Business Environment

Business Environment VIMAL JOSHI
Unit-I
Nature, components and determinants of business environment; basic nature of Indian
economic system; relation size and growth of public and private corporate sector; social
responsibility of business; broad features of India’s now economic policy.
Q.1 What are the main components of Business Environment? Account for the inherent
dynamism of business environment.
Ans. Generally Business refers to those activities that are related to the buying and selling of
goods.
Business Environment consists of all those factors that have a bearing on the business.
The survival and success of a business firm depend on its strength, resources at its command,
including physical resources, financial resources, human resources, skill and organisation and
its adaptability to the environment and the extend to which environment is favourable to the
development of the organization. The survival and success of a fir, thus, depend on two sets of
factors, viz., the internal factors the internal environment and external factors- the external
environment.
Some of the external factors have a direct intimate impact on the firm (like the suppliers and
distributors) of the firm. These factors are classified as microenvironment also known as task
environment and operating environment. These are other external factors which effect an
industry very generally (such as industrial policy, demography factors etc.). They constitute what
is called macro-environment, general environment or remote environment.
Hence business environment has three components.
− Internal environment
− Micro environment/task environment/operating environment
− Macro environment/general environment/remote environment
Internal Environment
The important internal factors which have a bearing on an organisation include:
a) Value system: The value system of the founders and those at the helm of affairs has
imported bearing on the choice of business, the mission and objective of the
organisation, business policies and practices.
b) 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 e.g. Ranbaxy’s thrust in to the foreign markets and
development have been driven by its mission “to become a research based international
pharmaceutical company.”
c) Management Structure and Nature: The organisation structures the composition of the
Board of Directors, experts of professionalisation of management etc. are important
factors influencing business decisions. Some management structures and styles delay
decision while some others facilitate quick decisions making.
d) 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.
e) Human Resources: The characteristics of the human resources like skill, quality, morale,
commitment, attitude etc. could contribute to the strength and weakness of an
organisation.
Company Image and Brand Equity: The image of the company matters while raising finance,
forming, joint venture or other alliances, soliciting marketing intermediaries, entering purchase
or sale contracts, launching new products etc.
Microenvironment: The microenvironment consists of the actors in the company’s immediate

environment that affects the performance of the company. These include the suppliers,
marketing intermediaries, competitors, customers’ etc.
Suppliers: Supplier supply the inputs like raw materials and components to the company. For
the smooth functioning of business, it is important to have a reliable source of supply of raw
material and components.
Marketing intermediaries: Marketing intermediaries are the firms that aid the company in
promoting, selling and distributing its goods to final buyers.
Marketing intermediaries include middlemen such as agents and merchants like: help the
company find customers or close sales with them “, physical distribution firms which assist the
company in stocking and moving goods from their origin to their destination such as advertising
agencies marketing research firms etc and financial intermediaries which finance marketing
activities and insure business risk.
Competitors: The firm’s competitors include not only the other firms which market the same or
similar products but also all those compete for the discretionary income of the consumers. An
implication of these different demands is that a marketer should strive to create primary and
selective demand for his products.
Customers: The major task of a business is to create and sustain customers. A business exists
only because of its customers monitoring the customer sensitivities, therefore, prerequisite for
the business success. A company may have different categories of customers like individuals,
households, industries and other commercial establishments, and government and other
institutions.
With the growing globalization, the customer environment is increasingly becoming global. Not
only the markets of other countries are becoming more open the Indian market is becoming
more exposed to the global competition and the Indian customer is becoming more “global” in
his shopping.
Macro Environment: The macro environment consists of the societal forces that affect all the
sectors in the company’s macro environment namely, the demographic, economic, natural,
technological, political and cultural forces. These environment forces are beyond the control of a
firm, its success will depend to a very large extend on its adaptability to the environment.
Socio-cultural Environment: The buying and consumption habits of the people, their language,
beliefs and values, customs and traditions, tastes and preferences, education etc are the
constituents of Socio-economic environment.
For a business to be successful, its strategies should be the one that is appropriate in the Socio-
cultural environment. The marketing characteristics of the market e.g. Nestle, a Swiss
multinational company brews more than forty varieties of instant coffees as per different national
tastes.
Natural Environment: Difference in geographical conditions between markets may sometimes

call for changes in the marketing mix, geographical and ecological factors also influence the
location of certain industries, climate and weather conditions affect the location of certain
industries like the cotton textile industry. Topographical factors may affect the demand pattern.
For example, in hilly areas with a difficult terrain, jeeps may be in greater demand than cars.
Demographical Environment: Demographic factors like the size, age composition, sex
composition etc of the population, family size, educational levels, language, religion etc are all
factors which are relevant to business.
The occupational and spatial mobility of population have implications for business if labour is
easily mobile between different occupations and regions, its supply will be relatively smooth and
this will affect wage rate.
Technological Environment: Technological developments may increase the demand for some
existing products. For example, voltage stabilizers help increase the sale of electrical appliances
in market characterized by frequent voltage fluctuations in power supply. However, the
introduction of TVs, refrigerators etc. with build-in-voltage stabilizers adversely affects the
demand for voltage stabilizers.
Political Environment: Political and government has close relationship with the economic system
and economics policy. Certain changes in government policies such as the industrial policy,
traffic policy, fiscal policy etc. may have profocused impact on business. In may countries with a
view to protecting consumer business. In many countries with a view to protecting consumer
interests, regulations have become stronger. Regulations to protect the purity of the
environment and preserve the ecological balance have assumed great importance in many
counties.
. 2 What do you mean by social responsibility of business: Why should business

oirganisation by socially responsible?
Ans. As business operates in society, it can’t exist and grows unless it cares for society. It exist
vis-à-vis with society. It is required to meet different needs of the society. For meeting these
needs, business has certain social responsibilities to discharge. “Cooperate social
responsibilities” is defined as considering the impact of the company’s action on society. A
newer concept,” social responsibilities”, is defined as the ability of a cooperation to relate it’s
operation and policies to social environment in ways that are mutually beneficial to both the
company and society. Social responsibilities of business are different for different sections of
society, which include responsibilities towards
(a) employees
(b) consumers
(c) Government
(d) Society as a whole
Responsibilities towards employee
1. Fair wages and regular payment.

2. Good working conditions and safety
3. Reasonable working standards and norms
4. Labour welfare services,- Health, education, recreation and accommodation
5. Training and promotion
6. Recognition and respect for hard work, honesty, sincerity and loyalty
7. Efficiency of redressing employees grievances.
Responsibilities towards customers
1. Providing goods and services at a reasonable price

2. Supply goods and services of promised quality, durability and services.
3. Supply social harmless products.
4. Offering an efficient consumer redressal mechanism
5. Resisting profiteering and black marketing.
6. Improving product quality towards R & D.
Responsibilities towards government
1. Regular payment of taxes.

2. Resisting bribing, bureaucrat and administers.
3. Cooperating with go of in up gradation of environment.
4. Cooperating with go of in social values.
Responsibilities towards society as a whole
1. Prevention of environmental pollution.

2. Preservation of ethical and moral values.
3. Making provision of health education and cultural services.
4. Minimizing ecological imbalance.
Q3 Explain the ways in which private corporate sector has been liberalised under the
new economic policy. Has liberalization accelerated industrialization process in the
country?
Ans- In response to the economic crises of 1991, the govt. embarked on a wide-ranging reform
of the policy regime. Prior to 1991 the Indian economy was a highly regulated economy. In the
July 1991 the beginning was made to dismantle controls which over the time had become a
major obstacle to industrial growth. Policy changes made to unshackle the economy from
controls and to orient it towards the free market are known as the Liberalization measures.
These measures are related to
(a) the industrial sector

(b) the trade region
(c) foreign investment & technology
(d) public sector
(e) the financial sector
In the financial sector, barriers to entry for new firms and limits on growth in the size of existing
firms have been removed. Industrial licensing has been abolished for most of the industries
irrespective of the levels of investment. The MRTP Act has been amended to remove the
threshold limit of one billion rupees on the assets of large business houses. The prior approval
from the govt. is no longer required for capacity creation, amalgamation, merger or acquisition
on the part of such companies.
The policy regime for foreign investment and foreign technology has been liberalized at a rapid
pace. The govt. now wants to enlarge non-debt-creating inflows. Hence, prior approval for
foreign investment is not the rule. It may be required in expected cases. The liberal access to
imports to technology aims at facilitating technology up gradation, which is a necessary
condition for increasing international competitiveness in industry.
The trade policy reforms have a limited quantitative restriction on imports and exports. Further,
these has been a substantial reduction in tariffs on imports along With abolition of subsidies in
exports. The exchange rate changes have led to a sizable depreciation of the rupee. It is hoped
that the exposure of domestic firms to international competition in this manner will compels them
to become more efficient
In this relatively open environment domestic firms will have to upgrade technology, reduce cost
and improve the quality of product.
Till recently the commercial banking system and the domestic capital market were over
regulated and under-governed. Over the past few years and attempt has been made to improve
the health of the financial sector through deregulation. With the reductions in the statutory
liquidity ratio and cash reserve ratio resources received by the banks in the form of deposits are
not preempted by the govt. but are made available to the private sector. Interest rates in the
domestic capital have been deregulated.
Liberalization has definitely led to increases industrialization. Direct foreign direct investment
has accelerated the industrial growth. Now, it is necessary that Indian firms penetrate foreign
markets. In December 1995, the no. of Indian joint ventures abroad was 592 of which 70% were
concentrated in just thirteen countries.
The Indian corporate business does not consider the presence of foreign companies in India
beneficial to them. In fact, many Indian companies now find that they are the target rather than
beneficiaries of the increased activity of foreign MNCs. It is argued that under the present
circumstances, one need not become defeatist about foreign MNCs. The correct approach is to
create our own MNCs. This, however, is easier said than done. The less developed companies
have failed to create major players in the global economy. Indian business at the most can hope
to survive only in those industries in which major global players have little stakes.
Q4 Explain the major public sector reforms that have been undertaken since 1991. have
these reforms improved the performance of public sector enterprises?
Ans- The Public sector has been central to India’s industrialization within the mixed economy
framework. The industrial Policy Resolution 1956 accorded a strategic role to public enterprises.
Accordingly, areas of strategic importance and core sectors were exclusively reserved for public
sector enterprises. Public enterprise was accorded preference even in areas where private
investments were possible. Public enterprises grew dominantly in terms of units and
investments both at the central and state levels. In 1993, number of central Public Enterprises
stood at 237 with an investment of Rs 1,47,000 crore.
However, the performance of public sector enterprises has been far from satisfactory. Its
protected growth over a period of time, has resulted in many shortcomings:
• insufficient growth in productivity

• poor project management
• inadequate attention to research & development
• low rate of return on investment
As a result, many public enterprises become a burden rather than an asset. One third of public
enterprises were accounted for by nationalized sick units. A number of public enterprises had
come up in non-strategic non-core, consumer goods and service sectors. In 1993, only about
60% of total investment in public enterprises was in the areas originally envisaged as the
“commanding height”. All these necessitated a change in approach. Industrial policy 1991
emphasized that public enterprises must be growth oriented and technologically dynamic.
Therefore, Industrial Policy 1991 set the future priorities for public enterprises as follows:
# Essential infrastructural goods & services.

# Exploration and exploitation of oil & minerals
# Manufacture of goods of strategic importance
# Development of technology and manufacturing capabilities in crucial areas for long term
economic development
Thus, public sector would be confined to strategic, high tech industries and essential
infrastructure. Chronically sick and unviable public sectors units would be referred to Board for
industrial & financial reconstruction (BIFR)
Workers of such units would be protected. In February 1992, the govt. established a non-
statutory National Renewal Fund (NRF) to provide assistance to cover the cost of retraining and
redeployment of labour and also provide compensation to labour affected by the closure of
unviable public sector units etc.
There is a greater thrust on the performance improvement through the memorandum of

understanding (MOU) by which management is granted greater autonomy and is held
accountable. Technical expertise on the part of the govt. is upgraded to make the MOU
negotiations and implementation more effective.
In February 1962, the govt. of India announced its decision to permit public sector undertaking
to float bonds. The move was aimed at mobilising extra budgetary resources for the public
sector and was applicable to all state enterprise fully owned by central govt. the Controller of
capital issues in the connection for floatation of bonds by existing as well as new corporate
undertakings including. Finance Corporation issued guidelines.
The major aim of economic reforms is to improve the public sector so that rate of return
improves. To remedy the situation, it was necessary that the overstaffing of the public sector
undertaking (PSUs) be reduced. The govt. has taken steps in this direction by its Voluntary
retirement scheme (VRS). In 1990-91, there were 22.19 lakh employees in PSUs of the central
govt.. but in 1994-95 their number has been reduced to 20.41 lakh. This implies that, as a result
of VRS, overstaffing has been reduced by 8%.
The net results of the efforts of the Govt. (URS,MO U Policy etc.) was that the overall net profit
earned by central PSEs increased from Rs. 4,545 crores on 1993-94 to Rs. 7,217 crores which
signify an increase of 58.8% over the previous year. This is a welcome development.
On the whole the reforms of PSUs, including privatization and phasing out of unviable units
have not gathered as much momentum as had been hoped for. Investment has been piecemeal
and the funds so raised are being used to reduce budget deficits rather than strengthening of
PSUs. Along with this, labour problems, Political and bureaucratic subordinate. Similarly
gestures taken by the listeners can help the communicator to know their reactions.
Essential Qualities of Good Business Report
A well written business report can help avoid semantic and perception barriers. A well written
business report eliminates the possibility of misunderstanding and misinterpretation. In writing
messages, it is necessary to be precise, making the meaning as clear as possible so that it
accomplishes the desired purpose. The language used should be simple, as it will be lost if the
words used are complex and do not lend to clear single meaning. Vagueness destroys accuracy
which leads to misunderstanding of the meaning or intent of the message. Accordingly be
specific and to the point.
There is great importance of timing in Business communication. The communication should not
only be timely so that the decisions and actions can be taken in time and when necessary but
also the timing of the message and the environment setting in which the message is delivered
and received is equally important. An important message delivered at he wrong time or in a non-
conducive environment may lose its effectiveness.
Business communication must pass through the proper channels to reach the intended receiver.
The communication flow ant its spread must avoid by passing levels or people. When these
concerned levels are omitted or by passed, it creates bickering distrust confusion and conflict.
Accordingly the established channels must be used as required.
Unless it is one-way communication that is simply meant to inform al business, communication

needs a follow up to ensure that is was properly understood and carried out. A verbal
communication may need to be followed up by written confirmation. The response and feedback
to the communication would determine. Whether the action to the communication has been
appropriate and accurate.
Business communication should be complete so as not only to meet the demands of today but
should also be based on future need of the organization as well as individuals. A reasonable
projection and assessment of future needs environment both work and be incorporate when
planning and executing communication.
The typical business firm usually considers three types of strategy: corporate: business
and functional.
Corporate Strategy:- It decides a company’s overall direction in terms of its general attitude
towards growth and the management of its various business and product lines. Corporate
strategies typically fit within the three main categories, of stability, growth and retrenchment.
Business Strategy:- usually occurs at the business unit or product level, & it emphasizes
improvement of the competitive position of a corporations’ products or services in the specific
industry or market segment served by that business unit.
Functional Strategy:- is the approach taken by a functional area to achieve corporate &
business unit objectives & strategies by maximizing resource productivity. It is concerned with
developing & nurturing a distinctive competence to provide a company or business unit with a
competitive advantage.
Business firms use all three types of Strategy Simultaneously. A hierarchy of Strategy is
the grouping of strategy types by level in the organization.
This hierarchy of strategy is a nesting of one strategy within anther so that they complement &
support one another.
Functional strategies support strategies, which, in turn, Support the corporate Strategy (ies).
Policies:-
A Policy is a broad guideline for decision making that links the formulation of strategy
with its implementation. Companies use polices to make sure that employees throughout the
firm make decisions & take actions that support the corporations’ mission, objectives and
strategies.
Strategy Implementation:-
Strategy implementation is the process by which Strateges & polices are put into action through
the development of programs, budgets & procedures. This process might involve changes
within the overall culture, structure, & or management system of the entire organization. Except
when such drastic corporate-wide changes are needed, however, the implementation of
strategy is typically conducted by middle & lower level managers with review by top
management. Sometimes referred to as operational planning, strategy implementation often
involves day-to-day decisions is resource allocation.
Programs:-
A program is a statement of the activities or steps needed to accomplish a single use

plan. It makes the strategy action oriented. It may involve restructuring the corporation,
changing the company’s internal culture, or beginning a now research effort.
Budgets:-
A budget is a statement of a corporations programs in terms of dollars. Used in planning

& control, a budget lists the detailed cost of each program. Many corporations demand & certain
percentage return on investment often called a “hurdle rate”, before management will approve a
new program. This ensures that the new program will significantly add to the corporations’ profit
performance & thus build shareholder value. The budget thus not only serves as a detailed plan
of the new strategy in action, but also specifies through pro forma financial statements the
expected impact on the firms financial future.
Procedures:-
Procedures, Sometimes termed Standard Operating Procedures (SOP), are a system of
interface have not been effectively reduced. Since it is not possible to privatize a large
component of the public sector, it would be advisable to reform it.
Unit-II
Trend and pattern of industrial growth; review of industrial policy developments; industrial
licensing policy; liberalisation of the private sector; trends and issues in corporate
management; growth and problems of the small scale sector; public sector reforms and
privatisation the problem of industrial sickness; MRTP Act, SICA and Industrial Disputes Act.
Industrial licensing Policy
The Indian government resorted to the licensing system in order to maintain control over
industries according to the Industrial, (Development and control Act 1951. A license is a written
permission granted to an enterprise by the government according to which the product
mentioned therein can be manufactured by the enterprise. The license also includes many other
particular such as:-
(i) The place where the factory is to be established.

(ii) The name of the product to be produced.
(iii) The limit of production capacity.
(iv) Expansion of the enterprises etc.
If a new company has to be formed, the industrial license in the first instance, is issued
in the name of the applicant and later when the company has been formed, the necessary
endorsement to that effect will be made in the license.
It is also subject to a validity period with in which the licensed capacity should be
established.
Objectives:-
Encouraging new entrepreneurs & wider dispersal of industrial ownership, prevention of

concentration of economic power, protection & promotion of the small-scale sector, regulation of
foreign capital & technology & scale economics, achieving demand-supply balance promotion of
exports & import substitution employment generation etc. Before the policy liber alisation of
1991, a license was required for following purposes:-
(i) Establisment of new undertaking.

(ii) Manufacture of new item.
(iii) Substantial expansion of capacity.
(iv) Continuation of business in certain cases.
(v) Change of location.
The New Policy:-
The industrial policy announced in July 1991 has abolished industrial licensing, irrespective of
the levels of investment, for all industries exempt 18 specified industries. There has been
subsequent liberalizations.
Industries for which industrial licensing is compulsory now are the following:-
1) Distillation & brewing of alcoholic drinks.

2) Cigars & Cigarettes of tobacco & manufactured tobacco substitutes.
3) Electronic Aerospace & defence equipment all types.
4) Industrial explosives including safety fuses, gen powder & matches.
5) Hazardous chemicals
6) Drugs & Pharmaceuticals.
The Compulsory licensing provisions would not apply in respect of small scale units taking up
the manufacture of any of the above items reserved for exclusive manufacture in small scale
sector.
Locational Policy:-
Industrial undertakings are free to select the location of a project. In the case of cities
with population of more than a million (as per the 1991Census), however, the proposed location
should be at least 25 KM away from the Standard Urban Area limits of that city unless, it is to be
located in an area designated as an “industrial area” before the 25th July 1991. Electronics,
Computer Software & Printing ( and any other industry which may be notified in future as “non
polluting industry”) are exempt from such locational restriction. Relaration in the a foresaid
locational restriction is possible if an industrial license in obtained as per the notified procedure.
Small Scale Industries Sector
The Central excise Department, on the other hand distinguishes Small Scale industries on the
basis of annual turnover of the units (upto a maximum limit of Rs 30 million).
(1) S.S.I. Undertaking:- An industrial undertaking in which the investment in Plant and
Machinery, whether held on ownership terms or on lease/hire-Purchase basis does not exceed
Rs 10 million is graded as small scale industrial undertaking. ( The Investment ceiling has been
revised from time to time. It was Rs 7.5 Lakkhs in 1966 and Rs 30 million in 1997). However, in
1999 the government decided to lower the investment ceiling from Rs 30 million to Rs 10
million).
(2) Ancillary Industrial Under taking:- An industrial undertaking which is engaged or is

proposed to be engaged in the manufacture or production of parts, component or rendering the
services is termed as ancillary undertaking. The ancillary undertaking has to supply or render or
propose to supply or render not less than 50% of its production or services as the case may be,
to one or more other industrial undertaking.
(3) Tinny Enterprise:- is a unit treated as tiny enterprise where investment in Plant &
Machinery does not exceed Rs 0.5 million, irrespective of cocation of the unit.
(4) Small scale service and Business Enterprise (SSSBES): Enterprise rendering industry
related Services business with investment up to Rs 0.5 million in fixed assets, excluding land
and building are called SSSBES.
EOU (Export Oriented Units)-

A unit with an obligation to export at least 30% of its annual production at the having
investment ceiling in fixed assets-plant & Machinery up to 10 million is regarded as an EOU.
The definition of SSI is linked to the question of Ownership. SSI units cannot be
controlled or owned a subsidiary of any other industrial undertaking. This combined investment
of all the units set up by the same Proprietor/ partner should not exceed the total investment
limit fixed for an SSI.
As regards the formation of an SSI as a limited company, the equity investment by other
companies in SSI’s should not exceed 24%.
The distinguishing features & major advantages of these industries particularly khadi & Village
industries are:-
(1) In an economy, like India, Characterized by abundant labour supply and the concomitant
Labour force, Khadi, Village and small industries assume special significance because of its
high employment potential.
(2) Another major advantage is their ability provide employment in the off-season. To a large
number of people, agriculture provides only seasonal employment opportunities during the off-
season and help many household’s mitigate their problem during off-season.
(3) Some to these industries provide employment opportunities within the household premises
and some other near the place of residence the locational advantage of these industries are
thus, very great.
(4) Because of low capital-output ratio and low gestation period they promote non-inflationary
growth.
(5) Khadi & Village industries have been found to be of particular help to the weaker sections of
the society. The participation of scheduled castes, scheduled tribes, women & other weaker
sections of Society in this sector is significant.
(6) These industries can develop in almost all areas including backward, tribal, hilly and in
accessible areas. They are thus, helpful in activities and thereby reducing the regional economic
imbalance.
(7) They help increases the pace of veiral development through its inputs & output linkages with
the other sectors of rural economy.
(8) The small industries have acquired more attention in recent years due to very less ecological
problems they create, compared to large industries.
(9) As Khadi & village industries do not use or use only very little electric power or oil, they do
not cause energy crisis & foreign exchange crises.
(10) The fact that the village and small industries account for about one-third of our total export
earning shows how important they are to the Indian economy constrained by shortage of foreign
exchange.
Measures:-
(1) Reservation of Products:-
Protection has been provided to the small-scale units by the reservation of items for
exclusive production in small scale sector. Over the gears there had been an increase in
number of items so reserved, but has significantly reduced it recently.
(2) Machinery on Hire Purchase:-
The National small Industries Corporation (NSIC) arrange supply of machines on hire
purchase to small scale units.
(3) Marketing Assistance:-
Including export promotion assistance are provided by institutions. Such as NSIC Small
Industries Development organization (SIDO), kvic etc.
(4) Supply of Raw Materials:-
Arrangements have also been made for the supply of raw materials, particularly of
scarce items, to the small scale units.
(5) Training:- Training for existing & potential entrepreneurs and others associated with the
working of small units are offered by Entrepreneurship Development Institute of India (EDII),
Technical Consultancy Organisations (TCOs), financial institutions and commercial banks, etc.
Problems of Small-Scale Sector
(1) Problem of Raw Material & Power:-
These industries do not get raw material in adequate quantity. Whatever raw material
they get is poor in quality and high in price. It increases the cost of production & goods
produced are of inferior quality.
(2) Problem of Finance:-
These industries do not get adequate loan facilities, as they cannot offer good security
because of poverty. They get very little financial accommodation from commercial banks and
industrial co-operative societies. So they largely depend on money-lenders for finance.
(3) Old methods of Production:-
Old tools & equipments like oil expellers and handlooms, are still in use. The result is fall
in the quantity of output & goods produced are of inferior quality. Such goods have little
demand.
(4) Problem of Marketing:-

These Industries have to face lot of difficulties in selling their goods at fair price & in
sufficient quantity for example:-
(a) because of high cost of Production, price of finished product increases very high.
(b) outward appearance of the finished product is not so appealing.
(c) These industries can ill afford to bear advertisement and publicity cost. So their goods are
not so popular.
(5) High Cost of Production:-
Costs of Production are very high in these industries. It is due to high cost of raw
material industries fail to compete with large industries.
(6) Competition with Large scale industries:-
One of the main problems of these industries is that they have to face competition of
large-scale industries, Finished products of large industries are relatively cheap and of good
quantity.
(7) More Taxes:-
Goods produced by the industries are heavily taxed by local authorities. Hence, their
cost of Production goes up & the price of finished products also rises.
(8) Lack of Standardisation:-
There is no standardization of finished products. For want of classification, workers do

not get remunerative prices of their goods.
(9) Sick Units:-
In India, about 25% small industries are sick. The sick units are running under loss.
Growth of Public Sector
Public enterprises refers to that industrial institution which is owned, managed and
controlled by the state.
Objectives:-
1) To help in rapid economic growth & industrialisation of country & create the necessary
infrastructure for economic development.
2) To earn return on investment & thus generate resources for development.
3) To promote redistribution of income & wealth.
4) To create employment opportunities.

5) To promote balanced regional development.
6) To assist the development of small-scale & ancillary industries.
7) To promote import substitution, save & earn foreign exchange for the economy.
Growth and Performance of Public Enterprises:-
These had been a phenomenal growth of the Public since the commencement of
Planning. In fact, even before the commencement of planning & adoption of goal of socialistic
pattern of society, the Public sector was assigned an important role in industrialisation &
economic development of the country. The Industrial Policy Resolution of 1948 made it very
clear that the manufacture of arms, and ammunition, the production & control of atomic energy
and the ownership and management of railway transport would be exclusive monopoly of
central government. It was resolved further that in another six industries the State alone would
set up new undertakings. These six industries were: coal, iron & steel, aircraft manufacture,
ship-building, manufacture of telephone, telegraph and wireless apparatus, excluding radio
receiving sets and mineral oils.
The Industrial Policy Resolution of 1956 enlarged the role of Public sector. Schedule A
to the Resolution enumerated 17 industries, the future development of which would be the
exclusive right of the state. Schedule B to the Industrial policy Resolution 1956, contained a list
of 12 industries which would be progressively state-owned and in which the state would,
therefore, generally take the initiative in establishing new units.
The four decades since the commencement of Planning witnessed a substantial growth
and expansion of Public sector in India. Investment in industrial undertaking by central
government increased from Rs 29 crores in 5 units at the commencement of First 5 Year Plan
(1951) to Rs 118492 crore at the commencement of Eighth Plan (1992) in 237 units. It further
increased to over 2 lakh crore (Rs 201,500 crore) spread over 238 units at the commencement
of the 9th Plan (1997). At the end of 1998-99, it was about Rs 273700 crore in 235 units.
Growth of Public Enterprises
At the commencement of Investment (Rs. Crore) Total Number of

Enterprises
Ist Plan (1-4-1951) 29 5
2nd Plan (1-4-1956 81 21
3rd Plan (1-4-1961) 953 48
4th Plan (1-4-1969) 3902 85
5th Plan (1-4-1974) 6237 122
6th Plan (1-4-1980) 18225 186
7th Plan (1-4-1985) 42811 221
8th Plan (1-4-1992) 118492 237
9th Plan (1-4-1997 201500 238
Ason 31st March 1999 273700 235
There were also about 100 state level public enterprises (SLPES) with an estimated investment
of about Rs 50,000 crores.
Major Part of the Central Public Sector investment was in the steel, coal, minerals & metals
power & petroleum sectors.
Privatisation:-
Meaning:- Privatisation means transfer of ownership or management of an enterprise from

public sector to private Sector. it also means withdrawal of state from an industry or sector
partially or fully. Another dimension of privatization is opening up of an industry that has been
reserved for Public sector to Private sector.
Due to following problems given below, the governments undertake programmes for
shifting public sector into private sector:-
(1) Economic inefficiency in production activities of public sector, with high cost of production
and costly delays in delivery of goods purchased.
(2). In effectiveness in provision of goods and services, such as failure to meet intended
objectives, and political interference in the management of enterprises.
(3) Rapid expansion of bureaucracy, causing problems in Labour relations with in public sector,
inefficiency in government and adverse effect on whole economy.
Ways of Privatization:-
In Britain, the staff of Privatized company have a priority in buying shares and are
entitled to a discount. One of important way of Privatisation is divestiture or privatization of
ownership, through Sale of equity. In countries where there are well functioning capital markets,
this entails selling stock to public. In Republic of korea, the government pioneered the
establishment of basic industries such as oil refining, steel and machine tools and them sold
them to the Private sector once their profitability was established, using funds raised to pioneer
other instruies.
Another way of Privatisation is contracting. Government may contract out services they have
planned & specified to other organizations that produce & deliver them.
Franchising- authorizing the delivery of certain services in designated geographical areas- is

common in utilities and urban transport. Contracting is common in public works, defence and
many specialised services. But there is scope for compition in contracting & long term contracts
tends to encourage monopolistic behaviour by private supplier Privatization may also take the
form of privatisation of management, using leases and management contracts.
Obstacles:-
As the World Bank points out, government confront Several obstacles like those
mentioned below, when they decide to divest SOE’s.
(1) Government usually want to sell the least profitable enterprises, those that the private sector
is not willing to buy at a price acceptable to the government.
(2) Relatively underveloped capital market sometimes make it difficult for governments to float
shares and for individual buyers to finance large purchases.
Conditions for success of Privatisation:-
1) Privatization cannot be sustained unless the political leadership is committed to it and unless
it reflects a shift in preferences of public arising out of dissatisfaction with performance of other
alternatives.
2) Any alternative institutional arrangements chosen should not stifle competition among
suppliers.
3) The third, related, condition is freedom of entry to provide goods and services.
4) Public services to be provided by private sector must be specific or have measurable

outcome.
5) Consumers should be able to link benefits they receive from a service to the costs they pay
for it, since they will then shop more wisely for different services.
6) Privately Provided services should be less susceptible to fraud than government services if
they are to be effective.
Benefits of Privatisation:-
1) It reduces fiscal burden of the state by relieving it of the losses of SOES and reducing size of
bureaucracy.
2) Privatisation of SOES enables the government to nop up funds. Government of India’s

Budget for 2000-01 proposed to raise Rs 10,000 crore during the year through Privatisation.
3) It help the state to trm size of administrative machinery.
4) It enables the government to concentrate more on essential state functions.
5) It helps accelerate the pace of economic development as it attracts more resources from
Private sector for development.
6) It may result in better management of the enterprise.
7) It may also encourage enter preneurship.
8) It may increases the number of workers & common man who are shareholders.
Failure of Privatisation:-
(1) Lack of Proper Strategy:-
Regarding industries to be privatized, the methods of Privatisation, extent of divestment,

selection of buyer/investor etc.
(2) Ambiguity of Objectives:-
The real objective of Privatisation is another problem. Is it for making enterprise

competitive? If these are multiple objectives, what is priority list?
(3) Poor Financial Strategies:-
Many Privatizations are carried out without a good financial strategy.
(4) Monopoly Elements:-
Privatisation may not produce much beneficial effects, it could even worsen the situation.
(5) Problems of Cultural changes:-
Improvement of Performance of an enterprise after the privatization will depend on

bringing about a change in work culture and total enterprise culture. This is no easy task.
(6) Wrong Timing:-
Many Privatisations schemes could not get a good price because of wrong timing. A
good Price can be obtained if Privatisation is done when performance, market capitalisation and
industry prospects are goods. It is pointed out the Maruti could have got a good price had it
been privatised when goings were good.
Industrial Sickness
Industrial sickness is a matter of serious national concern because besides affecting the
owners, employees creditors and suppliers, it causes wastage of national resources and social
unrest.
In terms of definition evolved by RBI, an industrial unit is regarded as sick if it has

incurred cash loss for one year and in judgement of the bank, it is likely to continue to incur cash
loss in two following years and it has imbalance in its financial structure such as current ratio
being less than 1:1 and worsening debt-equity ratio.
The sick Industrial Companies (Special Provision) Act 1985as amended in 1993, defines
a Sick Industrial Company as an industrial company (being a company registered for not less
than 5 years) which has at the and of any financial years accumulated losses equal to or
exceeding its entire not worth.
Common symptoms of industrial sickness include failure to pay statutory liabilities like
P.F. & E.S.I. contributions, failure to pay timely installment of capital and interest on loans taken
from financial institutions & through public deposits, increases in inventories with a large number
of slow or non-moving items, high rate of rejection of goods manufactured, low capacity
utilisation & frequent industrial disputes.
Causes of Sickness
(A) Born Sick:-
Industrial units born sick are those which are destined for disaster right from their
conception due to various causes.
Any one or more of the following factors may cause birth of sick units:-
i) Lack of experience of promoters, wrong selection of project, faulty project planning etc, may
give birth to sick units.
ii) Lack of funds and faulty financial management may also cause birth of sick units.
iii) Time & cost overruns sometimes prove to be very disastrous. Particularly in case of large
projects, delay in project commissioning due to delay in supply of equipments etc, are very
common. Such delays cause cost escalations leading to capital shortage, liquidity problems,
Like in Production cost etc.
iv) Technological factors like selection of obsolete or improper technology or technology

becoming outdated due to innovations while the project is being executed, sub-standard
machinery, wrong collaboration etc, also cause sickness.
v) Sickness may arise from locational problems.
vi) Wrong assessment of market potential or faculty demand forecasting, change in market
conditions etc, may also cause birth of sick units.
B) Achieved Sickness:-
Industries which achieve sickness are those which fail after becoming operational due to
internal causes. Such internal causes which are common are the following:-
(i) Bad management which covers a wide range from inexperience, inefficiency, lack of
Professional expertise, neglect & internal squabbles to delinquency & dishonesty is import
causes of industrial sickness. According to Tiwari Committee it was found that 65% of large sick
units were affected by this problem.
(ii) Unwarranted expansion and diversion of resources may also result in sickness. Some
concerns tend to expand beyond the resources including managerial capability. Diversion of
resources to start new units or to acquire interest in other concerns with out regard to capability
of the unit to provide such funds sometimes lands the unit in trouble.
(iii) Poor inventory management in respect of finished goods as well as inputs may land a unit in
trouble.
(iv) Failure to modernize the productive apparatus, change the product mix & other elements of
the marketing mix to suit the changing environment is a very important cause of industrial
sickness.
(v) Poor labour management relationship& associated poor worker morale& low productivity,
strikes, lockout etc may rain the health of a unit to survive.
(C) External Causes:-
Are beyond the control of an industrial unit. Some of external causes are the following:-
(i) Energy crises arising out of power cuts or shortage of coal & oil have been a serious problem
for many industrial units in India.
(ii) In a number of cases the units are not able to achieve optimum capacity due to shortage of
raw materials due to production set-backs in supply industries, poor agricultural output due to
natural reasons, changes in import conditions etc.
(iii) Infrastructural problems like transport bottlenecks also sometimes cause serious problems.
(iv) It is a general complaint of the industrial circles that the credit squeeze very advessly affects
the industrial sector. According to the Tiwari Committee 24% of the large sick units were
affected by shortage of working capital liquidity constraints.
Thus there are many external and internal factors which can cause industrial sickness.
In many cases, sickness is caused by a combination of factors.
MRTP Act
The Principal low in India to deal with competition was Monopolistic and Restrictive
Trade Practices Act, 1969. The MRTP Act, brought into force form Ist June 1970, was a very
controversial piece of legislation. The high level committee on Competition Policy and law,
appointed by Government of India, recommended that a new competition. Act may be enacted
and MRTP Act may be repeated. The Government has accepted their recommendation. The
MRTP Act, one of the Most, controversial piece of legislation in India, has thus become a
document of historical value. The salient features of this Act is given her because of the
importance with which it reined the industrial sector of the country.
The main objectives of MRTP Act 1969 were-
(1) Prevention of concentration of economic power to common detriment.
(2) Control of Monopolistic, restrictive and unfair trade practices which are pre judical to public
interest.
The main thrust of the MRTP Act now is the achievement of Prevention of Monopolistic,
restrictive and unfair trade practices. Thus, the ‘M’ las almost been knocked out of MRTP Act. In
other words, large companies have been freed from MRTPA requirement of prior permission of
the government for substantial expansion of existing undertaking, eatables wing new
undertakings and MEAs.
In accordance with the Provisions of the Act, the Government of India had set up a
Commission known as the Monopolistie & Restrictive Trade Practices Commision. The MRTP
Commission was vested with Power to inquire into restrictive, monopolistic and unfair trade
practices. The MRTP Act empowered the central Government to control and Prohibit those
monopolistic, restrictive & unfair trade practices that are, or are likely to be prejudicial to the
public interest.
Monopolistic Trade Practice:- is a trade practice which has, or is likely to have, the effect of
unreasonably preventing or lessening competition in the production, supply or distribution of any
goods or services, limiting technical development and capital investment to the common
detriment or allowing quality of goods or services to deteriorate.
A Restrictive Trade Practice:- is a trade practice which has the effect, actual or probable of
restricting, lessening or destroying competition. Such trade practices may tend to obstruct the
flow of production or to bring about manipulation of prices or condition of delivery etc, to the
common detriment.
An Unfair trade Practice:- is a trade practice which, for the purpose of promoting the sale, use
or supply of any goods or the provision of any services, adopts one or more unfair trade
practices (like misleading advertisements) & thereby causes loss or injury to the consumers of
such goods or services, whether by eliminating or restricting competition or otherwise.
The Act also empowered the commission to make any undertaking or person to pay
compensation to the party who suffered a loss or damage as a result of unfair trade practice
carried on by undertaking or person.
Criticism:-
Because of its defeating Provisions. We had a very inepti situation of not allowing Indian
companies to grow by capacity expansion, establishment of new units or by M&A an because of
short supply importing goods produced by foreign multinationals which were far larger in size
than the Indian biggies, spending the scarce foreign exchange.
The MRTP Act, besides adversely affecting economic growth, blunted Indian Companies
ability to grow, consolidate and improve competitiveness. This had had a very dampening effect
on their global competitiveness.
SICA – Sick Industrial Companies Act.
An important price of legislation dealing with industrial sickness was the Sick Industrial
Companies (Special Provisions) Act, 1985. The objectives of the (SICA) were:
(1) The timely detection of sick and Potentially sick companies owning industrial
undertaking.
(2) The speedy determination by a board of experts of the Preventive, ameliorative,
remedial and other measures which need to be taken with respect to such companies.
(3) The expeditions enforcement of the measures so determined and for matters connected
therewith or incidental thereto.
According to the SICA amended in 1993, a sick industrial company meant and industrial
company registered for not less than 5 year) which had at the end of any financial year
accumulated losses equal to or exceeding its entire net worth.
An industrial company was regarded as potentially sick, if the accumulated losses of an

industrial company as at the end of any financial year had resulted in the erosion of 50% or
more of its peak net worth during the immediately preceding 4 financial year.
Under the Central Government established a Board for Industrial and Financial
Reconstruction to exercise the jurisdiction and powers and discharge the function and duties
conferred or imposed on the Board by the Act.
The SICA required the Board of Director of a sick industrial company to make a
reference to the BIFR for determination of the measures to be adopted with respect to the
company. The BIFR could dried any operating agency like the financial institution to prepare the
scheme for revival of the sick unit. The scheme could provide for any one or more of the
following measures:-
(1) The Financial reconstruction of the company.

(2) The Proper management of the sick industrial company by change in or takeover of
management of sick industrial company.
(3) The amalgamation of the sick industrial company with any other company, or any other
company with the sick industrial company.
(4) The sale or lease of apart or whole of industrial undertaking of sick industrial company.
Where the BIFR was of the opinion that the sick industrial company was not likely to make
its net worth exceed its accumulated losses within a reasonable time and that it was not
likely to become viable in future & that it was just and equitable that the company should be
wound up, it could imitate proceedings with the High Court, for
Industrial Disputes
“ According to Sec 2 of Industrial Disputes Act 1947, Industrial dispute means any dispute or
difference between employers & employers or between employers and workmen or between
workmen and workmen, which is connected with the employment or non-employment or
terms of employment or with the conditions of labour of any person.”
Industrial disputes are symptoms of industrial unrest. Industrial unrest may take either
unorganized or organized from. When it is unorganized it is manifested inform of low morale,
low productivity, frustration etc. organized from of industrial unrest includes strikes,
demonstration, gheraos, boycotts etc.
Forms:-
(a) Strikes-
is a very powerful weapons to get its demand accepted by a trade union. It means
quitting work by a group of workers for the purpose of bringing pressure on their employers
to accept their demands.
There are may types of strikes.
(a) Economic Strike:-
Under this type of strike, members of trade Union stop work to enforce their economic
demands such as increase in wages, bonus & other benefits.
(b) Sympathetic Strike:-
When members of a Union collectively stop work to support or express their sympathy
with the members of other union who are on strike.
(1) General Strike:-

Means a strike by numbers of all or most of unions in a region or an industry. If may be

strike of all workers in a particular region to force demands common to all workers.
(2) Sit Down Strike:-
When workers do not leave their place of work but cases work, they are said to be on sit
down or stay in strike.
(3) Slow Down Strike:-
Employers remain on their jobs under this type of strike. They do not stop work but
restrict rate of output in an organized manners.
Lock-Out:-
Is declared by employers to put pressure on their workers. It is an act on the part of the
employers to close down the place of work until workers agree to resume work on terms &
conditions specified by employers.
Gherao:-
Denotes a collective action initiated by a group of workers under which members of

management of an industrial establishment are prohibited from leaving their business or
residential promises by workers who block their through human barricade.
Unit-III
Development banks for corporate Sector (IDBI, IFCI, ICICI)- trends pattern and policy;
regulation of stock exchanges and the role of SEBI; banking sector reforms;
challenges facing public sector banks; growth and changing structure of non bank
financial institutions; problem of non performing assets in Indian Banks
INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
The Industrial Development bank of India (IDBI) was established in 1964 by the Indian
government under an act of the Indian Parliament, the Industrial Development Bank of India Act,
1964.
IDBI was initially established as a wholly-owned subsidiary of Reserve Bank of India. In

1976, the ownership of IDBI was transferred to the Government of India (GOI) The IDBI Act was
amended in October 1994, to, inter alia, permit IDBI to raise equity from the public, subject to
the holding to GOI not falling below 51% of issued capital.
According to Bank’s Corporate Mission “IDBI Steategic objective is to position itself as

India’s Prenier wholesale bank through a full range of wholesale products-lending, capital
market, advisory & risk management-through an integrated group structure.”
According to IDBI sources, its strengths lie
1) Diversified portfolw across different industries, regions and sectors.

2) Long-standing business relationships with all major industrial house.
3) Proven core competence in project financing.

4) Large balance sheet & sound financials.
5) Capacity to take large single party expouce.
6) Capacity to leverage.
7) Sizeable stock of cost-effective, long term funds.
8) Fairly good retail network with a large investor base.
9) Lean organization with a sizeable pool of qualified, experienced professionals.
Subsidiary Organisations:-
IDBI has set up a host of Subsidiaries and associates with a view to expand the functional reach
of IDBI Group & take advantage of opportunities in a liberalised market economy.
SIDBI:-
To give focused attention to the needs of small scale industry, IDBI had set up the Small
Industries Development Bank of India (SIDBI) in 1990 as a wholly owned subsidiary. The SIDBI
Act was amended in March 2000, enabling, among other things, the transfer of IDBI
shareholding to a maximum 51% from IDBI.
IDBI Capital:-
A stock broking company, IDBI Capital Market Services limited (IDBI Capital) was set up
in 1993 to provide a range of capital market related services. It commenced operation as a
primary Dealer in November 1999. IDBI capital markets public issues of seclinties through its
network of agents. It also acts as a portfolio manager & manages the investment portfolios of
several Provident & Pension funds.
IDBI Bank:- Consequent upon opening up of commercial banking to the Private Sector, IDBI
Set up a Commercial bank, IDBI Bank limited on 1994. Consequently upon the initial public
offering of the equity share in February 1999, IDBI now holds 57.14% of the equity of IDBI Bank
limited.
INTECH:- To take advantage of the emerging business prospects of the IT sector, IDBI setup
IDBI In tech limited (INTECH) in March 2000 to undertake IT-related activities.
ITSL:- The new company would be technology driven to provide safety, up to date information &
professional services to the subscribers and issuers of debentures.
Products:-
The important products (schemes of assistance) of IDBI are the following:-
(1) Project Finance:-
The objective of this product is to provide long term finance for new projects and
expansion diversification and modernization of existing projects.
(2) Corporate Loan:-
This Product has been designed to provide for capital expenditure and long-term
working capital to financially sound companies with net worth of not less than Rs 10 crore,
having been in commercial operation for 5 years & making Profit consistently for last 3 years,
Rupee & foreign currency loans are available under this scheme.
(3) Equipment lease:- Financially-sound companies are eligible for financial lease facility for
purchase of equipment on lease basis. However, sale & lease back transactions are normally
excluded from this facility.
(4) Services:- IDBI also provide some very important services to promote & develop industries.
These include, merchant banking, debentures trusteeship & foreign exchange services.
IFCI (Industrial Finance Corporation of Indian)
The Industrial Finance Corporation of India was established in 1948 under the IFCI Act,
with the object of making medium & long term credit more readily available to industrial
concerns in India; IFCI was corporatised in 1993 as a part of financial sector reforms and an
initial public offer was made in the same year.
Principal Activities:-
IFCI’s Financial operations principally include Project Financing, Financial Services and
Comprehensive corporate advisory services.
Project financing:-
Is the core of IFCI. Financial assistance is provided by way of medium/ long term credit fo:-
(a) Setting up new projects.

(b) Expansion/Diversification schemes.
(c) Modernisation / Balancing schemes of existing projects.
Financial Services:-
IFCI provides assistance tailor-made to meet specific needs of corporates through

various specially designed schemes:-
(a) Equipment finance.

(b) Equipment credit, Equipment leasing.
(c) Suppliers / buyer’s credit.
(d) Leasing and hire purchase concerns.
(e) Corporate loans, short term loans.
(f) Working capital term loans.
Problems
The Committee has looked into the major factors which have led to the sudden & sharp down
turn in IFCI’s performance after 1997-98 and is of view that the following are the main
contributory factors:-
(1) In many cases, financial plan for the projects included raising equity from capital market or
from internal generation of group companies. However, due to prolonged, depressed conditions,
in capital market & the industrial recession in aftermath of South East Asian crises of 1997, the
promoters were unable to raise such resources as planned which led to time and cost overruns
and a number of projects remaining incomplete, resulting in loans becoming non-performing.
(2) IFCI’s loans portfolio was heavily weighted towards traditional commodity sectors such as
iron & steel, textiles, sugar, plastics etc, which were significantly move exposed to demand
recession & price flictuations.
(3) Unlike other financial institutions, IFCI has not diversified in to other type of businesses.
(4) As credit rating agencies started taking note of IFCI’s deteriorating loan book quality, they
lowered credit ratings. This in turn affected IFCI’s Standing in the debt market, making
resources raising increasing difficult
(5) Constraints in resource raising in turn led to cutbacks in disbursements & new business with
an inevitable impact of on earnings, thus completing the cycle of downward spiral.
(6) In this context, the Committee would like to observe that some of factors referred to above
such as impact of trade policy liberisation & tariff reduction, recessionary conditions in late 90’s,
depressed conditions in capital market etc. affected other DFIs & banks as well.
Suggestions for Improvements:-
According to the analysis and obsewations, the committee has made the following
recommendations.
1. IFCI Should transform itself into a fully licessed term credit Bank over a period of time.
2. IFCI should endeavour to reduce the proportion of project finance in their books and
diversify into post project and short-term financing business, as well as enter fee-based
services.
3. There s a growing basket of newer forms of corporate finance business.
4. IFCI need not enter the retail financial market for the present.
5. IFCI functions as a government entity than a vibrant business organization. A new
culture has established within the organisation that encourages aggressive business
development with adequate risk monitering and control.
6. IFCI needs to develop quickly a range of new products and services before
transformation into a bank.
7. IFCI should consider building up a portfolio of selected highly-rated corporate bonds with
appropriate maturities.
8. IFCI should activate its treasury operations and view it as an important profit centre.
ICICI Bank
The Industrial Credit and Investment Corporation of India Limited (ICIC), which was merged with
the ICICI Bank in 2001, was founded by World Bank, the Government of India and
representatives of Private Industry on January 5, 1955 to encourage and assist industrial
development and investment in India.
Objectives & functions

(1) Providing assistance in the creation, expansion & modernization of Industrial enterprise.
(2) Encouraging and Promoting the participation of Private capital, both internal and
external in such enterprise.
(3) Encouraging & Promoting industrial investment and expansion of investment markets.
Over the Year, ICICI has evolved into a diversified financial institution. ICICI’s principal business
activities include:-
(1) Medium- term and long-term project financing for the infrastructure and manufacturing
sectors:
(2) Corporate finance to meet the treasury requirements of Indian Companies.
(3) Lease Finance.
(4) A comprehensive range of financial and advisory services.
Diversifications:-
1) ICICI Venture Funds Management Company Limited:
Q 5. What is the function of development bank? Explain the leading policies and Criteria
of the IDBI.
Ans- A Development Bank is a multipurpose institution which shares entrepreneurial Risk,

Changes its approach in tune with the industrial climate and encourages new industrial projects
to bring about speedier economic growth. The concept of development banking is based on the
assumption that mere provision of finance will not help to bring about entrepreneurial
development. Successful entrepreneurial banking should include the discovery of investment
projects, undertaking the preparation of project reports, provision of technical will not help to
bring about entrepreneurial development. Successful entrepreneurial banking should include the
discovery of investment projects, undertaking the preparation of project reports, provision of
technical advice and management services and finally assisting the management of industrial
units. They are different from commercial banks in three ways:
i) They do not seek or accept deposits from the public

ii) They specialise in providing medium and long-term finance (commercial banks
specialise in proving short term finance)
iii) Their functions are confined to providing long-term finance.
Development banks provide financial assistance to industry in the following forms:
i) term loans and advances

ii) subscription to share and debentures
iii) Underwriting of new issues
iv) Guarantees for term loans and deferred payments
The first two forms place funds directly in the hands of companies as subscription to shares and
debentures. The last tow forms facilitate the raising of funds from other sources.
The distinguishing role of development banks is the promotion of economic development by way
of providing investment and enterprise in their chosen spheres (manufacturing, agriculture etc)
The factors which led to the growth of development banks are the inability of the normal
institutional structure to keep pace with the requirement of funds and entrepreneurship of the
growing industrial sector. The important development banks are the following.
1) Industrial fiancé corporation of India Ltd. (IFCI)

2) Industrial credit and Investment Corporation of India (ICICI)
3) Industrial Development Bank of India (IDBI)
4) Small Industrial Development Bank of India (SIDBI)
5) Exim bank (Export and Import bank)
IDBI (Industrial Development Bank of India) was established as a wholly owned subsidiary of
RBI in year 1964. However, in year 1976. the IDBI was made an autonomous institution and
was thus delinked from the RBI. It is now independent public ector financial institution whose
ownership vets in the Government of India.
The functions of the IDBI can be broadly grouped into three categories, viz.
i) direct assistance to industrial units in the form of loans and advances.

ii) Indirect assistance through refinancing of the loans and advances given by other
financial institution.
iii) Promotional activities in respect of industrialisation of backward areas, small
industrial units etc.
Direct Assistance: The industrial development bank of India provides direct assistance to
industrial units in the form of loans and advances. Besides, it also sudscribes to their shares
and debentures thereby giving then strong financial support. The bank can guarantee the loans
and advances raised by the industrial concerns from the scheduled banks, IFCI and other
notified sources. It can also underwrite the shares and debentures issued by the industrial
concern.
Indirect Financial Assistance: The promotional activities of the Industrial Development bank of
India include
I) special assistance for industrial development in the backward areas.

II) Assistance to small scale industries and
III) Special assistance by way of soft loan scheme
With a view to promoting the industrial development of the backward areas the IDBI provides
confessional finance assistance to the small and medium projects in these areas. This
concession assistance is available upto an account of Rs. 2 crores and has a longer repayment
period.
. 6 Give an overview of banking sector reforms in India. How have these reforms affected
the performance of public sector bank?
Ans. The experience of successful developing countries indicates that repaid growth requires a
sustained effort at mobilising savings and resources and deploying them in ways, which
encourage efficient production. Financial sector (which includes banking sector) reforms thus
constitutes and important component of the programme of stabilization and structural reforms.
The major reform measures undertaken during the past few years are as follows:
1) The government has over the past eight years brought down both
statutory liquidity ratio and cash reserve ratio in a phased manner. The effective statutory
liquidity ratio has been lowered down to 25 percent. The cash reserve ratio, which is only
effective instrument of monetary control in India, is being no longer depended upon to
combat inflation. It has thus been brought down to 10 percent.
2) The earlier formats of the balance sheet and profit loss account did not
reflect the true financial position of the banks. Hence, they have been revised and made
effective from the bank accountanting year 1991-92.
3) Commercial banks attaining capital adequacy norms and prudential
accounting standards have been given freedom to set up new branches without the
approval of the reserve bank of India. Banks can also rationalize their existing branch
network by relocating branches, opening of specialized branches, setting up controlling
offices etc.
4) Number of interest rates slabs on banks advances were reduced from
about 20 in 1989-90 to 2 in the financial year 1994-95. This attempt to unify interest rate
structure aims at reducing the degree of cross-subsidy in the banking system.
5) The RBI has announced guidelines for setting up banks in the private
sector. These banks should be financially viable and should avoid concentration of credit
and crossholding with industrial groups. Further, they will have to observe priority sector
lending targets as applicable to other banks.
6) The supervisory system of the RBI was strengthened with the
establishing of a new board for financial supervision under the chairmanship of Deputy
Governor of RBI. The Board will ensure implementation of the regulations with respect to
credit management, assets classification, income recognition, capital adequacy with the
treasury operations.
7) Recovery of debts by banks and other financial institutions in the past
has been unsatisfactory. Hence, an act was passed in 1993 under which special recovery of
loan areas.
8) Agreement between the RBI and public sector banks has been made to
improve the management and the quality of the performance of the latter. This includes
management information system and the internal audit and control mechanism.
9) The quickness for determining the maximum permissible bank finance
have been made more flexible banks now have greater freedom in determining the working
capital needs of the borrowers and responding to local requirements in an appropriate
manner.
A large part of the addenda for reforms of the financial system relates to the problems facing the
public sector commercial banks, which have dominated banking in India since nationalisation
was to extend the reach of banking and financial services to all parts of the country and to all
sections of society. It also aimed at widening the net of resources mobilization.
While there are significant achievement, they have been accompanied by serous shortcoming
as well. For instance, the quality of customer service has not kept pace with modern standards
and changing expectations.
Stock Exchange
Stock Exchange is a market in which securities are brought and sold and it s an essential
component of a developed capital market.
According to Securities Contracts (Regulation) Act, 1956, Stock Exchange means anybody of
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or
controlling the business of beinging selling or dealing in securities.
According to this Act, securities include
(i) Shares, Scrips, Stocks bonds, debentures, stock or other marketable securities of a like
nature n or of any incorporated company or body corporate.
(ii) Government Securities.
(iii) Rights or interest in securities.
It provides necessary nobility of to capital & directs the flow of capital into profitable and
successful enterprises. It may be defined as the place or market where securities of joint stock
companies & of government or semi-government bodies are dealtion.
Dealing on Stock Exchange
Stock exchange dealings in India are regulated by the Securities Contracts (Regulation)
Act and the Securities and Exchange Board of India (SEBI).
On the trading floor of stock Exchange, dealings are permitted only n the listed securities
through the members or their authorized clerks during fixed working hours.
There are 2 important types of trading on the stock exchange namely Ready Delivery contract
and Forward Delivery Contract. The important differences between these 2 dealings are the
following:-
Ready delivery contracts also known as cash trading or cash transactions, are to be settled
either on the same date or within a short period that may extend at best up to seven days. As
against these the forward delivery contracts are discharged on fixed settlement days. Ready
delivery contract can be made in respect of all securities where as forward delivery contracts
are confined to those securities which are placed of the forward list.
Speculation on the Stock Exchange:-
Stock Exchange transactions are made ether for the purpose of investment or for
speculation. Investment transactions are made with the intention of earnings a return on the
securities by holdings them more or less permanently whereas speculative transactions are
made with the intention of making gains by disposing of the securities at favourable prices.
Organisation of Stock Exchange in India-
There are 23 stock exchange functioning in India including the Over. The Counter
Exchange of India (OTCEI) and National Stock Exchange (NSE).
The Bombay Stock Exchange, which was established n 1875 is the oldest one in Asia,
the Tokyo Stock Exchange was founded only n 1878.
With about 10,000 listed companies, India holds the unique distinction of having the
largest number of listed companies in the world.
Since the coming into effect of the Securities Contracts Act, 1956, only those stock
exchange which are recognized by the government can function in the country. The policy of the
Government is that there shall be only one stock exchange in one area. In pursuance of this
policy, where more than one stock exchange in one area. In pursuance of this policy, where
more than one stock exchange was given recognition and active members of the non-
recognized stock exchanges were admitted.
Each stock exchange is managed by an Executive Committee/ Governing Body to which

the Government is empowered to nominate not more than 3 members. The rules & bye-laws of
the stock exchange shall be in conformity with such conditions as may be prescribed by the
Government. The Securities Contracts (Regulation) Act empowers the Government also to
withdraw the recognition granted to a stock exchange, in the interest of trade or in public
interests.
Regulation of Stock Exchange:-
In India the Development of the stock market is directed and the dealings on the stock
exchange are regulated by the Central Government in accordance with the Securities Contracts
(Regulation) Act 1956 (SCRA) and Securities and Exchange Board of India (SEBI) established
by the Central Government.
Securities Contracts (Regulation) Act:-
The Securities Contracts (Regulation) Act, Exacted in 1956, come into force on February
20, 1957.
Objectives:-
(1) To empower the Central Government to regulate the dealings n and functioning of the
stock exchange in India.
(2) To promote healthy & orderly development of stock market in India.
(3) To prevent unhealthy speculation & other undesirable activities on the stock exchange.
(4) To protect the interest of investors.
(5) To provide for reasonable uniformity of the bye laws & rules of the different stock
exchange in India.
Main Provisions:-
1) The grant of recognition or withdrawal of recognition to any stock exchange.

2) Approval of the bye-laws and rules of stock exchanges.
3) Power to direct the stock exchanges to make or amend roles and bye-laws in
certain cases.
4) Power to make or amend bye-laws or roles for stock exchanges.
5) Monitoring the activities & functioning of the stock exchanges by calling for
periodic returns & specific information as and when required and by conducting inquiry
into certain matters when the situation so warrants.
6) Power to suspend business of stock exchanges.
7) Power to supersede governing body of any stock exchange on account of

specific reasons.
8) Regulation of listing of securities.
Recognition to Stock Exchanges.:
Any stock exchanges which is desirous of being recognized may apply to the Central
Government in the prescribed manner with the required particulars and a copy of the bye-laws
of the stock exchange and the rules relating to the constitution of the stock exchange.
The Act lays down that the Central Government Shall not refuse grant of recognition to a
stock exchange without giving it an opportunity to be heard & that the reasons for the refusal
shall be communicated to the stock exchange in writing.
Power of Recognized Stock Exchange to Make Rules Restricting Voting Rights Etc.
A Recognised Stock exchange shall have effect until they have been approved by the Central
Government and published by that Government in the official Gazettee.
Power to obtain Information & to Conduct Inquiry:-
Every recognized stock exchange shall furnish the Central Government with a copy of the
annual report containing all the particulars prescribed. Further, every recognized stock
exchange. Shall furnish to the SEBI such periodical returns relating to its affairs as may be
prescribed.
The SEBI is also authorised to call upon any recognized stock exchange or any
members of such exchange to furnish any information or explanation relating to the affairs of the
stock exchange or the members in relation to the stock exchange.
Power to supersede Governing Body:-
It the Central Government has sufficient reasons to think that the governing body of any
stock exchange should be superseded; it may do so after serving a written notice on the
governing body & giving the body an opportunity to be heard in this matter.
These Powers are exercisable by the SEBI also.
Power to Suspend Business of Stock Exchange:-
The SCRA empowers the Central Government to suspend the business of any stock
exchange, under certain circumstances, for a period not exceeding 7 days in the interest of
trade or public interest. The period of suspension may be extended from time to time but after
the governing body has been given an opportunity of being heard in the matter.
SEBI
(Securities and Exchange Board of India)
The SEBI was constituted in 1988 by a resolution of Government of India & it was made a
Statutory body by the Securities and Exchange Board of India Act 1992.
Management:-
Section 4 of the Act lays down the constitution of the management of SEBI. The Board
of members of SEBI shall consist of a chairman, two members from amongst the officials of the
Ministeries of the Central Government dealing with finance and law, one member from amongst
the officials of Reserve Bank of India, 2 other members to be appointed by the Central
Government, who shall be professionals & interalia have experience or special knowledge
relating to securitia market.
Objectives:-
To Protect the Interest of investors in securities & to promote the developments of and to
regulate, the securities market for matters, connected there with or incidental there with.
Powers and Functions:-
These measures provide for:-
(1) Regulating the business in stock exchange & any other securities market.
(2) Registered and regulating the working of collective investment schemes, including
mutual funds.
(3) Promoting and regulating self-regulatory organizations.
(4) Promoting & regulating self-regulatory organizations. Prohibiting fraudulent & on fair
trade practices in securities market.
(5) Promoting investors education & training of interdiaries in securities market.
(6) Promoting investor education & training of interdiaries in securities market.
(7) Prohibiting insider trading in securities.
(8) Regulating substantial acquisition of shares and take-over of companies.
(9) Calling far information from, undertaking inspection, conducting enquiries and audits
of the stock exchange & intermediaries & self-regulatory organizations in the
securities market.
(10) Performing such functions & exercising such power under the provision of the capital
issues (control) Act, 1947, (Subsequently repeated) and Securities Contracts
(Regulations) Act. 1956 as may be delegated to it by the Central Government.
(11) Levying fees or other charges for carrying out the purposes of section 11 of the Act.
(12) Conducting research for the above purpose.
(13) Performing such other functions as may be presented by the government.
Non-Banking Financial Institutions
NBFC’s are financial intermediaries engaged primarily in the business of accepting

deposits and making loans and advances, Investments, leasing, hire-Purchase etc. NBCs are a
heterogenouslot. NBFC sector is characterized by a large number of privately owned,
decentralized and relatively small sized financial intermediaries. NBFCs are of various types
such as loan companies (LCs), investment companies (ICs), here purchase finance companies
(HPFCS), equipment leasing companies (ELCs) mutual benefit financial companies (MBFCs)
also known as NIdhis, and equipment leasing companies are defined on the basis of the
principal activity of their business. Although NBFCs in India have existed for a long time, they
shot into prominevce in the second half of the 80’s & in the Ist half of the 70’s as deposits raised
by them grew rapidly. Customer orientation, concentration in the main financial centres &
attractive rates of return offered by them are some of the reason for their rapid growth. Primarily
engaged in the area of retail banking, they face competition from banks & financial institutions.
Unit-IV
Trend and pattern of India’s foreign trade and balance of payments; latest EXIM
policy-main features; policy towards foreign direct investment; globalisation trends in
Indian economy; role of MNCs; India’s policy commitments to multilateral
institutions- IMF, World Bank and WTO.
Foreign trade
Regulation of Foreign trade:-
Control of foreign trade in India dates back to the early year of Second World War.
Import Control was introduced in 1940 as a war time measure under the Defence of India Rules
with the Primary objective of conserving the foreign exchange resources and restricting physical
import so as to reduce the pressure on the limited available shipping space. Initially, the import
of only 68 commodities, mainly consumer goods, were brought under control. Subsequently,
with the increasing pressure on the foreign exchange resources, import control was extended to
other commodities as well.
After the end of the war, Defence of India Rules Lapsed and hence in September 1946,
was Promulgated to continue the import trade Control. This was ultimately replaced by Imports
and Experts (control) Act 1947, which come into force with effect from 25th March 1947. this Act
gave the government enormous powers of control over foreign trade of India. The imports and
Exports (Control) Act, 1947, was replaced by foreign Trade (Development & Regulation Act),
1992.
The major concern of government in the past was restriction of imports with a view to
controlling the trade deficit & protection of domestic industries against foreign competition.
Imports were, therefore very much restricted by Prohibition of imports of many items, import
licensing, very high import duties & foreign exchange restrictions. The foreign trade policy was
characterised by overtone of regativism.
The foreign trade Act 1992
This Act which replaced the Imports and Exports (Control) Act 1947 come into force on
19th June 1992. No export or import shall be made by any person except in accordance with the
provisions of this Act, the orders and rules made under this Act and the expert and import
policy.
Objectives:-
Is to provide for development & regulation of foreign trade by facilitating imports into and
augmenting exports from India and for matters connected there with or incidental thereto.
Main Provisions:-
(1) Development & Regulation:-

The FTDRA empowers central govt to make provision for development & regulation of
foreign trade by facilitating imports & increasing exports.
(2) Prohibition & Restriction:-
The Act also empowers the Central government to make provision for prohibiting,
restricting or otherwise regulating the import or export of goods as and when required.
(3) Exem Policy:-
The Act lays down that the Central Government may, from time to time, formulate &
announce export and import policy & policy & may also amend that policy.
(4) Director General of Foreign Trade:-
The Act provides for the appointment by Central Government, of a director General of
foreign Trade for the purpose of this Act. The DGFT Shall advise Central government in
formulation of export & import policy & shall to be responsible for carrying out that policy.
(5) Importer-Exporter Code Number:-
The Act lays down that no person shall make any import or export except under an
Importer-Exporter Code (IEC) Number granted by the DGFT or officer authorised by him in his
behalf.
(6) Issue and Suspension/ Cancellation of licence:-
The Director General or any other officer authorised under this Act is empowered to
suspend or cancel a licence issued for export or import of good in accordance with this Act for
good & sufficient reasons, after giving licence holder a reasonable opportunity of being heard.
(7) Search, Inspection & Seizure
Any person authorized by Central govt may search, inspect & seize such goods,
documents which are imported and suspected.
Foreign Investment in India.
The flow of direct foreign investment to India has been comparatively limited because of the
type of industrial development strategy and the very cautions foreign investment policy followed
by the nation.
Direct foreign investment (private) in India was adversely affected by the following factors.
(1) The public sector was assigned a monopoly or dominant position in the most important
industries and therefore, the scope of private investment, both domestic and foreign,
was limited.
(2) When the public sector enterprises needed foreign technology or investment, there was
a marked preference for the foreign government sources.
(3) Government policy towards foreign capital was very selective. Foreign investment was
normally permitted only in high technology industries in priority areas and is export-
oriented industries.
(4) Foreign equity participation was normally subject to celeing or 40%, although exceptions
were allowed on merit.
(5) Payment of dividends aboard, repatriation of capital etc as well as inward remittances
were subject to strigent laws like the foreign Exchange Regulations Act (FERA), 1973.
These discouraged foreign investment.
(6) Corporate taxation was high and tax laws & procedure were Complex.
Those factors either limited the scope of or discouraged the foreign investment in India.
Government Policy.:- India was following a very restrictive policy towards foreign capital and
Technology. Foreign collaboration was permitted only in fields of high priority and in also where
the import of foreign technology was considered necessary. Import of technology was
considered on merits if substantial exports were guaranted over a powered of 5 to 10 years and
if there were reasonable proposals for such exports. The government had issued list of
industries where:
(i) Foreign investment may be permitted.

(ii) Only foreign technical collaboration may be permitted.
(iii) No foreign collaboration either financial or technical was considered necessary.
The government policy on foreign equity participation was selective. This type of
participation had to be justified w.r.t. factors like nature of Technology involved. Foreign
share capital was to be by way of cash without being liked to wed Imports of machinery and
equipment or to payments for trademark brandnames etc.
The Foreign Exchange Regulation Act (FERA) served as a too for implementing the
national policy on foreign private investment in India. The FERA empowered the Reserve
Bank of India to regulate or exercise direct control over the activities of foreign companies
and foreign nationals in India.
According to FERA, non-residents, foreign citizens resident in India and foreign

companies required the permission of the RBI to accept appointment as agents or technical
management advisers in India.
The trading, commercial and industrial activities in India of persons resident abroad,
foreign citizens in India and foreign companies were regulated by The FERA. They had to
obtain permission from the RBI for carrying on in India any activity of a trading, commercial
and industrial nature, opening branches or other places of business in India acquiring any
business undertaking in India and purchasing shares of India companies.
The New Policy:- The industrial policy statement of July 24, 1991, which observes
that while freeing the Indian economy from official controls, opportunities for promoting
foreign investment in India should also be fully exploited has liberalized and Indian policy
towards foreign investment & technology. In pre-liberalisation era, foreign equity
participation was restricted to 40% and foreign investment and technology agreements
needed prior approval. New policy has allowed majority foreign equity with automatic
approval in a large no of industries.
The new policy also made the import of capital goods automatic provided the
foreign exchange requirement for such import is ensured through foreign equity.
Salient features of initiatives under new policy includes the following:-
The automatic route has subsequently been expanded very significantly & now there are
different categories of industries on the basis of the celing of foreign equity participation.
(1) Industries in which FDI does not exceed 26%.

(5) Industries in which upto 100% foreign equity is permitted.
In Feburary 2000, government took a major decision to place all items under the automatic
route for FDI/NRI/OCB (Overseas Corporate Bodies) Investment except for a small negative list
which include:
(1) Automatic Approval by RBI is available for any proposal with lumpsum payment not
exceeding us $2 million and royaltly of upto 5% on domestic sales & eight percent on
exports.
(2) In all other cases, the Project Approval Board (PAB) considers the proposals and
makes recommendations to the Industry Ministry regarding approval.
Globalisation
Globalisation as “ The growing economic interdeperdence of countries world wide through

increasing volume & variety of cross border transactions is goods and services and of
international capital flows, and also through the move rapid and widespread diffusion of
technology.”
India’s economic integration with the rest of the world was very limited because of the
rest of the world was very limited because of the restrictive economic policies followed until
1991. Indian firms confined themselves, by and large, to the home market. Foreign Investment
by Indian firms was very insignificant.
With the new economic policy ushered in 1991, there has, however, been a change.
Globalization has in fact become a buzz word with the Indian firms now and many are
expanding their overseas business by different strategies.
This section takes a look at the hardles to and prospects for globalization of Indian
business and the different globalization strategies.
Obstacles to Globalisation:-
The Indian business suffers from a number of disadvantages in respect of globalization of

business. The important problems are the following:-
(1) Government Policy and Procedures:-
in India are among the most complex, confusing and difficult in the world.
Even after the much publicized liberlisation, they do not present a very conducive situation. One
pre requisite for success in globalization is swift and efficient action. Government policy and
bureaucratic culture in India in this respect are not that encouraging.
(2) High Cast:-
of many vital inputs and other factors like raw material and intermediates, power, etc.
tend to reduce the international competitveness of the Indian business.
(3) Poor Infrastructure:-
Infrastructure in India is generally inadequate & inefficient & therefore very costly. This is
a serious problem affecting the growth as well as competitiveness.
(4) Obsolescene:- The Technology employed, mode & style of operations etc, are in general,
obsolete & these seriously affect the competitiveness.
(5) Resistance to change:-
There are several socio-political factors which resist change & this comes in a way of
modernization, vationalisation & efficiency improvement. Technological modernization is
resisted due to fear of unemployment. The extent of excess labour employed by Indian Industry
is alarming. Because of this labour productivity is low and this is some cases more than offsets
the advantages of cheap labour.
(6) Poor Quality Image:-
Due to various reasons, the quality of many Indian product is poor is poor. Even when
the quality is good, the poor quality image India has become a handicap.
(7) Small Size:-
Due to various reasons like low level of resources, in many cases Indian firms are not
able to complete with the giants of other countries. Even the largest of Indian companies are
small compared to the multinational giants.
(8) Supply problems:-
Due to various reasons like low production capacity, shortage of raw material and
infrastructures like power and port facilities, Indian companies in many instances are not able to
accept large orders or to keep up delivery schedules.
(9) Lack of Experiences:-
The general lack of experience in managing international business is another important

problem.
(10) Growing Competition:-

The Competition is growing not only from the firms in the developed countries but also
from the developing country firms. Indeed, he growing competition from the developing country
firms is a serious challenge to India’s international business.
Factors Favouring Globalisation:-
Although India has several handicaps, there are also a number of favourable factors for
globalization of Indian Business.
(1) Human Resources:-
In India, there is abundant supply of labour and cheap labour has particular attraction for
several industries.
(2) Wide Base:-
India has a very broad resources and industrial base which can support a variety of
business.
(3) Growing Enterpreneurship:-
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 India 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) Expanding Markets :-
The growing population and disposable income and the resultant expanding internal
market provides enormous business opportunities.
(6) NRI’s :-
The large number of non-resident Indians who ave resourceful in terms of capital, skill,
experience, ideas etc. is an asset which can contribute to the globalization of Indian business.
The contribution of the overseas Chinese to the recent impressive industrial development of
china may not be noted here.
(7) Economic liberalization :-
in India is an encouraging factor of globalization. The delicensing of industries, removal

of restrictions on growth, opening up of industries earlier reserved for the public sector, import
liberalizations, etc. could courage globalization of Indian business . Further liberalization in other
countries increases the foreign business opportunities for Indian business.
(8) Competition:-
The growing competition, both from with the country and abread, provide many Indian
Companies to look to foreign markets seriously to improve their competitiveness position & to
increases the business.
Role of MNC’s
According to an ILO repot, “the essential nature of multinational enterprises lies in the
fact that its managerial headquarters are located in one country (home country) while
enterprises carries out operations in number of other countries as well. (host countries).
Domivance of MNC’s
Through liberlisation there has been expansion & growth of MNC’s. The GDP has increased
from about 5% in beginning of 1980’s to nearly 7% at end of 1990’s. The MNC’s are estimated
to employ directly, at home and abroad around 73 billion people.
For example, the US footwear company Nike currently employes 9000 people, while nearly
75,000 people are employed by its independent sub-contractors located in different countries.
Merits of MNC’s
The important arguments in favour of MNC’s are given below:-
MNC’s help the host countries in following ways:-
1) MNC’s help to increases the investment level & thereby the income & employment in host
country.
2). The transnational corporations have become vehicles for the transfer technology, especially
to developing countries.
3) They also kind a managerial revolution in host countries through professional management
and employment of highly sophisticated management techniques.
4) The MNCs enable that host countries to increases their exports & decreases their import
requirements.
5) They work to equalize cost of factors of production around the world.
6) MNC’s provide and efficient means of integrating national economies.
7) The enormous resources of multinational enterprises enable them to have very efficient
research & development systems. Thus, they make a commendable contribution to inventions &
innovations.
8) MNC’s also stimulate domestic enterprise because to support their own operations, the
MNC’s may encourage & assist domestic suppliers.
9) MNC’s help to increase competition & break domestic monopolies.

Demerits:-
1) MNC’s may destroy competition & acquire monopoly powers.
2) The transfer pricing enables MNC’s to avoid taxes by manipulating prices on intra-company
transactions.
3) Through their power and flexibility , MNC’s can evade national economic autonomy & control,
and their activities may be inimical to national income interests of particular countries.
4) MNCs retard growth of employment in home country.
5) MNCs technology is designed for world-wide Profit maximization, not the development needs
of poor countries. In general, it is asserted, the imported technologies are not adopted to (a)
Consumption needs (b) size of domestic markets (c) resource availabilities (d) stage of
development of many of developing countries.
Multinationals in India
Comparatively very little foreign investment has taken place in India due to several
reasons, some multinationals, Coca Cola and IBM, even left India in late 1970s as the
government conditions were unacceptable to them.
A Common criticism against MNC’s is that they tend to invest in low priority & high profit
sectors in developing countries, ignoring national priobities. However high technology and
heavy investment sectors of national importance & export sectors. Firms which had been
established non-priority areas prior to implementation of this policy have, however been allowed
to continue in those sectors.
It is not a right approach to estimate the net impact of multinationals on foreign

exchange reserves by taking net foreign exchange outflow or inflow. If a multinational is
operating in an import substitution industry, the net effect in foreign exchange reserves could be
favourable even if there is net foreign exchange outflow of company.
EXPORT -IMPORT POLICY [EXIM POLICY]
This Policy was announced under foreign Trade 1992 on 31 March. An important feature
of Exim Policy sence 1992 is freedom. Licensing, quantitative restrictions & other regulatory and
discretionary controls have been eliminated.
Exim Policy 2002-2007
Features/Proposals are given below:-
1) The Mission:-
The main aim of this policy is to increase exports from 0.67% to 1% over this period.
This implies that total exports will nearly double from $46 billion to over $ 80 billion achieving a
compound annual growth rate of (CAGR) of 11.9% in dollar terms.
2) Agricultural Exports:-
Agri Export Zones scheme are proposed to be supported with development of necessary
infrastructure, flow of credit & other facilities for promoting agro exports. Such as processed
fruits, vegetables, products of dairy, wheat, rice etc. Packaging, and quantitative restrictions is
respect of exportof a number of agricultural products to Russia were removed.
3) SEZ :-
The Current Exim Policy offer several fiscal incentives to units in the SEZ’s other
proposals include exemption to SEZ units from External Commercial Borrowings restrictions,
and freedom to make overseas investment and carry out commodity hedging.
4) Towns of Export Excellence:-
A number of Industrial Cluster-towns are exporting a substantial portion of their products

which are world class. A beginning is being made to consider industrial cluster-townssuch as
Tirupur for hosiery, Panipat for wollen blankets to be eligible for following benefits. Common
Service Providers in these areas shall be entitled for facility of EPCS Scheme.
5) Special Focus on cottage Sector and Handicrafts:-
The following facilities will be made available to them. Initially an amount of Rs 5 crore
has been earmarked for promoting cottage sector exports coming under KVIC. The Units in
handicrafts sectors can also access funds from Market Access Initiative (MAI) Scheme for
activities including development of website for virtual exhibition.
6) Reduction in Transaction Time, Costs:-
The new policy contains several initiatives to immunize export sector against
disadvantages arising from sate of infrastructure, power tariffs, interestrate, etc. The
simplification of Exem policy schemes being announced in new policy will more effectively
rebate all indirect taxes on imports.
7) Assistance to States for Infrastructural Development for Exports:-
During 2000 Government had announced a Scheme for participation of states in export
endeavour. 80% of total funds would be allotted to states based on above criteria and remaining
20% will be utilized by the center for various infrastructure activities that act across State
boundaries etc.
8) Condusion :-
The new policy has improve export infrastructure & export production, removal of
quantitative restrictions on exports, procedural simplication etc.
UNIT -D
Ques 7 Explain India’s Policy commitment towards:

(a) IMF and (b) WTO
Ans (a) The International monetary fund (IMF) is an international monetary institution
established by 44 nations under the Bretton Woods Agreement of July 1944.
The objectives of the funds stated in Articlel of the fund Agreement are as follows:
1) To promote international monetary cooperation through a permanent institutions

which provides the machinery for consultation and collaboration or international
monetary problems.
2) To facilitate the expansion and balanced growth of international trade and to
contribute thereby to the promotion and maintenance of high levels of
employment and real income and to the development of productive resources of
all members as primary objective of economic policy.
3) To Promote exchange stability to maintain orderly exchange arrangements
among the members and to avoid competitive exchange depreciation.
4) To assist in the establishment of a multilateral systems of payment in respect of
current transactions between members and the elimination of foreign exchange
restrictions.
5) To give confidence to members by making the fund’s resources temporarily
available to them under adequate safeguards.
6) In accordance with the above, shorten the duration and lesson the degree of
disequalibrium in the international balance of payments of members, the fund is
guided in all policies and decisions by the purposes set forth in the above article.
India is on of the founder member of IMF, It signed the fund agreement of 27th.
December 1945. Till 1970, India’s quota in the fund was the fifth. After May 1970 the quota
stands at 13th place. However, in absolute terms, India’s quota stood at SDR 3.05 in January
1993.
India has been one of the major beneficiaries of the fund assistance. Between 1947 to
1955, India borrowed $ 100 Million twice to tide over its balance of payment difficulties. It also
received SDR 529.01 million from 1 July 1978 to 21 February 1981 under the IMF Trust fund in
1979, India entered into agreements with the IMF for a loan of $5.6 billion or Rs. 5,220 crores
under extended fund facility. After April 1984, India did not take any resources of IMF till
December 1990. In January 1991, it approached the IMF under compensatory and contingency
Financing Facility (CCFF) to get $0.79 billion a the first credit tranche of a stand by arrangement
for three months. On 31 October, the IMF approved a stand by credit of $ 2.2 billion to be
disbursed to India n 8 branches over a solve world trade problems. But the WHO is a properly
established permanent world trade organization. It has a legal status and enjoys privileges and
immunities on the same footing as the IMF and the World Bank. It includes:
(1) The GATT as modified by the Uruguay Round.

(2) All agreements and arrangements concluded under the GATT and
(3) The complete results of the Uruguay round. 104 members signed an agreement for the
setting up to the WTO. The WTO agreement came into force from January 1, 1995 and
India has become a founder member of the WTO, ratifying the WTO Agreement on Dec,
30
The World bank and the GATT secretariat have estimated that the income effects of the
implementation of the Uruguay package will add between 213 and 274 billion U.S. Dollars
annually to world income. The GATT secretariat further projects that the largest increases will
be n the areas of clothing, agriculture, forestry and fishery products and processed food and
beverages. According to Government of India, since our country’s existing and potential export
competitiveness lies in these products group, it is logical to believe that India will obtain large
gains in these sectors. Assuming that India’s market share in the world export improves from
0.5 percent to percent and that we are able to take advantage of the opportunities thus created,
the government believes that the trade gain may conservatively be placed at 2.7 billion dollars
extra exports per year. A generous estimate will range from 3.7 to 7 billion US Dollars per year.

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Business Environment

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Business Environment VIMAL JOSHI

Microenvironment: The microenvironment consists of the actors in the company’s immediate

Natural Environment: Difference in geographical conditions between markets may sometimes

. 2 What do you mean by social responsibility of business: Why should business

Responsibilities towards employee

1. Fair wages and regular payment.

Responsibilities towards customers

1. Providing goods and services at a reasonable price

1. Regular payment of taxes.

Responsibilities towards society as a whole

1. Prevention of environmental pollution.

(a) the industrial sector

• insufficient growth in productivity

# Essential infrastructural goods & services.

There is a greater thrust on the performance improvement through the memorandum of

Essential Qualities of Good Business Report

Unless it is one-way communication that is simply meant to inform al business, communication

A program is a statement of the activities or steps needed to accomplish a single use

A budget is a statement of a corporations programs in terms of dollars. Used in planning

Industrial licensing Policy

(i) The place where the factory is to be established.

Encouraging new entrepreneurs & wider dispersal of industrial ownership, prevention of

(i) Establisment of new undertaking.

The New Policy:-

1) Distillation & brewing of alcoholic drinks.

Small Scale Industries Sector

(2) Ancillary Industrial Under taking:- An industrial undertaking which is engaged or is

EOU (Export Oriented Units)-

(1) Reservation of Products:-

(2) Machinery on Hire Purchase:-

(3) Marketing Assistance:-

(4) Supply of Raw Materials:-

Problems of Small-Scale Sector

(1) Problem of Raw Material & Power:-

(2) Problem of Finance:-

(3) Old methods of Production:-

(4) Problem of Marketing:-

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

(5) High Cost of Production:-

(6) Competition with Large scale industries:-

(7) More Taxes:-

(8) Lack of Standardisation:-

There is no standardization of finished products. For want of classification, workers do

(9) Sick Units:-

Growth of Public Sector

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

3) To promote redistribution of income & wealth.

4) To create employment opportunities.

5) To promote balanced regional development.

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

Growth and Performance of Public Enterprises:-

Growth of Public Enterprises

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

Meaning:- Privatisation means transfer of ownership or management of an enterprise from

Franchising- authorizing the delivery of certain services in designated geographical areas- is

Conditions for success of Privatisation:-

4) Public services to be provided by private sector must be specific or have measurable

2) Privatisation of SOES enables the government to nop up funds. Government of India’s

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

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

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

7) It may also encourage enter preneurship.

(1) Lack of Proper Strategy:-

Regarding industries to be privatized, the methods of Privatisation, extent of divestment,