDQLQJDQGGH¿QLWLRQ
provides the franchise. Generally he owns
One of the key components of success of the patent / trademark and offers it to the
any business lies in its ability to reach out franchisee under a licensing agreement.
to customers at local, national and global Depending on the agreement, the franchisor
level. Franchising has often been used as may also provide support services like
a method for expanding domestic market service/product training, marketing,
and for entering international markets. A advertising, etc. The franchisor levies fees in
wide variety of goods and services are now the form of royalty.
made available to customers using this
Franchisee: The individual who acquires
model. Franchising is used by businesses for
the right to operate the business or use
marketing and distributing products and
the trademark of the seller is known as the
services.
franchisee.
According to International Franchise %&KDUDFWHULVWLFVRIIUDQFKLVLQJ
Association a franchise is a “continuing
relationship in which the franchisor provides a (i) Franchise relationship is based on an
licensed privilege to do business, plus assistance agreement which lays down terms and
in organising training, merchandising and conditions of this relationship.
management , in return for a consideration (ii) The term of franchise may be for 5 years
from the franchisee.” or more. The franchise agreement may
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be renewed with the mutual consent of be considered as franchises. However, they

the parties. but should be considered more as exclusive
(iii) The franchisee gives an undertaking not dealerships with more operational freedom
to carry any other competing business for the dealers.
during the term of the franchise; and b) Business format franchising: When
the franchiser gives an undertaking not a franchisor awards rights covering all
to terminate the franchise agreement business aspects as a complete business
before its expiry except under situations package to the franchisee it is called as
which may justify the termination of business format franchising. This package
the franchise agreement. includes training , support and the corporate
(iv) The franchisee agrees to pay specified name. This enables uniformity of products,
royalty to the franchiser, as per terms of services, environment across geographical
the franchise agreement. boundaries with a high degree of
(v) Franchise means selling the same standardisation. Examples are McDonald’s,
product and maintaining a similar Pizza Hut. KFC, Hot breads, Titan, Color
type of shop decor (i.e. style of interior plus, Zodiac, Lakmé beauty parlour.
decoration) for which franchiser '$GYDQWDJHVRIIUDQFKLVLQJ
provides assistance to franchisee
a) Reduced risk: The franchisee will
in organising, merchandising and
acquire the right of running an already
management. The franchiser virtually
established business, thus eliminating
sets up the business for the franchisee.
the risk of starting a new business.
(vi) Franchisee is supposed to follow parent
b) Business expansion: Franchising
company’s policies regarding mode of
provides an opportunity to expand
business operations, as per clauses in
business at regional, national and global
the franchise agreement.
levels without incurring additional
(vii) Franchiser may give training to expenditure. Thus rapid growth of
personnel working in the franchisee’s franchisor’s business is facilitated.
organization.
c) Cost of advertising: The cost of
&7\SHVRIIUDQFKLVLQJ advertising for the franchisor will be
reduced since this cost will be shared
There are primarily two types of
by the franchisee. Moreover, it enables
franchising
the franchisor to reap the benefits of
a) Product/ trade name franchising: In increased visibility across regional and
this type, the franchisee exclusively deals national boundaries.
with a manufacture’s product. Examples d) Operational support: The franchisee is
include Kidzee, French Loaf outlets, Bharat provided assistance in not only obtaining
Petroleum bunks,Patanjali products, etc. finance,but also in deciding business
Relationships like Maruti Suzuki with ABT location , decor /design, staff training,
Maruti or Hero Honda bike dealerships may and handling day to day operations.
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Top 10 Franchises in India 2017

Name of Number of Years of
Position Country of Origin Industry
Franchise Franchising in India
1 Subway USA 16 Food & Beverage
2 Aloha India Malaysia 15 Education & Training
3 Baskin-Robbins USA 24 Food & Beverage
4 Kidzee India 14 Children’s
5 US Dollar Store India 13 Retail
6 McDonald’s USA 21 Food & Beverage
7 Khadim’s India 22 Retail
Prestige Smart
8 India 14 Retail
Kitchen
9 Domino’s Pizza USA 21 Food & Beverage
Bachpan (A Play
10 India 13 Children’s
School)
Examples of Indian Franchise
http://www.kidzee.com/partner-with-us/
Kidzee school franchise

Committed to quality education
Minimum area of 2000-3000 sq. ft.
Minimum investment ₹ 12, 00,000
Franchise with Oriental Cuisines Private Limited
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Haldiram takes Franchise route to add 150 stores
Particulars The French Loaf Wangs Kitchen

Floor placement Ground floor properties with good frontage
Carpet Area 350 - 500 sq.ft.in a high footfall area. 800 - 1000 sq.ft. in a high footfall area
Investment ₹20 - 25 Lakh Approximately ₹50 - 65 Lakh Approximately
Location Chennai, Rest of Tamil Nadu, Bengaluru, Mangalore, Mysore, Hyderabad &
Kolkata
('LVDGYDQWDJHVRIIUDQFKLVLQJ of the franchiser, This may serve as a

a) Franchising fees: The initial franchising deterrent whether suitable to him or not.
fee and the subsequent renewal fees e) Limitation on range of products: The
can be very high in case of successful franchisee cannot introduce new product
businesses. From the franchisee’s point lines into the business, except those
of view, this may be a deterrent. permitted by franchiser. This may mean
b) Fixed royalty payment: The franchisee loss of business to franchisee amidst
has to make payment of royalty to demands based on local conditions.
the franchiser on a regular basis. This )&RQFOXVLRQ
considerably reduces the income of the
Franchising enables a franchisor to
franchisee.
expand the existing business to wider
c) Danger of image tarnishing: If the geographical regions within the country
franchisee does not maintain standards of and abroad. Franchisees, especially those
quality and service; there is a danger that who are new entrants to business, do
the goodwill and image of the reputed not have to “start from the scratch”, but
franchiser will be adversely affected. work with an established business model
d) Lack of freedom: The franchisee does not getting the necessary operational support
have the freedom to run his business in and guidance. In international business,
an independent manner. He has to abide franchising is the best option to enter
by management and operational policies other country markets.
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16.02 FACTORING The Factoring Regulation Act 2011 governs

the registration of factors and regulating the
$,QWURGXFWLRQ
assignment of receivables and the associated
Firms sell goods on cash and credit basis. obligations.
When goods are sold on credit basis, bills are
&)DFWRULQJ3URFHVV
drawn on the buyer by the seller. In case of
small and medium business, a considerable a) The firm enters into a factoring
part of their working capital is tied down arrangement with a factor, which is
in bills receivables. The liquidity position generally a financial institution, for
of the firm is affected and this hinders the invoice purchasing
smooth functioning of the business. In b) Whenever goods are sold on credit basis,
order to overcome this hurdle, Factoring as an invoice is raised and a copy of the
a service has emerged. same is sent to the factor.
%0HDQLQJDQG'H¿QLWLRQ c) The debt amount due to the firm

is transferred to the factor through
Factoring is derived from a Latin term assignment and the same is intimated to
“facere” which means ‘to make or do’. the customer.
Factoring is an arrangement wherein the
trade debts of a company are sold to a d) On the due date, the amount is collected
financial institution at a discount. The by the factor from the customer.
factor is an agent who buys the accounts e) After retaining the service fees, the
receivables (Debtors and Bills Receivables) remaining amount is sent to the firm by
of a firm and provides finance to a firm to the factor
meet its working capital requirements.The credit sale of
main advantage of factoring is that the small Customer goods Client
Invoice
or big business firm receives short term Pays the

Pays the amount (In recourse type balance amount
finance (working capital) to meet day-to- customer pays throuth client) Submit invoice
copy
Payment up to
day payments. 80% initially
Factor
In a report submitted to the Reserve Bank
of India, Mr.C.S.Kalyanasundaram defines
')HDWXUHVRI)DFWRULQJ
factoring as “a continuing arrangement
under which a financing institution assumes a) Maintenance of book-debts
the credit and collection functions for its A factor takes the responsibility of
clients, purchases receivables as they arise maintaining the accounts of debtors of a
(with or without recourse for credit losses, business institution.
i.e., the customer’s financial inability to
pay), maintains the sales ledgers, attends to b) Credit coverage
other book-keeping duties relating to such The factor accepts the risk burden of loss of
accounts, and performs other auxiliary bad debts leaving the seller to concentrate
duties”. on his core business.
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c) Cash advances G,QWHUQDWLRQDOIDFWRULQJ
Around eighty percent of the total amount When the claims of an exporter are assigned
of accounts receivables is paid as advance to a financial institution and the finance is
cash to the client. advanced on the basis of export invoice it is
called as international factoring.
d) Collection service
The factoring process involving the client
Issuing reminders, receiving part payments,
firm, factor and the customer is given below.
collection of cheques form part of the
factoring service. ))DFWRULQJYV)RUIDLWLQJ
e) Advice to clients Forfaiting is defined as “the non-recourse

purchase by a bank or any other financial
From the past history of debtors, the factor
institution of receivables arising from an
is able to provide advices regarding the
export of goods and services”.
credit worthiness of customers, perception
of customers about the products of the
client, etc. Examples of Factoring companies in
(7\SHVRIIDFWRULQJ India
D)XOO VHUYLFH IDFWRULQJ RU :LWKRXW

Canbank Factors Limited:
UHFRXUVHIDFWRULQJ http://www.canbankfactors.com
When a factor agrees to provide complete
SBI Global: http://www.sbiglobal.in
set of services which includes financing,
maintenance of sales ledger, debt collection IFCI Factors Limited: http://www.
at his own risk, and providing consultancy ifcifactors.com
services as and when necessary, it is called Export Credit Guarantee Corporation
as full servicing factoring. of India Ltd: https://www.ecgc.in/Portal/
E:LWKUHFRXUVHIDFWRULQJ
productnservices/maturity/mfactoring.
asp
When the factor does not undertake credit
risk, it is known as with recourse factoring. Small Industries Development Bank
In case the debtor fails to make the payment of India (SIDBI):http://www.sidbi.
on due date, it is assigned back to the firm com/?q=receivable-finance-scheme
by the factor. Here the responsibility of
collecting the amount lies with the selling *&RQFOXVLRQ
firm.
Factoring helps smooth running of business
F0DWXULW\IDFWRULQJ by getting short term credits from financial
In this type, the factor agrees to finance the institutions against accounts receivables.
firm only after collecting the amount on Forfaiting is a variation of factoring with
maturity from debtors. focus on international exports.
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S. No. Characteristics Factoring Forfaiting

1. Basis of financing Financing is dependent on Financing is dependent on
exporter’s credit standing the availing bank’s financial
standing
2. Cost Cost is borne by the seller Cost is borne by the overseas
buyer
3. Suitability For transactions of short-term For transactions of medium-
maturity period term maturity period
4. Extent of financing Only a certain per cent Full finance is available
of receivables factored is
advanced
5. Risk Risk can be transferred to All risks are borne by the
seller forfeiter
LOGISTICS
MANAGEMENT
16.03 LOGISTICS
A. Meaning
Logistics can be viewed as a logical extension
Logistics Management is defined as ‘Design
of transportation and related areas to achieve
and operation of the physical, managerial,
an efficient and effective goods distribution
and informational systems needed to allow
system.
goods to overcome time and space (from
the producer to the consumer)’. This implies
that an integrated view of a number of
different activities and functions may be
required. These activities are represented
as part of the value chain, called the generic
value chain by Porter. All firms are viewed
as a collection of primary and secondary
activities.
%'HFLVLRQV
The logistics management involves various
decisions that need examination for an
integrated system, they are:
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Product design, Plant location, Choice of

markets/sources, Production structure,
Distribution/Dealer network design,
Location of Warehouses, Plant Layout and
Logistics, Allocation Design, Production
Planning, Inventory Management – Stocking
Levels, Transportation-mode Choice,
Shipment Size and Routing Decisions, and
Transport Contracting, Packaging, Materials
Handling, Warehousing Operations.
&.H\$FWRUV
Vertically
Shippers (users of logistics), Suppliers Integrated

Partnerships
Procurement
(of logistics services) – Carriers (rail,

road, air, water, pipeline, rope-way), Demand
Management
Inventory
Contrl
Supply Chain
Warehouse Providers, Freight Forwarders, Management
Terminal Operators (ports, stevedores etc),

Preferential
Government (regulator of logistics). Pricing &
Lead- Times Product
Logistics
Lifecycle
Management
Organisations taking proactive managerial

attention in co ordinating the actors in
logistics leads to reduced logistics costs and )OHPHQWVRI/RJLVWLFV&RVW
improved customer service.
The important elements of logistics cost are
'5ROHRI*RYHUQPHQW
Product Inventory at source, Pipeline
The government plays a significant role in Inventory, Product Inventory at Warehouses
logistics in India. The important legislations and Dealers, Transit Losses/Insurance,
that affect logistics are Central Sales Tax Storage Losses/Insurance, Handling
and Local Sales Tax, Consignment Tax, and Warehouse Operations, Packaging,
Excise Duties, Octroi and Entry Tax, Use of Transportation, Customers’ Shopping.
Packaging Material, MODVAT, GST, Motor
Vehicles Act and similar acts for other *0RGHOVLQ/RJLVWLFV0DQDJHPHQW
modes, Distribution of Policies. The decision areas of Logistics can be
(&ODVVL¿FDWLRQRI/RJLVWLFV addressed using various quantitative models
$SSOLFDWLRQV from Operations Research namely
The Logistics Management can be classified i. Forecasting Models ii. Mathematical
on the basis of applications from various Programming Models – Location Models,
dimensions in the process of examining Allocation Models, Distribution Network
and evaluating alternatives. They are Design Models iii. Inventory Models iv.
1. Decision-wise 2. Actor-wise 3.Inbound Routing Models v. Scheduling Models vi.
logistics and Outbound logistics Alternatives Analysis
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+/RJLVWLFVDQG,QIUDVWUXFWXUH outsourcing the work which is routine in

Generally a good transportation, storage, nature, to an outside agency. This practice
handling and information infrastructure was initiated in United States of America
helps in efficient logistics management. In in few companies. The routine work of
India most of the transportation happens a company if outsources the company
through road and rail. Pipeline and concentrate on critical issues without
Water transport are to be fully utilized wasting time on routing job. In later years
further. Air transportation is used for it became popular in other countries also.
high value commodities. In transportation For example designing an advertisement,
infrastructure the following framework after sales service, maintance of accounts
can be used to identify the problem areas etc. can be outsourced.
like Right of way, Vehicle, Motive power,
Terminals, Operations/systems. The companies must identify their core
competence and concentrate on that
,/RJLVWLFV 0DQDJHPHQW WR 6XSSO\
&KDLQ0DQDJHPHQW function and outsource all other routine
function to outside agencies, who are
Logistics Management deals with the
specialized in those functions.
efficient management of a static gap between
demand and supply whereas Supply Chain
Management tries to identify the dynamic
nature of the value creation itself such
as responsiveness, quality and design.
Hence, it aims for an effective management
response over the longer run.SCM focuses
on profit maximization rather than cost
minimization. LM activity is supply driven
and SCM is more demand driven.
%)HDWXUHVRI2XWVRXUFLQJ
1. Transferring Non Core Activities to

Outsiders
16.04 OUTSOURCING
Companies can outsource those non core
A. 0HDQLQJRI2XWVRXUFLQJ activities functions like maintenance,
Recently a new type of business in housekeeping, gardening, etc. to outsiders,
service sector has become popular in the depending upon the nature of the business
world. It is called the Business Process and the activities are identified as core or
Outsourcing (BPO). BPO refers to non core activities.
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2. Outsourcing Involves Contracting outsourced to outsiders who are specialists

As the companies start outsourcing their in their area of operation.
activities focusing on their main business, '%HQH¿WV
the outside agencies enter into an agreement
with the company to perform the routine 1. Focusing on Core Activities
activities on a contractual basis. Companies can focus on their core
3. Operational Efficiency through competence, a few areas where the company
Outsourc.ing has distinct capability. The rest of the
activities (non core ) can be outsource to
Companies specialize in their business outside agencies.
system as the time available at their disposal
can be utilized for the core activities leading 2. To Fill up Economic Development
to efficiency improving quality of the
product. Outsourcing stimulates entrepreneurship,
encourages employment opportunities,
4. Improved Customers Satisfaction expands exports, enables tremendous
The number of customers can be increased growth of the economy.
through timely delivery and high quality
services. Outsourcing helps in customer 3. Encourages Employment
satisfaction and results in repetitive purchase Opportunities
of the same product Companies that are outsourcing their non
core activities provide chances for other
5. Cost Reduction small business units to take up the activities.
The only way to survive and earn profit This paves way for more job opportunities
is through global competitiveness by and new employment avenues.
fixing a competitive price. Division of
labour and specialization along with 4. Reduction in Investment
good quality product reduces the cost. Companies through outsourcing avails the
For example outsourcing of research and services of outsiders which in turn reduces
development, manufacturing, software the investment requirements. The amount
development etc. so available can be utilized productively and
this increases the profits.
&&RUHDQG1RQ&RUHDFWLYLWLHV
Companies can benefit in the long run 5. Quest for Excellence

provided they are keen on their core Outsourcing enables the firms to pursue
activities rather than non core activities. A excellence in two ways namely excelling
core activity involves experience, expertise, themselves in the activities they do and excel
efficiency and even investment in the field outsiders by extending their capabilities
of specialization. Non core activities can be through contracting out.
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4. Economic growth and development

5. Increasing profit
6. Catering to the dynamic demand
Customer
Support
Form Tech
Processing Support
Tele-
Book- keeping
Marketing
Accounting
BPO Services
Data IT Help
Conversation Desk
Insurance
Date Entry Processing
.QRZOHGJH 3URFHVV 2XWVRXUFLQJ

(%XVLQHVV 3URFHVV 2XWVRXUFLQJ (KPO)
%32 DQG .QRZOHGJH 3URFHVV Meaning
2XWVRXUFLQJ.32
KPO refer to outsourcing of Knowledge
Meaning based Process. It means obtaining high
BPO means getting contractual services of end knowledge work from outside the
external companies or group of companies organization in order to run the business
to complete special work or process of a successfully and in cost effective manner.
company. For example call centres, data In short KPO firms get knowledge related,
entry etc. This reduces the expenditure by information related, work done from outside
using cheap labour available in developing firm and it involves high value work carried
countries like Indian, China etc. highly skilled staff.
Need for BPO Need for KPO
1. To focus on key function 1. Usage of best skills

2. benefit of specialization / efficiency 2. Ultimate use of knowledge
3. cost cutting 3. Finding solution to complex problem
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4. Reduction of expenditure i) E – commerce generates great

5. Special focus on principal functions opportunities for entrepreneurship in
the sphere of online retailing, online
6. Outsources reduces risk service digital commerce and so on
ii) E – commerce companies have
invested heavily in supply chain area,
warehousing, and delivery points
iii) With a rise in e - commerce transactions
sale of financial, physical and data
security system related products has
seen tremendous growth in India
16.05 E-COMMERCE iv) E – commerce promotes innovative
E - Commerce or Electronic Commerce is practices of carrying on business. Social
the buying and selling of goods and services media and social media networks have
through electronic networks like internet. opened new ways of transacting with
E – Business is a broader term which the customers through e - commerce
includes internal and external transaction v) Thanks to wider broad band
of an organization across the internet. connectivity many business concerns
The internal transactions include finance, are switching over to e – commerce
production, operations etc., while external mode of transacting business
transactions include customer – service, vi) More contemporary customers are
sales, marketing and business to business buying through Flipkart and Amazon
transactions. The term e – commerce
denotes mainly external transactions, vii) Direct marketing companies are using
internet to promote products and
According to Deloitte Association
render efficient customer service
report, seventy percent of revenue in e –
Commerce in India in the year 2015 was &,PSDFWRI(FRPPHUFHRQYHQGRUV
only from online travel followed by online
i) Vendors could have a wider access to
retail which accounted for 20 percent
customers across the globe
of revenue. The major segments in the
sphere of e – commerce includes Health, ii) This helps minimize the cost of operating
Education, Real estate, Financial services, business due to direct distribution of
Digital downloads, Online classified goods to end consumers thanks to
advertisement etc., minimum invention of intermediaries
iii) Vender could interact with multiple
%*HQHUDO,PSDFWRI(±FRPPHUFH
buyers and sellers
About 40 million people of India is said to
iv) Business concerns could orient marketing
be employed in E – Commerce sector either efforts towards targeted customers.
directly or indirectly
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',PSDFWRI(FRPPHUFHRQEX\HUV 3. Consumer to Consumer ( C 2 C)

i) Buyers could have a global access to Under this model, customers sell directly to
information about variety of products other customers through online classified
and services available in the market advertisement or through auction or through
ii) They could buy the products/services mobile or through market places. Example.
round the clock from anywhere in Indian ventures in C 2 C are Kraftly App
world (buying and selling anythings) which deals
in hand made products of a wide range.
iii) The prices of products bought through
Onceagainstore. Com is a website that buys
e – commerce tend to be relatively
pre – owned women’s fashion products.
lower than those purchased physically
Other players are quirkr,Olx, ebay etc..
in the conventional shops due to offers,
discount etc. 4. Customer to Business ( C 2 B)
iv) Electronic and software products could This model is reverse to auction model.
be downloaded immediately after Products like automobile, electronic items
purchase through e – commerce mode furniture and smilar product are traded
by customer through websites. Example
v) Customers could participate in e
Naukri.com, and Monster.com are examples
auction which is one of the facets of e
of Indian companies operating in this
– commerce and get contract in a free
domain
and fair manner
vi) Individuals could sell their used 5. Business to Government ( B 2 G)
products through e – commerce mode This model envisages selling products
with relative ease. and services by business consumer to
vii) Buyers can bargain and negotiate better Government organization . For instance
terms and conditions with respect to TCS operates the passport application
buying knowledge products. process for the Government of India as part
off - line process
((±&RPPHUFH'RPDLQV0RGHOV
1. Business to Customers (B 2 C) Key Terms
This is fastest growing segment in e – Franchiser Franchisee
commerce spare. Under this model,
Merchandising Standardisation
business concern sells directly to consumers
Liquidity Factor
2. Business to Business (B 2 B) Customers Recourse
Under the model, business concerns Transportation Design
transact with one another through internet. Operation activities
For instance, Snapdeal, Filipkart, Alibaba, application framework
Indamart, Trade India. Com etc.
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Key Terms (continue) To identify the core activities of any

Specialisation competence, business
core activity call centre, To analyse the benefits of Outsourcing
Business Process Outsourcing, noncore items
Knowledge Process Outsourcing, To evaluate the areas which needs KPO
online business, To understand critically analyse the
economic development impact of call centers
Electronic Digital
Internet Business
Logistics Factoring )RU)XWXUH/HDUQLQJ
Outsourcing
1. Identify methods of moving goods
Self Study Exercise 2. Draft ways and means of overcoming
Identify and write about five examples of the problems in Logistics
franchises in your area. 3. Project the future of Logistics
[Hint: couriers, eating houses, training Management in India
centres]
1. Suggest methods of discriminating

core and non core items
)RU2ZQ7KLQNLQJ
2. Write ways and means of overcoming
You are a small scale manufacturer of
the drawbacks of BPO,KPO
ignition coils for automobiles, located
near Ranipet. Explain how will you avail 3. Project the future of outsourcing on
of financial credits through factoring if economic development
you get orders from
a. Ford India , Chennai
([HUFLVH
b. Maruti Suzuki, Gurgaon
c. Kun Hyundai, Seoul ,&KRRVHWKH&RUUHFW$QVZHU
1. A continuing relationship which provides

To identify the activities involved in the a licence privileges to do business and
movement of goods provides training, merchandising for a
To analyse the benefits of Logistics consideration is called ______
To evaluate the areas which need more a) Franchising
focus relating to Logistics b) Factoring
c) Supply Chain
To understand critically and analyse the Management
impact of Logistics on Profitability d) Exchange
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2. A condition where a factor agrees to 9. A company under outsourcing transfers

provide complete set of services like activities which are …
financing, debt collection, consultancy is (a) Core
called ______
(b) Non-core
a) Maturity Factoring
(c) Business
b) National Factoring
(d) Non business
c) Full service Factoring
d) Recourse Factoring 10. Business units can reduce expenditure
by outsourcing front office work like
3. Buying and selling of goods through
electronic network is known as ____ (a) Paper work
a) E-commerce b) internet (b) File work
c) Website d) Trade (c) Billing
(d) Manufacturing
4. An organization carrying out activities to
move goods from producer to consumer is 11. The main benefit of outsourcing is
(a) Transport (b) Logistics (a) Productivity
(c) Channels (d) Marketing (b) Cost reduction
5. The role of government in logistics (c) Skill
management is through (d) Units
(a) Legislations (b) Governance
12. Outsourcing job is given to developing
(c) Transport (d) Distribution
countries specifically for
6. The main benefit of Logistics is (a) Cheap labour
(a)Productivity (b) Cost Minimisation (b) Land
(c)Profitability (d) Storage (c) Capital
7. What aims for an effective management (d) Factors
response over the longer run 13. Outsourcing is carried out for the
(a) Logistics benefit of
(b) Supply Chain Management (a) Global village
(c) Demand (b) Transport
(d) Supply (c) Factory
8. The model that identifies alternatives, (d) Time and money
criteria for decision making and analyse
alternatives to arrive at the best choice is $QVZHUV
(a) Routing Model 1. a 2. c 3. a 4. a 5. d 6. b
(b) Scheduling Model 7. a 8. b 9. b 10. b 11. b
(c) Inventory Model
12. a 13. d
(d) Alternative Analysis
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,,9HU\6KRUW$QVZHU4XHVWLRQV ,9/RQJ$QVZHU4XHVWLRQV
1. Who is a franchisee? 1. Enumerate the characteristics of

2. State two disadvantages of franchising? franchising.
3. Who is a factor? 2. Elucidate the features of factoring.
4. Define outsourcing
3. Describe the benefits of Outsourcing.
5. What is need for outsourcing?
4. Explain the points of differences between
6. State the importence of BPO
BPO and KPO
7. What are the benefits of KPO?
5. Write a note on e-commerce models.
8. Define Logistics.
9. What is the need for Logistics? 5HIHUHQFH
10. Write about the importance of Logistics. 1. Logistics and supply chain management
11. What are the types of Logistics cases and concepts G.Raghuram and
Applications?
N.Rangaraj, Mac millan India ltd.,
12. What do you mean by e-commerce?
2. www.bing.com
,,,6KRUW$QVZHU4XHVWLRQV
3. solutiondots.com
1. What are the types of franchising?
4. www. Zigya.com
2. List the steps in factoring process.
3. Describe the benefits of Logistics. 5. https://m.meritnation.com
4. Explain the points of differences between 6. www.tisparkle.com
Logistics and Supply Chain Management.
7. www.Flatworldsolutions.com
5. What is the impact of e-commerce on
buyers? 8. cdn.mos.cms.futurecdn.net
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ICT CORNER
E-COMMERCE-STATISTICS
Explore retail
e-commerce sales
growth worldwide
STEPS:
• “STATISTICA-The Portal for Statistics” page will open. Click on “E-Commerce”
menu in the page.
• “E-commerce worldwide - Statistics & Facts” page will open. Under the heading
“E-Commerce Worldwide - important statistics” there are 5 Menus (1) Overview
(2) Digital shoppers (3) Shopping behaviour (4) Mobile retail (5) Digital payment
• Under “Overview” select “Retail e-commerce sales growth worldwide 2014-
2021”. Access to “Overview “ is FREE
• Graphical representation for “Annual retail e-commerce sales growth worldwide
from 2014 to 2021” will appear. If you move the cursor over the bars respective
data will appear. Analyse the data’s. Open other data’s in overview and analyse.
• If you want to download the graph and data as pdf file you can click on the menu
on the right top. Register when you are asked to register for certain free access.
Step1 Step2 Step3
URL:
https://www.statista.com/
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UNIT V SOCIAL RESPONSIBILITY OF

BUSINESS AND BUSINESS ETHICS
CHAPTER
17 SOCIAL RESPONSIBILITY OF
BUSINESS
Learning Objectives
i. have better understanding of the
concept of Social Responsibility
ii. identify the need for studying Social
Responsibility
iii. comprehend on different view points
for and against Social Responsibility
iv. specify various kinds of Social
Responsibilities
developing gardens and parks on streets and

squares in cities. Some businessmen engage
themselves in research for improving the
quality of products; some provide housing,
transport, education and health care to their
employees and their families. In some places
,QWURGXFWLRQ businessmen provide free medical facility to
poor patients. Sometimes they also sponsor
A business entity carries out economic
games and sports at national as well as
activities on a regular basis to earn profits.
international level.
These entities spend money on different
aspects of business which do not give them &RQFHSWRI6RFLDO5HVSRQVLELOLW\
profit directly. For example, businessmen
take the responsibility of maintaining and The term social responsibility is defined
in various ways. Every businessman earns
prosperity from business and should give
Succ
ess
back the benefit of this prosperity to society.
Purpose of This is voluntary. This benefit is the moral
responsibility of business. As this benefit is
Social Responsibility of
wth
supposed to be passed on to society, it can be

Gro
Bu
sin
ess
Business said to be social responsibility of business.
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'H¿QLWLRQRI6RFLDO5HVSRQVLELOLW\ 2. Creation of Society

The following are some important Business is a creation of society and uses
definitions of social responsibility the resources of society. Therefore, it should
fulfil its obligations to society. Businessmen
“Social Responsibility refers to the should respond to the demands of society
obligation to pursue those policies to and should utilise the social resources for
make those decisions or to follow those the benefit of the people at large. In the long
lines of action which are desirable in terms run a successful business can be built on the
of objectives and values of our society.” foundations of a happy community and a
– Howard R. satisfied work force.
“Social Responsibility requires 3. Social Power
managers to consider whether their action
Businessmen have considerable social
is likely to promote the public good, to
power. Their decisions and actions affect
advance the basic beliefs of our society,
the lives and fortunes of the society.
to contribute to its stability, strength and
They collectively determine for the
harmony”.
nation such important matters as level of
Peter F. Drucker employment, rate of economic progress
1HHGIRU6RFLDO and distribution of income among various
5HVSRQVLELOLW\ groups. Businessmen should assume social
obligations commensurate with their social
Business is expected to be responsible to
power. The government controls and
society due to the following reasons
regulations intervene in the social power of
1. Self-Interest business in the absence of business taking
up social responsibility. It is, therefore,
A business unit can sustain in the market
the moral and right thing for business
for a longer period only by assuming some
enterprises to assume social obligations.
social obligations. Normally businessmen
recognise that they can succeed better by 4. Image in the Society
fulfilling the demands and aspirations A business can improve its image in public by
of society. People who have had a assuming social obligations. Good relations
higher standard of living and have been with workers, consumers and suppliers help
exposed to an environment conducive to in the success of business. Social obligations
healthy growth make better employees improve the confidence and faith of people
and customers for business than those in a business enterprise.
who are poor, ignorant and oppressed.
For example, provision of higher wages 5. Public Awareness
and good working conditions motivates Now-a-days consumers and workers are
workers to work hard and produce more. well informed about their rights. Consumers
Labour turnover and absenteeism are expect better quality products at reasonable
reduced. prices. Similarly, workers desire fair wages
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and other benefits. They exercise pressure 9. Socio-Cultural Norms

on the employer’s through-trade unions. India has a rich cultural heritage. Businessmen
There will be industrial unrest and conflict who help in preserving and promoting this
in society, if business does not fulfil its heritage will naturally enjoy the patronage
obligations. of the society and the government. Business
6. Free Enterprise should, therefore, promote equality of
opportunity, healthy relations with employees
A business enterprise which accepts and and customers, etc.
discharges social obligations enjoys greater
freedom. For example, the government 10. Professionalism
has passed the Consumer Protection Act Management of business enterprises is being
to prevent businessmen from indulging professionalised. An owner-manager nurses
in adulteration, black marketing and a greater greed for profiteering because
other anti-social practices. Thus, social all the gains go to him. But a salaried and
responsibilities are essential for avoiding qualified manager is less likely to be lured
governmental action against business. Such because he does not benefit from the profits
action will reduce the freedom of decision earned through questionable practices.
making in business.
11. Trusteeship
7. Law and Order
Mahatma Gandhi suggested that “those
Any business unit can survive and grow who own money or property should hold
only when there is law and order in society. and use it in trust for society.” Businessmen
If business exploits the weaker sections of should run business firms not for their self-
society for too long, these sections will take enrichment but for the good of the society.
the law in their own hands. The resulting
chaos will threaten the very survival of $UJXPHQWV)RUDQG$JDLQVW
business. 6RFLDO5HVSRQVLELOLW\
8. Moral Justification Arguments for social responsibility
In a large country like India, government The rationale for assuming social
alone cannot solve all the problems. Business responsibility lies in the following
has money and talent with which it can arguments;
assist the government in solving problems.
For example, business can play a vital role in 1. Protection of Stakeholders Interest
solving regional disparities, unemployment, A business organisation is a coalition of
illiteracy, scarcity of foreign exchanges several interest groups or stakeholders.
and such other problems in the country. Example – shareholders, customers,
Moreover, business has created some social employees, suppliers, etc. Business should,
problems such as pollution, health hazards, therefore, work for the interest of all of them
etc. Therefore, business should help society rather than for the benefit of shareholders /
in solving its problems. owners alone.
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2. Promotion of Society solve social problems and thereby play a

Business is a sub-system of society. It draws leadership role.
support and sustenance from society in
the form of inputs. Socially responsible 7. Professional Conduct
behaviour is essential to sustain this Professional managers are required to display
relationship between business and society. a keen social sensitivity and serve the society
as a whole. Social responsibility is one of the
3. Assessment of Social Impact professional demands on managers. They
During the course of its functioning, a adhere to the code of conduct and ethics
business enterprise makes several decisions applicable to respective area of operation.
and actions. Its activities exercise a strong
influence on the interests and values of 8. Public Opinion
society. Business must fulfil social obligations
Adoption of social responsibility as an
as a compensation for undermining the
objective will help to improve the public
legitimate interests of society.
opinion of business. A good public image
4. Organised Social Power is a valuable asset for business. For example
maintaining parks, traffic islands and
Large corporations have acquired
organising awareness camps etc.,
tremendous social power through their
multifarious operations. Social power
may be misused in the absence of Arguments Against Social Responsibilitly
social responsibility. There should be a Critics of the social responsibility concept
equilibrium between social power and social put forward the following arguments:
responsibility.
1. Lack of Conceptual Clarity
5. Legitimacy
The concept of Social responsibility is
It is in the enlightened self-interest of
very vague and amenable to different
business to assume social responsibility.
interpretations. There is no consensus on
Social responsibility legitimises and
its meaning and scope. In such a situation,
promotes the economic objectives of
it would be futile as well as risky to accept
business. By improving social life, business
social responsibility.
can obtain better customers, employees
and neighbours. Social responsibility thus
builds good citizenship as well as good 2. Dilution of Economic Goals
business. By accepting social responsibility, business
will compromise with economic goals.
6. Competence Business is an economic institution and its
Business organisations and their managers only responsibility is to make maximum
have proved their competence and leadership possible profits for its owners. It would
in solving economic problems. Society endanger its economic viability by accepting
expects them to use their competence to any other responsibility.
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3. Lack of Social Skill 7. Lack of Yard-stick

Business organisations and their managers Profitability is the common criteria for
are not familiar with social affairs. There decision-making in business. Tampering it
are special social service organisations such with social responsibility would make the
as Government and Non-Governmental decision-making process quite complex and
Agencies which can better deal with social controversial.
problems.
8. Improper Role
The proper role of business is to use its
4. Burden on Consumers resources and energies efficiently so as to
If business deals with social problems, cost earn the best possible return on investment
of doing business would increase. These within the confines of law and ethics.
costs will be passed on to consumers in Business should concentrate on economic
the form of higher prices or will have to performance leaving social service to other
be borne by owners. This would lead to organisations.
taxation without representation.
9. Over Loading Responsibility
Business organisations are already serving
5. Responsibility without Power society by providing goods and services,
Business organisations possess only generating employment, developing
economic power and not social power. It technology and contributing to public
is unjust to impose social responsibilities exchequer through tax payments. It would
with social power. If business is allowed to be unjust to overburden them with further
intervene in social affairs it may perpetuate responsibilities.
its own value system to the detriment of
society. .LQGVRI6RFLDO
5HVSRQVLELOLW\
6. Misuse of Responsibilities Social responsibility of business can broadly

be divided into four categories, which are as
Acceptance of social responsibilities will
follows:
involve diversion of precious managerial
time and talent on social action Kinds of Social Responsibility
programmes. It may result in dilution of
1. Economic Responsibility
valuable corporate resources.
A business enterprise is basically an
Kinds of Social
economic entity and, therefore, its primary
Responsibility of
Business
social responsibility is economic i.e., produce
goods and services that society wants and sell
Economic Legal Ethical Discretionary
them at a profit. There is little discretion in
Responsibility Responsibility Responsibility Responsibility
performing this responsibility.
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2. Legal Responsibility Responsibility of Business Towards

Every business has a responsibility to Different Interest Groups
operate within the laws of the land. Since
Shareholders
these laws are meant for the good of or Investors
General Employees
the society, a law abiding enterprise is a Public or Workers
socially responsible enterprise as well.

Social
3. Ethical Responsibility Environment Responsibility Consumers
of Business or Customers
This includes the behaviour of the firm towards....
that is expected by society but not Local

Government
or its
Adminstrative
codified in law. For example, respecting Community
Bodies
the religious sentiments and dignity of
people while advertising for a product. i. Business ii. Investors
There is an element of voluntary action iii. Employees iv. Government
in performing this responsibility. v. Competitors vi. Society
4. Discretionary Responsibility vii. Customers viii. Suppliers
This refers to purely voluntary obligation that 1. Responsibility towards Owners
an enterprise assumes, for instance, providing
charitable contributions to educational Owners are the persons who own the
institutions or helping the affected people business. They contribute capital and bear the
during floods or earthquakes. It is the business risks. The primary responsibilities
responsibility of the company management to of business towards its owners are to
safeguard the capital investment by avoiding a. Run the business efficiently.
speculative activity and undertaking only
healthy business ventures which give good b. Proper utilisation of capital and other
returns on investment. resources.
c. Growth and appreciation of capital.
6RFLDO5HVSRQVLELOLW\
d. Regular and fair return on capital
WRZDUGV'L໤HUHQW,QWHUHVW
invested.
*URXSV
After identifying the concept and 2. Responsibility towards Investors
importance of social responsibility of
Investors are those who provide finance by
business the various responsibilities that a
way of investment in debentures, bonds,
business has towards different groups with
deposits etc. Banks, financial institutions,
whom it interacts are discussed below. The
and investing public are all included in this
business generally interacts with owners,
category. The responsibilities of business
investors, employees, suppliers, customers,
towards its investors are :
competitors, government and society. They
are called as interest groups because by each a. Ensuring safety of their investment,
and every activity of business, the interest of b. Regular payment of interest,
these groups is affected directly or indirectly. c. Timely repayment of principal amount.
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3. Responsibility towards Employees responsibility of business towards them

Business needs employees or workers to the business should provide the following
work for it. These employees put their best facilities:
effort for the benefit of the business. So it is a. Products and services must be able to
the prime responsibility of every business to
take care of the needs of the customers.
take care of the interest of their employees.
If the employees are satisfied and efficient, b. Products and services must be
then the only business can be successful. qualitative
The responsibilities of business towards its c. There must be regularity in supply of
employees include: goods and services
a. Timely and regular payment of wages After learning about Social Responsibility
and salaries. of the business in this chapter, one can
b. Proper working conditions and welfare understand the significance of Social
amenities. Responsibility. The next chapter is about
c. Opportunity for better career prospects. Business Environment and Protection
d. Job security as well as social security like which deals with the organization taking
facilities of provident fund, group insurance, steps to protect both internal and external
pension, retirement benefits, etc. environment for their sustained growth and
e. Better living conditions like housing, development.
transport, canteen, crèches etc.
f. Timely training and development. 6XFFHVV6WRU\
&RUSRUDWH 6RFLDO 5HVSRQVLELOLW\

4. Responsibility towards Suppliers ([DPSOHVLQ,QGLD
Suppliers are businessmen who supply
raw materials and other items required by Tata Group
manufacturers and traders. Certain suppliers, The Tata Group
called distributors, supply finished products conglomerate in India
to the consumers. The responsibilities of carries out various CSR
business towards these suppliers are: projects, most of which are
community improvement
a. Giving regular orders for purchase of and poverty alleviation programs.
goods. Through self-help groups, it is engaged
b. Dealing on fair terms and conditions. in women empowerment activities,
c. Availing reasonable credit period. income generation, rural community
d. Timely payment of dues. development, and other social welfare
programs. In the field of education, the
5. Responsibility towards Customers Tata Group provides scholarships and
endowments for numerous institutions.
No business can survive without the
support of customers. As a part of the Source: www.tata.com
175
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Mahindra & Mahindra

)RUIXWXUH/HDUQLQJ
Indian automobile
manufacturer Mahindra
& Mahindra (M&M) 1. To evaluate the impact of social
established the K. responsibility on profitability of
C. Mahindra Education Trust in 1954, business unit
followed by Mahindra Foundation in 1969 2. To predict methods by which social
with the purpose of promoting education. responsibility can be discharged
The company primarily focuses on
education programs to assist economically 3. To depict through pictures, the
and socially disadvantaged communities. stakeholders position in a company
CSR programs invest in scholarships and taking socially responsible activities
grants, livelihood training, healthcare
for remote areas, water conservation,
and disaster relief programs. M&M runs
programs such as Nanhi Kali focusing on
girl education, Mahindra Pride Schools for ([HUFLVH
industrial training, and Lifeline Express ,&KRRVHWKH&RUUHFW$QVZHU
for healthcare services in remote areas.
1. Which type of Responsibility gives the
Source: www.mahindra.com/
benefit to the Society out of its profits
earned?
Key Terms (a) Legal
Economic Activity, Stakeholders, (b) Ethical
Prosperity, Standard of living, Resources,
(c) Moral
Ethics
(d) Economic
)RU2ZQ7KLQNLQJ 2. The Stakeholders of Socially Responsible

business units are except
1. To identify ethical and unethical
(a) Share Holders
practices of business enterprises
2. To understand the level of discharging (b) Employees
Socially Responsiblity practises of (c) Government
business units (d) Company
3. To analysis the impact of Social
Responsibility of Small, Medium and 3. Assuming Social Responsibility of
Large scale enterprises in the Society. business helps the enterprise in
4. To clearly distinguish the benefits (a) Increase profit
derived by different stakeholders while (b) Decrease profit
discharging of Social Responsibility of (c) Sustainability
business units
(d) Equilibrium
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4. Socially Responsible business provides 3. What are the benefits derived by

goods at employees of a Socially Responsible
(a) high price business enterprise?
(b) low price 4. Enumerate the points relating to why
(c) reasonable price business units are Socially Responsible?
(d)moderate price 5. List the kinds of Social Responsibility.
5. Social Responsibility towards employees ,9/RQJ$QVZHU4XHVWLRQV

represents the following except 1. Explain in detail the concept and need
(a) reasonable remuneration for Social Responsibility?
(b) proper facilities 2. Illustrate with examples the arguments
(c) Social security for Social Responsibility?
(d) exploitation 3. What are the arguments against Social
Responsibility?
$QVZHUV 3. Discuss the different groups benefited
1. c 2. d 3. c 4. c 5. d out of Social Responsibility of business?
4. How do you classify Social
Responsibility?
,,9HU\6KRUW$QVZHU4XHVWLRQ
1. What do you mean by Social 5HIHUHQFH

Responsibility? 1. C.B.Gupta-Business Environment
2. Give the meaning of Social Power 2. Prof. M.B Shukla , Taxmann’s Publication,
3. What is a free enterprise? Business Environment
4. Who are called Stakeholders? 3. K. Aswathappa, Himalaya Publishing
House 12th Edition 2014, Essential of
5. What is ethical Responsibility?
Business
4. Environment –A.C. Fernado, Ref Date
,,,6KRUW$QVZHU4XHVWLRQ
January 2011, Publisher- Pearson India,
1. Define the Concept of Social Business
Responsibility? 5. Environment Dr. V.Radha, Prasanna
2. Why you do think Social Responsibility Publisher, Chennai, Business
of business is needed? Environment
177
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ICT CORNER
EXPLORE CSR PROJECTS
Explore CSR Projects

in India
STEPS:
• CSRBOX site will open. Click on “NEWS & STORIES” and in the drop-down
menu Select “IMPACT STORIES”
• Scroll down the stories given and select education related CSR activity success
impact story you wish.
• Make a note on it and share it with your friends and teachers about your
observation.
• Also Explore CSR PROJECTS in Tamil Nadu.
Step1 Step2
URL:
https://csrbox.org/
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SOCIAL RESPONSIBILITY OF BUSINESS

AND BUSINESS ETHICS
CHAPTER
BUSINESS ETHICS AND
18 CORPORATE GOVERNANCE
‫ܕ‬Ὰܶ‫ܱܥ‬ᾞ῀‫ܱܭ᾽ܱܧ᾽ܱܧ‬ᾼᾰܷ‫ܛ‬᾵‫ܲܥ‬ᾔΆ܏Ὰܶ‫ܱܥ‬ᾞ῀
ܶ‫ܦ‬ᾼᾺܶ‫ܱܥ‬ᾞ῀‫ܱܛ‬ᾶ‫ܲܩܢܥ‬ᾫᾁ‫῀ܩ‬
Couplet:
To discern the truth in everything, by whomsoever spoken, is wisdom.
Learning Objectives &RQFHSWRI%XVLQHVV(WKLFV

‘Business houses need to go beyond
the interests of their companies to the
i. have better understanding of the communities they serve.’
concept of business ethics
Ratan Tata, Former Chairman of the Tata
ii. identify the Key elements of business group
ethics
‘A business that is in the making of only
iii. know the code of business ethics money is a poor kind of business.’
iv. understand the Corporate
Hendry Ford, Founder of Ford Motor
Governance and International
Corporation.
Benchmarks and MNC’s in India
Ethics is derived from the Greek word
In this chapter the important concept ‘ethos’ which means a person’s fundamental
of business ethics is discussed briefly. orientation towards life. It governs the
Business ethics is vital for the running behaviour, derived from the moral standards
of all organisations both in the short and which help to determine right or wrong,
the long run. The Code of Conduct of good or evil. Ethical behaviour is the acts
business units are clearly defined and consistent with the moral standards or codes
executed in terms of transparency through of conduct established by society. It may
corporate Governance. The role of MNCs change over time and differ from culture
in the development of the economy is to culture. For example, political bribes or
explained along with the features. The need payoffs may be acceptable in one culture but
for international benchmarking is also not in other. Ethical issues are inevitable in
highlighted. business.
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Business ethics may be defined as a set of All business units have realised that ethics
moral standards to be followed by owners, is vitally important for the existence and
managers and business people. These progress of the business as well as the
standards determine the conduct and society. It is very important as it improves
behaviour of business people. Business public image, earns public confidence, and
ethics reflects the conduct in the context of leads to greater success. Ethics and profits
business. go together in the long run. It enhances
the quality of life, standard of living and
%XVLQHVV(WKLFV
business.
Business exists to supply goods and
services to the people from social point .H\ (OHPHQWV 2I %XVLQHVV
of view but from individual point of view, (WKLFV
the primary objective of any business unit Some of the basic elements of business ethics
is to make profit. The individual objective while running a business enterprise are:
should not be in conflict with societal
objective. These two objectives normally 1. Top Management Commitment
contradict each other, as one business
Top management has a very important role
enterprise may be good in individual
to guide the entire organization towards
objective and bad at societal objective
ethical behaviour. The top level personnel
and vice versa. This raises the question
in any organisation should work openly and
of what is right and what is wrong. The
strongly committed towards ethical conducts
subject matter of ethics is concerned with
and guide people working at middle and low
establishing linkages between individual
level to follow ethical behaviour.
good and social good.
2. Publication of a “Code”
Ethical standards are often enacted into
laws. For example charging fair prices Generally organisations formulate their own
to customers, using fair weights for ethical codes for the conduct of the enterprise;
measurement of commodities giving fair it should followed by the employees of the
treatment to workers, earning reasonable organisation. The organisation principles are
profits etc. defined in the written document called code.
The code of conduct covers various areas such
as health and safety in the work place, fair
dealing in selling and marketing activities,
ethical practices in the business etc.
3. Establishment of Compliance Mechanism

To make sure that actual decisions match
with a firm’s ethical standards, suitable
mechanism should be established. Any
organisation following ethical codes in
training, recruitment, selection etc., is sure
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to be profitable. The organisation must employees should follow .It guides them in
provide for an environment where the decision making.
employees are to free to report about the
matters of unethical behaviour. The code of business ethics can include the
following:
4. Involving Employees at All Levels
1. To offer goods at fair prices.
It is the employees at different levels who
2. To supply quality goods and not to deal
implement ethics policies to make ethical
in spurious and sub standard products.
business a reality. Therefore, their involvement
3. To listen to consumer’s complaints and
in ethics programmes becomes a must. For
to reduce them.
example small group of employees can be
4. Not to raise the price of its products
formed to discuss the important ethics policies
unjustifiably.
of firms and examine attitudes of employees
towards these policies. 5. Not to resort to hoarding and black
marketing.
5. Measuring Results 6. Not to resort to price cutting with the
The organisations from time to time keep a sole aim of killing competition.
check on ethical practise followed. Although 7. Not to issue advertisement containing
it is difficult to accurately measure the end false information or exaggerated claims.
results of ethics programmes, the firms can 8. To pay fair wages to its employees and
certainly audit to monitor compliance with not to exploit them.
ethical standards. The top management team 9. To provide congenial work atmosphere.
and other employees should then discuss the 10. To design production process in such
results for further course of action. a way as to reduce environmental
pollution.
&RGHRI%XVLQHVV(WKLFV 11. To keep proper books of accounts and
Code of ethics documents the generally records.
accepted principles of ethical conduct. They 12. To pay taxes regularly.
are statements of values and principles 13. Not to overlook Government rules and
which define the purpose of an organisation. regulations even at the time of incurring
It gives a clear picture of the standards that losses.
Codes
of
Ethics
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&RUSRUDWH*RYHUQDQFH “Corporate governance is about promoting

fairness, transparency and accountability.”
‘The proper governance of companies
will become as crucial to the world -World Bank
economy as the proper governing of
“Corporate governance is defined as the
countries.’
system by which companies are directed
Jeames Wolfenson, and controlled.”
President of World Bank, 1999 - Cadbury committee
%HQH¿WVRI&RUSRUDWH*RYHUQDQFH
0HDQLQJRI&RUSRUDWH*RYHUQDQFH
Balanced economic development is made
Corporate Governance is the system by possible through transparent management
which businesses are directed and controlled under corporate governance. All Stakeholders
in the best interests of all stakeholders. interests are protected and promoted through
Corporate Governance lays emphasis on corporate governance. Some of the benefits of
ethics, fair business practices, transparency, corporate governance are as follows
discloser and conduct of business for the
benefit of all stakeholders. 1. Good corporate governance enables
corporate success and economic
Corporate governance specific the rights development.
and liabilities of different group of people 2. Ensures stable growth of organizations.
like the chief executives, directors of the
3. Aligns the interests of various
board, managers of different departments
stakeholders.
and other stakeholders. This helps to
provide the structure through which the 4. Improves investors’ confidence and
objectives of the company formulated and enables raising of capital.
their performance is monitored. 5. Reduces the cost of capital for
companies.
Corporate Governance maintains balance
6. Has a positive impact on the share price
among individual goals, societal goals,
economic goals and social goals. For 7. Provides incentive to managers to achieve
example companies like Infosys, Wipro, organizational objectives.
Reliance, Hindustan Uni Lever Ltd. etc. have 8. Eliminates wastages, corruption, risks
implemented corporate governance codes and mismanagement.
which ensure ethical and efficient conduct 9. Improves the image of the company.
leading to their development.
10. The organization is managed to benefit
'H¿QLWLRQV the stakeholders.
There are different definitions contributed 11. Ensures efficient allocation of resources
by various authors. Some important 12. Creates a strong brand as an ethical
definitions are as follows. business.
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0XOWLQDWLRQDO&RUSRUDWLRQVLQ,QGLD budget of some of the MNCs are so high that

Meaning at times they even exceed the GDP (Gross
Domestic Product) of a nation.
Indian economy is growing over the lengths
and breaths and establishes businesses Features of MNCs
earning huge profit. Companies have The main features or elements of MNCs
grown in their size (capital and number are as follows
of employees) competing with different
1. Considers opportunities throughout the
countries companies. The concept of
globe though they do the business in a
Multinational Corporation has gained
few countries.
significance over a period of time as it has
its business globally in different countries. 2. To invest considerable portion of their
assets internationally.
'H¿QLWLRQ
3. They are huge industrial/business
MNC is defined to be an enterprise operating organisation.
in several countries but managed from one
country. 4. It engages in international production
and operates plants in a number of
A Multinational corporation is an organization countries.
doing business in more than one country. It 5. They take managerial decisions on a
engages in various activities like exporting, global perspective.
manufacturing in different countries.
6. They produce in one or a few countries
MNC is company which functions with a and sell them in most of the countries.
head quarters based in one country, while 7. Their international operations are
other facilities are based in other location. integrated into the corporations overall
Any company is referred to as a business.
Multinational company or corporation Why MNC’s in India
(MNC) when that company manages its The reasons for so many MNC’s in Indian
operation or production or service delivery are as follows
from more than a single country. It has its
headquarter based in one country with 1. India has a huge market
several other operating branches in different 2. It is one of the fastest growing economies
other countries. The country where the in the world.
head quarter is located is called the home
country whereas; the other countries with 3. Favorable policies of the government
operational branches are called the host towards FDI.
countries. Apart from playing an important 4. Financial liberalization of the country
role in globalization and international after 1991.
relations, these multinational companies 5. Government encourages and makes
even have notable influence in a country’s continuous efforts to attract foreign
economy as well as the world economy. The investment by relaxing policies.
183
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Highlights (2015) industry bests and best practices from other

companies.
India ranks 10th in the world in factory
output There are four primary types of
The manufacturing sector accounts for benchmarking: internal, competitive,
27.6% GDP functional, and generic. Internal
Privatisation of certain public sector benchmarking is a comparison of a business
industries process to a similar process inside the
organization. Competitive benchmarking
Liberlisation also attracted MNC’s and is a direct competitor-to-competitor
encouraged local entrepreneurs comparison of a product, service, process,
Indian stands 15th in services output or method.The generic concept is related to
Increased demand from foreign consumers the overall performance of the chosen unit
for Indian products and services of MNC or business.
India has an extensive network of undersea How Benchmarking works:

fibre-optic cables leading to India becoming
the centre for outsourcing of business 1. Select a product, service or process to
process benchmark.
India has become big employment generator 2. Identify the key performance metrics.
especially amongst young graduates. 3. Choose companies or internal areas to
India has witnessed sustained economic benchmark.
development as envisioned by our forefathers 4. Collect data on performance and
Top MNC’s in India practices.
Following are the names of some of the most 5. Analyze the data and identify
famous multinational companies opportunities for improvement.
The entry of MNC’s into India have Benchmarking in Various parts of the World
proved quite beneficial for the growth and
$VLD
development of Indian economy providing
employment opportunities for the young Independent Directors are a requirement for
generation. listed companies in all Asian economies, where
most require at least 1/3rd of the Board to be
,QWHUQDWLRQDO%HQFKPDUNLQJ independent. The 2012 Singapore corporate
Benchmarking is comparing one’s business governance code recommends a majority of
processes and performance metrics to Independent Directors when the chairman
of the Board is not independent. Committees
of Boards such as audit, remuneration and
IBM Microsoft Board nomination are required in all Asian
Pepsi Co Sony economies except Vietnam. In China, the
Vodafone Reebok Nokia Audit Committee is to be composed of
Independent Directors only.
184
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The USA committee of the Board comprising

The Council of Institutional Investors (CII), either wholly or a majority of Independent
Corporate Governance Policies state that Directors. Independent Directors Board to
at least 2/3rd of the directors should be have specific proportion of Independent
independent. The Nominating and Corporate Directors Although, there is no specific law
Governance Committee is one of the three to enforce number of women directors on
standing committees, along with Audit the Board, following countries have taken
Committee and Compensation Committee, steps to maintain the ratio of female Board
required by NYSE, to be composed entirely representation (source: www.cfainstitute. org):
of Independent Directors. G20/ OECD predetermined and measurable performance
principles encourage formulation of criteria, including criteria of a non-financial
Nomination Committee to ensure proper Nature. The UK Corporate Governance Code
compliance with established nomination recommends evaluation of the Board of FTSE
procedures and to facilitate and co-ordinate 350 companies to be externally facilitated
the search for a balanced and qualified Board. at least every three years (on a comply-or-
explain basis) The European Commission
Formulation of various Committees has proposed legislation that would require
nonexecutive directors to be 40% women by
i. Audit Committee,
2020, up from 16.6% in 2013.
ii. Advisory Committee,
-DSDQ
iii. Nomination and Remuneration
Committee, In early 2014, Japanese Prime Minister
iv. Stakeholder Relationship Committee announced the goal of increasing the
The U.S. National Association of Corporate percentage of women in executive positions
Directors (NACD), recommends that at Japanese companies to 30% by 2020.
the Governance Committee should be The UK
responsible for ensuring that a process
UK businesses had voluntary targets first set
exists for the Board to routinely assess its
in 2011 i.e. to have 25% women on FTSE100
own performance, the performance of its
(The Financial Times Stock Exchange)
Committees as well as individual directors
Boards by 2015.
to conduct self- assessment.
(XURSH Canada
European commission urges member At the Federal level, two bills are currently
states to have sufficient number of being tabled which will impose a 40%
independent non-executive or supervisory quota for female Board members of public
directors on Board. G20/ OECD: The latest companies and other regulated entities such
principles encourage the prominent role of as banks and insurance companies.
independent Board members. It states that,
%UD]LO
it is a good practice where remuneration
policy and contracts for Board members A bill pending in the Brazilian Senate would
and key executives is handled by a special impose a 40% female quota on the Boards
185
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of state owned enterprises by 2022. IBGC acceptability that good corporate governance
Code of Best Practices (Brazilian Institute is a means to create a business environment of
of Corporate Governance) recommends: trust, transparency and accountability in order
to support investment, financial stability and
i. A formal evaluation process of the
sustainable economic growth. In the global
performance of the Board, of individual
and highly interconnected world of business
directors and of the CEO
and finance where money and corporate
ii. The process to be conducted by the Chair
operations constantly cross borders, creating
iii. Participation of the outsider to make the
trust is something that we need to do together.
process more effective
iv. Evaluation system adapted to each
organization .H\7HUPV
v. Disclosure of the process of evaluation to Behaviour Moral Mechanism
the shareholders Atmosphere Fair Prices Monitor
)UDQFH
French parliament adopted a bill that

requires public companies making at least
50 million Euros in turnover and employing )RU2ZQ7KLQNLQJ
more than 500 workers to have 40% female 1. Illustrate the ethical practices followed
Board representation by 2017. by different reputed organisation
Germany giving practical examples.
In November 2013, Germany’s Christian 2. Create case studies concerning the

Democrats and Social Democrats agreed existing famous organisation following
on a gender quota on supervisory Boards ethical practices quoting their real life
where, issuers would be required to have practice
women comprise 30% of nonexecutive 3. Identifying ethical codes based on
directors by 2016. The planned legislation which organisation exits, for long run
would require firms that don’t meet the and short run, justifying the adherence
30% mark to leave those seats vacant. The of code of ethics.
latest G20/ OECD principles encourages
measures such as voluntary targets,
disclosure requirements,
)RU)XWXUH/HDUQLQJ
Boardroom quotas and private initiatives
that enhance gender diversity on Boards 1. Money earning cannot be sole
objective of business or life.
and in senior management.
2. The mind of students to accept
Woman Director
that ethics and consideration for
Requirement of at least 1 woman
environment, law etc can lengthen the
Director on the Board for listed income earning of an individual or
Companies and public companies business
Globally, there is an increased realization and
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$QVZHUV
([HUFLVH
1.c 2.d 3.a 4.c 5.d
,&KRRVHWKH&RUUHFW$QVZHU
,,9HU\6KRUW$QVZHU4XHVWLRQV
1. Which of the following helps in 1. What is ethics?
maximising sale of goods to society?
2. What do you mean by code?
a) Business success
3. State two ways by which ethics influences
b) laws and regulations behaviour
c) Ethics 4. What is need for Corporate Governance?
d) Professional 5. What are MNCs?
management
2. Ethics is important for
1. Define business ethics.
a) Top management
2. What do you mean by the concept of
b) Middle level managers business ethics?
c) Non managerial employees 3. Why is ethics necessary in business?
d) All of them 4. What are the benefit of Corporate
3. Which of the following does not ensure Governance to Share holders
effective ethical practices in a business 5. Illustrate with example the working of a
enterprise MNC
a) Publication of a code
,9/RQJ$QVZHU4XHVWLRQV
b) Involvement of employees
c) Establishment of compliance 1. Explain the different key elements of
mechanisms business ethics.
d) none of them 2. Describe the code of business ethics.
4. The role of top management is to guide 3. Explain the significance of Corporate
the entire organisation towards Governance from the point of
Stakeholders
(a) General behaviour
4. Discuss the role of International
(b) Organisavtion behaviour Benchmarking on the working of
(c) Ethically upright behaviour Companies in India
(d) Individual behaviour 5. Describe the benefits of increasing the
5. The ethical conduct of employees leading number of MNCs.
to standard practices results in
5HIHUHQFH
(a) good behaviour
1. Business Environment – C.B.Gupta
(b) bad behaviour
2. Business Studies – Dhanpat Rai
(c) ethical behaviour 3. Business Ethics and Values –Dr. Neeru
(d) correct decision making Vasishth and Dr. Namita Rajput
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CHAPTER
19 SOURCES
FINANCE
OF BUSINESS
ᾁᾹܷ‫ܤܸܱܧܲܩܩ‬Ὰܷ‫ܛ᾽ܱܥ‬ᾶ‫ܠ‬ι‫ܢ᾿ܱܩ‬Ᾱܸ‫ܛ‬ᾷܶ‫ܱܢ‬Ᾱᾠ
‫ܓ‬ᾶ‫ܛܱܠ‬ᾲܶ‫ܝ‬ᾼ‫ܱܭ‬Ᾱ‫ܤܸܲܭ‬ ᾁ‫῀ܩ‬
Couplet:
An undertaking of one who has wealth in one’s hands is like viewing an elephant-
fight from a hill-top.
Learning Objectives
i. explain the meaning, nature and
significance of business finance
ii. explain the need for business finance
iii. classify the various sources of
business finance
iv. understand the importance of
savings and investments
need finance for fixed and working capital
requirement. Fixed capital requirements
,QWURGXFWLRQ include purchase of plant, machinery,
The previous chapter highlighted the furniture, fixtures, vehicles, and so on,
importance of insurance. The present while working capital requirements
chapter enlightens the students on the include purchase of raw materials,
concept of Business Finance. Need for the payment of salary and wages, incurring
Business Finance, sources of funds and operating expenses like telephone bills,
the importance of savings and personal carriage inward and outward, electricity
investment avenues, are briefly discussed in charges, premium, stationery, etc. Owner
this chapter. or promoter has to estimate the business
finance and accordingly look for various
“Finance is the lifeblood of any business.” sources for financing the operations of the
No business enterprise can function enterprises. The term sources of funds
without finance. Business enterprises denote the various avenues of mobilisation
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of funds for a concern. This chapter throws 1. Business finance comprises of all types
light on each source of capital. of funds namely short, medium and long
term used in business.
0HDQLQJDQG1DWXUHRI
2. All types of organisations namely small,
%XVLQHVV)LQDQFH
medium and large enterprises require
Meaning business finance.
The term business finance denotes the 3. The volume of business finance required
economic resources employed in business varies from one business enterprise to
enterprises. This term includes money another depending upon its nature and
and credit employed in the business. size. In other words, small and medium
Business finance is mainly concerned with enterprises require relatively lower level
arrangement of cash and credit for the of business finance than the large scale
business enterprises to carry out their day to enterprises.
day operations smoothly.
4. The amount of business finance required
It is clear from the definitions given above differs from one period to another. In
that the term ‘business finance’ is mainly other words the requirement of business
concerned with not only acquisition of finance is heavy during the peak season
funds from various sources but also with while it is at low level during the dull
effective and efficient utilisation of the season.
finance mobilised therefrom. 5. The amount of business finance
determines the scale of operations of
'H¿QLWLRQ business enterprises.
“The finance function is the process 6LJQL¿FDQFHRI%XVLQHVV)LQDQFH
of acquiring and utilizing funds by a
Business enterprise can function effectively
business.”
and efficiently only with adequate business
– R.C. Osborn
finance. It cannot expand its business
“Finance is that business activity which operations without business finance. The
is concerned with the acquisition and success of any business firm depends, to
conservation of capital fund in meeting a larger extent, on the manner in which it
the financial needs and overall objectives mobilizes, uses and disburses its funds.
of business enterprises.”
The following points highlight the
- B.O.Wheeler
significance of business finance.
1. A firm with adequate business finance
1DWXUH DQG 6LJQL¿FDQFH RI %XVLQHVV can easily start any business venture.
)LQDQFH
2. Business finance helps the business
1DWXUHRI%XVLQHVV)LQDQFH organisation to purchase raw materials
The following characteristics can be derived from the supplier easily to produce
from the above definitions. goods.
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3. The business firm can meet financial 2QWKHEDVLVRISHULRG

liabilities like prompt payment of salary The different sources of finance can be
and wages, expenses, etc., in time with further grouped into three categories on the
the help of sound financial support. basis of period
4. The sound financial support enables
1) Short term finance 2) Medium term
the enterprises to meet any unexpected
finance 3) Long term finance
or uncertain risks arising from business
environment efficiently. For example
6RXUFHVRI6KRUW7HUP)LQDQFH
economic slowdown, trade cycles,
severe competition, shift in consumer Short term funds are those sources which are
preference, etc. required by the business firms for a period
of within one year. Some of the important
5. Sound financial position empowers the
sources of short term finance are briefly
enterprise to attract talented man power
explained below.
and introduce latest technology.
1. Loans and Advances
6RXUFHVRI%XVLQHVV
Loan is a direct advance made in lump sum
)LQDQFH
which is credited to a separate loan account
&ODVVL¿FDWLRQRI6RXUFHVRI)LQDQFH
in the name of borrower. The borrower
can withdraw the entire amount in cash
Business finance is classified into three
immediately. It can be repaid in one or
types with reference to time pereiod
more installments. But the interest on loans
i.e. Long term finance (more than 5
and advances is calculated on the whole of
years), Medium term finance (above 1
the amount borrowed right from the date of
year but below 5 years) and Short term
sanction. It may be secured or unsecured.
finance (within one year) for carrying on
Loans and advances are usually sanctioned
business operations. Long term finance
by pledge of specific assets like Fixed Deposit
can be mobilized by issue of shares and
Receipts, Document of Title to the Goods,
debentures, term loans from commercial
Shares, Debentures, etc.
banks and financial institutions, and
retained earnings. Medium term finance 2. Bank Overdraft
can be mobilized by public deposits,
Bank overdraft refers to an arrangement
leasing, medium term loans from banks
whereby the bank allows the customers to
and financial institutions. Short term fiancé
overdraw the required amount from its
can be raised through public deposits, trade
current deposit account within a specified
credit, customer advance, , hypothecation,
limit. Interest is charged only on the amount
cash credit, bank overdraft, pledge,
actually overdrawn.
mortgage etc.
The various sources of business finance can 3. Discounting Bills of Exchange
be classified into three categories on the When goods are sold on credit, the suppliers
basis of i) period basis ii) ownership basis generally draw bills of exchange upon
iii) source of generation basis customers who are required to accept it.
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The duration of such bills of exchange may this type of loan. It is a loan taken on
be ranging from 15 days to 180 days. Instead the security of movable asset.
of holding the bills till the date of maturity,
borrowers generally prefer to get them 7. Mortgage
discounted with the bank. Discounting bills This is a type of loan taken from the bank
of exchange refers to an act of selling a bill to by lodging with the banker title deeds of
obtain payment for it before its maturity. immovable assets like land and building.
Business people raise loans by depositing the
4. Trade Credit title deeds of the properties with the bank.
Trade credit is the credit extended by
one trader to another for the purpose of 8. Loans Against the Securities
purchasing goods and services. Purchaser Banks accept various types of securities like
need not pay money immediately after the fixed deposit receipt, book debts, insurance
purchase. Such credit appears in balance policies, supply bills, shares debentures,
sheet as Trade Creditors, or Accounts bonds of company, document of title to the
Payable. Trade credit is very simple and goods like railway receipt, bill of lading,
convenient method of raising short term trust receipt, warehouse keeper’s receipt,
finance. There is no formality involved in book debt, and so on, and provides loan on
availing this facility. There is no need to the basis of the aforesaid securities.
give any security for trade credit. It is said
to be more economical than bank loans. 9. Clean Loan
Banks provide clean loan to certain
5. Pledge customer of outstanding credit worthiness
A customer transfers the possession of on the basis of their character, capacity and
an article with the creditor (banker) and capability. It simply grants loan without any
receives loan. Till the repayment of loan, the physical security. In other words clean loan
article is under the custody of the borrower. is loan given without any security or with
If the debtor fails to refund the loan, creditor personal security.
(banker) will auction the article pawned and
adjust the outstanding loan from the sale 10. Commercial Paper (CP)
proceeds. Commercial paper (CP) is an unsecured
money market instrument in the form of
6. Hypothecation a promissory note. Corporates, Primary
This is loan taken by depositing Dealers (PD), and All India Financial
document of title to the property with Institutions are eligible to issue Commercial
the banker. Of course the physical Paper. It was introduced in India in 1990
possession of asset property is with under Section 45W of the Reserve Bank
the borrower. If the borrower fails of India Act. It is issued by a firm to raise
to repay the loan amount, the article funds for a short period. It can be issued for
hypothecated will be sold in auction by maturities between a minimum of 7 days
the banker concerned. Business people and a maximum of up to one year from the
hypothecate goods or equipment to get date of issue.
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11. Hire Purchase Finance medium enterprises, acquisition of plant

Small scale firms can acquire industrial and equipment and other permanent assets
machinery, office equipments, vehicles etc., will be difficult in the initial stages. In
without making full payment through hire such a situation Leasing is helping them to
purchase. With the help of assets acquired a greater extent. Leasing here refers to the
through hire purchase, they can produce owning of an asset by any individual or a
and sell. From the earnings, payments can corporate body which will be given for use
easily be made in installments. Ultimately to another needy business enterprise on a
the ownership of assets can be acquired. rental basis.
Now several agencies like National Small The firm which owns the asset is called
Industries Corporation (NSIC) provide ‘Lessor’ and the business enterprise which
machinery and equipments to small scale hires the asset is called ‘Lessee’. The contract
units on hire purchase basis. is called ‘Lease’. The lessee pays a fixed rent
on agreed basis to the lessor for the use of the
12. Factoring asset. The terms and conditions like lease
Factoring is one of the methods of raising period, rent fixed, mode of payment and
business finance through sale or mortgage allocation of maintenance, are mentioned in
of book debts. Under this method, business the lease contract. At the end of the lease
concerns sell the accounts receivable to period, the asset goes back to the lessor.
a finance company called a factor at a Alternatively lessee can own the asset taken
discount. on lease by payimg the balance of price
of asset concerned to lessor. Hence lease
6RXUFHVRI0HGLXP7HUP)LQDQFH finance is a popular method of medium
term business finance.
1. Loans from Banks
6RXUFHVRI/RQJ7HUP)LQDQFH
When the bank lends for a period ranging
from more than one year to less than five Long term sources of funds refer to those
years, it is called medium term loan. All sources which are required by the business
aspects of bank finance have been discussed firms for a period exceeding five years.
under the head long term sources of finance. The various sources of long term business
finance are briefly explained below.
2. Loan from Financial Institutions
6KDUHV
Where the financial institutions lends for a
Corporate enterprises generally obtain
period ranging from more than one year to
capital mainly from share capital which
less than five years, it is called medium term
is divided into small units called shares.
loan. All aspects of institutional finance
Each share has a nominal value. The
have been discussed under the head long
Indian Companies Act 2013 describes a
term sources of finance.
share “to be a share in the share capital of
3. Lease Financing a company”. The person holding a share is
Lease financing denotes procurement of called shareholder who has the interest in
assets through lease. For many small and the assets and profit of the company. There
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are two types of shares namely Equity shares 5HWDLQHG(DUQLQJV

and Preference shares. Retained earnings refer to the process of
i) Equity Shares retaining a part of net profit year after
The fund raised by issuing equity shares is year and reinvesting them in the business.
termed as equity share capital. Equity share It is also termed as ploughing back of
is the most important source of raising long profit. An individual would like to save
term capital by a company. These shares a portion of his/her income for meeting the
do not carry any special or preferential contingencies and growth needs. Similarly
rights in the matter of payment of annual profit making company would retain a
dividend and repayment of capital at the portion of the net profit in order to finance
time of winding up . Equity shareholder its growth and expansion in near future. It
enjoys more voting rights in proportion is described to be the most convenient and
to number of shares held by them. Thus economical method of finance.
they take part in the management of the
3XEOLF'HSRVLWV
company.
Under this method, companies invite public
ii) Preference Shares deposits by giving advertisement in the
The fund raised by issue of preference media. It offers deposit schemes for a longer
shares is called preference share capital. tenure. Person interested in making public
Preference shares are those shares which deposit has to undergo a simple formality.
enjoy priority regarding payment of The interest rates offered by companies on
dividend at a fixed rate out of the net public deposits are relatively higher than
profits of the company. They will get their the bank. Public deposits are perceived to
dividend every year before any dividend be economical for the company since the
is paid to equity shareholders. They will interest rate on deposits is less than the cost
have a right to get their settlement before of borrowing from the bank.
the claims of equity shareholder are settled
at the time of liquidation of company. The company need not offer any of its assets
However they do not have voting rights. as security on accepting public deposits.
Moreover the control of the company is not
'HEHQWXUHV
diluted as the deposit holders do not enjoy
Debentures are an important instrument for the voting rights.
raising long term debt capital. A company can
raise funds through issue of debentures which /RQJ 7HUP /RDQ IURP &RPPHUFLDO
%DQNV
bear a fixed rate of interest. The individual
or person subscribing to debentures is called Commercial banks are important sources of
debenture holder. An entity raising funds raising business finance for various purposes
through debenture has to pay interest at the as well as for different time periods. Banks
stipulated date whether it earns profit or loss. in modern times offer long tenured loans for
Failure to pay interest leads to liquidation a period beyond 5 years also. The long term
of the company. Debenture holders do not loan taken from banks can be repaid either
have voting rights. in installment or in one lump sum. Banks
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provide long term loans on the security of 1. Owner’s Funds

assets of the business firms. Nowadays the Owner’s funds mean funds which are
formalities for taking long term loans are provided by the owner of the enterprises
simplified by the Reserve Bank of India. who may be an individual, or partners or
shareholders of a company. The profits
7KH/RDQVIURP)LQDQFLDO,QVWLWXWLRQV
reinvested in the business (ploughing back
Central and State Governments have of profit or retained earnings) come under
established various financial institutions owner’s funds. These funds are not required
in India to provide finance to business to be refunded during the life time of
enterprises for a longer period. These business enterprise. It provides the owner
institutions aim at promoting the industrial the right to control the management of the
development of a country. In addition enterprise.
to loan assistance, they conduct market
surveys, provide technical assistant and 2. Borrowed Funds
supply managerial talents to borrowing
The term ‘borrowed funds’ denotes the funds
enterprises to manage the companies. They
raised through loans or borrowings. For
mainly provide large funds for longer period
example debentures, loans from banks and
for financing expansion, reorganisation
financial institutions, public deposits, trade
and modernisation of an enterprise. They
credit, lease financing, commercial papers,
allow longer repayment period to repay the
factoring, etc. represent borrowed funds.
loan. Hence the borrowing companies do
not feel the stress of repayment. Financial 1. These borrowed sources of funds provide
institutions provide term loans mostly to specific period before which the fund is
highly rated corporates by the credit rating to be returned.
companies. 2. Borrower is under legal obligation to pay
interest at given rate at regular intervals
2QWKH%DVLVRI2ZQHUVKLS
to the lender.
Business finance can be divided into two
3. Generally borrowed funds are obtained
categories based on ownership of funds.
on the security of certain assets like
bonds, land, building, stock, vehicles,
On the Basis of Ownership machinery, documents of title to the
goods, and the like.
Owner’s Borrowed
Funds
2QWKH%DVLVRI*HQHUDWLRQRI)XQGV
Funds
The sources of funds can be grouped into
Debentures
Equity two categories based on generation.
Shares
Loan from banks
Retained
Loan from Financial 1. Internal Sources
Earnings
Institution
This includes all those sources generated
Public Deposits
from within the business enterprises. For
Lease Financing instance retained earnings, collection
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from receivables (trade debtors and

bills receivable), surplus from disposal ,QIRUPDOPRQH\OHQGHUV
of old assets and so on. These sources There are certain groups or individuals in
can meet only limited needs of business urban and rural areas of Tamil Nadu, and
enterprise. all over India, who lend money informally.
They follow unethical practices of lending
2. External Sources by
External sources of funds include all those i) Charging very high rate of interest on
sources which generate funds from outside daily basis.
the business enterprise. For example issue ii) Collecting back the loans through money
of shares and debentures, borrowings and muscle power.
from banks and financial institutions,
iii) Ill-treating the borrowers to the core,
public deposits, factoring, leasing, hire sometimes leading to suicides
purchase, etc.
iv) Being highly choosy about the borrowers
rather than the project financed.
)DFWRUV ,QÀXHQFLQJ &KRLFH
RI%XVLQHVV)LQDQFH The RBI and the respective governments in
various states have come up with many legal
There are various factors influencing choice control measures, but still they are beyond
of source of business finance. These factors the reach of such measures. For example with
are briefly discussed below the rapid growth in information technology
1. Cost personal financing has undergone a sea-
change. Peer-to-peer lending is very popular
Business enterprises have to analyse the cost among urban salaried class. Sites like https://
of mobilising and utilizing the funds. For www.faircent.com/ enable salaried people to
take an advance at a nominal interest in case
of emergencies.
Micro finance or financing small business

enterprises today has to be viewed from
the ‘ethical’ sources than the ‘informal’
sources that are totally unscrupulous in their
financing practices. So Entrepreneurs can
approach sites like https://udyamimitra.in
to apply for MSME, ‘STAND UP INDIA’ and
MUDRA loans.
The website portals like https://www.

vidyalakshmi.co.in/ enable the students to
approach for Education Loan in moderate
rate of interest for further studies in various
banks and financial institutions. The portal
helps in providing linkages to National
scholarship Portal.
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instance where the interest rate is relatively and capital may lead to the liquidation of
lower, public deposits, debentures, term business enterprises besides damaging the
loan etc. may be desirable options. reputation of the business concern in the
business world.
2. Financial Capacity of the Firm
Financially sound enterprises have capacity 6. Control
to pay interest promptly and return Equity shareholders are real owners of
the capital at the stipulated time. Such corporate enterprises. They exercise
enterprises can go for borrowed source. On complete control over the management of
the other hand, if the firm is not financially the company. If the existing shareholders do
stable, it has to depend on owned sources of not like to lose their control, they must not
fund. issue more equity shares to supplement the
financial resources. Contrarily borrowed
3. Forms of Organisation sources of funds will not disturb the control
The choice of source of fund depends on the exercised by the company management.
form of organisation. Sole proprietor and Hence borrowed source is suitable for
partnership firms cannot issue shares and maintaining the administrative control of
debentures. They have to depend on short the company.
term sources like bank finance, leasing, hire
purchase, factoring, etc. On the other hand 7. Stage of Development
Companies, Government organisations and A new business enterprise finds it hard
Co operative organisations mobilise funds to mobilise business finance than an
both from long term sources like shares, established firm. Therefore it may have to
debentures, public deposits etc. and from rely on owned sources in the initial stage.
short term sources. Once the business enterprise has established
itself in the business world, they can tap
4. Time Period
borrowed source of funds and offer its assets
The period for which business finance is as security there for.
required determines the suitable source.
For instance, where funds are required for 8. Credit Worthiness of Firms
shorter period, bank finance like overdraft,
Some sources of funds like debentures
cash credit, bill discounting, mortgage,
and creditors require the business firms to
pledge, leasing, hire purchase, factoring and
mortgage the assets. This hurts the credit
so on, are suitable sources. Funds required
worthiness of the business concern in
for longer period can be tapped from issue
the financial market. Contrarily business
of shares, debentures, bonds, term loan and
concerns do not have to mortgage its
the like.
assets when they mobilise funds through
5LVN)DFWRU sources like share capital, retained
Owned funds do not invite any risk while earnings, unsecured loans, etc. and
using borrowed funds entails a lot of risk. thereby maintaining good image in the
The probable default in paying interest financial market.
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6DYLQJV,PSRUWDQFHRI6DYLQJV 3. Savings invested in government

The concept of savings plays an important bonds and various institutions
role in economic development of any helps in great measure in building
country. Saving is defined as the difference in strengthening the infrastructure
between income and consumption. In other facilities in a country.
words it points to sacrifies of some sort.
4. The country with higher savings can
Earning money may be easy; but using it
easily face the consequences of economic
in the right way as well as saving it for the
recession.
future is pretty tough. Savings is important
for each and every one of us to lead a peaceful 5. The bad consequences of inflation can
life. Saving paves way for a happier future. be met easily with strong savings. As a
“World Savings Day” was promoted all over result the evil effect of soaring prices can
the world to emphasis the value of savings. be controlled.
October 31 has been declared as the “World
Savings Day” by the International Savings 3HUVRQDO,QYHVWPHQW
Bank Congress. $YHQXHV
People invest the savings to gain financial
)ROORZLQJ 3RLQWV +LJKOLJKW WKH
,PSRUWDQFHRI6DYLQJV security. They are investing their savings
in a various investment avenues for various
Money invested in deposit account,
purposes. They may invest in various
small savings schemes, mutual funds, life
securities and wait for a stipulated period to
insurance policies, Bonds of Government
companies, shares etc. lead to overall get back their investments with higher value
economic development of a country. addition.
1. Money invested in bank deposits There are three aspects which need to be
facilitates employment generation in considered before investing the money
various sectors of economy and poverty namely liquidity, profitability, and safety.
alleviation. In other words some investments can be
2. The savings invested in bank deposits easily and readily encashed in the market
lead to credit creation in the country without any loss. Such investments are
which in turn promotes industrial and called liquid investments, for example
agricultural development in a country. bank deposits, government bonds,
mutual funds, precious metals like
gold, silver, platinum etc. while certain
other investments cannot be liquidated
immediately but they may fetch higher
returns at maturity. For example shares,
real assets, debentures, public deposits,
fixed deposits, money back insurance
“SAVE MONEY TO SAVE ALL” policies come under this category.
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Certain other investments offer higher of various shares traded in stock exchange,
income earning prospects but they are reputation of the company, consistency in
totally unsafe as in the case of gambling, the payment of dividend, the nature of the
horse race, lottery, speculation and so on project undertaken by the company, growth
and so forth. Therefore an individual prospects of industry in which a company
investor has to park the surplus funds is operating, before investing in shares. If
judiciously so as to balance the liquidity, the investment is made for a long time, it
safety and profitability. may yield good return. However there is
equally risky to invest in shares as there is
Following are some of the investment
no guaranteed return therein.
options available to individual investor
4. Real Estate Investment

1. Public Provident Fund (PPF)
Real estate is one of the fastest growing
It is the safest long-term investment option
sectors in India. Buying a flat or plot is
for the investors in India. It is totally tax-
supposed to be the best decision amongst
free. PPF account can be opened in bank or
the investment options. The value of the real
post office. The money deposited cannot be
asset may increase substantially depending
withdrawn before 15 years and an investor
upon the area of location and other support
can earn compound interest from this
facilities available therein. However an
account. However the investor can extend
investor in real estate has to be cautious and
the time frame for the next five years if
circumspect in verifying the genuineness of
the investor does not opt to withdraw the
the title deeds before investing in real estate
amount matured for payment at maturity
date. PPF investor can take loan against PPF assets and also the reputation of seller of real
account when he/she experiences financial assets.
difficulties.
5. Investing in Metals
2. Mutual Funds Investment in metals like gold, silver
An individual investor who wants to invest and platinum is one of the oldest and
in equities and bond with a balance of risk evergreen investment products. The
and return generally can invest in mutual values of the metals rise slowly and
funds. Nowadays people invest in stock steadily in line with the dynamic market
markets through a mutual fund. Systematic conditions. But investors can liquidate
investment plan is one of the best investment the metals immediately in the market
options in India. without any loss. Besides an investor
can opt for investment format, like gold
deposit scheme, gold ETF (exchange-
3. Direct Equity or Share Purchase traded fund), Gold Bar, Gold mutual
An individual can opt for investment in fund etc., to get benefit in the short
shares. But he has to analyse the market price period of time.
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6. Post Office Saving Schemes bond and Tax saving bonds. The term
There are different types of postal small bond is used for the debt collected by the
savings schemes namely Post Office government while the term debenture
Savings Account, Post Office Recurring is used when the corporates collect debt
Deposit Account (RD), Post Office Fixed capital from the public.Investment in
Deposit Account (FD/TD), Post Office
bonds is totally risk free.
Monthly Income Account Scheme (MIS),
Senior Citizens Saving Scheme (SCSS)
9. Unit Linked Insurance Plans (ULIP)
Public Provident Fund Account (PPF),
National Savings Certificates (NSC), Kisan ULIP is a life insurance linked product, which
Vikas Patra (KVP), Sukanya Samriddhi provides risk cover for the policy holder
Account (SSA). Investors can choose the along with investment options to invest in
appropriate postal schemes as per their any number of qualified investments such as
needs.Postal investment schemes is the stocks, bonds or mutual funds.
safest investments
10. Bank Deposits
7. Public Deposits Fixed deposits (FD) enable the investor
Public deposits are more beneficial than the to invest the money for a specific period.
fixed deposit in the bank, in the matter of The Fixed deposit can be opened from a
yielding good return. An investor has to minimum period of 7 days to a maximum
select the investment period very carefully. period of 10 years. The fixed deposit
He/she is not allowed to withdraw money holder can take loan against the fixed
before maturity. However the public deposits deposit receipt. The depositor cannot
collected by companies and institutions do withdraw the fixed deposits before the
not offer any insurance benefits. It does maturity date.
not come under the control of the Reserve
Bank of India. The investors who are willing Recurring deposit (RD) account is another
to invest for long term can opt for public investment option for those people who
deposits. earn regular income. This deposit can be
opened for a minimum period of 1 year to a
8. Bonds maximum period of 10 years. The Recurring
deposit holder can take loan against the
Bonds are one of the ideal investment
instalments paid.
options for those investors who would like
to invest their hard earned money safely.
Bonds are issued both by government and .H\7HUPV
public and private sector companies and Business Finance Trade Credit
financial institutions. Mostly there are Leasing
four types of bonds sold in India namely
Personal Savings
Government bonds, Corporate bonds,
Shareholders Mortgage
Banks and other financial institutions
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&DVH6WXG\ ([HUFLVH
Gokul Steel Ltd is a large and
creditworthy company that 1. What is defined as the provision of
manufactures steel for the Indian money at the time when it is required?
market. It now wants to cater the a. finance
Asian market and decides to invest b. bank
in new hi-tech machines. Since the
c. cash management
investment is large, it requires long
d. none of these
term finance. It decides to raise funds
by issuing equity shares. The issue of 2. Internal sources of capital are those that
equity shares involves huge floatation are ____
cost. To meet the expenses of
a generated through outsiders such as
floatation cost, the company decides
suppliers
to tap money market.
b. generated through loans from
a) Name and explain the money-market commercial banks
instrument the company can use for c. generated through issue of shares
the above purpose.
d. generated within the business
b) What is the duration for which the
company can get funds through the 3. Debenture holders are entitled to a fixed
instrument? rate of _________
a. Dividend
c) State any other purpose for which this
instrument can be used. b. Profits
c. Interest
d. Ratios
)RU2ZQ7KLQNLQJ
4. Public deposits are the deposits which are
1) Working of chit funds raised directly from ______
2) Finance for bonded labour a. The public
b. The directors
c. The auditors
d. The owners
)RU)XWXUH/HDUQLQJ
5. Equity shareholders are the __________
1) Export finance for small entrepreneurs of a company
a. Creditors
2) Financing software companies run by
b. Owners
young graduates
c. Debtors
d. Employees
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6. Funds required for purchasing current 4. For which purpose fixed capital is needed
assets is an example for in business?
a. Fixed Capital Requirement 5. What do you mean by working capital
b. Ploughing Back of Profits requirement of business?
c. Working Capital Requirement
d. Lease Financing
1. List out the various sources of financing.
7. Which of the following holder is given 2. What are the different types of short term
voting right? finances given by commercial banks?
a. Debentures b. Preference Shares 3. Write short notes on 1.Retained Earnings
c. Equity shares d. Bonds 2. Lease financing
4. Write short notes on a) owner’s funds
8. It may be wise to finance fixed assets
b) borrowed funds
through ____________
5. Explain any four personal investment
a. Creditors
avenues.
b. Long term debts
c. Bank Overdraft 3URMHFWZRUN
d. Bills Discounting
1. Visiting a bank in your locality and
$QVZHUV find out from them about the various
1. a 2. d 3. c 4. a 5. b ways in which they provide finance to
6. c 7. c 8. b small business enterprises.
2. Kumaran had started his leather bag
business as a sole proprietor, with a
1) Write a short notes on debentures. capital of ₹10,00,000/-. Now, after
2) What do you mean by public deposits? five years, he has decided to expand
his business in the form a company.
3) Name any two sources of funds classified
As a commerce student, give your
under borrowed funds.
suggestions to find out the various
4) Name any two internal sources of long term financial sources to generate
business finance. funds for his company.
5) State any two factors that affect the choice
of source of finance.
5HIHUHQFH
,,,6KRUW$QVZHU4XHVWLRQV 1. Business Finance R.M.Srivatsava,and
1. Define Business finance. others 1996 by Himalaya Publishing
House Mumbai
2. What is pledge?
3. List sources of raising long-term and 2. Financial management Dr A. Murthy
short-term finance. 2016 Margham Publications Chennai 17
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CHAPTER
20 INTERNATIONAL FINANCE
The following points highlight the

Learning Objectives
importance of international finance.
1. International finance helps in calculating
i. state the importance of International
exchange rates of various currencies of
finance
ii. explain the concept of Foreign Direct nations and the relative worth of each
Investment and every nation in terms thereof.
iii. analyse the advantages and 2. It helps in comparing the inflation rates
disadvantages of FDI and getting an idea about investing in
iv. state the meaning of Global international debt securities.
Depository Receipt and American 3. It helps in ascertaining the economic
Depository Receipt
status of the various countries and in
judging the foreign market.
,QWURGXFWLRQ 4. International Financial Reporting

System (IFRS) facilitates comparison of
International finance is a branch of financial financial statements made by various
economics that deals with the monetary countries.
interactions that occur between two or more
5. It helps in understanding the basics
countries. This section is concerned with
of international organisations and
topics that include foreign direct investment
maintaining the balance among them.
and currency exchange rates. It also involves
issues pertaining to financial management, 6. International finance organisations
such as political and foreign exchange risk such as IMF, World Bank etc. mediate
that comes with managing multinational and resolve financial disputes among
corporations. member nations.
,PSRUWDQFHRI,QWHUQDWLRQDO¿QDQFH )RUHLJQ'LUHFW,QYHVWPHQW
International finance plays a pivotal role in DQG,QVWLWXWLRQDO,QYHVWRUV
the international trade and in the sphere of Foreign Direct Investment occurs when
exchange of goods and services among the an investor based on one’s native country
nations. (the home country) acquires an asset or
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a company in another country (in host higher rate of growth in national income.
country) with the intention to manage 2. Help in Addressing BOP Crisis FDI
the asset or the company. The investing provides inflow of foreign exchange
company exercises control over decision-
resources into a country. This helps
making in an enterprise located in a foreign
the country to solve adverse balance of
country according to the level of equity
payment position.
shares held by it.
3. Faster Economic Development FDI
The foreign direct investments take the brings technology, management and
following forms marketing skills along with it. These are
1. Establishment of a new enterprise in a crucial for achieving faster economic
foreign country. development of developing countries.
2. Expansion of existing branch or 4. Generating Employment Opportunities
subsidiary in a foreign country. FDI generates a lot of employment
opportunities in developing countries,
3. Acquisition of enterprise located in a
especially in high skill areas.
foreign country.
5. Encouraging Competition in Host
Prior to 1999, FDI was permitted selectively
Countries Entry of FDI into developing
on a case to case basis with a normal ceiling
country promotes healthy competition
of 40% of total equity capital. However a
therein. This leads to enterprise
higher percentage of equity was permitted
in developing countries operating
in the case of high-tech import areas and
efficiently and effectively in the market.
export oriented units. After the Economic
Consumers get a variety of products of
liberalisation, the ceiling was removed and
good quality at market determined price
100% of foreign equities are permitted only
which usually benefits the customers.
in selected sectors.
Meaning 'LVDGYDQWDJHVRI)',
Foreign direct investment (FDI) is an 1. Exploiting Natural Resources: The FDI

investment made by a company or an Companies deplete natural resources like
individual in one country with business water, forest, mines etc. As a result such
interests in another country, in the form resources are not available for the usage of
of either establishing business operations common man in the host country.
or acquiring business assets in the other
2. Heavy Outflow of capital Foreign
country, such as ownership or controlling
companies are said to take away huge funds
interest in a foreign company.
in the form of dividend, royalty fees etc.
This causes a huge outflow of capital from
$GYDQWDJHVRI)',
the host country.
1. Achieving Higher Growth in National
Income Developing countries get much 3. Not Transferring Technology Some
needed capital through FDI to achieve foreign enterprises do not transfer the
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technology to developing countries. They Foreign Institutional Investors play a

mostly transfer second hand technology to very important role in Indian economy.
the host country. They keep the fundamental From 1992, Foreign Institutional
aspects of technology with the parent Investors (FIIs) have been allowed
company. In such case, the host country may to invest in all securities traded on
not get the advantage of technology transfer the primary and secondary markets,
and consequent economic development. including shares, debentures and
warrants issued by companies. Over
4. Exploiting Cheap Labour Foreign 1450 foreign institutional investors
enterprises employ cheap labour force at a have registered their names with the
lower pay in developing countries. They Securities and Exchange Board of India
do not employ local people for higher posts (SEBI), the regulator for the securities
in the management. Further they do not market in India.
extend the privileges they usually give to
the employees in their home country to the ,QWHUQDWLRQDO&DSLWDO0DUNHW
employees of the host country. Thus they
International Sources of Business Finance
are stated to exploit the labour in developing
countries. There are various avenues for organisations
to raise funds internationally. The
5. Creating Monopolistic Environment establishment of Indian economy after
Multi National Companies (MNCs) which 1990s, has facilitated many Indian
enter the host country through FDI route companies to expand their operations
create monopolistic conditions in the host beyond the frontiers of India. Many Indian
countries through their market power. They companies are now able to access funds in
may not create competitive environment in the international financial market. The
the host country. Contrarily they may affect various international sources from where
the competition altogether and establish funds may be generated are
supremacy.
1. Commercial Banks
)RUHLJQ ,QVWLWXWLRQDO ,QYHVWRUV Most of the commercial banks extend foreign
(FII) currency loans for promoting business
The FII can be defined as an investment opportunities. The loans and services of
made by a Non-resident in equity of domestic various types, provided by banks differ from
company without intention of acquiring country to country.
management control. 2. International Agencies and
FIIs are the investments made by an Development Banks
individual investor or an investment fund, International agencies and Development
into the financial markets of another nation. banks play an important role to promote
Organisations like hedge funds, insurance international trade and business. They
companies, pension funds and mutual funds provide term loans and grants to promote
can be called as institutional investors. the development of economically backward
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areas in the world. International Finance Process of Issuing GDRs

Corporation (IFC), EXIM Bank and There are four steps in the process of issuing
Asian Development Bank are the agencies GDRs as follows.
operating at International level to meet the
i. The company issuing GDRs hands over
needs of the international finance.
its shares to one Domestic Custodian
3. International Capital Markets Bank (DCB).
Modern organisations including ii. The DCB requests the Overseas

multinational companies depend upon Depository Bank (ODB) situated in the
sizeable borrowings in rupees as well as in foreign country for issuing the shares as
foreign currencies. Prominent financial GDR.
instruments used for this purpose are iii. The ODB converts the shares shown in
Depository Receipts. rupees into GDR which are denominated
in US dollars.
'HSRVLWDU\5HFHLSWV'5V
iv. Finally, ODB issues them to the intending
A depository receipt is a negotiable investors.
financial instrument issued by a bank to
represent a foreign company’s equity shares Features of GDR
or securities. They are issued to attract a 1. It is a negotiable instrument and can be
greater amount of investment from other traded freely like any other security.
countries. Any foreign investor can invest 2. Indian companies with sound financial
in a foreign stock directly without worrying track of three years are readily allowed
about differences in currency, accounting to access international financial markets
practices, or language barriers, etc. through GDR. However clearances are
required from the Foreign Investment
*OREDO'HSRVLWDU\5HFHLSW Promotion Board (FIPB) and the
(GDR) Ministry of Finance.
GDR is an instrument issued abroad by a 3. GDRs are issued to investors across
company to raise funds in some foreign the country. It is denominated in any
currencies and is listed and traded on a acceptable freely convertible currency.
foreign stock exchange. 4. GDR is denominated in any foreign
currency but the underlying shares
would be denominated in local currency
of the issuer.
Examples of Indian Companies that have raised funds through

5. The holder is entitled to dividend and
GDR bonus on the value of shares underlying
SBI BAJAJ AUTO WIPRO ITC
ICICI BANK GAIL Reliance infrastructure Ltd the GDR.
L&T INFOSYS TECHNOLOGIES
HDFC BANK HINDALCO
MTNL TATA MOTORS
6. The investor can convert GDR into equity
shares, and sell the shares mentioned in
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the GDR through a local custodian. This 2. They are issued only to investors who are
provision can be used after 45 days from American residents.
the date of issue.
3. The depository bank should be located
7. Under GDR, the issuing company in US.
transacts with only one entity for all its
transactions. 4. The approval of Securities and Exchange
Commission (SEC) of US needs to be
$PHULFDQ'HSRVLWRU\ obtained for issuing ADR.
5HFHLSWV$'5 5. They are sub-classified on the basis of
ADR is a dollar denominated negotiable level of clearance made by SEC.
certificate representing a non-US company
in US market which allows the US citizens )RUHLJQ&XUUHQF\
to invest in overseas securities. &RQYHUWLEOH%RQGV)&&%
Foreign currency convertible bond is a
3URFHVVRILVVXLQJ$'5V
special type of bond issued in the currency
6WHSV other than the home currency. In other
1. First of all, a company hands over the shares words, companies issue foreign currency
to a Domestic Custodian Bank (DCB) convertible bonds to raise money in foreign
2. Then DCB requests the American currency.
Depository Bank (ADB) to issue the )HDWXUHVRI)&&%V
shares in the form of ADRs
1) FCCB is issued by an Indian company in
3. ADB converts the issue which are in
foreign currency.
rupees into US dollars
2) These are listed and traded in foreign
4. Finally, ADB issues them to the intending
investors. stock exchange and similar to the
debenture.
)HDWXUHVRI$'5
3) It is a convertible debt instrument. It
The features of ADR are briefly given carries interest coupon. It is unsecured.
hereunder 4) It gives its holders the right to convert
1. ADRs are denominated only in US for a fixed numbers of shares at a pre-
dollars. determined price.
5) It can be converted into equity or
depository receipt after a certain period.
6) The amount received from the issue
of FCCB should be utilised as per the
guidelines of External Commercial
Borrowing (ECB).
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'L໤HUHQFHV%HWZHHQ*'5DQG$'5
Global Depository Receipts American Depository Receipts

Basis
GDR ADR
It is denominated in terms of any
Denomination It is denominated only in US dollars
freely convertible currency
It is issued only to investors, who
It is issued to investors in one or
To whom it is issued are residents of the United States of
across more markets simultaneously
America.
Non-US Stock Exchange such
Listed in as London Stock Exchange or American stock exchange
Luxemburg Stock Exchange.
Issue of ADR requires approval from
Issue of GDR does not require
Approval the Securities Exchange Commission
foreign regulatory clearances.
(SEC) of United States of America.
GDRs are normally co-related to In many cases ADRs co-related to
Mode of expression equity shares of the issuing company equity shares of the company are
expressed in whole numbers. expressed as a fraction
Negotiation It is negotiable all over the World. It is negotiable only in America.
.H\7HUPV
([HUFLVH
American Depositary Receipt (ADR)
Global Depository Receipt (GDR)
Foreign Currency Convertible Bond
(FCCB) 1. An instrument representing ownership
Foreign Direct Investment (FDI interest in securities of a foreign issuer is
called ___________
a. an ownership certificate
b. a depositary receipt.
)RU2ZQ7KLQNLQJ
c. an ownership receipt
1. Role of World Bank in globalization d. None of the above.
2. The concept of Hot Money 2. Issuance of DRs is based on the increase
of demand in the
a. International market
)RU)XWXUH/HDUQLQJ
b. Local market
c. Existing shareholders
1. Possibilities of making the western
and American countries in favour of d. All of the above
Indian Depository Receipt (IDR)
2. Petrodollar system and its future
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3. ADRs are issued in 3) What is a GDR (Global Depository

a. Canada Receipt)?
b. China 4) What is an American Depositary Receipt
(ADR)?
c. India
5) What is a Foreign Currency Convertible
d. The USA Bond?
4. Depositary receipts that are traded in
an international market other than the ,,,6KRUW$QVZHU4XHVWLRQV
United States are called 1. Explain the importance of international

a. Global Depositary Receipts finance.
b. International Depositary Receipts. 2. What are Foreign Currency Convertible
Bonds?
c. Open Market Depositary Receipts
3. Explain any three disadvantages of FDI
d. Special Drawing Rights.
4. State any three features of ADR.
5. __________ bond is a special type of 5. State any three features of GDR.
bond issued in the currency other than
the home currency. ,9/RQJ$QVZHU4XHVWLRQV
a. Government Bonds 1. Describe the importance of international

b. Foreign Currency Convertible Bond finance?
2. Distinguish between GDR and ADR.
c. Corporate Bonds
3. State any five features of FCCB.
d. Investment Bonds
4. Explain any five advantages of FDI.
$QVZHUV
5HIHUHQFH
1. b 2. a 3. d 4. a 5. b
1. International Finance by Neeraj, Neeraj
Publications
2. International Trade Finance Taxmann
1) Who are Foreign Institutional Investors? publishers pvt ltd 2017
2) What is a Depository Receipt? 3. www.ibef.org
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BUSINESS FINANCE
CHAPTER
MICRO, SMALL AND MEDIUM
21 ENTERPRISES (MSMEV) AND
SELF HELP GROUPS (SHGV)
ܶ‫ܱܥ‬ᾞ῀‫ܛ‬ᾞ‫ܪܱܛܲܭ‬Ά‫ܱܤܶܠܲܧܤܸܲܭ‬ᾌ‫ܗ‬ᾸᾐΆ
ܑᾞ῀‫ܕܨܳܢ‬ᾶ‫ܲܡ‬ᾲܶ‫᾿ܧܝ‬ ᾁ‫῀ܩ‬- 675
Couplet:
In His couplet He advised entrepreneurs
“Do an act after a due consideration of the (following) five, viz. money, means, time,
execution and place.”
0LFUR 6PDOO DQG 0HGLXP

Learning Objectives (QWHUSULVHV060(
To enable the students to The previous chapter highlighted the
i. state the meaning, role and importance of international finance, the
significance of Micro Small and various sources of mobilising international
Medium Enterprise finance, the concept of FDI and its merits
ii. understand the contribution and drawbacks. The present chapter
of MSMEs to the growth and enlightens the students on the concept of
development of Indian economy Micro small and medium enterprises, role
iii. define Self Help Groups and significance of MSMEs. An overview
iv. understand the objectives and of the concept of the Self Help Group and its
features of SHG objectives features and functions are briefly
discussed in the present chapter.
Entrepreneurship is the key for economic

development of any country By empowering
entrepreneurs, MSME sector provides more
employment opportunities to the people of
India. It helps towards the industrialization
of rural and backward areas. This sector
reduces regional imbalances. It provides
equitable distribution of national income
and wealth.
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Micro enterprises are engaged in low scale 5ROHDQG6LJQL¿FDQFHRI060(V

activities such as clay pot making, fruits and
vegetable vendors, transport (three wheeler 1. Employment Potential
tempos and autos), repair shops, cottage MSMEs generate more employment
industries, small industries, handlooms, opportunities than large business concerns.
handicraft works etc. They are mostly labour intensive, thus they
provide more employment opportunities to
'H¿QLWLRQ a larger number of people in India.
In accordance with the provisions of Micro,
2. Low Production Cost
Small and Medium Enterprises Development
Act 2006, the micro, small and medium MSMEs do not require skilled labourers
enterprises are classified into two classes. or professionals to run the organisation. It
employs cheap labour and thus minimizes
A. Manufacturing Enterprises the overhead. These units are more cost
efficient than large scale units, thus facilitates
They refer to the enterprises engaged production of goods at low cost.
in the manufacturing or production of
goods pertaining to any industry specified 3. Low Investment
in the first schedule to the Industries
MSMEs do not require a huge capital
(Development and Regulation) Act,
to start the unit. It can employ locally
1951. The manufacturing enterprises are
available resources within the reach of the
defined in terms of investment in plant and
owner. They help to perfect and promote
machinery.
traditional family skills and handicrafts.
These industries facilitate the growth of
B. Service Enterprises local entrepreneurs and self employed
They refer to the enterprises engaged in professionals in small towns and villages.
providing or rendering of services.
4. Quick Decision Making
The limit of investment in plant MSMEs need not hire professional managers
and machinery/equipment for to run the management on a day to day basis.
manufacturing/ Service Enterprises is In most cases, owner himself manages the
notified as under. enterprises. Hence, timely decision making
becomes easy and effective.
Enterprise Manufacturing sector Service sector

(The limit for investment in plant & (The limit for Investment in
machinery) Equipments)
Micro enterprises Does not exceed ₹25 lakhs Does not exceed ₹10 lakhs
Small enterprises More than ₹25 lakhs but not More than ₹0 lakhs but not
exceeding ₹5 Crores exceeding ₹2 crores
Medium enterprises More than 5 Crores but not More than ₹2 crores but not
exceeding ₹10 crores exceeding ₹5 crores
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5. Supplementary Role &RQWULEXWLRQ RI 060(V WR

MSMEs play a complementary role to ,QGLDQ(FRQRP\
serve as a feeder to large scale industries.
The MSME Sector contributes about
They supply accessories, spare parts and
8% to Gross Domestic Product (GDP)
components to large scale industries.
besides 45% to the total manufacturing
6. Establishment of Socialistic Pattern of output and 40% to the exports from the
Society country on the production of more than
MSME sector contributes towards the 6000 products. This Sector consists of 36
establishment of socialistic pattern of society million units and provides employment to
by reducing the concentration of income over 8 crore people.
and wealth. It enables and empowers
people of small means to take up a gainful 6000
products
industrial activity, and thereby helps to
36 million
achieve equitable distribution of wealth. units 8% GDP
7. Balanced Regional Development MSMEs
By encouraging MSMEs in industrially 45% 40%

manufacturing export
backward areas of India, balanced
8 crore
development can be achieved across all employment
regions. It will also help greatly in preventing
the people from migrating to cities and
060(6HFWRULQ7DPLO1DGX
towns in pursuit of employment.
In Tamil Nadu MSMEs sector produces
8. Promotion of Self Employment and Self a wide variety of products in almost all
Reliance Spirit fields. The prominent among them are the
textile, electronic products, engineering
MSMEs help to a great deal in developing
products, auto ancillaries, leather
a class of entrepreneurs. It promotes self
products, chemicals, plastics, garments,
employment and a spirit of self reliance
jewellery etc. There are 12.94 Lakh
in the society, thereby contributing an
registered number of units of MSMEs
increase in per capita income or economic
in the State, providing an employment
development.
opportunities to about 81 Lakh people.
(source cms.tn.gov.in - 12.12.2017)
9. Higher Contribution to Manufacturing
and Export 1HZ(QWUHSUHQHXUFXP(QWHUSULVH
'HYHORSPHQW6FKHPH1(('6
MSMEs contribute 45% to the total
manufacturing output and 40% to the Government of Tamil Nadu launched “New
exports from the country. It helps in earning Entrepreneur-cum-Enterprise Development
precious foreign exchange in various Scheme (NEEDS)” with a view to encouraging
countries across the world. the educated youth to become the first
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generation entrepreneurs. The Scheme C. Co operative Banks

envisages providing entrepreneurship (e.g) TNSC Bank, District Central Co
development training to educated young operative Banks
entrepreneurs, preparing business plans
and helping them to tie up with financial D. Micro Finance Institutions
institutions to set up new business ventures,
(e.g) MUDRA Bank
besides linking them with major industrial
clients. E. Non Banking Finance Institutions
■ (e.g) National Small Industries
Corporation Ltd (NSIC)
■ Small Industries Development Bank of
India (SIDBI)
0LFUR8QLWV'HYHORSPHQW5H¿QDQFH
$JHQF\08'5$EDQN
The Government of India has launched
MUDRA Bank with a capital amount
of ₹20,000 crore, and credit guarantee
corpus of ₹3,000 crore, to help Micro Small
and Medium Enterprises (MSMEs) and
startups to resolve problems relating to
,QVWLWXWLRQDO VRXUFHV RI ¿QDQFH IRU financing.
060(V
MUDRA Bank refinances micro-Finance
There are many Banks and Financial Institutions through a Pradhan Mantri
institutions which provide financial Mudra Yojana (PMMY). These measures
assistance to Micro Small and Medium will greatly increase the self confidence of
Enterprises and start-ups. young, educated or skilled workers who
A. Commercial Banks would now be able to aspire to become first
generation entrepreneurs.
1. Public sector banks (e.g) State Bank
of India, Indian Bank, Indian Overseas 6HOI+HOS*URXSV
Bank Canara Bank Rural development is one of the main pillars
2. Private sector banks (e.g) ICICI, Axis of progress of India. It has lagged behind
Bank, City Union Bank, HDFC, Karur in many aspects of development even after
Vasya Bank, Tamilnadu Mercantile six decades of the independence of India.
Bank According to 2011 population census, rural
and urban India accounts for 33.8 per cent
B. Regional Rural bank and 20.09 per cent of people below the
(e.g) Pandian Rural bank, Pallavan Rural poverty line respectively. Self Help Group
Bank, Vallalar Rural Bank has emerged as a new model for combating
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poverty. This concept mainly demonstrates

6XFFHVV VWRU\ 0V *DQGKLPDWKL the significance of togetherness. The Self Help
$SSOLDQFHV/WG7DPLO1DGX Group represents an association of people
formed to attain certain common goals.
Gandhimathi Appliances Limited was
started by Sri. V.Murugesan and his 5 Self Help Group is a small informal voluntary
sons with capital of rupees 700 only. Since association created for the purpose of
1971 the group has grown to a level of enabling members to reap economic
being recognised as one of the best quality benefit out of mutual help, solidarity, and
Brand. They were always sure that the joint responsibility. The benefits include
product will sell for its quality than for mobilization of savings and credit facilities
the price. for the pursuit of group enterprise activity.
They believe firmly that there is no National Bank for Agricultural & Rural
substitute for hard work to attain success. Development (NABARD) has defined
This was their firm conviction in business. Self Help Group as “a homogenous group
This company is constant innovator in of rural poor voluntarily formed to save
terms of brand new products and addition whatever amount they can conveniently save
of new features to their existing products. out of their earnings and mutually agree to
contribute to a common fund of the group
The LPG stoves are now the most fuel
to be lent to the members for meeting their
efficient ones compared with any other
productive and emergent credit needs”
brand, especially, when fuel saving is the
most crucial necessity for today. Even the 2EMHFWLYHVRI6HOI+HOS*URXSV
Bureau of Indian Standards distinguished
their L.P.G Stove by introducing a new Following are the objectives of Self Help Groups
type of labelling known as “GREEN 1. Focusing on empowerment of women.
LABEL”. 2. Saving people from the clutches of
money lenders
The enterprise has exported its products
to Japan, Canada, UK, and Australia. The 3. Building capacity of women and to
export increased from ₹89 lakhs to ₹576 enable them to participate in generating
lakhs in same period. activities.
4. Creating the habit of saving in the minds
For his efforts and excellent performance, of the people who are economically
the Ministry of MSME has honoured backward.
him by - National Award 2010-Quality
5. Promoting entrepreneurship skills
Product in Micro and Small Enterprises -
among women.
For LPG Operated Stoves/Appliances
6. Creating awareness about the importance
Source: Press Information Bureau, of credit circle or revolving credit and the
Government of India, Ministry of Micro, payment of the circle.
Small & Medium Enterprises 7. Elevating the economic standard of the
member’s families.
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8. Developing skills and facilitating full attendance is made mandatory for

credit linkages for eventual economic better participation.
empowerment. 9. The groups have transparency among
9. Promoting awareness among the themselves and they have collective
members about finding solutions for accountability in respect of financial
their economic problems. transactions.
10. Identifying the common interest of the 10. Every group provides a platform to its
group members and carrying out their members for exchange of their views and
operations in the most efficient and ideas freely.
economic way. )XQFWLRQVRI6HOI+HOS*URXSV
11. Enabling the members to overcome all
The Functions of Self Help Groups are listed
social and economic barriers.
below.
12. Promising and ensuring human rights to
1. Developing and enhancing the decision
women at all stages of their life cycle.
making capacity of members.
)HDWXUHVRI6HOI+HOS*URXSV 2. Increasing general awareness on literacy
1. The motto of every group members among members.
should be “saving first – credit latter” 3. Equipping the poor with basic skills for
2. Self Help Group is homogeneous in understanding monetary transactions.
terms of economic status. 4. Maintaining books and registers to
3. The ideal size of a Self Help Group ranges ensure proper accounts.
between 10 and 20 members. 5. Providing necessary training in the
4. The groups need not be registered. chosen field.
5. Groups are non-political, voluntary 6. Submitting the accounts for annual audit
associations and follow a democratic by a qualified auditor.
culture. 7. Deciding the loan amount to be
6. Each group should have only one sanctioned to the group members.
member from one single family.
0RGHRIOLQNDJH
7. A group is to be formed with only men
or only with women. There are three distinct modes of credit to
SHGs. Under the first mode, banks lend
8. Self Help Group holds weekly meetings
directly to the SHGs. In the second mode,
mostly during non-working hours, and
banks provide loans to the NGOs for onward
lending to the SHGs and ultimately to micro
entrepreneurs. Under the third mode, banks
extend credit to the SHGs with the NGOs
serving as facilitators. Out of these three
methods, the last method of direct lending
by bank with NGOs facilitation is widely
practised.
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Total number of Self Help Groups in Tamil Nadu 3,11,663

Total number of members in SHGs (Tamil Nadu) 35,76,693
Internal Savings 186814.79 LAKHS
Total no of Micro Enterprises 9754
Total Fund given to Micro Enterprises 40182 LAKHS
Source: http://www.nrlm.gov.in 2017
6HOI+HOS*URXSVLQ,QGLD
.H\7HUPV
In December 2017 there were 45,67,090 Manufacturing enterprises
SHGs in India. The total number of
Service enterprise
members in SHGs during the same period
Micro enterprise
stood at 5,02,65,933 at all India level.
Small enterprise
The five year plans of the government of Medium enterprise
India has given due recognition to the
Self Help Group
relevance of the Self-help group concept to
implement developmental schemes at the
grassroots level. 3URMHFW
1. Prepare a report on a Self Help Group

6+*VLQ7DPLO1DGX functioning in your locality.
In Tamil Nadu, Tamil Nadu Corporation 2. Visiting a Handicraft unit to
for Development of Women Limited understand the nature and scope
(TNCDW) was established in the year of its business, and analyse the
1983 with the prime objective of socio sources of finance for expansion and
economic development and empowerment modernization of the unit.
of rural women. The Government of Tamil
Nadu spearheaded the Self Help Group
concept in the country by forming SHGs )RU2ZQ7KLQNLQJ
in Dharmapuri district with the assistance
of International Fund for Agricultural 1. Role of women as entrepreneurs
Development (IFAD) in September 1989. 2. Income-tax exemption for Start-
The success of the IFAD project paved up initiatives
way for the now popularly called “Mahalir
Thittam” project, which was launched
)RU)XWXUH/HDUQLQJ
during 1997-98 with the State Government
funding and was progressively extended
1. World Association of Small & Medium
to all the 30 districts. The SHG movement
enterprises (WASME)
has now emerged as a powerful and vibrant
movement illuminating the lives of many 2. Ministry of MSME and its functions.
poor women in the state.
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$QVZHUV
([HUFLVH
1.c 2.d 3.b 4.c 5.c
1. MSMED Act was enacted in the year
(a) 2004 1) What do you understand by the
manufacturing enterprises?
(b) 2007
2) Give some examples for micro
(c) 2006
enterprises.
(d) 2008
3) What is the aim of NEEDS?
2. MSMEs are important for the nation’s 4) What is a Self Help Group?
economy because they significantly 5) State the investment limit for small
contribute to enterprise in manufacturing and service
(a) industrial production sector.
(b) exports
(c) employment
1. State the investment limit for medium
(d) all the above
enterprise engaged in Manufacturing
3. Self help groups convert the savings into and service sector.
a common fund known as 2. List out the products produced by MSME
(a) Common fund in Tamil Nadu?
(b) Group corpus fund 3. What is the role and significance of
(c) Group fund MSMEs in Indian Economy?
(d) none of the above 4. Explain any three features of Self Help
Group.
4. There are ______ distinct modes of 5. What are the different ways in which
credit to Self Help Groups. banks fund Self Help Groups?
(a) 1
(b) 2
(c) 3 1. What is the definition of MSME?
(d) 4 2. Explain the advantages of MSMEs?
3. What are the objectives of SHGs?
5. Investment limit of a micro enterprise
under manufacturing sector does not 5HIHUHQFH
exceed__________ lakhs 1. Business Organisation by Dr.K.Sundar
(a) 10 Vijayi Nicole Imprints Ltd
(b) 20 2. www.slideshare.net
(c) 25 3. planningcommission.nic.in/
(d) 50 4. cms.tn.gov.in
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UNIT VII TRADE

CHAPTER
22 TYPES OF TRADE
Learning Objectives the scattered consumers. Trade connects

To enable the students to producers and consumers and enables them
i. understand the meaning of trade to sell and purchase from wherever they are.
ii. explain the features of trade
22.01 Trade - Meaning
iii. explain the different types of trade
The buying and selling of goods and services
consists of trade. The essence of trade is to
,QWURGXFWLRQ make goods and services available to those
In continuation to the business finance dealt persons who need them and are able and
in the previous chapter, this chapter will willing to pay for them. Trade is conducted
present details about types of trade. Under in order to earn profit. Trade acts as an
‘barter system’ in olden days goods were intermediary in the exchange of commodities
exchanged for goods. After the invention between the producer and consumer.
of money as a medium of exchange, all
purchases are made in exchange of money. &ODVVL¿FDWLRQRI7UDGH
Similarly sale transactions are possible On the basis of geographical location of
in exchange of money. The producers buyers and sellers, trade can be broadly
producing the goods in large quantities classified into two categories;
find it difficult to sell the goods directly to
(i) Internal trade and
(ii) External trade
,QWHUQDO7UDGH±0HDQLQJ
Buying and selling of goods and services
within the boundaries of a nation are called
internal trade. It takes place between buyers
and sellers in the same locality, village, town
or city or in different states, but definitely
within the same country. Internal trade is
also called domestic trade or home trade.
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)HDWXUHVRI,QWHUQDO7UDGH Wholesale Trade

The following are the features of internal “Purchase of goods in bulk from the
trade manufacturers and selling them in smaller
quantities to other intermediaries” is known
a. The buying and selling of goods takes wholesale trade.
place within the boundaries of the same
country. Retail Trade
b. Payment for goods and services is made Retail trade deals with the distribution of
in the currency of the home country. goods in small quantities to the consumers.
c. It involves transactions between
)RUHLJQ7UDGH0HDQLQJ
the producers, consumers and the
middlemen. Foreign trade is a trade between a seller
and buyer of different countries. It involves
d. It consists of a distribution network of
the exchange of goods and services of one
middlemen and agencies engaged in
country with another country. Mostly
exchange of goods and services.
shipping and air transports are used for
e. In home trade the risk of transportation carriage of goods in international trade. The
is very less when compared to the foreign currencies of trading nations and commonly
trade. agreeable currency if any to both may be
f. In home trade the laws prevailing in that used in the said international trade.
country only have to be followed.
E.g., Petrol and Aeroplanes.
g. The aim of home trade is to provide the
goods and services economically. 7\SHVRI)RUHLJQ7UDGH
A. Import Trade
h. The goods must be a part of domestic
production. Import trade means buying goods from a
foreign country for domestic use. Example.
i. Goods must be purchased from an
India imports petroleum products from
individual or a firm established within a
Gulf Countries. India imports machinery,
country.
equipment, materials etc. It is necessary to
J. Goods can be delivered using locally speed-up industrialization, to meet consumer
available modes of transport. demands and to improve standard of living.
k. It does not involve any custom/import
duty, but buyers need to pay the taxes to
the Government.
7\SHVRI,QWHUQDO7UDGH
Home trade consists of two main sub-
divisions namely
1. Wholesale trade and 2. Retail trade
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B. Export Trade
6XFFHVV6WRU\
Export trade means the sale of domestic
goods to foreign countries. One of the famous Indian
women entrepreneurs
Examples: is Indra Nooyi She was
born in Chennai and had
1. Export of Iron ore from India to Japan
her bachelor’s degree in
2. Selling of Tea from India to England. Madras Christian College.
3. Export of jasmine flowers from Madurai Master’s Degree in Public Management
to Singapore from Yale University, Masters in Finance
and Marketing from IIM, Kolkata.
Export trade is necessary to sell domestic Occupation: Joined PepsiCo in 1994 and
surplus goods, to make better utilization became CFO in 2001. Earlier she held
of resources, to earn foreign exchange, senior executive positions in Motorola
to increase national income, to generate and Asea Brown Boveri. She was product
employment and to increase Government manager at Johnson & Johnson and
revenue then textile firm Mettur Beardsell.
Awarded Padma Bushan for her business
India’s Important Export and Import achievements and being an inspiration to
Items India’s corporate leadership. She helped
the company to complete 30 billion
Export items: Import items:
dollars worth of crucial deals within the
1. Petroleum 1. Mineral fuels last couple of years.
products including oil
C.Entrepot Trade
2. Jewelry 2. Gem, precious
metals Entrepot trade means importing of goods
from one country and exporting the same
3. Automobile 3. Electrical machinery
to foreign countries. It is also known as ‘Re-
and equipments
export trade’.
4. Bio-chemicals 4. Machinery including
computers E.g. Indian diamond merchants in Surat
import uncut raw diamonds from South
5. Pharmaceuticals 5. Organic chemicals Africa. They cut and polish the diamonds
Exp ort trade
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in their units in India and re-export them

to the International Diamond Market in &DVH6WXG\
Amsterdam.
6LQJDSRUH 'XEDL +RQJNRQJ DUH WKH Mr. Kovalan completed his M.Com.,
ODUJHVW HQWUHSRW WUDGH FHQWUHV LQ WKH degree and proposed to start a business
ZRUOG dealing powerloom machines. After a
Thus it can be concluded that effective complete analysis, it was found that it is
transfer of possession and ownership from better to buy from foreign countries than
the producer to consumer is facilitated to buy from domestic manufacturers.
by trade. After learning about the types of So what is your opinion whether to
trade, channels of distribution, wholesalers purchase from foreign countries or from
and retailers will be studied. domestic manufacturers.
.H\7HUPV
Foreign trade Export trade

([HUFLVH
Import trade Entrepot trade
)RU2ZQ7KLQNLQJ 1. The purchase of goods from a foreign

1. Student should go to nearby internal country is called----------
trade unit, and observe the trade a. Import
activities. b. Export
2. Students should go to retail shop, and c. Entrepot
observe the trading activities.
d. Re-export
2. When goods are imported for

)RU)XWXUH/HDUQLQJ the purpose of export it is called
as-----------.
1. In future the location of trade houses
a. Foreign Trade
will be completely changed, where
the customers place order by mobile b. Home Trade
phone or e-mail and it should be c. Entrepot
delivered at door step of the buyer. d. Trade
2. In future there is no need for
3. ---------- acts as a connective link
showrooms, displays, window
between the producer and the consumer.
decorations, etc. retail shops provide
code numbers to the products and a. Trade
hence there is no need for retail shop. b. Industry
So, the students should be prepared c. Commerce
to meet future changes.
d. Business
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4. The aim of home trade is 6. What are the classifications of internal

------------------. trade?
a. To raise the standard of living 7. What is import trade?
b. To provide the essential goods and 8. Explain the meaning of Entrepot trade.
services economically 9. TVS is selling motor bikes in Europe.
c. To raise the national income Under which type of trade can this be
d. To obtain all types of goods. classified?
10. What is the currency used in India in
5. Internal trade can be classified into internal trade?
----------categories
a. Three ,,,6KRUW$QVZHU4XHVWLRQV
b. Four 1. What is the classification of Foreign
c. Two trade?
d. Five 2. Give two examples of Entrepot trade.
3. What do you mean by Export trade?
4. What is Wholesale trade?
$QVZHUV
5. State the meaning of Retail trade.
1. a 2. c 3. a 4. b 5. c 6. Name any three retail traders in your
locality
7. State the main aim of trade.
1. Give the meaning of Trade? ,9/RQJ$QVZHU4XHVWLRQV

2. What is Internal Trade? 1. What are the features of Internal trade?
3. Mr. Vikram who runs a textile industry 2. Explain briefly the different types of
regularly procures cotton from Germany. Foreign trade?
Name the type of trade he is engaged in.
4. When Vikram of India sells cotton shirts 5HIHUHQFH
to Amal of England, what type of trade 1. Gupta.C.B. ‘I.S.C Commerce’ 2017
he is engaged in? edition, S.Chand and Company. New
5. How do you classify Trade? Delhi-64
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UNIT VII TRADE
CHAPTER
CHANNELS OF DISTRIBUTION
23
‫ܲܢ‬ᾞᾰᾁ‫῀ܩ‬
‫ܘ‬ᾶܶ‫ܱܥ‬ᾞ῀‫῁ܱܛ‬Ὰ‫ܧܑܥ‬ι‫᾽ܱܧܲܩ‬ᾰܶ‫ܛ‬ᾶܶ‫ܱܥ‬ᾞ῀
‫ܨܑܤܸܖ‬ᾶᾌΆ‫ܘ‬ᾞᾱᾁᾁ‫῀ܩ‬
Couplet:
Who plenteous store of glorious wealth have gained, By them the other two are
easily obtained
Learning Objectives &KDQQHOV RI 'LVWULEXWLRQ

Meaning
A channel is the route through which
i. state the meaning and types of channel
the goods are passed on to the ultimate
of distribution
consumer. There are direct channels or routes
ii. explain the meaning of different types
of distribution without middlemen. Indirect
of middlemen
channel consists of one or more middlemen
iii. understand the characteristics and performing different functions. Middlemen
services of whole help in the flow of goods towards the lakhs
iv. explain the characteristics and services or crores of consumers. The products should
of retailers reach all these consumers living inside the
country and throughout the world. There are
industrial and consumer goods, perishable
,QWURGXFWLRQ
and durable goods, pin to plane - different
The manufacturers producing goods on size of goods and so on. Not only the goods
large scale select the channel through which but also the services need distribution
their goods should reach the consumers. network.
These good are converted into cash only
when the end user buy and use them. To cut 'H¿QLWLRQ
the cost, to reach maximum customers and According to Cundiff E.W and Still, a
to retain all customers the producers select channel of distribution may be defined as “a
one channel or combine many channels to path traced in the direct or indirect transfer
distribute the goods. This chapter explains of title to a product as it moves from the
the channels of distribution in detail. producer to ultimate consumers”.
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According to American Marketing

Association, “A channel of distribution is
the structure of intra company organization
units and extra company agents and
deals wholesale and retail through which
a commodity or product or service is
marketed”.
ii. Mail - Order Business or Phone Order

Business
The manufacturer collects orders from the
consumers through post or mail or phone
and delivers the products themselves.
Some producers send the catalog of their
products directly to the consumers and
receive orders over post or phone. Then
they distribute goods to the demanding
7\SHV RI &KDQQHO RI consumers.
'LVWULEXWLRQ
The types of chennel of distribution are as iii. E-Commerce
follows; This is also a direct channel where there is
I. Channels based on the middlemen. no middleman. A website is created by the
producer and through internet the product
II. Channels based on the type of goods and
order is received and delivery of goods
services
is made from the nearest godown of the
III. Channels based on national and producer.
international markets
iv. Direct Marketing or Multi-Level
,&KDQQHOVEDVHGRQWKHPLGGOHPHQ
Marketing
$'LUHFW&KDQQHO
The manufacturer establishes branches
i. No middlemen all over the country or in other countries
The producer takes up the task of distributing also. The producer first enrolls few
the goods either through his own company consumers. These consumers are asked
showrooms or branches or through his to bring in more consumers. Various
sales team. Producer himself exercises commissions are paid to the senior and
direct control over thr distribution.Some junior consumers according to their
producers sell goods right from the doors of turnover. All consumers directly purchase
their factory directly to the consumers. from the producer’s branches.
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%,QGLUHFW &KDQQHO RU 'LVWULEXWLRQ Ingram Iris, Redington, Neoteric, HCL, etc.
7KURXJK0LGGOHPHQ System Integrators (SIs), VARs, Consultants,
i. Contract Distributors or Contract Managed Service Providers (MSPs),
Logistics Independent Software vendors (ISVs) are
also called channel partners.
The large scale producer outsources the
warehousing, transporting and distribution iv. Manufacturer - Franchisor - Consumers
functions to a third party on contract. The
Producers adopt this channel to distribute
contractor may process orders, collect
goods or services in the home country and
payments and carry out customer service
foreign countries. (Read separate chapter on
also. He is paid commission on the basis
Franchising in another lesson)
of turnover. Multi-National Companies
outsource distribution function and v. Manufacturer- Retailer - Consumer
concentrate on their core production
The producer appoints a network of retailers.
function.
The storage, warehousing, transport and
ii. Manufacturer - Value Added Reseller distribution functions are undertaken by
(VAR) or Distributor - Customers the producer himself. Branded and well
established products can be routed through
The VARs receive the products from the this channel.
manufacturers, incorporate them as if their
own products by adding value enhanced
service and sell them to customers. VARs
provide highly skilled technical support
so that the customer can have world class
satisfaction. Microsoft India has appointed
Avnet and Redington as VARs in India. A
solar panel producer may have builders as
VARs and the builders offer solar panel as
additional facility to the buyers of flats, etc.
vi. Manufacturer -Wholesaler - Retailer -
iii. Manufacturer - Channel partner - Consumer
Consumers
The manufacturer engages wholesalers
An agreement is entered in between the to purchase products from them as soon
producer and channel partner. The producer as the production is over. The storage,
trains the technicians of the partner and warehousing, transport and distribution
provides certification that quality product functions are carried out by the wholesalers.
and service is assured from the partner. These wholesalers contact retailers and
Channel partner and producer work in sell goods in small quantities to them.
cooperation to attain their respective goals. Wholesalers may deal in a variety of products
The USA computer Technology Company from different producers. Finally retailers
Dell has channel partners in India namely, sell goods to individual end consumers.
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vii. Producers - Agent - Wholesaler - ,,&KDQQHOV %DVHG RQ WKH 7\SH RI
Retailer - Consumer *RRGVDQG6HUYLFHV
In addition to the above channels of A. Consumer Goods Distribution

distribution, the middlemen, agents play Channels
the role of producers and wholesalers. They
Fast moving consumer goods (FMCG) like
gather the agricultural produces or fishes
provision items, clothes, etc. every customer
from boats operators. They collect orders
buys to utilise and exhaust them. Next day
from the wholesalers and bring the goods
or week or month fresh purchases need to
to the place of wholesaler. Agents perform
be made. There are durable goods used by
their functions for a commission based on
consumers like refrigerator, television, LED
their turnover.
bulbs, fan, laptop etc.
They are used continuously for years

together. Next purchase is made after some
years. Further they need to be installed,
serviced and spare parts for replacement.
viii. Manufacturer - Authorised Dealers - The retail stores for FMCG goods are
Consumers far more in number than durable goods
retailers. But the distribution channels are
To retain the control over the relationship
the same for both of them.
with consumers, the manufacturer appoints
authorized dealers. They receive all the
B. Industrial Goods Distribution
goods produced by the manufacturer and
Channels
sells them in smaller quantities to retailers.
Authorised Dealers use the brand name of Industrial machinery and equipment
the manufacturer and deal with one producer need shorter channel of distribution.
only. Authorised Dealers provide the service The industries that use the products
of installation of machinery to the consumers. are less in number. Technical support
Sports Utility Vehicles (Cars) are sold through from producer or dealer is required for
authorized dealers only. installation, operation and maintenance
of the machinery. The producer sells
B2B and B2C the machinery through his salesmen
or authorized dealers. MRI - Magnetic
All purchases and sales between the Resonance Imaging Scanner used in
producers and wholesalers,and from hospitals to produce images of body
the wholesalersto retailers,etc. are called structures are sold through authorized
Business to Business (B2B) transactions. dealers or wholesalers to customers.
All business transactions between the
producers or wholesalers or retailers ,,,6HUYLFHV'LVWULEXWLRQ&KDQQHOV
on the one side and consumers on
Services can never be stored. A banking
the other side are called Business to
transaction or a mobile connectivity is created
Consumers(B2C)
for the particular customer at the specific
225
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time. Mostly direct channel is operated by reach the consumer at the earliest. e.g.
all producers through branches. Even in Flowers and milk. Technical products which
Information Technology (IT) companies, require pre-sale and post-sale advice from
a software is created and modified to suit technicians should be directly distributed
the customer’s needs. Insurance companies by producer or with middlemen. e.g: Air-
have branches and employ agents to connect conditioners, Washing machine.
with policyholders. Producer’s website
is of greater use in connecting with the ii. Market Characteristics
consumers in services marketing. The size of the market for the goods is
a major factor while selecting the route
,9&KDQQHOV %DVHG RQ 1DWLRQDO DQG for distribution of products. Distribution
,QWHUQDWLRQDO0DUNHWV in large geographical area requires more
The national or country level middlemen middlemen. Middlemen are not required to
are already dealt with in detail in the distribute products in a limited area.
previous paragraphs. The international
distribution of goods and services consists iii. Number of Consumers
of two sub systems. They are domestic Large purchases made by few consumers
distribution system and foreign distribution require centralised distribution. Large
system. There are export merchants, export number of consumers making purchases
trading houses, export agents, state trading in small quantities requires more
organisations, joint ventures, licensees, middlemen.
franchisees etc. performing the functions of
middlemen. iv. Middlemen factor
)DFWRUV,QÀXHQFLQJ&KDQQHO Middlemen who are experienced and have
RI'LVWULEXWLRQ produced more sales are wanted by all
The factors determining the suitability of producers. Long channel naturally increases
a channel for a product distribution are as the cost and price of the product. The
follows: number of layers of middlemen should be
kept to the minimum. The competitor who
is efficient in reducing distribution cost will
i. Product Characteristics
sell more as his price tends to be lower.More
Seasonal products are distributed through the middlemen are lesser will be the level
less layer of middlemen. Non standardized of control and more problems on the part
products that are made according to of the producers. Quality of distribution
customer specifications may be delivered service can be ensured and loyal customer
directly. But standardized products may base can be created with less middlemen.
be passed on through middlemen. Trucks In some areas there may be scarcity of right
which are heavily needed to be distributed middlemen and in some other cases the
with less layers of distribution. The life of policies of producers may be not acceptable
perishable products is limited and should to the middlemen.
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v. Capacity of the Manufacturer 0LGGOHPHQ

A financially strong producer may select The term ‘Middlemen’ refers to all those
a high technology oriented channel who are in the link between the primary
which will reduce cost in the long run. producer and the ultimate consumer in the
Manufacturers with large volume of exchange of goods or service. The various
production may open direct branches intermediaries can be broadly classified into
in cities and towns where there is more two main categories.
sales. They can also provide more services 1) Mercantile Agents
expected by consumers. Small and
2) Merchant Middlemen
medium producers require the services of
middlemen for selling their products. A 0HUFDQWLOH$JHQWV
producer offering wide range of products Mercantile Agents are also called functional
can have a long channel as he can defray middlemen. A businessman appoints a
the cost of distribution over more number person to buy and sell goods on his behalf
of products. and gives him the right to borrow money
on the security of goods. He is known as
vi. Cost and Time Involved in the Channel mercantile agent. He is not given ownership
of Distribution title of the goods. He is paid commission on
his turnover.
The channel cost should go along with the
quality of service provided by middlemen. .LQGV RI 0HUFDQWLOH $JHQWV
Ordinary goods are routed through RU$JHQW0LGGOHPHQ
economical channel even though the time i. Brokers
taken by the channel for delivery is more. ii. Factors
iii Commission Agents
vii. Services Required along with the iv. Del-credere Agents
Product v. Auctioneers
Machinery or equipment which need to be vi. Warehouse keepers.
installed and demonstrated should be sold
(i) Brokers
with shorter channel. Technical services can
be provided by manufacturers or by their A Broker is one who bargains for another
trained technicians. Therefore a shorter and receives commission for his service. He
channel is preferred for sales. is paid ‘brokerage’ for his services .He brings
buyer and the seller to the negotiating
process and arranges for finalising contracts
viii. Life Cycle of the Product
between them. The principal businessman
An established product can select an does not pass on either possession of goods
ordinary channel. But a new product or the ownership of goods to the broker.
entering into the market should be carefully The broker is not personally liable for the
promoted by experienced middlemen. contracts concluded.
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Clothing, furniture, food, and commodities (iv) Del-credere Agents

such as timber and steel are often sold by The agent who guarantees to the principal
brokers. They are assigned to different the collection of cash from credit sales is
geographical territories by the producers called del-credere agent’. If they do not pay,
with whom they work as they have excellent the agent would bear the loss himself. He
industry contacts .The most common form is given an additional commission known
as del-credere commission for bearing
of agent and broker encountered by the
the risk. He carefully selects the buyers to
consumers are functioning in real estate
whom credit can be extended based on their
sector. A real estate agent acts for both the honesty and reliability.
buyer and the seller.
(v) Auctioneers
(ii) Factors
Auctioneers are agents who sell goods by
A factor is a mercantile agent to whom auction on behalf of their principals. Auction
goods are entrusted for sale by a sale is made through a notification to the
principal. He takes physical possession public. The notice clearly mentions the date,
of the goods, though he does not obtain time, place and details of goods which will
ownership of the goods. A factor sells be widely published through newspapers,
goods in his own name without revealing posters, leaflets and announcements etc.,
the name of his principal. He may even Auction sale may be “WITH RESERVE”
sell them on credit and other usual terms. and “WTIHOUT RESERVE”. In case of
He is entitled to receive payment for the auction “WITH RESERVE” no sale can take
goods sold and he gives valid receipts. place below the minimum price fixed by the
He is liable for his action. He can sue or seller, which is known as “Reserve Price”. In
be sued for his contracts. He has a right case of auction “WITHOUT RESERVE” the
of lien on goods in his possession for his auctioneer is bound to sell the product to the
unpaid charges. highest bidder. The price for which the bid
is accepted is called “knocked down price”.
(iii) Commission Agent or Consignees Striking a hammer on the desk indicates
the acceptance of a bid by auctioneer. After
A commission agent buys and sells goods
the highest bid is accepted, the auctioneer
on behalf of the principal for a fixed rate of
becomes the agent for both the seller and
commission for all his transactions. All risks
the buyer. For his services, the auctioneer is
connected with his transactions are borne
entitled to receive a commission, which is a
by the principal. His functions are more
certain percentage of the sale proceeds.
varied than a broker and he takes decision
over the prices and terms of the sale. He has
expert knowledge of the goods and trends (vi) Warehouse–keeper
in the market. He takes possession of the A Warehouse keeper accepts goods for the
goods without title over them and sells in purpose of storage in his warehouse. He
his own name. should exercise reasonable care and diligence
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in the storage of goods. He is entitled to assist customers, and delivering goods to

payment for his services. He will have lien customers.
on the goods in case the payments for his a. Limited- Service Wholesalers offer
services remain unpaid. The warehouse fewer services to their customers but
keeper delivers to the owner of the goods a lower prices. They might not offer
receipt known as warehouse keeper’s receipt delivery services, extend their customers’
or certificate. It is an acknowledgement credit, or have sales forces that actively
issued by warehouse keeper for the receipt call sellers. Small retailers often buy from
of goods by him for the purpose of storage. cash-and-carry wholesalers to keep their
It is not a document of title to goods. He prices as low as big retailers that get large
may issue a ‘Warehouse warrant’, which is a discounts because of the huge volumes
document of title to goods of goods they buy.
b. Drop Shippers are another type of
limited-service wholesaler. Although
drop shippers take title to the goods,
they don’t actually take possession of
them or handle them. They deal with
goods that are large or bulky. Instead,
they earn a commission by finding sellers
and passing their orders over to the
0HUFKDQW0LGGOHPHQ
producers, who then ship them directly
Merchant Middlemen are the intermediaries to the sellers. Mail-order wholesalers sell
who buy and sell the goods in their own their products using catalogs instead of
name, and in return earn a profit out of it. sales forces and then ship the products
They take ownership as well as possession over to buyers.
of the goods they sell. They operate in their
own name and bear all the risks. Merchant Truck jobbers (or truck wholesalers)
middleman can be further sub- divided into: actually store products, which are often
highly perishable (e.g., fresh fish), on
1. Wholesaler, 2. Retailer their trucks. The trucks make the rounds
to customers, who inspect and select
1. Merchant Wholesalers: Merchant
the products they want straight off the
wholesalers are wholesalers who take title
trucks.
to the goods. They are also sometimes
referred to as distributors, dealers, and Rack Jobbers sell specialty products, such
jobbers. This category includes both full- as books, hosiery, and magazines that they
service wholesalers and limited-service display on their own racks in stores. Rack
wholesalers. Full-service wholesalers jobbers retain the title to the goods while
perform a broad range of services for their the merchandise remain physically in the
customers, such as stocking inventories, stores for sale. Periodically, they take count
operating warehouses, supplying credit of what’s been sold off their racks and then
to buyers, employing salespeople to bill the stores for those items.
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:KROHVDOHU 2. Wholesalers buy goods in large quantities

Wholesale Trade means buying and selling and sell in relatively smaller quantities,
goods in relatively large quantities or in 3. Wholesalers sell different varieties of a
bulk. The traders who are engaged in particular variety of product,
wholesale trade are called wholesalers. 4. They employ a number of agents or
workers for distribution of products
5. They need large amount of capital to be
invested in his business,
6. They generally provide credit facility to
retailers,
7. They also provide financial assistance to
the producers or manufacturers,
8. In a city or town, they are normally
A wholesaler buys goods in bulk directly located in one particular area of the
from manufacturers and sells them in market.
small lots to customers or industrial users. %)XQFWLRQVRI:KROHVDOHUV
A wholesaler is the first intermediary and Following are the functions of wholesalers,
serves as a link between producers and
retailers. Wholesalers place large orders with a. Collection of Goods: Wholesaler collects
producers and supply in small quantities to the goods from manufacturers or
retailers. In this way wholesaler serve both producers in bulk.
manufacturers and retailers.
b. Storage of Goods: Wholesaler collects
'H¿QLWLRQ and stores them safely in warehouses, till
According to Cundiff and still “wholesaler they are sold out. Perishable goods like
buys from the producer and sell merchandise fruits, vegetables, etc. are stored in cold
to the retailers and other merchants and not storage facility.
to the consumers”. c. Distribution: Wholesaler sells goods to
different retailers. Thus he performs the
According to Evelyn Thomas “a true
function of distribution.
wholesaler is himself neither a manufacturer
nor a retailer but act as a link between the d. Financing: Wholesalers provide financial
two”. support to producers and manufacturers
by providing money in advance to them.
7KH&KDUDFWHULVWLFVRI
He also sells goods to retailer on credit.
:KROHVDOHUV
Thus, at both ends wholesaler acts as a
The following are the characteristics of financier.
wholesalers;
e. Risk Taking: Wholesaler buys finished
1. Wholesalers buy goods directly from goods from the producer and keeps them
producers or manufacturers, in the warehouses till the time they are sold
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and assumes the risk arising from price, retailers scattered over a wide area and
spoilage of goods, and changes in demand. buy goods in bulk from producers. He
enables producers to reach customers
f. Grading Packing and Packaging:
scattered over different parts of the
Wholesaler classifies the goods into
country by distributing goods through
different categories. He grades the goods
retailers located in different areas.
on the basis of quality, size and weight
Therefore producer can concentrate only
etc. He also undertakes packaging of
on production.
goods and also performs the function of
branding. 3. Warehousing Facility: A wholesaler
holds large stock of goods in his private
g. Providing Information: Wholesalers
warehouse or in a rented warehouse. In
provide valuable information to
this way he relieves the manufacturer
retailers and producers. The retailers
from the function of warehousing.
are informed about the quality and type
of products available in the market for 4. Forecasting of Demand: A wholesaler
sale. The producers are informed about collects information from retailers about
the changes in taste and fashions of the nature and extent of demand and
consumers by wholesalers so that they passes it onto the producers and enables
may produce the goods on the basis of them to produce goods according to the
tastes and preferences of customers. needs, tastes and fashions prevailing in
h. Transportation: A wholesaler arranges the market.
for the transport of goods from producers 5. Publicity of Goods: Often wholesalers
to his warehouse and from the warehouse launch advertising campaign to boost
to retailer. Many wholesalers maintain the demand for the goods. Producers
their own trucks, carry goods in bulk get the benefit of such publicity
and add place utility to the goods. and thus enabled to spend less on
advertising.
&6HUYLFHVRID:KROHVDOHU
6. Financial Assistance: A wholesaler often
A wholesaler provides valuable services
makes advance payments to producers.
to manufacturers, producers, retailers and
He buys the goods as soon as they are
customers.
produced. Producers need not lock up
their capital in maintaining huge stock
Services to Producers or Manufacturers of goods.
1. Economies in Large Scale: A wholesaler
7. Risk-bearer: A wholesaler provides ready
buys goods in bulk and, thereby, enables
market to producers by placing advance
the producers to produce goods on a
orders and relieves the manufacturer
large scale. Large scale production helps
from the risk of loss due to fluctuation
to reduce the cost of production per unit.
in demand and storage of goods. He also
2. Assistance in Distribution: Wholesalers reduces the risk by matching seasonal
collect orders from a large number of demand.
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8. Link: A wholesaler serves as a useful '7\SHVRI:KROHVDOHUV

intermediary between the producers and
1. Manufacturer wholesaler
retailers.
Manufacturer wholesaler undertakes
Services to Retailers manufacturing of goods in addition to
wholesale business. He sells not only the
1. Financial Assistance: Wholesalers
goods manufactured by him on wholesale
provide financial assistance to retailers
business, but also goods manufactured by
by selling goods on credit. This is done
other producers.
by allowing credit to retailers purchasing
goods from them and makes payment to
2. Retail Wholesaler
them after receiving money from their
customers. This helps retailers to manage This type of wholesaler carries on both
their business with small amount of wholesale and retail trade. He purchases
working capital. goods in bulk from manufacturers and sells
them directly to consumers through his own
2. Meeting the Requirements: Due to
retail outlets.
limited capital and lack of space in his
facility a retailer cannot hold large variety Ex. Super Bazaar.
of products. The wholesaler removes this
difficulty by selling goods as and when 3. Merchant Wholesaler.
the retailer requires. A merchant wholesaler neither
3. Introduction of New Products: manufactures goods nor sells them directly
Wholesalers bring new products and consumers. He is the ‘wholesaler proper’
their uses to the notice of retailers. Thus or ‘pure wholesaler’. He buys goods in bulk
retailers get knowledge about innovated from manufacturers and sells them in small
products and innovated features. lots to retailers. Merchant wholesalers can
be further classified into three categories on
4. Price Stability: Wholesalers reduce the basis of degree of specialisation.
price fluctuations by adjusting supply
and demand and save the retailers from a) General merchandise wholesalers.
loss arising from price fluctuations. b) Single line wholesalers
c) Speciality wholesalers
5. Economy in Transport: A wholesaler
often delivers goods at the door steps of a. General Merchandise Wholesalers:
retailers and save their time and cost of This type of wholesaler deals in a
transport. wide range of goods such as groceries,
electrical equipment, medicines, cloth
6. Regular Supply: Wholesalers keep large
etc. The importance of this type of
stock of varieties of goods and provide
wholesaler has heightened due to
a regular supply of goods as per the
increasing specialisation in trade.
retailer’s need. Retailers can purchase as
much as they like, from time to time and b. Single Line Wholesalers: This type
need not maintain a large stock of goods. of wholesaler deals in only one line of
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goods and distributes different brands Definition

and variety of the particular line. For According to S. Evelyn Thomas “the retailer
example, a wholesaler may deal in is the last of the many links in the economic
refrigerators produced by different chain whereby the consumer’s wants are
manufacturer. satisfied smoothly and efficiently by retailers”.
c. Speciality Wholesalers: This wholesaler
According to Cundiff and Still “a retailer is
specialises in a single product. For
a merchant or occasionally an agent whose
example, a wholesaler may deal only in
main business is selling directly to the ultimate
Tata tea and nothing else.
consumers”.
5HWDLOWUDGH0HDQLQJ A retailer has been defined as “a trading
Retail trade is a trade that deals with the intermediary engaged in the distribution of
distribution of goods in small quantities to goods to the ultimate consumer”.
the end consumers. The retails represent the
final stage in the distribution where goods are
transferred from the hands of manufacturers
or wholesalers to the final consumers or
users. If the sales are made directly to the end
consumers it will be considered as retailing.
Retail trade performs different functions
in the distribution of goods and services,
purchasing of variety of products, arranging
proper storages and selling the goods in
small quantities and so on. &KDUDFWHULVWLFVRI5HWDLOHUV
Following are the characteristics of retail
traders
1. Retailer generally involves dealing in
a variety of items. A retailer makes
purchases from producers or wholesalers
in bulk for sale to the end consumers in
small quantities.
2. Retail trade is normally carried on in or
near the main market area.
3. Generally, retailers involve buying on
credit from wholesalers and selling for
cash to consumers.
4. A retailer has indirect relation with the
manufacturer (through wholesalers) but
a direct link with the consumers.
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6. Transportation: Retailers often carry

goods from manufacturers to their
retail outlets.
7. Financing: Some retailers grant credit
facilities to his customers and provide the
facility of return or exchange of goods.
Door delivery and after sale service are
provided by retailers
&6HUYLFHV5HQGHUHGE\5HWDLOHUV
The following are the services rendered by

the retailers.
%)XQFWLRQVRI5HWDLOHUV Services to Manufacturers and

1. Buying: A retailer buys a wide variety Wholesalers
of goods from different wholesalers Retailers provide the following services to
after estimating customer’s demand. manufacturers and wholesalers.
He selects the best merchandise from
1. Help in Distribution Retailers relieve
each wholesaler and brings all the goods
the manufacturers and wholesalers of
under one roof. So, he performs the twin
the burden of collecting and executing
functions of buying and assembling of
a large number of small orders from
goods.
various consumers.
2. Storage: A retailer maintains a ready
2. Market Information Retailer supply
stock of goods and displays them in the
valuable information to wholesalers
shop.
about changes in tastes, preferences,
3. Selling: The retailer sells the goods in fashion etc. of consumers
small quantities according to the demand
3. Large Scale Operation The
taste and preference of consumers. He
manufacturers and wholesalers are freed
employs efficient methods of selling to
from the trouble of making individual
increase his sales turnover.
sales to consumers in small quantities.
4. Grading and Packing: The retailer This enables them to operate on, at
grades the goods which are not graded relatively large scale and thereby fully
by manufacturers and wholesalers. concentrate on their other activities
He packs goods in small lots for the
4. Help in Promotion Retailers participate
convenience of consumers
in the promotional activities carried by
5. Risk-bearing: A retailer always keeps manufacturers and wholesalers such as
stock of goods in anticipation of demand short time offers, coupons, free gifts,
and bears the risk of loss due to fire, theft, sales contests, etc. Retailers help in
spoilage, price fluctuations, etc. promoting the sale of the products.
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5. Personal Attention The retailer is able 6HUYLFHVWRWKH*RYHUQPHQW

to provide more personal attention to 1. Payment of Taxes
his customers than the wholesaler is, He
Retailers collect General Service Taxes and
gives special services on the spot when
pay it to the Government which leads to
the articles require minor repairs.
increase in national income.
6HUYLFHVWR&RQVXPHUV
2. Helps in Improve the Standard of Living
A retailer provides the following services to
consumers. Retailers help the society to improve the
standard of living of people and contribute
1. Regular Supply of Goods: Retailers to economic development of a country.
maintain a ready stock of various
products of different manufacturers 3. Implementation of Government Policies
for sale to consumers. This enables the and Acts
buyers to buy products as and when Retailers implement the government
needed. policies and enforcing the acts such as
2. New Products Information: The prohibition of tobacco products, prohibition
retailers provide important information of child labour, prohibition of adulteration
about the new arrival of products considering common interest.
through their personal. Selling efforts
'LVWLQFWLRQ%HWZHHQ
and effective display of products.
:KROHVDOHUDQG5HWDLOHU
3. Credit Facilities: Sometimes retailers 1 Link: A wholesaler serves as a link
provide credit facilities to their customers between producers and retailers. On
and enable them to increase their level of the other hand, a retailer provides a link
consumption. between wholesalers and consumers.
4. Wide Selection: Retailers generally Wholesaler is the first link, whereas
keep stock of a variety of products of retailer is the last link in the chain of
different manufacturers. This enables distribution of goods.
the consumers to make their choice out 2 Scale of Operations: A wholesaler
of a wide selection of goods. carries on business on a large scale and
requires huge capital. A retailer, on the
5. Miscellaneous Services
other hand, deals generally on a small
1. Retailers provide free door delivery scale and capital invested in retail trade
services to the customers. is relatively small.
2. They provide after sale service to 3 Range of Goods: A wholesaler generally
customers. deals in one commodity. But a retailer
3. They allow cash discounts on their deals in a large variety goods and caters
sales. to the diverse needs of his end customers.
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6XFFHVVVWRU\
Dr. Arokiaswamy Velumani
Landless farmer’s son to owner of ₹2158 crores business empire. Velumani was so
poor that he sought government subsidy to go through school and college. Today,
he is the owner of the world’s largest thyroid testing company, that boasts of 1,122
outlets across India, Bangladesh, Nepal and the Middle East!
He started his career as a shift chemist at Gemini Capsules, a small pharmaceutical company in
Coimbatore, in 1979 and earned a measly sum of ₹150 every month. The curtains came down on
the company three years later and Velumani found himself without a job.
After 14 years of servitude at BARC, Velumani resigned his job. He decided to channel his expertise
in thyroid biochemistry to set up testing labs that detected thyroid disorders. With ₹1,00,000 from
his provident fund, Velumani, at the age of 37, opened a shop in Byculla, South Mumbai.
Thyrocare is worth ₹3,377 crores ( on may 2016 ) and has made its debut on Indian bourses.
Velumani owns a 64% stake in the company, which makes him worth ₹2,158 crore!
But it doesn’t end there for Velumani and his team. Thyrocare is also working towards developing
a subsidiary to focus on cancer screening through molecular imaging.
4 Dealings: A wholesaler generally sells goods

to retailers on credit. But a retailer usually
.H\7HUPV
sells goods to end consumers on cash basis.
Channel of distribution,
5 Purpose of Selling: A wholesaler
Auctioneers,
sells goods for resale. On the other
hand, a retailer sells goods for ultimate Mercantile agent, Warehouse
consumption or use. keepers,
6 Source of Supply: A wholesaler buys goods Merchant middlemen Wholesalers,
from manufacturers and their agents in large Retailers Retail trade
quantities. On the other hand, a retailer
generally buys goods from wholesalers and
their agents in small quantities.
7 Location: A wholesaler operates his )RU2ZQ7KLQNLQJ
business in big commercial cities and
expand his business to different areas. A 1. Student should visit a nearby
retailer operates in a smallest village and wholesale trade unit and watch the
also big cities and locates his business in trading activities held there.
particular place of area.
2. Student should visit a nearby two-
Concludingly channels of distribution wheeler showroom and watch which
facilitate transfer of goods and services. It type of channel of distribution
enables free flow of goods and services from followed by them.
the producer to consumers.
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)RU)XWXUH/HDUQLQJ Because it is the wholesalers who

have put in all the effect to establish
1. Student should know that there will be sales network and prepared a market
SOHO (small Office - Home Office) for new product. The company has
method that plays an important role. though verbally promised wholesalers
the exclusivity to sell, so it may not
2. Students should recognize the send good signals about the company
importance of on-line trading and in the market. The wholesalers may
develop them as per the future sell the competitors’ product more
developments in this field. aggressively, which may affect the
company’s sales adversely.
b) Values ignored are
&DVH6WXG\
1. Mutual trust
2. Integrity
A Rama industry was established to
3. Importance to relationships
manufacturer fashion shoes. Since they
were new in the market, they decided to
sell their product through wholesalers.
They appointed one wholesaler in each ([HUFLVH
district and promised them verbally
that they will remain the exclusive ,&KRRVHWKH&RUUHFW$QVZHU
wholesalers in the area. After three years
1. Trade middleman who acts as a link
during one of the review meetings the
between wholesaler and customers refers
sales manager informed that if company
to a -----------.
sells directly to retailers, they will be able
to offer competitive prices, which will a. Producer
increase sales volume and eventually b. Broker
profits. He was directly supporting c. Retailer
elimination of wholesalers. d. Customer
a. Should the company follow sales
2. Who is the first middleman in the
manager’s suggestion and start direct
channel of distribution?
business with retailers?
a. Wholesaler
b. What values would the company
b. Producer
ignore if they by-pass wholesalers to
earn extra profit? c. Retailer
d. Customer
$QVZHUV
a) No, I don’t think that company should 3. ----------buy the goods from the producer
follow sales manager’s suggestion and and sell it to the retailers.
start direct business with retailers. a. Manufacturer b. Wholesaler
c. Retailer d. consumers
237
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4. ---------- are agents who merely bring ,,9HU\6KRUW$QVZHU4XHVWLRQV

the buyer and the seller into contact. 1. Who is a middleman?
a. Broker 2. Define Wholesaler.
b. Commission agent 3. Define Retailer.
c. Selling agent 4. Who is a broker?
d. stockiest 5. What are the classifications of the
merchant middlemen?
5. Merchant middlemen can be classified
6. Who are the mercantile agents?
into ---------- categories.
a. Three ,,,6KRUW$QVZHU4XHVWLRQV
b. Two 1. What do you understand by channels of
c. Five distribution?
d. Four 2. Who is a factor?
3. Explain the types of mercantile agents.
6. Wholesalers deal in ---------------
4. Explain any three characteristics of
quantity of goods. wholesalers.
a. Small 5. What are the services rendered by the
b. Large wholesalersto the manufacturers?
c. Medium
d. Limited
1. What are the characteristics of retailers?
7. A ------------ is a mercantile agent to 2. What are the functions of Wholesalers?
whom goods are entrusted for sale by a 3. What are functions of Retailers?
principal and takes physical possession
4. Explain the services rendered by
of the goods, but does not obtain wholesalers to retailers.
ownership.
5. What are the services rendered by
a. Broker retailers to wholesalers?
b. Factor 6. Explain the services rendered to
c. Warehouse-keeper consumers by Retailers.
d. Commission agent 7. What are the factors affecting a channel
of distribution?
$QVZHUV 5HIHUHQFH
1. c 2. a 3. b 4. a 5. b 1. Gupta. C.B.‘I.S.C Commerce’ 2017

edition, S. Chand and Company. New
6. b 7. b
Delhi-64.
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UNIT VII TRADE

CHAPTER
RETAILING
24
Learning Objectives 7\SHVRI5HWDLOHUV
On the basis of the size of the business,
product mix, pricing and service level and
i. understand the meaning of retailing. ownership of the business, it can be classified
ii. describe the meaning and types of into the following categories:
retailing traders i. Itinerant or Mobile Traders, ii. Fixed shop
iii. explain the various forms of small small retailers, iii. Fixed shop large scale
scale and large scale retailers retailers
iv. state the role of chambers of commerce ,WLQHUDQWRU0RELOH7UDGHUV
in the promotion of internal trade The traders who have no fixed place of
sale are called Itinerants. They move from
one place to another place in search of
,QWURGXFWLRQ customers. They are also known as Mobile
Retailing is the process of selling the traders. Mobile traders deal in low price,
goods and services directly to the ultimate daily usable items such as fruits, vegetables,
consumers in small quantities. fish, clothing, books, etc. They require
Retailers
Itinerant Traders Fixed shop small retailers Fixed shop large retailers
a. peddlers and hawkers a. Street stalls a. departmental stores
b. street traders b. general stores, b. chain stores
c. market traders c. single line stores c. consumer cooperative stores
d. cheap jacks traders d. speciality stores d. supermarkets
e. second shops e. hire purchase and installment
f. mail order houses
g. shopping malls
h. automatic vending machines
i. telemarketing
j. Online shopping
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small amount of investment. The types of c. Market Traders

itinerants are as follows: Small traders open their shops at different
places on fixed days or dates such as every
a. Peddlers and Hawkers
Sunday or alternative Wednesdays and so
Peddlers are individuals who sell their on ( Varasandhai - weekly market). They
goods by carrying on their head or shoulders deal in one particular line of merchandise
moving from place to place on foot. and in low priced consumer items of
Hawkers are petty retailers who sell their daily use. Examples Pollchi, Manapparai,
goods at various places such as bus stop, Ranipet, etc.
railway station, Public Park and gardens,
residential areas and other public places
using a convenient vehicle to carry goods
from place to place.
d. Cheap Jacks
Those retailers who have independent shops
b. Street Vendors of temporary nature in a business locality are
The traders sit on the footpath of the road depending upon the potentiality of the area.
or at the end of the road (pavement) and sell They deal in consumer goods and services
their goods such as fruits, vegetables, books, such as shoes and chappals, plastic items,
etc. are called Street vendors. repair of watches, etc.
)L[HG6KRS5HWDLOHUV
The retailers who maintain permanent
establishment to sell their goods are
called Fixed Shop Retailers. They do not
move from place to place to serve their
customers. The fixed shop retailers can
be classified into two types on the basis
of the size of their operations. They are: a.
Fixed Shop Small Retailers and b. Fixed
Shop Large Retailers
Fixed shop small retailers are of the
following categories:
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1. Street Stalls 3. Single-line Stores

These small shop-keepers are commonly Single-line Stores are small shops which
found at street crossings or other busy street deal in a particular line of products such
corners attract floating customers and deal in as garments, stationery, textiles, medicines,
cheap variety of goods like hosiery products, shoes, etc. They are generally situated in
toys, soft drinks, etc. They get their supplies market places and deal in a variety of goods
from local suppliers and wholesalers. in that line of product.
4. Speciality Stores
Speciallity Stores deal in a particular type
of product under one product line only.
For example, Sweets shop specialised in

Tirunelveli Halwa, Bengali Sweets, etc.
5. Seconds Shops
These shops deal with second-hand goods
or used articles in a low price such as books,
2. General Stores furniture, utensils, clothes, automobiles, etc.
and also new defective goods.
General Stores sell a wide variety of products
under one roof, most commonly found in a )L[HG6KRS/DUJH5HWDLOHUV
local market and residential areas to satisfy the
The retailers having permanent
day-to-day needs of the customers residing in
establishment and dealing in large scale
nearby localities. They remain open for long
are called Fixed shop large scale retailers.
hours at convenient timings and often provide
They are popular due to urbanisation,
credit facilities to their regular customers. For
modernisation and other reasons. The most
example, a provision store deals in grocery,
common forms of large scale retailers are as
bread,butter, toothpaste, soaps, washing
follows:
powder, soft drinks, confectionery, stationery,
cosmetics, etc. 1. Departmental Stores
2. Chain Stores or Multiple Stores
3. Super Markets
4. Consumer Cooperative stores
5. Hire purchase and Instalment Traders
6. Shopping Malls
7. Mail order houses
8. Automatic Vending Machines
9. Tele-marketing
10. Online Shopping
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'HSDUWPHQWDO6WRUHV iii. Departmentally organised

A Departmental Store is a large retail Goods offered for sale are classified into
establishment offering a wide variety various departments. Each department
of products, classified into well defined specialises in one line of product and
departments. Each department specialise operates as a separate unit.
in one particular line of product aimed at
satisfying every customers’ needs under iv. Facilities provided:
one roof. Each department is like a separate It provides a number of facilities and
shop with centralised purchasing, selling services to the customers such as restaurant,
and accounting. Administrative activities rest rooms, recreation, packing, free home
of the departmental stores are managed by delivery, parking,etc.
a General Manager. The General Manager
appoints department managers of each v. Centralised puchasing
department.
All the purchases are made centrally and
directly from the manufacturers and
operate separate warehouses whereas sales
are decentralised in different departments.
$GYDQWDJHV
i. Convenience in buying
The departmental stores provide great
convenience to all the members in a
family in buying almost all goods of their
requirements at one place. A large variety of
goods available in all the departments enable
)HDWXUHV customers to save time and no need to run
from one place to another to complete their
i. Large Size: shopping.
A department is a large scale retail showroom
requiring a large capital investment by ii. Attractive services
forming a joint stock company managed by It aims at providing maximum services and
a board of directors. There is a Managing facilities to the customers such as home
Director assisted by a general manager and delivery of goods, execution of telephone
several department managers. orders, rest rooms, restaurants, salons,
children game centres, etc.
ii. Wide Choice:
It acts as a universal provider of a wide iii. Central location
range of products from low priced to very These stores are usually located at central
expensive goods (Pin to Car) to satisfy all places so that more people can approach
the expected human needs under one roof. easily.
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iv. Elimination of Middleman the customers. The salaried staff may not
A departmental store combines both the take interest in securing the satisfaction and
functions of retailing as well as warehousing. goodwill of the customers
They purchase directly from manufacturers
and operate separate warehouses. It helps v. Difficult to establish
in eliminating undesirable middlemen A large amount of capital investment and
between the producers and the consumers. a large number of specialised persons are
required to establish a departmental store.
v. Economies of Large Scale Operations
The Departmental stores are organised at a vi. High risk
large scale i.e., buy goods in bulk, therefore Due to central location and large scale
they enjoy the benefit of special discount. operations, risk of loss is very high
In turn, the customers get their goods in
quality and lower price. Change in tastes and fashion and market
fluctuations may lead to heavy loss.
/LPLWDWLRQV
&KDLQ6WRUHVRU0XOWLSOH6KRSV
i. High cost of operations
A number of identical retail shops with
A departmental store requires a large similar appearance normally deal in
building with ample parking at a central standardised and branded consumer
place. It has to incur heavy expenditure products established in different localities
on salaries, maintenance of building, owned and operated by manufacturers or
customer services, advertising, etc. As a intermediaries are called as Chain stores or
result, establishment and overhead cost of Multiple shops. In USA, these are known
operations are very high. as chain stores but these are popular as
multiple shops in Europe. They deal only in
ii. Higher prices particular line of product and specialise in
Due to high operating costs, prices of goods the same. Many such shops are in India. For
in a departmental store are comparatively example : Bata.
high. Only rich persons can afford to buy
goods at a departmental store.
iii. Distance
It is located at a central place of a city, away
from people living in suburban areas have to
travel a long distance to reach the store.
iv. Lack of personal touch

The management of a store finds it very
difficult to maintain personal contact with
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)HDWXUHV iii. No bad debts

1. Location All the sales are made in these shops on cash
These shops are located in fairly populous basis only. So, no bad debts will arise and no
localities where sufficient number of reduction of working capitals.
customers can be approached.
iv. Convenience in shopping
2. Nature of product
Shops are located in all important areas.
These shops deal in a particular product
Therefore, customers are not required to
line and specialise in the same product
travel long distances for long distances for
i.e, standardised and branded consumer
products. making purchases.
3. Centralised management v. Public confidence

The manufacturing or procurement of Multiple shops enjoy public confidence due
goods for all the retail units is centralised at to fixed prices, standard quality, uniform
the head office, from where the goods are appearance and selection of goods with the
despatched to each of these shops. help of salesmen.
4. Fixed price
/LPLWDWLRQV
The prices of goods are fixed and all sales
are made on cash basis. i. Limited variety
Multiple shops deal only in limited range of
5. Role of Sales personnel products.
The sales persons play an active role in
helping the consumers to complete their ii. Absence of services
shopping i.e., in the slection and choice of
Customers do not get credit, home delivery
their goods as per the tastes.
and other facilities.
$GYDQWDJHV
i. Economies of large scale iii. Lack of personal touch

Multiple shops are owned and operated The owner loses direct personal contact
by manufacturers or intermediaries. with the customers. The paid staffs do not
Centralised and bulk buying, results in take personal interest in each and every
lower costs. customer.
ii. Elimination of middlemen
iv. Inflexibility
Goods are sold in multiple shops at
relatively low prices. By selling directly All the branches centrally controlled and
to the consumers, it is able to eliminate uniform policies are adopted for all the
unnecessary middlemen. shops.
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6XSHU0DUNHWV &RRSHUDWLYH6WRUHV
A Super market is a large retail store selling A consumers cooperative store is a
a wide variety of consumer goods on the retail organisation owned, managed and
basis of low price appeal, wide variety and controlled by the consumers themselves to
assortment, self-service and heavy emphasis obtain products of daily use at reasonable low
on merchandising appeal. The goods traded prices. Its objective is to eliminate profits to
are generally food products and other low middlemen by establishing a direct contact
priced, branded and widely used consumer with the manufacturers. People belonging
products such as grocery, utensils, clothes, to middle and low income groups , at least
house hold goods, electronic appliances and 25 persons have to come together to form
medicines. For example : The Nilgiris a voluntary association and get it registered
under the Cooperative Societies Act.
The important characteristics of a super

market are listed below:
The capital of a cooperative store is raised by
1. Supermarkets are generally situated at issuing shares to members. The management
the main shopping centres. of the store is democratic and entrusted to
2. The goods kept on racks with clearly an elected managing committee, where one
labelled price and quality tags in such man one vote is the rule. The cooperative
stores, stores are very famous in Tamilnadu. For
example, Kamadhenu and Chinthamani
3. The customers move into the store to cooperative supermarkets in Chennai,
pickup goods of their requirements, Karpagam in Vellore, etc.
bring them to the cash counter, make
payment and take home delivery. +LUH 3XUFKDVH $QG ,QVWDOPHQW
4. The goods are sold on cash basis only. 7UDGHUV
No credit facilities are made available. Hire purchase trading is a system by which
the seller agrees to sell the articles to the buyer
5. Supermarkets are organised on
on condition that the payment of the article
departmental basis.
will be made in a fixed number of instalments
6. It requires huge investment. till the sale price is paid. Though the buyer
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gets possession of the goods immediately on The customers may be asked to make full
signing the contract the ownership does not payment in advance or at the time of receiving
pass on till the payment of last instalment. the goods In this arrangement, there is no risk
The buyer prefers to pay a lump sum or a of bad debt. Perishable goods like milk are not
part of the price initially i.e., down payment suitable for sale by mail order. Suitable goods
and the balance in instalments as per the are books, watches, etc.
contract. The seller continues to be the
owner of the article till then. If the buyer $XWRPDWLF9HQGLQJ0DFKLQHV$90
commits a default in payment, the seller is Automatic vending machine is a new form
entitled to repossess the article. It is also a of direct selling. It is a machine operated by
form of credit sale. Only durable articles coins or tokens. The buyer inserts the coin
like television, air conditioner, refrigerator, or the tokens into the machine and receives
washing machines, etc., are suitable for hire a specified quantity of a product from the
sale. machine. AVMs are placed at a convenient
location such as railway stations, airports,
Instalment system is a type of purchase in
petrol pumps, etc.
which the price amount of the product is
not paid initially but in instalments. It is also
called as deferred payment system. Under
this system, title or ownership of articles as
well as possession is passed on to the buyer
as soon as the first instalment is paid. On
default of payment, the seller cannot seize
the article but recover the dues through
court.
0DLO2UGHU+RXVHV
Mail order houses are the retail outlets that
sell their merchandise through mail. There
is generally no direct personal contact
between the buyers and the sellers in this
type of trading. Example Aavin Dairy Milk through AVMs
3URFHGXUH 6KRSSLQJ0DOOV
1. Advertisements provide information Shopping malls are developed due to
about the products to consumers change in departmental stores in modern
time. A shopping mall functions in a
2. Order receiving and processing
multi-storey building. Many small to big
On receiving the orders, the goods are shops are commenced under the separate
sent to the customers through the post ownership. Various types of branded
office by Value Payable Post (VPP). goods of daily requirement and luxurious
3. Receiving Payments products are available.Modern facilities
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such as refreshment hall, entertainments for the products of competitors by observing

children, wi-fi, auditorium, etc. are provided such advertisements and select the product
in shopping mall. through internet and make the payment
through online or cash on delivery.
For example, FORUM in Chennai.
7HOH0DUNHWLQJ
Telemarketing can be divided into two
parts.
i. Telephonic Marketing
Potential Customers are contacted through
telephone or mobile to provide information
about the products. Willing customers visit
the office and place the orders. This method
is useful for loan, financing, insurance Because of the absence of middlemen,
services, credit card, etc. No middlemen in showroom expenses, etc. products are available
this marketing and cost reduced accordingly. at cheaper price in comparison to local market.
Customers also get after sales services.
ii. Television Marketing
5ROHRI&KDPSHUVRI
In this method, customers are attracted &RPPHUFHDQG,QGXVWU\
by providing full information of product $VVRFLDWLRQV
or service through TV demonstrations.
The Chamber of Commerce and Industry is an
Customers are given either phone number
association of business and industrial houses
or name of the website to place the order.
like merchants, financiers, manufacturers,
Payments for these products are made
etc. in a locality, region, or state. The main
through two methods.
objective of these associations is to promote
i. Advance payment by debit/credit card. ii. and protect the interest and goals of Indian
Payment in cash at the time of delivery. commerce and industry. These associations
are non-profit making organisation and its
For example- Tablemate and other home
members are institutional members.
appliances
)XQFWLRQV
2QOLQH 6KRSSLQJ RU ,QWHUQHW
0DUNHWLQJ 1. They act as national guardians of trade,
commerce and industry.
The manufacturers or the intermediaries
place the advertisement of their products 2. They act as a catalyst in strengthening
on different media of internet like e-mail, the internal trade of the country.
portal and browser. Sometimes, they have 3. Interact with Government with regard
their own website like Flipkart, Amazon, to formulation and implementation of
Snapdeal. etc. The customers compare related policies.
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$VVRFLDWLRQVRU&KDPEHUVLQ,QGLD vi. Labour legislation

a. Federation of Indian Chambers of They interact with the Government on
Commerce and Industry (FICCI), New regular basis and the issues related to labour
Delhi. laws, retrenchments, compensation, etc.
b. Associated Chamber of Commerce and so that the industry can run efficiently,
generate employment and achieve maximum
Industry (ASSOCHAM)
productivity.
c. Confederation of Indian Industry (CII)
d. Madras Chamber of Commerce, .H\7HUPV
Chennai.
Peddlers Cheap jacks
e. Tamil Nadu Traders Associations. Speciality stores Hawkers
Seconds shop Chambers of commerce
5ROHRI$VVRFLDWLRQVRU&KDPEHUV
i. Transportation or inter-state movement

)RU)XWXUH/HDUQLQJ
of goods
The Chambers facilitate registration There are about two lakh retailers in Tamil
of vehicles, surface transport policies, Nadu. About one lakh in Chennai city.
construction of highways and roads in There was an abortive move in 2012 to
promoting interstate movement of goods. invite FDI in retail sector by the central
government.
ii. Harmonisation CGST and SGST
structure What is your opinion?
iii. Marketing of agro products and related

issues )RU2ZQ7KLQNLQJ
The associations of agriculturists and 1. Many products are available near the
other federations interact with farming residence of people.How do these
cooperatives to streamline local subsidies products reach the shops from the
and formulate marketing policies for selling manufacturers?
agro products. 2. Identify various fixed shop retailers in
your locality and classify them according
iv. Weights and measures and prevention to the different types you have studied.
of duplication of brands 3. Do you know any retailer selling second-
They help the Government in formulation hand goods in your area? Find out the
and implementation of uniform policies in category of the product that they deal in?
weights and measures and prevention of Which products are suitable for resale?
duplication of brands. List out some of your findings. What
conclusions do you draw?
v. Promoting sound infrastructure 4. From your own experience, compare
the features of two retail stores selling
They interact with Government to construct
the same type products.
roads, ports, electricity, railways, etc.
248
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([HUFLVH 1. What is Retailing?
,&KRRVHWKH&RUUHFW$QVZHU 2. State the meaning of multiple shops.
3. Mention any two benefits of Vending
1. Retailers deal in ____________ quantity
machines.
of goods
4. What are specialty stores?
a) Small
b) Large ,,,6KRUW$QVZHU4XHVWLRQV
c) Medium 1. Explain the features of general stores.
d) Limited 2. Give any four points of distinction
2. Small scale Fixed retailers include between hire purchase system and
__________ installment system of selling.
a) General stores 3. Explain the characteristics of super
markets.
b) Pedlars
4. What is meant by ‘mail order retailing’?
c) Cheap Jacks
d) Hawkers ,9/RQJ$QVZHU4XHVWLRQV
1. State the features of Departmental

3. Small shops which deal in a particular
stores.
line of products are called as _______
2. What is meant by Consumer Cooperative
a) Market traders
Store? Explain its merits in brief.
b) Single line stores
3. Describe the role of chambers of
c) Sugar market
commerce in promotion of internal
d) Street stalls trade.
4. _____are mobile traders who deal in 5HIHUHQFH
low priced articles with no fixed place of
1. JagdishBhagwati2013,Free Trade Today,
business.
Fifth Edition, Sultan Chand & Sons, New
a) Shopping malls
Delhi.
b) Super markets
2. Bhatia. S. C. 2018, Retail Management,
c) Street stalls Atlantic Publishers and dist.
d) Itinerant traders 3. www.schools.aglasem.com
$QVZHUV
1. a 2. a 3. b 4. d
249
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CHAPTER
25 INTERNATIONAL BUSINESS
Learning Objectives
To enable the students to Literature. There were regular Trade
i. explain the meaning of international Routes across the seas to the distant Jawa
business and Sumatra islands in the east and up to
ii. state as to why international business the Arabian Peninsula in the west. But the
takes place and how does it differ volume of such trade was insignificant and
from internal trade continued to remain so small all through
the middle ages and right up to the advent
iii. describe the scope and benefits of
of the British rule in India. It is only after
international trade
the establishment of the British rule in India
iv. discuss the different types of that India’s foreign trade took a definite
international trade shape.
,QWURGXFWLRQ
The previous chapter deals with internal
trade and various types of internal trade
in detail. The present chapter presents the There are some routes of International
basic aspects of international business. It Business before 18th century 1. Salt
enlightens the students on the difference Route-India to Egypt 2.Silk Route-
between internal trade and international China to India 3.Spice Route-India to
business, types of international business, Europe
the advantages and disadvantages of
international business. Let us first shed
light on the meaning and definition of
international business. India’s international
trade is not of recent origin. The various
pieces of literature bear enormous evidence
about India’s foreign trade with other
countries. Evidences about our international
trade are found in the ancient literature of
our country particularly in our Sangam
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International trade has become inevitable all natural resources required for its
after the second world war since no country people. Due to varying climatic conditions
remains self sufficient in terms of all prevailing across the world certain resources
natural resources available therein. In other are abundantly available in some countries,
while these resources may not exist or may
not be available to the required extent in
&KRODDQG)RUHLJQ7UDGH
other parts of the countries. This situation
The Cholas excelled in foreign trade paves way for international business. In
and maritime activity, They extended other words countries with surplus resources
their influence overseas to China and have to exchange them with other countries
Southeast Asia.Towards the end of the 9th for its deficit resources. For example, Gulf
century, Southern India had developed countries are super rich in petroleum
vast extensive maritime and commercial resources but they do not have any other
activity. The South Indian guilds played a essential resources needed for human
major role in interregional and overseas existence. Hence they have to exchange the
trade. The best known of these were surplus petroleum resources to buy other
the Manigramam and Ayyavole guilds. essential resources from other countries
The encouragement given by the Chola where they are available abundantly.
court gave impetus to the expansion
of Tamil Merchant Associations such as Similarly some advanced countries produce
the Ayyavole and Manigramam guilds in goods and services of good quality at
Southeast Asia and China. The Cholas, affordable prices using sophisticated
being in possession of ports of both the techniques. The developing countries
west and the east coast of peninsular and least developed countries cannot
India, were at the forefront of these afford to produce those goods with their
ventures. limited technical knowhow. In such a
case international business enables these
words no country is currently functioning countries to buy those goods from advanced
independently as a closed system. Even the countries. This makes it necessary for
socialistic countries like U.S.S.R. China, etc., international business
are now taking concrete steps to capture
In short uneven distribution of
foreign markets for the product abundantly
natural resources across the world
produced in their countries. International
and specialisation attained by certain
trade has become a part and parcel of our
countries in the production of certain
normal economic life of any country.
products push those countries to exchange
goods and services with one another. This
1DWXUH RI ,QWHUQDWLRQDO
exchange a warrants International trade
%XVLQHVV
or International business.
Countries across the world are endowed
with natural resources of various kinds. Today we live in a world where the obstacles
But no single country uniquely possesses to the exchange of the goods and technology
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have been substantially reduced. Due to Company(TNC). These companies operate

advancement of technology the national on the principle that the world is their field
economies are increasingly becoming of operations. For example. Shell, Unilever,
borderless and getting progressively Nestle, etc., operate on the philosophy of
integrated into the world economy. The “global corporation”. They cannot be labeled
contemporary world is called as ‘global as French or German or Dutch or Swiss
village’. Business in today’s context is not company. These companies have no real
restricted to the mere boundaries of the domestic market. People of many different
country but also expands to boundaries nationalities are managing and operating
of the several other countries. Due to these corporations on a day to day basis. Their
tremendous development in the information products and services are sold around the
and communication technology (ICT ) and world through their operating subsidiaries
rapid advancement in transportational functioning in various countries.
system more and more firms engage in
International business involves transactions
international business which presents them
across the national boundaries. It includes
with numerous opportunities for their faster
the transfer of goods, services, technology,
economic growth and increased gains.
managerial knowledge and capital to other
India has been trading with other countries countries. Although business has been
fairly for a long period of time. It has played conducted on an international scale for many
a vital role in international business from the years, international business has gained more
ancient period. But it has of late considerably significance only in recent years because of the
speeded up the process of integrating with emergence of multinational corporations in
the world economy and phenomenally some of the developing countries.
increased its foreign trade and investments.
Meaning
&RQFHSW 0HDQLQJ DQG International business denotes all those

'H¿QLWLRQ RI ,QWHUQDWLRQDO business activities which take place beyond
%XVLQHVV the geographical limits of the country.
It involves not only the international
&RQFHSWRI,QWHUQDWLRQDO%XVLQHVV movements of goods and services, but
Today business is growing globally and the also of capital personnel, technology
need for profit is pushing a large number of and intellectual property like patents,
business firms into world markets beyond trademarks, know-how and copy rights.
their historical and traditional boundaries. 'H¿QLWLRQ
A global corporation is gaining an increasing
Roger Bennet defines, International
acceptance in the business community business involves commercial activities that
compared to corporations operating within cross national frontiers
the geographical limits of a country. These
companies are termed as Multi National According to John D. Daniels and Lee
Corporations (MNC) or Trans National H. Radebaugh, International business
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0HWKRG RI &RQGXFWLQJ

,QGLD HPEDUNV RQ WKH SDWK WR ,QWHUQDWLRQDO%XVLQHVV
*OREDOLVDWLRQ
International business has entered 1. Exporting and Importing
into a new era of reforms. India too Exporting denotes selling of goods and
did not remain cut-off from these services from the home country to a foreign
developments. India was under severe
country. Similarly importing refers to
debt trap and was facing crippling
purchasing of products from foreign country
balance of payments crisis. In 1991, it
and bringing them into home country
approached the International Monetary
Fund (IMF) for raising funds to tide
over its balance of payment deficit. IMF 2. Contract Manufacturing (or)
agreed to lend money to India subjects Outsourcing
to the conditions that India would It connotes a type of international business
undergo structural changes to be able where a firm enters into a contract with
to ensure repayment of borrowed fund. one or a few local manufacturers in foreign
India had no alternative but to agree countries in order to get certain components
to the proposal. It was the conditions of goods produced according to its
imposed by IMF which more or less specifications. It is also called outsourcing
force India to liberalise its economic or contract manufacturing
policies. Since then a fairly large amount
of liberalization at the economic front 3. Licensing and Franchising
has taken place. Though the process
of reforms has somewhat slowed Licensing is contractual agreement wherein
down. India is very much on the path one firm grants access to its plants, trade
to globalization and integrating with secrets or technology to another firm in a
world economy. While, on the one foreign country, for a fee called royalty, e.g.
hand, many multinational corporations McDonald, Pisa Hut, etc., The firm which
(MNCs) have ventured into Indian grants such permission is called Licensor
market for selling their goods and or Franchisor and other firm to whom
services, many Indian companies too the license is granted is called Licensee or
have stepped out the country to market Franchisee
their goods and services to consumers
in foreign countries 4. Joint Venture
A Joint venture is a business agreement
is all business transactions-private and wherein parties agree to develop a new entity
governmental- that involve two or more and assets subscribing to equity shares and
countries. Private companies undertake thereby exercising control over enterprise
such transactions for profits, governments and consequently sharing revenues,
may or may not do the same in their expenses and the assets. It can be established
transactions. under three different ways namely
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1. Foreign Investors buying an interest in (d) Exposure to Risk.

local company International business imposes huge
2. Local firm acquiring an interest in the risks on the parties thereto due to long
existing foreign firm distances, fluctuation of value of currency,
3. Both the foreign and local firms jointly obsolescence, sanctioned, war, etc.,
forming a new enterprise.
(e) Heavy Documentation Work.
5. Foreign Direct Investment (FDI)
International business necessitates
FDI means investment made by a company fulfillment of a lot of formalities. Parties
or individual in one country in the business to international business have to execute
interest in another country in the form of a number of documents in the matters of
either establishing new business operations conducting International business.
or acquiring business assets in the other
country
(f) Difference in Economic Environment.
)HDWXUHV RI ,QWHUQDWLRQDO
The economic environment of countries
%XVLQHVV
involved in international business differs
The following are the features of significantly in terms of legal framework,
international business institutional set-up, monetary fiscal and
commercial policy, resources availability,
(a) Involvement of Countries.
production techniques, etc.,
International business can take place only
when transactions occur across different
5DWLRQDOH%HKLQG
countries
,QWHUQDWLRQDO%XVLQHVV
(b) Use of Foreign Exchange.

i. Unequal Distribution of Natural
Where countries trade with one another, it Resources.
has to exchange the goods and services on
Countries across the world are not endowed
the basis of foreign currency.
with the natural resources of various types
equally and equitably. In other words, the
(c) Legal Obligations. natural resources are unevenly spread
Foreign trade is to be conducted strictly across the various nations. As a result the
in accordance with the export and import countries having surplus resources have
policy of the country concerned. The consent to exchange it for those resources which
of the government is to be mandatorily are not available in their home country.
obtained with reference to export and This uneven distribution of resources
import of certain goods and services. Thus worldwide makes it necessary the
government intervention is direct in respect exchange of goods among the countries
of international transactions. through international business.
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ii. Uneven Availability of Factors of and producing textiles and machinery;

Production. Tirupur specialises in manufacturing
The availability of various factors of hosiery products This specialisation paves
production namely, land, labour, capital way for large scale production of specialised
and technology for producing goods and items. International business transfers the
services differ among different countries. abundant surplus to other countries which
International business moves the surplus do not have these specialised goods or
factor in one country over to another products
country where it is in short supply. Therefore
international business is necessary. iv. Cost Benefit.
Production cost varies significantly among
iii. Specialisation. the countries due to difference in socio-
Certain countries or some geographical economic, geographical, demographical,
areas of a certain country specialize in the technical and political environments
production of goods and services due to some prevailing therein. As a result some countries
natural advantages like abundant availability are in a better position to produce some
of skilled labour, favorable climatic goods more economically and efficiently
conditions, availability of natural resources, than other countries. This makes the firms
technical know-how, etc., For example, In engaged in international business import
India Coimbatore specilises in cotton textiles the goods available at lower prices from
'L໤HUHQFHV%HWZHHQ'RPHVWLF%XVLQHVVDQG,QWHUQDWLRQDO%XVLQHVV
Basis Domestic Business International Business
1. Meaning Domestic business refers to International business refers
business transactions transacted to the business transactions
within the geographical transacted in beyond the
boundaries of a country boundaries of a country
2. Participants in People / organizations within the People/organizations outside the
Business country participate in business country participate in business
activities activities
3. Mobility of Factor of The factors of production i.e. The factors of production i.e.
Production labour,, capital, technology, labour,, capital, technology,
material, etc., move freely within material, etc., move across the
the boundaries of the country boundaries of the country.
4. Nature of Consumers Consumers are relatively Consumers are relatively
homogenous in nature in terms heterogeneous in nature in
of culture, behavior ,taste, terms of culture, behavior ,taste,
preferences, legal system, customs preferences, legal system, customs
and practices, etc., and practices, etc. prevailing
across the countries,
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5. Business System Domestic business is governed by International business is governed

the rules, laws, policies taxation by rules, laws and policies ,tariffs
system of a single country and quotas etc., of multiple
countries
6. Currency Used Domestic business transactions International business
are settled by local currency of a transactions are settled by foreign
country. currencies.
7. Mode of Transport The goods involved in domestic The goods involved in
business are mainly transported international business is mainly
by roadways and railways. transported by water and airways.
8. Risk Exposure The risks involved in domestic The risks involved in
business are relatively less. international business are more
due to distance, difference in
socio-economic and political
conditions. change in foreign
exchanges value, etc.,
9. Scope of Market The scope of market is limited to The scope of international
national boundaries of a country. business is very wide and extends
beyond the frontiers of a country.
10. Payment of Excise Payment of excise duty involves The process of payment of excise
duty simple procedures and it is is complicated in international
relatively low in domestic trade business and the rate of excise
duty is relatively high.
other countries and export the goods which These trades are briefly stated hereunder
bring them better prices to other countries.
A) Export Trade
7\SHVRI,QWHUQDWLRQDO When the firm of country sells goods and
%XVLQHVV services to a firm of another country it is
On the basis of sale and purchase of goods called export trade. Export trade indicates
and services, international trade can be selling of goods and services from the home
divided into three kinds. They are export country to a foreign country. For Example;
trade, import trade and entrepot trade. It the sale of handicraft, leather products,
has been exhibited in the chart drawn below electronic goods, herbal products, etc., by
Indian company to other countries is known
1.EXPORT TRADE
as export trade.
2.IMPORT TRADE %,PSRUW7UDGH
When the business firm of a country

purchases goods from the firm of another
3.ENTREPOT TRADE country it is called import trade. Importing
means purchase of foreign products and
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bringing them into one’s home country. For c) There may not have any bilateral trade
example when Indian enterprise purchases agreement between both the country
petroleum products, electrical goods, d) Importer and exporter may not share
machinery, and medical equipments etc., good economic relation with each other
from other countries, it is termed as Import
Trade )HDWXUHVRI(QWUHSRW7UDGH
The following are the special features of

C) Entrepot Trade Entrepot trade
When the firm of country imports goods
a) Import duty is not levied on such goods
for the purpose of exporting the same goods
to the firms of some other country with or b) These goods are reprocessed and
without making any change in the goods repacked for re- export
meant for export it is known as entrepot c) Such goods are kept in the Bonded
trade warehouse till they are re-exported.
For example, If an Indian company imports
$GYDQWDJHVDQG
crude oil from Iran and exports it as
'LVDGYDQWDJHVRI
petroleum after refining it in India, to Nepal
,QWHUQDWLRQDO%XVLQHVV
it is called Entrepot trade. In this context
crude is converted into petrol and exporter $GYDQWDJHV
as petrol to Nepal
1. Geographical Specialization
Now you must be thinking why India comes Countries across the world differ
between Iran and Nepal. Why does not significantly in terms of natural resources,
Nepal directly import crude oil from Iran?. capital equipment, manpower, technology
Let us explore what could be the possible and land and so on. Some countries are
reasons for this. rich in mineral resources hydro-electric
power metallic resources, and so on while
1HFFHVVLW\IRU(QWUHSRW7UDGH some other countries may possess advanced
A country cannot import goods directly technique of manufacturing, efficient
from the others because of the following working population, capital equipment and
reasons. so on. International business is required to
exchange the surplus resources resulting
a) The country may not have any accessible from geographical specialisation for deficit
trade routes connecting the importing resources in other countries
country
b) The goods imported may require 2. Optimum use of Natural Resources
further processing or finishing before International business operates on a
exporting, and these facilities may be simple principle that a country which can
lacking in the exporting or importing produce more efficiently and trade the
country surplus production with other countries
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has to procure what it cannot produce 6. Price Equilisation

more efficiently. This enables the countries International business helps to stabilize the
to optimally utilize the scarce resources prices of various commodities which are
available with them fluctuating on a daily basis in the world
market. Whenever the price of a commodity
3. Economic Development. rises sharply in a particular country, the
International business helps the developing same commodity is imported from some
countries greatly in achieving rapid other foreign countries to prevent the
economic development by importing sharp rise in prices in the home country.
machinery, equipment, technology, talent, Thus international business prevents
and so on. For example., China, India, Brazil violent fluctuations of prices of various
and South Korea which were once slower in commodities and helps maintain prices of
their economic development are achieving various commodities at stable level in each
faster economic development due to and every country.
international business. Even the developed
countries like Japan, USA, UK, etc., have 7. Prospects for Higher Profit.
achieved remarkable economic progress
through the import of raw materials and International business helps the firms which
export of manufactured goods. produce goods in excess to sell them at
relatively higher price to various countries
in the international market. This enables
4. Generation of Employment.
them to earn higher profit.
International business generates
employment opportunities by assisting 8. Capacity Utilisation.
the expansion and growth of agricultural
and industrial activities. It provides direct International business enables the firms
employment to those people who are across the country to sell their goods and
hired by export and import firms and services on a large scale in the international
generates indirect employment to number market. As a result their machinery and
of intermediary firms like, clearing and equipments are used to their full capacity.
forwarding agent, indent houses transport In short very prospect of selling goods
organizations, outsourcing agencies, etc. in international market besides selling
the goods in home market keeps the
5. Higher Standard of Living. machineries, tools, equipment, and factory
fully engaged all through the year.
On account of international business,
the citizens of the country can buy more
9. International Peace.
varieties of goods and services which
cannot be produced cost effectively within International business makes countries
the home country. This exchange of goods across the world become inter-dependent
and services among the countries enhances while these countries are independent in their
the standard of living of people. functioning. This facilitates the exchange of
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culture, ideas and mutual understanding. It 5. Misuse of Natural Resources.

develops and strengthens cultural and social Excessive export of scarce natural resources
relations among the people of different to various countries across the world may
countries. All these collectively contribute lead to faster depletion of the resources
to maintain international peace. in the exporting countries. This in turn
may bring about ecological disaster in the
'LVDGYDQWDJHV
country from which it is exported.
1.Economic Dependence.
6. Political Exploitation.
International trade is more likely to make
the country too much dependent on imports International business may create economic
from foreign countries. The former may not dependence among the countries which
take any efforts to produce goods and services may threaten their political independence.
indigenously to substitute imported goods and The MNCs may influence the policy
thus becoming self sufficient. As a result the decision of the government to their favour.
importing country may become economically In due course of time they may dictate terms
slave to exporting country and end up to administrators of nation by the sheer
becoming colony of the exporting country. strength of their money power. For example
Britishers came to many countries as mere
traders and ultimately colonized those
2. Inhibition of Growth of Home
countries and ruled them for centuries.
Industries.
International business may discourage the 7. Rivalry among the Nations.
growth of indigenous industry. Unrestricted
Acute competition for exports may lead to
imports and severe competition from foreign
rivalry among the nations. This may lead to
companies may ruin the home industries
conflict of interest among the countries and
altogether.
end up in wars among them.
3. Import of Harmful Goods. 8. Invasion of Culture.

International business may lead to import of International business may result in invasion
luxurious goods, spurious goods, dangerous of country’s culture. Younger generation is
goods, etc. It may harm the well-being of more likely to imitate foreign culture and
people. buy goods and services beyond their means
to gain acceptance in the affluent section
4. Shortage of Essential Goods in Home of society. This will ruin the conventional
Country. lifestyle of the society.
Moreover the export of essential commodities
out of the greed of earning more foreign .H\7HUPV
exchange may result in absolute shortage of International business Export Trade
these goods at home country and people may Import Trade Specialization
have to buy these commodities at exorbitant Natural resources Entrepot
price in the local market.
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4. Selling of goods from home country to

)RU)XWXUH/HDUQLQJ foreign country is called
(a) Home Trade (b) Entrepot Trade
1. Scope of international business (c) Foreign Trade (d) Joint Venture
2. Wide range of international business $QVZHUV
1.a 2.c 3.b 4.c
)RU2ZQ7KLQNLQJ
1. What do you mean by international
Take interest in export or import trade business?
Try to become exporter 2. What is meant by Export Trade?
3. What is meant by Import Trade?
4. What is meant by Entrepot Trade?
([HUFLVH
5. Give any two reasons for International
Business.
1. Movement of goods , services, intellectual ,,,6KRUW$QVZHU4XHVWLRQV

property, human assets, technology and 1. Describe importance of the external
so on among the countries. trade to an economy
(a) International Trade 2. What is the necessity for entrepot trade?
(b) International business 3. What are the limitations of international
(c) Entrepot Trade business?
(d) Internal trade
2. Goods are imported for purpose of re- 1. List out the advantages of international
export to another country is termed trade
as_________. 2. Enumerate the disadvantages of
(a) Import Trade international trade
(b) Export Trade 3. Distinguish between internal and
(c) Entrepot Trade international trade
(d) International trade 5HIHUHQFH
3. Movement of goods , services among 1. Hand book of Business studies by Preeti
the countries. Sharma Arihant Prakhashan Meerut
(a) International Trade 2. ISC Commerce by S B Gupta - S Chand’s
(b) International business Company Ltd New Delhi.2017
(c) Entrepot Trade 3. International Business by Aswathappa –
(d) Internal trade McGraw Hall
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CHAPTER
26 EXPORT AND IMPORT

PROCEDURES
Y@Þ[GY@ÞPTåY@Jå¯[L2á[G
6ãNPTå6ãNÝY>TNà ᾁ‫῀ܩ‬
Couplet:
The method of performance for one who has begun an act is to ascertain the mind
of him who knows the secret thereof.
Learning Objectives sides of the same coin of international trade.

In other words the countries have to buy the
To enable the students to goods which are either not available or not
i. explain the need and importance of adequately available in home country and sell
export trade the surplus goods/ services produced by it to
ii. describe the various procedures other countries which need them utmost. In
followed in the export trade short each and every country has to export
iii. state the role of intermediaries of surplus goods and import the deficit goods.
export trade In this process, it earns precious foreign
iv. explain the various procedures exchange and use the foreign exchange thus
followed and intermediaries earned for import goods which cannot be
involved in import trade produced or adequately produced in the
home country.
26.01 Export Trade. Developing countries like India, Bangladesh,
Exports have attained greater importance in South Korea and so on require substantial
the contemporary world. It has emerged as amount of foreign exchange in order to
one of the vital indicators of a nation’s social, acquire machineries, equipment, raw
economical and political growth. No country materials, petroleum products, mineral
in the world can produce all the goods and resources, technical know-how, managerial
services it required. They have to inevitably talents and so on for their faster economic
buy and sell from one another. Therefore development. Government of India has
countries have to engage in international initiated several steps to encourage exports.
trade. Export and import represent two It has been promoting export by providing
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cash incentives, tax incentives and relief, exhibitions too are organized for promoting
institutional support, concessional interest international business. The Government of
rate, infrastructural assistance, loan India has set up several institutions for the
assistance, tax exemptions, tax holidays purpose of promoting exports.
and transport concessions, etc., Trade
Export and Import Bank
delegations are sent abroad to explore export
(EXIM Bank)
potential for various products and services
in various countries across the world. Export and Import Bank which is one of
Bilateral trade agreements are entered into the specialized financial institutions wholly
with foreign countries which offer bright owned by Government of India was set up in
prospects for export. Besides trade fairs and the year 1982 for financing, facilitating and
Institutions for promoting International Business In India.
Institution for promotion of

Purpose
International Business
1. Department of Commerce Formulations of policies for promotion of international
business and establishment of commercial relations with
other countries. Initiating export promotion measures.
Developing and Regulating of export-oriented units
2. Export Promotion Council Promotion and Development of certain export
(EPC) commodities
3. Export Inspection Council(EIC) Developing export trade through quality control and
pre-shipment inspection
4. Indian Institute of Foreign Trade Providing training to people involved in international
business and conducting research in the areas of
international business
5. Indian Institute of Packing.(IIP) Training in the art of packaging and testing
6. Commodity Board Promoting of production of traditional commodities in
the export
7. India Trade Promotion Organising trade fair and exhibition and Developing
Organisation (ITPO) export of new item and providing updated commercial
and business information
8. State Trading Corporation(STC) Promoting trade among different partners of the world
9. Metals and Minerals Trading Handling export of primary products like, coal, iron, ore,
Corporation (MMTC) manufactured agro and industrial products agricultural
fertilizer and so on.
10. Export and Credit Guarantee Providing export credit insurance support to Indian
corporation (ECGC) exporters
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promoting foreign trade of India. The main on the basis of exports orders and letter of
objective of EXIM bank is to co-ordinate the credit opened in favour of overseas buyer
various activities of institutions and bank
engaged in financing foreign trade. Post-Shipment Financial Assistance.
Main Functions of EXIM Bank Post-shipment financial assistance is an
assistance granted in the form of advances
Main functions of EXIM bank are listed
on the basis of bills of exchange and
below
shipping documents drawn under letters of
1. It provides direct financial assistance credit. This type of export finance is granted
to exporters of plant, machinery, and right from the date of shipment of the goods
related services. to date of realization collection of export
proceeds for the purpose meeting capital
2. It underwrites the shares, debentures
need, paying insurance charges. ECGC
and bonds of the companies engaged in
premium commission and brokerage to
exports
agent export promotion expenses and so on
3. It provides re-discount facility in respect and so forth.
of export bills for a period not exceeding
90 days against short-term export bill
discounted by commercial bank. Objectives of Export Trade
4. It gives overseas buyer credit to foreign The important objectives of the export
exporters for the import of Indian capital include the following.
goods which are used for manufacturing 1. Facilitating selling of goods to countries
export products. which desperately need such goods
5. It finances export- oriented industries.
2. Expanding the market for goods by
6. It collects and provides market and credit producing them on a large scale.
information about foreign trade to those
engaged in international business. 3. Earning foreign exchange through
exports
Role of Commercial Bank in
4. Helping a country increase the national
International Business
income
Commercial banks provide financial
assistance in two ways, namely, pre- 5. Creating employment opportunity in
shipment financial assistance and post- a country by promoting of export -
shipment financial assistance. oriented and export related enterprises.
6. Generating revenue for the Government
Pre-Shipment Financial Assistance. in the form of customs and excise duties.
This is the type of assistance given to 7. Promoting mutual understanding and
enable exporters to purchase raw materials co-operation among the nations.
process them and create finished goods for 8. Achieving optimum utilization of
the purpose of export. This credit is given
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resources by large scale production of

goods
Export Trade Procedure

An exporter has to fulfill the formalities
given below to export the goods out of the
country
1. Receiving Trade Enquiry
Exporter receives trade enquiry (written

request) from the importer / his agent who
intends to buy the product. In the first place
importer requests the exporter to supply the
information given right below.
a. Specification about the goods like, size,

design, quality and brand name.
b. Quantity of goods available.
c. Price per unit Content of an Indent
d. Terms and conditions of shipment a. Quantity of goods sent

b. Design of goods
e. Terms and conditions of payment
c. Price
f. Probable delivery time d. Nature of packing shipment
g. The period up to which his proposal to e. Mode of shipment
import is valid. f. Period of delivery
g. Mode of payment
2. Receiving Indent and Sending
Confirmation
After the scrutiny of quotation / proforma Indent is prepared in duplicate. One copy
invoice, the buyer who intends to buy the of the indent is sent to the exporters and
goods sends an indent to exporter. The latter second one is retained by the importer and
may either receive the order directly from the kept in his records. There are three types of
indent, namely open indent, closed indent
importer or through an agent who acts as an
and confirmatory indent.
intermediary between the exporter and the
importer. The agent receives commission A. Open Indent
for this intermediating service. An indent
actually points to an order received from It gives complete freedom to exporter to
abroad for export of goods. i.e. sale of goods. choose type of goods, price, quality, method
The indent contains the details in the box. of packing etc.,
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B. Closed Indent Letter of Credit (LC) is an undertaking by its

It does not give any freedom to exporter. issuer (importer’s bank) that bills of exchange
Importer specifies climates the type of drawn by the foreign dealer on the importer
will be honoured upon its presentation by
goods, price, quality, packing method, and
exporter’s bank up to a specified amount. In
so on which should be strictly observed by
other words it simply represents a guarantee
the exporter.
given by the importer bank to the foreign
dealer (exporter) that the amount in the bill
C. Confirmatory Indent will be honoured upon its presentation by
An indent is to be confirmed by importer/ the exporter /his agent. There are different
his agent and the final indent is sent by types of letter of credit.
importer thereafter.
Letter of Credit is opened only for well-
established and reputed importer. It is
3. Arranging Letter of Credit
beneficial both to the exporter and importer.
Under this stage exporter intends to satisfy Exporter is assured of payment and need not
himself/herself about the trust worthiness bother about credit worthiness of importer.
of the importer. In this case the exporter is The letter of credit simply transfers the
requested to arrange a letter of credit in his burden of settling the transactions to the
favour. bank
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4. Obtaining Importer Exporter Code The exporter proceeds to collect the

(IEC) and RBI code Number goods from the factory or purchase it
Exporter has to apply in Ayaab Niryatt Form from the market. These goods have to be
2A(ANF2A) to the Regional Authority of the packed as per the specifications given by
Director General of Foreign Trade (DGFT) the importer. Where such instructions
in the region where the registered office of the are not specifically given by the importer,
company is located. Exporter has to mention the goods can be packed keeping in
the number in all the shipping documents. mind the safety and freight charges in
However IEC number is not required where respect of the consignment. The goods
the goods are exported/imported for the packed are marked distinctly to facilitate
personal use of importer and not for trade/ easy identification of goods of specific
manufacture or agriculture purpose. importer. The markings reveal the name
of the importer, port of destination and
5. Obtaining Registration cum
weight of consignment.
Membership Certificate (RCMC) from
Export Promotion Council /Commodity
7. Export Inspection Certificate
Board
After the goods have been packed as per the
An Exporter is required to obtain RCMC
specifications of importer, the exporter has
from Export Promotion Councils/
to apply to the Export Inspection Agency
Commodity Board/Development
(EIA) or other designated agency in this
Authority in order to avail himself/herself
connection The agency sends an inspector
of export incentives, concessions, and
other facilities offered by Government e g.
cash compensatory support and benefit of
promotional scheme from Government.
6. Manufacturing /Procuring Goods and
Packing items
Exporters steps into manufacturing

and procuring of goods required by the
importer. Where the materials required
for manufacturing of goods are subject to
excise duty. the exporter has to apply to
Export Commissioner for exemption from
excise duty if the goods are meant for export
along with the invoice AR4/AR5 and other
documents. The Excise Commissioner
would issue excise clearance certificate if he
is satisfied with the documentation made
by exporter. If the exporter has already
paid excise duty, he can get refund from the
Directorate of Drawback functioning under
the Ministry of Finance.
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to inspect the consignment meant for to importer, This certificate helps the
export. If the inspector is satisfied with the importer to get concessions on import
packing he/she issues certificate mentioning duty on the goods imported based on the
that goods exported adhere to specification bilateral trade agreement between the
made by the exporter. This certificate is countries.
termed as Export Inspection Certificate. It is
required by the customs authorities for the 10. Consular Invoice
shipment of goods. Where the customs duties are charged
on the basis of value of goods at import’s
8. Insurance of Goods
port(ad-valorem basis), the customs officers
Exporter has to arrange for getting the are empowered to open the consignment
goods insured to protect them against the to calculate duties. In order to avoid this
various risks like deterioration, collision, problem exporter obtains consular invoice
immersion, fire, entry of sea water etc., as and sends it over to the importer.
per the instructions of importer if any.
This document is signed by the consul of
9. Certificate of Origin. importer’s country stationed in exporter’s
country. Hence customs officer at the port of
Import regulation of foreign countries may
destination will not open the consignment
require that all this import consignments
and simply access customs duty based on the
must accompany a certificate of origin.
value declared in the invoice. They simply
This certificate certifies that goods which
accept the invoice as true statement of the
are exported have been manufactured in
content of the consignment.
a particular country. In India, Chamber
of Commerce, Trade Association, Export
Promotion Council have been empowered
to issue such certificate. It will be sent
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11. Engagement of Forwarding Agent
After Export Inspection certificate is

obtained, the exporter has to obtain
clearance from customs authorities.
Generally exporters engage Clearing
Forwarding Agent to fulfill various custom
formalities. The latter do it for fees.
12. Dispatch of Goods to Port and Sending

the Receipt to Agent
The exporter will send the goods over to

port town by rail or by truck and endorse the
Railway Receipt (R/R) or Lorry Receipt(L/R)
to forwarding agent’s favour with necessary
instructions. iii. Charter Party
13. Fulfilment of Customs Formalities by A charter party is a formal agreement

Forwarding Agent between ship owner and the exporter under
which exporter hires an entire ship or a
i. Taking the Delivery of Goods at Port major part of ship either for a particular
Town voyage or for a specific time period when
When the goods arrive at port town, the the shipping is heavy. The hiring of ship for
forwarding agent takes delivery from the specific voyage is called voyage charter while
rail or from the truck after the submission this hiring of entire ship for a specific time
of railway receipt (R R) or lorry receipt (L period is called time charter. The content of
R). Then the agent arranges for storage of charter party includes the following
the consignment in a warehouse.
1. Name of the ship 2. Place of loading
3. Port of destination 4. Name of exporter
ii. Obtaining Shipping Order
5. Amount of freight
The clearing and forwarding agent
approaches the shipping company or its
agent to book space in the ship. On booking
a space in ship, shipping company issues
a document called Shipping Order. It
contains instruction to the captain of the
ship concerned to accept the consignment
on board. Besides it provides information
about the name of ship, nature of goods
shipped, the date of shipping, weight of
goods, port of destination, and freight
paid.
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14. Customs Clearance iii. Mate’s Receipt

The exporter or his agent prepares three Mate’s Receipt is the document issued by
copies of shipping bill in printed form. the captain of the ship acknowledging the
The shipping bill contains the details like receipt of goods on board by him to the port
name and address of exporter, description of specified destination. This contains details
of goods, value of goods, volume of goods, like quantity of goods shipped, number of
identification marks on the goods, port of packages condition for packing. etc., Where
destination and port of loading. the Mate is satisfied with packing he/she
issues clean receipt. If he/she is not satisfied
There are three types of shipping bills for with packing, he/she issues foul receipt.
three different categories of goods namely, Forwarding agent should seek to get clean
dutiable goods, duty-free goods and receipt. Otherwise insurance company will
duty draw-back goods Forwarding agent not bear liability for loss in case of foul
proceeds to pay of export duty calculated receipt.
by customs officers in the case of dutiable
goods.
i. Payment of Dock Dues

After the payment of export duty,
the forwarding agent arranges for
transporting the goods to docks. The
agent fills two copies of challan and
submits it to the dock authorities along
with one copy of shipping bill. Then
the agent pays dock charges. Dock
authorities retain one copy of challan and
return the second copy to the forwarding
agent. This signed copy is called Dock
Receipt or Port Trust Receipt.
ii. Obtaining Permission for Shipment

The forwarding agent brings the consignment
iv. Bill of Lading
over to the dock. The Customs Preventive
Officer stationed at the docks inspects the Bill of Lading, refers to a document signed
goods on the basis of declaration in the by ship owner or to his agent mentioning
shipping bill. This officer gives permission that goods specified have been received and
to load the goods onto board by issuing it would be delivered to the importer or
Customs Export Pass or simply makes an his agent at the port of destination if good
endorsement with wordings ‘Let Ship’ on condition subject to terms and conditions
the duplicate copy of shipping bill. mentioned therein.
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Content of the Bill Lading certificate of origin, consular invoice,

etc., to his bank for onward transmission
1. Name of the ship to importer’s bank with the instruction
2. Date of shipment that there documents should be delivered
3. Place of Boarding to importer only when he accepts the bills
4. Port of destination enclosed.
5. Name address of exporter
16. Securing Payment
6. Name and address of importer
7. Description of Goods i) Bills of Exchange
8. Number of package Bills of exchange of can be two types
9. Distinctive mark on good
10. Amount of freight a) Document against payment (D/P)
b) Document against acceptance(D/A)
15. Preparation of Commercial Invoice

and Submitting Documents to Bank
Document against Payment (D/P)
The exporter prepares a commercial In this case documents are handed over to
invoice in respect of the goods shipped the importer only against payment of bill by
in triplicate according to the terms and importers bank
conditions agreed between the exporter
and the importer. Then the exporter Document Against Acceptance (D/A)
submits all related documents like In this case documents are released to the
commercial invoice, insurance policy, importer immediately after he accepts
the bills of exchange sent along with the
Specimen of Bill of Lading

BILL OF LADING
Shipped in apparent good condition and order by Tamizhan Enterprises at Chennai in the
Rebel Range’s whereof Udaya Kumar is the master for the Present Voyage the 1000 cases
of goods marked SE-01 to be delivered and conditions subject to the terms and conditions
stated overleaf at the port of Chicago to Pallavan & Co. or their agents upon their paying the
freight for the said goods with the primage and average.
Stamp
for Mooventhan. Shipping Co.
Sd/-
Dated: 20/Feb/2018
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Distinction between Bill of Lading and Charter Party
Basis Bill of Lading Charter Party

1. Meaning This represents a document It refers to an agreement to hire a
acknowledging receipt of goods on whole or major part of ship when the
board for carrying them over to goods take exported is heavy.
specified port of destination
2. Transferable It can be transferred to third party by It cannot be transferred to third party
endorsement and delivery
3. Loan Loan can be raised against it Loan cannot be raised against it
4. Crew Master and crew remain the agent of Master and crew become the agent of
ship owner exporter for a temporary period
5. Lease It is not a lease of ship It is a lease of ship
document of title to the goods and agrees from his bank mentioning that the
to pay at maturity date. The exporter’s documents relating to export have been
bank makes payment through importer’s presented to the importer for payment
bank either immediately or at maturity and the payment has been received from
date in the case of usance bill. This amount the importer as per exchange control
is, then credited to the exporter’s account. regulation.
ii) Bank Certificate of Payment Intermediaries in Export Trade

After receiving payment for exports, Intermediaries involved in export trade
the exporter has to get a certificate include the following
Export Documents
2.Documents Related to 3.Documents Related to

1.Documents Shipment Payment
Related to Goods 1. Mate’s receipt
1. Letter of Credit
2. Shipping Bill
1.Indent 2. Commercial
2.Certificate of Origin 3. Shipping Order
Invoice
3.Certificate of 4. Bill of Lading
Inspection
3. Bills of
5. Marine Insurance
Exchange
Policy
4. Bank Certificate
6. Consular Invoice
Payment
7. Railway
receipt/Lorry receipt
Intermediaries in Export Trade
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3. Export Trading House

1. Forwarding Agent Export Trading House has been established
to increase the export, strengthen the global
market, capacity and get necessary facilities
2. Commission Agents for increasing export performance of our
country. It consists of merchants, exporters,
trading companies, export oriented units,
3. Export Trading House units located in export processing zones,
electronic hardware technology park etc.
1. Forwarding Agent Functions/Services of Export house

Forwarding agent is appointed by exporter The functions of export house are mentioned
to fulfill the customs and shipping related below
formalities and certain logistic functions.
1. Identifying potential market for a
1. Enlightening exporters on the relevant product
trade laws 2. Finding buyers and their agent and
2. Supplying transport, handling cost eliciting their response for export
information to exporter. proposal.
3. Assisting exporter in packing, marking 3. Establishing product specification in
and labeling. the light of market needs, standards and
regulation in accordance with suppliers
4. Arranging transport for exporter
capabilities.
5. Assisting in fulfilling customs formalities 4. Determining appropriate mode of
6. Preparing and procuring documents transportation and routing keeping in
7. Exposing exporter on the developments mind the cost, quality of service and
happening in transportation. security
5. Preparing the goods for delivery at
2. Commission Agents destination
Commission Agent is an international 6. Determining buyer’s creditworthiness
agent who is paid a certain percentage of 7. Negotiating the transactions
commission for the order booked by him
8. Arranging proper insurance coverage
abroad. He offers product to potential
against maritime risks and currency
customers in the territory allotted to him
fluctuations
in accordance with the terms and condition
9. Financing the transactions and paying
specified by the principal. However there is
no employment relationship between the for goods and service received.
agent and the principal and the relationship 10. Preparing document for international
is purely temporary. The agents gets only trade
commission at the end of the deal. 11. Settling claim.
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India’s Exports and Imports. 2011-12 to 2016-17 (Rupees in Crores)
Year Exports Imports Trade Balance

2011-2012 1,465,959 2,345,463 -879,504
2012-2013 1,634,318 2,669,162 -1,034,844
2013-2014 1,905,011 2,715,434 -810,423
2014-2015 1,896,348 2,737,087 -840,738
2015-2016(P) 1,716,378 2,490,298 -773,920
2015-2016 April to October 998,212 1,501,291 -503,079
2016-2017April to October (P) 1,039,797 1,396,352 -356,554
P= Provisional
Source: Annual Report 2016-2017. Ministry of Commerce and Industry Government of India New Delhi
India is Major Trading Partners (Exports)
Value in Rs Crore
Rank Country 2014-15 2015-16 2016-17 2017-18
1 CHINA 73,030.43 58,932.74 68,246.12 34,523.14
2 The U A E 259,427.52 263,859.28 283,008.01 151,756.00
3 The U S A 201,852.69 198,140.14 208,939.49 98,227.09
4 SAUDI ARAB 68,029.68 41,796.44 34,253.90 50,685.41
5 SWITZERLAND 6,538.75 6,421.29 94,114.93 16,302.67
6 SINGAPORE 46,061.97 46,456.71 48,153.70 13,680.91
7 GERMANY 83,118.57 79,306.61 6,543.02 26,624.71
8 HONG KONG 24,674.35 23,038.41 23,400.69 2,901.97
9 INDONESIA 28,084.74 18,446.42 28,436.72 11,304.92
10 IRAQ 35,614.11 50,531.32 64,115.09 33,830.51
Total of Top countries 826,432.81 786,929.37 859,211.67 439,837.32
% Share of Top
43.58 45.85 46.46 46.91
countries
OTHER COUNTRIES 1,069,915.60 929,448.66 990,217.07 497,863.92
% Share of other
56.42 54.15 53.54 497,863.92
countries
India's Total exports 1,896,348.41 1,716,378.03 1,849,428.74 53.09
Source: Annual Report 2016-2017. Ministry of Commerce and Industry Government of India
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26.02 Import Trade and so on food grains, vegetables and

Meaning other essential commodities are imported
Import trade refers to purchasing goods and from foreign countries and bad situation
service from a foreign country. For Example arising from the above situations are thus
Purchase of chemicals by an Indian company overcome.
from France is termed as import. Domestic
purchaser of goods is termed as importer 5. Strengthening Defence
and overseas seller is called exporter.
Many countries around the world import
Objectives of Import Trade defence equipments for its armed force.
Objectives of import trade have been Such imports enable the country to ensure
highlighted hereunder. its sovereignty and territorial integrity.
1. Achieving Rapid Industrialization Import Procedure

Developing countries can achieve rapid
Import procedure varies from country to
industrialisation by importing advanced
country depending upon the foreign trade
technology scarce raw materials, capital
goods like machinery equipment, etc., and policy of a country. Government of India has
talents from other countries. framed rules and regulations for the import.
The import procedures has been clearly
2. Meeting Consumer Demand spelt out of Government of India. Following
are the procedures of import trade.
Certain goods are either not available
or cannot be manufactured / produced
adequately to meet the growing demand in 1. Obtaining Import License
home country. Hence import is necessary to
Importer has to secure Import and Export
meet the short supply of those goods.
Code (IEC) from the Director General of
3. Upgrading Standard of Living of the Foreign Trade or its Regional Authority.
People The Indian Institute classification (ITC)
–Harmonized System (HS) classified
Consumers are able to use a wide variety of
the goods into three categories, namely
goods like cell phone, car laptop. television
audio system, washing machine, perfume, Restricted, Canalised and Prohibited. Goods
soaps, etc., manufactured in foreign not specified in the above categories can be
countries and enhance their standard of freely imported without any restrictions.
living through import trade. Import license is not required to import
the goods not mentioned in the above
4. Meeting Shortage Situation classification. An import license is valid for
During famine, earthquake, flood draught, 24 months for capital goods and 18 months
tsunami, abnormal price-increase situations for other goods.
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d. Terms of shipping
e. Terms of payments i.e. Letter of credit
Documents against Acceptance (D/A)or
Documents against Payment (D/P)
f. Probable delivery time
g. Validity of offer period
Importer responds to enquiry by sending
proforma invoice
3. Obtaining Foreign Exchange
Since importer has to settle import bills in

foreign currency, he has to obtain foreign
exchange. Importer has to provide IEC code
in the form supplied by authorized dealer to
get foreign exchange.. The importer has to
submit an application along with necessary
documents to the Exchange Control
Department of RBI. After scrutinising the
said application, the Reserve Bank of India
will sanction the release of foreign exchange.
Importer has to fill in ANF 2A form and 4. Placing an Indent Order

grant of e-LEC and submit all documents Importer places an order either directly
required in this regard online. IEC will be or through an indent houses. The indent
issued. contains the details like type of goods,
design of goods, price, quantity, grade,
Importer has to submit the copy of IEC to packing instructions, insurance, delivery
customs authorities at the time of clearance mode, desired delivery period, mode of
of goods. The second copy of IEC is used to period, mode of shipment, etc.,
obtain foreign exchange from RBI.
5. Opening Letter of Credit(L/C)
2. Trade Enquiry Where foreign exporter does not know

Indian importer, he may like to ensure the
Having obtained IEC, the intending importer
creditworthiness of the unknown importer.
has to make enquiry from exporter or his
In such a case, exporter may advise the
agents. Importer makes request by e-mail or
importer to arrange for letter of credit in his
postal mail to supply the details given below.
favour..Letter of credit is a document under
a. Specification of goods like size, design, which issuing bank undertakes to make
quality etc., payment on behalf of the importer or to the
b. Quantity goods available order of importer in exchange for specified
c. Price per unit documents from exporters bank. The letter
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of credit is issued only for financially sound i) Getting Endorsement for Delivery
importer. Exporter’s bank eventually sends The clearing agent gets bill of lading endorsed
the document to issuing bank which releases by importer in his favour to enable him to
the payment. take delivery of goods and approaches the
shipping company. Where the freight is not
6. Receiving Shipping Document
paid, the clearing agent pays it. The shipping
The importer collects shipping documents company may give a separate delivery order
along with the advice note of shipment after collecting the freight charges or it may
of goods from the exporters. Advice note simply endorse on the bill of lading by the
contains a written message through which importer or by his agent itself as a proof
exporter informs the importer about the payment of freight charges.
dispatch of goods and advise him to make
agreement for taking delivery of goods on ii) Payment of Dock Dues
arrival of goods at the port of destination.
The clearing agent submits two copies of
The captain of the ship informs the dock
filled in Application form to “Landing and
authorities about the arrival of goods on a
Shipping Dues Office. This office levies
document called Import General Manifest.
charges on all the imported goods. The
The customs authorities in turn inform the
clearing agent has to pay Dock charges by
importer concerned about the arrival of
Dock challan. After paying dock charges
goods at the port.
‘Landing and Shipping Due Office stamps on
7. Appointment of Clearing Agents the application form itself with wordings like
Dock charges paid’ or it may issue a separate
There are lot of formalities involved in
receipt called Post Trust Dues Receipt.
clearing the goods imported from the
port. Normally importer does not feel
comfortable with completing the formalities iii) Preparation of Bill of Entry
by himself. In this case he may delegate the Bill of Entry is prepared in triplicate in order
task of clearing the imported goods from to pay custom duty. This document contains
the port of discharge to clearing agent who the details like name and address of importer,
is well-versed in this job. The latter performs the name of the ship, full description of the
the job for a fee. The importer sends all the goods, number of packages, importer and
documents to the clearing agent to enable exporter code (IEC) name of the exporting
him to take delivery of goods after fulfilling country and custom duty payable. Bill of
the customs formalities prescribed in this Entry is issued in three colours. The black
regard. form is meant for non-dutiable goods while
the blue form is meant for the goods within
8. Fulfillment of Customs Formalities
the country and the violet is intended
Clearing agent engaged by the importer for re-export. Import duty is calculated
performs the following activities in on the basis of details given in the bill of
connection with taking delivery of goods entry by customs authorities. Where the
from the port. importer / clearing agent does not know
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Specimen of Bill of Entry

Bill of Entry
Vessel Master or Agent Port o f Port of Destination Importer’s Name and Address
Shipment
Packages Quantity Description Real Value as per Sea Value on w hich d uty is Duty
of e ach class Customs Act assessed
of Goods
Number Marks Unit Amount Rate Amount Tariff Add Amount Rate Amou
Rate Value nt
Total Value_Rs_______________
Total Duty Rs_________________
the exact /and full details about goods the bill is passed over to the port authority.
imported, he will prepare a bill of sight. He He would issue release order.
would provide as much as details possible
about the goods imported to the extent of vi) Getting Delivery From The Dock.
his memory and with specific remark that The clearing agent takes delivery of
he cannot give complete information about goods from the dock after submitting the
the goods imported. In such a case , customs documents like, Port Trust Dues Receipt, Bill
authorities will complete the statement and of Entry and Bill of Lading. If the goods are
import duty only after assessing the arrival imported for re-export, the agent / importer
of goods at the port of delivery. will deposit them in a bonded warehouse
and receives Dock Warrant.
iv) Payment of Import Duty
The clearing agent / importer submits the vii) Dispatching Goods to the Importer
bill of entry and other required documents The agent despatches the goods to the
to the customs authorities. He pays import importer by the rail/ road. He gets Railway
duty in the case of dutiable goods to the Receipt (R/R) or Lorry Receipt (L/R) from
customs authorities. the transporter.
v) Release Order From Dock viii) Sending Advice to the Importer

After payment of customs duty, the bill Clearing agent informs the despatch of
of entry has to be marked by the dock. goods to the importer and sends Railway
Superintendent and an examiner are Receipt / Lorry Receipt with the statements
instructed to physically examine the goods. of expenses incurred by him and the
He gives his report on the bill of entry. Then commission payable to him for his service.
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9. Taking Delivery of Goods Documents used in import trade

Importer takes delivery of goods from 1.Import License (IEC)
the Railway /Carrier after producing the
Railway Receipt or Lorry Receipt. 2.Indent
10. Settlement of Import Bill 3.Letter of Credit
The importer settles the import bill in the

Import Documents
following ways.
i. Import License
a. Importer collects shipping document ii. Indent
after payment
iii. Letter of Credit
b. Importer gets shipping documents after iv. Bill of Entry
payment of bills of exchange in the case
v. Bill of sight
of Documents against payments (D/P)
vi. Port Trust Dues Receipt
c. Importer gets shipping documents after
vii. Bill Of Lading
giving acceptance on bills of exchange
in the case of Documents against viii. Bill of Exchange
Acceptance(D/A) ix. Advice Note
India is Major Trading Partners (Imports)

Value Rs - in Cr.
Rank Country 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018
1 CHINA 309,234.96 369,565.36 404,043.38 411,093.52 241,603.57
2 UAE 135,613.46 133,420.60 142,678.20 149,655.40 75,526.59
3 USA 174,126.66 159,624.88 126,981.39 144,237.12 73,060.39
4 SAUDI ARAB 220,515.49 171,220.87 132,579.98 133,945.75 36,403.90
5 SWITZERLAND 78,209.64 135,367.33 126,074.29 54,906.18 63,805.46
6 SINGAPORE 112,338.18 78,181.10 79,098.18 77,704.41 56,757.88
7 GERMANY 44,107.06 34,088.62 39,635.91 115,619.29 41,194.34
8 HONG KONG 89,035.42 91,845.35 85,363.11 90,081.93 62,408.53
9 INDONESIA 111,637.70 82,720.09 85,799.57 84,404.33 50,896.11
10 IRAQ 41,063.47 67,918.84 47,734.89 47,541.69 22,212.35
Total of Top countries 1,315,882.04 1,323,953.03 1,269,988.91 1,309,189.62 723,869.12
% Share of Top 48.46 48.38 51 50.79 50.99
countries
OTHER COUNTRIES 1,399,538.74 1,412,723.96 1,220,307.40 1,268,471.75 695,623.91
% Share of other 51.54 51.62 49.00 49.21 49.01
countries
India’s Total Imports 2,715,420.78 2,736,676.99 2,490,296.31 2,577,661.37 1,419,493.03
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Intermediaries in Import Trade

For Future Learning
1. Indent Houses/ Import Agent
1. Import Trade Procedures.
This intermediary is specialized in a
particular trade. He charges fees for his 2. Agencies involved in Import Trade
service. Importer has to enter into contract
with indent house to avail himself of his
service
Services rendered by Indent Houses/ For Own Thinking
Import Agent
1. You should be able to think to
The services rendered include the following simplify Import Trade Procedures
a. Helping the importer get orders from 2. Create interest in International

foreign countries Business for yourself
b. Providing information about the

availability of goods of various types and
arranging credit facilities to importer Exercise
c. Maintaining regular contact with the I. Choose the Correct Answer

exporter and obtaining sample and
1. EPC stands for
transmitting it to the importer
a) Export processing commission
2. Clearing Agent b) Export Promotion Council
Clearing Agent is specialised in clearing c) Export Carriage council
the goods from the port of discharge d) Export Promotion Congress
destination and transport it over to the
importer. They fulfill the various custom 2. STC is expansion for
formalities on behalf of the importer and a) State Training Centre
get the goods cleared from the port. They b) State Training Council
charge commission for their service. c) State Trading Centre
d) State Trading Corporation
Key Terms
3. An ------------- is document prepared by
1. Export Trade importer an sent to the exporter to buy
2. Import Trade the goods
a) Invoice
3. Export Promotion Councils
b) Indent
4. Export Trade Procedures
c) Enquiry
5. Letter of Credit d) Charter Party
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4. The ------------------- receipt is an III. Short Answer Questions

acknowledgement of receipt of goods on
1. What are the contents of Indents?
the ship issued by the Captain
2. What is meaning of consular invoice?
a) Shipping Bill
b) Bill of Lading 3. What is meant Charter Party?
c) Mate’s Receipt 4. Write a short note on Mate’s receipt?
d) Consular Invoice 5. What is Bill of Lading?
5. The Exporters appoint the ------------- IV. Long Answer Questions

agent to fulfill the customs formalities
1. What are the procedures relating to
a) Clearing Agent
Export trade?
b) Forwarding Agent
2. Distinguish between Bill of Lading and
c) Commission Agent
Charter Party
d) Factor
3. What are the documents used in Export
Answers Trade?
1. b 2. d 3. b 4. b 5. b 4. Explain the various functions of Export

Trading Houses.
Reference
1. What is meant by Indent?
2. Write any two export promotion 1. Hand book of Business studies by Preeti
institutions. Sharma Arihant Prakhashan Meerut
3. Mention the types of Indent. 2. ISC Commerce by S B Gupta - S Chand’s
4. What is the Letter of credit? Company Ltd New Delhi.2017
Share of top five commodities in India’s exports, (April-October), 2016-17 (P)

2.42
Petroloeum products
4.7
4.85 Peral precious semi precious
stone
9.8 Gold and other precious

metals jewellery
Drug formulations
66.41 biological
11.82
Rmc cotton including

accessories
Others
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ICT CORNER
TRADE ANALYTICS
Analyse the Import &

Export data provided by
India- Ministry of Commerce &
Industry.
STEPS:
• Ministry of Commerce and Industry Analytics page will open. It consists
of Exports, Imports data. By default, Imports data is seen. Import value, Top
commodities, Top ports, Geography wise imports, Commodities across ports are
given as charts.
• If you move your cursor over the chart, it will highlight respective data. For
commodities across ports you have to double click on each commodity for
respective data.
• Similarly you can select Export and analyse the data.
Step1 Step2 Step3
URL:
http://commerce.gov.in/analytics/
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CHAPTER
27 FACILITATORS OF
INTERNATIONAL BUSINESS
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Couplet:
The learned say that the best kingdom is that which knows no evil (from its foes),
and, if injured (at all), suffers no diminution in its fruitfulness.
Learning Objectives
27.01 World Trade Organisation
To enable the students to (WTO)
i. explain the meaning, objectives and International business involved complex
functions of WTO
issues among various countries way
ii. discuss the importance and functions back in 1950’s. A keen need then was
of World Bank felt to establish separate mechanism for
iii. understand the objectives and regulating and controlling trade relation
functions of IMF across the countries around the world. As
iv describe the role of SAARC a result, the General Agreement on Tariffs
and Trade. (GATT) was signed at Geneva
on 30th October 1947 by 23 countries.
It came into effect on 1st January 1948.
GATT was a multilateral treaty. It laid
down rules and regulations for conducting
international trade. GATT achieved many
success but various countries felt the
need to create a new international body
to replace the GATT. The GATT which
remained in force from 1948 to 1994 thus
came to an end with the establishment of
World Trade Organisation (WTO) on 1st
Headquarters of WTO at Geneva January 1995.
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Meaning 2. It settles disputes and grievances relating

The World Trade Organisation (WTO) was to trade among the member countries.
estabilished on 1st January 1995. The GATT 3. It frames commonly acceptable code
was renamed as WTO with some changes. of conduct in order to reduce trade
WTO has 164 member countries as on 29th barriers.
July 2016 . India is one of the three founder
4. It holds consultations with IMF and
members. The ministerial conference
World Bank(IBRD) and its affiliates to
consisting of the representatives of all the
bring about a greater understanding and
member countries is the highest decision-
co-operation in global economic policy
making authority of WTO. It meets almost
making.
once in every three years. It is empowered
to take decisions on all vital matters under 5. It supervises the operations of agreement
the multilateral trade agreements. The day- relating to General Agreement on Tariffs
today work of WTO has been entrusted to and Trade(GATT) and Trade-Related
the General Council. WTO is located at Intellectual Properties Rights (TRIPS)
Geneva (Switzerland) 6. It regulates trade between participating
Objectives of WTO
countries.
The objectives of WTO include the Benefits of WTO

following. Some of the major benefits of WTO are as
1. Improving the standard of living of follows.
people in member countries
1. WTO is promoting international peace
2. Making optimum utilization of world’s and creating a conducive environment
resources for sustainable development of for conducting international trade
member countries.
2. It settles the trade disputes amicably
3. Promoting an integrated more viable
among the member countries.
and durable trading system in the sphere
of international business 3. It promotes the standard of living of
people by increasing their income level
4. Expansion of trade in goods and
from free trades
services
4. WTO has removed quantitative
5. Ensuring full employment and large
restrictions and non-tariff barriers. It
steady growth volume of real income
has facilitated free flow of foreign trade
and effective demand
among the member countries. The
6. Protecting the environment countries can impose import restrictions
Functions/Role of WTO only to correct balance of payments
difficulties and not otherwise.
WTO performs the following functions
1. It is a forum for negotiation and 5. It stimulates economic growth of
formalization of trade agreement among developing countries by providing them
the member countries. with much needed capital and giving
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them preferential treatment in trade 2. Agreement on Textile and Clothing

related matters.
This agreement was evolved to eliminate
6. WTO organizes periodical regional and quota restrictions imposed by developing
international conference. Thus developing countries on the export of textiles and
countries get opportunity to learn the clothing by them. It helps mainly developing
technicalities, rules and regulations countries to expand their textile and clothing
governing world trade, technical assistance export.
available globally, trade potentials in
3. Agreement of Agriculture(AOA)
member countries and so on.
This agreement was made to ensure free and
7. WTO gives people across the world a
fair trade in agriculture. This agreement made
wider choice of goods and broader range the developed countries reduce customs duties
of qualities of goods to choose from by on their imports and subsidies on the export
promoting free trade among the member of agricultural products. But developing
countries. countries were exempted from making
8. WTO has lowered trade barriers and reciprocal offer keeping in view of high
thereby allowed trade to flourish dependence of these countries on agriculture.
across the world. The increase in trade 4. General Agreement on Trade in Services
contributes to increase in national
Under this agreement, all member countries
income and personal income of people
were required to remove restrictions on
9. WTO provides a platform for member trade in services in a phased manner.It
countries to establish trade links with provides that trade in service is governed
one another. In the absence of WTO by the principle of most favoured nation
member countries may have to enter obligation. In other words countries have
many multilateral agreement with so to award business contract on the basis of
many countries across the world. It merit of service suppliers and on the basis
provides a greater access to all nations of nationality status of service provider. It
under one roof. prevents the countries from discriminating
between foreign service provider and local
10. WTO is committed to protecting free service provider. This agreement requires all
trade. It has framed rules on subsidies the member countries to publish their laws
and dumping. relating to trade in service.
5. Agreement on Trade Related aspects of

Intellectual Property Rights (TRIPS)
This agreement sets out seven minimum
WTO AGREEMENTS standards of protection to be accepted
1. Agreement Forming part of GATT by parties in respect of seven intellectual
properties namely, copyright, trademark,
GATT is an important part of WTO geographical indication, industrial design,
agreements. It includes special agreement patent, layout design of integrated circuits
evolved to deal with non-tariff barriers and undisclosed information.
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Criticism Against WTO to diversify into other sectors of the

The following criticisms are levelled against economy at least in the short term. Many
WTO developed nations used this tariff protection
in the process of their development . In this
1. Free Trade Benefits Developed Countries context WTO is criticised for being unfair
more than Developing Countries and neglecting the interest of farmers in
Developing countries need some sort of developing countries.
trade protection to develop their new
industries. Many developed countries had 5. Neglect Environmental Considerations
once used this protection to nurture their
WTO encourages import from certain
infant industries in their development stage.
countries which produce the product on
In this context prevention of developing
a larger scale at the cost of environment.
countries from defending their infant
industries altogether through restriction is WTO pushes for achieving increase in GDP
unfair. It is suspected to be a conspiracy to without any regard for environment. In the
indirectly favour MNC’s. current environment of global warming
and ever increasing environmental
2. Most Favoured Nation Principles disaster, utmost priority given by WTO on
maximizing GDP at the cost of environment
This is the core of WTO rules. Under this
is misplaced.
rule member countries are advised not to
discriminate among the home enterprises,
multi-nationals and foreign enterprises. 6. Neglect of Cultural and Social Factors
In other words WTO prevents developing WTO is criticized for promoting the
countries from favouring their emerging domination of multinational companies
companies. This move is supposed to which are feared to eliminate local enterprises
give unfair advantage to multinational from business world altogether. The growth
companies. of MNC’s is feared to ruin cultural diversity
of many developing countries.
3. Failure to Reduce Tariffs on Agriculture
WTO failed to convince the USA and
7. Inability of People in Developing
European Unions to eliminate high tariff
Countries to Buy Life Saving Drugs
on agriculture . In other words it defends
high tariff on agriculture in USA and EU. WTO defends trade related intellectual
This would undoubtedly hurt the farmers in property rights which allow the firm to
developing countries. protect the patent and copy right. This
protection particularly in the area of
4. Neglect of Farmers Interest in manufacturing of drugs is supposed to
Developing Countries escalate the price of essential and life saving
Developing Countries specialize in drugs. As a result people of developing
producing primary products. i.e. agricultural countries may not be able to buy costly
products. They need some sort of protection drugs at affordable price.
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27.02 World Bank Functions Of IBRD
International Bank for Reconstruction and The main functions of the world bank are
Development (IBRD) stated below
1. Assisting reconstruction of war-affected

countries
2. Promoting economic growth and
balanced growth of international
business
3. Promoting infrastructural facilities
like energy and transportation, road
development, etc. in member countries.
International Bank for Reconstruction 4. Encouraging agricultural and industrial
and Development is commonly known as development in developing countries by
World Bank. It was set up in 1944 in order providing adequate resources
to reconstruct and rehabilitate first world 5. Providing resources for promoting
war affected countries of Europe and assist sanitation, education, health care and
in the development of developing countries. small scale enterprises in member
It is located at Washington DC. It has its countries
offices all over the world.
6. Improving standard of living of people
Objectives of IBRD of member countries by providing
Objectives of IBRD are briefly mentioned assistance by removing poverty, raising
here under. productivity, providing technical
support and conducting research and
1. Providing long term capital to member
development
countries to reconstruct and develop
their war-affected economy
27.03 International Monetary Fund
2. Promoting capital investment in member (IMF)
countries
3. Providing guarantees for loans granted to
small and large units and other projects
of member countries
4. Ensuring implementation of
development projects so as to transform
the war-affected economy into peace
economy
5. Providing long term capital for ensuring
balance of payment equilibrium and
balanced development of international
trade
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International Monetary fund (IMF) is an Objectives of IMF

international organization headquartered The objective of IMF are mentioned below.
in Washington DC. It has a membership
a. Promoting international monetary
of 189 countries. It was established in 27th
cooperation
December 1945 on the recommendation of
the Bretton Wood Conference. It provides b. Ensuring balanced international trade
shorter loan to member countries to their c. Ensuring exchange rate stability
correct balance of payments disequilibrium.
AFFILIATES OF WORLD BANK GROUP
International Development Association (IDA)

It was set up in 1960. It provides term loans to member countries at concessional terms and
conditions for their economic development. It creates supplementary sources of credit for
member countries. It assists in poverty alleviation programme of least developed countries.
It provides support for health, education, infrastructure agriculture, human resources
development of developing and least developed countries.
International Financial corporation (IFC)

International Financial Corporation (IFC) is an international financial institution that offers
advisory services to build up private sector in developing countries. It is headquartered
at Washington DC. It was established in the year 1956. There are 184 countries in the
membership list. It aims at lifting the standard of people of developing and least developed
countries by removing poverty, improving education and healthcare, investing in
infrastructure development and sustainable agricultural opportunities therein.
Multinational Investment Guarantee Agency(MIGA)

This is one of International Financial Institutions offering political risk insurance and credit
enhancement guarantees. The guarantee provided by this institution protects foreign direct
investments against the political and non-commercial risks in developing countries. It is
head quartered at Washington. It promotes flow of foreign direct investment (FDI) into
developing countries .
International Centre for Settlement of Invarstment Disputes (ICSID)

ICSID is an autonomous institution setup in order to provide a forum for conciliation and
arbitration of international dispute, It was setup in 1966. It is located at Washington
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d. Eliminating or minimizing exchange 5. It offers technical assistance and training

restrictions by promoting multilateral to help member countries strengthen and
payments. implement effective policies. Technical
e. Providing economic assistance to assistance is offered in formulating
member countries for correcting banking, fiscal, monetary and exchange
imbalance in balance of payments of policies.
countries 6. It helps member countries correct their
f. Minimizing imbalance in quantum and imbalance in balance of payment.
duration of balance of payment.
IMF AND INDIA
Functions of IMF
Free Convertibility of Indian Rupee
The functions of IMF are enumerated
below Indian rupee has become independent after
the establishment of IMF. Earlier it was
1. It acts as short term credit institution at linked with pound sterling. Its value is now
the international level. determined in terms of Gold. Hence it is
2. It provides machinery for ordinary freely convertible.
adjustments of exchange rates.
1. Loan For Development Activities
3. It has a reservoir of currencies of the
India got several loan facilities from IMF for
member countries from which a borrower
its several development projects.
can borrow currencies of other nations.
4. It promotes economic stability and global 2. Ability To Purchase Foreign Currency
growth by encouraging countries adopt Government of India is able to purchase
sound economic and financial policies. foreign currencies from time to time to
SPECIAL DRAWING RIGHTS (SDR)
SDR was created by the IMF in the year 1969 as supplementary international reserve asset.
It is described as paper gold. Initially the value of SDR was fixed to be 0.888671 grams of
fine gold equivalent to one US dollar till the year 1973. After the collapse of Britten Wood
system in 1973 SDR was redefined as basket of currencies. From 1st October 2016 SDR
basket consists of US dollar, Euro, the Chinese Renminbi, Japanese Yen and British Pound
sterling. The value of SDR is regularly posted daily in IMF website.
It is calculated as the sum of specific amount of each basket currency value in US dollar
based on the spot exchange rates observed at noon London time. IMF allocates SDR
to member countries in proportion to their quota. IMF member can exchange SDR
for freely usable currencies by voluntary exchange or as per IMF instructions. Besides
members can borrow from IMF at favorable rate of interest to correct imbalance in
balance of payments.
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meet the ever growing requirement of 6. Membership in World Bank

development activities. By virtue of its membership in IMF India
could become member in the World Bank.
3. Expert Advice
India used to get expert advice from IMF 7. Help During 1991 Economic Crisis
for solving the economic problems. It has
given valuable advice to India with regard to During 1990, India faced serious economic
financing its 5 year plan. crisis. Indian Government was almost
nearing bankruptcy. It got assistance from
IMF by pledging its gold reserve with it to
4. Timely Help
solve its balance of payments crisis.
India has received timely help from IMF
many a time to eliminate the deficit in its 27.04 South Asian Association for
balance of payments. India got help from Regional Co-Operation (SAARC)
IMF during 1966 in the aftermath of war
South Asian Association for Regional Co-
with Pakistan. It received assistance from
operation is the regional inter governmental
IMF for combating oil shock. Between 1980
organization and geo-political union
and 1983 India got assistance from IMF to
of nations in South Asia. The member
manage global economic recession.
countries include Afghanistan, Bangladesh,
Bhutan, India, Nepal, Srilanka, Pakistan
5. Financial Assistance during Natural and Maldives. It was established on 8th
Calamity December 1985. It was founded at Dhaka in
India has got a lot of financial assistance Bangladesh.
from IMF to solve the economic crises
Objectives of SAARC
arising from natural calamities like, floods,
famine, earthquake, aggressions of Chinese The objectives of SAARC include the
and Pakistan etc. It gets technical assistance following
from IMF.
LERMS
Liberalised Exchange Rate Management System (LERMS) was introduced in the budget
1992-93. Under the LERMS, Exporters of goods and services and those who are recipients
of remittances from abroad could sell the bulk of their foreign exchange receipts at market
determined rates. Similarly, those who need to import goods and services or undertake
travel abroad could buy foreign exchange to meet such needs, at market determined rates
from the authorised dealers, subject to their transactions being eligible under the liberalised
exchange control system. However, in respect of certain specified priority imports and
transactions, provisions were made in the scheme for making available foreign exchange at
the official rate by the Reserve Bank of India.
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1. Promoting the welfare of people of Asia

2. Achieving economic growth, social For Own Thinking
programme and cultural development in i. A vital role played in international
member countries. business by WTO
3. Strengthening self reliance among the ii. Necessity for world as global village
members through IMF IBRD and SAARC
4. Strengthening co-operation among the
members as well as with other developing
countries and international and regional
organization. For Future Learning
5. Maintaining peace among the member
nations in the region. i. WTO- new agreements
Council ii. IMF World Bank and SAARC
major role in international business
At the top SAARC is represented by the
heads of member nations. It meets once
in two years. The head quarter is located
in Nepal. SAARC secretariat is headed by Exercise
the Secretary General appointed by the
members.
1. General Agreement on Tariff and Trade
Functions was signed on
a. 30-October-1947
Functions of SAARC are highlighted
b. 29-October-1947
1. Monitoring and co-ordinating the c. 28-October-1947
development programme d. 26-October-19472. WTO was
2. Determining inter-sectoral priorities estabilished on
a. 1-1-1996
3. Mobilizing cooperation within and
outside the region. b. 1-1-1997
c. 1-1-1995
4. Dealing with modalities of financing
d. 1-1-1994
3. The headquarter of WTO is located at

Key Terms
a. New York
WTO GDP
b. London
GATT SDR
c. Geneva
IBRD IMF
d. Brazil
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4. The day to day administration of WTO III. Short Answer Questions

is entrusted with 1. What is the primary motive of
a. Executive Council establishment of WTO?
b. General Council 2. Name the affiliate of World Bank
3. What are the criticisms of World Bank?
c. Administrative Council
4. How is the value of SDR determined
d. General Body
currently?.
5. World bank is located at 5. Mention the functions of SAARC.
a. Washington DC IV. Long Answer Questions.

b. New York 1. Point out the objectives of WTO
c. Tokyo 2. Write down the functions of WTO.
d. Hongkong 3. Describe the benefits of WTO
4. Highlights the functions of IBRD
5. Write down the functions of IMF
Answers
6. Explain how far India has benefited from
1. a 2. c 3. c 4. b 5. a IMF
Reference
II. Very Short Answer Questions.
1. ISC Commerce by S B Gupta - S Chand’s
1. What is WTO? Company Ltd New Delhi.2017
2. What do you mean by World Bank? 2. International Business Theory and
Practises by Ghanshyam Sharma-
3. What is Special Drawing Rights?
Centrum Press-2012
4. What is SAARC? 3. Experiencing International Business
5. What is GATT? Management by Routledge-2017
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CHAPTER
28 BALANCE OF TRADE AND

BALANCE OF PAYMENTS
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A kingdom is that which can bear any burden that may be pressed on it (from
adjoining kingdoms) and (yet) pay the full tribute to its sovereign.
Learning Objectives
services rendered and capital received by
To enable the students to residents in a country and payment made
i. explain the meaning, definition, and by them on account of goods imported,
structure of balance of payments services rendered and capital transferred
ii. explain the meaning, definition, and to non residents or foreigners out of the
structure of balance of trade country.
Purpose of Preparing Balance of
Payments
Balance of trade and balance of payment
are important aspects in international trade. Balance of payment is the principal tool
The various aspects of the both the terms for analyzing the monetary position of
have been briefly dealt with in this chapter international trade of a country just like
Receipts and Payments account of enterprise
28.01 Balance of Payments (BOP) revealing the net effect of cash movements
happening in an enterprise during a
Meaning
particular period.
Balance of payment refers to a systematic
record of all economic transactions between Balance of payments help in framing
the residents of one country and the residents monetary, fiscal and trade policies of
of foreign countries during a particular period country. Government keenly observes
of time. For example, one year. balance of payment position of its important
trade partners in making policy decisions. It
It contains a classified record of all receipts reveals whether a country produces enough
and payments arising from goods exported, economic output to pay for its growth. It is
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reported either for every quarter or for a particular period of time, usually a calendar
year. year.”
Net Result Revealed by BOP
Features of Balance of Payments
A Balance of Payment surplus indicates
that country’s exports are more than its The main features of balance of payments
imports and its government and residents are as follows.
are savers. They are in position to have 1. It is a systematic record of all economic
enough capital to pay for its domestic transactions between one country and
production. The country can even lend
certain other countries of the world
to other countries which in turn buy
its products. As a result it boosts the 2. It is prepared for a period of three months
economic growth in the short term. The or twelve months, i.e., usually 12 months
country achieves higher economic growth 3. It contains all receipts and payments
due to higher exports in the long run. both visible and invisible
It builds strong domestic market. This
4. It includes all economic transactions
protects the economy from exchange rate
both recorded on current account and
fluctuations.
capital account
A Balance of Payment deficit points to the 5. Economic transactions are recorded
fact that country’s import is more than the according to double entry principle of
export. This situations forces the country to book keeping. Accordingly receipts are
borrow from other countries to pay for its
recorded on credit side and payments
imports. It creates economic development
are recorded on debit side
in the short term. It is just similar to taking
an educational loan from bank to pay school 6. It indicates a country’s position in foreign
fees of children expecting their salary in the trade
future which would help repay the loan. 7. BOP shows a favourable or surplus
position when the total receipts from
Definition
foreign countries exceed the total
According to International Monetary Fund, payments to foreign countries. When the
“ The balance of payments for given period receipts from foreign countries are less
is a systematic records of all economic
than the payments to foreign countries,
transactions taken place during the
BOP is said to be unfavorable or in deficit
period between residents of the reporting
countries.” 8. BOP position shows the economic health
of nation just like the thermometer
In the words of Domini Salvatore indicates the temperature of human
“The Balance of payment is a summary body. Favourable BOP indicates
statement in which principle all the records economic prosperity while unfavourable
of the resident of a nation with the resident balance of payments shows economic
of all other nations are recorded during a weakness of a country.
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28.02 Balance of Trade Structure of Balance of Payments

Meaning The balance of payments consists of four
Balance of trade denotes the difference components namely, current account.
between the value of import and the value Capital account, They are highlighted
of export during a year. If the export of briefly.
a country exceeds its imports, it shows Current Account
favourable balance of trade. If the import
exceeds the exports, it shows unfavorable The current account balance includes two
balance of trade. items
Difference Between Balance of Payments 1. Visible trade - Import and export of

and Balance of Trade goods
Points of difference between balance of 2. Invisible trade - Invisible service items
trade and balance of payments are briefly like, banking, shipping, insurance, travel
explained in the following Table. and transportation
Difference Between Balance of Payments and Balance of Trade

Nature Balance of Payment Balance of Trade
1. Meaning It is a systematic record of all Balance of trade is statement
economic transactions happened showing the net effect of export
between the resident of one country and import of a country
and resident of foreign countries
during a particular period.
2. Nature of It records both the transactions It records only transactions
Transactions recorded relating to goods and services relating to merchandise , i.e. goods
transactions
3. Capital Transactions It records capital transactions It does not record capital
transactions
4. Structure It includes balance of trade. balance It is part of current account of
of services, balance of unilateral BOP
transfer and balance of capital
transactions
5. Net Position It always remains balanced in the It may be at favorable or
sense that receipt side is made equal unfavourable or in equilibrium
to payment side state.
6. Indicator Economic It is true indicator of economic It is not true indicator of economic
Status performance of an economy prosperity or economic relations of
country.
7. Correcting Unfavourable balance of payment Unfavourable balance of trade can
Unfavourableness leads to deficit in balance of be converted into favorable balance
payment situation. of payment
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Current Account
Credit Items Debit Items

1. Goods Export(visible) 1. Goods Import
2. Invisible Exports 2. Invisible Imports
1. Transport service sold abroad 1. Transport services purchased from foreign countries
2. Banking service sold abroad 2. Banking services purchased from foreign countries
3. Insurance service sold abroad 3. Insurance services purchased from foreign countries
4. Income received on loan and investment 4. Visit of our tourists to foreign countries
made in foreign countries 5. Other services purchased from foreign countries
5. Expenses incurred by foreign tourists 6. Interest paid on loan in home country
in India
CAPITAL ACCOUNT
Capital account consists of three components For Future Learning

1. Private Capital
2. Banking Capital 1. Impact of Balance of Payments and
3. Official Capital Trade
1. Private Capital 2. Necessary for Global Village concept
Private capital consists of foreign

investments, long term loan and foreign
currency deposits
For Own Thinking
2. Banking Capital 1. Balance of Payment is key to economic

development
Banking capital includes movement into
2. Importance of BOP and BOT
external financial asset and liabilities
commercial and co-operative banks
authorized to dealing in foreign exchange
Exercise
3. Official Capital
It includes RBI’s holdings of foreign currency I. Choose the Correct Answer
and special drawing rights (SDR) held by the 1. The Statement which discloses a record
Government of transactions between the residents
of one country and residents of foreign
Key Terms country.
1. Balance of Payments (a) Balance of Payment
2. Balance of Trade (b) Balance of Trade
3. Current Account
(c) Statement of Receipts and Payments
4. Capital Account
(d) Accounting Statement
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2. The Balance of Payments councils II. Very Short Answer Questions

consists of 1. What do you mean by Balance of
(a) Current Account payments?
(b) Capital Account 2. What do you mean by Balance of trade?
(c) Receipts and Payments Account 3. Define Balance of payments
(d) Both Current Account and Capital 4. What is the composition of private
Account capital?
3. Foreign capital long- term loan and 5. Mention the components of banking
foreign currency reserve are recorded capital.
under 6. Mention the components of official
(a) Official Capital capital.
(b) Private Capital III. Short Answer Questions
(c) Banking Capital
1. Why is Balance of payment prepared?
(d) Both Private and
2. What does Balance of payment disclose?
Official Capital
3. What are the credit items shown in
4. The term official capital includes currents accounts?
(a) RBI holdings of foreign currencies 4. State the components of capital account.
(b) Special Drawing Rights held by the
Government IV. Long Answer Questions
(c) Both A and B 1. Write down the structure of capital

(d) Foreign Investment account
2. Distinguish balance of payment and
5. Balance of payments surplus indicates
balance of trade
(a) Exports are more than the Imports
3. Highlight the features of balance of trade.
(b) Imports are more than Exports
(c) Exports and Imports are at Reference
Equilibrium 1. Hand book of Business studies by Preeti
(d) Exports and Imports are above Sharma. Arihant Prakhashan Meerut
Equilibrium 2. ISC Commerce by S B Gupta - S Chand’s
Company Ltd New Delhi.2017
Answer
3. International Trade by Jingon-Sulthan
1. (a) 2. (d) 3. (b) 4. (c) 5. (a)
Chand- 2017
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CHAPTER
29 ELEMENTS OF CONTRACT
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Couplet:
Let king first ask, ‘Who shall the deed perform?’ and ‘What the deed?’ Of hour
befitting both assured, let every work proceed.
Learning Objectives peace, harmony, justice, social security and

To enable the students to order which is possible only through laws.
i. Understand the meaning and Every country has a regulatory framework
definition of contract comprised by a plethora of laws such as
constitutional law, civil law, criminal law, tax
ii. Learn about the elements of contract
law, labour law, business law etc. Every law
iii. Understand about the various types has a particular field of activity to regulate
of contract and govern.
The Indian Contract Act
29.01 Meaning and Definition The Indian Contract Act occupies the most
Law means a ‘set of rules’ which governs important place in the Commercial Law.
our behaviour and relating in a civilized Without Contract Act, it would have been
society. So there is no need of Law in a difficult to carry on trade or any other
uncivilized society. One to should know business activity. It is not only the business
the law to which he is subjected to because community which is concerned with the
ignorance of law is no excuse. Contract Act, but it also influences the entire
society. The main object of contract act is to
assure that the rights and obligations which
Generally life in a civilized society is arise out of the contract are carried out and
regulated by a welfare state. The existence in case of failure to do so, the remedies are
and growth of civilized society requires made available to the affected party.
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Definition
Offer (i.e. Proposal) [section 2(a)]

When one person signifies to another
his willingness to do or to abstain from
doing anything, with a view to obtaining
the assent of that other person either to
such act or abstinence, he is said to make
The Indian Contract Act is so much infused a proposal.
in the daily lives that it affects all. For every
Acceptance 2(b) When the person to
purchase that one does, or a loan taken from a
banker, or a ride one takes in a bus and many whom the proposal is made, signifies his
other transactions of daily life has its impact assent thereto, the proposal is said to be
by Contract Act. accepted.
The English common law is the base for the Agreement 2(e) Every promise and set
development of Indian Contract Act 1872. of promises forming consideration for
The Act came into force on 1st September each other is an agreement. In short,
1872, and applies to the whole of India Agreement = Offer + Acceptance.
except the state of Jammu and Kashmir.
This Act applies to the usage of trade and Consideration 2(d) When at the desire
lays down the general principles. of the promisor, the promisee or any
other person has done or abstained from
There are two parts of Indian Contract
Act namely
doing something or does or abstains
from doing something or promises to do
a. General Contracts
or abstain from doing something, such
b. Special Contracts act or abstinence or promise is called a
Meaning of Contract consideration for the promise.
As per the Indian Contract Act, 1872, a
Contract 2(h) An agreement enforceable
“contract” is an agreement enforceable by
by Law is a Contract.
law. The agreements not enforceable by law
are not contracts. An “agreement” means
‘a promise or a set of promises’ forming
consideration for each other. A promise
arises when a proposal is accepted. By
implication, an agreement is an accepted
proposal. In other words, an agreement
consists of an ‘offer’ and its ‘acceptance’.
Agreement = offer / Proposal + Acceptance
Contract = Agreement + Enforceability
by law
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29.02 Essentials of a Valid Contract thing in the same sense at the same time
“All agreements are contracts, if they are i.e. there should be consensus – ad – idem.
made among parties – by free consent of the Consent is said to be free when it is not
parties, competent to contract, for a lawful caused by coercion, undue influence, fraud,
consideration and with a lawful object, and misrepresentation or mistake.
not hereby expressly declared to be void.”
Sec.10 6. Capacity of Parties (Section 11)
The parties to a contract must have
1. Offer and Acceptance capacity (legal ability) to make valid
There must be two parties to an agreement contract. The Indian contract Act
namely one party making the offer and the specifies that every person is competent
other party accepting it. to contract provided he
(i) is of the age of majority according to the

2. Legal Relationship Law which he is subject to, and
The parties must have the intention to (ii) who is of sound mind and
create legal relationship between them. An
(iii) is not disqualified from contracting
agreement of Social or domestic nature is
by any law to which he is subject to, an
not at all a contract.
alien enemy, foreign sovereigns and
accredited representative of a foreign
3. Lawful Consideration (quid pro quo)
state, insolvents and convicts are not
As per Contract Act under Sec.2 (d) competent to contract.
Consideration means something in return.
A contract without consideration becomes 7. Certainty of Terms (Section 29)
invalid. It may be in cash or kind or in any The agreement should be clear to the parities
form as specified in the act. Consideration of the agreement. The agreement must be
must not be unlawful, immoral or opposed precise. For example X informs Y “I agree
to the public policy. to sell my car”. X has four cars. Here nothing
is stated about which car he is going to sell.
4. Lawful Object (Section 23) There is no clarity of terms.
The object of agreement should be lawful
and legal. It must not be immoral, illegal 8. Possibility of Performance (Section 56)
or opposed to public policy. Two persons The terms of the agreement should be
cannot enter into an agreement to do a capable of performance. An agreement
criminal act. to do an act, impossible in itself cannot
be enforced. For example A agrees to B to
5. Free Consent (Section 13 & 14) discover a new planet. The agreement is
Consent of the parties must be free and void because the act in itself is impossible to
genuine. Consent means agreeing upon same be performed from the very beginning.
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9. Not declared Void 29.03 Classification of Contract

The agreement should be such that it should TYPES OF CONTRACTS
be capable of being enforced by law. Certain
agreements have been expressly declared Classification
of contracts
illegal or void by the law.
10. Necessary Legal Formalities Validity Formation Performance
A contract may be oral or in writing. Where

Valid contract Express contract Executed contract
a particular type of contract is required by
law to be in writing and registered, it must
Volid contract Implied contract Exeutory contract
comply with necessary formalities as to
writing, registration and attestation. If legal
Volid contract Quasi contract Unilateral contract
formalities are not carried out then the
contract is not enforceable by law.
Illegal contract Tacit contract Bilateral contract
For example: A promise to pay a time barred
debt must be in writing. Unenforceable
contract
All Contracts are Agreements, but all
Agreements are not Contracts
I. On the Basis of the validity
The agreements may be classified into
two categories:
1. Valid Contract
Agreement not enforceable by law - Any An agreement which fulfils all the essentials
essential of a valid contract is not available. prescribed by law on the basis of its creation.
For example S offers to sell his car for
Agreement enforceable by law - All essentials Rs.2,00,000 to T. T agrees to buy it. It is a
of a valid contract are available Valid Contract.
Distinction between Contract & Agreement
S.No Basis Contract Agreement

1 Definition A contract is an agreement An Agreement is every promise
enforceable by law. or every set of promises forming
consideration
2 Enforceability Every contract is enforceable Every promise is not enforceable.
3 Inter relationship A contract includes an An agreement does not include a
agreement. contract.
4 Validity Only legal agreements are called An agreement may be both legal
contracts. and illegal.
5 Legal Obligation Every contract contains a legal It is not necessary for every
obligation. agreement to have legal obligation.
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2. Void Contract (2(j)) proposal or acceptance of any promise is

A contract which ceases to be enforceable by made in words, the promise is said to be
law. A contract which does not satisfy any express. For example P says to Q ‘will you
of the essential elements of a valid contract buy my bicycle for Rs.1,000?” Q says to P
is said to be Void. For example A contract “Yes”.
between drug dealers to buy and sell drugs
is a void contract. 2. Implied Contract
The implied contract is one, which is not
3. Voidable Contract 2(i) expressly written but understood by the
An agreement which is enforceable by law at conduct of parties. Where the proposal or
the option of one or more parties but not at acceptance of any promise is made otherwise
the option of the other or others is a voidable than in words, the promise is said to be
contract. This is the result of coercion, undue implied. For example A gets into a public
influence, fraud and misrepresentation. bus, there is an implied contract that he will
pay the bus fare.
4. Illegal Contract
It is a contract which is forbidden by law. 3. Quasi Contract
All illegal agreements are Void but all void It is a contract created by law. Actually, there
agreements or contracts are not necessarily is no contract. It is based on the principle
illegal. Contract that is immoral or opposed that “a person shall not be allowed to enrich
to public policy are illegal in nature. himself unjustly at the expense of the other”.
i. Unlike illegal agreements there is no In other words it is an obligation of one party
punishment to the parties to a void to another imposed by law independent of
agreement. an agreement between the parties.
ii. Illegal agreements are void from the very
beginning but sometimes valid contracts 4. Tacit Contract
may subsequently become void. A contract is said to be tacit when it has to be
inferred from the conduct of the parties. For
5. Unenforceable Contract example obtaining cash through automatic
Where a contract is unenforceable because teller machine, sale by fall of hammer of an
of some technical defect i.e. absence in auction sale.
writing barred by imitation etc. If the parties
III. On the Basis of Performance
perform the contract it will be valid, but the
court will not compel them if they do not 1. Executed Contract
II. On the Basis of the Formation A contract in which both the parties
have fulfilled their obligations under the
1. Express Contract contract. For example X contracts to buy
A contract made by word spoken or written. a car from Y by paying cash, Y instantly
According to Section. 9, in so for as the delivers his car.
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2. Executory Contract
A contract in which both the parties are yet For Own Thinking
to fulfil their obligations, it is said to be an 1. A agrees to pay B (Rs.20,000) and in
executory contract. For example A agrees to consideration, B agrees to unload 10 bags
buy B’s cycle by promising to pay cash on of sugar from a truck in 5 minutes. Is it a
15th June. B agrees to deliver the cycle on Valid contract?
20th June. 2. X writes to Y, “As a doctor you treat
my wife without charging, I promise to
3. Unilateral Contract pay you Rs 10,000/-. “X” does not pay.
Advise Y
A unilateral contract is a one sided contract
3. P owes Q Rs.10,000/-for the last 10 years
in which only one party has performed his
and the payment is time barred. P signs a
promise or obligation, the other party has to pro-note for it. Is it a valid contract? If yes,
perform his promise or obligation. give reason
For example X promises to pay Y a sum of

Rs.10,000 for the goods to be delivered by Y.
X paid the money and Y is yet to deliver the For Future Learning
goods.
1. After studying this chapter any one can
enter into Valid Contract and can also
4. Bilateral Contract identify the essentials present in the
A contract in which both the parties commit contract.
to perform their respective promises is 2. After understanding this chapter entering
called a bilateral contract. For example R into Offer and giving Acceptance becomes
offers to sell his fiat car to S for Rs.10,00,000 easier
on acceptance of R’s offer by S, there is a 3. After going through this chapter the value
promise by R to Sell the car and there is a of consideration and the requirement for
promise by S to purchase the car, there are return payment can be understood better.
two promises. 4. After reviewing this chapter the parties
who are allowed to enter and the parties
Key Terms who are not allowed to enter into a
contract can be clearly demarcated.
Agreement Consideration Proposal
Acceptance Offer Promise 5. After analysing this chapter an obligation
Lawful Consent Coercion imposed by law – Quasi Contracts are
Void Valid Auction better understood and distinguished from
Enforceable other contracts.
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Exercise Answers
1.d 2.a 3.b 4.c 5.b

I Choose the Correct Answer
1. An agreement enforceable by law is a

(a) Enforceable acceptance II Very Short Answer Questions
(b) Accepted offer 1. What is law?

(c) Approved promise 2. Why should one know law?
(d) Contract 3. Can a minor enter into a Contract?
4. Who can enter into a Contract?
2. Every promise and every set of promises,
forming the consideration for each other, 5. Define Contract
is an
III Short Answer Questions
(a) Agreement
1. Define Offer
(b) Contract
2. What do you mean by Agreement?
(c) Offer
3. Define a Voidable Contract
(d) Acceptance
4. What do you mean by Revocation?
3. Void agreement signifies 5. Who is a promisor, promisee?
(a) Agreement illegal in nature
(b) Agreement not enforceable by law IV Long Answer Questions
(c) Agreement violating legal procedure 1. Explain the essentials of a Valid Contract
(d) Agreement against public policy. 2. Difference between Contract and
Agreement.
4. Acceptance to be valid must
3. Explain the classification of Contract on
(a) Be absolute
the basis of the Validity.
(b) Be unqualified
4. Explain the classification of Contract on
(c) Both be absolute & unqualified the basis of the Formation.
(d) Be conditional. 5. Explain the classification of Contract on
5. A contract with or by a minor is a the basis of the Performance.
(a) Valid contract
(b) Void contract
(c) Voidable contract
(d) Voidable at the option of either party.
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CHAPTER
30 PERFORMANCE OF CONTRACT
Learning Objectives So, it is also called offer to performance or

tender. Hence, a valid tender of performance
is considered to be the performance of a
i. Define offer of performance or
promise.
tender and explain its essentials.
ii. Discuss the rules regarding time and Essentials of a Valid Tender of
place of performance Performance (Section 38)
iii. Explain about the devolution of Joint A tender, tobe valid, must satisfy the
Rights and Joint Liabilities following essential requirements
i) It must be unconditional
30.01 Introduction ii) It must be for the whole obligation
Regarding the performance of contract, and must not be in instalments, if the
Section 37 of the Act states that the parties contract requires in full.
to a contract must be either (i) perform their iii) It must be by a person who is in a
respective promises or (ii) offer to perform position and willing to perform the
the same (iii) such performance is dispensed promise.
with or (iv) excused under the provisions of
iv) It must be at the proper time and place.
the Act or of any other law. There are mainly
two ways of performing a contract such as: v) It must be in proper form.
vi) It must be made to a proper person i.e.
i. Actual Performance to the promisee or his authorized agent.
When the party has done what he had vii) In case of the tender of goods the
undertaken to do, it is called actual promisee must be given a reasonable
performance. In actual performance, the opportunity to inspect the goods.
party is to fulfil all his obligations under the viii) It may be made to one of the several
contract. joint promisees.
ii. Attempted Performance Who can Demand Performance?

When the party offers to perform his Thef following are those who can demand
obligation, it is not accepted by the promisee. the performance of a valid contract
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1. Promisee – only a promisee can demand comes to an end if the promisor dies. Of
performance and not a stranger demand course in case of other contracts, the legal
performance of the contract. representatives of a deceased promisor are
bound to perform it as provided in Para 2 of
2. Legal Representative – legal
Section 37.
representative can demand Exception
performance. Contrary intention For Example M promises to sell his car
appears from the contract. Contract is of for (Rs. 1,00,000) to N after a week. But,
a personal nature. M dies after 5 days of the contract. M’s
representative will be liable to sell the car to
3. Third party – Exception to “stranger to a
N and N will be liable to pay Rs. 1,00,000/-
contract”
to M’s representative.
30.02 Who will Perform the Contract?
iv) Third Person
i) Promisor himself
According to Section 41, if a promisee
Under Para 1 to Section 40, it is laid down accepts the performance of the promise by a
that where it appears from the nature of the third person he cannot afterwards enforce it
contract, the intention of the parties that any against the promisor.
promise contained in it must be performed
by the promisor himself or by his legal v) Joint Promisors
representatives or by any other competent (a) Devolution of Joint Liabilities
person employed by him, then such promise (Section 42)
must be performed by the promisor himself
or by his legal representatives or by any Section.42 of Indian Contract Act lays down
other competent person employed by him. that ‘‘When two or more persons have made
a joint promise, then unless a contrary
For Example X promises to sketch a site intention appears in the contract, all such
map of Y’s house. X will have to perform persons, during their joint lives and after the
this promise himself. Because it requires death of the last survivor, representatives of
the skill of X. all, jointly must fulfil the promise”
ii) Agent (b) Devolution of Joint Rights (Section 45)

According to Para 2 of Section 40, the “When a person has made a promise to two
promisor may employ a competent person or more persons jointly, then unless there is
such as agent to perform the promise, if a contract to the contrary, the right to claim
the contract is not formed on personal performance rests as between him and them,
condition. with them during their joint lives: and after
the death of them with representatives of
iii) Representations such deceased person jointly with survivors,
A contract which involves the use of personal and after the death of last survivor, with the
skill or it is found on personal considerations, representatives of all jointly”.
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vi) Time and place of Performance of Example: A has given an order of supply of
Promise books in July which should be performed
It is only the promisee for whom the within 4 to 5 days of the month of July.
contract is performed. Only the promisee
can demand the performance of the promise
2. Under Section 47, specified time and
under a contract.
place for performance:
For Example: X promises Y to pay Z If the promise is to be performed on a
₹ 10,000/-. X does not pay the sum to Z. certain day, the promisor may undertake
Here Z cannot bind X for the payment. It to perform it without application of the
is only promisee Y who can enforce the promisee. According to the Section 47,
promise against the promisor X. In such a case the promisor may perform
the promise at any time during the usual
Of course, there are certain special cases, hours of business on such day and at the
where a third party can enforce a promise place at which the promise ought to be
though he is not a party to the contract performed.
For example in respect of trust, marriage
settlement etc. In case of death of promisee, 3. Under Section 48, performance on a
the representative appointed by him can ask certain day:
for the performance of the promise under a If the promise is to be performed on a
contract. certain day the promisor may undertake
to perform it after the application by the
Legal provisions regarding the time, place
and manner of performance of a contract promisee to that effect.
Various legal provisions are laid down under 4. Under Section 49, performance of promise
Section 46 to 50 regarding the time, place when no place is fixed and without
and manner of performance of a contract. application:
So, as far as the time, place and manner of
If the promise is to be performed
performance of a contract are concerned it
without application by the promisee
must be agreed upon by the parties to the
and where no place is mentioned to be
contract themselves. The legal provisions
performed of the contract then it is the
regarding these are given below –
duty of the promisor to apply to the
1. Under Section 46, performance within a promisee to provide a reasonable place
reasonable time: for the performance of the promise and
to perform it at such place.
According to Section 46, a promisor is to
perform his promise within a reasonable
time. On the other hand, reasonable For Example: M takes to deliver 1,000
time will depend upon the circumstance kilos of wheat to N on a fixed day. M must
of the case, the usage of trade or on the apply to appoint a reasonable place for the
intention of the parties entering into the purpose of receiving it and must deliver it
contract. to him at such place.
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5. Under Section 50, performance is independent, For example Ramu agrees to

prescribed by the promisee: pay Somu the amount for the rice supplied
on 10th June. Somu promises to deliver rice
According to Section 50, the performance
on 18th June.
of any promise may be made in any
manner or at any time, which the
promisee prescribes. Example: T owes S 2.Mutual and Dependent
Rs. 2,00,000/- to accept T’s car value of Where the performance of the promise by
Rs. 1,00,000/- in reduction of the debt. one party depends upon prior performance
The delivery of the car will amount to a of promise by the other party, the promises
part payment of the debt. are conditional and dependent. For example
A agrees to construct a building for B. B
30.03 Reciprocal Promises agrees to supply cement for the construction.
(Section 2 (f)) Hence A’s promise to perform depends on
Promises which form consideration or part B’s promise.
of consideration for each other are called
‘reciprocal promise’.
3. Mutual and Concurrent
For example X promises to sell his house Where the two promises are said to be
to Y for Rs.5,00,000. The promises are performed simultaneously, they are said to
reciprocal. X is the promisor to give the be mutual and concurrent.
house and a promise to receive Rs.5,00,000.
Y is the promise to receive the house and a Appropriation of Payments
promisor to pay Rs. 5,00,000 [Section 59 – 61]
Appropriation means application of
Kinds of Reciprocal Promises payments – The question of appropriation
1. Mutual and Independent of payments arises when a debtor owes
several debts to the same creditor and makes
Where each party must perform his promise a payment that is not sufficient to discharge
independently without the performance the whole indebtedness.
of the other, the promise are mutual and
1. Appropriation of Payments
Sometimes, a debtor owes several distinct
debts to the same creditor and he makes a
(i) Time place and manner form payment which is insufficient to satisfy all
the core of the performance of a the debts. In such a case, a question arises as
contract to which particular debt the payment is to
be appropriated. Section 59 to 61 of the Act
(ii) Valid tender of performance
lay down following rules as to appropriation
is always considered to be the
of payments which provide an answer to
performance of a contract
this question.
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Appropriation as Per express Instructions Key Terms

Every debtor who owes several debts to a Promise Instalment
creditor has a right to instruct his creditor Promisee Unconditional
to which particular debt, the payment is promisor Tender
to be appropriated or adjusted. Therefore,
where the debtor expressly states that the
payment is to be applied to the discharge
of a particular debt, the payment must be
For Own Thinking
applied accordingly.
1. To identify the performance and
For Example X owes Y three distinct debts distinguish the performance as actual
of ₹20,000, ₹30,000 and ₹50,000 X sends or attempted
₹50,000 and instructs Y that the payment 2. To understand the time and place of
should be appropriated against the third performance, so that the contract is
debt. He is bound to appropriate the established to be discharged or not
payment against the third debt only.
2. Application of payment where debt to

be discharge is not indicated [60] For Future Learning
If section 60 is attracted, the creditor shall
have the discretion to apply such payment 1. Suggest ways by which the nature
for any lawful debt which is due to him from of performance of a contract can be
the person making the payment. categorised
For Example P owes to Q, among other 2. To identify those who are involved in
debts, the sum of Rs.10,000. Q writes to the process of performance of contract
P and demands payment of this sum. and their legal status
P sends to Q Rs.10,000. This payment is
to be applied to the discharge of the debt
of which Q had demanded payment.
Exercise
3. Application of payment where neither I Choose the Correct Answer
party appropriates [61]
1. On the valid performance of the
The payment shall be applied in discharge contractual obligations by the parties,
of the debts in order of time whether they the contract
are or are not based by the limitation Act
a. Is discharged
1963, if the debt are of equal standing (i.e.
payable on the same date) the payment shall b. Become enforceable
be applied in discharge of each of these debt c. Becomes void
proportionately. d. Becomes legal
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2. Which of the following persons can Answers

perform the contract?
1.a 2.d 3.b 4.d 5.c
a. Promisor alone
b. Legal representatives of promisor II Very Short Answer Questions
c. Agent of the promisor
1. State the ways of Performing a
d. All the above Contract.
3. A, B, C jointly promised to pay Rs.50,000 2. Who is a Legal Representative?
to D. Before performnce of the contract, 3. Who is an agent?
C dies. Here, the contract 4. Define Reciprocal Promise.
a. Becomes void on C’s death 5. By whom must contracts be perfomed?
b. Should be performed by A and B along
with C’s legal representatives. III Short Answer Questions
c. Should be performed by A and B alone. 1. What is a Valid tender?

d. Should be renewed between A, B 2. Who can execute and Perform a
and D. Contract?
4. Which of these parties cannot demand 3. Who can demand performance?
performance of promise? 4. Write a note on the benefits of Reciprocal
a. Promisee Promise.
b. Any of the Joint Promisees 5. Who is a Joint Promisors?
c. On the death of a Promisee, his Legal IV Long Answer Questions
Representative.
1. Explain rules relating to place of
d. Stranger to the Contract
performance of promise
5. A person is said to be a third person if he 2. Elucidate the provision regarding time as
is not a factor in performance.
a. promisor b. promise 3. How do you think appropriation of
c. agent d. Legal Representative payments takes place?
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CHAPTER
31 DISCHARGE AND BREACH

OF A CONTRACT
1. Discharge by Performance
Learning Objectives
Performance implies carrying out the
To enable the students to obligation of the contract. Performance must
i. Understand the circumstances be completed according to the real intentions
under which a contract is said to be of the agreement. Performance must be done
discharged. according to time and manner prescribed.
ii. Analyse the impossibility of Performance of contract may be of two types
performance as a mode of discharge namely
of contract.
(i) Actual performance
iii. Perceive the breach of contract as a
mode of discharge of contract. (ii) Attempted performance
iv Absorb the remedies available to
2. By Agreement on Consent
an aggrieved party on the breach of
contract. Agreement between the parties comes to
an end by mutually agreeing for it. Any
contract is created by an agreement, hence
in the same way, it can be discharged by
31.01 Discharge of Contract
an agreement. In this connection the rule
Discharge of contract implies termination of law is as follows. “Eodem modo qus and
of the contractual relationship between quide constituitor, eodem modo destruitur,”
the parties. A contract is discharged if it the meaning of which is that a thing may
ceases to operate and when the rights and be destroyed in the same manner, in which,
obligations created by it come to an end. it is constituted. The consent may be of the
Sometimes, other rights and obligations following types
may arise as a result of discharge of the
(i) Express: Express consent may be given at
contract. These are independent of the
the time of formation of the contract or
original contract.
subsequent to its formation
Modes of Discharge Of Contract (ii) Implied: The contracts are also
Different modes of discharge of contract discharged by implied consent, different
have been provided under different sections modes of discharge by implied consent
of the Act. are mentioned below
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(a) Novation, (b) Alteration, 4. By Lapse of Time

(c) Recession, (d) Remission, According to the Limitation Act, 1963
(e) Accord and Satisfaction, a contract must be performed within a
(f) Waiver and (g) Merger specified time. If it is not performed within
this specified time limit and against which
3. By Impossibility of Performance if no action is taken by the promisee in
A contract may be discharged if its the Court of Law within specified time,
performance becomes impossible. The rule then the promisee is deprived of his
of impossibility of performance is based on remedy at law. In such cases, the contract
the following maxims is discharged.
i) the law does not recognize what is 5. By Operation of Law:

impossible and
A contract can be discharged by the opera-
ii) what is impossible does not create an
tion of law. The operation of law by which
obligation.
contract can be discharged are as follows
According to the Section 56 of the Act, all
i) By Death: If the contracts depend on
acts to do impossible acts are void. There are
the personal skill or ability, then such
two types of impossibility of performance
contract may be discharged on the death
such as –
of the promisor
i) Impossibility existing at the time of
agreement. ii) By Merger: Merger will take place when
an inferior right accruing to the same
ii) Impossibility arising subsequent to the
party either under the same or another
formation of contract.
contract.
On the other hand, impossibility of
performance existing at the time of iii) By Insolvency: An insolvent is discharged
performance of a contract may be either from all liabilities incurred prior to his
adjudication.
(a) known to the parties or (b) not known to
the parties. iv) Unauthorized Alteration of the Terms of a
Contract: If one party makes any material
Likewise impossibility arising subsequent to alteration in the contract without the
the formation of a contract or supervening consent of the other party, then the other
impossibility may be party can avoid the contract.
a) By some event beyond the control of the v) Rights and liabilities vesting in the same
parties or person: W here the right and liability
b) By some act either of the promisor or of become vested in the same person, the
the promisee. other parties are discharged.
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31.02 Remedies for Breach of i) When the act agreed to be done is such
Contract that compensation in money for its non-
All parties to a contract are expected to performance is not sufficient
perform their promises. When one party ii) When it is probable that compensation
refuses to perform his promise, then the in money cannot be received for the
breach of contract takes place. The other non- performance of the act agreed to be
party or parties are called aggrieved or done
injured party or parties. iii) When there is no standard for
ascertaining the actual damage caused by
Remedies the non-performance of the act agreed to
There are various types of remedies for the be done
injured parties listed as follows
On the other hand, the court does not grant
i) Recission of Contract. specific performance in the following cases:
ii) Claim for Specific Performance. i) Damages are an adequate remedy
iii) Claim for Injunction. ii) The contract is not certain
iv) Claim for Quantum Merit and iii) The contract is inequitable to either
v) Claim for Damages. party
iv) The contract is of revocable nature
(i) Recission of Contract
v) The contract is made by the trustee in
In case of breach of contract by one party, breach of trust
then the other parties may rescind the vi) The contract is of personal nature i.e.,
contract and thereby the party is absolved contract to marry
from his all obligations under the contract.
vii) The contract made by a company
ultra-vires of its Memorandum of
For Example: M promises N to supply
Association
him a motor car on 1st January 2017, and
N promises to pay for the motor car on 1st viii) The court cannot supervise its carrying
January 2017. N is absolved from paying out
its price.
(iii) Claim for Injunction
(ii) Claim for Specific Performance Injunction is an order passed by a competent
court restraining a person from doing some
In some specific cases if the damages are
act. Injunction can be defined as a mode
not the adequate remedy, then the court can
of securing the specific performance of the
direct the party in breach for the specific
negative terms of a contract. Negative terms
performance of the contract. In such case,
of contract imply doing something, which
the promise is carried out as per terms and
a party has promised not to do. Injunction
conditions of the contract.
is an order which is granted by the court
Generally in the following cases, the court restraining the person to do what he had
grants specific performance promised not to do.
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The court may order injunction in the by a party for breach of contract. There are
following cases – mainly four types of damages, such as-
(a) if the contract is voidable. i) Ordinary damages

(b) if the contract becomes void or ii) Special damages
(c) on discovering the contract as void. iii) Vindictive or exemplary damages and
iv) Nominal damages.
(iv) Claim for Quantum Merit
The claim for quantum merit may arise if a
Key Terms
contract performed by one party has become
discharged by breach of the other party. The Breach of Contract Rescission
meaning of the phrase quantum merit is ‘as Restitution Novation
much as earned’. The claim is not for the Injunction Remission
original contract that has been discharged
or void, but on an implied promise by the
other party to pay for what he has done.
Quantum merits arises in the following For Own Thinking
circumstances.
1 To draw inference about the nature of
a) If a contract is found to be void.
contract and legal ways of discharging
b) If something is done without any
it
intention to do so gratuitously.
2. To understand the modes of discharge
c) If one party abandons or refuses to
of contract
perform the contract.
d) If a contract is divisible.
e) If a contract is performed badly.
(v) Claim for damages For Future Learning
Damages are a monetary compensation 1. To interpret the consequence of breach

awarded by the court to the injured party of performance of contract
for the loss or injury suffered by him. As
per contract, one party can claim damages 2. Illustrate with example the modes
if other party breach the contract. The main of discharge of contract and if not
purpose of awarding the damages is to make discharged, the consequences
good the loss suffered by him. It is known
3. To foresee the suitability of remedies for
as doctrine of restitution. The Section 73 of
breach of contract violation of which
the Indian Contract Act, 1872 deals with the
leading to legal consequences
compensation for loss or damages caused
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II Very Short Answer Questions

Exercise 1. What are the kinds of consent?
I Choose the Correct Answer 2. What are the types of Impossibility of
Performance?
1. On the valid performance of the
contractual obligation by the parties, the 3. What is Quantum merit?
contract
III Short Answer Questions
a. Is discharged
1. What are the different modes of
b. Becomes enforceable
discharged by implied consent?
c. Becomes void
2. Define discharge by Performance.
d. None of these
3. What are reasons for impossibility
2. An agreement to do an act impossible in arising after the formation of contract?
itself under Section.56 is 4. What are the various rules regarding
a. Void b. Valid damages?
c. Voidable d. Unenforceable
IV Long Answer Questions
3. Any agreement which becomes
1. Explain the ways of discharge of Contract?
impossible to perform under various
circumstances 2. Write about the various remedies for
a. Voidable b. Void breach of contract
c. Valid d. None of these 3. Discuss the different types of damages
awarded to the injured party.
4. Discharge by mutual agreement may
involve Reference
a. Novation b. Rescission 1. Mercantile Law – N.D.Kapoor

c. Alteration d. All of the above 2. Contract & Specific Relief – Avtar Singh
3. Indian Contract Act - - Taxmann’s
5. The compensation given for breach of
contract is 4. The Indian Contract and Specific Relief
Act – Pollock & Mulla
a. Damage B. remuneration
5. Indian Contract Act – Dr R.K.Bangla
c. Money D. Cheque
6. Digest of Indian Contract Act – Sandeer
Answers
Bhalla
7. www.newlawman.com
1. a 2. a 3. b 4. d 5. a
8. www.lawbusinessman.com
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CHAPTER
32 DIRECT TAXES
Learning Objectives
KINDS OF
TAXES
i. know the meaning of direct tax and
its types
ii. understnad the term income tax and
its features Direct Indirect
iii. explain the basic concepts of Income Taxes Taxes
tax
iv understand the heads of Income,
Gross Total Income and Total Income
Government, it is called direct tax e.g.
Income-Tax, Wealth Tax, Capital Gains
32.01 Meaning of Tax Tax, Securities Transaction Tax, Fringe
Tax is a compulsory contribution to state Benefits Tax (from 2005), Banking Cash
revenue by the Government. It is levied Transaction Tax (for Rs.50,000 and above
on the income or profits from business of - from 2005), etc. In India all direct taxes
individuals and institutions. It may be added are levied and administered by Central
to the price of goods, services or transactions. Board of Direct Taxes.
Tax is the basic source of revenue to the ii. Indirect Tax: If tax is levied on the
Government. This revenue is utlised for the goods or services of a person (seller). It
expenses of civil administration, internal and is collected from the buyers and is paid
external security, building infrastructure, by seller to the Government. It is called
etc. indirect tax. e.g. GST.
Types of Taxes
32.02 Income Tax
There are two types of taxes – direct taxes
and indirect taxes. Income tax is a direct tax under which tax
is calculated on the income, gains or profits
i. Direct Tax: If a tax levied on the income earned by a person such as individuals and
or wealth of a person and is paid by that other artificial entities (a partnership firm,
person (or his office) directly to the company, etc.)
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Features of Income Tax in India iv. Annual Tax

Income tax is an annual tax because it is
i. Levied as Per the Constitution
the income of a particular year which is
Income tax is levied in India by virtue chargeable to tax.
of entry No. 82 of list I (Union List) of
Seventh Schedule to the Article 246 of the v. Tax on Person
Constitution of India. It is a tax on income earned by a person.
The term ‘person’ has been defined under
ii. Levied by Central Government the Income tax Act. It includes individual,
Income tax is charged by the Central Hindu Undivided Family, Firm, Company,
Government on all incomes other than local authority, Association of person or
agricultural income. However, the power to body of Individual or any other artificial
charge income tax on agricultural income juridical persons. The persons who are
has been vested with the State Government covered under Income tax Act are called
as per entry 46 of list II, i.e., State List. ‘assessees’.
iii. Direct Tax vi. Tax on Income

Income tax is direct tax. It is because the It is a tax on income. The Income tax Act
liability to deposit and ultimate burden has defined the term income and it includes
are on same person. The person earning salary income, house property income,
income is liable to pay income tax out of his business/profession income, capital gains
own pocket and cannot pass on the burden and other sources income. However, there
of tax to another person. are certain incomes which are specifically
exempt from income tax.
vii. Income of ‘Previous Year’ is Assessable

in ‘Assessment Year’
Structure of Indian Taxation System

Income earned during a particular
financial year is assessed to tax in the
Indian taxation system is one of the immediately following financial year. The
largest systems in the world.The authority year of earning income is called ‘Previous
to levy tax is derived from the Indian Year’ and the year in which assessment of
constitution and is well-structured. The income is done is called ‘Assessment Year’.
tax administration has clear demarcation The income tax return of previous year’s
between Central Government and State income is filed in the relevant assessment
Governments and then between State year.
Governments and Local Bodies. Article
246 (Seventh Schedule) of the Indian viii. Charged at Prescribed Rate(s)
constitution contains the legislative Income tax is charged at prescribed rate(s).
powers (including taxation) of the Union The rates of income tax differ for different
government and the State Governments. income and for different persons. While tax
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rates for normal incomes are prescribed by ii. Person[Sec.2 (31)]

the annual Finance Act, tax rates for certain The term ‘person’ includes the following
special incomes have been prescribed under
Income Tax Act itself. For instance, the (i) an individual,
following tax rates have been prescribed (ii) a Hindu Undivided Family (HUF),
under Income Tax Act. (iii) a company,
a. Tax on long term capital gain @ 20% (iv) a firm,
(Section 112). (v) an Association Of Persons or a Body
b. Tax on short term capital gain on shares Of Individual, whether incorporated or
covered under STT @15% (Section not,
111A). (vi) a local authority, and
c. Tax on lottery income @ 30% (Section (vii) every artificial juridical person e.g., an
115BB) idol or deity.
iii. Assessment Year (A.Y)[Sec.2 (9)]

ix. Administered by the Central
Government The term has been defined under section
2(9). The year in which tax is paid is called
Income tax is administered by the Central
the assessment year. It normally consisting
Government (Ministry of Finance) with
of a period of 12 months commencing on 1st
the help of ‘Income tax department’ with
April every year and ending on 31st March
branches throughout the country. The
of the following year.
Central Government has constituted the
‘Central Board of Direct Taxes’ (CBDT) iv. Previous Year (P.Y)[Sec.(3)]
which exercises overall control over the The year in which income is earned is called
Income tax department by issuing guidelines previous year. It is also normally consisting
for related matters. of a period of 12 months commencing on 1st
April every year and ending on 31st March
x. Applicability of the following year. It is also called as
Income Tax is applicable throughout India financial year immediately following the
including the State of Jammu and Kashmir. assessment year.
v. Income [Sec.2 (24)]
Basic Concepts of Income Tax Income includes the followings;
i. Assessee[(Sec. 2(7)] i. Profits and gains of business or

profession.
Assessee means a person by whom any tax
or any other sum of money is payable under ii. Dividend
this Act. It includes every person in respect iii. Voluntary contribution received by a
of whom any proceeding has been taken for charitable / religious trust or university/
the assessment of his income or assessment education institution or hospital/
of fringe benefits. electoral trust[ w.e.f.01.04.2010]
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iv. Value of perquisite or profit in lieu vi. Agricultural Income (Section 2(1A)
of salary taxable u/s 17 and social Any rent or revenue derived from land
allowance or benefit specifically granted which is situated in India and is used for
either to meet personal expenses or for agriculture purposes. Agricultural income
performance of duties of an office or an is fully exempted from tax u/s 10(1) and as
employment of profit. such does not form part of total income.
v. Export incentives, like duty drawback,
cash compensatory support, sale of Heads of Income [Sec. 14]
licenses, etc., Section 14 of Income Tax Act 1961 provides
vi. Interest, salary, bonus, commission or for the computation of total income of an
remuneration earned by a partner of a assessee which is divided under five heads
firm from such firm. of income. Each head of income has its own
vii. Capital gain chargeable u/s 45. method of computation.
viii. Profits and gains from the business of These five heads are;
banking carried on by a cooperative
(i) Income from ‘Salaries’ [Sections 15-
society with its members.
17];
ix. Winning from lotteries, crossword
(ii) Income from ‘House Property’
puzzles, races including horse races,
[Sections 22-27];
card games and other games of any
(iii) Income from ‘Profits and Gains of
sort or from gambling or betting of any
Business or Profession’ [Sections 28-
form or nature whatsoever.
44];
x. Deemed income u/s 41 or 59. (iv) Income from ‘Capital Gains’ [Sections
xi. Sums received by an assessee from 45-55]; and
his employees towards welfare fund (v) Income from ‘Other Sources’ [Sections
contribution such as provident fund, 56-59].
superannuation fund, etc. Gross Total Income (GTI) [Section
80B (5)]
xii. Amount received under key man
insurance policy including bonus Income from all the above five heads of
thereon. income shall be computed separately
according to the provisions given in the
xiii. Amount received under agreement for-
Act. Income computed under these heads
(a) not carrying out activity in relation
shall be aggregated after adjusting past and
to any business, or (b) not sharing any
present losses and the total so arrived at is
know – how, patent, copyright etc.
known as ‘Gross Total Income’.
xiv. Benefit or perquisite received from
(i) Income from ‘Salaries’ *****
a company, by a director or a person
(ii) Income from ‘House Property’ *****
holding substantial interest or a relative (iii) Income from ‘Business or Profession’ *****
of the director or such person. (iv) Income from ‘Capital Gains’ *****
xv. Gift as defined u/s 56 (2)(vi), and (v) Income from ‘Other Sources’ *****
others. Gross Total Income (GTI) *****
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Total Income (T.I.)

[Sections 2 (45)] Exercise
Out of Gross Total Income, Income tax
Act 1961 allows certain deductions under
section 80. After allowing these deductions 1. Income Tax is
the figure which we arrive at is called ‘Total a) a business tax
Income’ and on this figure tax liability is b) a direct tax
computed at the prescribed rates. c) an indirect tax
Gross Total Income **** d) none of these
Less: Deductions (Sec.80C to 80U) **** 2. Period of assessment year is

Total Income (T.I.) **** a) 1st April to 31st March
b) 1st March to 28th Feb
80C Deductions; Contribution to Provident
c) 1st July to 30th June
Fund, life Insurance Premium, Children’s
Tuition Fees, Health Insurance Premium, d) 1st Jan. to 31st Dec.
Investment in National Savings Certificate, 3. The year in which income is earned is
interest paid for home loans, etc. known as
a) Assessment Year
Income Tax Slab Rate for Individual -
Illustration b) Previous Year
c) Light Year
As per the Assessment Year 2018-19
d) Calendar Year
4. The aggregate income under five heads

TOTAL INCOME Income Tax Rate
is termed as
(Rs)
a) Gross Total Income
Upto 2,50,000 Nil
(b) Total Income
2,50,001 – 500,000 5% (c) Salary Income
500,001 – 10,00,000 20% (d) Business Income
Above 10,00,000 30% 5. Agricultural income earned in India is

a) Fully Taxable
b) Fully Exempted
Key Terms c) Not Considered for Income
Direct Tax Indirect Tax d) None of the above
Assessment Year Previous Year
Assessee Person Answers
Agricultural Income 1. b 2. a 3. b 4. b 5. b
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II. Very Short Answer Questions 2. Define Tax. Explain the term direct tax
1. What is Income tax? and indirect tax with an example.
3. List out any ten kinds of incomes
2. What is meant by previous year?
chargeable under the head income tax.
3. Define the term person?
4. Discuss the various kinds of assesses.
4. Define the term assessee?
5. What is an assessment year? Reference
1. V.P.Gaur, et.al., Income Tax Law and
Practice: Incorporating Income tax
1. What is Gross Total Income? Act, 1961 As Amended Up –to –Date,
2. List out the five heads of income. (Assessment Year 2017-18) 45th Edition,
Kalyani Publishers, New Delhi 2017.
3. Write a note on Agricultural Income.
2. A. Murthy., IncomeTax Land and
4. What do you mean by Total Income.
Practice: Assessment Year 2017-18, 5th
5. Write short notes on: edition, Vijay Nicole Imprints Private
1. Direct Tax. 2. Indirect Tax Limited Chennai.
3. The Institute of Chartered Accountants
of India, Taxation (Part – I: Income-tax,
1. Elucidate any five features of Income ICAI Bhawan, Indraprastha Marg, New
Tax. Delhi.
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ICT CORNER
DIRECT AND INDIRECT TAXES: GST CALCULATOR
Lets Calculate GST tax

and Amount to be paid
after tax.
STEPS:
• GeoGebra Work book called “COMMERCE” will appear. In this several work
sheets for Commerce are given, Open the worksheet named “GST CALCULATOR”
• You can enter Rate of GST and the Amount in the respective boxes and press
enter.
• You will get 3 Answers
1. GST amount,
2. If the cost is the amount, you will get the amount after Tax.
3. If you enter the amount Which Includes the GST you will get
split up value Cost + GST.
Step1 Step2 Step3
URL:
https://ggbm.at/b9jZFxRE
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CHAPTER
33 INDIRECT TAXATION
Differences between Direct Taxes and
Learning Objectives Indirect Taxes
To enable the students to The main differences between direct taxes

i. understand the meaning of Indirect and indirect taxes are given in table.
tax 33.02 Goods and Services Tax
ii. distinguish between direct taxes and (GST) – Meaning
indirect taxes
Goods and Services Tax (GST) is the tax
iii. describe the meaning, kinds and
imposed on the supply (consumption) of
objectives of GST
goods and services. It is a destination based
iv. learn about the GST council and its consumption tax and collected on those value-
functions added items at each stage of the supply chain.
33.01 Meaning of Indirect Tax A manufacturer in India, need not pay

GST wherever he/she manufactures. GST is
Indirect Tax is levied on the goods and
applicable to all goods and services except
services. It is collected from the buyers by
alcohol and specified petroleum products.
the sellers and paid by the sellers to the
GST Act has proposed four tax rates, i.e. 5%,
Government. Since it is indirectly imposed
12%, 18% and 28%.
on the buyers it iscalled indirect tax. e.g.
GST - Goods and Services Tax, Excise duty. Traders having annual turnover, within
The following picture clearly explains the a state, below Rs.20 lakhs are exempted
direct tax and indirect tax concepts. from GST. These small traders need not
Direct Tax
(Example - Income Tax) Pays
Consumer Govt
Indirect Tax
(Example - Income Tax) Pays Pays
Consumer Manufacturer Govt
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Differences between Direct Taxes and Indirect Taxes

Basis Direct Taxes Indirect Taxes
1. Meaning If a tax levied on the income or If tax is levied on the goods or
wealth of a person is paid by that services of a person is collected
person (or his office) directly to the from the buyers by another person
Government, it is called direct tax. (seller) and paid by him to the
Government it is called indirect tax.
2. Incidence and Impact Falls on the same person. Imposed Falls on different persons. Imposed
on the income of a person and paid on the sellers but collected from the
by the same person. consumers and paid by sellers.
3. Burden More income attracts more income Rate of tax is flat on all individuals.
tax. Tax burden is progressive on Therefore more income individuals
people. pay less and lesser portion of
their income as tax. Tax burden is
regressive.
4. Evasion Tax evasion is possible. Tax evasion is more difficult
5. Inflation Direct tax helps in reducing the Indirect tax contributes to
inflation. inflation.
6. Shiftability Cannot be shifted to others Can be shifted to others
7. Examples Income Tax, Wealth Tax, Capital GST. Excise Duty.
Gains Tax, Securities Transaction
Tax, Perquisites Tax.
register under GST. But the traders having Constitution Amendment Act 2016 was
inter-state business should register and passed and the President’s acceptance was
pay GST even the turnover is below Rs.20 received on September 8, 2016. Under this
lakhs. Special provisions are there in the Act, GST Council, a constitutional body was
GST Act for the 8 northeastern states to be formed to implement GST.
and Himschal Pradesh, Uttarakhand and
Kinds of GST
Jammu and Kashmir.
GST is of three kinds: CGST, SGST/UGST,
Goods and Service Tax
and IGST.
GST Act was passed on April 12, 2017.
GST came into effect from 1st July, 2017. a. CGST - Central Goods and Services Tax
It is the single biggest tax reform since - imposed and collected by the Central
Independence. Several Countries like Government on all supply of goods
Russia, Canada, Australia, Singapore, China, within a state (intra-state) under CGST
etc. have already introduced GST. Act 2017
The right to levy tax is derived from the b. SGST - State Goods and Services Tax
Constitution of India. To permit the Centre - imposed and collected by the State
and the States to levy taxes on the same goods Governments under State GST Act.
and services needed unique amendment (Tamil Nadu GST Act 2017 passed by
to the Constitution. Accordingly 101st Tamil Nadu Govt.)
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c. UGST - Union Territory Goods and makes recommendations on rate of GST,

Services Tax - imposed and collected by apportionment of IGST, exemptions,
the five Union Territory Administrations model GST laws, etc.
in India under UGST Act 2017.
The Chairman of the Council is the Union
d. IGST - Inter-State Goods and Services Finance Minister. The Minister of State
Tax - imposed and collected by the in the Finance Ministry and all Finance
Central Government and the revenue Ministers of the State Governments shall
shared with States under IGST Act 2017. be its members. The Central Government
e. IGST on exports - All exports are shall have 1/3rd voting power and all State
treated as Inter-State supply under GST. Governments shall have 2/3rd voting
Since exports are zero rated, GST is powers. All decisions of the Council can be
not imposed on all goods and services passed only with ¾th of the total votes. Each
exported from India. Any input credit state has one vote, irrespective of its size or
paid already on exports will be refunded. population. Twenty four council meetings
were held until 2017.
33.03 GST Council
Apart from the GST Council, GST
The GST Council will oversee the Secretariat was formed with the following
implementation of the GST. But the officials
Central Board of Excise and Customs i. The Secretary (Revenue) will be
is responsible for administration of appointed as the Ex-officio Secretary to
the CGST and IGST Acts. The Council the GST Council.
Differences between CGST, SGST and IGST
CGST SGST IGST

Meaning CGST means Central SGST means State goods IGST refers to the
goods and service tax to and service tax, replace Integrated Goods and
replace the existing tax the existing tax like sales Services Tax and it is a
like service tax, excise, tax, luxury tax, entry tax, combined form of CGST
etc. and It is levied by etc. and it is levied by the and IGST and it is levied
central government state government by central government
Collection of tax Central government State government Central government
Applicability Intra-state supply Intra-state supply Inter-state supply
Registration No registration till the No registration till the Registration is mandatory
turnover crosses 20 lakhs turnover crosses 20
( 10 lakhs for north Lakhs ( 10 lakhs for
eastern states) north eastern states)
Composition The dealer can use the The dealer can use the The composition scheme
benefit up to 75 lakhs benefit up to 75 lakhs is not applicable in
under the composition under the composition interstate supply
scheme scheme
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ii. The Chairperson, Central Board of 2. It brings parity in taxation among

Excise and Customs (CBEC), will be a imported goods and Indian
permanent invitee (non-voting). manufactured goods. All imported goods
iii. One post of Additional Secretary to the will be charged with IGST which will be
GST, and more or less equivalent to the total of
CGST and SGST levied on manufactured
iv Four posts of Commissioner in the GST
goods. Removal of several taxes will
Council Secretariat will also be created.
make the price of Indian products more
Objectives of GST competitive at world market.
1. The foremost objective of GST is to 3. It will boost manufacturing, export, GDP
create a common market with uniform leading to economic growth through
tax rate in India. (One Nation, One Tax, increase in economic activity.
One Market) 4. Creation of more employment
2. To eliminate the cascading effect of taxes, opportunities which will result in poverty
GST allows set-off of prior taxes for the eradication.
same transactions as input tax credit. 5. It will bring more tax compliance (more
3. To boost Indian exports, the GST already tax payers) and increase revenue to the
collected on the inputs will be refunded Governments.
and thus there will be no tax on all
6. It is transparent and will improve India’s
exports.
ranking in the ‘Ease of Doing Business’
4. To increase the tax base by bringing in the world.
more number of tax payers and increase
7. Uniform rates of tax will reduce tax
tax revenue.
evasion and rate arbitrage between
5. To simplify tax return procedures States.
through common forms and avoidance
of visiting tax departments. B. To Business Community
6. To provide online facilities for payment 1. Simpler Tax System with fewer
of taxes and submission of forms. Goods exemptions. 17 taxes were abolished and
and Services Network (GSTN), a robust one tax exists today.
Information Technology system has been
2. Input tax credit will reduce cascading
created for the operation of GST.
effect of taxes. Reduction in average tax
Benefits of GST burden will encourage manufacturers
and help “Make in India” campaign and
A. To the Society and country make India as a manufacturing hub.
1. Unified common national market will 3. Common procedures, common
attract more foreign investment. GST classification of goods and services and
has integrated the economy of all States timelines will lend greater certainty to
and Union Territories. taxation system.
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4. GSTN facility will reduce multiple record this rate will surpass fifteen percent and
keeping, lesser investment in manpower effectively double the tax rate.
and resources and improve efficiency. v. Adoption and migration to the new
5. All interactions will be through common GST system would involve teething
GSTN portal and will ensure corruption troubles and learning for the entire
free administration. ecosystem.
6. Uniform prices throughout the country.
Expansion of business to all states is Key Terms
made easy. Indirect Tax
Value Added Tax
C. To Consumers
Security Transaction Tax
1. Input tax credit allowed will lower the
Excise Duty
prices to the consumers.
Custom Duty
2. All small retailers will get exemption and
Goods and Services Tax
purchases from them will cost less for
GST Council
the consumers.
Constitution of India
Disadvantages of GST
Besides the above listed advantages the
Exercise
GST is also criticized for many reasons. The
disadvantages of GST are stated below: I. Choose the Right Answer:
i. Several Economists says that GST in 1. Who is the chairman of the GST council?
India would impact negatively on the a) RBI Governor b) Finance Minister
real estate market. It would add up to 8 c) Prime Minister d) President of India
percent to the cost of new homes and
reduce demand by about 12 percent. 2. GST Stands for
ii. Another criticism is that CGST, SGST a) Goods and Supply Tax
are nothing but new names for Central b) Government Sales Tax
Excise/Service Tax, VAT and CST. c) Goods and Services Tax
Hence, there is no major reduction in the d) General Sales Tax
number of tax layers.
iii. A number of retail products currently 3. What kind of Tax the GST is?
have only four percent tax on them. a) Direct Tax
After GST, garments and clothes could b) Indirect Tax
become more expensive. c) Dependence on
iv. The aviation industry would be affected. the Type of Goods
Service taxes on airfares currently range and Services
from six to nine percent. With GST, d) All Business Organisations
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4. What is IGST? 2. What are the objectives of GST?

(a) Integrated Goods and Service Tax 3. Briefly explain the functions of GST
(b) Indian Goods and Service Tax council.
(c) Initial Goods and Service Tax 4. Explain IGST with an example.
(d) All the Above 5. Write any three demerits of UGST.
5. In India GST became effective from? IV. Long Answer Questions

a) 1st April, 2017
1. Distinguish between direct taxes and
b) 1st January, 2017 indirect taxes.
c) 1st July, 2017 2. Discuss the different kinds of GST.
d) 1st March, 2017 3. Elucidate the merits of GST.
Answers
4. Compare CGST, SGST and IGST.
1. b 2. c 3. b 4. a 5. d Reference
II. Very Short Answer Questions 1. Awdhesh Singh, 2017, GST Made
Simple: A Complete Guide to Goods and
1. Define Indirect tax.
Services Tax in India (Second Edition)
2. List out any four types of indirect taxes
2. Taxman, 2017, GST Manual, Taxman
levied in India.
Publications
3. What do you mean by Goods and
3. Taxman, 2017, GST Acts with Rules
Services Taxes?
& Forms (Incorporating Notifications
4. Write a note on SGST. Issued till 17-11-2017)
5. What is CGST? 4. www.gstcouncil.gov.in/
III. Short Answer Questions 5. www.cleartax.in
1. Write any two differences between direct 6. www.taxmann.com
taxes and indirect taxes. 7. www.indiafilings.com
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GLOSSARY
Acceptance 9ä®
Agreement ;ÜHÛEÝ
Amalgamation ;å[DÜ®
Artificial Person Y@Jä[> FHß
Assessement Year IÜØ© 3Ù©
Assessee IÜØ©Ô¤TUJPß
Agricultural Income ZPNTÙ P±ITGÝ
Barter System HÙCITä² ¯[L
Business YETà
Business Organisation YETà 2[IÜ®
Bonded Warehouse [DJ HÙC>Ô>TÜH>Ý
Business Process Outsourcing(BPO)- YETà ¯[L ®LÚLØCà
Business Ethics YETà YF¯[L>ã
Broker EK>ß
Balance of Payments Y@³ÚEà @I[M
Balance of Trade PßÚE>Ö @I[M
Breach of Contract ;ÜHÛE ¯¶
Commerce P~>Ý
Credit Standing >Cå E¤
Coparceners ·Ø©Ô ¤©ÝH 6²ÜGß
Common Seal YHT« ¯Ú[K
Consumer Cooperatives ¬>ßZPTß ·Ø©L¶@Õ>Õ>ã
Credit Co Operatives ·Ø©L¶ >Cå @Õ>Õ>ã
Commercial Banks P~> PÕx>ã
Cash credit YKTÔ>Ô >Cå
Credit Card >Cå 2Ø[C
Common Carrier YHT«Ö @KÔZ>ä
Causa Proxima (Proximate cause) 2Ù[IÔ >TKDÝ
Channels of Distribution POÕ>à P>ã
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Cheap Jacks 4CÝ IT²Ý JTHT>ã

Chambers of Commerce P~>Ö @Õ>Õ>å ·ØC[IÜ®
Consideration 6J HJå
Contract ;ÜHÛEÝ
CGST IÚJ @KÔ¤ Iä²Ý Z@[P P
Dayabhaga Law EJTHT> @ØCÝ
Dissolution >[MÜ®
Domestic industry 6ãFTØ© YETà
Development Bank PNßÖz PÕx
Debit Card Hä² 2Ø[C
Dock Warrant «[L¯> @TåLT[D
Discharge of contract ;ÜHÛE ©Ü®
Direct Tax ZFß¯> P
Economic Activities YHT±NTETK FCP}Ô[>>ã
Employment ZP[MPTÞÜ®
Exploitation ¦KÙCÜH©Eà
E.Business åGª YETà
E.Commerce åGª P~>Ý
Entrepot Trade I² 9ä²I
Export Trade 9ä²I
Export and Import Bank 9ä²I 4LÔ¤I PÕx
Fixed Deposits [M [PÜ®>ã
Food Corporation of India 4ÛJ 6D¶Ô >O>Ý
Franchiser äH[G 6[I YHäLPß
Franchisee äH[G 6[I POÕ¤Fß
Factor Eå YHT²Ü® ¯>Pß
Fair Prices JTJ [M
Foreign Direct Investment 2ÛJ ZFK} ¯E©
Foreign Currency Convertible Bond- 2ÛJ Y@MTP~ ITä²ÜHÚKÝ
Foreign Trade 2JàFTØ© JTHTKÝ
Guarantee YHT²Ü®²
Global Enterprises 6M>NTJ ²PGÕ>ã
329
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Government Company 2K¦ ²IÝ

Global Depository Receipt 6M>NTJ [PÜ® K«
Gross Domestic Product (GDP) YITÚE 6ãFTØ© 6äHÚ
Goods and Services Tax (GST) @KÔ¤ Iä²Ý Z@[P P
GST Council @KÔ¤ Iä²Ý Z@[P P ¤µIÝ
Hindrances E[C>ã
Human Activities IE FCP}Ô[>>ã
Housing Cooperatives Ø© P@ ·Ø©L¶ @Õ>Õ>ã
Host Country Y@JàPKZPä¤Ý FT©
Hawkers PTaGÚà[PÚ«äHPß>ã
Hire Purchase System PTC[> Y>Tã¯Eà ¯[L
Industry 6äHÚÚ YETà
Indemnity 5Ø©²
Internal Trade 6ãFTØ© JTHTKÝ
International Business HåGTØ©Ú YETà
Import 4LÔ¤I
International Bank for Reconstruction and HåGTØ© I²K[IÜ® Iä²Ý
Development (IBRD)- World Bank PNßÖz PÕx
Internation Monetory Fund (IMF) HåGTØ© HD JÝ
Indirect Tax I[L¯> P
Integrated Goods and Services Tax (IGST) ;±Õx[DÛE @KÔ¤ Iä²Ý Z@[P P
Knowledge Process Outsourcing 2¶ @Tß ¯[L ®LÚLØCà
Limited Capital ¤[LÛE 2N¶ ¯Eà
Lender of last resort 4² >Cå 5ZPTß
Letter of Credit >Cå >}EÝ
Mitigation IØ©ÜH©Ú«Eà
Mortgage 2[CITGÝ
Micro Small and Medium Enterprises ¤² z² Iä²Ý F©ÚEK ²PGÕ>ã
(MSME)
MUDRA Bank ¯ÚKT PÕx
Middlemen 4[CÚEKaß>ã
Mercantile Agents P~> ¯>Pß>ã
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Multiple Shops ICÕ¤ >[C>ã

Non-Economic Activities YHT±ã @TKT FCP}Ô[>>ã
Nationalisation FTØ©[C[I
Non Core Activities ¯ÔxJÚ«PÝ ¤[LÛE Y@JàHT©>ã
Oligopoly zàZMTß ¯ä²[I
Offer ¯[G¶ /¯åYIT¶
Peddlers ¦[I¾Ôx äHPß>ã
Promise PTÔ¤²
Promiser PTÔ¤² E±HPß
Promisee PTÔ¤² YH²HPß
Previous Year ¯Û[EJ 3Ù©
Person FHß
Recurring Deposits YETCß [PÜ®>ã
Retailer zàM[K JTHT
Sole Proprietorship EJTã P~>Ý
Service Motto Z@[P EÚ«PÝ
Specialisation EÚEå[I/zLÜ©HT©
Special Drawing Rights (SDR) zLÜ® 8©Ü® 6[I>ã
South Asian Association for
Regional Cooperation (SAARC) YEä>TzJ FT©>å PØCTK
;Ú«[OÜä>TG ·ØC[IÜ®
State Warehousing Corporation- ITM HÙC>Ô >TÜH> >O>Ý
Subrogation H>K 6[I
Surrender Value ©IÜ®
Social Power @Â> 2>TKÝ
Stakeholder @ÝHÛEÜHØCPß>ã
Social Responsibility @Â>Ü YHT²Ü®
Share Holder HÕ¤ETKß
Self Help Group ¦J 6EÔ¤µ
Specialty Stores zLÜ® HÙC> @T[M>ã
Seconds Shops H[OJ YHT±Øaã äZHTß
State Goods and Services Tax (SGST) ITM @KÔ¤ Iä²Ý Z@[P P
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Trade JTHTKÝPßÚE>Ý
Tender ;ÜHÛEÜ ®ã
Tramps ¯[L PJäL >ÜHà>ã
Trade Credit PßÚE>Ô >Cå
Unlimited liability P[KJLTÜ YHT²Ü®
Voluntary Association EåÖ[@JTG 2[IÜ®
Voting Rights PTÔ¤[I
Valid Contract Y@àMÚEÔ> ;ÜHÛEÝ
Void Contract Y@àMÚE>T ;ÜHÛEÝ
Warehouse HÙC>Ô >TÜH>Ý
Warehousing HÙC>Ô >TÜ®
Way Bill PÖ Ø©
World Trade Organisation 6M> PßÚE> 2[IÜ®
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COMMERCE – Class XI
List of Authors and Reviewers
Domain Expert Authors

Dr . D. Ilangovan, Dr. Vidya Srinivasan
Professor and Head, Department of Commerce, Chidambaram HOD, Stella Maris College, Chennai
Dr. T. Thirupathi
Reviewers HOD, Government Arts College,
Salem
Dr. M.S. John Xavier,
Associate Professor and Head, Department of Dr. K. Padhmanaban,
Corporate Secretaryship, Professor, Department of Commerce,
Presidency College, Chennai Annamalai University, Chidambaram
Dr. K . Sundar Dr. K. Murugadoss,

Associate Professor of Commerce, Associate Professor,
Annamalai Univrersity, Chidambaram Head of the Department of Commerce,
Thanthai Periyar Government Arts College,
Dr. Jayanthi Lakshmanaswamy Cuddalore
Associate Professor of Commerce, Government Arts College,
Nandanam, Chennai S.S. Kumaran
HM (Retd), KENC GHSS, Manavalanagar, Thiruvallur
R. Ramesh
ICT Coordinators PG Assistant in commerce, Trinity Academy MHSS,
Vagurampatty, Namakkal
Vasuraj.D,
BT Assistant (Mathematics), PUMS, Kosapur, Puzhal Block G. Baskar
Tiruvallur PG Assistant in commerce, Hindu HSS,
Madurantakam, Kancheepuram Dist.
Senthil Selvan.J
BT Assistant (Mathematics), GHSS, Mangudi, S. Udayakumar
Sivagangai PG Assistant in commerce,GHSS, Karunguzhi,
Kancheepuram
SCERT Coordinator Dr. J. Anand
PG Assistant in commerce, Maharishi Vidya Mandir HSS,
P. Nantha Chetpet, Chennai
Senior Lecturer,
SCERT, Chennai S. Rajendran
PG Assistant in commerce, Government Kallar HSS,
V. Kallapatty, Madurai Dist.
K. Gopi
PG Assistant in commerce, GGHSS,
Venugopalapuram, Cuddalore Dist.
Art and Design Team R. Shanmugasundaram
PG Assistant in commerce, GHSS, Pandamangalam,
Chief Co-ordinator and Namakkal Dist.
Creative Head
C. Babu
SrinivasanNatarajan PG Assistant in commerce, GBHSS,
Chinnasalem, Villupuram Dist.
Illustrator
Art Teachers,
Government of Tamil Nadu. This book has been printed on 80 G.S.M.
Elegant Maplitho paper.
Students, Government College of Fine Arts,
Chennai & Kumbakonam. Printed by offset at:
In-House
QC
Gopu Rasuvel
Asker Ali
Layout
In-House
Co-ordination
Ramesh Munisamy

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HIGHER SECONDARY FIRST YEAR

Untouchability is Inhuman and a Crime

Department of School Education

Government of Tamil Nadu

First Edition - 2018

NOT FOR SALE

State Council of Educational

Printing & Publishing

Tamil NaduTextbook and Educational

UNIT I FUNDAMENTALS OF BUSINESS

Chapter 7 Cooperative Organisation 60

Chapter 14 Transportation 127

Chapter 21 Micro, Small and Medium Enterprises

Chapter 27 Facilitators of International Business 282

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This section of the Chapters in general would give you various

This section is an attempt to explain you how some people or

This section is given to test your ‘applied knowledge’ on the

This is an exercise given to you to do either class work or home

There is an useful section in all chapters for ‘ your own thinking

This section is attempted to make the students to learn about

Students are expected to be thorough about certain concepts which

This is an interesting section of many a chapter in the book

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SCOPE OF “COMMERCE” EDUCATION

UNIT I FUNDAMENTALS OF BUSINESS

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through electronic modes like Online

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Coastal Trade in Ancient Role of the Government during

Contribution of ‘Kautilya’ to Trade

1.02 Barter System

4. Hindrance of risk of deterioration in 10. Hindrance of both selection and

5. Hindrance of risk of loss

7. Hindrance of exchange I. Choose the Correct Answer

4. Trade and Commerce was common to III. Short Answer Questions

UNIT I FUNDAMENTALS OF BUSINESS

2.01 Introduction Examples:

i. Production of goods by manufacturers

Activities undertaken with the object Examples:

Economic Activity Vs. Non-Economic Activity

Economic Activities Non-Economic Activities

iii. Watching movies in a theatre said to be engaged in their occupation.

There is a contract existing between the According to James Stephenson business

Examples 3. Activities on the Basis of Function

(i) Manufacturing Textiles in a large On the basis of functions, business activities

a. Private Enterprises It establishes a link between the producers

Comparision of Business, Profession and Employment

its activities. Objectives are needed in satisfaction of employees and development

people who are disabled, handicapped 1. The Primary objective of a business is

2. Occupation of a Doctor is III. Short Answer Questions

UNIT I FUNDAMENTALS OF BUSINESS

Primary Secondary Tertiary

A) On the Basis of Activities and

c. Processing Industry which involves

(i) Manufacturing Industries i. Personalised service: Individuals and

Comparison between Industry, Commerce and Trade

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