Business Organigation

B1��

Section -II

BUSINESSFUNDAMENTALS

�� B2

Study Note - 9FORMS OF

BUSINESS ORGANISATION

This Study Note includes

• Introduction

• Sole-Proprietorship

• Joint Hindu Family Business

• Partnership Firm

• Comparison Between Partenership and Sole-Proprietorship

• Comparison Between Joint Hindu Family and Partnership

• Co-operatives

• Joint Stock Company

• Public Utility Services and State Enterprises

• Limited Liability Partnership

9.1 INTRODUCTION

During the life time human being has to undertake numerous and varied activities. The na-ture, propensity and the motivating force behind them are not similar in all cases.

The infinite human activities are of two kinds.

(1) economic activities and

(2) non economic activities.

Economic activities are those which are inspired by the desire to earn money or livelihood. Forexample a worker is working in a factory, a clerk is attending to his duties in office, a teacher isteaching in the class. Non economic activities are those which are undertaken not for earningmoney but out of love, patriotism, humanity, social and religion, customers etc.

Economic activities are those human activities which are related to the production, exchange,distribution and unlimited consumption of wealth. They are inspired mainly by economicconsideration and result in the production of economic goods and services. These activitiesbelong to the domain of business. Hence all human activities related with the earning andspending of wealth fall under the category of economic activities.

Forms of Business Organisation

B3��

Economic activities are also identified with occupations. Business is an occupation in whichorganized production and exchange of goods and services are undertaken with a view to earnprofits. There are different types of business activities. A grocery shop is as a much a businessenterprise as a giant company like Reliance Industries or Maruti Udyog Ltd.

Business is an economic activity involving the production or procurement and sale of certaingood and services for the satisfaction of human need in the society.

All the business activities fall under three difference categories –

(i) Industry

(ii) Trade

(iii) Commerce.

Industry, Trade and Commerce are closely related to each other. They are interdependent.Industry depends upon commerce for the distribution of goods and services and commercehas to depend upon the industry for the supply of goods. Trade provided support to industryand commerce.

A modern businessman desires that his activities should be well organized and planned so asto active maximum success. In order to fulfil this desire a number of forms of business organi-zation have been evolved to suit different situations and purposes. For example, when thebusiness is of a local nature and on a small scale, a sole proprietorship would be found to besuitable whereas if export and import on large scale is to be undertaken by a concern a jointstock company may have to be formed. Each form of business organization has its own meritsand demerits. Different types of business entities along with their advantages and limitationshave been depicted in the following pages.

9.2. SOLE-PROPRIETORSHIP

9.2.1 Introduction

Sole proprietorship is the oldest, the simplest and, in some respects, the most natural form ofbusiness organization. In such an undertaking, the proprietor brings in his own capital, man-ages the business himself, bears all the risks alone and takes all business decisions. Here, theproprietor uses his own skill and intelligence in the management of its affairs with almostunlimited freedom. The proprietor is entitled to receive all the profits and assumes all the risksof ownership. The competence of the proprietor determines the prospect of the business. Theproprietor is, in fact, the sole organizer, manager, controller and master of his business.

�� B4

9.2.2 Meaning and definitions of sole proprietorship

The sole proprietorship is a form of business that is owned, managed and controlled by anindividual. This organization is also called a single ownership or single proprietorship. Thesole proprietorship form of business is generally operated on a small-scale basis. At present, itis the most popular form of organization.

Definitions given by eminent management experts :

(i) “Sole proprietorship is an informal type of business owned by one person”. [James L. Lundy]

(ii) “Sole proprietorship is a type of business unit where one person is solely responsible for providing the capital, for bearing the risk of the enterprise and forthe management of the business”. [J.L.Hanson]

(iii) “Sole proprietorship form of ownership, a single individual organizes and operates the business in his own name. He is not only responsible for its management but also for its risks.” [Kimbell and Kikbell]

(iv) “Under the sole proprietorship form of ownership, a single individual organizes and operates the business in his own name. He is not only responsible forits management but also for its risks”. [J.M.Shubin]

Thus, sole proprietorship is a ‘one-man show’ where an individual by his cleverness, courage,ability, honesty, education and co-operation tries on business exclusively by and for himself.The proprietor not only bears all the risks but also receives the entire gains form the business.

9.2.3 Characteristics of the sole proprietorship form of business.

The main characteristics of a sole proprietorship business are as follows :

(i) Capital contribution : The proprietor alone has to arrange for necessary capital and other assets essential for starting and subsequent operation of his business. The proprietor provides the entire capital, either from his private resources or by borrowings from relatives and friends.

(ii) Management and control : The proprietor has full authority over the affairsof the business. He is free to take decisions. There is no need for consultationwith any other person. The working of the concern is entirely based on hisown dis cretion and decision.

(iii) Unlimited liability : The liability of a proprietor is always comprehensiveand unlimited. He is liable for all the debts and loans of the business. If theassets of the business are not sufficient to meet the liabilities, in that case hispersonal property can be attached.

(iv) Limited area of operation : The scope of operation of a sole proprietor islimited because of limited capital, limited managerial ability and limited space.

(v) Free from legal formalities : A sole proprietor is free from any legal formali


B5��

ties to be complied with in the establishment of the business. Sole proprietorship is subject to minimum legal formalities and Government restrictions.

(vi) Distribution of profit : The sole proprietor receives all the profits of hisbusiness alone. Moreover, he bears all the losses of the business (if any). So,there is a direct relationship between effort and reward. A sole proprietor generally puts in his heart and soul to increase his profits.

(vii) Flexibility in operations : A sole proprietor enjoys the maximum flexibility inhis business. He can easily change, expand or reduce business according tohis discretion.

(viii) No separate entity : This form of business does not have an entity separatefrom the owner. The proprietor and the business enterprise are not the same.

(ix) Discretionary start and end : A proprietor can start the business at any timewithout any legal formalities. Similarly, he can terminate the business without waiting for legal compliance.

(x) Trade secrecy : The proprietor keeps all his trade secrets only to himself. Inthis way, he avoids competitors by retaining business secrets.

(xi) Freedom in selection of trade : A proprietor can start any business accordingto his own will. There is no binding on him. He is not supposed to consult anyperson while making a selection of his trade.

(xii) Personal relations : A sole trader has always direct relations with his customers. The business, which requires personal service and attention, is generallyestablished under this form of organization.

9.2.4 Legal position of a sole proprietor

The following points are worth considering with regard to the legal position of a soleproprietor :

(i) There is no legal restriction in the establishment of a sole proprietorship form ofbusiness.

(ii) There is no specific law under which this business required registration.

(iii) Licenses are, in some cases, obligatory [i.e., to open a wine shop].

(iv) This business is subject to the general laws of the country.

(v) The liability of the sole proprietor is unlimited.

(vi) The proprietor and his business have one personality. The business exists onlywith the sole proprietor.

9.2.5 Merits ( or advantages) of sole proprietorship form of business

The sole proprietorship form of business possesses the following significant merits :

(i) Easy formation : The sole proprietorship business can be established very easily.

�� B6

No legal formality or other complicated procedure is required to be followed. Aperson can start business operations as and when he desires. Only a licence is neededin some special cases (i.e., opening a wine shop, etc.)

(ii) Prompt decisions : A proprietor can take quick decisions regarding his businessaffairs (e.g., price policy, credit policy, discount policy, disposal of surplus funds,etc.). He can take spot decisions as and when required.

(iii) Smooth functioning : There is none to oppose his decisions. Therefore, he can func-tion smoothly. He can control his business affairs personally.

(iv) Incentives for hard work : There is always a direct relationship between the effortsand the rewards in the case of a sole proprietorship. Therefore, the more a propri-etor will work, the more he will earn. It provides incentives to work hard, effi-ciently and honestly.

(v) Flexibility in operations : This form of business can easily adapt to the changingconditions of the market. The line of the business can easily be changed or modifiedaccording to change in socio-economic conditions. A proprietor can easily change,expand or reduce his business on account of change of market conditions. Thus, heenjoys the maximum flexibility in his business.

(vi) Maintenance of business secrecy : Maintenance of secrecy is very vital in a small-scale business. A proprietor can maintain secrecy regarding his business as he hasnot to consult anyone on business decisions. Possibilities of maintaining completesecrecy give him a greater competitive strength.

(vii) Intimate contacts with customers : The proprietor develops close and personal con-tacts with his customers. This enables him to cater to the exact requirements of hiscustomers. He can easily ascertain the nature of tastes, habits and attitudes of hiscustomers. He can also know their difficulties, complaints easily by keeping per-sonal contact with the customers.

(viii) Inexpensive management : The management of a sole proprietor is not expensiveat all. All supervisory and management activities are performed by the proprietorhimself, thus minimizing the additional expenditure on managerial staff. More-over, overhead costs of management are relatively low. This leads to a good deal ofsavings.

(ix) Efficiency in management : The proprietor’s personal interest is involved in hisbusiness. He tries, heart and soul, to eliminate all sorts of wastages in order to re-duce costs and maximize profits.

(x) Freedom regarding selection of business : A sole proprietor can select the businessof his choice and he is not required to seek permission from anyone else for thispurpose. He can also change his business acoording to business requirements andchanging circumstances.

(xi) Minimum Government regulations : The business activities of a sole proprietorare least regulated by law and the Government. A sole proprietorship business has


B7��

to comply with mainly labour laws and tax laws. There is no other interference inthe day-to-day running of the business from the Government.

(xii) Tax advantage : A sole proprietorship business enjoys the minimum tax burden ascompared to other forms of business organizations. A proprietor is taxed as an indi-vidual an not as a business unit separately. Income tax authorities make no differ-ence between the proprietor ad the business regarding the assessment of incometax.

9.2.6 Demerits Limitations of sole proprietorship form of Business

The sole proprietorship form of business suffers from the following drawbacks :

(i) Unlimited liability and risk : The principles of unlimited liability for the ownerputs the proprietor at great risk in times of losses. The proprietor will always behaunted by the fear of losing his private property in case of failure of his business.

(ii) Limited financial resources : The capital and other resources of an individual arealways limited. An individual proprietor cannot offer much security to raise fundsfrom financial institutions. Therefore, there appears to be a limited capacity of ex-pansion of business operations.

(iii) Limited managerial capability : It is not possible for a single individual to possesexpertise in all fields (i.e., production, finance, personnel, marketing, etc.) So, thedecisions of the proprietor may not be balanced due to limited managerial ability.

(iv) Instability of the business : The continuity and existence of a sole proprietorshipform of business is most uncertain. Any uncertain events happening in the personallife of the proprietor are surely to disturb the smooth working of the business. Thebusiness may suddenly come to an end with the death or physical incapacity of theproprietor.

(v) Uncertainty in purchase and sales : The proprietor is unable to get full advantageof bulk purchases and increased sales, as he carries on his business on a small-scale.This may lead to a rise in the cost of business operations. This form of businesscannot enjoy the benefits of large-scale production.

(vi) Weak bargaining position : The proprietor cannot control the market because ofhis limited financial resources. Thus, his bargaining power is weak, both as a pur-chaser and seller.

(vii) Limited scope for employees : A sole proprietor cannot attract trained and quali-fied persons for reasons of limited career opportunities. Moreover, a proprietor can-not offer financial incentives to attract skilled employees because his activities areon a small-scale.

(viii) No check and control : A sole proprietor is the monarch of his business. No out-sider can question him on his acts and deals. Moreover, there is nobody to help andguide him. There are no checks and controls on the activities of the p proprietor.

�� B8

(ix) Too much secrecy causes suspicion : Secrecy is desirable for business operationsbut too much secrecy leads to suspicion by outsiders. The outsiders are unable toasses the soundness of a proprietorship form of business because it is not requiredto publish accounts of the business.

(x) Limited scope for expansion : Due to limited capital, limited managerial capabilityand unlimited liability, a sole proprietorship cannot grow and expand to a largesize. Its goodwill and bargaining positions are also weak.

9.2.7. COMMON FORMS OF SOLE PROPRIETORSHIP :

The business that take the form of sole proprietorship are – retailers, hawkers, bakers, confec-tioners, restaurants, jewellery shops, furniture shops, printing houses, small machine shops,professional firms (accountants, solicitors, photographers, tax consultants, etc.)

9.2.8. Social desirability of sole proprietorship

The sole proprietorship form of business has a social desirability because of the following rea-sons :

(i) Equal distribution of wealth in the society;

(ii) Opportunity for self-employment with limited investment;

(iii) Employment to a large number of persons in the society;

(iv) Direct and close relations with the customers;

(v) Providing goods at low prices due to less overhead burdens;

(vi) Providing opportunities to learn the techniques of the business;

(vii) Limited risks associated with the business due to the low-scale of operations;

(viii) Opportunity to establish cottage and small-scale industries;

(ix) Suitable for production of seasonal goods;

(x) Producing goods on the basis of customers; choice and preferences;

(xi) The absence of middlemen ensures the benefit of both the sole trader and theconsumers; and

(xii) Offering an honorable living to those who do not want to work under others.

9.2.9. Suitability of sole proprietorship

The sole proprietorship form of business is considered to be indispensable under the followingcases :


B9��

(i) It is very suitable for the production of goods of an artistic nature.

(ii) It is very suitable in all such cases where :

(a) A small amount of capital is required;

(b) The risks involved are relatively small;

(c) Personal attention towards customers is required;

(d) Business is of a small size;

(e) The markets are localized and limited.

(iii) It is very suitable for a business, which requires greater personal attention to cutomers.

(iv) It is very suitable for small-scale business requiring prompt decisions andadjustability with the market conditions.

(v) It is very suitable for the business where techniques of precision are essential.

9.3 JOINT HINDU FAMILY BUSINESS

The Joint Hindu Family business is a peculiar form of business organization, operating in ourcountry. It is a form of business organization is which the family possesses some inheritedproperty and the head of the family, known as Karta, manages its affairs. It is possible only inthose parts of India where the Mitakshara System (Hindu Law) of inheritance is in operation. Itmeans that no Joint Hindu Family is possible in Bengal and Assam where Dayabhaga systemof inheritance prevails. Again, the joint family business is confined to those persons who con-stitute the coparcenaries interests. Previously, female members and their relations did not havecoparcenaries interest; only male members had the interest. Under the Hindu Succession Act,any female relative of deceased (male) coparcener is entitled to get a share of the coparceneryinterests at the time of death of such coparcener. The rights and liabilities of coparceners aredetermined by the general rules of the Hindu Law. Thus, joint family business is created by theoperation of Hindu Law and does not arise out of contract between the coparceners.

9.3.1 Characteristics

(1) Status. The membership of the family business is the result of status arising formbirth in the family. Hence the majority or minority in age of the members is imma-terial.

(2) Only male members. Female members are excluded from the class of coparceners.Only male members can be coparceners.

(3) No Registration. For the purposes of enforcing its claims and right it does not re-quire registration like partnership.

(4) Management. The business is managed by Karta, the head of the family. Otherfamily members have no rights of arrangement over the business and they cannotcontract any loans on mortgages binding on the joint family property.

�� B10

(5) Liability. The liability of all members of the family, except the Karta, is limited tothe value of their individual interests in the joint property. The liability of Karta isunlimited.

(6) Fluctuating share. The share of each members interest in the family property in-cluding business is always fluctuating in character. The member’s interest increaseby death of existing coparcener and decreases by birth of a new coparcener.

(7) Continuity. The existence of the business is not affected by the death or insolvencyof a coparcener of the Karta.

(8) Supremacy of karta. Karta is supreme authority in the business. The members can-not question the judgment of Karta in the conduct of the business. If they are ag-grieved, they can ask for the partition of family and business property. But theycannot ask the Karta for an account of past profits and losses.

9.3.2 Merits

Following are the Merits or Advantages of Joint Hindu Family Business :-

(1) Assured of a share in profits. Every coparcener is assured of a share in the profitsof the business, irrespective of his contribution to the successful running of the busi-ness.

(2) Freedom of action. Karta can cake quick decisions and can also act without anyinterference by others.

(3) Limited liability. The liability of all the coparceners except that of Karta is limited.

(4) Insurance against contingencies. It serves as an insurance cover for maintainingthe children, widows, ailing or invalid members of the family.

(5) Cooperative efforts. The duties of the business are divided among the members inaccordance with their capabilities and resourcefulness.

(6) Inclusion of finer values of life. Every member of the family gets an opportunityfor participation in the business and the qualities of duty, sacrifice and disciplinebecome embedded in them.

9.3.3. Demerits

Following are the demerits or disadvantages of joint family business :

(1) Lack of motivation- Members do not fell motivated to work hard because there islack of direct relationship between benefits and efforts.

(2) Scope for misuse- Since Karta has full freedom and authority tomanage the business,he may misuse this freedom for his personal benefits and gains.


B11��

(3) Limited resources- It has limited resources at its disposal for investment in busi-ness.

(4) Family quarrels- Small family quarrels may lead to its disintegration.

This form of organization is declining because of the strains on joint family system due topreference for individual family living.

9.4. PARTNERSHIP FIRM

The partnership firm of business organization grew out from the limitations of sole proprietor-ship. When the business expands, one man is unable to arrange the financial resources andbear the risks. He cannot supervise and manage all the functions of business personally. There-fore, two or more persons joint hands and combine their capital and skill to start and run abusiness, Partnership is thus an extension of sole proprietorship.

9.4.1 Meaning and Definitions of Partnership

A partnership is a voluntary association of two or more persons who agree to carry on somebusiness jointly and share its profits and losses. They combine their funds and skills to carry onbusiness together. Some popular definitions of partnership are as follows:

Partnership is the relation existing between persons competent to make contract, who agree tocarry on a lawful business in common with a view to private gain.

— L.H. Haney

A partnership or firm as it is often called is, then a group of men who have joined capital orservices for the prosecuting of some enterprise. — Kimball

Partnership is the relation between persons who have agreed to share profits of a businesscarried on by all or any one of them acting for all. — The Partnership Act

A partnership is a form of business organization in which two or more persons upto a maxi-mum twenty join together to undertake some form of business activity. – J.L.Hanson

Two or more individuals may form a partnership by making a written or oral agreement thatthey will jointly assume full responsibility for the conduct of business.

—John shubin.

The persons who enter into partnership with the one another are individually called ‘partners’and collectively a ‘firm’. The name under which they carry on business is called the ‘firm name’.

�� B12

9.4.2 Essential elements (or features) of partnership

The essential elements of a partnership contract are enumerated as follows :

(i) Lawful business : The term ‘business’ includes all trades, professions or occu-pations. The purpose of a partnership agreement is to carry on a lawful businessand nothing else.

(ii) Name of the business : The partnership firm must have its own name. Thename in which the business is carried on is called the ‘firm name’.

(iii) Association of persons : At least two persons are needed to make a partnership.Indian Partnership Act is silent about the maximum number of members. TheIndian Companies Act provides that maximum number of member as then (incase of a Banking business) and as twenty (in other cases).

(iv) Profit motive and sharing of profits : Partnership business is formed with theobject of earning profit. The earned profit is to be distributed among the part-ners as per an agreed ratio.

(v) Contractual relationship : Partnership is a contractual relationship between thepersons who are competent to enter into a contract. Relationship between part-ners arises from contract and not from status.

(vi) Mutual trust and confidence : The successful working of a partnership dependson mutual trust and confidence of its partners. Partners have the duty to ob-serve utmost good faith in business dealings.

(vii) Principal-agent relationship : It is not necessary that the business should bemanaged by all the partners. Any one or more partners can run the business onbehalf of all the partners. Each partner is an agent of the firm and his activitiesbind the firm.

(viii) Restrictions on transfer of share. No partner can transfer his share in the part-nership without the prior consent of all the other partners. Thus, a partner can-not transfer his interest at his own will.

(ix) Unlimited liability : Partnership is based on the principle of unlimited liability.The personal property of the partners can be attached to satisfy the claims ofcreditors of the firm, if the assets of the firm are insufficient to meet the claim ofthe creditors.

(x) Management and control : Every partner has a right to take an active part in themanagement of the firm. The unanimous consent of all partners is required totake any major decision.

(xi) Financing : Ordinarily, each partner is required to contribute capital on a profit-sharing ratio. However, in some cases, a partner with special technical skillsand ability may not contribute at all towards the capital of the firm.


B13��

9.4.3 Kinds of Partners

We can classify partners into various categories, depending on the role played by them in theirday-to-day business activities.

(i) Based on extent of participation :

(a) Active partner; (b) Sleeping partner.

(ii) Based on sharing of profits :

(a) Nominal partner; (b) Partner in profits only.

(iii) Based on liabilities :

(a) Limited partner; (b) General partner

(iv) Based on the nature of behaviour :

(a) Partner by estoppel; (b)Partner by holding out.

(v) Other partners :

(a) Secret partner; (b) Silent partner.

(i) Based on extent of participation :

(a)Active partner (or Working partner) : An active partner is a partner who not onlycontributes capital but also takes an active part in the conduct of the business of thefirm. He is a full-fledged partner in the real sense of the term. The active partner isalso known as a ‘working partner’.

(b) Sleeping partner (or Dormant partner) : A partner who does not take active part inthe management of the business is called a sleeping partner. A sleeping partneronly contributes his capital to the business and shares in the profits or losses of thefirm.

(ii) Based on sharing of profits :

(a) Nominal partner (or, Quasi/Ostensible partner) : Nominal partner is a person whoneither contributes capital not takes an active part in the conduct of the business ofthe firm. He only lends his name and reputation for the benefit of the firm. He is notentitles to receive any benefit or share of profits from the firm.

(b) Partner in profit only : A partner in profit is a person who gets a share of profits butdoes not share any losses of the firm. Such a partner is not allowed to take part inthe management but will have to bear all liabilities to third parties.

(iii) Based on liabilities :

(a) Limited partner : A limited partner is a partner who has the right to take part in theaffairs and management of the firm. The liability of such a partner is limited to theextent of the capital contributed by him. In a partnership firm, all the partners can-not have limited liability. At least one partner must have unlimited liability.

�� B14

(b) General partner : In case of a general partnership, the liability of all they partners isunlimited. A general partner is entitled to participate in the management of thebusiness.

(iv) Based on nature of behaviour :

(a) Partner by estoppel : A partner by estoppel is a person who has neither contributedany capital nor takes any part in the management of the firm. But he conductshimself in such a manner which leads third parties to believe that he is a partner ofthe firm. If fact, he is not a partner of the firm. He is held liable for the debts of thefirm to such third parties who might heave entered into contract with the firmunder such an impression.

(b) Partner by holding out : if a person is declared by other as a partner of the firm andhe does not contradict it immediately and remains silent, he would be treated as apartner by holding out. He is liable to such third parties who enter into contractwith the firm in the belief that he is a partner of that firm.

(v) Other partners :

(a) Secret partner : A partner who wants that his name should be kept secret is called asecrete partner. Such a partners is, however, liable for the debts of the firm.

(b) Silent partner : A partner who does not have any voice in the management of thefirm is called a silent partner. Such a partner, however, shares the profits or losses ofthe firm and bears the burden of its debts.

9.4.4 Kinds of partnership

The partnership business has been divided into different categories as follows:

According to aims :

(a) Partnership at will; (b) Particular partnership.

According to time :

(a) Fixed term partnership; (b) Flexible partnership.

According to legality :

(a) Legal partnership; (b) Illegal partnership.

According to nature :

(a) General partnership; (b) Limited partnership.

According to aims :

(a) Partnership at will : When a partnership is formed to conduct the business foran undefined period, it is called partnership at will. The life of such a partnershipdepends on the will of the partners. The partnership can be dis solved at thedesire of any partner on giving due notice. Such a partnership firm is formed tocarry on lawful business for an indefinite period.


B15��

(b) Particular partnership : When a partnership is formed to conduct a particular busi-ness of a temporary nature or only for a certain period, it is called particular part-nership. Such a firm is dissolved immediately on the completion of a particularventure or on the expiry of a certain period.

(ii) According to time :

(a) Fixed term partnership : The partnership which can be formed for a fixed period oftime is called fixed term partnership. On the expiry of that fixed period, the part-nership is automatically dissolved.

(b) Flexible partnership : When a partnership is formed neither for a fixed period norfor any particular venture, it is called flexible partnership. Such a partnership firmcontinues its operation till any contingent happening (under which dissolution iscompulsory).

(iii) According to legality :

(a) Legal partnership : When a partnership firm is established under the conditions ofthe Indian Partnership Act, 1932, it is known at legal partnership. Here, the mini-mum number of partners is two and maximum is twenty (but in a Banking Busi-ness, the maximum number is ten).

(b) Illegal partnership : When the business of a firm becomes (or is declared) illegal,violating the provisions of any law of the country, it is called an illegal partnership.When the number of partners, either reduces to less than two or increases to morethan twenty, then also the partnership becomes illegal.

(iv) According to nature :

(a) General partnership : In a general partnership, the liability of each partner is un-limited. In India, all partnership firms are general partnerships. In the absence ofan agreement, the provisions of the Indian Partnership Act, 1932, will be applicablefor general partnership. Each partner of a general partnership is entitled to take anactive part in the management of the firm, unless otherwise decided by the otherpartners.

(b) Limited partnership : A limited partnership is a partnership consisting of somepartners whose liability is limited to the amount of capital contributed by each. Ina partnership firm, all the partners cannot have limited liability. At least one part-ner must have unlimited liability.

Minor as a partner. A minor is a person who has not completed 18 years of age. A minorcannot become a partner because he is not qualified to enter into a contract. But he may beadmitted to the benefits of partnership with the mutual consent of all the partners. On being soadmitted, a minor becomes entitled to a share in the profits of the firm. He can inspect andcopy the books of account of the firm but he cannot take active part in the firm’s management.His liability is limited to the extent of his share in the capital and profits of the firm. He cannotfile a suit against the firm or its partners to get his share except when he wants to disassociatehimself from the firm.

�� B16

After becoming a major, the minor must give a public notice within six months if he wants tobreak off his connections with the partnership firm. If he does not give such a notice within sixmonths or if he decides to remain in the firm, he comes liable to an unlimited extent for thedebts of the firm from the date he was admitted to the benefits of partnership. He also becomesentitled to take active part in the management of the firm’s business.

Rights and Liabitities of a Minor Partner :

1. A minor is entitled to a share in the profits of the firm.

2. A minor may be admitted with the benefits of partnership with the mutual consent of all the partners.

3. A minor has got the right to inspect and copy the books of accounts of the firm.

4. A minor’s liability is limited to the extent of share in the capital of the firm.

5. Being a minor he cannot file a suit against the firm or its partners to get his shareexcept when he wants to leave the partnership. If he does not express anything inwriting, his existence as a partner will be implied and he will be subject to unlimited liability like the other partners.

6. After he becomes a major he also becomes entitled to take part in the management of the firm’s business.

9.4.5 Partnership Deed. It is a document containing the terms and conditions of a partnership.It is an agreement in writing singed by all the partners duly stamped and registered. If definesthe rights, duties and obligations of partners and governs relations among them in the conductof business affairs of the firm. It is not a public document. The partnership deed must notcontain stated in partnership deed can be changed with the consent of all the partners.

Partnership deed usually contains the following clauses :

1. Name of the firm.

2. Nature of the firm’s business.

3. The principal place of business.

4. Duration of partnership, if any.

5. Names and address of partners.

6. Amount of capital to be contributed by each partner.

7. Amount which can be withdrawn by each partner.

8. The profit-sharing ratio.

9. Rate of interest, if any, on capital and drawings.


B17��

10. Amount of salary or commission payable to partners.

11. Allocation of work among partners.

12. Mode of valuation of goodwill.

13. Procedure for admission, retirement, etc. of a partner.

14. Procedure for maintaining accounts and getting them audited.

15. Procedure to be followed in the event of dissolution of the firm andsettlement of accounts.

16. Arbitration clause in case of disputes among partners.

17. Loans and advances by partners and rate of interest payable on them.

9.4.6 Registration of Partnership

Registration of a partnership firm is not compulsory under law. The Partnership Act 1932 pro-vides that if the partners so desire they may register the firm with the Registrar of Firms of theState in which the main office of the firm is situated. A firm may be registered at the time of itsformation or at any time thereafter.

Procedure for Registration

In order to get a partnership firm registered an application in the prescribed form must be filedwith the Registrar of Firms. The application should contain the following information :

(i) The name of the firm.

(ii) The principal place of business of the firm.

(iii) Names of the other places where the firm’s business is carried on.

(iv) Names in full and permanent addresses of the partners.

(v) The date on which each partner joined the firm.

(vi) Duration of partnership, if any.

The application should be signed and verified by each partner. Then it is submitted to theRegistrar of Firms of the area in which the principal place of the firm’s business is situated orproposed to be situated. A small amount of registration fee is also deposited along with theapplication. The application submitted to the Registrar is examined. If the Registrar is satisfiedthat everything is in order and all legal formalities have been observed, the Registrar shallmake an entry in the registrar of firms. He will also issue a certificate of registration. Anychange in the information submitted at the time of registration should be communicated to theRegistrar. Registration does not provide a legal entity to the partnership firm.

�� B18

9.4.7 Rights and Obligations of Partners

The rights and obligations of partners are generally laid down in the partnership deed. In casethe partnership deed not specify them, then the partners will have rights and obligations pre-scribed in the Partnership Act. These are given below:

Rights of Partners

1. Every partner has a right to take part in the conduct and management of the firm’sbusiness.

2. Every partner has a right to be consulted and express his opinion on any matter relatedto the firm. In case of difference of opinion, the decision has ordinarily to be taken by amajority. But vital issues like admission of a new partner, change in the firm’s business,alteration of profitsharing ratio, etc., must be decided by unanimous consent of all thepartners.

3. Every partner has a right to have access to, inspect and copy any books of accounts andrecords of the firm.

4. Every partner has the right to an equal share in the profits of the firm unless otherwiseagreed by the partners.

5. Every partner has the right to receive interest on loans and advances made by him to thefirm. The rate of interest should be 6 per cent unless otherwise agreed by the partners.

6. Every partner has the right to be indemnified for the expenses incurred and losses sus-tained by him in the ordinary conduct of the firm’s business.

7. Every partner has a right to continue in the firm unless expelled in accordance with theterms of the partnership agreement.

8. Every partner has a right to retire in accordance with the terms of the partnershipagrement.or with the consent of other partners.

Duties and Liabilities of Partners

1 Every partner must act diligently and honestly in the discharge of his duties to themaximum advantage of all the partners.

2. Every partner must act in a just and faithful manner towards each other.

3. Every partner must act within the scope of the authority entrusted to him.

4. Every partner is bound to share the losses of the firm equally unless otherwise agreed.

5. Every partner must indemnify the firm against losses sustained due to his willfulnegligence in the ordinary course of business.

6. No partner can transfer or assign his interest in the firm to others without the consentof other partners.


B19��

7. Every partner must maintain and render true and correct accounts relating to thefirm’s business.

8. No partner must engage himself in a business in competition with the firm, otherwisehe will be liable for any loss suffered by the firm. He will have to surrender privateprofits to the firm.

9. Every partner should use the firm’s property only for the firm business and interest.

10. No partner should make secret profits by way of commission or otherwise from thefirm’s business. He is liable to account for and pay to the firm any private profit fromthe transaction of the firm or from the use of its property or goodwill.

11. Every partner is liable jointly with all the other partners and also severally for all thedebts of the firm. The liability of a partner to third parties is unlimited.

Implied Authority of A Partner

Every partner has the implied authority to bind the firm and other partners by his acts done inthe name of the firm, in the ordinary course of the firm’s business and with the intention tobind the firm.

A partner has the implied authority to do the following acts on behalf of his firm.

(i) To buy, sell and pledge goods on behalf of the firm.

(ii) To raise loans on the security of such assets.

(iii) To receive payments of debts due to the firm.

(iv) To accept, make and issue bills of exchange, promissory notes, etc., on thebehalf of the firm.

(v) To engage servants for the firm’s business.

(vi) To take on lease a premises on behalf of the firm.

However, a partner has no implied authority, unless otherwise expressed in the partnershipdeed, in the following matters :

(a) To submit a dispute relating to the firm to arbitration.

(b) To compromise or relinquish any claim or a portion of claim made by the firm.

(c) To withdraw a suit or proceeding filed on behalf of the firm.

(d) To admit any liability in a suit or proceeding against the firm.

(e) To open a bank account on behalf of the firm in his own name.

(f) To acquire or purchase immovable property for and on behalf of the firm.

(g) To transfer or sell immovable property belong to the firm; and

(h) To enter into partnership with others on behalf of the firm.

�� B20

9.4.8. Dissolution of Partnership Firms

A partnership firm is said to be dissolved when it ceases to carry on business, its assets are soldand its liabilities are paid off. The firm discontinues its activities and none of the partners hasany relation of partnership with other partners.

Dissolution of the firm should be differentiated from dissolution of partnership. In dissolutionof partnership the original partnership agreement is terminated due to the admission, insol-vency. Retirement or death of a partner. But the other partners continue the business by enter-ing into a new agreement. A partnership can be dissolved without dissolving the firm. Disso-lution of partnership implies change in partnership whereas dissolution of firm means discon-tinuance of business. The dissolution of the includes dissolution of partnership too.

A partnership firm may be dissolved in any of the following ways :-

1. Dissolution by agreement. A partnership firm maybe dissolved with the mutual con-sent of all the partners or in accordance with the terms of the agreement.

2. Dissolution by notice. In case of partnership-at-will, a firm may be dissolved if anypartner gives a notice in writing to other partners indicating his intention to dissolve thefirm. In such a case, the dissolution takes place with effect from the date mentioned inthe notice. If no date is mentioned, the firm would be dissolved with effect from the dateof receipt of the notice by other partners. When such a notice is given to other partners,it cannot be withdrawn without their consent.

3. Contingent dissolution. A firm may be dissolved on the happening of any of the follow-ing contingencies :

(i) On the expiry of the term, if it is for a fixed period.

(ii) On the completion of the venture for which the firm was constituted.

(iii) On the death of a partner.

(iv) On the adjudication of a partner as insolvent.

4. Compulsory dissolution. A firm stands automatically dissolved in the followingcases:

(i) When all partners or all but one partner are declared insolvent.

(ii) When the business of the firm becomes unlawful due to the happening of anevent.

5. Dissolution through Court. Court may order the dissolution of a firm in the following cases:

(i) When a partner becomes of unsound mind.

(ii) When a partner becomes permanently incapable of performing hisduties as a partner.

(iii) When a partner is guilty of misconduct which is likely to affect preju dicially(e.g. moral turpitude, misuse of money) the business of the firm.


B21��

(iv) When a partner willfully and persistently commits breach of the partnershipagreement.

(v) When a partner unauthorized transfers the whole of his interest orshare in the firm to a third person.

(vi) When the business of the firm cannot be carried on except at a loss.

(vii) When in the opinion of the court it is just and equitable that the firm should bedissolved.

9.4.9. Merits of a partnership form of business

The following are the merits of a partnership form of business:

(i) Simple formation : It can be formed easily without much expense and legalformalities. Only an agreement between the partners is required. Registrationis also not compulsory.

(ii) Sufficient resources : A partnership has larger resources as compared to asole trader. The combined resources of many individuals would certainly belarger than the limited capital of a sole trader. Moreover, new partners can beadmitted to secure more capital, managerial ability and organizing capacity.

(iii) Flexibility of operations : A partner can introduce any changes that he considers desirable to meet the changing circumstances. There is no legal restrictionas long as the firm carries on a lawful business.

(iv) Specialization in management : A partnership enjoys all the advantages of division of labour. Division of work among partners is done on the basis of theirspecialization. It helps in increasing the efficiency of the business, resulting inmore profits.

(v) Benefits of combined ability : Under a partnership, several persons pool theircapital, resources, skills, expertise, experience, services, etc. This helps to expand the activities of the firm.

(vi) Prompt and balanced decisions : A partnership firm is a combination of abilities, experience and judgment of different persons. Such a combination of skillsfacilitates the making of balanced and sound decisions.

(vii) Caution for unlimited liability : Fear of unlimited liability encourages cationand care on day-to-day activities. Partners are discouraged to take hasty andreckless business decisions in the conduct of the business.

(viii) Democratic organization. Every partner can participate in the operation ofthe business of a partnership firm. Moreover, all the partners are consultedbefore taking any decision.

(ix) Protection of minority interest : The views and voices of each partner carriesequal weight. All the partners have a rights to take part in the day-to-daymanagement. Thus, a partnership firm protects the minority interests.

�� B22

(x) Business secrecy : A partnership firm is not expected to publish its final accounts for the general public. Thus, the partners can keep their business secrets to themselves. The competitors do not have to know anything about theexact position of the business.

(xi) Close supervision : Partners have direct access to the employees and they canencourage workers to improve production. Thus, the partners can directly

minimize costs in order to maximize profit by reducing wastage.

(xii) Protection to minor partner: A minor partner can be taken into a firm withlimited liability. He shares the profits of the business only. He may or may notbe a partner after attaining maturity.

(xiii) Risk and reward are fairly balanced : There is always a direct relationshipbetween effort and reward in the case of partnerships. This motivates parnersto work harder in order to enjoy higher profits.

(xiv) Good personal relations with customers and employees : Every partner canbe made to develop healthy and cordial relationship with employees and customers. The fruits of such relationships may be reflected in better accomplishment and larger profits.

(xv) Easy dissolution : It is easy and inexpensive to dissolve a partnership. Thepartnership can be dissolved on insolvency, lunacy or death of a partner. Nolegal formalities are required at the time of dissolution. So, it is easy to start aswell as dissolve a partnership concern.

9.4.10 Demerits of partnership

The following are the demerits of a partnership form of business organization :

(i) Unlimited liability: The liability of the partners is unlimited and they arejointly responsible for all acts and debts. The creditors can make any or all ofthe partners liable and recover their dues even form the private property ofpartners.

(ii) Uncertain continuity: There is always an uncertainty in continuing this typeof organization. Death, insolvency, insanity of one of the partners may leadto dissolution of the firm. In an atmosphere of uncertainty, long range planning and innovations are not possible.

(iii) Limited resources : A partnership firm may not be able to raise adequatecapital for expansion beyond a certain limit. Though the capital is more in apartnership than in a sole proprietorship form of business, still it is not sufficient for large-scale operations.

(iv) Lack of harmony : It is difficult task to maintain harmony among the partners for a long time. There is a possibility of differences of opinion amongstthemselves. Mutual conflicts and lack of team spirit among partners may leadto loss of reputation and dissolution of the firm.


B23��

(v) Lack of public confidence: It may not enjoy the confidence of the publicbecause its accounts are kept secret and there is an absence of publicity. Moreover, the affairs of the firm are not legally controlled. Therefore, the publicmay not place much confidence in such firms.

(vi) Risk of dishonest co- partners : A dishonest partner may cause injury to theother partners. One partner may be made to suffer heavy losses due to thedishonesty of another.

(vii) Restricted transferability of the partner’s interest : A partner cannot transfer or assign his share in the firm to a third person without the consent of theother partners. He, thus, loses the liquidity of his investment.

(viii) Risk of implied authority : Each partner of the firm has the implied authority to act on behalf of the firm and all other partners. A partner may abuse hisimplied authority for personal gain.

(ix) Absence of professional management: Modern business needs the expertservices of those who have acquired managerial skills and render their services to business undertakings as salaried officers. In partnership firms, wewitness the absence of professional management.

Suitability : Despite its weakness, partnership form of organization is suitable for small andmedium-sized business. It is highly appropriate for professional services like chartered ac-countants, solicitors, doctors, etc. which require pooling of specialized skills and direct contactwith the clients. Partnership is also popular in wholesale and retail trade.

9.5COMPARISON BETWEEN PARTNERSHIP AND SOLE PROPRIETORSHIP

1. Number of members. Sole proprietorship is owned and controlled by oneperson. The number of partners in a firm can be upto ten in banking businessand twenty in other cases. At least two persons are required to form a partnership.

2. Agreement. No agreement is required in a sole proprietorship. On the otherhand, there must be an express or implied agreement among partners in order to constitute a partnership.

3. Registration. A sole proprietorship need not be registered except under theShops and Establishment Act. A partnership firm should be registered otherwise it will not be able to enforce its rights in the court of law.

4. Capital. The entire capital of a sole proprietorship is contributed by one man,the owner of business. In a proprietorship, several persons contribute capital.There fore, a partnership firm can raise larger financial resources than a proprietor.

�� B24

5. Management. The management of sole proprietorship lies exclusively withits owner. He is the supreme authority in the business. But in a partnership,every partner has a right to take part in the management of the firm. There ispooling of knowledge and judgment. Work can be divided among partnersaccording to their skills and aptitudes.

6. Secrecy. Secrets of sole proprietorship are known only to its owner. In partnership, secrets are shared among the partners. Therefore, a sole proprietor isin a better position to retain the secrets of business.

7. Quick decisions. In sole proprietorship one man takes all the decisions. Butin partnership decisions are taken though mutual consultation between thepartners. Therefore, sole proprietorship can take decisions more quickly thana part nership. But decsionsm taken in a partnership are likely to be less reckless and hasty than those of a proprietor.

8. Governing law. There is no specific law governs sole proprietorship. Partnership is governed under the Partnership Act 1932.

9. Sharing of profits. There is no profit sharing in a sole proprietorship and allprof its belong to the owner. In a partnership profits are shared between allthe parners.

10. Flexibility of operation. Proprietorship is a one man show whereas partnership is carried on by two or more persons. Therefore, there is greater flexibilityof operations in sole proprietorship.

11. Mutual agency. In proprietorship there is no mutual agency. But in a partnership every partner is an implied agent of the firm and of other partners.

12. Scale of operations. Sole proprietorship is suitable for small scale business,while partnership is suitable for medium sized business. Scope for expansionis greater under partnership.

13. Risk. The owner alone bears all the risks of sole proprietorship. In a partnership risks are shared by all the partners.

14. Continuity. The life of a partnership is more uncertain than that of sole proprietorship. Lack of mutual trust and unity among the partners can result in untimely dissolution of partnership.

9.6COMPARISON BETWEEN JOINT HINDU FAMILY AND PARTNEERSHIP

The distinction between partnership and Joint Hindu Family business may be put as under:

1. Partnership is the result of an agreement between the members while Joint HinduFamily business is not the result of an agreement but the result of status.


B25��

2. The death of a member will bring about the dissolution of the partnership firmbut joint Hindu family firm is not dissolved by the death of any male member.

3. A member of either sex can be partner in a firm while it is only male membersthat can be members of a joint family firm.

4. A new partner can be admitted into the partnership firm only with the consentof the other partners while in case of joint family firm, there are constant andautomatic additions by the birth of male children.

5. Every partner has the right to pledge the credit or the firm or the partnershipbusiness but it is only the manager (Karta) of the Joint family firm that can con-tract a debt so as to bind the other members.

6. The liability of the partners in a firm is always unlimited and they are person-ally liable for the debts. But the members of a joint family firm except the Kartaare liable only to the extent of their interest in the joint family firm. The Karta ispersonally liable for the firm’s debts.

7. Every partner can ask for dissolution and accounts of the firm but only right ofa member of joint family business is to ask for partition of the existing assets,and not to demand an account from the manager for his dealings in past.

8. A minor cannot become a partner in the firm. However, a minor can be admit-ted to the benefits of the partnership. But in a joint family business, a minormale becomes its members by his birth in the family.

9. Every partner enjoys the authority to act and to bind the other partners by hisacts. All the partners can take active part in the management of the business ofthe firm. In the joint Hindu family firm, only the Karta of the family enjoysthese.

10. In partnership the number of partners is limited to 10 in case of banking busi-ness and to 20 in the case of other business but in case of Joint family businessthere is no such restriction.

9.7 CO-OPERATIVES

Just as limitations of a sole proprietorship led to the rise of the partnership form of businessorganization, the limitations of partnership too gave rise to larger forms of business organiza-tion like cooperatives and companies.

A co-operative society is a voluntary association of persons who join together to safeguardtheir own interests. It is a business activity without having any profit motive, but for benefitingthemselves through self-help and co-operation. The primary objective of forming a co-opera-tive is to protect economically the weaker sections of the society from the oppression of theeconomically organized strong segment of the society. It is a democratic organization run byits members for serving their own interests.

�� B26

The basic philosophy of a co-operative organization is four fold :

(i) Service in place of profits; (ii) Mutual help in place of competition; (iii) Self-help inplace of dependence; and (iv) Moral solidarity in place of unethical business practices.

Thus, co-operative organizations are generally started by the economically weak sections topromote their common economic interests through business propositions. The primary objectof any co-operative organization is to render service to its members.

Definitions given by eminent management experts :

(a) “Co-operative is a form of organization, wherein persons voluntarily associate together as human beings on the basis of equality for the promotion of the economicinterests of themselves.” [Prof. E.H.Calvert]

(b) “Co-operative is joint enterprise of those who are not financially strong and therefore, come together not with a view to get profits but to overcome disability arisingout of the want of adequate financial resources.” [H.N.Kunzen]

(c) “Co-operative is an association of individuals to secure a common economic goalby honest means.” [Sir Horace plunkett]

Definition as per Co-operative Societies Act, 1912:

Co-operative society is a voluntary association of individuals which has its objectives inthe promotion of economic interests of its members in accordance with co-operative prin-ciples. [Section 4 of the Indian Co-operative Societies Act, 1912]

From the definitions, certain definite features of a cooperative could be noted as follows:

9.7.1 Features

(a) Voluntary association. The membership of co-operatives is open to all freelyand voluntarily. There are no conditions laid down on the basis of caste or

creed and colour. There is neither compulsion or denial to any one desiring tobecome member of the cooperative.

(b) Service motive. The purpose of the co-operatives is not making profit. The co-operative societies are formed with a motive of service. The members are interested in helping each other. The co-operatives are for ensuring social justice. Itdoes not mean that co-operatives do not make profit. In business the profit ismany times regarded as the acid test of the efficiency of working units. However, the members of co-operatives do not believe in profit making throughexploitation.


B27��

(c) Equality. Every members of a co-operative society enjoys equal status. No onehas special voting rights. The members may be holding different number ofshares but all the members have equal voting right. No one is enjoying anyspecial privileges.

(d) Democratic management. Every member of a co-operative society is allowedto express his views and is also free to criticize the working of the cooperative.The management is democratic. Like political democracy, here also the management is of the members, by the members and for the members. The memberselect their representatives and like the board of directors of a company theserepresentatives manage the affairs of the co-operative on behalf of the members.

(e) Cash transactions. The business of co-operatives is generally carried on Cashbasis. The members are discouraged to have credit facilities with a view to avoiding bad debts. This safeguards the interests of all the members.

(f) Corporate status and state control. Like a Joint Stock Company, a Co-operative Society also is required to be registered in law and it is also treated as anindependent legal entity. The Government regulations are binding on it. It cansue and get sued in law and also can purchase or sell any asset or property.

(g) Religious and political neutrality. The cooperatives believe in fraternity. Allthe members are brothers and sisters and therefore, the religious or politicalview of the members do not find any place in the affairs of the cooperative.

(h) Education. The co-operatives believe in educating their members about the principle of cooperative. There is a feeling of togetherness. The benefits are to beshared by all equally.

(i) Limit on shares. Usually, it is decided by the co-operatives as to what would bethe maximum limit of the shares that could be held by any member. The capitalis made available by the members at practically no cost. The interest if any isdistributed out of surplus but in most of the cases the interest is waived by themembers contributing the capital.

(j) The distribution of surplus. All the members are entitled to an equitable shareof the surplus. There is a limit of the dividend that could be paid by a Cooperative Society.

(k) Political and religious neutrality : The membership of a cooperative society isopen to all, irrespective of religion, caste, political affiliations and beliefs. A co-operative represents universal brotherhood and it should not lose its path inpolitical contradictions. Co-operative societies are neutral as far as political andreligious affiliations are concerned.

(l) Legal status : A cooperative society is required to be registered under the Co-operative Societies Act, 1912. It has its separate legal entity and perpetual succession. With the change in the status of its members, the structure of a cooperative society is not changed.

�� B28

(m) Transfer of shares : The shares of a cooperative society are not freely transferable. A member can surrender his shares to the society with the permission ofthe society’s office bearers.

(n) Liability of members : The liability of the members of the co-operative societyis restricted to the extent of subscribed shares. But, for this purpose, the societywill have to write the work ‘Limited’ after its name.

(o) Government regulation and control : A co-operative society is governed by theIndian Co-operative Societies Act, 1912. A society can be registered only if itsatisfies the conditions laid down by the statute for this purpose. The co-operative societies are to follow certain rules and regulations framed by the Government. There is a control of Central and State Governments on the working ofco-operative societies in India.

9.7.2 Types of co-operative undertakings

Co- operative societies are classified into different types, according to the nature ofservicesrendered by them. The following are them main types of co-operative :

(i) Consumer’s co-operatives;

(ii) Producer’s co-operatives;

(iii) Marketing co-operatives;

(iv) Credit co-operatives;

(v) Housing co-operatives;

(vi) Industrial co-operatives societies.

(i) Consumer’s co-operative societies : Consumers co-operative societies are estab-lished by the consumers of a certain locality for the purpose of social upliftmentof their members. These co-operatives are formed to ensure a steady supply ofessential commodities of standard quality to the members at fair prices. The con-sumers co-operatives purchase the goods on a wholesale basis and sell these goodson a retail basis to the members at fair prices. The profits of the society are distrib-uted among the members in also utilized for providing social services (e.g., medi-cal aid, education, sanitary improvements, etc.) These co-operatives are run bythe members themselves through an elected team of office bearers.

The objectives of consumer’s co-operative societies are :

(a) Availability of consumer goods of higher quality at a cheap rate.

(b) Eliminating the middlemen by establishing a direct link with the producers.

(c) Maintaining stability in the prices of essential commodities.


B29��

(d) Avoiding black marketing and hoarding practices.

e) Avoiding the evil effects of inflation as far as possible.

(f) Establishing equality of status among the members.

(g) Enhancing the purchasing power of the members.

(h) Providing incentives to the members in the form of bonus on purchases madefrom co-operatives.

(ii) Producer’s co-operative societies : These societies are formed for the benefit ofsmall producers, who have difficulty in collecting various factors of productionand face market problems.

The objectives of producer’s co-operative societies are :

(a) To stimulate higher production.

(b) To improve the quality of the products.

(c) To make full use of the available industrial skills of individuals.

(d) To help in tackling the problems of unemployment and underemployment.

(e) To utilize idle man-power.

(f) To strengthen the position of small-scale artisans or crafts.

Thus, producer’s co-operatives are voluntary associations of small producers, who joinhands to face powerful capitalists. These societies are formed for the benefit of small pro-ducers who cannot easily collect various items of production and face some problems inmarketing. These co-operatives provide raw-materials, tools, technical guidance, etc., tothe members, so as to enable them to produce specified goods. Profits of the society aredisbursed among the members as per rules.

Producer’s co-operatives may be of two categories :

(1) Production co-operatives, and

(2) Industrial service co-operatives.

(iii) Marketing co-operative societies : These societies are formed to enable theirmembers to secure fair prices for their goods. In other words, these co-operatives are associations of producers for selling their products at remunerativeprices. The production of different members is pooled and the society undertakes to sell these products by eliminating middlemen.

�� B30

The objectives of these societies are :

(a) to ensure a ready, steady and favourable market for the production of different members;

(b) to undertake centralized selling of the produce contributed by their members;

(C) to eliminate middlemen and reduce the costs of marketing;

(d) to provide services like assembling, grading, storing, packing etc;

(e) to provide loans to producers against the deposit of their goods;

(f) to improve the bargaining position of the producers;

(g) to ensure the supply of standard goods at reasonable prices;

(h) to control the flow of supplies and thus influence prices;

(i) to collect marketing information and supply it to the members for their benefit;

(iv) Credit co-operative societies : These societies are formed in rural and urban areas to attract the small savings of its members. These societies are estab lished byagriculturists, industrial workers, salary earners, artisans, etc., on the basis of collective interests for the purpose of mutual assistance. These societies provide loansto their members on easy terms of interest, security and repayment. The aim of acredit society is to grant credit to its members for productive purposes at a verylow rate of interest. The society educates its members with the habit of thrift. Thesociety collects savings of its members and gives short loans to members (in need)from time to time at cheaper rates.

The credit co-operative societies may be of two types : (1) Agricultural credit societ-ies and (2) Non-agricultural credit societies.

Agricultural credit society may be of three types:

(a) Primary credit societies (at the village level);

(b) Central co-operative banks (at the district level);

(C) State co-operative banks (at the State level).

(v) Housing co-operative societies: These societies are organized to provide residential accommodation to their members, either on an ownership basis or at fairrents. The members of the society contribute their savings to the common fund ofthe society with borrowed money from banks to buy a plot of land in order toconstruct a building for their dwelling purposes. The purpose of these societies isto help the members in purchasing land and constructing houses. State HousingBoards help economically weaker sections of the society in owning their housesand paying the price in easy.


B31��

(vi) Industrial Cooperatives

Industrial co-operative means an association of artisans, craftsmen, industrial work-ers, small businessmen for co-operative and collective interest.

Industrial co-operative may be defined as an undertaking of craftsmen or skilledworkers engaged in a cottage or small scale industry to undertake production, pur-chase of supplies and raw materials, marketing of products and supply other ser-vices to members.

The need for such an organization is felt due to the individual financial and mana-gerial limitations. The members of a co-operative pool their resources to carry onthe business and thus to provide employment.

The objectives of this type of organization could be classified under two heads.Social objectives and Economic objectives.

The following are the main objectives of an industrial co-operative :

1. To promise industrial development of rural areas.

2. To increase production and productivity.

3. To purchase in bulk raw materials, tools and equipments and to supply to members.

4. To provide marketing facilities to the members.

5. To arrange for training of members in managerial matters.

6. To raise loans from members and non-members.

7. To provide gainful employment to rural masses.

8. To grant loans and advances to members.

9. To safeguard the weaker sections from exploitation of large producers and sellers.

10. To purchase machinery and other equipments and to give them on hire to mem bers.

11. To make optimum use of the available resources.

12. To improve financial position of artisans and craftsmen by selling their goods at best prices.

13. To take advantage of combined managerial and technical expertise.

14. To secure large contracts from Government agencies and public bodies.

�� B32

As indicated earlier, the industrial co-operatives could be related to production or service ac-tivities or they may manage industrial estates.

They are observed to be suffering from a number of problems. Some of these problems are :

(a) Poor planning,

(b) Inadequate finance,

(c) Non availability of raw materials

(d) Non availability of expertise due to poor service conditions.

(e) Competition in the area of marketing.

(f) Political interference as in case of sugar co-operative in the State of Maharashtra

(g) Inadequate supervision and control.

(h) Hostile attitude of merchants and traders.

9.7.3 Advantages of co-operative undertakings

The advantages of a co-operative form organization can be enumerated as follows:

(i) Easy formation : A co-operative society is a voluntary association of persons. Itdoes not require long and complicated legal formalities at the time of formation. Any ten persons may form a co-operative society for the promotion oftheir economic interests.

(ii) Limited liability : The liability of the members is limited to the extent of capitalcontributed by them as mentioned in the bye-laws of the society.

(iii) Open membership : Any person can become a member of the society andavail of its advantages. The minimum number of members required is ten butthere is no limit to the maximum number of members. A member can leave thesociety by returning his share whenever he likes.

(iv) Democratic management : A co-operative society is managed in a democraticway on the basis of equal voting rights. Thus, every member is able to have avoice in its management. Every member has an equal say in formulating thepolicies of the society.

(v) Perpetual succession : It is a separate legal entity and its life is not affected bythe death, insolvency or conviction of its members. It has a fairly stable life andit continues to exist for a longer period.

(vi) State patronage : The policy of the Government is to encourage co-operativesin every field. Co-operatives are given financial assistance and loans at muchlower rates of interest. Co-operatives are exempted from paying stamp dutiesand reg istration fees. As regards income-tax, co-operatives are offered severalconces sions and reliefs.


B33��

(vii) Service motive : Co-operative societies are started, not for profit, but for service. The members are provided with financial help and goods and services atconcessional rates. A feeling of co-operative is created among the members.

(viii) Economic advantages : It provides financial assistance to agriculturists andlow income group members. It also provides loans for productive purposes.More over, credit co-operatives protect the members from exploitation by moneylenders.

(ix) Social advantages : With the establishment of co-operative societies, the feeling of co-operation and democracy increases in the society. Economic power isdecentralized. The poor people can get the advantages of their efficiency bybecoming members of a co-operative society.

(x) Moral advantages : Mutual help, self-help, hard work, education, self-dependence, savings, etc., are considered as the basic principles of co-operative societies. It is for avoiding social tensions, litigation and mutual distrust. Co-operative systems attempt to achieve a wide-based rural development and rural industrialization.

(xi) Political advantages : It is based on the principles of equal distribution ofwealth. It puts effort to eliminate vested interests, to create delegated leadership and teach members the need of self-governance.

(xiii) Low management cost: Some of the expenses of the management are saved bythe voluntary service of the members. Members take active interest in theworking of the society. So, the society does not require to spend large amountson managerial personnel.

9.7.4 Disadvantages of co-operative undertakings

Co-operative undertakings suffer from the following drawbacks:

(i) Limited resources : Co-operative societies always suffer due to lack of capital. Societies are not able to raise huge amounts of capital because their members are persons of meager income. Therefore, societies are not able to takeadvantage of large-scale production.

(ii) Inefficient management : The societies are not managed efficiently becausethey do not get specialized and professional managers as they cannot affordto pay high remunerations. The members usually lack experience and managerial capability. Thus, management here is generally inefficient due to lack ofspecialization.

(iii) Lack of direct incentive : There is no direct relationship between effort andreward. Honorary office bearers often do not have incentives to work hard.

(iv) Lack of secrecy : The affairs of co-operatives are generally exposed to the

�� B34

members. It becomes quite difficult for them to maintain secrecy in businessaffairs. Business secrecy is leaked out to the members and office bearers of thesociety.

(v) Lack of business elasticity : There is a lack of business elasticity in such co-operative societies. These societies are unable to compete with other privateenterprises.

(vi) Lack of savings by the members : The progress of co-operatives mainly depends on savings. But in our country, the members are not in the habit ofsaving. That is why co-operatives may not be able to mobilize adequate capital for large-scale and risky businesses.

(vii) Lack of competition : Co-operatives, generally, do not face any stiff competition. Markets for their goods and services are more or less ready and assured.Hence, there is possibility of slackening of efforts.

(viii) Limited considerations : Profits earned by societies are very low. Proper andadequate returns on capital employed are not possible. That is why peopleare not interested in becoming members of the society.

(ix) Excessive government interference : Excessive State regulations interfere withthe flexibility of its operations and the efficiency of the management. Excessive State interference is detrimental to the development of co-operatives inIndian.

(x) Corruption : One of the most important drawbacks of co-operatives is the

prevalence of corrupt practices in the management and functioning of suchsocieties. Corruption is an obstacle in the growth, progress and developmentof a co-operative society.

(xi) Other drawbacks :

(a) Non co-operation among members;

(b) Absence of motivation;

(c) Inflexibility in operations;

(d) Groupism in management’

(e) Conservatisms and illiteracy of the members;

(f) Improper maintenance and checking of accounts.

9.8. JOINT STOCK COMPANY

A company is an artificial person created by law, having a separate legal entity, with a per-petual succession and a common seal. It is an association of individuals for the purpose ofearning profit. It has a capital divided into a number of shares, of which each member pos-sesses one or more shares and which are transferable by its owners.


B35��

Joint stock company has been defined by many eminent authors, eminent jurists and institu-tions. From a study point of view, we can divide these definitions into the following threecategories :

Definitions given by eminent authors :

(i) “A company is an artificial person created by law, having a separate legal entity,

with a perpetual succession and a common seal.” [L.H. Haney]

(ii) “A company is an association of many persons who contribute money or money’s

worth to common stock and employ it in some trade or business and who share theprofits or losses arising therefrom.” [James Stephenson]

Definitions given by eminent jurists :

(i) “A company is an artificial being, invisible, intangible and existing only in theeyes of law.” [Chief Justice Marshall]

(ii) “Company means an association of persons united for a common object.”

[Justice James]

(iii) “A company is an association of many persons who contribute money to a com mon stock and employ it for a common purpose.’’ [Justice Lord Lindley]

Definitions given by the Indian Companies Act :

According to Section 3(1)(i) of the Companies Act, 1956, a company means an artificial entitywhich is formed and registered under this Act or existing company.

Thus, a company is an incorporated association created by law, having a distinctive name, acommon seal, perpetual succession, limited liability, etc., formed to carry on business for profit.

9.8.1. Characteristics (or features) of joint stock company

The most distinguishing features of a joint stock company may be stated as follows :

(i) Incorporated association : A company is an incorporated association. It comesinto existence only after registration under the Companies Act.

(ii) Voluntary association : A company is an association of many persons on avoluntary basis. So, a company is formed by the choice and consent of themembers. Shareholders can withdraw their investments from the company atany time they desire.

(iii) Artificial legal person : A company has a legal personality and, as such, it isregarded by law as an artificial legal person. A company has the right to acquire and dispose of the property. It can into contract with third parties in itsown name. It can sue and be sued in its own name.

�� B36

(iv) Separate legal entity : A company has a legal entity distinct from its members. It is an artificial person having an independent existence. The principleof separate legal entity was established in the case of Solomon Vs. Solomon &Company Limited. (1897).

(v) Common seal : The common seal with the name of the company engraved onit. It is used as a substitute for its signature. The company cannot sign anydocument as it is an artificial person. Documents issued by a company mustbear a common seal and it must be witnessed by at least two directors of thecompany.

(vi) Perpetual succession : The company has perpetual succession as its existenceis not affected in any way by the death, insolvency or exit of any shareholder.A company comes to an end only when it is liquidated according to the provisions of the Companies Act.

(vii) Transferability of shares : The shareholders are at fully liberty to dispose oftheir shares to any person of their choice. Transferability of shares enables ashareholder to increase or decrease his investment in a company at any time.It ensures the safety of investment in the shares of a company.

(viii) Limited liability : Liability of the members of a limited company is restrictedto the face value of the shares purchased by them. The personal property ofthe members of a company cannot be attached to satisfy the claims of creditors of a company.

(ix) Separation of ownership from management : The company is not managedby all the members because, the number of members may be large. The authority to manage the whole of the affairs is conferred to elected representatives of members known as directors. A company acts through its directors.Thus, directors are the hands and brains of the company. Members of thecompany have no direct control over the day-to-day activities of the company.

(x) Statutory regulations and Government control : A company is governed bythe Companies Act and it has to follow various provisions of the aforesaidAct. Moreover, accounts of the company must be audited by a chartered accountant. In addition to this, a company has to submit a number of returns tothe Government. In this way, a company has to comply with numerous statutory requirements.

(xi) Rigidity of objects : The type of business in which the company would participate must be mentioned in the ‘object clause’ of its Memorandum of Association. The company cannot take up any new business without changing theobject clause. A company cannot work beyond its Memorandum and Articlesof Association.


B37��

(xii) Strict legal formalities to commence business : A company is to follow somestrict formalities to commence its business. In order to form a company, it isnecessary to submit certain documents to the Registrar of Companies (such asmemorandum of association, articles of association, prospectus, list of directors, consent of directors, etc).

(xiii) Social benefits : Company form of business enables better utilization of available resources. It is needless to say that with the increase in production andimprovement in quality, all classes of the society have benefited.

(xiv) Accountability to shareholders : All the affairs of the company are to be disclosed to the shareholders so that they may come to know about the prospectsand other problems of the company as a whole. Therefore, a company is responsible for its accountability to the shareholders.

(xv) Public confidence : Audit of accounts of the company is compulsory underthe Indian Companies Act, 1956. The financial statements of a company arepublished every year. Thus, public remains acquainted with the activities ofthe company. Moreover, there are some legal restrictions of the activities of acompany. In these way, a company enjoys greater public confidence.

(xvi) Scope for expansion : A company is better placed as regards the facilities ofthe growth, development and expansion of its business. It can expand itsmanagerial capacities and financial resources easily. It has great potential forgrowth and expansion.

9.8.2 Advantages (or merits) of a company form of organization

The following are the merits of a joint stock company :

(i) Accumulation of huge financial resources: The company form of businessfacilitates mobilization of large amounts of capital for investment in industries. The company by its widespread appeal to investors of all classes, canraise huge capital required for large-scale operations. In addition, it can borrow from banks and financial institutions to a larger extent.

(ii) Economies of large-scale production: The company form of business can enjoyall the benefits of large-scale production, such as minimum cost of productionand maximum profit. Economies in purchase, production, selling and distribution, etc., would provide goods to the consumer at a cheaper price. Largecapital enables the size of the business to be extended and permits the use ofexpert knowledge and specialization of functions. Thus, production is increasedand efficiency is enhanced.

(iii) Scope for expansion: A company can easily expand its managerial capacitiesand financial resources. It has great potential for diversification and growth.It can expand its business by issuing new shares and debentures as there is notrestriction to the maximum number of members in a public company.

�� B38

(iv) Stability of existence : The organization of a company as a separate legalentity gives it a character of continuity. As a incorporated body, a companyenjoys perpetual existence. Thus, a company, because of its continuity andstability, can build up a power of endurance and a high level of efficiency.

(v) Transferability of shares : The shares of a public company are freely transferable. The shareholders are at full liberty to dispose of their shares to anyperson they desire. In other words, shareholders can withdraw their investments from the company at any time they like. Transferability of shares provides maximum protection to those shareholders who are in the minority group.

(vi) Democratic control : The company is managed on the principle of democracy. The Board of Directors who manage the company are elected by theshareholders. The directors are responsible and accountable to the shareholders. Because of separation between ownership and management, persons withmanagerial ability can occupy positions of control.

(vii) Managerial efficiency : A company can secure the services of highly qualified persons who are experts in different fields of business management.Through the company, capital and business ability may be linked together forthe benefit of both the individual investor and the community as a whole.

(viii) Stimulation to savings and investments : The company is an effective mediaof mobilizing the scattered savings of the community and investing these savings for commercial purposes. Insurance companies, banks and other financial institutions invest their money in the shares of different joint stock companies. It channelises public small savings into industry.

(ix) Tax relief : The company enjoys greater tax relief as compared to other formsof business. Company pays lower tax on a higher income as it pays tax on theflat rates. Moreover, a company gets some tax concessions, if it establishesitself in backward area. Some tax incentives are available for export promotion also.

(x) Diffused risks : The membership of a public company is large. The businessrisk is divided among several members of the company. This encourages investment of small investors.

(xi) Statutory regulation and control : Formation and working of companies arewell regulated by the provisions of the Companies Act. These strict regulations safeguard the interests of shareholders and people who deal with thecompany. Statutory regulations make the management healthy, fair and justfor all the activities of the company.

(xii) Public confidence and popularity: A company is guided and controlled bystrict regulations and Government control. These ensure public confidencewith regard to investment in shares and debentures. Since the company’s fi


B39��

nancial accounts are published and circulated, the public has enough faith onthe activities of the company. Thus, at present, a company enjoys greater public confidence, better prestige and reputation in the business world as a whole.

(xiii) Capacity of afford maximum risks : A company can bear high risks, becauseof its large financial resources. Companies in many industries are progressingday by day because of their capacity to afford high risks.

(xiv) Social responsibilities: Due to the existence of the company form of business, society is benefited in respect of: (a) opportunity in employment; (b) development of large-scale industries; (c) facility of huge capital formation; (d)increased Government revenue; (e) improvement in standard of living, etc.

9.8.3 Disadvantages (or limitations) of a company form of organization

The following are the disadvantages of a joint stock company :

(i) Adherence of too many legal formalities : The formation of a company requires adherence of too many legal formalities. The establishment and running of a company would prove to be troublesome, because of complicatedlegal regulations. Moreover, the formation and management of the companyis expensive too.

(ii) Concentration of power in few hands : Shareholders of the company havepractically no say in the affairs of the company. The directors of the companybecome self-centered and they do not care for the shareholders. In most of thecases, directors try to formulate policies in order to promote their own interests. Thus, the company form of organization has helped concentration ofeconomic power in few hands.

(iii) Excessive Government control : A company has to observe too many provisions of different laws imposed by the Government. This affects the smoothfunctioning of the company.

(iv) Undue speculation in shares of the company : Undue speculation in sharesof a company is injurious to the interests of the shareholders. Sometimes, directors indulge in speculation by misusing inner information of the companyfor speculative purposes and personal gain.

(v) Fraudulent management : The promoters and directors may indulge in fraudulent practices. The unscrupulous directors may present a rosy picture of thecompany in its annual report. In this way, the innocent and ignorant investors are duped.

(vi) Bureaucratic control : Quick decisions and prompt action are absent in themanagement of a company. It makes a company an inflexible enterprise. As aresult, officers and their assistants do not enforce any decision promptly. Opportunities may be lost because of delay in decision-making.

�� B40

(vii) High nepotism : In companies, employees are selected not on the basis ofability but on the basis of personal interest of the management. There is scopefor a high degree of favoritism and nepotism and as a result worthless peoplejoin in the company.

(viii) Inflexibility in management : A company cannot quickly adjust with thechanging conditions in the market, because of its complex structure and legalobligations. It has, therefore, less flexibility in management.

(ix) Monopolistic control and exploitation of consumers : Joint stock companiesfacilitate formation of business combinations which ultimately lead to monopolistic control and exploitation of consumers.

(x) Social abuses : Evils of factory system like insanitation, pollution, congestionof cities are attributed to the company form of organization. Moreover, theclose and cordial relationship between the management and employees is difficult to maintain. It brings about strikes, lock outs, retrenchment, closure,etc., in the business.

9.9. PUBLIC UTILITY SERVICES AND STATE ENTERPRISES

The enterprises which are owned, managed and controlled by the state on behalf ofpeoplearecalled State Enterprises. In the earlier period it was felt that the principle of Laissez-faire

would work in the best interest of the people. It was thought that if there is no interferencefrom the Government, everybody would try to maximize his individual welfare and it willresult in maximum social welfare collectively. In practice, however, it was observed that differ-ent interests in any society are likely to clash with each other and as such the total social wel-fare cannot increase to its maximum. In fact, after the break of the First World War there wasacute shortage of a number of essential things and the Government had to accept more activerole in economic and industrial activities.

State has not only abandoned the principle of laissez-faire but has also accepted the role of aWelfare State. This is an outcome of Socialistic ideas. A large number of glaring defects wereseen in Capitalism and it was felt that it was necessary to remove these defects by taking activeinterest in the ownership and management of Utility Services and some other Enterprises. As amatter of Industrial Policy in most of the countries, the basic and key industries, defenceindustries and Public Utility Services are nationalized. It is also true that many countries havefound a Mixed Economy as a better solution and India perhaps, is not an exception. In otherwords, in India the Private Sector Industries and Public Sector Industries have been workingtogether.


B41��

9.9.1. Merits of State Enterprise.

(i) A check and prevention on the formation of private monopolies. A largenumber of countries in the world have found that due to lust of economic andpolitical power there is a tendency to form monopolies. These monopolies seriously affect the Social interest in the sense that the monopolist charges exorbitant prices, makes enormous profit, provides lower quality of goods andcreates artificial scarcity by hoarding.

(ii) Acceleration of economic growth. The industrialization in a country is fasterwith the state enterprises functioning actively. The rate of economic growth isalso accelerated. The profits of state enterprises are further invested in industries. Various schemes for economic development can get financial supportfrom the state enterprises. Because of such surplus, it is not necessary for theGovernment to levy heavy taxes.

(ii) Economy. It is possible to avail of economies of large scale operation when anumber of enterprises are brought under the State umbrella. This can alsoresult in proper co-ordination between various industries. There is then nofear of discord. The capital at the disposal of the State can always be big andtherefore, it becomes easier to retain the services or experts for proper adviceand also conduct research in various areas for reduction in cost.

(iv) Object to render service rather then making profit. The concept of Stateenterprises is an outcome of the idea to provide services to consumers or themembers of public. A State enterprise is supposed to be interested in Socialwelfare and not making profit. If therefore, believes in providing good qualityservice at the most reasonable prices. Hoarding with a view to making enormous profit is just out of question. A State enterprises does not believe in Blackmarketing as a Private Undertaking may.

(v) Efforts to provide full employment. Generally, unemployment can arise because the resources are not fully utilized or when the capacity is underutilized.In case of State enterprises, since a large number of units or industries areunder the State control, it is possible to provide maximum employment to thepeople. In other words, a State aims at full employment-it is opined that onlyunder socialized production, the fullest employment is possible for all the ablebodies adults to have work according to their aptitude, training and skill. It isalso observed that in case of employment with the State enterprises there areno violent ups and downs which are so common with Private Sector.

(vi) Encouragement to the balanced regional development. It is the duty of anyState to ensure the there is a balanced regional development otherwise onlysome parts of the State may progress leaving others behind. The uneven development can create a number of problems. The Status usually encourages

�� B42

growth of undeveloped or underdeveloped region by offering concessionsand many other facilities. Lopsided development is never in the interest of allthe people. The Government is interested in ensuring that the fruits of prosperity are enjoyed by all.

(vii) Justice and Equality for all the employees. The Private enterprises are manytimes accused of exploitation of the employees, uncertainty of jobs, paymentof wages at a lower rate and miserable conditions of work. A State enterpriseis on the other hand away from exploitation of workers. It tries to providesecurity of jobs and justice to its employees. The relations between the Government undertakings and their employees are usually cordial.

(viii) Planned production and equitable distribution. State enterprises believe inplanned production and not overproduction, particularly because they areguided with the service motive. The responsibility of equitable distributionalso rests on the shoulders of the Government undertakings.

9.9.2 Demerits of State Enterprises

State enterprises have their own limitations too. They suffer from the following demerits :-

(a) Lack of efficiency. The employees of State Enterprises are generally observed tolack any initiative in their work. They also lack flexibility in operation and effi-ciency. On the other hand incase of Private Sector the maximum premium is paid toefficiency, creativity and initiative. The State Enterprises have service as their mo-tive whereas in case of private undertakings, maximum weightage is given to Profitmaking. The decision making process in State Enterprises is comparatively veryslow and implementation also is delayed. This results in loss of many opportuni-ties. Private sector is dynamic and progressive. Even the cost of administration ofthe State Enterprises is on the higher side.

(b) Political interference. In case of state enterprises, the worst difficulty is the politi-cal interference. The ministers and other political influences affect the scientific andrational decision making. Undue weightage is granted to people who know little inbusiness. The smooth and efficient working is therefore not guaranteed with Gov-ernment in business.

(c) Regimentation. The Private Sector Undertakings usually believe that the consum-ers are kings and that they must be served well. They cannot take customers for ajoy ride. The resistance from the customers could create serious problems for con-ducting business. On the other hand, in case of State Enterprises, there is virtually amonopoly. The consumers have no choice. This is against the principle of democ-racy and the State is many times tempted to take unfair advantage of the situation.

(d) Open to public criticism. The working of Public Sector undertakings is always ex-posed to public criticism. Sometimes, the criticism is unfair too. In such situation,the executives of Public Utilities generally lose interest in work. They cease to showany initiative and become virtually Time Killers.


B43��

(e) Rigid control. The State Enterprises are subject to strict control from various agen-cies. People, Parliament, Ministers, Financial Agencies and the Auditors criticizeand exercise direct or indirect control. It is not, therefore, to enjoy autonomy indecision making or policy implementation. Thus the efficiency is always at stake.

In spite of such demerits, the state enterprises and public utilities have to play a signifi-cant role in India where the mixed economy is prevailing for quite a long time.

9.10 LIMITED LIABILITY PARTNERSHIP

A limited partnership is a partnership consisting of some partners whose liability is limited tothe amount of capital contributed by each. The personal property of a limited partner is notliable for the firm’s debts. He cannot take part in the management of the firm. His retirement,insolvency, lunacy or death does not cause dissolution of the firm. There is at lest one partnerhaving unlimited liability. A limited partnership must be registered.

There is a proposal to permit the formation of a limited partnership in India. But in Europe andthe U.S.A. limited partnership is allowed. For example, in England limited partnership can beformed under the Limited Partnership Act, 1907 and under the Partnership Act, 1890 in theU.S.A. the chief characteristics of a limited partnership are as follows:

1. There must be at least one partner with unlimited liability. The liability of the rmaining partners is limited to their capitals in the firm. Thus, a limited partnershipconsists of two types of partners, general partner and limited partner.

2. The limited partner cannot take part in the management of the firm. He has noimplied authority to represent and bind the firm. However, he is allowed to inspectthe books of accounts of the firm.

3. The limited or special partner cannot assign his share to an outsider without theconsent of the general partner.

4. The limited partner cannot withdraw any part of his capital.

5. A limited partnership must be registered.

9.10.1 Advantages. Limited partnership offers the following benefits:

(i) It enables people to invest in a business without assuming unlimited risk andwithout devoting much time and attention in management of business.

(ii) It permits the mobilization of larger financial resources from cautious and con-servative investors.

�� B44

(iii) It provides an opportunity to able and experienced persons to manage the busi-ness without any interference from other partners. Complete control and per-sonal supervision help to ensure prompt decisions and uniform actions.

(iv) It is more stable than general partnership because it is not dissolved by the in-solvency, retirement, incapacity or death of limited partner.

9.10.2 Disadvantages. Limited partnership suffers from the following drawbacks:

(i) The limited partners are deprived of the right to manage. They remain at themercy of the general partner.

(ii) The general partner may misuse his power to exploit the limited partners.

(iii) A limited partnership enjoys little credit standing as the liability of some part-ners is limited. It has to be registered.

EXERCISES

1. Define the term business. Show the relation between industry, trade & commerce.

2. Define the term ‘Sole Proprietorship’ & state the principal features of a sole propri-etorship business.

3. State the merits & de-merits of sole proprietorship business.

4. Justify on the suitability of a sole proprietorship business.

5. What is the meaning of Joint Hindu Family business and state the major character-istics of such form of business.

6. Define the term ‘partnership’. Explain the features of partnership.

7. Describe the various types of partners.

8. Explain the merits & de-merits of partnership form of business.

9. Is registration of Partnership compulsory? What happens if a partnership firm isunregistered.

10. Distinction between Partnership & Sole Proprietorship.

11. Define a Co-operative society? What are its essential features?

12. State the merits & de-merits of a co-operative organization.


B45��

13. Distinguish clearly between a company & a co-operative society.

14. State & explain the different types of co-operative organization.

15. Define a Joint Stock Company & state the salient feature of a Joint Stock Company?

16. Explain the merits & de-merits of Joint Stock Company.

17. What are State Enterprises? State the objectives of State Enterprises.

18. “The main object of co-operative organization is the service of members”. Com ment.

19. State the merits & de-merits of State Enterprises.

20. State the problems of Public Enterprises.

21. “In spite of all its limitation as a business unit, the State Enterprises are preferred ina mixed economy”. On the basis of the above statement explain the merits & de-merits of Public Utility & State Enterprises.

22. What is the meaning of limited liability & how does it apply to the different formsof organization.

23. Explain various ways in which a partnership firm can be dissolved.

24. What is the meaning of implied authority of a partner?

25. State the rights, duties & liabilities of the partners.

26. “The relation of Partnership arises from contract & not from status”. Comment

27. Write short notes on :

a) Separate legal entity

b) Minor Partner

28. “The one man control is the best in the world if the max. is big enough to manageeverything”. Discuss.

29. “A sole trader is the supreme Judge of all matters, pertaining to his business, subjectonly to the general laws of the land and to such special legislation as may affect hisparticular business”. Comment

30. “Partnership is a firm of business organization, is evolved due to limitations of SoleProprietorship”. — Do you agree with the statement? Why?

�� B46

Study Note - 10

COMPANY ORGANISATIONAND MANAGEMENT


• Types of Companies

• Detail of Private Company

• Detail of Public Company

• Incorporation of a Company

• Promotion of a Company

• Basic Documents of the Company

Memorandum of Association

Articles of Association

Prospectus

• Shares

• Debentures

• Board of Directors

• Meeting

• Resolutions

10.1. TYPES OF COMPANIES

10.1.1. On the basis of mode of incorporation

Companies may be divided into three categories on the basis of mode of incorporation as shownbelow:

(i) Chartered Company : A chartered company is incorporated under Royal Charterissued by the King or Head of the State. Before the enactment of the Companies Act,the formation of a company was made under a special Charter by the King. TheEast India Company, Chartered Bank of England, etc., are important examples ofchartered companies. This type of company is not found in India at present.

(ii) Statutory Company : A statutory company is established by a special Act of Parlia-ment. Generally, public utility concerns are established in this way for the purposeof performing certain important economic functions. Examples of statutory compa-nies are : (i) Reserve Bank of India; (ii) Damodar Valley Corporation; (iii) State Bankof India; (iv) Industrial Finance Corporation of India.

ä

ä

ä

Company Organisation and Management

B47��

(iii) Registered Company : A company which is formed by registration under the Com-panies Act is known as a registered company. All existing companies in India (ex-cept statutory companies) have been formed and registered under the CompaniesAct. The workings and continuity of registered companies are governed by the rel-evant provisions of the Companies Act. Registered companies may be of three types:(i) company limited by shares; (ii) company limited by guarantee, and (iii) unlim-ited liability company.

10.1.2. On the basis of the extent of liability

Companies may be divided into three categories on the basis of the extent of liability as shownbelow:

(i) Company limited by shares : A company limited by shares is registered underthe provisions of the Companies Act. It has a specified amount of capital divided into a definite number of shares. Liability of the members is limited to theextent of the face value of the shares they have purchased. Most of the companies formed in India are of this class. A company limited by shares may be oftwo types : (a) public company, and (b) private company.

(ii) Company limited by guarantee : A company limited by guarantee is such aregistered company where the extent of liability of members is specified in the‘Memorandum of Association’. The liability of its members, in case of need,may exceed the face value of shares held by them. The guarantee liability isenforceable only at the time of winding up of the company. It implies that, if acompany cannot pay for its liabilities in full at the time of winding-up, theexisting members would be required to contribute for meeting debts and liabilities of the company. A guaranteed company may be with share capital orwithout share capital. Companies limited by guarantee are usually formed topromote art, literature, sports, education, religious or other charitable purposes.In other words, non-profit earning companies are mostly registered with aguaranteed capital.

(iii) Company with unlimited liability : This is a company having no limit on theliability of its members. In this company, members are personally liable to paythe debts of the company in proportion to their interest. Members are underthe obligation to satisfy in full, all the claims of the third parties on the company. An unlimited liability company is just like a big partnership firm. Nowadays, such company is not found in the field of business.

�� B48

10.1.3 On the basis of transferability of shares

Companies may also be divided into two categories on the basis of transferability of shares asshown below:

(i) Private company : A private company is an incorporated body, registered under theCompanies Act (with a minimum paid-up capital of rupees one lakh), with fourimportant restrictive provisions in its ‘Articles of Association’. Therefore, a privatecompany is one which:

(i) restricts the rights of its members to transfer their shares in the company;

(ii) limits the number of its members to fifty (excluding its employee sharehold-ers);

(iii) prohibits any invitation to the public to subscribe for any shares or deben-tures of the company;

(iv) prohibits any invitation or acceptance of deposits from persons other thanits members, directors or their relatives.

(ii) Public company : A public company means a company which :

(i) is not a private company;

(ii) has minimum paid up capital of rupees five lacs; and

(iii) is a subsidiary of a company which is not a private company.

In other words, a public company is one which is not a private company. It is an associa-tion consisting of seven or more members, which is registered under the Companies Act.

10.1.4. On the basis of jurisdiction of functioning

Companies may be divided into three categories on the basis of jurisdiction of functioning asshown below:

(i) Indian company : A company which is registered and incorporated in India is calledan Indian Company. This company is registered under the provisions of the IndianCompanies Act with its registered office in India.

(ii) Foreign company : A foreign company is a company which is incorporated outsidethe country but carries on business in this country through agents or branches. Theprovisions of the Indian Companies Act are equally applicable to foreign compa-nies carrying on business in India.

(iii) Multinational company : A company whose management, ownership and controlare spread over more than one country is known as multinational company. There-fore, a service facilities outside the country’s origin. A multinational company takesdecisions in a global context. A multinational company organizes its operations indifferent countries through either of the following five alternatives : (i) Subsidiarycompanies; (ii) Joint venture companies; (iii) Branches; (iv) Franchise holders and(v) Turn-key projects.


B49��

The examples of multinational companies are : (a) Philips; (b) Coca-Cola; (c) Bata;(d) IBM; (e) Siemens; (f) Imperial Chemical Industries; (g) Union Carbide; (h) Nestle;(i) Unilever, etc.

10.1.5. On the basis of the extent of ownership and control

Companies may be divided into three categories on the basis of the extent of ownership asshown below:

Government company : A Government company is a company in which at least 51%of the paid up share capital is held by the Government (Central Government orState Government). Government companies are also registered under the Compa-nies Act. Examples of Government companies are : (i) Bharat Electronics Ltd.; (ii)Steel Authority of India Ltd.; (iii) Coal Mines Authority Ltd., etc.

Holding company : A holding company is one that directly or indirectly holds morethan 50% of equity share capital or controls the composition of the Board of Direc-tors of some other companies.

A company may become a holding company of another company in any of the fol-lowing three ways :

by holding more than 50% of the paid up equity share capital of another copany,or

by holding more than 50% of the voting rights of another company; or

by holding the right to appoint the majority of the Directors of another company.

Subsidiary company : A subsidiary company is one : (i) in which more than 50% ofthe paid up equity share capital is held by another company; or (ii) whose majorityof the Directors are appointed by anther company ; or (iii) where more than 50% ofthe voting powers are exercised by another company.

10.2.PRIVATE COMPANY

10.2.1.Definition of a private company

A private company is an incorporated body, registered under the Companies Act (with a mini-mum paid-up capital of rupees one lakh), with four important restrictive provisions in its ‘Ar-ticles of Association’. Therefore, a private company is one which:

(i) restricts the rights of its members to transfer their shares in the company;

(ii) limits the number of its members of fifty (excluding its employee shareholders);

(iii) prohibits any invitation to the public to subscribe for any shares or debentures ofthe company;

(iv) prohibits any invitation or acceptance of deposits from persons other than its mem-bers, directors or their relatives.

�� B50

10.2.2. Features of a private company

(i) A private company can select any name, but the words ‘Private Limited’ must beadded at the end of its name.

(ii) It must have a minimum of two members and a maximum of fifty members (ex-cluding employee shareholders).

(iii) It can start its business just after its registration. It does not require a commence-ment certificate.

(iv) It cannot issue shares to the public. Moreover, a restriction is imposed on the trans-ferability of its shares.

(v) It need not require to file a prospectus or a statement in lieu of prospectus to theRegistrar of Companies.

(vi) It need not require to hold a statutory meeting or file a statutory report.

(vii) It does not restrict any investment in the same group of companies.

10.2.3. Privileges and exemptions allowed to a private company

The following are some of the privileges and exemptions allowed to private companies ascompared to public companies :

(1) Exemptions in formation of a company :

(i) A private limited company can be formed by two persons only.

(ii) It can start its business just after its registration. It does not require a com-mencement certificate.

(iii) It need not require to file a prospectus or a statement in lieu of prospectus tothe Registrar of Companies.

(2) Exemptions regarding holding of meetings :

(i) It need not require to hold a statutory meeting or file a statutory report to theRegistrar of the Company.

(ii) Provisions of the Companies Act, regarding quorum, voting rights, countingof votes and information of meetings can be relaxed in case of a private com-pany.

(3)Exemptions regarding appointment, removal, etc., of Directors :

(i) Minimum number of Directors required in a private company is two, whilein case of public company, it is three.

(ii) The rules regarding appointment, retirement, etc., of Directors do not applyto a private company.


B51��

(iii) The rules regarding qualifying shares of Directors do not apply to a privatecompany.

(iv) Loans and financial help can be given to the Directors of the private companywithout permission of the Central Government.

(v) The approval of the Central Government is not required regarding increasein the number of Directors of a private company.

(vi) There is no limit on remuneration of Directors and Managing Director of aprivate company.

(4) Exemptions regarding managerial remuneration :

Remuneration payable to Directors and Managing Directors of a private company is notrestricted to 11% of the net profits.

(5) Exemptions regarding appointment of Managing Directors :

(i) A Managing Director can be appointed even for more than five years.

(ii) No approval of the Central Government is required in case of appointmentof Managing Director.

(6) Exemptions regarding share capital :

(i) It can enhance its capital without observing the legal provisions regardingfurther issue of capital applicable to public companies.

(ii) The provisions regarding voting rights and the distribution of share capitalinto preference and equity shares do not apply in the case of a private lim-ited company.

(7) Exemptions from various legal formalities :

A private limited company is not bound to observe the restrictions under the CompaniesAct with regard to publication of accounts, issue of right-shares, investment of companyfunds in the same group of companies, etc.

10.2.4. Advantages (or merits) of private companies

The main advantages of a private limited company are as follows:

(i) Easy formation due to lesser formalities : A private company is easy to form astwo or more persons are required to form it. A private company can start its opera-tions immediately after its incorporations. There is no need to get the certificate ofcommencement of business. It is neither required to issue a prospectus nor to call astatutory meeting.

(ii) Maintenance of secrecy of business affairs : A private limited company is betterplaced to maintain secrecy of the affairs of business. A private company does not

�� B52

have to show its accounts and financial statements before the registrar of Compa-nies and the public.

(iii) Promptness of decisions : Policy decisions can be implemented quickly in the caseof private companies as compared to public companies. The management is also ina few hands who manage the day-to-day affairs effectively.

(iv) Direct encouragement : There is no difference between owners and management ofa private company. The members and management, thus, get more incentive towork.

(v) Greater elasticity : Private companies have been granted exemptions from the ap-plications of various important provisions of company law. Thus, a private com-pany is required to perform a few number of legal formalities as compared to pub-lic companies.

10.2.5 Disadvantages (or limitations) of private companies

Main disadvantages of a private limited company are as follows:

(i) Limited membership : A private company cannot have more than fifty members(excluding employee-shareholders). So, the financial resources of such companiesare limited. Therefore, possibilities of expansion and diversification become lim-ited.

(ii) Interests of the shareholders are not safeguarded : Provisions of the CompaniesAct regarding safety of shareholders do not apply to private companies (e.g., work-ing of Directors, limit of managerial remuneration, etc.) Moreover, non-transfer-ability of shares puts the minority at the mercy of the majority.

(iii) State priorities to public companies : Public companies are always preferred ascompared to private companies in matters of tax relief, financial assistance, mana-gerial assistance, etc. Generally, the Central Government gives preference to publiccompanies in matters of granting licences.

(iv) Dissatisfaction among minority shareholders : The minority shareholders cannotdispose of their shares even when they are dissatisfied with the affairs of the com-pany.

10.2.6 Private company deemed to be a public company

A private company is deemed to be a public company :

(i) Where at least 25% of the paid-up share capital of a public company is held by aprivate company;

(ii) Where at least 25% of the paid-up share capital of a private company is held by oneor more bodies corporate;

(iii) Where a private company accepts public deposits;

(iv) Deemed public companies have become inoperative as per Companies (Amend-ment) Act, 2000.


B53��

10.3 PUBLIC COMPANY

10.3.1Definition of a public company

A public company means a company which :

(i) is not a private company;

(ii) has a minimum paid up capital of rupees five lakh; and

(iii) is a subsidiary of a company which is not a private company.

In other words, a public company is one which is not a private company. It is an association consisting of seven or more members, which is registered under the

Com panies Act.

10.3.2 Features of a public company:

(i) It requires a minimum of seven persons to form a public company. There is norestriction on the maximum number of members.

(ii) It can offer shares to the general public in order to raise huge financial resources.

(iii) Shares of a public company are freely transferable like movable property.

(iv) Shareholders have no control over the management of the company.

(v) A public company can choose any name, but it must add the word ‘Limited’ at theend of its name.

(vi) It cannot commence its operations until it obtains a ‘Certificate to Commence Busi-ness’ in addition to the ‘Incorporation Certificate’ from the Registrar of Companies.

10.3.3. Advantages (or merits) of a public company

The following are the advantages of a public company

(i) Limited liability : The liability of each member is limited to the extent of the facevalue of shares purchased.

(ii) Large membership : There is no upper limit as to the number of members. Thisdiffuses the risk of investment in shares.

(iii) Mobilisation of huge financial resources : This form of organization can obtainlarge amounts of capital for carrying out large-scale operations.

(iv) Economies of large-scale production : Huge financial resources lead to a phenom-enal growth in the size of the company. This will result in greater division of labour,specilisation, more effective use of resources, bulk purchase of raw materials at lowerprices, etc.

(v) Professional management : The large size enables the company to acquire servicesof professional people in various field like accounting, finance, production, sales,etc. Thus, greater specilisation is possible in various fields of operation.

�� B54

(vi) Transferability of shares : Shares of a public company are freely transferable. Trans-ferability of shares enables an investor to increase or decrease his investment in acompany at any time. Transferability of shares reduces the risk of investment.

(vii) Safeguarding interest of shareholders : Strict legal regulations safeguard the inter-ests of the shareholders and people who deal with public companies.

(viii) Social benefit : Increase in production, improvement in quality and providing goodsand services at a cheaper rate ensures betterment of the society.

10.3.4 Disadvantages (or limitations) of a public company

The following are the disadvantages of a public company:

(i) Legal complexities : The formation of a public company is complex and expensive.

(ii) Separation of ownership and management : The management of the business iscontrolled, not by the shareholders in mass, but by their representatives called theBoard of Directors. Thus, management and ownership become separated.

(iii) Oppression of minority shareholders’ interests : All the affairs of a public com-pany are controlled by a set of Directors. The directors can do anything within thelimits of the Companies Act. Minority shareholders are oppressed and have no sayin the management of the company.

(iv) Delay in decision-making : It is rather difficult to take quick decisions on accountof disagreements among the Directors. Moreover, a public company has to observea good deal of legal formalities. As a result, there appears to be a huge delay indecision-making.

(v) Speculation in shares : Very often Directors indulge in speculation of shares fortheir personal interest. Speculation can create chaos in the stock exchange and candestabilize the company.

10.3.5. Differences between a private company and a public company


SlNo

1

2

3

4

5

Basis of differentiation

Minimum number of member

Maximum number of member

Transferability of shares

Raising capital from public

Number of Directors

Private company

Two

Fifty

Restricted

Not allowed

Minimum-twoMaximum- not limit.

Public company

Seven

Unlimited

Freely transferable

Allowed

Minimum-three;Maximum- as specifiedby the Article.

B55��

Basis of differentiation

Commencement of business

Holding of statutorymeeting andsubmission of statutory report

Filing of prospectus or astatement in lieu of prospectus

Name of company

Quorum at the annualgeneral meeting

Rotation of Directors

Procedure for formation

Index of members

Business secrets

Exemption from several legal restriction

Listing of sharesin stock exchange

Ability to make quick decisions

Protection to members

Financial and managerial re-sources

Scope for expansion

Disposal of shares

Liquidity of investment in shares

Minimum paid-up capital

SlNo

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

Private company

After obtainingcertificate ofincorpotation

Not required

Not required

Name must end with thewords Private Ltd.

Two

Need not retire by rotation

Simple and cheap

No need to maintain

Not requird to make widerpublicity of its affairs

Not required to observeseveral legal restrictions.

Not listed and quoted in thestock exchange

Possible.

Low protection

Small

Low

Not allowed.

Less liquid

One lakh.

Public company

After obtaining

certificate of commence-ment

Required to be submittedto the Registrar of Com-panies

Required

Name must andwith the word’ Limited’.

Five

Retire by rotation

Complicated andrelatively costly

Index to be maintained

Wide publicity to all theimportant discussion,state of affairs, etc.

Too many legal formali-ties and restriction tobe adhered to.Listed and quoted inthe stock exchange.

Not possibile.

High protection

Large.

High.

Allowed.

Greater liquidity.

Five lacs.

�� B56

10.4. INCORPORATION OF A COMPANY

The following documents are to be filed with the Registrar of Companies of the State in whichthe registered office of the company is to be situated :

(i) Memorandum of Association;

(ii) Articles of Association;

(iii) List of persons agreeing to act as Directors (their full address and occupations);

(iv) Statement of consent signed by each Director,

(v) A statement of Authorized Capital;

(vi) Address of the company’s registered office;

(vii) An undertaking by each Director to hold and pay for the qualification shares;

(viii) A statutory declaration by a chartered accountant or an advocate that all the legalrequirements of the Companies Act have been complied with.

The Registrar of Companies scrutinizes the above documents. If the documents are found to bein order, the name of the company is entered in the register. Then the Registrar issues a ‘certifi-cate of incorporation’ in favour of the company. This certificate gives birth to a company with aseparate legal entity. A private company can commence its business just after getting a ‘com-mencement certificate’ to start its operations in addition to an ‘Incorporation certificate’.

10.4.1. Raising of capital (for public companies only)

Capital subscription (i.e., raising of capital) is the third stage of formation of the company. Aprivate limited company does not require this stage as it does not collect funds by selling sharesto the public.

A capital subscription stage is required for public companies as they are to collect funds formthe members of the public at large by selling its shares and securities. So, with a view to raisingfunds, a public company, soon after its incorporation, has to arrange a meeting to deal with thefollowing matters :

(i) Issue of a prospectus or a statement in lieu of prospectus;

(ii) Appointment of bankers;

(iii) Appointment of a brokers for underwriting shares;

(iv) Appointment of a pro tem secretary;

(v) Conform to the guidelines issued by SEBI from time to time.

A public company issues a prospectus in order to invite the public to subscribe to the issue ofshares. A public company cannot allot shares to the public, unless the amount mentioned asminimum subscription is received within 120 days of the date of the issue of the prospectus.


B57��

The restriction of ‘minimum subscription’ is meant to prevent the formation of companies withan inadequate capital. In other words, the companies which can raise enough capital to meetthe minimum requirements are allowed to start their business. A company can allot shares tothe public provided the minimum subscription (as disclosed in the prospectus) has been raisedwithin 120 days from the date of issue of the prospectus.

10.4.2. Commencement of business of a public company

A public company cannot start the business without having a ‘certificate of commencement’from the Registrar. A ‘certificate of commencement’ is issued in favour of a public company bythe Registrar when the following conditions are fulfilled :

(i) A declaration that a prospectus or a statement in lieu of prospectus has been filedwith the Registrar.

(ii) A declaration that the amount of minimum subscription (as specified in the prospectus) has been received.

(iii) A declaration that the Directors of the company have paid for their qualificationshares.

(iv) A certificate by a Director or the secretary of the company that all the formalitiesrelating to the commencement of the business have been fulfilled.

If the Registrar is satisfied that all the conditions have been fulfilled, he issues a ‘certificate ofcommencement’ in favour of the public company. No public company can start its operationswithout obtaining a ‘commencement certificate’.

10.5.PROMOTION OF A COMPANY

Promotion is the discovery of business opportunities and the subsequent organization of funds,property and management ability into a business concern for the purpose of making profitstherefrom. Promotion is the first stage in the formation of a company. Promotion means vari-ous initial steps to be taken for the establishment of a company, before it comes into existence.

10.5.1.Definitions given by eminent authors :

(1) “Promotion is the process of organizing and planning the finances of a business enter-prise under the corporate form.” [L.H.Haney]

(2) “Promotion starts with the conception of the idea from which the business is fully readyto begin operations as a going concern.” [Guthman and Dougall]

Promotion is an idea which is developed into a concrete project accomplished by the incorpo-ration and floatation of a company. All the initial activities undertaken before the company isregistered are called promotional efforts. Persons who help in the promotion of a company arecalled promoters. These promoters are experts in the work of company formation.

�� B58

10.5.2 Meaning and definitions of promoter

There is no statutory definition of a promoter. But in simple terms, a promoter is one whousually performs the preliminary duties necessary to bring a company into existence and floatit. A promoter undertakes to form a company with reference to a given project and performsvarious formalities required for starting a company.

A promoter may be :

(a) an individual; (b) a firm; (c) an association of persons; (d) a company. Every individualconnected with the formation of a company cannot be called a promoter. Thus, the per-sons who assist the promoters in performing the various legal formalities, are not pro-moters (e.g., accountants, solicitors, professional advisors, tax consultants, etc.).

Definitions given by eminent jurists ;

(1) “A promoter is one, who undertakes to form a company with reference to a given objectand sets it going and takes the necessary steps to accomplish that purpose.”

[Justice C. J. Cokburn]

(2) “A promoter is one, who conceives a business opportunity and assembles resources totranslate a possibility into a reality.” [Justice Bowen]

A promoter is one, who identifies a business opportunity, analyses its prospects and takesthe initiative to form a company, taking into consideration the opportunities available.

10.5.3 Types of promoters

Depending on the nature of the promotion work, promoters can be classified as follows:

(i) Professional promoters : They are specialists in forming a new corporate enter-prise. After promoting an enterprise, they eventually hand over the control andmanagement to the shareholders of the company.

(ii) Occasional promoters : Promoters who are not involved in promotion work on aregular basis are called occasional promoters. Promotion is not their main occupa-tion, and after promoting a company, they go back to their original profession.

(iii) Financial institutions as promoters : Some financial institutions or financiers maytake up the promotion of a company. After the incorporation of the company, fin-anciers get their fixed remuneration and leave it. Banking and insurance companieshave been engaged as institutional promoters. These promoters provide technical,managerial and financial assistance for the promotion of new enterprises.


B59��

(iv) Enterpreneuring promoters : These promoters conceive and idea of the new busi-ness unit, do the necessary preliminary work in setting up the business unit andultimately control and manage the same. In India, most of the promoters belong tothis category.

(v) Technical firms as promoters : Engineers and technical experts sometimes pick upthe lucrative idea of business promotions. They are not in the promotional work ona regular basis. They take up the promotion of some company and then go back totheir earlier profession.

(vi) Government as a promoter : Since independence, the Government of India hasemerged as a big promoter of enterprises. The Government (Central or State or both)have become promoters for public sector undertakings, economic organizations,defence industries, oil and natural gas, etc.

(vii) Specialised institutions as promoters : The Government has set up special institu-tions to promote corporate enterprises in order to fill in the gaps in the industrialstructure of the country. National Industrial Development Corporation (NIDC),Industrial Bank of India, etc., are examples of such institutions. These institutionsprovide technical, managerial and financial assistance for the promotion of newenterprises.

10.5.4 Functions (or role) of a promoter

The functions of a promoter may be summed-up as follows:

(i) A promoter selects the line to business of a proposed company.

(ii) He studies the future possibilities of the business of the proposed company.

(iii) He decides the name of the company, objects of the company and also to decidewhere its registered office should be situated.

(iv) He prepares the memorandum of association and articles of association and filesthese documents with the Registrar of Companies.

(v) He takes necessary steps to get the company registered.

(vi) He makes necessary arrangements for the initial capital of the proposed company.

(vii) He selects the first Director of the proposed company.

(viii) He appoints the banker, auditors, brokers and legal advisors for the proposed com-pany.

(ix) He enters into preliminary contracts with different parties (i.e. vendors, underwrit-ers, etc.)

(x) He makes necessary arrangements for the allotment of shares and secrities.

�� B60

10.5.5 Qualities of a promoter

In order to perform the task of promotion successfully, a promoter must have several essentialqualities. A promoter must be well-acquainted with the social, economic, political and busi-ness conditions of the place where the business is to be established. He must be a person withimagination, organizing ability and resources. In brief, a successful promoter must possess thefollowing qualities:

(i) Organising ability; (ii) Farsightedness; (iii) Tactfulness and laborious; (iv) Self-confi-dence; (v) Perseverance and consistency; (vi) Risk-bearing capability; (vii) Honesty; (viii)Knowledge of company law and other related laws. (ix) Resourcefulness; (x) Salesman-ship.

10.5.6 Legal status of a promoter

Company law has not given any legal status to a promoter. In other words, legally, a promoter occupiesa peculiar position, as company law is silent in this regard. A promoter is neither a trustee nor an agentof the company which he promotes.

Truly speaking, a promoter stands in a fiduciary position towards the company. The fiduciaryposition of a promoter may be discussed as follows:

(i) The promoter must not make any profit from the company that he has promoted.

(ii) The promoter must not take advantage of his position in order to make any secretprofit.

(iii) The promoter must not indulge in any undue influence or fraud.

(iv) The promoter must give to the company the benefit of any negotiations or contractsinto which he enters.

10.5.7 Stages of promotionThere are six stages in the promotion of a company, which are as follows:

(i) Discovery of business opportunities : A promoter conceives the idea of forming acompany. A promoter is to discover the business opportunities, considering theavailability of human and non-human resources. He is to consider whether the ideais practical or feasible in the light of the proposed risks and profitability.

(ii) Detailed investigation of the idea conceived : Detailed investigation regardingcommercial feasibility is absolutely essential before capital is invested to imple-ment the idea conceived. Detailed investigation may relate to : (a) Market condi-tions (b) Demand for the product to be manufactured; (c) Estimated cost of produc-tion ; (d) Estimated profit margin, and (e) Capital requirement of the proposed busi-ness. Such an investigation gives a critical appraisal of the idea conceived and re-veals whether the idea is commercially feasible or not. The services of experts maybe needed to prepare a project report.

(iii) Verification of the results of investigation : The reports submitted by the investi-gators must not be accepted without getting them verified by a separate team ofimpartial experts.


B61��

(iv) Assembling of different elements of the business : When the results of the inves-tigation is favourable, the promoter should go ahead with the promotion of a com-pany

(iii) verification of the results of investigation : The reports submitted by the investi-gators must not be accepted without getting them verified by a separate team ofimpartial experts.

(iv) Assembling of different elements of the business : When the results of the inves-tigation is favourable, the promoter should go ahead with the promotion of a com-pany.

(v) Preparation of a financial plan for the business project : After considering all thefactors, the promoters proceed with the preparation of a financial plan for the pro-posed company. The Promoters are to decide what amount of capital is required atthe initial state. For this purpose, they are to approach banks, financial institutionsand underwriters. A company raises its capital through the issue of shares and de-bentures. While preparing the financial plan, promoters have to keep in mind thatadequate funds should be provided to launch the company.

(vi) Submission of necessary documents required for incorporation : It is necessary tosubmit certain documents to the Registrar of Companies in order to incorporate ajoint stock company. The documents involved are : (a) the memorandum of associa-tion; (b) the articles of association; (c) the prospectus; (d) the list of Directors; (e) theconsent of Directors; (f) the address of the company’s registered office; (g) statutorydeclarations, etc.

10.5.8 Other relevant concepts

(a) Minimum subscription: Minimum subscription means the minimum amount of capitalwhich a company requires for the starting of the business. The minimum subscriptionshould be received within 120 days after the date of the issue of the prospectus. Acompany cannot allot any shares unless the minimum subscription has been raisedthrough the application for shares. If this minimum amount is not collected within thestipulated period, the amount received from the applicants must be returned withinthe next 10 days (i.e., within 130 days after the issue of shares).

Minimum subscription is necessary to cover the following expenses :

(i) preliminary expenses;

(ii) underwriting commissions on sale of shares;

(iii) working capital;

(iv) the cost of any property purchased or to be purchased;

(v) payment of any money borrowed for the above purpose;

(vi) any other necessary expenditure.

�� B62

(b) Certificate of incorporation: This is certificate issued by the Registrar of Companies toa company, whereby the incorporation of the company is recognized. In order to obtainthe certificate of incorporation, a limited company has to file with the Registrar of Com-panies the following documents:

(i) Memorandum of Association;

(ii) Articles of Association;

(iii) List of first Directors;

(iv) Written consent of Directors to act as such;

(v) Address of the registered office of the proposed company;

(vi) Statutory declaration that the requirements of the Companies Act have beencomplied with.

On the filing of the above documents and the payment of necessary registration fees, ifthe Registrar is satisfied that everything is in order, he will register the name of thecompany and issue a Certificate of Incorporation. After this is done, the company comesinto existence.

(c) Certificate of commencement: A private company can commence business immedi-ately after the grant of the Certificate of Incorporation. A public company cannot com-mence business until it obtains a ‘Certificate of Commencement’ in addition to the ‘In-corporation Certificate’ from the Registrar of Companies.

The ‘Certificate of Commencement’ is issued in favour of a public company by the Regis-trar only when the following conditions are fulfilled :

(i) a prospectus or a statement in lieu of prospectus has been filed with the Regis-trar;

(ii) the minimum subscription has been raised;

(iii) the Directors have paid for their qualifications shares;

(iv) a certificate by a Director or the Secretary of the company that all the require-ments of the Companies Act regarding commencement of business have beencomplied with.

The Registrar issues the ‘Certificate of Commencement’ in favour of a public companywhen he is satisfied that all the conditions (mentioned above) have been fulfilled.

(d) Preliminary expenses : Expenses incidental to the formation of a company are knownas preliminary expenses. These expenses are of a capital nature, but they do not repre-sent any tangible assets.

Thus, preliminary expenses are treated as fictitious assets and these expenses are to bewritten off against Profit & Loss Account over a certain period.


B63��

The following items of expenses are usually treated as preliminary expenses :

(i) cost of preparing and printing the Memorandum and the Articles of associa-tion;

(ii) cost of preparing, printing and circulating the prospectus;

(iii) cost of registering the company (i.e., filing necessary documents, fees and stampduties, etc.);

(iv) cost of preliminary agreements;

(v) cost of preparing and printing the letter of allotment;

(vi) valuers’ fees for reports, certificates, etc.

10.6 BASIC DOCUMENTS OF THE COMPANY

10.6.1.Introduction

In the company form of organization, a large number of legal documents and papers are pre-pared and filed with the Registrar of Companies. However, the following documents are con-sidered most important :

(A) Memorandum of Association;

(B) Articles of Association;

(C) Prospectus or statement in lieu of prospectus.

Now we shall discuss briefly each one of these documents:

10.6.2. Memorandum of Association

The Memorandum of Association is a document which contains the fundamental rules regard-ing the constitution and activities of a company. It lays down the objects and scope of activitiesof the company. A memorandum also states the limits to which a company can move. If acompany moves beyond the limits mentioned in the memorandum, it shall be considered ultravires. Thus, a Memorandum of Association is the charter of a company.

Definition according to the Indian Companies Act :

“Memorandum means the Memorandum of Association of a company, as originally framedor as altered from time to time in pursuance of any previous Companies Act.”

[Section 2(28) of Indian Companies Act, 1956]

The memorandum governs the relationship of the company with the outside world. Thecompany has to work within the limits laid down in the memorandum. The memoran-dum is the foundation upon which the superstructure of the company is built.

�� B64

10.6.3 Importance of Memorandum of Association

(1) Basis of incorporation : It is the basis of incorporation of a company. A companycannot be registered without filing this document.

(2) Informing the name, address, object, capital and liability of the company to out-siders : Every outsider can easily obtain information about the company regardingits name, address, object, capital and liability, etc., through the Memorandum ofAssociation.

(3) Determining the extent of working of the company : It lays down the objects andscope of activities of the company. It also states the limits up to which a companycan move. Any activity outside the scope of the memorandum will be ultra viresand void.

(4) Unalterable document : The provisions of this document cannot be changed with-out passing a special resolution (passed by 75% majority). In certain cases, the changescan be made by seeking permission from the Company Law Board or Central Gov-ernment.

(5) Determining the relationship between the company and others : It enables outsidesto know whether the company is authorized to enter into a particular transaction ornot.

10.6.4 Contents (or clauses) of the Memorandum of Association

The Memorandum of Association contains the following clauses :

(i) Name clause; (ii) Registered office (i.e., domicile) clause; (iii) Object clause; (iv) Liabil-ity clause; (v) Capital clause; and (vi) Association (or subscription) clause.

(i) Name Clause : The name of the proposed company is mentioned in this clause.The name of a company must end with the word ‘Limited’ in the case of apublic company and the words ‘Private Limited’ in the case of a private company. The name should not be identical with the name of any existing company. The name should not create an impression that the company is carryingon the business of some other existing company. The name should not be misleading (i.e., creating confusion regarding its nature of business).

(ii) Registered office (i.e., domicile) clause : The name of the ‘State’ in whichthe registered office of the company is to be situated is mentioned in this clause.This clause determines the jurisdiction of the Registrar of Companies and thecourt. This clause also ascertains the nationality of the company (whether thecompany is an Indian company or a foreign company). The full address of theregistered office must be communicated to the Registrar of Companies forfuture communication.

(iii) Object Clause : This clause states the object with which the company is proposed to be established. A company is not legally entitled to do any businessother than that specified in its object clause. The object clause should include


B65��

(i) main objects to be pursued after incorporation;

(ii) incidental objects ancillary to the attainment of the main objects;

(iii) other objects not included in (i) and (ii) above.

The object clause must not include anything which is :

(i) illegal or opposed to the public interest;

(ii) against the general law of the country; and

(iii) contradictory to the Companies Act itself.

(iv) Liability clause: This clause states the nature of liability of the members of thecompany (i.e., whether limited by shares or by guarantee or unlimited) :

(i) In case of a company limited by shares, members’ liability is limited to the facevalue of the shares.

(ii) In case of a company limited by guarantee, the liability clause must state theextent of liability of each individual member in the event of its being wound up.

(iii) In case of an unlimited company, the liability clause does not appear in thememorandum of association.

(v) Capital clause : This clause states the total capital of the proposed company.The amount of capital as stated in the memorandum is known as the authorized capital of the company. A company cannot collect funds exceeding theauthorized capital.

The division of capital into equity share capital and preference share capital shouldalso be mentioned. The number of shares in each category and their value should begiven in the memorandum.

(vi) Association (or subscription) clause : The names, addresses, signatures anddescriptions of the signatories to the memorandum are given in this clause.This clause also states the amount and number of shares taken by the signatories of the memorandum. The number of signatories to the memorandum shallnot be less than : (i) Seven (in case of a public company), and (ii) two (in caseof a private company).

10.6.5 Alteration of the Memorandum of Association

The different clauses of the memorandum can be altered according to the procedure and modelaid down in the Companies Act, by passing an ordinary or special resolution. Under certaincircumstances, the approval of the Government is necessary to alter the memorandum.

(1) Alteration of name clause : A company can change its name in the following ways

(i) By a special resolution at a general meeting with the written approval of theCentral Government.

�� B66

(ii) If the name registered by it is identical to the name of an existing company, theregistered name can be changed by passing an ordinary resolution and by ob-taining a written consent of the Central Government.

(2) Alteration of registered office : A company may change its registered office: (a) within the same city; (b) one city to another city within the same State,and (c) from one State to another.

(i) If the registered office is to be shifted from one locality to another within thesame city, an ordinary resolution will be sufficient.

(ii) If the registered office is to be shifted from one city to another city within thesame State – a special resolution is required.’

(iii) If the registered office is to be shifted from one State to another State – a specialresolution as well as sanction of the court is required.

(3) Alteration of the object clause : The object clause cannot be altered as aroutine affair. The object clause of a company may be changed by passing aspecial resolution and by obtaining the sanction of the court on the followinggrounds :

(i) to carry on its business more economically or efficiently;

(ii) to enlarge the area of its operations;

(iii) to attain its main purpose by new or improved means;

(iv) to sell the whole or part of the company’s property;

(v) to amalgamate with any other company;

(vi) to restrict any of the objects specified in the memorandum.

(4) Alteration of capital clause : A limited company, having a share capital, mayalter its capital clause by passing an ordinary resolution in the general meeting for the following purposes :

(i) increasing its share capital; (ii) consolidating and dividing its capital intoshares of larger amounts; (iii) converting its fully paid up shares into stock;(iv) reconverting stock into fully paid up shares; (v) sub-dividing its sharesinto shares of smaller amounts.

But, for the deduction of share capital, a special resolution and confirmation by thecourt are necessary.

(5) Alteration of liability clause : The liability clause cannot be changed so as tomake the liability of the members unlimited. However, if the members of apublic limited company are reduced to below seven, the liability of the members automatically becomes unlimited. Liability of the Directors, and managing Director may be made unlimited by altering the articles of associations.


B67��

10.6.6 Articles of Association

The Articles of Association is a document which contains the rules and regulations for theinternal management of the company. It prescribes bye-laws for the general management ofthe company. It lays down the rules by which the objects of the company are to be carried out.The articles define the duties, the rights and powers of the governing body as between them-selves and the company at large. Every company is required to file its articles of associationalong with its Memorandum of Association with the Registrar of Companies at the time of itsregistration.

10.6.7 Definition according to the Indian Companies Act :

“Articles mean the Articles of Association of a company as originally framed or as ateredfrom time to time in pursuance of any previous Companies Act.”

[Section 2(2) of Indian Companies Act, 1956]

Articles are concerned with matters in the routine conduct of the affairs of the company.The articles must not contain anything ultra vires the memorandum and contrary to theprovisions of the Companies Act.

10.6.8 Contents of Articles of Association

Some of the important contents of the Articles of Association are as follows:

(1) Matters relating to shareholders :

(i) types, number and denominations of shares;

(ii) the respective rights of different types of shares;

(iii) methods of making an issue of share capital;

(iv) procedure for making calls and allotment of shares;

(v) procedure for issue of share certificates and share warrants;

(vi) conversion of shares into stock, lien of shares, etc.;

(vii) alteration of share capital;

(viii) voting powers of the shareholders;

(ix) procedure of forfeiture, re-issue and surrender of shares;

(x) the amount of minimum subscription;

(xi) procedure regarding company meetings;

(xii) procedure for transfer and transmission of shares.

(2) Matters relating to Directors :

(i) rules regarding appointment, re-appointment, remuneration, reward, etc., ofthe Directors;

(ii) rules regarding qualification and disqualification of Directors;

�� B68

(iii) procedure for retirement and removal of Directors;

(iv) rules regarding borrowing power of Directors;

(v) rules regarding conducting meeting of Directors;

(vi) rights and liabilities of Directors;

(vii) rules for fixation of maximum and minimum Directors, etc.

(3) Other matters :

(i) procedure for audit of company accounts;

(ii) procedure of winding-up of the company;

(iii) rules regarding keeping of books of accounts;

(iv) borrowing of funds from the public and the rate of interest thereon;

(v) commission and brokerage for selling shares to underwriters;

(vi) rules regarding declaration of dividends and capitalization of reserves;

(vii) rules regarding use and custody of common seal;

(viii) interest rates on calls-in-advance and calls-in-arrear.

10.6.9 Alteration of Articles of Association

Articles of Association concern themselves with the internal management of the company.Such matters are not permanent in nature and in course of time the policies of the companymay undergo charges. In such a situation, the company may alter its Articles by passing aspecial resolution.

(i) The alteration must be made for the benefit of the company.

(ii) The alteration can only be made by a special resolution.

(iii) The alteration must not sanction anything illegal.

(iv) The alteration must not in any way increase the liability of the existing members.

(v) The alteration must not constitute a fraud on the minority.

(vi) The alteration must not be detrimental to the provisions of the Companies Act.

(vii) The alteration must not cause any breach of contract with an outsider.

(viii) The alteration must not contravene any clause of the memorandum.


B69��

10.9.10 Comparison between Memorandum and Articles of Association

Sl. No. Basis ofdifferentiation

Memorandum of Association Articles of Association

1. Nature ofdocuments

Memorandum is thefundamental charter of acompany. A company functionswithin the limits laid down inthe memorandum.

Articles are subsidiary to thecharter. Articles contain by-laws and rules regarding day-to-day working of thecompany.

2. Scope Memorandum states therelationship between thecompany and an outsider.

Articles contain provisions forinternal management of thecompany.

3. Objectives Memorandum defines theobjects of the company.

Articles define the rules forcarrying out the objects of thecompany.

4. Alteration in thedocument

Memorandum cannot bealtered easily. It requires courtconfirmation.

Articles can easily be alteredwithout the confirmation of thecourt.

5. Limitations A company cannot do anythingbeyond the scope of theMemorandum. Any act beyondits scope will be void.

Any act done beyond theprovisions of the Articles willnot be void as it can be alteredby passing a special resolution.

6. Registration Registration of Memorandum iscompulsory for any company.

Registration of Articles is notnecessary in case of a publiccompany. Public company mayopt for Table-A of Schedule-1 forits incorporation purposes.

7. Application ofrules

Memorandum of association isbased on the doctrine ofconstructive notice.

Articles of Association arebased on the doctrine of indoormanagement.

8. Provision and itsobservations

Memorandum cannot containsanything contrary to theprovisions of the CompaniesAct.

Articles are subsidiary to boththe Memorandum andCompanies Act. Articles cannotcontain anything contrary toboth.

9. Violation Company cannot violate theclauses of the Memorandum.There is no remedy for ultravires acts.

Company may go beyond thescope of the Articles (but withinits powers). Outsiders maypresume that Articles arecomplies with.

10. Necessity This document is a must forgetting a company registered.

All companies are not requiredto have their own Articles ofAssociation. Public companiesmay adopt Table –A of Schedule-1 of Companies Act. ButArticles are a must for a privatecompany.

�� B70

10.6.11 Prospectus

A prospectus is a document inviting the general public to subscribe to the share capital of apublic company. A prospectus is issued by a public company after obtaining the ‘certificate ofincorporation’ from the Registrar. The facts and figures stated in the prospectus are meant topersuade the public to purchase shares or debentures of the company. A private companyneed not require to issue a prospectus, as it cannot invite the public to subscribe to its shares.

A prospectus is the only window through which the potential investors can look into the sound-ness of the company’s venture. The prospectus is placed before the public for raising necessaryfunds. The investors must, therefore, be given a complete picture of the company’s future ac-tivities, efficiency and integrity of its Directors and the profitability of investment. A prospec-tus must be dated and signed by the Directors. A company must get its minimum subscriptionwithin 120 days from the issue of prospectus.

10.6.12 Characteristics of a prospectus

The important characteristics of a prospectus are as follows:

(i) It is a document described or issued as a prospectus.

(ii) It includes any notice, circular, advertisement, etc., inviting deposits fromthe public.

(iii) It is an invitation to the public to subscribe to the shares or debentures ofthe company.

(iv) It is a document through which the company secures the capital requiredfor carrying on its business.

10.6.13 Purposes for the issue of a prospectus

The following are the main objects of issuing a prospectus :

(i) A prospectus brings to the notice of the public that a new company hasbeen formed.

(ii) It provides detailed information about the company to the general investors.

(iii) It outlines the terms and conditions of issue of shares and debentures.

(iv) It highlights the present position and the future prospects of the company.

(v) It reflects the business policies and programmes of the company.

(vi) It identifies the person who can be held responsible for misstatements inthe prospectus.

10.6.12 Contents of a prospectus

A prospectus should contain information on the following matters :


B71��

(i) Name and full address of the company.

(ii) Existing and future activities of the company.

(iii) Composition of the Board of Directors.

(iv) Qualification shares of the Directors and their remuneration.

(v) Capital of the company, the number of shares and the amount of each share.

(vi) Rights and dividends attached to different classes of shares.

(vii) Preliminary expenses incurred by the company.

(viii) Minimum subscription and the amount payable on application, allotment andcalls on shares.

(ix) Remuneration of the Managing Director.

(x) Names and address of auditors and underwriters of the company.

(xi) Restrictions on the powers of the Directors.

(xii) Full particulars of the promoters, brokers, bankers, etc.

(xiii) Nature and extent of interests of each Director in the company’s promotion.

(xiv) Details regarding the agreement to purchase property for the company andnames of the vendors.

(xv) The amount of minimum subscription to be received before allotment of shares.

(xvi) Inspection of books of accounts of the company.

(xvii) Amount payable on application on an allotment and on different calls.

(xviii) Time of opening and closing the subscription list.

(xix) Revaluation and reduction of share capital.

10.6.15 Statement in lieu of a prospectus

If a public company does not issue a prospectus, it can issue a statement in lieu of prospectus.The statement in lieu of prospectus is drafted in accordance with the form set out in Part –I ofSchedule – III of the Companies Act. It contains almost the same information as is contained inthe prospectus. It should not contain any misleading or untrue statement. A statement in lieuof prospectus must be signed by every person named therein as a Director.

10.6.16 Liability for false statement in the prospectus

A prospectus is an open invitation to the public to subscribe to the shares or debentures of acompany. It must disclose all relevant facts and figures very clearly. Greatest care should betaken to prepare a prospectus. Information provided in the prospectus should not be false andmisleading. It is the duty of the persons who are responsible for the issue of a prospectus not todisclose all relevant facts but also to see that any fact which may be relevant should not beomitted.

�� B72

If there is any false statement in the prospectus, it creates civil and criminal liability on the partof those who are responsible to publish the same. Persons authorizing the issue of the prospec-tus can be held liable for punishment with imprisonment up to two years and/or for a fine upto Rs. 50,000 for misstatement in the prospectus.

If the Directors have submitted certain false information with a fraudulent intention, they willbe liable for a fine up to Rs. 1,00,000 and/or imprisonment up to five years.

10.6.17 Misleading Prospectus and its Consequences

A prospectus constitutes the basic of the contract between the company and the shareholderand therefore, it must disclose all material facts (i.e., facts likely to influence the judgment of aprospective investor in deciding whether to take shares or debentures or not) very accurately.It must not misrepresent or conceal material facts and thereby improperly influence and mis-lead the prospective investor into becoming an allottee of shares or debentures and in conse-quence suffer loss (Peed vs. Gurney). A prospectus containing false, misleading, ambiguous orfraudulent statement of material facts, is termed as misleading prospectus and in that case amisled investor (original allottee of share who had relied in the prospectus and not a buyer inthe open market) is entitled to proceed against those who misled him.

What is a false or untrue statement? A general commendation even if too highly coloured is nota false statement, but to say that something has been done, when it is not so, is a misstatementof fact (Karberg’s Case). If there is omission of material facts from a prospectus or/and wherethe statement is ambiguous in the form and context in which it is included, the prospectus shallbe deemed to be untrue. (Sec. 65). Hence a prospectus should be honestly framed and shouldnot by any half statement of the truth or ambiguous phraseology give a false impression ormislead the investor for, the whole prospectus is to be read, and if, as a whole, if be misleading,those who issue it cannot escape on the ground that there is not a single statement whichstanding alone, can be challenged as false.

It must however, be observed that in order to call a prospectus a ‘misleading prospectus, theremust be misrepresentation of facts and not of law or expectation. For example, if a prospectusrepresents that the company’s shares will be issued at half their nominal value, whereas sec-tion 79 prohibits the issue of share at a discount exceeding ten percent. It is a misrepresentationof law and a person deceived by it will have no remedy. The facts of Shiromani Sugar Mills Ltd.v. Debi Prasad case was also similar. The prospectus in this case, stated that “the managingagents with their friends, promoters and directors have already promised to subscribe sharesworth six lakhs rupees.” But they actually subscribed much lesser number of shares. It washeld that there was no misrepresentation of facts and the prospectus was not misleading be-cause, “the only fact asserted was the existence of promise…and the existence of promise is notfalsified by the breaking of it”.

A person who subscribes for shares based on the misleading prospectus has certain remediesseparately against the company as well as against the directors, promoters and experts.


B73��

10.7 SHARES

The shares capital of a company is divided into shares distinguished by its appropriate num-bers. The shares shall be movable property transferable in the manner provided by the articlesof the company and subject to provision of the Companies Act, 1956.

The share capital of a company limited by shares shall be of three kinds only, namely : -

(a) Equity share;

(b) Preference share; and

(c) Sweat equity shares.

Preference capital means that part of the share capital which fulfils both the following require-ments, namely –

(a) that in respect of dividends, it carries or will carry a preferential right to be paida fixed amount or an amount calculated at a fixed rate, which may be eitherfree of or subject to income tax; and

(b) that in respect of capital it carries or will carry on a winding up or repayment ofcapital a preferential right to the payment of either or both of the followingamount, namely –

(i) any money remaining unpaid in respect of the amount specified in clauses (a)up to the date of the winding up or repayment of capital and

(ii) any fixed premium.

Sweat Equity Shares

Sweat equity shares mean equity shares issued at a discount or for consideration other thancash for providing know-how or making available rights in the nature of intellectual propertyrights or value additions, by whatever name called.

A company may issue sweat equity shares of a class of shares already issue if the followingconditions are fulfilled : -

(a) the issue of sweat equity shares is authorized by a resolution passed by thecompany in the general meeting;

(b) the resolution specifies the number of shares the value and the classes of directors or employees to whom such equity shares are to be issued;

(c) not less than one year has at the date of issue elapsed since the date on whichthe company was entitled to commence business;

(d) the sweat equity shares are issued in accordance with the regulations made bythe securities and Exchange Board of India in this behalf.

Every holder of shares in a company may at any time nominate in the prescribed mannerof shares upon the production of such evidence as many required by the Board may:

�� B74

(a) register himself as holder of the share, or

(b) transfer of the share as the deceased share holder could have been made.

Distinction Between Preference and Equity Shares

The important distinctions are –

(a) Preference shares are entitled to a fixed rate of dividend on and amount calculated at a fixed rate as a percentage of the face value of the shares. Equityshares on the other hand are entitled to a varying rate of dividend dependingupon profits of the company.

(b) Preferences shares can be cumulative. In other words during the year whenthe company does not make profits, the arrear dividends accumulate. In caseof equity shares the accumulation of the arrears dividends does not arise. Thisis because the entitlement to dividend is contingent upon the making of theprofit by the company.

(c) The holders of the preference shares have a priority over the holders of theequity shares to dividends. In other words, when a company does make profitand declare dividends, the dividends payable to the preference shareholderincluding the arrears of the dividend should be paid first before any dividendscan be declared to the equity shareholders.

(d) Preference shareholder also have a priority over the equity shareholder towards the repayment of capital in the event of winding up of the company.Preference share are redeemable after a specified periods of time. In other words,preference shares are entitled to get back their investment from the companyafter a fixed period of time as specified in the terms of issue of the preferenceshare.

(e) The preference shareholder do not have a right to vote at the meeting of theshareholders of the company unless it is a matter in which their rights areaffected. On the other hand equity shareholder have voting right on everyresolution which comes up before the meeting. The voting right of the equityshareholder are proportionate to the number of share held by them.

An exception to the rule denying the voting right on account of dividends being on ar-rears the voting right of the preference shareholder also would be proportional to thecapital paid up in respect of the preference shares bears to the total paid up equity capitalof the company.

Redemption of Preference Shares

If so authorized by its articles, preferences shares are liable to be redeemed at the option of thecompany. After the coming into force of the companies (Amendment) Act, 1988 redemption ofthe preference shares has been made mandatory. No company limited by shares after the com-mencement of the Companies (Amendment) Act, 1996 issue any Preference Shares which is


B75��

redeemable or is redeemable after the expiry of a period of 20 years from the date of its issue.Preference shares shall be redeemed subject to the following conditions, namely :-

(a) No such shares shall be redeemed except out of profit of the company whichwould otherwise be available for dividend or out of the proceeds of a fresh issuesof shares made for the purposes of the redemptions:

(b) No such shares shall be redeemed unless they are fully paid.

(c) The premium if any payable on redemption shall have been provided for out ofthe profits of the company or out of the company’s shares premium accountbefore the shares are redeemed.

(d) Where any such shares are redeemed otherwise than out of the proceeds of afresh issue, there shall out profits which would otherwise have been available fordividend, be transferred to a reserve fund to be called the capital redemptionreserve account, a sum equal to the nominal amount of the shares redeemed andthe provision of the Companies Act relating to the reduction of the shares capitalof a company shall except as provided in this section apply as if the capital redemptions reserve account were paid-up shares capital of the company.

However the redemptions of preference shares will not attract the problems of redemp-tion of capital.

Issue of Shares at a Premium

Where a company issues shares at a premium whether for cash or otherwise, a sum equal to theaggregate amount or value of the premiums on those shares shall be transferred to an account,to be called the shares premium account and the provisions of the companies relating to thereduction of share capital of a company shall except as provided herein apply as if sharespremium account were paid on share capital of the company.

The share premium account may be applied by the company :

(a) in paying up unissued shares of the company to be issued to members of thecompany as fully paid bonus shares.

(b) in writing off the preliminary expenses of the company.

(c) in writing off the expenses of or the commission paid or discount allowed on anyissue of the shares or debentures of the company.

(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.

�� B76

Right Shares

Whenever a company proposes to increase the subscribed capital by issue of further shares atany time after the expiry of two years from the formation of the company or at any time afterthe expiry of one year from the allotment of shares by that company made for the first timeafter its incorporation whichever is earlier. It shall offer such shares to holder of equity sharesof the company as on the date of the offer in proportion to the capital paid up as on that date.As the existing holders of equity shares are given the right of preemption these shares arecalled the Right Shares.

A private company or a deemed private company which retains the restrictive clauses of aprivate company in the Articles need not offer to the existing shareholders.

When a special resolution is passed by the company in general meeting to the effect that fur-ther shares may be allotted at the discretion of the board of directors to persons other than theholders of equity shares the shares can be offers to the general public.

However, the issue of right shares will take place in accordance with the guidelines of theSecurities and Exchange Board of India.

Bonus Shares

The issue of bonus shares by a company is a common feature. When a company is prosperousand accumulates a large surplus, it converts this surplus into capital and divides the capitalamong the members in proportion to their right. This is done by issuing fully paid sharesrepresenting the increased capital. The shareholders to whom shares are allotted have to paynothing. The purpose is to capitalize profit which may be available for division or to utilisequasi-capital gains. Bonus share go by the modern name of “capitalization shares”

The company transfers before declaring dividends for a financial year certain portion of theprofit as prescribed by the companies (Transfer of Profit to Reserve) Rules, 1975 to the reserveof the company.

The company shall ensure strict compliance with the following financial parameters for deter-mining the quantum of the bonus issue :-

(i) that the bonus issue is made out of the free reserves built out of the genuineprofits or shares premium collected in cash only;

(ii) that Reserve created by revaluation of fixed assets or without accrual of cashresources are not capitalized.

The bonus issue could not be made until the expiry of 12 months from any public or rightissue and there is no restriction as to the timing of one bonus issue and another. Thebonus issue should be made within a period of 6 month from the date of approval of theBoards of Directors thereof and the company has no option of changing that decision. TheSEBI has issued guidelines for the capitalization of reserves and issue of bonus shares.


B77��

The Articles should provide the issue of bonus shares by capitalization of reserves. If there isno such provision the Articles are to be altered suitably. Further it is be observed that theexpanded capital after the issue is within the authorized share capital of the company. Other-wise the authorized capital is to be increased suitably.

Depository System in India

Over the last decade, the capital markets has been growing by leaps and bounds, India has thelargest number of listed companies in the world today. As a result investors have to face a lot ofinconvenience in effective registration of securities in their favour and to ensure that they re-ceive their rightful share of dividend, bonus, right and other benefits. The large numbers in theCapital Market have also given rise to a large amount of paper work, bringing with it theassociated problems.

The physical movement of (share) certificates and their transfer are fraught with a number ofproblems and are usually cumbersome and time consuming. Further with the increase in thevolumes of trading, there has been an increase in the number of bad deliveries and this hasintroduced increased risk in settlement of trade. The threat of wrong/forged signatures, stolenshares, fake certificates etc. need to be contained if the investors are not to shy away fromtrading and investing in the India market.

All these factors served as barriers to the entry of an investor in to the market. This failure gavethe idea of setting up of an electronics system with scripless trading and quick settlementcycles.

The Government of India promulgated the Depositories Ordinance in September 1995. Securi-ties and Exchange Board of India (SEBI) notified Regulations under the ordinance in May,1996, in order to provide the regulatory framework for the depositories. National SecuritiesDepository Limited (NSDL) was registered on the 7th June 1996, with the SEBI as the first de-pository in the country.

This new system of keeping ownership record in the form of electronic holdings has a numberof advantages over the existing system of physical securities. In the new system, the Physicalmovement of securities would be replaced by a book entry system, under which the ownershipwould be transferred by electronics entries.

The Depositories Act, 1956 makes a provision for the setting up of multiple depositories inIndia. The investor has been granted the option of holding securities in a physical or demate-rialized form. Thus it is matter of choice for the investor as to whether he wants to avail of thedepository services.

All rights with respect to the securities held in the depository will with the beneficial owner(investor) and not with the depository. The depository acting as the registered owner only.When transacting through a depository, the investor will not be required to pay stamp duty ontransfer of shares or the unit of mutual funds within the depository.

The depository will interface with the investor through market intermediaries called Deposi-tory Participants (DP). The depository will hold beneficial owner-level information through

�� B78

its networks of DP. This will facilitate proper distribution of benefits arising out of the investor’sholding such as dividend, interest, bonus and right as on a given record date by the issuercompany of its registrar and transfer agent.

The SEBI (Depository and Participants) Regulations, 1996 specify the norms for the function-ing and operations of depositories. The regulations have selected various categories of marketparticipants who are eligible to become depository participants.

10.8 DEBENTURES

Debentures constitute a valid instrument by which long term and medium term financial needsare met by raising loans from the public. Debentures represent loan capital and the debenturesand transferable securities as in the case of shares through stock exchanges. The debenturesoffer a predetermined fixed return by way of interest and are redeemed after a stipulated pe-riod. They may be offered privately without public announcement in the newspaper.

Debenture is defined to include debenture stock, bond and other instruments of companywhether constituting a charge on the assets of the company or not. A debenture shall not ceaseto be so merely because it is not secured by charge.

There is no precise definition of the term and it can only be concluded that any instrumentsthat creates or acknowledges a debts is a debentures. In CIT v. Cochin Refineries Ltd. (1982) itwas held that where a company issued “notes” to secure a dollar loan, such “notes” and loan.Since a debenture means a document which creates or acknowledges a debt the distinctionbetween a debenture and loan can be understood from the following passage :

The substance of a loan is a right in the creditors to demand repayment and the substance of adebt is a liability upon the debtor to replay the money [per Chakravarty J. in Ram RatanKarmakar v. Amulya Charan Karmakar].

The debentures have the following features namely :

1. It is an instrument issued by the company acknowledging debt.

2. It provides for the payment of or acknowledging the indebtedness in a specifiednominal value or face value of the debenture.

3. It carries a specified rate of interest.

The debentures may be registered debentures or bearer debentures. Registered debentures aredebentures which are payable to the holder thereof whose name is registered in the registeredof debenture holders. Registered debentures certificates are transferred by executing a deed oftransfer as in the case of shares. A bearer debenture is transferred by simple delivery.

Debentures could be secured or unsecured. But normally most of the debentures are secured.Repayment of the indebtedness by way of debenture is secured by a charge on the assets of thecompany.


B79��

Debentures could be redeemable or irredeemable. Redeemable connotes that the borrowingwill be repaid by the company within a fixed term. In case of irredeemable debentures there isno obligation on the part of the company to repay the amount of the borrowing raised by wayof debentures.

Debentures may be convertible into shares. This indicates that after a particular period of timeof issue of debentures, the debentures may be converted into shares at a specific rate of conver-sion. In other words till the date of conversion of the debentures into shares debenture holderswould be earning interest from the company at a specific rate of interest . On conversion of thedebenture, debenture would be cancelled and shares would be issued in favour of the deben-ture holders. After such conversion the debenture holders become the shareholder of the com-pany and will not be entitled to may fixed return by way of interest but will be entitled to thedividends that may be declared by the company.

Since the debentures are corporate securities akin to the shares, almost all the rules, regulationsand restrictions in respect of issue of shares are applicable to debenture. Some of the importantstatutory provisions relating to the debentures are discussed below :

1. The power to issue debenture shall be exercised by the board of directors at ameeting [s. 292(1) (d)]

2. No company shall issue any debenture carrying voting right at any meting ofthe company whether generally or in respect of particulars classes of business.[s. 117]

3. Debentures which have been issued and redeemable may be kept alive for reis-sue [s.121]

4. Every debenture holder is entitled to a copy of the debenture trust deed within7 days of making a request for such deed.

5. A contract to take up and pay for debentures can be enforced by a degree forspecific performance [section 122]

6. The holders of the debenture have a priority under section 530 of the Act, ifwinding up were to take place. If the debenture are secured by floating chargeon the assets of the company the creditors with fixed charges will be paid firstand the debenture holders with a floating charge on the assets will get nextpreference in the list of priorities for repayment.

7. Every company shall keep a register of debenture holders in the same manneras the register of members.

8. A debenture holder is not entitled to the balance sheet and profit and loss ac-count of the company [section 219]

Every holder of debenture of a company may at any time nominate in the prescribedmanner a person to whom his debenture of the company shall vest in the event of hisdeath.

�� B80

10.9 BOARD OF DIRECTORS

Introductin - when a Company is incorporated under the companies Act 1956, it becomes alegal entity capable of exercising all its function. For example, a company can own property,enter into contracts and even be guilty of certain offences.The company can only act throught some human agency. It being impracticable for all themember of company to conduct its affairs; they elect their representative for this purpose.These elected representatives are usually known as Directors. Every public company (otherthan a public company which has become such by virtue of sec 43-A) must have at least threeDirectors. Every other company must have at least two Directors. Directors of a company col-lectively are referred to as ‘’the Board of Directors.’’Nobody corporate association or firm shall be appointed director of a company. Only aninduividual can be a director of a company.

How director exercise their powers?

Subject to any special provisions in the articles, powers delegated by a company to its directorsmust be exercised at properly convened meeting referred to as Board Meeting.In the case of every company a meeting of its Board of Directors shall be held at least once inevery 3months’ and at least four such meetings shall be held in every year.Provided that the Central Government may, by notification in the official Gazette, direct thatthe provisions of this section shall not apply in relation to any class of companies or shall applyin relation thereto subject to such exceptions, modifications or conditions as may be specifiedin the notification.

Notice- Notice of every meeting of the Board of Directors of a company shall be given in writ-ing to every director for the time being in India; and at his usual addres in India to every otherdirector.Quorum - A quorum is the preseribed minimum number of qualified persons authorized totransact the business at meeting. In relation to Board Meeting- quorum implies fully qualifiedand disinterested director who must be present at the meeting so as to enable the Board tolegally transact the business thereat.Accordingly by the quorum for a meeting of the Board of Directors of a company shall be1/3rd of its total strength (any fraction contained in that 1/3rd being rounded off as one) ortwo directors whichever is higher.Certain powers to be exercised by Board only at meetingThe Board of Directors of a company shall exercise the following power on behalf of the com-pany and it shall do only by means of resolution passed at meeting of the Board

(a) the power to make calls on sharehloders in respect of money unpaid on theirshares;

(b) the power to issue debentures(c) the power to borrow moneys otherwise than on debentures(d) the power to invest the funds of the company(e) the power to make loans.


B81��

10.10 MEETINGSWe are here concerned with general meetings of members/share holders. The general meet-ings of members are of vital importance in the working of a company. For although generalpower of management of a company are vested in the Board of Directors the consent of mem-bers on such major issues as specified in Section 293 has to be obtained in their general meet-ing. Otherwise also it is fair to provide an opportunity to the shareholders to come together adreview the working of the company. Hence the companies Act has provided for various typesof meetings of the shareholder of a company.

10.10.1 Types of general Meetings

There are three types of general meetings of shareholder :—

1. Statutory meeting.

2. Annual general meeting.

3. Extraordinary general meeting.

In addition to the above types of meetings, sometimes a meeting of a particular class ofshareholder may also be held. Such meetings are called “class meetings”. They are con-vened either by the company or by the court to affect variations in the right of that par-ticular class of shareholders [Sec. 106] or in connection with a scheme of arrangement[Sec. 394] or at the time of winding up of the company. A class meeting is not a generalmeeting but similar rules relating to convening and conducting of a meeting apply to it[Sec. 170].

10.10.2 Statutory Meeting

It is the first official general meeting of the shareholders. All public companies having a share capitalexcept unlimited companies are required to hold a statutory meeting compulsory. It implies that privatecompanies, unlimited companies and companies limited by guarantee but not having shares capital arenot required to hold such a meeting. Statutory meeting must be held after one month but within sixmonths of obtaining the certificate to commence business [Sec. 165(1)]. Unlike other types of generalmeetings, this meeting is held only once in the lifetime of company.

The object of the statutory meeting is to provide an opportunity to the members, as early as possible, ofacquainting themselves with the assets and properties acquired so far and to discuss the success of theflotation. The members are free to discuss any matter relating to the formation of the company or arisingout of the statutory report. But they cannot pass any resolution without previous notice of at least 21days.

10.10.3 Statutory Report

In order to enable the members to make the best use of this opportunity the directors are re-quired to prepare and send to every member a document known as the ‘statutory report’ atleast 21 days before the day on which the meeting is to be held. If the report is sent later it willstill be valid if it is so agreed to by a unanimous vote of the members entitled to attend and vote

�� B82

at the meeting [Sec 165(2)]. The report should be certified as correct by at least two directors,one of whom shall be the managing director where there is one, and must also be certified bythe auditors [Sec. 165(4)]. A copy of this report must be filed with the Registrar forthwith at thetime of sending it to members [Sec. 165(5)].

10.10.4.The statutory report must set out the following information : -

(i) The total number of shares allotted, distinguishing those issued otherwise thanfor cash and stating in the case of partly paid up shares, the extent to which theyare so paid;

(ii) The total amount of cash received by the company in respect of all the sharesallotted;

(iii) An abstract of the receipts and payments up to a date within seven days of thereport and the balance in hand. The abstract must show under distinc tive headings the receipts of the company from shares, debentures and other sources andshall give an account or estimate of the prelimi nary expenses of the companyshowing separately any commission or discount paid or to be paid on the issue orsale of shares or debentures;

(iv) The names, addresses and occupations of the company’s directors, auditors, managing director or manage secretary and the changes, if any, that have occurredsince incorporation.

(v) The particulars of any contract to be submitted to the meeting for approval andits modification done or proposed, if any;

(vi) The extent to which any under writing contract has not been carried out and thereasons therefore;

(vii) The details of arrears of calls due from directors and managing director are managers;

(viii) The particulars of any commission or brokerage paid or to be paid to directorsand manager in connections with the sale of shares or debenturesof the company.

If any default is made in filing the statutory report with the Registrar or in holding the statu-tory meeting, every officer of the company responsible for the default shall be punishable, witha fine up to Rs 500 [Sec. 165(a)]. Further if the statutory meeting is not held in time, the courtmay under section 433 order the compulsory winding up of the company on a petition filed byany member after the expiry of 14 days from the date an which statutory meeting was to beheld.


B83��

10.10.5 Annual General Metting

Every company must in each year hold in addition to any other meeting a general meeting asits annual general meeting [Sec 166(1)]. It is the most important meeting of the members of acompany. It is held each year with a view to reviewing and evaluating the overall progress ofthe company during a year. The annual general meeting is sometimes called ordinary generalmeeting as usually it deals with the so called ordinary business. The following ordinary busi-ness must be transacted at the annual general meeting of a public company and a subsidiarythereof [Sec 173(1)].

(i) The consideration of the Annual Accounts, Balance sheet and the Reports ofthe Board of Directors and Auditors.

(ii) The declarations of a dividend.

(iii) The appointment of directors in place of those retiring, and

(iv) The appointment of and the fixation of the remuneration of the auditors.

Any other business on agenda except that listed above shall be considered as special business.It is to be noted that in the case of extraordinary general meeting all business shall be treated as“special business” [Sec 173(1)(b)]. It is relevant to state that the ordinary business required anordinary resolutions while the special business may require ordinary or special appointmentof auditors although it is an item of ordinary business in the case of a company in which notless than 25% of the subscribed share capital is held whether singly or jointly by a public finan-cial institutions or a Government Company or Central Government or any State Governmentor a nationalized bank or a general insurance company.

It may be noted that an independent private company may make its own provisions by itsarticles in respect of ‘ordinary business’ to be transacted at an annual general meeting.

10.10.6 Other Statutory Requirements

(1) The first annual general meeting of a company must be held within 18 monthsfrom the date of its incorporation, and if such general meeting is held withinthat period, it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation or in the following year. It may benoted that there can be no extension of period beyond 18 months in case of thismeeting even by the Registrar.

(2) Subsequent annual general meeting must be held each year within six monthsof the end of the company’s financial year; but the interval between any twoannual general meeting must not be more than fifteen months. The Registrarmay, however, for any special reason extend the above lime by a period byexceeding three months.

�� B84

In connection with subsequent annual general meetings it is worth noting that theholding of an annual general meeting in each calendar year is a statutory neces-sity, and it is not enough that they are held within fifteen months of each other.There should be one meeting per year and as many meeting as there are years.Further, though the annual general meeting of a company may be adjourned to asubsequent date and the adjourned meeting is to be deemed to be a continuationof the earlier meeting, the adjourned meeting too must be held within fifteenmonths of the previous meeting.

(3) The annual general meeting must be held on a working day during businesshours at the registered office of the company or at some other place within thecity where the registered office of the company is situated.

(4) At least twenty-one days written notice to call an annual general meeting mustbe given to every shareholder, directors, and auditors of the company, and toevery such person on whom the shares of any deceased or insolvent membermay have devolved. The meeting may be held with a shorter notice, if it is soagreed unanimously by all members entitled to vote in such a meeting. An independent private company may, however, by its articles make its own regulations as regards length of period of notice and to whom it should be given.

A copy of Directors Report, audited Annual Accounts and Auditor’s Report must be annexedto every such notice.

The holding of annual general meeting is also governed by Sections 171 to 186 which containprovisions relating to convening and conducting of all types of general meeting under the Act.

10.10.7 Default in Holding the Annul General Meeting

If a company fails to call an annual general meeting within the prescribed time limits, theCompany Law Board may, on the application of any member of the company, call or direct thecalling of the meeting and give such ancillary consequential directions as it thinks expediter inrelation to the calling, holding and conducting of the meeting. The directions that may begiven by the Company Law Board may include a direction that one member of the companypresent in person or by proxy shall be deemed to constitute a meeting.

Further the company and every officer who is in default is liable to a fine which may extent tofive thousand rupees and in the case of a continuing default, with a further fine which mayextend to Rs. 250 for every day after the first during which such default continues.

10.10.8. Extraordinary General Meeting

All general meetings other than the statutory and annual general meetings are called extraor-dinary general meetings. Regulation 47 of Table A defines :

All general meetings other annual general meeting shall be called extraordinary general meet-ing. These meetings may be convened by the company at any time. The business transacted atan extraordinary general Meeting comprises anything which cannot be postponed till the next


B85��

annual General Meeting e.g. changes in memorandum and articles of association reductionand reorganization of share capital, issue of debentures, etc. All business transacted at thismeeting is called special business [Sec. 173 (1) (b)] The convening and conducting of this meet-ing is governed, like the annual general meeting by Sections 171 to 186.

Extraordinary general meeting may be called –

(1) By the directors. The directors may, whenever they think fit, convene a meetingby passing a resolution to that effect in the Board’s meeting.

(2) By the directors on requisition [Sec. 469]. The directors must convene anextraordinary general meeting on the requisition (written demand) of membersholding not less than 1/10th of the total voting rights on the matter of requisition.The requisition must state the matters for the consideration of which the meetingis to be called. It must be signed by the requisitionists and deposited at the registered office of the company. The directors should, within 21 days from the dateof the deposit of a valid requisition, move to call a meeting and should give 21days notice to members for calling such a meeting and the meeting should actually be held within 45 days from the date of the requisition.

It maybe noted that the requisitionists are not bound to disclose reasons for theresolution they propose to move at the meeting. Further, no business other thanthe business for which the meeting has been expressly convened can be transacted at the requisitioned meeting.

(3) By the requisitionists themselves. If the directors fail to call the meeting withinafore mentioned time-limits, the requisitionists, or such of the requisitionists asrepresent not less than 1/10th of the total voting rights of all the members, maythem selves convene a meeting within three month of depositing requisition. Sucha meeting should be called in the same manner, as nearly as possible, as that inwhich meeting are called by the Board. Any reasonable expenses incurred by therequisitionists must be repaid to them by the company, and any sum so paid shallbe retained by the company out of-any sums due or likely lo become due to thedirectors in default.

(4) By the Company Law Board [Sec. 186]. If for any reason it is impracticable locall or conduct an extraordinary general meeting, the Company Law Board may,either of its own motion or on the application of any director or any memberwho would be entitled to vote, order a meeting to be called, held and conductedin such manner as the Company Law Board thinks fit and may give such directions as it thinks expedient, including a direction that one member present inperson or by proxy shall be deemed to constitute a meetings.

It may be noted that unlike an annual general meeting, an extraordinary generalmeeting can be convened on a public holiday and at a place other than the regis-tered office of the company or the city in which the registered office is situated.

�� B86

10.10.9 Proxies

A proxy is a member’s authorized agent for the purpose of voting. The term is also applied tothe instrument by which the appointment to act on his behalf is made by the members. Asper Section 176 the provisions relating to proxies are as follows :

(1) Members of a company having share capital have a statutory right to appointproxies, notwithstanding anything to the contrary in the articles. In other wordsproxies may be appointed if allowed in the articles.

(2) Unless the articles otherwise provide, a proxy shall not be allowed to vote excepton a poll.

(3) Unless the articles otherwise provide, a member of a private company is not entitled to appoint more than one proxy to attend on the same occasion. (For everyresolution poll is taken separately and for every resolution separate proxy may beappointed in a public company).

(4) A proxy must be in writing, in the proper form duly signed by the appointer andstamped. If the appointer is a body corporate, the instrument of proxy should beunder its seal and be signed by a duly authorized officer.

(5) A proxy may be lodged at the company’s office not later than 48 hours before thecommencement of the meeting. If the articles of a company other than an independent private company require a longer period than 48 hours, that will be inoperative and shareholder will have the right to deposit proxies 48 hours beforethe meeting.

(6) For each meeting a separate proxy is required.

(7) A proxy need not be a member of the company.

(8) A proxy shall not have any right to speak at the meeting.

(9) Every notice calling a general meeting must suit with reasonable prominence thata member is entitled to appoint a proxy and that the proxy need not be a member.If default is made in complying with this provision every defaulting officer is punishable with fine which may extend to one thousand rupees.

(10) No invitation to appoint any person as proxy shall be issued at company’s expense and idea if any such invitation is issued every officer of the company who isknowingly in default shall be punishable with fine which may extend to one thousand rupees.

(11) After giving three days notice to the company, members may inspect proxies lodgedwith the company during 24 hours (within business hours) before the time fixedfor the meeting and till the conclusion of the meeting.

(12) Subject lo the provisions in the articles, a proxy can be revoked by intimating the


B87��

company, at any lime, before it is acted upon. Death or insanity of the principalalso revokes the authority of the proxy but proper intimation to the company isnecessary. Moreover, a member can prevent the proxy from exercising the rightto vote by himself attending and voting at the meeting.

(13) Where a company is a member of another company or where Government is amember of a company, their properly appointed representative enjoys all the rightsof a member. He can speak at the meeting and vote on a show of hands as well ason a poll [Sees. 187(2) 1 and 187A (2)]. It may be noted that a private companywhich is not subsidiary of a public company is free to make its own provisions byits articles as regards ‘proxies’ and the provisions of Section 176 (as stated aboveunder points I to II) shall apply to such a company only if its articles do not otherwise provide [Sec. 170(1)(ii)].

10.11 RESOLUTION

A ‘Proposed Resolution or motion’ when passed by requisite majority of votes by the share-holder become a company resolution. Thus a resolution may be defined as the formal decisionof a meeting on any proposal before it.

The Companies Act provided for three kinds of resolutions that may be passed at the generalmeeting of a company :

1. Ordinary resolution.

2. Special resolution.

3. Resolution requiring special notice.

The Companies Act and the Articles of Association lay down the type of resolutionsrequired for any particular matter.

10.11.1. Ordinary Resolution

A resolution shall be an ordinary resolution when the votes cast in favour of the resolution bymembers present in person or where proxies are allowed, by proxy, exceed the votes, if any,cast against the resolution 189(1). In other words, this is a resolution passed by simple majorityof votes of members present in person or by proxy. Those absenting or remaining neutral arcnot counted.

An ordinary resolution is normally used for the so-called ‘ordinary business done in the An-nual General Meeting. e.g.. to pass the annual accounts, to declare dividend, to appoint direc-tor in the place of those retiring and to appoint auditors. It is relevant to state that a specialresolution is required for any appointment of auditors at an annual general meeting, althoughit is an item of ordinary business, in the case of a company in which at least 25 per cent of thesubscribed share capital is held, whether singly or jointly, by Central Government or a nation-alized bank or a general insurance company or a public financial institutions or a Governmentcompany (Sec 224A). Certain items of ‘special business’ also require ordinary resolutions un-der the Companies Act. For example: issue of shares at a discount [Sec. 79(3)] the alteration of

�� B88

the share capital [Sec. 94(2)]., appointment of sole selling agents (sec. 294) etc.

It may be added that an ordinary resolution will suffice unless expressly provided otherwise inthe Companies Act or the Articles of the company. An ordinary resolution usually does notrequire ‘filing with the Registrar. However, a copy of ordinary resolution conferring powerupon the directors under Section 293 must be filed with the Registrar within 30 days of the dateof its passing. The usual notice of at least 21 days is, however, required for passing an ordinaryresolution.

10.11.2 Special Resolution

A resolution shall be a special resolution when the votes cast in favour of the resolution bymembers present in person or, where proxies are allowed, by proxy, are not less than threetimes the number of votes, if any, cast against the resolution and the has been duly specified inthe notice calling the meeting [Sec 189(2)]. In other words, this is a resolution passed by amajority of at least 75 per cent of votes of members present in person or by proxy and a men-tion of the fact that the resolution shall be passed as a special resolution must have alreadybeen made in the notice of the meeting and the notice should have been duly given at least 21days before the date of the meeting.

The articles of the company may specify purposes for which a special resolution is required.The Companies Act has also specified certain matters, for which a special resolution must bepassed, for example –

(i) to alter the memorandum of the company (Sec. 17),

(ii) to alter the articles of the company (Sec. 31),

(iii) to issue further shares with preemptive rights (Sec. 81), for creation ofReserve Capital (Sec. 99),

(iv) to reduce the share capital (Sec. 100),

(v) to pay interest out of capital to members (Sec. 208),

(vi) authorizing a director to hold an office or place of profit (Sec. 314),

(vii) voluntary winding up of a company (Sec. 484), ‘A copy of special reso-lution must be filed with the Registrar within 30 days of the date of itspassing.

10.11.3 Resolution Requiring Special Notice

A resolution requiring special notice is not actually an independent class of resolutions. It is akind of ordinary resolution, with the difference that the mover of the proposed resolution isrequired to give special notice at least 14 days to the company before moving the resolutionand the company in turn, is required to give the notice of the resolution to the shareholder atleast “seven” days before the meeting either individually or through advertisement in an ap-propriate newspaper (Sec 190). This provision is a sort of concession to the mover of a pro-posed resolution, because otherwise he is required to intimate the company about the pro-


B89��

posed resolution he intends to move before the company issues Notice of the meeting. So thatthe same may be included in the Notice and Agenda of the meeting as an item of business Itmay be recalled that a notice of at least twenty-one “clear dyas” is required for calling a generalmeeting.

The articles of a company may specify purposes in respect of which special notice is re-quired. Under the Act a special notice is required before moving a resolution relating tothe following matter :

(a) Appointment of an auditor other than the retiring auditor (Sec. 225).

(b) Provision that a retiring auditor shall not be re-appointed (Sec. 225).

(c) Removal of a director before the expiry of his term. (Sec. 284).

(d) Appointment of another person as a director in place of the director removed(Sec. 284).

10.11.4 Minutes of Meetings

The term ‘minutes’ means a concise and accurate official record of the business transacted atcompany meetings. It normally includes only the resolutions actually passed. It is not neces-sary to record therein the discussion which preceded the adoption of a resolution. “Minutesare more analogous to a telegram than to a latter”.

Section 193 requires every company to keep minutes of the proceedings of both General andBoard meetings in books kept for that purpose within 30 days of every much meeting. Thepages of the minutes books must be consecutively numbered and into case there should beattached by pasting or otherwise any extra page. Each page of every such book shall be signedand the last page of the record of proceedings of each meeting in such books shall be dated andsigned –

(a) in the case of the Board or Committee meetings, by the Chairman of the meetingof the next succeeding meeting;

(b) in the case of a general meeting, by the Chairman of the same meeting within aperiod of 30 days of the conclusion of the meeting or in the event of death orinability of the Chairman within that period, by a director duly authorized by theBoard for that purpose [Sec. 193(IA)].

The minutes of each meeting shall contain a fair and correct summary of the proceedings thereat. The chairman shall, however, enjoy an absolute discretion in regard to non-inclusion of anymatter in the minutes which in his opinion is defamatory of any person, is irrelevant or detri-mental to the interests of the Board or of a Committee of the Board, the minutes must includethe names of the directors present at the meeting and the names of the directors, if any dissent-ing from the resolution passed at the meeting.

The minutes of meetings kept in accordance with the above provisions are prima facie evi-dence of the proceedings recorded therein (Sec. 194) and the meeting to which such minutesrelate shall be deemed to have been duly called and held, the proceedings to have duly takenplace and the appointments, of directors or liquidators made at the meeting shall be deemed tobe valid, until the contrary is proved (Sec. 195).

�� B90

The minute books of general meetings are to be kept at the registered office of the company andbe open to inspection for at least two hours a day during business hours to any member with-out charge. Members are also entitled to obtain copies of minutes on request within seven dayson payment of rupee one. The Company Law Board is also empowered to order inspection ofthe minutes books or direct to deliver the copy required thereof, if the company fails to complywith the provisions of this Section (Sec. 196).

Exercises

1. Explain the different states in the incorporation of a Public Ltd. Co.

2. Define a company. What are it essential features?

3. Briefly describe fine privileges of a Private Company.

4. Explain briefly the meaning & contents of articles of associations.

5. What is a ‘memorandum of association’? Briefly explain its clauses

6. Differentiate between the ‘memorandum of association’ and the ‘articles of

association’.

7. What are the important contents of a ‘prospectus’?

8. What is certificate of incorporation? What are the documents which are necessaryto be filed with the ‘Registrar of Companies’ for incorporation of a public limitedCompany?

9. Explain the various States in the promotion of a company.

10. Write Short notes on :

(a) Minimum subscription.

(b) Preliminary expenses

(c) Certificate of commencement

11. “A Joint Stock Company is an artificial person created by law, having a separatelegal entity with a perpetual succession & a common seal”. – Discuss.

12. What is a debenture? How is it different from a share of a company?

(a) What are the requisites of a valid general meeting?

(b) How can general meetings be called at “shorter notice”?

(c) What is your interpretation of “not less than 21 days” used in Section 171 of theAct?

13. State the legal provisions regarding holding of the Annual General Meet ings.


B91��

14. What is a special resolution? For what purposes are such resolutions necessary?

15. What is an Extraordinary Meeting and how can it be convened?

16. What is a statutory meeting? What are the consequences of not holding a statutorymeeting?

17. Classify different kinds of meetings of the members of a company and state thecircumstances in which, and the authorities by whom, such meetings may be called.

18. (a) What are the different kinds of meetings of the shareholders?

(b) One general meeting was called by a company in December, 1998. This meetingwas adjourned to March, 1999 and then held. Subsequent meeting was held in Feb-ruary, 2000. Is the company liable for any irregularity?

�� B92

Study Note - 11

BUSINESS OBJECTIVES AND ENVIRONMENT


• Business Objectives

• Business Environment

Economic Environment

Social Environment

Political Environment

International Environment

11.1 BUSINESS OBJECTIVES

11.1.1 Introduction to Business Objectives

An aimless pursuit of anything is likely to end in a waste of energy, time and possibly moneytoo. Every activity is supposed to be with a purpose or an objective. An objective is a targettowards which a rational activity is directed. An organization is expected to be with somedefinite objectives and all the available resources are necessarily to be utilized to reach or achievethem. “WHY” is one of the most important questions that one should ask himself before onethinks of starting the activity. It is true that the purposes for which the business activity is to becarried on, may change from Organisation to Organisation, place to place and also from time totime but the fact remains that the choice of right task or objective at the right time is the key ofbusiness success.It is indeed a difficult task for a businessman to set proper objectives and though he may beguided by parallel experiences of others, it is necessary for him to scientifically analyse thesituation and decide the objectives.Peter Drucker opines that objectives in the key areas are the instruments necessary to pilot thebusiness enterprise. Without them the management files by the “Seats of its planes”. – withoutland marks to steerby, without having flown the route before.A businessman, at any juncture of time, compares his actual achievements with the decidedobjectives and feels happy if the results are positive. In the modern dynamic business world,the objectives are likely to be affected positively or negatively with various social, political oreconomic forces as a result of which today the business environment plays an important partfor deciding or changing the objectives. Business can give social status. It can enable the busi-nessman to earn money or profit. It can offer the joy of achievement. For a long time, it was feltthat profit making is the only objective of any business activity. Nowadays however, it is feltthat profit making is the only objective of any business activity. Nowadays however, it is feltthat profit making is one of the objectives of business but there could be a number of otherobjectives which could justify the existence of a business activity.

Business Objectives and Environment

B93��

Management is getting work done through the people and all the functions of managementi.e. planning, organizing, staffing, directing, co-coordinating, controlling, reporting or budget-ing, have to center round the pre-decided objectives.

11.1.2. Characteristics of Objectives

It is interesting to note various characteristics of objectives. Some of the important characteris-tics are:

1. Multiplicity

2. Tangibility or intangibility

3. Primacy

4. Hierarchy

5. Clashing or supporting tendency

6. Network

7. Time-boundedness

8. Clarity and understandability

9. Concreteness or specific nature.

Peter Drucker has justified eight key areas in which the objectives of a business could be set.According to him these key areas are: Productivity, Physical and financial resources. Profit-ability, Market standing, Innovation, Managerial performance and development, workers per-formance and attitude and the Social Responsibility. The various other characteristics of busi-ness objectives could be illustrated thus :

The tangible objectives can be expressed in terms of quantity such as financial resources. Forexample, the share capital to be raised should be 20 lakhs rupees. On the other hand someobjectives are expressed in terms of numbers or percentages, for example, the labour turnovershould not be more than 5% or workers morale should be higher are statements indicatingintangible objectives.

Some objectives get priority over the others. Thus in the initial stages a business should givepriority to survival as compared to profitability. The important objectives stand first and theyare followed by the less important ones. Business is more important than personal convenienceor inconvenience.

When there are some objectives which differ in nature when compared, it becomes necessaryto reconcile and achieve larger interest of the business.

A network of various objectives is to be set for achieving greater success. When specific goalsor targets are to be achieved, it becomes necessary to coordinate. Larger production must becoordinated with larger sales otherwise there would be piling of stocks and it may prove to bea graveyard for management.

�� B94

The objectives may vary in the context of a period of time. The objectives may thus be classifiedinto short term, medium term and long term objectives. Thus the short term objectives aregenerally to be achieved within a period of one year, the medium range objectives could beachieved within a period of two to four years and the long term objectives could be achievedwithin a period of five years or more.

It is necessary that the objectives should be clear and easily understandable. If the objectivesare ambiguous, the personnel responsible for achieving them is perplexed. The understand-able and reasonable objectives are likely to be achieved with fullest cooperation of workers.The objectives should be expressed in specific terms. For example, when the Production Man-ager states that it is desired to increase the production by 30% in the current year, his workersunderstand as to what is expected of them.

Ideal objectives are clear, acceptable by all concerned, supporting one another, precise andmeasurable.

11.1.3 Advantages of Objectives

When the objectives are rationally pre-decided, they help the business to channelise variousavailable resources for achieving the goals. The objectives, in fact, are the basis for all kinds ofplanning. The policies, strategies, and procedures are based on the objectives. They can serveas the motivating factors for the employees and different departments concerned. The activi-ties of different departments could then be coordinated. The controlling becomes feasible. Thebusinessman can lead, guide, direct and get work done as per specifications. A proper commu-nication of the objectives can ensure lesser conflicts, misunderstanding or disputes among theconcerned employees. Peter Drucker feels that Management by objectives (MBO) is based onthe acceptance of objectives after discussion by the superiors and subordinates sitting together.The traditional way was that all the objectives were decided by the Top Management and thelower cadre was required to accept them without objection or suggestions. MBO on the otherhand believes in mutual conversation, discussion and acceptance of the objectives by the TopManagement and the representatives of the Lower management at the same table. Objectives,in this manner, are specifically decided by all concerned and this can ensure maximum coop-eration from all.

11.1.4 Various Business Objectives.

The various objectives of business could be classified as follows:

1) Economic objectives

2) Social objectives

3) Human objectives

4) National objectives

5) Organic objectives


B95��

The Economic objectives are :

a) Earning of adequate profit

b) Production of tangible form of wealth

c) Creation of market or creation of customers

d) Innovation

e) Best use of available scarce resources.

The Social objectives are :

f) Providing quality goods and services

g) Charging reasonable prices

h) Generation of employment

i) Avoiding antisocial practices and profiteering

j) Creating and maintaining better environment.

The Human objectives are :

k) Giving a fair deal to the employees

l) Ensuring job satisfaction

m) Treating employees as partners to prosperity

n) Development of human resources

The National objectives are :

o) Producing goods and providing services as per national priori-ties

p) Development of small enterprises

q) Guaranteeing social justice

r) Export promotion

The Organic objectives are :

s) Survival

t) Growth, expansion and diversification

u) Creating goodwill, prestige and recognition.

Casting a cursory glance at the above mentioned objectives it could be said that these objec-tives have relevance to the period and the environment under which the business is function-ing. Thus earning adequate profit is obviously one of the most important economic objectives.Even in the socialistic countries, it has been accepted that generating a surplus out of anybusiness activity is a sign of efficient use of the available resources. The profit may be utilizeddifferently under different economic systems but there should be a break even as early as pos-sible and it should be followed by a surplus too.

�� B96

The production of tangible form of wealth for the benefit of community is equally important.The business can generate profit by providing people various goods and services, which theyneed. The customers are to be created and the potential markets must be tapped. Peter Duckerbelieves that the only valid definition of business purpose is to create a customer who is thefoundation of business and who helps it to survive and grow.

Change is the order of the day in the modem business world. The business which cannot changeaccording to the changing trends is likely to perish. Innovation, in other words, becomes aMUST with better machines, and improved technology.

Since business is the specific organ of growth, expansion and change, exploring and discover-ing ways and means for making the production and services more useful for the customers isinevitable.

The optimum use of the available resources is the duty of every businessman in the individualas well as social context. Unnecessary waste of material and energy must be avoided.

The society has its own expectations about the business. It demands that the quality goods andservices must be provided regularly and at reasonable prices. A business should generate em-ployment and provide welfare to the employees. Better working conditions should be pro-vided and a fair return on the investment should be available to the owners.

The human considerations require that the employees should be paid fair wages and offeredan opportunity to participate. They must get job satisfaction.

Similarly, from the point of a nation, the scarce resources should be utilized to produce goodsand services to which the nation gives a priority and not a few individuals, the small scaleindustries which provide employment to many should be encouraged. Exports should be pro-moted for earning valuable foreign exchange and the social justice should also be ensured.

From the point of view of an organization, the first and the foremost objective is the survival ofthe business in the adverse circumstances. The survival should be followed by expansion andgrowth. If necessary diversification should also be resorted to, for earning legitimate higherprofit. Similarly, in course of time, Goodwill, Prestige and Recognition should also be the goalsof a successful business.

These are called organic goals.

To discuss the question of business objectives further, as Peter Ducker has suggested, one couldconcentrate on KRAT i.e. KEY RESULT AREAS TECHNIQUES.

These 8 different areas are :

1. Market Standing

2. Innovation

3. Productivity


B97��

4. Profitability

5. Physical and financial resources

6. Managerial performance and development

7. Workers’ performance and attitude

8. Public or Social Responsibility.

11.1.5 The Concept of Social Responsibility

As mentioned earlier, modern businessmen have started accepting that profit making is nomore the only objective of business. In marketing also it is said “A sale is not made at thecounter or by a salesman, it is made in the mind of the buyer”. In other words, just as for sale ofa product or service the most important person is a buyer, similarly, for achieving all the otherobjectives of business, it is the society which is the most important factor and a business cannotsurvive or prosper without a Society. It must therefore be realized that a business has also someresponsibility towards Society.

The obligations of a business towards society could be classified under two heads :

a. The socio-economic obligations and

b. The socio-human obligations.

It is the socio-economic obligation of a business that its activity should not adversely affect theeconomic welfare of people. When a business generates employment, it adds to the welfare ofthe society. It can help to raise the standard of living of the people. This should be accepted asone of the responsibility towards society though it cannot be insisted that one must start busi-ness to create employment opportunities.

Similarly, competition should be accepted and not curbed because it can force a business tomaintain quality and control overhead costs.

A business should also try to hold the price line and curb inflation. On the other hand nurtur-ing and developing human values such as morale, cooperation, motivation etc. comes underthe socio-human values of a business.

The social responsibilities of a business thus should be studied and appreciated under thefollowing heads :

1. objectives which protest consumer interests;

2. objectives which protect the interests of workers, and

3. objectives which protect the interests of the society.

�� B98

It is felt necessary now that continuous efforts should be made to improve the benefits to theconsumers. This involves the following :

(i) Adequate and efficient supply of goods and services

(ii) Reasonable prices charged

(iii) Productivity improvement by reducing cost and price, by optimum utilization ofnational resources, by remunerating workers better for improving competitiveness of the enterprise and for increasing the profitability.

(iv) Reduction of costs by other methods.

(v) Quality improvement

(vi) Product development

(vii) After sales service

(viii) Product safety

(ix) Disclosures about the products like risks, expiry dates, ingredients, precautionsetc.

(x) Handling of complaints and grievances.

Workers’ interests could be safeguarded by :

(a) Payment of fair wages

(b) Providing better working conditions

(c) Providing labour welfare

(d) Promoting self development to employees

(e) Promoting healthy industrial relations

(f) Helping workers to be shareholders of the company.

Social interest could be taken care of by :

1. Protecting ecology of the surrounding locality

2. Helping overall development of the locality

3. Rehabilitating the population displaced by the operation of the business, if any.

4. Conserving scarce resources and developing substitutes;

5. Improving productivity;

6. Helping the national causes like earning foreign exchange, developing backwardregions, assisting weaker sections of the society etc;

7. Promoting ancillary and small scale industries;


B99��

8. Contributing to research and development; and

9. Helping social causes like education, health, entertainment, etc. It is necessary forany business to strike a harmonious balance between Social and Economic objectives.

11.2 BUSINESS ENVIORNMENT

Any business depends upon certain internal factors and is also influenced by certain externalfactors. The external factors are generally uncontrollable factors and are referred to as BusinessEnvironment. Business environment refers to all those external forces such as economic, social,political, regulatory, technological, natural and competitive factors which affect the business.Every businessman goes in for analyzing all the factors by resorting to what is known as aSWOT ANALYSIS. S stands for Strength, W for Weaknesses, O for the opportunities and T forthreats. Strength and weaknesses are internal factors whereas Opportunities and Threats areexternal factors. Any change in a business environment may imply an increase in opportuni-ties or in threats. The same environment may offer opportunities to some firms and threats tosome other Firms. Thus liberalization policy of the Government of India may result in openingof new opportunities to some Indian firms while it may result into threats to the existence orgrowth of some other firms. A duty reduction in the Central Government Budget may resultinto a boost to some industries. The reduction of subsidies to the fertilizer industry may resultinto an increase in the prices of fertilizers and also reduction of demand for them. The demandfor sunflower oil may increase because of the medical reports that it helps keeping the hearthealthy.

11.2.1 Economic Environment

Economic environment includes the factors like the nature and level of development of theeconomy, economic resources, size of the economy, economic system and economic policies,current economic conditions, trends in the GNP, growth rate and per capita income, nature ofand trends in foreign trade, domestic supply and demand conditions etc.

All these factors affect business favorably or unfavourably. For example, a developing economywill offer more opportunities for business for businessmen in the advanced countries. On theother hand, if the income is very low, some of the commodities considered to be essential inadvanced countries will have no demand in the backward countries.

If the taxation is on the higher side, the prices will shoot and the demand will fall, Because ofthe shortage of foreign exchange, the Government may put restrictions on the import of for-eign goods or raw material as a result of which the quality of the goods manufactured will belower as compared to that produced with the foreign imported ingredients. If the growth rateis satisfactory and the per capital income has started growing, the demand for luxuries willslowly start growing.

�� B100

Similarly, a number of developing countries are offering new opportunities because of fastergrowth in population, existence of large unsatisfied demand, growing democratization andindividual freedom together with fairly good growth of the economy. The developed econo-mies are characterized by high levels of income, consumption and competition in businesssector. In case of countries where income is low, the businessmen may be required to reduceother costs such as packaging.

It is observed that less fuel consuming cars were required to be produced because of the pricesof oil, shooting high. The inflation and depression or the changing phases of trade cycle doaffect the business. Diversification can help a firm to combat with the recession in some indus-tries. In short a business has to consider various economic factors in the stages of survival,stability and growth.

11.2.2 Social Environment

The social or cultural environment includes customs, traditions, religious beliefs, tastes andpreferences, social institutions, buying and consumption habits etc. and all these do affect abusiness.

The food habits of people in South India differ from those of people in North India. Some of theforeign companies have failed in India because they could not appreciate the cultural values ofpeople in India. The advertising and publicity firms have consider these factors. The languagecan be a barrier or an aid depending how it serves as a vehicle of thought. Social inertia andassociated factors may come in the way of the promotion of certain products, services or ideas.Certain social stigmas in the marketing of family planning ideas, use of bio-gas for cooking,etc. do create barriers for business activity. The success of some of the business ventures de-pend upon the success of changing social attitudes or value systems.

The demographic factors, such as the age and sex composition of population, family size, habi-tat, religion etc. also influence business. Louis L. Stem has observed in his article ConsumerProtection via Self-Regulation in the Journal of Marketing, that more the educated the societybecome more discretionary the use of its resources, the more marketing will become enmeshedin social issues. The number of married couples in India these days, are having a double earn-ing, as a result of which the demand for domestic electric appliances has stated growing.

It may, therefore, be concluded that the social environment of different markets will be differ-ent and the difference will also be observed within the market making it necessary to havebusiness strategies suitable to any particular type of Social environment.

11.2.3 Political Environment

The political policies, the nature of the Constitution and the government system, the govern-ment environment encompassing the economic and business policies and regulations havevery important implications for business. The Industrial Policy decisions have been taken bythe successive governments. Pandit Jawaharlal Nehru had a different economic scenario ascompared to the one which Smt. Indira Gandhi had. The liberalization policy adopted by theGovernment is likely to have long reaching repercussions. Besides, as compared to the previ-


B101��

ous politico-economic decisions of nationalization of banks and insurance, the latest trend ap-pears to be more towards privatization. Disinvestments of Government holdings in publicsector enterprises have gained momentum. All over the world, the political environment hasdefinite effect on business.

11.2.4 International Environment

With the rapid Industrial, Commercial and Computer Revolutions, the world has becomessmaller. The rapid changes cannot allow any country to be economically independent. Thetrade and commerce is no more restricted to national boundries. It is International Trade obvi-ously therefore, the business world of today cannot be in isolation and any political or eco-nomic change on the world map is bound to increase or decrease the volume of business. WTOi.e. World Trade Organisation for example, is bound to be discussed in the business circlesbecause its repercussions on different industries is bound to be different and serious. The NRI,the Multinationals etc. are likely to shape the Indian business differently. The InternationalEnvironment, thus can affect the business radically. The Russia or the Germany, as markets,are now presenting a changed picture. The Kashmir Tourists Trade is seriously hampered bythe strained relationship between India and Pakistan.

Therefore, we may conclude that the economic, political, social, regulatory, competitive, tech-nological or international environment must be studied in proper perspective before any busi-ness decisions could be taken.

Exercises

1. What are the various objectives of a business? Explain their characteristics and im-portance.

2. Is profit-making the only objective of a business? Discuss the recent trends regard-ing the objectives of a business.

3. Explain the concept of ‘Social Responsibility of a Business.”

4. What is a Business Environment? What are various types of business environments?Give illustrations.

5. How does Business Environment affects a business? Can a business affect environ-ment? How?

6. Write notes on – (a) Economic Environment; (b) Social Environment; (c) PoliticalEnvironment; (d) International Environment.

�� B102

Study Note - 12

STOCK MARKET IN INDIA


• Stock Market

Introduction

Important Ingredients of a Stock Exchange

Functions and Services of Stock Exchanges

• Stock Exchanges in India

Brief History

Management

Membership

Listing of Securities

Methods of Trading

Stock Exchange Terminology

12.1. STOCK MARKET (STOCK EXCHANGE)

12.1.1 Introduction

Then are two stages involed in the purchase and sale of securities. In the first stage, the securi-ties are acquired from the issuing company themselves from the issuing comany thenselvesand in the second stage, the securities are purchased and sold continuously among the inves-tors without any involvement of the companies.Thus the industrial securities market is di-vided into two parts namly NIM and Stock Market.

The NIM deals with new securities that is, securities which were not previously available andare offered to the investing public for the first time.

The stock market covers the second stage of dealing in securities. The Stock Exchanges, there-fore, provide a regular and continuous market for buying and selling of securities.

The Securities Contracts Regulation Act, 1956 defines stock exchanges as ‘an association, orga-nization or body of individuals whether incorporated or not, established for the purpose ofassisting, regulating and controlling business in buying, selling, and dealing insecurities’. Aclose review of the well known definition brings out the following features of the stock market

Stock Market in India

B103��

1. Stock market is an organized market where securities of government and semi-government bodies and corporate enterprises are bought and sold.

2. Stock market deals in second hand or existing securities.

3. Individuals alone can buy and sell securities. The stock market does not providethis facility to corporations and partnership firms.

4. In the Stock market only those securities which are listed in the stock market aretransacted. Unlisted securities are not permitted to be dealt in the market.

5. Stock market may be a registered or unregistered body. It is not always necessaryfor a stock exchange to incorporate it under the Companies Act.

6. Transactions in the stock market must adhere to the rules and byelaws framed bythe stock exchange to regulate its day-to-day operations.

12.1.2 Important Ingredients of a Stock Exchange

Following are important ingredients of a stock exchange:

1. Provisions of the place for the buyers and sellers of securities for transacting theirdealings.

2. Existence of brokers and other intermediaries to assist their client investors infinalizing their deals.

3. Scope for genuine and legitimate speculation and allied transactions so as to makethe market continuously responsive to the basic forces of demand and supply.

4. Framing of regulations of ensure transactions in such a manner as to avoid unduefluctuation in the value of securities and prevent unfair dealings.

12.1.3 Functions and Services of Stock Exchanges

Stock exchanges play an important role in capitalistic countries. It is indispensable for the properfunctioning of joint stock companies. The importance of a stock exchange will be clear from thestudy of its functions and services.

A stock exchange performs the following economic functions and services:

1. Provides ready and continuous market : Stock exchanges provide a ready andcontinuous market where anybody can purchase or sell the securities during thebusiness hour. Therefore, it provides liquidity, price continuity and marketabilityto the capital locked up in the investments. This facility of marketability helps aperson in choosing shares or debenture for investment. He feels confident that hewould be able to dispose of the shares to his best advantage in the shortest possible time and convert them into cash, when necessary

2. Facilitates regular valuation of securities : In a stock exchange, evaluation ofthe listed securities is carried on continuously. That way it is able to determine theprice of the securities as close as possible to their investment values based on presentand future income-yielding prospects of the various enterprises. A well regulated

�� B104

and efficient stock exchange performs this function of evaluation cheaply andquickly.

3. Encourages capital formation : Stock exchanges contribute to a considerable extent to capital formation in the country. It inculcates the habit of saving, investingand risk taking in the investor. The publicity that the stock exchange gives to thedifferent kinds of securities and their price induces all persons to take interest incorporate and government securities and their surplus funds in such securities.The saving that are put at the disposal to industries and government are usedeffective and dividends and interest are paid on the investments. More often, thedividends and interest earned are again invested in similar securities. This processof funds in corporate or government securities earning of dividend and intereston such securities and reinvestment of the whole or part of such income in similarleads to capital formation.

4. Provides proper direction to invest capital : The securities of companies withgood profits are popular in the stock exchanges. Investors are attracted towardsthose securities. The securities of companies which are not profitable are bearingno response in the stock exchange, In this way. Stock exchange gives proper direction to invest the capital of investors. Because of this, stock exchange is called a“sensitive barometer of business activity”.

5. Ensures wide ownership of securities : A stock exchange ensures wider distribution of securities. If a company’s securities are listed in different stock marketsof the country, its securities will be bought and sold by persons scattered all overthe country and ownership of securities is widely diffused.

6. Facilitates distribution of new securities : Stock exchange is primarily a marketfor dealings in second hand securities. But it helps, in marketing the shares anddebentures of a new company also. If the securities are listed on the stock exchange for the purpose of their trading, they attract investors from different partsof the country.

7. Ensures safety of funds : Stock exchanges ensure safety of investible funds because they have to operate under set rules which seek to check over-trading, illegitimate speculation and manipulation etc. They would strengthen the investor’sconfidence and stimulate larger investment in business securities.

8. Regulates company management and performance : The companies which wantto get their securities listed have to follow certain rules and fulfill prescribed requirements. Through then the stock exchange yields influence on the working ofthose companies in the public interest. Further, as the stock exchange publishesthe ruling prices of securities constantly, it indirectly induces the companies toimprove their performance. Otherwise inefficiency would soon become public.

9. Disseminates information : A stock exchange disseminates information relatingto the capital, management earnings and dividends of listed companies throughinformation bureau. Some stock exchanges publish year books giving history and


B105��

financial position of listed companies. Thus it provides necessary data for deciding on investment.

10. Facilitates speculation : Stock exchanges provide facilities for speculation in thesecurities. Healthy speculation tends to equate demand and supply and regulatestheir prices to a substantial extent.

11. Mirror of business cycle : Stock exchanges mirror the phases of business cycle,that is the changing conditions of economic health of a country Booms and depressions find their echoes in the dealings on stock exchanges.

The above account of the various functions performed by a stock exchange shows that itis really an important institution of a country. Briefly, community savings, productiveinvestments, capital formation, industrial growth, economic development and individualprosperity are the integrated chain of benefits that may be derived from the efficient work-ing of stock exchanges in a country.

Services

A well organized and efficient stock exchange renders services of considerable importance.Such services can be examined under three heads, i.e., to the community, to the investor and tothe corporation.

Services to the Community

1. The stock market is an important institution to finance the economic development of a country. It is no exaggeration to say that the sharp increase in industrialactivity in the past two decades and more would not have been possible but forthe important part played by the stock exchanges particularly in Mumbai, Kolkataand Chennai.

2. It encourages highly profitable enterprises. It places a premium on efficiency. Itdiverts funds from unprofitable and unproductive channels to profitable and productive ones.

3. It encourages capital formation by extending facilities for productive investmentof surplus funds available with the people.

4. It helps the government to borrow funds from the public and utilize the same onprojects of national importance.

5. By providing facilities for the sale and purchase of shares and the publication ofreports regarding the conditions of the stock market from time to time, it encourages even persons of small means with little or no knowledge of corporate financeto acquire shares in large concerns in the hope of earning a good return on them.This function of the stock exchange has the effect of ‘socializing’ the capital oflarge corporation.

�� B106

6. On the basis of information provided by the bulletins issued by stock brokers andreports published by the stock exchanges, investors are able to buy shares in concerns operating in different parts of the country or even in different parts of theworld.

Services to investors

1. The investors are assured of already and continuous market for the securitiesowned by them and, thus the liquidity of the investment is ensured by the stockmarket.

2. They may secure credits on the basis of the security owned by them easily as thestock market provides negotiability to the securities.

3. An investor may be assured of safety of investment and fair dealing in them whenthey are dealt with through a well regulated and well organized stock exchange.

4. They may easily find the variations in the value of their investments as the stockexchanges publish daily or periodically the quotations of listed securities.

Thus, they are able to assess the value of their holdings.

5. The risk in the investment is minimized and safety is well ensured by the presenceof the continuous market, negotiability, correct evaluations and facility for liquidating the investment.

Services to the Corporation

1. Easy marketability of securities help companies to enjoy a wide market for theirshares.

2. If the securities of a company are listed in a stock exchange it gives an impressionof a sound concern. It will improve its good will and credit standing.

3. If the securities of a company are offered through a stock exchange they get goodresponse from public.

4. Since fluctuations in the prices of securities are minimized, the company enjoythe confidence of the public.

5. Generally the market prices of listed securities are higher in relation to earnings.

This help the companies at the time of merger and amalgamation.

6. Regulation of company management and performance is ensured.

12.2 STOCK EXCHANGES IN INDIA

12.2.1 Brief history

Growth of stock exchange in India has been linked with the growth of joint stock companies.The organized stock exchange in the country started in Bombay in 1877. By 1939, there wereseven stock exchanges. By 1945, they increased to 21, operation of too many stock Exchanges


B107��

was considered undesirable. It was felt that their diverse rules and policies may lead to un-settled conditions resulting in perverse speculative dealing injurious to genuine investmentactivity. Hence the government of India as per the recommendations of Gorwala Committeeenacted Securities Contracts (Regulation) Act in 1956 to regulate formation, operation and trad-ing roles of stock exchanges in the country. Following are some of the stock exchanges recog-nized under the Act.

1) Bombay Stock Exchange.

2) Calcutta Stock Exchange.

3) Madras Stock Exchange.

4) Delhi Stock Exchange.

5) Ahmedabad Stock Exchange.

6) Hyderabad Stock Exchange.

7) Indore Stock Exchange.

8) Bangalore Stock Exchange.

Bombay Ahmedabad and Indore stock exchanges are organized as voluntary associations whileCalcutta and Delhi stock exchanges have been incorporated as public limited companies andHyderabad, Madras and Bangalore stock exchanges as companies limited by guarantee.

Major operations of prominent stock exchanges, are found to be in specific securities, For ex-ample, cotton textiles and bank shares are predominant in Bombay; coal, jute tea, bank andengineering securities are more popular in Calcutta Stock Exchange; textile shares are domi-nant in Ahmedabad while Madras stock exchange abounds in plantations and textiles.

12.2.2 Management

Each stock exchange is managed by a committee of management whose condition and powersare governed by its own byelaws. This committee is entrusted with the responsibility of overallcontrol and guidance. This is given different names in different exchanges. In Bombay, it iscalled the Governing Board, in Calcutta, it is known as the Committee, and in other places thecouncil of management. Their day-to-day management is vested in a number of sub-Commit-tees such as Listing Committee, Defaulters Committee, Arbitration Committee and so on. EachExchange has its own rules for the conduct of business. The Securities Contracts (Regulation)Act provides for a general system control over stock exchanges.

12.2.3 Membership of the Stock Exchange

The regulations Governing the admission of members of the recognised Stock Exchanges areuniform in terms of the provisions of the Securities Contracts (Regulation) Rules, 1957. Thesestatutary Rules provide that no person shall be eligible to be elected as a member, if he is lessthan 21 years of age; if not a citizen of India; or has been adjudged bankrupt or proved to beinsolvent or has compouded with his creditors; or has been convicted of an offence involving

�� B108

fraud or dishonesty, or is engaged as principal or employee in any business other than that ofsecurities; or is a member of any other association in India where dealings in securities arecarried on; or is a director, partner or employee of any company whose principal business isthat of dealing in securities.

Firms and companies are not eligible for membership of a recognized Stock Exchange andindividuals are ordinarily not deemed to be qualified unless they have at least 2 years’ marketexperience as an apprentice or as a partner or authorized assistant or authorized clerk or remisierof a member.

Jobbers and Brokers (Members of the London Stock Exchange)

The London Stock Exchange has two types of member’s viz. jobbers and brokers. Every mem-ber has to declare at the beginning of each year whether he proposes to act as a jobber or abroker during the year. Once the declaration made it holds good for the entire year and itcannot be changed during the course of the year. The classification is maintained rigidly by theexchange.

A Jobber is a dealer in securities. He is prohibited from dealing directly with the public. Hedeals with the brokers who are engaged by the public. Thus, the jobber buys securities fromand sells them to members who are operating on the exchange as brokers. The Broker functionsas a commission agent. He deals in securities on behalf of the investing public. He is an inter-mediary between the jobber and the outside public.

The jobber occupies a very important position in the London Exchange. Every transaction mustpass through jobber. Every jobber quotes two price when he receives enquiry from a broker.The first is the prices at which he is willing to buy the security and the second at which he willsell it. For example, in response to an enquiry regarding the price of the shares of a certaincompany he may declare “I will make you Rs. 100 to Rs. 105”. This implies that be is willing tobuy the security at Rs. 100 or he will sell it at Rs. 105. The jobber is always ready to buy and sellany number of shares. He is not interested to know whether the broker wants to buy or sellsecurities. If the broker is satisfied with the quotation he discloses the nature of the transactionand strikes the bargain. The quotation by the jobber is called the double quotation or the doublebarreled quotation. The difference between the two prices quoted will be the profit for thejobber. It is also called the ‘Jobbers turn’.

Tarawaniwalas and Brokers

Members of the Bombay Stock Exchange are unofficially classified as Tarawaniwalas, thosewho take away the cream of the business, and commission brokers. A commission broker isone who transacts business on behalf of members or non-members on commission basis. Hemay appoint a number of sub brokers to secure business for him A Tarawaniwals, on the otherhand, is a dealer in securities. He transacts business in his own name and on his own behalf. Hespecializes in the purchase and sale of specific securities. He resembles the Jobber of LondonStock Exchange. But, he is not prohibited from acting as a broker too.


B109��

Remisiers and Authorised Clerks

Only members, who are given full right and privileges of conducting business on the stockexchange, are permitted to enter the building of the stock exchange. There are also others whoare permitted for reasons of convenience, to enter the building of the exchange and act onbehalf of members. They are given limited rights and privileges. They are called the Remisiersand Authorised clerks.

Remisiers : Remisiers act as sub brokers. They act as agents to the members to secure businessfor them. Since they are not members they cannot carry on the business for their own name. Aremisier is a ‘half commission man’ and gets remuneration for the work done for his principalpayment is made to him in accordance with the rules and regulations of the stock exchange.Usually, the commission does not exceed 40% of the commission received on the business.

Authorised clerks : Members require the assistance of others to carry on trading activities.They cannot be present always on the floor. Hence they are permitted to employ a specifiednumber of authorized clerks or member assistants to transact dealings on their behalf. TheBombay Exchange permits 5 clerks, the Calcutta Exchange allows maximum of 8 clerks and theMadras exchange permits – up to 3 clerks to be appointed by a member. Members are heldliable for the dealings made by their respective authorized clerks or assistants. Besides salary,the authorized clerks are paid a commission up to 50% of the brokerage earned on transactionput through by them. Members have to pay entrance fee, annual subscription at prescribedrate for each of their authorized clerk. Stock exchange maintain an up-to-date register of allauthorized clerks appointed by the members.

Members can remove the clerks from office by informing the concerned stock exchange.

12.2.4 Listing of Securities

A stock exchange does not deal in the securities of all companies. Only securities which areincluded in the official trade list of the stock exchange can be bought and sold on it. Therefore,listing of securities means, the inclusion of securities in the official list of a stock exchange. Thesecurities can be listed, only if the company furnishes details of its organization and the work-ing to stock exchange and fulfils the conditions laid down in the ‘rules and regulations of theexchange’ by listing the securities of a company, the stock exchange does not guarantee thefinancial soundness of the company or recommend it shares to the public. It is not the functionof the stock exchange to advise the investors in the selection of securities.

�� B110

Objective of Listing

The objectives of listing may be as under :

1. To assure constant marketing facilities.

2. To ensure liquidity.

3. To facilitate negotiability, and

4. To regulate the dealings in securities according to the interests of the investors.

Conditions for Listing : A company desiring its securities to be listed must apply in the pre-scribed form with the following documents and information :

1. Copies of the memorandum and articles, prospectus, statement in lieu of prospectus, director’s report, balance sheet and agreement with underwriters.

2. Specimen copies of shares and debentures, certificates, letter of allotment acceptance etc.

3. Particulars regarding its capital structure.

4. A statement showing the distribution of shares.

5. Particulars of the dividends and cash bonus declared during the last 10 years.

6. Particulars of shares and debentures for which permission to deal is applied for.

7. A brief history of the company’s activities since its inception.

While scrutinizing the application the stock exchange will examine the following care-fully.

1. Whether the articles of the company contain the following provisions

a) Use of common transfer form.

b) Fully paid up shares must be free from company’s lien.

c) Calls paid in advance may carry interest, but shall not confer a right to dividend.

d) Unclaimed dividends shall not be forfeited before the claim becomes time barred.

e) Option to call on shares shall be given only after sanction by the general meeting?

2. Whether at least 49% of each class of securities issued was offered to the publicfor subscription through newspapers for not less than 3 days?

3. Whether the company is of a fair size has a broad based capital structure andthere is a sufficient public interest in its securities?


B111��

After the structure of the application, if the stock exchange authorities are satis-fied, they call upon the company to execute the ‘Listing Agreement’.

Classification of Listed Securities

Listed Securities may be classified into two categories, viz,

(i) Cleared Securities, and

(ii) Non-cleared Securities. Cleared securities are also known as securities on forwardlist and non-cleared securities as securities on cash list. It is to be noted that forward transactions are possible only in case of cleared securities.

Conditions for the Inclusion of Securities in the Cleares Securities.There are certain conditions to be fulfilled before securities are included in the cleared securi-ties list. These conditions are.

1. The securities must be fully paid up equity shares of a company, other than abanking company.

2. They must have been admitted for dealings for at least three years on any stockexchange.

3. They must not be included in the cleared securities list of any other stock exchange.

4. The company must be of sufficient public importance and the subscribed capitalrepresented by the securities must be at least Rs. 25 lakhs and their value at theruling market price must at least be one crore rupees.

5. There must be adequate public interest in the company and at least 40% of thecapital represented by the securities must be held by public and such holdings areto be evenly distributed among a large number of shareholders.

Advantages of Listing

1. Listing gives the company a higher status, contributes to expansion of activitiesand helps its growth by making future finance easier. It enables a company toenjoy the confidence of the investing public.

2. Listing helps in widening the market for the securities issued.

3. The listed company gets some tax advantages.

4. The investors are also benefited by the listing of securities. These securities may beused for obtaining bank credit as they command higher collateral value. Theystand to gain in respect of income tax. Wealth tax, estate duty and other taxespayable by them. They can be sure that there is no fraud in the issue of shares.Listing insists on due notice in advance of closure of the transfer books’ Thus, it

�� B112

offer facilities to them for transfer, registration of right fair and equitable allotment.

5. Listing safeguards the interest of the general public too as it enforces timely disclosure of proper information regarding dividends, bonus shares, new issues ofcapital etc.

Limitations of Listing

1. Listing amount to encroachment on secrecy of the company’s operations. Listingregulations compel the company to disclose certain information like sales, remuneration to personnel besides profits, dividends etc., which may prove to be advantageous to its trade-rivals, trade unions.

2. Speculation in stock exchange creates erratic oscillations in the market price ofthe listed securities. Due to such blind changes, the listed securities may be affected. This will injure the credit worthiness of the company from the point ofview of banks and other financial institutions.

3. Listed securities may become a victim of depressions or wide fluctuations in theirvalues. This would degrade the company’s image in the eyes of the public and thefinancial institutions.

4. The free negotiability of listed securities may induce certain group of persons toown substantial shares of a company with a view to capturing the managementof the company in their hands.

5. Listed security tempt the speculators to manipulate the value in such a way asmay prove to be detrimental to the interest of the company. Even the directorsand other key functionaries in the management of the company indulge in speculations of listed securities misusing the inside information available to them.

12.2.5 Methods of Trading

The way in which the securities are transacted in a stock exchange is much different fromtrading in ordinary goods. A person who wants to purchase or sell securities cannot do ithimself. He is not allowed to enter into the hall of the stock exchange and thus he can not carryon transaction personally. He has to depend upon the brokers.

There are two types of trading on the stock exchange viz.

1. Ready delivery contracts, and

2. Forward delivery contracts.

They are also called cash transaction or cash trading and forward trading or dealing for theaccount.

B113��

The stock exchanges at Hyderabad, Indore and Bangalore are established for trading in readydelivery contracts only and they are called the cash markets. The other stock exchanges arepermitted to adopt both the methods of trading.

Ready delivery contractors are presumed to be investment transactions and forward contractare deemed to be speculative transactions. Of course, the speculative transactions are also asso-ciated with ready delivery contract.

There are some important points of distinction between ready delivery contracts and forwardcontracts. In the first place, ready delivery contracts are settled either on the date of the transac-tion or within 14 days from the date of the contract “If the transactions are to be settled on fixedsettlement days occurring at periodic intervals.

Secondly the ready delivery contracts must be settled within, the specified time limit, whereasthe forward contracts can be carried forward to the next settlement day, if the buyer or theseller desires to do so’. This facility is popularly known as the Badla facility.

Thirdly, ready delivery contract can be made in respect of all securities. The forward contractsare confined to those securities which are included in the forward list.

Trading procedure

Let us briefly discuss the various steps involved in completing a transaction through stockexchange brokers.

(1) Choice of a broker : A person who wants to buy or sell security, contracts thebroker either directly or through his banker. The choice of the broker may be madeon the advice of the banker. It is desirable to deal with the broker directly because itwill ensure quick action. Before dealing with a new party a broker always insists ona formal introduction or a bank reference so that the broker may rely on the honesty and financial standing of the client If he is satisfied with the reference given heintimates his willingness to act on behalf of he client.

(2) Placing the Order : The investor has to select the securities in which he wants toinvest his savings. This he can do in consultation with the broker. He then places anorder with the broker. The order must be clear and it should not contain ambiguousterms. There are several methods of placing an order with the brokers.

Various methods of placing an order with the brokers are as follows : -

(i) Fixed Price Order. In this order the client specifically mentions the price at whichspecific securities are to be bought or sold. Here the broker has no discretionexcept to buy on lower than the price fixed by the client’s order. In case of salesorder, the broker has to sell the securities at or above the price mentioned in theclient’s order. The broker has to wait until market swings around the price levelsspecified by the client.

�� B114

Example : Buy 10 Brooke Bond Ltd Equity at Rs. 17/-. IT means as that the shares must bepurchased if the price of the share is Rs. 17 or below.

(ii) Limit Price Order. A limit “price order indicates the upper or lower limit of prices.It is generally worked thus : Buy under 16 or sell over 18. The broker is expected tobuy at the lowest price and sell at the highest price.

(iii)Bargain Price Order. The bargain price order does not specify any price but instructs the broker to buy or sell immediately at the best price obtainable in themarket.

Example : “Buy 20 DCM at best”.

(i) Stop-loss Order. A stop loss order is an order which protects the client against 1heavy fall or rise in the price. It aims at reducing the amount of loss on the previous purchase or sale of securities by indicating the stopping point in the pricemovements. If the order is “Buy Hindustan Motors at Rs. 15 stop”, the brokermust wait till the price reaches this limit. As soon as it reaches Rs. 15 and beginsto rise, the broker would buy the shares at the best possible price. If a client haspurchased the share at Rs. 15 and be wants to sell it, he may instruct the broker to“Sell at Rs. 13 stop” thereby limiting his loss to Rs. 2 per share. As soon is theprice reaches Rs. 13 and shows a tendency to decline the broker will execute theorder and save the client from incurring further loss.

(v) Discretionary Order. Discretionary order is one which gives the broker complete freedom to buy and sell certain inactive securities. The client place such anorder when he has full confidence in his broker.

(vi) Open Order. Open order is one where the client does not prescribe any time limitfor the execution of the order. It is kept in operation so long as it is not cancelledby ‘the client’.

On receipt of the order, the broker notes it down in his memorandum book. Later, it is trans-ferred to the order book. Big brokers arrange for execution of order through authorized clerks.Small brokers execute the orders personally.

(3) Executing the Order : The authorized clerks of the brokers transact the deals atproper time as per client’s instructions. The brokers or their clerks operate on thefloor of the exchange. These dealings are first recorded in the respective roughpads. Purchases are entered on debit side and sales are recorded on the creditside with particulars of the script’s number, value and names of the parties fromwhom bought or to whom sold. These dealings are made in prescribed lot underthe rules of the stock exchange.


B115��

On the basis of these records, contract notes are prepared in prescribed forms. Separate con-tract notes are complied for cash and forward delivery contracts. These are exchanged betweenthe concerned parties. The broker sends the contract note to the other party and a copy of it tohis client also. It is stamped and signed by the broker and contains particulars of securities,names of parties, brokerage charged etc., is sent to the client along with the contract note.

(4) Settlement of Transactions: There are two methods of settlement of transactions.In the case of ready delivery transactions payment has to be made immediatelyon the transfer of the securities or within a period of one to seven days. The settlement may be made either through the clearing house or by hand delivery between the members without the intervention of the clearing house. Usually readydelivery contracts are entered into by outsiders or genuine investors.

In the case of forward delivery contracts the settlement is made on a fixed day-inthe Bombay Stock Exchange, settlement day is once in a week and in London it isfortnightly. All forward contracts are cleared through the clearing house which sim-plifies payment for, and delivery of securities. If the transactions of two members ofa stock exchange are equal, they are crossed out; if however, they are not equal, thenet balance alone is paid for or received. Moreover, there is the system of carry overto the next settlement day if agreed upon by the two parties. If the buyer desires tocarry over, he has to pay a premium or consideration to the seller known as ‘con-tango’ but if the seller desires to carry over he pays a premium to the buyer knownas ‘backwardation’.

Stock Exchange Clearing House

Important stock exchanges maintain a clearing house. It functions on the lines of abanker’s clearing house. The clearing house facility exists in Bombay, Madras, Delhi,Calcutta and Ahmedabad. The clearing house serves as a useful link between buyersand sellers of securities. It pools together all the bargains of a member and ascertainshis net position. The member can settle all his accounts by a single transaction, i.e., thereceipt or payment of the net amount.

Advantages of Clearing House Settlement : Settlement through clearing house hasfollowing advantages:

1. Settlement becomes prompt and easy.

2. It is economical as intermediaries are eliminated.

3. It amounts to saving of currency-payment because only the net dues are settled incash.

4. It decreases the demand for bank credit for payments towards securities purchased.

�� B116

Investors and Speculators

Purchasers and sellers of securities on stock exchange are classified as investors and specula-tors.

Investors are those who buy securities in order to earn a fair or fixed return. They intend tohold them more or less permanently. They are interested in the safety of their capital andconstant yield thereon in the form of dividends or interest offered by respective companies.

They select sound securities to ensure safety and fair return in respect of their investments.Investors may sell their holdings if they desire liquidity of funds. Otherwise they prefer tobecome permanent shareholders or debenture holders.

Speculators are those who deal in securities in order to make a profit out of their price differen-tials. They buy the securities with a view to sell them with a profit. They do not hold on to thesecurities bought by them but mark time to dispose of them of at higher price to earn profit.They do not usually take delivery of the securities purchased or give delivery of those sold bythem but only pay or receive the difference between buying and selling prices. The price spreadis their profit margin.

It is of course difficult to find pure investor and pure speculator in practice as many as timeinvestors too would be tempted by the prospects of capital appreciation and earning quickgains and speculators may be compelled to hold on to their purchases to avoid losses.

Types of Speculators

There are different types of speculators dealing in a stock exchange. There are named aftersome animals, as they behave like wild animals. Their classification depends upon the natureof their activities in the stock exchange and in general, they are of four types, viz. bulls, bears,lame ducks and stags.

Bull. A bull is speculator who expects a rise in the price of shares of a company. Heis an optimist. He aims at making profit out of an expected rise in the price ofa particular share. For this purpose he purchases the security for future delivery. Generally, he has no intention of taking delivery on the fixed date orsettlement day. He may sell before the settlement day He may receive or paythe difference between the purchase price and sale price either on or beforethe settlement day.

Let us explain how a bull speculator makes profit out of expected rise in theprice of a security. Suppose a speculator expects that the price of equity sharesof ‘X’ company would rise. Suppose he purchases 1,000 shares of ‘X’ companyfor future delivery at the present market price of Rs. 150 and suppose the pricerises to Rs. 160 on or before the settlement day, he will sell at that price. Thus hemakes a profit of Rs. 10,000 out of the rise in the price of the security. It shouldbe noted that if his expectation goes wrong. He will incur a loss.


B117��

Bear. A bear is a speculator who expects a fall in the price of a security. He is a pessi-mist and he forecasts a fall in price. He aim at making profit out of an expectedfall in the price of a particular share. For this purpose he sells the security forfuture delivery. He may or may not posses the security. Generally, he has nointention of giving delivery on fixed date or the settlement day. He may pur-chase before the settlement day or settle the transaction on the settlement day.He may receive or pay the difference between the purchase price and the saleprice.

Let us explain how a bear speculator makes profit out of an expected fall in theprice of securities. Suppose he expects that price of equity shares of ‘Z’ com-pany would fall and he sells 1,000 shares of that company Rs. 150 for futuredelivery and let us further suppose that the price fall to Rs. 140 on or before thesettlement day. He will purchase at the price and he receives the difference ofRs. 10 per share. Thus he makes a profit of Rs. 10,000 out of a fall in the price ofthe security. It should be noted that if his expectation go wrong he will incur aloss.

Lame Duck. In case the bear is unable to strike the bargain immediately, he is said to “bestruggling like a lame duck”. This may happen on account of the fact that thesecurity which has been agreed to be sold may not be available in the marketand in that case the commitment cannot be fulfilled. If the other party agrees topostpone the deal, there would be no trouble but if he does not agree to post-pone such a situation would arise.

Stag. Sometimes the shares to be issued by new company may be unofficially quotedat a premium. This happens when the prospectus of the new company. Areexpected to be excellent. Some persons may apply for more shares than actuallyneeded. Their object is to sell the shares at a high one as soon as they are allottedby the new company and thus make quick profit. So stag is a person who ap-plies for shares of a new company with a view to selling the shares allotted tohim at a profit.

Stags may suffer loss. This happens when the public applies for less number ofshares than offered for. Then the stags will be allotted at the number of sharesapplied for and the shares may be quoted at a discount in the market. Undersuch circumstances stags will incur a loss, if they sell the allotted shares. Theoperations of stag create artificial scarcity of shares of the new company.

12.2.6 Stock Exchange Terminology

The following terms usually applied in the stock exchange dealings needs further clarificationfor benefit of the students :

Arbitrage

This is the business of buying securities in one stock exchange for selling them in another, totake advantage of price differential that may exist between the two

�� B118

Contract Note.

It is the evidence about the transaction betwen buyer and his broker. The court will not acceptany petition without the valid contract note.

Quotation List :

The stock exchange usually publish the price of their listed securities from time to time so thatthe investors may know the real worth of their holdings. Some exchanges communicate totheir members regular reports of their activities and dealings. The quotation list is also pub-lished in newspapers to make it public and enlighten the investing public about the dealingpattern of various securities.

Cum dividend or C.D. :

Shares are said to be bought and sold cum-dividend when the buyer acquires the right toreceive the amount of dividend which has been declared but not paid by the company. Theprice paid by the buyer includes the amount of dividend and is naturally higher than the pricethat would have to be paid without that right (or dividend). For example, if the cum-dividendprice of a security is quoted at Rs. 115, the company has already quoted a dividend of 35% onthe face value of this share of Rs. 10 i.e. Rs. 3.50 per share. In such transaction the buyer isentitled to receive this dividend of Rs. 3.50 on each along with the possession of the security.Government Securities are always quoted and traded at cum-dividend and the rate of interestthere on is fixed. The quoted price includes the amount of net interest (i.e. gross interest dueless tax deducted therefrom). Thus the cum-dividend quotation indicates that the buyer has aright to receive the dividend or interest declared/due there on.

Ex-dividend (or Ex-div.) :

Shares are said o be bought or sold ex-dividend when the buyer acquired the shares withoutany right to receive the dividend declared (interest due in case of debentures and bonus). It isonly the seller who gets the dividend or interest there on.

Stock :

Stock is a wide term, which includes all types of shares, debentures and bonds, the total priceof those has already been received by the company and which are duly traded in the stockexchange.

Spot or ready delivery contracts :

A ready delivery contract is one in which the parties intend to take delivery of the securitiesand pay for them. Such a contract is to be settled either on the same day or within a shortperiod of time. The Bombay and madras exchanges allow a period of 7 days for settlement. AtCalcutta exchange only 3 days are allowed for the purpose. There can be no extension of theperiod of settlement or postponement of the date of settlement. A ready delivery contract maybe settled in either of the following two ways.


B119��

(i) Actual Delivery : The broker receive delivery of the securities purchased and paythe price in full on behalf of the client. Similarly he may give actual delivery of thesecurities sold and receive the price on behalf of the client.

(ii) Squaring up of transaction : The original transaction may be squared up by meansof a fresh purchase or sale at the time of settlement under this system. Only theprice difference is adjusted between the two members.

Forward Delivery Contracts

These dealings are for account and settlement takes place at the end of every fortnight throughclearing house only and such transaction can have carry over facilities also. The speculators arethe main parties in these dealing. It is also to be noted here that business on spot deliverycontracts may be in all listed securities whether cleared or non-cleared. But all business foraccount representing forward delivery contract must be only in cleared securities cleared orsettled through clearing house only.

Thus forward dealing can be made only in those securities which are placed on the forward listby an exchange. They are meant mostly for the purpose of speculation.

Legally speaking all contracts including forward ones are mode with the intention of takingdelivery of securities on cash payment of their price. But in actual practice, forward business isdone not with the intention of taking delivery and making payment, but with the object ofmaking profit from buying and selling securities on the day of settlement either –

(i) the delivery is taken,

(ii) the transaction is reversed through a neutralizing purchase or sale, or

(iii) the transaction is carried over to the next settlement day.

Exercises

1. What is a Stock Exchange? What are its important functions?

2. Explain how dealings on a Stock Exchange are carried out.

3. Write notes on :—

a) Brokers and Jobbers

b) Listing of securities

c) Bulls and Bears

d) Settlement of Badla.

4. Briefly indicate the services rendered by the Stock Exchanges?

5. Write a detailed note on “Listing of Securities”.

�� B120

Study Note - 13

BUSINESS COMMUNICATION

This study note includes

• Communication

• Business Letters

• Report Writing

• Directors Report

• Directors’ Report to the Members

• Telegraphic Messages

COMMUNICATION

13.1. Meaning of Communication

Communication is a process by which send information and feelings to recipients through oneor more channels. It is an change of ideas, facts, opinions, information and understandingbetween two or more persons. It may also be regarded as the process of meaningfully transfer-ring information from one person to another. The success of a business depends to a greatextent on effective communication. It has become an essence of management. It is not only alink function but is alternative in the entire process of management Communication is the life-blood of modern business and industry. It is a systematic and continuous process that leads toproper running of the business.

A few noteworthy definitions are enumerate below : -

· “Communication is the process of passing information and understanding fromone person to another”. [Keith Davis]

· “Communication is the act of making one ideas and opinions known to others”

[Fred G. Meyer]

· “Communication is the conveying of information from one person to another.”

[Cyril L. Hudson]

· “Communication is an exchange of facts, ideas, opinions, emotions,

etc., be tween two or more persons.” [Newmen and Summar]

· “Communication is the act of inducing others to interpret an idea in the mannerintended by the speaker or writer.”

[Edwin Brown Flippo]

Business Communication

B121��

· “Communication is a systematic and continuous process of telling, listeningand understanding”. [Louis A. Alley]

· “Communication is a systematic and continuous process of telling, knowledge,etc., by speech, writing or signs.” [Oxford Dictionary]

· “Communication means an interchange of thoughts, opinions and information”. [Webster’s Dictionary]

Thus, communication refers to the exchange of ideas, feelings, emotions, knowledge and infor-mation between two or more persons. It is an attempt to achieve an accurate understandingbetween two or more persons. It is an act characterized by a desire to exchange information. Itinvolves a systematic and continuous process of telling. Listening and understanding. Com-munication is one of the most important functions of management. The success of business,depends upon the effectiveness of communication. It is said to be the nervous system of anenterprise.

13.1.2.Elements in the process of communication

Sender Encoding Message Medium

Feedback Receiver Decoding

(i) Sender (i.e., communicator) : The sender is a person who initiates the process ofcommunication. The sender may be a superior, a subordinate, a fellow member, acustomer or any other outside person.

(ii) Encoding : This refers to preparing the subject-matter of communication in a suitable language. The purpose of encoding is to translate the thought of the senderinto a language or code that can be easily understandable to the receiver of themessage.

(iii) Message : This refers to the encoded subject-matter of the communication whichis to be transmitted. The message may be regarded as a subject matter of communication.

(iv) Medium (or channel) : This is a path in which the message is transmitted fromone person to another. It serves as a link between the sender and the receiver.

(v) Decoding : This refers to the conversion of the message by receiver into meaningterms so as to make communication understandable. The effectiveness of communication depends on how much the receiver’s decoding matches with the sender’smessage.

�� B122

(vi) Receiver (or communicate) : The receiver is a person who receives the message ofthe sender. For communication to be effective, it must be receiver-oriented.

(vii) Feedback : This refers to the actual response of the receiver to the message communicated to him. It is a reversal of the communication process, in which the r e -ceiver expresses his reactions to the sender of the message.

13.1.3. Characteristics (or features) of communication

The characteristics of communication are explained as follows:

(i) Co-operative process : It is a co-operative process involving the participation of atleast two persons (one who transmits the message and the other who receives themessage and responds to it).

(ii) Continuous process : It is a continuous process. It is required by superiors, subordi-nates and fellow-members on a continuous basis to keep operations runningsmoothly.

(iii) Two-way process : It is a two-way process. It involves both sending the messageand receiving the response to that message. It is not complete unless the receiverhas understood the message. Understanding is the end result of communication.

(iv) Flow of information : The purpose of communication is to pass on information inorder bring about commonness of interest and effort.

(v) Pervasive function : It is regarded as a pervasive function because it is required atall levels of management (top, middle, lower) and in all departments (manufactur-ing, finance, marketing, personnel, etc.) of an organization.

(vi) Circular process : It becomes a circular process when the response to the message(i.e, feedback) requires another message to be communicated by the sender. Here,the response indicates the impact o the communication.

(vii) Flows in all directions : Communication flows downward from a superior to hissubordinates. It flows upward from the subordinates to a superior. It may flowhorizontally between persons occupying similar ranks in different departments. Itmay also flow diagonally between persons at different levels in different depart-ments. Therefore, it flows in all directions.

(viii) Influencing human behaviour : The primary purpose of communication is to influ-ence human behavious. It is a means of motivating people by proper timing of com-munication.

(ix) Conveying a message : A communication must convey some message. A message isthe subject-matter of communication. If there is no message, there is no communi-cation.

(x) Establishing interpersonal relations : Interpersonal relations are created by a regular interaction with subordinates on several aspects of work. By sharing feelingsand exchanging information with subordinates, they are made more loyal, sincereand faithful to their superiors.


B123��

13.1.4 Steps in the process of communication

The process of communication includes the following steps :

Step – 1 : To have a clear idea about facts, opinions, information, etc., on the part of thecommunicator.

Step – 2 : To secure the participation of other persons involved in the decision to commu-nicate a message.

Step – 3 : To decide what to communicate, with whom to communicate, when and howto communicate.

Step – 4 : To prepare the subject-matter of communication in a suitable language (i.e.,encoding the message).

Step – 5 : To select a suitable medium for the transmission of the message (e.g., telephone,telegraph, television, etc.).

Step – 6 : To transmit the message to the communicate (i.e., receiver).

Step – 7 : To ensure the correct interpretation of the message by the communicate (i.e.,receiver).

Step – 8 : To motivate the receiver to behave as desired by the sender of the message.

Step – 9 : To evaluate the effectiveness of communication through response or feedback.

Step – 10 : To evaluate the nature of impact of the communication.

13.1.5 Importance of communication in management

Management functions cannot be performed efficiently without an effective network of com-munication in the organization. The overall functioning of the whole organization is supportedby an effective communication network. It is said to be the nervous system of an enterprise.The importance of communication in management may be explained as follows :

(i) Facilitates sound planning : It facilitates planning by providing such information as is needed by the planners. Through communication, the mangers get therequired and relevant information which helps them to formulate proper plansand programmes for the company. It also helps in the proper implementation ofplans and policies of the management.

(ii) Provides proper information : It helps management by providing informationabout the duties, responsibilities, authority, positions and jobs. Delegation anddecentralization of authority is accomplished in an organization through effective communication.

�� B124

(iii)Facilitates co-ordination : Co-ordination can be maintained among various related departments by making an exchange of information on a regular basis. Co-ordination of various efforts becomes easy if communication is effective. It bindsthe people together and is really an aid to co-ordination.

(iv) Facilitates decision-making : It helps the management in arriving at vital decisions. The quality of any decision depends largely on the quality of informationavailable to the decision-maker. Effective communication helps in implementingthe decisions of the management.

(v) Creates inter-personal relationships : It helps in improving relationships betweenthe superior and his subordinates by providing clear and accurate information intime. These relations can be created through an exchange of ideas, opinions, information, directives, suggestions and other instructions between them.

(vi) Creates mutual trust and confidence : It creates mutual trust and confidencebetween the management and the employees. It is essential for healthy industrialrelations. It is helpful in boosting the morale and motivation of employees working in the organization. Prompt redressal of employees’ grievances by top-levelmanagers motivates employees to work efficiently.

(vii)Facilitates directing functions : It facilitates directing functions by providingproper interaction between managers and their subordinates. It improves superior-subordinate relationships by providing opportunities to employees to expresstheir opinions and viewpoints.

(viii)Ensures democratic management : It is the basis of democratic management. Itensures co-operation through understanding. It facilitates effective leadership maintenance of man-to-man relationships.

(ix) Facilitates controlling functions : It facilitates controlling functions by providinga feedback of actual performance against planned targets. It acts as a tool foreffective control. It ensures attainment of enterprise objectives according to pre-conceived and planned actions.

(x) Improves public relations : Public relations are improved though proper communication. Effective communication helps the management in maintaining goodrelations with customers, suppliers, shareholders, the Government and the community at large. It helps in developing a good public image of the organization.

(xi) Helps to cope with the changing environment : It helps the organization to copewith a rapidly changing business environment. It also helps managers in devisingsuitable strategies for meeting future challenges.

(xii)Helps in conducting global economic operations : Globalisation of business operations have increased the need and importance of communication. For a successful executive, it has become necessary to be aware of different cultures which


B125��

are prevailing in various countries. Thus, communication helps in the smoothconduct of global economic operations.

(xiii)Increases managerial efficiency : It contributes a great deal to higher efficiencyin job performance. The efficiency of a manager depends upon his ability to communicate effectively with his subordinates. Effective communication will makethe employees feel more secure and more interested in their work. Everyone involved in an organization must know clearly his duties, responsibilities and powers.

(xiv)Establishes team-spirit : It establishes a cordial and friendly atmosphere in theorganization. It helps members in establishing a closer link with each other. Itsatisfies employee’s organization work like a team to achieve the targets assignedto them.

13.1.6 Principles of effective communication

Effective communication systems are essential and important in all forms of business. Thefollowing are the essential elements of an effective communication system :

(i) Clarity of message : The subject-matter which is to be communicated, must beclear. No ambiguous (or confusing) terms should be used so that the purpose ofcommunication is deviated.

(ii) Unbiasness : It should be free from personal prejudices. It must take into accountthe interests of the other parties.

(iii) Reciprocal communication : Both the communicator and the communicate shouldparticipate in the communication. There should be a reciprocal effect (i.e., two-way communication).

(iv) Consistency : The communication should be consistent. The communicator shouldcommunicate the message which he believes to be true and proper. There shouldnot be any gap between what he says and what he does.

(v) Correct channel : The correct channel of communication is to be chosen in orderto make communication effective. The channel to be chosen depends on the nature and purpose of communication.

(vi) Speed : The communication system should be capable of carrying messages speedily. However, speed of communication should not impair the accuracy of theinformation to be transmitted.

(vii) Accuracy : The communication system should ensure accuracy in the transmission of information.

(viii)Safety : The communication system should ensure safety of the contents of communication from loss in transit (or miscarriage)

(ix) Flexibility : The communication system should be amenable to change accord

�� B126

ing to the needs of business. It should absorb new techniques of communicationwith little resistance.

(x) Human and physical conditions : A good communication system must take intoaccount all the human and physical conditions to make communication effective.

(xi) Sense of understanding : Both the communicator and the communicate shouldhave a sense of understanding about what they intend to convey.

(xii) Feedback : This refers to the actual response of the receiver to the message communicated to him. Feedback is a reversal of communication. It makes communication more effective.

(xiii) Listening carefully : Listening to verbal messages carefully implies an activeprocess. Half-hearted attention to the communication is often the cause of misunderstandings and confusion.

(xiv) Restraint over emotions : Strong feelings and emotional stress are serioushandicaps in the communication process. It should be avoided as far as practicable.

13.1.7 Objectives of communication

The following are the objectives of communication :

(i) Promotion of managerial efficiency : Communication is the lubricant fosteringthe smooth operation of the management process. It keeps people working inaccordance with the decisions of the management.

(ii) Co-operation through understanding : It induces human beings to put forthgenuine efforts in work performance. It inculcates the understanding of employees and leads them to greater efforts. It ensures efficiency in work in all respects.

(iii) Motivation to employees : It helps in moulding employees’ behaviour favourably.It encourages the employees to accept new ideas for completion of the worksystematically. It leads to better employer-employee relations.

(iv) Basis of leadership action : Effectiveness of leadership is greatly influenced bythe adequacy and clarity of communication. Personal communication is essential for maintaining man-to-man relationships in leadership.

(v) Job satisfaction to employees : The employees get better education, trainingand knowledge about the modern methods of production due to modern communication systems. The employees are trained to increase their productive power.This enhances the mutual trust and confidence between the management andworkers. Job satisfaction of employees promotes their loyalty towards the enterprise.


B127��

(vi) Quick implementation of decisions : Effective communication systems help themanagement to implement decisions quickly. Moreover, such systems help themembers to adjust quickly to changing circumstances.

13.1.8 Written communication

Written communication means transmission of information through written words. It mayconsist of messages in the form of letters, circulars, notes, notices, telegrams, bulletins, reports,memoranda, etc.

Written communication provides a permanent record for future reference. It enables informa-tion to be conveyed far and wide. It should be clear, concise, complete and correct in order tomake it effective.

Advantages of written communication :

The advantages of written communication are as follows :

(i) It may be transmitted to numerous persons simultaneously.

(ii) It provides a permanent record for future reference.

(iii) It is more effective than oral communication.

(iv) It is an ideal way of transmitting lengthy messages.

(v) It is a formal communication and it carries more weight.

(vi) It can be quoted as legal evidence in the case of any dispute.

Disadvantages of written communication :

The demerits of written communication are as follows :

(i) It is an expensive and time-consuming method of communication.

(ii) It is very formal and lacks a personal touch of sophistication.

(iii) Written communication finds it difficult to maintain secrecy.

(iv) It may be unsuited if unknown words and unfamiliar phrases are used.

(v) It encourages red-tapism and involves too many formalities.

13.1.9 Verbal (oral) communication.

Oral communication means transmission of information through the spoken word. It may bein the form of (i) face to face communication; (ii) through electronic devices (like telephone,intercom, etc.); (iii) lectures; (iv) interviews; (v) public speeches, etc.

�� B128

It is found useful where a detailed explanation of a message is required. It is a flexible methodof communication, where the message can be changed to suit the needs of the receiver.

Advantages of verbal communication :

The merits of verbal (oral) communication are as follows:

(i) It is an effective and a natural method of communication.

(ii) It is easily understandable.

(iii) It is less expensive and quicker as compared to written communication.

(iv) It removes distances and barriers between the communicator and the communicate.

(v) It ensures better understanding of the message communicated.

(vi) It is a flexible method where messages can be changed to suit the needs of the receiver.

Disadvantages of verbal communication :

(i) It provides no record for future reference.

(ii) It has a tendency of being distorted.

(iii) It may create legal problems in future.

(iv) It may generate communication gaps.

(v) It is difficult to act on it due to missing details.

Different methods of oral communication

Oral communication can take place in two ways, namely,

(1) Face-to-face communication; and

(2) Mechanical-device based communication.

Face-to-face communication

This refers to direct speech between two persons or between small group of persons. This is themost natural form of conveying messages and needs no equipment. Here, facial expressionsand gestures can be used to reinforce the spoken words. This method of communication pro-motes better understanding and ensures co-operation. It is the most effective and easiest wayof transmission of information. It helps in prompt decision making in case of solving urgentproblems. The purpose of this communication is to communicate – (a) orders; (b) requests; (c)instructions; (d) information and observation.


B129��

Face-to-face communication includes the following kinds :

(i) Direct personal talk : This refers to personal talk between two individuals oramong a small group of persons. Here, the speaker can explain the matter keeping in view the reactions of the listeners. It is the most flexible form of oral communication and is suitable for confidential matters.

(ii) Meeting (i.e. Joint consultation) : This is a process whereby concerned peoplemeet together to discuss the matters of general interest so as to arrive at decisions.Meetings are conducted with previous notice to transact certain business and toarrive at various decisions.

(iii) Interview : It is a face-to-face conversation to see and judge the personality of aperson. It is a two-way communication in the sense that both parties make statements about their respective positions and ask questions. An interview can besuccessful only when it is held in a relaxed atmosphere.

(iv) Lectures : It is a face-to-face communication which is used to provide knowledgeto students, trainees etc. Hence, the teacher (or trainer) delivers a lecture to students (or trainees) on any relevant topic.

13.1.10 Latest developments in communication media :

Electronic mail (e-mail)

This involves sending written messages through telecommunication links. The message to besent through e-mail is typed on the computer and is transmitted on the internet address (i.e.,website) of the receiver. It is a latest device to send written messages anywhere in the worldwith the help of internet. E-mail is the fastest method of communicating written messagesanywhere in the world at the least cost.

E-mail is the quickest means of transmitting messages. It provides the facility of sending andreceiving the messages anytime during the day and night. E-mail message can be sent to alarge number of people simultaneously, depending upon the requirement. It does not requireany stationary (such as pen, pencil, paper, stamp, etc.) to be used. The messages sent or re-ceived through e-mail can be stored for future reference. Moreover, e-mail messages are sup-posed to be highly confidential and secure. It is suitable for any type of message whether it is aletter, picture, design, etc. It ensures instant feedback provided both the receiver and the senderof the message are simultaneously sitting at their computer terminals.

The steps involved in sending e-mail message are as follows :

(i) Connect internet and start an internet browser (Outlook Express, Internet Explorer, etc.)

(ii) Type the e-mail address of the person to whom you want to send message.

(iii) Type the message in the provided ‘message box’.

�� B130

(iv) Type sender’s name and his e-mail address.

(v) Take the mouse pointer at the send button and click the mouse once.

Video – conferencing

This is a system by which people staying at different places can discuss certain issues of com-mon interest. This method of communication is very effective for executives, political leaders,consultants, etc. With the help of this facility, people can hold conferences and can both hearand see on another on television screen.

A typical video conferencing system consists of a set-top box, high quality digital camera,coder/decoder hardware, external microphones, telephone, satellite connection and other com-ponents. These facilities enable the participants in distant locations to take part in a conferenceby means of electronic sound and video communication. It reduces time, distance and cost ofexchanging views. It improves the quality of timely decisions. When conferencing is conductedwith the help of a computer, we can call it computer conferencing. For this conferencing, werequire a computer, telephone, internet facility and web camera. This conferencing can be usedfor seminars, meetings, consultations and recruitment. In this era of globalization when multi-national corporations are simultaneously operating in several countries, video conferencingcan prove to be a very effective means of mutual consultation. It can lead to substantial saving,both in terms of money and executive time.

Short Message Service (SMS)

The mobile telephone is capable of displaying short messages on the screen SMS provides amechanism for transmitting short messages to and from mobile phones. SMS is similar to pag-ing which can be availed anytime and anywhere. It enables the transmission of messages speedilyand at much lower costs. It facilitates the delivery of messages to multiple subscribers (havingmobile phones) at a time. It facilitates communication in a wide geographical area. Anyonewho knows the mobile number of a receiver, can send short messages through his mobilephone. SMS is a globally accepted seamless message service that guarantees speedy delivery ofinformation (text as well as numerical messages). An active mobile handset is capable of re-ceiving or submitting a short message at any time to any subscriber of mobile set. Recording ofmessages in the memory facilitates storage of information which can be retrieved as and whenrequired. It helps the receiver of message to react instantly to any business situation or other-wise.

13.1.11 Measures to improve communication

Effective communication is vital for managing the people in the organization. In order to makethe communication process more effective and responsive, the barriers (or obstacles) are to behandled effectively. The following are the measures to overcome the barriers to communica-tion :

(i) Regulating the flow of communication : Effective communication should involve determining the priority of messages to be communicated. Incoming com


B131��

munication should be edited and condensed. Otherwise there is a possibility ofmanagers being overloaded with the tasks of communication.

(ii) Handling language differences : Language differences can be handled by explaining the meaning of technical (or unconventional) terms in a simple language.Vague expressions should be avoided. As far as possible, use of ambiguous wordsshould be avoided.

(iii) Control over emotions : Both the sender and the receiver of the message shouldhave control over their emotions. They should ensure that the content of the message is not affected by any negative impact of emotion. Emotional stress is a serious handicap in the communication process.

(iv) Feedback : Feedback means the response or reaction to the initial message. Itmay include receiver’s acceptance and his behavioural response. Along with eachcommunication, there is a need for feedback. It is a reversal of the communication process.

(v) Importance of listening carefully : A receiver of the message should listen toverbal messages carefully so as to avoid misunderstandings and confusion. Areceiver of the message has to be patient and mentally composed while receivingthe message. A sender, on the other hand, should also be prepared to listen towhat the receiver has to say and respond to his questions, if any.

(vi) Clarity and completeness of message : The message should be adequate andappropriate for the purpose of communication. It is very essential to know theaudience for whom the message is meant. It may not be possible to achieve perfect communication unless the purpose of communication is clearly defined.

(vii) Sound organization structure : The organization structure must be sound andappropriate to make communication effective. Attempt must be made to shortenthe channel for conveying information. The channels should be straight-forwardto reduce delay and distortion in communication.

(viii)Mutual trust and faith : The parties involved in communication should havemutual trust and faith between themselves. They should feel free to make suggestions and correct each other’s views without there being any misunderstandings.

(ix) Physical layout of work place : In a modern organization, it is also found thatthe physical layout of the work place influences the communication pattern. Thelayout of an office should be designed in such a way so as to facilitate frequentinteraction.

(x) Use of informal channel of communication : It helps to improve managerialdecisions and makes communication more effective. For effective communication, formal channels must be supplemented with the use of informal channels.

�� B132

13.2 BUSINESS LETTER

Characteristics of a good business letter

Business people have to communicate with their customers, suppliers, debtors, creditors, pub-lic authorities and the public at large for the purpose of exchanging their views and for sendingand receiving information. Written communication is called correspondence. Commercial cor-respondence means correspondence by business people on matters of commerce.

Following are the characteristics of a good business letter :

(1) Clarity :

The language shall be clear so that the ideas are properly expressed and the readercan understand them in the correct sense.

(2) Conciseness :

A letter shall not be unnecessarily long. It must be concise and precise.

(3) Completeness :

A business letter shall be complete in every sense. The points must be arranged systematically and logically and then a complete and clear picture emerges.

(4) Unambiguous :

A business letter must be free from ambiguity.

(5) Courtesy :

A business letter must be courteous. This means that the letter should be polite in itsform.

(6) Well-planned :

Effectiveness of a letter depends on its good planning.

The form of a business letter contains the following :

(a) Heading :

Name, address, telephone number and telex are generally printed; reference numbershould be given on the left side on top and the date should be given on the right side.

(b) Inside Address :

The official designation of the addressee is given on the left side. Circular letters do notrequire inside address.

(c) Opening Salutation or Greeting :

‘Dear Sir’ in case of the singular and ‘Dear Sirs’ in case of the plural should be used. Inthe case of a circular letter, either ‘Dear Sirs’ or ‘Gentlemen’ may be the salutation.


B133��

(d) Body of the Letter :

This includes three parts :

(i) Introduction :

This is to draw the attention of the reader and it may contain a reference to a previousletter.

(ii) Middle portion :

This contains the principal information or message to be set out in one or more para-graphs.

(iii) Conclusion :

This contains the action to be taken by the recipient. The letter must end with ‘ThankYou’ or ‘With Thanks’ or ‘With regards’, etc.

(e) Complimentary Close :

Complimentary Close should be matched with the style of salutation, for example, ‘Yoursfaithfully’ or ‘Yours sincerely’ or ‘Yours truly’, etc.

(f) Signature and Date :

Every business letter must be signed by the authorized person and dated.

�� B134

Sketch of Layout of a Letter

(A) Telephone No. —- Name of the Sender ——

Telex No. —- Address of the Sender –

Telegraphic Address — Nature of business —-

Reference No. — Date –

(B) Name/Designation of Addressee

Address of Addressee

(C) Opening Salutation (Dear Sir/ Sirs, etc.)

(D) Re. : ……………………………………

Subject Matter :

……………………………………………………………………………….

………………………………………………………………………………..

(E) …………………………………………………………………………………

…………………………………………………………………………………

(F) Yours faithfully,

Complimentary Close

(For ………………….)

(G) Signature of sender

Designation.

(H) Enclosure :

(A) = The heading; (B) = The inside address; (C) = Opening Salutation; (D) = Re :________; (E) = Main Body of letter divided into paragraph; (F) = Complimentary Close; (G) =Signature of Sender;

Kinds of Business Letters

There are many varieties of business letters depending on the subject matter or the pur-pose for which these are being written. Some common varieties, suitably grouped, areindicated as follows :

(1) Offers, Quotations and Orders;

(2) Confirmation, Refusal and Cancellation of orders;

(3) Claims, Complaints and Adjustments;


B135��

(4) Collection letters;

(5) Agency letters;

(6) Status enquiry letters;

(7) Recommendation and credit letters;

(8) Banking and Insurance letters;

Offers, Quotations and Orders

An offer is an invitation extended by a trader to the public or to a particular customer to placeorders for his products sold by him. The object of making an offer is to increase the sales of theproducts in the market.

When an offer is being made against a particular enquiry, it is known as a quotation. An offeror quotation should contain the following particulars :

(i) Description an quality of the goods;

(ii) Unit of measurement of weight;

(iii) The price per unit;

(iv) The terms of payment,

(v) The place, mode and time of delivery.

�� B136

A few specimen of such letters are given below :

Specimen – 1

Offer to a retailer in respect of “Clean Well” – Liquid Cleansing Soap

XYZ COMPANY LTD.

5, Brabourne Road, Kolkata – 700 001

Telephone : 37-9128

Telex – A501

Telegraphic Address – OFAG Dated : 19th August, 2001

Code – A.X.Y.

Ref. No. – BL/5409/01

To Messrs Elite Stores,

Darjeeling, West Bengal

Dears Sirs,

Re: ‘Clean Well’ – Liquid Cleansing Soap

We have pleasure in sending you today a sample packet of ‘Clean Well’, which hasrecently been introduced in the market. The product is the result of a number of years oftireless effort by our research staff.

We forward herewith a few copies of our leaflets so that your can distribute them forthe purpose of advertisement. It will be observed from the leaflets that the various qualitiesof the product are really unique. We also enclose a few copies of the price lists and you willappreciate that the prices quoted are very competitive. As per our terms, you will be al-lowed two months’ credit and a discount of 20% on the catalogue price.

Thanking you.

Yours faithfully,

For XYZ Company Ltd.

Enclosures :

(1) Leaflets Prabhat Das

2) Catalogue Director


B137��

Specimen – 2

Asking for Catalogue and Trade Terms

Dated : 31st January,2001

(As per layout sketched)

Dear Sirs,

We take this opportunity to introduce ourselves to you. We are one of the leading booksellers of this city, having stocks of all types of books. We have trade terms with a numberof publishing houses, both Indian and foreign, whose books we sell. We would like tostock your publications. We, therefore, request you to send us your latest catalogue andstate your trade terms. Please let us know whether it will be possible for you to give usgoods on credit, if we give satisfactory trade and bank references. It would be convenientfor us to settle the account quarterly.

Expecting a favourable reply,

Yours faithfully,

Specimen – 3

Reply to the above

15th February, 2001

(As per Layout sketched)

Dear Sirs,

We thank you for your inquiry dated 31st January,2001. We are glad to know that youare interested in our publications and desire to stock them. We are sending our latestcatalogue and price-list under separate cover.

We allow a trade discount of 20 per cent on the printed prices. Our terms are cash ingeneral but we can still grant credit for one month at the maximum.

We trust you will find these terms suitable and hope you will favour us with your orders.

Yours faithfully,

�� B138

Specimen – 4

Asking for quotations of cloth

10h February, 2001


Dear Sirs,

We are interested in placing orders for the supply of Khaki Drill cloth required forN.C.C. uniforms. It would be appreciated if you could kindly send at your earliest theparticulars of Khaki Drill cloth manufactured by you.

As it is likely that our requirements may be quite heavy, it is hardly necessary to re-mind you of the benefits likely to accrue to you by offering competitive prices.

Our needs would be mainly for this particular item and we should appreciate samplesin various weights.

We await an early response from you, so that we may be able to place orders with youin time and you may execute these orders expeditiously.

Yours faithfully,

Specimen – 5

Reply to the above

21st February, 2001(As per Layout sketched)

Dear Sirs,

We thank you for your inquiry of 10th February and have the pleasure in quoting ‘Dia-mond Khaki Drill’ fast colour 45 metres at Rs. 4.25 per metre.

You will find that this drill is absolutely unshrinkable and extremely hardwearing. Thespecial quality it possesses is its resistant to the action of daily use.

Orders will be executed promptly from stock, but of course, a reasonable period ofnotice would be required for unusually large quantities.

We trust we shall have the pleasure of supplying your needs.

Yours faithfully,


B139��

Specimen – 6

An order for the supply of Toys

5th February, 2001


Dear Sirs,

We have pleasure to introduce ourselves as your old customers for toys. We gave yougood business two years ago in toys manufactured by you, having sold them for about Rs.20,000/-. For some reasons beyond our control, we could not find it possible to arrangethe sales and could not place orders with you for the supply of the same. But this year, wehave decided to come into the field again and would expect you to favour us with specialconsideration for our orders as you did earlier. Kindly book our order for the supply oftoys as per details given below:

(i) Plastic toys of different kinds and sizes, Rs. 15,000

(ii) Paper toys of different kinds and sizes, Rs. 12,000

(iii) Glass toys of different kinds and sizes, Rs. 10,000

(iv) Clay toys of different kinds and sizes, Rs. 5,000

Total Rs. 42,000

Please see that the toys are properly packed and delivered to our destination F.O.R. as before.Your firm will bear the responsibility for any damage due to breakage, etc.

A prompt response is awaited.

Yours faithfully,

�� B140

Specimen – 7

A Reply to the above

15th February, 2001


Dear Sirs,

With reference to your order dated February 5, 2001 for the supply of toys worth Rs.42,000/-, we are sorry to inform you that at present we are not in a position to meet yourfull requirements, as we have to comply with the outstanding orders received from manyconcerns of the neighboring States of Rajasthan, Madhya Pradesh, Haryana and the UnionTerritory of Delhi. However, we would like to recommend a well reputed manufacturingconcern “The Taj Toys” of the local market, with which you may place your order andreceive the supply in time. Had we known before hand that you would place with us sucha large order, we could have made some arrangement, rather than missing our esteemedcustomer. However, we would like to assure you that, in future, you will have no need tocomplaint to us for orders, regardless of the worth.

Willing to serve you at all times,

Yours faithfully,

Specimen – 8

Placing an order for Radios

22nd March, 2001


Dear Sirs,

With reference to your quotation Number SY/74/01, dated 10th February, 2001, wehave pleasure in placing an order for the supply of :

(1) One dozen, 3 Band, Retheim radio Sets, and

(2) Two dozen, 2 Band Transistor sets Model no. 35 ‘Priya’.

Please ensure the proper packing of the goods and arrange to dispatch them by passen-ger train within a fortnight of the issue of this order, as the items of this order are urgentlyrequired.

Please dispatch the goods at an early date, as these items are in heavy demand thesedays due to the World Cup Football.

Thanking you,

Yours faithfully,


B141��

Specimen – 9

Reply to the above

30th March, 2001


Dear Sirs,

We thank you for your order dated 22nd March, 2001 for the supply of one dozen rediosets and two dozen transistor sets.

In view of the urgency shown by you, we have forthwith executed the order and thegoods are already on their way to you by passenger train.

We thank you very much for your brisk business and particularly congratulate you on

your success in disposing of your goods to our mutual advantage.

Yours faithfully,

Confirmation, Refusal and Cancellation of an order

Confirmation :

As soon as an order is received, it should be immediately acknowledged and confirmed.When the order is executed immediately, no confirmation is, however, necessary. Butwhere there is any possibility of delay in executing the order, the confirmatory letter mustbe issued in respect of the order.

Refusal :

At times, orders are to be refused on various grounds. Orders may be refused for lack ofstocks or, where the customer is financially unsound, etc. The refusal letter should bepolite and generally the reason for refusal should be stated.

Cancellation :

Sometimes it becomes necessary to cancel an order already placed by the party due tosome unforeseen circumstances. It may be due to undue delay in the execution of theorder, sudden fall in the market price or bankruptcy of the customer. The letter cancelingsuch an order should clearly state the reasons for such cancellation.

�� B142

A few specimen of such letters are given hereunder :

Specimen –1

Expressing inability to execute order

25th July, 2001


Dear Sir,

We sincerely thank you for your order of the 2nd July, 2001 for some of our publications,but we regret to say that we are unable to execute your order at present, as our stock ofthese books is exhausted.

The books ordered are being reprinted and we expect them to be ready for sale by theend of this month. We are, therefore, keeping your order before us and, unless we hearfrom you to the contrary, we shall be glad to execute your order as an when the books

We greatly regret the inconvenience caused to you. Assuring you of out best co-opera-tion always.

Yours faithfully,

Specimen – 2

Asking for extension of time

4th August, 2001


Dear Sir,

We thank you for your order of the 20th July, 2001 for five tones of coconut oil for deliv-ery by the 15th of this month.

Owing to a sudden strike in our Mills during the previous month, our stocks are ex-hausted and fresh supplies are expected to be ready for delivery within a fortnight. Wehope that your requirements are not so urgent as to render an immediate delivery.

We may, therefore, request you to wait for a further three weeks, by which time weshall be in a position to comply with your order.

If you can see your way to extend the date of delivery to 30th August, 2001 we shall beable to accept your order and ensure its execution within the time stated above.

An early reply will be appreciated.

Yours faithfully,


B143��

Specimen –3

Cancelling order due to undue delay in execution

20th August, 2001


Dear Sir,

We placed an order with you on 5th July for the supply of 500 sets of pistons and rings,which were to be delivered by the 5th August. But to our surprise we have received nei-ther the goods nor any intimation from you. Sine the time of delivery has long expired,we are complelled to cancel the order under reference.

This may kindly be noted.

Thanking You

.Yours faithfully,

Specimen – 4

Cancelling order due to bankruptcy of customer

25th April, 2001


Dear Sirs,

We placed an order with you on the 22nd of this month for the supply of 200 dozenhandloom bedsheets with pillow covers, but we very much regret that we have to cancelthis order as our customer for whom these goods were intended has now become bank-rupt.

We shall, therefore, request you to make a note of this and stop dispatching the goods.However, we may assure you that we will make goods the loss of this order within a shorttime.

Thanking you,

Yours faithfully,

�� B144

Claims, Complaints and Adjustments

Claims and Complaints:

At times the buyers are not satisfied with the quality of the goods supplied. There mayalso be discrepancies in respect of the quantity, terms and conditions of payment, deliv-ery, etc. As a result, the buyers raise different claims on the suppliers. Both the lettersraising such claims and the replies thereto, should be written tactfully, avoiding an un-pleasant situation.

Adjustments :

When the claims as mentioned above are substantiated, some letters of adjustment arerequired to b issued to the purchaser in order to rectify the error and settle any disputeamicably. The supplier should always try to settle the matter amicably, even at his owncost, as the customers are valuable assets of a concern.

A few specimen of such letters are given below:

Specimen – 1

Complaints regarding delay in delivery

17th September, 2001


Dear Sirs,

We regret to point out that, although you acknowledged our order dated 4th August,2001 the goods have not yet reached us. This has been causing us considerable inconve-nience, and we have been put to substantial loss.

The orders were placed with your on the explicit understanding and your promise thatyou could execute the orders within a fortnight. The fact that you have taken undue timeand have not yet delivered the orders, has put us at a great loss in business, for which wemay claim compensation from you.

However, we have no intention of exercising this right and we propose to wait for theexecution of the order till the end of this month.

Prompt action is expected from you.

Thanking you, Yours faithfully,


B145��

Specimen – 2

Reply to the above

25th September, 2001


Dear Sirs,

We have received your letter of the 17th September,2001, complaining of the delay in thedelivery of goods for which order was placed on the 4th August, 2001. We are really verysorry that you have had to face some inconvenience on our could not be executed. How-ever, we shall try to expedite things and every effort shall be made to deliver the suppliesin time in future. Once again we very much regret the inconvenience caused to you andassure you of the delivery of the present supply before the end of the month.

We fully appreciate the indulgence you have shown to us in extending the date of deliv-ery and hope that you will accept our apologies for the delay and continue the samefriendly relationship which existed in the past.

With thanks,

Yours faithfully,

Specimen – 3

Complaint about receipt of wrong goods

5th August, 2001


Dear Sir,

Today we have received delivery of the consignment sent by you on 25th July, 2001.

On opening the parcel, we were surprised to discover that the contents of the samewere entirely different from those ordered by us vide our letter no. R25/CA dated 10th

July, 2001. A statement of the goods received is enclosed for your perusal. While compar-ing them, you yourself would find that none of them were ordered by us.

Please look into the matter immediately and let us have your reply by return post.

Yours faithfully,

�� B146

Specimen – 4

Reply to the above

10th August, 2001


Dear Sirs,

We thank you for your letter of 5th August, 2001, and are sorry to learn that by an over-sight of our dispatch section, you have received the wrong consignment.

The consignment received by you was meant for M/S. Hari Prakash & Bros., SadarBazar, Meerut, who have in turn received your consignment. We have received a letterfrom them also.

We have requested M./S, Hari Prakash & Bros., Meerut, to deliver that parcel to yourper passenger train and you are also requested to dispatch their goods to them directly.Expenses incurred by you exchanging these goods will be borne by us, and you are re-quested to draw a bill on us.

We very much regret the inconvenience caused to you on this account.

Thanking your and assuring you of our best co-operation,

Yours faithfully,

Specimen – 5

Complaint about damaged goods

15th July, 2001


Dear Sir,

We very much regret to inform you that the consignment delivered by you on 5th July,2001, has been received in an entirely damaged condition and to our surprise not a singlepacket is in a saleable condition. Will you, therefore, look into the matter and send us afresh consignment of the goods, for which we placed an order with you. On receipt ofthese goods, we shall return this damaged consignment to you by passenger train. Thecost incurred in returning the damaged goods will be borne by you.

Please replace the goods of the consignment urgently.

An early reply is awaited.

Yours faithfully,


B147��

Specimen – 6

Reply to the above

20th July, 2001


Dear Sir,

Your letter dated July, 15, 2001 complaining about damaged goods has been duly re-ceived. We sorry to learn that, by some negligence on the part of our packing department,and partly due to the mishandling of goods by the railways, you have received the con-signment in a damaged condition.

While we are arranging to send a fresh consignment of your order within this week, wewould suggest that you may dispose of the tea (already with you) in loose form. Wewould allow you an additional discount of 10% on this lot to cover the loss your mayincur in this regard.

We regret once again the inconvenience caused to you and would like to assure youthat such mistakes will not occur in future.

Thanking you,

Yours faithfully,

Specimen – 7

Complaint of inferior quality

11th March, 2001


Dear Sir,

We thank you for your prompt delivery of distemper wall paint manufactured by you.However, we are sorry to note that the quality of this consignment does not tally withthat of the previous one supplied by you on 10th February, 2001. The paints you havesupplied this time are of rather inferior quality and are not so fast as the previous ones.

We may, however, retain the goods on the condition that an allowance of 10% is madein the price, failing which goods will be kept pending till the receipt of instructions fromyou as to how best they should be disposed of.

Expecting your prompt attention,

Yours faithfully,

�� B148

Specimen – 8

Reply to the above

20th March, 2001


Dear Sir,

We are in receipt of your letter of 11th March, 2001, regarding supply of inferior qualitywall paints. We very much regret that the goods are not to your satisfaction. We thankyou very much for this act of kindness as we are always anxious to improve the quality ofthe goods manufactured by us. If the goods are not to your satisfaction, you are requestedto send the consignment back to us at our cost so that we may find out where the fault lies.

Thanking you,

Yours faithfully,

Specimen – 9

Complaint of shortage of goods

31st January, 2001


Dear Sir,

We are in receipt of the books sent under the cover of your invoice No. 437/AX dated25th January, 2001 and thank you for the same.

In this connection, we may state that books of item no. 4 were found short of the order.You have sent only 20 copies of these books instead of 30 copies as per our order.

We presume that this mistake has crept in inadvertently and you may either issue us aCredit Note or send us by post the copies in short supply.

Your prompt attention is requested.

Thanking you,

Yours faithfully,


B149��

Specimen –10

Reply to the above

5th February, 2001

As per Layout sketched)

Dear Sir,

Your letter dated January 31, 2001 has been duly received. We are sorry to note thatsome books were found short in item 4 of our Invoice No. 437/AX dated 25th January,2001. This mistake seems to have occurred due to the negligence of some newly appointedpersons of our packing section and we have taken them to task. We are sending 10 copiesof the book of this item under separate cover by registered book post in order to cover theshortage.

The inconvenience so caused is very much regretted.

We assure you of our best services and co-operation at all times.

Thanking you,

Yours faithfully,

Collection Letters

Business is carried on mostly on credit. Therefore, collection of money and issuingreminders for payment are a regular features of business.

In drafting collection letters, necessary care should be taken not to wound the sentimentsof the customers. Sometimes, it may be necessary to issue several reminders for non-payment.


Specimen – 1

Fixing a date of payment

1st March, 2001


Dear Sir,

We are surprised to find that you have taken no notice of our letters of 3rd and 18th Febru-ary, 2001 asking for settlement of your account of Rs. 5000, which is now long overdue.

�� B150

As we are unable to allow the account to stand over longer, we must insist on its paymentby the 10th March at the latest, failing which we shall be compelled, much to our regret, totake further steps to have the account settled.

Yours faithfully,

Specimen – 2

Threatening legal action

15th March, 2001


Dear Sir,

We have written to you three times for the settlement of our account, but much to ourregret, you have not only failed to settle outstanding but have taken no notice of it. Wenow inform you that, unless we have a remittance from you within the next seven days,we shall be compelled, of course against our desire, to place the matter in the hands of ourlawyers. We trust, that you will not compel us to take such an unpleasant step.

Yours faithfully,

Specimen – 3

Asking a customer to take advantage of cash discount

25th February, 2001


Dear Sir,

Kindly refer to our letter of February 3, 2001 enclosing a statement of account of Rs. 5000/- (Rupees five thousand only) outstanding against you. You are one of our esteemed cus-tomers who invariably settle their accounts promptly and take advantage of our cashdiscount 2% for payment within seven days or net cash for one month. As your accountfor November is still unpaid, we think it our duty re remind you that you are entitled tothe discount only if your remittance reaches us by the end of this month.

Yours faithfully,


B151��

Agency Letters

An agent is a person or a firm who has been appointed by someone to act for him. The personappointing an agent is known as the principal. The against are generally entitled to get a com-mission. When the agent is to give guarantee for bad debts, he is also entitled to get Del-credereCommission in addition to the usual commission.

When writing to an agent, the principal must be careful to make the subject matter of the letterunambiguous and convincing. He should, in no case, write a letter in a dictatorial tone, becausehis business depends on the co-operation of his agent.


Specimen – 1

Offering agency

10th January, 2001


Dear Sir,

We are contemplating to appoint a commission agent for the sale of our products in yourState, and your name has been kindly given to us by our business friend M/s. Hariram &Sons, Chandni Chowk, Delhi.

At present, we are not in production of all the woolens mentioned in our list. We havespecialized in different woolen garments like pull-overs, cardigans and socks. These prod-ucts have become very popular in Punjab, Haryana, Delhi and Uttar Pradesh. We nowseek markets in other parts of northern India as well.

In case you wish to co-operate with us, will you be good enough to inform us whether, inthe event of your appointment as our agents, you will be free to act for us in that capacity?On receipt of your concurrence, we will furnish you with our terms and conditions.

Thanking you,

Yours faithfully,

�� B152

Specimen – 2

Complaint of inferior quality

15th January, 2001


Dear Sir,

We feel that there is an excellent market in Bihar for our milk products, and we should beglad to know whether you are prepared to represent our firm there, as our sole agent.

As our preparations are in great demand in other States of northern India, we are inclinedto believe that you will find no difficulty in introducing them to your State.

Your efforts will, of course, be backed by an advertisement campaign, a plan of which isenclosed, and we are prepared to consider your suggestions for any improvement in thisdirection. We will also maintain, at our cost, a showroom under your supervision andcontrol for the display of our products.

We shall be willing to allow you a trade commission of 10% on net sales and undertake tore-imburse all expenses resulting from this representation. We would like to send you aformal agreement form on hearing from you.

Kindly reply at your earliest.

Yours faithfully,


B153��

Specimen – 3

Applying for agency

15th January, 2001


Dear Sir,

We have been informed by our business friends M/s. Harsuk Lal & Sons, Nagpur, thatyou have no representation in Delhi. You will be pleased to note that we have an estab-lished agency business at Delhi with a standing of 25 years, and we are prepared to offerour services to act as your local agent.

We are specialized in this line and we represent several reputed firms in Kolkata andMumbai. We believe that we would succeed in introducing your products in this area.

Our terms are 5% commission on net sales, and the refund of all our disbursements, shouldthere be any.

For reference, you may write to Bombay Trading Corporation, Mumbai and our bankers,Indian Overseas Bank, Chandni Chowk, Delhi.

Should you decide to entrust the representation of your firm to us, we would use our bestefforts to promote your business in this area.

Yours faithfully,

Specimen – 4

Letters accepting agency

7th February, 2001


Dear Sir,

Thank you very much for your letter of January 15, 2001. We have noted with keen inter-est the contents contained therein.

We have pleasure in informing you that we are prepared to accept your agency on theterms and conditions stated in your letter and hope that we would be able to develop asubstantial business for you here. We may point out that most of our principals bear the

�� B154

cost of our cables to them regarding the agency work. We hope you would also not mindto do so.

You will be glad to know that we also represent a reputed and renowned firm manufacturingwoolen garments and you may kindly introduce us to an interested party, if you have contacts.

Thanking you,

Yours faithfully,

Specimen – 5

Letter informing of termination of agency

5th January, 2001


Dear Sir,

It has been necessary for us to terminate the agency with M/s. Govind Shai & Sons, Kanpur,who represented us in Uttar Pradesh and we must accordingly ask you to ignore theparty entirely should they attempt to inform you that they are still acting on our behalf.Despite our best efforts, we have not been able to find a suitable party, and we should beobliged if you would very kindly excuse us for the inconvenience incidental to the ab-sence of our agency in your area.

We are sure that you would assist us materially by forwarding your orders directly to us,unless a visit from a representative is essential, in which case we shall be glad to makesome special arrangement.

We are sorry for any inconvenience you may suffer on account of the present change.

Yours faithfully,

Status Enquiries

Every businessman is to take some risk in selling his goods on credit to various types of cus-tomers. But the prudent way to minimize this risk is to verify the creditworthiness of the newcustomers before allowing them any credit.

Information regarding the financial standing and reputation of credit worthiness of a newcustomer should be obtained from various sources, like business friends, credit informationagencies and mainly from banks.


B155��

Status enquiries should always be made confidentially. The language asking for any informa-tion must be polite. The information supplied should be accurate and factual. The answer shouldindicate that the information is given in confidence and without any liability.

A few specimen of such letters are given below:

Specimen – 1

Asking for Bank reference

20th March, 2001


Dear Sir,

We are much obliged to you for your order of 12th March, 2001.

As this is our first transaction with you, we would request you to furnish us with the name ofyour banker as a reference and a couple of other trade references. We invariably follow thisconvention in handling new accounts.

We shall be executing your order while this routine matter is settled.

We hope this to be the beginning of a long and cordial relationship between our firms.

Yours faithfully,

�� B156

Specimen – 2

Asking for names of reverences

10th March, 2001


Dear Sir,

We thank you for your order of 20th February, 2001 and it is engaging our attention.

It is our invariable practice, when opening new accounts, to ask for a couple of tradereferences. As we have not had the pleasure of doing business with you previously, it willbe appreciated if you could very kindly furnish two trade references.

Always ready to serve you,

Yours faithfully,

Specimen – 3

Favourable Reply

5th April, 2001


Dear Sir,

Your letter of 10th March, 2001 regarding the financial standing and general reputation ofM/s. Jamuna Lal & Sons, has been duly received. In this connection we have the pleasureto inform you that we have been in business with the aforesaid firm for over then yearsand we have not had any occasion to create any doubt regarding their financial sound-ness. We personally would be quite willing to allow them credit even in excess of theamount you mention.

This information, however, is supplied in confidence and without any responsibility onour part.

Yours faithfully,


B157��

Specimen – 4

Favourable reply

6th April, 2001


Dear Sir,

We have your inquiry dated 30th March, 2001 and are glad to inform you that the firm inquestion enjoy a good reputation and confidence in the local market. We have been doingbusiness with this firm for about ten years and we have all along found them prompt inpayment. So far as we know, they are financially quite sound, though we cannot give youany definite idea about their financial capacity. They have been a valued customer of oursand we feel no hesitation in giving them credit for an amount beyond the sum you havementioned.

Yours faithfully,

Specimen – 5

Unfavourable reply

5th April, 2001


Dear Sir,

In reply to your letter of 30th March, 2001, we have to inform you that the firm aboutwhich you have inquired has been undergoing a bad time lately, and more than once, wehave had to press them for payment of our bills. We would ourselves hesitate to extendthem credit to the extent you mention.

We are giving this information to you in confidence and would request you to treat it assuch. However, we would like to add that our firm is not guided by any prejudices inmatters like this.

Yours faithfully,

�� B158

Specimen – 6

Letter refusing credit

9th April, 2001


Dear Sir,

With reference to your letter of 23rd March, 2001, we regret to state the information re-ceived by us from private sources about your firm is not complete enough to permit us tomeet your wishes in the matter of credit.

We trust that this position will change in the near future so as to allow us to open anaccount with you. Meanwhile, we suggest that you may order the goods on C.O.D. basis.We hope that taking into account the high quality of our goods, our low prices and ourcash discount of two per cent you will accept our suggestions.

We regard the inconvenience caused to you.

Yours faithfully,

Recommendation and Credit Letters

Sometimes, letters of recommendation are issued either for the purpose of introducing an ap-plicant for a job or for introducing a businessman to others in the same line of business.

When a person, besides introducing a certain person, requests the recipients to pay a certainamount of money to the person introduced, the letter written by him in such a case is called,Letter of Credit. Generally, banks issue different types of letters of credit to their customers tofacilitate traveling and international trade.

Every letter of credit must contain the name and address of the person to whom it is to bepresented for payment. It should also contain the name, address and specimen signature of theperson in whose favour it is issued, the amount to be paid or the limit, if any, and the period ofvalidity of the Letter of Credit.


B159��

Two specimen of such letters are given hereunder:

Specimen – 1

Regarding loss by fire

15th January, 2002


Dear Sir,

We have pleasure in introducing Mr. Mahesh Kumar, the bearer of this letter, who is ourbusiness friend. He is one of the senior partners in the firm M/s Mahesh Kumar SureshKumar, who deal in textile goods in the city. They want to make new business connec-tions in Mumbai and with this end in view, they are sending Mr. Mahesh Kumar on a tourto that State.

We shall be glad if you could kindly help him with the addresses of respectable firms asalso with your valuable advice in business matters.

We will regard every service you render to Mr. Mahesh Kumar as a personal favour. Weshall always be ready to be of service to you in similar matters.

Thanking you,

Yours faithfully,

�� B160

Specimen – 2

Acknowledging claim for damage

17th January, 2002


Dear Sir,

We have pleasure in introducing to you the bearer of this letter, Sri Hari Krishan Seth, abusiness friend of our firm. He starts today on a business tour through the State of UttarPradesh to establish new business connections in brass ware.

Sri Hari Kishan Seth is a pertner in the firm of M/s. Seth & Sons, Station Road, Moradabad,who are well-known for the manufacture of quality brass ware.

We shall be glad if you could assist him with your kind advice regarding the standingfirms in your area.

Sri Seth is well equipped with funds for the tour; still, if he stands in need of money,please help him with the necessary funds to the extent of Rs. 2,000 and draw on us a billfor the same.

Please take a receipt in duplicate from Sri Seth for the money advanced to him and for-ward one copy of the same along with the bill drawn on us.

We shall always be willing to reciprocate any service you may render to Sri Hari KishanSeth, whose signatures are given and attested below.

Thanking you,

Yours faithfully,

Attested Signature of Sri Hari Kishan Seth


B161��

Banking and Insurance Letters

Banks are indispensable in modern business. The primary functions of a bank are :

(a) receiving deposits from customers;

(b) making payments against deposits to customers;

(c) granting loans and advances for earning interest through overdrafts, credits, loans,advances, etc.

Banking letters must be of a very high standard and should be carefully worded, as customersare often touchy in money matters. Correspondence about customer’s accounts should be treatedas confidential. Banking letters should avoid ambiguity, must be courteous and respectful.

There are generally three forms of insurance – Life, Fire and Marine. All letters in connectionwith Life Insurance must contain reference to Policy No. or Proposal No., name of the lifeassured, mode of payment, amount of premium, etc.

Correspondence regarding Fire Insurance generally is made of a proposal for a policy, accep-tance or refusal of the proposal, rate of premium, claims and their settlement.

Correspondence regarding Marine Insurance generally includes a proposal to insure, accep-tance or refusal of the proposal, quotation for premium, claims and acceptance or refusal ofclaims.

�� B162

A few such letters are given below:

Specimen – 1

Letter refusing credit

15th January, 2002


Dear Sir,

We have to inform you with great regret that a fire broke out last night in our godownsituated at 23/27 Loha Mondi, Agra, Thana hariparwat. The cause of the fire could not beestablished even by the police, who have been to the site this morning. The fire was seenby the watchman in the store where paper is stocked. He immediately informed the firebrigade which arrived within minutes. I also reached the spot as soon as I received thetelephonic message from the watchman. Despite the best efforts put in by the fire brigade,nothing could be saved.

We estimate the loss worth Rs. 40,000/- and request you to please send you Surveyor orInspector to assess the loss and let us know what formalities are to be completed forputting up a claim for the loss.

Yours faithfully,


B163��

Specimen – 2

Acknowledging claim for damage

17th January, 2002


Dear Sir,

We are in receipt of your letter of 15th January, 2002 informing us of the loss due to the firewhich occurred at your godown at 23/27 Loha Mondi, Agra, on 14th January, 2001.

We have instructed our surveyor, Sri A.G.Sharma, to survey the loss and we shall pro-ceed in the matter on getting his report. In the meantime, please fill in the enclosed claimform and return it to us at your earliest convenience.

Yours faithfully,

Specimen – 3

Enclosing cheque in settlement of claim

25th January, 2002


Dear Sir,

In continuation of our Letter of 17the January, 2002 we have to inform you that we re-ceived the surveyors’ report which assesses the damage at Rs. 85,000/-.

We enclose our cheque No. ………………………. dated ……………………. on the StateBank of India, M.G.Road, Agra for Rs. 85,000/-, together with a voucher and shall thankyou to return the same to us duly signed.

Yours faithfully,

�� B164

Specimen – 4

Letters asking for Overdraft facilities

3rd February, 2002


Dear Sir,

We wish to have overdraft facilities for which we are prepared to deposit with you StateGovernment Securities of the face value of Rs. 50,000/-.

We shall very much appreciate your sending us the necessary forms for signature. In caseany further particulars are required, the undersigned would be glad to call on you per-sonally.

Yours faithfully,

Specimen – 5

Reply to the above

4th February, 2002


Dear Sir,

We are in receipt of your letter dated February 3, 2002 asking for overdraft facilities. It thisconnection, we have to inform you that we shall be allowing you overdraft facilities,subject to certain restrictions, which are mentioned in the book of rules and regulations, acopy of which is being enclosed. Kindly go through the rules and act accordingly.

Necessary forms and promissory notes are enclosed. Please fill in the same and sign at theplaces marked with red ink. Government securities duly endorsed in our favour alongwith the forms may then be sent to us to enable us to give you necessary overdraft facili-ties.

Yours faithfully,


B165��

Specimen – 6

Letter disclaiming liability

25th January, 2002


Dear Sir,

We are in receipt of your letter dated 15th January, 2002 informing us of a fire which brokeout on the night of 14th January in your godown at 23/27 Loha Mondi, Agra and de-stroyed goods therein.

In this connection, we wish to state that the above policy was issued for six months end-ing 31st December, 2001, and had to be renewed to cover the risk further. You were ad-vised of the same by our letter No. SA/24 dated 1st December, 2001, but you failed torenew the policy and the policy stood lapsed. Under the circumstances, we regret that wecannot entertain your claim for loss.

Yours faithfully,

13.3 REPORT WRITING

Reporting or a feed back is very essential in business, particularly because a timely action canenable the Management to avail of some opportunities or save the organization from a possibleloss. In fact, the communication process is not considered to have been completed without afeed back.

A Report may be oral, visual or written, formal or informal. It could be a document in which aparticular situation is analysed or a particular problem is examined with a view to offeringinformation to the Receiver. It may include the facts, figures, findings and may also be supple-mented with recommendations.

Majority of the reports are Routine Reports called Work Reports or they are investigation re-ports. Reports help Managers to carry out their functions better. They can plan, evaluate andtake decisions faster. Timely reporting in a scientific manner can free the supervisors advise

�� B166

the subordinates regarding the desired action. The superiors can also take a note of such re-ports for further reference. The information submitted in a report by technical experts can helpthe Management to correct flows in the working if any.

A good Report is:

Timely submitted information

A well written document

Properly organized, drawing attention to important facts and is Cost-effective.

The usual classifications of reports could be:

1) Function –

a) informational

b) Interpretative

c) Analytical

2) Length – Short or long.

3) Period or Time – Monthly, Bimonthly, Quarterly, Six-monthly, Annual Progressor Special.

4) Importance – Routine, Important, Emergency.

5) Subject – Management, Financial, Accounting, Insurance, Sales, Tax, Produc-tion, Miscellaneous.

6) Ares – Internal, External.

7) Presentation – Written or oral by Individual or Committee.

The written report could be in a letter format or Schematic format. In case of the latter, it ispresented in a particular order with subheadings. We have newspaper reports informing usabout some events concerning business stated as a news or reports like a Stock Exchange Re-port providing us facts and figures with an analysis and observations.


B167��

13.4 DIRECTORS REPORT

The report of the Directors is prepared in accordance to the provisions of Sec. 217 of the Com-panies Act. This report should contain information on the following matters :-

(a) The state of the company’s affairs.

(b) The amounts, if any, which is proposed to be carried to any reserves in the balancesheet.

(c) The amount of dividend recommended if any.

(d) Material changes and commitments affecting the financial position of the companywhich have occurred between the last date of the balance sheet and the date of thedirector’s report.

(e) Certain mandatory informations relating to steps taken in respect of conservation ofenergy, technology absorption, foreign exhange earnings and outgo etc.

The Board of Director’s Report also contains information relating to any change in the natureof business of the company or the business of the subsidiary companies. In addition, theDirector’s report also contains information relating to the remuneration received by employeesbeyond a prescribed amount.

The following specimens will help understanding the practices followed.

An Investigation Report (in letter format)

22nd April 2001

The Chairman,

Prosperous Steel Limited

Tagore Street.

Kolkata – 700 001

Sir,

In accordance with your letter dated 18th June 2000, instructing me to carry out an in-vestigation into the services provided by the canteen at our factory at Shrirampur, Iwould like to submit as follows :

�� B168

1. The Procedure : I visited the factory on 19th and 20th April 2001 and conductedpersonal interviews of representative staff working in our factory, at both day andnight shifts. Earlier, I had a spot checking of the kitchen and the Service Hall of the‘FACTORY CANTEEN’. I also had prepared a questionnaire (Appendix A) whichwas filled in by 87 workers availing of the canteen facility.

2. Finding :

(a) The services provided by the Factory Canteen are far from being satisfactory. Thekitchen was found to be most dirty with solid waste dumped in a corner.

(b) The uniforms of the canteen boys appeared to have not been washed for severaldays. While serving the food, minimum health care is not being taken.

(c) During the night shift, tea was not available and the canteen boys were replyingrudely. It appears that the Canteen Manager is running a hotel nearby and the sur-plus stale food items are brought to our Factory Canteen for disposal.

(d) The crockery used is of the Third Grade and also not sufficient for catering to our250 employees.

(e) The rates of the foodstuff provided, have been reused steeply upwards, withoutnotice and discussion with us.

3. Recommendations

(a) Considering the fact that majority of our employees depend upon our canteen andthat there is no other substitute facility for the night shift workers, the CanteenManager be asked to improve hygienic conditions at Canteen immediately.

(b) If should be insisted upon the Canteen Manager that all the food served every day,should be fresh and that under no circumstances, the outside stuff be brought fordisposal in our Factory Canteen.

(c) The Canteen Manager should be asked to reduce the rates of the food items imme-diately, by at least 20% since we have been providing him canteen subsidy. The teashould be available to the night shift employees regularly and they should not becharged more than Rs. 1.50 per cup.

(d) The Canteen contract will come to an end on 15th July 2001. If there are no immedi-ate improvements and if clean uniforms are not provided to the Canteen Boys, thecontract should not be renewed.


B169��

(e) The Canteen Manager be called for a personal explanation at the Head Office dur-ing the next fortnight.

Yours faithfully,

John Roberts

13.5 DIRECTORS’ REPORT TO THE MEMBERS

Your Directors have pleasure in presenting their Thirty-sixth Annual Report and the AuditedAccounts for the year ended 31st March 2002.

Financial Results : Year ended Year ended

31st March’02 31st March’01

Rs. in lakhs Rs. in lakhs

Sales 13655.24 12744.73

Profit before tax 1519.81 1350.28

LessProvision for taxation 814.00 413.00

Profit after tax 705.81 637.28

Add

Taxation adjustments

for earlier years 2.31 23.13

Profit and Loss Account surplus

Brought forward ….. 325.00 770.00

1033.12 770.43

Appropriations:

General Reserves 111.24 83.80

Dividend (proposed) 421.88 361.63

Balance carried over 500.00 325.00

1033.12 770.43

�� B170

2. Operations:

The Company’s sales for the year amounted to Rs. 136.55 crores for the previous year, record-ing a growth of 7.4%.

During the year under review, sales of Chloramphencol products were adversely affected dueto the continued dumping of L. Base (drug intermediate for Chloramphenicol) by China atconsiderably lower prices. But for the reduction in sales of Chloramphenicol products as com-pared to last year, the growth in sales would have been higher.

Profit before tax amounted to Rs. 15.2 crores compared to Rs. 13.5 crores in the previous year,registering an increae of 12.6%.

Profit after tax at rs. 7.06 crores has registered a growth of 10.8% over the previous year’s netprofit of Rs. 6.37 crores.

3. Dividend :

Your Directors recommend payment of a dividend of Rs. 3.50 per share (35%), subject to de-duction of tax at source. The dividend payout would be Rs. 4.22 crores.

4. Exports :

The Company’s Export (on F.O.B. basis) was Rs. 1.72 crores during the year under review ascompared to Rs. 2.07 crores in the previous year.

5. Fixed Deposits :

Deposits of an aggregate amount of Rs. 7.38 lakhs which had matured remained unclaimed ason 31st March, 2002.

6. Directors :

Mr. X.Y.Z. ceased to be a Whole-Time Director of the Company on his resignation from theBoard effective 30th June 2002. Your Directors wish to place on record their appreciation for thevaluable rendered by him during his tenure of office.

In accordance with the Articles of Association of the Company, Messrs P.Q.R. and S.T.U. retireby rotation and being eligible offer themselves for reappointment.


B171��

7. Employee Relations :

Employee relations were satisfactory during the year. Your Directors record their appreciationof the contributions made by employees at all levels to the operations of the Company duringthe year.

8. Cost Auditor :

Pursuant to the provision of Section 233-B of the Companies Act, 1956, necessary applicationshave been submitted to the Department of Company Affairs for the appointment Messrs. MNC& Company as Cost Auditors to audit the cost accounts maintained by the Company in respectof bulk drugs as well as formulations for the year ending 31st March, 2003.

9. Auditors :

The Auditors Messrs. Honest and Loyal retire and offer themselves for reappointment.

On Behalf of the Board

Bombay Venugopal Shetty

29th June 2002 CHAIRMAN

13.6 TELEGRAPHIC MESSAGES

Telegraphic communication is one of the fastest way of reaching information. This service ismanaged by the Indian Post and Telegraphs Department with a network spread all over thecountry. The telegraphs could be Ordinary or Express. The charges for Express telegraps areusually double the rate of an ordinary telegraph. A concessional rate is charged for the stan-dard phrases telegrams. A telegraphic message is required to be brief because each word afterthe minimum words (Ten words), is charged extra, However, the message to be telegraphedshould never be economized at the cost of the meaning, otherwise there would be misunder-standing or miscommunication. Usually telegrams are sent to convey urgent information andare followed by a detailed communication.

Exercises

1. What is meant by communication? Why has communication gained importance inmodern business?

2. Explain the essential elements in the process of an effective communication sys-tem.

�� B172

3. Discuss the characteristics (or features) of communication.

4. Mention the steps involved in the process of communication.

5. Discuss the principles of effective communication.

6. State five important objectives of communication.

7. What are the different methods (or channels) of communication?

8. What is formal communication? Briefly describe its advantages and disadvantages.

9. What is informal communication? Mention its merits and demerits.

10 Differentiate between formal communication and informal communication.

11. Discuss the advantages and disadvantages of verbal communication.

12. Discuss the merits and demerits of written communication.

13. Explain in brief the barriers to effective communication.

14. What are the factors which should be considered in order to make communicationeffective?

15. Discuss the merits and demerits of horizontal communication.

(a) Bring out the usual barriers to effective communication.

(b) State the measures to overcome these barriers.

16. Why are reports necessary in a business? What are the different types of reportssubmitted?

17. What are the essential factors to be considered while drafting a business letter?

18. Write a letter of complaint about the delay of delivery of goods ordered by youstaling that you may cancel the order if no reply is received immediately.

19. Draft a Circular letter informing your clients about the new products, you are shortlyintroducing into the market.
