Business Organigation

Section -II
BUSINESS FUNDAMENTALS
Business Fumdamentals
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Forms of Business Organisation
Study Note - 9
FORMS 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 nature, 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. For example a worker is working in a factory, a clerk is attending to his duties in office, a teacher is teaching in the class. Non economic activities are those which are undertaken not for earning money 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 economic consideration and result in the production of economic goods and services. These activities belong to the domain of business. Hence all human activities related with the earning and spending of wealth fall under the category of economic activities.
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Business Fundamentals
Economic activities are also identified with occupations. Business is an occupation in which organized production and exchange of goods and services are undertaken with a view to earn profits. There are different types of business activities. A grocery shop is as a much a business enterprise as a giant company like Reliance Industries or Maruti Udyog Ltd. Business is an economic activity involving the production or procurement and sale of certain good and services for the satisfaction of human need in the society. All the business activities fall under three difference categories (i) (ii) (iii) Industry Trade 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 commerce has to depend upon the industry for the supply of goods. Trade provided support to industry and commerce. A modern businessman desires that his activities should be well organized and planned so as to active maximum success. In order to fulfil this desire a number of forms of business organization have been evolved to suit different situations and purposes. For example, when the business is of a local nature and on a small scale, a sole proprietorship would be found to be suitable whereas if export and import on large scale is to be undertaken by a concern a joint stock company may have to be formed. Each form of business organization has its own merits and demerits. Different types of business entities along with their advantages and limitations have 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 of business organization. In such an undertaking, the proprietor brings in his own capital, manages the business himself, bears all the risks alone and takes all business decisions. Here, the proprietor uses his own skill and intelligence in the management of its affairs with almost unlimited freedom. The proprietor is entitled to receive all the profits and assumes all the risks of ownership. The competence of the proprietor determines the prospect of the business. The proprietor is, in fact, the sole organizer, manager, controller and master of his business.
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9.2.2 Meaning and definitions of sole proprietorship The sole proprietorship is a form of business that is owned, managed and controlled by an individual. This organization is also called a single ownership or single proprietorship. The sole proprietorship form of business is generally operated on a small-scale basis. At present, it is the most popular form of organization. Definitions given by eminent management experts : (i) (ii) Sole proprietorship is an informal type of business owned by one person. [James L. Lundy] Sole proprietorship is a type of business unit where one person is solely re sponsible for providing the capital, for bearing the risk of the enterprise and for the management of the business. [J.L.Hanson] Sole proprietorship form of ownership, a single individual organizes and op erates the business in his own name. He is not only responsible for its manage ment but also for its risks. [Kimbell and Kikbell] Under the sole proprietorship form of ownership, a single individual orga nizes and operates the business in his own name. He is not only responsible for its management but also for its risks. [J.M.Shubin]
(iii)
(iv)
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 capi tal and other assets essential for starting and subsequent operation of his busi ness. The proprietor provides the entire capital, either from his private re sources or by borrowings from relatives and friends. Management and control : The proprietor has full authority over the affairs of the business. He is free to take decisions. There is no need for consultation with any other person. The working of the concern is entirely based on his own dis cretion and decision. Unlimited liability : The liability of a proprietor is always comprehensive and unlimited. He is liable for all the debts and loans of the business. If the assets of the business are not sufficient to meet the liabilities, in that case his personal property can be attached. Limited area of operation : The scope of operation of a sole proprietor is limited because of limited capital, limited managerial ability and limited space. Free from legal formalities : A sole proprietor is free from any legal formali
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ties to be complied with in the establishment of the business. Sole proprietor ship is subject to minimum legal formalities and Government restrictions. (vi) Distribution of profit : The sole proprietor receives all the profits of his business 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 gen erally puts in his heart and soul to increase his profits. Flexibility in operations : A sole proprietor enjoys the maximum flexibility in his business. He can easily change, expand or reduce business according to his discretion. No separate entity : This form of business does not have an entity separate from the owner. The proprietor and the business enterprise are not the same. Discretionary start and end : A proprietor can start the business at any time without any legal formalities. Similarly, he can terminate the business with out waiting for legal compliance. Trade secrecy : The proprietor keeps all his trade secrets only to himself. In this way, he avoids competitors by retaining business secrets. Freedom in selection of trade : A proprietor can start any business according to his own will. There is no binding on him. He is not supposed to consult any person while making a selection of his trade. Personal relations : A sole trader has always direct relations with his custom ers. The business, which requires personal service and attention, is generally established under this form of organization.
(vii)
(viii) (ix)
(x) (xi)
(xii)
9.2.4 Legal position of a sole proprietor The following points are worth considering with regard to the legal position of a sole proprietor : (i) (ii) (iii) (iv) (v) (vi) There is no legal restriction in the establishment of a sole proprietorship form of business. There is no specific law under which this business required registration. Licenses are, in some cases, obligatory [i.e., to open a wine shop]. This business is subject to the general laws of the country. The liability of the sole proprietor is unlimited. The proprietor and his business have one personality. The business exists only with 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.
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No legal formality or other complicated procedure is required to be followed. A person can start business operations as and when he desires. Only a licence is needed in some special cases (i.e., opening a wine shop, etc.) (ii) Prompt decisions : A proprietor can take quick decisions regarding his business affairs (e.g., price policy, credit policy, discount policy, disposal of surplus funds, etc.). He can take spot decisions as and when required. Smooth functioning : There is none to oppose his decisions. Therefore, he can function smoothly. He can control his business affairs personally. Incentives for hard work : There is always a direct relationship between the efforts and the rewards in the case of a sole proprietorship. Therefore, the more a proprietor will work, the more he will earn. It provides incentives to work hard, efficiently and honestly. Flexibility in operations : This form of business can easily adapt to the changing conditions of the market. The line of the business can easily be changed or modified according to change in socio-economic conditions. A proprietor can easily change, expand or reduce his business on account of change of market conditions. Thus, he enjoys the maximum flexibility in his business. Maintenance of business secrecy : Maintenance of secrecy is very vital in a smallscale business. A proprietor can maintain secrecy regarding his business as he has not to consult anyone on business decisions. Possibilities of maintaining complete secrecy give him a greater competitive strength. Intimate contacts with customers : The proprietor develops close and personal contacts with his customers. This enables him to cater to the exact requirements of his customers. He can easily ascertain the nature of tastes, habits and attitudes of his customers. He can also know their difficulties, complaints easily by keeping personal contact with the customers. Inexpensive management : The management of a sole proprietor is not expensive at all. All supervisory and management activities are performed by the proprietor himself, thus minimizing the additional expenditure on managerial staff. Moreover, overhead costs of management are relatively low. This leads to a good deal of savings. Efficiency in management : The proprietors personal interest is involved in his business. He tries, heart and soul, to eliminate all sorts of wastages in order to reduce costs and maximize profits. Freedom regarding selection of business : A sole proprietor can select the business of his choice and he is not required to seek permission from anyone else for this purpose. He can also change his business acoording to business requirements and changing circumstances. Minimum Government regulations : The business activities of a sole proprietor are least regulated by law and the Government. A sole proprietorship business has
(iii) (iv)
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to comply with mainly labour laws and tax laws. There is no other interference in the day-to-day running of the business from the Government. (xii) Tax advantage : A sole proprietorship business enjoys the minimum tax burden as compared to other forms of business organizations. A proprietor is taxed as an individual an not as a business unit separately. Income tax authorities make no difference between the proprietor ad the business regarding the assessment of income tax.
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 owner puts the proprietor at great risk in times of losses. The proprietor will always be haunted by the fear of losing his private property in case of failure of his business. Limited financial resources : The capital and other resources of an individual are always limited. An individual proprietor cannot offer much security to raise funds from financial institutions. Therefore, there appears to be a limited capacity of expansion of business operations. Limited managerial capability : It is not possible for a single individual to posses expertise in all fields (i.e., production, finance, personnel, marketing, etc.) So, the decisions of the proprietor may not be balanced due to limited managerial ability. Instability of the business : The continuity and existence of a sole proprietorship form of business is most uncertain. Any uncertain events happening in the personal life of the proprietor are surely to disturb the smooth working of the business. The business may suddenly come to an end with the death or physical incapacity of the proprietor. Uncertainty in purchase and sales : The proprietor is unable to get full advantage of 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 business cannot enjoy the benefits of large-scale production. Weak bargaining position : The proprietor cannot control the market because of his limited financial resources. Thus, his bargaining power is weak, both as a purchaser and seller. Limited scope for employees : A sole proprietor cannot attract trained and qualified persons for reasons of limited career opportunities. Moreover, a proprietor cannot offer financial incentives to attract skilled employees because his activities are on a small-scale. No check and control : A sole proprietor is the monarch of his business. No outsider can question him on his acts and deals. Moreover, there is nobody to help and guide him. There are no checks and controls on the activities of the p proprietor.
(ii)
(iii)
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(v)
(vi)
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(viii)
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(ix) Too much secrecy causes suspicion : Secrecy is desirable for business operations but too much secrecy leads to suspicion by outsiders. The outsiders are unable to asses the soundness of a proprietorship form of business because it is not required to publish accounts of the business. Limited scope for expansion : Due to limited capital, limited managerial capability and unlimited liability, a sole proprietorship cannot grow and expand to a large size. Its goodwill and bargaining positions are also weak.
(x)
9.2.7. COMMON FORMS OF SOLE PROPRIETORSHIP : The business that take the form of sole proprietorship are retailers, hawkers, bakers, confectioners, 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 reasons : (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) Equal distribution of wealth in the society; Opportunity for self-employment with limited investment; Employment to a large number of persons in the society; Direct and close relations with the customers; Providing goods at low prices due to less overhead burdens; Providing opportunities to learn the techniques of the business; Limited risks associated with the business due to the low-scale of operations; Opportunity to establish cottage and small-scale industries; Suitable for production of seasonal goods; Producing goods on the basis of customers; choice and preferences; The absence of middlemen ensures the benefit of both the sole trader and the consumers; and 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 following cases :
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(i) (ii)
It is very suitable for the production of goods of an artistic nature. 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) (iv) (v)
It is very suitable for a business, which requires greater personal attention to cu tomers. It is very suitable for small-scale business requiring prompt decisions and adjustability with the market conditions. 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 our country. It is a form of business organization is which the family possesses some inherited property and the head of the family, known as Karta, manages its affairs. It is possible only in those parts of India where the Mitakshara System (Hindu Law) of inheritance is in operation. It means that no Joint Hindu Family is possible in Bengal and Assam where Dayabhaga system of inheritance prevails. Again, the joint family business is confined to those persons who constitute the coparcenaries interests. Previously, female members and their relations did not have coparcenaries 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 coparcenery interests at the time of death of such coparcener. The rights and liabilities of coparceners are determined by the general rules of the Hindu Law. Thus, joint family business is created by the operation 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 form birth in the family. Hence the majority or minority in age of the members is immaterial. Only male members. Female members are excluded from the class of coparceners. Only male members can be coparceners. No Registration. For the purposes of enforcing its claims and right it does not require registration like partnership. Management. The business is managed by Karta, the head of the family. Other family members have no rights of arrangement over the business and they cannot contract any loans on mortgages binding on the joint family property.
(2) (3) (4)
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(5) Liability. The liability of all members of the family, except the Karta, is limited to the value of their individual interests in the joint property. The liability of Karta is unlimited. Fluctuating share. The share of each members interest in the family property including business is always fluctuating in character. The members interest increase by death of existing coparcener and decreases by birth of a new coparcener. Continuity. The existence of the business is not affected by the death or insolvency of a coparcener of the Karta. Supremacy of karta. Karta is supreme authority in the business. The members cannot question the judgment of Karta in the conduct of the business. If they are aggrieved, they can ask for the partition of family and business property. But they cannot ask the Karta for an account of past profits and losses.
(6)
(7) (8)
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 profits of the business, irrespective of his contribution to the successful running of the business. Freedom of action. Karta can cake quick decisions and can also act without any interference by others. Limited liability. The liability of all the coparceners except that of Karta is limited. Insurance against contingencies. It serves as an insurance cover for maintaining the children, widows, ailing or invalid members of the family. Cooperative efforts. The duties of the business are divided among the members in accordance with their capabilities and resourcefulness. Inclusion of finer values of life. Every member of the family gets an opportunity for participation in the business and the qualities of duty, sacrifice and discipline become embedded in them.
(2) (3) (4) (5) (6)
9.3.3. Demerits Following are the demerits or disadvantages of joint family business : (1) (2) Lack of motivation- Members do not fell motivated to work hard because there is lack of direct relationship between benefits and efforts. Scope for misuse- Since Karta has full freedom and authority tomanage the business, he may misuse this freedom for his personal benefits and gains.
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(3) (4)
Limited resources- It has limited resources at its disposal for investment in business. 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 to preference for individual family living.
9.4. PARTNERSHIP FIRM

The partnership firm of business organization grew out from the limitations of sole proprietorship. When the business expands, one man is unable to arrange the financial resources and bear the risks. He cannot supervise and manage all the functions of business personally. Therefore, two or more persons joint hands and combine their capital and skill to start and run a business, 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 some business jointly and share its profits and losses. They combine their funds and skills to carry on business together. Some popular definitions of partnership are as follows: Partnership is the relation existing between persons competent to make contract, who agree to carry 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 or services for the prosecuting of some enterprise. Kimball Partnership is the relation between persons who have agreed to share profits of a business carried 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 maximum 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 that they 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.
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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 occupations. The purpose of a partnership agreement is to carry on a lawful business and nothing else. Name of the business : The partnership firm must have its own name. The name in which the business is carried on is called the firm name. Association of persons : At least two persons are needed to make a partnership. Indian Partnership Act is silent about the maximum number of members. The Indian Companies Act provides that maximum number of member as then (in case of a Banking business) and as twenty (in other cases). Profit motive and sharing of profits : Partnership business is formed with the object of earning profit. The earned profit is to be distributed among the partners as per an agreed ratio. Contractual relationship : Partnership is a contractual relationship between the persons who are competent to enter into a contract. Relationship between partners arises from contract and not from status. Mutual trust and confidence : The successful working of a partnership depends on mutual trust and confidence of its partners. Partners have the duty to observe utmost good faith in business dealings. Principal-agent relationship : It is not necessary that the business should be managed by all the partners. Any one or more partners can run the business on behalf of all the partners. Each partner is an agent of the firm and his activities bind the firm. Restrictions on transfer of share. No partner can transfer his share in the partnership without the prior consent of all the other partners. Thus, a partner cannot transfer his interest at his own will. Unlimited liability : Partnership is based on the principle of unlimited liability. The personal property of the partners can be attached to satisfy the claims of creditors of the firm, if the assets of the firm are insufficient to meet the claim of the creditors. Management and control : Every partner has a right to take an active part in the management of the firm. The unanimous consent of all partners is required to take any major decision. Financing : Ordinarily, each partner is required to contribute capital on a profitsharing ratio. However, in some cases, a partner with special technical skills and ability may not contribute at all towards the capital of the firm.
(ii) (iii)
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9.4.3 Kinds of Partners We can classify partners into various categories, depending on the role played by them in their day-to-day business activities. (i) (ii) (iii) (iv) (v) Based on extent of participation : (a) Active partner; (b) Sleeping partner. Based on sharing of profits : (a) Nominal partner; (b) Partner in profits only. Based on liabilities : (a) Limited partner; (b) General partner Based on the nature of behaviour : (a) Partner by estoppel; (b)Partner by holding out. 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 only contributes capital but also takes an active part in the conduct of the business of the firm. He is a full-fledged partner in the real sense of the term. The active partner is also known as a working partner. (b) Sleeping partner (or Dormant partner) : A partner who does not take active part in the management of the business is called a sleeping partner. A sleeping partner only contributes his capital to the business and shares in the profits or losses of the firm. (ii) Based on sharing of profits : (a) Nominal partner (or, Quasi/Ostensible partner) : Nominal partner is a person who neither contributes capital not takes an active part in the conduct of the business of the firm. He only lends his name and reputation for the benefit of the firm. He is not entitles 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 but does not share any losses of the firm. Such a partner is not allowed to take part in the 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 the affairs and management of the firm. The liability of such a partner is limited to the extent of the capital contributed by him. In a partnership firm, all the partners cannot have limited liability. At least one partner must have unlimited liability.
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(b) General partner : In case of a general partnership, the liability of all they partners is unlimited. A general partner is entitled to participate in the management of the business. (iv) Based on nature of behaviour : (a) Partner by estoppel : A partner by estoppel is a person who has neither contributed any capital nor takes any part in the management of the firm. But he conducts himself in such a manner which leads third parties to believe that he is a partner of the firm. If fact, he is not a partner of the firm. He is held liable for the debts of the firm to such third parties who might heave entered into contract with the firm under such an impression. (b) Partner by holding out : if a person is declared by other as a partner of the firm and he does not contradict it immediately and remains silent, he would be treated as a partner by holding out. He is liable to such third parties who enter into contract with 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 a secrete 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 the firm is called a silent partner. Such a partner, however, shares the profits or losses of the 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 for an undefined period, it is called partnership at will. The life of such a partnership depends on the will of the partners. The partnership can be dis solved at the desire of any partner on giving due notice. Such a partnership firm is formed to carry on lawful business for an indefinite period.
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(b)
Particular partnership : When a partnership is formed to conduct a particular business of a temporary nature or only for a certain period, it is called particular partnership. Such a firm is dissolved immediately on the completion of a particular venture or on the expiry of a certain period. Fixed term partnership : The partnership which can be formed for a fixed period of time is called fixed term partnership. On the expiry of that fixed period, the partnership is automatically dissolved. Flexible partnership : When a partnership is formed neither for a fixed period nor for any particular venture, it is called flexible partnership. Such a partnership firm continues its operation till any contingent happening (under which dissolution is compulsory). Legal partnership : When a partnership firm is established under the conditions of the Indian Partnership Act, 1932, it is known at legal partnership. Here, the minimum number of partners is two and maximum is twenty (but in a Banking Business, the maximum number is ten). 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 more than twenty, then also the partnership becomes illegal. General partnership : In a general partnership, the liability of each partner is unlimited. In India, all partnership firms are general partnerships. In the absence of an agreement, the provisions of the Indian Partnership Act, 1932, will be applicable for general partnership. Each partner of a general partnership is entitled to take an active part in the management of the firm, unless otherwise decided by the other partners. Limited partnership : A limited partnership is a partnership consisting of some partners whose liability is limited to the amount of capital contributed by each. In a partnership firm, all the partners cannot have limited liability. At least one partner must have unlimited liability.
(ii) According to time : (a)
(b)
(iii) According to legality : (a)
(b)
(iv) According to nature : (a)
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Minor as a partner. A minor is a person who has not completed 18 years of age. A minor cannot become a partner because he is not qualified to enter into a contract. But he may be admitted to the benefits of partnership with the mutual consent of all the partners. On being so admitted, a minor becomes entitled to a share in the profits of the firm. He can inspect and copy the books of account of the firm but he cannot take active part in the firms management. His liability is limited to the extent of his share in the capital and profits of the firm. He cannot file a suit against the firm or its partners to get his share except when he wants to disassociate himself from the firm.
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After becoming a major, the minor must give a public notice within six months if he wants to break off his connections with the partnership firm. If he does not give such a notice within six months or if he decides to remain in the firm, he comes liable to an unlimited extent for the debts of the firm from the date he was admitted to the benefits of partnership. He also becomes entitled to take active part in the management of the firms business. Rights and Liabitities of a Minor Partner : 1. 2. 3. 4. 5. A minor is entitled to a share in the profits of the firm. A minor may be admitted with the benefits of partnership with the mutual con sent of all the partners. A minor has got the right to inspect and copy the books of accounts of the firm. A minors liability is limited to the extent of share in the capital of the firm. Being a minor he cannot file a suit against the firm or its partners to get his share except when he wants to leave the partnership. If he does not express anything in writing, his existence as a partner will be implied and he will be subject to unlim ited liability like the other partners.
6. After he becomes a major he also becomes entitled to take part in the manage ment of the firms 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 defines the rights, duties and obligations of partners and governs relations among them in the conduct of business affairs of the firm. It is not a public document. The partnership deed must not contain stated in partnership deed can be changed with the consent of all the partners. Partnership deed usually contains the following clauses :
1. 2. 3. 4. 5. 6. 7. 8. 9.
Name of the firm. Nature of the firms business. The principal place of business. Duration of partnership, if any. Names and address of partners. Amount of capital to be contributed by each partner. Amount which can be withdrawn by each partner. The profit-sharing ratio. Rate of interest, if any, on capital and drawings.
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10. 11. 12. 13. 14. 15. 16. 17.
Amount of salary or commission payable to partners. Allocation of work among partners. Mode of valuation of goodwill. Procedure for admission, retirement, etc. of a partner. Procedure for maintaining accounts and getting them audited. Procedure to be followed in the event of dissolution of the firm and settlement of accounts. Arbitration clause in case of disputes among partners. 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 provides that if the partners so desire they may register the firm with the Registrar of Firms of the State in which the main office of the firm is situated. A firm may be registered at the time of its formation or at any time thereafter. Procedure for Registration In order to get a partnership firm registered an application in the prescribed form must be filed with the Registrar of Firms. The application should contain the following information : (i) (ii) (iii) (iv) (v) (vi) The name of the firm. The principal place of business of the firm. Names of the other places where the firms business is carried on. Names in full and permanent addresses of the partners. The date on which each partner joined the firm. Duration of partnership, if any.
The application should be signed and verified by each partner. Then it is submitted to the Registrar of Firms of the area in which the principal place of the firms business is situated or proposed to be situated. A small amount of registration fee is also deposited along with the application. The application submitted to the Registrar is examined. If the Registrar is satisfied that everything is in order and all legal formalities have been observed, the Registrar shall make an entry in the registrar of firms. He will also issue a certificate of registration. Any change in the information submitted at the time of registration should be communicated to the Registrar. Registration does not provide a legal entity to the partnership firm.
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9.4.7 Rights and Obligations of Partners The rights and obligations of partners are generally laid down in the partnership deed. In case the partnership deed not specify them, then the partners will have rights and obligations prescribed 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 firms business. 2. Every partner has a right to be consulted and express his opinion on any matter related to the firm. In case of difference of opinion, the decision has ordinarily to be taken by a majority. But vital issues like admission of a new partner, change in the firms business, alteration of profitsharing ratio, etc., must be decided by unanimous consent of all the partners. 3. Every partner has a right to have access to, inspect and copy any books of accounts and records of the firm.
4. Every partner has the right to an equal share in the profits of the firm unless otherwise agreed by the partners. 5. Every partner has the right to receive interest on loans and advances made by him to the firm. 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 sustained by him in the ordinary conduct of the firms business. 7. Every partner has a right to continue in the firm unless expelled in accordance with the terms of the partnership agreement. 8. Every partner has a right to retire in accordance with the terms of the partnership agrement.or with the consent of other partners. Duties and Liabilities of Partners 1 2. 3. 4. Every partner must act diligently and honestly in the discharge of his duties to the maximum advantage of all the partners. Every partner must act in a just and faithful manner towards each other. Every partner must act within the scope of the authority entrusted to him. 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 willful negligence in the ordinary course of business. 6. No partner can transfer or assign his interest in the firm to others without the consent of other partners.
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7. Every partner must maintain and render true and correct accounts relating to the firms business. 8. No partner must engage himself in a business in competition with the firm, otherwise he will be liable for any loss suffered by the firm. He will have to surrender private profits to the firm. Every partner should use the firms property only for the firm business and interest.
9.
10. No partner should make secret profits by way of commission or otherwise from the firms business. He is liable to account for and pay to the firm any private profit from the 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 the debts 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 in the name of the firm, in the ordinary course of the firms business and with the intention to bind the firm. A partner has the implied authority to do the following acts on behalf of his firm. (i) (ii) (iii) (iv) (v) (vi) To buy, sell and pledge goods on behalf of the firm. To raise loans on the security of such assets. To receive payments of debts due to the firm. To accept, make and issue bills of exchange, promissory notes, etc., on the behalf of the firm. To engage servants for the firms business. To take on lease a premises on behalf of the firm.
However, a partner has no implied authority, unless otherwise expressed in the partnership deed, in the following matters : (a) (b) (c) (d) (e) (f) (g) (h) To submit a dispute relating to the firm to arbitration. To compromise or relinquish any claim or a portion of claim made by the firm. To withdraw a suit or proceeding filed on behalf of the firm. To admit any liability in a suit or proceeding against the firm. To open a bank account on behalf of the firm in his own name. To acquire or purchase immovable property for and on behalf of the firm. To transfer or sell immovable property belong to the firm; and To enter into partnership with others on behalf of the firm. B19

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 sold and its liabilities are paid off. The firm discontinues its activities and none of the partners has any relation of partnership with other partners. Dissolution of the firm should be differentiated from dissolution of partnership. In dissolution of partnership the original partnership agreement is terminated due to the admission, insolvency. Retirement or death of a partner. But the other partners continue the business by entering into a new agreement. A partnership can be dissolved without dissolving the firm. Dissolution of partnership implies change in partnership whereas dissolution of firm means discontinuance 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 consent 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 any partner gives a notice in writing to other partners indicating his intention to dissolve the firm. In such a case, the dissolution takes place with effect from the date mentioned in the notice. If no date is mentioned, the firm would be dissolved with effect from the date of 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 following 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 following cases: (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 an event. 5. Dissolution through Court. Court may order the dissolution of a firm in the follow ing cases: (i) (ii) (iii) When a partner becomes of unsound mind. When a partner becomes permanently incapable of performing his duties as a partner. 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. Business Fundamentals
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(iv)
When a partner willfully and persistently commits breach of the partnership agreement.
(v) When a partner unauthorized transfers the whole of his interest or share in the firm to a third person. (vi) (vii) When the business of the firm cannot be carried on except at a loss. When in the opinion of the court it is just and equitable that the firm should be dissolved.
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 legal formalities. Only an agreement between the partners is required. Registration is also not compulsory. Sufficient resources : A partnership has larger resources as compared to a sole trader. The combined resources of many individuals would certainly be larger than the limited capital of a sole trader. Moreover, new partners can be admitted to secure more capital, managerial ability and organizing capacity. Flexibility of operations : A partner can introduce any changes that he consid ers desirable to meet the changing circumstances. There is no legal restriction as long as the firm carries on a lawful business. Specialization in management : A partnership enjoys all the advantages of di vision of labour. Division of work among partners is done on the basis of their specialization. It helps in increasing the efficiency of the business, resulting in more profits. Benefits of combined ability : Under a partnership, several persons pool their capital, resources, skills, expertise, experience, services, etc. This helps to ex pand the activities of the firm. Prompt and balanced decisions : A partnership firm is a combination of abili ties, experience and judgment of different persons. Such a combination of skills facilitates the making of balanced and sound decisions.
(ii)
(iii)
(iv)
(v)
(vi)
(vii) Caution for unlimited liability : Fear of unlimited liability encourages cation and care on day-to-day activities. Partners are discouraged to take hasty and reckless business decisions in the conduct of the business. (viii) Democratic organization. Every partner can participate in the operation of the business of a partnership firm. Moreover, all the partners are consulted before taking any decision. (ix) Protection of minority interest : The views and voices of each partner carries equal weight. All the partners have a rights to take part in the day-to-day management. Thus, a partnership firm protects the minority interests. B21

(x) Business secrecy : A partnership firm is not expected to publish its final ac counts for the general public. Thus, the partners can keep their business se crets to themselves. The competitors do not have to know anything about the exact position of the business.
(xi)
Close supervision : Partners have direct access to the employees and they can encourage 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 with limited liability. He shares the profits of the business only. He may or may not be a partner after attaining maturity. (xiii) Risk and reward are fairly balanced : There is always a direct relationship between effort and reward in the case of partnerships. This motivates parners to work harder in order to enjoy higher profits. (xiv) Good personal relations with customers and employees : Every partner can be made to develop healthy and cordial relationship with employees and cus tomers. The fruits of such relationships may be reflected in better accomplish ment and larger profits. (xv) Easy dissolution : It is easy and inexpensive to dissolve a partnership. The partnership can be dissolved on insolvency, lunacy or death of a partner. No legal formalities are required at the time of dissolution. So, it is easy to start as well 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 are jointly responsible for all acts and debts. The creditors can make any or all of the partners liable and recover their dues even form the private property of partners. (ii) Uncertain continuity: There is always an uncertainty in continuing this type of organization. Death, insolvency, insanity of one of the partners may lead to dissolution of the firm. In an atmosphere of uncertainty, long range plan ning and innovations are not possible.
(iii) Limited resources : A partnership firm may not be able to raise adequate capital for expansion beyond a certain limit. Though the capital is more in a partnership than in a sole proprietorship form of business, still it is not suffi cient for large-scale operations. (iv) Lack of harmony : It is difficult task to maintain harmony among the part ners for a long time. There is a possibility of differences of opinion amongst themselves. Mutual conflicts and lack of team spirit among partners may lead to loss of reputation and dissolution of the firm.
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(v) Lack of public confidence: It may not enjoy the confidence of the public because its accounts are kept secret and there is an absence of publicity. More over, the affairs of the firm are not legally controlled. Therefore, the public may not place much confidence in such firms. (vi) Risk of dishonest co- partners : A dishonest partner may cause injury to the other partners. One partner may be made to suffer heavy losses due to the dishonesty of another. Restricted transferability of the partners interest : A partner cannot trans fer or assign his share in the firm to a third person without the consent of the other partners. He, thus, loses the liquidity of his investment.
(vii)
(viii) Risk of implied authority : Each partner of the firm has the implied author ity to act on behalf of the firm and all other partners. A partner may abuse his implied authority for personal gain. (ix) Absence of professional management: Modern business needs the expert services of those who have acquired managerial skills and render their ser vices to business undertakings as salaried officers. In partnership firms, we witness the absence of professional management.
Suitability : Despite its weakness, partnership form of organization is suitable for small and medium-sized business. It is highly appropriate for professional services like chartered accountants, solicitors, doctors, etc. which require pooling of specialized skills and direct contact with the clients. Partnership is also popular in wholesale and retail trade.
9.5COMPARISON BETWEEN PARTNERSHIP AND SOLE PROPRIETOR SHIP

1. Number of members. Sole proprietorship is owned and controlled by one person. The number of partners in a firm can be upto ten in banking business and twenty in other cases. At least two persons are required to form a part nership. Agreement. No agreement is required in a sole proprietorship. On the other hand, there must be an express or implied agreement among partners in or der to constitute a partnership. Registration. A sole proprietorship need not be registered except under the Shops and Establishment Act. A partnership firm should be registered other wise it will not be able to enforce its rights in the court of law. 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 pro prietor. B23
2.
3.
4.

5. Management. The management of sole proprietorship lies exclusively with its 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 is pooling of knowledge and judgment. Work can be divided among partners according to their skills and aptitudes. Secrecy. Secrets of sole proprietorship are known only to its owner. In part nership, secrets are shared among the partners. Therefore, a sole proprietor is in a better position to retain the secrets of business. Quick decisions. In sole proprietorship one man takes all the decisions. But in partnership decisions are taken though mutual consultation between the partners. Therefore, sole proprietorship can take decisions more quickly than a part nership. But decsionsm taken in a partnership are likely to be less reck less and hasty than those of a proprietor. Governing law. There is no specific law governs sole proprietorship. Partner ship is governed under the Partnership Act 1932. Sharing of profits. There is no profit sharing in a sole proprietorship and all prof its belong to the owner. In a partnership profits are shared between all the parners. Flexibility of operation. Proprietorship is a one man show whereas partner ship is carried on by two or more persons. Therefore, there is greater flexibility of operations in sole proprietorship. Mutual agency. In proprietorship there is no mutual agency. But in a part nership every partner is an implied agent of the firm and of other partners. Scale of operations. Sole proprietorship is suitable for small scale business, while partnership is suitable for medium sized business. Scope for expansion is greater under partnership. Risk. The owner alone bears all the risks of sole proprietorship. In a partner ship risks are shared by all the partners. Continuity. The life of a partnership is more uncertain than that of sole propri etorship. Lack of mutual trust and unity among the partners can result in un timely dissolution of partnership.
6.
7.
8. 9.
10.
11. 12.
13. 14.
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 Hindu Family business is not the result of an agreement but the result of status.
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2. 3. 4.
The death of a member will bring about the dissolution of the partnership firm but joint Hindu family firm is not dissolved by the death of any male member. A member of either sex can be partner in a firm while it is only male members that can be members of a joint family firm. A new partner can be admitted into the partnership firm only with the consent of the other partners while in case of joint family firm, there are constant and automatic additions by the birth of male children. Every partner has the right to pledge the credit or the firm or the partnership business but it is only the manager (Karta) of the Joint family firm that can contract a debt so as to bind the other members. The liability of the partners in a firm is always unlimited and they are personally liable for the debts. But the members of a joint family firm except the Karta are liable only to the extent of their interest in the joint family firm. The Karta is personally liable for the firms debts. Every partner can ask for dissolution and accounts of the firm but only right of a 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. A minor cannot become a partner in the firm. However, a minor can be admitted to the benefits of the partnership. But in a joint family business, a minor male becomes its members by his birth in the family. Every partner enjoys the authority to act and to bind the other partners by his acts. All the partners can take active part in the management of the business of the firm. In the joint Hindu family firm, only the Karta of the family enjoys these. In partnership the number of partners is limited to 10 in case of banking business and to 20 in the case of other business but in case of Joint family business there is no such restriction.
5.
6.
7.
8.
9.
10.
9.7 CO-OPERATIVES
Just as limitations of a sole proprietorship led to the rise of the partnership form of business organization, the limitations of partnership too gave rise to larger forms of business organization like cooperatives and companies. A co-operative society is a voluntary association of persons who join together to safeguard their own interests. It is a business activity without having any profit motive, but for benefiting themselves through self-help and co-operation. The primary objective of forming a co-operative is to protect economically the weaker sections of the society from the oppression of the economically organized strong segment of the society. It is a democratic organization run by its members for serving their own interests.
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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 in place of dependence; and (iv) Moral solidarity in place of unethical business practices. Thus, co-operative organizations are generally started by the economically weak sections to promote their common economic interests through business propositions. The primary object of 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 to gether as human beings on the basis of equality for the promotion of the economic interests of themselves. [Prof. E.H.Calvert] (b) Co-operative is joint enterprise of those who are not financially strong and there fore, come together not with a view to get profits but to overcome disability arising out of the want of adequate financial resources. [H.N.Kunzen] (c) Co-operative is an association of individuals to secure a common economic goal by 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 in the promotion of economic interests of its members in accordance with co-operative principles. [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 freely and 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 to become member of the cooperative. (b) Service motive. The purpose of the co-operatives is not making profit. The cooperative societies are formed with a motive of service. The members are inter ested in helping each other. The co-operatives are for ensuring social justice. It does not mean that co-operatives do not make profit. In business the profit is many times regarded as the acid test of the efficiency of working units. How ever, the members of co-operatives do not believe in profit making through exploitation.
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(c)
Equality. Every members of a co-operative society enjoys equal status. No one has special voting rights. The members may be holding different number of shares but all the members have equal voting right. No one is enjoying any special privileges. Democratic management. Every member of a co-operative society is allowed to express his views and is also free to criticize the working of the cooperative. The management is democratic. Like political democracy, here also the man agement is of the members, by the members and for the members. The members elect their representatives and like the board of directors of a company these representatives manage the affairs of the co-operative on behalf of the mem bers. Cash transactions. The business of co-operatives is generally carried on Cash basis. The members are discouraged to have credit facilities with a view to avoid ing bad debts. This safeguards the interests of all the members. Corporate status and state control. Like a Joint Stock Company, a Co-opera tive Society also is required to be registered in law and it is also treated as an independent legal entity. The Government regulations are binding on it. It can sue and get sued in law and also can purchase or sell any asset or property. Religious and political neutrality. The cooperatives believe in fraternity. All the members are brothers and sisters and therefore, the religious or political view of the members do not find any place in the affairs of the cooperative. Education. The co-operatives believe in educating their members about the prin ciple of cooperative. There is a feeling of togetherness. The benefits are to be shared by all equally. Limit on shares. Usually, it is decided by the co-operatives as to what would be the maximum limit of the shares that could be held by any member. The capital is made available by the members at practically no cost. The interest if any is distributed out of surplus but in most of the cases the interest is waived by the members contributing the capital. The distribution of surplus. All the members are entitled to an equitable share of the surplus. There is a limit of the dividend that could be paid by a Coopera tive Society. Political and religious neutrality : The membership of a cooperative society is open to all, irrespective of religion, caste, political affiliations and beliefs. A cooperative represents universal brotherhood and it should not lose its path in political contradictions. Co-operative societies are neutral as far as political and religious affiliations are concerned. Legal status : A cooperative society is required to be registered under the Cooperative Societies Act, 1912. It has its separate legal entity and perpetual suc cession. With the change in the status of its members, the structure of a coop erative society is not changed. B27
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)

(m) Transfer of shares : The shares of a cooperative society are not freely transfer able. A member can surrender his shares to the society with the permission of the societys office bearers. Liability of members : The liability of the members of the co-operative society is restricted to the extent of subscribed shares. But, for this purpose, the society will have to write the work Limited after its name. Government regulation and control : A co-operative society is governed by the Indian Co-operative Societies Act, 1912. A society can be registered only if it satisfies the conditions laid down by the statute for this purpose. The co-opera tive societies are to follow certain rules and regulations framed by the Govern ment. There is a control of Central and State Governments on the working of co-operative societies in India.
(n)
(o)
9.7.2 Types of co-operative undertakings Co- operative societies are classified into different types, according to the nature ofservices rendered by them. The following are them main types of co-operative : (i) Consumers co-operatives; (ii) Producers co-operatives; (iii) Marketing co-operatives; (iv) Credit co-operatives; (v) Housing co-operatives; (vi) Industrial co-operatives societies. (i) Consumers co-operative societies : Consumers co-operative societies are established by the consumers of a certain locality for the purpose of social upliftment of their members. These co-operatives are formed to ensure a steady supply of essential commodities of standard quality to the members at fair prices. The consumers co-operatives purchase the goods on a wholesale basis and sell these goods on a retail basis to the members at fair prices. The profits of the society are distributed among the members in also utilized for providing social services (e.g., medical aid, education, sanitary improvements, etc.) These co-operatives are run by the members themselves through an elected team of office bearers.
The objectives of consumers 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.
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(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 made from co-operatives. (ii) Producers co-operative societies : These societies are formed for the benefit of small producers, who have difficulty in collecting various factors of production and face market problems.
The objectives of producers 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, producers co-operatives are voluntary associations of small producers, who join hands to face powerful capitalists. These societies are formed for the benefit of small producers who cannot easily collect various items of production and face some problems in marketing. These co-operatives provide raw-materials, tools, technical guidance, etc., to the members, so as to enable them to produce specified goods. Profits of the society are disbursed among the members as per rules. Producers 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 their members to secure fair prices for their goods. In other words, these co-opera tives are associations of producers for selling their products at remunerative prices. The production of different members is pooled and the society under takes to sell these products by eliminating middlemen.
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The objectives of these societies are : (a) (b) (C) (d) (e) (f) (g) (h) (i) (iv) to ensure a ready, steady and favourable market for the production of differ ent members; to undertake centralized selling of the produce contributed by their members; to eliminate middlemen and reduce the costs of marketing; to provide services like assembling, grading, storing, packing etc; to provide loans to producers against the deposit of their goods; to improve the bargaining position of the producers; to ensure the supply of standard goods at reasonable prices; to control the flow of supplies and thus influence prices; to collect marketing information and supply it to the members for their ben efit;
Credit co-operative societies : These societies are formed in rural and urban ar eas to attract the small savings of its members. These societies are estab lished by agriculturists, industrial workers, salary earners, artisans, etc., on the basis of col lective interests for the purpose of mutual assistance. These societies provide loans to their members on easy terms of interest, security and repayment. The aim of a credit society is to grant credit to its members for productive purposes at a very low rate of interest. The society educates its members with the habit of thrift. The society 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 societies 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 resi dential accommodation to their members, either on an ownership basis or at fair rents. The members of the society contribute their savings to the common fund of the society with borrowed money from banks to buy a plot of land in order to construct a building for their dwelling purposes. The purpose of these societies is to help the members in purchasing land and constructing houses. State Housing Boards help economically weaker sections of the society in owning their houses and paying the price in easy.
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(vi)
Industrial Cooperatives Industrial co-operative means an association of artisans, craftsmen, industrial workers, small businessmen for co-operative and collective interest. Industrial co-operative may be defined as an undertaking of craftsmen or skilled workers engaged in a cottage or small scale industry to undertake production, purchase of supplies and raw materials, marketing of products and supply other services to members. The need for such an organization is felt due to the individual financial and managerial limitations. The members of a co-operative pool their resources to carry on the 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.
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As indicated earlier, the industrial co-operatives could be related to production or service activities 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. It does not require long and complicated legal formalities at the time of forma tion. Any ten persons may form a co-operative society for the promotion of their economic interests. Limited liability : The liability of the members is limited to the extent of capital contributed by them as mentioned in the bye-laws of the society.
(ii)
(iii) Open membership : Any person can become a member of the society and avail of its advantages. The minimum number of members required is ten but there is no limit to the maximum number of members. A member can leave the society by returning his share whenever he likes. (iv) Democratic management : A co-operative society is managed in a democratic way on the basis of equal voting rights. Thus, every member is able to have a voice in its management. Every member has an equal say in formulating the policies of the society. Perpetual succession : It is a separate legal entity and its life is not affected by the death, insolvency or conviction of its members. It has a fairly stable life and it continues to exist for a longer period. State patronage : The policy of the Government is to encourage co-operatives in every field. Co-operatives are given financial assistance and loans at much lower rates of interest. Co-operatives are exempted from paying stamp duties and reg istration fees. As regards income-tax, co-operatives are offered several conces sions and reliefs.
(v)
(vi)
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(vii)
Service motive : Co-operative societies are started, not for profit, but for ser vice. The members are provided with financial help and goods and services at concessional rates. A feeling of co-operative is created among the members.
(viii) Economic advantages : It provides financial assistance to agriculturists and low income group members. It also provides loans for productive purposes. More over, credit co-operatives protect the members from exploitation by money lenders. (ix) Social advantages : With the establishment of co-operative societies, the feel ing of co-operation and democracy increases in the society. Economic power is decentralized. The poor people can get the advantages of their efficiency by becoming members of a co-operative society. Moral advantages : Mutual help, self-help, hard work, education, self-depen dence, savings, etc., are considered as the basic principles of co-operative soci eties. It is for avoiding social tensions, litigation and mutual distrust. Co-opera tive systems attempt to achieve a wide-based rural development and rural in dustrialization. Political advantages : It is based on the principles of equal distribution of wealth. It puts effort to eliminate vested interests, to create delegated leader ship and teach members the need of self-governance.
(x)
(xi)
(xiii) Low management cost: Some of the expenses of the management are saved by the voluntary service of the members. Members take active interest in the working of the society. So, the society does not require to spend large amounts on 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 capi tal. Societies are not able to raise huge amounts of capital because their mem bers are persons of meager income. Therefore, societies are not able to take advantage of large-scale production. Inefficient management : The societies are not managed efficiently because they do not get specialized and professional managers as they cannot afford to pay high remunerations. The members usually lack experience and mana gerial capability. Thus, management here is generally inefficient due to lack of specialization. Lack of direct incentive : There is no direct relationship between effort and reward. Honorary office bearers often do not have incentives to work hard. Lack of secrecy : The affairs of co-operatives are generally exposed to the
(ii)
(iii) (iv)
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members. It becomes quite difficult for them to maintain secrecy in business affairs. Business secrecy is leaked out to the members and office bearers of the society. (v) Lack of business elasticity : There is a lack of business elasticity in such cooperative societies. These societies are unable to compete with other private enterprises. Lack of savings by the members : The progress of co-operatives mainly de pends on savings. But in our country, the members are not in the habit of saving. That is why co-operatives may not be able to mobilize adequate capi tal for large-scale and risky businesses. Lack of competition : Co-operatives, generally, do not face any stiff competi tion. Markets for their goods and services are more or less ready and assured. Hence, there is possibility of slackening of efforts. Limited considerations : Profits earned by societies are very low. Proper and adequate returns on capital employed are not possible. That is why people are not interested in becoming members of the society. Excessive government interference : Excessive State regulations interfere with the flexibility of its operations and the efficiency of the management. Exces sive State interference is detrimental to the development of co-operatives in Indian. Corruption : One of the most important drawbacks of co-operatives is the prevalence of corrupt practices in the management and functioning of such societies. Corruption is an obstacle in the growth, progress and development of 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.
(vi)
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9.8. JOINT STOCK COMPANY

A company is an artificial person created by law, having a separate legal entity, with a perpetual succession and a common seal. It is an association of individuals for the purpose of earning profit. It has a capital divided into a number of shares, of which each member possesses one or more shares and which are transferable by its owners. B34 Business Fundamentals
Joint stock company has been defined by many eminent authors, eminent jurists and institutions. From a study point of view, we can divide these definitions into the following three categories : 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 moneys worth to common stock and employ it in some trade or business and who share the profits or losses arising therefrom. [James Stephenson] Definitions given by eminent jurists : (i) A company is an artificial being, invisible, intangible and existing only in the eyes 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 entity which is formed and registered under this Act or existing company. Thus, a company is an incorporated association created by law, having a distinctive name, a common 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) (ii) Incorporated association : A company is an incorporated association. It comes into existence only after registration under the Companies Act. Voluntary association : A company is an association of many persons on a voluntary basis. So, a company is formed by the choice and consent of the members. Shareholders can withdraw their investments from the company at any time they desire. Artificial legal person : A company has a legal personality and, as such, it is regarded by law as an artificial legal person. A company has the right to ac quire and dispose of the property. It can into contract with third parties in its own name. It can sue and be sued in its own name.
(iii)
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(iv) Separate legal entity : A company has a legal entity distinct from its mem bers. It is an artificial person having an independent existence. The principle of separate legal entity was established in the case of Solomon Vs. Solomon & Company Limited. (1897). Common seal : The common seal with the name of the company engraved on it. It is used as a substitute for its signature. The company cannot sign any document as it is an artificial person. Documents issued by a company must bear a common seal and it must be witnessed by at least two directors of the company. Perpetual succession : The company has perpetual succession as its existence is 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 provi sions of the Companies Act. Transferability of shares : The shareholders are at fully liberty to dispose of their shares to any person of their choice. Transferability of shares enables a shareholder to increase or decrease his investment in a company at any time. It ensures the safety of investment in the shares of a company. Limited liability : Liability of the members of a limited company is restricted to the face value of the shares purchased by them. The personal property of the members of a company cannot be attached to satisfy the claims of credi tors of a company. Separation of ownership from management : The company is not managed by all the members because, the number of members may be large. The au thority to manage the whole of the affairs is conferred to elected representa tives of members known as directors. A company acts through its directors. Thus, directors are the hands and brains of the company. Members of the company have no direct control over the day-to-day activities of the com pany. Statutory regulations and Government control : A company is governed by the Companies Act and it has to follow various provisions of the aforesaid Act. Moreover, accounts of the company must be audited by a chartered ac countant. In addition to this, a company has to submit a number of returns to the Government. In this way, a company has to comply with numerous statu tory requirements. Rigidity of objects : The type of business in which the company would par ticipate must be mentioned in the object clause of its Memorandum of Asso ciation. The company cannot take up any new business without changing the object clause. A company cannot work beyond its Memorandum and Articles of Association.
(v)
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(xii)
Strict legal formalities to commence business : A company is to follow some strict formalities to commence its business. In order to form a company, it is necessary to submit certain documents to the Registrar of Companies (such as memorandum of association, articles of association, prospectus, list of direc tors, consent of directors, etc). Social benefits : Company form of business enables better utilization of avail able resources. It is needless to say that with the increase in production and improvement in quality, all classes of the society have benefited. Accountability to shareholders : All the affairs of the company are to be dis closed to the shareholders so that they may come to know about the prospects and other problems of the company as a whole. Therefore, a company is re sponsible for its accountability to the shareholders. Public confidence : Audit of accounts of the company is compulsory under the Indian Companies Act, 1956. The financial statements of a company are published every year. Thus, public remains acquainted with the activities of the company. Moreover, there are some legal restrictions of the activities of a company. In these way, a company enjoys greater public confidence. Scope for expansion : A company is better placed as regards the facilities of the growth, development and expansion of its business. It can expand its managerial capacities and financial resources easily. It has great potential for growth and expansion.
(xiii)
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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 business facilitates mobilization of large amounts of capital for investment in indus tries. The company by its widespread appeal to investors of all classes, can raise huge capital required for large-scale operations. In addition, it can bor row from banks and financial institutions to a larger extent. Economies of large-scale production: The company form of business can enjoy all the benefits of large-scale production, such as minimum cost of production and maximum profit. Economies in purchase, production, selling and distri bution, etc., would provide goods to the consumer at a cheaper price. Large capital enables the size of the business to be extended and permits the use of expert knowledge and specialization of functions. Thus, production is increased and efficiency is enhanced. Scope for expansion: A company can easily expand its managerial capacities and financial resources. It has great potential for diversification and growth. It can expand its business by issuing new shares and debentures as there is not restriction to the maximum number of members in a public company. B37
(ii)
(iii)

(iv) Stability of existence : The organization of a company as a separate legal entity gives it a character of continuity. As a incorporated body, a company enjoys perpetual existence. Thus, a company, because of its continuity and stability, can build up a power of endurance and a high level of efficiency. Transferability of shares : The shares of a public company are freely trans ferable. The shareholders are at full liberty to dispose of their shares to any person they desire. In other words, shareholders can withdraw their invest ments from the company at any time they like. Transferability of shares pro vides maximum protection to those shareholders who are in the minority group. Democratic control : The company is managed on the principle of democ racy. The Board of Directors who manage the company are elected by the shareholders. The directors are responsible and accountable to the sharehold ers. Because of separation between ownership and management, persons with managerial ability can occupy positions of control. Managerial efficiency : A company can secure the services of highly quali fied persons who are experts in different fields of business management. Through the company, capital and business ability may be linked together for the benefit of both the individual investor and the community as a whole. Stimulation to savings and investments : The company is an effective media of mobilizing the scattered savings of the community and investing these sav ings for commercial purposes. Insurance companies, banks and other finan cial institutions invest their money in the shares of different joint stock compa nies. It channelises public small savings into industry. Tax relief : The company enjoys greater tax relief as compared to other forms of business. Company pays lower tax on a higher income as it pays tax on the flat rates. Moreover, a company gets some tax concessions, if it establishes itself in backward area. Some tax incentives are available for export promo tion also. Diffused risks : The membership of a public company is large. The business risk is divided among several members of the company. This encourages in vestment of small investors. Statutory regulation and control : Formation and working of companies are well regulated by the provisions of the Companies Act. These strict regula tions safeguard the interests of shareholders and people who deal with the company. Statutory regulations make the management healthy, fair and just for all the activities of the company. Public confidence and popularity: A company is guided and controlled by strict regulations and Government control. These ensure public confidence with regard to investment in shares and debentures. Since the companys fi
(v)
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nancial accounts are published and circulated, the public has enough faith on the activities of the company. Thus, at present, a company enjoys greater pub lic confidence, better prestige and reputation in the business world as a whole. (xiii) Capacity of afford maximum risks : A company can bear high risks, because of its large financial resources. Companies in many industries are progressing day by day because of their capacity to afford high risks. Social responsibilities: Due to the existence of the company form of busi ness, society is benefited in respect of: (a) opportunity in employment; (b) de velopment of large-scale industries; (c) facility of huge capital formation; (d) increased Government revenue; (e) improvement in standard of living, etc.
(xiv)
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 re quires adherence of too many legal formalities. The establishment and run ning of a company would prove to be troublesome, because of complicated legal regulations. Moreover, the formation and management of the company is expensive too. Concentration of power in few hands : Shareholders of the company have practically no say in the affairs of the company. The directors of the company become self-centered and they do not care for the shareholders. In most of the cases, directors try to formulate policies in order to promote their own inter ests. Thus, the company form of organization has helped concentration of economic power in few hands. Excessive Government control : A company has to observe too many provi sions of different laws imposed by the Government. This affects the smooth functioning of the company. Undue speculation in shares of the company : Undue speculation in shares of a company is injurious to the interests of the shareholders. Sometimes, di rectors indulge in speculation by misusing inner information of the company for speculative purposes and personal gain. Fraudulent management : The promoters and directors may indulge in fraudu lent practices. The unscrupulous directors may present a rosy picture of the company in its annual report. In this way, the innocent and ignorant inves tors are duped. Bureaucratic control : Quick decisions and prompt action are absent in the management of a company. It makes a company an inflexible enterprise. As a result, officers and their assistants do not enforce any decision promptly. Op portunities may be lost because of delay in decision-making.
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(vii) High nepotism : In companies, employees are selected not on the basis of ability but on the basis of personal interest of the management. There is scope for a high degree of favoritism and nepotism and as a result worthless people join in the company. Inflexibility in management : A company cannot quickly adjust with the changing conditions in the market, because of its complex structure and legal obligations. It has, therefore, less flexibility in management. Monopolistic control and exploitation of consumers : Joint stock companies facilitate formation of business combinations which ultimately lead to mo nopolistic control and exploitation of consumers. Social abuses : Evils of factory system like insanitation, pollution, congestion of cities are attributed to the company form of organization. Moreover, the close and cordial relationship between the management and employees is dif ficult to maintain. It brings about strikes, lock outs, retrenchment, closure, etc., in the business.
(viii)
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9.9. PUBLIC UTILITY SERVICES AND STATE ENTERPRISES

The enterprises which are owned, managed and controlled by the state on behalf of peoplearecalled State Enterprises. In the earlier period it was felt that the principle of Laissezfaire would work in the best interest of the people. It was thought that if there is no interference from the Government, everybody would try to maximize his individual welfare and it will result in maximum social welfare collectively. In practice, however, it was observed that different interests in any society are likely to clash with each other and as such the total social welfare cannot increase to its maximum. In fact, after the break of the First World War there was acute shortage of a number of essential things and the Government had to accept more active role in economic and industrial activities. State has not only abandoned the principle of laissez-faire but has also accepted the role of a Welfare State. This is an outcome of Socialistic ideas. A large number of glaring defects were seen in Capitalism and it was felt that it was necessary to remove these defects by taking active interest in the ownership and management of Utility Services and some other Enterprises. As a matter of Industrial Policy in most of the countries, the basic and key industries, defence industries and Public Utility Services are nationalized. It is also true that many countries have found a Mixed Economy as a better solution and India perhaps, is not an exception. In other words, in India the Private Sector Industries and Public Sector Industries have been working together.
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9.9.1. Merits of State Enterprise. (i) A check and prevention on the formation of private monopolies. A large number of countries in the world have found that due to lust of economic and political power there is a tendency to form monopolies. These monopolies se riously affect the Social interest in the sense that the monopolist charges exor bitant prices, makes enormous profit, provides lower quality of goods and creates artificial scarcity by hoarding. Acceleration of economic growth. The industrialization in a country is faster with the state enterprises functioning actively. The rate of economic growth is also accelerated. The profits of state enterprises are further invested in indus tries. Various schemes for economic development can get financial support from the state enterprises. Because of such surplus, it is not necessary for the Government to levy heavy taxes. Economy. It is possible to avail of economies of large scale operation when a number of enterprises are brought under the State umbrella. This can also result in proper co-ordination between various industries. There is then no fear of discord. The capital at the disposal of the State can always be big and therefore, it becomes easier to retain the services or experts for proper advice and also conduct research in various areas for reduction in cost. Object to render service rather then making profit. The concept of State enterprises is an outcome of the idea to provide services to consumers or the members of public. A State enterprise is supposed to be interested in Social welfare and not making profit. If therefore, believes in providing good quality service at the most reasonable prices. Hoarding with a view to making enor mous profit is just out of question. A State enterprises does not believe in Black marketing as a Private Undertaking may. Efforts to provide full employment. Generally, unemployment can arise be cause 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 are under the State control, it is possible to provide maximum employment to the people. In other words, a State aims at full employment-it is opined that only under socialized production, the fullest employment is possible for all the able bodies adults to have work according to their aptitude, training and skill. It is also observed that in case of employment with the State enterprises there are no violent ups and downs which are so common with Private Sector. Encouragement to the balanced regional development. It is the duty of any State to ensure the there is a balanced regional development otherwise only some parts of the State may progress leaving others behind. The uneven de velopment can create a number of problems. The Status usually encourages
(ii)
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growth of undeveloped or underdeveloped region by offering concessions and many other facilities. Lopsided development is never in the interest of all the people. The Government is interested in ensuring that the fruits of pros perity are enjoyed by all. (vii) Justice and Equality for all the employees. The Private enterprises are many times accused of exploitation of the employees, uncertainty of jobs, payment of wages at a lower rate and miserable conditions of work. A State enterprise is on the other hand away from exploitation of workers. It tries to provide security of jobs and justice to its employees. The relations between the Gov ernment undertakings and their employees are usually cordial.
(viii) Planned production and equitable distribution. State enterprises believe in planned production and not overproduction, particularly because they are guided with the service motive. The responsibility of equitable distribution also 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 to lack any initiative in their work. They also lack flexibility in operation and efficiency. On the other hand incase of Private Sector the maximum premium is paid to efficiency, creativity and initiative. The State Enterprises have service as their motive whereas in case of private undertakings, maximum weightage is given to Profit making. The decision making process in State Enterprises is comparatively very slow and implementation also is delayed. This results in loss of many opportunities. Private sector is dynamic and progressive. Even the cost of administration of the State Enterprises is on the higher side. (b) Political interference. In case of state enterprises, the worst difficulty is the political interference. The ministers and other political influences affect the scientific and rational decision making. Undue weightage is granted to people who know little in business. The smooth and efficient working is therefore not guaranteed with Government in business. (c) Regimentation. The Private Sector Undertakings usually believe that the consumers are kings and that they must be served well. They cannot take customers for a joy ride. The resistance from the customers could create serious problems for conducting business. On the other hand, in case of State Enterprises, there is virtually a monopoly. The consumers have no choice. This is against the principle of democracy 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 exposed 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 show any initiative and become virtually Time Killers.
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(e) Rigid control. The State Enterprises are subject to strict control from various agencies. People, Parliament, Ministers, Financial Agencies and the Auditors criticize and exercise direct or indirect control. It is not, therefore, to enjoy autonomy in decision 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 significant 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 to the amount of capital contributed by each. The personal property of a limited partner is not liable for the firms 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 partner having 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 and the U.S.A. limited partnership is allowed. For example, in England limited partnership can be formed under the Limited Partnership Act, 1907 and under the Partnership Act, 1890 in the U.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 r maining partners is limited to their capitals in the firm. Thus, a limited partnership consists 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 no implied authority to represent and bind the firm. However, he is allowed to inspect the books of accounts of the firm. 3. The limited or special partner cannot assign his share to an outsider without the consent 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) (ii) It enables people to invest in a business without assuming unlimited risk and without devoting much time and attention in management of business. It permits the mobilization of larger financial resources from cautious and conservative investors.
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(iii) It provides an opportunity to able and experienced persons to manage the business without any interference from other partners. Complete control and personal supervision help to ensure prompt decisions and uniform actions. It is more stable than general partnership because it is not dissolved by the insolvency, retirement, incapacity or death of limited partner.
(iv)
9.10.2 Disadvantages. Limited partnership suffers from the following drawbacks: (i) (ii) (iii) The limited partners are deprived of the right to manage. They remain at the mercy of the general partner. The general partner may misuse his power to exploit the limited partners. A limited partnership enjoys little credit standing as the liability of some partners is limited. It has to be registered.
EXERCISES
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
Define the term business. Show the relation between industry, trade & commerce. Define the term Sole Proprietorship & state the principal features of a sole proprietorship business. State the merits & de-merits of sole proprietorship business. Justify on the suitability of a sole proprietorship business. What is the meaning of Joint Hindu Family business and state the major characteristics of such form of business. Define the term partnership. Explain the features of partnership. Describe the various types of partners. Explain the merits & de-merits of partnership form of business. Is registration of Partnership compulsory? What happens if a partnership firm is unregistered. Distinction between Partnership & Sole Proprietorship. Define a Co-operative society? What are its essential features? State the merits & de-merits of a co-operative organization.
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13. 14. 15. 16. 17. 18. 19. 20. 21.
Distinguish clearly between a company & a co-operative society. State & explain the different types of co-operative organization. Define a Joint Stock Company & state the salient feature of a Joint Stock Company? Explain the merits & de-merits of Joint Stock Company. What are State Enterprises? State the objectives of State Enterprises. The main object of co-operative organization is the service of members. Com ment. State the merits & de-merits of State Enterprises. State the problems of Public Enterprises. In spite of all its limitation as a business unit, the State Enterprises are preferred in a mixed economy. On the basis of the above statement explain the merits & demerits of Public Utility & State Enterprises. What is the meaning of limited liability & how does it apply to the different forms of organization. Explain various ways in which a partnership firm can be dissolved. What is the meaning of implied authority of a partner? State the rights, duties & liabilities of the partners. The relation of Partnership arises from contract & not from status. Comment Write short notes on : a) Separate legal entity b) Minor Partner
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28. 29.
The one man control is the best in the world if the max. is big enough to manage everything. Discuss. A sole trader is the supreme Judge of all matters, pertaining to his business, subject only to the general laws of the land and to such special legislation as may affect his particular business. Comment Partnership is a firm of business organization, is evolved due to limitations of Sole Proprietorship. Do you agree with the statement? Why?
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Company Organisation and Management
Study Note - 10
COMPANY ORGANISATION AND MANAGEMENT
This Study Note includes

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 shown below: (i) Chartered Company : A chartered company is incorporated under Royal Charter issued 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. The East India Company, Chartered Bank of England, etc., are important examples of chartered companies. This type of company is not found in India at present. Statutory Company : A statutory company is established by a special Act of Parliament. Generally, public utility concerns are established in this way for the purpose of performing certain important economic functions. Examples of statutory companies are : (i) Reserve Bank of India; (ii) Damodar Valley Corporation; (iii) State Bank of India; (iv) Industrial Finance Corporation of India. Business Fundamentals
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(iii)
Registered Company : A company which is formed by registration under the Companies Act is known as a registered company. All existing companies in India (except statutory companies) have been formed and registered under the Companies Act. The workings and continuity of registered companies are governed by the relevant provisions of the Companies Act. Registered companies may be of three types: (i) company limited by shares; (ii) company limited by guarantee, and (iii) unlimited 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 shown below: (i) Company limited by shares : A company limited by shares is registered under the provisions of the Companies Act. It has a specified amount of capital di vided into a definite number of shares. Liability of the members is limited to the extent of the face value of the shares they have purchased. Most of the compa nies formed in India are of this class. A company limited by shares may be of two types : (a) public company, and (b) private company. Company limited by guarantee : A company limited by guarantee is such a registered 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 is enforceable only at the time of winding up of the company. It implies that, if a company cannot pay for its liabilities in full at the time of winding-up, the existing members would be required to contribute for meeting debts and liabili ties of the company. A guaranteed company may be with share capital or without share capital. Companies limited by guarantee are usually formed to promote art, literature, sports, education, religious or other charitable purposes. In other words, non-profit earning companies are mostly registered with a guaranteed capital. Company with unlimited liability : This is a company having no limit on the liability of its members. In this company, members are personally liable to pay the debts of the company in proportion to their interest. Members are under the obligation to satisfy in full, all the claims of the third parties on the com pany. An unlimited liability company is just like a big partnership firm. Nowa days, such company is not found in the field of business.
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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 as shown below: (i) Private company : A private company is an incorporated body, registered under the Companies Act (with a minimum paid-up capital of rupees one lakh), with four important restrictive provisions in its Articles of Association. Therefore, a private company is one which: (i) (ii) (iii) (iv) (ii) restricts the rights of its members to transfer their shares in the company; limits the number of its members to fifty (excluding its employee shareholders); prohibits any invitation to the public to subscribe for any shares or debentures of the company; prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. is not a private company; has minimum paid up capital of rupees five lacs; and is a subsidiary of a company which is not a private company.
Public company : A public company means a company which : (i) (ii) (iii)
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 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 as shown below: (i) Indian company : A company which is registered and incorporated in India is called an Indian Company. This company is registered under the provisions of the Indian Companies Act with its registered office in India. Foreign company : A foreign company is a company which is incorporated outside the country but carries on business in this country through agents or branches. The provisions of the Indian Companies Act are equally applicable to foreign companies carrying on business in India. Multinational company : A company whose management, ownership and control are spread over more than one country is known as multinational company. Therefore, a service facilities outside the countrys origin. A multinational company takes decisions in a global context. A multinational company organizes its operations in different countries through either of the following five alternatives : (i) Subsidiary companies; (ii) Joint venture companies; (iii) Branches; (iv) Franchise holders and (v) Turn-key projects.
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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 as shown 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 or State Government). Government companies are also registered under the Companies 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 more than 50% of equity share capital or controls the composition of the Board of Directors of some other companies. A company may become a holding company of another company in any of the following 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% of the paid up equity share capital is held by another company; or (ii) whose majority of the Directors are appointed by anther company ; or (iii) where more than 50% of the 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 minimum paid-up capital of rupees one lakh), with four important restrictive provisions in its Articles of Association. Therefore, a private company is one which: (i) (ii) (iii) (iv) restricts the rights of its members to transfer their shares in the company; limits the number of its members of fifty (excluding its employee shareholders); prohibits any invitation to the public to subscribe for any shares or debentures of the company; prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.
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10.2.2. Features of a private company (i) (ii) (iii) (iv) (v) (vi) (vii) A private company can select any name, but the words Private Limited must be added at the end of its name. It must have a minimum of two members and a maximum of fifty members (excluding employee shareholders). It can start its business just after its registration. It does not require a commencement certificate. It cannot issue shares to the public. Moreover, a restriction is imposed on the transferability of its shares. It need not require to file a prospectus or a statement in lieu of prospectus to the Registrar of Companies. It need not require to hold a statutory meeting or file a statutory report. 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 as compared to public companies : (1) Exemptions in formation of a company : (i) (ii) (iii) A private limited company can be formed by two persons only. It can start its business just after its registration. It does not require a commencement certificate. It need not require to file a prospectus or a statement in lieu of prospectus to the Registrar of Companies. It need not require to hold a statutory meeting or file a statutory report to the Registrar of the Company. Provisions of the Companies Act, regarding quorum, voting rights, counting of votes and information of meetings can be relaxed in case of a private company.
(2) Exemptions regarding holding of meetings : (i) (ii)
(3)Exemptions regarding appointment, removal, etc., of Directors : (i) (ii) Minimum number of Directors required in a private company is two, while in case of public company, it is three. The rules regarding appointment, retirement, etc., of Directors do not apply to a private company.
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(iii) (iv) (v) (vi)
The rules regarding qualifying shares of Directors do not apply to a private company. Loans and financial help can be given to the Directors of the private company without permission of the Central Government. The approval of the Central Government is not required regarding increase in the number of Directors of a private company. There is no limit on remuneration of Directors and Managing Director of a private company.
(4) Exemptions regarding managerial remuneration : Remuneration payable to Directors and Managing Directors of a private company is not restricted to 11% of the net profits. (5) Exemptions regarding appointment of Managing Directors : (i) (ii) A Managing Director can be appointed even for more than five years. No approval of the Central Government is required in case of appointment of Managing Director. It can enhance its capital without observing the legal provisions regarding further issue of capital applicable to public companies. The provisions regarding voting rights and the distribution of share capital into preference and equity shares do not apply in the case of a private limited company.
(6) Exemptions regarding share capital : (i) (ii)
(7) Exemptions from various legal formalities : A private limited company is not bound to observe the restrictions under the Companies Act with regard to publication of accounts, issue of right-shares, investment of company funds 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 as two or more persons are required to form it. A private company can start its operations immediately after its incorporations. There is no need to get the certificate of commencement of business. It is neither required to issue a prospectus nor to call a statutory meeting. Maintenance of secrecy of business affairs : A private limited company is better placed to maintain secrecy of the affairs of business. A private company does not
(ii)
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have to show its accounts and financial statements before the registrar of Companies and the public. (iii) Promptness of decisions : Policy decisions can be implemented quickly in the case of private companies as compared to public companies. The management is also in a few hands who manage the day-to-day affairs effectively. Direct encouragement : There is no difference between owners and management of a private company. The members and management, thus, get more incentive to work. Greater elasticity : Private companies have been granted exemptions from the applications of various important provisions of company law. Thus, a private company is required to perform a few number of legal formalities as compared to public companies.
(iv)
(v)
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 companies are limited. Therefore, possibilities of expansion and diversification become limited. Interests of the shareholders are not safeguarded : Provisions of the Companies Act regarding safety of shareholders do not apply to private companies (e.g., working of Directors, limit of managerial remuneration, etc.) Moreover, non-transferability of shares puts the minority at the mercy of the majority. State priorities to public companies : Public companies are always preferred as compared to private companies in matters of tax relief, financial assistance, managerial assistance, etc. Generally, the Central Government gives preference to public companies in matters of granting licences. Dissatisfaction among minority shareholders : The minority shareholders cannot dispose of their shares even when they are dissatisfied with the affairs of the company.
(ii)
(iii)
(iv)
10.2.6 Private company deemed to be a public company A private company is deemed to be a public company : (i) (ii) (iii) (iv) Where at least 25% of the paid-up share capital of a public company is held by a private company; Where at least 25% of the paid-up share capital of a private company is held by one or more bodies corporate; Where a private company accepts public deposits; Deemed public companies have become inoperative as per Companies (Amendment) Act, 2000.
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10.3 PUBLIC COMPANY

10.3.1Definition of a public company A public company means a company which : (i) (ii) (iii) is not a private company; has a minimum paid up capital of rupees five lakh; and 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) (ii) (iii) (iv) (v) (vi) It requires a minimum of seven persons to form a public company. There is no restriction on the maximum number of members. It can offer shares to the general public in order to raise huge financial resources. Shares of a public company are freely transferable like movable property. Shareholders have no control over the management of the company. A public company can choose any name, but it must add the word Limited at the end of its name. It cannot commence its operations until it obtains a Certificate to Commence Business 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) (ii) (iii) (iv) Limited liability : The liability of each member is limited to the extent of the face value of shares purchased. Large membership : There is no upper limit as to the number of members. This diffuses the risk of investment in shares. Mobilisation of huge financial resources : This form of organization can obtain large amounts of capital for carrying out large-scale operations. Economies of large-scale production : Huge financial resources lead to a phenomenal 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 lower prices, etc. Professional management : The large size enables the company to acquire services of professional people in various field like accounting, finance, production, sales, etc. Thus, greater specilisation is possible in various fields of operation.
(v)
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(vi) Transferability of shares : Shares of a public company are freely transferable. Transferability of shares enables an investor to increase or decrease his investment in a company at any time. Transferability of shares reduces the risk of investment. Safeguarding interest of shareholders : Strict legal regulations safeguard the interests of the shareholders and people who deal with public companies. Social benefit : Increase in production, improvement in quality and providing goods and services at a cheaper rate ensures betterment of the society.
(vii) (viii)
10.3.4 Disadvantages (or limitations) of a public company The following are the disadvantages of a public company: (i) (ii) Legal complexities : The formation of a public company is complex and expensive. Separation of ownership and management : The management of the business is controlled, not by the shareholders in mass, but by their representatives called the Board of Directors. Thus, management and ownership become separated. Oppression of minority shareholders interests : All the affairs of a public company are controlled by a set of Directors. The directors can do anything within the limits of the Companies Act. Minority shareholders are oppressed and have no say in the management of the company. Delay in decision-making : It is rather difficult to take quick decisions on account of disagreements among the Directors. Moreover, a public company has to observe a good deal of legal formalities. As a result, there appears to be a huge delay in decision-making. Speculation in shares : Very often Directors indulge in speculation of shares for their personal interest. Speculation can create chaos in the stock exchange and can destabilize the company.
(iii)
(iv)
(v)
10.3.5. Differences between a private company and a public company
Sl No 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-two Maximum- not limit.
Public company Seven Unlimited Freely transferable Allowed Minimum-three; Maximum- as specified by the Article.
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Sl No 6
Basis of differentiation Commencement of business
Private company After obtaining certificate of incorpotation Not required
Public company After obtaining certificate of commencement Required to be submitted to the Registrar of Companies Required
Holding of statutory meeting and submission of statutory report Filing of prospectus or a statement in lieu of prospectus Name of company Quorum at the annual general meeting Rotation of Directors Procedure for formation Index of members
8 9 10 11 12 13 14 15
Not required
Name must and Name must end with the with the word Limited. words Private Ltd. Five Two Need not retire by rotation Simple and cheap No need to maintain Retire by rotation Complicated and relatively costly
16 17 18 19 20 21 22 23
Index to be maintained Wide publicity to all the Not requird to make wider Business secrets important discussion, publicity of its affairs state of affairs, etc. Too many legal formaliExemption from several Not required to observe ties and restriction to legal restriction several legal restrictions. be adhered to. Listing of sharesin stock exchange Not listed and quoted in the Listed and quoted in the stock exchange. stock exchange Ability to make quick decisions Possible. Not possibile. Protection to members Low protection High protection Large. High. Allowed. Greater liquidity. Five lacs. Financial and managerial re- Small sources Low Scope for expansion Disposal of shares Not allowed. Liquidity of investment in shares Less liquid Minimum paid-up capital One lakh.
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Company Organisation and Management 10.4. INCORPORATION OF A COMPANY

The following documents are to be filed with the Registrar of Companies of the State in which the registered office of the company is to be situated : (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Memorandum of Association; Articles of Association; List of persons agreeing to act as Directors (their full address and occupations); Statement of consent signed by each Director, A statement of Authorized Capital; Address of the companys registered office; An undertaking by each Director to hold and pay for the qualification shares; A statutory declaration by a chartered accountant or an advocate that all the legal requirements of the Companies Act have been complied with.
The Registrar of Companies scrutinizes the above documents. If the documents are found to be in order, the name of the company is entered in the register. Then the Registrar issues a certificate of incorporation in favour of the company. This certificate gives birth to a company with a separate legal entity. A private company can commence its business just after getting a commencement 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. A private limited company does not require this stage as it does not collect funds by selling shares to the public. A capital subscription stage is required for public companies as they are to collect funds form the members of the public at large by selling its shares and securities. So, with a view to raising funds, a public company, soon after its incorporation, has to arrange a meeting to deal with the following matters : (i) (ii) (iii) (iv) (v) Issue of a prospectus or a statement in lieu of prospectus; Appointment of bankers; Appointment of a brokers for underwriting shares; Appointment of a pro tem secretary; 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 of shares. A public company cannot allot shares to the public, unless the amount mentioned as minimum subscription is received within 120 days of the date of the issue of the prospectus. B56 Business Fundamentals
The restriction of minimum subscription is meant to prevent the formation of companies with an inadequate capital. In other words, the companies which can raise enough capital to meet the minimum requirements are allowed to start their business. A company can allot shares to the public provided the minimum subscription (as disclosed in the prospectus) has been raised within 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 by the Registrar when the following conditions are fulfilled : (i) (ii) A declaration that a prospectus or a statement in lieu of prospectus has been filed with the Registrar. A declaration that the amount of minimum subscription (as specified in the pro spectus) has been received.
(iii) A declaration that the Directors of the company have paid for their qualification shares. (iv) A certificate by a Director or the secretary of the company that all the formalities relating 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 of commencement in favour of the public company. No public company can start its operations without 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 profits therefrom. Promotion is the first stage in the formation of a company. Promotion means various 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 enterprise under the corporate form. [L.H.Haney] (2) Promotion starts with the conception of the idea from which the business is fully ready to begin operations as a going concern. [Guthman and Dougall] Promotion is an idea which is developed into a concrete project accomplished by the incorporation and floatation of a company. All the initial activities undertaken before the company is registered are called promotional efforts. Persons who help in the promotion of a company are called promoters. These promoters are experts in the work of company formation.
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10.5.2 Meaning and definitions of promoter There is no statutory definition of a promoter. But in simple terms, a promoter is one who usually performs the preliminary duties necessary to bring a company into existence and float it. A promoter undertakes to form a company with reference to a given project and performs various 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 individual connected with the formation of a company cannot be called a promoter. Thus, the persons who assist the promoters in performing the various legal formalities, are not promoters (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 object and 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 to translate a possibility into a reality. [Justice Bowen] A promoter is one, who identifies a business opportunity, analyses its prospects and takes the 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 enterprise. After promoting an enterprise, they eventually hand over the control and management to the shareholders of the company. Occasional promoters : Promoters who are not involved in promotion work on a regular basis are called occasional promoters. Promotion is not their main occupation, and after promoting a company, they go back to their original profession. Financial institutions as promoters : Some financial institutions or financiers may take up the promotion of a company. After the incorporation of the company, financiers get their fixed remuneration and leave it. Banking and insurance companies have been engaged as institutional promoters. These promoters provide technical, managerial and financial assistance for the promotion of new enterprises.
(ii)
(iii)
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(iv)
Enterpreneuring promoters : These promoters conceive and idea of the new business unit, do the necessary preliminary work in setting up the business unit and ultimately control and manage the same. In India, most of the promoters belong to this category. Technical firms as promoters : Engineers and technical experts sometimes pick up the lucrative idea of business promotions. They are not in the promotional work on a regular basis. They take up the promotion of some company and then go back to their earlier profession. Government as a promoter : Since independence, the Government of India has emerged 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. Specialised institutions as promoters : The Government has set up special institutions to promote corporate enterprises in order to fill in the gaps in the industrial structure of the country. National Industrial Development Corporation (NIDC), Industrial Bank of India, etc., are examples of such institutions. These institutions provide technical, managerial and financial assistance for the promotion of new enterprises.
(v)
(vi)
(vii)
10.5.4 Functions (or role) of a promoter The functions of a promoter may be summed-up as follows: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) A promoter selects the line to business of a proposed company. He studies the future possibilities of the business of the proposed company. He decides the name of the company, objects of the company and also to decide where its registered office should be situated. He prepares the memorandum of association and articles of association and files these documents with the Registrar of Companies. He takes necessary steps to get the company registered. He makes necessary arrangements for the initial capital of the proposed company. He selects the first Director of the proposed company. He appoints the banker, auditors, brokers and legal advisors for the proposed company. He enters into preliminary contracts with different parties (i.e. vendors, underwriters, etc.) He makes necessary arrangements for the allotment of shares and secrities.
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10.5.5 Qualities of a promoter In order to perform the task of promotion successfully, a promoter must have several essential qualities. A promoter must be well-acquainted with the social, economic, political and business conditions of the place where the business is to be established. He must be a person with imagination, organizing ability and resources. In brief, a successful promoter must possess the following qualities: (i) Organising ability; (ii) Farsightedness; (iii) Tactfulness and laborious; (iv) Self-confidence; (v) Perseverance and consistency; (vi) Risk-bearing capability; (vii) Honesty; (viii) Knowledge of company law and other related laws. (ix) Resourcefulness; (x) Salesmanship. 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 occupies a peculiar position, as company law is silent in this regard. A promoter is neither a trustee nor an agent of the company which he promotes.
Truly speaking, a promoter stands in a fiduciary position towards the company. The fiduciary position of a promoter may be discussed as follows: (i) (ii) (iii) (iv) The promoter must not make any profit from the company that he has promoted. The promoter must not take advantage of his position in order to make any secret profit. The promoter must not indulge in any undue influence or fraud. The promoter must give to the company the benefit of any negotiations or contracts into which he enters.
10.5.7 Stages of promotion There 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 a company. A promoter is to discover the business opportunities, considering the availability of human and non-human resources. He is to consider whether the idea is practical or feasible in the light of the proposed risks and profitability. Detailed investigation of the idea conceived : Detailed investigation regarding commercial feasibility is absolutely essential before capital is invested to implement the idea conceived. Detailed investigation may relate to : (a) Market conditions (b) Demand for the product to be manufactured; (c) Estimated cost of production ; (d) Estimated profit margin, and (e) Capital requirement of the proposed business. Such an investigation gives a critical appraisal of the idea conceived and reveals whether the idea is commercially feasible or not. The services of experts may be needed to prepare a project report. Verification of the results of investigation : The reports submitted by the investigators must not be accepted without getting them verified by a separate team of impartial experts. Business Fundamentals
(ii)
(iii)
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(iv)
Assembling of different elements of the business : When the results of the investigation is favourable, the promoter should go ahead with the promotion of a company verification of the results of investigation : The reports submitted by the investigators must not be accepted without getting them verified by a separate team of impartial experts. Assembling of different elements of the business : When the results of the investigation is favourable, the promoter should go ahead with the promotion of a company. Preparation of a financial plan for the business project : After considering all the factors, the promoters proceed with the preparation of a financial plan for the proposed company. The Promoters are to decide what amount of capital is required at the initial state. For this purpose, they are to approach banks, financial institutions and underwriters. A company raises its capital through the issue of shares and debentures. While preparing the financial plan, promoters have to keep in mind that adequate funds should be provided to launch the company. Submission of necessary documents required for incorporation : It is necessary to submit certain documents to the Registrar of Companies in order to incorporate a joint stock company. The documents involved are : (a) the memorandum of association; (b) the articles of association; (c) the prospectus; (d) the list of Directors; (e) the consent of Directors; (f) the address of the companys registered office; (g) statutory declarations, etc.
(iii)
(iv)
(v)
(vi)
10.5.8 Other relevant concepts (a) Minimum subscription: Minimum subscription means the minimum amount of capital which a company requires for the starting of the business. The minimum subscription should be received within 120 days after the date of the issue of the prospectus. A company cannot allot any shares unless the minimum subscription has been raised through the application for shares. If this minimum amount is not collected within the stipulated period, the amount received from the applicants must be returned within the next 10 days (i.e., within 130 days after the issue of shares). Minimum subscription is necessary to cover the following expenses : (i) (ii) (iii) (iv) (v) (vi) preliminary expenses; underwriting commissions on sale of shares; working capital; the cost of any property purchased or to be purchased; payment of any money borrowed for the above purpose; any other necessary expenditure.
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(b) Certificate of incorporation: This is certificate issued by the Registrar of Companies to a company, whereby the incorporation of the company is recognized. In order to obtain the certificate of incorporation, a limited company has to file with the Registrar of Companies the following documents: (i) (ii) (iii) (iv) (v) (vi) Memorandum of Association; Articles of Association; List of first Directors; Written consent of Directors to act as such; Address of the registered office of the proposed company; Statutory declaration that the requirements of the Companies Act have been complied with.
On the filing of the above documents and the payment of necessary registration fees, if the Registrar is satisfied that everything is in order, he will register the name of the company and issue a Certificate of Incorporation. After this is done, the company comes into existence. (c) Certificate of commencement: A private company can commence business immediately after the grant of the Certificate of Incorporation. A public company cannot commence business until it obtains a Certificate of Commencement in addition to the Incorporation Certificate from the Registrar of Companies. The Certificate of Commencement is issued in favour of a public company by the Registrar only when the following conditions are fulfilled : (i) (ii) (iii) (iv) a prospectus or a statement in lieu of prospectus has been filed with the Registrar; the minimum subscription has been raised; the Directors have paid for their qualifications shares; a certificate by a Director or the Secretary of the company that all the requirements of the Companies Act regarding commencement of business have been complied with.
The Registrar issues the Certificate of Commencement in favour of a public company when he is satisfied that all the conditions (mentioned above) have been fulfilled. (d) Preliminary expenses : Expenses incidental to the formation of a company are known as preliminary expenses. These expenses are of a capital nature, but they do not represent any tangible assets. Thus, preliminary expenses are treated as fictitious assets and these expenses are to be written off against Profit & Loss Account over a certain period.
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The following items of expenses are usually treated as preliminary expenses : (i) (ii) (iii) (iv) (v) (vi) cost of preparing and printing the Memorandum and the Articles of association; cost of preparing, printing and circulating the prospectus; cost of registering the company (i.e., filing necessary documents, fees and stamp duties, etc.); cost of preliminary agreements; cost of preparing and printing the letter of allotment; 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 prepared and filed with the Registrar of Companies. However, the following documents are considered 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 regarding the constitution and activities of a company. It lays down the objects and scope of activities of the company. A memorandum also states the limits to which a company can move. If a company moves beyond the limits mentioned in the memorandum, it shall be considered ultra vires. 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 framed or 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. The company has to work within the limits laid down in the memorandum. The memorandum is the foundation upon which the superstructure of the company is built.
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10.6.3 Importance of Memorandum of Association (1) (2) Basis of incorporation : It is the basis of incorporation of a company. A company cannot be registered without filing this document. Informing the name, address, object, capital and liability of the company to outsiders : Every outsider can easily obtain information about the company regarding its name, address, object, capital and liability, etc., through the Memorandum of Association. Determining the extent of working of the company : It lays down the objects and scope of activities of the company. It also states the limits up to which a company can move. Any activity outside the scope of the memorandum will be ultra vires and void. Unalterable document : The provisions of this document cannot be changed without passing a special resolution (passed by 75% majority). In certain cases, the changes can be made by seeking permission from the Company Law Board or Central Government. Determining the relationship between the company and others : It enables outsides to know whether the company is authorized to enter into a particular transaction or not.
(3)
(4)
(5)
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) Liability 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 a public company and the words Private Limited in the case of a private com pany. The name should not be identical with the name of any existing com pany. The name should not create an impression that the company is carrying on the business of some other existing company. The name should not be mis leading (i.e., creating confusion regarding its nature of business). Registered office (i.e., domicile) clause : The name of the State in which the 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 the court. This clause also ascertains the nationality of the company (whether the company is an Indian company or a foreign company). The full address of the registered office must be communicated to the Registrar of Companies for future communication. Object Clause : This clause states the object with which the company is pro posed to be established. A company is not legally entitled to do any business other than that specified in its object clause. The object clause should include
(ii)
(iii)
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(i) (ii) (iii) (i) (ii) (iii) (iv) (i) (ii) (iii) (v)
main objects to be pursued after incorporation; incidental objects ancillary to the attainment of the main objects; other objects not included in (i) and (ii) above. illegal or opposed to the public interest; against the general law of the country; and contradictory to the Companies Act itself. Liability clause: This clause states the nature of liability of the members of the company (i.e., whether limited by shares or by guarantee or unlimited) : In case of a company limited by shares, members liability is limited to the face value of the shares. In case of a company limited by guarantee, the liability clause must state the extent of liability of each individual member in the event of its being wound up. In case of an unlimited company, the liability clause does not appear in the memorandum of association. 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 autho rized capital of the company. A company cannot collect funds exceeding the authorized capital.
The object clause must not include anything which is :
The division of capital into equity share capital and preference share capital should also be mentioned. The number of shares in each category and their value should be given in the memorandum. (vi) Association (or subscription) clause : The names, addresses, signatures and descriptions of the signatories to the memorandum are given in this clause. This clause also states the amount and number of shares taken by the signato ries of the memorandum. The number of signatories to the memorandum shall not be less than : (i) Seven (in case of a public company), and (ii) two (in case of 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 mode laid down in the Companies Act, by passing an ordinary or special resolution. Under certain circumstances, 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 the Central Government.
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(ii) If the name registered by it is identical to the name of an existing company, the registered name can be changed by passing an ordinary resolution and by obtaining a written consent of the Central Government. 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. If the registered office is to be shifted from one locality to another within the same city, an ordinary resolution will be sufficient. If the registered office is to be shifted from one city to another city within the same State a special resolution is required. If the registered office is to be shifted from one State to another State a special resolution as well as sanction of the court is required. Alteration of the object clause : The object clause cannot be altered as a routine affair. The object clause of a company may be changed by passing a special resolution and by obtaining the sanction of the court on the following grounds : to carry on its business more economically or efficiently; to enlarge the area of its operations; to attain its main purpose by new or improved means; to sell the whole or part of the companys property; to amalgamate with any other company; to restrict any of the objects specified in the memorandum. Alteration of capital clause : A limited company, having a share capital, may alter its capital clause by passing an ordinary resolution in the general meet ing for the following purposes : (i) increasing its share capital; (ii) consolidating and dividing its capital into shares of larger amounts; (iii) converting its fully paid up shares into stock; (iv) reconverting stock into fully paid up shares; (v) sub-dividing its shares into shares of smaller amounts. But, for the deduction of share capital, a special resolution and confirmation by the court are necessary. (5) Alteration of liability clause : The liability clause cannot be changed so as to make the liability of the members unlimited. However, if the members of a public limited company are reduced to below seven, the liability of the mem bers automatically becomes unlimited. Liability of the Directors, and manag ing Director may be made unlimited by altering the articles of associations.
(2)
(i) (ii) (iii) (3)
(i) (ii) (iii) (iv) (v) (vi) (4)
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10.6.6 Articles of Association The Articles of Association is a document which contains the rules and regulations for the internal management of the company. It prescribes bye-laws for the general management of the 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 themselves and the company at large. Every company is required to file its articles of association along with its Memorandum of Association with the Registrar of Companies at the time of its registration. 10.6.7 Definition according to the Indian Companies Act : Articles mean the Articles of Association of a company as originally framed or as atered from 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 the provisions 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) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (i) (ii) types, number and denominations of shares; the respective rights of different types of shares; methods of making an issue of share capital; procedure for making calls and allotment of shares; procedure for issue of share certificates and share warrants; conversion of shares into stock, lien of shares, etc.; alteration of share capital; voting powers of the shareholders; procedure of forfeiture, re-issue and surrender of shares; the amount of minimum subscription; procedure regarding company meetings; procedure for transfer and transmission of shares. rules regarding appointment, re-appointment, remuneration, reward, etc., of the Directors; rules regarding qualification and disqualification of Directors;
(2) Matters relating to Directors :
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(iii) (iv) (v) (vi) (vii) (3) (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) procedure for retirement and removal of Directors; rules regarding borrowing power of Directors; rules regarding conducting meeting of Directors; rights and liabilities of Directors; rules for fixation of maximum and minimum Directors, etc. Other matters : procedure for audit of company accounts; procedure of winding-up of the company; rules regarding keeping of books of accounts; borrowing of funds from the public and the rate of interest thereon; commission and brokerage for selling shares to underwriters; rules regarding declaration of dividends and capitalization of reserves; rules regarding use and custody of common seal; 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 company may undergo charges. In such a situation, the company may alter its Articles by passing a special resolution. (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) The alteration must be made for the benefit of the company. The alteration can only be made by a special resolution. The alteration must not sanction anything illegal. The alteration must not in any way increase the liability of the existing members. The alteration must not constitute a fraud on the minority. The alteration must not be detrimental to the provisions of the Companies Act. The alteration must not cause any breach of contract with an outsider. The alteration must not contravene any clause of the memorandum.
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10.9.10 Comparison between Memorandum and Articles of Association

Sl. No. 1. Basis differentiation Nature documents of of Memorandum of Association Memorandum is the fundamental charter of a company. A company functions within the limits laid down in the memorandum. Memorandum states the relationship between the company and an outsider. Memorandum defines the objects of the company. Memorandum cannot be altered easily. It requires court confirmation. A company cannot do anything beyond the scope of the Memorandum. Any act beyond its scope will be void. Registration of Memorandum is compulsory for any company. Articles of Association Articles are subsidiary to the charter. Articles contain bylaws and rules regarding dayworking of the to-day company. Articles contain provisions for internal management of the company. Articles define the rules for carrying out the objects of the company. Articles can easily be altered without the confirmation of the court. Any act done beyond the provisions of the Articles will not be void as it can be altered by passing a special resolution. Registration of Articles is not necessary in case of a public company. Public company may opt for Table-A of Schedule-1 for its incorporation purposes. Articles of Association are based on the doctrine of indoor management. Articles are subsidiary to both the Memorandum and Companies Act. Articles cannot contain anything contrary to both. Company may go beyond the scope of the Articles (but within its powers). Outsiders may presume that Articles are complies with. All companies are not required to have their own Articles of Association. Public companies may adopt Table A of Schedule1 of Companies Act. But Articles are a must for a private company.
2.
Scope
3.
Objectives
4.
Alteration document Limitations
in
the
5.
6.
Registration
7.
Application rules Provision and observations
of
8.
its
Memorandum of association is based on the doctrine of constructive notice. Memorandum cannot contains anything contrary to the provisions of the Companies Act. Company cannot violate the clauses of the Memorandum. There is no remedy for ultra vires acts. This document is a must for getting a company registered.
9.
Violation
10.
Necessity
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10.6.11 Prospectus A prospectus is a document inviting the general public to subscribe to the share capital of a public company. A prospectus is issued by a public company after obtaining the certificate of incorporation from the Registrar. The facts and figures stated in the prospectus are meant to persuade the public to purchase shares or debentures of the company. A private company need 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 soundness of the companys venture. The prospectus is placed before the public for raising necessary funds. The investors must, therefore, be given a complete picture of the companys future activities, efficiency and integrity of its Directors and the profitability of investment. A prospectus must be dated and signed by the Directors. A company must get its minimum subscription within 120 days from the issue of prospectus. 10.6.12 Characteristics of a prospectus The important characteristics of a prospectus are as follows: (i) (ii) (iii) (iv) It is a document described or issued as a prospectus. It includes any notice, circular, advertisement, etc., inviting deposits from the public. It is an invitation to the public to subscribe to the shares or debentures of the company. It is a document through which the company secures the capital required for 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) (ii) (iii) (iv) (v) (vi) A prospectus brings to the notice of the public that a new company has been formed. It provides detailed information about the company to the general inves tors. It outlines the terms and conditions of issue of shares and debentures. It highlights the present position and the future prospects of the com pany. It reflects the business policies and programmes of the company. It identifies the person who can be held responsible for misstatements in the prospectus.
10.6.12 Contents of a prospectus A prospectus should contain information on the following matters :
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(i) (ii) (iii) (iv) (v) (vi) (vii)
Name and full address of the company. Existing and future activities of the company. Composition of the Board of Directors. Qualification shares of the Directors and their remuneration. Capital of the company, the number of shares and the amount of each share. Rights and dividends attached to different classes of shares. Preliminary expenses incurred by the company.
(viii) Minimum subscription and the amount payable on application, allotment and calls on shares. (ix) (x) (xi) (xii) Remuneration of the Managing Director. Names and address of auditors and underwriters of the company. Restrictions on the powers of the Directors. Full particulars of the promoters, brokers, bankers, etc.
(xiii) Nature and extent of interests of each Director in the companys promotion. (xiv) Details regarding the agreement to purchase property for the company and names 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 of Schedule III of the Companies Act. It contains almost the same information as is contained in the prospectus. It should not contain any misleading or untrue statement. A statement in lieu of 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 a company. It must disclose all relevant facts and figures very clearly. Greatest care should be taken to prepare a prospectus. Information provided in the prospectus should not be false and misleading. It is the duty of the persons who are responsible for the issue of a prospectus not to disclose all relevant facts but also to see that any fact which may be relevant should not be omitted.
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If there is any false statement in the prospectus, it creates civil and criminal liability on the part of those who are responsible to publish the same. Persons authorizing the issue of the prospectus can be held liable for punishment with imprisonment up to two years and/or for a fine up to Rs. 50,000 for misstatement in the prospectus. If the Directors have submitted certain false information with a fraudulent intention, they will be 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 shareholder and therefore, it must disclose all material facts (i.e., facts likely to influence the judgment of a prospective 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 mislead the prospective investor into becoming an allottee of shares or debentures and in consequence suffer loss (Peed vs. Gurney). A prospectus containing false, misleading, ambiguous or fraudulent statement of material facts, is termed as misleading prospectus and in that case a misled investor (original allottee of share who had relied in the prospectus and not a buyer in the 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 not a false statement, but to say that something has been done, when it is not so, is a misstatement of fact (Karbergs Case). If there is omission of material facts from a prospectus or/and where the statement is ambiguous in the form and context in which it is included, the prospectus shall be deemed to be untrue. (Sec. 65). Hence a prospectus should be honestly framed and should not by any half statement of the truth or ambiguous phraseology give a false impression or mislead 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 which standing alone, can be challenged as false. It must however, be observed that in order to call a prospectus a misleading prospectus, there must be misrepresentation of facts and not of law or expectation. For example, if a prospectus represents that the companys shares will be issued at half their nominal value, whereas section 79 prohibits the issue of share at a discount exceeding ten percent. It is a misrepresentation of 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 managing agents with their friends, promoters and directors have already promised to subscribe shares worth six lakhs rupees. But they actually subscribed much lesser number of shares. It was held that there was no misrepresentation of facts and the prospectus was not misleading because, the only fact asserted was the existence of promiseand the existence of promise is not falsified by the breaking of it. A person who subscribes for shares based on the misleading prospectus has certain remedies separately against the company as well as against the directors, promoters and experts.
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10.7 SHARES
The shares capital of a company is divided into shares distinguished by its appropriate numbers. The shares shall be movable property transferable in the manner provided by the articles of 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) (b) (c) Equity share; Preference share; and Sweat equity shares.
Preference capital means that part of the share capital which fulfils both the following requirements, namely (a) that in respect of dividends, it carries or will carry a preferential right to be paid a fixed amount or an amount calculated at a fixed rate, which may be either free of or subject to income tax; and that in respect of capital it carries or will carry on a winding up or repayment of capital a preferential right to the payment of either or both of the following amount, namely 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 any fixed premium.
(b)
(i) (ii)
Sweat Equity Shares Sweat equity shares mean equity shares issued at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. A company may issue sweat equity shares of a class of shares already issue if the following conditions are fulfilled : (a) the issue of sweat equity shares is authorized by a resolution passed by the company in the general meeting; (b) the resolution specifies the number of shares the value and the classes of direc tors 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 which the company was entitled to commence business; (d) the sweat equity shares are issued in accordance with the regulations made by the securities and Exchange Board of India in this behalf. Every holder of shares in a company may at any time nominate in the prescribed manner of shares upon the production of such evidence as many required by the Board may:
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(a) (b) register himself as holder of the share, or 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 calcu lated at a fixed rate as a percentage of the face value of the shares. Equity shares on the other hand are entitled to a varying rate of dividend depending upon profits of the company. Preferences shares can be cumulative. In other words during the year when the company does not make profits, the arrear dividends accumulate. In case of equity shares the accumulation of the arrears dividends does not arise. This is because the entitlement to dividend is contingent upon the making of the profit by the company. The holders of the preference shares have a priority over the holders of the equity shares to dividends. In other words, when a company does make profit and declare dividends, the dividends payable to the preference shareholder including the arrears of the dividend should be paid first before any dividends can be declared to the equity shareholders. Preference shareholder also have a priority over the equity shareholder to wards 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 company after a fixed period of time as specified in the terms of issue of the preference share. The preference shareholder do not have a right to vote at the meeting of the shareholders of the company unless it is a matter in which their rights are affected. On the other hand equity shareholder have voting right on every resolution which comes up before the meeting. The voting right of the equity shareholder are proportionate to the number of share held by them.
(b)
(c)
(d)
(e)
An exception to the rule denying the voting right on account of dividends being on arrears the voting right of the preference shareholder also would be proportional to the capital paid up in respect of the preference shares bears to the total paid up equity capital of the company. Redemption of Preference Shares If so authorized by its articles, preferences shares are liable to be redeemed at the option of the company. After the coming into force of the companies (Amendment) Act, 1988 redemption of the preference shares has been made mandatory. No company limited by shares after the commencement of the Companies (Amendment) Act, 1996 issue any Preference Shares which is
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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 which would otherwise be available for dividend or out of the proceeds of a fresh issues of 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 of the profits of the company or out of the companys shares premium account before the shares are redeemed. (d) Where any such shares are redeemed otherwise than out of the proceeds of a fresh issue, there shall out profits which would otherwise have been available for dividend, be transferred to a reserve fund to be called the capital redemption reserve account, a sum equal to the nominal amount of the shares redeemed and the provision of the Companies Act relating to the reduction of the shares capital of a company shall except as provided in this section apply as if the capital re demptions reserve account were paid-up shares capital of the company. However the redemptions of preference shares will not attract the problems of redemption 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 the aggregate 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 the reduction of share capital of a company shall except as provided herein apply as if shares premium 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 the company 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 any issue of the shares or debentures of the company. (d) in providing for the premium payable on the redemption of any redeemable pref erence shares or of any debentures of the company.
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Right Shares Whenever a company proposes to increase the subscribed capital by issue of further shares at any time after the expiry of two years from the formation of the company or at any time after the expiry of one year from the allotment of shares by that company made for the first time after its incorporation whichever is earlier. It shall offer such shares to holder of equity shares of 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 are called the Right Shares. A private company or a deemed private company which retains the restrictive clauses of a private 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 further shares may be allotted at the discretion of the board of directors to persons other than the holders 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 the Securities and Exchange Board of India. Bonus Shares The issue of bonus shares by a company is a common feature. When a company is prosperous and accumulates a large surplus, it converts this surplus into capital and divides the capital among the members in proportion to their right. This is done by issuing fully paid shares representing the increased capital. The shareholders to whom shares are allotted have to pay nothing. The purpose is to capitalize profit which may be available for division or to utilise quasi-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 the profit as prescribed by the companies (Transfer of Profit to Reserve) Rules, 1975 to the reserve of the company. The company shall ensure strict compliance with the following financial parameters for determining the quantum of the bonus issue :(i) (ii) that the bonus issue is made out of the free reserves built out of the genuine profits or shares premium collected in cash only; that Reserve created by revaluation of fixed assets or without accrual of cash resources are not capitalized.
The bonus issue could not be made until the expiry of 12 months from any public or right issue and there is no restriction as to the timing of one bonus issue and another. The bonus issue should be made within a period of 6 month from the date of approval of the Boards of Directors thereof and the company has no option of changing that decision. The SEBI has issued guidelines for the capitalization of reserves and issue of bonus shares.
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The Articles should provide the issue of bonus shares by capitalization of reserves. If there is no such provision the Articles are to be altered suitably. Further it is be observed that the expanded capital after the issue is within the authorized share capital of the company. Otherwise 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 the largest number of listed companies in the world today. As a result investors have to face a lot of inconvenience in effective registration of securities in their favour and to ensure that they receive their rightful share of dividend, bonus, right and other benefits. The large numbers in the Capital Market have also given rise to a large amount of paper work, bringing with it the associated problems. The physical movement of (share) certificates and their transfer are fraught with a number of problems and are usually cumbersome and time consuming. Further with the increase in the volumes of trading, there has been an increase in the number of bad deliveries and this has introduced increased risk in settlement of trade. The threat of wrong/forged signatures, stolen shares, fake certificates etc. need to be contained if the investors are not to shy away from trading and investing in the India market. All these factors served as barriers to the entry of an investor in to the market. This failure gave the idea of setting up of an electronics system with scripless trading and quick settlement cycles. The Government of India promulgated the Depositories Ordinance in September 1995. Securities 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 Securities Depository Limited (NSDL) was registered on the 7th June 1996, with the SEBI as the first depository in the country. This new system of keeping ownership record in the form of electronic holdings has a number of advantages over the existing system of physical securities. In the new system, the Physical movement of securities would be replaced by a book entry system, under which the ownership would be transferred by electronics entries. The Depositories Act, 1956 makes a provision for the setting up of multiple depositories in India. The investor has been granted the option of holding securities in a physical or dematerialized form. Thus it is matter of choice for the investor as to whether he wants to avail of the depository 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 on transfer of shares or the unit of mutual funds within the depository. The depository will interface with the investor through market intermediaries called Depository Participants (DP). The depository will hold beneficial owner-level information through
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its networks of DP. This will facilitate proper distribution of benefits arising out of the investors holding such as dividend, interest, bonus and right as on a given record date by the issuer company of its registrar and transfer agent. The SEBI (Depository and Participants) Regulations, 1996 specify the norms for the functioning and operations of depositories. The regulations have selected various categories of market participants who are eligible to become depository participants.
10.8 DEBENTURES
Debentures constitute a valid instrument by which long term and medium term financial needs are met by raising loans from the public. Debentures represent loan capital and the debentures and transferable securities as in the case of shares through stock exchanges. The debentures offer a predetermined fixed return by way of interest and are redeemed after a stipulated period. They may be offered privately without public announcement in the newspaper. Debenture is defined to include debenture stock, bond and other instruments of company whether constituting a charge on the assets of the company or not. A debenture shall not cease to 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 instruments that creates or acknowledges a debts is a debentures. In CIT v. Cochin Refineries Ltd. (1982) it was 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 distinction between 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 a debt is a liability upon the debtor to replay the money [per Chakravarty J. in Ram Ratan Karmakar v. Amulya Charan Karmakar]. The debentures have the following features namely : 1. 2. 3. It is an instrument issued by the company acknowledging debt. It provides for the payment of or acknowledging the indebtedness in a specified nominal value or face value of the debenture. It carries a specified rate of interest.
The debentures may be registered debentures or bearer debentures. Registered debentures are debentures which are payable to the holder thereof whose name is registered in the registered of debenture holders. Registered debentures certificates are transferred by executing a deed of transfer 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 the company.
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Debentures could be redeemable or irredeemable. Redeemable connotes that the borrowing will be repaid by the company within a fixed term. In case of irredeemable debentures there is no obligation on the part of the company to repay the amount of the borrowing raised by way of debentures. Debentures may be convertible into shares. This indicates that after a particular period of time of issue of debentures, the debentures may be converted into shares at a specific rate of conversion. In other words till the date of conversion of the debentures into shares debenture holders would be earning interest from the company at a specific rate of interest . On conversion of the debenture, debenture would be cancelled and shares would be issued in favour of the debenture holders. After such conversion the debenture holders become the shareholder of the company and will not be entitled to may fixed return by way of interest but will be entitled to the dividends that may be declared by the company. Since the debentures are corporate securities akin to the shares, almost all the rules, regulations and restrictions in respect of issue of shares are applicable to debenture. Some of the important statutory provisions relating to the debentures are discussed below : 1. 2. The power to issue debenture shall be exercised by the board of directors at a meeting [s. 292(1) (d)] No company shall issue any debenture carrying voting right at any meting of the company whether generally or in respect of particulars classes of business. [s. 117] Debentures which have been issued and redeemable may be kept alive for reissue [s.121] Every debenture holder is entitled to a copy of the debenture trust deed within 7 days of making a request for such deed. A contract to take up and pay for debentures can be enforced by a degree for specific performance [section 122] The holders of the debenture have a priority under section 530 of the Act, if winding up were to take place. If the debenture are secured by floating charge on the assets of the company the creditors with fixed charges will be paid first and the debenture holders with a floating charge on the assets will get next preference in the list of priorities for repayment. Every company shall keep a register of debenture holders in the same manner as the register of members. A debenture holder is not entitled to the balance sheet and profit and loss account of the company [section 219]
3. 4. 5. 6.
7. 8.
Every holder of debenture of a company may at any time nominate in the prescribed manner a person to whom his debenture of the company shall vest in the event of his death.
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Company Organisation and Management 10.9 BOARD OF DIRECTORS

Introductin - when a Company is incorporated under the companies Act 1956, it becomes a legal 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 the member of company to conduct its affairs; they elect their representative for this purpose. These elected representatives are usually known as Directors. Every public company (other than a public company which has become such by virtue of sec 43-A) must have at least three Directors. Every other company must have at least two Directors. Directors of a company collectively are referred to as the Board of Directors. Nobody corporate association or firm shall be appointed director of a company. Only an induividual 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 directors must 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 in every 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 that the provisions of this section shall not apply in relation to any class of companies or shall apply in relation thereto subject to such exceptions, modifications or conditions as may be specified in the notification. Notice- Notice of every meeting of the Board of Directors of a company shall be given in writing to every director for the time being in India; and at his usual addres in India to every other director. Quorum - A quorum is the preseribed minimum number of qualified persons authorized to transact the business at meeting. In relation to Board Meeting- quorum implies fully qualified and disinterested director who must be present at the meeting so as to enable the Board to legally transact the business thereat. Accordingly by the quorum for a meeting of the Board of Directors of a company shall be 1/3rd of its total strength (any fraction contained in that 1/3rd being rounded off as one) or two directors whichever is higher. Certain powers to be exercised by Board only at meeting The Board of Directors of a company shall exercise the following power on behalf of the company 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 their shares; (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.
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10.10 MEETINGS
We are here concerned with general meetings of members/share holders. The general meetings of members are of vital importance in the working of a company. For although general power of management of a company are vested in the Board of Directors the consent of members on such major issues as specified in Section 293 has to be obtained in their general meeting. Otherwise also it is fair to provide an opportunity to the shareholders to come together ad review the working of the company. Hence the companies Act has provided for various types of 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 of shareholder may also be held. Such meetings are called class meetings. They are convened either by the company or by the court to affect variations in the right of that particular 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 general meeting 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 capital except unlimited companies are required to hold a statutory meeting compulsory. It implies that private companies, unlimited companies and companies limited by guarantee but not having shares capital are not required to hold such a meeting. Statutory meeting must be held after one month but within six months of obtaining the certificate to commence business [Sec. 165(1)]. Unlike other types of general meetings, 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, of acquainting themselves with the assets and properties acquired so far and to discuss the success of the flotation. The members are free to discuss any matter relating to the formation of the company or arising out of the statutory report. But they cannot pass any resolution without previous notice of at least 21 days.
10.10.3 Statutory Report In order to enable the members to make the best use of this opportunity the directors are required to prepare and send to every member a document known as the statutory report at least 21 days before the day on which the meeting is to be held. If the report is sent later it will still be valid if it is so agreed to by a unanimous vote of the members entitled to attend and vote Business Fumdamentals B81

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 by the auditors [Sec. 165(4)]. A copy of this report must be filed with the Registrar forthwith at the time 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 than for cash and stating in the case of partly paid up shares, the extent to which they are so paid; The total amount of cash received by the company in respect of all the shares allotted; An abstract of the receipts and payments up to a date within seven days of the report and the balance in hand. The abstract must show under distinc tive head ings the receipts of the company from shares, debentures and other sources and shall give an account or estimate of the prelimi nary expenses of the company showing separately any commission or discount paid or to be paid on the issue or sale of shares or debentures; The names, addresses and occupations of the companys directors, auditors, man aging director or manage secretary and the changes, if any, that have occurred since incorporation. The particulars of any contract to be submitted to the meeting for approval and its modification done or proposed, if any; The extent to which any under writing contract has not been carried out and the reasons therefore;
(ii) (iii)
(iv)
(v) (vi)
(vii) The details of arrears of calls due from directors and managing director are man agers; (viii) The particulars of any commission or brokerage paid or to be paid to directors and 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 statutory meeting, every officer of the company responsible for the default shall be punishable, with a fine up to Rs 500 [Sec. 165(a)]. Further if the statutory meeting is not held in time, the court may under section 433 order the compulsory winding up of the company on a petition filed by any member after the expiry of 14 days from the date an which statutory meeting was to be held.
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10.10.5 Annual General Metting Every company must in each year hold in addition to any other meeting a general meeting as its annual general meeting [Sec 166(1)]. It is the most important meeting of the members of a company. It is held each year with a view to reviewing and evaluating the overall progress of the company during a year. The annual general meeting is sometimes called ordinary general meeting as usually it deals with the so called ordinary business. The following ordinary business must be transacted at the annual general meeting of a public company and a subsidiary thereof [Sec 173(1)]. (i) (ii) (iii) (iv) The consideration of the Annual Accounts, Balance sheet and the Reports of the Board of Directors and Auditors. The declarations of a dividend. The appointment of directors in place of those retiring, and 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 an ordinary resolutions while the special business may require ordinary or special appointment of auditors although it is an item of ordinary business in the case of a company in which not less than 25% of the subscribed share capital is held whether singly or jointly by a public financial institutions or a Government Company or Central Government or any State Government or a nationalized bank or a general insurance company. It may be noted that an independent private company may make its own provisions by its articles 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 months from the date of its incorporation, and if such general meeting is held within that period, it shall not be necessary for the company to hold any annual gen eral meeting in the year of its incorporation or in the following year. It may be noted that there can be no extension of period beyond 18 months in case of this meeting even by the Registrar. (2) Subsequent annual general meeting must be held each year within six months of the end of the companys financial year; but the interval between any two annual general meeting must not be more than fifteen months. The Registrar may, however, for any special reason extend the above lime by a period by exceeding three months.
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In connection with subsequent annual general meetings it is worth noting that the holding of an annual general meeting in each calendar year is a statutory necessity, 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 a subsequent date and the adjourned meeting is to be deemed to be a continuation of the earlier meeting, the adjourned meeting too must be held within fifteen months of the previous meeting. (3) The annual general meeting must be held on a working day during business hours at the registered office of the company or at some other place within the city where the registered office of the company is situated. (4) At least twenty-one days written notice to call an annual general meeting must be given to every shareholder, directors, and auditors of the company, and to every such person on whom the shares of any deceased or insolvent member may have devolved. The meeting may be held with a shorter notice, if it is so agreed unanimously by all members entitled to vote in such a meeting. An inde pendent private company may, however, by its articles make its own regula tions as regards length of period of notice and to whom it should be given. A copy of Directors Report, audited Annual Accounts and Auditors Report must be annexed to every such notice. The holding of annual general meeting is also governed by Sections 171 to 186 which contain provisions 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, the Company Law Board may, on the application of any member of the company, call or direct the calling of the meeting and give such ancillary consequential directions as it thinks expediter in relation to the calling, holding and conducting of the meeting. The directions that may be given by the Company Law Board may include a direction that one member of the company present 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 to five thousand rupees and in the case of a continuing default, with a further fine which may extend 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 extraordinary general meetings. Regulation 47 of Table A defines : All general meetings other annual general meeting shall be called extraordinary general meeting. These meetings may be convened by the company at any time. The business transacted at an extraordinary general Meeting comprises anything which cannot be postponed till the next
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annual General Meeting e.g. changes in memorandum and articles of association reduction and reorganization of share capital, issue of debentures, etc. All business transacted at this meeting is called special business [Sec. 173 (1) (b)] The convening and conducting of this meeting 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 meeting by passing a resolution to that effect in the Boards meeting. (2) By the directors on requisition [Sec. 469]. The directors must convene an extraordinary general meeting on the requisition (written demand) of members holding 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 meeting is to be called. It must be signed by the requisitionists and deposited at the regis tered office of the company. The directors should, within 21 days from the date of the deposit of a valid requisition, move to call a meeting and should give 21 days notice to members for calling such a meeting and the meeting should actu ally be held within 45 days from the date of the requisition. It maybe noted that the requisitionists are not bound to disclose reasons for the resolution they propose to move at the meeting. Further, no business other than the business for which the meeting has been expressly convened can be trans acted at the requisitioned meeting. (3) By the requisitionists themselves. If the directors fail to call the meeting within afore mentioned time-limits, the requisitionists, or such of the requisitionists as represent not less than 1/10th of the total voting rights of all the members, may them selves convene a meeting within three month of depositing requisition. Such a meeting should be called in the same manner, as nearly as possible, as that in which meeting are called by the Board. Any reasonable expenses incurred by the requisitionists must be repaid to them by the company, and any sum so paid shall be retained by the company out of-any sums due or likely lo become due to the directors in default. (4) By the Company Law Board [Sec. 186]. If for any reason it is impracticable lo call 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 member who would be entitled to vote, order a meeting to be called, held and conducted in such manner as the Company Law Board thinks fit and may give such direc tions as it thinks expedient, including a direction that one member present in person or by proxy shall be deemed to constitute a meetings. It may be noted that unlike an annual general meeting, an extraordinary general meeting can be convened on a public holiday and at a place other than the registered office of the company or the city in which the registered office is situated.
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10.10.9 Proxies A proxy is a members authorized agent for the purpose of voting. The term is also applied to the instrument by which the appointment to act on his behalf is made by the members. As per Section 176 the provisions relating to proxies are as follows : (1) Members of a company having share capital have a statutory right to appoint proxies, notwithstanding anything to the contrary in the articles. In other words proxies may be appointed if allowed in the articles. (2) Unless the articles otherwise provide, a proxy shall not be allowed to vote except on a poll. (3) Unless the articles otherwise provide, a member of a private company is not en titled to appoint more than one proxy to attend on the same occasion. (For every resolution poll is taken separately and for every resolution separate proxy may be appointed in a public company). (4) A proxy must be in writing, in the proper form duly signed by the appointer and stamped. If the appointer is a body corporate, the instrument of proxy should be under its seal and be signed by a duly authorized officer. (5) A proxy may be lodged at the companys office not later than 48 hours before the commencement of the meeting. If the articles of a company other than an inde pendent private company require a longer period than 48 hours, that will be in operative and shareholder will have the right to deposit proxies 48 hours before the 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 that a 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 pun ishable with fine which may extend to one thousand rupees. (10) No invitation to appoint any person as proxy shall be issued at companys ex pense and idea if any such invitation is issued every officer of the company who is knowingly in default shall be punishable with fine which may extend to one thou sand rupees. (11) After giving three days notice to the company, members may inspect proxies lodged with the company during 24 hours (within business hours) before the time fixed for 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
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company, at any lime, before it is acted upon. Death or insanity of the principal also revokes the authority of the proxy but proper intimation to the company is necessary. Moreover, a member can prevent the proxy from exercising the right to vote by himself attending and voting at the meeting. (13) Where a company is a member of another company or where Government is a member of a company, their properly appointed representative enjoys all the rights of a member. He can speak at the meeting and vote on a show of hands as well as on a poll [Sees. 187(2) 1 and 187A (2)]. It may be noted that a private company which is not subsidiary of a public company is free to make its own provisions by its articles as regards proxies and the provisions of Section 176 (as stated above under points I to II) shall apply to such a company only if its articles do not other wise provide [Sec. 170(1)(ii)].
10.11 RESOLUTION
A Proposed Resolution or motion when passed by requisite majority of votes by the shareholder become a company resolution. Thus a resolution may be defined as the formal decision of a meeting on any proposal before it. The Companies Act provided for three kinds of resolutions that may be passed at the general meeting of a company : 1. 2. 3. Ordinary resolution. Special resolution. Resolution requiring special notice.
The Companies Act and the Articles of Association lay down the type of resolutions required 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 by members 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 majority of votes of members present in person or by proxy. Those absenting or remaining neutral arc not counted. An ordinary resolution is normally used for the so-called ordinary business done in the Annual General Meeting. e.g.. to pass the annual accounts, to declare dividend, to appoint director in the place of those retiring and to appoint auditors. It is relevant to state that a special resolution is required for any appointment of auditors at an annual general meeting, although it is an item of ordinary business, in the case of a company in which at least 25 per cent of the subscribed share capital is held, whether singly or jointly, by Central Government or a nationalized bank or a general insurance company or a public financial institutions or a Government company (Sec 224A). Certain items of special business also require ordinary resolutions under the Companies Act. For example: issue of shares at a discount [Sec. 79(3)] the alteration of
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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 in the Companies Act or the Articles of the company. An ordinary resolution usually does not require filing with the Registrar. However, a copy of ordinary resolution conferring power upon the directors under Section 293 must be filed with the Registrar within 30 days of the date of its passing. The usual notice of at least 21 days is, however, required for passing an ordinary resolution. 10.11.2 Special Resolution A resolution shall be a special resolution when the votes cast in favour of the resolution by members present in person or, where proxies are allowed, by proxy, are not less than three times the number of votes, if any, cast against the resolution and the has been duly specified in the notice calling the meeting [Sec 189(2)]. In other words, this is a resolution passed by a majority of at least 75 per cent of votes of members present in person or by proxy and a mention of the fact that the resolution shall be passed as a special resolution must have already been made in the notice of the meeting and the notice should have been duly given at least 21 days 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 be passed, for example (i) (ii) (iii) (iv) (v) (vi) (vii) to alter the memorandum of the company (Sec. 17), to alter the articles of the company (Sec. 31), to issue further shares with preemptive rights (Sec. 81), for creation of Reserve Capital (Sec. 99), to reduce the share capital (Sec. 100), to pay interest out of capital to members (Sec. 208), authorizing a director to hold an office or place of profit (Sec. 314), voluntary winding up of a company (Sec. 484), A copy of special resolution must be filed with the Registrar within 30 days of the date of its passing.
10.11.3 Resolution Requiring Special Notice A resolution requiring special notice is not actually an independent class of resolutions. It is a kind of ordinary resolution, with the difference that the mover of the proposed resolution is required to give special notice at least 14 days to the company before moving the resolution and the company in turn, is required to give the notice of the resolution to the shareholder at least seven days before the meeting either individually or through advertisement in an appropriate newspaper (Sec 190). This provision is a sort of concession to the mover of a proposed resolution, because otherwise he is required to intimate the company about the proB88 Business Fundamentals
posed resolution he intends to move before the company issues Notice of the meeting. So that the same may be included in the Notice and Agenda of the meeting as an item of business It may be recalled that a notice of at least twenty-one clear dyas is required for calling a general meeting. The articles of a company may specify purposes in respect of which special notice is required. Under the Act a special notice is required before moving a resolution relating to the following matter : (a) (b) (c) (d) Appointment of an auditor other than the retiring auditor (Sec. 225). Provision that a retiring auditor shall not be re-appointed (Sec. 225). Removal of a director before the expiry of his term. (Sec. 284). 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 at company meetings. It normally includes only the resolutions actually passed. It is not necessary to record therein the discussion which preceded the adoption of a resolution. Minutes are more analogous to a telegram than to a latter. Section 193 requires every company to keep minutes of the proceedings of both General and Board meetings in books kept for that purpose within 30 days of every much meeting. The pages of the minutes books must be consecutively numbered and into case there should be attached by pasting or otherwise any extra page. Each page of every such book shall be signed and the last page of the record of proceedings of each meeting in such books shall be dated and signed (a) in the case of the Board or Committee meetings, by the Chairman of the meeting of the next succeeding meeting; (b) in the case of a general meeting, by the Chairman of the same meeting within a period of 30 days of the conclusion of the meeting or in the event of death or inability of the Chairman within that period, by a director duly authorized by the Board for that purpose [Sec. 193(IA)]. The minutes of each meeting shall contain a fair and correct summary of the proceedings there at. The chairman shall, however, enjoy an absolute discretion in regard to non-inclusion of any matter in the minutes which in his opinion is defamatory of any person, is irrelevant or detrimental to the interests of the Board or of a Committee of the Board, the minutes must include the names of the directors present at the meeting and the names of the directors, if any dissenting from the resolution passed at the meeting. The minutes of meetings kept in accordance with the above provisions are prima facie evidence of the proceedings recorded therein (Sec. 194) and the meeting to which such minutes relate shall be deemed to have been duly called and held, the proceedings to have duly taken place and the appointments, of directors or liquidators made at the meeting shall be deemed to be valid, until the contrary is proved (Sec. 195). Business Fumdamentals B89

The minute books of general meetings are to be kept at the registered office of the company and be open to inspection for at least two hours a day during business hours to any member without charge. Members are also entitled to obtain copies of minutes on request within seven days on payment of rupee one. The Company Law Board is also empowered to order inspection of the minutes books or direct to deliver the copy required thereof, if the company fails to comply with the provisions of this Section (Sec. 196).
Exercises
1. 2. 3. 4. 5. 6. 7. 8. Explain the different states in the incorporation of a Public Ltd. Co. Define a company. What are it essential features? Briefly describe fine privileges of a Private Company. Explain briefly the meaning & contents of articles of associations. What is a memorandum of association? Briefly explain its clauses Differentiate between the memorandum of association and the articles of association. What are the important contents of a prospectus? What is certificate of incorporation? What are the documents which are necessary to be filed with the Registrar of Companies for incorporation of a public limited Company? Explain the various States in the promotion of a company. Write Short notes on : (a) Minimum subscription. (b) Preliminary expenses (c) Certificate of commencement 11. 12. A Joint Stock Company is an artificial person created by law, having a separate legal entity with a perpetual succession & a common seal. Discuss. 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 the Act? 13. State the legal provisions regarding holding of the Annual General Meet ings.
9. 10.
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14. 15. 16. 17. 18.
What is a special resolution? For what purposes are such resolutions necessary? What is an Extraordinary Meeting and how can it be convened? What is a statutory meeting? What are the consequences of not holding a statutory meeting? Classify different kinds of meetings of the members of a company and state the circumstances in which, and the authorities by whom, such meetings may be called. (a) What are the different kinds of meetings of the shareholders? (b) One general meeting was called by a company in December, 1998. This meeting was adjourned to March, 1999 and then held. Subsequent meeting was held in February, 2000. Is the company liable for any irregularity?
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Business Objectives and Environment
Study Note - 11
BUSINESS OBJECTIVES AND ENVIRONMENT
This Study Note includes 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 money too. Every activity is supposed to be with a purpose or an objective. An objective is a target towards which a rational activity is directed. An organization is expected to be with some definite objectives and all the available resources are necessarily to be utilized to reach or achieve them. WHY is one of the most important questions that one should ask himself before one thinks of starting the activity. It is true that the purposes for which the business activity is to be carried on, may change from Organisation to Organisation, place to place and also from time to time but the fact remains that the choice of right task or objective at the right time is the key of business success. It is indeed a difficult task for a businessman to set proper objectives and though he may be guided by parallel experiences of others, it is necessary for him to scientifically analyse the situation and decide the objectives. Peter Drucker opines that objectives in the key areas are the instruments necessary to pilot the business enterprise. Without them the management files by the Seats of its planes. without land marks to steerby, without having flown the route before. A businessman, at any juncture of time, compares his actual achievements with the decided objectives 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 or economic forces as a result of which today the business environment plays an important part for deciding or changing the objectives. Business can give social status. It can enable the businessman to earn money or profit. It can offer the joy of achievement. For a long time, it was felt that profit making is the only objective of any business activity. Nowadays however, it is felt that profit making is the only objective of any business activity. Nowadays however, it is felt that profit making is one of the objectives of business but there could be a number of other objectives which could justify the existence of a business activity. B92 Business Fundamentals
Management is getting work done through the people and all the functions of management i.e. planning, organizing, staffing, directing, co-coordinating, controlling, reporting or budgeting, 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 characteristics are: 1. 2. 3. 4. 5. 6. 7. 8. 9. Multiplicity Tangibility or intangibility Primacy Hierarchy Clashing or supporting tendency Network Time-boundedness Clarity and understandability 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. Profitability, Market standing, Innovation, Managerial performance and development, workers performance and attitude and the Social Responsibility. The various other characteristics of business objectives could be illustrated thus : The tangible objectives can be expressed in terms of quantity such as financial resources. For example, the share capital to be raised should be 20 lakhs rupees. On the other hand some objectives are expressed in terms of numbers or percentages, for example, the labour turnover should not be more than 5% or workers morale should be higher are statements indicating intangible objectives. Some objectives get priority over the others. Thus in the initial stages a business should give priority to survival as compared to profitability. The important objectives stand first and they are followed by the less important ones. Business is more important than personal convenience or inconvenience. When there are some objectives which differ in nature when compared, it becomes necessary to reconcile and achieve larger interest of the business. A network of various objectives is to be set for achieving greater success. When specific goals or targets are to be achieved, it becomes necessary to coordinate. Larger production must be coordinated with larger sales otherwise there would be piling of stocks and it may prove to be a graveyard for management.
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The objectives may vary in the context of a period of time. The objectives may thus be classified into short term, medium term and long term objectives. Thus the short term objectives are generally to be achieved within a period of one year, the medium range objectives could be achieved within a period of two to four years and the long term objectives could be achieved within a period of five years or more. It is necessary that the objectives should be clear and easily understandable. If the objectives are ambiguous, the personnel responsible for achieving them is perplexed. The understandable 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 Manager states that it is desired to increase the production by 30% in the current year, his workers understand as to what is expected of them. Ideal objectives are clear, acceptable by all concerned, supporting one another, precise and measurable. 11.1.3 Advantages of Objectives When the objectives are rationally pre-decided, they help the business to channelise various available resources for achieving the goals. The objectives, in fact, are the basis for all kinds of planning. The policies, strategies, and procedures are based on the objectives. They can serve as the motivating factors for the employees and different departments concerned. The activities of different departments could then be coordinated. The controlling becomes feasible. The businessman can lead, guide, direct and get work done as per specifications. A proper communication of the objectives can ensure lesser conflicts, misunderstanding or disputes among the concerned employees. Peter Drucker feels that Management by objectives (MBO) is based on the 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 the lower cadre was required to accept them without objection or suggestions. MBO on the other hand believes in mutual conversation, discussion and acceptance of the objectives by the Top Management 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 cooperation from all. 11.1.4 Various Business Objectives. The various objectives of business could be classified as follows: 1) 2) 3) 4) 5) Economic objectives Social objectives Human objectives National objectives Organic objectives
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The Economic objectives are : a) b) c) d) e) f) g) h) i) j) k) l) m) n) o) p) q) r) s) t) u) Earning of adequate profit Production of tangible form of wealth Creation of market or creation of customers Innovation Best use of available scarce resources. Providing quality goods and services Charging reasonable prices Generation of employment Avoiding antisocial practices and profiteering Creating and maintaining better environment. Giving a fair deal to the employees Ensuring job satisfaction Treating employees as partners to prosperity Development of human resources Producing goods and providing services as per national priorities Development of small enterprises Guaranteeing social justice Export promotion Survival Growth, expansion and diversification Creating goodwill, prestige and recognition.
The Social objectives are :
The Human objectives are :
The National objectives are :
The Organic objectives are :
Casting a cursory glance at the above mentioned objectives it could be said that these objectives have relevance to the period and the environment under which the business is functioning. 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 any business activity is a sign of efficient use of the available resources. The profit may be utilized differently under different economic systems but there should be a break even as early as possible and it should be followed by a surplus too. Business Fumdamentals B95

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 they need. The customers are to be created and the potential markets must be tapped. Peter Ducker believes that the only valid definition of business purpose is to create a customer who is the foundation 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 change according to the changing trends is likely to perish. Innovation, in other words, becomes a MUST with better machines, and improved technology. Since business is the specific organ of growth, expansion and change, exploring and discovering ways and means for making the production and services more useful for the customers is inevitable. The optimum use of the available resources is the duty of every businessman in the individual as 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 and services must be provided regularly and at reasonable prices. A business should generate employment and provide welfare to the employees. Better working conditions should be provided 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 offered an opportunity to participate. They must get job satisfaction. Similarly, from the point of a nation, the scarce resources should be utilized to produce goods and services to which the nation gives a priority and not a few individuals, the small scale industries which provide employment to many should be encouraged. Exports should be promoted 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 of the business in the adverse circumstances. The survival should be followed by expansion and growth. If necessary diversification should also be resorted to, for earning legitimate higher profit. Similarly, in course of time, Goodwill, Prestige and Recognition should also be the goals of a successful business. These are called organic goals. To discuss the question of business objectives further, as Peter Ducker has suggested, one could concentrate on KRAT i.e. KEY RESULT AREAS TECHNIQUES. These 8 different areas are : 1. 2. 3. Market Standing Innovation Productivity
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4. 5. 6. 7. 8.
Profitability Physical and financial resources Managerial performance and development Workers performance and attitude Public or Social Responsibility.
11.1.5 The Concept of Social Responsibility As mentioned earlier, modern businessmen have started accepting that profit making is no more the only objective of business. In marketing also it is said A sale is not made at the counter or by a salesman, it is made in the mind of the buyer. In other words, just as for sale of a product or service the most important person is a buyer, similarly, for achieving all the other objectives of business, it is the society which is the most important factor and a business cannot survive or prosper without a Society. It must therefore be realized that a business has also some responsibility towards Society. The obligations of a business towards society could be classified under two heads : a. b. The socio-economic obligations and The socio-human obligations.
It is the socio-economic obligation of a business that its activity should not adversely affect the economic welfare of people. When a business generates employment, it adds to the welfare of the society. It can help to raise the standard of living of the people. This should be accepted as one of the responsibility towards society though it cannot be insisted that one must start business to create employment opportunities. Similarly, competition should be accepted and not curbed because it can force a business to maintain quality and control overhead costs. A business should also try to hold the price line and curb inflation. On the other hand nurturing and developing human values such as morale, cooperation, motivation etc. comes under the socio-human values of a business. The social responsibilities of a business thus should be studied and appreciated under the following heads : 1. 2. 3. objectives which protest consumer interests; objectives which protect the interests of workers, and objectives which protect the interests of the society.
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It is felt necessary now that continuous efforts should be made to improve the benefits to the consumers. 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 of national resources, by remunerating workers better for improving competitive ness 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, precautions etc. (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) 1. 2. 3. 4. 5. 6. 7. Helping workers to be shareholders of the company. Protecting ecology of the surrounding locality Helping overall development of the locality Rehabilitating the population displaced by the operation of the business, if any. Conserving scarce resources and developing substitutes; Improving productivity; Helping the national causes like earning foreign exchange, developing backward regions, assisting weaker sections of the society etc; Promoting ancillary and small scale industries; Social interest could be taken care of by :
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8. 9.
Contributing to research and development; and Helping social causes like education, health, entertainment, etc. It is necessary for any business to strike a harmonious balance between Social and Economic objec tives.
11.2 BUSINESS ENVIORNMENT

Any business depends upon certain internal factors and is also influenced by certain external factors. The external factors are generally uncontrollable factors and are referred to as Business Environment. 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 a SWOT ANALYSIS. S stands for Strength, W for Weaknesses, O for the opportunities and T for threats. Strength and weaknesses are internal factors whereas Opportunities and Threats are external factors. Any change in a business environment may imply an increase in opportunities or in threats. The same environment may offer opportunities to some firms and threats to some other Firms. Thus liberalization policy of the Government of India may result in opening of new opportunities to some Indian firms while it may result into threats to the existence or growth of some other firms. A duty reduction in the Central Government Budget may result into a boost to some industries. The reduction of subsidies to the fertilizer industry may result into an increase in the prices of fertilizers and also reduction of demand for them. The demand for sunflower oil may increase because of the medical reports that it helps keeping the heart healthy. 11.2.1 Economic Environment Economic environment includes the factors like the nature and level of development of the economy, 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 of and trends in foreign trade, domestic supply and demand conditions etc. All these factors affect business favorably or unfavourably. For example, a developing economy will offer more opportunities for business for businessmen in the advanced countries. On the other hand, if the income is very low, some of the commodities considered to be essential in advanced 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 of the shortage of foreign exchange, the Government may put restrictions on the import of foreign goods or raw material as a result of which the quality of the goods manufactured will be lower as compared to that produced with the foreign imported ingredients. If the growth rate is satisfactory and the per capital income has started growing, the demand for luxuries will slowly start growing.
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Similarly, a number of developing countries are offering new opportunities because of faster growth in population, existence of large unsatisfied demand, growing democratization and individual freedom together with fairly good growth of the economy. The developed economies are characterized by high levels of income, consumption and competition in business sector. In case of countries where income is low, the businessmen may be required to reduce other costs such as packaging. It is observed that less fuel consuming cars were required to be produced because of the prices of oil, shooting high. The inflation and depression or the changing phases of trade cycle do affect the business. Diversification can help a firm to combat with the recession in some industries. 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 and preferences, social institutions, buying and consumption habits etc. and all these do affect a business. The food habits of people in South India differ from those of people in North India. Some of the foreign companies have failed in India because they could not appreciate the cultural values of people in India. The advertising and publicity firms have consider these factors. The language can be a barrier or an aid depending how it serves as a vehicle of thought. Social inertia and associated 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 depend upon the success of changing social attitudes or value systems. The demographic factors, such as the age and sex composition of population, family size, habitat, religion etc. also influence business. Louis L. Stem has observed in his article Consumer Protection via Self-Regulation in the Journal of Marketing, that more the educated the society become more discretionary the use of its resources, the more marketing will become enmeshed in social issues. The number of married couples in India these days, are having a double earning, 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 different and the difference will also be observed within the market making it necessary to have business 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 government environment encompassing the economic and business policies and regulations have very important implications for business. The Industrial Policy decisions have been taken by the successive governments. Pandit Jawaharlal Nehru had a different economic scenario as compared to the one which Smt. Indira Gandhi had. The liberalization policy adopted by the Government is likely to have long reaching repercussions. Besides, as compared to the previ-
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ous politico-economic decisions of nationalization of banks and insurance, the latest trend appears to be more towards privatization. Disinvestments of Government holdings in public sector enterprises have gained momentum. All over the world, the political environment has definite effect on business. 11.2.4 International Environment With the rapid Industrial, Commercial and Computer Revolutions, the world has becomes smaller. The rapid changes cannot allow any country to be economically independent. The trade and commerce is no more restricted to national boundries. It is International Trade obviously therefore, the business world of today cannot be in isolation and any political or economic change on the world map is bound to increase or decrease the volume of business. WTO i.e. World Trade Organisation for example, is bound to be discussed in the business circles because 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 International Environment, 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 by the strained relationship between India and Pakistan. Therefore, we may conclude that the economic, political, social, regulatory, competitive, technological or international environment must be studied in proper perspective before any business decisions could be taken.
Exercises
1. 2. 3. 4. 5. 6. What are the various objectives of a business? Explain their characteristics and importance. Is profit-making the only objective of a business? Discuss the recent trends regarding the objectives of a business. Explain the concept of Social Responsibility of a Business. What is a Business Environment? What are various types of business environments? Give illustrations. How does Business Environment affects a business? Can a business affect environment? How? Write notes on (a) Economic Environment; (b) Social Environment; (c) Political Environment; (d) International Environment.
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Stock Market in India
Study Note - 12
STOCK MARKET IN INDIA
This Study Note includes 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 securities are acquired from the issuing company themselves from the issuing comany thenselves and in the second stage, the securities are purchased and sold continuously among the investors without any involvement of the companies.Thus the industrial securities market is divided into two parts namly NIM and Stock Market. The NIM deals with new securities that is, securities which were not previously available and are offered to the investing public for the first time. The stock market covers the second stage of dealing in securities. The Stock Exchanges, therefore, provide a regular and continuous market for buying and selling of securities. The Securities Contracts Regulation Act, 1956 defines stock exchanges as an association, organization or body of individuals whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling, and dealing insecurities. A close review of the well known definition brings out the following features of the stock market
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1. 2. 3. 4. 5. 6.
Stock market is an organized market where securities of government and semigovernment bodies and corporate enterprises are bought and sold. Stock market deals in second hand or existing securities. Individuals alone can buy and sell securities. The stock market does not provide this facility to corporations and partnership firms. In the Stock market only those securities which are listed in the stock market are transacted. Unlisted securities are not permitted to be dealt in the market. Stock market may be a registered or unregistered body. It is not always necessary for a stock exchange to incorporate it under the Companies Act. Transactions in the stock market must adhere to the rules and byelaws framed by the 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. 2. 3. 4. Provisions of the place for the buyers and sellers of securities for transacting their dealings. Existence of brokers and other intermediaries to assist their client investors in finalizing their deals. Scope for genuine and legitimate speculation and allied transactions so as to make the market continuously responsive to the basic forces of demand and supply. Framing of regulations of ensure transactions in such a manner as to avoid undue fluctuation 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 proper functioning of joint stock companies. The importance of a stock exchange will be clear from the study 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 and continuous market where anybody can purchase or sell the securities during the business hour. Therefore, it provides liquidity, price continuity and marketability to the capital locked up in the investments. This facility of marketability helps a person in choosing shares or debenture for investment. He feels confident that he would be able to dispose of the shares to his best advantage in the shortest pos sible time and convert them into cash, when necessary Facilitates regular valuation of securities : In a stock exchange, evaluation of the listed securities is carried on continuously. That way it is able to determine the price of the securities as close as possible to their investment values based on present and future income-yielding prospects of the various enterprises. A well regulated B103
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and efficient stock exchange performs this function of evaluation cheaply and quickly. 3. Encourages capital formation : Stock exchanges contribute to a considerable ex tent to capital formation in the country. It inculcates the habit of saving, investing and risk taking in the investor. The publicity that the stock exchange gives to the different kinds of securities and their price induces all persons to take interest in corporate and government securities and their surplus funds in such securities. The saving that are put at the disposal to industries and government are used effective and dividends and interest are paid on the investments. More often, the dividends and interest earned are again invested in similar securities. This process of funds in corporate or government securities earning of dividend and interest on such securities and reinvestment of the whole or part of such income in similar leads to capital formation. Provides proper direction to invest capital : The securities of companies with good profits are popular in the stock exchanges. Investors are attracted towards those securities. The securities of companies which are not profitable are bearing no response in the stock exchange, In this way. Stock exchange gives proper di rection to invest the capital of investors. Because of this, stock exchange is called a sensitive barometer of business activity. Ensures wide ownership of securities : A stock exchange ensures wider distri bution of securities. If a companys securities are listed in different stock markets of the country, its securities will be bought and sold by persons scattered all over the country and ownership of securities is widely diffused. Facilitates distribution of new securities : Stock exchange is primarily a market for dealings in second hand securities. But it helps, in marketing the shares and debentures of a new company also. If the securities are listed on the stock ex change for the purpose of their trading, they attract investors from different parts of the country. Ensures safety of funds : Stock exchanges ensure safety of investible funds be cause they have to operate under set rules which seek to check over-trading, ille gitimate speculation and manipulation etc. They would strengthen the investors confidence and stimulate larger investment in business securities. Regulates company management and performance : The companies which want to get their securities listed have to follow certain rules and fulfill prescribed re quirements. Through then the stock exchange yields influence on the working of those companies in the public interest. Further, as the stock exchange publishes the ruling prices of securities constantly, it indirectly induces the companies to improve their performance. Otherwise inefficiency would soon become public. Disseminates information : A stock exchange disseminates information relating to the capital, management earnings and dividends of listed companies through information bureau. Some stock exchanges publish year books giving history and
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financial position of listed companies. Thus it provides necessary data for decid ing on investment. 10. Facilitates speculation : Stock exchanges provide facilities for speculation in the securities. Healthy speculation tends to equate demand and supply and regulates their 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 de pressions find their echoes in the dealings on stock exchanges. The above account of the various functions performed by a stock exchange shows that it is really an important institution of a country. Briefly, community savings, productive investments, capital formation, industrial growth, economic development and individual prosperity are the integrated chain of benefits that may be derived from the efficient working 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 to the corporation. Services to the Community 1. The stock market is an important institution to finance the economic develop ment of a country. It is no exaggeration to say that the sharp increase in industrial activity in the past two decades and more would not have been possible but for the important part played by the stock exchanges particularly in Mumbai, Kolkata and Chennai. It encourages highly profitable enterprises. It places a premium on efficiency. It diverts funds from unprofitable and unproductive channels to profitable and pro ductive ones. It encourages capital formation by extending facilities for productive investment of surplus funds available with the people. It helps the government to borrow funds from the public and utilize the same on projects of national importance. By providing facilities for the sale and purchase of shares and the publication of reports regarding the conditions of the stock market from time to time, it encour ages even persons of small means with little or no knowledge of corporate finance to 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 of large corporation.
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6. On the basis of information provided by the bulletins issued by stock brokers and reports published by the stock exchanges, investors are able to buy shares in con cerns operating in different parts of the country or even in different parts of the world. The investors are assured of already and continuous market for the securities owned by them and, thus the liquidity of the investment is ensured by the stock market. They may secure credits on the basis of the security owned by them easily as the stock market provides negotiability to the securities. An investor may be assured of safety of investment and fair dealing in them when they are dealt with through a well regulated and well organized stock exchange. They may easily find the variations in the value of their investments as the stock exchanges 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 presence of the continuous market, negotiability, correct evaluations and facility for liqui dating the investment. Easy marketability of securities help companies to enjoy a wide market for their shares. If the securities of a company are listed in a stock exchange it gives an impression of a sound concern. It will improve its good will and credit standing. If the securities of a company are offered through a stock exchange they get good response from public. Since fluctuations in the prices of securities are minimized, the company enjoy the confidence of the public. 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.
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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 were seven stock exchanges. By 1945, they increased to 21, operation of too many stock Exchanges B106 Business Fundamentals
was considered undesirable. It was felt that their diverse rules and policies may lead to unsettled conditions resulting in perverse speculative dealing injurious to genuine investment activity. Hence the government of India as per the recommendations of Gorwala Committee enacted Securities Contracts (Regulation) Act in 1956 to regulate formation, operation and trading roles of stock exchanges in the country. Following are some of the stock exchanges recognized 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 while Calcutta and Delhi stock exchanges have been incorporated as public limited companies and Hyderabad, Madras and Bangalore stock exchanges as companies limited by guarantee. Major operations of prominent stock exchanges, are found to be in specific securities, For example, cotton textiles and bank shares are predominant in Bombay; coal, jute tea, bank and engineering securities are more popular in Calcutta Stock Exchange; textile shares are dominant 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 powers are governed by its own byelaws. This committee is entrusted with the responsibility of overall control and guidance. This is given different names in different exchanges. In Bombay, it is called the Governing Board, in Calcutta, it is known as the Committee, and in other places the council of management. Their day-to-day management is vested in a number of sub-Committees such as Listing Committee, Defaulters Committee, Arbitration Committee and so on. Each Exchange 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 are uniform in terms of the provisions of the Securities Contracts (Regulation) Rules, 1957. These statutary Rules provide that no person shall be eligible to be elected as a member, if he is less than 21 years of age; if not a citizen of India; or has been adjudged bankrupt or proved to be insolvent or has compouded with his creditors; or has been convicted of an offence involving
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fraud or dishonesty, or is engaged as principal or employee in any business other than that of securities; or is a member of any other association in India where dealings in securities are carried on; or is a director, partner or employee of any company whose principal business is that of dealing in securities. Firms and companies are not eligible for membership of a recognized Stock Exchange and individuals are ordinarily not deemed to be qualified unless they have at least 2 years market experience as an apprentice or as a partner or authorized assistant or authorized clerk or remisier of a member. Jobbers and Brokers (Members of the London Stock Exchange) The London Stock Exchange has two types of members viz. jobbers and brokers. Every member has to declare at the beginning of each year whether he proposes to act as a jobber or a broker during the year. Once the declaration made it holds good for the entire year and it cannot be changed during the course of the year. The classification is maintained rigidly by the exchange. A Jobber is a dealer in securities. He is prohibited from dealing directly with the public. He deals with the brokers who are engaged by the public. Thus, the jobber buys securities from and sells them to members who are operating on the exchange as brokers. The Broker functions as a commission agent. He deals in securities on behalf of the investing public. He is an intermediary between the jobber and the outside public. The jobber occupies a very important position in the London Exchange. Every transaction must pass 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 will sell it. For example, in response to an enquiry regarding the price of the shares of a certain company he may declare I will make you Rs. 100 to Rs. 105. This implies that be is willing to buy the security at Rs. 100 or he will sell it at Rs. 105. The jobber is always ready to buy and sell any number of shares. He is not interested to know whether the broker wants to buy or sell securities. If the broker is satisfied with the quotation he discloses the nature of the transaction and strikes the bargain. The quotation by the jobber is called the double quotation or the double barreled quotation. The difference between the two prices quoted will be the profit for the jobber. It is also called the Jobbers turn. Tarawaniwalas and Brokers Members of the Bombay Stock Exchange are unofficially classified as Tarawaniwalas, those who take away the cream of the business, and commission brokers. A commission broker is one who transacts business on behalf of members or non-members on commission basis. He may appoint a number of sub brokers to secure business for him A Tarawaniwals, on the other hand, is a dealer in securities. He transacts business in his own name and on his own behalf. He specializes in the purchase and sale of specific securities. He resembles the Jobber of London Stock Exchange. But, he is not prohibited from acting as a broker too.
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Remisiers and Authorised Clerks Only members, who are given full right and privileges of conducting business on the stock exchange, are permitted to enter the building of the stock exchange. There are also others who are permitted for reasons of convenience, to enter the building of the exchange and act on behalf of members. They are given limited rights and privileges. They are called the Remisiers and Authorised clerks. Remisiers : Remisiers act as sub brokers. They act as agents to the members to secure business for them. Since they are not members they cannot carry on the business for their own name. A remisier is a half commission man and gets remuneration for the work done for his principal payment 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 specified number of authorized clerks or member assistants to transact dealings on their behalf. The Bombay Exchange permits 5 clerks, the Calcutta Exchange allows maximum of 8 clerks and the Madras exchange permits up to 3 clerks to be appointed by a member. Members are held liable 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 transaction put through by them. Members have to pay entrance fee, annual subscription at prescribed rate for each of their authorized clerk. Stock exchange maintain an up-to-date register of all authorized 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 are included 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. The securities can be listed, only if the company furnishes details of its organization and the working to stock exchange and fulfils the conditions laid down in the rules and regulations of the exchange by listing the securities of a company, the stock exchange does not guarantee the financial soundness of the company or recommend it shares to the public. It is not the function of the stock exchange to advise the investors in the selection of securities.
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Objective of Listing The objectives of listing may be as under : 1. 2. 3. 4. To assure constant marketing facilities. To ensure liquidity. To facilitate negotiability, and 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 prescribed form with the following documents and information : 1. 2. 3. 4. 5. 6. 7. Copies of the memorandum and articles, prospectus, statement in lieu of prospec tus, directors report, balance sheet and agreement with underwriters. Specimen copies of shares and debentures, certificates, letter of allotment accep tance etc. Particulars regarding its capital structure. A statement showing the distribution of shares. Particulars of the dividends and cash bonus declared during the last 10 years. Particulars of shares and debentures for which permission to deal is applied for. A brief history of the companys activities since its inception.
While scrutinizing the application the stock exchange will examine the following carefully. 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 companys 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. 3. Whether at least 49% of each class of securities issued was offered to the public for subscription through newspapers for not less than 3 days? Whether the company is of a fair size has a broad based capital structure and there is a sufficient public interest in its securities?
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After the structure of the application, if the stock exchange authorities are satisfied, 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 forward list and non-cleared securities as securities on cash list. It is to be noted that for ward 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 securities list. These conditions are. 1. 2. 3. 4. The securities must be fully paid up equity shares of a company, other than a banking company. They must have been admitted for dealings for at least three years on any stock exchange. They must not be included in the cleared securities list of any other stock ex change. The company must be of sufficient public importance and the subscribed capital represented by the securities must be at least Rs. 25 lakhs and their value at the ruling market price must at least be one crore rupees. There must be adequate public interest in the company and at least 40% of the capital represented by the securities must be held by public and such holdings are to be evenly distributed among a large number of shareholders.
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Advantages of Listing 1. Listing gives the company a higher status, contributes to expansion of activities and helps its growth by making future finance easier. It enables a company to enjoy the confidence of the investing public. Listing helps in widening the market for the securities issued. The listed company gets some tax advantages. The investors are also benefited by the listing of securities. These securities may be used for obtaining bank credit as they command higher collateral value. They stand to gain in respect of income tax. Wealth tax, estate duty and other taxes payable 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
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offer facilities to them for transfer, registration of right fair and equitable allot ment. 5. Listing safeguards the interest of the general public too as it enforces timely dis closure of proper information regarding dividends, bonus shares, new issues of capital etc.
Limitations of Listing 1. Listing amount to encroachment on secrecy of the companys operations. Listing regulations compel the company to disclose certain information like sales, remu neration to personnel besides profits, dividends etc., which may prove to be ad vantageous to its trade-rivals, trade unions. Speculation in stock exchange creates erratic oscillations in the market price of the listed securities. Due to such blind changes, the listed securities may be af fected. This will injure the credit worthiness of the company from the point of view of banks and other financial institutions. Listed securities may become a victim of depressions or wide fluctuations in their values. This would degrade the companys image in the eyes of the public and the financial institutions. The free negotiability of listed securities may induce certain group of persons to own substantial shares of a company with a view to capturing the management of the company in their hands. Listed security tempt the speculators to manipulate the value in such a way as may prove to be detrimental to the interest of the company. Even the directors and other key functionaries in the management of the company indulge in specu lations of listed securities misusing the inside information available to them.
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12.2.5 Methods of Trading The way in which the securities are transacted in a stock exchange is much different from trading in ordinary goods. A person who wants to purchase or sell securities cannot do it himself. He is not allowed to enter into the hall of the stock exchange and thus he can not carry on transaction personally. He has to depend upon the brokers. There are two types of trading on the stock exchange viz. 1. 2. Ready delivery contracts, and Forward delivery contracts.
They are also called cash transaction or cash trading and forward trading or dealing for the account.
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The stock exchanges at Hyderabad, Indore and Bangalore are established for trading in ready delivery contracts only and they are called the cash markets. The other stock exchanges are permitted to adopt both the methods of trading. Ready delivery contractors are presumed to be investment transactions and forward contract are deemed to be speculative transactions. Of course, the speculative transactions are also associated with ready delivery contract. There are some important points of distinction between ready delivery contracts and forward contracts. In the first place, ready delivery contracts are settled either on the date of the transaction or within 14 days from the date of the contract If the transactions are to be settled on fixed settlement days occurring at periodic intervals. Secondly the ready delivery contracts must be settled within, the specified time limit, whereas the forward contracts can be carried forward to the next settlement day, if the buyer or the seller 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 contracts are 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 stock exchange brokers. (1) Choice of a broker : A person who wants to buy or sell security, contracts the broker either directly or through his banker. The choice of the broker may be made on the advice of the banker. It is desirable to deal with the broker directly because it will ensure quick action. Before dealing with a new party a broker always insists on a formal introduction or a bank reference so that the broker may rely on the hon esty and financial standing of the client If he is satisfied with the reference given he intimates his willingness to act on behalf of he client. (2) Placing the Order : The investor has to select the securities in which he wants to invest his savings. This he can do in consultation with the broker. He then places an order with the broker. The order must be clear and it should not contain ambiguous terms. 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 which specific securities are to be bought or sold. Here the broker has no discretion except to buy on lower than the price fixed by the clients order. In case of sales order, the broker has to sell the securities at or above the price mentioned in the clients order. The broker has to wait until market swings around the price levels specified by the client.
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Example : Buy 10 Brooke Bond Ltd Equity at Rs. 17/-. IT means as that the shares must be purchased 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 to buy at the lowest price and sell at the highest price. (iii) Bargain Price Order. The bargain price order does not specify any price but in structs the broker to buy or sell immediately at the best price obtainable in the market. Example : Buy 20 DCM at best. (i) Stop-loss Order. A stop loss order is an order which protects the client against 1 heavy fall or rise in the price. It aims at reducing the amount of loss on the previ ous purchase or sale of securities by indicating the stopping point in the price movements. If the order is Buy Hindustan Motors at Rs. 15 stop, the broker must wait till the price reaches this limit. As soon as it reaches Rs. 15 and begins to rise, the broker would buy the shares at the best possible price. If a client has purchased 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 the price reaches Rs. 13 and shows a tendency to decline the broker will execute the order and save the client from incurring further loss.
(v) Discretionary Order. Discretionary order is one which gives the broker com plete freedom to buy and sell certain inactive securities. The client place such an order when he has full confidence in his broker. (vi) Open Order. Open order is one where the client does not prescribe any time limit for the execution of the order. It is kept in operation so long as it is not cancelled by the client. On receipt of the order, the broker notes it down in his memorandum book. Later, it is transferred 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 at proper time as per clients instructions. The brokers or their clerks operate on the floor of the exchange. These dealings are first recorded in the respective rough pads. Purchases are entered on debit side and sales are recorded on the credit side with particulars of the scripts number, value and names of the parties from whom bought or to whom sold. These dealings are made in prescribed lot under the rules of the stock exchange.
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On the basis of these records, contract notes are prepared in prescribed forms. Separate contract notes are complied for cash and forward delivery contracts. These are exchanged between the concerned parties. The broker sends the contract note to the other party and a copy of it to his 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 immediately on the transfer of the securities or within a period of one to seven days. The settle ment may be made either through the clearing house or by hand delivery be tween the members without the intervention of the clearing house. Usually ready delivery contracts are entered into by outsiders or genuine investors. In the case of forward delivery contracts the settlement is made on a fixed day-in the Bombay Stock Exchange, settlement day is once in a week and in London it is fortnightly. All forward contracts are cleared through the clearing house which simplifies payment for, and delivery of securities. If the transactions of two members of a stock exchange are equal, they are crossed out; if however, they are not equal, the net balance alone is paid for or received. Moreover, there is the system of carry over to the next settlement day if agreed upon by the two parties. If the buyer desires to carry over, he has to pay a premium or consideration to the seller known as contango but if the seller desires to carry over he pays a premium to the buyer known as backwardation. Stock Exchange Clearing House Important stock exchanges maintain a clearing house. It functions on the lines of a bankers clearing house. The clearing house facility exists in Bombay, Madras, Delhi, Calcutta and Ahmedabad. The clearing house serves as a useful link between buyers and sellers of securities. It pools together all the bargains of a member and ascertains his net position. The member can settle all his accounts by a single transaction, i.e., the receipt or payment of the net amount. Advantages of Clearing House Settlement : Settlement through clearing house has following advantages: 1. 2. 3. 4. Settlement becomes prompt and easy. It is economical as intermediaries are eliminated. It amounts to saving of currency-payment because only the net dues are settled in cash. It decreases the demand for bank credit for payments towards securities pur chased.
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Investors and Speculators Purchasers and sellers of securities on stock exchange are classified as investors and speculators. Investors are those who buy securities in order to earn a fair or fixed return. They intend to hold them more or less permanently. They are interested in the safety of their capital and constant 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 to become permanent shareholders or debenture holders. Speculators are those who deal in securities in order to make a profit out of their price differentials. They buy the securities with a view to sell them with a profit. They do not hold on to the securities 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 by them but only pay or receive the difference between buying and selling prices. The price spread is their profit margin. It is of course difficult to find pure investor and pure speculator in practice as many as time investors too would be tempted by the prospects of capital appreciation and earning quick gains 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 after some animals, as they behave like wild animals. Their classification depends upon the nature of 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. He is an optimist. He aims at making profit out of an expected rise in the price of a particular share. For this purpose he purchases the security for future deliv ery. Generally, he has no intention of taking delivery on the fixed date or settlement day. He may sell before the settlement day He may receive or pay the difference between the purchase price and sale price either on or before the settlement day. Let us explain how a bull speculator makes profit out of expected rise in the price of a security. Suppose a speculator expects that the price of equity shares of X company would rise. Suppose he purchases 1,000 shares of X company for future delivery at the present market price of Rs. 150 and suppose the price rises to Rs. 160 on or before the settlement day, he will sell at that price. Thus he makes a profit of Rs. 10,000 out of the rise in the price of the security. It should be noted that if his expectation goes wrong. He will incur a loss.
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Bear. A bear is a speculator who expects a fall in the price of a security. He is a pessimist and he forecasts a fall in price. He aim at making profit out of an expected fall in the price of a particular share. For this purpose he sells the security for future delivery. He may or may not posses the security. Generally, he has no intention of giving delivery on fixed date or the settlement day. He may purchase 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 sale price. Let us explain how a bear speculator makes profit out of an expected fall in the price of securities. Suppose he expects that price of equity shares of Z company would fall and he sells 1,000 shares of that company Rs. 150 for future delivery and let us further suppose that the price fall to Rs. 140 on or before the settlement day. He will purchase at the price and he receives the difference of Rs. 10 per share. Thus he makes a profit of Rs. 10,000 out of a fall in the price of the security. It should be noted that if his expectation go wrong he will incur a loss. Lame Duck. In case the bear is unable to strike the bargain immediately, he is said to be struggling like a lame duck. This may happen on account of the fact that the security which has been agreed to be sold may not be available in the market and in that case the commitment cannot be fulfilled. If the other party agrees to postpone the deal, there would be no trouble but if he does not agree to postpone such a situation would arise. Sometimes the shares to be issued by new company may be unofficially quoted at a premium. This happens when the prospectus of the new company. Are expected to be excellent. Some persons may apply for more shares than actually needed. Their object is to sell the shares at a high one as soon as they are allotted by the new company and thus make quick profit. So stag is a person who applies for shares of a new company with a view to selling the shares allotted to him at a profit. Stags may suffer loss. This happens when the public applies for less number of shares than offered for. Then the stags will be allotted at the number of shares applied for and the shares may be quoted at a discount in the market. Under such circumstances stags will incur a loss, if they sell the allotted shares. The operations 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 clarification for benefit of the students : Arbitrage This is the business of buying securities in one stock exchange for selling them in another, to take advantage of price differential that may exist between the two
Stag.
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Contract Note. It is the evidence about the transaction betwen buyer and his broker. The court will not accept any petition without the valid contract note. Quotation List : The stock exchange usually publish the price of their listed securities from time to time so that the investors may know the real worth of their holdings. Some exchanges communicate to their members regular reports of their activities and dealings. The quotation list is also published in newspapers to make it public and enlighten the investing public about the dealing pattern of various securities. Cum dividend or C.D. : Shares are said to be bought and sold cum-dividend when the buyer acquires the right to receive the amount of dividend which has been declared but not paid by the company. The price paid by the buyer includes the amount of dividend and is naturally higher than the price that would have to be paid without that right (or dividend). For example, if the cum-dividend price of a security is quoted at Rs. 115, the company has already quoted a dividend of 35% on the face value of this share of Rs. 10 i.e. Rs. 3.50 per share. In such transaction the buyer is entitled 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 interest there on is fixed. The quoted price includes the amount of net interest (i.e. gross interest due less tax deducted therefrom). Thus the cum-dividend quotation indicates that the buyer has a right 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 without any right to receive the dividend declared (interest due in case of debentures and bonus). It is only 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 price of those has already been received by the company and which are duly traded in the stock exchange. Spot or ready delivery contracts : A ready delivery contract is one in which the parties intend to take delivery of the securities and pay for them. Such a contract is to be settled either on the same day or within a short period of time. The Bombay and madras exchanges allow a period of 7 days for settlement. At Calcutta exchange only 3 days are allowed for the purpose. There can be no extension of the period of settlement or postponement of the date of settlement. A ready delivery contract may be settled in either of the following two ways.
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(i)
Actual Delivery : The broker receive delivery of the securities purchased and pay the price in full on behalf of the client. Similarly he may give actual delivery of the securities sold and receive the price on behalf of the client.
(ii) Squaring up of transaction : The original transaction may be squared up by means of a fresh purchase or sale at the time of settlement under this system. Only the price 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 through clearing house only and such transaction can have carry over facilities also. The speculators are the main parties in these dealing. It is also to be noted here that business on spot delivery contracts may be in all listed securities whether cleared or non-cleared. But all business for account representing forward delivery contract must be only in cleared securities cleared or settled through clearing house only. Thus forward dealing can be made only in those securities which are placed on the forward list by an exchange. They are meant mostly for the purpose of speculation. Legally speaking all contracts including forward ones are mode with the intention of taking delivery of securities on cash payment of their price. But in actual practice, forward business is done not with the intention of taking delivery and making payment, but with the object of making 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. 2. 3. What is a Stock Exchange? What are its important functions? Explain how dealings on a Stock Exchange are carried out. Write notes on : a) Brokers and Jobbers b) Listing of securities c) Bulls and Bears d) Settlement of Badla. 4. 5. Briefly indicate the services rendered by the Stock Exchanges? Write a detailed note on Listing of Securities.
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Business Communication
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 one or more channels. It is an change of ideas, facts, opinions, information and understanding between two or more persons. It may also be regarded as the process of meaningfully transferring information from one person to another. The success of a business depends to a great extent on effective communication. It has become an essence of management. It is not only a link function but is alternative in the entire process of management Communication is the lifeblood of modern business and industry. It is a systematic and continuous process that leads to proper running of the business. A few noteworthy definitions are enumerate below : Communication is the process of passing information and understanding from one 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 manner intended by the speaker or writer. [Edwin Brown Flippo]
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Communication is a systematic and continuous process of telling, listening and 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. [Websters Dictionary]
Thus, communication refers to the exchange of ideas, feelings, emotions, knowledge and information between two or more persons. It is an attempt to achieve an accurate understanding between two or more persons. It is an act characterized by a desire to exchange information. It involves a systematic and continuous process of telling. Listening and understanding. Communication 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 an enterprise. 13.1.2.Elements in the process of communication Sender Feedback (i) Encoding Receiver Message Decoding Medium
Sender (i.e., communicator) : The sender is a person who initiates the process of communication. The sender may be a superior, a subordinate, a fellow member, a customer or any other outside person. Encoding : This refers to preparing the subject-matter of communication in a suit able language. The purpose of encoding is to translate the thought of the sender into a language or code that can be easily understandable to the receiver of the message. Message : This refers to the encoded subject-matter of the communication which is to be transmitted. The message may be regarded as a subject matter of commu nication. Medium (or channel) : This is a path in which the message is transmitted from one person to another. It serves as a link between the sender and the receiver. Decoding : This refers to the conversion of the message by receiver into meaning terms so as to make communication understandable. The effectiveness of commu nication depends on how much the receivers decoding matches with the senders message.
(ii)
(iii)
(iv) (v)
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(vi) (vii) Receiver (or communicate) : The receiver is a person who receives the message of the sender. For communication to be effective, it must be receiver-oriented. Feedback : This refers to the actual response of the receiver to the message com municated 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 at least two persons (one who transmits the message and the other who receives the message and responds to it). Continuous process : It is a continuous process. It is required by superiors, subordinates and fellow-members on a continuous basis to keep operations running smoothly. Two-way process : It is a two-way process. It involves both sending the message and receiving the response to that message. It is not complete unless the receiver has understood the message. Understanding is the end result of communication. Flow of information : The purpose of communication is to pass on information in order bring about commonness of interest and effort. Pervasive function : It is regarded as a pervasive function because it is required at all levels of management (top, middle, lower) and in all departments (manufacturing, finance, marketing, personnel, etc.) of an organization. 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. Flows in all directions : Communication flows downward from a superior to his subordinates. It flows upward from the subordinates to a superior. It may flow horizontally between persons occupying similar ranks in different departments. It may also flow diagonally between persons at different levels in different departments. Therefore, it flows in all directions.
(ii)
(iii)
(iv) (v)
(vi)
(vii)
(viii) Influencing human behaviour : The primary purpose of communication is to influence human behavious. It is a means of motivating people by proper timing of communication. (ix) Conveying a message : A communication must convey some message. A message is the subject-matter of communication. If there is no message, there is no communication. Establishing interpersonal relations : Interpersonal relations are created by a regu lar interaction with subordinates on several aspects of work. By sharing feelings and exchanging information with subordinates, they are made more loyal, sincere and faithful to their superiors.
(x)
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13.1.4 Steps in the process of communication The process of communication includes the following steps : Step 1 : Step 2 : Step 3 : Step 4 : Step 5 : Step 6 : Step 7 : Step 8 : Step 9 : Step 10 : To have a clear idea about facts, opinions, information, etc., on the part of the communicator. To secure the participation of other persons involved in the decision to communicate a message. To decide what to communicate, with whom to communicate, when and how to communicate. To prepare the subject-matter of communication in a suitable language (i.e., encoding the message). To select a suitable medium for the transmission of the message (e.g., telephone, telegraph, television, etc.). To transmit the message to the communicate (i.e., receiver). To ensure the correct interpretation of the message by the communicate (i.e., receiver). To motivate the receiver to behave as desired by the sender of the message. To evaluate the effectiveness of communication through response or feedback. 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 communication in the organization. The overall functioning of the whole organization is supported by 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 informa tion as is needed by the planners. Through communication, the mangers get the required and relevant information which helps them to formulate proper plans and programmes for the company. It also helps in the proper implementation of plans and policies of the management. (ii) Provides proper information : It helps management by providing information about the duties, responsibilities, authority, positions and jobs. Delegation and decentralization of authority is accomplished in an organization through effec tive communication.
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(iii) Facilitates co-ordination : Co-ordination can be maintained among various re lated departments by making an exchange of information on a regular basis. Coordination of various efforts becomes easy if communication is effective. It binds the people together and is really an aid to co-ordination. (iv) Facilitates decision-making : It helps the management in arriving at vital deci sions. The quality of any decision depends largely on the quality of information available to the decision-maker. Effective communication helps in implementing the decisions of the management. (v) Creates inter-personal relationships : It helps in improving relationships between the superior and his subordinates by providing clear and accurate information in time. These relations can be created through an exchange of ideas, opinions, in formation, directives, suggestions and other instructions between them. (vi) Creates mutual trust and confidence : It creates mutual trust and confidence between the management and the employees. It is essential for healthy industrial relations. It is helpful in boosting the morale and motivation of employees work ing in the organization. Prompt redressal of employees grievances by top-level managers motivates employees to work efficiently. (vii)Facilitates directing functions : It facilitates directing functions by providing proper interaction between managers and their subordinates. It improves supe rior-subordinate relationships by providing opportunities to employees to express their opinions and viewpoints. (viii)Ensures democratic management : It is the basis of democratic management. It ensures co-operation through understanding. It facilitates effective leadership main tenance of man-to-man relationships. (ix) Facilitates controlling functions : It facilitates controlling functions by providing a feedback of actual performance against planned targets. It acts as a tool for effective control. It ensures attainment of enterprise objectives according to preconceived and planned actions. (x) Improves public relations : Public relations are improved though proper com munication. Effective communication helps the management in maintaining good relations with customers, suppliers, shareholders, the Government and the com munity 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 cope with a rapidly changing business environment. It also helps managers in devising suitable strategies for meeting future challenges. (xii)Helps in conducting global economic operations : Globalisation of business op erations have increased the need and importance of communication. For a suc cessful executive, it has become necessary to be aware of different cultures which
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are prevailing in various countries. Thus, communication helps in the smooth conduct of global economic operations. (xiii)Increases managerial efficiency : It contributes a great deal to higher efficiency in job performance. The efficiency of a manager depends upon his ability to com municate effectively with his subordinates. Effective communication will make the employees feel more secure and more interested in their work. Everyone in volved in an organization must know clearly his duties, responsibilities and pow ers. (xiv)Establishes team-spirit : It establishes a cordial and friendly atmosphere in the organization. It helps members in establishing a closer link with each other. It satisfies employees organization work like a team to achieve the targets assigned to them. 13.1.6 Principles of effective communication Effective communication systems are essential and important in all forms of business. The following are the essential elements of an effective communication system : (i) Clarity of message : The subject-matter which is to be communicated, must be clear. No ambiguous (or confusing) terms should be used so that the purpose of communication is deviated.
(ii) Unbiasness : It should be free from personal prejudices. It must take into account the interests of the other parties. (iii) Reciprocal communication : Both the communicator and the communicate should participate in the communication. There should be a reciprocal effect (i.e., twoway communication). (iv) Consistency : The communication should be consistent. The communicator should communicate the message which he believes to be true and proper. There should not be any gap between what he says and what he does. (v) Correct channel : The correct channel of communication is to be chosen in order to make communication effective. The channel to be chosen depends on the na ture and purpose of communication. (vi) Speed : The communication system should be capable of carrying messages speed ily. However, speed of communication should not impair the accuracy of the information to be transmitted. (vii) Accuracy : The communication system should ensure accuracy in the transmis sion of information. (viii)Safety : The communication system should ensure safety of the contents of com munication from loss in transit (or miscarriage) (ix) Flexibility : The communication system should be amenable to change accord
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ing to the needs of business. It should absorb new techniques of communication with little resistance. (x) Human and physical conditions : A good communication system must take into account all the human and physical conditions to make communication effective. (xi) Sense of understanding : Both the communicator and the communicate should have a sense of understanding about what they intend to convey. (xii) Feedback : This refers to the actual response of the receiver to the message com municated to him. Feedback is a reversal of communication. It makes communi cation more effective. (xiii) Listening carefully : Listening to verbal messages carefully implies an active process. Half-hearted attention to the communication is often the cause of misunder standings and confusion. (xiv) Restraint over emotions : Strong feelings and emotional stress are serious handicaps in the communication process. It should be avoided as far as practi cable. 13.1.7 Objectives of communication The following are the objectives of communication : (i) Promotion of managerial efficiency : Communication is the lubricant fostering the smooth operation of the management process. It keeps people working in accordance with the decisions of the management.
(ii) Co-operation through understanding : It induces human beings to put forth genuine efforts in work performance. It inculcates the understanding of employ ees 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 work systematically. It leads to better employer-employee relations. (iv) Basis of leadership action : Effectiveness of leadership is greatly influenced by the adequacy and clarity of communication. Personal communication is essen tial for maintaining man-to-man relationships in leadership. (v) Job satisfaction to employees : The employees get better education, training and knowledge about the modern methods of production due to modern com munication systems. The employees are trained to increase their productive power. This enhances the mutual trust and confidence between the management and workers. Job satisfaction of employees promotes their loyalty towards the enter prise.
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(vi) Quick implementation of decisions : Effective communication systems help the management to implement decisions quickly. Moreover, such systems help the members to adjust quickly to changing circumstances. 13.1.8 Written communication Written communication means transmission of information through written words. It may consist 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 information to be conveyed far and wide. It should be clear, concise, complete and correct in order to make 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 be in the form of (i) face to face communication; (ii) through electronic devices (like telephone, intercom, etc.); (iii) lectures; (iv) interviews; (v) public speeches, etc.
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It is found useful where a detailed explanation of a message is required. It is a flexible method of 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 communi cate. (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 re ceiver. 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 the most natural form of conveying messages and needs no equipment. Here, facial expressions and gestures can be used to reinforce the spoken words. This method of communication promotes better understanding and ensures co-operation. It is the most effective and easiest way of transmission of information. It helps in prompt decision making in case of solving urgent problems. The purpose of this communication is to communicate (a) orders; (b) requests; (c) instructions; (d) information and observation.
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Face-to-face communication includes the following kinds : (i) Direct personal talk : This refers to personal talk between two individuals or among a small group of persons. Here, the speaker can explain the matter keep ing in view the reactions of the listeners. It is the most flexible form of oral com munication and is suitable for confidential matters.
(ii) Meeting (i.e. Joint consultation) : This is a process whereby concerned people meet 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 to arrive at various decisions. (iii) Interview : It is a face-to-face conversation to see and judge the personality of a person. It is a two-way communication in the sense that both parties make state ments about their respective positions and ask questions. An interview can be successful only when it is held in a relaxed atmosphere. (iv) Lectures : It is a face-to-face communication which is used to provide knowledge to students, trainees etc. Hence, the teacher (or trainer) delivers a lecture to stu dents (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 be sent 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 world with the help of internet. E-mail is the fastest method of communicating written messages anywhere in the world at the least cost. E-mail is the quickest means of transmitting messages. It provides the facility of sending and receiving the messages anytime during the day and night. E-mail message can be sent to a large number of people simultaneously, depending upon the requirement. It does not require any stationary (such as pen, pencil, paper, stamp, etc.) to be used. The messages sent or received through e-mail can be stored for future reference. Moreover, e-mail messages are supposed to be highly confidential and secure. It is suitable for any type of message whether it is a letter, picture, design, etc. It ensures instant feedback provided both the receiver and the sender of 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 Ex plorer, 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.
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(iv) Type senders 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 common 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 hear and 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 components. These facilities enable the participants in distant locations to take part in a conference by means of electronic sound and video communication. It reduces time, distance and cost of exchanging views. It improves the quality of timely decisions. When conferencing is conducted with the help of a computer, we can call it computer conferencing. For this conferencing, we require a computer, telephone, internet facility and web camera. This conferencing can be used for seminars, meetings, consultations and recruitment. In this era of globalization when multinational corporations are simultaneously operating in several countries, video conferencing can 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 a mechanism for transmitting short messages to and from mobile phones. SMS is similar to paging which can be availed anytime and anywhere. It enables the transmission of messages speedily and at much lower costs. It facilitates the delivery of messages to multiple subscribers (having mobile phones) at a time. It facilitates communication in a wide geographical area. Anyone who knows the mobile number of a receiver, can send short messages through his mobile phone. SMS is a globally accepted seamless message service that guarantees speedy delivery of information (text as well as numerical messages). An active mobile handset is capable of receiving or submitting a short message at any time to any subscriber of mobile set. Recording of messages in the memory facilitates storage of information which can be retrieved as and when required. It helps the receiver of message to react instantly to any business situation or otherwise. 13.1.11 Measures to improve communication Effective communication is vital for managing the people in the organization. In order to make the communication process more effective and responsive, the barriers (or obstacles) are to be handled effectively. The following are the measures to overcome the barriers to communication : (i) Regulating the flow of communication : Effective communication should in volve determining the priority of messages to be communicated. Incoming com
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munication should be edited and condensed. Otherwise there is a possibility of managers being overloaded with the tasks of communication. (ii) Handling language differences : Language differences can be handled by ex plaining the meaning of technical (or unconventional) terms in a simple language. Vague expressions should be avoided. As far as possible, use of ambiguous words should be avoided. (iii) Control over emotions : Both the sender and the receiver of the message should have control over their emotions. They should ensure that the content of the mes sage is not affected by any negative impact of emotion. Emotional stress is a seri ous handicap in the communication process. (iv) Feedback : Feedback means the response or reaction to the initial message. It may include receivers acceptance and his behavioural response. Along with each communication, there is a need for feedback. It is a reversal of the communica tion process. (v) Importance of listening carefully : A receiver of the message should listen to verbal messages carefully so as to avoid misunderstandings and confusion. A receiver of the message has to be patient and mentally composed while receiving the message. A sender, on the other hand, should also be prepared to listen to what the receiver has to say and respond to his questions, if any. (vi) Clarity and completeness of message : The message should be adequate and appropriate for the purpose of communication. It is very essential to know the audience for whom the message is meant. It may not be possible to achieve per fect communication unless the purpose of communication is clearly defined. (vii) Sound organization structure : The organization structure must be sound and appropriate to make communication effective. Attempt must be made to shorten the channel for conveying information. The channels should be straight-forward to reduce delay and distortion in communication. (viii)Mutual trust and faith : The parties involved in communication should have mutual trust and faith between themselves. They should feel free to make sugges tions and correct each others views without there being any misunderstandings. (ix) Physical layout of work place : In a modern organization, it is also found that the physical layout of the work place influences the communication pattern. The layout of an office should be designed in such a way so as to facilitate frequent interaction. (x) Use of informal channel of communication : It helps to improve managerial decisions and makes communication more effective. For effective communica tion, formal channels must be supplemented with the use of informal channels.
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Business Communication 13.2 BUSINESS LETTER

Characteristics of a good business letter Business people have to communicate with their customers, suppliers, debtors, creditors, public authorities and the public at large for the purpose of exchanging their views and for sending and receiving information. Written communication is called correspondence. Commercial correspondence 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 reader can 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 sys tematically 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 its form. (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 number should 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 not require 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. In the case of a circular letter, either Dear Sirs or Gentlemen may be the salutation.
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(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 previous letter. (ii) Middle portion : This contains the principal information or message to be set out in one or more paragraphs. (iii) Conclusion : This contains the action to be taken by the recipient. The letter must end with Thank You or With Thanks or With regards, etc. (e) Complimentary Close : Complimentary Close should be matched with the style of salutation, for example, Yours faithfully or Yours sincerely or Yours truly, etc. (f) Signature and Date : Every business letter must be signed by the authorized person and dated.
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Sketch of Layout of a Letter (A) Telephone No. Telex No. Telegraphic Address Reference No. (B) (C) (D) Name/Designation of Addressee Address of Addressee Opening Salutation (Dear Sir/ Sirs, etc.) 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 purpose for which these are being written. Some common varieties, suitably grouped, are indicated as follows : (1) Offers, Quotations and Orders; (2) Confirmation, Refusal and Cancellation of orders; (3) Claims, Complaints and Adjustments; Name of the Sender Address of the Sender Nature of business Date
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(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 place orders for his products sold by him. The object of making an offer is to increase the sales of the products in the market. When an offer is being made against a particular enquiry, it is known as a quotation. An offer or 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.
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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 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 has recently been introduced in the market. The product is the result of a number of years of tireless effort by our research staff. We forward herewith a few copies of our leaflets so that your can distribute them for the purpose of advertisement. It will be observed from the leaflets that the various qualities of the product are really unique. We also enclose a few copies of the price lists and you will appreciate that the prices quoted are very competitive. As per our terms, you will be allowed two months credit and a discount of 20% on the catalogue price. Thanking you. Yours faithfully, For XYZ Company Ltd. Enclosures : (1) Leaflets 2) Catalogue Prabhat Das Director Dated : 19th August, 2001
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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 book sellers of this city, having stocks of all types of books. We have trade terms with a number of publishing houses, both Indian and foreign, whose books we sell. We would like to stock your publications. We, therefore, request you to send us your latest catalogue and state your trade terms. Please let us know whether it will be possible for you to give us goods on credit, if we give satisfactory trade and bank references. It would be convenient for 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 you are interested in our publications and desire to stock them. We are sending our latest catalogue and price-list under separate cover. We allow a trade discount of 20 per cent on the printed prices. Our terms are cash in general 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,
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Specimen 4 Asking for quotations of cloth 10h February, 2001 (As per Layout sketched) Dear Sirs, We are interested in placing orders for the supply of Khaki Drill cloth required for N.C.C. uniforms. It would be appreciated if you could kindly send at your earliest the particulars of Khaki Drill cloth manufactured by you. As it is likely that our requirements may be quite heavy, it is hardly necessary to remind 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 samples in various weights. We await an early response from you, so that we may be able to place orders with you in 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 Diamond Khaki Drill fast colour 45 metres at Rs. 4.25 per metre. You will find that this drill is absolutely unshrinkable and extremely hardwearing. The special 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 of notice would be required for unusually large quantities. We trust we shall have the pleasure of supplying your needs. Yours faithfully,
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Specimen 6 An order for the supply of Toys 5th February, 2001 (As per Layout sketched) Dear Sirs, We have pleasure to introduce ourselves as your old customers for toys. We gave you good 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 arrange the sales and could not place orders with you for the supply of the same. But this year, we have decided to come into the field again and would expect you to favour us with special consideration for our orders as you did earlier. Kindly book our order for the supply of toys as per details given below: (i) (ii) (iii) (iv) Plastic toys of different kinds and sizes, Rs. 15,000 Paper toys of different kinds and sizes, Rs. 12,000 Glass toys of different kinds and sizes, Rs. 10,000 Clay toys of different kinds and sizes, Total Rs. 5,000 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,
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Specimen 7 A Reply to the above 15th February, 2001 (As per Layout sketched) 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 your full requirements, as we have to comply with the outstanding orders received from many concerns of the neighboring States of Rajasthan, Madhya Pradesh, Haryana and the Union Territory of Delhi. However, we would like to recommend a well reputed manufacturing concern The Taj Toys of the local market, with which you may place your order and receive the supply in time. Had we known before hand that you would place with us such a large order, we could have made some arrangement, rather than missing our esteemed customer. However, we would like to assure you that, in future, you will have no need to complaint 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 (As per Layout sketched) Dear Sirs, With reference to your quotation Number SY/74/01, dated 10th February, 2001, we have pleasure in placing an order for the supply of : (1) (2) One dozen, 3 Band, Retheim radio Sets, and Two dozen, 2 Band Transistor sets Model no. 35 Priya.
Please ensure the proper packing of the goods and arrange to dispatch them by passenger train within a fortnight of the issue of this order, as the items of this order are urgently required. Please dispatch the goods at an early date, as these items are in heavy demand these days due to the World Cup Football. Thanking you, Yours faithfully,
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Specimen 9 Reply to the above 30th March, 2001 (As per Layout sketched) Dear Sirs, We thank you for your order dated 22nd March, 2001 for the supply of one dozen redio sets and two dozen transistor sets. In view of the urgency shown by you, we have forthwith executed the order and the goods 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. But where there is any possibility of delay in executing the order, the confirmatory letter must be issued in respect of the order. Refusal : At times, orders are to be refused on various grounds. Orders may be refused for lack of stocks or, where the customer is financially unsound, etc. The refusal letter should be polite and generally the reason for refusal should be stated. Cancellation : Sometimes it becomes necessary to cancel an order already placed by the party due to some unforeseen circumstances. It may be due to undue delay in the execution of the order, sudden fall in the market price or bankruptcy of the customer. The letter canceling such an order should clearly state the reasons for such cancellation.
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A few specimen of such letters are given hereunder : Specimen 1 Expressing inability to execute order 25th July, 2001 (As per Layout sketched) 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 of these books is exhausted. The books ordered are being reprinted and we expect them to be ready for sale by the end of this month. We are, therefore, keeping your order before us and, unless we hear from 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-operation always. Yours faithfully, Specimen 2 Asking for extension of time 4th August, 2001 (As per Layout sketched) Dear Sir, We thank you for your order of the 20th July, 2001 for five tones of coconut oil for delivery by the 15th of this month. Owing to a sudden strike in our Mills during the previous month, our stocks are exhausted and fresh supplies are expected to be ready for delivery within a fortnight. We hope 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 we shall 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 be able to accept your order and ensure its execution within the time stated above. An early reply will be appreciated. Yours faithfully,
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Specimen 3 Cancelling order due to undue delay in execution 20th August, 2001 (As per Layout sketched) 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 neither 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 (As per Layout sketched) Dear Sirs, We placed an order with you on the 22nd of this month for the supply of 200 dozen handloom bedsheets with pillow covers, but we very much regret that we have to cancel this order as our customer for whom these goods were intended has now become bankrupt. 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 short time. Thanking you, Yours faithfully,
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Claims, Complaints and Adjustments Claims and Complaints: At times the buyers are not satisfied with the quality of the goods supplied. There may also be discrepancies in respect of the quantity, terms and conditions of payment, delivery, etc. As a result, the buyers raise different claims on the suppliers. Both the letters raising such claims and the replies thereto, should be written tactfully, avoiding an unpleasant situation. Adjustments : When the claims as mentioned above are substantiated, some letters of adjustment are required to b issued to the purchaser in order to rectify the error and settle any dispute amicably. The supplier should always try to settle the matter amicably, even at his own cost, 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 (As per Layout sketched) 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 inconvenience, and we have been put to substantial loss. The orders were placed with your on the explicit understanding and your promise that you could execute the orders within a fortnight. The fact that you have taken undue time and have not yet delivered the orders, has put us at a great loss in business, for which we may claim compensation from you. However, we have no intention of exercising this right and we propose to wait for the execution of the order till the end of this month. Prompt action is expected from you. Thanking you, Yours faithfully,
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Specimen 2 Reply to the above 25th September, 2001 (As per Layout sketched) Dear Sirs, We have received your letter of the 17th September,2001, complaining of the delay in the delivery of goods for which order was placed on the 4th August, 2001. We are really very sorry that you have had to face some inconvenience on our could not be executed. However, we shall try to expedite things and every effort shall be made to deliver the supplies in time in future. Once again we very much regret the inconvenience caused to you and assure 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 delivery and hope that you will accept our apologies for the delay and continue the same friendly relationship which existed in the past. With thanks, Yours faithfully, Specimen 3 Complaint about receipt of wrong goods 5th August, 2001 (As per Layout sketched) 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 same were 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 comparing 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,
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Specimen 4 Reply to the above 10th August, 2001 (As per Layout sketched) Dear Sirs, We thank you for your letter of 5th August, 2001, and are sorry to learn that by an oversight of our dispatch section, you have received the wrong consignment. The consignment received by you was meant for M/S. Hari Prakash & Bros., Sadar Bazar, Meerut, who have in turn received your consignment. We have received a letter from them also. We have requested M./S, Hari Prakash & Bros., Meerut, to deliver that parcel to your per 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 requested 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 (As per Layout sketched) 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 single packet is in a saleable condition. Will you, therefore, look into the matter and send us a fresh consignment of the goods, for which we placed an order with you. On receipt of these goods, we shall return this damaged consignment to you by passenger train. The cost 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,
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Specimen 6 Reply to the above 20th July, 2001 (As per Layout sketched) Dear Sir, Your letter dated July, 15, 2001 complaining about damaged goods has been duly received. 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 consignment in a damaged condition. While we are arranging to send a fresh consignment of your order within this week, we would suggest that you may dispose of the tea (already with you) in loose form. We would allow you an additional discount of 10% on this lot to cover the loss your may incur in this regard. We regret once again the inconvenience caused to you and would like to assure you that such mistakes will not occur in future. Thanking you, Yours faithfully, Specimen 7 Complaint of inferior quality 11th March, 2001 (As per Layout sketched) 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 with that of the previous one supplied by you on 10th February, 2001. The paints you have supplied 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 made in the price, failing which goods will be kept pending till the receipt of instructions from you as to how best they should be disposed of. Expecting your prompt attention, Yours faithfully,
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Specimen 8 Reply to the above 20th March, 2001 (As per Layout sketched) Dear Sir, We are in receipt of your letter of 11th March, 2001, regarding supply of inferior quality wall paints. We very much regret that the goods are not to your satisfaction. We thank you very much for this act of kindness as we are always anxious to improve the quality of the goods manufactured by us. If the goods are not to your satisfaction, you are requested to 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 (As per Layout sketched) Dear Sir, We are in receipt of the books sent under the cover of your invoice No. 437/AX dated 25th 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 a Credit Note or send us by post the copies in short supply. Your prompt attention is requested. Thanking you, Yours faithfully,
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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 that some 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 appointed persons of our packing section and we have taken them to task. We are sending 10 copies of the book of this item under separate cover by registered book post in order to cover the shortage. 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 issuing reminders for payment are a regular features of business. In drafting collection letters, necessary care should be taken not to wound the sentiments of the customers. Sometimes, it may be necessary to issue several reminders for nonpayment.
A few specimen of such letters are given below : Specimen 1 Fixing a date of payment 1st March, 2001 (As per Layout sketched) Dear Sir, We are surprised to find that you have taken no notice of our letters of 3rd and 18th February, 2001 asking for settlement of your account of Rs. 5000, which is now long overdue.
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As we are unable to allow the account to stand over longer, we must insist on its payment by the 10th March at the latest, failing which we shall be compelled, much to our regret, to take further steps to have the account settled. Yours faithfully, Specimen 2 Threatening legal action 15th March, 2001 (As per Layout sketched) Dear Sir, We have written to you three times for the settlement of our account, but much to our regret, you have not only failed to settle outstanding but have taken no notice of it. We now 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 our lawyers. 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 (As per Layout sketched) 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 customers who invariably settle their accounts promptly and take advantage of our cash discount 2% for payment within seven days or net cash for one month. As your account for November is still unpaid, we think it our duty re remind you that you are entitled to the discount only if your remittance reaches us by the end of this month. Yours faithfully,
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Agency Letters An agent is a person or a firm who has been appointed by someone to act for him. The person appointing an agent is known as the principal. The against are generally entitled to get a commission. When the agent is to give guarantee for bad debts, he is also entitled to get Del-credere Commission in addition to the usual commission. When writing to an agent, the principal must be careful to make the subject matter of the letter unambiguous and convincing. He should, in no case, write a letter in a dictatorial tone, because his business depends on the co-operation of his agent. A few specimen of such letters are given below : Specimen 1 Offering agency 10th January, 2001 (As per Layout sketched) Dear Sir, We are contemplating to appoint a commission agent for the sale of our products in your State, 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 have specialized in different woolen garments like pull-overs, cardigans and socks. These products have become very popular in Punjab, Haryana, Delhi and Uttar Pradesh. We now seek 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, in the 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,
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Specimen 2 Complaint of inferior quality 15th January, 2001 (As per Layout sketched) Dear Sir, We feel that there is an excellent market in Bihar for our milk products, and we should be glad 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 inclined to 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 is enclosed, and we are prepared to consider your suggestions for any improvement in this direction. We will also maintain, at our cost, a showroom under your supervision and control for the display of our products. We shall be willing to allow you a trade commission of 10% on net sales and undertake to re-imburse all expenses resulting from this representation. We would like to send you a formal agreement form on hearing from you. Kindly reply at your earliest. Yours faithfully,
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Specimen 3 Applying for agency 15th January, 2001 (As per Layout sketched) Dear Sir, We have been informed by our business friends M/s. Harsuk Lal & Sons, Nagpur, that you have no representation in Delhi. You will be pleased to note that we have an established agency business at Delhi with a standing of 25 years, and we are prepared to offer our services to act as your local agent. We are specialized in this line and we represent several reputed firms in Kolkata and Mumbai. 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, should there 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 best efforts to promote your business in this area. Yours faithfully, Specimen 4 Letters accepting agency 7th February, 2001 (As per Layout sketched) Dear Sir, Thank you very much for your letter of January 15, 2001. We have noted with keen interest the contents contained therein. We have pleasure in informing you that we are prepared to accept your agency on the terms and conditions stated in your letter and hope that we would be able to develop a substantial business for you here. We may point out that most of our principals bear the
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cost of our cables to them regarding the agency work. We hope you would also not mind to do so. You will be glad to know that we also represent a reputed and renowned firm manufacturing woolen 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 (As per Layout sketched) 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 the party 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 be obliged if you would very kindly excuse us for the inconvenience incidental to the absence 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 make some 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 customers. But the prudent way to minimize this risk is to verify the creditworthiness of the new customers before allowing them any credit. Information regarding the financial standing and reputation of credit worthiness of a new customer should be obtained from various sources, like business friends, credit information agencies and mainly from banks.
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Status enquiries should always be made confidentially. The language asking for any information must be polite. The information supplied should be accurate and factual. The answer should indicate 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 (As per Layout sketched)
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 of your banker as a reference and a couple of other trade references. We invariably follow this convention 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,
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Specimen 2 Asking for names of reverences 10th March, 2001 (As per Layout sketched) 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 trade references. As we have not had the pleasure of doing business with you previously, it will be appreciated if you could very kindly furnish two trade references. Always ready to serve you, Yours faithfully, Specimen 3 Favourable Reply 5th April, 2001 (As per Layout sketched) Dear Sir, Your letter of 10th March, 2001 regarding the financial standing and general reputation of M/s. Jamuna Lal & Sons, has been duly received. In this connection we have the pleasure to inform you that we have been in business with the aforesaid firm for over then years and we have not had any occasion to create any doubt regarding their financial soundness. We personally would be quite willing to allow them credit even in excess of the amount you mention. This information, however, is supplied in confidence and without any responsibility on our part. Yours faithfully,
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Specimen 4 Favourable reply 6th April, 2001 (As per Layout sketched) Dear Sir, We have your inquiry dated 30th March, 2001 and are glad to inform you that the firm in question enjoy a good reputation and confidence in the local market. We have been doing business with this firm for about ten years and we have all along found them prompt in payment. So far as we know, they are financially quite sound, though we cannot give you any definite idea about their financial capacity. They have been a valued customer of ours and we feel no hesitation in giving them credit for an amount beyond the sum you have mentioned. Yours faithfully,
Specimen 5 Unfavourable reply 5th April, 2001 (As per Layout sketched) Dear Sir, In reply to your letter of 30th March, 2001, we have to inform you that the firm about which you have inquired has been undergoing a bad time lately, and more than once, we have had to press them for payment of our bills. We would ourselves hesitate to extend them credit to the extent you mention. We are giving this information to you in confidence and would request you to treat it as such. However, we would like to add that our firm is not guided by any prejudices in matters like this. Yours faithfully,
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Specimen 6 Letter refusing credit 9th April, 2001 (As per Layout sketched) Dear Sir, With reference to your letter of 23rd March, 2001, we regret to state the information received by us from private sources about your firm is not complete enough to permit us to meet 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 an account 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 our cash 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 applicant 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 certain amount 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 to facilitate traveling and international trade. Every letter of credit must contain the name and address of the person to whom it is to be presented for payment. It should also contain the name, address and specimen signature of the person in whose favour it is issued, the amount to be paid or the limit, if any, and the period of validity of the Letter of Credit.
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Two specimen of such letters are given hereunder:
Specimen 1 Regarding loss by fire 15th January, 2002 (As per Layout sketched)
Dear Sir, We have pleasure in introducing Mr. Mahesh Kumar, the bearer of this letter, who is our business friend. He is one of the senior partners in the firm M/s Mahesh Kumar Suresh Kumar, who deal in textile goods in the city. They want to make new business connections in Mumbai and with this end in view, they are sending Mr. Mahesh Kumar on a tour to that State. We shall be glad if you could kindly help him with the addresses of respectable firms as also with your valuable advice in business matters. We will regard every service you render to Mr. Mahesh Kumar as a personal favour. We shall always be ready to be of service to you in similar matters. Thanking you, Yours faithfully,
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Specimen 2 Acknowledging claim for damage 17th January, 2002 (As per Layout sketched)
Dear Sir, We have pleasure in introducing to you the bearer of this letter, Sri Hari Krishan Seth, a business friend of our firm. He starts today on a business tour through the State of Uttar Pradesh 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 standing firms 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 bill for the same. Please take a receipt in duplicate from Sri Seth for the money advanced to him and forward 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 Kishan Seth, whose signatures are given and attested below. Thanking you, Yours faithfully, Attested Signature of Sri Hari Kishan Seth
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Banking and Insurance Letters Banks are indispensable in modern business. The primary functions of a bank are : (a) (b) (c) receiving deposits from customers; making payments against deposits to customers; 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 customers are often touchy in money matters. Correspondence about customers accounts should be treated as 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 connection with Life Insurance must contain reference to Policy No. or Proposal No., name of the life assured, mode of payment, amount of premium, etc. Correspondence regarding Fire Insurance generally is made of a proposal for a policy, acceptance or refusal of the proposal, rate of premium, claims and their settlement. Correspondence regarding Marine Insurance generally includes a proposal to insure, acceptance or refusal of the proposal, quotation for premium, claims and acceptance or refusal of claims.
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A few such letters are given below:
Specimen 1 Letter refusing credit 15th January, 2002 (As per Layout sketched) Dear Sir, We have to inform you with great regret that a fire broke out last night in our godown situated at 23/27 Loha Mondi, Agra, Thana hariparwat. The cause of the fire could not be established even by the police, who have been to the site this morning. The fire was seen by the watchman in the store where paper is stocked. He immediately informed the fire brigade which arrived within minutes. I also reached the spot as soon as I received the telephonic 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 or Inspector to assess the loss and let us know what formalities are to be completed for putting up a claim for the loss. Yours faithfully,
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Specimen 2 Acknowledging claim for damage 17th January, 2002 (As per Layout sketched) Dear Sir, We are in receipt of your letter of 15th January, 2002 informing us of the loss due to the fire which 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 proceed in the matter on getting his report. In the meantime, please fill in the enclosed claim form and return it to us at your earliest convenience. Yours faithfully,
Specimen 3 Enclosing cheque in settlement of claim 25th January, 2002 (As per Layout sketched) Dear Sir, In continuation of our Letter of 17the January, 2002 we have to inform you that we received the surveyors report which assesses the damage at Rs. 85,000/-. We enclose our cheque No. . dated . on the State Bank of India, M.G.Road, Agra for Rs. 85,000/-, together with a voucher and shall thank you to return the same to us duly signed. Yours faithfully,
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Specimen 4 Letters asking for Overdraft facilities 3rd February, 2002 (As per Layout sketched) Dear Sir, We wish to have overdraft facilities for which we are prepared to deposit with you State Government Securities of the face value of Rs. 50,000/-. We shall very much appreciate your sending us the necessary forms for signature. In case any further particulars are required, the undersigned would be glad to call on you personally.
Yours faithfully, Specimen 5 Reply to the above 4th February, 2002 (As per Layout sketched) Dear Sir, We are in receipt of your letter dated February 3, 2002 asking for overdraft facilities. It this connection, 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, a copy 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 the places marked with red ink. Government securities duly endorsed in our favour along with the forms may then be sent to us to enable us to give you necessary overdraft facilities. Yours faithfully,
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Specimen 6 Letter disclaiming liability 25th January, 2002 (As per Layout sketched) Dear Sir, We are in receipt of your letter dated 15th January, 2002 informing us of a fire which broke out on the night of 14th January in your godown at 23/27 Loha Mondi, Agra and destroyed goods therein. In this connection, we wish to state that the above policy was issued for six months ending 31st December, 2001, and had to be renewed to cover the risk further. You were advised of the same by our letter No. SA/24 dated 1st December, 2001, but you failed to renew the policy and the policy stood lapsed. Under the circumstances, we regret that we cannot 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 can enable the Management to avail of some opportunities or save the organization from a possible loss. In fact, the communication process is not considered to have been completed without a feed back. A Report may be oral, visual or written, formal or informal. It could be a document in which a particular situation is analysed or a particular problem is examined with a view to offering information to the Receiver. It may include the facts, figures, findings and may also be supplemented with recommendations. Majority of the reports are Routine Reports called Work Reports or they are investigation reports. Reports help Managers to carry out their functions better. They can plan, evaluate and take decisions faster. Timely reporting in a scientific manner can free the supervisors advise
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the subordinates regarding the desired action. The superiors can also take a note of such reports for further reference. The information submitted in a report by technical experts can help the 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) b) c) 2) 3) 4) 5) 6) 7) informational Interpretative Analytical
Length Short or long. Period or Time Monthly, Bimonthly, Quarterly, Six-monthly, Annual Progress or Special. Importance Routine, Important, Emergency. Subject Management, Financial, Accounting, Insurance, Sales, Tax, Production, Miscellaneous. Ares Internal, External. 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 is presented in a particular order with subheadings. We have newspaper reports informing us about some events concerning business stated as a news or reports like a Stock Exchange Report providing us facts and figures with an analysis and observations.
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13.4 DIRECTORS REPORT

The report of the Directors is prepared in accordance to the provisions of Sec. 217 of the Companies Act. This report should contain information on the following matters :(a) (b) (c) (d) The state of the companys affairs. The amounts, if any, which is proposed to be carried to any reserves in the balance sheet. The amount of dividend recommended if any. Material changes and commitments affecting the financial position of the company which have occurred between the last date of the balance sheet and the date of the directors report. Certain mandatory informations relating to steps taken in respect of conservation of energy, technology absorption, foreign exhange earnings and outgo etc.
(e)
The Board of Directors Report also contains information relating to any change in the nature of business of the company or the business of the subsidiary companies. In addition, the Directors report also contains information relating to the remuneration received by employees beyond 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 investigation into the services provided by the canteen at our factory at Shrirampur, I would like to submit as follows :
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1. The Procedure : I visited the factory on 19th and 20th April 2001 and conducted personal interviews of representative staff working in our factory, at both day and night 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) which was filled in by 87 workers availing of the canteen facility. Finding : The services provided by the Factory Canteen are far from being satisfactory. The kitchen was found to be most dirty with solid waste dumped in a corner. The uniforms of the canteen boys appeared to have not been washed for several days. While serving the food, minimum health care is not being taken. During the night shift, tea was not available and the canteen boys were replying rudely. It appears that the Canteen Manager is running a hotel nearby and the surplus stale food items are brought to our Factory Canteen for disposal. The crockery used is of the Third Grade and also not sufficient for catering to our 250 employees. The rates of the foodstuff provided, have been reused steeply upwards, without notice and discussion with us. Recommendations Considering the fact that majority of our employees depend upon our canteen and that there is no other substitute facility for the night shift workers, the Canteen Manager be asked to improve hygienic conditions at Canteen immediately. 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 for disposal in our Factory Canteen. The Canteen Manager should be asked to reduce the rates of the food items immediately, by at least 20% since we have been providing him canteen subsidy. The tea should be available to the night shift employees regularly and they should not be charged more than Rs. 1.50 per cup. The Canteen contract will come to an end on 15th July 2001. If there are no immediate improvements and if clean uniforms are not provided to the Canteen Boys, the contract should not be renewed.
2. (a) (b) (c)
(d) (e)
3. (a)
(b)
(c)
(d)
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(e)
The Canteen Manager be called for a personal explanation at the Head Office during 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 Audited Accounts for the year ended 31st March 2002. Financial Results : Year ended 31st March02 Rs. in lakhs Sales Profit before tax Less Provision for taxation Profit after tax Add Taxation adjustments for earlier years Profit and Loss Account surplus Brought forward .. Appropriations: General Reserves Dividend (proposed) Balance carried over 111.24 421.88 500.00 1033.12 83.80 361.63 325.00 770.43 325.00 1033.12 770.00 770.43 2.31 23.13 13655.24 1519.81 814.00 705.81 Year ended 31st March01 Rs. in lakhs 12744.73 1350.28 413.00 637.28
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2. Operations: The Companys sales for the year amounted to Rs. 136.55 crores for the previous year, recording a growth of 7.4%. During the year under review, sales of Chloramphencol products were adversely affected due to the continued dumping of L. Base (drug intermediate for Chloramphenicol) by China at considerably lower prices. But for the reduction in sales of Chloramphenicol products as compared 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 years net profit of Rs. 6.37 crores. 3. Dividend : Your Directors recommend payment of a dividend of Rs. 3.50 per share (35%), subject to deduction of tax at source. The dividend payout would be Rs. 4.22 crores. 4. Exports : The Companys Export (on F.O.B. basis) was Rs. 1.72 crores during the year under review as compared 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 as on 31st March, 2002. 6. Directors : Mr. X.Y.Z. ceased to be a Whole-Time Director of the Company on his resignation from the Board effective 30th June 2002. Your Directors wish to place on record their appreciation for the valuable 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. retire by rotation and being eligible offer themselves for reappointment.
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7. Employee Relations : Employee relations were satisfactory during the year. Your Directors record their appreciation of the contributions made by employees at all levels to the operations of the Company during the year. 8. Cost Auditor : Pursuant to the provision of Section 233-B of the Companies Act, 1956, necessary applications have 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 respect of 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 is managed by the Indian Post and Telegraphs Department with a network spread all over the country. The telegraphs could be Ordinary or Express. The charges for Express telegraps are usually double the rate of an ordinary telegraph. A concessional rate is charged for the standard phrases telegrams. A telegraphic message is required to be brief because each word after the minimum words (Ten words), is charged extra, However, the message to be telegraphed should never be economized at the cost of the meaning, otherwise there would be misunderstanding or miscommunication. Usually telegrams are sent to convey urgent information and are followed by a detailed communication.
Exercises
1. 2.
What is meant by communication? Why has communication gained importance in modern business? Explain the essential elements in the process of an effective communication system.
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3. 4. 5. 6. 7. 8. 9. 10 11. 12. 13. 14. 15. Discuss the characteristics (or features) of communication. Mention the steps involved in the process of communication. Discuss the principles of effective communication. State five important objectives of communication. What are the different methods (or channels) of communication? What is formal communication? Briefly describe its advantages and disadvantages. What is informal communication? Mention its merits and demerits. Differentiate between formal communication and informal communication. Discuss the advantages and disadvantages of verbal communication. Discuss the merits and demerits of written communication. Explain in brief the barriers to effective communication. What are the factors which should be considered in order to make communication effective? 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. 17. 18. 19. Why are reports necessary in a business? What are the different types of reports submitted? What are the essential factors to be considered while drafting a business letter? Write a letter of complaint about the delay of delivery of goods ordered by you staling that you may cancel the order if no reply is received immediately. Draft a Circular letter informing your clients about the new products, you are shortly introducing into the market.
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Section -II

Forms of Business Organisation

Forms of Business Organisation

Forms of Business Organisation

Forms of Business Organisation

(iii) (iv) (v)

9.3 JOINT HINDU FAMILY BUSINESS

(2) (3) (4)

Forms of Business Organisation

(2) (3) (4) (5) (6)

9.4. PARTNERSHIP FIRM

Forms of Business Organisation

Forms of Business Organisation

(ii) According to time : (a)

(iii) According to legality : (a)

(iv) According to nature : (a)

Forms of Business Organisation

10. 11. 12. 13. 14. 15. 16. 17.

Forms of Business Organisation

Forms of Business Organisation

Forms of Business Organisation

9.5COMPARISON BETWEEN PARTNERSHIP AND SOLE PROPRIETOR SHIP

Forms of Business Organisation

9.6COMPARISON BETWEEN JOINT HINDU FAMILY AND PARTNEERSHIP

Forms of Business Organisation

Forms of Business Organisation

Forms of Business Organisation

Forms of Business Organisation

Forms of Business Organisation

9.8. JOINT STOCK COMPANY

Forms of Business Organisation

Forms of Business Organisation

Forms of Business Organisation

9.9. PUBLIC UTILITY SERVICES AND STATE ENTERPRISES

Forms of Business Organisation

9.10 LIMITED LIABILITY PARTNERSHIP

Forms of Business Organisation

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

13. 14. 15. 16. 17. 18. 19. 20. 21.

22. 23. 24. 25. 26. 27.

Company Organisation and Management

Memorandum of Association Articles of Association Prospectus

Shares Debentures Board of Directors Meeting Resolutions

10.1. TYPES OF COMPANIES

Company Organisation and Management

Company Organisation and Management

(2) Exemptions regarding holding of meetings : (i) (ii)

(iii) (iv) (v) (vi)

(6) Exemptions regarding share capital : (i) (ii)

Company Organisation and Management

10.3 PUBLIC COMPANY

Company Organisation and Management

10.3.5. Differences between a private company and a public company

Basis of differentiation Commencement of business

Private company After obtaining certificate of incorpotation Not required

Company Organisation and Management 10.4. INCORPORATION OF A COMPANY

Company Organisation and Management

Company Organisation and Management

Company Organisation and Management

10.6 BASIC DOCUMENTS OF THE COMPANY

Company Organisation and Management

The object clause must not include anything which is :

Company Organisation and Management