ANSWER: Micro-enterprises are ones with a capital investment of less than Rs. 1 crore, and turnover less than Rs. 5 crore.
Q.2 What is a cottage industry?
ANSWER: A cottage industry is a small-scale, decentralised manufacturing enterprise that is frequently run from a house rather than a dedicated facility. The amount of capital necessary to start a cottage industry, as well as the number of people employed, characterise cottage industries.
Q.3 What is meant by Village and Khadi Industry?
ANSWER: Village Industries are the Industries located in rural areas with investment in fixed assets as per the rules of central government.
Khadi Industries those industries which weave handlooms from materials like cotton, wool, sik yarn etc or weave handlooms from the mixture of any two or all of these yarns.
Hence, Khadi and Village Industries are those that are based in rural areas and have a fixed capital Investment per artisan (weaver) of less than a hundred thousand rupees. The Government of India has the authority to amend the Fixed Capital Investment anytime it sees fit.
Q.4 Give any two characteristics of entrepreneurship development.
ANSWER: To operate a successful firm, every entrepreneur needs to have the following abilities.
Effective Time Management
Visualizing Aim and Success
Proper Listening and Communication
Seeking Help When Needed
Q.5 What is MSME?
ANSWER: The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 was adopted by the Indian government, and it defines micro, small and medium enterprises as follows:
Micro-enterprises are ones with a capital investment of less than Rs. 1 crore, and turnover less than Rs. 5 crore
A small enterprise are ones with a capital investment of less than Rs. 10 crore, and turnover less than Rs. 50 crore
Medium enterprise business are ones with a capital investment of less than Rs. 50 crore, and turnover less than Rs. 250 crore
Q.6 State the meaning of entrepreneurship?
ANSWER: These are persons or a group of individuals who exploit a business opportunity by bringing a new product or process to market, or by significantly enhancing an existing good, service, or method of production.
Q.7 MSME and Entrepreneurship are connected. Do you agree? Give two reasons.
Ans: Yes, MSME and Entrepreneurship are connected to each other.
Reasons:
MSMEs offer banks funding assistance. They encourage the growth of entrepreneurship as well as the upgrading of skills by establishing specialised training institutes. MSMEs are known for the provision of genuine assistance in gaining entry to domestic and international markets.8. MSME and Entrepreneurship are connected. Do you agree? Give two reasons.
Long Answer Type Question:
Q.1 How do small scale industries contribute to the socio-economic development of India? Answer: Small-scale industries (SSIs) play an important role in ensuring the progress of developing countries such as India. The following points highlight their contribution.
Market Share: SSIs make up 95 per cent of the industrial units in India. They contribute about 40 percent of the ‘gross industrial value added’ and 45 per cent of India’s total exports.
Regional Balance: SSIs produce simple products and use basic technology. In addition, these industries do not require heavy capital investment, and therefore, they can be set up by anyone anywhere across the country. Small units not only benefit the particular region where it is established but also help reduce the regional disparities in industrial development among different regions of a country.
Employment Generation: As SSIs use labour-intensive production techniques, they have a greater employment generation potential than large industries. Moreover, the skills required to perform jobs in SSIs are usually not very specific, which further increases their scope for generating employment.
Wide range of Products: Small scale units produce a large variety of consumer products, such as stationery items, safety matches, handicrafts, vegetables and processed food. Besides, SSIs also produce a few items by using technology, such as calculators, televisions and engineering goods.
Customized Goods: Small industrial units adapt perfectly to specific needs of consumers. As SSIs use simple and highly flexible production techniques, they can provide their customers with goods best suited to the customers tastes and preferences.
Q.2 Describe the role of small business in rural India? Answer: The following are some of the major roles played by small scale businesses in rural India.
They generate employment opportunities: Cottage and rural industries play a significant role in providing employment opportunities, particularly to people in rural areas. This proves to be a boon especially for the economically weaker sections of the rural society.
They enable equitable income distribution: The capital requirements of small- scale businesses are low, mainly because of their use of labour-intensive production techniques, and this encourages entrepreneurs to start units on a small scale. Small- scale businesses are, therefore, set up all over the country. Many of them providing employment opportunities to people in rural areas. This triggers the redistribution of wealth and income, and enables the equitable distribution of income in rural areas.
They help to accelerate growth: Small-scale businesses have been considered as a major propeller for the acceleration of economic growth and as an employment generator, particularly in the rural and backward areas of India.
They mitigate disguised unemployment and alleviate poverty: Small-scale businesses use labour-intensive production techniques, and are, therefore, able to provide employment to the excess/surplus rural labour. Thus, small-scale businesses remove disguised unemployment from the agriculture sector and at the same time provide livelihood to the rural people. Hence, they contribute to alleviating rural poverty.
They facilitate rural development and reduce migration from rural to urban areas: It is well known that a large number of people migrate from rural to urban areas in search of better employment opportunities and improved living standards. Small-scale businesses help reduce this migration by providing employment opportunities to rural people in their own regions. By doing so, small units also help mitigate the excessive pressure on urban infrastructure.
Q.3 Discuss the problems faced by small scale industries. Answer: Major problems faced by the small scale industries are: (1) Finance (2) Raw material (3) Idle capacity (4) Technology (5) Marketing (6) Infrastructure (7) Under Utilization of Capacity (8) Project Planning. Small scale industries play a vital role in the economic development of our country. This sector can stimulate economic activity and is entrusted with the responsibility of realising various objectives i.e., generation of more employment opportunities with less investment, reducing regional imbalances etc. Small scale industries are not in a position to play their role effectively due to various constraints. The various constraints, the various problems faced by small scale industries are as under:
Finance: Finance is one of the most important problems confronting small scale industries. Finance is the life blood of an organisation and no organisation can function properly in the absence of adequate funds. The scarcity of capital and inadequate availability of credit facilities are the major causes of this problem. Firstly, adequate funds are not available and secondly, entrepreneurs due to weak economic base, have lower credit worthiness. Neither they are having their own resources nor are others prepared to lend them. Entrepreneurs are forced to borrow money from money lenders at exorbitant rate of interest and this upsets all their calculations. After nationalisation, banks have started financing this sector. These enterprises are still struggling with the problem of inadequate availability of high cost funds. These enterprises are promoting various social objectives and in order to facilitate them working adequate credit on easier terms and conditions must be provided to them.
Raw Material: Small scale industries normally tap local sources for meeting raw material requirements. These units have to face numerous problems like availability of inadequate quantity, poor quality and even supply of raw material is not on regular basis. All these factors adversely affect the functioning of these units. Large scale units, because of more resources, normally comer whatever raw material is available in the open market. Small scale units are thus forced to purchase the same raw material from the open market at very high prices. It will lead to increase in the cost of production thereby making their functioning unavailable.
Idle Capacity: There is under utilization of installed capacity to the extent of 40 to 50 per cent in case of small scale industries. Various causes of this under utilization are shortage of raw material problem associated with funds and even availability of power. Small scale units are not fully equipped to overcome all these problems as is the case with the rivals in the large scale sector.
Technology: Small scale entrepreneurs are not fully exposed to the latest technology. Moreover, they lack requisite resources to update or modernise their plant and machinery Due to obsolete methods of production, they are confronted with the problems of less production in inferior quality and that too at higher cost. They are in no position to compete with their better equipped rivals operating modem large scale units.
Marketing: These small scale units are also exposed to marketing problems. They are not in a position to get first hand information about the market i.e., about the competition, taste, liking, disliking of the consumers and prevalent fashion. With the result they are not in a position to upgrade their products keeping in mind market requirements. They are producing less of inferior quality and that too at higher costs. Therefore, in competition with better equipped large scale units they are placed in a relatively disadvantageous position. In order to safeguard the interests of small scale enterprises the Government of India has reserved certain items for exclusive production in the small scale sector. Various government agencies like Trade Fair Authority of India, State Trading Corporation and the National Small Industries Corporation are extending helping hand to small scale sector in selling its products both in the domestic and export markets.
Infrastructure: Infrastructure aspects adversely affect the functioning of small scale units. There is inadequate availability of transportation, communication, power and other facilities in the backward areas. Entrepreneurs are faced with the problem of getting power connections and even when they are lucky enough to get these they are exposed to unscheduled long power cuts. Inadequate and inappropriate transportation and communication network will make the working of various units all the more difficult. All these factors are going to adversely affect the quantity, quality and production schedule of the enterprises operating in these areas. Thus their operations will become uneconomical and unviable.
Under Utilization of Capacity: Most of the small-scale units are working below full potentials or there is gross under utilization of capacities. Large scale units are working for 24 hours a day i.e., in three shifts of 8 hours each and are thus making best possible use of their machinery and equipment’s. On the other hand, small scale units are making only 40 to 50 percent use of their installed capacities. Various reasons attributed to this gross under utilization of capacities are problems of finance, raw material, power and underdeveloped markets for their products
Project Planning: Another important problem faced by small scale entrepreneurs is poor project planning. These entrepreneurs do not attach much significance to viability studies i.e., both technical and economical and plunge into entrepreneurial activity out of mere enthusiasm and excitement. They do not bother to study the demand aspect, marketing problems, and sources of raw materials and even availability of proper infrastructure before starting their enterprises. Project feasibility analysis covering all these aspects in addition to technical and financial viability of the projects, is not at all given due weight age. Inexperienced and incomplete documents which invariably results in delays in completing promotional formalities. Small entrepreneurs often submit unrealistic feasibility reports and incompetent entrepreneurs do not fully understand project details. Moreover, due to limited financial resources they cannot afford to avail services of project consultants. This results in poor project planning and execution.
Skilled Manpower: A small scale unit located in a remote backward area may not have problem with respect to unskilled workers, but skilled workers are not available there. Firstly, skilled workers may be reluctant to work in these areas and secondly, the enterprise may not afford to pay the wages and other facilities demanded by these workers. Besides non-availability of entrepreneurs are confronted with various other problems like absenteeism, high labour turnover indiscipline, strike etc. These labour related problems result in lower productivity, deterioration of quality, increase in wastages, and rise in other overhead costs and finally adverse impact on the profitability of these small scale units.
Managerial: Managerial inadequacies pose another serious problem for small scale emits. Modem business demands vision, knowledge, skill, aptitude and whole hearted devotion. Competence of the entrepreneur is vital for the success of any venture. An entrepreneur is a pivot around whom the entire enterprise revolves. Many small scale units have turned sick due to lack of managerial competence on the part of entrepreneurs. An entrepreneur who is required to undergo training and counseling for developing his managerial skills will add to the problems of entrepreneurs. Of course, increase in number of units, production, employment and exports of small- scale industries over the years are considered essential for the economic growth and development of the country. It is encouraging to mention that the small-scale enterprises accounts for 35% of the gross value of the output in the manufacturing sector, about 80% of the total industrial employment and about 40% of total export of the country.
Q.4 What measures have the Government taken to solve the problem of finance and marketing in the small scale sector? Answer: Indian Government created two ministries to promote and develop small scale industries:
Ministry of Small Scale Industries. Ministry of Small Scale Industries designs policies, programmes and schemes to promote small scale industries. Small Industries Development Organization (SIDO) is responsible for implementing and monitoring of various policies and progammes formulated by the ministry.
Ministry of Agro and Rural Industries is a nodal agency for coordination and development of village and khadi industries, tiny and micro enterprises in urban as well as rural areas. Its policies are implemented through Khadi and Village Industries Commission (KVIC), Handicrafts Board, Coir Board etc.
The small-scale sector has played a major role in employment generation, regional development and export promotion in India. The Government of India has realized that a lot more can be achieved if the two major bottlenecks that affect the further development of SSIs—inadequate funds and inefficient market penetration—are removed. In pursuit of this objective, the government has established the following agencies.
National Bank for Agriculture and Rural Development (NABARD): It was established in 1982 with the main objective of promoting rural development and integrating the efforts in this direction. This agency is an apex banking body that governs the operations particularly of the rural and ‘Gramm’ banks. The main focus of NABARD is to provide cheap and easy credit facility to small, cottage and rural industries.
Small Industries Development Bank of India (SIDBI): It was set up to provide direct and indirect financial assistance under different schemes. It caters to the credit and finance requirements of small-scale enterprises.
World Association for Small and Medium Enterprises (WASME): It is an international non-governmental organisation that addresses the problems of small and medium-scale enterprises. It has set up an ‘International Committee for Rural Industrialisation’ with the aim of designing a model for the growth and development of rural industries.
The National Commission for Enterprises in the Unorganised Sector (NCEUS): It was formed in September 2004 with the objective of improving the efficiency and enhancing the global competitiveness of small scale industries. It focuses on addressing the problems faced by small enterprises, particularly in the unorganised/informal sector.
Various Development and Employment Generation Programmes: Besides establishing the organisations mentioned above, the government has launched various programmes for rural development. Among the important programmes are the Prime Minister’s Rozgar Yojana (PMRY), Integrated Rural Development Programme (IRDP) and Training of Rural Youth for Self-Employment (TRYSEM). These programmes are aimed at generating greater employment opportunities, developing rural areas and making the rural people self-reliant.
Q.5 What are the incentives provided by the government for industries in backward and hilly areas? Answer: It is quite lucrative and feasible for entrepreneurs to establish industries in metropolitan and other developed cities. However, because of numerous factors such as irregular power supply, poor transport and absence of banking facilities, it is extremely difficult for them to set up industries in backward, hilly and tribal areas. As a result, there exists acute regional disparities in development between these areas and the big cities in the country. The Government of India has been making efforts to remove the regional imbalances in development by providing incentives for setting up industries in rural areas. The following are among the incentives offered.
Land: It is a basic requirement for setting up a business unit. In order to encourage the establishment of industries in backward areas, the government provides land plots at concessional rates, especially to industrialists in backward regions. This makes setting-up industries cheaper.
Power: Power is an essential requirement for the functioning of business enterprises. However, its supply is highly irregular in some parts of India. Therefore, in order to facilitate the setting up of industries in these areas, electricity is supplied at a discounted rate of 50 per cent. In addition, some states exempt such units from any payment during the initial years of operation.
Banking and finance: Due to the poor banking facilities, industries set up in the backward areas face the problem of inadequate credit and finance. As a solution, the government provides loans at a concessional rate and offers subsidies of 10 to 15 per cent for the accumulation of capital assets.
Raw Materials: Resources such as cement, iron and steel are of prime importance for industries. Since these resources are scarce, the government provides them on priority basis to industries located in backward areas.
Tax Exemption: In order to attract entrepreneurs to set up industries in the backward areas, different state governments grant tax exemption to the industries. Thus, the industries are exempted from paying taxes for 5 to 10 years.
Q.1 What is business finance? Why do businesses need funds? Explain
ANSWER: Finance is the life blood of a business and the money required to run the business is known as business finance.
Business needs finance for three reasons mainly:
To purchase plant and machinery, land, buildings and other fixed assets (Fixed capital requirements).
Smooth functioning of day to day operations of the business (Working capital requirements)
Expansion, growth and diversification.
Q.2 List sources of raising long-term and short-term finance.
ANSWER: Long-term financial resources are:
Equity Shares
Retained earnings
Preference shares
Debentures
Loans from financial institutions
Loans from Banks
Short-term financing sources are:
Trade credit
Factoring
Banks
Commercial papers
Q.3 What is the difference between internal and external sources of raising funds? Explain.
ANSWER:The difference between internal and external sources of raising funds are as follows:
S.No.
Basis of Comparison
Internal Source
External Source
1
Meaning
Funds generated from within the organization are known as internal sources.
Funds generated from sources outside the organisation are called external sources
2
Needs
Only short term or limited needs could be fulfilled by this source.
Large amounts of money requirements are fulfilled through external sources.
3
Security
No security required
Security required by way of collateral assets
4.
Cost
Less expensive
These are more expensive sources than internal sources of financing.
5.
Examples
Ploughing back of profit, Disposing surplus inventory, etc.
Borrowings from commercial banks, Acceptance of Public deposits, Raising debentures etc.
Q.4 What preferential rights are enjoyed by preference shareholders. Explain.
ANSWER:Preference shareholders have the following preferred rights:
Preference in Dividend: They receive dividends at a fixed rate, and dividends on these shares are paid before dividends on equity shares.
Preference in Repayment: When a corporation closes, preference shares are paid out first, followed by equity shares.
Excess Profits: Preference shares have the right to partake in any excess profits that remain after equity shares have been paid.
Preference in case of dissolution: They have the preference over equity shareholders in the share capital refund in the event of company dissolution.
Q.5 Name any three special financial institutions and state their objectives.
ANSWER:The three institutions are:
Unit Trust of India or UTI: It was established under Unit Trust of India Act, 1963 in 1964. The purpose of the establishment of the UTI was supposed to combine savings and monetization of investment in profitable businesses.
The Industrial Finance Corporation of India or IFCI: It was established in 1948, under Industrial Finance Corporation Act, 1948. Its purpose was to assist in balanced regional development, encouraging entrepreneurs to enter emerging sectors, and to contribute to management education development.
State Financial Corporation (SFC): SFC’s fulfils the long term, and medium term finance needs of industries which are beyond the scope of IFCI. It covers public limited, private limited, partnership firms as well, thus its scope is broader than IFCI.
Q.6 What is the difference between GDR and ADR? Explain.
ANSWER:the difference between GDR and ADR is:
Basis
GDR
ADR
Meaning
A GDR is a negotiable instrument or an instrument that can be traded freely in various foreign capital markets.
This instrument is like a regular stock which is purchased and sold in American markets.
Stands for
Global Depository Receipt
American Depository Receipt
Issued by
These are issued by Indian enterprises in order to raise capital from foreign investors.
It is issued by American businesses and can be traded on American stock exchanges. Only American citizens are eligible to receive it.
Traded on
It is traded on foreign stock exchanges.
Only be traded in US stock exchanges.
Q.7 Explain trade credit and bank credit as sources of short-term finance for business enterprises.
ANSWER: Trade Credit
It refers to the extension and provision of credit by one one trader to another for the purchase of goods and services, or other supplies without on the spot payment..
This is generally used by organizations as short term financing. The terms of trade credit may vary from person to person based on past records and from industry to industry based on industry norms.
Merits
A continuous and a convenient source of funds.
It is readily available if credit worthiness is known to the seller.
It helps in increasing the inventory levels in case of increase in sales volume.
While providing funds, It does not create a charge on assets of the firm .
Limitations
There can be chances of over-trading.
Fulfils only limited financial needs.
Costly in comparison to few other sources.
Bank Credit
A loan provided by a bank to a business firm is known as bank credit. The bank’s interest rate on the loan is usually determined by the current interest rate in the economy. To secure the loan, the borrower must mortgage assets with the bank.
Advantages
Secrecy of business is maintained.
An easier source of finance as formalities of issuing of prospectus and underwriting is not required.
Bank credit gives the borrower flexibility because the amount of the loan can be increased or decreased depending on the borrower’s business demands.
Disadvantages
Generally, the funds are available for a short period of time and renewal becomes a difficult process and is uncertain.
The company may have to keep assets as security as the banks ask for security assets before issuing such loans.
Sometimes, the terms and conditions imposed by the banks are quite difficult.
Banks’ terms are frequently highly restrictive; for example, a bank that has provided a loan may limit the borrower’s ability to sell commodities mortgaged to it.
Q.8 Discuss the sources from which a large industrial enterprise can raise capital for financing modernization and expansion.
ANSWER:The following are some long-term funding options:
Equity shares: These shares represent a company’s ownership capital. These shareholders are known as equity shareholders, and they have a say in the management and benefit from higher returns when profits are higher. They are also known as the company’s owners, or residual owners because payments to them are provided only after external debts or claims have been paid.
Retained earnings: Before paying out dividends to shareholders, companies often keep a portion of their income. These undistributed profits are referred to as retained earnings since the money is kept for future use.
Preference shares: As the name suggests, these shareholders are the ones who hold a preferential position in respect to getting a fixed rate of dividend before any dividend for the equity shareholders, and receiving the capital at the time of liquidation just after the payment to the creditors of the company.
Debentures: Debentures are long-term debt capital raising financial instruments employed by companies. They signify that a corporation has borrowed a particular amount of money, which it will eventually repay to the holders of debentures. They have a predetermined rate of return and a stipulated time for debt payback. Debenture holders are called the creditors of the company.
Bank and other financial institution loans: Businesses can borrow funds from banks and financial institutions for a certain period of time in exchange for a defined periodic payment known as interest. The repayment period for such a loan is predetermined and announced at the time of loan approval.
Long Answer Type Question:
Q.1 Explain trade credit and bank credit as sources of short-term finance for business enterprises.
ANSWER: Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit is commonly used by business organisations as a source of short-term financing. It is granted to those customers who have reasonable amount of financial standing and goodwill.
• Merits of trade credit as a source of short-term finance: → Trade credit helps a company to finance the accumulation of inventories for meeting future increase in sales. → As the trade creditors do not have any rights over the assets of the company, it can mortgage its assets to raise money from other sources.
• Demerits of bank credit as a source of short-term finance:https://704a05148f9ca4a81fff005e88b98af1.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html→ It is difficult to increase the loan. → The terms imposed by banks are often very restrictive as example, the bank that has granted a loan may restrict the sale of goods mortgaged to it by the borrower.
Q.2 Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion.
ANSWER: Industrial Finance Corporation of India (IFCI): It was established in July 1948 as a statutory corporation under the Industrial Finance Corporation Act, 1948. Its objectives include assistance towards balanced regional development and encouraging new entrepreneurs to enter into the priority sectors of the economy. IFCI has also contributed to the development of management education in the country.
→ Industrial Credit and Investment Corporation of India (ICICI): This was established in 1955 as a public limited company under the Companies Act. ICICI assists the creation, expansion and modernisation of industrial enterprises exclusively in the private sector. The corporation has also encouraged the participation of foreign capital in the country.
→ Industrial Development Bank of India (IDBI): It was established in 1964 under the Industrial Development Bank of India Act, 1964 with an objective to coordinate the activities of other financial institutions including commercial banks. The bank performs three types of functions, namely, assistance to other financial institutions, direct assistance to industrial concerns, and promotion and coordination of financial-technical services.
→ Unit Trust of India (UTI): It was established by the Government of India in 1964 under the Unit Trust of India Act, 1963. The basic objective of UTI is to mobilise the community’s savings and channelise them into productive ventures. For this purpose, it sanctions direct assistance to industrial concerns, invests in their shares and debentures, and participates with other financial institutions.
→ Industrial Investment Bank of India Ltd.: It was initially set up as a primary agency for rehabilitation of sick units and was known as Industrial Reconstruction Corporation of India. It was reconstituted and renamed as the Industrial Reconstruction Bank of India in 1985 and again in 1997 its name was changed to Industrial Investment Bank of India. The Bank assists sick units in the reorganisation of their share capital, improvement in management system, and provision of finance at liberal terms.
→ Life Insurance Corporation of India (LIC): LIC was set up in 1956 under the LIC Act, 1956 after nationalising 245 existing insurance companies. It mobilises the community’s savings in the form of insurance premia and makes it available to industrial concerns, both public as well as private, in the form of direct loans and underwriting of and subscription to shares and debentures.
Q.3 What advantages does issue of debentures provide over the issue of equity shares?
ANSWER: Debentures are long term debts by which a company can raise funds which bear a fixed rate of interest. The debenture issued by a company is an acknowledgment that the company has borrowed a certain amount of money, which it promises to repay at a future date.
The advantage of issue of debentures over the issue of equity shares are:
→ The issue of equity shares means dilution of ownership of a firm while debentures holders do not have any rights in the company. They do not enjoy voting rights or any kind of ownership in the firm. They are only entitled to a fixed amount as payment.
→ For issuing shares a company has to incur huge costs. Also, it has to pay dividends to its shareholders, which are not tax deductible while a company receives tax deductions on the interest paid to its debenture holders. Therefore, issuing debentures is advantageous for a firm in terms of low costs.
→ Debentures carry a fixed rate of return which means that irrespective of the profit earned, the company has to pay only a fixed interest to its debenture holders while a company that issues shares has to pay dividends to the shareholders, which varies with the profit i.e., the higher the profit, the higher will be the dividends.
Q.4 State the merits and demerits of public deposits and retained earnings as methods of business finance.
ANSWER: Public Deposits The deposits that are raised by organisations directly from the public are known as public deposits. Rates of interest offered on public deposits are usually higher than that offered on bank deposits. Any person who is interested in depositing money in an organisation can do so by filling up a prescribed form. The organisation in return issues a deposit receipt as acknowledgment of the debt.
• Merits of Public deposits are:
→ The procedure of obtaining deposits is simple and does not contain restrictive conditions as are generally there in a loan agreement → Cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions → Public deposits do not usually create any charge on the assets of the company. The assets can be used as security for raising loans from other sources → As the depositors do not have voting rights, the control of the company is not diluted.
• Demerits of Public deposits are: → New companies generally find it difficult to raise funds through public deposits → It is an unreliable source of finance as the public may not respond when the company needs money → Collection of public deposits may prove difficult, particularly when the size of deposits required is large.
Retained earnings Business enterprise keep a portion of the net earnings may be retained in the business for use in the future. This is known as retained earnings. It is a source of internal financing or self- financing or ‘ploughing back of profits’.
• Merits of Retained earnings are: → Retained earnings is a permanent source of funds available to an organisation → It does not involve any explicit cost in the form of interest, dividend or floatation cost → As the funds are generated internally, there is a greater degree of operational freedom and flexibility → It enhances the capacity of thebusiness to absorb unexpected losses; → It may lead to increase in the market price of the equity shares of a company.
• Demerits of Retained earnings are: → Excessive ploughing back may cause dissatisfaction amongst the shareholders as they would get lower dividends; → It is an uncertain source of funds as the profits of business are fluctuating; → The opportunity cost associated with these funds is not recognised by many firms. This may lead to sub-optimal use of the funds.
Q.5 Discuss the financial instruments used in international financing.
ANSWER: The financial instruments used in international financing are: → Global Depository Receipts (GDRs): These are receipts issued by depository banks against the shares of a company. Such depository receipts denominated in US dollars are known as Global Depository Receipts (GDR). GDR is a negotiable instrument and can be traded freely like any other security. In the Indian context, a GDR is an instrument issued abroad by an Indian company to raise funds in some foreign currency and is listed and traded on a foreign stock exchange.
→ American Depository Receipts (ADR’s): The depository receipts issued by a company in the USA are known as American Depository Receipts. ADRs are bought and sold in American markets like regular stocks. It is similar to a GDR except that it can be issued only to American citizens and can be listed and traded on a stock exchange of USA.
→ Foreign Currency Convertible Bonds (FCCBs): These bonds are debt securities that are convertible into equity shares or depository receipts after a specific period of time. The terms and prices of such conversions are generally specified in advance. The return on such securities is pre-fixed and lower than the return on non-convertible securities.
Q.6 What is a commercial paper? What are its advantages and limitations.
ANSWER: Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short period, varying from 90 days to 364 days. It is issued by one firm to other business firms, insurance companies, pension funds and banks. The amount raised by CP is generally very large. As the debt is totally unsecured, the firms having good credit rating can issue the CP. Its regulation comes under the purview of the Reserve Bank of India.
• Advantages of Commercial paper are: → A commercial paper is sold on an unsecured basis and does not contain any restrictive conditions; → As it is a freely transferable instrument, it has high liquidity; → It provides more funds compared to other sources. Generally, the cost of CP to the issuing firm is lower than the cost of commercial bank loans; → A commercial paper provides a continuous source of funds. This is because their maturity can be tailored to suit the requirements of the issuing firm. Further, maturing commercial paper can be repaid by selling new commercial paper; → Companies can park their excess funds in commercial paper thereby earning some good return on the same.
• Limitations of Commercial paper are: → Only financially sound and highly rated firms can raise money through commercial papers. New and moderately rated firms are not in a position to raise funds by this method. → The size of money that can be raised through commercial paper is limited to the excess liquidity available with the suppliers of funds at a particular time; → Commercial paper is an impersonal method of financing. As such if a firm is not in a position to redeem its paper due to financial difficulties, extending the maturity of a CP is not possible.
Q.1 Name the stages in the formation of a company.
ANSWER:The different stages in the formation of company are:
Promotion
Incorporation
Subscription of capital
Commencement of Business
Q.2 List the documents required for the incorporation of a company.
ANSWER: The documents needed for registration for incorporation.
Memorandum of Association: The Memorandum of Association duly stamped, signed, and witnessed. In the case of a public business, it must be signed by at least seven members. For a private business, however, two members’ signatures are sufficient.
Articles of Association: As with the Memorandum, the Articles of Association must be legally stamped and witnessed. This is also a very important document for the company that describes the way through which the objectives of MOA could be achieved.
Director’s Approval: The prospective directors’ written approval to serve as directors, as well as an agreement to purchase qualification shares. The proposed Managing Director, Manager, or whole-time director’s agreement, if any also needed.
List of Directors: The names, addresses and all the details of the persons who have agreed to become and work as directors are provided.
Registrar’s Letter: A copy of the Registrar’s letter approving the name of the company.
Statutory Declaration: A statutory declaration attesting to the fact that all registration requirements have been met. This must be duly signed.
Documentary Evidence: Documentary evidence of payment of registration fees.
Prospectus: If a company wants to raise money from the public, prospectus is also needed.
Q.3 What is a prospectus? Is it necessary for every company to file a prospectus?
ANSWER:A prospectus is a company’s announcement or invitation to the general public to subscribe for or acquire the company’s shares or debentures. The initial public offering (IPO) is the process through which a public business can raise the money it requires.
It is not necessary for every company to file a prospectus, as a private business does not need to submit a prospectus since it is barred from collecting capital from the public. A prospectus is only necessary for a firm that needs to obtain cash from the general public by issuing shares or debentures.
Q.4 Briefly explain the term ‘Return of Allotment’.
ANSWER:Return of Allotment is a statement in which the names, addresses, the number of shares allotted to the shareholders is mentioned. It is signed by a director or secretary and is filed with the Registrar of Companies(ROC) within 30 days of allotment. It shows that the company has received the minimum subscription.
Q.5 At which stage in the formation of a company does it interact with SEBI?
ANSWER:A company interacts with SEBI (Securities and Exchange Board of India) in the third stage of formation of the company, that is Capital Subscription, as SEBI clearance is required to raise funds from the public. The company is supposed to abide by the rules and guidelines provided by SEBI so as to protect the investors’ interests. Thus, it is necessary for the company to get SEBI’s approval before proceeding with capital subscription.
Q.6 What is meant by the term ‘Promotion’? Discuss the legal position of promoters with respect to a company promoted by them.
ANSWER:Promotion is the preliminary step in the formation of a company. Promotion of company means taking all the necessary steps to incorporate a company as per the provision of the Company Act,2013. The persons undertaking the task of promotion are called Promoters. A promoter can be an individual, a partner, a company, an association or a syndicate.
The legal position of promoters with respect to a company promoted by them are:
The promoters are neither the trustees nor the agents of the company that they are forming. Promoters are the ones who come up with the idea of starting a business.
They are expected to disclose profits, if any, made during the contracts executed by him on behalf of the company he promotes.
They are responsible for the preparation of various documents needed for the incorporation of a company
Promoters can be nominated as first directors of the company.
They are not supposed to make any secret profit while promoting a company.
A company may choose to allot shares to them in order to compensate for their services.
Long Answer type Question:
Q.1 what is meant by the term ‘promotion’? Discuss the legal position of promoters with respect to a company promoted by them.
Answer: Promotion is the first stage in the formation of a company. It involves conceiving a business opportunity and taking an initiative to form a company so that practical shape can be given to exploiting the available business opportunity. Thus, it begins with somebody having discovered a potential business opportunity. Any person or a group of persons or even a company may have discovered an opportunity. If such a person or a group of persons or a company proceeds to form a company, then, they are said to be the promoters of the company. The legal position of promoters with respect to a company promoted by them are: → The promoters are neither the trustees nor the agents of the company that they are forming. This is because the company does not exist as a legal entity before its incorporation. → They cannot make any secret profits by making deals on behalf of the company. → They are legally liable for any untrue statement filed in the prospectus of the company. → The promoters cannot claim the expenses incurred by them during the promotion of the company. → The company may or may not indemnify the promoters for the payments made before its incorporation. The company may choose to allot shares to them in order to compensate for their services.
Q.2 Explain the steps taken by promoters in the promotion of a company.
Answer: Promoter is a person who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose. The steps taken by promoters in the promotion of a company are:
→ Identification of business opportunity: The first and foremost activity of a promoter is to identify a business opportunity. The opportunity may be in respect of producing a new product or service or making some product available through a different channel or any other opportunity having an investment potential.
→ Feasibility studies: All the identified business opportunities may not be feasible or profitable as real projects. The promoters, therefore, undertake detailed feasibility studies to investigate all aspects of the business they intend to start with the help of charted accountants, engineers, accountant, etc.. Various types of feasibility includes:• Technical feasibility: Sometimes an idea may be good but technically not possible to execute. It may be so because the required raw material or technology is not easily available. Therefore, the technical feasibility of the idea has to be considered before proceeding further. • Financial feasibility:Every business activity requires funds. The promoters have to estimate thefund requirements for the identified business opportunity. If the project cannot be financed within the fund available then idea may have to be dropped.• Economic feasibility: Sometimes it so happens that a project is technically viable and financially feasible but the chance of it being profitable is very little. So, the idea will have to given up.
→ Name approval: The promoters have to select a name for it and submit, an application to the registrar of companies of the state in which the registered office of the company is to be situated, for its approval. The proposed name may be approved if it is not considered undesirable. In such cases the proposed name is not accepted but some alternate name may be approved. Therefore, three names, in order of their priority are given in the application to the Registrar of Companies.
→ Fixing up Signatories to the Memorandum of Association: Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company. Generally, who sign the MoA become the first directors of the company.
→ Appointment of professionals: Certain professionals such as mercantile bankers, auditors etc., are appointed by the promoters to assist them in the preparation of necessary documents which are required to be with the Registrar of Companies. The details of the number of shares allotted to each shareholder, along with his or her addresses for correspondence, are submitted to the registrar.
→ Preparation of necessary documents: The promoter takes up steps to prepare certain legal documents includes Memorandum of Association, Articles of Association and Consent of Directors, which have to be submitted under the law, to the Registrar of the Companies for getting the company registered.
Q.3 What is ‘Memorandum of Association’? Briefly explain its clauses.
Answer: Memorandum of Association is the most important document as it defines the objectives of the company. No company can legally undertake activities that are not contained in its Memorandum of Association. The Memorandum of Association contains different clauses, which are:
→ The name clause: This clause contains the name of the company with which the company will be known, which has already been approved by the Registrar of Companies.
→ Registered office clause: This clause contains the name of the state, in which the registered office of the company is proposed to be situated.
→ Objects clause: It defines the purpose for which the company is formed. A company is not legally entitled to undertake an activity, which is beyond the objects stated in this clause. It can be divided into two types: • The main objects: The main objects for which the company is formed are listed in this sub-clause. • Other objects: Objects not included in the main objects could be stated in this sub-clause.
→ Liability clause: This clause limits the liability of the members to the amount unpaid on the shares owned by them.
→ Capital clause: This clause specifies the maximum capital which the company will be authorised to raise through the issue of shares.
→ Association clause: In this clause, the signatories to the Memorandum of Association state their intention to be associated with the company and also give their consent to purchase qualification shares.
Q.4 Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’
Answer:
Basis of difference
Memorandum of Association (MoA)
Articles of Association (AoA)
Objective
The MoA defines the character of a company and the scope of its activities.
The AoA defines the rules and regulation of the company.
Position
It is the main document of a company which is subordinate to the Companies Act.
It is the subsidiary document of a company which is subordinate to both MoA and the Companies Act.
Relationship
The MoA establishes the relation between the company and outsiders.
The AoA defines the relation of the company with its members.
Alteration
Altering the MoA requires the approval of a statutory authority.
The AOA can be easily altered by passing a resolution.
Ratification
Acts beyond MoA cannot be ratified.
Acts beyond the AoA can be ratified by the members if they do not violate the MoA.
Necessity
It is a necessary document.
It is a secondary document.
Q.5 What is the effect of conclusiveness of the ‘Certificates of Incorporation’ and ‘Commencement of Business’?
Answer: Effect of Certificates of Incorporation: → A company becomes a legal entity with perpetual succession on the date printed on the Certificate of Incorporation. After conclusiveness of the certificate of incorporation, the company becomes entitled to enter into valid contracts.
→ The Certificate of Incorporation is a conclusive evidence of the regularity of the incorporation and legal existence of a company even if there is any flaw in its registration process.
→ A company can immediately commence its business once its certificate of incorporation is issued. Thus, the certificate of incorporation is conclusive evidence of the existence of a company. As a result, the birth of the company cannot be questioned if it has the certificate of incorporation.
Effect of Certificate of Commencement of Business
→ The certificate of commencement of business is issued by the registrar of companies when all the documents submitted by the company are found satisfactory.
→ The commencement of business certificate acts as definite proof for the company that it has the legal right to do business.
→ The formation of a public company is completed once it is granted the certificate of commencement of business. Thus, the business activities of the company cannot be questioned as it is legally allowed to start its business after getting the certificate.
Q.6 Is it necessary for a public company to get its share listed on a stock exchange? What happens if a public company going for a public issue fails to apply for a stock exchange for permission to deal in its securities or fails to get such permission?
Answer: Yes, it is mandatory for every public company to be listed on a stock exchange. The public company is required to send an application to at least one stock exchange to get registered. Once it is listed, the company is allowed to offer its shares in order to become public. However, initially the company may offer only a small percentage of its shares to the public. If a public company going for a public issue fails to apply to a stock exchange for permission to deal in its securities or fails to get such permission before the expiry of ten weeks from the date of closure of subscription list, the allotment of shares done by the company shall become void and all money received from the applicants will have to be returned to them within eight days.
Q.1 What do you understand by social responsibility of business? How is it different from legal responsibility?
ANSWER: Social responsibility is an ethical paradigm that implies that an entity, whether an organization or an individual, has a responsibility to behave in the best interests of society as a whole. Every individual has a responsibility to fulfill in order to maintain a balance between the economy and the ecosystems.
Difference between Social and Legal Responsibility is:
Basis
Legal Responsibility
Social Responsibility
Scope
Under any law, act, or constitution, legal responsibility is required. It is comparatively a narrower term.
Social responsibility is a broad term that refers to a company’s obligation to society and the environment.
Obligation
Legal responsibility is obligatory.
Social responsibility is voluntary.
Legal action
Legal action can be taken against those who do not uphold their legal obligations.
There are no penalties for organisations that do not uphold their social responsibilities.
Q.2 What is environment? What is environmental pollution?
ANSWER: The whole of man’s surroundings, both natural and manmade is characterised as the environment. These surroundings also include resources that are beneficial to human life.
Environmental Pollution is when there are undesirable changes in the surrounding that have harmful effects on plants and animals. Pollution alters the physical, chemical, and biological properties of the atmosphere, land, and water. Because the environment can only absorb a certain quantity of pollutants and wastes, pollution exists.
Q.3 What is business ethics? Mention the basic elements of business ethics?
ANSWER: Ethics is concerned with determining what is acceptable and wrong in human behaviour based on a standard form of individual conduct/behaviour as approved by society in a particular sector of activity. The relationship between company objectives, procedures, and processes and the good of society is the subject of business ethics.
Elements of business ethics are:
Top management’s commitment,
Publication of code
Establishment of compliance mechanism,
Involving employees at all levels
Measuring results.
Q.4 Briefly explain
(a) Air pollution
ANSWER: Air pollution is the pollution in the air which isprimarily due to carbon monoxide emitted by automobiles, as well as smoke and other chemicals emitted by manufacturing industries. As a result of the pollution, a hole in the ozone layer has formed, causing severe global warming.
(b) Water pollution
ANSWER: Chemicals, industrial waste, and trash dumping are the main sources of pollution in water. It has killed a number of animals and poses a severe threat to human life.
(c) Land pollution.
ANSWER: Land contamination occurs when toxic wastes are dumped on it. This degrades the land’s quality, rendering it unsuited for agriculture or planting.
Q.5 What are the major areas of social responsibility of business?
ANSWER: Social responsibility is an ethical paradigm that implies that an entity, whether an organization or an individual, has a responsibility to behave in the best interests of society as a whole. Every individual has a responsibility to fulfil in order to maintain a balance between the economy and the ecosystems.
The major areas of social responsibility of business include the following:
Economic Responsibility
The primary social obligation of a business enterprise is the economic responsibility, i.e., to produce things and services that society desires and sell them for a profit.
Legal Responsibility
Every business has a legal obligation to follow the rules of the land. A business who abides to the laws and regulations of the country, is also a socially responsponsible business.
Ethical Responsibility
Described as socially acceptable behaviour that is not codified in legislation. This job requires some volunteer participation.
Discretionary Responsibility
It is the responsibility of the company to protect the capital investment by avoiding speculative activity and engaging in only healthy business initiatives that provide good returns on investment, such as charities, donations etc.
Q.6 State the meaning of Corporate Social Responsibility as per the Companies Act 2013.
ANSWER: CSR is a self-regulatory company model that strives to contribute to social goals, such as volunteering or ethically-oriented actions. It establishes a company’s social responsibility and accountability. This accountability is towards itself, its stakeholders (i.e., the people who have an interest in the life of a corporation including shareholders, creditors, consumers, competitors, workers, government and society at large).
Long answer Type Question:
Q.1 Build up arguments for and against social responsibilities. Answer:Arguments for Social Responsibility:
Justification for Existence and Growth: Although the main motive of any business is profit but the prosperity and growth of business is not possible without a continuous service to the society. Therefore, it is justified for a business to assume social responsibility.
Avoidance of Government Regulation: Businessmen can avoid the problem of government regulations by assuming social responsibilities voluntarily which helps to reduce the need for new laws.
Maintenance of Society: Those people who do not get a return for their hardships get indulged in anti-legal activities. Therefore, it is advisable for business enterprises to assume their social responsibilities.
Long Term Interest of the Firm: If consumers, workers, shareholders, government officials feel that they are not getting what they deserve, they start to withdraw their hands from business. It may prove more expensive for an enterprise.
Availability of Resources with Business: A business enterprise has effective human and financial resources to solve many of the social problems.
Converting Problems into Opportunities: Business can make risky situations useful by using their efficiency.
Better Environment for Doing Business: Business system should do something to meet needs before it is confronted with a situation when its own survival is endangered.
Holding Business responsible for Social Problems: Environmental pollution, unsafe workplaces, corruption in public institutions and discriminatory practices in employment are some of the problems which have caused due to business enterprises.
Arguments against Social Responsibility:
Violation of Profit Maximization: As per this argument, business enterprises claim that our objective is profit maximization. Business can reduce its cost and raise profits and then only it can meet its social responsibility.
Lack of Social Skills: Business enterprises neither have skill nor experience to solve all types of social problems. Therefore, it should be handled by specialized agencies.
Burden on Consumers: Many of the social responsibilities cost a lot and its burden falls on consumers only.
Lack of Broad Public Support: Business cannot operate successfully because of lack of cooperation and confidence on behalf of public to business enterprises.
Q.2 Discuss the forces which are responsible for increasing concern of business enterprises towards social responsibility. Answer: The following are the forces which are responsible for increasing the concern of business enterprises for social responsibility.
Threat of Public Regulation: The government is meant to safeguard the interests of society. Thus, in case the government feels that a business enterprise is behaving in a manner that is not socially desirable, then it can regulate the operations of that enterprise accordingly.
Pressure of Labour Movement: The increase in capital mobility over time has increased the pressure on business enterprises to pay attention to the welfare of workers, by providing them with healthy working conditions along with good remuneration.
Impact of Consumer Consciousness: As consumers today are aware of their rights and responsibilities, they take their decisions more rationally. Thus, business enterprises are made to work more efficiently and produce better products at reasonable rates to satisfy their customers.
Development of Social Standards: Business enterprises are not merely profit-making entities. For their long-term growth and existence, they require fulfilling the new standards of social welfare.
Development of Business Education: The spread of education over time has made consumers, investors, employees and owners aware of social problems, thereby making them more sensitive to social issues.
Relationship Between Social Interest and Business Interest: No business enterprise can work in isolation from society. Thus, there should be a balance between business interests and social interests, such that the business can grow by doing the maximum good to society.
Development of a Professional Managerial Class: Every business professional pursues the goal of profit maximization. But today’s professional managers make efforts to satisfy the interests of all members of society.
Q.3 ‘Business is essentially, a social institution and not merely a profit making activity.’ Explain. Answer: The primary objective of any business enterprise is profit maximization. This is because profit acts as a measure of success and at the same time is the main source of income for an enterprise. Also, profits are often used to finance the expansion projects of a business enterprise. However, it is argued that business enterprises are not merely profit-making entities. They are considered as social institutions, too, as they are created by society. As every business makes use of society’s resources in terms of human and physical capital, it cannot work in isolation from society. Its operations are affected by social problems such as unemployment and poverty. Thus, a need arises to create a balance between the business interests and social interests of a business enterprise, such that it can grow by doing the maximum good to society. Hence, we can say that a business enterprise is a social institution and not merely a profit-making entity. In this regard, the following are some of the responsibilities that must be fulfilled by an enterprise:
Paying taxes on time.
Paying fair wages to employees.
Supplying quality products at reasonable prices to customers.
Cooperating with the government in solving social problems, such as unemployment, poverty and illiteracy.
A business has some responsibility towards:
Shareholders or investors who contribute funds for business.
Employees and others that make up its personnel.
Consumers or customers who consume and/or use its outputs (products and/or services).
Government and local administrative bodies that regulate its commercial activities in their jurisdictions.
Members of a local community who are either directly or indirectly influenced by its activities in their area.
Surrounding environment of a location from where it operates.
The general public that makes up a big part of society.
Q.4 Why do the enterprises need to adopt pollution control measures? Answer: Pollution control is necessary for preserving and improving the quality of environmental resources. As business activities such as production, transportation, distribution, storage and consumption are often assumed to cause the maximum destruction to society’s resources, a need arises for adopting pollution control measures. Following are some of the reasons why business enterprises need to adopt pollution control measures,
Reduced health hazards: Pollutants in the environment cause diseases such as cancers and respiratory problems. Thus, pollution control measures will not only help in reducing the incidence of diseases but also help people enjoy a good and healthy life.
Reduced risk of liability: Enterprises are often held responsible for polluting the environment and are asked to compensate. Pollution control helps in reducing the risk of such liabilities.
Cost savings: Efficient pollution control mechanisms help in reducing the cost of waste disposal and the cost of cleaning up production plants. This in turn helps firms to reduce their costs.
Improved public image: An increase in the education level has made people more aware about environmental problems. As a result, they have started realising the need to protect the environment. Thus, business enterprises which adopt pollution control measures enjoy a good reputation in the society.
Other social benefits: Pollution control helps a firm to enjoy various other benefits such as cleaner surroundings, better quality of life for its employees as well as owners and increased availability of good quality resources.
Q.5 What steps can an enterprise take to protect the environment from the dangers of pollution? Answer: Various business activities such as production, transportation and consumption of goods oftenVarious business activities such as production, transportation and consumption of goods often result in over exploitation of natural resources. Thus, it is the responsibility of every business enterprise to control discharge of pollutants into the environment. The following steps can be taken by the business enterprises to control pollution.
Control by top managers: The top management of every organisation should be committed to creating, developing and maintaining a work culture conducive to environmental protection and pollution prevention.
Control by employees: Employees at all the levels of an organisation should be committed to keeping the environment clean and protected.
Better technology: Enterprises should employ good and superior technologies of production and use scientific techniques for waste disposal. This will ensure environmental protection and pollution control.
Follow rules: Enterprises must conform to the rules and regulations enacted by the government for the prevention of environmental pollution.
Increased awareness: By conducting workshops and training programmes, business enterprises must make an effort to spread awareness among its employees of the need to conserve the environment.
Assessment programmes: An efficient mechanism for the periodic assessment of pollution control programmes may also be adopted, in order to weigh their costs and benefits.
Q.6 Explain the various elements of business ethics. Answer: Business ethics can be defined as the code of conduct that a business must follow, such that it takes up only those activities that are desirable from the viewpoint of society. The purpose of business ethics is to guide managers and other employees in an organisation in performing their jobs in a manner that is socially acceptable. Business ethics should be followed in the day-to-day working of a business enterprise. The following are some of the elements of business ethics.
Commitment by top management: Top-level officers, such as the CEO’s and other higher level managers, must sincerely follow the ethical code of conduct. They should also guide other employees in their organisation in adopting the code.
Publication of a code: An enterprise must clearly define the ethical code of conduct to be followed in the organisation. The code should include quality standards for work, laws governing production and employee’s health and safety standards.
Establishment of compliance mechanism: In addition to setting performance standards, an enterprise must also devise a mechanism through which it can measure the actions of individual employees. This should be done in order to confirm whether the ethical standards are being met.
Involvement of employees at all levels: The successful implementation of ethical standards depends to a large extent on the involvement of employees at different levels. This is because it is the employees who actually implement the ethical codes.
Measurement of results: Although it is difficult to measure the end results of implementation of ethical standards, the top management should take steps to monitor compliance. Also, it must take serious action against any unethical behaviour in the organisation.
Q.1 State any three differences between e- business and traditional business.
ANSWER: The differences between e-business and traditional business are:
Basis of difference
Traditional business
e-Business
Ease in formation
The process of formation is complicated by the various requirements that must be completed.
It’s a lot easier to get started.
Internal communication
Communication is structured in a hierarchical manner (from top to bottom)
Follows a communication framework that isn’t hierarchical (no defined structure).
Start-up cost
High startup costs
Start-up costs are quite cheap (as physical facilities are not required).
Market access
The physical domain is the only domain that may be accessed.
Access is relatively broad and unrestricted.
Q.2. How does outsourcing represent a new mode of business?
ANSWER: Outsourcing has changed the way businesses were done traditionally, these are growing each day, and have a great future ahead as well. Outsourcing is an innovative concept which has raised the value of the businesses, facilitated more convenience, and added more efficiency in business activities such as procurement, production, marketing etc. This is why it is called an emerging mode of business.
The factors responsible for the growing importance of outsourcing are:
Assist in making high-quality products more affordable
Facilitate innovation and technology development
Accelerate the business process
Assist in making high-quality products more affordable
Q.3 Describe briefly any two applications of e- business.
ANSWER: The two applications of e-business are:
A. B2B Commerce
Because both parties involved in e-commerce transactions are businesses, the term B2B (business-to-business) was coined.
A business must engage with a number of other businesses in order to create utility or deliver value. These businesses may be suppliers or vendors of various inputs, or they may be part of the distribution channel through which a company distributes its items to clients.
Example Turtle.com
B. B2C Commerce
Business-to-customer (B2C) interactions involve business organizations on one hand and their customers on the other.
It encompasses a wide range of internet marketing operations such as identifying activities, promoting them, and occasionally even delivering items.
It enables a business to be in touch with its customers on round-the-clock basis which helps in knowing the customer satisfaction level.
Few examples are Amazon, Walmart etc.
Q.4 What are the ethical concerns involved in outsourcing?
ANSWER: Outsourcing has also raised some ethical concerns. The major ethical issue are:
Employment: Taking away employment opportunities from one’s own country, when the function is outsourced to a company from another country.
Child labour: Children and women are employed in factories as a result of outsourcing, and working conditions are unsanitary and even dangerous. Due to strict regulations against the employment of child labour in industrialised nations, the corporations are unable to do so.
Discrimination: Similarly there exists wage-discrimination on the basis of sex of the worker. Workers are exploited by giving less than minimum wages and hence women are paid lower wages.
Confidentiality: Confidentiality issues are there, as outsourcing necessitates the exchange of a great deal of critical information and knowledge. It can harm the interest of the party that outsources its processes and even has a risk of competitor firms getting information about that company.
Q.5 Describe briefly the data storage and transmission risks in e-business.
ANSWER: Data storage and transmission risks:
Data in the systems and on the way is vulnerable to a variety of threats.
Important data may be stolen or altered for nefarious purposes or merely for fun/adventure
Antivirus softwares installed and updated on a regular basis prove useful in scanning files and discs, protecting data files, folders, and systems against virus attacks.
Data could be intercepted during transmission. Cryptography can be used for this. It refers to the process of encrypting data and transforming it to cyphertext, an unreadable format. Only those with a secret key may decipher (or decrypt) the message into ‘plaintext.’
Q.6 Why are e-business and outsourcing referred to as the emerging modes of business? Discuss the factors responsible for the growing importance of these trends.
ANSWER: E-business and outsourcing have changed the way businesses were done traditionally, these are growing each day, and have a great future ahead as well. E-businesses and outsourcing are innovative concepts which have raised the value of the businesses, facilitated more convenience, and added more efficiency in business activities such as procurement, production, marketing etc. This is why they are called as emerging modes of businesses:
The factors responsible for the growing importance of outsourcing and e business:
They assist in making high-quality products more affordable: The demand for high-quality, custom-made products has risen, and e-commerce and outsourcing are playing an increasingly important role in supplying consumers with what they want at a fair price. E-business and outsourcing assist in achieving the goal of excellence by enabling the manufacture and supply of high-quality products.
Facilitate innovation and technology development: Every firm needs to innovate and develop new ideas and products in order to stay competitive. E-business and outsourcing have emerged as a boon for producers in this setting, as they allow for the ongoing development of company strategies and new technology.
They accelerate the business process: As customer demands expand, it has become important to facilitate trade from anywhere and at any time. E-commerce and outsourcing help to speed up the purchasing and selling procedure around the clock.
They lay the path for efficient after-sales support: It is critical for any firm to cater to its clients’ demands. Customers benefit from e-commerce and outsourcing because they can get rapid and effective post-sale services.
Q.7 Elaborate the steps involved in on-line trading.
ANSWER: The steps are:
Registration ⇒ Placing an order ⇒ Payment mechanism
Step 1: Registration:
When you register with an online retailer, you create an ‘account’, by filling up the registration form.
A “password” must be entered among the numerous details since the areas relating to an individual’s “account” and “shopping basket” are password protected.
Step 2: Placing an order:
You can add products to the shopping cart by dragging and dropping them.
A shopping cart is an online record of what an individual has added to his cart while visiting an online store.
Once you’ve decided what you want to buy, you may ‘checkout.’
Step 3: Payment Mechanism:
Purchases through online shopping may be done in a number of ways.
Cash-on-Delivery: Payment for things ordered online can be made in cash when the goods are delivered physically.
Cheque: The online merchant may arrange for the customer’s cheque to be picked up. After realisation, product delivery may be attempted.
Net-banking Transfer: Modern banks provide to their customers the facility of electronic transfer of funds over the Internet using Immediate Payment Service (IMPS), NEFT and RTGS.
Credit or Debit Cards: The holders of credit cards can enjoy making purchases on credit. The amount owed by the cardholder to the online seller is assumed by the card issuing bank, which then transfers the transaction’s amount to the seller’s credit. A debit card permits the holder to make purchases up to the amount of money in the linked account. The moment a transaction is made, the amount due as payment is deducted electronically from the card.
Digital Cash: This type of currency has no physical qualities, but it allows you to utilise real money in an electronic format, such as through e-wallets or PayTm.
Q.8 Evaluate the need for outsourcing and discuss its limitations.
ANSWER: Outsourcing is the process of contracting some business functions to external agencies.
Need for outsourcing:
A. Delimiting the scope of business:
Business firms are realising the usefulness of focusing on just a few areas where they have distinct capabilities or core competence, and contracting out the rest of the activities to their outsourcing partners.
By restricting the scope of their business, they may concentrate their attention and resources on a few key tasks, improving efficiency and effectiveness.
B. Quest of excellence:
In two ways, outsourcing allows the company to strive for excellence. One, due to their narrow focus, individuals excel in the activities that they can do best.
They also succeed by increasing their capabilities by outsourcing out the remaining tasks to people who excel at them.
C. Cost reduction:
Division of labour and specialisation improve quality while also lowering costs.
This occurs when outsourcing partners benefit from economies of scale by providing the same service to multiple organisations.
Cost reduction is also aided by differences in the prices of various production inputs across countries.
D. Growth through Alliance:
To the extent one can avail of the services of the others, the investment requirements are reduced.
As a result, a company can grow quickly because the same quantity of investible funds creates a big number of firms.
Inter-organizational information sharing and collaborative learning are facilitated by outsourcing.
F. Economic development:
Outsourcing, more offshore outsourcing stimulates entrepreneurship, employment and exports in the host counties (i.e., the countries from where outsourcing is done).
Limitations of Outsourcing Are:
A. Confidentiality
Outsourcing necessitates the exchange of a great deal of critical information and knowledge.
It can harm the interest of the party that outsources its processes and even has a risk of competitor firms getting information about that company.
B. Sweat shopping
Outsourcing aims to reduce expenses by maximising the use of low-cost labour.
So, the firms that go in for outsourcing look for the ‘doing’ skills rather than development of the ‘thinking’ skills.
C. Ethical concerns
In order to cut the cost, the companies outsource the work to some other country where the work is done in an unethical way.
For example work is accomplised by doing child labour.
D. Resentment in the home countries
In the course of contracting out manufacturing, marketing, research and development or IT based services, what is ultimately contracted out is ’employment’ or jobs from one country to another.
This may cause resentment back in the home country if the home country is suffering from the problem of unemployment.
Q.9 Discuss the salient aspects of B2C commerce.
ANSWER: The transactions under ‘B2C commerce’ are between a business firm and its customers.
The salient aspects of B2C commerce are:
Includes: It includes promotion, product information, reviews about the product / services and delivery of the product at the doorstep.
Cost of product: The cost of product and services is kept low through this method and the speed of transaction is also faster.
Customisation: It has enabled businesses to produce products with customised characteristics to meet the needs of their customers. It also offers clients the ease of delivery and payment.
Customer Feedback: The B2C e-commerce model allows a company to stay in contact with its consumers by conducting online demand surveys.
Customer service: Customers can also utilise call centres set up by businesses to make toll-free calls to ask questions or file complaints 24 hours a day, 7 days a week, at no cost to them. B2C companies include Amazon, Walmart, and others.
Q.10 Discuss the limitations of electronic mode of doing business. Are these limitations severe enough to restrict its scope? Give reasons for your answer.
ANSWER: The various limitations of electronic mode of business are:
I. Lack of personal touch:
Unlike traditional business, you cannot touch and feel the product. So it is difficult for the consumers to check the quality of the product, until the order has been delivered.
Traditional businesses have contact with the salesperson in the traditional way, and there is a sense of humanity and trustworthiness as a result of this. It also fosters customer confidence. Such characteristics will always be absent from an e-business paradigm.
II. Delivery time:
The delivery of the products takes time in e-business. This lag time often discourages customers.
However, these days, e-businesses are trying to resolve such issues by promising very limited time. For exampleAmazon now guarantees delivery within one day.
III. Security issues:
Many people are capable of conducting online business. Additionally, hackers have an easier time obtaining one’s financial information. It has a few concerns with security and integrity. This creates scepticism among potential clients.
IV. Technology capability and competency of e-business participants are required:
E-business necessitates a high level of computer literacy among the parties involved. This obligation can also be blamed for the so-called digital divide.
The term “digital divide” refers to the separation of society based on one’s familiarity or lack thereof with digital technologies.
V. Ethical fallouts:
Companies utilise an ‘electronic eye’ to keep track of your computer files, email account, and internet visits, among other things, so as to gain knowledge about your interests, preferences etc. It’s unethical in a number of ways
Despite the limitations, the scope of e- business is quite vast which helps in overcoming the limitations. In India, nowadays many businesses are becoming aware of the advantage of e-business and are incorporating this into their strategies. Almost all types of business functions such as production, finance and marketing as well as managerial activities like planning, organizing can be carried out over computer network. Various business and payments apps popularly used in E-business transactions. Hence, despite the limitations, the scope of e-business cannot be restricted
Long Answer Type Question:
Q.1 Why are E-business and outsourcing referred to as the emerging modes of business? Discuss the factors responsible for the growing importance of these trends. Answer: E-business and outsourcing are referred to as emerging modes of business. Prefix ‘emerging’ puts emphasis on the fact that these businesses are in the process of development. These changes are happening here and now, and, that these changes are likely to continue. In fact, three changes are taking place most strongly:
Digitizaton: The conversion of text, sound, images, video and other content into a series of ones and zeroes that can be transmitted electronically.
Outsourcing: Contracting out non core activities to outside firms.
Internationalisation and globalisation: More and more foreign companies are entering into India and sending Ashia and Indian companies becoming MNCs. Therefore, E-business and outsourcing referred to as the emerging modes of business.
Following factors are responsible for the growing importance of these trends:
Improvement in Information Technology: With the improvement in information technology and emergence of internet the process of outsourcing and e-business is on an expansionary path.
More and More Interactive Websites: Websites are becoming more and more interactive. It is removing the problem of ‘low touch’.
Improvement in Communication Technology: Communication technology is continually evolving and increasing the speed and quality of communication through internet.
Diffusion of E-Commerce in all nooks and corners of the country: In order to diffuse e-commerce in all nooks and corners, India has undertaken about 150 such projects. It is also growing importance of these trends.
Global Competitive Pressures for higher quality products: Due to adoption of new economic policy of 1991 in India, there has been an increase in competitive pressure from giant sized MNCs and global enterprises.
Ever Demanding Consumers: There is increasing demands from consumers for high quality products at minimum cost. Therefore, e-business and outsourcing are being chosen as newer options. But e-business and outsourcing are not emerging out of compulsion but also out of choice because of its benefits to consumers as well as producers.
Q.2 Elaborate the steps involved in online trading. Answer: Operationally, following steps are involved in online trading:
Registration: First step in online trading is registration with the online trader by filling up a registration form. With registration buyer has opened an account with online trader. A password is created for the account which protects account and shopping cart which can be misused otherwise.
Placing an Order: An account holder can drop the items in the shopping cart. Shopping cart is an online record of what a person has picked up while browsing the online store. Once being sure of what a person wants to buy, one can check out and choose his payment options.
Payment Mechanism: In online trading payment may be made in any of the following ways:
Cash On Delivery: Under this, the payment for goods ordered online may be made in cash at the time of physical delivery of the goods.
Cheque: Another option is that the online vendor may arrange for the pickup of the cheque from the customer’s end. Upon realization, goods may be delivered.
Net Banking Transfer: These days banks provide facility to the customers for electronic transfer of funds using internet. Therefore, a buyer can also make use of net banking money transfer to pay for the goods ordered.
Credit or Debit Cards: These are also called plastic money. These cards are most popularly used in payment for online transactions. To accept credit card as an online payment type, the seller first needs a secure means of collecting credit card information from its customer. Payments through credit cards can be processed either manually, or through online authorization system like SSL Certificate.
Digital Cash: It is a kind of electronic currency which exists only in cyberspace. It has no real physical properties, but offers the ability to use real currency.in an electronic format. For this, the buyer has to deposit cash in bank account which issues equivalent digital cash to the person which can be used for online trading. It is more secure than credit or debit cards.
Q.3 Evaluate the need for outsourcing and discuss its limitations. Answer: Outsourcing has emerged as a way of doing business due to global competitive pressures for higher quality products at lower costs, ever-demanding customers and emerging technologies. Need for outsourcing can be understood from the benefits which are given below:
Focusing of Attention: Business firms are realizing the importance of focusing on core areas where they have distinct ability and core competence and contracting out the rest of the activities to their outsourcing partners. A business organization needs to decide its core areas and non-core areas. Once they outsource non-core areas, they can focus their attention on selected activities. It will increase efficiency and effectiveness.
Quest for Excellence: Outsourcing enables the firms to attain excellence in two ways: (a) By focusing on activities selected, their excellence in those activities increases. (b) They excel by extending their capabilities through contracting out the remaining activities to them who excel in them.
Cost Reduction: In the age of globalization, cost reduction is of vital importance to survive in the market. Division of labour not only enhances quality but also reduces cost. For example, India is preferred as an outsourcing destination because of cost factors.
Growth through alliance: When some activities are outsourced then these alliance partners invest for the outsourced activities. Business can be expanded by same amount of investible funds as now these funds are to be invested in limited number of activities.
Fillip to Economic Development: Outsourcing stimulates entrepreneurship, employment and exports in the host countries. For example, in India there has been remarkable growth in entrepreneurship, employment and exports that today India is an undisputed leader in software development and IT enable services.
But outsourcing is not an unmixed blessing. It has its own limitations. Some of which are discussed below:
Confidentiality: When a business opts for outsourcing, it has to share a lot of vital information and knowledge. This information may be leaked by the outsourcing partner. It may be against the outsourcing firm. It is also possible that the outsourcing partner starts a business of same line after getting such information.
Ethical Concerns: Many a time, outsourcing makes use of child labour and violates labour laws to reduce costs. They also discriminate in wages on the basis of sex.
Sweat Shopping: A firm which goes in for outsourcing actually transfers ‘doing’ skills rather than ‘thinking’ skills. Therefore, they do not create skilled manpower in developing countries but just take maximum benefit of low cost labour by transferring non intellectual tasks.
Resentment in their Home Countries: Outsourcing is being disliked by people in developed countries because the jobs which they could get are being transferred to developing countries through outsourcing. The problem is still more severe if there is problem of unemployment in home country of outsourcing firm.
Q.4 Discuss the salient aspects of B2C commerce. Answer: In this, both the parties involved are business firms and therefore, it has been named as B2B i.e., business to business. Historically, the term e-commerce originally meant for facilitation of B2B transactions using Electronic Data Interchange (EDI) technology to send and receive commercial documents like purchase orders and invoices. Salient aspects of B2B Commerce:
Need: Creation of utility requires a business to contact with a number of other businesses which
May be suppliers
May act as channel of distribution.
Different middlemen in different locations;
Changing production as per specifications of the customer.
Benefits:
It strengthens and improves the distribution system of a firm. For example, each consignment of goods from a warehouse and the stock in hand can be monitored and replenishments and reinforcements can be set in motion as and when needed.
A customer’s specifications can be routed through the dealers to the factory so that there may be customized production.
B2B E-commerce expedites the movement of information and documents.
It also expedites money transfers.
Example: The manufacture of an automobile requires assembly of a large number of components which in turn are being manufactured elsewhere. To reduce dependence on a single vendor, the automobile factory cultivates more than one vendor for each of the components. A network of computers is used for placement of orders, controlling production and delivery of components and making payments.
Q.5 Discuss the limitations of electronic mode of doing business. Are these limitations severe enough to restrict its scope? Give reasons for your answer. Answer: The limitations of electronic mode of doing business are given below:
Low personal Touch: It lacks the warmth of interpersonal interactions. Therefore, such products which need personal touch like beauty products, garments, fashion accessories etc. can’t be traded through e-business.
Mismatch between order giving/taking speed and order fulfillment speed: Sometimes websites take a long time to open which may frustrate the user. Even after giving or taking order, it takes enough time to give physical delivery of goods. It also plays on the patience of the customer.
Knowledge of technology is must: For e-commerce both the parties need fairly high degree of familiarity with the world of computers. It divides the society into two parts i.e; one who are familiar with digital technology and other who are not.
Increased risk due to parties being unknown to each other: When two parties are involved in e-business, they are unaware of personal identities of each other. They do not even know the locations of the parties involved. It makes e-business risky. There may also be problems of virus and hacking.
People Resistance: People are resistant to change their ways and adopt new technology. Change is perceived as a source of stress and insecurity by many.
Ethical Concerns: These days companies use an electronic eye to keep track of the websites being used by employees, computer files that they use, their e-mal accounts etc. It is not ethical.
But in spite of these limitations, e-business is the way. No, these limitations are not severe enough to restrict its scope.
Improvement in Information Technology: With the improvement in information technology and emergence of internet the process of outsourcing and e-business is on an expansionary path. Anti virus and improved security measures are increasing to make e-business more secure and safer option.
More and more Interactive Websites: Websites are becoming more and more interactive. It is removing the problem of ‘low personal touch’.
Improvement in Communication Technology: Communication technology is continually evolving and increasing the speed and quality of communication through internet so that customer does not get frustrated in processing the order.
Diffusion of E-Commerce in all nooks and corners of the country: An order to diffuse e-commerce in all nooks and corners, India has undertaken about 150 such projects. It is increasing the number of people acquainted with digital technology. We can conclude that e-business will continue to stay and reshape the businesses, governance and economies.
