GNCC Chapter 2 (Repaired)

DR GURVINDER SINGH PUNAINI (National Awardee)
M.Com, M.A. (Eco.), PGDST, M.Phil. , Ph.D Contact:9814440429
CHAPTER: PUBLIC, PRIVATE AND MULTINATIONAL COMPANY

INTRODUCTION: Private, Public and Global enterprises teach the students the differences between
these 3 sectors. This chapter is incorporated with the concepts like – meaning of private and public
sector, form of public sector enterprises, departmental undertakings, its features, merits and demerits,
Public corporation or Statutory corporation – its characteristic features, advantages and limitations,
Government companies – advantages and disadvantages, role of public sector – its features, Global
enterprises, Joint venture, its merits and demerits.
ECONOMY
Private Sector Enterprises Public Sector Enterprises
1. Sole Proprietorship 1. Departmental Undertakings

2. Partnership 2. Statutory Corporations
3. Joint Hindu Family Business 3. Government Companies
4. Co-operative Society
5. MNC’s
Private Sector Enterprises

These are the businesses which are owned, controlled and financed by a private businessman. Private
companies are not run by the government .They are the part of a country’s economic system and is run
by individual and companies with the intension to earn the profit.
Features
 Main objective is to earn profit.
 Fully owned and controlled by the private entrepreneurs. It may be owned by one individual or by a
group of individuals jointly.
 No participation by the Central or State Governments in the ownership and control of private sector
undertakings.
 Capital is arranged by its owners. The sole trader contributes the capital of a sole proprietorship. In case
of partnership, capital is invested by the partners. A joint stock company raises capital by the issue of
shares and debentures. A private sector undertaking can also raise loans to meet its long-term and
short-term needs for funds.
 The private sector tends to make up a larger share of the economy in free market, capitalist based
societies.
 A private sector undertaking is managed by its owners. In case of sole proprietorship and partnership,
the owners directly manage the firm. The management of a joint stock company lies in the hands of
directors who are the elected representatives of the shareholders.
Public Sector Enterprises

The public sector consists of various organizations owned and managed by central or State or by both
governments. The govt. participates in economic activity of the country through these enterprises.
Primarily, the objective of establishing a public enterprise is to serve the public. They can supply essential
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goods/services at reasonable prices and also create employment opportunities.

Features
 They function under the direct control of the government and some are even established under
statutes and Companies Act. Therefore, public enterprises are autonomous or Semi-Autonomous
in nature.
 Either the State or the Central government can control a public sector enterprise.
 The government makes the primary investment in a public sector enterprise. However, they arrange
finance for the day-to-day operation making it financially independent.
 In some sectors, private organizations do not have permission to operate. Therefore, the public sector
enterprises enjoy a monopoly in operation. For example, the State enterprises have a monopoly in Energy
production, Railways, and Post and Telegraph services.
 These enterprises help in the implementation of the economic plans and policies of the government.
 These undertakings are accountable to the public at large as tax payers' money is utilized by the
government to invest in such companies.
Departmental Undertaking
This is the oldest form of public sector enterprises. The departmental undertaking is considered as one
of the departments of government. It has no separate existence than the government. It functions under
the overall control of one ministry or department of government.
For Example, Railways, post &telegram, broadcasting, telephone service etc.
Features
 It is established either as a separate full- fledged ministry or as a sub-division of a ministry of the
Government.
 They does not have an independent entity distinct from the government.
 These undertakings are financed through annual budget appropriations by the Parliament or the State
Legislature. The revenues of the undertaking are paid into the treasury.
 The departmental undertaking is subject to the normal budgeting, accounting and audit procedures,
which are applicable to the government departments.
 The ultimate responsibility for the management of departmental undertaking lies with the minister
concerned.
 Employees are govt. employees & are recruited & appointed as per government rules.
Merits
 It is very easy to form a departmental undertaking as no registration is compulsory. The departmental
undertaking is created by an administrative decision of the Government, involving no legal formalities
for its formation.
 There is direct parliamentary control. The performance of departmental undertakings can be discussed
in parliament. So there is public accountability.
 The revenue of departmental undertaking is deposited in the treasury of the government. So these
undertakings help to increase the government revenue.
 The departmental undertaking can maintain secrecy of important policy matters; as the Government
can withhold any information, in public interest.
 Government can promote economic and social justice through departmental undertakings. Hence, a
departmental undertaking can be used by the Government, as an instrument of social change.
Demerits
 Departmental undertaking is run in a way other departments of the Government are run. Its
management and functioning are subject to excessive red-tape and bureaucracy. (Red-tape means
unnecessary and complicated officials rules which prevent things from being done quickly)
 Losses incurred by a departmental enterprise are met out of the treasury. This very often necessitates
additional taxation the burden of which falls on the common man.
 A departmental undertaking is subject to excessive political influence. Its fate depends on the balance
of power between the ruling party and the opposition. As such, a departmental undertaking becomes a
political organization rather than an economic or business organization.
 These organizations are usually insensitive to consumer needs and do not provide goods and adequate
service to them.
 Such organization is managed by civil servants and govt. officials who may not have the necessary
expertise and experience in management.
Statutory Corporation
It is establishes under a special Act passed in parliament or state legislative assembly. Its objectives,
powers and functions are clearly defined in the special Act. It is fully financed by the government.
For example, Indian airlines ,Air India, State Bank Of India ,Life Insurance Corporation of India, Oil and
Natural gas Corporation.
Features
 It is a corporate body created by law and is a legal entity. Such corporations are managed by the board
of directors constituted by the government.
 State provides help to such corporations by subscribing to the capital fully or wholly. This type of
organization is wholly owned by the state.
 A statutory corporation enjoys financial autonomy or independence. It is not subject to the budget,
accounting & audit controls.
 Employees are not government servants, even though government owns and manages the corporation.
But the recruitment is done as per the provisions of the act.
 A statutory corporation is answerable either to parliament legislature or state assembly whosever
creates it. Parliament has no right to interfere in the working of statutory corporations. It can only
discuss policy matters & overall performance of corporations.
Merits
 Operations & management of a statutory corporation is done independently, without any government’s
interference, with its own initiative & flexibility.
 It can take prompt decisions and quick actions as it is free from the prohibitory rules of govt.
 A statutory corporation is relatively free from red-tapism, as there is less file work & less formality to be
completed before taking decisions.
 The activities of the statutory corporation are discussed in parliament. This ensures the protection of
public interest.
 The statutory corporations can have their own rules & regulations regarding remuneration &
recruitment of employees. It can provide better facilities & attractive terms of service to staff to secure
efficient working from its staff.
 Board of directors of statutory corporation consists of business experts & the representatives of
various
groups such as labor, consumers nominated by the government.
 As such corporations are fully owned by the government, they can easily raise required capital by
floating bonds at a low rate of interest. Since these bonds are safe, the public also feels comfortable in
subscribing such bonds.
Demerits
 In reality, there is not much operational flexibility. It suffers from lot of political interference.
 Usually they enjoy monopoly in their field and do not have profit motive due to which their working
turns out to be inefficient.
 The objects & powers of public corporations are defined by the act & these can be amended only by
amending the statute or the act. Amending the act is a time-consuming & complicated task.
 The governing board of a public corporation may indulge in unfair practices. It may charge an unduly high
price to cover up inefficiency.
 The government appoints the board of directors & their work is to manage & operate corporations. As
there are many members, it is quite possible that their interests may clash. Because of this reason, the
smooth functioning of the corporation may be hampered.
Government Companies
The company in which at least 51% of the paid-up share capital is held by the central or state
government or partly by central or state government is Government Company. The government
companies are governed &ruled by the provisions of the companies act, 2013 like any other registered
companies.
For example, Steel authority of India, State Trading Corporation, Hindustan machine Tools, Maruti
Udhyog Limited.
Features
 The government company gets incorporated under the companies act, 1956.All the provisions of
companies act are applicable to a government company.
 The government company is wholly or partly owned by the government. The share capital of these
companies is owned by the government of India in the name of the president.
 The govt. company obtains its funds from govt. shareholdings and other private shareholdings. It can
also raise funds from capital market.
 Employees are recruited and appointed as per the rules and regulations contained in Memorandum
and Articles of association.
 The government is managed by the board of directors, who are nominated by the government & other
shareholders. The government has the authority to appoint a majority of the directors.
 A government company is audited by the agency appointed by the central government. This agency is
mainly Comptroller and Auditor General of India (C&AG).
Merits
 To incorporate a government company, all the provisions of the Companies Act are to be followed.
 It can be easily formed as per the provision of companies Act. Only an executive decision of govt. is
required.
 The government companies can avail & accommodate managerial skill, technical know-how or
expertise of the private enterprise of the private enterprise by conveniently collaborating with it.
 The government organization enjoys all autonomy in management decisions and flexibility in day
to day activities.
 The government company is relatively free from government & political interference.
Demerits
 It suffers from interference from govt. officials, ministers and politicians
 It evades constitutional responsibility which a company financed by the govt. should have as it is not
directly answerable to parliament.
 The board usually consists of the politicians and civil servants who are interested more in pleasing their
political bosses than in efficient operation of the company.
Multinational Companies/Global Enterprises

Multinational company may be defined of a company that has business operations in several countries
by having its factories, branches or offices in those countries. But is has it’s headquarter in one country
in which it is incorporated. It must be emphasized that the headquarters of a multinational company are
located in the home country.
“A multinational corporation owns and manages business in two or more countries.”
For example, Philips, Coca Cola, Walmart, Apple inc., Volkswagen, Toyota Motor.
Features
 Huge Assets and Turnover: Because of operations on a global basis, MNCs have huge physical and
financial assets. This also results in huge turnover of MNCs.
 Unity of Control: MNCs are characterized by unity of control. MNCs control business activities of their
branches in foreign countries through head office located in the home country. Managements of
branches operate within the policy framework of the parent corporation.
 Advanced Technology: These enterprises possess advanced and superior technology which enables
them to provide world class products & services.
 Product Innovations: MNCs have highly sophisticated research and development departments. They are
engaged in developing new products superior design of existing products.
 Marketing Strategies: MNCs use aggressive marketing strategies. Their brands are well known and
spend huge amounts on advertising and sale promotion.
 Foreign Collaboration: Usually they enter into agreements relating to sale of technology, production of
goods, and use of brand names etc.with local firms in host country.
 Mighty Economic Power: MNCs are powerful economic entities. They keep on adding to their economic
power through constant mergers and acquisitions of companies, in host countries.
 Promotion of international brotherhood and culture: MNCs integrate economies of various nations
with the world economy. Through their international dealings, MNCs promote international
brotherhood and culture; and pave way for world peace and prosperity.
 End of Local Monopolies: The entry of MNCs leads to competition in the host countries. Local
monopolies of host countries either start improving their products or reduce their prices. Thus MNCs
put an end to exploitative practices of local monopolists. As a matter of fact, MNCs compel domestic
companies to improve their efficiency and quality.
Joint Ventures
When two or more independent firms together establish a new enterprise by pooling their capital, technology
and expertise, it is known as a joint venture. Joint ventures, in very simple words, are business ventures that two or
more people or entities undertake for a certain period of time. They are created keeping specific and
pre-determined purposes in mind. The venture generally comes to an end once those purposes are
met unless the parties decide to continue working together.
For example, Hero Cycle of India and Honda Motors Co. of Japan jointly established Hero Honda.
Similarly, Suzuki Motors of Japan and Maruti of Govt. of India come together to form Maruti Udhyog.
Types of Joint Venture
A. Contractual Joint Venture : Agreement in which two parties come together for a particular business
project and sign a contract outlining the terms under which they will work together. The parties do not
set up a separate legal entity for the project but work together in partnership, sharing the profits or
losses of the venture on the terms set out in the joint venture contract. The contractual joint venture is a
different legal arrangement from the incorporated or equity joint venture in which two or more parties
set up a separate legal entity to act as the vehicle for carrying out the project.
Key Elements
 Two or more parties have a common intension.
 Each party brings some inputs.
 Both parties exercise some control on the business venture.
 The relationship is not a transaction to transaction relationship but has a character of relatively longer
duration.
B. Equity –based Joint Venture: A type of joint venture in which two or more parties set up a separate
legal company to act as the vehicle for carrying out the project. This new company would usually be
located in the same country as one of the two partner companies, with the purpose of mutually
establishing an activity with its own objectives: marketing and distribution, research, manufacturing etc.
Key Elements
 Shared ownership by the parties involved.
 Shared profits and losses according to the agreement.
 There is an agreement to either create a new entity or for one of the parties to join into ownership of an
existing entity.
 Shared management of the jointly owned entity.
Features
 Agreement: Two or more firms come to an agreement, to undertake a business, for a definite purpose
and are bound by it.
 Joint Control: There exist a joint control of the co-ventures over business assets, operations,
administration and even the venture.
 Pooling of resources and expertise: Firms pool their resources like capital, manpower, technical know-
how, and expertise, which help in large-scale production.
 Sharing of profit and loss: The co-ventures agree to share the profits and losses of the business in an
agreed ratio. The computation of the profit and loss is usually done at the end of the venture, however,
when it continues for the long duration, the profit and loss is calculated annually.
 Access to advanced technology: By entering into joint venture firms get access to various techniques of
production, marketing and doing business, which decreases the overall cost and also improves quality.
 Dissolution: Once the term or purpose of the joint venture is complete, the agreement comes to an end,
and the accounts of the covertures, are settled, as and when it is dissolved.
The co-ventures are free to carry on their own business, unless otherwise provided in the joint venture
agreement, during the life of the venture.

Merits
 Greater resources and Capacity – In a joint venture the resources and capacity of two or more
firms are combined which enables it to grow quickly and efficiently.
 Access to advanced technology – It provides access to advanced techniques of production which
increases efficiency and then helps in reduction in cost and improvement in quality of product.
 Innovation – Foreign partners in joint ventures have the ideas and technology to develop innovative
products and services. They have an advantage in highly competitive and demanding markets.
 Low Cost of production – Raw material and labour are comparatively cheap in developing countries so if
one partner is from developing country they can be benefitted by the low cost of production.
 Well known Brand Names: When one party has well established brands & goodwill, the other party gets
its benefits. Products of such brand names can be easily launched in the market.
 Access to advanced technology – It provides access to advanced techniques of production which
increases efficiency and then helps in reduction in cost and improvement in quality of product.
Public Private Partnership (PPP)

Enterprise in which a project or service is finance and operated through a partnership of government
and private enterprises.PPP is a long –term contract between a private party and a government entity,
for providing a public asset or service, in which the private partly bears significant risk and management
responsibility and remuneration is linked to performance. Financing a project through a PPP can allow a
project to be completed sooner or make it a possibility in the first place.
Features
 Long term contractual relationships between public and private sectors.
 Under this contract a single private body is responsible to engage not in one type but in complex activity.
 PPP approach can bring value for money in public services delivery.
 Project related risks are shared among partners and allocated to the party best able to manage it.
 Better infrastructure solutions than an initiative that is wholly public or wholly private.
Merits
 They provide better infrastructure solutions.
 They result in faster project completion and reduced delays on infrastructure projects by including time-
to-completion as a measure of performance and therefore of profit.
 A public-private partnership's return on investment (ROI) might be greater than projects with traditional,
all-private or all-government fulfillment. Innovative design and financing approaches become available
when the two entities work together.
 Risks are fully appraised early on to determine project feasibility. In this sense, the private partner can
serve as a check against unrealistic government promises or expectations.
 The operational and project execution risks are transferred from the government to the private
participant, which usually has more experience in cost containment.
 Public-private partnerships may include early completion bonuses that further increase efficiency. They
can sometimes reduce change order costs as well.
 By increasing the efficiency of the government's investment, a P3 allows government funds to be
redirected to other important socioeconomic areas.
 The greater efficiency of P3s reduces government budgets and budget deficits.
 High-quality standards are better obtained and maintained throughout the life cycle of the project.
 Public-private partnerships that reduce costs potentially can lead to lower taxes.
Demerits
 Every public-private partnership involves risks for the private participant, who reasonably expects
to be compensated for accepting those risks. This can increase government costs.
 When there are only a limited number of private entities that have the capability to complete a project,
such as constructing a high-speed rail system, the relatively small field of bidders might mean less
competition and thus less cost-effective partnering.
 Profits of the projects can vary depending on the assumed risk, the level of competition, and the
complexity and scope of the project.
 If the expertise in the partnership lies heavily on the private side, the government is at an inherent
disadvantage. For example, it might be unable to accurately assess the proposed costs.
 PPP project agreements are long-term, complicated and comparatively inflexible because of
impossibility to envisage and evaluate all particular events that could influence the future activity.
CHAPTER: BUSINESS SERVICES

INTRODUCTION: Today world is of tough competition, where the survival of the fittest is the rule.
There is no room for non-performance. In order to be competitive, business enterprises are becoming
more and more dependent on specialized business services.
Business enterprises look towards:
 Banks for availability of funds
 Insurance companies for getting their plant, goods ,machinery etc. insured
 Communication services for establishing link with outside world.(e.g. telecom and postal services)
 Warehouses for keeping and storing goods in a systematic manner.
 Transport companies for transporting raw material and finished goods.
Business Services
Meaning: Those services which are used by business enterprises for the conduct of their activities. For
example, banking, insurance, transportation, warehousing and communication services.
Types of Business Services
1. Banking: Business needs funds for acquiring assets, purchasing raw material and m meeting day to day
expenses. Necessary funds (in form of overdraft, cash credit facilities, loan etc.) can be obtained from
commercial banks.
2. Communication: These services like postal services and telephone facilities are helpful to business for
establishing links with outside world (suppliers, customers etc.), also for quick exchange of information.
3. Insurance: Business involves various types of risks e.g. theft, fire etc. Insurance makes provision against
such risks. By getting their goods insured, producers can avoid risk of goods.
4. Transportation: These services (like road, railway, coastal shipping) facilitates movement of raw
materials to the place of production and the finished goods from factories to the place of consumption.
Transportation makes for speed and efficiency in exchange. It creates place utility.
5. Warehousing: Refers to the holding and preservation of goods until they are finally consumed. It helps
firms to overcome the problem of storage of goods and facilitates the availability of goods when
needed. Creates time utility.
Banking
A banking company in India is one which transacts the business of banking which means accepting
deposits of money from public( for the purpose of lending and investment),repayable on demand and
withdrawable by cheques or otherwise.
Types of Bank Account
 Savings Deposit Account: This type of banks accounts encourages the small savings of households.
Savings accounts are typically the first official bank account anybody opens. Opening a savings account
also marks the beginning of your relationship with a financial institution. For example, when joining a
credit union, your “share” or savings account establishes your membership.
 Current Deposit Account: Current bank accounts are very popular among companies, firms, public
enterprises, businessmen who generally have higher number of regular transactions with the bank. The
current account includes deposits, withdrawals, and contra transactions. Such accounts are also called
the Demand Deposit Account. Current accounts allow handling of large volumes of receipts and/or
payments systematically.
 Recurring Deposit Account: RD offers you a fixed interest on the invested amount at a specific
frequency till the pre-determined term or up on maturity. At the end of the term, the amount
upon maturity (which is your invested capital) along with remaining or accumulated interest is
paid. Recurring Deposit schemes aim to inculcate a regular habit of saving among the public.
 Fixed Deposit Account: Fixed deposit is investment instruments offered by banks and non-banking
financial companies, where you can deposit money for a higher rate of interest than savings accounts.
You can deposit a lump sum of money in fixed deposit for a specific period, which varies for every
financier. Fixed deposit enables investors to earn higher interest on their surplus funds.
 Multiple Option Deposit Accounts: It is a combination of savings account and fixed deposit account
which provide specific options to the depositors. It is a type of account in which amount of deposit in
excess of a particular limit gets automatically transferred to the Fixed Deposit Account and ,in case
sufficient funds are not available in Saving Deposits Account to honor a cheque issued the required
Amount gets automatically transferred from fixed deposit account to saving deposit account.
Banking Services
 Bank Draft: It is a financial instrument with the help of which money can be remitted from one place to
another. Anyone can obtain a bank draft after depositing the amount in the bank. The bank issues a
draft for the amount in its own branch at other places or other banks (only in case of tie up with those
banks) on those places. The payee can present the draft on the drawee bank at his place and collect the
money. Bank charges some commission for issuing a bank draft.
 Bank Overdraft: The customer, who maintains a current account with the bank, takes permission from
the bank to withdraw more money than deposited in his account. The extra amount withdrawn is called
overdraft. This facility is available to trustworthy customers for a small period. This facility is usually
given against the security of s some assets or on the personal security of the customer. Interest is
charged on the actual amount overdrawn by customer.
 Cash Credits: Under this arrangement, the bank advances cash loan up to a specified limit against
current assets and other securities. The bank opens an account in the name of the borrower and allows
him to withdraw the borrowed money from time to time subject to the sanctioned limit. Interest is
charged on the amount actually withdraw.
E-Banking
Using computers and internet in the functioning of the banks is called electronic banking. Because of
these services the customers do not need to go to the bank every time he has to transact with bank. He
can make transactions with the bank at any time and from any place. Under this I.T system, banking
services are delivered through a computer-controlled system. The chief electronic services are the
following.
 Electronic Fund Transfer Under it, a bank transfers wages and salaries directly from the company s
account to the accounts of employees of the company. The other examples of EFTs are on line payment
of electricity bill, water bill, insurance premium, house tax etc.
Automatic Teller Machines (ATMs) ATM is an automatic machine with the help of which money can be
withdrawn or deposited by inserting the card and typing your personal Identity Number (PIN). This
machine operates for all the 24 hours.
 Debit Card A Debit Card is issued to customers in lieu of his money deposited in the bank. The customers
can make immediate payment of goods purchased or services obtained on the basis of his debit card
provided the terminal facility is available with the seller.
 Credit Card A bank issues a credit card to those of its customers who enjoy good reputation.
This is a sort of overdraft facility. With the help of this card the holder can buy goods or obtain
Services up to a certain amount even without having sufficient deposit in their bank accounts.
 Point of Sales A Point of Sale (POS) is technically a system in a retail store from which you conduct the
sale of physical goods. In a store, a POS is where the checkout happens, orders are processed and bills
are paid.
 Digital Cash also known as e-currency, e-money, electronic cash, electronic currency, digital money,
digital currency, cyber currency) refers to a system in which a person can securely pay for goods or
services electronically without necessarily involving a bank to mediate the transaction.
 AEPS - Aadhaar Enabled Payment System is a type of payment system that is based on the Unique
Identification Number and allows Aadhaar card holders to seamlessly make financial transactions through
Aadhaar-based authentication.
Benefits of E-Banking
Benefits of E-Banking to customer:
 E-Banking provides 24 hours a day X 365 days a year services to the customers.
 Customers can make transactions from office or house or while traveling via mobile telephone.
 There is a greater customer satisfaction through E-banking as it offers unlimited access and great
security as they can avoid travelling with cash.
Benefits of E-Banking to Banks:
 E-Banking lowers the transaction cost.
 Load on branches can be reduced by establishing centralized data base.
 E-Banking provides competitive advantage to the bank, adds value to the banking
relationship.
Postal Services
This service is required by every business to send and receive letters, market reports, parcel, money
order etc. on regular. All these services are provided by the post and telegraph offices scattered
throughout the country. The postal department performs the following services.
1. Mail Services: The mail services offered by post offices includes transmission of messages through post
cards, Inland letters, envelops etc.
2. Registered Post: Sometimes we want to ensure that our mail is definitely delivered to the addressee
otherwise it should come back to us. In such situations the post office offers registered post facility
which serves as a proof that mail has been posed.
3. Parcel: Transmission of articles from one place to another in the form of parcels is known as parcel post.
Postal charges vary according to the weight of the parcels.
4. Speed Post: It allows speedy transmission of articles (within 24 hours) to people in specified cities.
5. Courier Services: Letters, documents, parcels etc. can be sent through the courier service. This service is
provided by private post offices and is cheaper than the post office services.
Telecom Services
Today’s global business world, the dream of doing business across the world, will remain a dream only in
the absence of telecom services. The various types of telecom services are:
1. Cellular mobile services: cordless mobile communication device including voice and non-voice
messages, data services and PCO services.
2. Radio Paging Services means of transmitting information to persons even when they are mobile.
3. Fixed Line Services includes voice and non-voice messages and data services to establish linkage
for long distance traffic.
4. Cable services Linkages and switched services within a licensed area of operation to operate
media services which are essentially one-way entertainment related services.
5. VSAT Service (Very small Aperture Terminal) is a Satellite based communication service. It offers
government and business agencies a highly flexible and reliable communication solution in both urban
and rural areas.
6. DTH Services (Direct to Home) a Satellite based media services provided by cellular companies with the
help of small dish antenna and a setup box.
Insurance
Insurance is a contract under which one party (Insurer or Insurance Company) agrees in return of a
consideration (Insurance premium) to pay an agreed sum of money to another party (Insured) to make
good for a loss, damage or injury to something of value in which the insured has financial interest as a
result of some uncertain event.
Principles of Insurance: These principles are:
1. Utmost Good Faith: Insurance contracts are based upon mutual trust and confidence between the
insurer and the insured. It is a condition of every insurance contract that both the parties i.e. insurer and
the insured must disclose every material fact and information related to insurance contract to each
other.
2. Insurable Interest: It means some pecuniary interest in the subject matter of insurance contract. The
insured must have insurable interest in the subject matter of insurance i.e., life or property insured the
insured will have to incur loss due to this damage and insured will be benefitted if full security is being
provided. A businessman has insurable interest in his house, stock, his own life and that of his wife,
children etc.
3. Indemnity: Principle of indemnity applies to all contracts except the contract of life insurance because
estimation regarding loss of life cannot be made. The objective of contract of insurance is to
compensate to the insured for the actual loss he has incurred. These contracts ‘provide security from
loss and no profit can be made out of these contracts.
4. Proximate Cause: The insurance company will compensate for the loss incurred by the insured due to
reasons mentioned in insurance policy. But if losses are incurred due to reasons not mentioned in
insurance policy than principle of proximate cause or the nearest cause is followed.
5. Subrogation: This principle applies to all insurance contracts which are contracts of indemnity. As per
this principle, when any insurance company compensates the insured for loss of any of his property,
then all rights related to that property automatically gets transferred to insurance company.
6. Contribution: According to this principle if a person has taken more than one insurance policy for the
same risk then all the insurers will contribute the amount of loss in proportion to the amount assured by
each of them and compensate for the actual amount of loss because he has no right to recover more
than the full amount of his actual loss.
7. Mitigation: According to this principle the insured must take reasonable steps to minimize the loss or
damage to the insured property otherwise the claim from the insurance company may be lost.
Concept of Life Insurance
Under life insurance the amount of Insurance is paid on the maturity of policy or the death of policy
holder whichever is earlier. If the policy holder survives till maturity he enjoys the amount of insurance.
If he dies before maturity then the insurance claim helps in maintenance of his family. The
insurance company insures the life of a person in exchange for a premium which may be paid
in one lump sum or periodically say yearly, half yearly quarterly or monthly.
Main Elements of Life Insurance Contract
 The life insurance contract must have all the essentials of a valid contract. The essential element of a
valid Contract is that the parties to it must be lawfully proficient to contract. Certain elements like offer
and acceptance, free consent, capacity to enter into a contract, lawful consideration and lawful object
must be present for the contract to be valid.
 The contract of life insurance is a contract of utmost good faith. Life insurance requires that the
standard of utmost good, faith should be conserved by both the parties.They must make full and true
disclosure of the facts material to the risk. It is his duty to disclose accurately all material facts known to
him even if the insurer does not ask him;
 In life insurance, the insured must have an insurable interest in the life assured. Insurable interest is
financial interest. Without insurable interest the contract of insurance is void. The insured must have an
insurable interest in the life to be insured for a valid contract. For example, a person is presumed to
have an interest in his own life and every part of it, a creditor has an insurable interest in the life of his
debtor, and a proprietor of a drama company has an insurable interest in the lives of the actors;
 The life insurance contract is not a contract of indemnity. The life of a human being cannot be
compensated and only a specified sum of money is paid. That is why the amount payable in life
insurance on the happening of the event is fixed in advance. The sum of money payable is fixed, at the
time of entering into the contract. A contract of life Insurance, therefore, riots a contract of indemnity.
Concept of Fire Insurance
It provides safety against loss from fire. If property of insured gets damaged due to property as
compensation from insurance company. If no such event happens, then no claim shall be given. Fire
insurance is an agreement between two parties, i.e., insurer and insured, whereby insurer undertakes to
indemnify the loss suffered by the insured in consideration for his (insured) paying of certain sum called
‘Premium’. There are two conditions which are to be satisfied, to claim for loss by fire:
 The actual fire caused to the subject matter.
 The fire occurred is accidental and not deliberate and the cause of the fire is irrelevant.
Main Elements of Fire Insurance Contract
 Utmost good faith – In insurance contracts, the legal doctrine of utmost good faith applies. The insured
has the duty to disclose all material facts, which have a bearing on the insurance. A breach of this duty
may make the contract void or voidable. The duty of disclosure continues throughout the policy period.
 Insurable Interest- The requirement of insurable interest gives legal validity to insurance contracts and
distinguishes them from wagers. It may be defined as the legal right to insure, where the right arises out
of a pecuniary relationship between the insured and the subject matter of insurance.
 Indemnity – The objective of the principle is to place the insured, as far as possible, in the same financial
position after a loss, as that occupied by him, immediately before the loss.
 Proximate cause – A cause which immediately precedes and produces the effect, as distinguished from
the remote, mediate, or predisposing cause. An act from which a loss or injury results as a natural,
direct, uninterrupted consequence and without which the loss or injury would not have occurred.
 Contribution – The principle of contribution, which is also a corollary of the principle of indemnity,
provides that if the same property is insured under more than one policy, the insured can recover a rate
able proportion of the loss under each policy. Under no circumstances can he recover more than
his loss, and make a profit.
Concept of Marine Insurance
Marine Insurance provides protection against loss during sea voyage. The businessmen can get his ship
insured by paying the premium fixed by the insurance company. The functional principles of marine
insurance are the same as the general principles of Insurance.
Types
 Hull insurance This policy covers the vessel of transportation against damages and accidents. The policy
covers the hull and torso of the transportation vehicle, like a ship, as well as the different articles
present in the vessel.
 Cargo insurance A cargo insurance policy covers the cargo, or the goods, which are being transported
from one place to another.
 Freight insurance Under freight insurance, the loss of freight suffered by the vessel operator is covered.
In many cases of marine transportation, the vessel operator is supposed to receive the freight amount
for carriage of goods only when the goods are delivered safely to their destination. If, however, the
goods are damaged in transit, the operator would lose the freight receivable. A freight insurance policy,
therefore, provides compensation for the loss of freight.
Main Elements of Marine Insurance Contract
Marine insurance is a contract of indemnity. That means, the insurance company is liable to compensate
only till the extent of actual loss suffered. There is no liability lies on the part of the insurance company if
there is no actual loss suffered. For example, let's says an insured has a marine insurance policy for Rs.25
lacs. In the event of loss, actual loss was estimated as Rs.15 lacs. In this case, insured will not receive
compensation more than Rs.15 lac even if the coverage is Rs.25 lac.
 Marine insurance gets applicable only if the insured has an insurable interest in the subject matter
(insurable property) at the time of loss. Requirement of insurable interest to be present only at the time
of loss makes the marine insurance policy as ‘freely assignable'. Policy can be assigned freely prior to or
after the occurrence of damage or loss unless the terms and condition of the policy restricts it.
 Marine insurance policies work on the principle of utmost good faith. Owner of the goods or property to
be transported must disclose all the required information accurately to the insurance company at the
time of availing the marine insurance. Non-disclosure, mis-description or misrepresenting of facts and
information by insured makes the marine insurance policy voidable at the time of claim.
 Principle of contribution applies in case of multiple marine insurance policies. Losses will be paid
proportionately if the insured holds multiple policies for his goods or property. For instance, goods
worth Rs.40 lac is insured with two different insurers. And there is loss of goods in the marine event,
total amount of loss will be compensated to the insured proportionately by both the insurance
companies.
Concept of Health Insurance
With a lot of awareness today, Health insurance has gained a lot of popularity. General Insurance
companies provide special health insurance policies such as Mediclaim for the general public. The
insurance company charges a nominal premium every year and in return undertakes to provide up to
stipulated amount for the treatment of certain diseases such as heart problem, cancer, etc.
Coverage
Medical Expenses-It covers the expenses of hospitalization/nursing home bills and doctor’s services.
Disability Income- It replaces the income lost while the insured is unable to work.
BASIS LIFE INSURANCE FIRE INSURANCE MARINE INSURANCE

Subject matter Human life Any physical property or Ship, Cargo or freight
assets.
Element Protection or investment or both Only protection Only protection
Insurable interest Must exist at time of affecting the
Must exist both while Must exist when the loss
policy. taking the policy and on takes place.
the
occurrence of loss.
Duration Usually exceeds 1 year and is Does not exceed 1 year. It is for 1 year or period of
taken for longer periods ranging voyage or mixed.
5 to 30 years or whole life.
Policy amount Any amount Cannot be more than the
Can be the market value of
value of subject matter. cargo or ship.
Indemnity Not based on principle of Based on principle of Based on principle of
Indemnity. Indemnity. Indemnity.
Contingency of There is element of certainty. There is element There
of is element of
risk The event of maturity is bound to uncertainty as uncertainty as the event
Happen. destruction by fire may not
(loss at sea)may not
happen and there may occur and there may be no
be no claim. claim.
Loss measurement Not measurable measurable measurable
CHAPTER: Emerging modes of Business
Concept of E-Business
Meaning: E-business refers to “Carrying on business activities through internet.” E-business or Online
business means business transactions that take place online with the help of the internet. The term e-
business came into existence in the year 1996. E-business is an abbreviation for electronic business. So
the buyer and the seller don’t meet personally. In this age of internet, the world commerce has
gradually started linking with it. This has brought a new concept of commerce called e-commerce/e-
business. Now we are capable of reaching the users of Internet all over the world simply by opening a
shop on the Internet. The Internet users can order for the goods, receive their delivery and make their
payment while sitting at their home on the Internet.
Scope of E-Business
The scope of E-Commerce Business in India is undoubtedly going to increase year after year. The scope
of E-Commerce business is turning out to be more famous day-after-day according to the market
demand. And this requirement is generating innovations worldwide focused on delivery time, ease of
transactions and several features served by E-Commerce businesses, for example, drone delivery or
artificial intelligence. As you know, everything from foods, clothing to entertainment and furniture can
be brought online.
 B2B (Business-to-Business): One company doing business with another company using internet-enabled
devices, such as manufacturers are buying raw material from another raw material manufacturer, or a
distributor is buying online from a manufacturer. Such B2B E-Commerce business is volumetric, and
price varies based on the quantity of the order and is often negotiable. Transaction taking place
between business units are known as B2B transaction.
These transactions may involve
(a) Creation of utility
(b) Collaborations
(c) Commercial negotiations
(d) Inviting tenders
 B2C (Business-to-Consumer): One company is selling goods or services online to the general public
typically through an E-Commerce website or mobile application, directly to consumers over the Internet.
An example of B2C portals includes Flipkart, Myntra or Snapdeal. A B2C E-Commerce transaction would
be an individual buying a pair of shoes through Flipkart’s website. The transaction taking place between
business units and customers are known as B2C transaction.
B2C transaction may involve
(a) Selling and distribution
(b) After sale service
(c) Promotion and other marketing activities
 C2B (Consumer-to-Business): A customer posts his requirement on a website online, and several
companies review such requirements (RFQ) and quote on the project. The consumer reviews all bids and
finalizes the deal with the enterprise going to complete the project. C2B business involves consumers
seeking products or services from a business/company. For example, you can take ref. of
indiamart. com.
 C2C (Consumer-to-Consumer): Many sites are offering free classifieds listing where individuals
can buy and sell thanks to the site such as OLX or Quikr, where people can buy and sell stuff nearby.
Such transactions called consumer to consumer E-Commerce. Where users sell products to other
prospective customers. An example would be someone selling something that he or she no longer
needs, and he listed the same on OLX, and another person who needs the same thing contacts the seller
and get the transaction done. The transaction taking place between customer and customers are known
as C2C transaction.
C2C transactions may involve
(a) Selling used books, clothes etc
(b) Selling antique items
(c) Information about the quality and durability of products etc
Applications E-Business
E-business may be defined as conducting of activities of industry, trade and commerce through the
computer network. The most common network used is internet.
Applications of e-business are as follows:
1. E-bidding/e-auction: Many shopping sites such as airline tickets, etc. have ‘Quote your price’, wherein
one can bid for the goods and services online. It also provides the facility for e-tendering under which
quotation can be submitted online.
2. E-trading: It involves trading of securities like shares and other financial instruments. The securities are
bought and sold online.
3. E-procurement: It involves sales transactions between business firms through internet. It includes
‘reverse auctions’ and ‘digital market places’. Reverse auction facilitates online trade between a single
business purchaser and many sellers. Digital market places facilitate online trading among multiple
buyers and sellers.
4. E-delivery: It involves electronic delivery of photographs, videos, journals and other multimedia
contents to the user’s computer. It also involves rendering various consulting services like legal, medical,
accounting, etc. electronically.
5. e-communication/e-promotion : It involves advertisement through banners, pop ups, customer surveys,
opinion polls, publication of online catalogues, displaying images of goods, etc.
Benefits of E-Business
There are actually innumerable advantages of e-Business, the most obvious one being the ease of doing
business. Some of the major advantages of e-business are as follows:
 Easy to set Up: It is easy to set up an electronic business. You can set up an online business even by
sitting at home if you have the required software, a device, and the internet.
 Cheaper than Traditional Business: Electronic business is much cheaper than traditional business. The
cost taken to set up an e-business is much higher than the cost required to set up a traditional business.
Also, the transaction cost is effectively less.
 No Geographical Boundaries: There are no geographical boundaries for e-business. Anyone can order
anything from anywhere at any time. This is one of the benefits of e-business. Internet gives businessman
an extended market. New customers come in contact with them. This results in increase in
sales.
 Government Subsidies: Online businesses get benefits from the government as the government
is trying to promote digitalization.
 Flexible Business Hours: Since the internet is always available. E-business breaks down the time barriers
that location-based businesses encounter. As long as someone has an Internet connection, you may be
able to reach and sell your product or service to these visitors to your business website.
 Easy Distribution Process - Many types of information and services be received on computer through e-
business. This has simplified the system of distribution and has also made it less costly.
 Movement towards a paperless Society - Use of internet has considerably reduced dependence on
paper work.
BASIS FOR COMPARISON TRADITIONAL COMMERCE E-Business
Formation Difficult Easy
Physical presence Required Not required

Locational requirements Proximity to the source of raw None
materials or market for the
products.
Cost of setting up High Low
Operating cost High due to fixed charges Low as a result of reliance on
associated with investment in network of relationships.
storage, production etc.
Nature of contact with Indirect through intermediaries Direct
suppliers and customers
Response time for Long Instantaneous
meeting customers
Nature of internal Hierarchical Non- Hierarchical
communication
Transaction risk Low due to arm’s length High due to distance
transactions and face to face
contact.
Nature of human capital Semi-skilled and even un-skilled Technically and professionally
manpower needed. qualified personnel needed.
Government patronage shrinking Much as IT is among the topmost
priorities of the government.
Ease of going Global Less Much as cyber space is truly
without boundaries.
Outsourcing or Business Process Outsourcing (BPO)
Many activities have to be performed for the successful conduct of business like productions, buying,
selling, advertising etc. When the scale of business is small, the businessman used to perform these
activities easily. However, with the enlargement of scale of business, this job has become tedious.
Therefore, in order to overcome the difficulties connected with the performance of many
activities and to get the benefit of specialization, these services are now obtained from outside
the organization. This is called outsourcing of services or BPO.
For example, If Reliance Industries Ltd. wants to advertise its ‘Vimal’ brand of clothing, it may appoint
Anmol Advertising Co. to design, prepare and release advertisements on its behalf.
Nature of Outsourcing:
 Outsourcing involves contracting out some work to other firms. – Many of the business firms are now
being entrusted to outside agencies on a contractual basis. e.g., sanitation or housekeeping.
 Non-core activities are generally outsourced – Let us understand the same activity in two different
companies which becomes different activity. Sanitation and housekeeping are considered as non-core
activities in case of manufacturing firms and so are outsourced. But housekeeping is a core activity for a
hotel so is performed in house.
 Business processes may be outsourced to a captive unit or a third party – A big company having many
plants may create a separate unit to perform certain common services or functions. Examples:
recruitment, selection, training, customer care support services, etc. may be transferred to a separate
unit created for this purpose. So such services many be outsourced to external agencies.
 Outsourcing is popularly associated with IT enabled services (ITES) – These are known as BPO. There
has been tremendous growth in the number and size of call centers which provide customer oriented
voice based services to their clients.
Scope of BPO
Outsourcing is popularly associated with IT enabled services (ITES) is known as BPO. Customer care
accounts for the bulk of call centre activities with 24*7 handling of inbound and out-bound activities.
The basic feature of BPO is that companies hire out on contract those services which are to be
performed on a regular basis.
Key Segments
o Customer support services
o Telemarketing services
o Administrative support services
o Customer relations management
o Accounting services
o Human resource management.
Some of the BPO companies of India are Gentpact, IBM Daksh, Wipro BPO, TCS BPO, Aegis etc.
Need For Outsourcing

 Concentration on Core Competency Areas Leading to Specialization: Business process outsourcing
enables a business enterprise to concentrate its attention on core competency areas like manufacturing,
marketing, capital budgeting etc.; and thus obtain advantages of specialized performance in those areas.
As a result, organizational functioning is at its optimum performance level.
 Advantages of the Expertise of Outsourcer: The service provider is an expert his field. Moreover he
keeps in touch with the latest development in his field of expertise. Therefore, through outsourcing,
a business enterprise can take full advantage of the specialized services of the outsourcer.
 Better Accountability: The outsourcer provides services at a fee. Therefore, he is more
responsible for the quality of services provided than the internal staff of the client company.
 Boost to Economic Development: Business process outsourcing enables both – the client company and
the external provider to perform according to the best of their abilities. This type of performance, all
through the economy, is a boost to the economic development of the economy.
 Avoiding Fixed Investment in Services: If the client company plans to perform certain services within
the organization; there is a need for huge fixed investment in facilities required for performing those
services. In fact, there is a problem of idle facilities; when they are not in use leading to unnecessary
expenditure of fixed costs on the maintenance of those facilities.
 Advantage of Consultancy from the Outsourcer: The outsourcer often acts as a consultant for the
particular function performed by it and may advise the client company (or the outsourced) on better
ways of managing that function.
 Less Labour Costs and Labor Problems: Outsourcing of services reduces the need for staff in the client
company. Hence, the labor costs of the company are reduced. Further with less staff; labour problems
are also minimized.
Knowledge Process Outsourcing

The growth of information technology has paved the way for the Knowledge based economy. KPO
means outsourcing of knowledge based operations to an independent service providing on a contract
basis. A firm may transfer the performance of knowledge related activities to a specialized firm at an
agreed amount of consideration. Thus, the firm concentrates on its core activities and has the benefit of
performance of knowledge related activities, by the KPO firm. In KPO, the work assigned to a KPO
vendor is based on knowledge and information, whereas work assigned in BPO ids basically process-
oriented.
In today’s competitive environment focus is to concentrate on core specialization areas and
outsources the rest of activities. Many companies have come to realize that by outsourcing
the non case activities not only costs are minimized and efficiency improved but the total
business improves because the focus shifts to key growth areas of business.
Features of KPO
o It is the upward shift of BPO
o It focuses on knowledge expertise instead of process expertise.
o It provides all non case activities.
o It has no pre-determined process to reach a conclusion.
o It offers an alternative career path for the educated.
Services covered by KPO
o Research and Technical analysis.
o Business and Technical analysis.
o .Business and Market research.
o Animation and Design.
CHAPTER: Social Responsibility of Business and Business Ethics
Concept of Social Responsibility

Social responsibility is the obligation of businessmen towards the society. Businessmen must review the
impact of their decisions and actions on the other sections of the society. A business is a part of society.
So, a business enterprise should do business and earn money in ways that fulfill the aspirations of the
society. Thus social responsibility relates to the voluntary efforts on the part of the businessmen to
contribute to the social well being. The businessmen make use of resources of society and earn money
from the members of society so they must do something for the society.
According to Peter F Druker, “Social responsibility requires managers to consider whether their action is
likely to promote the public good, to advance the basic beliefs of our society, to contribute to its
stability, strength and harmony.”
SOCIAL RESPONSIBILITY TOWARDS DIFFERENT INTEREST GROUPS
Business has Interaction with several interest groups such a shareholders, workers, consumers,
government and community. Business is responsible to all these groups.
1. Responsibility towards shareholders
o To ensure a fair and regular return on the investment of shareholders.
o To ensure the safety of their investment
o To strengthen financial position of the company.
o To safeguard the assets of the business.
o To protect the interest of all types of investors in the business.
2. Responsibility Towards workers
o Providing fair compensation and benefits,
o Providing good and safe Working conditions,
o To develop a sense of belongingness
3. Responsibility toward consumers
o To supply right quality of goods & services at reasonable prices.
o To ensure regular and adequate supply of products.
o To inform them about new products and new uses of existing products.
o To handle the customers grievance promptly
o Being truthful in advertising
4. Responsibility towards Government
o To pay taxes honestly
o To observe rules laid down by the government,
o To avoid corrupting government employees.
o To help in solving social problem
5. Responsibilities towards the Community
o To protect the environment from all types of pollution
o To provide more employment opportunities
o To help the weaker section of the society
6. Responsibilities towards Suppliers
o To ensure regular payment to the supplier

o To adopt fair dealing with the suppliers
o To protect and assist small scale suppliers by placing order with them
Arguments in favor of Social Responsibility

There is a need for Social Responsibility of business for Existence and Growth:
 Justification for Existence and Growth: Business is the creation of society therefore it should respond
according to the demands of the society. To survive and grow in society for long run the business must
provide continuous services to the society.
 Long term Interest of the firm: A firm can improve its image and builds goodwill in the long run when its
highest goal is to serve the society . If it indulges in unfair Trade Practices e.g. adulteration, hoarding,
black marketing, it may not be able to exist for long.
 Avoidance of government regulations: Business can avoid the problem of government regulations by
voluntarily assuming social responsibilities.
 Availability of resources with business: Business has valuable financial and human resources which can
be effectively used for solving problems of the society.
 Better environment for doing business: It is the social responsibility of business enterprise to provide
better Quality of life and standard of living to people. So, business will
get better community to conduct business.
 Contribution to social problems: Some of the social problems have been created by business firms
themselves such as pollution, creation of unsafe work places, discrimination
Arguments against Social Responsibility

Major arguments against social responsibility are:
 Profit Motive - A business is an economic entity that is guided by profit motive. It should not waste its
energies and resources in fulfilling social responsibility.
 Burden on consumers - Involvement of business in social responsibilities involve a lot of expenditure
which will ultimately be borne by the customers.
 Lack of Social Skills -The business firms and managers have the skills to handle business operation. They
are not expert to tackle the social problems like poverty, over population etc.
Therefore, social problems must be tackled by social experts.
 Lack of public support - Generally public does not like business involvement in social problems.
Therefore, business cannot fulfill social responsibility because of lack of public
confidence & cooperation.
BUSINESS AND ENVIRONMENTAL PROTECTION
Meaning of Environment: The environment is defined as the totality of man’s surroundings - both
natural and man-made. Natural Resources-all land, water, air and man-made – cultural heritage, socio
economic institutions and the people. The environment is crucial for the society and businesses
together. We all have a responsibility to conserve and protect the environment. And whether it
be governments, businesses, consumers, workers or other members of society, each much contribute to
stop the environment from polluting further.
Governments must initiate programs to ban the use of hazardous products such as plastic carry bags.
Consumers, workers and society can support environmental protection by not using these hazardous
products or other products that are not environmental friendly.
Steps that can be Taken
 A sincere commitment by the top management of the business to cultivate, maintain and develop work
culture for environmental protection and pollution prevention.
 To ensure that the commitment towards environmental protection is shared by all the employees of all
the divisions of the business.
 Developing clear-cut policies and programmes for purchasing good quality raw material, using latest
technology, using scientific techniques of disposal and waste management and to develop the skills of
the employees for the purpose of pollution control.
 To adapt to the laws and regulations passes by the government for the prevention of pollution.
 Participation in government programmes relating to the management of hazardous substances, clearing
up of polluted water bodies, plantation of trees and to reduce deforestation.
 Assessment of pollution control programmes in terms of costs and benefits to increase the progress with
respect to environmental protection.
 Also businesses can arrange workshops and give training material and share technical information and
experience with suppliers and customers to get them involved in pollution control programmes.
 Promoting green energy that reduces the use of fossil fuels.
BUSINESS ETHICS
Refers to the moral values or standards or norms which govern the activities of a businessman. Ethics
define what is right and what is wrong. By ethic we mean the business practices which are desirable
from the point of view of Society. The purpose of business ethics is to guide the managers and
employees in performing their job. Example of business ethics are charging fair price from customers,
giving fair treatment to workers, earning reasonable profits and paying taxes tithe government honestly.
ELEMENTS OF BUSINESS ETHICS
 Top management commitment - The CEO and higher level managers must be committed to ethical
norms of behavior. This would set an example for all employers and encourage them to follow ethical
practice.
 Publication of code - Code of ethics is a formal written document of the principles, values and standards
that guide firm’s actions. It may cover areas like honesty, quality, safety, health care etc.
 Establishment of compliance mechanism: A suitable mechanism should be developed to comply with
the ethical standards of the enterprise. The mechanism should be properly communicated to all in the
organization.
 Employee involvement: It is the employees of the lower levels who implement ethical principal so they
must be involved in the process of developing ethical code.
 Measuring results: Although it is difficult to measure the ethical results but it must be verified and
audited that have for work is being carried according to ethical standards.
CHAPTER: Sources of Business Finance
CONCEPT OF BUSINESS FINANCE

The term finance means money or fund. The requirements of funds by business to carry out its various
activities are called business finance. Finance is needed at every stage in the life of a business. A
business cannot function unless adequate funds are made available to it. A business person, therefore,
has to look for different other sources from where the need for funds can be met.
According to BO Wheeler, “Finance is that business activities which is concerned with acquisition and
conservation of capital fund in meeting the financial needs and over all objectives of business
enterprise.”
NEED OF BUSINESS FINANCE
o Fixed Capital Requirement: In order to start a business, funds are needed to purchase fixed assets like
land and building, plant and machinery. The funds required in fixed asset remain invested in the
business for a long period of time.
o Working Capital Requirement: A business needs funds for its day to day operation. This is known as
working Capital requirements. Working capital is required for purchase of raw materials, to pay salaries,
wages, rent and taxes.
o Diversification: A company needs more funds to diversify its operation to become a multi-product
company e.g. ITC.
o Technology up gradation: Finance is needed to adopt modern technology for example uses of
computers in business.
o Growth and expansion: Higher growth of a business enterprise requires higher investment in fixed
assets. So finance is needed for growth and expansion.
CLASSIFICATION OF SOURCE OF FUNDS

Ownership Basis: On the basis of ownership, the sources can be classified into ‘owner’s
fund’ and ‘borrowed fund’,
(a) Owner Fund it refers to the funds contributed by owners as well as the accumulated profit of the
company this fund remains with the company and it has no liability to return this fund. e.g., equity
shares, retained earnings.
 Meaning: Consist of the amount contributed by owners and their profit reinvested in business.
 Permanent: It remains permanent invested.
 Risk: It carries risk of business.
 Control: Control rests with providers of owners capital.
 Security: It does not require any asset as security.
 Reward: Reward is dividend.
 Priority: Reward is paid after payment of interest on borrowed funds.
 Nature of return: The rate of dividend may fluctuate year to year.
(b) Borrowed Fund it refers to the borrowing of the firm. It includes all funds available by way of loans
or credit.
 Meaning : It includes funds available in the form of loans or credit

 Permanent: It is not permanent source of investment.
 Risk: The debts of company are secured.
 Control: No control rests with providers of borrowed funds.
 Security: It is backed by security of assets.
 Reward: Reward is interest.
 Priority: Payment of interest gets priority over payment of dividend.
 Nature of return: The rate of interest is fixed on funds.
Various Sources of Owner’s Funds

1. Equity Share: Equity shares represent the ownership of a company. They have right to
vote and right to participate in the management.
ADVANTAGES/MERITS:
 Permanent Capital: Equity share capital is important source of finance for a long term.
 No charge on assets: For raising funds by issue of equity shares a company does not need to mortgage
its assets.
 Higher returns: Equity share holder get higher returns in the years of high profits.
 Control: They have right to vote and right to participate in the management.
 No burden on company: Payment of equity dividend is not compulsory.
LIMITATIONS/DEMERITS:
 Risk: Equity shareholder bear higher risk because payment of equity dividend is not compulsory.
 Higher Cost: Cost of equity shares is greater than the cost of preference share.
 Delays: Issue of Equity shares is time consuming.
 Issue depends on Share Market Conditions: Equity Shareholders are the primary risk bearer therefore
the demand of equity shares is more in the boom time.
2. Preference Share - Preference shares are considered safer in investment. (As compare to equity
shares) They receive dividend at a fixed rate. Preference shareholder is like creditors. They have no voting
right.
Types of preference shares:
o Cumulative preference shares.
o Non cumulative preference shares.
o Participating preference shares.
o Non participating preference shares.
o Convertible preference shares.
o Non Convertible preference shares.
MERITS OF PREFERENCE SHARES
 Investment is safe: Preference shareholders’ investment is safe. They have preferential right to claim
dividend and capital.
 No Charge on assets: The Company does not need to mortgage its assets for issue of preference shares.
 Control: It does not affect the control of equity share holders because they have no voting right.
 Fixed dividend: They get fixed dividend. So, they are useful for those investor who want fixed rate
of return.
LIMITATIONS /DEMERITS:
 Costly sources of funds: Rate of preference dividend is greater than rate of interest on debenture, for a
company it is costly source of funds than Debentures.
 No tax saving: Preference dividend is not deductible from profit for income tax. Therefore, there is no
tax saving.
 Not suitable for risk takers - Preference shares are not suitable for those who are willing to take risk for
higher return.
 As dividend on these shares is to be paid only when the company earns profit, so investors may not be
very attractive to these.
3. Retained Earnings: A portion of company’s net profit after tax and dividend, Which is not distributed
but are retained for reinvestment purpose, is called retained earnings. This is also called sources of self-
financing.
MERITS
 No costs: No costs in the form of interest, dividend, advertisement and prospects, to be incurred by the
company to get it.
 No charges on assets: The Company does not have to mortgage its assets.
 Growth and expansion: Growth and expansion of business is possible by reinvesting the retained profits.
DEMERITS
 Uncertain Source: It is uncertain source of fund because it is available only when profits are high.
 Dissatisfaction among shareholder: Retained profits cause dissatisfaction among the shareholder
because they get low dividend.
4. GDR: When the local currency shares of a company are delivered to the depository bank, which issues
depository receipt against shares, these receipt denominated in US dollar are caller GDRs.
Feature of GDR
 GDR can be listed and traded on a stock exchange of any foreign country other than
 America.
 It is negotiable instrument.
 A holder of GDR can convert it into the shares.
 Holder of GDR gets dividends.
 Holder of GDR does not have voting rights.
 Many Indian companies such as Reliance, Wipro and ICICI have issue GDR.
5. ADR: The depository receipt issued by a company in USA is known as ADRs (American Depository
Receipts)
Feature of ADR
 It can be issued only to American Citizens.
 It can be listed and traded is American stock exchange.
 Indian companies such as Infosys, Reliance issued ADR
Indian Depository Receipts (IDRS)
6. IDRs are like GDR or ADR except that the issuer is a foreign company raising funds from Indian Market.
IDRS are rupee dominated. They can be listed on any Indian stock Exchange.
Issue Procedure of IDRS
1. Firstly, a Foreign Co. hands over the shares to OCB (it requires approval from Finance Ministry to
act as a custodian)
2. The OCB request ID to issue shares in the form of IDR.
3. The ID converts the issue which is in foreign currency into IDR and into Indian rupee.
4. Lastly the ID issues them to intending investors.
Features of IDRs
 IDRs are issued by any foreign company
 The IDRs can be listed on any Indian stock exchange.
 A single IDR can represent more than one share, such as one IDR = 10shares.
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 The holders of IDR have no right to vote in the company.
 The IDRS are in rupee denomination.
Advantages of IDR
 It provides an additional investment opportunity to Indian Investors for overseas investment.
 It satisfies the capital need of foreign companies.
 It provides listing facility to foreign companies to list on Indian Equity Market.
 It reduces the risk of Indian Investors who want to take their money abroad.
Various Sources of Borrowed Funds

A. Debentures: Debentures are the important debt sources of finance for raising long term finance.
Debenture holders get fixed rate of interest on Debentures. Interest is paid after every six months or
one year. They are like creditors of a company.
Type of Debentures:
1. Secured Debentures
2. Unsecured Debentures
3. Convertible Debentures.
4. Non Convertible Debentures
5. Redeemable Debentures.
6. Registered Debentures.
MERITS
 Investment is Safe: Debentures are preferred by those investor who do not want to take risk and
interested in fixed income.
 Control: Debenture holder does not have voting right. No control over the management.
 Less Costly: Debentures are less costly as compared to cost of preference shares.
 Tax Saving: Interest on Debentures is a tax deductable expense. Therefore, there is a tax saving.
LIMITATION
 Fixed Obligation: There is a greater risk when there is no earning because interest on debentures has to
be paid if the company suffers losses.
 Charge on assets: The company has to mortgage its assets to issue secured Debentures.
B. PUBLIC DEPOSITS: The deposits that are raised by company direct from the public are known as
public deposits. The rate of interest offered on public deposits are higher than the rate of interest on
bank deposits. This is regulated by the R.B.I. and cannot exceed 25% of share capital and reserves.
MERITS
 No charge on assets: The Company does not have to mortgage its assets.
 Tax Saving: Interest paid on public deposits is tax deductable, hence there is tax saving.
 Simple procedure: The procedure for obtaining public deposits is simpler than share and
Debenture.
 Control: They do not have voting right therefore the control of the company is not diluted.
LIMITATIONS
 For Short Term Finance: The maturity period is short. The company cannot depend on them for long
term.
 Limited fund: The quantum of public deposit is limited because of legal restrictions 25% of share capital
and free reserves.
 Not Suitable for New Company: New company generally find difficulty to raise funds through public
deposits.
C. COMMERCIAL BANKS: Commercial Banks give loan and advances to business in the form of cash
credit, overdraft loans and discounting of Bill. Rate of interest on loan is fixed.
MERITS
 Timely financial assistance: Commercial Bank provide timely financial assistance to business.
 Secrecy: Secrecy is maintained about loan taken from a Commercial Banks.
 Easier source of funds: This is the easier source of funds as there in no need to issue prospectus for
raising funds.
LIMITATIONS/DEMERITS
 Short or Medium term finance: Funds are not available for a long time.
 Charge on assets: Required source security of assets before a loan is sanctioned.
D. FINANCIAL INSTITUTION: The state and central government have established many financial
institutions to provide finance to companies. They are called development Bank. These are IFCI, ICICI,
IDBI, LIC and UTI. etc.
MERITS
 Long term Finance: Financial Institution provide long term finance which is not provided by Commercial
Bank.
 Managerial Advice: They provide financial, managerial and technical advice to business firm.
 Easy installments: Loan can be made in easy installments. It does not prove to be much of a burden on
business.
 Easy availability: The funds are made available even during periods of depression.
LIMITATIONS/ DEMERITS
 More time Consuming: The procedure for granting loan is time consuming due to rigid criteria and many
formalities.
 Restrictions: Financial Institution place restrictions on the company’s board of Directors.
 Reduction in Credibility: With the new issue of debentures, the company’s capability to further borrow
funds reduces.
E. Inter-Corporate Deposits (ICD) Inter-Corporate Deposits are unsecured short term deposits
made by one company with another company. These deposits are essentially brokered deposited, which
led the involvement of brokers. The rate of interest on their deposits is higher than that of banks
and other markets. The biggest advantage of ICDS is that the transaction is free from legal hassles.
Type of ICD
o Three Months Deposits
o Six months Deposits
o Call deposits
Features of ICDS
 These transactions takes place between two companies.
 There are short term deposits.
 These are unsecured deposits.
 These transactions are generally completed through brokers.
 These deposits have no organized market.
 These deposits have no legal formalities.
 These are risky deposits from the point of view of lenders
CHAPTER: Small Business and Enterprises
Small Business Enterprises

A business which operates on a small scale and required less capital, less labour and less machines is
called small business. The goods are produces on a small scale. This business is operated and managed
by the owner of the business. In India, the village and small Industries sector consists of traditional
Handlooms, Handicrafts, khadi and Village Industries. Modern small Industries - Small scale industries
and Power looms.
According to The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006, a small scale
enterprise defined as one where the investment in Plant and Machinery is more than Rs. 25 lakhs but
does not exceed Rs. 5 crores.
Several parameters can be used to measure the size of business. These include:
o the number of persons employed in business,
o Capital invested in business,
o Volume of output of business and
o Power consumed for business activities.
The definition used by the Government of India to describe small Industries is based on the investment
in plant and machinery. It can be divided as follows:
Category Manufacturing Unit Service Providers

Micro Enterprise Less than Rs. 25 Lakhs Less than Rs. 10 Lakhs
Small Enterprise Between Rs. 25 Lakhs to Rs. 5 Between Rs. 10 Lakhs to Rs. 2
Crores Crores
Medium Between Rs. 5 Crores to Rs. 10 Between Rs. 2 Crores to Rs. 5
Enterprise Crores Crores
Types of Small Business

o Small-scale manufacturing industries.
o Handlooms and power loom.
o Khadi
o Agro-based industries.
o Tuition Centers.
o Photography.
o Breakfast joint
o Printing.
o Coir
o Sericulture
ROLE OF SMALL SCALE INDUSTRIES IN SOCIO ECONOMIC DEVELOPMENT OF INDIA
 SSI Increases Production - India is one of the world’s fastest growing economies in the world.
Consequently, its production output is massive. It is pertinent to note that SSIs contribute almost 40% of
India’s gross industrial value. The number of Small Scale Industries in India increased from around
8 lakhs in 1980 to over 30 lakhs in 2000. This figure has grown even more in recent years owing to
the government’s ‘Ease of Doing Business’ policies. As a result of this, the total industrial
production output rose tremendously in the last few years. SSIs are, therefore, strongly
responsible for the growth of India’s.
 SSI Increases Export - Apart from producing more goods and services, SSIs have been able to export
them in large numbers as well. Almost half of India’s total exports these days come from small-scale
businesses. 35% of the total exports account for direct exports by SSIs, while indirect exports amount to
15%. Even trading houses and merchants help SSIs export their goods and services to foreign countries.
 SSI Improves Employment Rate - Small scale Industries are second largest employers of human
resources after Agriculture. It has 95% of the industrial unit in the country. These enterprises are labour
intensive and labour is available in abundant amount is rural areas of India.
 Balance regional development - SSI can be set anywhere in the country. They use local resources, less
capital and simple technology.
 Quick and timely decision - Due to the small size of the organization quick and timely decisions can be
taken without consulting many people.
 Development of entrepreneurship - SSI provide opportunity of young men and women to start their
own business.
 SSI Advances Welfare- Apart from providing profitable opportunities, Small Scale Industries play a large
role in advancing welfare measures in the Indian economy as well. A large number of poor and
marginalized sections of the population depend on them for their sustenance. These industries not only
reduce poverty and income inequality but they also raise standards of living of poor people.
Furthermore, they enable people to make a living with dignity.
ROLE OF SMALL BUSINESS IN RURAL INDIA

 Provides Employment in Rural Areas - Cottage and rural industries provide employment opportunities
in the rural areas as these are labour oriented enterprises. In Indian rural areas ample labour is available.
 Improve Economic Condition - Small business provide multiple source of income to the rural
households. SSI improves economic conditions and standard of living of people living in those Areas.
 Prevent migration - Development of rural and village industries can also prevent migration of the rural
population to urban areas in search of employment.
 Utilization of Local Resources - SSI use local resources e.g. coir, wood and other products.
 Equitable distribution of rational Income - Small Scale Industries and cottage Industries ensure
equitable distribution of national income. This helps to reduce the gap between rich and the poor in the
country.
 Balanced Regional development - These enterprises are often dependent on local source of production.
This way, industries do not just limit themselves to a particular place but diversify. This helps in balanced
regional development.
GOVERNMENT ASSISTANCE TO SMALL INDUSTRIES AND SMALL BUSINESS
UNITS
The Indian government has been supporting and developing small unit sectors. India is focusing on rural
industries and cottage industries. According to layman’s language, a small business is a project or
venture that requires a small budget or is run by small group of people.
1. National Small Industries Corporation (NSIC)
NSIC was set up in 1995 by the government to popularize and support small businesses focusing
on commercial aspects. The important functions of NSIC are:
o Supply imported goods and machine on hire purchase agreement.
o Procurement of supply imported indigenous raw materials.
o Developing small business by importing their products.
o Supervising services
o Awareness on technical up gradation
Also, a new scheme called performance and credit rating for small units have been started by NSIC, this
ensures that the more their credit rating, the more their financial assistance for their investment and
capital requirement.
2. District Industries Center (DIC)
The concept of DIC came during 1977, when Government of India announced the new Industrial policy
on 23rd Dec, 1977. The main objective of DICs is to make available all necessary services at one place.
The finance for setting up DICs in a state are contributed equally by particular state Govt. and Central
Govt.
Functions of District Industries Center
o Act as the focal point of industrialization of the district
o Identifies projects for setting up of SSI units.
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o Issues permanent registration certificate to SSI units.
o Provides marketing support to SSI units
o Act as a link between the entrepreneurs and the lead bank of district.
o Helps businessman in obtaining license from Electricity board, water supply board etc.
3. Small Industries Development Bank of India (SIDBl)
SlDBI was established in 1989 as a public corporation. Its main object is to promote. Finance and
develop the small scale sector in India.
4. National Bank for Agriculture and Rural Development (NABARD)
The NABARD provides loans and advances to State Government for a period not exceeding 20 years to
enable to State Government
5. The Rural Small Business Development Centre (RSBDC)
6. The National Commission for Enterprises in the Unorganized Sector (NCEUS)
7. Rural and women Entrepreneurship Development (RWED)
8. World Association for Small and Medium Enterprise (WASME)
9. Scheme of Fund for Re-generation of Traditional Industries (SFURTI)
Govt. Incentives to hilly backward and Rural Areas

 Power: Some states supply power at a confessional rate of 50%.
 Tax holidays: Exemption from payment of tax for 5 years.
 Land and Water: Availability of land at confessional rate. Water is supplied on no profit no loss basis.
 Octroi: Most of the states have abolished octroi.
 Protective Measures: The government reserved 800 items for exclusive production by the small scale
Industries and give priority in allocation of raw materials and machines.
 Marketing Assistance: Government tries to solve their marketing problem by improving information
and in order to provide guarantee for sale of goods.

 Finance: Subsidy of 10-15% for building capital asset. Loans are offered data confessional rates.
 Sales Tax: In all Union Territories, small industries are exempted from sales tax while some states
give exemption of 5 years.
Entrepreneurship Development
Entrepreneurship is the process of setting up one’s own business as distinct from pursuing any other
economic activity, be it employment or practising some profession. The person who set-up his business
is called an entrepreneur. The output of the process, that is, the business unit is called an enterprise.
You may invoke ‘subject- verb-object (SVO)’ relationship in English grammar to clearly understand these
terms. (See Figure on SVO Analogy)
It is interesting to note that entrepreneurship besides providing self-employment to the entrepreneur is

responsible to a great extent for creation and expansion of opportunities for the other two economic
activities, that is, employment and profession. (Can you think why and how?) Further, each business
gives rise to other businesses– the suppliers of raw materials and components, service providers (be it
transport, courier, telecom, distributor middlemen and advertising firms, accounting firms and
advocates etc.
And, in the process, entrepreneurship becomes crucial for overall economic development of a nation
No society can wait for the chance of ‘birth’ of entrepreneurs to pursue its developmental plans. In fact,
plans for economic development would bear little fruit unless entrepreneurship development is
regarded as a deliberate process of making people aware of entrepreneurship as a career at an early age
and creating situations where they may actually make a choice to become entrepreneurs.
When you make this choice, you become a job-provider rather than a job-seeker, besides enjoying a
host of other financial and psychological rewards. Taking to entrepreneurship is surely more a matter of
aspiring to become an entrepreneur rather as being born as one.
CHARACTERISTICS OF ENTREPRENEURSHIP
 Systematic Activity: Entrepre- neurship is not a mysterious gift or charm and something that happens by
chance! It is a systematic, step-by- step and purposeful activity. It has certain temperamental, skill and
other knowledge and competency requirements that can be acquired, learnt and developed, both by
formal educational and vocational training as well as by observation and work experience.
 Lawful and Purposeful Activity: The object of entrepreneurship is lawful business. It is important to
take note of this as one may try to legitimize unlawful actions as entrepreneurship on the
grounds that just as entrepreneurship entails risk, so does illicit businesses. Purpose of
entrepreneurship is creation of value for personal profit and social gain.
 Organization of Production: Production, implying creation of form, place, time personal utility, requires
the combined utilization of diverse factors of production, land, labour, capital and technology.
Entrepreneur, in response to a perceived business opportunity mobilizes these resources into a
productive enterprise or firm. It may be pointed out that the entrepreneur may not possess any of these
resources; he may just have the ‘idea’ that he promotes among the resource providers. In an economy
with a well-developed financial system, he has to convince just the funding institutions and with the
capital so arranged he may enter into contracts of supply of equipment, materials, utilities (such as
water and electricity) and technology. What lies at the core of organization of production is the
knowledge about availability and location of the resources as well as the optimum way to combine
them. An entrepreneur needs negotiation skills to raise these in the best interests of the enterprise.
 Innovation: In a world, where almost everything has been done, innovation is a priceless gift to
have. Innovation basically means generating a new idea with which you can start a business and achieve
a substantial amount of profits. Innovation can be in the form of a product, i.e., launching a product that
no one is selling in the market. It can also be in the form of process, i.e., doing the same work in a more
efficient and economical way.
An easy example of product innovation could be the launching of touch screen cell phones when the
world was still using a keypad on cell phones.
 Risk bearing: The essence of entrepreneurship is the ‘willingness to assume risk’ arising out of the
creation and implementation of new ideas. New ideas are always tentative and their results may not be
instantaneous and positive. An entrepreneur has to have patience to see his efforts bear fruit. In the
intervening period (time gap between the conception and implementation of an idea and its results), an
entrepreneur has to assume risk. If an entrepreneur does not have the willingness to assume risk,
entrepreneurship would never succeed.
Need of Entrepreneurship
1. Contribution to GDP: Increase in the Gross Domestic Product or GDP is the most common definition
of economic development. You are aware that income is generated in the process of production. So,
entrepreneurs generate income via organization of production be it agriculture, manufacturing or
services. You are also aware that income generated is distributed among the factors of production
where land gets rent, labour gets wages and salaries, capital gets interest and the residual income
accrues to the entrepreneur in the form of profits. As rent and interest accrue to those few who have
land and capital respectively whereas larger masses are destined to earn their incomes via wage
employment, the biggest contribution of the entrepreneurship lies in capital formation and generation
of employment.
2. Entrepreneurs create jobs: Without entrepreneurs, jobs wouldn’t exist. Entrepreneurs take on the
risk to employ themselves. Their ambition to continue their business’ growth eventually leads to the
creation of new jobs. As their business continues to grow, even more jobs are created. Thus, lowering
unemployment rates while helping people feed their families.
3. Generation of Business Opportunities for Others: Every new business creates opportunities for the
suppliers of inputs (this is referred to as backward linkages) and the marketers of the output
(what is referred to as forward linkages). As a pen manufacturer you would create opportunities
for refill manufacturers as well as wholesalers and retailers of stationery products. These
immediate linkages induce further linkages. For example greater opportunities for refill manufacturers
would mean expansion of business for ink manufacturers. In general, there are greater opportunities for
transporters, advertisers, and, so on. So, via a chain-reaction, entrepreneurship provides a spur to the
level of economic activity.
4. Improvement in Economic efficiency: You are aware that efficiency means to have greater output
from the same input. Entrepreneurs improve economic efficiency by, a. improving processes, reducing
wastes, increasing yield, and, b. Bringing about technical progress, that is, by altering labour -capital
ratios. You are aware that if labour is provided with good implements (capital), its productivity increases.
5. Increasing the Spectrum and Scope of Economic Activities: Development does not merely
mean ‘more’ and ‘better’ of the existing, it also and more crucially means diversification of economic
activities– across the geographic, sectoral and technological scope.
Process of Entrepreneurship Development

 Opportunity Scouting: Entrepreneurial opportunities have to be actively sear ched for. One may r ely on
personal observation, discovery or invention. Personal/professional contacts/networks and experience
or may also help in identifying business opportunities. Alternatively, one may rely on published reports,
surveys etc. Most of us have a consumer’s mindset. If we see any object of desire, may be a pen, laptop,
latest model of the mobile phone or somebody eating pizza or burger, we crave to have the same thing
for ourselves. he entrepreneurial mind, on the other hand starts working out, what would be the market
size, where to procure it from and at what price, will I able to woo the customers from the existing.
 Identification of Specific Product Offering: While the environment scan leads to the discovery of more
generalised business opportunities, there is a need to zero in on to a specific product or service
idea. Deciding on the product offering makes the highest demand on the entrepreneur’s creativity and
innovativeness. Yet, in a competitive environment, it is possible to differentiate your product offering
even if the generic product is the same and serves the same need. Clearly decision on specific product
offering necessitates decisions on who is buying, why, and what are the value expectations. You will be
able to succeed when the value delivered not only meets but also exceeds customers’ expectations and
create a ‘Vow!’ impact.
 Feasibility Analysis: The product offering idea must be technically feasible, that is it should be possible
with the available technology to convert the idea into a reality. And this should be possible at a cost that
can be covered by the price it will fetch; in other words, the idea must be economically feasible too. The
project cost should be within the resources available and the resource providers should be reasonably
sure of an appropriate return on (profit) and return of (safety and liquidity) of their investments. That is,
the idea must be financially viable as well.
There should be enough sales in the immediate and the prospect of growth in the foreseeable future;
there should be adequate assurance on the commercial viability of the chosen product offering. Now a
day, it is also important to be sure that there aren’t any environmental and other legal
restrictions/necessity of prior approvals for setting up the business It is also to be decided as to whether
the business will be organized as a proprietary concern/partnership firm/ company or cooperative entity
.
You must compile these findings in the form of a business plan that would have to be submitted to the
funding authorities, in the Indian context, the State Finance Corporation of your area. They may be
having a prescribed Performa in which the details of the business plan are required to be furnished and,
as such there may a need to adapt the contents accordingly.
The business plan may be appraised by the funding institution and upon satisfying itself about the
desirability of assisting your project and upon the furnishing of some margin money it may sanction the
loan
Upon the project approval, the entrepreneur can proceed for project commissioning, that is putting up
the factory premises, installing the equipment, obtaining the supplies of the input materials with a view
to starting the manufacture and marketing the product.
entrepreneurial functions do not come to an end with the business start-up. He often looks after its day-
to-day operations and strives for its stability and growth.
Startup India – A Government Initiative

Startup India Scheme is an initiative by the Government of India for generation of employment and
wealth creation. The goal of Startup India is the development and innovation of products and services
and increasing the employment rate in India. Benefits of Startup India Scheme are Simplification of
Work, Finance support, Government tenders, networking opportunities. Startup India was launched by
Prime Minister Shri. Narendra Modi on 16th January 2016.
Ways to Fund Start up
 Bootstrapping your startup business: Self-funding, also known as bootstrapping, is an effective way of
startup financing, specially when you are just starting your business. First-time entrepreneurs often have
trouble getting funding without first showing some traction and a plan for potential success. You can
invest from your own savings or can get your family and friends to contribute. This will be easy to raise
due to less formalities/compliances, plus less costs of raising. In most situations, family and friends are
flexible with the interest rate.
 Crowd funding As A Funding Option: Crowd funding is one of the newer ways of funding a startup that
has been gaining lot of popularity lately. It’s like taking a loan, pre-order, contribution or investments
from more than one person at the same time. An entrepreneur will put up a detailed description of his
business on a crowd funding platform. He will mention the goals of his business, plans for making a
profit, how much funding he needs and for what reasons, etc. and then consumers can read about the
business and give money if they like the idea. Those giving money will make online pledges with the
promise of pre-buying the product or giving a donation. Anyone can contribute money toward helping a
business that they really believe in..
 Get Angel Investment In Your Startup: Angel investors are individuals with surplus cash and a keen
interest to invest in upcoming startups. They also work in groups of networks to collectively screen the
proposals before investing. They can also offer mentoring or advice alongside capital.
 Get Venture Capital For Your Business: This is where you make the big bets. Venture capitals are
professionally managed funds who invest in companies that have huge potential. They usually invest in
a business against equity and exit when there is an IPO or an acquisition. VCs provide expertise,
mentorship and acts as a litmus test of where the organization is going, evaluating the business from the
sustainability and scalability point of view.
 Get Funding From Business Incubators & Accelerators: Early stage businesses can consider
Incubator and Accelerator programs as a funding option. Found in almost every major city, these
programs assist hundreds of startup businesses every year. Though used interchangeably, there are few
fundamental differences between the two terms. Incubators are like a parent to a child, who nurtures
the business providing shelter tools and training and network to a business. Accelerators so more or less
the same thing, but an incubator helps/assists/nurtures a business to walk, while accelerator helps to
run/take a giant leap.
 Get Business Loans from Microfinance Providers or NBFCs: Microfinance is basically access of financial
services to those who would not have access to conventional banking services. It is increasingly
becoming popular for those whose requirements are limited and credit ratings not favored by bank.
Similarly, NBFCs are Non Banking Financial Corporations are corporations that provide Banking services
without meeting legal requirement/definition of a bank.
CHAPTER: Internal Trade
Internal Trade
When buying and selling of goods and services takes place within the geographical limits of a country. It
is known as internal trade. Internal trade is also known as domestic trade, and as the name suggests it is
the trade of domestic goods within the confines of the geographical boundaries of a nation. So the
buying and selling of either goods or services done within a country is the internal trade.
The main features of internal trade are
(i) The buying and selling of goods and services takes place within a country.
(ii) The payment are made and received in the home country only.
(iii) There are no or very few formalities to be completed by the traders.
Types of Internal Trade

A. Wholesale Trade
Wholesale trade is one of the main categories of domestic trade. In this form of trade goods are
generally bought in huge quantities from the manufacturer. These goods are then warehoused and
finally sold to retailers, middlemen, merchants etc. The goods in wholesale trade are not sold to the final
consume directly. So all the customers of a wholesaler are commercial users or other intermediaries, not
the ultimate customers.
The word ‘Wholesaler’ has been derived from the word ‘Wholesale’ which means to sell goods in
relatively large quantities or in bulk. A wholesaler, in the words of S.E. Thomas ‘is a trader who
purchases goods in large quantities from manufacturers and sells to retailers in small quantities.
Characteristics of a Wholesaler:
 He buys in bulk quantities from producers and resells them to retailers in small quantities.
 He usually deals in a few types of products.
 He is a vital link between the producer and the retailer.
 He operates in a specific area determined by producers.
 He does not display his goods but keeps them in godowns. Only samples are shown to intending buyers.
 A wholesaler may be an individual or otherwise a firm.
 A wholesaler generally sets up distribution centre in parts of the country to make available goods to the
retailers.
B. Retail Trade
It means buying in small quantities from the wholesaler and selling in small quantities to the consumers.
The goods are bought by the retailers from the wholesalers or the producers and sold to the consumers.
Retailer acts as a link between wholesalers and the customers. He maintains wide variety of goods, as he
does not specialize in one line of goods. Retail trade is the final stage of distribution.
The word ‘Retailer’ had been derived from the French word ‘Re-tailer’ which means ‘to-cut again’.
Obviously then, retailing means to cut in small portions from large lumps of goods. A retailer is last
middlemen in the chain of distribution of goods to consumers. He is a link between the wholesalers and
the consumer.
Characteristics of Retailers:
 A retailer is the link between a wholesaler and the ultimate consumer and he is the last intermediary
in distribution.
 A retailer buys goods from wholesaler in bulk and resells them to consumers in small quantities.
 A retailer maintains a personal contact with his customers.
 A retailer makes sufficient shop display of his wares to attract customers.
 Retailers perform all the marketing functions which a wholesaler performs and in addition emphasises
on advertisement.
 Retailers deal in a variety of merchandise and are often known as general merchants.
 Usually retailers are classified into two major groups, viz., small scale retailers and large scale retailers.
 Retailers aim at providing maximum satisfaction to their customers in limited area.
Services rendered by Wholesaler and Retailer

Services of Wholesaler
A. Wholesalers Services to Manufacturers
 Allows for Large Scale Production: Generally, manufacturers produce their goods in large quantities.
This helps them keep costs low and enjoy economies of the scale. But they are only able to do so
because wholesalers order in bulk. Wholesalers will round up all the small orders from various retailers
and place an order in rather larger quantities with the manufacturers. This allows them to scale
their production of goods, without worrying about warehousing or spoilage.
 Risk Bearing: Once the wholesaler acquires the goods from the manufacturer, he also acquires of all the
risks. This includes the risk of theft, fire, spoilage, change in demand, any many more such risks. He will
even bear the cost of the insurance. In the absence of the wholesaler, such risks would remain with the
producers until the goods were sold.
 Financial Cooperation: Wholesalers actually provide a form of financial assistance to the producers.
They more often than not make cash payments for their purchases. They at times even make advance
payment if the purchase order is rather large. This allows the producers not only to avoid bad debts but
also frees up their working capital.
 Distribution Function: Distribution is one of the most important functions of marketing. It allows the
producers to remove the barrier of place, by making the goods available in place of need. But it is
actually wholesalers who perform this function for the manufacturers. They distribute the goods over a
large geographical area by selling them to various widespread retailers.
 Warehousing: Another important function of marketing. The wholesaler buys bulk quantities from the
manufacturers and stores these goods in their own warehouses and godowns. This reduces the storage
headaches of the manufacturers to a large extent.
Wholesalers Services to Retailers

 Availability of Goods: Retailers must always keep their customers satisfied, so it is very important that
the goods in demand always be available to them. The wholesalers make this possible. The retailers
cannot order directly from the manufacturers and face a wait of inordinate time. Wholesale trade
facilitates them with the ready availability of their products.
 Expert Advice: Wholesaler also advice retailers on a variety of matters like special features of a product,
correct displaying tactics, new products in the market etc. This ensures that retailers are always up to
the mark and can provide their customers with the best products and services available in the market.
 Credit Facilities: While wholesalers themselves do not generally buy goods on credit, they tend to make
this facility available to the retailers. This will allow retailers to expand their scale of operations
as well even if they sometimes lack liquidity or have limited resources.
Services of Wholesaler
A. Services to consumers
 Ready or quick supply : The most important service of a retailer to consumers is to maintain regular
availability of various products so that the buyers can buy the products whenever they need.
 Wide variety : Retailers generally keep stock of a variety of products and different manufacturers. This
enables the consumers to make their choice out of a wide selection of goods.
 Guiding customers : By ananging the effective display of products and through their personal selling
efforts retailers should provide the information of products to the customers.
 Demonstration and after sales services : It can be done in the form of home delivery, supply of spare
parts and attending to customers.
 Home delivery : It is an important part of after sale services and for a buyers decision for repeat
purchase of the products.
 Convenient location : They are suitated very near to the residential areas and remain open for long
hours which makes great convenience to the customers.
Services to wholesalers and manufacturers :
 Ready market: Retailers deal with individuals so the manufacturers and whole-salers will not make
individual sales.
 Providing information : By undertaking personal selling efforts retailers relieve the producers of this
activity of individual selling.
 Risk bearing : Retailers participates in the promotional activities of the product so that the product
becomes popular and then it is less risk for the manufacturers.
 Distribution of goods to distant places : Retailers helps in distribution of goods to the final consumers
and thus provide place utility.
Services to Wholesalers or Manufacturers

 Final link in the distribution of goods: This is a function of place utility. Wholesalers or manufacturers
cannot cover a wide geographical area and markets to sell the goods to the final consumer. It falls upon
the retailer to create place utility and ensure that the goods are distributed throughout a
wide market and reaches all consumers. Retailers are the link between the wholesalers and the final
consumers
 Personalised Selling Efforts: There are certain goods that require personal selling. These are non-
standardised goods that cannot just be picked off the shelves. But the manufacturer is not there to sell
the product, that responsibility falls on the retailers. They use personal selling techniques to realize the
sale. Take for example selling shoes, which always requires a personal touch from the retailer.
 Permit Economies of Scale: A manufacturer can produce goods in bulk, and a wholesaler can buy goods
in bulk because retailers perform the function of breaking up the bulk. Although they buy in bulk
themselves, they sell in smaller (sometimes individual) units. This allows the producers and even the
wholesalers to enjoy the economies of scale.
 Source of Market Information: Retailers are the only ones in direct contact with the final consumers on
a daily basis. They are in a unique position to provide the manufacturers with an valuable feedback they
have collected from the consumers. If a consumer has complaints or problems, the retailer is the
first person he contacts. Such information is invaluable to the manufacturers in their quest to
improve their products.
 Advertising and Promotions: Retailers will even help manufacturers and wholesalers with their
promotions and advertisements. Retailers will frequently take part in promotional activities, put up
advertisements of the product inside their shops, run offers, discounts etc.
Types of Retail Trade

The retail trade can be classified in to the following categories:
1. Itinerants retailers 2. Fixed shop retailers
A. Itinerants Retailer refers to retailers who have no fixed place of sale. They move from one
place to another in search of customers. Included under this heading are those retailers who do not
possess any shop of their own and who move from place to place to sell their wares.
Their common characteristic features are:
o They do not have fixed shops of their own.
o They carry very little stock either on their heads or on bicycles or on hand-carts.
o Their capital investment is very small.
o They do not stick to a particular line of business throughout the year.
o They move from place to place in order to sell their wares.
o They do not have fixed hours of work or even fixed days of work.
o They operate at the minimum cost.
o They provide door-to-door service moving about in residential localities and selling their wares.
They are travelling or wandering sellers and include the following types:
(a) Hawkers: They are itinerant traders who move about in residential localities with their wares usually
on bicycles or hand-carts. They usually deal in consumer goods of a cheap nature. Their range of
merchandise varies from vegetables, fruits to toys, bangles, plastic utensils etc.
(b) Peddlers: They carry their wares on their heads or on their back and move from one house to the
other in the residential localities of a city. They also deal in cheap goods and usually cater to the needs
of the low- income gentry.
(c) Cheap Jack: They do not stay long at one place of business but differ from peddlers and hawkers in
the sense that while the latter do not have shops of their own, cheap jacks do hire small ships in
residential localities to display their wares. They shift from locality to locality according to the prospects
of getting business.
(d) Market traders: They are a type of small-scale sole-proprietors who hold stalls at different places in
different localities on fixed days known as “market days” which may be once a week. They deal in a
variety of cheap goods which are of consumers interests and which are needed in every household daily.
Toys, cheap cosmetics, cheap readymade garments for kids, imitation jewellery, sewing and knitting
material, etc. are a few examples of the items which they usually stock. Market traders are temporary in
nature, in the sense that they do not permanently establish their stalls in particular place, rather they
move from one market place to another.
(e) Street Traders: They are “pavement retailers” who display and sell their products from pavements/
footpaths. They are usually seen in crowded cities and handle light goods.
B. Fixed Shop Retailer These are self-explanatory, they operate out of a fixed place of
business. They are permanent establishments that do not change their locations very often in search of
greener pastures.
Their common characteristic features are:
o Fixed shop retailers generally operate on a much bigger scale, although their size of operations will differ
according to the type of store
o They require a sizeable capital infusion for inventory and infrastructure purposes
o They also provide a large variety and categories of products as a general rule
o These establishments have more credibility and are trusted more by the consumers and
manufacturers/wholesalers as well
Types of Fixed Shop Retailers
1. Small Scale Fixed Shop Retailers
a) General Stores: These are the most common stores we find in India. They carry all items of daily use a
customer needs from biscuits and grains to toothpaste and shampoos. They are centrally and
conveniently located in a local market or a residential area, where they are accessible to the customers.
Sometimes these stores to increase the convenience factor even offer home delivery and credit
facilities.
b) Specialty Stores: These are stores that specifically sell only one line of products, like women wear,
electronics, cosmetics etc. They specialize in selling only a variety of products of that one category. Like
for example Vijay Sales only sells electronics. Such stores are usually found in urban cities. They place
themselves in a central location so they can attract maximum footfalls, like say in a mall for example.
c) Secondhand Goods Store: As the name suggests they sell used goods. These used goods can range from
old and rare books to furniture to cars even. They source their products differently than normal
retailers, but since the goods are going to final consumers it is still considered a retail trade. People in
low-income groups or with modest means often shop in such stores, looking for a good bargain.
d) Street Stallholders: These retailers operate out of stalls set up on the street, but their establishments
are permanent still. They do not shift their stalls on a regular basis. The stalls are often located in central
locations with heavy foot traffic. They cannot hold a lot of inventory since their shops tend to be small.
And they too deal in items of daily use like clothes, stationary, cigarette shops etc.
2. Large Scale Retailers
a) Departmental Stores - A departmental store is a classic example of a large retailer or large
retailing business. It is, in fact, one of the mainstays of the retailing industry. These stores are generally
incredibly huge stores and sell a very wide variety of products. These products are organized into
categories, or rather into ‘departments‘. And all these departments are under the same roof.
Generally, a department store will sell everything from women wear, menswear, electronics, toys, home
wear, bed and linen, kitchen appliances, footwear, accessories, cosmetics and many more such things.
Every department will be an independent unit by itself, united under one roof in one store. A
classic example of such a departmental store is Macy’s. In India, we could cite the example of Big Bazaar
or Central stores.
 They are generally located in a heavily populated area in the heart of a city, which provides them with
heavy footfall.
 Departmental stores provide all necessary facilities to ease shopping experiences of their valued
customers. These include restrooms, parking, valet etc.
 Since the size of operation and funding requirement for them is significant, they are
generally companies with shareholders.
 Most departmental stores actually combine the functions of retailing and warehousing, eliminating the
middleman from the process.
 Generally, all the different departments follow the method of centralized purchasing. One purchase
department will purchase for the entire store.
b) Chain Stores - Chain stores are multiple retail shops which operate under one brand name and have the
common ownership. Basically, they are all outlets or branches of the same brand/store. These types of
retail stores actually originated in America but are now seen worldwide. One common example would
be Croma or DMart.
One thing to note is that all chain stores are under one common ownership; the stores do not have
individual owners (like in franchising). These shops often even have similar looks and designs. Even the
display system, color schemes, and other arrangements are kept uniform. This helps the store retain its
brand identity.
 There is centralized purchasing by the head office or the main branch. The home office will then send
the goods to the individual chain stores. This will allow them to order in bulk and cut down on costs.
 Such chain stores tend to be located in populist areas. The idea is to be as closely located to the
customer’s house as possible.
 The control of individual stores will fall to the Branch/Store Manager. He will be answerable to the head
office regarding the performance and all other matters related to the store
 There is one head office. All the policy formation and control happen from this head office.
What is GST?
GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and Service Tax Act
was passed in the Parliament on 29th March 2017. The Act came into effect on 1st July 2017; Goods &
Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that is levied on
every value addition.
In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods and
services. This law has replaced many indirect tax laws that previously existed in India.
GST is one indirect tax for the entire country.
Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST
and State GST are charged. Inter-state sales are chargeable to Integrated GST.
Now let us try to understand the definition of Goods and Service Tax – “GST is a comprehensive, multi-
stage, destination-based tax that is levied on every value addition.
What are the components of GST?

There are 3 taxes applicable under this system: CGST, SGST & IGST.
CGST: Collected by the Central Government on an intra-state sale (E.g.: transaction happening within
Maharashtra).
SGST: Collected by the State Government on an intra-state sale (E.g.: transaction happening
within Maharashtra).
IGST: Collected by the Central Government for inter-state sale (E.g.: Maharashtra to Tamil Nadu).
Advantages of GST to Citizens:

(i) Simpler tax system
(ii) Reduction in prices of goods and services due to elimination of cascading
(iii) Uniform prices throughout the country
(iv) Transparency in taxation system
(v) Increase in employment opportunities
Advantages of GST to Trade/Industry:
(i) Reduction in multiplicity of taxes
(ii) Mitigation of cascading/double taxation
(iii) More efficient neutralization of taxes especially for exports
(iv) Development of common national market
(v) Simpler tax regime-fewer rates and exemptions
Advantages of GST to Central/State Governments:
(i) Reduction incompliance costs as no requirement of multiple record keeping
(ii) Simpler tax system
(iii) Broadening of tax base
(iv) Improved revenue collections
(v) Efficient use of resources
Some of the salient features of the GST regime are:

o Dual GST : In consideration of the federal structure of India, Dual GST has been chosen as the apt model
wherein tax would be jointly levied by both Centre and the states on supply of goods and services.
o Components of GST :
CGST (Central GST)
SGST (State GST)
IGST (Integrated GST)
o Levy of GST: On intrastate transactions CGST + SGST will be applicable and on interstate transactions &
Imports, IGST will be applicable.
o Taxes Subsumed under GST : Central Excise, Service Tax, CST, VAT, Entertainment Tax, Luxury Tax,
Octroi and Entry Tax, Purchase Tax
o Taxes not subsumed under GST: Basic Customs Duty, Stamp Duty, Property Tax, Toll Tax
o Items exempt from GST: Petrol / Diesel / Aviation fuel / Natural Gas, Electricity
o GST has different slabs which encourages trade in the economy.
CHAPTER: International Trade

International Business
International Business refers to business transactions i.e. manufacturing and trading, carried on beyond
the boundaries of one’s own country. International business takes place beyond boundaries of one’s
own country and there is participation by people and organizations from different countries.
International business includes merchandise exports and imports, service exports and imports, foreign
investments, licensing and franchising. Foreign investments can be direct and portfolio investments.
direct investments takes place when a company directly invests in properties to undertake production
and marketing of goods and services in foreign countries. Portfolio investment refers to an investment
that a company makes in another company by acquiring shares or providing loans and earns dividends
or interest on shares or loans, respectively. International business offers benefits under two categories –
benefits to nations and benefits to firms.
WHAT’S THE NEED FOR AN INTERNATIONAL TRADE?

 Greater Variety of Goods Available for Consumption: International trade brings in different varieties of
a particular product from different destinations. This gives consumers a wider array of choices which will
not only improve their quality of life but as a whole it will help the country grow.
 Efficient Allocation and Better Utilization of Resources: Efficient allocation and better utilization of
resources since countries tend to produce goods in which they have a comparative advantage. When
countries produce through comparative advantage, wasteful duplication of resources is prevented. It
helps save the environment from harmful gases being leaked into the atmosphere and also provides
countries with a better marketing power.
 Promotes Efficiency in Production: International trade promotes efficiency in production as countries
will try to adopt better methods of production to keep costs down in order to remain competitive.
Countries that can produce a product at me lowest possible cost will be able to gain larger share in the
market.
Therefore an incentive to produce efficiently arises. This will help to increase the standards of the
product and consumers will have a good quality product to consume.
 More Employment: More employment could be generated as the market for the countries’ goods
widens through trade. International trade helps generate more employment through the establishment
of newer industries to cater to the demands of various countries. This will help countries to bring-down
their unemployment rates.
 Consumption at Cheaper Cost: International trade enables a country to consume things which either
cannot be produced within its borders or production may cost very high. Therefore it becomes cost
cheaper to import from other countries through foreign trade.
 Reduces Trade Fluctuations: By making the size of the market large with large supplies and extensive
demand international trade reduces trade fluctuations. The prices of goods tend to remain more stable.
 Utilization of Surplus Produce: International trade enables different countries to sell their surplus
products to other countries and earn foreign exchange.
 Fosters Peace and Goodwill: International trade fosters peace, goodwill, and mutual understanding
among nations. Economic interdependence of countries often leads to close cultural relationship
and thus avoid war between them.
What is Export Trade?

Exports are explained as the goods and services manufactured in one country and acquired by citizens of
another country. The export of good or service can be anything. This trade can be done through
shipping, e-mail, transmitted in private luggage on a plane. Basically, if the product is manufactured
domestically and traded in a foreign country, it is known as an export.
The procedure of Export Trade
 Trade Enquiry and Sending Quotations: The international buyer who wishes to buy the goods from the
other country sends an inquiry relating to price, desired quality, terms, and conditions for the export of
goods which is known as Trade inquiry. The exporter sends a reply to the inquiry in the form of
‘Quotation’. The quotation is also known as ‘Performa Invoice’ which contains information about the
selling price, quantity, quality, mode of delivery, etc.
 Receipt of an indent or export order: If the prospective importer finds the terms and conditions
acceptable, then he places an order for export of goods which is known as indent. An indent contains a
description of the goods ordered, price to be paid, terms and conditions of delivery, packing of goods
and other details. On receipt of indent if the exporter finds it satisfactory, then he forwards his
acceptance to export the goods.
 Assessing the Creditworthiness: Before proceeding further, the exporter wants to satisfy him regarding
the payment of goods. For this, he demands a Letter of Credit (L/C) from the importer. This L/C is issued
by importer’s bank in favor of the exporter’s bank. Through the (L/C), the bank gives assurance to the
exporter of accepting the bill of exchange of a certain amount. If required, the exporter can ask for
advance payment also from the importer
 Obtaining export licence : Each and every country has its own import and export policy for free goods
and restricted goods. An exporter in India has to complete various formalities and apply for export
license to the appropriate authority. If the authority is satisfied it will issue the export license. To get an
export license, the exporter must have (i) an IEC number (ii) RCMC from appropriate export promotion
council and (iii) Registration with Export Credit and Guarantee Corporation (ECGC).
 Production or Procurement of goods: The exporter has to produce the goods or buy them from the
market. The goods must be in accordance with the instructions given in the indent regarding the quality,
quantity, price, etc.
 Pre-shipment Inspection: To ensure that only good quality products are exported from our country, the
Government of India has made compulsory pre-shipment inspection of goods by certain authorized
agencies .
 Excise Clearance: In India, manufactured products are subject to excise duty under the Central Excise
Act. Therefore excise clearance certificate is a must for the goods to be exported. It may be noted here
that the Government of India has exempted excise duty in many cases if the goods are manufactured
exclusively for the purpose of export.
 Certificate of Origin: This certificate specifies the country in which the goods are being
manufactured. This certificate enables the importer to claim tariff concessions or other exemptions. This
certificate is also required in case when there is a ban on imports of some goods from certain countries.
 Reservation of shipping space: The exporting firm applies to the shipping company for provision of
shipping space. It has to specify the types of goods to be exported, probable date of hipment
and the port of destination. On acceptance of application for shipping, the shipping company
issues a shipping order. A shipping order is an instruction to the captain of the ship that the specified
goods after their customs clearance at a designated port be received on board.
 Packing and marking of the goods: Packing should be done strictly according to the instructions given in
the indent. If loss arises due to defective packing, the exporter may have to bear it. If necessary, grading
should be done before packing. The packages should be properly marked according to instructions, if
any, so that they may be easily recognized.
 Insurance of goods: The exporter then gets the goods insured with an insurance company to protect
against the risks of loss or damage of the goods due to the perils of the sea during the transit.
 Customs clearance: The goods must be cleared from the customs before these can be loaded on the
ship. For obtaining customs clearance, the exporter prepares the shipping bill. Shipping bill is the main
document on the basis of which the customs office gives the permission for export. Shipping bill contains
particulars of the goods being exported, the name of the vessel, the port at which goods are to be
discharged, country of final destination, exporter’s name and address, etc.
Five copies of the shipping bill along with the following documents are then submitted to the Customs
Appraiser at the Customs House:
Export Contract or Export Order
Letter of Credit
Commercial Invoice
Certificate of Origin
Certificate of Inspection, where necessary
Marine Insurance Policy
After submission of these documents, the Superintendent of the concerned port trust is approached for
obtaining the carting order. Carting order is the instruction to the staff at the gate of the port to permit
the entry of the cargo inside the dock. After obtaining the carting order, the cargo is physically moved
into the port area and stored in the appropriate shed. Since the exporter cannot make himself or herself
available all the time for performing all these formalities, these tasks are entrusted to an agent —
referred to as Clearing and Forwarding (C&F) agent.
 Obtaining mates receipt: The goods are then loaded on board the ship for which the mate or the
captain of the ship issues mate’s receipt to the port superintendent. A mate receipt is a receipt issued by
the commanding officer of the ship when the cargo is loaded on board, and contains the information
about the name of the vessel, berth, date of shipment, description of packages, marks and numbers,
condition of the cargo at the time of receipt on board the ship, etc. The port superintendent, on receipt
of port dues, hands over the mate’s receipt to the C&F agent.
 Payment of freight and issuance of bill of lading: The C&F agent surrenders the mates receipt to the
shipping company for computation of freight. After receipt of the freight, the shipping company issues a
bill of lading which serves as an evidence that the shipping company has accepted the goods for carrying
to the designated destination. In the case the goods are being sent by air, this document is referred to as
airway bill.
 Preparation of invoice: After sending the goods, an invoice of the dispatched goods is prepared. The
invoice states the quantity of goods sent and the amount to be paid by the importer. The C&F agent gets
it duly attested by the customs.
 Securing payment: After the shipment of goods, the exporter informs the importer about the
shipment of goods. The importer needs various documents to claim the title of goods on their
arrival at his/her country and getting them customs cleared. The documents that are needed in
this connection include certified copy of invoice, bill of lading, packing list, insurance policy, certificate of
origin and letter of credit. The exporter sends these documents through his/her banker with the
instruction that these may be delivered to the importer after acceptance of the bill of exchange — a
document which is sent along with the above mentioned documents. Submission of the relevant
documents to the bank for the purpose of getting the payment from the bank is called ‘negotiation of
the documents’.
On receiving the bill of exchange, the importer releases the payment in case of sight draft or accepts the
usance draft for making payment on maturity of the bill of exchange. The exporter’s bank receives the
payment through the importer’s bank and is credited to the exporter’s account.
The exporter, however, need not wait for the payment till the release of money by the importer. The
exporter can get immediate payment from his/ her bank on the submission of documents by signing a
letter of indemnity. By signing the letter, the exporter undertakes to indemnify the bank in the event of
non-receipt of payment from the importer along with accrued interest.
Having received the payment for exports, the exporter needs to get a bank certificate of payment. Bank
certificate of payment is a certificate which says that the necessary documents (including bill of
exchange) relating to the particular export consignment has been negotiated (i.e., presented to the
importer for payment) and the payment has been received in accordance with the exchange control
regulations.
What is Import Trade?

Import trade refers to purchase of goods from a foreign country. Import procedure differs from country
to country depending upon the country’s import and custom policies and other statutory requirements.
The following paragraphs discuss various steps involved in a typical import transaction for bringing
goods into Indian Territory.
The procedure of Export Trade
 Trade enquiry: The first thing that the importing firm has to do is to gather information about the
countries and firms which export the given product. The importer can gather such information from the
trade directories and/or trade associations and organisations. Having identified the countries and firms
that export the product, the importing firm approaches the export firms with the help of a trade enquiry
for collecting information about their export prices and terms of exports. A trade enquiry is a written
request by an importing firm to the exporter for supply of information regarding the price and various
terms and conditions on which the latter is ready to exports goods .
 Procurement of import licence: There are certain goods that can be imported freely, while others need
licensing. The importer needs to consult the Export Import (EXIM) policy in force to know whether the
goods that he or she wants to import are subject to import licensing. In case goods can be imported only
against the licence, the importer needs to procure an import licence. In India, it is obligatory for every
importer (and also for exporter) to get registered with the Directorate General Foreign Trade (DGFT) or
Regional Import Export Licensing Authority, and obtain an Import Export Code (IEC)
number. This number is required to be mentioned on most of the import documents.
 Obtaining Foreign Exchange: After obtaining the licence (or quota, in case of an established importer),
the importer has to make arrangement for obtaining necessary foreign exchange since the importer has
to make payment for the imports in the currency of the exporting country.
The foreign exchange reserves in many countries are controlled by the Government and are released
through its central bank. In India, the Exchange Control Department of the Reserve Bank of India deals
with the foreign exchange. For this the importer has to submit an application in the prescribed form
along-with the import license to any exchange bank as per the provisions of Exchange Control Act.
 Placing the Indent or Order: After the initial formalities are over and the importer has obtained the
licence quota and the necessary amount of foreign exchange, the next step in the import of goods is that
of placing the order. This order is known as Indent. An indent is an order placed by an importer with an
exporter for the supply of certain goods.
 Dispatching a Letter of Credit: Generally, foreign traders are not acquainted to each other and so the
exporter before shipping the goods wants to be sure about the creditworthiness of the importer. The
exporter wants to be sure that there is no risk of non-payment. Usually, for this purpose he asks the
importers to send a letter of credit to him.
 Arranging for finance: The importer should make arrangements in advance to pay to the exporter on
arrival of goods at the port. Advanced planning for financing imports is necessary so as to avoid huge
demurrages (i.e., penalties) on the imported goods lying uncleared at the port for want of payments.
 Receipt of shipment advice: After loading the goods on the vessel, the overseas supplier dispatches the
shipment advice to the importer. A shipment advice contains information about the shipment of goods.
The information provided in the shipment advice includes details such as invoice number, bill of
lading/airways bill number and date, name of the vessel with date, the port of export, description of
goods and quantity, and the date of sailing of vessel.
 Retirement of import documents: Having shipped the goods, the overseas supplier prepares a set of
necessary documents as per the terms of contract and letter of credit and hands it over to his or her
banker for their onward transmission and negotiation to the importer in the manner as specified in the
letter of credit. The set of documents normally contains bill of exchange, commercial invoice, bill of
lading/airway bill, packing list, certificate of origin, marine insurance policy, etc.
 Arrival of goods: Goods are shipped by the exporter as per the specifications of the importer. When
goods reach the importer’s country, the captain of the ship informs the dock officer and instructs him to
receive the goods and record the details about the goods on the document called
’ import general manifest. This document gives details of about imported goods.
 Informing importer: After the arrival of goods, the dock authorities inform the importer about the
arrival of goods. The importer prepares a document called bill of entry which contains details about the
imported goods and submits this document to the customs officer to get customs clearance.
 Customs clearance: The customs officer examines the bill of entry carefully and assesses the custom
duty to be paid by the importer and after assessing the duty amount, the bill of entry is given to the
appraiser officer who verifies the details given in the bill. If the appraiser officer is satisfied with the
information given in bill of entry, then he returns the bill to the importer for making payment of custom
duty.
List of Documents Used in International Trade
1. Indent: Indent is an order placed by the importers to the exports. It contains the essential
information regarding the goods to be imported i.e. quality, quantity, packing, packaging, mode of
payment, insurance, price of good, etc.
When the price at which the goods are to be purchased by the importer is clearly stated in an order
(Indent), with no options to the exporter, then it called "Closed Indent".
If the prices are not mentioned by the importer and it is left to the discretion of the exporter, then it is
known as "Open Indent".
Indent can be sent by the importer directly to the exporter or it may be sent through the indent
agencies.
2. Mate's Receipt: Mate's Receipt is a receipt issued by Captain / Master / Mate of the ship.
The Mate of the ship after receiving the goods on the board and after inspection of the goods issues this
receipt.
The loading of the goods on the ship is possible only after presentation of 'shipping order'. Mate's
receipt contains details regarding name of ship, date on which the goods are loaded, description of
goods, numbers and marks on the packages, conditions of cargo, etc. This receipt is issued to the
exporter who has to present the mate's receipt in the office of shipping company by which he will get
bill of lading.
3. Letter of Credit: Letter of Credit is an important document in international trade. It is for safety and
security of the exporter as regards payment for the goods to be exported.
Letter of Credit can be defined as "an undertaking by importer's bank stating that payment will be made
to the exporter if the required documents are presented to the bank".
Exporter gets safety and security of payment for the goods exported. The exporter gets discounting
facility from the bank. It enables the exporter to take more initiative in promoting exports and earns
foreign exchange for his country.
4. Shipping bill: To obtain clearance for exports from customs, you have to submit a Shipping Bill in the
form of an application. Whether you are shipping your export items by air, sea, or road, an exporter
cannot load the goods without filing the Shipping Bill.
A Shipping Bill must be submitted electronically unless the Commissioner or Principal Commissioner
makes an exception and allows you to submit it physically. Shipping Bills are color-coded depending on
the export type.
World Trade Organisation (WTO)

World Trade Organisation (WTO) is a permanent international organisation dealing with global rules of
trade between nations. It came into existence in 1995. It is the successor of General Agreement on
Tariffs and Trade (GATT) established aftermath of Second World War. The last round 1986-94 Uruguay
round led to creation of WTO. At the heart of WTO is multilateral trading system. It consists of WTO
agreements negotiated and signed by majority world’s trading nations and their parliaments. WTO has a
total of 157 member countries accounting for over 97% of the world trade. One of important functions
of WTO is smooth trade flow between nations.
Objectives of WTO
o The primary aim of WTO is to implement the new world trade agreements.
o To promote multilateral trade i.e. trade among many nations.
o To promote free trade by abolishing tariff and non tariff barriers.

o To promote world trade in a manner that benefits every member country.
o To ensure that developing countries get a better share in the advantages resulting from the
expansion of international trade corresponding to their development needs.
o To remove all hurdles to an open world trading system and use world trade as an effective instrument to
boost economic growth.
o To enhance competitiveness among all trading partners so as to benefit consumers.
o To expand and utilize world resources in the most optimum manner.
o To improve the level of living for the global population and speed up economic development of the
member nations.
o To take special steps for the development of poorest nations.
Functions of WTO
o Laying down code of conduct aiming at reducing tariff and non-tariff barriers in international trade.
o Implementing WTO agreements and administering the international trade.
o Cooperating with IMF and World Bank and its associates for establishing coordination in Global Trade
Policy-Making
o Settling trade related disputes among member nations with help of its Dispute Settlement Body (DSB).
o Reviewing trade related economic policies of member countries with the help of its Trade Policy Review
Body (TPRB).
o Providing technical assistance and guidance related to management of foreign trade and fiscal policy to
its member nations.
o Acting as form for trade liberalization.

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DR GURVINDER SINGH PUNAINI (National Awardee)

M.Com, M.A. (Eco.), PGDST, M.Phil. , Ph.D Contact:9814440429

CHAPTER: PUBLIC, PRIVATE AND MULTINATIONAL COMPANY

Private Sector Enterprises Public Sector Enterprises

1. Sole Proprietorship 1. Departmental Undertakings

Private Sector Enterprises

Public Sector Enterprises

goods/services at reasonable prices and also create employment opportunities.

Multinational Companies/Global Enterprises

agreement, during the life of the venture.

Public Private Partnership (PPP)

CHAPTER: BUSINESS SERVICES

BASIS LIFE INSURANCE FIRE INSURANCE MARINE INSURANCE

Loss measurement Not measurable measurable measurable

CHAPTER: Emerging modes of Business

BASIS FOR COMPARISON TRADITIONAL COMMERCE E-Business

Formation Difficult Easy

Physical presence Required Not required

Need For Outsourcing

Knowledge Process Outsourcing

CHAPTER: Social Responsibility of Business and Business Ethics

Concept of Social Responsibility

o To ensure regular payment to the supplier

Arguments in favor of Social Responsibility

Arguments against Social Responsibility

CHAPTER: Sources of Business Finance

CONCEPT OF BUSINESS FINANCE

CLASSIFICATION OF SOURCE OF FUNDS

 Meaning : It includes funds available in the form of loans or credit

Various Sources of Owner’s Funds

Various Sources of Borrowed Funds

CHAPTER: Small Business and Enterprises

Small Business Enterprises

Category Manufacturing Unit Service Providers

Types of Small Business

ROLE OF SMALL BUSINESS IN RURAL INDIA

Govt. Incentives to hilly backward and Rural Areas

and in order to provide guarantee for sale of goods.

It is interesting to note that entrepreneurship besides providing self-employment to the entrepreneur is

Process of Entrepreneurship Development

Startup India – A Government Initiative

CHAPTER: Internal Trade

Types of Internal Trade

Services rendered by Wholesaler and Retailer

Wholesalers Services to Retailers

Services to Wholesalers or Manufacturers

Types of Retail Trade

What are the components of GST?

Advantages of GST to Citizens:

Some of the salient features of the GST regime are:

CHAPTER: International Trade

WHAT’S THE NEED FOR AN INTERNATIONAL TRADE?

What is Export Trade?

What is Import Trade?

World Trade Organisation (WTO)

o To promote free trade by abolishing tariff and non tariff barriers.

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