class-11-business-studies

188 BUSINESS STUDIES the purchase of plant and machinery, The amount of working capital furniture, and other fixed assets. required varies from one business Similarly, some funds are required for concern to another depending on various day-to-day operations, say to purchase factors. A business unit selling goods on raw materials, pay salaries to credit, or having a slow sales turnover, employees, etc. Also when the business for example, would require more expands, it needs funds. working capital as compared to a concern selling its goods and services on The financial needs of a business can cash basis or having a speedier turnover. be categorised as follows: (a) Fixed capital requirements: In The requirement for fixed and working capital increases with the order to start business, funds are growth and expansion of business. At required to purchase fixed assets like times additional funds are required for land and building, plant and upgrading the technology employed so machinery, and furniture and that the cost of production or operations fixtures. This is known as fixed can be reduced. Similarly, larger funds capital requirements of the may be required for building higher enterprise. The funds required in inventories for the festive season or to fixed assets remain invested in the meet current debts or expand the business for a long period of time. business or to shift to a new location. It Different business units need varying is, therefore, important to evaluate the amount of fixed capital depending on different sources from where funds can various factors such as the nature of be raised. business, etc. A trading concern for example, may require small amount 8.3 CLASSIFICATION OF SOURCES OF of fixed capital as compared to a FUNDS manufacturing concern. Likewise, the need for fixed capital investment In case of proprietary and partnership would be greater for a large concerns, the funds may be raised either enterprise, as compared to that of a from personal sources or borrowings small enterprise. from banks, friends etc. In case of company form of organisation, the (b) Working Capital requirements: different sources of business finance The financial requirements of an which are available may be categorised enterprise do not end with the as given in Table 8.1 procurement of fixed assets. No matter how small or large a business As shown in the table, the sources is, it needs funds for its day-to-day of funds can be categorised using operations. This is known as working different basis viz., on the basis of the capital of an enterprise, which is used period, source of generation and the for holding current assets such as ownership. A brief explanation of these stock of material, bills receivables and classifications and the sources is for meeting current expenses like provided as follows: salaries, wages, taxes, and rent. 2018-19

Table 8.1 Classification 2018

SOURCES OF BUSINESS FINANCE 189 n of Sources of Funds 8-19

190 BUSINESS STUDIES 8.3.1 Period Basis 8.3.2 Ownership Basis On the basis of period, the different On the basis of ownership, the sources sources of funds can be categorised can be classified into ‘owner’s funds’ into three parts. These are long-term and ‘borrowed funds’. Owner’s funds sources, medium-term sources and means funds that are provided by the short-term sources. owners of an enterprise, which may be a sole trader or partners or The long-term sources fulfil the shareholders of a company. Apart financial requirements of an enterprise from capital, it also includes profits for a period exceeding 5 years and reinvested in the business. The include sources such as shares and owner’s capital remains invested in the debentures, long-term borrowings and business for a longer duration and is loans from financial institutions. Such not required to be refunded during the financing is generally required for the life period of the business. Such capital acquisition of fixed assets such as forms the basis on which owners equipment, plant, etc. acquire their right of control of management. Issue of equity shares Where the funds are required for a and retained earnings are the two period of more than one year but less important sources from where owner’s than five years, medium-term sources funds can be obtained. of finance are used. These sources include borrowings from commercial ‘Borrowed funds’ on the other banks, public deposits, lease financing hand, refer to the funds raised through and loans from financial institutions. loans or borrowings. The sources for raising borrowed funds include loans Short-term funds are those which from commercial banks, loans from are required for a period not exceeding financial institutions, issue of one year. Trade credit, loans from debentures, public deposits and trade commercial banks and commercial credit. Such sources provide funds for papers are some of the examples of the a specified period, on certain terms sources that provide funds for short and conditions and have to be repaid duration. after the expiry of that period. A fixed rate of interest is paid by the Short-term financing is most borrowers on such funds. At times it common for financing of current assets puts a lot of burden on the business such as accounts receivable and as payment of interest is to be made inventories. Seasonal businesses that even when the earnings are low or must build inventories in anticipation when loss is incurred. Generally, of selling requirements often need short- borrowed funds are provided on the term financing for the interim period security of some fixed assets. between seasons. Wholesalers and manufacturers with a major portion of their assets tied up in inventories or receivables also require large amount of funds for a short period. 2018-19

SOURCES OF BUSINESS FINANCE 191 8.3.3 Source of Generation Basis cost and associated risk, a choice may be made about the source to be used. Another basis of categorising the sources For example, if a business wants to of funds can be whether the funds are raise funds for meeting fixed capital generated from within the organisation or requirements, long term funds may be from external sources. Internal sources required which can be raised in the form of funds are those that are generated from of owned funds or borrowed funds. within the business. A business, for Similarly, if the purpose is to meet the example, can generate funds internally by day-to-day requirements of business, accelerating collection of receivables, the short term sources may be tapped. disposing of surplus inventories and A brief description of various sources, ploughing back its profit. The internal along with their advantages and sources of funds can fulfill only limited limitations is given below. needs of the business. 8.4.1 Retained Earnings External sources of funds include those sources that lie outside an A company generally does not distribute organisation, such as suppliers, all its earnings amongst the lenders, and investors. When large shareholders as dividends. A portion of amount of money is required to be the net earnings may be retained in the raised, it is generally done through the business for use in the future. This is use of external sources. External funds known as retained earnings. It is a may be costly as compared to those source of internal financing or self- raised through internal sources. In financing or ‘ploughing back of profits’. some cases, business is required to The profit available for ploughing back mortgage its assets as security while in an organisation depends on many obtaining funds from external sources. factors like net profits, dividend policy Issue of debentures, borrowing from and age of the organisation. commercial banks and financial institutions and accepting public Merits deposits are some of the examples of external sources of funds commonly The merits of retained earning as a used by business organisations. source of finance are as follows: 8.4 SOURCES OF FINANCE (i) Retained earnings is a permanent source of funds available to an A business can raise funds from organisation; various sources. Each of the source has unique characteristics, which must be (ii) It does not involve any explicit cost properly understood so that the best in the form of interest, dividend or available source of raising funds can floatation cost; be identified. There is not a single best source of funds for all organisations. (iii) As the funds are generated Depending on the situation, purpose, internally, there is a greater degree of operational freedom and flexibility; 2018-19

192 BUSINESS STUDIES (iv) It enhances the capacity of the record of payment and degree of business to absorb unexpected competition in the market. Terms of losses; trade credit may vary from one industry to another and from one person to (v) It may lead to increase in the another. A firm may also offer different market price of the equity shares credit terms to different customers. of a company. Limitations Merits Retained earning as a source of funds The important merits of trade credit are has the following limitations: as follows: (i) Excessive ploughing back may (i) Trade credit is a convenient and cause dissatisfaction amongst the continuous source of funds; shareholders as they would get lower dividends; (ii) T rade credit may be readily available in case the credit (ii) It is an uncertain source of funds worthiness of the customers is as the profits of business are known to the seller; fluctuating; (iii) Trade credit needs to promote the (iii) The opportunity cost associated sales of an organisation; with these funds is not recognised by many firms. This may lead to (iv) If an organisation wants to increase sub-optimal use of the funds. its inventory level in order to meet expected rise in the sales volume 8.4.2 Trade Credit in the near future, it may use trade credit to, finance the same; Trade credit is the credit extended by one trader to another for the purchase (v) It does not create any charge on of goods and services. Trade credit the assets of the firm while facilitates the purchase of supplies providing funds. without immediate payment. Such credit appears in the records of the Limitations buyer of goods as ‘sundry creditors’ or ‘accounts payable’. Trade credit is Trade credit as a source of funds has commonly used by business certain limitations, which are given as organisations as a source of short-term follows: financing. It is granted to those customers who have reasonable amount (i) Availability of easy and flexible of financial standing and goodwill. The trade credit facilities may induce a volume and period of credit extended firm to indulge in overtrading, depends on factors such as reputation which may add to the risks of the of the purchasing firm, financial position firm; of the seller, volume of purchases, past (ii) Only limited amount of funds can be generated through trade credit; (iii) It is generally a costly source of funds as compared to most other sources of raising money. 2018-19

SOURCES OF BUSINESS FINANCE 193 8.4.3 Factoring services include SBI Factors and Commercial Services Ltd., Canbank Factoring is a financial service under Factors Ltd., Foremost Factors Ltd., which the ‘factor’ renders various State Bank of India, Canara Bank, services which includes: Punjab National Bank, Allahabad (a) Discounting of bills (with or without Bank. In addition, many non-banking finance companies and other recourse) and collection of the client’s agencies provide factoring service. debts. Under this, the receivables on account of sale of goods or services Merits are sold to the factor at a certain discount. The factor becomes The merits of factoring as a source of responsible for all credit control and finance are as follows: debt collection from the buyer and provides protection against any bad (i) Obtaining funds through factoring debt losses to the firm. There are two is cheaper than financing through methods of factoring — recourse and other means such as bank credit; non-recourse. Under recourse factoring, the client is not protected (ii) With cash flow accelerated by against the risk of bad debts. On the factoring, the client is able to meet other hand, the factor assumes the his/her liabilities promptly as and entire credit risk under non-recourse when these arise; factoring i.e., full amount of invoice is paid to the client in the event of (iii) Factoring as a source of funds is the debt becoming bad. flexible and ensures a definite (b) Providing information about credit pattern of cash inflows from credit worthiness of prospective client’s etc., sales. It provides security for a Factors hold large amounts of debt that a firm might otherwise information about the trading be unable to obtain; histories of the firms. This can be valuable to those who are using (iv) It does not create any charge on factoring services and can thereby the assets of the firm; avoid doing business with customers having poor payment record. Factors (v) The client can concentrate on other may also offer relevant consultancy functional areas of business as the services in the areas of finance, responsibility of credit control is marketing, etc. shouldered by the factor. The factor charges fees for the Limitations services rendered. Factoring appeared on the Indian financial The limitations of factoring as a source scene only in the early nineties as a of finance are as follows: result of RBI initiatives. The organisations that provides such (i) This source is expensive when the invoices are numerous and smaller in amount; (ii) The advance finance provided by the factor firm is generally available at a higher interest cost than the usual rate of interest; 2018-19

194 BUSINESS STUDIES (iii) The factor is a third party to the (iii) Lease rentals paid by the lessee are customer who may not feel deductible for computing taxable comfortable while dealing with it. profits; 8.4.4 Lease Financing (iv) It provides finance without diluting the ownership or control A lease is a contractual agreement of business; whereby one party i.e., the owner of an asset grants the other party the right (v) The lease agreement does not affect to use the asset in return for a periodic the debt raising capacity of an payment. In other words it is a renting enterprise; of an asset for some specified period. The owner of the assets is called the (vi) The risk of obsolescence is borne ‘lessor’ while the party that uses the by the lesser. This allows greater assets is known as the ‘lessee’ (see flexibility to the lessee to replace Box A). The lessee pays a fixed periodic the asset. amount called lease rental to the lessor for the use of the asset. The terms and Limitations conditions regulating the lease arrangements are given in the lease The limitations of lease financing are contract. At the end of the lease period, given as below: the asset goes back to the lessor. Lease finance provides an important means (i) A lease arrangement may impose of modernisation and diversification to certain restrictions on the use of the firm. Such type of financing is more assets. For example, it may not prevalent in the acquisition of such allow the lessee to make any assets as computers and electronic alteration or modification in the equipment which become obsolete asset; quicker because of the fast changing technological developments. While (ii) The normal business operations making the leasing decision, the cost may be affected in case the lease of leasing an asset must be compared is not renewed; with the cost of owning the same. (iii) It may result in higher payout Merits obligation in case the equipment is not found useful and the lessee The important merits of lease financing opts for premature termination of are as follows: the lease agreement; and (i) It enables the lessee to acquire the (iv) The lessee never becomes the asset with a lower investment; owner of the asset. It deprives him of the residual value of the asset. (ii) Simple documentation makes it easier to finance assets; 8.4.5 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 2018-19

SOURCES OF BUSINESS FINANCE 195 usually higher than that offered on beneficial to both the depositor as well bank deposits. Any person who is as to the organisation. While the interested in depositing money in an depositors get higher interest rate than organisation can do so by filling up a that offered by banks, the cost of prescribed form. The organisation in deposits to the company is less than return issues a deposit receipt as the cost of borrowings from banks. acknowledgment of the debt. Public Companies generally invite public deposits can take care of both medium deposits for a period upto three years. and short-term financial requirements The acceptance of public deposits is of a business. The deposits are regulated by the Reserve Bank of India. Box A The Lessors 1. Specialised leasing companies: There are about 400-odd large companies which have an organisational focus on leasing, and hence, are known as leasing companies. 2. Banks and bank-subsidiaries: In February 1994, the RBI allowed banks to directly enter leasing. Till then, only bank subsidiaries were allowed to engage in leasing operations, which was regarded by the RBI as a non-banking activity. 3. Specialised financial institutions: A number of financial institutions, at the Central as well as the State level in India, use the lease instrument along with traditional financing instruments. Significantly, the ICICI is one of the pioneers in Indian leasing. 4. Manufacturer-lessors: As competition forces the manufacturer to add value to his sales, he finds the best way to sell the product on lease. Vendor leasing is gaining increasing importance. Presently, vendors of automobiles, consumer durables, etc., have alliances or joint ventures with leasing companies to offer lease finance against their products. The Lessees 1. Public sector undertakings: This market has witnessed a good rate of growth in the past. There is an increasing number of both centrally as well as State- owned entities which have resorted to lease financing. 2. Mid-market companies: The mid-market companies (i.e., companies with reasonably good creditworthiness but with lower public profile) have resorted to lease financing basically as an alternative to bank/institutional financing. 3. Consumers: Recent bad experience with corporate financing has focussed attention towards retail funding of consumer durables. For instance, car leasing is a big market in India today. 4. Government deptts. and authorities: One of the latest entrants in leasing markets is the government itself. Recently the Department of Telecommunications of the central government took the lead by floating tenders for lease finance worth about Rs. 1000 crores. 2018-19

196 BUSINESS STUDIES Merits business firms, insurance companies, pension funds and banks. The amount The merits of public deposits are: raised by CP is generally very large. As (i) The procedure of obtaining the debt is totally unsecured, the firms deposits is simple and does not having good credit rating can issue the contain restrictive conditions as are CP. Its regulation comes under the generally there in a loan agreement; purview of the Reserve Bank of India. (ii) Cost of public deposits is generally lower than the cost of borrowings The merits and limitations of a from banks and financial Commercial Paper are as follows: institutions; Merits (iii) Public deposits do not usually create any charge on the assets of (i) A commercial paper is sold on an the company. The assets can be unsecured basis and does not used as security for raising loans contain any restrictive conditions; from other sources; (ii) As it is a freely transferable (iv) As the depositors do not have instrument, it has high liquidity; voting rights, the control of the company is not diluted. (iii) It provides more funds compared to other sources. Generally, the Limitations cost of CP to the issuing firm is lower than the cost of commercial The major limitation of public deposits bank loans; are as follows: (iv) A commercial paper provides a (i) New companies generally find it continuous source of funds. This difficult to raise funds through is because their maturity can be public deposits; tailored to suit the requirements of the issuing fir m. Further, (ii) It is an unreliable source of finance maturing commercial paper can as the public may not respond be repaid by selling new when the company needs money; commercial paper; (iii) Collection of public deposits may (v) Companies can park their excess prove difficult, particularly when funds in commercial paper the size of deposits required is large. thereby earning some good return on the same. 8.4.6 Commercial Paper (CP) Limitations Commercial Paper emerged as a source of short term finance in our country in (i) Only financially sound and highly the early nineties. Commercial paper is rated firms can raise money an unsecured promissory note issued through commercial papers. New by a firm to raise funds for a short and moderately rated firms are period, varying from 90 days to 364 not in a position to raise funds by days. It is issued by one firm to other this method; 2018-19

SOURCES OF BUSINESS FINANCE 197 (ii) The size of money that can be dividend but are paid on the basis raised through commercial paper of earnings by the company. They is limited to the excess liquidity are referred to as ‘residual owners’ available with the suppliers of since they receive what is left after funds at a particular time; all other claims on the company’s income and assets have been (iii) Commercial paper is an impersonal settled. They enjoy the reward as method of financing. As such if a well as bear the risk of ownership. firm is not in a position to redeem Their liability, however, is limited its paper due to financial to the extent of capital contributed difficulties, extending the maturity by them in the company. Further, of a CP is not possible. through their right to vote, these shareholders have a right to 8.4.7 Issue of Shares participate in the management of the company. The capital obtained by issue of shares is known as share capital. The capital Merits of a company is divided into small units called shares. Each share has its The important merits of raising funds nominal value. For example, a through issuing equity shares are given company can issue 1,00,000 shares as below: of Rs. 10 each for a total value of Rs. 10,00,000. The person holding the (i) Equity shares are suitable for share is known as shareholder. There investors who are willing to are two types of shares normally issued assume risk for higher returns; by a company. These are equity shares and preference shares. The money (ii) Payment of dividend to the equity raised by issue of equity shares is called shareholders is not compulsory. equity share capital, while the money Therefore, there is no burden on raised by issue of preference shares is the company in this respect; called preference share capital. (iii) Equity capital serves as (a) Equity Shares permanent capital as it is to be Equity shares is the most repaid only at the time of important source of raising long liquidation of a company. As it term capital by a company. Equity stands last in the list of claims, it shares represent the ownership of provides a cushion for creditors, a company and thus the capital in the event of winding up of a raised by issue of such shares is company; known as ownership capital or owner’s funds. Equity share (iv) Equity capital provides credit capital is a prerequisite to the worthiness to the company and creation of a company. Equity confidence to prospective loan shareholders do not get a fixed providers; (v) Funds can be raised through equity issue without creating 2018-19

198 BUSINESS STUDIES any charge on the assets of the and (ii) receiving their capital after company. The assets of a company the claims of the company’s are, therefore, free to be mortgaged creditors have been settled, at the for the purpose of borrowings, if the time of liquidation. In other words, need be; as compared to the equity (vi) Democratic control over shareholders, the preference management of the company is shareholders have a preferential assured due to voting rights of claim over dividend and repayment equity shareholders. of capital. Preference shares resemble debentures as they bear Limitations fixed rate of return. Also as the dividend is payable only at the The major limitations of raising funds discretion of the directors and only through issue of equity shares are as out of profit after tax, to that extent, follows: these resemble equity shares. Thus, preference shares have some (i) Investors who want steady income characteristics of both equity may not prefer equity shares as shares and debentures. Preference equity shares get fluctuating shareholders generally do not returns; enjoy any voting rights. A company can issue different types of (ii) The cost of equity shares is preference shares (see Box B). generally more as compared to the cost of raising funds through other Merits sources; The merits of preference shares are given (iii) Issue of additional equity shares as follows: dilutes the voting power, and earnings of existing equity (i) Preference shares provide shareholders; reasonably steady income in the form of fixed rate of return and (iv) More formalities and procedural safety of investment; delays are involved while raising funds through issue of equity (ii) Preference shares are useful for share. those investors who want fixed rate of return with comparatively (b) Preference Shares low risk; The capital raised by issue of preference shares is called (iii) It does not affect the control of preference share capital. The equity shareholders over the preference shareholders enjoy a management as preference preferential position over equity shareholders don’t have voting shareholders in two ways: rights; (i) receiving a fixed rate of dividend, out of the net profits of the (iv) Payment of fixed rate of dividend company, before any dividend is to preference shares may enable a declared for equity shareholders; 2018-19

SOURCES OF BUSINESS FINANCE 199 company to declare higher rates (iv) As the dividend on these shares is of dividend for the equity to be paid only when the company shareholders in good times; earns profit, there is no assured (v) Preference shareholders have a return for the investors. Thus, preferential right of repayment these shares may not be very over equity shareholders in the event attractive to the investors; of liquidation of a company; (vi) Preference capital does not create (v) The dividend paid is not any sort of charge against the deductible from profits as expense. assets of a company. Thus, there is no tax saving as in the case of interest on loans. Limitations 8.4.8 Debentures The major limitations of preference Debentures are an important shares as source of business finance instrument for raising long term debt are as follows: capital. A company can raise funds through issue of debentures, which (i) Preference shares are not suitable bear a fixed rate of interest. The for those investors who are willing debenture issued by a company is an to take risk and are interested in acknowledgment that the company has higher returns; borrowed a certain amount of money, which it promises to repay at a future (ii) Preference capital dilutes the date. Debenture holders are, therefore, claims of equity shareholders over termed as creditors of the company. assets of the company; Debenture holders are paid a fixed stated amount of interest at specified (iii) The rate of dividend on preference shares is generally higher than the rate of interest on debentures; Box B Types of Preference Shares 1. Cumulative and Non-Cumulative: The preference shares which enjoy the right to accumulate unpaid dividends in the future years, in case the same is not paid during a year are known as cumulative preference shares. On the other hand, on non-cumulative shares, dividend is not accumulated if it is not paid in a particular year. 2. Participating and Non-Participating: Preference shares which have a right to participate in the further surplus of a company shares which after dividend at a certain rate has been paid on equity shares are called participating preference shares. The non-participating preference are such which do not enjoy such rights of participation in the profits of the company. 3. Convertible and Non-Convertible: Preference shares that can be converted into equity shares within a specified period of time are known as convertible preference shares. On the other hand, non-convertible shares are such that cannot be converted into equity shares. 2018-19

200 BUSINESS STUDIES intervals say six months or one year. Limitations Public issue of debentures requires that the issue be rated by a credit rating Debentures as source of funds has agency like CRISIL (Credit Rating and certain limitations. These are given as Information Services of India Ltd.) on follows: aspects like track record of the company, its profitability, debt (i) As fixed charge instruments, servicing capacity, credit worthiness debentures put a permanent and the perceived risk of lending. A burden on the earnings of a company can issue different types of company. There is a greater risk debentures (see Box C and D). Issue of when earnings of the company Zero Interest Debentures (ZID) which fluctuate; do not carry any explicit rate of interest has also become popular in recent (ii) In case of redeemable debentures, years. The difference between the face the company has to make value of the debenture and its purchase provisions for repayment on the price is the return to the investor. specified date, even during periods of financial difficulty; Merits (iii) Each company has certain The merits of raising funds through borrowing capacity. With the issue debentures are given as follows: of debentures, the capacity of a company to further borrow funds (i) It is preferred by investors who reduces. want fixed income at lesser risk; 8.4.9 Commercial Banks (ii) Debentures are fixed charge funds and do not participate in profits of Commercial banks occupy a vital the company; position as they provide funds for different purposes as well as for different (iii) The issue of debentures is suitable time periods. Banks extend loans to in the situation when the sales and firms of all sizes and in many ways, like, earnings are relatively stable; cash credits, overdrafts, term loans, purchase/discounting of bills, and (iv) As debentures do not carry issue of letter of credit. The rate of voting rights, financing through interest charged by banks depends debentures does not dilute control on various factors such as the of equity shareholders on characteristics of the firm and the level management; of interest rates in the economy. The loan is repaid either in lump sum or in (v) Financing through debentures is installments. less costly as compared to cost of preference or equity capital as the Bank credit is not a permanent interest payment on debentures is source of funds. Though banks have tax deductible. started extending loans for longer 2018-19

SOURCES OF BUSINESS FINANCE 201 periods, generally such loans are used (iv) Loan from a bank is a flexible for medium to short periods. The source of finance as the loan borrower is required to provide some amount can be increased security or create a charge on the assets according to business needs and of the firm before a loan is sanctioned can be repaid in advance when by a commercial bank. funds are not needed. Merits Limitations The merits of raising funds from a The major limitations of commercial commercial bank are as follows: banks as a source of finance are as follows: (i) Banks provide timely assistance to business by providing funds as (i) Funds are generally available for and when needed by it. short periods and its extension or renewal is uncertain and difficult; (ii) Secrecy of business can be maintained as the information (ii) Banks make detailed investigation supplied to the bank by the of the company’s affairs, financial borrowers is kept confidential; structure etc., and may also ask for security of assets and personal (iii) Formalities such as issue of sureties. This makes the procedure prospectus and underwriting are of obtaining funds slightly not required for raising loans from difficult; a bank. This, therefore, is an easier source of funds; Box C Types of Debentures 1. Secured and Unsecured: Secured debentures are such which create a charge on the assets of the company, thereby mortgaging the assets of the company. Unsecured debentures on the other hand do not carry any charge or security on the assets of the company. 2. Registered and Bearer: Registered debentures are those which are duly recorded in the register of debenture holders maintained by the company. These can be transferred only through a regular instrument of transfer. In contrast, the debentures which are transferable by mere delivery are called bearer debentures. 3. Convertible and Non-Convertible: Convertible debentures are those debentures that can be converted into equity shares after the expiry of a specified period. On the other hand, non-convertible debentures are those which cannot be converted into equity shares. 4. First and Second: Debentures that are repaid before other debentures are repaid are known as first debentures. The second debentures are those which are paid after the first debentures have been paid back. 2018-19

202 BUSINESS STUDIES (iii) In some cases, difficult terms and (ii) Besides providing funds, many of conditions are imposed by banks. these institutions provide financial, for the grant of loan. For example, managerial and technical advice restrictions may be imposed on the and consultancy to business firms; sale of mortgaged goods, thus making normal business working (iii) Obtaining loan from financial difficult. institutions increases the goodwill of the borrowing 8.4.10 Financial Institutions company in the capital market. Consequently, such a company The government has established a can raise funds easily from other number of financial institutions all over sources as well; the country to provide finance to business organisations (see Box E). (iv) As repayment of loan can be made These institutions are established by in easy instalments, it does not the central as well as state governments. prove to be much of a burden on They provide both owned capital and the business; loan capital for long and medium term requirements and supplement the (v) The funds are made available even traditional financial agencies like during periods of depression, when commercial banks. As these other sources of finance are not institutions aim at promoting the available. industrial development of a country, these are also called ‘development Limitations banks’. In addition to providing financial assistance, these institutions The major limitations of raising funds also conduct market surveys and from financial institutions are as given provide technical assistance and below: managerial services to people who run the enterprises. This source of financing (i) Financial institutions follow rigid is considered suitable when large funds criteria for grant of loans. Too many for longer duration are required for formalities make the procedure expansion, reorganisation and time consuming and expensive; modernisation of an enterprise. (ii) Certain restrictions such as Merits restriction on dividend payment are imposed on the powers of the The merits of raising funds through borrowing company by the financial institutions are as follows: financial institutions; (i) Financial institutions provide long- (iii) Financial institutions may have term finance, which are not their nominees on the Board of provided by commercial banks; Directors of the borrowing company thereby restricting the powers of the company. 2018-19

SOURCES OF BUSINESS FINANCE 203 Box D Special Financial Institutions 1. 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. 2. State Financial Corporations (SFC): The State Financial Corporations Act, 1951 empowered the State Governments to establish State Financial Corporations in their respective regions for providing medium and short term finance to industries which are outside the scope of the IFCI. Its scope is wider than IFCI, since the former covers not only public limited companies but also private limited companies, partnership firms and proprietary concerns. 3. 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. 4. 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. 5. State Industrial Development Corporations (SIDC): Many state governments have set up State Industrial Development Corporations for the purpose of promoting industrial development in their respective states. The objectives of the SIDCs differ from one state to another. 6. 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. 7. 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. 8. 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. 2018-19

204 BUSINESS STUDIES BOX E Inter Corporate Deposits (ICD) Inter Corporate Deposits are unsecured short-term deposits made by a company with another company. ICD market is used for short-term cash management of a large corporate. As per the RBI guidelines, the minimum period of ICDs is 7 days which can be extended to one year. The three types of Inter Corporate Deposits are: (i) Three months deposits; (ii) Six months deposits; (iii) Call deposits. Interest rate on ICDs may remain fixed or may be floating. The rate of interest on these deposits is higher than that of banks. These deposits are usually considered by the borrower company to solve problems of short-term funds insufficiency. 8.5 INTERNATIONAL FINANCING development banks have emerged over the years to finance international trade In addition to the sources discussed and business. These bodies provide above, there are various avenues for long and medium term loans and organisations to raise funds grants to promote the development of internationally. With the opening up of economically backward areas in the an economy and the operations of the world. These bodies were set up by the business organisations becoming Governments of developed countries of global, Indian companies have an the world at national, regional and access to funds in global capital market. international levels for funding various Various international sources from projects. The more notable among them where funds may be generated include: include International Finance (i) Commercial Banks: Commercial Corporation (IFC), EXIM Bank and banks all over the world extend foreign Asian Development Bank. currency loans for business purposes. They are an important source of (iii) International Capital Markets: financing non-trade international Modern organisations including operations. The types of loans and multinational companies depend upon services provided by banks vary from sizeable borrowings in rupees as well country to country. For example, as in foreign currency. Prominent Standard Chartered emerged as a financial instruments used for this major source of foreign currency loans purpose are: to the Indian industry. (ii) International Agencies and (a) Global Depository Receipts Development Banks: A number (GDR’s): The local currency shares of international agencies and of a company are delivered to the depository bank. The depository bank issues depository receipts 2018-19

SOURCES OF BUSINESS FINANCE 205 against these shares. Such (b) American Depository Receipts depository receipts denominated in (ADRs): The depository receipts US dollars are known as Global issued by a company in the USA Depository Receipts (GDR). GDR is a are known as American Depository negotiable instrument and can be Receipts. ADRs are bought and sold traded freely like any other security. in American markets, like regular In the Indian context, a GDR is an stocks. It is similar to a GDR except instrument issued abroad by an that it can be issued only to Indian company to raise funds in American citizens and can be listed some foreign currency and is listed and traded on a stock exchange and traded on a foreign stock of USA. exchange. A holder of GDR can at any time convert it into the number of (c) Indian Depository Receipt shares it represents. The holders of GDRs do not carry any voting rights (IDRs): An Indian Depository but only dividends and capital Receipt is a financial instrument appreciation. Many Indian denominated in Indian Rupees in companies such as Infosys, Reliance, the form of a Depository Receipt. It Wipro and ICICI have raised money is created by an Indian Depository through issue of GDRs (see Box F). to enable a foreign company to raise funds from the Indian securities market. The IDR is a Box F Companies rush to float GDR issues It’s not the IPO (initial public offer) market alone which is humming with activity. Companies — mostly small and medium-sized — are rushing to the overseas market to raise funds through Global Depository Receipts (GDRs). Five firms have already raised $464 million (around Rs 2,040 crore) from the international markets through GDR offerings this year. This is almost double of $228.6 mn raised by nine companies in 2004 and $63.09 mn mobilised by four companies in 2003. Nearly 20 companies are waiting in the wings to launch GDR issues worth over $1 bn in the coming months. On the other hand, though the number of companies going for FCCB (Foreign Currency Convertible Bonds) issues has come down, several companies are still in the FCCB race, thanks to lax rules and disclosure norms. For example, Aarti Drugs Ltd. has decided to raise $12 mn by issuing FCCBs. Significantly, small and medium companies are now taking the GDR route to raise funds this time even for a small amount. For example, Opto Circuits has decided to go for a GDR issue of $20 mn with a green-shoe option of $5 mn. The share price of this company shot up by 370 per cent from Rs 34 on May 17, 2004 to around Rs 160 on the BSE recently. Videocon Industries, Lyka Labs, Indian Overseas Bank, Jubilant Organosys, Maharashtra Seamless, Moschip Semiconductors, and Crew BOS are planning GDR issues. Two banks — UTI Bank ($240 million) and Centurion Bank ($70 million) — raised funds from the GDR market recently. Companies now prefer GDR over FCCB issues in view of the rise in interest rates abroad. 2018-19

206 BUSINESS STUDIES specific Indian version of the similar 8.6 FACTORS AFFECTING THE CHOICE OF THE SOURCE OF FUNDS global depository receipts. The foreign company issuing IDR Financial needs of a business are of different types — long term, short term, deposits shares to an Indian Depository fixed and fluctuating. Therefore, (custodian of securities registered with business firms resort to different types of sources for raising funds. Short-term the Securities and Exchange Board of borrowings offer the benefit of reduced India). In turn, the depository issues cost due to reduction of idle capital, but long – term borrowings are considered receipts to investors in India against a necessity on many grounds. Similarly these shares. The benefits of the equity capital has a role to play in the scheme for raising funds in the underlying shares (like bonus, corporate sector. dividends, etc.) accrue to the IDR As no source of funds is devoid of holders in India. limitations, it is advisable to use a According to SEBI guidelines, IDRs combination of sources, instead of relying only on a single source. A are issued to Indian residents in the number of factors affect the choice of same way as domestic shares are this combination, making it a very issued. The issuer company makes a complex decision for the business. The public offer in India, and residents can factors that affect the choice of source bid in exactly the same format and of finance are briefly discussed below: method as they bid for Indian shares. (i) Cost: There are two types of cost viz., ‘Standard Chartered PLC’ was the the cost of procurement of funds and first company that issued Indian cost of utilising the funds. Both Depository Receipt in Indian securities these costs should be taken into market in June 2010. account while deciding about the source of funds that will be used by (d) Foreign Currency Convertible an organisation. Bonds (FCCBs): Foreign currency (ii) Financial strength and stability convertible bonds are equity linked of operations: The financial debt securities that are to be strength of a business is also a key converted into equity or depository determinant. In the choice of source receipts after a specific period. Thus, of funds business should be in a a holder of FCCB has the option of sound financial position so as to be either converting them into equity able to repay the principal amount shares at a predetermined price or and interest on the borrowed exchange rate, or retaining the amount. When the earnings of the bonds. The FCCB’s are issued in a organisation are not stable, fixed foreign currency and carry a fixed interest rate which is lower than the rate of any other similar non- convertible debt instrument. FCCB’s are listed and traded in foreign stock exchanges. FCCB’s are very similar to the convertible debentures issued in India. 2018-19

SOURCES OF BUSINESS FINANCE 207 charged funds like preference schedule for both the principal and shares and debentures should be the interest. The interest is required carefully selected as these add to the to be paid irrespective of the firm financial burden of the organisation. earning a profit or incurring a loss. (vi) Control: A particular source of (iii) Form of organisation and fund may affect the control and legal status: The form of business power of the owners on the organisation and status influences management of a firm. Issue of equity shares may mean dilution of the choice of a source for raising the control. For example, as equity money. A partnership firm, for share holders enjoy voting rights, example, cannot raise money by financial institutions may take issue of equity shares as these can control of the assets or impose be issued only by a joint stock conditions as part of the loan company. agreement. Thus, business firm should choose a source keeping in (iv) Purpose and time period: mind the extent to which they are Business should plan according to willing to share their control over the time period for which the funds business. are required. A short-term need for (vii) Effect on credit worthiness: The example can be met through dependence of business on certain borrowing funds at low rate of sources may affect its credit interest through trade credit, worthiness in the market. For commercial paper, etc. For long example, issue of secured term finance, sources such as issue debentures may affect the interest of shares and debentures are more of unsecured creditors of the appropriate. Similarly, the purpose company and may adversely affect for which funds are required need their willingness to extend further to be considered so that the source loans as credit to the company. is matched with the use. For (viii) Flexibility and ease: Another example, a long-term business aspect affecting the choice of a expansion plan should not be source of finance is the flexibility financed by a bank overdraft which and ease of obtaining funds. will be required to be repaid in the Restrictive provisions, detailed short term. investigation and documentation in case of borrowings from banks (v) Risk profile: Business should and financial institutions for evaluate each of the source of example may be the reason that a finance in terms of the risk involved. business organisations may not For example, there is a least risk in prefer it, if other options are readily equity as the share capital has to available. be repaid only at the time of winding up and dividends need not be paid if no profits are available. A loan on the other hand, has a repayment 2018-19

208 BUSINESS STUDIES (ix)Tax benefits: Various sources interest paid on debentures and may also be weighed in terms of loan is tax deductible and may, their tax benefits. For example, therefore, be preferred by while the dividend on preference organisations seeking tax shares is not tax deductible, advantage. Key Terms Owned capital Fixed capital Borrowed capital Short term sources Finance Long term sources Charge on assets Working capital Fixed charge funds Accounts receivable Restrictive conditions Factoring GDRs Voting power ADRs 1CD Bill discounting 1DR FCCBs SUMMARY Meaning and significance of business finance: Finance required by business to establish and run its operations is known as business finance. No business can function without adequate amount of funds for undertaking various activities. The funds are required for purchasing fixed assets (fixed capital requirement), for running day-to-day operations (working capital requirement), and for undertaking growth and expansion plans in a business organisation. Classification of sources of funds: Various sources of funds available to a business can be classified according to three major basis, which are (i) time period (long, medium and short term), (ii) ownership (owner’s funds and borrowed funds), and (iii) source of generation (internal sources and external sources). Long, medium and short-term sources of funds: The sources that provide funds for a period exceeding 5 years are called long-term sources. The sources that fulfill the financial requirements for the period of more than one year but not exceeding 5 years are called medium term sources and the sources that provide funds for a period not exceeding one year are termed as short term sources. Owner’s funds and borrowed funds: Owner’s funds refer to the funds that are provided by the owners of an enterprise. Borrowed capital, on the other hand, refers to the funds that are generated through loans or borrowings from other individuals or institutions. Internal and external sources: Internal sources of capital are those sources that are generated within the business say through ploughing back of profits. 2018-19

SOURCES OF BUSINESS FINANCE 209 External sources of capital, on the other hand are those that are outside the business such as finance provided by suppliers, lenders, and investors. Sources of business finance: The sources of funds available to a business include retained earnings, trade credit, factoring, lease financing, public deposits, commercial paper, issue of shares and debentures, loans from commercial banks, financial institutions and international sources of finance. Retained earnings: The portion of the net earnings of the company that is not distributed as dividends is known as retained earnings. The amount of retained earnings available depends on the dividend policy of the company. It is generally used for growth and expansion of the company. Trade credit: The credit extended by one trader to another for purchasing goods or services is known as trade credit. Trade credit facilitates the purchase of supplies on credit. The terms of trade credit vary from one industry to another and are specified on the invoice. Small and new firms are usually more dependent on trade credit, as they find it relatively difficult to obtain funds from other sources. Factoring: Factoring has emerged as a popular source of short-term funds in recent years. It is a financial service whereby the factor is responsible for all credit control and debt collection from the buyer and provides protection against any bad-debt losses to the firm. There are two methods of factoring — recourse and non-recourse factoring. Lease financing: A lease is a contractual agreement whereby the owner of an asset (lessor) grants the right to use the asset to the other party (lessee). The lessor charges a periodic payment for renting of an asset for some specified period called lease rent. Public deposits: A company can raise funds by inviting the public to deposit their savings with their company. Pubic deposits may take care of both long and short-term financial requirements of business. Rate of interest on deposits is usually higher than that offered by banks and other financial institutions. Commercial paper (CP): It is an unsecured promissory note issued by a firm to raise funds for a short period The maturity period of commercial paper usually ranges from 90 days to 364 days. Being unsecured, only firms having good credit rating can issue the CP and its regulation comes under the purview of the Reserve Bank of India. Issue of equity shares: Equity shares represents the ownership capital of a company. Due to their fluctuating earnings, equity shareholders are called risk bearers of the company. These shareholders enjoy higher returns during prosperity and have a say in the management of a company, through exercising their voting rights. Issue of preference shares: These shares provide a preferential right to the shareholders with respect to payment of earnings and the repayment 2018-19

210 BUSINESS STUDIES of capital. Investors who prefer steady income without undertaking higher risks prefer these shares. A company can issue different types of preference shares. Issue of debentures: Debenture represents the loan capital of a company and the holders of debentures are the creditors. These are the fixed charged funds that carry a fixed rate of interest. The issue of debentures is suitable in the situation when the sales and earnings of the company are relatively stable. Commercial banks: Banks provide short and medium-term loans to firms of all sizes. The loan is repaid either in lump sum or in instalments. The rate of interest charged by a bank depends upon factors including the characteristics of the borrowing firm and the level of interest rates in the economy. Financial institutions: Both central and state governments have established a number of financial institutions all over the country to provide industrial finance to companies engaged in business. They are also called development banks. This source of financing is considered suitable when large funds are required for expansion, reorganisation and modernisation of the enterprise. International financing: With liberalisation and globalisation of the economy, Indian companies have started generating funds from international markets. The international sources from where the funds can be procured include foreign currency loans from commercial banks, financial assistance provided by international agencies and development banks, and issue of financial instruments (GDRs/ ADRs/ FCCBs) in international capital markets. Factors affecting choice: An effective appraisal of various sources must be instituted by the business to achieve its main objectives. The selection of a source of business finance depends on factors such as cost, financial strength, risk profile, tax benefits and flexibility of obtaining funds. These factors should be analysed together while making the decision for the choice of an appropriate source of funds. EXERCISES Multiple Choice Questions Tick ( ) the correct answer out of the given alternatives 1. Equity shareholders are called (a) Owners of the company (b) Partners of the company (c) Executives of the company (d) Guardian of the company 2018-19

SOURCES OF BUSINESS FINANCE 211 2. The term ‘redeemable’ is used for (a) Preference shares (b) Commercial paper (c) Equity shares (d) Public deposits 3. Funds required for purchasing current assets is an example of (a) Fixed capital requirement (b) Ploughing back of profits (c) Working capital requirement (d) Lease financing 4. ADRs are issued in (a) Canada (b) China (c) India (d) USA 5. Public deposits are the deposits that are raised directly from (a) The public (b) The directors (c) The auditors (d) The owners 6. Under the lease agreement, the lessee gets the right to (a) Share profits earned (b) Participate in the by the lessor management of the organisation (c) Use the asset for a specified period (d) Sell the assets 7. Debentures represent (a) Fixed capital of the company (b) Permanent capital of the company (c) Fluctuating capital of the company (d) Loan capital of the company 8. Under the factoring arrangement, the factor (a) Produces and distributes (b) Makes the payment on the goods or services behalf of the client (c) Collects the client’s debt (d) Transfer the goods from or account receivables one place to another 9. The maturity period of a commercial paper usually ranges from (a) 20 to 40 days (b) 60 to 90 days (c) 120 to 365 days (d) 90 to 364 days 10. Internal sources of capital are those that are (a) generated through outsiders (b) generated through loans such as suppliers from commercial banks (c) generated through issue (d) generated within of shares the business 2018-19

212 BUSINESS STUDIES Short Answer Questions 1. What is business finance? Why do businesses need funds? Explain. 2. List sources of raising long-term and short-term finance. 3. What is the difference between internal and external sources of raising funds? Explain. 4. What preferential rights are enjoyed by preference shareholders. Explain. 5. Name any three special financial institutions and state their objectives. 6. What is the difference between GDR and ADR? Explain. Long Answer Questions 1. Explain trade credit and bank credit as sources of short-term finance for business enterprises. 2. Discuss the sources from which a large industrial enterprise can raise capital for financing modernisation and expansion. 3. What advantages does issue of debentures provide over the issue of equity shares? 4. State the merits and demerits of public deposits and retained earnings as methods of business finance. 5. Discuss the financial instruments used in international financing. 6. What is a commercial paper? What are its advantages and limitations. Projects/Assignment 1. Collect information about the companies that have issued debentures in recent years. Give suggestions to make debentures more popular. 2. Institutional financing has gained importance in recent years. In a scrapbook paste detailed information about various financial institutions that provide financial assistance to Indian companies. 3. On the basis of the sources discussed in the chapter, suggest suitable options to solve the financial problem of the restaurant owner. 4. Prepare a comparative chart of all the sources of finance. 2018-19

CHAPTER 9 SMALL BUSINESS LEARNING OBJECTIVES After studying this chapter, you should be able to: • explain the meaning and nature of small business; • appreciate the role of small business in India; • analyse the problems of small business; and • classify the different forms of assistance provided by the government to small business, particularly in rural and hilly areas. 2018-19

214 BUSINESS STUDIES Amar, Akbar and Anthony are three good friends who have completed a vocational course in entrepreneurship, after their school education. Finding the job market tough, they were contemplating the idea of setting up a small business, using the skills they had learnt in their course. However, they knew very little about business. They were wondering what business to start, where to locate it, how to procure machinery and materials needed for the business, how to raise money and how to market. They came across a notification given by the District Industries Centre located near the Industrial Estate in Balanagar, Ranga Reddy district of Andhra Pradesh regarding a seminar on government’s assistance for a small business, aimed at young entrepreneurs. Excited with the news, the three friends decided to attend the seminar. They were told about the financial and other assistance offered by the Central and State Governments under the Rural Employment Generation Programme to the educated youth. They found that toys were in demand and decided to manufacture toys. They started a small scale industry in their village by taking financial assistance with the help of Khadi and Village Industries Commission. Today, they are successful makers of toys and in the near future, they plan to get into export market as well. 9.1 INTRODUCTION industries and powerlooms. The last two come under the modern small In the pervious chapters, the concepts industries, while the others come under of business, trade, commerce and traditional industries. Village and small industry were discussed. The present industries together provide the largest chapter discusses the issue of size of employment opportunities in India. business, with reference to small industries and small business Before understanding the nature establishments. It also describes the and meaning of small business, it is role of small business and the major important to know how size is defined problems faced by the small sector in our country, with reference to small units. Further, the assistance provided industries and small business by the government to small business, establishments. Several parameters can particularly in the rural and hilly areas be used to measure the size of business has been discussed. units. These include the number of persons employed in business, capital 9.2 MEANING AND NATURE OF SMALL invested in business, volume of output BUSINESS or value of output of business and power consumed for business activities. In India, the ‘village and small However, there is no parameter which industries sector’ consists of both is without limitations. Depending on the ‘traditional’ and ‘modern’ small need the measures can vary. industries. This sector has eight subgroups. They are handlooms, The definition used by the handicrafts, coir, sericulture, khadi and Government of India to describe small village industries, small scale industries is based on the investment 2018-19

SMALL BUSINESS 215 in plant and machinery. This measure (ii) Small enterprise, where the seeks to keep in view the socio-economic investment in plant and machinery is environment in India where capital is more than twenty five lakh rupees but scarce and labour is abundant. does not exceed five crore rupees. The emergence of a large services (iii) Medium enterprise, where the sector has necessitated the government investment in plant and machinery is to include other enterprises covering more then five crore rupees but does both Small Scale Industries (SSI) sector not exceed ten crores rupees. and related service entities under the same umbrella. Expansion of the small Services scale enterprises was taking place In the case of enterprises engaged in growing into medium scale enterprises providing or rendering of services there and they were required to adopt higher are three types of enterprises: levels of technologies in order to remain competitive in a fast globalising world. (i) Micro enterprise, where the Thus, it was necessary to address the investment in equipment does not concerns of such enterprises micro, small exceed ten lakh rupees. and medium and provide them with a single legal framework. The Micro, Small (ii) Small enterprise, where the and Medium Enterprises Development investment in equipment is more than (MSMED) Act, 2006 addresses these ten lakh rupees but does not exceed issues relating to definition, credit, two crore rupees. marketing and technology upgradation. Medium scale enterprises and service (iii) Medium enterprise, where the related enterprises also come under the investment in equipment is more than purview of this Act. The MSMED two crore rupees but does not exceed Act, 2006 came into force w.e.f., five crore rupees. October, 2006. Accordingly, enterprises are classified into two major categories Village industries: Village industry viz., manufacturing and services. has been defined as any industry located in a rural area which produces Manufacturing any goods, renders any service with or In the case of enterprises engaged in without the use of power and in which the manufacture or production of the fixed capital investment per head goods pertaining to any industries or artisan or worker is specified by the specified in the first schedule to the central government, from time to time. Industries (Development and Regulation) Act, 1951, there are three Cottage industries: These are also types of enterprises: known as Rural Industries or Traditional Industries. They are not (i) Micro enterprise, where the defined by capital investment criteria investment in plant and machinery does as in the case of other small scale not exceed twenty-five lakh rupees. industries. However, cottage industries are characterised by certain features like the following: 2018-19

216 BUSINESS STUDIES • these are organised by individuals, promotion and growth of SSIs. The with private resources; National Small Industries Corporation (NSIC), a public sector enterprise of the • normally use family labour and Ministry, has been providing marketing locally available talent; support to the medium and small enterprises under the Marketing • the equipment used is simple; Assistance Scheme. • capital investment is small; Ministry of Agro and Rural • produce simple products, normally Industries is the nodal agency for in their own premises; coordination and development of Village and Khadi industries, tiny and • production of goods using micro enterprises in both urban and indigenous technology. rural areas. It also implements Prime Minister’s Rojgar Yojana. The various 9.3 ADMINISTRATIVE SETUP FOR THE policies, programmes and schemes SMALL SCALE, AGRO AND RURAL related to agro and rural industries are INDUSTRIES implemented by the ministry through the Khadi and Village Industries The Government of India created the Commission (KVIC), Handicrafts Board, Ministry of Micro, Small and Medium Coir Board, Silk Board, etc. The KVIC Enterprises as the nodal ministry for may include the micro or tiny formulation of policy and coordination enterprises or the village enterprises as of central assistance for the promotion part of small enterprises depending and development of small scale upon the criteria or standards in industries in India. The Small respect of employment or turnover of Industries Development Organisation the enterprise. (SIDO), also known as the Office of the Development Commissioner (SSI) State Governments also execute which is attached to this ministry is different promotional and develop- responsible for implementing and mental projects and schemes to provide monitoring of various policies and number of supporting incentives for programmes formulated. The Ministry development and promotion of SSIs in of Micro, Small and Medium Enterprises designs policies, programmes and schemes for Category Manufacturing* Providing of Services Investment Limit Investment Limit Micro enterprise 25 lakh 10 lakh Small enterprise Between 25 lakh Between 10 lakh and and 5 crore 2 crore Medium enterprise Between 5 crore Between 2 crore and and 10 crore 5 crore * While calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items shall be excluded. 2018-19

SMALL BUSINESS 217 their respective states. These are and less capital intensive. This is a boon executed through the State Directorate for a labour surplus country like India. of Industries, who has District Industries Centres (DICs) under it to (iii) Small industries in our country implement central/state level schemes. supply an enormous variety of products which include mass consumption 9.4 ROLE OF SMALL BUSINESS IN INDIA goods, readymade garments, hosiery goods, stationery items, soaps and Small Scale Industries in India enjoy a detergents, domestic utensils, leather, distinct position in view of their plastic and rubber goods, processed contribution to the socio-economic foods and vegetables, wood and steel development of the country. The furniture, paints, varnishes, safety following points highlight their matches, etc. Among the sophisticated contribution. items manufactured are electric and electronic goods like televisions, (i) Small industries in India account calculators, electro-medical equipment, for 95 per cent of the industrial units in electronic teaching aids like overhead the country. They contribute almost 40 projectors, air conditioning equipment, per cent of the gross industrial value drugs and pharmaceuticals, added and 45 per cent of the total exports agricultural tools and equipment and (direct and indirect exports) from India. several other engineering products. A special mention should be made of (ii) Small industries are the second handlooms, handicrafts and other largest employers of human resources, products from traditional village after agriculture. They generate more industries in view of their export value. number of employment opportunities (see Box A which highlights the major per unit of capital invested compared industry groups that come under the to large industries. They are, therefore, considered to be more labour intensive Box A Major Industry Groups in the Small Scale Sector • Food Products • Transport Equipment and • Chemical and Chemical Parts Products • Leather and Leather Products • Basic Metal Industries • Miscellaneous Manufacturing • Metal Products • Electrical Machinery and Parts Industries • Rubber and Plastic Products • Beverages, Tobacco and • Machinery and Parts except Tobacco Products Electrical Goods • Repair Services • Hosiery and Garments — Wool • Cotton Textiles • Wool, Silk, Synthetic Fibre and Products • Non-metallic Mineral Products Textiles • Paper Products and Printing • Jute, Hemp and Mesta Textiles • Other Services 2018-19

218 BUSINESS STUDIES purview of small industries as per the business opportunities can be classification laid down by the captured at the right time. government.) (viii) Small industries are best (iv) The contribution of small suited for customised production. i.e. industries to the balanced regional designing the product as per the tastes/ development of our country is preferences/needs of individual noteworthy. Small industries which customers, say for an example tailor- produce simple products using simple made shirt or trouser. The recent trend technologies and depend on locally in the market is to go in for customised available resources both material and production of even non-traditional labour can be set up anywhere in the products such as computers and other country. Since they can be widely spread such products. They can produce without any locational constraints, the according to the needs of the customers benefits of industrialisation can be as they use simple and flexible reaped by every region. They, thus, production techniques. contribute significantly to the balanced development of the country. (ix) Last but not the least, small industries have inherent strength of (v) Small industries provide ample adaptability and a personal touch and opportunity for entrepreneurship. The therefore maintain good personal latent skills and talents of people can relations with both customers and be channelled into business ideas employees. The government does not which can be converted into reality have to interfere in the functioning of a with little capital investment and almost small scale unit. Due to the small size nil formalities to start a small business. of the organisation quick and timely Amar, Akbar and Anthony in our story decision can be taken without proved that a small business can be consulting many people as in large started, if one has the determination to sized organisations. New business achieve. opportunities can be captured at the right time, thus providing healthy (vi) Small industries also enjoy competition to big business which is the advantage of low cost of production. good for the economy. Locally available resources are less expensive. Establishment and running 9.5 ROLE OF SMALL BUSINESS IN costs of small industries are on the RURAL INDIA lower side because of low overhead expenses. Infact, the low cost of Traditionally, rural households in production which small industries developing countries have been viewed enjoy is their competitive strength. as exclusively engaged in agriculture. There is an increasing evidence that (vii) Due to the small size of the rural households can have highly varied organisations, quick and timely and multiple sources of income and that, decisions can be taken without rural households can and do participate consulting many people as it happens in a wide range of non-agricultural in large sized organisations. New 2018-19

SMALL BUSINESS 219 activities such as wage employment and However, the potential of small self-employment in commerce, industries is often not realised fully, manufacturing and services, along with because of several problems related to the traditional rural activities of farming size. We shall now examine some of the and agricultural labour. This can be major problems that small businesses largely attributed to the policy initiatives whether in urban or in rural areas are taken by the Government of India, to encountering in their day-to-day encourage and promote the setting up functioning. of agro-based rural industries. 9.6 PROBLEMS OF SMALL BUSINESS The emphasis on village and small scale industries has always been an Small scale industries are at a distinct integral part of India’s industrial disadvantage as compared to large scale strategy, more so, after the second Five industries. The scale of operations, Year Plan. Cottage and rural industries availability of finance, ability to use play an important role in providing modern technology, procurement of employment opportunities in the rural raw materials are some of these areas. areas, especially for the traditional This gives rise to several problems. artisans and the weaker sections of society. Development of rural and Most of these problems can be village industries can also prevent attributed to the small size of their migration of rural population to urban business, which prevents them from areas in search of employment. taking advantages, which accrue to large business organisations. However, Village and small industries are the problems faced are not similar to significant as producers of consumer all the categories of small businesses. goods and absorbers of surplus labour, For instance, in the case of small thereby addressing the problems of ancillary units, the major problems poverty and unemployment. These include delayed payments, uncertainty industries contribute amply to other of getting orders from the parent units socio-economic aspects, such as and frequent changes in production reduction in income inequalities, processes. The problems of traditional dispersed development of industries and small scale units include remote linkage with other sectors of the economy. location with less developed infrastructural facilities, lack of In fact promotion of small scale managerial talent, poor quality, industries and rural industrialisation traditional technology and inadequate has been considered by the availability of finance. Government of India as a powerful instrument for realising the twin The problems of exporting small objectives of ‘accelerated industrial scale units include lack of adequate growth and creating additional data on foreign markets, lack of productive employment potential in market intelligence, exchange rate rural and backward areas.’ fluctuations, quality standards, and 2018-19

220 BUSINESS STUDIES pre-shipment finance. In general the (iii) Managerial skills: Small business small businesses are faced with the is generally promoted and operated by following problems: a single person, who may not possess all the managerial skills required to run (i) Finance: One of the severe the business. Many of the small problems faced by SSIs is that of business entrepreneurs possess sound non-availability of adequate finance to technical knowledge but are less carry out its operations. successful in marketing the output. Moreover, they may not find enough Generally a small business begins time to take care of all functional with a small capital base. Many of the activities. At the same time they are not units in the small sector lack the credit in a position to afford professional worthiness required to raise as capital managers. from the capital markets. As a result, (iv) Labour: Small business firms they heavily depend on local financial cannot afford to pay higher salaries to resources and are frequently the the employees, which affects employee victims of exploitation by the money willingness to work hard and produce lenders. These units frequently suffer more. Thus, productivity per employee from lack of adequate working capital, is relatively low and employee turn over either due to delayed payment of dues is generally high. Because of lower to them or locking up of their capital in remuneration offered, attracting unsold stocks. Banks also do not lend talented people is a major problem in money without adequate collateral small business organisations. security or guarantees and margin Unskilled workers join for low money, which many of them are not in remuneration but training them is a a position to provide. time consuming process. Also, unlike large organisations, division of labour (ii) Raw materials: Another major cannot be practised, which results problem of small business is the in lack of specialisation and procurement of raw materials. If the concentration. required materials are not available, (v) Marketing: Marketing is one of the they have to compromise on the quality most important activities as it generates or have to pay a high price to get good revenue. Effective marketing of goods quality materials. Their bargaining requires a thorough understanding power is relatively low due to the small of the customer’s needs and quantity of purchases made by them. requirements. In most cases, marketing Also, they cannot afford to take the risk is a weaker area of small organisations. of buying in bulk as they have no These organisations have, therefore, to facilities to store the materials. Because depend excessively on middlemen, who of general scarcity of metals, chemicals at times exploit them by paying low and extractive raw materials in the price and delayed payments. Further, economy, the small scale sector suffers direct marketing may not be feasible the most. This also means a waste of production capacity for the economy and loss of further units. 2018-19

SMALL BUSINESS 221 for small business firms as they lack privatisation and globalisation (LPG) the necessary infrastructure. policies being followed by several (vi) Quality: Many small business countries across the world. Remember, organisations do not adhere to desired India too has taken the LPG path since standards of quality. Instead they 1991. Let us look into the areas where concentrate on cutting the cost and small businesses feel threatened with keeping the prices low. They do not the onslaught of global competition. have adequate resources to invest in quality research and maintain the (a) Competition is not only from standards of the industry, nor do they medium and large industries, but also have the expertise to upgrade from multinational companies which technology. In fact maintaining quality are giants in terms of their size and is their weakest point, when competing business volumes. Opening up of trade in global markets. results in cut throat competition for (vii) Capacity utilisation: Due to lack small scale units. of marketing skills or lack of demand, many small business firms have to (b) It is difficult to withstand the operate below full capacity due to quality standards, technological skills, which their operating costs tend to financial creditworthiness, managerial increase. Gradually this leads to and marketing capabilities of the large sickness and closure of the business. industries and multinationals. (viii) Technology: Use of outdated technology is often stated as serious (c) There is limited access to lacunae in the case of small industries, markets of developed countries due to resulting in low productivity and the stringent requirements of quality uneconomical production. certification like ISO 9000. (ix) Sickness: Prevalence of sickness in small industries has become a point 9.7 GOVERNMENT ASSISTANCE TO of worry to both the policy makers and SMALL INDUSTRIES AND SMALL the entrepreneurs. The causes of BUSINESS UNITS sickness are both internal and external. Internal problems include lack of Keeping in view the contribution of skilled and trained labour and small business to employment managerial and marketing skills. Some generation, balanced regional of the external problems include development of the country, and delayed payment, shortage of working promotion of exports, the Government capital, inadequate loans and lack of of India’s policy thrust has been on demand for their products. establishing, promoting and developing the small business sector, particularly (x) Global competition: Apart from the the rural industries and the cottage and problems stated above small businesses village industries in backward areas. are not without fears, especially in the Governments both at the central and present context of liberalisation, state level have been actively participating in promoting self- employment opportunities in rural areas by providing assistance in respect 2018-19

222 BUSINESS STUDIES of infrastructure, finance, technology, by NABARD. It works for the benefit training, raw-materials, and marketing. of socially and economically The various policies and schemes of disadvantaged individuals and groups. Government assistance for the It aims at providing management and development of rural industries insist technical support to current and on the utilisation of local resources and prospective micro and small raw materials and locally available entrepreneurs in rural areas. Since its manpower. These are translated into inception, RSBDC has organised action through various agencies, several programmes on rural departments, corporations, etc., all entrepreneurship, skill upgradation coming under the purview of the workshops, mobile clinics and trainers industries department. All these are training programmes, awareness primarily concerned with the promotion and counselling camps in various of small and rural industries. villages of Noida, Greater Noida and Ghaziabad. Through these Some of the support measures and programmes it covers a large programmes meant for the promotion number of rural unemployed youth of small and rural industries are and women in several trades, which discussed below: includes food processing, soft toys making, ready-made garments, A. INSTITUTIONAL SUPPORT candle making, incense stick making, two-wheeler repairing and 1. National Bank for Agriculture servicing, vermicomposting, and non and Rural Development conventional building materials. (NABARD) 3. National Small Industries NABARD was setup in 1982 to promote Corporation (NSIC) integrated rural development. Since then, it has been adopting a This was set up in1955 with a view to multi-pronged, multi-purpose strategy promote, aid and foster the growth of for the promotion of rural business small business units in the country. enterprises in the country. Apart from This focuses on the commercial aspects agriculture, it supports small industries, of these functions. cottage and village industries, and rural • Supply indigenous and imported artisans using credit and non-credit approaches. It offers counselling and machines on easy hire-purchase consultancy services and organises terms. training and development programmes • Procure, supply and distribute for rural entrepreneurs. indigenous and imported raw materials. 2. The Rural Small Business • Export the products of small Development Centre (RSBDC) business units and develop export- worthiness. It is the first of its kind set up by the • Mentoring and advisory services. world association for small and medium enterprises and is sponsored 2018-19

SMALL BUSINESS 223 • Serve as technology business (iii) To update MSMEs about the incubators. prevalent market scenario and its impact on their activities. • Creating awareness on techno-logical upgradation. (iv) To facilitate the formation of consortia of MSMEs for marketing • Developing software technology of their products and services. parks and technology transfer centres. (v) To provide platform to MSMEs for A new scheme of ‘performance interaction with large institutional buyers. and credit rating’ of small businesses is implemented through National Small (vi) To disseminate/propagate various Industries Corporation (NSIC) with the programmes of the Government. twin objectives of (i) sensitising the small industries about the need for credit (vii) To enrich the marketing skills of rating and (ii) encouraging the small the micro, small and medium business units to maintain good entrepreneurs. financial track record. This is to ensure that they score higher rating for their MARKETING SUPPORT TO MSMES credit requirements as and when they approach the financial institutions for Under the Scheme, it is proposed to their working capital and investment enhance competitiveness and requirements. marketability of their products, through following activities: MARKETING ASSISTANCE SCHEME (i) Organising International Marketing, a strategic tool for business Technology Exhibitions in Foreign development, is critical for the growth Countries by NSIC and Participation in and survival of micro, small and International Exhibitions/Trade Fairs: medium enterprises. International Technology Expositions/ exhibitions may be organised by NSIC Ministry of Micro, Small and with a view to providing broader Medium Enterprises, through National exposure to Indian micro, small and Small Industries Corporation (NSIC), a medium enterprises to facilitate them in Public Sector Enterprise of the exploring new business opportunities Ministry, has been providing marketing in emerging and developing markets. support to Micro and Small Enterprises (MSEs) under the Marketing This helps in promoting trade, Assistance Scheme. establishing joint ventures, technology transfers, marketing arrangements and Objectives image building of Indian MSMEs in foreign countries. In addition to the The broad objectives of the scheme are: organisation of the international (i) To enhance marketing capabilities exhibitions, NSIC would also facilitate and competitiveness of the MSMEs. participation of Indian MSMEs in the (ii) To showcase the competencies of select international exhibitions and trade MSMEs. fairs. Participation in such events exposes MSMEs to international practices. 2018-19

224 BUSINESS STUDIES (ii) O r g a n i s i n g D o m e s t i c (v) Intensive Campaigns and Exhibitions and Participation in Marketing Promotion Events: To Exhibitions/Trade Fairs in India: disseminate information about the Certain theme based exhibitions/ various schemes for the benefit of the technology fairs etc., may be micro, small and medium enterprises. organised by NSIC, focused on They are also facilitated to enrich their products and services offered by knowledge regarding latest MSMEs, including technologies developments, quality standards etc. suitable for employment generation, and improve the marketing potential of products from specific regions or their products and services. clusters (like North Eastern Region, food processing, Machine-tools, (vi) Other Support Activities Electronics, Leather etc.). • Development of Display Centres, Participation in such events is show windows and hoarding etc., for expected to help the MSMEs in promoting products and services of enhancing their marketing avenues by MSMEs. way of capturing new markets and • Printing of Literature, Brochures and expanding existing markets. Product-specific catalogues and CDs etc., and preparation of short films (iii) Support for Co-sponsoring of for disseminating information. Exhibitions Organised by other • Development of website/portal for Organisations/Industry facilitating the marketing of MSME Associations/Agencies: This support products and services. would be in the form of co-sponsoring • Development and dissemination of of the event by NSIC. In order to apply Advertising and Publicity material for co-sponsoring of an event by NSIC, about various programes/schemes the applicant organisation/agency for MSME sectors and events. must fulfill the centre criteria/ • Preparation and Upgradation of conditions. MSME Manufacturers/ Suppliers/ Exporters Directory. (iv) Buyer-Seller Meets: Bulk and • Documentation of the success stories departmental buyers such as the of MSMEs. Railways, Defense, communication • Conducting studies to explore and departments and large companies are assess new markets/ businesses and invited to participate in buyer-seller product ranges for both domestic meets to bring them closer to the and international markets. MSMEs for enhancing their marketing • Hosting international delegations competitiveness. Participation in these and networking events. programmes enables MSMEs to know the requirements of bulk buyers on the 4. Small Industries Development one hand and help the bulk buyers to Bank of India (SIDBI) know the capabilities of MSMEs for their purchases. • Set up as an apex bank to provide direct/indirect financial assistance 2018-19

SMALL BUSINESS 225 under different schemes, to meet required by the informal sector. credit needs of small business • Provision of micro-finance and related organisations. • To coordinate the functions of other services to the informal sector. institutions in similar activities. • Providing social security for the Thus, so far, we have learnt about workers in the informal sector. the various institutions operating at the central level and state level in support 6. Rural and Women of the small industries. Entrepreneurship Development (RWED) 5. The National Commission for Enterprises in the Unorganised The Rural and Women Entrepreneurship Sector (NCEUS) Development programme aims at promoting a conducive business The NCEUS was constituted in environment and at building September 2004, with the following institutional and human capacities objectives: that will encourage and support the • To recommend measures entrepreneurial initiatives of rural people and women. RWE provides the considered necessary for improving following services: the productivity of small enterprises • Creating a business environment in the informal sector. • To generate more employment that encourages initiatives of rural opportunities on a sustainable basis, and women entrepreneurs. particularly in the rural areas. • To enhance the competitiveness of • Enhancing the human and the sector in the emerging global institutional capacities required to environment. foster entrepreneurial dynamism • To develop linkages of the sector and enhance productivity. with other institutions in the areas of credit, raw materials, • Providing training manuals for infrastructure, technology upgradation, women entrepreneurs and training marketing and formulation of them. suitable arrangements for skill development. • Rendering any other advisory services. The commission has identified the following issues for detailed 7. World Association for Small and consideration: Medium Enterprises (WASME) • Growth poles for the informal sector It is the only International Non- in the form of clusters/hubs, in order Governmental Organisation of micro, to get external economic aid. small and medium enterprises based in India, which set up an International • Potential for public-private Committee for Rural Industrialisation. partnerships in imparting the skills Its aim is to develop an action plan model for sustained growth of rural enterprises. 2018-19

226 BUSINESS STUDIES Apart from these, there are several • To build innovative and traditional schemes to promote the non-farm skills, improve technologies sector, mostly initiated by the and encourage public-private Government of India. For instance, partnerships, develop market there are schemes for entrepreneurship intelligence etc., to make them through subsidised loans like competitive, profitable and Integrated Rural Development sustainable; and Programme (IRDP), Prime Minister Rojgar Yojana (PMRY), schemes to • To create sustained employment provide skills like Training of Rural opportunities in traditional Youth for Self Employment (TRYSEM), industries. and schemes to strengthen the gender component like Development of Women 9. The District Industries Centers and Children in Rural Areas (DWCRA). (DICs) There are schemes to provide wage employment, like Jawahar Rojgar The District Industries Centers Yojana (JRY), food for work, etc., on Programme was launched on 1 May rural works programmes to achieve the 1978, with a view to providing an twin objectives of creation of rural integrated administrative framework at infrastructure and generation the district level, which would look at of additional income for the rural the problems of industrialisation in the poor, particularly during the lean district, in a composite manner. In other agricultural season. Last, but not the words, District Industries Centers is the least, there are schemes for specific institution at the district level which groups of industries such as khadi, provides all the services and support handlooms and handicrafts. facilities to the entrepreneurs for setting up small and village industries. 8. Scheme of Fund for Identification of suitable schemes, Regeneration of Traditional preparation of feasibility reports, Industries (SFURTI) arranging for credit, machinery and equipment, provision of raw materials To make the traditional industries and other extension services are the more productive and competitive and main activities undertaken by these to facilitate their sustainable centers. Broadly DICs are trying to bring development, the Central Government change in the attitude of the rural set up this fund with Rs. 100 crore entrepreneurs and all other connected allocation to begin within the year with economic development in the rural 2005. This has to be implemented by areas. Even within the narrow spectrum, the Ministry of Agro and Rural an attempt is being made to look at Industries in collaboration with State some of the neglected factors such as governments. The main objectives of the rural artisan, the skilled craftsman the scheme are as follows: and the handloom operator and to tune • To develop clusters of traditional up these activities with the general process of rural development being industries in various parts of the country; 2018-19

SMALL BUSINESS 227 taken up through other national Some of the common incentives programmes. The DIC is thus emerging offered are discussed as below: as the focal point for economic and industrial growth at the district level. Land: Every state offers developed plots for setting up of industries. The terms B. INCENTIVES and conditions may vary. Some states don’t charge rent in the initial years, Special emphasis on the industrial while some allow payment in development of backward, tribal and instalments. hilly areas has been the concern of the Government of India expressed in all Power: Power is supplied at a the Five Year Plans and industrial policy concessional rate of 50 per cent, while statements. Realising that backward some states exempt such units from areas development is a long-term payment in the initial years. process, several committees were appointed to identify the criteria for Water: Water is supplied on a no-profit, identifying backward areas and also to no-loss basis or with 50 per cent suggest schemes to take up the concession or exemption from water Herculean task of balanced regional charges for a period of 5 years. development. The implementation of integrated rural development Sales Tax: In all union territories, programme is one such attempt made industries are exempted from sales tax, by the government to develop while some states extend exemption for backward areas. The rural industries 5 years period. project programme initiated by the Octroi: Most states have abolished Government of India was meant to octroi. develop small business units in select Raw materials: Units located in rural areas. Though the backward area backward areas get preferential development programmes varied from treatment in the matter of allotment of state to state, they cumulatively scarce raw materials like cement, iron represented a significant package of and steel etc. incentives to attract industries in Finance: Subsidy of 10-15 per cent backward areas. is given for building capital assets. Loans are also offered at concessional rates. Forms of Support Offered to Small Industries by the Government • Institutional support in respect of credit facilities • Provision of developed sites for construction of sheds • Provision of training facilities • Supply of machinery on hire purchase terms • Assistance for domestic and export marketing • Technical and financial assistance for technological up-gradation • Special incentives for setting up of enterprises in backward areas 2018-19

228 BUSINESS STUDIES Industrial estates: Some states markets. They have to steadily reorient encourage setting up of industrial themselves to face the challenges posed estates in backward areas. by increased competition, domestically Tax holiday: Exemption from paying and internationally too. With their taxes for 5 or 10 years is given to dynamism, flexibility and innovative industries established in backward, entrepreneurial spirit, small businesses hilly and tribal areas. have to adapt themselves to the fast changing needs of the market driven To sum up, it may be stated that the economy. Government should reorient small business sector in India is getting its assistance to the small business the support of government through sector by acting as a facilitator and various institutions in different forms promoter and not as a regulator. New for different purposes. Despite special strategies have to be evolved to foster attention being given to backward partnership between large and small areas, it is observed that imbalances in industries, adopt cluster approach, development are still there. There is a develop creative marketing, improve need to develop infrastructural facilities technological skills by upgradation, in these areas, as no amount of building export competitiveness by subsidies or concessions can overcome identifying the core competencies of the natural handicaps caused by a lack the small businesses. of such facilities. In fact small business sector 9.8 THE FUTURE should view globalisation as an opportunity for its active participation The present era is the regime of the as suppliers of specialised component World Trade Organisation (WTO), in and parts. If small businesses are to which the rules of trade are subject to maintain their market share and frequent changes as per global healthy growth, they have to create expectations. As a founder member of a level-playing field for themselves. WTO, India too has committed itself to The long-term competitive position the policy framework of WTO. As a for the small businesses will depend result, small business is also moving on how well they learn to manage, away from the pre-liberalisation era of adopt and improve their competitive protection. With the Indian economy strength. getting integrated with the global economy, it is inevitable for the small In short the mantra of success for businesses to gear up their capabilities small businesses in this modern era to explore, penetrate and develop new has to be ‘think global, act local.’ 2018-19

SMALL BUSINESS 229 Key Terms Cottage industries Micro business enterprises Rural industries Women enterprises Small scale industries Khadi industries Tiny industries Expert oriented units Ancillary SUMMARY On the basis of the capital invested, small business units can be categorised into various categories, which include Small Scale Industry, Ancilliary Small Industrial Units, Export Oriented Units, Small Scale Industries owned and managed by Women Entrepreneurs, Tiny Industrial Units, Small Scale Services and Business (Industry related) Enterprises, Micro Business Enterprises, Village Industries and Cottage Industries. Administrative setup: The administrative setup for small scale industry consists of two ministries viz., the Ministry of Small Scale Industries and Ministry of Agricultural and Rural Industry, Government of India, the Ministry of SSIs is the nodal ministry for formulation of policy and coordination of central assistance, for the promotion and development of SSIs in India. Similarly, the ministry of Agro and Rural Industries is the nodal agency for coordination and development of village and Khadi Industries, Tiny and Micro Enterprises in both urban and rural area. State Governments also execute different promotional development projected schemes to provide a number of supporting incentives for development and promotion of SSIs in their respective states. Role of small business in India: Small Scale Industries play a very important role in the socio economic development of the country. These industries account for 95 per cent of industrial units, contributing up to 40 per cent of the gross industrial value added and 45 per cent of the total exports. SSIs are the second largest employers of human resources, after agriculture and produce a variety of products for the economy. These units contribute to the balanced regional development of the country by using locally available material and indigenous technology. These provide ample scope for entrepreneurship; enjoy the advantage of low cost of production; quick decision making, and have quick adaptability and are best suited to customised production. Role of small business in rural India: Small business units provide multiple source of income, in wide range of non-agricultural activities and provide employment opportunities in rural areas, especially for the traditional artisan and weaker sections of the society. Problems of small industries: Small Industries suffer from various problems including that of (i) Finance, (ii) Non-availability of raw material, 2018-19

230 BUSINESS STUDIES (iii) Managerial skills, (iv) Skilled labour, (v) Marketing of their goods, (vi) Maintaining Quality standards, (vii) Low capacity utilisation, (viii) Use of traditional technology, (ix) Prevalence of sickness, and (x) Facing global competition. Governmental assistance to small industries: In view of the contribution of small business in various areas including employment generation, balanced regional development, and promotion of export the central and state government have been providing assistance in respect of infrastructure, finance, technology, training etc., to SSI units. Some of the major institutions providing support include National Bank for Agriculture and Rural Development, Rural Small Business Development Centre, National Small Industries Corporation, Small Industries Development Bank of India (SIDBI)), The National Commission for Enterprises in Unorganised Sector (NCEUS), Rural and Women Entrepreneurship Development (RWE), World Association for Small and Medium Enterprises (WASME), Scheme of Fund for Regeneration of Traditional Industries (SFURM) and the District Industries centre (DIC). EXERCISES Short Answer Questions 1. What are the different parameters used to measure the size of business? 2. What is the definition used by Government of India for Small Scale Industries? 3. How would you differentiate between an ancillary unit and a tiny unit? 4. State the features of cottage industries. Long Answer Questions 1. How do small scale industries contribute to the socio-economic development of india? 2. Describe the role of small business in rural India. 3. Discuss the problems faced by small scale industries. 4. What measures has the government taken to solve the problem of finance and marketing in the small scale sector? 5. What are the incentives provided by the Government for industries in backward and hilly areas? Projects/Assignments 1. Prepare a questionnaire to find out the actual problems faced by an owner of a small scale unit. Prepare a project report on it. 2. Survey about five small scale units in your vicinity and find out if they have received any assistance by the institutions setup by the Government. 2018-19

CHAPTER 10 INTERNAL TRADE LEARNING OBJECTIVES After studying this chapter, you should be able to: • describe the meaning and types of internal trade; • specify the services of wholesalers to manufactures and retailers; • explain the services of retailers; • classify the types of retailers; • explain the forms of small scale and large scale retailers; and • state the role of Chambers of Commerce and industry in the promotion of internal trade. • officiate the implementation of GST 2018-19

232 BUSINESS STUDIES Have you ever thought if there were no markets, how products of different manufacturers would reach us? We are all aware of our general provisions store round the corner which is selling items of our daily need. But is that enough? When we need to buy items of a specialised nature, we like to look at bigger markets or shops with variety. Our observation tells us that there are different types of shops selling different items or specialised goods and depending on our requirements we purchase from certain shops or markets. In rural areas, we may have noticed people selling their goods on the streets, these goods may range from vegetables to clothes. This is a completely different scene from what we see in the urban areas. In our country, all kinds of markets co-exist in harmony. With the advent of imported goods and multinational corporations, we have shops selling these products too. In big towns and cities, there are many retail shops selling particular branded products only. Another aspect of all this is, how these products reach the shops from the manufacturers? There must be some middlemen doing this job. Are they really useful or do prices increase because of them? 10.1 INTRODUCTION country is called internal trade. Trade between two or more countries, on the Trade refers to buying and selling of other hand, is called external trade. The goods and services with the objective present chapter discusses in detail the of earning profit. Mankind has been meaning and nature of internal trade engaged in trading, in some form or and explains its different types and the the other, since early days of role of chambers of commerce in civilisation. The importance of trade promoting internal trade. in modern times has increased as new products are being developed every 10.2 INTERNAL TRADE day and are being made available for consumption throughout the world. Buying and selling of goods and No individual or country can claim to services within the boundaries of a be self-sufficient in producing all the nation are referred to as internal trade. goods and services required by it. Whether the products are purchased Thus, each one is engaged in from a neighbourhood shop in a locality producing what it is best suited to or a central market or a departmental produce and exchanging the excess store or a mall or even from any door- produce with others. to-door salesperson or from an exhibition, all these are examples of On the basis of geographical internal trade as the goods are location of buyers and sellers, trade can purchased from an individual or broadly be classified into two categories establishment within a country. No (i) Internal trade; and (ii) External trade. custom duty or import duty is levied Trade which takes place within a 2018-19

INTERNAL TRADE 233 on such trade as goods are part of 10.3 WHOLESALE TRADE domestic production and are meant for domestic consumption. Generally, As discussed in the previous section, payment has to be made in the legal wholesale trade refers to buying and tender of the country or any other selling of goods and services in large acceptable currency. quantities for the purpose of resale or intermediate use. Internal trade can be classified into two broad categories viz., (i) wholesale Wholesaling is concerned with the trade and (ii) retail trade. Generally, for activities of those persons or products, which are to be distributed to establishments which sell to retailers a large number of buyers who are and other merchants, and/or to located over a wide geographical area, it industrial, institutional and commercial becomes very difficult for the producers users but who do not sell in significant to reach all the consumers or users amount to ultimate consumers. directly. For example, if vegetable oil or Wholesalers serve as an important link bathing soap or salt produced in a between manufacturers and retailers. factory in any part of the country are to They enable the producers not only to reach millions of consumers throughout reach large number of buyers spread the country, the help of wholesalers and over a wide geographical area (through retailers becomes very important. retailers), but also to perform a variety Purchase and sale of goods and services of functions in the process of in large quantities for the purpose of distribution of goods and services. They resale or intermediate use is referred to generally take the title of the goods and as wholesale trade. bear the business risks by purchasing and selling the goods in their own name. On the other hand, purchase and They purchase in bulk and sell in small sale of goods in relatively small lots to retailers or industrial users. They quantities, generally to the ultimate undertake various activities such as consumers, is referred to as retail trade. grading of products, packing into Traders dealing in wholesale trade are smaller lots, storage, transportation, called wholesale traders and those promotion of goods, collection of market dealing in retail trade are called information, collection of small and retailers. Both retailers and wholesalers scattered orders of retailers and are important marketing intermediaries distribution of supplies to them. They who perform very useful functions in also relieve the retailers of maintaining the process of exchange of goods and large stock of articles and extend credit services between producers and users facilities to them. Most of the functions or ultimate consumers. Internal trade performed by wholesalers are such aims at equitable distribution of goods which cannot be eliminated. If there are within a nation speedily and at no wholesalers, these functions shall reasonable cost. have to be performed either by the manufacturers or the retailers. 2018-19

234 BUSINESS STUDIES Services of Wholesalers block their capital in the stocks. Sometimes they also advance money to Wholesalers provide various services to the producers for bulk orders placed manufacturers as well as retailers and by them. provide immense help in the distribution of goods and services. By (iv) Expert advice: As the wholesalers making the products available at a place are in direct contact with the retailers, where these are needed and at a time they are in a position to advice the when these are needed for consumption manufacturers about various aspects or use, they provide both the time and including customer’s tastes and place utility. The various services of preferences, market conditions, wholesalers to different sections are competitive activities and the features discussed below: preferred by the buyers. They serve as an important source of market 10.3.1 Services to Manufacturers information on these and related aspects. Major services offered by wholesalers to the producers of goods and services are (v) Help in marketing function: The given as below: wholesalers take care of the (i) Facilitating large scale production: distribution of goods to a number of Wholesalers collect small orders from a retailers who, in turn, sell these goods number of retailers and pass on the pool to a large number of customers spread of such orders to the manufacturers and over a large geographical area. This make purchases in bulk quantities. This relieves the manufacturers from many enables the producers to undertake of the marketing activities and enable production on a large scale and take them to concentrate on the production advantage of the economies of scale. activity. (ii) Bearing risk: The wholesale merchants deal in goods in their own (vi) Facilitateproduction continuity: name, take delivery of the goods and The wholesalers facilitate continuity of keep the goods purchased in large lots production activity throughout the in their warehouses. In the process, they year by purchasing the goods as and bear variety of risks such as the risk of when these are produced and storing fall in prices, theft, pilferage, spoilage, them till the time these are demanded fire, etc. To that extent, they relieve the by retailers or consumers in the manufacturers from bearing these risks. market. (iii) Financial assistance: The (vii) Storage: Wholesalers take wholesalers provide financial assistance delivery of goods when these are to the manufacturers in the sense that produced in factory and keep them in they generally make cash payment for their godowns/warehouses. This the goods purchased by them. To that reduces the burden of manufacturers extent, the manufacturers need not of providing for storage facilities for the finished products. They thus provide time utility. 2018-19

INTERNAL TRADE 235 10.3.2 Services to Retailers (v) Risk sharing: The wholesalers purchase in bulk and sell in relatively The important services offered by small quantities to the retailers. Being manufacturers to the retailers are able to purchase merchandise in smaller described as below: quantities, retailers are in a position to avoid the risk of storage, pilferage, (i) Availability of goods: Retailers obsolescence, reduction in prices and have to maintain adequate stock of demand fluctuations in respect of larger varied commodities so that they can quantites of goods that they would have offer variety to their customers. The to purchase in case the services of wholesalers make the products of wholesalers are not available. various manufacturers readily available to the retailers. This relieves 10.4 RETAIL TRADE the retailers of the work of collecting goods from several producers and A retailer is a business enterprise that keeping big inventory of the same. is engaged in the sale of goods and services directly to the ultimate (ii) Marketing support: The whole- consumers. The retailer normally buys salers perform various marketing goods in large quantities from the functions and provide support to the wholesalers and sells them in small retailers. They undertake advertising quantities to the ultimate consumers. and other sales promotional activities The retails represents the final stage to induce customers to purchase the in the distribution where goods are goods. The retailers are benefitted as it transferred from the hands of the helps them in increasing the demand manufacturers or wholesalers to the for various new products. final consumers or users. Retailing is, thus, that branch of business which is (iii) Grant of credit: The wholesalers devoted to the sale of goods and generally extend credit facilities to their services to the ultimate consumers for regular customers. This enables the their personal and non-business use. retailers to manage their business with relatively small amount of working There may be different ways of capital. selling the goods viz., personally, on telephone, or through vending (iv) Specialised knowledge: The machines. Also, the products may be wholesalers specialise in one line of sold at different places, viz., in a store, products and know the pulse of the at the customer’s house or any other market. They pass on the benefit of place. Some of the common situations their specialised knowledge to the that we encounter in our daily life, for retailers. They inform the retailers example, are the sale of ball pens or about the new products, their uses, some magic medicine or book of jokes quality, prices, etc. They may also in the roadways buses; the sale of advise them on the decor of the retail outlet, allocation of shelf space and demonstration of certain products. 2018-19

236 BUSINESS STUDIES cosmetics/detergent powder, on door-to- provide help in the distribution of their door sales basis; and the sale of products by making these available to vegetables by the road side by a small the final consumers, who may be farmer. But as long as the goods are sold scattered over a large geographic area. to ultimate consumers, these will be They thus provide place utility. treated as cases of retail selling. Thus, irrespective of ‘how’ the products are sold (ii) Personal selling: In the process of or ‘where’ the sale is made, if the sales sale of most consumer goods, some are made directly to the consumers, it amount of personal selling effort is will be considered as retailing. necessary. By undertaking personal selling efforts, the retailers relieve the A retailer performs different functions producers of this activity and greatly in the distribution of goods and services. help them in the process of actualising He/she purchases a variety of products the sale of the products. from the wholesale distributors and others, arranges for proper storage of (iii) Enabling large-scale operations: goods, sells the goods in small quantities, On account of retailer’s services, the bears business risks, grades the manufacturers and wholesalers are products, collects market information, freed from the trouble of making extends credit to the buyers and individual sales to consumers in small promotes the sale of products through quantities. This enables them to displays, participation in various operate on, at relatively large scale, and schemes, etc. thereby fully concentrate on their other activities. Services of Retailers (iv) Collecting market information: Retailers serve as an important link As retailers remain in direct and constant between the producers and final touch with the buyers, they serve as an consumers in the distribution of important source of collecting market products and services. They provide information about the tastes, preferences useful services to the consumers, and attitudes of customers. Such wholesalers and manufacturers. Some information is considered very useful in of the important services of retailers are taking important marketing decisions in described as below: an organisation. 10.4.1 Services to Manufacturers (v) Help in promotion: From and Wholesalers time-to-time, manufacturers and distributors have to carry on various The invaluable services that the promotional activities in order to retailers render to the wholesalers and increase the sale of their products. For producers are given as here under: example, they have to advertise their products and offer short-term incentives (i) Help in distribution of goods: A in the form of coupons, free gifts, sales retailer’s most important service to the contests, and so on. Retailers participate wholesalers and manufacturers is to in these activities in various ways and, 2018-19