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Varun Dixit
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    Nature, components and determinants of business environment; basic nature of Indian economicsystem; relation size and growth of public and private corporate sector; social responsibility ofbusiness; broad features of Indias now economic policy.

    Q.1 What are the main components of business environment? Account for the inherentdynamism of business environment.

    Ans. Generally Business refers to those activities that are related to the buying and selling of goods.

    Business Environment consists of all those factors that have a bearing on the business.

    The survival and success of a business firm depend on its strength, resources at its commandincluding physical resources, financial resources, human resources, skill and organisation and itsadaptability to the environment and the extend to which environment is favourable to the developmentof the organization. The survival and success of a fir, thus, depend on two sets of factors, viz., theinternal factors the internal environment and external factors- the external environment.

    Some of the external factors have a direct intimate impact on the firm (like the suppliers anddistributors) of the firm. These factors are classified as microenvironment also known as taskenvironment and operating environment. These are other external factors which effect an industry verygenerally (such as industrial policy, demography factors etc.). They constitute what is called macro-environment, general environment or remote environment.Hence business environment has three components.

    Internal environment Micro environment/task environment/operating environment Macro environment/general environment/remote environment

    Internal EnvironmentThe important internal factors which have a bearing on an organisation include:

    a) Value system: The value system of the founders and those at the helm of affairs has importedbearing on the choice of business, the mission and objective of the organisation, businesspolicies and practices.

    b) Mission and objectives: The business domain of the company, priorities, direction odevelopment, business philosophy, business policy etc. are guided by the mission andobjectives of the company e.g. Ranbaxys thrust in to the foreign markets and developmenthave been driven by its mission to become a research based international pharmaceuticacompany.

    c) Management Structure and Nature: The organisation structures the composition of the Board ofDirectors, experts of professionalisation of management etc. are important factors influencingbusiness decisions. Some management structures and styles delay decision while some othersfacilitate quick decisions making.

    d) Internal Power Relationship: Factors like the amount of support the top management enjoysfrom different levels of employees, shareholders and board of directors have important influenceon the decisions and their implementation.

    e) Human Resources: The characteristics of the human resources like skill, quality, moralecommitment, attitude etc. could contribute to the strength and weakness of an organisation.

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUCompany Image and Brand Equity: The image of the company matters while raising finance, forming

    joint venture or other alliances, soliciting marketing intermediaries, entering purchase or sale contractslaunching new products etc.

    Microenvironment: The microenvironment consists of the actors in the companys immediateenvironment that affects the performance of the company. These include the suppliers, marketingintermediaries, competitors, customers etc.

    Suppliers: Supplier supply the inputs like raw materials and components to the company. For thesmooth functioning of business, it is important to have a reliable source of supply of raw material andcomponents.

    Marketing intermediaries: Marketing intermediaries are the firms that aid the company in promotingselling and distributing its goods to final buyers.

    Marketing intermediaries include middlemen such as agents and merchants like: help the company findcustomers or close sales with them , physical distribution firms which assist the company in stockingand moving goods from their origin to their destination such as advertising agencies marketingresearch firms etc and financial intermediaries which finance marketing activities and insure businessrisk.

    Competitors: The firms competitors include not only the other firms which market the same or similarproducts but also all those compete for the discretionary income of the consumers. An implication ofthese different demands is that a marketer should strive to create primary and selective demand for hisproducts.

    Customers: The major task of a business is to create and sustain customers. A business exists onlybecause of its customers monitoring the customer sensitivities, therefore, prerequisite for the businesssuccess. A company may have different categories of customers like individuals, households, industriesand other commercial establishments, and government and other institutions.

    With the growing globalization, the customer environment is increasingly becoming global. Not only the

    markets of other countries are becoming more open the Indian market is becoming more exposed tothe global competition and the Indian customer is becoming more global in his shopping.

    Macro Environment: The macro environment consists of the societal forces that affect all the sectors inthe companys macro environment namely, the demographic, economic, natural, technological, politicaand cultural forces. These environment forces are beyond the control of a firm, its success will dependto a very large extend on its adaptability to the environment.

    Socio-cultural Environment: The buying and consumption habits of the people, their language, beliefsand values, customs and traditions, tastes and preferences, education etc are the constituents ofSocio-economic environment.

    For a business to be successful, its strategies should be the one that is appropriate in the Socio-culturaenvironment. The marketing characteristics of the market e.g. Nestle, a Swiss multinational companybrews more than forty varieties of instant coffees as per different national tastes.

    Natural Environment: Difference in geographical conditions between markets may sometimes call forchanges in the marketing mix, geographical and ecological factors also influence the location of certainindustries, climate and weather conditions affect the location of certain industries like the cotton textileindustry. Topographical factors may affect the demand pattern. For example, in hilly areas with adifficult terrain, jeeps may be in greater demand than cars.

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUDemographical Environment: Demographic factors like the size, age composition, sex composition etcof the population, family size, educational levels, language, religion etc are all factors which arerelevant to business.

    The occupational and spatial mobility of population have implications for business if labour is easilymobile between different occupations and regions, its supply will be relatively smooth and this will affectwage rate.

    Technological Environment: Technological developments may increase the demand for some existingproducts. For example, voltage stabilizers help increase the sale of electrical appliances in marketcharacterized by frequent voltage fluctuations in power supply. However, the introduction of TVsrefrigerators etc. with build-in-voltage stabilizers adversely affects the demand for voltage stabilizers.

    Political Environment: Political and government has close relationship with the economic system andeconomics policy. Certain changes in government policies such as the industrial policy, traffic policyfiscal policy etc. may have profocused impact on business. In may countries with a view to protectingconsumer business. In many countries with a view to protecting consumer interests, regulations havebecome stronger. Regulations to protect the purity of the environment and preserve the ecologicabalance have assumed great importance in many counties.

    . 2 What do you mean by social responsibility of business: Why should business oirganisationby socially responsible?

    Ans. As business operates in society, it cant exist and grows unless it cares for society. It exist vis--vis with society. It is required to meet different needs of the society. For meeting these needs, businesshas certain social responsibilities to discharge. Cooperate social responsibilities is defined asconsidering the impact of the companys action on society. A newer concept, social responsibilities, isdefined as the ability of a cooperation to relate its operation and policies to social environment in waysthat are mutually beneficial to both the company and society. Social responsibilities of business aredifferent for different sections of society, which include responsibilities towards

    (a) employees

    (b) consumers(c) Government(d) Society as a whole

    Responsibilities towards employee

    1. Fair wages and regular payment.2. Good working conditions and safety3. Reasonable working standards and norms4. Labour welfare services,- Health, education, recreation and accommodation5. Training and promotion6. Recognition and respect for hard work, honesty, sincerity and loyalty

    7. Efficiency of redressing employees grievances.

    Responsibilities towards customers

    1. Providing goods and services at a reasonable price2. Supply goods and services of promised quality, durability and services.3. Supply social harmless products.4. Offering an efficient consumer redressal mechanism5. Resisting profiteering and black marketing.6. Improving product quality towards R & D.

    Responsibilities towards government

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    1. Regular payment of taxes.2. Resisting bribing, bureaucrat and administers.3. Cooperating with go of in up gradation of environment.4. Cooperating with go of in social values.

    Responsibilities towards society as a whole

    1. Prevention of environmental pollution.2. Preservation of ethical and moral values.3. Making provision of health education and cultural services.4. Minimizing ecological imbalance.

    Q3 Explain the ways in which private corporate sector has been liberalised under the neweconomic policy. Has liberalization accelerated industrialization process in the country?

    Ans- In response to the economic crises of 1991, the govt. embarked on a wide-ranging reform of thepolicy regime. Prior to 1991 the Indian economy was a highly regulated economy. In the July 1991 thebeginning was made to dismantle controls which over the time had become a major obstacle toindustrial growth. Policy changes made to unshackle the economy from controls and to orient it towardsthe free market are known as the Liberalization measures. These measures are related to

    (a) the industrial sector(b) the trade region(c) foreign investment & technology(d) public sector(e) the financial sector

    In the financial sector, barriers to entry for new firms and limits on growth in the size of existing firmshave been removed. Industrial licensing has been abolished for most of the industries irrespective ofthe levels of investment. The MRTP Act has been amended to remove the threshold limit of one billionrupees on the assets of large business houses. The prior approval from the govt. is no longer requiredfor capacity creation, amalgamation, merger or acquisition on the part of such companies.

    The policy regime for foreign investment and foreign technology has been liberalized at a rapid paceThe govt. now wants to enlarge non-debt-creating inflows. Hence, prior approval for foreign investmentis not the rule. It may be required in expected cases. The liberal access to imports to technology aimsat facilitating technology up gradation, which is a necessary condition for increasing internationacompetitiveness in industry.The trade policy reforms have a limited quantitative restriction on imports and exports. Further, thesehas been a substantial reduction in tariffs on imports along With abolition of subsidies in exports. Theexchange rate changes have led to a sizable depreciation of the rupee. It is hoped that the exposure ofdomestic firms to international competition in this manner will compels them to become more efficient

    In this relatively open environment domestic firms will have to upgrade technology, reduce cost and

    improve the quality of product.

    Till recently the commercial banking system and the domestic capital market were over regulated andunder-governed. Over the past few years and attempt has been made to improve the health of thefinancial sector through deregulation. With the reductions in the statutory liquidity ratio and cashreserve ratio resources received by the banks in the form of deposits are not preempted by the govt.but are made available to the private sector. Interest rates in the domestic capital have beenderegulated.

    Liberalization has definitely led to increases industrialization. Direct foreign direct investment hasaccelerated the industrial growth. Now, it is necessary that Indian firms penetrate foreign markets. In

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUexpertise on the part of the govt. is upgraded to make the MOU negotiations and implementation moreeffective.

    In February 1962, the govt. of India announced its decision to permit public sector undertaking to floatbonds. The move was aimed at mobilising extra budgetary resources for the public sector and wasapplicable to all state enterprise fully owned by central govt. the Controller of capital issues in theconnection for floatation of bonds by existing as well as new corporate undertakings including. FinanceCorporation issued guidelines.The major aim of economic reforms is to improve the public sector so that rate of return improves. Toremedy the situation, it was necessary that the overstaffing of the public sector undertaking (PSUs) bereduced. The govt. has taken steps in this direction by its Voluntary retirement scheme (VRS). In 1990-91, there were 22.19 lakh employees in PSUs of the central govt.. but in 1994-95 their number hasbeen reduced to 20.41 lakh. This implies that, as a result of VRS, overstaffing has been reduced by8%.

    The net results of the efforts of the Govt. (URS,MOU Policy etc.) was that the overall net profit earnedby central PSEs increased from Rs. 4,545 crores on 1993-94 to Rs. 7,217 crores which signify anincrease of 58.8% over the previous year. This is a welcome development.

    On the whole the reforms of PSUs, including privatization and phasing out of unviable units have notgathered as much momentum as had been hoped for. Investment has been piecemeal and the fundsso raised are being used to reduce budget deficits rather than strengthening of PSUs. Along with thislabour problems, Political and bureaucratic subordinate. Similarly gestures taken by the listeners canhelp the communicator to know their reactions.

    Essential Qualities of Good Business Report

    A well written business report can help avoid semantic and perception barriers. A well written businessreport eliminates the possibility of misunderstanding and misinterpretation. In writing messages, it isnecessary to be precise, making the meaning as clear as possible so that it accomplishes the desiredpurpose. The language used should be simple, as it will be lost if the words used are complex and donot lend to clear single meaning. Vagueness destroys accuracy which leads to misunderstanding of the

    meaning or intent of the message. Accordingly be specific and to the point.

    There is great importance of timing in Business communication. The communication should not only betimely so that the decisions and actions can be taken in time and when necessary but also the timing ofthe message and the environment setting in which the message is delivered and received is equallyimportant. An important message delivered at he wrong time or in a non-conducive environment maylose its effectiveness.

    Business communication must pass through the proper channels to reach the intended receiver. Thecommunication flow ant its spread must avoid by passing levels or people. When these concernedlevels are omitted or by passed, it creates bickering distrust confusion and conflict. Accordingly theestablished channels must be used as required.

    Unless it is one-way communication that is simply meant to inform al business, communication needs afollow up to ensure that is was properly understood and carried out. A verbal communication may needto be followed up by written confirmation. The response and feedback to the communication woulddetermine. Whether the action to the communication has been appropriate and accurate.

    Business communication should be complete so as not only to meet the demands of today but shouldalso be based on future need of the organization as well as individuals. A reasonable projection andassessment of future needs environment both work and be incorporate when planning and executingcommunication.

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUThe typical business firm usually considers three types of strategy: corporate: business and


    Corporate Strategy:- It decides a companys overall direction in terms of its general attitude towardsgrowth and the management of its various business and product lines. Corporate strategies typically fiwithin the three main categories, of stability, growth and retrenchment.

    Business Strategy:- usually occurs at the business unit or product level, & it emphasizesimprovement of the competitive position of a corporations products or services in the specific ind ustryor market segment served by that business unit.

    Functional Strategy:- is the approach taken by a functional area to achieve corporate & business uniobjectives & strategies by maximizing resource productivity. It is concerned with developing & nurturinga distinctive competence to provide a company or business unit with a competitive advantage.

    Business firms use all three types of Strategy Simultaneously. A hierarchy of Strategy is thegrouping of strategy types by level in the organization.

    This hierarchy of strategy is a nesting of one strategy within anther so that they complement & supportone another.Functional strategies support strategies, which, in turn, Support the corporate Strategy (ies).


    A Policy is a broad guideline for decision making that links the formulation of strategy with itsimplementation. Companies use polices to make sure that employees throughout the firm makedecisions & take actions that support the corporations mission, objectives and strategies.

    Strategy Implementation:-

    Strategy implementation is the process by which Strateges & polices are put into action through thedevelopment of programs, budgets & procedures. This process might involve changes within the overalculture, structure, & or management system of the entire organization. Except when such drasticcorporate-wide changes are needed, however, the implementation of strategy is typically conducted bymiddle & lower level managers with review by top management. Sometimes referred to as operationalplanning, strategy implementation often involves day-to-day decisions is resource allocation.


    A program is a statement of the activities or steps needed to accomplish a single use plan. Itmakes the strategy action oriented. It may involve restructuring the corporation, changing thecompanys internal culture, or beginning a now research effort.


    A budget is a statement of a corporations programs in terms of dollars. Used in planning &control, a budget lists the detailed cost of each program. Many corporations demand & certainpercentage return on investment often called a hurdle rate, before management will approve a newprogram. This ensures that the new program will significantly add to the corporations profiperformance & thus build shareholder value. The budget thus not only serves as a detailed plan of thenew strategy in action, but also specifies through pro forma financial statements the expected impacton the firms financial future.

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUProcedures:-Procedures, Sometimes termed Standard Operating Procedures (SOP), are a system of interfacehave not been effectively reduced. Since it is not possible to privatize a large component of the publicsector, it would be advisable to reform it.

    Unit-IITrend and pattern of industrial growth; review of industrial policy developments; industrial licensingpolicy; liberalisation of the private sector; trends and issues in corporate management; growth andproblems of the small scale sector; public sector reforms and privatisation the problem of indu striasickness; MRTP Act, SICA and Industrial Disputes Act.

    Industrial licensing Policy

    The Indian government resorted to the licensing system in order to maintain control over industriesaccording to the Industrial, (Development and control Act 1951. A license is a written permissiongranted to an enterprise by the government according to which the product mentioned therein can bemanufactured by the enterprise. The license also includes many other particular such as:-

    (i) The place where the factory is to be established.(ii) The name of the product to be produced.(iii) The limit of production capacity.(iv) Expansion of the enterprises etc.

    If a new company has to be formed, the industrial license in the first instance, is issued in thename of the applicant and later when the company has been formed, the necessary endorsement tothat effect will be made in the license.

    It is also subject to a validity period with in which the licensed capacity should be established.


    Encouraging new entrepreneurs & wider dispersal of industrial ownership, prevention of concentrationof economic power, protection & promotion of the small-scale sector, regulation of foreign capital &technology & scale economics, achieving demand-supply balance promotion of exports & imporsubstitution employment generation etc. Before the policy liber alisation of 1991, a license was requiredfor following purposes:-

    (i) Establisment of new undertaking.(ii) Manufacture of new item.(iii) Substantial expansion of capacity.(iv) Continuation of business in certain cases.(v) Change of location.

    The New Policy:-

    The industrial policy announced in July 1991 has abolished industrial licensing, irrespective of thelevels of investment, for all industries exempt 18 specified industries. There has been subsequentliberalizations.

    Industries for which industrial licensing is compulsory now are the following:-

    1) Distillation & brewing of alcoholic drinks.2) Cigars & Cigarettes of tobacco & manufactured tobacco substitutes.3) Electronic Aerospace & defence equipment all types.

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDU4) Industrial explosives including safety fuses, gen powder & matches.5) Hazardous chemicals6) Drugs & Pharmaceuticals.

    The Compulsory licensing provisions would not apply in respect of small scale units taking up themanufacture of any of the above items reserved for exclusive manufacture in small scale sector.

    Locational Policy:-

    Industrial undertakings are free to select the location of a project. In the case of ci ties withpopulation of more than a million (as per the 1991Census), however, the proposed location should beat least 25 KM away from the Standard Urban Area limits of that city unless, it is to be located in anarea designated as an industrial area before the 25 th July 1991. Electronics, Computer Software &Printing ( and any other industry which may be notified in future as non polluting industry) are exemptfrom such locational restriction. Relaration in the a foresaid locational restriction is possible if anindustrial license in obtained as per the notified procedure.

    Small Scale Industries Sector

    The Central excise Department, on the other hand distinguishes Small Scale industries on the basis ofannual turnover of the units (upto a maximum limit of Rs 30 million).

    (1) S.S.I. Undertaking:- An industrial undertaking in which the investment in Plant and Machinerywhether held on ownership terms or on lease/hire-Purchase basis does not exceed Rs 10 million isgraded as small scale industrial undertaking. ( The Investment ceiling has been revised from time totime. It was Rs 7.5 Lakkhs in 1966 and Rs 30 million in 1997). However, in 1999 the governmentdecided to lower the investment ceiling from Rs 30 million to Rs 10 million).

    (2) Ancillary Industrial Under taking:- An industrial undertaking which is engaged or is proposed tobe engaged in the manufacture or production of parts, component or rendering the services is termedas ancillary undertaking. The ancillary undertaking has to supply or render or propose to supply orrender not less than 50% of its production or services as the case may be, to one or more other

    industrial undertaking.

    (3) Tinny Enterprise:- is a unit treated as tiny enterprise where investment in Plant & Machinery doesnot exceed Rs 0.5 million, irrespective of cocation of the unit.

    (4) Small scale service and Business Enterprise (SSSBES): Enterprise rendering industry relatedServices business with investment up to Rs 0.5 million in fixed assets, excluding land and building arecalled SSSBES.

    EOU (Export Oriented Units)-

    A unit with an obligation to export at least 30% of its annual production at the having investment

    ceiling in fixed assets-plant & Machinery up to 10 million is regarded as an EOU.

    The definition of SSI is linked to the question of Ownership. SSI units cannot be controlled orowned a subsidiary of any other industrial undertaking. This combined investment of all the units set upby the same Proprietor/ partner should not exceed the total investment limit fixed for an SSI.

    As regards the formation of an SSI as a limited company, the equity investment by other companies inSSIs should not exceed 24%.

    The distinguishing features & major advantages of these industries particularly khadi & Villageindustries are:-

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    (1) In an economy, like India, Characterized by abundant labour supply and the concomitant Labourforce, Khadi, Village and small industries assume special significance because of its high employmentpotential.

    (2) Another major advantage is their ability provide employment in the off-season. To a large number ofpeople, agriculture provides only seasonal employment opportunities during the off-season and helpmany households mitigate their problem during off-season.

    (3) Some to these industries provide employment opportunities within the household premises andsome other near the place of residence the locational advantage of these industries are thus, verygreat.

    (4) Because of low capital-output ratio and low gestation period they promote non-inflationary growth.

    (5) Khadi & Village industries have been found to be of particular help to the weaker sections of thesociety. The participation of scheduled castes, scheduled tribes, women & other weaker sections ofSociety in this sector is significant.

    (6) These industries can develop in almost all areas including backward, tribal, hilly and in accessibleareas. They are thus, helpful in activities and thereby reducing the regional economic imbalance.

    (7) They help increases the pace of veiral development through its inputs & output linkages with theother sectors of rural economy.

    (8) The small industries have acquired more attention in recent years due to very less ecologicaproblems they create, compared to large industries.

    (9) As Khadi & village industries do not use or use only very little electric power or oil, they do not causeenergy crisis & foreign exchange crises.

    (10) The fact that the village and small industries account for about one-third of our total export earningshows how important they are to the Indian economy constrained by shortage of foreign exchange.


    (1) Reservation of Products:-

    Protection has been provided to the small-scale units by the reservation of items for exclusiveproduction in small scale sector. Over the gears there had been an increase in number of items soreserved, but has significantly reduced it recently.

    (2) Machinery on Hire Purchase:-

    The National small Industries Corporation (NSIC) arrange supply of machines on hire purchaseto small scale units.

    (3) Marketing Assistance:-

    Including export promotion assistance are provided by institutions. Such as NSIC SmalIndustries Development organization (SIDO), kvic etc.

    (4) Supply of Raw Materials:-

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUArrangements have also been made for the supply of raw materials, particularly of scarce items

    to the small scale units.

    (5) Training:- Training for existing & potential entrepreneurs and others associated with the working ofsmall units are offered by Entrepreneurship Development Institute of India (EDII), TechnicaConsultancy Organisations (TCOs), financial institutions and commercial banks, etc.

    Problems of Small-Scale Sector

    (1) Problem of Raw Material & Power:-

    These industries do not get raw material in adequate quantity. Whatever raw material they get ispoor in quality and high in price. It increases the cost of production & goods produced are of inferiorquality.

    (2) Problem of Finance:-

    These industries do not get adequate loan facilities, as they cannot offer good security becauseof poverty. They get very little financial accommodation from commercial banks and industrial co-operative societies. So they largely depend on money-lenders for finance.

    (3) Old methods of Production:-

    Old tools & equipments like oil expellers and handlooms, are still in use. The result is fall in thequantity of output & goods produced are of inferior quality. Such goods have little demand.

    (4) Problem of Marketing:-

    These Industries have to face lot of difficulties in selling their goods at fair price & in sufficientquantity for example:-

    (a) because of high cost of Production, price of finished product increases very high.

    (b) outward appearance of the finished product is not so appealing.

    (c) These industries can ill afford to bear advertisement and publicity cost. So their goods are not sopopular.

    (5) High Cost of Production:-

    Costs of Production are very high in these industries. It is due to high cost of raw materialindustries fail to compete with large industries.

    (6) Competition with Large scale industries:-

    One of the main problems of these industries is that they have to face competition of large-scaleindustries, Finished products of large industries are relatively cheap and of good quantity.

    (7) More Taxes:-

    Goods produced by the industries are heavily taxed by local authorities. Hence, their cost ofProduction goes up & the price of finished products also rises.

    (8) Lack of Standardisation:-

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    There is no standardization of finished products. For want of classification, workers do not getremunerative prices of their goods.

    (9) Sick Units:-

    In India, about 25% small industries are sick. The sick units are running under loss.

    Growth of Public Sector

    Public enterprises refers to that industrial institution which is owned, managed and controlled bythe state.


    1) To help in rapid economic growth & industrialisation of country & create the necessary infrastructurefor economic development.

    2) To earn return on investment & thus generate resources for development.

    3) To promote redistribution of income & wealth.

    4) To create employment opportunities.

    5) To promote balanced regional development.

    6) To assist the development of small-scale & ancillary industries.

    7) To promote import substitution, save & earn foreign exchange for the economy.

    Growth and Performance of Public Enterprises:-

    These had been a phenomenal growth of the Public since the commencement of Planning. Infact, even before the commencement of planning & adoption of goal of socialistic pattern of society, thePublic sector was assigned an important role in industrialisation & economic development of thecountry. The Industrial Policy Resolution of 1948 made it very clear that the manufacture of arms, andammunition, the production & control of atomic energy and the ownership and management of railwaytransport would be exclusive monopoly of central government. It was resolved further that in another sixindustries the State alone would set up new undertakings. These six industries were: coal, iron & steelaircraft manufacture, ship-building, manufacture of telephone, telegraph and wireless apparatusexcluding radio receiving sets and mineral oils.

    The Industrial Policy Resolution of 1956 enlarged the role of Public sector. Schedule A to theResolution enumerated 17 industries, the future development of which would be the exclusive right of

    the state. Schedule B to the Industrial policy Resolution 1956, contained a list of 12 industries whichwould be progressively state-owned and in which the state would, therefore, generally take the initiativein establishing new units.

    The four decades since the commencement of Planning witnessed a substantial growth andexpansion of Public sector in India. Investment in industrial undertaking by central governmenincreased from Rs 29 crores in 5 units at the commencement of First 5 Year Plan (1951) to Rs 118492crore at the commencement of Eighth Plan (1992) in 237 units. It further increased to over 2 lakh crore(Rs 201,500 crore) spread over 238 units at the commencement of the 9 th Plan (1997). At the end of1998-99, it was about Rs 273700 crore in 235 units.

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    At the commencement of Investment (Rs. Crore) Total Number of Enterprises

    Ist Plan (1-4-1951) 29 52nd Plan (1-4-1956 81 213rd Plan (1-4-1961) 953 48



    Plan (1-4-1969) 3902 855th Plan (1-4-1974) 6237 1226th Plan (1-4-1980) 18225 1867th Plan (1-4-1985) 42811 2218th Plan (1-4-1992) 118492 2379th Plan (1-4-1997 201500 238

    Ason 31st March 1999 273700 235

    There were also about 100 state level public enterprises (SLPES) with an estimated investment ofabout Rs 50,000 crores.

    Major Part of the Central Public Sector investment was in the steel, coal, minerals & metals power &

    petroleum sectors.


    Meaning:- Privatisation means transfer of ownership or management of an enterprise from publicsector to private Sector. it also means withdrawal of state from an industry or sector partially or fully.

    Another dimension of privatization is opening up of an industry that has been reserved for Public sectoto Private sector.

    Due to following problems given below, the governments undertake programmes for shiftingpublic sector into private sector:-

    (1) Economic inefficiency in production activities of public sector, with high cost of production and costlydelays in delivery of goods purchased.

    (2). In effectiveness in provision of goods and services, such as failure to meet intended objectives, andpolitical interference in the management of enterprises.

    (3) Rapid expansion of bureaucracy, causing problems in Labour relations with in public sectorinefficiency in government and adverse effect on whole economy.Ways of Privatization:-

    In Britain, the staff of Privatized company have a priority in buying shares and are entitled to adiscount. One of important way of Privatisation is divestiture or privatization of ownership, through Sale

    of equity. In countries where there are well functioning capital markets, this entails selling stock topublic. In Republic of korea, the government pioneered the establishment of basic industries such as oirefining, steel and machine tools and them sold them to the Private sector once their profitability wasestablished, using funds raised to pioneer other instruies.

    Another way of Privatisation is contracting. Government may contract out services they have planned &specified to other organizations that produce & deliver them.

    Franchising- authorizing the delivery of certain services in designated geographical areas- is commonin utilities and urban transport. Contracting is common in public works, defence and many specialisedservices. But there is scope for compition in contracting & long term contracts tends to encourage

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUmonopolistic behaviour by private supplier Privatization may also take the form of privatisation ofmanagement, using leases and management contracts.


    As the World Bank points out, government confront Several obstacles like those mentionedbelow, when they decide to divest SOEs.

    (1) Government usually want to sell the least profitable enterprises, those that the private sector is notwilling to buy at a price acceptable to the government.

    (2) Relatively underveloped capital market sometimes make it difficult for governments to float sharesand for individual buyers to finance large purchases.

    Conditions for success of Privatisation:-

    1) Privatization cannot be sustained unless the political leadership is committed to it and unless itreflects a shift in preferences of public arising out of dissatisfaction with performance of othealternatives.

    2) Any alternative institutional arrangements chosen should not stifle competition among suppliers.

    3) The third, related, condition is freedom of entry to provide goods and services.

    4) Public services to be provided by private sector must be specific or have measurable outcome.5) Consumers should be able to link benefits they receive from a service to the costs they pay for it,since they will then shop more wisely for different services.

    6) Privately Provided services should be less susceptible to fraud than government services if they areto be effective.

    Benefits of Privatisation:-

    1) It reduces fiscal burden of the state by relieving it of the losses of SOES and reducing size ofbureaucracy.

    2) Privatisation of SOES enables the government to nop up funds. Government of Indias Budget for2000-01 proposed to raise Rs 10,000 crore during the year through Privatisation.

    3) It help the state to trm size of administrative machinery.

    4) It enables the government to concentrate more on essential state functions.

    5) It helps accelerate the pace of economic development as it attracts more resources from Private

    sector for development.

    6) It may result in better management of the enterprise.

    7) It may also encourage enter preneurship.

    8) It may increases the number of workers & common man who are shareholders.

    Failure of Privatisation:-

    (1) Lack of Proper Strategy:-

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    Regarding industries to be privatized, the methods of Privatisation, extent of divestmentselection of buyer/investor etc.

    (2) Ambiguity of Objectives:-

    The real objective of Privatisation is another problem. Is it for making enterprise competitive? Ifthese are multiple objectives, what is priority list?

    (3) Poor Financial Strategies:-

    Many Privatizations are carried out without a good financial strategy.

    (4) Monopoly Elements:-

    Privatisation may not produce much beneficial effects, it could even worsen the situation.

    (5) Problems of Cultural changes:-

    Improvement of Performance of an enterprise after the privatization will depend on bringingabout a change in work culture and total enterprise culture. This is no easy task.

    (6) Wrong Timing:-

    Many Privatisations schemes could not get a good price because of wrong timing. A good Pricecan be obtained if Privatisation is done when performance, market capitalisation and industry prospectsare goods. It is pointed out the Maruti could have got a good price had it been privatised when goingswere good.

    Industrial Sickness

    Industrial sickness is a matter of serious national concern because besides affecting theowners, employees creditors and suppliers, it causes wastage of national resources and social unrest.

    In terms of definition evolved by RBI, an industrial unit is regarded as sick if it has incurred cashloss for one year and in judgement of the bank, it is likely to continue to incur cash loss in two followingyears and it has imbalance in its financial structure such as current ratio being less than 1:1 andworsening debt-equity ratio.

    The sick Industrial Companies (Special Provision) Act 1985as amended in 1993, defines a SickIndustrial Company as an industrial company (being a company registered for not less than 5 years)which has at the and of any financial years accumulated losses equal to or exceeding its entire notworth.

    Common symptoms of industrial sickness include failure to pay statutory liabilities like P.F. &E.S.I. contributions, failure to pay timely installment of capital and interest on loans taken from financialinstitutions & through public deposits, increases in inventories with a large number of slow or non-moving items, high rate of rejection of goods manufactured, low capacity utilisation & frequent industriadisputes.

    Causes of Sickness

    (A) Born Sick:-

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUIndustrial units born sick are those which are destined for disaster right from their conception

    due to various causes.

    Any one or more of the following factors may cause birth of sick units:-

    i) Lack of experience of promoters, wrong selection of project, faulty project planning etc, may give birthto sick units.

    ii) Lack of funds and faulty financial management may also cause birth of sick units.

    iii) Time & cost overruns sometimes prove to be very disastrous. Particularly in case of large projects,delay in project commissioning due to delay in supply of equipments etc, are very common. Suchdelays cause cost escalations leading to capital shortage, liquidity problems, Like in Production costetc.

    iv) Technological factors like selection of obsolete or improper technology or technology becomingoutdated due to innovations while the project is being executed, sub-standard machinery, wrongcollaboration etc, also cause sickness.

    v) Sickness may arise from locational problems.

    vi) Wrong assessment of market potential or faculty demand forecasting, change in market conditionsetc, may also cause birth of sick units.

    B) Achieved Sickness:-

    Industries which achieve sickness are those which fail after becoming operational due tointernal causes. Such internal causes which are common are the following:-

    (i) Bad management which covers a wide range from inexperience, inefficiency, lack of Professionalexpertise, neglect & internal squabbles to delinquency & dishonesty is import causes of industrialsickness. According to Tiwari Committee it was found that 65% of large sick units were affected by this


    (ii) Unwarranted expansion and diversion of resources may also result in sickness. Some concernstend to expand beyond the resources including managerial capability. Diversion of resources to startnew units or to acquire interest in other concerns with out regard to capability of the unit to provide suchfunds sometimes lands the unit in trouble.

    (iii) Poor inventory management in respect of finished goods as well as inputs may land a unit introuble.

    (iv) Failure to modernize the productive apparatus, change the product mix & other elements of themarketing mix to suit the changing environment is a very important cause of industrial sickness.

    (v) Poor labour management relationship& associated poor worker morale& low productivity, strikeslockout etc may rain the health of a unit to survive.

    (C) External Causes:-

    Are beyond the control of an industrial unit. Some of external causes are the following:-

    (i) Energy crises arising out of power cuts or shortage of coal & oil have been a serious problem formany industrial units in India.

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDU(ii) In a number of cases the units are not able to achieve optimum capacity due to shortage of rawmaterials due to production set-backs in supply industries, poor agricultural output due to naturareasons, changes in import conditions etc.

    (iii) Infrastructural problems like transport bottlenecks also sometimes cause serious problems.

    (iv) It is a general complaint of the industrial circles that the credit squeeze very advessly affects theindustrial sector. According to the Tiwari Committee 24% of the large sick units were affected byshortage of working capital liquidity constraints.

    Thus there are many external and internal factors which can cause industrial sickness. In manycases, sickness is caused by a combination of factors.

    MRTP Act

    The Principal low in India to deal with competition was Monopolistic and Restrictive TradePractices Act, 1969. The MRTP Act, brought into force form Ist June 1970, was a very controversiapiece of legislation. The high level committee on Competition Policy and law, appointed by Governmentof India, recommended that a new competition. Act may be enacted and MRTP Act may be repeated.The Government has accepted their recommendation. The MRTP Act, one of the Most, controversialpiece of legislation in India, has thus become a document of historical value. The salient features of this

    Act is given her because of the importance with which it reined the industrial sector of the country.The main objectives of MRTP Act 1969 were-

    (1) Prevention of concentration of economic power to common detriment.

    (2) Control of Monopolistic, restrictive and unfair trade practices which are pre judical to public interest.

    The main thrust of the MRTP Act now is the achievement of Prevention of Monopolisticrestrictive and unfair trade practices. Thus, the M las almost been knocked out of MRTP Act. In otherwords, large companies have been freed from MRTPA requirement of prior permission of thegovernment for substantial expansion of existing undertaking, eatables wing new undertakings and


    In accordance with the Provisions of the Act, the Government of India had set up a Commissionknown as the Monopolistie & Restrictive Trade Practices Commision. The MRTP Commission wasvested with Power to inquire into restrictive, monopolistic and unfair trade practices. The MRTP Actempowered the central Government to control and Prohibit those monopolistic, restrictive & unfair tradepractices that are, or are likely to be prejudicial to the public interest.

    Monopolistic Trade Practice:- is a trade practice which has, or is likely to have, the effect ounreasonably preventing or lessening competition in the production, supply or distribution of any goodsor services, limiting technical development and capital investment to the common detriment or allowingquality of goods or services to deteriorate.

    A Restrictive Trade Practice:- is a trade practice which has the effect, actual or probable of restrictinglessening or destroying competition. Such trade practices may tend to obstruct the flow of production orto bring about manipulation of prices or condition of delivery etc, to the common detriment.

    An Unfair trade Practice:- is a trade practice which, for the purpose of promoting the sale, use orsupply of any goods or the provision of any services, adopts one or more unfair trade practices (likemisleading advertisements) & thereby causes loss or injury to the consumers of such goods oservices, whether by eliminating or restricting competition or otherwise.

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUThe Act also empowered the commission to make any undertaking or person to pay

    compensation to the party who suffered a loss or damage as a result of unfair trade practice carried onby undertaking or person.


    Because of its defeating Provisions. We had a very inepti situation of not allowing Indiancompanies to grow by capacity expansion, establishment of new units or by M&A an because of shortsupply importing goods produced by foreign multinationals which were far larger in size than the Indianbiggies, spending the scarce foreign exchange.

    The MRTP Act, besides adversely affecting economic growth, blunted Indian Companies abilityto grow, consolidate and improve competitiveness. This had had a very dampening effect on theirglobal competitiveness.

    SICA Sick Industrial Companies Act.

    An important price of legislation dealing with industrial sickness was the Sick IndustriaCompanies (Special Provisions) Act, 1985. The objectives of the (SICA) were:

    (1) The timely detection of sick and Potentially sick companies owning industrial undertaking.(2) The speedy determination by a board of experts of the Preventive, ameliorative, remedial and

    other measures which need to be taken with respect to such companies.(3) The expeditions enforcement of the measures so determined and for matters connected

    therewith or incidental thereto.

    According to the SICA amended in 1993, a sick industrial company meant and industrial companyregistered for not less than 5 year) which had at the end of any financial year accumulated losses equalto or exceeding its entire net worth.

    An industrial company was regarded as potentially sick, if the accumulated losses of anindustrial company as at the end of any financial year had resulted in the erosion of 50% or more of itspeak net worth during the immediately preceding 4 financial year.

    Under the Central Government established a Board for Industrial and Financial Reconstructionto exercise the jurisdiction and powers and discharge the function and duties conferred or imposed onthe Board by the Act.

    The SICA required the Board of Director of a sick industrial company to make a reference to theBIFR for determination of the measures to be adopted with respect to the company. The BIFR coulddried any operating agency like the financial institution to prepare the scheme for revival of the sick unitThe scheme could provide for any one or more of the following measures:-

    (1) The Financial reconstruction of the company.

    (2) The Proper management of the sick industrial company by change in or takeover omanagement of sick industrial company.

    (3) The amalgamation of the sick industrial company with any other company, or any othecompany with the sick industrial company.

    (4) The sale or lease of apart or whole of industrial undertaking of sick industrial company.

    Where the BIFR was of the opinion that the sick industrial company was not likely to make its networth exceed its accumulated losses within a reasonable time and that it was not likely to becomeviable in future & that it was just and equitable that the company should be wound up, it couldimitate proceedings with the High Court, for

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    According to Sec 2 of Industrial Disputes Act 1947, Industrial dispute means any dispute ordifference between employers & employers or between employers and workmen or betweenworkmen and workmen, which is connected with the employment or non-employment or terms oemployment or with the conditions of labour of any person.

    Industrial disputes are symptoms of industrial unrest. Industrial unrest may take eitheunorganized or organized from. When it is unorganized it is manifested inform of low morale, lowproductivity, frustration etc. organized from of industrial unrest includes strikes, demonstrationgheraos, boycotts etc.


    (a) Strikes-

    is a very powerful weapons to get its demand accepted by a trade union. It means quitting workby a group of workers for the purpose of bringing pressure on their employers to accept theirdemands.

    There are may types of strikes.

    (a) Economic Strike:-

    Under this type of strike, members of trade Union stop work to enforce their economic demandssuch as increase in wages, bonus & other benefits.

    (b) Sympathetic Strike:-

    When members of a Union collectively stop work to support or express their sympathy with themembers of other union who are on strike.

    (1) General Strike:-

    Means a strike by numbers of all or most of unions in a region or an industry. If may be strike ofall workers in a particular region to force demands common to all workers.

    (2) Sit Down Strike:-

    When workers do not leave their place of work but cases work, they are said to be on sit downor stay in strike.

    (3) Slow Down Strike:-

    Employers remain on their jobs under this type of strike. They do not stop work but restrict rateof output in an organized manners.


    Is declared by employers to put pressure on their workers. It is an act on the part of theemployers to close down the place of work until workers agree to resume work on terms & conditionsspecified by employers.


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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUDenotes a collective action initiated by a group of workers under which members o

    management of an industrial establishment are prohibited from leaving their business or residentiapromises by workers who block their through human barricade.

    Unit-IIIDevelopment banks for corporate Sector (IDBI, IFCI, ICICI)- trends pattern and policy;regulation of stock exchanges and the role of SEBI; banking sector reforms; challenges

    facing public sector banks; growth and changing structure of non bank financiainstitutions; problem of non performing assets in Indian Banks


    The Industrial Development bank of India (IDBI) was established in 1964 by the Indiangovernment under an act of the Indian Parliament, the Industrial Development Bank of India Act, 1964.

    IDBI was initially established as a wholly-owned subsidiary of Reserve Bank of India. In 1976,the ownership of IDBI was transferred to the Government of India (GOI) The IDBI Act was amended inOctober 1994, to, inter alia, permit IDBI to raise equity from the public, subject to the holding to GOI notfalling below 51% of issued capital.

    According to Banks Corporate Mission IDBI Steategic objective is to position itself as IndiasPrenier wholesale bank through a full range of wholesale products-lending, capital market, advisory &risk management-through an integrated group structure.

    According to IDBI sources, its strengths lie

    1) Diversified portfolw across different industries, regions and sectors.2) Long-standing business relationships with all major industrial house.3) Proven core competence in project financing.4) Large balance sheet & sound financials.5) Capacity to take large single party expouce.

    6) Capacity to leverage.7) Sizeable stock of cost-effective, long term funds.8) Fairly good retail network with a large investor base.9) Lean organization with a sizeable pool of qualified, experienced professionals.

    Subsidiary Organisations:-

    IDBI has set up a host of Subsidiaries and associates with a view to expand the functional reach of IDBGroup & take advantage of opportunities in a liberalised market economy.


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    To give focused attention to the needs of small scale industry, IDBI had set up the SmallIndustries Development Bank of India (SIDBI) in 1990 as a wholly owned subsidiary. The SIDBI Actwas amended in March 2000, enabling, among other things, the transfer of IDBI shareholding to amaximum 51% from IDBI.

    IDBI Capital:-

    A stock broking company, IDBI Capital Market Services limited (IDBI Capital) was set up in1993 to provide a range of capital market related services. It commenced operation as a primary Dealein November 1999. IDBI capital markets public issues of seclinties through its network of agents. It alsoacts as a portfolio manager & manages the investment portfolios of several Provident & Pension funds.

    IDBI Bank:- Consequent upon opening up of commercial banking to the Private Sector, IDBI Set up aCommercial bank, IDBI Bank limited on 1994. Consequently upon the initial public offering of the equityshare in February 1999, IDBI now holds 57.14% of the equity of IDBI Bank limited.

    INTECH:- To take advantage of the emerging business prospects of the IT sector, IDBI setup IDBI Intech limited (INTECH) in March 2000 to undertake IT-related activities.

    ITSL:- The new company would be technology driven to provide safety, up to date information &professional services to the subscribers and issuers of debentures.Products:-

    The important products (schemes of assistance) of IDBI are the following:-

    (1) Project Finance:-

    The objective of this product is to provide long term finance for new projects and expansiondiversification and modernization of existing projects.

    (2) Corporate Loan:-

    This Product has been designed to provide for capital expenditure and long-term working capitato financially sound companies with net worth of not less than Rs 10 crore, having been in commercialoperation for 5 years & making Profit consistently for last 3 years, Rupee & foreign currency loans areavailable under this scheme.

    (3) Equipment lease:- Financially-sound companies are eligible for financial lease facility for purchaseof equipment on lease basis. However, sale & lease back transactions are normally excluded from thisfacility.

    (4) Services:- IDBI also provide some very important services to promote & develop industries. Theseinclude, merchant banking, debentures trusteeship & foreign exchange services.

    IFCI (Industrial Finance Corporation of Indian)

    The Industrial Finance Corporation of India was established in 1948 under the IFCI Act, with theobject of making medium & long term credit more readily available to industrial concerns in India; IFCwas corporatised in 1993 as a part of financial sector reforms and an initial public offer was made in thesame year.

    Principal Activities:-

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUIFCIs Financial operations principally include Project Financing, Financial Services andComprehensive corporate advisory services.

    Project financing:-

    Is the core of IFCI. Financial assistance is provided by way of medium/ long term credit fo:-

    (a) Setting up new projects.(b) Expansion/Diversification schemes.(c) Modernisation / Balancing schemes of existing projects.

    Financial Services:-

    IFCI provides assistance tailor-made to meet specific needs of corporates through variousspecially designed schemes:-

    (a) Equipment finance.(b) Equipment credit, Equipment leasing.(c) Suppliers / buyers credit.(d) Leasing and hire purchase concerns.(e) Corporate loans, short term loans.(f) Working capital term loans.


    The Committee has looked into the major factors which have led to the sudden & sharp down turn inIFCIs performance after 1997-98 and is of view that the following are the main contributory factors:-

    (1) In many cases, financial plan for the projects included raising equity from capital market or frominternal generation of group companies. However, due to prolonged, depressed conditions, in capitamarket & the industrial recession in aftermath of South East Asian crises of 1997, the promoters wereunable to raise such resources as planned which led to time and cost overruns and a number of

    projects remaining incomplete, resulting in loans becoming non-performing.

    (2) IFCIs loans portfolio was heavily weighted towards traditional commodity sectors such as iron &steel, textiles, sugar, plastics etc, which were significantly move exposed to demand recession & priceflictuations.

    (3) Unlike other financial institutions, IFCI has not diversified in to other type of businesses.

    (4) As credit rating agencies started taking note of IFCIs deteriorating loan book quality, they loweredcredit ratings. This in turn affected IFCIs Standing in the debt market, making resources raisingincreasing difficult

    (5) Constraints in resource raising in turn led to cutbacks in disbursements & new business with aninevitable impact of on earnings, thus completing the cycle of downward spiral.

    (6) In this context, the Committee would like to observe that some of factors referred to above such asimpact of trade policy liberisation & tariff reduction, recessionary conditions in late 90s, depressedconditions in capital market etc. affected other DFIs & banks as well.

    Suggestions for Improvements:-

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUAccording to the analysis and obsewations, the committee has made the following recommendations.

    1. IFCI Should transform itself into a fully licessed term credit Bank over a period of time.2. IFCI should endeavour to reduce the proportion of project finance in their books and diversify

    into post project and short-term financing business, as well as enter fee-based services.3. There s a growing basket of newer forms of corporate finance business.4. IFCI need not enter the retail financial market for the present.5. IFCI functions as a government entity than a vibrant business organization. A new culture has

    established within the organisation that encourages aggressive business development withadequate risk monitering and control.

    6. IFCI needs to develop quickly a range of new products and services before transformation into abank.

    7. IFCI should consider building up a portfolio of selected highly-rated corporate bonds withappropriate maturities.

    8. IFCI should activate its treasury operations and view it as an important profit centre.

    ICICI Bank

    The Industrial Credit and Investment Corporation of India Limited (ICIC), which was merged with theICICI Bank in 2001, was founded by World Bank, the Government of India and representatives ofPrivate Industry on January 5, 1955 to encourage and assist industrial development and investment inIndia.

    Objectives & functions

    (1) Providing assistance in the creation, expansion & modernization of Industrial enterprise.(2) Encouraging and Promoting the participation of Private capital, both internal and external in

    such enterprise.(3) Encouraging & Promoting industrial investment and expansion of investment markets.

    Over the Year, ICICI has evolved into a diversified financial institution. ICICIs principal businessactivities include:-

    (1) Medium- term and long-term project financing for the infrastructure and manufacturing sectors:(2) Corporate finance to meet the treasury requirements of Indian Companies.(3) Lease Finance.(4) A comprehensive range of financial and advisory services.


    1) ICICI Venture Funds Management Company Limited:

    Q 5. What is the function of development bank? Explain the leading policies and Criteria of theIDBI.

    Ans- A Development Bank is a multipurpose institution which shares entrepreneurial Risk, Changes itsapproach in tune with the industrial climate and encourages new industrial projects to bring aboutspeedier economic growth. The concept of development banking is based on the assumption that mereprovision of finance will not help to bring about entrepreneurial development. Successfuentrepreneurial banking should include the discovery of investment projects, undertaking thepreparation of project reports, provision of technical will not help to bring about entrepreneuriadevelopment. Successful entrepreneurial banking should include the discovery of investment projects,undertaking the preparation of project reports, provision of technical advice and management services

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUand finally assisting the management of industrial units. They are different from commercial banks inthree ways:

    i) They do not seek or accept deposits from the publicii) They specialise in providing medium and long-term finance (commercial banksspecialise in proving short term finance)iii) Their functions are confined to providing long-term finance.

    Development banks provide financial assistance to industry in the following forms:

    term loans and advancessubscription to share and debentures

    iii) Underwriting of new issuesiv) Guarantees for term loans and deferred payments

    The first two forms place funds directly in the hands of companies as subscription to shares anddebentures. The last tow forms facilitate the raising of funds from other sources.

    The distinguishing role of development banks is the promotion of economic development by way ofproviding investment and enterprise in their chosen spheres (manufacturing, agriculture etc) Thefactors which led to the growth of development banks are the inability of the normal institutionastructure to keep pace with the requirement of funds and entrepreneurship of the growing industriasector. The important development banks are the following.

    1) Industrial fianc corporation of India Ltd. (IFCI)2) Industrial credit and Investment Corporation of India (ICICI)3) Industrial Development Bank of India (IDBI)4) Small Industrial Development Bank of India (SIDBI)5) Exim bank (Export and Import bank)

    IDBI (Industrial Development Bank of India) was established as a wholly owned subsidiary of RBI inyear 1964. However, in year 1976. the IDBI was made an autonomous institution and was thus

    delinked from the RBI. It is now independent public ector financial institution whose ownership vets inthe Government of India.

    The functions of the IDBI can be broadly grouped into three categories, viz.

    i) direct assistance to industrial units in the form of loans and advances.ii) Indirect assistance through refinancing of the loans and advances given by other financia

    institution.iii) Promotional activities in respect of industrialisation of backward areas, small industrial units


    Direct Assistance: The industrial development bank of India provides direct assistance to industria

    units in the form of loans and advances. Besides, it also sudscribes to their shares and debenturesthereby giving then strong financial support. The bank can guarantee the loans and advances raised bythe industrial concerns from the scheduled banks, IFCI and other notified sources. It can alsounderwrite the shares and debentures issued by the industrial concern.

    Indirect Financial Assistance: The promotional activities of the Industrial Development bank of Indiainclude

    I) special assistance for industrial development in the backward areas.II) Assistance to small scale industries andIII) Special assistance by way of soft loan scheme

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    With a view to promoting the industrial development of the backward areas the IDBI providesconfessional finance assistance to the small and medium projects in these areas. This concessionassistance is available upto an account of Rs. 2 crores and has a longer repayment period.

    . 6 Give an overview of banking sector reforms in India. How have these reforms affected theperformance of public sector bank?

    Ans. The experience of successful developing countries indicates that repaid growth requires asustained effort at mobilising savings and resources and deploying them in ways, which encourageefficient production. Financial sector (which includes banking sector) reforms thus constitutes andimportant component of the programme of stabilization and structural reforms. The major reformmeasures undertaken during the past few years are as follows:

    1) The government has over the past eight years brought down both statutoryliquidity ratio and cash reserve ratio in a phased manner. The effective statutory liquidity ratio hasbeen lowered down to 25 percent. The cash reserve ratio, which is only effective instrument ofmonetary control in India, is being no longer depended upon to combat inflation. It has thus beenbrought down to 10 percent.2) The earlier formats of the balance sheet and profit loss account did not reflecthe true financial position of the banks. Hence, they have been revised and made effective from thebank accountanting year 1991-92.3) Commercial banks attaining capital adequacy norms and prudential accountingstandards have been given freedom to set up new branches without the approval of the reservebank of India. Banks can also rationalize their existing branch network by relocating branchesopening of specialized branches, setting up controlling offices etc.4) Number of interest rates slabs on banks advances were reduced from about 20in 1989-90 to 2 in the financial year 1994-95. This attempt to unify interest rate structure aims atreducing the degree of cross-subsidy in the banking system.5) The RBI has announced guidelines for setting up banks in the private sectorThese banks should be financially viable and should avoid concentration of credit and crossholdingwith industrial groups. Further, they will have to observe priority sector lending targets as applicable

    to other banks.6) The supervisory system of the RBI was strengthened with the establishing of anew board for financial supervision under the chairmanship of Deputy Governor of RBI. The Boardwill ensure implementation of the regulations with respect to credit management, assetsclassification, income recognition, capital adequacy with the treasury operations.7) Recovery of debts by banks and other financial institutions in the past has beenunsatisfactory. Hence, an act was passed in 1993 under which special recovery of loan areas.8) Agreement between the RBI and public sector banks has been made toimprove the management and the quality of the performance of the latter. This includesmanagement information system and the internal audit and control mechanism.9) The quickness for determining the maximum permissible bank finance havebeen made more flexible banks now have greater freedom in determining the working capital needs

    of the borrowers and responding to local requirements in an appropriate manner.

    A large part of the addenda for reforms of the financial system relates to the problems facing the publicsector commercial banks, which have dominated banking in India since nationalisation was to extendthe reach of banking and financial services to all parts of the country and to all sections of society. Italso aimed at widening the net of resources mobilization.

    While there are significant achievement, they have been accompanied by serous shortcoming as well.For instance, the quality of customer service has not kept pace with modern standards and changingexpectations.

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    Stock Exchange

    Stock Exchange is a market in which securities are brought and sold and it s an essential component ofa developed capital market.

    According to Securities Contracts (Regulation) Act, 1956, Stock Exchange means anybody oindividuals, whether incorporated or not, constituted for the purpose of assisting, regulating ocontrolling the business of beinging selling or dealing in securities.

    According to this Act, securities include

    (i) Shares, Scrips, Stocks bonds, debentures, stock or other marketable securities of a like nature n orof any incorporated company or body corporate.

    (ii) Government Securities.

    (iii) Rights or interest in securities.

    It provides necessary nobility of to capital & directs the flow of capital into profitable andsuccessful enterprises. It may be defined as the place or market where securities of joint stockcompanies & of government or semi-government bodies are dealtion.

    Dealing on Stock Exchange

    Stock exchange dealings in India are regulated by the Securities Contracts (Regulation) Act andthe Securities and Exchange Board of India (SEBI).

    On the trading floor of stock Exchange, dealings are permitted only n the listed securitiesthrough the members or their authorized clerks during fixed working hours.

    There are 2 important types of trading on the stock exchange namely Ready Delivery contract andForward Delivery Contract. The important differences between these 2 dealings are the following:-

    Ready delivery contracts also known as cash trading or cash transactions, are to be settled either onthe same date or within a short period that may extend at best up to seven days. As against these theforward delivery contracts are discharged on fixed settlement days. Ready delivery contract can bemade in respect of all securities where as forward delivery contracts are confined to those securitieswhich are placed of the forward list.

    Speculation on the Stock Exchange:-

    Stock Exchange transactions are made ether for the purpose of investment or for speculation.Investment transactions are made with the intention of earnings a return on the securities by holdingsthem more or less permanently whereas speculative transactions are made with the intention of makinggains by disposing of the securities at favourable prices.

    Organisation of Stock Exchange in India-

    There are 23 stock exchange functioning in India including the Over. The Counter Exchange ofIndia (OTCEI) and National Stock Exchange (NSE).

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUThe Bombay Stock Exchange, which was established n 1875 is the oldest one in Asia, the

    Tokyo Stock Exchange was founded only n 1878.

    With about 10,000 listed companies, India holds the unique distinction of having the largestnumber of listed companies in the world.

    Since the coming into effect of the Securities Contracts Act, 1956, only those stock exchangewhich are recognized by the government can function in the country. The policy of the Government isthat there shall be only one stock exchange in one area. In pursuance of this policy, where more thanone stock exchange in one area. In pursuance of this policy, where more than one stock exchange wasgiven recognition and active members of the non-recognized stock exchanges were admitted.

    Each stock exchange is managed by an Executive Committee/ Governing Body to which theGovernment is empowered to nominate not more than 3 members. The rules & bye-laws of the stockexchange shall be in conformity with such conditions as may be prescribed by the Government. TheSecurities Contracts (Regulation) Act empowers the Government also to withdraw the recognitiongranted to a stock exchange, in the interest of trade or in public interests.

    Regulation of Stock Exchange:-

    In India the Development of the stock market is directed and the dealings on the stockexchange are regulated by the Central Government in accordance with the Securities Contracts(Regulation) Act 1956 (SCRA) and Securities and Exchange Board of India (SEBI) established by theCentral Government.

    Securities Contracts (Regulation) Act:-

    The Securities Contracts (Regulation) Act, Exacted in 1956, come into force on February 201957.Objectives:-

    (1) To empower the Central Government to regulate the dealings n and functioning of the stock

    exchange in India.(2) To promote healthy & orderly development of stock market in India.(3) To prevent unhealthy speculation & other undesirable activities on the stock exchange.(4) To protect the interest of investors.(5) To provide for reasonable uniformity of the bye laws & rules of the different stock exchange in


    Main Provisions:-

    1) The grant of recognition or withdrawal of recognition to any stock exchange.2) Approval of the bye-laws and rules of stock exchanges.3) Power to direct the stock exchanges to make or amend roles and bye-laws in certain

    cases.4) Power to make or amend bye-laws or roles for stock exchanges.5) Monitoring the activities & functioning of the stock exchanges by calling for periodicreturns & specific information as and when required and by conducting inquiry into certainmatters when the situation so warrants.6) Power to suspend business of stock exchanges.7) Power to supersede governing body of any stock exchange on account of specificreasons.8) Regulation of listing of securities.

    Recognition to Stock Exchanges.:

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    Any stock exchanges which is desirous of being recognized may apply to the CentraGovernment in the prescribed manner with the required particulars and a copy of the bye-laws of thestock exchange and the rules relating to the constitution of the stock exchange.

    The Act lays down that the Central Government Shall not refuse grant of recognition to a stockexchange without giving it an opportunity to be heard & that the reasons for the refusal shall becommunicated to the stock exchange in writing.

    Power of Recognized Stock Exchange to Make Rules Restricting Voting Rights Etc.

    A Recognised Stock exchange shall have effect until they have been approved by the CentraGovernment and published by that Government in the official Gazettee.

    Power to obtain Information & to Conduct Inquiry:-

    Every recognized stock exchange shall furnish the Central Government with a copy of the annual reporcontaining all the particulars prescribed. Further, every recognized stock exchange. Shall furnish to theSEBI such periodical returns relating to its affairs as may be prescribed.

    The SEBI is also authorised to call upon any recognized stock exchange or any members ofsuch exchange to furnish any information or explanation relating to the affairs of the stock exchange orthe members in relation to the stock exchange.

    Power to supersede Governing Body:-

    It the Central Government has sufficient reasons to think that the governing body of any stockexchange should be superseded; it may do so after serving a written notice on the governing body &giving the body an opportunity to be heard in this matter.

    These Powers are exercisable by the SEBI also.

    Power to Suspend Business of Stock Exchange:-

    The SCRA empowers the Central Government to suspend the business of any stock exchange,under certain circumstances, for a period not exceeding 7 days in the interest of trade or public interest.The period of suspension may be extended from time to time but after the governing body has beengiven an opportunity of being heard in the matter.


    (Securities and Exchange Board of India)

    The SEBI was constituted in 1988 by a resolution of Government of India & it was made a Statutory

    body by the Securities and Exchange Board of India Act 1992.


    Section 4 of the Act lays down the constitution of the management of SEBI. The Board ofmembers of SEBI shall consist of a chairman, two members from amongst the officials of theMinisteries of the Central Government dealing with finance and law, one member from amongst theofficials of Reserve Bank of India, 2 other members to be appointed by the Central Government, whoshall be professionals & interalia have experience or special knowledge relating to securitia market.Objectives:-

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUTo Protect the Interest of investors in securities & to promote the developments of and to regulate, thesecurities market for matters, connected there with or incidental there with.

    Powers and Functions:-

    These measures provide for:-

    (1) Regulating the business in stock exchange & any other securities market.(2) Registered and regulating the working of collective investment schemes, including mutua

    funds.(3) Promoting and regulating self-regulatory organizations.(4) Promoting & regulating self-regulatory organizations. Prohibiting fraudulent & on fair trade

    practices in securities market.(5) Promoting investors education & training of interdiaries in securities market.(6) Promoting investor education & training of interdiaries in securities market.(7) Prohibiting insider trading in securities.(8) Regulating substantial acquisition of shares and take-over of companies.(9) Calling far information from, undertaking inspection, conducting enquiries and audits of the

    stock exchange & intermediaries & self-regulatory organizations in the securities market.(10) Performing such functions & exercising such power under the provision of the capital issues

    (control) Act, 1947, (Subsequently repeated) and Securities Contracts (Regulations) Act1956 as may be delegated to it by the Central Government.

    (11) Levying fees or other charges for carrying out the purposes of section 11 of the Act.(12) Conducting research for the above purpose.(13) Performing such other functions as may be presented by the government.

    Non-Banking Financial Institutions

    NBFCs are financial intermediaries engaged primarily in the business of accepting deposits andmaking loans and advances, Investments, leasing, hire-Purchase etc. NBCs are a heterogenouslot.NBFC sector is characterized by a large number of privately owned, decentralized and relatively

    small sized financial intermediaries. NBFCs are of various types such as loan companies (LCs)investment companies (ICs), here purchase finance companies (HPFCS), equipment leasingcompanies (ELCs) mutual benefit financial companies (MBFCs) also known as NIdhis, and equipmentleasing companies are defined on the basis of the principal activity of their business. Although NBFCsin India have existed for a long time, they shot into prominevce in the second half of the 80s & in the Isthalf of the 70s as deposits raised by them grew rapidly. Customer orientation, concentration in themain financial centres & attractive rates of return offered by them are some of the reason for their rapidgrowth. Primarily engaged in the area of retail banking, they face competition from banks & financiainstitutions.

    Unit-IVTrend and pattern of Indias foreign trade and balance of payments; latest EXIM policy-main

    features; policy towards foreign direct investment; globalisation trends in Indian economy;role of MNCs; Indias policy commitments to multilateral institutions- IMF, World Bank andWTO.

    Foreign trade

    Regulation of Foreign trade:-

    Control of foreign trade in India dates back to the early year of Second World War. ImportControl was introduced in 1940 as a war time measure under the Defence of India Rules with the

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUPrimary objective of conserving the foreign exchange resources and restricting physical import so as toreduce the pressure on the limited available shipping space. Initially, the import of only 68 commoditiesmainly consumer goods, were brought under control. Subsequently, with the increasing pressure on theforeign exchange resources, import control was extended to other commodities as well.

    After the end of the war, Defence of India Rules Lapsed and hence in September 1946, wasPromulgated to continue the import trade Control. This was ultimately replaced by Imports and Experts(control) Act 1947, which come into force with effect from 25th March 1947. this Act gave thegovernment enormous powers of control over foreign trade of India. The imports and Exports (Control)

    Act, 1947, was replaced by foreign Trade (Development & Regulation Act), 1992.

    The major concern of government in the past was restriction of imports with a view to controllingthe trade deficit & protection of domestic industries against foreign competition. Imports were, thereforevery much restricted by Prohibition of imports of many items, import licensing, very high import duties &foreign exchange restrictions. The foreign trade policy was characterised by overtone of regativism.

    The foreign trade Act 1992

    This Act which replaced the Imports and Exports (Control) Act 1947 come into force on 19 t

    June 1992. No export or import shall be made by any person except in accordance with the provisionsof this Act, the orders and rules made under this Act and the expert and import policy.


    Is to provide for development & regulation of foreign trade by facilitating imports into andaugmenting exports from India and for matters connected there with or incidental thereto.

    Main Provisions:-

    (1) Development & Regulation:-

    The FTDRA empowers central govt to make provision for development & regulation of foreign

    trade by facilitating imports & increasing exports.

    (2)Prohibition & Restriction:-

    The Act also empowers the Central government to make provision for prohibiting, restricting orotherwise regulating the import or export of goods as and when required.

    (3) Exem Policy:-

    The Act lays down that the Central Government may, from time to time, formulate & announceexport and import policy & policy & may also amend that policy.

    (4) Director General of Foreign Trade:-

    The Act provides for the appointment by Central Government, of a director General of foreignTrade for the purpose of this Act. The DGFT Shall advise Central government in formulation of export &import policy & shall to be responsible for carrying out that policy.

    (5) Importer-Exporter Code Number:-

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    INDIAN BUSINESS ENVIRONMENT NOTES MBA 2ND SEM MDUThe Act lays down that no person shall make any import or export except under an Importer-

    Exporter Code (IEC) Number granted by the DGFT or officer authorised by him in his behalf.

    (6) Issue and Suspension/ Cancellation of licence:-

    The Director General or any other officer authorised under this Act is empowered to suspend orcancel a licence issued for export or import of good in accordance with this Act for good & sufficientreasons, after giving licence holder a reasonable opportunity of being heard.

    (7) Search, Inspection & Seizure

    Any person authorized by Central govt may search, inspect & seize such goods, documentswhich are imported and suspected.