Business Environment and Ethics

MODEL QUESTION PAPER
MBA
Second Year
Sub: Business Environment and Ethics
Time: 3 hours Total Marks: 100
Direction: There are total eight questions, each carrying 20 marks. You
have to attempt any five questions.
1. Discuss in detail that how factors of Macro Environment influences the business
decisions.
2. Discuss the responsibility of business towards its stakeholders.
3. Discuss the role of Ethics in Decision Making.
4. Describe in detail the impact of Multinational Companies.
5. Explain the concept of VAT and methods of calculating it.
6. Critically evaluate the Foreign Exchange Management Act. And describe how it is
different from its earlier version that is FERA.
7. Critically evaluate the role of SEBI in managing the stock exchanges.
8. Write short notes on any four of following:
a) Five forces of Michael Porter
b) Gandhian Philosophy of Trusteeship
c) The Family Life Cycle
d) Non-Tariff Barrier
e) Deficit Financing
f) Copyrights
Business Environment and Ethics
MBA Second Year

Paper No. 2.8
School of Distance Education

Bharathiar University, Coimbatore - 641 046
Author: Vivek Mittal
Copyright © 2008, Bharathiar University

All Rights Reserved
Produced and Printed

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CONTENTS
Page No.
UNIT I
Lesson 1 Business Environment: The Concept 7
Lesson 2 Social Responsibility of Business 22
Lesson 3 Socio-culture Environment 30
Lesson 4 Political and Government Environment 42
Lesson 5 Constitution and its Role in Business 50
UNIT II
Lesson 6 Ethics 63
Lesson 7 Corporate Governance 74
UNIT III
Lesson 8 Globalisation 91
Lesson 9 Multinational Corporations 101
Lesson 10 World Trade Organisation 121
UNIT IV
Lesson 11 Fiscal Policy 139
Lesson 12 Value Added Tax, Service Tax and Expenditure Tax 157
UNIT V
Lesson 13 Company Law 175
Lesson 14 Competition Bill, 2001 196
Lesson 15 Foreign Exchange Management Act 203
Lesson 16 Consumer Protection 213
Lesson 17 Intellectual Property Rights (Patents) 227
Lesson 18 Stock Exchange and SEBI 237
Lesson 19 Excise, Customs and Sales Tax 245
Model Question Paper 253
BUSINESS ENVIRONMENT AND ETHICS
SYLLABUS
UNIT I
Business environment - The concept and significance - constituents of business
environment - Business and society , Business & ethics - Social responsibility -
Environmental pollution and control. Business and culture- Business and
Government - Political system and its influence on business - Indian constitution -
Directive Principles of State Policy.
UNIT II
Managing Ethics- meaning and types - framework of organizational theories
and sources - ethics across culture - factors influencing business ethics - ethical
decision making - ethical values and stakeholders - ethics and profit. Corporate
Governance - structure of Boards- reforms in Boards - compensation issues -
ethical leadership.
UNIT III
Globalisation of the economy - trends and issues, Politics and environment, MNCs
and Government relationships- Introduction to GATT and WTO.
UNIT IV
Fiscal policy - central finances and new fiscal policy - Direct and indirect Tax
structure, VAT, MODVAT - Service Tax problems and reforms -Expenditure Tax -
Public debts &deficit financing.
UNIT V
Legal environment of business - Monopolies - Company Law, Competition Act 2002.
Foreign Exchange Management Act- Securities and exchange board of India Act -
Customs and Central Excise Act - Central and State sales Tax - Consumer protection
Act Patents Act.
5
Business Environment: The Concept
UNIT 1
UNIT I
6
7
LESSON Business Environment: The Concept
1
BUSINESS ENVIRONMENT: THE CONCEPT
CONTENTS
1.0 Aims and Objectives
1.1 Introduction
1.2 Characteristics of Environment
1.3 Types of Environment
1.3.1 Internal Environment
1.3.2 Macro Environment
1.3.3 Micro Environment
1.4 Environmental Analysis
1.4.1 Collection of Information
1.5 Let us Sum up
1.6 Lesson End Activities
1.7 Keywords
1.8 Questions for Discussion
1.9 Suggested Readings
1.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to:
z Understand the concept of business environment
z Know various types of business environment and its impact on business
z Know how to analyze the environment
z Know how does environment influenced the business decision-making
1.1 INTRODUCTION
Environment literally means the surroundings, external objects, influences or
circumstances under which someone or something exists. The environment of
any organization is “the aggregate of all conditions, events and influences that
surround and affect it.” Davis. K, The Challenge of Business, (New York: McGraw
Hill, 1975), P43.
Environment refers to all external forces which have a bearing on the functioning of
business. Jauch and Gluecke has define environment in following manner “The
environment includes factors outside the firm which can lead to opportunities or a
threat to the firm. Although there are many factors the most important of the sectors
are socio- economic, technological, supplier, competitor and govt.”
8
Business Environment and Ethics 1.2 CHARACTERISTICS OF ENVIRONMENT
1. Environment is complex: The environment consists of a number of factors,
events, conditions and influences arising from different sources. All these interact
with each other to create entirely new sets of influences.
2. Environment is dynamic: The environment is constantly changing in nature. Due
to many and varied influences operating there is dynamism in the environment
causing it to change its shape and character continually.
3. Environment is multi-faceted: The same environment trend can have different
effects on different industries. As the GATS is an opportunity for some companies
and threat for some companies.
4. Environment has a far reaching impact: The environment has far reaching
impact on the organization. The growth and profitability of an organization
depends critically on the environment in which it exists.
5. The impact of an environmental trend often differs significantly for different
firm with in the same industry: Any change in environment may have different
impacts on different firms operating in the same industry. As in pharmaceuticals
industry in India the Impact of new patent law will different on research based
pharmacy companies as Ranbaxy and Dr. Reddy's Lab and will be different on
small pharmacy companies.
6. The general environment usually holds both opportunities for, and threat to,
expansion: Development in general environment often provides opportunities for
expansion in terms of both products, and markets. For example liberalization in
1991 opened lot of opportunities for companies and HLL took the advantage of
opportunities and acquire many companies like Lakme, TOMCO, KISSAN etc.
Changes in environment also pose serious threat to entire industry. As
liberalization of poses serious threat of new entrants in the form of MNC to
Indian firms.
7. Development in the general environment change competitive battle line:
General environmental changes may alter the boundaries of an industry and
change the nature of its competition. This has been the case with deregulation in
the telecom sector In India. Where since the deregulation every second year new
competitor emerges old foes become friends, M&A take place with every new
regulation.
8. Many developments in the general environment are difficult to predict with any
degree of accuracy, while others are readily predictable: Macroeconomic
development such as interest rate fluctuations, the rate of inflation, and exchange
rate variations are extremely difficult to predict on a medium – or long-term basis.
On the other hand some trends as on demographic, income level, age can be
forecast.
The process by which organization monitor their relevant environment to identify
opportunities and threats affecting their business is known as environmental scanning.
Factors to be considered for environmental scanning: The external environment
consists of variety of factors we can explain them as follows:
1. Events are important and specific occurrences taking place in different
environment sector.
9
2. Trends are the general tendencies or courses of action along which events takes Business Environment: The Concept
places.
3. Issues are the current concerns that arise in responses to events and trends.
4. Expectations are the demands made by interested groups in the light of their
concern for issues.
Check Your Progress 1
Define Environment.
…………………………………………………………………………………..
…………………………………………………………………………………..
1.3 TYPES OF ENVIRONMENT

Environment can be divided into three broad categories:
z Internal Environment
z Macro Environment (General Environment)
z Micro Environment (Relevant Environment, Competitive Environment)
1.3.1 Internal Environment

Internal environment is internal to the organization and it is controllable. In brief
important internal factors are as follows:
1. Culture and Value System: Organizational culture can be viewed as a system of
shared values and believes that shape a company’ behavioral norms. A value is an
enduring preference for a mode of conduct or an end – state. The value systems of
founders have a great and lasting impact on the value system of organization.
Value system not only influences the operations and behavior it also influences
the choice of business.
2. Mission and Objectives: The business domain of the company. The mission and
objectives of the company guide priorities, direction, of development, business
philosophy, and business policy.
3. Management Structure and Nature: Structure is the way in which the tasks and
sub tasks are related. Structure is about the hierarchical relationship, span of
management relationship between different functional areas. Structure of top
management, pattern of share holding etc.
4. Human Resource: It deals with factors like manpower planning, recruitment and
selection, and development, compensation, communication, and appraisal.
Besides this internal environment includes corporate resources, production/ operation
of goods and services, finance and accounting system and methods, marketing and
distribution.
1.3.2 Macro Environment

Macro/ General Environment consists of factors external to the industry that may have
significant impact on the firm’s strategies. Here we will look at six broad dimensions:
Demographic, Socio-cultural, political/legal, technological, economic and global.
10
Demographic Socioculture
Political/ Business Technological

Legal
Economic Global
Figure 1.1: Dimensions in General Environment

1. Political Environment: It is the political environment of the country which
decides the fortune of the business in a country. After 1917 revolution in USSR
suddenly a political change transform the whole equation of business. In Indian in
1977 Janta government came in power and because of this Coca Cola and IBM
have to leave the country. Because of Janta government all liquor company have
to close their operations. After the change in the regime in the USSR in late 1980s
and early 1990s the whole equation of business changed in Russia. Recently when
P.V. Narsimha Rao came in power and new economic policy changed the whole
definition of business in India on the one hand it gave a bulk of new opportunities
for business on the other hand it also brought threat for inefficient organization.
Not only political philosophy but also political stability has a significance
importance. More stable will be the political environment of country the more
conducive will be the environment for business. Not only stableness but also the
consensus among various political parties on key issues also have a significant
importance.
2. Regulatory and Legal Environment: Political environment decides the legal and
regulatory environment of country. Regulatory environment plays a vital role by
telling dos and don’ts to business. Every country has its legal environment. In
India we have companies act which governs companies, MRTP act which restricts
monopoly, there are various laws regarding shares, consumer protection act,
environment laws and recent development in WTO and implementation of GATS
which resulted in the implementation of international law regarding Patent,
import export law, licensing etc. has drastic impact on business and the future of
organizations.
Once an NRI, Lord Swaraj Paul, a British citizen, tried to takeover Escorts then
Nandas approached govt to save their company then a new law came into force
which restrict any NRI to purchase the share of an Indian company and Escorts
was saved.
3. Demographic: It is Demographic environment which decides the all the
marketing mix for the organization. Structure of demographic decides type of
product as in India lot of research is going on to reduce the cost of product and
launce products at cheapest possible as 1 Rs sachet of shampoo or 5Rs ice-cream
cone. It is demography which decides the pricing, promotion and distribution 11
strategy. India’s 70% population is leaving in villages and of this 70% major part
is youth that’s why every business house is launching new products specifically
for rural market. ITC launched its unique and ambitious programme called
e-chaupal targeted at rural market.
4. Socio Culture: Socio culture variable like the beliefs, value system, attitudes of
people, their demographic composition have a major impact on their personality
and behavior style. The conspectus of needs and the pattern of consumers’
preferences have undergone a change in 1990s. This change has led to the
production of more cars, refrigerators, air conditioners and other articles which
were at one time considered to be ostentatious and luxurious. Not only this socio
culture decides the preference of consumer even in India itself, company's
launched products in south and north are many times different because of changes
in preference. Companies have to change their product portfolio because of
cultural preferences as Macdonald and KFC did when they launched their
restaurant chain in India.
5. Technological: Technological forces present wide range of opportunities and
threats which have to be accounted for in the process of business strategy
formulation. Technological advancement may dramatically affect “organization’s
products, service, markets, suppliers, distributor’s competitors, customers,
manufacturing process, marketing practices, financial composition, and
competitive position.” Some of the important factors that influences operating in
the technological environment are as follows:
Sources of technology, like company sources, external source, and foreign
sources, cost of technology acquisition, collaboration in and transfer of
technology.
Rate of change in technology, rate of obsolesce.
Impact of technology on human being, the man machine system, and the
environmental effect of technology.
Communication and infrastructural technology in management.
In fact technology is today a decisive factor. And from FMCG to Microprocessor
industry every body is investing heavily on technology. Level of technology of
consumer also influences the decisions. As organizations have to modify the
product according to the level of technology of the target costumer as in
developing nations any complex household machine, which needs programming,
will not work.
6. Global Environment: The international environment consist of all those factors
that operates at the transnational, cross cultural, an across the border level which
have an impact on the business of an organization. World is today a global village.
World is getting closer and closer as far as business is concern. For the sake of
business countries are burying their grievances and are developing economic
relationship. Erstwhile hard poles as America and Russia are today goods friends,
China and India is coming closer, India have signed bilateral treaty with Sri
Lanka, India is developing close economic relationship with South Africa and
Brazil, India is planning to develop a road network with South East Asia, India is
close ally of ASIAN, India is a signatory of WTO which is multilateral trade
agreement among more than 100 nations. India is in a process of laying down a
gas pipeline from Iran to India through its archrival Pakistan. All this is just a
glimpse of International environment. Every new bilateral and multilateral
agreement opens new vistas for business and also gives new threat in the form of
global competition.
12 7. Economic Environment: The economic environment consists of macro level
factors related to the means of production and distribution of wealth, which have
an impact on the business of an organization. The economic structure whether it is
socialist, mixed or capitalist, its stage whether its developing or developed,
economic policies such as foreign trade policy, industrial policy, fiscal policy,
GDP growth rate, policy of licensing, monetary policy, development of financial
institutions, development of money and stock market, extent of globalization all
have a drastic impact on business. As slight change in monetary policy can release
1000crore of rupees in economy which result in decrease in interest rate, which
further increases the investment and inflation too. Banks lending rate decides the
level of investment in any country. Higher the interest rate lower the level of
investment. In most industrialized nations like USA this interest rate is between
4%-6% on the other hand in India in 1991 PLR (prime lending rate) was
17%-18% which was reduced to 8%-10% by 2000 because of change in economic
policy.
8. National Competitive Advantage: Despite globalization number of industries are
clustered in specific and small number of countries. As many of the most
successful computer and biotechnology firms are based in USA, many of the
successful chemical and engineering industry is based in Germany, many of the
successful electronics industry is based on Japan. Many of the successful call
centers are situated in India, many of the customized software companies are
clustered in India. This suggest that in nation in which a company is based may
have an important bearing on the competitive position of that company in the
global market place.
Firm Strategy, Structure,

and Rivalry
Factor Endowment Local Demand Condition
Relating and Supporting

Industries
Figure 1.2: Michael Porter’s International Competitiveness Model

In a study of national competitive advantage Michael Porter identified four attributes
of a national or country – specific environment that have an important impact on the
global competitiveness of companies located within that nation.
1. Factor Endowment: A nation’s position in factors of production such as skilled
labor, capital, technology or the infrastructure necessary to compete in a given
industry.
2. Demand Condition: The nature of home demand for the industry’s product and
service.
3. Relating and Supporting Industry: The presence and absence in a nation of 13
supplier industries and related industries that is internationally competitive.
4. Firm Strategy, Structure and Rivalry: The condition in the nation governing how
companies are created, organized and managed and the nature of domestic rivalry.
What is macro environment? What are the broad dimensions of macro
environment?
…………………………………………………………………………………..
…………………………………………………………………………………..
1.3.3 Micro Environment

Microenvironment or competitive environment refers to the environment, which an
organization faces in its specific arena. This arena may be an industry, or it may be
what is referred to as strategic group. Besides looking at primary demand and supply
factors, the firms examine state of competition it faces. Because it also determines that
whether it remains in same or will start new business. All the business decision that is
new business, pricing, distribution channel, promotion strategy, product portfolio etc
depends upon to extent upon the competitive position of the firm. Like every new
entrant in the glucose biscuit segment have to study and consider the marketing mix
strategy of existing players as Britttania, Parle, Priyagold etc., before deciding its
marketing mix.
Professor Michael Porter of the Harvard Business School has convincingly
demonstrated the state of competition in and industry is a composite of five
competitive forces.
The Five Forces of Competition

According to Michael porter five forces of competition are:
1. The rivalry among sellers in the industry. (threat of competitors)
2. The potential entry of new competitor. (the threat of new entrant)
3. The market attempts of companies in other industries to win customers over to
their own substitutes products. (threat of substitute)
4. The competitive pressure of stemming from supplier-seller collaboration and
bargaining. (bargain power of supplier)
5. The competitive pressure stemming from seller-buyer collaboration and

bargaining. (bargain power of buyer)
Threat of Substitutes
Bargain power
Bargain power of
of Supplier Buyer
Threat of New
Entrant
Figure 1.3: Michael Porter Model of Five Forces

14 Threat of New Entrant
A new entrant in an industry represent a competitive threat to the established firms,
sometimes called the incumbents. The entrants add new production capacity and bring
substantial resources that were not previously required for success in the industry.
There are various entry barriers which hinders the entry of new entry. This barrier are
challenge for a new entrant and a protective shield for the established player. The
barrier are:
1. Economies of Scale: Existing large firms enjoy low cost per unit. They have
enough room to reduce price as they may taking high profits or they may be
selling product at such a low price that new player couldn’t produce it at that
cost as it might be producing small quantity.
2. Cost disadvantage independent of scale: Besides economies of scale existing
firm have other many cost advantages as proprietary product knowledge, such
as a patent, favorable access to raw material, favorable location, lowering
borrowing cost and government subsidies etc.
3. Learning and Experience Curve: Established companies an advantage of
learning curve. Because of this learning curve established firm are in a better
position as they better skilled and equipped human resource.
4. Product Differentiation: It differences in physical or perceived characteristics
make an incumbent’s product unique in the eyes of the consumer, new entrant
must overcame the resulting brand loyalty.
5. Capital requirement: It is said the offender must have three times power than
that of defender. Thus offender required capital not only to establish new
business but also to compete from established firms. Even the cost of capital
is higher for a new firm as lenders hesitate to lend to lend new people.
6. Switching Cost: Sometimes the costs (Physical, Psychological and financial)
incurred in switching from one supplier to another supplier. This also resists
the customer to go for new vendor.
7. Access to Distribution: The middleman is reluctant to deal with the product
which is new to market. It is more critical in industrial and international
market as there are few middle man and who usually prefer only establish
products.
Government and Regulatory Environment

Government policies as license, permit, broadcasting regulations, liquor policies, anti
monopoly policies like in India MRTP and in America Anti trust law, etc. also work
as barrier for new entrant.
1. Bargain Power of Supplier: Suppliers have little or no bargain power when there
are many suppliers and supply exceeds demand and supplier competes with each
other to grab the order. On the other hand bargain power is very high when in
question is of high technology and supplier have an expertise, or supplier is
working at economies of scale so having a significant cost advantage, or supplier
regular augment the product in interest of consumer, or supplier also finance the
buyer, sometime supplier also increase its bargain power buy advertising its
product directly to end consumer. As INTEL even being an industrial product it
advertise its processor heavily among end consumer and thus created as brand
value among end use, the result of this was that before buying computer ask for
“s Pentium Inside” and this increases the bargain power of supplier that is
supplier.
2. Bargain Power of Buyer: Today we are leaving in market oriented economy,
where consumer is king. Buyer enjoys as significant bargain power when sellers
are many and buyers are few or when production capacity exceeds the demand.
Buyer can bargain for reduction of prices, quantity discount, better quality at same 15
price, better after sale service even they can ask for credit or finance facility. As
Boieng arranges finances for its buyers, today all the consumer durable, two
wheeler and automobile industry arranges finances in collaboration with banks for
their clients.
3. The market attempts of companies in other industries to win customers over to
their own substitutes products (threat of substitute): Firm in one industry are
quite in close competition with firm in another industry because their respective
products are good substitutes. The producer of scooter compete with motorcycle,
Newspaper compete with television, tea compete with coffee, CD player compete
with DVD player, Aspirin manufacturer compete with the makers of
acetaminophen, ibuprofen and other pain reliever, eyeglasses compete with the
makers of contact lenses, road transport compete with railways. Strong
competitive pressure from substitute product depends upon three factors:
(a) Whether attractively prices substitutes are available.
(b) Whether the buyers view the substitutes as being satisfactory in terms of
quality, performance, and other relevant attributes,
(c) Whether buyers can switch to substitutes easily.
The presence of readily available and attractively prices substitutes create
competitive pressure by placing a ceiling on the prices an industry can charge for
its product without giving customers an incentive to switch to substitute and
risking sales erosion.
4. Rivalry among Competing Sellers: The strongest force in the rivalry with
competitors. When compete with each other to get favorable attitude of customer,
to please customer, to improve market share or profitability. The intensity of
rivalry among competing sellers is a function of how vigorously they employ such
tactics as lower prices, snazzier features expanded customer service, longer
warranties, special promotions, and new product introductions. All this leads to
adverse impact on the profits of the firm. Rivalry intensifies as the number of
competitors increases and as a competitors become equal in size and capability,
Rivalry is more stronger when demand of a product in growing more slowly,
rivalry become more intense when industry condition tempt competitors to use
price cuts or other competitive weapons to boost unit volume, rivalry in stronger
when one or more competitor are dissatisfied with their market position and
launch moves to bolster their standing at the expense of rivals, rivalry ends to be
more vigorous when exit barrier is very high and it cost more to get out of
business then to stay in and compete rivalry increase when stronger companies
outside the industry acquire weak firms in the industry and launch aggressive,
well funded moves to transform tier newly acquired competitors into major
market contenders.
Rivalry is weak when most competitors in the industry are relatively well satisfied
with their sales growth and market shares, rarely make concerted attempt to steal
customers away from one another, and have comparatively attractive earning and
returns on investment.
Besides this five force there are many other factors which have a direct impact on
business and constitute micro environment of business these are:
(a) The Sixth Force: Andrew Grove the former CEO of Intel has argued that
Porter’s five forces model ignores a sixth force: the power, vigor and
competence of complementors. Complementary products are those product
are those products which add value to some other product. They are consumed
together with some other product. Because they are used together that’s why
16 demand of one product depends upon the demand and availability of another
product. Like demand of personal vehicle in a country depend upon the
availability and price of fuel. Demand of Personal Computer depends upon
the availability and affordability of user friendly software. In fact whole
business of accessories like car accessories, Motorcycle accessories,
Computer accessories etc depend upon key product. So both substitute and
complements product influence demand. So while study the environment one
should not forget complement product as some time they can be decisive
factor for sales and profits.
(b) Marketing Intermediaries: These are firms and persons which help in
distribution, promotion, selling, gives consultancy etc. Almost every business
have to take the help of these intermediaries. Some time they play a decisive
role. Like in FMCG distribution is of critical importance and firms are in
intense competition to acquire support of strong distributor. The major reason,
because of which Coca-Cola acquires Parle is to have an access to the
distribution network of Parle which was very wide and penetrated. Besides
this there are brokers, agents, logistics companies, private transporters, which
play an important role.
There are incidences of retailer boycotting the product of particular
companies because of low margins.
Not only this promotion and advertising firm also have an direct bearing as on
them success of marketing strategy is not only dependent but it also constitute
the significant amount of marketing expenditure for the companies like HLL
it is as high as Rs. 800 crore.
(c) Financial Institution: For any business FIs plays a critical role. FIs not only
make available the finance but also create environment for investment. FIs
also give expert opinion and consultancies to the corporate. Every corporate is
dependent on FIs whether it is banks or consultancies or NBFCs for its
financial needs. These also facilitate the mode of payment. For the industrial
development of any country a well-established financial institutions is
prerequisite. These FIs mobilize the savings of public to corporate world. An
organization which has a good rapport with FIs usually get the finance easily
and at easy terms which makes a lot of difference in this competitive
environment.
1.4 ENVIRONMENTAL ANALYSIS

1.4.1 Collection of Information
The analysis is done by means of a search of verbal and written information, spying,
forecasting and formal studies and information system.
At first there is the gathering of verbal information, the sources of verbal information
are:
1. Media such as Radio and Television
2. The firm’s employees such as peers, subordinates, and supervisors.
Other source of verbal information out side the firm are: Customer of the enterprise,
persons in industry channel (as wholesalers, brokers, distributors etc), suppliers doing
business with the firm, competitors and their employees, financial executives such as
bankers, stockholders, and stock analysts, consultant, government an university
employees.
Besides verbal sources, information can be gathered through reading. Information
about environment is readily available in newspapers, trade journals, industry
newsletter, Journals publications, government reports, reports of various marketing 17
research agencies as Gallop, ORG etc. It is said that behind every business activity
there is one govt. department and one association. This department and association
publish the information related to business on regular intervals.
Second solution to environment analysis in to design a Management Information
System. A formal MIS gives quick relevant information to the decision makers, which
helps a lot in taking timely decisions. Beside this, information regarding competitor
can be gathered through Corporate Intelligence and Spying.
Environmental analysis can be divided into two parts:
i) Environmental evolution
ii) Process of environmental analysis
Environmental Evolution
There are three components, which are useful to describe changes in the
environmental segments:
z Type of Change
z Forces driving change
z Type of future evolution
Changes in the micro environment may be systematic or discontinuous. Gradual, or
changes in phased manner which are predictable are systematic changes. As change in
the ratio of youth in population of India, rise in the income of middle class and
specially the youth after Liberalization. Unpredictable, sudden changes are
discontinuous as attack on twin tower in USA and its aftermath.
Some time changes in one segment may be the result of driving forces in other
segment. Driving force behind the acceptance of packaged food in India can be
increased purchasing power of middle class or it can be because more and more
women are working or it can be more awareness among youth from mass media.
Driving force interact with each other.
Evolution of change in the future, evolution can be completely predictable and some
time they are dependent upon actions of the firm or other entities in the environment.
Process of Environmental Analysis

Process of environmental analysis can be divided into four parts:
z scanning the environment to detect warning signals,
z monitoring specific environmental trends,
z forecasting the direction of future environmental changes and
z assessing current and future environmental changes for their organizational
implications.
1. Scanning: Environmental scanning is aimed at alerting the organization to
potentially significant external impingement before it has fully formed or
crystallized. Successful environment scanning draws attention to possible changes
and events well before occurrence, giving time for suitable action. Scanning
frequently detects environmental change that is already in an advanced stage.
Scanning is most ill-structured and ambiguous environmental analysis activity.
The data sources are many and varied. Moreover a common feature of scanning is
that early signals often show up in unexpected places. Fundamental challenge for
the analyst in scanning is to make sense of vague, ambiguous and unconnected
data and to infuse meaning into it.
18 2. Monitoring: Monitoring involves following the signals or indicators unearthed
during environmental scanning. In monitoring the data search is focused and
much more systematic than scanning. By focused it is meant that the analyst is
guided by a priori premonition. Systematic refers to the notion that the analyst has
the general sense of the pattern and he is looking for and collects data regarding
the evolution of the pattern.
As monitoring progress the data frequently move from the imprecise and
unbounded to reasonably specific and focused. The output or monitoring are three
fold:
(a) A specific description of environmental patterns to be forecast.
(b) Identification of trends for further monitoring and,
(c) Identification of patterns requiring further scanning.
3. Forecasting: Forecasting is concerned with the development of plausible
projections of directions, scope, speed and intensity of environment change, to lay
out the evolutionary path of anticipatory change. There are number of key analytic
tasks and outputs involved in forecasting. The first concern untangling of forces
that drive the evolution of a trend. The second concern understanding the nature
of the evolutionary path; that is whether the change is a fad or of some duration,
or cyclical or systematic in character. The third concern more or less clearly
delineating the evolutionary path or paths leading to projections and alternatives
futures. Forecasting is well focused and is much more deductive and complex
activity.
4. Assessment: Assessment involves identifying and evaluating how and why
current and projected environmental change will affect strategic management of
an organization. In assessment, the frame of reference moves from understanding
the environment – the focus of scanning, monitoring and forecasting – to
identifying what that understanding of environment means for the organization.
Assessment thus tells about the implication of environment change on the
organization.
There is not always a liner relationship between scanning, monitoring, forecasting and
assessment. If some trends are disclosed in scanning process a organization can
directly jump to find out how it is going to influence the organization.. Even after
having the assessment of the external environment factor an organization may
continuously monitor and forecast the factor about is future development. So
sometime assessment monitoring and forecasting go simultaneously. A good strategist
always keep an eye on development in environment. Like when Vijay Mallaya came
to know that there is some internal problem in Chabaria (owners of Shaw Wallace)
family, he started monitoring it and when he found suitable time he purchased his arch
rival that is Shaw Wallace and became second largest brewery of world.
Benefits of Environmental Analysis

1. Environmental analysis gives the idea of whole environment organization.
2. Environmental analysis gives in brief about competitors.
3. Environmental analysis tells us about opportunities to reap profits.
4. Environmental analysis gives detail about threats in the environment.
5. Environmental analysis keeps the manager informed and alert.
6. Business is all about taking right decision at the right time without proper
Environmental analysis right decision can’t be taken.
7. Environmental analysis helps in predicting future.
8. Environmental analysis helps in suitable modification of strategies as and when
required.
Check Your Progress 3 19
Fill in the blanks:
1. _______________ is important and specific occurrences taking place in
different environment sector.
2. A ___________ is an enduring preference for a mode of conduct or an
end-state.
3. ____________ Act restricts monopoly.
4. Once an NRI ______________ a British citizen tried to takeover Escorts.
5. India is in a process of laying down a gas pipeline from ________ to India
through its archrival Pakistan
6. The concept of National Competitive Advantage is given by
______________.
7. ____________ the former CEO of Intel has argued that Porter’s five forces
model ignores a sixth force.
8. In ______________ GATS (General Agreement on Trade and Services)
has been implemented in India
1.5 LET US SUM UP

Every business operates in an environment and business unit has its own environment.
A change in environment gives opportunity to some and threat to some. Environment
has specific characteristics as, environment is complex, environment is dynamic
environment is multi faceted, environment has a far reaching impact, the Impact of an
environmental trend often differs significantly for different firm with in the same
industry, the general environment usually holds both opportunities for, and threat to,
expansion. Development in the general environment change competitive battle line,
many developments in the general environment are difficult to predict with any degree
of accuracy, while others are readily predictable.
The environment which influences the business can be divided into three types:
z Internal Environment
z Macro Environment (General Environment)
z Micro Environment (Relevant Environment, Competitive Environment)
Internal Environment is all about culture and value system, mission and objectives
Management Structure and Nature, Human Resource.
Macro Environment deals with Political Environment, Regulatory and Legal
Environment, Demographic, Socio Culture, Technological, Global Environment,
Economic Environment, National Competitive Advantage etc.
Micro Environment analysis: The Five Forces of Competition, The Sixth Force,
Marketing Intermediaries, Financial Institution. There are various techniques of
analyzing the environment. To analyze the environment the very first step is collection
of information. Information can be collected in verbal and written form. There can be
various source of information such as Radio and Television, the firm’s employees
such as peers, subordinates, and supervisors, Corporate Intelligence, Spying etc.
Process of environmental analysis, includes the steps like Scanning, Monitoring,
Forecasting and Assessment.
20
Business Environment and Ethics 1.6 LESSON END ACTIVITIES
1. A multinational two wheeler company wants to starts its operation in India.
Identify the relevant environmental factor influencing the decision and describe
how they will influence the decision.
2. Prepare a report on the changes took place in the economic environment in India
because of changes took place in political environment in country since last
10 years.
1.7 KEYWORDS
GATS: General Agreement on Trade and Services.
CPI: Communist Party of India.
LPG: Liberalization, Privatization, and Globalization.
NBFC: Non Banking Financial Companies.
CSF: Critical Success Factors.
Industrial Spying: Process of getting the information of competitor through the
spying.
1.8 QUESTIONS FOR DISCUSSION

1. Discuss the various macro environmental factors, which can have an impact on
business.
2. Describe micro environmental factors, which influences the business.
3. Describe the various sources of information for the environmental analysis.
4. Describe the various characteristics of environment and the process of analyzing
the environment.
5. Write brief short notes on the following:
(a) Five Forces Model
(b) Corporate Intelligence
(c) Critical Success Factors (CSFs)
(d) Driving Force
Check Your Progress Model Answers

CYP 1
Environment literally means the surroundings, external objects, influences or
circumstances under which someone or something exists.
CYP 2
Macro/General Environment consists of factors external to the industry that
may have significant impact on the firm’s strategies. Here we will look at six
broad dimensions: Demographic, Socio-cultural, political/legal, technological,
economic and global.
CYP 3
1. Events 2. Value 3. MRTP
4. Lord Swaraj Paul 5. Iran 6. Michael Porter
7. Andrew Groove 8. January 2005
21
1.9 SUGGESTED READINGS Business Environment: The Concept
Mittal Vivek (2007) Business Environment, Excel Books.

Bedi Suresh (2006) Business Environment, Excel Books.
Mishra, Puri (2006) Economic Environment of Business, Himalaya Publications
House.
Spiro George W. (1993) The Legal Environment of Business, Englewood Cliffs, NJ
Prentice Hall.
Starling, Grower (1996) The Changing Environment of Business, Cincinnati, OH,
South Western College Publishing.
Weidenbaum, Marray L. (1999) Business and Government in the Global Market
Place, Upper Saddle River, NJ Prentice Hall.
22
LESSON
2
SOCIAL RESPONSIBILITY OF BUSINESS
CONTENTS
2.1 Introduction
2.2 Social Responsibility
2.2.1 Responsibilities to Shareholders
2.2.2 Responsibility to Employees
2.2.3 Responsibility to Consumer
2.2.4 Responsibility to Community
2.3 Major Social Responsibilities of Business
2.4 Let us Sum up
2.6 Keywords

z Understand the concept of social responsibility
z Know the responsibility of business towards various stake holders
z Explain that how investment in the social responsibility can even increase the
profits of the business
2.1 INTRODUCTION
By “Social Responsibility we mean the intelligent and objective concern for the
welfare of society that restrains individuals and corporate behavior from ultimately
destructive activities of positive contributions to human betterment, variously as the
latter may be defined.” - Kenneth R. Andrews, (The Concept of Corporate Strategy
[Burr Ridge, IL: Irwin Co. 1971] P.120)
Does corporate social responsibility translates into fiscal responsibility? A landmark
study by Professors Stephen Erfle and Michael Frantantuono found that firms that
were ranked highest in terms of their records on a variety of social issues (including
charitable contributions, community outreach programs, environmental performance,
advancement of women, and promotion of minorities) had greater financial
performance as well. Financial performance is better in terms of operating income
growth, sales-to-asset ratio, sale growth, return on equity, earning to asset growth,
return on investment, return on assets, and asset growth. (Joel Makeover, Beyond the 23
Social Responsibility of Business
Bottom Line (New York: Simon& Schuster, 1994, pp.70-71)
Look at well-run company and you will see the needs of its stockholders, its
employees and the community at large being served simultaneously. – Arnold Hiatt,
Former CEO Stride Rite Corp.
Business is not only an economic function but also a social function. It is the only
activity, which influences every aspect of society and nation. Business innovates, it
develops new products and services to serve human, it produces goods and service for
the nation and society, it invent new molecules to cure human ailments it gives
employment, it generates earning, it exports, it gives taxes for the smooth functioning
of government it utilizes the resources of society and nation. But it is one side of
picture, other side is all about exploitation of natural resources, exploitation of human
resource, sexual harassments at work place, political funding for business interest,
spreading pollution, spreading materialism, abetting terrorism to increase sale of arms
and ammunition, selling smoke and liquor, global warming, acid rain and many other
surfing of human kind is only because of business.
All this raise questions do business has some social responsibility? Do business can be
performed while performing social responsibility? Do business is accountable to
society?
2.2 SOCIAL RESPONSIBILITY

The Socio-Economic obligation of business refers to its obligation to prevent
economic consequences of business from adversely affecting public welfare. Social –
Human obligation refers to the obligation of business to nurture and develop its
human resource so that employees get every opportunity to grow and develop and
advance through life and their careers; to make the organization more humane and
humanistic and to promote human values within the organization. Keth Devis has
defined social responsibility as:
“Social responsibility refers to the businessman’s decision and actions taken for
reasons at least partially beyond the firm’s direct economic or technical interest.”
Business and society interact with each other. So organizations have to fulfill their
social responsibilities some they volunteer do that some time there are many forces,
which induces social responsibilities.
Keith Davis model of Corporate Social Responsibility

Davis model gave a list of five proposition that describe why and how business should
adhere to the obligation to take action that protects and improves the welfare of
society as well as the organization:
Proposition 1: Social Responsibility Arises from Social Power: Business in the
country primarily determines the proportion of employment and prevailing condition
of the environment in which the citizens are living. Davis reasons that since business
has this power over society, society can and must hold business responsible for social
condition that result from the exercise to this power.
Proposition 2: Business shall operate as a two way open system, with open receipts
of inputs from society and open disclosure of its operations to the public: According
to this proposition business must be willing to listen to what must be done to sustain
to improve societal welfare. In turn society must be willing to listen to business
reports on what it is doing to meet its social responsibilities.
24 Proposition 3: The social costs and benefits of an activity, product or service shall
be thoroughly calculated and considered in deciding whether to proceed with it:
This proposition stresses that business should consider both the long term and short
term societal consequences of all business activities before undertaking them.
Proposition 4: The social costs and benefits of an activity, product or service shall
be passed on to the consumer: The cost of socially desirable activities with in the
business should be passed on to consumer through higher prices for the goods or
service related to these activities.
Proposition 5: Business institutions as citizens have the responsibility to become
involved in certain social problems that are outside their normal areas of
operations: David reasons that because business eventually will reap an increased
profit form a generally improved society; business should share in the responsibility
of all citizens to generally improve society.
There are four important groups which influences and are influenced by business and
business is suppose to accept its responsibilities towards these groups they are:
1. The owner of the business i.e. shareholders
2. The employees
3. The customer
4. The society at large
Interest of this diverse group is not identical rather they are conflicting. Every group
wants lions’ share of the pie. Customer crave for value added but economical product,
employees claim for better remuneration and working conditions, society expects
philanthropy and healthy environment and owner demand for higher and higher ROI.
Management has to bring effective synthesis and secure good relation among these
four diverse interests.
Shareholder
Society Social Employees

at Large Responsibility
Customer
Figure 2.1

What do you understand by the social responsibility of business?
…………………………………………………………………………………..
…………………………………………………………………………………..
2.2.1 Responsibilities to Shareholders 25
Men and women who invested in business are interested in only one thing that is
money. They have invested money to make money. As Milton Friedman claims that
the ethical mandate of business is to increase shareholders profit. Primary
responsibility of business is to increase shareholders wealth, to give good return on
investment, to give dividends at proper time, to protect the interest of even small
shareholders, to hear and respect shareholders, to regular invite shareholder to
participate in decision making. So basic responsibility of business towards shareholder
is to create wealth for shareholder. Economic Value Added analysis is effective tool to
measure the increment in shareholders wealth. Economic values added are increment
in shareholders wealth beyond its expected return. Debt has its cost in terms of interest
but in financial terms equity doesn’t has any cost. So in EVA Equity cost are the risk-
adjusted rate of return that investor should expect from this type of investment.
Could be met and above this it is EVA and if it is below this then company may be in
profit but in terms of EVA it is decreasing shareholders wealth. These expected
returns should be met and if returns are above this then EVA is positive and if it is less
than this than EVA is negative, that is that firm may be in profit but it is not meeting
expectations.
2.2.2 Responsibility to Employees

Success of the organization is dependent on its employees. Gone are the days when
employees were the most neglected resource of the organization. Today HRM is the
Critical Success Factor for the success of all the industries whether it is old economy
industry as Steel, Cement or FMCG or new economy industry as BPO and software.
Organization has much responsibilities toward their employees they are:
1. Fair treatment.
2. No discrimination on the basis of sex, cast or creed.
3. Fair wages.
4. Fair Appraisal system.
5. Healthy and safe working environment.
6. Establishment of fair work standards and norms.
7. The provision of labor welfare facilities.
8. Fair opportunity for accomplishment and promotion.
9. Proper recognition, appreciation and encouragement of special skills and
capabilities of the workers.
10. Installation of an efficient grievances handling system.
11. An opportunity for participating in managerial decision to the extent desirable.
12. Proper training and development programmes so that workers can develop
themselves according to changing environment.
13. Family Welfare. That is if workers have less problem in their family life then their
productivity will be high. It is this reason that TATAs have invested lot in family
welfare of its employees. JRD has also won UNESCO’s world population award.
JRD have invested a lot in making its employee understand about the family
planning which ultimately resulted in happier families of its employees. India’s
most work force is employed in private sector imagine if every private sector
concentrate on family planning then it will not only help a lot to India but also to
its organization.
26
2.2.3 Responsibility to Consumer
1. Providing products of proven quality.
2. Regular R&D to augment the product and to innovate the product.
3. To ensure that product is reached to customer and to check any sort of black
marketing or profiteering by middleman and anti social elements.
4. To supply goods at reasonable price.
5. To provide required after sale service, and to ensure that spare parts should be
available in the market.
6. To fulfill its commitments impartially and courteously in accordance with sound
and straightforward business principles.
7. To provide sufficient information about the product, including their adverse
effects, risks and care to be taken while using the products.
8. To ensure that product supplied doesn’t have any adverse effect on customer.
9. To hear and redress the genuine grievances of customer.
10. To avoid any type of cartel formation and to reap monopoly profits.
2.2.4 Responsibility to Community

Business has following responsibilities towards community:
1. To prevent environmental pollution and to prevent the ecological balance.
2. Improve the efficiency of business operation.
3. Contributing to research and development.
4. Development of backward areas.
5. Promotion of small scale industry.
6. Development of region in which they are operating.
7. Social development of region in which organization is working as development of
schools, social awareness programmes, adult education, health, medical facilities,
helping NGOs and Government for social cause as Pulse Polio mission etc.
8. Taking steps to conserve scarce resources and developing alternatives, wherever
possible.
2.3 MAJOR SOCIAL RESPONSIBILITIES OF BUSINESS

1. Optimum Utilisation of Scarce National Resources: All corporations must use
the resources in a judicious manner in a optimum way and should not waste,
misutilise, damage or cause to deteriorate the resources at its disposal. It is
essential in energy/power scare country like India. Not only this they should
develop alternative sources of energy and power. Like ITC is using wind power in
some of its projects. M&M is doing research in developing alternative fuel.
Reliance is a classical example of efficient utilization of resources as it uses
byproducts and waste of one project in another its Petrochemical plants and
refineries are so integrated they use each other products.
2. Responsibility Not to Make Losses: A loss making unit is burden on society. Loss
making unit not only wastes the resources of society but in fact it don’t perform
any of its duty that is towards customer by not providing better products , towards
shareholder by not creating wealth , towards society by wasting its resources and
towards its employees by not meeting better HR standards. As most of the PSUs 27
which are had make losses and are making losses but are kept alive in the name of
socialism and employment are basically a burden on society. There losses are met
by taxing the society. So we can say that society is paying higher tax to subsidies
the inefficiency of PSUs question arises why should they.
3. Improved Quality of Life: Any organization should prove to be a reason to the
development of standard of the quality of life in both terms that is in terms of
standard of living which is based on financial power and material growth and in
terms of one’s internal growth, the growth of one’s character, growth of mind and
soul.
4. Responsibility of Employment and Income: Every business should make
provision for the payment of fair wages, satisfactory working conditions, steady
employment and job security, prospects for promotion, growth and development
of workers and also take adequate measures for employee welfare. Not only this,
it should also ensure.
5. Offering Quality Product at Fair Prices: Business is all about creating customer,
and customer can be created only when customers are satisfied. Customer can be
satisfied when they will be provided with value added products, at fair prices,
providing after sales service giving correct and timely information, ensuring that
product is reaching to the customer etc.
6. Environmental Protection: Business has done and is doing so much irreparable
harm to the environment that it becomes an obligation for them, not only morally
but also legally to undo the damage by taking serious and responsible steps to
protect the environment and keep it in healthy condition. They should adopt all
the modern technology which are there to ensure that their operation doesn’t harm
the environment. With the protective action business should also take corrective
action that is to grow more and more trees, to educate its employees and people in
general about environment.
7. Fair Trade Practices
Fair trade practices of business constitutes of:
(a) Avoidance of formation of cartel or following monopolistic practices.
(b) By creating shortages, for the purpose of black marketing and speculation.
(c) By exaggerating and making false statements about the claims.
(d) Not buying political favors to sway decisions it its favour.
(e) Following healthy competition with competitors by not indulging in industrial
espionage or other unethical means.
(f) Not deliberately make organization sick to avoid obligations or to escape from
responsibilities.
(g) Not to involve in insider trading or to take undue advantage of inside
information.
(h) Not bribing public servants and corrupting democratic structure of country.
(i) Paying taxes, duties and other dues timely and honestly.
(j) To give required information to shareholders and all other stake holders.
(k) Making timely payment of borrowing and interest.
(l) While dealing with suppliers instead of using bargain power corporation
should use reward and cooperation power that is establishing good relation
with supplier and helping supplier in maintaining quality and developing new
28 product for the organization but it may look costly affair initially but
ultimately it pays Japanese usually believes in establishing good rapport with
their suppliers.
(m) Not making any communication strategy is which is not compliant with social
norms.
(n) Law of the land should abide business.
8. Local development: As business uses the resources of society so business is also
responsible of local development. Business can perform various function to
develop local area. In fact, if every business house take responsibility of some
villages then miracle can happen in India. Business houses like TATA Chemicals,
ITC, HLL are doing so. Cooperative as IFFCO is following this concept. Here
business house adopt some village and then he construct road in village, spread
education in village, ensure health programmes, promotes family planning, and
other social reform programmes, helps farmers in agriculture and marketing of
their product, promoting handicraft and cottage industry in villages. HLL is
giving employment and empowerment to the women of villages through its
Operation SHAKTI and ITC is revolutionizing the village distribution system
through its e- choupal system.

Fill in the blanks:
1. ________________claims that the ethical mandate of business is to
increase the shareholders profit.
2. _______________analysis is effective tool to measure the increment in
shareholders wealth.
3. _____________ has won UNESCO’s world population award.
4. HLL is giving employment and empowerment to the women of villages
through its Operation ______________.
5. M&M is doing research in developing alternative _________________.
2.4 LET US SUM UP

Business is not only an economic function but also a social function. It is the only
activity, which influences every aspect of society and nation. The socio-economic
obligation of business refers to its obligation to prevent economic consequences of
business from adversely affecting public welfare, responsible for forcing the business
to recognize and honor the new social responsibilities.
There are four important groups which influences and are influenced by business and
business is suppose to accept its responsibilities towards these groups they are:
1) The owner of the business i.e. shareholders
2) The employees,
3) The customer
4) The society at large
Major Social Responsibilities of Business is to use the resources in a judicious manner
in a optimum way and should not waste, misutilise, damage or cause to deteriorate the
resources at its disposal. A loss making unit is burden on society. A business should
offer quality product at fair prices to society and should follow fair trade practices of
business. Business can perform various function to develop local area.
29
2.5 LESSON END ACTIVITIES Social Responsibility of Business
1. Prepare a report on the steps taken by TATA for the well being of society.
2. Prepare a report on the impact of e-chaupal on the rural life.
2.6 KEYWORDS
EVA: Economic Value Added, it is an increment in shareholders wealth beyond its
expected return.
FMCG: Fast Moving Consumer Goods.
BPO: Business Process Outsourcing.
JRD: Jahangir Ratan DadaBhai TATA.
NGO: Non Govt. Organization, the organizations that work for social welfare.
PSUs: Public Sector Units.

1. Define social responsibility. In recent times what factors have influenced the
social responsibility?
2. Discuss the various responsibilities of the business to its various stake holders.
3. “Expenditure in social responsibility is not an expenditure rather it is a
investment”. Discuss the statement.
4. What are the various social responsibilities a business should perform?
5. Discuss how organizations are using social responsibility strategically.
Check Your Progress: Model Answers

CYP 1
Social responsibility refers to the businessman’s decision and actions taken for
reasons at least partially beyond the firm’s direct economic or technical
interest.
CYP 2
1. Milton Friedman 2. Economic Value Added 3. JRD
4. SHAKTI 5. Fuel
2.8 SUGGESTED READINGS

House.
Prentice Hall.
30
LESSON
3
SOCIO-CULTURE ENVIRONMENT
CONTENTS
3.1 Introduction
3.2 Impact of Socio-culture Environment on Business
3.2.1 Family
3.2.2 Social Class and its Affects on Taste and Lifestyle
3.2.3 Culture and its Influence
3.3 Let us Sum up
3.5 Keywords

z Understand various aspect of culture and society
z Know the impact of culture and society on business decision
z Study the changing role of women in society
z Understand the impact of the business on the culture
3.1 INTRODUCTION
If any thing is there, which influences the every aspect of the lifestyle of a prospective
individual then it is society and culture. Individual’s eating habits, buying behavior,
dressing priorities; physical possessions etc. all are influenced by the society. People
invest lakhs of Rupees for the sake of society and culture as it is only societal pressure
that people spend so much money in marriages, celebrations, and even in funeral. In
India the expenditure on festivals like Holy, Diwali, Eid, Raksha Bandhan, Durga
Puja, Ganesh Puja, Pongal, etc is billions every year. So culture itself is a big
opportunity for business.
If we study the Maslow’s Hierarchy of Human Needs we will find that after fulfilling
physiological, safety and security needs it is only social needs for which human being
works. Not only this, in most cases for the after reaching social needs most of the
people remain there that is they never approach for ego and self actualization needs.
So his whole life is all about fulfilling social needs. When a person purchase a gift for
someone, when he purchases a clothes for party or for morning walk, when he 31
Socio-culture Environment
purchases a particular model of motorcycle or automobile, when he take admission in
a particular college/college, or he do any sort of purchase every purchase is influenced
by societal and cultural environment. As with all these purchases he is satisfying his
social needs as in all these purchase he has desire in his subconscious mind to be
looked as smart and intelligent consumer and individual in the eyes of society. It has
been seen that in the case of middle class and above the spending on social needs
constitutes higher part of their income. This ratio increases in favor of social needs as
we go above in the income strata. It is the reason that most of the organizations tries to
hit and position their product around social needs.
3.2 IMPACT OF SOCIO-CULTURE ENVIRONMENT ON

BUSINESS
To study the socio culture environment on business we can divide the socio-culture
environment in following way:
z The Family
z The Social Class
z Culture
3.2.1 Family
A consumer is born every ten seconds.
(Edwin Newman, 1976)
Family is the smallest unit of society. It is also the first school of child and of course it
is the school which has maximum and lasting influence on an individual. A family
plays a key role in the development of attitude regarding the objects in environment,
regarding beliefs, and preferences of a child. Drastic differences have been seen in the
attitude and preferences of individuals who have been nurtured in combined family,
nuclear family, or a family where both husband and wife are professional or have been
brought up in hostel. Family perform four basic function for a individual that is
economic support, emotional support that is love, affection, intimacy etc,
establishment of suitable lifestyle for the family and socialization of family.
Socialization is a central function of family as here family impart basic value and
modes of behavior consistent with the culture to child. These generally include moral
and religious principles, interpersonal skills, dress and grooming standards, sociably
acceptable manners and speech, and a selection of suitable educational and
occupational goal.
Role of Family Member in Decision-making

Family plays a following role in decision-making of members:
1. Influencer: Individual whose opinion are sought concerning criteria the family
should use in purchase and which products or brands most likely fit those
evaluative criteria.
2. Gatekeeper: Influencer and initiator provides information on the other hand
gatekeeper restrict flow of information. He control the flow of information about a
product or service into family.
3. Decider: The person with financial authority or power choose how the family’s
money will be spent and on which products and brands.
4. Buyer: The person who acts as the purchasing agent by visiting the store, calling
suppliers, writing checks, bringing products into the home, and so on.
5. User: The family member who makes actually use of the product.
32 6. Disposer: A family member(s) who initiate or carry out the disposal or
discontinuation of a particular product or service.
Family Life Cycle

Family goes through various stages in its whole life. These stages are called as Family
Life Cycle. Roger D. Blackwell (Consumer Behavior, Thomson South western, Vikas
Publishing House, Ninth edition) has describe stages of life cycle in Indian context
which can be described in following manner:
Young Singles: Bachelors, young, live alone or with their family, or with friends, low
individual income, usually don’t have any financial burdens, less price sensitive,
usually buy two wheeler, audio system, gifts items, fashions, movies, computer,
mobile phones etc. Purchases are influenced by opposite sex.
Newly Married Couples: These families tend to spend a substantial amount of their
incomes on cars, clothing’s, vacations and other leisure activities. They are more
susceptible to advertising.
Full Nest I: At this stage first child arrives and role of family member changes.
Purchases shift from leisure to baby products and toys.
Full Nest II: At this stage youngest child has reached school, and family spending is
children centric and money is invested in various financial instrument for future of
children and themselves.
Full Nest III: At this stage parents enters in their 40s. Family income increases
simultaneously expenditure as children are more demanding, major share of income
goes for their education, their belonging like motorbikes, computers, clothings,
fashion, mobile etc.
Empty Nest I: At this stage children has left the home and establish their own nest.
Financial condition of the couple become better as now they have less responsibilities
and income is at its peak. In Indian contest at this stage nowadays spending is usually
on health products, tonics, and gift for their newly married children. It has been seen
that in India usually at this stage biggest spending is on newly married couple and on
their children. In fact in some cases spending on grandchildren is very high. This
means that in India target customer for baby product is not only their parents but also
grand parents.
Empty Nest II: At this time income earner get retires so their income reduces in India
in case of business families and private jobs they get dependent on their children and
their spending is on their grand children and health.
Solitary Survivor: Spending habits of solitary survivor remain same as that of empty
nest II.
Family life cycle influences the product mix and marketing mix of almost every
company.
3.2.2 Social Class and its Affects on Taste and Lifestyle

The term social class is now used more generally o describe the overall rank of people
in as society. Social class is defined Roger D. Blackwell et al (Consumer Behaviour,
Thomson South Western, ninth edition) as relatively permanent and homogenous
divisions in a society into which individuals or families sharing similar values,
lifestyles, interests, wealth, status, education, economic position, and behavior can be
categorized.
People who are grouped within same social class are approximately equal in terms of
their social standing in the community. They work in roughly similar occupations, and
they tend to have similar lifestyles by virtue of their income levels and common tastes. 33
These people tend to socialize with one another and share many ideas and values
regarding the way of life should be lived.
Status group reflects a community’s expectations for style of life among each class as
well as the positive or negative social estimation of honor given to each class.
Social Stratification
Social stratification can be described as the processes in social system by which scarce
and valuable resources are distributed unequally to status positions that become more
less permanently ranked in terms of the share of valuable resources each receives. It
can also be describe as perceived hierarchies in which consumers rate others as higher
or lower in social status. Those who earn a higher status due to work or study have
achieved status, whereas those who are lucky to be born wealthy or beautiful achieve
ascribed status.
Social class can be classified into six distinct segments as defined by W. Lloyd
Warner in 1941:
1. Upper Upper: World of inherited wealth.
2. Lower Upper: Inherited wealth and newer social elites drawn from current high
achiever professional.
3. Upper Middle: Professionals, Small businessperson.
4. Lower Middle: Average pay white color workers.
5. Upper Lower: Underpaid white color workers and blue color workers.
6. Lower Lower: Living hand to mouth.
Component (Subjective measure) of Social Class

The factors like occupation, income, possessions, associations, education and level of
influence are the subjective measures or component of social class.
1. Occupation: What person does for its living is one of the most telling indicators
of social class. It is the occupation which dictates other signs of class membership
as income, personal associations, and status. Not only this occupation also decides
other things that is availability and use of leisure of time, allocation of family
resources, political orientation, stress on type of education to children and many
other things. Some time Occupation is also seen as a synonym of class as we think
that CAs, Doctors, Businessman etc belong to upper class, Teachers, Engineers
etc. middle class etc.
2. Income: Income is a most critical determinant of social class as it decides the
buying power and market potential. People performing same occupation can have
different level of income. Consumer’s consumption pattern is determined by level
of income.
3. Possessions: Possessions are symbols of class membership-not only the number
of possessions, but also the nature of the choices. Conspicuous consumption,
people’s desire to provide prominent visible evidence of their ability to afford
luxury goods, helps explain why different buy different products. For example
possessions of luxury cars and membership of a particular club are clearly
indicative of one class and possession of small cars or two-wheeler are clearly
indicative of particular class.
4. Associations: Consumption pattern and interaction network are intimately linked:
people spend their leisure time with others who shares their tastes and recreational
34 activities, and they learn new tastes, lifestyles, dressing sense etc from those with
whom they associate. Selection of and Interaction with friends, relatives and even
life partner vary according to class membership.
5. Level of Influence: Class rank and influence go hand in hand. Members of high
class usually commands higher level of influence. Even marketer use them as a
opinion leader to influence the lower class.
Values, Attitudes and Lifestyles across, Social Classes

Social class in a big sense determines the values, attitude and lifestyle of a particular
person. As a person moves from one social level to other his values also changes.
Values and Attitude

Values and attitude differs with society and person belongs to it society shares same
values and attitudes. Values towards sex, education, profession, possessions differ
with level of social class. As attitude towards education and type of education differs
with the level of society, middle class gives much stresses on professional education
as it become source of livelihood for them, on the other hand lower class emphasis on
learning some skills.
Lifestyle
Number of hours spend in house or outside, how they spend their evenings, for how
long they watch TV in a day, at what time they take dinner in night or day, at what
time they go to bed and at when they get awake in morning, how they spend their
holidays how much time they spend in activities like reading, art, aerobics, or serving
the community, etc are determined by the social class a person belongs to.

1. What do you understand by family life cycle?
……………………………………………………………………………….
……………………………………………………………………………….
2. Define social stratification.
……………………………………………………………………………….
……………………………………………………………………………….
3.2.3 Culture and its Influence

There can be many ways to think about culture. Dutch management professor Geert
Hofstede refers to culture as the “software of mind” and says that it provides a guide
for human on how to think and behave. Leon G. Schiffman and L.L.Kanuk has
described culture as the sum total of learned beliefs, values and customs that serve to
direct the consumer behavior of members of particular society. Roger D. Backwell
et.al has described culture as “Culture can be referred as a set of values, ideas,
artifacts and other meaningful symbol that help individuals communicate, interpret
and evaluate as members of society”.
Culture is learned. We are not born with specific values, behavior. These are passed
on to us. Members of the society passes the culture norms to new member of society.
It can be in three ways. In formal learning adults and other siblings teach young
family member how to behave, in informal learning child learns primarily by imitating
the behavior of selected others such as family, friends, or TV heroes and in technical
Learning a it is teacher in school and colleges who instruct the child in an educational 35
environment about what should be done, how it should be done, and why it should
be done.
Elements of Culture
Following can be treated as the elements which influence most the culture:
Technology, Family, Education Political Structure The Media, Belief System Art,
Music Drama, Dance, Language. The four social institutions that most strongly
influence values and behavior are schools, religion, families and most recently the
media.
Family: The family is a learning center for an endless stream of attitudes, behaviors
and skills that the child carries through life. Family experience also serve as an
interpreter of the world. The position of men and women in society, what is so called
good or bad how to behave, how to greet, what to wear, what to eat etc are taught to
young one by family. Why in India usually boys strive for career and girls are more
interested in future groom is only because of family as from childhood it is taught that
boy will become officer and girl will get marry with dream boy and the result is that in
India for girls to be housewife is considered to be satisfactory role, on the other hand
in the families where girls and boys were treated equally there both strive for career.
Religion: When there was no law religion was the only law. Religion came into
existence as a social law. At the early civilization stage when there was no law to
control the behavior of human being in the interest of society, when there was no
explanation of the happening in the society then religion came into force. Since then
till today religion controls the human behavior all over world. The kind of religious
training, or lack of it, that we receive during socialization affects behavior as
consumers. Religious practice may dictate the use of some goods and services or
prohibit the consumption of others. Some time religious rules are more abiding than
law of the land. In strict religious culture such as the Islamic culture of Iran, religion is
a part of all aspects of life, from family to education to the workplace to the Govt. On
the other hand in India which is a secular state there are many religions. All over
world companies have to change their product portfolio, packaging and
communication strategy according to the religion. In Hindus saffron color is sacred on
the other hand in Muslims it is green. KFC doesn’t include beef and pork in its
portfolio in India only because of religion. Religious beliefs are so strong that in
whole world there are people who can kill other only because he/she follows different
religion.
It is the religion which decides many social events like marriage, polygamy,
monogamy, number of children in family, festivals, rituals etc. These festivals decides
the purchasing pattern of different religions as Hindus do most of there purchasing in
Deewali, Christians in Christmas and Muslims in Ed. That’s why accordingly
companies launched there campaigns.
Education: Education and educational institutions are a major socialization influence
in the lives of the members of the culture. Socialization through educational
institutions influence consumption in several ways. Interaction with teachers, for
example may lead to more informed choices in the marketplace. A teacher’s guidance
on appropriate food choices, basic, medical and dental care, reproductive health,
concern for the environment and the problems associated with drugs, alcohol, and
tobacco products all encourage certain marketplace behavior.
It is the level of education on which success of many products depend. In India it is
because of level of education that campaign like Pulse Polio couldn’t get success.
AIDS, once which is considered to be the problem of west is now biggest social
problem of east and Africa, it is because of level of education only. As west now
36 knows how to check AIDS but in country like India or continent like Africa where
level of education is very low it is very difficult to communicate message to
everybody. And it is spreading like fire in jungle.
Mass Media The mass media are those communication options with which large share
of the population have contact on a regular basis. It is a critical question that do mass
media mirror the culture, or do they shape it. Television, Newspaper, Magazines,
radio, Internet, Cinema Hall are some examples of mass media. Modern culture and
society has been revolutionized by mass media. Today’s fashion products, beauty
aids, cars, soft drinks, and foods are all promoted in such a way as to make them seem
socially “right” for the target customer. But only all this mass media have beget
altogether new cultural norms which is considered to be taboo yesterday is fashion
today thanks too mass media. It is the mass media who beget the concept of Valentine
Day, Mother’s Day, Rose Day, Friendship Day etc in India.
Language and Symbols: To acquire common culture, the members of a society must
be able to communicate with each other through a common language. It is the
language through which people communicate with each other and it is distinct with
every nation and culture. In India itself there are more than 25 languages and more
than 800 dialects spoken. Every organization must have a deep understanding of the
language of people with whom they want to do business. Every culture and nation
loves its language and feel proud on it. Even he feel elevated if some foreigner talks in
his language.
Technology: Every culture has its own level of technology. And attitude of culture
towards technology depend upon there level of technology. A culture’s level of
technology is manifest in many ways. Countries like United States, Japan, Germany
other counties have a high level of technology, the general population has a broad
level of technical understanding that allows them to adapt and learn new technology.
In countries like India, Sri Lanka, Pakistan, Bangla Desh, etc level of technology is
low that’s why they resist any technological change. The level of technology in
culture that farmers of Haryana (former Punjab) believed that water of canal of
Bhakra Nagal Dam is useless for irrigation purpose as in dam power of water has been
extracted in producing electricity. Same way initially in many organizations resist
computers. It is the level of technology that people search answer of every happening
in nature or body in superstitions rather in science.
Aesthetics: Aesthetics that is arts, folklore, music, drama and dance have an effect on
people and are part and parcel of culture. Aesthetics are of particular interest to the
marketer because of their role in interpreting the symbolic meanings of various
methods of artistic expression, color, and standard of beauty in each culture.
Customers everywhere respond to images, myths, and metaphors that help them
define their personal and national identities and relationship within a context of
culture and product profile.
Rituals: Culture includes various ritualized experiences and behavior. A ritual is a
type of symbolic activity consisting of series of steps occurring in a fixed sequence
and repeated over time. In practice these rituals are extended overtime from birth to
death. To a extent these rituals are eternal too. As in India we are following same
ritual in many cases as in Marriage and death as we use to do so 3000 years back.
These rituals can be very public, elaborate, religious, or civil ceremonies. From the
standpoint of business with every ritual certain products are associated. As sale of
sweets and crackers is all time high in India during Deewali. In north India at many
places Butchers and barber keep their shop close as because of ritual many persons
don’t eat meat and don’t take hair cut on Tuesday.
Cultural Values 37
Individualism verses Collectivism: Individualism is a culture where member of
society put their personal advancement and welfare above all. In such societies,
people are personally focused, have loose connections with others, and place there
interest and goals above those of other individuals and the groups to which they
belong. Collectivism as its opposite, pertains to societies in which people from birth
onwards are integrated into strong, cohesive groups, which throughout people’s
lifetime continue to protect them in exchange for unquestioning loyalty. In
collectivism people put the good of others, the groups, they belong to and the society
as a whole above their own. As Japan, India has much more collectivist culture than
the Unites States.
Masculinity versus Femininity Cultures: Culture may also be judged on how the
roles of men and women are differentiates and how publicly or privately segregated
the two genders are one from another. Societies are classed as “masculine” if male
roles are considered superior to those of the female and “feminine” if the reverse is
true. Some culture are strictly masculine leading to strict gender segregation and very
restrictive behavior norms, especially for females. The value of a male child may be
greater than female.
High verses Low Power Distance: Power distance with in a culture is tied to level of
social responsibility that exist and how willing members or society are to accept
authority at all levels. This includes accepting authority at the family level in social
settings at work, from Govt. agencies and the like. Very high power distance are those
culture are those where the difference in power between the most and least powerful
individual is great. In high power distance societies there is strict social caste system.
Even at work place distance is maintained with boss, and senior and subordinate
relations are strictly maintained. In low power distance cultures, relationship are more
informal across social level, more equality is found among all people, and authority is
more shared. Countries with high power distance are like India, Japan, Malaysia etc.
and with low power distance are Germany, Sweden, USA etc.
High verses Low Uncertainty Avoidance Cultures: Uncertainty tells that to what
extent culture accepts uncertainty and ambiguity. High uncertainty avoidance is found
in cultures where people have low tolerance for new ideas or new ways to do things.
They believe in routine behavior pattern. They want to live in a very predictable and
certain environment. On the other hand low uncertainty avoidance means that culture
is ready to welcome new ideas and people are ready to face uncertainties in life. India
is to a extent have a high uncertainty avoidance. But in India itself we find that the
cast who have low uncertainty avoidance and are ready to face uncertainties are very
successful in business as Marwaris, Gujratis, Parsis, Punjabis.
Abstract versus Associative Culture: Culture where members believe in the principle
of cause and effect are classified as Abstract thinking culture. Abstract culture is more
scientific society. Here science is given more importance, technical know how is
more, and level of education is more, people are more logical and take decision on
basis of logical reasons. Associative thinking culture are more related to God,
supernatural or mystic beings, events or places to various life events. In these societies
importance of things are associated with people, celebrities and events. India is more
considered as associative culture as here more importance is given to God. But it is
not true basically India is very scientific culture. As one Adiguru Shankaracharya said
and I quote here “chahe Lakh ved kahe agg thandi hai mat mano kyonki yeh dharma
ka nahi vigyan ka vishaya hai” (even if Vedas says million time that fire is cool don’t
believe as it is not the subject of religion but of science.) In a sense he declared that if
one have to choose from religion and science he must choose science.
38 Materialism and Leisure: Societies are also classified as how much importance they
give to materialism. Societies who give more importance to materialism are likely to
have more interested in business and personal achievement. In these culture, to market
the product, product are usually associated with achievement on the other hand in
culture having less importance to materialism product are associated with family and
enjoyment. Though India is taken as having less materialism and having a philosophy
of detachment. But traditionally India has a very high materialism culture as it is only
country where Goddess of Wealth is Worshiped. War of Mahabartha was fought for
material. In fact if we go to old literature we find that wealth was given a big
importance and acquiring wealth was considered as Pursharth (Achievement).
Trust: In countries where trust is high the cost of business is low and on the other
hand where trust is low cost of business will be high. As in USA people believe less
on people and more on written documents and legal cases in business in USA is very
high. Litigation is major cost center in business. ON the other hand countries like
Japan and India cost to litigation is very less as even big organization have faith in
words and they tries their best to keep there words. In these countries business worth
million is done without having any legal formalities.
Future Orientation: Countries also differ to what extent individuals live for the
present or future. In countries where future orientation is high people live for future
and tries to secure their future. It is the reason that in India people give more
importance to Govt. Jobs as there future is secure. Same way Japan is future oriented
and organizations there provide social and future security not only to person but also
to its next generation. On the other hand in USA more importance is given to present.
P-time versus M-Time: North American are more time bound than Indian or than
Latin American. M-time or monochromic time cultures tend to concentrate on one
thing at a time. They divide time into small units and are concerned with promptness.
M-time is used in linear say and it is experienced as being almost tangible in that one
saves time, wastes time, bides time, spend times and losses time. Most low context
culture operate on M-time. P-time or polychronic time is more dominant in high
context cultures, where the completion of a human transaction is emphasized more
than holding to schedules. P-time is characterized by the simultaneously occurances of
many things and by “great involvement with people” p-time allows for relationships
to build and context to be absorbed as parts of high context cultures.
High Context and Low Context: High context culture is one which gives importance
to intangible aspects also and Low context culture are cultures which are very specific
about things low context culture concentrate on logical and aspect of things. As
America, Germany, France etc are Low context culture there marketer have to
concentrate more on cognitive aspect of product and in negotiations in low context
culture talk about only figures and facts and reaches on decisions on the other hand
high context culture like Japanese prefer to establish relations before taking about
business and in these type of culture marketer have to concentrate on aesthetic and
emotions associations with product.
Ambitious or complacent: An ambitious individual is highly motivated, is wealth
acquisitive has a strong urge to excel is prepared to change organization and even take
risks. Economy becomes vibrant if a large production of the population comprises
ambitious people. As people in Japan and Britain are more ambitious and achievement
oriented so does there economy is flourishing. On the other hand in economies like
India much importance is given to ascetic life and renunciation. We give importance
to contentment which results in complacent behavior.
But that is not true in fact India is the country where utter most importance has been
given to achievement. Our whole ancient literature is filled with war between Aryas
and Anaryas. They explored wealth in sea. Our Vedas contains many verses for
wealth and riches. In almost all the prayers we ask for wealth, and prosperity. So there 39
is no reason to say that we don’t believe in ambitious. It is only in medieval age that
complacency become part of our culture.
Marriage: Marriage is the smallest unit of culture. Attitude towards marriage
influences a culture a lot. There are cultures where marriage is a personal matter and it
remained confined to two persons, on the other hand there are cultures where marriage
is social event with which whole society is concern and it became a family affaire. In
India where marriage is family affaire, there marriage season is big opportunity for
business. In India most of the Jewelry, white goods and kitchen ware is purchased in
marriage season on the other hand in western culture the most associated product with
marriage is honey package.
Fill in the blanks:
1. __________ is the smallest unit of society.
2. __________ restrict flow of information.
3. __________ is a family member(s) who initiate or carry out the disposal or
4. _________ is a stage first child arrives and role of family member changes.
5. Social class determines where people ______________.
6. ___________ came into existence as a social law.
7. KFC doesn’t include ___________and __________ in its portfolio in India
only because of religion.
8. In _____________ societies there is strict social caste system.
9. M-time or monochromic time cultures tend to concentrate on _________
thing at a time.
10. High context culture is one which gives importance to _________ aspects
also.
3.3 LET US SUM UP

Individual’s eating habits, buying behavior, dressing priorities, physical possessions
etc all are influenced by the society. We can divide the socio-culture environment in
following way:
1. Family
2. Social Class
3. Culture
A family plays a key role in the development of attitude regarding the objects in
environment, regarding beliefs, and preferences of a child. Socialization is a central
function of family as here family imparts basic value and modes of behavior
consistent with the culture to child. Family plays a critical role in the decision making
of individual it plays the role of Influencer, Gatekeeper, Decider Buyer, User,
Disposer etc. In its whole span Family goes through various stages from bachelorhood
to the empty nest.
In the present scenario the role of woman in family decision-making is changing
drastically. Which have to considered seriously by the organizations.
40 The consideration of social class is also very important from the organization point of
view. The term social describes the overall rank of people in as society. People who
are grouped within same social class are approximately equal in terms of their social
standing in the community. Social class can be classified on the basis of Occupation,
Income, Possessions, etc. Social class in a big sense determines the values, attitude,
lifestyle, and buying habits of a particular person. As a person moves from one social
level to other his values also changes.
Culture is something which a person inherits from his/her parents and family.
Throughout the life a person may move upward or downward in social strata but his
culture remain usually same. The four institution i.e. School, religion, family and
media influence most the culture. The cultural values are divided in many ways. These
cultural values change with the place and people. The cultural values can be : -
Individualism verses Collectivism, Masculinity versus Femininity Cultures, High
verses Low Power Distance, High verses Low Uncertainty Avoidance Cultures,
Abstract versus Associative Culture, Materialism and Leisure, Future Orientation,
Ambitious or complacent, Sex etc. As the cultural values changes the buying and
consumption behavior changes.
3.4 LESSON END ACTIVITIES

1. Prepare report on the changing cultural values in last fifteen years.
2. Prepare an assignment on organizations who have faced set back because of not
understanding the culture.
3. Find out the organization/marketing campaign who have tried to change the
culture/habits of consumer. (As Cadbury’s campaign to position Chocolate as a
substitute for sweets in India.)
3.5 KEYWORDS
Family Life Cycle: Family goes through various stages in its whole life. These stages
are called as Family Life Cycle.
Social stratification: It can be described describe as perceived hierarchies in which
consumers rate others as higher or lower in social status.
Disposer: A family member(s) who initiate or carry out the disposal or

1. What is the difference between the society and culture? Discuss the role of family
in the decision-making.
2. Discuss the Family Life Cycle and its role in decision making of an individual.
3. Discuss the changing role of woman in the present society.
4. Describe the social class and discuss how it influences the buying behavior.
5. Describe the elements which influence the culture.
6. Describe the various cultural values and how they influence the individual as a
customer and consumer.
41
Check Your Progress: Model Answers Socio-culture Environment
CYP 1
1. Family goes through various stages in its whole life. These stages are called
as Family Life Cycle.
2. Social stratification can be described as the processes in social system by
which scarce and valuable resources are distributed unequally to status
positions that become more less permanently ranked in terms of the share
of valuable resources each receives.
CYP 2
1. Family, 2. Gatekeeper 3. Disposer
4. Full Nest I 5. Shop 6. Religion
7. Beef, Pork 8. High Power Distance 9. One
10. Intangible

House.
Prentice Hall.
42
LESSON
4
POLITICAL AND GOVERNMENT ENVIRONMENT
CONTENTS
4.1 Introduction
4.2 Role of Government in Business
4.2.1 Regulatory Role
4.2.2 Legal Role
4.2.3 Infrastructure Development
4.2.4 Human Resource Development
4.2.5 Entrepreneurial Role
4.2.6 Planning Role
4.3 Let us Sum up
4.4 Lesson End Activity
4.5 Keywords

z Understand how Government influences the economic environment of the nation
z Know the various role of Government
4.1 INTRODUCTION
Does politics influences the economics or economics influences the politics. It is a
critical question. But if we see the world history we will find that it is both way traffic,
which is both influences each other. In medieval history we find that foreigners
invaded India for the sake of wealth but it changed the whole political system of India,
The whole World War II was fought for the sake of colonies (money which colonies
used to give). Because of prevailing economic condition famous revolt of France,
Russia, USA and of China took place and all these revolt not only changed the
political system of respective country but also their economic system.
Economics
Politics
In India British came for business and what ever they did they did for money, and all 43
Political and
this changed the whole political system of India. Not only this Indian freedom Government Environment
movement got the strength when common man that is farmers, and artisans joined the
movement and they joined the movement only when there condition became
miserable because of British Policies. Gandhiji’s first organized campaign in India
was in Champaran for the economic rights of the peasant of Champaran, similarly
second big campaign which earn the title ‘Sardar’ for Sardar Vallabh Bhai Patel was
‘Bardoli Satyagraha’ ‘Dandi March’ ‘Swadeshi’ seeds of all these were somewhere in
economics.
So it is very clear that economics and politics are closely related. It is because it is the
believes of political leaders which decide the fate of economic policies and it is the
economic condition of country and masses which decides the political fate of the
country.
The present lesson throws light that how Government can influence the business.
It is the Govt. influences and in some states it even decides the following things:
1. What to Produce?
2. Where to Produce?
3. When to Produce?
4. How much to Produce?
5. How to Produce? (Manufacturing Process)
6. To whom to sell?
7. How to distribute?
8. What should be the price?
Answer to these entire question to a great extent lies with Government. It is very
much true in India as before liberalisation license and permit raj in India was so deep
that before starting any venture entrepreneur or industrial house have to obtain had not
only to get registered with the Govt. authority but also have to obtain various licenses
from the Govt. Not only this in India prior to 1991 it is the Govt. who used to decide
that private sector will produce what, where it will produce , how much it will
produce, not the market forces but the Govt used to decide the interest rate and forex
rate. So in totality prior to liberalization in India business was at the mercy of Govt.
And to do business one don’t have to be expert in business strategy but one have to be
good at liasoning with Govt. Soon after freedom Liberalization policy of Congress
Govt. (1991) gave numerous opportunities to business organization and also prove to
be an threat for many as after liberalization many companies expanded manifold and
many have to close their operation or have to sell their operations. Mergers and
Acquisition has taken place in last 15 years. Soon after liberalization HLL acquired
Lakme, TOMCO, Kissan, Modern foods, etc. UB group acquired Herbenston and
Shaw Wallace and become second largest liquor player of the world. TATA launched
its small car, which they couldn’t launch in 1980s because of Govt. policy, India
became the battleground for Multinational Automobile companies, Coca Cola
purchased Parle, Pepsi purchased Uncle Chipps. Soon India may see the advent of
Multinational Retail giant Wal-Mart.
44
Business Environment and Ethics 4.2 ROLE OF GOVERNMENT IN BUSINESS
We have seen that how slight change in Government policy can change the whole
scenario of Business. Government can influence the business in the following manner:
Regulatory Role
Legal Role Entrepreneurial
STATE
HRD Planning Role
Infrastructure
Figure 4.1: Role of Government in Business
4.2.1 Regulatory Role

Government regulates the business. It not only decides the rule of the game it also
looks after the implementation of the rules.
1. Reservation: It limits the spheres of investment by reserving the industry for
small scale, public and co-operative sector. As prior to liberalization Petroleum,
Telecommunication, Coal, Power, et c were the monopoly of Public Sector, but
liberalization bring new investment opportunities of investment for private sector
as now only two sector railways and atomic energy are reserved for public sector.
Many sectors are still reserved for small scale sector. Because of this policy we
see boom in many industry in last fifteen years. As now India has mobile user
than that of Land line users, Reliance established one of the largest grass root
refinery of the world, and besides other big players as Bharti Telecom , Reliance
and TATA have invested heavily in Telecommunication new power projects were
established by private sector, Aviation is no more an Govt. monopoly dozen of
private players are there as Sahara Airlines, Kingfisher Airlines, Spice jet, Air
Deccan etc., host of new player enters in finance sector specially in Insurance
Sector as now to tap new opportunity many business houses like TATA, AV
Birla, Bajaj, ICICI etc have forayed in insurance sector.
2. Licensing: License is a very effective tool in the hands of Govt. to regulate the
business. Earlier for almost every new venture license is required through it Govt.
used to keep tight control on the production in private sector, but now only
investment in few industries requires license. Though in few cases Industry may
have to acquire license from different other authorities as Pollution control, ISI,
Ministry of Environment and Forest, Food and Drug Administration etc.
3. Expansion: Government can give the opportunity to the business house to expand
to its height and can even limits its expansion programmes. As earlier through
MRTP Act Govt. have restricted the expansion of big houses, not only this
various restriction were imposed on increasing production capacity or launching
new variants, even restriction were their on advertisement budget of big houses.
Restriction were their on investment in abroad. It is the reason that we were
driving the same car in 1980 which we were driving in 1950, by 1990 also we got 45
Political and
only one new option that is Maruti. But when this restriction was repealed the Government Environment
whole equation of business have changed. Ranbaxy, AV Birla, Dr. Reddy’s Lab,
ONGC, L&T are now Multinational Companies, Asian Paints has operation in 28
nations of the world. Indians companies are producing at economies of scale,
consumer have a wide choice from big product portfolio of companies. Even the
expansion of the programme is on the mercy of Govt.
4. Foreign Direct Investment: It is the Govt. who decides, whether MNC can invest
in a country or not. Because of Govt. policy there are very few MNCs in India.
Even companies like IBM and Coca Cola had to leave India because of Govt.
policy. Today MNC are in the field of even sectors like insurance ,petroleum,
banks and publication but are they are not in Retail sector as Govt. don’t allowed
foreign participation in retail sector.
5. Import and Export Policy: With a small declaration Govt. can open and close
various avenues for export and import. As a policy matter Govt. can use various
tool to impose restriction on import as Quota, Tariffs, cumbersome import
process, import licenses etc. Till 1991 India followed a protectionist policy and
protected the industry from import through various tools. But now policy has been
changed and import is easy. It begets new opportunities and treat for the business.
As because of this Indian Toy industry very badly affected and many have to shut
down their operation. So it is the Govt., which decides that what can be imported
or exported, and what can not be.
6. Taxes: Through taxes also Government regulates the industry. Govt. usually
impose high rate of tax on the industry which it don’t want to encourage as after
independence very high excise was imposed on product like ACs, Automobile etc
and there was virtually no tax on production of product reserved for small scale
industry and to increase the use of particular product Govt. even provide subsidy
as on Fertilizer and Tractor and other farm equipment. Govt. also influences the
location of industry by giving tax breaks in establishing industry in a particular
region.
7. Supply of Money: Demand depends upon the purchasing power of the consumer
and the purchasing power depends upon supply of money and supply of money is
decided by the Govt. (RBI). There are many ways through which Govt. regulate
the supply of money. RBI can increase the supply of money in the market by
decreasing the CRR , SLR etc. which decreases the interest rate in the market. In
last 15 years interest rate have been decreased drastically, which have given more
purchasing power to consumer. It boosted the consumer goods industry and
Housing industry. Govt. can also increase or decrease the supply of money by
increasing or decreasing income tax rate and interest rate on savings. So industry
is to an extent dependent on Govt. to increase the demand.
8. Supply of FOREX: Government not only regulate import and export through
policy decision it also control it through control of supply of foreign exchange.
Prior to liberalization it is the Govt. which used to decide the exchange rate, to
restrict the import it usually restrict the supply of Forex, to boost export and
discourage import Govt. also devaluate the currency. After liberalization when
Rupee is convertible then also RBI control the supply and exchange rate through
open market operation.
Besides all these Government regulates the business through administrative and
physical controls. So we see that Govt. regulates almost every aspect of business
and not only this it gives opportunity to invest and simultaneously it restrict
investment in particular area.
46 9. Incentives: Govt. also regulate the industry by giving incentive in key thrust area.
As Govt. gives tax beaks if industrial unit is established in backward area. It also
gives subsidy under various schemes to small scale sector. To support export it
establishes special Zones like SEZs, it gives subsidy on export, tax relaxation on
export, import licenses and less import duty for exporters, and easy financing
through banks. To support a particular industry in national interest it also direct
the financial institution to give liberal loans to that sector that too at easy terms.
To give boost to housing industry Govt. has given exemption to housing loan
from Income Tax.
Mention some of the instruments through which the Government regulate the
business.
……………………………………………………………………………………
……………………………………………………………………………………
4.2.2 Legal Role

Parliament is the law making authority and it is the council of ministers who present
the proposed law on the table of parliament. It is Govt. which decides and implement
the legal environment of the country. When in 1980s NRI Swaraj Paul tried to took
over Escorts then it is the legal environment which saved the Escort as new law was
enacted which said that an NRI could not take the stake in an Indian company above a
certain limit. Govt. has enacted many laws to regulate the industry. As IDRA, to
control their expansion MRTP Act, which was repealed to Competition Act to ensure
fair competition among organization, Essential Commodities Act, to protect the
environment, Environment Act, Companies Act, SEBI Act, to protect the consumes
the Consumer Protection Act, to protect the human resource from exploitation Labor
laws are their. So while doing business the enterprises have to abide by the law, it not
only ensures healthy competition but it also gives companies a level playing field. It
is the law only which protects the intellectual capital of organization. Business
flourishes only in states where there is a healthy legal system.
4.2.3 Infrastructure Development

In developing nations development of infrastructure is the essential and Govt. plays a
critical role in it. It is said that take care of Roads and Electricity and development
and employment generation will take care of itself. Well-established infrastructure is
the basic requirement for the establishment and growth of industry. In a developing
nation where infrastructure is in poor state, their state has to take steps to develop the
infrastructure, that is construction of roads, development of railways, supply of power,
transport , finance sector, training and guidance, research and development etc. Since
independence state has invested heavily on infrastructure. Now under new regime
even private sector is playing a critical role in developing infrastructure. In the budget
of 2005-06 provision of SPV (special purpose vehicle) has been made for the
development of infrastructure.
4.2.4 Human Resource Development

The whole stage of industry is reallocating its location around availability of human
resource. Today it is not raw material or nearness to market which decides the
location of unit, but it is availability of human resource which is playing decisive role
in deciding the location of establishment. Today when research, new product
development, economies of scale, low production cost are the mantra to success
trained and skilled human resource has become the critical success factor for every
industry. But in developing nation like in India state plays critical role in developing a 47
Political and
human resource as at time of independence private sector was not in a position to Government Environment
invest in higher and technical education, and unlike developed nation masses of India
was and is not in a position to afford higher technical education. It is the reason that
state invested heavily higher technical education established premier education like
IITs, IIIT, IIMs, IVRIs, AIMS, BHU, and other Universities, recently Dr. Manmohan
Singh the Prime Minister of India declared to invest Rs 100 crore in a university in
Bangalore to develop it as research house in science, not only this thanks to J.L.
Nehru that India kept English as a medium of instruction in education. Because of
these effort of state India feel proud of its human resource and it help a lot to business.
Today many business are flourishing in India because of these human resource as
BPO, Software, Electronics, India is becoming a manufacturing hub for Mobile
Phones, Pharmaceuticals, Fundamental Research etc.. Technical and Knowledge
Level of HR is also a critical thing for industry and state plays a vital role in
influencing and deciding that.
4.2.5 Entrepreneurial Role

State also plays the role of entrepreneur. It invest in the business. Indian Govt. has
done it significantly since Independence. Through its investment Govt. significantly
influences the business environment. In India after independence Govt. has reserved
some industry for only Public Sector, where private sector cant invest. Though Govt.
has invested even other areas, which were not reserved for private sector. In a
developing nation in some way investment by Govt. helps a lot to private sector. After
independence Indian Govt. heavily invested in capital intensive industry where
gestation period is also very high and private entrepreneurs are not interested in
investing there, as Steel (SAIL), Aluminum (Indal), Railways, Power (NTPC), Heavy
Machines, Earth Moving Machines, Heavy Electrical Machinery (BHEL), Petroleum,
Telecommunication etc. all these investment promoted the private industry by making
available the raw material and machines. Investment by Govt. also changed the
competitive environment. It itself become a competitor to private sector in alluring
consumer. As its investment in Automobile (MUL) changed the whole competitive
environment of automobile industry of India , same way it invested in soft drink and
launched brand ‘Double Seven’ it also invested in Consumer Electronics (Jolly,
Uptron), Two Wheeler (Scooter India), Cosmetic Soaps, Bakery Products, Milk
Products, Distribution network, etc. Though new industry policy is not in favor of any
further investment but rather following a policy of disinvestment and privatization.
But in altogether in last fifty years it has played critical role in deciding the business
environment of the country.
4.2.6 Planning Role

State is an architect of industrial scenario in a country. It is more true for the country
like India where state also perform the task of planner. India have followed a policy of
five year planning system. Where planning commission plans the direction of
investment for the following five years. This significantly influences the business
environment. As planning commission declares the key areas where state is going to
invest and support in coming five years. And all this influences the investment
decision of the even private sector, as they get support from Govt. when they invest in
priority sector.
So we see that state /govt. plays a vital role in deciding and influencing business
environment. It not only influences in fact it make the rule of the game and also act as
umpire and referee.
Besides all this political stability also plays a critical role in generating conducive
environment for business. Today India is attracting foreign investment only because
almost all political parties have consensus on foreign investment except some issues
48 like foreign investment in retail or more than 50% investment in print media. Even the
political parties like CPI is trying hard to attract foreign investment in their ruled
states. How much political differences may be their but almost chief ministers of all
the states are promoting foreign investment. Resent visits of foreign diplomats of
Indian IT hub shows increasing confidence of foreigners in Indian Political system. So
political stability itself is a positive statement for industry.

Fill in the blanks:
1. Gandhiji’s first organized campaign in India was in ______________for
the economic rights of the peasant.
2. Soon after liberalization – acquired Lakme.
3. __________ established one of the largest grass root refinery of the world.
4. As earlier through ___________ have restricted the expansion of big
houses.
5. ________ can increase the supply of money in the market by decreasing
the CRR.
6. Govt. invested in soft drink and launched brand ‘_____________’.
4.3 LET US SUM UP

There is a close relationship between political environment and economic
environment of country. The Governing body of the State regulates and influences the
every aspect of the business. It is true not only with socialist economies but it is also
true with capitalist economies. Govt. performs various functions, which directly
influences the business as it is the Govt. who is a regulatory authority in state. As a
regulator of the economy it decides the reservation policy by which it limits the
spheres of investment by the industry for small scale, public and co-operative sector.
It decides the Licensing and Expansion policy through it restrict the entry and exit in
business. Through its Foreign Direct Investment policy it decides that how much and
where the FDI can be invested. Through its Import and Export Policy it can increase
or decrease the trade barrier.
Through the taxes and monetary policy Govt. can influence the disposable income of
people, interest rate , availability of fund for the industry thus it can influence both the
supply and demand.
Not only this it is the Govt. influences the business by investing in infrastructure
projects thus creating a conducive environment for business. It also invest in the
development of HRD thus it provides trained and skilled HR to industry. It is the
Govt. who make the law for the smooth functioning of Business. So we see that Govt.
influences every aspect of business.
4.4 LESSON END ACTIVITY

Prepare an assignment on the changed role (Pre and after 1991) of the Govt. in
regulating the business.
49
4.5 KEYWORDS Political and
Government Environment
RBI: Reserve Bank of India.
CRR: Cash Reserve Ratio.
Forex: Foreign Exchange.
SEZ: Special Economic Zones.
MRTP: Monopolies and Restrictive Trade Practices.
SEBI: Securities and Exchange Board of India.
SPV: Special Purpose Vehicle.

1. Discuss how Govt. regulates the business.
2. Tell in brief that how Govt. can influence the business by investing in
infrastructure.
3. “Industry gets the Human Resource because the blessing of Govt.” Discuss the
statement.

CYP 1
Government’s Regulatory Tools:
(a) Reservation
(b) Licensing Policy
(c) Policy towards FDI
(d) Exim Policy
(e) Taxation
(f) Monetary Policy, etc.
CYP 2
1. Champaran 2. HLL 3. Reliance
4. MRTP Act Govt. 5. RBI 6. Double Seven

House.
Prentice Hall.
50
LESSON
5
CONSTITUTION AND ITS ROLE IN BUSINESS
CONTENTS
5.1 Introduction
5.2 Preamble
5.3 Fundamental Rights
5.4 Directive Principles of State Policy – Positive Directions for State
5.4.1 Classification of Directive Principles and their Influence on Economy and
Business
5.5 Distinction between Directive Principles and Fundamental Rights
5.6 Political Institutions
5.6.1 Legislative Organ
5.6.2 Executive (Administrative) Organ
5.6.3 Judicial Organ
5.7 Let us Sum up
5.9 Keywords

z Understand fundamental rights and their role in business decisions
z Know directive principles and how they influences policy decisions
z Know the Lok Sabha, Rajya Sabha and Judiciary of India
5.1 INTRODUCTION
The main objective of economic legislation is (a) to support economic policies of
Government (b) to control and regulate economic activities (c) to protect consumer
interest and rights (d) to restrict negative aspect of development i.e. to protect
environment.
Indian freedom fighters were quite influenced by the Russian economic system. They
used to believe in socialism or in communism. While struggling for freedom
everybody dreamt of a country as a land of ‘Opportunity’, a Nation where every
citizen has equal opportunity, every citizen is treated equally, a Nation where there is
no economic disparity a nation where economics and wealth is not concentrated in 51
Constitution and its Role
few hands, in nutshell they have dreamt of utopia. in Business
All this is reflected in our constitution. Our Constitution does not includes only
fundamental rights but also Directive Principles which tells the state that what they
should do for the welfare of common man. Not only this constitution also includes the
Duties of Citizen. Government decides the legal framework of business, and legal
framework is designed on the guidelines given by the constitution. To understand the
role of constitution in business first of all we have to understand The Preamble of the
Constitution.
5.2 PREAMBLE
Our constitution states that “We the people of India having solemnly resolved to
constitute India into a SOVEREIGN SOCIALIST DEMOCRATIC SECULAR
REPUBLIC and to secure all its citizens:
JUSTICE, social, economic and political;
LIBERTY of thought, expression, belief, faith and worship
EQUALITY of status and opportunity; and promote among them
FRATERNITY assuring the dignity of the individual and the unity of the Nations
IN OUR CONSTITUENT ASSEMBLY this twenty-sixth day of November, 1949, do
HEREBY ADOPT, ENACT AND GIVE OURSELVES THIS CONSTITUION. ”
[The word SOCIALIST SECULAR were inserted in The Preamble through the
42 Amendment which came into force on 18th December, 1976]
The Preamble of the Constitution began with the word We the people of India having
solemnly resolved to ……….and ends with the word ……..do hereby adopt, enact and
give ourselves this constitution, it clearly depicts that people are ultimate authority
and source of Constitution. Indian Constitution derives its strength from the
sovereignty of the people. As all governmental organs and institutions owe their origin
to the sovereignty of the people, they cannot enjoy unlimited powers. They can enjoy
only such powers which are conferred by the Constitution. Though Parliament
possesses the power to amend the Constitution but the power should be exercised in
such a manner that the framework of the basic structure of the Constitution may not be
abridged or destroyed.
From the economic point of view the word SOCIALIST that was inserted through 42
Amendment is of critical importance. It mentions the economic objectives and policy
of the state and guides the state in making law which should attain Socialist Pattern of
society. It also paves the way for the nationalization of many industries in 1970s.
Though Indian socialism is quite different from the western type of socialism, which
involves nationalization of all means of production. As Indira Gandhi explained:
“We have always said that we have our own brand of socialism. We will nationalize
the sectors where we feel necessity. Just nationalization is not our type of socialism”.
Therefore though Indian Constitution doesn’t abolish private property altogether but
seeks to put it under restraints so that it may be used for public benefit.
Shri J. L. Nehru had declared the ‘Socialistic pattern of society and not socialism’ as
the objective of planning. He observed “Socialism to some people means: Distribution
which means cutting off the pockets of the people who have too much money and
rationalization. Both these are desirable objectives, but neither is by itself socialism.
Any attempt to distribute by affecting the productive machinery is utterly wrong; to do
so would be weaken us.
52 Secondly there is a question of nationalization. I think it is dangerous merely without
being prepared to work it properly. To nationalize we have to select things. My idea of
socialism is that every individual in the State should have equal opportunity for
progress.”
So we see that term ‘Socialist’ has been accepted in India in a different manner than
that of in Communism. Though this term is the guiding principle for the economic
policy of India. Behind all the major economic policy decisions as active participation
of Govt. in Business, heavy investment in Public Sector, reservation of industry for
PSUs and small scale, highly progressive tax rate, heavy excise on luxury items as
automobiles, curb on expansion on private sector etc. the guiding force was the
philosophy of SOCIALISM.
Socialism is also reflected in the Fundament Rights and Directive Principles of State
Policy mentioned in Constitution. These Directive Principle have the everlasting and
maximum impact on the economic policy of State, thus have the direct impact on the
every aspect of business whether it is scope of business (where to invest), supply of
raw material, level of competition, purchasing power of consumer, R&D, entry
barrier, level of technology, pricing, HRM etc.
5.3 FUNDAMENTAL RIGHTS

“The object of Fundamental Right as far as I can gather from a reading of the
Constitution was….to provide certain standard of conduct, citizenship and fair play.”
(Justice Sapru)
The Constitution of India contains an exhaustive list of Fundamental Rights. They are
above all other law of land. The Courts ensures their observance by the State. The
Constitution has granted fundamental rights to the citizen they are as follows:
1. Right to Equality (Article 14): Article 14 of the Constitution guarantees equality
of all persons before law. Article 15 prohibits any discrimination on the basis of
religion, race, cast, sex or place of birth as between citizens. It abolishes
untouchability and ensures equality of opportunity in the matter of public
employment.
Article 14 prohibits hostile discrimination and not reasonable classification for the
purpose of legislation.
2. Right to Freedom (Article 19): Article 19(1) of the Constitution gives right to
following six freedoms:
(a) Freedom of speech and expression
(b) Freedom to assemble peacefully and without arms.
(c) Freedom to form associations or unions;
(d) Freedom to move freely throughout the territory of India;
(e) Freedom to reside and settle in any part of the territory of India; and
(f) Freedom to practice any profession or to carry on any occupation, trade or
business.
These freedoms are not absolute; there are limitations on these freedoms. The first
Amendment Bill to the Constitution was passed by the parliament on June 2,
1951. It allowed the State to impose reasonable restrictions on the freedom of the
individual in the interest of the security of the State, friendly relations with foreign
states, public order, decency or morality or in relation to contempt of court,
defamation or incitement to an offence.
3. Right to Life and Personal Property: Article 31, 31A and 31B guaranteed the 53
right of the individuals sand trusts to own and trusts to own, and administer their in Business
property. The Constitution says that no person shall be deprived of his property
except by lawful authority. Right to property has been deleted by 44th amendment
and now it has been made only a legal right.
4. Right to Freedom of Religion: Article 25 says that all the persons shall be entitled
to freedom of conscience and the right to practice and propagate the religion
freely.
5. Right to Cultural and Educational Freedom: Constitution allows all the
minorities in India to preserve and promote their languages, script and culture.
The Constitutions permits all the minorities, whether based on religion, to start
and run their educational institutes and get financial aid without any
discrimination from the State.
6. Right against Exploitation: Our Constitution recognizes the dignity of the
individual and protects him against him any form of exploitation either by the
State or by the privileged classes in the society.
7. Right to Constitutional Remedy: Article 32 confers on the people the right to
move the Supreme Court in case of encroachment of the Fundamental Rights by
the State.
Can Parliament Amend Fundamental Right

On April 24, 1973 the Supreme Court gave ruling that Parliament has the Right to
amend the Constitution including Fundamental Right but not the basic structure of
framework of the constitution.
Some of the Fundamental Rights have economic importance. The Right to equality for
example, prohibits discrimination against any citizen on grounds of religion, race,
caste, sex or place of birth. But it support protective discrimination. To support
development of the socially and economically backward section of the society
Legislature is given sufficient latitude for making selection or differentiation and so
long as such a selection is not arbitrary and has rational basis having regard to the
object of the Act.
Right to freedom allows the citizen to choose the profession of their choice and gives
freedom to practice the profession or to do the business in any part of the country.
Fundamental right against exploitation prohibits the exploitation of weaker section
and of human resource. Article 23 prohibits traffic in human beings and forced labor.
Indirectly it ensures a conductive environment for working. Article 24 prohibits to
child labor.
So we see that Fundamental Rights guarantee several economic rights to the citizen.

Describe, in brief, the current status of right to property in Indian Constitution.
…………………………………………………………………………………….
…………………………………………………………………………………….
5.4 DIRECTIVE PRINCIPLES OF STATE POLICY –

POSITIVE DIRECTIONS FOR STATE
“Although the Directive Principles of State Policy confer no legal rights and create no
legal remedies, they appear to be like an Instrument of Instructions, or general
54 recommendations addressed to all authorities in the Union reminding them of the
basic principles of the new social and economic order which the Constitutions aims at
building. These fundamental axioms of State Policy, though of no legal effect, have
served as useful beacon-lights to courts”. (M.C. Setalvad)
Directive principles of State Policy are contained in Part IV of the Constitution.
Article 37 says that the Directive Principles, although not enforceable by the court, are
nevertheless fundamental in the governance of the country and it shall be the duty of
the state to apply these principles in making law.
5.4.1 Classification of Directive Principles and their Influence on

Economy and Business
Principles which help in the establishment of a Welfare State or
Socialistic Principles
Article 38 of constitution declares that the primary concern of the state shall be to
promote the welfare of the people and create a social order in which justice- social,
economic and political- shall be practiced by all the national institutions. The ideal of
the welfare state is to be achieved by the state by:
1. Providing adequate means of livelihood
2. Distributing the ownership of material resources in a way that it does not lead to
monopolistion.
3. Reorganizing the economic system in a way that it does not lead to concentration
of wealth in a few hands.
4. Securing equal pay for work for both men and women.
5. Securing suitable employment for men, women and children so that their health is
not undermined.
6. Guarding the children and young men against exploitation an moral degradation,
7. Taking effective steps to provide for work, education and public assistance in case
of unemployment, old age, sickness and disablement.
8. Improving the conditions of work and providing material relief.
9. Securing for all the workers reasonable wages and a decent standard of life,
reasonable leisure and culture opportunities.
10. Making arrangement within the 10 years from the commencement of the
constitution for free an compulsory education for all children up to the age of 14;
11. Doing its best to raise the standard of living and to improve public health.
Those Principles which Conform to the Gandhian Thought or Gandhian Principles

The Directive Principle which intends to give a shape to Gandhian ideals are:
1. The State shall take steps to organize village Panchayats and make them powerful
enough to work as units of self –governemnt.
2. It shall be the effort of the states to start and encourage cottage industries on an
individual or co-operative basis in the villages
3. The State shall work for the uplift of the Scheduled Castes and Scheduled Tribes
by educating them and protecting their economic interest
4. The State shall consider it their primary duty to stop the use of intoxicating drinks
and drugs except for medical purpose.
5. It will be part of duty of the state to improve the breeds of cattle and stop the 55
slaughter of cows and calves. in Business
6. The State shall also try to protect every monument and place of artistic and
historic interest from destruction or disfigurement.
7. The State shall take steps to separate the Judiciary from the Executive.
8. Article 39(b) says that ownership and control of the material resources of the
community are so distributed as best to subserve the common good.
9. Article 39(c) says that operation of economic system should not result in
concentration of wealth and means of production to the common detriment. Small
scale industry also helps increasing employment and promote industrial economy
in harmonious manner. That’s why IDRA makes provision for support,
encouragement and protection to small scale industries.
Directive Principle Added by 42nd Amendment

In 1976 Mrs. Indira Gandhi during the Internal Emergency brought about 42nd
Amendment of the Constitution. 42nd Amendment added 39A to enjoin the State shall
secure that the operation of the legal system promotes justice, on a basis of equal
opportunity, and shall, in particular, provide free legal aid, by suitable legislation or
schemes or in any other way, to ensure that opportunities for securing justice are not
denied to any citizen by reason of economic or other disabilities.
Article 43A had been inserted which state that the State shall take steps, by suitable
legislation or in other way, to secure the participation of worker in management of
undertaking, establishment or other organizations engaged in any industry.
Article 48A stated that the State shall endeavor to protect and improve the
environment and to safeguard the forests and wild life of the country.
The 42nd Amendment Act, 1976 enacted during Emergency had accorded primacy to
the Directive Principles of State Policy in comparison with the Fundamental Rights.
The importance and utility of the Directive Principle in the economic policy of state
can be seen in the steps taken by the then Congress Govt. which was followed by later
governments as follows:
To establish welfare state and to check concentration of economic power following
steps were taken:
1. Zamindari pratha was abolished.
2. Highly Progressive tax rate were introduced.(which were at its peak during Indira
Govt.)
3. Few industry were nationalized as Aviation, HAL, Banking, Insurance etc.
4. Higher excise were introduced on the luxury items as AC, Automobile etc.
5. License and Permit were imposed on the industry.
6. Expansion of established big houses was controlled trough MRTP.
7. Prices and distribution for essential commodities were controlled by Govt.
8. Various industries were declared reserved for public sector and small-scale sector.
9. To use the resource in the interest of nation and to check concentration of
economic power in few hands and to make thing available to common man at
reasonable prices and to reduce dependency on import heavy investment was done
in Public Sector in every field as Aviation, Railways, Defence, Power, Heavy
Machines, Infrastructure and even in consumer goods as Bread (Modern), Soft
drink (Double Seven).
56 10. By 44th amendment Right to Property was abolished as a fundamental right, and
it has been made only a legal right.
11. To use the scarce national resources in national interest, investment and research
in non key thrust areas were checked through license system.
12. To check the concentration of economy small scale and cottage industry were
promoted. Even commodity products like steel and cement were promoted to
produce in small plants called mini steel plants or mini cement plants.
13. To have a balanced regional growth, to generate employment, to reduce economic
disparity Small Scale, Tiny and Cottage industry were promoted. They were given
subsidy and loan at low interest rate compare to big firms as Banks were in the
hand of Govt.
14. Excise and other taxes were also low or nill on small scale sector. It is the key
reason that NIRMA gave a tough fight to HLL as NIRMA used to come in small
scale and have to pay no excise on the other hand HLL have to pay this results in
higher production cost for HLL. Similarly small scale factories of Match Box
have to pay less excise then that of organized sector company as WIMCO. Many
industries like Bread, Candle etc were reserved for small scale. Govt. establishes
various institutions and corporation to help small scale industry.
15. Various laws were enacted to give conducive environment to work force to
protect the consumer from unfair practices, to protect environment to protect
small scale from the jaws of big houses as Minimum Wage Act, IDRA, MRTP,
Consumer Protection Act, Essential Commodities Act, Standard and Weights and
Measures Act etc, Environment Protection Act etc.
16. The biggest private sector in the country was the private sector of the peasants
with his small holding. As per the instruction of Directive Principles Govt took
several measures for the welfare of farmers as there is no tax on earnings by
agriculture, subsidy on fertilizers is provided, Govt. announces minimum support
prices for selected crops, it has also establishes the proper purchase and
distribution system of agri-Products. An exclusive bank NABARD was
established for the development of Agriculture.
So we see that whole regulatory environment of the country is guided by one force
and that is Directive Principle.

What do you understand by ‘Directive Principles of State Policy?
…………………………………………………………………………………….
…………………………………………………………………………………….
5.5 DISTINCTION BETWEEN DIRECTIVE PRINCIPLES

AND FUNDAMENTAL RIGHTS
There is great difference between the Directive Principles and Fundamental Rights.
According to Glehill “Fundamental Rights are injunctions to prohibit the Govt. from
doing certain things, the Directive Principles are affirmative instructions to the Govt.
to do certain things.” Another point of difference between two is that where as
Fundamental Rights have a legal sanctions behind the Directive Principles have moral
sanction only. The Former are Justiciable and enforceable, the later are not so.
When the Govt and executive imposes certain restrictions upon the Fundamental
Rights, the Courts have to decide in the light of Directive Principle of State Policy
whether the restrictions imposed upon the Fundamental Rights are reasonable or not, 57
whether they are in he public interest or not. in Business
As acquisition of property sought to be effected by the U.P. Zamindari Abolition and
Land Reform Act of 1961, is for the purpose of implementing one or more of the
Directive Principles of State Policy.
5.6 POLITICAL INSTITUTIONS

India is a Union of States. The Structure of Govt. is federal in nature. The three wings
of any Government are : The Executive, The legislature and the Judiciary. The
Legislature makes Laws for the country; the Executive enforces those laws and
administers the guardian angel of the Constitution; the Judiciary guarantees fairness
and justice and protects the individual from the despotism of Govt.
5.6.1 Legislative Organ

Legislative organ of India is Parliament. Parliament consist of President, Lok Sabha
and Raj Sabha. Parliament make law for governance of the country. The Parliament
has absolute control over the purse of the nation. No new tax can be levied or
expenditure incurred without its consent. The Parliament exercise fair measures of
control over the day to day activities of Council of Ministers. In extreme cases they
can compel the Govt. to resign by expressing their want of confidence the Executive.
Parliament can amend Constitution of India.
z Delegated Legislation: Parliament delegate some power to other authorities
(usually Government or some Board or authority like RBI) to make rules,
regulation and issues notification. This is called delegated legislation. Often these
are required to be published in Official Gazette.
z Ordinances: Any Act can be passed when parliament is in session. But sometime
need is urgent and it is not possible to wait for the commencement of session of
Parliament, in such cases President has been empowered to issue Ordinance. Such
Ordinance has the same force as Act of Parliament, except that the Ordinance is
valid only for limited period. Indian Govt. enacted new Patent Law through
ordinance [Patents (Amendment) Ordinance 2004] as to fulfill WTO requirement,
it has to be implemented from 1st January 2005 and there was no time to get it
pass through parliament so Ordinance was issued on 27th December 2004 to enact
new Patent Law.
5.6.2 Executive (Administrative) Organ

Administration is looked after by Government for which Council of Ministers is at its
head. President of India is on paper the Head of he State but to all intents and
purposes the real power to rule is vested in the Council of Ministers. Thus the Union
Cabinet consists of the Prime Minister and his colleagues. Each minister is assigned a
particular ministry. Govt. deals with the matter through various departments and
generally head of the department who is senior Govt. officer is called ‘Secretary’. In
some cases where department is too big Board in formed to control the department as
Railway Board. Further various junior and senior officers are appointed by Govt. for
the purpose of administration. The Union Cabinet formulates the general policy of the
country. Cabinet also prepare the draft of all important Bills and present it before the
Parliament for approval. Finance Minister with the co-operation of Ministers prepares
a budget for the next financial year and present it in Lok Shabha. So all the
administrative powers lies with the Council of Ministers.
58
5.6.3 Judicial Organ
Our Constitution provides independent judiciary with wide powers. The Highest court
in India is Supreme Court.
z Supreme Court: The Constitution of India gives both original and appellate
jurisdiction to Supreme Court. Original Jurisdiction means that the court can hear
and entertain suits directly from the parties in dispute. Under appellate jurisdiction
the court entertain appeal against a decision by any other court of India. Supreme
Court interprets any clause of Constitution and renders legal advice to the Union
Govt. Principle function of the Supreme Court is to act as the guardian of the
Constitution, particularly the Fundamental Rights, guaranteed to the citizens.
Article 136 grants discretion to Supreme Court to grant special leave to appeal
from an judgment, decree, determination, sentence or order in any cause of matter
passed or made by any court or tribunal in India. Article 141 of Constitution
provides that law declared by Supreme Court is binding on all courts within India.
z High Court: High Court has both appellate and original jurisdiction. It is also a
court of record. It means that the judgment of the High Court are considered
authoritative and they serve as case laws. It functions include both judicial and
administrative. A High Court has the right of superintendence over all other courts
subordinate to it. High Courts have been granted to issue writs. The Writ is an
order or process issued by court or judicial officers, asking any person to perform
or refrain from performing the Act. This is a very powerful right and is very
useful in case Government or other authorities of not give justice to a person.
Application made to High Court for this purpose is called Writ Petition.
Besides High every state has three type of Subordinate Courts: Criminal Courts
Civil Courts, and Revenue Courts.
Constitution of any country is a decisive force in creating a conducive
environment for business. It administers and regulates the environment. Judiciary
also plays a critical role in supporting business. Business flourishes in only in
those countries that have a healthy judicial system, Legislature and Administrative
body.
Fill in the blanks:
1. As all governmental organs and institutions owe their origin to the
__________of the people.
2. Government can enjoy only such powers which are conferred by the
___________.
3. Word_______________ was inserted through 42 Amendment.
4. _____________ of the Constitution guarantees equality of all persons
before law.
5. The structure of Govt. is ___________ in nature.
5.7 LET US SUM UP

The Constitution is not only a document which tell about the formation and running of
Govt. Rather it influences the life of every individual. It is the torch in the light of
which our elected Govt. works and takes decision. The decisions, which affect our
business. Our Constitution provided the Fundamental Rights to the citizens of nations.
And they allow the person to engage in business or occupation of their choice. Our
Constitution not only give fundamental rights, in not only tell how the Govt. will be
formed and work it even lay the guidelines in Directive Principles for the Govt. These 59
directive principles influences the decision making of Govt. and these decisions in Business
influence the business.
The Structure of Govt. is federal in nature. The three wings of any Government are:
The Executive (Council of Ministers), the legislature (Parliament) and the Judiciary.
The Legislature makes Laws for the country; the Executive enforces those laws and
administers the guardian angel of the Constitution; the Judiciary guarantees fairness
and justice and protects the individual from the despotism of Govt.

1. Prepare a report on the role of Judiciary in present environment.
2. Analyze the role of Public Interest Litigation (PIL) and its role in present
economy. Prepare a report on how PIL influenced the industry in Delhi.
5.9 KEYWORDS
Directive Principles: Added by 42nd Amendment, they are the suggestions to the
Govt. about their objectives to be achieved.
HAL: Hindustan Aeronautics Limited.

1. Discuss the impact of Constitution on the Policies of Govt.
2. Describe Fundamental Rights.
3. Discuss the Directive Principles.
4. Analyze the role of Directive Principles in deciding the economic policies of
nations.
5. Why the conflict arise between Directive Principles and Fundamental Rights
while making policies.
6. Discuss the various political institution of India and there role.

CYP 1
Article 31, 31A and 31B guaranteed the right of the individuals and trusts to
own and trusts to own, and administer their property. The Constitution says that
no person shall be deprived of his property except by lawful authority. Right to
property has been deleted by 44th amendment and now it has been made only a
legal right.
CYP 2
“Although the Directive Principles of State Policy confer no legal rights and
create no legal remedies, they appear to be like an Instrument of Instructions, or
general recommendations addressed to all authorities in the Union reminding
them of the basic principles of the new social and economic order which the
Constitutions aims at building.
CYP 3
1. Sovereignty, 2. Constitution, 3. Socialist,
4. Article 14, 5. Federal
60
Business Environment and Ethics 5.11 SUGGESTED READINGS
Mittal Vivek (2007), Business Environment, Excel Books.
Bedi Suresh (2006), Business Environment, Excel Books.
Mishra, Puri (2006), Economic Environment of Business, Himalaya Publications
House.
Prentice Hall.
Starling, Grower (1996), The Changing Environment of Business, Cincinnati, OH,
Weidenbaum, Marray L. (1999), Business and Government in the Global Market
61
Ethics
UNIT 1
UNIT II
62
63
LESSON Ethics
6
ETHICS
CONTENTS
6.1 Introduction
6.2 Ethical Theories
6.3 Characteristics of Ethics
6.4 Modern Decision-making and Ethics
6.5 Ethical Decision-making Dilemma
6.6 Sources of Ethics
6.7 Ethics and Profit
6.8 Let us Sum up
6.10 Keywords

z Understand the concept and origin of ethics
z Understand the role of ethics in business decision
z Know the relationship between ethics and business decisions
6.1 INTRODUCTION
The word ‘Ethics’ has been originated from the word ‘ethos’, meaning character or
manners. Ethics is thus said to be the science of morals; a treatise on this: moral
principle; recognized rules of conduct. Ethics involves judgment as to good and bad,
right and wrong, and what ought to be. Ethics deals with things to be sought and
things to be avoided by ways of life. An ethical dilemma exists where two or more
values are in conflict, and we seek from ethics a resolution to this conflict. Business
ethics refers to the measurement of business behavior on standards of right and wrong,
rather than relying entirely on principles of accounting and management. Ethics is not
only desirable but is essential for the smooth functioning of business. If business does
not follow ethics then there will be an utter chaos and there will be no trust and in this
situation there is no scope of business. Ethics plays a role whether it is a buyer and
seller relationship or it is a competitor relationship. The objectives of Ethics are:
1. Studying human behavior and makes evaluative assessment about them as moral
or immoral (diagnostic goal).
64 2. Established moral standards and norms of behaviour.
3. Makes judgment upon human behavior based on these standards and norms.
4. Prescribe moral behavior and makes recommendation about how to or how not to
behave (therapeutic goal)
5. Express an opinion or attitude about human conduct in general.
6. TISCO never faced any lock out or labor problem only because of ethical
standards followed by TATA. TATA is one of the most trusted brands of India
only because of its ethical standards.
Matsushita Electric Co. follows the following value system
The seven ‘Spiritual’ Values
1. National Service through Industry
2. Fairness
3. Harmony and Cooperation
4. Struggle and Betterment
5. Courtesy and Humility
6. Adjustment and Assimilation
7. Gratitude
Prof. S.K. Chakraborty in his book “The Management and Ethics Omnibus” cited
following values which are deep rooted in Indian Culture and Society:
1. The Individual Must be Respected
2. Cooperation and Trust
3. Jealousy is Harmful for Health
4. ‘Chitta-Shuddhi’ or Purification of the Mind
5. Top Quality Product/ Service
6. Work is Worship
7. Containment of Greed
8. Ethico-moral Soundness
9. Self-discipline and Self-restraint
10. Customer Satisfaction
11. Creativity
12. The Inspiration to Give
13. Renunciation and Detachment
6.2 ETHICAL THEORIES

Ethical theories can be divide into two categories: Teleological and Deontological.
The teleological determine the ethics of an act by looking the consequences of the
decision (the ends), while deontological theories determine the ethics of an act by
looking to the process of the decision. (Means)
1. Teleological (Utilitarianism) Ethical System: The teleological morality of a 65
Ethics
decision is determined by measuring the probable outcome. The theory most
representative of this approach is utilitarianism, which seeks end the greatest
“good” (or Utility) for the greatest number. The most basic form of utilitarian
analysis is cost – benefit analysis, where one tallies the costs and benefit of a
given decision and follows the decision that provides for the greatest overall gain.
Utilitarianism hold that actions are right in proportion as they tend to promote
happiness, wrong as they tend to produce the reverse of happiness.
2. Deontological Ethical System: A deontological system is based on rules or
principles that governs decisions. In this system ethics are measured by the
rightness of an act depends little on the results of the act. According to it moral
persons is one of goodwill, and that person renders ethical decisions based on
what is right, regardless of the consequences of decision. Thus the student who
refuses to cheat on exam is morally worthy if her or his decision springs from
duty. But morally unworthy if the decision is merely one born of self interest,
such as fear of being caught.
3. Hybrid Theory: Robert Nozick holds that justice and fairness, right and wrong are
measured not by equality of results for all, but from ensuring equal opportunity
for all to engage in informed choices about their own welfare.
Enlightened ethical egoism says that it is important to the individual that the
world is a “good” world; therefore the individual may have a self interest in
curbing pollution or in community projects, even though she or he may not
individually and personally benefit from the decision.
4. Distributive Justice and Social Contract: Prof. Rawls of Harvard University
propounded this theory. Who says that when people get together, they form
societies and cooperation, and when they come together their arises conflict
because people do not receive a just distribution of the benefits yielded through
their activities. Rawls believe that the base of all distribution systems should be
just and the primacy of justice in the basic structure of our system of society
requires greater equality.
5. Individual Freedom: According to this theory all individuals must be allowed to
make informed choice by all in society. Though choice must be within the law
and the same freedom enjoyed by one individual in the society, must be extended
to all within the society.
1. Define ethics.
……………………………………………………………………………….
……………………………………………………………………………….
2. Describe, in brief, the ethical theories.
……………………………………………………………………………….
……………………………………………………………………………….
6.3 CHARACTERISTICS OF ETHICS

1. Ethical decision differs with the individual perspective of different persons. Each
person has its own perception and believes regarding ethics. Hence ethical
decision of not have unique solutions, but have a multitude of alternatives.
66 2. Ethical decisions are not limited only to themselves, but affects a wide range of
other situations as well. Similarly, unethical decision do not end in themselves,
but have widespread ramification.
3. Most ethical decision involves a trade off between costs incurred and benefits
received.
4. Many times consequences of ethical decision are not clear. They are ambiguous in
nature. Similarly it is not clear what the consequences will be of an unethical
decision, either of an individual or of on organization.
5. Ethical decisions have long term impact. Ethical decision may give bitter results
in short term as lost of sales but in long term it reaps not only good results but
results will also of persist for long. As high quality management may effect
bottom line in short turn but it in long term it position the product in the mind of
prospective customer, which gives lasting impression.
6. Every person is individually responsible of the ethical or unethical decision and
action that he or she takes but the consequences of decision have to be faced by
whole organization.
7. Ethical decisions are voluntary human actions. A person can not escape his
personal liability by quoting that he committed because of seniors pressure.
6.4 MODERN DECISION-MAKING AND ETHICS

The economic activity and competition are no longer considered to be bedfellows
altogether incompatible with ethics and morals. This is correct because man is always
much more than mere commerce and competition. He has the ineffable of ethics and
morals also to manage – whether in business or politics.
Two academics, Victor and Cullen, conclude a research study by pointing out;
It is our belief that organization theory needs to attend more explicitly to the ethical
content in organizational processes. Ethical issues in organizations increasingly
preoccupy theoreticians and practitioners. Firms are attempting to control the ethical
decision-making of individuals, and society is attempting to influence directly the
ethical decisions making of firms.
Business decision based on moral reasoning can be too absolute and decision based on
only realities and logic can be too harsh and inhuman. To avoid these two extremes
one can resort to traditional stakeholder model of decision-making. Stake holder
theory suggests that in reaching ethical decision, we respond to the following
inquiries:
1. What is the moral dimension?
2. What is ethical issue?
3. Who are the interested parties?
4. What values are involved?
5. What alternative do you have in your decision?
6. What is the weight of the benefits and the burdens of each alternatives on each
impacted party?
7. Are there any analogous cases?
8. Can I discuss the case with relevant others?
9. Can I gather additional opinion or perspectives?
10. Is the decision in line with legal and organizational rules?
11. Am I comfortable with the decision? Can I live with it?
Philosopher Laura Nash suggest asking oneself 12 question prior to reaching a 67
Ethics
decision in an ethical dilemma (Laura Nash “Ethics without the sermon”, Harward
Business Review 56, no.6 (1981) pp. 80-81)
1. Have you defined problem accurately?
2. How would you define the problem if you stood on the other side of the fence?
3. How did the situation occur in the first place?
4. Who was involved in the situation in the first place?
5. What is your intention in making this decision?
6. How does this intention compare with likely results?
7. Who could your decision or action injure?
8. Can you engage the affected parties in a discussion of the problem before you
made your decision?
9. Are you confident that your decision be as valid over a long period as it seems
now?
10. Could you disclose without qualms your decision or action to your boss, your
CEO, the board of directors, your family, or society as a whole?
11. What is the symbolic potential of your action if understood?
12. Under what condition would you allow exceptions to your stand?
In evaluating decision two elements should be considered: Integrity and
Accountability. Integrity, means consistency in values, would require that the decision
maker define her or his values, as well as create a prioritization of those values.
Accountability means no matter which direction is taken, the decision maker must be
accountable to all stakeholders who are impacted by this decision.
6.5 ETHICAL DECISION-MAKING DILEMMA

Managers experiences the dilemma of ethical decision making during performing their
duties as:
1. I have to satisfy inspector from the electricity board to maintain adequate power
supplies in times of recurrent shortages.
2. I have to oblige, entertain, and enrich an important customer to keep him from
switching over to competitor.
3. I have to do manipulation in accounts statement to show high profit figure.
4. To increase profits I have to sell same product in three different packing at
different price.
5. Without having any improvement in product I have to advertise New and
Improved.
6. I have to sign a transfer orders of an officer to satisfy the prejudice of a higher
level officer.
7. I have to oblige bank officer to get loan for the project.
American Accounting Association (AAA) published in 1988 a report on Ethics in the
Accounting Curriculum which included a “decision model” for analyzing ethical
dilemmas. Its steps are shown in Figure 6.1.
68
Make your Decision
Assess the consequences
Compare values and alternatives

for a clear decision
Specify the alternatives
Identify major principles, rules

and values
Define the Ethical Issue
Determine the Facts
Figure 6.1: Decision Model for Analyzing Dilemmas

Modern theories of ethics may prove useful in understanding and encouraging ethical
behavior in business. Imagine a lawless system where every human action is
influenced by market forces. Does in this situation organization can remain ethical?
Does business can exist if every firm took decision on the basis of self interest at any
cost? Does lawless market forces ensure justice and fair business. Of course not.
Economist Dwight Lee and Richard Mckenzie support this contention. They explain
that a businessperson may act honestly because of the high cost of dishonesty.
An economy in which people deal with each other honestly produces more wealth
than one in which people are chronically dishonest because more exchanges occur
directing resources into their most productive employments.
[Dwight Lee and Richard Mckenzie, “How the Marketplace Fosters Business
Honesty”, Business and Society Review (Winter 1995) pp. 5-9]
6.6 SOURCES OF ETHICS

Sources of ethics are as follows:
1. Genetic Inheritance: There are persuasive evidence and arguments suggesting
that the evolutionary forces of natural selection influences the development of
traits such as cooperation and altruism that lie at the core of ethical system. The
very first school of ethics is the home. More ethical the parents will be higher the
chances that children will be following the same ethics. Ethics are passed on
generation from one generation to second generation and process goes on.
2. Religion: Religion plays a critical role in deciding ethics. Before effective law
system it is the religion that has played a role of restriction on unsocial activities.
Today also a common man tries to abide by the ethics describe by the religion. As
the Brihadarayaka Upnishad states, the Karmavada states:
Yathakari, Yathachari tatha bhavati 69
Ethics
Sadhukari sadhur-bhavati, papakari papi bhavati;
Punyah punyena karmaan bhavati, papah papena.
[As it does, and as it acts, so it becomes: the doer of good becomes good, and
the doer of evil becomes evil ; he become virtuous through a virtuous act and
vicious through a vicious act.]
All religion preach humanity, all religion preach peace all religion preach
development of whole society. Ethics has its roots in religion. Sacred Geeta
preaches about Niskam Karma that is work with out sake of result.
Following verse of Isha Upanishad talks about enjoyment in detachment:
Isha vasyanidam sarvah,
Yatkincha Jagatyam jagat
Tena tyaktena bhunjitah
Ma gridha kasyaswiddhanam
(All this whatsoever moves on earth should be understood as covered by the lord.
So let your enjoyment be done with detachment. Do not covet the wealth of
others.)
3. Culture: Culture also begets ethical standards. Culture refers to rules, customs
and standards transmitted through generation to generation. Though culture
changes with region but their ethical standards remain same. Different places may
have different cultures regarding dress sense but no culture believes in dishonesty,
or in the deceiving others in the name of others. There are three aspect of culture:
(a) Universal, trans-cultural human values and ideas: These are universal ideals.
Which is expected from sages, saints etc. As in its ideal form it is culture to
spend a part of life in vanprastha, that is in forest after fulfilling worldly
duties, or to chant sacred mantras in the morning or to meditate in tapovans.
(b) Culture specific, operative human values that translate the ideals into
actionable conduct in a given culture: It is the cultural values expected from
common man it is all about day to day operations and believes. As in India
‘mother’ image being most dominant in relation to woman in India, we have
the operational value that even a father cannot touch his daughter’s body once
she attains puberty.
(c) Culture Specific, operative human values that derive for certain altogether
different human ideals: This predisposition contributes to purity of mind and
is check against permissive and incest. In India it is translated into practical
conduct through the tradition of a son or a daughter bowing down and
touching the feet of his/her parents or by a student doing the same to a
teacher.
4. Philosophical System: Philosophical system also influences the ethics. Aristotle,
Pluto, Shri Aurbindo, Vivekanand, Subhash Chandra Bose, Swami Dayanand,
Mahatma Gandhi have left lasting impact on the ethics with their philosophies.
There are difference of opinion to. On the one hand there is a philosophy of Karl
Marx according to him it is unethical to do business to accumulate wealth etc on
the other hand Mahatma Gandhi believes in business and preached trusteeship
according to which business man should look after the welfare of its employee.
Jamna Lal Bajaj, JRD TATA, G.D.Birla who were influenced by M. Gandhi
adopted this philosophy and invested heavily on the welfare of employees. On the
70 other hand countries like China erstwhile USSR etc were influenced by the
philosophy of Karl Marx and they declared business as unethical in their
respective countries. Vivekananda has given great importance to means of
achieving results:
“with means aright end must come …..if we take care of the cause the effect will
take care of itself. The realization of the ideal is the effect. The means are the
cause: attention to the means, is therefore is the great secret of life.”
5. Legal System: In society take the activities as hoarding the stock, black
marketing, cheating, giving wrong information etc as unethical and there is law to
restrain all these activities. There even laws against exploitation of labour, sexual
harassment etc and all this activities are considered as unethical.
6. Code of Conduct: Steiners and Steiner identify three primary categories of such
codes. First Company codes, ordinarily belief and highly generalized. Second
company operating policies often contain an ethical dimension. As policies
regarding, customer complaints, hiring and other decisions serve as a guide to
conduct and as a shield by which the employee can protect against unethical
advances fro m those outside the firm. Third many professional and industry
associations have developed codes of ethics, such as in India Association of
advertising agencies have develop a code of conduct for themselves. Council for
Fair Business Practices (CFBP) established in 1966 adopted following code of fair
business practices:
(a) To charge only fair and reasonable prices and take every possible step to
ensure that the prices to be charged to the consume are brought to his notice.
(b) To take every possible step to ensue that the agents or dealers….do not charge
prices higher than fixed.
(c) In times of scarcity, not to withhold or suppress stocks of goods with a view
to hoarding or profiteering.
(d) Not to produce or trade in spurious goods of standards lower than specified.
(e) Not to publish misleading advertisement.
(f) To invoice goods exported or imported at their correct prices.
(g) To maintain accuracy in weights and measures of good offered for sale.
(h) Not to deal knowingly in smuggled goods.
(i) Providing after sales service where necessary or possible.
(j) Honoring the fundamental rights of the consumer- right of safety, right to
choose, right to information and right to be heard.
(k) Discharging social responsibilities and the responsibilities to protect the
environment and nature’s infrastructure.
(l) Ensuring that the product warranty is offered in simple, unambiguous and
concise language, highlighting the rights of the consumer under it.
71
Check Your Progress 2 Ethics
State whether the following statements are true or false:

1. The word ‘Ethics’ has been originated from the word ‘ethos’.
2. The deontological system of a decision is determined by measuring the
probable outcome.
3. A teleological morality is based on rules or principles that governs
decisions.
4. Before effective law system it is the religion that has played a role of
restriction on unsocial activities.
5. TUFF shoes launched a advertisement featuring Milind Soman and Madhu
Sapre.
6. TATA launched a indigenously developed car Fiesta.
6.7 ETHICS AND PROFIT

The Business Roundtable had introduced a survey report on corporate ethics by US
business which included among others the following sentences:
One of the myths about business is that there is a contradiction between ethics and
profits. The myths are thoroughly debunked by the attitudes and action of top
managers in the companies that contributed to this report. There is a deep conviction
that a good reputation for fair an honest business is a prime corporate asset that all
employees should nurture with the greater care.
Ethics and profit both go together. It may be possible that in short run an organization
can get an edge or good profits because of unethical means but it is the ethics which
lasts. As an organization may get good initial sales by communicating false message
about product but he will not get repeat sales and he will earn bad name too. As in
India few years back TUFF shoes launched a advertisement featuring Milind Soman
and Madhu Sapre, in the advertisement both were node and covered there body with
Snake and were wearing only shoes. These advertisement gave them instant publicity
and soon TUFF shoes became household name in India, but all this publicity went in
vain as TUFF shoes does not get sales, in fact this advertisement earned a bad name
for TUFF shoes, and even after years they couldn’t manage sales for them. Take the
case of Reliance Infocom, it was launched in India with a big bang but increased sale
they adopted every sale gimmick, frequent changes in price and tariffs, frequent
changes in policy, even they frequently changed their policy regarding distribution
network which resulted in losses to thousand of Youth who became their distributor
all this gave them initial sales and finance but also rotten image and this influenced
their sale and profits.
By late 1990s Indian automobile market was totally dominated by MNC as Hundai,
Daewoo, and Suzuki, at that TATA launched a indigenously developed car INDICA,
and it got very good response from day one, even when critics didn’t appraise the car
it is only believe of Indians in the ethics of TATA that people always welcome any
product from TATA and never oppugn its quality. Which results in the low
expenditure in advertisement high initial and repeat sales of any new launch all this
means big profits for years not from only existing product portfolio but with every
new and prospective launch.
People want to do business with honest person that means with ethical companies
attract more supplier, and business contracts. As GM and FORD followed a policy of
having many supplier for the same product to increase their bargain power they also
72 used threat of backward integration to increase their bargain power, on the other hand
TOYOTA take their supplier as their business partners it kept the number of supplier
as low as possible help them in R&D help them in their production system and all this
resulted in a good rapport among them. And instead of bargain power and threat they
achieved one of the lowest procurement cost in automobile industry in world through
cooperation.
Even the dishonest people love to work for those who believe in ethics. Ethical
companies attract more and good quality human resource, it has low executive
turnover, they less labour problem and lock out. All this decreases the cost and
increases the production, which results in high revenues and profits.
In totality we can say that ethics give sale, good relation with industry and better
human resource all this results in higher profits and long-term eminence.
We can conclude the chapter with the golden words of Mahatma Gandhi who gave a
Talisman to solve the dilemma of decision-making:
“I give you a talisman, when you are in doubt or when the self becomes too much
with you apply the formula test.
Recall the face of the poorest and the weakest man whom you may have seen and ask
yourself if the step you contemplate is going to be of any use to him, will he gain any
thing by it, will it restore him to a control over his ruined life and destiny? In other
word will it lead to Swaraj for the hungry and spiritually starving millions.
Then you will find your doubts melting away.”
6.8 LET US SUM UP

Ethics deals with things to be sought and things to be avoided by ways of life.
Business ethics refers to the measurement of business behavior on standards of right
and wrong, rather than relying entirely on principles of accounting and management.
If business does not follow ethics then there will be an utter chaos and there will be no
trust and in this situation there is no scope of business. Ethics plays a role whether it is
a buyer and seller relationship or it is a competitor relationship. Ethical theories can be
divide into two categories: teleological and deontological. The teleological determine
the ethics of an act by looking the consequences of the decision (the ends), while
deontological theories determine the ethics of an act by looking to the process of the
decision. (Means)
Ethical decision differs with the individual perspective of different persons. Most
ethical decision involves a trade- off between costs incurred and benefits received.
Managers experiences the dilemma of ethical decision making during performing their
duties as:
Whether to satisfy inspector from the electricity board or to maintain adequate power
supplies in times of recurrent shortages, Whether to oblige, entertain, and enrich an
important customer to keep him from switching over to competitor.
Ethics are passed on generation from one generation to second generation and process
goes on. Religion plays a critical role in deciding ethics. Today also a common man
tries to abide by the ethics describe by the religion. Culture also begets ethical
standards. Philosophical system also influences the ethics. Laws represent a rough
approximation of society’s ethical standards. Company codes, company operating
policies often contain an ethical dimension. Third many professional and industry
associations have developed codes of ethics, such as in India Association of
advertising agencies have develop a code of conduct for themselves.
There is a close relationship between ethics and profit. Organizations who follows
ethics earn good profit in long run. As ethics not only increase there customer base but
it also reduces it cost. Ethics helps a lot in maintaining good relation with buyers,
suppliers and even with competitor. So following ethics may look a luxury in short
term but in long term it is milk giving cow.
73
6.9 LESSON END ACTIVITIES Ethics
1. Prepare an assignment on the role of ethics in decision-making in Indian
corporate.
2. Prepare a report on the role of ethics in the functions of TATA.
3. Pick a company of your choice and find that how ethics it in making good
decision.
6.10 KEYWORDS
TISCO: Tata Iron and Steel Company.
AAA: American Accounting Association.
CFBP: Council for Fair Business Practices.

1. What is ethics? Discuss the various ethical theories.
2. What is the role of ethics in decision-making?
3. Discuss the various sources of ethics.
4. “Ethics and profit both go together”. Discuss the statement.

CYP 1
1. The word ‘Ethics’ has been originated from the word ‘ethos’, meaning
character or manners. Ethics is thus said to be the science of morals; a
treatise on this: moral principle; recognized rules of conduct. Ethics
involves judgment as to good and bad, right and wrong, and what ought to
be.
2. Ethical theories can be divide into two categories: Teleological and
Deontological. The teleological determine the ethics of an act by looking
the consequences of the decision (the ends), while deontological theories
determine the ethics of an act by looking to the process of the decision.
(Means)
CYP 2
1. True 2. False 3. False
4. True 5. True 6. True

House.
Prentice Hall.
74
LESSON
7
CORPORATE GOVERNANCE
CONTENTS
7.1 Introduction
7.2 Corporate Governance – Definitions
7.2.1 Scope of Corporate Governance
7.2.2 Participants to Corporate Governance
7.2.3 Principles of Corporate Governance
7.2.4 Role/Importance of Corporate Governance
7.3 Mechanism and Control
7.4 Corporate Governance and Firm Performance
7.5 Corporate Governance in India
7.6 Code of Conduct for Corporate Governance
7.7 Let us Sum up
7.9 Keywords

z Understand the concept and scope of corporate governance
z Explain the impact of corporate governance on the stakeholders
z Know how corporate governance influences the bottom line of the firm
7.1 INTRODUCTION
“Capitalism with integrity outside the government is the only way forward to create
job and solve the problem of poverty. We, the business leaders are the evangelists of
capitalism with integrity. If the masses have to accept this we have to become credible
and trustworthy. Thus we have to embrace the finest principles of corporate
governance and walk and talk.” (Narayan Murthy)
Corporate governance has succeeded in attracting a good deal of public interest
because of its apparent importance for the economic health of corporations and
society in general. However, the concept of corporate governance is poorly defined
because it potentially covers a large number of distinct economic phenomenon. As a
result different people have come up with different definitions that basically reflect
their special interest in the field. It is hard to see that this 'disorder' will be any 75
Corporate Governance
different in the future so the best way to define the concept is perhaps to list a few of
the different definitions rather than just mentioning one definition.
7.2 CORPORATE GOVERNANCE – DEFINITIONS

1. "Corporate governance is a field in economics that investigates how to
secure/motivate efficient management of corporations by the use of incentive
mechanisms, such as contracts, organizational designs and legislation. This is
often limited to the question of improving financial performance, for example,
how the corporate owners can secure/motivate that the corporate managers will
deliver a competitive rate of return", www.encycogov.com, Mathiesen [2002].
2. "Corporate governance is the system by which business corporations are directed
and controlled. The corporate governance structure specifies the distribution of
rights and responsibilities among different participants in the corporation, such as,
the board, managers, shareholders and other stakeholders, and spells out the rules
and procedures for making decisions on corporate affairs. By doing this, it also
provides the structure through which the company objectives are set, and the
means of attaining those objectives and monitoring performance", OECD April
1999. OECD's definition is consistent with the one presented by Cadbury [1992,
page 15].
3. "Corporate governance is about promoting corporate fairness, transparency and
accountability" J. Wolfensohn, president of the Word bank, as quoted by an article
in Financial Times, June 21, 1999.
4. “Some commentators take too narrow a view, and say it (corporate governance) is
the fancy term for the way in which directors and auditors handle their
responsibilities towards shareholders. Others use the expression as if it were
synonymous with shareholder democracy. Corporate governance is a topic
recently conceived, as yet ill-defined, and consequently blurred at the
edges…corporate governance as a subject, as an objective, or as a regime to be
followed for the good of shareholders, employees, customers, bankers and indeed
for the reputation and standing of our nation and its economy” Maw et al. [1994,
page 1].
5. Corporate governance is the acceptance by management of the inalienable rights
of shareholders as the true owners of the corporation and of their own role as
trustees on behalf of the shareholders. It is about commitment to values, about
ethical business conduct and about making a distinction between personal and
corporate funds in the management of a company. (Report of SEBI Committee on
Corporate Governance)
The simplest definition is given by Cadbury Report (UK). ‘Corporate Governance
is the system by which businesses are directed and controlled’.
6. The Cadbury committee said “The primary level is company’s responsibility to
meet its material obligations to shareholders, employees, customer, suppliers,
creditors, to pay its taxes & to met its statutory duties. The next level of
responsibility is the direct result of actions of companies in carrying out their
primary task includes making the most of the community’s human resource and
avoiding damage to the environment. Beyond these two levels, there is a much
less well-defined area of responsibility, which takes in the interaction between
business and society in a wider sense.”
The Cadbury Committee on to a formula for governance progress that has become the
industry standards- it developed a list of ‘best practices’ standards to which companies
should aspire. Among other recommendations, the committee opined that:
76 z It is board’s duty to present a balanced and understandable assessment of a
company’s position,
z An objective and professional relationship with auditors must be ensured,
z An audit committee of at least three non-executive directors with written terms of
reference should be established,
z It must be reported that a business is going concern.
At its broadest, corporate governance comprehends the framework of rules,
relationships, systems and processes within and by which fiduciary authority is
exercised and controlled in corporations. Relevant rules include applicable laws of the
land as well as internal rules of a corporation. Relationships include those between all
related parties, the most important of which are the owners, managers, directors of the
board (when such entity exists), regulatory authorities and to a lesser extent
employees and the community at large. Systems and processes deal with matters such
as delegation of authority, performance measures, assurance mechanisms, reporting
requirements and accountabilities.
In this way, the corporate governance structure spells out the rules and procedures for
making decisions on corporate affairs. It also provides the structure through which the
company objectives are set, as well as the means of attaining and monitoring the
performance of those objectives.
Corporate governance is the method by which a corporation is directed, administered
or controlled. It includes the laws and customs affecting that direction, as well as the
goals for which it is governed. The principal participants are the shareholders,
management and the board of directors. Other participants include regulators,
employees, suppliers, partners, customers, constituents (for elected bodies) and the
general community.
What do you understand by corporate governance?
……………………………………………………………………………………
……………………………………………………………………………………
7.2.1 Scope of Corporate Governance

Corporate Governance covers the following functional area of governance:
1. Preparation of the entity's (Company) financial statements
2. Internal controls and the independence of the entity's auditors
3. Review of the compensation arrangements for the chief executive officer and
other senior executives
4. The way in which individuals are nominated for positions on the board
5. The resources made available to directors in carrying out their duties
6. Oversight and management of risk.
7.2.2 Participants to Corporate Governance

Corporate Governance is concerned with governing or regulatory body (e.g. the
SEBI), the CEO, the board of directors and management. Other stakeholders who take
part include suppliers, employees, creditors, customers and the community at large.
The shareholder delegates decision rights to the managers. The managers are expected
to act in the interest of shareholders. This results in the loss of effective control by
shareholders over managerial decisions. Thus a system of corporate governance
controls is implemented to assist in aligning the incentives of managers with those of 77
shareholders, in order to limit the self-satisfying opportunities for managers.
A board of directors plays a key role in corporate governance. It is their responsibility
to endorse the organisation's strategy, develop directional policy, appoint, supervise
and remunerate senior executives and to ensure accountability of the organisation to
its owners and authorities.
A key factor in an individual's decision to participate in an organisation (e.g. through
providing financial capital or expertise or labor) is trust that they will receive a fair
share of the organisational returns. If some body receives more than their fair return
(e.g. exorbitant executive remuneration), then the participants may choose to not
continue participating, potentially leading to organisational collapse (e.g. shareholders
withdrawing their capital). Corporate governance is the key mechanism through which
this trust is maintained across all stakeholders.
Who are the participants to corporate governance?
……………………………………………………………………………………
……………………………………………………………………………………
7.2.3 Principles of Corporate Governance

Commonly accepted principles of corporate governance include:
1. Rights of, and equitable treatment of, shareholders: Organisations should
respect the rights of shareholders and help shareholders to exercise those rights.
2. Interests of other stakeholders: Organisations should recognise that they have
legal and other obligations to all legitimate, stakeholders.
3. Role and responsibilities of the board: The board needs a range of skills and
understanding - to be able to deal with various business issues and have the ability
to review and challenge management performance. It needs to be of sufficient size
and have an appropriate level of commitment to fulfill its responsibilities and
duties. There are issues about the appropriate mix of executive and non-executive
directors.
4. Integrity and ethical behaviour: Organisations should develop a code of conduct
for their directors and executives that promotes ethical and responsible decision
making.
5. Disclosure and transparency: Organisations should clarify the role of board and
management and it should be convey to public. They should also implement
procedures to independently verify and safeguard the integrity of the company's
financial reporting. Disclosure of material matters concerning the organisation
should be timely and balanced to ensure that all investors have access to clear,
factual information. Transparency is the best principle of corporate governance.
7.2.4 Role/Importance of Corporate Governance

The role of effective corporate governance is of immense significance to society as a
whole it can be summarized as follows:
1. Corporate Governance ensures efficient use of resources
2. It makes the resources flow to those sectors or entities where there are efficient
production of goods and services and the return is adequate enough to satisfy the
demands of stakeholders.
78 3. It provides for choosing the best managers to administer the scarce resources.
4. It helps the managers to remain focused on improving performance, making sure
that they are replaced when they fail to do so.
5. It pressurizes the organization to comply with the laws, regulations and
expectations of society.
6. It assist the supervisor in regulating the entire economic sector without partiality
and nepotism.
7. It increases the shareholders value which attract more investors, thus Corporate
Governance ensures easy access to capital.
8. As corporate governance leads to higher consumers satisfaction thus it helps in
increasing market share and sales. Thus it also reduces the advertising and
promotion cost.
9. Employees are more satisfied in the organizations which follows corporate
governance policies thus it reduces the employee turnover which results in the
reduction in the human resource management cost. A satisfied employee can only
create a satisfied customer.
10. Corporate Governance reduces the procurement and inventory cost. As it helps in
maintaining good rapport with suppliers, which results in better and economical
inventory management system.
11. Corporate Governance helps in establishing good rapport with distributors thus
gives not only better access to the market but also reduces the distribution cost.
So in zest we can say that on the one hand it increase the revenue by fetching more
sales on the other hand it reduces the cost in every field, so the ultimate impact will be
a big leap in bottom line.
7.3 MECHANISM AND CONTROL

Internal corporate governance controls monitor activities and then take corrective
action to accomplish organisational goals. Examples includes:
1. Monitoring by the board of directors: The board of directors, with its legal
authority to hire, fire and compensate top management, safeguards invested
capital. Regular board meetings allow potential problems to be identified,
discussed and avoided.
2. Audit committees: There should be an Audit Committee, which shall have access
to all financial information. Major role of Audit Committee is to have an oversight
of the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and
credible.
3. Financial Reporting: Financial reporting is a crucial element necessary for the
corporate governance system to function effectively. Accountants and auditors are
the primary providers of information to capital market participants. The directors
of the company should be entitled to expect that management prepare the financial
information in compliance with statutory and ethical obligations, and rely on
auditors' competence.
The Enron collapse is an example of misleading financial reporting. Enron concealed
huge losses by creating illusions that a third party was contractually obliged to pay the
amount of any losses. However, the third party was an entity in which Enron had a
substantial economic stake. In discussions of accounting practices with Arthur
Anderson, the partner in charge of auditing, views inevitably led to the client
prevailing.
However, good financial reporting is not a sufficient condition for the effectiveness of 79
corporate governance if users don't process it, or if the informed user is unable to
exercise a monitoring role due to high costs.
What is the role of audit committee in corporate governance?
……………………………………………………………………………………
……………………………………………………………………………………
7.4 CORPORATE GOVERNANCE AND FIRM

PERFORMANCE
In its 'Global Investor Opinion Survey' of over 200 institutional investors first
undertaken in 2000 and updated in 2002, McKensey found that 80% of the
respondents would pay a premium for well-governed companies. They defined a well-
governed company as one that had mostly out-side directors, who had no management
ties, undertook formal evaluation of its directors, and was responsive to investors'
requests for information on governance issues. The size of the premium varied by
market, from 11% for Canadian companies to around 40% for companies where the
regulatory backdrop was least certain.
Basel Committee has issued several papers on corporate governance, where the
importance of corporate governance is emphasized. These papers suggested the
following practices to be avoid governance problems in banking organization though
which is applicable to all organization:
Establishing strategic objectives and setting up corporate values and communicating
them across the banking organization.
Setting up and enforcing a clear line of authority and responsibility:
1. Ensuring that the board members are well qualified and not subject to pressure.
2. Ensuring that the board has a clear understanding of their role in corporate
governance
3. Ensuring that there is appropriate overseeing by the senior management.
4. Effectively utilizing the work done by internal and external auditors, in
recognition of the important control function they provide.
5. Ensuring that the compensation approaches are consistent with the bank’s ethical
values, objectives, strategy and control environment.
7.5 CORPORATE GOVERNANCE IN INDIA

In India, Corporate Governance has matured well and today’s we have the proud
privilege of New York Stock Exchange citing Infosys Technologies, an Indian
company, as a role model regarding disclosure of information to shareholders. Good
corporate governance is good business because it inspires investor’s confidence,
which is essential in attracting capital.
In India corporate governance is not a new thing, the roots of Indian working ethos is
in values. Indians have never ranked the person according to wealth and power but in
fact they have praised standard of learning, virtue and character which he had attained.
We can see the glimpse of Corporate Governance in the Arthashastra of Kautliya. As
he said:
80 “Only if a king himself energetically active, do his officers follow him energetically.
If he is sluggish, they too remain sluggish. And besides, they ear up his works. His
enemies thereby easily overpower him. Therefore he should ever dedicate himself
energetically to activity. The vow of the king is energetic activity, his sacrifice is
constituted of the discharge of his own administrative duties; his sacrificial fee (to the
officiating priest) is his impartiality of attitude towards all; his sacrificial consecration
is his anointment as king” (Arthshastra 8.2)
So it is quit obvious that Indians used to believe in high level of standards. In modern
times even Mahatma Gandhiji gave the principle of “Trusteeship” which can be an
ideal Corporate Governance as in the principle he Gandhiji said that Entrepreneurs is a
trustee of the organization and of its employee and he should look after the
organization and employee as their trustee. In present scenario India is reinventing the
principles of Corporate Governance.
Scams as of share scam after liberalization in 1991, failure of banks as of Global Trust
Bank, Lala Kashinath Bank, issue of the age of directors in the TATAs, fiasco of UTI,
with the introduction of option of share buyback, big remunerations and perks enjoyed
by top management and in a peculiar condition where most of the business is with
business families where Chairman and Managing Director is the same person, and in
many cases the son becomes the CEO there is urgent need of Corporate Governance
to protect the right and safeguard the interest of small shareholders and other
stakeholders in India.
In purview of this situation government and the industry took a step to be more
accountable. Both tried at their level to make Indian business to be more responsible
to the shareholders. Result of this was the constituents of various committees both by
CII and SEBI. Corporate governance initiatives in India began in 1998 with the
Desirable Code of Corporate Governance – a voluntary code published by the CII, and
the first formal regulatory framework for listed companies specifically for corporate
governance, established by the SEBI. Which resulted in the amendment in the
Companies Act to introduce effective Corporate Governance in India.
SEBI constituted a committee on corporate governance under the chairmanship of Sri
N.R. Narayana Murthi. The committee included representatives from the stock
exchange, chamber of commerce and industry, investor associations and professional
bodies; debated on key issues and made recommendations as under:
1. All audit committee member should be ‘financially literate’ at least one member
should have accounting or related financial management expertise.
2. Mere explanation as to why a company has followed a different accounting
standard from the prescribed standards will not be sufficient.
3. Board members should be informed about risk assessment and minimization
procedures.
4. Board members should be trained in the business model of the company as well as
the risk profile of the business parameters, their responsibilities as directors and
the best way to discharge them.
5. Use of proceeds of IPO should be disclosed to the audit committee.
6. There shall be no nominee directors when a directors is to be appointed on the
board and such appointment shall be made by shareholders.
7. Compensation paid to non-executive directors may be fixed by Board of
Directors, limiting the maximum number of stock options that can be granted to
non-executive directors in any financial year.
8. The performance evaluation of non-executive board members should be made by 81
a peer group comprising the entire board of director, excluding the director being
evaluated.
The Narayan Murthy committee has mentioned about correct approach for successful
Corporate Governance, it has said:
“Corporate Governance is beyond the realm of law. It stems from the culture an
mindset of management, and cannot be regulated by legislation alone. Corporate
Governance deals with conducting the affairs of a company such that there is fairness
to all stakeholders and that its actions benefit the greatest number of stakeholders. It is
about openness, integrity an accountability. What legislation can and should do, is to
lay down a common framework – the ‘form’ to ensure standards. The ‘substance’ will
ultimately determine the credibility and integrity of the process. Substance is
inexorably linked to the mindset and ethical standards of management”.
From the government’s side there have been swift moves through law and regulations
made by the Department of Company’s affaire (DOC) and SEBI to hasten the process
of bringing improvements in the corporations functioning. Number of provisions
regarding Corporate Governance have been inserted in Companies Act through
Companies (Amendment) Act, 2000. Important changes to improve Corporate
Governance are:
1. Providing for Director’s responsibility statement.[Section 217 (2AA)]
2. Board to report in cases where buyback was not completed within the time
specified in sub-section (4) of section 77.
3. Small shareholders to get a representation through a Director (Section 252)
4. Limitations in Directorships in companies (Section 274 & 275)
5. Constitutions of Audit Committees.
6. Providing for higher penalties (tenfold increase) for offences provided in various
sections of the Companies Act.
Recommendations of the Birla Committee

KM Birla Committee was a 19 member committee appointed by SEBI on 7th May
1999. It submitted its report in 1999/2000. On the basis of this report, clause 49 of the
Listing Agreement was issued by the SEBI. KM Birla committee recommended a
code for the effective implementation of corporate governance. Some of the
recommendations are core and are considered as mandatory and while others can be
considered as desirable. SEBI accepted the KM Birla committee recommendation
which is reflected in the takeover codes and statutory requirement under clause 49 of
Listing Agreement which is to be certified by the statutory auditors. Clause 49 of
Listing Agreement calls for the following:
1. Attendance of Each Director at the Board Meetings and AGM
2. Appropriate mix of executive and Independent Directors to maintain the
independence of the Board: - Board of Directors should consist of a combination
of executive and non- executive directors. At least 30% of the board should
consist of non executive directors if one of them is chairman. The non- executive
member should comprise at least 50% of the board if the chairman and the
managing director is the same member. The Birla Committee also laid down
recommendation for the induction of independent executive directors.
Independent directors are the directors who do not have any material pecuniary
relationship of transactions with the company, its promoters, its management or
its subsidiaries, which in the judgment of the board may effect their independence
of judgment.
82 3. Following board committees are recommended:
(a) Audit
(b) Remuneration
(c) Shareholders
(d) General Body
(e) Disclosures
(f) Means of Communication.
The Birla Committee also took note of various steps taken by SEBI for strengthening
corporate governance, some of which are:
1. Stringent disclosure norms for initial Public Offers
2. Providing information in directors’ reports for utilization of funds and variation
between projected and actual use of funds as per the requirement of the
Companies Act.
3. Declaration of Quarterly results.
4. Mandatory appointment of compliance officer for monitoring share transfer
process.
5. Timely disclosure of material and price sensitive information having a bearing on
the performance of a company.
6. Dispatching one copy of complete balance sheet to every household and abridged
balance sheet to all shareholders,
7. Issues of guidelines for preferential allotment at market related process, and
8. Issue of regulations providing for a fair and transparent framework for takeovers
and substantial acquisitions.
Fill in the blanks:
1. _____________ is the system by which business corporations are directed
and controlled.
2. ______________ found that 80% of the respondents would pay a premium
for well-governed companies.
3. Mahatma Gandhiji gave the principle of “____________” which can be an
ideal Corporate Governance.
4. Corporate governance initiatives in India began in 1998 with the Desirable
Code of Corporate Governance – a voluntary code published by the
____________.
5. ___________ committee was a 19 member committee appointed by SEBI
on 7th May 1999.
7.6 CODE OF CONDUCT FOR CORPORATE

GOVERNANCE
Revised clause 49 of SEBI proscribes that there should be a code of conduct for BOD.
Part E of this clause reads as under:
1. It shall be obligatory for the Board of a company to lay down the code of conduct 83
for all board members and senior management of a company. This code of
conduct should be posted o the website of the company.
2. All Board members and senior management personal shall affirm compliance with
the code on an annual basis. The annual report of the company shall contain a
declaration to this effect signed by the CEO and COO.
To safeguard the interest of small shareholders and stakeholders clause 49 has many
tight provision for the appointment of independent directors. Appointment of
independent director will certainly change the face of Indian Corporate. To follow and
implement the new law Indian Corporate need huge number of independent directors.
As Business Standard said (April 11, 2005) that:
“India Inc will require over 15,000 trained independent directors before the end of
2005, as most of the existing independent directors will fail to make the grade once
Clause 49 of the listing agreement comes into effect from January 1, 2006, according
to the UK-based World Council for Corporate Governance (WCCG), a global body
that promotes greater boardroom transparency.”
The New Law disqualifies the company’s existing legal, audit or consultancy
associate, or suppliers, and relatives of promoters to be independent directors. It even
disallows a shareholders with more than a 2% stake in a company form being as
independent director, as well as former senior executives who left the company less
than three years ago. All this make the situation more stringent for the Indian
Corporate.
Situation is more difficult for many family-owned companies which feel that giving
up half the board positions to independent directors is hardly fair when they own the
lion’s share of the company.
Under the new Board Members be responsible for a variety of legal compliances
issues about which they may not have personal knowledge. This will require host of
compliance officers since the law in question are diverse and compliance officer will
also have to be diverse – accountant, lawyers and engineers. This will certainly
increase the expenditure of compliance.
What will be the role of independent directors in public sector is a critical issues. As
will independent directors in oil companies force their boards to oppose the
government’s policy of enforcing these companies to absorb the rising oil process. In
India we need a Corporate Governance code which is rooted in Indian Corporate
reality. In today era of consumerism, in the long run only those companies are going
have healthy balance sheet that willingly follows high standards of ethics and
corporate standards.
To ensure corporate governance the securities and Exchange Board of India (SEBI)
has stipulated that effective from January 2006 at least one-third of the directors on
the board of a company should comprise "independent directors". Known as 'revised
clause 49', SEBI has fixed the December 31, 2005 as the date by which all the listed
that all listed entities would have to comply with clause 49.
The revised clause 49 stipulates that in companies which have executive chairmen,
50% of board should constitute independent directors. For companies with non-
executive chairmen one-third of the board must comprise independent directors.
The companies which will not be ensure it may have to face penalties such as
suspension of trading and delisting from the stock exchange. While SEBI can delist a
company for non-compliance, even individual stock exchanges have been empowered
to suspend the trading of shares of defaulting companies. Acoording the clause the
functions of the board of the directors now includes:
84 z The corporate as well as the operational strategy
z Policies determining the terms of employment of the top management; its
performance evaluation, compensation and succession, etc.
z Determining and propagating the right values and culture in the organisation.
z Ensuring healthy governance practices within the organisation
z Ensuring co-ordination between the CEO and the top management and balancing
the relationship with various stakeholders
z Statutory Responsibilities
z Ensuring legal compliance with 'clause 49' of SEBI's 'listing agreement'
Now companies are to form various committees like a 'nomination committee',
'compensation committee', 'governance committee' and other committees like to
adhere to corporate governance.
The function of the 'compensation committee' for instance, is to ensure credible and
transparent policy in determining and accounting for specific remuneration packages
for executive directors including pension rights and any compensation payment.
According to the new law the nomination committee of the board to be composed
entirely of independent directors, who will be responsible for the evaluation and
nomination of board members.
Companies Act defined the Independent Director in following manner:
z Are not relatives of the chairman, managing director, whole time director, or the
company secretary
z Should not have been auditors, internal auditors, legal advisors or consultants to
the company during any of the preceding three financial years
z Should not have been suppliers, vendors or customers of the company
z Should not hold below two per cent of the shares of the company, presently or in
past
z Should not have held any position in the company
z Should not have been a director for a continuous period of nine years
z Nominee directors of banks or FIs cannot be considered independent directors
Independent directors according to SEBI's clause 49 of the listing agreement:
z Should not be related to promoters or the management at the board level or at one
level below the board
z Should not have been a partner or an executive of the statutory audit firm or an
internal audit firm or legal and consultancy firm, during the last three years
z Should not have been suppliers, service providers or customers of the company
z Should hold below two per cent of the shares of the company
z Should not have been an executive of the company in the immediately preceeding
three financial years
z Appointment of non executive director a beyond continuous period of nine years
not permissible
z Nominee directors of banks or FIs will be considered as independent directors
85
Table 7.1: Instructions Organization have to Follow to have Corporate Governance Corporate Governance
z 50% of the board should comprise of non-executive directors
z If Chairman is Executive, 50% of Board consisting of Independent Directors
z Else 1/3 of BoD should be independent
z Nominee Directors
z Information to be made available
Management Discussion and Analysis report to be attached with annual report. The following
should be covered:
z Opportunities and Threats
z Segment-wise or product-wise performance
z Outlook
z Risks and concerns
z Internal control systems and their adequacy
z Discussion on financial performance with respect to operational performance
z Material developments in Human Resources /Industrial Relations front, including number of
people employed
Corporate governance improves the economic efficiency of a firm. Corporate

Governance emerges from the culture and mindset of management and cannot be
regulated legislation alone. Corporate Governance ensures that organization works in
the interest of all the stakeholders, it ensures that corporate doesn’t work in the favor
of majority shareholders. It is about openness, integrity and accountability. It take
cares of that management act as trustees of the shareholders at large and prevent
asymmetry of benefits between various sections of shareholders, especially between
the owner-managers and the rest of the shareholders.
7.7 LET US SUM UP

Corporate Governance is a buzzword today in Corporate. After the fiasco of Enron
and Global Trust Bank and after various corporate scams the importance of corporate
governance increase very much. Corporate Governance is about governing the
corporate in the interest of the every shareholder in a fair manner that should not be
biased towards majority shareholders. Corporate governance is the acceptance by
management of the inalienable rights of shareholders as the true owners of the
corporation and of their own role as trustees on behalf of the shareholders. It is about
commitment to values, about ethical business conduct and about making a distinction
between personal and corporate funds in the management of a company.
SEBI), the CEO, the board of directors and management. Other stakeholders who take
part include suppliers, employees, creditors, customers and the community at large.
Corporate Governance ensures efficient use of resources. It provides for choosing the
best managers to administer the scarce resources. It helps the managers to remain
focused on improving performance, making sure that they are replaced when they fail
to do so. It pressurizes the organization to comply with the laws, regulations and
expectations of society. It increases the shareholders value which attract more
investors, thus Corporate Governance ensures easy access to capital. As corporate
governance leads to higher consumers satisfaction thus it helps in increasing market
share and sales. Thus it also reduces the advertising and promotion cost.
Corporate governance initiatives in India began in 1998 with the Desirable Code of
Corporate Governance – a voluntary code published by the CII, and the first formal
regulatory framework for listed companies specifically for corporate governance,
established by the SEBI. SEBI constituted various committees for the implementation
86 of Corporate Governance in India. These Committees are Birla Committee under the
Chairmanship of Kumar Manglam Birla, and Narayan Murthy committee under the
chairmanship of Sri N.R. Narayana Murthi. Recommendation of these committees are
implemented by SEBI. On there recommendation SEBI also introduce the clause 49 to
ensure better corporate governance by inducting more and more independent directors
in the Board.

1. Pick few companies and find the change in their Board Members after the
implementation of Clause 49.
2. Pick few companies and out relationship between profit and corporate
governance.
7.9 KEYWORDS
Corporate governance: Corporate Governance is the system by which businesses are
directed and controlled.
CII: Confederation of Indian Industries.
SEBI: Securities and Exchange Board of India.
Narayan Murthy Committee: Committee constituted by SEBI on Corporate
Governance under the chairmanship of Sri N.R. Narayana Murthy.
KM Birla Committee: KM Birla committee was a 19 member committee appointed
by SEBI on 7th May 1999 on Corporate Governance.
Clause 49: Clause introduce by SEBI for the implementation of Corporate
Governance.

1. What is corporate governance? Discuss the scope and importance of corporate
governance.
2. Write a brief note on the development of corporate governance in India.
3. Write short notes on: (a) Birla Committee, (b) Narayan Murthy Committee,
(c) Clause 49, (d) Independent Director.

CYP 1
At its broadest, corporate governance comprehends the framework of rules,
relationships, systems and processes within and by which fiduciary authority is
exercised and controlled in corporations.
CYP 2
SEBI), the CEO, the board of directors and management. Other stakeholders
who take part include suppliers, employees, creditors, customers and the
community at large.
CYP 3
There should be an Audit Committee, which shall have access to all financial
information. Major role of Audit Committee is to have an oversight of the
company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and
credible.
Contd…
87
CYP 4
1. Corporate governance
2. McKensey
3. Trusteeship
4. CII,
5. KM Birla

House.
Prentice Hall.
88
89
Globalisation
UNIT III
90
91
LESSON Globalisation
8
GLOBALISATION
CONTENTS
8.1 Introduction
8.2 Globalisation
8.3 Characteristics of Globalisation
8.4 Impact of Globalisation on the Functions of Corporations
8.4.1 Designing in Global Environment
8.4.2 Production Location Selection
8.4.3 Rationalized Production
8.5 Let us Sum up
8.7 Keywords

z Understand the concept of Globalisation
z Know the reasons of Globalisation
z Know how organization should cope with Globalisation
8.1 INTRODUCTION
The many meanings of the word "Globalisation" have accumulated very rapidly, and
recently, and the verb, "globalize" is first attested by the Merriam Webster Dictionary
in 1944. In considering the history of Globalisation, some authors focus on events
since 1492, but most scholars and theorists concentrate on the much more recent past.
Globalisation is not just a recent phenomenon.
Long before 1492, people began to link together disparate locations on the globe into
extensive systems of communication, migration, and interconnections. This formation
of systems of interaction between the global and the local has been a central driving
force in world history.
In 325 BCE, Chandragupta Maurya becomes a Buddhist and combines the expansive
powers of a world religion, trade economy, and imperial armies for the first time.
Greeks (Selukas) sues for peace with Chandragupta in 325 at Gerosia, marking the
eastward link among overland routes between the Mediterranean, Persia, India, and
Central Asia.
92 By 1350, networks of trade which involved frequent movements of people, animals,
goods, money, and micro-organisms ran from England to China, running down
through France and Italy across the Mediterranean to the Levant and Egypt, and then
over land across Central Asia (the Silk Road) and along sea lanes down the Red Sea,
across the Indian Ocean, and through the Straits of Malacca to the China coast. 1492
and 1498: Columbus and Vasco da Gama travel west and east to the Indies,
inaugurating an age of European sea-borne empires.
In South Asia, it should be noted, the Delhi Sultanate and Deccan states provided a
system of power that connected the inland trading routes of Central Asia with the
coastal towns of Bengal and the peninsula and thus to Indian Ocean trade for the first
time.
The commodities trades continued as before well into the seventeenth century,
concentrating on local products from each region of the Eurasian system – Chinese
silk and porcelain, Sumatra spices, Malabar cinnamon and pepper, etc. – but by the
1600s, the long distance trade was more deeply entrenched in the production process.
An expansion of commercial production and commodities trades was supported by the
arrival into Asia of precious metals from the New World, which came both from the
East and West (the Atlantic and Pacific routes – via Palestine and Iran, and also the
Philippines and China).
Liberalisation of the 19th century is often called "The First Era of Globalisation". The
"First Era of Globalisation" is said to have broken down in stages beginning with the
first World War, and then collapsing with the crisis of the gold standard in the late
1920's and early 1930's. Countries that engaged in that era of Globalisation, including
the European core, some of the European periphery and various European offshoots in
the Americas and Oceania, prospered. Inequality between those states fell, as goods,
capital and labour flowed remarkably freely between nations.
20th century is also governed by Economic Nationalism. Most of the nations of even
Europe followed policy of economic nationalism. Though after second world war
economic nationalism became the key factor for the most the nations in Asia and
Europe. Even the nations like USA and France are not untouched with phenomenon of
Economic Nationalism. As when USA started loosing jobs because of Globalisation it
reacted sharply, not only this in 20th century itself it took various measures to protect
its domestic industry like Automobile and Motorcycle. As it imposed quantitative
restrictions on the imports of automobiles from Japan. Same way when in 2006 an
Britain based NRI make a bid for the Europe’s largest Steel Maker France reacted
sharply.
Economic Nationalism is a term used to describe policies which are guided by the
idea of protecting domestic consumption, labor and capital formation, even if this
requires the imposition of tariffs and other restrictions on the movement of labour,
goods and capital. It is in opposition to Globalisation in many cases, or at least it
questions the perceived benefits of unrestricted free trade. Economic nationalism may
include such doctrines as protectionism and import substitution.
8.2 GLOBALISATION
People around the globe are more connected to each other than ever before.
Information and money flow more quickly than ever. Goods and services produced in
one part of the world are increasingly available in all parts of the world. International
travel is more frequent. International communication is commonplace. This
phenomenon has been titled "Globalisation."
It refers to the increasing integration of economies around the world, particularly
through trade and financial flows. The term sometimes also refers to the movement of
people (labor) and knowledge (technology) across international borders.
Globalisation (or Globalisation) is a modern term used to describe the changes in 93
Globalisation
societies and the world economy that result from dramatically increased international
trade and cultural exchange. It describes the increase of trade and investing due to the
falling of barriers and the interdependence of countries. In specifically economic
contexts, it is often understood to refer almost exclusively to the effects of trade,
particularly trade liberalisation or "free trade".
The IMF defines Globalisation as “the growing economic interdependence of
countries worldwide through increasing volume and variety of cross-border
transactions in goods and services, freer international capital flows, and more rapid
and widespread diffusion of technology” (IMF, World Economic Outlook, May,
1997). The World Bank defines Globalisation as the "Freedom and ability of
individuals and firms to initiate voluntary economic transactions with residents of
other countries".
"Globalisation" can mean:
z It shares a number of characteristics with internationalization and is often used
interchangeably, although some prefer to use Globalisation to emphasize the
erosion of the nation-state or national boundaries.
z The formation of a global village: Closer contact between different parts of the
world, with increasing possibilities of personal exchange, mutual understanding
and friendship between "world citizens", and creation of a global civilization.
z Economic Globalisation: There are four aspects to economic Globalisation,
referring to four different flows across boundaries, namely flows of
goods/services, i.e. 'free trade (or at least freer trade), flows of people (migration),
of capital and of technology. A consequence of economic Globalisation is
increasing relations among members of an industry in different parts of the world
(Globalisation of an industry), with a corresponding erosion of National
Sovereignty in the economic sphere.
z In the field of Management Globalisation is a Marketing or Strategy term that
refers to the emergence of international markets for consumer goods characterized
by similar customer needs and tastes enabling, for example, selling the same cars
or soaps or foods with similar ad campaigns to people in different cultures. This
usage is contrasted with internationalization which describes the activities of
multinational companies dealing across borders in financial instruments,
commodities, or products that are extensively tailored to local markets.
Globalisation offers extensive opportunities for truly worldwide development but it is
not progressing evenly. Some countries are becoming integrated into the global
economy more quickly than others. Countries that have been able to integrate are
seeing faster growth and reduced poverty. Outward-oriented policies brought
dynamism and greater prosperity to much of East Asia, transforming it from one of
the poorest areas of the world 40 years ago. And as living standards rose, it became
possible to make progress on democracy and economic issues such as the environment
and work standards.
The removal of barriers to the movement of goods and services and in some cases
even the movement of personnel led to the increasing specialization of nations in
exports, to get engage in those goods in which they have comparative advantage over
other, as rest can be imported at much economical price internationally instead of
manufacturing it locally. Over the past two decade’s world is observing following
trends towards Globalisation.
94
Business Environment and Ethics Check Your Progress 1
Define the following:
1. Economic nationalism
……………………………………………………………………………….
……………………………………………………………………………….
2. Globalisation
……………………………………………………………………………….
……………………………………………………………………………….
8.3 CHARACTERISTICS OF GLOBALISATION

1. Over the past two decades, there is a rapid Globalisation of markets and
production.
2. The Globalisation of markets implies that national markets are merging into one
huge marketplace.
3. Erosion of national sovereignty and national borders through international
agreements leading to organizations like the WTP and EU.
4. Development of Global Financial System.
5. Reduced transportation costs, especially from development of containerization for
ocean shipping.
6. The Globalisation of production implies that firms are basing individual
productive activities at the optimal world locations for the particular activities. As
a consequence, it is increasingly irrelevant to talk about American products,
Japanese products, or German products, since these are being replaced by "global"
products.
7. Two factors seem to underlie the trend toward Globalisation: declining trade
barriers and changes in communication, information, and transportation
technologies.
8. Since the end of World War II, there has been a significant lowering of barriers to
the free flow of goods, services, and capital.
9. Increase in international flow of capital.
10. Increase in the share of the world economy controlled by multinational
corporations.
11. Increased role of international organizations such as WTO, WIPO, IMF that deal
with international transactions.
12. Increase of economic practices like outsourcing, by multinational corporations
Elimination of capital controls.
13. Intellectual Property Restrictions.
14. Harmonization of intellectual property laws across nations (generally speaking,
with more restrictions).
15. Supranational recognition of intellectual property restrictions (e.g. patents granted
by China would be recognized in the US).
16. As a consequence of the Globalisation of production and markets, in the last 95
Globalisation
decade world trade has grown faster than world output, foreign direct investment
has surged, imports have penetrated more deeply into the world's industrial
nations, and competitive pressures have increased in industry after industry.
17. The development of the microprocessor and related developments in
communication and information processing technology have helped firms link
their worldwide operations into sophisticated information networks.
18. Development of a global telecommunications infrastructure and greater trans-
border data flow, using such technologies as the Internet communication satellites
and telephones.
19. Increases in the number of standards applied globally; e.g. copyright laws and
patents.
20. The most dramatic environmental trend has been the collapse of Communist
power in Eastern Europe, which has created enormous long-run opportunities for
international businesses. In addition, the move toward free market economies in
China, Latin America and India is creating opportunities (and threats) for Western
international businesses.
21. The benefits and costs of the emerging global economy are being hotly debated
among businesspeople, economists, and politicians. The debate focuses on the
impact of Globalisation on jobs, wages, the environment, working conditions, and
national sovereignty.
22. Some argue that even terrorism has undergone Globalisation with attacks in
foreign countries that have no direct relation with the own country.
23. Culturally
Greater international cultural exchange.
Spreading of multiculturalism and better individual access to Cultural
diversity.
The imported culture can easily supplant the local culture, causing reduction
in diversity through hybridization or even assimilation.
The most prominent form of this is Westernization but Sanitization of cultures
also takes place.
Greater international travel and tourism.
Greater immigration including illegal immigration.
24. Managing an international business is different from managing a domestic
business for at least four reasons:
(i) Countries are different,
(ii) The range of problems confronted by a manager in an international business is
wider and the problems themselves more complex than those confronted by a
manager in a domestic business,
(iii) Managers in an international business must find ways to work within the
limits imposed by governments' intervention in the international trade and
investment system, and
(iv) International transactions involve converting money into different currencies.
In nutshell all the Globalisation can be characterized by four key factors which
resulted in Globalisation:
1. Emergence of international organization specifically WTO. (Reduction in Tariff)
96 2. Emergence of Regional Trade Agreements/FTA as ASEAN, NAFTA.
(Reduction in Tariff)
3. Growing role of Multinational Corporations.
4. End of Cold War/ Paradigm shift in erstwhile socialist economies
5. Emerging Technology
1. By signing the WTO more than 150 nations get agree to either reduce or to
eliminate tariffs and to eliminate non tariff barrier. This results in a free flow of
factors of production that is capital, labour, machines and raw material. Every
next year the list of items with reduced tariffs increased. Hence world is becoming
borderless as far as trade is concern and organizations have wide opportunities in
terms of new market, new source of raw material and human resource and capital.
2. While the pace of scheme of eliminating trade barrier is slow at WTO and at
many times faces bottleneck in talks in the crucial issues like Agriculture or
NAMA, regional groupings have achieved remarkable success in not only in
reducing tariff rather in eliminating them at least at regional level. As there is no
trade barrier in NAFTA countries that is USA, Canada and Mexico. EU have gone
one step ahead and launched one currency euro which is accepted in most EU
nations. ASEAN is also eliminating their trade barrier. There is all possibility that
in few years whole world will be divided into few regional economic groups.
3. Multinational Corporations: It has been said that the multinational corporation
(MNC) is the most powerful institution in the world today. Indeed, the process of
Globalisation, which is radically transforming our world, is driven in large part by
the rapid growth and spread of corporations. Since the end of the Cold War in
1991, nearly all nations in the world have reduced the role of the state in the
economy and lowered barriers to the international movement of goods, services,
capital, ideas and technology. As the walls imposed by nations/states have
crumbled, multinational corporations have thrived, spreading across the globe in
search of new markets and factors of production. MNCs have expanded across
national borders in two ways: trade and Foreign Direct Investment (FDI). Each
has contributed to stable, lasting benefits to the world economy.
The increasing power of the Multinational Corporation (MNC) is beyond doubt.
The production of MNCs amounts to approximately one-quarter of world output.
Fifty-one of the world’s largest 100 economies are corporations, not countries.
The total value of foreign sales of MNCs now exceeds world exports of goods and
services, and intra-firm trade alone by MNCs accounts for about one-third of
world trade. There are now approximately 63,000 multinational corporations –
defined as firms that engage in international production – with over 690,000
foreign affiliates. In 1997, these firms controlled $12 trillion in foreign assets,
employed 30 million workers and earned $9.5 trillion in revenues – larger than the
annual GDP of the United States or the European Union (EU). The rapid growth
of MNCs is a direct result of the worldwide liberalisation of trade and investment.
Corporations have grown larger because they now compete in much bigger
markets.
4. End of cold war and paradigm shift in the erstwhile socialist countries also
brought significant change in world. International event like dismantling of USSR
and end of Communist regime not only from USSR but from also Eastern Europe,
unification of Germany, Communist Govt. of China inviting FDI, and erstwhile
closed economy like India following a policy of Liberalisation, Privatization and
Globalisation etc have contributed in changing whole world into one economic
theater.
5. Technology is working as catalyst to multiply the pace of Globalisation. New 97
Globalisation
technology of communication has brought significant changes in way, the
business is done. Because of communication technology organizations are
fragmenting there operations all over world. As now organizations are
establishing there basic research centers in USA and Britain, value added research
centers at China and India, production facilities are shifted to South East Asia,
India, China or Mexico, designing is going on in Italy and France, quality control
methods are applied from Japan and then product is marketed all over world. All
these activities can be coordinated and managed only through the modern means
of communication and technology. It because of technology only those
organizations are able to take the advantage of such big opportunities.
8.4 IMPACT OF GLOBALISATION ON THE FUNCTIONS

OF CORPORATIONS
Globalisation has influenced the every part of the Globe. Corporations are changing
there strategies and are reorganizing there function to cope up with the changed
scenario. In the changed scenario they are reorganizing and bringing change in all its
functions whether it is production process or location, Product strategy, Marketing,
Finance, HR policies etc. Few changes which an organization has to brought are as
follows:
8.4.1 Designing in Global Environment

If managing product development processes was a challenge before, it is not getting
any easier as companies continue to adopt global design strategies. Global design has
cost benefits that are very attractive to today’s manufacturer, but adds new Product
Lifecycle Management (PLM) challenges and intensifies existing problem areas such
as protecting intellectual property. Designing products in a distributed approach
makes classic control, communication, and collaboration even more challenging,
requiring better management of product innovation, product development, and
engineering processes and new approaches to sharing product designs.
8.4.2 Production Location Selection

Jeffrey Immelt of GE Medical Systems (GEMS), pushed for acquisitions to build up
scale because, for the leading global competitors, an R&D-to-sales ratio of at least 8
percent represented a significant source of scale economies. But he also implemented
a production strategy that was intended to arbitrage cost differences by concentrating
manufacturing operations—and, ultimately, other activities—wherever in the world
they could be carried out most cost effectively. By 2001, GEMS obtained 15 percent
of its direct material purchases from, and had located 40 percent of its own
manufacturing activities in, low-cost countries.
8.4.3 Rationalized Production

Companies produce different components or different portions of their product line in
different parts of the world to take advantage of low labor costs, capital, and raw
materials. This is rationalized production. In a new Globalised world production
rationalization is easier. As now organization can outsource or can established there
own production units in those areas where it is more economical. As GE use Mexico
as a manufacture base for labor-intensive operations. Today Japan sales a Japanese car
to American consumer which is making in USA and Americans are selling American
cars which are made in Japan. Not only this British Firms sell British Cricket Bat
which are made in India, Asia manufactures the sports shoes for almost all the major
sports shoe manufacturers, much of the production of motherboards for PCs is located
in Taiwan, in microwave ovens, Japanese brands have less than a 50% share of the US
98 market, but manufacturing share of Japanese companies is over 70%. After the
liberalisation in economies India and China a great shift in location is going on as
more and more organizations are shifting there labor intensive operations to these
locations.
Thailand, Vietnam, Indonesia, Malaysia, Philippines, Singapore, and Brunei
Darussalam are small countries themselves but as they become member of ASEAN
the whole region became very attractive from business point of view and more and
more companies started establishing there manufacturing unit there to take the
advantage of cost and vast market. And today this region is one of the most active
business hub.
Vertical Integration
Vertical Integration is a company’s control of the different stages in a value chain of
making of product- from raw material to production to final distribution of product.
As international trade barriers are eliminating organizations can combine resources
located in more than one country. As Indian petroleum companies who have world
class refining capacities import petrol but as in new system they are allowed to invest
overseas they are acquiring oil wells overseas to ensure regular supply of oil in future,
same way Shell acquire oil well all over world and have refinery all over world.
Companies are vertically integrating themselves. Recently to integrate vertically
Videocon acquired the picture tube manufacturing capacities of Thomson with this
acquisition Videocon get access to Picture Tube manufacturing in many countries
including Europe. Asian Paints also have its operations in more than 27 nations.
Ranbaxy and Dr. Reddy’s Lab is also taking locational advantage by doing Horizontal
integration by acquiring generic pharmaceutical organization in USA , Europe, Israel
and other nations.
Product Strategy
It was a Coke CEO, the late Roberto Goizueta, who declared in 1996: "The labels
'international' and 'domestic'…no longer apply." His Globalisation program, often
summarized under the tagline "think global, act global," had included an
unprecedented amount of standardization. By the time he passed away in 1997, Coca-
Cola derived 67 percent of its revenues and 77 percent of its profits from outside
North America. To cross borders organization has to face a very critical question that
is Product Standardization vs. Product Adaptation.
Standardization gives the advantages in the production and distribution of products
and services. If cost is the decisive factor as in case of most commodities like steel the
answer is economies of scale and through standardization an organization can fulfill
the demand of many nations through one plant. Even in consumer goods economies
standardization work at least at regional level as in India Chinese are toys are very
successful and after reduction of tariff barrier they have almost captured the Indian
market. Same way in industrial goods like Processors, RAM, Chemicals, etc
standardization can save millions of Dollars and Globalisation helps in establishing
Global plants which is win-win situation as organization reduces the cost and
customer gets the product at economical price. Standardization is not possible in all
the goods, specifically in most of the consumer goods.
In many goods product adaptation is essential to meet the local conditions or
preferences. Some time adaptation is mandatory because of Govt.’s regulation, Local
Standards (as Electrical), Measurement Standards and Product Standards and Systems.
Some time product modification is done only because of making it fit for specific
distribution channel as in India COCA - COLA is distributed in glass bottles which
are reused on the other hand in USA they use Tin which are not recollected from the
outlet. Product adaptation increases the cost. Some time when product is new to new
market as few years back electric shaver to Indian market then issue of adaptation and
standardization become crucial as sales volume don’t justify the adaptation and the 99
Globalisation
standard product don’t suit the local requirement.
But organization has to choose a trade off between standardization and product
adaptation.
Besides these Globalisation have influenced every aspect of organization as it may be
the Sales Promotion, Research, Market Research, Distribution Strategies, Product
Development Strategies etc.
After the implementation of GATS (General Agreement on Trade and Tariffs) and
clause of free movement of labor in most of regional trade agreements the HR policies
have seen significant change. More and more organization are adopting international
HR standards because:
1. As job hopping may increase after this new opportunities will be available
2. When an MNC follows international standards in a new territory local industry
also learns and follow international HR standards.
3. Because of free movement of capital and goods competition increases because of
FDI and imports in this situation a Business Unit can survive only by providing a
world class product. And to provide world class product it must have HR of
international standards and it has to invest in the nourishment of that HR.
4. When cost of HR is a significant cost of production as in case of Software or
Service industry the new trend is that shift the location of the unit where HR is
available in abundance. It is the reason that more and more software companies
are coming to India.
Fill in the blanks:
1. The verb, "globalize" is first attested by the __________Webster
Dictionary in 1944.
2. NAFTA countries that is USA, Canada and_____________.
3. EU have gone one step ahead and launched one currency ____________
which is accepted in most EU nations.
4. _______________ Integration is a company’s control of the different
stages in a value chain of making of product.
5. ________________ acquired the picture tube manufacturing capacities of
Thomson.
8.5 LET US SUM UP

The verb, "globalize" is first attested by the Merriam Webster Dictionary in 1944. The
IMF defines Globalisation as “the growing economic interdependence of countries
worldwide through increasing volume and variety of cross-border transactions in
goods and services, freer international capital flows, and more rapid and widespread
diffusion of technology” In nutshell all the Globalisation can be characterized by four
key factors which resulted in Globalisation:
1. Emergence of international organization specifically WTO.(Reduction in Tariff)
2. Emergence of Regional Trade Agreements/FTA as ASEAN, NAFTA.
(Reduction in Tariff)
3. Growing role of Multi-national Corporations.
4. End of Cold War/ Paradigm shift in erstwhile socialist economies
5. Emerging Technology
100 Corporations are changing there strategies and are reorganizing there function to cope
up with the changed scenario. In the changed scenario they are reorganizing and
bringing change in all its functions whether it is production process or location,
Product strategy, Marketing, Finance, HR policies etc.

1. Prepare an impact on the impact of Globalisation on Indian Industry.
2. “Globalisation is a threat or opportunity for Indian organization”. Discuss the
statement.
8.7 KEYWORDS
Nationalism Economic: Nationalism is a term used to describe policies which are
guided by the idea of protecting domestic consumption, labor and capital formation.
FTA: Foreign Trade Agreements.
ASEAN: Association of South East Asian Nations.

1. Define Globalisation and its characteristics.
2. Discuss the impact of Globalisation on the strategies of the organizations.

CYP 1
1. Economic nationalism is a term used to describe policies which are guided
by the idea of protecting domestic consumption, labor and capital
formation, even if this requires the imposition of tariffs and other
restrictions on the movement of labour, goods and capital.
2. The IMF defines Globalisation as “the growing economic interdependence
of countries worldwide through increasing volume and variety of cross-
border transactions in goods and services, freer international capital flows,
and more rapid and widespread diffusion of technology”.
CYP 2
1. Merriam, 2. Mexico, 3. Euro,
4. Vertical, 5. Videocon

House.
Prentice Hall.
101
LESSON Multinational Corporations
9
MULTINATIONAL CORPORATIONS
CONTENTS
9.1 Introduction
9.2 Multinational Corporation (MNCs)
9.3 Multinational, Global, Multi-Domestic and Transnational
9.3.1 Multinational Enterprises (MNE)
9.3.2 Transnational Companies (TNCs)
9.3.3 Global Company
9.3.4 Multi-domestic Company
9.4 Why Companies Cross Borders (Benefits of Being MNCs)
9.5 Impact of MNC
9.5.1 Impact on the Trade Balance
9.5.2 Promote Small Scale/Ancillary Industry
9.5.3 Knowledge Transfer
9.5.4 Improves the Technology Level of Local Firms
9.5.5 Utilization of Resources
9.5.6 Inter-industry Linkage Effects
9.6 Demerits of MNC
9.6.1 Exploitation of Workers
9.6.2 Transfer Pricing
9.7 MNCs of India
9.8 Let us Sum up
9.10 Keywords

z Know the characteristics of multinational corporations
z Explain various types of multinational corporations
z Discuss the impact of multinational corporations on origin country and target
country
z Understand the Indian multinational firms
102
Business Environment and Ethics 9.1 INTRODUCTION
It has been said that the multinational Corporation (MNC) is the most powerful
institution in the world today. Indeed, the process of globalization, which is radically
transforming our world, is driven in large part by the rapid growth and spread of
corporations. Since the end of the Cold War in 1991, nearly all nations in the world
have reduced the role of the state in the economy and lowered barriers to the
international movement of goods, services, capital, ideas and technology. As the walls
imposed by nations/states have crumbled, multinational corporations have thrived,
spreading across the globe in search of new markets and factors of production. MNCs
have expanded across national borders in two ways: trade and Foreign Direct
Investment (FDI). Each has contributed to stable, lasting benefits to the world
economy.
Although modern multinational firms date from the late nineteenth century, the term
Multinational Corporation did not appear until 1960. At a conference at Carnegie
Mellon University, David Lilienthal (1960) distinguished between portfolio and direct
investment and then defined ‘Such corporations – which have their home in one
country but which operate and live under the laws of other countries as well..’ as
multinational corporations. It is of interest that from the start the multinational
corporation was defined in terms of jurisdiction and potential jurisdictional conflict.
The modern multinational corporation has its roots in the Dutch and British East India
Companies of the 17th century. These companies imposed some semblance of order,
often forcefully and illegitimately, on the world of commerce, which until then was
ruled by economic anarchy. Where once pirates threatened trade and commerce, the
East India companies assembled armies and erected fortresses to protect their pursuit
of profit. They often gained market share by force – against rivals, including one
another, and against the inhabitants of lands they wished to colonize. Typically, the
companies demanded free trade and local monopoly rights in the markets in which
they operated so as to maximize profits. These predatory practices impacted the
colonized lands for the worse.
Multinationals Corporations are major player in the international business. In an era of
WTO, Regional Groupings, Liberalization, and Globalization role of MNCs have
increased tremendously. Almost ¾ of total GDP of South Korea comes from only 5
MNC of South Korea. Out of 50 largest “economies” 14 are MNCs. In America,
Japan, South Korea, Singapore, Malaysia, etc. There are now approximately 63,000
multinational corporations – defined as firms that engage in international production –
with over 690,000 foreign affiliates. In 1997, these firms controlled $12 trillion in
foreign assets, employed 30 million workers and earned $9.5 trillion in revenues –
larger than the annual GDP of the United States or the European Union (EU). The
rapid growth of MNCs is a direct result of the worldwide liberalization of trade and
investment. Corporations have grown larger because they now compete in much
bigger markets.
Table 9.1: An Overview of the Richest Economic Entities the World Over
Country MNC Revenue / GDP (US$ billions)
1. US 10,417
2. Japan 3,979
3. China 1,237
4. India 515
5. WALMART 287
6. BP 285
7. Exxon Mobil 270
8. Royal Dutch 268
MNC plays a significant role in all aspect of life even they play significant role in a 103
Multinational Corporations
national politics. Most of the MNCs work on the philosophy of that Merchant doesn’t
have any nationality. USA has a maximum number of MNCs. In Asian countries
Japan had maximum number of MNCs.
9.2 MULTINATIONAL CORPORATION (MNCs)

MNCs are defined as and enterprises that is headquartered in one country but has
operations in two or more countries. Sometimes it is difficult to know if a firm is an
MNCs because multinationals often downplay the fact that they are foreign held. For
example most of people in India are unaware that Bata is a Canadian company Bayer
is German company, Nestle is a Swiss company, Cadbury is British company. Various
definitions have been given to describe to MNCs. Sak Onkwist and John J. Shah have
described MNCs in following manner:
Definition by Size
MNCs refer to company which is big in size. Bit this size has many dimensions. One
company may be big in terms of turnover and another may be in terms of Profit and
still another in terms of market value. But corporate size in terms of sales is primarily
used to describe one company as Multinational Corporation. World Investment Report
1997 indicate that there were about 45,000 MNCs with some 2,80,000 affiliates,
according to the World Investment Report 2002 there were about 65000 of them with
about 8.5 Lakh foreign affiliates. But corporate size cant be used as criterion to be
classified as MNC. As GM does not become multinational because it was large but it
became large as a result of going international.
Definition by Structure
Structural definition defines MNC in terms that in how many country firm is operating
and by citizenship of corporate owners and top managers. For example Coca Cola
operates in approx 200 nations and wide spread share holdings. The board room and
top management of top companies is becoming global.
Definitions by Performance
Definitions by performance depends on such characteristics as earnings, sales and
assets. These performance characteristics indicate the extent of the commitment of
corporate resources to foreign operations and the amount of reward from that
commitment. As major junk of revenue of coca cola comes from overseas operations.
In India Ranbaxy is considered as true MNC as half to its turnover comes from
overseas market and this proportions is expected to significantly increase in coming
years.
Human Resource or overseas employees are customarily considered as part of the
performance requirement rather than as part of the structural requirement. Willingness
of company to use overseas personnel is a significant criterion for multinationalism.
Definition by Behavior
According to this definition it is the behavioral characteristics of top management
which decides that firm is a multinational or not. Thus a company becomes more
multinational as its management more internationally. If a management has a
geocentric thinking them this firm is treated as true MNC. In Geocentric approach
firm considers the whole world rather than particular country as its target market.
104
Business Environment and Ethics 9.3 MULTINATIONAL, GLOBAL, MULTI-DOMESTIC
AND TRANSNATIONAL
Multinational, Global, International and Transnational are terms which are frequently
used to describe the organizations which are operating in more than one nations.
Though usually theses terms are used interchangeably but these terms have specific
meanings.
9.3.1 Multinational Enterprises (MNE)

Multinational enterprises (MNE) is a company that takes a global approach to foreign
markets and production; thus it is willing to consider market and production location
anywhere in the world. The term Multinational Corporations (MNCs) is also
commonly used in the international business arena and often is a synonym for MNE.
Usually most of the authors prefers the MNE there are many international firms which
are not organized as corporations.
9.3.2 Transnational Companies (TNCs)

Transnational Companies (TNCs) is a termed used by United Nations and most of
developing nations for multinational firms. This term is used in two contexts. Some
writers use this term for a company that is:
1. trying to achieve economies of scale through global integrations of its functional
area while at the same time
2. highly responsive to different locational environment (a newer name is
multicultural multinational).
Business people define transnational company as a firm formed by merger of two
firms of approximately the same size that are from two different countries as Royal
Dutch Shell is a company that is jointly owned in the United Kingdom and the
Netherlands, and its corporate management is split between the two countries. Same
way Unilever is a Dutch and English firm, VFK-Fokker (Germany – Netherland
aircraft company). Though today frequently this term is used as synonymous for
MNE/MNC. MNE as well as any other company can be categorized into two category
that is a Global Company and Multi-domestic Company.
9.3.3 Global Company

The term Global Company is widely used for MNE but every MNE is not a Global
MNE. Global company is company which has a global vision. It is company which
looks for opportunities worldwide, it sources it products, raw material, and financing
and personnel worldwide, it seeks to maintain a presence in key markets of world and
look for similarities not differences among markets. The biggest characteristic of these
company is that it takes the whole world as single market and it standardize operations
and its product worldwide in one or more of the firm’s functional areas. If we go
strictly by this definition then perhaps there is no Global firm as ever firm do some
alteration in its product or functional strategy according to the local condition and if
overseas market is as big as that of India and China and certain modifications are
essential. Though there are firms who two a extent can be classified as Global firms as
Coco Cola, Pepsi, Kellogs, SONY, etc. These are the companies who keep there
product portfolio same and manufacture the product for whole world considering them
as a single market, though they change many times there functional strategy according
to local requirements.
9.3.4 Multi-domestic Company

It is company which treats its every unit operating in different countries as a
independent profit center. It allows its foreign country operations to act fairly
independently such as by designing and producing a product or service in India for the 105
Indian market and in China for the Chinese market.
1. Multinational Corporations
……………………………………………………………………………….
……………………………………………………………………………….
2. Global Company
……………………………………………………………………………….
……………………………………………………………………………….
3. Multi-domestic Company
……………………………………………………………………………….
……………………………………………………………………………….
9.4 WHY COMPANIES CROSS BORDERS (BENEFITS OF

BEING MNCs)
Undoubtedly firms cross the national boundaries and take the risk of operating in
unknown environment in the hope of earning more profit increasing share holders
wealth, besides this there are many other reasons as survival, new sources of supplies,
cheap human resource, and even just to keep busy nearest rival in its home country.
Some of the key reason of crossing national boundaries are as follows:
1. Survival: Most countries are not as fortunate as that of India, Russia, China or
USA in terms of size, resources, and opportunities. Most European nations are
small in size or most middle east and south east countries are rich in only one or
very few resources. In these countries the organization are bound to do business in
and with other countries to survive. Not only in these countries even in big
countries organization are bound to find new markets for their product and cheap
source of resources to remain competitive and to survive.
2. Growth of Overseas Market (Sales): This is the biggest reason of going abroad.
In the past years. In last 20 years many economies have opened there doors for
world. This resulted in big opportunity in terms of Market. Most of the European
nations, USA, Canada, Japan etc have a stagnant population growth and very low
GDP growth all this led to companies to search for new market. Emerging
economies that is India, China, South East Asia form significant market perhaps
more than 35% of world market give them this opportunity and MNC started
expanding its wings in these areas. India and China are among top five countries
of world in terms of Purchasing Power Parity. All this attracted many organization
to tap new market in emerging economies. Besides this agreement/ groups like
GATT, GATS, ASEAN, EU, SAPTA, NAFTA etc have also created huge
opportunities of business for organizations To tap these opportunities organization
are going abroad.
3. Diversification: No organization wants to keep all its egg in one basket. Every
organization wants to diversify the risk and internationalization is a good manner
to diversify the risk. Through internationalization a organization can diversify its
risk while sticking to its core competency or old business. As different countries
have different trade cycle for same product. When there is a recession in one
106 economy there may be boom in another economy and organization can cover
losses in one country by profits in another country. As Ispat group has steel plant
in almost allover world. Which is number two in almost all the countries is
number one in terms of sale in India, Levers which is behind P&G in USA as
much ahead of P&G in India. Thus MNC diversify risk through
internationalization.
4. Source of Resources: In today’s cut throat competition cost cutting is the key to
success. Prices are controlled by consumers and the only thing which can be
manipulated to increase profit is cost. Organizations go abroad in search of
economical source of supply. A truly global firm always locate its processing in
the best available location in world and outsource HR and other physical
resources from best suited in world. It is the reason that more and more companies
are establishing there Call centers in India. Even Wal-Mart the biggest retailer of
world doesn’t have any retail shop in India have a purchase office in India. Nike
get its shoes manufactured in South East Asia. Nokia, IBM, Toyota, Sony, Philips,
Samsung, Mitsihuta, Boeing, Airbus, Addidas, GM, Ford, etc have there
Manufacturing capacities, Research Center, and ancillary unit at the place which
is best suited for them in world. So companies cross the border to have
economical source of resources.
5. To Protect Market Share: Firms also become MNEs in response to increased
foreign competition and a desire to protect their home market share. Using a
“follow the competitor” strategy, a growing number of MNEs now set up
operations in the home countries of their major competitors. This approach serves
dual purpose: - (1) it takes away business from their competitors by offering
customers other choices and (2) it lets competitors know that, if they attack the
MNEs home markets, they will face a similar response.
6. Tariff and Non-Tariff Barrier: Organizations establish there operation overseas
to deal with tariff and non tariff barriers. Many time countries impose tariff and
non tariff restrictions on import in such case organization establish their
production unit in host country so that it can be treated as local company. As in
late 1970 when USA imposes some non tariff restrictions on automobile import of
Japan, Japanese firm started establishing there units in USA so that in terms of
taxes they can be treated at par with US firms. And soon America become the
playground of Japanese firms.
7. Technology Expertise: A reason for becoming an MNE is to take advantage of
technological expertise by manufacturing goods directly (by FDI) rather than
allowing others to do it under a license. Many MNCs feel it unwise to give
another firm access to proprietary information such as patent, trademarks, or
technological expertise.
8. To have an access to Economical Human Resource: Many a times Companies
cross borders to have an access to the economical human resource. As more and
more Organizations which used to import Human Resource from country are now
establishing there operation in India only to take the advantage of economical
human resource. The cost of human resource is rising this is the significant reason
why companies are crossing borders.
9.5 IMPACT OF MNC

Multinational firms play a pivotal role in global economy, linking rich and poor
economies, and transmitting capital, knowledge, ideas and value systems across
borders. Their interaction with institutions, organizations and individuals is generating
positive and negative spillovers for stakeholders in host countries. In consequence
they have become focal points in the popular debate on the merits and dangers of
globalization, especially when it comes to developing countries. MNE are profit
maximizing, and thus naturally not interested in creating benefits for others without 107
obtaining a good price for it.
9.5.1 Impact on the Trade Balance

The second macroeconomic effect of FDI is their impact on the trade balance. MNEs
have a competitive advantage in both accessing global markets in importing their
products to local markets. The ability to produce at central locations with large
economies of scale and supply markets in several countries is a core strategy of in
many manufacturing MNEs. Hence, they frequently export more than domestic firms,
but also import a larger share of their inputs. A large share of both exports and imports
is typically to or from affiliated companies, i.e. intra-firm international trade. Any
analysis of trade impact of FDI has to consider their impact on both exports and
imports.
Table 9.2: Impact on Balance of Payment on Selected Items
Balance of Payment
Capital Outflows Capital Inflows
Imports Exports
Import Export
- Intermediate goods for local assembly and sale - Final goods for global markets
- Machinery for local production facilities - Intermediate goods for global markets
- Investors’ global products for local sale
Service imports Service exports

- Fees for licenses and other services - Tourism and business travel receipts
Capital Import Capital Export

- Initial equity investment - Profit remittance
- Loans from parent to affiliate - Interest payments
- Repayment of loans
If a country runs a trade deficit, it must compensate for that deficit by reducing its
reserves or receiving an influx of capital. The more capital inflow a country receives
the more it can import and the more it can run a trade deficit. In recent times FDI
helped a lot to Indian in managing trade deficit.
Moreover, MNEs may open new export markets, and open up new export markets for
local followers that can build on the country of origin reputation that foreign investors
may help building, and use the same trade channels. MNEs are more likely to share
such general knowledge, as it is less industry-specific and not part of their core
capabilities and its diffusion to local businesses does not endanger their own
competitive advantage.
9.5.2 Promote Small Scale/Ancillary Industry

MNCs often catalyze the export of complex, technology-intensive products made by
small - and medium-size firms (SMEs) located in host countries. For example,
approximately two-thirds of consumer electronic products made in Korea and Taiwan
are sold to MNCs such as GE, IBM and Toshiba on an “original equipment
manufacture” basis. In India too companies like Maruti Suzuki, Hyundai, Samsung,
LG, etc do most of their purchases from India itself it promotes ancillary industry.
108
9.5.3 Knowledge Transfer
Host countries, especially developing economies, aim to create indigenous
technological capabilities”, that is “skills - technical, managerial and institutional -
that allow productive enterprises to utilize equipment and technical information
efficiently. Foreign investors are a potential source for knowledge at the technical and
systemic level. They can contribute not only by transferring information, but also by
stimulating directly or indirectly the generation of new knowledge in the host country.
Multinational firms possess some firm-specific advantages that can be profitably
combined with locational advantages at a site outside their home country. Knowledge
transfer raises the productivity of the subsidiary in the host economy and thus
contributes to tax revenues and national income and, possibly creates spillovers to the
local economy.
9.5.4 Improves the Technology Level of Local Firms

In the era of globalize capital markets, where overseas borrowing can be used to
supplement domestic savings, the importance of FDI perhaps lies less in the quantity
of capital inflow than on its ability to transfer technology and business best practices
to the domestic firms in the host country. Transfer of technology and business best
practices significantly improves the productivity of domestic firms in the recipient
countries, these firms would improve their international competitiveness, and the
impact of this spillover effect on the economy of the recipient country is arguably
much greater than the impact of the FDI itself. To maximize such benefits to local
firms, governments in many developing countries have stipulated that foreign firms
set up business operations in these countries in the form of Joint Ventures (JVs),
assuming that such cooperation among multinational enterprises and their local
partners would facilitate the transfer of technology and business practices.
Technology and business best practices are equally likely to be transferred from
MNEs to domestic firms in developing countries by way of migration of labour from
the former to the latter it is well proven truth for Indian software industry Labor and
executive mobility can thus enhance productivity throughout the economy by
transferring tacit knowledge that could not be transferred through informal contacts
between firms.
9.5.5 Utilization of Resources

Investment by MNEs increased the local development through a more optimum
combination of unemployed production factors and the utilization or upgrading of
resources. It is said that India is rich country, where people lives, only because India is
rich in mineral resources but unfortunately they have not been used. MNE may enable
idle resources to be used. MNE are always in search of new sources of resources.
MNE not only uses idle resource but they also use them at optimum level as they use
modern equipment, technology, and production methods. This increases their
productivity and reduces the production cost.
Development of Infrastructure and Economic Development

FDI is a transfer of capital across borders, which allows the receiving economy to
increase investment beyond its on savings rate. Traditionally, development economics
has focused on this addition to the capital stock as core contribution of foreign
investment to economic development. FDI is a source of capital because it has a more
long-term character than portfolio investment. It cannot be withdrawn quickly if the
volatile environment goes through an economic downturn, such as the exchange rate
crises in Mexico 1995, East Asia 1997 or Russia 1998.
FDI in infrastructure and business services has a direct impact on productivity its
customers. In industries such as telecommunication, foreign investment leads to
substantial improvement of services required by businesses; in other cases, such as 109
accounting or IT services, foreign investors provide services previously not available
locally.
For instance foreign investment in telecom operators leads to major improvements in
technology and competition in the sector. This ultimately reduces firms’
communication costs and thus increases productivity. Similar effects arise from FDI
in other utilities, such as energy distribution, or motorway and airport projects.
9.5.6 Inter-industry Linkage Effects

There is a strong industry linkage in terms of vertical integration. Vertical integration
can be forward and backward. In a forward integration organization goes one step
ahead to customer and in a backward linkage they go one step backward from
customer means that in forward linkage new unit is customer of organization and in
backward linkage old unit, and in backward linkage new unit becomes the supplier of
organization. If a MNC establish any type of relation (forward and backward
integration) with local entity it improves its productivity.
Forward and Backward Linkages

Foreign firms often purchase intermediate goods (backward integration) from
domestic suppliers. These backward linkages create several impacts on domestic
supplier. Foreign investors may transfer knowledge directly to local suppliers by
training and even joint product development. MNEs improve the productivity of
indigenous firms by providing technical assistance and training of employees to
increase the quality of suppliers products’, by helping in management and
organization, and by assisting them in purchasing of raw materials. Moreover, the FDI
may increase demand for intermediate goods, and thus allow local suppliers to realize
scale economies. In India almost all the MNCs like McDonalds, Pepsi, Coco-Cola,
Suzuki, Hyundai, Samsung etc. have transferred technology and imparted training to
personnel to so they that they can supply products of international standards to them.
McDonalds have even appointed agriculture engineer to help farmer to improve their
crop.
Foreign-owned customers (forward integration) may set higher requirements
regarding product quality and service-aspects of the supply relationships, such as just
in time delivery, thus providing incentives for improving product quality and
production processes.
Local firms acting as marketing outlets for foreign investors may receive considerable
support in form of training in sales techniques and supply of sales equipment such as
umbrellas or refrigerators, and by generating more economies of scale.
Increases Employment
MNC begets new opportunities of employment in host country. MNC transfers their
routine jobs and non core jobs to the destination where labor is cheap. It is the reason
that lot of jobs from Europe and USA have been transferred to India in last decade.
MNCs also transfers its operation to new and economical destination this also
increases the opportunity for employment. MNC plays a critical role in economic
development and in raising income level of people this also increases, this also
increases level of employment. In last decade directly or indirectly MNC have created
millions of Jobs in India in almost all the sector as infrastructure, software, hardware,
old economy industry, entertainment, media, etc.
110
Business Environment and Ethics 9.6 DEMERITS OF MNC
Multinational corporations have become too powerful in absolute terms as well as
relative to governments
The enormous resources controlled by multinational corporations give them a
tremendous amount of power, especially relative to individuals and governments. The
ongoing reduction of national barriers to trade and investment enables these firms to
close shop and head overseas if government, workers or NGOs place restrictions (e.g.,
minimum wage, taxation, labor standards, fines for pollution, etc.) on them or
otherwise inhibit their ability to earn profits. Certainly, there is a danger that any
organization that controls resources and market share on a par with giant
conglomerates like HLL, Reliance or TATA, AV Birla, may abuse its power, perhaps
in ways that undermine democratic processes or hurt consumers. But these
corporations earn their profits through efficiency and innovation, without which they
would quickly lose market share to rivals. They employ millions of workers with
competitive wages, provide relatively low-cost/high-quality goods and services to
consumers and enrich shareholders. Moreover, they must accomplish all of this
without stepping beyond the boundaries of Competition/ Antitrust Law/ Consumer
Act in the countries in which they operate. In light of the profit motive, firm spend
money to influence legislation to its favor if doing so is likely to enhance profitability.
Multinational corporations put profits before people

Critics contend that too much emphasis is placed on attaining profits and enhancing
shareholder value. The sharp focus on shareholder value causes firms to undertake
activities that reduce the level of social welfare in order to make a buck It is true that
the sole focus of a corporation is to earn profits. However, the simplicity of the
corporate incentive system facilitates regulation while encouraging efficiency. For
example, a firm will not pollute if the cost (e.g., a fine, for instance) is greater than the
benefit (e.g., money saved by bypassing proper disposal). That is why legislation
based on the “polluter pays” principle is so effective and so efficient. A corporation
will not abuse its workers, consumers or shareholders, lest these parties abandon the
corporation for one of its competitors. Laws, penalties and surveillance are, in most
cases, sufficient to prevent such collusion. Moreover, the rapidly growing capacity of
civil society, particularly NGOs, places a heavy check on corporate practices. The
increasing sophistication of telecommunications and the scope of media coverage
ensure that harmful corporate practices are revealed to millions of people. In this way,
mobilization by citizens, fines levied by governments, class-action lawsuits and
scrutiny in the media all adversely affect the single objective of any multinational
corporation: profit. Consumer boycotts, fines and other penalties cut into a firm’s
bottom line. Consequently, corporations attempt to avoid activities that might draw
the ire of civil society groups, government and consumers. Finally, empirical evidence
shows that multinational corporations typically use the more environmentally-friendly
technology, which can be transferred to developing countries via FDI, even when not
required, and there is little evidence that governments lower environmental standards
in order to attract investment.
9.6.1 Exploitation of Workers

Another contention is that multinational firms are too powerful in relation to workers
and even unions. Worldwide liberalization magnifies this mismatch. Fleet-footed
multinationals can simply pick up and move jobs overseas to a place where unions are
weak or illegal, wages are low and working conditions are horrific. The liberalization
of trade and investment, allows MNCs to move operations from rich countries with
high labor standards to poorer countries with lower or non-existent labor standards.
Workers, on the other hand, cannot just pick up and head overseas in search of better
wages and working conditions. The result, according to this “logic,” is a “race to the 111
bottom” in terms of labor standards and wages. This is a deeply flawed argument.
First, many, though certainly not all, workers are mobile enough to move about in
search of better work. Second, a firm cannot necessarily reduce labor costs by
trampling labor standards.
IT has been seen that multinationals pay a ‘wage premium’ compared to domestic
wages in the host countries: around 10%. When Modern Foods is purchased by HLL
from Govt. the employ get happy as they feel elevated in becoming part of a MNC.
Oligopoly of MNC (impact on host country)

If local firms are forced to exit (or are taken over) this can lead to oligopolistic market
structures that may hinder endogenous technological development, reverse the
downward pressure on prices, and even trigger adverse political economy effects. In a
worst-case scenario, the foreign investor may attain monopolistic market power and
thus extract rents in imperfectly competitive markets that are transferred out of the
country. This however would only occur in very specific cases, notably if competition
constrained by high barriers to entry.
The entry of foreign firms in the host country market may increase competition and
force inefficient indigenous firms to use existing technology more efficiently, or look
for new technology, while the least efficient firms may be driven out of the market. As
today Indian soft drink market is today totally dominated by MNC. The remaining
domestic firms would recognize that to compete with FDI firms, they have to invest in
advanced technology to increase their productivity. As in India many local
organization improved as lot their quality as they have to compete with MNCs,
companies like Videocon, Onida, Tata Motors, TISCO etc have improved themselves
in all aspect and are continuously among top five player in their respective categories.
This may benefit consumers in terms of lower prices or better quality products.
M&A Activities by MNCs (impact on host country)

Mergers and acquisitions (M&As) have become increasingly important channels of
cross-border industrial restructuring and foreign direct investment all over the world.
In India, the policy liberalization in the 1990s has facilitated M&As including cross-
border M&As. As a result, the M&A activity has boomed over the past few years. In
tune with the worldwide trend, M&As have become an important conduit for FDI
inflows in India in the recent years. Official figures on the relative importance of
M&As in total FDI inflows are not published. However, the figures summarized in
Table suggests that during 1997-99 nearly 40 per cent of FDI inflows in the country
have taken the form of M&As by MNEs of existing Indian enterprises rather than
organic investments. Though up to 1990 most of the FDI was in the organic
establishment. As after 1991 both Coca Cola and Pepsi acquired many Indian players.
Table 9.3: Share of M&As in FDI Inflows in India
Year FDI Inflows M&A Funds Share of M&A Funds in Inflows
($ million) ($million) (%)
1997 3200 1300 40.6
1998 2900 1000 34.5
1999 (Jan-Mar) 1400 500 35.7
Total 7100 2800 39.4
Source: Economic Times, 23rd December 1998 and 21st June 1999.
After 1991 HLL choose the inorganic rout for growth and acquired many firms, some
of them as follows:
112 Food and Beverages
Mar 1993 - Kothari General Foods
Jun 1993 - Merger of Doom Dooma India
Jun 1993 - Merger of Tea Estates India
Jun 1993 - Merger of Brooke Bond India and Lipton India to form Brooke
Bond Lipton India (BBLIL)
Jun 1993 - Kissan Products (BBLIL)
Jul 1993 - Cadbury’s Dollops (Ice creams)
Mar 1994 - Tata Oil Mills Company (TOMCO)
May 1994 - Merryweather Food Products
Dec 1994 - Kwality Ice Creams
Apr 1995 - Milkfood Ice Creams
Jan 1996 - Merger of BBLIL into HLL
Jan 1998 - Kwality Frozen Foods
Dec 1999 - Rossell Industries Ltd. (Tea plantations)
Jan 2000 - Modern Foods Industries
Personal Care Products

Jan 1993 - Quest International with Pond’s India
Oct 1995 - Lakme Lever Ltd.
Sep 1996 - Lakme’s manufacturing facilities
Jan 1998 - Pond’s India Ltd. with HLL
Opportunity Loss (impact on host country)

Some critics have claimed that MNEs are making investment that domestic companies
otherwise would have undertaken. The result is the displacement of local
entrepreneurial drive or the bidding up of prices without additional output. MNCs
have ability to raise funds in various countries, MNEs thus can reduce their capital
cost relative to that of local companies and apply the savings wither to attracting the
best personnel or to enticing customers from competitors through greater promotional
efforts.
Key Sector Control (impact on host country)

If foreign ownership dominates key industries, then decision made outside of the
country may have extremely adverse effects on the local economy or may exert an
influence on local politics. MNEs are more loyal to their home country as they have
majority of their assets, sales, employees, managers, and stockholders in their home
counties. Their home country have access to their global financial records and can tax
them on their global earnings, and even influence their decision, which host country
govt. cannot do. IN case of conflict among host and home countries policies of MNEs
reflect the policies of home country as in India during Indo- Pak war an MNE from
USA denied to supply the Air Fuel to Indian Air Force on another occasion MNE
involved in Oil refining denied to refined crude oil produced in India and insist on
importing it. If MNE in key sector is state owned then concern become more serious.
It is the reason that countries restrict the entry of foreign investment in key industries.
India doesn’t allow FDI in railways and Atomic Energy, in United States the President
can halt any foreign investment that endangers national security.
MNE Independence (impact on host country) 113
Companies can by playing one country against another, avoid coming under almost
any unfavorable restriction. For instance if they do not like wage rates, union laws fair
employment requirements or pollution and safety codes in one country, they can move
elsewhere or at least threaten to do so. In addition they can develop structures to
minimize their payment of taxes anywhere.
9.6.2 Transfer Pricing

A transfer price is price on goods and services sold by one member of a corporate
family to another, such as from a parent to its subsidiary in a foreign country.
Companies establishes arbitrary transfer price because of difference in taxation
between countries. If tax is higher in host country than MNE will charge higher price
from its subsidiary in host country for all its export from home to host countries thus it
will earn profit in home country and will evade tax in host country. Companies also
set arbitrary transfer prices for competitive reasons or because of restrictions on
currency flows. As if the parent sells a product at low transfer price to the subsidiary
the subsidiary will be able to sell the product to local consumers for less, thus
improving the competitive position. And if subsidiary’s countries has currency
controls on dividend flows, the parent can get more hard currency out of the country
by shipping in products at a high transfer price or by receiving products at a low
transfer price.
Loss of Job (Home Country)

MNC may be a source of employment generator for host country but they are
responsible for cutting of jobs in home country. Once US senator said that China is
taking our dinner and India is taking out lunch with this he means that the job from
USA are transferring to India and China. MNC from USA and Europe are shifting
there production center from home country to cost effective destination like South
East Asia, China and India, all this resulted loss of job in home country.
Obviously not all the MNEs have same effect on home or host country. It depends
upon type of investment and the policy of Govt. One the one hand MNE creates jobs,
utilizes resources, increase national income, develops infrastructure on the other hand
it may use its power in exploiting consumers and some time even nations. FDI is more
likely to generate growth if the product or process is highly differentiated or foreign
investors have access to scarce resources in the more advance LDCs.
Table 9.4: World’s Largest Corporations (Fortune Global 500)
Rank (2004) Company Revenue ($ million)
1. Wal-Mart Stores(US) 287,989.0
2. BP (Britain) 285,059.0
3. EXXON Mobil (US) 270,772.0
4. Royal Dutch/Shell (Britain/Dutch) 268,690.0
5. General Motors (US) 193,517.0
6. DaimlerChrysler (Germany) 176,687.5
7. Toyota Motor (Japan) 172,616.3
8. Ford Motor (US) 172,233.0
9. General Electric (US) 153,866.0
10. Total (France) 152,609.5

Contd…
114
Business Environment and Ethics 11. Chevron (US) 147,967.0
12. Conocophillips (US) 121,663.0
13. AXA(France) 121,663.0
14. Allianz (Germany) 118,937.2
15. Volkswagen (Germany) 110,648.7
16. Citigroup (US) 108,276.0
17. ING Group (Netherland) 105,886.0
18. Nippon Telegraph &Telephone (Japan) 100,545.3
19. American International Group (US) 97,987.0
20. International Business Machine (US) 96,293.0
21. Siemens (Germany) 91,493.2
22. Carrefour (France) 90,381.7
23. Hitachi (Japan) 83,993.0
24. Assicurazioni Generali (Italy) 83,267.0
25. Matsushita Electric Industrial (Japan) 81,077.7
26. Mckesson(US) 80,514.6
27. Honda Motor (Japan) 80,486.6
28. Hewlett-Packard (US) 79,905.0
29. Nissan (Japan) 79,799.6
30. Fortis (Belgium/Netherland) 75,518.1
31. Sinopec (China) 75,076.7
32. Berkshire Hathaway (US) 74,382.0
33. ENI (Italy) 74,227.7
34. Home Depot (US) 73,094.0
35. Aviva (Britain), 73,025.2
36. HSBC Holdings (Britain) 72,550.0
37. Deutsche Telekom (Germany) 71,988.9
38. Verizon Communication (US) 71,563.3
39. Samsung Electronics (South Korea) 71,555.9
40. State Grid (China) 71,290.2
41. Peugot (France) 70,641.9
42. Metro (Germany) 70,159.3
43. Nestle (Switzerland) 69,825.7
44. U.S.Postal Service (US) 68,996.0

Contd…
115
45. BNP Paribas (France) 68,654.4
46. China National Petroleum (China) 67,723.8
47. Sony (Japan) 66,618.0
48. Cardinal Health (US) 65,130.0
49. Royal Ahold (Netherland) 64,675.0
50. Altria Group (US) 64.440.0
India in “Fortune Global 500”
170. Indian Oil 29,643.2

417. Reliance Industries 14,841.0
429. Bharat Petroleum 14,436.9
436. Hindustan Petroleum 14,114.9
454. Oil and Natural Gas 13,751.7
176 companies of Fortune Global 500 companies are from USA followed by Japan who has 81
companies. Following list shows the country wise distribution of few Fortune Global 500
corporations:
Country No. of Corporation (country wise )
in Fortune Global 500
USA 176
Japan 81
France 39
Germany 37
Britain 35
China 16
Canada 13
Switzerland 11
Australia 9
Italy 8
Spain 8
Sweden 7
India 5
Source: Fortune, August 1, 2005

State true and false for the following statements:
1. Bata is a Canadian company.
2. Bayer is British company.
3. Nestle is a Swiss company.
4. Cadbury is British company.
5. A transfer price is price on goods and services sold by one member of a
corporate family to another, such as from a parent to its subsidiary in a
foreign country.
6. Alcatel’s Fraud Management Group (FMG) Subex systems.
7. Essel Propack, is the single largest telecom company in the world
manufacturing laminated and seamless tubes.
116
Business Environment and Ethics 9.7 MNCs OF INDIA
“When the Bangalore based telecom software product company Subex systems
acquired Alcatel’s Fraud Management Group (FMG) it took quite a few in the
industry by surprise. After all, Subex with revenues of 90 crore and Alcatel the C 25
Billion French giant were in totally different leagues. It was a part of Subex’s well
thought out strategy to move centre-stage in the global arena of its chosen space of
telecom fraud management and revenue maximization. With this acquisition, Subex
claims to be the largest vendor, the world over for Fraud Management Systems, based
on the number of installations. It currently has 61 customers with 105 networks spread
across 37 countries.” (Business India December 20, 2004 to January 2, 2005.)
“Not many know that most new generation vehicles that ply the Indian roads have
Moterson’s inputs be it Toyota, Honda, Mercedes, Ford, Hyundai or even the
homegrown Maruti. From wiring harnessing to cockpits to door trims to bumpers and
plastic components, it chips in with its produce, not just for the cars rolled out in India
but also for those rolled out in the Far East. Group has 13 plants including at Sharjah
and Ireland. (Business India. September 26-October 9, 2005.”)
“If you were to ask which Indian company leads the world in a given product/
segment, chances are that you would get wrong hit. It is neither Reliance nor a
company from the stable of TATA or the Birlas or even Infosys or the Wipros of the
country. The right answer is Subhash Chandra’s Essel Propack (EPL), the single
largest speciality packaging company in the world manufacturing laminated and
seamless tubes catering to oral care, cosmetics, personal care, pharmaceuticals, food,
and industrial sectors. With an estimated 32% market share in laminated tubes
globally, EPL is multinational with manufacturing facilities in 13 countries through 21
plants, including the US, the UK, Russia, Germany, Mexico, Colombia, Venezuela,
Philippines, Indonesia, Egypt, Nepal and China besides India. EPL which was
established in 1984, ventured out to become a global player in 1993 by setting its first
overseas venture in Egypt. Four years later it formed a wholly owned subsidiary in
Guanghou, China. In 2000 it acquired Switzerland’s Propack A.G. then the world’s
fourth largest laminated tubes company. This helped Essel gain access to markets in
Latin America, Indonesia, and China”. (October10-23, 2005)
Sundaram Fasteners
Global Measures:
z Signed an MoU to acquire Precision Forging Unit of Dana Spicer Europe to
manufacture cold forged products for automotive applications
z Plans to set up a factory in Haiyan Economic Development Zone (HEDZ), Haiyan
County, Zhejiang province in South China to manufacture and sell High Tensile
Fasteners to the Chinese automobile industry. The commencement of the
production is slated for the first half of 2004.The market demand for automobile
components is vast in china as the country produces 1.6mn commercial vehicles
and buses, 1mn cars and 5mn two wheelers.
Asian Paint India Ltd. was set up in 1942 by four young men Champaklal H.
Choksey, Chimanlal Choksy, S.C. Dani, A. Vakil, in Bombay. In 1999 it acquired
76% stake in Sri Lanka’s paint company “Delmege Forsyth & Co. In November 2000
it started its operations in partnership with Al Hassan group of companies in Oman. In
November 2002 it bought 50.1% controlling stake in Berger International of
Singapore ” which has a manufacturing capacity in 11 locations. In December 2002
Asian paints purchased 60% stake in SCIB chemicals AE Egypt. In September 2003 it
acquired Taumbmans Paint (Fiji) Ltd.
Today Asian Paints is largest Paint company of India and among top ten decorative 117
company in world. It has manufacturing location in 23 countries which includes
Australia, China, Fiji, Solomon Island, Myanmar, Thailand, Malaysia, India,
Singapore, Bangladesh, Nepal, Srilanka, Bahrain, Egypt, Mauritius, Malta, etc
Incorporated in the year 1961, Ranbaxy Laboratories Limited crossed a sales turnover
of Rs 5 billion by the year 1997. In India, Ranbaxy is the largest pharmaceutical
Company by sales with a domestic market share of 4.83% and is ranked third on the
retail market.
In the case of Ranbaxy, 2 surveillance audits in 2000, renewed the ISO 9002
Certification for Mumbai and Baroda locations. The Company is working towards
getting the ISO 14001 Certification, which includes all processes, besides ensuring
safety and environmental protection. The successful establishment of Ranbaxy in US
can be explained by the following sequence of events:
1. In 1988, Ranbaxy’s plant at Toansa, Punjab got US FDA approval.
2. In 1990 and 1991, Ranbaxy was granted a US patents for its products
3. In 1995, it acquired Ohm Laboratories, a manufacturing facility in the US.
4. In 1998, Ranbaxy entered USA, world’s largest pharmaceuticals market, with
products under its own name.
5. Located at Gurgaon (Haryana), near New Delhi, and set amidst 17 acres of land,
the Ranbaxy Research Centre is one of the finest R&D facilities in India.
6. Ranbaxy is ranked amongst the top 100 pharmaceutical companies in the world
(9th largest generic company worldwide ), it has ground operations in 25
Countries and products sold in over 70 countries, manufacturing in 7. With an annual
net global sales of USD 764 million reflecting a growth of 39% for the year 2002 and
a workforce of over 8000 professionals across the globe, Ranbaxy Laboratories Ltd.
reaffirms its status as a potential MNC.
In ten days from Rs. 7,200 crore Indian company to a Rs. 17,500 crore global one
without spending a rupee.
In November 2004, when Videocon enters the race for the colour picture tubes
manufacturing capacity (19 million units a year across four plants in Europe, Asia, and
North America) of Thomson SA, not to many people gave the company a chance
against the likes of LG Philips display, Samsung and Matsushita. Yet not just has CMD
Venugopal Dhoot (Videocon) pulled off the deal, he has done so on terms that are
favorable to his company. “the world is out in the world that India and Indian
companies are not just a good by themselves, but also a hedge against China.” Fact is
Dhoot agreed to pay the asking price of euro 240 million (Rs. 1,248 crore) without
batting an eyelid (and net of cash and debt, which continue to be Thomson’s ); the deal
was completed through a special purpose vehicle, Eagle Electronics. Then he managed
to sell his oil and gas story to Thomson as a great investment. Sure enough, after due
diligence study by UBS, Thomson agreed to invest $ 295 million (Rs 1,298 crore) in
Videocon Industries for a 15 percent stake. The Electrolux deal was stuck pretty much
the same way; in return for taking over the company’s 91.85% stake in its loss making
Indian subsidiary (losses as of December 2005: Rs. 118 crore) Dhoot got the Swedish
major to agree to invest $94 million (Rs.413.6 crore) in Vidocon industries for around
5% stake. And since Electrolux wanted to stick to its business of consumer products, he
agreed to merge Vidocon International with Videocon Industries.
118
Business Environment and Ethics Deal Mechanics
Company What Vidiocon Invested
Thomson CPT euro 240 million

Quid Pro Quo: Thomson to invest $ 195 - million in Vidiocon Industries, and get a
15% stake in Videocon Industries, plus two board seats.
Electrolux AB’s 91.85% in Electrolux Kelvinator Cash less deal

Quid Pro Quid: Electrolux to invest $ 94 million in Vidiocon Industries and get a 5
Percent stake plus one seat on the board. (Business Today, July 31, 2005, P.53)
After this deal Videocon group has a manufacturing foot print across four continents.
And half of its sale will be coming from global operations. As list below shows:
Country Facility /Interest

1. India 12 consumer electronics and appliances plants. CPT glass.
2. Italy 2 million CPTs Nicci compressor plant.
3. Poland 4 million CPTs four million CPT glass shells.
4. China 10 million CPTs compressor plant.
5. Mexico 5 Million CPT
6. Oman Consumer Durable manufacturing.
7. South Africa Consumer Durable/electronics New plant coming up.
8. Sudan Prospecting one Oil and gas field
9. Jordan Prospecting four oil and gas fields.
Global Advertising Agency (Law and Kenneth)

“It’s a global advertising agency starting in 2005, not 1945”, maverick adman Andy
Law on founding Law and Kenneth in partnership with Indian adman, Praveen
Kenneth. Andy Law says it is a global agency no in the sense of just having operations
in multiple countries, but in that it has no global head quarter. “you don’t want 250
people each sitting London, Paris an Mumbai doing the same thing,” says Law. Law
and Kenneth will have nodal structure, with each country run by a local entrepreneur,
with a majority stake in the business, and a team of 35-40.
Rolled out almost simultaneously across London, Mumbai, Dubai, Stolkholm, Sydney
and Paris, Law and Kenneth will soon enter China, the USA and Japan.. As a truly
global agency it will allows clients to tap London for strategic inputs, India for
creative execution and Stockholm for the interactive edge. (Business Today, July 31,
2005, P.24)
Bharat Forge India Ltd. Is India’s only forging company supplying globally and the
country’s largest exporter of auto components. Bharat Forge has the largest single
location commercial forging facility in the world. With the acquisition of German
forging company in 2004 it became the second largest forging company in the world.
Mr. B.N. Kalyani Chairman and MD, Bharat Forge Ltd. Gave ten basics to compete in
the global market.
119
9.8 LET US SUM UP
It has been said that the multinational corporation (MNC) is the most powerful
institution in the world today. Multinationals Corporations are major player in the
international business. MNCs have expanded across national borders in two ways:
trade and Foreign Direct Investment (FDI). Each has contributed to stable, lasting
benefits to the world economy.
In an era of WTO, Regional Groupings, Liberalization, and Globalization role of
MNCs have increased tremendously. MNCs are defined as and enterprises that is
headquartered in one country but has operations in one or more countries.
Multinational Enterprises (MNEs) is a company that takes a global approach to
foreign markets and production; Transnational Companies (TNCs) is a termed used by
United Nations and most of developing nations for multinational firms. Business
people define transnational company as a firm formed by merger of two firms of
approximately the same size that are from two different countries. The biggest
characteristic of Global company is that it takes the whole world as single market and
it standardize operations and its product worldwide in one or more of the firm’s
functional areas. Multi-domestic Company is a company which treats its every unit
operating in different countries as a independent profit center.
Some of the key reason of crossing national boundaries are Survival, Growth of
Overseas Market (Sales), Diversification, access to more Source of Resources, To
Protect Market Share at home and to increase market share overseas, to have access to
technology expertise etc.
There is wide range of impact of MNC on both that is host an home countries. MNCs
influences trade balance of country, Promote Small Scale/ancillary Industry as they
use them as a suppliers, MNCs transfer knowledge and improves the technology of
local firms. MNCs help in Economic Development, and development of
Infrastructure.
But all this advantages MNCs all MNCs are also considered responsible for putting
profit before people, for exploitation of workers, engaging in M&A Activities instead
of Greenfield projects. Some time they become so big that controls the key sectors of
the economy.

1. Pick an Indian MNC and see how they are performing in all over world.
2. Prepare a report on the global operations of Mahindra.
3. Prepare a assignment on the impact of MNC on Indian firms.
9.10 KEYWORDS
Transfer Pricing: A transfer price is price on goods and services sold by one member
of a corporate family to another, such as from a parent to its subsidiary in a foreign
country.
Global company: Global company is a company which takes the whole world as
single market and it standardize operations and its product worldwide in one or more
of the firm’s functional areas.
Multi-domestic Company: It is company which treats its every unit operating in
different countries as a independent profit center. Thus all the operations in this
organizations are highly decentralized.
120
Business Environment and Ethics 9.11 QUESTIONS FOR DISCUSSION
1. What is Multinational Corporations? What is difference between TNCs, MNCs,
MNEs, Multi-domestic firm and Global firm?
2. Describe the various approaches to international business. Discuss the reasons
because of which an organization crosses the border.
3. Discuss the impact of MNCs on host country.
4. Discuss the impact of MNCs on home country.
5. Analyze the impact of MNCs on local business organization.
6. “Multinational corporations have become too powerful in abso lute terms as well
as relative to governments.” Critically evaluate the statement.

CYP 1
1. MNCs are defined as and enterprises that is headquartered in one country
but has operations in two or more countries.
2. Global company is a company which takes the whole world as single
market and it standardize operations and its product worldwide in one or
more of the firm’s functional areas.
3. It is company which treats its every unit operating in different countries as
a independent profit center. Thus all the operations in this organizations are
highly decentralized.
CYP 2
1. True, 2. False, 3. True, 4. True,
5. True, 6. False, 7. False.

House.
Prentice Hall.
121
LESSON World Trade Organisation
10
WORLD TRADE ORGANISATION
CONTENTS
10.1 Introduction
10.2 Uruguay Round and Dunkal Proposals
10.3 World Trade Organisation
10.4 Principles of The Trading System
10.5 Function of WTO
10.5.1 Helping Developing and Transition Economies
10.5.2 WTO in Global Economic Policy-making
10.5.3 Encouraging Development and Economic Reform
10.6 Rules of WTO (Agreements)
10.6.1 Binding and Cutting of Tariff
10.6.2 Agriculture Rules and Policies
10.6.3 Standard and Safety
10.6.4 Textile
10.6.5 Services
10.6.6 Trade Related Intellectual Property Rights
10.6.7 Anti-dumping Measures and Countervailing Duties
10.6.8 Safeguards: Emergency Protection from Imports Surge
10.6.9 Non-tariff Barrier
10.6.10 Plurilaterals
10.7 Advantages/Benefits of WTO
10.8 Impact of WTO on India
10.9 Let us Sum up
10.11 Keywords

z Explain the origin of GATT (WTO)
z Explain the objectives of WTO
122 z How WTO promotes Globalisation by promoting international trade
z What are the advantages of WTO
z How it influences the India
10.1 INTRODUCTION
The first half of the 20th century was marked by a major worldwide economic
depression that occurred between two world wars and that all but destroyed most of
the industrialised nations. International trade get a set back when after First World
War countries erected high tariff wall and raised other tariff barrier to intolerable
height, and international trade was stalled, along with most economies. All this
resulted in great depression. This was also one of the fundamental reasons of World
War II.
After Second World War to avoid the repetition of the same, world leaders created
GATT, a forum for member countries to negotiate a reduction of tariffs and other
barrier to trade. Including India 23 countries signed the General Agreement on Tariffs
and Trade. The original agreement provided a process to reduce tariffs and created an
agency to serve as a watchdog over world trade. In general the agreement covers three
basic elements:
1. Trade shall be conducted on a nondiscriminatory basis,
2. Protection shall be afforded domestic industries through customs tariffs, not
through such commercial measures as import quotas,
3. Consultation shall be the primary method used to solve global trade problems.
Since inception there have been eight rounds of intergovernmental tariff negotiations.
And the most comprehensive was Uruguay Round.
Table 10.1: The GATT Trade Rounds
Year Place/ name Subjects covered Countries
1947 Geneva Tariffs 23
(Switzerland)
1949 Annecy (France) Tariffs 13
1951 Torquay (UK) Tariffs 38
1956 Geneva Tariffs 26
1960– Geneva (Dillon Tariffs 26
1961 Round)
1964– Geneva (Kennedy Tariffs and anti-dumping measures 62
1967 Round)
1973– Geneva (Tokyo Tariffs, non-tariff measures, “framework” 102
1979 Round) agreements
1986– Geneva (Uruguay Tariffs, non-tariff measures, rules, services, 123
1994 Round) intellectual property, dispute settlement,
textiles, agriculture, creation of WTO, etc
10.2 URUGUAY ROUND AND DUNKAL PROPOSALS

Eight set (Uruguay Round) of negotiations began in 1986and concluded on September
1993. Mr. Aurthur Dunkul the then Director General of GATT submitted a proposal
on in 1991 popularly known as Dunkul Proposal. It envisages the following issues.
The 1986 agenda 123
World Trade Organisation
The fifteen original Uruguay round issues:
1. Tariffs
2. Non-tariff Barrier
3. Natural Resource Products
4. Textile and Clothing
5. Agriculture
6. Tropical Products
7. GATT articles
8. Tokyo Round Codes
9. Anti-dumping
10. Subsidies
11. Intellectual Property
12. Investment Measures
13. Dispute Settlement
14. The GAT system
15. Services
The Tokyo Round ‘codes’

z Subsidies and countervailing measures — interpreting Articles 6, 16 and 23 of
GATT
z Technical barriers to trade — sometimes called the Standards Code
z Import licensing procedures
z Government procurement
z Customs valuation — interpreting Article 7
z Anti-dumping — interpreting Article 6, replacing the Kennedy Round code
z Bovine Meat Arrangement
z International Dairy Arrangement
At Uruguay Round faced many bottlenecks as various countries, varying interests

repeatedly stalled the talk. France wanted to veto the accord between the United States
and the EU which cut production supports, export subsidy payments, and import
tariffs. Japan and South Korea are insisting to continue with the ban on rise imports.
The US wanted to keep import Quota on textile import and wished that EU should
drop quotas on imported films and TV programmes. Agriculture disputes even led to
violent protests by farmers in France, Japan, South Korea and other nations. The
Uruguay Round was concluded on 15th December 1994. Developing nations like
India have its own reservation on Intellectual Property, and Agriculture.

What do you understand by Uruguay Round?
……………………………………………………………………………………
……………………………………………………………………………………
124
Business Environment and Ethics 10.3 WORLD TRADE ORGANISATION
There are a number of ways of looking at the WTO. It’s an organisation for
liberalizing trade. It’s a forum for governments to negotiate trade agreements. It’s a
place for them to settle trade disputes. It operates a system of trade rules.
At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s
trading nations. These documents provide the legal ground-rules for international
commerce.
FACT FILE WTO

Location: Geneva, Switzerland
Established: 1 January 1995
Created by: Uruguay Round negotiations (1986-94)
Membership: 148 countries (on 13 October 2004)
Budget: 169 million Swiss francs for 2005
Secretariat staff: 630
Head: Supachai Panitchpakdi (director-general)
Functions:
• Administering WTO trade agreements
• Forum for trade negotiations
• Handling trade disputes
• Monitoring national trade policies
• Technical assistance and training for developing countries
• Cooperation with other international Organisations
10.4 PRINCIPLES OF THE TRADING SYSTEM

Following principles are the foundation of the multilateral trading system. A closer
look at these principles:
1. Trade without discrimination: It should not discriminate between its trading
partners and it should not discriminate between its own and foreign products,
services or nationals. Imported and locally produced goods should be treated
equally — at least after the foreign goods have entered the market. The same
should apply to foreign and domestic services, and to foreign and local
trademarks, copyrights and patents.
2. Freer trade gradually, through negotiation: Lowering trade barriers is one of the
most important principle of WTO to encourage trade The WTO agreements allow
countries to introduce changes gradually, through “progressive liberalization”.
Developing countries are usually given longer time to fulfill their obligations.
3. Predictability through binding and transparency: The multilateral trading
system is an attempt by governments to make the business environment stable and
predictable. It ensures that there will not be frequent and arbitrary changes in
tariffs.
4. Promoting fair competition: It does not altogether eliminate tariffs and other
barrier, it allows it in limited circumstances. In fact it promotes level playing field
and fair completion by scrapping high tariffs, other trade barrier and to promote
fair competition it anti dumping duties and support various agreements on in
agriculture, intellectual property, services.
125
10.5 FUNCTION OF WTO World Trade Organisation
Instead of calling it Word Trade Organisation it should be called as Word Trade

Opportunities. WTO gives an opportunities to the nations to sit together and talk trade.
It gives them the forum where nations can negotiate with the objective of Win – Win
situation. WTO administers the 28 agreement contained n the final Act and a number
of plurilateral agreements and govt. procurement through various councils and
committees. It enforces the multilateral trade rules. In nutshell WTO perform
following function:
10.5.1 Helping Developing and Transition Economies

Developing countries make up about three quarters of the total WTO membership.
The role of WTO increases as most of these developing countries are in transition
phase as they are shifting from planned economic system to market based economic
system.
The WTO Secretariat’s Training and Technical Cooperation Institute organizes a
number of programmes to train government officials and negotiators. Besides Geneva
these programmes also takes place in the country concern. Various numbers of
programmes are organized jointly with other international Organisations.
WTO provides data of tariff and trade to developing nations to help them in their
export.
Specialized help for export

In 1964 WTO established International Trade Center to help develop countries in their
export. It is jointly operated by WTO and United Nations techniques. It provides
information and advice on export markets and marketing techniques. It assists in
establishing export promotion and marketing services, and in training personnel
required for these services.
10.5.2 WTO in Global Economic Policy-making

WTO’s cooperate with the International Monetary Fund, the World Bank and other
multilateral institutions to achieve greater coherence in global economic policy-
making. A separate Ministerial declaration was adopted at the Marrakesh Ministerial
Meeting in April 1994 to underscore this objective.
Taking Information
WTO takes the regular information from the member countries regarding their
policies and tariffs. According to many agreements Government have to notify WTO
about the modified trade measures like safety standards, technical standards, anti
dumping and countervailing duties etc. In this way it keeps not itself update regarding
developments but also it disseminate information to the member countries, which help
them in increasing their exports.
Giving Information to Public

It also disseminates the information to public about the developments in WTO
through its publication and its websites.
10.5.3 Encouraging Development and Economic Reform

GATT that allow for special assistance and trade concessions for developing
countries. WTO agreements give them transition periods to adjust to the more
unfamiliar and, perhaps, difficult. A ministerial decision adopted at the end of the
round says better-off countries should accelerate implementing market access
126 commitments on goods exported by the least-developed countries, and it seeks
increased technical assistance for them.
10.6 RULES OF WTO (AGREEMENTS)

WTO agreements includes goods, services and intellectual property. It has an
objective of reducing tariffs to zero. It ensures liberalization and allows limited
exemption regarding duties. It establishes a system to resolve disputes and ensures
transparency regarding the trade policy of government. Present WTO system is based
on Uruguay Round Agreements which is as follows:
10.6.1 Binding and Cutting of Tariff

This includes commitment to cut and “bind” custom duty rate on import of good. In
some cases, tariff is being cut to zero. There is significant increase in the bound
tariffs.
Developed countries’ tariff cut were for the most part phased in over five year from
1st January 1995.
On 26th March 1997, 40 countries which accounts for more than 92% of old trade in
information technology product, agreed to eliminate import duties and other charge on
the product by 2000 (by 2005 in a handful of case).
Binding of Tariff rates represent commitments not to increase tariffs above the listed
rates. The rates are “bound”. Bound rate serve as ceilings on tariffs. It is expected that
the respective country will not increase the tariff above the bound rate which it has
stated. Though it may be below it. Developing countries though keep tariff rate low
but to maintain flexibility of hiking keep bound rate high.
10.6.2 Agriculture Rules and Policies

GATT allows countries to use some non-tariff measure such as import quota, and to
subsidies. The Uruguay Round produced the first multilateral agreement dedicated to
the Agriculture sector It a implemented over a six-year period and for developing
nations that began in 1995.
The new rule and commitment apply to:
1. Market Access
2. Domestic Support
3. Export Subsidies
Market Access
WTO supports the tariffication in the field of Agriculture. It has replaced all non tariff
barrier in the field of Agriculture by Tariffs giving same level of protection as given
by previous policy which has been replaced by Tariffs.
Domestic Support
The Agriculture Agreement make differences between agriculture support
programmes of Govt. as policies that do not have a direct effect on production and
trade that do have a direct impact. Policies which have a direct impact on production
and trade have to be cut back. This category of domestic support is sometime called
the “amber box.”
Measure having a minimal impact on trade can be used freely — they are in a “green
box”. They include government service such a research, disease control, infrastructure
and food security. They also include payment made directly to farmer that do not
stimulate production, such as certain form of direct income support, assistance to help
farmer in restructuring agriculture and direct payment under environmental and 127
regional assistance programme.
Also permitted, are certain direct payment to farmer here the farmer are required to
limit production (sometime called “blue box” measure), certain government assistance
programme to encourage agricultural and rural development in developing countries,
and other support on a small scale (“de minimis ”) when compared with the total value
of the product or product supported (5% or le in the scale of developed countries and
10% or le for developing countries).
Export Subsidies
The Agriculture Agreement prohibit export subsidies on agricultural product except
those which are specified in a member’ list of commitment.
WTO makes certain measure, for the provision of food aid and aid for agricultural
development of least developed and poor countries. As they cant afford costly import
and need assistance to export.
10.6.3 Standard and Safety

Article 20 (GATT) allows government to make necessary arrangement in order to
protect human, animal or plant life or health, provided they do not use it to
discriminate or use it as tool to protectionism. In WTO there are specific arrangement
regarding food, safety and animal.
10.6.4 Textile
From 1974 until the end of the Uruguay Round, the trade a governed by the Quota
system (Multifibre Arrangement). This is against the spirit and principle of GATT.
Since 1995, the WTO’ has replaced the Mulltifibre Arrangement with the Agreement
on Textile and Clothing (ATC). By 1st January 2005, the sector is to be fully
integrated into normal GATT rule. That is that the quota ill come to an end and
importing countries will no longer be able to discriminate among exporters. The
Agreement on Textile and Clothing is itself no longer exist.
10.6.5 Services
The General Agreement on Trade in Service (GATS) is the first and only set of
multilateral rule governing international trade in service. Negotiated in the Uruguay
Round, it a developed in response to the huge growth of the service economy over the
past 30 year and the greater potential for trading service brought about by the
communication revolution.
General Obligations and Disciplines

Total coverage the agreement covers all internationally-traded service — for example,
banking, telecommunication, tourism, professional service, etc. It also define four way
(or “mode”) of trading service:
1. Service supplied from one country to another (e.g. international telephone call),
officially known as “cross -border supply” (in WTO jargon, “mode 1”)
2. Consumer or firm making use of a service in another country (e.g. tourism),
officially “consumption abroad” (“mode 2”)
3. A foreign company setting up subsidiaries or branches to provide services in
another country (e.g. foreign bank setting up operation in a country), officially
“commercial presence” (“mode 3”)
4. Individual traveling from their own country to supply service in another (e.g.
fashion model or consultant), officially “presence of natural person” (“mode 4”).
128
10.6.6 Trade Related Intellectual Property Rights
The WTO’ Agreement on Trade-Related Aspect of Intellectual Property Right
(TRIPS), negotiated in the 1986–94 Uruguay Round, introduced intellectual property
rule into the multilateral trading system for the first time. The WTO’ TRIPs
Agreement is an attempt to narrow the gap in the way the rights are protected around
the world, and to bring them under common international rule.
As GATT and GATS, TRIPS also work on the principle of National Treatment that is
treating national and foreigner player equally),and Most-Favored-Nation that is giving
equal treatment to national of all trading partner in the WTO. TRIPS agreement has an
additional important principle that is that intellectual property protection should
contribute to technical innovation and the transfer of technology. It says that both
producer and user should benefit, and economic and social welfare should be
enhanced.
TRIPS provide adequate protection of intellectual property in following categories:
1. Copyright: The TRIPS agreement says that computer program will be protected
as literary work under the Berne Convention and outline how database should be
protected.
It also expand international copyright rule to cover rental right. Author of
computer program and producer of sound recording must have the right to
prohibit the commercial rental of their work to the public. A similar exclusive
right applied to film, literary works, art etc.
The agreement say performer must also have the right to prevent unauthorized
recording, reproduction and broadcast of live performance for no less than 50
year. Producer of sound recording must have the right to prevent the unauthorized
reproduction of recording for a period of 50 year.
2. Trademarks: The agreement defines the type of sign that must be eligible for
protection as a trade-mark, and it describes that what are the minimum rights of
trademark owners. According to it service mark must be protected in the same
way as trademark used for good.
3. Geographical indications: This tool gives protection to goods that can be
identified as originating or manufactured in the territory of a country, or a region
or locality in that territory where a given quality, reputation or other
characteristics of such goods is essentially attributable to its geographical origin.
A place name is sometime used to identify a product. This “geographical
indication” does not only say where the product is made. More importantly it
identifies the product special characteristic, which are the result of the product’s
origin. Well-known example include “Champagne”, “Scotch”, “Tequila”, and
“Roquefort” cheese. Wine and spirit maker are particularly concerned about the
use of place-name to identify product, and the TRIPS Agreement contain special
provision for these types of goods. Using the place name when the product is
made elsewhere or when it does not have the usual characteristic can mislead
consumer, and it can lead to unfair com-petition. The TRIPS Agreement say
countries have to prevent misuse of place name.
Some exception are allowed, for example if the name is already protected as a
Trademark or if it had become a generic term. But any country wanting to make
an exception for these reason must be willing to negotiate with the country which
want to protect the geographical indication in question.
4. Industrial designs: Under the TRIPS Agreement, industrial design must be
protected for at least 10 year.
One of protected design must be able to prevent the manufacture, sale or 129
importation of article bearing or embodying a design which is a copy of the
protected design.
5. Patents: The agreement say patent protection must be available for invention for
at least 20 year. Patent protection must be available for both product and process,
in almost all field of technology. Government can refuse to issue a patent for an
invention if it commercial exploitation is prohibited for reason of public order or
morality. They can also exclude diagnostic, therapeutic and surgical method, plant
and animal (other than microorganism), and biological process for the production
of plant or animal (other than microbiological processes). Plant varieties,
however, are protect able by patent or by a special system (such as the breeder’s
right provided in the convention of UPOV — the International Union for the
Protection of New Varieties of Plant). The agreement describe the minimum right
that a patent owner must enjoy. But it also allows certain exception. A patent
owner could abuse his right, for example by failing to supply the product on the
market. To deal with the situation, Article 31 of TRIPs provide the provision of
Compulsory license which means a situation where a government allows an agent
to produce a patented product without the consent of the original patent owner. If
attempts to obtain right to produce a patented product from patentee fails and if a
compulsory license is issued, then adequate remuneration will paid to the original
rights holder.
If a patent is issued for a production process, then the right must extend to the
product directly obtained from the process. Under certain condition alleged
infringers may be ordered by a court to prove that they have not used the patented
process.
6. Layout Design for Integrated Circuit: The scope of Layout design for integrated
Circuit is to protect the chip and also the articles incorporated on it. TRIPS says
that here protection must be given for ten years.
7. Undisclosed Information and Trade Secrets: Trade secret and other type of
“undisclosed information” which have commercial value must be protected
against breach of confidence and other act contrary to honest commercial practice.
But reasonable step must have been taken to keep the information secret. Test data
submitted to government in order to obtain marketing approval for new
pharmaceutical or agricultural chemical must be protected against unfair
commercial use.
Para 3 of the TRIPS state that Govt. should take steps to implement TRIPS. It further
state that Govt. should impose tough penalties to check the infringement, and should
keep the procedure easy, fair and equitable.
10.6.7 Anti-dumping Measures and Countervailing Duties

Dumping means selling the product at below the on-going market price and /or at the
price below the cost of production.
GATT (Article 6) allow countries to take action against dumping. Anti-dumping
action mean charging extra import duty on the particular product from the particular
exporting country in order to bring it price closer to the “normal value” or to remove
the injury to domestic industry in the importing country. There are three methods to
calculate the normal value of product as follows:
1. The price which the exporter is charging in the domestic market
2. The price charged by the exporter in another country.
3. Calculation based on the combination of the exporter’s production cost, other
expense and normal profit margin.
130 Subsidies and Countervailing Measures
WTO allows the subsidies on the one hand and on the other hand it regulates the
action which a country can take to deal with the effect of subsidies. An country can go
to the dispute settlement body of WTO for the dispute settlement regarding subsidy
and it can even take action on its own by imposing countervailing duty on subsidized
import that are found to be hurting domestic producer.
10.6.8 Safeguards: Emergency Protection from Imports Surge

Article 19 of WTO provide the safeguard against the surge of imports which can
cause injury or threatened the domestic industry. An import “surge” justifying
safeguard action can be a real increase in import (an absolute increase); or it can be an
increase in the imports’ share of a shrinking market, even if the import quantity has
not increased (relative increase).
Safeguard measures should be applied only to the extent necessary to prevent or
remedy serious injury and to help the industry concerned to adjust. Where quantitative
restriction (quota) are imposed, they normally should not reduce the quantities of
import below the annual average for the last three representative year for which
statistic are available, unless clear justification is given that a different level is
necessary to prevent serious injury.
10.6.9 Non-tariff Barrier

A number of agreement deals with various bureaucratic or legal issue that could
involve hindrance to trade:
1. Import licensing
2. Rule for the valuation of good at custom
3. Preshipment inspection
4. Rule of origin
5. Investment measure (TRIMs)
Import Licensing
The Agreement on Import Licensing Procedure say import licensing should be simple,
transparent and predictable. The agreement say the agencies handling licensing should
not normally take more than 30 day to deal with an application — 60 day when all
application are considered at the same time.
Rules for the Valuation of Goods at Customs

The agreement says that the rule of the valuations should by precise and transparent.
The Valuation should by fair and neutral and should be based on commercial realities.
Valuation should outlaw any system which is arbitrary fictitious.
Preshipment Inspection
Govt. also uses the pre-shipment inspection as a tool to hinder import. It is widely
used to delay the export and to give enough room to domestic industry to get prepare
for the import. The Preshipment Inspection Agreement of WTO says that while
inspection country should follow a policy of non-discrimination, transparency,
protection of confidential business information, and should avoid unreasonable delay.
Rules of Origin
“Rule of origin” are the criteria used to define origin of the product, that is where the
product is manufactured. The Rule of Origin Agreement requires WTO members to
ensure that their rule of origin are transparent; that they do not have restricting,
distorting or disruptive effect on international trade; that they are administered in a 131
consistent, uniform, impartial and reasonable manner; and that they are based on a
positive standard.
Investment Measures (TRIMS)

TRIMS state that no member shall apply any measure that discriminate against
foreigner or foreign product (i.e. violate “national treatment” principle in GATT). It
also outlaws investment measure that lead to restriction in quantities (violating
another principle in GATT). It restricts the measures as ‘local content requirement’
which compels the enterprise to use particular level of local components, or which set
restrictions on a level of import which an enterprise can do or which set target for the
company to export (trade balancing requirement)
10.6.10 Plurilaterals
In WTO there are few agreements where there are only few signatory; they were
negotiated at Tokyo Round they are known as “plurilateral agreement. Following are
the Plurilateral Agreement:
1. trade in civil aircraft
2. government procurement
3. dairy product
4. bovine meat.
The bovine meat and dairy agreement ere terminated in 1997.
Trade in Civil Aircraft

The Agreement on Trade in Civil Aircraft entered into force on 1 January 1980. It
now has 30 signatories. The agreement eliminate import duties on all aircraft, other
than military aircraft, as well as there parts and components.
Government Procurement
The objective of the agreement is to make law, regulation, procedure and practice
regarding government procurement more transparent and to ensure they do not protect
domestic product or supplier, or discriminate again t foreign product or supplier.
Dairy and bovine meat agreements: ended in 1997

The International Dairy Agreement and International bovine Meat Agreement were
scrapped at the end of 1997. Countries that had signed the agreement decided that the
sector were better handled under the Agriculture and Sanitary and Phytosanitary
agreement.
What is the present state multi-fibre agreement?
……………………………………………………………………………………
……………………………………………………………………………………
10.7 ADVANTAGES/BENEFITS OF WTO

Few distinct advantages are as follows:
1. The system helps promote peace
132 2. Disputes are handled constructively
3. Rules make life easier for all
4. Freer trade cuts the costs of living
5. It provides more choice of products and qualities
6. Trade raises incomes and stimulates economic growth
7. Free Trade Reduces the Manufacturing Cost
8. Governments are shielded from lobbying
9. The system encourages good government
10.8 IMPACT OF WTO ON INDIA

In the new WTO environment, the buzzwords would be efficiency and productivity.
"Success will lie with those who exhibit competitiveness in price and quality." P.K.
Kaul, Former Indian Ambassador to USA.
The Indian economy has experienced a major transformation during the decade of the
1990s. Apart from the impact of various unilateral economic reforms undertaken since
1991, the economy has had to reorient itself to the changing multilateral trade
discipline within the newly written GATT/WTO framework. The unilateral trade
policy measures have encompassed exchange-rate policy, foreign investment, external
borrowing, import licensing, custom tariffs and export subsidies. The multilateral
aspect of India’s trade policy refers to India’s WTO commitments with regard to trade
in goods and services, trade related investment measures, and intellectual property
rights.
The multilateral trade liberalization under the auspices of the Uruguay Round
Agreement and the forthcoming WTO negotiations is aimed at reducing tariff and
non-tariff barriers on international trade.
India is a founding member of the GATT (1947) as well as of the WTO, which came
into effect from January 1, 1995. By virtue of its WTO membership, India
automatically is availed of Most Favored Nation Treatment (MFN) and National
Treatment (NT) from all WTO members for its exports and vice versa. Its
participation in this increasingly rule-based system is aimed towards ensuring more
stability and predictability in its international trade.
The Uruguay Round resulted in increased tariff binding commitments by developing
countries. India bound 67% of its tariff lines compared to 6% prior to this round. the
Government has simplified the tariff, eliminated quantitative restrictions on imports,
and reduced export restrictions. It plans to further simplify and reduce the tariff.
All agricultural tariff lines and nearly 62% of the tariff lines for industrial goods are
now bound. Ceiling bindings for industrial goods are generally at 40% ad valorem for
finished goods and 25% on intermediate goods, machinery and equipment. The
phased reduction to these bound levels is to be achieved during the 10-year period
commencing in 1995. Tariff rates on equipment covered under the Information
Technology Agreement and software are to be brought down to zero by 2005.
Quantitative Restrictions (QRs) on imports are maintained on Balance-of-Payments
(BOP) grounds but nation is reducing it QR gradually and it will be reduced to
minimum level up to 2005.
India has fulfilled its commitment by reducing tariff and eliminating QR, it had also
implemented the TRIPS measures by implementing new patent law and now India
Patent Law is at par with international patent law following a product patent that too
for 20 years, India has also implemented TRIMs (Trade Related Investment 133
Measures) and GATS.(General Agreement on Trade and Services).
The Indian economy has grown rapidly over the past decade, with real GDP growth
averaging some 6% annually, in part due to the continued structural reform, including
trade liberalization, according to a WTO Secretariat report on the trade policies and
practices of India. Social indicators, such as poverty and infant mortality have also
improved during the last ten years.

Fill in the blanks:
1. Including India ___________ countries signed the General Agreement on
Tariffs and Trade.
2. The WTO agreements allow countries to introduce changes gradually,
through “_______________”.
3. In 1964 WTO established ______________ to help develop countries in
their export.
4. _____________ of tariff rates represents commitments not to increase
tariffs above the listed rates.
5. Since 1995, the WTO has replaced the Multifibre Arrangement with the
______________.
6. _____________ means selling the product at below the on-going market
price and /or at the price below the cost of production.
7. ____________ are the criteria used to define origin of the product, that is
where the product is manufactured.
8. In WTO there are few agreements where there are only few signatory, they
are known as _______________.
10.9 LET US SUM UP

After Second World War to avoid the repetition of the same, world leaders created
GATT, a forum for member countries to negotiate a reduction of tariffs and other
barrier to trade. Including India 23 countries signed the General Agreement on Tariffs
and Trade. The objective of GATT was that trade shall be conducted on a
nondiscriminatory basis, protection shall be afforded domestic industries through
customs tariffs, not through such commercial measures as import quotas, Consultation
shall be the primary method used to solve global trade problems.
Many rounds of talk takes place on GATT and most important was Eight set(Uruguay
Round) of negotiations began in 1986 and concluded on September 1993. Mr. Aurthur
Dunkul the then Director General of GATT submitted a proposal on in 1991 popularly
known as Dunkul Proposal. It envisages the following key issues:
Tariffs, Non Tariff Barrier, Textile and Clothing, Agriculture, GATT articles, Anti-
Dumping, Subsidies, Intellectual Property, Investment Measures, Dispute Settlement
Services.
Fortunately Delegation from more than 100 countries reached to an agreement. And
on 15th April, 1994 in Marrakesh, Morocco an agreement regarding multilateral
trading system was finally signed and WTO came into existence. The principle of new
trading system were:- Trade without discrimination, Freer trade: gradually, through
134 negotiation, Predictability: through binding and transparency, Promoting fair
competition.
WTO functions on the basis of following rules;- Binding and Cutting of Tariff,
Agriculture Rules and Policies, Standard and Safety, Textile Services Trade Related
Intellectual Property Rights Anti Dumping Measures and Countervailing Duties,
Emergency protection from imports surge, Non Tariff Barrier, Plurilaterals.

1. Prepare a brief report on the Agriculture issues in WTO. Also see the impact of
Hong Kong pact on Indian Agriculture issues.
2. Prepare a report on the NAMA. And find out what developed nations want in the
name of NAMA.
10.11 KEYWORDS
Quota: It is Quantitative restrictions against imports. Generally they are specific
provisions limiting the amount of foreign products imported
Tariff bindings: In tariff binding country commits the maximum limit of tariff which
it can impose on import thus it is difficult to increase tariff beyond binding rates.
Tariffication: It is a process of converting the non-tariff barrier into a tariff barrier.
Amber Box: In GATT, Policies which have a direct impact on production and trade
have to be cut back. This category of domestic support is sometime called the “amber
box.”
Green Box: These are measures which have a minimal impact on international trade
can be used freely these are in a “green-box”.
Technical Barrier: These are the trade barrier against import in the form of
regulation, standards, testing and certification procedure etc.
Multifibre Arrangement: It is a type of Quota system. Usually used against the
import of textile.
MFN: Most Favored Nation. It is principle of GATT which means treating one
trading partner equally on the principle of non-discrimination.
Dumping: Dumping means selling the product at below the on-going market price
and /or at the price below the cost of production.
Plurilateral Agreement: In WTO there are few agreements where there are only few
signatory, they were negotiated at Tokyo Round they are known as “plurilateral
agreement.
Singapore issues: Trade and Investment, Competition policy, Transparency in
Government Procurement, and Trade “facilitation” are called Singapore issues.

1. Briefly describe the Uruguay round and Dunkel Proposals.
2. What are the principles and functions of WTO?
3. Describe various agreements (component of WTO agreement) of WTO.
4. Discuss the various advantages of WTO.
5. Critically evaluate the impact of WTO on the India.
135
Check Your Progress: Model Answers World Trade Organisation
CYP 1
Eight set (Uruguay Round) of negotiations began in 1986and concluded on
September 1993. Mr. Aurthur Dunkul the then Director General of GATT
submitted a proposal on in 1991 popularly known as Dunkul Proposal.
CYP 2
From 1974 until the end of the Uruguay Round, the trade a governed by the
Quota system (Multifibre Arrangement). This is against the spirit and principle
of GATT. Since 1995, the WTO’ has replaced the Multifibre Arrangement with
the Agreement on Textile and Clothing (ATC). By 1st January 2005, the sector
is to be fully integrated into normal GATT rule. That is that the quota ill come
to an end and importing countries will no longer be able to discriminate among
exporters. The Agreement on Textile and Clothing is itself no longer exist.
CYP 3
1. 23, 2. Progressive liberalization, 3. International Trade Center
4. Binding 5. Agreement on Textile and Clothing (ATC)
6. Dumping, 7. Rule of origin 8. Plurilateral agreement

House.
Prentice Hall.
136
137
Fiscal Policy
UNIT IV
138
139
LESSON Fiscal Policy
11
FISCAL POLICY
CONTENTS
11.1 Introduction
11.2 Component of Budget
11.3 Revenue Budget
11.4 Capital Budget
11.5 Mobilization of Resources
11.6 Expenditure of Central Government
11.7 Budgets of State Government
11.8 Financial Power of Central and State Government
11.9 Fiscal Policy and Economic Growth
11.10 Role of Taxes in Economic Growth
11.11 Public Debt in India
11.12 Deficit Financing
11.12.1 Deficit Financing and Economic Growth
11.13 Impact of Fiscal Policy on Business
11.14 Glimpses of Budget 2008
11.15 Let us Sum up
11.17 Keywords

z Explain the concept and role of fiscal policy in Indian economy
z Understand in details the central budget and the role of budget in business
decision-making
11.1 INTRODUCTION
The sphere of state action is very vast and al pervading. It includes “maintaining
public services, influencing, attitudes, shaping economic institutions, influencing the
use of resources, influencing the distribution of income, controlling the quantity the of
money, controlling fluctuations, ensuring full employment, and influencing the level
of investment.” W.A. Lewis. Philip V. Taylor gave a more comprehensive definition
140 when he said, “Budget is a master financial plan of the government. It brings
estimates of anticipated revenues and proposed expenditures, employing schedule of
activities to be undertaken towards the direction of national objectives. It is a device
for consolidating various interest, objectives, desires and needs of people into a
programme whereby they provide for their safety, convenience and comforts”
It is through fiscal policy that the government tries to correct inequalities of income
and wealth that increases with development in country. It expands internal market,
reduces unessential imports, counteracts inflationary pressure, provides incentives for
desirable types development projects, and increase the total volume of savings and
investment. For all this government adopts appropriate taxation, budgetary
expenditure and public borrowings policies.
Fiscal policy is the projected balance sheet of the country, prepared by Chief Finance
Officer of country that is finance minister of the state. Public finance is the study of
generating resources for the development of country and about allocation of resources.
Fiscal policy is implemented through Budget, which is statement of state’s revenue
and expenditure.
11.2 COMPONENT OF BUDGET

Typically budget includes four components:
1. Some review of economy
2. Major policy announcement
3. Expenditure proposal
4. Tax proposal.
There are three major functions of fiscal policy: First is allocation function of budget
policy, that is, the provision for social goods. It is a process by which the total
resources are divided between private and social goods and by which the mix of social
goods is chosen. Second the distribution function of budget policy that is distribution
of income and wealth in accordance with what society consider at “fair” or “just”
distribution. Third the stabilization function of budget policy, that is marinating high
employment, a reasonable degree of price stability an appropriate rate of economic
growth, with due considerations of its effects on trade and the balance of payment.
The budget includes revenue and expenditure. Revenue and expenditure is divided in
capital and revenue account. Thus receipts are broken into Revenue Receipts and
Capital Receipts, and disbursement are broken up into Revenue expenditure and
capital expenditure.
11.3 REVENUE BUDGET

It consists of revenue receipts and revenue expenditure.
1. Revenue Receipts: It includes tax revenue and other revenues.
a) Tax revenue: These comprised of taxes and other duties levied by the Union
Govt.
b) Other Revenue: These receipts of government mainly consist of interest and
dividends on investment made by government, fees and receipts for other
services for other services, rendered by govt.
2. Revenue Expenditure: This is expenditure for normal running of govt.
departments and various services interest charges on debt incurred by
government, subsidies, etc. Expenditure which does not result in the creation of
assets is treated as revenue expenditure.
Check Your Progress 1 141
Fiscal Policy
What are the components to revenue receipts?
…………………………………………………………………………………...
…………………………………………………………………………………...
11.4 CAPITAL BUDGET

It consists of capital receipts and payments.
1. Capital Receipts: It includes loans raised by government from public which are
called market loans, borrowings by government from RBI and other parties
through sale of treasury bills, loans received from foreign bodies and government
and recoveries of loans granted by the union government to states and Union
Territory govt. and other parties.
2. Capital Payments: These payment consist of capital expenditure on acquisition of
assets like land, buildings, machinery, equipment, infrastructure, as also
investment in shares, etc. and loans and advances granted by the Union
government to state and union territory govt. companies, corporations and other
parties.
11.5 MOBILIZATION OF RESOURCES

The main sources of funds for financing development expenditure can be grouped
under following categories:
1. Taxation
2. Profits of Public Sector (Price)
3. Domestic non-monetary borrowing
4. External borrowing
5. Borrowing form the RBI (monetised borrowing)
Some minor source of revenue are Fees, Fines, Forfeitures and Escheats, Tributes, and
Indemnities, Gifts, and Grants.
Taxation
Taxed are imposed in many ways, we can distinguish taxes in following manner:
z Direct Tax
z Indirect Tax
Direct taxes are those which are imposed on individuals or householders who bear the
burden as Income tax. Indirect tax are those which are imposed on an equity at some
point in the system but whose burden can be shifted to some other entity or entities,
as excise, customs etc.
Some important type of taxes are as follows:
1. Income Tax: There are two type of income tax that is personal income tax and
corporation tax. Personal Income tax is levied on individuals by the Central
Government and the proceeds are shared between sates and Center. It is based on
principle of “ability to pay” that is who company more should pay more to the
Government. Corporation is a tax on income of the companies. The Central Govt.
has been imposing corporation tax on the profits of the large a small companies.
142 2. Interest Tax: The interest tax act provided for the levy and a special tax on the
gross amount of interest accruing to the commercial banks on loans and advances
made by them in India. The tax is levied on the gross interest income of “credit
institutions” that is banks, financial institutions, financial companies etc.
3. Estate Duty: Estate duty was imposed on the estate of a person, which was
inherited by his heirs.
4. Wealth Tax: Wealth tax has been imposing on accumulated wealth or property of
every individual.
5. Taxes on Commodities: Revenue from commodity taxation is the most important
source of taxation for the Central Govt. Central Excise and Custom Duties are two
important taxes of the Central Govt.
6. Central Excise (Indirect): These duties are levied by the center on commodities
which is produced with in country. Now it has been converted to VAT.
7. Customs Duties (Indirect): These are duties or taxes imposed on commodities
imported into India.
8. VAT (Value Added Tax).
It is imposed on sales.
Price: For the development of the economy Govt. has to launch public sector. As
private sector don’t take interest or it is unable in some highly capital intensive and
having a high gestation period projects like infrastructure projects, heavy industry etc.
Some time for the rapid development also Govt. have to invest in many sector
simultaneously that in consumer industry like clothes etc to meet the huge gap
between demand and supply and in heavy industry to make available the resources for
the economy. Govt. charges the price for the goods its manufactures or the services it
provides. Income from public enterprises now constitute a substantial source of
revenue.
Fee: It is a payment against the services. Though it is never more than the cost of the
services. Sometime it covers only part of the services. As nominal fees in govt.
hospitals, educational fees etc. Fees like license fee are much higher then the services
rendered. Sometime there is no positive return in terms of services and fees is charged
just to grant permission in terms of license etc. Difference between price and fees is
that in fees it is public interest which is prominent that’s why part of the cost is
charged in most cases on the other hand in price is payment for the service of business
charter. Here usually full cost is covered.
Rates: Rates are levied by local bodies, i.e., municipalities and district boards, for
local purchases. They are generally imposed on the local immovable properties.
Fines: Fine are imposed as the deterrent for breaking law.
Escheat: When a person dies heirless or without a successor or leaves no will behind,
his property or assets will go the State. The claim of the state to deceased’s assets is
called escheat.
Grants and Gifts: Grants are given by a government at a higher level to that at the
lower level, e.g. from the Central Govt. to the state govt. or to the local district boards,
municipalities etc. Gifts are sometime received from private bodies and foreign Govt.
for relief in natural calamities like earthquake, floods, droughts, cyclones, for building
a hospital, schools etc.
143
Check Your Progress 2 Fiscal Policy
What are the main sources of funds of the Government of India for financing
development expenditure?
…………………………………………………………………………………...
…………………………………………………………………………………...
11.6 EXPENDITURE OF CENTRAL GOVERNMENT

All public expenditure classified into:
a) Non-plan expenditure
b) Plan expenditure
Non-plan Expenditure
Non-plan expenditure of the central govt. is divided into revenue expenditure and
capital expenditure. Under revenue expenditure we include: interest payment, defense
revenue expenditure, major subsidies (export, food and fertilizer), interest and other
subsidies, debt relief to farmers, postal deficit, police, pension and other general
services, social service, economic service (agriculture, industry, power, transport,
communications, science and technology etc.) and grants to states and union
territories, and grants to foreign government. Capital non plan expenditure includes
such items as: Defense capital expenditure, loans to public enterprises, loans to states
and union territories and loans to foreign government.
Plan Expenditure
Plan expenditure is to finance central plans, such as agriculture, rural development
irrigation and flood control energy industry and minerals transport, communications,
science and technology and environment, social services and others and Central
assistance for Plans of the state and Union Territories.
11.7 BUDGETS OF STATE GOVERNMENT

In India each State Govt. prepares its own budget of income and expenditure every
year. State Govt. collects the revenue from different sources to meet their expenditure.
The important source of revenue for states are VAT, (earlier sales tax), grant in aid
other contributions for the Center, states own non tax revenue, consisting of interest
receipts, dividends, and profits, general services (of which state lotteries are the most
important) social services and economic services. Besides this state also collect taxes
on income and commodities. State imposes income tax on agriculture and profession.
State Govt. receives income from taxes on property and capital transactions. The main
sources are land revenue, stamps, and registration, and tax on urban and immovable
property.
States also charges commodity taxes like motor vehicle tax, electricity duties etc.
State is also empowered to impose tax alcoholic liquor, opium, Indian hemp, and
other narcotics.
11.8 FINANCIAL POWER OF CENTRAL AND STATE

GOVERNMENT
The Constitution of India divides the functions and financial powers of the Govt. into
Central and State spheres together with the concurrent areas. It also provides for
sharing of taxes in various forms and system of grants-in-aids. The Seventh Schedule
144 of the constitution of India divides functions and financial resources between the
Center and States. It contains three lists namely, List I or Union List, List II or State
List, and List III or Concurrent List.
List I: Union List: It comprises of following items:
Tax Revenue
The Union List contains of 97 contains the following sources of tax revenues for the
Central Govt.:
1. Taxes on income other than agriculture income.
2. Duties on customs including exports duties.
3. Duties of excise on tobacco and other goods manufactured or produced in India
except (a) alcoholic liquors for human consumption and (b) opium, Indian hemp
and other narcotic drugs and narcotics, but including medicinal and toilet
preparations containing alcohol or any substance included this paragraph (entry
84).
4. Corporation Tax.
5. Taxes on capital value of the assets exclusively of agriculture land of individual s
and companies, taxes on the capital of companies.
6. Estate duty in respect of succession to property other than agriculture land.
7. Duties in respect of succession to property other than agriculture land.
8. Terminal taxes on goods or passengers carried by railways, sea, or air taxes on
railways fares and freights.
9. Taxes other than stamp duties on transactions in stock exchanges and future
markets.
10. Rates on stamp duty in respect of bills of exchange, cheque, promissory notes,
bills of lading, letters of credit, policies of insurance, transfer of shares,
debentures, proxies and receipts.
11. Taxes on sale or purchase of newspapers and on advertisements published therein.
12. Taxes on sale or purchase of goods other than newspaper where such sale or
purchase takes place in the course of inter-State trade or commerce.
13. Taxes on inter-State consignments of goods for trade or commerce.
14. Fees in respect of any of the matters in the list but not including fees taken in any
court.
15. Fees taken in Supreme Court.
Non-tax Revenue
Non-tax revenue includes Borrowings, both internal and external, income from
various govt. undertaking and monopolies, income from govt. property etc.
List II: State List: Some of the financial resource as mentioned in constitution are as
follows:
Tax Revenue
1. Land Revenue
2. Taxes on agriculture income
3. Taxes on land and buildings
4. Duties of excise on the following goods manufactured or produced in the State 145
Fiscal Policy
and countervailing duties at the same or lower rates on similar goods
manufactured or produced elsewhere in India: (a) alcoholic liquors for human
consumption (b) opium, Indian hemp and other narcotic drugs and narcotics but
not including medicinal and toilet preparations containing alcohol or any
substances included in this sub-paragraph (entry 51).
5. Taxes on the entry of goods into local area of consumption.
6. Taxes on electricity.
7. Taxes on sales and purchase of goods other than newspaper excluding inter-state
sale.
8. Taxes on advertisement other than advertisements published in the newspaper.
9. Taxes on vehicles for use on roads.
10. Tolls.
11. Taxes on professions, trades, callings and employment.
12. Capitation Taxes.
13. Taxes on luxuries, including taxes on entertainments, amusements, betting and
gambling.
14. Fees in respect of any the matters in the State List but excluding court fees.
15. Share in some specified Union Taxes.
Non-tax Revenue
1. The State Govt. can borrow upon the security of their respective Consolidated
Funds, but only with in the country, including loans from the Government of
India.
2. Income from govt. undertakings owned fully or partly by State Govt.
3. Income from public property owned by the State Govt.
4. Grants in aid from the Central Government.
5. Other Grants for the Central Government.

Mention the sources non-tax revenue of the Central Government.
……………………………………………………………………………………
……………………………………………………………………………………
11.9 FISCAL POLICY AND ECONOMIC GROWTH

Fiscal policy is a potent tool in the hands of Govt. to regulate the economic growth.
As deficit financing is the very effective tool in the hands of the govt. for increasing
effective demand in recession. To fill the deficit as Govt. borrows from RBI, Market
and even create additional currency and then it spends it increases the disposable
income of people thus results in conductive environment for investment. Market
mechanism of an underdeveloped economy is not likely to be able to generate enough
of savings and investment needed for a rapid economic growth. Fiscal policy plays a
leading role in effecting savings in the economy. Budgets play a direct role in capital
accumulation and economic growth in an underdeveloped country. Saving potential in
an underdeveloped economy is very limited partly because of shortage of several
146 specific resources, partly due to lack of adequate demand, partly because of high cost
of production. This vicious circle can be broken by the govt. with the help of saving
oriented budgets.
Through the fiscal policy govt. can also encourage the growth of particular industries
and in particular areas. For this industries are provided with specific tax concessions
and subsidies such as tax holidays, higher depreciation allowances etc. can be
designed and incorporated in the budgetary policy. Further the role of Fiscal policy in
economic growth can be understood through the impact of Public Debt, Deficit
Financing, and Taxes.
11.10 ROLE OF TAXES IN ECONOMIC GROWTH

Taxation is an effective tool of budget to influence the level of savings and investment
in country. Abolition and reduction of various taxes pushes up profits and reduces cost
of production and prices. Lower prices are expected to increase demand production
and employment, which in turn add to effective demand, and so on. Similar steps can
be taken in case of custom duties. Raising import duties diverts the domestic demand
form imports to home produced goods, and reducing or abolishing exports duties or
giving export subsidies increase the demand for export and contributes towards
recovery form depression. It will be more helpful to lower tax rates on those goods
which have a higher elastic demand. Demand will be very high if persons with a
higher marginal propensity to consume are given a relief in direct taxation. In the
same manner investment may be encouraged by specific tax concession like tax
holidays, greater depreciation allowance and the like.
Taxes are also considered to be effective tool in controlling the inflation. It can do it in
two ways. First as built - in stabilizers and the second relates to the common belief
that taxes can be used to curb prices and demand.
Taxes as a Built in Stabilizers: Given the level of govt. expenditure the tax system
itself tend to create a budgetary surplus during a boom and a deficit during a
depression. A budgetary surplus would curb expenditure and demand while budgetary
deficit would have the opposite effect and thus an anti-cyclical pressure is generated.
This happens because revenue from indirect and direct taxes is dependent upon the
level of economic activities. Moreover direct taxes are usually progressive. With
increasing money incomes the direct taxes bill rises more than proportionately, and
during a depression there is more than proportionate reduction in it. Therefore yield
from these taxes also moves in line with the level of economic activities. The result is
that during the depression the tax revenue falls and with given govt. expenditure, there
is a budgetary deficit, which in turn has an expansionary effect. On the other hand
during boom larger revenue causes a budgetary surplus, which has a contractionary
effect.
11.11 PUBLIC DEBT IN INDIA

Public debt in Indian context refers to the borrowings of the Central and state
government. Gross public debt is the gross financial liability of the government. Net
public debt is the gross debt minus the value of capital assets of the government and
loans and advances given by the government to other sectors. Debt obligation can be
of many types as:
z Short term debt are the debt of which the maturity is less than one year at the time
of issue and consist of items like the treasury bills.
z Some obligations may not have specific maturity but may be repayable subject to
various terms and conditions they are called Floating Debt. As provident funds,
small savings, reserve funds and deposits.
z Permanent of funded debt are loans having a maturity of more than one year at the 147
Fiscal Policy
time of issue. Usually there maturity is between three and thirty years. Some of
them may even be non – terminable so that the govt. is only to pay the interest on
such debt without ever repaying the principle amount.
z Obligations owed to foreigners – govt. institutions, firms and individuals are
called external loans.
Debt obligation of the central govt. are broadly divided into two categories:
z Internal Debt
z External Debt
Internal debt: It includes the loans raised within the country and includes following:
(a) Current market Loans, (b) others (comprising balance of expired loans,
compensation and other bonds such as National Rural Development Bonds and capital
Investment Bonds), (c) Special Bearer Bonds, (d) Treasury Bills, (e) Special floating
and other loans, (f) Special securities issued to the RBI, (g) Small savings
(h) Provident funds, (i) other accounts, (j) reserve funds and deposits.
External Debt: External debt is raised in foreign currency and a substantial part of it
as it is also repayable in foreign currency. External debt represent loans raised by a
country from outside sources includes debt raised by the Govt. and by the non-govt.
sources such as NRI deposits, commercial borrowings from abroad, suppliers credit
and short-term borrowings etc.
Public debt in India has grown immensely in planning period. In 1999 the total debt of
Central Government was Rs. 8,75,925 and in 1998 debt of State Government was
Rs. 2,84,942. In the budget of 2005-2006 the 22% of total expenditure was only
interest payment. If the debt is owned by central bank of India it increases inflation as
RBI meets the growing demand by issuing additional quantity of money.
Public debt plays an important role in economy. Public debt contributes to the saving
effort of the economy. LDCs are usually short of capital resources. As saving capacity
of the masses is very low, so appropriate measures are taken to step up rates of saving
and investment in the economy. The net effect of the borrowing also depends upon the
sources from which they come:
z If Govt. goes of the borrowings from the market and public reduces its own
consumption and lends its savings to the govt. the result will be a net increase in
the rate of savings. But if loans are given to govt. by diverting the savings from
private investment, then there will be no net increase in savings and investment
activity. But even after that public loans can help economic growth by
reallocation of resources.
z If money is borrowed from the central bank then it results in the addition to
aggregate money supply in the country. This results in increment in demand and
an upward pressure on prices.
11.12 DEFICIT FINANCING

Deficit financing can be defined as “the financing of deliberately created gap between
public revenue and public expenditure or a budgetary deficit, the method of financing
resorted to being borrowing of a type that results in a net addition to national outlay or
aggregate expenditure” Therefore we can say deliberate unbalancing of the budget in
such a way that government expenditure exceeds government revenue. In India great
reliance has been placed on deficit financing for mobilizing resources for the plans.
Deficit financing has been explained in different manner as follows:
148
Business Environment and Ethics a) Revenue Deficit:
Revenue Deficit = Revenue Expenditure – Revenue Receipts.
b) Budget Deficit:
Budget Deficit = Total Expenditure – Total Receipts.
Total expenditure includes revenue expenditure and capital expenditure and total
receipts includes revenue receipts and capital receipts. This excess of total
expenditure over total revenue is called budget deficit. It is also defined as the
fiscal deficit minus government borrowing and other liabilities (public debt
receipts). This is somewhat close to the concept of monetised deficit, which meant
the printing of the new money by the Reserve Bank of India to part finance the
deficit.
But this conventional definition of deficit has lost relevance as it does not meet
international practice. So this concept of Budget deficit has been given up by the
govt. in 1997-98. Now we follow the concept of Fiscal Deficit
c) Fiscal Deficit: In a simple terms fiscal deficit is budgetary deficit plus market
borrowings and other liabilities of the Government of India. It is also refers to as
difference between the total expenditure and the government’s total non - debt
receipts.
Fiscal Deficit = Revenue Receipts (Net tax revenue + non tax revenue)
+ Capital Receipts (only recoveries of loans and other receipts)
– Total Expenditure (Plan and non plan)
OR
= Budget Deficit + Government’s market borrowing and liabilities.
d) Primary Deficit: Primary deficit is obtained by subtracting interest payment (a
component of non plan expenditure) from the fiscal deficit. Therefore, the primary
deficit is the deficit of the current year and it is accordingly triggered by an
expansionary fiscal policy during the year.
Government of India adopted the deficit financing to obtain necessary resources for
the development but deficit financing may beget many problems as it increases the
public debt which increases the interest burden of the government. Most serious
disadvantage of deficit financing is inflationary rise of price. Deficit financing
increases the total supply of money in country and raises the aggregate demand of
goods and services. In the absence of corresponding increase in supply of goods and
services, deficit financing leads to rise in level of price. Inflation work as a forced
saving or indirect taxation on people as because of increased price now they have to
pay extra to maintain same living standard.
One way for a govt. to finance a budget deficit is simply to print money - a policy that
leads to higher inflation. Some economist have suggested that a high level of debt
might also encourage the government to create inflation. Because most Govt. Debt is
specified in nominal terms, the real value of debt falls when the price level rises. This
is the usual redistribution between creditors and debtors caused by unexpected
inflation- here the debtor is the govt. and the creditor is the private sector. But this
debtor, unlike others has access to the monetary printing press. A high level of debt
might encourage govt. to print money, thereby raising the price level and reducing the
real value of its debts.
149
11.12.1 Deficit Financing and Economic Growth Fiscal Policy
Deficit financing can be used in accelerating economic growth. The Govt. can use
deficit spending for shifting productive resources of the economy into capital goods
sector, developing basic and key industries and providing necessary infrastructure.
Deficit financing is a very potent tool in the hands of the govt. for increasing effective
demand. If deficit is financed through creation of additional currency or borrowings
from the central bank of the country. Even if govt. borrows from the market and
spends the borrowed sums, the aggregate expenditure is most likely to increase
because during depression the investment opportunities are not much and savings of
the market get spent through the govt. Though the govt.’s expenditure policy more
effective when the extra purchasing power goes into the hands of those people who
have a high marginal propensity to consume. That’s why various security measures
like unemployment relief, old - age pensions, and so on are , therefore, very helpful in
raising the total demand in the market. There are two form of deficit financing which
can be resorted to in combination:
1. The Govt. may borrow from the market. This procedure is equivalent to
transferring of resources straight from the hands into those of the govt. The
market borrowings therefore, generally amount to loans from various - institutions
and this generally means diversion of investable funds from the private sector to
the public sector.
2. The deficit financing namely, resorting to the printing pres amounts to taking
away a portion of the private sector’s resources and leaving it with extra money.
This technique can be used for re-allocation of the economy’s resources and thus
accelerating the pace of economic growth.
11.13 IMPACT OF FISCAL POLICY ON BUSINESS

If there is any single document, which has maximum impact on business than, it is
Budget. Every year budgets brings opportunity and threats for business. Every budget
improves the bottom line of some business and some business go in red because of
budget. As in recent budget compelled the organizations to work out on their
Compensation plan because of Fringe Benefit Tax (FBT). Same way the budget of
year 2005 gave a big impetus to Mutual Funds and in turn to stock market by allowing
tax rebate on the investment in Mutual Funds. The introduction of VAT also have big
impact on the business.
In early 1990 electronic industry was in great pressure as market growth rate was very
low, understanding this the then finance minister Dr. Manmohan Sing reduce the
excise on electronics specially CTVs which resulted in decrease of price and sales
started rising. Not only this in last years government has reduced the taxes which
increased the disposable income of the household which increased the demand and
which gave birth to great Indian Middle Class and big spurt in the sale of white goods
and readymade garments. Taxes on intermediary goods and industry and taxes on
corporate as corporate tax and dividend tax have an obvious impact on business. One
of the reason which brought a big spurt in Indian consumer industry is because of
relaxation in fiscal policy as in last few budgets have reduced a savings rate a lot and
have given free hand to banks to distribute consumer loans to consumers.
A smart business person always keep an eye on fiscal policy to reap the maximum
advantage from the opportunity given by policy and to minimize the prospective
losses because of threats in budget. Like budget of 2005-06 allow to invest in mutual
funds to avoid tax now it is big opportunity for mutual funds, it now to them how the
reap maximum from this step. Budget creates an atmosphere for investment.
150
Business Environment and Ethics 11.14 GLIMPSES OF BUDGET 2008
Union Finance Minister P Chidambaram presented his fifth Budget (2008) in
Parliament the key features of the budget are as follows:
z Changes in I-T slab. Threshold of exemption for all Income Tax assesses raised
from Rs 1,10,000 to Rs 1,50,000.
z Every income tax assessee to get relief of minimum of Rs 4,000.
z No change in rate of surcharge.
z New tax slabs will be: 10 per cent for Rs 150,000 to Rs 300,000, 20 per cent for
Rs 300,000 to Rs 500,000 and 30 per cent above Rs 500,000.
z For women, the income tax limit goes up from Rs 1.45 lakh to Rs 1.80 lakh. In
case of senior women citizens, it increases from Rs 1.95 lakh to Rs 2.25 lakh.
z Fresh facilities, encouragement to sports and guest houses exempted from Fringe
Benefit Tax.
z Five year tax holiday for setting up hospitals in tier II and tier III regions for
providing healthcare in rural areas from April 1, 2008.
z Five year tax holiday for promoting cultural tourism.
z Short-term capital gains increases to 15 per cent.
z Commodities Transaction Tax to be introduced on the lines of Securities
Transaction Tax.
z Banking cash transaction tax withdrawn from April one, 2009.
z Direct tax proposals to be revenue neutral. Indirect tax proposals to result in loss
of Rs 5,000 crore.
z Rs 500 crore for corpus fund to subsidise all women Self Help Groups for LIC
cover for permanent disability.
z Agricultural loans given by scheduled commercial banks, regional rural banks and
cooperative credit institutions up to March 31, 2007 and due for December 31 that
year will be covered under the waiver scheme to address the problem of
indebtedness.
z No change in corporate income tax.
z To protect tigers, Rs 50 crore for National Tiger Conservation Programme. Bulk
of it to be used to raise Tiger Protection Force.
z Plan expenditure fixed at Rs 2,43,000 crore and non plan expenditure at 5,74,000
crore.
z Fiscal deficit pegged at 3.1 per cent and revenue deficit at 1.4 per cent.
z Tax to GDP ratio increased from 9.2 per cent in 2004-05 to 12.5 per cent 2007-08.
z Customs duty on specified life saving drugs reduced from ten per cent to five per
cent.
z Special Countervailing Duty on power imports.
z Customs duty on specified sports goods machinery down from 7.5 per cent to five
per cent.
z Duty withdrawn on naptha for production of polymers.
z Duty on crude and unrefined sulphur reduced from five to 2 per cent to help raise
domestic fertiliser production.
z General Cenvat on all goods to be reduced from 16 per cent to 14 per cent. Excise 151
Fiscal Policy
duty reduced from 16 per cent to eight per cent on all pharmaceutical goods
manufacture.
z Excise duty on small cars reduced to 12 per cent from 16 per cent and hybrid cars
to 14 per cent.
z Excise duty reduced from 16 to 8 per cent on water purification items.
z Duty on non filter cigarettes to be raised.
z Asset management service under mutual funds, services by stock exchanges to be
brought under Services Tax net.
z Threshold for small service providers raised from Rs eight lakh to Rs. 10 lakh.
z Allocation for defence to be increased by 10 per cent from Rs. 96,000 crore to Rs.
1,05,600 crore.
z 75 lakh people to be covered by health insurance scheme.
z Allocation for Textile Upgradation Fund to be more than doubled.
z Micro, small and medium enterprises to continue to get special attention.
z Risk Capital Fund to be set up in SIDBI.
z PAN requirement to be extended to all transactions in capital market subject to a
threshold.
z Rs. 750 crore for upgradation of 300 ITIs in 25 districts.
z Rs. 32,676 crore as subsidy to Public Distribution System.
z PDS through smart cards in Haryana and Chandigarh on pilot basis.
z Three schemes to be introduced for providing social security to unorganised
sector workers.
z Sixth central pay commission to submit report by March 31, 2008.
z Rs. 624 crore allocated for Commonwealth Games
z Farmers' debt to be waived
z Complete waiver of loans for marginal farmers owning land up to one hectare and
small farmers owning land up to 1 and 2 hectares.
z Agricultural loans given by scheduled commercial banks, regional rural banks and
cooperative credit institutions up to March 31, 2007 and due for December 31 that
year will be covered under the waiver scheme to address the problem of
indebtedness.
z One time settlement of loans for other farmers.
z Agriculture loans restructured and rescheduled by banks from 2004-06 and other
loans normally rescheduled under RBI guidelines will also be eligible under the
waiver scheme.
z Implementation of debt waiver and debt relief will be completed by June 30 this
year.
z Loan waiver scheme to involve loans liability of Rs 60,000 crore and to benefit
four crore farmers.
z By loan waiver scheme, the country is discharging a deep debt and sense of
gratitude to farmers, says Chidambaram.
152 z The corpus of rural infrastructure development fund to be raised to Rs. 14,000
crore.
z More reforms needed in coal and electricity sectors to ensure double digit growth
in manufacturing sector.
z Rs. 800 crore for accelerated power reforms programme.
z National Fund for Transmission and Distribution Reforms to be launched.
z The loan waiver scheme will benefit three crore small and medium farmers and
cover loans totalling Rs. 50,000 crore.
z One crore other farmers will benefit to the tune of Rs. 10,000 crore in the waiver.
z Foreign investment of 3.5 to 8 billion dollars expected for exploration and
development of new oil blocks.
z Rs. 7,200 crore to be allocated to the Ministry of Women and Child Development,
marking an increase of 24 per cent.
z Rs. 500 crore for corpus fund to subsidise all women Self Helf Groups for LIC
cover for permanent disability.
z A target of Rs. 2.80 lakh crore for agriculture credit set for the coming year.
z Rs. 20,000 crore for irrigation projects under AIPB, showing an increase of Rs.
9,000 crore over last year.
z National Horticulture Mission to be given Rs. 1,100 crore in 2008-09 with special
focus on coconut cultivation.
z Rs. 75 crore to be given to Agriculture Ministry for providing mobile soil testing
laboratories in 250 districts.
z Rs. 644 crore for National Agriculture Insurance Scheme, which will be continued
pending evolving an alternative crop insurance scheme.
z National Plant Protection Training Institute at Hyderabad to be made autonomous
body and Rs. 29 crore will be allocated to it.
z A scheme of debt waiver and relief for small and marginal farmers announced.
z NREGA scheme to be rolled out in all the 596 rural districts in the country in
2008-09.
z Jawaharlal Nehru Urban Renewal Mission to get Rs. 6,865 crore this year against
Rs. 5,482 crore past year.
z Allocation for Rajiv Gandhi Drinking Water Mission to be increased to Rs. 7,300
crore. Rs. 200 crore for potable water in schools.
z Rs. 300 crore to be set aside for desalination plant in Chennai for drinking water.
z Rs. 500 crore for identifying urgent needs of development programmes of border
areas like Arunachal Pradesh.
z SC, ST and minority students to continue to get special attention.
z Allocation for several schemes in North East raised from Rs. 14,365 crore to Rs.
16,400 crore.
z Rs. 75 crore sanctioned for Rajiv Gandhi National Fellowship Programme for
SC/ST students pursuing M.Phil.
z Rs. 230 crore will be extended as additional equity to developmental organisations
looking after the welfare of SC.
153
z ST, socially and economically backward classes and minorities. Fiscal Policy
z Allocation for Minority Affairs Ministry to be doubled from Rs. 500 crore to Rs.
1,000 crore.
z Rs. 540 crore for multi-sectoral development plan for minority concentration
districts.
z 288 public sector bank branches to be opened in districts having minority
community concentration.
z Sarva Shiksha Abhiyan will be provided Rs. 13,100 crore, Mid Day Meal scheme
Rs. 8,000 crore, Secondary education Scheme Rs. 4,554 crore.
z 410 additional Kasturba Gandhi Vidyalaya to be set up in backward blocks.
z Navodaya Vidyalayas to be opened in 20 districts with special focus on regions
having SC/ST concentration.
z Allocation of Rs. 130 crore for this purpose. Rs. 750 crore more to be given for
merit scholarship to students up to 10th and 12th class.
z Mid day Meal scheme extended to upper primary level in 3479 schools. 16 central
universities to be opened in 2008-09.
z Three IITs to be set up in Andhra Pradesh, Bihar and Rajasthan.
z Schools of architecture and planning in Bhopal and Vijaywada. More institutes of
higher education to be opened.
z Rs. 100 crore to be given to Information Technology Ministry to set up national
knowledge centres.
z Allocation for NRHM increased to Rs. 12,050 crore
z Rs. 992 crore for national AIDS programme.
z A national programme for the elderly to be started at a cost of Rs. 400 crore.
z Rashtra Swasthya Beema Yojana to start from April one in Delhi and Haryana.
Rs. 30,000 for each family belonging to unorganised sector.
z Allocation for ICDS increased to Rs 6300 crore.
z Rs. 85 crore sanctioned for scholarships to students pursuing science education.
z Indian Institutes of Science Education and Research to be set up at Bhopal and
Thiruvananthapuram.
z Agriculture credit doubled in the first two years of the government to reach
Rs. 2.40 lakh crore by March 2008.
z Eleventh Plan started on a robust growth.
z Gross budgetary support to be raised to Rs. 2,43,386 crore, an increase of more
than Rs. 38,000 crore from the current level.
z Allocation for Bharat Nirman to be raised to Rs. 31,280 crore.
z Twenty per cent hike in education budget this year from Rs. 28,674 crore to
Rs. 34,400 crore.
z GDP growth slows down to 8.4 per cent during quarter ended December 31, 2007
as compared to 9.1 per cent a year ago.
z Economy grew over eight per cent over 12 successive quarters since 2005, says
Finance Minister P Chidambaram.
z Growth rate of agriculture estimated at 2.6 per cent during the current year.
154 z Services and manufacturing sectors expected to grow by 10.7 per cent and 9.4 per
cent, says Chidambaram.
z Keeping inflation under check is one of the cornerstones of the Government's
policy.
z Rice production estimated at 94.08 million tonnes, maize 16.78 mt, soyabean 9.45
mt and cotton 23.38 million bales.
As a last budget of the present Govt., this budget has nothing significant. The most
talked about feature is the Rs. 60,000 crore loan waiver of farmers. But it is applicable
to only those who have taken money from the nationalized and scheduled banks, who
comprise just one third of the farmers in distress. Two thirds of the farmers have
borrowed money from private money lenders. The bulk of suicides are taking place
among them. There has been an increase in the allocations for health, education and
other social sectors.
Fill in the blanks:
1. _____________ is a master financial plan of the government.
2. ____________ is the projected balance sheet of the country, prepared by
Chief Finance Officer of country that is Finance Minister of the State.
3. ____________ is the study of generating resources for the development of
country and about allocation of resources.
4. Fiscal policy is implemented through ____________,
5. ___________ in Indian context refers to the borrowings of the Central and
State Government.
6. ____________ is obtained by subtracting interest payment (a component of
non plan expenditure) from the fiscal deficit.
11.15 LET US SUM UP

Fiscal policy is a statement of Govt. about its projected source of revenue and
expenditure, it tells about the schedule of activities to be undertaken towards the
direction of national objectives. Fiscal policy is the projected balance sheet of the
country, prepared by Chief Finance Officer of country that is finance minister of the
state. Public finance is the study of generating resources for the development of
country and about allocation of resources. Fiscal policy is implemented through
Budget, which is statement of state’s revenue and expenditure. Typically budget
includes four components: Some review of economy, Major policy announcement,
Expenditure proposal, Tax proposal. The budget includes revenue and expenditure.
Revenue and expenditure is divided in capital and revenue account. Thus receipts are
broken into Revenue Receipts and Capital Receipts, and disbursement are broken up
into Revenue expenditure and capital expenditure.
Taxation, Profits of Public Sector (Price), Domestic non-monetary borrowing,
External borrowing, Borrowing form the RBI (monetised borrowing) are the main
source of funds for the Govt. Expenditure of the Govt. can be divided into non - plan
expenditure and plan expenditure.
Fiscal policy is a potent tool in the hands of Govt. to regulate the economic growth.
Through the fiscal policy govt. can influences the demand, supply and even the level
of currency in the economy. It increases the supply of currency in the economy by
resorting to deficit financing thus taking public debt. Through fiscal policy Govt. also
influences the level of investment and saving rate.
155
11.16 LESSON END ACTIVITY Fiscal Policy
Prepare a report on the impact of Present Budget on the business at large.
11.17 KEYWORDS
Deficit Financing: It is the deliberate unbalancing of the budget in such a way that
government expenditure exceeds government revenue.
Public Debt: In Indian context it refers to the borrowings of the Central and State
Government.
LDC: Least Development Countries.
VAT: Value Added Tax, it is imposed on sales.
Customs Duties: These are duties or taxes imposed on commodities imported into
India.
Internal Debt: It includes the loans raised within the country.

1. What is fiscal policy? Describe the component of Budget.
2. Describe the various sources of Revenue of the Govt.
3. Discuss the role of fiscal policy in economic growth.
4. What is public debt? Discuss its role in economy.
5. Discuss the relation between deficit financing, public debt and inflation.

CYP 1
It includes tax revenue and other revenues.
a) Tax revenue: These comprised of taxes and other duties levied by the
Union Govt.
b) Other Revenue: These receipts of government mainly consist of interest
and dividends on investment made by government, fees and receipts for
other services for other services, rendered by govt.
CYP 2
The main sources of funds for financing development expenditure can be
grouped under following categories:
(a) Taxation
(b) Profits of Public Sector (Price)
(c) Domestic non-monetary borrowing
(d) External borrowing
(e) Borrowing form the RBI (monetised borrowing)
CYP 3
Non Tax revenue includes Borrowings, both internal and external, income from
various govt. undertaking and monopolies, income from govt. property etc.
CYP 4
1. Budget, 2. Fiscal policy 3. Public finance
4. Budget 5. Public debt 6. Primary deficit
156
House.
Prentice Hall.
157
LESSON Value Added Tax, Service Tax
and Expenditure Tax
12
VALUE ADDED TAX, SERVICE TAX
AND EXPENDITURE TAX
CONTENTS
12.1 Introduction
12.2 Meaning of VAT
12.3 Value Added
12.4 Objectives of VAT
12.5 VAT Concept
12.5.1 Subtraction Method
12.5.2 Cumulative Method
12.6 Advantages of VAT
12.7 Difference between VAT and Existing Taxation System
12.8 History of VAT
12.9 VAT in India
12.9.1 State Level VAT
12.9.2 White Paper on VAT
12.9.3 Why Traders are Opposing VAT in India?
12.9.4 VAT and Exports
12.9.5 VAT and Savings
12.9.6 VAT and Administrative Problem
12.9.7 VAT will increase Govt. Revenues
12.10 Service Tax
12.11 Expenditure Tax
12.11.1 Application of the Act
12.11.2 Tax Authorities
12.11.3 Penalty for Failure to Furnish Prescribed Return
12.11.4 Wilful attempt to Evade Tax, etc.
12.12 Let us Sum up
12.14 Keywords
158
Business Environment and Ethics 12.0 AIMS AND OBJECTIVES
z Understand the concept of Value Added Tax
z Explain the various methods of calculating the VAT
z Learn the various advantages of VAT
z Know the reasons why businessmen are opposing the VAT
z Impact of VAT on Revenue
12.1 INTRODUCTION
The Govt. appointed a Tax Reform Committee under the chairmanship of Dr. Raja J.
Chelliah on 29th August 1991. The Committee submitted its interim report in
December, 1991 and its final report in August, 1992. The Committee has suggested
far-reaching proposals to reform the tax system. Dr. Chelliah Committee has
recommended value added tax (VAT) as the best option to the existing Central Excise
Duty Tax system in relation to Indirect Tax System. After over a decade of debate,
Value Added Tax was introduced in April 2005 by 21 Indian States.
12.2 MEANING OF VAT

Value Added Taxation is a kind of indirect tax. Value Added taxation is a percentage
of tax on value (Ad valorem) added to the production or service at each selling point.
It is a multi stage sales tax. VAT is levied in parts at every stage of the production and
distribution process. A tax levied on business on the value they added to their
purchase of raw material is known as VAT. Since Value added equals total output
minus total input of purchases on current account. Thus value added is a multiple
point sales tax with set-off for tax paid on purchases. Ultimately it is the customer
who generally pays the full amount of the VAT. To understand the VAT, we should
understand the Concept of Value Added in terms of VAT.
In brief VAT can be understood in following points:
z It is a local sales tax collected under a different system.
z It is a multi point tax with a facility of set off for tax paid on purchases.
z It is collected on each stage of the production distribution cycle.
z It based on the destination principle.
z The final and total burden by the domestic consumer.
12.3 VALUE ADDED

Before reaching to the consumer a product or service passes through many stages. In
each stage from which product or service passes value addition takes place. Value
added can be termed as either differences between sales and purchases or as the sum
of the components which go to make up the value added such as rent, wages, interest
and profit. According to economics terminology “the difference between the value of
output produced by the firm in a given period and value of the inputs purchased from
other firms in producing output is known as value added.” The ICMA defines value
added as “the increase in the market value resulting from an alteration in the form,
location or availability of a product or service, excluding the cost of bought-materials
and services.”
159
Value Added Tax, Service Tax
12.4 OBJECTIVES OF VAT and Expenditure Tax
VAT is implemented with following objectives:

1. To remove the double taxation having cascading effect.
2. To eliminate multiplicity of taxes such as entry tax, turnover tax, sales tax,
surcharge, excise duties etc.
3. To eliminate inter-state tax.
4. To reduce inspector Raj.
5. To make the tax structure, simple, efficient, and transparent.
6. To widen the tax net.
7. Coordinate revenue growth with development by Ad valorem rate of tax.
8. To create level playing field to enable industry and trade to meet the challenge of
globalised economy.
12.5 VAT CONCEPT

VAT is a tax on value added. Thus tax is paid at every stage from which good or
service passes but it is paid on the value added only and not on whole cost. Thus every
body in the production and distribution chain pays the tax but only on the value added
at his level only. Thus in very brief we can say that if a trader X purchases a good A at
price of Rs. 10 and sells it to trader Y at Rs. 12, thus value addition is only Rs. 2 and
he will pay tax on that Rs. 2 only (not on Rs.12). Rate of tax is say 10% then the
effective tax is 00.20 (10% of Rs 2).
We can understand it in following equation:
Producer Manufacturer Trader Consumer
Pays the first Pays Tax on Pays Tax on

Point Tax Value Added Value Added
Total tax incidence on consumer = FP tax paid by producer
+ Tax on value added by M/F
+ Tax on value added by trader
= Tax on retail sale price
VAT is in many respect is in many respect equivalent to a last point retail sales tax.
The difference between these two is that, the VAT is collected in bits at each stage of
production and distribution: which is in total is equal to tax on the retail sale on the
same rate as the VAT. It can be understood from the following example:
Suppose there is a retailer who purchases goods worth Rs. 200 and sells it to
consumer at Rs. 250 so tax effect will be as follows:
Retailer
Purchase = 200 Sales = 250
Tax charged = 10% of 200 Tax charged = 10 % of 250
From Retailer = 20 from customer = 25
160 Out of Rs. 25 charged from the customer, retailer will pocket Rs. 20 (tax paid at the
time of purchase) and pay balance Rs. 5 to the department.
Further it can be understood by following example:
The value added can be derived either by Subtractionor by addition.
12.5.1 Subtraction Method

According to this method VAT is calculated on the difference between selling value
and purchasing value of a product-service at a predetermined tax rate. We can
understand this by following example:
Suppose M is a raw material supplier,
P is a Manufacturer
W is a Wholesaler
R is a retailer.
And VAT is at 10%
If M sales a product to P for Rs. 100 and pays tax at the applicable VAT rate of 10%.
It is assumed that M is a primary producer of product thus his input can be assumed as
zero. So the tax will be 10% of Rs. 100 that is Rs. 10. Rs. 100 is the purchase price of
P. Manufacturer P will add value to the product increasing its usability through the
manufacturing process. In this process he invest some money and add his profit so his
sale value is 200. Value added is the difference value that is Rs. 200 - Rs. 100 = 100,
tax @ 10 is Rs. 10 (10% of Rs 100 (difference)). The sale price of P is the purchase
price of W the wholesaler. Wholesaler will add his operating cost and profit and thus
suppose his sale value is Rs. 250. At this point value addition in terms of money is
Rs. 250 - 200 = 50 and applicable VAT at the rate of 10% will be Rs. 5. The Retailer
R purchases it at Rs. 250 and sells it at Rs. 350 the value addition is Rs. 350 – Rs. 250
= Rs. 100 and tax will be Rs. 10 (10% of difference.) It can be understood from
following diagram:
M P W R
Sale Value Sale Value Sale Value Sale Value
= Rs.100 = Rs.200 = Rs.250 =Rs.350
V.A. = 100 – 00 V.A. = 200 –100 V.A. = 250 – 200 V.A. = 350 – 250
= 100 = Rs. 100 = Rs. 50 = Rs. 100
VAT @ 10% VAT @ 10% VAT @ 10% VAT @ 10%
VAT = Rs. 10 VAT = Rs. 10 VAT= Rs. 5 VAT = Rs. 10
(10% of Rs.100) (10% of Rs.100) (10% of Rs.100) (10% of Rs.100)
Total VAT collected at four stages = 10 + 10 + 5 + 10 = 35

Last point retail Sales Tax @ 10 on 350 = 35.
12.5.2 Cumulative Method

As per cumulative method, tax is collected on overall sale value. In this system
accumulation takes place for the cost increased for producing goods and profit added
at each previous sage. In this method, tax is computed on purchasing value is
deducted from the amount of tax computed on selling value. The difference amount of
tax is payable to Govt. by seller of product or service. Here the tax paid at previous
stage is set off against the total amount of tax on selling value for fixing net tax 161
liability of seller at each stage. We can understand in the above mention assumption: and Expenditure Tax
M P W R
Sale Value = Rs.100 Sale Value = Rs.200 Sale Value = Rs.250 Sale Value = Rs.350
VAT on SV @ 10% VAT on SV @ 10% VAT on SV @ 10% VAT on SV @ 10%
= 10 = 20 = 25 = Rs. 35
Less: set off pre Less: set off pre Less: set off pre Less: set off pre
stage = 00 stage = 10 stage = 20 stage = 25
Net VAT = 10 – 00 Net VAT = 20-10 Net VAT = 25 – 20 Net VAT = 35 - 25
= Rs. 10 = Rs. 10 = Rs. 5 = 10
As in the example M sales a product to Mr. P for Rs. 100 and pays tax at the
applicable VAT rate of 10% or Rs. 100. As M is the primary producer of product, his
input could be assumed Zero. Hence the sale would be Rs. 100 and on this sale value
of Rs. 100 @ 10% VAT would be Rs. 100. This Rs. 100 is the purchase price of P.
Manufacturer P will add value to the purchased product. Assume that after adding all
the cost incurred by him and his own profit his sale value is Rs. 200. On this sale
value of Rs. 200@ 10% total VAT would be Rs. 200. As Raw material producer M
has already paid VAT on his sale value of Rs. 100 @ 10% Rs. 10 and Manufacturer P
will get credit/set - off for this tax. Hence net liability of VAT for P Rs. 10. Similarly
the sale value of Rs. 250 by wholesaler W would have net liability of VAT of Rs. 5.
And the sale value of Rs. 350 by Retailer R would also have net liability of Rs.10.
The illustration shows that VAT is collected at each stage of production and
distribution channel. Thus it is broad base tax covering the value added of each
product-service by a firm during all stages of production and distribution though final
burden falls on the consumer.
What do you understand by the Value Added Tax (VAT)?
……………………………………………………………………………………
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12.6 ADVANTAGES OF VAT

VAT has following advantages:
1. Simplicity: It is very simple tax system, it doesn’t contain cumbersome
calculations, even a simple retailer can calculate his or her tax, so the expenditure
on tax collection and tax assessment is very low compared to traditional tax
system.
2. Transparency: It is a fully transparent system so there is little scope of if and buts
and of course of corruption.
3. No cascading effect: VAT avoids multiple taxation thus it remove the problem of
cascading effect of traditional tax system.
4. A few rates of tax: In VAT regime there is mainly four tax rates (0%, 1%, 4%,
12.5%) so it is very simple.
162 5. Self Assessment: It replaces existing system of inspection by built in assessment
by the dealers and internal auditing.
6. Less incentive to tax evasion (wider coverage): In VAT the trader pays the tax
only at the value added thus it is less then that of earlier tax system second he will
charge that tax from its customers, third, he can charge VAT from his customer if
he has paid it to its supplier so VAT make a chain where everybody pays tax, so
that he can collect tax from its customer. This is the major objective of VAT that a
less amount of tax should be paid by every trades in a value chain.
7. Revenue security: VAT represents an important instrument against tax evasion
and is superior to a business tax or a sales tax from the point of view of revenue
security for three reasons.
In the first place, under VAT it is only buyers at the final stage who have an
interest in undervaluing their purchases, since the deduction system ensures that
buyers at earlier stages will be refunded the taxes on their purchases. Therefore,
tax losses due to under valuation should be limited to the value added at the last
stage. Under a retail sales tax, on the other hand, retailer and consumer have a
mutual interest in under declaring the actual purchase price.
Secondly, under VAT, if payment of tax is successfully avoided at one stage
nothing will be lost if it is picked up at a later stage; and even if it is not picked up
subsequently, the government will at least have collected the VAT paid at stages
previous to that at which the tax was avoided; while if evasion takes place at the
final stage the state will lose only the tax on the value added at that point.
If evasion takes place under a sales tax, on the other hand, all the taxes due on the
product are lost to the government. A significant advantage of the value added
form in any country is the cross-audit feature. Tax charged by one firm is reported
as a deduction by the firms buying from it. Only on the final sale to the consumer
is there no possibility of cross audit. Cross audit is possible with any form of sales
tax, but the tax-credit feature emphasizes and simplifies it and is likely to make
firms more careful not to evade because they know of the possibility of cross
check.
8. Selectivity: VAT may be selectively applied to specific goods or business entities.
VAT provides a full credit for the tax included in purchases of capital goods. The
credit does not subsidize the purchase of capital goods; it simply eliminates the
tax that has been imposed on them.
12.7 DIFFERENCE BETWEEN VAT AND EXISTING

TAXATION SYSTEM
In brief difference between VAT and existing tax system can be understood from
following table 12:
Table 12.1: Difference between VAT and Existing System
VAT Existing System
Levied at each stage of the production Mainly first point taxation
distribution cycle
Mainly four flour rates : Multiplicity of rates result in hairsplitting
0%, 1%, 4%, 12.5% distinction among commodities and breeds
excessive litigation & economic distortion
Concessions and incentives are also Concessions and incentives are quite common
deliberated to be done away with
Uniform tax rates Competing tax rates among various states
No cascading effect of taxes Cascading effect of taxes
163
12.8 HISTORY OF VAT Value Added Tax, Service Tax
and Expenditure Tax
At present VAT is in vogue in many countries. The most important group of countries
in this respect is European Union (EU). It is not a new concept at international level.
For the first time in 1921, EVON, Siemens proposed VAT as substitute for the
established German Turnover Tax in Germany. France was the first European Country
who adopted VAT in 1954. VAT was implemented in U.K. in 1973. China
implemented it in 1994, Switzerland implemented it in 1995. Table 12.2 shows the list
few countries adopted VAT and the tax system replaced by VAT:
Table 12.2: History of VAT
Country Year of Adoption of VAT Tax system replaced by VAT
France 1954 Wholesale Sales Tax
West Germany 1968 Multi Stage Turnover Tax
Netherlands 1968 Multi Stage Turnover Tax
Luxembourg 1970 Multi stage turnover tax
Belgium 1971 Multi Stage Turnover Tax
Italy 1973 Multi Stage Turnover Tax
United Kingdom 1973 Purchase Tax
12.9 VAT IN INDIA

The Govt. of India had set up an Indirect Taxes Inquiry Committee in 1976 of which
Mr.L.K. Jha was the chairman. It strongly recommended the adoption of VAT in
India. It recommended the MANVAT, a VAT at the manufacturing level. As a result
the MODVAT scheme was introduced with effect from May 1, 1986. Initially it
covered selected items in only 37 Chapters which was gradually extended to 77
chapters.
Table 12.3: VAT in India
Some Earlier Half Baked Effort of Some Important Milestones
Implementing VAT in Country
Maharashtra introduced half baked VAT 1986: Introduction of a restricted

from 1.10.95 and allowed input credit for VAT called MODVAT
tax paid above 4%.
1991: Report of the Tax Reforms
Andhra Pradesh, Kerala, Madhya Pradesh Committee
also introduced half baked VAT on some
select commodities for resellers only but recommends VAT, among others.
did not grant set-off for tax paid on recommendations accepted by
inputs. Government.
But all these states withdrew such VAT 1994: Introduction of Service Tax Jan, 2000:
within a couple of years. Implementation of uniform floor tax rates
In 1998 West Bengal Govt. also (1%, 4%, 8%, 12% & 20%).
introduced half baked VAT on few select
Abolition of tax related incentives granted by States.
commodities (jute goods, T.V. sets
stainless steel wares, electric bulbs) on March, 2000:
the value added by the dealer. However it Replacement of MODVAT by Central VAT
was withdrawn within 6 months. (CENVAT).
Even Haryana had some scheme of VAT July, 2000:
for manufacturers. Introduction of ‘Transaction Value’ in
CENVAT.
April, 2002:
Introduction of State VAT
164 MODVAT was renamed as CENVAT (Central Value Added Tax) with effect from
April 1, 2000. All inputs used directly or indirectly (except HSD, LDO, and Petrol)
are eligible for CENVAT. What VAT is to sales tax same way CENVAT is to excise?
This Central VAT has replaced the erstwhile excise duty regime. The CENVAT
regimes permits the setoff of CENVAT paid on inputs/capital goods as also a setoff of
the equivalent of the CENVAT which is imposed on imported goods, namely
countervailing duties against the CENVAT payable on output. In addition to
CENVAT, a central sales tax is also imposed on inter stat sales of goods. This tax is
generally at 4%. Besides there is a provision of 10% service tax on various services.
There exist following taxes on trading and manufacturing in present system:
CENVAT: A tax imposed by tax on manufacture or production of goods in India.
Service Tax: A tax on identified services. It is imposed by center.
States Sales Tax: A tax imposed by the state on the intra-State sale/ trade of goods.
Central Sales Tax (CST): A tax on inter state sale/trade of goods.
Other local tax imposed by states.
The finance ministry will follow a gradual approach to move towards aligning the goods and
services tax into a single rate. Highly-placed sources said the process can begin in the near future,
but will take at least three years to complete. The finance ministry is deliberating on the road map
for transition to a single rate of tax.
At present, 81 services are taxed at 10%; the median central value-added tax (Cenvat) has been
fixed at 16% for goods, while states levy 12.5% value-added tax (VAT) on goods. The alignment
of service tax with Cenvat is essential to administer VAT credit uniformly in transactions where
goods are used as inputs to provide services.
A hike in the service tax rate seems unlikely this year, given that the rate was hiked to 10% in
Budget 2005-06. The rate, which was fixed at 5% when the tax was first introduced in 1994, was
raised to 8% in ’03-04.
Top finance ministry sources said the ministry favoured a phased implementation of a common
goods and services tax (GST) — an important landmark in tax reforms. “The phase-out of local
sales taxes has taken 10 years. It is not easy to shift to a uniform tax regime overnight,” said this
source.
The Economic Times November 15, 2005
12.9.1 State Level VAT

The first state level preliminary discussion on State level VAT took place in meeting o
State Chief Ministers convened by Dr. Manmohan Singh the then finance Minister. It
is the efforts of the Convener of the Empowered Committee of State Finance
Ministers, Sri Asim Kumar Dasgupta and the Union Finance Minister, Mr. P.
Chidambaram that the VAT is implemented in the States form April 1, 2005. Today
more than 21 states have implemented the VAT.
12.9.2 White Paper on VAT

The ‘white paper’ on VAT released by the Finance Minister lays down a road map for
a uniform state-level tax on cover 500 items and gives the states an option to exempt
food grains for a year. The key features of VAT are:
1. The VAT will replace a web of sales taxes, and will cover around 550 goods, of
which large number of commodities will fall in the 12.5% tax rate. On another
270 items 4% duty and tax of 1% will have to be paid on gold and silver
ornaments. 46 products were exempted form VAT of these 10 items are to be
decided by state rest being common across country.
2. The Finance Minister said that three items - Textile, Sugar, and Tobacco covered
under the additional excise duty structure will not be under the VAT regime for
one year and the existing arrangement would continue.
3. A special 1% floor rate will cover only gold and silver ornaments, precious and 165
semi precious stones. and Expenditure Tax
4. Medicines, agriculture and industrial inputs are in 4% slab.
5. State are free to choose 12.5 or 4% VAT on tea.
6. The Threshold limit for traders under VAT at Rs. 5 Lakhs.
7. The Upper turnover limit of being classified as a ‘small traders’ had been raised to
Rs. 50 Lakhs from Rs. 40 Lakhs in the draft documents.
8. Traders up to turnover of Rs. 5 Lakh to R. 50 Lakh can pay 1% VAT.
9. 4% Central Tax to be phased out after 2006.
10. Tax paid for export to be refunded with in 3 months.
11. VAT on imports, service tax and items under additional excise duty will be
integrated into VAT system form the second year if decisions are taken
expeditiously at central level.
12. Under the formula commanded by VAT panel, states would get 100%
compensation for revenue loss, if any in first year, while 75% of the loss will be
compensated in the second year, and 50% in the third year.
The Finance Minister Mr. P. Chidambaram said, “This is the best example of
cooperative federalism and the first document which has been collectively prepared
and put out by the finance ministers of all states.”
12.9.3 Why Traders are Opposing VAT in India?

"We will step up our protest come what may. It is a do or die situation for us."
Praveen Khandelwal, secretary-general of the Confederation of All India Traders.
1. The power to enhance the rate of tax will rest with the finance department of the
states. The industry feels that this will be largely misused, and rates could be
increased at the wishes of the bureaucrats, ignoring the stipulations.
2. The bureaucracy will have full control over every dealer and trader, and will have
the authority to inspect not only the books of accounts, but verify case or stock
too. This is absurd feels the industry.
3. The department will have the power to attach provisionally, any money which is
due or which may become due in the course of any enquiry, inspection or
proceedings. The revocation of such an attachment is possible only after the
submission of a bank guarantee. Though it is provided that such an attachment
will cease to have effect after the expiry of one year, the commissioner has the
power to extend this period up to two years.
4. Getting refunds of the VAT would be a cumbersome procedure.
5. There will be no set-off on inter-state sales.
6. The new VAT provisions give power to the authorities to create check nakas at
their discretions.
7. No redressal system of recheck.
8. Audit requirement under VAT on a turnover of Rs 40 lakh is required to be
audited and assessed. When there is already an audit of accounts for income tax
purposes, a separate audit requirement for VAT is a duplication of the work.
9. Penal provision for a lapse of even a single day in filing return is very high, to the
extent of 50 per cent of the tax payable.
166 10. Traders dealing in products with brand names will be required to pay additional
taxes of brand name and not set-off on these is provided.
Traders have mentioned that maintaining books of accounts is an almost impossible
task, especially for the very small textile traders that are spread across the country and
in the interiors of the country too. The present rules give the sales tax department,
finance department, etc sweeping powers, and will lead to a lot of malpractices and
harassment. Even as traders are not opposed to paying tax, this should be done
without harassing the traders.
12.9.4 VAT and Exports

Implementation of VAT does not have any major impact on Exports. This is because
the export sector has no VAT. If imposition of VAT results in inflation, the price of
exports may rise, making it less competitive for exports sector to compete in the
international economy. Imposing a VAT on imports of not affect imports because the
domestic products are charged VAT too.
12.9.5 VAT and Savings

A VAT can boost savings. Since the Tax is imposed on consumption, people will be
motivated to consume les and save more. In this respect VAT is superior to income
Tax in fostering growth.
12.9.6 VAT and Administrative Problem

Multiple VAT will not only have high administrative cost but will also create
administrative problem for Govt. In multiple VAT there is a problem of definition. As
in France, medical products attract less VAT than that of cosmetics. So few
companies are showing there shampoo as medical product, it results in litigation and
was even extended parliamentary debate. Finally it was declared that it was a cosmetic
product. These types of confusion and litigation are also possible in India as we have
also adopted multiple VAT. To reduce administrative cost and problem, a multiple
VAT should clearly mention the items which are exempted, which are Zero rated, and
which items fall in which grade of the VAT.
A multiple VAT can have tremendous administrative costs. As this is collected at
almost every level through which product goes, this increases the number of persons
to be contacted (involved) to collect the tax, though consumer is giving same tax. So
to collect the same amount now more persons are to be contacted, it will certainly
increase the administrative cost. Costs further increase because of multiple rates and
various exemptions.
The success of VAT depends upon the cost - output ratio. If increase in collection as it
is expected from VAT is not higher than increase in its administrative cost than
certainly it will lose its purpose.
12.9.7 VAT will increase Govt. Revenues

Experience of other countries shows that it will certainly increase the revenue of Govt.
As it is collected at many levels and if one misses at any particular level than it can be
traced at subsequent levels. It also discouraged the purchases from the unregistered
trader’s purchaser have to get a tax invoice from the registered seller to avail credit. It
encouraged the retailer to get registered with the department other wise they will be
loosing sale/business. In many cases where tax is collected at last level, to avoid tax
traders usually gives goods to consumer without mentioning it in books, consumers
also welcomes it as in this case he/she doesn’t have to pay tax on it But in case of
VAT it is not possible as retailer/trader has already paid the tax, and if he had paid
then he will certainly collect it from consumer.
167
VAT helps raise Bengal tax collection and Expenditure Tax
Tax collections have shown a growth in the first six months of the current fiscal in the post value
added tax (VAT) regime despite the scope for deductions. Speaking at the conference on the new
VAT regime at the Bengal National Chamber of Commerce and Industry (BNCCI), CM
Bachhawat, commissioner of commercial taxes of the government of West Bengal, said despite the
prevalence of high tax rate in the state especially in the case of categories like cement, cosmetics,
medicines, food processing, etc. where taxes have been rationalised, growth was satisfactory. In
West Bengal, tax on cement being brought down from 20.25 per cent to 12.5 per cent and
cosmetics from 26 per cent to 12.5 per cent.
Cash memo compliance was a major issue, explained Bachhawat. Modalities to improve cash
memo compliance were being worked out through public awareness campaigns and technology
usage, he informed.
Business Standard, Kolkata, November 24, 2005.

What do you understand by CENVAT?
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12.10 SERVICE TAX

As per the Finance Act of 1994, all service providers in India, except those in the state
of Jammu and Kashmir, are required to pay a Service Tax in India. Service Tax is
levied on the notified services. It is a union levy administered by the Central Excise
Department and governed by Chapter V of Finance Act, 1994 (the Act) as amended
from time to time. The rate of service tax till 9 September, 2004 was 8 per cent and
from 10 September, 2004, it was increased to 10 per cent. Education cess at 2 per cent
is levied on service tax amount from 10 September, 2004. The effective rate of service
tax works out to 10.2 per cent. Service tax is charged on the gross value of services
and is generally payable on receipt basis. It is an indirect tax - it is payable by the
service provider but it is ordinarily recovered from the recipient of services. The law
requires separate mention of service tax amount in the invoices.
Ordinarily, every person liable to pay service tax is required to register itself with
service tax authorities and comply with procedural requirements like paying taxes,
filing returns, etc. However, in case of non-residents, who do not have any office in
India and who are liable to pay service tax in India, this burden is shifted to the
recipient of service with effect from 16th August, 2002.
There is a basic exemption limit of INR 0.4 million which means that service tax shall
be exempted for service providers providing taxable services up to INR 0.4 million. A
mechanism for credit of input service tax and central excise duty on specified inputs
and capital goods is also in place.
Any service for which payment was received in convertible foreign exchange in India
and which was not repatriated or sent outside India was exempt from levy of service
tax up to 28 February, 2003. But this exemption was withdrawn with effect from 1st
March, 2003, although export of services continued to remain taxfree even after such
a withdrawal. This exemption was reinstated with effect from 20th November, 2003
as a stop-gap arrangement till the government could satisfactorily determine "what
constitutes export of services". The government has now notified the new "Export of
Service Rules 2005" which defines as to what constitute "export of services". These
rules are effective from 15th March, 2005. Consequently, the exemption from service
tax on payments received in convertible foreign exchange has now been removed with
effect from 15th March, 2005.
168 When two or more services are bundled together it would be classifiable under the
category which gives essential character to the service. Classification rules are in
place from 14th May, 2003. If in case of composite activities, one or more of the
activities are liable to service tax and the others are not liable to service tax, service
tax would ordinarily be payable only on the charges received for the services to which
service tax is applicable, provided charges for each activity can be separately
identified / determined and it is not incidental to the main service. There are no rules
for such identification / allocation and, therefore, such allocation, if required, must be
made on a reasonable basis.
Service tax is a comparatively new levy in India and very few judicial precedents are
available on the subject. The language of the law is quite broad and generic and uses
terms like "directly or indirectly" and "in any manner" which raise a number of issues
regarding scope of specific category of service. Revenue authorities have been issuing
explanatory circulars from time to time in relation to specific issues. Yet, there is,
considerable ambiguity in the applicability of the service tax law to various services.
Table 12.4: Service Tax is Currently Levied on 80 notified Categories of Services
Advertising Air Travel Agent Airport Architect Sound
Agency Recording
Authorized Banking and Beauty Broadcasting Steamer Agent
Service Other Financial Treatment
Station Services
Business Business Cable Cargo Stock Broker
Auxiliary Exhibition Operator Handling
Services
Chartered Cleaning Activity Clearing and Construction Storage and
Accountant Services Forwarding Warehousing
Agent
Construction Consulting Convention Cost Survey and
of Complex Engineer Accountant Exploration of
Services Mineral
Courier Credit Rating Custom Dredging Survey and
Agency House Agent Services Map-making
Services
Dry Cleaning Erection, Event Facsimile Technical
Commissioning Management Inspection and
and Installation Certification
Agency
Fashion Forward Contract Franchise General Technical
Designing Insurance Testing or
Analysis
Goods Goods Transport Health Club Insurance Telegraph
Transport by by Road and Fitness Auxiliary
Air Centre Services
Intellectual Interior Decorator Internet Café Leased Circuit Telephone and
Property Pager
Life Insurance Mailing List Mailing List Maintenance Telex
Compilation or Repair
Mailing
Services
Management Mandap Keeper Database Opinion Poll Tour Operator
Consultant Access or
Retrieval
Outdoor Packaging Pandal and Photography Transport of
Caterer Activity Services Shamiana Studio goods other
than water
Contd…
169
Port (major Programme Rail Real Estate Travel Agents (other Value Added Tax, Service Tax
and Expenditure Tax
and others) Production Travel Agent than air and rail)
Agent through pipeline or
other conduit services
Rent-a-cab Scientific or Security Site Formation Underwriters
Technical Agency and Clearance,
Consultancy etc., Services
Video
Production
Service tax is new to India and most of the effected organization has never given such
type of tax. This organizations and individuals feel uncomfortable in giving tax. This
has not only increase there financial burden but also the cost in terms of time and
money. People also avoid interacting tax departments/personnel etc. for the fear of
harassment and Govt. interference. To avoid the tax evasion and to widen the tax net it
is essential educate organizations and people regarding the tax and its procedures. In
service tax even individuals are involved thus it essential to make the procedures
simple and online.
Fill in the blanks:
1. Value Added Taxation is a kind of _____________tax.
2. Value Added taxation is a percentage of tax on value (Ad valorem) added
to the production or service at each ________________.
3. ___________is in many respects is in many respect equivalents to a last
point retail sales tax.
4. According to ____________ VAT is calculated on the difference between
selling value and purchasing value of a product-service at a predetermined
tax rate.
5. As per _____________, tax is collected on overall sale value.
6. The __________ scheme was introduced with effect from May 1st, 1986.
12.11 EXPENDITURE TAX

Expenditure tax is levied on expenditure incurred in certain hotels or restaurants and
for matters connected there with or incidental there to. It is applicable to the whole of
India except the State of Jammu and Kashmir.
12.11.1 Application of the Act

This Act is applied in relation to any chargeable expenditure:
1. incurred in a hotel wherein the room charges for any unit of residential
accommodation at the time of incurring of such expenditure are two thousand
rupees or more per day per individual and where:
(a) a composite charge is payable in respect of such unit and food, the room
charges included therein shall be determined in the prescribed manner;
(b) (i) a composite charge is payable in respect of such unit, food, drinks and
other services, or any of them, and the case is not covered by the
provisions of sub-clause (a), or
170 (ii) it appears to the Assessing Officer that the charges for such unit, food,
drinks or other services are so arranged that the room charges are
understated and the other charges are overstated, the Assessing Officer
shall, for the purposes of this clause determine the room charges on such
reasonable basis as he may deem fit; and
2. incurred in a restaurant.
12.11.2 Tax Authorities

Regarding the authorities this Act says:
1. Every Director General of Income-tax, Chief Commissioner of Income-tax,
Director of Income-tax, Commissioner of Income-tax, Commissioner of Income-
tax (Appeals), Additional Director of Income-tax, Additional Commissioner of
Income-tax, Joint Director of Income-tax, Joint Commissioner of Income-tax,
Deputy Director of Income-tax, Deputy Commissioner of Income-tax, Assistant
Director of Income-tax, Assistant Commissioner of Income-tax, Income-tax
Officer, Tax Recovery Officer and Inspector of Income-tax shall have the like
powers and perform the like functions under this Act as he has and performs
under the Income-tax Act, and for the exercise of his powers and the performance
of his functions, his jurisdiction under this Act shall be the same as he has under
the Income-tax Act.
2. All officers and persons employed in the execution of this Act shall observe and
follow the orders, instructions and directions of the Board.
Provided that no such orders, instructions or directions shall be issued:
(a) so as to require any tax authority to make a particular assessment or to dispose
of a particular case in a particular manner; or
(b) so as to interfere with the discretion of the Commissioner (Appeals) in the
exercise of his appellate functions.
3. Every Assessing Officer employed in the execution of this Act shall observe and
follow the orders, instructions and directions issued for his guidance by the
Director General or Director or by the Chief Commissioner or Commissioner or
by the Additional Commissioner of Income-tax or Joint Commissioner within
whose jurisdiction he performs his functions.
12.11.3 Penalty for Failure to Furnish Prescribed Return

If a person fails to furnish in due time the return which he is required to furnish under
sub-section (1) of section 8 or by notice given under sub-section (2) of that section, he
shall pay, by way of penalty, a sum which shall not be less than one hundred rupees,
but which may extend to two hundred rupees for every day during which the failure
continues.
12.11.4 Wilful attempt to Evade Tax, etc.

If a person wilfully attempts in any manner whatsoever to evade collection or payment
of any tax, penalty or interest chargeable or imposable under this Act, or to understate
the aggregate of the chargeable expenditure, he shall, without prejudice to any penalty
that may be imposable on him under any other provision of this Act, be punishable
with rigorous imprisonment for a term which shall not be less than three months but
which may extend to seven years and with fine
171
12.12 LET US SUM UP and Expenditure Tax
Value Added Taxation is a kind of indirect tax. VAT is levied in parts at every stage
of the production distribution process. A tax levied on business on the value they
added to their purchase of raw material is known as VAT. Ultimately it is the
customer who generally pays the full amount of the VAT. VAT was implemented
with the objectives of eliminating multiplicity of taxes such as entry tax, turnover tax,
sales tax, surcharge, excise duties etc., to eliminate inter-state tax, to reduce inspector
Raj, to make the tax structure simple and to widen the tax net thus increasing the
revenue for state.
VAT has many advantages as it is simple, Transparent, it doesn’t have any cascading
effect, has few rates of tax, allows self assessment has less incentive for tax evasion
and gives revenue security.
Center has implemented the VAT in 1986 with the name of MODVAT at the
manufacturing level which renamed CENVAT in 2000. By the April 2005, more than
21 states were following the VAT. As at the State level VAT was implemented
replacing erstwhile sales tax, a feeling of uncertainty proliferated among people
regarding the new tax system. Govt. has launched many training programmes for
traders but theses training programmes and awareness programmes is also required for
consumers.

1. Prepare a report on the impact of VAT on the retail outlet in your colony.
2. Do a survey of 20 retail outlets and find out there perception about VAT.
3. Analyze impact of VAT on the price of consumer goods.
12.14 KEYWORDS
VAT: Value added tax, a tax levied on business on the value they added to their
purchase of raw material is known as VAT.
Multi Stage Sales Tax: Tax levied in parts at every stage of the production and
distribution process.
Excise: Erstwhile tax imposed on manufacturing by Center.
MODVAT: Imposed by Center on manufacturing replacing excise.
CENVAT: MODVAT was renamed CENVAT (Central Value Added Tax) in year
2000.

1. What is Value Added Tax? Describe its concept through example.
2. What is difference between VAT and existing tax system? Discuss the advantages
of VAT.
3. Discuss the status of VAT in India.
4. Why business community is opposing the VAT.
5. Explain the Service Tax in India.
172
CYP 1
VAT is a tax on value added. Thus tax is paid at every stage from which good
or service passes but it is paid on the value added only and not on whole cost.
Thus every body in the production and distribution chain pays the tax but only
on the value added at his level only.
CYP 2
MODVAT was renamed as CENVAT (Central Value Added Tax) with effect
from April 1, 2000. All inputs used directly or indirectly (except HSD, LDO,
and Petrol) are eligible for CENVAT. What VAT is to sales tax same way
CENVAT is to excise? This Central VAT has replaced the erstwhile excise
duty regime. The CENVAT regimes permits the setoff of CENVAT paid on
inputs/capital goods as also a setoff of the equivalent of the CENVAT which is
imposed on imported goods, namely countervailing duties against the
CENVAT payable on output. In addition to CENVAT, a central sales tax is
also imposed on inter stat sales of goods.
CYP 3
1. indirect 2. selling point 3. VAT
4. Subtraction method 5. cumulative method 6. MODVAT

Mittal Vivek (2007) Business Environment, Excel Books
Bedi Suresh (2006) Business Environment, Excel Books
House
Prentice Hall
South Western College Publishing
173
Company Law
UNIT V
174
175
LESSON Company Law
13
COMPANY LAW
CONTENTS
13.1 Introduction
13.2 Objectives of Company Law
13.3 Company
13.4 Characteristics of Company
13.5 Types of Company
13.5.1 Private Company
13.5.2 Public Company
13.6 Promotion and Formation of a Company
13.6.1 Promotion
13.6.2 Registration
13.6.3 Commencement of Business
13.7 Capital of a Company
13.7.1 Types of Shares
13.8 Membership
13.9 Board of Directors
13.9.1 Powers of Board of Directors
13.9.2 Board Meetings
13.10 Accounts and Audit
13.10.1 Balance Sheet and Profit and Loss Account
13.10.2 Auditors of Company
13.11 Audit Committee (Section 292A)
13.12 Investigation
13.13 Winding up of Companies
13.13.1 Modes of Winding up
13.13.2 Buy Back of Shares
13.14 Companies (Amendment) Act, 2000
13.15 Company Law Tribunal (Erstwhile Company Law Board)
13.16 Let us Sum up
13.18 Keywords
176
Business Environment and Ethics 13.0 AIMS AND OBJECTIVES
z Explain the origin of company law in India
z Know the formation of company
z Understand the auditing of company
z Learn the winding up of company
z Earn the company law Board Tribunal
13.1 INTRODUCTION
The Company legislation in India owes its origin to the English company law. The
Companies Act passes from time to time in India have been following the English
Companies Act with certain modifications to suit Indian Conditions. The first
legislation passed in 1850 for the registration of Joint Stock Companies Act, it was
based on the English Companies Act, 1844. This Act recognizes the companies as
distinct legal entities but did not introduce the concept of limited liability. In 1857
another Act was passed to give effect to the principle of limited liability. In 1860
principle of limited liability was extended to banking companies. The Companies Act
1866 repealed all the previous Act. This was followed by Companies Consolidation
Act 1882. English Companies Consolidation Act was passed in 1908. Following the
English Companies Act, 1908, the Indian Companies Act, 1913 was passed. As this
Act closely followed the English Act the decisions of the English Courts under the
English Company Law were also closely followed by the Indian courts.
Government of Independent India appointed a Committee under the Chairmanship of
Shri H.C. Bhaba for the revision of the Indian Companies Act. The Committee
submitted its Report in March, 1952. In mean time, Indian Companies (Amendment).
At 1951 was passed as an interim measures which conferred powers upon the Govt. to
intervene directly in regulating the affairs of companies in India. Bhaba Committee
submitted its report in March 1952, based on the report Companies Act, 1956 was
introduced in Parliament. This Act once again followed the English Companies Act,
1948. The major changes that the Indian Companies Act introduced over the Act of
1913 are:
1. Promotion and Formation of Companies
2. Capital Structure of Companies
3. Company Meetings and Procedures
4. The Presentation of company accounts, their audit, and the powers and duties of
auditors
5. The inspection and investigation of the affairs of the company
6. The constitution of the Board of Directors and the powers and duties of Directors
7. The Administration of Company Law
Since then Companies Act has been amended several times. The major amendments
were introduced in the years 1960, 1962, 1963, 1964, 1965, 1966, 1967, 1969, 1974,
1977, 1985, 1988, 1991. In the era of liberalization Govt. felt that many of the
provision of the company law are not conducive to the present condition. Keeping in
view Amendment bill 1993 was introduced in Parliament. The bill was later
withdrawn for the purpose of redrafting. In the mean time to meet the demand of the
day Companies (Amendment Act), 1996, then Companies (Amendment Act), 1997
and Companies (Amendment Act), 1998 were enacted. Which was replaced by the
Companies Amendment Act 1999. This Act brought number of changes in the Act. 177
Company Law
All the changes were in line with the Govt.’s policy of liberalization, globalization and
privatization. The facility to buy back companies own shares is given to corporate,
provisions regarding investments, and loans were rationalized and liberalized. Govt.’s
approval is no more required for investment decisions and companies were allowed to
issue ‘sweat equity’ in lieu of intellectual property. To make the accounts of Indian
companies compatible with international practices, the compliance of Indian
Accounting Standards was made mandatory. For the benefits of investors provisions
were made for setting up of “Investor Education and Protection Fund.” It also certain
measures of good corporate governance.
Soon some more changes were introduced through Companies Amendment Act, 2001
and then 2002.
13.2 OBJECTIVES OF COMPANY LAW

The Company law 1956 was passed with the following objectives:
1. To ensure that the activities of the companies are carried on not only in the
interest of those directly concerned with them but also in furtherance of the
ultimate ends of economic and social policy which the country has accepted.
2. To fix up minimum standards of business integrity and conduct in the promotion
and management of companies’ affair.
3. To protect the legitimate interest of the shareholders by ensuring effective
participation and control by them.
4. To prevent misconduct and malpractices on the part of company management and
abuse of power vested in them by the general body of shareholders.
5. To enforce proper performance of duties by persons responsible for the
management of companies.
6. To adjust the rights of the management vis-a-vis the shareholders and other
concerned persons.
7. To require full and fair disclosure of all reasonable information relating to the
affairs of the companies.
8. To empower the govt. to intervene and investigate into the affairs of the company
where the business of the company is being carried on in a manner prejudicial to
the interest of the shareholders, the company or the general public.
Sub Division of Company Law

The subject of the Company Law is very vast. But in short it can be sub-divided into
the following important heads:
1. Incorporation of Companies
2. Allotment of shares and share capital
3. Membership in Companies
4. Borrowing by companies and registration of charge
5. Management and administration of companies
6. Winding up of Companies.
13.3 COMPANY
The word 'Company' is an amalgamation of the Latin word 'Com' meaning "with or
together" and 'Pains' meaning "bread". Originally, it referred to a group of persons
178 who took their meals together. A company is nothing but a group of persons who have
come together or who have contributed money for some common person and who
have incorporated themselves into a distinct legal entity in the form of a company for
that purpose. Under Halsbury’s Laws of England, the term "company" has been
defined as a collection of many individuals united into one body under special
domination, having perpetual succession under an artificial form and vested by the
policies of law with the capacity of acting in several respect as an individual,
particularly for taking and granting of property, for contracting obligation and for
suing and being sued, for enjoying privileges and immunities in common and
exercising a variety of political rights, more or less extensive, according to the design
of its institution or the powers upon it, either at the time of its creation or at any
subsequent period of its existence. Lord Justice Lindley has defined a company as ''an
association of many persons, who contribute money or, money's worth to a common
stock and employs it in some trade or business and who share the profit and loss,
arising there from.'' Chief Justice Marshall of the United States Supreme Court
defined a company as "an artificial being, invisible, intangible and, existing only in
contemplation of the law. Being a mere creation of the law, it possesses only those
characteristics which the Charter of its creation confers upon it, either expressly or as
incidental to its very existence.''
However, the Supreme Court of India has held in the case of State Trading
Corporation of India v/s CTO that a company cannot have the status of a citizen under
the Constitution of India.
The Act does not define a company in terms of its features. Act merely states that “a
company means a company formed and registered under this Act or an existing
company as defined in section 3(1) (ii)”. Section 3(1) (ii) lays down that “an existing
companies means a company formed and registered under any of the previous law.”

1. What do you understand by the term ‘company’?
……………………………………………………………………………….
……………………………………………………………………………….
2. What are the important heads of the company law?
……………………………………………………………………………….
……………………………………………………………………………….
13.4 CHARACTERISTICS OF COMPANY

The most important feature of company are ‘separate legal entity’ of the company and
in most cases ‘limited liability’ these and other characteristics of company are as
follows:
1. Separate Legal Entity: Company is different from the persons who constitute it.
The company is different and distinct from its members in law. In law company is
regarded as an artificial legal person having its own name and its own seal, its
assets and liabilities are separate and distinct from those of its members. It is
capable of owning property, incurring debt, borrowing money, having a bank
account, employing people, entering into contracts and suing and being sued
separately.
2. Limited Liability: One of the principle advantages of trading through the medium
of a limited company is that the members of the company are only liable to
contribute towards payment of its debts to a limited extent. The liability of the
members of the company is limited to contribution to the assets of the company 179
Company Law
up to the face value of shares held by him. A member is liable to pay only the
uncalled money due on shares held by him when called upon to pay and nothing
more, even if liabilities of the company far exceeds its assets.
3. Separate Property: A company is a distinct legal entity. It can therefore hold the
property in its own name. The company’s property is its own. A member cannot
claim to be owner of the company's property during the existence of the company.
4. Common Seal: A company is an artificial person and does not have a physical
presence. Thus it cannot sign its name. It has a common seal, which is used as a
substitute for its signature. The common seal is the official signature of the
company. The name of the company must be engraved on the common seal. Any
document not bearing the seal of the company may not be accepted as authentic
and may not have any legal force.
5. Capacity to sue and being sued: Being a legal person a company can sue or be
sued in its own name as distinct from its members.
6. Perpetual Succession: The term perpetual succession may be defined as the
continuous existence. A company does not die or cease to exist unless it is
specifically wound up or the task for which it was formed has been completed.
Membership of a company may keep on changing from time to time but that does
not affect life of the company. Death or insolvency of member does not affect the
existence of the company.
7. Transferability of Shares: The Shares of a company are freely transferable and
can be purchased and sold in share market, subject to certain conditions, such that
no share-holder is permanently or necessarily wedded to a company. When a
member transfers his shares to another person, the transferee steps into the shoes
of the transferor and acquires all the rights of the transferor in respect of those
shares.
8. Separate Management: A company is administered and managed by its
managerial personnel i.e. the Board of Directors. The shareholders are simply the
holders of the shares in the company and need not be necessarily the managers of
the company.
9. One Share-One Vote: The principle of voting in a company is one share-one vote.
I.e. if a person has 10 shares, he has 10 votes in the company. This is in direct
contrast to the voting principle of a co-operative society where the "One
Member – One Vote" principle applies i.e. irrespective of the number of shares
held, one member has only one vote.
13.5 TYPES OF COMPANY

The two common types of companies which may be registered under the Act are:
1. Private Companies and
2. Public Companies
Besides public and private companies there can be another types of companies as
Govt. Companies, Statutory Companies, Holding and Subsidiary Companies, Foreign
Companies.
13.5.1 Private Company

Private Company is a company which:
(a) Restricts the right of members to transfer its shares
180 (b) Limits the number of its members to fifty. In determining this number of 50,
employee-members and ex-employee members are not to be considered.
(c) Prohibits an invitation to the public to subscribe to any shares in or the debentures
of the company.
13.5.2 Public Company

Companies (Amendment) Act 2000 defines a public company which:
i) is not a private company;
ii) has a minimum paid-up- capital of five lakh rupees or such higher paid-up capital
as may be prescribed;
iii) is a private company, which a subsidiary of a company, which is not a private
company.
These companies may be incorporated either as limited liability companies or as
unlimited liability companies.
Limited liability companies may be:

(i) limited by shares, (ii) Companies limited by guarantee (iii) Companies limited by
guarantee and as well as shares.
i) Company limited by shares: In this case, the liability of members is limited to the
amount of uncalled share capital. No member of company limited by the shares
can be called upon to pay more than the face value of shares or so much of it as is
remaining unpaid. Members have no liability in case of fully paid up shares.
ii) Company limited by the guarantee: A company limited by guarantee is a
registered company having the liability of its members limited by its
memorandum of association to such amount as the members may respectively
thereby undertake to pay if necessary on liquidation of the company. The liability
of the members to pay the guaranteed amount arises only when the company has
gone into liquidation and not when it is a going concern. A guarantee company
may be a company with share capital or without share capital.
Unlimited Company
The liability of members of an unlimited company is unlimited. Therefore their
liability is similar to that of the liability of the partners of a partnership firm.
Under the Companies Act, 1956, the name of a public limited company must end with
the word 'Limited' and the name of a private limited company must end with the word
'Private Limited'. However, under Section 25, the Central Government may allow
companies to remove the word "Limited/Private Limited" from the name if the
following conditions are satisfied:
(a) The company is formed for promoting commerce, science, art, religion, charity or
other socially useful objects
(b) The company does not intend to pay dividend to its members but apply its profits
and other income in promotion of its objects.
Holding and Subsidiary Companies

A company shall be deemed to be subsidiary of another company if:
(a) That other company controls the composition of its board of directors; or
(b) That other company holds more than half in face value of its equity share capital
(c) Where the first mentioned company is subsidiary company of any company which
that other's subsidiary e.g. Company B is subsidiary of the Company A and
Company C is subsidiary of Company B, therefore Company C is subsidiary of 181
Company Law
Company A.
The control of the composition of the Board of Directors of the company means that
the holding company has the power at its discretion to appoint or remove all or
majority of directors of the subsidiary company without consent or concurrence of any
other person.
Government Companies
Means any company in which not less than 51% of the paid up share capital is held by
the Central Government or any State Government or partly by the Central
Government and partly by the one or more State Governments and includes a
company which is a subsidiary of a government company. Government Companies
are also governed by the provisions of the Companies Act. However, the Central
Government may direct that certain provisions of the Companies Act shall not apply
or shall apply only with such exceptions, modifications and adaptions as may be
specified to such government companies.
Foreign Companies
Foreign Companies are the companies incorporated in a country outside India under
the law of that other country and has established the place of business in India.
Statutory Companies
A statutory company is one which is incorporated by a Special Act of the Legislature
(i.e. by the Act of the Parliament or State Legislature). The statutory companies are
also known as ‘corporations’. Such companies are generally created for the public
utilities. The nature and the powers or such companies are defined by the Special Act,
Under which they are created. In our country LIC, UTI, RBI, Food Corporation of
India etc are created by Special Act of the Legislature and are considered as Statutory
companies.
Registered Companies
A company registered under the Companies Act is known as registered company.
1. Company limited by the guarantee
……………………………………………………………………………….
……………………………………………………………………………….
2. Statutory Company
……………………………………………………………………………….
……………………………………………………………………………….
13.6 PROMOTION AND FORMATION OF A COMPANY

The whole process of formation of a company can be divided into three stages:
1. Promotion
2. Registration
3. Commencement of Business.
182
13.6.1 Promotion
Promotion refers to the entire process by which a company is brought into existence.
It starts with the conceptualization of the birth a company and determination of the
purpose for which it is to be formed. The persons who conceive the company and
invest the initial funds are known as the promoters of the company.
The promoters have certain basic duties towards the company formed:
1. He must not make any secret profit out of the promotion of the company. Secret
profit is made by entering into a transaction on his own behalf and then sell to
concerned property to the company at a profit without making disclosure of the
profit to the company or its members. The promoter can make profits in his
dealings with the company provided he discloses these profits to the company and
its members. What is not permitted is making secret profits i.e. making profits
without disclosing them to the company and its members.
2. He must make full disclosure to the company of all relevant facts including to any
profit made by him in transaction with the company.
A promoter may be rewarded by the company for efforts undertaken by him in
forming the company in several ways. The more common ones are:
1. The company may to pay some remuneration for the services rendered.
2. The promoter may make profits on transactions entered by him with the company
after making full disclosure to the company and its members.
3. The promoter may sell his property for fully paid shares in the company after
making full disclosures.
4. The promoter may be given an option to buy further shares in the company.
5. The promoter may be given commission on shares sold.
6. The articles of the Company may provide for fixed sum to be paid by the
company to him. However, such provision has no legal effect and the promoter
cannot sue to enforce it but if the company makes such payment, it cannot recover
it back.
13.6.2 Registration
It is the second stage in the formation of a company. If the company is to be formed as
a public company, any seven or more persons associated for any lawful purpose may
form the company be getting it registered with Registrar of Companies. And if
company is to be formed as a private company, any two or more (but not more than
50) persons may get the same registered. The Company so formed whether private or
public are of two types:
1. Limited Company
2. Unlimited Company
After the selection of type of company to be registered following steps are followed in
registration process:
Memorandum of Association
Contents of Memorandum: The memorandum of association of every company must
contain the following clauses:
a) Name Clause: The name of the company is mentioned in the name clause. A
public limited company must end with the word 'Limited' and a private limited
company must end with the words 'Private Limited'. The company cannot have a
name which in the opinion of the Central Government is undesirable. A name
which is identical with or the nearly resembles the name of another company in 183
Company Law
existence will not be allowed. A company cannot use a name which is prohibited
under the Names and Emblems (Prevention of Misuse Act, 1950 or use a name
suggestive of connection to government or State patronage.
b) Domicile Clause: The state in which the registered office of company is to be
situated is mentioned in this clause. Every company must affix or paint its name
and address of its registered office on the outside of the every office or place at
which its activities are carried on in. The name must be written in one of the local
languages and in English.
c) Objects Clause: It is about the activities which a company can carry on and which
activities it cannot carry on. This clause must specify:
i. Main objects of the company to be pursued by the company on its
incorporation.
ii. Objects incidental or ancillary to the attainment of the main objects.
iii. Other objects of the company not included in (i) and (ii) above.
d) Doctrine of the ultra-vires: Any transaction which is outside the scope of the
powers specified in the objects clause of the MA and are not reasonable
incidentally or necessary to the attainment of objects is ultra-vires the company
and therefore void. No rights and liabilities on the part of the company arise out of
such transactions and it is a nullity even if every member agrees to it.
Consequences of an ultra-vires transaction:
i) The company cannot sue any person for enforcement of any of its rights.
ii) No person can sue the company for enforcement of its rights.
iii) The directors of the company may be held personally liable to outsiders for an
ultra vires.
e) Liability Clause: A declaration that the liability of the members is limited in case
of the company limited by the shares or guarantee must be given. A declaration
that the liability of the members is unlimited in case of the unlimited companies
must be given.
f) Capital Clause: The amount of share capital with which the company is to be
registered divided into shares must be specified giving details of the number of
shares and types of shares. A company cannot issue share capital greater than the
maximum amount of share capital mentioned in this clause without altering the
memorandum.
g) Association Clause: A declaration by the persons for subscribing to the
Memorandum that they desire to form into a company and agree to take the shares
place against their respective name must be given by the promoters.
Articles of Association
The Articles of Association (AA) contain the rules and regulations of the internal
management of the company. The AA is a contract between the company and its
members and also between the members themselves that they shall abide by the rules
and regulations of internal management of the company specified in the AA. It
specifies the rights and duties of the members and directors.
The provisions of the AA must not be in conflict with the provisions of the MA. In
case such a conflict arises, the MA will prevail.
The important items covered by the AA include:
1. Powers, duties, rights and liabilities of Directors
2. Powers, duties, rights and liabilities of members
184 3. Rules for Meetings of the Company
4. Dividends
5. Borrowing powers of the company
6. Calls on shares
7. Transfer & transmission of shares
8. Forfeiture of shares
9. Voting powers of members, etc.
Alteration of articles of association: A company can alter any of the provisions of its
AA, subject to provisions of the Companies Act and subject to the conditions
contained in the Memorandum of association of the company. A company, by special
resolution at a general meeting of members, alter its articles provided that such
alteration does not have the effect of converting a public limited company into a
private company unless it has been approved by the Central Government.
Registration of the Company

Once the documents have been prepared, vetted, stamped and signed, they are filed
with the Registrar of Companies for incorporating the Company. The following
documents must be filed in this connection:
1. The MA & AA.
2. An agreement, if any, which the company proposes to enter into with any
individual for appointment as its managing director or whole-time director or
manager.
3. A statutory declaration in Form 1,that the requirements of the Companies Act
have been complied with in respect of the registration of the company and matters
precedent and incidental thereto.
4. In addition to the above, in case of a public company, the following documents
must also be filed:
Written consent of directors in Form 29 to agree to act as directors.
The complete address of the registered office of the company in Form 18.
Details of the directors, managing director and manager of the company in
Form 32.
Certificate of Incorporation
Once all the above documents have been filed and they are found to be in order, the
Registrar of Companies will issue Certificate of Incorporation of the Company.
13.6.3 Commencement of Business

A private company or a company having no share capital can commence its business
immediately after it has been incorporated. However, other companies can commence
their activities only after they have obtained Certificate of Commencement of
Business. For this purpose, the following additional formalities as:
1. If a company has share capital and has issued a prospectus, then: Shares up to the
amount of minimum subscription must be allotted, every director has paid to the
company on each of the shares which he has taken the same amount as the public
have paid on such shares etc.
2. If a company has share capital but has not issued a prospectus, then: It must file a
statement in lieu of prospectus with the Registrar of Companies, every director
has paid to the company on each of the shares which he has taken the same 185
Company Law
amount as the other members have paid on such shares etc.
1. Promotion
……………………………………………………………………………….
……………………………………………………………………………….
2. Doctrine of the ultra-virus
……………………………………………………………………………….
……………………………………………………………………………….
13.7 CAPITAL OF A COMPANY

Capital refers to the amount invested in the company so that it can carry on its
activities. In a company capital refers to "share capital". The capital clause in
Memorandum of Association must state the amount of capital with which company is
registered giving details of number of shares and the type of shares of the company.
13.7.1 Types of Shares

Shares in the company may be similar i.e. they may carry the same rights and
liabilities and confer on their holders the same rights, liabilities and duties. There are
two types of shares under Indian Company Law:
1. Equity shares means that part of the share capital of the company, which are not
preference shares.
2. Preference shares means shares, which fulfill the following two conditions.
Therefore, a share which is does not fulfill both these conditions is an equity
share.
(a) It carries preferential rights in respect of Dividend at fixed amount or at fixed
rate i.e. dividend payable is payable on fixed figure or percent and this
dividend must paid before the holders of the equity shares can be paid
dividend.
(b) It also carries preferential right in regard to payment of capital on winding up
or otherwise. It means the amount paid on preference share must be paid back
to preference shareholders before anything in paid to the equity shareholders.
In other words, preference share capital has priority both in repayment of
dividend as well as capital.
13.8 MEMBERSHIP
The members of a company are the persons who, for the time being, constitute the
company as a corporate entity. One can become the member of the company in
following ways:
1. By subscribing to the memorandum of association: A subscriber to the
memorandum of association becomes a member on incorporation of the company
in respect of the shares subscribed by him
By agreeing in writing to become a member in any of the following ways
provided the name is entered in the Register of Members of the Company.
186 2. By application and allotment: A person who applies for share becomes a member
when shares are allotted to him and his name is entered in the register of
members.
3. By taking a transfer of shares: Membership may be acquired from an existing
member by purchase of the shares from open market.
4. By transmission of shares: In the case of transmission, a person can become a
share holder in consequence or by reason of the death of a member, his executor
or the person who is entitled to succeed to the estate of the deceased under the
law, gets the right to have the shares transmitted and registered in his name.
13.9 BOARD OF DIRECTORS

Companies Act 1956 defines a ‘director’ as including “any person occupying the
position of a director by whatever name called”. Thus it is not the name by which a
person is called but the position he occupies and the functions and duties he
discharges that determine whether in fact he is a director or not. So long as person is
duly appointed by the company to control the company’s business and authorized by
the articles to contract in the company’s name and on its behalf, he functions as
director.
13.9.1 Powers of Board of Directors

1. General powers of Board: Section 291 of Companies Act 1956 provides for
General Powers of the Board of Directors. It provides:
Board may exercise all powers of the company and can do all such acts and things
that the company can do except those which are specifically provided to be
exercised or done by the company in a general meeting. But the exercise of such
powers of the Board shall be in conformity with the provisions of the Companies
Act or any other Act and Memorandum, Articles and resolutions of the company
passed in general meeting. Certain powers to be exercised by Board only at
meeting
The Board of directors of a company shall exercise the following powers (Section
292 (1)) on behalf of the company, and it shall do so only by means of resolutions
passed at meetings of the Board:
1. The power to make calls on shares holders in respect of money unpaid on
their shares
(1a)The power to buy back its shares under section 77A
2. The power to issue debentures
3. The power to borrow moneys otherwise than on debentures
4. The power to invest the funds of the company. This power shall however be
subject to the provisions of sections 293 and 372A
5. The power to make loans. Again this power is subject to the provisions
contained in sections 295 and 372A
However, the Board may, by a resolution passed at a meeting delegate to any
committee of directors, the managing director, or the manager of the company or
any other principal officer of the company or in the case of a branch office of the
company, a principal officer of the branch office.
Besides the powers specified in section 292 there are certain other powers also
which can be exercised only at the meeting of the Board. These include:
(a) The power of filling casual vacancies in the Board (Section 262)
(b) Sanctioning of a contract in which a director is interested. (Section 297) 187
Company Law
(c) The power to recommend the rate of dividend to be declared by the company
at the Annual General Meeting, subject to the approval by the shareholders.
(d) The power to make political contributions (Section 293 A)
2. Restrictions on powers of Board: The Board of directors of a public company, or
of a private company which is a subsidiary of a public company, shall not, except
with the consent of such public company or subsidiary in general meeting:-
1) sell, lease or otherwise dispose of the whole, or substantially the whole, of the
undertaking of the company, or where the company owns more than one
undertaking, of the whole, or substantially the whole, of any such undertaking
2) remit, or give time for the re-payment of, any debt due by a director except in
the case or renewal or continuance of any advance made by a banking
company to its director in the ordinary course of business
3) invest, otherwise than in trust securities, the amount of compensation received
by the company in respect of compulsory acquisition of any such undertaking
as is referred to in clause (a), or of any premises or properties used for any
such undertaking and without which it cannot be carried on or can be carried
on only with difficulty or only after a considerable time
4) borrow moneys, where the moneys to be borrowed together with the moneys
already borrowed by the company, (apart from temporary loans obtained from
the company's bankers in the ordinary course of business) will exceed the
aggregate of the paid-up capital of the company and its free reserves
5) contribute, to charitable and other funds not directly relating to the business of
the company or the welfare of its employees, any amounts the aggregate of
which will, in any financial year, exceed fifty thousand rupees, or five per
cent of its average net profits during the three financial years immediately
preceding, whichever is greater.
The resolutions passed at the general meeting must specify the total amount up to
which the Board may borrow or the total amount which may be contributed in a
financial year.
13.9.2 Board Meetings

1. Board to meet once in every three months: In the case of every company, a
meeting of its Board of directors shall be held at least once every three months
and at least four such meetings must be held every year.
2. Notice of meetings: Notice of every meeting of the Board of directors of a
company shall be given in writing to ever director for the time being in India, and
at his usual address in India to every other director.
3. Quorum for meetings: The quorum for a meeting of the Board of directors of a
company shall be one-third of its total strength (any fraction contained in that one-
third being rounded off as one), or two directors, whichever is higher. Provided
that where at any time the number of interested directors exceeds or is equal to
two-thirds of the total strength, the number of the remaining directors, that is to
say, the number of the directors who are not interested, present at the meeting
being not less than 2 shall be the quorum during such time.
188
Business Environment and Ethics 13.10 ACCOUNTS AND AUDIT
Every company must maintain proper books of accounts of its affairs. The following
transactions must be entered in the books of accounts of the company which must be
kept at its registered office:
1. all sums of money received and expended by the company and the matters in
respect of which the respect of which the receipt and expenditure took place;
2. all sales and purchases of goods by the company; and
3. the assets and liabilities of the company.
4. in the case of a company engaged in production, processing, manufacturing or
mining activities, such particulars relating to utilisation of material or other items
of cost as may be prescribed relating to certain class of companies as the Central
Government may require.
13.10.1 Balance Sheet and Profit and Loss Account

The company has to prepare its balance sheet and profit & loss account from the
books of account maintained by it. The Board of directors must present to the
shareholders of the company, the balance sheet and a profit and loss account for the
financial year at every annual general meeting.
13.10.2 Auditors of Company

i) Auditors of Government Companies: The auditor of a Government company is
appointed or re-appointed by the Comptroller and Auditor-General of India. The
auditor must submit a copy of his audit report to the Comptroller and Auditor-
General of India who shall have the right to comment upon or supplement, the
audit report in such manner as he may think fit.
ii) Auditors of Other Companies: It is the duty of the auditor conduct the audit of
the books of accounts of the company and to make his report to the members of
the company on the accounts examined by him, and on every balance sheet, every
profit and loss account and on every other document declared by the Act to be
part of or annexed to the balance-sheet or profit and loss account and laid before
the company in general meeting during his tenure of office.
13.11 AUDIT COMMITTEE (SECTION 292A)

The Companies Amendment Act, 2000, has incorporated the mandatory
recommendation of the Birla Committee on Corporate Governance for an Audit
Committee for company, with powers to investigate any activity within its terms of
reference and to seek information from any employee. The major role of the Audit
Committee is the oversight of the company’s financial reporting process and the
disclosure of its financial information to ensure that the financial statement is correct,
sufficient and credible.
13.12 INVESTIGATION
Central Govt. may investigate into the affaire of the company under Sections 235 and
237 or into the ownership of shares of a company under Section 247 of the Act.
Central Govt. and Company Law Board has been empowered to consider such
application and cause an investigation to be made by the Central Govt. Action on the
report of inspector also vest in the Central Govt.
Who can apply for Investigation 189
Company Law
The following can apply for the investigation of affaire of a company:
i) On the report of Registrar: On the report of Registrar Central Govt. may appoint
one or more competent persons as inspectors to investigate the affairs or a
company and to report thereon in such manner as the Central Govt. may direct.
ii) Shareholders: The Companies Act, 1956 empowers the Company Law Board
(now Tribunal) to consider an application from a specified number of
shareholders and to declare that an investigation be conduct into the affairs of the
company.
iii) The Company By Passing Special Resolution (Section 237(a)(i)).
iv) The Court by Order: Court by order can declare that the affairs of the company
ought to be investigated by inspector appointed by the Central Govt.
Action
On the receipt of the report of the inspector appointed, the Central Govt. may take one
or following actions:
i) Prosecute the person found guilty for any Criminal offence
ii) Present a petition to the Court (now Tribunal) for winding up of the company.
iii) Make an application to the Court (now Tribunal) under section 397 or 398 (sec.
243)
iv) Bring proceedings for fraud or misappropriation of the company’s property.
Inspection
Section 209A(1) provides that the books of account and other books and papers of
every company shall be open to inspection during business hour:
i) by the Registrar
ii) by such officer of Government as may be authorized by the Central Govt. in this
behalf
iii) by such officers of the SEBI as may be authorized by it.
13.13 WINDING UP OF COMPANIES

Winding up of a company is the process where by its life is ended and its property
administered for the benefit of its creditors and members. The object of winding up a
company is to realize the assets and pay the debts of the company expeditiously in a
fair manner in accordance with the law.
13.13.1 Modes of Winding up

Company may be wound-up in any of the following three ways:
i) By the court (now Tribunal) making a winding-up order (Compulsory Winding-
up)
ii) By the passing of a appropriate resolution for voluntary winding up at a general
meeting of members (can be of two type):
a) Members’ voluntary winding-up
b) Creditors’ voluntary winding-up
iii) Winding up subject to supervision of the Court
190 i) Compulsory Winding up: It is primarily the High Court, which has the
jurisdiction to wind up companies in relation to the place at which registered
office of the company is situated. However, the Central Government may
empower on any District Court to exercise that jurisdiction, only in respect of
small companies with the paid-up capital of not more than Rs. one lakh of rupees
and having their registered office within that district. The High Court may
regulate the conduct of such proceedings before the District Court. It may even
direct a District Court to retain and continue winding up proceedings, which that
District Court had no jurisdiction to handle. It may also withdraw any winding up
process in a District Court from that Court and proceed with the winding by itself,
or transfer it to another District Court.
ii) Voluntary Winding up: Winding up by the members or creditors without any
intervention of the Court is called ‘Voluntary Winding up’.
iii) Winding up subject to the provision of Court: At any time after a company has
passed a resolution for voluntary winding up the court may make an order that the
voluntary winding up should continue subject to the supervision of the Court
(Section 522). The application for such intervention of the Court may be made by
a creditor, contributory or the voluntary liquidator, when there are irregularities or
frauds in the voluntary winding up.
13.13.2 Buy Back of Shares

The Companies (Amendment) Act, 1999 has inserted new Section 77A, 77AA and
77B relating to a company’s powers to purchase its own shares. Buy back of its own
shares by a company is nothing but reduction of share capital. It is nothing but a
process which enables a company to go back to the holders of its shares and offer to
purchase from them the shares that they hold.
13.14 COMPANIES (AMENDMENT) ACT, 2000

Following are the major highlights of the Companies (Amendment) Act, 2000:
1. Penalties have been increased by almost ten times for non-compliances.
2. The minimum paid up capital for a private company would be Rs. 1,00,000/- and
for a public company would be Rs. 5,00,000/- or higher capital as prescribed. A
private company shall not invite or accept deposits from persons other than its
members, directors or their relatives. A public company shall include a private
company which is the subsidiary of a public company. (Section 3)
3. The private company cannot automatically become a public company on account
of turnover or shareholding criteria [Section 43A(11)] A public company now
becoming private company has to inform ROC that it has become a private
company and necessary alteration in the certificate of incorporation is required to
be done within 4 weeks from the date of application made by company
4. SEBI has been conferred power to deal exclusively with listed companies and
companies proposed to be listed in connection with the matters related to issue,
transfer of securities and non-payment of dividend (Section 55A)
5. The concept of Shelf Prospectus and Information Memorandum has been
introduced. `Shelf Prospectus’ means a prospectus issued by any financial
institution or bank for one or more issues of securities and `Information
Memorandum’ means memorandum issued to the public along with the shelf
prospectus filed at the stage of the first offer of securities under which such
prospectus shall be valid for a period of one year from the date of opening of the
first issue of securities. (Section 60A & 60B)
6. The offer of any securities to more than 50 people in one financial year will be 191
Company Law
treated as a public offer. This provision is not applicable to NBFC’s and public
financial institutions. [Section 67(3)]
7. Every listed public company making an initial offer of securities of more than
Rs. 10 crores is to be in the dematerialised form only (Section 68B).
8. Equity capital of the company can be now issued either with voting rights or with
differential rights as regards to dividends, voting rights or otherwise (Section 86).
9. Provisions relating to Debenture Trust Deed, Debenture Redemption Reserve,
Debenture Trustee has been inserted.
10. The concept of postal ballot has been introduced to pass resolution instead of
transacting the business in general meeting. Under these provisions members are
required to send their assent/dissent in writing on a postal ballot within 30 days
from the date of posting the letter (Section 192A).
11. The concept of interim dividend has been included in the provisions.
12. In addition to the Central Government, SEBI has now been authorized to carry out
inspection of books of account and other books in connection with listed
companies. (Section 209A).
13. The Board Report should also include Directors Responsibility Statement
requiring the disclosure of various information and making the directors
responsible for the disclosures. (Section 217).
14. Disqualification for appointment of auditor includes such auditors who holds
security carrying voting rights after a period of one year from the date of
commencement of the amended act. (Section 226)
15. The observations or comments of the auditors which has adverse effect on the
functioning of a company should be written in thick type or in italics in the
Auditors’ Report (Section 227)
16. The public limited company which has paid up capital of at least Rs. 5 crores and
having at least 1,000 small shareholders should have at least one director elected
by such small shareholders (Section 252).
17. Disqualification of Directors includes a person who is already a director of a
public company which has not filed annual accounts and annual returns for
continuous 3 financial years or more or has failed to repay its deposits or interest
or redeem its debentures on due date or pay dividend and such failure continues
for at least one year. (Section 274)
18. The maximum number of companies in which a person can be a director has been
reduced from 20 to 15. (This excludes directorships of private companies,
unlimited companies, non profit associations and companies in which the person
is an alternate director). [Section 275]
19. The concept of audit committee consisting of at least 3 directors has been
introduced for such public companies having paid up capital of at least Rs. 5
crores. (Section 292A)
20. A company which is incorporated or is to be incorporated outside India is allowed
to offer Indian Depository Receipts under the rules framed by the Central
Government. (Section 605A)
21. In case of Government companies, auditors will now be appointed only by the
Comptroller and Auditor General of India. (Section 619)
22. Registrar of Companies, Shareholders and persons authorized by the Central
Government can make a complaint in writing to a court against the offences
192 committed by a company against the provisions of any Act. SEBI has also been
authorized to make such complaints relating to issue, transfer of securities and
non-payment of dividend. (Section 621)
Fill in the blanks:
1. The company legislation in India owes its origin to the _________
company law.
2. Company has a ______________, which is used as a substitute for its
signature.
3. A ______________ is one which is incorporated by a Special Act of the
Legislature.
4. _____________ refers to the entire process by which a company is brought
into existence.
5. The ________ contain the rules and regulations of the internal management
of the company.
6. ___________ means that part of the share capital of the company, which
are not preference shares.
13.15 COMPANY LAW TRIBUNAL (ERSTWHILE

COMPANY LAW BOARD)
Company Law Tribunal is responsible for the administration of the company Law.
1. Members: The Company Law Tribunal shall consist of such number of judicial
and technical members, not exceeding fourteen, as the Central Government deems
fit.
2. Constitution of benches: The powers of the Company Law Tribunal may be
exercised by benches, out of which one shall be a judicial member and another
shall be a technical member. There are five regional benches and one Principal
Bench at New Delhi presided over by the President or Vice-President.
3. Powers of benches: Every Bench constituted have powers of a Civil Court while
trying a suit, under the Code of Civil Procedure, 1908 (5 of 1908), in respect of
the following matters, namely:
(a) discovery and inspection of documents or other material objects producible as
evidence;
(b) enforcing the attendance of witnesses and requiring the deposit of their
expenses;
(c) issuing of commissions;
(d) compelling the production of documents or other material objects produced as
evidence and impounding the same;
(e) appointing Committees for the investigation of any matter, including the
giving of any expert opinion or advice on any matter specified by it;
(f) examining witnesses on oath;
(g) granting adjournments;
(h) reception of evidence on affidavits.
4. Power to punish for contempt: The Company Law Tribunal shall have the same
jurisdiction, powers and authority in respect of its own contempt as the High
Court has and may exercise for this purpose the provisions of the Contempt of 193
Company Law
Courts.
13.16 LET US SUM UP

Based on the report of the Bhabha Committee, Companies Act, 1956 was introduced
in Parliament in 1952. Since then Companies Act has been amended several times.
Companies can be of many types such as Private and Public Company, Limited and
Unlimited Company, Holding and Subsidiary Companies, Government Companies
Foreign Companies, Statutory Companies, Registered Companies.
The whole process of formation of a company can be divided into three stages: -
Promotion, Registration, Commencement of Business. Promotion refers to the entire
process by which a company is brought into existence. If the company is to be formed
as a public company, any seven or more persons associated for any lawful purpose
may form the company be getting it registered with Registrar of Companies. A private
company or a company having no share capital can commence its business
immediately after it has been incorporated.
There should be proper auditing of the Company Accounts. Besides auditing the
accounts should be investigated by the Audit Committee. Central Govt. may
investigate into the affaire of the company under Sections 235 and 237 or into the
ownership of shares of a company under Section 247 of the Act. Central Govt. and
Company Law Board has been empowered to consider such application and cause an
investigation to be made by the Central Govt. Action on the report of inspector also
vest in the Central Govt.
Winding up of a company is the process where by its life is ended and its property
administered for the benefit of its creditors and members. Company may be wound-
up in any of the following three ways: Compulsory Winding Up, by the passing of a
appropriate resolution for voluntary winding up at a general meeting of members and
winding up subject to supervision of the Court.
Company Law has given many rights to Central Govt. and Company Law Board to
check the Oppression and Mismanagement of company. Companies (Amendment)
Act 2000 brought many significant changes to the companies Act. Company Law
board which used to look after the administration of Company Law is replaced by the
Company Law Tribunal by the Companies (Second Amendment) Act,2002

1. Prepare a project on the changes brought in Company Law in last fifteen years, to
make it suitable in changed situation.
2. Form a virtual company according to the Company Law.
13.18 KEYWORDS
Shareholders: Person having the shares of company.
Company: Company Act states that “a ‘company’ means a company formed and
registered under Companies Act”.
Separate Legal Entity: In law company is regarded as an artificial legal person having
its own name and its own seal, its assets and liabilities are separate and distinct from
those of its members.
Limited Liability: The liability of the members of the company is limited to
contribution to the assets of the company up to the face value of shares held by him.
194 Common Seal: It has a common seal, which is used as a substitute for its signature.
Promotion: In Companies Act, Promotion refers to the entire process by which a
company is brought into existence.
Memorandum of Association: It is the charter of the company. It prescribes the name
of the company, its registered office, objects and capital and also defines the extent of
its powers.
Articles of Association: The Articles of Association (AA) contain the rules and
regulations of the internal management of the company.
Unlimited Company: The liability of members of an unlimited company is unlimited.
Board of directors: The directors of a company collectively are referred to as the
"Board of directors.
Qualification shares: Qualification shares are the minimum number of shares a
person must own, as provided in the articles of the company, in order to qualify to
become a director of the company.
Winding Up: Winding up of a company is the process where by its life is ended and
its property administered for the benefit of its creditors and members.
Buy Back of Shares: process which enables a company to go back to the holders of
its shares and offer to purchase from them the shares that they hold.
Preference Shares: preference share capital has priority both in repayment of
dividend as well as capital.
Subscribed Capital: means that part of the issued capital at nominal or face value
which has been subscribed or taken up by purchaser of shares in the company and
which has been allotted.
Nominal, authorized or registered capital: means the sum mentioned in the capital
clause of Memorandum of Association.
Paid-up capital: means the total amount of called up share capital which is actually
paid to the company by the members.

1. Describe various types of company and their characteristics.
2. Briefly describe the process of formation of company according to the company
law.
3. What is Board of Directors? What are the powers of Board of Directors?
4. Describe various mode of Winding up of companies.
5. Write Short Notes on: Capital, Membership, Disqualification of Director, Audit
Committee, Company Law Tribunal (Erstwhile Company Law Board),
Companies (Amendment) Act, 2000,

CYP 1
1. The word 'Company' is an amalgamation of the Latin word 'Com' meaning
"with or together" and 'Pains' meaning "bread". Originally, it referred to a
group of persons who took their meals together. A company is nothing but
a group of persons who have come together or who have contributed
money for some common person and who have incorporated themselves
into a distinct legal entity in the form of a company for that purpose.
Contd…
2. 195
Company Law
2. Important needs:
(a) Incorporation of Companies
(b) Allotment of shares and share capital
(c) Membership in Companies
(d) Borrowing by companies and registration of charge
(e) Management and administration of companies
(f) Winding up of Companies
CYP 2
1. A company limited by guarantee is a registered company having the
liability of its members limited by its memorandum of association to such
amount as the members may respectively thereby undertake to pay if
necessary on liquidation of the company.
2. A statutory company is one which is incorporated by a Special Act of the
Legislature (i.e. by the Act of the Parliament or State Legislature). The
statutory companies are also known as ‘corporations’.
CYP 3
1. Promotion refers to the entire process by which a company is brought into
existence. It starts with the conceptualization of the birth a company and
determination of the purpose for which it is to be formed. The persons who
conceive the company and invest the initial funds are known as the
promoters of the company.
2. Any transaction which is outside the scope of the powers specified in the
objects clause of the MA and are not reasonable incidentally or necessary
to the attainment of objects is ultra-vires the company and therefore void.
CYP 4
1. English, 2. Common Seal, 3. Statutory Company,
4. Promotion, 5. Articles of Association 6. Equity shares

House.
Prentice Hall.
196
LESSON
14
COMPETITION BILL, 2001
CONTENTS
14.1 Introduction
14.2 Prohibition of Agreements
14.3 Prohibition of Abuse of Dominant Position
14.4 Regulation of Combinations
14.5 Competition Commission of India
14.6 Duties, Powers and Functions of Commission
14.7 The Jurisdiction, Powers and Authority of the CCI
14.8 Penalties
14.9 Let us Sum up
14.11 Keywords

z Understand the reasons of introducing the Competition Bill
z Explain the concept of Competition Bill
z Know the role of Competition bill in regulating business
z Learn the role and powers of Competition Commission of India
14.1 INTRODUCTION
The Central Government constituted a High Level Committee on Competition Policy
and Law. The Committee submitted its report on the 22nd May, 2000 to the Central
Government. The Central Government consulted all concerned including the trade and
industry associations and the general public. The Central Government after
considering the suggestions of the trade and industry and the general public decided to
enact a law on Competition.
The Competition Bill, 2001 seeks to ensure fair competition in India by prohibiting
trade practices which cause appreciable adverse effect on competition in markets
within India and, for this purpose, provides for the establishment of a quasi-judicial
body to be called the Competition Commission of India (hereinafter referred to as
CCI) which shall also undertake competition advocacy for creating awareness and
imparting training on competition issues.
The Bill aims at curbing negative aspects of competition through the medium of CCI. 197
Competition Bill, 2001
The Bill confers power upon the CCI to levy penalty for contravention of its orders,
failure to comply with its directions, making of false statements or omission to furnish
material information, etc.
The Competition Bill aims at repealing the Monopolies and Restrictive Trade
Practices Act, 1969 and the dissolution of the Monopolies and Restrictive Trade
Practices Commission. The Bill provides that the cases pending before the
Monopolies and Restrictive Trade Practices Commission will be transferred to the
CCI [Competition Commission of India] except those relating to unfair trade practices
which are proposed to be transferred to the relevant for established under the
Consumer Protection Act, 1986.
It has following provision:
14.2 PROHIBITION OF AGREEMENTS

No enterprise or association of enterprises or person or association of persons shall
enter into any agreement in respect of production, supply, distribution, storage,
acquisition or control of goods or provision of services, which causes or is likely to
cause an appreciable adverse effect on competition within India.
Any agreement entered into between enterprises or associations of enterprises or
persons or associations of persons or between any person and enterprise or practice
carried on, or decision taken by, any association of enterprises or association of
persons, including cartels, engaged in identical or similar trade of goods or provision
of services, which:
1. directly or indirectly determines purchase or sale prices;
2. limits or controls production, supply, markets, technical development, investment
or provision of services;
3. shares the market or source of production or provision of services by way of
allocation of geographical area of market, or type of goods or services, or number
of customers
It prohibits any agreement amongst enterprises or persons at different stages or
levels of the production chain in different markets, in respect of production,
supply, distribution, storage, sale or price of, or trade in goods or provision of
services, including:
(a) Tie-in Arrangement: includes any agreement requiring a purchaser of goods,
as a condition of such purchase, to purchase some other goods;
(b) Exclusive Supply Agreement: includes any agreement restricting in any
manner the purchaser in the course of his trade from acquiring or otherwise
dealing in any goods other than those of the seller or any other person;
(c) Exclusive Distribution Agreement: includes any agreement to limit, restrict or
withhold the output or supply of any goods or allocate any area or market for
the disposal or sale of the goods;
(d) Refusal to Deal: includes any agreement which restricts, or is likely to restrict,
by any method the persons or classes of persons to whom goods are sold or
from whom goods are bought;
(e) Resale Price Maintenance: includes any agreement to sell goods on condition
that the prices to be charged on the resale by the purchaser shall be the prices
stipulated by the seller unless it is clearly stated that prices lower than
those prices may be charged; shall be an agreement in contravention of
198 sub-section (1) if such agreement causes or is likely to cause an appreciable
adverse effect on competition.
Things which are not contained in the Act shall refer to following:
1. "copyright" under the Copyright Act, 1957;
2. "patent" or "exclusive right" granted under the Patents Act, 1970;
3. "collective mark", "permitted use", "registered proprietor", "registered trade
mark" or "registered user" under the Trade Marks Act, 1999;
4. "homonymous geographical indication" or "geographical indications" registered
under the Geographical Indications of Goods (Registration and Protection) Act,
1999;
5. "design" registered under the Designs Act, 2000;
6. "layout-design" registered under the Semi-conductor Integrated Circuits Layout-
Design Act, 2000;
7. the right of any person to export goods from India to the extent to which the
agreement relates exclusively to the production, supply, distribution or control of
goods or provision of services for such export.
Describe, in brief, the following:
1. Exclusive supply agreement.
……………………………………………………………………………….
……………………………………………………………………………….
2. Refusal of deal.
……………………………………………………………………………….
……………………………………………………………………………….
14.3 PROHIBITION OF ABUSE OF DOMINANT POSITION

The organizations enjoying dominant position in the market are prohibited by the Act
to use their strength to affect its competitors or consumers or the relevant market in its
favour.
14.4 REGULATION OF COMBINATIONS

Regulation of combinations regulates the mergers and acquisitions. Any person or
enterprise, who or which proposes to enter into a combination, may, at his or its
option, have to give notice to the Commission, in the form as may be specified, and
the fee which may be determined, by regulations, disclosing the details of the
proposed combination, within seven days of:
(a) approval of the proposal relating to merger or amalgamation, by the board of
directors of the enterprises concerned with such merger or amalgamation, as the
case may be;
(b) execution of any agreement or other document for acquisition referred to in clause
(a) of section 5 or acquiring of control referred to in clause (b) of that section.
The Commission shall, after receipt of notice under sub-section (2), deal with such
notice in accordance with the provisions.
199
14.5 COMPETITION COMMISSION OF INDIA Competition Bill, 2001
For the purpose of this act Govt. established a commission to called as Competition
Commission of India.
Sub-clause (1) of clause 8 of the Bill provides that the Commission shall consist of a
Chairperson and not less than two and not more than ten other Members to be
appointed by the Central Government.
14.6 DUTIES, POWERS AND FUNCTIONS OF

COMMISSION
Subject to the provisions of this Act, it shall be the duty of the Commission to
eliminate practices having adverse effect on competition, promote and sustain
competition, protect the interests of consumers, and ensure freedom of trade carried
by other participants, in markets in India.
The Commission may inquire into any alleged contravention of the provisions either
on its own motion or on:
(a) receipt of a complaint from any person, consumer or their association or trade
association; or
(b) a reference made to it by the Central Government or a State Government or a
statutory authority.
The Commission can enquire whether an agreement has an appreciable adverse effect
on competition. The Commission can enquire whether an enterprise enjoys a
dominant position or not, The Commission can enquire that whether any combination
is likely to cause an appreciable adverse effect on competition in India, or any other
violation of the Act.
14.7 THE JURISDICTION, POWERS AND AUTHORITY OF

THE CCI
On receipt of a complaint or a reference from the Central Government or a State
Government or a statutory authority or on its own knowledge or information, under
section 19, if the Commission is of the opinion that there exists a prima facie case, it
shall direct the Director General to cause an investigation to be made into the matter.
The Director General submits its report in a specified period.
Where after inquiry the Commission finds that any agreement or action, of an
enterprise in a dominant position, is in contravention of section 3 or section 4, as the
case may be, it may pass all or any of the following orders, namely:
(a) Direct any enterprise or association of enterprises or person or association of
persons, as the case may be, involved in such agreement, or abuse of dominant
position, to discontinue and not to re-enter such agreement or discontinue such
abuse of dominant position, as the case may be;
(b) Impose such penalty, as it may deem fit which shall be not more than ten per cent.
of the average of the turnover for the last three preceding financial years, upon
each of such person or enterprises which are parties to such agreements or abuse;
(c) Award compensation to parties in accordance with the provisions contained in
section 34;
(d) Direct that the agreements shall stand modified to the extent and in the manner as
may be specified in the order by the Commission;
200 (e) Direct the enterprises concerned to abide by such other orders as the Commission
may pass and comply with the directions, including payment of costs, if any;
(f) Recommend, to the Central Government for the division of an enterprise enjoying
dominant position;
(g) Pass such other order as it may deem fit.
The Commission shall not be bound by the procedure laid down by the Code of Civil
Procedure, 1908, but shall be guided by the principles of natural justice and, subject to
the other provisions of this Act and of any rules made by the Central Government, the
Commission shall have powers to regulate its own procedure including the places at
which they shall have their sittings, duration of oral hearings when granted, and times
of its inquiry. The Commission shall have, for the purposes of discharging its
functions under this Act, the same powers as are vested in a civil court under the Code
of Civil Procedure, 1908, while trying a suit, in respect of the following matters,
namely:
(a) summoning and enforcing the attendance of any person and examining him on
oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination witnesses or documents,
(e) subject to the provisions of sections 123 and 124 of the Indian Evidence Act,
1872, requisitioning any public record or document or copy of such record or
document from any office;
(f) dismissing an application in default or deciding it ex parte;
(g) any other matter which may be prescribed;
(h) Every proceeding before the Commission shall be deemed to be a judicial
proceeding within the meaning of sections 193 and 228 and for the purposes of
section 196 of the Indian Penal Code and the Commission shall be deemed to be a
civil court for the purposes of section 195 and Chapter XXVI of the Code of
Criminal Procedure, 1973.
Fill in the blanks:
1. The ____________ aims at repealing the Monopolies and Restrictive Trade
Practices Act, 1969.
2. ___________ includes any agreement requiring a purchaser of goods, as a
condition of such purchase, to purchase some other goods;
3. ______________ or "exclusive right" granted under the Patents Act, 1970;
4. The ________________ shall not be bound by the procedure laid down by
the Code of Civil Procedure.
5. The Commission shall have, the same powers as are vested in a civil court
under the Code of _______________, 1908.
14.8 PENALTIES
1. Without prejudice to the provisions of this Act, if any person contravenes, without
any reasonable ground, any order of the Commission, or any condition or
restriction subject to which any approval, sanction, direction or exemption in
relation to any matter has been accorded, given, made or granted under this Act or
fails to pay the penalty imposed under this Act, he shall be liable to be detained in
civil prison for a term which may extend to one year, unless in the meantime the
Commission directs his release and he shall also be liable to a penalty not 201
Competition Bill, 2001
exceeding rupees ten lakhs.
2. The Commission may, while making an order under this Act, issue such directions
to any person or authority, not inconsistent with this Act, as it thinks necessary or
desirable, for the proper implementation or execution of the order, and any person
who commits breach of, or fails to comply with, any obligation imposed on him
under such direction, may be ordered by the Commission to be detained in civil
prison for a term not exceeding one year unless in the meantime the Commission
directs his release and he shall also be liable to a penalty not exceeding rupees ten
lakhs.
3. If any person fails to comply with a direction given by the Commission, the
commission shall impose on such person a penalty of rupees one lakh for each day
during which such failure continues.
The Competition bill repealed the MRTP Act which was not relevant in the changed
situation. The Competition bill is more pragmatic and an effective tool in curbing
unhealthy competition or checking big firm to take undue advantage of their strength.
Not only in India such type of laws are in force even in USA and Europe. As there is
a probability that big firms may affect supplier , consumer, and competitor in their
favour and in a duopoly or Oligopoly market situation firms establishes cartel and
tries to influence the market in their favour. Competition bill works in the interest of
nation and to provide level playing field.
14.9 LET US SUM UP

The Competition Bill aims at repealing the MRTP. The Bill provides that the cases
pending before the Monopolies and Restrictive Trade Practices Commission will be
transferred to the CCI. CCI prohibits any agreements which restrict production,
supply, distribution, or indulge in storing, which have an adverse effect on
competition within India. Agreement can be as Tie-in Arrangement, Exclusive Supply
Agreement.
The organizations enjoying dominant position in the market are prohibited by the Act
to use their strength to affect its competitors or consumers or the relevant market in its
favour. CCI regulates the combinations , mergers and acquisitions. The Commission
shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908,
but shall be guided by the principles of natural justice and, subject to the other
provisions of this Act and of any rules made by the Central Government.

Prepare a project on impact of competition Bill on Indian industry after its execution.
14.11 KEYWORDS
Competition Commission of India (CCI): It is a quasi-judicial body. Established
under The Competition Bill, 2001. It aims at curbing negative aspects of competition
Tie-in Arrangement: It includes any agreement requiring a purchaser of goods, as a
condition of such purchase, to purchase some other goods.

1. Discuss the type of agreement which competition bill prohibits.
2. Briefly discuss the functions and power of Competition Commission of India.
3. Discuss how competition bill of India is better than that of MRTP.
202
CYP 1
1. Exclusive Supply Agreement includes any agreement restricting in any
manner the purchaser in the course of his trade from acquiring or otherwise
dealing in any goods other than those of the seller or any other person;
2. Refusal to Deal includes any agreement which restricts, or is likely to
restrict, by any method the persons or classes of persons to whom goods
are sold or from whom goods are bought;
CYP 2
1. Competition Bill, 2. Tie-in Arrangement, 3. patent
4. Competition Commission, 5. Civil Procedure

House
Prentice Hall
203
LESSON Foreign Exchange Management Act
15
FOREIGN EXCHANGE MANAGEMENT ACT
CONTENTS
15.1 Introduction
15.2 Difference between FERA and FEMA
15.3 Scope of FEMA
15.4 Functions of Reserve Bank of India
15.5 Exports of Goods and Services
15.6 Possession and Retention of Foreign Currency
15.7 Realization and Repatriation of Foreign Exchange
15.8 Capital Account Transaction
15.8.1 Regulation of Capital Account Transaction
15.9 Current Account Transaction
15.10 Enforcement and Penalties
15.10.1 Directorate of Enforcement
15.10.2 Penalties
15.11 Let us Sum up
15.13 Keywords

z Explain the reasons for introducing FEMA in place of FERA
z Know the concept of FEMA
z Discuss the executing body of FEMA
z Learn the role of RBI in implementing FEMA
15.1 INTRODUCTION
Foreign Exchange Management Act (FEMA), 1999 has been enacted as part of
liberalization. The Act is implemented w.e.f. 1st June, 2000.
Foreign exchange control was first introduced in September, 1939 under Defense of
India Rules. Foreign exchange regulation act was introduced in 1947. This was later
204 replaced with ‘the Foreign Exchange Regulation Act, 1973 (FERA)’. Which was
further replaced by FEMA which came into effect from 1st June 2000.
15.2 DIFFERENCE BETWEEN FERA AND FEMA

The object of FEMA is bill is to consolidate and amend the law relating to foreign
exchange with the object of facilitating external trade and payment and for promoting
the orderly development and maintenance of foreign exchange market in India. The
main difference between FERA and FEMA is as follows:
(a) The object of FERA was to conserve foreign exchange and to prevent its misuse.
The object of FEMA is to facilitate external trade and payments and maintenance
of foreign exchange market in India.
(b) Violation of FERA was a criminal offence while violation of FEMA is civil
offence.
(c) Offences under FERA were not compoundable while offences under FEMA are
compoundable.
(d) Citizenship was a criteria to determine residential status of a person under FERA,
while stay of more than 182 days in India is the criteria to decide residential
status.
(e) Provision in respect of Basic Travel Quota (BTQ) business travel export
commission, gifts, donation etc have been considerably enhanced in FEMA.
(f) Almost all current account transactions are free, except a few.
15.3 SCOPE OF FEMA

FEMA provides:
1. Free transactions on current account subject to reasonable restrictions that may be
imposed.
2. RBI controls over capital account transactions.
3. Control over realization of export proceeds.
4. Dealing in foreign exchange through authorized persons like authorized dealer/
Money changer/ off shore banking unit.
5. Adjudication of Offences.
6. Appeal provision including Special Director (Appeals) and Appellate Tribunal.
7. Directorate of Enforcement.
15.4 FUNCTIONS OF RESERVE BANK OF INDIA

FEMA envisages that RBI will have key role in management of foreign exchange.
The main function of RBI under FEMA as follows:
(a) Control over dealing in foreign exchange by giving general or special permission
for dealing in foreign exchange, excluding those cases where specific provision
have been made in ACT, rules or regulation – section 3.
(b) RBI cannot impose any restriction on current account transaction.
(c) Specifying conditions for payment in respect of capital account transaction –
section 6 (2).
(d) Regulate/prohibit/ restrict the following, by issuing regulations:
(i) transfer or issue of foreign security to resident and Indian security to non- 205
Foreign Exchange Management Act
resident.
(ii) borrowing and lending in foreign exchange or to a foreign person.
(iii) Export/Import of currency or currency notes.
(iv) Transfer of immovable property outside India.
(v) Giving guarantee or surety where foreign exchange transaction is involved –
section 6(3).
(e) Specify (by regulation) period and manner in which foreign exchange due from
export of goods and services should be received – section 8.
(f) To grant exemption from realization an repatriation in cases specified under
section 9 [These cover provision in respect of possession of foreign currency or
foreign coins, foreign currency accounts, foreign exchange acquired form
employment, business, trade, services etc.].
(g) Granting authorization to ‘Authorized Person’ to deal in foreign exchange to give
direction to them and to inspect the authorized person – section 10, 11 and 12.
(h) To make regulation – section 47.
Today rupee is convertible on current account, this means all current income
(including rent, dividend, interest, salary etc.) is repatriable, even in cases where
principle amount is not repatriable. Today many currencies like Dollars (USA), Pound
Sterling, Euro, DM, Yen, Lira etc. are freely convertible, all this limits the role of
FEMA. As now to deal in Forex is not so cumbersome and any authorized person or
agency can deal in any currency.
Authorized Person to deal in foreign exchange and foreign securities – RBI

RBI delegate its power to authorized person to deal in foreign exchange with suitable
guidelines:
Authorised Person
Section 2(c) states that ‘authorised person’ means an authorised dealer, money
changer, off-shore banking unit or any other person authorized under section 10(1) to
deal in foreign exchange and foreign securities. Generally all nationalised banks, and
foreign banks are appointed as ‘Authorised Dealers’ to deal in foreign exchange.
Money changer are authorized by RBI only to purchase foreign currency in form of
traveler’s cheques, notes or coins or sale foreign currency in form of coins and notes.

What do you mean by authorised person?
……………………………………………………………………………………
……………………………………………………………………………………
15.5 EXPORTS OF GOODS AND SERVICES

Regulation relating to export of goods and services from India are contained in
Foreign Exchange Management (Export of Goods and Services) Regulations, 2000.
Every exporter of goods or software in physical form or through any other form, either
directly or indirectly, to any place outside India, other than Nepal, and Bhutan, shall
206 furnish to the specified authority, a declaration in one of the forms set out in the
Schedule. Declaration should be submitted with in 21 days from exports.
15.6 POSSESSION AND RETENTION OF FOREIGN

CURRENCY
Under FEMA restriction are only for physical possessions and retention of foreign
currency and not in respect of the foreign currency kept in permissible account with
authorized dealers (banks).
Limits for Possessions and Retention of Foreign Currency or Foreign Coins:
1. An authorized person can retain and possess foreign currency and coin within the
scope of his authority without any limit;
2. Any person can possess foreign coins without limit;
3. A person resident in India can retain foreign currency notes, bank notes and
foreign currency travelers’ cheques up to a limit as prescribed by RBI;
4. A person resident it India but not permanently resident therein may possess
without limit foreign currency in the form of currency notes, bank notes and
travelers cheques if such foreign currency was acquired, held or owned by him
when he was resident outside India and has been brought into India in accordance
with the regulation made under the Act i.e. after making declaration when
required.
15.7 REALIZATION AND REPATRIATION OF FOREIGN

EXCHANGE
A person resident in India to whom any account of foreign exchange is due or has
accrued shall take all reasonable steps to realize and repatriate to India such foreign
exchange within such period and in such manner as may be specified by the RBI .
15.8 CAPITAL ACCOUNT TRANSACTION

Section 2(e) states that ‘Capital Account Transaction’ means:
z A transaction which alters the assets or liabilities, including contingent liabilities
outside India of person resident in India.
z A transaction which alters the assets or liabilities in India of person’s resident
outside India.
z Transfer or issue of any foreign security by a person resident in India.
z Transfer or issue of any security by a person resident outside India.
z Transfer or issue of any security or foreign security by any branch, office or
agency in India or a person resident outside India.
z Any borrowing or lending in foreign exchanges in whatever form or by whatever
name called.
z Any borrowing or lending in rupees in whatever form or by whatever name called
between a person resident in India and a person resident outside India.
Deposits between person’s resident in India and person resident outside India.
z Export, import or holding or currency or currency notes.
z Transfer of immovable property outside India, other than lease not exceeding five
years, by a person resident in India.
z Acquisition or transfer of immovable property in India, other than a lease not 207
exceeding five years, by a person resident outside India.
z Giving of guarantee or surety in respect of any debt, obligation or other liability
incurred # by a person resident in India and owed to a person resident outside
India or # By a person resident outside in India.
15.8.1 Regulation of Capital Account Transaction

Subject to the provision of sub-section (2) any person may sell or draw foreign
exchange to or from an authorized person for a capital account transaction.
The RBI may, in consultation with the central Government specify:
(a) any class or classes of capital account transaction which are permissible;
(b) the limit up to which foreign exchange shall be admissible for such transaction.
Provided that the RBI shall not impose any restriction on the withdrawal of foreign
exchange for payments due on account of amortization of loans for depreciation of
direct investment in the ordinary course of business.
Without prejudice to the generality of the provision of sub-section (2) the Reserve
Bank may by regulations, prohibit, restrict or regulate the following:
(a) Transfer or issue of any foreign security by a person resident in India.
(b) Transfer or issue of any security by a person outside India.
(c) Transfer of issue of any security of foreign security by any branch, office or
agency in India of a person resident outside India.
(d) Any borrowing or lending in foreign exchange in whatever form or by whatever
name called.
(e) Any borrowing or lending in rupees in whatever form or by whatever name called
between a person resident in India and a person resident outside India.
(f) Deposits between persons resident in India and person resident outside India.
(g) Export, import or holding of currency or currency notes.
(h) Transfer of immovable property outside India, other than lease not exceeding five
years, by a person resident in India.
(i) Acquisition or transfer of immovable property in India, other than a lease not
exceeding five years by a person outside India.
(j) Giving a guarantee or surety in respect of any debt, obligation or other liability
incurred –
1) By a person resident in India an owed to a person resident outside India; or
2) By a person resident outside India.
A person resident in India may hold, own transfer or invest in foreign currency,
foreign security or any immovable property situated outside India if such currency,
security or property was acquired, held or owned by such person when he was resident
outside India or inherited from a person who was resident outside India.
A person resident outside India may hold, own, transfer or invest in Indian currency,
security or any immovable property situated in India if such currency , security or
property was acquired , held or owned by such person when he was resident in India
or inherited from a person who was resident in India.
Without prejudice to the provision of the section, the RBI may, by regulations
prohibit, restrict or regulate establishment in India of a branch, office or other place of
208 business by a person resident outside India, for carrying on any activity relating to
such branch, office or other place of business.
Some Words Used in FEMA
Convertible Currency / Hard Currency:
Some currency are freely convertible i.e. one can exchange these currencies with any other
currency without any restriction. Major among these are : Dollars(USA), Pound Sterling, Euro,
DM, Yen, Franc, Lira, etc. This is often called ‘hard currency’.
Rupee Trade
India has rupee trade with Nepal and Bhutan i.e. payment in respect of trade with Nepal an
Bhutan is made in Indian Rupees.
Currency
Currency includes all currency notes, postal notes, postal orders, money orders, cheques, drafts ,
traveller’s cheques, letter of credit, Bill of Exchange and Promissory notes, credit cards or such
other similar instruments as may be notified by RBI. RBI has notified ‘debit cards’, ATM cards
or any other instruments by whatever name called that can be used to create a financial liability’
as ‘currency’.
Foreign Exchange
Foreign exchange means foreign currency and includes (i) deposits, credits, and balances payable
in any foreign currency. (ii) drafts, traveller’s cheques, letter of credit or bill of exchange
expressed or drawn in Indian currency but payable in foreign currency. (iii ) drafts, traveller’s
cheques letter of credit or bill of exchange expressed drawn by bank, institutions or person
outside India, but payable in Indian currency.
Overseas Corporate Bodies
OCB means any overseas company, partnership, firm, society, and other corporate body
predominantly owned directly or indirectly to the extent of at least 60% by NRIs. It also includes
overseas trust in which at least 60% beneficial interest is irrevocably held by NRIs.

1. Convertible currency
……………………………………………………………………………….
……………………………………………………………………………….
2. Rupee Trade
……………………………………………………………………………….
……………………………………………………………………………….
15.9 CURRENT ACCOUNT TRANSACTION

FEMA has eased the regulation over transactions in foreign exchange and security.
Transaction in current account are made restriction free:
No restriction on Current account transaction unless specified: Any person can sell
or draw foreign exchange to or from authorized person if such sale or withdrawal is a
current account transaction. Reasonable restriction on current account transaction can
b imposed by central government in public interest, in consultation with RBI.
Current Account Transaction: Section 2(j) states that current account transaction
means a transaction other than a capital account transaction. It includes following:
1. Payment due in connection with foreign trade, other current business, services and
short term banking and credit facilities in the ordinary course of business.
2. Payment due as interest on loans as net income from investment. 209
3. Remittances for living expenses of parents, spouse and children residing abroad
4. Expense in connection with foreign travel, education and medical care of patents,
spouse and children.
5. The definition is ‘inclusive’ i.e. besides of aforesaid expenses, any expenditure
which is not a ‘capital account transaction’ will be current account transaction
e.g. own expenses on foreign travel, education, and medical care are covered as
‘current account transaction’ even not specified above.
6. Any person may sell or draw foreign exchange to or from an authorized person if
such sale or drawl is a current account transaction.
Foreign currency/security/property by resident: A person resident in India may hold,
own transfer or invest in foreign currency, foreign security or any immovable property
situated outside India, if such currency, security or property was acquired, held or
owned by such person when he was resident outside India or inherited from a person
who was resident outside India. [Section 6(4)]
Indian currency/security/property by non-resident: A person resident outside India
may hold, own transfer or invest in Indian currency, security or any immovable
property situated in India, if such currency, security or property was acquired, held or
owned by such person when he was resident in India or inherited from a person who
was resident in India. [Section 6 (4)]
Restrictions on branches, offices of non-resident: RBI prohibit , restrict or regulate
establishment of branch, office or other place of business by a person resident outside
India; for carrying on any activity relating to such branch, office or other place of
business. [Section 6(6)]
15.10 ENFORCEMENT AND PENALTIES

15.10.1 Directorate of Enforcement
Directorate of Enforcement has been formed to ensure that the provision of the
Act are followed. Directorate of Enforcement Additional Director, Special Director,
an Assistants Directors of Enforcement are appointed by Central Government
(section 36).
These officers can investigate contraventions of FEMA. The officers have powers
similar to those conferred on Income Tax authorities under Income Tax Act. These
powers can be exercised subject to limitation laid down under Income Tax Act.
(Section 37)
Following powers are available under the Income Tax Act: Powers to requisition
books of accounts etc. Power to call for information, Power to inspect registers of
companies [Section 131 to 136 of Income Tax Act].
Penalties under the Act: An Adjudicating Authority appointed by Central
Government under FEMA can impose penalty for violating of any provision of Act or
contravention of any rule, regulation, direction or order issued under power conferred
by the Act.
Departmental Adjudication: Central Government can authorize certain officers as
‘Adjudicating Authority’ u/s 16(1). There jurisdiction will be prescribed by Central
Government [Section 16(2)]. They can adjudicate cases in respect of violation of
FEMA. These are quasi judicial. They have to follow principle of natural justice by
giving opportunity of making representation. The Adjudicating Authority can hold
enquiry only on receiving a complaint from an authorized officer. [Section 16 (3)]
210 Powers of adjudicating and appellate authorities: The adjudicating authority, Special
Director (Appeals) and Appellate Tribunal have following powers:
They have following power of civil court:
1. Summoning witnessing and enforcing attendance of any person and examining
him on oath.
2. Requiring discovery and production of any document.
3. Receiving evidence on affidavits.
4. Requisition any public record or document or copy of such record/document from
any office (subject to section 123 and 124 of Indian Evidence Act)
5. Reviewing its decisions.
6. Dismissing a representation of default or deciding it ex parte.
7. Setting aside any order of any representation for default or any order passed by it
ex parte.
8. Any other matter as may be prescribed by Central Government.
15.10.2 Penalties
If any person contravenes any provision of Act he shall be liable to a penalty up to
thrice the sum involved in such contravention where such amount is quantifiable, or
up to two lakhs rupees where the amount is not quantifiable, and where such
contravention is a continuing one, further penalty which may extend to five thousand
rupees for every day after the first day during which the contravention continues.
Any adjudicating authority adjudging any contravention under sub-section (1) may if
he thinks fit in addition to any penalty which he may impose for such contravention
direct that any currency, security or any other money or property in respect of which
the contravention has taken place shall be confiscated to the Central Government and
further direct that the foreign exchange holdings, if any of the persons committing the
contraventions or any part thereof, shall be brought back into India or shall be retained
outside India in accordance with the directions made in this behalf.
Fill in the blanks:
1. Foreign exchange control was first introduced in September, 1939 under
_______________.
2. The object of ___________ was to conserve foreign exchange and to
prevent its misuse.
3. Violation of __________ is civil offence.
4. _________ controls over capital account transactions.
5. Today rupee is convertible on ___________.
6. India has ___________ trade with Nepal and Bhutan.
15.11 LET US SUM UP

Foreign exchange regulation act was introduced in 1947. This was later replaced with
‘the Foreign Exchange Regulation Act, 1973’(FERA). Which was further replaced by
FEMA which came into effect from 1st June 2000.
The object of FEMA is to consolidate and amend the law relating to foreign exchange 211
with the object of facilitating external trade and payment and for promoting the
orderly development and maintenance of foreign exchange market in India. FEMA
envisages that RBI will have key role in management of foreign exchange. RBI
delegate its power to authorized person to deal in foreign exchange with suitable
guidelines.
FEMA allows Free transactions on current account subject to reasonable restrictions
that may be imposed. It also ease the regulation regarding the capital account
transaction.
Regulation relating to export of goods and services from India are contained in
Foreign Exchange Management (Export of Goods and Services) Regulations 2000.
Under FEMA restriction are only for physical possessions and retention of foreign
currency and not in respect of the foreign currency kept in permissible account with
authorized dealers (banks).
FEMA has eased the regulation over transactions in foreign exchange and security.
Directorate of Enforcement has been formed to ensure that the provision of the Act
are followed.

Prepare a report on the impact of FEMA on the trade in India.
15.13 KEYWORDS
Authorized Person: Authorized Person means an authorized dealer, money changer,
off-shore banking unit or any other person authorized under section 10(1) to deal in
foreign exchange and foreign securities.
Current Account Transaction: Section 2(j) states that current account transaction
means a transaction other than a capital account transaction.

1. Describe the scope of FEMA and discuss the difference between the FERA and
FEMA.
2. Discuss the role of RBI in enforcing FEMA.
3. What is Capital Account Transaction? Discuss the role of FEMA in regulating
Capital Account and Current Account Transaction.
4. Discuss how Directorate of Enforcement, enforces the FEMA.

CYP 1
Section 2(c) states that ‘authorized person’ means an authorized dealer,
money changer, off-shore banking unit or any other person authorized under
section 10(1) to deal in foreign exchange and foreign securities.
CYP 2
1. Some currency are freely convertible i.e. one can exchange these currencies
with any other currency without any restriction. Major among these are:
Dollars (USA), Pound Sterling, Euro, DM, Yen, Franc, Lira, etc. This is
often called ‘hard currency’.
2. Contd…
212 3.
2. India has rupee trade with Nepal and Bhutan i.e. payment in respect of
trade with Nepal and Bhutan is made in Indian Rupees.
CYP 3
1. Defense of India Rules, 2. FERA, 3. FEMA,
4. RBI, 5. Current Account, 6. Rupee

House
Prentice Hall
213
LESSON Consumer Protection
16
CONSUMER PROTECTION
CONTENTS
16.1 Introduction
16.2 Consumer Rights
16.3 Consumer Protection Act, 1986
16.4 Aims and Objective of Act
16.5 Grounds for Appeal for the Jurisdiction to Redressal Forums
16.5.1 Consumer Act and Unfair Trade Practices
16.5.2 Restrictive Trade Practice
16.6 Who can File Complaint [Sections 2(b) and 12]
16.7 Consumer Protection Councils
16.7.1 Central Consumer Protection Council
16.7.2 State Consumer Protection Council
16.8 Consumer Disputes Redressal, Agencies under Consumer Protection
Act, 1986 (CDRA)
16.9 Jurisdiction
16.10 Let us Sum up
16.12 Keywords

After studying this lesson, you should be able to understand:
z Origin of Consumer Rights
z Various agencies of India for consumer treatment
z Process of safeguarding consumer interest
16.1 INTRODUCTION
“The purpose of any business is to create a customer. It is the customer who
determines what a business is. It is the customer and he alone, who, through being
willing to pay for a good or services, convert economic resources into wealth, thing
into goods. What a business thinks it produces is not of first importance – especially
not to the future of the business and to its success. What the customer thinks he is
214 buying – what he consider value, is decisive; it determines what a business is, what it
produce and whether it will prosper”. (Peter F. Drucker)
Business is about creating customers, business is about satisfying customer, business
is about creating value for customer, business is about delighting customer all this are
the buzzword of marketing but for some people business becomes about deceiving
customer, for them business is all about making money by exploiting and deceiving
customer. For them there is law, in India it is Consumer Protection Act, 1986.
16.2 CONSUMER RIGHTS

Every year the 15th march is observed as the “world consumer right day” the
significance of this day is that on this day in 1962, John Fitzerald Kennedy, the then
president of USA declared four consumer rights. Later International Organization of
Consumers Union (IOCU) added three more rights to the list. The government of
India too included these rights in its 20-point programme. These have also been
incorporated in the United Nations Charter of Human Rights. These are:
(1) Right to Safety
(2) Right to be Informed Mentioned by President Kennedy
(3) Right to Choose
(4) Right to be Heard
(5) Right to Redress
Added by International Organization
(6) Right to Healthy Environment of Consumers Union (IOCU)
(7) Right to Consumer Education
In our country too the Government has been adding impetus to this movement through
various schemes and measures. Late Prime Minister Indira Gandhi ascribed 17th point
to her 20 point programme to consumer protection. The first step in the direction was
the setting up for National Consumer Council at Delhi. To promote the formation of
voluntary consumer organizations the state and central Government have also
provided for the dispersal of funds. The Central Government has encouraged the
growth of certain units in various departments, which are concerned with consumer
awareness.
What are the consumer rights incorporated in the UN charter of Human Rights?
…………………………………………………………………………………...
…………………………………………………………………………………...
16.3 CONSUMER PROTECTION ACT, 1986

Consumer
The term consumer is defined in Section 2(d) of the Consumer Protection Act, 1986 in
two parts, one in reference to a consumer who purchases goods and the second in
reference to a person who hires services.
“Consumer” means any person who:

(i) buys any goods for a consideration which has been paid or promised or partly paid
and partly promised, or under system of deferred payment and includes any user
of such goods other than the person who buys such goods for consideration paid
or promised or partly paid or partly promised, or under any system of differed 215
Consumer Protection
payment when such use is made with the approval of such person, but does not
include a person who obtains such goods for resale or for any commercial
purpose*; or
(ii) hires or avails of any services for a consideration which has been paid or promised
or partly paid and partly promised, or under any system of deferred payment and
includes any beneficiary or such services other than the person who hires or avails
of the services for consideration paid or promised, or partly paid and partly
promised, or under any system of deferred payment, when such services are
availed of with the approval of the first mentioned person.
[* For the purpose of sub clause of (i) “commercial purpose” does not include use by a consumer of
goods bought and used by him exclusively for the purpose of earning his livelihood, by means of self-
employment.]
Thus for a person to be treated as a consumer under the Act he may either be
purchaser of goods (or used thereof) or be a hirer of services (or avail or thereof). In
first category there is sale or agreement to sale, while in the latter category there is
either hiring of services of agreement for availing the services. The word ‘hire” means
to acquire the temporary use of a thing or the services of a person in exchange for
payment, to engage the temporary use for a fixed sum to procure the use of services
of, at a price; to grant temporary use for compensation. This is the plain meaning in
reference of which the word has been referred in the Act.
16.4 AIMS AND OBJECTIVE OF ACT

The main objective of the Act (as per preamble to the Act) is to provide for better
protection of interest of consumers. Consumer councils and other authorities are
provided for settling the consumers’ disputes and other matters. The objective of the
Act, 1986 is as follows:
1. The foremost objective of Consumer Protection Bill is to provide for better
protection of the interest of consumer and for that purpose, to make provision for
the establishment of Consumer Protection Councils and other authorities for the
settlement of consumer disputes and for matters connected therewith.
2. Rights of Consumer: The act is intended to protect following rights of the
consumers [Section 6]:
(i) The right to be protected against marketing of goods which are hazardous to
life and property,
(ii) The right to be informed about the quality, quantity, potency, purity, standard
and price of goods to protect the consumer against unfair trade practices,
(iii) The right to be assured, whether possible, access to a variety of goods at
competitive prices,
(iv) The right to be heard and to be assured that consumers’ interest will receive
due consideration at appropriate forums,
(v) The right to seek redressal against unfair trade practices or unscrupulous
exploitation of consumers, and
(vi) The right to consumer education.
3. To provide speedy and simple redressal at minimum expenses to consumer
disputes, a quasi-judicial body is to be set up at the district, state and central
levels.
Various short coming were witnessed in the Act and as such various amendment
were advocated. In Various Amendment Act were introduced in 1993
216 Amendment Act to make it more effective in protecting the customer. The 1993
bill seeks to provide for following:
(a) To enlarge the scope of the Act so as to enable the consumers to file class
action complaints where such consumers have a common interest and to file
complaints relating to restrictive practices adopted by trader;
(b) To enable the consumers who are all self-employed to file complaints before
the redressal agencies where goods bought by them exclusively for earning
their livelihood, suffer from any defect;
(c) To add services relating to housing construction;
(d) To enable filing of class action complaints on behalf of groups of consumer
having the same interest;
(e) To provide for the constitution of selection committees for the selection of
non-judicial members of various redressal agencies;
(f) To increase the monetary jurisdiction of District forum/State Commissions/
National Commission;
(g) To confer additional powers on the redressal agencies by way of awarding
costs to the parties for ordering removal of defects or deficiency form the
services and for empowering the recall of goods likely to endanger the safety
of the public etc.;
(h) To impose punishment on the complainant in cases of frivolous or vexatious
complaints;
(i) To provide for a limitation period of one year for filling complaints.
Define ‘Consumer’ as per the Consumer Protection Act, 1986.
…………………………………………………………………………………..
…………………………………………………………………………………..
16.5 GROUNDS FOR APPEAL FOR THE JURISDICTION

TO REDRESSAL FORUMS
Consumer can appeal for the jurisdiction to the Consumer Redressal forums upon any
of the five grounds as follows:
16.5.1 Consumer Act and Unfair Trade Practices

CP Act recognizes only those practices as unfair, which are covered under ambit of
Section 36-A of the MRTP Act. Specific categories of Unfair Trade Practices
recognized by the Act are:
False Representation
The practice of making any statement, whether oral or written or by verbal
representation which:
1. Falsely suggest that the goods are of a particular standard, quality, grade,
composition, style or model.
2. Falsely suggest that the services are of a particular standards or quality or grade.
3. Falsely suggest any rebuilt, second hand, renovated or reconditioned or old goods
as new goods.
4. Represent that the goods or services has sponsorship, approval, performance, 217
Consumer Protection
characteristics, accessories, uses or benefits which such goods or services so not
have.
5. Represent the seller or the supplier has a sponsorship or approval or affiliation
which such seller or supplier doesn’t have.
6. Make a false or misleading representation concerning the need for or usefulness of
any goods or services.
7. Gives a warranty or guarantee as to the durability, performance or efficacy of the
goods which is not based upon adequate or proper test; the burden of proof will lie
upon him to show that the goods were adequately and properly tested.
8. Makes to the public a representation in a form that looks like a guarantee or
warranty, or a promise to replace, maintain or repair the goods until they achieve a
specified result, and the representation is materially misleading or there is no
reasonable prospect that the guarantee, etc contained in he representation shall be
carried out.
9. Materially misleads the public about the prices at which such goods or services
are available in the market.
10. Gives false or misleading facts disparaging the goods, services or trade of another
person.
False Offer or Bargain Price

The second category is in clause (2). It includes the publication of an advertisement in
a newspaper or otherwise by which goods or services are offered at a bargain price
when in fact this is not the intention or they are not intended to be offered at that price
for a reasonable a reasonable period or reasonable quantity. The bargain price for the
purposes of this provision means the price stated in the advertisement in such manner
as suggests that it is lesser than the ordinary price or a price which the person coming
across the advertisement would believe to be better that the price at which such goods
are ordinarily sold.
Offering of Gifts Prize etc and Conducting Promotional Contests

Clause (3)(a), of section 36-A of MRTP Act and of section 2 (r) CP Act:
Section 36 (3) prohibits, “offering of gifts, prizes, or other items with the intention of
not providing them as offered or creating the impression that something is being given
or offered free of charge, when it is fully or partly covered by the amount charged in
the transaction as a whole. ”
Product Safety Standards

(Clause (4) of section 36-A MRTP Act and of Section 2(r) CP Act, 1986)
The objective of the clause is to protect the consumer from unreasonable risks
associated with Consumer products. There are certain laws which prescribes the
standards regarding the performance, composition, contents, design etc. Which are
necessary to be followed to reduce the risk of injury to the consumer. This clause is
regarding the sale or supply of goods intended to be used or is of a kind likely to be
used by consumers, knowing or having reason to believe that the goods do not comply
with the standards prescribed by competent authority relating to performance,
composition, contents, design, constructions , finishing or packaging as are necessary
to prevent or reduce the risk of injury to the person using the goods.
218 Hoarding or Destruction of Goods Act
[Clause (5) of section 36-A MRTP Act and of section 2(r) CP Act, 1986]
This Act restrict the hoarding or stocking of goods, thus creating artificial scarcity,
and reaping the benefits of price rise. Provision of Essential Commodities Act, 1955
do cover such cases, but only with respect to commodities declared essential under
Act. Clause 5 of section 36-A prohibits the hoarding and destruction of goods, or
refuses to sell the goods or to make them available for sale or to provide any service,
if such hoarding or destruction or refusal raises or tends to raise or is intended to raise,
the cost of those to other similar goods or services.
Box 16.1: UN Guidelines for Consumer Protection, 1986 – General Principles
1. Governments should develop, strengthen or maintain a strong consumer protection policy,

taking into account the guidelines set out below. In so doing, each Government must set its
own priorities for the protection of consumers in accordance with the economic and social
circumstances of the country, and the needs of its population, and bearing in mind the costs
and benefits of proposed measures.
2. The legitimate needs, which the guidelines are intended to meet, are the following:
(a) The protection of consumers from hazards to their health and safety;
(b) The promotion and protection of the economic interests of consumers;
(c) Access of consumers to adequate information to enable them to make informed choices
according to individual wishes and needs;
(d) Consumer Education;
(e) Availability of effective consumer redress;
(f) Freedom to form consumer and other relevant groups or organizations and the
opportunity of such organizations to present their views in decision-making processes
affecting them.
3. Governments should provide or maintain adequate infrastructure to develop, implement and
monitor consumer protection policies. Special care should be taken to ensure that measures for
consumer protection are implemented for the benefit of all sections of the population,
particularly the rural population.
4. All enterprises should obey the relevant laws and regulations of the countries in which they do
business. They should also conform to the appropriate provisions of international standards for
consumer protection to which the competent authorities of the country in question have agreed.
5. The potential positive role of universities and public and private enterprises in research should
be considered when developing consumer protection policies.
Source: Department of International Economic and Social Affairs.
16.5.2 Restrictive Trade Practice

Section 2(1) (nn) of the Act provides that , “restrictive trade practice” means “any
trade practice which requires a consumer to buy, hire or avail of any goods or , as the
case may be , services as a condition precedent for buying, hiring or availing of other
goods or services”.
According to above definition sale or purchase of a product or service id made
conditional on the sale or purchase of one or more other products and services, it
amounts to restrictive trade practice. These type of sale are called ‘tie up sale’. The
effect is that the purchaser of goods is compelled to purchase some goods or services
with the purchase of some goods. As buyer may be compelled to buy gas stove with
the purchase of gas cylinder.
Goods and Defect [Section 2 (1)(i)&(f)]

Goods: The consumer protection act doesn’t define the term ‘Goods’ It says that –
‘Goods’ means goods as defined in he Sale of Goods Act, 1930. Section 2(7) of the
Sale of Goods Act, defines goods as “Goods means every kind of movable property
other than actionable claims and money, and includes stock and shares, growing
crops, grass, and things attached to or forming part of land which are agreed to be 219
Consumer Protection
severed before sale or under the contract of sale”.
Defect: Under section 2(1)(f) of the Act ‘defect’ means: “any fault, imperfection or
shortcoming in quality potency, purity or standard which is required to be maintained
by or under any law, for the time being in force or as is claimed by the trader in any
manner whatsoever in relation to the goods.”
Deficiency in Services [Section 2(1)(o)& (g)]

Service: According to CP Act “Service means service of any description which is
made available to potential users and includes the provision of facilities in connection
with banking, financing, insurance transport, processing, supply of electrical or other
energy, board of lodging or both, housing construction, entertainment, amusement, or
the purveying a news or other information, but does not include the rendering of any
service free of charge or under a contract of personal service.”
Deficiency in Service: According to Act “deficiency means any fault, imperfection,
shortcoming or inadequacy in the quality, nature and manner of performance which is
required to be maintained by or under any law for the time being in force or has been
undertaken to be performed by a person in pursuance of a contract or otherwise in
relation to any service.”
Charging of excessive price over that fixed by law or displayed

A complaint may be made against a trader who has charged a price in excess of the
price:
1. Fixed by or under any law for the time being in force, or
2. Displayed on the goods, or
3. Displayed on any package containing the goods.
Hazardous Goods
The consumer protection act in spite of recognizing the right of consumer to be
protected against marketing of goods, which are hazardous to life and property, did
not provide any preventative mechanism in favor of the consumer. The term
‘Hazardous goods’ has not been defined in the Act. The person can make complain if
he is not informed about the hazardous nature of the goods but the same is not true in
case of the hazardous services.
1. Bargain price
………………………………………………………………………………
………………………………………………………………………………
2. Deficiency in service
………………………………………………………………………………
………………………………………………………………………………
220
Business Environment and Ethics 16.6 WHO CAN FILE COMPLAINT
[SECTIONS 2(B) AND 12]
A complaint in reference to any goods sold or delivered or services rendered may be
filed by any of the following:
(a) By consumer himself to whom such goods have been sold or delivered or such
service rendered.
(b) Any voluntary consumer association registered under Companies Act, 1956 or
under any other law for the time being in force, or
(c) One or more consumers, where there are numerous consumers having the same
interest.
(d) The Central and State Government.
In addition to above following are also considered as a consumer and hence they may
file a complaint:
Beneficiary of Goods/Services, Legal representative of the deceased consumer, Legal
heirs of the deceased consumer, Husband of the Consumer, A Relative of Consumer,
and Insurance Company.
Relief available against complaint [Sections 14 and 22]

If the firm is convinced that the goods were really defective or that the complaint
about the service is proved, the forum shall have to order any of the following things
to be done by the opposite party:
(a) To remove the defect pointed out by the appropriate laboratory for the goods in
question;
(b) To replace the goods with new goods of similar description which shall be free
form any defect;
(c) To return to the complaint the price or as the case may be the charges paid by the
complainant;
(d) To pay such amount as may be awarded by it as compensation to the consumer for
any loss or injury suffered by the consumer due to the negligence of the opposite
party;
(e) To remove the defects or deficiencies in the services in question;
(f) To discontinue the unfair trade practice or the restrictive trade practice or not to
repeat it;
(g) Not to offer the hazardous goods for sale;
(h) To withdraw the hazardous goods from being offered for sale;
(i) To provide for adequate costs to complainant.
16.7 CONSUMER PROTECTION COUNCILS

These councils work towards the promotion and protection of consumers. The
Consumer Council are created to advice and assist the consumers in seeking and
enforcing their rights. We have consumer protection councils both at Center level and
State level.
16.7.1 Central Consumer Protection Council

The Central Government was authorized to establish by notification Central Council
has come to existence w.e.f. 15th April 1987 through the framing of the (Central)
Consumer Protection Rules, (1987).
Composition [Section 2 and rule 3] 221
Consumer Protection
Member of the councils are selected from various areas of consumer interest, who are
when possible, leading members of statewide organizations representing segments of
the consumer public so as to establish a broadly based and representative consumer
council. The council shall consist of following member namely:
(a) the Minister in charge of he Department of Food an Civil supplies in the Central
Government, who shall be its chairman; and
(b) Such members of other official or non-official members representing such interest
as may be prescribed.
The Central Government has provided that the Central Council shall consist of the
following members not exceeding, 150 namely:
1. The Chairman shall be the Minister-in-Charge of the Department of Civil
Supplies;
2. The Vice Chairman shall be the Minister of State (where he is not holding
independent charge) or Deputy Minister I the Department of Civil supplies;
3. The Minister of Food and Civil Supplies or Minister –in –Charge of consumer
Affairs;
4. Eight members of parliament – five from Lok Sabha and three from Rajya Sabha;
5. The commissioner of Scheduled Casts and Tribes;
6. Representatives of the Central Government Department [and] autonomous
organizations concerned with consumer interest- not exceeding twenty;
7. Representatives of the Consumer Organization or consumer- not less than thirty
five;
8. Representative of women- not less than ten;
9. Representatives of farmers, trade industries-not exceeding twenty;
10. Person capable of representing consumer interest not specified above-not
exceeding 15;
11. Secretary in the Department of Civil Supplies shall be the member secretary to the
Central Council.
The term of council is for three years.
A member can resign by submitting his written resignation to the Chairman. The
vacancy would be filled from the category to which the resigning member belonged
and also only for the period for which he would have continued.
16.7.2 State Consumer Protection Council

Under section 7 of the Act, State Government are required to establish their respective
protection councils. Rules as to composition etc. are to be prescribed by the State
Government. The objects of the State Consumer Protection Council are described in
section 7 to be the same as those of the Central Council, namely, the points
enumerated in Section 6.
Working Groups
Central Government may constitute from amongst the members of the Council a
standing Working Group, under Chairmanship of the Member Secretary of the
council. The Standing Working Group shall consist of not exceeding 30 members and
shall meet and when considered necessary by the Central Government.
222
Business Environment and Ethics 16.8 CONSUMER DISPUTES REDRESSAL, AGENCIES
UNDER CONSUMER PROTECTION ACT, 1986
(CDRA)
Under the Act, Consumer Disputes Redressal Agencies have been established. The
Consumer Protection Act provides for a 3-tier approach in resolving consumer
disputes. These three levels are:
1. A consumer Disputes Redressal Forum to be known as the “District forum”. This
is to be established by the State Government in each district of the State by means
of a notification. More than one can also be established in one district.
2. A Consumer Disputes Redressal Commission to be known as the “State
Commission”. This has also to be established by the State Government in the
State by means of notification.
3. A National Consumer Disputes Redressal Commission to be established by
Central Government by means of notification.
The Act thus envisages a hierarchy of three Redressal Forums:
1. District Forum
2. State Forum
3. National Forum.
District Forum (Section 10)

Each District forum should consist of:
(a) A person who is or has been or is qualified to be a district judge, who shall be its
president.
(b) Two other member who shall be person of ability, integrity an standing and have
adequate knowledge or experience of, or have shown capacity in dealing with,
problem relating to economics, law, commerce, accountancy, industry, public
affairs or administration, one of whom shall be a woman.
Appointment Authority: Every appointment under have to be made by the State
Government on the recommendation of a Selection Committee consisting of the
following, namely:
z The President of State Commission – Chairman,
z Secretary, Law Department of the State – Member,
z Secretary in Charge of the Department.
Members of the District Office remain in the office for a term of five years, or up to
the age of 65, which ever is earlier, members are not liable for reappointment Forum
created under the Act are judicial authorities and proceedings before them are legal
proceedings.
State Commission: (Section 16)

State commission consists of a president and two members one of whom is to be a
woman. President is a person who is or has been a judge of a High Court, and the
members are person of ability, integrity and standing and have adequate knowledge or
experience of, or have shown capacity in dealing with, problems relating to
economics, law, commerce, accountancy, industry, public affairs or administration.
Appointing Authority: President of the State Commission is appointed by State
Government after consultation with the chief justice of High Court. Others members
of the commission are made by the State Government on the recommendation of a 223
Consumer Protection
selection committee consisting of the following, namely:
z President of State Commission –Chairman
z Secretary of Law Department of the State – Member
z Secretary in charge of Department dealing with consumer affair in the State-
Member.
Member of the State Commission hold the office for five years or up to the age of 67
year whichever is earlier and he shall not be eligible for re-appointment.
National Commission (Section 20)

The National Commission consists of a president and four other members (one of
whom is to be a woman). The president should be the one who is or has been judge of
the Supreme court, and the members should be the persons of ability, integrity and
standing and have adequate knowledge or experience of , or have shown capacity in
dealing with problems relating to economics, law, commerce, accountancy, industry,
public affairs or administration.
Appointing Authority: The President is appointed by the Central Government after
consultation with the Chief Justice of India;
The other members of the Commission are made by the central Government on the
recommendation of a Selection committee.
The selection committee consists of following:
z A person is a judge of Supreme Court, to be nominated by the Chief Justice of
India – Chairman.
z The Secretary in the Department of Legal Affairs in the Government of India –
Member.
z Secretary of the Department of Legal Affairs in the Government of India –
Member.
Every member of National Commission has to hold office for a term of five years or
up to the age of seventy which ever is earlier and is not eligible for re-appointment.
State whether the following statements are true or false:
1. The purpose of any business is to create a profit only.
2. John Fitzerald Kennedy, the then president of USA declared four consumer
rights.
3. The word ‘hire” means to acquire the temporary use of a thing or the
services of a person in exchange for payment.
4. Cases having a claim exceeding 5 lakhs but up to the limit of Rs. 20 Lakhs
can go to District Commission.
5. Territorial Jurisdiction of the National Commission is whole of India
except the State of Jammu & Kashmir.
224
Business Environment and Ethics 16.9 JURISDICTION
The question has to be considered with reference to the value, place, and nature of the
subject matter:
District Forum
District forum deals the cases where the value of claim is up to Rs. 5 lakhs.
Territorial Jurisdiction: A case is supposed to fall within the purview of District
Council when at the time of the institution of the complaint:
(a) The party against whom the claim is made actually and voluntarily resides or
carries on business or has a branch office or personally works for gain in that area,
or
(b) Where there are more than one opposites party, each such party actually and
voluntarily resides or carries on business or has a branch office or personally
works for gain in that area, or
(c) Where there are more than one opposite party, and any such party actually and
voluntarily resides or carries on business or has a branch office or personally
works for gain in that area; provided the other parties not so residing or working
agrees, or the district Forum gives permission in this regard,
(d) The cause of action, wholly or in part, arises in that area.
State Commission
Cases having a claim exceeding 5 Lakhs but up to the limit of Rs. 20 Lakhs can go to
State Commission.
The Consumer Protection Act does not specifically provide for the territorial
jurisdiction of the State Commission. Broadly these are on similar lines on which the
territorial jurisdiction of District Forum is based.
National Commission
National Commission is the highest level of Consumer Forums; it may entertain all
the matters where the value of claim exceeds Rs. 20 Lakhs. Territorial Jurisdiction of
the National Commission is whole of India except the State of Jammu & Kashmir.
Orders of the Consumer Forum are like orders of the Civil Court and are enforceable
like decree of the court. The decree of a junior Forum is appealable with senior
Forum, and when no appeal is instituted, the order is final. Every order made by the
District Forum, or State Commission, or the National Commission may be enforced
in the same manner as if it were a decree of the court (Section 25).
16.10 LET US SUM UP

Right to Safety, Right to be informed, Right to Choose Right to be Heard, Right to
Redress Right to Healthy Environment, Right to Consumer Education are considered
to be the rights of consumers which should be protected. To safeguard the interest of
consumers the Consumer Protection Act 1986 was enacted.
The foremost objective of Consumer Protection Bill is to provide for better protection
of the interest of consumer and for that purpose, to make provision for the
establishment of Consumer Protection Councils and other authorities for the
settlement of consumer disputes and for matters connected therewith.
Consumer can appeal for the jurisdiction to the Consumer Redressal forums against
Unfair Trade Practices, False Offer or Bargain Price, insufficient product safety
Standards, charging high price, defective goods etc. This act restricts the hoarding or
stocking of goods, thus creating artificial scarcity. If consumer forum is convinced
with the pleas of the consumer then it can give orders to give relief to consumer.
Under the Act, Consumer Disputes Redressal Agencies have been established. The 225
Consumer Protection
Consume Protection Act provides for a 3 tier approach. The Act thus envisages a
hierarchy of three Redressal Forums they are District Forum, State Forum, National
Forum.

Prepare on the present status of consumer movement in India.
16.12 KEYWORDS
Consumerism: This term is related to the modern consumer movement.
IOCU: International Organization of Consumers Union.
Consumer Council: These are created to advice and assist the consumers in seeking
and enforcing their rights.
District forum: Consumer Disputes Redressal Agencies at district level deals the
cases where the value of claim is up to Rs. 5 lakhs.
State Commission: Consumer Disputes Redressal Agencies at State level deals the
cases where the value of claim exceeding 5 Lakhs but up to the limit of Rs. 20 Lakhs.
National Commission: It is the highest level of Consumer Forums, it may entertain all
the matters where the value of claim exceeds Rs. 20 Lakhs.

1. Define consumer. Discuss the role of consumerism in consumer protection.
2. Discuss the factors responsible for evoking consumer protection movement in
India.
3. Briefly describe the Consumer Protection Act, 1986.
4. Discuss the role of Consumer Protection Council in consumer protection.
5. Briefly describe the Consumer Disputes Redressal Agencies established under the
Consumer Protection Act 1986

CYP 1
(a) Right to Safety
(b) Right to be informed
(c) Right to Choose
(d) Right to be Heard
(e) Right to Redress
(f) Right to Healthy Environment
(g) Right to Consumer Education
CYP 2
For a person to be treated as a consumer under the Act he may either be
purchaser of goods (or used thereof) or be a hirer of services (or avail or
thereof). In first category there is sale or agreement to sale, while in the latter
category there is either hiring of services of agreement for availing the services.
Contd…
226
CYP 3
1. The bargain price for the purposes of this provision means the price stated
in the advertisement in such manner as suggests that it is lesser than the
ordinary price or a price which the person coming across the advertisement
would believe to be better that the price at which such goods are ordinarily
sold.
2. Deficiency means any fault, imperfection, shortcoming or inadequacy in
the quality, nature and manner of performance which is required to be
maintained by or under any law for the time being in force or has been
undertaken to be performed by a person in pursuance of a contract or
otherwise in relation to any service.
CYP 4
1. False , 2. True, 3. True, 4. False, 5. True

House
Prentice Hall
227
LESSON Intellectual Property
Rights (Patents)
17
INTELLECTUAL PROPERTY RIGHTS (PATENTS)
CONTENTS
17.1 Introduction
17.2 Patent
17.2.1 What can be Patented?
17.2.2 Type of Patent
17.3 New Patent Law [Patent (Amendment) Ordinance, 2005]
17.4 Important Public Interest Provisions in the Patent Law
17.5 The Salient Features of the Third Amendment of the Patent Law
17.6 Let us Sum up
17.8 Keywords

z Explain the concept of copyrights and patents
z Understand various types of Patents
z Know the difference between product and process patents
z Know how interest of pubic is protected in patents
17.1 INTRODUCTION
National patent laws have a history of over 500 years beginning with the Venetian
Patent Law in 1474. The first international agreement, the Paris Convention was
agreed upon in 1883. The Paris Convention gave Member States considerable
flexibility in enacting their national legislation on Intellectual Property Rights (IPRs).
17.2 PATENT
In India intellectual property rights fall under item 49 of list I – Union List – of
Seventh Schedule to Constitution. The items read – Patents, inventions and designs;
copyright; trademark; and merchandise marks, Thus patent is a Union subject. Patent
protection was first introduced in 18th century. Formal patent protection in Indian was
introduced by Patent Act, 1911.
A patent is a grant of property right by the government to an inventor. Patent are
exclusive property rights that can be sold, transferred, willed licensed, or used as
collateral much like other valuable assets. Patent law stipulates broad categories of
228 what can and cannot be patented, and in the words of the statute, any person who
“invents or discover any new and useful process, machine, manufacture or
composition or matter, or any new and useful improvement thereof, may obtain a
patent.”
17.2.1 What can be Patented?

Patentable subject matter can be broadly classified into four broad categories:
1. Process: The word process as used in patents refers to new methods of
manufacturing or new technological procedures that can be validated as unique.
As a new method of gene splitting can be patented, or a new patent of
manufacturing a drug can be patented.
2. Machine: The word machine in patent law means that the patent application is for
a specific physical item. It has to be new and useful, not merely a work of art or
some curiosity.
3. Manufacture: The word manufacture refers to physical items that have been
fabricated through new combination of materials or technical applications. In
most instances the application must explain how the product is made, including
material, manufacturing processes, and additional modification that the inventor
wants to include for protection under the patent grant.
4. Composition of Matter: The law also permits patenting composition of matter.
This category is related to compounds such as synthetic material, medicines,
cosmetics, fertilizing agents, and biogenetic catalyst. Simply having a mixture of
ingredients, however, does not constitute a patentable composition.
17.2.2 Type of Patent

The patent law provides three categories of Patents: utility patents, design patents and
plant patents.
1. Utility Patents: A utility patent is granted for a new product process machine
methods of manufacturing, and composition of matter. This category excludes
most botanical creations related to plant and agriculture use.
2. Design Patents: Design patents are granted for any new or original ornamental
design for an article of manufacture. A design patents protect the appearance of
the article not the article itself. An inventor can easily register both a utility patent
and a design patent.
Design as per Design Act: Section 2(5) of Design Act defines that ‘design’
means only the features of shape, configuration, pattern or ornament applied to
any article by any industrial process or means, whether manual, mechanical or
chemical, separate or combined, which in the finished article appeal to and are
judged solely by the eye; but does not include any mode or principle of
construction of anything which is in substance a mere mechanical device, and
does not include any trademark defined in section 2(1)(v) of Trade and
Merchandise Marks Act or property mark as defined in section 479 of Indian
Penal Code.
The highlights of definition are:
a) Design Deals with external experience only.
b) It relates to features of shape, configuration, pattern or ornamental decoration
to any article.
c) Application of shape, configuration etc. to an article should be by an
industrial process or means.
d) In the finished article, it should appeal to and judged solely by the eye. 229
Intellectual Property
e) It does not include any mode or principle of construction. Rights (Patents)
f) It does not include any trademark.

3. Plant Patent: In botanical term, any new variety of plant that has been asexually
reproduced can be granted a plant patent. The new plant must not exist in nature
or in an uncultivated state. Therefore new plants, mutants, hybrids, and seedlings
may be patented, provided the inventor can satisfy the Patent Office that the new
plant did not evolve from nature.
Besides Patent IPR (Intellectual Property Rights) includes following things:
1. Trademarks: Trademarks “includes any word, name, symbol, or distinguishing
device, or any combination thereof adopted and used by a manufacturer or
merchant to identify his goods as distinguish them from those manufactured or
sold by others.” Trademarks can be name used in commerce, such as Coke,
clearly trademarked by Coca-Cola Corporation. A trademark can be a symbol,
such as Apple Computer Corporation’s unusual apple with a bite in he side.
Distinguishing device can be artistic renderings of corporate products , such as the
wild mustang horse for the Ford automobile, the intricate shield and insignia
designed NFL football team.
Besides trademarks organization can also get Service Marks. Service Marks are
unique characters or slogans, often quite similar to trademarks, that provide
protection for brand images and creative properties that enhances a company’s
marketability. AS Onida has a familiar service mark “neighbor’s envy owner’s
pride”.
Trademark law is also applicable on Internet as it is in the physical world. This
gives the protection to “domain name” in the same manner as to trademark.
2. Copyrights: Copyrights are similar to patents in establishing ownership and
protection for creative endeavor, but they pertain to intellectual property. A
copyright extends protection to authors, composers, and artists, and it relates to
the form of expression rather than the subject matter. This distinguishing is
important because most intellectual property has proprietary information in terms
of subject matter, and if that property cannot be patented, the copyright only
prevents duplicating and using original matter. The probation does not prevents
another person from using the “subject matter” and them rewriting the material.
For example the concept of an electronic spreadsheet is not protected; however
the software program devised to create the spreadsheet (form of expressive) is
protected by copyright.
Virtual matters under copyright protection are photographs, paintings, sculptures,
poems, articles, stories, books, music, sound recordings, motion pictures,
audiovisual works, periodicals, computer punch cards, microfilms, pantomimes,
an choreographic works. These can be accurately differentiated from similar
works. Copyright law extends to literary and dramatic efforts, so that performance
and recording rights also can be protected. In some instances new copyright can
be obtained for old material, if the new use represents a new form of expression.
Works in which copyright subsist-
Section 13(1) of Copyright Act provides that copyright subsist in (a) original
literary, dramatic, musical and artistic works (b) cinematograph films and
(c) sound recording.
3. Layout Design for Integrated Circuit: The scope of layout design for integrated
circuit is to protect the chip and also the articles incorporated on it. An innocent
230 infringer is free from liability, but once he has received the notice of infringement
he is liable to pay a reasonable royalty.
4. Trade Secrets and Undisclosed Information: This provide protection to
persons/institutions on information which is lawfully under their control from
being disclosed to, acquired by or used by others without their consent in a
manner contrary to commercial practices so long as the information is secret and
has commercial value because it is secret. It is expected that person/institution has
taken reasonable steps to keep information secret.
5. Geographical Indicators: This tool gives protection to goods that can be
identified as originating or manufactured in he territory of a country, or a region
or locality in that territory where a given quality, reputation or other
characteristics of such goods is essentially attributable to its geographical origin.
6. Anti-Competitive Practices in Contractual Licenses: It is accepted that some
licensing practices related to IPR, which restrains competition may have an
adverse impact on trade and impede transfer for technology.
Coca Cola has taken five IPRs for its product as follows:
Trademark: For its Logo
Design Patent: For the design of its bottle
Copyright: For its slogan “Thanda matlab Coco-Cola”
Secret Patent: For its formula
1. Trademarks
……………………………………………………………………………….
……………………………………………………………………………….
2. Copyrights
……………………………………………………………………………….
……………………………………………………………………………….
17.3 NEW PATENT LAW [PATENT (AMENDMENT)

ORDINANCE, 2005]
In January 2005 with the amendment of Indian Patent Act, 1970, through a midnight
ordinance on December 31, 2004, the India entered in a new a phase of Product
Patent.
Some of the important provisions and their legal implications in respect of product
patents are as follows:
1. Patentable Subject Matter: According to new ordinance whatever falls within the
purview of the definition of ‘invention’ will be patentable in India. The
amendment to the Act in 2002 defines invention as “A new product or process
involving inventive step and capable of industrial application” Thus if product
satisfies the tests of patentability, viz., novelty, inventive step(non-obviousness)
and industrial application (utility) it can be patented in India.
The second requirement of a patentable invention, that of novelty, requires that
the invention was not known to the public before the patent application was
lodged. The novelty of an invention is determined by the patent examiner 231
conducting a search of literature in the relevant field, to determine what the state Rights (Patents)
of the art was at the date of patent application being filed.
The novelty requirement also necessitates that the invention has not been
disclosed publicly by the person applying for the patent. An example of the
application of that rule is that the application must not have offered the product
for sale before applying for a patent. The requirement of novelty is not actually as
strict a limitation as one might suppose.
There is certain exception to it. As under section 3(j) “Plants and animals in whole
or any part thereof (other than micro organism) including seeds, varieties
and species and essentially biological process for the production of plants and
animals – cannot be patented” This is in line with Article 27.3 of TRIPS. Under
section 3(d) of the Act, the mere discovery of any new property or new use for a
known substance or new use for a known substance is not patentable.
a) Farm Sector: The new amendment has not categorically excluded seeds
developed by novel means. The third amendment has extended the product
patent regime, which includes seeds developed by novel means, particularly
the transgenic seeds.
(b) Software: Software would now be patentable if embedded with hardware.
Currently the intellectual property rights (IPRs) protection with regard to
software are limited to copyrights. This means that software embedded in
hardware application like mobile phones, TVs and computers are patentable.
c) Micro-Organism and Microbiological Process: The TRIPs Agreement has
not defined micro-organism and microbiological process. The question is
whether the micro organism, existing freely, are patentable or their mere
isolation in pure form are patentable or human intervention, in establishing a
level of novelty in the discovered micro – organism, I needed for patenting.
The next question is whether a product produced by a micro-organism, which
is known can be patentable or the process is patentable. In absence of clear
definition of micro-organism and micro biological process in the TRIPs
Agreement.
In the absence of clarity in the third amendment, claims in gene patent
applications may pertain to genes or partial DNA sequence, proteins encoded
by these genes, vectors used for transfer of genes, genetically modified micro-
organism, cells, plants and animals and the process of developing a transgenic
product. All these may lead to multiple rights, owned by multiple actors,
called patient thickets over a final product. Hence there are problem of not
only patent thickets but also of royalty staking and reach through claims.
d) “Mere” new use: Earlier ‘new use for a known substance’ could not be
patented. However new Ordinance provides that “mere new use for a known
substance ” cannot be patented. The insertion of a single word ‘mere’ would
open the floodgates for pharmaceutical product patents. The word ‘mere’
restrict the scope of non-patentable subject matter and widens the scope of
patentability. The effect is that new pharmaceuticals use of known substance
itself is known and comprises part of the state of the art would be patentable.
Infringement
A person who infringes a patent by making or using a patented invention
without permission can be sued by the patent holder for damages. Perhaps the
most distinctive feature of patents in comparison to copyright law, is that it is
possible to infringe a patent unintentionally, and that this makes no difference
to liability for damages.
232 2. Mail Box Application: The Mail box application for product patents that were
filed from January 1, 1995 until December 31, 2004 will now be examined for
grant of patents rights. Nearly 12,000 patents applications, majority of them from
multinational Parma companies, would be opened by the Government on 1st
January as the Government has complied it with WTO obligations.
(The Economic Times, 28th December 2004).
Only upon the actual grant of patent will the patentee be able to prevent others
from exploiting his invention. The grant of patent will typically take anywhere
between 1 and 3 years for now depending on the backlog of work in various
branches of the patent office. The product which are patented abroad, but for
which no corresponding patent applications were filled in India, will continue to
be open for exploitation in India. Patent term of 20 years will be calculated from
the date of the application and not from the day the patent was granted.
Due to the existence of bolar provision in Section 107A of the Act, organization
will be able to make , use sell or import the patented product for uses related to
development and submission under Indian or foreign law.
3. Exclusive Marketing Right (EMR): Product patent was also applicable to those
applications, which that were made since 1995 using the “mailbox” provisions.
The “mailbox” provision were introduced in the Patent Act through the first
amendment undertaken in 1999 in order to fulfill the condition imposed in Article
of the TRIPs Agreement (The so called Transitional Arrangement) The
“Transitional Arrangement” required India to introduce two provisions in its
Patent Act. Article 70.8 of the TRIPs Agreement required India to provide “a
means” by which product patent application can be filed from 1 January 1995. If
the products figuring in these applications were granted a patent in any of the
WTO member countries and the product were granted marketing approvals in any
of the WTO member countries, then according to Article 70.9, five years
Exclusive Marketing Rights (EMR) have to be granted by India before the patent
on the product was either granted or rejected in India.
According to new ordinance holders of EMRs will continue to enjoy their EMR
till the patent is granted or rejected.
4. Compulsory License: Article 31 of TRIPs provide the provision of Compulsory
license which means a situation where a government allows an agent to produce a
patented product without the consent of the original patent owner. If attempts to
obtain right to produce a patented product from patentee fails and if a compulsory
license is issued, then adequate remuneration will paid to the original rights
holder. These requirements are waived or diluted when these are issued for public
and non commercial use or for other circumstances of extreme urgency.
Chapter XVI of the Act deals with the provision of compulsory license in India.
Section 92A allows the grant of compulsory license to manufacture and export a
patented product to any country having insufficient or no manufacturing capacity
in the pharmaceutical sector to address public health problems, provided a
compulsory license has been granted in that country.
Provision of compulsory license can be implemented after payment of adequate
remuneration to the patent holder.
5. Pre-versus Post Grant Opposition: Before the introduction of new ordinance
India followed a system of Pre Grant Opposition. Erstwhile section 25 of the
Patent Act provided for initiation of proceedings for opposition the grant of a
patent which could be launched within four months from the date of
advertisement of the acceptance of complete specification. The Grant of patents
could be opposed on the grounds included:
i) the invention for which the patent has been claimed was publicly known or 233
publicly used in India, Rights (Patents)
ii) the invention is obvious and does not involve an inventive step,
iii) the invention is not patentable under the Patent Act 1970,
iv) the complete specification wrongly mentions the source or geographical
origin of biological material used in the invention, and
v) the invention on which the patents is claimed forms part of the traditional
knowledge whether in India or elsewhere.
The 2003 Amendment introduces two sets of changes to the condition relating to
opposition to the grant of patents. First the pre- grant opposition of the 1970 Act is
proposed to be changed to a pre-grant representation and secondly, the pre grant
opposition has been replaced by post-grant opposition. Post Grant opposition, which
has been provided in Section 25(3) of the Patents Act, 1970 allows any interested
person to oppose the grant of a patent before the expiry of one year from the date of
grant of patent. But while change in the system of opposition has been included the
ground for opposition has been left unchanged. The grounds for pre grant opposition
in the 1970 Act have been retained in the post grant opposition of 2003 Amendment
and two sub-clauses (j) and (k) have been added.
17.4 IMPORTANT PUBLIC INTEREST PROVISIONS IN

THE PATENT LAW
Union Minister of Commerce and Industry, Shri Kamal Nath has said that the Patent
(third) amendment has taken care of public interest, particularly public health and
nutrition. He said:
“The law effectively balances and celebrates intellectual property protection with
public health concerns and national security. By participating in the international
system of intellectual property protection, India unlocks for itself vast opportunities in
both export as well as its potential to become a global hub in the area of R&D based
clinical research outsourcing, particularly in the area of biotechnology”.
The important public interest provision in the Patent Law announced by Shri Kamal
Nath are:
a) Conditional grant of Patent (Section 47): This empowers the Government to
import, make or use any patent for its own purpose. For drugs, it also empowers
import for public health distribution.
b) Revocation of Patent in Public interest (section 66): This empowers the
Government to revoke a patent where it is found to be mischievous to the state or
prejudicial to the public.
c) Grant of Compulsory License (Section 82 to 94): Chapter XVI deals with the
general principles and circumstances for grant of compulsory licenses in order to
protect public interest particularly public health and nutrition. These provision
check the abuse of patent rights. They can be invoked if the reasonable
requirement of the public with respect to patented inventions have not been
satisfied, and the patented inventions is not available for public at a reasonably
affordable price, and if the patented inventions is not worked in the territory of
India.
d) Acquisition of Invention and Patent for Public purpose (Section 102): This
empowers the Government to acquire a patent to meet national requirements.
234 e) Bolar Provision [Section 107 (A) (a)]: This facilitates production and marketing
of patented products immediately after expiry of term of patent protection by
permitting preparatory action by non-patentees during life of patent.
f) Parallel import [Section 107 (A)(b)]: This provides for import so that patented
product can become available at the lowest international price. (PIB Press
Release, 27th December 2004).

Fill in the blanks:
1. The first international agreement, the ________ Convention was agreed
upon in 1883.
2. Patent is a _________ subject.
3. Formal patent protection in Indian was introduced by Patent Act, ________
4. Since 1970 till the new amendment India has followed a _____________
patent.
5. The word _________________ refers to physical items that have been
fabricated through new combination of materials or technical applications.
6. Besides trademarks organization can also get ___________ Mark.
17.5 THE SALIENT FEATURES OF THE THIRD

AMENDMENT OF THE PATENT LAW
z Extension of product patent protection to all fields of technology (i.e. drugs, food,
and chemicals).
z Deletion of the provisions relating to Exclusive Marketing Rights (EMR) and
introduction of a transitional provision for safeguarding EMRs already granted.
z Introduction of provision for enabling grant of compulsory license for export of
medicines to countries which have insufficient or no manufacturing capacity, to
meet emerging public health situations (in accordance with Doha Declaration on
TRIPS and Public Health).
z Modification in the provision relating to opposition procedures with a view to
streamlining the system by having both pre – grant and post grant opposition in
the Patent office.
z Addition to a new provision to circumscribe rights in respect of mailbox
applications so that patent rights in respect of the mailbox shall be available only
from the date of grant of patent, and not retrospectively form the date of
publication.
z Strengthening the provisions relating to national security to guard against
patenting abroad of dual use technologies.
z Clarification of the provision relating to patenting of software related to patenting
of software related inventions when they have technical application to industry or
are in combination with hardware.
z Rationalization of provision relating to time-lines with a view to introducing
flexibility and reducing the processing time for patent application and simplifying
and rationalizing procedures.
z Government has the power to acquire a patent for national requirement.
z Polymorphs new form of older drugs are patentable.
z Parallel imports are allowed. 235
z Local production is mandatory. Rights (Patents)
z Earlier provision of ‘new use’ criteria is modified to ‘mere new use’.

z Transfer of cases from High Courts to the Appellate Board (S.117G.).
17.6 LET US SUM UP

In India intellectual property rights fall under item 49 of list I – Union List – of
seventh Schedule to Constitution. Formal patent protection in Indian was introduced
by Patent Act, 1911.
A patent is a grant of property right by the government to an inventor. Besides Patent
IPR (Intellectual Property Rights) includes following things: - Trademarks, Copyright,
Layout Design for Integrated Circuit, Trade Secrets and Undisclosed Information,
Geographical Indicators, Anti Competitive Practices in Contractual Licenses.
On December 31, 2004, the India entered in a new phase a phase of Product Patent.
According to new ordinance whatever falls within the purview of the definition of
‘invention’ will be patentable in India. To secure the interest of public the provisions
in the Patent Law are Conditional grant of Patent, Revocation of Patent in Public
interest, Grant of Compulsory License, Bolar Provision, Acquisition of Invention and
Patent for Public purpose, Parallel import etc.

1. Prepare a report on impact of New Patent Law on Indian Pharmaceutical Industry.
2. Prepare a project on strategies of medium level pharma companies like Matrix
Lab, Divi Lab in new patent regime.
17.8 KEYWORDS
Utility Patents: A utility patent is granted for a new product process machine methods
of manufacturing, and composition of matter.
Design Patents: Design patents are granted for any new or original ornamental design
for an article of manufacture.
Plant Patent: In botanical term, any new variety of plant that has been asexually
reproduced can be granted a plant patent.
Trademarks: Trademarks “includes any word, name, symbol, or distinguishing
device, or any combination thereof adopted and used by a manufacturer or merchant
to identify his goods as distinguish them from those manufactured or sold by others.
Copyrights: Copyrights are similar to patents in establishing ownership and protection
for creative endeavor, but they pertain to intellectual property.
Bolar Provision: This facilitates production and marketing of patented products
immediately after expiry of term of patent protection by permitting preparatory action
by non-patentees during life of patent.
Incrementally Modified Drugs (Evergreening): Incrementally Modified Drugs
(IMDs), includes new formulations, new combinations of active ingredients or new
salts or esters of approved compound.
Generic Drug: Once the patent on a drug expires it is termed as generic.
236 Compulsory License: Article 31 of TRIPs provide the provision of Compulsory
license which means a situation where a government allows an agent to produce a
patented product without the consent of the original patent owner.

1. What is IPR describe the various component/type of IPR.
2. Describe in brief new patent law.
3. Discuss the various measures, which were in New Patent Law to protect consumer
interest.
4. Discuss the various strategies which the Indian Pharmaceutical Industries can
follow to change the New Patent Law into a Opportunity from a threat.
5. Write short notes on:
a) Pre-versus Post Grant Opposition,
b) Third amendment of the Patent Law,
c) Compulsory License,
d) Exclusive Marketing Right (EMR),
e) Mail Box Application.

CYP 1
1. Trademarks “includes any word, name, symbol, or distinguishing device, or

any combination thereof adopted and used by a manufacturer or merchant
to identify his goods as distinguish them from those manufactured or sold
by others”.
2. Copyrights are similar to patents in establishing ownership and protection

for creative endeavor, but they pertain to intellectual property. A copyright
extends protection to authors, composers, and artists, and it relates to the
form of expression rather than the subject matter.
CYP 2
1. Paris, 2. Union, 3. 1911,
4. Process, 5. Manufacture, 6. Service

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LESSON Stock Exchange and SEBI
18
STOCK EXCHANGE AND SEBI
CONTENTS
18.1 Introduction
18.2 Functions of SEBI
18.3 Department at SEBI
18.4 Powers and Scope of SEBI
18.5 Certain Guidelines and Reforms introduced by SEBI
18.5.1 Primary Securities Market
18.5.2 Secondary Market and Various Intermediaries
18.5.3 Investment Protection Measures
18.5.4 Classification of Complaints
18.6 Insider Training
18.7 Underwriting
18.8 Let us Sum up
18.10 Keywords

z Explain the functions of Securities and Exchange Board of India
z Learn the powers of SEBI
z Know the guidelines issued by SEBI
18.1 INTRODUCTION
According to CICA Act Companies had to take prior approval for any new issue, and
for pricing or public and right issue. It gives powers to GOI to regulate the timing of
new issues by private sector companies, the composition of securities to be issued,
interest rates which can be offered on debentures and preference shares, the timing
and frequency of bonus issues, the amount of prior allotment to promoters, floatation
costs, and the premium charged on securities. Now this Act has been repealed by
Capital Issues (Control) Repeal Act, 1992.
A major development in the Indian Stock market took place in 1988 when Securities
and Exchange Board of India (SEBI) was established through an administrative order,
238 on the lines of the Securities and Investment Board of the U.K. But it became really
powerful organization in 1992 when CICA was repealed and the office of Controller
of Capital Issues was abolished and The Securities and Exchange Board Act of 1992,
provides for the establishment of a Board to protect the interest of investors and to
promote the development and regulation of securities market. The Board of SEBI
consist of six members comprising the chairman, two members from the amongst the
official of the ministries of the central government dealing with fiancé and law, two
members who are professional and have expertise or special knowledge relating to
securities market, and one member for the RBI.
18.2 FUNCTIONS OF SEBI

SEBI is entrusted with following function (objective):
1. regulating the business in stock exchanged and any other securities market;
2. registering the regulating the working of stock brokers, sub-brokers, share transfer
agents, bankers to an issue, merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediaries who may be associated with
securities market in any manner;
3. Registering and regulating the working of collective investment schemes
including mutual funds;
4. Promoting and regulating self-regulatory organization;
5. Prohibiting fraudulent and unfair trade practices relating to securities market;
6. Promoting investors’ education and training of intermediaries of securities
market;
7. Prohibiting insider trading in securities;
8. Regulating substantial acquisition of shares and take-over and mergers of
companies;
9. Calling for information from, undertaking inspection, conducting inquiries and
audits of the stock exchange and intermediaries and self- regulatory organization
in the securities market;
10. Levying fees or other changes for carrying out the above purposes.
18.3 DEPARTMENT AT SEBI

SEBI has five operational departments, besides it, it has two more department the
legal department and the investigation department. The department and there scope is
as follows:
The Primary Market Policy, Intermediaries, Self-Regulatory Organizations (SROs),
and Investor grievances and Guidance Department: It looks after all policy matters
and regulatory issues in respect of primary market, registration, merchant bankers,
portfolio management services, investment advisers, debentures trustees, underwriters,
SROs and investor grievances, guidance, education and association.
The Issue Management and Intermediaries Department: It is responsible for vetting
of all prospectuses and letters of offer for public and right issues, for coordinating
with the primary market policy, for registration, regulation and monitoring of issue-
related intermediaries.
The Secondary Market Policy, Operation and Exchange Administration, New
Investment Products and Insider Trading Department: It is responsible for all policy
and regulatory issues of secondary market and new investment products, registration
and monitoring of members of stock exchanges, administration of some of the stock
exchanges, market surveillance and monitoring of price movement s and insider 239
Stock Exchange and SEBI
trading, and EDP and SEBIs data base.
The Secondary Market Exchange Administration, Inspection and Non-member
Intermediaries Department: It looks after the smaller stock exchange of Guwahati,
Indore, Mangalore etc. It also responsible foe inspection of all stock exchanges,
registration, regulation and monitoring or non-member intermediaries such as
sub-brokers.
Institutional Investment, Mergers and Acquisition, Research and Publication, and
International Relations and IOSCO Department: It looks after policy, registration
and monitoring of Foreign Institutional Investors (FIIs), domestic mutual funds,
merger and substantial acquisition of shares, and IOSCO (International Organization
of Securities Commissions) membership, and research, publication and Annual Report
of SEBI.
Legal Department: This department looks after all legal matters under the supervision
of the General Counsel.
Investigation Department: This department carries out inspection and investigation
under the supervision of the Chief of Investigation.
SEBI has its regional offices at Calcutta, Chennai, and Delhi. SEBI has also formed
two non statutory advisory committees, the Primary Market Advisory Committee and
Secondary Market Advisory committee with the members from market player,
recognized investors associates and other eminent persons. SEBI is also a member of
International Organization of Securities Commissions (IOSCO).
18.4 POWERS AND SCOPE OF SEBI

Functional area of SEBI is very wide it is the rule maker, it is custodian, it is watch
dog of the security market. In brief it has the power to regulate: (i) depositors and
participants, (ii) custodians, (iii) debentures trustees and trust deeds, (iv) FIIs
(v) inside traders, (vi) mutual fund, (vii) portfolio manager, (viii) investment advisers,
(ix) merchant bankers, (x) registrars to issue and share transfer agents, (xi) stock
brokers and sub-brokers, (xii) underwriters, (xiii) venture capital funds, and
(xiv) bankers to issue.
The SEBI can issue guidelines in respect of following:
z Information disclosure, operational transparency, and investor protection
z Development of financial institutions
z Priding of issues
z Bonus issues
z Preferential Issues
z Financial Instruments
z Firm allotment and transfer of shares among promoters.
SEBI is empowered to register any agency or intermediary who may be associated
with the securities market, except under and in accordance with the conditions of a
certificate of registration issued by the SEBI.
After the suspension of CICA (Capital Issues Control Act, 1947), SEBI is now
authorized to govern all he matter related to issue of capital. SCRA also authorizes the
SEBI to conduct inquiries into the working of the stock exchange, they are required to
submit their annual reports to the SEBI and requires the approval of SEBI for
amending their rules and bye laws; SEBI can direct them to amend their bye-laws and
240 rules including reconstitution of their governing boards/councils; and it is empowered
to license security dealers operating outside their jurisdiction.
SEBI has been empowered to demand explanation, to summon the attendance and call
for documents from all categories of market intermediaries in order to enable it to
investigate irregularities, impose penalties, and initiate prosecution. The SEBI is also
empowered to notify its regulations and file complaints in courts without the prior
approval of the GOI.
What are the regulatory powers of SEBI?
……………………………………………………………………………………
……………………………………………………………………………………
18.5 CERTAIN GUIDELINES AND REFORMS

INTRODUCED BY SEBI
18.5.1 Primary Securities Market
1. The issues of capital no longer requires any consent from any authority for
making issue and for pricing it.
2. SEBI raised the standards of disclosure in public issues and enhanced the
transparency.
3. The offer document is now made public even at the draft stage.
4. Companies without track record making first issue can price the issue at par only.
At the first issue companies are free to price its securities, provided it has shown
net profits in the immediately preceding 3 years, subject to its fulfilling the
existing disclosure requirements.
5. Companies with 3 years track record or companies without track record, but
promoted by companies with five years track record are free to price the issues.
They can list the shares on a stock exchange.
6. Not less than 20% of equity (issued) should be offered to public.
7. For issues above 100 crore, book building requirement has been introduced
8. The pricing of preferential allotment scheme, a minimum of 50% of the net offer
to the public is to be reserved for individual investors applying for securities not
exceeding 1000 securities, and the remaining part can be allotted to applications
for more than 1000 securities.
9. Draft prospectus will be vetted by the SEBI to ensure adequacy of disclosure.
10. Bankers to an issue and portfolio managers have to be registered with the SEBI.
11. Existing listed companies are allowed to raise fresh capital by freely pricing their
further issues. However price should be determined in consultation with the lead
managers to the issues. The high and low prices for the last two years should be
indicated in the offer document. The draft proposal will be vetted by SEBI to
ensure adequacy of disclosure.
18.5.2 Secondary Market and Various Intermediaries

1. The governing body and various committees of Stock Exchanges (SEs) have been
recognized, restructured and broad based.
2. Inspection of all 22 SEs has been carried out to determine, inter alia, the extent of 241
Stock Exchange and SEBI
compliance with the directives of the SEBI.
3. Corporate membership of SE is now allowed, encouraged, and preferred. THE
Articles of Association of SEs have been amended so as to increase their
membership.
4. All the SEs have been asked to established wither a clearing house or a clearing
corporation.
5. The BSE have been asked to reduce trading period or settlement cycle from 14 to
7 days for B group’s shares.
6. All the recommendations of the Dave committees for improving the working of
the OTCEI have been accepted.
7. In accordance with the recommendations of G.S. Patel Committee, BSE has been
allowed to introduce a revised carry forward system (CFS) of trading. Other SEs
can introduce forward trading only with the prior permission of the SEBI.
8. Brokers are required to segregate the client and its own account.
9. The capital adequacy norms of 3% for individual brokers and 6% for corporate
brokers introduced.
10. Both the Brokers and the Sub brokers have been brought within the regulatory
fold for the first time now; and the concept of the dual registration of stock
brokers with the SEBI and the SEs has been introduced.
11. Panel action can now be taken directly by the SEBI against any member of a stock
exchange for violation of any provision of the SEBI Act.
12. It has been mandatory for stockbrokers to disclose the transaction price and
brokerage separately in the contract notes issued by them to their clients.
13. Compulsory audit of the brokers’ books and filling of the audit reports with the
SEBI has now been made mandatory.
14. Insider trading has been prohibited and such trading has been made a criminal
offence punishable in accordance with the provision of SEBI.
18.5.3 Investment Protection Measures

The SEBI has introduced an automated complaints handling system to deal with
investor complaints. To create an SEBI issues fortnightly press releases, disclosing
names to the companies against whom maximum number of complaints have been
received. A representative of SEBI now supervises the allotment of share process.
Besides many other measures it also issues advertisement frequently to make investor
aware of various issues to the securities market and of their rights and remedies.
18.5.4 Classification of Complaints

The complaints received by the SEBI are categorized in five types:
Type I: Non-receipts of refund orders/allotment letters/ stock investment
Type II: Non-receipt of dividend
Type III: Non-receipt of share certificates/bonus shares.
Non IV: Non-receipt of debentures certificate/interest on debentures/redemption
amount of debentures/interest on delayed payment of interest.
Type V: Non-receipt of annual reports, right issue forms/interest on delayed receipt of
refund orders/dividends.
242
Business Environment and Ethics 18.6 INSIDER TRAINING
Insider training in securities is prohibited by SEBI under Insider Trading Regulations
1992. Insider training can be defined as the sale or purchase of securities by persons
who possess price sensitive information about the company, on account of their
fiduciary capacity involving confidence or trust. SEBI Insider Regulations, 1992
defines he insider as any person who is or was connected with company and who is
reasonably expected to have access by virtue of such connection to unpublished price
sensitive information with respect to the securities of the company, or who has
received or has had access to such unpublished price sensitive information. Broadly
insider can be of two type:
(a) Primary Insider e.g. Directors, stock exchanges, merchant bankers, registrars,
brokers of the company, top executives, auditors, banks etc. (b) Secondary insider e.g.
dealers, agents, other employees, etc, (c) others having access to price sensitive
information due to their proximity with the company.
The SEBI Insider Regulations, 1992 prohibits the insider trading and lays down that
no insider should:
(i) either on his own behalf or on behalf of any other person, deal in securities of a
company listed on any stock exchange on the basis of any unpublished price
sensitive information; or
(ii) communicate any unpublished price sensitive information to any person, with or
without his or her request for such information except as required in the ordinary
course of business or under any law; or
(iii) counsel or procure any other person to deal in securities of any company on the
basis of unpublished price sensitive information.
Check your Progress 2

State True and False for the following statements:
1. A major development in the Indian Stock market took place in 1988 when
Securities and Exchange Board of India (SEBI)
2. According to CICA Act Companies did not require any prior approval for
any new issue, and for pricing or public and right issue.
3. The Board of SEBI consists of 10 members.
4. SEBI raised the standards of disclosure in public issues and enhanced the
transparency.
5. The offer document is now made public even at the draft stage.
6. A representative of SEBI now supervises the allotment of share process.
7. Insider training in securities is allowed by SEBI under Insider Trading
Regulations, 1992.
18.7 UNDERWRITING
Underwriter makes a commitment to get the underwritten issue subscribed either by
others or by themselves. They agree to take unsubscribe portion of the issue. They
render this service for a commission agreed upon between the issuing company and
the underwriter subject to the ceiling under the Companies Act.
Underwriter service are available from brokers, investment, companies, commercial,
banks and term lending institutions. Only such person (an individual, firm or a
company) who has obtained certificate of registration from SEBI, can act as
underwriter. Merchant bankers and stock brokers already having a valid certificate
from SEBI for working as underwriters.
243
18.8 LET US SUM UP Stock Exchange and SEBI
The Securities and Exchange Board of India Act, 1992 provides for the establishment
of the Securities and Exchange Board of India (SEBI) to protect the interest of
securities and to promote the development of and to regulate the securities market. A
major development in the Indian Stock market took place in 1988 when Securities and
Exchange Board of India (SEBI) was established SEBI is now authorized to govern all
he matter related to issue of capital. SCRA also authorizes the SEBI to conduct
inquiries into the working of the stock exchange, they are required to submit their
annual reports to the SEBI and requires the approval of SEBI for amending their rules
and bye laws; SEBI can direct them to amend their bye-laws and rules including
reconstitution of their governing boards/councils; and it is empowered to license
security dealers operating outside their jurisdiction.

1. Prepare a report on the performance of SEBI since its inception.
2. Prepare assignment on the functions and powers of SEBI in case of any Merger
and Acquisition of a listed companies.
18.10 KEYWORDS
Bull: A bull is a buyer in the stock market. He is optimistic about the security prices.
Bear: Bear is a seller of securities. His expectation is that the market would go down.
Derivatives: These are financial instruments that are valued according to the expected
price movements of an underlying assets, which may be a commodity, currency or a
security.
Insider Trading: Insider training can be defined as the sale or purchase of securities
by persons who possess price sensitive information about the company, on account of
their fiduciary capacity involving confidence or trust.
Underwriter: Underwriter make a commitment to get the underwritten issue
subscribed either by others or by themselves.

1. Describe briefly the development of Stock Exchange in India.
2. Discuss the function and powers of SEBI.
3. Critically evaluate the guidelines and reform SEBI introduced.
4. Write short notes on: Badla System, Carry Forward Transactions, Derivatives,
Insider Trading, Underwriting

CYP 1
Functional area of SEBI is very wide it is the rule maker, it is custodian, it is
watch dog of the security market. In brief it has the power to regulate:
(i) depositors and participants, (ii) custodians, (iii) debentures trustees and trust
deeds, (iv) FIIs (v) inside traders, (vi) mutual fund, (vii) portfolio manager,
(viii) investment advisers, (ix) merchant bankers, (x) registrars to issue and
share transfer agents, (xi) stock brokers and sub-brokers, (xii) underwriters,
(xiii) venture capital funds, and (xiv) bankers to issue.
Contd…
244 CYP 2
1. True, 2. False, 3. False,
4. True, 5. False, 6. True, 7. False

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LESSON Excise, Customs and Sales Tax
19
EXCISE, CUSTOMS AND SALES TAX
CONTENTS
19.1 Introduction
19.2 Customs
19.3 Excise Tax
19.3.1 Rates of Excise Tax
19.3.2 Importance of Central Excise Tax in India
19.3.3 Types of Excise Taxes
19.4 Sales Tax
19.4.1 Value-Added Tax/Sales Tax
19.5 Let us Sum up
19.7 Keywords

z Understand the nature of various states and central taxes
z Know the role of customs in Indian economy
z Explain the concept of Excise and its implementation in India
z Know the sales tax and how it is replaced by VAT
19.1 INTRODUCTION
India has a well developed tax structure with a three-tier federal structure, comprising
the Union Government, the State Governments and the Urban/Rural Local Bodies.
The power to levy taxes and duties is distributed among the three tiers of
Governments, in accordance with the provisions of the Indian Constitution. The main
taxes/duties that the Union Government is empowered to levy are Income Tax (except
tax on agricultural income, which the State Governments can levy), Customs duties,
Central Excise and Sales Tax and Service Tax. The principal taxes levied by the State
Governments are Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on
transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue
(levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment
and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on
properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within
246 areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like
water supply, drainage, etc.
Since 1991 tax system in India has under gone a radical change, in line with liberal
economic policy and WTO commitments of the country. Some of the changes are:
z Reduction in customs and excise duties
z Lowering corporate Tax
z Widening of the tax base and toning up the tax administration
The present lesson discusses the Customs, Excise, and Sales Tax.
19.2 CUSTOMS
Customs Duty is a type of indirect tax levied on goods imported into India as well as
on goods exported from India. Taxable event is import into or export from India.
Import of goods means bringing into India of goods from a place outside India. India
includes the territorial waters of India which extend up to 12 nautical miles into the
sea to the coast of India. Export of goods means taking goods out of India to a place
outside India.
In India, the basic law for levy and collection of customs duty is Customs Act, 1962.
It provides for levy and collection of duty on imports and exports, import/export
procedures, prohibitions on importation and exportation of goods, penalties, offences,
etc.
The Constitutional provisions have given to Union the right to legislate and collect
duties on imports and exports. The Central Board of Excise and Customs is the apex
body for customs matters. Central Board of Excise and Customs (CBEC) is a part of
the Department of Revenue under the Ministry of Finance, Government of India. It
deals with the task of formulation of policy concerning levy and collection of customs
duties, prevention of smuggling and evasion of duties and all administrative matters
relating to customs formations. The Board discharges the various tasks assigned to it,
with the help of its field organisations namely the Customs, Customs (Preventive) and
Central Excise Zones, Commissionerate of Customs, Customs (preventive), Central
Revenues Control Laboratory and Directorates. It also ensures that taxes on foreign
and inland travel are administered as per law and the collection agencies deposit the
taxes collected to the public exchequer promptly.
Customs duties currently comprise the following:
Basic Customs Duty (BCD): Current general peak rate is 15 per cent.
Countervailing Duty (CVD): This duty is equivalent to central excise duty leviable on
a like product manufactured in India. Current rate applicable to majority of the
industrial products is 16 per cent plus 2 per cent education cess, taking the effective
rate to 16.32 per cent. This duty is calculated on the value of product + basic customs
duty.
Additional Duty of Customs (ADC): This duty is levied to countervail the sales tax,
value-added tax, local taxes and other charges leviable on the like goods on their sale
or purchase or transportation in India. Presently, this duty is levied at 4 per cent on
certain items viz. items bound under the Information Technology (IT) Agreement and
on specified inputs/raw materials for manufacture of electronic/IT goods. This duty is
levied on value of product +basic customs duty + countervailing duty.
Education Cess: This cess is levied at 2 per cent on the amount of BCD + CVD.
In addition, government also levies anti-dumping and safeguard duties on specified
products for specified periods. "Value" for the purpose of levy of customs duty is
"transaction value" in the course of international trade in arm's length unrelated party 247
Excise, Customs and Sales Tax
transaction.
Import of goods into and export from India is regulated by the Foreign Trade Policy
(the Policy) issued from time to time by Government of India. The Policy remains in
force for five years and is amended from time to time. The Policy currently in force is
for tax year 2004-09. Majority of goods are now freely importable.
Recently, the special duty exemption scheme has released the importers from the
burden of paying import duty for those import items which will facilitate production
of export goods.
Certain input norms and output norms have been developed for approximately 4,200
items and these norms have been formulated to decide the quantity of duty-free inputs
to be imported for the production of a specific export item. The Export Promotion
Capital Goods Scheme (EPCG) is the latest addition in the import tax structure which
serves to provide deductions in import duty on capital goods. But the deductions
under the Export Promotion Capital Goods (EPCG) Scheme are available only after
conforming with the export obligations like providing a statement of exports as per
Appendix-10 C of the scheme and the statement is required to be certified by a
Chartered accountant.
Import Tax in India also includes tariffs that are applied to foreign goods. Tariffs are
charged by customs official to allow the landing of the imported goods in the port.
The purpose behind levying tariffs is mainly to protect the domestic industries from
foreign competition. Tariffs serve to protect the domestic industries through-the
revenue tariffs and the protective tariff. The revenue tariffs contain certain set rates to
apply on the imports to increase the revenue earning of the government. Whereas
protective tariffs serve to superficially amplify the cost of the imported goods so that
the buyer has to pay more money for the purchase of an imported good which can be
purchased at a lesser price from an indigenous manufacturer.
Indian tariffs are categorized as per the Harmonized Commodity Description and
Coding System. The Customs Act acts as the guideline for the application of tariffs on
imported goods and also for formulating rules for the valuation of customs. The
Customs Tariff Act provides guidance as to the rates of tariffs, anti-dumping, as well
as countervailing duties.
India levies import tax on a wide range of articles and some of the significant
commodities are as follows:
Table 19.1
Category Commodity
Metals Copper, Aluminum, Zinc , Lead, Tin etc.
Iron & Steel Products Iron and Non Iron alloy steel, Stainless steel etc.
Roller bearings, motor parts, electrical machinery,

Machine tools cinematographic measuring instruments, optical instruments,
surgical instruments, man made filaments etc.
Chemicals Both Organic and inorganic chemicals
Oils Crude oils, Petroleum oils etc.
Cash Crops Coffee, Tea, Rubber etc.

248
Business Environment and Ethics Check Your Progress 1
Describe, in brief, the following:
1. Countervailing duty
……………………………………………………………………………….
……………………………………………………………………………….
2. Additional duty on customs
……………………………………………………………………………….
……………………………………………………………………………….
19.3 EXCISE TAX

Excise Tax is more commonly known as Excise Duty and is one of the most well-
known forms of taxation in India. Any manufacturer of excisable products is liable to
pay this tax and is levied on a wide variety of commodities manufactured in India.
Central Excise Duty (CENVAT) is levied on goods manufactured and produced in
India. It is levied under the authority of the Central Excise Act, 1944 at the rates
prescribed in the First Schedule and Second Schedule to the Central Excise Tariff Act,
1985 as amended by Central Excise Tariff (Amendment) Act, 2004. In addition,
education cess at 2 per cent on excise duty amount is levied by Finance (No. 2) Act,
2004. The effective rates may be lower pursuant to general/specific notifications
issued by the government granting whole or partial exemption from duty. The duty, in
most cases, is levied on the basis of value of the excisable goods.
Value, for this purpose, with effect from 1st July 2000 is the "transaction value"
which is:
z For delivery at the time and place of removal;
z Where buyer is not a related person; and
z Price is the sole consideration.
For the Indian central government this duty is an important source of revenue. The
Excise Tax is required to be paid before the goods leave the factory, as a result of
which the small-scale industries do not pay Excise Tax up to the specified value of
goods cleared from the factory. The state governments are liable to levy excise duty
on a few commodities including liquor, provided the central government fails to do so.
At times when the manufactured goods are exported excise drawback is available.
19.3.1 Rates of Excise Tax

The rates of the Excise Tax vary depending on the nature of commodity. Sometimes,
even for the similar commodity the tax rates are different depending on circumstances.
Factors like end-use and taxability of inputs are responsible for this. The Excise Tax
rates are notified in the Central Excise Tariff Act but can be revised accordingly by
the annual Finance Acts. However, the former Acts should be considered to determine
the applicable excise duty rate for any commodity. According to the Central Excise
Tax provisions, such excise duty can be imposed on any goods either produced or
manufactured, although the payment can be done during the time of removing the
goods.
19.3.2 Importance of Central Excise Tax in India 249
Excise, Customs and Sales Tax
In India, the revenue from the Excise Tax is the biggest single financial source. The
main objective of the central Government is to achieve different socio-economic
policies by making suitable adjustments regarding the scope, nature, and quantum of
levy of the Central Excise Tax. Such schemes of the Excise Tax taken by the central
government modifies and serves various purposes of price control, adequate supply of
essential commodities, promotion of small scale industries and industrial growth.
19.3.3 Types of Excise Taxes
In India, the three types of Central Excise Taxes being collected include the Basic
Excise Duty, Additional Duty of Excise, and Special Excise Duty.
The Basic Excise Duty is charged under the Section 3 of the Central Excises and Salt
Act, 1944. According to this all excisable goods other than salt produced or
manufactured in India, has to pay the rates given in the schedule to the Central Excise
Tariff Act, 1985.
As per the Section 3 of the Additional Duties of Excise Act, 1957 it is authorized that
only the goods described in the Schedule to this Act are liable for Excise Tax
payments. Generally these are imposed under different categories like medicinal and
toilet preparations, sugar and other industries development.
The Special Excise Duty following the Section 37 of the Finance Act, 1978 was
imposed on all excisable goods that are also subjected to Basic excise Duty under the
Central Excises and Salt Act, 1944. However, the Finance Act provisions regarding
the said fiscal year specify the levy and collection of the Special Excise Duty.
CENVAT is payable by the manufacturer but is, ordinarily, recovered from the buyer
as a part of consideration for sale of goods. To reduce the cascading effect of
CENVAT, a scheme known as MODVAT was introduced in 1986, which has now
been renamed as CENVAT (effective 1st April, 2000). Under the CENVAT Scheme,
a manufacturer can avail of the credit of the central excise duties or additional duties
of customs (i.e. CVD) paid on specified inputs and capital goods used in the
manufacture of excisable goods and also service tax paid on eligible input services
and utilize it in discharging central excise duty on finished excisable goods.
The State has been also empowered to levy the duties of excise on:
1. alcoholic liquors for human consumption and
2. opium, Indian hemp and other narcotic drugs and narcotics manufactured in the
State by the powers enshrined in the Constitution of India.
19.4 SALES TAX

Sales tax is levied on the sale of movable goods. Most of the Indian States have
replaced. Sales tax is the most important source of revenue to the states and is
imposed on virtually all sales of goods. It is primarily the liability of the seller, who
generally recovers it from the purchaser. Each state has its own sales tax act under
which tax is imposed at different rates. Sales of imported items and sales by way of
export are generally exempt from sales tax. Luxury goods are normally taxed at a
higher rate than other commodities. The sales tax acts of certain states provide for
certain additional levies, i.e., works contracts tax (imposed on a contractor for
manufacture, erection, repairs, etc.), turnover tax (imposed on the value of turnover
exceeding a certain limit) and purchaser tax (imposed on the value of goods purchased
from suppliers that are not registered under the sales tax laws).
The Central Sales Tax Act covers interstate sales. A concessional rate of sales tax is
applicable if the buyer is registered with the Sales Tax authorities.
Most of the state sales tax has been on a First Point basis, though some states, notably
Kerala, Karnataka and Tamil nadu of late have a Multi-point system of taxation
250 covering certain limited commodities. In view of the independence of the States to
frame their Sales tax systems, every state had its own system, with no uniformity or
coordination with other states, and used the power to tax, purely as a revenue raising
exercise with no regard for economic efficiency. Generally the following adverse
characteristics marked the State Sales tax regime:
1. Multiplicity of rates
2. Numerous exemptions for commodities.
3. Wide spread between the rates, resulting in classification difficulties and attendant
legal issues.
4. Incentive schemes such as Tax Holidays and Tax deferrals for New Industrial.
5. Undertakings with a view to promote industrialisation, even at loss of revenue.
These features resulted in difficulty in compliance and administration; excessive
litigation on classification; and unhealthy competition among states to corner new
investments by offering all sorts of tax holidays and deferrals, resulting in what is
called as the 'race to the bottom'.
Government of India has introduced a Value Added Tax (VAT) system to bring
uniformity in tax system
19.4.1 Value-Added Tax/Sales Tax

Sales tax with a new Value Added Tax (VAT) from April 1, 2005. VAT is imposed
on goods only and not services and it has replaced sales tax. Other indirect taxes such
as excise duty, service tax etc., are not replaced by VAT. VAT is implemented at the
State level by State Governments. VAT is applied on each stage of sale with a
mechanism of credit for the input VAT paid. There are four slabs of VAT:
z 0% for essential commodities
z 1% on bullion and precious stones
z 4% on industrial inputs and capital goods and items of mass consumption
z All other items 12.5%
z Petroleum products, tobacco, liquor etc., attract higher VAT rates that vary from
State to State.
A Central Sales Tax at the rate of 2% is also levied on inter-State sales and would be
eliminated gradually.
State True and False for the following statements:
1. India has a well developed tax structure with a three-tier federal structure.
2. Customs Duty is a type of indirect tax levied on imports only.
3. The Constitutional provisions have given to States the right to legislate and
collect duties on imports and exports.
4. Central Excise Duty (CENVAT) is levied on goods manufactured and
produced in India.
5. In India, the revenue from the Excise Tax is the biggest single financial
source.
6. Sales tax is primarily the liability of the seller, who generally recovers it
from the purchaser.
7. Sales tax has been replaced by VAT
251
19.5 LET US SUM UP Excise, Customs and Sales Tax
India has a well developed tax structure with a three-tier federal structure, comprising
the Union Government, the State Governments and the Urban/Rural Local Bodies.
The power to levy taxes and duties is distributed among the three tiers of
Governments, in accordance with the provisions of the Indian Constitution. Customs
Duty is a type of indirect tax levied on goods imported into India as well as on goods
exported from India. The Constitutional provisions have given to Union the right to
legislate and collect duties on imports and exports. Central Excise Duty (CENVAT) is
levied on goods manufactured and produced in India. It is levied under the authority
of the Central Excise Act, 1944. Sales tax is levied on the sale of movable goods.
Most of the Indian States have replaced. Sales tax is the most important source of
revenue to the states and is imposed on virtually all sales of goods.

1. Consult your nearest shopkeeper and analyze the changes he has to bring to
follow the VAT.
2. Prepare a brief report on the changes brought in rates of customs in the recent
past.
19.7 KEYWORDS
CENVAT: Central Excise Duty.
VAT: Value Added Tax.
MODVAT: Modified Value Added Tax.
EPCG: The Export Promotion Capital Goods Scheme.
WTO: World Trade Organizations.

1. Discuss the taxes on Import and Export in India.
2. Briefly describe the taxes on the production in India.
3. Discuss that why sales tax has been replaced by the VAT

CYP 1
1. This duty is equivalent to central excise duty leviable on a like product
manufactured in India. Current rate applicable to majority of the industrial
products is 16 per cent plus 2 per cent education cess, taking the effective
rate to 16.32 per cent. This duty is calculated on the value of product +
basic customs duty.
2. This duty is levied to countervail the sales tax, value-added tax, local taxes
and other charges leviable on the like goods on their sale or purchase or
transportation in India. Presently, this duty is levied at 4 per cent on certain
items viz. items bound under the Information Technology (IT) Agreement
and on specified inputs/raw materials for manufacture of electronic/IT
goods.
CYP 2
1. True, 2. False, 3. False, 4. True,
5. True, 6. True, 7. True
252
House
Prentice Hall

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MODEL QUESTION PAPER

MBA Second Year

School of Distance Education

Copyright © 2008, Bharathiar University

Produced and Printed

1.0 AIMS AND OBJECTIVES

1.3 TYPES OF ENVIRONMENT

1.3.1 Internal Environment

1.3.2 Macro Environment

Political/ Business Technological

Figure 1.1: Dimensions in General Environment

Firm Strategy, Structure,

Factor Endowment Local Demand Condition

Relating and Supporting

Figure 1.2: Michael Porter’s International Competitiveness Model

1.3.3 Micro Environment

The Five Forces of Competition

5. The competitive pressure stemming from seller-buyer collaboration and

Figure 1.3: Michael Porter Model of Five Forces

Government and Regulatory Environment

1.4 ENVIRONMENTAL ANALYSIS

Process of Environmental Analysis

Benefits of Environmental Analysis

1.5 LET US SUM UP

1.8 QUESTIONS FOR DISCUSSION

Check Your Progress Model Answers

Mittal Vivek (2007) Business Environment, Excel Books.

2.0 AIMS AND OBJECTIVES

2.2 SOCIAL RESPONSIBILITY

Keith Davis model of Corporate Social Responsibility

Society Social Employees

Check Your Progress 1

2.2.2 Responsibility to Employees

2.2.4 Responsibility to Community

2.3 MAJOR SOCIAL RESPONSIBILITIES OF BUSINESS

Check Your Progress 2

2.4 LET US SUM UP

2.7 QUESTIONS FOR DISCUSSION

Check Your Progress: Model Answers

2.8 SUGGESTED READINGS

3.0 AIMS AND OBJECTIVES

3.2 IMPACT OF SOCIO-CULTURE ENVIRONMENT ON

Role of Family Member in Decision-making

Family Life Cycle

3.2.2 Social Class and its Affects on Taste and Lifestyle

Component (Subjective measure) of Social Class

Values, Attitudes and Lifestyles across, Social Classes

Values and Attitude

Check Your Progress 1

3.2.3 Culture and its Influence

3.3 LET US SUM UP

3.4 LESSON END ACTIVITIES

3.6 QUESTIONS FOR DISCUSSION

3.7 SUGGESTED READINGS

4.0 AIMS AND OBJECTIVES

Legal Role Entrepreneurial

HRD Planning Role

Figure 4.1: Role of Government in Business

4.2.1 Regulatory Role

4.2.2 Legal Role