class-11-business-studies

FORMS OF BUSINESS ORGANISATION 39 (ii) Particular partnership: Partner- partnership does not get terminated ship formed for the accomplishment of with the death, lunacy or insolvency of a particular project say construction of the limited partners. The limited a building or an activity to be carried partners do not enjoy the right of on for a specified time period is called management and their acts do not bind particular partnership. It dissolves the firm or the other partners. automatically when the purpose for Registration of such partnership is which it was formed is fulfilled or when compulsory. the time duration expires. This form of partnership was not Classification on the basis of permitted in India earlier. The liability permission to form partnership firms with limited liability has been granted (i) General Partnership: In general after introduction of New Small partnership, the liability of partners Enterprise Policy in 1991. The idea is unlimited and joint. The partners behind such a move has been to enable enjoy the right to participate in the the partnership firms to attract equity management of the firm and their capital from friends and relatives of acts are binding on each other as small scale entrepreneurs who were well as on the firm. Registration of earlier reluctant to help, due to the the firm is optional. The existence existence of unlimited liability clause of the firm is affected by the death, in the partnership form of business. lunacy, insolvency or retirement of the partners. 2.4.3 Partnership Deed (ii) Limited Partnership: In limited A partnership is a voluntary association partnership, the liability of at least one of people who come together for partner is unlimited whereas the rest achieving common objectives. In order may have limited liability. Such a to enter into partnership, a clear agreement with respect to the terms, conditions and all aspects concerning Price Waterhouse Coopers was a Partnership Firm earlier Price Waterhouse Coopers, one of the world’s top accountancy firms has been created in 1998 by the merger of two companies, Price Waterhouse and Coopers and Lybrand — each with historical roots going back some 150 years to the 19th century Great Britain. In 1850, Samuel Lowell Price set up his accounting business in London. In 1865, he was joined in partnership by William H. Holyland and Edwin Waterhouse. As the firm grew, qualified members of its professional staff were admitted to the partnership. By the late 1800s, Price Waterhouse had gained significant recognition as an accounting firm. Source: Price Waterhouse Coopers archives in Columbia University. 2018-19

40 BUSINESS STUDIES the partners is essential so that there is It is optional for a partnership firm no misunderstanding later among the to get registered. In case a firm does partners. Such an agreement can be not get registered, it is deprived of oral or written. Even though it is not many benefits. The consequences of essential to have a written agreement, it non-registration of a firm are as follows: is advisable to have a written agreement (a) A partner of an unregistered firm as it constitutes an evidence of the conditions agreed upon. The written cannot file a suit against the firm agreement which specifies the terms and or other partners, conditions that govern the partnership (b) The firm cannot file a suit against is called the partnership deed. third parties, and (c) The firm cannot file a case against The partnership deed generally the partners. includes the following aspects: In view of these consequences, it is therefore advisable to get the firm • Name of firm registered. According to the India • Nature of business and location of Partnership Act 1932, the partners may get the firm registered with the business Registrar of firms of the state in which • Duration of business the firm is situated. The registration can • Investment made by each partner be at the time of formation or at any time • Distribution of profits and losses during its existence. The procedure for • Duties and obligations of the getting a firm registered is as follows: 1. Submission of application in the partners prescribed form to the Registrar of • Salaries and withdrawals of the firms. The application should contain the following particulars: partners • Name of the firm • Terms governing admission, • Location of the firm • Names of other places where the retirement and expulsion of a partner firm carries on business • Interest on capital and interest on • The date when each partner joined drawings • Procedure for dissolution of the the firm firm • Names and addresses of the • Preparation of accounts and their auditing partners • Method of solving disputes • Duration of partnership This application should be signed by 2.4.4 Registration all the partners. Registration of a partnership firm means the entering of the firm’s name, 2. Deposit of required fees with the along with the relevant prescribed par- ticulars, in the Register of firms kept Registrar of Firms. with the Registrar of Firms. It provides conclusive proof of the existence of a 3. The Registrar after approval will partnership firm. make an entry in the register of firms and will subsequently issue a certificate of registration. 2018-19

FORMS OF BUSINESS ORGANISATION 41 Cooperative is a form of organisation wherein persons voluntarily associate together as human beings on the basis of equality for the promotion of an economic interest for themselves. E. H. Calvert Cooperative organisation is “a society which has its objectives for the promotion of economic interests of its members in accordance with cooperative principles. The Indian Cooperative Societies Act 1912 2.5 COOPERATIVE SOCIETY anytime as per his desire. There cannot be any compulsion for him to The word cooperative means working join or quit a society. Although together and with others for a common procedurally a member is required to purpose. serve a notice before leaving the society, there is no compulsion to The cooperative society is a remain a member. Membership is open voluntary association of persons, who to all, irrespective of their religion, join together with the motive of welfare caste, and gender. of the members. They are driven by the need to protect their economic interests (ii) Legal status: Registration of a in the face of possible exploitation at cooperative society is compulsory. This the hands of middlemen obsessed with accords a separate identity to the society the desire to earn greater profits. which is distinct from its members. The society can enter into contracts and The cooperative society is hold property in its name, sue and be compulsorily required to be registered sued by others. As a result of being a under the Cooperative Societies Act separate legal entity, it is not affected 1912. The process of setting up a by the entry or exit of its members. cooperative society is simple enough and at the most what is required is the (iii) Limited liability: The liability of consent of at least ten adult persons the members of a cooperative society is to form a society. The capital of a limited to the extent of the amount society is raised from its members contributed by them as capital. This through issue of shares. The society defines the maximum risk that a acquires a distinct legal identity after member can be asked to bear. its registration. (iv) Control: In a cooperative society, Features the power to take decisions lies in the hands of an elected managing committee. The characteristics of a cooperative The right to vote gives the members a society are listed below. chance to choose the members who will constitute the managing committee and (i) Voluntary membership: The this lends the cooperative society a membership of a cooperative society democratic character. is voluntary. A person is free to join a cooperative society, and can also leave 2018-19

42 BUSINESS STUDIES (v) Service motive: The cooperative the society, and hence the risk of bad society through its purpose lays debts is lower. emphasis on the values of mutual help and welfare. Hence, the motive of service (v) Support from government: The dominates its working. If any surplus cooperative society exemplifies the idea is generated as a result of its operations, of democracy and hence finds support it is distributed amongst the members from the Government in the form of low as dividend in conformity with the bye- taxes, subsidies, and low interest rates laws of the society. on loans. Merits (vi) Ease of formation: The cooperative society can be started with a minimum The cooperative society offers many of ten members. The registration benefits to its members. Some of the procedure is simple involving a few legal advantages of the cooperative form of formalities. Its formation is governed by organisation are as follows. the provisions of Cooperative Societies Act 1912. (i) Equality in voting status: The principle of ‘one man one vote’ governs Limitations the cooperative society. Irrespective of the amount of capital contribution by The cooperative form of organisation a member, each member is entitled to suffers from the following limitations: equal voting rights. (i) Limited resources: Resources of a (ii) Limited liability: The liability of cooperative society consists of capital members of a cooperative society is contributions of the members with limited to the extent of their capital limited means. The low rate of dividend contribution. The personal assets of the offered on investment also acts as a members are, therefore, safe from being deterrent in attracting membership or used to repay business debts. more capital from the members. (iii) Stable existence: Death, (ii) Inefficiency in management: bankruptcy or insanity of the members Cooperative societies are unable to do not affect continuity of a cooperative attract and employ expert managers society. A society, therefore, operates because of their inability to pay them unaffected by any change in the high salaries. The members who offer membership. honorary services on a voluntary basis are generally not professionally (iv) Economy in operations: The equipped to handle the management members generally offer honorary functions effectively. services to the society. As the focus is on elimination of middlemen, this helps (iii) Lack of secrecy: As a result of in reducing costs. The customers or open discussions in the meetings of producers themselves are members of members as well as disclosure obligations as per the Societies Act 2018-19

FORMS OF BUSINESS ORGANISATION 43 (7), it is difficult to maintain secrecy 2.5.1 Types of Cooperative about the operations of a cooperative Societies society. Various types of cooperative societies (iv) Government control: In return of based on the nature of their operations the privileges offered by the are described below: government, cooperative societies have to comply with several rules and (i) Consumer’s cooperative societies: regulations related to auditing of The consumer cooperative societies are accounts, submission of accounts, etc. formed to protect the interests of Interference in the functioning of the consumers. The members comprise of cooperative organisation through the consumers desirous of obtaining good control exercised by the state quality products at reasonable prices. cooperative departments also negatively The society aims at eliminating affects its freedom of operation. middlemen to achieve economy in operations. It purchases goods in bulk (v) Differences of opinion: Internal directly from the wholesalers and sells quarrels arising as a result of contrary goods to the members, thereby viewpoints may lead to difficulties in eliminating the middlemen. Profits, if decision making. Personal interests any, are distributed on the basis of either may start to dominate the welfare their capital contributions to the society motive and the benefit of other or purchases made by individual members may take a backseat if members. personal gain is given preference by certain members. Amul’s amazing Cooperative ventures! Every day Amul collects 4,47,000 litres of milk from 2.12 million farmers (many illiterate), converts the milk into branded, packaged products, and delivers goods worth Rs. 6 crore (Rs. 60 million) to over 5,00,000 retail outlets across the country. It all started in December 1946 with a group of farmers keen to free themselves from intermediaries, gain access to markets and thereby ensure maximum returns for their efforts. Based in the village of Anand, the Khera District Milk Cooperative Union (better known as Amul) expanded exponentially. It joined hands with other milk cooperatives, and the Gujarat network now covers 2.12 million farmers, 10,411 village level milk collection centres and fourteen district level plants (unions). Amul is the common brand for most product categories produced by various unions: liquid milk, milk powder, butter, ghee, cheese, cocoa products, sweets, ice-cream and condensed milk. Amul’s sub-brands include variants such as Amulspray, Amulspree, Amulya and Nutramul. Source: Adapted from Pankaj Chandra, “Rediff.com”, Business Special, September 2005. 2018-19

44 BUSINESS STUDIES (ii) Producer’s cooperative societies: products. The members consist of These societies are set up to protect the producers who wish to obtain interest of small producers. The reasonable prices for their output. The members comprise of producers society aims to eliminate middlemen desirous of procuring inputs for and improve competitive position of its production of goods to meet the members by securing a favourable demands of consumers. The society market for the products. It pools the aims to fight against the big capitalists output of individual members and and enhance the bargaining power of performs marketing functions like the small producers. It supplies raw transportation, warehousing, materials, equipment and other inputs packaging, etc., to sell the output at to the members and also buys their the best possible price. Profits are output for sale. Profits among the distributed according to each members are generally distributed on member’s contribution to the pool of the basis of their contributions to the output. total pool of goods produced or sold by the society. (iv) Farmer’s cooperative societies: These societies are established to (iii) Marketing cooperative societies: protect the interests of farmers by Such societies are established to help providing better inputs at a reasonable small producers in selling their cost. The members comprise farmers Indian Companies in League of FORTUNE GLOBAL Organisations Company GLOBAL Rank in Revenues Website rank India (Million$) www.iocl.com 1 www.ril.com Indian Oil Corporation Ltd. 161 54,711 2 Reliance Industries Ltd. 215 43,437 Tata Motors Ltd. 226 3 42,092 www.tatamotors.com State Bank of India 232 4 41,681 www.sbi.co.in 350 Bharat Petroleum 367 5 20,082 www.bharatpetroleum.in Corporation Ltd. 423 6 28,820 www.hindustanpetroleum.com Hindustan Petroleum Corporation Ltd. 7 25,237 www.rajeshindia.com Rajesh Exports Corporation Ltd. 2018-19

FORMS OF BUSINESS ORGANISATION 45 who wish to jointly take up farming 2.6 JOINT STOCK COMPANY activities. The aim is to gain the benefits of large scale farming and increase the A company is an association of persons productivity. Such societies provide formed for carrying out business ac- better quality seeds, fertilisers, tivities and has a legal status indepen- machinery and other modern dent of its members. A company can techniques for use in the cultivation of be described as an artificial person hav- crops. This helps not only in improving ing a separate legal entity, perpetual the yield and returns to the farmers, succession and a common seal. The but also solves the problems associated company form of organisation is gov- with the farming on fragmented land erned by The Companies Act, 2013. As holdings. per section 2(20) of Act 2013, a com- pany means company incorporated (v) Credit cooperative societies: under this Act or any other previous company law. Credit cooperative societies are The shareholders are the owners of established for providing easy credit the company while the Board of on reasonable terms to the members. Directors is the chief managing body The members comprise of persons who elected by the shareholders. Usually, seek financial help in the form of loans. the owners exercise an indirect control The aim of such societies is to protect over the business. The capital of the the members from the exploitation of company is divided into smaller parts lenders who charge high rates of called ‘shares’ which can be transferred interest on loans. Such societies provide freely from one shareholder to another loans to members out of the amounts person (except in a private company). collected as capital and deposits from the members and charge low rates Features of interest. The definition of a joint stock company (vi) Cooperative housing societies: highlights the following features of a Cooperative housing societies are company. established to help people with limited income to construct houses at (i) Artificial person: A company is a reasonable costs. The members of these creation of law and exists independent societies consist of people who are of its members. Like natural persons, desirous of procuring residential a company can own property, incur accommodation at lower costs. The aim debts, borrow money, enter into is to solve the housing problems of the contracts, sue and be sued but unlike members by constructing houses and them it cannot breathe, eat, run, talk giving the option of paying in and so on. It is, therefore, called an instalments. These societies construct artificial person. flats or provide plots to members on which the members themselves can (ii) Separate legal entity: From the construct the houses as per their choice. day of its incorporation, a company acquires an identity, distinct from its 2018-19

46 BUSINESS STUDIES members. Its assets and liabilities are officials for running the business. The separate from those of its owners. The directors hold a position of immense law does not recognise the business significance as they are directly and owners to be one and the same. accountable to the shareholders for the working of the company. The (iii) Formation: The formation of a shareholders, however, do not have the company is a time consuming, expensive right to be involved in the day-to-day and complicated process. It involves the running of the business. preparation of several documents and Previous Company law means any of the laws specified below: 1. Act relating to companies in force before the Indian companies Act, 1866 (10 of 1866). 2. The Indian companies Act, 1866 (10 of 1866). 3. The Indian companies Act, 1882 (6 of 1882). 4. The Indian companies Act, 1913 (6 of 1913). 5. The Registration of Transferred Companies Ordinance, 1942 (ordinance 42 of 1942). 6. The Companies Act, 1956. compliance with several legal (vi) Liability: The liability of the requirements before it can start members is limited to the extent of the functioning. Incorporation of companies capital contributed by them in a is compulsory under The Companies Act company. The creditors can use only the 2013 or any of the previous company assets of the company to settle their law, as state earlier. Such companies claims since it is the company and not which are incorporated under the members that owes the debt. The companies Act 1956 or any company law members can be asked to contribute to shall be included in the list of companies. the loss only to the extent of the unpaid amount of share held by them. Suppose (iv) Perpetual succession: A company Akshay is a shareholder in a company being a creation of the law, can be holding 2,000 shares of Rs.10 each on brought to an end only by law. It will which he has already paid Rs. 7 per only cease to exist when a specific share. His liability in the event of losses procedure for its closure, called or company’s failure to pay debts can winding up, is completed. Members be only up to Rs. 6,000 — the unpaid may come and members may go, but amount of his share capital (Rs. 3 per the company continues to exist. share on 2,000 shares held in the company). Beyond this, he is not liable (v) Control: The management and to pay anything towards the debts or control of the affairs of the company is losses of the company. undertaken by the Board of Directors, which appoints the top management 2018-19

FORMS OF BUSINESS ORGANISATION 47 (vii) Common seal: A company may into cash in case the need arises. or may not have a common seal. If a This avoids blockage of investment company has a common seal, it must and presents the company as a be affixed to the documents such as favourable avenue for investment agreements of a company. If a company purposes. does not have a common seal then the person signing the document should (iii) Perpetual existence: Existence of be authorised by a board’s resolutions. a company is not affected by the death, retirement, resignation, insolvency or (viii) Risk bearing: The risk of losses insanity of its members as it has a in a company is borne by all the share separate entity from its members. A holders. This is unlike the case of sole company will continue to exist even if proprietorship or partnership firm all the members die. It can be liquidated where one or few persons respectively only as per the provisions of the bear the losses. In the face of financial Companies Act, 2013. difficulties, all shareholders in a company have to contribute to the (iv) Scope for expansion: As debts to the extent of their shares in compared to the sole proprietorship the company’s capital. The risk of loss and partnership forms of organisation, thus gets spread over a large number a company has large financial of shareholders. resources. Further, capital can be attracted from the public as well as Merits through loans from banks and financial institutions. Thus there is greater scope The company form of organisation for expansion. The investors are offers a multitude of advantages, some inclined to invest in shares because of of which are discussed below. the limited liability, transferable ownership and possibility of high (i) Limited liability: The shareholders returns in a company. are liable to the extent of the amount unpaid on the shares held by them. (v) Professional management: A Also, only the assets of the company company can afford to pay higher can be used to settle the debts, leaving salaries to specialists and professionals. the owner’s personal property free from It can, therefore, employ people who any charge. This reduces the degree of are experts in their area of risk borne by an investor. specialisations. The scale of operations in a company leads to division of work. (ii) Transfer of interest: The ease Each department deals with a of transfer of ownership adds to the particular activity and is headed by an advantage of investing in a company expert. This leads to balanced decision as the share of a public limited making as well as greater efficiency in company can be sold in the market the company’s operations. and as such can be easily converted 2018-19

48 BUSINESS STUDIES Limitations (iii) Impersonal work environment: Separation of ownership and The major limitations of a company management leads to situations in form of organisation are as follows: which there is lack of effort as well as personal involvement on the part of (i) Complexity in formation: The the officers of a company. The large formation of a company requires size of a company further makes it greater time, effort and extensive difficult for the owners and top knowledge of legal requirements and management to maintain personal the procedures involved. As compared contact with the employees, to sole proprietorship and partnership customers and creditors. form of organisations, formation of a company is more complex. Pen is mightier than the Sword: The Case of Luxor Writing Instruments Pvt. Ltd. In the year 1963, a young gentleman armed with the power of hard work and ambition, started a new era in the field of writing instruments. At a tender age of 19, he started a small manual assembly shop in Sadar Bazaar area in Delhi where he manufactured fountain pens under the name Luxor Writing Instruments Pvt. Ltd. (LWIPL). Being awarded the coveted ‘Number One Writing Instruments Exporter’ award consecutively for three years, LWIPL has been given the exclusive rights of manufacturing and distributing four international brands in India, viz., Pilot, Papermate, Parker and Waterman. Luxor Writing Instruments Pvt. Ltd. has the largest share of this market of over 20 percent, with a turnover pushing way beyond the Rs. 150 crore mark. As of today Luxor is a leading manufacturer and exporter of writing instruments from India. It is currently exporting over 15 percent of the output and has four manufacturing facilities in New Delhi and three at Mumbai. It employs over 600 people. It is the leader in most segments of the market, manufacturing and distributing a wide variety of pens for various applications and needs. Source: http://www.luxorparker.com (ii) Lack of secrecy: The Companies Act (iv) Numerous regulations: The requires each public company to provide functioning of a company is subject to from time-to-time a lot of information to many legal provisions and compulsions. the office of the registrar of companies. A company is burdened with numerous Such information is available to the restrictions in respect of aspects general public also. It is, therefore, including audit, voting, filing of reports difficult to maintain complete secrecy and preparation of documents, and is about the operations of company. required to obtain various certificates 2018-19

FORMS OF BUSINESS ORGANISATION 49 from different agencies, viz., registrar, small percentage attend the general SEBI, etc. This reduces the freedom of meetings. The Board of Directors as operations of a company and takes away such enjoy considerable freedom in a lot of time, effort and money. exercising their power which they sometimes use even contrary to the (v) Delay in decision making: interests of the shareholders. Companies are democratically managed Dissatisfied shareholders in such a through the Board of Directors which is situation have no option but to sell followed by the top management, middle their shares and exit the company. As management and lower level the directors virtually enjoy the rights management. Communication as well as to take all major decisions, it leads to approval of various proposals may rule by a few. cause delays not only in taking decisions but also in acting upon them. (vii) Conflict in interests: There may be conflict of interest amongst various (vi) Oligarchic management: In stakeholders of a company. The theory, a company is a democratic employees, for example, may be institution wherein the Board of interested in higher salaries, consumers Directors are representatives of the desire higher quality products at lower shareholders who are the owners. In prices, and the shareholders want practice, however, in most large sized higher returns in the form of dividends organisations having a multitude of and increase in the intrinsic value of shareholders; the owners have their shares. These demands pose minimal influence in terms of problems in managing the company as controlling or running the business. it often becomes difficult to satisfy such It is so because the shareholders are diverse interests. spread all over the country and a very Table 2.3 Difference between a Public Company and Private Company Basis Public company Private company Members Minimum - 7 Minimum - 2 Maximum - unlimited Maximum - 200 Minimum number of directors Three Two Index of members Compulsory Not compulsory Transfer of shares No restriction Restriction on transfer Invitation to public to Can invite the public to Cannot invite the public to subscribe to shares subscribe to its shares or subscribe to its securities debentures 2018-19

50 BUSINESS STUDIES Bharat Heavy Electricals Limited — A Public Company’s Journey in Quality Bharat Heavy Electricals Limited (BHEL) is the largest engineering and manufacturing enterprise in India today in the energy-related/ infrastructure sector. BHEL was established more than 40 years ago, ushering in the indigenous heavy electrical equipment industry in India — a dream that has been more than realised with a well-recognised track record of performance. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77. BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian economy, viz., power generation and transmission, transportation, telecommunication, renewable energy, etc. BHEL has acquired certifications to Quality Management Systems (ISO 9001), Environmental Management Systems (ISO 14001) and Occupational Health and Safety Management Systems (OHSAS 18001) and is also well on its journey towards Total Quality Management. Major achievements of BHEL include: • Installed equipment for over 90,000 MW of power generation — for utilities, captive and industrial users. • Supplied over 2,25,000 MVA transformer capacity and other equipment operating in transmission and distribution network up to 400 kV (AC and DC). • Supplied over 25,000 motors with Drive Control System to power projects, petrochemicals, refineries, steel, aluminium, fertiliser, cement plants, etc. • Supplied traction electrics and AC/DC locos to power over 12,000 kms railway network. • Supplied over one million valves to power plants and other industries. BHEL’s vision is to become a world-class engineering enterprise, committed to enhancing stakeholder value. The company is striving to give shape to its aspirations and fulfil the expectations of the country to become a global player. The greatest strength of BHEL is its highly skilled and committed 43,500 employees. Every employee is given an equal opportunity to develop himself and grow in his career. Continuous training and retraining, career planning, a positive work culture and participative style of management — all these have engendered development of a committed and motivated workforce setting new benchmarks in terms of productivity, quality and responsiveness. Source: website of BHEL 2018-19

FORMS OF BUSINESS ORGANISATION 51 2.6.1 Types of Companies 4. A private company needs to have only two directors as against the A company can be either a private or a minimum of three directors in the public company. These two types of case of a public company. However companies are discussed in detail in the the maximum number of directors following paragraphs. for both types of companies is fifteen. Private Company 5. A private company is not required A private company means a company to keep an index of members while which: the same is necessary in the case (a) restricts the right of members to of a public company. transfer its shares; Public Company (b) has a minimum of 2 and a maximum A public company means a company of 200 members, excluding the which is not a private company. As per present and past employees; The Companies Act, a public company (c) does not invite public to subscribe is one which: to its securities and (a) has a minimum of 7 members and It is necessary for a private company to use the word private limited after its no limit on maximum members; name. If a private company contravenes (b) has no restriction on transfer any of the aforesaid provisions, it ceases to be a private company and loses all securities; and the exemptions and privileges to which (c) is not prohibited from inviting the it is entitled. The following are some of the privileges public to subscribe to its securities. of a private limited company as against However, a private company which is a a public limited company: subsidiary of a public company is also 1. A private company can be formed treated as a public company. by only two members whereas seven people are needed to form a 2.7 CHOICE OF FORM OF BUSINESS public company. ORGANISATION 2. There is no need to issue a prospectus as public is not invited After studying various forms of to subscribe to the shares of a business organisations, it is evident that private company. each form has certain advantages as well 3. Allotment of shares can be done as disadvantages. It, therefore, becomes without receiving the minimum vital that certain basic considerations are subscription. A private limited kept in mind while choosing an company can start business as appropriate form of organisation. The soon as it receives the certificate of important factors determining the incorporation. choice of organisation are listed in Table 2.4 and are discussed as follows: 2018-19

52 BUSINESS STUDIES Table 2.4 Factors influencing the choice of form of Business Organisation Form of organisation Factor Most advantageous Least advantageous Availability of capital Company Sole proprietorship Cost of formation Sole proprietorship Company Ease of formation Sole proprietorship Company Company (except Transfer of ownership private company) Partnership Managerial skills Company Sole proprietorship Regulations Sole proprietorship Company Flexibility Sole proprietorship Company Continuity Liability Company Sole proprietorship Company Sole proprietorship (i) Cost and ease in setting up the (ii) Liability: In case of sole organisation: As far as initial proprietorship and partnership firms, business setting-up costs are the liability of the owners/partners is concerned, sole proprietorship is the unlimited. This may call for paying the most inexpensive way of starting a debt from personal assets of the owners. business. However, the legal In joint Hindu family business, only the requirements are minimum and the karta has unlimited liability. In scale of operations is small. In case of cooperative societies and companies, partnership also, the advantage of less however, liability is limited and creditors legal formalities and lower cost is there can force payment of their claims only because of limited scale of operations. to the extent of the company’s assets. Cooperative societies and companies Hence, from the point of view of have to be compulsorily registered. investors, the company form of Formation of a company involves a organisation is more suitable as the risk lengthy and expensive legal procedure. involved is limited. From the point of view of initial cost, therefore, sole proprietorship is the (iii) Continuity: The continuity of sole preferred form as it involves least proprietorship and partnership firms is expenditure. Company form of affected by such events as death, organisation, on the other hand, is insolvency or insanity of the owners. more complex and involves greater However, such factors do not affect the costs. continuity of business in the case of organisations like joint Hindu family business, cooperative societies and 2018-19

Table 2.5 Comparative Evaluati Basis of Sole Partnership Joint Hin comparison proprietorship family busi Formation Minimal legal Registration is Less lega formalities, optional, formalitie Members easiest exemption formation easy formation registratio Capital easy forma contribution Only owner Minimum-2 At least tw Liability Maximum: 50 persons f division of fa Control and management property no maxim Continuity limit Limited finance Limited but more Ancestra than that can be property raised in case of sole proprietorship Unlimited Unlimited and Unlimited (K joint Limited (O member Owner takes all Partners take Karta tak decisions, decisions, decision quick decision consent of all making partners is needed Unstable, More stable but Stable business and affected by status busines owner regarded continues ev of partners karta die as one 2018

ion of Forms of Organisation FORMS OF BUSINESS ORGANISATION ndu Cooperative society Company iness Registration Registration compulsory, al compulsory, lengthy and expensive es, greater legal formation process from on, formalities Minimum Private-2 ation Public Company-7 At least 10 adults, wo no maximum limit Maximum for Private Company-200 amily Public Company-unlimited y, mum al Limited Large financial resources y Karta), Limited Limited Other Separation between rs) ownership and management kes Elected Stable because of separate ns representative, i.e., legal status managing committee takes decisions e Stable because of ss, separate legal status ven if es 53 8-19

54 BUSINESS STUDIES companies. In case the business needs form may be suitable whereas for a permanent structure, company form medium and small sized business one is more suitable. For short term can opt for partnership or sole ventures, proprietorship or partnership proprietorship. Further, from the point may be preferred. of view of expansion, a company is more suitable because of its capability (iv) Management ability: A sole to raise more funds and invest in proprietor may find it difficult to have expansion plans. It is precisely for this expertise in all functional areas of purpose that in our opening case management. In other forms of Neha’s father suggested she should organisations like partnership and consider switching over to the company company, there is no such problem. form of organisation. Division of work among the members in such organisations allows the (vi) Degree of control: If direct control managers to specialise in specific over operations and absolute decision areas, leading to better decision making power is required, making. But this may lead to proprietorship may be preferred. But situations of conflicts because of if the owners do not mind sharing differences of opinion amongst people. control and decision making, Further, if the organisation’s partnership or company form of operations are complex in nature and organisation can be adopted. The require professionalised management, added advantage in the case of company form of organisation is a company form of organisation is that better alternative. Proprietorship or there is complete separation of partnership may be suitable, where ownership and management and it is simplicity of operations allow even professionals who are appointed to people with limited skills to run the independently manage the affairs of business. Thus, the nature of a company. operations and the need for professionalised management affect (vii) Nature of business: If direct the choice of the form of organisation. personal contact is needed with the customers such as in the case of a (v) Capital considerations: Companies grocery store, proprietorship may be are in a better position to collect large more suitable. For large manufacturing amounts of capital by issuing shares units, however, when direct personal to a large number of investors. contact with the customer is not Partnership firms also have the required, the company form of advantage of combined resources of all organisation may be adopted. Similarly, partners. But the resources of a sole in cases where services of a professional proprietor are limited. Thus, if the nature are required, partnership form is scale of operations is large, company much more suitable. 2018-19

FORMS OF BUSINESS ORGANISATION 55 It would not be out of place to run on a small scale might not be mention here that the factors stated appropriate when the same business above are inter-related. Factors like is carried on a large scale. It is, capital contribution and risk vary with therefore, suggested that all the relevant the size and nature of business, and factors must be taken into hence a form of business organisation consideration while making a decision that is suitable from the point of view with respect to the form of organisation of the risks for a given business when that should be adopted. Key Terms Partnership Joint Hindu Family Sole proprietorship Cooperative Societies Joint Stock Company Mutual agency Perpetual succession Artificial person Holding company Co-parceners Incorporation of a Company SUMMARY Forms of business organisation refers to the types of organisations which differ in terms of ownership and management. The major forms of organisation include proprietorship, partnership, joint Hindu family business, cooperative society and company. Sole proprietorship refers to a form of organisation where business is owned, managed and controlled by a single individual who bears all the risks and is the only recipient of all the profits. Merits of this form of organisation include quick decision making, direct incentive, personal satisfaction, and ease of formation and closure. But this form of organisation suffers from limitations of limited resources, unstable life span of business, unlimited liability of sole proprietor and his/her limited managerial ability. Partnership is defined as an association of two or more persons who agree to carry on a business together and share the profits as well as bear risks collectively. Major advantages of partnership are: ease of formation and closure, benefits of specialisation, greater funds, and reduction of risk. Major limitations of partnership are unlimited liability, possibility of conflicts, lack of continuity and lack of public confidence. As there are different types of partners such as active, sleeping, secret and nominal partners; so is the case with types of partnerships which can vary from general partnership, limited partnership, partnership at will to particular partnership. 2018-19

56 BUSINESS STUDIES Joint Hindu family business is a business owned and carried on by the members of a Hindu Undivided Family, which is governed by the Hindu law. Karta — the oldest male member of the family — controls the business. The strong points of joint Hindu family business include effective control, stability in existence, limited liability and increased loyalty among family members. But this form of organisation too suffers from certain limitations such as limited resources, lack of incentives, dominance of the karta and limited managerial ability. A cooperative society is a voluntary association of persons who get together to protect their economic interests. The major advantages of a cooperative society are equality in voting, members’ limited liability, stable existence, economy in operations, support from government, and ease of formation. But this form of organisation suffers from weaknesses such as limited resources, inefficiency in management, lack of secrecy, government control, and differences among members in regard to the way society should be managed and organised. Based on their purpose and nature of members, various types of societies that can be formed include: consumers cooperative society, producers cooperative society, marketing cooperative society, farmers cooperative society, credit cooperative society, and cooperative housing society. A company, on the other hand, may be defined as an artificial person, existing only in the eyes of the law with perpetual succession and having a separate legal identity. While major advantages of a company form of organisation are members’ limited liability, transfer of interest, stable existence, scope for expansion, and professional management; its key limitations are: complexity in formation, lack of secrecy, impersonal work environment, numerous regulations, delay in decision making, oligarchic management, and conflict of interests among different shareholders. Companies can be of two types — private and public. A private company is one which restricts transfer of shares and does not invite the public to subscribe to its securities. A public company, on the other hand, is allowed to raise its funds by inviting the public to subscribe to its securities. Furthermore, there is a free transferability of securities in the case of a public company. Choice of form of organisation: Selection of an appropriate form of organisation can be made after taking various factors into consideration. Initial costs, liability, continuity, capital considerations, managerial ability, degree of control and nature of business are the key factors that need to taken into account while deciding about the suitable form of organisation for one’s business. 2018-19

FORMS OF BUSINESS ORGANISATION 57 EXERCISES Multiple Choice Questions Tick the appropriate answer 1. The structure in which there is separation of ownership and management is called (a) Sole proprietorship (b) Partnership (c) Company (d) All business organisations 2. The karta in Joint Hindu family business has (a) Limited liability (b) Unlimited liability (c) No liability for debts (d) Joint liability 3. In a cooperative society the principle followed is (a) One share one vote (b) One man one vote (c) No vote (d) Multiple votes 4. The board of directors of a joint stock company is elected by (a) General public (b) Government bodies (c) Shareholders (d) Employees 5. Profits do not have to be shared. This statement refers to (a) Partnership (b) Joint Hindu family business (c) Sole proprietorship (d) Company 6. The capital of a company is divided into number of parts each one of which are called (a) Dividend (b) Profit (c) Interest (d) Share 7. The Head of the joint Hindu family business is called (a) Proprietor (b) Director (c) Karta (d) Manager 8. Provision of residential accommodation to the members at reasonable rates is the objective of (a) Producer’s cooperative (b) Consumer’s cooperative (c) Housing cooperative (d) Credit cooperative 9. A partner whose association with the firm is unknown to the general public is called (a) Active partner (b) Sleeping partner (c) Nominal partner (d) Secret partner 2018-19

58 BUSINESS STUDIES Short Answer Questions 1. Compare the status of a minor in a Joint Hindu family business with that in a partnership firm. 2. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain. 3. State the important privileges available to a private company. 4. How does a cooperative society exemplify democracy and secularism? Explain. 5. What is meant by ‘partner by estoppel’? Explain. 6. Briefly explain the following terms in brief. (a) Perpetual succession (b) Common seal (c) Karta (d) Artificial person Long Answer Questions 1. What do you understand by a sole proprietorship firm? Explain its merits and limitation? 2. Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership. 3. Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation. 4. Discuss the characteristics, merits and limitation of cooperative form of organisation. Also describe briefly different types of cooperative societies. 5. Distinguish between a Joint Hindu family business and partnership. 6. Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why? Application Questions 1. In which form of organisation is a trade agreement made by one owner binding on the others? Give reasons to support your answer. 2. The business assets of an organisation amount to Rs. 50,000 but the debts that remain unpaid are Rs. 80,000. What course of action can the creditors take if (a) The organisation is a sole proprietorship firm (b) The organisation is a partnership firm with Anthony and Akbar as partners. Which of the two partners can the creditors approach for repayment of debt? Explain giving reasons 2018-19

FORMS OF BUSINESS ORGANISATION 59 3. Kiran is a sole proprietor. Over the past decade, her business has grown from operating a neighbourhood corner shop selling accessories such as artificial jewellery, bags, hair clips and nail art to a retail chain with three branches in the city. Although she looks after the varied functions in all the branches, she is wondering whether she should form a company to better manage the business. She also has plans to open branches countrywide. (a) Explain two benefits of remaining a sole proprietor (b) Explain two benefits of converting to a joint stock company (c) What role will her decision to go nationwide play in her choice of form of the organisation? (d) What legal formalities will she have to undergo to operate business as a company? Projects/Assignments Divide students into teams to work on the following (a) To study the profiles of any five neighbourhood grocery/stationery store (b) To conduct a study into the functioning of a Joint Hindu family businesses (c) To enquire into the profile of five partnerships firms (d) To study the ideology and working of cooperative societies in the area (e) To study the profiles of any five companies (inclusive of both private and public companies) Notes 1. Some of the following aspects can be assigned to the students for undertaking above mentioned studies. Nature of business, size of the business measured in terms of capital employed, number of persons working, or sales turnover, problems faced, Incentive, reason behind choice of a particular form, decision making pattern, willingness to expand and relevant considerations, Usefulness of a form, etc. 2. Students teams should be encouraged to submit their findings and conclusions in the form of project reports and multi-media presentations. 2018-19

CHAPTER 3 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES LEARNING OBJECTIVES After studying this chapter, you should be able to: • explain the concept and characteristics of business; • explain the features of different forms of public enterprises viz., departmental, statutory corporations and government companies; • critically examine the changing role of the public sector; • explain the features of global enterprises; and • appreciate the benefits of joint ventures. 2018-19

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 61 Anita, a student of class XI, was going through some newspapers. The headlines stared at her face, Government plans to disinvest its shares in a few companies. The next day there was another news item on one public sector company incurring heavy losses and the proposal for closing the same. In contrast to this, she read another item on how some of the companies under the private sector were doing so well. She was actually curious to know what these terms like public sector, disinvestment, privatisation meant. She realised that in certain areas there was only the government which operates like the railways and in some areas both the privately owned and government run business were operating. For example, in the heavy industry sector SAIL, BHEL and TISCO, Reliance, Birlas all were there and in the telecom sector, companies like Tata, Reliance, Airtel operate and in airlines Sahara and Jet have recently gained entry. These companies along with the Government-owned companies like MTNL, BSNL, Indian Airlines, Air India. She then started wondering where from companies like Coca cola, Pepsi, Hyundai came? Were they always here or did they operate somewhere else, in some other country. She went to the library and was surprised to know that there was so much information about all these in books, business magazines and newspapers. 3.1 INTRODUCTION and towns has been greatly reduced. This is because of plenty of private You must have come across all types courier services firms operating in of business organisations in your daily bigger towns. Then there are businesses life. In your neighbourhood market, which operate in more than one country there are shops owned by sole known as global enterprises. Therefore, proprietors or big retail organisations you may have observed that all types run by a company. Then there are of organisations are doing business in people providing you services like legal the country whether they are public, services, medical services, being owned private or global. In this chapter we by more than one person i.e., shall be studying how the economy is partnership firms. These are all divided into two sectors, public and privately owned organisations. private, the different types of public Similarly, there are other offices or enterprises, their role and that of the places of business which may be owned global enterprises. by the government. For example, Railways is an organisation wholly 3.2 PRIVATE S ECTOR AND P UBLIC owned and managed by the SECTOR government. The post office, in your locality is owned by the Post and There are all kinds of business Telegraph Department, Government of organisations — small or large, India, though our dependence on their industrial or trading, privately owned postal services, particularly in cities or government owned existing in our 2018-19

62 BUSINESS STUDIES country. These organisations affect our private and public sector were clearly daily economic life and therefore defined and the government through become part of the Indian economy. various Acts and Regulations was Since the Indian economy consists of overseeing the economic activities of both privately owned and government both the private and public sector. The owned business enterprises, it is Industrial Policy Resolution, 1956 had known as a mixed economy. The also laid down certain objectives for the Government of India has opted for a public sector to follow so as to mixed economy where both private and accelerate the rate of growth and government enterprises are allowed to industrialisation. The public sector was operate. The economy, therefore, may given a lot of importance but at the be classified into two sectors viz., same time mutual dependency of private sector and public sector. public and private sectors was emphasised. The 1991 industrial The private sector consists of policy was radically different from all business owned by individuals or a the earlier policies where the group of individuals, as you have government was deliberating learnt in the previous chapter. The disinvestment of public sector and various forms of organisation are allowing greater freedom to the private sole proprietorship, partnership, sector. At the same time, foreign direct joint Hindu family, cooperative investment was invited from business and company. houses outside India. Thus, multinational corporations or global The public sector consists of enterprises which operate in more than various organisations owned and one country gained entry into the managed by the government. These Indian economy. Thus, we have public organisations may either be partly or sector units, private sector enterprises wholly owned by the central or state and global enterprises coexisting in the government. They may also be a part Indian economy. of the ministry or come into existence by a Special Act of the Parliament. The 3.3 FORMS OF ORGANISING PUBLIC government, through these enterprises SECTOR ENTERPRISES participates in the economic activities of the country. Government’s participation in business and economic sectors of the country The government in its industrial needs some kind of organisational policy resolutions, from time-to-time, framework to function. You have defines the area of activities in which studied about the forms of business the private sector and public sector are organisation in the private sector viz., allowed to operate. In the Industrial sole proprietorship, partnership, Hindu Policy Resolution 1948, the undivided family, cooperative and Government of India had specified the company. approach towards development of the industrial sector. The roles of the 2018-19

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 63 Indian Economy Public Sector Private Sector Departmental Government Undertakings Companies Partnership Joint Cooperative Multinational Statutory Sole Hindu Corporations Corporation Properietorship Family Company Public Private (Ltd.) (Ltd.) In the public sector, as it grows, an A public enterprise may take any important question arises in respect of particular form of organisation how it is to be organised or what form depending upon the nature of its of organisation it should take. The operations and their relationship with government has a major role to play in the government. The suitability of a the formation of the public sector. But particular form of organisation would the government acts through its people, depend upon its requirements. At the its offices, employees and they take same time, in accordance with general decisions on behalf of the government. principles, any organisation in the For this purpose, public enterprises public sector should ensure organisational were formed by the government to performance productivity and quality participate in the economic activities of standards. the country. They are expected to contribute to the economic deve- The forms of organisation which a lopment of the country in today’s public enterprise may take are as liberalised, competitive world. These follows: public enterprises are owned by the public and are accountable to the (i) Departmental undertaking public through the Parliament. They (ii) Statutory corporation are characterised by public ownership, (iii) Government company public funds being used for its activities and public accountability. 3.3.1 Departmental Undertakings This is the oldest and most traditional form of organising public enterprises. 2018-19

64 BUSINESS STUDIES These enterprises are established as Indian Administrative Service (IAS) departments of the ministry and are officers and civil servants who are considered part or an extension of the transferable from one ministry to ministry itself. The Government another; functions through these departments (iv) It is generally considered to be and the activities performed by them a major subdivision of the are an integral part of the functioning Government department and is of the government. They have not been subject to direct control of the constituted as autonomous or ministry; independent institutions and as such (v) They are accountable to the are not independent legal entities. They ministry since their management act through the officers of the is directly under the concerned Government and its employees are ministry. Government employees. These undertakings may be under the central Merits or the state government and the rules of central/state government are Departmental undertakings have applicable. Examples of these certain advantages which are as follows: undertakings are railways and post and telegraph department. (i) These undertakings facilitate the Parliament to exercise effective Features control over their operations; The main characteristics of (ii) These ensure a high degree of Departmental undertakings are as public accountability; follows: (iii) The revenue earned by the (i) The funding of these enterprises enterprise goes directly to the come directly from the Govern- treasury and hence is a source of ment Treasury and are an annual income for the Government; appropriation from the budget of the Government. The revenue (iv) Where national security is earned by these is also paid into concerned, this form is most the treasury; suitable since it is under the direct control and supervision of the (ii) They are subject to accounting concerned Ministry. and audit controls applicable to other Government activities; Limitations (iii) The employees of the enterprise are This form of organisation suffers from Government servants and their serious drawbacks, some of which are recruitment and conditions of as follows: service are the same as that of other employees directly under the (i) Departmental undertakings fail to Government. They are headed by provide flexibility, which is essential for the smooth operation of business; (ii) The employees or heads of depart- ments of such undertakings are 2018-19

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 65 not allowed to take independent Features decisions, without the approval of the ministry concerned. This leads Statutory corporations have certain to delays, in matters where distinct features, which are discussed prompt decisions are required; as below: (iii) These enterprises are unable to take advantage of business (i) Statutory corporations are set up opportunities. The bureaucrat’s under an Act of Parliament and over-cautious and conservative are governed by the provisions of approval does not allow them to the Act. The Act defines the objects, take risky ventures; powers and privileges of a (iv) There is red tapism in day-to-day statutory corporation; operations and no action can be taken unless it goes through the (ii) This type of organisation is wholly proper channels of authority; owned by the state. The (v) There is a lot of political inter- government has the ultimate ference through the ministry; financial responsibility and has (vi) These organisations are usually the power to appropriate its insensitive to consumer needs and profits. At the same time, the state do not provide adequate services also has to bear the losses, if any; to them. (iii) A statutory corporation is a body 3.3.2 Statutory Corporations corporate and can sue and be sued, enter into contract and Statutory corporations are public acquire property in its own name; enterprises brought into existence by a Special Act of the Parliament. The Act (iv) This type of enterprise is usually defines its powers and functions, rules independently financed. It obtains and regulations governing its funds by borrowings from the employees and its relationship with government or from the public government departments. through revenues, derived from sale of goods and services. It has This is a corporate body created by the authority to use its revenues; the legislature with defined powers and functions and is financially independent (v) A statutory corporation is not with a clear control over a specified subject to the same accounting area or a particular type of commercial and audit procedures applicable activity. It is a corporate person and to government departments. It is has the capacity of acting in its own also not concerned with the central name. Statutory corporations therefore budget of the Government; have the power of the government and considerable amount of operating (vi) The employees of these enterprises flexibility of private enterprises. are not government or civil servants and are not governed by government rules and regulations. The conditions of service of the employees are governed by the provisions of the Act itself. At 2018-19

66 BUSINESS STUDIES times, some officers are taken (ii) Government and political from government departments, interference has always been there on deputation, to head these in major decisions or where huge organisations. funds are involved; Merits (iii) Where there is dealing with public, rampant corruption exists; This form of organisation enjoys certain advantages in its working, which are (iv) The Government has a practice of as follows: appointing advisors to the Corporation Board. This curbs the (i) They enjoy independence in their freedom of the corporation in functioning and a high degree of entering into contracts and operational flexibility. They are free other decisions. If there is any from undesirable government disagreement, the matter is regulation and control; referred to the government for final decisions. This further delays action. (ii) Since the funds of these organi- sations do not come from the 3.3.3 Government Company central budget, the government generally does not interfere in their A government company is established financial matters, including their under The Companies Act, 2013 and income and receipts; is registered and governed by the provisions of The Act. These are (iii) Since they are autonomous established for purely business organisations they frame their own purposes and in true spirit compete policies and procedures within the with companies in the private sector. powers assigned to them by the Act. The Act may, however, According to the section 2(45) of the provide few issues/matters which Companies Act 2013, a government require prior approval of a company means any company in which particular ministry; not less than 51 per cent of the paid up capital is held by the central (iv) A statutory corporation is a government, or by any state valuable instrument for economic government or partly by Central development. It has the power of government and partly by one or more the government, combined with State governments and includes a the initiative of private enterprises. company which is a subsidiary of a government company. Under the Limitations Companies Act 2013, there is no change in the definition of a company. This type of organisation suffers from All provisions of the Act are applicable several limitations, which are as follows: to government companies unless otherwise specified. A government (i) In reality, a statutory corporation company may be formed as a private does not enjoy as much operational limited company or a public limited flexibility as stated above. All company. There are certain provisions actions are subject to many rules and regulations; 2018-19

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 67 which are applicable to the (vi) These companies are exempted appointment/retirement of directors from the accounting and audit and other managerial personnel. rules and procedures. An auditor is appointed by the Central From the above it is clear that the Government and the Annual government exercises control over the Report is to be presented in the paid up share capital of the company. Parliament or the State Legislature; The shares of the company are purchased in the name of the President (vii) The government company obtains of India. Since the government is the its funds from government major shareholder and exercises shareholdings and other private control over the management of these shareholders. It is also permitted to companies, they are known as raise funds from the capital market. government companies. Merits Features Government companies enjoy several Government companies have certain advantages, which are as follows: characteristics which makes them distinct from other forms of organisations. (i) A government company can be These are discussed as follows: established by fulfilling the requirements of the Indian (i) It is an organisation created under Companies Act. A separate Act in the Companies Act, 2013 or any the Parliament is not required; other previous Company Law. (ii) It has a separate legal entity, apart (ii) The company can file a suit in a from the Government; court of law against any third party and be sued; (iii) It enjoys autonomy in all management decisions and takes (iii) The company can enter into a actions according to business contract and can acquire property prudence; in its own name; (iv) These companies by providing (iv) The management of the company goods and services at reasonable is regulated by the provisions of prices are able to control the the Companies Act, like any other market and curb unhealthy public limited company; business practices. (v) The employees of the company are Limitations appointed according to their own rules and regulations as contained Despite the autonomy given to these in the Memorandum and Articles of companies, they have certain Association of the company. The disadvantages: Memorandum and Articles of Association are the main documents (i) Since the Government is the only of the company, containing the shareholder in some of the objects of the company and its rules companies, the provisions of the and regulations; Companies Act does not have much relevance; (ii) It evades constitutional responsibility, which a company 2018-19

68 BUSINESS STUDIES financed by the government should private sector companies in the same have. It is not answerable directly industry. They were also held to the Parliament; accountable for losses and return on (iii) The government being the sole investment. If a public sector was shareholder, the management and making losses continuously, it was administration rests in the hands referred to the Board for Industrial of the government. The main and Financial Reconstruction (BIFR) for purpose of a government complete overhauling or shut down. company, registered like other Various committees were set up to companies, is defeated. study the working of inefficient public sector units with reports on how to 3.4 C H A N G I N G R O L E O F P U B L I C improve their managerial efficiency SECTOR and profitability. The role of public sector is definitely not what was At the time of Independence, it was envisaged in the early 1960s or 70s. expected that the public sector enterprises would play an important (i) Development of infrastructure: role in achieving certain objectives of The development of infrastructure is a the economy either by direct prerequisite for industrialisation in any participation in business or by acting country. In the pre-Independence as a catalyst. The public sector would period, basic infrastructure was not build up infrastructure for other sectors developed and therefore, industrialisation of the economy and invest in key areas. progressed at a very slow pace. The The private sector was unwilling to process of industrialisation cannot invest in projects which required heavy be sustained without adequate investment and had long gestation transportation and communication periods. The government then took it facilities, fuel and energy, and basic and upon itself to develop infrastructural heavy industries. The private sector did facilities and provide for goods and not show any initiative to invest in heavy services essential for the economy. industries or develop it in any manner. They did not have trained personnel or The Indian economy is in a stage finances to immediately establish heavy of transition. The Five Year Plans in industries which was the requirement the initial stages of development gave of the economy. lot of importance to the public sector. In the post–1990s, the new economic It was only the government which policies, emphasised on liberalisation, could mobilise huge capital, coordinate privatisation and globalisation. The industrial construction and train role of public sector was redefined. It technicians and workforce. Rail, road, was not supposed to play a passive sea and air transport was the role but to actively participate and responsibility of the government, and compete in the market with other 2018-19

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 69 their expansion has contributed to the employment to the workforce and pace of industrialisation and ensured develop ancilliary industries. This was future economic growth. The public achieved to some extent but there is sector enterprises were to operate in scope for a lot more. Development of certain spheres. Investments were to be backward regions so as to ensure a made to: regional balance in the country is one (a) Give infrastructure to the core of the major objectives of planned development. Therefore, the govern- sector, which requires huge capital ment had to locate new enterprises in investment, complex and upgraded backward areas and at the same time technology, big and effective prevent the mushrooming growth of organisation structures like steel private sector units in already plants, power generation plants, advanced areas. civil aviation, railways, petroleum, (iii) Economies of scale: Where large state trading, coal, etc; scale industries are required to be set (b) Give a lead in investment to the core up with huge capital outlay, the public sector where private sector sector had to step in to take advantage enterprises are not functioning in of economies of scale. Electric power the desired direction, like fertilizers, plants, natural gas, petroleum and pharmaceuticals, petro-chemicals, telephone industries are some newsprint, medium and heavy examples of the public sector setting engineering; up large scale units. These units (c) Give direction to future investments required a larger base to function like hotels, project management, economically which was only possible consultancies, textiles, auto- with government resources and mass mobiles, etc. scale production. (ii) Regional balance: The government (iv) Check over concentration of is responsible for developing all regions economic power: The public sector and states in a balanced way and acts as a check over the private sector. removing regional disparties. Most of In the private sector there are very few the industrial progress was limited to industrial houses which would be a few areas like the port towns in the willing to invest in heavy industries pre-Independence period. After 1951, with the result that wealth gets the government laid down in its Five concentrated in a few hands and Year Plans, that particular attention monopolostic practices are encouraged. would be paid to those regions which This gives rise to inequalities in income, were lagging behind and public sector which is detrimental to society. industries were deliberately set up. Four major steel plants were set up in The public sector is able to set large the backward areas to accelerate industries which requires heavy economic development, provide investment and thus the income and 2018-19

70 BUSINESS STUDIES benefits that accrue are shared by a for the public sector. In 1991, only large of number of employees and 8 industries were reserved for workers. This prevents concentration the public sector, they were restricted of wealth and economic power in the to atomic energy, arms and private sector. communication, mining, and (v) Import substitution: During the railways. In 2001, only three second and third Five Year Plan period, industries were reserved exclusively India was aiming to be self-reliant in for the public sector. These are many spheres. Obtaining foreign atomic energy, arms and rail exchange was also a problem and it transport. This meant that the private was difficult to import heavy machinery sector could enter all areas (except required for a strong industrial base. the three) and the public sector At that time, public sector companies would have to compete with them. involved in heavy engineering which The public sector has played a vital would help in import substitution were role in the development of the established. Simultaneously, several economy. However, the private sector public sector companies like STC and is also quite capable of contributing MMTC have played an important role substantially to the nation building in expanding exports of the country. process. Therefore, both the public (vi) Government policy towards the sector and the private sector need to public sector since 1991: The be viewed as mutually complementary Government of India had introduced parts of the national sector. Private four major reforms in the public sector sector units also have to assume in its new industrial policy in 1991. The greater public responsibilities. main elements of the Government policy Simultaneously, the public sector are as follows: needs to focus on achieving more in a highly competitive market. • Restructure and revive potentially (b) Disinvestment of shares of viable PSUs a select set of public sector enterprises: Disinvestment involves • Close down PSUs, which cannot the sale of the equity shares to the be revived private sector and the public. The objective was to raise resources and • Bring down governments equity in encourage wider participation of the all non-strategic PSUs to 26 per general public and workers in the cent or lower, if necessary; and ownership of these enterprises. The government had taken a decision to • Fully protect the interest of withdraw from the industrial sector workers. and reduce its equity in all undertakings. It was expected that (a) Reduction in the number of industries reserved for the public sector from 17 to 8 (and then to 3): In the 1956 resolution on Industrial policy, 17 industries were reserved 2018-19

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 71 this would lead to improving amongst workers of the units which managerial performance and are to be closed down. A National ensuring financial discipline. But Renewal Fund was set up by the there remains a lot to be done in government to retrain or redeploy this area. retrenched labour and to provide The primary objectives of privatising compensation to public sector public sector enterprises are: employees seeking voluntary retirement. • Releasing the large amount of public resources locked up in non- There are many enterprises strategic Public Sector Enterprises which are sick and not capable of (PSEs), so that they may be utilised being revived as they have on other social priority areas such accumulated huge losses. With as basic health, family welfare and public finances under intense primary education. pressure, both central and state government are just not able to • Reducing the huge amount of sustain them much longer. The only public debt and interest burden; option available to the government in such cases is to close down these • Transferring the commercial risk undertakings after providing a safety to the private sector so that the net for the employees and workers. funds are invested in able projects; Resources under the National Renewal Fund have not been • Freeing these enterprises from sufficient to meet the cost of government control and Voluntary Separation Scheme or introduction of corporate Voluntary Retirement Scheme. governance; and (d) Memorandum of Understanding: • In many areas where the public Improvement of performance sector had a monopoly, for through a MoU (Memorandum of example, telecom sector the Understanding) system by which consumers have benefitted by more managements are to be granted choices, lower prices and better greater autonomy but held quality of products and services. accountable for specified results. Under this system, public sector (c) Policy regarding sick units to be units were given clear targets and the same as that for the private operational autonomy for achieving sector: All public sector units were those targets. The MoU was between referred to the Board of Industrial the particular public sector unit and and Financial Reconstruction to their administrative ministries decide whether a sick unit was to defining their relationship and be restructured or closed down. The autonomy. Board has reconsidered revival and rehabilitation schemes for some cases and winding up for a number of units. There is a lot of resentment 2018-19

72 BUSINESS STUDIES 3.5 GLOBAL ENTERPRISES to sell any product in different countries. Some of these corporations At some time you must have come may be slightly exploitative in nature across products produced by Multi and concentrate more on selling National Corporations (MNCs). In the consumer goods and luxury items last ten years MNCs have played an which are not always desirable for important role in the Indian economy. developing countries. They have become a common feature of most developing economies in the Features world. MNCs as is evident from what we see around us, are gigantic These corporations have distinct corporations which have their features which distinguish them from operations in a number of countries. other private sector companies, public They are characterised by their huge sector companies and public sector size, large number of products, enterprises. These are as follows: advanced technology, marketing (i) Huge capital resources: These strategies and network of operations all enterprises are characterised by over the world. Global enterprises thus possessing huge financial resources are huge industrial organisations which and the ability to raise funds from extend their industrial and marketing different sources. They are able to tap operations through a network of their funds from various sources. They may branches in several countries. Their issue equity shares, debentures or branches are also called Majority bonds to the public. They are also in a Owned Foreign Affiliates (MOFA). These position to borrow from financial enterprises operate in several areas institutions and international banks. producing multiple products with their They enjoy credibility in the capital business strategy extending over a market. Even investors and banks of number of countries. They do not aim the host country are willing to invest in at maximising profits from one or two them. Because of their financial products but instead spread their strength they are able to survive under branches all over. They have an impact all circumstances. on the international economy also. This (ii) Foreign collaboration: Global is evident from the fact that the sales of enterprises usually enter into top 200 corporations were equivalent agreements with Indian companies to 28.3 percent of the world’s GDP in pertaining to the sale of technology, 1998. This shows that top 200 MNCs production of goods, use of brand control over a quarter of the world names for the final products, etc. These economy. Therefore, MNCs are in a MNCs may collaborate with companies position to exercise massive control on in the public and private sector. There the world economy because of their are usually various restrictive clauses capital resources, latest technology and in the agreement relating to transfer goodwill. By virtue of this, they are able of technology, pricing, dividend 2018-19

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 73 payments, tight control by foreign already have carved out a place for technicians, etc. Big industrial houses themselves in the global market, and wanting to diversify and expand have their brands are well-known, selling gained by collaborating with MNCs in their products is not a problem. terms of patents, resources, foreign (vi) Expansion of market territory: exchange etc. But at the same time Their operations and activities extend these foreign collaborations have given beyond the physical boundaries of their rise to the growth of monopolies and own countries. Their international concentration of power in few hands. image also builds up and their market (iii) Advanced technology: These territory expands enabling them to enterprises possess technological become international brands. They superiorities in their methods of operate through a network of production. They are able to conform subsidiaries, branches and affiliates in to international standards and quality host countries. Due to their giant size specifications. This leads to industrial they occupy a dominant position in the progress of the country in which such market. corporations operate since they are (vii) Centralised control: They have able to optimally exploit local resources their headquaters in their home and raw materials. Computerisation country and exercise control over all and other inventions have come due to branches and subsidiaries. However, the technological advancements this control is limited to the broad provided by MNCs. policy framework of the parent company. There is no interference in (iv) Product innovation: These day-to-day operations. enterprises are characterised by having highly sophisticated research and 3.6 JOINT VENTURES development departments engaged in the task of developing new products Meaning and superior designs of existing products. Qualitative research requires Business organisations as you have huge investment which only global studied earlier can be of various types enterprises can afford. private or government owned or global (v) Marketing strategies: The enterprises. Now, any business marketing strategies of global organisation if it so desires can companies are far more effective than join hands with another business other companies. They use aggressive organisation for mutual benefit. These marketing strategies in order to increase two organisations may be private, their sales in a short period. They posses government-owned or a foreign a more reliable and up-to-date market company. When two businesses agree information system. Their advertising to join together for a common purpose and sales promotion techniques are and mutual benefit, it gives rise to a normally very effective. Since they joint venture. Businesses of any size 2018-19

74 BUSINESS STUDIES can use joint ventures to strengthen products or moving into new markets, long-term relationships or to particularly in another country. It is collaborate on short term projects. A becoming increasingly common for joint venture can be flexible depending companies to create joint ventures with upon the party’s requirements. These other businesses/companies and form need to be clearly stated in a joint strategic alliances with them. The venture agreement to avoid conflict at reasons for these alliances may be a later stage. complementary capabilities and resources such as distribution A joint venture may also be the result channels, technology or finance. In this of an agreement between two businesses kind of a joint venture, two or more in different countries. In this case, there (parent) companies agree to share are certain provisions provided by the capital, technology, human resources, governments of the two countries, which risks and rewards in the formation of a will have to be adhered to. new entity, under shared control. Thus, we see that joint ventures In India, joint venture companies may mean many things, depending are the best way of doing business. upon the context we are using it in. But There are no separate laws for these in a broader sense, a joint venture is joint ventures. The companies the pooling of resources and expertise incorporated in India are treated the by two or more businesses, to achieve same as domestic companies. a particular goal. The risks and rewards of the business are also Joint Ventures are of two types — shared. The reasons behind the joint Contractual joint venture venture often include business expansion, development of new Equity-based joint venture 2018-19

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 75 3.6.1 Types of Joint Ventures (b) Shared ownership by the parties (i) Contractual Joint Venture (CJV): involved; In a contractual joint venture, a new jointly-owned entity is not created. (c) Shared management of the There is only an agreement to work together. The parties do not share jointly owned entity; ownership of the business but exercise some elements of control in the joint (d) Shared responsibilities regarding venture. A typical example of a contractual joint venture is a franchisee capital investment and other relationship. In such a relationship the key elements are: financing arrangements; and (a) Two or more parties have a (e) Shared profits and losses common intention – of running according to the agreement. A joint venture must be based on a a business venture; memorandum of understanding signed by both the parties, highlighting the (b) Each party brings some inputs; basis of a joint venture agreement. The terms should be thoroughly discussed (c) Both parties exercise some control and negotiated to avoid any legal complications at a later stage. on the business venture; and Negotiations and terms must take into account the cultural and legal (d) The relationship is not a background of the parties. The joint venture agreement must also state that transaction-to-transaction all necessary governmental approvals and licences will be obtained within a relationship but has a character specified period. of relatively longer duration. Examples of Joint Ventures: 1. AVI Oil India Pvt. Ltd. (ii) Equity-based Joint Venture (EJV): Date of establishment: 4 An equity joint venture agreement is November, 1993 one in which a separate business entity, Joint Venture Holders: Balmer jointly owned by two or more parties, Lawrie & Co. Ltd., NYCO SA, is formed in accordance with the France. agreement of the parties. The key Areas of operation: Mineral- operative factor in such case is joint based lubricating oil, defence ownership by two or more parties. The and civil aviation uses, greases. form of business entity may vary — 2. Green Gas Ltd. company, partnership firm, trusts, Date of establishment: 7 limited liability partnership firms, October, 2005 venture capital funds, etc. Joint Venture Holders: GAIL (India) Ltd. and IOCL (a) There is an agreement to either create a new entity or for one of the parties to join into ownership of an existing entity; 2018-19

76 BUSINESS STUDIES Areas of operations: Providing and human resources and is able to face market challenges and take safe and reliable natural gas to advantage of new opportunities. (ii) Access to new markets and customers. distribution networks: When a business enters into a joint venture with 3. Delhi Aviation Fuel Facility Pvt. a partner from another country, it opens up a vast growing market. For Ltd. example, when foreign companies form joint venture companies in India they Date of establishment: 28 gain access to the vast Indian market. Their products which have reached March, 2010 saturation point in their home markets can be easily sold in new markets. Joint Venture Holders: BPCL They can also take advantage of the and DIAL established distribution channels i.e., Areas of operations: the retail outlets in different local Construction, management, markets. Otherwise, establishing their maintenance, developing, own retail outlets may prove to be designing. The company is very expensive. formed with a joint venture (iii) Access to technology: between Delhi International Technology is a major factor for most Airport Ltd. and Airport businesses to enter into joint ventures. Authority of India with the view Advanced techniques of production of maintenance, designing and leading to superior quality products modernisation. saves a lot of time, energy and investment as they do not have to 3.6.2 Benefits develop their own technology. Technology also adds to efficiency and Business can achieve unexpected gains effectiveness, thus leading to reduction through joint ventures with a partner. in costs. Joint ventures can prove to be extremely beneficial for both parties (iv) Innovation: The markets involved. One party may have strong are increasingly becoming more potential for growth and innovative demanding in terms of new and ideas, but is still likely to benefit from innovative products. Joint ventures entering into a joint venture because it allow business to come up with enhances its capacity, resources and something new and creative for technical expertise. The major benefits the same market. Specially foreign of joint ventures are as follows: partners can come up with innovative (i) Increased resources and products because of new ideas and capacity: Joining hands with another technology. or teaming up adds to existing resources and capacity enabling the joint venture company to grow and expand more quickly and efficiently. The new business pools in financial 2018-19

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 77 (v) Low cost of production: When partners in PPP are Government international corporations invest in entities, i.e., ministries, government India, they benefit immensely due to the departments, municipalities or state- lower cost of production. They are able owned enterprises. The private partners to get quality products for their global can be local or foreign (international) requirements. India is becoming an and include businesses or investors important global source and extremely with technical or financial expertise competitive in many products. relevant to the project. PPP also includes NGOs and/or community- There are many reasons for this, low based organisations who are the cost of raw materials and labour, stakeholders directly affected by the technically qualified workforce; project. PPP is, therefore, defined as a management professionals, excellent relationship between public and manpower in different cadres, like private entities in the context of lawyers, chartered accountants, infrastructure and other services. engineers, scientists. The international Under the PPP model, public sector partner thus, gets the products of plays an important role and ensures required quality and specifications at a that the social obligations are fulfilled much lower cost than what is prevailing and sector reforms and public in the home country. investment are successfully met. The (vi) Established brand name: When government’s contribution to PPP is in two businesses enter into a joint the form of capital for investment and venture, one of the parties benefits from transfer of assets that support the the other’s goodwill which has already partnership in addition to social been established in the market. If the responsibility, environmental awareness joint venture is in India and with an and local knowledge. The private Indian company, the Indian company sector’s role in the partnership is to does not have to spend time or money make use of its expertise in operations, in developing a brand name for the managing tasks and innovation to run product or even a distribution system. the business efficiently. There is a ready market waiting for the product to be launched. A lot of Sectors in which PPPs have been investment is saved in the process. completed worldwide include power generation and distribution, water 3.7 PUBLIC PRIVATE PARTNERSHIP (PPP) and sanitation, refuse disposal, pipelines, hospitals, school buildings The Public Private Partnership model and teaching facilities, stadiums, air allocates tasks, obligations and risks traffic control, prisons, railways, among the public and private partners roads, billing and other information in an optimal manner. The public technology systems, and housing. 2018-19

78 BUSINESS STUDIES PPP Model Features • Contract with the private party to design and build public facility. • Facility is financed and owned by the public sector. • Key driver is the transfer of design and construction risk. Application • Suited to capital projects with small operating requirement. • Suited to capital projects where the public sector wishes to retain the operating responsibility. Strengths • Transfer of design and construction risk. • Potential to accelerate project. Weaknesses • Conflict between parties may arise on environmental considerations • Does not attract private finance easily. Example • Kundli Manesar Expressway Ltd.: In this 135 km expressway, land has been provided by the government and surface has been laid out by the company. Key Terms Departmental undertaking Globalisation Public sector Public enterprises Government companies Global enterprises Statutory corporation Joint ventures Disinvestment Public Sector Undertakings Public Private Partnership Public accountability Privatisation SUMMARY Private sector and public sector: There are all kinds of business organisations — small or large, industrial or trading, privately owned or government owned existing in our country. These organisations affect our daily economic life and therefore, become part of the Indian economy. The Government of India has opted for a mixed economy, where both private and government enterprises are allowed to operate. The economy, therefore, may be classified into two sectors viz., private sector and public sector. The private sector consists of business owned by individuals or a group of individuals. Various for ms of organisation are sole proprietorship, partnership, joint Hindu family, cooperative and company. The public sector consists of various organisations owned and managed by the government. These organisations may either be partly or wholly owned by the Central or State government. 2018-19

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 79 Forms of organising public sector enterprises: Government’s participation in business and economic sectors of the country needs some kind of organisational framework to function. A public enterprise may take any particular form of organisation depending upon the nature of it’s operations and their relationship with the government. The suitability of a particular form of organisation would depend upon its requirements. The forms of organisation which a public enterprise may take are as follows: (i) Departmental undertaking (ii) Statutory corporation (iii) Government company Departmental undertakings: These enterprises are established as departments of the ministry and are considered part or an extension of the ministry itself. The Government functions through these departments and the activities performed by them are an integral part of the functioning of the government. Statutory corporations: Statutory corporations are public enterprises brought into existence by a Special Act of the Parliament. The Act defines its powers and functions, rules and regulations governing its employees and its relationship with Government departments. This is a corporate body created by legislature with defined powers and functions and financially independent with a clear control over a specified area or a particular type of commercial activity. Government company: A Government company means any company in which not less than 51 percent of the paid up capital is held by the central government, or by any state governments or government or partly by central government and partly by one or more state governments and includes a company which is a subsidiary company of such a government company. Changing role of public sector: At the time of Independence, it was expected that the public sector enterprises would play an important role in achieving certain objectives of the economy either by direct participation in business or by acting as a catalyst. The Indian economy is in a stage of transition. In the post 90’s period, the new economic policies emphasised liberalisation, privatisation and globalisation. The role of the public sector was redefined. It was not supposed to play a passive role but to actively participate and compete in the market with other private sector companies in the same industry. Development of infrastructure: The process of industrialisation cannot be sustained without adequate transportation and communication facilities, fuel and energy, and basic and heavy industries. It is only the government which could mobilise huge capital, coordinate industrial construction and train technicians and workforce. 2018-19

80 BUSINESS STUDIES Regional balance: The government is responsible for developing all regions and states in a balanced way and removing regional disparties. Development of backward regions so as to ensure a regional balance in the country is one of the major objectives of planned development. Therefore, the government had to locate new enterprises in backward areas and at the same time prevent the mushrooming growth of private sector unit in already advanced areas. Economies of scale: Where large scale industries are required to be set up with huge capital outlay, the public sector had to step in to take advantage of economies of scale. Check over concentration of economic power: The public sector acts as a check over the private sector. In the private sector there are very few industrial houses which would be willing to invest in heavy industries with the result that wealth gets concentrated in a few hands and monopolostic practices are encouraged. Import substitution: During the second and third Five Year Plan period, India was aiming to be self-reliant in many spheres. Public sector companies involved in heavy engineering which would help in import substitution were established. Government policy towards public sector since 1991. Its main elements are: Restructure and revive potentially viable PSUs, Close down PSUs, which cannot be revived. Bring down governments equity in all non-strategic PSUs to 26 per cent or lower if necessary; and fully protect the interest of workers. (a) Reduction in the number of industries reserved for the public sector from 17 to 8 (and then to 3): This meant that the private sector could enter all areas (except 3) and the public sector would have to compete with them. (b) Disinvestment of shares of a select set of public sector enterprises: Disinvestment involves the sale of the equity shares to the private sector and the public. The objective was to raise resources and encourage wider participation of the general public and workers in the ownership of these enterprises. The government had taken a decision to withdraw from the industrial sector and reduce its equity in all undertakings. (c) Policy regarding sick units to be the same as that for the private sector: All public sector units were referred to the Board of Industrial and Financial Reconstruction to decide whether a sick unit was to be restructured or closed down. Memorandum of Understanding: Improvement of performance through a MoU (Memorandum of Understanding) system by which managements are to be granted greater autonomy but held accountable for specified results. Global enterprises: In the last ten years MNCs have played an important role in the Indian economy. They are characterised by their huge size, large number of products, advanced technology, marketing strategies and network 2018-19

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 81 of operations all over the world. Global enterprises thus are huge industrial organisations which extend their industrial and marketing operations through a network of their branches in several countries. Features: These corporations have distinct features which distinguishes them from other private sector companies, public sector companies and public sector enterprises i.e., (i) Huge capital resources, (ii) Foreign collaboration, (iii) Advanced Technology, (iv) Product innovation, (v) Marketing strategies, (vi) Expansion of market territory, (vii) Centralised control. Joint ventures: Joint ventures may mean many things, depending upon the context we are using it in. But in a broader sense, a joint venture is the pooling of resources and expertise by two or more businesses, to achieve a particular goal. The risks and rewards of the business are also shared. The reasons behind the joint venture often include business expansion, development of new products or moving into new markets, particularly in another country. Benefits: Business can achieve unexpected gains through joint ventures with a partner. The major benefits of joint venture are as follows: (i) Increased resources and capacity (ii) Access to new markets and distribution networks (iii) Access to technology (iv) Innovation (v) Low cost of production (vi) Established brand name. Public Private Partnership: It is a relationship among public sector and private sector for allocation and completion of development projects. EXERCISES Multiple Type Questions 1. A government company is any company in which the paid up capital held by the government is not less than (a) 49 per cent (b) 51 per cent (c) 50 per cent (d) 25 per cent 2. Centralised control in MNC’s implies control exercised by (a) Branches (b) Subsidiaries (c) Headquarters (d) Parliament 3. PSE’s are organisations owned by (b) Government (a) Joint Hindu family (d) Private entrepreneurs (c) Foreign Companies 4. Reconstruction of sick public sector units is taken up by (a) MOFA (b) MoU (c) BIFR (d) NRF 2018-19

82 BUSINESS STUDIES 5. Disinvestments of PSE’s implies (b) Closing down (a) Sale of equity shares to operations private sector/public (c) Investing in new areas (d) Buying shares PSE’s 6. The equity-based joint venture does not include (a) Cooperative development (b) Company (c) Partnership (d) Limited liability partnership Short Answer Questions 1. Explain the concept of public sector and private sector. 2. State the various types of organisations in the private sector. 3. What are the different kinds of organisations that come under the public sector? 4. List the names of some enterprises under the public sector and classify them. 5. Why is the government company form of organisation preferred to other types in the public sector? 6. How does the government maintain a regional balance in the country? 7. State the meaning of public private partnership. Long Answer Questions 1. Describe the Industrial Policy 1991, towards the public sector. 2. What was the role of the public sector before 1991? 3. Can the public sector companies compete with the private sector in terms of profits and efficiency? Give reasons for your answer. 4. Why are global enterprises considered superior to other business organisations? 5. What are the benefits of entering into joint ventures and public private partnership? Projects/Assignments 1. Make a list of Indian companies entering into joint ventures with foreign companies. Find out the apparent benefits derived out of such ventures. 2018-19

CHAPTER 4 BUSINESS SERVICES LEARNING OBJECTIVES After studying this chapter, you should be able to: • state the characteristics of services; • distinguish services from goods; • classify different types of business services; • explain the concept of e-banking; • identify and classify different types of insurance policies; and • describe different types of warehouses. 2018-19

84 BUSINESS STUDIES All of us have seen a petrol pump. Have your ever thought how a petrol pump owner does his business in a village? How he gets the petrol and diesel to the villages in the interior? How he gets the money to purchase large quantities of petrol and diesel? How he communicates to petrol depots for requirement and also to customers? How he safeguards himself from various risks associated with this business? The answer to all the above questions lies in the understanding of business services. The transportation of petrol and diesel from oil refineries to petrol pumps is carried out by train and tankers (transport services). They are then stored at various depots of oil companies situated in all major towns across India (warehousing services). Petrol pump owners use postal, mail and telephone facilities to be in touch with customers, banks and the depots for the availability of their requirements on regular basis (communication services). As oil companies always sell the petrol and diesel on advance payment, the owners have to take loans and advances from banks to fund their purchases (banking services). Petrol and diesel being highly risky products, the owners have to safeguard themselves from various risks by getting the business, the products, the life of people working there, etc., insure (insurance services). Thus, we see that a single business of providing petrol and diesel at a petrol pump is actually a collective outcome of various business services. These services are being utilised in the entire process of shipment of petrol and diesel from oil refineries to the point of sale at petrol pumps, spread across the length and breath of India. 4.1 INTRODUCTION experiencing a service. But there is definitely a difference between the item You must all have, at some time or the or good and the service performed. other experienced the effect of business activities on your lives. Let us examine For a layperson, services are few examples of business activity i.e., essentially intangibles. Their purchase purchasing ice cream from a store and does not result in the ownership of eating ice cream in a restaurant, anything physical. For example, you can watching a movie in a cinema hall or only seek advice from the doctor, you purchasing a video cassette/CD, cannot purchase him. Services are all purchasing a school bus and leasing it those economic activities that are from a transporter. If you analyse all intangible and imply an interaction to these activities, you will observe that be realised between the service provider there is a difference between purchasing and the consumer. and eating, purchasing and watching and purchasing and leasing. What is Services are those separately common in all of them is that one is identifiable, essentially intangible purchasing an item and the other is activities that provides satisfaction of wants, and are not necessarily linked to the sale of a product or another service. 2018-19

BUSINESS SERVICES 85 A good is a physical product happening, for example, in the case of capable of being delivered to a mobile services. purchaser and involves the transfer of ownership from seller to customer. (iii) Inseparability: Another Goods are also generally used to refer important characteristic of services is to commodities or items of all types, the simultaneous activity of production except services, involved in trade or and consumption being performed. commerce. This makes the production and consumption of services seem to be 4.2 NATURE OF SERVICES inseparable. While we can manufacture a car today and sell it after, say, a There are five basic features of services. month; this is often not possible with These features also distinguish them services that have to be consumed as from goods and are known as the five Is and when they are produced. Service of services. These are discussed as providers may design a substitute for below: the person by using appropriate (i) Intangibility: Services are technology but the interaction with the intangible, i.e., they cannot be touched. customer remains a key feature of They are experiential in nature. One services. Automated Teller Machines cannot taste a doctor’s treatment, or (ATMs) may replace the banking clerk touch entertainment. One can only for the front office activities like cash experience it. An important implication withdrawal and cheque deposit. But, of this is that quality of the offer can at the same time, the presence of the often not be determined before customer, is required and his/her consumption and, therefore, purchase. interaction with the process has to be It is, therefore, important for the service managed. providers that they consciously work on creating a desired service so that the (iv) Inventory (Less): Services have customer undergoes a favourable little or no tangible components and, experience. For example, treatment by a therefore, cannot be stored for a future doctor should be a favourable experience. use. That is, services are perishable (ii) Inconsistency: The second and providers can, at best, store some important characteristic of services is associated goods but not the service inconsistency. Since there is no itself. This means that the demand and standard tangible product, services supply needs to be managed as the have to be performed exclusively each service has to be performed as and time. Different customers have different when the customer asks for it. They demands and expectations. Service cannot be performed earlier to be providers need to have an opportunity consumed at a later date. For example, to alter their offer to closely meet the a railway ticket can be stored but the requirements of the customers. This is railway journey will be experienced only when the railways provides it. 2018-19

86 BUSINESS STUDIES (v) Involvement: One of the most at the consumption point, there are no important characteristics of services is inventories. On the basis of above the participation of the customer in the features, we can have following service delivery process. A customer points of distinction between goods has the opportunity to get the services and services. modified according to specific requirements. 4.3 TYPES OF SERVICES 4.2.1 Difference between Services When speaking of the service sector, and Goods services can be classified into three broad categories, viz., business From the above, it is clear that the two services, social services and personal main differentiating characteristics of services. These have been explained in services and goods are non- the following pages. transferability of ownership and presence of both provider as well as (i) Business Services: Business consumer. While goods are produced, services are those services which are services are performed. A service is an used by business enterprises for the act which cannot be taken home. What conduct of their activities. For we can take home is the effect of the example, banking, insurance, services. And as the services are sold transportation, warehousing and communication services. Difference between Services and Goods Basis Services Goods Nature An activity or process. e.g., A physical object. e.g., watching a movie in a cinema hall video cassette of movie Type Heterogeneous Homogenous Intangibility Intangible e.g., doctor treatment Tangible e.g., medicine Inconsistency Different customers having different Different customers getting demands e.g., mobile services standardised demands fulfilled. e.g., mobile phones Inseparability Simultaneous production and Separation of production and consumption. e.g., eating consumption. e.g., purchasing ice-cream in a restaurant ice cream from a store Inventory Cannot be kept in stock. e.g., Can be kept in stock. e.g., train experience of a train journey journey ticket Involvement Participation of customers at the Involvement at the time of time of service delivery. e.g., delivery not possible. e.g., self-service in a fast food joint manufacturing a vehicle 2018-19

BUSINESS SERVICES 87 (ii) Social Services: Social services enterprises, are becoming more and are those services that are generally more dependant on specialised provided voluntarily in pursuit of business services. Business enterprises certain social goals. These social goals look towards banks for availability of may be to improve the standard of funds; insurance companies for getting living for weaker sections of society, to their plant, machinery, goods, etc., provide educational services to their insured; transport companies for children, or to provide health care and transporting raw material; and finished hygienic conditions in slum areas. goods, and telecom and postal services These services are usually provided for being in touch with their vendors, voluntarily but for some consideration suppliers and customers. Today’s to cover their costs. For example, globalised world has ushered in a rapid health care and education services change in the service industry in India. provided by certain Non-government India has been gaining a highly organisations (NGOs) and government competitive edge over other countries agencies. when it comes to providing services to (iii) Personal Services: Personal the developed economies of the world. services are those services which are Many foreign companies are looking to experienced differently by different India for performing a host of business customers. These services cannot be services. They are even transferring a consistent in nature. They will differ part of their business operations to be depending upon the service provider. performed in India. We will discuss They will also depend upon these in detail in the next chapter. customer’s preferences and demands. For example, tourism, recreational 4.4 BANKING services, restaurants. Commercial banks are an important In the context of better institution of the economy for providing understanding of the business institutional credit to its customers. A world, we will be limiting our banking company in India is the one further discussions to the first which transacts the business of category of the service sector i.e., banking which means accepting, for the business services. purpose of lending and investment of deposits of money from the public, 4.3.1 Business Services repayable on demand or otherwise and withdrawable by cheques, draft, order Today’s world is of tough competition, or otherwise. In simple terms, a bank where the survival of the fittest is the accepts money on deposits, repayable rule. There is no room for non- on demand and also earns a margin of performance, and hence companies profit by lending money. A bank tend to stick to what they can do best. stimulates economic activity in the In order to be competitive, business market by dealing in money. It mobilises 2018-19