Professional Documents
Culture Documents
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 are those performed out
earn 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 the road are performing
a teacher teaching in a non-economic activities
school are doing so to earn since they are doing so
their livelihoods and are, out of love or sympathy.
therefore, engaged in an
economic activity.
3. Types Economic activities may Religious, social, parental
be further divided into and patriotic activities
three categories, are non-economic
namely business, activities.
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.
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 Bar Council of India
Accounting Lawyer Institute of Chartered
s Accountants of India
Chartered Accountants (ICAI)
(CA)
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 Appointment
establishment decision and other of a letter and
legal formalities, professional service
if necessary body and agreement
certificate of
practice
Top
ProfitTip
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 enterprises constantly face two types of risk :
Business
speculative and pure.
1. Speculative risks:Speculative risks involve
both the possibility of gain, as well as, the
possibility
loss. Speculative
of 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
causesinclude uncertainties relating to demand for
These
goods, competition, price, collection of dues
customers,
from change of technology or method of
production, etc. Financial problems, like
rise
interest rate for borrowing, levy of higher taxes, etc.,in
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)
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
.
(Choose the correct
alternative)
(a) Modern industries
(b) modern technological and scientific institutes
(c) space and nuclear programmes
(d) All of these
Note
The Joint Hindu Family Business is on the decline because of
the diminishing number of joint Hindu families in the country.
Feature
s1. 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.
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.
(c) does not invite public to subscribe to its
Note
securities.
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
The minimum amount that,Subscription
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.
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 Three Two
of directors
Index of members Compulsory Not compulsory
Transfer of shares No restriction Restriction on transfer
Invitation to public Can invite the public to Cannot invite the public
to subscribe to subscribe to its shares or to subscribe to its
shares debentures securities
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.
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 Idenbtiyfication 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
to be submitted
complied with is the with the
mentioned
to Registrar above the
registered This statement cancompany
documentsunder the law. for be
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 documents
are in hasthat
and to beall
satisfied
the that the
order
requirements statutory
registration
the have
regarding complied been
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
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 informationfrom 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 the company.
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
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
2. Unlimited liability
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
3. Ease of formation and closure
4. Direct incentive
5. Sense of accomplishment
Limitations
6. Limited resources
7. Limited life of a business concern
8. Unlimited liability
9. 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
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 Society
Cooperative
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
3. Limited liability
4. Democratic control
5. Service motive
Merits
6. Ease of formation
7. Equality in voting status
8. Limited liability
9. Stable existence
10. Economy in operations
11. Support from government
Limitations
12.Limited resources
13. Inefficiency in management
14.Lack of secrecy
4. Differences of opinion
5. Government control
Types of Cooperative Societies
6. Consumers’ cooperative societies
7. Producers’ cooperative societies
8. Marketing cooperative societies
9. Farmers’ cooperative societies
10. Credit cooperative societies
11.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
3. Unlimited liability
4. Risk bearing Maximum—50
5. Joint decision making and control
6. Mutual agency
7. Continuity
Merits
8. Ease of formation and closure
9. Balanced decision making
10.More funds
11. Sharing of risks
12.Secrecy
Limitations
1. Unlimited liability
2. Limited resources
3. Possibility of conflicts
4. Lack of continuity
5. Lack of public confidence
Types of Partners
6. Active Partner
7. Sleeping or Dormant
Partner
8. Secret Partner
9. Nominal Partner
10. 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
9. Limited liability
10. Transfer of interest
11. Perpetual existence
12. Scope for expansion
13. 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 determine whether the 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
Qualification Shares. called
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- (i) Articles of
laws of a company.
Associatio
n
(b) The document inviting subscriptions for (ii) Memorandum
shares and debentures. of Association
Indian Railways
Feature
1s. 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
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
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
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.
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
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
O verdraft facility is available only on
(Choose the correct
alternative)
(a) Current account deposits
(b) Saving account deposits
(c) Recurring deposits
(d) Fixed deposits
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 fire or marine
of
insurance are contracts of indemnity. The
compensate
insurer undertakes
(in terms of to
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
4. Doctrine of ‘causa
proxima’to this principle, when the loss is the result of
According
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 insurance is human life. is any physical matter is a ship,
property or assets. cargo or freight.
2. Element Life insurance has the Fire insurance has Marine insurance
elements of protection only the element has only the
and investment or of protection and element of
both. not the element of protection.
investment.
8. Policy One can insure for In fire insurance, the In marine insurance,
Amount any amount in life amount of the the amount of the
insurance. policy cannot be policy cannot
more than the value exceed the market
of the subject value of the ship or
matter. cargo.
9. There is an element The event i.e., The event i.e., loss
Contingency of certainity. The destruction by fire at sea may not occur
of Risk event i.e., death of may not happen. and there may be no
maturity or policy is There is an element claim. There is an
bound to happen. of uncertainity and element of
Therefore a claim there may be no uncertainty.
will be present. claim.
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
causedby 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
7. Life Insurance: A life insurance policy is basically a
protection against the uncertainty of life, that is death.
8. 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 (a) The principle of
economic interest in the Subrogation
subject matter of insurance
contract.
(ii) After compensating the loss, (b) The principle of
insurer gets all the rights with Indemnity
respect to the subject-matter
insured.
(iii) Insured is entitled to recover the (c) The principle of
loss suffered by him, up to the Insurable Interest
limit of policy amount.
Objective Type Questions 4.2
Answer 1
(i) - (c), (ii) - (a), (iii) -
(b)
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
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 touchwith 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 forthem.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
presenc
e
3. Locational Proximity to the source of None
requirement raw materials or the market
s for the products
4. Cost of High Low as no
setting up requirement of
physical facilities
5. Operating High due to fixed charges Low as a result of
cost associated with investment in reliance on network
procurement and storage, of relationships
production, marketing and rather than
distribution facilities ownership of
6. Nature of Indirect Direct
contact with through
the suppliers intermediaries
and
customers
7. Nature of Hierarchical–from top level Non-hierarchical,
internal management to middle allowing direct vertical,
communicatio level management to lower horizontal and
n level management to diagonal
operatives communication
8. Response Long Instantaneous
time for
meeting
customers’/
internal
requirement
s
9. Shape of the Vertical/tall, due to hierarchy Horizontal/flat due to
organisationa or chain of command directness of command
l structure and communication
10. Business Sequential precedence Simultaneous
processes succession relationship, i.e., (concurrence) different
and length purchase, production/ processes. Business
of the cycle operation, marketing, sales. process cycle is,
The business process cycle therefore, shorter
is, therefore, longer
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 Responsibilitytowards 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
6. A definite commitment by top management of the
enterprise to create, maintain and develop work culture
for environmental protection and pollution prevention.
7. 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
quality rawgood
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. 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:
(Choose the correct
alternative)
(a) Same as legal responsibility
(b) N arrower than legal responsibility
(c) Broader than legal responsibility
(d) None of these
(6 marks)
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
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.
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
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.
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.
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
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
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
(Choose the correct alternative)
(a) Owners of the company
(b) Partners of the company
(c) Executives of the company
(d) Guardian of the company
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
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 whichprotects the
IPR
scientific inventions (products and or
which shows technical advancement process)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
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
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-
shopsstores or multiple shops are networks of re-
Chain
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.
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 .
(Choose the correct alternative)
(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 .
(Choose the correct alternative)
(a) External trade
(b) Export
(c) Internal trade
(d) Import
Questions
Answer 3
(c) Internal trade
Questions
Question 4
Wholesale trade refers to
(Choose the correct alternative)
(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
.
(Choose the correct alternative)
(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
.
(Choose the correct alternative)
(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-
International Trade vs. Internal
Trade
Basis Internal Trade International Trade
1. Nationality People or People or
of buyers organisations from organisations of
and sellers one nation participate different countries
in domestic business participate in
transactions. international business
transactions.