B.ST XI Subhash Dey All Chapters PPTs (Teaching Made Easier)

Evolution and
Fundamentals of Business
 History of Trade and Commerce in India:
Indigenous Banking System, Rise of
Intermediaries, Transport, Trading
Communities: Merchant Corporations, Major
Trade Centers, Major Imports and Exports,
Position of Indian Sub- Continent in the World
Economy.
 Business – meaning and characteristics
 Business, profession and employment-Concept
 Objectives of business
 Classification of business activities - Industry
and Commerce
 Industry-types: primary, secondary, tertiary
Meaning and subgroups
 Commerce-trade: (types-internal, external;
wholesale and retail) and auxiliaries to trade;
(banking, insurance, transportation,
warehousing, communication, and advertising)
– meaning
 Business risk-Concept
Economic and
non-economic activities
Concept of Business
The term business is derived from the word ‘busy’.
Thus, business means being busy. However, in a
specific sense, business refers to an occupation in
which people regularly engage in activities related to
purchase, production and/or sale of goods and services
with a view to earning profits. The activity may consist
of production or purchase of goods for sale, or
exchange of goods or supply of services to satisfy the
needs of other people.
In every society, people undertake various activities to
satisfy their needs. These activities may be broadly
classified into two groups — economic and non-
economic.
Basis Economic Activities Non-Economic
Activities
1. Meaning Economic activities are Non-economic activities
those by which we can earn are those performed out
our livelihood. of love, sympathy,
sentiments, patriotism, etc.
2. A worker working in a A housewife cooking food
Examples factory, a manager working for her family, or a boy
in an office, a doctor helping an old man cross
operating in his clinic, and a the road are performing
teacher teaching in a school non-economic activities
are doing so to earn their since they are doing so out
livelihoods and are, therefore, of love or sympathy.
engaged in an economic
activity.
3. Types Economic activities may Religious, social, parental
be further divided into and patriotic activities are
three categories, namely non-economic activities.
business, profession and
employment
 Top Tip
The main distinction between economic and non-economic activities
depends on the basic motives with which they are performed. The
same activity can be economic if it results in earning money and can be
non-economic if the motive is to serve others, not a monetary gain.
For example, when a lady cooks food for monetary gain, it is an
economic activity. But if the same lady cooks food for her family, it is a
non-economic activity. Similarly, if a teacher is teaching in a school
and gets salary, it is an economic activity. But when he/she is teaching
his/her son or daughter at home, then it is a non-economic activity.
Business may be defined as an economic activity

involving the production and sale of goods and
services undertaken with a motive of earning profit
by satisfying human needs in society.
Definitions of Business
 “Business is an institution organised and operated to provide
goods and services to society under the incentive of private
gain.” —B.O. Wheeler
 “Business may be defined as a human activity directed
towards producing or acquiring wealth through buying and
selling of goods.” —Lewis H. Haney
 “Business is any enterprise engaged in the production and
distribution of goods for sale in market or rendering services
for a price.” —R.N. Ownes
 “Business may be defined as an activity in which different
persons exchange something of value, whether goods or
services, for mutual gain or benefit.”
—Peterson and Plowman
Business Functions at Enterprise Level
Business includes a wide variety of functions performed by different kinds of
organisations called business enterprises or firms. Financing, production,
marketing and human resource management are the four major functions which
are performed by business enterprises.
• Financing is concerned with mobilising and utilising funds for running a
business enterprise.
• Production involves the conversion of raw materials into finished products
or generation of services.
• Marketing refers to all those activities which facilitate exchange of goods and
services from producers to the people who need them at a place they want,
at a time they require and at a price they are prepared to pay.
• Human resource management aims at ensuring the availability of working
people who have necessary skills to perform various tasks in enterprises.
Nature/Characteristics/Features of
Business
The nature of business can be understood clearly by
studying its main characteristics, discussed below:
1. An economic activity
Business is considered to be an economic activity
because it is undertaken with the object of earning
money or livelihood. There is no place for love,
affection, sympathy or patriotism.
Business involves sale, exchange, purchase of goods
and services for mutual profit through the satisfaction
of human wants.
 Top Tip
Business activity can be undertaken either on small and
individual level, e.g. (purchase and sale by a shopkeeper) or
on large scale in a more formal and organised level (purchase
and sale by a cooperative society or company).
2. Production or procurement of goods and
services
Before goods are offered to people for consumption, these
must be either produced or procured by business
enterprises. Thus, every business enterprise either
manufactures the goods it deals in or acquires them from
producers, to be further sold to consumers or users.
Goods may consist of consumption goods of daily use,
capital goods, like machinery, furniture, etc.,
Services may include facilities offered to consumers,
business firms and organisations in the form of
transportation, banking, electricity, etc.
3. Sale or exchange of goods and services
The essential characteristic of business is that there
should be sale or exchange of goods or services
between the seller and the buyer.
Directly or indirectly, business involves transfer or
exchange of goods and services for value.
 Top Tip
If goods are produced not for the purpose of sale but for
personal consumption, it cannot be called a business activity.
For example, cooking food at home for the family is not
business, but cooking food and selling it to others in a
restaurant is business.
4. Dealings in goods and services on a
regular basis
Business involves dealings in goods or services on a
regular basis. One single transaction of sale or
purchase, therefore, does not constitute business. For
example, if a person sells his/her domestic radio set
even at a profit, it will not be considered a business
activity. But if he/she sells radio sets regularly either
through a shop or from his/her residence, it will be
regarded as a business activity.
5. Profit earning
One of the main purpose of business is to earn income
by way of profit. No business can survive for long
without profit. That is why, businessmen make all
possible efforts to maximise profits, by increasing the
volume of sales or reducing costs.
6. Uncertainty of return
Uncertainty of return refers to the lack of knowledge
relating to the amount of money that the business is
going to earn in a given period. Every business invests
money (capital) to run its activities with the objective
of earning profit. But it is not certain as to what
amount of profit will be earned.
Also, there is always a possibility of losses being
incurred, despite the best efforts of the management of
the business.
7. Element of risk
Risk is the uncertainty associated with an exposure to
loss. No business can altogether do away with risks.
Risk is caused by some unfavourable or undesirable
event. Risks are related with factors, like changes in
consumer taste and fashion, changes in method of
production, strike or lockout at workplace, increased
competition in market, fire, theft, accidents, natural
calamities, etc.
Business, Profession and
Employment
Economic activities may be divided into three major
categories viz., Business, Profession and Employment.
Business
Business refers to an occupation in which people
regularly engage in activities related to purchase,
production and/or sale of goods and services with a
view to earning profits by satisfying the needs of other
people. People engage in business to earn income in
the form of profit.
Profession
Profession includes those economic activities which
require application of special knowledge and skills in
the occupation. In every profession, guidelines or codes
of conduct laid down by professional bodies have to be
followed. Those engaged in professions are known as
professionals.
Professions Professionals Professional bodies
Medical Doctors Medical Council of India
Legal Lawyers Bar Council of India
Accounting Chartered Accountants Institute of Chartered
(CA) Accountants of India (ICAI)
Employment
Employment refers to the occupation in which people
work for others and get remuneration (wages/salaries)
in return. Those who are employed by others are
known as employees.
Examples:
(i) People who work in factories receive wages,
(ii) Bank employees get salaries, etc.
Comparison of Business, Profession and
Employment
Basis Business Profession Employment
1. Mode of Entrepreneur’s Membership of Appointment
establishment decision and other a professional letter and service
legal formalities, body and agreement
if necessary certificate of
practice
2. Nature of Provision of goods Rendering of Performing work
work and services to the personalised, as per service
public expert services contract or rules
of service
3. Qualification No minimum Qualifications, Qualification
qualification is expertise and and training as
necessary training in prescribed by the
specific field as employer
prescribed by
the professional
body is a must
4. Reward or Profit earned Professional fee Salary or wages
return
5. Capital Profits are Fee is generally Fixed and
investment uncertain and regular and regular pay; no
irregular; risk is certain; some or little risk
present risk
6. Risk Profits are Fee is generally Fixed and
uncertain and regular and regular pay; no
irregular; risk is certain; some or little risk
present risk
7. Transfer Transfer possible Not possible Not possible
of interest with some
formalities
8. Code of No code of conduct Professional Norms of
conduct is prescribed code of conduct behaviour laid
is to be followed down by the
employer are to
be followed
8. Code of No code of conduct Professional Norms of
conduct is prescribed code of conduct behaviour laid
is to be followed down by the
employer are to
be followed
9. Example Shop, factory Legal, medical Jobs in banks,
profession, insurance
chartered companies,
accountancy government
departments
Question 1
Which of the following is a non-economic activity?
(Choose the correct alternative)
A. A factory owner producing school bags for sale in the
market.
B. Person begging at a busy traffic intersection.
C. Services of a domestic help doing household chores
at an employer’s house.
D. Services of a housewife doing household chores at
home.
Objective Type Questions 1.1
Answer 1
B. Person begging at a busy traffic intersection. B. Person
begging at a busy traffic intersection.

Question 2
Which of the following is an economic activity?
(a) A housewife cooking food for her family.
(b) A person selling cold water on the pavement.
(c) A young boy driving his motorcycle in the city.
(d) An old man offering prayers in a temple.

Answer 2
(b) A person selling cold water on the pavement.

Question 3
Which of the following does not characterise business
activity? (Choose the correct alternative)
(a) Production of goods
(b) Presence of risk and services
(c) Sale or exchange
(d) Salary or wages

Answer 3
(d) Salary or wages

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

Answer 4
(b) Employment

Question 5
The economic activity in which specialised knowledge is
required is _________.
(a) Business
(b) Employment
(c) Profession
(d) None of them

Answer 5
(c) Profession

Question 6
The reward a businessman gets for bearing the risks is
called _________. (Choose the correct alternative)
(a) Remuneration
(b) Commission
(c) Bonus
(d) Profit

Answer 6
(d) Profit

Question 7
Taking photographs of mountains as a hobby is
_______________ (an economic/a non-economic)
activity. (Fill up the blank with correct answer)

Answer 7
a non-economic

Question 8
Teaching in a school is a non-economic activity.True/False? Give
reason.

Answer 8
False: It is an economic activity undertaken to earn money
and to create wealth.

Question 9
Business is an economic activity.
True/False? Give reason.

Answer 9
True: It is undertaken with the objective of earning
money or livelihood. There is no place for love,
sympathy or patriotism.

Question 10
Sale of one’s ancestral house will not fit into the
description of a business.

Answer 10
True: Because business involves dealings in goods and
services on a regular or daily basis. One single
transaction of sale does not constitute business.

Question 11
A business activity may be without a profit motive.

Answer 11
False: Profit earning is the main objective of every
business. Profit is essential to cover costs and
risks of the business and to survive and grow.

Question 12
A housewife sells old newspapers for `100. Is it a
business activity? Why?

Answer 12
No, it is not a business activity because business
involves dealings in goods or services on a regular or
daily basis.

Question 13
If a person sells his/her domestic T.V. set at a profit, will
it be considered as a business? Why?

Answer 13
No, selling a domestic T.V. set at a profit will not be
considered a business activity because business
involves dealings in goods or services on a regular or
daily basis. One single transaction of sale or purchase
does not constitute business.

Question 14
Give an example of activity which is economic in one
sense and non-economic in other sense.

Answer 14
If a teacher is teaching in a school and gets salary, it is
an economic activity. But when he is teaching his
son/daughter at home, then it is a non-economic
activity.

Question 15
Ritika produces goods not for the purpose of sale but
for personal consumption. Will it be a business activity?
Why?

Answer 15
No, because it does not involve sale or exchange of
goods and services between the seller and the buyer.

Question 16
Chhavi cooks food at home for her family but Shelly cooks
food and sells it to others in a restaurant. Who is engaged in
business activity?

Answer 16
Shelly is engaged in business activity.

Question 17
__________ is the primary objective of business.
(Fill in the blank)

Answer 17
Profit earning

Question 18
Profit is essential for covering _____________ of the
business. Every business must earn reasonable profit to
____________. (Fill up the blank with correct answer)

Answer 18
costs and risks, survive and grow

Question 19
A person repairs scooters on roadside. How will you
describe this activity?

Answer 19
Business activity.

Question 20
“Business activities are undertaken under conditions of
uncertainty.” Which characteristic of business is
highlighted in this statement?

Answer 20
Element of risk.

Question 21
“Business is undertaken with the object of earning
money.” Which characteristic of business is highlighted in
this statement?

Answer 21
Business is an economic activity.

Question 22
Nitin is a salesman and sells mobile phones on behalf of
his employer. What will be his remuneration?

Answer 22
Salary or wages

Question 23
Which economic activity requires minimum academic
and other qualifications?

Answer 23
Profession

Question 24
A hawker sells toys for children. How will you describe
this activity?

Answer 24
Business activity

Question 25
Name the type of economic activity wherein a doctor
operates his clinic.

Answer 25
Profession

Question 26
Name the economic activity which is conducted by a
person having some special knowledge and skills which
is used to serve different sections of the society.

Answer 26
Element of risk.

Question 1
All the four children of Mr. Madan Mohan Lal are doctors.
Shyam is a skin specialist, Krishna is a heart specialist,
Radhika is a child specialist and Gauri is a physician. Dr.
Shyam joined a multi-speciality private hospital. Dr.
Krishna established his own nursing home. Dr. Radhika
works in a government hospital and also treats the poor
people free of cost in a charitable dispensary. Dr. Gauri
opened a medical store wherein she sells genuine
medicines, getting the minimum profit margin.
Case Studies 1.1 — Analysing, Evaluating & Creating Type Questions

(a) State, giving reasons, whether they are engaged in
economic or non-economic activities.
(b) Also explain in which form of the economic activities
and non-economic activities they have been engaged.
(4 marks)

Answer 1
(a) All the four children of Mr. Madan Mohan Lal –
Shyam, Krishna, Radhika and Gauri have been
engaged in economic activities. However, Dr.
Radhika is also engaged in a non-economic activity
of social welfare since she treats the poor people
free of cost in a charitable dispensary.
(b) Dr. Shyam, who has joined a multi-speciality private
hospital, is in employment. Similarly, Dr. Radhika,
who works in a government hospital, is also in
employment.

Dr. Krishna, who has established his own nursing home,
is in profession.
Dr. Gauri, who has opened a medical store is in
business.

Question 2
After completing their graduation, Salman and Ram
decided to set up a flour mill to earn income. Their main
job is to purchase wheat from the market and have
ground it into flour. Their flour is available in the packets
of 5 kg, 10 kg and 20 kg. They sell these under the brand
name ‘Desh ka Atta’, and earn a reasonable profit of 10%
on cost. They worked very hard to flourish the business
on a regular basis, and hence in no time their brand
became very popular in the market. The main reasons
for the success of their business are superior quality and
low price.Their business was running very well.
But one day, the flour mill caught fire, and as a result
they had to suffer a heavy loss. However, Salman and
Ram did not lose their heart, and worked even harder.
Gradually, their business was back to normal. Now, they
are fully satisfied with their business.
Quoting the lines from the above para, explain any four
characteristics of business. (6 marks)

Answer 2
Characteristics of business:
(i) An economic activity
“After completing their graduation, Salman and Ram
decided to set up a flour mill to earn income.”
(ii) Profit earning
“They sold these under the brand name ‘Desh ka Atta’
and earn a reasonable profit of 10% on cost.”
(iii) Dealings in goods and services on a regular basis
“They worked very hard to flourish the business on

a regular basis ...”
(iv) Element of risk
“..., the flour mill caught fire, and as a result they had to
suffer a heavy loss.” (Explain these characteristics)

Objectives of Business and
the Role of Profit in
Business
Every business is directed to the achievement of certain
objectives. Objectives are defined as ends which a
business firm seeks to achieve by its operations, e.g.,
increasing sales by 10 per cent, earning 20 per cent
Return on Investment (RoI), etc. Objectives provide
directions for all decisions and actions.
Since a business has to balance a number of needs and
goals, and has to satisfy different individuals and
groups, it requires multiple objectives. If a business
firm follows only one objective, say profit
maximisation, it cannot achieve excellence. Objectives
have to be specific in every area and sphere of business.
This is essential for its own survival and prosperity.
Economic Objectives
Since business is an economic activity, its main
objectives are economic objectives. The economic
objectives of business are as follows:
1. Earning profits
Profitability refers to profit in relation to capital
investment. One of the main economic objectives of
business is to earn profits on the capital employed.
Every business must earn a reasonable profit which is
so important for its survival and growth.
2. Market standing
Market standing refers to the position of an enterprise
in relation to its competitors. A business enterprise
must aim at standing on stronger footing in terms of
offering competitive products to its customers and
serving them to their satisfaction.
3. Innovation
Innovation is the introduction of new ideas or methods
in the way something is done or made.
There are two kinds of innovation in every business:
(i) innovation in product or services; and
(ii) innovation in various skills and activities needed
to supply products and services.
No business enterprise can flourish in a competitive
world without innovation. Therefore, innovation
becomes an important objective.
4. Optimum utilization of physical and
financial resources
Every business requires physical resources, like plants,
machines, offices, etc., and financial resources, i.e.,
funds to be able to produce and supply goods and
services to its customers.
The business enterprise must aim at acquiring these
resources according to their requirements and use
them efficiently.
5. Increasing productivity
Productivity is ascertained by comparing the value of
output with the value of inputs. It is used as a measure
of efficiency.
In order to ensure continuous survival and progress,
every enterprise must aim at greater productivity
through the best use of available resources.
Social Objectives
Social objectives of business are centred around the
interests of society and based on the slogan of ‘social
welfare’.
1. Production and supply of quality goods and
services
Business should produce and supply products of proper
quality to satisfy customer expectations. Quality may mean
durability as in the case of radio, TV, refrigerator, etc. or
purity as in the case of medicine, or safety as in the
case of pressure cooker, electric appliances, etc.
Modern consumers prefer to buy quality products. He
looks for ISI mark on electrical goods, FPO mark on
food products, Hallmark on jewellery, etc.
2. Avoidance of anti-social and unfair trade
practices
A businessman should avoid hoarding, black-marketing,
over-charging, misleading advertisements, etc. to mint
money. Such unfair practices destroy the goodwill and
image of the business and may be punishable also.
3. Generation of employment
Business should generate employment opportunities to
the disadvantaged sections of the society (e.g.,
differently abled people).
4. Welfare of employees
Business should provide good working conditions and
pay satisfactory wages/salaries to its employees.
5. Community service
Large business units should undertake community
services like setting up charitable dispensaries, schools,
etc. For example, Steel Authority of India contributes
regularly for agriculture, industry, education, health
care, dairy, poultry, fisheries and drinking water supply
to the people living nearby to their steel plants.
Extra Shots
Multiple Objectives of Business
 Manager performance and development: Business enterprises need
managers to conduct and coordinate business activity. Various
programmes for motivating managers need to be implemented.
Manager performance and development, therefore, is an important
objective. The enterprises must actively work for this purpose.
 Worker performance and attitude: Workers’ performance and
attitudes determine their contribution towards productivity and
profitability of any enterprise. Therefore, every enterprise must aim at
improving its workers’ performance. It should also try to ensure a
positive attitude on the part of workers.
 Social responsibility: Social responsibility refers to the obligation of
business firms to contribute resources for solving social problems and
work in a socially desirable manner.
Role of Profit in Business
The basic objective of every business is profit
maximisation. Profit may be regarded as an essential
objective of business because of the following reasons:
1. For long-term survival of business: Profit helps a
business to continue to exist for a long period. In the
absence of profit, the establishment of a particular
business loses its justification.
2. For growth and expansion of business: All
businessmen want their businesses to expand and grow.
For growth and expansion of business, additional capital
is needed. Retained earnings is a very good source of
capital.
3. For increasing efficiency: Profit motivates the
owners as well as the workers to do their best. As a
result of higher profits, employees get adequate
compensation.
4. For building prestige and recognition: For
gaining prestige in the society, evey business has to
satisfy all the parties concerned. It has to supply
good quality products/services at reasonable price to
customers, pay adequate remuneration to employees,
pay sufficient dividend to the shareholders etc. All
this is possible only if the business is earning
sufficient profits.
5. For covering costs and risks of the business:
It is in the hope of earning sufficient profits that a
businessman invests money in business and
undertakes risks.
 Top Tip
Profit maximisation cannot be the sole objective of business. Profit
maximisation objective may ignore the interests of various stakeholders
especially consumers. Unfair trade practices such as hoarding, black-
marketing or adulteration may be followed to maximise profits. However,
no business can be successful in the long-run if such practices are adopted
because the consumers may raise voice against the exploitation; and the
business enterprises then might lose business and reputation. The early
concept of business was based on the goal of profit maximisation as
reflected in the slogan ‘the business of business is to do business’.
However, the modern concept of business is founded on the goal of
‘profits through service’.
Business Risks – Concept,
Nature and Causes
Concept and Types of Business Risks
The term ‘business risks’ refers to the possibility of
inadequate profits or even losses due to uncertainties
or unexpected events.
For example, demand for a firm’s product may decline
due to change in taste and fashion of customers or due
to increased competition. Decrease in demand will
result in low sales and hence low profits or even losses.
Types of Business Risks
Business enterprises constantly face two types of risk :
speculative and pure.
1. Speculative risks: Speculative risks involve both
the possibility of gain, as well as, the possibility of
loss. Speculative risks arise due to changes in
market conditions, including fluctuations in
demand and supply, changes in prices or changes in
fashion and tastes of customers. Favourable market
conditions are likely to result in gains, whereas,
unfavourable ones may result in losses.
2. Pure risks: Pure risks involve only the possibility
of loss or no loss. The chance of fire, theft or strike
are examples of pure risks.
Their occurrence may result in loss, whereas, non-
occurrence may explain absence of loss, instead of
gain.
Nature of Business Risks
Nature of business risks can be understood in terms of
their peculiar characteristics:
1. Business risks arise due to uncertainties.
Uncertainty refers to the lack of knowledge about what
is going to happen in future. Natural calamities,
change in demand and prices, changes in government
policies and prices, improvement in technology, etc.,
are some of the examples of uncertainty which create
risks for business because the outcomes of these future
events are not known.
2. Risk is an essential part of every business.
No business can avoid risk. Risk can be minimised but
cannot be eliminated. However, a business enterprise
can minimise business risks by avoiding too much
risky transactions, taking insurance policy, making
provisions in the current earnings (e.g., provision for
bad and doubtful debts), using preventing measures
like firefighting devices, etc.
3. Degree of risk depends mainly upon the
nature and size of business.
Nature of business (i.e., type of goods and services
produced and sold) and size of business (i.e., volume of
production and sale) are the main factors which
determine the amount of risk in a business. For
example, a business dealing in fashionable items has a
high degree of risk. Similarly, a large-scale business
generally has a higher risk than what a small scale has.
4. Profit is the reward for risk taking
‘No risk, no gain’ is an age-old principle, which applies
to all types of business. Greater the risk, higher is the
chance of profit. An entrepreneur undertakes risks
under the expectation of higher profit. Profit is thus
the reward for risk taking.
Causes of Business Risks
Business risks arise due to a variety of causes, which are
classified as follows:
1. Natural causes
Natural causes of business risks (e.g., flood,
earthquake, lightning, heavy rains, famine, etc.) are
beyond human control. They result in heavy loss of
life, property and income.
2. Human causes
Human causes include such unexpected events, like
dishonesty, carelessness or negligence of employees,
stoppage of work due to power failure, strikes, riots,
management inefficiency, etc.
3. Economic causes
These include uncertainties relating to demand for
goods, competition, price, collection of dues from
customers, change of technology or method of
production, etc. Financial problems, like rise in
interest rate for borrowing, levy of higher taxes, etc.,
also come under these type of causes as they result in
higher unexpected cost of operation or business.
4. Physical causes
Mechanical defects or failures may also lead to losses.
For example, bursting of boiler of machine may cause
death or destruction.
5. Other causes
These are unforeseen events, like political disturbances,
fluctuations in exchange rates, etc. which lead to the
possibility of business risks.
Extra Shots
Methods of Dealing with Risks
Although no business enterprise can escape the presence of risk, there
are many methods a business enterprise can use to deal with risk
situations. For instance, the enterprise may
(a) decide not to enter into too risky transaction;
(b) take preventive measures, like firefighting devices, to reduce risk;
(c) take insurance policy to transfer risk to insurance company;
(d) assume risk by making provisions in the current earnings as is the
case of provision for bad and doubtful debts; or
(e) share risks with other enterprises as manufacturers and wholesalers
may do by agreeing to share losses which may be caused by falling
prices.
Question 1
____________ (speculative/pure) risks means chance of
loss without any possibility of gain.
(Fill up the blank with correct option)

Answer 1
Pure

Question 2
____________ (speculative/pure) risks means chance
of loss with possibility of gain.
(Fill up the blank with correct option)

Answer 2
Speculative

Question 3
ABC Ltd. is planting trees on the road side. It is trying to
achieve ___________ objectives of the business.
(Fill up the blank with correct answer)

Answer 3
Social

Question 4
Risks arise in business due to uncertain future.

Answer 4
True: Business risks arise due to uncertainties. Natural
calamities, change in demand and prices, etc. and create
risks for business because these future events are not
known in advance.

Question 5
Profit is the reward for bearing risks.

Answer 5
True: Greater the risk in a business, higher is the
chance of profit.

Question 6
Earning profits is the sole objective of business.

Answer 6
False: Besides earning profits, the business should
pursue social objectives also because business is an
integral part of the society.

Question 7
Risk is an essential element of every business activity.

Answer 7
True: No business can avoid risk. However, risk can be
minimised through insurance.

Question 8
Business risk is not likely to arise due to
(a) Changes in government policy
(b) Good management
(c) Employee's dishonesty
(d) Power failure

Answer 8
(b) Good management

Question 1
Shreya and Vrinda joined together and established a
partnership firm dealing in electronic goods. Each one of
them looks after one particular department. They had
made it certain that every Saturday they would hold a
meeting and share the information on the activities of
their respective departments. In one of their meetings,
they discuss about some key areas on which they should
focus their attention.

Shreya says, “we should focus on increasing productivity
and profits through the best use of available resources.”
On the other hand, Vrinda says, “we should keep clear of
the anti-social activities like adulteration, hoarding and
profiteering, and contribute to the benefits of the society
like opening charitable dispensary, educational institution,
etc.
What are the objectives of business Shreya and Vrinda
focusing on? Explain. (6 marks)

Answer 1
A. Shreya is focusing on 'Economic Objectives' of
business.
Economic objectives of business are centred
around the personal profit of the business and are
based on one slogan ‘to earn maximum profits’.
(i) Profit earning
(ii) Increasing productivity (Explain)
B. On the other hand, Vrinda is focusing on “Social
Objectives” of business.

Social objectives of business are centred around the
interests of society and based on the slogan of ‘social
welfare’. It is necessary that business should also pursue
certain objectives desired by the people of the society
because business is an integral part of society.
(i) Avoidance of anti-social and unfair trade practices
(ii) Community service (Explain)

Question 2
Manjeet Pvt. Ltd. is a reputed company manufac-turing
computers. The company is earning a considerable profit.
Both the proprietors and the employees are putting
their best efforts to make good quality products
available to the customers at a low price, paying its
shareholders a good amount of dividends and the
employees a reasonable remuneration. This contributes
to the successful operations of the business. With
increased profits over time, the company’s foundation
becomes strong, and it earns a good reputation in the
society.
It utilises its profits to finance its growth and expansion
requirements.
Explain the role of profit in business of Manjeet Pvt. Ltd.
by quoting the lines from the above para. (6 marks)

Answer 2
Role of profit in business of Manjeet Pvt. Ltd.:
(i) Source of income: “... paying its shareholders a good amount
of dividends and the employees a reasonable remuneration.”
(ii) Indication of efficient working of business: “This
contributes to the successful operations of the business.”
(iii) Builds up reputation of business: “With increased profits
over time, the company’s foundation become strong, and it
earns a good reputation in the society.”
(iv) Source of funds for meeting expansion requirements: “It utilises
its profits to finance its growth and expansion requirements.”

Question 3
Ganga Ltd. is a popular company manufacturing water
coolers. Its product is very much liked by people in the
market. The traders are in a race to become the company’s
distributors. The company had been earning huge profits
for many years. However, in the year 2020, the
company’s half yearly report shows a great decline in the
company’s profit. The top management is worried about
this. A team of specialists from outside is appointed to
solve this serious problem. After a thorough
examination, the specialists presented the following
reasons for the decline in the profits of the company.
(i) Increase in competition and change in taste of the
consumers.
(ii) Theft of cash and goods by the employees.
Identify and explain the two causes of decline in
profits. (3 marks)

Answer 3
Two causes of decline in profits:
(i) Economic causes: “Increase in competition and change
in taste of the consumers.”
(ii) Human causes: “Theft of cash and goods by the
employees.” (Explain)

Classification of Business
Activities
Various business activities may be classified into two
broad categories — industry and commerce.
• Industry is concerned with the production or
processing of goods and materials.
• Commerce includes all those activities, which are
necessary for facilitating the exchange of goods and
services. On the basis of these two categories, we
may classify business firms into industrial and
commercial enterprises.
Industry
Industry refers to economic activities, which are
connected with conversion of resources into
useful goods.
Generally, the term 'industry' is used for activities in
which mechanical appliances and technical skills are
involved. These include activities relating to producing
or processing of goods, as well as, breeding and raising
of animals.
The term 'industry' is also used to mean groups of
firms producing similar or related goods. For example,
cotton textile industry refers to all manufacturing units
producing textile goods from cotton.
Similarly, electronic industry would include all firms
producing electronic goods, and so on.
Further, certain services, like banking and insurance,
are also referred to as industry, say banking industry,
insurance industry, etc.
Industries may be divided into three broad categories
namely primary, secondary and tertiary.
1. Primary industries
These include all those activities which are concerned
with the extraction and production of natural
resources and reproduction and development of living
organisms, plants, etc.
Primary industries are divided as follows:
(i) Extractive industries: These industries extract or
draw products from natural sources. Extractive
industries supply some basic raw materials that are
mostly products of geographical or natural
environment. Products of these industries are usually
transformed into many other useful goods by
manufacturing industries. Important extractive
industries include farming, mining, lumbering,
hunting and fishing operations.
(ii) Genetic industries: These industries are engaged
in breeding plants and animals for their use in further
reproduction. Seeds and nursery companies are typical
examples of genetic industries. In additional, activities
of cattle breeding farms, poultry farms, and fish
hatchery come under genetic industries.
2. Secondary industries
These are concerned with using materials, which have
already been extracted at the primary state. These
industries process such materials to produce goods for
final consumption or for further processing by other
industrial units. For example, mining of iron ore is a
primary industry, but manufacturing of steel by way of
further processing of raw irons is a secondary industry.
Secondary industries may be further divided as follows:
(i) Manufacturing industries: These industries are
engaged in producing goods through processing of raw
materials and, thus, creating form utilities. They bring
out diverse finished products, that we consume, or use
through the conversion of raw materials or partly
finished materials in their manufacturing operations.
Manufacturing industries may be further divided into
four categories on the basis of method of operation for
production.
• Analytical industry which analyses and separates
different elements from the same materials, as in
the case of oil refinery.
• Synthetical industry which combines various
ingredients into a new product, as in the case of
cement.
• Processing industry which involves successive
stages for manfucturing finished products, as in the
case of sugar and paper.
• Assembling industry which assembles different
component parts to make a new product, as in the
case of television, car, computer, etc.
(ii) Construction industries: These industries are
involved in the construction of buildings, dams,
bridges, roads as well as tunnels and canals.
Engineering and architectural skills are an important
part in construction industries.
3. Tertiary industries
These are concerned with providing support services to
primary and secondary industries as well as activities
relating to trade. These industries provide service
facilities. As business activities, these may be
considered part of commerce because as auxiliaries to
trade these activities assist trade.
Tertiary industries include transport, banking,
insurance, warehousing, communication, packaging
and advertising.
Commerce
Commerce includes all those activities, which are
necessary for facilitating the exchange of goods
and services.
Commerce includes two types of activities, viz., (i)
trade and (ii) auxiliaries to trade. Buying and selling of
goods is termed as trade. But there are a lot of activities
that are required to facilitate the purchase and sale of
goods. These are called auxiliaries to trade (or services) and
include transport, banking, insurance, communication,
advertisement, packaging and warehousing.
Trade
Trade refers to sale, transfer or exchange of goods.
Trade is an essential part of commerce. It helps in
making the goods produced available to the consumers
or users. These days goods are produced on a large
scale and it is difficult for producers to themselves
reach out to individual buyers for selling their
products. Businessmen are engaged in trading
activities to make the goods available to consumers in
different markets. In the absence of trade, it would not
be possible to undertake production activities on a
large scale.
Trade may be classified into two broad categories –
internal and external.
1. Internal trade: Internal, domestic or home trade is
concerned with the buying and selling of goods and
services within the geographical boundaries of a
country. This may further be divided into wholesale
and retail trade.
(i) Wholesale trade: It refers to buying and selling of
goods and services in large quantities for the purpose
of resale or intermediate use. Traders dealing in
wholesale trade are called wholesalers.
(ii) Retail trade: When goods are purchased and sold
in comparatively smaller quantities, for final
consumption it is referred to as retail trade.
2. External trade: External or foreign trade consists of
the exchange of goods and services between persons or
organisations operating in two or more countries.
(i) Import trade: If goods are purchased from
another country, it is called import trade.
(ii) Export trade: If goods are sold to other countries,
it is known as export trade.
(iii) Entrepot trade: When goods are imported for
export to other countries, it is known as entrepot
trade.
Auxiliaries to Trade
1. Banking and Finance: Business activities
cannot be undertaken unless funds are available
for acquiring assets, purchasing raw materials
and meeting other expenses. Necessary funds can
be obtained by businessmen from a bank. Thus,
banking helps business activities to overcome the
problem of finance.
• Commercial banks, generally lend money by
providing overdraft and cash credit facilities,
loans and advances.
• Banks also undertake collection of cheques,
remittance of funds to different places, and
discounting of bills on behalf of traders.
• In foreign trade, commercial banks help exporters
in collecting money from importers.
• Commercial banks also help promoters of
companies to raise capital from the public.
2. Insurance: Business involves various types of
risks:
• Factory building, machinery, furniture, etc.,
must be protected against fire, theft and other
risks.
• Material and goods help in stock or in transit are
subject to the risk of loss or damage.
• Employees are also required to be protected
against the risks of accident and occupational
hazards.
Insurance provides protection in all such cases.
On payment of a nominal premium, the amount
of loss or damage and compensation for injury, if
any, can be recovered from the insurance company.
3. Transportation: Transport (road, rail or 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 is because of transportation that
a producer can sell his goods in different parts of
the world. It creates place utility.
4. Warehousing: Usually, goods are not sold or
consumed immediately after production. They are
held in stock to make them available as and when
required. Special arrangement must be made for
the storage of goods to prevent loss or damage.
Warehousing helps business firms to overcome the
problem of storage and facilitates the availability of
goods when needed. Prices are, thereby,
maintained at a reasonable level through
continuous supply of goods.
5. Communication: Communication services like
postal services and telephone facilities are helpful
to the business for:
— establishing links with the outside world, viz.,
suppliers, customers, competitors, etc.
— for quick exchange of information.
The electronic media is mainly responsible for this
transformation.
6. Advertising: Advertising is one of the most important
methods of promoting the sale of products,
particularly, consumer goods, like electronic and
automobile goods, soaps, detergents, etc. Most of these
goods are manufactured and supplied in the market by
numerous firms — big or small. It is practically
impossible for producers and traders to contact each
and every customer. Thus, for promoting sales,
information about the goods and services available,
their features, price, etc., must reach potential buyers.
Also, there is a need to persuade potential buyers about
the uses, quality, prices, competitive information about
the goods and services etc. Advertising helps in
providing information about available goods and
services and inducing customers to buy particular
items.
Role of commerce in removal of hindrances
in the process of exchange
Commerce includes two types of activities, viz.,
(i) trade and (ii) auxiliaries to trade.
Buying and selling of goods is termed as trade. But
there are a lot of activities that are required to facilitate
the purchase and sale of goods. These are called
services or auxiliaries to trade and include transport,
banking, insurance, communication, advertisement,
packaging and warehousing.
Commerce provides the necessary link between producers
and consumers. It embraces all those activities, which
are necessary for maintaining a free flow of goods and
services.
Thus, all activities involving the removal of hindrances
in the process of exchange are included in commerce.
The hindrances may be in respect of persons, place,
time, risk, finance, etc.
1. Trade removes 'hindrance of persons' by making the
goods available to the consumers from the producers.
2. Transportation removes 'hindrance of place' by
moving goods from the places of production to the
markets for sale.
3. Storage and warehousing activities remove the
'hindrance of time' by facilitating holding of stock of
goods to be sold as and when required.
4. Insurance removes 'hindrance of risk'. Goods held
in stock, as well as, goods in course of transport are
subject to a risk of loss or damage due to theft, fire,
accidents, etc. Protection against these risks is
provided by insurance of goods.
5. Banking removes 'hindrance of finance'. Capital
required to undertake the above activities is
provided by banking and financing institutions.
6. Advertising removes 'hindrance of information'.
Advertising makes it possible for producers and
traders to inform consumers about the goods and
services available in the market.
Conclusion: Commerce is said to consist of activities
of removing the hindrances of persons, place, time,
risk, finance and information in the process of
exchange of goods and services.
Extra Shots
Starting a Business — Basic Factors
Starting a business enterprise is similar to any other human effort in
which resources are employed to achieve certain objectives. Successful
results in business depend largely upon the ability of the entrepreneurs
or the starters of a new business to anticipate problems and solve them
with minimum cost. This is especially true of the modern business world
where competition is very tough and risks are high. Some of the
problems, which business firms encounter, are of basic nature. For
example, to start a factory, plans must be made about the location of the
business, the possible number of customers, the kind of equipment
required and the amount of money needed to procure them, the shop
layout, purchasing and financing needs, and hiring of workers for its
effective implementation. These problems become more complex in a
big business. However, some of the basic factors, which must be
considered by anybody who is to start the business are as follows.
 Selection of nature and type of business: The first thing to
be decided by an entrepreneur is the nature and type of
business to be undertaken. He/she will obviously like to enter
that branch of industry and commerce, which has the
possibility of greater amount of profits. The decision will be
influenced by the customer requirements in the market and
also the kind of technical knowledge and interest the
entrepreneur has for producing a particular product.
 Size of the firm: Size of the firm or scale of its operation is
another important decision to be taken at the start of the
business. Some factors favour a large size, whereas, others tend
to restrict the scale of operation. If the entrepreneur is
confident that the demand for the proposed product is likely to
be good over time and he/she can arrange the necessary
capital for business, he/she will start the operation at a large
scale. If the market conditions are uncertain and risks are high,
a small size business would be better choice.
 Choice of form of ownership: With respect to ownership, the
business organisation may take the form of a sole
proprietorship, partnership, or a joint stock company. Each
form has its own merits and demerits. The choice of the
suitable form of ownership will depend on such factors as the
line of business, capital requirements, liability of owners,
division of profit, legal formalities, continuity of business,
transferability of interest and so on.
 Location of business enterprise: An important factor to be
considered at the start of the business is the place where the
enterprise will be located. Any mistake in this regard can result
in high cost of production, inconvenience in getting, right kind
of production inputs or serving the customers in the best
possible way. Availability of raw materials and labour; power
supply and services, like banking, transportation,
communication, warehousing, etc., are important factors while
making a choice of location.
 Financing the proposition: Financing is concerned with
providing the necessary capital for starting, as well as, for
continuing the proposed business. Capital is required for
investment in fixed assets, like land, building, machinery and
equipment and in current assets, like raw materials, books,
debts, stock of finished goods, etc. Capital is also required for
meeting day-to-day expenses. Proper financial planning must
be done to determine (a) the requirement of capital, (b) source
from where the capital will be raised and (c) the best ways of
utilising the capital in the firm.
 Physical facilities: Availability of physical facilities, including
machines and equipment, building and supportive services is
an important factor to be considered at the start of the
business. The decision relating to this factor will depend on the
nature and size of business, availability of funds and the
process of production.
 Plant layout: Once the requirement of physical facilities has
been determined, the entrepreneur should draw a layout plan
showing the arrangement of these facilities. Layout means the
physical arrangement of machines and equipment needed to
manufacture a product.
 Competent and committed worked force: Every enterprise
needs competent and committed workforce to perform various
activities so that physical and financial resources are converted
into desired outputs. Since no individual entrepreneur can do
everything himself, he/she must identify the requirement of
skilled and unskilled workers and managerial staff. Plans should
also be made about how the employees will be trained and
motivated to give their best performance.
 Tax planning: Tax planning has become necessary these days
because there are a number of tax laws in the country and they
influence almost every aspect of the functioning of modern
business. The founder of the business has to consider in
advance the tax liability under various tax laws and its impact
on business decisions.
 Launching the enterprise: After the decisions relating to the
above mentioned factors have been taken, the entrepreneur
can go ahead with actual launching of the enterprise which
would mean mobilising various resources, fulfilling necessary
legal formalities, starting the production process and initiating
the sales promotion campaign.
Question 1
Choose the correct alternative:
Column I Column II
(i) The service which helps in removing A. Advertising
hindrance of knowledge.
(ii) The service which helps in removing B. Transport
hindrance of place.
(iii) The service which helps in removing C. Insurance
hindrance of time.
(iv) The service which helps in removing D. Warehousing
hindrance of risk.

(a) (i) – A, (ii) – B, (iii) – D, (iv) – C
(b) (i) – C, (ii) – B, (iii) – D, (iv) – A
(c) (i) – A, (ii) – D, (iii) – B, (iv) – C
(d) (i) – C, (ii) – D, (iii) – B, (iv) – A

Answer 1
(a) (i) – A, (ii) – B, (iii) – D, (iv) – C

Question 2
Which of the broad categories of industries covers oil
refinery and sugar mills? (Choose the correct alternative)
(a) Primary
(b) Secondary
(c) Tertiary
(d) None of them

Answer 2
(b) Secondary

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

Answer 3
(a) Mining

Question 4
The industries which provide support services to other
industries are known as (Choose the correct alternative)
(a) Primary industries
(b) Secondary industries
(c) Commercial industries
(d) Tertiary industries

Answer 4
(d) Tertiary industries

Question 5
‘Fishing’ is what type of Industry?
(a) Primary industry
(b) Secondary industry
(c) Commercial industry
(d) Tertiary industry

Answer 5
(a) Primary industry

Question 6
Industry and commerce are interchangeable terms.

Answer 6
False: Industry refers to economic activities which are
connected with conversion of resources into useful
goods while commerce includes all those activities
which are necessary for facilitating the exchange of
goods and services.

Question 7
Trade between two countries is known as internal
trade. True/False? Give reason.

Answer 7
False: Trade between two countries is called ‘External
Trade’.

Question 8
Conversion of cotton into cloth is an example of genetic
industry. True/False? Give reason.

Answer 8
False: It is a manufacturing industry.

Question 9
Name the business activity which is concerned with
conversion of resources into useful products.

Answer 9
Industry

Question 10
Name the category of industry which involves breeding
or reproduction of plants and animals.

Answer 10
Genetic industries.

Question 11
Name the manufacturing industry in which TV sets or
computers are produced.

Answer 11
Assembling industry

Question 12
Name the auxiliary to trade which removes the
hindrance of time.

Answer 12
Warehousing or storage

Question 13
Name the auxiliary to trade which removes the
hindrance of exchange.

Answer 13
Banking and finance

Question 14
Name the commercial activity that removes the
hindrance of knowledge.

Answer 14
Advertising

Question 15
Why do we insure goods?

Answer 15
We insure goods to minimise the risk of loss. Goods
may be damaged or destroyed by theft, fire and natural
calamities in the process of transport and storage.
Insurance protects against such loss.

Question 16
Name the type of manufacturing industry in which one
material is separated into several useful products.

Answer 16
Analytical industry

Question 17
Name the type of manufacturing industry wherein two
or more ingredients are combined into one product.

Answer 17
Synthetic industry

Question 18
Name the type of manufacturing industry wherein a
finished product is produced through successive stages.

Answer 18
Processing industry

Question 19
Is furniture making a manufacturing industry? Why?

Answer 19
Yes, because manufacturing industries convert raw
materials or semi-finished products into finished
products (timber into furniture).

Question 20
_________ industries provide support services to
primary and secondary industries.

Answer 20
Tertiary

Question 21
Why is mining called a primary industry?

Answer 21
Because it is connected with extraction of natural
resources.

Question 22
Why is construction industry called a secondary
industry?

Answer 22
Because this industry is engaged in construction of
buildings, bridges or roads using bricks, sand, cement,
iron and steel, wires, etc. which are natural resources.

Question 23
Why is insurance known as a tertiary industry?

Answer 23
Because insurance provides facility of removing
hindrance of risk of loss or damage of goods due to
theft, fire, accidents, etc.

Question 24
______________ facilitate buying and selling of goods
and services. (Fill up the blank with correct answer)

Answer 24
Auxiliaries to trade

Question 25
Manufacturing industries are known as secondary
industries because _____________.

Answer 25
manufacturing industries convert raw materials or
semi-finished products into finished products, e.g.,
timber into furniture.

Question 26
Banking is called a tertiary industry because
______________.

Answer 26
banks provide service facility of providing funds to
businessmen.

Question 27
_______________ is concerned with holding goods in
stock for sale in future.

Answer 27
Warehousing

Question 28
______________ involves movement of goods from
one place to another.

Answer 28
Transportation

Question 29
Is dairying a genetic or an extractive industry? Why?

Answer 29
Genetic industry, because it involves breeding or
reproduction of animals.

Question 30
Match the following:
Column I Column II
(i) The trade in which goods are bought from A. Import trade
other countries.
(ii) The economic activities concerned with B. Warehousing
extraction, production, processing or
fabrication of products.
(iii) The trade in which goods are imported and C. Entrepot trade
exported to some other country.
(iv) The branch of commerce which removes the D. Industry
hindrance of time.

Answer 30
(i) – A, (ii) – D, (iii) – C (iv) – B

Question 1
Shree Radhey Industries Pvt. Ltd. is a large company which
produces agricultural products like sugarcane, cotton, etc.
Instead of selling these agricultural products in the market, the
company uses these as raw materials to produce sugar and
cloth in its own established sugar mill and cloth mill at some
rural area where there was a high unemployment. In this way,
the company provided employment to about 200 local people.
To which type and sub-type of industries are related the
different products described in the above para? Explain.
(4 marks)
Answer 1
(i) Sugarcane and cotton – Extractive industries
(Primary industries)
Primary industries industries are connected with
the extraction and production of natural
resources, and reproduction and development of
living organisms, plants, etc.
Extractive industries extract or draw out various
products from natural resources such as earth,
soil, water, etc. Farming, mining, fishing, hunting,
lumbering, oil extraction, etc. are examples of
extractive industries.
(ii) Sugar and cloth — Processing industries
(Secondary industries)
Secondary industries are concerned with using the
materials extracted at the primary stage to
produce goods for final consumption or for
further processing by other industrial units.
Processing industries are manufacturing industries
which involve successive stages for manufacturing
finished products (e.g., sugar, cloth, paper, etc.).

Question 2
Farhan, a young man, wants to provide employment to the
local people of his village. He decided to do the wholesale
business of mobile phones made by the latest technique. But
so many questions began to crop up in his mind: how will the
goods be brought from distant places, how will the finance be
arranged, and how will the information on his modern
business be conveyed to the people? He consulted a business
expert, Mr. Balram who gave him information on the
auxiliaries to trade, which could solve his problem. Farhan
understood what the expert told him. He employed 50
workers and started his business.
(a) Which economic activity is Farhan going to do?
(b) On which part of business was the information
given to Farhan by the business expert?
(c) If we add the answer of (a) to the answer of (b)
which part of business shall we have?
(d) Explain the auxiliaries to trade which may solve
the problem of Farhan, as suggested by the
business (6 marks)

Answer 2
(a) Trade, which refers to buying and selling of goods
and services with the objective of earning profit.
(b) Auxiliaries to trade – activities which are meant for
assisting trade, i.e., services.
(c) Commerce, which includes all those activities which
are necessary for facilitating the exchange of goods
and services. (Commerce = Trade + Auxiliaries to
trade)
(d) (i) Transportation removes hindrance of place by
moving goods from the places of production to the
markets for sale.
(ii) Banking removes hindrance of finance by providing
funds to a businessman for acquiring assets,
purchasing raw materials and meeting other
expenses.
(iii) Advertising removes hindrance of infor-mation by
informing consumers about the goods and
services available in the market.

Question 3
MVT Construction Pvt. Ltd. deals in constructing building,
bridges, roads and dams by using cement, steel, bricks and
wood. There are 1000 employees in all working in this
company. The managing director of the company, Mr.
Shyamsundar, takes full care of the quality of work done.
Recently, the company got a contract of constructing five big
buildings, two bridges, one long road and one dam. The
company has got a special division also, which owns one
hundred trucks. These trucks are used for transporting goods
on hire. This division is working quite successfully under the
supervision of the divisional manager, Radhika Dasi.
Identify and state two types of industrial activities from
the above para by quoting the lines. (3 marks)

Answer 3
(i) “MVT Construction Pvt. Ltd. deals in constructing building,
bridges, roads and dams by using cement, steel, bricks
and wood.”
Secondary industries – These industries are concerned
with using the materials extracted at the primary
stage to produce goods for final consumption or for
further processing by other industrial units.
(ii)“The company has got a special division also, which owns
one hundred trucks.”

Tertiary or service industries – These industries
provide services facilities. It includes transport,
communication, banking, insurance, warehousing,
advertising, etc.

Question 4
Dr. Rajiv Mishra is working against the post of a senior
doctor in a government hospital. He does not
discriminate between the rich and poor while treating
his patients medically. When he returns home from the
hospital, he attends to the poor patients at home free of
cost between 6 pm to 8 pm. Besides, he gives them the
information about the employment opportunities. He
advises many young people to go into the fields of
advertising and transportation. They went into these
fields and remarkably succeeded there.

(i) What type of activities does Dr. Rajiv Mishra
perform in the hospital and at home?
(ii) Explain the auxiliaries to trade mentioned in the
above para. (4 marks)

Answer 4
(i) Working in a government hospital – An economic
activity
Attending to the poor patients at home free of cost – A
non-economic activity
(ii) (a) Transportation: Transport (road, rail or 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 is because
of transportation that a producer can sell his goods in
different parts of the world. It creates place utility.
(b) Advertising: Advertising brings goods and services
to the knowledge of prospective buyers. With the
help of such knowledge, consumers can obtain
better value for their money. Thus, advertising
helps to promote the sale of products like
electronic goods, automobiles, soaps and
detergents, etc. by providing information about
them.

History of Trade and
Commerce in India
The economic and commercial evolution of any land
depends upon its physical environment. This stands true
for the Indian subcontinent as a whole which has
Himalayas in the North bordered by water in the South.
A network of roads merging into the Silk Route helped
in establishing commercial and political contacts with
adjoining foreign kingdoms and empires of Asia, in
particular, and the world, in general.
The maritime routes linked the east and the west by
sea and were used for the trade of spices and known as
‘spice route’. Due to the flow of wealth through these
routes, the chief kingdoms, important trade centres
and the industrial belt flourished, which in turn
further facilitated the progress of domestic and
international trade in ancient India.
Trade and commerce have played a vital role in making
India to evolve as a major actor in the economic world in
ancient times. Archaeological evidences have shown that
trade and commerce was the mainstay of the economy of
ancient India carried out by water and land. Commercial
cities like Harappa and Mohenjodaro were founded in the
third millennium B.C. The civilisation had established
commercial connections with Mesopotamia and traded in
gold, silver, copper, coloured gemstones, beads, pearls, sea
shells, terracotta pots, etc. The period was marked by
substantial commercial activities and urban development.
Political economy and military security during ancient
times united most of the Indian subcontinent and
trade regulations were carefully planned.
There were diverse types of coins and weighing practices
which used to vary from place to place with the help of
money changers and by resorting to certain commonly
accepted weights and measures.
Indigenous Banking System
As economic life progressed, metals began to supplement
other commodities as money because of its durability and
divisibility. As money served as a medium of exchange,
the introduction of metallic money and its use accelerated
economic activities.
Documents such as Hundi and Chitti were in use for
carrying out transactions in which money passed from
hand to hand. Hundi as an instrument of exchange, which
was prominent in the subcontinent, involved a contract
which — (i) warrant the payment of money, the promise or
order which is unconditional
(ii) capable of change through transfer by valid negotiation.
Hundi as practised by Indian Merchant Communities
Name of Broader Functions of Hundi
Hundi Classification
Dhani-jog Darshani Payable to any person—no liability over who
received payment.
Sah-jog Darshani Payable to a specific person, someone
‘respectable’. Liability over who received
payment.
Firman-jog Darshani Hundi made payable to order.
Dekhan-har Darshani Payable to the presenter or bearer.
Dhani-jog Muddati Payable to any person—no liability over who
received payment, but payment over a fixed
term.
Firman-jog Muddati Hundi made payable to order following a fixed
term.
Jokhmi Muddati Drawn against dispatched goods. If goods lost in
transit, the drawer or holder bears the costs, and
the drawee carries no liability.
Indigenous banking system played a prominent role in
lending money and financing domestic and foreign
trade with currency and letter of credit. With the
development of banking, people began to deposit
precious metals with lending individuals functioning
as bankers or Seths, and money became an instrument
for supplying the manufacturers with a means of
producing more goods.
Agriculture and the domestication of animals were
important components of the economic life of ancient
people. Due to the favourable climatic conditions they
were able to raise two or sometimes three crops in a
year. In addition to this, by resorting to weaving cotton,
dyeing fabrics, making clay pots, utensils, and handicrafts,
sculpting, cottage industries, masonry, manufacturing,
transports (i.e., carts, boats and ships), etc., they were
able to generate surpluses and savings for further
investment.
Workshops (Karkhana) were prominent where skilled
artisans worked and converted raw materials into
finished goods which were high in demand. Family-
based apprenticeship system was in practice and duly
followed in acquiring trade-specific skills. The artisans,
craftsmen and skilled labourers of different kinds
learnt and developed skills and knowledge, which were
passed on from one generation to another.
Rise of Intermediaries
Intermediaries played a prominent role in the
promotion of trade. It comprised commission agents,
brokers and distributors both for wholesale and retail
goods.
They provided considerable financial security to the
manufacturers by assuming responsibility for the risks
involved, especially in foreign trade. An expanding
trade brought in huge amounts of silver bullion into
Asia and a large share of that bullion gravitated
towards India.
The institution of Jagat Seths also developed and
exercised great influence during the Mughal period
and the days of the East India Company.
Bankers began to act as trustees and executors of
endowments.
Foreign trade was financed by loans. However, the rate
of interest for longer voyages was kept high in view of
the huge risk involved.
The emergence of credit transactions and availability of
loans and advances enhanced commercial operations.
The Indian subcontinent enjoyed the fruits of
favourable balance of trade, where exports exceeded
imports with large margins and the indigenous
banking system benefitted the manufacturers, traders
and merchants with additional capital funds for
expansion and development.
Commercial and Industrial banks later evolved to
finance trade and commerce and agricultural banks to
provide both short-and long-term loans to finance
agriculturists.
Transport
Transport by land and water was popular in the ancient
times. Trade was maintained by both land and sea.
Roads as a means of communication had assumed key
importance in the entire process of growth, particularly
of the inland trade and for trade over land. The
northern roadway route is believed to have stretched
originally from Bengal to Taxila. There were also trade
routes in the south spreading east and west. Trade
routes were structurally wide and suitable for speed
and safety.
Maritime trade was another important branch of
global trade network.
Malabar Coast, on which Muziris is situated, has a long
history of international maritime trade going back to
the era of the Roman Empire. Pepper was particularly
valued in the Roman Empire and was known as ‘Black
Gold’. For centuries, it remained the reason for rivalry
and conflict between various empires and trade powers
to dominate the route for this trade. It was in the
search for an alternate route to India for spices that led
to the discovery of America by Columbus in the closing
years of 15th century and also brought Vasco da Gama
to the shores of Malabar in 1498. Calicut was such a
bustling emporium that it was even visited by Chinese
ships to acquire items, like frankincense (essential oil)
and myrrh (fragrant resin used in perfumes, medicines)
from the Middle East, as well as, pepper, diamonds,
pearls and cotton from India. On the Coromandel
Coast, Pulicat was a major port in the 17th century.
Textiles were the principal export from Pulicat to
Southeast Asia.
Trading Communities
In different parts of the country, different communities
dominated trade.
• Punjabi and Multani merchants handled business in
the northern region, while the Bhats managed the trade
in the states of Gujarat and Rajasthan.
• In western India, these groups were called Mahajan,
Chatt is were important traders from the South.
• In urban centres, such as Ahmedabad the Mahajan
community collectively represented by their chief called
nagarseth.
• Other urban groups included professional classes, such
as hakim and vaid (physician), wakil (Lawyer), pundit
or mulla (teachers), painters, musicians, calligraphers,
etc.
Merchant Corporations
The merchant community also derived power and prestige
from guilds, which were autonomous corporations
formed to protect the interests of the traders. These
corporations, organised on formal basis, framed their
own rules of membership and professional code of
conduct, which even kings were supposed to accept
and respect.
• Trade and industry taxes were also a major source of
revenue. Traders had to pay octroi duties that were
levied on most of the imported articles at varying
rates. They were paid either in cash or in kind.
• Customs duties varied according to the commodities.
Tariffs varied from province to province.
• The ferry tax was another source of income generation.
It had to be paid for passengers, goods, cattle and
carts. The right to receive the labour tax was usually
transferred to the local bodies.
• The guild chief dealt directly with the king or tax
collectors and settled the market toll on behalf of its
fellow merchants at a fixed sum of money. The guild
merchants also acted as custodians of religious
interests. They undertook the task of building
temples and made donations by levying a corporate
tax on their members. The commercial activity, thus,
enabled big merchants to gain power in the society.
Major Trade Centres
There were all kinds of towns-port towns, manufacturing
towns, mercantile towns, the sacred centres, and pilgrimage
towns. Their existence is an index of prosperity of
merchant communities and professional classes. The
following were the leading trade centres in ancient
India:
1. Pataliputra (known as 'Patna' today): It was not
only a commercial town, but also a major centre
for export of stones.
2. Peshawar: It was an important exporting centre
for wool and for the import of horses. It had a
huge share in commercial transactions between
India, China and Rome in the first century A.D.
3. Taxila: It served as a major centre on the important
land route between India and Central Asia. It was
also a city of financial and commercial banks. The
city occupied an important place as a Buddhist
centre of learning. The famous Taxila University
flourished here.
4. Indraprastha: It was the commercial junction on
the royal road where most routes leading to the
east, west, south and north converged.
5. Mathura: It was an emporium of trade and people
here subsisted on commerce. Many routes from
South India touched Mathura and Broach.
6. Varanasi: It was well placed as it lay both on the
Gangetic route and on the highway that linked
North with the East. It grew as a major centre of
textile industry and became famous for beautiful
gold silk cloth and sandalwood workmanship. It
had links with Taxila and Bharuch.
7. Mithila: The traders of Mithila crossed the seas
by boats, through the Bay of Bengal to the South
China Sea, and traded at ports on the islands of
Java, Sumatra and Borneo. Mithila established
trading colonies in South China, especially in
Yunnan.
8. Ujjain: Agate, carnelian, muslin and mallow
cloth were exported from Ujjain to different
centres. It also had trade relations through the
land route with Taxila and Peshawar.
9. Surat: It was the emporium of western trade
during the Mughal period.
Textiles of Surat were famous for their gold borders
(zari). It is noteworthy that Surat hundi was honoured
in far off markets of Egypt and Iran.
10. Kanchi (today known as Kanchipuram): It was
here that the Chinese used to come in foreign ships
to purchase pearls, glass and rare stones and in
return they sold gold and silk.
11. Madura: It was the capital of the Pandayas who
controlled the pearl fisheries of the Gulf of Mannar. It
attracted foreign merchants, particularly Romans,
for carrying out overseas trade.
12. Broach: It was the greatest seat of commerce in
Western India. It was situated on the banks of river
Narmada and was linked with all important marts
by roadways.
13. Kaveripatta (also known as Kaveripatnam): It was
scientific in its construction as a city and provided
loading, unloading and strong facilities of
merchandise. Foreign traders had their
headquarters in this city. It was a convenient place
for trade with Malaysia, Indonesia, China and the
Far East. It was the centre of trade for perfumes,
cosmetics, scents, silk, wool, cotton, corals, pearls,
gold and precious stones; and also for ship
building.
14. Tamralipti: It was one of the greatest ports
connected both by sea and land with the West and
the Far East. It was linked by road to Banaras and
Taxila.
Major Exports and Imports
Exports consisted of spices, wheat, sugar, indigo,
opium, sesame oil, cotton, parrot, live animals and
animal products—hides, skin, furs, horns, tortoise
shells, pearls, sapphires, quartz, crystal, lapis, lazuli,
granites, turquoise and copper etc.
Imports included horses, animal products, Chinese
silk, flax and linen, wine, gold, silver, tin, copper, lead,
rubies, coral, glass, amber, etc.
Position of Indian Subcontinent in
World Economy (1 AD up to 1991)
Between the 1st and the 7th centuries CE, India is
estimated to have the largest economy of the ancient
and medieval world, controlling about one-third and
one-fourth of the world’s wealth (timeline). The
country was often referred to as ‘Swaranbhumi’ and
‘Swarndweep’ in the writings of many travellers, such
as Megasthenes, Faxian (Fa Hien), Xuanzang (Huen
Tsang), Al Beruni (11th century), Ibn Batuta (11th
century), Frenchman Francois (17th century) and
others. They repeatedly refer to the prosperity of the
country.
The pre-colonial period in Indian history was an age of
prosperity for Indian economy and made the
Europeans embark great voyage of discovery. Initially,
they came to plunder but soon realised the rewards of
trade in exchange of gold and silver.
The British empire began to take roots in India in the
mid– 18th century. The East India Company used
revenues generated by the provinces under its rule for
purchasing Indian raw materials, spices and goods.
Hence, the continuous inflow of bullion that used to
come on account of foreign trade stopped. This
changed the condition of the Indian economy from
being an exporter of processed goods to the exporter
of raw materials and buyer of manufactured goods.
India begins to Reindustrialise
After Independence, the process of rebuilding the economy
started and India went for centralised planning.
The First Five Year Plan was implemented in 1952. Due
importance was given to the establishment of modern
industries, modern technological and scientific institutes,
space and nuclear programmes.
Despite these efforts, the Indian economy could not
develop at a rapid pace. Lack of capital formation, rise
in population, huge expenditure on defence and
inadequate infrastructure were the major reasons. As a
result, India relied heavily on borrowings from foreign
sources and finally, agreed to economic liberalisation
in 1991.
The Indian economy is one of the fastest growing
economies in the world today and a preferred FDI
destination.
Rising incomes, savings, investment opportunities, increased
domestic consumption and younger population ensures
growth for decades to come.
The high growth sectors have been identified, which
are likely to grow at a rapid pace world over and the
recent initiatives of the Government of India such as
‘Make in India’, Skill India’, ‘Digital India’ and roll out
of the Foreign Trade Policy (FTP 2015-20) is expected
to help the economy in terms of exports and imports
and trade balance.
Extra Shots
Make In India
‘Make in India’ is an initiative launched by the Government of India on 25
September 2014, to encourage national, as well as multinational
companies to manufacture their products in India. The major objectives
behind the ‘Make in India’ initiative are job creation and skill
enhancement in 25 sectors of the economy, which are as follows:
1. Automobile
2. Automobile Components
3. Aviation
4. Biotechnology
5. Chemicals
6. Construction
7. Defence Manufacturing
8. Electrical Machinery
9. Electronic Systems
10. Food Processing
11. Information Technology and Business Process Management
12. Leather 13. Media and Entertainment
14. Mining 15. Oil and Gas
16. Pharmaceuticals 17. Port and Shipping
18. Railways 19. Renewable Energy
20. Roads and Highways 21. Space and Astronomy
22. Textiles and Garments 23. Thermal power
24. Tourism and Hospitality 25. Wellness
RECAP
Economic and Non-economic Activities

Economic activities are those activities which are undertaken to
earn money and to create wealth, e.g. a teacher teaching in a
school, etc. Business, profession and employment are economic
activities.
Non-economic activities are those activities which are
undertaken to satisfy social, psychological and emotional
needs, e.g., a housewife cooking food for her family, a boy
helping an old man cross the road, etc.
Concept and Characteristics of Business
Business may be defined as an economic activity involving the
production and sale of goods and services undertaken with a
motive of earning profit by satisfying human needs in society.
Characteristics of Business DPS PURE
1. Economic activity 2. Profit earning
3. Uncertainty of return 4. Element of risk
5. Production or procurement of goods and services
6. Sale/exchange of goods and services for satisfaction of
human needs
7. Dealings in goods and services on a regular basis
Objectives of Business
Economic objectives
1. Earning profits
2. Market standing
3. Innovation
4. Optimum utilization of physical and financial resources
5. Increasing productivity
Social objectives
1. Supply of desired quality of products
2. Avoidance of anti-social and unfair trade practices
4. Welfare of employees
5. Community service
Role of Profit in Business PRES - G
1. For long-term Survival of business
2. For Growth and expansion of business
3. For increasing Efficiency
4. For building Prestige and recognition
5. For covering costs and Risks of the business
Business Risks
Business risks refer to the possibility of inadequate profits or even
losses due to uncertainties or unexpected events, e.g., decline in
demand for a firm’s product due to change in taste and fashion of
customers.
Nature of Business Risks
1. Business risks arise due to uncertainties.
2. Risk is an essential part of every business.
3. Degree of risk depends mainly upon the nature and size of
business.
4. Profit is the reward for risk taking.
Causes of Business Risks
1. Natural causes e.g., flood, earthquake.
2. Human causes e.g., theft, strikes.
3. Economic causes e.g., fluctuations in demand and prices,
competition.
4. Other causes e.g., political disturbances.
Classification of Business Activities
Various business activities may be classified into two broad
categories— Industry and Commerce. Industry refers to
economic activities which are connected with conversion of
resources into useful goods.
Commerce includes trade and auxiliaries to trade. Buying and
selling of goods is termed as trade. Activities which are meant
for assisting trade are known as auxiliaries to trade or services,
e.g., transportation, communication, banking, insurance, etc
Types of Industries
1.Primary industries
(i) Extractive industries e.g., farming, mining, fishing, oil
extraction.
(ii) Genetic industries e.g., poultry farms, pisciculture.
2.Secondary industries
(i) Manufacturing industries
• Analytical industry e.g., an oil refinery separates crude oil
into kerosene, diesel, lubricating oil, gasoline and petrol.
• Synthetical industry e.g., cement, soaps, paints.
• Processing industry e.g., sugar and paper.
• Assembling industry e.g., car, computer.
(ii) Construction industries e.g., construction of buildings,
bridges, roads.
3. Tertiary industries: These industries provide services
facilities, e.g., transport, communication, banking,
insurance, etc.
Types of Trade
1.Internal Trade: Trade which takes place within a country.
(i) Wholesale trade (ii) Retail trade
2.External Trade: Trade between two or more countries. (i)
Import Trade (ii) Export Trade (iii) Entrepot Trade
Auxiliaries to Trade CWA - BIT
1. Banking 2. Insurance
3. Transportation 4. Warehousing
5. Communication 6. Advertising
History of Trade and Commerce in India
Hundi: It was an instrument of exchange which was used in
subcontinent. It involved a contract which warrants the
payment of money, the promise or order which is
unconditional; and capable of change through transfer by valid
negotiation.
Indigenous banking system
— Helped in lending money and financing domestic and
foreign trade with currency and letter of credit.
— People began to deposit precious metals with bankers
called seths.
— Money become an instrument for supplying the
manufacturers with a means of producing more goods.
Rise of Intermediaries (Brokers, commission agents,
distributions) for wholesale and retail trade
(i) Intermediaries provided security to the manufactures by
taking responsibility for risk involved.
(ii) Emergence of credit transactions and availability of loans
and advances enhanced commercial operations.
Transport: Transport by land and water was popular in ancient
times
Trading communities
Different parts of the country had different communities
dominated trade e.g. Punjabi and Multani merchants in
Northern India, Bhats in Gujarat and Rajasthan, Mahajans
from western India etc.
Merchant corporations were formed. Merchant communites
derived power and prestige from guilds which were
autonomous corporations formed to protect interest of traders.
These corporations framed their own rules of membership and
professional code of conduct which even kings were supposed
to accept and respect.
The guild chief dealt directly with long or tax collections and
settled the market toll on behalf of its fellow merchants at a
fixed sum of money.
Major Trade Centres: Patliputra, Peshwar, Taxila,
Indraprastha, Mathura, Varanasi, Mithila, Ujjain, Surat,
Kanchi, Madura, Broach, Kaveri patta, Tamralipti.
Major Exports and Imports
Exports: Spices, wheat, sugar, indigo, opium, sebame oil, cotton, live
animals & animal products like hides, furs, pearls etc.
Imports: Horses, animal products, chinese silk flax and liner,
gold, silver, tin etc.
Position of Indian sub-continents in the world economy
After independence five year plans were initiated. Despite these
efforts Indian economy could not develop at a rapid pace. Lack
of capital formation, rise in population, huge expenditure on
defence and inadequate infrastructure were major reasons.
Finally in 1991 India agreed to economic liberalisation. Because
of this, now India is one of the fastest growing economies of
the world. Initiatives like Digital India, Make in India, etc. are
expected to help the economy in terms of exports and imports.
Key Terms
Economic activities are those by which we can earn our
livelihood.
Non-economic activities are those performed out of love,
sympathy, sentiments, patriotism, etc.
Business may be defined as an economic activity involving the
production and sale of goods and services undertaken with a
motive of earning profit by satisfying human needs in society.
Goods may consist of consumption goods of daily use, such as
sugar, ghee, pen, notebook, etc., or capital goods, like machinery,
furniture, etc.
Services may include facilities offered to consumers, business
firms and organisations in the form of transportation, banking,
electricity, etc.
Risk is the uncertainty associated with an exposure to loss. No
business can altogether do away with risks. It is caused by some
unfavourable or undesirable event. Risks are related with factors,
like changes in consumer taste and fashion, changes in method of
production, strike or lockout at workplace, increased competition
in market, fire, theft, accidents, natural calamities, etc.
Profession includes those economic activities which require
application of special knowledge and skills in the occupation. In
every profession, guidelines or codes of conduct laid down by
professional bodies have to be followed. Those engaged in
professions are known as professionals, e.g. doctors, C.A., etc.
Employment refers to the occupation in which people work for
others and get remuneration (wages/salaries) in return. Those
who are employed by others are known as employees.
Market standing refers to the position of an enterprise in relation
to its competitors.
Innovation is the introduction of new ideas or methods in the
way something is done or made.
Productivity is ascertained by comparing the value of output with
the value of inputs. It is used as a measure of efficiency.
Economic Objectives – Since business is an economic activity,
its main objectives are economic objectives. The main economic
objective of business is earning profits. Profitability refers to profit
in relation to capital investment. Every business must earn a
reasonable profit which is so important for its survival and growth.
Social objectives of business are centred around the interests of
society and based on the slogan of ‘social welfare’. It is necessary
that business should also pursue certain objectives desired by the
people of the society because business is an integral part of
society.
Social responsibility refers to the obligation of business firms to
contribute resources for solving social problems and work in a
socially desirable manner.
Business risk refers to the possibility of inadequate profits or even
losses due to uncertainties or unexpected events.
Speculative risks involve both the possibility of gain, as well as,
the possibility of loss. Speculative risks arise due to changes in
market conditions, including fluctuations in demand and supply,
changes in prices or changes in fashion and tastes of customers.
Pure risks involve only the possibility of loss or no loss. The
chance of fire, theft or strike are examples of pure risks. Their
occurrence may result in loss, whereas, non-occurrence may
explain absence of loss, instead of gain.
Industry is concerned with the production or processing of goods
and materials.
Primary industries – These include all those activities which are
concerned with the extraction and production of natural
resources and reproduction and development of living organisms,
plants, etc.
Extractive industries – These industries extract or draw products
from natural sources, e.g. farming, mining, lumbering, hunting
and fishing operations.
Genetic industries – These industries are engaged in breeding
plants and animals for their use in further reproduction, e.g. Seeds
and nursery companies, activities of cattle breeding farms, poultry
farms, fish hatchery, etc.
Secondary industries – These are concerned with using materials,
which have already been extracted at the primary state, e.g.
manufacturing of steel.
Manufacturing industries – These industries are engaged in producing
goods through processing of raw materials and, thus, creating form
utilities.
Analytical industry which analyses and separates different elements
from the same materials, as in the case of oil refinery.
Synthetical industry which combines various ingredients into a new
product, as in the case of cement.
Processing industry which involves successive stages for manfucturing
finished products, as in the case of sugar and paper.
Assembling industry which assembles different component parts to
make a new product, as in the case of television, car, computer, etc.
Construction industries – These industries are involved in the
construction of buildings, dams, bridges, roads as well as tunnels
and canals. Engineering and architectural skills are an important
part in construction industries.
Tertiary industries – These are concerned with providing support
services to primary and secondary industries as well as activities
relating to trade. These industries provide service facilities.
Tertiary industries include transport, banking, insurance,
warehousing, communication, packaging and advertising.
Commerce includes all those activities, which are necessary for
facilitating the exchange of goods and services. Commerce
includes two types of activities, viz., (i) trade and (ii) auxiliaries to
trade.
Trade refers to sale, transfer or exchange of goods.
Auxiliaries to trade (or services) – There are a lot of activities that
are required to facilitate the purchase and sale of goods. These
are called auxiliaries to trade (or services) and include transport,
banking, insurance, communication, advertisement, packaging
and warehousing.
Internal trade – Internal, domestic or home trade is concerned
with the buying and selling of goods and services within the
geographical boundaries of a country.
Wholesale trade refers to buying and selling of goods and services
in large quantities for the purpose of resale or intermediate use.
Traders dealing in wholesale trade are called wholesalers.
Retail trade – When goods are purchased and sold in
comparatively smaller quantities, for final consumption it is
referred to as retail trade.
External trade – External or foreign trade consists of the exchange
of goods and services between persons or organisations operating
in two or more countries.
Import trade – If goods are purchased from another country, it is
called import trade.
Export trade – If goods re sold to other countries, it is known as
export trade.
Entrepot trade – When goods are imported for export to other
countries, it is known as entrepot trade.
Question 1
The maritime routes linked the east and the west by sea
and were used for the trade of spices and known as
____________ . (Fill up the blank with correct answer)

Answer 1
spice route

Question 2
Commercial cities like Harappa and Mohenjodaro were
founded in the third millennium B.C. The civilisation had
established commercial connections with Mesopotamia
and traded in ______________, coloured gemstones,
beads, pearls, sea shells, terracotta pots, etc.
(Fill up the blank with any two items of trade)

Answer 2
gold, silver, copper (any two)

Question 3
As economic life progressed, metals began to
supplement other commodities as money because of its
______ and ________.
(Fill up the blanks with correct answers)

Answer 3
durability, divisibility

Question 4
In ancient India, documents such as _________ and
_________ were in use for carrying out transactions in
which money passed from hand to hand.
(Fill up the blanks with correct answers)

Answer 4
Hundi, Chitti

Question 5
The Indian subcontinent enjoyed the fruits of favourable
balance of trade, where _____ exceeded _____ with
large margins. (Fill up the blanks with correct answers)

Answer 5
exports, imports

Question 6
_________ and _________ banks later evolved to
finance trade and commerce and agricultural banks to
provide both short-and long-term loans to finance
agriculturists. (Fill up the blanks with correct answers)

Answer 6
Commercial, Industrial

Question 7
_________ was another important branch of global
trade network. Malabar Coast, on which Muziris is
situated, has a long history of international maritime
trade going back to the era of the Roman Empire.

Answer 7
Maritime trade

Question 8
Pepper was particularly valued in the Roman Empire and was
known as __________ .

Answer 8
Black Gold

Question 9
Calicut was such a bustling emporium that it was even
visited by Chinese ships to acquire items, like
frankincense (essential oil) and myrrh (fragrant resin
used in perfumes, medicines) from the Middle East, as
well as, ________________ from India.

Answer 9
pepper, diamonds, pearls and cotton

Question 10
On the Coromandel Coast, Pulicat was a major port in
the 17th century. ______ were the principal export
from Pulicat to Southeast Asia.

Answer 10
Textiles

Question 11
Punjabi and Multani merchants handled business in the
northern region, while the ______ managed the trade
in the states of Gujarat and Rajasthan.

Answer 11
Bhats

Question 12
_____________ was another source of income
generation. It had to be paid for passengers, goods, cattle
and carts.

Answer 12
The ferry tax

Question 13
Match the Columns
Column I Column II
(i) Pataliputra (A) major centre for export of stones
(ii) Peshawar (B) major centre of textile industry
(iii) Indraprastha (C) commercial junction on the royal road
(iv) Varanasi (D) important exporting centre for wool and for
the import of horses

Answer 13
(i)– (A), (ii) – (D), (iii) – (C), (iv) – (B)

Question 14
The First Five Year Plan was implemented in 1952. Due
importance was given to the establishment of ______ .
(a) Modern industries
(b) modern technological and scientific institutes
(c) space and nuclear programmes
(d) All of these

Answer 14
(d) All of these

Question 15
In the first five year plan, due importance was given to
the establishment of modern industries, modern
technological and scientific institutes, space and nuclear
programmes. Despite these efforts, the Indian economy
could not develop at a rapid pace. Why?

Answer 15
Lack of capital formation, rise in population, huge
expenditure on defence and inadequate infrastructure
were the major reasons.

Self-Assessment Test 1
Evolution and Fundamentals of Business
Time Allowed: 1 hour Maximum Marks: 25

Question 1
Which is not an economic activity?
(Choose the correct alternative) (1 mark)
(a) Clerical work in a bank
(b) Teaching in Govt. school
(c) Cooking by a housewife
(d) Car production
Answer 1
(c) Cooking by a housewife
Question 2
Which is service industry?
(a) Sugar
(b) Cement
(c) Poultry farm
(d) Banking
Question 3
Risk is the result of _____________.
(a) Uncertainty
(b) Certainty
(c) Business activities
(d) None of these
Question 4
Code of conduct exist in ________.
(a) Business
(b) Profession
(c) Employment
(d) All of these
Question 5
Match the following: (1 mark)
(a) Buying soft toys from China and selling them in India (i) Export Trade
(b) Selling Basmati Rice to USA from India (ii) Import Trade
(c) Buying electronic items from Japan and selling them in (iii) Entrepot Trade
Thailand.
Question 6
Name and explain the two characteristics of business
which involve possibility of loss. (3 marks)
Answer 6
The two characteristics of business which involve possibility
of loss are:
(i) Uncertainty of return: There is always uncertainty of return
and possibility of loss. Every businessman invests money in
his/her business with the objective of earning profit.
However, there is always a possibility of loss.
(ii) Element of risk: Risk implies the uncertainty of reward or
the possibility of loss. There is always some element of risk
involved in business because the future is uncertain. The
risks are related to changes in consumer taste and fashions,
strikes or lock-outs at the work place, increased
competition, fire, theft, accidents, etc.
Question 7
“Business is an institution organised and operated to
provide goods and services under the incentive of
private gain.” Discuss. (3 marks)
Answer 7
“Business is an institution organised and operated to
provide goods and services under the incentive of
private gain.” This statement is correct. The following
points justify the given statement:
(i) Business is an economic activity as it is undertaken
with the main objective of earning profits. Profit
is essential to cover costs and risks of the business.
Every business must earn a reasonable profit to
survive and grow.
(ii) It involves sale, exchange, purchase of goods
(sugar, pen, textbook, machinery, furniture, etc.)
Answer 7
and services (transportation, banking, insurance, etc.)
on a regular basis for mutual profit through the
satisfaction of human wants.
Question 8
Anshul is a farmer. His elder brother Ankur is an
advocate while his sister Priyanka is a clerk in a
government office. Name the economic activities in
which they are engaged and distinguish among them
on the basis of: (i) Reward/Return (ii) Capital
investment (iii) Risk. (3 marks)
Answer 8
Anshul is engaged in business, Ankur is engaged in
profession and Priyanka is engaged in employment.
Basis Business Profession Employment
(i) Reward/Return Profit earned Professional fee Salary or wages
(ii) Capital Capital investment Limited capital No capital
Investment required as per size needed for required
and nature of business establishment
(iii) Risk Profits are uncertain Fee is generally Fixed and regular
and irregular; risk is regular and pay; no risk
present certain; some risk
Question 9
What is business risk? What is its nature? Explain.
(5 marks)
Question 10
(a) Rajni, a house wife exchanges utensils for old clothes
on a regular basis. Is it a business and why ?
(b) Ramesh sells winter wear in the month of december,
January and February but he is not able to sell
his complete stock. (6 marks)
(i) Identify the hindrance.
(ii) How can he resolve this hindrance?
(iii) Will this hindrance always occur ? Why?
Answer 10
(b) Hindrance of time resolved by warehousing, because
there is time gap between production and consumption.

Question 1
Which is not included in ‘Auxiliary to Trade’?
(a) Animal Husbandry
(b) Insurance
(c) Transport
(d) Warehousing
Question 2
‘Fraud by Employee’ is a type of business risk ______.

(a) Human
(b) Natural
(c) Economic
(d) All of these
Question 3
Which economic activity has zero risk?
(a) Business
(b) Profession
(c) Employment
(d) All of these
Question 4
Which is Extractive Industry?
(a) Building construction
(b) Plantation
(c) Mining
(d) Textile
Question 5
‘Only sale or exchange of goods/services for profit is
business.’ Do you agree with the statement? Give reason
in support of your answer. (3 marks)
Answer 5
No, the given statement is not correct.
Reason: Business involves dealings in goods or services
on a regular or daily basis. One single transaction of
sale or purchase does not constitute business. For
example, sale of old newspaper by a housewife or
the sale of one’s old scooter (even at a profit) is not
business though the seller gets money in exchange.
Question 6
Categorise the following into business, profession and
employment.
(i) A farmer
(ii) An advocate
(iii) A clerk
(iv) A doctor
(v) A hawker selling toys for children
(vi) A person repairing scooters on roadside
(3 marks)
Answer 6
(i) Business
(ii) Profession
(iii) Employment
(iv) Profession
(v) Business
(vi) Business
Question 7
It is one of the activities means for assisting trade and
help in the promotion of the product by providing
information to the consumers. Business does not exits in
Isolation , it has to communicate with others and the
activity help in making consumers aware and informed
about the product of the company and inducing them
to buy particular items.
(i) Which activity is discussed in the above para ?
(ii) What are those activities called which are meant
for assisting trade ?
(iii) Name and explain the categories into which
communication services can be classified.
(4 marks)
Question 8
Mr. X and Y are having a discussion. Mr. X fells that
business is based on selfish desire to gain higher and
higher profits while Mr. Y thinks that profit is essential
for a business. Can you support Mr. Y’s case by giving
strong points in his favour? (5 marks)
Question 9
Profit maximization cannot be the sole objective of a
business. Comment. (6 marks)

Question 1
Which is not the objective of business?
(a) Making profit
(b) Creation of customers
(c) Investment
(d) Innovation
Question 2
Capital is required in ____________.
(a) Profession
(b) Employment
(c) Business
(d) Non-economic activity
Question 3
A company has decided to donate 1% of its sales to
an NGO, serving mentally disabled people. This
initiative by the company was highly appreciated by
the public and their sales increased by 10%
Identify the objective depicted in the given example.
(1 mark)
Answer 3
Social objective
Question 4
Mr. Rajnesh sold his furniture & bike on OLX as he was
shifting base to London. Is this a business activity ?
Which element of business is being referred to here ?
(1 mark)
Question 5
Tea is mainly produced in Assam, while cotton in Gujrat &
Maharastra but they are required for consumption in
different parts of the country. How can this hindrance of
place be removed ? Under what business activity will it
be categorized? Explain. (3 marks)
Question 6
A factory emits a lot of smoke and pollutants while
manufacturing Sugar. It is overlooking the impact of its
activities on the environment and is engaged in profit
maximization.
(i) Which objective is not being fulfilled by the
manufacturers? Explain.
(ii) Which type of industry will you classify sugar
manufacturing? Explain. (3 marks)
Question 7
Rising Heights Ltd. wants to expand and grow. For this it
needs funds to acquire land, building, machinery etc.
Also since these assets cost a lot they want the risk
associated with them to be reduced. Identify the
hindrances and explain how they can be removed.
(4 marks)
Answer 7
Hindrance of Finance and Risk (explain)
Question 8
Define business. Explain the characteristics of business.
(any four) (5 marks)
Question 9
Commerce is considered as the backbone of industry and
other business activities. Discuss the various functions
performed by commerce. (6 marks)
Forms
a of Business
Organisation
 Sole Proprietorship-Concept, merits and
limitations.
 Partnership-Concept, types, merits and
limitation of partnership, registration of a
partnership firm, partnership deed. Types of
partners
 Hindu Undivided Family Business: Concept
 Cooperative Societies-Concept, types, merits,
and limitations.
 Company - Concept, merits and limitations;
Types: Private, Public and One Person
Company – Concept
 Formation of company - stages, important
documents to be used in the formation of a
company
Sole Proprietorship –
Concept, Merits and
Limitations
Do you often go in the evenings to buy registers, pens,
chart papers, etc., from a small neighbourhood
stationery store? Well, in all probability in the course
of your transactions, you have interacted with a sole
proprietor.
Sole proprietorship is a popular form of business
organisation and is the most suitable form for small
businesses, especially in their initial years of operation.
Meaning
Sole proprietorship refers to a form of business
organisation which is owned, managed and
controlled by an individual who is the recipient of
all profits and bearer of all risks.
This form of business is particularly common in areas
of personalised services such as beauty parlours, hair
saloons and small scale activities like running a retail
shop in a locality.
It requires less amount of capital. It is best suited for
businesses which are carried out on a small scale and
where customers demand personalised services.
Definitions of Financial Management
 “Sole trader is a type of business unit where a person is solely
responsible for providing the capital, for bearing the risk of
the enterprise and for the management of business.”
—J.L. Hansen
 “The individual proprietorship is the form of business
organisation at the head of which stands an individual as one
who is responsible, who directs its operations and who alone
runs the risk of failure.”
—L.H. Haney
Features
Salient characteristics of the sole proprietorship form
of organisation are as follows:
1. Formation and closure
There is no separate law that governs sole
proprietorship. Hardly any legal formalities are
required to start a sole proprietary business, though in
some cases one may require a license.
Closure of the business can also be done easily. Thus,
there is ease in her personal property to repay the
firm’s debts.
2. Unlimited liability
Sole proprietors have unlimited liability. This implies
that the owner is personally responsible for payment of
debts in case the assets of the business are not
sufficient to meet all the debts. As such the owner’s
personal possessions such as his/her personal car and
other assets could be sold for repaying the debt.
For example, suppose the total outside liabilities of
ABC dry cleaner, a sole proprietorship firm, are
`6,00,000 at the time of dissolution, but its assets are `
4,00,000 only. In such a situation the proprietor will
have to bring in ` 2,00,000 from his/her personal
sources even if (s)he has to sell his/her personal
property to repay the firm’s debts.
3. Sole risk bearer and profit recipient
The risk of failure of business is borne all alone by the
sole proprietor. However, if the business is successful,
the proprietor enjoys all the benefits. He receives all
the business profits which become a direct reward for
his risk bearing.
4. Control
The right to run the business and make all decisions
lies absolutely with the sole proprietor. He can carry
out his plans without any interference from others.
5. No separate entity
In the eyes of the law, no distinction is made between
the sole trader and his business, as business does not
have an identity separate from the owner. The owner is,
therefore, held responsible for all the activities of the
business.
6. Lack of business continuity
The sole proprietorship business is owned and
controlled by one person. Therefore death, insanity,
imprisonment, physical ailment or bankruptcy of the
sole proprietor will have a direct and detrimental effect
on the business and may even cause closure of the
business.
Merits and Limitations of Sole
Proprietorship
Merits Limitations
1. Quick decision making: A sole 1. Limited resources: Resources of a sole
proprietor enjoys considerable proprietor are limited to his/her
degree of freedom in making personal savings and borrowings from
business decisions. others. Banks and other lending
Decision making is prompt because institutions may hesitate to extend a
there is no need to consult others. long term loan to a sole proprietor. Lack
This may lead to timely of resources is one of the major reasons
capitalisation of market why the size of the business rarely
opportunities as and when they grows much and generally remains
arise. small.
2. Confidentiality of information: 2. Limited life of a business concern:
A sole proprietor can keep all The sole proprietorship business is
business information confidential owned and controlled by one person, so
and maintain secrecy. He is not death, insanity, imprisonment, physical
bound by law to publish the ailment or bankruptcy of a proprietor
accounts of his business. affects the business and can lead to its
closure.
3. Ease of formation and closure: An 3. Unlimited liability: A major
important merit of sole proprietorship is disadvantage of sole proprietorship is
the possibility of entering into business that the owner has unlimited liability. If
with minimal legal formalities. There is the business fails, the creditors can
no separate law that governs sole recover their dues not merely from the
proprietorship. As sole proprietorship is business assets, but also from the
the least regulated form of business, it is personal assets of the proprietor. A poor
easy to start and close the business as decision or an unfavourablecircumstance
per the wish of the owner. can create serious financial burden on
the owner. That is why a sole proprietor
is less inclined to take risks in the form
of innovation or expansion.
4. Direct incentive: A sole proprietor 4. Limited managerial ability: The
directly gets the benefits of his efforts as owner has to assume the responsibility
he is the sole recipient of all the profits. of varied managerial tasks such as
The need to share profits does not arise purchasing, selling, financing, etc. It is
as he is the single owner. This provides rare to find an individual who excels in
maximum incentive to the sole trader to all these areas. Thus decision making
work hard. may not be balanced in all the cases.
5. Sense of accomplishment: There is a Also, due to limited resources, sole
personal satisfaction involved in working for proprietor may not be able to employ
oneself. If the business is successful, it and retain talented and ambitious
contributes to self-satisfaction of the employees.
sole proprietor and creates a sense of
accomplishment in him.
Hindu Undivided Family
Business/Joint Hindu Family Business
Joint Hindu family business is a specific form of
business organisation found only in India. It is one of
the oldest forms of business organisation in the
country.
Joint Hindu family business refers to a form of
organisation wherein the business is owned and
carried on by the members of the Hindu
Undivided Family (HUF).
It is governed by the Hindu Law. The basis of
membership in the business is birth in a particular
family and three successive generations can be
members in the business.
The business is controlled by the head of the family
who is the eldest member and is called karta.
All members have equal ownership right over the
property of an ancestor and they are known as
co-parceners.
 Note
The Joint Hindu Family Business is on the decline because of
the diminishing number of joint Hindu families in the country.
Features
1. Formation
For a joint Hindu family business, there should be at
least two members in the family and ancestral property
to be inherited by them. The business does not require
any agreement as membership is by birth. It is
governed by the Hindu Succession Act, 1956.
2. Liability
The liability of all members except the karta is limited
to their share of co-parcenery property of the business.
The karta, however, has unlimited liability.
3. Control
The control of the family business lies with the karta.
He takes all the decisions and is authorised to manage
the business. His decisions are binding on the other
members.
4. Continuity
The business continues even after the death of
the karta as the next eldest member takes up the
position of karta, leaving the business stable.
The business can, however, be terminated with
the mutual consent of the members.
5. Minor Members
The inclusion of an individual into the business occurs
due to birth in a Hindu Undivided Family. Hence,
minors can also be members of the business.
Gender Equality in the Joint Hindu Family – a Reality

According to the Hindu Succession (Amendment) Act, 2005, the daughter of a
coparcener of a Joint Hindu Family shall, by birth, become a coparcener. At the
time of partition of such a 'Joint Hindu Family' the coparcenary property shall
be equally divided to all the coparceners irrespective of their gender (male or
female). The eldest member (male or female) of 'Joint Hindu Family' shall
become Karta. Married daughter has equal rights in property of a Joint Hindu
Family.
Cooperative Societies – Concept, Merits,
Limitations and Types
The word ‘cooperative’ means working together and
with others for a common purpose.
The cooperative society is a voluntary association
of persons, who join together with the motive of
welfare of the members.
• They are driven by the need to protect their
economic interests in the face of possible
exploitation at the hands of middlemen obsessed
with the desire to earn greater profits.
• The cooperative society is compulsorily required to
be registered under the Cooperative Societies Act
1912.
• The process of setting up a cooperative society is
simple enough and at the most what is required is
the consent of at least ten adult persons to form a
society.
• The capital of a society is raised from its members
through issue of shares.
• The society acquires a distinct legal identity after its
registration.
 “Cooperative organisation is “a society which has its
objectives for the promotion of economic interests of its
members in accordance with cooperative principles.”
—The Indian Cooperative Societies Act, 1912
 “Cooperative is a form of organisation wherein persons
voluntarily associate together as human beings on the basis of
equality for the promotion of an economic interest for
themselves.” —E.H. Calvert
Features
1. Voluntary membership
The membership of a cooperative society is voluntary.
Membership is open to all, irrespective of their religion,
caste, and gender.
A person is free to join a cooperative society, and can
also leave anytime as per his desire. There cannot be any
compulsion for him to join or quit a society.
Although procedurally a member is required to serve a
notice before leaving the society, there is no compulsion
to remain a member.
A person is free to join a cooperative society, and can
also leave anytime as per his desire. There cannot be
any compulsion for him to join or quit a society.
Although procedurally a member is required to serve a
notice before leaving the society, there is no
compulsion to remain a member.
2. Legal status
Registration of a cooperative society is compulsory.
Therefore, it is a separate legal entity distinct from its
members. The society can enter into contracts and
hold property in its name, sue and be sued by others.
As a result of being a separate legal entity, it is not
affected by the entry or exit of its members.
3. Limited liability
The liability of the members of a cooperative society is
limited to the extent of the amount contributed by
them as capital. This defines the maximum risk that a
member can be asked to bear.
4. Control
In a cooperative society, the power to take decisions lies
in the hands of an elected managing committee. The
right to vote gives the members a chance to choose the
members who will constitute the managing committee
and this lends the cooperative society a democratic
character.
5. Service motive
The purpose of a cooperative society is mutual help
and welfare. It is formed with the motive of service to
its members, not to earn profits.
If any surplus is generated as a result of its operations,
it is distributed amongst the members as dividend in
conformity with the byelaws of the society.
Amul's amazing Cooperative ventures!
Every day Amul collects 4,47,000 litres of milk from 2.12 million farmers (many
illiterate), converts the milk into branded, packaged products, and delivers
goods worth `6 crore (`60 million) to over 5,00,000 retail outlets across the
country. It all started in December 1946 with a group of farmers keen to free
themselves from intermediaries, gain access to markets and thereby ensure
maximum returns for their efforts. Based in the village of Anand, the Khera
District Milk Cooperative Union (better known as Amul) expanded
exponentially. It joined hands with other milk cooperatives, and the Gujarat
network now covers 2.12 million farmers, 10,411 village level milk collection
centres and fourteen district level plants (unions). Amul is the common brand
for most product categories produced by various unions: liquid milk, milk
powder, butter, ghee, cheese, cocoa products, sweets, ice-cream and condensed
milk. Amul's sub-brands include variants such as Amulspray, Amulspree,
Amulya and Nutramul.
Merits and Limitations of Cooperative
Societies
Merits Limitations
1. Ease of formation: The 1. Limited resources: Resources
cooperative society can be of a cooperative society consists
started with a minimum of ten of capital contributions of the
members. The registration members with limited means.
procedure is simple involving a The low rate of dividend
few legal formalities. Its offered on investment also acts
formation is governed by the as a deterrent in attracting
provisions of Cooperative membership or more capital
Societies Act 1912. from the members.
2. Equality in voting status: The 2. Inefficiency in management:
principle of ‘one man one vote’ The members who offer honorary
governs the cooperative society. services on a voluntary basis are
Irrespective of the amount of generally not professionally
capital contribution by a equipped to handle the
member, each member is management functions effectively.
entitled to equal voting rights.
Cooperative societies are unable to
attract and employ expert managers
because of their inability to pay
them high salaries.
3. Limited liability: The liability of 3. Lack of secrecy: As a result of open
members of a cooperative society is discussions in the meetings of
limited to the extent of their capital members as well as disclosure
contribution. The personal assets of obligations as per the Societies Act (7),
the members are, therefore, safe from it is difficult to maintain secrecy about
being used to repay business debts. the operations of a cooperative society.
4. Stable existence: Death, bankruptcy 4. Government control: In return of the

or insanity of the members do not privileges offered by the government,
affect continuity of a cooperative cooperative societies have to comply
society. A society, therefore, operates with several rules and regulations
unaffected by any change in the related to auditing of departments
membership. also negative accounts, submission of
accounts, etc. Interference in the
functioning of the cooperative
organisation through the control
5. Economy in operations: The
exercised by the state cooperatively
members generally offer honorary
affects its freedom of operation.
services to the society. As the focus is
on elimination of middlemen, this
helps in reducing costs.
6. Support from government: The 5. Differences of opinion: Internal
cooperative society exemplifies the quarrels arising as a result of
idea of democracy and hence finds contrary viewpoints may lead to
support from the Government in difficulties in decision making.
the form of low taxes, subsidies, Personal interests may start to
and low interest rates on loans. dominate the welfare motive and
the benefit of other members may
take a backseat if personal gain is
given preference by certain
members.
Types of Cooperative Societies– A
Comparison
Question 1
A sole proprietor has (Choose the correct alternative)
(a) Limited liability
(b) Unlimited liability
(c) No liability for debts
(d) Joint liability

Answer 1

Question 2
The Karta in Joint Hindu Family Business has
(d) Joint liability

Answer 2

Question 3
The Head of the Hindu undivided Family Business is
called (Choose the correct alternative)
(a) Proprietor
(b) Director
(c) Karta
(d) Manager

Answer 3
(c) Karta

Question 4
In a cooperative society, the principle followed is
(a) One share one vote
(b) One man one vote
(c) No vote
(d) Multiple votes

Answer 4
(b) One man one vote

Question 5
The minimum number of members in a cooperative
society is (Choose the correct alternative)
(a) 2
(b) 3
(c) 7
(d) 10

Answer 5
(d) 10

Question 6
The liability of a sole trader is limited to the extent of
capital introduced by him into the business.

Answer 6
False: A sole trader has unlimited liability. In the case
of business losses, if the business assets are not
sufficient to meet all business liabilities, he may
have to sell his personal property to pay off the
liabilities.

Question 7
The sole proprietorship concern sinks or swims with its
proprietor. True/False? Give reason.

Answer 7
False: If there are losses, he alone has to bear them. If
there is profit, he is its sole recipient.

Question 8
Sole proprietorship is more suitable for large-scale business.

Answer 8
False: Sole proprietorship is suitable for businesses which
are carried out on a small scale with modest capital,
e.g.,grocery store.

Question 9
A Joint Hindu Family Business is based on a contract
between co-parceners. True/False? Give reason.

Answer 9
False: It is not based on any contract between
members. There must be at least two members
and an ancestral property for a Joint Hindu
Family Business. Membership is by birth.

Question 10
There is no limit to the number of members in a Joint
Hindu Family Business. True/False? Give reason.

Answer 10
False: Since membership is by birth, minors can also
be its members. However, only three successive
generations can be members in the business.

Question 11
Death or insanity of a member of the Joint Hindu Family
Business will bring its business to an end.

Answer 11
False: The business continues even after the death of
Karta as the next oldest member takes up the
position of Karta.The business is stable.

Question 12
Registration of a cooperative society is not compulsory.

Answer 12
False: A cooperative society is compulsorily required
to be registered under the Cooperative Societies
Act, 1912.

Question 13
Cooperative societies are established with profit motive.

Answer 13
False: The purpose of a cooperative society is mutual
help and welfare. It is formed with the motive
of service to its members, not to earn profits.

Question 14
Is a sole proprietor bound to publish his/her businesses
accounts?

Answer 14
No, he/she can keep all business information confidential.

Question 15
What are the different options to expand sole
proprietorship business?

Answer 15
The two options for sole proprietorship firm to
expand are:
(i) Appointment of salaried manager/ assistant.
(ii) Admit a partner.

Question 16
Name the form of business organisation found only in India.

Answer 16
Joint Hindu Family Business.

Question 17
Name the person who manages a Joint Hindu Family
Business.

Answer 17
Karta.

Question 19
How many members must be there in a joint family to
carry on Joint Hindu Family Business?

Answer 19
Minimum two members.

Question 20
What is the liability of Karta in Joint Hindu Family
Business?

Answer 20
Unlimited liability.

Question 21
Who are co-parceners?

Answer 21
Co-parceners are the members of the Joint Hindu
Family Business other than Karta.

Question 22
What is the basis of membership in the Joint Hindu
Family Business?

Answer 22
Basis of membership is birth in a particular family.

Question 23
What happens to Joint Hindu Family Business if Karta or
any other member dies?

Answer 23
Business continues.

Question 24
What is the main cause of decline in Joint Hindu Family
Business?

Answer 24
Diminishing number of Joint Hindu families.

Question 25
What is the minimum number of persons required to
form a cooperative society?

Answer 25
Ten adult persons.

Question 26
Is registration of a cooperative society compulsory?

Answer 26
Yes, registration of a cooperative society is compulsory
under the Cooperative Societies Act, 1912.

Question 27
Name the type of cooperative society set up to protect
the interest of small producers.

Answer 27
Producers’ cooperative societies

Question 28
Name the cooperative society set up to protect the
interests of farmers.

Answer 28
Farmers’ cooperative societies

Question 29
Name the cooperative society set up to make
residential accommodation available to its members at
lower costs.

Answer 29
Cooperative housing society

Question 30
Which form of business is suitable for a tailoring shop?

Answer 30
Sole proprietorship because personal attention is
required.

Question 31
Which form of organisation is considered to be the
simplest form of organisation?

Answer 31
Sole proprietorship.

Question 32
Mention any two businesses sole proprietorship would
be suitable form of business.

Answer 32
(i) Beauty parlour
(ii) Grocery store

Question 33
Which is the least regulated form of business?

Answer 33
Sole proprietorship.

Question 34
Name the form of business organisation in which a
minor can be full-fledged member.

Answer 34

Question 35
Who controls the Joint Hindu Family Business?

Answer 35
Karta, generally the eldest member of the family.

Question 36
Name the form of business organisation which is
formed with the motive of welfare of the members.

Answer 36
Cooperative society.

Question 37
Name the type of cooperative society set up to protect
the interests of consumers.

Answer 37
Consumers’ cooperative societies.

Question 38
“Working for oneself provides personal satisfaction.”
Which merit of sole proprietorship is highlighted in this
statement?

Answer 38
Sense of accomplishment.

Question 39
“The control of the business lies with the eldest
member of the family.” To which form of business
organisation is this applicable?

Answer 39

Question 40
“Employees Union of Hindustan Textiles start a retail
store to make daily household articles at reasonable
prices available to its members.” Identify this form of
business organisation.

Answer 40
Cooperative society (Consumers’ cooperative society).

Question 41
Teachers of various schools in South Delhi form a
society to buy land and construct flats for its members.
Identify this form of business organisation.

Answer 41
Cooperative society (Cooperative housing society).

Question 42
Name the type of cooperative society set up to help the
small producers in selling their products.

Answer 42
Marketing cooperative society.

Question 43
Name the cooperative society set up to provide easy
credit on reasonable terms to the members.

Answer 43
Credit cooperative society

Question 1
Radhika Priya Dasi opened a boutique along with four
workers. No problem of any type was faced in opening
the boutique. At her boutique special dresses made for
marriages and parties are sold. Despite there being a lot
of competition in the market, the boutique was earning a
good profit. Since all the profit went into her pocket,
Radhika Priya Dasi was getting inspired to work with
great efficiency. With the increase in workload, the
number of workers was increased from 4 to 6 by her.

All of them were happy since the business was running
successfully. Unfortunately, one day the boutique caught
fire due to a short circuit. Consequently, Radhika Priya
Dasi had to suffer a heavy loss. The circumstances
deteriorated so much that she had to dispose off her
personal properties to repay the boutique’s debts. In
order to revive the boutique, she approached a bank
which did not extend a long-term loan to her.
(a) Identify the form of business organisation discussed in
the above para.
(b) Explain any three merits of the form of business
(b) Explain any three merits of the form of business
organisation identified in (a) by quoting the lines from
the above para.
(c) Also explain any two limitations of the form of
business organisation identified in (a) by quoting the
lines from the above para. (6 marks)

Answer 1
(a) The form of business organisation of Radhika Priya
Dasi’s boutique is ‘Sole Proprietorship’.
(b) MERITS OF SOLE PROPRIETORSHIP :
(i) Ease of formation
“No problem of any type was faced in opening the boutique.”
Hardly any legal formalities are required to start a sole
proprietary business.
(ii) Direct incentive
“Since all the profit went into her pocket, Radhika Priya Dasi
was getting inspired to work with great efficiency.”
A sole proprietor directly gets the benefits of his
efforts as he is the sole recipient of all the profits.
(iii) Flexibility of operations
“With the increase in workload, the number of workers was
increased from 4 to 6 by her.”
In a proprietorship business, all decisions are taken by a
single person. There are no delays and the business can
quickly adapt itself to the changing environment. This
provides flexibility to the business.

LIMITATIONS OF SOLE PROPIETORSHIP :
(i) Unlimited liability
“The circumstances deteriorated so much that she had to
dispose off her personal properties to repay the boutique’s
debts.”
Sole proprietors have unlimited liability. In the case of
business losses, if the business assets are not sufficient
to meet all business liabilities, the proprietor may have
to sell his personal property to pay off the liabilities.

(ii) Limited resources
“In order to revive the boutique, she approached a bank
which did not extend a long-term loan to her.”
Resources of a sole proprietor are limited to his/her
personal savings and borrowings from others. Banks and
other lending institutions may hesitate to extend a long-
term loan to a sole proprietor.

Question 2
Gopal Sharma and Balram Sharma are two brothers,
who inherited some ancestral property. They decided to
form a Hindu Undivided Family (HUF) business
consisting of four male members. Gopal Sharma is the
elder brother. So he became ‘Karta’. The business took a
loan of ` 20 lakh from Punjab National Bank having
maturity period of 5 years. Due to poor financial
position of the business, they were unable to repay the
loan. They sold the ancestral property for ` 10 lakh and
paid the same to Punjab National Bank. They could not
pay the balance amount of loan with interest. The bank
filed a case for recovery of the balance amount. Gopal
Sharma pleaded the court that the loan was taken for
the purpose of business, therefore, all the members of
the business were liable to repay the loan. The court
held that all other members were responsible only to
the extent of their share in business, and the business
property was already sold. However, Gopal Sharma,
being ‘Karta’ would have to repay the balance amount
even by selling his personal properties. Gopal Sharma
had to sell some of his personal assets to repay the
balance amount of bank loan.
(a) Is the court’s decision justified? Give reasons in
support of your answer.
(b) State any three other features of HUF businesses.
(4 marks)

Answer 2
(a) Yes, the court’s decision is justified because in a
Hindu Undivided Family (HUF) business, ‘Karta’ has
unlimited liability, whereas the liability of all other
members is limited to their share in the property of
the business.
(b) FEATURES :
(i) Membership by Birth: Membership of the Joint
Hindu Family Business is automatic by birth.
(ii) No Maximum Limit: There is no restriction on the
number of co-parceners of the HUF business. However,
only three successive generations can be members in the
business.
(iii) Formation: There should be at least two members
and ancestral property to form a Joint Hindu Family
Business. It is not created by an agreement between
persons.

Question 3
A group of people in a locality of Delhi used to go for a
walk in the morning. After the walk, they would often sit
together and discuss the subjects like Politics,
Demonetisation, Elections, Market prices of different goods,
etc. There were about fifty persons in this group. One day,
instead of other subjects, their focus of discussion was
‘Market Prices of Different Goods’. During the discussion,
the emphasis laid on the point was that goods become
very costly by the time they reach the consumers after
getting transported from the producers. Consequently,
everyone’s budget is getting disturbed.
To get rid of this problem some people suggested that
they should join together to form a society. The society
would sell the goods to all the members as per their
requirements after buying them in a large quantity directly
from the producers. This suggestion was appreciated by all of
them. They all became members of the society and
encouraged other people also to become its members. In no
time, 100 members assembled and the society was formed.
The idea of forming the society immediately proved to be
successful. Now their budget became balanced. A special
characteristic of this society was that apart from its
members it also sold goods to the other people of the
society at cheaper rates.All of them were very happy wi
(a)Identify and explain the type of the society formed by
them.
(b)Under what Act, the society must have been formed?
(c)What is the liability of the members of the society so
formed?
(d)Explain any two merits of the society so formed.
(6 marks)

Answer 3
(a) Consumers’ Cooperative Society
Its purpose is to protect the interests of consumers.
Consumers desirous of obtaining good quality
products at reasonable prices become its members. It
purchases goods in bulk directly from the wholesalers
and sells goods to the members.
(b) The Cooperative Societies Act, 1912
(c) Limited Liability
The liability of the members of a cooperative society is limited
to the extent of the amount contributed by them as capital.

The personal assets of the members are safe from being
used to repay business debts.
MERITS OF COOPERATIVE SOCIETY
(i) Ease of formation: Any ten adult persons can form a
cooperative society. The registration procedure is
simple involving a few legal formalities.
(ii) Stable existence: It is a separate legal entity distinct
from its members. Death, bankruptcy or insanity of
the members do not affect its continuity.

(iii) Support from government: Government gives all
kind of support to cooperative societies in the
form of relief in taxation, subsidies and low
interest rates on loans. (any two)

Question 4
Shonali Sharma, after completing her MBA, began to help
her father, Mr. Shiv Sharma, in his business. The business
had a limited capital investment. Shonali wanted to use
the modern business techniques in every area of
business, namely, purchase, sales, production, finance, etc.
In fact, she wanted to implement the methods, which
she had learnt in her MBA course, in her father’s
business. As soon as she started adopting the latest
techniques, the workers began to protest and resist the
changes. So she became disappointed and left her
father’s business. She started working in an MNC. Mr.
Shiv Sharma was unable to assume the responsibility of
all managerial tasks such as purchasing, selling, financing,
etc. Good workers started leaving the organisation. The
goodwill of the business in the market went on declining.
In no time, the liabilities of the business became many
times more than the assets. On account of the pressure
exerted on him by the creditors, Mr. Shiv Sharma had to
repay the debts of the business by disposing off his
personal properties.
(a) Identify the form of business organisation discussed
in the above para.
(b) Quoting the relevant lines from the para explain
any three limitations of the form of business
organisation identified in (a). (4 marks)

Answer 4
(a) Sole proprietorship
(b) LIMITATIONS OF SOLE PROPRIETORSHIP
(i) Limited resources
“The business had a limited capital investment.”
Resources of a sole proprietor are limited to his/her
personal savings and borrowings from others. Banks and
other lending institutions may hesitate to extend a long-
term loan to a sole proprietor.
(ii) Limited managerial ability
“Mr. Shiv Sharma was unable to assume the responsibility
of all managerial tasks such as purchasing, selling,
financing, etc. Good workers started leaving the
organisation.”
The owner has to assume the responsibility of all
managerial tasks such as purchasing, selling, financing,
etc. Due to limited resources, he may not be able to
employ talented employees.
(iii) Unlimited liability
“ Mr. Shiv Sharma had to the debts of the business
by disposing off his personal properties.”

Sole proprietors have unlimited liability. In the case
of business losses, if the business assets are not
sufficient to meet all business liabilities, the
proprietor may have to sell his personal property
to pay off the liabilities.

Question 5
Rajeev Lochan Das is the only owner of a shirt
manufacturing factory. He took a loan of ` 20 lakh from
a finance company for expansion of his business. In the
beginning his business was running well but later on he
started incurring losses and due to continuous losses he
was not able to repay the loan. After receiving many
reminders from the finance company, Rajeev planned to
close the business. He sold all his machines and other
asset He requested the finance company to settle the
accounts at ` 15 lakh. But the finance company refused,
and on his failure to pay the total debt, it filed a case
against him in the court.s and realised ` 15 lakh. Rajeev
gave an argument in the court that he had sold all his
business assets, and the loan was taken by him for
business, not for his personal use. So the finance
company must settle the account at ` 15 lakh. The court
did not agree with the argument of Rajeev and gave the
decision in favour of the finance company. He was
ordered to pay full amount of loan by selling off his
personal assets.
(a) Identify the form of business carried on by Rajeev
Lochan Das.
(b) State the feature of the form of business identified
in (a) which is considered by the court while giving
the judgement.
(c) State why Rajeev’s argument was not correct.
(3 marks)

Answer 5
(a) Sole Proprietorship
(b) Unlimited Liability
Sole proprietors have unlimited liability. In the case of
business losses, if the business assets are not sufficient
to meet all business liabilities, the proprietor may have
to sell his personal property to pay off the liabilities.
(c) Rajeev’s argument was not correct because a sole
proprietor does not enjoy separate legal entity.

Partnership – Concept,
Merits and Limitations
Concept of Partnership
As the business expands, one needs more capital and
larger number of people to manage the business and
share its risks. In such a situation, people usually adopt
the partnership form of organisation.
When two or more persons join hands to set up a
business and share its profits and losses, they are
said to be in partnership.
Persons who have entered into partnership with one
another are individually called ‘partners’ and
collectively called ‘firm’.
The name under which the business is carried is called
the 'firm's name'.
 “Partnership is the relation between persons who have agreed
to share the profits of a business carried on by all or any of
them acting for all.”
—Section 4 of the Indian Partnership Act, 1932
 “Partnership is the relation which subsists between persons
who have agreed to combine their property, labour or skill in
some business and to share the profits therefrom between
them.”
—The Indian Contract Act, 1872
Partnership is the relation between persons competent to make
contract, who agree to carry on a lawful business in common
with a view to private gain.” —L.H. Haney
 Note
A partnership firm has no separate legal entity, apart from the
partners constituting it.
Features of Partnership
has to sell his/her personal property to repay the firm’s
debts.
1. Formation
The partnership form of business organisation is governed
by the Indian Partnership Act, 1932.
 Partnership is the result of an agreement between two
or more persons to do business and share its profits and
losses. The agreement becomes the basis of relationship
between the partners. It is not necessary that such
agreement is in written form. An oral agreement is
equally valid. But in order to avoid disputes, it is
preferred that the partners have a written agreement.
The agreement should be to carry on some business. Mere co-
ownership of a property does not amount to partnership.
For example, if Harshit and Chirag jointly purchase a
plot of land, they become the joint owners of the
property and not the partners. But if they are in the
business of purchase and sale of land for the purpose
of making profit, they will be called partners.
 The agreement between partners must be to share
profits and losses of a business. If some persons join
hands for the purpose of some charitable activity, it
will not be termed as partnership.
2. Number of Partners
The minimum number of partners needed to start a
partnership firm is two.
According to section 464 of the Companies Act 2013,
maximum number of partners in a partnership firm
can be 100, subject to the number prescribed by the
government. As per Rule 10 of The Companies
(miscelleneous) Rules 2014, at present the maximum
number of members can be 50.
3. Liability
The partners of a firm have unlimited liability. Personal
assets may be used for repaying debts in case the
business assets are insufficient to pay business debts.
Further, the partners are jointly and individually liable
for payment of firm’s debts. Jointly, all the partners are
responsible for the debts and they contribute in their
profit sharing ratio. Individually, each partner can be
held responsible to repay the debts of the business.
However, such a partner can later recover the balance
amount from other partner(s).
For example, A and B are partners of a firm sharing profits
and losses equally. The assets of the firm amount to
`1,00,000 but the firm’s debts are ` 1,50,000.
Here, A and B are liable to bring ` 25,000 each from
their personal property to pay the firm’s debts. But if
suppose B is insolvent and cannot bring any amount,
then A alone will be liable to pay firm’s debt of ` 50,000
because of his unlimited liability.
4. Risk bearing
The partners bear the risks involved in running a
business as a team. The reward comes in the form of
profits which are shared by the partners in an agreed
ratio.
However, they also share losses in the same ratio in the
event of the firm incurring losses.
5. Decision making and control
The partners share amongst themselves the responsibility
of decision making and control of day to day activities.
Decisions are generally taken with mutual consent.
Thus, the activities of a partnership firm are managed
through the joint efforts of all the partners.
6. Continuity
Partnership is characterised by lack of continuity of
business since the death, retirement, insolvency or
insanity of any partner can bring an end to the
business.
However, the remaining partners may, if they so desire,
continue the business on the basis of a new agreement.
7. Mutual agency
The business of a partnership concern may be carried
on by all the partners or any of them acting for all. This
statement has two important implications:
 First, every partner is entitled to participate in the
conduct of the affairs of its business.
 Second, that there exists a relationship of mutual
agency between all the partners. Each partner
carrying on the business is the principal as well as
the agent for all the other partners. He can bind
other partners by his acts and also is bound by the
acts of other partners with regard to business of the
firm.
Relationship of mutual agency is so important
that one can say that there would be no
partnership, if the element of mutual agency is
absent.
Merits and Limitations of Partnership
Types of Partnership and
Partners
Classification on the basis of duration
Partnership at will Particular partnership
Meaning Partnership formed at the will of Partnership formed for the
the partners is called 'partnership accomplishment of a particular
at will'. project say construction of a
building or an activity to be carried
on for a specified time period is
called 'particular partnership'.
Duration It can continue as long as the It dissolves automatically when the
partners want and is terminated purpose for which it was formed is
when any partner gives a notice of fulfilled or when the time duration
withdrawal from partnership to expires.
the firm.
Classification on the basis of liability
General Partnership Limited Partnership
Liability In general partnership, the In limited partnership, the
liability of partners is liability of at least one partner is
unlimited and joint. unlimited whereas the rest may
have limited liability.
Participation in The partners enjoy the right to The limited partners do not
Management participate in the management enjoy the right of management
of the firm and their acts are and their acts do not bind the
binding on each other as well firm or the other partners.
as on the firm.
Registration Registration of the firm is Registration of such partnership
optional. is compulsory.
Existence The existence of the firm is Such a partnership does not get
affected by the death, lunacy, terminated with the death,
insolvency or retirement of the lunacy or insolvency of the
partners. limited partners.
Limited Partnership was not permitted in India earlier. The permission to form
partnership firms with limited liability has been granted after introduction of
New Small Enterprise Policy in 1991. The idea behind such a move has been to
enable the partnership firms to attract equity capital from friends and relatives of
small scale entrepreneurs who were earlier reluctant to help, due to the
existence of unlimited liability clause in the partnership form of business.
Types of Partners
 Top Tip
An example of a partner by estoppel
Suppose Abhishek is a friend of Naveen who is a partner in a
software firm — Simplex Solutions. On Naveen’s request,
Abhishek accompanies him to a business meeting with Amit
Softwares and actively participates in the negotiation process
for a business deal and gives the impression that he is also a
partner in Simplex Solutions. If credit is extended to Simplex
Solutions on the basis of these negotiations, Abhishek would
also be liable for repayment of such debt, as if he is a partner
of the firm.
Such partners are held liable for the debts of the firm because
in the eyes of the third party they are considered partners,
even though they do not contribute capital or take part in its
management.
Minor as a Partner
Partnership is based on legal contract between two persons who agree to share
the profits or losses of a business carried on by them. As such a minor is
incompetent to enter into a valid contract with others, he cannot become a
partner in any firm. However, a minor can be admitted to the benefits of a
partnership firm with the mutual consent of all other partners. In such cases, his
liability will be limited to the extent of the capital contributed by him and in the
firm. He will not be eligible to take an active part in the management of the
firm. Thus, a minor can share only the profits and can not be asked to bear the
losses. However, he can if he wishes, inspect the accounts of the firm.
The status of a minor changes when he attains majority. In fact, on attaining
majority, the minor has to decide whether he would like to become a partner in
the firm. He has to give a public notice of his decision within six months of
attaining majority. If he fails to do so, within the stipulated time, he will be
treated as a full-fledged partner and will become liable to the debts of the firm to
an unlimited extent, in the same way as other active partners are.
Registration of a Partnership Firm
Registration of a partnership firm means the entering of
the firm's name, along with the relevant prescribed
particulars, in the Register of firms kept with the Registrar
of Firms.
 It provides conclusive proof of the existence of a partnership
firm.
 It is optional for a partnership firm to get registered.
However, in case a firm does not get registered, it is deprived
of many benefits.
Consequences of non-registration of a firm
1. A partner of an unregistered firm cannot file a suit against
the firm or other partners,
2. The firm cannot file a suit against third parties, and
3. The firm cannot file a case against the partners.
In view of these consequences, it is therefore advisable to get
the firm registered.
Extra Shots
Procedure for Registration of a Partnership Firm
According to the Indian Partnership Act 1932, the partners may get the
firm registered with the Registrar of firms of the state in which the firm is
situated. The registration can be at the time of formation or at any time
during its existence.
The procedure for getting a firm registered is as follows:
1.Submission of application: Submission of application in the prescribed
form to the Registrar of firms. The application should contain the
following particulars:
• Name of the firm
• Location of the firm
• Names of other places where the firm carries on business
• The date when each partner joined the firm
• Names and addresses of the partners
• Duration of partnership
This application should be signed by all the partners.
Partnership Deed
A partnership is a voluntary association of people who come together for
achieving common objectives. In order to enter into partnership, a clear
agreement with respect to the terms, conditions and all aspects concerning the
partners is essential so that there is no misunderstanding later among the
partners.
Such an agreement can be oral or written. Even though it is not essential to have
a written agreement, it is advisable to have a written agreement as it constitutes
an evidence of the conditions agreed upon.
The written agreement which specifies the terms and conditions that govern the
partnership is called the partnership deed.
Clauses/Contents of Partnership Deed
The partnership deed generally includes the following aspects:
• Name of firm
• Nature of business and location of business
• Duration of business
• Capital contribution made by each partner
• Profits and losses sharing ratio between the partners
• Duties and obligations of the partners
• Salaries and withdrawals of the partners
• Terms governing admission, retirement and expulsion of a partner
• Interest on capital and interest on drawings
• Procedure for dissolution of the firm
• Preparation of accounts and their auditing
• Method of solving disputes
Question 1
Match the Columns:
(i) A person who lends his name and goodwill for the (A) Particular partnership
benefits of a partnership firm.
(ii)A person who contributes capital but does not take (B) Partnership deed
part in the business of the firm.
(iii)A document containing terms and conditions of (C) Sleeping partner
partnership.
(iv)A partnership set up for a specific project. (D) Nominal partner

Answer 1
(i) – (D), (ii) – (C), (iii) – (B), (iv) – (A)

Question 2
A partner whose association with the firm is unknown
to the general public is called
(a) Active partner
(b) Sleeping partner
(c) Nominal partner
(d) Secret partner

Answer 2
(d) Secret partner

Question 3
It is compulsory to get a partnership firm registered.

Answer 3
False: Registration of a partnership firm is optional.
However, an unregistered firm suffers from many
disabilities, e.g., it cannot file a suit against any third
party or any partner.

Question 4
The liability of a partner in a partnership firm is limited
to the extent of his share. True/False? Give reason.

Answer 4
False: A partner has unlimited liability. He may have to
sell his personal assets to pay firm’s debts.

Question 5
An unregistered firm can not be sued by a third party.

Answer 5
False: Non-registration of a partnership firm does not
affect the right of third parties to file a suit against
the firm for their claims.

Question 6
Every partner is both principal and agent of the other
partners. True/False? Give reason.

Answer 6
True: An agreement made by one partner is binding
on other partners if it is made in the name of the
firm and is related to the business of the
partnership firm.

Question 7
If two dacoits sign an agreement to operate together
and share the loot, it is a partnership.

Answer 7
False: The partnership comes into an agreement
among partners to carry on some lawful
business with profit motive.

Question 8
A nominal partner is a partner in name only—he incurs no
liabilities. True/False? Give reason.

Answer 8
False: A nominal partner also has unlimited liability to the
third parties for the repayment of firm’s debts.

Question 9
What is the maximum number of partners in a
partnership firm?

Answer 9
Rule 10 of the Companies (Miscellaneous) Rules 2014
provides the maximum limit as 50 partners.

Question 10
Name the form of business organisation in which the
members are jointly and individually liable for payment
of the firm's debts.

Answer 10
Partnership

Question 11
Name the basic document prepared in partnership firm.

Answer 11
Partnership deed

Question 12
State the law governing the partnership in India.

Answer 12
The Indian Partnership Act, 1932.

Question 13
Why is a written agreement of partnership preferred?

Answer 13
To avoid any dispute among the partners which may
arise in future.

Question 14
What is meant by mutual agency in a partnership?

Answer 14
Mutual agency in a partnership means that every
partner is both an agent and a principal of other
partners for the purpose of carrying on the business.

Question 15
Name the type of partner who contributes capital and
shares profits/losses but does not take part in the day-
to-day management of the firm.

Answer 15
Sleeping or dormant partner.

Question 16
Name the type of partner who is not really a partner but is
liable to third parties for the repayment of the firm's debts.

Answer 16
Nominal partner

Question 17
Name the partner whose association with the firm is
not known to the general public.

Answer 17
Secret partner

Question 18
Name the form of business organisation which can be
formed by an oral agreement between the members.

Answer 18
Partnership

Question 19
In which form of organisation is a trade agreement
made by one owner binding on the others?

Answer 19
Partnership.

Question 20
What is the liability of partners?

Answer 20
Unlimited, i.e., they may have to sell their personal
assets to pay firm’s debts.

Question 21
Name the form of business organisation in which
members are agents and principals of each other.

Answer 21
Partnership

Question 22
Name the type of partnership which is formed to
accomplish a specific project for a specified time period.

Answer 22
Particular partnership

Question 23
Name the partner who does not have interest in the
partnership business but lends his name to the firm.

Answer 23
Nominal partner

Question 24
“In spite of not being a partner, he becomes liable to
third parties for the repayment of the firm’s debts.” By
what name such a person is known?

Answer 24
Nominal partner

Question 25
“Arora Brothers is a firm formed for the construction
of a shopping mall.” Identify this type of partnership.

Answer 25
Particular partnership

Question 1
The business assets of an organisation amount to `
50,000 but the debts that remain unpaid are ` 80,000.
What course of action can the creditors take if:
(a) the organisation is a sole proprietorship firm
(b) the organisation is a partnership firm with Anthony
and Akbar as partners, who share profits and losses
equally. Which of the two partners can the creditors
approach for repayment of debt? Explain giving
reasons. (4 marks)
Answer 1
Business assets = `50,000; Liabilities = ` 80,000
Therefore, Creditor’s claim = ` 30,000
(a) If the organisation is a sole proprietorship firm, the
creditors can sue the sole proprietor for ` 30,000,
because a sole proprietor has unlimited liability. In
the case of business losses, if the business assets
are not sufficient to meet all business liabilities, the
proprietor may have to sell his personal property
to pay off the liabilities.
(b) If the organisation is a partnership firm with
Anthony and Akbar as partners, the creditors can
sue both the partners or a single partner for their
claims. The reason is that partners have unlimited
liability.They are jointly and individually liable for
payment of firm’s debts. Jointly, all the partners are
responsible for the payment of the firm’s debts in their
profit sharing ratio. So, Anthony and Akbar will have to
pay ` 15,000 each. Individually, a single partner (suppose
Anthony) can be held responsible to repay the debts of
the business ` 30,000, if Akbar becomes insolvent and
cannot bring anything from his private assets.

Question 2
The two friends, Soniya and Raman started a business by
the name of ‘Soniyo Fancy Dress Shoppy’. Both of them
invested equal capital in the business. At the start of the
business, Soniya had placed one condition before Raman
that if unfortunately they suffered a heavy loss in their
business, she would not be able to give anything except the
capital invested in the business. Raman had accepted this
condition on the terms and condition that Soniya would not
enjoy the right to participate in the management of the
firm. Their business was gradually growing well and they
were fully satisfied with their business.
(a) To what form of business organisation is concerned
the above para?
(b) Identify and explain the type of the form of
organisation identified in (a). (3 marks)

Answer 2
(a) Partnership
(b) Limited Partnership
• In limited partnership, the liability of at least one
partner is unlimited whereas the rest may have limited
liability.
• The limited partners do not enjoy the right of
management and their acts do not bind the firm or the
other partners.

Question 3
Dhruv, Sarthak and Dheeraj are three partners in a firm.
The name of the firm is ‘Friends Pustak Bhandar’. The
latest books of almost all subjects remain available at the
Pustak Bhandar. All the three partners decided that 10%
of the total profit of the firm would be distributed
among the poor children every year. This has a very
positive effect on the goodwill of the firm. Dheeraj is a
renowned businessman who allowed the use of his name
by the firm but does not c ontribute capital. Sarthak had
contributed capital to the firm but does not participate in
the management of the firm. Dhruv actively participates in
the management and does business on behalf of other
partners.
Explain what types of partners Dhruv, Sarthak and
Dheeraj are in ‘Friends Pustak Bhandar’. (6 marks)

Answer 3
(i) Dhruv is an active partner.An active partner is one
who contributes capital to the firm and takes actual
part in carrying out business of the firm on behalf of
other partners. He shares profits and losses of the
business. He has unlimited liability to the third parties
for the repayments of the firm’s debts.
(ii) Sarthak is a sleeping partner.A sleeping partner
contributes capital to the firm but does not
participate in the management of the firm. He shares
profits and losses of the business. He has unlimited
liability.
(iii) Dheeraj is a nominal partner. A nominal partner is one
who allows the use of his name by a firm, but does
not contribute capital. He does not take part in
management of the firm. He generally does not share
profit or losses. He has unlimited liability.

Question 4
Mr. Mukul Gupta contracted with a firm. According to
the contract, he has advanced a loan of ` 20 lakh to the
firm and in exchange he got the power to take a few
decisions regarding the firm’s business. Besides, he got
9% interest on the loan and 12% of profits earned by the
firm.
Is Mr. Mukul Gupta a partner of the firm? Give reasons
in support of your answer. (4 marks)

Answer 4
No, Mr. Mukul Gupta cannot be regarded as a partner of the
firm because on the basis of the contract he has been given
power to take a few decisions only, whereas to become a
partner of the firm, the following additional conditions have
to be fulfilled:
(i)Unlimited liability: The partners of a firm have unlimited
liability. Personal assets may be used for repaying debts.
(ii)Risk bearing: The partners bear the risks involved in
running the business. The reward comes in the form of
profits which are shared by them in an agreed ratio.

Mutual agency: The partnership business can be carried
on by all partners or any one of them acting for all. In
other words, every partner is both an agent and a
principal of other partners.

Company – Concept, Merits
And Limitations
A company is an association of persons formed for
carrying out business activities and has a legal
status independent of its members. A company
can be described as an artificial person having a
separate legal entity, perpetual succession and a
common seal.
The company form of organisation is governed by
The Companies Act, 2013.
As per section 2(20) of the Companies Act, 2013, a
company means company incorporated under this Act
or any other previous company law.
 Top Tip
Previous Company law means any of the laws specified below:
1. Act relating to companies in force before the Indian companies
Act, 1866 (10 of 1866).
2. The Indian companies Act, 1866 (10 of 1866).
5. The Registration of Transferred Companies Ordinance, 1942
(ordinance 42 of 1942).
6. The Companies Act, 1956.
The shareholders are the owners of the company while
the Board of Directors is the chief managing body
elected by the shareholders.
Usually, the owners exercise an indirect control over
the business.
The capital of the company is divided into smaller
parts called 'shares' which can be transferred freely
from one shareholder to another person (except in a
private company).
Features
1. Separate legal entity
From the day of its incorporation, a company acquires
an identity, distinct from its members. Its assets and
liabilities are separate from those of its owners. The law
does not recognise the business and owners to be one
and the same.
2. Artificial person
A company is a creation of law and exists independent
of its members. Like natural persons, a company can
own property, incur debts, borrow money, enter into
contracts, sue and be sued but unlike them it cannot
breathe, eat, run, talk and so on. It is, therefore, called
an artificial person.
3. Formation
The formation of a company is a time consuming,
expensive and complicated process. It involves the
preparation of several documents and compliance with
several legal requirements before it can start
functioning.
Incorporation of companies is compulsory under The
Companies Act 2013 or any of the previous company
law, as state earlier. Such companies which are
incorporated under companies Act 1956 or any
company law shall be included in the list of companies.
4. Perpetual succession
A company being a creation of the law, can be brought
to an end only by law. It will only cease to exist when a
specific procedure for its closure, called winding up, is
completed. Members may come and members may go,
but the company continues to exist. Thus, where all the
members of a private company sitting in a general
meeting were killed by a bomb but the company
survived.
5. Control
The management and control of the affairs of the
company is undertaken by the Board of Directors,
which appoints the top management officials for
running the business. The shareholders do not have
the right to be involved in the day-to-day running of
the business.
6. Liability
The liability of the members is limited to the extent of
the capital contributed by them in a company. The
creditors can use only the assets of the company to
settle their claims since it is the company and not the
members that owes the debt. The members can be
asked to contribute to the loss only to the extent of the
unpaid amount of share held by them.
Suppose Istuti is a shareholder in a company holding
2,000 shares of `10 each on which she has already paid
`7 per share. Her liability in the event of losses or
company’s failure to pay debts can be only up to `
6,000—the unpaid amount of her share capital (`3 per
share on 2,000 shares held in the company). Beyond
this, she is not liable to pay anything towards the debts
or losses of the company.
7. Common seal
A company may or may not have a common seal. If a
company has a common seal, it must be affixed to the
documents such as agreements of a company. If a
company does not have a common seal then the person
signing the document should be authorised by a
board’s resolutions.
8. Risk bearing
The risk of losses in a company is borne by all the share
holders. This is unlike the case of sole proprietorship or
partnership firm where one or few persons respectively
bear the losses. In the face of financial difficulties, all
shareholders in a company have to contribute to the
debts to the extent of their shares in the company’s
capital. The risk of loss thus gets spread over a large
number of shareholders.
Merits and Limitations of Company
Form of Organisation
Extra Shots
Indian Companies in League of FORTUNE GLOBAL
Organisations
Types of Companies
Private Company
A private company means a company which:
(a) restricts the right of members to transfer its shares;
(b) has a minimum of 2 and a maximum of 200 members,
excluding the present and past employees;
(c) does not invite public to subscribe to its securities.
 Note
1. It is necessary for a private company to use the word
private limited after its name.
2. If a private company contravenes any of the aforesaid
provisions, it ceases to be a private company and loses
all the exemptions and privileges to which it is entitled.
Minimum Subscription
The minimum amount that, in the opinion of directors, must be raised to meet
the needs of business operations of the company. ‘Minimum subscription’ of
capital cannot be less than 90% of the issued amount according to Securities and
Exchange Board of India (SEBI) Guidelines.
4. A private company needs to have only two directors

as against the minimum of three directors in the
case of a public company. However, the maximum
number of directors for both types of companies
is fifteen.
5. A private company is not required to keep an
index of members while the same is necessary in
the case of a public company.
Public Company
A public company means a company which is not a
private company. As per the Companies Act, 2013 a public
company is one which:
(a) has a minimum of 7 members and no limit on
maximum members;
(b) has no restriction on transfer securities; and
(c) is not prohibited from inviting the public to
subscribe to its securities.
 Top Tip
A private company which is a subsidiary of a public company is
also treated as a public company.
Difference between a Private Company and
Public Company
Basis Public company Private company
Members Minimum - 7 Maximum - Minimum - 2
unlimited Maximum - 200
Minimum number of Three Two
directors
Index of members Compulsory Not compulsory
Transfer of shares No restriction Restriction on transfer
Invitation to public to Can invite the public to Cannot invite the public
subscribe to shares subscribe to its shares or to subscribe to its
debentures securities
The risk of loss thus gets spread over a large number of

shareholders.
One Person Company
With the implementation of The Companies Act, 2013,
a single person could constitute a company, under the
One Person Company (OPC) concept. The introduction of
OPC in the legal system is a move that would encourage
corporatisation of micro businesses and entrepreneurship.
One Person Company (OPC) is a company with
only one person as a member. That one person will
be the shareholder of the company. It avails all the
benefits of a private limited company such as
separate legal entity, protecting personal assets
from business liability and perpetual succession.
In India, in the year 2005, the JJ Irani Expert Committee recommended the
formation of OPC. It had suggested that such an entity may be provided with a
simpler legal regime through exemptions so that the small entrepreneur is not
compelled to devote considerable time, energy and resources on complex legal
compliance.
4. A private company needs to have only two directors

as against the minimum of three directors in the
case of a public company. However, the maximum
number of directors for both types of companies
is fifteen.
5. A private company is not required to keep an
index of members while the same is necessary in
the case of a public company.
Characteristics
1. Only a natural person who is an Indian citizen and
resident in India:
(i) Shall be eligible to incorporate a One Person
Company;
(ii) Shall be a nominee for the sole member of a One
Person Company.
 Note
For the purposes of this rule, the term “resident in India”
means a person who has stayed in India for a period of not
less than one hundred and eighty two days during the
immediately preceding one calendar year.
2. No person shall be eligible to incorporate more

than a One Person Company or become nominee
in more than one such company.
3. Where a natural person, being member in One
Person Company in accordance with this rule
becomes a member in another such Company by
virtue of his being a nominee in that One Person
Company, shall meet the eligibility criteria specified in
sub rule (2) within a period of one hundred and eighty
days.
4. No minor shall become member or nominee of the
One Person Company or can hold share with beneficial
interest.
5. Such Company cannot be incorporated or converted
into a company under section 8 of the Act.
6. Such Company cannot carry out Non-Banking Financial
Investment activities including investment in securities
of anybody corporates.
7. No such company can convert voluntarily into any
kind of company unless two years have expired from
the date of incorporation of One Person Company,
except threshold limit such person (paid up share
capital) is increased beyond `50 lakh or its average
annual turnover during the relevant period exceeds `2
crore.
Formation of A Company – Stages and
Important Documents
Formation of a company means bringing a company
into existence and starting its business. It involves
completion of a lot of legal formalities and procedures.
Formation of a company is a complex activity involving
completion of legal formalities and procedures. To fully
understand the process one can divide the formalities
into three distinct stages, which are:
I. Promotion;
II. Incorporation and
III. Subscription of capital.
 Note
Private company as against the public limited company is
prohibited to raise funds from public, it does not need to
issue a prospectus and complete the formality of minimum
subscription.
Company, except threshold limit such person(paid up

share capital) is increased beyond `50 lakh or its
average annual turnover during the relevant period
exceeds `2 crore.
Promotion is the first stage in the formation of a company.
It involves conceiving a business idea and taking
an initiative to form a company so that practical
shape can be given to exploiting the available
business opportunity.
Thus, it begins with somebody having discovered a
potential business idea. Any person or a group of
persons or even a company may have discovered an
opportunity. If such a person or a group of persons
or a company proceeds to form a company, then,
they are said to be the promoters of the company.
A promoter is said to be the one who undertakes to
form a company with reference to a given project and
to set it going and who takes the necessary steps to
accomplish that purpose. Thus, apart from conceiving
a business opportunity the promoters analyse its
prospects and bring together the men, materials,
machinery, managerial abilities and financial resources
and set the organisation going.
After thoroughly examining the feasibility of the idea,
the promoters assemble resources, prepare necessary
documents, give a name and perform various other
activities to get a company registered and obtain the
necessary certificate enabling the company to
commence business. Thus, the promoters perform
various functions to bring a company into existence.
Functions of a Promoter
1. Identification of business opportunity
The first and foremost activity of a promoter is to
identify a business opportunity. The opportunity may
be in respect of producing a new product or service or
making some product available through a different
channel or any other opportunity having an investment
potential. Such opportunity is then analysed to see its
technical and economic feasibility.
2. Feasibility studies
It may not be feasible or profitable to convert all identified
business opportunities into real projects. The promoters,
therefore, undertake detailed feasibility studies to investigate
all aspects of the business they intend to start.
Depending upon the nature of the project, the following
feasibility studies may be undertaken, with the help of
the specialists like engineers, chartered accountants etc.,
to examine whether the perceived business opportunity
can be profitably exploited.
(a) Technical feasibility: Sometimes an idea may be
good but technically not possible to execute. It may
be so because the required raw material or technology
is not easily available.
(b) Financial feasibility: Every business activity
requires funds. The promoters have to estimate the
fund requirements for the identified business
opportunity. If the required outlay for the project is
so large that it cannot easily be arranged within the
available means, the project has to be given up.
(c) Economic feasibility: Sometimes it so happens
that a project is technically viable and financially
feasible but the chance of it being profitable is
very little. In such cases as well, the idea may have
to be abondoned.
 Top Tip
Promoters usually take the help of experts to conduct these
studies. It may be noted that these experts do not become
promoters just because they are assisting the promoters in
these studies.
Only when these investigations throw up positive results, the
promoters may decide to actually launch a company.
3. Name approval
Having decided incorporate to a company, the promoters
have to select a name for it and submit an application to the
registrar of companies of the state in which the registered
office of the company is to be situated, for its approval.
The proposed name may be approved if it is not considered
undesirable. It may happen that another company exists
with the same name or a very similar name or the preferred
name is misleading, say, to suggest that the company is in a
particular business when it is not true. In such cases, the
proposed name is not accepted but some alternate name
may be approved. Therefore, three names, in order of their
priority are given in the application to the Registrar of
Companies.
4. Fixing up Signatories to theMemorandum
of Association
Promoters have to decide about the members who will
be signing the Memorandum of Association of the
proposed company.
Usually the people signing memorandum are also the
first Directors of the Company. Their written consent
to act as Directors and to take up the qualification
shares in the company is necessary.
5. Appointment of professionals
Certain professionals such as mercantile bankers,
auditors etc., are appointed by the promoters to assist
them in the preparation of necessary documents which
are required to be with the Registrar of Companies.
The names and addresses of shareholders and the
number of shares allotted to each is submitted to the
Registrar in a statement called 'return of allotment'.
6. Preparation of necessary documents
The promoter takes up steps to prepare certain legal
documents, which have to be submitted under the law,
to the Registrar of the Companies for getting the
company registered. These documents are Memorandum
of Association, Articles of Association and Consent of
Directors.
Documents Required to be Submitted
1. Memorandum of Association
Memorandum of Association is the most important
document as it defines the objectives of the company.
No company can legally undertake activities that are
not contained in its Memorandum of Association.
The Memorandum of Association contains different
clauses, which are given as follows:
(i) The name clause: This clause contains the name
of the company with which the company will be
known, which has already been approved by the
Registrar of Companies.
(ii) Registered office clause: This clause contains
the name of the state, in which the registered
office of the company is proposed to be situated.
The exact address of the registered office is not
required at this stage but the same must be
notified to the Registrar within thirty days of the
incorporation of the company.
(iii) Objects clause: This is probably the most
important clause of the memorandum. It defines
the purpose for which the company is formed. A
company is not legally entitled to undertake an
activity, which is beyond the objects stated in this
clause. The main objects for which the company
is formed are listed in this sub-clause.
An actTopwhich
Tip
is either essential or incidental for the attainment
of the main objects of the company is deemed to be valid,
although it may not have been stated explicitly.
(iv) Liability clause: This clause limits the liability of

the members to the amount unpaid on the shares
owned by them. For example, if a shareholder has
purchased 1000 shares of `10 each and has already
paid ` 6 per share, his/ her liability is limited to `
4 per share. Thus, even in the worst case, he/she
may be called upon to pay ` 4, 000 only.
(v) Capital clause: This clause specifies the
maximum capital which the company will be
authorised to raise through the issue of shares.
The authorised share capital of the proposed
company along with its division into the number
of shares having a fixed face value is specified in
this clause. For example, the authorised share
capital of the company may be `25 lakhs with
divided into 2.5 lakh shares of `10 each. The said
company cannot issue share capital in excess of
the amount mentioned in this clause.
The signatories to the Memorandum of Association
state their intention to be associated with the company
and give their undertaking to subscribe to the shares
mentioned against their names.
The Memorandum of Association must be signed by at
least 7 persons in case of a public company and by
2 persons in case of a private company.
Extra Shots
The memorandum of a company shall be in respective forms
specified in Tables A, B, C, D and E in Schedule I as may be
applicable to such company.
Respective forms for Memorandum of Association
Table A MOA of a company limited by shares
Table B MOA of a company limited by guarantee and not having share
capital
Table C MOA of a company limited by guarantee and not having share
capital
Table D MOA of an unlimited company and not having share capital
Table E MOA of an unlimited company and having share capital
A copy of a Memorandum of Association is given below:
Extra Shots
Extra Shots
2. Articles of Association
Articles of Association are the rules regarding internal
management of a company. These rules are subsidiary
to the Memorandum of Association and hence, should
not contradict or exceed anything stated in the
Memorandum of Association.
Extra Shots
The Articles generally contains the following matters:
• Number and value of shares • Allotment of shares
• Calls on shares • Buy back of shares
• Transfer and transmission of shares
• Forfeiture of shares • Alteration of capital
• Conversion of shares into stock • Dematerialization
• Voting rights and proxies • General meetings
• Meetings and rules regarding committees
• Directors, their appointment and delegations of powers
• Issue of Debentures and stocks • Audit committee
• Managing director, Whole-time director, Manager, Secretary
• Additional directors • Remuneration of directors
• Directors meetings • Borrowing powers
• Dividends and reserves • Accounts and audit
• Winding up • Indemnity
The articles of a company shall be in respective forms as specified
Extra
in TableShots
F, G, H, I and J in schedule I as may be applicable to such
company.
Respective forms for Articles of a Company
Table F AOA of a company limited by shares
Table G AOA of a company limited by guarantee and having share
capital
Table H AOA of a company limited by guarantee and not having share
capital
Table I AOA of an unlimited company and having share capital
Table J AOA of an unlimited company and not having share capital
However, the companies are free to make their own articles of

association which may be contrary to the clauses of Table F, G, H,
I, J and in that case articles of association as adopted by the
company shall apply.
Difference between Memorandum of Association
and Articles of Association
Basis of Difference Memorandum of Articles of Association
Association
Objectives Memorandum of Articles of Association are rules of
Association defines the internal management of the
objects for which the company. They indicate how the
company is formed. objectives of the company are to
be achieved.
Position This is the main document This is a subsidiary document and
of the company and is is subordinate to both the
subordinate to the Companies Memorandum of Association and
Act. the Companies Act.
Relationship Memorandum of Articles define the relationship
Association defines the of the members and the
relationship of the company company.
with outsiders.
Validity Acts beyond the Memorandum of Acts which are beyond Articles can
Association are invalid and cannot be be ratified by the members, provided
ratified even by a unanimous vote of they do not violate the
the members. Memorandum.
Necessity Every company has to file a It is not compulsory for a public ltd.
Memorandum of Association. company to file Articles of
Association. It may adopt Table F of
The Companies Act, 2013
3. Consent of Proposed Directors

A part from the Memorandum and Articles of
Association, a written consent of each person named as
a director is required confirming that they agree to act
in that capacity and undertake to buy and pay for
qualification shares, as mentioned in the Articles of
Association.
 Note
Qualification Shares
To ensure that the directors have some stake in the proposed
company, the Articles usually have a provision requiring them
to buy a certain number of shares. They have to pay for these
shares before the company obtains Certificate of Commencement
of Business. These are called Qualification Shares.
4. Agreement
The agreement, if any, which the company proposes to
enter with any individual for appointment as its
Managing Director or a whole time Director or
Manager is another document which is required to be
submitted to the Registrar for getting the company
registered under the Act.
Director Identification Number (DIN)
Every Individual intending to be appointed as director of a company shall make
an application for allotment of Director Identification Number (DIN) to the
Central Government in prescribed form along with fees. The Central
Government shall allot a Director Identification Number to an application
within one month from the receipt of the application. No individual, who has
already been allotted a Director Identification
by Number, shall apply for, obtain
or possess another Director Identification Number (DIN).
5. Statutory Declaration
A declaration stating that all the legal requirements
pertaining to registration have been complied with is
to be submitted to the Registrar with the above
mentioned documents for getting the company
registered under the law. This statement can be signed by
an advocate or by a Chartered Accountant or a Cost
Accountant or a Company Secretary in practice who is
engaged in the formation of a company and by a
person named in the articles as a director or manager
or secretary of the company.
6. Receipt of Payment of fee
Along with the above-mentioned documents,
necessary fees has to be paid for the registration of the
company. The amount of such fees shall depend on the
authorised share capital of the company.
Position of Promoters
1. Promoters are neither the agents nor the trustees of
the company.
 Promoters can’t be the agents as the company is yet
to be incorporated. Therefore, they are personally
liable for all the contracts which are entered by
them, for the company before its incorporation, in
case the same are not ratified by the company later
on.
 Also promoters are not the trustees of the company.
2. Promoters of a company enjoy a fiduciary
position with the company, which they must not
misuse.
They can make a profit only if it is disclosed but must
not make any secret profits. In the event of a non-
disclosure, the company can rescind the contract and
recover the purchase price paid to the promoters. It can
also claim damages for the loss suffered due to the
non-disclosure of material information.
3. Promoters are not legally entitled to
claim the expenses incurred in the
promotion of the company.
However, the company may choose to reimburse them
for the pre-incorporation expenses. The company may
also remunerate the promoters for their efforts by
paying a lump sum amount or a commission on the
purchase price of property purchased through them or
on the shares sold. The company may also allot them
shares or debentures or give them an option to
purchase the securities at a future date.
After completing the aforesaid formalities, promoters make
an application for the incorporation of the company. The
application is to be filed with the Registrar of Companies of
the state within which they plan to establish the registered
office of the company. The application for registration must
be accompanied with the following documents:
1. The Memorandum of Association duly stamped, signed
and witnessed. In case of a public company, at least seven
members must sign it. For a private company however the
signatures of two members are sufficient. The signatories
must also give information about their address, occupation
and the number of shares subscribed by them.
2. The Articles of Association duly stamped and witnessed
as in case of the Memorandum. However, a public
company may adopt Table A, which is a model set of
Articles, given in the Companies Act. In that case, a
statement in lieu of the prospectus is submitted,
instead of Articles of Association.
3. Written consent of the proposed directors to act as
directors and an undertaking to purchase qualification
shares.
4. The agreement, if any, with the proposed Managing
Director, Manager or whole-time director.
5. A copy of the Registrar’s letter approving the name of
the company.
6. A statutory declaration affirming that all legal
requirements for registration have been complied with.
This must be duly signed.
7. A notice about the exact address of the registered
office may also be submitted along with these
documents. However, if the same is not submitted at
the time of incorporation, it can be submitted within
30 days of the receipt of the certificate of
incorporation.
8. Documentary evidence of payment of registration
fees.
The Registrar upon submission of the application along
with the required documents has to be satisfied that the
documents are in order and that all the statutory
requirements regarding the registration have been
complied with.
However, it is not his duty to carry out a thorough
investigation about the authenticity of the facts mentioned
in the documents. When the Registrar is satisfied, about
the completion of formalities for registration, a Certificate
of Incorporation is issued to the company, which signifies
the birth of the company. The certificate of incorporation
may therefore be called the birth certificate of the company.
 Note
With effect from November 1, 2000, the Registrar of
Companies allots a CIN (Corporate Identity Number) to the
Company.
Effect of the Certificate of Incorporation
A company is legally born on the date printed on the
Certificate of Incorporation. It becomes a legal entity with
perpetual succession on such date. It becomes entitled to
enter into valid contracts.
The Certificate of Incorporation is a conclusive
evidence of the regularity of the incorporation of a
company. The legal situation is that once a Certificate of
Incorporation has been issued, the company has become
a legal business entity irrespective of any flaw in its
registration. The Certificate of Incorporation is thus
conclusive evidence of the legal existence of the company.
Some interesting examples showing the impact of
the conclusiveness of the Certificate of Incorporation
are as under:
1. Documents for registration were filed on 6th January.
Certificate of Incorporation was issued on 8th January.
But the date mentioned on the Certificate was 6th
January. It was decided that the company was in
existence and the contracts signed on 6th January were
considered valid.
2. A person forged the signatures of others on the
Memorandum. The Incorporation was still considered
valid.
Thus, whatever be the deficiency in the formalities, the
Certificate of Incorporation once issued, is a conclusive
evidence of the existence of the company. Even when a
company gets registered with illegal objects, the birth of
the company cannot be questioned. The only remedy
available is to wind it up.
Because the Certificate of Incorporation is so crucial, the
Registrar has to go very carefully before issuing it.
 Note
On the issue of Certificate of Incorporation, a private company
can immediately commence its business. It can raise necessary
funds from friends, relatives or through private arrangement
and proceed to start business.
Preliminary Contracts (or pre-incorporation contracts): Contracts signed by
promoters with third parties before the incorporation of company.
During the promotion of the company, promoters enter into certain contracts
with third parties on behalf of the company. These are called preliminary
contracts or pre-incorporation contracts. These are not legally binding on the
company. A company after coming into existence may, if it so chooses, decide
to enter into fresh contracts with the same terms and conditions to honour the
contracts made by the promoters. Note that it cannot ratify a preliminary
contract. A company thus cannot be forced to honour a preliminary contract.
Promoters, however, remain personally liable to third parties for these contracts.
Provisional Contracts: Contracts signed after incorporation but before
commencement of business.
A public company can raise the required funds from the
public by means of issue of securities (shares and debentures
etc.). For doing the same, it has to issue a prospectus which is
an invitation to the public to subscribe to the capital of the
company and undergo various other formalities.
Steps for raising funds from the public
1. SEBI Approval
SEBI (Securities and Exchange Board of India) which is the
regulatory authority in our country A public company
inviting funds from the general public must make
adequate disclosure of all relevant information and must
not conceal any material information from the potential
investors. This is necessary for protecting the interest of the
investors. Prior approval from SEBI is, therefore, required
before going ahead with raising funds from public.
2. Filing of Prospectus
A copy of the prospectus or statement in lieu of prospectus is
filed with the Registrar of Companies.
A prospectus is an invitation to the public to apply for
securities (shares, debentures etc.) of the company or to
make deposits in thecompany.
 Note
Investors make up their minds about investment in a company
primarily on the basis of the information contained in this
document. Therefore, there must not be a mis-statement in
the prospectus and all material significant information must
be fully disclosed.
3. Appointment of Bankers, Brokers,
Underwriters
Raising funds from the public is a stupendous task.
 The application money is to be received by the bankers
of the company.
 The brokers try to sell the shares by distributing the
forms and encouraging the public to apply for the
shares.
 If the company is not reasonably assured of a good
public response to the issue, it may appoint
underwriters to the issue. Underwriters undertake to
buy the shares if these are not subscribed by the public.
They receive a commission for underwriting the issue.
Appointment of underwriters is not necessary.
4. Minimum Subscription
In order to prevent companies from commencing
business with inadequate resources, it has been
provided that the company must receive applications
for a certain minimum number of shares before going
ahead with the allotment
of shares. According to the Companies Act, this is
called the ‘minimum subscription’.
As per the SEBI Guidelines, the limit of 'minimum
subscription' is 90% of the size of the issue.
Thus, if applications received for the shares are for an amount
less than 90% of the issue size, the allotment cannot be made
and the application money received must be returned to the
applicants.
5. Application to Stock Exchange
An application is made to at least one stock exchange
for permission to deal in its shares or debentures.
If such permission is not granted before the expiry of
10 weeks from the date of closure of subscription list,
the allotment shall become void and all money
received from the applicants will have to be returned to
them within 8 days.
6. Allotment of Shares
Till the time shares are alloted, application money
received should remain in a separate bank account and
must not be used by the company. In case the number
of shares allotted is less than the number applied for,
or where no shares are allotted to the applicant, the
excess application money, if any, is to be returned to
applicants or adjusted towards allotment money due
from them. Allotment letters are issued to the
successful allottees.
‘Return of allotment’, signed by a director or secretary
is filed with the Registrar of Companies within 30 days
of allotment.
Comparative Evaluation of Forms of
Organisation
RECAP
Sole Proprietorship
Sole proprietorship refers to a form of business organisation
which is owned, managed and controlled by an individual,
who is the recipient of all profits and bearer of all risks.
Features
1. Ease of formation and closure
3. No separate entity
4. Sole risk bearer and profit recipient
5. Full control
6. Lack of business continuity Merits
Merits
1. Quick decision making
2. Confidentiality of information
4. Direct incentive
5. Sense of accomplishment
Limitations
1. Limited resources
2. Limited life of a business concern
4. Limited managerial ability
Hindu Undivided Family Business
It is one of the oldest forms of business organisation found
only in India. Business is owned and carried on by the members
of the Hindu Undivided Family (HUF). The business is
controlled by the head of the family, who is the eldest member
and is called ‘Karta’. He takes all the decisions to manage the
business. All members have equal ownership right over the
property and they are known as ‘Co-parceners’.
Features
1. Ease of formation
2. Liability (Karta—unlimited, Co parceners—limited)
3. Control of Karta
4. Continuity
5. Minor Members
Cooperative Society
A ‘cooperative society’ is a voluntary association of persons
for mutual benefit. Its primary motive is welfare of the
members.
Features
1. Voluntary membership
2. Legal status
4. Democratic control
5. Service motive
Merits
1. Ease of formation
2. Equality in voting status
4. Stable existence
5. Economy in operations
6. Support from government
Limitations
2. Inefficiency in management
3. Lack of secrecy
4. Differences of opinion
5. Government control
Types of Cooperative Societies
1. Consumers’ cooperative societies
2. Producers’ cooperative societies
3. Marketing cooperative societies
4. Farmers’ cooperative societies
5. Credit cooperative societies
6. Cooperative housing societies
Partnership
Partnership is the relation between persons who have agreed
to share the profits of a business carried on by all or any one
of them acting for all.
Features
1. Formation: It comes into existence with an agreement
(written or oral) among the partners.
2. Membership: Minimum—2
4. Risk bearing Maximum—50
5. Joint decision making and control
6. Mutual agency
7. Continuity
Merits
2. Balanced decision making
3. More funds
4. Sharing of risks
5. Secrecy
Limitations
3. Possibility of conflicts
4. Lack of continuity
5. Lack of public confidence
Types of Partners
1. Active Partner
2. Sleeping or Dormant Partner
3. Secret Partner
4. Nominal Partner
5. Partner by Estoppel
Types of Partnership
1. Partnership at will
2. Particular partnership
3. General Partnership
4. Limited Partnership
Registration of Partnership Firm
Registration of a partnership firm is not compulsory. It is
optional. However, a partner of an unregistered firm cannot
file a suit against the firm or any third party. Firm cannot file
a suit against any partner or a third party.
Company
A company is an association of many persons who
contribute money and employ it in some trade or business,
and who share the profit and loss arising thereof. The
persons who contribute money are its members.
Features
1. Formation – complex
2. Separate legal entity
3. Artificial person
4. Limited Liability
5. Perpetual succession
6. Control of the Board of Directors
7. Common seal
8. Risk bearing
Merits
2. Transfer of interest
3. Perpetual existence
4. Scope for expansion
5. Professional management
Limitations
1. Complexity in formation
2. Lack of secrecy
3. Impersonal work environment
4. Numerous regulations
5. Delay in decision making
6. Oligarchic management
7. Conflict in interest
Types of Companies
A private company is one which restricts transfer of shares and does
not invite the public to subscribe to its securities.
A public company, on the other hand, is allowed to raise its funds by
inviting the public to subscribe to its securities. Furthermore, there
is a free transferability of securities in the case of a public company.
One Person Company (OPC) is a company with only one person as
a member. That one person will be the shareholder of the
company. It avails all the benefits of a private limited company
such as separate legal entity, protecting personal assets from
business liability and perpetual succession.
Formation of a company
There are two stages in the formation of a private company,
promotion and incorporation. A public company has to undergo
capital subscription stage to begin operations.
1.Promotion: It begins with a potential business idea. Certain
feasibility studies e.g., technical, financial and economic, are
conducted to determinewhetherthe idea can be profitably exploited.
In case, the investigations yield favourable results, promoters may
decide to form the company. Persons who conceive the business idea,
decide to form a company, take necessary steps for the same, and
assume associated risks, are called promoters.
Steps in Promotion
(i) Approval of company’s name is taken from the Registrar
of Companies
(i) Signatories to the Memorandum of Association are fixed
(iii)Certain professionals are appropriated to assist the
promoters
(iv) Documents necessary for registration are prepared
Necessary Documents
• Memorandum of Association
• Articles of Association
• Consent of proposed directors
• Agreement, if any, with proposed managing or whole
time director
• Statutory declaration
2. Incorporation: An application is made by promoters to
the Registrar of Companies along with necessary
documents and registration fee. The Registrar, after due
scrutiny, issues certificate of incorporation. The
certificate of incorporation is a conclusive evidence of
the legal existence of the company.
3. Capital Subscription: A public company raising funds
from the public needs to take following steps for fund
raising:
(i) SEBI approval;
(ii) File a copy of prospectus with the Registrar of Companies;
(iii) Appointment of brokers, bankers and underwriters etc.;
(iv) Ensure that minimum subscription is received;
(v) Application for listing of company’s securities;
(vi) Refund/adjust excess application money received;
(vii) Issue allotment letters to successful applicants; and
(viii) File return of allotment with the Registrar of
Companies (ROC).
Key Terms
Sole proprietorship refers to a form of business organisation
which is owned, managed and controlled by an individual who is
the recipient of all profits and bearer of all risks.
Unlimited liability – This implies that the owner is personally
responsible for payment of debts in case the assets of the
business are not sufficient to meet all the debts.
Joint Hindu family business refers to a form of organisation
wherein the business is owned and carried on by the members of
the Hindu Undivided Family (HUF).
Karta – Joint Hindu family business is controlled by the head of
the family who is the eldest member and is called karta.
Co-parceners – In a Joint Hindu family business, all members have
equal ownership right over the property of an ancestor and they
are known as co-parceners.
Cooperative society is a voluntary association of persons, who
join together with the motive of welfare of the members.
Consumer's cooperative societies – The consumer cooperative
societies are formed to protect the interests of consumers.
Producer's cooperative societies – These societies are set up to
protect the interest of small producers.
Marketing cooperative societies – Such societies are established
to help small producers in selling their products.
Farmer's cooperative societies – These societies are established
to protect the interests of farmers by providing better inputs at a
reasonable cost.
Credit cooperative societies – Credit cooperative societies are
established for providing easy credit on reasonable terms to the
members.
Cooperative housing societies – Cooperative housing societies are
established to help people with limited income to construct
houses at reasonable costs.
Partnership is the relation between persons who have agreed to
share the profits of a business carried on by all or any of them
acting for all.
Mutual agency – The business of a partnership concern may be
carried on by all the partners or any of them acting for all. Every
partner is entitled to participate in the conduct of the affairs of its
business. Each partner carrying on the business is the principal as
well as the agent for all the other partners.
Partnership at will – Partnership formed at the will of the partners
is called 'partnership at will'. It can continue as long as the
partners want and is terminated when any partner gives a notice
of withdrawal from partnership to the firm.
Particular partnership – Partnership formed for the
accomplishment of a particular project say construction of a
building or an activity to be carried on for a specified time period
is called 'particular partnership'.
General Partnership – In general partnership, the liability of
partners is unlimited and joint.
Limited Partnership – In limited partnership, the liability of at
least one partner is unlimited whereas the rest may have limited
liability.
Active Partner – An active partner is one who takes actual part in
carrying out business of the firm on behalf of other partners.
Sleeping or Dormant Partner – Partners who do not take part in
the day to day activities of the business are called sleeping
partners.
Secret Partner – A secret partner is one whose association with
the firm is unknown to the general public. Contributes to the
capital of the firm.
Nominal Partner – A nominal partner is one who allows the use
of his/her name by a firm.
Partner by Estoppel – A person is considered a partner by
estoppel if, through his/her own initiative, conduct or behaviour,
he/she gives an impression to others that he/she is a partner of
the firm.
Minor as a Partner – A minor is incompetent to enter into a valid
contract with others, he cannot become a partner in any firm.
However, a minor can be admitted to the benefits of a partnership
firm with the mutual consent of all other partners.
Registration of a partnership firm means the entering of the firm's
name, along with the relevant prescribed particulars, in the
Register of firms kept with the Registrar of Firms. It provides
conclusive proof of the existence of a partnership firm.
Partnership deed – The written agreement which specifies the
terms and conditions that govern the partnership is called the
partnership deed.
Company is an association of persons formed for carrying out
business activities and has a legal status independent of its members.
A company can be described as an artificial person having a
separate legal entity, perpetual succession and a common seal.
Perpetual succession – A company being a creation of the law, can
be brought to an end only by law. It will only cease to exist when a
specific procedure for its closure, called winding up, is completed.
Members may come and members may go, but the company
continues to exist.
Private company means a company which restricts the right of
members to transfer its shares; has a minimum of 2 and a maximum of
200 members, excluding the present and past employees; and does not
invite public to subscribe to its securities.
Minimum Subscription – The minimum amount that, in the
opinion of directors, must be raised to meet the needs of business
operations of the company. ‘Minimum subscription’ of capital
cannot be less than 90% of the issued amount according to
Securities and Exchange Board of India (SEBI) Guidelines.
Public company is one which has a minimum of 7 members and
no limit on maximum members; has no restriction on transfer
securities; and is not prohibited from inviting the public to
subscribe to its securities.
One Person Company (OPC) is a company with only one person as
a member. That one person will be the shareholder of the
company. It avails all the benefits of a private limited company
such as separate legal entity, protecting personal assets from
business liability and perpetual succession.
Promotion is the first stage in the formation of a company. It
involves conceiving a business idea and taking an initiative to form
a company so that practical shape can be given to exploiting the
available business opportunity.
Promoter is said to be the one who undertakes to form a company
with reference to a given project and to set it going and who takes
the necessary steps to accomplish that purpose.
Technical feasibility – Sometimes an idea may be good but
technically not possible to execute. It may be so because the
required raw material or technology is not easily available.
Financial feasibility – Every business activity requires funds. The
promoters have to estimate the fund requirements for the
identified business opportunity. If the required outlay for the
project is so large that it cannot easily be arranged within the
available means, the project has to be given up.
Economic feasibility – Sometimes it so happens that a project is
technically viable and financially feasible but the chance of it
being profitable is very little. In such cases, the idea may have to
be abondoned.
Memorandum of Association is the most important document as it
defines the objectives of the company. No company can legally
undertake activities that are not contained in its Memorandum of
Association.
Name clause contains the name of the company with which the
company will be known, which has already been approved by the
Registrar of Companies.
Registered office clause contains the name of the state, in which the
registered office of the company is proposed to be situated.
Objects clause defines the purpose for which the company is formed.
Liability clause limits the liability of the members to the amount
unpaid on the shares owned by them.
Capital clause specifies the maximum capital which the company
will be authorised to raise through the issue of shares.
Articles of Association are the rules regarding internal
management of a company. These rules are subsidiary to the
Memorandum of Association and hence, should not contradict or
exceed anything stated in the Memorandum of Association.
Qualification Shares – To ensure that the directors have some
stake in the proposed company, the Articles usually have a
provision requiring them to buy a certain number of shares. They
have to pay for these shares before the company obtains
Certificate of Commencement of Business. These are called
Qualification Shares.
Certificate of Incorporation is issued to the company, which
signifies the birth of the company. The Certificate of Incorporation
is a conclusive evidence of the regularity of the incorporation of a
company. The legal situation is that once a Certificate of
Incorporation has been issued, the company has become a legal
business entity irrespective of any flaw in its registration.
Preliminary Contracts (or pre-incorporation contracts) –
Contracts signed by promoters with third parties before the
incorporation of company.
Provisional Contracts – Contracts signed after incorporation but
before commencement of business.
Prospectus is an invitation to the public to apply for securities
(shares, debentures etc.) of the company or to make deposits in
the company.
Statement in Lieu of Prospectus – A public company may not
invite public to subscribe to its securities (shares, debentures
etc.). Instead, it can raise the funds through friends, relatives or
some private arrangements as done by a private company. In such
cases, there is no need to issue a prospectus. A ‘Statement in Lieu
of Prospectus’ is filed with the Registrar of Companies (ROC) at
least 3 days before making the allotment.
Question 1
Match the columns:
(a) The document containing the rules, regulations and bye-laws (i) Articles of
of a company. Association
(b) The document inviting subscriptions for shares and (ii) Memorandum of
debentures. Association
(c) The amount of money which must be raised before (iii) Prospectus
allotment of shares.
(d) The principal document of a company. (iv) Minimum
subscription

Answer 1
(a) – (i), (b) – (iii), (c) – (iv), (d) – (ii)

Question 2
The structure in which there is separation of ownership
and management is called
(b) Partnership
(c) Company
(d) All business organisations

Answer 2
(c) Company

Question 3
The board of directors of a Joint stock company is
elected by (Choose the correct alternative)
(a) General public
(b) Government bodies
(c) Shareholders
(d) Employees

Answer 3
(c) Shareholders

Question 4
The capital of a company is divided into number of
parts, each one of which is called
(a) Dividend
(b) Profit
(c) Interest
(d) Share

Answer 4
(d) Share

Question 5
Maximum number of members in a private company can
be (Choose the correct alternative)
(a) 20
(b) 10
(c) 50
(d) 200

Answer 5
(d) 200

Question 6
Minimum number of members to form a public company
is (Choose the correct alternative)
(a) 5
(b) 12
(c) 7
(d) 21

Answer 6
(c) 7

Question 7
Application for approval of name of a company is to be
made to (Choose the correct alternative)
(a) SEBI
(b) Registrar of Companies
(c) Government of India
(d) Government of the State in which Company is to
be registered

Answer 7

Question 8
A proposed name of Company is considered undesirable If
(a) It is identical with the name of some other company
(b) It resembles closely with the name of an existing
company
(c) It is an emblem of Government of India, United Nations,
etc.
(d) In case of any of the above

Answer 8
(d) In case of any of the above

Question 9
A prospectus is issued by
(a) A private company
(b) A public company seeking investment from public
(c) A public enterprise
(d) A public company

Answer 9

Question 10
Stages in the formation of a public company are in the
following order (Choose the correct alternative)
(a) Promotion, Commencement of Business,
Incorporation, Capital Subscription
(b) Incorporation, Capital Subscription, Comm-
encement of Business, Promotion
(c) Promotion, Incorporation, Capital Subscription,
Commencement of Business
(d) Capital Subscription, Promotion, Incorporation,
Answer 10
(c) Promotion, Incorporation, Capital Subscription,

Question 11
A company cannot come into existence without:
(a) electing directors
(b) getting Certificate of Incorporation
(c) issuing a prospectus
(d) all of these

Answer 11
(b) getting Certificate of Incorporation

Question 12
Every company must have Articles of Association.
True /False. Give reason?

Answer 12
False : A public limited company may adopt the rules
of Table F.

Question 13
Acts against the Memorandum are ultra vires.
True /False. Give reason?

Answer 13
True: If a company does anything that is not provided
for in the Memorandum of Association, it will
be treated as ultra-vires, i.e., beyond the legal
power and authority of the company.

Question 14
A company can enter into contracts, file suits against
others, and hire persons. True/False? Give reason.

Answer 14
True: A company is created by law. It has a separate
legal status.

Question 15
If a majority of its shareholders are dead, the company
has to be wound up too. True/False? Give reason.

Answer 15
False: Being a separate legal entity, the death of even
all its members does not affect its life. It is
stable. False: Being a separate legal entity, the
death of even all its members does not affect
its life. It is stable.

Question 16
If the assets of a company are not enough to pay off its
liabilities, personal assets of its shareholders may be taken
over for the purpose. True/False? Give reason.

Answer 16
False: The liability of the members is limited to the
face value of the shares held by them.

Question 17
It is necessary to get every company incorporated,
whether private or public. True/False? Give reason.

Answer 17
True: Incorporation/registration of every company is
must with the Registrar of Companies. Every
company (public or private) must get
‘Certificate of Incorporation’ to have legal
status.

Question 18
Name the type of company in which there is restriction
on the maximum number of members. What is that
number?

Answer 18
Private company; maximum number of members can
be 200, excluding present and past employees.

Question 19
Name the type of company which cannot invite public
to subscribe to its share capital.

Answer 19
Private company.

Question 20
Why is a company called an artificial person?

Answer 20
A company is called an artificial person because it
does not possess the body of a natural being. It cannot
breathe, eat, run, talk and so on.

Question 21
What is the minimum number of directors for a private
company and a public company?

Answer 21
(i) Private company— 2
(ii) Public company— 3

Question 22
When can a private company commence its business?

Answer 22
A private company can commence its business after
incorporation.

Question 23
When can a public company commence business?

Answer 23
A public company can commence business only after
receiving ‘Certificate of Commencement of Business’.

Question 24
Mention any two documents which are filed with the
Registrar of Companies for incorporation of a company.

Answer 24
(i) Memorandum of Association
(ii) Articles of Association

Question 25
At which stage in the formation of a company does it
interact with SEBI?

Answer 25
Capital subscription stage

Question 26
Name the document by which a company becomes a
distinct legal entity.

Answer 26
Certificate of Incorporation

Question 27
Which document is called charter of the company?

Answer 27
Memorandum of Association

Question 28
Name the document which invites the general public to
subscribe to the shares and debentures of the company.

Answer 28
Prospectus

Question 29
Name the document containing the rules and bye-laws
of the company.

Answer 29
Articles of Association

Question 30
A person forged the signatures of others on the
Memorandum of Association. But the Registrar issued
the ‘Certificate of Incorporation’. Was the registration of
the company valid?

Answer 30
Yes, the registration of the company was valid since the
‘Certificate of Incorporation’ is the conclusive evidence
of the legal existence of t he company.

Question 31
Name the form of business enterprise where there is
separation of ownership and management.

Answer 31
Company form of business.

Question 32
Who manages and controls the affairs of the company?

Answer 32
Board of Directors

Question 33
Why does a company enjoy perpetual succession?

Answer 33
Because it is created by law. It has a separate legal
status. The death, insolvency or retirement of its
members does not affect the life of the company.

Question 34
What is a Certificate of Incorporation?

Answer 34
Certificate of Incorporation is like the birth certificate
of the company. It is conclusive evidence of legal status
of a company.

Question 35
Name the document which authorises a public company
to start its business.

Answer 35
Certificate of Commencement of Business.

Question 36
What is a Certificate of Incorporation?

Answer 36
Certificate of Incorporation is like the birth certificate
of the company. It is conclusive evidence of legal status
of a company.

Question 37
Name the document which authorises a public company
to start its business.

Answer 37
Certificate of Commencement of Business.

Question 38
Name the process by which the shares of a company are
allowed to be traded on a stock exchange.

Answer 38
Listing of shares

Question 1
Mr. Arjun is a sole proprietor. He has been doing the
wholesale business of tea for the last three years. The
brand name of his tea is ‘Tadka Chay’. This is a popular
brand of its region. Now Mr. Arjun has been worried
about two issues. First, his business unit is situated in an
unorganised sector and therefore, he is unable to buy
goods on credit from any trader easily. Similarly, banks and
other lending institutions hesitate to extend a long-term
loan to him. Such a treatment by the people produces the

inferiority complex in him. The second issue worrying him
is that he has unlimited liability. If unfortunately he suffers
a heavy loss in business, his business property and
personal property both will be finished. He wants to get
rid of these worries. So he contacts a business specialist,
who suggests a new form of business organisation which
will remove all his problems.
In your opinion what advice must have been given to Mr.
Arjun by the business specialist? Explain.
(3 marks)

Answer 1
The business specialist must have advised Mr. Arjun to
establish One Person Company (OPC).
The Indian Companies Act, 2013 introduces a new type of
entity to the existing list, i.e., apart from forming a public or
private limited company, the 2013 Act enables the
formation of a new entity a 'one-person company' (OPC).
An OPC means a company with only one person as its
member.
Rule 3(1) provides that only a natural person who is an
Indian citizen and resident in India shall be eligible to
incorporate OPC. No person shall be eligible to
incorporate more than one OPC or become nominee
in more than one such company.

Question 2
XYZ Ltd. took a loan of ` 50 lakh from a bank for its
growth and expansion plans. The company was unable to
repay the loan amount because of heavy losses incurred
in the business on a continuous basis. The management
of the company asked its shareholders to contribute
towards repayment of the loan. But the shareholders
refused as they had already paid the full amount due on
their shares. The bank filed a case against XYZ Ltd. in
the court. The court held that the shareholders of the
company were not liable to repay the loan as they had
not unpaid amount on shares.
(a) Is the court’s decision justified? Give reason in support
of your answer.
(b) Which characteristic of the company form of
organisation protected the shareholders? Explain.
(4 marks)

Answer 2
(a) Yes, the court’s decision is justified because the
shareholders of a company have limited liability.
The liability of the members is limited to the face value
of the shares held by them. They are not personally
liable to the debts of the company.
(b) Separate Legal Entity
A company is a legal entity distinct from its
shareholders, directors and promoters. It can carry on
business in its own name, enter into contracts, buy, sell
and hold property, sue and be sued.

Question 3
A group of seven friends decided to jointly set up a
public company in a rural area where the people were
facing a serious unemployment problem. All of them
jointly selected a place where the company’s registered
office would be situated. Along with it, with the advice of
business specialists, it was also decided what procedure
would be followed for the issue and allotment of shares.
All the friends wanted their company to have a singular
recognition, and people should get immediate attraction
towards its products. It was felt that the very name of
the company could become a reason for its recognition.
After a detailed discussion, the company’s name was
decided as Trimurti Ltd. Then, they jointly completed all
the formalities of the formation of the company.
Identify and explain the two important documents used
in the formation of the company quoting the lines from
the above para which helped you identify these
documents. (5 marks)

Answer 3
(a) Consumers’ Cooperative Society
Its purpose is to protect the interests of consumers.
Consumers desirous of obtaining good quality products
at reasonable prices become its members. It purchases
goods in bulk directly from the wholesalers and sells
goods to the members.
(b) The Cooperative Societies Act, 1912
(c) Limited Liability
The liability of the members of a cooperative society is
limited to the extent of the amount contributed by them
as capital.
(i) Memorandum of Association
“All of them jointly selected a place where the
company’s registered office would be situated.”
(Situation Clause)
“After a detailed discussion, the company’s name was
decided as Trimurti Ltd.” (Name Clause)
Memorandum of Association is the principal
document of a company. No company can be
registered without a Memorandum of Association;
and that is why it is sometimes called a ‘life-giving
document’. Memorandum of Association defines the
powers and objects of the company as well as the
scope of operations of the beyond which it cannot
operate.
(ii) Articles of Association
“...it was also decided what procedure would be
followed for the issue and allotment of shares.”
The Articles of Association are the rules for the
internal management of the affairs of a company.
The articles define the duties, rights and powers
of the officers and the board of directors.The

rules contained in the Articles of Association are
subsidiary to the Memorandum of Association.

Question 4
Yamuna Ltd. invited general public to subscribe for its
public issue of ` 10 crore (10 lakh shares of ` 100 each)
through issue of prospectus. However, the company
received applications for 8 lakh shares. Can the company
proceed with allotment of shares? Give reasons in
support of your answer. (3 marks)

Answer 4
No, Yamuna Ltd. cannot proceed with allotment of shares as
minimum subscription has not been received.
In order to prevent companies from commencing business
with inadequate resources, it is provided that a company
must receive the amount of minimum subscription in cash.
Minimum subscription is 90 per cent of the issued amount
(according to SEBI guidelines). Otherwise, the allotment
cannot be made and the application money received must
be returned to the applicants.

Question 5
A Ltd. was issued Certificate of Incorporation by the
Registrar on 10th February 2020. However, the date
mentioned on the Certificate was 1st February 2020. The
company entered into a contract for purchase of land
with B Ltd. on 5th February 2020. Now B Ltd. is not
interested to sell the land as it is getting a higher price
from another buyer. Can A Ltd. file a case against B Ltd.?
Give reasons in support of your answer. (3 marks)

Answer 5
Yes, A Ltd. can file a case against B Ltd. as the company was
in existence on 5th February 2020. Although wrong date was
entered in the certificate, still ‘Certificate of Incorporation’
is a conclusive evidence of regularity of incorporation of a
company, irrespective of any deficiency. So the contract is
valid and B Ltd. is under a legal obligation to honour the
contract.

Question 6
You are a business consultant. Mr. Madanpal has recently
retired from government service. He is 60 years old and he
wants to set up a factory to manufacture plastic goods. He
has come to consult you so that you may suggest to him the
most suitable form of business organisation. The following are
his main expectations from the business organisation:
(i) Ease in formation,
(ii) Flexibility in operations,
(iii) Sharing of profits with limited persons, and
(iv) Sufficient persons to look after various business activities.
Question 6
Which form of business organisation will you suggest to
Mr. Madanpal? Give reasons in support of your answer.
(3 marks)

Answer 6
‘Partnership’ form of organisation will suit Mr. Madanpal.
Reasons:
(i) Setting up a partnership firm is quite easier than
company organisation.
(ii) Since the number of partners is limited, operational
decisions can easily be changed.
(iii) In partnership form of organisation, sharing of profits
is with limited persons.
(iv) The availability of persons to look after the different
business activities is more than one.

Question 7
Shikha is a sole proprietor. Over the past decade, her
business has grown from operating a neighbourhood corner
shop selling accessories such as artificial jewellery, bags, hair
clips and nail polish to a retail chain with three branches in
the city. Although she looks after the varied functions in
all the branches, she is wondering whether she should form
a company to better manage the business. She also has plans
to open branches countrywide.
(a) Explain two benefits of remaining a sole proprietor.
(b) Explain two benefits of converting to a joint stock
company.
(c) What role will her decision to go nationwide play in
her choice of form of the organisation? (6 marks)

Answer 7
(a) Two benefits of remaining a sole proprietor:
(i) She is the sole recipient of all the profits.
(ii) She will have the exclusive control over her business.
All the decision can be made by herself without consulting
others.
(b) Two benefits of converting to a joint stock company:
(i) Her business can mobilise large amount of financial
resources from the public as well as through loans from
banks and financial institutions. Thus, there will be
greater scope for growth and expansion.

(c) If she takes decision to go nationwide, she will have to
operate on large scale. In such a case, company
organisation is the best choice.

Question 8
All the members of a company sitting in a general
meeting were killed by a bomb. Was the company wound
up? Explain. (3 marks)

Answer 8
No, the company survived. Not even a hydrogen bomb
could have destroyed it. A company has perpetual
succession. Being distinct from members, the death,
insolvency or retirement of its members does not affect the
life of the company. Members may come and go, but the
company can go forever.

Question 9
A member, who held all shares except one share of a
timber company, insured the company’s timber in his
own name. Can he claim compensation from the
insurance company? Explain. (3 marks)

Answer 9
No, his claim for compensation will be rejected by the
insurance company since a member does not have any
insurable interest in the property of the company, even if he
acquires all the shares of the company. The company has
separate property from the property of its members.

Question 10
Shakti Ltd. issues 1,00,000 shares of ` 10 each for public
subscription. Application (along with money) are
received for 80,000 shares. Can the company allot these
shares? Explain. (3 marks)

Answer 10
No, the company cannot allot these shares because the legal
formality of ‘minimum subscription’ is not fulfilled. A
company must receive the amount of minimum subscription
in cash (which is 90% of the issued amount). Otherwise,
allotment cannot be made.
In this case, the company has received only 80% of the
issued amount. So, it cannot make allotment of these shares
and will have to refund all the money received from the
applicants.

Question 11
Mr. Aman wants to set up a business organisation. He has
two main expectations from the business organisation– (i)
Limited Liability and (ii) Continuity.
What form of business organisation is suitable for Mr.
Aman? Give reasons in support of your answer.
(3 marks)

Answer 11
Company form of organisation Reasons:
(i) Limited Liability: The liability of the members is limited
to the face value of the shares held by them. They are
not personally liable to the debts of the company.
(ii) Perpetual succession: Being distinct from the members,
the death, insolvency or retirement of its members does
not affect the life of the company.

Question 12
A company got its Certificate in Incorporation on 20th
August, 2020 and on the certificate the date was written
as 10th August, 2020. The company allotted some shares
on 18th August. Is the allotment valid or not? Give
reason in support your answer. (3 marks)

Answer 12
Yes, it is a valid allotment because though the registrar
issued the certificate of incorporation on 20th August, 2020
but on the certificate 10th August was written. So in the
eyes of law, the company was registered on 10th August as
the certificate of incorporation is the conclusive evidence of
its legal existence of the company.

Forms of Business Organisation

Question 1
Minimum number of members to form a private
company is (Choose the correct alternative) (1 mark)
(a) 2
(b) 3
(c) 5
(d) 7
Question 2
Application for approval of name of a company is to
be made to (Choose the correct alternative)
(1 mark)
(a) SEBI
(c) Government of India
(d) Government of the State in which Company is to
be registered
Question 3
A proposed name of Company is considered
undesirable if (Choose the correct alternative)
(1 mark)
(a) It is identical with the name
(b) It resembles closely with of an existing company
the name of an existing company
(c) It is an emblem of Government
(d) In case of any of the above of India, United
Nations etc.
Question 4
A prospectus is issued by
(a) A private company
(c) A public enterprise
(d) A public company
Question 5
Briefly explain three activities which can be suitably
undertaken by cooperative societies. (3 marks)
Answer 5
Following are the activities undertaken by cooperative societies:
(i) A cooperative society may undertake the construction of
houses/flats for its members at lower costs and giving the
option of paying in instalments. (Cooperative housing
societies)
(ii) A cooperative society may undertake the provision of
easy credit on reasonable terms to the members at low
interest rates. (Credit cooperative societies)
(iii) A cooperative society may undertake the sale of the
products of its members at reasonable prices. (Marketing
cooperative societies)
Question 6
“Karta is the most active member in a Joint Hindu Family
Business. He is too powerful to ruin the business.”
Comment. (3 marks)
Answer 6
Karta is the most active member in a Joint Hindu Family
Business. The right to manage the business vests in Karta
alone. He has the implied authority to obtain loans
through mortgages, etc. for the purpose of the business.
His decisions are binding on other members. Other
members have neither any right to manage the affairs of
business nor any right to take loans on mortgage of
business property.
But if Karta is inefficient and incapable for managing the
business, he may ruin the business. The decisions of such a
person (Karta) may not be acceptable to other members,
which may cause conflicts, resulting in the break-down of
the family business.
Question 7
Aditya is promoting a company. Before the company is
formed, he enters into a contract with DLF for purchase of
land and also agreed to pay 10 crores within a period of 2
moths. The company was formed within 1 month. On the basis
of the facts, answer the following :-
(i) Which type of contract is entered by Aditya ?
(ii) Is the contract legally binding on the company ?
(iii) Can DLF Ltd. hold Aditya liable for the payment money?
(iv) What can the company do to prevent Aditya from such
a situation? (4 marks)
Question 8
Explain the steps taken by promoters in the promotion
of a company. (5 marks)
Question 9
“One man control is best in the world if that one man
is big enough to manage everything.” Explain the
statement. (6 marks)
Answer 9
“One man control is best in the world if that one man
is big enough to manage everything” —W.R. Basset.
These advantages are as follows:
(i) It requires less amount of capital.
(ii) Ease of formation and closure of business.
(iii) Quick decision making without consulting others.
(iv) Confidentiality of information.
(v) A sole proprietor is the sole recipient of all the
profits.
(vi) Flexibility of operations because all decisions
are made by a single person.
These advantages are available provided the man is
capable of managing everything. In real life such a
person does not exist. A person may be a rich
engineer but he may lack financial ability. Therefore,
one man business suffers from several limitations:
(i) Limited financial resources and limited scope for
expansion.
(ii) Limited life of a business concern, depending on
the life of the owner.
(iii) The sole proprietor has unlimited liability.
(iv) Limited managerial ability
Though sole proprietorship suffers from various
shortcomings, many entrepreneurs opt for this form of
organisation because of its inherent advantages. It
requires less amount of capital. It is best suited for
businesses which are carried out on a small scale and
where customers demand personalised services.
Forms of Business Organisation

Question 1
Minimum number of members to form a public company
is (Choose the correct alternative) (1 mark)
(a) 5
(b) 7
(c) 12
(d) 21
Question 2
Stages in the formation of a public company are in
the following order:
(a) Promotion, Commencement
(b) Incorporation, Capital of Business, Capital
Subscription, Promotion Subscription, Incorporation
(c) Promotion, Incorporation
(d) Capital Subscription Capital Subscription,
Promotion, Incorporation,
Question 3
Preliminary Contracts are signed
(a) Before the incorporation
(b) After incorporation but before capital subscription
(c) After incorporation but before commencement of
business business
(d) After commencement of commencement of business
business
Question 4
It is necessary to get every company incorporated,
whether private or public. (True/False) (1 mark)
Question 5
The business assets of a firm are worth ` 2,00,000 but
the debts remain unpaid are worth ` 3,00,000. What
course of action can the creditors take in the following
cases?
(a) The organisation is a sole proprietorship firm.
(b) The organisation is a partnership firm with A and B,
two partners sharing profit equally. (3 marks)
Answer 5
(a) The creditors may claim from the personal
property of the proprietor as he has unlimited
liability.
(b) A and B are jointly and individually liable to
repay the firm’s debts in their profit sharing ratio,
i.e., 1:1; and if one of the partners becomes
insolvent then the other is liable to repay the
whole debt.
Question 6
Compare the status of a minor in a Joint Hindu Family
Business with that in a partnership firm. (3 marks)
Answer 6
A minor is a person who has not attained the age of
18 years.
• In a Joint Hindu Family Business, membership is by
birth. Therefore, minors can also be members of
the business.
The liability of minor is limited to his share in the
business. They have to share losses also.
• In a partnership firm, a minor cannot become a
partner because he is not capable of entering into
a valid agreement. However, a minor can be
admitted to the benefits of an existing partnership
firm with the mutual consent of all other partners. He
cannot be asked to bear the losses.
Question 7
The business assets of an organisation amount to `50,000
but the debts that remain unpaid are `80,000. What
course of action can the creditors take if
(a) The organisation is a sole proprietorship firm
(b) The organisation is a partnership firm with Anthony
and Akbar as partners. Which of the two partners
can the creditors approach for repayment of debt?
Explain giving reasons. (4 marks)
Question 8
Dhirubhai Chaurasiya operates a textile business. His
family is joint and has a lot of ancestral property. All
the 15 family members are a part of this business. He
is the eldest male member in the family so he heads
the business. He is liable to all the creditors of the
business as he is the decision maker. Dhirubhai’s
grandson has just born a few days ago and he is also
the member of the business.
(a) Which form of business is being undertaken by
Dhirubhai Chaurasiya ?
(b) Identify the features of this form of business
based on the information given.
(c) Textile business is part of which type of industry
according to you ? (5 marks)
Question 9
The owner of a general store wants to open a branch
in a nearby town. Will you advise him to take a
partner to run the branch store or employ a
manager/assistant? Give reasons for your advice.
(6 marks)
Answer 9
Since the owner of the general store (sole
proprietorship business) wants to expand his business
by opening a branch in a nearby town, he may
appoint a salaried manager/assistant or may take a
partner.
Employment of salaried manager/assistant
Advantages
(i) Division of work: The proprietor can delegate
duties to the manager/assistant according to his
ability and experience. In this way, the burden
of work on the proprietor is reduced. He can devote
more time and attention on key issues.
(ii) Centralised control and freedom of decision-
making: The proprietor has full control over the
business. He is free to decide business policies
without any interference from the
manager/assistant.
(iii) No profit sharing: The proprietor is the sole
recipient of all profits as the manager/assistant is
appointed on salary.
Admitting a partner
Advantages
(i) More financial resources: By taking a partner,
the problem of capital will be solved.
(ii) Division of work: Work can be divided among
partners according to their skills and experience.
(iii) Joint liability: Both the partners will be jointly
liable to the firm’s debts.
Conclusion: The choice between salaried
manager/assistant and partner will depend upon the
type of assistance required by the owner of the
general store.
— If he requires additional capital for the
purpose of expansion of business as well as
managerial assistance, and is interested in sharing of
risk, taking a partner will be a better choice.
— But if he himself can arrange more capital,
needs someone to share his managerial duties only
and is ready to bear entire risk, then it is better to
employ a salaried manager/assistant.
Unit-1 and Unit-2
Time Allowed: 1 hr. 30 min. Maximum Marks: 40

Question 1
The structure in which there is separation of ownership
and management is called
(b) Partnership
(c) Company
(d) All business organisations
Question 2
The karta in Joint Hindu family business has
(d) Joint liability
Question 3
Preliminary Contracts are ___________. (binding on
the Company, if ratified after incorporation/not
binding on the Company, after incorporation Company)
(Fill up the blank with correct answer) (1 mark)
Question 4
Statement in lieu of prospectus can be filed by a
public company going for a public issue.
(True/False) (1 mark)
Question 5
ABC Ltd. Is planting a tree on roadside. Which objective
it is trying to achieve? (1 mark)
Question 6
Why is the insurance known as a tertiary industry?
(1 mark)
Question 7
A lawyer is working in a knowledge process outsourcing
(KPO) organization. What type of economic activity is he
performing ? (1 mark)
Question 8
Shiv, Anandi & John were partners John died in a car
accident Both Shiv & Anandi decided to admit his son
Ryan who was 16 years old as partner. Can they do so ?
Justify. (3 marks)
Answer 8
Minor as a partner
Question 9
Categories the following into business, profession and
employment:
(i)A farmer (ii) An advocate (iii) A clerk (iv) A hawker
selling toys for children (v) A doctor (vi) A person
repairing scooter on roadside (3 marks)
Question 10
Comment on the following :
(i) Meeting of X Ltd. was going on in which all the
members of the company were present suddenly a
natural calamity occurred and all the members of the
company X Ltd. died. What would happen to the
existence of the company ‘X’ Ltd. Why?
(ii) The company being an artificial person acts through its
Board of Directors. All teh agreements on behalf of the
company are entered by the Board of Directors. When
is an agreement entered by the Board of directors not
legally binding on the company. (4 marks)
Question 11
Different situations in different business are being
elaborated below:
(i) Raghunath Gorkha had a match stick factory in Nepal
which got distructed by the recent earthquake.
(ii) Mr Arya. a senior manager in a telecom company
shared confidential information about the company
with a competitor which led to huge losses for the
company.
(iii) Vodafone Co was charged with evasion of tax and
asked to pay fine in cross which would lead to heavy
losses for the company.
(iv) Type writers becoming redundant because of
laptops.
(a) Which characteristic of business is being referred to
in all the above cases ?
(b) How can you classify the different cases based on
this characteristic ? (4 marks)
Answer 11
[Hint : Business Risks - Causes]
Question 12
Rahul and Sanchali felt that there was an opportunity of
business in providing a service of online grocery stores
for working people. They analysed the idea in terms of
technical, financial and economic liability. Once they
found all the aspects satisfactory they decided to start a
company called ‘convenience @ home’ private Ltd. They
got the name registered with the registrar.
(a) Which steps of formation of company are being
referred to here ?
(b) Also write the next three steps associated with it.
(5 marks)
Answer 12
[Hint : steps in promotion of a company]
Question 13
Commerce is the sum total of activities that remove
hindrances in the free flow of goods from producers to
consumers. Explain. (5 marks)
Question 14
What is meant by the term ‘Promotion’. Discuss the legal
position of promoters with respect to a company
promoted by them. (6 marks)
Public Sector and Private
Sector Enterprises – Concept
Difference between Private Sector and
Public Sector Enterprises
Private Sector Enterprises Public Sector Enterprises
 The private sector enterprises  The public sector enterprises are various
are the businesses owned, organisations owned and managed by
managed and controlled by the government. These organisations
individuals or a group of may either be partly or wholly owned by
individuals. the central or state government. They
 The various forms of may also be a part of the ministry or
organisation in the private come into existence by a Special Act of
sector are: the Parliament. The government,
• Sole Proprietorship through these enterprises participates in
• Partnership the economic activities of the country.
• Joint Hindu Family Business  The forms of organisation which a
• Cooperative Societies public sector enterprise may take are:
• Company • Departmental Undertakings
• Multi-National Corporations • Statutory Corporations
(MNCs) • Government Companies
Features of Public Sector Enterprises
(PSEs)
1. The government has a major role to play
in the formation of public sector
enterprises.
But the government acts through its people, its offices,
employees and they take decisions on behalf of the
government. For this purpose, public enterprises
were formed by the government to participate in the
economic activities of the country.
2. Public sector enterprises contribute to
the economic development.
They are expected to contribute to the economic
development of the country in today’s liberalised,
competitive world.
2. Public sector enterprises contribute to
the economic development.
They are expected to contribute to the economic
development of the country in today’s liberalised,
competitive world.
3. Public sector enterprises are owned by
the public and are accountable to the
public through the Parliament.
They are characterised by public ownership,
public funds being used for its activities and public
accountability.
4. A public enterprise may take any particular
form of organisation depending upon the
nature of its operations and their
relationship with the government.
• The suitability of a particular form of organisation
would depend upon its requirements. The forms
of organisation which a public sector enterprise
may take are: Departmental Undertakings, Statutory
Corporations and Government Companies.
• At the same time, in accordance with general principles,
any organisation in the public sector should ensure
organisational performance productivity and quality
standards.
 Top Tip
There are all kinds of business organisations — small or large,
industrial or trading, privately owned or government owned
existing in our country. These organisations affect our daily
economic life and therefore become part of the Indian
economy.
Since the Indian economy consists of both privately owned
and government owned business enterprises, it is known as a
mixed economy.
The Government of India has opted for a mixed economy
where both private and government enterprises are allowed
to operate. The economy, therefore, may be classified into two
sectors viz., private sector and public sector.
The government in its industrial policy resolutions, from time-to-
time, defines the area of activities in which the private sector and
public sector are allowed to operate.
• In the Industrial Policy Resolution 1948, the Government of
India had specified the approach towards development of the
industrial sector. The roles of the private and public sector were
clearly defined and the government through various Acts and
Regulations was overseeing the economic activities of both the
private and public sector.
• The Industrial Policy Resolution, 1956 had also laid down certain
objectives for the public sector to follow so as to accelerate the
rate of growth and industrialisation. The public sector was given a
lot of importance but at the same time mutual dependency of
public and private sectors was emphasised.
• The 1991 Industrial Policy was radically different from all the earlier
policies where the government was deliberating disinvestment of public
sector and allowing greater freedom to the private sector. At the same time,
foreign direct investment was invited from business houses outside India.
Thus, multinational corporations or global enterprises which operate in
more than one country gained entry into the Indian economy.
Thus, we have public sector units, private sector enterprises and global
enterprises coexisting in the Indian economy.
Departmental Undertakings
– Features, Merits and
Limitations
 This is the oldest and most traditional form of organising
public enterprises.
 These enterprises are established as departments of
the ministry and are considered part or an extension
of the ministry itself.
 The Government functions through these departments
and the activities performed by them are an integral
part of the functioning of the government.
 They have not been constituted as autonomous or
independent institutions and as such are not independent
legal entities.
 They act through the officers of the Government and
its employees are Government employees.
 These undertakings may be under the central or the
state government and the rules of central / state
government are applicable. For example, the Indian
Railways are managed by the Ministry of Railways.
Post and telegraph services are run as a department,
in the Ministry of Communication. The Delhi Milk
Scheme, All India Radio, Doordarshan are other
examples of departmental undertakings.
Indian Railways
Features
1. They are accountable to the ministry since their
management is directly under the concerned ministry.
2. The funding of these enterprises come directly
from the Government Treasury and are an annual
appropriation from the budget of the Government.
The revenue earned by these is also paid into the
treasury.
3. They are subject to accounting and audit controls
applicable to other Government activities.
4. The employees of the enterprise are Government
servants and their recruitment and conditions of
service are the same as that of other employees
directly under the Government. They are headed by
Indian Administrative Service (IAS) officers and
civil servants who are transferable from one ministry
to another.
5. It is generally considered to be a major subdivision
of the Government department and is subject
to direct control of the ministry.
Merits
Departmental undertakings have certain advantages
which are as follows:
1. These undertakings facilitate the Parliament to
exercise effective control over their operations.
2. These ensure a high degree of public
accountability.
3. The revenue earned by the enterprise goes
directly to the treasury and hence is a source of
income for the Government.
4. Where national security is concerned, this
form is most suitable since it is under the direct
control and supervision of the concerned ministry.
Limitations
This form of organisation suffers from serious drawbacks,
some of which are as follows:
1. Departmental undertakings fail to provide flexibility,
which is essential for the smooth operation of business.
2. The employees or heads of departments of such
undertakings are not allowed to take independent
decisions, without the approval of the ministry
concerned. This leads to delays, in matters where
prompt decisions are required.
3. These enterprises are unable to take advantage of
business opportunities. The bureaucrat’s over-cautious
and conservative approval does not allow them to
take risky ventures.
4. There is red tapism in day-to-day operations and
no action can be taken unless it goes through the
proper channels of authority.
5. There is lot of political interference through the
ministry.
6. These organisations are usually insensitive to
consumer needs and do not provide adequate services
to them.
Statutory Corporation –
Features, Merits and
Limitations
 Statutory corporations are public enterprises brought
into existence by a Special Act of the Parliament.
The Act defines its powers and functions, rules and
regulations governing its employees and its
relationship with government departments.
 This is a corporate body created by the legislature
with defined powers and functions and is financially
independent with a clear control over a specified
area or a particular type of commercial activity.
 It is a corporate person and has the capacity of
acting in its own name.
Statutory corporations, therefore, have the power of
the government and considerable amount of operating
flexibility of private enterprises.
Examples of Statutory Corporations: The Reserve
Bank of India (RBI), State Bank of India (SBI), Life
Insurance Corporation (LIC), Employees State Insurance
Corporation (ESIC), Oil and Natural Gas Corporation
(ONGC), etc.
The Reserve Bank of India (RBI)

Features
Statutory corporations have certain distinct features,
which are discussed as below:
1. Statutory corporations are set up under an Act of
Parliament and are governed by the provisions of
the Act. The Act defines the objects, powers and
privileges of a statutory corporation.
2. This type of organisation is wholly owned by the
state. The government has the ultimate financial
responsibility and has the power to appropriate its
profits. At the same time, the state also has to bear
the losses, if any.
3. A statutory corporation is a body corporate and can
sue and be sued, enter into contract and acquire
property in its own name.
4. This type of enterprise is usually independently
financed. It obtains funds by borrowings from the
government or from the public through revenues,
derived from sale of goods and services. It has the
authority to use its revenues.
5. A statutory corporation is not subject to the same
accounting and audit procedures applicable to
government departments. It is also not concerned
with the central budget of the Government.
6. The employees of these enterprises are not
government or civil servants and are not governed
by government rules and regulations. The conditions
of service of the employees are Governed by the
provisions of the Act itself. At times, some officers
are taken from government departments, on deputation,
to head these organisations.
Merits
This form of organisation enjoys certain advantages in
its working, which are as follows:
1. They enjoy independence in their functioning and
a high degree of operational flexibility. They are
free from undesirable government regulation
and control.
2. Since the funds of these organisations do not come
from the central budget, the government generally
does not interfere in their financial matters,
including their income and receipts.
3. Since they are autonomous organisations they
frame their own policies and procedures within the
powers assigned to them by the Act. The Act may,
however, provide few issues/matters which require
prior approval of a particular ministry.
4. A statutory corporation is a valuable instrument for
economic development. It has the power of the
government, combined with the initiative of private
enterprises.
Limitations
This type of organisation suffers from several limitations,
which are as follows:
1. In reality, a statutory corporation does not enjoy as
much operational flexibility as stated above. All actions
are subject to many rules and regulations.
2. Government and political interference has always
been there in major decisions or where huge funds
are involved.
3. Where there is dealing with public, rampant
corruption exists.
4. The Government has a practice of appointing advisors
to the Corporation Board. This curbs the freedom
of the corporation in entering into contracts and
other decisions. If there is any disagreement, the matter
is referred to the government for final decisions.
This further delays action.
Government Company –
Features, Merits and
Limitations
A government company is established under The
Companies Act, 2013 and is registered and governed by
the provisions of The Act. A government company may
be formed as a private limited company or a public
limited company. These are established for purely business
purposes and in true spirit compete with companies in
the private sector.
According to the Section 2(45) of the Companies Act
2013, “a government company means any company in
which not less than 51 per cent of the paid up capital is
held by the central government, or by any state government
or partly by Central government and partly by one or
more State governments and includes a company which
is a subsidiary of a government company.”
Since the government is the major shareholder and
exercises control over the management of these companies,
they are known as government companies.
All provisions of the Companies Act 2013 are applicable
to government companies unless otherwise specified.
The government exercises control over the paid up
share capital of a government company.
The shares of the company are purchased in the name
of the President of India.
Examples of Government Companies:
• Bharat Heavy Electricals Limited (BHEL)
• Maruti Udyog Limited
• Steel Authority of India Limited (SAIL)
• Hindustan Steel Limited
• Hindustan Aeronautics Limited
• Bharat Earthmovers Limited (BEML
• Madras Refineries Limited (MRL)
• Indian Telephone Industries Limited
• Hindustan Antibiotics Limited
• Hindustan Machine Tools (HMT)
Features
1. It is an organisation created under the Companies
Act, 2013 or any other previous Company Law.
2. The company can file a suit in a court of law against
any third party and be sued.
3. The company can enter into a contract and can
acquire property in its own name.
4. The management of the company is regulated by
the provisions of the Companies Act, like any other
public limited company.
5. The employees of the company are appointed according
to their own rules and regulations as contained in
the Memorandum and Articles of Association of the
company.
6. These companies are exempted from the accounting
and audit rules and procedures. An auditor is appointed
by the Central Government and the Annual Report
is to be presented in the Parliament or the State
Legislature.
7. The government company obtains its funds from
government shareholdings and other private shareholders.
It is also permitted to raise funds from the capital
market.
Merits
1. A government company can be established by fulfilling
the requirements of the Indian Companies Act,
2013. A separate Act in the Parliament is not required.
2. It has a separate legal entity, apart from the
Government.
3. It enjoys autonomy in all management decisions
and takes actions according to business prudence.
4. These companies by providing goods and services at
reasonable prices are able to control the market and
curb unhealthy business practices.
Limitations
1. Since the Government is the only shareholder in some
of the companies, the provisions of the Companies
Act does not have much relevance.
2. It evades constitutional responsibility, which a company
financed by the government should have. It is not
answerable directly to the Parliament.
3. The government being the sole shareholder, the
management and administration rests in the hands
of the government. The main purpose of a government
company, registered like other companies, is defeated.
RECAP
Private Sector vs Public Sector Enterprises

Private sector enterprises are owned, managed and controlled
by individuals or a group of individuals. Their main objective
is to earn profit.
Public sector enterprises are owned, managed and controlled
by the government. The forms of organisation which a public
enterprise may take are departmental undertakings, statutory
corporations and government companies.
Departmental Undertakings
This is the oldest and most traditional form of organising
public enterprises. The Government functions through these
departments. Examples: Posts & Telegraphs, Indian Railways.
Merits
1. Effective control
2. High degree of public accountability
3. Source of income for the Government
4. National security
Limitations
1. Fail to provide flexibility
2. Delay in decision-making
3. Unable to take advantage of business opportunities
4. Red tapism
5. Political interference
Statutory Corporation
Statutory corporations are public enterprises brought into
existence by a Special Act of the Parliament. Examples:
Indian Airlines, LIC, RBI, etc.
Merits
1. Free from undesirable government regulations
2. Government does not interfere in their financial matters
3. Free from red tapism and bureaucracy
4. Protection of public interest.
Limitations
1. Rules and regulations 2. Corruption
3. Government and political interference
4. Curbs the freedom of the corporation
Government Company
A government company means any company in which not
less than 51 per cent of the paid-up capital is held by the
Central government or state government or both. Examples:
HMT, BHEL, etc.
Merits
1. Easily established 2. Separate legal entity
3. Enjoys autonomy
4. Curbs unhealthy business practices
1. Government is the only major shareholder
2. Not directly accountable to the Parliament
Limitations
1. Government is the only major shareholder
2. Not directly accountable to the Parliament
Question 1
Match the columns:
(i) It enjoys maximum autonomy in all (a) Government Company
management activities.
(ii) LIC and Air India are the examples (b) Statutory Corporation
of this form of enterprise.
(iii) This enterprise is most suitable (c) Departmental Undertaking
when national security is concerned.
Objective Type Questions

Answer 1
(i) – (a), (ii) - (b), (iii) - (c)

Question 2
A government company is any company in which the
paid-up capital held by the government is not less than
(a) 49 per cent
(b) 51 per cent
(c) 50 per cent
(d) 25 per cent

Answer 2
(b) 51 per cent

Question 3
PSEs are organisations owned by
(a) Joint Hindu Family Business
(b) Government
(c) Foreign Companies
(d) Private entrepreneurs

Answer 3
(b) Government

Question 4
A corporation established under a special law of
Parliament (Choose the correct alternative)
(a) Statutory Corporation
(b) Departmental undertaking
(c) Government company
(d) Multi-national Corporation

Answer 4

Question 5
Reserve Bank of India has been set up as which type of
public enterprise? (Choose the correct alternative)

Answer 5

Question 6
“Steel Authority of India Limited is a public enterprise.”
Identify this form of organising public enterprises.

Answer 6

Question 7
The oldest form of organisation of public enterprises

Answer 7

Question 8
Disinvestments of PSEs implies
(a) Sale of equity shares to public
(b) Investing in new areas
(c) Buying shares of PSEs
(d) Closing down private sector/public operations

Answer 8
(a) Sale of equity shares to public

Question 9
Public enterprises are owned by the public.

Answer 9
False: Public sector enterprises are owned, managed
and controlled by the government.

Question 10
A departmentally run enterprise enjoys corporate
status. True/False? Give reason.

Answer 10
False: They are established as departments of the
ministry, e.g., Indian Railways.

Question 11
A statutory corporation is a body corporate.

Answer 11
True: A statutory corporation can sue and be sued,
enter into contract and acquire property in its
own name.

Question 12
Reserve Bank of India (RBI) is an example of a
Government company. True/False? Give reason.

Answer 12
False: RBI is an example of a statutory corporation.

Question 13
A government company enjoys maximum autonomy.

Answer 13
True: It enjoys maximum autonomy in all management
decisions and actions. There is no undue
departmental interference in the working of a
government company.

Question 14
The government provides funds to departmental undertakings.

Answer 14
True: The funding of departmental undertakings come
directly from the Government Treasury. The
revenue earned by these is also paid into the
treasury.

Question 15
Who heads the departmental undertakings?

Answer 15
Departmental undertakings are headed by government
employees, IAS officers and civil servants.

Question 16
Why are departmental undertakings accountable to the
ministry?

Answer 16
Because their management is directly under the concerned
ministry.

Question 17
Where national security is concerned, which form of
public enterprises is most suitable?

Answer 17
Departmental undertakings, because they are under
the direct control and supervision of the ministry.

Question 18
Why is there red tapism in day-to-day operations of a
departmental undertaking?

Answer 18
Because of bureaucrats’ control, no action can be taken
unless it goes through the proper channels of authority.

Question 19
Name the organisation formed by passing a Special Act
of the Parliament.

Answer 19
Statutory company

Question 20
Name the company in which at least 51% shares are
kept by government.

Answer 20
Government company

Question 21
In whose name the shares of a government company are
purchased?

Answer 21
The President of India

Question 22
Name the organisation which is considered as a part of
government only.

Answer 22
Departmental undertaking.

Question 23
Name the organisation which is formed by passing a
special Act of Parliament of State Legislature.

Answer 23
Statutory Corporation

Question 1
Once upon a time a round of Election to the five Legislative
Assemblies of the country was in progress. The different
political parties were putting in the best of their efforts to
entice the people through their respective promises to them.
There were three main political parties contesting elections
in these states. One of the political parties made a promise
that if they came into power, they would set up such public
sector enterprises in the states which will have the
partnership of both the public and the government. However,
Case Studies — Analysing, Evaluating & Creating Type Questions

in these enterprises, the ownership of the government shall
not be less than 51%. The setting up of these enterprises is
done as per the provisions of the Indian Companies Act, 2013.
The financing of these enterprises is done jointly by both, the
people and the government. The second political party
promised that if they came into power, they would set up such
public sector enterprises which will be completely under the
ownership of the government. The burden of financing them
will not be put on the shoulders of the people, but they will be
managed with the general budget. The third political party,
which was contesting the elections for the first time, promised
that on coming into power they would set up such public
sector enterprises which will be fully financed by the
government. However, there will be no bar to get loan from
the people to set up them. They will be set up as per the
special Act passed by the Parliament or the State Legislative
Assembly.
On the basis of the above para, identify the type of public
sector enterprises to be set up as being promised by the three
political parties.Also state any two merits of each of them.
(6 marks)

Answer 1
(a) The first political party promised to set up
Government Companies.
Merits:
(i) A government company can be easily established
under the Indian Companies Act, 2013. A separate
Act in the Parliament is not required.
(ii) It has a separate legal entity, apart from the
government. It is free from government regulations.
(b) The second political party promised to set up
Departmental Undertakings.

(i) Since control is direct and centralised, these
undertakings facilitate the Parliament to exercise
effective control over their operations.
(ii) These ensure a high degree of public accountability.
(c) The third political party promised to set up
Public Corporations/Statutory Corporations.
(i) The government does not interfere in their financial
matters, including their income and receipts.
(ii) A statutory corporation is relatively free from red
tapism and bureaucracy and hence, can take quick
decisions.
Question 2
‘Indian Railways’ is a part of Railway Ministry. It is
organised, financed and controlled by Railway Ministry.
The finances are allocated from government treasury and
whatever revenue it earns is deposited to government
treasury only. It is treated as a part of government and even
the appointment recruitment and selection of employees is
done in the same way as that of civil servant.
(i) Name the type of public sector enterprise ‘Indian
Railways’ is.
(ii) What is the status of employees working in Indian
Railways?
(iii) How does it get its finance?
(iv) What does it do with its revenue? (6 marks)

Answer 2
(i) Departmental Undertaking
(ii) They are considered as civil servants or government
employees.
(iii) From government treasury.
(iv) It is deposited in the government treasury.

Question 3
Gas authority of India Ltd. (GAIL) is carrying on various
projects of energy and power. Majority of its shares are
held by the government of India. It was registered under
the previous Companies Act. It enjoys all the
characteristics of a company. The board of directors are
appointed by the government. The Board and
shareholders are responsible for the efficient working of
the company. The company prepares its annual report
and submit to the appropriate authorities.
(a) Name the type of public sector enterprise referred
to in the above para.
(b) In whose name does the government buy shares?
(c) State any three features of the type of public sector
enterprise identified in part (a) other than those
discussed in the above para. (5 marks)

Answer 3
(a) Government Company (b) President of India
(c) Features of government company:
(i) The company can file a suit in a court of law
against any third party and be sued.
(ii) The company can enter into a contract and can
acquire property in its own name.
(iii) The government company obtains its funds from
government shareholdings and other private
shareholders. It is also permitted to raise funds
from the capital market.

 Business services–meaning and types. Banking:
Types of bank accounts - savings, current,
recurring, fixed deposit and multiple option
deposit account
 Banking services with particular reference to
Bank Draft, Bank Overdraft, Cash credit. E-
Banking meaning, Types of digital payments
 Insurance – Principles. Types – life, health, fire
and marine insurance – concept
Business Services: Meaning
and Types
Business services are 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 materials and meeting day-to-day expenses. Necessary
funds (in the form of overdraft and cash credit facilities,
loan and advances, etc.) can be obtained by business-
men from commercial banks. Thus, banking helps
business activities overcome the problem of finance.
2. Insurance
Business involves various types of risks, e.g., theft, fire,
accidents, etc. Insurance makes provision against such
risks. By getting their goods insured, producers can
avoid the risk of loss of goods.
3. Transportation
Transport (road, rail or 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 is because of transportation that a producer can sell
his goods in different parts of the world. It creates place
utility.
4. Warehousing
Warehousing refers to the holding and preservation of
goods until they are finally consumed. It helps business
firms to overcome the problem of storage of goods and
facilitates the availability of goods when needed.
Warehousing creates time utility.
5. Communication
Communication services like postal services and telephone
facilities are helpful to the business for establishing
links with the outside world, viz., suppliers, customers,
competitors, etc. and for quick exchange of information.
The electronic media is mainly responsible for this
transformation.
Banking: Types of Bank
Accounts
A banking company in India is one which transacts
the business of banking which means accepting
deposits of money from the public (for the purpose
of lending and investment), repayable on demand
and withdrawable by cheques or otherwise.
Types of Bank Accounts
1. Savings Deposit Account
This type of bank account encourages the small savings
of households. The deposits in this account are made
by the persons who wish to save a little out of their
incomes.
Interest is paid at nominal rate, say 4 percent per annum.
The rate of interest is less than that of fixed deposit
account.
2. Current Deposit Account
These deposit accounts are most suitable for business
organisation. In this account, a depositor can deposit
money any number of time and can withdraw it as and
when he/she requires it.
No interest is paid on these accounts, Rather, the bank
may charge some service charges.
Money can be withdrawn from this account by cheque.
3. Recurring Deposit (RD) Account
In this type of account a depositor deposits a fixed
amount of money on an annuity basis (say on monthly
basis) for a fixed period.
This money cannot be withdrawn before the expiry of
that fixed term except in special circumstances.
Rate of interest on RD account is generally higher than
that of Savings Account deposits.
4. Fixed Deposit (FD) Account
Money is deposited in fixed deposit account for a fixed
period, say 1 year, 2 years, 3 years or 5 years.
The rate of interest is higher than that of saving deposits
account.
The longer is the period of deposit, the higher will be
the rate of interest. This is so because banks can use
the money for a longer period.
The amount of deposits is repayable by the bank after
the expiry of the fixed term.
If the depositor needs this money before the specified
fixed period, then banks can refund the money deposited
after charging some discount.
5. Multiple Option Deposit Account
Multiple Option Deposit account is a combination of
savings account and fixed deposit account which
provide specific options to the depositors. It is a type of
Saving Deposits Account in which amount of deposit in
excess of a particular limit gets automatically transferred
to Fixed Deposit Account. And, in case sufficient funds
are not available in Saving Deposits Account to honour
a cheque issued, the required amount gets automatically
transferred from Fixed Deposit Account to the Saving
Deposits Account.
The account holder has two benefits from this account
— he/she can earn more interest and it lowers the risk
of dishonouring a cheque. It is also called Multiple
Option Deposit Scheme (MODS).
Banking Services
1. Bank Draft
A bank draft (also known as Demand Draft) is an
instrument which is used for the transfer of funds.
Anybody can obtain a bank draft after depositing
the amount in the bank.
A bank draft is drawn by a bank branch on another
branch or some other bank at the place of destination.
The bank charges some commission in lieu of issuing.
A bank may issue bank draft free of cost depending
on the customer's relation with the bank.
2. Bank Overdraft
The bank allows a customer to overdraw his current
account balance up to an agreed limit.
The customer has to pay interest on the amount overdrawn
by him.
The security for overdrafts is usually financial assets of
the account-holder such as shares, debentures, etc.
It is a temporary facility.
The rate of interest changed by banks is lower than that
on cash credit because the risk involved and service
cost is less.
3. Cash Credits
A cash credit is a short-term cash loan to a company.
The borrower is sanctioned a credit limit upto
which it may draw amounts from the bank. This
credit limit is determined by the bank's estimation
of the borrower's credit-worthiness.
The bank provides this type of funding, but only
after the required security is given to secure the
loan.
Once a security for repayment has been given, the
borrower company can continuously draw from the
bank up to the specified amount.
e-Banking – Meaning, Types
of Digital Payments
e-Banking – Meaning
The growth of Internet and e-commerce is dramatically
changing everyday life, with the world wide web and e-
commerce transforming the world into a digital global
village. The latest wave in information technology is
internet banking.
e-Banking or Internet Banking is a part of virtual banking
and another delivery channel for customers.
e-Banking
In simple terms, internet banking means any user
with a PC and a browser can get connected to the
banks website to perform any of the virtual banking
functions and avail of any of the bank's services.
There is no human operator to respond to the needs of
the customer. The bank has a centralised data base that
is web-enabled. All the services that the bank has
permitted on the internet are displayed on a menu.
Any service can be selected and further interaction is
dictated by the nature of service.
In this new digital market place, banks and financial
institutions have started providing services over the
internet. These types of services provided by the banks
on the internet, called e-banking, lowers the transaction
cost, adds value to the banking relationship and empowers
customers.
e-banking is electronic banking or banking using
electronic media. Thus, e-banking is a service provided
by many banks that allows a customer to conduct
banking transactions, such as managing savings, checking
accounts, applying for loans or paying bills over the
internet using a personal computer, mobile telephone
or handheld computer (personal digital assistant).
e-Banking Services
The range of services offered by e-banking are:
• Automated Teller Machines (ATM)
• Point of Sales (PoS)
• Electronic Data Interchange (EDI)
• Credit Cards • Electronic or Digital cash
• Electronic funds transfer (EFT)
e-Banking Services
Extra Shots
1. Electronic Data Interchange (EDI) is the transfer of data from
one computer system to another by standardized message
formatting, without the need for human intervention. EDI
permits multiple companies, possibly in different countries, to
exchange documents electronically.
2. Point of Sales (PoS) is the ‘point’ where a transaction is finalized or
the moment where a customer tenders payment in exchange for
goods and services. Any form of payment can be used, such as cash,
debit cards, credit cards, mobile payments, etc.
3. Automated Teller Machines (ATM) is an electronic banking outlet
that allows customers to complete basic transactions without the aid
of a branch representative or teller. Anyone with a credit card or
debit card can access most ATMs.
Types of Digital Payments
1. Electronic funds transfer (EFT)
EFT are electronic transfer of money from one bank account
to another, either within a single financial institution or
across multiple institutions, via computer-based systems,
without the direct intervention of bank staff. The two ways
in which EFT can be done are: NEFT (National Electronic
Fund Transfer) and RTGS (Real Time Gross Settlement).
NEFT refers to a nationwide system that facilitates
individuals and firms to electronically transfer funds
from any bank branch to any other individual having
an account with any other bank branch in the country.
RTGS is the fastest possible money transfer system
through banks.
Funds may be transferred through the RTGS using the
internet facility provided by banks. The minimum
transaction value for RTGS is ` 2 lakh. However, there
is no maximum limit for RTGS transactions.
2. Credit or Debit Cards, i.e. ‘plastic money’
The customer can make digital payments for online
transaction through credit or debit cards. In fact, about
95 per cent of online transactions are executed with a
credit card.
3. Digital Cash
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.
4. Aadhaar Enabled Payment System (AEPS)
It can be used for payment transactions. This service
can only be availed if your Aadhaar number is registered
with the bank where you hold an account.
5. Mobile Wallets
A mobile wallet is a type of virtual wallet service that
can be used by downloading an app (e.g. Paytm, Mobi-
kwik etc.). The digital or mobile wallet stores bank
account or debit / credit card information or bank
account information in an encoded format to allow
secure payments. One can also add money to a mobile
wallet and use the same to make payments and
purchase goods and services. This eliminated the need
to use credit/debit cards or remember the CVV or 4-
digit pin.
6. Point of Sales (PoS) Terminals
It is usually a hand held device that reads banking
cards. With digitization the scope of PoS is expanding
and this service is also available on mobile platforms
and through internet browsers. There are different
types of PoS terminals such as Physical PoS, Mobile
PoS and Virtual PoS. Physical terminals are kept a
shops and stores, mobile PoS terminals work through a
tablet or smartphone. Virtual PoS systems use web-
based applications to process payments.
Question 1
Overdraft facility is available only on
(a) Current account deposits
(b) Saving account deposits
(c) Recurring deposits
(d) Fixed deposits

Answer 1
(a) Current account deposits

Question 2
It is a type of saving bank account in which excess of a
particular limit gets automatically transferred to fixed
deposit account. (Choose the correct alternative)
(a) Current deposits account
(b) Recurring deposits
(c) Multiple option deposit account
(d) None of these

Answer 2
(c) Multiple option deposit account

Question 3
Current account is most suitable for the mobilisation of
savings of the public. True/False? Give reasons.

Answer 3
False: ‘Savings Account’ is the most suitable for
mobilisation of savings of the public.

Question 4
The bank does not pay any interest on saving account
deposit. True/False? Give reasons.

Answer 4
False: The bank pays interest on savings account
deposits at a nominal rate, say 4% p.a. The bank
does not pay interest on current account
deposits.

Question 5
Overdrafts are only allowed in current accounts.
True/False? Give reasons.

Answer 5
True: The bank allows a customer to overdraw his
current account. The customer has to pay
interest on the amount overdrawn by him.

Question 6
Money can be withdrawn from fixed deposit accounts by
cheques. True/False? Give reasons.

Answer 6
False: Fixed deposits are repayable by the bank only
after the expiry of a specified period, say 1 year,
2 years, 3 years or 5 years.

Question 7
Who can get an overdraft from a bank?

Answer 7
A holder of Current Account (i.e., a business-man).

Question 8
Which type of deposit account is suitable for business
organisations?Why?

Answer 8
Current account; because there are no restrictions on
amount of deposits and withdrawals from this account.

Question 9
Which type of deposit account offers maximum interest
on the deposits?

Answer 9
Fixed deposit account

Question 10
Mention any two methods of advancing loans by the
commercial banks.

Answer 10
(i) Bank Overdraft (ii) Term Loans

Question 11
Name the banking service in which the customer can
conduct banking activities like managing savings, checking
accounts, applying for loans, etc. over the internet.

Answer 11
The banking service is e-Banking.

Question 12
The bank issues a financial instrument, with the help of
which money can be sent from one place to another.
Identify this instrument.

Answer 12
Bank Draft

Question 1
Zeenat has recently completed her course in Fashion
Designing from NIFT. Now her father wants her to do
something creative. He has no consideration for earning
money. He wants that Zeenat should teach fashion
designing to those girls who have great interest in it but
have failed to get admission to the Fashion Designing
Course because of their poor financial position. His aim is
to help the girls from poor families. So he gave ` 10 lakh
to Zeenat to establish a Fashion Designing Centre. 50 girls
could take admission in this centre. Zeenat announced
Case Studies 4.1— Analysing, Evaluating & Creating Type Questions
nominal fees to be charged for admission. Within one week of
the opening of the centre, all the seats were filled. After getting
training in this centre, it became easy for the girls to get jobs in
the market. Within a few months, Zeenat’s centre became
popular. She spent ` 5 lakh out of the total ` 10 lakh on
infrastructure and other things, and the remaining ` 5 lakh
she deposited in the Savings Account of a bank. One of her
friends was a bank employee. She advised Zeenat that instead
of keeping ` 5 lakh in the Savings Account, She should keep
them in a Fixed Deposit Account. But Zeenat replied that she
would need money any time and so she could not keep her
money in a Fixed Deposit Account.Then her friend told her
that she should deposit her money in such a bank account
which would serve the purpose of both, the Savings Account
and the Fixed Deposit Account. From this account she could
withdraw money as and when needed and a definite amount
would continue to get automatically transferred to the Fixed
Deposit. Zeenat opened the account with her bank.
Identify and explain the type of Bank Account which Zeenat’s
friend advised her to open in the bank. (3 marks)

Answer 1
Multiple Option Deposit Account
It is a combination of savings account and fixed deposit
account which provide specific options to the
depositors. It is a type of Saving Deposits Account in
which amount of deposit in excess of a particular limit
gets automatically transferred to Fixed Deposit
Account. And, in case sufficient funds are not available in
Saving Deposits Account to honour a cheque issued,
the required amount gets automatically transferred
from Fixed Deposit Account to the Saving Deposits
Account.The account holder has two benefits from this
account— he/she can earn more interest and it lowers
the risk of dishonouring a cheque.

Question 2
Mr. Rajesh is employed in a branch of Punjab National
Bank in Delhi. His friend, Mr. Vijay goes to the bank very
often. One day, Vijay goes to the bank to get a Bank
Draft issued. There he noticed that a customer of the
bank told Rajesh that he wanted to transfer ` 40,000 to
ChandigaRajesh expla-ined to him that it was not
possible to transfer the money immediately; it would be
done after some time. When some such cases of
transfer would come, all of them would be transferred in
a batch. On another day, Vijay noticed that one of the
bank customers came and asked Rajesh if he could get
`3 lakh transferred to Mumbai immediately. Rajesh
replied in affirmative.rh immediately. Vijay asked Rajesh
why he refused to transfer `40,000 to Chandigarh
immediately that day, and how `3 lakh got transferred to
Mumbai immediately now. Rajesh explained this to Vijay,
and he was satisfied.
What explanation must have been given by Rajesh to
Vijay? (3 marks)

Answer 2
Real Time Gross Settlement (RTGS) and National Electr-
onic Funds Transfer (NEFT) are the fastest possible mone-
y transfer system through banks using the internet facility
provided by banks. In RTGS system, the transactions are
settled immediately as soon as they are processed on one
to one basis without bunching or netting with any other
transaction, i.e., no waiting period. However, the minimum
transaction value for RTGS is ` 2 lakh.
On the other hand, in NEFT takes place in batches at
regular time intervals, not immediately.

Question 3
The owner of ‘Govinda Fertilisers’, Rehan opened a
current account in ‘The Punjab National Bank’. The
customer can often withdraw money from the current
account only up to the amount deposited in it. One day
he needed money more than the balance in the account.
He was worried about how to arrange the money. He
needed this amount for about a day or so. One of his
friends told him that the customers having a current
account in the bank can get the permission to withdraw
money more than the balance in the account after
making an agreement with the bank.
Identify the facility provided by the bank referred to in
the above case. (1 mark)

Answer 3
Bank Overdraft

4.2
Insurance – Principles and
Types (Life, Health, Fire
and Marine Insurance
Life is full of uncertainties and risks. Buildings may get
wholly or partially destroyed due to fire, storms,
cyclones, etc. Goods and other property may be lost or
destroyed due to theft, robbery, fire, flood and such
other happenings beyond human control. Both life and
property are exposed to risk of accidents, e.g., death or
serious injury caused by an accident.
Insurance is a means of providing against loss caused
by natural or man-made factors.
It is a device by which the loss likely to be caused by an
uncertain event (e.g., fire/theft of goods) is spread over
a number of persons who are exposed to it and who are
prepared to insure themselves against such an event.
It is a contract or agreement under which one party
agrees in return for a consideration (called ‘premium’,
which may be monthly, quarterly, half-yearly or annually)
to pay an agreed amount of money to another party to
make good a loss, damage or injury to something of
value.
Under the contract of insurance, the person whose risk
is insured is called insured and the firm which insures
the risk of loss is known as insurer.
Life Insurance Corporation of India

Fundamental Principle of Insurance
The fundamental principle of insurance is that an
individual or a business concern chooses to spend a
definite amount of money in place of a possible huge
amount involved in an indefinite future loss. Thus,
insurance, in essence, is the substitution of a small
periodic payment (premium) for a risk of large possible
loss. The loss of risk still remains, but the loss, when it
occurs, is spread over a large number of policyholders
exposed to the same risk. The premium paid by them is
pooled, out of which the loss sustained by any
policyholder is compensated. Thus, in effect, risks are
shared with others.
The amount of premium payable by each policyholder is so
from all the policyholders should be enough to pay for the
losses actually suffered by the policyholder(s) and to cover
the expenses of the insurance company and leave a
reasonable margin of profit.
Principles of Insurance
1. Utmost good faith
A contract of insurance is a contract of uberrimae fidei
i.e., a contract found on utmost good faith. Both the
insurer and the insured should display good faith
towards each other in regard to the contract.
• The insured must voluntarily make full, accurate
disclosure of all facts, material to the risk being
proposed.
• The insurer must make clear all the terms and
conditions in the insurance contract.
Example: Mr X is a heart patient. But he hides this
fact to the LIC while taking a life policy. On
his death due to a heart attack, LIC can refuse to
pay compensation to his legal representative
because a material fact was not disclosed by the
insured.
 Note
Fire insurance: Construction of building, fire detection and fire
fighting equipment; nature of its use.
Motor insurance: Type of vehicle, driver details.
Personal accident insurance: Age, height, weight, occupation,
previous medical history.
Life insurance: Age, previous medical history, smoking/drinking
habits.
2. Insurable interest
The insured must have an insurable interest in the subject
matter of insurance. Insurable interest means some
pecuniary interest in the subject matter of the insurance
contract. The insured must have an interest in the
preservation of the thing or life insured, so that he/she will
suffer financially on the happening of the event against
which he/she is insured. For example, a businessman has
insurable interest in his stock of goods.
In order to have insurable interest, it is not necessary that
one should be the owner of the property. For example, a
trustee holding property on behalf of others has an
insurable interest in the property.
Similarly, a person who had advanced money on the
security of a factory (mortgage) can take fire insurance
policy of that factory though he is not the owner of the
factory because he has financial interest in the factory
premises.
3. Indemnity
All insurance contracts of fire or marine insurance are
contracts of indemnity. The insurer undertakes to
compensate (in terms of money) the insured for the loss
caused to him/her due to damage or destruction of property
insured.
Example: A businessman gets his stock of goods insured for
` 4,00,000. If the goods are destroyed by the fire, the
insurance company will be liable to pay compensation for the
loss caused to the insured. However, maximum compen-
sation shall be ` 4,00,000 even if loss is more than this.
The principle of indemnity is not applicable to life insurance
because one cannot estimate the loss due to the death of a
person.
4. Doctrine of ‘causa proxima’
According to this principle, when the loss is the result of
two or more causes, the proximate cause, i.e., the direct, the
most dominant and most effective cause of loss should be
taken into consideration. The insurance company is not
liable for the remote cause.
Example: In the above example, ‘fire’ is accepted as the
proximate cause of loss. If there had been no fire and
goods would have destroyed due to excessive heat, the
insurance company would not be liable to pay
compensation.
5. Doctrine of subrogation
After the insured is compensated for the loss or damage of
the property insured by him/her, the right of ownership of
such property passes on to the insurer. This is because the
insured cannot make any profit by selling the damaged
property.
Example: Mr. Y gets his motor car insured. Some of its
parts got damaged in a road accident. He gets the insurance
claim and gets the damaged parts replaced with new ones.
But the damaged parts will be taken by the insurance
company. The insured has no right over the damaged parts
since he has already got compensation for the loss.
6. Contribution
When more than one insurance policy is taken to cover
the same risk, then it is known as ‘Double Insurance’.
According to the principle of contribution, 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 him for the actual amount of
loss. Separately, the insured cannot claim total loss
from each insurer because he has no right to recover
more than the full amount of his actual loss.
If the full amount is recovered from one insurer, the
right to obtain further payment from other insurers
ceases; and the insurer who has paid claim has the
right to call upon other liable insurers to contribute for
the loss of payment.
Example: A businessman gets his factory insured
against fire for `5,00,000 with insurer A and ` 3,00,000
with insurer B. Due to fire, a loss of ` ` 1,60,000
occurred. Then, insurers A and B will contribute the
loss in the ratio 5 : 3 and will be liable to pay `
1,00,000(3/8 × 1,60,000) and ` 60,000(5/8 × 1,60,000)
respectively to the businessman.
Life Insurance
A life insurance policy is basically a protection against
the uncertainty of life, that is death.
Life Insurance may be defined as a contract in which
the insurance company (called insurer) undertakes to
insure the life of a person (called assured) in exchange
of a sum of money called premium (which may be paid
in one lump sum or monthly, quarterly, half yearly or
yearly) and promises to pay a certain sum of money
either on the death of the assured or on expiry of
certain period.
Importance of Life Insurance
1. Life insurance provides protection to the family at
premature death of an individual.
2. It gives adequate amount at an old age when earni-
ng capacities are reduced.
3. Life insurance is not only a protection but is a sort
of investment because a certain sum is returnable
to the assured at the time of death or at the expiry
of a certain period.
Main Elements of a Life Insurance Contract
1. The contract of life insurance is a contract of
utmost good faith. The assured should be honest
and must disclose all material facts about his
health to the insurer.
2. In case of life insurance policy, a person has insur-
able interest in his / her own life, in the life of
his/her spouse, or in the lives of his/her children.
The assured must have insurable interest at the
time when the insurance is affected. Insurable
interest at the time of maturity is not necessary.
Example: A husband took the life insurance
policy of his wife. After one year the couple got
divorced and later on after two years the wife
died. If the husband is making regular payment of
premium even after divorce, then he will get the
compensation for the death of his wife even after
divorce because the insurable interest must be present
at the time of taking policy.
It is to be noted that an employer has insurable interest
in the life of the employees. Similarly, a creditor has
insurable interest in the life of the debtor upto the
amount of debt.
3. 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 death of the
assured is fixed in advance.
Fire Insurance
Fire insurance is a contract whereby the insurer, in
consideration of the premium paid, undertakes to
make good any loss or damage caused by a fire during a
specified period upto the amount specified in the
policy.
A claim for loss by fire must satisfy the following two
conditions:
1. There must be actual loss; and
2. Fire must be accidental and non-intentional.
Main elements of a fire insurance contract
1. In fire insurance, the insured must have insurable
interest in the subject matter of the insurance. Insurable
interest must be present both at the time of insurance
and at the time of loss.
2. The contract of fire insurance is a contract of utmost
good faith. The insured should be honest and disclose
all facts regarding the nature of property and risks
attached to it. The insurance company should also
disclose the facts of the policy to the insured.
3. The contract of fire insurance is a contract of strict
indemnity. In the event of loss, the insured can recover
the actual amount of loss or maximum amount of
policy, whichever is lower, but not more than that. For
example, if a businessman has insured goods for`
2,00,000, the insurer is not liable to pay more than
`2,00,000 if goods worth ` 5,00,000 are destroyed by
fire.
4. The insurer is liable to compensate only when fire
is the proximate cause of damage or loss. For
example, if overheating without ignition causes
damage to goods, it will not be regarded as a fire
loss and hence insurance claim cannot be
recoverable.
Marine Insurance
A marine insurance contract is an agreement wherein
the insurer (called underwriter) undertakes to compe-
nsate the insured (generally the owner of a ship or
cargo) for complete or partial loss at sea. A certain sum
of money is paid by the insured in consideration for
the guarantee/protection he gets.
Marine insurance provides protection against loss by
marine perils or perils of the sea, e.g., collision of ship
with the rock, or ship attacked by the enemies, risk of
theft of goods, etc.
Marine insurance is slightly different from other types
of insurance. There are three things involved—ship or
hull, cargo or goods, and freight.
1. Ship or hull insurance: This is an insurance policy
for indemnifying the insured for losses caused by
damage to the ship.
2. Cargo insurance: The cargo while being transported
by ship is subject to many risks, e.g., risk of theft, loss
of goods. These may be at the port or on voyage. Thus,
an insurance policy can be issued to cover against such
risks to cargo.
3. Freight insurance: Freight insurance is for
reimbursing the loss of freight to the insured (shipping
company), if the cargo does not reach the destination
due to damage or loss in transit because in such a case
freight charges are not paid to the insurance company.
Main elements of a marine insurance contract
1. The contract of marine insurance is a contract of
indemnity. In the event of loss, the insured can recover
only the actual amount of loss from the insurance
company. However, in case of ‘Hull Policy’, the amount
insured is fixed at a level above the current market
value.
2. The contract of marine insurance is a contract of
utmost good faith. Both the insured and insurer must
disclose everything, which is in their knowledge and
can affect the insurance contract.
3. Insurable interest must exist at the time of loss but not
necessary at the time when the policy was taken.
Following persons have insurable interest in marine
adventure:
• Owner of the goods
• Buyer of the goods
• Insurer
• Lender of money on mortgage of ship/cargo in
respect of the loan
• Master and crew of a ship in respect of their wages.
4. The principle of causa proxima will also apply to a
marine insurance contract. If a loss is caused by
several reasons, then the nearest cause of loss will
be considered.
Difference between Life, Fire and Marine Insurance
Basis Life Insurance Fire Insurance Marine Insurance
1. Subject The subject matter of The subject matter The subject matter
matter insurance is human life. is any physical is a ship, cargo or
property or assets. freight.
2. Element Life insurance has the Fire insurance has Marine insurance
elements of protection only the element of has only the
and investment or protection and not element of
both. the element of protection.
investment.
3. Insurable Insurable interest must Insurable interest Insurable interest
Interest be present at the time on the subject must be present at
of effecting the policy, matter must be the time when claim
but need not be present both at the falls due or at the
necessary at the time time of effecting the time of loss only.
when the claim falls policy as well as
due. when the claim falls
due.
4. Duration Life insurance policy Fire insurance policy Marine insurance
usually exceeds 1 year usually does not policy is for one year
and is taken for exceed one year. or period of voyage
longer periods or mixed.
ranging from 5 to 30
years or whole life.
5. Loss Loss is not Loss is measurable. Loss is measurable.
measurement measurable.
6. Indemnity Life insurance is not Fire insurance is a Marine insurance is
based on the contract of a contract of
principle of indemnity. The indemnity. The
indemnity. The sum insured can claim insured can claim
assured is paid either only the actual the market value of
on the happening of amount of loss from the ship and cost of
certain event or on the insurer. The loss goods destroyed at
maturity of the due to the fire is sea and the loss will
policy. indemnified subject be indemnified.
to the maximum
limit of the policy
amount.
7. Surrender Life insurance policy Fire insurance does Marine insurance
Value or has a surrender value not have any does not have any
paid up or paid up value. surrender value or surrender value or
value paid up value. paid up value.
8. Policy One can insure for any In fire insurance, the In marine insurance,
Amount amount in life amount of the policy the amount of the
insurance. cannot be more than policy cannot exceed
the value of the the market value of
subject matter. the ship or cargo.
9. There is an element of The event i.e., The event i.e., loss at
Contingency certainity. The event destruction by fire sea may not occur
of Risk i.e., death of maturity may not happen. and there may be no
or policy is bound to There is an element of claim. There is an
happen. Therefore a uncertainity and there element of
claim will be present. may be no claim. uncertainty.
Health Insurance
Disability resulting from illness or accident may be
peril to family because it not only cuts off income but
also creates large medical expenses. Health insurance
is a safeguard against such medical costs. In India,
presently the health insurance exists primarily in the
form of Mediclaim policy.
Health insurance provides following types of coverage:
• Medical expenses: It covers the expenses of hospi-
talisation/nursing home bills and doctors’ services.
• Disability income: It replaces the income lost wh-
ile the insured is unable to work.
RECAP
Types of Bank Accounts

1. Savings Deposit Account: This type of bank account
encourages the small savings of households.
2. Current Deposit Account: In this type of accounts,
funds are deposited by business organisations,
withdrawable through cheque.
3. Recurring Deposit Account: In this type of account, a
depositor deposits a fixed amount of money on an
annuity basis (say on monthly basis) for a fixed period.
This money cannot be withdrawn before maturity.
4. Fixed Deposit Account: Money deposited in fixed
deposit account carry higher rate of interest than saving
deposits account. The amount of deposits is repayable by
the bank after the expiry of the fixed term.
5. Multiple Option Deposit Account: Multiple Option
Deposit account is a combination of saving account
and fixed deposit account in which amount of deposit in
excess of a particular limit gets automatically transferr-
ed into fixed Deposit.
Banking Services
1. Bank Draft: A bank draft (also known as Demand
Draft) is an instrument which is used for the transfer of
funds. Anybody can obtain a bank draft after depositing
the amount in the bank.
2. Cash Credits: A cash credit is a short-term cash loan to
a company against security.
3. Bank Overdraft: The bank allows a customer to
overdraw his current account balance up to a limit.
e-Banking
It means banking using the electronic media.
The range of services offered by e-banking are:
• Automated Teller Machines (ATM)
• Point of Sales (PoS)
• Electronic Data Interchange (EDI)
• Credit Cards
• Electronic or Digital cash
• Electronic funds transfer (EFT)
Types of Digital Payments
1. Electronic funds transfer (EFT): EFT are electronic
transfer of money from one bank account to another via
computer-based systems. The two ways in which EFT
can be done are: NEFT (National Electronic Fund
Transfer) and RTGS (Real Time Gross Settlement). The
minimum transaction value for RTGS is ` 2 lakh.
2. Credit or Debit Cards, i.e. ‘plastic money’: The customer
can make digital payments for online transaction throu-
gh credit or debit cards.
3. Digital Cash: Digital cash (also known as electronic
cash) refers to a system in which a person can securely
pay for goods or services electronically.
4. Aadhaar Enabled Payment System (AEPS): It can be
used for payment transactions.
5. Mobile Wallets: A mobile wallet is a type of virtual
wallet service that can be used by downloading an app
(e.g. Paytm, Mobikwik etc.).
6. Point of Sales (PoS) Terminals: It is usually a hand
held device that reads banking cards.
Insurance
Insurance is a means of providing against loss caused by
natural or man-made factors.
Principles of Insurance
1. Utmost good faith
2. Insurable interest
3. Indemnity
4. Proximate cause
5. Subrogation
6. Contribution
Types of Insurance
1. Life Insurance: A life insurance policy is basically a
protection against the uncertainty of life, that is death.
2. Fire Insurance: It is a contract whereby the insurer, in
consideration of the premium paid, undertakes to make good
any loss or damage caused by a fire during a specified period
upto the amount specified in the policy.
3. Marine Insurance: It is a contract or an agreement
wherein the insurer (called underwriter) undertakes to
compensate the insured (generally the owner of a ship or
cargo) for complete or partial loss at sea.
4. Health Insurance: Health insurance is a safeguard
against such medical costs. In India, presently the health
insurance exists primarily in the form of Mediclaim
policy.
Question 1
Match the columns:
(i) Insured must have some economic (a) The principle of Subrogation
interest in the subject matter of
insurance contract.
(ii) After compensating the loss, insurer (b) The principle of Indemnity
gets all the rights with respect to the
subject-matter insured.
(iii) Insured is entitled to recover the loss (c) The principle of Insurable
suffered by him, up to the limit of policy Interest
amount.

Answer 1
(i) - (c), (ii) - (a), (iii) - (b)

Question 2
A contract of insurance is a contract of indemnity in
every case. True/False? Give reason.

Answer 2
False: Life insurance contract is not a contract of
indemnity because one cannot estimate the loss
due to the death of person.

Question 3
In fire and marine insurance, the insured event may or
may not happen. True/False? Give reason.

Answer 3
True: The events like destruction by fire or loss at sea
may not happen and there may be no claim. There
is an element of uncertainty.

Question 4
In a life insurance contract, insurable interest must exist
both at the time of making the contract and at the time
of payment under the policy. True/False? Give reason.

Answer 4
False: In life insurance, insurable interest must be
present only at the time of effecting the policy,
but need not be necessary at the time when
the claim falls due.

Question 5
In fire insurance, the policy-holder need to have
insurable interest in the goods only at the time of taking
the policy. True/False? Give reason.

Answer 5
False: In fire insurance, the insured must have
insurable interest in the subject matter of the
insurance—both at the time of insurance and at
the time of loss.

Question 6
Principle of indemnity is not applicable to which insurance?

Answer 6
Life insurance

Question 7
A company has undertaken a fire insurance policy for `
8 lakh. After two months due to fire it incurred a loss of
` 5 lakh. How much amount will the company get as
compensation?

Answer 7
` 5 lakh

Question 8
At what time the insurable interest must be present in case of
life insurance?

Answer 8
At the time of taking the policy.

Question 9
Name the principle of insurance under which the
insurer stands in place of the insured after settlement of
claim, in relation to the insured property.

Answer 9
Principle of Subrogation

Question 10
Name the type of insurance wherein insurable interest
need not exist when the policy in taken.

Answer 10
Marine insurance

Question 11
When should insurable interest be present in fire
insurance?

Answer 11
At the time of taking policy as well as at the time of
loss of subject matter.

Question 12
When should insurable interest be present in marine
insurance?

Answer 12
At the time of loss of subject matter.

Question 13
Name the principle of insurance which states that it is
the duty of the insured to take reasonable steps to
minimise the loss or damage to the insured property.

Answer 13
Principle of Mitigation.

Question 14
Ragini has insured her house for ` 5,00,000 against the
fire. There is a fire and Ragini suffers a loss of ` 1,00,000.
How much amount she can recover from the insurer?

Answer 14
` 1,00,000.

Question 15
Mention any two persons who have insurable interest in
case of a marine insurance policy.

Answer 15
(i) Buyer of goods (ii) Lender of money.

Question 16
In which type of insurance, insurable interest must exist
both at the time of insurance and at the time of loss?

Answer 16
Fire insurance.

Question 17
“The insured must have an interest in the subject matter
of insurance.” Which principle of insurance is referred to
in this statement?

Answer 17
Principle of insurable interest.

Question 1
Aditya gets his house insured against fire of ` 10 lakh
with insurer A and for ` 5 lakh with insurer B. A loss of `
3 lakh occurred. How much compensation can he claim
from A and B? Why? (3 marks)

Answer 1
Aditya can claim compensation for loss by fire (` 3 lakh)
from the insurers A and B in the ratio of 2 : 1 (10 lakh : 5
lakh), i.e., ` 2 lakh from insurer A and ` 1 lakh from the
insurer B. This is because of the principle of contribution.
According to the principle of contribution, 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 him for the actual amount of loss. Separately,
the insured cannot claim total loss from each insurer
because he has no right to recover more than the full
amount of his actual loss.
Question 2
Sukarn has taken fire insurance policy for his factory.
Due to fire he suffered a loss of ` 2 lakh and he gets the
compensation for the same. The half-burnt goods can be
sold for ` 30,000.Who has the right over it? Why?
(3 marks)

Answer 2
The insurance company has the right over the amount
realised by selling the half burnt goods after it has paid
compensation for the loss to the insured. Sukarn cannot
make any profit by selling the half burnt goods. (Principle
of subrogation)

Question 3
A factory owner gets his stock of goods insured, but he
hides the fact that the electricity board has issued him a
statutory warning letter to get his factory’s wiring
changed. Later on, the factory catches fire due to short
circuit of wiring. Can he claim compensation?
(3 marks)

Answer 3
No, the factory owner cannot claim compensation from
the insurance company since he has hidden the fact of
statutory warning from the electricity board. He has
violated the principle of ‘utmost good faith’. According to
this principle, the insured must voluntarily make full,
accurate disclosure of all facts, material to the risk being
proposed. The insurer must also make clear all the terms
and conditions in the insurance contract.

Question 4
Shubham has taken a loan from Saurabh against the
security of his factory. Can Saurabh take a fire insurance
policy of that factory? (1 mark)

Answer 4
Yes, Saurabh (the lender) can take a fire insurance policy
of the factory though he is not its owner, because he has
financial interest in the factory premises. (Principle of
insurable interest)

Question 5
Rishabh insured his factory for ` 5 lakh against fire. Due
to fire, he suffered a loss of ` 2 lakh. How much amount
he can recover from the insurance company? Why?
(1 mark)

Answer 5
Rishabh can recover ` 2 lakh from the insurance company
(not the policy amount, that is, ` 5 lakh) since he has
suffered a loss of ` 2 lakh only. The purpose of insurance
is to compensate for loss and not to earn profit. (Principle
of indemnity)

Question 6
Ashish took a marine policy to cover the goods
exported by him. Under the policy goods have been
insured against damage likely to be caused by sea-water.
During the voyage a hole was caused in the bottom of
the ship. Through this hole sea water entered into the
ship which damaged the goods insured. Can Ashish claim
compensation for the loss? (3 marks)

Answer 6
Yes, Ashish can claim compensation for the loss from the
insurance company.
Reason: In this case there are two causes of the mishap,
which has occurred. First, the hole caused in the bottom
of the ship and second, seepage of sea water into the ship.
The nearest cause of the damage caused to the goods is
the seepage of the water, the hole in the bottom of the
ship is the remote cause. Therefore, Ashish must be
compensated for the loss caused by the damage to the
goods covered by the policy.

Question 7
Sohan took the life insurance policy of his wife. After
one year, the couple got divorced and after two years,
his wife met with an accident and died on the spot. Is
Sohan entitled to get compensation from the insurance
company, if Sohan was regularly paying the premium
amount? (3 marks)

Answer 7
Yes, Sohan is entitled to the compensation because in case
of life insurance policy, the insurable interest must be
present at the time of contract. So, Sohan will get the
compensation for the death of his wife even after divorce.

Question 8
Madhav took a fire insurance policy of ` 20 lakh for his
factory at the annual premium of ` 24, 000. In order to
avoid premium more than this amount, he did not
disclose that highly explosive chemicals are being
manufactured in his factory. Due to a fire, his factory
gets severely damaged. The insurance company refused
to make the payment tor claim as it became aware
about the highly explosive chemicals. Is Madhav entitled
to receive the claim? Give reason in support of your
answer. (1 mark)

Answer 8
No, Madhav is not entitled to receive the claim as he has
violated the principle of ‘Utmost Good Faith’.

Question 9
A transport company took an accident insurance policy
for all its vehicles. A truck of that company carrying
oranges met with an accident. Due to that accident
there was no damage to oranges but oranges were
unloaded from that truck and reloaded to another. Due
to time wasted in unloading and reloading the oranges
got spoiled. Will the company get compensation for loss
of oranges from the insurance company or not? Which
principle is related with this case? (1 mark)

Answer 9
The company will not get compensation because oranges
were not spoiled in accident, but got spoiled due to delay
in unloading and loading. This case is related to the
principle of ‘Proximate Cause’.

Question 10
Mr. Sugan took an Insurance Policy against his car and
after three months he sold it to Mr. Sunil. The car was
stolen from outside of Mr. Sunil’s house. Mr. Sugan made
a claim to the insurance company. His claim was rejected
on the ground that Mr. Sugan was no longer owner of
the car, so he has no insurable interest and he has no
financial loss with the loss of the car.
(a) Was Mr. Sugan right in making claim? Give reason in
support of your answer.
(b) Who can claim compensation? (3 marks)

Answer 10
(a) No, Mr. Sugan cannot claim compensation from the
insurance company because he has already sold the
car. The principle of Insurable Interest states that the
insured must have insurable interest at the time of
the loss.
(b) Mr. Sunil can claim compensation from the insurance
company since he has insurable interest in the car at
the time of the loss.

 e-business: concept, scope and benefits
— Give the meaning of e-business.
— Discuss the scope of e-business.
— Appreciate the benefits of e-business
— Distinguish e-business from
traditional business.
e-Business: Concept,
Scope and Benefits
Concept
e-Business (electronic business) means conducting
industry, trade and business using the computer
networks, i.e. the internet.
e-Business
e-business versus e-commerce
Though, many a times, the terms e-business and
ecommerce are used interchangeably, yet more precise
definitions would distinguish between the two. Just as
the term ‘business’ is a broader term than ‘commerce’,
e-business is a more elaborate term and comprises
various business transactions and functions conducted
electronically, including the more popular gamut of
transactions called ‘e-commerce.’
e-commerce covers a firm’s interactions with its
customers and suppliers over the internet. e-business
includes not only e-commerce, but also other electronically
conducted business functions such as production, inventory
management, product development, accounting and finance
and human resource management.
e-business is, therefore, clearly much more than buying
and selling over the Internet, i.e., e-commerce.
Scope of e-Business
The scope of e-business is quite vast. Almost all types
of business functions such as production, finance,
marketing and personnel administration as well as
managerial activities like planning, organising and
controlling can be carried out over computer
networks.
The other way of looking at the scope of e-business is
to examine it in terms of people or parties involved in
electronic transactions. Viewed from this perspective,
a firm’s electronic transactions and networks can be
visualised as extending into three directions viz.,
• B2B which is a firm's interactions with other
businesses,
• B2C i.e., a firm's interactions with its customers and
• intra-B or a firm's internal processes.
A brief discussion of various constituents of e-business
and inter and intra-transactions among them is given
as below:
B2B Commerce
Here, both the parties involved in e-commerce
transactions are business firms, and, hence the
name B2B, i.e., business-to-business.
B2B Commerce
Creation of utilities or delivering value requires a

business to interact with a number of other business
firms which may be suppliers or vendors of diverse
inputs; or else they may be a part of the channel
through which a firm distributes its products to the
consumers.
For example, the manufacture of an automobile requires
assembly of a large number of components which in
turn are being manufactured elsewhere — within the
vicinity of the automobile factory or even overseas. To
reduce dependence on a single supplier, the automobile
factory has to cultivate more than one vendor for each
of the components. A network of computers is used
for placing orders, monitoring production and delivery
of components, and making payments.
Likewise, a firm may strengthen and improve its
distribution system by exercising a real time control
over its stock-in-transit as well as that with different
middlemen in different locations. For example, each
consignment of goods from a warehouse and the stock
-at-hand can be monitored and replenishments and
reinforcements can be set in motion as and when
needed. Or else, a customer's specifications may be
routed through the dealers to the factory and fed into
the manufacturing system for customised production.
Use of e-commerce expedites the movement of the
information and documents; and of late, money transfers
as well.
Historically, the term e-commerce originally meant
facilitation of B2B transactions using Electronic Data
Interchange (EDI) technology to send and receive
commercial documents like purchase orders or invoices.
B2C Commerce
B2C (business-to-customers) transactions have
business firms at one end and its customers on the
other end.
B2C Commerce
Although, what comes to one’s mind instantaneously is

online shopping, it must be appreciated that ‘selling’ is
the outcome of the marketing process. And, marketing
begins well before a product is offered for sale and continues
even after the product has been sold. B2C commerce,
therefore, entails a wide gamut of marketing activities
such as identifying activities, promotion and sometimes
even delivery of products (e.g., music or films) that are
carried out online. e-Commerce permits conduct of
these activities at a much lower cost but high speed.
For example, ATM speeds up withdrawal of money.
Customers these days are becoming very choosy and
desire individual attention to be given to them. Not only
do they require the product features to be tailormade to
suit their requirements, but also the convenience of
delivery and payment at their pleasure. With the onset
of e-commerce, all this has become a reality.
Further, B2C variant of e-commerce enables a business
to be in touch with its customers on round-the-clock
basis. Companies can conduct online surveys to ascertain
as to who is buying what and what the customer
satisfaction level is.
 Note
Many consumer organisations are also working towards
this direction and helping consumers in redressal of their
grievances. For example, they provide legal assistance to
consumers by way of providing aid, legal advice, etc. in
seeking legal remedy. They may also file complaints in
appropriate consumer courts on behalf of the consumers.
Intra-B Commerce
Here, parties involved in the electronic transactions
are from within a given business firm, hence, the
name intra-B commerce. It is largely due to use of
intra-B commerce that today it has become possible for
the firms to go in for flexible manufacturing. Use of
computer networks makes it possible for the marketing
department to interact constantly with the production
department and get the customised products made as
per the requirements of the individual customer.
Closer computer-based interactions among the other
departments makes it possible for the firm to reap
advantages of efficient inventory and cash management,
greater utilisation of plant and machinery, effective
handling of customers’ orders, and effective human
resource management.
Just as intercom facilitated voice communication within
the office, intranet facilitates multimedia and even 3-D
graphic communication among organisational units for
well-informed decisions, permitting better coordination,
faster decisions and speedier work flows.
 Note
A firm’s interactions with its employees, sometimes referred
to as B2E commerce. Companies are resorting to personnel
recruitment, interviewing and selection, training, development
and education via e-commerce (‘e-learning’). Employees can
use electronic catalogues and ordering forms and access
inventory information for better interaction with the
customers. They can send field reports via e-mail and the
management can have them on real time basis. In fact,
Virtual Private Network (VPN) technology would mean that
employees do not have to come to office. Instead, in a way
the office goes to them and they can work from wherever
they are, and at their own speed and time convenience.
Meetings can be held online via tele/video conferencing.
C2C Commerce
Here, the business originates from the consumer and
the ultimate destination is also consumers, thus the
name C2C commerce. This type of commerce is best
suited for dealing in goods for which there is no
established market mechanism, for example, selling
used books or clothes either on cash or barter basis. The
vast space of the internet allows persons to globally
search for potential buyers.
C2C Commerce
An excellent example of this is found at e-Bay where
consumers sell their goods and services to other
consumers. Firstly, e-Bay allows all the sellers and buyers
to rate one another. In this manner, future prospective
purchasers may see that a particular seller has sold to
more than 2,000 customers — all of whom rate the
seller as excellent. In another example, a prospective
purchaser may see a seller who has previously sold only
four times and all four rate the seller poorly. This type of
information is helpful.
Another technology that has emerged to support C2C
activities is that of the payment intermediary. Pay Pal is
a good example of this kind. Instead of purchasing
items directly from an unknown, untrusted seller; the
buyer can instead send the money to Pay Pal. From
there, Pay Pal notifies the seller that they will hold the
money for them until the goods have been shipped and
accepted by the buyer.
An important C2C area of interactive commerce can be
the formation of consumers’ forum and pressure groups
(e.g. Yahoo groups). Like a vehicle owner in a traffic jam
can alert others via message on radio (FM) about the
traffic situation of the area he is stuck in; an aggrieved
customer can share his experience with a product/
service/ vendor and warn others by writing just a
message and making it known to the entire group.
Extra Shots
Some e-Business Applications
e-Procurement: It involves internet-based sales transactions between
business firms, including both, “reverse auctions” that facilitate online
trade between a single business purchaser and many sellers, and,
digital marketplaces that facilitate online trading between multiple
buyers and sellers.
e-Bidding/e-Auction: Most shopping sites have 'Quote your price'
whereby you can bid for the goods and services (such as airline
tickets!). It also includes e-tendering whereby one may submit tender
quotations online.
e-Communication/e-Promotion: Right from e-mail, it includes
publication of online catalogues displaying images of goods,
advertisement through banners, pop-ups, opinion poles and
customer surveys, etc. Meetings and conferences may be held by the
means of video conferencing.
e-Delivery: It includes electronic delivery of computer software,
photographs, videos, books (e-books) and journals (ejournals) and
other multimedia content to the user's computer. It also includes
rendering of legal, accounting, medical, and other consulting services
electronically. In fact, internet provides the firms with the
opportunities for outsourcing of a host of Information Technology
Enabled Services (ITES) that we will be discussing under business
process outsourcing. Now, you can even print the airlines and railway
tickets at home!
e-Trading: It involves securities trading, that is online buying and
selling of shares and other financial instruments. For example,
sharekhan.com is India's largest online trading firm.
Benefits of e-Business
1. Ease of formation and lower investment
requirements
Unlike a host of procedural requirements for setting
up an industry, e-business is relatively easy to start.
Business firms can get quick order supplies from the
vendors. They need not maintain huge stocks and
block up their capital.
2. Convenience
Internet offers the convenience of ‘24 hours a day × 7
days a week × 365 days’ a year business that allows a
customer to go for shopping well after midnight. e-
business offers the advantage of accessing anything,
anywhere, anytime.
3. Speed
Much of the buying or selling involves exchange of
information that internet allows at the click of a
mouse. This benefit becomes all the more attractive
in the case of information-intensive products such as
softwares, movies, music, e-books and journals that
can even be delivered online. Cycle time, i.e., the time
taken to complete a cycle from the origin of demand
to its fulfilment, is substantially reduced due to
transformation of the business processes from being
sequential to becoming parallel or simultaneous.
4. Global reach/access
Internet is truly without boundaries. e-business
enables business firms to reach out to customers all
over the world who have access to internet. Similarly,
buyers have wider choice because the whole world
has become a shop for them. They have complete
freedom to choose products from almost any part of
the world.
5. Movement towards a paperless society
Use of internet has considerably reduced dependence
on paperwork and the attendant ‘red tape.’ Maruti
Udyog does bulk of its sourcing of supplies of
materials and components in a paper less fashion.
Even the government departments and regulatory
authorities are increasingly moving in this direction
whereby they allow electronic filing of returns and
reports. In fact, e-commerce tools are effecting the
administrative reforms aimed at speeding up the
process of granting permissions, approvals and
licences. In this respect, the provisions of Information
Technology Act 2000 are quite noteworthy.
Difference between Traditional
Business and e-Business
BASIS TRADITIONAL BUSINESS e-BUSINESS
1. Ease of Difficult Simple
formation
2. Physical Required Not required
presence
3. Locational Proximity to the source of raw None
requirements materials or the market for
the products
4. Cost of setting High Low as no requirement
up of physical facilities
5. Operating High due to fixed charges Low as a result of
cost associated with investment in reliance on network of
procurement and storage, relationships rather
production, marketing and than ownership of
distribution facilities resources
6. Nature of Indirect through Direct
contact with intermediaries
the suppliers
and customers
7. Nature of Hierarchical–from top level Non-hierarchical,
internal management to middle level allowing direct vertical,
communication management to lower level horizontal and diagonal
management to operatives communication
8. Response Long Instantaneous
time for
meeting
customers’/
internal
requirements
9. Shape of the Vertical/tall, due to hierarchy Horizontal/flat due to
organisational or chain of command directness of command
structure and communication
10. Business Sequential precedence Simultaneous
processes succession relationship, i.e., (concurrence) different
and length of purchase, production/ processes. Business
the cycle operation, marketing, sales. process cycle is,
The business process cycle is, therefore, shorter
therefore, longer
11. Opportunity Much more Less. However, for
for physical digitable products such
pre-sampling an opportunity is
of the products tremendous. You can
pre-sample music,
books, journals
software, videos, etc.
12. Opportunity Much more Less
for
interpersonal
touch
13. Ease of going Less Much, as cyber space is
global truly without boundaries
14. Government Shrinking Much, as IT sector is
patronage among the topmost
priorities of the
government
15. Nature of Semi-skilled and even Technically and
human unskilled manpower needed professionally qualified
capital personnel needed
16. Transaction Low, due to arm’s length High due to the
risk transactions and face-to-face distance and anonymity
contact of the parties
Question 1
e-commerce does not include:
(a) A business’s interactions with its suppliers
(b) A business’s interactions with its customers
(c) Interactions among the various departments within
the business
(d) Interactions among the geographically dispersed
units of the business
Answer 1
(c) Interactions among the various departments within
the business

Question 2
A Call Centre handles
(a) Only in-bound voice based business
(b) Only out-bound voice based business
(c) Both voice based and non-voice based business
(d) Both customer facing and back-end business

Answer 2
(c) Both voice based and non-voice based business

Question 3
It is not an application of e-business:
(a) Online bidding
(b) Online procurement
(c) Online trading
(d) Contract R&D

Answer 3
(d) Contract R&D

Question 4
Use of ATM to withdraw money is an example of:
(a) B2B commerce
(b) B2C commerce
(c) C2C commerce
(d) C2B commerce

Answer 4
(b) B2C commerce

Question 5
Formation of consumers’ forum and pressure groups
(e.g.,Yahoo group) is an example of:
(a) B2B commerce
(b) B2C commerce
(c) C2C commerce
(d) C2B commerce

Answer 5
(c) C2C commerce

Question 6
This is not a benefit of e-Business:
(a) Convenience
(b) Low personal touch
(c) Global reach
(d) Customer satisfaction

Answer 6
(b) Low personal touch

Question 7
Match the columns:
Column I Column II
(i) Withdrawal of money from ATM. (a) B2B commerce
(ii) Employees send their daily report (b) C2C commerce
through e-mail.
(iii) Sale of used books through (c) Intra-B commerce
eBay.com.
(iv) Purchase of security lock system (d) B2C commerce
by Hyundai from Autocops.

Answer 7
(i) - (d), (ii) - (c), (iii) - (b), (iv) - (a)

Question 8
e-Business only includes buying and selling products and
services over the internet.

Answer 8
False: e-Business includes not only buying and selling
products and services over the internet (i.e., e-
commerce) but also other electronically conducted
business functions such as production, inventory
management, product development, accounting and
finance and HRM.

Question 9
Intra-B commerce involves a firm's interactions with its
employees.

Answer 9
False: In Intra-B commerce, parties involved are from
within a given business firm, e.g., interaction between
production department and marketing department.

Question 10
C2C commerce is best suited for dealing in goods for
which there is no established market.

Answer 10
True: For example, C2C commerce can be used to
sell used books over the internet.

Question 11
e-Business provides customers' wider choice.

Answer 11
True: Because of internet (e-Business), the whole world
has become a shop for the customers. They have
complete freedom to choose products from almost any
part of the world.

Question 12
By what name digitisation of business is known?

Answer 12
e-Business

Question 13
What is the relationship between e-business and
e-commerce?

Answer 13
e-Business includes not only e-commerce, but also
other electronically conducted business functions
such as production, inventory management, product
development, accounting and finance and human

Question 1
Home Foods Pvt. Ltd. deals in grocery items of daily
domestic usage. Its business is spread throughout Delhi.
The company’s 20 stores are providing their services to
the residents of Delhi. All the business activities of this
company are done through internet. Its main activities
are obtaining information about goods, receiving orders
of goods, making payments, receiving payments,
inventory management, product development, etc. The
use of internet in the business activities has resulted into
reduced costs of business transactions. The customer also
can shop sitting at home or office. They can access the
internet to buy goods and services. The use of internet
has considerably reduced dependance on paper work for
the company.
(a) Which system of business is being followed by Home
Foods Pvt. Ltd.?
(b) State any three benefits of the system of business
identified in (a) by quoting the lines from the above para.
(4 marks)

Answer 1
(a) The company is following e-Business since it conducts
all business activities using the computer networks,
i.e., through internet.
(b) Benefits of e-Business:
(i) Reduced costs
“The use of internet in the business activities has
resulted into reduced costs of business transactions.”
e-Business can help reduce advertising cost, exchange
of information cost, delivery cost, etc.

(ii) Customer convenience and satisfaction
“The costumer also can shop sitting at home or office.
They can access the internet to buy goods and services.”
Customers need not stand in a queue to talk to
salesman or to read catalogue and price-lists. They
can access the internet to buy goods and services.
Payments can also be made online. e-Business allows
quick response and redressal to customer complaints.
This helps to increase customer satisfaction.

(iii) Movement towards a paperless society
“The use of internet has considerably reduced dependence
on paper work for the company.”
Even the government departments and taxation
authorities are increasingly following electronic filing
of returns and reports.

Question 2
Unique enterprise is dealing in auto spare parts. With
the expansion in business the enterprise found that the
decisions are delayed and level of coordination is coming
down. The CEO of the company called for a meeting of
all the managers. Ayush, a newly appointed manager
suggested that company should have its own internet so
that all the employees can interact and pass important
information to each other through internet. Even short
meeting of different departments can be conducted
through Video conferencing to take fast action. The CEO
liked the idea and installed an internet connection for
connecting all the employees on line.
Which type of e-commerce is suggested by Mr Ayush?
Explain.
(3 marks)

Answer 2
Intra-B Commerce
Here, parties involved in the electronic transactions are
from within a given business firm; hence, the name intra-B
commerce.
Intra-B commerce makes it possible for the marketing
department to interact constantly with the production
department to get information about customer
requirements.
Intra-B commerce makes it possible for the firm to reap
advantages of efficient inventory and cash management,

greater utilisation of plant and machinery, effective
handling of customers’ orders and effective human

Question 3
Mr. Mohan wants to buy a new sofa set for his house, but
he did not have enough space to keep it. He planned to
sell the old sofa through OLX, so that he could get some
surplus money and space for new sofa set. He got a very
good response and out of many buyers, he chose the
buyer who gave him the best price.
Identify and explain the type of e-commerce referred to in
the above case.
(3 marks)

Answer 3
C2C Commerce
Here, the business originates from the consumer and the
ultimate destination is also consumer.
This type of commerce is best suited for dealing in goods
for which there is no established market, e.g., selling used
books over the internet.
Another important C2C area of application is the
formation of consumers’ forum and pressure groups (e.g.,
Yahoo groups). An aggrieved customer can share his
experience with a product/service/vendor and warn
others by just writing a message.
 Concept of social responsibility
 Case for social responsibility
 Responsibility towards owners, investors,
consumers, employees, government and
community.
 Role of business in environment protection
Introduction
Sugan is a young newspaper reporter and has been
writing for almost six months on malpractices by
business enterprises including such issues as misleading
advertisements, supply of adulterated products, poor
working conditions, environmental pollution, bribing
government officials, and so on. He has started
believing that business people tend to do anything to
mint money. He happens to take an interview of Mr.
Raman Jhunjhunwala, chairman of a leading truck
manufacturing company which is known for its fair
dealing with customers, employees, investors as well
as other social groups. Through this interview, Mani
develops the understanding that it is possible for a
business enterprise to be socially responsible and
ethically upright and, at the same time, be highly
profitable. He then gets busy with studying more
about the social responsibility of business and
business ethics.
A business enterprise should do business and earn
money in ways that fulfill the expectations of the
society. Every individual living in society has certain
obligations towards society. He has to respect social
values and norms of behaviour. A business enterprise
is permitted by society to carry on industrial or
commercial activities and thereby earn profits. But it
is obligatory on part of the business enterprise not to
do anything, that is undesirable from society’s point
of view. Manufacture and sale of adulterated goods,
making deceptive advertisements, not paying taxes
which are due, polluting the environment and
exploiting workers are some examples of socially
undesirable practices which may increase the profit
of enterprises but which have adverse effect on
society at large. On the other hand, supplying good
quality goods, creating healthy working conditions,
honestly paying taxes prevention/installing pollution
devices in the factory, and sincerely attending to
customer complaints are examples of socially
desirable practices which improve the image of
enterprises and also make them profitable. In fact, it
is through socially responsible and ethically upright
behaviour that business enterprises can get durable
success.
Concept of Social Responsibility
Social responsibility of business refers to its obligation
to take those decisions and perform those actions
which are desirable in terms of the objectives and values
of our society.
The assumption of social responsibilities by business
enterprises implies that they respect the aspirations of
society and would try their best to contribute to the
achievement of these aspirations along with their profit
interests.
This idea is in contrast to the common notion that
business exists only for maximising profits for its owners.
SocialTopresponsibility
Tip
is broader than legal responsibility of business.
Legal responsibility may be fulfilled by mere compliance with the
law. Social responsibility is more than that. It is a firm’s recognition
of social obligations even though not covered by law, along with the
obligations laid down by law.
Social Responsibility Towards Different

Interest Groups
A business is a socio-economic institution. It has interaction
with several interest groups such as shareholders or
owners, workers, consumers, government and community,
etc. Business is responsible to all these interest groups.
1. Responsibility towards the shareholders/
investors/owners
 To pay a fair return on their investment (dividend
or interest).
 To ensure the safety of their investment.
 To provide regular, accurate and full information
about the working of business as well as schemes
of future growth.
 To maximise shareholders’ wealth, i.e., increase in
market value of shares.
2. Responsibility towards the workers/
employees
 To pay fair wages and salaries to the workers
and employees.
 To provide right kind of working conditions
so that it can win the cooperation of workers.
 To provide service benefits such as medical
facilities, education to children, retirement
benefits, etc.
 To develop their skills through training and
education.
 To respect the democratic rights of the workers
to form unions.
3. Responsibility towards the consumers
 To supply right quality and quantity of goods and
services at reasonable prices.
 To ensure regular and adequate supply of products.
 To avoid unfair trade practices such as
adulteration, hoarding, black-marketing, under-
weighing, misleading advertising, etc.
 To inform them about new products and new uses
of the existing products.
 To handle the customers’ grievances promptly.
4. Responsibility towards the government
and community
 To respect the laws of the country.
 To pay taxes regularly and honestly.
 To behave as a good citizen and act according to
the well accepted values of the society.
 To protect the natural environment and avoid bad,
effluent, smoky chimneys, ugly buildings, dirty
working conditions.
 To develop to proper image in society through
continuous interaction with various groups of
people.
Case/Arguments for Social Responsibility
1. Justification for existence and growth
Business exists for providing goods and services to
satisfy human needs. Though, profit motive is an
important justification for undertaking business
activity, it should be looked upon as an outcome of
service to the people. In fact, the prosperity and
growth of business is possible only through continuous
service to society.
Thus, assumption of social responsibility by business
provides justifications for its existence and growth.
2. Long-term interest of the firm
A firm can earn maximum profits in the long run
when it has its highest goal as ‘service to society’.
When increasing number of members of society —
including workers, consumers, shareholders, government
officials, feel that business enterprise is not serving
its best interest, they will tend to withdraw their
cooperation to the enterprise concerned. Therefore,
it is in its own interest if a firm fulfills its social
responsibility.
3. Avoidance of government regulation
From the point of view of a business, government
regulations are undesirable because they limit
freedom. Therefore, it is believed that businessmen
can avoid the problem of government regulations
by voluntarily assuming social responsibilities.
4. Availability of resources with business
This argument holds that business institutions have
valuable financial and human resources which can
be effectively used for solving problems of the
society.
5. Better environment for doing business
If business is to operate in a society which is full of
diverse and complicated problems, it may have little
chance of success. A society with fewer problems
provides better environment for a firm to conduct
its business.
6. Holding business responsible for social
problems
It is argued that some of the social problems have
either been created or perpetuated by business
enterprises themselves. Environmental pollution,
unsafe workplaces, corruption in public institutions,
and discriminatory practices in employment are
some of these problems. Therefore, it is the moral
obligation of business to get involved in solving
these problems, instead of merely expecting that
other social agencies will deal with them on their
own.
Extra Shots
Corporate Social Responsibility (CSR)
The European Commission defines CSR as “the responsibility of enterprises
for their impacts on society”.
The World Business Council for Sustainable Development defines CSR as
“the continuing commitment by business to contribute to economic
development while improving the quality of life of the workforce and
their families, as well as, of the community and society at large”.
The United Nations Industrial Development Organisation defines
‘Corporate social responsibility’ as a management concept whereby
companies integrate social and environmental concerns in their business
operations and interactions with their stakeholders.
In India, the concept of CSR is governed by Clause 135 of the Companies
Act, 2013, which was passed by both the Houses of the Parliament, and
had received the assent of the President of India on 23 August 2013. The
CSR provisions within the Act is applicable to companies with an annual
turnover of `1,000 crore and more, or a net worth of `500 crore and more,
or a net profit of ` 5 crore and more.
 The new rules, which are applicable from the fiscal year 2014-15 onwards,
also require companies to setup a CSR committee consisting of their
board members, including at least one independent director.
 The Act encourages companies to spend at 2% of their average net
profit in the previous three years on CSR activities.
 Only CSR activities undertaken in India will be taken into consideration.
 Activities meant exclusively for employees and their families will not
qualify under CSR.
Role of Business in Environmental
Protection
Since the quality of the environment is important for
all of us, we have a collective responsibility to protect it
from being spoiled. Whether it is government, business
enterprises, consumers, workers, or other members of
society, each one can do something to stop polluting
the environment. Government can enact laws to ban
hazardous products. Consumers, workers and the
members of society can avoid using certain products
and doing things that are not environment friendly.
The business enterprises should, however, take the
lead in providing their own solutions to environmental
problems. It is the social responsibility of every business
to take steps not only to check all sorts of pollution but
also to protect environmental resources. Business
enterprises are leading creators of wealth, employment,
trade and technology. They also command huge
financial, physical and human resources. In most
cases, a modification or change in the process of
production, redesign of equipment, substituting poor
quality materials with better ones or other innovative
approaches could greatly reduce or even eliminate
pollution entirely.
Some of the specific steps which can be taken by
business enterprises for environmental protection
are as stated below:
1. A definite commitment by top management of the
enterprise to create, maintain and develop work
culture for environmental protection and pollution
prevention.
2. Ensuring that commitment to environmental
protection is shared throughout the enterprise by
all divisions and employees.
3. Developing clear-cut policies and programmes for
purchasing good quality raw materials, employing
superior technology, using scientific techniques of
disposal and treatment of wastes and developing
employee skills for the purpose of pollution control.
4. Complying with the laws and regulations enacted
by the Government for prevention of pollution.
5. Participation in government programmes relating
to management of hazardous substances, clearing
up of polluted rivers, plantation of trees, and
checking deforestation.
6. Periodical assessment of pollution control
programmes in terms of costs and benefits so as to
increase the progress with respect to environmental
protection.
7. Arranging educational workshops and training
materials to share technical information and
experience with suppliers, dealers and customers
to get them actively involved in pollution control
programmes.
RECAP
Social Responsibility
Social responsibility refers to the obligation of business firms
to contribute resources for solving social problems and work
in a socially desirable manner.
Case for Social Responsibility
1. Justification for existence and growth
2. Long-term interest of the firm
3. Avoidance of government regulations
4. Availability of resources with business
5. Better environment for doing business
6. Holding business responsible for social problems.
Social Responsibility towards Different Interest
Groups
1. Responsibility towards the shareholders/ investors/
owners
• To pay a fair return on their investment
• To ensure the safety of their investment, etc.
2. Responsibility towards the workers/employees
• To pay fair wages and salaries to the workers and
employees
• To provide good working conditions and service benefits
such as medical facilities.
3. Responsibility towards the consumers
• To supply right quality and quantity of goods and
services at reasonable prices
• To avoid unfair trade practices such as adulteration,
hoarding, black marketing, under weighing, etc.
4. Responsibility towards the government
• To respect the laws of the country
• To pay taxes regularly and honestly.
5. Responsibility towards the community
• Not to create pollution
• To provide basic amenities like schools, dispensaries,
etc.
Role of Business on Environmental Protection
1. A definite commitment by top management of the
enterprise to create, maintain and develop work culture
for environmental protection and pollution prevention.
2. Ensuring that commitment to environmental protection
is shared throughout the enterprise by all divisions and
employees.
3. Developing clear-cut policies and programmes for
purchasing good quality raw materials, employing
disposal and treatment of wastes and developing employee
skills for the purpose of pollution control.
4. Complying with the laws and regulations enacted by the
Government for prevention of pollution.
5. Participation in government programmes relating to
management of hazardous substances, clearing up of
polluted rivers, plantation of trees, and checking
deforestation.
6. Arranging educational workshops and training materials
to share technical information and experience with
suppliers, dealers and customers to get them actively
involved in pollution control programmes.
Question 1
Social responsibility is:
(a) Same as legal responsibility
(b) Narrower than legal responsibility
(c) Broader than legal responsibility
(d) None of these

Answer 1
(c) Broader than legal responsibility

Question 2
If business is to operate in a society which is full of
diverse and complicated problems, it may have”:
(a) Little chance of success
(b) Great chance of success
(c) Little chance of failure
(d) No relation with success

Answer 2
(a) Little chance of success

Question 3
Business people have the skills to solve
(a) All social problems
(b) Some social problems
(c) No social problems
(d) All economic problems

Answer 3
(b) Some social problems

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

Answer 4
(d) Community

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

Answer 5
(d) All of these

Question 6
Providing accurate and up-to-date information on the
financial position of the company is a responsibility of
business towards:
(a) shareholders or owners
(b) workers
(c) consumers
(d) government and community

Answer 6
(a) shareholders or owners

Question 7
Protection of environment is a social responsibility of
business towards:
(a) shareholder or owners
(b) workers
(c) consumers

Answer 7

Question 8
Match the columns:
Column I Column II
(i) To develop employees’ skills through (a) Government
training and education
((ii)To avoid unfair trade practices such as (b) Workers
under-weighing, poor quality of goods
and services, misleading advertising, etc.
(iii) To pay taxes regualarly and honestly (c) Consumers

Answer 8
(i) — (b), (ii) — (c), (iii) — (a)

Question 9
The only obligation of a business towards its employees
is to pay them well so that they work to their maximum
capacity.

Answer 9
False: A business also provides services benefits such as
medical facilities, education to children, etc. It should also
provide good working conditions for the employees.

Question 10
Legal responsibility means compliance with the law.

Answer 10
True: Every business enterprise must respect and operate
within the laws of the country, e.g., payment of taxes
regularly and honestly, not to create pollution, etc.

Question 11
What is good for the society is also good for the
business.

Answer 11
True: Business is a part of the society. If a business firm
voluntarily helps in solving society’s problems such as
poverty, unemployment, illiteracy, etc., it gets better
environment to conduct its business. The prosperity and
growth of a business is possible only through continuous
service to society.

Question 1
Mr. Debashish is the owner of readymade garments
factory. His main motive is maximising the profit. For this
he is charging high prices from the customers while
suppling low quality products. He does not provide good
working conditions to the workers, and does not pay
them reasonable remunerations. Even he did not bother
about the pollution caused by his factory. As a result, the
efficient employees started leaving the organisation. The
government put a heavy penalty for causing pollution,
and even the number customers gradually decreased
day-by-day.
(a) What do think what is lacking by Mr. Debashish?
(b) What should be done to resolve the situation/
problem?
(6 marks)

Answer 1
(a) Mr. Debashish is not fulfilling his social responsibility
towards various interest groups for the sake of
maximising the profits.
(b) He should fulfill his responsibility towards various
interest groups.
Responsibility towards the workers
• To pay fair wages and salaries to the workers and
employees.
• To provide good working conditions.

Responsibility towards the consumers
• To supply right quality of goods and services at
reasonable prices.
• To avoid unfair trade practices such as adulteration,
hoarding, black-marketing, under-weighing, poor
quality of goods and services, misleading advertising,
etc.
Responsibility towards the community
• To protect the natural environment and avoid bad,
effluent, smoky chimneys, dirty working conditions.
• To generate more employment opportunities.
Question 2
Ajay Medicos is a partnership firm. Akku and Mona are
two partners in this firm. It sells medicines to the other
business units only. Almost all the transactions of this
firm are done through the electronic medium, i.e., the
internet. Akku wants to set up the anti-pollution plant in
his factory, but Mona does not want.
Identify and explain the unethical behaviour of the firm
from the above case.
(4 marks)

Answer 2
Mona’s intention of not installing the anti-pollution plant
contributes to the unethical behaviour of the firm
because it will cause environment pollution.
It is the social responsibility of every business to take
steps not only to check all sorts of pollution. A business
enterprise can take following steps to protect the
environment from the dangers of pollution:
(i) Top management of the enterprise should be
committed to create, maintain and develop work
culture for environmental protection and pollution
prevention.
(ii) Clear-cut policies should be framed for employing
disposal of wastes, etc.
(iii) The enterprise should participate in government
programmes relating to management of hazardous
substances, plantation of trees, checking deforestation,
etc.

 Business finance: Concept and Importance
 Owners’ funds - equity shares, preferences
share, retained earnings, Global Depository
receipt (GDR), American Depository Receipt
(ADR) and International Depository Receipt
(IDR) – concept
 Borrowed funds: debentures and bonds, loan
from financial institution and commercial
banks, public deposits, trade credit
Finance is the lifeblood of business.
Business Finance: Meaning,
Nature and Importance
Business Finance – Meaning and Nature
The requirements of funds by business to carry
out its various activities is called business finance.
Finance is called the life blood of any business
Nature/Features of Business Finance

1. A business cannot function unless adequate funds
are made available to it. For carrying out various
activities, business requires money.
2. The initial capital contributed by the entrepreneur
is not always sufficient to take care of all financial
requirements of the business. A business person,
therefore, has to look for different other sources
from where the need for funds can be met.
3. A clear assessment of the financial needs and the
identification of various sources of finance, therefore, is
a significant aspect of running a business organisation.
4. The need for funds arises from the stage when an
entrepreneur makes a decision to start a business.
Some funds are needed immediately say for the
purchase of plant and machinery, furniture, and
other fixed assets. Similarly, some funds are required
for day – to – day operations, say to purchase raw
materials, pay salaries to employees, etc. Also when
the business expands, it needs funds.
 Note
Nature of Business Finance
• Necessary for all types of business
• Depends on size of business
• Includes all types of capital
• Fluctuating nature
• Determines the size of business
Importance/Significance of Business
Finance
Finance is needed for the following reasons:
1. Fixed capital requirements
In order to start business, funds are required to purchase
fixed assets like land and building, plant and machinery,
and furniture and fixtures. This is known as fixed capital
requirements of the enterprise.
The funds required in fixed assets remain invested in
the business for a long period of time.
Different business units need varying amount of fixed
capital depending on various factors such as the nature of
business, scale of operations, growth and expansion of
business, etc.
• Nature of business: A trading concern for example,
may require small amount of fixed capital as compared
to a manufacturing concern.
• Scale of operations: The need for fixed capital
investment would be greater for a large enterprise,
as compared to that of a small enterprise.
• Growth and expansion of business: The requirement
for working capital increases with the growth and
expansion of business.
2. Working Capital requirements
The financial requirements of an enterprise do not end
with the procurement of fixed assets. A business needs
funds for its day-to-day operations. This is known as
working capital of an enterprise, which is used for
holding current assets such as stock of material, bills
receivables and for meeting current expenses like
salaries, wages, taxes, and rent.
The amount of working capital required varies from
one business concern to another depending on various
factors such as basis of sales, sales turnover, growth
and expansion of business, technology upgradation,
seasonal factors, etc.
• A business unit selling goods on credit, or having a
slow sales turnover would require more working
capital as compared to a concern selling its goods and
services on cash basis or having a speedier turnover.
• The requirement for working capital increases with
the growth and expansion of business.
• At times additional funds are required for upgrading
the technology employed so that the cost of production
or operations can be reduced.
• Similarly, larger funds may be required for building
higher inventories for the festive season or to meet
current debts or expand the business or to shift to a
new location.
It is, therefore, important to evaluate the different sources
from where funds can be raised.
7.2
Classification of Sources of
Funds on the Basis of
Ownership
On the basis of ownership, the sources can be classified
into ‘owner’s funds’ and ‘borrowed funds’.
Differences between Owners' Funds
and Borrowed Funds
Basis Owners' Funds Borrowed Funds
1. Meaning Owner’s funds means funds that Borrowed funds refer to the
are provided by the owners of an funds raised through loans or
enterprise, which may be a sole borrowings.
trader or partners or shareholders
of a company. Apart from capital,
it also includes profits reinvested
in the business.
2. Sources • Equity shares • Debentures and Bonds
• Preference shares • Loan from Financial
• Retained earnings Institutions
• GDR • Loan from Commercial
• ADR Banks
• IDR • Public Deposits
• Trade Credit
• Inter Corporate Deposits
(ICD)
3. Time The owner’s capital remains Such sources provide funds
Period invested in the business for a for a specified period, on
longer duration and is not certain terms and conditions
required to be refunded during and have to be repaid after
the life period of the business. the expiry of that period.
4. Return Return on Owner’s funds (e.g. A fixed rate of interest is paid
equity and preference shares) is by the borrowers on such
called dividend, which is a part of funds. At times it puts a lot of
profit after tax distributed among burden on the business as
the shareholders. Dividend is payment of interest is to be
payable only when there are made even when the earnings
profits available to the company. are low or when loss is incurred.
5. Security It does not require any security. Generally, borrowed funds
are provided on the security
of some fixed assets.
6. Control Such capital forms the basis on It does not carry any right of
which owners acquire their right control of management.
of control of management.
7.3
Various Sources of Owners’
Funds – Concept
1. Equity Shares
Equity shares is the most important source of raising
long term capital by a company.
Equity shares represent the ownership of a company
and thus the capital raised by issue of such shares
is known as ownership capital or owner’s funds.
 Equity share capital is a pre-requisite to the creation
of a company.
 Equity shareholders do not get a fixed dividend but
are paid on the basis of earnings by the company.
 They are referred to as ‘residual owners’ since they
receive what is left after all other claims on the
company’s income and assets have been settled.
 They enjoy the reward as well as bear the risk of
ownership.
 Their liability, is limited to the extent of capital
contributed by them in the company.
 Through their right to vote, equity shareholders
have a right to participate in the management of the
company.
 The capital obtained by issue of shares is known as share capital.

 The capital of a company is divided into small units called shares.
 Each share has its nominal value/face value/par value. For
example, if a company issues 1,00,000 shares of `10 each, then
`10 is the face value/ nominal value/par value of each share.
 The person holding the share is known as shareholder.
 There are two types of shares normally issued by a company.
These are equity shares and preference shares.
 The money raised by issue of equity shares is called equity share
capital, while the money raised by issue of preference shares is
called preference share capital.
Features/Merits
1. Payment of dividend to the equity shareholders is
not compulsory. Therefore, there is no burden on
the company in this respect.
2. Equity capital serves as permanent capital as it is to
be repaid only at the time of liquidation of a company.
As it stands last in the list of claims, it provides a
cushion for creditors, in the event of winding up of
a company.
3. Funds can be raised through equity issue without
creating any charge on the assets of the company.
The assets of a company are, therefore, free to be
mortgaged for the purpose of borrowings, if the
need be.
2. Preference Shares
The capital raised by issue of preference shares is called
preference share capital.
The preference shareholders enjoy a preferential
position over equity shareholders in two ways:
(i) receiving a fixed rate of dividend, out of the net
profits of the company, before any dividend is
declared for equity shareholders; and
(ii) receiving their capital after the claims of the
company's creditors have been settled, at the
time of liquidation.
In other words, as compared to the equity shareholders,
the preference shareholders have a preferential claim
over dividend and repayment of capital.
 Top Tips
1. Preference shareholders generally do not enjoy any voting
rights.
2. Preference shares resemble debentures as they bear
fixed rate of return. Also as the dividend is payable only at
the discretion of the directors and only out of profit after
tax, to that extent, these resemble equity shares. Thus,
preference shares have some characteristics of both
equity shares and debentures.
Features/Merits
1. Preference shares provide reasonably steady income
in the form of fixed rate of return. Thus, preference
shares are useful for those investors who want fixed
rate of return.
2. It does not affect the control of equity shareholders
over the management as preference shareholders
don’t have voting rights.
3. Payment of fixed rate of dividend to preference
shares may enable a company to declare higher rates
of dividend for the equity shareholders in good
times.
4. Preference shareholders have a preferential right of
repayment over equity shareholders in the event of
liquidation of a company.
5. Preference capital does not create any sort of charge
against the assets of a company.
Extra Shots
Different types of preference shares

 Cumulative and Non-Cumulative: The preference shares which
enjoy the right to accumulate unpaid dividends in the future years,
in case the same is not paid during a year are known as
cumulative preference shares. On the other hand, on non-
cumulative shares, dividend is not accumulated if it is not paid in a
particular year.
 Participating and Non-Participating: Preference shares which
have a right to participate in the further surplus of a company
shares which after dividend at a certain rate has been paid on
equity shares are called participating preference shares. The non-
participating preference are such which do not enjoy such rights
of participation in the profits of the company.
 Convertible and Non-Convertible: Preference shares that can be
converted into equity shares within a specified period of time are
known as convertible preference shares. On the other hand, non-
convertible shares are such that cannot be converted into equity
shares.
3. Retained Earnings
A company generally does not distribute all its earnings
amongst the shareholders as dividends. A portion of
the net earnings may be retained in the business for
use in the future. This is known as retained earnings.
It is a source of internal financing or self-financing or
‘ploughing back of profits’.
The profit available for ploughing back in an organisation
depends on many factors like net profits, dividend policy
and age of the organisation.
Features/Merits
1. Retained earnings is a permanent source of funds
available to an organisation.
2. It does not involve any explicit cost in the form of
interest, dividend or floatation cost.
3. As the funds are generated internally, there is a greater
degree of operational freedom and flexibility.
4. It enhances the capacity of the business to absorb
unexpected losses.
5. It may lead to increase in the market price of the
equity shares of a company.
Excessive
Top Tip
ploughing back may cause dissatisfaction amongst
the shareholders as they would get lower dividends.
4. Global Depository Receipts (GDRs)
The local currency shares of a company are delivered
to the depository bank. The depository bank issues
depository receipts against these shares. Such depository
receipts denominated in US dollars are known as Global
Depository Receipts (GDR).
 GDR is a negotiable instrument and can be traded
freely like any other security.
 In the Indian context, a GDR is an instrument
issued abroad by an Indian company to raise funds
in some foreign currency and is listed and traded on
a foreign stock exchange.
 A holder of GDR can at any time convert it into the
number of shares it represents.
 The holders of GDRs do not carry any voting rights
but only dividends and capital appreciation.
Many Indian companies such as Infosys, Reliance, Wipro

and ICICI have raised money through issue of GDRs.
5. American Depository Receipts (ADRs)
 The depository receipts issued by a company in the
USA are known as American Depository Receipts.
 ADRs are bought and sold in American markets,
like regular stocks.
 ADR is similar to a GDR except that it can be issued
only to American citizens.
 ADRs can be listed and traded on a stock exchange
of USA.
Features
Note
of ADRs - • US dollar denominated • Listed on any
American stock exchanges • No right to vote in the company
• Right to get dividend
6. Indian Depository Receipts (IDRs)
An Indian Depository Receipt is a financial instrument
denominated in Indian Rupees (`) in the form of a
Depository Receipt.
 It is created by an Indian Depository to enable a
foreign company to raise funds from the Indian
securities market.
 The IDR is a specific Indian version of the similar
global depository receipts.
 The foreign company issuing IDR deposits shares to
an Indian Depository (custodian of securities registered
with the Securities and Exchange Board of India). In
turn, the depository issues receipts to investors in
India against these shares.
 The benefits of the underlying shares (like bonus,
dividends, etc.) accrue to the IDR holders in India.
 According to SEBI guidelines, IDRs are issued to
Indian residents in the same way as domestic shares
are issued. The issuer company makes a public offer
in India, and residents can bid in exactly the same
format and method as they bid for Indian shares.
‘Standard Chartered PLC’ was the first company that issued

Indian Depository Receipt in Indian securities market in
June 2010.
7.4
Various Sources of
Borrowed Funds – Concept
1. Debentures and Bonds
Debentures are an important instrument for raising long-
term debt capital. A company can raise funds through
issue of debentures, which bear a fixed rate of interest.
 The debenture issued by a company is an
acknowledgment that the company has borrowed a
certain amount of money, which it promises to
repay at a future date. Debenture holders are,
therefore, termed as creditors of the company.
 Debenture holders are paid a fixed stated amount
of interest at specified intervals say six months or
one year. For example, if X Ltd. has 8% Debentures
of `1,00,000, then annual interest on debentures =
8% of `1,00,000 = `8,000 (or `4,000 half yearly)
 Public issue of debentures requires that the issue be rated
by a credit rating agency like CRISIL (Credit Rating and
Information Services of India Ltd.) on aspects like track
record of the company, its profitability, debt servicing
capacity, credit worthiness and the perceived risk of
lending.
 Issue of Zero Interest Debentures (ZID) which do not
carry any explicit rate of interest has also become popular
in recent years. The difference between the face value of
the debenture and its purchase price is the return to the
investor.
Features/Merits
1. It is preferred by investors who want fixed income
at lesser risk.
2. Debentures are fixed charge funds and do not
participate in profits of the company.
3. As debentures do not carry voting rights, financing
through debentures does not dilute control of equity
shareholders on management.
4. Financing through debentures is less costly as compared
to cost of preference or equity capital as the interest
payment on debentures is tax deductible.
Bonds are also debt instrument that does not carry a
specific rate of interest, but issued at a heavy discount.
The difference between nominal valve and issue price is
treated as the amount of interest related to the duration
of bonds.
Extra Shots
Types of Debentures
 Secured and Unsecured: Secured debentures are such
which create a charge on the assets of the company, thereby
mortgaging the assets of the company. Unsecured debentures
on the other hand do not carry any charge or security on
the assets of the company.
 Registered and Bearer: Registered debentures are those
which are duly recorded in the register of debenture holders
maintained by the company. These can be transferred only
through a regular instrument of transfer. In contrast, the
debentures which are transferable by mere delivery are
called bearer debentures.do not enjoy such rights
 Convertible and Non-Convertible: Convertible debentures
are those debentures that can be converted into equity
shares after the expiry of a specified period. On the other
hand, non-convertible debentures are those which cannot
be converted into equity shares.
 First and Second: Debentures that are repaid before other
debentures are repaid are known as first debentures. The
second debentures are those which are paid after the first
debentures have been paid back.
2. Loan From Financial Institutions
The government has established a number of financial
institutions all over the country to provide finance to
business organisations.
 These institutions are established by the central as
well as state governments.
 They provide loan capital for long and medium term
requirements.
 This source of financing is considered suitable
when large funds for longer duration are required
for expansion, reorganisation and modernisation of
an enterprise.
As financial
Note
institutions aim at promoting the industrial
development of a country, these are also called ‘development
banks’.
Features/Merits
1. Financial institutions provide long-term finance,
which are not provided by commercial banks.
2. Obtaining loan from financial institutions increases
the goodwill of the borrowing company in the
capital market. Consequently, such a company can
raise funds easily from other sources as well.
3. As repayment of loan can be made in easy instalments,
it does not prove to be much of a burden on the
business.
4. The funds are made available even during periods
of depression, when other sources of finance are
not available.
Extra Shots
Special Financial Institutions

 Industrial Finance Corporation of India (IFCI): It was
established in July 1948 as a statutory corporation under the
Industrial Finance Corporation Act, 1948. Its objectives
include assistance towards balanced regional development
and encouraging new entrepreneurs to enter into the
priority sectors of the economy. IFCI has also contributed to
the development of management education in the country.
 State Financial Corporations (SFC): The State Financial Corporations
Act, 1951 empowered the State Governments to establish State
Financial Corporations in their respective regions for providing
medium and short term finance to industries which are outside
the scope of the IFCI. Its scope is wider than IFCI, since the former
covers not only public limited companies but also private limited
companies, partnership firms and proprietary concerns.
 Industrial Credit and Investment Corporation of India (ICICI):
This was established in 1955 as a public limited company under
the Companies Act. ICICI assists the creation, expansion and
modernisation of industrial enterprises exclusively in the private
sector. The corporation has also encouraged the participation of
foreign capital in the country.
 Industrial Development Bank of India (IDBI): It was established
in 1964 under the Industrial Development Bank of India Act, 1964
with an objective to coordinate the activities of other financial
institutions including commercial banks. The bank performs three
types of functions, namely, assistance to other financial institutions,
direct assistance to industrial concerns, and promotion and coordination
of financial-technical services.
 Life Insurance Corporation of India (LIC): LIC was set up in 1956
under the LIC Act, 1956 after nationalising 245 existing insurance
companies. It mobilises the community's savings in the form of
insurance premia and makes it available to industrial concerns,
both public as well as private, in the form of direct loans and
underwriting of and subscription to shares and debentures.
3. Loan from Commercial Banks
Commercial banks occupy a vital position as they provide
funds for different purposes as well as for different time
periods.
 Banks extend loans to firms of all sizes and in many
ways:
(i) Cash credits (ii) Bank overdrafts
(iii) Term loans
(iv) Purchase/discounting of bills
(v) Issue of letter of credit
 The rate of interest charged by banks depends on
various factors such as the characteristics of the firm
and the level of interest rates in the economy.
 The loan is repaid either in lump sum or in
installments.
 Bank credit is not a permanent source of funds.
Though banks have started extending loans for
longer periods, generally such loans are used for
medium to short periods.
 The borrower is required to provide some security
or create a charge on the assets of the firm before a
loan is sanctioned by a commercial bank.
Features/Merits
1. Banks provide timely assistance to business by
providing funds as and when needed by it.
2. Secrecy of business can be maintained as the
information supplied to the bank by the borrowers
is kept confidential.
3. Formalities such as issue of prospectus and underwriting
are not required for raising loans from a bank. This,
therefore, is an easier source of funds.
4. Loan from a bank is a flexible source of finance as
the loan amount can be increased according to business
needs and can be repaid in advance when funds are
not needed.
4. Trade Credit
Trade credit is the credit extended by one trader to
another for the purchase of goods and services.
 Trade credit facilitates the purchase of supplies
without immediate payment. The borrower does
not receive any cash, but gets its supplies on credit.
 Such credit appears in the records of the buyer of
goods as ‘sundry creditors’ or ‘accounts payable’.
 Trade credit is commonly used by business organisations
as a source of short-term financing.
 It is granted to those customers who have reasonable
amount of financial standing and goodwill.
 Normally, trade credit is granted for a period ranging
30 to 90 days.
 The volume and period of credit extended depends
on factors such as reputation of the purchasing
firm, financial position of the seller, volume of
purchases, past record of payment and degree of
competition in the market.
Features/Merits
1. Trade credit is a convenient and continuous source
of funds.
2. Trade credit may be readily available in case the
credit worthiness of the customers is known to the
seller.
3. Trade credit needs to promote the sales of an
organisation.
4. If an organisation wants to increase its inventory
level in order to meet expected rise in the sales
volume in the near future, it may use trade credit
to, finance the same.
5. It does not create any charge on the assets of the
firm while providing funds.
 Note
Terms of trade credit may vary from one industry to another
and from one person to another. A firm may also offer different
credit terms to different customers.
5. Public Deposits
The deposits that are raised by organisations directly
from the public are known as public deposits.
 Companies generally invite public deposits for a
period up to three years.
 Rates of interest offered on public deposits are
usually higher than that offered on bank deposits.
 The acceptance of public deposits is regulated by
the Reserve Bank of India.
 Any person who is interested in depositing money
in an organisation can do so by filling up a prescribed
form. The organisation in return issues a deposit
receipt as acknowledgment of the debt.
 Public deposits can take care of both medium and
short-term financial requirements of a business.
 Public deposits are beneficial to both the depositor
as well as to the organisation. While the depositors
get higher interest rate than that offered by banks,
the cost of deposits to the company is less than the
cost of borrowings from banks.
Features/Merits
1. The procedure of obtaining deposits is simple and
does not contain restrictive conditions as are generally
there in a loan agreement.
2. Cost of public deposits is generally lower than the
cost of borrowings from banks and financial institutions.
3. Public deposits do not usually create any charge on
the assets of the company. The assets can be used
as security for raising loans from other sources.
4. As the depositors do not have voting rights, the
control of the company is not diluted.
RECAP
Concept, Nature and Importance of Business

Finance
Money required for carrying out business activities is called
business finance.
Finance is needed for the following reasons:
1. Fixed capital requirement: In order to start business,
funds are needed to purchase fixed assets like land and
building, plant and machinery, furniture, etc. This is
called fixed capital requirements.
2. Working Capital requirements: A business needs funds
for its day-to-day operations. This is known as working
capital requirements. Working capital is required to
purchase raw materials, to meet current expenses like
salaries, wages, rent and taxes, etc.
Classification of Sources of Funds on the basis of
Ownership
1. Owner’s funds– funds that are provided by the owners of
an enterprise, e.g. Equity shares, Preference shares,
Retained earnings, etc.
2. Borrowed funds – funds raised through loans or
borrowing, e.g. Debentures and Bonds, Loan from Financial
Institutions and Banks, etc.
Sources of Owners’ Funds
1. Equity shares: The money raised by issue of equity shares
is known as ‘equity share capital’. It represents owner’s
funds.
2. Preference shares: The money raised by issue of
preference shares is called ‘preference share capital’.
3. Retained Earnings: The portion of company’s net profits
after tax and preference dividend which is not distributed
as equity dividend, but are retained for reinvestment purposes
is called ‘retained earnings’.
4. Global Depository Receipts (GDRs): GDR is an
instrument issued abroad by an Indian company to raise
funds in some foreign currency.
5. American Depository Receipts (ADRs): The depository
receipts issued by a company in the USA are known as
ADRs.
6. Indian Depository Receipts (IDRs): An IDR is an
instrument denominated in Indian Rupees in the form of
a depository receipt created by an Indian Depository
against the underlying equity of issuing company to
enable foreign company to raise funds from the Indian
securities market.
Sources of Borrowed Funds
1. Debentures and Bonds: Debentures are an important
debt instrument for raising long-term finance. They carry
a fixed rate of interest. Bonds are also debt instrument
that does not carry a specific rate of interest, but issued at
a discount.
2. Loan from Financial Institutions: Examples: Industrial
Finance Corporation of India (IFCI), Industrial Credit and
Investment Corporation of India (ICICI), etc.
3. Trade Credit: Trade credit is the credit extended by one
trade to another for the purchase of goods and services.
Trade credit is commonly used by business organisations
as a source of short-term financing. Trade credit appears
in the records of the buyer of goods as ‘sundry creditors’
or ‘accounts payable’.
4. Loan from Commercial Banks: Commercial banks extend
loans to firms of all sizes and in many ways: Cash credits,
Bank overdrafts, Term loans, Purchase/ discounting of
bills and Issue of letter of credit.
5. Public Deposits: The deposits that are raised by organisations
directly from the public are known as public deposits.
Companies generally invite public deposits for a period up
to three years. Rates of interest offered on public deposits
are usually higher than that offered on bank deposits.
Key Terms
Business Finance –The requirements of funds by business to
carry out its various activities is called business finance.
Fixed capital – In order to start business, funds are required to
purchase fixed assets like land and building, plant and machinery,
and furniture and fixtures. This is known as fixed capital
requirements of the enterprise.
Working Capital – A business needs funds for its day – to - day
operations. This is known as working capital of an enterprise,
which is used for holding current assets such as stock of material,
bills receivables and for meeting current expenses like salaries, wages,
taxes, and rent.
Owner’s funds means funds that are provided by the owners of an
enterprise, which may be a sole trader or partners or shareholders
of a company. Apart from capital, it also includes profits reinvested
in the business.
Borrowed funds refer to the funds raised through loans or
borrowings.
Equity shares represent the ownership of a company and thus the
capital raised by issue of such shares is known as ownership
capital or owner’s funds.
Preference Shares – The capital raised by issue of preference
shares is called preference share capital.
Share capital – The capital obtained by issue of shares is known as
share capital. The money raised by issue of equity shares is called
equity share capital, while the money raised by issue of preference
shares is called preference share capital.
Shares – The capital of a company is divided into small units called
shares.
Nominal value – Each share has its nominal value/face value/par
value. For example, if a company issues 1,00,000 shares of `10
each, then `10 is the face value/ nominal value/ par value of each
share.
Shareholder – The person holding the share is known as shareholder.
Retained Earnings – A company generally does not distribute all
its earnings amongst the shareholders as dividends. A portion of
the net earnings may be retained in the business for use in the
future. This is known as retained earnings.
Global Depository Receipts (GDRs) – The local currency shares of
a company are delivered to the depository bank. The depository
bank issues depository receipts against these shares. Such depository
receipts denominated in US dollars are known as Global Depository
Receipts (GDR).
American Depository Receipts (ADRs) – The depository receipts
issued by a company in the USA are known as American Depository
Receipts.
Indian Depository Receipts (IDRs) – An Indian Depository Receipt
is a financial instrument denominated in Indian Rupees in the
form of a Depository Receipt.
Debentures are an important instrument for raising long term
debt capital. A company can raise funds through issue of
debentures, which bear a fixed rate of interest.
Bonds are also debt instrument that does not carry a specific rate
of interest, but issued at a heavy discount. The difference between
nominal valve and issue price is treated as the amount of interest
related to the duration of bonds.
Trade credit is the credit extended by one trader to another for
the purchase of goods and services.
Public Deposits – The deposits that are raised by organisations
directly from the public are known as public deposits.
Question 1
Equity shareholders are called
(a) Owners of the company
(b) Partners of the company
(c) Executives of the company
(d) Guardian of the company

Answer 1
(a) Owners of the company

Question 2
The term ‘redeemable’ is used for
(a) Preference shares
(b) Commercial paper
(c) Equity shares
(d) Public deposits

Answer 2
(a) Preference shares

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

Answer 3
(c) Working capital requirement

Question 4
ADRs are issued in
(a) Canada
(b) China
(c) India
(d) USA

Answer 4
(d) USA

Question 5
Debentures represent
(a) Fixed capital of the company
(b) Permanent capital of the company
(c) Fluctuating capital of the company
(d) Loan capital of the company

Answer 5
(d) Loan capital of the company

Question 6
_______ are debt instrument that does not carry a
specific rate of interest, but issued at a heavy
discount.
(a) Debentures
(b) Equity shares
(c) Bonds
(d) None of these

Answer 6
(c) Bonds

Question 7
_________ is commonly used by business
organisations as a source of short-term financing.
(a) Lease financing
(b) ADRs
(c) Trade Credit
(d) None of these

Answer 7
(c) Trade Credit

Question 8
Match the columns:
Column I Column II
(i) It facilitates the purchase of (a) Trade Credit
goods and services without
making immediate payment.
(ii) It refers to that part of (b) Preference
profits which is kept and Shares
reserve for use in the future.
(iii) This source of finance has (c) Retained
characteristics of both equity Earnings
shares and debentures.

Answer 8
(i) - (a), (ii) - (c), (iii) - (b)

Question 9
Finance invested in fixed assets is called working
capital.

Answer 9
False: It is called fixed capital.

Question 10
Working capital is raised through short-term
funds.

Answer 10
True: Working capital is required to meet day-
to-day expenses. So, it is raised through short-
term sources like trade credit, factoring, banks,
commercial paper, etc.

Question 11
Preference shares carry preferential rights over
the equity shares as regards payment of dividend
and repayment of capital.

Answer 11
True: They get dividend before equity dividend
is paid. On the winding up of the company, their
capital is refunded first.

Question 12
A debenture is an acknowledgment of debt.

Answer 12
True: Debentures are a part of borrowed funds
of a company. Debentures are an important debt
instrument for raising long-term finance.

Question 13
Debentureholders are entitled to a fixed rate of
interest.

Answer 13
True: Debentures carry a fixed rate of interest.
Interest on debentures is a change against the
profits of a company. It has to be paid even if
the company suffers losses.

Question 14
Name the capital invested in permanent assets.

Answer 14
Fixed capital

Question 15
Name the funds needed for day-to-day operations
of business.

Answer 15
Working capital

Question 16
Which concern—a trading concern or a
manufacturing concern—will have large amount
of fixed capital? Why?

Answer 16
Manufacturing concern, because it has to invest
in plant and machinery.

Question 17
Neha Ltd. sells goods on credit while Pankhuri
Ltd. sells goods on cash basis. Which company
will require more working capital?

Answer 17
Neha Ltd

Question 18
Why is equity share capital called risk capital?

Answer 18
Because equity shareholders bear the risk of loss
of the business. Moreover, they do not get
dividend in the years of losses.

Question 19
Why are equity shareholders referred to as
‘residual owners’?

Answer 19
Equity shareholders do not get a fixed dividend,
but are paid only when tax to the government,
interest on loans and debentures and
preference dividend have been paid. So, they
are referred to as ‘residual owners’.

Question 20
Why is equity share capital called the
permanent capital?

Answer 20
Because it is to be paid only at the time of
liquidation of a company.

Question 21
Why are debentures known as borrowed funds?

Answer 21
Because debentures are an important debt-
instrument for raising long-term finance. They
carry a fixed rate of interest.

Question 22
Name the source of finance which is available in
the normal course of purchase of goods.

Answer 22
Trade credit

Question 23
Why share capital is known as owned funds?

Answer 23
Shareholders are the real owners of the
company.

Question 24
Why are retained profits called self-financing?

Answer 24
Because the business firm itself generates
them.

Question 25
Name any two Indian companies which have
raised money through issue of GDRs.

Answer 25
(i) Infosys (ii) Reliance

Question 26
A company wants to issue such shares which do
not have the right of preference for payment of
dividend and refund of capital at the time of
liquidation.
Identify such shares.

Answer 26
Equity Shares

Question 27
A foreign company ‘Zylo Ltd.’ wants to collect
money from the capital market of India. The
finance manager of the company, Mr. Robert
wants to issue a financial instrument which
instead of being in dollars shall be denominated
in rupees. One of the characteristics of this
financial instrument is that it can be got listed
in any Indian stock exchange.
Identify the financial instrument.

Answer 27
Indian Depository Receipts (IDR)

Question 28
Pranav Udyog Ltd. is a company manufacturing
electric devices. The company’s financial
manager, Mr. Dhruv, in order to fulfill the long-
term financial need, wants to raise the cheapest
source of finance.
Identify the source of finance.

Answer 28
Debentures

Question 29
An Indian company ‘Vandana Ltd.‘, in order to
cater to its financial needs, wants to issue such
an international financial instrument which can
be issued only to the American residents.
Identify the financial instrument.

Answer 29
American Depository Receipts (ADR)

Question 30
Fashion Hut, a reputed garments
manufacturing unit needs to meet its day-to-
day expenses like wages, rent, maintaining
stock of raw material, etc. The owner
approaches the supplier of the raw materials
to give credit for two months, so that he can
get cloth for making garments without making
immediate payment. The supplier made an
enquiry regarding the business organisation
and found that its reputation was very good.
So it extended two months credit to it.
Identify the source of finance discussed above.
Answer 30
Trade Credit

Question 31
C Ltd. is planning to modernise its plant with
latest technology. The company is not having
sufficient money. The finance manager plans to
arrange money for 3 years since after that the
company is expecting a good return on
investment. The finance manager does not want
to spend on floatation costs on issue of shares or
debentures.
Identify the suitable source of finance for the
company.

Answer 31
Public Deposits

Small Business and
Enterpreneurship
 Entrepreneurship Development (ED): Concept,
Characteristics and Need.
 Process of Entrepreneurship Development: Start-up
India Scheme, ways to fund start-up.
 Intellectual Property Rights and Entrepreneurship
 Small scale enterprise as defined by MSMED Act 2006
(Micro, Small & Medium Enterprise Development Act)
 Role of small business in India with special reference
to rural areas
 Government schemes and agencies for small scale
industries: National Small Industries Corporation
(NSIC) and District Industrial Centre (DIC) with
special reference to rural, backward areas
Introduction
Small scale industries contribute significantly to the development
process and acts as a vital link in the industrialisation in terms
of production, employment and exports for economic prosperity
by widening entrepreneurial base and use of local raw materials
and indigenous skills. Small scale industries dominate the
industrial scenario in the country with sizeable proportion of
labour force and tremendous export potential. In India, the
'village and small industries sector' consists of both 'traditional'
and 'modern' small industries. This sector has eight subgroups.
They are handlooms, handicrafts, coir, sericulture, khadi and
village industries, small scale industries and powerlooms. The
last two come under the modern small industries, while the
others come under traditional industries. Village and small
industries together provide the largest employment opportunities
in India.
Small-Scale Enterprises as
defined by Msmed Act, 2006
In India, the ‘village and small industries sector’
consists of both ‘traditional’ and ‘modern’ small
industries. This sector has eight subgroups. They are
handlooms, handicrafts, coir, sericulture, khadi and
village industries, small scale industries and
powerlooms.
The last two come under the modern small industries,
while the others come under traditional industries.
Village and small industries together provide the
largest employment opportunities in India.
Before understanding the nature and meaning of small
business, it is important to know how size is defined in
our country, with reference to small industries and
small business establishments. Several parameters can
be used to measure the size of business units. These
include:
 number of persons employed in business
 capital invested in business
 volume of output or value of output of business
 power consumed for business activities.
However, there is no parameter which is without
limitations. Depending on the need the measures can
vary.
The definition used by the Government of India to
describe small industries is based on the investment in
plant and machinery. This measure seeks to keep in
view the socio-economic environment in India where
capital is scarce and labour is abundant.
The emergence of a large services sector has
necessitated the government to include other
enterprises covering both Small Scale Industries (SSI)
sector and related service entities under the same
umbrella. Expansion of the small scale enterprises was
taking place growing into medium scale enterprises
and they were required to adopt higher levels of
technologies in order to remain competitive in a fast
globalising world. Thus, it was necessary to address the
concerns of such enterprises micro, small and medium
and provide them with a single legal framework.
The Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006 addresses these
issues relating
to definition, credit, marketing and technology
upgradation. Medium scale enterprises and service
related enterprises also come under the purview of this
Act. The MSMED Act, 2006 came into force w.e.f.,
October, 2006. Accordingly, enterprises are classified
into two major categories viz., manufacturing and
services.
Manufacturing Enterprises
In the case of enterprises engaged in the manufacture
or production of goods pertaining to any industries
specified in the first schedule to the Industries
(Development and Regulation) Act, 1951, there are
three types of enterprises:
1. Micro Enterprises— where the investment
in plant and machinery does not exceed `25 lakh.
2.Small Enterprises —where the investment in plant
and machinery is more than `25 lakh but does not
exceed `5 crore.
3. Medium Enterprises — where the investment in
plant and machinery is more than `5 crore but does
not exceed `10 crore.
Service Enterprises
1. Micro Enterprises — where the investment in
equipment does not exceed `10 lakh.
2. Small Enterprises — where the investment in
equipment is more than `10 lakh but does not
exceed `2 crore.
3. Medium Enterprises —where the investment in
 Top Tip
Money market is a market where low risk, unsecured and
atraded everyday. It has no physical location, but is an activity
conducted over the telephone and through the internet.
equipment is more than `2 crore but does not exceed
`5 crore.
 Note
While calculating the investment in plant and machinery, the
cost of pollution control, research and development, industrial
safety devices and such other items shall be excluded.
Category Manufacturing Investment Providing of Services

Limit Investment Limit
Micro enterprise `25 lakh `10 lakh
Small enterprise Between `25 lakh and `5 crore Between `10 lakh and `2
crore
Medium enterprise Between `5 crore and `10 crore Between `2 crore and `5
crore
Extra Shots
Major Industry Groups in the Small Scale Sector
(under the purview of small industries as per the classification laid down
by the government)
• Food Products
• Transport Equipment and Parts
• Chemical and Chemical Products
• Leather and Leather Products
• Basic Metal Industries
• Miscellaneous Manufacturing Industries
• Metal Products
• Beverages, Tobacco and Tobacco Products
• Electrical Machinery and Parts
• Repair Services
• Rubber and Plastic Products
• Cotton Textiles
• Machinery and Parts except Electrical Goods
• Wool, Silk, Synthetic Fibre and Textiles
• Hosiery and Garments — Wool Products
• Jute, Hemp and Mesta Textiles
• Non-metallic Mineral Products
• Paper Products and Printing
• Other Services
Role of Small Business
Role of small business in the socio-
economic development of India
Small Scale Industries in India enjoy a distinct position
in view of their contribution to the socio-economic
development of the country. The following points
highlight their contribution:
1. Output generation
Small industries in India contribute almost 40 per cent
of the gross industrial value added and 45 per cent of
the total exports (direct and indirect exports) from
India.
2.Generation of employment
Small industries are the second largest employers of
human resources, after agriculture. They account for 95
per cent of the industrial units in the country. They
generate more number of employment opportunities
per unit of capital invested compared to large
industries. They are, therefore, considered to be more
labour intensive and less capital intensive. This is a
boon for a labour surplus country like India.
3. Supply an enormous variety of products
Small industries in our country supply an enormous
variety of products which include mass consumption
goods, ready made garments, hosiery goods, stationery
items, soaps and detergents, domestic utensils, leather,
plastic and rubber goods, processed foods and vegetables,
wood and and vegetables, wood and steel furniture,
paints, varnishes, safety matches, etc.
Among the sophisticated items manufactured are electric
and electronic goods like televisions, calculators, electro-
medical equipment, electronic teaching aids like overhead
projectors, air conditioning equipment, drugs and
pharmaceuticals, agricultural tools and equipment and
several other engineering products. A special mention
should be made of handlooms, handicrafts and other
products from traditional village industries in view of
their export value.
4. Balanced regional development
Small industries which produce simple products using
simple technologies and depend on locally available
resources both material and labour can be set up anywhere
in the country. Since they can be widely spread without
any locational constraints, the benefits of industrialisation
can be reaped by every region. They, thus, contribute
significantly to the balanced development of the country.
resources both material and labour can be set up anywhere
in the country.
5. Provide ample opportunity
entrepreneurship
Small industries provide ample opportunity for
entrepreneurship. The latent skills and talents of
people can be channelled into business ideas which
can be converted into reality with little capital
investment and almost nil formalities to start a
small business.
6. Advantage of low cost of production
Small industries also enjoy the advantage of low cost
of production. Locally available resources are less
expensive. Establishment and running costs of small
industries are on the lower side because of low
overhead expenses. Infact, the low cost of
production which small industries enjoy is their
competitive strength.
7. Quick and timely decision-making
Due to the small size of the organisations, quick and
timely decisions can be taken without consulting
many people as it happens in large sized
organisations. New business opportunities can be
captured at the right time. Due to the small size of
the organisations, quick and timely decisions can be
taken without consulting many people as it happens
in large sized organisations. New business
opportunities can be captured at the right time.
Government Schemes and
Agencies for Small-Scale
Industries
Institutions setup by the government of
India to promote small-scale industries
in rural India
1. National Small Industries Corporation
(NSIC)
National Small Industries Corporation was set up in
1955 with a view to promote, aid and foster the growth
of small business units in the country. This focuses on
the commercial aspects of these functions.
(i) Supply indigenous and imported machines on
easy hire-purchase terms.
(ii) Procure, supply and distribute indigenous and
imported raw materials.
(iii) Export the products of small business units and
develop export-worthiness.
(iv) Mentoring and advisory services:
(a) Serve as technology business Incubators.
(b) Creating awareness on technological upgradation.
(c) Developing software technology parks and
technology transfer centres.
2. The District Industries Centers (DICs)
The District Industries Center was launched on 1 May
1978, with a view to providing an integrated
administrative framework at the district level, which
would look at the problems of industrialisation in the
district, in a composite manner.
The main activities undertaken by the District
Industries Centers (DICs) are as follows:
• Identification of suitable schemes,
• Preparation of feasibility reports,
• Arranging for credit,
• Machinery and equipment,
• Provision of raw materials and
• Other extension services
Incentives offered by the government
of India for small scale industries,
especially in rural, backward, tribal
and hilly areas
1. Land
Every state offers developed plots for setting up of
industries. The terms and conditions may vary. Some
states don't charge rent in the initial years, while some
allow payment in instalments.
2. Power
Power is supplied at a concessional rate of 50 per cent,
while some states exempt such units from payment in
the initial years.
3. Water
Water is supplied on a no-profit, no-loss basis or with
50 per cent concession or exemption from water
charges for a period of 5 years.
4. Goods and Services Taxes (GST)
Small industries with less than`20 lakh turnover are
completely exempted, whether they register or not.
5. Raw materials
Units located in backward areas get preferential
treatment in the matter of allotment of scarce raw
materials like cement, iron and steel etc.
6. Finance
Subsidy of 10-15 per cent is given for building capital
assets. Loans are also offered at concessional rates.
Entrepreneurship
Development: Concept,
Characteristics & Need
Concept of 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. We may
invoke 'Subject-Verb- Object (SVO)‘relationship in
English grammar to clearly understand these terms.
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. 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.
Entrepreneurship becomes crucial for overall economic

development of a nation. Despite its important role in
the economic development, not many persons opt for a
career in entrepreneurship. Traditionally, it was
believed that entrepreneurs are born.
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 one makes this choice, he/she becomes a job-
provider rather than a job-seeker, besides enjoying a
host of other financial and psychological rewards.
Entrepreneurship is defined as a systematic, purposeful and
creative activity of identifying a need, mobilising resources and
organising production with a view to delivering value to the
customers, returns for the investors and profits for the self in
accordance with the risks and uncertainties associated with
business.
Characteristics of Entrepreneurship
1. Systematic Activity
Entrepreneurship 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.
2. Lawful and Purposeful Activity
The object of entrepreneurship is lawful business.
Purpose of entrepreneurship is creation of value for
personal profit and social gain.
3. Innovation
From the point of view of the firm, innovation may be
cost saving or revenue-enhancing. If it does both it is
more than welcome. Even if it does none, it is still
welcome as innovation must become a habit!
Entrepreneurship is creative in the sense that it
involves creation of value. In the absence of
entrepreneurship 'matter' does not become a
“resource.” By combining the various factors of
production, entrepreneurs produce goods and services
that meet the needs and wants of the society. Every
entrepreneurial act results in income and wealth
generation.
Even when innovations destroy the existing industries
(for example, zerox machines destroyed carbon paper
industry, mobile telephony threatens landline/ basic
telephony)net gains accruing to the economy lend such
entrepreneurial actions as commendable as the acts of
creative destruction.
Entrepreneurship is creative also in the sense that it
involves innovation– introduction of new products,
discovery of new markets and sources of supply of
inputs, technological breakthroughs as well as
introduction of newer organisational forms for doing
things better, cheaper, faster and, in the present
context, in a manner that causes the least harm to the
ecology/environment.
It is possible that entrepreneurs in developing
countries may not be pioneering/ innovative in
introducing path-breaking, radical innovations. They
may be the first or second adopters of technologies
developed elsewhere. That does not make their
achievement small.
4. Organisation of Production
Production requires the combined utilisation of diverse
factors of production, land, labour, capital and
technology. Entrepreneur, in response to a perceived
business opportunity mobilises these resources into a
productive enterprise or firm.
The entrepreneur may not be possessing 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 organisation 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.
Organisation of production also involves product
development and development of the market for the
product.
5. Risk-taking
As the entrepreneur contracts for an assured supply of
the various inputs for his project, he incurs the risk of
paying them off whether or not the venture succeeds.
Thus, landowner gets the contracted rent, capital
providers gets the contracted interest, and the
workforce gets the contracted wages and salaries.
However, there is no assurance of profit to the
entrepreneur.
It may be pointed out that the possibility of absolute
ruin may be rare as the entrepreneur does everything
within his control to de-risk the business. What is
generally implied by risk-taking is that realised profit
may be less than the expected profit. What is generally
implied by risk-taking is that realised profit may be
less than the expected profit.
It is generally believed that entrepreneurs take high
risks. Yes, individuals opting for a career in
entrepreneurship take a bigger risk that involved in a
career in employment or practice of a profession as
there is no “assured” payoff.
It is said that the entrepreneurs thrive on circumstances
where odds favouring and against success are a even,
that is 50:50 situations. They are so sure of their
capabilities that they convert 50% chances into 100%
success. They avoid situations with higher risks as they
hate failure as anyone would do; they dislike lower risk
situations as business ceases to be a game/fun! Risk as
such more than a financial stake, becomes a matter of
personal stake, where less than expected performance
causes displeasure and distress.
Need for Entrepreneurship
Every country, whether developed or developing, needs
entrepreneurs. Whereas, a developing country needs
entrepreneurs to initiate the process of development,
the developed one needs entrepreneurship to sustain
it.
In the present Indian context, where on the one hand,
employment opportunities in public sector and large-
scale sector are shrinking, and on the other hand, vast
opportunities arising from globalisation are waiting to
be exploited; entrepreneurship can really take India to
the heights of becoming a super economic power.
The need for entrepreneurship arises from the
functions the entrepreneurs perform in relation to the
process of economic development and in relation to
the business enterprise.
Functions of Entrepreneurs in Relation to
Economic Development
1. Contribution to GDP: Increase in the Gross
Domestic Product or GDP is the most common
indicator of economic development. Income is
generated in the process of production, which 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. Capital Formation: The entrepreneurial decision,
in effect, is an investment decision that increases the
productive capacity of the economy and hence results
in capital formation. In fact, GDP formation are related
to each other via Capital Output Ratio (COR); more
precisely Incremental Capital Output Ratio (ICOR)
that measures the percentage increase in capital
formation required obtaining a percentage increase in
GDP. So, if a country desires to grow @ 10 % p.a. and its
ICOR is 2.5, then it must ensure capital formation @
25% p.a. Entrepreneurs, by investing their own savings
and informally mobilising the savings of their friends
and relatives contribute to the process of capital
formation.
These informal funding supplements the funds made
available by the formal means of raising resources from
banks, financial institutions etc.
3. Generation of Employment: Every new business
is a source of employment to people with different abilities,
skills and qualifications. As such entrepreneurship
becomes a source of livelihood to those who do neither
have capital to earn interest on nor have the land to
earn rent.
4. 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’). For example, a pen
manufacturer would create opportunities for refill
manufacturers as well as wholesalers and retailers of
stationery products.
5. Improvement in Economic Efficiency: 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. If labour is provided
with good implements (capital), its productivity
increases.
6. 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.
Entrepreneurs mobilise local and even overseas
resources to augment the productive capacity of a
country. Indian Multinational Giants is fast becoming a
reality.
Process of Entrepreneurship
Development
Entrepreneurship does not emerge spontaneously.
Rather, it is the outcome of a dynamic process of
interaction between a person and his/ her
environment. Ultimately, the choice of
entrepreneurship as a career lies with an individual, yet
he/she must see it as a desirable, as well as, a feasible
option. In this regard, it becomes imperative to look at
both—factors in the environment, as well as, factors in
the individual's perception of desirability and
feasibility.
Opportunity Scouting
Entrepreneurial opportunities have to be actively
searched for. One may rely on personal observation,
discovery or invention. Personal/professional
contacts/networks and experience may 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. The
entrepreneurial mind, on the other hand starts
working out, what would be the market size, where to
procure it from, at what price to sell it, etc.
Entrepreneurial opportunities may also be identified
through a process of research of international,
domestic, sectoral/ industrial analysis. For example,
post WTO, international trade and investment have
become freer of restrictions. Textile quotas are being
phased out, and, there are greater opportunities for
textile and textile made-ups from India. Global
outsourcing is on the rise and India offers a huge and
varied pool of technical manpower that makes it a cost
effective destination for in-bound global outsourcing
in manufacturing as well as Information Technology
Enabled Services (ITES).
Identification of Specific Product Offering
While the environment scan leads to the discovery of
more generalised business opportunities, there is a
need to identify 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. 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 organised as a proprietary concern/partnership
firm/ company or cooperative entity.
An entrepreneur 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 the area.
They may be having a prescribed proforma 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 the project and upon the
furnishing of some margin money it may sanction the
loan amount.
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 Scheme and
Ways to Fund Startup
Startup India Scheme
The Startup India Scheme is a flagship initiative of the
Government of India with an objective to carve a strong
ecosystem for nurturing innovation and startups in the
country. This drive will lead towards sustainable
economic growth and generate large-scale employment
opportunities. The Government of India aims to
empower startups to grow through innovation and
design.
The scheme specifically aims to:
1.trigger an entrepreneurial culture and inculcate
entrepreneurial values in the society at large and
influence the mindset of people towards
entrepreneurship,
2. create awareness about the charms of being an
entrepreneur and the process of entrepreneurship,
especially among the youth,
3. encourage more dynamic startups by motivating
educated youth, scientists and technologists to
consider entrepreneurship as a lucrative, preferred and
viable career, and
4. support the early phase of entrepreneurship
development, including the pre-startup, nascent, as
well as, early post startup phase and growth
enterprises.
5. Broad base the entrepreneurial supply by meeting
specific needs of under represented target groups, like
women, socially and economically backward
communities, scheduled castes and scheduled tribes;
under represented regions to achieve inclusiveness and
sustainable development to address the needs of the
population at the bottom of the pyramid.
As per the notification dated February 17, 2017,
issued by the Ministry of Commerce and Industry,
a startup means:
• An entity incorporated or registered in India;
• Not older than five years;
• Annual turnover does not exceed `25 crore in any
preceding year;
• Working towards innovation, development or
commercialisation of products /service/processes
driven by technology or Intellectual Property
Rights (IPRs) and patent.
Ways to fund startup
In addition to the government plans that offer startup
capital and bank loans, the funding for startups can
also be availed in the following ways:
1. Boot Strapping
Commonly known as self financing, it is considered as
the first funding option because by stretching out your
personal savings and resources, you are tied to your
business. Also, at a later stage, investors consider it as
your merit. However, it is a good option of funding
only if the initial requirement is small and handy.
2. Crowd funding
It is the pooling of resources by a group of people for a
common goal. Crowd funding is not new to India.
There are many instances of organisations reaching out
to common people for funding. However, the
emergence of platforms that promote crowd funding is
fairly recent to India. These platforms help startups or
small businesses to meet their funding requirements.
3. Angel Investment
Angel investors are individuals with surplus cash who
have keen interest to invest in upcoming startups. They
also offer mentoring or advice alongside capital.
4. Venture capital
There are professionally managed funds which are
invested in companies that have huge potential.
Venture capitalists provide expertise and mentorship.
5. Business Incubators and Accelerators
Early stage business can consider incubator and
accelerator programmes as a funding option. These
programmes assist hundreds of startup businesses
every year. These two are generally used
interchangeably. However, incubator is like a parent
who nurtures the business (child), whereas, accelerator
helps to run or take a giant leap in business. Incubators
and accelerators ably connect the startups with
mentors, investors and fellow startups using this
platform.
6. Micro finance and NFBCs
Micro finance is basically access to financial services to
those who either do not have access to conventional
banking services or have not qualified for a bank loan.
Similarly, NBFCs (Non Banking Financial Corporation)
provides banking services without meeting legal
requirement/definition of a bank.
Intellectual Property Rights (IPR)
Over the past two decades, intellectual property rights
have grown to a stature from where it plays a major role
in the development of global economy. Intellectual
property is everywhere, i.e., the music you listen to, the
technology that makes your phone work, the design of
your favourite car, the logo on your sneakers, etc. It
exists in all the things you can see—all are the products
of human creativity and skill, such as inventions,
books, paintings, songs, symbols, names, images, or
designs used in business, etc. All inventions of
creations begin with an 'idea'. Once the idea becomes
an actual product, i.e., Intellectual Property, one can
apply to the authority concerned under the
Government of India for protection. Legal rights
conferred on such products are called 'Intellectual
Property Rights' (IPR).
 Intellectual property (IP) refers to products of human mind,
hence, just like other types of property, the owners of IP can
rent, give or sell it to other people.
 Intellectual property (IP) refers to the creations of the human
mind, like inventions, literary and artistic works, symbols,
names, images and designs used in business. Intellectual
property (IP) refers to the creations of the human mind, like
inventions, literary and artistic works, symbols, names,
images and designs used in business.
 Note
The most noticeable difference between intellectual property
and other forms of property is that intellectual property is
intangible i.e., it cannot be defined or indentified by its own
physical parameters. The scope and definition of intellectual
property is constantly evolving with the inclusion of newer
forms. In recent times, geographical integrated circuits and
undisclosed indications, protection of plant varieties,
information have been brought under the protection of
semiconductors and umbrella of intellectual property.
In history, you must have come across the historic 'Battle of Haldighati', which
took place between the then Rajput ruler, Rana Pratap Singh of Mewar,
Rajasthan and the Mughal emperor Akbar in 1567 A.D. A similar Battle of
Haldighati was hotly contested in the year 1997. The issue was the patent
granted by the US Patent Office on turmeric (haldi) to University of Mississippi
medical centre in 1995 for its wound healing properties; implying that this was a
new invention, when we have been using haldi since times immemorial for
healing injuries. The Government of India vehemently opposed thispatent, and
ultimately, India won this battle—the patent was cancelled!
Types of Intellectual Property
1. Industrial property
It includes inventions (patents), trademarks, industrial
designs and geographical indications.
2. Copyrights
It includes literary and artistic works, such as novels,
poems, plays, films, musical works, artistic works, such
as drawings, paintings, photographs and sculptures
and architectural designs.
 Note
The following types of Intellectual Property Rights are
recognized in India:
• Copyright • Trademark
• Geographical Indication • Patent
• Design • Plant Variety
• Semiconductor Integrated Circuit Layout Design
Extra Shots
 Traditional knowledge also fall under IP. You must have often
taken homely remedies passed on from your grandparents and
great-grandparents as cure for an ailment. These homely
remedies are traditional medicines that have been practiced in
India for past several centuries. They are also known as
'Traditional Knowledge'. Some examples of Indian traditional
medicinal systems are Ayurveda, Unani, Siddha and Yoga.
Traditional Knowledge (TK) means the knowledge, systems,
innovations and practices of local communities across the
globe. Such wisdom has been developed and accumulated
over the years and has been used and passed down through
several generations. A Traditional Knowledge Digital Library
(TKDL) has been developed by Government of India, which is
essentially a digital knowledge repository of Traditional
Knowledge that has existed in our ancient civilization,
especially about medicinal plants and formulations used in
Indian systems of medicine. This rich body of knowledge helps
prevents wrongful patenting of our traditional knowledge.
Extra Shots
 Another type of IP is Trade Secrets. You must have heard
about the popular beverage, Coca Cola. But do you know that
the recipe of this beverage is only known to three people in the
whole world? This secret information is termed as a 'Trade
Secret'. A trade secret is basically any confidential information
which provides a competitive edge. Trade secrets in India are
protected under the Indian Contract Act, 1872.
Definition of Intellectual property Rights(IPR)
Intellectual Property Rights are legal rights conferred upon the

creator/IP owner to prevent others from using the protected
subject matter. It is a legal watch guard of knowledge.
Why Is IPR Important for
Entrepreneurs?
1. It encourages creation of new, pathbreaking
inventions, such as cancer cure medicines. It
incentivises inventors, authors, creators, etc., for
their work.
2. It allows the work created by a person to be
distributed and communicated to the public only
with his/her permission. Therefore, it helps in the
prevention of loss of income.
3. It helps authors, creators, developers and owners
to get recognition for their works.
IPRs are extremely essential for fostering creativity and
contribute towards the economic growth of a nation.
Such rights allow creators and inventors to have
control over their creations and inventions. These
rights create incentives for artists, entrepreneurs and
inventors to further commit the necessary resources to
research, develop, and market new technology and
creative works. The changing global economy is
creating unprecedented challenges and opportunities
for continued progress in human development.
 Note
With the establishment of the World Trade Organisation
(WTO), the importance and role of intellectual property
protection has been crystallised in the Trade-Related
Intellectual Property Systems (TRIPS) Agreement.
With the establishment of WTO, and India being a signatory to
the agreement on TRIPS, several legislations were passed for
the protection of intellectual property rights to meet the
international obligations. These included:
• Trade Mark Act 1999
• The Geographical Indications of Goods (Registration and
Protection) Act 1999
• Designs Act 2000
• Protection of Plant Varieties and Farmers' Rights Act 2001
• The Patents Act 2005
• The Copyright (Amendment) Act 2012
Types of Intellectual Property Rights
1. Copyright
Copyright is the right to "not copy". It is offered when
an original idea is expressed by the creator or author.
Copyright is a right conferred upon the creators of
literary, artistic, musical, sound recording and
cinematographic film.
The copyright is an exclusive right of the creator to
prohibit the unauthorized use of the content which
includes reproducing and distributing copies of the
subject matter. The unique feature of copyright is that,
the protection of work arises automatically as soon as
the work comes into existence.
 Note
The registration of the content is not mandatory but is
essential to exercise exclusive rights in case of an
infringement.
What is protected under Copyright?
Literary work Pamphlets, Brochures, Novels, Books,
Poems, Song Lyrics, Computer Programme
Artistic work Drawings, Paintings, Sculpture,
Architectural Drawings, Technical
Drawings, Maps, Logos
Dramatic work Including Dance or Mime, Screenplay,
Musical Work, Sound Recording,
Cinetographic films
2. Trademark
A trademark is any word, name, or symbol (or
their combination) that lets us identify the goods
made by an individual, company, organization,
etc.
Trademarks also let us differentiate the goods of
one company from another. In a single brand or logo,
trademarks can let you know many things about a
company's reputation, goodwill, products and services.
A trademark helps in distinguishing similar products
in the market from its competitors.
A competitor cannot use the same, or similar
trademark to sell their product in the market as the
same fall under the concept of deceptive similarity
which may be defined as phonetic, structural or visual.
similarity.
Categories of Trademark
(i) Conventional Trademark: Words, colour
combination, label, logo, packaging, shape of goods,
etc.
(ii) Non-Conventional Trademark: Under this category
those marks are considered which were not considered
 Note
The registration of trademark is not mandatory under the
Trademark Act 1999, but registration of trademark helps
establish exclusive rights over the mark. To register the mark
you can visit http://www.ipindia.nic.in which is the website of
the Indian Trademark Registry.
3. Geographical Indication (GI)
A Geographical Indication (GI) is primarily an
indication which identifies agricultural, natural
or manufactured products (handicrafts, industrial
goods and food stuffs) originating from a definite
geographical territory, where a given quality,
reputation or other characteristic are essentially
attributable to its geographical origin.
GIs are part of our collective and intellectual heritage
that need to be protected and promoted.
Goods protected and registered as GI are categorized
into agricultural products, natural, handicrafts,
manufactured goods and food stuffs.
Examples of GIs: Naga Mircha, Mizo Chilli,
Shaphee Lanphee, Moirang phee and Chakhesang
Shawl, Bastar Dhokra, Warli Paintings, Darjeeling Tea,
Kangra Painting, Nagpur Orange, Banaras Brocades
and Sarees, and Kashmir Pashmina
Importance of GIs: The importance of GIs has
increasingly grown over the past few decades. GI
represents collective goodwill of a geographical region,
which has built itself over centuries. Today, consumers
are paying more and more attention to the
geographical origin of products and accord much care
to the specific characteristics present in the products
that they purchase. In some cases, there is a difference
between "place of origin" and "geographical
indications“which suggests to consumers, that the
product will have a particular quality or characteristic,
that they may value. which suggests to consumers,
that the product will have a particular quality or
characteristic, that they may value.
4. Patent
A patent is a type of IPR which protects the
scientific inventions (products and or process)
which shows technical advancement over the
already known products.
A 'patent' is an exclusive right granted by the
Government which provides the exclusive 'right to
exclude' all others and prevent them from making,
using, offering for sale, selling or importing the
invention.
The purpose of patent is to encourage innovation in
the scientific field. A patent grants exclusive rights to
the inventor for a period of 20 years, during which
anybody else who wishes to use the patented subject
Matter needs to seek permission from the patentee, by
paying certain costs for the commercial use of such an
invention. This process of seeking exclusive rights of
the patentee for a fee is called Licensing.
Patent creates a temporary monopoly. Once the term
of a patent expires, the invention is in public domain
which means it is free for use by people. This prevents
the patentee from involving in anti-competitive
practices like creating monopoly etc.
For an invention to be patentable, it must be new,
non-obvious to any person who is skilled in the
relevant field of technology and must be capable
of industrial application.
(i) It must be new, i.e. it should not already exist in
the current knowledge anywhere in the world, i.e. not
in public domain in any form, before the filing of
patent application (Novelty).
(ii) It must be non-obvious to any person who is
skilled in the relevant field of technology. That
is, the standard is a person reasonably skilled in
field of study (Inventive Step).
(iii) Finally, it must be capable of industrial
application, i.e. capable of being used or
manufactured in the industry.
 Top Tip
Patent can only be filed to get rights over an invention and not
discovery. Newton saw the apple fall and discovered gravity
which is considered to be a discovery. On the other hand, the
father of telephone Alexander Graham Bell invented
telephone. Thus when we use our ability to create something
novel, or something unique into existence, it is called an
invention, whereas the process of highlighting the existence of
an already existing thing is called discovery.
What cannot be patented?
Scientific principles, contrary to well established natural laws, formulation of
abstract theory, frivolous inventions, prejudicial to morality or injurious to
public health, method of agriculture or horticulture, method of treatment,
admixtures, traditional knowledge, incremental inventions without increase in
efficacy and inventions related to atomic energy are some of the inventions not
patentable under Sections 3 & 4 of the Patents Act, 1970.
5. Design
A 'design' includes shape, pattern, and
arrangement of lines or colour combination that is
applied to any article. It is a protection given to
aesthetic appearance or eye-catching features. The
term of protection of a design is valid for 10 years,
which can be renewed for further 5 years after
expiration of this term, during which a registered
design can only be used after getting a license from its
owner and once the validity period is over, the design is
in public domain.
5. Design
A 'design' includes shape, pattern, and
arrangement of lines or colour combination that is
applied to any article. It is a protection given to
aesthetic appearance or eye-catching features. The
term of protection of a design is valid for 10 years,
which can be renewed for further 5 years after
expiration of this term, during which a registered
design can only be used after getting a license from its
owner and once the validity period is over, the design is
in public domain.
6. Plant Variety
Plant Variety is essentially grouping plants into
categories based on their botanical characteristics.
It is a type of variety which is bred and developed by
farmers. This helps in conserving, improving and
making available plant genetic resources. For example,
hybrid versions of potatoes. Such protection promotes
investment in R&D, recognizes Indian farmers as
cultivators, conservers and breeders as well as
facilitates high quality seeds and planting material.
This leads to the growth of the seed industry.
7. Semiconductor Integrated Circuits Layout
Design
Have you ever seen a computer chip? Are you aware of
integrated circuits also known as 'ICs'? A
semiconductor is an integral part of every computer
chip. Any product that contains transistors and other
circuitry elements used and formed on a
semiconductor material, as an insulating material, or
inside the semiconductor material. Its design is to
perform an electronic circuitry function.
Extra Shots
Intellectual Property (IP) and Business
We have already discussed the importance of intellectual property and
the ways to protect it as intellectual property rights. Let us now see how
this helps a business. Recall the old proverb 'necessity is the mother of all
inventions'? If we were to trace the development of a wheel from the
Stone Ages, the round wheel was invented as there was felt a need to
increase the efficiency of work. This wheel underwent various
technological advancements, and today, we know successful business
tyre giants like CEAT, JK Tyres, Bridgestone, etc. Whether a business is
establishing its presence in the marketplace or is already well-
entrenched, protecting and managing its intellectual property is critical in
taking the business ahead. Any business has to continuously innovate
and think ahead, otherwise it will simply stagnate and wither away. It is
equally essential to respect others' IP, not only on ethical grounds, but
also legal. After all, respect for others' IP begets respect for one's IP.
Start-up is an entrepreneurial venture that capitalizes on developing,
improving and innovating new products, processes and services for the
target audience. Start-ups today are responsible for several disruptive
technologies that have changed the very way we think and live. With
Extra Shots
20,000+ start-ups, India is said to have the third largest start-up
ecosystem in the world. The Start-up India initiative seeks to
capture the entrepreneurial streak in Indians, and create a nation
of job-creators, not job-seekers. Intellectual property rights can be
critical in aiding new ventures monetise their ideas and establish
competitiveness in the market by extending the protective
umbrella offered by IPRs.
RECAP
Small-scale Enterprises as Defined by MSMED

Act, 2006
Manufacturing Enterprises
(i) Micro Enterprises— where the investment in plant and
machinery does not exceed `25 lakh.
(ii) Small Enterprises—where the investment in plant and
machinery is more than `25 lakh but does not exceed `5 crore.
(iii) Medium Enterprises— where the investment in plant and
machinery is more than `5 crore but does not exceed `10 crore.
Service Enterprises
(i) Micro Enterprises— where the investment in equipment
does not exceed `10 lakh.
(ii) Small Enterprises— where the investment in equipment is
more than `10 lakh but does not exceed ` 2 crore.
(iii) Medium Enterprises — where the investment
in equipment is more than `2 crore but does not
exceed `5 crore.
Role of Small Business in India
1. Output generation
3. Supply an enormous variety of products
4. Balanced regional development
5. Provide ample opportunity entrepreneurship
6. Advantage of low cost of production
7. Quick and timely decision-making
Role of Small Business in Rural India
1. Multiple source of income
2. Mobilisation of local resources
3. Prevent migration
4. Reduction in poverty unemployment and income
inequalities
5. Accelerated industrial growth and creating employment
potential in rural and backward areas
Government Agencies for Small-Scale Industries (SSIs)
National Small Industries Corporation (NSIC): It
supplies indigenous and imported machines and raw
materials to SSIs on easy hire-purchase schemes and
exports the products of SSIs.
District Industrial Centres (DICs): They provide all the
services and support facilities to the entrepreneurs for
setting up small and village industries.
Incentives offered to the small scale industries in rural,
backward areas
(i) Land– Some states don’t charge rent in the initial
years, while some allow payment in instalments.
(ii) Power– Power is supplied at a concessional rate of 50
per cent
(iii) Water– Water is supplied on a no-profit, no-loss basis
or with 50 per cent concession
(iv) Goods and Services Taxes (GST) – Small industries
with less than`20 lakh turnover are completely
exempted.
(v) Finance– Subsidy of 10-15 per cent is given for
building capital assets.
Concept of Entrepreneurship Development
creative activity of identifying a need, mobilising resources
and organising production with a view to delivering value to
the customers, returns for the investors and profits for the
self in accordance with the risks and uncertainties
associated with business.
Characteristics of Entrepreneurship
1. Systematic Activity
2. Lawful and Purposeful Activity
3. Innovation
4. Organisation of Production
5. Risk-taking
Need for Entrepreneurship
The need for entrepreneurship arises from the functions the
entrepreneurs perform in relation to the process of
economic development and in relation to the business
enterprise.
1. Contribution to GDP
2. Capital Formation
3. Generation of Employment
4. Generation of Business Opportunities for Others
5. Improvement in Economic Efficiency
6. Increasing the Spectrum and Scope of Economic
Activities
Process Of Entrepreneurship Development
Opportunity Scouting: Entrepreneurial opportunities have
to be actively searched for. One may rely on personal
observation, discovery or invention.
Identification of Specific Product Offering: While the
environment scan leads to the discovery of more generalised
business opportunities, there is a need to identify a specific
product or service idea.
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. The
idea must be financially viable as well.
Startup India Scheme
As per the notification dated February 17, 2017, issued by the
Ministry of Commerce and Industry, a startup means:
(i) An entity incorporated or registered in India.
(ii) Not older than five years.
(iii) Annual turnover does not exceed `25 crore in any
preceding year.
(iv) Working towards innovation, development or
commercialisation of products/service/processes
driven by technology or Intellectual Property Rights
(IPRs) and patent.
Ways to fund startup
1. Boot Strapping
2. Crowd funding
3. Angel Investment
4. Venture capital
5. Business Incubators and Accelerators
6. Micro finance and NFBCs
Intellectual Property Rights (IPR)
Legal rights conferred on products (such as inventions,
books, paintings, songs, symbols, names, images, or designs
used in business, etc)are called ‘Intellectual Property Rights’
(IPR).
Intellectual property is divided into two board categories:
(i) Industrial property, which includes inventions
(patents), trademarks, industrial designs and
geographical indications.
(ii) Copyrights, which includes literary and artistic
works, such as novels, poems, plays, films, musical
works, artistic works, such as drawings, paintings,
photographs and sculptures and architectural
designs.
Why is IPR Important?
1. It encourages creation of new, path breaking inventions,
such as cancer cure medicines. It incentivises inventors,
authors, creators, etc., for their work.
2. It allows the work created by a person to be distributed
and communicated to the public only with his/her
permission. Therefore, it helps in the prevention of loss
of income.
3. It helps authors, creators, developers and owners to get
recognition for their works.
Types of Intellectual Property Rights (IPR)
1.Copyright: Copyright is the right to “not copy”. It is offered
when an original idea is expressed by the creator or
author. Copyright is a right conferred upon the creators of
literary, artistic, musical, sound recording and
cinematographic film.
2.Trademark: A trademark is any word, name, or symbol
(or their combination) that lets us identify the goods made
by an individual, company, organization, etc.
3.Geographical Indication (GI): A Geographical
Indication (GI) is primarily an indication which identifies
agricultural, natural or manufactured products (handicrafts,
industrial goods and food stuffs) originating from a definite
geographical territory, where a given quality, reputation or
other characteristic are essentially attributable to its
geographical origin.
4.Patent: A patent is a type of IPR which protects the
scientific inventions (products and or process) which
shows technical advancement over the already known
products.
The purpose of patent is to encourage innovation in the
scientific field. A patent grants exclusive rights to the
inventor for a period of 20 years, during which anybody else
who wishes to use the patented subject-matter needs to seek
permission from the patentee, by paying certain costs for the
commercial use of such an invention. This process of
seeking exclusive rights of the patentee for a fee is called
Licensing.
5.Design : A ‘design’ includes shape, pattern, and
arrangement of lines or colour combination that is applied
to any article.
6. Plant Variety : Plant Variety is essentially grouping plants
into categories based on their botanical characteristics.
Key Terms
creative activity of identifying a need, mobilising resources and
organising production with a view to delivering value to the
customers, returns for the investors and profits for the self in
accordance with the risks and uncertainties associated with
business.
Intellectual property (IP) refers to products of human mind,
hence, just like other types of property, the owners of IP can rent,
give or sell it to other people.
Intellectual Property Rights are legal rights conferred upon the
creator/IP owner to prevent others from using the protected
subject matter. It is a legal watch guard of knowledge.
Copyright is a right conferred upon the creators of literary,
artistic, musical, sound recording and cinematographic film.
Trademark is any word, name, or symbol (or their combination)
that lets us identify the goods made by an individual, company,
organization, etc.
Geographical Indication (GI) is primarily an indication which
identifies agricultural, natural or manufactured products
(handicrafts, industrial goods and food stuffs) originating from a
definite geographical territory, where a given quality, reputation
or other characteristic are essentially attributable to its
geographical origin.
Patent is a type of IPR which protects the scientific inventions
(products and or process) which shows technical advancement
over the already known products. A ‘patent’ is an exclusive right
granted by the Government which provides the exclusive ‘right to
exclude’ all others and prevent them from making, using, offering
for sale, selling or importing the invention.
Question 1
Ram, Kabir and Gurpreet are three friends who belong to
the same village. They have completed their MBA
education from IIM, Ahmedabad. They want that the
country should benefit from their education. With this aim
they want to do such a business which will generate more
employment and output, mobilise local resources, and
contribute to balanced regional development. For this they
set up a small-scale industrial unit in their own village.
(4 marks)
Do you think they will be able to contribute to the
development of rural, backward areas of the country?
Explain.

Answer 1
Yes, Ram, Kabir and Gurpreet will be able to contribute
to the development of rural, backward areas of the
country by setting up a small-scale industrial unit in
their own village.
The small-scale businesses play a significant role from
the socio-economic development point of view of the
Indian economy. The following points highlight their
contribution, especially in rural, backward areas:
(i) Generation of employment: Small-scale
industries (SSIs) provide employment opportunities
in the rural areas, especially for the traditional
artisans and the weaker sections of society.
(ii) Output generation: SSIs contribute almost 40 per
cent of the gross industrial value added. Small
industries in our country supply an enormous
variety of products, e.g., ready-made garments,
stationery items, soaps and detergents, domestic
utensils, leather, plastic and rubber goods, etc.
(iii) Rural industrialisation and balanced regional
development: The development of village and rural
industries leads to industrialisation in rural areas.

SSIs produce simple products by using simple
technology and local resources. They can be set
anywhere in the country. Thus, balanced regional
development is possible.
(iv) Mobilisation of local resources: Small business
facilitates mobilisation and utilisation of local
resources and skills which might otherwise remain
unutilised.

Question 2
Rajan wants to start a business unit manufacturing
Khadhi items. His friend who makes craft items,
suggests him to start a small-scale industrial unit in some
rural, backward area since the government is offering
various incentives to small-scale industries.
(a) State any four incentives offered by the government
for small-scale industries.
(b) Name two institutions set up by the government of
India to promote small-scale industries in rural
India. Explain their role. (6marks)

Answer 2
(a) The Government of India provides a number of
incentives to the small-scale industries (SSIs) in India
for the industrial development of rural, backward
areas.
(i) Availability of land at concessional rates
(ii) Supply of power at a concessional rate of 50%
(iii) Supply of water on no profit, no loss basis or with
50% concession
(iv) Loans at concessional rates.

(b) Two institutions set up by the government of India
to promote small-scale industries in rural India are:
(i) National Small Industries Corporation (NSIC):
This was set up in 1955 to promote, aid and foster
the growth of small business units in India. It
supplies indigenous and imported machines and
raw materials to SSIs on easy hire-purchase
schemes. It exports the products of SSIs. It
provides technology to SSIs and creates awareness
on technological upgradation.

(ii) District Industrial Centres (DICs): They provide
an integrated administrative framework at the
district level. They provide all the services and
facilities to the entrepreneurs for setting up
small and village industries.

Question 3
Anshuman was a very industrious sales executive
with a small herbal cosmetic manufacturer. He
earned a good salary and commission on the business
he brought for the firm and had very good command
over the Delhi market for which he had virtually
become indispensable. He was aware of the enviable
position he held in the firm and thought aloud:
“The key to success in any business is the sale of its
products. The beginning and end of the business
cycle is nothing but sale and “other” people

Question 3
working in the factory to manufacture products are
mere “The key to success in any business is the sale of
its products. The beginning and end of the business
cycle is nothing but sale and “other” people working
in the factory to manufacture products are mere cogs
in the business machine set in motion by sales people.
So why carry this burden and get only a tiny share of
the prosperity of the firm? Instead others enjoying
the fruits of my labour, why should I not start my
own business?”
(a) Should Anshuman take a leap? Give reasons
Question 3
for your answer.
(b) State any four functions Anshuman will perform
as an entrepreneurs in relation to economic
development. (5 marks)

Answer 3
(a) Yes, Anshuman should start his own business because
as an entrepreneur, he will become a job-provider
rather than a job-seeker, besides enjoying a host of
other financial and psychological rewards.
(b) Functions of Anshuman as an entrepreneur in relation
to economic development: (Explain)
(i) Contribution to GDP
(ii) Capital formation
(iii) Generation of employment
(iv) Generation of business opportunities for others
Question 1
Investment limit in plant and machinery for micro
manufacturing enterprises is _________ .
(a) `1crore
(b) ` 25 lakh
(c) ` 1lakh
(d) ` 10 lakh

Answer 1
(b) ` 25 lakh

Question 2
Investment limit in equipment for medium service
enterprises is ________________ .
(a) above `10 lakh and up to ` 2 crore
(b) above ` 25 lakh and up to ` 5 crore
(c) above ` 2 crore and up to ` 5 crore
(d) above ` 5 crore and up to ` 10 crore

Answer 2
(c) above ` 2 crore and up to ` 5 crore

Question 3
SSIs contribute to gross industrial value added of India
about ___________ . (Choose the correct alternative)
(a) 95percent
(b) 40 percent
(c) 45percent
(d) 50 per cent

Answer 3
(b) 40 percent

Question 4
For the industrial development of backward, tribal and
hilly areas, power is supplied at a concessional rate of
___________. (Choose the correct alternative)
(a) 95 per cent
(b) 40 per cent
(c) 45 per cent
(d) 50 per cent

Answer 4
(d) 50 per cent

Question 5
Incentive which is not given by government to industries
in backward, tribal and hilly areas, is
(a) Exemption from GST
(b) Power at concessional rates
(c) Preferential allotment of raw materials
(d) Free advertising in TV and newspapers

Answer 5
(d) Free advertising in TV and newspapers

Question 6
It was set up in 1955 to promote, aid and foster the
growth of small business units in India. It provides
technology to SSIs and creates awareness on
technological upgradation.
(a) Small Industries Development Bank of India
(SIDBI)
(b) National Bank for Agriculture and Rural
Development (NABARD)
(c) National Small Industries Corporation (NSIC)
(d) District Industrial Centres (DICs)
Answer 6
(c) National Small Industries Corporation (NSIC)

Question 7
Entrepreneurs undertake
(a) Calculated risks
(b) High risks
(c) Low risks
(d) Moderate and calculated risks

Answer 7
(a) Calculated risks

Question 8
In economics, which of the following is not a function of the
entrepreneur? (Choose the correct alternative)
(a) Risk-taking
(b) Provision of capital and organisation of production
(c) Innovation
(d) Day to day conduct of business

Answer 8
(d) Day to day conduct of business.

Question 9
Which of the following cannot be protected under
copyright: (Choose the correct alternative)
(a) Music
(b) Drawings
(c) Video games
(d) Actors

Answer 9
(c) Video games

Question 10
Which of these is a geographical indication?
(a) Mona Lisa Painting
(b) IRCTC logo
(c) Darjeeling tea
(d) Light bulb

Answer 10
(c) Darjeeling tea

Question 11
What is the role of an entrepreneur in contributing
towards Intellectual Property Rights?
(a) Recognise and respect others’ Intellectual Property
Rights
(b) Be creative and innovative
(c) Protect their own Intellectual Property
(d) All these

Answer 11
(d) All the above

Question 12
All small industries are highly labour-intensive.

Answer 12
False: Only traditional small industries (Handlooms,
Handicrafts, etc.) are highly labour-intensive while
modern small industries (small-scale industries and
powerlooms) make use of highly sophisticated
machinery and equipment to produce simple items
(e.g., plastic and rubber goods) as well as sophistica-
ted items (e.g., TV, calculators).

Question 13
The Government of India has defined small industries on
the basis of volume and value of output.

Answer 13
False: The Government of India had defined small
industries on the basis of investment in plant and
machinery and equipment.

Question 14
Investment limit in plant and machi-nery for small-scale
enterprises is `5 crore. True/False? Give reason.

Answer 14
False: For small-scale manufacturing enterprises –
investment above `25 lakh and up to ` 5 crore. For
small-scale service enterprises – investment above ` 10
lakh and up to ` 2 crore.

Question 15
What is the parameter used by the government to
identify manufacturing enterprises?

Answer 15
Investment in plant and machinery (excluding land and
buildings)

Question 16
What is the parameter used by the government to identify
service enterprises?

Answer 16
Investment in equipment.

Question 17
What is the investment limit in plant and machinery for
medium manufacturing enterprises?

Answer 17
Above `5 crore and up to ` 10 crore.

Question 18
What is the investment limit in equipment for micro
service enterprises?

Answer 18
Up to `10 lakh.

Question 19
How much do small industries in India account for the
total industrial units?

Answer 19
95%

Question 20
Name the institution which provides an integrated
administrative framework for small-scale industries at
the district level.

Answer 20
District Industrial Centre (DIC).

 Internal trade - meaning and types of services
rendered by a wholesaler and a retailer
 Large scale retailers - Departmental stores, c-
hain stores – concept
Internal Trade:
Meaning and Types
Meaning of Internal Trade
Buying and selling of goods and services within the
boundaries of a nation are referred to as internal
trade.
Whether the products are purchased from a neighbor-
urhood shop in a locality or a central market or a depa-
rtmental store or a mall or even from any door-to- door
salesperson or from an exhibition, all these are exam-
ples of internal trade as the goods are purchased from
an individual or establishment within a country.
No custom duty or import duty is levied on such trade
as goods are part of domestic production and are me-
ant for domestic consumption.
Generally, payment has to be made in the legal tender
of the country or any other acceptable currency.
Types of Internal Trade
Internal trade can be classified into two broad categor-
ies viz., (i) wholesale trade and (ii) retail trade.
Wholesale trade
Purchase and sale of goods and services in large
quantities for the purpose of resale or intermedi-
ate use is referred to as wholesale trade.
Wholesaling is concerned with the activities of those
persons or establishments which sell to retailers and
other merchants, and/or to industrial, institutional an-
d commercial users but who do not sell in significant a-
mount to ultimate consumers.
Wholesalers serve as an important link between
manufacturers and retailers.
 They enable the producers not only to reach large
number of buyers spread over a wide geographical
area (through retailers), but also to perform a varie-
ty of functions in the process of distribution of goo-
ds and services.
 They generally take the title of the goods and bear
the business risks by purchasing and selling the go-
ods in their own name.
 They purchase in bulk and sell in small lots to retai-
lers or industrial users.
 They undertake various activities such as grading of
products, packing into smaller lots, storage, transp-
ortation, promotion of goods, collection of market
information, collection of small and scattered orde-
rs of retailers and distribution of supplies to them.
 They also relieve the retailers of maintaining large
stock of articles and extend credit facilities to them.
 Top Tip
Most of the functions performed by wholesalers are such which cannot be
eliminated. If there are no wholesalers, these functions shall have to be
performed either by the manufacturers or the retailers.
Retail trade
Purchase and sale of goods in relatively small qua-
ntities, generally to the ultimate consumers, is ref-
erred to as retail trade.
A retailer is a business enterprise that is engaged in the
sale of goods and services directly to the ultimate cons-
umers.
The retailer normally buys goods in large quantities fr-
om the wholesalers and sells them in small quantities
to the ultimate consumers.
A retailer performs different functions in the distribu-
tion of goods and services, as stated below:
• Purchases a variety of products from the wholesale
distributors and others
• Arranges for proper storage of goods
• Sells the goods in small quantities
• Bears business risks
• Grades the products
• Collects market information
• Extends credit to the buyers
• Promotes the sale of products through displays,
participation in various schemes, etc.
Services Rendered by a
Wholesaler and a Retailer
Services of Wholesalers
Wholesalers provide various services to manufacturers
as well as retailers and provide immense help in the di-
stribution of goods and services.
Services to Manufacturers
Major services offered by wholesalers to the producers
of goods and services are given as below:
1. Facilitating large scale production: Wholesale-
rs collect small orders from a number of retailers
and pass on the pool of such orders to the manuf-
acturers and make purchases in bulk quantities.
This enables the producers to undertake producti-
on on a large scale and take advantage of the econ-
omies of scale.
2. Bearing risk: Wholesalers deal in goods in their
own name, take delivery of the goods and keep the
goods purchased in large lots in their warehouses.
In the process, they bear variety of risks such as
the risk of fall in prices, theft, pilferage, spoilage,
fire, etc. To that extent, they relieve the manufact-
urers from bearing these risks.
3. Financial assistance: The wholesalers provide
financial assistance to the manufacturers in the
sense that they generally make cash payment for
the goods purchased by them. Sometimes they al-
so advance money to the producers for bulk orde-
rs placed by them.
4. Expert advice: Wholesalers advice the manufact-
urers about customer's tastes and preferences, m-
arket conditions, competitive activities and the fe-
atures preferred by the buyers.
5. Help in marketing function: The wholesalers
take care of the distribution of goods to a number
of retailers who, in turn, sell these goods to a large
number of customers spread over a large geograp-
hical area. This relieves the manufacturers from
many of the marketing activities and enable them
to concentrate on the production activity.
6. Facilitate production continuity: The wholesa-
lers facilitate continuity of production activity thr-
oughout the year by purchasing the goods as and
when these are produced and storing them till the
time these are demanded by retailers or consum-
ers in the market.
7. Storage: Wholesalers take delivery of goods when
these are produced in factory and keep them in
their godowns/warehouses. This reduces the bur-
den of manufacturers of providing for storage fac-
ilities for the finished products. They thus provide
time utility.
Services to Retailers
The important services offered by manufacturers to the
retailers are described as below:
1. Availability of goods: The wholesalers make the
products of various manufacturers readily availab-
le to the retailers. This relieves the retailers of the
work of collecting goods from several producers
and keeping big inventory of the same.
2. Marketing support: The wholesalers perform va-
rious marketing functions and provide support to
the retailers. They undertake advertising and oth-
er sales promotional activities to induce custome-
rs to purchase the goods. The retailers are benefit-
ted as it helps them in increasing the demand for
various new products.
3. Grant of credit: The wholesalers generally extend
credit facilities to their regular customers. This e-
nables the retailers to manage their business with
relatively small amount of working capital.
4. Specialised knowledge: The wholesalers pass on
the benefit of their specialised knowledge to the
retailers. They inform the retailers about the new
products, their uses, quality, prices, etc. They may
also advise them on the decor of the retail outlet,
allocation of shelf space and demonstration of ce-
rtain products.
5. Risk sharing: The wholesalers purchase in bulk
and sell in relatively small quantities to the reta-
ilers. Being able to purchase merchandise in sma-
ller quantities, retailers are in a position to avoid
the risk of storage, pilferage, obsolescence, reduct-
ion in prices and demand fluctuations.
Services of Retailers
Retailers serve as an important link between the prod-
ucers and final consumers in the distribution of prod-
ucts and services. They provide useful services to the
consumers, wholesalers and manufacturers. Some of
the important services of retailers are described as bel-
ow:
Services to Manufacturers and Wholesalers
The invaluable services that the retailers render to the
wholesalers and producers are given as here under:
1. Help in distribution of goods: A retailer's most
important service to the wholesalers and manufa-
cturers is to provide help in the distribution of
their products by making these available to the fi-
nal consumers, who may be scattered over a large
geographic area. They provide place utility.
2. Personal selling: By undertaking personal sellin-
g efforts, the retailers relieve the producers of this
activity and greatly help them in the process of
actualising the sale of the products.
3. Enabling large-scale operations: On account of
retailer's services, the manufacturers and wholes-
alers are freed from the trouble of making individ-
ual sales to consumers in small quantities. This e-
nables them to operate on, at relatively large scale,
and thereby fully concentrate on their other acti-
vities.
4. Collecting market information: As retailers re-
main in direct and constant touch with the buy-
ers, they serve as an important source of collecting
market information about the tastes, preferences
and attitudes of customers.
5. Help in promotion: From time-to-time, manufa-
cturers and distributors have to carry on various
promotional activities in order to increase the sale
of their products. For example, they have to adver-
tise their products and offer short-term incentives
in the form of coupons, free gifts, sales contests,
and so on. Retailers participate in these activities
in various ways and, thereby, help in promoting
the sale of the products.
Services to Consumers
Some of the important services of retailers from the p-
oint of view of consumers are as follows:
1. Regular availability of products: The most imp-
ortant service of a retailer to consumers is to mai-
ntain regular availability of various products prod-
uced by different manufacturers. This enables the
buyers to buy products as and when needed.
2. New products information: By arranging for ef-
fective display of products and through their per-
sonal selling efforts, retailers provide important i-
nformation about the arrival, special features, etc.,
of new products to the customers.
3. Convenience in buying: Retailers generally buy
goods in large quantities and sell these in small
quantities, according to the requirements of their
customers. Also, they are normally situated very
near to the residential areas and remain open for
long hours. This offers great convenience to the
customers in buying products of their requirem-
ents.
4. Wide selection: Retailers generally keep stock of
a variety of products of different manufacturers.
This enables the consumers to make their choice
out of a wide selection of goods.
5. After-sales services: Retailers provide important
after-sales services in the form of home delivery,
supply of spare parts and attending to customers.
6. Provide credit facilities: The retailers sometim-
es provide credit facilities to their regular buyers.
This enables the consumers to increase their level
of consumption and, thereby, their standard of li-
ving.
Extra Shots
Terms of Trade
The following are the main terms used in the trade:
1. Cash on delivery (COD): It refers to a type of transaction in which
payment for goods or services is made at the time of delivery. If the
buyer is unable to make payment when the goods or services are
delivered then it will be returned to the seller.
2. Free on Board or Free on Rail (FoB or FOR): It rerers to a contract
between the seller and the buyer in which all the expenses up to the
point of delivery to a carrier (it may be a ship, rail, lorry, etc.) are to be
borne by seller.
3. Cost, Insurance and Freight (CFF): It is the price of goods which
includes not only the cost of goods but also the insurance and freight
charges payable on goods upto destination port.
4. Errors and Omissions Excepted (E&OE): It refers to that term which
is used in trade documents to say that mistakes and things that have
been forgotten should be taken into account.
Large Scale Fixed Shop
Retailers
Departmental Stores
A departmental store is a large establishment offe-
ring a wide variety of products, classified into well
-defined departments, aimed at satisfying practic-
ally every customer's need under one roof.
It has a number of departments, each one confining its
activities to one kind of product.
'Spencers' in Chennai
For example, there may be separate departments for to-
iletries, medicines, furniture, groceries, electronics, cl-
othing and dress material within a store.
Thus, they satisfy diverse market segments with a wide
variety of goods and services.
It is not uncommon for a department store in the Un-
ited States of America to carry 'needle to an aeroplane'
or 'all shopping under one roof.' Everything from 'a pin
to an elephant' is the spirit behind a typical departm-
ent store.
In India real departmental stores have not yet come in
a big way in the retailing business. However, some sto-
res on this line in India include 'Akberally' in Mumbai
and 'Spencers' in Chennai.
Features
Some of the important features of a departmental store
are as follows:
1. A modern departmental store may provide all fa-
cilities such as restaurant, travel and information
bureau, telephone booth, restrooms, etc. As such
they try to provide maximum service to higher
class of customers for whom price is of secondary
importance.
2. These stores are generally located at a central pla-
ce in the heart of a city, which caters to a large nu-
mber of customers.
3. As the size of these stores is very large, they are g-
enerally formed as a joint stock company manag-
ed by a board of directors. There is a managing di-
rector assisted by a general manager and several
department managers.
4. A departmental store combines both the functi-
ons of retailing as well as warehousing. They pur-
chase directly from manufacturers and operate se-
parate warehouses. That way they help in elimin-
ating undesirable middlemen between the produ-
cers and the customers.
5. They have centralised purchasing arrangements.
All the purchases in a department store are made
centrally by the purchase department of the store,
whereas sales are decentralised in different depar-
tments.
Chain Stores or Multiple-shops
Chain stores or multiple shops are networks of re-
tail shops that are owned and operated by manuf-
acturers or intermediaries.
 These different shops normally deal in standardised
and branded consumer products, which have rapid
sales turnover.
Fast Food Chains of

McDonalds
 These shops are run by the same organisation and
have identical merchandising strategies, with iden-
tical products and displays.
 Chain stores are most effective in handling high-vo-
lume merchandise, whose sales are relatively const-
ant throughout the year.
 In India, Bata Shoe stores are typical examples of
such shops. Similar type of retail outlets are coming
up in other products also. For example, the exclusive
showrooms of D.C.M., Raymonds and the fast food
chains of Nirula's and McDonalds.
Features
Some of the important features of such shops may be
described as follows:
1. These shops are located in fairly populous local-
ities, where sufficient number of customers can be
approached. The idea is to serve the customers at
a point which is nearest to their residence or work
place, rather than attracting them to a central pl-
ace.
2. The manufacturing/procurement of merchandise
for all the retail units is centralised at the head of-
fice, from where the goods are despatched to each
of these shops according to their requirements.
This results in savings in the cost of operation of
these stores.
3. Each retail shop is under the direct supervision of
a Branch Manager, who is held responsible for its
dayto- day management. The Branch Manager se-
nds daily reports to the head office in respect of
the sales, cash deposits, and the requirements of
the stock.
4. All the branches are controlled by the head office,
which is concerned with formulating the policies
and getting them implemented.
5. The prices of goods in such shops are fixed and all
sales are made on cash basis. The cash realised fr-
om the sales of merchandise is deposited daily in-
to a local bank account on behalf of the head of-
fice, and a report is sent to the head office in this
regard.
6. The head office normally appoints inspectors, w-
ho are concerned with day-to-day supervision of
the shops, in respect of quality of customer service
provided, adherence to the policies of the head
office, and so on.
Difference between Departmental stores and
Multiple shops/Chain stores
Basis Departmental stores Multiple shops or
Chain stores
1. Location A departmental store is The multiple stores are
located at a central located at a number of
place, where a large places for approaching a
number of customers large number of
can be attracted to it. customers. Thus, central
location is not necessary
for a multiple shop.
2. Range of Departmental stores aim The multiple stores
products at satisfying all the generally aim to satisfy
needs of customers the requirements of
under one roof. As such, customers relating to a
they have to carry a specified range of their
variety of products of products only.
different types.
3. Services The departmental stores The multiple shops
offered lay great emphasis on provide very limited
providing maximum service confined to
service to their guarantees and repairs if
customers. Some of the the sold out goods turn
services, provided by out to be defective.
them include alteration
of garments, restaurant
and so on.
4. Pricing The departmental stores The multiple shop
do not have uniform chains sell goods at fixed
pricing policy for all the prices and maintain
departments; rather uniform pricing policies
they have to occasionally for all the shops.
offer discounts on
certain products and
varieties to clear their
stock.
5. Class of The departmental stores The multiple shops cater
customers cater to the needs of to different types of
relatively high income customers, including
group of customers who those belonging to the
care more for the lower income groups,
services provided rather who are interested in
than the prices of the buying quality goods at
product. reasonable prices.
6. Credit The departmental stores All sales in the multiple
facilities may provide credit shops are made strictly
facilities to some of their on cash basis.
regular customers.
7. Flexibility As the departmental There is not much scope
stores deal in a wide for flexibility in the
variety of products, they chain stores, which deal
have certain flexibility in only in limited line of
respect of the line of products.
goods marketed.
Question 1
Kharbanda Ltd. deals in a variety of consumer pro-
ducts like toiletries, groceries, electronics, clothing,
etc. The work place has been divided into a number
of departments and every department sells a par-
ticular commodity. In this way almost all the needs
of customers are fulfilled under one roof.
Manchanda Ltd. deals in footwears. The company
has 200 shops at different places of the country.
The speciality of the business of this company is th-
Questions
at at all its shops the goods available are of the same
type, and there prices are also the same. All sales
are made strictly on cash basis.
Identify the type of retail trade done by Kharbanda
Ltd. and Manchanda Ltd. Also state any three feat-
ures of each.
(6 marks)
Questions
Answer 1
Kharbanda Ltd. is running a Departmental Store. It
is a fixed shop large retail trade.
Features:
(i) These stores are generally located at a central
place in the heart of a city, which cater to a la-
rge number of customers.
(ii) A departmental store purchases its supplies
directly from manufacturers (thereby elimina-
ting undesirable middlemen) and operates se-
parate warehouses.
Questions
(iii) As the size of these stores is very large, they
are generally formed as a joint stock company
managed by a board of directors. There is a
managing director assisted by a general
manager and several departmental managers.
The name of the trade of Manchanda Ltd. is Chain
Stores or Multiple Shops. It is also a fixed shop la-
rge retail trade.
Features:
(i) These shops are located in fairly populous lo-
calities, where sufficient number of customers
Questions
can be approached.
(ii) Sales are decentralised. Branch shops are just
like ordinary retail shops.
(iii) Each retail shop is under the direct supervise-
on and control of a Branch Manager, who is
responsible for its day-to-day management.
He sends daily reports to the head office in
respect of the sales, cash deposits and the inv-
entory requirements.
Questions
Question 2
Bata is an example of ___________.
(a) Mail order houses
(b) General stores
(c) Chain stores
(d) Departmental stores
Questions
Answer 2
(c) Chain stores
Questions
Question 3
Buying and selling of goods and services within the
boundaries of a country are referred to as ______.
(a) External trade
(b) Export
(c) Internal trade
(d) Import
Questions
Answer 3
(c) Internal trade
Questions
Question 4
Wholesale trade refers to
(a) Exporting goods and services
(b) Importing goods and services
(c) Buying and selling of goods and services in lar-
ge quantities for the purpose of resale or inte-
rmediate use
(d) None of the above
Questions
Answer 4
(c) Buying and selling of goods and services in la-
rge quantities for the purpose of resale or inte-
rmediate use
Questions
Question 5
Services which wholesalers provide to retailers are
___________.
(a) availability of goods
(b) marketing support
(c) risk sharing
(d) all of these
Questions
Answer 5
(d) all of these
Questions
Question 6
Services which retailers provide to consumers are
___________.
(a) wide selection of goods
(b) after-sales service
(c) provide credit facilities
(d) all of these
Questions
Answer 6
(d) all of these
Questions
 International trade: concept and benefits
• Understand the concept of international
trade.
• Describe the benefit of international trade to
the nation and business firms.
International Trade
– Concept and Benefits
Meaning
Manufacturing and trade beyond the boundaries of o-
ne’s own country is known as international business.
International or external business can, therefore, be d-
efined as those business activities that take place acr-
oss the national frontiers. It involves not only the inter-
national movements of goods and services, but also of
capital, personnel, technology and intellectual prope-
rty like patents, trademarks, know-how and copyrights.
International trade comprises exports and impo-
rts of merchandise (goods). It is also called ‘visible
trade’ because goods are tangible. Items of visible
trade include machinery, electronic goods, gold a-
nd silver, chemicals, etc.
International Trade vs. Internal Trade
Basis Internal Trade International Trade
1. Nationality People or organisations People or organisations
of buyers and from one nation of different countries
sellers participate in domestic participate in
business transactions. international business
transactions.
2. Nationality Various other Various other
of other stakeholders such as stakeholders such as
stakeholders suppliers, employees, suppliers, employees,
middlemen, middlemen,
shareholders and shareholders and
partners are usually partners are from
citizens of the same different nations.
country.
3. Mobility of The degree of mobility The degree of mobility
factors of of factors of of factors of
production production like labour production like labour
and capital is relatively and capital across
more within a country. nations is relatively
less.
4. Customer Domestic markets are International markets
heterogeneit relatively more lack homogeneity due
y across homogeneous in to differences in
markets nature. language, preferences,
customs, etc., across
markets.
5. Differences Business systems and Business systems and
in business practices are relatively practices vary
systems and more homogeneous considerably across
practices within a country. countries.
6. Political Domestic business is Different countries
system and subject to political have different forms of
risks system and risks of one political systems and
single country. different degrees of
risks which often
become a barrier to
international business.
7. Business Domestic business is International business
regulations subject to rules, laws transactions are subject
and policies and policies, taxation to rules, laws and
system, etc., of a single policies, tariffs and
country. quotas, etc. of multiple
countries.
8. Currency Currency of domestic International business
used in country is used. transactions involve
business use of currencies of
transactions more than one country.
Benefits of International Trade
Benefits to Nations
1. Earning of foreign exchange: International bus-
iness helps a country to earn foreign exchange wh-
ich can be used for payment for imports of capital
goods, technology, petroleum products, fertilisers,
pharmaceutical products, etc.
2. More efficient use of resources: Every country
produces select goods and services which it can
produce most effectively and efficiently. Gradually,
it attains specialisation in the production of these
goods and services, leading to efficient utilisation
of resources.
3. Improving growth prospects and employment
potentials: Producing solely for the purposes of
domestic consumption severely restricts a count-
ry's prospects for growth and employment. Many
countries, especially the developing ones, could n-
ot execute their plans to produce on a larger scale,
and thus create employment for people because
their domestic market was not large enough to
absorb all that extra production. Later on a few
countries such as Singapore, South Korea and Ch-
ina which saw markets for their products in the fo-
reign countries embarked upon the strategy 'exp-
ort and flourish', and soon became the star perfo-
rmers on the world map. This helped them not
only in improving their growth prospects, but also
created opportunities for employment of people
living in these countries.
4. Increased standard of living: In the absence of
international trade of goods and services, it would
not have been possible for the world community
to consume goods and services produced in other
countries that the people in these countries are
able to consume and enjoy a higher standard of
living.
Benefits to Business Firms
1. Prospects for higher profits: International busi-
ness can be more profitable than the domestic bu-
siness. When the domestic prices are lower, busin-
ess firms can earn more profits by selling their pr-
oducts in the international markets where prices
are high.
2. Increased capacity utilisation: By procuring ex-
port orders, a firm can make use of its surplus pro-
duction capacity. Production on large-scale leads
to economies of scale which, in turn, lowers the
cost of production.
3. Way out to intense competition in domestic
market: Highly competitive domestic market dr-
ives many companies to go international in search
of markets for their products.
4. Prospects for growth: When demand of a firm’s
products starts getting saturated in the domestic
market, the firm has to search overseas markets
for improving its growth prospects.
5. Improved business vision: The growth of inter-
national business of many companies (e.g., Pepsi,
Samsung, Ford Motors, Hindustan Unilever Ltd.,
etc.) is essentially a part of their business policies
to become more competitive and to diversify.

B.ST XI Subhash Dey All Chapters PPTs (Teaching Made Easier)

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Evolution and

Business may be defined as an economic activity

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