Regulatory Role of Government: Module-3

Regulatory Role of Government
Module-3
4/20/2012
manavazhaganr@bsnl.in
Political System
Forms of Political System Role of Political System Political system in a country Democratic Power is vested with Decides people Promotes Totalitarian- Power is vested with Encourages one or a group of people Shelters Directs and Controls the Business Activity
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Role of Individual Constituents of Political System

Legislature Policy Making Law Making Budget approval Government Directing Controlling Implementing Judiciary Settle Legal Disputes Judicial Review
Constituents of Political System Legislature
Executive Control
Acts as a mirror of public opinion
Executive/
Government Judiciary
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Impact of Government on Business

Governments Action Governments Motive Impact on Business
Cost of production increases, Affects Profitability & Competitiveness Ensure Social security, Labour Laws ( Role Direct / Control ) Improving Standard of
Living, Working condition
Generating revenue for re- Cost of production Tax Laws ( Role Direct / Control ) investment , saving affected increases, Affects
people, industry Profitability & Competitiveness
To ensure rights of parties Commercial Laws ( Role Direct / Control )
Increased business confidence

Local industries compete globally
Tariffs / Subsidies / Import ban / Export ban ( Role Encourage / Shelter ) Products reserved for SSIs & Public sectors ( Role Decides / 4/20/2012 Promotes )
To protect local industries from global competition
To promote mixed economy

Limited area of operation , could not be diversified, Vertical Integration not possible ,cost increase
Industrial Policy
1948, 1956 , 1991
Industrial policy Indicates
the relationship between Government & Business It contains guidelines for govts administrative action it has no quantitative target It is not passed as a Law Violation of Industrial Policy cannot be challenged in Court
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Industrial Policy 1948

Accepted Importance of both Private & Public sectors Divided industries into 4 categories
State Monopoly Arms, ammunitions , Atomic Energy, Rail transport Coal, Iron , Steel , aircraft, ship building, Manufacture of Telecom, Aircraft , Wireless, oil, mineral Automobile, Chemical, Textile All other Industries
Mixed Sector
Government Control Private Control
Recognised importance of Foreign Capital Recognised importance of SSIs

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Objective:
Accelerate Economic growth rate Expand public sector Increase employment opportunities Prevent creation of monopoly Expand Cottage,village,SSIs
Industry Classifications Schedule-A: ( 17 industries ) Govt. Arms , Ammunitions , Defence equipments , atomic energy , iron & steel , Heavy plant &Machinery, Heavy electrical plant , Coal & lignite, mineral oil, mining ,aircraft , air & rail transport, Telecom cables, electricity generation & distribution , ship building Schedule- B: ( 12 industries ) Private & Govt. machine tools , Ferro-alloys , drugs ,fertilizers , synthetic rubber , chemical pulp ,road transport , sea transport , carbonisation of coal , mining of aluminum & non-ferrous metals. Private sector others
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Objective:
Remove regulatory system Incentives for industries in backward areas To Run the PSUs on business lines Encourage Entrepreneurship Link Indian economy to global market Develop indigenous technology Promote productivity & employment generation
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Policy Initiatives
1. Industrial Licensing Policy
2. Public sector Policy

3. Foreign Investment 4. Foreign Technology Agreements 5. MRTP Act
Industrial
Licensing
Policy
Industrial Licensing - It is required to establish, to manufacture goods at a specific location before 1991. In the new policy licensing requirement was abolished except for 1. Distillation & Brewing of alcoholic drinks 2. Manufacturing Cigarettes & Tobacco substitutes 3. All types of electronic aerospace & Defence equipments 4. Industrial Explosives 5. Certain Hazardous chemicals Exempted factories have to furnish a memorandum to Industries department Location: In the new policy projects can be established at any location except cities . In a city of 1 million population it has to be established 25kms away from city.
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Public
Sector
Policy
Number of Industries reserved for public sector reduced to 8 and then to 2 ( Atomic energy & Railway ) Growth of PSUs in the following Priority sectors 1.Essential infrastructure Goods & Services 2. Exploration & Exploitation of Oil & Mineral resources 3. Strategic Defence equipments 4. Technology development & building of manufacturing capabilities in areas which are crucial for economic development Autonomy through MOU Navaratnas Bringing down government equity to 26 % in non-Priority sector PSUs Close down PSUs which can not be revived Fully protect the interest of workers
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Foreign
Investment
Foreign Investment allowed up to 51 % of Equity capital in FERA companies Foreign Investment allowed up to 26 % of Equity capital in Defence productions sector. Up to 100 % in certain sectors ( real estate ) Stock market opened for foreign investment EXIM Policy liberalised , tariffs reduced , lifted import restrictions Foreign exchange rate policy liberalised , Rupee was made fully convertible on current account and then recently partly on capital account.
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Foreign technology agreement under automatic route for priority sector Priority sectors are Infrastructure , Exploration , Defence products
Foreign
Technology
Agreement
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The government will not scrutiny the

investment decisions of MRTP companies Prior approval of MRTP companies for
expansion not required
MRTP Act
Monopolies and
Restrictive Trade Practices Act
Restrictions on merger, acquisition and transfer of shares will be replaced
MRTP commission will be strengthened to

take action against restrictive & unfair trade practice. MRTP commission will be
empowered to enquire into the complaints

of customers MRTP Act is replaced by Competition Law
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Public Sector
Public sector enterprise is an undertaking owned & managed by Government.
244 enterprises are public sector enterprises under the control of Central
Government Total investment Rs. 4,21,000 Cr. 1100 are State Public sector enterprises with 50,000 Cr. Investment These PSUs accounts for 25% of GDP & One-third of export PSUs accounts for 70 % of workers employed in organised sector
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Public Sector
Objective:
Help in rapid economic growth Earn return on investment & generate resources for development Create employment opportunity Assist & develop ancillary & small scale industries Promote redistribution of income & wealth
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Public Sector
Organisation of Public sector Units:
Public enterprises are organised in the following forms: 1. 2. 3. 4. 5. Ministry Departmental Undertakings Government Company Public corporation Holding company
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Public Sector
Organisation of Public sector Units:
Ministry Departmental Undertaking Management by a ministry, Railways, Budget to be approved by Parliament, Headed by Minister and management board It is directly subordinate to ministry, ICF, Ordnance factory, financed by annual appropriation from treasury, revenues are paid into treasury. Employees are civil servents, can be sued by following the procedure to sue the government 51% or more of equity owned by government, created under Company Law, Directors are appointed by Govt., fund from government
Government Company
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Public Sector
Navaratnas:
In 1997 govt. granted autonomy to 9 public sector units so as to support them to become global companies. These 9 companies are BHEL, BPCL, HPCL, IOC, ONGC, SAIL, VSNL, NTPC, IPCL. Later
GAIL ,MTNL,BEL,HAL were given the navaratna status.

These companies are free to decide upon joint venture, capital expenditure, set up PSEs, set up subsidiaries / office in foreign
countries, raise funds from capital market, set alliance. They

enjoy substantial managerial & operational autonomy
Privatisation
Privatisation : Privatisation means transfer of ownership and /or management of an enterprise from the public sector to the private sector. Disinvestment: Disinvestment means sale of shares of public sector enterprises to outsiders. It is one of the method of privatisation. Purpose of Privatisation 1. To increase efficiency 2. To reduce the monopoly of govt. 3. To encourage private & foreign investment 4. To reduce the states administrative work 5. To encourage wider ownership of public
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Privatisation
Method of Privatisation in India:
1. Disinvestment Route This involves sale of equity shares of public sector units to outsiders. Disinvestment policy was introduced in 1991-92. Up to 20% of equity in select PSUs sold to Public sector Institutional investors like LIC, UTI . In 1993 Disinvestment committee under the chairmanship of C.Rangarajan was set up to advise on the mode of disinvestment. 1996 Disinvestment commission was set up and 58 PSUs were recommended to shift to private management without sale of shares 1999 PSUs were classified under Strategic & non-Strategic areas for disinvestment purpose. Strategic Sectors Defence equipments , arms , ammunitions, air crafts, warships, atomic energy , railways.
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Privatisation
Method of Privatisation in India:
1. Disinvestment Route.Cont. Rangarajan Committee Report Recommendations: 1. Industries reserved for PSUs Up to 49% of equity can be sold 2. PSUs having dominant market share Up to 74 % can be sold 3. In all other cases equity can be sold up to 100% 4. Best disinvestment method is offering equity to public at a fixed price 5. Once shares of PSUs are traded in Stock market Fixed price method can be used . Untill such time sale can be made through auction Disinvestment Commission: 1. Was set up in 1996 , to determine extent of disinvestment, to select the PSU to be divestd, to recommend route to disinvestment, to supervise overall sale . As on date 76 PSUs were divested and Rs. 49,000 cr is raised.
Privatisation
National Investment Fund: Set up in 2005 , into which the sale proceeds of PSUs will be credited. This fund will be used to develop Infrastructure & Education, health, employment generation and in capital projects.
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Small & Medium Enterprises ( SMEs)

THE MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006
Micro Industries
Small Industries
Medium Industries
Enterprise means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner pertaining to any industry specified in the First Schedule to the Industries Development and Regulation Act, 1951.
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Small & Medium Enterprises

Type
Micro
Small
P&M > Rs.25 L <=500
Medium
P &M >Rs.500 L< =1000
Plant & Machinery
Manufacturing
<=Rs.25 L
Service
Equipment <=Rs.10 L
Equipment >Rs. 10 L<=200
Equipment >Rs. 200 L<=500
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Dynamic Economy
Role of SMEs
Socio-Economic Development
Accounts for
35% Industrial Production 40% - Export 60% - Employment
Provide Increased employment Require Low gestation period
Importance
Easy to set up in rural & backward areas
Need Small market

Encourage Local Entrepreneur
Influence standard of living of people
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Protection Promotion
1. Aim : Promotion & Strengthening of SMEs
2. Changes in Investment Limit

3. 24 % Equity Participation by other Companies
Government Policy Initiatives 1991
4. Integrated Infrastructure development 5. Encouraging Industry associations 6. Common Testing facility 7. Productivity Training
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1. Aim : Promotion of SMEs
2. Changes in Investment Limit

3. De-reservation of items
Government Policy Initiatives 1999
4. Foreign participation
5. Establishment of Growth centres

6. Export promotion 7. Marketin assistance
8. Incentives for Quality Improvement
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1. THE MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT 2006 ( MSMED Act 2006 )
2. NATIONAL MANUFACTURING COMPETITIVENESS
Recent Policy Initiatives 2006
PROGRAMME (NMCP)
3. PACKAGE FOR PROMOTION OF MICRO AND SMALL

ENTERPRISES 4 . RESERVATION / DERESERVATION OF PRODUCTS FOR
MANUFACTURE IN THE SMALL SCALE SECTOR
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Recent Policy Initiatives
Objective
PROMOTION DEVELOPMENT and Enhancement of Competitiveness
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PROMOTION DEVELOPMENT and ENHANCEMENT of Competitiveness through
Development of skill provisioning for technological upgradation providing marketing assistance or infrastructure facilities Credit Facilities Measures against Delayed payments
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Development of skill
National Institute for small Industry Extension & Training - Hyderabad ( NISIET) Indian istitute of Entrepreneurship ( IIE ) Guwahati National Institute for Entrepreneurship & small Business Development Newdelhi ( NIESBUD )
+ 12 other Institutes
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provisioning for technological upgradation

Small Industries Development Organisation ( SIDO ) National Small Industries Corporation Ltd. ( NSIC National science and technology Entrepreneurship Development Board ( NSTEDB National Productivity Council ( NPC )
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providing marketing assistance or infrastructure facilities

Director of export Promotion ( DEP) Director General of Supply & Disposal ( DGSD ) Rural Industrial & Marketing Corporation ( RIMCO )
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Credit Facilities
Commercial Banks Counsil of Scientific & Industrial Research Small industries Service Institute National Small industry Corporation
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Measures against Delayed payments

Micro and Small Enterprises Facilitation Council Arbitration and Conciliation Act 1996 Courts
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Small & Medium Enterprises Recent Policy Initiatives - 2006

2. NATIONAL MANUFACTURING COMPETITIVENESSPROGRAMME (NMCP)
Objective : To support manufacturing enterprises to become Competitive
Schemes : 1. Support for Lean manufacturing (Without Waste &
implementing flow )
2. Promotion of ICT in manufacturing ( Information communication Tech ) 3. Setting up Mini Tool Rooms 4. Encouragement for Quality Management Standards & Tools 5. Campaign for investment in Intellectual property

Recent Policy Initiatives - 2006
3. PACKAGE FOR PROMOTION OF MICRO AND SMALL ENTERPRISES
Objective : To Enhance Competitiveness
Package : 1. Legislative backup 2. Credit support 3. Tech & Quality up gradation support 4. Marketing support 5. Empowerment of women entrepreneur
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Small & Medium Enterprises Incentives for SMEs

Export Incentives:
Import Replenishment Licenses (REP) Importers are eligible for REP to import raw materials and spares which are used to produce export items. Deemed Export Benefits Producers who supply the inputs to final exporters are deemed to be exporters and are eligible for REP Import Export Pass Book Scheme Exportes having good track record are eligible to import duty free raw materials. Excise Concession: Up to 30 Lakhs for Ssis.
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Incentives for backwrad areas:

Investment Subsidy: Category A Districts up to 25 Lakhs Category B Districts up to 15 Lakhs Category C Districts up to 10 Lakhs Tax Holidy: Tax deduction upto 6% of profit 80J for 5 years from production date EOU, EPZ exempt fro corporate income tax upto 5 yrs. CST exemption for Khadi & Village industries for 5 yrs. 100% CST exemption for Tiny,small & large scale industries for 3 5 yrs. in different zones
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Small & Medium Enterprises Incentives for SMEs .Contd.

Other Incentives: Interest free loans Price preference Allotment of developed shed, raw material Land & building at concessional rates Subsidy for Artisans, handlooms Buying test equipments Capital investment Interest Market / Feasibility studies Power generation R&D works Transport Technical consultancy
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Incentives for
Handicapped NRIs Retired defence personnel Women Entrepreneurs Exemptions from: Income tax Property tax Stamp duty Sales tax
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Small & Medium Enterprises Sickness in SMEs

Sickness Definition : The definition of sickness in SME sector has been changing over time. The Third Census on SSI Sector Kohli Committee: "A small scale industrial unit is considered as sick when if any of the borrowal accounts of the unit remains substandard for more than six months, i.e., principal or interest, in respect of any of its borrowal accounts has remained overdue for a period exceeding 6 months OR There is erosion in the net worth due to accumulated losses to the extent of 50 per cent of its net worth during the previous accounting year, and The unit has been in commercial production for at least two years."
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Small & Medium Enterprises Sickness in SMEs

Criteria to identify sickness
In the Third Census, the following criteria were adapted to identify sick/
1. Continuous decline in gross output compared to the previous two financial years; 2. Delay in repayment of loan from institutional sources, for more than 12 months; and 3. Erosion in the net worth to the extent of 50 per cent of the net worth during the previous accounting year. Units satisfying one or more of the above criteria have to be treated as Sick unit
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Sickness in SMEs- Causes
Internal External
Anatomical causes
1. 2. 3. 4. Underestimation of Project cost Old Technology Wrong Site Unwanted investment in Fixed assets 5. Defective Plant & Machinery Operational causes
1.
2. 3.
4. 5.
Shortage of supply in inputs Rise in raw material cost Radical change in govt. policy Recession in Industry Foreign exchange fluctuations
1. Defective Financial planning 2. No R&D planning 3. Incapable Management

Small & Medium Enterprises Sickness in SMEs - Symptoms

At Implementation Stage Undue delay in implementation Lack of coordination with various agencies When the project has started operation Increase in level of inventories Increase in rejection rate of finished goods Irregularity in payment of loan Industrial relations Problem Position of cash credit account Cash credit or overdraft account has been overdrawn or frequently drawn Returned unpaid cheques Long pending unpaid bills Pledged stocks are overvalued to obtain fund from government Uninsured stocks
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Small & Medium Enterprises Sickness in SMEs - Cures

Discover new Products & Markets
Enhance accessibility to market Information

More thrust on R & D More Professionalism Planned training Modernising Operation More attention to Marketing Frequent use of advertisement Efforts to collect dues from buyers
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Small & Medium Enterprises Sickness in SMEs Role of BIFR

Under Sick Industries Companies Act -1985 , Board for Industrial and Financial Reconstruction ( BIFR ) was setup to make the sick companies viable. The BIFR can direct a financial institution to prepare a scheme for revival of sick companies. The scheme could provide for
1. Financial reconstruction of the company

2. Proper management of sick company by change or takeover the management 3. Amalgamation of sick company with other company 4. Sale or lease of the sick company Based on the scheme provided by financial institution BIFR will take action in line with the High court proceedings.
Entrepreneur
A person who creates something new with value and assuming the risk & Reward
Something New + Value + Risk + Reward
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Some Entrepreneurs
Entrepreneur Something New Value Risk Reward
Speedee Service System J. McDonald Pay from future earnings

Cyrus McCromick
Demand side Innovation Demand side Innovation
Mr. Ray Kroc American Way of Life
Credit risk
Global productivity
Pace University
Evening College
Demand side innovation
Perception
High Middle class Education
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Types of Entrepreneurs
Type of Business Business Trading Industrial Corporate Agricultural Retail Service Franchise Growth Growth Super Growth Others Imitating Forced National/International Intrapreneur Immigrant Motivation Pure Induced Motivated Spontaneous
Stage of Development First generation Modern Classical Scale of Operation Small, Large
Use of Technology Technical Non-Technical Professional High/Low Tech. Area Rural , Urban
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Gender Male, Female

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Role of entrepreneurs in Economic Development
Promotion of capital formation. Immediate large-scale employment. Promotion of balanced regional development. Reduced concentration of economic power. Encourages effective resource mobilization. Promotes export trade.
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Regulatory Role of Government: Module-3

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Regulatory Role of Government: Module-3

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Regulatory Role of Government

Role of Individual Constituents of Political System

Constituents of Political System Legislature

Impact of Government on Business

Living, Working condition

To ensure rights of parties Commercial Laws ( Role Direct / Control )

Increased business confidence

To protect local industries from global competition

To promote mixed economy

Industrial Policy 1948

Government Control Private Control

Recognised importance of Foreign Capital Recognised importance of SSIs

Industrial Policy 1956

Industrial Policy 1991

1. Industrial Licensing Policy

2. Public sector Policy

Industrial Policy 1991

Industrial Policy 1991

Industrial Policy 1991

Industrial Policy 1991

Industrial Policy 1991

The government will not scrutiny the

expansion not required

Restrictions on merger, acquisition and transfer of shares will be replaced

MRTP commission will be strengthened to

empowered to enquire into the complaints

GAIL ,MTNL,BEL,HAL were given the navaratna status.

countries, raise funds from capital market, set alliance. They

Small & Medium Enterprises ( SMEs)

Small & Medium Enterprises

Plant & Machinery

Equipment >Rs. 10 L<=200

Equipment >Rs. 200 L<=500

Small & Medium Enterprises

Small & Medium Enterprises

Provide Increased employment Require Low gestation period

Easy to set up in rural & backward areas

Need Small market

Influence standard of living of people

Small & Medium Enterprises

2. Changes in Investment Limit

Government Policy Initiatives 1991

Small & Medium Enterprises

2. Changes in Investment Limit

Government Policy Initiatives 1999

5. Establishment of Growth centres

8. Incentives for Quality Improvement

Small & Medium Enterprises

2. NATIONAL MANUFACTURING COMPETITIVENESS

Recent Policy Initiatives 2006

3. PACKAGE FOR PROMOTION OF MICRO AND SMALL

MANUFACTURE IN THE SMALL SCALE SECTOR

Small & Medium Enterprises

PROMOTION DEVELOPMENT and Enhancement of Competitiveness

Small & Medium Enterprises

PROMOTION DEVELOPMENT and ENHANCEMENT of Competitiveness through

Small & Medium Enterprises

Small & Medium Enterprises

provisioning for technological upgradation

Small & Medium Enterprises

providing marketing assistance or infrastructure facilities

Small & Medium Enterprises