KARNATAKA STATE OPEN UNIVERSITY

Mukthagangotri, Mysuru – 570006

[Link]. PROGRAMME
I – SEMESTER

BUSINESS POLICY AND ENVIRONMENT

Course Code: MCMHC 1.2 BLOCK – I
DEPARTMENT OF STUDIES AND RESEARCH IN
COMMERCE
Karnataka State Open University
Mukthagangothri, Mysuru - 570 006 I SEMESTER [Link]
BUSINESS POLICY AND ENVIRONMENT
COURSE CODE: MCMHC 1.2

Department of Studies and Research in Commerce

BLOCK
1

Page no.

UNIT - 1: BUSINESS ENVIRONMENT 1-15

UNIT - 2: TYPES OF BUSINESS ENVIRONMENT 16-34

UNIT - 3: ECONOMIC ENVIRONMENT 35-47

UNIT - 4: LIBRALISATION AND GLOBALISATION 48-62

 Credit Page
Programme : [Link] Year/Semester:First Block No :I
Course : Business Policy and Environment Credit : 04 Units No :1-4
Course Design Expert Committee
Prof. Vidyashankar Chairman
Vice-Chancellor,
Karnataka State Open University
Mukthagangotri, Mysuru – 570 006
Prof. Ashok Kamble Member
Dean (Academic)
Karnataka State Open University
Mukthagangotri, Mysuru – 570 006
[Link] V Member
Assistant Professor & Course Designer,
DOS&R in Commerce, KSOU, Mysuru.
[Link] V Member
BOS Chairman,
DOS&R in Commerce,KSOU, Mysuru.

Dr. Mahesha V.
Chairman Member Convener
DOS&R in Commerce, KSOU, Mysuru.
Course Writer Course Editor
[Link] G V. [Link] C.
Assistant Professor, Assistant Professor,
DOS&R in Commerce, DOS&R in Commerce,
KSOU, Mysuru. KSOU, Mysuru.
Editorial Committee
[Link] V Chairman
BOS Chairman,
DOS&R in Commerce,KSOU, Mysuru.

Prof. S B Akash External Subject Expert

Professor,Department of Commerce
Rani Chennamma University,Belagavi.

Dr. Chaya R. Internal Subject Member

Assistant Professor, DoS & R in Commerce
Karnataka State Open University, Mysuru.

Dr. Mahesh V.
Chairman Member Convener
DOS&R in Commerce, KSOU, Mysuru.
Copy Right
Registrar,
Karnataka State Open University, Mukthagangothri, Mysuru - 570006.
Developed by the Department of Studies and Research in Commerce , KSOU, under the guidance of Dean
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2022
 Karnataka State Open University
Mukthagangothri, Mysuru - 570 006

Preface
Dear Student,

As you know, the business firms in any country including India operate as per the reaction of
environment. The environment may be micro and macro which are self explanatory. It is the foremost duty of
the every business firms to function as per the expectations of the stakeholders under the surveillance of the
regulations. Business is influences by political-legal environment, socio-cultural environment, economical
environment and technical environment and technological environment. It is the Government machinery
which brings out the suitable legislation so as to enable the business to follow. The stakeholders have the
opportunity to question the business firms in the legal environment in case their rights are impaired. The
business firms are to be ethical for the sustainability. The firms will make up their mind to adopt the
technology suited to their conditions. Precisely, the business firms take attempts to keep the stakeholders
satisfied.
The Industrial policy will helps the business to carry out their business within the framework.
Competition act to provide, keeping in view of economic development of the country. The Act contains both
criminal and civil provisions aimed of providing anti-competitive practice in the marketplace.
Corporate Social responsibility is a form of international private business self-regulation which aims
to social goals of a philanthropic, activist or charitable nature by engaging in or supporting volunteering or
ethically oriented practices.
As you are aware that, Corporate Governance is the cornerstone of any good business, it encompasses
the process, practices and policies that a company relies on to make final decisions and to manage the
company.
As a student of [Link] First Semester, you have the opportunity to study “Business Policy and
Environment”. The said study materials relating is designed by the Facility members of the Department. Feel
free to write to the Department so as to enable us to improve the quality of the self learning material.

With best wishes,

Truly Your’s

Dr. Mahesha V.
Chairman
 BLOCK-I
INTRODUCTION
Business is considered to be a product of environment. Environment implies everything that is
external to the organisation. Environment is what is outside the organisation and it is something that
surrounds an enterprise. It is the sum total of internal and external factors within which enterprise operates.
This block analyses the various environmental factors that influence the business.

This block consist 4 Units:

Unit 1: Business Environment.

Unit 2: Types of Business Environment.
Unit 3: Economic Environment.
Unit 4: Liberalization and Globalization.
 BLOCK-I

Unit-1 BUSINESS ENVIRONMENT

Structure:
1.0 Objectives

1.1 Introduction

1.2 Meaning and Definitions of Business Environment

1.3 Nature of Business Environment

1.4 Scope of Business Environment

1.5 Importance of Business Environment

1.6 Objectives of Business Environment

1.7 Business and Community Stakeholders

1.8 Check Your Progress

1.9 Summary

1.10 Keywords

1.11 Questions for Self-Study

1.12 References

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1.0 OBJECTIVES

After studying this unit, you will be able to;

 Give the meaning and definitions of Business Environment.

 State the nature and scope of Business Environment.
 Highlight the importance of Business Environment.
 Discuss the objectives of Business Environment.
 Describe the Business and Community Stakeholders.
1.1 INTRODUCTION

As you know, the study of business environment in the context of government policy and
is to stimulate general management capability in higher level studies so that a holistic outlook of
industrial and business activities can be developed. You might have come across the facts that
industries and businesses face various kinds of pressures from customers, governments, vested
interest groups, societies and from employees group which influences to decide the course of
business activities. Because of various influences existed managers/decisions makers in business
will have to be very sensitive to act cordially without being rigid in their functions.

This type of attitude requires managers to be open minded and observe various issues that
shape the business course or movement. Perhaps you know that, for a business manager there is
no country border and they cannot have too much conservativeness. If change is the principle in
business, managers should be flexible and adopt broader view in shaping their business. To be
proactive and reactive, managers should develop an integrative out-look of business. You also
know that management principles clearly states that when managers move from lower level
management to higher level/top level management, their specialization reduces and
generalization increases and vice versa.

1.2 MEANING AND DEFINITONS OF BUSIENSS ENVIRONMENT

Let us discuss the meaning and definitions of business environment. It refers to all
external forces which have a bearing on the functioning of the business.
According to Barry M. Richman and Melvgn Copen “Environment consists of factors that
are largely if not totally, external and beyond the control of individual industrial enterprise and

2
their managements. These are essentially the „givers‟ within which firms and their management
must operate in a specific country and they vary, often greatly, from country to country”.
According to William F. Glucck defines business environment “as the process by which
strategists monitor the economic, governmental, market, supplier, technological, geographic, and
social settings to determine opportunities and threats to their firms.
From the above definitions we can extract that business environment consists of factors that are
internal and external which poses threats to a firm or these provide opportunities for exploitation.
There are two more factors which are not included in definition and which exercise
considerable influence on business. They are physical or natural environment and global
environment. Therefore, we will study the following environmental factors one by one.
• Global Environment

• Natural Environment

• Political – Legal Environment

• Economic Environment

• Socio-Economic Environment

• Technological Environment

1.3 NATURE OF BUSINESS ENVIRONMENT

In this section, we will discuss the nature of business environment; business may be
understood as the organised efforts of enterprises to supply consumers with goods and services
for a profit.

Complex:

Environment consists of number of factors, events, conditions arising from different sources
which impact business thus making the business complex.

Interdependence:

Factors affecting business environment like social, economic, legal, cultural etc. are inter
dependent.

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Dynamic:

Business Environment is dynamic as it keeps on changing in terms of technological

improvement, changes in consumer preferences, entry of new competitors and others related
factors.

Uncertainty:

Business Environment is largely uncertain as it is very difficult to predict future happenings.

Relatively:

Business Environment is a relative concept as it differs from country to country and region.

E.g. Demand of sarees is high in India compared to other countries.

Specific and General forces:

Specific forces affects individual enterprises directly and immediately whereas general forces
have impact on all business enterprises.

Forecasting is not possible for all developments:

Many developments such as interest rate fluctuations, the rate of inflation etc. are difficult to
forecast.

1.4 SCOPE OF BUSINESS ENVIRONMENT

Business is an integral part of modern society. It is an organized and systematic activity for
earning profit. It is concerned with activities of people working towards a common economic
goal. Modern society cannot exist without business. The scope of business can be described as
follows:

 Business improves the standard of living of the people by providing better quality and
large variety of goods and services at the right time and at the right place.
 It provides opportunities to work and earn a livelihood. Thus, it generates employment in
the country, which in turn reduces poverty.

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  It utilizes the scares resources of the nation and facilitates mass production of goods and
services.
 It improves national image by producing and exporting quality goods and services to
foreign countries. By participating in international trade fairs and exhibition it also
demonstrates the progress and achievements of its own country to the outside world.
 It gives better return to the investors on their capital investment and also provides
opportunities to grow and expand the business.
 It enables the people of a country to use quality goods of international standard. This is
possible by way of improving goods from foreign countries or by producing quality
goods in the country by applying modern methods of production.
 It promotes social interest by providing tourist services, sponsoring cultural
programmers, trade shows etc. in the country, which enable people of different parts of
the country to exchange their culture, traditions and practices. Thus, it promotes national
integration.
 It also facilitates exchange of culture among the people of different nations and thus,
maintains international harmony and peace.
 It helps in the development of science and technology. It spends large amount of money
on research and development in search of new products and services. Hence, a number of
innovative products and services are developed through industrial research.

1.5 IMPORTANCE OF BUSINESS ENVIRONMENT

There is a close and continuous interaction between the business and environment. This
interaction helps in strengthening the business firm and using its resources more effectively.
Business environment is multi-faceted, complex and dynamic in nature and has a far reaching
impact on the survival and growth of the business. The proper understanding of the social,
political and economic environment helps the business in the following ways:

a. Determining opportunities and threats: The interaction between the business and its
environment would identify opportunities for and threats to the business. It helps the business for
meeting the challenges successfully.

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b. Gives direction for growth: The interaction with the environment leads to open up new
frontiers of growth for the business firms. It enables the business to identify areas for growth and
expansion of their business.

c. Continuous learning: Environmental analysis makes the task of managers easier in dealing
with business challenges. The managers are motivated to continuously update their knowledge,
understanding and skills to meet the predicted changes in the realm of business.

d. Image building: Environmental understanding helps the business organizations in improving

their image by showing their sensitivity to the environment within which they are working.

e. Competition: It helps the firms to analyse the competitor‟s strategies and formulate their own
strategies accordingly.

f. Identifying strengths and weaknesses: Business environment helps to identify the individual
strengths and weaknesses in view of the technological and global developments.

1.6 OBJECTIVES OF BUSINESS ENVIRONMENT

All the business activities are performed with some objectives. The objectives of business
may be classified as follows:-

ECONOMIC OBJECTIVES:

Economic objectives of business refer to the objective of earning profit and also other objectives
that are necessary to be pursued to achieve the profit, which includes creation of customers,
regular innovations and best possible use of available resources.

Profit Earning: Profit is the lifeblood of business, without which no business can survive in a
competitive market. Thus, profit making is the primary objective for which a business unit is
brought into existence. Profits help businessmen not only to earn their living but also to expand
their business activities by reinvesting a part of the profits. In order to achieve this primary
objective, certain other objectives are also necessary to be pursued by business, which are as
follows:

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Creation of customers: A business unit cannot survive unless there are customers to buy the
products and services. Again a businessman can earn profits only when he/she provides quality
goods and services at a reasonable price. For this, it needs to attract more customers for its
existing as well as new products. This is achieved with the help of various marketing activities.

Continuous innovations: Business is highly dynamic and an enterprise can continue to be

successful only by adopting itself to change in its environment. Innovation means changes,
which bring about improvement in products, process of production and distribution of goods.
Reduction in cost and increase in sales gives more profit to the businessmen.

Best possible use of resources: As you know, to run any business you must have sufficient
capital or funds. The amount of capital may be used to buy machinery and raw materials, to
employ men and have cash to meet day to day expenses. Thus, business activities require various
resources like men, materials, money and machines. This objective can be achieved by
employing efficient workers, making full use of machines and minimizing wastage of raw
materials.

SOCIAL OBJECTIVES:

Social objectives are those objectives of business, which are desired to be achieved for the
benefit of the society. No activity of the business should be aimed at giving any kind of trouble
to the society. Social objectives of business include production and supply of quality goods and
services, adoption of fair trade practices and contribution to the general welfare of society and
provision of welfare amenities.

Production and supply of quality goods and services: Since the business utilizes the various
resources of the society, the society expects to get quality goods and services from the business.
The objectives of business should be to produce better quality goods and supply them at the right
time and at a right price. They should charge the price according to the quality of the goods and
services provided to the society.

Contribution to the general welfare of the society: Business unity should work for the general
welfare and upliftment of the society. This is possible through running of schools and colleges
for better education, opening of vocational training centers to train the people to earn their

7
livelihood, establishing hospitals for medical facilities and providing recreational facilities for
the general public like parts, sports complexes, etc.

Self-sufficiency and export promotion: To help the country to become self -reliant, business
units have the added responsibility of restricting import of goods. Besides, every business unit
should aim at increasing exports and adding to the foreign exchange reserves of the country.

GLOBAL OBJECTIVES:

Earlier, India had a very restricted business relationship with other nations. There was a very
rigid policy for import and export of goods and services. But, now-a-days due to the liberal
economic and export –import policy, restrictions on foreign investments have been largely
abolished and duties on imported goods have been substantially reduced. This change has bought
about increased competition in the market. Today, because of globalization the entire world has
become a big market. Goods produced in one country are readily available in other countries. So,
to face the competition in the global market every business has certain objectives in mind, which
may be called as global objectives.

(i) Raise general standard of living: Growth of business activities across national borders
makes available quality goods at reasonable prices all over the world. The people of one
country get to use similar types of goods that people in other countries are using. This
improves the standard of living of people.
(ii) Reduce disparities among nations: Business should help to reduce disparities among the
rich and poor nations of the world by expanding its operation. By way of capital
investment in developing as well as underdeveloped countries, it can foster their industrial
and economic growth.
(iii) Make available globally competitive goods and services: Business should produce
goods and services which are globally competitive and have huge demand in foreign
markets. This will improve the image of the exporting country and also earn more foreign
exchange for the country.

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1.7 BUSINESS AND COMMUNITY STAKEHOLDERS

Every nation in the world has social system based on language i.e. national and regional,
religion, culture, values and attitudes, customs etc. to signify the social system. To signify the
social system, often the word community stakeholder is also used in the literature of
stakeholder‟s management and business ethics.

The word community indicates immediate Locale - the town city or state in which a
business resides.
Nexus of Business and its community stakeholders involves two major kinds of relationships.

1. The positive contribution, business can make to the community. This include volunteerism
that is the resourcefulness and responsiveness of business to communities in need of
increasing services.

Example: In India many Public and Private sector Managing Directors, Managers and
Executives are related with one or the other nongovernmental organizations (NGO) as
members volunteering towards social problems of addressing serious community
problems. Similarly business units are also contributing for support programmes in
education culture, urban development civic activities, health and welfare endeavors.
2. A business and industrial unit can also cause harm to community stakeholders by
polluting environment; put people in unemployment by closing a plant or unit. It can also
abuse its power by exploiting consumers and ill-treating employees.
An argument for increased community involvement is made by chairman and Chief
Executive Officer (CEO) of Deloitte and Touch J. Michael Cook.
"We have an absolutely enormous stake in the communities where our people live and work”. If
we have good educational systems, good safety, and good activity programs for young people we
are going to be much more effective in attracting and retaining quality people.
So, business is not only for a healthier society, but also for its own well-being and be
willing to give the same serious consideration to human needs that it gives to its own needs for
production and profits.
Former president of Norton Company-Robert Bushman, specifies six reasons for business
involvement in the community (you may call it as corporate public relations).

9
They are as follows:

1. Business people are efficient problem solvers.

2. Employees gain satisfaction and improved morale from involvement in community
programs.
3. A positive image in community, facilitates hiring.
4. Social responsibility in business is the alternative to government regulation.
5. A company gains prestige and greater acceptance in a community when it gets
actively involved in solving or addressing community problems.
6. Business helps itself by supporting those institutions that are essential to the
Continuation of business.
In fact companies gain by involving in community services. If the employees of the
company especially CEO, managers etc. volunteer in community services, it benefits to the
company is mentioned below:

1. Indirect community benefits:

Creation of healthier communities
Improved corporate public image
Enhanced impact of monetary contributions

2. Employees benefits:
Building of teamwork skills
Improved morale
Attraction of better employees
3. Bottom-line benefits:
Facilitation of attainment of strategic corporate goals
Increased employee productivity
Positive impacts on company productivity
Increased stress on social concern on the part of business units is also due to increasing
competitive global environment pressurizing for brightened community service activities.

10
 In US, the greatest threat perceived by Colin Powell, Secretary of State is "the young
people who are disengaged from American life, who do not believe in the American dream that
the young people without viable job prospects are great threat to the United States”. You may
note from aforesaid discussion that why corporate public relations is increasing in India. This
corporate PR has roots in United States influencing Indian society both through NRI in United
States and MNC from United States.
Commitments made by some American companies to address their Local American
community problems.

Bank of America : Employees are contributing 1.3 million hours of volunteer

service.
Morgan Stanley Dean Witter : It involves in teaching literary to children and after school
business clubs focusing on the stock market, career
planning and college readiness.
Star wood Hotels and Resorts: Launched star care for the community, which encourages
employees to volunteer at least eight hours each year.
VHI : VHI save the music foundation and has committed to restore
public school music education to one Million children by
2007.
Survey made by business world-India (July 1999) on most respected companies in India
indicates among top 25 most respected companies, 68% are Indian companies 4% public sector
companies and 28% MNC who have adopted community and environment all responsibility.
Responsibilities undertaken include the following proactive care of marginalized,
underprivileged and the poor.

To name few companies

Satyam, NIT Infosys TATA, Godrej, Bajaj, Hindustan Lever Limited. Mahindra, Hero
Honda, Glaxo-India. Ranbaxy ITC, Digaeo, P&G Levistrauss and company.

Indian Instance:

Bhoruka group of companies in India has formed Bhoruka Charitable Trust (BCT) which
is actively involved in rural development in 300 villages of Rajgarh block in churn district of

11
Rajasthan. India Geo-climate conditions of this region are harsh and hostile (than desert) scanty
rainfall (i.e., 325-380 mm annually) temperature varying winter 3oc and 50oc in summer.
Underwater being saline with high fluoride content Pabhu Dayal son Dr Ashok Agarwal is
managing the trust activities. The trust is running dispensary with ten bedded hospital with O.T.,
X-Ray and lab as well as blood bank facilities.

The trust also undertakes laying road, ensuing availability of safe drinking water through
provision of hand pumps kinds, and well.

The trust also provides drinking water to villages during the summation of drought and
water shortages.

The trust runs public school in Bhorugram, building class rooms in villages and also
sponsors teachers to teach in Government schools. In fact, the trust is attempting to provide
premium education to villagers.

1.8 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. ______is an integral part of modern society.

2. A business organization does not exist in a ______.

3. Environmental analysis makes the ______.

4. ______is the lifeblood of business.

5. ______ in business is the alternative to government regulation.

Answer to Check Your Progress

1. Business
2. Vacuum
3. Task of managers
4. Profit
5. Social responsibility

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1.9 SUMMARY

As observed in broad manner, the business typically refers to the growth and handling of
economic values in society. The scope of business is very wide. It should not be jumbled with
trade. 'Trade' simply denotes purchase and sale of goods, whereas 'business' includes all activities
from production to distribution of goods and services. It holds industry, trade and other activities
like banking, transport, insurance, and warehousing which help production and supply of goods
and services.

All of us are clearly understand the meaning and definitions, nature and scope of
business, every business is having importance like determining opportunities and threats, gives
direction for growth, continuous learning, image building, competition and identifying strengths
and weaknesses. Also learned about the objectives of business are economic objectives, social
objectives, and global objectives. Finally the unit is ended with role of business and community
stakeholders in day to day business.

1.10 KEY WORDS

Monetary : Related to money

Image : A mental picture

Disparity : Lack of similarity

Volunteerism : The practice of doing work for good causes

Facilitation : Making something happen

1.11 QUESTIONS FOR SELF STUDY

1. Define the meaning and definitions of business environment?

2. Explain the nature and scope of business environment.

3. Discuss the importance of business environment.

4. Give an account of objectives of business environment.

5. Describe the business and community stakeholders.

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1.12 REFERENCES

1. Francis Cherunilam, (2019), Business Environment, Himalaya Publishing House.

2. Ian Worthington and Chris Britton, (2018), Business Environment, Pearson Education
Limited.
3. Justin Paul,(2017), Business Envirnoment, Tata MC Graw Hill, New Delhi.
4. Faisal Ahmed, Absar Man. M, (2017), Business Environment : Indian and Global
Perspectives, Prentice Hall of India.
5. Veena Keshav pailwar, (2016) Business Environment, Prentice Hall of India Private
Limited.
6. Jain T.R, Mukesh Trehan, Ranju Trehan, (2016), Business Environment, VK Global
publications.

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Unit-2 TYPES OF BUSINESS ENVIRONMENT

Structure:

2.0 Objectives

2.1 Introduction

2.2 Types of Business Environment

2.3 Internal Environment

2.4 External Environment

2.4.1 Micro Environment

2.4.2 Macro Environment

2.5 Environmental Scanning

2.6 Methods and Techniques of Environmental Scanning

2.7 Check Your Progress

2.8 Summary

2.9 Keywords

2.10 Questions for Self-Study

2.11 References

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2.0 OBJECTIVES

After studying this unit, you will be able to;

 List out the types of Business Environment.
 Explain the Internal and External Environment.
 Delineate the Micro and Macro Environment.
 Describe the Environmental Scanning.
 Analyze the Methods and Techniques of Environmental Scanning.

2.1 INTRODUCTION
Perhaps we have studied in the last unit about meaning and definitions, nature, scope,
importance of business environment and community stakeholders, now we will discuss on types
of Business environment. Business Environment consists of all those factors that have a bearing
on the business, Internal and External Environment and also Environmental scanning.

The formula for business success requires two elements – the individual and the
environment. Business environment consist of all those factors that have a bearing on the
business. The term business environment implies those external forces that are beyond the
control of individual business organizations. It implies all external forces within which a
business enterprise operates. Business environment may be defined as all those conditions and
forces which are external to the business and are beyond the individual business unit, but it
operates within it. Some of those forces affect the business directly which some others have
indirect effect on the business.

2.2 TYPES OF BUSINESS ENVIRONMENT

The environmental factors may be classified into different types. There are, broadly, two
types of environment, the internal environment, i.e., factors internal to the firm and external
environment, i.e., factors external to the firm.

The internal factors are generally regarded as controllable factors because the company
has control over these factors; it can alter or modify such factors as its personnel, physical
facilities, organization and functional means, such as marketing mix, to suit the environment.

16
 The external factors, on the other hand, are, by and large, beyond the control of a
company. The external environmental factors such as the economic factors, socio-cultural
factors, government and legal factors, demographic factors, geo-physical factors etc., are,
therefore generally regarded as uncontrollable factors.

Some of the external factors have a direct and intimate impact on the firm (like the
Suppliers and distributors of the firm). These factors are classified as micro environment, there
are other external factors which affect an industry very generally (such as industrial policy,
demographic factors etc.). They constitute the macro environment. The following chart shows
the types of business environment:

BUSINESS ENVIRONEMENT

Internal Environment External Environment

Value System

Mission and objectives Micro Environment Macro Environment

Management Structure and Nature

Internal Power Relationship Suppliers Economic

Human Resources Customers Political

Company image and Brand Equity Competitors Social-cultural

Miscellaneous factors Market intermediaries Natural

Financiers Technological

Publics Global

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2.3 INTERNAL ENVIRONMENT

The important internal factors which have a bearing on the strategy and other decisions
are:

Value System

The value system of the founders and those at the helm of affairs has important bearing
on the choice of business, the mission and objectives of the organization, business policies and
practices. It is a widely acknowledged the fact that the extent to which the value system is
shared by all in the organization is an important factor contributing to success.

Mission and Objectives

The business domain of the company, priorities, direction of development, business

philosophy, business policy etc., are guided by the mission and objectives of the company.

Management Structure and Nature

The organizational structure, the composition of the Board of Directors, extent of

professionalization of management etc., are important factors influencing business decisions.
Some management structures and styles, delay decision making while some others facilitate
quick decision making.

The Board of Directors being the highest decision making body which sets the direction
for the development of the organization and which oversees the performance of the organization,
the quality of the Board is a very critical factor for the development and performance of
company. The Shareholding pattern could have important managerial implications. There are
some companies where majority of the share is held by the promoters and in case of some other
companies where the promoters‟ position is very vulnerable.

Internal Power Relationship

Factors like the amount of support the top management enjoys from different levels of
employees, shareholders and Board of Directors have important influence on the decisions and
their implementation in the organisation.

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 The relationship between the members of Board of Directors and between the chief
executive and other stakeholders in the organisation.

Human Resources

The characteristics of the human resources like skill, quality, morale, commitment,
attitude integrity, etc., could contribute to the strength and weakness of an organization. Some
organizations find it difficult to carry out restructuring or modernization because of resistance by
employees whereas they are smoothly done in some others.

The involvement, initiative etc., of people at different levels may vary from organization
to organization. The organizational cultural and overall environments have bearing on them.

Company Image and Brand Equity

The image of the company matters while raising finance, forming joint ventures or
other alliances, soliciting marketing intermediaries, entering purchase or sale contracts,
launching new products etc. Brand equity is also relevant in several of these cases.

Miscellaneous Factors

There are number of other internal factors which influence the business success/failures
or influence the decision making. They are:

1. Physical assets and facilities like the production capacity, technology and efficiency of
the productive apparatus, distribution logistics etc., are among the factors which influence
the competitiveness of a firm.
2. Research and Development and technological capabilities, among other things, determine
a company‟s ability to innovate and compete.
3. Financial factors like financial policies, financial position and capital structure are
also important internal environment affecting business performances, strategies and
decisions.

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2.4 EXTERNAL ENVIRONMENT
The external business environment consists of a micro environment and a macro
environment.

2.4.1 Micro Environment

“The micro environment consists of the factors in the immediate environment that affects
the performance of the company. These include the suppliers, marketing intermediaries,
competitors, customers and the public.”

Suppliers

It is one of the important forces in the micro environment of a company. The suppliers
are those who supply the inputs like raw materials and components to the company. The
importance of reliable source/sources of supply to the smooth functioning of the business is
obvious. Uncertainty regarding the supply or other supply constraints often compels companies
to maintain high inventories causing cost increases.

It is very risky to depend on a single supplier because a strike, lock out or any other
production problem with that supplier may seriously affect the company. Similarly, a change in
the attitude or behaviour of the supplier may also affect the company. Hence, multiple sources of
supply often help reduce such risks.

Customers

A business exists only because of its customers. Monitoring the customer sensitivity is,
therefore, a prerequisite for the business success. A company may have different categories of
consumers like individuals, households, industries, other commercial establishment government
and other institutions.

Depending on a single customer is often too risky because it may place the company in
a poor bargaining position, apart from the risks of losing business consequent to the winding
up of business by the customer or due to the customer‟s – switching over to the competitors of
the company.

20
 The choice of the customer segments should be made by considering a number of
factors including the relative profitability, dependability, stability of demand, growth prospects
and the extent of competition.

Competitors

Competitors play a vital role in running the business enterprise. Business has to adjust its
various business activities according to the behaviour of the competitors. Consequent to the
liberalization, the competitive environment in India has been undergoing a significant change.
Many companies have restructured their business portfolio and strategies according to the
competition.

Public

A company may encounter certain public in its environment. A public is any group that
has an actual or potential interest in or impact on an organizations ability to achieve its interests.
Media public, citizen‟s action and local public are the examples of public.

Media public can seriously affect any business. These can be used to publish useful
information but sometimes, media public can tarnish the image of the company also. Local
public can also affect the business of the enterprises. Environmental pollution is an issue often
taken up by a number of local public. But fruitful cooperation between a business and the local
public may be established for the mutual benefit of the company and the local community.

Marketing Intermediaries

The micro environment of a company may consist of a number of marketing

intermediaries which are “firms that aid the company in promoting, selling and distributing its
goods to final buyers”.

The marketing intermediaries include middlemen such as agents and merchants “who
help the company in finding customers or make sales to them”. Physical distribution firms which
“assist the company in stocking and moving goods from their origin to their destination” such
as warehouses and transportation firms. Marketing service agencies which “assist the company
in targeting and promoting its products to the right markets” such as advertising agencies,

21
marketing research firms, media firms and consulting firms. Financial intermediaries which
finance marketing activities and insure business risks.

Marketing intermediaries are vital links between the company and the final consumers. A
dislocation or disturbance of the link, or a wrong choice of the link, may cost the company very
heavily.

Financiers

Another important micro environmental factor is the financiers of the company. Besides
the financing capabilities, their policies and strategies, attitudes (including attitude towards risk),
ability to provide non-financial assistance etc., are very important.

2.4.2 Macro Environment

The macro environment consists of larger societal forces that affect all the actions in the
company‟s micro environment – namely, the demographic, economic, natural, technological,
political and cultural forces.

1. Economic environment

The survival and success of a business enterprise is finally decided by the economic
environment and various market conditions. The important external factors that affect the
economic environment of a business are:

a. Economic conditions:

Business cycle and growth of the economy are important factors defining the economic
environment. The stage of economic development decides the size of the local or domestic
market and its dynamism effects on the business.

b. Economic policies:

The government decides the economic environment of business through the following;

* Budgets

* Industrial regulations

22
* Economic planning

* Import and export regulations

* Business laws

* Industrial policies, etc.

Various laws such as Factories Act, Industrial Disputes Act, and Companies Act etc.,
framed by the central government, state government and local bodies to regulate the business
also form part of the economic environment of business.

c. Economic System:

The economic system existing in the country also affects the business enterprise to a very
great extent. The economic system of a country may be:

(i) Free enterprise i.e. capitalist

(ii) Socialist

(iii) Communist or Mixed

2. Political and Government environment

Political environment refers to the influence exerted by the three political institutions:

(i) Legislature

(ii) Executive

(iii) Judiciary

The legislature decides on a particular course of action. Government is the executive and
its job is to implement whatever was decided by parliament. The judiciary has to ensure that both
the legislature and executive function in public interest and within the boundaries of constitution.

23
 Legal and political environment provides a framework within which the business is to
function and its existence depends on the success with which it can face the various challenges
constructed out of political and legal framework.

The overall success of the business will depend upon the political stability in the country.
There are some factors which may cause political instability e.g.

(i) Civil war

(ii) Declaration of emergency in the country

(iii) Changes in the form or Structure of Administration of Government

3. Socio-Cultural environment

The sociological and cultural factors have a considerable influence on non-economic

environment of the business. Culture consists of the cultivated behaviour of individuals within a
society. Socio-cultural environment refers to the influence exercised by certain factors which are
beyond the company‟s gate. Such factors include:

(i) People‟s attitude to work and health

(ii) Role of family
(iii) Marriage
(iv) Religion and education
(v) Ethical issues
(vi) Social responsibility of business

Social class and caste of a person go a long way in deciding the business activities in
relation to its production and marketing activities. Traditions, customs and social attitudes have
changed the attitudes and beliefs of the persons which have their effect on business environment.
From the marketing point of view both the caste and class structure are relevant because both of
them influence purchasing pattern.

While dealing with the social environment, we must consider the social environment of
the business which encompasses it‟s social responsibility and the alertness or vigilance of the
consumers and of society at large.

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4. Natural environment

Natural environment includes geographical and ecological factors. Both these factors are
relevant to business. These factors include the following:

(i) Natural resources endowments

(ii) Weather and climate conditions Topographical factors

(iv) Location aspects

(v) Port facilities etc.

Almost every aspect of business depends upon natural environment. For example:

(i) Manufacturing depends on physical inputs.

(ii) Mining and drilling depend on natural deposits.

(iii) Agriculture depends on nature.

(iv) Trade between two regions depends on geographical factors.

Transport and communication depends on geographical factors.

Difference in geographical conditions between markets may sometimes call for changes in the
marketing mix.

(vii) Geographical and ecological factors influence the location of certain industries.

(viii) Topographical factors may affect the demand pattern e.g. in hilly areas with a difficult
terrain, Maruti Gypsy may be in greater demand than a Maruti car.

Ecological factors have recently assumed great importance. Government policies aimed
at the preservation of environmental purity and ecological balance, conservation of non-
replenishable resources, etc., have resulted in additional responsibilities and problems for
business and some of these will increase the cost of production and marketing.

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5. Demographic environment

Demographic factors include:

(i) Size, growth rate, age composition, sex composition etc. of population.

(ii) Family size.

(iii) Economic stratification of population.

(iv) Educational level.

(v) Caste, religion etc.

All these demographic factors are relevant to business. These factors affect the demand
for goods and services. Growing population and increasing income are the main factors for the
growth of market because a rapidly increasing population indicates a growing demand for many
products.

High population growth rate indicates an enormous increase in labour supply. Cheap
labour and growing markets have encouraged many multinationals to invest in developing
countries.

If labour is easily available between different occupations and regions, its supply will be
relatively smooth and this will affect the wage rate.

Personnel management will become a very complex task if labour is highly

heterogeneous in respect of language, caste and religion, etc.

Population with varied tastes, preferences, beliefs, temperaments, etc.,. gives rise to
differing demand patterns and calls for different marketing strategies.

6. Technological environment

In order to survive in today‟s competitive world a business has to adopt technological

changes from time to time. Constant innovation is essential because the purpose of every
business is to create a customer, and therefore every business enterprise has two basic functions
i.e.

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 (a) Marketing and

(b) Innovation

In technological environment, the product or service remains the same but the method of
performing the function is always new.

Technological environment also includes research base of decisions. Research identifies

the consumer needs and provides information for target setting and programming the complete
marketing effort.

One of the ways in which product innovation may be stimulated is by the establishment
of research and development department in the enterprise. The research and development are
now directed into computer, sales energy, material science & laser technology.

The fast changes in technology also create problems for enterprises as these render plants
and products obsolete quickly. Product market technology matrix has a much shorter life today
than in the past. A firm which is unable to cope with the technological changes may not survive.

7. International environment

Another environmental factor which is fast emerging as the force to reckon with is the
international environment. Implications of global or international environment are as follows:

(i) Due to liberalisation, Indian companies are forced to view business issues from the global

Perspective.

(ii) Safe and protected markets are no longer there. World is becoming small in size due to
advanced means of transport and communication facilities.

(iii) Learning of foreign languages is a must for every business manager.

(iv) Acquiring familiarity with foreign currencies is also a must.

(v) Facing political and legal uncertainties is inevitable.

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(vi) To survive amidst intense competition every businessman should try to adapt his products
to different customer needs and tastes.

(Vii) Mobilisation of resources, particularly financial is an essential starting point in the

process of international environment. In order to mobilise public savings many Indian
Companies are issuing new shares in the international market.

2.5 ENVIRONMENTAL SCANNING

Environmental scanning is one essential component of the global environmental analysis.

Environmental monitoring, environmental forecasting and environmental assessment complete
the global environmental analysis. The global environment refers to the macro environment
which comprises industries, markets, companies, clients and competitors. Consequently, there
exist corresponding analyses on the micro-level. Suppliers, customers and competitors
representing the micro environment of a company are analysed within the industry analysis.

Environmental scanning can be defined as „the study and interpretation of the political,
economic, social and technological events and trends which influence a business, an industry or
even a total market‟. The factors which need to be considered for environmental scanning are
events, trends, issues and expectations of the different interest groups. Issues are often
forerunners of trend breaks. A trend break could be a value shift in society, a technological
innovation that might be permanent or a paradigm change. Issues are less deep-seated and can be
a temporary short-lived reaction to a social phenomenon. A trend can be defined as an
environmental phenomenon that has adopted a structural character.

2.6 METHODS AND TECHNIQUES OF ENVIRONMENTAL SCANNING

It involves two phase: Information gathering and Evaluation

1. Verbal Information: It includes, information obtained by direct talk with people, by

attending seminars, meeting, etc. The verbal information is significant in several other situations.
The situation might have changed after the documentation of the information, necessitating
personally contacting knowledgeable people to get the latest information. Personal contacts will
be helpful in getting more details of the written information. Personal contacts will also be useful
in obtaining diverse views of different people.

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There are indeed many matters on which written information is non – existent or scanty; these
highlight the importance of verbal information in environmental analysis.

While using written information, several factors such as the purpose for which it was prepared,
the methodology used for collection of the information, reliability of the sources of information,
the ideology/orientation of the individual/organization that prepared the information etc. need to
be evaluated. Such cautions should also be exercised while going in for verbal information.

Sources of verbal information also include electronic media, seminars, workshops etc.

2. Search and Scanning: This involves research for obtaining the required information. Search
and scanning are, therefore, needed, many a time, to identify the sources of information and to
manage the timely availability of the required information.

A number of organizations have clippings service which constantly scans newspapers,

periodicals etc. and prepare clippings containing information required by different
departments/executives of the organization.

Many organizations have management information system for systematic gathering, processing,
storing and disseminating information. An MIS is generally regarded as very useful.

3. Spying: Even though it is not considered as ethical, spying to get information about the
competitor is not uncommon.

4. Techniques of environmental forecasting:–

a) Econometric techniques: It involve casual models to predict major economic indicators.

When there is a well-established relationship between two or more variable, that causal
relationship can be used to forecast the future. The econometric models may “Utilise complex
simultaneous regression equations to relate economic occurrences in the areas of corporate
activity. They are especially useful when information is available on casual relationships and
when large changes are anticipated”. The most commonly used econometric environmental
forecasting techniques are multiple regression analysis and time series regression models.

29
b) Trend Extrapolation: Time series models assume that the past is a prologue to the future and
extrapolate the historical data to the future. The technique may use simple linear relationship or
more complex non – linear relationships to forecast trends.

c) Scenario Development: It is a techniques used to forecast the occurrence of complex

environmental events. It is particularly useful for forecasting events in which many variables
play a role. A scenario is a detailed description of how certain events may occur in the future and
their consequences for the organization.

d) Judgment Models: It involve the use of opinion of people who have intimate knowledge
relevant factors. For example, sales force opinion of the sales potential, competitive challenges
customer behaviour, etc. Another method is juries‟ executive opinions which “combine
estimating made by executives from marketing, production, finance, and purchasing and then
average their views.

e) Brain Storming: Is a creative method of generating ideas and forecasts. Under this method a
group of knowledgeable people are encouraged to generate ideas, discuss them and to make
forecasts on the basis of that. Brain storming is a popular technique of technological forecasting.

f) Delphi Method: Which is also a common technique for technological forecasting is a more
systematic technique than brain storming. This method uses a panel of experts on the subject
from whom opinions are gathered, may be by using semi- structured questionnaire and / or
interview. The opinions of the experts are documented and consolidated and circulated among
the panel members, preferable anonymously, for their evaluation and comments. The experts are
requested to review their opinion in the light of the feedback. This process may be continued
until a consensus view is arrived at.

2.7 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. Board of Directors being the______ decision making body.

2. Micro environment of a company may consist of a number of ______.

3. ______ decides on a particular course of action.

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4. Environmental scanning is one essential component of the ______.

5. ______ is significant in several other situations.

Answer to Check Your Progress

1. Highest
2. Marketing intermediaries
3. Legislature
4. Global environmental analysis
5. verbal information

2.8 SUMMARY

As you know we had discussed the issues relating to types of business environment. The
environmental factors may be classified into internal environment and external environment. The
internal environment is the environment that has a direct impact on the business. The important
internal factors which have a bearing on the strategy and other decisions of internal organization
are value system, mission and vision and objectives. External environment refers to the
environment that has an indirect influence on the business. The factors are uncontrollable by the
business.

There are two types of external environment – micro environment and macro
environment. The micro environment is also known as the task environment and operating
environment because the micro environment forces have a direct bearing on the operations of the
firm. The micro environmental factors are suppliers, customers, marketing intermediaries,
financiers and public. Macro environment is also known as general environment and remote
environment. Environmental scanning is one essential component of the global environmental
analysis. Environmental monitoring, environmental forecasting and environmental assessment
complete the global environmental analysis.

Environmental scanning is identification of strength, weakness, opportunities, threat,

optimum use of resources, survival growth, to plan long term business strategy and
environmental scanning aids decision making.

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2.9 KEY WORDS
Financiers : Those who supply funds.

Suppliers : Those who supply raw material / goods.

External factors : The factors which are beyond the control of a company.

Internal factors : The factors on which a company has got control and which have
a bearing on the strategy and other business decisions.

Micro environment : The external factors which have a direct and intimate impact on
the firm.

Macro environment : The external factors which affect an industry very generally.

2.10 QUESTIONS FOR SELF STUDY

1. Explain the various types of business environment.

2. Discuss the external environmental factors affecting to business.

3. List out the internal factors influencing business.

4. What is environmental scanning? Explain the different methods of environmental Scanning.

5. Discuss the techniques of environmental scanning.

2.11 REFERENCES

1. Aswathappa K, (2019), Essentials of Business Environment, Himalaya Publishing House,

New Delhi
2. Francis Cherunilum, (2019) Business Environment, Himalaya Publication, New Delhi.
3. Agarwal Raj and Diwanparag, (2018) Business Environment, Excel Books, New Delhi.
4. Justin Paul,( 2017), Business Environment,Tata McGraw Hill, Mumbai.
5. Ruddardatt, (2016), Indian Economy, S. Chand and Co, Ltd, New Delhi.
6. Biswanath Ghosh. (2016) Economic Environment of Business, Vikas Publication Pvt. Ltd,
New Delhi.
7. Shaikh and Saleem, (2015), Business Environment, Pearson education, New Delhi.

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Unit-3 ECONOMIC ENVIRONMENT

Structure:

3.0 Objectives

3.1 Introduction

3.2 Meaning and Definitions of Economic Environment

3.3 Nature of Economic Environment

3.4 Economic Factors

3.5 NITI Aayog

3.6 Claims and Counter Claims of Economic Environment

3.7 Agenda for Future

3.8 Make in India

3.9 Check Your Progress

3.10 Summary

3.11 Keywords

3.12 Questions for Self-Study

3.13 References

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3.0 OBJECTIVES

After studying this unit, you will be able to;

 Explain the Meaning and Definitions of Economic Environment.
 Delineate the Nature and Economic Factors of Economic Environment.
 Give an account of the NITI Aayog.
 Analyze the Claims and Counter Claims of Economic Environment.
 List out the Agenda for Future.
 Explain the concept of Make in India.

3.1 INTRODUCTION

Perhaps, you might have studied and aware of the diversity concept. You might have
heard or read the concept of Economic environment. Business depends on the economic
environment for all the needed inputs and to sell the finished goods. Business fortunes and
strategies are influenced by the economic characteristics and economic policy dimensions. The
factors of economic environment includes nature and structure on the economy, the stages
relating to the economic development, standard of living, economic resources, income and asset
distribution, economic linkage with global environment and so on. Economic system of country
provides its broadest economic environment.

3.2 MEANING AND DEFINITIONS OF ECONOMIC ENVIRONMENT

You probably know that business depends on economic environment, it refers to all those
economic factors which have a bearing on the functioning of a business unit. Business depends
on the economic environment for all the needed inputs. It also depends on the economic
environment to sell the finished goods. Naturally, the dependence of business on the economic
environment is total and it is not surprising because, as it is rightly said, business is one unit of
the total economy.

The survival and success of each and every business enterprise depends fully on its
economic environment.

The economic environment refers to all the economic factors that affect commercial and
consumer behaviour. The economic environment consists of all the external factors in the

34
immediate marketplace and the broader economy. These factors can influence a business, i.e.,
how it operates and how successful it might become.

The economic environment consists of different things for different people. For example,
for a farmer, the weather and price of fertilizers are important factors. For a TV channel on the
other hand, the growth in Internet advertising matters a great deal, but not the weather. Internet
advertising matters to a TV station because the Internet competes for advertising business. For a
farmer, however, advertising media is not important.

The Business Development Bank of Canada has defined “the term economic environment as all
the external economic factors that influence buying habits of consumers and businesses and
therefore affect the performance of a company.” “These factors are often beyond a company‟s
control, and may be either large-scale (macro) or small-scale (micro).”

3.3 NATURE OF ECONOMIC ENVIRONMENT

Economic environment refers to all those economic factors which have a bearing on the
functioning of business unit.

Business depends on the economic environment for all the needed inputs. It also depends
on the economic environment to market the finished goods. Naturally, the dependence of
business on the economic environment is total and it is not surprising, as it is rightly said,
business is one unit of the total economy.

The importance of an economic environment is reinforced by the fact that more and more
economists are finding place in industrial establishments. Dr. Pendse was the economic advisor
to the Tata‟s for a long time. Richard Freedom is the chief Economist of ICI, an American
company. These two are not isolated instances. There is the society Business Economists in
England, whose membership now is more than 600. All these members are employed in different
originations, if not as economists, but in planning, marketing or finance areas. Thus, trained
economists supplying macroeconomic forecasts and research are found in major companies in
manufacturing, commerce and finance departments.

35
3.4 ECONOMIC FACTORS

It is difficult to be precise about the factors which constitute the economic environment
of a country. It is equally difficult to draw the lines of distinction between the political
environment and the technological environment. The type of monetary policy, dear money policy
or cheap money policy that the government wants to pursue may be partly political and partly
economic. Again, importing a particular technology may be political, economic or both. It was
for this reason that we said in the beginning of this book that all these environmental factors of
business are closely interdependent.

Coming to the economic environment, the following factors are considered for our
purpose which constitute the economic environment of business. We are not confining ourselves
to pure economic principles such as the law of demand and supply, marginal utility and the like.
The following are the major macro and micro economic factors which have considerable
influence on business. They are:

 Growth strategy
 Economic systems
 Economic planning
 Industry
 Agriculture
 Infrastructure
 Financial and fiscal sectors
 Removal of regional imbalances
 Price and distribution controls
 Economic reforms
 Human development
 Per capital and national incomes etc.,

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3.5 NITI AAYOG

Before the 12th plan is fully implemented, major reorganize has taken place. A new
government assumed power at the Centre, replacing decade-old UPA government. The new
NDA government abolished the Planning Commission leaving the 50 year old planning system
totally shattered. What happens to the system of planning is not clear.

In place of the Planning Commission, the NDA government has constituted NITI Aayog.
(National Institution for Transforming India) The government listed seven principles for the new
body. They are

(1) Prioritizing service,

(2) Uplift of the poor,
(3) Marginalized inclusion of the vulnerable and marginalized sections,
(4) Redressing identity based inequalities integrating villages into the development
process harnessing India‟s demographic dividend through education
(5) Skilling people‟s participation in the developmental process,
(6) Nurturing an open and accountable style of governance,
(7) Sustainability at the core of the planning and developmental process.
The government released an e-book that spells out the structure and functioning of the NITI
Aayog.

The e-book says the Aayog will house a number of specialized wings. A research wing
will develop in house sectoral expertise as a dedicated think tank of domain experts, specialists
and scholars, a consultancy wing will provide a marketplace of whetted panels of expertise and
funding for central and state governments to tap into and a team India wing will comprise
representatives from every state and ministry to serve as permanent platform for national
collaboration.

NITI Aayog will function in close cooperation, consultation and coordination with the
ministries of the central and state governments. While it will make recommendations to the
central and state governments, the responsibility for taking and implementing decisions will rest
with them.

37
 It also says cooperative and competitive federalism, decentralized planning; evolving a
share vision of national development priorities and designing medium and long–term strategic
frame works of the big picture vision of India‟s future across schemes, sectors, regions and time
will be the key objectives of the Aayog.
The NITI is meant to reflect changes required in India‟s governance structures and
provide a more active role for the state governments in achieving national objectives.
In its existence of four plans years, NITI Aayog has been praised and is being criticized
also. Initiatives like Ayushmaan Bharat, water conservation measures, and approach to artificial
intelligence are the creation of NITI Aayog.
It has been criticized as being teethless glorious body having no role in influencing public
or private investment. It has no influence in policy making. It is a mere advisory body unlike the
erstwhile body which had the powers of a commission.
3.6 CLAIMS AND COUNTER CLAIMS

There have been claims and counter claims about the outcome. Official agencies claim
that huge investments produced positive results. But there claims are not acceptable to the
economists, intellectuals and politicians who do not see eye to eye with the government agencies.

Let us discuss this claim and counter claims one by one in detail. On the achievements,
the claims are related to industry, agriculture, infrastructure, foreign trade, growth rate, and
control of inflation and the standard of living of the people. It is asserted that significant progress
has been made in all these and many more during the last five decades economic planning.

The following developments, in particular, have made the Indian economy robust.

1. Huge investments have been proposed in the near future. India will invest
` 3,20,600 crore on infrastructure. Of this, 43 percent will go to power sector, 20 percent
to roads and the rest to other sectors of the economy, with a consequent multiplier effect.
What is interesting is that bulk of these investments is being made by companies through
internal accruals and motivated by the need to meet growing domestic and international
demand.
2. Competitiveness of the India‟s economy is high, the country being ranked 34 in IMD‟s
World Competitiveness Report 2004, up from 50 in 2003. Additionally, in terms of

38
 business efficiency, India‟s rank has moved from 51 to 22, and in terms of economic
performance from 22 to 12. The dismantling of industrial licensing system,
rationalization of tax regime, removal of competition stifling tariffs and the like have
boosted India‟s competitiveness. Profitability of Business Today 500 companies has
increased from 6.02 per cent in 2000-01 to 8.86 per cent in 2003-04.
3. The sourcing boom has vastly contributed to India‟s richness. The country has emerged
as hot spot for outsourcing IT, ITEs, pharmaceuticals, engineering design, Research and
Development, clinical research, textiles, and auto components. Outsourcing is going to be
much more attractive in the days of come.
4. Increasingly, Indian corporate sector is exploiting global opportunities. Companies are
realizing that a global presence can help to insulate them from the vagaries of the
domestic market. Take an example of Tata Motors which recently acquired Daewoo
Commercial Vehicle Company of South Korea and is also investing ` 9,200 crore in
Blangladesh. Tata Steel has the culmination of the efforts of Indian firms to establish
their presence outside India. In the 1990s, Indian manufacturing companies were
considered not competitive enough to compete globally. Today, in areas as diverse as
forgings, water pumps, commercial vehicles, and a range of auto components, Indian
firms are catering to the global market. This is in addition to businesses such as IT and
pharma where Indian companies have already established themselves as lead players.
5. Some other developments have also contributed to the growing demand. On billion plus
people supported by high growth rates and a decrease in the number of the poor
constitute a huge market. The number of middle class stands between 200 and 250
million. Salaried incomes, as stated earlier, are rising. All these are pushing demand to
higher levels.
6. Agriculture continues to be a major economic activity accounting for 14 percent of GCO.
After the Green Revolution of the late 1960s and early 1970s, agricultural production
started increasing at an annual rate of three percent. As a result, India became self-
sufficient in grain production.
7. Economic reforms have ensured ample supplies of everything, ending the perennial
scarcities of the bad old days. Law import duties have ended the smuggling of gold,

39
 synthetics and consumer electronics. The black market premium on foreign exchange has
gone. Inflation and interest rates have fallen with the reduction of external barriers.
8. Financial reforms have empowered consumers with access to housing loans, personal
loans, credit and debit cards and mutual funds. Better access has coincided with falling
interest rates. ATMs have revolutionized access to cash, and computerization has
improved the speed of the bank staff. The delivery of financial services has vastly
improved.
9. New technology has spread fast. It has revolutionized the capital market, facilitating
dematerialization of shares and giving India and electronic exchange (NSE) superior to
London Stock Exchange. Mobile phones have taken technology to the grassroots street
hawkers, rickshaw pullers and construction workers own them. E-governance initiatives
like Bhoomi (Karnataka) and e-seva (Andhra Pradesh) have improved the access of
villagers to land records and market information. ITC has launched e-Choupals.
Computerization has facilitated microfinance organizations.
10. “Ease of Doing Business” has shot up to 77 which is a great boon. MNCs will be
attracted to invest in India. For a long time red tapism, bureaucracy and corruption
discouraged FDI into India. These hurdles are no more a hindrance for MNCs.
11. Financial reforms have empowered consumers with access to housing loans, personal
loans, credit and debit cards and mutual funds. Better access has coined with falling
interest rates. ATMs have revolutionized access to cash, and computerization has
improved the speed of the bank staff. The delivery of financial services has vastly
improved.
12. New leadership at the Centre has aroused high expectations in people, particularly the
youth. Expectations need to be matched with reality. Or else, disappointment will sent in
and if continues, dissolution will be the consequence.
Counter claims are equally forceful.
1. It is alleged that all is not well with our industrial sector. The sector is facing too many
problems as will be described later. Many MSME sector units are facing the threat of
closure.
2. About agriculture, it is alleged that the phenomenal increase in production of food grains
is only in rice and wheat. Coarse cereals which are consumed by vast majority of

40
 villagers have not registered impressive increase in production. Besides, agriculture is
highly dependent on monsoon, failure of which disrupts not only agriculture but the
entire economy. The talk about achievements does not mean anything to the common
man who still reels under poverty, illiteracy and ignorance. Then there is the ever
increasing fiscal deficit.
3. The country has a huge unemployed population of 310.8 mn. China has little over five
million. All other developing countries too have the problem of unemployment but not as
much as India has.
4. The achievements of India stand nowhere near to those of China. In the past decade,
China has built at least 12 major international airports 29,000 kilometres of high quality
four lane highways renovated city centres, and built shopping districts. Its Guangzhou
Airport can handle 27 million passengers and one million tonnes of cargo a year. In
comparison, all airports in India put together can handle barely three million visitors per
year.
5. With all the talk about IT and BPO revolution, hunger continues to stay. On Global
Hunger Index, India ranks 94 (out of 118 countries researched), one rank behind
Ethiopia. Pakistan has done much better with 88th rank and China with 47th place.
1,50,000 farmers committed suicide. Thanks to market-friendly measures, poor are
getting isolated and rich are aggrandizing themselves. Digital divide has further worsened
the gap between the poor and the rich.
6. The quality of public services remains pathetic. A typical doctor at a primary health care
center in Delhi is less competent than in Tanzania and the chances of his recommending
harmful treatment are 50:50. Teacher absenteeism is rampant, and half standard V
children in five states cannot read class II texts. Water supply is just 4 hours a day in
Delhi, six hours on alternate days in Bangalore against round-the-clock supply in Jakarta
or Colombo. Electricity supply is erratic with 30 per cent of it being pilfered with
impunity.
7. Fear haunts people, particularly those in deprived sectors. Dalits and tribal fear upper
caste oppression and insurgency is rampant in 160 districts out of 600 of them. Across the
country, fear of crime is rising. Before Independence, the police seemed capable of

41
 catching criminals, and the courts of convicting them speedily. Today, few people are
caught and fewer are convicted beyond appeals.
8. Critics laugh at the rise in ease of doing business ranking. They wonder what to do with
ease of justified. A spate of new regulations has left start-ups in a flux forcing them to
divert attention from innovation and business growth to engage with the government.
9. Earlier we said that demonetization and GST are the game charges that would galvanize
the economy. Two years on, note ban as proud to be a costly exercise and the economy is
yet to recover from the shock. GST was introduced with a last of fanfare and like note
ban, has disrupted the economy. Economists say that GST‟s benefits would be felt in the
long run. Economists may have patience, but common people do not have.
10. The previous union government was inserted mainly on corruption charges. There is a
fear that history may repeat itself what with the alleged irregularities in defence deals,
bank seams and the infrastructure leasing and financial services (IL&FS) fiasco.
3.7 AGENDA FOR FUTURE

The following questions demand convincing answers from the government.

 In recent past several promises have been made and several aspirations have been
aroused. For example, people want our society to be free from black money and
corruption. How to meet people‟s expectations.
 How to restore GDP growth rate to 8% to 9% immediately and to double digit in course
of time?
 How to quicken the pace of industrial growth which has taken a beating as of now?
 How to step up public investment on infrastructure?
 How to generate jobs to millions of skilled people coming out of colleges and universities
every year?
 How to improve agricultural sector?
 How to channelize huge budget allocations to social sector to reach end users?
 How to boost exports from 1.62 per cent of world exports to at least 5 per cent?
 How to streamline labour laws so as to make them pro-growth, from anti-growth attitude
now?
 How to make public sector banks financially viable?

42
  How to restore credibility to public institutions such as RBI, judiciary, Constitution,
Meteorological Department Election Commission and Statistical Institutes?
 How to minimize income inequalities?
 How to provide decent standard of living to law and middle income groups of people?
3.8 MAKE IN INDIA

In September 2014, the Government of India announced an ambitious and well-intended

project called Make in India. It comprises the following aspects:
1. Boost to the manufacturing sector to peg share of industrial sector in GDP from 15.76 per
cent as of now to 25 per cent by 2024-2025.
2. Improve India‟s ranking from 142 (among 189 economies) to 50 in the World Bank‟s
ease of doing business index in three years.
3. 25 key sectors have been identified including automobiles, chemicals, IT,
pharmaceuticals, textiles, aviation, leather, tourism and railways. These sectors should act
as nucleus for economic development.
4. Skills and jobs for the youth
5. Make India for a manufacturing hub
6. Doing away with fashioned laws and regulations
7. Development of smart cities
8. Disinvestment of public sector enterprises

In order to realize the above, lot needs to be done by the government. Foreign investment
inflow to be intensified, tax regime to be simplified, single window clearances for new projects
to be set up, restoring tax sops for special economic zones, reform labour laws and „Skill India‟
to be put in place.

3.9 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. Internet _______matters to a TV station.
2. ______ government has constituted NITI Aayog.

3. Official agencies claim that ______ produced positive results.

43
4. Indian _______ is exploiting global opportunities.
5. _____ benefits would be felt in the long run.
Answer to Check Your Progress
1. Advertising
2. NDA
3. Huge investments
4. Corporate sector
5. GST‟s
3.10 SUMMARY
India is a country of land and people. It has a huge customer base as well as world‟s most
powerful brains. It is rich in its natural resources and is highly adaptive to changing business
environment. In some areas like technology and political stability, it requires some wise steps.
With all these virtues, India has become a favourite destination of other countries to expand their
business. India is expanding domestically as well as globally to compete with other powerful
business nations so as to get its desired share of world economic growth.

Economic factor is equally difficult to draw the lines of distinction between the political
environment and the technological environment. The type of monetary policy, their money
policy or cheap money policy that the government wants to pursue may be partly political and
partly economic. In place of the Planning Commission, the NDA government has constituted
NITI Aayog (National Institute for Transforming India). There have been claims and counter
claims about the outcome. Official agencies claim that huge investments produced positive
results. In September 2014, the Government of India announced on ambitious and well-intended
project called Make in India.

3.11 KEY WORDS

Economic linkage : Term sustainable economic growth purposes, a thoughtful diversification.

NITI Aayog : National Institute for Transforming India.
Counter claims : Monitoring programmes set up in the wake of these various claims and
Counter claims will resolve the issue.

44
Financial reforms : To improve the allocative efficiency of resources and ensure financial
Stability and maintain confidence in the financial system
GDP : Gross Domestic Product
GST : Goods service tax
3.12 QUESTIONS FOR SELF STUDY
1. Define economic environment. Explain the nature of economic environment.

2. Explain the various economic factors influencing in the economic environment.

3. Give an account of NITI Aayog.

4. Describe the claims and counter claims.

5. What are the challenges ahead in front of Government as on Agenda concept for future?

6. Briefly explain the concept of Make in India.

3.13 REFERENCES

1. Ashwathappa K (2019), Essentials of Business Environment, Himalaya Publishing House.

2. John R. Beighline,(2019) Business, Government and Public Policy.

3. “Made in India” (2018), Study conducted by McKinsey and Co. and excerpted in Business
India.

4. Vijay L. Kelkar and VV. Bhanoji Rao, (2017) Indian Development Policy Imperatives, Tata
McGraw-Hill, New Delhi.

5. Business Today, Dec. 22, 2013.

6. Bimal Jalan, (2005), India‟s Economic Crisis – The way Ahead.

45
Unit-4 LIBERALISATION AND GLOBALISATION

Structure:

4.0 Objectives

4.1 Introduction

4.2 Meaning of Liberalisation

4.3 New Economic Policy

4.4 Criticisms against Economic Reforms

4.5 Meaning of Globalization

4.6 Stages of Globalization

4.7 Factors Facilitating Globalisation in India

4.8 Implementing Globalisation in India

4.9 Consequences of Globalisation for India

4.10 Check Your Progress

4.11 Summary

4.12 Keywords

4.13 Questions for Self-Study

4.14 References

46
4.0 OBJECTIVES

After studying this unit, you will be able to;

 Delineate the meaning of liberalization.

 Discuss the concept of New Economic Policy.
 Highlight the Economic Reforms.
 Explain the Meaning of Globalization.
 Analyze the Stages and Factors facilitating and implementing Globalization in India.
 Highlight the consequences of Globalization for India.

4.1 INTRODUCTION

In the previous unit you have studied the economic environment. The world economies
are changing rapidly and most countries of the world, including developing countries and the
countries of Eastern Europe, are gearing up to the challenge of completing in an increasingly
integrated, highly global market place. The countries on the globe must, therefore, provide
facilities, conditions, opportunities and legal provisions for the economic activities to be carried
out by individuals, business firms and economic entities without impending restrictions. It means
that in order to integrate Indian economy with the global economy, India must provide suitable
conditions, transactions between firms and individual from within country and from abroad.
Liberalization is most important for the economic development in the country.

In early 1991, a major economic crisis surfaced in India. The widening gap between
revenue and expenditure of the government led to unmanageable fiscal deficits. In 1990-91 all
the measures of fiscal imbalance indicated a financial risk. The budgetary deficit grew from 0.9
percent in 1981-82 to 2.1 percent in 1990-91. This deficit was met by internal borrowings which
increased from 35 percent in 1980-81 to 49.8 percent in 1990-91. The balance of payment
situation was also not favourable in 1990-91. The current account deficit had to be met by
external borrowings which led to increase in external debt from 12 percent in 1980-81 to 23
percent in 1990-91. The level of foreign exchange reserves dropped to levels which were hardly
sufficient to meet imports of a few days.

In response to the crisis situation in 1990-91 the government decided to introduce

economic policy reforms which consist of Macroeconomic stabilization and Structural Reforms

47
 Macroeconomic stabilization involves returning to sustainable fiscal and balance of
payments position. Stabilization is necessary to overcome a crisis but it is more effective if
structural reforms are also introduced along with stabilization.

Structural reforms consists of reform measures, devaluation of rupee, introduction of

convertibility of the rupee, liberalization of imports, reduction in customs tariffs rates, etc.

4.2 MEANING OF LIBERALISATION

In the context of globalisation, liberalisation primarily means removal of controls and

regulations at various levels of the economy facilitating market forces to determine its course and
direction. It favours a competitive market solution to economic issues and a reduced role for the
state in economic management.

In its primary and stricter meaning liberalisation proclaims freedom of trade and
investment; creation of free trade areas; elimination of government controls on allocation of
resources in the domestic economy; progressive removal of restrictions on external trade and
payments; expansion of foreign investment, loans and aid and rapid technological progress.
Liberalisation also advocates a balanced budget; reduction in progressive taxation, social security
and welfare and a diminished role for the state in economic management. It does not favour
subsidies and state protection and resource allocations through administrative means. It suggests
that inefficiency, corruption and mismanagement are built into regimes with excessive state
control.

4.2.1 Shift from state to market

In 1970's an argument gained currency that economic problems confounding societies were due
to the sprawling public sector, policies of 111 employment, high rates of taxation, generous
social welfare benefits and growing state intervention. It was further argued that these policies
led to excessive wage demands, introduced rigidity in the market, encouraged parasitism and
blunted the incentives to save, work, invest and take risks. Political forces not favourably
disposed towards welfare state and socialism, such as the Conservative Party in Britain, rallied
behind this argument. In the 1980's there was a strong shift away from the State to the market in
the allocation of resources in large parts of the world. It was accompanied by the information and

48
communication revolution which favoured the market. This shall lead to widespread deregulation
of the economy and measures to reduce taxes and government expenditure. The primacy of the
market upheld by liberalisation came to be supported by global capital with open arms. The
transnational enterprises and multilateral agencies such as IMF and World Bank too brought
enormous pressures on States to pursue a policy of liberalisation. The collapse of socialist
regimes in Eastern Europe in 1989 and the dissolution of the Soviet Union in 1991 were hailed
as the triumph of the market and gave the impetus to market forces.

4.2.2 Facets of Liberalization

Liberalisation is a global phenomenon, closely connected with the process of globalisation. In

fact, in its existing version, liberalisation is the enabling condition for the intensive penetration of
globalisation into any society. But the contexts in which liberalisation has been carried out and
the patterns it has assumed have varied across regions and states.

a) In Europe liberalisation has led to curtailment of public expenditure; cuts in social security
programmes; reduction in progressive taxation; abandonment of full employment policies, curbs
on trade unions, flexible labour markets and privatisation of state enterprises. However
liberalisation did not affect highly protected agricultural production, the immigration policy and
certain categories of international trade, particularly involving advanced technology.

b) In the developing countries, hitherto, the state regulated imports and exports, foreign
investment, technology, labour markets and collective bargaining. The state owned and managed
a wide range of industrial, agricultural, marketing and financial enterprises. By mid-1970's most
of these countries were deeply in debt. In them, liberalisation involves the reversal of the
previous policies of state directed modernisation and industrialisation. The early phase of
liberalisation encompassed stabilisation of the economy through control of public expenditure
and increase in tax returns, industrial policy reforms; price liberalisation; control of state
expenditure; currency devaluation, reduction and removal of subsidies and capital and financial
market reforms. At a later stage, these countries have resorted to privatisation of state
enterprises, currency convertibility and integration of the economy in the global economy.

49
4.3 NEW ECONOMIC POLICY

The economy of the entire world has been experiencing dramatic and momentous
changes during the last two decades. But the economic reforms have never been as wide spread
as today. These reforms are being undertaken by almost all the countries of the world. The
economic reforms broadly indicate necessary structural adjustments to external events.

4.3.1 Background

The new economic policy was necessitated by the worst economic crisis which was never
witnessed by the country after Independence. The most visible sign of the country‟s economic
crisis was its:

a. Rapidly increasing burden of national debt.

b. Extremely low foreign exchange reserves.

c. High price level.

4.3.2 New Economic Policy

The Government of India announced a number economic reform measures in its 1991-92
budgets. The main objectives of the policy initiatives are :

a. To reduce the government deficit.

b. To reduce the current account deficit.

c. To raise the GDP.

4.3.3 Features of the New Economic Policy

Various changes have taken place since July 1991 in the policies relating to the field of
trade, industry, finance and foreign investments which were put together constitute an economic
policy. The new economic policy was initiated because of crisis of 1991 which includes various
measures introduced in India since 1991 to 2002 relating to its industry, public sector, fiscal
policy, price policy etc.,

50
The following are some of the important features of the new economic policy under economic
reforms:

1. Liberalization :

The policy has made a provision for liberalizing the economy against unnecessary
controls and regulations. It means liberating the economy, trade and industry from unwanted
restrictions. It has abolished the system of industrial licensing for all industrial undertakings
except for a short list of 8 industries according to the Budget of 2002-2003.

2. Privatization :

Economic policy emphasizes on widening the scope and role of private sector in
economic activities. The word privatization means introduction of private ownership in public
owned units and public managed enterprises and also signifies introduction of public control and
management in public sector enterprises. The privatization programme involves:

a. Reduction of the number of reserved industries.

b. Raising the share of private sector total investment.

c. Greater participation of private individuals.

d. Institutional credit support to private sector enterprises.

Thus this move is expected to raise the efficiency and productivity of private sector.

3. Globalization:

It means the opening up of the economy for the world market by attaining international
competitiveness. It offers both challenges and opportunities to the developing countries. It has
made the following changes:

a. The new economic policy has prepared a specified list of high technology and high investment
priority sectors in which automatic permission will be available for direct foreign investment.

b. No permission is now required for hiring foreign technicians for testing indigenously
developed technology abroad.

51
c. Rupee has been devalued to increase exports, discourage imports and to raise influx of foreign
capital.

d. Rupee has been made fully convertible.

e. New Export Import (EXIM) Policy of 1997- 2002 has simplified the trade practices further in
order to improve our competitiveness in the global market.

f. The Government has modified the custom duty to a considerable extent in order to bring the
Indian economy within the ambit of global competition.

4. New Public Sector Policy:

The new policy has shifted its emphasis from public to private sector. Four major
decisions are undertaken in this regard:

(a) Reduction in list of reserved industries from 17 to 8.

(b) Disinvestment of shares in public sector enterprise (PSE) to raise resources and encourage

wider participation of general public.

(c) Policy for sick PSEs be designed at par with that of private sector.

(d) Improving performance through the performance contract or Memorandum of Understanding

(MOU) system.

5. Modernization:

The policy has been providing high priority to the introduction of modern techniques in
production system. The policy facilitates the growth of sunrise industries i.e., electronics and
computers. The 2002-2003 Budget has made special provision of tax initiatives to facilitate
corporate mergers and collaborations to face new challenges ahead. Steps have been taken for
the revival and modernization of sick industrial units established both under private and public
sectors.

52
6. Financial Reforms:

The following reforms are undertaken in this sector:

a. Reduction in liquidity ratio.

b. Abolition of direct credit programme.

c. Free determination of interest rates.

d. Making provision for nonperforming assets (NPAs).

e. Establishment of speedy machinery for recovery of loans by special tribunals.

f. Reconstruction of banking system.

g. Liberal treatment to foreign banks.

h. Giving more freedom to banks and ending dual control of Reserve Bank of India and
Finance Ministry.

i. Introducing capital market reforms.

7. Fiscal Reforms:

Another important feature of policy is to introduce fiscal policy reforms. The government
initiated various measures to reduce fiscal deficit. The measures include control over public
expenditure and raise both in tax and non-tax revenues.

4.4 CRITICISMS AGAINST ECONOMIC REFORMS

The criticisms against the economic reforms can be broadly classified under five major
categories:

Lack of a broader strategy for development: The objective of both macroeconomic

stabilization and structural reforms is to create a competitive environment in industry which
gives freedom to entrepreneurs to take decisions based on market forces. The new government
policy lacks a well-defined strategy and role for the estate.

53
 Wrong sequencing of reforms: As a result of wrong sequencing of reforms,
serious distortions have surfaced in economic management. There are at least three examples
of wrong sequencing of reforms. They are;

 Reduction of non-development expenditure and tax rates;

 Reduction in government capital expenditure and public investment;
 Liberalizing import of capital goods without strengthening the technology base of the
domestic capital goods sector.

Hasty pace of reforms: The goal of liberalization in a hasty pace lacks objectivity. It has
led to rapid deterioration in the quality of industrial structure.

Prerequisites for reforms ignored: A minimum level of human development is

essential for the introduction of reforms. The effects of these policies are better absorbed with the
minimum level of human development. As India‟s record in life expectancy, literacy rates and
infant mortality rate were low; the social environment is not encouraging for the introduction of
reforms.

4.5 MEANING OF GLOBLISATION

The world economy has been emerging as a global or transnational economy. A global
economy is one which transcends the national borders unhindered by artificial restrictions like
government restrictions on trade and factor movements. Globalization is a process of
development of the world into a single integrated economic unit.

The transnational economy is different from the international economy. The international
economy is characterized by the existence of different national economies. The economic
relations between them are being regulated by the national governments. The transnational
economy is a borderless world economy characterized by the free flow of trade and factors of
production across national borders.

Globalization means integration of different economies and societies across the world
and has many dimensions. Globalization means different things to different people. Deepak
Nayyar defines it as “the expansion of economic activities across political boundaries of nation
and states, more importantly. Perhaps, it refers to a process of deepening economic integration,

54
increasing economic openness and growing economic interdependence between countries in the
world economy.

The important characteristics of globalization are as follows:

 Rapid growth in international financial transactions

 Fast growth in trade, especially among multinational corporations
 Increase in foreign direct investment
 The emergence of global markets
 The diffusion of technologies and ideas through rapid extension of globalized
transportation and communication system.

4.6 STAGES OF GLOBALISATION

There are five different stages in the development of a firm into global corporations

First Stage

The first stage is the arm‟s length service activity of essentially domestic company which moves
into new markets overseas by linking up with local dealers and distributors.

Second Stage

In the stage two, the company takes over these activities on its own.

Third Stage

In the next stage, the domestic based company begins to carry out its own manufacturing,
marketing and sales in the key foreign markets.

Fourth Stage

In the stage four, the company moves to a full insider position in these markets, Supported by a
complete business system including Research and Development and engineering. This stage calls
on the managers to replicate in a new environment the hardware, systems and operational
approaches that have worked so well at home.

55
Fifth Stage

In the fifth stage, the company moves toward a genuinely global mode of operation.

4.7 FACTORS FACILITATING GLOBALISATION

Although India has several handicaps, there are a number of facilitating factors for globalization
of Indian business:

1. Human Resources: Apart from the low cost of labour, there are several other aspects
of human resources to India‟s favour. India has the largest pool of scientific and technical
manpower. The number of management graduates is also surging. It is widely accepted that
given the right environment, Indian scientists and technical personnel can do exceedingly well.
Similarly, although the labour productivity in India is generally low, given the right environment
it will be good. While several other countries are facing labour shortage and may face
diminishing labour supply, India presents the opposite picture. Cheap labour has particular
attraction for several Industries.

2. Wide Base: India has a very broad resource and industrial base which can support a
variety of businesses.

3. Growing Entrepreneurship: Many of the established industries are planning to go

international in a big way. Added to this, is the considerable growth of new and dynamic
entrepreneurs who could make a significant contribution to the globalization of Indian business.

4. Growing Domestic Market: The growing domestic market enables the Indian
companies to consolidate their position and to gain more strength to make foray into the foreign
market or to expand their foreign business.

5. Niche Markets: There are many marketing opportunities abroad present in the form of
market niches. Such niches are particularly attractive for small enterprises. Several Indian
companies have become very successful by niche marketing.

6. Expanding Markets: The growing population and disposable incomes and the
resultant expanding internal market provide enormous business opportunities.

56
 7. Transnationalization of World Economy: Transnationalization of the world
economy into a single world as evidenced by the growing interdependence and globalization of
markets is an external factor encouraging globalization of India business.

4.8 IMPLEMENTING GLOBALISATION IN INDIA

Globalization in India is generally taken to mean integrating the economy of the country
with the world economy. This implies opening up the economy to foreign direct investment by
providing facilities to foreign companies to invest in different fields of economic activity in
India; allowing Indian companies to enter into foreign collaboration in India and also
encouraging them to set up joint ventures abroad; bringing down the level of import duties.
However the real thrust to the globalization process was provided by the government of India in
July 1991 as per the directions of the IMF and World Bank.

Steps towards globalization:

The main policy measures initiated towards globalization by the government of India can be
discussed under the following heads:

1. Exchange Rate Adjustment and Rupee Convertibility: The most important measure
of integrating the economy of a country with the global economy is to make its currency
fully convertible. This calls for the removal of exchange rate control measures. As a first
step, the IMF insisted Government of India to devalue its foreign currency by 18-19
percent. The 1993-94 budgets introduced the full convertibility of the rupee on trade
account.
2. Import Liberalization: The World Bank advocated a change in the import policy which
resulted in lowering of import tariffs on all goods, and free entry to capital goods,
intermediate goods, raw materials and consumer goods. The quantitative restrictions on
import of goods were also removed in a phased manner.

3. Opening up to foreign capital: In order to attract foreign capital, the government of

India threw open the doors to foreign investors. Various incentives and facilities were
offered to the foreign investors and non-resident Indians in the new economic policy. The
automatic permission was granted for foreign direct investment up to 51 percent foreign

57
 equity. This limit was raised from 51 percent to 74 percent and subsequently to 100
percent.

4.9 CONSEQUENCES OF GLOBALISATION FOR INDIA

Before globalization the Indian enterprises enjoyed the following advantages. They are:

1. The Indian corporate sector for four decades prior to 1991 operated in a protectionist
environment.

2. The quantitative restrictions and steep customs duties ensured a captive market.

3. In the absence of competition, the Indian firms became accustomed to producing poor
quality goods as everything was bound to sell.

The process of globalization in India had led to an unequal competition i.e., a competition
between giant MNCs and Indian companies. Globalization led to cheaper imports, more foreign
investment and opportunities to the MNCs to raid and takeover the Indian enterprises. Even the
Confederation of Indian Industry (CII) which had supported MNC initiatives started feeling
uneasy. The MNCs adopted three strategies to enter the Indian economy through the FDI.

1. Some foreign investors bought off existing local brands along with their branded products
with the aim of replacing their own internationally known products.
2. Some foreign investors initially opted for joint ventures with Indian partners to gain easy
entry in the domestic industry. Once they gained the control they reduced the role of the
Indian partner.
3. Some foreign investors, even as they started out with local partners in a joint venture,
they went on to set up 100 percent subsidiaries of their own in the same industry.

4.10 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. ______ is most important for the economic development in the country.

2. Economic reforms broadly indicate necessary _____ adjustments to external events.

58
3. _____ in India is generally taken to mean integrating the economy of the country with the
world economy.

4. Cheap labour has particular ____ for several Industries.

5. Globalization process was provided by the government of India in _______

Answer to Check Your Progress

1. Liberalization
2. Structural
3. Globalization
4. Attraction
5. July 1991

4.11 SUMMARY
The countries on the globe must, therefore, provide facilities, conditions, opportunities
and legal provisions for the economic activities to be carried out by individuals, business firms
and economic entities without impending restrictions. In 1990-91 all the measures of fiscal
imbalance indicated a financial risk. The budgetary deficit grew from 0.9 percent in 1981-82 to
2.1 percent in 1990-91.

The economic reforms broadly indicate necessary structural adjustments to external

events. Economic reforms required for the lack of development.

Globalization is a process of development of the world into a single integrated economic

unit. It requires different stages for development. It also covers facilitating factors for
globalization of Indian business. Globalization opens under Foreign Direct Investment. The
process of globalization in India had led to an unequal competition i.e., a competition between
giant MNCs and Indian companies.

4.12 KEY WORDS

PSE : Public Sector Enterprise

Niche : Suitable position in life

NPA : Non-Performing Assets

59
MOU : Memorandum of Understanding

MNC : Multinational Corporation

4.13 QUESTIONS FOR SELF STUDY

1. Explain the meaning of Liberalisation?

2. Define the meaning of new economic policy. Explain the effects of economic factors in the
light of Liberalization, Globalization.

3. Discuss the stages of Globalisation.

4. Describe the factors facilitating and Implementing globalisation in India.

5. What are the consequences of globalisation for India?

4.14 REFERENCES

1. Ashwathappa K (2019), Essentials of Business Environment, Himalaya Publishing House.

2. Philip Kotler (2017), Principles of Marketing, Prentice – Hall of India.

3. Francis Cherunilum.(2017) Business Environment, Himalaya Publication, New Delhi.

4. Justin Paul (2016) Business Environment, Tata McGraw Hill, Mumbai.

5. The Economist, Oct.13.2013.

60
 KARNATAKA STATE OPEN UNIVERSITY
Mukthagangotri, Mysuru – 570006
[Link]. PROGRAMME
I – SEMESTER

BUSINESS POLICY AND ENVIRONMENT

Course Code: MCMHC 1.2 BLOCK – II
DEPARTMENT OF STUDIES AND RESEARCH IN
COMMERCE
Karnataka State Open University
Mukthagangothri, Mysuru - 570 006 I SEMESTER [Link]
BUSINESS POLICY AND ENVIRONMENT
COURSE CODE: MCMHC 1.2

Department of Studies and Research in Commerce

BLOCK
2

Page no.

UNIT - 5: INDUSTRIAL POLICY 1-17

UNIT - 6: MICRO, SMALL AND MEDIUM ENTERPRISES 18-43

UNIT - 7: COMPETITION ACT, 2002 44-61

UNIT - 8: CONSUMER PROTECTION ACT, 2019 62-78

 Credit Page
Programme : [Link] Year/Semester :First Block No :II
Course : Business Policy and Environment Credit : 04 Units No :5-8
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Karnataka State Open University
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[Link] V. Member
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DOS&R in Commerce, KSOU, Mysuru.

[Link] V . Member
BOS Chairman,
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Dr. Mahesha V.
Chairman Member Convener
DOS&R in Commerce, KSOU, Mysuru
Course Writer Course Editor
[Link] G V. [Link] C.
Assistant Professor, Assistant Professor,
DOS&R in Commerce, DOS&R in Commerce,
KSOU, Mysuru. KSOU, Mysuru.
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[Link] V. Chairman
BOS Chairman,
DOS&R in Commerce, KSOU, Mysuru.

Prof. S B Akash External Subject Expert

Professor, Department of Commerce
Rani Chennamma University, Belagavi.

Dr. Chaya R. Internal Subject Member

Assistant Professor, DoS & R in Commerce
Karnataka State Open University, Mysuru.
Dr. Mahesha V.
Chairman Member Convener
DOS&R in Commerce, KSOU, Mysuru.
Copy Right
Registrar,
Karnataka State Open University, Mukthagangothri, Mysuru - 570006.
Developed by the Department of Studies and Research in Commerce , KSOU, under the guidance of Dean
(Academic) , KSOU, [Link] State Open University, January -2022
All rights reserved. No part of this work may be reproduced in any form, or any other means, without permission in
writing from the Karnataka State Open [Link] information on the Karnataka State Open University
Programmes may obtained from the University’s office at Mukthagangothri, Mysuru-570006.
Printed and Published on behalf of Karnataka State Open University. Mysuru-570006 by Registrar (Administration)-
2022
 Karnataka State Open University
Mukthagangothri, Mysuru - 570 006

Preface
Dear Student,

As you know, the business firms in any country including India operate as per the reaction of
environment. The environment may be micro and macro which are self explanatory. It is the foremost duty of
the every business firms to function as per the expectations of the stakeholders under the surveillance of the
regulations. Business is influences by political-legal environment, socio-cultural environment, economical
environment and technical environment and technological environment. It is the Government machinery
which brings out the suitable legislation so as to enable the business to follow. The stakeholders have the
opportunity to question the business firms in the legal environment in case their rights are impaired. The
business firms are to be ethical for the sustainability. The firms will make up their mind to adopt the
technology suited to their conditions. Precisely, the business firms take attempts to keep the stakeholders
satisfied.
The Industrial policy will helps the business to carry out their business within the framework.
Competition act to provide, keeping in view of economic development of the country. The Act contains both
criminal and civil provisions aimed of providing anti-competitive practice in the marketplace.
Corporate Social responsibility is a form of international private business self-regulation which aims
to social goals of a philanthropic, activist or charitable nature by engaging in or supporting volunteering or
ethically oriented practices.
As you are aware that, Corporate Governance is the cornerstone of any good business, it encompasses
the process, practices and policies that a company relies on to make final decisions and to manage the
company.
As a student of [Link] First Semester, you have the opportunity to study “Business Policy and
Environment”. The said study materials relating is designed by the Facility members of the Department. Feel
free to write to the Department so as to enable us to improve the quality of the self learning material.

With best wishes,

Truly Your’s

Dr. Mahesha V.
Chairman
 BLOCK-II
INTRODUCTION
As all of us know that industrial policy is a branch of business environment which emerged as a
separate field of study. Generally industrial policy is phenomenon where in a industry contributing to the
economic growth.
Micro, small and medium enterprises is contributing to the economy. The invention of the Micro,
small and medium enterprises is highly untapped potential emphasises to explore them.
Competition is one of the most important elements of the business. Competition is a curtailing task to
the company because it decides the life of the product as well as the company.
Consumer protection is a main part of business. Without the help of customer a business cannot get
information which relates to product, price, place, promotion and over all feedback about the customer.
Customer will help to identify strength and weakness of the business.

This block consists of 4 Units:

Unit 5: Industrial Policy.

Unit 6: Micro, Small And Medium Enterprises.
Unit 7: Competition Act, 2002.
Unit 8: Consumer Protection Act, 2019.
 BLOCK – II

Unit-5 INDUSTRIAL POLICY

Structure:
5.0 Objectives

5.1 Introduction

5.2 Rationale of Industrial Policy

5.3 Industrial Policy Resolution 1948

5.4 Industrial Policy 1956

5.5 Industrial Policy 1991

5.6 National Manufacturing Competitiveness Council (NMCC)

5.7 National Manufacturing Policy (NMP)

5.8 Check Your Progress

5.9 Summary

5.10 Keywords

5.11 Questions for Self-Study

5.12 References

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5.0 OBJECTIVES

After studying this unit, you will be able to;

 Give an account of rationale of Industrial Policy.

 Explain the Industrial Policy Resolution 1948.
 Discuss the Industrial Policy 1956 and Industrial Policy 1991.
 Analyse the National Manufacturing Competitiveness Council (NMCC).
 Delineate the National Manufacturing Policy.

5.1 INTRODUCTION

In the previous unit you have studied the Liberalization and Globalization. Let us
discuss the Industrial policy resolution 1948, 1956, 1991, and also NMCC, NMP. Industrial
policy is an important document, which lays a wide canvas and sets the tone for
implementing promotional and regulatory roles of the government. The term ―industrial
policy‖ refers to the government‘s policy towards industries- their establishment, functioning,
growth and management. The policy will indicate the respective areas for the large, medium
and small-scale sectors. It will also spell out government‘s policy towards foreign capital,
labour tariff and other related aspects. Naturally, the industrial development of a country will
be shaped, guided, fostered, regulated and controlled by its industrial policy.

Industrial policy is probably the most important document, which indicates the
relationship between government and business. The document is helpful to planners and
administrators in the government, in as much as it give clear guidelines for promoting and
regulating industries. It is equally helpful to industrialists and others for deciding areas and
priorities of their investments.

5.2 RATIONALE OF INDUSTRIAL POLICY

Let us discuss the rationale of industrial policies are:

 Correct the imbalance in the development of industries and help to bring about a
desirable balance and diversification in them.
 Direct the flow of scare resources in the most desirable areas of investment in
accordance with national priorities.
 Prevent the wasteful use of scare resources and ensure their conservation and
judicious utilization.

2
  Empower the government to regulate the establishment and expansion of private
industry in accordance with the planned objectives.

5.3 INDUSTRIAL POLICY RESOLUTION 1948

Perhaps, you might have studied the concept of industry and industrial policy
resolution. There are so many factors behind this policy resolution. The leaders of the country
had made many promises to the people when they were carrying on the national struggle. So,
when they assumed power after independence, they had moral responsibility to change the
face of India, particularly in the industrial sphere. Poverty, shortage of food items, low per
capital income, unemployment, illiteracy, etc., were some of the important hall-marks of
India at the time of its independence. The country was not growing the food and related items
in adequate quantity and hence, it was to depend heavily on imports. The country took about
five years to absorb the shocks of partition. Industrial society did not possess the required
infrastructure and lacked the capital goods and the production technology. Further, the
government wanted to develop its industrial society in a desired pattern. The Industries
conference held in December 1947 demanded that the government should have a definite
plan for the demarcation of the roles of the private and public sector.
In this background, the government of India announced its first industrial policy on
April 6, 1948.
Objectives: The industrial policy was designed to achieve the following objectives:
i. The establishment of a social order wherein justice and equality of opportunity
shall be secured to all the people.
ii. The promotion of standard of living of people by exploiting resources.
iii. The increase in production both at agriculture and industry.
iv. The offering of opportunities to all for employment.
v. The need for careful planning and integration of efforts and the establishment of a
national planning and integration of efforts and the establishment of a National
Planning Commission.
vi. The determination of state responsibility and enterprise in industrialization.
vii. The regulation of private enterprise.

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 Classification of industries:

Category-I (3): a. Arms and ammunition

b. Atomic energy
c. Railway transport
Category-II (6): a. Coal Industries
b. Iron and steel
c. Aircraft manufacture
d. Ship building
e. Telephone, telegraph and wireless apparatus
f. Mineral of 18 Industries
Category-III: Remaining industries
Three industries included in category-I were reserved for the exclusive monopoly of
the central government. In the case of six industries included in category II, the IPR, 1948
was for allowing the (then existing) private industrial undertakings to continue their
activities. However, it was the exclusive responsibility of the state to establish new
undertakings. All other industries (other than the above 3+6) were left to the private sector.
Out of these other industries left for private sector, the central government was made
responsible for planning and regulation of 18 industries, as they were basic and very
important. Other industries (i.e., industries left for private sector-18) were to be controlled
and regulated by the state governments. Further, the resolution stated unequally that the state
will not hesitate to nationalize any industry or industrial undertaking if its performance is not
satisfactory and if its nationalization is desirable in the interest of the economy. In the same
analogy, the state made it very clear, in the resolution, that it will establish, if the need arises,
the units on its own in any of the industries left for private sector. So, the country preferred a
mixed economy and the state assumed and started playing, the roles of planning, promotional,
entrepreneurial and regulatory.

The Industrial Policy Resolution of April 1948 had a mixed reaction. Some welcomed
it as a great step towards achieving a socialistic pattern of society. Some attacked the policy
as ‗one-sided‘ and biased against private enterprise.
The industrial policy resolution of 1948 did the greatest damage to private sector in
our country. The state undertook responsibilities for a large part of the country‘s industrial

4
development, but it did not have necessary resources in finance, technical and managerial
manpower.
Industrial policy when put into actual practice exhibited lack of co-ordination between
the Union government and the state governments. Poor experience, lack of technical know-
how and inadequate integration between policy and procedure in public sector, the
misdirected enthusiasm of nationalization without proper climate and resources, the suspicion
of the private sector, etc., all resulted in the slow and poor development of industries.

The ‗mixed economy‘ instead of taking the merits of socialism and capitalism,
exhibited the evils of the two. The evils of nepotism, favouritism, red tape, bureaucratic top-
heavy administration, etc., percolated in all spheres of industrial undertaking of the state.

By and large, the Industrial Policy Resolution of 1948 was the outcome of emotion
soon after independence rather than of scientific reasoning. So, within two years after the
announcement of this policy, the government made a clarification that it would not
nationalize all the basic key industries on ideological grounds.

5.4 INDUSTRIAL POLICY 1956

In this section we shall discuss the Industrial Policy 1956. Since the declaration of
Industrial Policy in April 1948, several economic and political developments had occurred,
which made it necessary to formulate a fresh industrial policy. Among those developments,
three major developments were notable. They are:
a) Adoption of constitution of India;
b) Resolution of the Lok Sabha to have socialistic pattern of society and
c) The launching of the second five year plan, which was mainly an industrial plan.
In this background, the Central Government formulated the second industrial policy
and adopted the same on April 30, 1956 in place of IPR 1948.
Objectives:
The objectives of IPR of 1956 were:
i) Reduction of disparities in income and wealth.
ii) Prevention of monopolies and concentration of economic power.
iii) Building up a large and growing public sector.
iv) Developing heavy and machine making industries and
v) To accelerate the rate of industrialization and economic growth.

5
NEW CLASSIFICATION OF INDUSTRIES
Industries Schedule-A (17)
Arms and Amenities, atomic, energy, Iron and steel, Heavy castings and forging of
iron and steel, Heavy machinery, Heavy electrical plant, coal and ignite, mineral oils, Mining
( iron ore, manganese ore, chrome ore, gypsum, Sulphur, gold and diamonds), mining and
processing (of copper, lead, zinc, tin etc.) Minerals specified in the scheduled to the atomic
energy, Aircraft, Air transport, Railway transport, Ship building, telephones, cables and
wireless apparatus, generation and distribution of electricity.
Schedule -B (12)
All other minerals except minor minerals as defined in section 3 of the minerals-
concession rules, 1949, Aluminium and other non-ferrous metals, machine tools, Ferro-alloys
and tool steels, Basic and Intermediate products required for chemical industries such as the
manufacture of drugs, dyestuffs and plastics, Antibiotics and other essential drugs, Fertilizers,
Synthetic rubber, Carbonization of coal, chemical pulp, road and sea transport.
Schedule -C other industries
Main Features:
Accordingly, the industrial policy was restated on April 30, 1956 by the then Prime
Minister in the Indian Parliament. The main features of this policy are:
(i) New Classification of Industries:
a) Seventeen industries were put in Schedule A, the future development of which was
to be the exclusive responsibility of the State, as against 6 reserved for the public sector in the
1948 resolution. All industries of basic and strategic importance or in the nature of public
utility service were put in the public sector.
Some of the industries included in this sector are iron and steel, atomic energy, heavy
machinery, coal, mineral oils, railway transport, and the generation and distribution of
electricity. All new units in these industries will be set up only by the State.
b) In the second category were placed 12 industries which will be progressively State-
owned and in which the State will, therefore, generally take initiative in establishing new
undertakings. But private enterprise will also be expected to supplement the efforts of the
State. These industries were given in Schedule B. Important among them are aluminium,
machine tools, ferro alloys, fertilizers, synthetic rubber, and sea transport. For accelerating
their future development, the State will increasingly establish new undertakings in these

6
industries. At the same time, private enterprise will also have opportunity to develop in this
field either on its own or with Sate participation.
c) The remaining industries fall in the third category. Their development will be left to
the initiative and enterprise of the private sector. It will be the policy of the State to facilitate
and encourage the development of these industries in the private sector in accordance with
the programs formulated in the successive Five Year Plans.
For this purpose, the State will ensure the development of transport, power and other services
and adopt appropriate fiscal and other measures. The State will continue to foster institutions
to provide financial assistance to these industries. Special assistance will be given to
enterprises organized on co-operative lines for agricultural purpose. The private sector in its
term must comply with the programs formulated in the Five-Year Plans and accept
regulations imposed under the Industries (Development and Regulation) Act of 1951.
(ii) No Watertight Classification. It must, however, be noted that the above division of
industries into separate categories does not imply that they are being placed in watertight
compartments. It will be open to the State to start any industry not included in Schedule A
and Schedule B when the needs of planning require or there are other important
considerations. Likewise in appropriate cases, privately-owned units may be permitted to
produce an item falling within Schedule A.
(iii) Aid to Cottage and Small-Scale Industries. The State would continue to follow a
policy of supporting such industries by restricting the volume of production in the large-scale
sector, by differential taxation of by direct subsidies. But the aim of the State policy would
be self –supporting and its development was integrated with that of large scale industry.

The State will, therefore, concentrate on measures designed to improve the

competitive strength of these industries. For this purpose it will be essential that the
technique of production should be continuously improved and modernized, the pace of
transformation being regulated so as to avoid, as far as possible, technological
unemployment. Establishment of industrial estates, and rural community workshops,
extension of rural electrification and the supply of power at cheap rates are bound to help
these industries.
(iv) Regional Balance in Industrial Development. The industrialization may benefit the
economy of the country as whole. It is important that disparities in the levels of development
between different regions should be progressively reduced. For this purpose, transport

7
facilities, power supply and other facilities will be made available to areas which are at
present lagging behind industrially and where there is a greater need for providing
opportunities for employment, provided the location is otherwise suitable.
(v) Co-operative Principle. The resolution said that the principle of co-operation should
be applied wherever possible and a steadily increasing proportion of activities of the private
sector would be developed along co-operative lines.
(vi) Role of Labour. Referring to the role of labour, it was said that workers and
technicians should, wherever possible, be associated progressively with management,
Enterprises in the public sector have to set an example in this regard.
(vii) Foreign Capital. The importance of foreign capital in our economic development
was also duly recognized. Foreign investors have been given clear assurance for the safety of
their interests and facilities for investments.

5.5 INDUSTRIAL POLICY 1991

The Industrial policies pursued till 1990 enabled India to develop a vast and
diversified industrial structure. India attained self-sufficiency in a wide range of consumer
goods. But the industrial growth was not rapid enough to generate sufficient employment, to
reduce regional disparities and to alleviate poverty. It was felt that government controls and
regulations had put shackles on the growth of different segments of Indian industry. Lack of
adequate competition resulted in inadequate emphasis on reduction of costs, upgradation of
technology and improvement of quality standards. It is to reorient and accelerate industrial
development with emphasis on productivity, growth and quality improvement to achieve
international competitiveness that the industrial policy of 1991 was announced.
Main objects: At the outset, industrial policy of 1991 renewed its commitment to the basic
objectives of IPR of 1956.

1) To bring overall changes in the economic structure of the country and to build a
sound and diversified industrial base.

2) To encourage for the internal and external industrial competitions.

3) To increase the productivity and encourage for profitable employment.

4) To encourage for private entrepreneurship and investment in industrial activity.

5) To encourage a sound capital market to mobilize capital for the business.

8
 6) To follow a liberalized outlook and to simplify the various statutory controls,
prohibitions and formalities towards the industries.

7) To remove the weakness and distortions spreading the industrial economy.

8) To encourage for adoption of foreign investment and technology in Indian

Industries.

9) To achieve technological dynamism in the country.

MAIN FEATURES OF INDUSTRIAL POLICY 1991

The Industrial Policy Statement of 1991 was tabled in the Lok Sabha by the Minister
of State for Industries, Mr. P.J. Kurien on July 24, 1991.
I) INDUSTRIAL LICENSING POLICY:
The new industrial policy statement has put accent upon the need for a continuation of
liberalised industrial licensing, procedures and approvals for a full realisation of the industrial
potential of the country. In order to explore and exploit the industrial potential of the country,
the following decisions were taken:-
(i) Delicensing: The industrial licensing would be abolished for all projects except for
those which are important for security, strategic, social and environmental reasons and items
of elite‘s consumption. The compulsory licensing provisions would therefore, apply only in
respect of industries as spelled out in Annex II. These industries are such as coal and ignite,
petroleum, distillation and brewing of alcoholic drinks, sugar, cigars and cigarettes of
tobacco, motor cars plywood, industrial explosives, hazardous chemicals, drugs and
pharmaceuticals, entertainment electronic, paper and newsprint, asbestos, electronic
aerospace, microwave ovens and domestic washing machines. However, the compulsory
licensing provisions would not apply to any of these items which are reserved for exclusive
manufacture in small scale sector.
(ii)Reservation of the Public Sector: The new industrial policy statement stipulates
that areas where security and strategic concerns predominate will continue to be reserved for
the public sector. The industries reserved for the public sector are spelled out in Annex I.
These industries are arms and ammunition and allied items of deference equipment, atomic
energy, mineral oils, mining of iron ore, manganese ore, chrome ore, Sulphur, gypsum, gold
and diamond, mining of copper, lead zinc ant tin, and railway transport.

9
 (iii)Automatic Clearance of Imports of Capital Goods: The new industrial policy
statement seeks to give automatic clearance for the imports of capital goods in such cases
where foreign exchange availability is ensured through foreign equity of the GF value of
imported capital goods required is less than 25% of total value of plant and equipment, up to
a maximum value of `.2 crores, However, the scheme of automatic clearance for imports of
capital goods up to 25% of value of plant and equipment will come into force from
April,1992.
(iv)Location Policy: In locations other than cities of more than one million
populations, there will be no requirement of obtaining industrial approvals from the Central
Government except for industries specified in Annex II. In respect of cities with population
greater than one million, industries other than those of non-polluting nature such as
electronics, computer software and printing will be located outside 25 Km of the periphery,
exception prior designated industrial areas. Land use regulation and environmental
legislation will continue to regulate industrial locations. Appropriate incentives will be used
to promote the dispersal of industry particularly to rural and backward areas.
(v)Abolition of Registration Schemes: All existing registration schemes such as
Delicensed Registration, Exempted Industries Registration and DGTD Registration will be
abolished. Entrepreneurs will hence-forth only be required to file and information
memorandum on new projects and substantial expansions.
(vi)Broad-banding: Existing units will be provided a new broad-banding facility to
enable them to produce any article without additional investment.
(vii)Abolition of Convertibility Clause: The mandatory convertibility clause will no
longer be applicable for term loans from the financial institutions for new projects.
(II) Foreign Investment Policy
The new industrial policy statement has underscored the need for a positive and liberal
attitude towards the inflow of foreign investment. This policy has been evolved keeping in
view of the increasing absorptive capacity in high priority industries to absorb large foreign
investment and advanced technology. The following policy measures have been announced
to promote inflow of foreign investments.
(i)Automatic Approval for Foreign Investment in High Priority Industries:
According to the new industrial policy, approval will be given for direct foreign investment
up to 51 per cent foreign equity in high priority industries. Annex III spells out 34 high

10
priority industries for this purpose. However, such approval will be available if foreign
equity covers the foreign exchange requirements for imported capital goods.
(ii)Monitoring of Dividend Payment on Foreign Equity by the Reserve Bank of
India: The new industrial policy stipulates that while payments in respect of import of
components, raw materials, intermediate goods and payment of know how fees and royalties
will be governed by general policy applicable to other domestic units, the payment of
dividend would be monitored through the Reserve Bank of India so as to ensure that outflows
on account of dividend payments are balanced by export earnings over a period of time.

(iii)Foreign Equity Participation in Trading: The new industrial policy states that
in order to provide access to international markets, majority foreign equity holding up to 51%
equity will be allowed for trading companies primarily engaged in export activities, while the
thrust would be on export activities. Such trading houses shall be at par with domestic trading
and export houses in accordance with the Import–Export Policy.

(iv)Special Programme to provide access to High Technology and World

Markets: According to the new industrial policy, a Special Empowered Board would be
constituted to negotiate with a number of large international firms and approve direct foreign
investment in selected areas. This would be a special programme to attract substantial
investment that would provide access to high technology and world markets. The investment
programmes of such firms would be considered in totality free from pre-determined
parameters or procedures.
(III) Foreign Technology Agreements Policy
The new industrial policy has recognised the fact that Indian industry can scarcely be
competitive with the rest of the world if the acquisition of technological capability is subject
to regulatory environment. Having view to injecting the desired level of technological
dynamism in Indian industry, the following policy measures have been announced.
(i)Automatic Approval for Technology Agreements in High Priority Industries: The
new industrial policy accords automatic approval for foreign technology agreements in high
priority industries 9Annex III) up to a lump sum payment of `.1 crore, 5% royalty for
domestic sales and 8% of sales over a 10 year period from the date of agreement of 7 years
from commencement of production. The prescribed royalty rates are net of taxes.
(ii)Automatic Approval for Technology agreements in Industries other than those in
Annex III: The new industrial policy has created a provision for an automatic approval for

11
technology agreements in industries other than those specified in Annex II, provided no free
foreign exchange is required for any payments.
(iii) Services of Foreign Technicians: No permission will be necessary for hiring of
foreign technicians, foreign testing of indigenously developed technologies. Payment may be
made from blanket permits or free foreign exchange according Reserve Bank of India‘s
guidelines.

(IV) Public Sector Policy

The new industrial policy has emphasised the need for a new approach to public enterprises.
Accordingly, measures must be taken to make these enterprises more growth oriented and
technically dynamic. The following policy measures have been announced.
(i) Review of Portfolio of Public Sector Investment: it will be reviewed with a focus
on strategic, high-tech and essential infrastructure as priority areas for growth of public
enterprises. However, public sector will not be barred from entering areas not specifically
reserved for it.
(ii)Rehabilitation Schemes for Sick Public Enterprises: The chronically sick public
enterprises will, for the formulation of revival rehabilitation schemes, be referred to the board
for Industrial and Financial Reconstruction (BIFR) or other similar high level institutions
created for this purpose. The interests or workers affected by such rehabilitation packages
will be protected by devising a -social security mechanism.
(iii)Resource Mobilisation and Public Participation: In order to raise resources and
encourage wider public participation, a part of the government‘s shareholding in the public
sector would be offered to mutual funds, financial institutions, general public and workers.
(iv)Professionalisation of Management: The Boards of Directors of public sector
companies would be made more professional and given greater powers.
(v)Thrust on Performance Improvement: There will be a greater thrust on
performance improvement of public enterprises through the Memorandum of Under-standing
(MOU) signed between Government and the public enterprises would be placed in Parliament
with a view to holding a fuller discussion on performance.
(V) MRTP Act: The new industrial policy has identified the interference of the
Government through the MRTP Act in investment decisions of large companies as the factor
having deleterious effects on Indian industrial growth. The MRTP Act will be amended to

12
remove the threshold limits of assets in respect of MRTP companies and dominant
undertakings.
Thus, the new industrial policy statement can be regarded as a realistic economic
constitution governing the growth of industrial sector. It is based on the thesis of liberal
economic order. It will certainly give an impetus to the inflow of foreign investment and
technological up gradation in Indian industries. It is expected to act as an instrument to
promote optimal size and pattern of industrial growth.

Merits of the 1991 Policy Statement:

1) The 1991 Policy Statement is truly historic, whether it is the result of IMF pressure or our
own realisation that the time has come to open up the economy.
2) The changes, long overdue, need to be welcomed as a bold initiative aimed at making
Indian industry more competitive internally as well as internationally, and at freeing industry
from needless and irksome controls, not of which have outlived their utility.
3) The delicensing of a host of industries and the abolition of all registration schemes will
free Indian entrepreneurs from the need to make endless trips to New Delhi. They can now
concentrate on their business and more quickly to seize business opportunities.
4) The scrapping of any asset threshold or market share prescription for the definition of an
MRTP company and a dominant undertaking allows companies to go ahead with investment
programs without delay.
5) The liberalisation of the rules relating to direct foreign investment, permitting 51 per cent
equity in a wide range of industries, the easier facilitation of foreign technology agreements
and other related measures go a long way in attracting foreign investment and technology.
6) Reforms relating to public sector like privatisation and transferring sick units to BIFR will
help improve the performance of the government undertakings.
7) Finally, the new Policy Statement is a most welcome package. There is a greater reliance
on the market, a bold attempt at deregulation, a desire to integrate with the world economy,
and to modernise.

Criticisms of 1991 Policy

1. Virtual scrapping of licensing means absence of a mechanism to determine priorities and

to develop backward areas.

13
2. The policy is silent about tackling the growing industrial sickness. The Government has
not announced a clear exit policy for sick units. Clearly government seems to have yielded to
the pressure of trade union lobby
3. Off-loading of 20 per cent equity in profit making public sector units to mutual funds is a
revenue raising exercise than genuine attempt at privatisation.

4. Even with the scraping of all regulations, the expected foreign investment may not come
through. Infrastructural deficiencies will deter foreign investment.
5. The policy is drafted at the behest of IMF which means virtual surrender of economic
sovereignty of the country to foreign agency.

5.6 NATIONAL MANUFACTURING COMPETITIVENESS COUNCIL (NMCC)

You are aware that NMCC has been set up by the government with a view to provide
inputs for policy making as well as suggest action plans to enhance competitiveness of Indian
industry

The main features of the NMCC include:

 Identify industries which carry potential to compete globally.

 Identify constraints faced by the sectors stated above.
 Suggest sector specific strategies that would help gain competitive advantage
 Create a platform where different stakeholders can coverage and debate on issues.
 Carry sectoral and enterprise level initiatives and create an enabling environment for
their competitiveness.

5.7 NATIONAL MANUFACTURING POLICY (NMP)

During the past two to three years, the GDP growth rate fell sharply. One of the
reasons for the slide in the rate is low contribution from manufacturing sector to the GDP.
Industrial sector‘s contribution to GDP now hovers around 15 to 16 per cent, as against 42
per cent in China. Unless manufacturing sector picks up the momentum, GDP growth rate
will continue to stagnate. In addition, manufacturing sector is expected to generate more job
opportunities for the newly entering workforce in the coming years. In order to boost the
manufacturing sector, the Government released the National Manufacturing Policy (NMP) in
2011, as a supplement to the industrial policy 1991.

14
NMP seeks to achieve the following objectives:

 Increase the share of manufacturing in GDP from 16 per cent as of now to as high as
25 per cent by 2022.
 Create 100 mn additional jobs in the manufacturing sector by 2022.
 Create appropriate skills among the rural migrant and urban poor for their
acceptability in industries.
 Increase domestic value addition and technological depth in manufacturing.
 Enhance global competitiveness of Indian industries.

To realize the above objectives, NMP proposes several interventions. It envisages

abolition of procedural bottlenecks: greater emphasis on MSME sector; skill development to
make youth more competitive and creation of the National Investment and Manufacturing
Zones (NIMZ‘s). Of all the above initiatives, NIMZs act as bellwether to boost the
manufacturing sector. Good physical infrastructure, a progressive exit policy, investment
incentives, and easy clearance of business proposals are some of the key areas of NIMZ
operation.

Manufacturing Industry Promotion Board has been set up to implement the National
Manufacturing Policy. Three panels have been created to facilitate the work of the Board.
They are: High Level Committee (HLC), Green Manufacturing Committee (GMC) and Board
of Approval (BOA).

5.8 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. The term _______ refers to the government‘s policy towards industries

2. Industrial policy is probably the most important document, which indicates the
relationship between________
3. Industries in the ______ in accordance with the programs formulated in the successive
Five Year Plans.
4. Annex III spells out ___ priority industries for this purpose.
5. During the past two to three years, the __ growth rate fell sharply

15
Answer to Check Your Progress:

1. ―Industrial policy‖
2. Government and business
3. Private sector
4. 34 high
5. GDP

5.9 SUMMARY

So for we have had discussed the term ―industrial policy‖. It refers to the
government‘s policy towards industries their establishment, functioning, growth and
management. The Industries conference held in December 1947 demanded that the
government should have a definite plan for the demarcation of the roles of the private and
public sector. In this background, the government of India announced its first Industrial
Policy on April 6, 1948.
Since the declaration of Industrial Policy in April 1948, several economic and
political developments had occurred, which made it necessary to formulate a fresh industrial
policy. In this background, the Central Government formulated the second industrial policy
and adopted the same on April 30, 1956 in place of IPR 1948.
The Industrial policies pursued till 1990 enabled India to develop a vast and
diversified industrial structure. India attained self-sufficiency in a wide range of consumer
goods. It is to reorient and accelerate industrial development with emphasis on productivity,
growth and quality improvement to achieve international competitiveness that the industrial
policy of 1991 was announced.
NMCC has been set up by the government with a view to provide inputs for policy
making as well as suggest action plans to enhance competitiveness of Indian industry. In
order to boost the manufacturing sector, the Government released the National Manufacturing
Policy (NMP) in 2011, as a supplement to the industrial policy 1991.

5.10 KEY WORDS

Per Capital Income : It is a measure of the amount of money earned per person in a nation
Policy : Principle of action adopted
NMCC : National Manufacturing Competitiveness Council

NMP : National Manufacturing Policy

16
HLC : High Level Committee

GMC : Green Manufacturing Committee

BOA : Board of Approval

5.11 QUESTIONS FOR SELF STUDY

1. Bring out the Rationale of Industrial Policy.

2. Explain the Industrial Policy Resolution 1948.

3. Discuss the new classification of industries under Schedule-A (17) Industrial Policy 1956.

4. Comment on the Industrial Policy 1991.

5. Give a brief account of NMCC and NMP.

5.12 REFERENCES

1. Ashwathappa K (2019), Business Environment Himalaya Publishing House.

2. Agarwal Raj and Diwanparag (2019) Business Environment, Excel Books, New Delhi.

3. Swaminathan S. Alyar (2016), From Narasimha Rao to Narendra Modi, Times Group
Books.

4. India Today, (March 15, 1987).

5. R.K Hazari,(1986) Essays on Industrial Policy.

17
Unit-6 MICRO, SMALL AND MEDIUM ENTERPRISES

Structure:

6.0 Objectives

6.1 Introduction

6.2 Meaning of Micro, Small and Medium Enterprises

6.3 Growth of Micro, Small and Medium Enterprises

6.4 Significance of Micro, Small and Medium Enterprises

6.5 Facilities for Micro, Small and Medium Enterprises

6.6 Problems and Remedies of Micro, Small and Medium Enterprises

6.7 Small Sector Industrial Policy

6.8 Recommendations of the Abid Hussain Committe

6.9 Mudra Card

6.10 Check Your Progress

6.11 Summary

6.12 Keywords

6.13 Questions for Self-Study

6.14 References

18
6.0 OBJECTIVES

After studying this unit, you will be able to;

 Discuss the Meaning of Micro, Small and Medium Enterprises.

 Explain the Growth and Significance of Small Scale Industries.
 Describe the Facilities of Small Scale Industries.
 Analyze the Problems and Remedies of Small Scale Industries.
 Delineate the Small Sector Industrial Policy.
 Bring out the Recommendations of the Abid Hussain Committee, Mudra Card.

6.1 INTRODUCTION

In this section we will discuss the micro, small and medium enterprises (MSMEs),
previously called small-scale industries (SSIs) have a place of pride in our economy. They
have a high potential, among others, for generating employment, dispersal to semi-urban and
rural areas, promoting entrepreneurship and earning foreign exchange. Aware of this, the
MSMEs have been accorded a strategic position in the successive five year plans towards
fulfilment of the socio-economic objectives, particularly in achieving growth with equity.

6.2 MEANING OF MICRO, SMALL AND MEDIUM ENTERPRISES

Let us discuss the meaning of small scale industries. The term small-scale unit has
always been based on investment limits which varied from time to time. As of now the
Medium, Small and Medium Enterprises Development (MSMED) Act, 2006 is the accepted
source for definitional purpose of small units. The Act classifies these units into two broad
categories: manufacturing and service sectors. Within each of the two, there are three groups
of small units: micro, small and medium.

However, Finance Minister-Nirmala Sitaraman announced revised MSME definitions

on 13th May 2020. Earlier, the MSMEs were defined on the basis of investments, now the
revised definitions will also include turnover of the company. Finance Minister also declared
that there will be no more distinction between manufacturing and service MSMEs.

The Existing and revised MSMEs classification as per the notification dated 1st July
2020 is given in the below table.

19
 Existing MSME Classification
Criteria: Investment in Plant and Machinery or Equipment
Classification Micro Small Medium
Manufacturing
Investment < `. 25lac Investment < `. 5Cr Investment < `.10Cr
Enterprises
Services
Investment < `. 10lac Investment < `. 2Cr Investment < `. 5 Cr
Enterprises

Revised MSME Classification

Composite Criteria: Investment and Annual Turnover
Classification Micro Small Medium
Investment < `. 1 Cr Investment < `.10Cr Investment < `. 50Cr
Manufacturing
and and and
& Services
Turnover < `.5 Cr Turnover < `.50 Cr Turnover < `. 250 Cr

6.3 GROWTH OF MICRO, SMALL AND MEDIUM ENTERPRISES

At the outset, it should be understood that MSME sector is the most visible, biggest
employer, largest contributor to foreign exchange and the list goes on. What is amazing is
their ambitious nature. Walk through narrow streets of the city like Bangalore. On either side,
every small dwelling is an industrial unit or a go down of some goods. Welding, boring or
machining activities spill over to the road which is already narrow making it difficult for you
to pass through or cross to the other side. Each unit has 3 to 4 employees working at least 14
hours a day. The owner has an old rattling typical Bajaj two wheeler and keeps going out
with finished goods for delivery and returning with a smiling face either with a cheque in his
pocket or a new order in his vehicle cover. Life goes on for him and his small group of
employees who keep changing places and jobs with regular frequency. Small enterprises are
the biggest employers absorbing 40 per cent of the country‘s workforce.

This is the real challenge of the MSME sector-to is able to not just start up, but also
continued to grow, thereby becoming a source of sustainable jobs and value creation. The
reason why too many firms tend to remain small and informal is the desire to avoid regulation
and taxes.

20
6.4 SIGNIFICANCE OF MICRO, SMALL AND MEDIUM ENTERPRISES

As we said in the beginning of this chapter, the small-scale sector has a high potential
for providing employment, dispersal of industries, promoting entrepreneurship and earning
foreign exchange to the country. The following points further demonstrate the importance of
small-scale industries.

1. Small is Beautiful: ‗Small is a beautiful‘, said EF Schumacher. He maintains that man‘s

current pursuit of profit and progress, which promotes joint organizations and increased
specialization, has in fact resulted in gross inefficiency, environmental pollution and inhuman
working conditions. Schumacher emphasises on small working units, communal ownership
and regional workplaces utilising local labour and resources. For him, emphasis should be on
the person and not on the product.

2. Innovative and productive: It is the small units which are highly innovative, though they
do not maintain their own research and development wings. It is a disproportionate share of
innovation and success in business seems to come from ‗skunk works‘, tiny groups that tend
to outperform the much larger labs that often have a cast of hundreds. We have now, several
score examples of effective skunk works.

A few remarkable innovations are worth recollecting here. Santosh Ostwal, the son of
a farmer, invented Nano Ganesh, a modem, which coupled with a mobile phone, is connected
to the starter mechanism of the water pump, making the long march of the farmers of their
water pumps in remote locations and necessary. For this, Ostwal was awarded the first prize
at international level admits 1000 competitors.

Janak Seth designed, a few years back, a molecule that forces concerous and
asthmatic cells to commit suicide. He was no set up Century Pharmaceuticals at Vadodara.

In Bangalore, Devesh Agarwal, CEO of Informart India, has a technology called

‗Power Over Ethernet‘ (POE), a system which transmits electric power, along with the data,
to remote devices over cable in an Ethernet network.

3. Individual Tastes, Fashions and Personalised Service: Small firms are quick in studying
the changes in tastes and the fashion of consumers and in adjusting the production process
and production accordingly.

21
 Small firms seems to have an edge in industries that call for personalized service,
attention to detail and the flexibility to adopt quickly to changes in the business or
technological environment. For instance, in the governments and electronic fields, the small
units have ruled the roost; a Chorus of garment and TV industry voices says that big
companies delegate responsibility down the line and cannot swiftly change the trace when
necessary. Says a garment exporter. ―The garment business is personalized, oriented to
changing fashions and has to be tightly controlled. Professional managers do not have the
motivation far had limited success because of their lack of flexibility.‖

4. Symbols of National Identity: Small enterprises are almost always locally owned and
controlled, and they can strengthen rather than destroy the extended family and other social
systems and cultural traditions that are perceived as valuable in their own rights as well as its
symbols of national identity.

5. Happier in work: People who work in the small enterprises or happier in their work than
those who are work in large ones in spite of lower wages and poor standards of safety,
comfort and welfare facilities.

6. Always winners of the Game: Small companies and new entrepreneurs were at the
forefront of practically every business boom of the last decade, whether it was computers,
television sets, consumer electronics, garments, diamond exports or advertising. And any
frequently put the established large industrial houses in the shade with the quality of their
performance, their ability to seize business opportunities and their aggressive feeding of
burgeoning markets. Remarkable enough, the giants of the corporate sector fell flat on their
faces in the precisely these areas. With losses piling up and JK Group had to put pull out of
manufacturing television sets, while the Sarabhai‘s Telegram limped along. In garments,
virtually all the big firms, including the cigarette behemoth, the Indian Tobacco Company
(ITC), tested the waters to call it quits or retain a small presence in the field.

7. Many of the present big empires owe their origin to small firms: Bill Gates and Paul
Allen came together to start a small business unit called Microsoft‘s in the late 70s and David
Filo and Jerry Young turned their campus start up into email and searched small units called
you Yahoo in the 1995. In 1998, Standford students Larry page and Sergey Brin suspended
their Ph.D. studies to create the Google universe. Apple Computers was started by Steve Jobs
in a garage.

22
 Majority of micro and small units demonstrate the fact that affluence can be generated
amidst effluents around. Walk into a typical small-scale unit, you need to do careful about
your feet, your hands and your clothes. Floors are stream with cuttings, oil and nails. Walls
and doors handles or greasy. Smoke and dust will settle on your head, makes unrecognisable
if you come back home without a wash.

With oily face, oiled and soiled clothes and torn boots make a typical workers and
with machines. But these are the people who toil hard, maintain employees and their families,
and earn money for themselves. They are not after paid jobs. These are the people the country
needs.

6.5 FACILITIES FOR MICRO, SMALL AND MEDIUM ENTERPRISES

Realising the unique place of small-scale industries in our economy, the Central and
the respective State Government have been providing a variety of facilities for the growth and
development of SME‘s.

SME‘s got major boost when the Ministry of Small-Scale Enterprises and the
Ministry of Agro and Rural Industries (ARIs) were merged to form the Ministry of Micro,
Small and Medium Enterprises (MoMSME‘s). And when Micro, Small and Medium
Enterprises Development (MSMED) Act, 2006 came into force and became operational from
October 2006; it came as a major initiative that affected a massive overhaul of the MSME
sector in India. The MSME Act 2006 aims to facilitate the promotion and development and
enhancing the competitiveness of MSMEs. It has also redefined MSMEs and further
broadened its scope.

Subsequently, over the years, MSME has revised policies, programs and projects;
monitored their implementation in consultation with various organisations and stakeholders
for the growth and promotion of MSMEs.

Needless to say, through the Ministry, the government has brought about changes in
policies and developmental support (as per the emerging needs of globalization) that have
enabled rapid and substantial development of MSMEs in India and given them a competitive
edge over their global counterparts.

Government policy today is moving forward to provide a major thrust to this sector by
abolishing corruption, inspector raj and streaming rules and regulations so that MSMEs get

23
 an environment conducive for growth and development so that they can easily face emerging
new challenges.

Some programs and policies have been outlined here. Broadly, the facilities can be
categorised into three: policy initiatives, institutional support and credit dispensation.

Marketing
Clusters

Pollution Infrastructu
Control ral Facilities

Policy Economic
Women Reforms
Initiatives
Entrepren
eurs

Small
Industry
Growth
Incentive
Centres
Facilities s
for SMEs Banks

Industry
Associations Credit
Dispensa
tion
Institutional
Central
Support
Government State Level
Network Institutions

NGOs Apex Level

State Institutions
Government
Network

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A. Policy Initiatives

(i) Small Industry Policies and Incentives

Starting from the Industrial Policy Resolution, 1948, the Central Government has come out
with a total of six resolutions and statements. All the policies gave a thrust to the promotion of
small units through various incentives. These incentives pertained to financial, fiscal, and
infrastructure-related measures targeted at achieving the growth of the MSME sector.
Every state government or government of a union territory evolves its own industrial
policy which shall be complementary to the policies of the Central Government. The state
governments also design suitable incentives to encourage the growth of the MSME sector.
There is the policy of reservation of items for exclusive manufacture by small units. This
policy has been made applicable only to those product lines which are techno-economically
suitable for manufacture by MSMEs.
In October 2008, the Government deleted some more items that were reserved for the
MSMEs. There are now only 21 items that are reserved for this sector. There include bread,
pickles, wooden furniture, wax candles, exercise books and registers, safety matches, incense
sticks, fireworks, stainless steel and aluminium utensils.
There is also the Preferential Purchase Policy designed to help SMEs to market their
produce better. The Director General of Supplies and Disposal (DGS&D) is responsible to buy
stores from small units and supply them (the former) to different Ministries.
The MSME has recently recommended that at least 20% of public procurement by
government organizations should be from small units. The current figure is merely 3.5% of the
approximately `. 10lakh core worth of goods purchased by government and its various agencies. It
is estimated that the Defence Ministry‘s procurement bill is worth `.55, 000 crore, While the
Railways buy `.30, 000 crore worth and Health Ministry does around `.20, 000 crore of buying
annually. If the recommendation is accepted, it would be a big boon to MSME sector.

(ii) Economic Reforms and SME Policy

Economic reforms initiated since 1991 facilitate the growth of the MSME sector. For
example, foreign direct investment is allowed up to 24% in the equity of a small unit. This inflow
of funds results in better financial strength, the upgradation of technology and promotion of
exports.

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(iii) Infrastructural Facilities
The Central as well as the State Government have devised various schemes for the
development of suitable infrastructure to encourage the growth of the MSME sector. The main
scheme of the Central Government includes the Industrial Estates Programme, Integrated
Infrastructural Development Scheme and the Growth Centers Scheme.

(iv) Small Industry Clusters

A cluster is a sectoral and geographical concentration of enterprises. It may be a local
agglomeration of enterprises, which produce and sell a range of related and complimentary
products and services. Examples of clusters are found in items like sports goods (Meerut), glass
products (Friozabad) and foundry (Agra).
MSMEs operating in clusters derive their strength through a unique sense of togetherness.
They also benefit from backward and forward economic linkages since such units have similar
cultural and social backgrounds.
Clusters provide an active base for business and social interaction. The economics of
agglomeration ensures a network of suppliers that provide raw materials, equipment, machinery,
spares, repair and other services. Clusters encourage specialization in manufacturing process,
inter-firm relationships in production, division of labour, and sharing of information.
The Government of India has evolved unique schemes for the development of clusters.
Several private institutions have been roped into develop these clusters. Institutions like
IL&FS have established an exclusive business unit called the Cluster Development Initiative
(CDI) to enhance the competitiveness by addressing the infrastructure, market access, and
technology and finance requirements of MSMEs through development of modern industrial
clusters in textiles, pharmaceutical, leather, light engineering, afro/food processing, crafts and
other industry vertical across the country through a cluster based Public-Private Partnership (PPP)
approach.
Major SME Clusters:
 Electronics and machine tool industry clusters in Bangalore.
 Marble cutting and polishing industries around Makrana, Rajasthan.
 Auto cluster in Delhi-NCR and Pune.
 Woollen garments and knitwear, bicycle and bicycle parts cluster in Ludhiana.
 Pharmaceuticals clusters in Mumbai, Gujarat, Ahmedabad (Including WAPI industrial area
that is famous for pharmaceutical and drug formulation).

26
  Diamond and diamond polishing industry in Surat.
 Cotton hosiery cluster in Tirupur.
 Blankets industry in Panipat.

Benefits of Clusters

Some of the benefits of staying in a cluster are:

 Nearness to sources of raw materials.

 Easy availability of machinery, technology and skilled labour.
 Suitable business development services.
 Abundance of buyers and customers due to the popularity of a particular cluster.
 Easier to set up a greenfield project near a cluster as enough information is available.
 Easier to deal with the government agencies on compliance and banks for loans.
 Support for technology upgradation by the government and financial agencies.

(v) Industrial Growth Centres

Growth centres were envisaged, way back in 1988, for the promotion of industries in
backward areas. Once a growth centre has been identified, government provides to it the best of
infrastructure. So far, 66 centres have been taken up and funds for them have been released by the
Government of India to the respective State Governments.

(vi) Marketing

Marketing of products is a serious problem faced by small units. The marketing

infrastructure, as available for SMEs, consists of a combination of agencies and incentives as
shown below:

 National Small Industries Corporation (NSIC) to promote the marketing of MSE products
to government departments under the preferential purchasing policy.
 16 subcontracting exchanges to identify items for ancillarisation from various public sector
undertakings.
 Marketing Development Assistance (MDA) to reimburse expenses incurred by SME
delegations that visit foreign countries with a view to promote exports.
 Training programmes for export packaging.
 Organising exhibitions and international trade fairs.

27
  Export Promotion Councils.
 Quality certification by the Bureau of Indian Standards.

(vii) Pollution Control

The Water Act, 1974, the Air Act, 1981 and the Environment Protection Act, 1986 are the
three legislations mainly concerned with ecology in our country. Provisions of these Acts do not
apply to SME units. However, certain highly polluting industries are required to obtain no
objection certificates to establish units, even in the SME sector.

Subsequently, the Government of India has notified 17 industries, wherein a small unit
needs to obtain clearance from the Central Pollution Control Board.

For industries other than the 17, a mere acknowledgement by the State Pollution Control
Board of the application form would serve as consent for a small unit.

(viii) Women Entrepreneurs

The term ‗woman entrepreneur‘ signifies that section of the female population who venture
out into industrial activities. With the passage of time, awareness has motivated women to start
their own enterprises and contribute to the family income. According to the Survey of
Manufacturing Enterprises 1994-95, there were more than two million women-owned proprietary
units in our county. The activities covered by these units include food products, beverages,
textiles, jute, wood, leather, chemicals, metals, transport equipment, printing, hosiery and several
others.

In order to promote and develop units owned by women, a number of exclusive facilities
have been provided. The Small Industries Development Organisation (SIDO) has been conducting
development programmes for the women entrepreneurs.

In view of the changing outlook for the promotion of women entrepreneurs, the SSI Board
in 1991 revised the definition of women entrepreneurs by omitting the condition of employing 50
per cent of women workers. This provided a boost to women entrepreneurs to take up business and
avail of facilities as are applicable to all SMEs.

SIDBI too has been encouraging women entrepreneurs. The Bank has designed
programmes, with a focus on women, viz., Mahila Vikas Nidhi, Mahila Udyam Nidhi, Micro
Credit Scheme and Women Entrepreneurship Development Programmes.

28
 Special recognition has given to encourage women entrepreneurs in Andhra Pradesh. The
State has set up an exclusive industrial estate for women Ranga Reddy District.

(i) 12th Plan Recommendations

In the recent past, the Prime Minister‘s Task Force on MSME sector and the 12th plan
working group on MSME‘s have discussed issues relating to the MSME sector. The
12th plan policy framework guided by the recommendations of these key committees.
The plan covers various issues of MSME sector and its key recommendations fall
under six broad areas: (i) finance and credit (ii) technology (iii) Infrastructure (iv)
marketing and procurement (v) skill development and training, and (vi) institutional
structure. Initiative towards all these six is already in place but no need to be
strengthened.
B. Institutional Support

Series of institutions have been set up by the Central Government, State Government,
industry associations and non-government organisations.

Institutions set up by the Central Government include Small-Scale Industries (SSI) Board,
Small Industries Development Bank of India (SIDBI), Small Industries Development Organisation
(SIDO), Small Industries Service Institutes (SISIs), Product-cum-Process Development Centers
(PPDCs), Regional Testing Centers (RTCs), Central Footwear Training Institutes(CFTIs),
National Small Industries Corporation Ltd.(NSIC), Technology Transfer Centre (TTC), National
Productivity Council (NPC), and National Institute Entrepreneurship and Small Business
Development (NIESBU).

Institute established by respective state government include District Industries Centers

(DIGs), State Financial Corporations (SFCs), Small Industrial Development/Investment
Corporations (SIDCs/SIICs), State Small Industries Development Corporations (SSIDCs) and
Technical Consultancy Organisations (TCOs).

Institutional support network made available by industry associations include the

Confederation of Indian Industry (CII), Federation of Indian Chamber of Commerce and Industry
(FICCI), Consortium of Women Entrepreneurs of India (CWEI), Indian Council of Small
Industries (ICSI) and the like.

Banks have an obligation to lend to small units on ‗Priority sectors‘ basis. 40 per cent of
the net bank credit (NBC) is earmarked for the priority sector and it is 32 per cent in foreign

29
banks. Of the 32 per cent, 10 per cent is meant for MSME sector units. In the last few years, the
credit flow to the MSME sector has gone up considerably. During the 2004-2008, the outstanding
credit of public sector banks to MSMEs has increased from `.58, 278 crore to `.148, 651 crore.
An SME Fund of $2.27 billion has also been operationalised.

Banks now offer cash management services for SMEs. Such services include cheque
collection, management of post-dated cheques, remote demand draft printing, cash delivery, and
the like. Cash management services offer several benefits as follows:

 Financial Benefits: An MSME can improve its liquidity position by realizing cheques
earlier, thus improving its balance sheet and financial ratios.
 Operational Benefits: Since most of the funds and liquidity management functions get
outsourced to the bank, the company would thus require fewer people to preform various
payment-related activities.
 Control Benefits: A corporate can maintain better control over its various banking and
treasury related activities, improve speed and ease of reconciliation and reduce the risk of
fraud.

In addition, to allow quicker and easier access to credit, the government has launched
Credit Guarantee Fund Scheme through which collateral free loans are sanctioned to small
entrepreneurs. The eligible amount under this scheme has been raised from `.50 lakh to `. One
crore. To operationalise the scheme, government of India and SIDBI have set up the Credit
Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which extends help to
entrepreneurs in setting up their own enterprises, or for diversification, expansion, modification
and modernization by facilitating extension of collateral free credit through the institutional
mechanism.

The government has also launched the Scheme of Fund for Regeneration of Traditional
Industries(SFURTI) under which 100 traditional industry clusters of khadi, village industry and
coir sectors would be taken up for comprehensive development for over 5 years. The KVIC and
the Coir Board are the nodal agencies for the Scheme, which will be the first comprehensive
initiative for regeneration of the khadi and village industries sector, based on the cluster
development methodology, with a view to make these industries more productive and competitive
and increase employment opportunities in rural and semi-urban areas.

30
 The Rajiv Gandhi Udyami Mitra Yojana (RGUMY) is a fairly new scheme that has been
launched to promote and encourage entrepreneurial initiatives among MSMEs. This scheme is a
part of the Eleventh Five Year Plan and the objective is to provide handholding support and
assistance to the potential first generation entrepreneurs, who have already successfully completed
an entrepreneurship development programme (EDP), skill development programme (SDP),
entrepreneurship-cum-skill development programme (ESDP) or vocational training of at least two
weeks from it is, through the selected lead agencies, i.e., ‗Udyami Mitras‘, in the establishment
and management of the new enterprise, in dealing with various procedural and legal hurdles and in
completion of various formalities required for setting up and running of the enterprise.

It was in 2005-06 that the Government of India had set up the National Manufacturing
Competitiveness Programme (MNCP), particularly to enhance the competitiveness of MSMEs.
Schemes which come under the MNCP include: National Quality Management Campaign,
National Lean Manufacturing Competitiveness Programme, Managerial and Entrepreneurial
Support, Awareness in Intellectual Property Rights, Design Clinic Scheme, and Promotion of
Information and Communication Technology Scheme. All these schemes seek to remove
structural problems confronting small-scale units and improving their competitiveness.
Implementation of these schemes falls on the shoulders of the respective state governments.

Beside the Central and State Governments and industry associations, there have been set
up NGOs in different states to provide financial assistance, information, training, marketing
support and legal advice to MSMEs.

(C) Credit Dispensation

Availability of timely and adequate financial assistance is vital for the growth of SME
units. A multi-agency credit structure to fill the financial needs of small-scale units has evolved
over the years. The structure available for credit dispensation is as follows:

MILESTONES IN INSTITUTIONAL CREDIT FACILITY

*Setting up of National Industrial Credit(Long Term *Establishment of KVIC, 1956
Operations) Fund asper the RBI Act, 1934
*Passing of State Financial Corporations (SFCs) Act, *Establishment of IDBI, 1964
1951 and establishment of SFCs
*Establishment of NSIC, 1955 *Nationalisation of 14 commercial banks in 1969 and
six others in 1980
*Establishment of SIDCs/SIICs/SSIDCs, 1956 *Passing of SIDBI Act, 1989 and establishment
of SIDBI in 1990

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Apex Level Institutions

 Small Industries Development Bank of India (SIDBI)

Banks

 Commercial Banks (CBs)

 Regional Rural Banks (RRBs)
 Co-operative Banks (State, Central and Primary)

State level Institutions

 State Financial Corporations (SFCs)

 State industrial Development Corporations (SIDCs)/State Industrial Investment
Corporations (SIICs)
 State Small Industries Development Corporations (SSIDCs)

Local Level

 NBFCs and money lenders

 Angel investors

6.6 PROBLEMS AND REMEDIALS OF MICRO, SMALL AND MEDIUM

ENTERPRISES

Let us discuss the problems and remedies of MSME‘s. The facilities available to small
industrial owner/manager are varied. Right from the stage of inception, all aspects of the small
unit, viz., marketing, finance, training, export, modernization, turning around in case of sickness
and others are taken care of by the government. It looks as though you should only make up your
mind to start a small unit; you will be automatically raised to the status of an industrialist, just as
you are pushed to the other end of the road by a huge and thick crowd, provided you allow
yourself to be jostled.

But it is ironic that there are not many takes, though several facilities are available. One is
tempted to question the educated youth why they should not grab the facilities thrown open by the
government and start small-scale units instead of lining up before the employment exchanges for
jobs.

32
Problems of the SME sector are explained below:

1. The expansion of the MSME sector till now has been policy-driven. Raising the assets
limit, increasing the reservation net and providing concessions and subsidies have contributed to
the enormous increase in the number of small-scale units, many of them turning sick subsequently.
If some units have prospered, it is because of the dynamism of the owners-managers. Successful
entrepreneurs do not know what a small unit means, nor are they aware of the reservation net (It is
estimated that only 22 per cent of units have benefited from reservation). It is time that the policy-
driven measures are replaced by more forward-looking and entrepreneurial-oriented measures
like; (a) favoring the growth-oriented and viable units and the units satisfying the socio-economic
norms; (b) fostering more of the clustered units to reinforce backward and forward linkages; (c)
relying exclusively on assistance related to raw materials, marketing, machinery, and technical
advice, sparingly; and (d) offering timely and adequate assistance.
2. In today‘s environment, it is performance and not protection that is at the top of
agenda of any small unit. In order to achieve performance, small-scale units require efficient and
willing human resources. Since small scale units cannot offer the kind of packages that large
companies can, they lose personnel. Hence remedial measures are needed to check high employee
turnover in small units.
3. Sickness is a perennial problem afflicting the MSME sector.
4. Finance continues to be bugbear. Commercial banks have been fulfilling only
partially their commitment to the MSME sector. In fact, many banks are cautious
when it comes to lending money to small units. Exception however is SBI, PNB and
Canara Bank. Recently, SBI has restructured over 38,500 accounts of MSMEs thanks
to the RBIs revision of providing norms.
The MSME Act has, no doubt, mandated payments on purchases from small units within
45 days from the dates of procurement. This provision too has been observed more in breach than
in practice.
Export-oriented units in sectors like garments, leather, marine goods and auto
components have their own woes. They face serious problem while realizing payments from
overseas buyers.
The so-called micro units are disadvantageously placed. About 90 per cent of the MSME
units in the country are micro units. Majority of these units do not come under the formal banking
system.

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 SIDBI‘s reference facility, recently propped up by `.7,000 crore, has not benefited the
MSME export units. SIDBI‘s lack of proactive approach and lethargy have scuttled the benefit
otherwise should have reached the small units.
However, small units are now allowed to raise funds through stock exchanges. Recently,
SEBI released a framework for existing exchanges to set up separate SME trading platforms,
which must be corporatized entries with a minimum networth of `.100 crore. SMEs are exempt
from the usual eligibility norms applicable for initial public offerings (IPOs) and follow on public
offerings (FPOs).These norms include a minimum pre-issue networth and profit-making track
record.
Lending agencies need to relax their evaluation methods and be generous in extending
credit to the worthy units. It contains expert committee recommendations.
5. The other problem is marking. Small firms often do not have the resources for serious
marketing efforts. A market development fund may be set up by the government to solve the
marketing problem. Alternatively, the government could itself market products of small units
under a common brand name. Government need not shy away from intervention although the
present trend is non-intervention in economic activates.

6. Technology modernization has become a problem particularly because of the asset

limit for definitional purpose. To circumvent this problem, several entrepreneurs set up new units
with modern technology leaving the old ones to languish.
In order to meet a long-standing demand, the government is now considering twin
packages for the reserved and non-reserved sectors. First, the investment limit is likely to be raised
to `.1.5 crore for units falling under the reserved net and `.5crore for those falling outside. The
logic is that since excise concessions stop after a unit reaches the `. 2 crore rupees turnover limit,
the revenue loss will not be high. Units will be able to start with modern technology, or upgrade
the existing one. Small units might also choose to consolidate multiple units.

7. There are endless hassles from the government and other agencies, which are
otherwise meant for encouraging the development of the small scale sector. There are 30 to 40
inspectors from various departments visiting on average unit. The entrepreneurs are also
confronted with cumbersome procedures. To the credit of the governments, both Central as well as
State are trying to minimize inspectors and reduce procedures.

34
 8. There are a plethora of agencies offering advice, training, expertise and other support
systems for small units. Unfortunately, most small units are unaware of what is available to them.
Further, the agencies are content with providing existing infrastructure to the small units. The
bodies must become more aggressive, mobilise resources and assist the growth of the small units.

9. Economic reforms will affect the fortunes of small units badly. This will be particularly
true of the units which are engaged in the production of consumer goods without the benefit of
any brand advantage. The new product launches of giant corporations will sooner or later encroach
severely on the small segments of consumer markets which have hitherto been the sheltered
domain of the SME units.

10. The organizational base of many of the SME units has remained weak in terms of
what the emerging competitive conditions will warrant. The recent transformation of the Indian
capital market has not benefited the SME sector which continues to operate as proprietary
concerns. If they are to access capital markets, small units must grow in size to become corporate
entries.

11. Much of the current crisis faced by the SME sector is the lack of clarity with regard to
the nature on SME unit. There has been a proliferation of definitions of SMEs and consequently,
many small entrepreneurs are not sure whether they fit into the government‘s definitions.

Ancillary units (with stipulation that they should not be subsidiaries of other industrial
units) hardly number 8,000 out of the nearly 24 lakh SME units. In fact, it is this sub-sector which
holds much promise for the emergence of subcontracting as a major strategy for competitive
positioning of our industry. Unfortunately, these units are likely to be lumped with other loosely-
defined units for the purpose of benefits. This problem needs to be tackled immediately.

12. Multiplicities of laws have provided to be often a burden on small units. MSMEs are
required to follow several laws and regulations beginning from their inception till the time they
operate, at various stages. These laws framed by the government-both central and state-sometimes
do bring in a multiple adherence system which proves to be hurdle for SMEs but are nevertheless
necessary.

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6.7 SMALL SECTOR INDUSTRIAL POLICY

The government announced its policy towards the small sector on 6th August, 1991.
The main features of the policy are:

 Equity participation up to 24 percent by other industrial undertakings including

foreign companies
 Legislation to limit financial liability of new and non-active partners to the capital
invested.
 Services sector to be recognized as a tiny sector.
 Support from National Equity Fund for projects up to `.10 lakh
 Single window loans to cover projects up to `.20 lakh. Banks too to be involved.
 Relaxation of certain provisions of labour laws.
 Subcontracting exchanges to be set up by industry associations.
 Easier access to institutional finance.
 Factoring services through SIDBI to overcome the problem of delayed payments.
Also, legislation to ensure payment of bills.
 Women enterprises redefined.
 Package for handloom and handicraft sector.
 Export development centre in SIDO.
 Marketing of mass consumption items by National Small Industries Corporation
under a common brand name.

Tiny Enterprises

The Government has already announced an increase in the investment limits in plant
and machinery of small-scale industries, ancillary units and export oriented units to
`.60,00,00 or `.75,00,00 respectively such limits in respect of Binny Enterprises would now
be increased from the present 2,00,000 to 50,000 irrespective of locations of the unit.

Service subsectors is a fast growing area and there is need to provide support to it in
view of its recognised potential for generating employment hence all industry related services
and business enterprises irrespective of the location would be recognised as small scale
industries and their investment ceilings would correspond to any of those Enterprises.

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Financial Support Measures

Inadequate access to credit both short-term and long-term remains a perennial

problem facing the small-scale sector. Emphasis would henceforth shift from subsidized/
cheap credit, expect for specified target groups, and efforts would be made to ensure both
adequate flow of credit on normative basis and the quality of its delivery for viable operations
of this sector.

To provide access to the capital market and to encourage more modernisation and
technological upgradation, it has been decided to allow equity participation by other
industrial undertakings in the SME, not exceeding at 24 per cent of the total shareholding.
This would also provide a powerful boost to ancillarisation and sub-contracting, leading to
the expansion of employment opportunities.

A beginning has been made towards solving the problem of delayed payments to
small industries by setting up of ‗factoring‘ services through Small Industrial Development
Bank of India (SIDBI). Network of such services would be set up throughout the country and
operated through commercial banks. A suitable legislation will be introduced to ensure
prompt payment of small industries bills.

Infrastructural Facilities

A Technology Development Cell (TDC) would be set up in the Small Industries

Development Organisation (SIDO) which would also provide technology inputs to improve
productivity and competitiveness of the products of the small-scale sector. The TDC would
coordinate the activities of the Tools Rooms, Process-cum-Product Development Centres
(PPDs), existing as well as to be established under SIDO, and would also interact with other
industrial research and development organisations to achieve its objectives.

Adequacy and equitable distribution of indigenous and imported raw materials would
be ensured to the small-scale sector, particularly the tiny sub-sector.

Marketing and Exports

National Small Industries Corporation (NSIC) would concentrate on the marketing of

mass consumption items under a common brand name and organic links between NSIC and
SSIDs would be established.

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 Though the SSI sector is making a significant contribution to total exports, both direct
and indirect large potential remains untapped. The SIDO has been encouraged organised as
the nodal agency to support the small-scale industries in export promotion.

Modernisation, Technology and Quality Upgradation

Industry associations would be encouraged and supported to establish quality

counselling and common testing facilities. Technology and markets would be established.

A re-oriented programme of modernisation and technological upgradation aimed at

improving productivity, efficiency and cost-effectiveness in the small-scale sector would be
pursued.

Indian Institutes of Technologies (IITs) and selected regional/other engineering

colleges will serve as technological information, design and development centres in their
respective command areas.

Promotion of Entrepreneurship

The Government will continue to support the first generation entrepreneurs through
training and will support their efforts. Large number of EDP trainers and motivators will be
trained to significantly expand the Entrepreneurship Development Program (EDP). Woman
Entrepreneurs will receive support through special training programs.

Village Industries

Handloom sector contributes about 30 per cent of the total textile production in the
country. It is the policy of government to promote handloom to sustain employment in rural
areas and to improve the quality of life for handloom weavers.

The Janata Clothes Scheme, which sustains weavers on a minimum level of livelihood
will be phased out by the terminal year of the VIII plan and replace by the omnibus project
package scheme, under which substantial funds will be provided for the modernisation of
tools, training, provision of better designs, provision of better dyes and the chemicals and
marketing assistance.

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Handicraft Sector

The key areas in handicrafts that could contribute towards faster pace of rural
industrialisation are production and marketing. Scheme for training and design development
and for production and marketing assistance will be given encouragement.

Other Village industries

The government recognises the need to enhance the spread of rural and cottage
industries towards stepping up non-formal employment opportunities

The programmes of intensive development of key through area approach will be with
the tie-up with District Rural Development Agency (DRDA) and ongoing development
programmes releasing to weaker sections like schedule caste, schedule tribes and women
would be extended throughout the country.

6.8 RECOMMENDATIONS OF THE ABID HUSSAIN COMMITTEE

Following are the major recommendations made by the Abid Hussain Committee:

 Abolition of the reserved items.

 Hiking the investment limit of SME units.
 Scrapping the foreign investment ceiling of 24 percent
 New law to cover business practices.
 Special in incentives to cluster of units.
 Inclusion of services sector under SME units.
 National research Institute for SME units.
 Sanctioning of composite loans and credit rating of SME units
 liberalising exercise benefits for manufacturing brand-name items

MORE RECOMMENDATIONS

The Government constituted yet another committee in 2010 and it has already
submitted its report. Its recommendations fall under four areas: (i) initiatives that need
immediate push through, (ii) medium-term institutional measures, (iii) legal and regulatory
structures, and (iv) challenges from north east eastern states and Jammu and Kashmir.

Specifically, the committee‘s recommendations are eight in number which are the following:

39
1. Commercial banks to observe 20 percent lending under priority sector lending and 60

percent of which to be earmarked for micro enterprises.

2. Any shortfall in funds meant for micro sector to go to ‗special fund to micro‘ in SIDBI.

3. Continuation of the ‗stimulus package‘ scheme through 2010-11, which include the

interest subversion scheme for certain export- oriented and labour intensive units,

sustenance facility for SIDBI and the like.

4. Government‘s purchase of 20 percent from MSMEs to continue and the target to be

achieved in a specified time period.

5. ‗Offset policy‘, for defence and aviation sectors through which foreign support suppliers

need to procure goods of a specific percentage from local vendors, particularly MSMEs.

6. Additional `.5000 crore to be set aside and invested over three to five years on technology

upgradation schemes, incubating facilities, renovating and developing new industrial

estates, revitalising DICs, entrepreneurship and skill development programmes and

strengthening equity base of NSIC.

7. Giving legal and fiscal instruments to help jumping of units from unorganised sector to

organised sector.

8. Set up an independent body of the national level to promote MSMEs.

6.9 MUDRA CARD

Recently, the Government of India launched the MUDRA (Micro Unit Development
and Refinance Agency) card under the Pradhan Mantri MUDRA Yojana (PMMY). This
facility enables small entrepreneurs avail financial assistance and frees them from clutches of
moneylenders. Such a step is long overdue and it is hoped that MUDRA scheme will boost
the prospects of MSME sector.

Meaning of MUDRA Card

MUDRA card is a debit card issued against the MUDRA loan account for working capital
portion of the loan. The borrower can make use of MUDRA card in multiple withdrawal and

40
credit facilities, so as to manage the working capital limit efficiently and keep the interest
burden minimum.

Eligibility Criteria for MUDRA Loan

The Government of India has designed Mudra loans under the Pradhan Mantri Mudra Yojana
(PMMY) scheme to help small business owners to meet their capital needs and operating
costs through easy finance schemes. Anyone who runs a small business enterprise is eligible
to apply for the following entities are eligible to apply for a Mudra loan.

 The minimum age of the applicant must be 18 years and the maximum Mudra loan
age limit is set to 65 years.
 Loans can be availed by non-farm income-generating businesses in trading,
manufacturing and services.
 The requirement of the credit must be `.10, 00,000 or Lower.
 Entities must be engaged in allied agricultural services since 1st April 2016.

Lending institutions that are eligible to provide Mudra loan

All the public sector, private sector and the regional rural banks or eligible to provide Mudra
loan if they satisfy the following criteria:

 Bank should have it generated profits during the last two years
 Net performing assets should not be more than 15%, 10% and 6% for public, private
and regional rural banks respectively.
 Networth should be above ` 250 crore for private and public sector banks, while for
rural banks it should be above ` 50 crore.

6.10 CHECK YOUR PROGRESS

Fill In the blanks with suitable answers:

1. Small and Medium Enterprises Development (MSMED) Act, _____

2._____ sector accounts for 40 per cent of GDP

3. Foreign direct investment is allowed up to __ percentage in the equity of a small unit

4. Small-Scale units require efficient and willing _________

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5. ______ sector contributes about 30 per cent of the total textile production in the country.

Answer to Check Your Progress:

1. 2006
2. MSME
3. 24
4. human resources
5. Handloom
6.11 SUMMARY

As you know we had discussed the issues relating to MSMEs. The term small-scale
unit has always been based on investment limits which varied from time to time. As of now
the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is the accepted
source for definitional purpose of small units.

It is not just the leap forward in terms of number of units. Small enterprises are the
biggest employers absorbing 40 per cent of the country‘s workforce.

Majority of micro and small units demonstrate the fact that affluence can be generated
amidst effluents around. Walk into a typical small-scale unit. Ancillary units (with stipulation
that they should not be subsidiaries of other industrial units) hardly number 8,000 out of
nearly 24 lakh SME units.

Abid Hussain Committee made recommendations to SME units. The Government

constituted yet another committee in 2010 and it has already submitted its report. Its
recommendations fall under four areas: (i) initiatives that need immediate push through, (ii)
medium-term institutional measures, (iii) legal and regulatory structures, and (iv)challenges
from north east eastern states and Jammu and Kashmir. Pradhan Mantri MUDRA Yojana is
for providing different schemes for different benefits to the public.
6.12 KEY WORDS
DGS&D : Director General of Supplies and Disposal

IITs : Indian institutes of technology

SIDO : Small Industries Development Organisation

SIDBI : Small Industrial Development Bank of India

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PPDs : Process-cum-Product Development Centres

6.13 QUESTIONS FOR SELF-STUDY

1. Define a small industry/ what is the role of small industries in our economy?

2. Bring out the significance of small scale industries.

3. Explain the facilities available for the promotion of small scale industries?

3. Discuss the problems and remedies of small scale industries.

4. Give an account of small scale industrial policy.

5. Briefly explain the recommendations of Abid Hussain Committee.

6. Write a note on Mudra card.

6.14 REFERENCES

1. Ashwathappa K (2019), Business Environment Himalaya Publishing House.

2. Justin Paul.(2017) Business Environment, Tata McGraw Hill, Mumbai.
2. Peters and Waterman Jr., In search of Excellance.
3. Malcolm Harper, Small Business in the Third World.
4. S. Swaminathan,( 1995) ― Tall Talk on Small Industry‖, The Hindu.

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Unit- 7 COMPETITION ACT, 2002

Structure:
7.0 Objectives

7.1 Introduction

7.2 Definitions of Competition Act, 2002

7.3 Salient features of the Act

7.4 Anti Agreements

7.5 Types of Agreements

7.6 Abuse of Dominant Position

7.7 Competition Commission of India

7.8 Review of Orders of Commission

7.9 Appeal of the Act

7.10 Penalty of the Act

7.11 Check Your Progress

7.12 Summary

7.13 Keywords

7.14 Questions for Self-Study

7.15 References

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7.0 OBJECTIVES

After studying this unit, you will be able to;

• Explain the meaning and definitions of the Competition Act.

• Discuss the salient features of the Competition Act.
• Discribe the Anti Agreements.
• List out the Types of Agreements.
• Delineate the Abuse of Dominant Position.
• Give an account of the Competition Commission of India.
• Bring out the Review of Orders of Commission.
• State the Appeal and Penalty.

7.1 INTRODUCTION
As you know micro, small and medium enterprises (MSMEs), let us discuss the
Competition Act 2002. Prior to the era of liberalization this started in the year 1991, India
followed and policies comprising of laws, rules, regulations and executives orders. The
Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) was one of the important
Act to regulate the competition in India. It was in 1991 that widespread economic reforms
were undertaken and consequently the march from command and control economy to an
economy based more on free market principles was undertaken. Accordingly there is a need
for an effective competition regime.

In this background, India has chosen to enact a new competition law called
Competition Act, 2002. The MRTP Act has metamorphosed in to the new law, i.e.,
Competition Act, 2002. The new law designed to repeal the existing MRTP Act.

The Competition Act, 2002, was enacted to provide for the establishment of a
commission to prevent practices having adverse effect on competition, to promote and sustain
competition in market, to protect the interests of the consumers and to ensure freedom of
trade carried by the other participants in markets, in for matters connected therewith or
incidental thereto. The Act was amended by the Competition (Amendment) Act, 2007 to
provide for the establishment of Competition Tribunal to hear appeal against any direction
issued or decision made or order passed by the Competition Commission of India.

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7.2 DEFINITIONS OF COMPETITION ACT, 2002
It is must for us to know few important definitions quoted by the popular known
authors in the field of Competition Act, such definitions are

1. ‘Agreements’ includes any arrangements or understanding or action in concert whether or

not such agreement, understanding or action is formal or in writing or whether or not such
arrangement, understanding or action is intended to be enforceable by legal proceedings;

2.‘Appropriate Tribunal’ means the Competition Appellate Tribunal established under sub
section (1) of Section 53A;

3.‘Cartel’ includes an association or producers, sellers, distributors, traders or service

providers who, by agreement amongst themselves , limit, control or attempts to control the
production, distribution, sale or price of, or, trade or provision of services ;

4. Consumer means any person who

 Buys any goods for a consideration which has been paid or promised or partly
paid and partly promised, or under any system of deferred payment and
includes any user of such goods other than the person who buys such goods
for consideration paid or promised or partly paid or partly promised, or under
any system of deferred payment when such use is made with the approval of
such person, whether such purchase of goods is for resale or for any
commercial purpose or for personal use
 Hires or avails of any services for a consideration which has been paid or
promised or partly paid and partly promised, or under any system of deferred
payment and includes any beneficiary of such services other than the person
who hires or avails of the services for consideration paid or promised, or partly
paid and partly promised, or under any system of deferred payment, when
such services are availed of with the approval of the first-mentioned person
whether such hiring or availing of services is for any commercial purpose or
for personal use;

5.‘Goods’ means goods as defined in the Sale of Goods Act,1930 and includes- products
manufactured, processed or mined ; debentures, stocks and shares after allotment; in relation
to goods supplied, distributed or controlled in India, goods imported in to India:

46
6. ‘Price’, in relation to the sale of any goods or to the performance of any services, includes
every valuable consideration, whether direct or deferred, and includes any consideration
which in effect relates to the sale of any goods or to the performance of any services although
ostensibly relating to any other matter or thing:

7.‘Service’ means service of any description which is made available to potential users and
includes the provision of services in connection with business of any industrial or
commercial matters such as banking, communication, education, financing, insurance, chit
funds, real estate, transport, storage, material treatment, processing, supply of electrical or
other energy, boarding, lodging, entertainment, amusement, construction, repair conveying of
news or information and advertising ;

8.‘Trade’ means any trade, business, industry, profession or occupation relating to the
production, supply, distribution, storage or control of goods and includes the provision of any
services:

7.3 SALIENT FEATURES OF THE ACT

In this section we will discuss the salient features of the Competition Act 2002.

1. Anti-Agreements: Any individual or enterprises shall not deal in production supply or

distribution that may cause a negative impact regarding competition in India. Any existence
of such agreements is considered illegal.

2. Abuse of dominant position: In the event, an enterprise or an associated individual, it is

found to indulge in practices that are unfair or discriminatory in nature shall be considered an
abuse of dominant position. If a party is found to be in abuse of its position, then they will be
subjected to an investigation from the concerned authorities.

3. Combinations: As per the act a combination is defined as terms which lead to acquisitions
or mergers. But should such combinations cross the limits as put forth by the Act, then the
parties involved would be under the scrutiny of the Competition Commission of India.

4. Competition Commission of India: The Competition Commission of India is an

independent body with the powers to enter into contracts and should the contracts be broken
they can sue the parties involved. The Commission consists of a maximum of six members
who are tasked with sustaining and promoting the interests of consumers in order to foster an
ideal environment for economic competition.

47
The other function of the Commission is to advise the Government of India regarding
competition in the economy and create public awareness on the same issue.

7.4 ANTI AGREEMENTS

In simple words, Anti-Competitive agreements are agreements that are made by two
or more companies competing in the same market to fix prices or reduce stocks etc., so as to
manipulate the market favourably for them. This has the effect of the companies reducing the
competition in the market which adversely affects the end consumer.

The competition Act, 2002 defines anti-competitive agreements as such in section 3

where it states, ―No enterprise or association of enterprise or individuals or association or
individuals may enter into an agreement regarding production, supply, distribution, storage
acquisition or control of goods or provision of services which may adversely affect the
competition in the Indian market‖.

Prohibition of Anti-competitive agreements:

1. No enterprise or association of enterprises or person or association of persons shall enter

into any agreement in respect of production, supply, distribution, storage, acquisition or
control of goods or provision a service, which causes or is likely to cause an appreciable
adverse effect on competition within India

2. Any agreement entered into in contravention of the provisions contained in subsection (1)
shall be void.

3. Any agreement entered into between enterprises or associations of enterprises or persons or

associations of persons or between any person and enterprise or practice carried on, or
decision taken by, any association of enterprises or association of persons, including
cartels, engaged in identical or similar trade of goods or provision of services, which—

(a)Directly or indirectly determines purchase or sale prices;

(b)Limits or controls production, supply, markets, technical development,

investment or provision of services;

(c)Shares the market or source of production or provision of services by way of

allocation of geographical area of market, or type of goods or services, or number of
customers in the market or any other similar way;

48
 (d) Directly or indirectly results in bid rigging or collusive bidding, shall be presumed
to have an appreciable adverse effect on competition:

Provided that nothing contained in this sub-section shall apply to any agreement
entered into by way of joint ventures if such agreement increases efficiency in production,
supply, distribution, storage, and acquisition or of goods or provision of services.

7.5 TYPES OF AGREEMENTS

Such agreements are termed as AAEC agreement, which means the Appreciable
Adverse Effect on Competition agreements. The Act expressly states that such an agreement
shall be void. An AAEC agreement is classified as any agreements that result in:

 Directly affects purchase or sale prices.

 Indirectly affects purchase or sale prices.
 Limits production
 Limits supply
 Limits technical development
 Limits service provision in Market.
 Leads to the rigging of bids.
 Leads to collusive bidding.

7.6 ABUSE OF DOMINANT POSITION

The Act does not frown upon dominance, but upon abuse. Abuse of dominance by
any enterprises is prohibited. Dominance is the position of strength enjoyed by an enterprise
which enables, it to operate independently of competitive pressure in the relevant market and
also to appreciably affect the relevant market, competitors, and consumers by its actions.

Accordingly, under Sec 4, no enterprise or group shall abuse its dominant position.
There shall be an abuse of dominant position under sub-section (1), if an enterprise or a
group- directly or indirectly, imposes unfair or discriminatory – a) condition in purchase or
sale of goods or services or b) price in purchase or sale of goods or services

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7.7 COMPETITION COMMISSION OF INDIA
Establishment of Commission: As per Sec.7 (1):

(1)With effect from such date as the Central Government may, by notification,
appoint, there shall be established, for the purposes of this Act, a Commission to be called the
―Competition Commission of India.

(2) The Commission shall be a body corporate by the name aforesaid having
perpetual succession and a common seal with power, subject to the provisions of this Act, to
acquire, hold and dispose of property, both movable and immovable, and to contract and
shall, by the said name, sue or be sued,

(3) The head office of the Commission shall be at such place as the Central
Government may decide from time to time.

(4) The Commission may establish offices at other places in India.

Composition of Commission (Sec. 8):

(1) The Commission shall consist of a Chairperson and not less than two and not more than
six other members to be appointed by the Central Government.

(2) The Chairperson and every other Member shall be a person of ability, integrity and
standing and who, has special knowledge of, and such professional experience of not less
than fifteen years in, international trade, economics, business, commerce, law, finance,
accountancy, management, industry, public affairs, or competition matters, including
competition law and policy, which is in the opinion of the Central Government, may be
useful to the Commission.

(3) Chairperson and other Members shall be whole-time Members.

Selection Committee for Chairperson and Members of Commission (Sec. 9)

As per Sec (9) (1) The Chairperson and other Members of the Commission shall be
appointed by the Central Government a panel of names recommended by a Selection
Committee consisting of the Chief Justice of India or his nominee, the Secretary in the
Ministry of Corporate Affairs, the Secretary in the Ministry of Law and Justice, and two
experts who have special knowledge of, and professional experience in international trade,

50
economics, business, commerce, law, finance, accountancy, management, public affairs or
competition matters including competition law and policy.

7.8 REVIEW OF ORDERS OF COMMISSION

Any person aggrieved by an order of the Commission from which an appeal is

allowed by this Act but no appeal has been preferred, may, within thirty days from the date of
the order, apply to the Commission for review of its order and the Commission may make
such order thereon as it thinks fit: Provided that the Commission may entertain a review
application after the expiry of the said period of thirty days, if it is satisfied that the applicant
was prevented by sufficient cause from preferring the application in time: Provided further
that no order shall be modified or set aside without giving an opportunity of being heard to
the person in whose favour the order is given and the Director General where he was a party
to the proceedings.

7.9 APPEAL OF THE ACT

Establishment of Appellate Tribunal (Sec 53A)

(1) The National Company Law Appellate Tribunal constituted under section 410 of the
companies Act, 2013 shall, on and from the commencement of Part XIV of Chapter VI of the
Finance Act, 2017, be the Appellate Tribunal for the purpose of this Act and the said
appellate Tribunal shall –

(a) Hear and dispose of appeals against any direction issued or decision made or
order passed by the Commission under sub-sections (2) and (6) of section 26, section 27,
section 28, section 31, section 32, section 33, section 38, section 39, section 43, section 43A,
section 44, section 45 or section 46 of the Act;

(b) Adjudicate on claim for compensation that may arise from the findings of the
Commission or the orders of the Appellate Tribunal in an appeal against any finding of the
Commission or under section 42A or under sub- section (2) of section 53Q of this Act, and
pass orders for the recovery of compensation under section 53N of this Act.

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Appeal to Appellate Tribunal (Sec 53B):

(1) The Central Government or the State Government or a local authority or enterprise or any
person, aggrieved by any direction, decision or order referred to in clause (a) of section 53A
may prefer an appeal to the Appellate Tribunal.

(2) Every appeal under sub-section (1) shall be filed within a period of sixty days from the
date on which a copy of the direction or decision or order made by the Commission is
received by the Central Government or the State Government or a local authority or
enterprise or any person referred to in that sub-section and it shall be in such form and be
accompanied by such fee as may be prescribed: Provided that the Appellate Tribunal may
entertain an appeal after the expiry of the said period of sixty days if it is satisfied that there
was sufficient cause for not filing it within that period.

(3) On receipt of an appeal under sub-section (1), the Appellate Tribunal may, after giving
the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks
fit, confirming, modifying or setting aside the direction, decision or order appealed against

(4) The Appellate Tribunal shall send a copy of every order made by it to the Commission
and the parties to the appeal.

(5) The appeal filed before the Appellate Tribunal under sub-section (1) shall be dealt with by
it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal
within six months from the date of receipt of the appeal.

Awarding compensation (Sec 53N):

(1) Without prejudice to any other provisions contained in this Act, the Central Government
or a State Government or a local authority or any enterprise or any person may make an
application to the Appellate Tribunal to adjudicate on claim for compensation that may arise
from the findings of the Commission or the orders of the Appellate Tribunal in an appeal
against any findings of the Commission or under section 42A or under sub-section(2) of
section 53Q of the Act, and to pass an order for the recovery of compensation from any
enterprise for any loss or damage shown to have been suffered, by the Central Government or
a State Government or a local authority or any enterprise or any person as a result of any
contravention of the provisions of Chapter II, having been committed by enterprise.

52
(2) Every application made under sub-section (1) shall be accompanied by the findings of the
Commission, if any, and also be accompanied with such fees as may be prescribed.

(3) The Appellate Tribunal may, after an inquiry made into the allegations mentioned in the
application made under sub-section (1), pass an order directing the enterprise to make
payment to the applicant, of the amount determined by it as realisable from the enterprise as
compensation for the loss or damage caused to the applicant as a result of any contravention
of the provisions of Chapter II having been committed by such enterprise: Provided that the
Appellate Tribunal may obtain the recommendations of the Commission before passing an
order of compensation.

(4) Where any loss or damage referred to in sub-section (1) is caused to numerous persons
having the same interest, one or more of such persons may, with the permission of the
Appellate Tribunal, make an application under that sub-section for and on behalf of, or for
the benefit of, the persons so interested, and thereupon, the provisions of rule 8 of Order 1 of
the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908), shall apply subject to the
modification that every reference therein to a suit or decree shall be construed as a reference
to the application before the Appellate Tribunal and the order of the Appellate Tribunal
thereon. Explanation.—for the removal of doubts, it is hereby declared that—

(a) an application may be made for compensation before the Appellate (47) Tribunal only
after either the Commission or the Appellate Tribunal on appeal under clause (a) of sub-
section (1) of section 53A of the Act, has determined in a proceeding before it that violation
of the provisions of the Act has taken place, or if provisions of section 42A or sub-section (2)
of section 53Q of the Act are attracted.

(b) enquiry to be conducted under sub-section(3) shall be for the purpose of determining the
eligibility and quantum of compensation due to a person applying for the same, and not for
examining afresh the findings of the Commission or the Appellate Tribunal on whether any
violation of the Act has taken place.

Procedures and powers of Appellate Tribunal (Sec.53O):

(1) The Appellate Tribunal shall not be bound by the procedure laid down in the Code of
Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles of natural justice and,

53
subject to the other provisions of this Act and of any rules made by the Central Government,
the Appellate Tribunal shall have power to regulate its own procedure including the places at
which they shall have their sittings.

(2) The Appellate Tribunal shall have, for the purposes of discharging its functions under this
Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5
of 1908) while trying a suit in respect of the following matters, namely:-

a) Summoning and enforcing the attendance of any person and examining him on oath;

b) Requiring the discovery and production of documents;

c) Receiving evidence on affidavit;

d) Subject to the provisions of sections 123 and 124 of the Indian Evidence Act, 1872 (1 of
1872), requisitioning any public record or document or copy of such record or document
from any office;

e) Issuing commissions for the examination of witnesses or documents;

f) Reviewing its decisions;

g) Dismissing a representation for default or deciding it ex parte;

h) Setting aside any order of dismissal of any representation for default or any order passed
by it ex parte;

i) Any other matter which may be prescribed.

(3) Every proceedings before the Appellate Tribunal shall be deemed to be judicial
proceedings within the meaning of sections 193 and 228, and for the purposes of section 196,
of the Indian Penal Code (45 of 1860) and the Appellate Tribunal shall be deemed to be a
civil court for the purposes (48) of section 195 and Chapter XXVI of the Code or Criminal
Procedure, 1973 (2 of 1974).

54
Execution of orders of Appellate Tribunal (Sec 53P):

(1) Every order made by the Appellate Tribunal shall be enforced by it in t h e same manner
as if it were a decree made by a court in a suit pending therein, and it shall be lawful for the
Appellate Tribunal to send, in case of its inability to execute such order, to the court within
the local limits of whose jurisdiction,-

a) in the case of an order against a company, the registered office of the company is situated;
or b) in the case of an order against any other person, place where the person concerned
voluntarily resides or carries on business or personally works for gain, is situated.

(2) Notwithstanding anything contained in sub-section (1), the Appellate Tribunal may
transmit any order made by it to a civil court having local jurisdiction and such civil court
shall execute the order as if it were a decree made by that court.

Contravention of orders of Appellate Tribunal (Sec 53Q):

(1) Without prejudice to the provisions of this Act, if any person contravenes, without any
reasonable ground, any order of the Appellate Tribunal, he shall be liable for a penalty of not
exceeding rupees one crore or imprisonment for a term up to three years or with both as the
Chief Metropolitan Magistrate, Delhi may deem fit: Provided that the Chief Metropolitan
Magistrate, Delhi shall not take cognizance of any offence punishable under this sub-section,
save on a complaint made by an officer authorized by the Appellate Tribunal.

(2) Without prejudice to the provisions of this Act, any person may make an application to
the Appellate Tribunal for an order for the recovery of compensation from any enterprise for
any loss or damage shown to have been suffered, by such person as a result of the said
enterprise contravening, without any reasonable ground, any order of the Appellate Tribunal
or delaying in carrying out such orders of the Appellate Tribunal.

53R. [Omitted by the finance Act, 2017, w.e.f. 26th May, 2017]

Right to legal representation (Sec 53S):

(1) A person preferring an appeal to the Appellate Tribunal may either appear in person or
authorize one or more chartered accountants or company secretaries or cost accountants or

55
legal practitioners or any of its officers to present his or its case before the Appellate
Tribunal.

(2) The Central Government or a State Government or a local authority or any enterprise
preferring an appeal to the Appellate Tribunal may authorize one or more chartered
accountants or company secretaries or cost (49) accountants or legal practitioners or any of its
officers to act as presenting officers and every person so authorized may present the case with
respect to any appeal before the Appellate Tribunal.

(3) The Commission may authorize one or more chartered accountants or company
secretaries or cost accountants or legal practitioners or any of its officers to act as presenting
officers and every person so authorized may present the case with respect to any appeal
before the Appellate Tribunal.

Explanation – The expressions ―chartered accountant‖ or ―company secretary‖ or ―cost

accountant‖ or ―legal practitioner‖ shall have the meanings respectively assigned to them in
the Explanation to section 35.

Appeal to Supreme Court (Sec 53T):

The Central Government or any State Government or the Commission or any statutory
authority or any local authority or any enterprise or any person aggrieved by any decision or
order of the Appellate Tribunal may file an appeal to the Supreme Court within sixty days
from the date of communication of the decision or order of the Appellate Tribunal to them;
Provided that the Supreme court may, if it is satisfied that the applicant was prevented by
sufficient cause from filing the appeal within the said period, allow it to be filed after the
expiry of the said period of sixty days.

Power to Punish for contempt (Sec 53U):

The Appellate Tribunal shall have, and exercise, the same jurisdiction, powers and authority
in respect of contempt of itself as a High Court has and may exercise and, for this purpose,
the provisions of the Contempt of Courts Act, 1971 (70 of 1971) shall have effect subject to
modifications that,--

56
(a) The reference therein to a High Court shall be construed as including a reference to the
Appellate Tribunal;

(b) The references to the Advocate-General in section 15 of the said Act shall be construed as
a reference to such Law Officer as the Central Government may, by notification, specify in
this behalf.

7.10 PENALTY OF THE ACT

Contravention of orders of Commission (Sec 42):

(1) The Commission may cause an inquiry to be made into compliance of its orders or
directions made in exercise of its powers under the Act.

(2) If any person, without reasonable clause, fails to comply with the orders or directions of
the Commission issued under sections 27, 28, 31, 32, 33, 42A and 43A of the Act, he shall be
punishable with fine which may extend to rupees one lakh for each day during which such
non-compliance occurs, subject to a maximum of rupees ten crore, as the Commission may
determine.

(3) If any person does not comply with the orders or directions issued, or fails to pay the fine
imposed under sub-section (2), he shall, without prejudice to any proceeding under section
39, be punishable with imprisonment for a term which may extend to three years, or with fine
which may extend to rupees twenty-five crore, or with both, as the Chief Metropolitan
Magistrate, Delhi may deem fit: Provided that the Chief Metropolitan Magistrate, Delhi shall
not take cognizance of any offence under this section save on a complaint filed by the
Commission or any of its officers authorized by it.

Compensation in case of contravention of orders of Commission (Sec 42 A):

Without prejudice to the provisions of this Act, any person may make an application to the
Appellate Tribunal for an order for the recovery of compensation from any enterprise for any
loss or damage shown to have been suffered, by such person as a result of the said enterprise
violating

57
Penalty for failure to comply with directions of Commission and Director General
(Sec 43):

If any person fails to comply, without reasonable cause, with a direction given by—

(a) the Commission under sub-sections (2) and (4) of section 36; or (b) the Director General
while exercising powers referred to in sub-section (2)of section 41, such person shall be
punishable with fine which may extend to rupees one lakh for each day during which
such failure continues subject to a maximum of rupees one crore, as may be determined
by the Commission.

Power to impose penalty for non-furnishing of information on combinations (Sec 43A):

If any person or enterprise who fails to give notice to the Commission under sub- section(2)
of section 6, the Commission shall impose on such person or enterprise a penalty which may
extend to one percent, of the total turnover or the assets, whichever is higher, of such a
combination.

Penalty for making false statement or omission to furnish material information (Sec 44):

If any person, being a party to a combination —

(a) Makes a statement which is false in any material particular, or knowing it to be false; or

(b) Omits to state any material particular knowing it to be material, such person shall be
liable to a penalty which shall not be less than rupees fifty lakhs but which may extend to
rupees one crore, as may be determined by the Commission.

Penalty for offences in relation to furnishing of information (Sec 45):

(1) Without prejudice to the provisions of section 44, if a person, who furnishes or is required
to furnish under this Act any particulars, documents or any information,—

(a) Makes any statement or furnishes any document which he knows or has reason to believe
to be false in any material particular; or

(b) Omits to state any material fact knowing it to be material; or

58
(c) Wilfully alters, suppresses or destroys any document which is required to be furnished as
aforesaid, such person shall be punishable with fine which may extend to rupees one crore as
may be determined by the Commission.

(2) Without prejudice to the provisions of sub-section (1), the Commission may also pass
such other order as it deems fit.

Power to impose lesser penalty (Sec 46):

The Commission may, if it is satisfied that any producer, seller, distributor, trader or service
provider included in any cartel, which is alleged to have violated section 3, has made a full
and true disclosure in respect of the alleged violations and such disclosure is vital, impose
upon such producer, seller, distributor, trader or service provider a lesser penalty as it may
deem fit, than leviable under this Act or the rules or the regulations:

Provided that lesser penalty shall not be imposed by the Commission in cases where the
report of investigation directed under section 26 has been received before making of such
disclosure.

Provided further that lesser penalty shall be imposed by the Commission only in respect of a
producer, seller, distributor, trader or service provider included in the cartel, who made the
full, true and vital disclosures under this section.

Contravention by companies (Sec 48):

(1) Where a person committing contravention of any of the provisions of this Act or of any
rule, regulation, order made or direction issued thereunder is a company, every person who,
at the time the contravention was committed, was in charge of, and was responsible to the
company for the conduct of the business of the company, as well as the company, shall be
deemed to be guilty of the contravention and shall be liable to be proceeded against and
punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to any
punishment if he proves that the contravention was committed without his knowledge or that
he had exercised all due diligence to prevent the commission of such contravention.

59
(2) Notwithstanding anything contained in sub-section (1), where a contravention of any of
the provisions of this Act or of any rule, regulation, order made or direction issued thereunder
has been committed by a company and it is proved that the contravention has taken place
with the consent or connivance of, or is attributable to any neglect on the part of, any director,
manager, secretary or other officer of the company, such director, manager, secretary or other
officer shall also be deemed to be guilty of that contravention and shall be liable to be
proceeded against and punished accordingly.

Explanation.—For the purposes of this section,—

(a) ―Company‖ means a body corporate and includes a firm or other association of
individuals;

(b) ―Director‖, in relation to a firm, means a partner in the firm.

7.11 CHECK YOUR PROGRESS
Fill in the blanks with suitable answers:
1. The MRTP Act has metamorphosed in to the new law, i.e., _____

2. ____ means goods as defined in the Sale of Goods Act, 1930

3. Accordingly, ______, no enterprise or group shall abuse its dominant position

4. Chairperson and other Members of the Commission shall be appointed by the ________

5. ______ while exercising powers referred to in sub-section (2) of section 41

Answer to Check Your Progress

1. Competition Act, 2002

2. Goods
3. Under Sec 4
4. Central Government
5. Director General

7.12 SUMMARY

The Competition Act, 2002, was enacted to provide for the establishment of a
commission to prevent practices having adverse effect on competition, to promote and sustain
competition in market, to protect the interests of the consumers and to ensure freedom of

60
trade carried by the other participants in markets, for matters connected therewith or
incidental thereto. The Act was amended by the Competition (Amendment) Act, 2007 to
provide for the establishment of Competition Tribunal to hear appeal against any direction
issued or decision made or order passed by the Competition Commission of India.

7.13 KEY WORDS

MRTP : Monopolistic Restrictive Trade Practices

AAEC : Appreciable Adverse Effect on Competition agreements

CCI : Competition Commission of India

APPEAL : Heartfelt Request

PENALTY : A punishment imposed for breaking a law

7.14 QUESTIONS FOR SELF STUDY

1. Define the meaning and definitions of the competition Act.

2. Bring out the salient features of Competition Act, 2002.

3. Give and account of Anti Agreements.

4. Explain the different types Agreements.

5. Write a note on prohibition of certain agreements, Abuse of dominant position.

6. Discuss the Competition Commission of India.

7. Comment on Review of Orders of Commission.

8. Elucidate the Appeal and Penalty in Competition Act, 2002.

7.15 REFERENCES
1. Aswathappa.K,(2019) Essentials of Business Environment, Himalaya Publishing House.

2. Raj Agarwal (2019), Business Environment, Excel Books, 2nd edition.

3. Ashish K Agrawal, (2019), Business Laws, Aditi Law House.

4. Mittal D.P. (2017) Competition Laws and Practice, Taxman Publication.

5. Mithani D.M, (2017), International Economics, Himalaya Publishing House.

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Unit-8 CONSUMER PROTECTION ACT, 2019

Structure:

8.0 Objectives

8.1 Introduction

8.2 Meaning and definitions of Consumer

8.3 Objectives of Consumer Protection Act

8.4 Applicability of the Act

8.5 Rights of Consumer

8.6 Nature and Scope of Consumer Protection Act

8.7 Remedies available to Consumers

8.8 Recent Changes in Consumer Protection Act

8.9 Check Your Progress

8.10 Summary

8.11 Keywords

8.12 Questions for Self-Study

8.13 References

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8.0 OBJECTIVES
After studying this unit, you will be able to;

 Explain the Introduction and Objectives of the Act.

 Analyse the Applicability of the Act.
 Discuss the Consumer and Rights of Consumer.
 Bring out the Nature and Scope of Consumer Protection Act.
 List out the Remedies available to Consumer.
 Delineate the Recent Changes in Consumer Protection Act.

8.1 INTRODUCTION

Perhaps we have studied in the last topic about the Competition Act 2002, Let us
discuss the Consumer Protection Act 2019. The term consumerism was first coined by
business men in the middle of the 1960‘s because they thought that the consumer movement,
like any other movement, is threatening Capitalism. Consumerism may be defined as a
collective movement of the consumers to protect their own interest as against the business
man. ―Consumerism is the organize effort of the consumers seeking redressal, restriction and
remedy for dissatisfaction they have accumulated in the acquisition of their standard of
living.‖ It is considered as a social force designed to protect consumer interest in the market
place by organizing consumer pressures on business. It indicates an attitude of dissatisfaction
of the consumers with the marketing practices of the business men. It is also indicates an
organized effort of individuals, public, private agencies and government to protect the interest
of consumers from the unfair, undesirable and destructive practices of the businessmen.

 The Consumer Protection Act 2019 is the law relating to protection of consumers
against exploitation.
 The consumers have been provided with certain rights and this Act aims at protecting
them.
 In addition to Consumer Protection Act 2019, there are several other Acts which can
be used by an aggrieved consumer, such as Prevention of Food Adulteration Act, Sale
of Goods Act, the Dangerous Drugs Act, Standards of Weights and Measure Act. But
these Acts require filing of civil suits which was an expensive and time consuming
process. It involves engagement of a lawyer and the suit takes years for being decided.
 Consumer Protection Act 2019 was notified on 9th August 2019.

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8.2 MEANING AND DEFINITIONS OF CONSUMER
Let us discuss the meaning and definition of Consumer and Person
Meaning of ‘Consumer’ [Section 2(7)]
Definition of ‘Consumer’ –
 Section 2(7)
―Consumer‖ means any person who.—
(i) buys any goods for a consideration which has been paid or promised or partly
paid and partly promised, or under any system of deferred payment and includes
any user of such goods other than the person who buys such goods for
consideration paid or promised or partly paid or partly promised, or under any
system of deferred payment when such use is made with the approval of such
person, but does not include a person who obtains such goods for resale or for
any commercial purpose; or
(ii) hires or avails of any services for a consideration which has been paid or
promised or partly paid and partly promised, or under any system of deferred
payment and includes any beneficiary of such services other than the
person who hires or avails of the services for consideration paid or promised,
or partly paid and partly promised, or under any system of deferred payment,
when such services are availed of with the approval of the first mentioned
person but does not include a person who avails of such services for any
commercial purpose.
Explanation – For the purpose of this clause
(a) the expression ―commercial purpose‘ does not include use by a person of goods
bought and used by him exclusively for the purposes of earning his livelihood,
by means of self-employment;
(b) the expressions ―buys any goods‖ and ―hires or avails any services‖ includes
offline or online transactions through electronic means or by teleshopping or
direct selling or multi-level marketing;
Definition of ‘person’ –
 Section 2(31)
―Person‖ includes.—
(i) an individual;
(ii) a firm whether registered or not;

64
 (iii) a Hindu Undivided family;
(iv) a co-operative society;
(v) an association of persons whether registered under the Societies Registration
Act, 1860 or not;
(vi) any corporation, company or a body of individuals whether incorporated or not;
(vii) any artificial juridical person, not falling within any of the preceding sub-
clauses;
8.3 OBJECTIVES OF CONSUMER PROTECTION ACT

As you know the object of the act is given in the preamble of the Act. It says ― an Act
to make provision for better protection of the interests of consumers and for that purpose
to make provision for the establishment of the consumer councils and other authorities for
the settlement of the disputes and for matters connect therewith‖.

The Consumer Protection Act, 2019 seeks to provide for better protection of the
interests of the consumers. This Act seeks inter alia, to protect and promote the basic rights
of the consumers, which includes, right to safety, right to be informed, right to choose, right
to be heard, right to seek redressal, right to consumer education and right to healthy
environment.

8.4 APPLICABILITY OF THE ACT

In this section we will discuss the applicability of the act is:

1) This Act may be called the Consumer Protection Act, 2019

(2) It extends to the whole of India.

(3) It shall come into force on such date as the Central Government may be notification
appoints and different dates may be appointed for different States and for different
provisions of this Act.

(4) Save as otherwise expressly provided by the Central Government, by notification, this
Act shall apply to all goods and services.

If a consumer is not satisfied by the decision of a District Forum, he may apply to the
State Commission, against the order of the State Commission, he may approach the National
Commission.

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8.5 RIGHTS OF CONSUMERS
 Rights of Consumers
 The Consumers Protection Act 2019 provides for establishment of Consumer
protection Councils. These Councils render advice on promotion and protection of the
rights of Consumers.
 This Act aims at protecting the interests of consumers by recognising them in the
form of rights.
 As per section 2(9), ―consumer rights‖ includes,--
1. Right to be protected against hazardous goods/services –
Section 2(9) (i) gives the right to the consumers ―to be protected against the
marketing of goods, products or services which are hazardous to life and
property‖.
This right is given to consumers, in order to:--
 Ensure physical safety of the consumers; and
 To ensure that goods are safe for users.
In case of dangerous or risky goods, consumers should be informed of the risk
involved in improper use of the goods. Vital safety information should be
conveyed to consumers.
2. Right to be informed -
Under Section 2(9) (ii), this right has been recognized as, ―the right to be informed
about the quality, quantity, potency, purity, standard and price of goods, products
or services, as the case may be, so as to protect the consumer against unfair trade
practices‖.
Consumers are often cheated in relation to price, quality, quantity, potency, purity
of the product. Hence, this right enables the consumer to be pre-informed about
various aspects of the product before he makes the purchase. This leads to
protection of consumers against unfair trade practices.
3. Right to choose from variety of goods/services –
This right has been recognised by Section 2(9) (iii) as, ―the right to be assured,
wherever possible, access to a variety of goods, products or services at
competitive prices‖

66
 Wide variety of competitive goods should be available in the market. For this
purpose fair and effective competition has to be encouraged in the market. This
ensures that the consumer gets multiple options to choose from.
4. Right to be heard –
This right is ensured by Section 2(9)(iv) as, ―the right to be heard and to be
assured that consumer‘s interests will receive due consideration at appropriate
fora‖.
For this purpose, various District Commissions, State Commissions and National
Commission have been established, where a consumer‘s complaint is heard.
5. Right to seek redressal –
A consumer has a right to seed redressal against----
- Unfair trade practices; or
- Restrictive trade practices; or
- Unscrupulous exploitation of consumers.
Remedy should be available to consumers if they are exploited.
Consumer Commissions hear complaints against any unfair trade practice or
restrictive trade practices.
6. Right to consumer awareness –
This right has been recognized under Section 2(9)(vi) of the Act as, ―the right to
consumer awareness‖.
The right to consumer awareness is a right which ensures that consumers are
informed about the practices prevalent in the market, their rights and remedies
available to them.
The Consumer Protection Councils (Central/State/District) have a vital role to
play in this regard. Unless consumers are aware of their rights and remedies,
their interests cannot be protected.
8.6 NATURE AND SCOPE OF CONSUMER PROTECTION ACT, 2019
The salient features of Consumer Protection Act 2019 (CPA) are as follows:
(a) It is applicable to all goods, services and unfair trade practices unless specifically
exempted by the Central Government
(b) It covers all sectors private, public as well as co-operative.
(c) It provides three tier machinery for settling consumer grievances
(d) It provides six rights to consumer
(e) It extends to whole of India

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 (f) It includes E- Commerce transaction also.
Goods and Services covered under CPA 2019
The term ‗goods‘ under CPA 2019 covers all types of movable property other than money
and includes stocks and shares, growing crops, etc., The term ‗service‘ means service of any
description made available to potential users and includes banking, financing, housing
construction, insurance, entertainment, transport, supply of electrical and other energy,
boarding and lodging , amusement etc. and includes E-Commerce transactions.
Who can file a complaint under CPA 2019?
The following persons can file a complaint under consumer protection Act 2019
(a) A Consumer
(b) Any recognized voluntary consumer association whether the consumer is a member of
that association or not
(c) The Central or State Government; and
(d) One or More Consumers having same interest.
(e) Legal heir or representative in case of death of a consumer
(f) Parent or Legal guardian in case the consumer is minor
What Complaints can be filed under CPA 2019?
A consumer can file a complaint relating to any one or more of the following:
(a) Unfair trade practice or a restrictive trade practice adopted by any trader or service
provider
(b) Goods bought by him or agreed to be bought by him suffer from one or more defect;
(c) Services hired or availed of , or agreed to be hired or availed of, suffer from
deficiency in any respect
(d) Price charged in excess of the price (i) fixed by or under the law for the time being in
force, (ii) Displayed on the goods or the package, (iii) displayed in the price list (iv)
Agreed between the parties;
(e) Goods or services which are hazardous or likely to be hazardous to life and safety
when used.
Where to file a complaint under the CPA 2019?
(a) If the value of goods and services and compensation claimed does not exceed `.1
Crore the complaint can be filed in the district forum
(b) If it exceeds `.1 crore but does not exceed `.10 Crore the complaint can be filed
before the state commission
(c) If it exceeds `.10 Crore the complaint can be filed before the National Commission.
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How to file a Complaint under CPA 2019?
A complaint can be made in person or by any authorized agent or by post. The complaint can
be written on a plain paper duly supported by documentary evidence in support of the matter,
the relief sought, the description and address of the complaint as well as the opposite party,
facts relating to the complaint along with the timing of the events.

Time limit for filing the case

The consumer can file the complaint within two years from the date on which the cause of
action has arisen. However, it may be admitted even after the lapse of two years in sufficient
cause is shown for the delay.

Time limit deciding the case

Every complaint must be disposed of as speedily as possible within a period of three months
from the date of notice received by the opposite party. Where the complaint requires
laboratory testing of goods, this period is extended to five months.
8.7 THE REMEDIES AVAILABLE TO THE CONSUMERS
There are various reliefs available to the consumers under the Act. The District
Forum / State Commission / National Commission may pass orders to grant relief to the
aggrieved consumer:-

(a) To remove the defect pointed out by the appropriate laboratory from the goods in question

(b) To replace the goods with new goods of similar description this shall be free from any
defect.

(c) To return to the complainant the price, the charges paid by the complainant.

(d) To pay such amount as may be awarded by it as compensation to the consumer for any
loss or injury suffered by the consumer due to the negligence of the opposite party.

(e) To remove the defects in goods or deficiencies in the services in question.

(f) To discontinue the unfair trade practice or the restrictive trade practice.

(g) Not to offer the hazardous goods for sale.

(h) To withdraw the hazardous goods from being offered for sale.

69
(i) To cease manufacture of hazardous goods and to desist from offering services which are
hazardous in nature.

(k) To issue corrective advertisement to neutralize the effect of misleading advertisement at

the cost of the opposite party responsible for issuing such misleading advertisement

(l) To provide for adequate costs to parties.

8.8 RECENT CHANGES IN CONSUMER PROTECTION ACT, 2019

1. Consumer Protection Councils

(a)The Central Consumer Protection Council

(1)The Central Government shall, establish with effect from such date, a council to be
known as the Central Protection Council.

(2) The Central Council shall consist of the following members, namely

a. The Minister in charge of the consumer affairs in the Central Government,

who shall be its Chairman, and

b. Such number of other official or non-official members representing such

interests as may be prescribed

Objects:-The main objects of the Central Council shall be to promote and protect the
rights of the consumers, such as,

(a) The right to be protected against the marketing of goods and services, which are
hazardous to life and property;

(b) The right to be informed about the quality, quantity, potency, purity, standard and price of
goods, so as to protect the consumer against unfair trade practices;

(c) The right to be assured, wherever possible, access to a variety of goods [and services] at
competitive prices;

(d) The right to be heard and to be assured that consumer‘s interests will receive due
consideration at appropriate forums;

70
(e) The right to seek redressal against unfair trade practices or unscrupulous exploitation of
consumers; and

(f) The right to consumer education

(b) The State Consumer Protection Council

The State Government shall, establish, with effect from such date, a Council to be
known as the State Consumer Protection Council.

The State Council shall consist of the following members, namely

(a) The Minister in charge of the consumer affairs in the State Government who shall be its
Chairman;

(b) Such number of other official or non-official members representing such interests as may
be prescribed by the State Government.

(c) Such number of other official or non-official members, not exceeding ten, as may be
nominated by the Central Government.

Objects of the State Council

The objects of every state Council shall be to promote and protect within the State the
rights of the consumers.

(C)The District Consumer Protection Council

The State Government shall establish for every district, by notification, a council to be known
as the District Consumer Protection council with effect from such date.

The District Consumer Protection Council will consist of the following members,
namely:

(a) The Collector of the District, who shall be its Chairman; and

(b) Such number of other official and non-official member, representing such interests as may
be prescribed by the State Government.

Objects of the District Council—the objects of every District Council shall be to promote
and protect within the district the rights of the consumers.

71
2. Consumer Dispute Redressal Agencies (CDRA)

The main objectives of this agency are to protect and promote the rights of consumers
and to provide less expensive and speedy disposal of consumer disputes. Sec.9 of C.P.A
1986, provides for the establishment of 3-tier Consumer Disputes Redressal Agencies as,

(a) The District forum.

(b) The State Commission

(c) The National Commission

(a) The District Forum

Sec 10 of the CPA provides the composition of District forum as follows

(a) A person who is or who has been or is qualified to be a District Judge who shall be its
president;

(b) Two other members who shall be persons of ability, integrity and standing have the
adequate knowledge or experience of or have shown capacity in dealing with problems
relating to economics, law, commerce, accountancy, industry public fairs or administration,
one of them shall be a woman. So far as a member is concerned, no educational qualification
is fixed except for the president. The president and members of the District Forum should be
less than 65 years of age. They are appointed by the State Government on the
recommendation of the selection committee consisting of

(i) The President of the State Commission (Chairman);

(ii) Secretary (Law) to the State (member);

(iii) Secretary (in charge of the department dealing with consumer affairs) in the State
(member).

Jurisdiction: It has the jurisdiction to entertain complaints, if the cost of goods or

services and compensation asked for is up to `.20 Lakhs.

Where to file a consumer complaint:

A complaint shall be instituted in the District Forum/State Commission/National

Commission within the local limits of whose jurisdiction—

72
 (a) The opposite party at the time of the institution of the complaint, actually and
voluntarily resides or carries on business or has a branch office or personally works for gain,
or

(b) Any of the opposite party(s), at the time of the institution of the complaint,
actually and voluntarily resides, or carries on business, or personally works for gain, provided
that in such case either the permission of the District forum/State Commission/National
Commission is given, or the opposite party(s) who do not reside, or carry on business, or
personally work for gain, as the case may be, acquiesce in such institution, or

(c) The cause of action arises.

WHO CAN FILE COMPLAINTS

The Complaints may be filed with the District Forum/State Commission/National

Commission by:-

1. The consumer to whom such goods are sold or delivered or agreed to be sold or delivered
or such service provided or agreed to be provided.

2. Any recognised consumer association, whether the consumer to whom goods sold or
delivered or agreed to be sold or delivered or service provided or agreed to be provided, is a
member of such association or not.

3. One or more consumers, where there are numerous consumers having the same interest
with the permission of the District Forum, on behalf of or for the benefit of, all consumers so
interested.

4. The Central or the State Government. Every compliant filed shall be filed along with such
amount of fee as may be prescribed.

Tenure of Office

Every member of the District Forum shall hold office for a term of five years or up to
the age of 65 years whichever is earlier. The CPA requires both the president and the
members of the District Forum to give an undertaking that he does not or will not have any
such financial or other interest, which is likely to affect prejudicially his functions as a
member. A member of the forum may resign to his post but such resignations become
effective only when it is accepted by the competent authority.

73
Removal of the members

According to Section 30 (2) of the CPA, every State Government has the power to
remove the president or member of a District Forum when

(1) He has been adjudged as insolvent; or

(2) He has been adjudged of an offence which in the opinion of the State Government
‗involves moral turpitude‘: or

(3) Has become physically or mentally incapable of acting as such member; or

(4) Has acquired such financial or other interest as it likely to affect prejudicially his
functions as a member; or

(5) Has so abused his position as to render his continuance in office prejudicially to the
interest of the public.

(b)The State Commission

Composition:

The State Commission shall consist of its president and two other members. The
president of the Commission shall be a person who is or has been a judge of a High Court,
appointed by the State Government concerned after consultation with the Chief Justice of the
High Court. The other members of the commissions shall be persons of integrity, ability and
standing to be appointed by the State Government on the recommendation of the Selection
Committee consisting of the President of the State Commission, Secretary of the Law
Department of the State and the Secretary, in charge of the department dealing with consumer
affairs in the state. The members of the State Commission must have adequate knowledge or
experience in dealing with problems relating to economics, law, commerce, accountancy,
industry, public affairs or administration one among them should be a woman.

It has the Jurisdiction to entertain complaints, if the cost of goods or services and
compensation asked for is more than `.20 lakhs, but less than `.1 crore.

The State Commission also has the jurisdiction to entertain appeal against the orders
of any District Forum within the State.

74
 It also has the power to call for the records and pass appropriate orders in any
consumer dispute which is pending before or has been decided by any District Forum within
the State if :-

(a) It appears that such District Forum has exercised any power not vested in it by law

(b) Has failed to exercise a power rightfully vested in it by law

(c) Has acted illegally or with material irregularity.

(c) The National Commission

Composition:

As per Section 20, the National Commission consists of,

(a) The President, who shall be a person who is or has been a judge of the Supreme
Court, to be appointed by the Central Government in Consultation with the Chief Justice of
India;

(b) Other members (four) who shall be persons of ability, integrity and standing and
have adequate experience and knowledge in dealing with the problems relating to economics,
law, commerce, accountancy, industry, public affairs or administration. One of whom shall
be woman who shall be appointed by the Central Government on the recommendation of the
Selection Committee.

It has jurisdiction to entertain complaints—

If the cost of goods or services and compensation asked for exceed `.1 crore then the
complaint can be filed before the National Commission at New Delhi.

The National Commission besides entertaining the original complaints also has
jurisdiction to entertain appeals against the orders of any State Commission; and to call for
the records and pass appropriate orders in any consumer dispute which is pending before, or
has been decided by any State Commission:

(a) Where it appears to it that such Commission has exercised a jurisdiction not vested in it
by law,

(b) Has failed to exercise a jurisdiction so vested

75
(c) Has acted in the exercise of its jurisdiction illegally or with material irregularity.

Tenure of the Members

Both the President and the four members of the Commission shall hold the office for a
term of five years or up to the age of 70 years whichever is earlier.

Limitation Period for filing the complaint:

The Period of Limitation prescribed for the filing of complaints before District
Forum, the State Commission, or the National Commission is two years from the date on
which the cause of action has arisen. However, if the complainant satisfies the District Forum
/ State Commission, that he had sufficient cause for not filing the complaint within two years,
such complaint may be entertained by it after recording the reasons for condoning the delay.

Powers of Dispute Redressal Agencies:

For the purpose of protecting the interests of the consumers wide discretionary
powers are granted under the Act. The District Forum, State Commission and the National
Commission are vested with the powers of a civil court while trying a suit in respect of the
following matters:-

1. The summoning and enforcing attendance of any defendant or witness examining the
witness on oath;

2. The discovery and production of any document or other material producible as evidence;

3. The reception of evidence on affidavits:

4 The requisitioning of the report of the concerned analysis or test from the appropriate
laboratory or from any other relevant source;

5. Issuing of any commission for the examination of any witness; and

6. Any other matter which may be prescribed.

They also have the power to:-

(i) To issue remedial orders against the opposite party.

76
(ii) To dismiss frivolous and vexatious complaints and to order the complainant to make
payment of costs, not exceeding 10,000 to the opposite party.

8.9 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. Consumer Protection Act 2019 is the law relating to protection of consumers against
_______

2. ________aims at protecting the interests of consumers by recognising them in the form of

rights.

3. Replace the goods with new goods of _______ this shall be free from any defect

4. Right to seek redressal against unfair trade practices or ________of Consumers

5. The members of the ___________must have adequate knowledge

Answer to Check Your Progress

1. Exploitation.
2. Consumer Protection Act 2019
3. Similar description
4. Unscrupulous exploitation
5. State Commission

8.10 SUMMARY
This Unit makes an attempt to provide the information regarding consumer, their
grievances, their protection and the remedial provisions. Emphasis is also made on various
authorities to dispose the consumer disputes speedily with less expense. This also enlighten
regarding the composition, jurisdiction and powers of District Forum, State Commission and
National Commission. These bodies established for the purpose of giving proper, speedy
remedial measures to all kinds of consumer.

On 20th July 2020, the Consumer Protection Act 2019 came into force. The consumer
Protection Bill, 2019 was introduced in Lok Sabha by the Minister of Consumer Affairs,
Food and Public Distribution, Mr. Ram Vilas Paswan on July 8, 2019. The Bill replaces the
Consumer Protection Act, 1986.

77
8.11 KEY WORDS
CPA : Consumer Protection Act

Forum : Particular issue can be exchanged

Unfair : Behaving according to the principles of equality and justice

Turpitude : Wicked behaviour

Jurisdiction : The official power to make legal decisions

8.12 QUESTIONS FOR SELF STUDY

1. Define Consumer. Explain his rights.

2. Explain the objectives of consumer protection Act 2019.

3. Write a note on applicability of the Act 2019.

4. Discuss the nature and scope of the consumer protection Act 2019.

5. Explain the jurisdiction and powers of State Commission

6. List out the composition and powers of District Forum

7. Bring out the various remedies and reliefs that may be granted under the Consumer
Protection Act 2019.

8. State the powers and functions of consumer protection councils

8.13 REFERENCES
1. Ashish K Agrawal, (2019), Business Laws, Aditi Law House.

2. Bangia R K,(2019), A handbook of Consumer Protection Law, Allahabad law agency.

3. Kapoor S K (2019), Law of Torts and Consumer protection Act, 1986, Central Law
Agency.

4. Shukla M N (2016), The Law of Torts and Consumer protection Act, Central Law
Agency.

5. Avtar Singh (2015), Consumer Protection Law and Practice, Eastern Book Company.

78
 KARNATAKA STATE OPEN UNIVERSITY
Mukthagangotri, Mysuru – 570006
[Link]. PROGRAMME
I – SEMESTER

BUSINESS POLICY AND ENVIRONMENT

Course Code: MCMHC 1.2 BLOCK – III
DEPARTMENT OF STUDIES AND RESEARCH IN
COMMERCE
Karnataka State Open University
Mukthagangothri, Mysuru - 570 006 I SEMESTER [Link]
BUSINESS POLICY AND ENVIRONMENT
COURSE CODE: MCMHC 1.2

Department of Studies and Research in Commerce

BLOCK
3

Page no.

UNIT - 9: INDUSTRIAL SCIKNESS 1-14

UNIT - 10: CORPORATE SOCIAL RESPONSIBILITY 15-30

UNIT - 11: BUSINESS ETHICS 31-43

UNIT - 12: ETHICS IN FUNCTIONAL AREAS 44-72

 Credit Page
Programme : [Link] Year/Semester :First Block No :III
Course : Business Policy and Environment Credit : 04 Units No :9-12
Course Design Expert Committee
Prof. Vidyashankar Chairman
Vice-Chancellor,
Karnataka State Open University
Mukthagangotri, Mysuru – 570 006

Prof. Ashok Kamble Member

Dean (Academic)
Karnataka State Open University
Mukthagangotri, Mysuru – 570 006

[Link] V. Member
Assistant Professor & Course Designer,
DOS&R in Commerce, KSOU, Mysuru.

[Link] V . Member
BOS Chairman,
DOS&R in Commerce,KSOU, Mysuru

Smt. Usha C.
Chairperson Member Convener
DOS&R in Commerce, KSOU, Mysuru
Course Writer Course Editor
[Link] . G. V [Link] C.
Assistant Professor, Assistant Professor,
DOS&R in Commerce, DOS&R in Commerce,
KSOU, Mysuru. KSOU, Mysuru.
Editorial Committee
[Link] V. Chairman
BOS Chairman,
DOS&R in Commerce,KSOU, Mysuru

Prof. S. B. Akash External Subject Expert

Professor,Department of Commerce
Rani Chennamma University,Belagavi.

Dr. Chaya R. Internal Subject Member

Assistant Professor, DoS & R in Commerce
Karnataka State Open University, Mysuru.

Smt. Usha C.
Chairperson Member Convener
DOS&R in Commerce, KSOU, Mysuru
Copy Right
Registrar,
Karnataka State Open University, Mukthagangothri, Mysuru - 570006.
Developed by the Department of Studies and Research in Commerce , KSOU, under the guidance of Dean
(Academic).Karnataka State Open University, [Link] -2022
All rights reserved. No part of this work may be reproduced in any form, or any other means, without permission in
writing from the Karnataka State Open [Link] information on the Karnataka State Open University
Programmes may obtained from the University’s office at Mukthagangothri, Mysuru-570006.
Printed and Published on behalf of Karnataka State Open University. Mysuru-570006 by Registrar (Administration)-
2022
 Karnataka State Open University
Mukthagangothri, Mysuru - 570 006

Preface
Dear Student,

As you know, the business firms in any country including India operate as per the reaction of
environment. The environment may be micro and macro which are self explanatory. It is the foremost duty of
the every business firms to function as per the expectations of the stakeholders under the surveillance of the
regulations. Business is influences by political-legal environment, socio-cultural environment, economical
environment and technical environment and technological environment. It is the Government machinery
which brings out the suitable legislation so as to enable the business to follow. The stakeholders have the
opportunity to question the business firms in the legal environment in case their rights are impaired. The
business firms are to be ethical for the sustainability. The firms will make up their mind to adopt the
technology suited to their conditions. Precisely, the business firms take attempts to keep the stakeholders
satisfied.
The Industrial policy will helps the business to carry out their business within the framework.
Competition act to provide, keeping in view of economic development of the country. The Act contains both
criminal and civil provisions aimed of providing anti-competitive practice in the marketplace.
Corporate Social responsibility is a form of international private business self-regulation which aims
to social goals of a philanthropic, activist or charitable nature by engaging in or supporting volunteering or
ethically oriented practices.
As you are aware that, Corporate Governance is the cornerstone of any good business, it encompasses
the process, practices and policies that a company relies on to make final decisions and to manage the
company.
As a student of [Link] First Semester, you have the opportunity to study “Business Policy and
Environment”. The said study materials relating is designed by the Facility members of the Department. Feel
free to write to the Department so as to enable us to improve the quality of the self learning material.

With best wishes,

Truly Your’s

Dr. Mahesha V.
BOS-Chairman (PG)
 BLOCK-III
INTRODUCTION
Perhaps you are familiar with the concepts of business environment. Further you have learnt about
the industrial sickness and its effect on the industries.
Industrial sickness is creating so many problems like unemployment, less per capital income, decrease
of national income, standard of living etc,. However, in order to overcome from this solving the problems
time to time.
Corporate social responsibility is another important area that constitutes the companies tactical tool kit
for establishing strong positions in the business. Hence the corporate social responsibility is needed to the
society.
The business ethics ensure transparency in the business. Business promoting of business with proper
men power policy. We ensure societal development at large by addressing poverty unemployment and other
basic problems. Further this block also deals with the various functional areas of ethics.

This block consists of 4 Units:

Unit 9 : Industrial Sickness

Unit 10: Corporate Social Responsibility
Unit 11: Business Ethics
Unit 12: Ethics in functional Areas
 BLOCK - III

Unit-9 INDUSTRIAL SICKNESS

Structure:

9.0 Objectives

9.1 Introduction

9.2 Meaning and Definitions of Sickness

9.3 Extent of Sickness

9.4 Causes for Sickness

9.5 Signals of Sickness

9.6 Effects of Sickness

9.7 Remedies for Sickness

9.8 Check Your Progress

9.9 Summary

9.10 Keywords

9.11 Questions for Self-Study

9.12 References

1
9.0 OBJECTIVES
After studying this unit, you will be able to;

 Define the Meaning and Definitions of Sickness.

 Discuss the Extent of Sickness.
 Describe the Causes for Sickness.
 Highlight the Signals of Sickness.
 Explain the Effects of Sickness.
 Analyse the Remedies for Sickness.

9.1 INTRODUCTION
Let us discuss the term Industrial sickness is a natural concomitant of the market
economy. In the UK, over 10,000 units fall sick every year, In the USA, the figure may be
much higher. A study indicates that during the decade 1967-1976; one in four companies
listed on the US stock exchanges had turned sick. In our country too, the problem of sickness
is serious and is likely to grow worse in the years to come. This chapter is devoted to a
detailed discussion of the nature, extent and causes of industrial sickness. Towards the end,
reference is made to the remedial measures available to revive sick units.
9.2 MEANING AND DEFINITIONS OF SICKNESS

It must for us to know few important definitions; the term industrial sickness was
understood differently by the RBI, State Bank of India and financial institutions. There was
obviously overlapping and confusion. The mist was cleared with the passage of the Sick
Industrial Companies Act, 1985 (SICA). According to SICA, an industrial company was
defined as sick when: (i) it was in existence for not less than seven years; (ii) its net worth
eroded by losses; and (iii) incurred cash losses for the current year and the preceding year.
With the economic liberalisation, the need was felt to take a relook at the definition of
sickness. Accordingly, a new definition was provided by the Companies (Amendment) Act,
2002. According to the Act, a sick industrial company means an industrial company which
has: (i) accumulated losses in any financial year which are equal to 50 per cent or more of its
average net worth during four years immediately preceding such financial year; or (ii) failed
to repay its debt within any three consecutive quarters on demand made in writing for its
repayment by a creditor of such a company. Default in repayment of debt is enough to
declare a unit as sick. Technically speaking, the loan account of the unit needs to become a
non-performing asset (NPA).

2
 The above definition differs from the one given by the SICA. First, existence of a unit
for at least seven years has been dispersed with. Second, any one of the criteria is good
enough to declare a unit as sick. Third, sickness is viewed as inevitable in a market-oriented
economy. It is taken for granted and hence one need not panic about it.
The Companies Act, 2013, adds a new dimension to the nature of sickness. According
to the Act, a unit becomes sick if it fails to pay the outstanding debt within a period of 30
days from the date of demand for repayment.
Specifically, sickness involves-
 Demand from the secured creditors for repayment;
 Demand for repayment equivalent to 50 per cent or more of the outstanding debt;
 Company failure to repay within 30 days from the date of demand;
9.3 EXTENT OF SICKNESS

Industrial sickness is growing at an annual rate of about 28 per cent and 13 per cent
respectively in terms of the number of units and outstanding amount of bank credit. It is
reckoned that as of today, there are more than three lakh sick units with an outstanding bank
credit of over ` 46,000 crore. Nearly 29,000 units are added to the sick list every year, i.e.,
about 90 units fall sick every working day. Almost every third or fourth small sector unit and
every tenth unit in the medium and large sectors are sick or dying.
While data relating to sickness in medium and large units are not available, such a
problem does not exist with regard to MSME sector. The total number of sick small scale
units was 5,37,677 as at end December 2020, the outstanding bank credit against these units
stood at ` 25,000 crore.
Not that any data are needed to prove the extent of sickness. A casual drive through
an industrial estate or the suburbs of a city is enough to understand the magnitude. It is not
uncommon to see that if about five units are working successfully, equal or probably more
number of units are either closed or under indefinite lockout.

3
9.4 CAUSES FOR SICKNESS

Causes for industrial sickness may broadly be classified into two categories:
(a) internal; and (b) external. Internal factors mainly relate to the poor quality of the top
management. Poor quality of top management may take any or all of several forms, excessive
conservatism, excessive complacency, growth mania, poor financial control, excessive
centralisation and authoritarianism, weak board and a weak watchdog function, excessive
commitment to policies that worked well once but no longer appropriate, poor financial or
marketing management and the like.
External causes can be further classified into:
 Industry-specific factors;
 Government-related factors;
 Financial institutions-related factors:
 Others.
Industry-specific Factors: These relate to stagnation or recession in the industry
(e.g., the textile industry), competition faced by the unit (e.g., small units, rayan grade, pulp
units) and excess capacity in the industry (e.g., the type of industry).

Entry of MNCs and strict quality, hygiene specifications prescribed and enforced by
them have contributed to the sickness of several firms, particularly in the MSME sector. 16
out of 20 SME units (supplying metal caps to bottlers of soft drinks) have gone sick as they
failed to meet the specifications for metal caps prescribed by Coke and Pepsi. Similar is the
story with several mango pulp processors in the Chittoor district of Andhra Pradesh. Here
too, high quality and house keeping specifications prescribed by MNCs are beyond the reach
of the traditional pulp processors. Recession in the economy hits all sectors, particularly the
industrial units.

Government-related Factors: These include tax burden on the unit, especially

import duties, excise duties and sales tax; legal restrictions on the units;
expansion/diversification (as with erstwhile FERA and MRTP companies); frequent changes
in government policies affecting the unit; liberal imports that compete with the unit‘s
products; the government or its agencies going back on its promises made to the unit (such as
promised price performance to the joint sector units); poor law and order situation (as in parts
of North and Eastern India); political interference in the unit‘s affairs (as in the public sector

4
units and agro-based industry); unhelpful government machinery (e.g., in supplying power or
in clearing a project) and the like.

Financial Institutions- related Factors: These include harshness in dealing with the
unitd, delay in providing finance to the unit, inadequate working and long-term capital
provided by them and their inexpert assessment of the client‘s finance proposal.

Others: Other external factors include customer resistance to the unit‘s products;
erratic availability of raw materials/components/power/fuel to the unit (e.g., paper and sugar
industries, aluminium units), inadequate transport facilities available to the unit (e. g., for
transporting coal) and the like.

There are also unit specific factors contributing to sickness. Such unit related causes
include mismanagement of working capital, improper demand forecasting, improper choice
of technology and inexperience running business.

Sickness in PSUs has its own causation factors. In some cases, the cause of sickness is
historical: textile companies, for example, which were taken over from the private sector on
social consideration for protecting employment of workers.

Greenfield companies too became sick partly because of competition from private
sector units and MNCs and mainly owing to poor management as manifested in inappropriate
marketing strategies, delayed decisions, poor financial management and non-professional
CEOs who are basically bureaucrats who have no hands-on experience in running business
enterprises.
9.5 SIGNALS OF SICKNESS

The following actions of a unit indicate that the unit is sick or going to be sick:
 Continues irregularity in cash credit accounts.
 Low capacity utilization.
 Profit fluctuations, downward trend in sales and stagnation or fall in profits followed
by contraction in the share of the markets.
 High rate of rejection of goods manufactured.
 Reduction in credit summations-whenever the companies are in financial difficulty,
they open a separate account with another bank and deposit all collections therein.

5
  Failure to pay statutory liabilities.
 Larger and longer outstanding in the bills accounts.
 Longer period of credit allowed on sale documents negotiated through the bank and
frequent returns by customers of the same.
 Constant utilization of cash credit facilities to the hilt and failure to pay timely
instalment of principal and interest on the loans and instalment credit.
 Non-submission of periodical financial data/stock statement in time.
 Financing capital expenditure out of funds provided for working capital purpose.
 Decrease in working capital on account of;
(i) Increase in debtors and particular industry combined with many failures.
(ii) Increase in creditors.
(iii) Increase in inventories which may include a large number of slow or non-
moving items.
 A general decline in that particular industry combined with many failures.
 Rapid turnover of key personnel.
 Existence of a large number of law suits against a company.
 Rapid expansion and too much diversification within a short time.
 Sudden/frequent changes in management whether professional or otherwise and
dominated by one man/few individuals.
 Diversion of funds for purpose other than running the units.
 Any major change in the shareholders.
9.6 EFFECTS OF SICKNESS

Let us now discuss the effects of sickness. A sick industrial unit is like a patient at
home. A patient, in addition to suffering from the ailment himself causes inconvenience to
others and often, spells ruin to the family, particularly when the treatment is prolonged and
expensive. A sick unit too will have serious repercussions on the economy as a whole,
besides adversely affecting the interests of people directly connected with it.
Impact of sickness on the economy is easy to guess. In the first place, sickness
contributes to high cost economy. This, in turn, will affect the competitiveness of the
economy at home and abroad.
Secondly, industrial sickness is mainly the problem of 88 per cent terminally sick
units, investment in which is completely dead. Dead investment is a burden on both banks
and banks and budget and ultimately consumers have to pay the high cost.

6
 Thirdly, persistent nature of industrial sickness, especially when policies do not allow
flexibility for exists and other forms of adjustment, not only tends to restrict new employment
opportunities but also constrict technological innovation, thus keeping the employment
stagnant. Unviable units remain closed and employment in these units, in effect, is disguised
unemployment.
Fourthly, industrial sickness worsens the problem of stringency of financial resources
in the economy. Money locked up in sick units gives no returns and affects the availability of
resources to other viable units. The continued operations of chronic loss making firms
snatches markets from more efficient producers and acts as a drain on the financial system.
Besides, the huge amount of capital, running into many thousands of cores, which is invested
in sick units, is being wasted which a capital scarce country like ours can ill-afford.
Finally, government seeks to rehabilitate sick units that are viable. But rehabilitation
itself is expensive and even results in diversion of funds. Revival package includes a
combination of some or all of the following:
 Conversion of cash losses into interest-free loans or equity
 Moratorium on payment of all loans
 Interest holiday on outstanding government loans
 Write off of outstanding non-plan loans
 Write off interest on government loans
 Conversion of loans into equity
 Conversion of outstanding cash credit into working capital term loan
 Concession on existing power tariff(by concerned State Government)
 Release of fresh loans.

9.7 REMEDIES FOR SICKNSS

You should aware of remedies of sickness. Happily, a majority of the sick units are
retrievable. An RBI study indicates that 84 per cent of the large sick firms, for which viability
studies were conducted, were considered to be potentially viable, though only 10 per cent of
the small units were so considered. These figures provide some idea about the potential for
reducing sickness. The potential may be even greater. If effective steps can be taken to
prevent sickness in the first place, the incidence of sickness could be potentially lowered even
more. For the next decade, it may not be an impossible goal to cut down the incidence of
sickness to half of what it may otherwise be : (a) by devising steps to prevent sickness in the

7
first place, and (b) by strengthening the machinery to turn around expeditiously those
units that do fall sick but are salvageable.
In order to tackle the problem of sickness from the two angles, viz., preventing
sickness from occurring and curing if it has taken place but remediable, the role of three
agencies assumes significance: (a) the government, (b) the financial institutions and (c) the
industry associations.
Preventive Measures:
Role of the Government: If the number of industrial units in the country has
increased some ten times since independence and if we have a diversified industrial structure
with widespread entrepreneurship, the credit for this largely belongs to the government. Its
efforts at creating infrastructural facilities, specialised industrial and financial institutions and
package of incentives for entrepreneurs have borne rich fruit. Equally, of course, the
government‘s vacillating policies, incompetence in managing the core sector, excessive
protection to domestic units and a Frankenstein Ian control structure that has mostly bred
corruption and vitiated national objectives, are to blame for a good part of the structural
sickness in the Indian economy. All said, probably the Government of India is the only one in
the world that has a policy on industrial sickness. In a free market economy, sick units are
allowed to die on their own. We claim ourselves as a free economy but we have elaborate
policies and support measures to tackle sickness.
Penalising managements that wilfully make units sick is the first thing that the
government should do to prevent industrial sickness. Under the Sick Industrial Companies
(Special Provisions) Act, 1985, the government has set up a Board for Industrial and
Financial Reconstruction (BIFR) which will have to be notified by the management of
companies of their potential sickness. This early warning system may be supplemented by the
government strengthening the monitoring role of the banks and the financial institutions. Not
only in the public sector, but also in the private sector, the government can do much to
mitigate the number one cause of sickness, namely, the ineffective management of the unit.
The basic requirement for both sectors is to identify early the level of competence of the
unit‘s management, help it upgrade itself if there is a potential for improvement, or otherwise
replace it quickly and ruthlessly if the level is low and not much potential exists for
improvement.
A second area where the government can be helpful is vis-a vis industrial licensing.
The very existence of licensing and monopoly regulation legislation implies that there is a
stampede to ‗get in‘ whenever licensing is liberalised for an industry or the economy as a

8
whole. The two-wheeler industry, the car industry and the television industry are recent
examples of a stampede to get in which will inevitably lead to widespread sickness and a bad
shake-out a few years from now.
Role of Financial Institutions: The apex financial institutions like IDBI and IFCI
and nationalised commercial banks are in an extremely favourable position to prevent
industrial sickness. After all, they are the direct and indirect purveyors of the bulk of the
long-term and working capital needed to run private sector enterprises in India. They are the
ones that, by and large, decide whether an enterprise will get stated or not, and once stated,
whether it will run or not. Besides, they remain in constant touch with market conditions as
well as funded units, and are in an excellent position for receiving an early warning of
sickness.
The following are the ways by which sickness can be prevented by the financial
institutions:
A. Continuous Monitoring of Unit
(i) Periodic financial reports.
(ii) Desk officer for client unit.
(iii) Institutional nominee (s) on the board.
(iv) Periodic inspections.
(v) Institutional adviser deputed to the unit, especially to monitor project
implementation in risky ventures.
(vi) Inter-institutional reviews of unit.
(vii) Market intelligence and industry cells.

B. Careful Project Appraisal

(i) Independent verification of sales and profits projections of the client.
(ii) Careful scrutiny of technology and plant size, choices of location, government-
related contingencies and quality of management.
(iii) Use of external consultants for appraising large or risky projects.

C. Professional Institutional Response to Unit’s Problems

(i) Training of desk officers and reputed advisers in professional management.
(ii) Discretionary authority to monitoring desk officers to commit the institutions (up to
some limits) to immediate contingency reliefs.

9
 (iii) Better coordination and faster response by financial institutions through a smaller
consortium.
(iv) Lead agency concept.

D. Required Systems at Client Units

(i) Approval of financial institutions for appointing (or removing) internal and statutory
auditors.
(ii) Professional management training for promoters.
E. Incentives to Units to Remain Healthy
(i) Interest relief if there is no sickness.
(ii) Penal interest for avoidable project cost escalation, careless or false sales and profit
projections.
Role of Industry Associations: The industry associations in India have always
played, albeit indirectly, some sort of a sickness prevention role. This has largely taken the
form of lobbying the government for solving problems faced by or likely to be faced by the
industry. A more explicit and direct role, however, may be feasible because of the intimate
knowledge such associations can possess about industry-wise trends as well as the problems
faced by their various member units. Besides, an alternative to bureaucratic and centralised
regulation of the industry is industrial self-regulation in the light of national policies and a
greater self-monitoring and sickness prevention role could strengthen the development of
responsible industrial self-regulation. For this purpose, industry associations should be
broadened to include representatives from various stakeholders the government, labour,
financial institutions, suppliers and customers.
How can industry associations play a concrete role in sickness prevention and a
number of potentially useful steps are listed below.
A good practical review by each industry association of installed and usable capacity
in the industry, capacity utilisation, growth trends, problems and opportunities should be
useful for the potential new entrants for deciding whether to enter the industry or not, and for
existing firms for taking strategic diversification, expansion and project-mix decisions. This
should also help the financial institutions to formulate industry specific guidelines about
funding project finance requests and the government to formulate industry-specific licensing
guidelines.
The industry associations could have some sort of a first aid cell. This could consist
of professionals who could go to the aid of a unit that is beginning to fall, with the offer of

10
managerial and technical help. These professionals would be particularly useful since they
would be conversant with the nature of the industry and with practices that have effectively
worked in the industry.
The industry associations can perform a professionalising function by conducting
training programmes for manager‘s technocrats. The programmes could be quite useful since
they would be tailored to suit the needs of the industry. Suitable industry association
periodicals could also disseminate case studies of effective practices.
The industry associations would facilitate acquisitions of weaker units by stronger
units and other contractual arrangements to help out ailing units, such as loan of managers
from stronger units, sharing of marketing or production facilities, sharing of import of
technology, a fair sharing of imported inputs, collaboration in mounting export campaigns
etc.
These suggestions do not necessarily go counter to a policy of fostering competition.
On the contrary, by preventing ailing units from going sick and, indeed by strengthening
them, they should promote a healthy competition, that is, competition for serving customers
more effective with better products at cheaper prices.
Curative Measures
Till now, measures to prevent sickness were listed. Prevention is certainly better than
cure. But with the best of preventive measures, sickness often creeps in. How to cure the
sickness after it has crept in is a relevant question. The answer lies in the following
paragraphs.
The preventive measures detailed above will, help to cure industrial sickness. In
addition, the existing machinery to rehabilitate sick units should be strengthened. The
existing agencies are explained below.
There is the SICA. The Act was passed by the Parliament and received the assent of
the President in January 1986. The objectives of the Act are: (i) afford maximum protection
of employment, (ii) optimise the use of funds, (iii) salvaging the production assets,
(iv) releasing the amounts due to the banks, and (v) replace the existing time consuming and
inadequate machinery by efficient machinery for speedy decision by a body of experts. It was
amended in December 1991 so as to bring government companies within the purview of the
Act. The Act provides for the setting up a Board for Industrial and Financial Reconstruction
(BIFR). With the establishment of the BIFR, with effect from January 12, 1987, medium and
large-scale companies whose net worth has been eroded by 50 per cent or more will be
obliged to report this fact to the Board. The Board has been given wide ranging powers in

11
respect of the approval of rehabilitation packages for sick industrial companies, including
their reconstruction and revival as well as the change of managements or amalgamation with
any other company or sale of lease of a part or whole of the industrial undertaking or even
winding up of the company.
The Board deals with only medium and large sick units because it is in these
companies that large amounts are sunk.
Further, there is Industrial Investment Bank of India (IIBI) incorporated in 1997 by
converting the erstwhile Industrial Reconstruction Bank of India. The Investment Bank has
taken over all the functions of the former Reconstruction Bank. The IIBI is a principal
reconstruction agency which provides assistance for the reconstruction and rehabilitation of
sick units. In addition to granting of loans and advances to sick units, underwriting of shares
and debentures, guarantee of loans and deferred payments, IIBI‘s wide spectrum of activities
include such developmental activities as providing infrastructural facilities, raw materials,
consultancy, managerial and merchant banking services.
For sick units in the small-scale sector, separate facilities are available. State Finance
Corporations and commercial banks will be asked to devise schemes for the rehabilitation of
sick units in the small-scale sector, and the assistance given by them for the revival of such
units will be eligible for refinancing by the Industrial Reconstruction Bank of India (IRBI), at
a concessional rate of interest.
Mere strengthening of the existing machinery may often amount to taking an
unwilling horse to the water. The horse should be made to drink. Here lies the importance of
effective management. Ultimately, it is in the hands of the management to revive the sick unit
and put it on the profitable track.
The government and other buyers of the products of the small-scale industry will be
directed to settle the dues of the small-scale on a priority basis and commercial banks will be
asked to ensure that the credit given to large-scale units for working capital is applied first
towards meeting the dues of the small-scale suppliers.
In order to protect the investment of technical entrepreneurs in cases where the small-
scale units promoted by them are forced to close down for reason beyond their control, the
possibility of evolving a suitable scheme of risk insurance for safeguarding their interest may
be examined.
Finally, if a unit is so sick that it is beyond redemption, it is advisable to allow the unit
to die a natural death instead of clinging on to it on political or personal considerations. This

12
should be so whether the unit is in public, private, joint, cooperative or in the small-scale
sector.
Government of India has created layers of committees, policies and initiatives to
handle sickness in public sector, private sector and small-scale sector units. Multiple
definitions, overlapping policies and conflicting initiatives are available exclusively to
manage sickness. It is time that there is only definition to define sickness (public, private or
small unit), one policy to think about it and one initiative to act upon.
9.8 CHECK YOUR PROGRESS
Fill in the blanks with suitable answers:
1. Sick Industrial Companies Act, _______.
2. ____ of top management may take any or all of several forms.
3. Industrial sickness worsens the problem of stringency of ____ in the economy.
4. In a _______ sick units are allowed to die on their own.
5. For sick units in the small-scale sector______ are available.
Answer to Check Your Progress
1. 1985
2. Poor quality
3. Financial resources
4. Free market economy
5. Separate facilities
9.9 SUMMARY

In view of the large-scale industrial sickness it would be necessary to organize a task

force consisting of competent and experienced executives in various branches of business to
go into the case and monitor recovery. Rehabilitation of sick units is not an easy and simple
affair. An all-round effort is necessary to root out the disease; first necessary step is the
identification of sick units which can be made viable through renovation, expansion, and
diversification. Units beyond recovery should be wound up.
A study indicates that during the decade 1967-1976; one in four companies listed on
the US stock exchanges had turned sick. While data relating to sickness in medium and large
units are not available, such a problem does not exist with regard to MSME sector. The total
number of sick small scale units was 5,37,677 as at end December 2020, the outstanding bank
credit against these units stood at ` 25,000 crore.

13
 Causes for industrial sickness may broadly be classified into two categories:
(a) internal; and (b) external. Internal factors mainly relate to the poor quality of the top
management.
Finally, if a unit is so sick that it is beyond redemption, it is advisable to allow the unit
to die a natural death instead of clinging on to it on political or personal considerations. This
should be so whether the unit is in public, private, joint, cooperative or in the small-scale
sector.
9.10 KEY WORDS

SICA : Sick Industrial Companies Act.

CPSU : Central Public Sector Undertaking.

BIFR : Board for Industrial and Financial Reconstruction.

IIBI : Industrial Investment Bank of India.

9.11 QUESTIONS FOR SELF STUDY

1. Define the term Sickness of Industries. What are the causes for sickness?

2. Explain the extent of sickness.

3. State the signals of sickness.

4. Bring out the effects of sickness.

5. Suggest the remedies to cure the industrial sickness.

6. What impact does sickness have on the business environment of a country?

9.12 REFERENCES

1. Aswathappa.K,(2019) Essentials of Business Environment. Himalaya Publishing House.

2. Agarwal Raj and Diwanparag.(2019) Business Environment, Excel Books, New Delhi.

2. Mishra. M.K,(2016), Industrial Sickness, Anmol Pulication.

3. Bhattacharya D. K.(2015) Industrial Management, Vikas publishing house ltd,.

4. Verma A P, Mohan N (2015) Industrial Management, S K Kataria and Sons.

14
Unit-10 CORPORATE SOCIAL RESPONSIBILITY

Structure:

10.0 Objectives

10.1 Introduction

10.2 Meaning and Definitions of CSR

10.3 Concept of Charity

10.4 Corporate Philanthropy

10.5 Corporate Citizenship

10.6 CSR through triple bottom line and sustainable business

10.7 Drivers of CSR

10.8 Check Your Progress

10.9 Summary

10.10 Keywords

10.11 Questions for self-Study

10.12 References

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10.0 OBJECTIVES

After studying this unit, you would be in a position to;

 Give the Meaning and Definitions of Corporate Social Responsibility.

 Discuss the Concept of Charity.
 Delineate the Corporate Philanthropy.
 Give and account of Corporate Citizenship.
 Explain the CSR through triple bottom line and sustainable business.
 Bring out the Drivers of CSR.

10.1 INTRODUCTION

Perhaps we have studied about the Industrial Sickness in the last unit. In this unit we
shall discuss CSR. Corporate Social Responsibility is about how companies manage the
business process to produce an overall positive impact on society. Corporate Social
Responsibility (CSR) is also known as corporate responsibility, corporate citizenship,
responsible business, sustainable responsible business (SRB) or corporate social
performance. It is a form of corporate self-regulation integrated into a business model.

Corporate social responsibility described the body of management systems and tools
that help companies minimize their environmental impact, adhere to international labour
standards, contribute to their communities and manage toward a more economically
sustainable world.

CSR has been defined much in terms of a philanthropic model. Companies make
profits, unhindered excepted by fulfilling their duty to pay taxes. Then they donate a certain
share of the profits to charitable causes. It is seen as polluting the act for the company to
receive any benefit from giving. Social responsibility becomes an integral part of the wealth
creation process which if managed properly should enhance the competitiveness of business
and maximize the value of wealth creation to society.

When times get hard, there is incentive to practice CSR more and better if it is a
philanthropic exercise which is peripheral to the main business, it will always be the first
thing to go when push comes to thrust. But as with any process based on the collective
activities of communities of human beings there is no ‗one size fits all‘. In different countries,
there will be different priorities and values that will shape how business act. And even the

16
observations above are changing over time. For instance, the CSR definition used by
Business for Social Responsibility is operating a business in a manner that meets or exceeds
the ethical, legal, commercial and public expectations that society has of business.

Corporate Social Responsibility (CSR) is the decision-making and implementation

process that guides all company activities in the protection and promotion of international
human rights, labour and environmental standards and compliance with legal requirements
within its operations and in its goals. A properly implemented CSR concept can bring along a
variety of competitive advantages, such as enhanced access to capital and markets, increased
sales and profits, operational cost savings, improved productivity and quality, efficient human
resource base, improved brand image and reputation, enhanced customer loyalty, better
decision making and risk management processes.

10.2 MEANING AND DEFINITIONS OF CSR

You are aware that the concept of corporate social responsibility. Corporate social
responsibility refers to the concept whereby companies decide voluntarily to contribute to a
better society and a cleaner environment. Under corporate social responsibility companies
integrate social and environmental concerns in their business operations and in their
interaction with their stakeholders on a voluntary basis.

Definitions

Lord Holme and Richard Watts, defines that ―Corporate Social Responsibility is
the continuing commitment by business to behave ethically and contribute to economic
development while improving the quality of life of the workforce and their families as well as
of the local community and society at large‖.

United Nations Industrial Development Organization (UNIO), states that

―Corporate Social Responsibility is a management impression whereby enterprises integrate
social and environmental concerns in their business operations and interactions with their
participants‖.

10.3 CONCEPT OF CHARITY

Charity is the act of extending love and kindness to others unconditionally, which is a
conscious act but the decision is made by the heart, without expecting a reward. When charity

17
is carried out selflessly, it is a one-way act where a person gives but asks for nothing in
return.

It is this act of nature that makes it precious and soulful. There are people who believe
charity should begin at home and others believe it should originate from the heart. However,
charity originates from the heart as you feel the urge of giving, begins from home, ultimately
extending to others in the society.

Charity begins with the inward recognition of a need to show compassion to others
whether consciously or unconsciously. Everyone has problems, trouble, and griefs of some
sort in life but charity starts with those who learn to downplay their own problems, in order to
extend compassion, kindness, and love to help others. Hence some people set aside their own
pains to relieve the pain of others.

10.4 CORPORATE PHILANTHROPHY

According to the Council on Foundations, corporate philanthropy refers to the

investments and activities a company voluntarily undertakes to responsibly manage and
account for its impact on society.

Philanthropic investments and activities include:

 Money
 Donations of products
 In-kind services
 Technical assistance
 Employee volunteerism
 Other business transactions

The purpose of these investments and activities is to advance a social cause, issue or
the work of a non-profit organisation. Corporations often feel it is their social responsibility
to give back, building a positive culture and workplace within their companies. They often
want to show gratitude and give back to the communities that have helped them to make
profitable.

While revising your disaster relief strategy might be one action to consider, you can
expand your corporate giving much further that.

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7 TYPES OF CORPORATE PHILANTHROPY

The seven most common forms of corporate philanthropy are:

1. Matching Gifts: Companies financially match donations that their employees make
to non-profit organizations.
2. Volunteer Grants: Companies provide monetary grants to organizations where
employees regularly volunteer.
3. Employee & Board Grant Stipends: Corporations award grants to employees and/or
public boards to donate to the non-profit of their choice.
4. Community Grants: Company programs award non-profit organizations that apply
for grants based on defined criteria.
5. Volunteer Support Initiatives: Companies partner their employees with non-profits
to provide specialized support.
6. Corporate Sponsorships: Companies provide financial support to a non-profit that in
return acknowledges that the business has supported their activities, programs or
events.
7. Corporate Scholarships: Corporations provide scholarship dollars to universities on
behalf of students seeking support to continue their studies, encouraging college
education and workforce development.

BENEFITS OF CORPORATE PHILANTHROPY

Companies with successful corporate giving strategies publicly live the values of their
organizations and in return benefit from high employee engagement, employee retention and
the ability to attract top talent.

Corporate philanthropists also see a more positive work environment, increased employee
engagement, a boost to their company‘s public image and brand equity, enhanced customer
relationships and consumer confidence as well as strengthened government relations.

With benefits like these, it‘s no surprise that some of the most successful corporations in the
U.S. heavily invest in corporate philanthropy, including Coca-Cola Company, which offers a

19
$20,000 employee matching opportunity, and Walmart, which provides $250 to employees
for 25 volunteer hours.

10.5 CORPORATE CITIZENSHIP

If society would not cooperate, how would businesses be able to operate? Imagine a
market where the cost to produce rose sharply because of a lack of emphasis on
sustainability, there was a smaller pool of educated and qualified employees because of poor
advancements in education and training, and a reduced consumer base to purchase the
products that businesses make due to decreased buying power. These are many pitfalls but a
few of the many pitfalls that await business as a whole if society were to fail.

Many companies now utilize corporate citizenship, otherwise known as corporate

responsibility, CSR, etc., as a way to support society. Although corporate citizenship does not
have one singular definition at this point in its development, ethics are a highly important
factor at the core of the concept. Companies have a moral duty to be responsible in all facets
of their operations. Not only corporations expect to comply with the law or spirit of the law,
but they are expected to contribute to society. In return, firms receive a myriad of societal
benefits ranging from market infrastructure to property rights. A corporation‘s most sizeable
impact though comes from its day to day operations and interactions in the supply chain to
the customers and consumers; therefore, minimizing a firm‘s negative footprint on society
and maximizing economic wealth and social welfare are key components of corporate
citizenship.

Corporate citizenship matters because of the unique position businesses are in to

effect positive social change. Many have viewed the ineffectiveness of the government‘s
response to Hurricane Katrina as a sign that the government does not currently have the
ability to solve all of the nation‘s problems. Comparatively, businesses contributed money
and utilized its expertise in a variety of areas like logistics in order to provide the largest
business community relief effort in U.S. history. The government has fewer resources to
apply to social programs because of growing entitlements and debt interest payments that are
taking up more of the fiscal budget. As a result, market-based activity is expected to be the
driving factor for social change.

20
 Implementing corporate citizenship into a company‘s business model is not only
ethical, but there are far more tangible advantages to the firm itself. Six to ten percent of a
company‘s total market value consists of its reputation. Being socially responsible can
positively affect a firm‘s reputation, but doing nothing or not enough can cause substantial
reputational harm to a company. Additionally, employers will have greater success in
attracting and retaining employees because employees want to work for a company that is
socially responsible. Other benefits for employees include a higher commitment to their
work; they connect with the company on a deeper level and experience more of a sense of
meaning with their job. The advantages for firms that adopt corporate citizenship principles
are not solely limited to reputation and employees, but the business case for operating as a
socially responsible company helps to generate revenue, enhance asset value and reduce
costs.

Although small and medium sized firms do not have the resources to contribute at the
same level as Fortune 500 companies, they still have the ability to make an impact on society.
The actions of smaller companies have the potential to produce social change because of the
aggregate of their efforts across the country. With this in mind, companies have shown over
the last century that they are in the best position to bring about social change and innovation
in order to have a positive impact, while still remaining profitable.

10.6 CSR THROUGH TRIPLE BOTTOM LINE AND SUSTAINABLE BUSINESS

Corporate Social Responsibility (CSR)

The aptly named CSR view is that corporations are members of the moral community.
Instead of separating them from society as Friedman would, they are viewed as citizens in the
world. They have responsibilities that are analogous to those of other members of the moral
community and these responsibilities fall into four groups:

1. Economic Responsibility
2. Legal Responsibility
3. Ethical Responsibility
4. Philanthropic Responsibility

The Economic Responsibility is the responsibility of a business to make money. Required

by simple economics, this obligation is the business version of the human survival instinct.

21
Companies that don‘t make profits are in a modern market economy doomed to perish. So, as
long as we believe that the business ought to exist, it must be allowed to try and make a
profit. Otherwise, we are condemning it to death.

The Legal Responsibility is the responsibility to obey the letter and the spirit of the law. This
is not just the obligation to follow the law as it is written, but "this obligation must be
understood as a proactive duty. That is, laws aren‘t boundaries that enterprises skirt and cross
over if the penalty is low; instead, responsible organizations accept the rules as a social good
and make good faith efforts to obey not just the letter but also the spirit of the limits."

This responsibility is a heavier one than it may seem. Many corporations have broken the
rules when the profits that they stand to gain are much higher than the penalties that they
might have to pay for breaking the rules. According to this responsibility, they must not do
so, because they are required to view obeying the law as something that creates the best
results for everyone.

The Ethical Responsibility is the responsibility to do the right thing even when neither the
spirit nor the letters of the law apply to the situation. This is a key obligation, and it requires
the firm to act as any other citizen must. We might make allusions to the Good Samaritan or
to handling our change to someone who asks for it on the street, but the core of the
responsibility is that firms ought to act like persons who live in a civil community. This
requires that we view firms (and that they view themselves) as responsible members in a
community.

The last category, the Philanthropic Responsibility, is a responsibility "to contribute to

society's projects even when they are independent of the particular business."This
responsibility requires the business person to do some things which stem from generosity
towards the community that they exist in. This is likely to be a controversial requirement, but
it speaks to the connections between the community and the firm. "These public acts of
generosity represent a view that businesses, like everyone in the world, have some obligation
to support the general welfare in ways determined by the needs of the surrounding
community." It might require that an affluent business person stop and buy lemonade or a
hotdog from a stand that contributes to a neighbourhood project or to buy some cookies from
the local Girl Scout troop. It might require that they open their business to local youth who

22
want to learn about how it works and get inspired to become entrepreneurs. Whichever form
it takes, it requires that businesses do something that benefits the community without having
anything to gain, directly.

These four principles are ordered from the most pressing to the least. This means that
businesses must attend to the Economic, Legal, Ethical, and Philanthropic responsibilities in
that order. This does not mean that the economic responsibility to maintain a profitable
business always trump the other three. It means that a business which is profitable must also
act within the bounds of the law and that they must act within the bounds of ethics. At the
bottom of the list, a business might be required to behave philanthropically. This only applies
to a business that has already met the other three responsibilities, however. A struggling
business lacks any meaningful responsibility for community outreach. When they consider a
possible course of action they must weigh the benefits and burdens according to these
weighted responsibilities. If an action would keep the firm profitable, but it bends a law in a
way that is not ethically objectionable, they might be allowed to do it.

Think of laws on the highway. There are good reasons for following the speed limit. It keeps
us from getting speeding tickets (economic), shows respect for the law and the common rules
we all share (legal), and it helps to prevent traffic accidents through safe driving (ethical).

I might be allowed to break the law (and thereby risk a ticket), however, if there are really
strong ethical reasons to drive quickly. Perhaps there is someone in the car that requires
medical help. In such a case, the strength of that 3 responsibility might force to override the
other two above it.

It might also be the case that I could make a huge amount of money by doing something that
is illegal and very harmful. Perhaps my firm could save a great deal of money by dumping a
toxic substance (like PCB) along the roads in a rural area of North Carolina. It would save the
company a huge amount of money and time, while contaminating the soil in some 14
counties. In that case, the business would have been prohibited from taking the action that
they did by the illegality of it and the huge environmental harms imposed on nearby residents
and upon the state.

23
There is an important difference between this theory of corporate responsibility and the
Stakeholder theory of social responsibility. According to the CSR, the corporation has an
obligation to the society that it lives in. According to Stakeholder theory, the corporation
must consider the interests of many groups of people. The difference here is that these groups
of people might have preferences for, or demand things, which are counterproductive to the
wellbeing of the overall society. In this way, the Stakeholder theory might be much more
permissive than the CSR view. If the creation of some chemical by-products would be of
overall benefit to many of the stakeholders involved, then it might be permissible on one
view while prohibited on the other.

Triple Bottom Line

Another theory of corporate social responsibility is the Triple Bottom Line. Like the CSR
theory we just discussed, Triple Bottom Line works on the assumption that the corporation is
a member of the moral community, and this gives it social responsibilities. This theory
focuses on sustainability, and requires that any company weigh its actions on three
independent scales.
Scales:
1. Economic Sustainability.
2. Social Sustainability and
3. Environmental Sustainability.

These three tabulations are all aimed at long-term sustainability. Economic sustainability
must focus on the long term because this is the nature of a persistent company. A decision
which creates an economic boon in the short-term (like the Ford Pinto), but causes long-term
harm, would likely reduce this bottom line to such a degree that the action would be
untenable.

Social sustainability gives precedence on the balance of economic power in the society.
Competition in the business arena is common, and encouraged, behaviour, but maximizing
the bottom line in social terms requires that a business foster an environment in which all can
succeed. This might seem counterintuitive, but in the big-picture it is better for a whole
society to thrive than for one single corporation to thrive alone. This will allow the company
to continue to exist, and it will foster good-will between the company and the society that it

24
exists in. The PCB dumping alluded to in above created an environment in which that
company could not exist, and it is no longer present in NC.

The requirement of environmental sustainability stems from the recognition that resources are
not infinite, and leads to the reasoning that too much degradation will worsen the lives of
ourselves, our children and so on. Members of the moral community ought not to cause
undue harm to the people around them and the people who will come later, and so this bottom
line values some protection of the environment. The word "some" in the previous statement
introduces vagueness in the calculation, but it might be necessary because there is some risk
of environmental degradation in many necessary business activities. The question of how
much environmental degradation is acceptable is one that must be answered, but it need not
be answered in this module. Suffice it to say that this calculation must be made even if it is a
rough calculation. Business cannot operate in a world which is poisoned or "used up." Efforts
should be made to renew some of the environments that have been harmed in the past, and
these environmental harms and gains belong on this bottom line.

The reasoning behind this tripartite theory is that if businesses calculate their gains and losses
in this way they will be more likely to take actions which are to the benefit of both the
business and the community. It is easy, when the numbers are large enough, to ignore the
social and environmental dimensions of a business decision. This is because the average
business decision is made by comparing the expected costs and benefits in terms of dollars
and, only then, considering the other dimensions of that decision. In order to combat this
order of operations, the Triple Bottom Line requires that a business decision be composed of
all of these elements from the beginning. When the data shows each of these dimensions
along the same line, and measured with the same metric, it will be much easier to see the
impact of a decision and to judge the fittingness of that decision.

SUSTAINABLE BUSINESS

The Triple Bottom Line is one of the main systems being used by businesses to assess the
profits they are making through their corporate sustainability solutions. The Triple Bottom
Line method asks to see beyond the traditional bottom line of business to the profits that
business makes socially, environmentally, and economically. Measuring business using the
Triple Bottom Line is one of the best markers of how sustainable business is, and how
profitable it really is.

25
Social Sustainability

The Social bottom line measures business‘ profits in human capital, including position
within local society. Social bottom line is increased by having fair and beneficial labour
practices and through corporate community involvement, and can also be measured in the
impact of business activities on the local economy. For example, some questions can ask
when measuring Corporate Social Responsibility are:

 Is your business a job-growth driver in your city? Do you or your employees give
back to the community?
 Are the people you hire statistically better situated within the community in terms of
economic stability and community health?
 Does your business support local initiatives and grow the overall sustainability of
your community/region?
 Do you implement fair hiring standards? What are your employee demographics?

After all, if business is not nurturing positive relationships with community, client
base and employee pool shrinks accordingly. The social bottom line questions the belief that
the less a business pays its work force the longer it can afford to operate. Instead, the social
bottom line measures the long-term sustainability of business human capital, with the
understanding that a business that is also a desirable workplace will always be able to operate
into the future, since there will be a work force striving to be part of the business. Essentially,
corporate interests and labour interests are seen as interdependent.

Environmental Sustainability

The Triple Bottom Line approach to sustainability takes the view that the smaller
impact on business has on the environment and the fewer natural resources consume, the
longer and more successful business will be.

Controlling the Environmental bottom line means managing, monitoring, and

reporting consumption and waste and emissions. This is typically the work of Environment
Health and Safety department (EHS), though most sustainable business models also make
waste reduction and green policies corporate-wide values across all levels of management. A
sustainability committee is often required to communicate sustainability solution and
sustainability goals across all departments.

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 Measuring and reporting environmental bottom line is certainly possible, though
depending on the size of your business, it can be a time-consuming and difficult process.
However, EHS or corporate sustainability software can make the process much quicker and
cost effective.

Again, the Global Reporting Initiative offers a few helpful metrics for measuring and
reporting environmental triple bottom line. These include (but are not limited to):

 Renewable energy use and energy consumption (direct and indirect)

 Amount of material that is recycled
 Amount of water withdrawn from local water sources
 Total Nitrogen Oxide, Sulfur Oxide, and Green house gases(GHG), emissions

Economic Sustainability

In the Triple Bottom Line approach, economic sustainability is not simply traditional
corporate capital. The economic capital under the Triple Bottom Line model should be
measured in terms of how much of an impact the business has on its economic environment.

The business that strengthens the economy is one that will continue to succeed in the
future, since it contributes to the overall economic health of its support networks and
community. Of course, a business needs to be aware of its traditional profits as well, and the
Triple Bottom Line accounts for this.

By using the Triple Bottom Line method, the business can expand how it understands
its position in the current economy and its ability to survive in the future. Corporate
sustainability measures the ability to be in business indefinitely, based on your impact on the
environment, the relationship to the community, and contribution to the economy. In reality,
all three factors play a major role in determining the sustainability of business and generate a
profit no single bottom line can sustain a business alone.

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10.7 DRIVERS OF CSR
The five Driving forces of CSR:
1. Increased Affluence: CSR becomes more relevant as economies grow and stabilize.
Therefore, the greatest attention to CSR is found in developed countries. Stable work
and security provide the luxury of choice and socially
2. Ecological Sustainability: Perhaps the most obvious and most talked about of the
drivers, concerns over pollution, waste, natural resource depletion, climate change and
the like continue to fuel the CSR discussion and heighten expectations for proactive
corporate action. After all, it is in the best interest of firms to protect for the
sustainable future the long- term availability of the resources on which they depend.
3. Globalization: Globalization has had considerable impacts. First, the increased
wealth and power of multinational corporations has led to questions on the decreased
authority of the nation state, especially in developing areas. Further, culture
differences have added to the complexity of CSR as expectations of acceptable
behaviour vary regionally. With increased power comes increased responsibility and
globalization has fuelled the need to filter all strategic decision through a CSR lens to
ensure optimal outcomes for diverse stakeholders.
4. Free Flow of Information: Yes, blame the bloggers, but through the internet and
other electronic mediums the flow of information has shifted back to the stakeholders,
especially in the case of three important groups consumers, Non-Governmental
Organisation (NGO) and general media. Easily accessible and affordable
communication technologies have permanently changed the game and only truly
authentic and transparent companies will profit in the long term.
5. The Power of the Brand: Brands are today the focal point of corporate success and
much of the health of the brand depends on public perception of the corporation. In
other words, reputation is key and honest CSR is a way to protect that reputation and
therefore the brand.
10.8 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. Corporate social responsibility (CSR) is also known as _________.

2. ______ is the act of extending love and kindness to others unconditionally.

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3. Corporate _____ matters because of the unique position businesses are in to effect
positive social change.

4. Business might be required to behave ________.

5. CSR discussion and heighten expectations for ____ corporate action.

Answer to Check Your Progress

1. Corporate responsibility
2. Charity
3. Citizenship
4. Philanthropically
5. Proactive

10.9 SUMMARY

So for we have discussed the term corporate social responsibility. Corporate social
responsibility described the body of management systems and tools that help companies
minimize their environmental impact, adhere to international labour standards, contribute to
their communities and manage toward a more economically sustainable world.

Charity is the act of extending love and kindness to others unconditionally, which is a
conscious act but the decision is made by the heart, without expecting a reward.

Corporate philanthropists also see a more positive work environment, increased

employee engagement, a boost to their company‘s public image and brand equity, enhanced
customer relationships and consumer confidence as well as strengthened government
relations.

Triple Bottom Line works on the assumption that the corporation is a member of the
moral community, and this gives it social responsibilities. The Triple Bottom Line is one of
the main systems being used by businesses to assess the profits they are making through their
corporate sustainability solutions. Drivers of CSR are a way to protect that reputation and
therefore the brand.

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10.10 KEY WORDS

CSR : Corporate Social Responsibility.

EHS : Environment, Health and Safety.

PCB : Polychlorinated Biphenyls.

NGO : Nongovernmental Organization.

UNIO : United Nations Industrial Development Organization.

10.11 QUESTIONS FOR SELF-STUDY

1. Define the meaning and definitions of CSR.

2. Explain the concept of charity and corporate philanthropy.

3. Discuss the concept of corporate citizenship.

4. Give an account of the CSR through triple bottom line and sustainable business.

5. Write a note on Drivers of CSR.

10.12 REFERRENCES

1. Aswathappa.K,(2019) Essentials of Business Environment. Himalaya Publishing House.

2. James E Post et al., (2019) Business and Society, McGrow-Hill.

3. Nirmala K, Karunakara Reddy B A, Aruna Rani, (2018) Business Ethics and Corporate
Governance, Himalaya Publishing House.

3. George A. Steiner and John F. Steiner (1997) Business, Government and Society,
McGrow-Hill.

4. Keith Davis and Robert L. Blomstrom (1975) Business and Society – Environment and
Responsibility.

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Unit-11 BUSINESS ETHICS

Structure

11.0 Objectives

11.1 Introduction

11.2 Meaning of Ethics and Business

11.3 Sources of Business Ethics

11.4 Factors influencing Business Ethics

11.5 Values, Morals and Ethics

11.6 Business Ethics as Personal Integrity

11.7 Business Ethics as Social Responsibility

11.8 Ethics and Law

11.9 Check Your Progress

11.10 Summary

11.11 Keywords

11.12 Questions for Self-Study

11.13 References

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11.0 OBJECTIVES

After studying this unit, you will be able to;

 Discuss the Meaning of Ethics and Business.

 State the Sources and Factors influencing Business Ethics.
 Explain Values, Morals and Ethics.
 Highlight the Business Ethics as Personal Integrity, Social Responsibility.
 Give an account of Ethics and Law.

11.1 INTRODUCTION

Perhaps we have studied in the last topic about the corporate social responsibility. In
this unit we will discuss the Business Ethics. Ethics is the part of philosophy concerned with
the meaning of all aspects of human actions. Theoretical ethics, sometimes called normative
ethics is about discovering and delineating right from wrong, it is the consideration of how
we develop the rules and principles used to judge and guide meaningful decision-making.
Theoretical ethics is supremely intellectual in character and being a branch of philosophy is
also rational in nature. Theoretical ethics is the rational reflection on what is right, what is
wrong, what is just, what is unjust, what is good and what is bad in terms of human
behaviour. This is the basic concepts and fundamental principles of men and women, human
or natural rights, obedience to the law of land, concerned for health and safety and
increasingly, also for the natural environment.

11.2 MEANING OF ETHICS AND BUSINESS

Let us discuss about the meaning of ethics and business. Ethics refers to the
evaluation of moral values, principles and standards of human conduct and its application in
daily life to determine acceptable human behaviour. Ethics examines the rational justification
for moral judgements; it studies what is morally right or wrong, just or unjust.

Business ethics is the study of appropriate business policies and practices regarding
potentially controversial subjects including corporate governance, insider trading, bribery,
discrimination, corporate social responsibility, and fiduciary responsibilities. The law often
guides business ethics, but at other times business ethics provide a basic guideline that
businesses can choose to follow to gain public approval.

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11.3 SOURCES OF BUSINESS ETHICS

In every society there are three sources of business ethics-Religion, Culture and Law.
The HR manager in every organisation, thus, has to be well versed with the unique system of
values developed by these three sources.

1. Religion
Religion is the oldest source of ethical inspiration. There are more than ethical
inspirations. 1, 00,000 religions which exist across the whole world, but all of them
are in agreement on the fundamental principles. Every religion gives an expression of
what is wrong and right in business and other walks of life. The Principle of
reciprocity towards one‘s fellow beings is found in all the religions. Great religions
preach the necessity for an orderly social system and emphasize upon social
responsibility with an objective to contribute to the general welfare. With these
fundamentals, every religion creates its own code of conduct.

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 2. Culture
Culture is the set of important understandings that members of a community share in
common. It consists of a basic set of values, ideas, perceptions, preferences, concept
of morality, code of conduct etc. which creates distinctiveness among human groups.
When we talk about culture we typically refer to the pattern of development reflected
in a society‘s pattern of knowledge, ideology, values, laws, social norms and day to
day rituals. Depending upon the pattern and stage of development, culture differs
from society to society. Moreover culture is passed from generation to generation.
Culture facilitates the generation of commitment to something larger than one‘s
individual self interest.
Culture encourages the members of the organisation to give priority to organizational
goals over and above their personal interests. Culture also serves as a sense making
and control mechanism that guides and shapes the attitudes and behaviour of people.
Managers have to run an industrial enterprise on the cutting edge of cultural
experience. The tension that their actions create the business ethically more complex.
3. Law
The legal system of any country, guide the human behaviour in the society. Whatever,
ethics the law defines is binding on the society. The society expects the business to
abide by the law. Although it is expected that every business should be law abiding,
seldom do the businesses adhere to the rules and regulations. Law breaking in
business is common eg. Tax evasion, hoarding, adulteration, poor quality, high priced
products, environment pollution, and others.

11.4 FACTORS INFLUENCING BUSINESS ETHICS

In addition to the different types of positions on ethics in societies, we have also seen
ethics evolving. People within a community take up ethical positions based on many human,
political, social and economic factors around them. We have seen over time the world has
evolved in an ethical standpoint and business is not immune to this. From this, we can
understand that there are factors influencing business ethics that stem from within the
considerations of the business world and some are from outside the business world.

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To understand the factors influencing business ethics are;

1. Culture
The first factor influencing business ethics in any situation is the culture. Culture is a
collection of the customs, norms and practices of a group of people. Culture has been
described simply as ―the way we do things‖. This simple definition best explains how culture
is regarded as one of the factors influencing business ethics. Many different measures can be
used to assess where a community stands culturally. One good example that has a large
influence on business ethics is the power distance rating of a culture. Power distance is a
measure of the degree to which members of a community with authority are distanced by fear
from those without authority. In a high power distance culture, authority is not questioned
whereas low power distance cultures openly question those in authority. This is a factor
influencing business ethics as it determines how easily subordinates can question their
superiors. Many other cultural considerations influence business ethics.

2. Personal Code of Ethics

If culture is the first factor influencing business ethics, then personal code of ethics is
certainly the second factor influencing business ethics. The personal code of ethics is a set of
principles and rules used by an individual to govern their decision-making process, as well as
to distinguish right from wrong. This is not necessarily a set of written principles but they
none the less determine how a person handles decisions that require a moral position. An
example may be drawn from a celebrated individual who is against tobacco smoking and
refuses to work with businesses or other people involved in the tobacco industry. The
personal code of ethics is an important factor influencing business ethics because individuals
though in a larger organisation from time to time make decisions based on personal ethics on
behalf of their employers.

3. Legislation
The legislation is another factor influencing business ethics. The legislation refers to the rules
and laws that govern a country. If behaviour is defined as being illegal in a country then it is
also unethical for a business to be involved in such behaviour. However, in other countries,
the same behaviour may be perfectly legal and this would influence business ethics in that
country with regards to the behaviour. It is important to note that ethics is not limited to what
is legal and it is perfectly acceptable for business ethics to deem behaviours that are

35
otherwise legal to be unethical. The legislation is, however, a strong factor influencing
business ethics because it forms a basis and behavioural guideline.

4. Rules and Regulations

Rules and regulations are another factor influencing business ethics in a way similar to
legislation. Rules and regulations refer to guidelines that are specific to business or particular
industries which guide the behaviour of businesses and their agents within the industry. They
differ from legislation in that they are industry-specific and breaking them may not amount to
the commission of a crime but would not be taken positively in the industry. It doesn‘t take
much to see how it is unethical but in some countries and industries giving gifts may not be
allowed or there are restrictions on the nature, size and value of gifts that can be given in a
business relationship. Of course, a cash gift would be frowned upon by many even if not
illegal. Some professions such as accounting and banking would have rules in place against
cash gifts.

5. Company Ethical Code

It has become the norm for companies to have their ethical codes. These are general
agreements with employees on how employees will conduct themselves as agents of the
business and they may extend to behaviour even when not representing the company. A
company ethical code is a factor that influences business ethics to the extent that employees
are aware of it and have been bound to it. To be effective it is best if they are stated clearly
and all matters understood by employees. These company ethical codes tend to be tied into
conditions of employment and have a direct bearing on the choices employees of companies
make. In the absence of these companies would rely on personal ethical codes which are not
always known or expressed.

6. Industry Ethical Climate

An industries ethical climate can also act as a factor influencing business ethics. Earlier it was
noted that ethics have evolved. Similarly, business ethics have evolved in ways specific to
certain industries. The collapse of Enron and Anderson Accounting along with it put the
spotlight on the ethical climate within the accounting industry. As people placed a lot of trust
in the information produced by accountants on businesses like Enron, trust was broken and
the general public needed greater assurances that those in charge of reporting had a strict

36
ethical code. This factor influenced business ethics in the accounting industry to the extent
that professional accounting bodies include ethics classes in their training processes.

7. Social Pressures
The final factor affecting business ethics we will look at are social pressures. Communities
are affected by business operations. The best example of this is the effect extractive
businesses like mining have on the communities which live in areas close to the mines. While
they bring employment and investment to these areas it comes with the cost of environmental
impact. People have increasingly put pressure via political and social channels on mining
companies and their attitude towards the environment. While legal pressure has also lead to
change in their practices social pressure has been a major factor affecting business ethics in
mining companies. Many more businesses have been affected in a similar fashion including
alcohol, tobacco and cosmetics companies.

11.5 VALUES, MORALS AND ETHICS

Values

According to the dictionary, values are ―things that have an intrinsic worth in usefulness or
importance to the possessor,‖ or ―principles, standards, or qualities considered worthwhile or
desirable.‖ However, it is important to note that, although we may tend to think of a value as
something good, virtually all values are morally relative neutral, until they are qualified by
asking, ―How is it good?‖ or ―Good to whom?‖ The ―good‖ can sometimes be just a matter of
opinion or taste, or driven by culture, religion, habit, circumstance, or environment,
etc. Again, almost all values are relative. The exception, of course, is the value of life. Life is
a universal, objective value. We might take this point for granted, but we all have the life
value, or we would not be alive. Life is also a dual value we value our own life and the lives
of others.

Morals

Moral values are relative values that protect life and are respectful of the dual life value of
self and others. The great moral values, such as truth, freedom, charity, etc., have one thing in
common. When they are functioning correctly, they are life protecting or life enhancing for
all. But they are still relative values. Our relative moral values must be constantly examined

37
to make sure that they are always performing their life-protecting mission. Even the Marine
Corps core values of ―honor, courage and commitment‖ require examination in this context.
Courage can become foolish martyrdom, commitment can become irrational fanaticism,
honor can become self-righteousness, conceit, and disrespect for others. Our enemies have
their own standard of honor, they have courage, and they are surely committed. What sets us
apart? Respect for the universal life value sets us apart from our enemies.

Ethics

A person who knows the difference between right and wrong and chooses right is moral. A
person whose morality is reflected in his willingness to do the right thing, even if it is hard or
dangerous, is ethical. Ethics are moral values in action. Being ethical is an imperative
because morality protects life and is respectful of others. It is a lifestyle that is consistent with
mankind‘s universal values as articulated by the American Founding Fathers – human
equality and the inalienable right to life. As warriors it is our duty to be protectors and
defenders of the life value and to perform the unique and difficult mission of taking the lives
of those acting immorally (against life) when necessary to protect the lives of innocent others.

11.6 BUSINESS ETHICS AS PERSONAL INTEGRITY

1. Customer Value Strategy

Ethical standards in business are built off of a customer focus and commitment to providing
value to its customers. When an organization is committed to improving the lives of its
customers, it would be when there is a violation of that trust that would cause concern from a
strategic perspective.

For instance, the Facebook privacy and data sharing scandal caused mistrust of users. There
were deception and users did not have a good understanding of how Facebook was using
their profile data.

Not something you would prefer if you are committed to providing value to your customers.

2. Accounting Practices
Financial honesty and transparency is a basic expectation of shareholders, customers, and
employees. It serves no one when organizations ―cook the books‖ – whether it be intentional
or accidental. Careless accounting practices limit an organization‘s ability to operate with

38
good financial management. How can an organization‘s budget be accurate when there is not
complete transparency in spending?

3. Truth-in-Selling
When an organization markets a product or service, they are obligated to deliver what was
promised to the customer. Whether it is a television ad or a print ad in the newspaper, the
product described should be what is delivered to the customer.

For instance, we responded to a furniture ad one time and when we went to the department
store we discovered they were out of that particular item and the salesperson tried to sell us a
similar item that was more expensive.

Needless to say, we walked out of that store. Unfortunately, the sting of the ―bait-and-switch‖
experience kept us from visiting that department store again. Not a good way to grow a
customer base. You owe it to your customers to deliver what is promised.

4. Integrity in Management Practices

Management practices are the underlying foundation for organizational integrity. Whether it
is a commitment to good customer service or fair employment practices, a businesses‘
reputation can be tarnished by unresolved service or product issues. Additionally, employees
observe how leadership resolves issues and follows up on promises made. For example, SAS
ranked number 1 out of the top 100 employers to work for in 2010.

5. Customer Service Integrity

Service after the sale is what service integrity is all about. It is easy to make promises before
a sale but following up and ensuring a great customer experience is what makes some
organizations stand out. For example, we built a house a few years ago. The customer
experience was over the top – until we closed on the house.

6. Personal Integrity
It is important for business leaders to live a lifestyle of honesty, integrity, and high ethical
standards because what these leaders do can harm the reputation of the organization. Two
former Tyco executives, who have become the poster children for failed ethical leadership,
are a good example of this.

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11.7 BUSINESS ETHICS AS SOCIAL RESPONSIBILITY

Social responsibility refers to businesses doing what they can do to benefit their
communities. Societies set their own acceptable norms. To be successful, businesses have to
adhere to social norms and expectations. Some values have eroded over time and that has left
no moral compass to guide leaders through complex social dilemmas over right and wrong.
That means that businesses are on their own to decide the ways that they can best
demonstrate social responsibility and give back to their communities.

Social Responsibility in Business

We live in a more socially responsible period than ever before. Corporate social
responsibility is connected to what today companies calls ESG— environmental, social, and
governance. ESG is a practice that incorporates sustainability into a company business model.

Companies that embrace ESG find that it improves their brand and ultimately increases
profitability. Customers of today are more inclined to buy from socially responsible
companies and employees are more interested in working for socially responsible companies.
In research by Cone Communications, the study found that over 60% of Americans looked
favourably on companies that pursued social and environmental change whether it was
regulated or not. Almost 90% of consumers in the survey indicated they would be inclined to
purchase a particular product if it supported an issue that was close to their heart. The study
also showed that 75% of consumers refused to buy anything from a company if it supported
an issue they were against.

As the economy improves, society is beginning to expect corporations to give back to their
environments and communities. Besides going a long way to boost a company‘s branding and
image, sustainable practices can aid the financial bottom line. Using less packaging and less
energy in production helps to reduce production costs and increase revenue.

There are four general and specific ways that companies can join their efforts between
business ethics and social responsibility. They include:

1. Environmental efforts
2. Philanthropy
3. Ethical labour practices
4. Volunteering

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11.8 ETHICS AND LAW

The rule of law is expressed by codified legal standards. In the United States, and
most other democracies, laws spell out how we will govern ourselves. Over centuries, laws
have evolved based on commonly understood societal concepts of right and wrong. Even in
the present, the law is evolving to reflect not only our history but also current ideas of how
we want to be governed. Knowing we can depend on the law provides stability for the
country and for ourselves.

Ethics is the area of philosophical study that examines values, actions, and choices to
determine what is right and wrong. Core principles that have been foundational for ethical
behaviour were established millennia ago by the great philosophers Aristotle, Plato, and
Socrates. In the fourth century B.C. they defined ethics as ―the science of morals‖. Ethics lays
down the principles of human behavior. For example, we can debate the principle of the
greatest good for the greatest number. Ethics constitutes moral principles, and values are
related more to an individual‘s personal set of standards.

11.9 CHECK YOUR PROGRESS

Fill in the blanks with suitable answer:

1. Ethics is the part of ______concerned with the meaning of all aspects of human actions.

2. _____ is the oldest source of ethical inspiration.

3. Culture has been described simply as ______.

4. _______ is committed to improving the lives of its customers.

5. The rule of law is ______ by codified legal standards.

Answer to Check Your Progress

1. Philosophy
2. Religion
3. The way we do things
4. Organization
5. Expressed

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11.10 SUMMARY

From the above discussion we draw conclusion that ethics refers to the evaluation of
moral values, principles and standards of human conduct and its application in daily life to
determine acceptable human behaviour. In every society there are three sources of business
ethics-Religion, Culture and Law. The factors influencing business ethics are culture,
personal code of ethics, legislation, rules and regulations, company ethical code, industry
ethical climate, social pressures.

Business ethics as personal integrity and it is having social responsibility. The rule of
law is expressed by codified legal standards. In the United States, and most other
democracies, laws spell out how we will govern ourselves. Ethics is the area of philosophical
study that examines values, actions, and choices to determine what is right and wrong.

11.11 KEY WORDS

Law : A rule defining correct procedure.

Integrity : The quality of being honest and having strong moral principles.
Ideology : A system of ideas and ideals.
ESG : Environmental, social, Governance.
Bribery : The giving or offering of a bribe.

11.12 QUESTIONS FOR SELF STUDY

1. What is the meaning of ethics and business?

2. List out the sources of business ethics.
3. Explain the factor influencing on business ethics.
3. Give an account of values morals and ethics.
4. Examine the business ethics as personal integrity and social responsibility.
5. Give the meaning of ethics and law.

11.13 REFERENCES

1. Aswathappa.K,(2019) Essentials of Business Environment. Himalaya Publishing House.

2. Murthy C.S.V.(2018) Business Ethics and Corporate Governance, Himalaya Publishing
House.

42
3. Nirmala K, Karunakara Reddy, N. Aruna Rani(2018), Business Ethics and Corporate
Governance Himalaya Publishing House.
4. Gosh, B.N (2016), Business Ethics and Corporate Governance, Tata MacGrwa Hill.

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Unit-12 ETHICS IN FUNCTIONAL AREAS

Structure:

12.0 Objectives

12.1 Introduction

12.2 Ethics in Marketing

12.3 Ethics in Advertising

12.4 Trade secrets

12.5 Corporate Disclosure and Insider Trading

12.6 Ethics Accounting and Finance

12.7 Corporate Takeover

12.8 Ethical Codes

12.9 Check Your Progress

12.10 Summary

12.11 Keywords

12.12 Questions for self-Study

12.13 References

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12.0 OBJECTIVES

After studying this unit, you will be able to;

 Discuss the Ethics in Marketing and Advertising.

 Highlight the Trade Secrets.
 Explain the Corporate Disclosure and Insider Trading.
 State the Accounting and Finance.
 Give an account of Corporate Takeover and Ethical codes.

12.1 INTRODUCTION

In this unit we will discuss the ethics in functional area. It is just as different functions
in the human body are performed and regulated by different organs; different functions
within a business are performed and controlled by different parts of the business. One of the
reasons for separating business operations into functional areas is to allow each to operate
within its area of expertise, thus building efficiency and effectiveness across the business as a
whole. The key functional areas of a business are the following:

 Management

 Operations

 Marketing

 Accounting

 Finance

12.2 ETHICS IN MARKETING

You probably know that the concept of marketing, let us discuss the marketing ethics
are moral principles that define right or wrong behaviour in the world of marketing. The
coverage of marketing ethics is wider, as it deals with norms in relation to customers,
shareholders, employees, dealers, Government, and competition. Dealings with all the above
groups should be honest and fair. Every professional activity has rules of conduct and
professionals like lawyers, doctors, accountants are expected to follow ethical standards.

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Importance of Marketing Ethics
1. When a company charges fair prices, offer, quality products, provides after sales service
and pay regular taxes to Government, it creates good image in the mind of people.
2. It helps the company to increase sales.
3. The morale of the employee is high as the company enjoys a good reputation in the
market.
4. Business ethics is required to check malpractices and offer protection to consumers.
5. To develop the confidence of consumers regarding price, weight, quality.
6. To protect the interests of all the stakeholders i.e. employees, dealers, suppliers, and
shareholders.

Unfair Marketing Practices- In these days of intense competition, the emphasis is on

increasing sales volume, market share and profit, even at the cost of consumer-satisfaction
and service. Marketers adopt an aggressive sales approach in selling unsought or unwanted
goods. Many types of criticism have been levelled against marketing and, in general, they are
related to unfair marketing practices.
(A) Product:
(a) Product safety: Business should give safety the priority warranted by the product.
They should abandon the misconception that accidents occur due to product misuse
and it is absolved of responsibility.
(b) Product quality: The manufacturer and marketer should take responsibility to
ensure that the quality of the product measures up to the claim made about it and
meets reasonable consumer expectations.
(c) Spurious products: Several spurious drugs meant for cold, cough, body ache, fever
is available in the market. Illegal traders sell such products as they get attractive
discounts.

(B) Pricing
(a) The price may be higher compared to products extra quality.
(b) Price-fixing is another unethical marketing practice followed by some companies.
It is an agreement between two or more firms on the price they will charge for a
product or service or bidding the lowest price on a contract.
(c) Predatory pricing covers the practice of selling at a very low price or below the cost
of production to eliminate competition

46
(C) Packaging and Labelling
The marketer has the responsibility to provide accurate and adequate information through
packaging and labelling.

(D) Distribution Channel

(a) Exclusive dealing refers to manufacturers insisting on its distributors to sell only its
products and not to deal in competitors‘ products.
(b) Tying contracts require distributor/dealers to purchase unwanted/slow- moving
products as a condition for obtaining fast-moving brands.
(c) Full line forcing: Here, the buyer is forced to purchase all the products when
only the buyer requires part of the line.

Unfair Advertising Practices- If advertising is properly used it can be a boon or a blessing

in distribution. But if it is abused or misused, it can also act as a curse in distribution. Most
impartial studies of the economic value of advertising point out, that favourable economic
effect do counterbalance the unfavourable effects, which are primarily due to unsocial and
unethical advertisers.
1. Deceptive advertising: Advertising should win the confidence of consumer to
achieve its objectives. Many feels that advertising is deceptive and claims made in the
advertisement are exaggerated and untrue. Misrepresentations, ambiguous statements
and misleading interpretations are considered as deception.
2. Harmful effects: Some advertisements have created emotional disturbances and
long-run anxiety conditions among younger generation. Advertising repeats several
messages and becomes uninteresting and boring.

It exposes several messages which are undesirable. The growing desire to possess the
products advertised becomes a source of conflict in the family.
3. Confuses people: Advertising creates confusion in the mind of people. Consumers do
not take rational decisions.
4. Forceful selling: Manufacturers use persuasive advertising to influence people. Real
and information is often concealed from the people.
5. Media misuses: Newspapers, magazines, television etc. are crowded with
advertisements. Many advertisers buy advertising time or space to present their
messages. They try to sell stores favouring the products and small newspaper accept
such advertisements to improve their financial position

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 6. Message problems: The messages are often emotional. If people start liking such
advertisements there would be violence and immoral activities in the society.
Advertisements should carry acceptable messages.
7. Moral influence: Advertising motivates people in such a way that people have come
to believe that success is evaluated primarily based on material possessions. The
consumers try to realize their dreams. If they cannot achieve their dreams and
objectives, it leads to dissatisfaction and frustration.
8. Advertising impact on children: Advertising has adverse impact on children as they
are more susceptible to deception because they lack the conceptual defense of adults.
Advertising Standards Council of India (ASCI) -Registered in Oct. 1985, u/s 25, as a
Not-For-Profit Co., under the Companies Act 1956.

The main objects to be pursued by the Company on its incorporation are:

• To monitor, administer and promote standards of advertising practices in India
• To codify, adopt and from time to time modify the code of advertising practices in
India and implement, administer and promote and publicize such a code;
• To provide facilities and machinery in the form of one or more Consumer
Complaints Councils having such composition and with such powers as may be
prescribed from time to time to examine complaints against advertisements in terms
of the Code of Advertising practices and report thereon;
• To give wide publicity to the Code and seek adherence to it of as many as possible
of those engaged in advertising;
• To print and publish pamphlets, leaflets, circulars or other literature or material, that
may be considered desirable for the promotion of or carrying out of the objects of the
Company and disseminate it through any medium of communication.
Council for Fair Business Practices- The Council for Fair Business Practices is an
association of businessmen, which is playing an important role in making businessmen
conscious of business ethics. It is a voluntary non- profit and non-political association
promoted by enlightened businessmen. One of the objectives of CFBP is to create
awareness among trade, business and industry as to their social obligations and duties
towards the consumers. One important feature of CFBP is Code of Fair Business Practices.

48
12.3 ETHICS IN ADVERTISING
As you know ethics means a set of moral principles which govern a person‘s
behaviour or how the activity is conducted and advertising means a mode of communication
between a seller and a buyer.

Thus, ethics in advertising means a set of well-defined principles which govern the
ways of communication taking place between the seller and the buyer. Ethics is the most
important feature of the advertising industry. Though there are many benefits of advertising
but then there are some points which don‘t match the ethical norms of advertising.

An ethical ad is the one which doesn’t lie, doesn’t make fake or false claims and is in the
limit of decency.

Nowadays, ads are more exaggerated and a lot of puffing is used. It seems like the advertisers
lack knowledge of ethical norms and principles. They just don‘t understand and are unable to
decide what is correct and what is wrong.

The main area of interest for advertisers is to increase their sales, gain more and more
customers, and increase the demand for the product by presenting a well decorated, puffed
and colourful ad. They claim that their product is the best, having unique qualities than the
competitors, more cost effective, and more beneficial. But most of these ads are found to be
false, misleading customers and unethical. The best example of these types of ads is the one
which shows evening snacks for the kids, they use colouring and gluing to make the product
look glossy and attractive to the consumers who are watching the ads on television and
convince them to buy the product without giving a second thought.

Ethics in advertising is directly related to the purpose of advertising and the nature of
advertising. Sometimes exaggerating the ad becomes necessary to prove the benefit of the
product. For e.g. a sanitary napkin ad which shows that when the napkin was dropped in a
river by some girls, the napkin soaked whole water of the river. Thus, the purpose of
advertising was only to inform women about the product quality. Obviously, every woman
knows that this cannot practically happen but the ad was accepted. This doesn‘t show that the
ad was unethical.

Ethics also depends on what we believe. If the advertisers make the ads on the belief that
the customers will understand, persuade them to think, and then act on their ads, then this will

49
lead to positive results and the ad may not be called unethical. But at the same time, if
advertisers believe that they can fool their customers by showing any impractical things like
just clicking fingers will make your home or office fully furnished or just buying a lottery
ticket will make you a millionaire, then this is not going to work out for them and will be
called as unethical.

Recently, the Vatican issued an article which says ads should follow three moral principles -
Truthfulness, Social Responsibility and Upholding Human Dignity.

Generally, big companies never lie as they have to prove their points to various ad regulating
bodies. Truth is always said but not completely. Sometimes it‘s better not to reveal the whole
truth in the ad but at times truth has to be shown for betterment.

Pharmaceutical Advertising - they help creating awareness, but one catchy point here is that
the advertisers show what the medicine can cure but never talk about the side effects of that
same thing or the risks involved in intake of it.

Children - children are the major sellers of the ads and the product. They have the power to
convince the buyers. But when advertisers are using children in their ad, they should
remember not to show them alone doing their work on their own like brushing teeth, playing
with toys, or infants holding their own milk bottles as everyone knows that no one will leave
their kids unattended while doing all these activities. So showing parents also involved in all
activities or things being advertised will be more logical.

Alcohol - till today, there hasn‘t come any liquor ad which shows anyone drinking the
original liquor. They use mineral water and sodas in their advertisements with their brand
name. These types of ads are called surrogate ads. These types of ads are totally unethical
when liquor ads are totally banned. Even if there are no advertisements for alcohol, people
will continue drinking.

Cigarettes and Tobacco - these products should be never advertised as consumption of these
things is directly and badly responsible for cancer and other severe health issues. These as are
already banned in countries like India, Norway, Thailand, Finland and Singapore.

Ads for social causes - these types of ads are ethical and are accepted by the people. But ads
like condoms and contraceptive pills should be limited, as these are sometimes unethical, and

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are more likely to lose morality and decency at places where there is no educational
knowledge about all these products.

Looking at all these above mentioned points, advertisers should start taking responsibility of
self-regulating their ads by:

 Design self-regulatory codes in their companies including ethical norms, truth,

decency, and legal points
 Keep tracking the activities and remove ads which don‘t fulfil the codes.
 Inform the consumers about the self-regulatory codes of the company
 Pay attention on the complaints coming from consumers about the product ads.
 Maintain transparency throughout the company and system.

When all the above points are implemented, they will result in:

 Making the company answerable for all its activities

 Will reduce the chances of getting pointed out by the critics or any regulatory body.
 Will help gain confidence of the customers; make them trust the company and their
products

12.4 TRADE SECRETS

Let us discuss about the trade secret, a trade secret is defined as any information that is:

(1) Not generally known to the relevant business circles or to the public;

(2) Confers some sort of economic benefit on its owner. This benefit must derive specifically
from the fact that it is not generally known, and not just from the value of the information
itself.

(3) The subject of reasonable efforts to maintain its secrecy. A trade secret continues for as
long as the information is maintained as a trade secret.

Anything that is easily and completely disclosed by the mere inspection of a product put on
the market cannot be a trade secret.

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Type of information that could be a trade secret

Virtually any type of information may qualify as a trade secret

(1) A trade secret may consist of information relating to a formula, pattern, device or other
compilation of information that is used for a considerable period of time in a business.

(2) Often, a trade secret is technical information used in the manufacturing process for
production of goods.

(3) A trade secret may relate to marketing, export or sales strategies, or a method of
bookkeeping or other business management routines or procedures, including software
used for various business purposes.

Other examples of potential trade secrets may include technical, scientific or financial
information, such as business plans, business processes, list of key customers, list of reliable
or special suppliers, product specifications, product characteristics, purchase prices of key
raw materials, test data, technical drawing or sketches, engineering specifications, proprietary
recipes, formulas, content of laboratory note books, salary structure of a company, product
pricing and advertising rates, source code, object code, databases and electronic data
compilations, agreements containing details of marketing tie‐ ups, promotional or marketing
material under development.

Trade secret management programme

The 10 steps to build up a trade secret management programme

(1) Put in place a system for identifying trade secrets

Identifying and categorizing the trade secrets is a prerequisite for starting a trade secret
protection program. The steps taken to protect your trade secrets should be dictated by the
nature of the secrets themselves.

a. The basic questions to ask - What information would hurt my business if my competitors
get it? - And how much will it hurt?

b. A related question to ask - Do you have staff specifically assigned to record keeping, data
security, or for preservation of trade secrets?

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 Make a written list of the information to be protected and organize it into the different
types of information, depending on its value to the business and the type of protection
measures that would be needed to protect it.

(2) Develop an information security policy that includes a trade secret protection policy

The information security policy encompasses systems and procedures designed to protect the
information assets from disclosure to any person or entity not authorized to have access to
that information, especially information that is considered sensitive, proprietary, confidential,
or classified (as in national defence).

a. It is important to have a written information security or trade secret protection policy. A

written policy provides clarity on all aspects that need to be addressed.

- It should explain the why and how of doing so.

- It should prescribe how to reveal or share such information in‐ house or with outsiders.

- It should articulate and demonstrate the commitment of the business to protect its trade
secrets as this would eventually play an important role in any unavoidable litigation.

b. Information security can be implemented at various levels such as the following: -

Physical controls - Administrative controls - Technical controls.

(3) Educate all employees on issues related to information security

a. Always hire an employee on the basis of his competence knowledge and skills and not
because of his access to trade secrets of a former employer.

b. All employees should acknowledge that they have understood the policy and that they
agree to abide by it. Periodically, reiterate the policy.

c. Avoid hiring a person bound by a non- ompete agreement. If unavoidable then do so only
after taking advice from an independent and competent lawyer.

d. Indemnifying a new employee, who is bound by a non-compete agreement to a previous

employer, should be avoided, as doing so raises suspicion of wrong doing and may result
in a financial obligation if wrong doing is proved in a court case.

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e. Remind your employees not to disclose trade secrets to unauthorized individuals or
entities and to follow the security procedures; do so by way of notices, memos, network
e-mails newsletters, etc.

f. Hiring away more than one employee from a competitor would raise suspicion of wrong
doing, and, therefore, it should be avoided as far as possible.

(4) Importance of exercising care in hiring an employee of a competitor

a. Educate and train employees on information security policy.

b. Transform every employee into a potential security officer.

c. Every employee must contribute to create a secure environment.

d. Prevent inadvertent disclosure that may take place due to ignorance.

e. The employees should be trained to recognize and properly protect trade secrets.

(5) Include reasonable restrictions in writing, in all contracts

Signing a good confidentiality or non‐ disclosure agreements with employees, suppliers,

contractors, and business associates is of immense value in keeping information away from
competitors.

a. Non-analysis clauses: Include non‐ analysis clauses in agreements for licensing trade
secrets so that the other party agrees not to analyze or have analyzed any material or
sample supplied under the agreement to determine its composition, qualities,
characteristics, or specifications, unless authorized in writing by a duly authorized
representative of your business.

b. No-raiding, non-recruitment or non‐ solicitation clause: A no-raiding, non-recruitment

or non-solicitation clause in an employment agreement prohibits a departing employee
from soliciting co-workers to leave with him to join another business or set up a new rival
business.

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(6) Restrict access to paper records

To prevent unauthorized access to records classified as confidential, sensitive, or secret, limit

access to only those employees who are duly approved, or cleared, to see them on a need to
know basis.

This may be done more easily by proper labeling of records (e.g., with a stamp such as
confidential or secret) or using special colored folders (e.g., red or orange), and by keeping
such marked records physically isolated or segregated in a secure area or in locked filing
cabinets.

Depending on the size and nature of the trade secret, the location of the separated information
can vary from a locked file cabinet, to a security patrolled warehouse or storage facility.
There has to be proper access control through appropriate authorization and accountability
and tracking system for employees provided access to classified information.

(7) Mark documents

There are various types of useful ways for marking confidential or trade secret information.
Look at the following examples:

a. Make no copies.

B. Third party confidential.

C. Distribution limited to.

D. Covered by a non-analysis agreement.

The Critical, Maximum, Medium, and Minimum labels are examples of information
classifications

In general, the labels should provide brief but clear direction to the user on how to handle the
information.

(8) Office management and keeping confidentiality

a. Mobile or cellular phones discussing sensitive topics over a cellular phone is a dangerous
practice. Confidential information may be ―lost‖ if there is unrestricted use of mobile or
cellular telephones.

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b. Fax machines Often, the fax machine is located in a common area with unrestricted access
and it is typically unattended. The second problem with fax transmissions is that they
utilize phone lines, which can be tapped quite easily.

c. Photocopying It is not unusual for an employee to make copies of a secret or confidential

document, pick up the copies and walk away, leaving the original in the copier for the
next user to find. Extra care should be taken to remember to retrieve those original secret
or confidential records when the copying is finished.

d. Shredding A better method for disposition of all paper records, of course, is shredding
them. Shredding is a major element in most information security programs. With a wide
variety of machines on the market, businesses may implement shredding in several ways.

e. Telephones Callers posing as researchers, industry analysts, consultants, or students ask

for information about the organization and its employees–and many times get it.

f. Internal literature Newsletters, magazines, and other in-house publications often contain
information useful to snoops, including new product announcements, results of market
testing, and names of employees in sensitive areas (who are potential contacts).

g. Waste bins it is not safe to put them into a nearby office waste paper or trash bin, as
anyone with access to the trash might make use of those records for gathering competitive
intelligence.

h. The compulsive talker and loose talk Employees are deluding themselves if they think
their lunchtime or coffee break conversations and any discussion of company business on
the metro, subway, bus stop, train station, or a restaurant is wholly private. It is not at all
unusual for people nearby to hear clearly these conversations.

(9) Maintain computer secrecy

For most computer systems at least two security measures are built into them:

a. Use of passwords for a user to access the system

b. Automated audit trails to enable system security personnel to trace any additions or
changes back to whoever initiated

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(10) Guarding secrets that are shared in partnerships

a. While employees can be the single biggest threat to secrecy, it is also important to guard
secrets in joint ventures, with consultants and even with customers.

b. For many software companies, the most dangerous exposure is the sale of a system
because the software is then susceptible to reverse engineering. In software and many other
high-tech industries, licensing of your company's product is a secure way to guard against
loss.

12.5 CORPORATE DISCLOSURE AND INSIDER TRADING

PURPOSE OF THIS POLICY

The purpose of this Corporate Disclosure and Insider Trading Policy (the ―Policy‖) of
Continental Gold Inc. (―Continental‖ or the ―Company‖) is to:

(a) Reinforce Continental‘s commitment to comply with continuous disclosure obligations

as required under applicable Canadian securities law and regulations of the stock
exchanges on which the Company‘s securities are listed.

(b) Ensure that all communications to the investing public about the business and affairs of
the Company are.

(i) Informative, timely, factual, balanced and accurate; and

(ii) Broadly disseminated in accordance with all applicable legal and regulatory
requirements.

(c) Ensure the Company prevents the selective disclosure of Material Information (as
defined herein) to any person not otherwise bound by obligations of confidentiality.

(d) Ensure strict compliance by all insiders (as defined herein) with the prohibition against
insider trading (as defined herein) and

(e) Ensure all persons to whom this Policy applies understand their obligations to preserve
the confidentiality of Undisclosed Material Information (as defined herein).

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SCOPE

A. Personnel: This Policy applies to all directors, officers and other employees of the
Company and its subsidiaries (collectively, "Insiders"). In addition, family members of
directors, officers or other employees, as well as consultants, contractors or other outsiders
who may have access to material nonpublic information about the Company may also be
considered Insiders.

B. Transactions: This Policy applies to any and all transactions in the Company's securities,
including its common stock and options to purchase common stock, and any other type of
securities that the Company may issue, as well as to derivative securities relating to the
Company's securities, whether or not issued by the Company, such as exchange traded
options. It also applies to transactions in the securities of any other company if the person has
material nonpublic information about such other company that was obtained in the course of
employment with the Company, such as information about a supplier, distributor or customer
of the Company or a merger or similar transaction being negotiated.

C. Priority of Statutory or Regulatory Trading Restrictions: The trading prohibitions and

restrictions in this Policy are superseded by any greater prohibitions or restrictions prescribed
by federal or state securities laws and regulations, e.g., short-swing trading by Section 16
Reporting Persons or restrictions on the sale of securities subject to Rule 144 under the
Securities Act of 1933, as amended.

DEFINITION OF "MATERIAL NONPUBLIC INFORMATION"

A. "Material" Information. Information about the Company or its subsidiaries is "material"

it if would be expected to affect the investment or voting decisions of the reasonable
shareholder or investor, or if the disclosure of the information would be expected to
significantly alter the total mix of information in the marketplace about the Company.
In simple terms, material information is any type of information that could reasonably
be expected to affect the price of Company securities, regardless of whether the
information is positive or negative. It is important to remember that materiality will be
judged with the benefit of hindsight.

As a practical matter, it is sometimes difficult to determine whether inside information

is material. While it is not possible to identify all information that may be deemed
"material," information is likely to be "material" if it relates to:

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 Financial performance, especially quarterly and year-end earnings, and significant
changes in financial performance or liquidity.

 Projections of future earnings or losses and strategic plans.

 Major changes in accounting methods.

 Potential mergers and acquisitions, joint ventures, or the sale of Company assets or
subsidiaries.

 New major contracts, orders, suppliers, customers, or finance sources, or the loss thereof.
Major discoveries or significant changes or developments in products or product lines,
research or technologies.

 Significant changes or developments in supplies or inventory, including significant

product defects, recalls or product returns.

 Significant pricing or marketing changes.

 Government approvals or other significant regulatory action.

 Stock splits, public or private securities offerings (equity or debt), or changes in Company

dividend policies or amounts.

 Significant changes in senior management.

 Significant labor disputes or negotiations.

 Actual or threatened major litigation, or the resolution of such litigation, and major
government investigations.

B. "Non-public" Information. Material information is "non-public" if it has not been

widely disseminated to the public through filings with the United States Securities and
Exchange Commission (the "SEC"), press releases, major newswire or financial news
services, or otherwise disclosed generally to the marketplace. The circulation of
rumours, even if accurate, widespread and reported in the media, does not constitute
public disclosure. Similarly, only disclosing part of the information does not
constitute public dissemination. So long as any material portion of the inside

59
 information has yet to be publicly disclosed, the information is deemed "non-public"
and may not be misused. For purposes of this Policy, information will generally be
considered public, i.e., no longer "non-public," after the close of trading on the second
full trading day following the Company's widespread public release of the
information. However, if the information released is complex, such as a major
financing or other transaction, it may be necessary to allow additional time for the
information to be absorbed by the marketplace.

STATEMENT OF COMPANY POLICY AND PROCEDURES

 No Insider may trade in Company securities while in possession of material non-public

information about the Company or its subsidiaries.

 No Insider may tip or disclose any material non-public information about the Company or
its subsidiaries to any person (including, without limitation, family members, analysts,
investors, and members of the investment community and news media), unless authorized
in writing to do so in advance by the Company's Chief Executive Officer, Chief Financial
Officer or the Board of Directors. In any instance in which such information is disclosed
to outsiders, the Company will take such steps as it believes to be necessary to preserve
the confidentiality of the information, which may include requiring the outsider to agree
in writing to comply with the terms of this Policy and to sign a confidentiality agreement.
All inquiries from outsiders regarding material non-public information about the
Company must be referred to the Company's Chief Executive Officer, Chief Financial
Officer or other designated officer. Information is often inadvertently disclosed or
overhead in casual, social conversations. Care must be taken to avoid such disclosures.

 No Insider may give trading advice of any kind about the Company to anyone while in
possession of material nonpublic information about the Company or its subsidiaries,
except that Insiders should advise others not to trade if doing so might violate the law or
this Policy. The Company strongly discourages all Insiders from giving trading advice
about the Company to third parties even when not in possession of material nonpublic
information about the Company.

 No Insider may trade in any interest or position relating to the future price of Company
securities, such as a put, call or short sale, nor may any Insider "day trade," i.e., buy and
sell Company securities on the same day.

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 No Insider may trade in Company securities during any special blackout periods that the
Company may designate from time to time. No Insider may disclose to any outsider that a
special blackout period has been designated.

 No Insider may (a) trade in the securities of any other public company while in
possession of material non-public information about that company, (b) tip or disclose
material nonpublic information about any other public company to anyone, or (c) give
trading advice of any kind to anyone about any other public company while in the
possession of material nonpublic information.

EMPLOYEE BENEFIT PLANS

A. Employee Stock Purchase Plans: The trading prohibitions and restrictions set forth in
this Policy do not apply to periodic contributions by the Company or employees to any
employee benefit plans the Company may now or in the future offer (e.g., pension or
401K plans) and that are used to buy Company securities pursuant to the employee's
advance instructions. However, no officers or employees may alter their instructions
regarding the purchase or sale of Company securities in such plans while in the
possession of material non-public information.

B. Stock Option Plans: The trading prohibitions and restrictions of this Policy apply to all
sales of securities acquired through the exercise of stock options granted by the Company,
but not to the acquisition of securities through such exercises.

CONSEQUENCES OF A VIOLATION OF THIS POLICY

A. Civil and Criminal Penalties. The consequences of illegal insider trading can be severe.
For persons who trade on material non-public information, or who tip or disclose such
information to others, the penalties may include:

 A civil penalty of up to three times the profit gained or loss avoided.

 A criminal fine (no matter how small the profit) of up to $1 million and

 A jail term of up to ten years.

The Company and the supervisors of the person violating insider trading or tipping rules may
be liable if they fail to take appropriate steps to prevent such activity. Penalties may include.

61
A civil penalty of the greater of $1 million or three times the profit gained or loss avoided as
a result of the violation; and

 A criminal penalty of up to $2.5 million

B. Company Discipline. Violation of this Policy or any federal or state insider trading or
tipping laws by any director, officer or other employee, or their immediate family
members, may subject such a director to dismissal proceedings and such an officer or
employee to disciplinary action by the Company, including immediate termination for
cause and forfeiture of any vested or unvested stock options, bonuses, awards and
similar compensation.
C. Reporting Violations. Any Insider who violates this Policy or any federal or state
insider trading or tipping laws, or knows of any such violation by any other Insiders,
must report the violation immediately to the Company's Chief Executive Officer,
Chief Financial Officer or other designated officer. Upon learning of such violation,
such officer, in consultation with the Board of Directors and the Company's legal
counsel, will determine whether the Company should release any material non-public
information, or whether the Company should report the violation to the SEC or other
appropriate governmental authority.

DISTRIBUTION OF THIS POLICY

This Policy will be delivered to all directors, officers and other employees of the
Company and its subsidiaries and others designated as temporary Insiders by the Company,
and to all new directors, officers, employees and designated Insiders at the start of their
employment or relationship with the Company. Upon first receiving a copy of this Policy or
any revised version, and periodically upon request from an officer of the Company or its
subsidiaries, each Insider must sign an acknowledgement that he or she has received a copy
of this Policy and agrees to comply with its terms. This Policy may be redistributed from time
to time.

QUESTIONS ABOUT THIS POLICY STATEMENT

Insiders at all times should avoid even the appearance of impropriety with respect to
trading in the Company's securities or the securities of any other company. If you have any
questions about your obligations under this Policy or are uncertain as to whether information

62
you possess is material non-public information, please consult with the Company's Chief
Financial Officer or other designated officer of the Company.

INDIVIDUAL RESPONSIBILITY

Every person subject to this Policy has the individual responsibility to comply with
this Policy, and appropriate judgment should be exercised in connection with any trade in the
Company's securities. An Insider may, from time to time, have to forego a proposed
transaction even if he or she planned to make the transaction before learning of material
non-public information and even though the Insider believes he or she may suffer an
economic loss or forego anticipated profit by waiting. The existence of a personal financial
emergency does not excuse compliance with this Policy. While the Company's Chief
Financial Officer or other designated officer is available to provide general guidance with
respect to this Policy, the ultimate responsibility for adhering to this Policy and avoiding
improper transactions rests with you.

12.6 ETHICS IN ACCOUNTING AND FINANCE

Accounting ethics is an important topic because, as accountants, we are the key

personnel who access the financial information financial of individuals and entities. Such
power also involves the potential and possibilities for abuse of information or manipulation
of numbers to enhance company perceptions or enforce earnings management. Ethics is also
absolutely required in the course of an audit. Without meeting the requirements of auditing
and accounting ethics, an audit must instantly be paused.

Ethics and Code of Conduct

Ethics and ethical behaviour refer more to general principles such as honesty, integrity, and
morals. The code of professional conduct, however, is a specific set of rules set by the
governing bodies of certified public accountants. Although the rules set out by different
bodies around the world are unique, some rules are universal. Let‘s take a closer look at some
of these important rules.

63
Rules and Guidance

One of the key rules set out by professional accounting bodies in North America is the idea of
independence. This is the idea that, as an auditor, you must be totally objective and must be
without ties to or relationships with the client since that could potentially impair your
judgment and impair the overall course of the audit work.

There are two forms of independence:

 Independent in fact
 Independent in appearance

Independence in fact refers to any factual information such as whether you, as an auditor,
own any shares or other investments in the client firm. These facts are usually easy to
determine.

Independence in appearance, however, is more subjective. Let‘s say, for example, that as
an auditor you were invited to a year-end party at the client firm. The party turns out to be
extremely luxurious and you also receive a nice watch as a gift. In appearance, would the
auditor, who was invited to the party and who also received a gift, be able to maintain
independence in the audit? In order to solve a potential conflict of interest, a reasonable
observer‘s test is used – i.e., what would a reasonable observer say about the situation?

Threats to Independence

There are always threats and situations that can reduce the level of independence. Let‘s take a
look at some of these threats:

1. Familiarity Threat: If the auditor has a long relationship with the client or they are
close friends/relatives
2. Intimidation Threat: If the auditor changes the financial statements, the client
threatens to switch auditors
3. Self-Interest Threat: If the auditor has a direct financial interest through shares or a
large fee outstanding from the client
4. Self-Review Threat: If the auditor performs both audit and bookkeeping services, it
is a review of the auditor‘s own work

64
Ethics in Finance

The ethics in finance incorporate truthfulness, integrity, honesty, justice, and fairness in all
sorts of financial activities. Financial ethics or business ethics are actually subsets of general
ethics. It is crucial for maintaining harmony and stability in financial services where people
interact with one another and do any sort of financial or monetary transactions. To understand
it more properly, let us dive deep into both the terms separately-

Importance of ethics in Finance

1. Provides a moral code of standard

In the financial market, some barriers range from unequal information, misuse of power and
resources, etc. In such cases and those which involve third-party connections, there is a dire
need for a proper code to be followed in the industry. From investment to trading to stock to
economic activities of the corporate or finance system, all follow an ethical code in all their
transactions

2. Ethics in finance channelizes confidence in business/corporate dealings

The main objective of the financial industry is to have direct dealings with the industry.
These directly connect to their clients in the form of product or service delivery where they
look forward to winning their confidence. Despite the primary objective to maintain a
competitive stature in the industry, they must do so on ethical grounds. In addition to such
practices, being ethically right will gives businesses good returns in the long term.

3. Ethics makes business/corporate behaviour and activities harmonious

In the financial industry, we can expect many people to be part of an organization. Since
these have to work together at different levels and towards a similar core objective, there has
to be a set of ethical rules and guidelines that have to be followed. This will help in proper
management and higher productivity from the employees.

Codes of Ethics in Finance

Different moral codes that are supposed to be followed the finance-related behaviour of a
company towards its employees, customers, public and other stakeholders-

65
1. Acting with honesty and integrity while handling dilemmas of the world of finances
2. Not associating with any real/clear conflicts of interest in personal, or company
relationships
3. Providing information that is full, accurate, fair, complete, relevant, objective,
understandable, and timely in and for different documents and reports
4. Acting in accordance with all the applicable rules, laws, and regulations of governments
along with other relevant public/private regulatory agencies
5. Acting responsibly and in good faith with due care, carefulness, and competence without
any sort of misrepresentation of material facts
6. Respecting the confidentiality of information which is acquired in the business course and
such information should not be used for the personal benefit
7. Promoting ethical behavior among all the associates and stakeholders of a company
8. Adhering and promoting a code of ethics in the company

12.7 CORPORATE TAKEOVER

A takeover occurs when one company makes a successful bid to assume control of or
acquire another. Takeovers can be done by purchasing a majority stake in the target firm.
Takeovers are also commonly done through the merger and acquisition process. In a
takeover, the company making the bid is the acquirer and the company it wishes to take
control of is called the target.

Takeovers are typically initiated by a larger company seeking to take over a smaller
one. They can be voluntary, meaning they are the result of a mutual decision between the
two companies. In other cases, they may be unwelcome, in which case the acquirer goes
after the target without its knowledge or some times without its full agreement.

In corporate finance, there can be a variety of ways for structuring a takeover. An

acquirer may choose to take over controlling interest of the company‘s outstanding shares,
buy the entire company outright, and merge an acquired company to create new synergies,
or acquire the company as a subsidiary.

66
Types of Takeovers
Takeovers can take many different forms.

1. Welcome or Friendly takeover: will usually be structured as a merger or

acquisition. These generally go smoothly because the boards of directors for both
companies usually consider it a positive situation. Voting must still take place in a
friendly takeover. However, when the board of directors and key shareholders are in
favour of the takeover, takeover voting can more easily be achieved.

Usually, in these cases of mergers or acquisitions, shares will be combined under one
symbol. This can be done by exchanging shares from the target‘s shareholders to
shares of the combined entity.
2. Unwelcome or hostile takeover: can be quite aggressive as one party is not a
willing participant. The acquiring firm can use unfavourable tactics such as a dawn
raid, where it buys a substantial stake in the target company as soon as the markets
open, causing the target to lose control before it realizes what is happening.

The target firm‘s management and board of directors may strongly resist takeover
attempts by implementing tactics such as a poison pill, which allows the target‘s
shareholders to purchase more shares at a discount to dilute the potential acquirer‘s
holdings and voting rights.

3. Reverse takeover: happens when a private company takes over a public one. The
acquiring company must have enough capital to fund the takeover. Reverse takeovers
provide a way for a private company to go public without having to take on the risk
or added expense of going through an initial public offering (IPO).
4. Creeping takeover occurs when one company slowly increases its share
ownership in another: Once the share ownership gets to 50% or more, the acquiring
company is required to account for the target‘s business through consolidated
financial statement reporting. The 50% level can thus be a significant threshold,
particularly since some companies may not want the responsibilities of controlling
ownership. After the 50% threshold has been breached, the target company should be
considered a subsidiary.

67
Reasons for a Takeover
There are many reasons why companies may initiate a takeover. An acquiring
company may pursue an opportunistic takeover, where it believes the target is well priced.
By buying the target, the acquirer may feel there is long-term value. With these takeovers,
the acquiring company usually increases its market share, achieves economies of scale,
reduces costs, and increases profits through synergies.

Some companies may opt for a strategic takeover. This allows the acquirer to enter a
new market without taking on any extra time, money, or risk. The acquirer may also be able
to eliminate competition by going through a strategic takeover.

There can also be activist takeovers. With these takeovers, a shareholder seeks
controlling interest ownership to initiate change or acquire controlling voting rights.

Companies that make attractive takeover targets include:

 Those with a unique niche in a particular product or service.

 Small companies with viable products or services but insufficient financing.
 Similar companies in close geographic proximity where combining forces could
improve efficiency.
 Otherwise viable companies that pay too much for debt that could be refinanced at a
lower cost if a larger company with better credit took over.
 Companies with good potential value but management challenges.

12.8 ETHICAL CODES

A code of ethics is a guide of principles designed to help professionals conduct

business honestly and with integrity. A code of ethics document may outline the mission and
values of the business or organization, how professionals are supposed to approach
problems, the ethical principles based on the organization's core values, and the standards to
which the professional is held.

A code of ethics, also referred to as an "ethical code," may encompass areas such as business
ethics, a code of professional practice, and an employee code of conduct.

68
Understanding Codes of Ethics
Business ethics refers to how ethical principles guide a business's operations. Common
issues that fall under the umbrella of business ethics include employer employee relations,
discrimination, environmental issues, bribery, insider trading, and social responsibility.

While many laws exist to set basic ethical standards within the business community, it is
largely dependent upon a business's leadership to develop a code of ethics.

Both businesses and trade organizations typically have some sort of code of ethics that their
employees or members are supposed to follow. Breaking the code of ethics can result in
termination or dismissal from the organization. A code of ethics is important because it
clearly lays out the rules for behavior and provides the groundwork for a preemptive
warning.

Types of Codes of Ethics

A code of ethics can take a variety of forms, but the general goal is to ensure that a business
and its employees are following state and federal laws, conducting themselves with an ideal
that can be exemplary, and ensuring that the business being conducted is beneficial for all
stakeholders.

The following are three types of codes of ethics found in business.

1. Compliance-Based Code of Ethics

For all businesses, laws regulate issues such as hiring and safety standards.
Compliance-based codes of ethics not only set guidelines for conduct but also determine
penalties for violations.

In some industries, including banking, specific laws govern business conduct. These
industries formulate compliance-based codes of ethics to enforce laws and regulations.
Employees usually undergo formal training to learn the rules of conduct. Because
noncompliance can create legal issues for the company as a whole, individual workers
within a firm may face penalties for failing to follow guidelines.

To ensure that the aims and principles of the code of ethics are followed, some
companies appoint a compliance officer. This individual is tasked with keeping up to date
on changes in regulation codes and monitoring employee conduct to encourage conformity.

69
 This type of code of ethics is based on clear-cut rules and well-defined consequences
rather than individual monitoring of personal behaviour. Despite strict adherence to the law,
some compliance-based codes of conduct do not thus promote a climate of moral
responsibility within the company.

2. Value-Based Code of Ethics

A value-based code of ethics addresses a company's core value system. It may
outline standards of responsible conduct as they relate to the larger public good and the
environment. Value-based ethical codes may require a greater degree of self-regulation than
compliance-based codes.

Some codes of conduct contain language that addresses both compliance and values.
For example, a grocery store chain might create a code of conduct that espouses the
company's commitment to health and safety regulations above financial gain. That
grocery chain might also include a statement about refusing to contract with suppliers that
feed hormones to livestock or raise animals in inhumane living conditions.

3. Code of Ethics among Professionals

Financial advisers registered with the Securities and Exchange Commission (SEC) or
a state regulator is bound by a code of ethics known as a fiduciary duty. This is a legal
requirement and also a code of loyalty that requires them to act in the best interest of their
clients.

Certified public accountants, who are not typically considered fiduciaries to their
clients, still are expected to follow similar ethical standards, such as integrity, objectivity,
truthfulness, and avoidance of conflicts of interest, according to the American Institute of
Certified Public Accountants (AICPA).

12.9 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. ________are moral principles that define right or wrong behaviour in the world of

Marketing.

2. Trade secret is technical information used in the __________for production of goods.

70
3. Avoid ____ a person bound by a non-compete agreement.
4. Ethics and ethical behaviour refer more to ________such as honesty, integrity, and
morals.
5. Financial advisers registered with the ___________.

Answer to Check Your Progress

1. Marketing ethics
2. Manufacturing process
3. Hiring
4. General principles
5. Securities and Exchange Commission

12.10 SUMMARY

As you know we have discussed the issues relating to ethics in functional areas. The
coverage of marketing ethics is wider, as it deals with norms in relation to various
stakeholders need advertisement. Trade secret is most important for getting motto of the
every business. Corporate disclosure This Policy applies to all directors, officers and other
employees of the Company and its subsidiaries (collectively, "Insiders"). Every person
subject to this Policy has the individual responsibility to comply with this Policy, and
appropriate judgment should be exercised in connection with any trade in the Company's
securities. All of us we very clearly understand the ethics in accountants; we are the key
personnel who access the financial information financial of individuals and entities. Finally
the unit is ended with the role of corporate takeover and ethical codes.

12.11 KEY WORDS

Unfair : Not following the rules.

ASCI : Advertising Standards Council of India.

SEC : Securities and Exchange Commission.

IPO : Initial public offering.

CFO : Chief Financial Officer.

71
12.12 QUESTIONS FOR SELF STUDY

1. Discuss the ethics in marketing.

2. Explain the ethics in advertising.

3. What is trade secret and how it is protected?

4. How does insider trading affect the company?

5. Briefly explain the ethics in accounting and finance.

6. What is corporate takeover? Explain the types of corporate takeover.

7. List out the different types of ethical codes.

12.13 REFERENCES

1. Aswathappa.K,(2019) Essentials of Business Environment, Himalaya Publishing House.

2. Murthy C.S.V (2018) Business Ethics and Corporate Governance, Himalaya Publishing
House.
3. Nirmala. K, Karunakara Reddy.B. A, Aruna Rani N. (2018) Business Ethics and
Corporate Governance, Himalaya Publishing House.
4. Federick, Post and Davis,(2016), Business and Society, McGraw –Hill.

72
 KARNATAKA STATE OPEN UNIVERSITY
Mukthagangotri, Mysuru – 570006
[Link]. PROGRAMME
I – SEMESTER

BUSINESS POLICY AND ENVIRONMENT

Course Code: MCMHC 1.2 BLOCK – IV
DEPARTMENT OF STUDIES AND RESEARCH IN
COMMERCE
Karnataka State Open University
Mukthagangothri, Mysuru - 570 006 I SEMESTER [Link]
BUSINESS POLICY AND ENVIRONMENT
COURSE CODE: MCMHC 1.2

Department of Studies and Research in Commerce

BLOCK
4

Page no.

UNIT - 13: INTRODUCTION TO CORPORATE GOVERNANCE 1-21

UNIT - 14: COMMITTEES AND AUTHORITIES ON CORPORATE GOVERNANCE 22-33

UNIT - 15: CHIEF EXECUTIVE OFFICER AND CORPORATE GOVERNANCE 34-49

UNIT - 16: BOARD COMMITTEE 50-60

 Credit Page
Programme : [Link] Year/Semester :First Block No :IV
Course : Business Policy and Environment Credit : 04 Units No :13-16
Course Design Expert Committee
Prof. Vidyashankar Chairman
Vice-Chancellor,
Karnataka State Open University
Mukthagangotri, Mysuru – 570 006

Prof. Ashok Kamble Member

Dean (Academic)
Karnataka State Open University
Mukthagangotri, Mysuru – 570 006

[Link] V . Member
Assistant Professor & Course Designer,
DOS&R in Commerce, KSOU, Mysuru.

[Link] V . Member
BOS Chairman,
DOS&R in Commerce, KSOU, Mysuru

Dr. Mahesha V.
Chairman Member Convener
DOS&R in Commerce, KSOU, Mysuru
Course Writer Course Editor
[Link] G. V. [Link] C.
Assistant Professor, Assistant Professor,
DOS&R in Commerce, DOS&R in Commerce,
KSOU, Mysuru. KSOU, Mysuru.
Editorial Committee
[Link] V . Chairman
BOS Chairman,
DOS&R in Commerce, KSOU, Mysuru.

Prof. S. B. Akash External Subject Expert

Professor, Department of Commerce
Rani Chennamma University, Belagavi.

Dr. Chaya R. Internal Subject Member

Assistant Professor, DoS & R in Commerce
Karnataka State Open University, Mysuru.

Dr. Mahesha V.
Chairman Member Convener
DOS&R in Commerce, KSOU, Mysuru.
Copy Right
Registrar,
Karnataka State Open University, Mukthagangothri, Mysuru - 570006.
Developed by the Department of Studies and Research in Commerce , KSOU, under the guidance of Dean
(Academic) , KSOU, [Link] State Open University, January -2022
All rights reserved. No part of this work may be reproduced in any form, or any other means, without permission in
writing from the Karnataka State Open [Link] information on the Karnataka State Open University
Programmes may obtained from the University’s office at Mukthagangothri, Mysuru-570006.
Printed and Published on behalf of Karnataka State Open University. Mysuru-570006 by Registrar (Administration)-
2022
 Karnataka State Open University
Mukthagangothri, Mysuru - 570 006

Preface
Dear Student,

As you know, the business firms in any country including India operate as per the reaction of
environment. The environment may be micro and macro which are self explanatory. It is the foremost duty of
the every business firms to function as per the expectations of the stakeholders under the surveillance of the
regulations. Business is influences by political-legal environment, socio-cultural environment, economical
environment and technical environment and technological environment. It is the Government machinery
which brings out the suitable legislation so as to enable the business to follow. The stakeholders have the
opportunity to question the business firms in the legal environment in case their rights are impaired. The
business firms are to be ethical for the sustainability. The firms will make up their mind to adopt the
technology suited to their conditions. Precisely, the business firms take attempts to keep the stakeholders
satisfied.
The Industrial policy will helps the business to carry out their business within the framework.
Competition act to provide, keeping in view of economic development of the country. The Act contains both
criminal and civil provisions aimed of providing anti-competitive practice in the marketplace.
Corporate Social responsibility is a form of international private business self-regulation which aims
to social goals of a philanthropic, activist or charitable nature by engaging in or supporting volunteering or
ethically oriented practices.
As you are aware that, Corporate Governance is the cornerstone of any good business, it encompasses
the process, practices and policies that a company relies on to make final decisions and to manage the
company.
As a student of [Link] First Semester, you have the opportunity to study “Business Policy and
Environment”. The said study materials relating is designed by the Facility members of the Department. Feel
free to write to the Department so as to enable us to improve the quality of the self learning material.

With best wishes,

Truly Your’s

Dr. Mahesha V.
Chairman
 BLOCK-IV
INTRODUCTION
Now a days, business enterprises are witnessed for lot of changes in terms of expansions both
vertically and horizontally. The business enterprises require corporate governance for the purpose if more
transferency among all the stakeholders. This is programme that informs how a real world of corporate
governance works and the current and emerging role of an independent director. It will offer a clear
perspective on corporate governance and conceptual models for investigating independent director roles and
behaviour, based on both practical insights and corporate understands.
As we know, corporate governance is supported by various to recommendation from different
committees and also listing agreements and stock exchange.
The chief executive officer is the highest ranking executive in a company. Broadly speaking chief
executive officers primary responsibilities include supervising the overall operations and resources of a
company, as the main point of directors and corporate operations.
Board committee formations and assignments largely depends on the size of the company, The
committee members address relevant and make clear recommendations to the entire board for final approval.
Board committee normally function independently from each other and are provided with sufficient authority
and resources.

This block consists of 4 Units:

Unit 13: Introduction to Corporate Governance.

Unit 14: Committees and Authorities on corporate governance.
Unit 15: Chief executive offer and corporate governance.
Unit 16: Board committee.
 BLOCK-IV
Unit-13 INTRODUCTION TO CORPORATE GOVERNANCE

Structure:

13.0 Objectives

13.1 Introduction

13.2 Meaning and Definitions of Corporate Governance

13.3 Concepts of Corporate Governance

13.4 Origin of Corporate Governance

13.5 Need for Corporate Governance

13.6 Separations of Ownership and Management

13.7 Stakeholders Interest

13.8 Ethics and Social Responsibilities

13.9 Importance of Corporate Governance

13.10 Models of Corporate Governance

13.11 Check Your Progress

13.12 Summary

13.13 Keywords

13.14 Questions for Self-Study

13.15 References

1
13.0 OBJECTIVES

After studying this unit, you will be able to;

 Discuss the introduction and concept of Corporate Governance.

 Elucidate the origin and need for Registered Companies.
 Explain the Separation of ownership and management.
 Bring out the stakeholders interest.
 Delineate the Ethics and social responsibility.
 Outline the importance of corporate governance.
 List out the models of corporate governance.

13.1 INTRODUCTION

As you know Corporate governance is the system of rules, practices and processes by
which a company is directed and controlled. Corporate governance essentially involves
balancing the interests of the many stakeholders in a company. These include it‘s shareholders,
management, customers, suppliers, financiers, government and the community. Since corporate
governance also provides the framework for attaining a company‘s objectives, it encompasses
practically every sphere of management, from action plans and internal controls to performance
measurement and corporate disclosure. Governance provides the structure through which
corporations set and pursue their objectives while reflecting the context of the social, regulatory
and market environment. Governance is a mechanism for monitoring the actions, policies and
decisions of corporations.

Most companies strive to have a high level of corporate governance. These days, it is not
enough for a company to merely be profitable; it also needs to demonstrate good corporate
citizenship through environmental awareness, ethical behavior and sound corporate governance
practices.

2
13.2 MEANING AND DEFINITIONS OF CORPORATE GOVERNANCE

Let us discuss the meaning and definitions of Corporate Governance

Meaning of Corporate Governance

Corporate Governance refers to the way a corporation is governed. It is the technique by

which companies are directed and managed. It means carrying the business as per the
stakeholders‘ desires. I am actually conducted by the board of directors and the concerned
committees for the company‘s stakeholder‘s benefit. It is all about balancing individual and
societal goals, as well as economic and social goals.

Definitions of Corporate Governance

According to Shleifer and Vishny, ―Corporate governance deals with the ways in which
suppliers of finance to corporations assure themselves of getting a return on their investment‖.

According to OECD, ―Corporate governance is the system by which business corporations are
directed and controlled. The corporate governance structure specifies the distribution of rights
and responsibilities among different participants in the corporation, such as, the board, managers,
shareholders and other stakeholders and spells out the rules and procedures for making decisions
on corporate affairs. By doing this it also provides the structure through which the company
objectives are set and the means of attaining those objectives and monitoring performance‖.

According to J. Wolfensohn, ―Corporate governance is about promoting corporate fairness,

transparency and accountability‖.

According to Cadbury Committee (U.K.), ―Corporate governance is the system by which

companies are directed and controlled. It encompasses the entire mechanics of the functioning of
a company and attempts to put in place a system of checks and balances between the
shareholders, directors, employees, auditor and the management.‖

According to the Institute of Company Secretaries of India, ―Corporate Governance is the

application of best Management practices, Compliance of law in true letter and spirit and
adherence to ethical standards for effective Management and distribution of wealth and discharge
of Social Responsibility for sustainable development of all stakeholders‖.

3
13.3 CONCEPT OF CORPORATE GOVERNANCE

In this section we shall discuss the concept of corporate governance. Corporate

Governance is the acceptance by management of the inalienable rights of shareholders as the true
owners of the corporation and of their own role as trustees on behalf of the shareholders. It deals
with conducting the affairs of a company, such that there is fairness to all stakeholders and that
its actions benefit the greatest number of stakeholders. In this regard, the management needs to
prevent variability in terms of benefits between various sections of shareholders, especially
between the owner-managers and the rest of the shareholders.

It is about commitment to value, about ethical business conduct and about making a
distinction between personal and corporate funds in the management of a company. Ethical
dilemmas arise from conflicting interests of the parties involves. In this regard, managers make
decisions based on a set of principles influenced by the values, context and culture of the
organization. Ethical leadership is good for business as the organization is seen to conduct its
business in line with the expectations of all stakeholders.

It is the interaction between various participants (shareholders, board of directors and

company‘s management) in shaping corporation‘s performance and the way it is proceeding
towards. The relationship between the owners and the managers in an organization must be
healthy and there should be no conflict between the two. The owners must see that individual‘s
actual performance is according to the standard performance. These dimensions of corporate
governance should not be overlooked.

Corporate Governance deals with the manner the providers of finance guarantee
themselves of getting a fair return on their investment. Corporate Governance clearly
distinguishes between the owners and the managers. The managers are the deciding authority. In
modern corporations, the functions of owners and managers should be clearly, defined.

Corporate Governance is concerned with set of principles, ethics, values, morals, rules
regulations and procedures etc. Corporate Governance establishes a system whereby directors are
entrusted with duties and responsibilities in relation to the direction of the company‘s affairs.

4
 The term ―governance‖ means control i.e. controlling a company, an organization etc. or
Corporate Governance is governing or controlling the corporate bodies through ethics, values,
principles, morals. For corporate governance to be good, the manager needs to meet its
responsibilities towards its owners (shareholders), creditors, employees, customers, government
and the society at large. Corporate governance helps in establishing a system where a director is
showered with duties and responsibilities of the affairs of the company.

For effective corporate governance, its policies need to be such that the directors of the
company should not abuse their power and instead should understand their duties and
responsibilities towards the company and should act in the best interests if the company in the
broadcast sense. The concept of ‗corporate governance‘ is not an end; it‘s just a beginning
towards growth of company for long term prosperity.

Corporate Governance is essentially all about how corporations are directed, managed,
controlled and held accountable to their shareholders. In India, the question of corporate
governance has come up mainly in the wake of economic liberalization and de-regularization of
industry and business. The objective of any corporate governance system is to simultaneously
improve corporate performance and accountability as a means of attracting financial and human
resources on the best possible terms and of preventing corporate failure. With the rapid pace of
globalization many companies have been forces to tap international financial markets and
consequently to face greater competition than before. Both policy makers and business managers
have become increasingly aware of the importance of improved standards of corporate
governance.

13.4 ORIGIN OF CORPORATE GOVERNANCE

The development of the limited company in 1856 split the roles of ownership and control
for the first time and created the need for corporate governance. Limited liability alongside the
separation of ownership and control introduced the risk of financial irregularity arising from
dishonest or incompetent managers.

Corporate Governance is the system by which organizations are directed and controlled.
Cadbury defined corporate governance as ―the direction, management and control of an
organization‘ (1992). It relates to the way in which companies are governed, with a particular

5
emphasis on the relationship between shareholders and directors. Corporate Governance looks at
how an organization is manages in order to achieve its objectives. A company should be
managed in the best interests of its stakeholders, with a particular emphasis on its shareholders.
Consideration should be given to all stakeholders in relation to the activities a business
undertakes, for example employees, the general public, lenders, suppliers should all be
considered.

Global Scenario

U.S.A-Corporate Governance

Modern corporate governance began to take shape in the United States in the early 1980s.
A number of powerful and arrogant boards and executives of major listed corporations had been
acting in ways that were not considered consistent with the interests of the owners, who were
mainly small private investors, represented by pension funds and other institutional investors.
This caused leading institutional investors to intervene by exercising their power as owners and
formulating special corporate governance guidelines for how corporations should be run.

The 1990s and the beginning of the 21st century saw the introduction of binding
regulations on the major American Stock Exchanges, primarily the New York Stock Exchange
(NYSE) and NASDAQ, as well as increasingly detailed legislation. One example of the latter is
the Sarbanes-Oxley Act, which came into force in July 2003. Unlike in other parts of the world,
however, events in America have not led to the introduction of corporate governance codes. One
likely reason for this is that American corporate legislation is an issue for individual states and
there is therefore no national legal foundation on which to build a national code. Another may be
lower confidence in the power of ―soft law‖ in American society than in many other countries.

Europe-Corporate Governance

The breakthrough for corporate governance in Europe came with the publication of the
Cadbury report in the United Kingdom in 1992. This came in response to a number of corporate
scandals in the UK in the late 1980s. The report introduced the comply model, which has since
provided the standard for corporate governance codes in many countries. Cadbury was followed
by a number of other reports on different aspects of corporate governance within British

6
companies. A number of these were then collected in the Combined Code, which was originally
introduced for British companies in the mid-1990s and has been updated several times.

Towards the end of the 1990s, numerous national corporate governance codes were
devised Europe and other parts of the world. The first code in the Nordic region was introduced
in Denmark in 2001, with the other Nordic countries following a few years later.

The European Commission has had an active corporate governance agenda since 2003,
when it adopted its Action Plan for Corporate Law and Governance. This stated that far-reaching
harmonization of corporate law or governance codes were neither possible nor desirable within
the foreseeable future. Instead, the Commission expressed its expectation that all member states
introduce national corporate governance codes. Based on their own legislation and other
conditions. It also decides that harmonization would be limited to certain key issues within
corporate governance. Since then, the Commission has issued a significant number of
recommendations and directives concerning corporate governance, many of which have been
implemented in the member states through legislation.

Sweden-Corporate Governance

The breakthrough for corporate governance in Sweden came at the beginning of the
1990s, when the Companies Act Committee began working on a revision of the Swedish
Companies Act. The end result of the new Swedish Companies Act came into force on 1st
January 2006. The Swedish Shareholders Association published the first Swedish ownership
policy in March 1993. This was a set of guidelines for the ownership role within listed
companies. Since then, most significant Swedish institutional investors have issued similar
guidelines.

The first major practical impact of this new approach is considered to have taken place in
the Volvo Renault deal in 1993. The boards and executive management teams of both companies
had planned to merge the two companies, but the deal was blocked by the intervention of a
number of major institutional investors.

During the ensuring decade, a number of rules, guidelines and recommendations

concerning important corporate governance issues were published by various self-regulating

7
bodies, most notably by the Swedish Industry and Commerce Stock Exchange Committee and
the Swedish Securities Council. The Stockholm Stock Exchange also introduced a number of
corporate governance rules in its listing requirements.

In January 2003, the Swedish Academy of Directors published its Guidelines for Good
Board Practice, the first comprehensive code of practice for board of directors of Swedish
companies.
In September 2003, the Code Group, a joint working group of the Commission on
Business Confidence and a number of private sector organization, was set up to devise a Swedish
corporate governance code. The Code Group issued its first draft of the Swedish Corporate
Governance Code in April 2004. After this proposal had been widely circulated for comment, the
final version was presented in December 2004. The code came into force on 1 July 2005 and
applied to all companies listed on Stockholm Stock Exchange A List and to all companies on the
O List with a market capitalization exceeding SEK 3 billion, around 70 companies in total at that
time.
The Swedish Corporate Governance Board was set up in 2005. The duties of the Board
include monitoring and analyzing how the Code is applied in practice and the introduction of any
modifications or changes deemed necessary and appropriate. Three years after the introduction
of the Code, the Board conducted a major review with the aim of broadening the Code‘s
application to cover all companies listed on a regulated stock market in Sweden. The revised
code came into force on 1 July 2008 and applies to all Swedish companies that have their shares
traded on National Association of Securities Peoples Automated Quitting (NASDAQ).
Stockholm and on Nordic Growth Market (NGM) Equity, a total of around 300 companies. A
second revision of the Code was carried out, resulting in a number of new rules taking effect
from 1 February 2010.
13.5 NEED FOR CORPORATE GOVERNANCE

The need for corporate governance is highlighted by the following factors:

(i) Wide Spread of Shareholders:
Today a company has a very large number of shareholders spread all over the nation and even
the world, and a majority of shareholders being unorganised and having an indifferent attitude
towards corporate affairs. The idea of shareholders‘ democracy remains confined only to the law

8
and the Articles of Association, which requires a practical implementation through a code of
conduct of corporate governance.

(ii) Changing Ownership Structure:

The pattern of corporate ownership has changed considerably, in the present day times; with
institutional investors (foreign as well Indian) and mutual funds becoming largest shareholders in
large corporate private sector. These investors have become the greatest challenge to corporate
managements, forcing the latter to abide by some established code of corporate governance to
build up its image in society.

(iii) Corporate Scams or Scandals:

Corporate Scams (or frauds) in the recent years of the past have shaken public confidence in
corporate management. The event of Harshad Mehta Scandal, which is perhaps, one biggest
scandal, is in the heart and mind of all, connected with corporate shareholding or otherwise being
educated and socially conscious.

(iv) Greater Expectations of Society of the Corporate Sector:

Society of today holds greater expectations of the corporate sector in terms of reasonable price,
better quality, pollution control, best utilisation of resources etc. To meet social expectations,
there is a need for a code of corporate governance, for the best management of company in
economic and social terms.

(v) Hostile Take-Overs:

Hostile take-overs of corporations witnessed in several countries, put a question mark on the
efficiency of managements of take-over companies. This factor also points out to the need for
corporate governance, in the form of an efficient code of conduct for corporate managements.

(vi) Huge Increase in Top Management Compensation:

It has been observed in both developing and developed economies that there has been a great
increase in the monetary payments (compensation) packages of top level corporate executives.
There is no justification for exorbitant payments to top ranking managers, out of corporate funds,
which are a property of shareholders and society.

9
(vii) Globalisation:
Desire of more and more Indian companies to get listed on international stock exchanges also
focuses on a need for corporate governance. In fact, corporate governance has become a
buzzword in the corporate sector. There is no doubt that international capital market recognises
only companies well-managed according to standard codes of corporate governance.

13.6 SEPERATION OF OWNERSHIP AND MANAGEMENT

As a family owned business welcomes the next generation of incumbent heirs, various
challenges may arise. In some instances, those employed by the company may ultimately be
forced to serve multiple masters whose priorities are not always the same and difficult to
compete with them for positions within the organization. In other words emotions and the
confusion caused by family politics may threaten the continuity of business altogether.

These unique challenges present a significant level of risk to all involved. To pre-empt
and mitigate this, family business owners need to address the potential for these issues head-on
and consider practical ways in which to separate ownership and management.

When does professional management become necessary?

Businesses and the families that own and operate them grow and evolve. As start-ups
gain momentum, non-family staff are hired and assigned to various positions within the
organization and external shareholders may enter the business. With each new familial
generation, marriage or partnerships, the number of shareholders multiplies.

Families, by their very nature, add value to organizations through years of industry
experience. They do, however, also bring added layers of relationship, complexity and risk to the
businesses that they own and run as well as all involved. A fact that may not only make it
challenging to secure investor trust and external capital investment when it is needed, but that
may also ultimately compromise the company‘s long-term sustainability if these elements are
incorrectly managed.

10
 Therefore, as a family business grows and professionalizes, employing both family and
professional non-family members, it becomes necessary to formalize ownership structures,
power and processes. Separating ownership and management control is often an integral part of
corporate governance at this juncture to ensure the continued profitability and sustainability of
the business. It is also at this stage where the family might choose to professionalize beyond just
a single business and implement a fully-fledged family office.

The advantages of separating ownership and management

The advantages of separating ownership and management control are numerous.

Separation ensures the sustainability of the business through its management by a team of
professionals with the diverse skills necessary to effectively run the company. This ensures
continuity within the business, even when future heirs are not particularly interested in being part
of its day to day operations.

Separation also facilitates the maximization of capital. While every shareholder within
the business will naturally have investment preferences, it becomes management‘s job to identify
the optimal ones and identify ways in which business assets can be effectively managed to secure
the highest profits for all shareholders.

Separation is, however, not without its disadvantages. These may include slower
decision-making and reduced flexibility and agility when responding to change, as well as
the principal-agent problem, which occurs when conflicts of interest or incentive arise between
those who operate and manage the business. Still in many instances, the advantages outweigh the
disadvantages, most of which can be managed through implementing sound governance.

13.7 STAKEHOLDERS INTEREST

The Cadbury Committee 1992 defined corporate governance as ―the system by which
companies are directed and controlled.‖ Numerous theories have been proposed on corporate
governance best practice, none more popular than the shareholder and stakeholder theories.

11
Shareholder Theory

The shareholder theory was originally proposed by Milton Friedman and it states that the sole
responsibility of business is to increase profits. It is based on the premise that management are
hired as the agent of the shareholders to run the company for their benefit and therefore they are
legally and morally obligated to serve their interests. The only qualification on the rule to make
as much money as possible is ―conformity to the basic rules of the society, both those embodied
in law and those embodied in ethical custom.‖

The shareholder theory is now seen as the historic way of doing business with companies
realising that there are disadvantages to concentrating solely on the interests of shareholders. A
focus on short term strategy and greater risk taking are just two of the inherent dangers involved.
The role of shareholder theory can be seen in the demise of corporations such as Enron and
WorldCom where continuous pressure on managers to increase returns to shareholders led them
to manipulate the company accounts.

Stakeholder Theory

Stakeholder theory, on the other hand, states that a company owes a responsibility to a wider
group of stakeholders, other than just shareholders. A stakeholder is defined as any person/group
which can affect/be affected by the actions of a business. It includes employees, customers,
suppliers, creditors and even the wider community and competitors.

Edward Freeman, the original proposer of the stakeholder theory, recognized it as an important
element of Corporate Social Responsibility (CSR), a concept which recognizes the
responsibilities of corporations in the world today, whether they can be economic, legal, ethical
or even philanthropic. Nowadays, some of the world‘s largest corporations claim to have CSR at
the centre of their corporate strategy. Whilst there are many genuine cases of companies with a
―conscience‖, many others exploit CSR as a good means of Public Relations to improve their
image and reputation but ultimately fail to put their words into action.

Recent controversies surrounding the tax affairs of well-known companies such as Starbucks,
Google and Facebook in the UK have brought stakeholder theory into the spotlight. Whilst the
measures adopted by the companies are legal, they are widely seen as unethical as they are

12
utilising loopholes in the British tax system to pay less corporation tax in the UK. The public
reaction to Starbucks tax dealings has led them to pledge £10m in taxes in each of the next two
years in an attempt to win back customers.

Stakeholders and their Effect on Business

The various stakeholders are shareholder, employees, customers, government, lenders and others
and they all have different interests. With the dynamic world, the influence of the stakeholders
on setting goals also changes; day-to-day, it becomes tougher for managers to take decisions as
in this competent environment they cannot afford to neglect the interest of single stakeholder.
Before coming to any conclusion it is preferable if managers analyses their stakeholders
thoroughly, sometimes a minor conflict causes big problems.

Shareholder and their interest

Shareholders are the real owner of the business and their main interest is to maximize their
wealth. They want that the share price rise as much as possible and if firm unable to fulfil their
expectations they can sell their shares that means managers need to consider their interest.

Employees and their interest

Employees are the assets of the business; no doubt they can also be the firm competent edge.
Employees also have their interest like future and carrier development; want some bonus or
rewards for their performance etc. If managers do not fulfil their interest for the sake of earning
more profit, the firm not only loses its employees but also loses market reputation. The ongoing
dispute between British Airways and Cabin Crew is the best example of management-employee
dispute. British Airways want to save 62.5 million pounds annually by cost cutting in order to
remain competent in the market (Holden, 2010). This year, they have already taken 22 days of
strike, costing the company more than 150 million pounds (Guardian, 2010). Freeman argued
over dispute that company should create values with its employees (UVA Today, 2010). British
Airways management is thinking about increasing profit by cost cutting but they are not bothered
about their relationship with employees, costing them more than 150 million pounds loss during
strikes, moreover market reputation and share price also get affected by this dispute.

13
Customer and their interest

Customer is the God, every firm produce products for their customers considering their
expectations and interest. The customer‘s interest and expectations is Quality for Price. In
today‘s world customer is more aware and conscious, a firm can afford billions of dollars of loss
but it cannot afford to lose its customers. The best example for this is Toyota, in 2010 when it
faced the quality problem; the company took a step ahead and recalled more than 9million cars
from all around the world; which ultimately cause company loss of billions of dollars (Conner,
2010). No doubt, with the news of allegation of using poor quality of spare parts, the company
lost its share price in the market, on February 5, 2010 when Akio Toyoda, president of Toyoda
apologized and announced the recall of the Toyota cars, the company‘s share price ended 4.5%
higher 74.71 on the New York Stock Exchange; Investors revealed that announcement as a
concrete step to deal with the quality crisis (Reuters, 2010). This case also reveal that share price
also get affected by customer satisfaction; as if customers are not satisfied, they can switch to
some other product which adversely affect sales and profit which ultimately affect the share price
of the company

Creditors and their interest

The primary objective of lenders is to get back the amount with interest on time. Some scholars
argue that lenders can secure themselves by contracts. But it doesn‘t mean that lenders are not at
all interested in the market performance of the company. Lending institutes lend money to the
firms by considering its market value and previous performance. That means they are not only
interested in their returns on time but also in market value of the firm and long-term
relationships.

Community and their interest

Business exist in a social environment, business and community have organic relationship. The
stakeholder theory states that the main purpose of the businesses not only to maximize wealth
but it should also do some social activities because business directly or indirectly affects the
environment and society. Tata Group is committed to improve the quality of life of communities
they serve (TATA, 2010)

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Government and their interest

Governments principle purpose is to ensure that corporate operate according to the law imposed
on it and do business by fair means. Government impose lawn the business in order to protect the
rights of their citizens moreover they form apex bodies to keep eye on the businesses, as SEBI
(Security and Exchange Board of India), its main purpose is to guard the interests of investors in
securities and to standardize the security market (SEBI, 2010).

13.8 ETHICS AND SOCIAL RESPONSIBILITIES

Introduction

Social responsibility is an ethical theory in which individuals are accountable for fulfilling their
civic duty, and the actions of an individual must benefit the whole of society. In this way, there
must be a balance between economic growth and the welfare of society and the environment. If
this equilibrium is maintained, then social responsibility is accomplished.

Meaning

The theory of social responsibility is built on a system of ethics, in which decisions and actions
must be ethically validated before proceeding. If the action or decision causes harm to society or
the environment, then it would be considered to be socially irresponsible.

Moral values that are inherent in society to create a distinction between right and wrong. In this
way, social fairness is believed (by most) to be in the ―right‖, but more frequently this ―fairness‖
is absent. Every individual has a responsibility to act in manner that is beneficial to society and
not solely to the individual.

When Do Social Responsibility and Ethics Apply?

The theory of social responsibility and ethics applies in both individual and group capacities. It
should be incorporated into daily actions/decisions, particularly ones that will have an effect on
other persons and the environment. In the larger, group capacity, a code of social responsibility
and ethics is applied within said group as well as during interactions with another group or an
individual.

15
Businesses have developed a system of social responsibility that is tailored to their company
environment. If social responsibility is maintained within a company, then the employees and the
environment are held equal to the company‘s economics. Maintaining social responsibility
within a company ensures the integrity of society and the environment are protected.

Often, the ethical implications of a decision/action are overlooked for personal gain and the
benefits are usually material. This frequently manifests itself in companies that attempt to cheat
environmental regulations. When this happens, government interference is necessary.

Unfortunately, social responsibility and ethics are often not practiced by American companies
outside of U.S. borders, which make regulation difficult.

13.9 IMPORTANCE OF CORPORATE GOVERNANCE

The importance of corporate governance is listed below:

1. Changing Ownership Structure

In recent years, the ownership structure of companies has changed a lot. Public financial
institutions, mutual funds, etc. are the single largest shareholder in most of the large companies.
So, they have effective control on the management of the companies. They force the
management to use corporate governance. That is, they put pressure on the management to
become more efficient, transparent, accountable etc. They also ask the management to make
consumer-friendly policies, to protect all social groups and to protect the environment. So, the
changing ownership structure has resulted in corporate governance.

2. Importance of Social Responsibility

Today Social responsibility is given a lot of importance. The Board of Directors has to
protect the rights of the customers, employees, shareholders, suppliers, local communities etc.
This is possible only if they use corporate governance.

16
3. Growing Number of Scams

In recent years, many scams, frauds and corrupt practices have taken place. Exploitation
and misappropriation of public money are happening every day in India and worldwide. It is
happening in the stock market, banks, financial institutions, companies and government offices.
In order to avoid these scams and financial irregularities, many companies have started corporate
governance.

4. Indifference on the part of Shareholders

In general, shareholders are inactive in the management of their companies. They only
attend the Annual General Meeting. Postal ballot is still absent in India. Proxies are not allowed
to speak in the meetings. Shareholders associations are not strong. Therefore, directors misuse
their power for their own benefits. So, there is a need for corporate governance to protect all the
stakeholders of the company.

5. Globalization

Today most big companies are selling their goods in the global market. So, they have to
attract foreign investor and foreign customers. They also have to follow foreign rules and
regulations. All this requires corporate governance. Without Corporate governance, it is
impossible to enter, survive and succeed the global market.

6. Takeovers and Mergers

Today, there are many takeovers and mergers in the business world. Corporate
governance is required to protect the interest of all the parties during takeovers and mergers.

7. SEBI

SEBI has made corporate governance compulsory for certain companies. This is done to
protect the interest of the investors and other stakeholders.

17
13.10 MODELS OF CORPORATE GOVERNANCE

Important Models of Corporate Governance

Corporate governance systems vary around the world. This because of some cases, corporate
governance focuses on link between a shareholder and the company. Some on formal board
structures and board practices and yet others on social responsibilities of corporations. However,
basically, corporate governance is seen as the process by which organizations are run. There is
no one model of corporate governance which is universally acceptable as each model has its own
advantages and disadvantages.

The following are some of the models of corporate governance of various countries:

Anglo-American model: This model is also called an ‗Anglo-Saxon model‘ and is used as basis
of corporate governance in U.S.A, U.K, Canada, Australia and some common wealth countries.
The shareholders appoint directors who in turn appoint the managers to manage the business.
Thus there is separation of ownership and control. The board usually consist of executive
directors and few independent directors. The board often has limited ownership stakes in the
company. Moreover, a single individual holds both the position of CEO and chairman of the
board. This system (model) relies on effective communication between shareholders, board and
management with all important decisions taken after getting approval of shareholders (by
voting).

German model: This is also called as 2 tier board model as there are 2 boards viz. The
supervisory board and the management board. It is used in countries like Germany, Holland,
France, etc. Usually a large majority of shareholders are banks and financial institutions. The
shareholder can appoint only 50% of members to constitute the supervisory board. The rest is
appointed by employees and labour unions.

Japanese model: This model is also called as the business network model; usually shareholders
are banks/financial institutions, large family shareholders, corporate with cross-shareholding.
There is supervisory board which is made up of board of directors and a president, who are
jointly appointed by shareholder and banks/financial institutions. This is rejection of the

18
Japanese ‗keiretsu‘- a form of cultural relationship among family controlled corporate and
groups of complex interlocking business relationship, where cross shareholding is common most
of the directors are heads of different divisions of the company. Outside director or independent
directors are rarely found of the board.

Indian model: The model of corporate governances found in India is a mix of the Anglo-
American and German models. This is because in India, there are three types of Corporation viz.
private companies, public companies and public sectors undertakings (which includes statutory
companies, government companies, banks and other kinds of financial institutions). Each of
these corporations has a distinct pattern of shareholding. For example In case of companies, the
promoter and his family have almost complete control over the company. They depend less on
outside equity capital. Hence in private companies the German model of corporate governance is
followed.

13.11 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. Corporate Governance refers to the way a______ is governed.

2. Corporate Governance clearly distinguishes between the______

3. The ______ Corporate Governance Board was set up in 2005

4. The ______ interest and expectations is Quality for Price

5. Shareholder can appoint only ______ of members to constitute the supervisory board.

Answer to Check Your Progress

1. Corporation

2. Owners and the managers

3. Swedish

4. Customer‘s

5. 50%

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13.12 SUMMARY

As observed in the broad manner, the corporate governance is the interaction between
various participants in shaping corporation‘s performance and the way it is proceeding towards.
The owners must see that individual actual performance is according to the standard
performance. It deals with determining ways to take effective strategic decisions. Corporate
Governance has a broad scope. It includes both social and institutional accepts. It encourages a
trust worthy, moral, as well as ethical environment. Stakeholders for his purpose will include
everyone ranging from the board of directors, management, shareholders, customers, employees
and society. Good corporate governance ensures corporate success and economic growth and it
lowers the capital cost. And it ensures organizations are managed in a manner that fits the best
interests of all. The audit committee is directly responsible for the appointment, compensation,
and over sight of the work of any registered public accounting firm employed by the company.
Finally the unit is ended with the importance of Corporate Governance and Models of Corporate
Governance.
13.13 KEY WORDS

Governance : Means control i.e. controlling a company

CEO : Chief Executive officer

CSR : Corporate Social Responsibility

SSE : Stockholm Stock Exchange

13.14 QUESTIONS FOR SELF STUDY

1. What is meant by the concept of corporate governance?

2. Explain the origin and need for Registered Companies.

3. Discuss the separation of ownership and management.

4. Give an account of Stakeholders interest.

5. Write a note on Ethics and Social Responsibility.

6. Explain the importance of Corporate Governance.

7. List out the models of Corporate Governance.

20
13.15 REFERENCES

1. Aswathappa.K,(2019) Essentials of Business Environment, Himalaya Publishing House.

2. Murthy C.S.V (2018) Business Ethics and Corporate Governance, Himalaya Publishing
House.

3. Nirmala. K, Karunakara Reddy.B. A, Aruna Rani N. (2018) Business Ethics and Corporate
Governance, Himalaya Publishing House.

4. Gosh, B .N.(2018), Business Ethics and Corporate Governance, Tata MacGrawhill.

21
Unit-14 COMMITTEES AND AUTHORITIES ON CORPORATE GOVERNANCE

Structure :

14.0 Objectives

14.1 Introduction

14.2 Recommendations of Cadbury Committee

14.3 Confederation of Indian industries

14.4 Kumaramangalam Birla Committee (2000)

14.5 Listing Agreements and Stock Exchange

14.6 Check Your Progress

14.7 Summary

14.8 Keywords

14.9 Questions for self-Study

14.10 References

22
14.0 OBJECTIVES

After studying this unit, you will be able to;

 Explain the Recommendations of Cadbury Committee.

 Bring out the Confederation of Indian Industries.
 Delineate the Kumar Mangalam Birla Committee Recommendations.
 Outline the listing Agreements and Stock Exchange.
14.1 INTRODUCTION

Perhaps we have studied in the last unit Corporate Governance, in this unit we will
discuss about Committees and Authorities on Corporate Governance . Corporate
Governance on Government of India adopted the policy of liberalisation, privatization and
globalisation (LPG) in India. Since then several policy initiatives have been taken to boost
economic growth, efficiency and global competitiveness of Indian companies. Both legislative
and non-legislative reforms have been carried out to improve governance in the corporate sector.

14.2 RECOMMENDATIONS OF CADBURY COMMITTEE

Let us discuss Cadbury Committee Recommendations on Corporate Governance:

The London Stock Exchange and the Bank of England set up a committee in 1991 under the
Chairmanship of Sir Adrian Cadbury to look into the financial aspects of corporate governance.
The very focus of the committee was on control and reporting functions of the Board of
Directors. It developed a Code of Corporate Governance which is known as ‗Code of Best
Practice‘.
The Cadbury Code of Best practices had 19 recommendations. The recommendations are
in the nature of guidelines relating to Board of Directors, Non-executive Directors, Executive
Directors and those on Reporting and Control.

The Recommendations for the Board of Directors:

The Board should meet regularly retain full and effective control over the company and monitor
the executive management

 There should be a clearly accepted division of responsibilities at the head of a company,

which will ensure balance of power and authority, such that no individual has unfettered

23
 powers of decision. In companies where the Chairman is also the Chief Executive, it is
essential that there should be a strong and independent element on the Board, with a
recognized senior member.
 The Board should include non-executive Directors of sufficient caliber and number for
their views to carry significant weight in the Board‘s decisions.
 The Board should have a formal schedule of matters specifically reserved to it for
decisions to ensure that the direction and control of the company is firmly in its hands.
 There should be an agreed procedure for Directors in the furtherance of their duties to
take independent professional advice if necessary, at the company‘s expense.
 All directors should have access to the advice and services of the Company Secretary,
who is responsible to the Board for ensuring that Board procedures are followed and that
applicable rules and regulations are complied with. Any question of the removal of
Company Secretary should be a matter for the Board as a whole.

The recommendations for the Non-Executive Directors:

 Non-executive Directors should bring an independent judgement to bear on issues of

strategy, performance, resources, including key appointments and standards of conduct.
 The majority should be independent of the management and free from any business or
other relationship, which could materially interfere with the exercise of their independent
judgment, apart from their fees and shareholding. Their fees should reflect the time,
which they commit to the company. Non-executive Directors should be appointed for
specified terms and reappointment should not be automatic.
 Non-executive Directors should be selected through a formal process and both, this
process and their appointment, should be a matter for the Board as a whole.

The recommendations in the Cadbury Code of Best Practices for the Executive Directors:

 Director‘s service contracts should not exceed three years without shareholders‘ approval
 There should be full and clear disclosure of their total emoluments and those of the
Chairman and the highest-paid UK Directors, including pension contributions and stock
options. Separate figures should be given for salary and performance related elements
and the basis on which performance is measured should be explained.

24
  Executive Directors‘ pay should be subject to the recommendations of a Remuneration
Committee made up wholly or mainly of Non- executive Directors.

Reporting and Controls in the Cadbury Code of Best Practices:

 It is the Board‘s duty to present a balanced and understandable assessment of the

company‘s position.
 The Board should ensure that an objective and professional relationship is maintained
with the Auditors.
 The Board should establish an Audit Committee of at least three Non-executive Directors
with written terms of reference, which deal clearly with its authority and duties.
 The Directors should explain their responsibility for preparing the accounts next to a
statement by the Auditors about their reporting responsibilities.
 The Directors should report on the effectiveness of the company‘s system of internal
control
 The Directors should report that the business is a going concern, with supporting
assumptions or qualifications as necessary.

14.3 CONFEDERATION OF INDIAN INDUSTRIES

Confederation of Indian Industry (CII)

The Confederation of Indian Industry (CII) is a non-profit, non-governmental, industry-

led organization, which aims to support India‘s industrial development. CII has over 8100
private and public sector members, including SMEs and an indirect membership of over 90,000
companies from around 400 national and regional sectoral associations. CII wants to provide an
environment within the country which is conducive to sustainable industrial growth and consults
with both government and private parties. CII has launched several initiatives such as the
Climate Change Initiative, which aims to turn India into a low-carbon economy by enhancing
energy efficiency in the manufacturing sector, policy framework amendments and introducing a
green building rating system (CII, 2011a).‘

25
CII work related to Cement Industry

With the support from World Business Council for Sustainable Development (WBCSD)
and International Finance Corporation, CII‘s Green Business Centre and the National Council for
Cement and Building Materials (NCBM) developed a report on energy efficiency technologies
for the cement industry which will be used for the development of low carbon technology
roadmap for the cement industry in India (WBCSD, 2012).

CII work related to Pulp and Paper Industry

Through its centre of excellence, CII – Godrej Green Business Centre and with the
cooperation of all the stakeholders of the Indian pulp and paper industry, CII has initiated an
effort under the banner of ―Make Indian Pulp and Paper Industry World Class‖. The primary aim
of the initiative is to continuously improve the energy and environmental performance of the
Indian paper industry to make it competitive on the international market (CII, 2011b).

CII – Godrej Green Business Centre has published a Best Practices Manual in two
volumes, which discusses in great detail the best available techniques which can be applied to the
pulp and paper industry to enhance its environmental and energy performance (CII, 2011c).
Volume 1 of the manual discusses the Indian pulp and paper industry in general and briefly
describes energy efficiency in the global pulp and paper industry. It then details the best
available practices for pulp mills, stock preparation, paper machines, soda recovery, utilities and
other areas (CII, 2008). Volume 2 compares the best available practices applied at European pulp
and paper mills to the available techniques in Indian pulp and paper industry (CII, 2009).

14.4 KUMAR MANGALAM BIRLA COMMITTEE (2000)

In early 1999, Securities and Exchange Board of India (SEBI) had set up a committee
under Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of
good corporate governance. The report submitted by the committee is the first formal and
comprehensive attempt to evolve a ‗Code of Corporate Governance', in the context of prevailing
conditions of governance in Indian companies, as well as the state of capital markets.

26
The Committee's terms of the reference were to:

1. Suggest suitable amendments to the listing agreement executed by the stock exchanges with
the companies and any other measures to improve the standards of corporate governance in the
listed companies, in areas such as continuous disclosure of material information, both financial
and nonfinancial manner and frequency of such disclosures, responsibilities of independent and
outside directors;

2. Draft a code of corporate best practices

3. Suggest safeguards to be instituted within the companies to deal with insider information and
insider trading.

The primary objective of the committee was to view corporate governance from the perspective
of the investors and shareholders and to prepare a ‗Code' to suit the Indian corporate
environment. The committee had identified the Shareholders, the Board of Directors and the
Management as the three key constituents of corporate governance and attempted to identify in
respect of each of these constituents, their roles and responsibilities as also their rights in the
context of good corporate governance.

Corporate governance has several claimants, shareholders and other stakeholders, which include
suppliers, customers, creditors, bankers, the employees of the company, the government and the
society at large. The Report had been prepared by the committee, keeping in view primarily the
interests of a particular class of stakeholders, namely, the shareholders, who together with the
investors form the principal constituency of SEBI while not ignoring the needs of other
stakeholders.

Mandatory and non-mandatory recommendations

The committee divided the recommendations into two categories, namely, mandatory and non-
mandatory. The recommendations which are absolutely essential for corporate governance can
be defined with precision and which can be enforced through the amendment of the listing
agreement could be classified as mandatory. Others, which are either desirable or which may
require change of laws, May, for the time being, be classified as non-mandatory.

27
A. Mandatory Recommendations:

1. Applies to listed companies with paid up capital of `. 3 crore and above

2. Composition of Board of Directors optimum combination of executive and Non-

Executive Directors

3. Audit committee with 3 Independent Directors with one having financial and Accounting
Knowledge.

4. Remuneration Committee

5. Board Procedures At least 4 Meetings of the Board in a year with maximum Gap of 4 months
between 2 meetings. To Review Operational Plans, Capital Budgets, Quarterly Results,
Minutes Of Committee's Meeting. Director shall not be a member of more than 10 committee
and shall not act as chairman of more than 5 committees across all companies

6. Management discussion and analysis report covering industry structure, opportunities, threats,
risks, outlook, internal control system

7. Information sharing with shareholders

B. Non-Mandatory Recommendations:

1. Role of Chairman

2. Remuneration Committee of Board

3. Shareholders' right for receiving half yearly financial performance postal ballot covering

critical matters like alteration in memorandum etc.

4. Sale of whole or substantial part of the undertaking

5. Corporate Restructuring

6. Further issue of capital

7. Venturing into new businesses

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14.5 LISTING AGREEMENTS AND STOCK EXCHANGE

Listing Agreement is the basic document which is executed between companies and the
Stock Exchange when companies are listed on the stock exchange. The Stock Exchange on
behalf of the Security Exchange Board of India ensures that companies follow good corporate
governance.

Listing means admission of securities for dealing on specified stock exchanges. The
securities may of a public limited company, Central/State government, quasi-governmental and
other financial institutions/municipalities, etc. The Companies desirous of getting their securities
listed are required to enter in to an agreement with the Exchange called the Listing Agreement
and are required to make certain acts.

Importance of Listing Agreement

 Company undertakes to provide prompt facilities like transfer, consolidation, sub-

division, consolidation of securities.
 Provide proper notice for record dates and book closure.
 Furnish accounts on quarterly basis.
 Intimate stock exchanges the happenings which are likely to affect the financial
performance of the company and its stock prices.
 Comply with the corporate governance conditions
 Forward copies of its annual report and accounts to its shareholders.

Important Clauses in Listing Agreement

Clause 16

Give notice to Stock Exchange stating the date and purpose for register closure or of record date.

Stock Exchange to be intimated at least 7 days before such closure or record date

- For purposes of declaration of dividend.

- The issue of right or bonus shares.
- Issue of shares for conversion of debentures or of shares arising out of rights
attached to debentures.

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 - Close register of transfers once a year at the time of Annual General Meeting.
 The company on whose stocks, derivatives are available or whose stocks form part of an
index on which derivatives are available, shall give a notice period of 30 days to stock
exchanges for corporate actions like mergers, de-mergers, splits and bonus shares.
 Company not to have a gap of less than 30 days between two book closures/record date.

Clause 19

 Prior intimation to the Exchange about the Board meeting at which proposal for Buyback
of Securities, declaration of Dividend or Rights or issue of convertible debentures or of
debentures carrying a right to subscribe to equity shares or the passing over of dividend
or the issue of right is due to be considered at least 2 working days in advance.
 Simultaneous notice in case of proposal of declaration of Bonus is communicated to the
Board of Directors.

Clause 20 and 22

Under Clauses 20 and 22 of the Listing Agreement companies are required to intimate to
the stock exchange, immediately after the meeting of Board of Directors, regarding the decisions
taken in respect of declaration of dividend or rights or bonus etc. In order to avoid excessive
volatility in stock prices due to announcement regarding dividend, rights etc., during the market
hours, such announcement shall be made immediately on the date of the Board Meeting only
after the close of Market Hours.

Clause 35 and 40A

 Clause 35: Within 21 days from the end of every quarter, file the shareholding pattern of
the company with the Stock Exchanges.
 Clause 40A: The provision requires a company to maintain on a continuous basis, public
shareholding of at least 25% of the total number of issued shares of a class or kind, for
every such class or kind, for every such class or kind of its shares which are listed.

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Clause 49A

 Corporate Governance – Company to comply with certain requirements asper clause 49 A:

- Board of Directors
- Audit Committee
- Subsidiary Companies
- Disclosures
- CEO/CFO Certification
- Report on Corporate Governance
- Compliance

14.6 CHECK YOUR PROGRESS

Fill in the Blanks with suitable answers:

1. The ______ of Best practices had 19 recommendations.

2. Director‘s service contracts should not exceed three years without ______ approval

3. ______ should bring an independent judgement

4. Committee divided the recommendations into two categories, namely, _______________

5. Listing means _____ of securities for dealing on specified stock exchanges

Answer to Check Your Progress

1. Cadbury Code
2. Shareholders
3. Non-executive Directors
4. Mandatory and non-mandatory.
5. Admission

14.7 SUMMARY

As you know we have had discussed the Committees and Authorities on Corporate
Governance. Corporate Governance has considerable impact on business environment. Captains

31
of businesses are aware of this but in practice their practices differ from the proclamations they
make in forums and on TV screens. Otherwise, what one should say when the CEO of a loss
making company has cleared the highest compensation in 2012. The Cadbury Code of Best
practices had 19 recommendations. The recommendations are in the nature of guidelines relating
to Board of Directors, Non-executive Directors, Executive Directors and those on Reporting and
Control. The Confederation of Indian Industry (CII) is a non-profit, non-governmental, industry-
led organization.

Securities and Exchange Board of India (SEBI) had set up a committee under Shri Kumar
Mangalam Birla, member SEBI Board, to promote and raise the standards of good corporate
governance. Finally this unit discuss Listing agreements and Stock Exchanges of important
Clauses in Listing Agreement Clause 16, 19, 20 and 22, 35 and 40A, 49A.

14.8 KEY WORDS

WBCSD : World Business Council for Sustainable Development

NCMB : National Council for Cement and Building Materials

AGM : Annual general meeting

LPG : Liberalization, Privatisation, Globalisation

CII : Confederation of India Industry

SEBI : Security Exchange Board of India

14.9 QUESTIONS FOR SELF STUDY

1. Explain the recommendations of Cadbury Committee.

2. Give an account of confederation of Indian industries.

3. Write a note on recommendations of Board of Directors.

4. What are the recommendations of Kumara Mangalam Birla Committee.

5. Explain the Listing of agreements and stock exchange.

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14.10 REFERENCES

1. Aswathappa.K,(2019), Essentials of Business Environment, Himalaya Publishing House.

2. Murthy C.S.V (2018), Business Ethics and Corporate Governance, Himalaya Publishing
House.

3. Nirmala. K, Karunakara Reddy.B. A, Aruna Rani N (2018), Business Ethics and Corporate
Governance, Himalaya Publishing House.

4. Gosh, B .N.(2018), Business Ethics and Corporate Governance, Tata MacGrawhill.

33
Unit-15 CHIEF EXECUTIVE OFFICER AND CORPORATE GOVERNANCE

Structure:

15.0 Objectives

15.1 Introduction

15.2 Professional Management and Family Management

15.3 Constitution of Executive and Non-executive Directors

15.4 Role and Responsibilities

15.5 Minority Shareholder and Conduct of AGMs

15.6 Restrictions on Number of Companies

15.7 Nominee Director

15.8 Check Your Progress

15.9 Summary

15.10 Keywords

15.11 Questions for self-Study

15.12 References

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15.0 OBJECTIVES

After studying this unit, you will be able to;

 Discuss the Introduction of Chief Executive officer and Corporate Governance.

 Explain the Professional Mangement and Family Management.
 Bring out the Constitution of Board Executive and Non-executive Directors.
 Delineate the Restrictions on Number of Companies.
 Outline the Minority Shareholder and Conduct of AGMs.

15.1 INTRODUCTION

As we learnt committees and Authorities on Corporate Governance, let us discuss Chief

Executive officer and Corporate Governance in this unit.

A chief executive officer (CEO) is the highest-ranking executive in a company. Broadly

speaking, a chief executive officer‘s primary responsibilities include major corporate decisions,
making, managing the overall operations and resources of a company, acting as the main point
of communication between the board of directors and corporate operations. In many cases, the
chief executive officer serves as the public face of the company. The CEO is elected by the
board and its shareholders. They report to the chair and the board, who are appointed by
shareholders.

Further, corporate governance means a set of systems procedures, policies, and practices,
standards put in place by a corporate to ensure that relationship with various stakeholders is
maintained in transparent and honest manner. Corporate Governance is concerned with the
intrinsic nature, purpose, integrity and identity of an organization with primary focus on the
entity‘s relevance, continuity and fiduciary aspects.

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15.2 PROFESSIONAL MANAGEMENT AND FAMILY MANAGEMENT

Professional Management:

Tata Motors Managing director – Guenter Butschek

Professionally managed companies are run by the professionals who are also an employee of the
company (not the owner). These professionals may or may not have any significant stake in the
company.

Characteristics of the professionally managed businesses:

The professionals are in their position of chairman/CEO only as long as they are able to complete
their responsibilities.

These professional managers can easily be fired by the board of the directors if they do not meet
the required company target. (One of the popular examples is the Tata Son‘s board of directors
firing Cyrus Mistry as its Chairman because of his issue with Mr. Ratan Tata.)

These professionals focus on performance and consistency.

The biggest disadvantage of professional management is that they can readily leave the company
for a better pay or perquisites offered by another company.

Few best examples of professionally managed companies in India are ITC, HDFC, L&T etc.,

36
Family Management:

Rajiv Bajaj (Son of Rahul Bajaj) – Managing Director of Bajaj Auto

The family managed businesses are those companies who are managed/controlled by their
owners. Generally, the chairman or the CEO is the member of the controlling family. Further, the
board of the directors are either members of that family or their associates.

The family led businesses are been major contributors to the growth of Indian economy. A
bigger portion of the companies in India are under the control of family personnel like Reliance,
Tata group, Infosys, Bharti Airtel and Bajaj, who stands as some of the well-known examples.

Characteristics of the family managed businesses:

All the major policies of the company are determined by the controlling family (which may or
may not be in the favor of shareholders).

They are loyal towards their own company. You‘ll rarely find any case where the CEO of a
family managed business moved to take a job as CEO of another company just because they
were offering a higher salary.

15.3 CONSTITUTION OF EXECUTIVE AND NON EXECUTIVE DIRECTORS

An Executive Director is the working director of an organization whom we can say a full-
time employee. It is also known as inside or internal director. Generally, it has a specified role in
finance director, marketing operations on regular basis. This term is more popular in non-profit
organizations than commercial enterprises. The care standard needed from executive directors is
very much higher than that needed for Non- executive directors. However, both types of

37
directors are equally significant and liable under tax laws. In this article, we will let you know
Executive Vs Non-Executive Director and what are the requirements of these two.

A Non- Executive Director is the Non- working director of an organization which does not come
under the category of an Executive director. Therefore, he/she does not participate in the day-to-
day activities of the firm. But he/she may participate in the planning process and policy-
making process. Sometimes, it may include lending prestige to the firm as a benefit of his
standing in the community. The company expects the non- Executive director to monitor and
challenge the performance of the executive directors and the management. Further, they are also
expected to take a determined stand in the interests of the firm and its stakeholders. They are
equal in term of liability to the executive directors under certain statutory requirements such as
tax laws.

Executive Vs Non-Executive Director

Following are the differences between Executive Vs Non-Executive Director:

 Usually, an Executive Director is an employee of executive functions in the
management and administration of the company. On the contrary, Non- executive
directors are independent of corporate management.
 The directors have the first priority to rely on is the management of the corporation.
The board will not inform about the details of how the corporation is managed.
 There is a requirement of the degree of skill for an executive director. Whereas Non-
executive directors are not bound to be continuous attentive towards the affairs of the
corporation.
 The executive director has the powers of managing on a regular basis that is
exercisable without reference to the board as a delegated executive function of
management. Other than managing director, appointment carries no express or implied
the grant of executive power.

 Executive director not being managing director may depend on whether he has some
feature of the company‘s constitution or conduct of the company in general meeting or
not. Besides, the delegation of executive function evidence by the board of directors
operating as an executive of the company.

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Requirements for Executive Director
Following are the requirements of Executive Director under the companies act:
1. A person should be a director of the company to become an Executive director.
2. A person should be a whole-time director to become an Executive Director of the company.
3. Overall, Director + Whole time employee of the company indirectly will be considered as
the Executive Director due to (2)(1)(k) whether designated by the company as an
executive director or not.

Requirements for Non- Executive Director

Following are the requirements of Non-Executive Director:

1. Build Personal Attributes: The qualities that a non-executive director must have are
independent, challenging, passionate, objective, entrepreneurial, mature, intelligent, supportive,
well-rounded, interesting, and smart.
2. Possess a Business Background: Financial analysts, chartered accountants, MBAs, and other
people coming from a heavy business background secure more easily a non-executive director
job.
3. Get through The Interview: Feel free to quiz the chairman about the big issues and the
organization‘s concerns. This would give you a good idea of the governance path you need to
follow for maintaining the direction and morale of the organization.
15.4 ROLE AND RESPONSIBILITIES

Role of Executive Director

Best practices for governance give us some general guidelines about the expectations for the
individual who serves in the role of executive director. The guidelines are broad because every
organization has different and unique needs. A one-size-fits-all approach to the definition of the
role of executive director rarely serves any organization well.

The board chair and the executive director nearly always have a close working relationship with
each other because they work together on most activities of the organization. As with most close
working relationships, the organization benefits when the board chair and the executive director
understand and abide by their distinct roles and have a mutually trusting relationship.

39
Responsibilities of Executive Director

 The executive director‘s exact duties and responsibilities may vary somewhat, depending
on their job description. Generally, executive directors accept direct responsibility for
executing the organization‘s policies, programs and initiatives. Here is a template for a
job description for an executive director.
 Executive directors manage all of the day-to-day responsibilities of the organization,
including managing staff and volunteers. Working with staff, the executive director
develops policies to inform the various programs as they work toward fulfilling the
organization‘s charitable purpose.
 Another important duty of the executive director is to serve as the face and public
spokesperson for the organization. Executive directors often make public presentations
to the media, members, donors, government representatives and members of the
community at large.
 The role usually requires many hours outside of the office, as they often attend or host
fundraising events, public relations events and events for various organizational
programs.
 The importance of the executive director‘s role requires that the board choose someone
who is a person with high ethical and moral standards and who has a spotless reputation.
Most executive directors aren‘t really ever off duty, even when they‘re off the clock.
 Some organizations find it helpful for the board chair and the executive director to share
some responsibilities. Such shared duties often include developing an overall fundraising
plan, reviewing the budget and assessing whether the organization is staying true to its
mission.

Role of non-executive director

An independent director is a non-executive director of a company. Independent Director

Acts as a guide, coach and mentor to the Company. The role of non-executive directors includes
improving corporate credibility and governance standards by working as a watchdog and help in
managing risk. Independent directors are responsible for ensuring better governance by actively

40
involving in various committees set up by the company. The independent directors are required
because they perform the following important roles:

 Facilitate withstanding and countering pressures from owners.

 Fulfil a useful role in succession planning.
 On issues such as strategy, performance, risk management, resources, key appointments
and standards of conduct he or she must support in gaining independent judgment to bear
the board‘s deliberations.
 While evaluating the performance of the board and management of the company, he or
she needs to bring an objective view.
 Scrutinizing, monitoring and reporting management‘s performance regarding goals and
objectives agreed in the board meetings.
 Safeguard the interests of all stakeholders, particularly the minority shareholders.
 Balance the conflicting interest of the stakeholders.
 Check on the integrity of financial information and ensure financial controls and systems
of risk management are in operation.
 In situations of conflict between management and shareholder‘s interest, aim towards the
solutions which are in the best interest of the company.
 Establishing suitable levels of remuneration of executive directors, key managerial
personnel and senior management.

Responsibilities of Non-Executive Directors (NEDs) can be said to include the following:

 Strategic direction
As ‗an outsider‘, the non-executive director may have a clearer or wider view of external
factors affecting the company and its business environment than the executive directors.
The normal role of the Non-Executive Directors (NEDs) in strategy formation is
therefore to provide a creative and informed contribution and to act as a constructive
critic in looking at the objectives and plans devised by the chief executive and the
executive team.

41
 Monitoring performance
Non-executive directors should take responsibility for monitoring the performance of
executive management, especially with regard to the progress made towards achieving
the determined company strategy and objectives. They have a prime role in appointing,
and where necessary removing, executive directors and in succession planning.
 Remuneration
Non-executive directors are also responsible for determining appropriate levels of
remuneration of executive directors. In large companies this is carried out by a
remuneration committee, the objective of which is to ensure there is an independent
process for setting the remuneration of executive directors.
 Communication
The company and its board can benefit from outside contacts and opinions. An important
function for NEDs, therefore, can be to help connect the business and board with
networks of potentially useful people and organisations. In some cases, an NED will be
called upon to represent the company externally.
 Risk
NEDs should satisfy themselves on the integrity of financial information and that
financial controls and systems of risk management are robust and defensible.
 Audit
It is the duty of the whole board to ensure that the company accounts properly to its
shareholders by presenting a true and fair reflection of its actions and financial
performance and that the necessary internal control systems are put into place and
monitored regularly and rigorously. An NED has an important part to play in fulfilling
this responsibility, whether or not a formal audit committee (composed of NEDs) of the
board has been constituted.

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15.5 MINORITY SHAREHOLDER AND CONDUCT OF AGMS

Definitions:

Small Shareholder: a shareholder who is holding shares of nominal value of INR 20,000 or
such other sum as may be prescribed. Minority Shareholder: Equity holder of a firm who does
not have the voting control of the firm, by virtue of his or her below fifty percent ownership of
the firm's equity capital

Objectives:

1. The objective of the policy is to protect the rights of the minority shareholders and keep them
updated about their rights from time to time.

2. To check that the Shareholder Relationship Committee is redressing the grievance of the
minority shareholders.

Rights of Minority Shareholders:

1. Right to appoint a director- Small shareholders, upon notice of not less than 1/10th of the total
number of such shareholders or 1000 shareholders; have a small shareholder director elected.

2. Right in decision making and such director appointed shall be considered as independent
director.

3. Oppression and mismanagement-

 Right to apply to tribunal by the minority shareholders, when management or control of the
company is being conducted in a manner prejudicial to the interests of the class or
company.
4. Rights with respect to reconstruction and amalgamation-
 Purchase of shares of dissenting shareholders at a determined value by the registered
valuer.
 The minority have been given a right to make an offer to the majority shareholders to buy
the shares of minority shareholders.

 The transferor company shall be the agent for making payments to minority shareholders.

43
5. Class action suit: Class action suit may be filed by the minority shareholders as per the
provisions of Companies Act, 2013.

Annual General Meeting (AGM) Under the Companies Act, 2013

An Annual General Meeting (AGM) is held to have an interaction between the management and
the shareholders of the company. The Companies Act, 2013 makes it compulsory to hold an
annual general meeting to discuss the yearly results, auditor‘s appointment and so on. A
company should follow the procedures under the Companies Act, 2013 to conduct the AGM.

Companies Required to Hold an AGM

All companies except one person company (OPC) should hold an AGM after the end of each
financial year. A company must hold its AGM within a period of six months from the end of the
financial year.

However, in the case of a first annual general meeting, the company can hold the AGM in less
than nine months from the end of the first financial year. In such cases, where the first AGM is
already held, there is no need to hold any AGM in the year of incorporation. Do note that the
time gap between two annual general meetings should not exceed 15 months.

Procedure to Hold an AGM

The company must give a clear 21 days‘ notice to its members for calling the AGM. The notice
should mention the place, the date and day of the meeting, the hour at which the meeting is
scheduled. The notice should also mention the business to be conducted at the AGM. A company
should send the notice of the AGM to:

 All members of the company including their legal representative of a deceased member
and assignee of an insolvent member.

 The statutory auditors of the company.

 All directors of the company.

The notice may be given in writing through speed post or registered post or via electronic mode.
The notice should be sent to the address of the member as per the records of the company.

44
In the case of electronic communication, the notice should be sent to the e-mail address of the
member as per the records of the company. The notice can be text typed in an email or an
attachment to an email. The notice of the AGM should be placed on the website of the company
or any other website as may be mentioned by the government.

AGM can be called at a notice period shorter than 21 days, if at least 95% of the members
entitled to vote in the meeting agree to the shorter notice. The consent may be given in writing or
through electronic mode.

Matters Discussed in an AGM or Agenda for an AGM

The matters discussed or business transacted in an AGM consists of:

 Consideration and adoption of the audited financial statements.

 Consideration of the director‘s report and auditor‘s report.

 Dividend declaration to shareholders.

 Appointment of directors to replace the retiring directors.

 Appointment of auditors and deciding the auditor‘s remuneration.

 Apart from the above ordinary business, any other business may be conducted as a special
business of the company.

15.6 RESTRICTIONS ON NUMBER OF COMPANIES

Executive Director

1. Regulation 26 of LODR no person, after the commencement of this Act, shall hold office
as a director , including any alternate directorship, in more than twenty companies at the
same time: Provided that the maximum number of public companies in which a person
can be appointed as a director shall not exceed ten.
2. Subject to the provisions of sub-section (1), the members of a company may, by special
resolution, specify any lesser number of companies in which a director of the company
may act as directors.

45
 3. Any person holding office as director in companies more than the limits as specified in
sub-section (1), immediately before the commencement of this Act shall, within a period
of one year from such commencement,— (a) choose not more than the specified limit of
those companies, as companies in which he wishes to continue to hold the office of
director; (b) resign his office as director in the other remaining companies; and (c)
intimate the choice made by him under clause (a), to each of the companies in which he
was holding the office of director before such commencement and to the Registrar having
jurisdiction in respect of each such company.
4. Any resignation made in pursuance of clause (b) of sub-section (3) shall become effective
immediately on the dispatch thereof to the company concerned.
5. No such person shall act as director in more than the specified number of companies (a)
after dispatching the resignation of his office as director or non-executive director
thereof, in pursuance of clause (b) of sub-section (3); or (b) after the expiry of one year
from the commencement of this Act, whichever is earlier.
6. If a person accepts an appointment as a director in contravention of sub-section (1), he
shall be liable to a penalty of five thousand rupees for each day after the first during
which such contravention continues.

Non-Executive Director

The committee should include at least three members, all independent non-executive
directors. At least one member should have significant, recent and relevant financial experience,
and suitable training should be provided to all.

15.7 NOMINEE DIRECTOR

Besides the above categories of directors, there is another set of directors in Indian
companies who are the nominees of the financial or investment institutions to safeguard their
interest. The nominees of the institutions are often chosen from among the present or retired
employees of the institutions or from outside. In the context of corporate governance, there could
be arguments both for and against the continuation of this practice.
There are arguments both for and against the institution of nominee directors. Those who
favour this practice argue that nominee directors are needed to protect the interest of the

46
institutions who are custodians of public funds and who have high exposures in the projects of
the companies both in the form of equity and loans. On the other hand, those who oppose this
practice, while conceding that financial institutions have played a significant role in the industrial
development of the country as a sole purveyor of long term credit, argue that there is an inherent
conflict when institutions through their nominees participate in board decisions and in their role
as shareholders demand accountability from the board. They also argue that there is a further
conflict because the institutions are often major players in the stock market in respect of the
shares of the companies on which they have nominees.
The Committee recognises the merit in both points of view. When companies are well
managed and performing well, the need for protection of institutional interest is much less than
when companies are badly managed or under performing. The Committee would therefore
recommend that institutions should appoint nominees on the boards of companies only on a
selective basis where such appointment is pursuant to a right under loan agreements or where
such appointment is considered necessary to protect the interest of the institution.
The Committee also recommends that when a nominee of the institutions is appointed as
a director of the company, he should have the same responsibility, be subject to the same
discipline and be accountable to the shareholders in the same manner as any other director of the
company.
15.8 CHECK YOUR PROGRESS
Fill in the blanks with suitable answers:
1. The ______ is elected by the board and its shareholders.
2. ______companies are run by the professionals who are also an employee of the company.
3. The ______ businesses are those companies who are managed/controlled by their owners.
4. The company and its board can benefit from outside contacts and______.
5. Appointment of ______to replace the retiring directors.
Answer to Check Your Progress
1. CEO
2. Professionally managed
3. Family managed
4. Opinions
5. Directors

47
15.9 SUMMARY

This unit has provided a summary in which has been in the field of Chief Executive
Officer and Corporate Governance design to Professional Managers and Family Management.
From the above discussion, we understood (Executive and Non-Executive Directors) the role and
responsibilities of the company under the companies Act, 2013.
All of us are clearly understand the restrictions on number of companies under companies
act 2013 and also minority shareholder. Annual general meeting must be held by every type of
company, public or private, limited by shares or by guarantee, with or without share capital or
unlimited company once in a year. Besides the above categories of directors, there is another set
of directors in Indian companies who are the nominees of the financial or investment institutions
to safeguard their interest. The nominees of the institutions are often chosen from among the
present or retired employees of the institutions or from outside. In the context of corporate
governance, there could be arguments both for and against the continuation of this practice.
15.10 KEYWORDS

NED : Non- Executive Director

OPC : One Person Company
CEO : Chief Executive Officer
AGM : Annual General Meeting
15.11 QUESTIONS FOR SELF STUDY
1. Discuss professional managers and family management.
2. Delineate executive and non-executive directors.
3. Explain the Role and Responsibilities of executive and non-executive directors.
4. Give an account of Restrictions on number of companies.
5. Write a note on minority shareholder.
6. Briefly explain the annual general meeting.
7. Elucidate the nominee director.

15.12 REFERENCES
1. Aswathappa.K,(2019) Essentials of Business Environment, Himalaya Publishing House.
2. Murthy C.S.V (2018) Business Ethics and Corporate Governance, Himalaya Publishing
House.

48
3. Nirmala. K, Karunakara Reddy.B. A, Aruna Rani N. (2018) Business Ethics and Corporate
Governance, Himalaya Publishing House.
4. Avtar Singh (2015) Company Law, Eastern Book Company.
5. [Link]
6. [Link]
7. [Link]
8. [Link]
9. [Link]
10. Website: Legal Raasta.

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Unit-16 BOARD COMMITTEE

Structure:

16.0 Objectives

16.1 Introduction

16.2 Audit Committee

16.3 Compensation Committee

16.3.1 Constitution and Need

16.3.2 Responsibilities and Duties

16.4 Nomination and Remuneration Committee

16.4.1 Constitution and Need

16.4.2 Duties and Rights and Responsibilities

16.5 Check Your Progress

16.6 Summary

16.7 Keywords

16.8 Questions for Self-Study

16.9 References

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16.0 OBJECTIVES

After studying this unit, you will be able to;

 Discuss the Introduction of Board Committee.

 Give an account of Audit Committee.
 Write a note on Compensation Committee.
 State the Nomination Committee and Remuneration Committee.

16.1 INTRODUCTION

So for we have discussed about chief executive officer and corporate governance. Let us
now discuss Board Committee; the oversight function of corporate governance is performed by
the company's board of directors and its designated committees. Boards of directors perform
their advisory and oversight function through well structured, planned and assigned committees
to take advantage of the expertise of all the directors. Board committee formations and
assignments depend on the size of the company, its board and assumed responsibilities.
Committee members address relevant issues and make recommendations to the entire board for
final approval. Board committees normally function independently from each other and are
provided with sufficient authority, resources and assigned responsibilities in assisting the entire
board.

16.2 AUDIT COMMITTEE

Under Companied Act 1956, public companies with a paid up capital in excess of INR
50,000,000 (Rupees fifty million only) required to set up an audit committee comprising of not
less than 3 (three) directors. At least one third had to be comprised of directors other than
Managing Directors or Whole Time Directors. Companies Act, 2013 however, requires the board
of every listed company and certain other public companies to constitute the audit committee
consisting of a minimum of 3 (three) directors, with the independent directors forming a
majority. It prescribes that a majority of members, including its Chairman, have to be persons
with the ability to read and understand financial statements. The audit committee has been
entrusted with the task of providing recommendations for appointment and remuneration of
auditors, review of independence of auditors, providing approval of related party transactions
and scrutiny over other financial mechanisms of the company.

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16.3 COMPENSATION COMMITTEE
Let us discuss compensation committee to qualify for the performance-based
compensation exception under section 162(m), payment of the compensation must meet
several requirements, including that performance goals must be set by the corpora tion‘s
―compensation committee‖. The Code defines ―compensation committee‖ as the committee
of independent directors that has the authority to establish and administer the applicable
performance goals, and certify that the performance goals are met.
Since, the name for the subset of the independent members of the board with
responsibility for executive compensation doesn‘t matter for deductibility, we wondered
whether the compensation committee name implies anything about duties and
responsibilities, and whether there are any corporate governance implications regarding the
board‘s oversight of broader human resources issues beyond executive compensation?

To shed some light on the answers to these questions, pay governance accessed
committee charters with responsibility over executive compensation for all Standard and
Poor‘s 100 companies as of June 30, 2016. On the assumption that committee charters
accurately capture duties and responsibilities, we are able to see what else is included in
the compensation committee‘s remit, and whether the committee‘s name is a hint as to
what those responsibilities might include.

16.3.1 Constitution

The Board of Directors of the Company (Board) constituted the committee to be known
as the Nomination and Remuneration Committee consisting of three non-executive directors out
of which two shall be the Independent Directors. The Chairman of the Committee shall be an
Independent Director.

Need for a Compensation Committee

There are both legal and practical reasons for a board of directors to establish a
compensation committee. As noted previously, under the new Newyork Stock Exchange (NYSE)
rules, listed companies are required to have compensation committees consisting of independent
directors. The NASDAQ rules allow companies to either establish a compensation committee
consisting of independent directors or have the independent members of the full board make key

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compensation determinations. Even for NASDAQ companies, however, having a compensation
committee is generally recommended.

In many cases, the full board does not have adequate time to evaluate complex executive
compensation issues. Having a compensation committee helps to ensure that these issues receive
the deliberation and attention that they deserve. In addition, the federal tax and securities laws
create an incentive for companies to have independent compensation committees. The
$1,000,000 cap on the tax deductibility of executive compensation under Section 162(m) of the
Internal Revenue Code contains an important exemption that is available for performance based
compensation awarded by a compensation committee consisting of two or more ―outside
directors.‖ Similarly, certain exemptions from short-swing profit liability are available under
Rule 16b-3 of the SEC for transactions in employer stock by executive officers and directors
provided that the transactions are approved in advance by a compensation committee composed
of two or more ―non-employee directors‖ (alternatively, the exemptions apply if the transactions
are approved by the full board of directors).

Practices vary among companies with respect to the degree of autonomy given to the
compensation committee. In many cases, as discussed above, it is important for the
compensation committee to have autonomy with respect to the administration of certain
incentive compensation plans in order to ensure that awards under such plans qualify for the
exemptions under Section 162(m) of the Internal Revenue Code and Rule 16b-3 of the SEC.
Some companies give the compensation committee the power to finalize other pay arrangements
on its own, without board ratification. In 11 other companies, final decisions lie with the full
board acting on the advice of the compensation committee. It is important to note, however, that
all directors are ultimately accountable for decisions regarding executive pay. Therefore, the full
board should be well informed with respect to the company‘s executive compensation programs
and the actions of the compensation committee.

16.3.2 RESPONSIBILITIES AND DUTIES

The principal responsibilities and duties of the Committee in serving the purposes are
outlined below. These duties are set forth as a guide, with the understanding that the Committee
will carry them out in a manner that is appropriate given the Company‘s needs and
circumstances. The Committee may engage in such other activities, and establish such policies

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and procedures, from time to time as it deems necessary or advisable in implementing this
Charter and fulfilling its responsibilities.

The Committee will:

1. Annually review the Company‘s overall compensation strategy, including base salary,
incentive compensation and equity-based grants, to assure that it promotes stockholder interests
and supports the Company‘s strategic and tactical objectives, and that it provides for appropriate
rewards and incentives for the Company‘s management and employees.

2. Annually review and approve the goals and objectives to be considered in determining the
compensation of the Company‘s Chief Executive Officer (the ―CEO‖) and other ―executive
officers‖ and ―officers‖ and evaluate their performance in light of these goals and objectives.

Based on this evaluation, including an evaluation of the Company‘s performance, the

Committee will have the sole authority, subject to any approval by the Board which the
Committee or legal counsel determines to be desirable or is required by applicable law or the
Exchange Rules, to approve or recommend to the Board for approval

(i) The salary paid to the Executive Officers,

(ii) The grant of all cash-based incentive compensation and equity-based compensation to
the Executive Officers,

(iii) The entering into or amendment or extension of any offer letter, employment contract
or similar arrangement with the Executive Officers,

(iv) The entering into or amendment or extension of any Executive Officer severance or
change in control arrangements, and

(v) Any other Executive Officer compensation matters; provided that the Committee may
take account of the recommendations of the Board (or any Board member) with
respect to Executive Officer compensation.

When applicable, in connection with its evaluation of Executive Officer compensation, the
Committee will consider the results of the most recent stockholder vote on executive
compensation (a ―say on pay‖ vote), communicate with shareholders or their representatives
where appropriate, and make such adjustments to Company compensation practices for

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Executive Officers as it deems appropriate in response thereto, if any. The Committee also may
take account of the recommendations of the CEO with respect to other Executive Officers for
each of the foregoing items. The CEO may not be present during voting or deliberations
regarding the CEO‘s compensation.

3. Annually review and approve or make recommendations to the Board with respect to adoption
and approval of, or amendments to, all cash-based and equity-based incentive compensation
plans and arrangements, and the cash amounts and aggregate numbers of shares reserved for
issuance thereunder, after taking into consideration the Company‘s strategies with respect to
cash-based and equity-based compensation.

4. Review and approve policies and procedures relating to perquisites and expense accounts of
Executive Officers.

5. Administer and interpret the Company‘s cash-based and equity-based compensation plans and
agreements thereunder.

In addition to the authority to delegate to a subcommittee as set forth herein, the Committee may
adopt an equity grant policy and delegate to the CEO provided that the CEO is serving as a
member of the Board at all times during such delegation, including in conjunction with one or
more officers, within the limits imposed by such policy and applicable law and the Exchange
Rules, the authority to approve cash awards or make equity grants to employees of the Company
or of any subsidiary of the Company who are not Executive Officers or directors of the
Company, provided that in the case of grants of options or stock appreciation rights, the price per
share of any grant by the CEO is not less than the fair market value of the Company‘s common
stock on the date of grant; provided further that, while such delegation may include the authority
to grant options, performance shares, stock appreciation rights, phantom stock, restricted stock
units and other types of equity awards that may be permitted under the Company‘s equity
incentive plans, such delegation will not include authority to grant restricted stock awards or
stock bonus awards. The CEO shall promptly inform the Committee members in writing (which
includes email) of any equity grants made pursuant to this provision, which notice shall include
each grantee‘s name, grant date, exercise price and number of shares. The equity grant policy
shall state the maximum number of shares that may be granted pursuant to this delegation in any
calendar year to any one individual and shall require the maintenance of a written record of

55
equity awards granted pursuant to this delegation and the material terms of those awards,
including the grantee‘s name, exercise price (if applicable), number of shares subject to those
grants, and the vesting provision.

6. Meet with the CEO periodically to discuss the incentive compensation programs to be in effect
for the other Executive Officers and for other employees of the Company or any Company
subsidiary for such fiscal year, and the corporate goals and objectives relevant to those programs
and performance targets applicable to the Executive Officers and, where appropriate, other
employees of the Company or any subsidiary.

7. Approve, or recommend to the Board for approval, adoption, amendment and termination of
the Company‘s 401(k) plan and any deferred compensation plans and similar programs
(collectively, the ―Designated Plans‖). Oversee the administration of the Designated Plans and, if
desired, delegate the routine administration of the Designated Plans to an administrative
committee consisting of employees of the Company named by the Committee.

8. Recommend to the Board, for determination by the Board, the form and amount of cash-based
and equity-based compensation to be paid or awarded to the Company‘s non-employee directors,
including compensation for service on the Board or on committees of the Board.

9. Review with management, the Company‘s major compensation-related risk exposures and the
steps management has taken to monitor or mitigate such exposures.

10. When applicable make recommendations to the Board regarding the frequency with which
shareholder ―say on pay‖ votes should occur, including whether to make any such
recommendation at all regarding the frequency of such votes. Following any such ―say on pay‖
frequency vote, make recommendations to the Board regarding the frequency with which ―say on
pay‖ votes shall be included in the Company‘s proxy statements pending the next such ―say on
pay‖ frequency vote.

16.4 NOMINATION AND REMUNERATION COMMITTEE

While Company Act 1956 did not require companies to set up nomination and
remuneration committee, the listing agreement provided companies with the option to constitute
a remuneration committee. However, Companies Act 2013 requires the board of every listed
company to constitute the Nomination and Remuneration Committee consisting of 3 (three) or

56
more non-executive directors out of which not less than one half are required to be independent
directors. The committee has the task of identifying persons who are qualified to become
directors and provide recommendations to the board regarding their appointment and removal, as
well as carry out their performance evaluation.
16.4.1 Need for a Nomination and Remuneration Committee

1. Following class of companies are obligated to constitute Nomination and Remuneration

Committee as per the provisions of Companies Act, 2013 and SEBI (LODR) Regulations,
2015-

a. Every listed public company

b. Public Companies having paid up share capital of `. 10 crores or more

c. Public Companies having turnover of `. 100 crores or more

d. Public Companies having net total outstanding loans, debentures and deposits
exceeding `. 50 crores

2. Minimum number of directors;

 3 or more non-executive directors out of which at least 1/2 shall be independent directors
[as per the provisions of Companies Act, 2013]

 3 directors, all of which shall be non-executive directors and at least 50% shall be
independent directors [as per the provisions of SEBI (LODR) Regulations, 2015].

3. Nomination and Remuneration Committee shall meet at least once in a year.

4. Chairperson of the Nomination and Remuneration Committee shall be an independent

director (In case of a listed entity, chairperson may be appointed as a member of the
Committee and shall not chair such Committee).

16.4.2 DUTIES, RIGHTS AND RESPONSIBILITIES:

1. The Committee is authorised to review the following:
a. Elements of the remuneration package i.e. salary, perquisites, retirement benefits, pension,
separation compensation, and the structure of the remuneration package viz., the
proportion of fixed and variable component, annual / mid-term increments, merit rewards,
special payments, etc., of the Managing / Executive Director and that of the Key
Managerial Personnel.

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 b. Changes to remuneration package, terms of appointment, notice period, severance fees,
recruitment, retention and termination policies and procedures;
2. To recommend the shortlisted candidates who are qualified to become directors and who may
be appointed in senior management and recommend to the Board their appointment and / or
removal.
3. The Committee shall review the succession plans, if any, for both executive and non-
executive Directors.
4. The Committee is authorized to seek any information it requires about any employee and the
management is directed to co-operate with any request made by the Committee.
5. The Committee may obtain outside legal or other independent professional advice with regard
to issues pertaining to remuneration, incentives etc. Pertaining to industry practices as and
when required.
6. The Chairman of the Committee could be present at the Annual General Meeting to answer
shareholders' queries.

16.5 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. At least one third had to be comprised of directors other than _____ or Whole Time Directors.
2. Compensation exeption under Section _____.
3. Cash-based incentive compensation and _____ to the Executive Officers
4. _____ is serving as a member of the Board
5. Nomination and _____ shall meet at least once in a year

Answer to Check Your Progress

1. Managing Directors
2. 162(m)
3. Equity-based compensation
4. CEO
5. Remuneration Committee

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16.6 SUMMARY

As observed in the broad manner, the Board committee consists of a smaller working group
of board of directors, to assist the enterprise in managing its governance needs, are essential to drive
complex issues facing an enterprise today. Since each committee is constituted for a specific
purpose, the membership is based on the expertise of board members in that area, especially when
these committees enable better management of time and more in-depth discussions.

All of us have clearly understand the Audit Committee, Compensation Committee and
Nomination and Remuneration Committee. Finally this unit is ended with the discussion of
constitution, need and also Rights, Duties and Responsibilities of Compensation Committee,
Nomination and Remuneration Committee.

16.7 KEYWORDS

NYSE : NASDAQ and the American Stock Exchange

SEC : Stock by Executive Officers

CEO : Chief Executive Officer

SEBI : Security Exchange Board of India

16.8 QUESTIONS FOR SELF STUDY

1. What is Audit Committee?

2. Give an account of Compensation Committee.

3. Highlight the need for Compensation Committee.

4. Write a note on Nomination and Remuneration Committee.

5. Discuss the Rights and Responsibilities of Compensation Committee.

6. Explain the Rights and Responsibilities of Nomination and Remuneration Committee.

16.9 REFERENCES

1. Aswathappa.K,(2019) Essentials of Business Environment, Himalaya Publishing House.

2. Murthy C.S.V (2018) Business Ethics and Corporate Governance, Himalaya Publishing
House.

59
3. Nirmala. K, Karunakara Reddy.B. A, Aruna Rani N. (2018) Business Ethics and Corporate
Governance, Himalaya Publishing House.
4. Avtar Singh (2015) Company Law, Eastern Book Company
5. [Link]
6. [Link]

60