A.

P Model Schools Commerce Study Material for Intermediate 1st year

UNIT-1 1. CONCEPT OF BUSINESS Human Activities: All the activities which are directed towards satisfying human wants are called human activities. Ex: A farmer working in the field. Human activities are classified into two categories a. Economic activities b. Non-Economic activities. Economic Activities: Economic activities are concerned with production, distribution and exchange of goods and services. All these activities involve working to earn a livelihood by producing wealth in different forms. Non-Economic Activities: All those activities of man which are inspired by love, patriotism, sympathy, religion etc are called non-economic activities. Classification of Economic Activities: Economic activities are classified into 3 categories. I. Profession. II. Employment or Service. III. Business Profession: Profession means an occupation which renders specialized, expert and personal services .The services are based on professional education, knowledge, training etc. .Ex: CA, Doctor, Lawyer etc. Employment or service: In this type of occupation a person has to work under an agreement or contract and perform such work assigned to him by the employee in return for wages or salary. Business: According to L.A.Hony business is the human activity directed towards providing or acquiring wealth through buying and selling of goods and services. Characteristics of Business: The following are the business characteristics: 1. Sale, Transfer or Exchange. 2. Dealing in goods and services. 3. Profit motive. 4. Continuity of transaction.. 5. Risk or uncertainty. 1. Sale, Transfer or Exchange: All business activities are directly or indirectly concerned with the exchange of goods and services for value. 2. Dealing in goods and services: Every business enterprise comes into existence to provide goods and services to society. Goods are of two types: a) Consumer goods b) Producer goods. 3. Profit motive: Making profit is an essential characteristic of business. Every business is carried on with the purpose of earning money and profit. However profit must be earn through legal and fair. 4. Continuity of transaction: Dealing in goods and services constitutes business only when they are carried on regularly and continuously. 5. Risk or uncertainty: A business involves some element of risk and uncertainty. Risk means Possibility of loss or uncertainty of profit. Objectives of business: Objectives of business may be classified under following heads.

1. Economic objectives. 2. Social objectives. 1) Economic objectives: The important economic objectives are a) Profit earning b) Creation of customers c) Innovation 2) Social objectives: a) Supply of the desired quality of goods b) Providing more employment c) Utilising natural resources d) Cooperation with the government e) Protection of quality of human life. Profit earning: Business is done for profits. A business therefore needs profits not only for its existence but also for expansion, diversification and to face various uncertainties. Creation of customers: Business involves exchange of goods and services to satisfy the need of the customer. Without customers a business cannot survive. So, a businessman must search for new consumers for increasing in sales. Innovation: In this world of competition, every business tries to sell its products by offering quality products at lower prices. It can be achieved only by introducing new methods in production, distribution and adopting sophisticated technology to produce more at lower cost. Supply of the desired quality of goods: The main responsibility of the business is to produce and supply a standard quality of goods and services. Providing more employment: The business can help the society by creating more employment for the people. Utilizing natural resources: A business is not supposed to damage or waste the natural resources. Wastage of natural resources is not only the loss of the business but also the national loss. Co-operation with the government: The business community should adopt positive approach towards the policies of government in promoting business development. Protection of quality of human life: The modern business has an obligation to protect the quality of human life from air, water and soil pollution. Social responsibilities of business: The following are the social responsibilities of business towards different sections of people: 1. Obligation of business itself: The first obligation of business is to stay in business and the next is to grow better constantly. These can be accomplished by operating at a reasonable profit. 2. Obligation of Share holders: Share holders who provide the capital to the business can expect a reasonable profit on their investments. So, the business has to pay a fair return on their capital. 3. Obligation to workers: The business concern must provide security and fair salaries to the employees. It must give proper education and training to upgrade the skills of employee. 4. Obligation to consumers: The obligation of every business is to provide greatest possible services to the society. Role of profit in business: A. Profits ensure adequate funds for future expansion and innovation. B. Profits are also helpful to attract new capital from outside sources like Banks , Financial institutions , investors etc C. Profits provide the most accurate test of business efficiency. D. Apart of total profits is transferred to various reserves for the purpose of improving the efficiency of the plant and machinery. E. Profits are necessary for meeting the risk inherent in business activity

2. BUSINESS ACTIVITIES Industry and types of industry: Industry refers to the production of goods and services through the use of human and material resources. Types of Industry: 1. Extractive Industries. 2. Genetic Industries. 3. Manufacturing Industries. 4. Construction Industries. 5. Service Industries. Extractive Industries: These industries are mainly concerned with extract or draw out various products from the natural sources like soil, earth, water, air etc.,Some may be obtained from the beneath or surface of the earth .Ex : Agriculture , fishing oil exploration etc., Genetic Industries: Genetic means heredity or parentage .Genetic Industries are engaged in reproduction or multiplication of certain species of plants and animals for profit. Ex: Nurseries, cattle breeding forms. Manufacturing Industries: These industries are engaged in the conversion or transformation of raw materials or semi-finished products into finished products. Ex: Cotton textile industries. These industries are sub-divided into a) Analytical Industries. b) Processing Industries. c) Synthetic Industries. d) Assembling Industries. Construction Industries: These industries involve construction of buildings, bridges, dams, canals, etc., Service Industries: These industries provide a variety of services like domestic, financial and entertainment services. Ex: Hospitals, Educational Institutions, Transport, Insurance. Commerce: Commerce is concerned with the exchange of goods and services. It includes all those activities which are related to the transfer of goods from place of consumption to the ultimate consumer. It tries to deliver the right goods to the right persons at the right place and the right price.(or) According to James Stephenson , Commerce is the sum total of those processes which are engaged in the removal of hindrances of persons , place and time in the exchange of commodities. Hindrances of Exchange of Products: The following are the hindrances of exchange of goods and services: a) Hindrances of person: The manufactures and the consumers are often unknown to each other. Consumers are millions in number while producers are a few. So there is need for an agency to overcome this hindrance .Various types of traders such as wholesale, retailers are helpful to bridge the gap between the producers and consumer. b) Hindrances of place: Goods are produced in one place but the required consumers are at different places. Various means of transport like road, railway, water and airways remove the hindrances of place. c) Hindrances of time: Goods are produced in some particular season and their utility is spread through the year. There is gap between the production and consumption. Godowns perform the function of storage to balance the time gap. d) Hindrances of Exchange: Dealing in goods will naturally involve the question of time and place of payment of the cost of then goods. Banks and other financial institutions remove the hindrances of exchange.

e) Hindrances of knowledge: Lack of information is a great hindrance in the way of exchange of goods . Proper organization of advertising, publicity and selling campaigns will remove the hindrances of knowledge. Trade and types of trade: Trade is concerned with the sale, transfer or exchange of goods and services. Types of trade: Trade may be classified into two types: 1. Home Trade. 2. Foreign Trade. Home Trade: It is concerned with the buying and selling of goods within the boundaries of one country. This trade is also known as Internal Trade or Domestic Trade .This trade is further divided into: a) Whole sale trade b) Retail trade; Whole sale trade: It refers to the purchase and sale of goods in a specific variety of goods on a large scale. A trader who is engaged in this type of trade is known as whole sale trader. Retail Trade: Retail trade refers to the sale or purchase of goods in small quantities to the final consumer. Person who is engaged in this type of trade is known as retailer. Foreign Trade: Foreign trade is also known as External Trade or International Trade. It consists of the exchange of goods and services between two or more countries. This trade is further divided into: a) Import Trade b) Export Trade c) Entreport Trade. Import Trade: When goods are purchased from outside countries for the use in the domestic market, it is called Import trade. Export Trade: When domestic goods are sold to the other countries, it is called as Export trade. Entreport Trade: It means to say when goods are imported from one country with a view to export the same to another country; such trade is called Entreport trade. Inter relation between Industry, Commerce and Trade Industries, Commerce, Trade are a part of business and are closely related with each other .Industry provides goods and services, while commerce facilitates the distribution of goods and services from the producers to consumers. One cannot function without the support of other. Thus Industry and Commerce are compared to the two sides of the same coin. Trade is a channel for transfer of goods from producer to consumer. It helps industry in creating the demand of production; Therefore Industry, Commerce and Trade are interdependent.

Industry

Commerce Trade Comparison between Trade, Commerce and Industry. Basis Trade Commerce

Industry

Meaning

Utility Scope

Trade includes transfer of ownership of goods and services. Trade creates possession utility.

Commerce is the process of distribution of goods and services. Commerce creates place and time utility.

Industry concerned with the production of goods and services. Industry creates form utility.

It includes home trade It includes trade and It includes all the and foreign trade. aids to trade. activities needed to produce final product.

UNIT - II 1. What is sole proprietorship and what are Its Characterstics ? A). The sole proprietor is individual who owns and manages a business .The individual brings is own or borrowed capital manages the business him self , bears all the risks alone , enjoys all profits, suffers all losses. This is the oldest and the simplest form of the business organization. It has been in operation since the birth of our civilization. It is also called singled entrepreneurship. Characterstics : The Characterstics of a sole proprietor are as follows : 1. Sole ownership 2. Contribution of owned and/or borrowed capital 3. Entire Management or control in the hands of the proprietor 4. No sharing of profits or losses 5. No sharing of risks 2) What are the Advantages and Disadvantages of sole proprietor? A). Advantages: The advantages of a sole proprietor are as follows: 1 . Easy formation: A sole trading concern is easiest to form any person capable of entering contract can start an organization. Only a formal license from the local authority is necessary. 2. Quick decisions and promote actions :Proprietor of the form is the Supreme judge and he can take quick decisions and promote action in all business matters like pricing , credit extension , discount , stock position , treatment of surplus funds etc. 3. Personal Interest: The sole proprietor takes a great personal interest in his customers and he can meet their individual and typical needs easily and adequately. 4. Secrecy: There is no need to disclose secret or confidential information of the business to the outsiders. He is accountable only to himself and (a part from income tax) he need not disclose the state of affairs of his business to anyone. 5. Incentive: Sole trader put his best effort to manage business efficiently and to increase his earnings as he alone is to suffer if there is any laps in his part. 6. Flexibility : It is capable of adjustment to the requirements of changing business conditions 7. Lower cost of Management: The business of such a sole proprietor concern is mostly super vised, managed and controlled by the sole trader alone or with help of his relatives. 8. Self-Employment : It helps for earning livelihood independently 9. Diffusion of ownership : There is no danger of concentration of economic power in a few hands 10. Development of Personality: Qualities of self-reliance, self-confidence, responsibility, tact and initiative have full scope for their development only in the sole trader. 2. Disadvantages: The disadvantages of a sole proprietor are as follows:

1. Limited capital: The Sole proprietor has only two sources of securing capital personal savings and borrowing on personal security or property. Borrowing capacity of one person is bound to be limited. 2. Limited organizing ability and Managerial Skill: The sole trader has a limited organizing ability and managerial skill. When compared to partnership and company. 3. Unlimited Liability: The Sole trader will have to think twice to adopt new and risky adventures as his private property is constantly in danger of meeting the debts and obligations of his business. 4. Absence of Legal Statues: Disability, prolonged illness or death of a sole trader may result in the business coming to a stand still or its closure . 5. No Economics of large scale and specialization : A sole proprietor can no secure any economics of large scale 3. Karta or Manager A). The oldest man member in the family or the father alone allowed to conduct , manage control and organize the business . He assumes the full responsibility for the business risks. He is called Karta or Manager. 4. Mitakshara A). i) This school of concept prevised in entire India except in Assam and West Bengal ii) Family members of male line and their wifes , unmarried daughters are its members. iii) By birth in the family , He gets the right on existing property. iv) By birth a member gets a share in common property , it continues till his death . v) In this way shares in the property gets fluctuates in accordance with number of coparcener. 5 . Dayabhaga A). i) This School of hindu law is prevailed only on Assam and West Bengal States . ii) Under this the right of property comes to a proper coparcener by succession and not by birth iii) Share /Claim on a joint family does not fluctuates on the basis of birth and death of a member. 6. Advantages and Disadvantages of a Joint Hindu Family Firm ? A) Advantages : The advantages of a joint hindu family firm are as follows. 1 Continuity : It is not dissolved by the death or insanity of coparcener 2 Centralised and Efficient Management : The management of joint hindu Family firm is rested in the hands of karta only. 3 No Limits to Membeship : By birth a coparcener will automatically become a member in joint hindu undivided family. 4 Better Credit : Its credit worthiness is better then that of the sole trader . Disadvantages : The disadvantages of a joint hindu family firm are as follows : 1 No direct Correlation between efforts and Rewards : Karta alone looks after the business of joint hindu undivided family .But benefits are shared among all coparceners. 2 Limited Managerial Ability : for expansion and growth of the business becomes difficult,as the kartha alone has to manage . 3 Limited Capital and Financial Resources : The Capital and Financial resources of the limited as compared with partnership and joint stock company . Co-Operative Society : According to the co-operative societies Act 1912 a co-operative organization is a society which has its objectives for the promotion of the interest of its objectives for the promotion of the interest of its members in accordance with the principles of operation. Characterstics of principles of cooperatives : The characterstics of co-operative enterprises are as follows :

1. Voluntary Association :- There is no compulsion to become a member of co-operative society. A Person can join in a society whenever he like. Similarly a member can leave the society at any time after giving proper notice to the society. 2. Plural Membership: According to Co-operative society Act. The Minimum membership is ten and maximum is unlimited. 3. Equal Voting Rights: Every member has only one vote irrespectively of the number of shares held by him in the society. One man one vote is the basic principle of a cooperative society. 4. Service Motive : It may make profits while rendering service. But service is the main objective and profit is secondary. 5. Open Membership: The membership of a co- operative society is open to all irrespective of religion caste creed color or political affiliation any man are woman belong into any caste community or creed can join a society. 6. Democratic Management : Every member has only one vote irrespective of the number of shares held by him. So every one has equal voice in management of a co-operative society .They elect managing committee to conduct and control day to day working of society . 7. Distribution of surplus : The co-operative societies Act has given guidelines for the distribution of surplus a certain percentage is paid in the form of dividend. 8. State Control : The government conducts periodic inspections of the audited accounts and affairs of the society. 9. Cash Trading : Another principle of co-operative societies is trading on cash basis 10. Compulsory Registration : A co-operative society must be registered under the cooperative societies Act . 11. Separate Legal Entity : It can own property . It can enter into contracts on its name. It can sue and sued. 12. Finance: One member cannot subscribe to more than 10% of the total shares. 13. Liability of Members : In practice the liability is generally limited. 7. Advantages and Disadvantages of Co-operative Society . Advantages: i) Simple Formation: It is easy and simple to form a co-operative society. There need to comply with a number of legal formalities as in the case of joint stock company .Any ten adults can form a society. ii) Democratic Management : Every member has only one vote irrespective of the number of shares held by him. As such the management of the society is democratic. iii) Low operating Costs : Administrative expenses of a co-operative society are usually low. iv) Service Motive : Co-operative societies are shared not for profit but for service. v) Limited Liability : The liability of every member is limited to the extent of his capital contribution as there is no risk of losing their meager private assets. vi) Continuity For Stability: Its life is not affected by the death insolvency , conviction, retirement etc. its members. vii) Tax Advantage : A co-operative society is exempted from income tax and surcharge on its evenings up to a certain limit .It is also exempted . viii) State Patronage : State has adopted a helpful policy towards co-operatives ix) No Speculation in shares : In a co-operative society can buy shares at any time . so there is no possibility of speculative dealings in the share of co-operatives.

Social Utility : Co-operative form or organization provides education and training in democracy self-government , self-Health and mutual health spirit of service among members . xi) Check on the Business : Co-operatives societies supply good at reasonable prices.The co-operative are check on other form of business Organization. xii) Elimination of Middlemen : Co-operative societies eliminate middlemen from the channel of distribution. xiii) Aim of Mutual Prosperity: Co-operative function on the principle of each for all and all for each with the aim of Mutual Prosperity. Disadvantages: 1. Inefficient Management: There is possibility that the management committee members may not take proper interest in the management as they are paid only honorarium for their services. 2. Limited Financial Resources : Restriction on divided and the principle of one member one vote. Discourage rich people from joining the society 3. Lake of unity among members : Many co-operative fail because of constant rivalry and quarrels among members. 4. Lake of incentive to work hard : Management committee members do not take an active part and interest in the management and the affairs of the society. 5. Non-Transferability of shares : A member cannot transfer in shares freely but he can be allowed to withdraw his capital. 6. Rigid State Control : Societies have to follow the rules and regulations of the co-operative societies Act and the government . 7. No universal Application : it is suitable mainly for small and medium size enterprises. 8. Lack of Secrecy : A co-operative society are exposed to the all members .So it is difficult to maintain secrecy of business matter. 9. Absence of Loyalty : The loyalty of the members of a co-operative society may not we always assured and cannot be enforced. 10. Political interference : Government Even nominates members every government tries to send their own party member to these societies. x) 8. Types of co-operatives : 1. Consumer co-operative Societies : The societies make bulk purchases directly from producers and sell this goods to the members on retail basis. i. Eliminate Middlemens Profits ii. Protect weaker sections of the societies from exploitation by business men. iii. Supply good quality of goods and services at reasonable prices to its members iv. Enhance the purchasing power of its members. v. Provide welfare and other amenities of its member. 2. Producers Co-operative Societies : These societies are established for the benefit of small producers who find it difficult to collect various factors of production and also who want to avoid marketing problem. The purpose is to improve economic conditions of small producers by giving them necessary facilities 3. Marketing Co-operative Societies : In these societies the production of different members is pooled and the society undertakes to sell their products by elimination of middle men.

4. Co-operative Farming Societies: These societies are voluntary association farmers formed to reap the benefits of large scale forming on scientific lines better farming increases production and improve the economic position of members . 5. Co-operative Credit Societies : The credit co-operative societies are formed to give finance term to small farmers and other poor section of the society. These Societies grant short term loans at low rates of interest to its members . 6. Co-operative Housing Societies : The low and middle income group people are not able to construct their own house for want of money. These societies arrange loans for their members from financial institutions and government agencies against the security of the houses a part from acquiring land and giving plots . 9. Meaning of Partnership : The Partnership Act 1932 , Section 4, defines partnership as the relations between two or more persons who have agreed to share profits of a business , carried on by all are any of them acting for all Characteristics: i. Presence of business : The association of a few individuals is called starting or conducting a certain business either industry or commerce or to carry on a certain profession. ii. Agreement : There must be an oral or written agreement to form a partnership iii. Sharing of Profit : The object of starting a partnership must be sharing of profit. iv. Dual role of principal : To the third parties or outsides the partner principal while to other partners is an agent. v. Team Spirit : Partners must be faithful to one another . The team spirit is reflected in high degree of mutual Trust , Mutual Confidence must and mutual control among the partners. vi. Minimum and Maximum Membership : The minimum membership for starting a partnership is 2 and the maximum membership is 20 and for a banking partnership. vii. Unlimited Liability : The partners liability is joint as well as several. viii. No transfer of share with out consent of other partners : A partner is not permitted to sell or transfer his share to an outsider with out the consent of all partners. ix. No legal statues : Firm and partners are inspirable from one another 10. Partnership Deed (Partnership Agreement) The Partnership agreement contains the terms and conditions relating to partnership and the regulations governing its internal management and organization. It is also called the Articles of partnership it may be oral or in writing. Hence it is usually in writing and preferably in the form of deed. The deed is a duly stamped and sealed document containing in the term of a contract and it is also registered before and the registrar of firms. It is legal evidence. Merits and demerits of partnership firm:Merits:- The merits of partnership firm are as follows 1)High capital raising power:- Partnership is a combination of several partners, hence it can have high capital raising power than that of sole proprietor. 2)Higher managerial power:-In a partnership, we can pool capital, organizing power managerial capacity, technical skills etc., 3)Easy formation:-Its formation is very easy, mutual consent is enough to start the partnership.

4)Simple dissolution:-Its can be dissolved by giving 14 days notice to other partner or by partnership agreements. 5)Business secrecy:-All affairs of the firm can be kept secret,confidential. 6)Cautions and sound approach :-Unlimited liability can act as the best security for raising loans or advance to the firm. Demerits:-The demerits of partnership firm are as follows 1)Limitations on capital, organizing power and technical skill:-The partnership organizing is in capable of providing the required capital, organizing power and technical skill. 2)Absence of separate legal status and stable life:-The partnership firm and one and the same it is terminable by death or insolvency of partner. 3)Dangers unlimited liability:-The partner liability is not and several. 4)Non-transferable partnership share:-The transfer of share without the consent of other partners. 5)Non public confidence:- In absence of publicity of accounts and in absence of any strict legal control over the affairs of partnership,it is said that there is much less public confidence in partnership. 1. Explain various of partners? Ans:1) Active Partners:- The partner who takes active part in the affairs of the firm is called As active partner He enjoys full voice in its managements. 2)Sleeping or Dormant partner:- The partners who does not participate in the business affairs And provides only capital for the firm is known as sleeping partner he has voice in its management but the liability is unlimited. 3) Nominal partner:-Nominal partner does not contribute capital and participate in the management of the firm. But he lends his name and credit to the firm. But he is consider as partner to outside .he is also liable to the third parties. 4) Partner by estoppel:- if a person gives an impression that he is a partner in a firm by words of mouth or by his behavior, then he is called a partner by estoppels. 5)Holding out partner:- if a person is considered by outside as a partner in a firm and he does not deny his being so consider ,he is a partner by holding out . 6)Partners in profits:-The partners enters into the partnership firms with the understanding that he will be shared only in the profits but not in losses such partners is called partners in profits. 7)Secret partners:-The partner does not close his name as partner in a certain firm ,before public. He keeps his name as secret . such a partner is called secrete partner. 8)Minor partner:-According to the Indian contract act 1932, a minor (below 18 years age) cannot enter into a contract .but he can be admitted into partner v/s 30 of Indian partner ship act. 9)Out standing partner:-the partner will go out voluntary without dis solution of the firm ,such a partner is called out standing partner. 10)Incoming partner:-with the consent of other partners if a new person joins in the running partnership firm, such a partner is called incoming partner. 2. State the features of joint stock company i) Registration:- Every company has got to be registered as per the provisions of companies Act 1956. ii) Separate Legal entity : A joint stock company is a artificial person created by law . it can purchase properties , enter in to contracts with others and can sue others .Thus , it possesses a separate legal entity. iii) Common Seal : The company does not have physical existence .As a substitute , the act prescribes a official seal to be affixed on all papers. iv) Perpetual Succession : It is not terminable by insolvency or death of any of its shareholders or directors.

v) ownership and management are different : The shareholders are the real owners of the company . it can be managed by the Board of Directors elected by the shareholders. Thus the owners and management are different from each other. vi)Limited Liability : The liability of a shareholders is limited to the face values of share held by him. vii) Facility of Transfer of shares : The shares of a public limited company are freely transferred from one share holders to another. viii) Number of Members : A minimum of two persons are required to run a private company and the maximum number is 50 . In case of public company at least persons are needed. There is no maximum limit in the membership. ix) Capital Mobilization : Due to limited liability , transferability of shares and unlimited membership there is a possibility of huge capital mobilization for the joint stock company. x) Statutory Regulations : A company is governed by the companies Act 1956. 1) Merits and Limitation of company from of business organization ? A). Merits : The advantages of company from of business organization are as follows : i. Large Financial resources : A company can secure or raise large amount of capital by issuing shares and debentures to the public . ii. Limited Liability : share holders are liable only to the extent of the face value of shares held by them. iii. Perpetual Succession : A company enjoys continuous or uninterrupted business life , it is not terminable by insolvency or health of any of its share holders or directors. iv. Transfer of shares : A member of a public company can freely transfer his shares without the consent of other members. V . Economics of Large scale production : Increase in the scale and size of the business , will result in economics in production purchasing , selling, management ,expenses. vi. Efficient professional management : In company form of business organization ,ownership is separate from management . It enables the company to appoint expert and qualified persons for managing various business functions due to large financial resources. vii. Diffused Risk : The risk of loss in a company is spread over a large number of members. viii. Public Confidence : A company enjoys the confidence of public because its activities are regulated by the government. ix. Social Benefits : The company from of business organization mobilizes the scattered saving of the community. x. Tax Advantage : A company enjoys certain concessions in the matter of tax compared to other forms of business organizations. xi. Democratic Control : The affairs of the company is being controlled by the board directors who are elected by the share holders with their voting power on democratic principles. Limitations : 1) Difficulty of formation : A number of documents have to be prepared and field with the registrar of companies , Many legal formalities have to be fulfilled before a company can start its business. 2) Fraudulent Management : The share holders are scattered in different geographical areas. This the reason why a few persons secure control over the affairs of the company . 3) Ownership only management or Different : The actual management of the affairs of company is in the hands of the employees. They work for their salaries only there is a lack od initiative and absence of personal interest.

4) Undue Speculation in shares : The securities of the company are listed on the stock exchange primarily to establish continuous open and wide mark for them and to provide necessary liquidity or markelability to them , but this speculators may fluctuate the prices of share s accounting their suitability . 5) Excessive Government Control : The company has to follows many provision of different Acts passed by the legislature. 6) Diverse Interests : The top management has to secure effective compromise of many many conflicting interests ,Employees demand higher wages and salaries ,consumers expect lower prices and better equality share holders expect rising dividend .It is difficult to satisfy such diverse interests. 7) Slow decision Making : In taking decisions on various problem of administration.Meetings are necessary and there must be requisite quorum also for such meeting .

1. Distinguish between sole proprietor and partnership firm of business organization. Nature 1. Formation Sole proprietor Partnership It is very easy with single Easy , simple and optional proprietor. registration with a partnership deed. Membership It is only one man show Minimum 2 and Maximum 10 in Banking and 20 in non-banking business firm. Capital raising power Very limited Limited pooling of capital on a limited scale. Liability of members Unlimited liability Joint and several ,unlimited liability Constitution Changes at owners will Changes are admitted by the consent of all partners Government control and Free from government control Very limited government control Regulation and regulation and regulation. Marketable share No share as such No transfer or sale of share without consent of all partners . Profit Sharing No sharing of profits Profit sharing as per partnership agreement. Tax Liability Individual tax liability as per Tex liability will be comparatively income-tax Act more than sole-trader Sharing of risk No sharing of risk Sharing of risk as per its agreement

2.

3. 4. 5. 6. 7. 8. 9. 10.

2. State the distinction between Joint-Hindu undivided family and partnership firm. Nature JOINT-HINDU undivided family Partnership firm

1. Governance

2. Mode of creation 3. Legal position 4. Number of Members

5. Position of minor

6. Liability of members 7. Dissolution 8. Registration 9. Implied Authority 10. Profit and loss sharing

Joint- Hindu undivided family is Partnership firm is governed by governed by two schools of Indian partnership Act 1932 Hindu law a) Mitakshara It rises from status i.e. by birth It is created by mutual agreement between partners Members of family are merely Partners and the firm are one co-owners and the same in the eyes of law There is no minimum or Minimum numbers are two and maximum number of members is maximum is 10in banking and 20 fixed for non-banking business A male minor becomes a Minor may be admitted to the member by birth in family benefits of firm with the consent of other partners. Liability of karta is unlimted Joint and several It is not affected by death or It can be dissolved on death or insanity of a member insanity of a partner It is not at all necessary It is advisable No implied authority to present A Partner has implied authority JHF to act on behalf of the firm The share of these will be The partners share these varying basis of deaths according to ratio agreed up on as per partnership deed

3. Distinction between co-operative society and partnership firm . Nature 1. Formation 2. Membership Co-operative Society It is formed under co-operative societies Act , 1912 It can be formed with minimum 10 members and there is no maximum limit Service motto Limited and It is managed on democratic lines Partnership firm Partnership firm is forms under Indian partnership Act 1932 It can be formed with minimum 2 and maximum m20 members in non-banking business Profit motto Joint and several It is managed on controlled by all partners or as per the partnership agreement No such exemptions , privileges concessions and assistance The distribution of profits is in accordance with the partnership agreement The share-capital is in a accordance with the partnership agreement

3. Basic Object 4. Members liability 5. Management control

6. Exemptions and It enjoys several concessions privileges privileges and exemptions 7. Distribution of surplus The profits are distributed in profits accordance with guidelines given by co-operative societies Act. 8. Share capital A person cannot buy more than 10% of the total number of shares 4. Distinguish between partnership and joint stock company.

Nature 1. Formation

2. Separate Legal Entity

Partnership firm Registration of partnership firm is optional .it is formed with the under partnership agreement under partnership Act. It does not have separate legal identity It is dissolved by death or insolvency of any of its members The liability is unlimited joint and several A partner of a firm cannot transfer his share to a third party without the consent of all other partners Every partner has a right to take part in the firm The minimum member of a partnership and the maximum number of members in ease of banking firm is 10 and 20 for non-banking

3. Perpetual succession

4. Liability 5. Transfer of share

Company A number of legal formalities have to the fulfilled and number of document have it is formed under companies Act 1956 A company is an artificial person created by law ,it can sure or be sued on it own name It is not affected by the death ,insolvency of only of its members Liability is limited to the face value of the share held by them The shares each be easily sold or purchased on stock exchanges

6. Management 7. No members

8. Accounts and audit

9. Capital

The management will be in the hands of broad of directors In the case of private company minimum number of member is and maximum in 50.In the case of public company minimum number of members are 7 and maximum is unlimited The accounts of partnership firm The accounts of company must need not be audited and be audited and certified by certified by a qualified auditor qualified auditor. The partner ship firm can secure A public company can have any only limited amount of capital. number of share holders, it can raise huge capital from public as the face value of the share is small.

5. Distinction between co-operative and partnership firm. Nature Private company Public company 1. Membership Minimum 2 ; maximum 50 Minimum 7 ,maximum unlimited 2. Transfer of shares Transfer of shares is deliberately Shares of public company are restricted by its articles freely transferable as they can be quoted on the stock on the stock exchange 3. Name It must have suffix the word It must have suffix the word private limited in its name limited in its name 4. Board of Directors 1.It must have at least 2 1.It must have at least 3 directors ,maximum unlimited directors ,maximum 20 directors 2. Directors need not retire by 2. Directors are subject to rotation every year. retirement by rotation.

5. Prospectus

Directors have to retire by rotation and separate resolutions and required. 8. Managerial Remuneration There are no restricting on the There are restrictions. remuneration of directors and managing directors of private companies 9. Restrictions on allotment There are no restrictions on There are certain restriction as of shares allotment of shares the public company should received minimum subscription for allotment of shares UNIT - III PROMOTION : The process of conceiving a business is known as promotion people who carry out this process are known as promoters. Promotion involves identification of business opportunity or idea , analysis of its prospects , gathering the relevant information and taking steps to implement it through the formation of a company. PROMOTER : A promoter is a person who conceives the idea of forming a company and takes necessary steps for formation of the company . A company may have several promoters. A promoters completes required formalities for incorporation of a company and also takes the responsibility for raising the capital , acquiring the assets , etc. Till the company gets into operation. Types of Promoters : 1. Professional Promoters : These promoters are specialized agencies and promotion is their whole time occupation. 2. Accidental promoters : These promoters are not specialists in company formation. They promote their own firms as enterpreneus. 3. Financial promoters : They float new enterprises during favorable conditions in the securities market. 4. Technical promoters : promoters promote new enterprises on the basis of their specialized knowledge and training technical fields. 5. Institutional promoters : IDBI , NIDC and several other specialized institutions provide technical managerial and financial assistance for the promotion of new enterprises. Incorporation of a company: A company being an artificial person comes in to existence through incorporation it is the legal process through which an enterprises obtains recognition as a separate legal entity. The promoter undertaking necessary steps for incorporation registration of the company . Important document for registration of the company is situated along with the following documents. 1. Memorandum of Association (MOA) : The memorandum or association is the constitution of a company . It is the first and the most important document which defines the area within which the company can act. The name of the company ,its object , situation etc. Is contained in the memorandum.

It cannot secure capital from the public 6. Issue of share warrants A private company cannot issue share warrants against its fully paid share. 7. Retirement by rotation Directors need not retire by resolution rotation and single resolution.

It can secure capital from the public It can issue share warrants

2. Articles of Association (AOA) : The other important document is the articles of association (AOA) which contains bye laws or rules and regulations relating to the internal management of the company. It contains the constitution , rules ,capital structure etc. of the company. 3. Vetting of Memorandum and Articles , printing ,stamping and signing of the same : The drafts of the memorandum and articles of association should be prepared and before printing. 4. Power of Attorney : with a view to fulfill the various formalities that are required for incorporation of a company , the promoters may appoint an attorney empowering him to carry. 5. Additional Documents Required : i. Consent of Directors in form in no.29 Directors named in the memorandum of association have to give their consent for acting as directors of the company. ii. Notice of registered office in form no.18 iii. Particulars of directors in form no.32 6. Statutory Declaration : A declaration that all the requirements under the companies been compiled with in form no.1 is to be filled with the registrar. 7. Payment of Registration Fee : In addition to filling with above documents ,the prescribed registration fee has to be provided. 8. Certificate of Incorporation : The Registrar is satisfied that all the statutory requirements stated above are complied with the under the Act ,issues a certificated called certificate of Incorporation. MEMORANDUM OF ASSOCIATION :Meaning: The memorandum of association (MOA) is the charter of the company. It defines of the companies constitution and scope of powers . It lays down the fundamental conditions upon which alone a company is allowed to be floated .It contains the relationship between the company and outsiders. Purpose : The main purpose of framing the MOA is that the intending shareholders before making investment in the company should know the about the company the field in or the purpose for which their money is going to be used and what risk he is taking in marking the investment.

Contents (clauses) : i. Name clauses : A Company being a legal entity must have a name of its own to establish its separate entity . The name of the company is a symbol of its independent corporate existence. A company can choose any name it likes subjects ,however to the following conditions: a) The prosed name should not be identical or similar to the name of an existing company. b) The prosed name should not convey any connection or link with government department or local authority. c) The name of the public company limited by shares should end the with word limited while that of private company should contain the words private limited. d) The proposed name should not be objectionable under the provisions in of emblems and names. ii. Situation Clause : The memorandum of every company must state the name of state in which are registered office of the company is to be situated. This is necessary to determine the domicile of the company.

Objects clause : The third compulsory clause in the MOA sets out the objects for which the company has been formed . This clause may be considered as the core of the MOA because it defines the powers of the company and scope of its activities . iv. Liability Clause : it contains the nature of liability of its members it means that the liability of a member limited to the nominal value of share held by him. v. Capital clause : This is the fifth compulsory clause. It contains the capital structure of the company. It states the capital with which a company is registered .A company cannot issue more shares than the authorized for the time being the MOA. vi. Subscription or association clause : The MOA concludes with association and subscription clause in which there is a declaration of associations. It should be signed by at least 7 subscribers in case of people of public company and at least 2 subscribers in cause of a private company. Articles of Association: Meaning : The articles of association(AOA) of a company are its bye-laws or rules and regulations that govern the internal management of the company and the conduct of its business . The articles play a very important role in the affairs of a company. Contents : The articles of association is the document which I contains the rules and regulations to be followed for the purpose of internal management of the company . It generally contains the following: i. Rules and Regulations ii. Rules for Preliminary contracts iii. Provisions regarding use of common seal iv. Procedure of issuing share capital . Number and value of share ,issue of shares calls on shares. Lien on member shares etc. v. Procedure for transfer and forfeiture of shares vi. Procedure for issue of debentures and stocks vii. Procedure for alteration of capital viii. Provisions regarding conducting the general meetings, special meetings , voting proxies ,resolutions etc. ix. Rules regarding appointment of Directors and their renumeration x. Provisions relating Dividends and reserves xi. Preparation of accounts and audit ; and method of appropriation of profits xii. Winding-up procedure xiii. Maintenance of bank accounts. What do you mean by prospectus and what are its legal requirements ? A. A private company can start its business immediately after receiving the certificate of Incorporation. Where as a public company has to raise the necessary capital from the public .In that connection the company have to invite the public to subscribe for shares in their company. This invitation to the public is known as Prospectus. Definition : Any document described or issued as a prospectus and includes any notice, circular ,advertisement or other document inviting deposits from the public or inviting offers from the public for purchase of any shares in or debentures of a body corporate Part-I : 1. General Information 2. Capital structure of the company 3. Term of the present issue 4. Particulars of the issue

iii.

5. Company ,Management , Project 6. Management discussion and analysis of the financial condition and result of the operation as reflected in the financial statement. 7. Financial information of group companies 8. Particulars of companies under the same management 9. Promise vis--vis performance 10. Projections 11. Basis for issue prince 12. Particulars of outstanding litigations or defaults 13. Management perception of risk factors 14. Disclosure of investor grievances and redressal system. Part-II : Reports to be set out 1. General Information 2. Financial Information 3. Statutory and other Information

Part III Provisions applying to parts I and II of the schedule.

UNIT - IV 1. BUSINESS FINANCE DEFINITION: Business Finance is defined as that business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of business enterprise. 2. Need for business finance: finance is needed for the business mainly due to the following

1. To Start a Business: while starting a business money is needed to procure fixed assets and also meeting day to day expenses the amount of finance to be procured depends upon the type of business usage of technology. 2. To Expand the Business: changing environment of Business and increasing competition require new methods of production or distribution to be adopted or plant and machinery to be modernized or new products to be introduced in the market. 3. To develop and market new products: In fast moving markets where competitors are constantly updating their products .a business needs to spend money on developing and marketing new products invention and innovation of products should be given much priority to sustain in the market. 4. To enter new markets: an enterprise can expand its production capacity or product mix but also by way of entering into new markets. 5. To take over acquire another business: To overcome compaction or to strengthened further ,an 6. To Move to New Premises: A business enterprise may be forced to shift its business to new premises following the direction of the Government sometimes it may be advantageous to shift the premises to densely populated area from present location.

7. To Pay for the day to day running of Business: A Business enterprise needs money to meet its day to day expenses such as payment of wages transport stationery ,payments to suppliers etc. 1. TYPES OF BUSINESS FINANCE 1. Long term Finance: Funds that are required in the business for long period are termed as long term finance. This isusually required for a period exceeding five years. Long term finance is essential for investing. 1. Fixed assets such as land, buildings, plant, machinery etc. 2. Expansion and modernization of the business and business processes. Sources of long term finance: 1. Issue of shares 2. Issue of Debentures 3. Loans from banks and other financial institutions 4. Hire Purchasing 5. Retained earnings Medium Term Finance Funds that are raised for a period between one and five years are termed as medium term finance medium ter finance is 1. Modernization of Machinery 2. Large advertisement campaigns

3. Launching of new products and 4. Opening of new branches or outlets Sources of Medium Term Finance: 1. Issue of Shares 2. Loans from banks and other financial Institutions 3. Leasing 4. Issue of Debentures. Short Term Finance: Thistype of finance is required for a short period up to one year short term finance is utilized for meeting working capital requirements of the Business The Amount required in short term funds depends on Sources of short term finance: 1. 2. 3. 4. 5. 1. A. Bank Credit Trade Credit Installment Credit Customer advances Retained earnings Define ownership funds? Write its features, merits and limitations ownership funds? Owner ship Funds: The Capital procured from the equity share holders, who are said to be the owners of the company, and the undistributed profits which are known as retained earnings put to gather is called ownership funds.

The Features of ownership funds: a. Provision of risk capital : Owners fund is the source of risk capital in the business .it is the owner who bear the risk in a business b. Permanent source of capital: owners capital is the permanent source of capital in a business c. Separation of ownership and management: if the cases of a company, shareholders are the owners are the owners but the management is done by the board of directors elected by shareholders. d. No security Required : Owner ship capital does not involve any security or charge on the properties of the business e. Voting Rights : The contributors of this type of capital have a right to participate and vote in the meeting of the company f. Right to make decisions: In a company from of organization the decision making power is vested with board of directors. g. Direct relationship between return and profit of the firm Merits of ownership funds 1. Provision of risk capital : owners provide risk capital to the business enterprise which forms the basis for fatherlands or borrowed capital.

2. Safe source of finance : it a safe source of finance owners funds can be utilized for investing in fixed assets of business since the ownership capital is no - refundable until business is permanently closed down. 3. Right to control Business : ina joint stock company the control and management in the hands of board of directors 4. Scope for more borrowed funds: since no security is required for the ownership capital ,the assets of company can be utilized for raising loans from banks and financial institution 5. Unlimited amount of capital: A reputed company can raise unlimited amount of capital. Its Limitations: 1. Dilution of power of promoters: A Joint stock company can raise unlimited capital depending upon its needs; will reduce the control and power of the original promoters. 2. Underutilization of ownership funds: the owners funds may not be put into proper use. 3. Low rate of dividend: in the case of company ,the rate of dividend declared to owners will be less if the entire investment is purely of owners funds. 10.5Equity Shares Equity shares were earlier known as ordinary shares. Equity shares are the most common shares .the holder of these shares are the real owners of the company Features of Equity shares: 1. Different values: Equity share has contain face value which is also called book value or normal value 2. Risk Capital: it is the equity shares that provide primarily the risk capital of the business. 3. Permanent capital : The capital procured by issue of equity shares is a permanent source of funds to the company as it need not be redeemed during the life time of company . 4. No Need for security: there is no need to offer any security to the shareholders. 5. Residual Claim to income: Equity share holders are paid dividend only after paying it to the preference share holders 6. No fixed rate to return : the rate of dividend on these shares depends upon the profits of the company 7. No obligation to pay dividend: The Company has no obligation to pay dividend to equity share holders even through the company gets profits. 8. Residual claimto assets: At the time of Liquidation of the company the equity share holders will be paid only if any amount is left after all the other claims against the company are settled. 9. Right to Centool:Equity share holders have rotting rights and they elect board of directors who controls the affairs of company. 10. Pre Emptive rights: an equity share holder owning 2% of the existing issued capital is entitled to a preemptive right to acquire 2 % of the additional shares issued by company 11. Speculation: This is possible because the market value of share fluctuates depending up on the good will of the firm. 12. Limited liability: The liability of shareholders is limited only up to the un paid value of the share. Merits of Equity Shares: (A) To The share holders 1. High rode of dividends : in case there is a possibility of getting a high rate of dividend as the profit left over after paying interest on debentures and dividend. 2. Increase in market value: The value of equity shares goes up in the stock market with increase in profits of concern.

3. Liquidity: Equity share can be easily sold in stock market 4. Control: Equity share holders have greater say in the management of a company as they have voting rights. 5. Pre empties rights: they injury pre empties rights. 6. Facility of bay back: Buy Back of shares by the company gives much liquidity to equity share holders. (B) To Management: 1. No Charge on assets: A Company can raise fixed capital by issuing equity shares without creating any charge on its fixed assets 2. No Need to Pay: The capital raised by issuing equity shares is not required to be back during the life time of company 3. Less Risk: There is no liability on the company regarding payment of dividend on equity shares. 4. Plugging back of profits: can be reinvested in the company as there is no compulsory obligation on part of a company to pay dividend every year. 5. More Credibility: Equity shares provide credibility to the business. LIMITATIONS OF EQUITY SHARES: 1. No fired return: Equity shares have risk of fluctuating returns. 2. No Guarantee of dividends: even if the company gets profits there is noguarantee of payment of dividends to equity share holders. 3. Residual Claims : The equity share holders get dividend only after payment of dividends to preference share holders 4. Over capitalization: it may raise more funds than required by issuing shares. This may amount to over capitalization. 5. Control in hands of few people : in reality only a handful of persons control the votes and manage the company 6. Move risk : Equity share holders actually swim and sink with the company 7. Speculative losses: the equity shares suffer speculative losses due to frequent fluctuations in their market value. B To the company 1. Over Capitalization: As equity capital cannot be redeemed there is a danger of over capitalization. 2. Permanent burden : Equity shares capital is permanent in a company 3. More legal formalities : there are lengthily legal formalities to be complied with before making public issue of shares 4. Not Use full In Emergence : Equality shares can be issued only when the market condition is good and healthy 5. Group conflicts: The equity share holders carry voting rights group are formed to corner to votes and to grab control of company 6. No Attraction: Investors who desire in safe securities with a fixed income have no attraction for such shares. Preference Shares: The shares which enjoy certain preferential right and privileges over the equity shares called preference shares have the following two rights. a. Right to receive the dividends at a fixed rate, irrespective of profits b. Right to get back the capital prior to equity capital in case the company is wound up.

1. Fixed rate of dividend: preference shareholders are paid dividend at a fixed rate irrespective of the quantum of profit earned. 2. Cumulative dividend: the cumulative preference shareholders have right to receive dividends every year irrespective of profits of the company .cumulative shareholders gets accumulated and they would be entitled to receive dividend with arrears in the later years when the company earns profits 3. Redeem ability: Preference share capital is to be refunded after the end of a fixed period and the period should not be more than 20 years. 4. Less Risky: Preference shares as an investment are comparatively less risky for the investors. 5. Voting rights: The preference share share holders do not have any of its assets as security to procure funds through preference shares. 6. No Charge on assets: the company need not offer any of its assets as security to procure funds through preference shares. 7. Convertibility: preference shares can be converted either fully or partially into equity shares provided the terms and conditions of issue and the articles of association allow the company to do so. 8. No absolute ownership: there are not the absolute owners of the company. Types of preference shares: 1. Cumulative preference shares: Accumulative preference share is one that carries the right to a fixed amount of dividend at affixed rate such dividend is payable even out of future profit if current years profits. 2. Non-Cumulative Preference shares: The hold of these shares have no claim for the arrears of dividends .they are paid dividend if there are sufficient profits they cannot claim arrears of dividends in subsequent years. 3. Redeemable preference shares: these are the shares that a company condition that the company will repay after the fixed period or even earlier at the discretion of the company. 4. Non Redeemable preference shares: The shares which cannot be redeemed unless the company is liquidated are known as non redeemable or irredeemable preference shares. 5. Convertible preference shares: these shares give the right to the holder to get them converted into equity shares at their option according to the terms and conditions of the issue. 6. Non- Convertible preference shares :The share which cannot be converted in to equity shares are known as non convertible preference shares. 7. Participating Preference Shares: The category of preference shares center on the holder the right to participate in the surplus profits if any types of share carries the right to receive predetermined proportion of surplus as well once the equity share holders have been paid off. 8. Non Participating preference shares: The shares on which only a fixed rate of dividend is paid every year without any accompanying on winding up ,is called no participating preference share. Explain The Features Merits and Limitations of retained earnings? Retained earnings is also known as plugging back of profits retained earnings refers to reinvestment of undistributed profits it is a very good source of business finance a part of profit is transferred to the reserves every year. After a few years it becomes a large amount which is then employed for modernization and expansion of business. As per Indian companies Act 1956 companies are required to transfer a part of their profits reserve.

Merits: Retained earnings as a source of finance benefits the company shareholders and society the following are the advantages of retained earnings. A) Benefits of the Company: 1. Ability to with stand difficult situations: Ability to with stand enables the company to with stand difficult situations such as a depression, rescission, credit squeeze etc. 2. Stable dividend Policy: It enables the company to adopt stable dividend policy even if in a particular year the profit is inadequate or the company incurs loss. 3. Redemption of loans: Retained earnings enable the company to redeem long from liabilities such as debentures. 4. Free from obligation: there is no obligation on the part of the company eight her to pay interest or to pay back the money. 5. Modernization : Modernization and expansion programmers will not suffer for want of funds if the company as large retained earnings. B. Benefits to share Holders 1. Stable state of dividend: Ensures a stable rate of dividend to the share holders 2. Increase in market value: The sound ness of the company and its stable dividend policy enhances the market value of the shares. 3. Benefits of redemption of loans: Enable redemption of loans which indirectly benefits the shareholders. 4. Good will: Retained profits add to the financial strength and earning Capacity of the business. 5. Tax Benefits: The Government allows tax relief in certain cases to companies which plug their profits. B) Benefits to the Society: 1. Capital Formation: the policy of retained earnings increases the rate of capital formation and thus indirectly promotes the economic development of nation as a whole. 2. Conventies: Retained earnings are the most convinent source of finance. No legal formalities are involved. 3. Employment Opportunities: The increase in corporate investment increase the employment opportunities. 4. Availability of Funds: Internal financial reduces the demands for funds in the capital market. It would thus increase the availability of funds to other investors. 5. Reduction in cost of production: Modernization and expansion financed by internal funds benefit society because they reduce the cost of production and improve the equality of goods. Limitations: Retained earnings as a source of financing suffers from the following limitations. 1. Misuse of Profits: The profits earned by the company belongs to the share holders. Retaining profits and deprives shareholders from their due shares. So it amounts profits. 2. Danger of over capitalization: There is always a danger or over capitalization if the company goes on retaining profits every year. 3. Misuse of funds and encouragement to Speculation: The management can misuse the funds available as undistributed profit. It may lead to speculation. 4. Limits dividend: Retaining of Profits limits the amount of dividend payable to share holders. 5. Dissatisfaction: Excessive retention of profits creates dissatisfaction among the share holders. Explain the difference between preferences shares and equity shares. Basis of Differences Preferences Shares Equity shares Choice to issue these shares It is not compulsory to issue It is compulsory to issue these

Payment of dividend Return of capital

Voting rights Rate of dividends

these shares Dividend is paid before paying dividend on equity shares In case of winding up capital is repaid before the payment of equity shares capital Limited voting rights Rate of dividends prefixed and pre communicated No scope for speculation Enable the company to trade on equity Less risk Bonus shares are not offered to preference share holders The preference share holders have no right to participate in the management

Speculation Trading on equity Risk Bonus shares Practicipation in management

shares Dividend is paid after paying dividend on preference shares In case of winding up capital is refunded after the payment of preference share capital Absolute voting rights Dividend rate is not fixed and it is recommended by the board of directors Scope for speculation Company cannot take advantage of trading equity High risk Bonus shares are offered to equity share holders The equity share holders as owners of the company can participate in the management.

UNIT - V Explain the need for Public Sector in India: 1) Faster rate of Economic Growth: Public sector enterprising can increase industrial production by investment in basic and infrastructural sector such as iron and steel, energy, transport, communication etc. promotion of this sector requires huge investment and along gestation period for this reason private enterprise keep away from it. 2) Control of Monopoly : It is desirable to give monopoly status to public utility services like electricity, water, railways etc. such essential services cannot be in the hands of private sector due to the treat of exploitation. 3) Balanced regional Development : Public Sector enterprises could be established in backward regions of the country. 4) Employment Generation : Public sector is an instrument for generating employment in large number. In addition to creating gainful employment, Public sector seeks to improve working conditions and living standards of people. 5) Socialist Pattern of Society : The constitution of India aims at socialist society. It means prevention of concentration of economic power and reduction of inequalities in income and wealth. 6) Entrepreneurial Development : Public sector facilitates the growth and small scale units and ancillary industries. Discuss the merits and demerits of public sector undertakings: Merits of Public Sector Undertakings:1) Balanced Regional Development : Majority of Public sector undertakings reducing regional disparities in Industrial Development. 2) Resources Mobilization : Public sector in contributing resources to the central government by of dividends, interest, taxes and excise and other duties.

3) Employment Generation : Public sector is generating employment on large scale of the total employment in the organized sector, public sector account for more than 75%. 4) Capital formation : The shares of public sector in total investment reached the peak point during the third plan. Investment in public sector usually engaged in the production of essential infrastructure for national development. 5) Foreign exchange earnings : Public sector has contributed significantly to export earnings. Export by the public sector increasing foreign exchange earnings of the country. Demerits: 1) Political Interference : Political leaders are interfering in the working and management of public sector undertakings. 2) Delay in project completion: Most of the public sector projects took longer time to complete than initially estimated. Delay in completion and consequent increase in costs are due to poor project planning. 3) Over capitalization: Inadequate planning, delays in construction, wasteful capital expenditure, provision of housing and other amenities are the main cause of over capitalization. In public sector undertakings. 4) Over staffing : In most of public enterprises man power is in excess of actual requirement. Poor man power planning results in inefficiency. 5) Inefficient inventory control: Poor materials management and faulty financial controls are the reasons for inefficiency in the public sector. 6) Under utilization of capacity : Over head charges and wage bills increase due to under utilization of installed capacity. Technology in many public sector undertakings has become absolute.

Explain the merits and demerits of department undertakings. A department undertakings is organized financial and controlled like any other government department. Merits : 1) Accountability : It is run by government department with a minister at the top responsible to the parliament for its operations. Hence all its operations are accountable which lead to improvement. 2) Social Justice : It enables the state to achieves its economics and social objectives of promoting social and economic justice. 3) Aid to state earnings : They help to increase the revenues of the government. 4) Effective economic control: It enables the government to secure control over production and distribution of essential goods and services. 5) Managed by civil servants: These departmental undertakings ae managed by civil servants who are recruited through civil servies examination. 6) Secrecy: it enables important policy matters to be kept secret. Demerits:

1) Lack of flexibility: Departmental undertakings have lack flexibility which is very much required in the business operations. It is because these undertakings require the approval of parliament for any changes that are proposed. 2) Lack of Initiative : In the obscene of competition and profit motive there is lack of initiative in the employees. 3) Red Tapism : The excessive centralization leads to red tapism. 4) Mercy of Political Parties: These department undertakings are running at the mercy of political parties. 5) Efficient Management: They are persons having specialized knowledge and experience in their respected fields. Demerits : 1) Registration : Statutory corporations must be registered. 2) Excursing Powers : The power of the corporation depends on its memorandum of association. 3) Influence of Government Policies: The working of the statutory corporations is influenced by the government policies. 4) Autonomy on paper only: The autonomy of a statutory corporation exists on paper only. Merits of Private Sector: The merits of private sector are as follows. a) Government Plan and Policies : Private enterprises derived many special benefits from the plans and policies of the government public sector since the beginning of the plan period provided the necessary infrastructure for the development of private business and generated wide spread demand for its products. b) Investment: The plan documents indicated the specific areas in which further investment could be made. These provided valuable guidelines for the private enterprises to proceed. c) Indigenous Resources: The policy of developing indigenous resources lead to almost total banning of such imports as might complete with the products of local industry. d) Entrepreneurial Development: The various feasibility studies and demand projection estimates made by the public sector institutions enable the potential. Entrepreneurs to know the prospects of investment in the private sector. e) Financial Assistance: Various institutions have been set up to see that industries are not starved of legitimate financial needs. The development banks like IFC, ICICI, IDBI, SFC etc., f) Tax Incentives: The private enterprises received some direct incentives from the government heavy doses of taxation, many of the finance act contained various tax concessions such as tax holidays for new undertakings, developmental rebates, abolition of bonus tax etc., Demerits of Private sector: The demerits of private sector are detailed below. 1) Profit generation is the main motive: Industrialists in the private sector operate with the sole motive of maximizing profits. 2) Focus on Consumer durables sector: Even in the consumer good sector, the focus of the private sector is on the elite consumer groups since they have ample purchasing power. The production pattern is skewed in favour of the relatively small richer sectors of the society. 3) Monopoly and Concentration: It is the general pattern of capitalist development that, as the economy progress, monopoly organizations are strengthened and concentrate of wealth and economic power in a few hands increases. 4) Dealing share of net value added in total output: Net value added is defined as the amount generated over and above the cost of raw materials which go to the production system after allowing for the depreciation charges. 5) Infrastructure Bottle Necks: Severe capacity short falls, poor quality and high cost of infrastructure continue to constrain Indian business.

6) Contribution of Trade Deficit: A large number of private sector companies have been resorting to massive imports in the post- liberalization phase to upgrade their technology in a bid to meet global competition. 7) Industrial Disputes: As compared to public sector enterprises, the private sector enterprises suffer from more industrial disputes. Differences and conflicts between the owners and employees regarding wages, bonus, retrenchnet and other issues frequently emerge. 8) Industrial sickness: This is a serious problem confronting the small, medium and large units in the private sector. Substantial amount of loanable funds of the financial institutions is locked up sick. 9) Problems relating to finance and credit: Since the rate of capital formation in the economy is low and the capital markets is in an under developed state, the private sector enterprises have to encounter serious difficulties in arranging finances. 10) Threat from Foreign Competition: The process of liberalization unleashed in 1997 has opened up the gates to foreign investors and the government has progressively introduced measures to open up the economy to foriegin competition. 1. Define Government Company? Write Merits and Demerits of Government Company ? Ans : Government Company: A Government company is a company in which not less than 51% of the paid up share capital is held by the central government or by the state government or partly by central or state governments. Merits: 1) Appointment of Auditors: The auditor of Government Company is appointed or reappointed by the central government on the advice of comptrollers and auditor general of India. The annual reports have 2) more liability and authenticity which reflect the true financial position of the company. 3) Scope for Improvement: The auditor of a government is required to submit a copy of his audit report to the comptroller and auditor general of Indai (CAG) 4) Placing report before Parliament: The annual report of the company should be placed before the parliament or appropriate body and comment of CAG are also useful to review the performance. 5) Avail exemptions of Law: The central government may by notification in official Gazett direct that nay of the provision of the Act shall not apply to government company. 6) Contributes for Efficiency: The companies get finances from both the government and public and hence finance are properly used to get expected rate of return on investments. Demerits: 1) Evasion of Responsibilities: The constitutional responsibilities of a state enterprises are evaded by it. 2) Lacks Autonomy: The autonomy of a company exists only in name. in reality, everything rests with the government which exercises managerial control over all matters. 3) Spokesman of Government: The board of Directors may consists of experts who find it convenient to serve as the spokesman of the government. 4) Lacks Interest: Directors and salaried persons may not always take active interest in the affairs of the concern. 5) Lacks Answerability: As contemplated in India, Government companies are answerable neither to parliament nor to the controller and Auditor General of India. 2. Define private sector and write need of private sector?

Ans: Private Sector: Private sector refers to all types of individual or corporate enterprises, domestic and foreign in any field of activity. The ownership and management are held by shareholders and professional managers in the private enterprises. The private sector refers to an undertaking which is owned and controlled by private individuals but not by the government. Need for Private Sector: 1) Need for more Investments: There is a need for more and more investments to keep the place of development. Since public sector units have not been able to generate required funds for expansion and diversification after a limit. 2) Need for Non Interference in decision- Making: Public sector units. They do not have the freedom of taking independent decision making. They do not priority in framing policies and deciding important matter. Privatization eliminate political interference and decisions will be taken keeping the interest of business in mind . 3) Need for Professional Management: To run any unit on business lines, professionalism in management is the pre-requisite public sector units run by IAS officers showed no initiatives and have not put their heart soul in running business. This has given are rise to the private sector units which employed people with professional managerial skills, who manned the private business firms more efficiently and on commercial lines. 4) Need for efficient use of resources: In the present days, public enterprises are over capitalized. The low profitability of these units does not justify and investment. The private sector cannot afford over- capitalization. The resources will be justified by the profitability. 5) Need for Personal Touch: The public sector units adopt a casual approach to the government investment and indulge in wasteful expenditure, whereas private sector units. It is direct link between efforts and rewards and profits go to the owners. 14.1 Meaning and Definition of MNCS: MNCs are also known as transnational corporations or International corporations or global corporations. The word multinational is a combinational of two are more words ie. Multi which refers too many and national refers to a country. Hence Multinational Corporation can be taken as a corporation which operates in more number of countries. Definition:1. According to international labour organization (ILC) report, MNC refers to an enterprises whose managerial head quarters are located in a one country. While it carries out operations in a number of other countries as well. 14.2 Characteristic of MNCs:a) Global Operations:- MNCs carry production and marketing operations in different countries of the world. They possess all the infra structural facilities in all the countries of their operations. b) Gaint Size: The size of assets and sales of MNC are very large. The turnover of the MNC is more than the Gross National Product of many developing countries. c) Centralized Control: MNC will have managerial head quarters in the home country. Whereas it many have number of branches and subsidiaries in different countries. All these subsidiaries and branches. d) Dominant Position and status: Since MNC carry an operations in bulk and in number of countries the size is large and carter to many people. Hence they control the market and enjoy a dominant position and status in all the countries where they operate. e) Internationalized research and Development: MNC internationalize their research and development operations which are intended to capture the quality and serve according to the requirements of the host countries. f) Sophisticated Technology: MNC have Sophisticated technology at their disposal. This enables them to provide qualitative goods and services to the consumers.

g) Professional Management: In order to unite the global operations and to run the branches efficiently make use of the services of such managers who are well trained in their skill and are equipped with professionalism in managing and running business organization with a goal to maximize profits. Merits of MNCs: MNCs provide benefits to host countries as well as home country which are discussed below:a) Merits of MNCs Host Countries: These merits of MNCs to home countries are as follows. 1) Provide Capital: The under developing countries face the problem of shortage of capital for their paid industrialization. The MNCs provide required capital for the development of Industries. 2) Transfer of Technology: MNCs have become vehicles of the transfer of technology, especially in the developing countries. 3) Generate Employment: MNCs create employment in various cardes and pay attractive salaries in the host countries. Hence MNCs help increase in the national income of host countries. 4) Foreign Exchange: MNC enable the host countries to increase their exports and reduce the import requirements. This in turn help the country to improve the position of balance payments. Thus a saving in foreign exchange reserves is made possible by MNCs. 5) Managerial Revolution: MNCs create a managerial revolution in host countries through professional management. 6) Break Monopoly: MNCs encourage healthy competition and break domestic monopolies. The domestic companies have to increase their efficiency and with stand in the competition. 7) Growth of Domestic Business Firms: MNCs contribute to development of domestic business firms. They encourage domestic suppliers, ancillary units, bankers and other institutions to expand their activities. 8) Innovation: MNCs bring out innovation in their production and distribution activities which are required to provide goods and services to satisfy the growing and changing consumer need of the host country. 9) Better Standard of Living: MNCs provide superior products and services in the host country at a reasonable rate. 10) Improves Public Relations among Nations: MNCs provide an efficient means of integrating diverse cultures with the international trade. 11) Stabilizes the Prices: MNCs help in stabilizing the prices of goods and services. They try to equalize the cost of production worldwide. B. Merits of MNCs to Home Country: The Merits of MNCs home country are as follows. 1) Availability of resources: Since MNCs procure the materials, labour, land wherever available at cheap rates and they can supply goods and services at reasonable rates. 2) Develop Exports: MNCs encourage the export of several products. The home countries indigenous industrial units get a boost in their foreign exchange earnings. 3) Generate Income: MNCs generate income for their home countries. They earn divided, royalty, licensing, fees, profits etc., from their operations. 4) Provides Employment: MNCs also provide employment to the people of home country. 5) Make use expertise: The MNCs make use the latest technical knowledge and expertise of managers different countries to run their business. Demerits of MNCs: The demerits of MNCs are as follows 1) Monopolize the markets: IN order to monopolize the markets, MNCs may join hands with big business units in the host country and dictate prices of goods and services. This ultimately leads to concentration of economic power.

2) Disregard host countries priorities: MNCs invest only in profitable business and ignore priorities set by the host countries. 3) Imbalance in the foreign exchange remittances: MNCs and their subsidiaries collect huge amounts in the form of dividend, royality technical, fees etc., from the host country. 4) Transfer of Outdated Technology: Normally, the MNCs transfer the outdated technology to the host country. 5) Impose restrictions: MNCs have storm of bargaining power they try to impose restrictions when collaboration agreements are made with host countries. 6) Threat to Sovereignty: MNCs may create a threat to sovereignty of host countries. They may inference in the political affairs of the country and try to create internal disturbances. 7) Spread of Foreign Culture: MNCs cause damage to the cultural values of the host countries they impose foreign culture by selling foreign products in the host country. 8) Depletion of National Resources: With the entry of MNCs in host country, the source natural resources get depleted early. 9) Retard Growth of Employment: MNCs retard growth of employment in the host country, since they try to provide employment to their own nationals. Types of Debentures: a) On the basis of security: i) Secured debentures: Secured debentures are those which are secured by some charges on property of company. The charge or mortege may be fixed or floating. ii) Unsecured debentures: In case of unsecured debentures on charges is created on the assets of the company. Such debentures holders are just like ordinary creditors of company. b) On the basis of convertibility: i) Convertible debentures: These are debentures which will be converted into equality shares often certain period of time from the date of their issue. These debenture may be fully or partly convertible. ii) Non- Convertible debentures: These are debentures which cannot be converted into shares in future. c) On the basic of permanence: i) Redeemable debentures: In case of redeemable debentures the principle amount is paid back either on a fixed date or upon demand or notice. ii) Irredeemable debentures: In this case the issuing company does not fix any date boy which they should be redeemed and the holders of such debentures cannot demand payment from the company. d) On the basis of priority: i) First Martager debentures: These debentures are repaid first out of the sale proceeds of the property charged. ii) Second Mortege debentures: These debentures are repaid often the first mortgage debentures holders are fully paid off. e) On the basis of Negotiability: i) Bearer debentures: These debentures are transferability by more delivery. The company is neither informed a boittheir nor it records any transfer warrants. ii) Registered debentures: These debenture are registered in the debenture holder register of the company these are transferable the shares and each registered Describe the features:

Section2 (12) of the Indian companies Act 1956 defines debenture which includes debentures stock bonds other securities of a company whether constituting on the assets of the company or not i) Assured payment of interest: Debenture holders are the creditors of the company. They are entitled to periodic payment of interest at a fixed rate. ii) Redemption: Generally debentures are repayable often the experts of certain period say 5 or 10 years. iii) Voting Rights: Debenture holders are not owners. They do not carry voting rights. iv) Debenture holders trust: Issue of debentures and related affairs are controlled by an authorized representatives of the debenture holder known as debenture holder known as debenture holder trust. v) Charge on assets: Ordinarly debentures are secured on the assets of the company. vi) Convertibility: Debentures have the facility of conversion into equality shares or preference. vii) Permanent Capital: The funds proceed by sale of conversion into debenture can be utilized for the purchase fixed assets and to meet. viii) Negotiability: Debentures are negotiability and can be transferred hence the debentures holders liquidity. A) To the Debenture holders: 1) Less Risk: The risk is less they are generally. Cover by a charge on the assets of the company. 2) Fixed rate of Return: A fixed of return is paid on debenture irrespective of profit. 3) Priority: They have priority over the repayment at the time of liquidation. 4) Attractive: Investment in attractive to the cautious investors who sqire for regular return and safety of investment. B) To the Company: 1) No loss of Control: Control of a company is not surrendered to debenture holders because they do not have any voting rights. 2) Trading on Equality: Trading equality is possible in times of property. 3) Tax Benefits: Entrust on debentures is allowable an expenditure under the income tax act. Incidence of tax on the company is regreed. 4) Redeem ability: Debentures can be redeemed when company has surplus funds. Limitations: 1) High Unit Value : Common people cannot buy debenture is high denominations. 2) High rate of return required: They are not meant for companies as they are of high. 3) Expensive: Cost of raising capital through debentures is high because of high stamp duty. 4) High risk: Have to bear heavy risks if they raise funds through issue mortaged to the debentures. 5) Law Credibility: A company is browing capacity would be limited as the assets of the company are mortaged to the debentures holders. 6) Entrust Burden: Debentures involves fixed commitment to pay interest. In times of crisis this compliment can become a real burden to the company. 7) Problem of redemption: Repayment of debentures is another danger.

1. Difference between preference shares and equality? Basis of Difference Choice to issue these shares Return of capital Preference Share It is not compulsory to issue these shares In case of winding up capital is repaid before the payment of equity share capital Divided is paid before paying dividend on equity shares Limited voting rights Rate of dividend is prefixed and pre communicated Equity Shares It is compulsory

Payment of divided Voting rights Rate of dividend

Speculation Trading on equity

Risk Bonus Shares

In case of winding up capital in refunded after the payment of preference share capital Divided is paid after paying divided on preference shares. Absolute voting right Dividend rate is not fixed and it is re communicated by the board of directors. No scope for speculation Scope for speculation Enable the company to trade Company cannot take on equity advantage of trading on equity high risk Less risk High risk Bonus shares are not offered Bonus shares are offered to to preference share holders equity share holders.

2. Difference in between shares and debentures. Sl.No Shares 1 A share is a part of owned capital 2 3 4 5 6 7 8 9 10 11 12

Debentures A debenture is an acknowledgement of a debt A share carries voting rights A debenture does not carry voting rights Share holders are paid dividends Debenture holders are paid interest. Dividends on share is appropriation of Interest on debenture is a charge against profits profit Rate of dividends depends upon the The rate of interest is fixed profits Shareholders have no control over the Debentures are have no the control over the company company Capital is repaid only at the time of Debentures are repaid after the expiry of liquidation specified period Shareholders have no charge on assets They have charge on the assets of the of the company company Shareholders have no priority over They have priority over share holders in the debentures in the payment of capital repayment of capital Shareholder can attend the meetings They have no right to in the meeting of the company Payment of dividend is not an Payment of interest is an obligation of the obligation company Lucrative to adventurous investors Lucrative to cautious investors

3. Merits and Demerits of Public Deposits?

1) Low rate of interest: The rate of interest that the companies have to pay on deposits from the public is lower than the interest on back loans. 2) Popularity: As the rate of interest offered by the companies have been significantly higher than the rates offered by banks for the same periods there has been a good public response for public deposits. 3) Easy to secure: public deposits have been easier method of mobilizing funds than bank loans, especially during the periods of credit squeeze. 4) No need to prove credit worthiness: There is no need for the company to prove its credit worthiness in the case of public deposits. 5) No security : Since they are unsecured companies are attracted more towards public deposits. 6) Less legal formalities: The legal formalities to be followed are lesser when compared to other types of securities. 7) Flexible: Capital remains elastic as repayment of money on deposits is easy. 8) Benefits of trading on equity: Better trading on equity is possible when earnings of the company are greater than the rate of interest which it pays to its depositors. Limitation: 1) More risk: Public is deposit are safe only for those companies with stable and regular earnings. 2) Financial problem: A concern should be of high repute and have a high credit rating to attract public to deposit their savings. There may be sudden withdrawals of deposits which may create financial problems. 3) Not Locrative: The rate of return on public deposits is low and there is no capital appreciation. Hence the professional investors do not appreciate this mode of investment. 4) Expensive: The rate of interest paid on public deposits may be low but there are other expenses like commission and brokerage which make them uneconomical. 5) Speculative trends: In that case it may not be able to make the best use of the funds or may indulge in speculative practices.