Internal Trade: - It refers to buying and selling of goods or services

within the geographical boundaries of a country.

Trade carried Now- External Trade
External Trade: - It refers to buying and selling of goods or services
beyond the geographical limits of the country.
4. Ratan after doing his B.Pharm degree from a reputed government
college started two chemist shops in two different localities of his home
town. Encouraged with the success of these shops, he started six more
shops in different cities of the state. His strategy was to cut price, focus
on lower- and middle-class patients and open shops near hospitals. He
earned good profit margins. But the staff of the shops did not give much
attention to the customers. Because of this mis-management he started
incurring huge losses and his business failed. On the basis of the given
information about Ratan, answer the following questions:
a) Identify and explain the main cause behind the business failure of
Ratan.
b) Explain any two other causes of risk associated with Ratan’s
business.

Answer:
a) The main cause behind the business failure of Ratan is Human Cause.
Human Causes: Human causes include such unexpected events,
like dishonesty, carelessness or negligence of employees,
stoppage of work due to power failure, strikes, riots, management
inefficiency, etc.
b) The other causes of business risks are:
I. Natural causes: Human beings have little control over natural
calamities like flood, earthquake, famine etc. They result in heavy losses
of life, property and income in business.
II. Economic Causes: They are related to a chance of loss due to change
in market condition e.g., fluctuation in demand and prices, competition,
change in exchange rate etc.

CHAPTER 2
Forms of Business Organisation
The business enterprises which are owned, controlled and managed by private
individuals are known as Private sector enterprises. These enterprises work
with the main motive of earning profit. Various forms of such business
organisations are:
(a) Sole proprietorship
(b) Joint Hindu family business
(c) Partnership
(d) Cooperative societies and
(e) Joint stock company

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 a) Sole Proprietorship: The word “sole” implies “only”, and “proprietor”
refers to “owner”. Hence, a sole proprietor is the one who is the only
owner of a business. It refers to a form of business organisation which
is owned, managed and controlled by an individual who is the recipient
of all profits and bearer of all risks.
Features of Sole Proprietorship Business
(i) Formation and closure: Hardly any legal formalities are required to start
a sole proprietary business. Closure of the business can also be done easily.
Thus, there is ease in formation as well as closure of business.
(ii) Liability: Sole proprietors have unlimited liability. She /he has to sell her
personal property to repay the firm’s debts.
(iii) Sole risk bearer and profit recipient: The risk of failure of business is
borne all alone by the sole proprietor. The proprietor enjoys all the benefits
also.
(iv) Control: Sole trader can carry out his plans without any interference from
others.
(v) No separate entity: Business does not have an identity separate from the
owner.
(vi) Lack of business continuity: The death, insanity, imprisonment,
physical ailment or bankruptcy of the sole proprietor may even cause closure
of the business.
Merits:
(i) Quick decision making: A sole proprietor enjoys considerable degree of
freedom in making business decisions. Further the decision-making is prompt
because there is no need to consult others.
(ii) Confidentiality of information: Sole decision-making authority enables
the proprietor to keep all the information related to business operations
confidential and maintain secrecy.
(iii) Direct incentive: A sole proprietor directly gets the benefits of his efforts
as he is the sole recipient of all the profit.
(iv) Sense of accomplishment: The knowledge that one is responsible for the
success of the business not only contributes to self-satisfaction but also a
sense of accomplishment and confidence in one’s abilities.
(v) Ease of formation and closure: Sole proprietorship is the least regulated
form of business; it is easy to start and close the business as per the wish of
the owner.
Limitations
(i) Limited resources: Resources of a sole proprietor are limited to his
personal savings and borrowings from others. Lack of resources is one of the
major reasons why the size of the business generally remains small.
(ii) Limited life of a business concern: The sole proprietorship business is
owned and controlled by one person, so death, insanity, imprisonment etc of
the proprietor can lead to its closure.

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(iii) Unlimited liability: The liability of the sole proprietor is unlimited. If the
business fails, the creditors can recover their dues not merely from the
business assets, but also from the personal assets of the proprietor.
(iv) Limited managerial ability: It is rare to find an individual who excels in
purchasing, selling, financing, etc. Thus decision making may not be balanced
in all the cases.

b) Partnership
The Indian Partnership Act, 1932 defines partnership as “the relation between
persons who have agreed to share the profit of the business carried on by all
or any one of them acting for all.”
Features
(i) Formation: The partnership form of business organisation is governed by
the Indian Partnership Act, 1932. It comes into existence through a legal
agreement.
(ii) Liability: The partners of a firm have unlimited liability. Personal assets
may be used for repaying debts of the business.
(iii) Risk bearing: The partners bear the risks involved in running a business
as a team.
(iv) Decision making and control: The partners share amongst themselves
the responsibility of decision making and control of day to -day activities.
(v) Continuity: The death, retirement, insolvency or insanity of any partner
can bring an end to the business.
(vi) Number of Partners: The minimum number of persons to start a
partnership firm is two. As per Rule 10 of The Companies (miscellaneous)
Rules 2014, at present the maximum number of members can be 50.
(vii) Mutual agency: The business is carried on by all or any one of the
partners acting for all. Every partner is both an agent and a principal.
Merits
(i) Ease of formation and closure: A partnership firm can be formed easily
by putting an agreement between the prospective partners. Closure of the firm
too is an easy task.
(ii) Balanced decision making: The partners can oversee different functions
according to their areas of expertise. So the decisions are likely to be more
balanced.
(iii) More funds: In a partnership, the capital is contributed by a number of
partners. So it can raise larger amount of funds.
(iv) Sharing of risks: The risks involved in running a partnership firm are
shared by all the partners.

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 (v) Secrecy: A partnership firm is not legally required to publish its accounts
and submit its reports. So it can maintain confidentiality of information.
Limitations:
(i) Unlimited liability: Partners are liable to repay debts even from their
personal resources. Thus, they have unlimited liability.
(ii) Limited resources: Capital contributed by the partners is usually not
sufficient to support large scale business operations.
(iii) Possibility of conflicts: Difference in opinion of partners on some issues
may lead to disputes between partners.
(iv) Lack of continuity: Partnership comes to an end with the death,
retirement or insolvency of any partner. It may result in lack of continuity.
(v) Lack of public confidence: A partnership firm is not legally required to
publish its financial reports. As a result, the confidence of the public in
partnership firms is generally low.
Types of Partnership
Partnership can be classified on the basis of two factors, i.e, duration and
liability.
Classification on the basis of duration
(i) Partnership at will: This type of partnership can continue as long as the
partners want and is terminated when any partner gives a notice of
withdrawal from partnership to the firm.
(ii) Particular partnership: Partnership formed for the accomplishment of a
particular project or for a specified time period is called particular
partnership.
Classification on the basis of liability
(i) General Partnership: In general partnership, the liability of partners is
unlimited and joint. The partners enjoy the right to participate in the
management.
(ii) Limited Partnership: In limited partnership, the liability of at least one
partner is unlimited whereas the rest may have limited liability. Such a
partnership does not get terminated with the death, lunacy or insolvency of
the limited partners.

Registration
Registration of a partnership firm means the entering of the firm’s name, along
with the relevant prescribed particulars, in the Register of firms kept with the
Registrar of Firms. It is optional for a partnership firm to get registered.
The consequences of non-registration of a firm

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(a) A partner of an unregistered firm cannot file a suit against the firm or other
partners,
(b) The firm cannot file a suit against third parties, and
(c) The firm cannot file a case against the partners.
In view of these consequences, it is therefore advisable to get the firm
registered.
Partnership Deed
The written agreement which specifies the terms and conditions of the
partnership is called the partnership deed.
Types of Partners
(i) Active partner: An active partner is one who contributes capital,
participates in the management, shares its profits and losses and has
unlimited liability.
(ii) Sleeping or dormant partner: Partners who do not take part in the day-
to-day activities of the business are called sleeping partners.
(iv) Nominal partner: A nominal partner is one who allows the use of his
name by a firm, but does not contribute capital, does not actively take part in
management, does not share its profit or losses but has unlimited liability.
(v) Partner by estoppel: A person is considered a partner by estoppel if,
through his own initiative, conduct or behaviour, he gives an impression to
others that he is a partner of the firm. Such partners are held liable for the
debts of the firm.

c) Joint Hindu Family Business

This is a specific form of business organisation found only in India. It refers
to a form of organisation wherein the business is owned and carried on by the
members of the Hindu Undivided Family (HUF). It is governed by the Hindu
Law. The basis of membership in the business is birth in a particular family
and three successive generations can be members in the business. The
business is controlled by the head of the family who is the eldest member and
is called karta.
Features of Joint Hindu Family
(i) Formation: There should be at least two members in the family and
ancestral property to be inherited by them to start a sole proprietorship
(v) Minor Members: The basis of membership in the business is birth in a
particular family Hence, minors can also be members of the business.
(ii) Liability: The liability of all members except the Karta is limited to their
share of co-parcenery property of the business, But Karta has unlimited
liability.
(iii) Control: The control of the family business lies with the Karta. His
decisions are binding on the other members.

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(iv) Continuity: The business continues even after the death of the Karta as
the next eldest member takes up the position of Karta, leaving the business
stable.
(v) Minor Members: Minors can become the members of the business.
d) Cooperative Society
The cooperative society is a voluntary association of persons, who join
together with the motive of welfare of the members. The cooperative society is
compulsorily required to be registered under the Cooperative Societies Act
1912. The consent of at least ten adult persons is required to form a society.
The capital of a society is raised from its members through issue of shares.
Features
(i) Voluntary membership: A person is free to join a cooperative society, and
can also leave at any time. There cannot be any compulsion for him to join or
quit a society.
(ii) Legal status: Registration of a cooperative society is compulsory. This
provides a separate identity to the society which is distinct from its members.
(iii) Limited liability: The liability of the members of a cooperative society is
limited to the extent of the amount contributed by them as capital.
(iv) Control: In a cooperative society, the power to take decisions lies in the
hands of an elected managing committee.
(v) Service motive: The cooperative society through its purpose lays
emphasis on the values of mutual help and welfare. If any surplus is
generated, it is distributed to the members as dividend.
Merits
(i) Equality in voting status: The principle of ‘one man one vote’ governs the
cooperative society.
(ii) Limited liability: The liability of members of a cooperative society is
limited to the extent of their capital contribution.
(iii) Stable existence: Death, bankruptcy or insanity of the members do not
affect continuity of a cooperative society.
(iv) Economy in operations: The members generally offer honorary services
to the society. As the focus is on elimination of middlemen, this helps in
reducing costs.
(v) Support from government: The cooperative society finds support from
the Government in the form of low taxes, subsidies, and low interest rates on
loans.
(vi) Ease of formation: The cooperative society can be started with a
minimum of ten members. Its formation is governed by the provisions of
Cooperative Societies Act 1912.

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Limitations
(i) Limited resources: The low rate of dividend offered on investment also
acts as an obstacle in attracting membership or more capital from the
members.
(ii) Inefficiency in management: Cooperative societies are unable to attract
and employ expert managers because of their inability to pay them high
salaries.
(iii) Lack of secrecy: As a result of open discussions in the meetings of
members, it is difficult to maintain secrecy about the operations of a
cooperative society.
(iv) Government control: Control of the government negatively affects its
freedom of operation.
(v) Differences of opinion: Internal conflicts arising as a result of contrary
viewpoints may lead to difficulties in decision making.
Types of Cooperative Societies:
(i) Consumer’s cooperative societies: The consumer cooperative societies
are formed to protect the interests of consumers. It purchases goods in bulk
directly from the wholesalers and sells goods to the members.
(ii) Producer’s cooperative societies: These societies are set up to protect
the interest of small producers. The members comprise of producers desirous
of procuring inputs for production of goods to meet the demands of
consumers. It supplies raw materials, equipment and other inputs to the
members and also buys their output for sale.
(iii) Marketing cooperative societies: Such societies members consist of
producers who wish to obtain reasonable prices for their output. The society
aims to eliminate middlemen and improve competitive position of its members
by securing a favourable market for the products.
(iv) Farmer’s cooperative societies: These societies are established to
protect the interests of farmers by providing better inputs at a reasonable cost.
The aim is to gain the benefits of large-scale farming and increase the
productivity.
(v) Credit cooperative societies: Credit cooperative societies are established
for providing easy credit on reasonable terms to the members. The aim of such
societies is to protect the members from the exploitation of lenders who charge
high rates of interest on loans.
(vi) Cooperative housing societies: Cooperative housing societies are
established to help people with limited income to construct houses at
reasonable costs. These societies construct flats or provide plots to members
on which the members themselves can construct the houses as per their
choice.

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 e) Joint Stock Company
A company is an artificial person having a separate legal entity, perpetual
succession and a common seal. The company form of organisation is governed
by The Companies Act, 2013. The shareholders are the owners of the company
while the Board of Directors is the chief managing body elected by the
shareholders.
Features
(i) Artificial person: Like natural persons, a company can own property,
incur debts, borrow money, enter into contracts, sue and be sued. It is,
therefore, called an artificial person.
(ii) Separate legal entity: From the day of its incorporation, a company
acquires an identity, distinct from its members.
(iii) Formation: The formation of a company is a time consuming, expensive
and complicated process which involves the preparation of several documents.
(iv) Perpetual succession: A company being a creation of the law, can be
brought to an end only by law.
(v) Control: The management and control of the affairs of the company is
undertaken by the Board of Directors, which appoints the top management
officials for running the business.
(vi) Liability: The liability of the members is limited to the extent of the capital
contributed by them in a company.
(vii) Common seal: The company being an artificial person cannot sign its
name by itself. Therefore, every company is required to have its own seal
which acts as official signature of the company.
(viii) Risk bearing: The risk of losses in a company is borne by all the
shareholders.
Merits
(i) Limited liability: The shareholders are liable to the extent of the amount
unpaid on the shares held by them.
(ii) Transfer of interest: The shares of a public limited company can be easily
sold in the market and converted into cash in case the need arises. This avoids
blockage of investment.
(iii) Perpetual existence: Existence of a company is not affected by the death,
retirement, resignation, insolvency or insanity of its members as it has a
separate entity from its members.
(iv) Scope for expansion: Capital can be attracted from the public as well as
through loans from banks and financial institutions. Thus there is greater
scope for expansion.

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(v) Professional management: A company can afford to pay higher salaries
to specialists and professionals. It can, therefore, employ people who are
experts in their area of specialisations.
Limitations
(i) Complexity in formation: As compared to sole proprietorship and
partnership form of organisations, formation of a company is more complex.
(ii) Lack of secrecy: The Companies Act requires each public company to
provide from time-to-time a lot of information to the office of the registrar of
companies. Such information is available to the general public also. It is,
therefore, difficult to maintain complete secrecy.
(iii) Impersonal work environment: Separation of ownership and
management leads to situations in which there is lack of effort as well as
personal involvement on the part of the officers of a company.
(iv) Numerous regulations: The functioning of a company is subject to many
legal provisions and compulsions. This reduces the freedom of operations of
a company and takes away a lot of time, effort and money.
(v) Delay in decision making: Companies are democratically managed
through the Board of Directors which is followed by the top management,
middle management and lower-level management. Communication as well as
approval of various proposals may cause delays not only in taking decisions
but also in acting upon them.
(vi) Oligarchic management: In most large sized organisations having a
multitude of shareholders and are spread all over the country and a very small
percentage attend the general meetings. The Board of Directors as such enjoy
considerable freedom in exercising their power which they sometimes use
even contrary to the interests of the shareholders.
(vii) Conflict in interests: There may be conflict of interest amongst various
stakeholders of a company. These demands pose problems in managing the
company as it often becomes difficult to satisfy such diverse interests.
Types of Companies: A company can be either a Private or a Public
company and One Person Company
Private Company: A private company means a company which:
(a) restricts the right of members to transfer its shares;
(b) has a minimum of 2 and a maximum of 200 members, excluding the
present and past employees;
(c) does not invite public to subscribe to its securities.
It is necessary for a private company to use the word private limited after its
name.
Public Company A public company means a company which is not a private
company. As per The Companies Act, a public company is one which:
(a) has a minimum of 7 members and no limit on maximum members;

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(b) has no restriction on transfer securities; and
(c) is not prohibited from inviting the public to subscribe to its securities.
However, a private company which is a subsidiary of a public company is also
treated as a public company.
Privileges of a private limited company as against a public limited
company:
1. A private company can be formed by only two members whereas seven
people are needed to form a public company.
2. There is no need to issue a prospectus as public is not invited to subscribe
to the shares of a private company.
3. Allotment of shares can be done without receiving the minimum
subscription. A private limited company can start business as soon as it
receives the certificate of incorporation.
4. A private company needs to have only two directors as against the minimum
of three directors in the case of a public company. However, the maximum
number of directors for both types of companies is fifteen.
5. A private company is not required to keep an index of members while the
same is necessary in the case of a public company.
One Person Company
One Person Company is a company with only one person as a member. That
one person will be the shareholder of the company. It avails all the benefits of
a private limited company such as separate legal entity, protecting personal
assets from business liability and perpetual succession.
Formation of a Company: Formation of a company is a complex activity
involving completion of legal formalities and procedures. These formalities can
be divided into three distinct stages, which are:
(i) Promotion; (ii) Incorporation and (iii) Subscription of capital.
1. Promotion of a Company: Promotion is the first stage in the formation of
a company. It involves conceiving a business idea and taking an initiative to
form a company so that practical shape can be given to exploiting the available
business opportunity.
Any person or a group of persons or even a company may have discovered an
opportunity. If such a person or a group of persons or a company proceeds to
form a company, then, they are said to be the promoters of the company.
Steps in Promotion:

➢ Identification of Business Opportunity: The first and foremost function

of a promoter is to identify a business idea e.g. production of new product or
service.

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➢ Feasibility Studies: After identifying a business opportunity the promoters
undertake detailed studies of technical, Financial, Economic feasibility of a
business.

➢ Name Approval: After selecting the name of company the promotors submit
an application to the Registrar of companies for its approval.

➢ Fixing up signatories to the Memorandum of Association: Promotors

have to decide about the director who will be signing the memorandum of
Association.

➢ Appointment of professional: Promoters appoint merchant bankers,

auditors etc.

➢ Preparation of necessary documents: The promoters prepare certain legal

documents such as memorandum of Association, Articles of Association
which have to be submitted to the Registrar of the companies.
2.Incorporation
¾ Application for incorporation: Promoters make an application for the
incorporation of the company to the Registrar of companies.

➢ Filing of necessary documents: Promoters files the following documents:

(i) Memorandum of Association.
(ii) Articles of Association.
(iii) Statement of Authorized Capital
(iv) Consent of proposed director.
(v) Agreement with proposed managing director.
(vi) Statutory declaration.

➢ Payment of fees: Along with filing of above documents, registration fee has
to be deposited which depends on amount of the authorized capital.

➢ Registration: The Registrar verifies all the document submitted. If he is

satisfied then he enters the name of the company in his Register.

➢ Certificate of Incorporation: After entering the name of the company in

the register. The Registrar issues a Certificate of Incorporation. This is called
the birth certificate of the company.
3 Capital Subscription: A public company can raise funds from the
public by issuing shares and Debentures. For this it has to issue
prospectus and undergo various other formalities:
Steps in capital subscription:
1. SEBI Approval: SEBI regulates the capital market of India. A public
company is required to take approval from SEBI.
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2. Filing of Prospectus: Prospectus means any documents which invites
offers from the public to purchase share and Debenture of the company.
3. Appointment of bankers, brokers, underwriters: Banker of the company
receive the application money. Brokers encourage the public to apply for the
shares, underwriters are the person who undertake to buy the shares if these
are not subscribed by the public. They receive a commission for underwriting.
4. Minimum subscription: According to the SEBI guide lines minimum
subscription is 90% of the issue amount. If minimum subscription is not
received then the allotment cannot be made and the application money must
be returned to the applicants within 30 days.
5. Application to Stock Exchange: It is necessary for a public company to
list their shares in the stock exchange therefore the promoters apply in stock
exchange to list company shares.
6. Allotment of Shares: Allotment of shares means acceptance of share
applied. Allotment letters are issued to the shareholders. The name and
address of the shareholders submitted to the Registrar.
4. COMMENCEMENT OF BUSINESS: To commence business a public
company has to obtain a certificate of commencement of Business. For this
the following documents have to be filled with the registrar of companies.
1. A declaration that 90% of the issued amount has been subscribed.
2. A declaration that all directors have paid in cash in respect of allotment of
shares made to them.
3. A statutory declaration that the above requirements have been completed
and must be signed by the director of company.
IMPORTANT DOCUMENTS IN THE FORMATION OF A COMPANY
1. Memorandum of Association: It is the most important document as it
defines the objectives of the company. No company can legally undertake
activities that are not contained in its Memorandum of Association.
Contents of Memorandum of Association:
(i) The name clause: This clause contains the name of the company with
which the company will be known.
(ii) Registered office clause: This clause contains the name of the state, in
which the registered office of the company is proposed to be situated.
(iii) Objects clause: It defines the purpose for which the company is formed.
(iv) Liability clause: This clause limits the liability of the members to the
amount unpaid on the shares owned by them.
(v) Capital clause: This clause specifies the maximum capital which the
company will be authorised to raise through the issue of shares.

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2. Articles of Association: Articles of Association are the rules regarding
internal management of a company. These rules are subsidiary to the
Memorandum of Association.
Contents of the Articles:
1. The amount of share capital and different classes of shares.
2. Rights of each class of shareholders.
3. Procedure for making allotment of shares.
4. Procedure for issuing share certificates.
5. Procedure for forfeiture and reissue of forfeited shares.
6. Rules regarding casting of votes and proxy voting
7. Procedure for selection and removal of directors
8. Dividend declaration and payment related rules
9. Procedure for capital readjustment
10. Procedure regarding winding up of the company.

3 . Prospectus: Prospectus means any document which invites deposits from

the public to purchase share or debentures of a company.

Choice of form of Business Organisation

(i) Cost and ease in setting up the organisation: From the point of view of
initial cost, sole proprietorship is the preferred form as it involves least
expenditure. Company form of organisation, on the other hand, is more
complex and involves greater costs.
(ii) Liability: In case of sole proprietorship and partnership firms, the liability
of the owners/partners is unlimited. In joint Hindu family business, only the
karta has unlimited liability. In cooperative societies and companies, however,
liability is limited.
(iii) Continuity: The continuity of sole proprietorship and partnership firms
is affected by death, insolvency or insanity of the owners. However, such
factors do not affect the continuity of business in the case of Joint Hindu
family business, cooperative societies and companies.
(iv) Management ability: A sole proprietor may find it difficult to have
expertise in all functional areas of management. If the organisation’s
operations are complex in nature and require professionalised management,
company form of organisation is a better alternative.
(v) Capital considerations: If the scale of operations is large, company form
may be suitable whereas for medium and small sized business one can opt
for partnership or sole proprietorship.
(vi) Degree of control: If direct control over operations and absolute decision-
making power is required, proprietorship may be preferred. But if the owners
do not mind sharing control and decision making, partnership or company
form of organisation can be adopted.
(vi) Nature of business: If direct personal contact is needed with the
customers, sole proprietorship may be more suitable. For large manufacturing
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units, however, when direct personal contact with the customer is not
required, the company form of organisation may be adopted. Similarly, in
cases where services of a professional nature are required, partnership form
is much more suitable.
MCQ QUESTIONS
1. The certificate of …………is called as the birth certificate of the
company.
A. Prospectus
B. Certificate of Incorporation
C. Certificate of commencement
D. Memorandum of Association
2. Assertion: A public company inviting funds from the general public
must make adequate disclosure of all relevant information and must
not conceal any material information from the potential investors.
Reason: Prior approval from SEBI is necessary for protecting the
interest of the investors.
(A) Both A and R are true. R is the correct explanation of A.
(B) Both A and R are true, but R is not the correct explanation of A.
(C) A is correct, but R is incorrect.
(D) A is incorrect, but R is correct.
3. Identify the stage which involves conceiving a business idea and taking
an initiative to form a company so that practical shape can be given to
exploiting the available business opportunity.
(A) Company (B) Promotion (C) Partnership (D) None of these
4. It is a popular form of business organisation and is the most suitable
form for small businesses, especially in their initial years of operation.
(A) Company (B) JHF (C) Partnership (D) Sole proprietorship
5. The Memorandum of Association must be signed by at least …. Persons
in case of a public company and by ….. persons in case of a private
company.
A. 1 and 2
B. 2 and 5
C. 2 and 7
D. 7 and 2
6. Assertion: Promoters have to decide about the members who will be
signing the Memorandum of Association of the proposed company.
Reason: The people signing memorandum are also the first Directors
of the Company.
(A) Both A and R are true. R is the correct explanation of A.
(B) Both A and R are true, but R is not the correct explanation of A.
(C) A is correct, but R is incorrect.
(D) A is incorrect, but R is correct.
7. Joint Hindu Family Business is controlled by the head of the family who
is the eldest member and is called…...
A. Karanavar
B. Co-parcener

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 C. Kartha
D. Superior
8. A ………… partner is one whose association with the firm is unknown
to the general public. Other than this distinct feature, in all other
aspects he is like the rest of the partners. He contributes to the capital
of the firm, takes part in the management, shares its profits and losses,
and has unlimited liability towards the creditors.
(A) Secret (B) Active (C) Zero (D) None of these
9. Assertion: Articles of Association are the rules regarding internal
management of a company.
Reason: The rules are not subsidiary to the Memorandum of
Association.
(A) Both A and R are true. R is the correct explanation of A.
(B) Both A and R are true, but R is not the correct explanation of A.
(C) A is correct, but R is incorrect.
(D) A is incorrect, but R is correct.

10. As per Rule 10 of The Companies (miscellaneous) Rules 2014, at

Present the maximum number of partners can be …
(A) 2 (B) 200 (C) 50 (D) 100

ANSWERS
1. (B) Incorporation
2. (A) Both A and R are true. R is the correct explanation of A.
3. (B) Promotion
4. (D) Sole proprietorship
5. ( D)Seven, two
6. (A) Both A and R are true. R is the correct explanation of A.
7. (c)Karta
8. (A) Secret
9. (C) A is correct, but R is incorrect.
10. (C) 50
Short Answer questions (3/4 Marks)
1. Read the following text and answer questions(A-D) on the basis of the
same.
Sarah's friends lived in a small town of 1,000 people. They were
struggling to make ends meet. They didn't own a home and were paying
heavy rents, leaving them with minimal funds for other essentials.
Sarah was concerned about their well-being and she wanted to help
them. She listened to their challenges and offering emotional support.
Her aim was to solve the housing problems of that locality by
constructing houses and giving the option of paying in instalments.
Sarah and her friends established an organisation to help people with
limited income to construct houses at reasonable costs. f lats or
provide plots to members on which the members themselves can
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 construct the houses as per their choice.
A. Name the form of organisation established by Sarah and her friends
to solve their housing crisis?
(A) Sole proprietorship
(B) Partnership
(C) Cooperative society
(D) Company
B. Under which Act, these organisations are governed?
(A) Indian Partnership Act, 1932
(B) Cooperative Societies Act, 1912
(C) The Companies Act, 2013
(D) Hindu Succession Act, 1956
C. What is the minimum number of persons required to form such
organisation?
(A) 2 (B) 5 (C) 20 (D) 10
D. Who can become the members of the above identified organisation?
(A) Person of Sound mind (B) Has a common interest (C) Any person
who is above 18 years (D) All of the Above
Answer:
1.(C) Cooperative society
2. (B) Cooperative Societies Act, 1912
3. (D) 10
4. (D) All of the Above
2. It can be described as an artificial person having a separate legal
entity, perpetual succession and a common seal. Identify the type of
business organisation. Explain its merits.
Ans: Joint stock company
Merits
i. Limited liability: The shareholders are liable to the extent of
the amount unpaid on the shares held by them.
ii. Transfer of interest: The shares of a public limited company
can be easily sold in the market and converted into cash in
case the need arises. This avoids blockage of investment.
iii. Perpetual existence: Existence of a company is not affected
by the death, retirement, resignation, insolvency or insanity
of its members as it has a separate entity from its members.
iv. Scope for expansion: Capital can be attracted from the
public as well as through loans from banks and financial
institutions. Thus there is greater scope for expansion.
v. Professional management: A company can afford to pay
higher salaries to specialists and professionals. It can,
therefore, employ people who are experts in their area of
specialisations.
3. Partnership firm’s registration is optional, but still why do partnership
firms willingly go through this legal formality and get themselves
registered? Explain.

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 Ans: The consequences of non-registration of a firm
a) A partner of an unregistered firm cannot file a suit against the
firm or other partners,
b) The firm cannot file a suit against third parties, and
c) The firm cannot file a case against the partners.
4. Explain the choice of form of business organisation on the basis of:
i) Liability ii) Continuity iii) Management ability iv) Capital
consideration.
i) Liability: In case of sole proprietorship and partnership firms, the
liability of the owners/partners is unlimited. In joint Hindu family business,
only the karta has unlimited liability. In cooperative societies and companies,
however, liability is limited.
(ii) Continuity: The continuity of sole proprietorship and partnership firms is
affected by death, insolvency or insanity of the owners. However, such factors
do not affect the continuity of business in the case of Joint Hindu family
business, cooperative societies and companies.
(iii) Management ability: A sole proprietor may find it difficult to have
expertise in all functional areas of management. If the organisation’s
operations are complex in nature and require professionalised management,
company form of organisation is a better alternative.
(iv) Capital considerations: If the scale of operations is large, company form
may be suitable whereas for medium and small sized business one can opt
for partnership or sole proprietorship.
5. It is a voluntary association of persons, who join together with the
motive of welfare of the members. They are driven by the need to
protect their economic interests in the face of possible exploitation at
the hands of middlemen obsessed with the desire to earn greater
profits. Name the type of business organisation. Explain its types.Ans:
Co-operative society.
(i) Consumer’s cooperative societies: The consumer cooperative societies
are formed to protect the interests of consumers; The society aims at
eliminating middlemen to achieve economy in operations. It purchases goods
in bulk directly from the wholesalers and sells goods to the members.
(ii) Producer’s cooperative societies: These societies are set up to protect
the interest of small producers. The members comprise of producers desirous
of procuring inputs for production of goods to meet the demands of
consumers. It supplies raw materials, equipment and other inputs to the
members and also buys their output for sale.
(iii) Marketing cooperative societies: Such societies members consist of
producers who wish to obtain reasonable prices for their output. The society
aims to eliminate middlemen and improve competitive position of its members
by securing a favourable market for the products.

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(iv) Farmer’s cooperative societies: These societies are established to
protect the interests of farmers by providing better inputs at a reasonable cost.
The aim is to gain the benefits of large-scale farming and increase the
productivity.
Long answer questions (6 marks)
1.This form of business is particularly common in areas of personalised
services such as beauty parlours, hair salons and small- scale activities like
running a stationery shop in a locality. Identify the form of business
organisation. Explain its advantages.
Ans: Sole proprietorship
Merits
(i) Quick decision making: A sole proprietor enjoys considerable degree of
freedom in making business decisions. Further the decision- making is
prompt because there is no need to consult others.
(ii) Confidentiality of information: Sole decision -making authority enables
the proprietor to keep all the information related to business operations
confidential and maintain secrecy.
(iii) Direct incentive: A sole proprietor directly gets the benefits of his efforts
as he is the sole recipient of all the profit.
(iv) Sense of accomplishment: The knowledge that one is responsible for the
success of the business not only contributes to self-satisfaction but also a
sense of accomplishment and confidence in one’s abilities.
(v) Ease of formation and closure: Sole proprietorship is the least regulated
form of business, it is easy to start and close the business as per the wish of
the owner.
2. It is a specific form of business organisation found only in India which is
one of the oldest types of business organisation in the country. Write a short
note about this form of business.
Ans: Joint Hindu Family Business
This is a specific form of business organisation found only in India. It refers
to a form of organisation wherein the business is owned and carried on by the
members of the Hindu Undivided Family (HUF). It is governed by the Hindu
Law. The basis of membership in the business is birth in a particular family
and three successive generations can be members in the business. The
business is controlled by the head of the family who is the eldest member and
is called karta.
(i) Formation: There should be at least two members in the family and
ancestral property to be inherited by them to start a sole proprietorship.
(v) Minor Members: The basis of membership in the business is birth in a
particular family Hence, minors can also be members of the business.
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 (ii) Liability: The liability of all members except the karta is limited to their
share of co-parcenery property of the business, But Karta has unlimited
liability.
(iii) Control: The control of the family business lies with the karta. His
decisions are binding on the other members.
(iv) Continuity: The business continues even after the death of the karta as
the next eldest member takes up the position of karta, leaving the business
stable.
(v) Minor Members: Minors can become the members of the business.
3. Compare different types of partners like active partner, dormant partner,
secret partner and partner by estoppel on the basis of capital contribution,
liability, participation in management and profit share.
(i) Active partner: An active partner is one who contributes capital,
participates in the management, shares its profits and losses and has
unlimited liability.
(ii) Sleeping or dormant partner: Partners who do not take part in the day
to day activities of the business are called sleeping partners.
(iii) Secret partner: A secret partner is one whose association with the firm
is unknown to the general public. He contributes to the capital of the firm,
takes part in the management, shares its profits and losses, and has
unlimited liability.
(iv) Partner by estoppel: A person is considered a partner by estoppel if,
through his own initiative, conduct or behaviour, he gives an impression to
others that he is a partner of the firm. Such partners are held liable for the
debts of the firm.
4. Briefly explain the various documents required to be submitted to get the
company registered.
1. Memorandum of Association: It is the most important document as it
defines the objectives of the company. No company can legally undertake
activities that are not contained in its Memorandum of Association.
2. Articles of Association: Articles of Association are the rules regarding
internal management of a company. These rules are subsidiary to the
Memorandum of Association.
3. Prospectus: Invitation to public for subscription of shares.
5. As compared to the sole proprietorship and partnership forms of
organisation, this form of organisation has large financial resources. Further,
capital can be attracted from the public as well as through loans from banks
and financial institutions. Identify the form of business organisation and
explain its demerits.
Ans: Joint stock company.
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Limitations
(i) Complexity in formation: As compared to sole proprietorship and
partnership form of organisations, formation of a company is more complex.
(ii) Lack of secrecy: The Companies Act requires each public company to
provide from time-to-time a lot of information to the office of the registrar of
companies. Such information is available to the general public also. It is,
therefore, difficult to maintain complete secrecy.
(iii) Impersonal work environment: Separation of ownership and
management leads to situations in which there is lack of effort as well as
personal involvement on the part of the officers of a company.
(iv) Numerous regulations: The functioning of a company is subject to many
legal provisions and compulsions. This reduces the freedom of operations of
a company and takes away a lot of time, effort and money.
(v) Delay in decision making: Companies are democratically managed
through the Board of Directors which is followed by the top management,
middle management and lower level management. Communication as well as
approval of various proposals may cause delays not only in taking decisions
but also in acting upon them.
CHAPTER-3
Public, Private and Global Enterprises

Indian Economy

Private Sector Public Sector

Difference between Private Sector and Public Sector

Private Sector Public Sector

x It includes the business x It includes the enterprises and
enterprises owned, managed organisations owned and managed by
and controlled by individuals government (central or state or both)
or group of individuals. either fully or partly.
x Enterprises work with the x These are popularly known as Public
main objective of earning Sector Undertakings /Enterprises
profit. (PSUs/PSEs).
x There is more freedom of x Enterprises work with the main motive
operation. of providing social welfare.
x These are directly accountable x There is less freedom of operation.
to general public. x These are accountable to general public
x Forms of Private Sector as well as to parliament.
Enterprises are: x Forms of Public Sector Enterprises:
o Sole Proprietorship o Departmental Undertakings
o Partnership o Statutory Corporations
o Joint Stock Company (Public Corporations)
o Government Company
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 (Public Company,
Private Company and
OPC)
o Joint Hindu Family
Business (Hindu
Undivided Family)
o Cooperative Society

Public Sector Enterprises:

1. Departmental Undertakings: These are established as departments of
ministry and financed, managed and controlled by either central government
or state government. Indian Railways, All India Radio, State Public
Transportation (KSRTC, UPSRTC, RSRTC, etc.) are some examples of these.

Departmental Undertakings:
Features Merits Limitations
1. No Separate Entity 1. Parliament has 1. Lack of Flexibility
2. Financed by Effective Control 2. Leads to Delay
Government 2. High Degree of 3. Avoids Risky
3. Accounting & Audit Public Ventures
Control as per Accountability 4. Over Political
Government Rules 3. Source of Revenue Interference
4. Employees are for Government 5. Promotes Red
Government Servants 4. Suitable for Tapism
5. Accountable to the National Security 6. Insensitive to
concerned Ministry Consumer Needs

2. Statutory Corporations: These are established by passing special Act in

the Parliament. The Act defines its power, functions, rules, regulations of
governing employees and its relationship with government. RBI, UTI, ONGC,
LIC are some examples of these.

Statutory Corporations:

Features Merits Limitations

1. Set up under Act of 1. Internal 1. Autonomy for
Parliament Autonomy name’s sake
2. Separate Legal Entity 2. Quick decisions 2. Major Political
3. Employees are not 3. Effective Interference
Government Servants Parliamentary 3. Hub of Corruption
4. Not Subject to Audit & control 4. Appointment of
Accounting like 4. Efficient Advisors by
Government Management Government
Department 5. No Interference by
5. Independently Government in
Financed Finance
6. Wholly owned by
Government

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3. Government Company: A government company is a company which is
registered under the Companies Act, 2013 and in which not less than 51% of
the paid-up capital is held by central government or state government or
jointly by both. BHEL, SAIL, NMDC, etc. are some examples of it.

Government Company:

Features Merits Limitations

1. Registered under 1. Easy to 1. Interference of
the Companies Act, Form Ministers and
2013 2. Separate Government
2. Separate Legal Legal Entity Officials
Entity 3. Enjoys 2. Not Directly
3. Management by Autonomy Answerable to
Provisions of the 4. Able to Parliament
Companies Act Control 3. Government is
4. Employees are Market the Sole
appointed as per Shareholder
MOA of Companies 4. Provisions of the
5. Auditor is appointed Companies Act
by Government do not have
6. Permitted to raise much Relevance
funds from Capital
Market

Multi-national Company/Global Enterprise:

x Global enterprises are huge industrial organisations which extend their
industrial and marketing operations through a network of their
branches in several countries but these have their headquarters in one
country in which these are incorporated.
x Walmart, IBM, Microsoft, Toyota Motors, Coca cola, Wipro, Infosys,
Apple Inc. are some examples of MNCs.

Features of MNCs:

1. Centralized control:
x MNCs have headquarters in their home countries from where they
exercise control over all branches and subsidiaries.
x It provides only broad policy framework to them and there is no
interference in their day-to-day operations.
2. International Operations:
x An MNC has production, marketing and other facilities in several
countries.
3. Foreign Collaborations:
x Usually, they enter into agreements relating to sale of technology,
production of goods, use of brand name etc. with local firms in the host
country.
4. Huge Capital Resources:
x MNCs possess huge capital resources and they are able to raise lot of
funds from various sources.

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5. Advanced technology: These organisations possess advanced and
superior
technology which enables them to provide world class products &
services.
6. Product Innovations:
x MNCs have highly sophisticated research and development
departments.
x These are engaged in developing new products and superior design of
existing products.
7. Marketing Strategies:
x MNCs use aggressive marketing strategies.
x Their brands are well known and spend huge amounts on advertising
and sale promotion.

Joint Venture:
x When two or more businesses agree to join together for a common
purpose and mutual benefit, it gives rise to a joint venture.
x These two or more organisations may be private, government-owned or
a foreign company.
x In a broader sense, a joint venture is the pooling of resources and
expertise by two or more businesses, to achieve a particular goal.

Benefits of Joint Venture:

(a) Increased resources and capacity:
Joining hands with another or teaming up adds to existing resources and
capacity enabling the joint venture company to grow and expand more quickly
and efficiently.
(b) Access to new markets & distribution networks:
When a business enters into a joint venture with a partner from another
country, it opens up a vast growing market.
(c) Access to technology:
Technology is a major factor for most businesses to enter into joint ventures.
Advanced techniques of production leading to superior quality products save
a lot of time, energy & investment as they do not have to develop their own
technology.

(d) Innovation:
The markets are increasingly becoming more demanding in terms of new and
innovative products. Joint ventures allow business to come up with something
new and creative for the same market.
(e) Low cost of production:
When international corporations invest in India, they benefit immensely due
to the lower cost of production. They are able to get quality products for their
global requirements. India is becoming an important global source and
extremely competitive in many products.
(f) Established brand name:
When two businesses enter into a joint venture, one of the parties’ benefits
from the other’s goodwill which has already been established in the market.
If the joint venture is in India and with an Indian company, the Indian
company does not have to spend time or money in developing a brand name
for the product or even a distribution system.
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Public Private Partnership (PPP):
x PPP is defined as a relationship between public and private entities in
the context of infrastructure and other services.
x The public partners in PPP are Government entities, i.e., ministries,
government departments, municipalities or state-owned enterprises.
x The private partners can be local or foreign and include businesses or
investors with technical or financial expertise relevant to the project.
x Under the PPP model, public sector plays an important role and ensures
that the social obligations are fulfilled and sector reforms and public
investment are successfully met.
x The private sector’s role in the partnership is to make use of its expertise
in operations, managing tasks and innovation to run the business
efficiently.
x 135 Km expressway by Kundli Manesar Expressway Ltd., Delhi Metro
Railway Corporation, and Automated Testing Stations are some
examples of PPP projects.
Features of PPP Model:
x Contract with the private party to design and build public facility.
x Facility is financed and owned by the public sector.
x Key driver is the transfer of design and construction risk.
Multiple Choice Questions (MCQs)/One Mark Questions
Q.1 Match the following:
A B

i) Financed through budget allocation 1. Statutory Corporations

ii) Formed by special Act 2. MNCs

iii) Incorporated under Companies Act. 3 Departmental Undertakings

iv) Centralised control over the 4. Government Company

operations

(a) i)-3, ii)-1, iii)-4, iv)-2 (b) i)-4, ii)-2, iii)-3, iv)-1
(c) i)-1, ii)-2, iii)-3, iv)-4 (d) i)-3, ii)-1, iii)-2, iv)-4

Q.2 Government decided to sell the shares in Telecom department to private

sector. This is an example of _______
(a) Disinvestment (b) Memorandum of Undertaking
(c) Reconstruction (d) Rehabilitation

Q.3 LIC is an example of a................

(a) Multinational Company (b) Departmental Undertaking
(c) Statutory Corporation (d) None of these

Q.4 Public Sector Enterprises (PSEs / PSUs) are owned and managed by
______
(a) HUF (b) Government
(c) Private Sector (d) Foreign Companies

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Q.5 Which among the following is a departmental undertaking?
(a) Air India (b) LIC (c) SBI (d) Indian Railways

Q.6 Pick out the departmental undertaking from the following:

(a) Shipping Corporation of India (b) RBI
(c) Indian Railways (d) LIC

Q.7 Identify the business which is brought in to existence by a Special Act of

Parliament or State Legislature.
(a) Departmental Organisation (b) Public Corporation
(c) Government Company (d) Private Company

Q.8 What is the minimum portion that the Government should hold in the
paid-up capital of a Government Company?
(a) 49% (b) 51% (c) 50% (d) 25%

Instructions: Q.9 to Q.12 are based on Assertion and Reason. In each

question, on the basis of (A) and (R) given in the question, choose the correct
choice from the options given below:
(a) Both (A) and (R) are wrong
(b) Only (A) is right and (R) is wrong
(c) Both (A) and (R) are right and (R) is the correct explanation of (A)
(d) Both (A) and (R) are right but (R) is not the correct explanation of (A)

Q.9 Assertion (A): When a national security is concerned, departmental

undertakings form of public sector enterprises is most suitable.
Reason (R): Departmental undertaking is under the direct control and supervision
of the concerned ministry.

Q.10 Assertion (A): The government generally does not interfere in their financial
matters, including their income and receipts.
Reason (R): The funds of these organisations do not come from the central budget.
Q.11 Assertion (A): Partnership is a relation between two or more persons who
agree to
carry on a business to share profits.
Reason (R): Joint ventures and partnership are same.

Q.12 Assertion (A): MNCs have centralised control.

Reason (R): They only aim at maximising profits irrespective to spreading
their branches all over.
Instructions: Q.13 to Q.16 are based on two statements, in each question,
choose
the correct option from the following:
(a) Both Statements are wrong
(b) Statement I is right and Statement II is wrong
(c) Statement I is wrong and Statement II is right
(d) Both Statements are right

Q.13 Statement I: A statutory corporation is established under the Companies

Act, 2013
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and is registered and governed by the provisions of the Act.
Statement II: A government company may be formed as a private limited company
or a
public limited company.

Q.14 Statement I: The shares of a government company are purchased in the

name
of the President of India.
Statement II: The government is the major shareholder and exercises control over
the management of government companies.

Q.15 Statement I: Qualitative research requires huge investment which only

global
enterprises can afford.
Statement II: Global enterprises possess a more reliable and upto-date market
information system. Their advertising and sales techniques are normally very
effective.
Q.16 Statement I: A public private partnership ensures higher quality and timely
provision of public services.
Statement II: Huge industrial organization which extend their industrial
operations
through a network of their branches in several countries are known as global
enterprises.
Read the following and answer Q.17 to Q.20 on the basis of the same:
Indian Railways is a part of Railway Ministry. It is organised, financed and
controlled by
Railway Ministry. The finances are allocated from government treasury and
whatever
revenue it earns is deposited to government treasury only. It is treated as a part of
government and even the appointment recruitment and selection of employees is
done in the same way as that of civil servant.
Gas Authority of India Ltd. (GAIL) is carrying on various projects of energy and
power.
Majority of its shares are held by the government of India. It was registered under
the
previous Companies Act. It enjoys all the characteristics of a company. The board
of
directors are appointed by the government. The Board and shareholders are
responsible
for the efficient working of the company. The company prepares its annual report
and
submit to the appropriate authorities.
Q.17 Name the type of public sector enterprise Indian Railways is:
(a) Government Company (b) Departmental Undertaking
(c) Statutory Corporation (d) Public Company

Q.18 How does Indian Railways get its finance?

(a) Independently financed (b) From government treasury
(c) From Reserve Bank of India (d) From the public

Q.19 Name the type of public sector enterprise GAIL is:

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 (a) Government Company (b) Departmental Undertaking
(c) Statutory Corporation (d) Public Company

Q.20 In whose name does the public sector enterprise identified in Q.19 buy
shares?
(a) The Central Bank (b) The Governor of India
(c) The President of India (d) The Prime Minister of India
Answer Key

1 (a) 2 (a) 3 (c) 4 (b) 5 (d) 6 (c) 7 (b) 8 (b) 9 (c) 10 (c)
11 (b) 12 (b) 13 (c) 14 (d) 15 (d) 16 (d) 17 (b) 18 (b) 19 (a) 20 (b)

Very Short Answer Type Questions ( 3 Marks Questions)

Q.1 The Government of India planned to begin a Road Project. The

Government needed management specialists and financial help to complete
it. The Government contacted the private sector to fulfill this requirement.
Now, this project will be completed jointly by both the public sector and
private sector.
(a) Identify the form of enterprise.
(b) Give any two features of such enterprise.
Ans. (a) Public Private Partnership
(b) Features:
1. Contract with the private party to design and build public facility.
2. Facility is financed and owned by the public sector.
Q.2 Differentiate between private sector and public sector enterprises.
Ans. Difference between Private Sector and Public Sector
Private Sector Public Sector
x It includes the business x It includes the enterprises and
enterprises owned, organisations owned and managed by
managed and controlled government (central or state or both)
by individuals or group of either fully or partly.
individuals. x These are popularly known as Public
x Forms of Private Sector Sector Undertakings /Enterprises
Enterprises are: (PSUs/PSEs).
o Sole Proprietorship x Forms of Public Sector Enterprises:
o Partnership o Departmental Undertakings
o Joint Stock o Statutory Corporations
Company (Public Corporations)
(Public Company,Private o Government Company
Company & OPC)
o Joint Hindu Family
Business
o Cooperative Society

Q.3 “Departmental Undertakings are a curse for public enterprise.” Do you

agree? Give reasons to support your answer.
Ans. Yes.

Reasons:
1. Lack of Flexibility
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 2. Leads to Delay
3. Avoids Risky Ventures
4. Over Political Interference

Q.4 “multi-national corporations are giants both in terms of assets and

operations.” Explain this statement.
Ans.
1. Huge Capital Resources:
MNCs possess huge capital resources and they are able to raise lot of funds
from various sources.
2. International Operations:
An MNC has production, marketing and other facilities in several countries.
3. Foreign Collaborations:
Usually, they enter into agreements relating to sale of technology, production
of goods, use of brand name etc. with local firms in the host country.

Q.5 Why is the government company form of organisation preferred to other

types in the public sector?
Ans. Merits of Government Company:
1. Easy to Form
2. Separate Legal Entity
3. Enjoys Autonomy

Short Answer Type Questions/Four Marks Questions

Q.1 To overcome the difficulties faced by public in public transport system,

the government of India started the METRO project in which the government
involved private sector participation to get the benefits of efficiency of private
sector. The project was great success as lakhs of people are enjoying the metro
service to move from one place to other.
(a) Identify the form of enterprise.
(b) Give any three features of such enterprise.

Ans. (a) Public Private Partnership

(b) Features:
1. Contract with the private party to design and build public facility.
2. Facility is financed and owned by the public sector.
3. Key driver is the transfer of design and construction risk.

Q.2 Distinguish between Departmental Undertakings and Statutory

Corporation on the basis of:
(i) Incorporation (ii) Legal Status
(iii) Autonomy (iv) Suitability

Ans. Departmental Undertakings Vs Statutory Corporation

Basis Departmental Statutory Corporation

Undertakings

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 These are not incorporated These are incorporated under
Incorporation under any act but special act passed in
established by the ministry parliament
as department of
government
Legal Status No separate legal entity It has separate legal entity
Autonomy No autonomy Sufficient autonomy
Suitability Where national security is Industrial and commercial
concerned undertaking of national
priority

Q.3 Name the enterprise which is the result of partnership between two
companies. Why do two companies unite together to work as one enterprise?
Give at least three reasons.

Ans. Joint Venture.

Reasons:
1. Increased Resources and Capacity:
Joining hands with another or teaming up adds to existing resources and
capacity enabling the joint venture company to grow and expand more quickly
and efficiently
2. Access to New Markets and Distribution Networks:
When a business enters into a joint venture with a partner from another
country, it opens up a vast growing market.
3. Access to Technology:
Technology is a major factor for most businesses to enter into joint ventures.
Advanced techniques of production leading to superior quality products save
a lot of time, energy & investment as they do not have to develop their own
technology.
Q.4 Name the organisation which is established by passing a Special Act of
Parliament or State Legislature. Give any three characteristics of such
enterprise.
Ans. Statutory Corporation
Characteristics:
1. Set up under Act of Parliament
2. Separate Legal Entity
3. Employees are not Government Servants

Q.5 You must have consumed soft drinks like Coca cola and Pepsi. Identify
these companies and discuss three features of such companies.

Ans. Global Enterprises/Multi-national Corporations

Features:
1. Advanced technology:
These organisations possess advanced and superior technology which enables
them to provide world class products & services.
2. Product Innovations:
MNCs have highly sophisticated research and development departments.
These are engaged in developing new products and superior design of existing
products.

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3. Marketing Strategies:
MNCs use aggressive marketing strategies. Their brands are well known and
spend huge amounts on advertising and sale promotion

Long Answer Type Questions/Six Marks Questions

Q.1 The Tata Group, founded by Jamshedji N. Tata in 1868, as a private

trading firm. Presently doing business in different segments like steel,
automobiles, energy, home care products, etc. The group is managed by
professional managers appointed by the Board of Directors. The business
group enjoy global leadership and its main motive is to earn profit and
generate wealth. The group is not accountable to the public.
(i) The given case is referring to the working of a private sector enterprise.
Name the other sector which is also working in our mixed economy.
(ii) In the instant case, the group is not accountable to the public. State to
whom the group is accountable?
(iii) What is the main aim of public sector enterprises?
(iv) In whose hand the management of public enterprises are entrusted?
(v) Does public enterprises have freedom of operations?
(vi) Are public enterprises accountable to the public?
Ans.
(i) Public Sector
(ii) Owners/Investors
(iii) To render services to the public at large.
(iv) The management and control lies in the hands of the Board of Directors
having more of government representatives.
(v) Due to government interference, freedom of operation is less.
(vi) Yes, these enterprises are accountable to the public through Parliament.

Q.2 Explain the characteristics of global enterprises.

Ans. Characteristics of Global Enterprises:
1. Centralized control:
x MNCs have headquarters in their home countries from where they
exercise control over all branches and subsidiaries.
x It provides only broad policy framework to them and there is no
interference in their day to day operations.
2. International Operations:
x An MNC has production, marketing and other facilities in several
countries.
3. Foreign Collaborations:
x Usually they enter into agreements relating to sale of technology,
production of goods, use of brand name etc. with local firms in the host
country.
4. Huge Capital Resources:
x MNCs possess huge capital resources and they are able to raise lot of
funds from various sources.
5. Advanced technology:
x These organisations possess advanced and superior technology which
enables them to provide world class products & services.
6. Product Innovations:

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 x MNCs have highly sophisticated research and development
departments.
These are engaged in developing new products and superior design of existing
products.

Q.3 Discuss the benefits of Joint Venture.

Ans. Benefits of Joint Venture:
(a) Increased resources and capacity:
Joining hands with another or teaming up adds to existing resources and
capacity enabling the joint venture company to grow and expand more quickly
and efficiently.
(b) Access to new markets & distribution networks:
When a business enters into a joint venture with a partner from another
country, it opens up a vast growing market.
(c) Access to technology:
Technology is a major factor for most businesses to enter into joint ventures.
Advanced techniques of production leading to superior quality products save
a lot of time, energy & investment as they do not have to develop their own
technology.
(d) Innovation:
The markets are increasingly becoming more demanding in terms of new and
innovative products. Joint ventures allow business to come up with something
new and creative for the same market.
(e) Low cost of production: When international corporations invest in India,
they benefit immensely due to the lower cost of production.

(f) Established brand name:

When two businesses enter into a joint venture, one of the parties benefits
from the other’s goodwill which has already been established in the market.

Q.4 What do you understand by public sector enterprise? Describe the various
forms of public sector enterprises.
Ans. Public Sector Enterprise:
It includes the enterprises and organisations owned and managed by
government (central or state or both) either fully or partly. These are popularly
known as Public Sector Undertakings /Enterprises (PSUs/PSEs).
Forms of Public Sector Enterprises:
x Departmental Undertakings
x Statutory Corporations (Public Corporations)
x Government Company
1. Departmental Undertakings: These are established as departments of
ministry and financed, managed and controlled by either central government
or state government. Indian Railways, All India Radio, State Public
Transportation (KSRTC, UPSRTC, RSRTC, etc.) are some examples of these.
2. Statutory Corporations: These are established by passing special act in
the parliament. The act defines its power, functions, rules, regulations of
governing employees and its relationship with government. RBI, UTI, ONGC,
LIC are some examples of these.

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 3. Government Company: A government company is a company which is
registered under the Companies Act, 2013 and in which not less than 51% of
the paid-up capital is held by central government or state government or
jointly by both. BHEL, SAIL, NMDC, etc. are some examples of it.

Q.5 What are public corporations? Narrate their features, merits and
limitations.
Ans. Public Corporations: These are also known as statutory corporations.
These are established by passing special act in the parliament. The act defines
its power, functions, rules, regulations of governing employees and its
relationship with government. RBI, UTI, ONGC, LIC are some examples of
these.
Statutory Corporations:
Features Merits Limitations
1. Set up under Act of 1. Internal Autonomy 1. Autonomy for
Parliament 2. Quick decisions name’s sake
2. Separate Legal Entity 3. Effective 2. Major Political
3. Employees are not Parliamentary control Interference
Government Servants 4. Efficient Management 3. Hub of
4. Not Subject to Audit & 5. No Interference by Corruption
Accounting like Government in 4. Appointment
Government Dept Finance of Advisors by
5. Independently Government
Financed
6. Wholly owned by
Government

CHAPTER 4 BUSINESS SERVICES

BUSINESS SERVICES
Meaning : Business services are those services which are used by business
enterprises for the conduct of their activities. For example, banking,
insurance, transportation, warehousing and communication services.
Types of Business Services
1. Baking
2. Insurance
3. Transportation
4. Warehousing
5. Communication

Banking:
A banking company in India is the one which transacts the business of
banking which means accepting, for the purpose of lending and
investment of deposits of money from the public, repayable on demand
or otherwise and withdrawable by cheques or otherwise.

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 Types of Bank Accounts
1. Savings Deposit Account: This type of bank account encourages the
small savings of individuals. The deposits in this account are made by
persons who wish to save a little out of their incomes. Interest is paid
at nominal rate.
2. Current Deposit Account: these deposit accounts are most suitable
for business organization. In this account, a depositor can deposit
money any number of time and can withdraw it as and when requires
it. No interest is paid on these accounts.
3. Recurring Deposit Account: in this type of account a depositor
deposits a fixed amount of money on monthly basis for a fixed period.
Rate of interest on RD account is generally higher than that of Savings
account.
4. Fixed Deposit Account: money is deposited in fixed deposit account
for a fixed period. Fixed accounts are time deposits with higher rate of
interest as compared to the savings accounts. The amount of deposit is
repayable by the bank after the expiry of the fixed term.
5. Multiple Option Deposit Account: It is a combination of savings
account and Fixed Deposit Account which provide specific options to
the depositors. It is a type of Savings Deposit Account in which amount
of deposit in excess of a particular limit gets automatically transferred
to Fixed Deposit Account

Banking Services
1. Bank Draft: It is also known as Demand Draft. It is an instrument
which is used for the transfer of funds.
2. Bank Overdraft: The bank allows a customer to overdraw his
current account balance up to an agreed limit. The customer has to
pay interest on the amount overdrawn by him.
3. Cash Credits: It is a short- term cash loan to a company. The
borrower is sanctioned a credit limit up to which it may draw
amounts from the bank. This credit limit is determined by the bank’s
estimation of the borrower’s credit worthiness.
E– Banking:
In simple terms, Internet banking means any user with a PC or
mobile and a browser can get connected to the banks website to

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 perform any of the virtual banking functions and avail of any of the
bank’s services.
The range of services offered by e-banking are: Automated Teller
Machines (ATM), Point of Sales (PoS), Electronic Data Interchange
(EDI), Credit Cards, Electronic or Digital cash and Electronic bank
transfer (EFT).
Types of Digital Payments
1) Electronic Funds Transfer (EFT): EFT are electronic transfer of
money from one bank account to another either within a single
financial institution or across multiple institutions.
2) Credit or Debit Cards (Plastic Cards): The customer can make
digital payments for online transactions through credit or debit
cards.
3) Digital Cash: Digital cash (or e-cash) is a system of purchasing cash
credits, storing the credits in computer or digital wallet, and then
spending them while making electronic purchases over the internet
or in person.
4) Aadhaar Enabled Payment System (AEPs): It can be used for
payment transactions. This service can only be availed if Aadhaar
number is registered with the bank.
5) Mobile Wallets: A mobile wallet stores credit card or debit card
information on a mobile device like phone, a tablet, or smartwatch.
Mobile wallets are a convenient way to buy things online or in stores
that are set up to take payments through mobile wallet.
6) Point of Sale (POS): Point of sale (POS) is where a customer makes
the payment for goods purchased in a store. POS can be found at
restaurants, hospitals, gas stations, hotels, etc., to allow a space for
customers to pay their bills.
7) Unified Payments Interface (UPI): It is a way to move money from
one bank account to another using a single window. We can send or
receive money or scan a quick response (QR) code to pay a person, a
merchant, or a service provider to shop, pay bills, or authorize
payments.
8) Bharat Interface for Money (BHIM): It is a UPI enabled initiative to
facilitate safe, easy and instant digital payments through your
mobile phone.
9) Micro ATM: Micro ATMs are like modified point of sales terminals
which can connect to banking network via GPRS to perform banking
transactions. This machine contains card swipe facility.
10) Prepaid Cards: A prepaid card is a card with money loaded on it,
which can be used to pay for things at many stores and online.

INSURANCE: It is a contract or agreement under which one party agrees in

return for a consideration (called premium) to pay an agreed amount of money
to another party to make good a loss, damage or injury to something of value.
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 Under the contract of insurance, the person whose risk is insured is called
insured and the firm which insures the risk of loss is known as insurer.

PRINCIPLES OF INSURANCE

(i) Utmost good faith: A contract of insurance is a contract of uberrimae

fidei i.e., a contract found on utmost good faith. Both the insurer and
the insured should display good faith towards each other in regard to
the contract. It is the duty of the insured to voluntarily make full,
accurate disclosure of all facts, material to the risk being proposed and
the insurer to make clear all the terms and conditions in the insurance
contract.
(ii) Insurable Interest: The insured must have an insurable interest in
the subject matter of insurance. Insurable interest of the insured in
the subject matter of the insurance must exist at the time of happening
of the event.
(iii) Indemnity: All insurance contracts of fire or marine insurance are
contracts of indemnity. According to it, the insurer undertakes to
compensate the insured for the loss caused to him/her due to damage
or destruction of property insured. The principle of indemnity is not
applicable to life insurance.
(iv) Proximate Cause: According to this principle, an insurance policy is
designed to provide compensation only for such losses as are caused by the
perils which are stated in the policy. In case of loss arising out of any mishap,
the most proximate cause of the mishap should be taken into consideration.
(v) Subrogation: It refers to the right of the insurer to stand in the place of the
insured, after settlement of a claim. After the insured is compensated for
the loss or damage to the property insured by him/her the right of
ownership of such property passes on to the insurer. This is because the
insured should not be allowed to make any profit, by selling the damaged
property or in the case of lost property being recovered.
(vi) Contribution: According to this principle, in case of double insurance,
the insurers are to share the losses in proportion to the amount assured by
each of them. In case there is a loss, when there is more than one policy on

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 the same property, the insured will have no right to recover more than the
full amount of his actual loss.

Types of Insurance: Life, Fire, Marine and Health

1. Life Insurance: Life insurance may be defined as a contract in which the

insurer in consideration of a certain premium, (either in a lump sum or
by other periodical payments,) agrees to pay to the assured, or to the
person for whose benefit the policy is taken, the assured sum of money,
on the happening of a specified event contingent on the human life or at
the expiry of certain period.

2. Fire Insurance: Fire insurance is a contract whereby the insurer, in

consideration of the premium paid, undertakes to make good any loss or
damage caused by fire during a specified period up to the amount specified
in the policy. Normally, the fire insurance policy is for a period of one year
after which it is to be renewed from time to time.

3. Marine insurance: A marine insurance contract is an agreement whereby

the insurer undertakes to indemnify the insured in the manner and to the
extent thereby agreed against marine losses. Marine insurance provides
protection against loss by marine perils or perils of the sea.

4. Health Insurance: A health insurance is a contract between an insurer

and an individual or group in which the insurer agrees to provide specified
health insurance at an agreed-upon the premium, payable either in a
lump sum or installments.

POSTAL SERVICE

1. Mail Services: Mail services consist of parcel facilities that is

transmission of articles from one place to another; registration facility
to provide security of the transmitted articles and insurance facility to
provide insurance cover for all risks in the course of transmission by
post.
2. Registered Post: It is a service provides a higher level of security and
tracking for packages as it is assigned a unique tracking number that
helps to monitor its progress from the time it is dispatched until it is
delivered.
3. Parcel: It is a service of post office for sending books, garments etc.
across the country as well as outside the country.
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 4. Speed Post: It has over 1000 destinations in India and links with 97
major countries across the globe.
5. Courier Services: It is provided by private post offices for sending and
receiving letters, documents parcels, etc.

TELECOM SERVICES

(i) Cellular mobile services: These are all types of mobile telecom
services including voice and non-voice messages, data services
(ii) Fixed line services: These are all types of fixed services including
voice and non-voice messages and data services to establish linkages
for long distance traffic.
(iii) Cable services: These are linkages and switched services within a
licensed area of operation to operate media services, which are
essentially one way entertainment related services. The two-way
communication including voice, data and information services
through cable network.
(iv) VSAT services: VSAT (Very Small Aperture Terminal) is a satellite-
based communications service. It offers businesses and government
agencies a highly flexible and reliable communication solution in
both urban and rural areas.
(v) DTH services: DTH (Direct to Home) is again a satellite-based
media services provided by cellular companies.

MULTIPLE CHOICE QUESTIONS

1. -------------------is a type of Savings Deposits Account in which amount of

deposit in excess of a particular limit gets automatically transferred to Fixed
Deposit Account. And, in case sufficient funds are not available in Saving
Deposits Account to honour a cheque issued, the required amount gets
automatically transferred from Fixed Deposit Account to the Savings Deposits
Account

(a) Recurring Deposit (RD) Account (b) Multiple Option Deposit Account
(c) Current Deposit Account (d) None of these
2. Which of the following is not included in the range of services offered by
e-banking?

(a) Automated Teller Machines (ATM) (b) Bank Overdraft

(c) Digital cash d) Mobile wallet
3. AlI types of deposits in banks carry interest except----------------

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 (a) Savings Account deposits b) Current Deposit Account

(c)Fixed Deposits d) Recurring Deposits

4. Read the following statements carefully – Assertion (A) and Reason (R) and
choose the correct alternative:

Assertion (A): Banking, insurance, transportation, warehousing and

communication services are examples of Business Services
Reason (R): These services are used by business enterprises for the
conduct of their activities.

(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct
explanation of Assertion (A).

(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the
correct explanation of Assertion (A).

(c) Assertion (A) is true, but Reason (R) is false

(d) Assertion (A) is false, but Reason (R) is true

5. Which of the following is not an example of ‘Business Service’?

a) Transportation b) Warehousing c) Banking d) Recreational services

6. “Loss” is not measurable in this type of insurance. Name the type of such
insurance.

a) Life insurance. b) Fire insurance) Marine insurance. d) Accident

insurance.

7. DTH services are provided by

a) Transport companies. b) Banks c) Cellular companies d) None of the

above

8. Mrs. Kavitha is working as an accountant in ABC Ltd. She wants to deposit

₹4,000 every month in a bank in order to meet her son’s future education
expenses. Suggest the best deposit a/c she should open in a bank.

a) Savings Bank a/c b) Fixed Deposit a/c c) Recurring Deposit a/c

d) Multi- Option Deposit a/c

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9. The insurance is not only a protection but is a sort of investment because
a certain sum is returnable to the insured at the time of death or at the expiry
of a certain period. Choose the correct option for it.

a) Fire Insurance b) Marine Insurance c) Medical Insurance d) Life Insurance

10. There are two statements marked as Assertion (A) and Reason (R).

Read the statements and choose the appropriate option from the options given
below:
Assertion (A) There is always an element of risk in life and business.
Reason (R) Insurance is a tool which is used to minimise the impact of such
risks.
(a) Both the Assertion (A) and Reason (R) are true and Reason (R) is the correct
explanation of Assertion (A)
(b) Both the Assertion (A) and Reason (R) are true, but Reason (R) is not the
correct explanation of Assertion (A)
(c) Assertion (A) is true, but Reason (R) is false
(d) Assertion (A) is false, but Reason (R) is true

11. Identifying the emerging mode of business service shown in the picture
below:

a) Communication b) e-Banking
c) Warehousing d) Insurance

12. Roshan, the owner of GB Fertilizers

opened a current account in State Bank of India. One day he needed money
more than the balance in the account. He was worried about how to arrange
the money. He needed the amount for 1 month. One of his friends told him
that the customer having current account in the bank can get the permission
to withdraw money more than the balance in the account after making an
agreement with the bank.
Identify the facility provided by the bank referred to in the above case.
a) Cash credit b)Bankers’ cheque c)Bank draft d)Bank overdraft

13. Assertion (A): According to the principle of Subrogation, the insured

should not be allowed to make any profit by selling damaged property or in
case of lost property being recovered.
Reason (R): Principle of Subrogation is corollary to the principle of Indemnity
and damaged goods will belong to the insurance company, once the
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compensation is paid. It also states that insurance is not a contract of making
profit.
a) Both Assertion and Reason are correct and (R)is the correct explanation
to (A).
b) Both Assertion and Reason are incorrect.
c) Assertion is correct, but Reason is incorrect.
d) Assertion is incorrect, but Reason is correct.
14. A contract of insurance is a contact of ‘uberrimae fidei’: which principle of
insurance is being highlighted?
a) Indemnity b) Subrogation c) Utmost good faith d) Insurable interest
15. Insurable interest must exist at the time of loss only in case of
a). Life insurance b). Fire Insurance c). Marine insurance d) all of these.

MCQs ANSWERS
1 b 2 b 3 b 4 a 5 d
6 a 7 d 8 c 9 d 10 a
11 b 12 d 13 a 14 c 15 d

SHORT ANSWER QUESTIONS

1. Identify and explain any three types of digital payments shown in
the picture below:

Ans.1. Credit or Debit Cards (Plastic

Cards) : The customer can make
digital payments for online
transactions through credit or debit
cards.
2. Mobile Wallets: A mobile wallet stores credit card or debit card
information on a mobile device like phone, a tablet, or smartwatch.
Mobile wallets are a convenient way to buy things online or in stores
that are set up to take payments through mobile wallet.
3. Micro ATM: Micro ATMs are like modified point of sales terminals
which can connect to banking network via GPRS to perform banking
transactions. This machine contains card swipe facility.

2.Postal services are important for modern business. Indian Post &
Telegraph department provides various postal services across India
through 22 postal circles. In the light of this statement explain the different
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types of postal services.
ANS:
a. Mail Services: Mail services consist of parcel facilities that is
transmission of articles from one place to another; registration facility
to provide security of the transmitted articles and insurance facility to
provide insurance cover for all risks in the course of transmission by
post.
b .Registered Post: It is a service provides a higher level of security and
tracking for packages as it is assigned a unique tracking number that
helps to monitor its progress from the time it is dispatched until it is
delivered.
C Parcel: It is a service of post office for sending books, garments etc.
across the country as well as outside the country.
d. Speed Post: It has over 1000 destinations in India and links with 97
major countries across the globe.
e. Courier Services: It is provided by private post offices for sending and
receiving letters, documents parcels, etc.

4. Explain any three types of insurance.

Ans:

a) Life Insurance: Life insurance may be defined as a contract in

which the insurer in consideration of a certain premium, (either
in a lump sum or by other periodical payments,) agrees to pay to
the assured, or to the person for whose benefit the policy is taken,
the assured sum of money, on the happening of a specified event
contingent on the human life or at the expiry of certain period.
b) Fire Insurance: Fire insurance is a contract whereby the insurer,
in consideration of the premium paid, undertakes to make good
any loss or damage caused by fire during a specified period upto
the amount specified in the policy. Normally, the fire insurance
policy is for a period of one year after which it is to be renewed
from time to time.
c) Marine insurance: A marine insurance contract is an agreement
whereby the insurer undertakes to indemnify the insured in the

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 manner and to the extent thereby agreed against marine losses.
Marine insurance provides protection against loss by marine perils
or perils of the sea.

4.Krishna completed her degree course and decided to set up an IAS coaching
class to girls of poor families who couldn’t bear the high fee charged by
reputed coaching centres. Her father agreed for this and gave her Rupees 10
lakh to establish the institute as a start-up. She used Rupees 5 lakh for the
infrastructure facilities and the remaining amount deposited in the savings
bank account. One of her friends was a bank employee, advised her to keep
it in fixed deposit account. But Krishna replied that she would need money
any time, hence could not keep in fixed deposit. Then her friend told her that
she could deposit this amount in such an account which would serve the
purpose of both savings account and fixed deposit account. Identify and
explain the type of bank account which was explained by Krishna’s friend.

Ans. Multiple Option Deposit Account: A kind of deposit scheme

introduced by different banks, where the excess amount in the
savings bank account is transferred to fixed deposit account and the
account holder earns more rate of interest. If the bank receives a
cheque for this account and the balance is not sufficient, the amount
will be transferred from fixed deposit account to savings bank
account to clear the cheque.

5. Vimal took out the life insurance policy of his wife. After one year the couple
got divorced and after two years, his wife met with an accident and died on
the spot. Is Vimal entitled to get compensation from the insurance company?
If Vimal was regularly paying the premium amount?

Ans: Yes, Vimal is entitled to the compensation because in case of the life
insurance policy, the insurable interest must be present at the time of
contract. So, Vimal will get the compensation for the death of his wife even
after divorce
LONG ANSWER QUESTIONS

1.
a) Amit took an insurance policy against his car and after 3 months he sold the
car to Biju. The car was stolen from outside Biju’s house. Amit made a claim
to the insurance company. His claim was rejected on the ground that Amit was
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no longer the owner of the car, so he has no right to get the compensation.
(i) Was Amit eligible for compensation from the insurance
company?
(ii) Which principle of Insurance is applicable here? Explain.
b) Mr. Hareesh gets his house insured against fire for Rs.10 Lakh with
Insurer A and for Rs. 5 Lakh with B. The house was damaged due to landslide
and incurred a loss of Rs.6 Lakh. How much compensation can Mr. Haree
claim from A and B? Give reason in support of your answer by explaining the
principle of insurance applicable.
Ans. (i) No
(ii) Insurable interest: The insured must have an insurable interest
in the subject matter of insurance. Insurable interest means some
pecuniary interest in the subject matter of the insurance contract.
b) Hareesh can claim ₹4,00,000 from A and ₹1,00,000 from B.
According to the Principle of Contribution, if a person takes out more than
one insurance policy for the same risk, then all the insurers will contribute
the amount of loss in proportion to the amount assured by each of them
and compensate him for the actual loss.
2. Read the following and answer the question that follow on the basis of the
same:

All of us have seen a petrol station. Have your ever thought how a petrol
station owner does his business in a village: How he gets the petrol and diesel
to the villages in the interior? How he gets the money to purchase large
quantities of petrol and diesel: How he communicates to petrol depots for
requirement and also to customers? How he safeguards himself from various
risks associated with this business? The answer to all the above questions lies
in the understanding of business services. The transportation of petrol and
diesel from oil refineries to Petrol pumps is carried out by train and tankers.
They are then stored at various depots of oil companies situated in all major
towns across India. Petrol pump owners use postal, mail and telephone
facilities to be in touch with customers, banks and the depots for the
availability of their requirements on a regular basis. As oil companies always
sell the petrol and diesel on advance payment, the owners have to take out
loans and advances from banks to fund their purchases. Petrol and diesel

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being highly risky products, the owners have to safeguard themselves from
various risks by getting the business, the products, the life of people working
there, etc., insure. Thus, we see that a single business of providing petrol and
diesel at a petrol pump is actually a collective outcome of various business
services. These services are
being utilized in the entire process of shipment of petrol and diesel from oil
refineries to the point of sale at petrol pumps, spread across the length and
breadth of India.
a) Give the meaning of Business service
b) Explain briefly various types of business services described
above.

Ans. a) Business services are those services which are used by business
enterprises for the conduct of their activities.
b) “The transportation of petrol and diesel from oil refineries to Petrol pumps
is carried out by train and tankers”. -- Transportation
“They are then stored at various depots of oil companies situated in all
major towns across India”. -- Warehousing
“Petrol pump owners use postal, mail and telephone facilities to be in touch
with customers”. ---Communication
“The owners have to take out loans and advances from banks to fund their
purchases”. ---Banking
“The owners have to safeguard themselves from various risks by getting the
business, the products, the life of people working there, etc.” ---Insurance

3.Alan has recently constructed a new godown in the basement of his

furniture showroom. He approached New India General Insurance Company
for fire insurance of his godown. The official there asked for the information
regarding construction type, age of building, fire safety equipment installed
etc. The official of insurance company also made it clear that in the event of
any loss due to a fire, he can recover an actual amount of loss only. Alan to
understand that any loss arising due to fire in godown will lead to loss to his
business. Identify and explain the principles of insurance stated in above
paragraph. (any three)

Ans. Principles of insurance identified

(i) Utmost good faith

(ii) Indemnity
(iii) Insurable interest

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4. Briefly explain the following principles of insurance
a) Utmost good faith
b) Insurable interest
c) Doctrine of subrogation
d) Causa Proxima
Ans:

a) Utmost good faith: A contract of insurance is a contract of uberrimae

fidei i.e., a contract found on utmost good faith. Both the insurer and
the insured display good faith towards each other in regard to the
contract.
b) Insurable interest: The insured must have an insurable interest in the
subject matter of insurance. Insurable interest means some pecuniary
interest in the subject matter of the insurance contract.
c) Subrogation: It refers to the right of the insurer to stand in the place of
the insured, after settlement of a claim, as far as the right of the insured
in respect of recovery from an alternative source is involved.
d) Proximate Cause: According to this principle, an insurance policy is
designed to provide compensation only for such losses as are caused by
the perils which are stated in the policy.

5. Briefly explain the following banking services.

a) Bank Draft b) Bank Overdraft
c) Cash Credits d) E- Banking
Ans :

1. Bank Draft: It is also known as Demand Draft. It is an instrument

which is used for the transfer of funds.
2. Bank Overdraft: The bank allows a customer to overdraw his current
account balance up to an agreed limit. The customer has to pay
interest on the amount overdrawn by him.
3. Cash Credits: It is a short- term cash loan to a company. The
borrower is sanctioned a credit limit up to which it may draw
amounts from the bank. This credit limit is determined by the bank’s
estimation of the borrower’s credit worthiness.
4. e-banking is electronic banking or banking using the electronic
media. Thus, e-banking is a service provided by banks that allows a
customer to conduct banking transactions, such as managing
savings, checking accounts, applying for loans or paying bills over
the internet using a personal computer, mobile phone, etc.

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 CHAPTER 5
EMERGING MODES OF BUSINESS
E-Business
z Business operations such as industry, trade and commerce using
computer networks are called E-Business.
z Business functions as well as managerial activities can be carried out
through computer networks.

E-Commerce
z Commercial transactions conducted electronically on the internet
z It is only a part of e-Business
z It covers a firm’s interactions with its customers and suppliers over the
internet

Business To Business (B2B)

z In this case, commercial transactions take place between different
business organizations
Eg: Placing of purchase orders, invoices, quotations etc.
Business To Customers (B 2 C)
z It means Business to Customers transactions
z It includes selling of goods, call centers, After sale service etc.

Intra – B (With in the Business)

z Here the transactions take place within the firm
z It includes the use of computer networks in marketing, finance,
production, purchase, human resource, Research and Development
departments etc.
z It also includes interaction of business with its employees (B2E) like salary
payment, seeking suggestions from employees etc.

Customer To Customer (C2C)

z It is best suited for dealing in goods for which has no established markets
z E.g.eBay.com, olx.com, etc.
z Allows persons to globally search for potential buyers
Differences between Traditional Business and E-Business
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 Base Traditional E-Business
Ease of Formation Difficult Simple

Physical presence Required Not required

Location requirement Important Not Important

Cost of setting up High Low Cost

Operating cost High Low

Contact with suppliers Indirect through Direct

and customers Intermediaries

Business process and Long time Short time

length of cycle

Interpersonal touch More Less

Ease of going global Less More

Employees Semi-skilled or Technically and

unskilled professionally
Qualified

Benefits of E-Business
1.Ease of formation
It is very easy to start due to less legal formalities and with a limited
investment.
2.Convenience
Internet offers the convenience of 24 hours business
3.Speed
Internet allows faster services.
4.Global reach
It provides a boundary less market
5.Movement towards a paperless Society
Use of internet has considerably reduced dependence on paperwork
MULTIPLE CHOICE QUESTIONS
1. Out of e-commerce and e-business, which is a broader term?

(a) e-business (b) both e-business and e-commerce are the same thing
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 (c) e-commerce (d) None of these
2. Complaint lodged by a customer at the company’s call center is
_______ type of e-business transaction.

(a) C2C Commerce (b) C2B Commerce

(c) B2C Commerce (d) B2B Commerce
3. Here, parties involved in the electronic transactions are from within a
given business firm; hence the name is ________.

(a) Intra-C Commerce (b) Intra-D Commerce

(c) Intra-B Commerce (d) Intra-A Commerce

4. Mail sent by the Marketing department to the Purchase department

is an example of:
(a) B2B (b) B2C (c) C2C (d) Intra B

5. Length of the business cycle is generally __________ in the case of e-

business.
(a) Longer (b) Shorter (c)Narrower (d)Wider

6. Interaction between any two departments of one firm is a common

feature of______ commerce.
(a) B2B Commerce(b) B2C Commerce
(c)C2C Commerce (d)Intra-B Commerce

7. Match the following:

1.C2C a. After-sale service
2.B2C b. Collaborations
3.B2B c. Selling antique items
(A) 1-c, 2-a, 3-b
(B) 1-a, 2-b, 3-c
(C)1-b, 2-c, 3-a
(D)1-c, 2-b, 3-a

8. Assertion: There is no risk in the traditional business.

Reason: In traditional business, Parties have no personal interaction
while buying and selling.
(a) Assertion is correct, reason is not
(b) Assertion is incorrect, reason is correct.
(c)Assertion and reason both are correct.
(d)Assertion and reason both are incorrect.
9. Assertion: There is more risk in the traditional business.
Reason: In traditional business, Parties have personal interaction
while buying and selling.
(a) Assertion is correct, reason is not
(b) Assertion is incorrect, reason is correct.
(c)Assertion and reason both are correct.
(d)Assertion and reason both are incorrect.
10. Passion Limited is a well-known automobile company in India. In
order to reduce dependence on a single supplier the automobile
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 factory works through a network of computers which is used for
placing orders. Identify the constituent of e-business being described
in the given lines.
a) B2B (b) B2C (c) C2C (d) Intra B

ANSWER KEY:
1. Answer: (a) e-business
2. Answer: (b) C2B Commerce

3. Answer: (c) Intra-B Commerce

4. Answer. d) Intra-B
5. Answer. b) Shorter
6. Answer. d) Intra-B Commerce
7. Answer. a) 1-c 2-a, 3-b
8. Answer. d) Assertion and Reason both are incorrect
9. Answer. c) Assertion and Reason both are correct
10. Answer. a) B2B

SHORT ANSWER QUESTIONS:

1. During summer holidays, Mayur visit his grandparents to celebrate
his grandfather’s 90th birthday. His grandmother shares with him
that she would like to buy a special gift for her husband on his
birthday, but she cannot walk comfortably up to the market. Mayur
opens an application of a popular e- commerce company on his
smartphone and shows his grandmother different types of products
which are being offered for sale from distant places and also some
product of China company. Although, initially the grandmother is
fascinated by the concept of purchase online, but is reluctant to
make a purchase as she is not confident about the whereabouts of
the seller.
State any two advantages of e-business mentioned in the paragraph.
1. Convenience
Ans: Internet offers the convenience of 24 hours business
2.Global reach
It provides a boundary less market

2. OLX Is a system of selling where consumers directly interact with the

other consumers through electronic mode. Identify and explain this
system. How in your opinion is this system beneficial to consumers?
This system is called C2C commerce.
z It provides a market for those consumers who wants to deal in
Ans: goods for which there is no established market.
z Consumers directly interact with other consumers through
electronic mode.
Advantage: Allows persons to globally search for potential buyers

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 3. Govind is a manufacturer of readymade kid’s garments. He sells his
products through various dealers across the country. However, his
sales are decreasing over the years. Recently, his wife gifted him a
jacket. Which she had ordered through Myntra. This gave Govinda
an idea to start selling his products online.
1.What type business was Govind doing earlier and which type of
business he wants switch to?
2.State any two advantage.

Ans: Govind was doing traditional business and he wants to do e-

business.
Benefits of E-Business (any two)
1.Ease of formation
It is very easy to start due to less legal formalities and with a limited
investment.
2.Convenience
Internet offers the convenience of 24 hours business
3.Speed
Internet allows faster services.
4.Global reach
It provides a boundary less market
5.Movement towards a paperless Society
Use of internet has considerably reduced dependence on paperwork

LONG ANSWER QUESTIONS:

1.
Unique enterprise is dealing in auto spare parts. With the expansion
in business the enterprise found that the decisions are delayed and
level of coordination is coming down. The CEO called for a meeting
of all the managers. Ravi a newly appointed manager suggested that
company should have its own internet so that all the employees can
interact and pass important information to each other through
internet. Even short meeting of different departments can be
conducted through Video conferencing to take fast action. The CEO
liked the idea and installed an internet for connecting all the
employees in line.
(a) Which branch of e-business is suggested by Mr.Ravi ?
ANS: (b) What are the benefits provided by e-business ?
: Intra – B (Within the Business)
z Here the transactions take place within the firm
z It includes the use of computer networks in marketing, finance,
production, purchase, human resource, Research and
Development departments etc.
Benefits of E-Business
1.Ease of formation
It is very easy to start due to less legal formalities and with a limited
investment.
2.Convenience
Internet offers the convenience of 24 hours business
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 3.Speed
Internet allows faster services.
4.Global reach
It provides a boundary less market
5.Movement towards a paperless Society
Use of internet has considerably reduced dependence on paperwork

2. Melodius Ltd. Is a popular music company. Keeping in line with the

changing trends the company uses various types of e-business
activities to operate successfully. The company interacts through a
network of computers with a number of other businesses firms
which may be suppliers or salespersons. The company carries out of
a number of promotional activities and sometimes even delivery of
products that are carried out online. The company has setup call
centres for the customers to make toll free calls to make queries and
lodge complaints round the clock at no extra cost to them. The
company makes use of intranet for managing interactions and
dealings among various department and persons within the
organisations. The company provides virtual private network
technology because of which it is not necessary for the employees to
come to office and the meeting can be held online via video
conferencing. The company uses the financial intermediaries like
‘paypal’ in order to facilitate payments on line.
Quote the scope of e-business mentioned in the above paragraph by
quoting the line.
Ans:
B2B commerce: ‘The company interacts through a network of
computers with a number of other businesses firms which may be
suppliers or salespersons.”
B2C commerce:” The company carries out of a number of
promotional activities and sometimes even delivery of products that
are carried out online”
Intra-B:” The company makes use of intranet for managing
interactions and dealings among various department and persons
within the organisations.”
B2E commerce: The company provides virtual private network
technology because of which it is not necessary for the employees to
come to office and the meeting can be held online via video
conferencing”
C2C commerce: “The company uses the financial intermediaries like
paypal in order to facilitate payments on line.”

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3. www.olx.in, www.quicker.com etc. are examples of websites used to
conduct business. Dipti's sofa set got spoiled in the rain. Her friend
suggested that she should change the fabric so that it looks new and
put it for sale on www.olx.com. Dipti followed her friend's advice and
got her sofa repaired so that it looks better and uploaded nicely
clicked pictures on www.olx.com in without disclosing the fact that
it was damaged from inside. She found a customer and sold it for
Rs.9,000. After one week the buyer found the real state of the sofa
set and called Dipti but she did not answer any of the calls.
(i) Name the type of e-business in the above case.
(iii) Explain two advantages of e-commerce
Ans

(i)C2C business.
The Advantages of E-Commerce
1. No Geographical Boundaries: Anyone, at any moment, can order
anything from anywhere. On the one hand, it provides access to the
worldwide market for the seller, while on the other side, it allows the
buyer to select products from nearly any area of the globe.
2. Workable Business Hours: Since the internet is always available.
E-business eliminates the time constraints that local enterprises
face.

4. Binu and Sinu where childhood friends. Both had a passion to start
a textile business. Binu rented a shop and started a business in his
village. He encouraged Sinu also to start a business. As she had only
less capital she thought of selling the dress from Binu’s shop
through online with less investment. Binu had customers from his
own village where as Sinu had customers from all over India. Point
out the difference between the business carried out by Binu and
Sinu from the above paragraph.
Ans:
Binu did traditional business and Sinu did e- business.
Physical presence Required Not required

Location requirement Important Not Important

Cost of setting up High Low Cost

Interpersonal touch More Less

Ease of going global Less More

5.
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 Mr Gupta is working at the post of general manager in AU small
finance Haryana. He is transferred to Delhi. So, he sold his old sofa,
and bed through OLX. In Delhi, he brought a new sofa and small
bed of his choice according to the space of the room placing online
order to Godrej furniture. On receiving the delivery of the items, he
found colour defect in the sofa so he filed an online complaint with
customer care cell of Godrej furniture. The head of customer
grievances cell forwarded this complaint mail to the Marketing
manager and production manager for further action. In enquiry, it
was found that M/s Touchwood furniture dealers, online
distributor of Godrej furniture in Delhi, took a long time to deliver
the online order to Godrej furniture.
A. ‘So, he sold his old sofa, and bed through OLX’. Identify which
type of e-business model involve in the transaction mentioned here.
B. ‘He found colour defect in the sofa so he filed an online complaint
with the customer care cell of Godrej furniture. Identify the type of
e-business model involved in the transaction mentioned here.
C. ‘The head of the customer grievances cell forwarded this
complaint mail to the Marketing manager and production manager
for further action’. Identify the scope of e-business mentioned in this
case.
D. ‘M/s Touchwood furniture dealers, distributors of Godrej
furniture in Delhi made the ‘took a long time on delivery’ while taking
Ans: online order from Godrej furniture for making delivery to its online
customers.’ Identify which advantage was not enjoyed by the
customer.

A. customer to customer
B. C2B
C. Intra-B
D.Speed

Internet allows faster services.

*******************
Chapter 6
Social Responsibility of Business and Business Ethics.
Social Responsibility: Social responsibility of business refers to its obligation
to take those decisions and perform those actions which are desirable in terms
of objectives and values of our society.
Thus, social responsibility relates to the voluntary efforts on the part of
the businessmen to contribute to the social well-being. The businessmen
make use of resources of society and earn money from the members of society
so they must do something for the society.

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Need for Social Responsibility. The very concept of social responsibility
implies that it is essentially an ethical issue, since it involves the question of
what is morally right or wrong in relation to the firm’s responsibilities. Social
responsibility also has an element of voluntary action on the part of the
business person who may feel free to perform or not to perform such
responsibilities. They may also exercise their freedom for deciding the extent
to which they would like to serve various sections of society.

Arguments For Social Responsibility. There is a need for social

responsibility of business for existence and growth:

1. Justification for existence and growth: Business is the creation of

society, therefore it should respond according to the demands of the
society. To survive and grow in a society for long run the business must
provide continuous services to the society.
2. Long term interest of the firm: A firm can improve its image and build
goodwill in the long run when its highest goal is to serve the society. If it
indulges in unfair trade practices, e.g., adulteration, hoarding, black
marketing it may not be able to exist for long.
3. Avoidance of government regulations: Business can avoid the problem
of government regulations by voluntarily assuming social responsibilities.
4. Availability of resources with business: Business has valuable financial
and human resources which can be effectively used for solving problems
of the society.
5. Better environment for doing business: Social responsibility creates
better environment for business operations as it improves quality of life
and standard of living of people. So, business will get better community to
conduct business.
6. Contribution to social problems: Some of the social problems have been
created by business firms themselves such as pollution, creation of unsafe
work places, discrimination, etc. Therefore, it is the moral obligation of
business to solve such social problems.

Arguments Against Social Responsibility. Major arguments against social

responsibility are:

1. Profit Motive: A business is an economic entity that is guided by profit

motive. It should not waste its energies and resources in fulfilling social
responsibility.

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 2. Burden on Consumers: Involvement of business in social
responsibilities involves a lot of expenditure which will ultimately be
borne by the customers.
3. Lack of Social Skills: The business firms and managers have the skills
to handle business operation. They are not expert to tackle the social
problems like poverty, overpopulation, etc. Therefore, social problems
must be tackled by social experts.
4. Lack of Public Support: Generally public does not like business
involvement in social problems. Therefore, business cannot fulfil social
responsibility because of lack of public confidence and cooperation.
Kinds of Social Responsibility.

1. Economic Responsibility: Basically, a business enterprise is an economic

institution. Therefore, its primary responsibility is to produce the goods and
services according to the demands of the society and to earn profits.
2. Legal Responsibility: The responsibility of every business is to carry out
business activities within the laws of the country. Since these laws are meant
for the good of the society, a law-abiding enterprise is a socially responsible
enterprise as well.
3. Ethical Responsibility: This refers to the behaviour of the firm expected
by the society but not defined by law (example, respecting the dignity of
employees).
4. Discretionary Responsibility: These obligations are assumed by the
enterprises voluntarily. (example, donation to charitable institutions, helping
the affected people during floods, earthquakes, etc).
Social Responsibility Towards Different Interest Groups.

Business has interaction with several interest groups such as shareholders,

workers, consumers, government and community. Business is responsible to
all these groups
Responsibility Towards Shareholders:

a) To ensure a fair and regular return on the investment of shareholders.

b) To ensure safety of their investment.
c) To strengthen financial position of the company.
d) To safeguard the assets of the business.
e) To protect the interest of all types of investors in the business.

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Responsibility Towards Workers:

a) Providing fair compensation and benefits.

b) Providing good and safe working conditions.
c) To develop a sense of belongingness.
Responsibility Towards Consumers:

a) To supply right quality of goods and services at reasonable prices.

b) To ensure regular and adequate supply of products.
c) To inform them about new products and new uses of existing products.
d) To handle the customer’s grievance promptly.
Responsibility Towards Government:
a) To pay taxes honestly.
b) To observe rules laid down by the government.
c) To avoid corrupting government employees.
Responsibility Towards Community:

a) To create employment opportunities.

b) To avoid polluting the environment.
c) To uplift the weaker sections of society.

Business and Environmental Protection

Meaning of Environment: The environment is defined as a totality of natural

and man-made things existing around us. It is from the environment that the
business draws its resources.

Meaning of Environmental Pollution: It means injection of harmful

substances into the environment. The greatest problem that industries and
businessmen are creating is that of pollution, which is the result of industrial
production. So, protection of environment is a must.

Role of Business in Environmental protection.

1. Eco-friendly and clean or low wastage technology should be used by the

industrial organisations.
2. Industrial wastes should be recycled as far as possible.
3. Plant & Machinery should be modernized to minimise pollution.
4. The business houses should comply with the laws and regulations enacted
for prevention of pollution.
5. Positive steps to be taken to save environment. These include plantation of
trees, cleaning of rivers, ponds, etc.
Business Ethics:

Business Ethics refers to the moral values or standards or norms which

govern the activities of a businessman. Ethics define what is right and what

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is wrong. By ethics we mean the business practices which are durable from
the point of view of society.

Elements of Business Ethics.

1. Top Management Commitment: The CEO and higher-level managers

must be committed to ethical norms of behaviour. This would set an
example for all employees paying taxes to the government honestly.
2. Publication of Code: Code of ethics is a formal written document of the
principles, values and standards that guide a firm’s actions. It may cover
areas like honesty, quality, safety, healthcare, etc.
3. Establishment of Compliance Mechanism: A suitable mechanism should
be developed to comply with the ethical standards of the enterprise. This
mechanism should be properly communicated to all in the organisation.
4. Employees Involvement: It is the employees at the lower levels who
implement ethical principles, so they must be involved in the process of
developing ethical code of conduct.
5. Measuring Result: Although it is difficult to measure the ethical results, it
must be verified and audited that how far work is being carried according to
ethical standards.
Multiple Choice Questions

1. Social responsibility is:

(A) Same as legal responsibility.
(B) Broader than legal responsibility.
(C) Narrower than legal responsibility.
(D) None of them.
2. That an enterprise must behave as a good citizen is an example of its
responsibility towards:
(A) Consumers (B) Owners (C) Workers (D) Community

3. Which of the following is not the part of ethics?

(A) Caring towards well-being of others.
(B) Chemical and waste dumping in water bodies.
(C) Respect for others.
(D) Fairness in dealing.

4. Match the following:

Stakeholders Services expected from business.
1. Employees A. To provide the desired quality of goods and
services.
2. Consumers B. To provide good working conditions and

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 satisfactory remuneration.
3. Government C. To provide more employment opportunities.
4. Community D. To respect the laws of the land.
(A) 1. B; 2. A; 3. D; 4. C. (C) 1. C; 2. B; 3. A; 4 D
(B) 1. D; 2.C; 3. B; 4. A. (D) 1. A; 2. B; 3, C; 4. A
5. Smoke and other chemicals from manufacturing plants are type of……
(A) Air pollution. (C) Land pollution.
(B) Noise pollution. (D) None of these.
6. Environmental protection can best be done by the efforts of:
(A) Scientists. (B) Business people (C) Government (D) All of these.
7. Carbon monoxide emitted by the automobiles directly contributes to:
(A) Noise pollution. (C) Water pollution.
(B) Air pollution. (D) Land pollution.
8. Which of the following can explain the need for pollution control?
(A) Reduced risk of liability. (C) Cost savings.
(B) Reduction of health hazards. (D) All of these.
9. Match the following:
Type of pollution Cause of pollution.
1. Land pollution A. Industrial and commercial activities done by
businessmen.
2. Air pollution B. Dumping of waste in water bodies.
3. Noise pollution C. Smoking, chemicals of manufacturing plants created
a hold in the ozone layer, which is created pollution.

4. Water pollution D. Dumping of toxic waste on land.

(A) 1, D; 2, C; 3, A; 4, B. (C) 1, A; 2, B; 3, C; 4, D.
(B) 1, C; 2, B; 3. A; 4, D. (D) 1, D; 2, C; 3, B; 4, A.
10. Noise pollution can be responsible for………….
(A) Loss of hearing. (C) Malfunctioning of heart.
(C) Mental disorder. (D) All of these.
12 Ethics is important for:
(A) Top-level management. (C) Non-managerial employees.
(B) Middle-level management. (D) All of these.
11. Which of the following alone can ensure effective ethics programme in a
business enterprise?
(A) Publication of a code. (C) Establishment of compliance mechanisms.
(B) Involvement of employees. (D) All of these.

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12. Primary responsibility of a business is to produce goods and services that a
society wants and sell them at a profit. This is called……………
(A) Legal responsibility. (C) Economic Responsibility.
(B) Personal responsibility. (D) None of these.
13. Every business has a responsibility to operate within the laws of the land as
per the ………………
(A) Legal responsibility. (C) Economic responsibility.
(B) Financial responsibility. (D) Personal responsibility.
14. Respecting the religious sentiments and dignity of people while advertising for
a product is ………………
(A) Economical responsibility. (C) Ethical responsibility.
(B) Legal responsibility. (D) None of these.
15. Providing charitable contributions to educational institutions is ………
(A) Discretionary responsibility. (C) Economic responsibility.
(B) Legal responsibility. (D) Noe of these.
16. A business enterprise has the responsibility to provide a fair return to the
………….
(A) Customers (B) Government (C) Shareholders (D) Tax authority.
17. Which of the following is a responsibility of a business towards the workers?
(A) Providing opportunities to the workers for meaningful work.
(B) Right kind of working conditions.
(C) Fair wages. (D) All of these.
18. Which of the following is an example of responsibility towards consumers?
(A) Fair wages to workers.
(B) Responsibility to provide a fair return.
(C) Supply of right quality and quantity of goods and services.
(D) Responsibility for providing jobs.
19. Responsibility towards government is ………….
(A) Safety of investments provided by the shareholders.
(B) Pay taxes regularly and honestly.
(C) Supply of goods at a reasonable price to consumers.

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 (D) None of these.

SHORT ANSWER QUESTIONS

20. “There is a strong case for assumption of social responsibility by business.”
Give any two reasons.
Ans: can write any two points from the segment “Arguments for social
responsibility”
21. Mention a business firm’s social responsibility towards shareholders
Ans: to ensure fair and regular return on investment
22. “Social responsibility is different from legal responsibility.” How?
Ans: Can differentiate on the basis of “compulsion”
23. What is business ethics?
Ans: Moral standards which govern the activities of business
Case Study Questions/Long Answer Questions.

24. Read the following text and answer the questions that follow:
Newlook Furniture Ltd., a company manufacturing and trading
furniture, was started by 5 youths of Mysuru under Start Up India
Scheme. It provides a diverse collection of wooden, plastic, cane,
bamboo and metal furniture at reasonable rates to the customers.
They import raw-materials from Indonesia for the same by abiding
the government policy and procedures for imports. The company is
earning good profits and donating 10% of its profits for plantation
of trees on highway sides. The company also organizes training and
skill development programme for its workers. The efficient planning
and marketing strategy of the company has offered the owners of
the company reasonable appreciation of capital employed.
1. Providing furniture at the reasonable rates is an example of social
responsibility towards which of the following:
(A) Consumers (B) Community (C) Creditors (D) Owners.
2. “Donating 10% of its profits for plantation of trees on highway

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 sides”. Identify the kind of social responsibility undertaken by the
company.
(A) Legal (B) Personal (C) Discretionary (D) None of these.
3. “Import raw-materials from Indonesia for the same by abiding the
government policy and procedures for imports”. Identify the kind of
responsibility fulfilled here:
(A) Discretionary (B) Legal (C) Economic (D) Ethical
Answers: 1 A 2 C 3 B
27 Read the following text and answer the questions that follow:
Anand and Adarsh graduated from IIT Kharagpur, joined together
and started a company in Mysuru under the Name Chamundi
Synthetic Fibres Ltd., engaged in producing packing cases. Their
company is outsourced a large order of such packing cases from a
Chinese firm. Getting such business orders from local as well as
foreign firms, the company has expanded the scale of its operations.
They were aware of the fact that their factory is polluting the
environment but no necessary equipment to control air pollution
and for waste disposal were installed by them. It was argued by the
Finance Manager of the company that such decision will involve a
cash outlay of 1 crore which would decrease the working capital of
the company by this amount. After a long discussion, finally the
management of the company decided that the benefits of pollution
control are more than the cost of pollution control. The business
must follow the laws and regulations enacted by the government for
protecting the environment instead of ignoring social responsibility
of the business.

1. Which of the following does not cause any pollution?

(A) Dumping of toxic waste on land.
(B) Dumping waste into rivers, streams and lakes.
(C) Recycling waste instead of disposal.
(D) Smoke and other chemicals from manufacturing plants.

2. “The business must follow the laws and regulations enacted by

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 the government for protecting the environment instead of ignoring
social responsibility of the business”. Identify the kind of social
responsibility stated here:
(A) Economical (B) Ethical (C) Legal (D) Discretionary.
(B)
3. “The benefits of pollution control are more than the cost of
pollution control.” Identify the benefits of pollution Control:
(A) Reduced risk of liability. (C) Both (A) & (B)
(B) Cost savings. (D) Neither (A) & (B)

4. By adopting pollution control measures the company has

discharged its social responsibility towards:
(A) Government and community. (C) Workers and Owners.
(B) Community and investors. (D) Investors and Employees.
Ans: 1. C 2. C 3. C 4. A
28 ‘It is in the interest of business to fulfil its social responsibilities
towards different interest groups”. Why?
Ans: Hint: Give arguments for assumption of social responsibilities
by the business
29 “Business is not merely a profit-making enterprise but essentially a
social institution.” Explain.
Ans: Hint: Business is a part of society. It gets inputs from the
society and supplies its output to the society. It is also an economic
institution whose aim is to earn profit. However, it must fulfil its
social obligations towards different groups in the society.
30 “Like an individual, a business enterprise should also be a loyal
citizen of the state.” Comment.
Ans: Hint: give responsibilities of business towards government

******************************

ZIET, MYSORE
 CHAPTER 7
SOURCES OF BUSINESS FINANCE
Concept of Business Finance:
The term finance means money or fund. The requirements of funds by
business to carry out its various activities is called business finance.
Finance is needed at every stage in the life of a business. A business
cannot function unless adequate funds are made available to it.

Significance of Business Finance:

● To purchase plant and machinery, land, buildings and other fixed
assets.
● Smooth functioning of day-to-day operations of the business
● Expansion.
Need of Business Finance:
(a) Fixed Capital Requirement: In order to start a business, funds
are needed to purchase fixed assets like land and building, plant and
machinery. The funds required in fixed assets remain invested in the
business for a long period of time.
(b) Working Capital Requirement: A business needs funds for its
day-to-day operation. This is known as Working Capital
requirements. Working capital is required for purchase of raw
materials, to pay salaries, wages, rent and taxes.
(c) Diversification: A company needs more funds to diversify its
operation to become a multi-product company e.g. ITC.
(d) Technology upgradation: Finance is needed to adopt modern
technology for example uses of computers in business.
(e) Growth and expansion: Higher growth of a business
enterprise requires
higher investment in fixed assets. So, finance is needed for growth
and expansion.
Sources of Finance on the basis of Ownership:
A. Owners' Funds and B. Borrowed Fund.
A. Owners' Fund: Funds provided by the owners of the organisation
are known as Owners' Funds. It includes profits that are reinvested
into the business. The important sources of owners' funds are:
1. quity shares.
2. Preference Shares Retained earnings.
3. Retained Earnings.

B. Borrowed Funds: These are the funds raised through loans and
borrowings. This source includes raising funds from
1. Debentures and bonds.
2. Loans from financial institutions.
3. Loans from commercial Banks.
4. Public deposits.
ZIET, MYSORE
 5.Trade credit.
6.Inter Corporate deposits (ICD).
Issue of Share (Owner’s Fund - Long-term Source of Finance):

The capital obtained by issue of shares is known as share capital.

The capital of a company is dividedinto small units called share. If a
company issue 10,000 shares of ₹ 10/- each then the share capital
ofcompany is ₹ 1, 00,000. The person holding the share is known as

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shareholder.

1. Equity Share:
Equity shares represent the ownership of a company. They have right
to vote and right to participate inthe management.

Merits:
(a) Permanent Capital: Equity share capital is important source of
finance for a long term.
(b) No charge on assets: For raising funds by issue of equity
shares a company does not need tomortgage its assets.
(c) Higher returns: Equity share holder get higher returns in the years
of high profits.
(d) Control: They have right to vote and right to participate in the
management.
(e) No burden on company: Payment of equity dividend is not
compulsory.

Limitations:
(a) Risk: Equity shareholder bear higher risk because payment of equity
dividend is not compulsory.
(b) Higher Cost: Cost of equity shares is greater than the cost of
preference share.
(c) Delays: Issue of Equity shares is time consuming.
(d) Issue depends on Share Market Conditions: Equity
Shareholders are the primary risk bearertherefore the demand
of equity shares is more in the boom time.

ZIET, MYSORE
 2. Preference Share (Owner’s Fund - Long-term Source of Finance):
Preference shares are considered safer in investment (as compare
to equity shares). They receive dividend at a fixed rate. Preference
shareholders are like creditors. They have no voting right.
Merits:
(a) Investment is safe: Preference shareholders investment is
safe. They have preferential right to claim dividend and capital.
(b) No Charge on assets: The Company does not need to mortgage
its assets for issue of preference shares.
(c) Control: It does not affect the control of equity shareholders because
they have no voting right.
(d) Fixed dividend: They get fixed dividend. So, they are useful for
those investors who want fixed rate of return.
(e) Hybrid Security: The Preference Shares are called hybrid
securities, as these shares have the features of equity shares
as well as features of debentures.
Limitations:
(a) Costly sources of funds: Rate of preference dividend is
greater than rate of interest on debenture, for a company
it is costly source of funds than Debentures.
(b) No tax saving: Preference dividend is not deductible from profit
for income tax. Therefore, there is no tax saving.
(c) Not suitable for risk takers: Preference shares are not suitable
for those who are willing to take risk for higher return.
(d) As dividend on these shares is to be paid only when the
company earns profit, so investors may not be very attractive to
these.

Difference between Equity Shares and

Preference Shares
Bas Equity Shares Preference Shares
e
1. Dividend After preference shares Priority over equity share

2. Voting Have voting rights. No voting right.

Right
3. Risk Risk bearing securities Less risk

4. Rate of Fluctuates with profit Fixed Rate of dividend

Return
5. Control Control on the management. No control on the
management.

ZIET, MYSORE
 Retained Earnings (Owner’s Fund- Long-term Source of Finance):
When a company earns profit, a certain amount or percentage of those
profits is retained within the business for future use and this is known
as Retained Earnings. When the business is financed through this
source it is known as ploughing back of profit or internal financing.

Merits:-
(a) Permanent source of funds.
(b) No explicit cost involved in the form of dividend or interest.
(c) Greater degree of operational flexibility and freedom.
(d) Enhances the unexpected loss absorption capacity of the business.
(e) May lead to an increase of the market price of the company's equity
shares.
Limitations:-
(a) Excess retention of profits may lead to dissatisfaction among
shareholders.
(b) Since the profits keep on fluctuating, it is an uncertain source of
funds.
(c) Opportunity cost remains unrecognized so it may lead to sub-optimal
use of funds.
B. Borrowed Funds:
1. Debentures/Bonds (Borrowed Fund- Long-term Source of Finance)
It is an important source of raising funds or long-term debt capital.
It bears a fixed rate of interest. Debenture holders are the creditors
of the company.
Merits:
(a) Investment is Safe: Debentures are preferred by those investors
who do not want to take risk and interested in fixed income.
(b) Control: Debenture holder does not have voting right. No control over
the management.
(c) Less Costly: Debentures are less costly as compared to cost of
preference shares.
(d) Tax Saving: Interest on Debentures is a tax-deductible expense.
Therefore, there is a tax saving.
Limitation:
(a) Fixed Obligation: There is a greater risk when there is no earning
because interest on debentures has to be paid if the company
suffers losses.
(b) Charge on assets: The Company has to mortgage its assets to issue
secured Debentures.
(c) Reduction in Credibility: With the new issue of debentures, the
company’s capability to further borrow funds reduces.
Difference between Shares and
Debentures

ZIET, MYSORE
 Base Debentures
Shares
1. Nature Shares are the capital. Debentures are a loan.
2. Return Dividend. Interest.
3. Voting Right Have voting right. No voting right.
4. Holder Owner is called Creditor.
shareholder.
5. Types There are two types of More than two types.
shares.
Secured and generally carry a
6. Security Not secured by any
charge on the assets of the
charge.
company.

2. Loan from Financial Institutions (Borrowed Fund- Long-term

Source of Finance):
The state and central government have established many financial
institutions to provide finance to companies. They are called
development Bank. These are IFCI, ICICI, IDBI, LIC and UTI. etc.

Merits:
(a) Long term Finance: Financial Institution provides long term
finance which is not provided by Commercial Bank.
(b) Managerial Advice: They provide financial, managerial and technical
advice to business firm.
(c) Easy instalments: Loan can be made in easy instalments. It
does not prove to be much of a burden on business.
(d) Easy availability: The funds are made available even during periods
of depression.
Limitations:
(a) More time Consuming: The procedure for granting loan is time
consuming due to rigid criteria and many formalities.
(b) Restrictions: Financial Institution place restrictions on the
company’s board of Directors.

3. Loan from Commercial Banks (Borrowed Fund- Short & Medium-

term Finance):
Commercial Banks give loan and advances to business in the form
of cash credit, overdraft loans and discounting of Bill. Rate of interest
on loan is fixed.

Merits:
(a) Timely financial assistance: Commercial Bank provides timely
financial assistance to business.
ZIET, MYSORE
 (b) Secrecy: Secrecy is maintained about loan taken from a Commercial
Banks.
(c) Easier source of funds: This is the easier source of funds as
there is no
need to issue prospectus for raising funds.
Limitations:
(a) Short- or Medium-term finance: Funds are not available for a long
time.
(b) Charge on assets: Required source security of assets before a loan is
sanctioned.

4. Public Deposits (Borrowed Fund- Medium-term Finance):

The deposits that are raised by company direct from the public are
known as Public Deposits. The rate of interest offered on public
deposits is higher than the rate of interest on bank deposits. This is
regulated by the R.B.I. and cannot exceed 25% of share capital and
reserves.

Merits:
(a) No charge on assets: The Company does not have to mortgage its
assets.
(b) Tax Saving: Interest paid on public deposits is tax deductible, hence
there is tax saving.
(c) Simple procedure: The procedure for obtaining public deposits is
simpler than share & Debenture.
(d) Control: They do not have voting right therefore the control of the
company is not diluted.

Limitations:
a. For Short Term Finance: The maturity period is short. The
company cannot depend on them for long term.
b. Limited fund: The quantum of public deposit is limited because
of legal restrictions 25% of shar capital and reserves.
c. Not Suitable for New Company: New Company generally
find difficulty to raise funds through public deposits.

5. Trade Credit (Borrowed Fund- Short-term Finance):

It refers to the extension and provision of credit by one trader to
another for the purchase of goods and services, or other supplies
without on-the-spot payment. This is generally used by organizations
as short-term financing. The terms of trade credit may vary from
person to person based on past records and from industry to industry
based on industry norms.
Merits:
(a) A continuous and a convenient source of funds.
(b) It is readily available if credit worthiness is known to the seller.

ZIET, MYSORE
 (c) It helps in increasing the inventory levels in case of increase in sales
volume.
(d) While providing funds. It does not create a charge on assets of the
firm.
Limitations:
(a) There can be chances of over-trading.
(b) Fulfils only limited financial needs.
(c) Costly in comparison to few other sources.
6. Inter-Corporate Deposits (ICD) (Borrowed Fund- Short-term
Finance):
Inter-Corporate Deposits are unsecured short-term deposits made
by one company with another company. These deposits are
essentially brokered deposited, which led the involvement of
brokers. The rate of interest on their deposits is higher than that of
banks and other markets. The biggest advantage of ICDS is that
the transaction is free from legal hassles.
Features of ICDS:
(a) These transactions take place between two companies.
(b) There are short term deposits.
(c) These are unsecured deposits.
(d) These transactions are generally completed through brokers.
(e) These deposits have no organized market.
(f) These deposits have no legal formalities.
(g) These are risky deposits from the point of view of lender

ZIET, MYSORE
MULTIPLE CHOICE QUESTIONS (MCQs)
1. Which of the following is a short-term source of finance?
(a) Shares
(b) Debentures
(c) Trade Credit
(d) All of these
2. Out of the following, which one is a type of Inter-Corporate Deposit?
(a) Three Month Depos its (b)Six Month Deposits
(c ) Call Deposit (d)All of these
3. Equity shareholders are called:
(a) Owners of the company
(b) Partners of the company
(c) Executives of the company
(d) Guardian of the company
4. Which of the preferential right is enjoyed by preference shareholders over equity
shareholders?
(a) Right to receive repayment of capital
(b) Right to receive fixed rate of dividend
(c) Both (a) and (b)
(d) Voting rights

5. Which of the following is a source of Borrowed Fund?

(a) Equity Shares (b) Global Depository Receipts
(c) Inter-Corporate Deposits (d) Indian Depository Receipts
6. Out of the following, which one is not a feature of Owners’ Funds?
(a) Risk Bearer Capital (b) Periodic Interest Payment
(c)Permanent Capital (d) No Security Needed
7. The providers of ___________ funds have a control over the management of business.
(a) Owners’ (b) Borrowed (c) Both (a) and (b). (d) None of these
8. The liability of equity shareholders is __________.
(a) Unlimited (b) Limited (c) Zero (d) None of these
9. Preference Shares are referred to as Hybrid Securities because they have features
of both _____________ and _____________.

(a) Equity Shares, Debentures (b) Retained Earnings, Debentures

(c) Equity Shares, Public Deposits (d) Retained Earnings, Equity Shares
10. ___________ Capital is used for buying Current Assets.
(a) Fixed (b) Working (c) Both (a) and (b) (d) None of these
11. At the time of winding up, refund of __________ is made after the refund of
_______________.
(a) Preference Share Capital, Equity Share Capital
(b) Retained Earnings, Equity Share Capital
(c) Equity Share Capital, Preference Share Capital
(d) None of these
12. Retained Earnings is also known as:
(a) Internal Financing (b) Ploughing Back of Profits
(c)Self-Financing (d) All of these
13. Which source of finance is available in normal course of purchase of goods?
(a) Inter-Corporate Deposits (b) Trade Credit
(c) Public Deposits (d) None of these
14. ________________ are more dependable than external sources as they do not depend
on investors’ preference and market conditions.
(a) Equity Shares (b) Preference Shares
(c) Retained Earnings (d) Debentures
15. Which of the following constitutes a source for long-term finance?
(a) Retained Earnings (b) Equity Shares
(c) Debentures (d) All of the above
16. Retained Earnings does not involve any cost in the form of:
(a) Dividend (b) Interest
(c)Floatation Cost (d) All of the above
17. Which of the following source of finance does not create any charge against the
assets of a company?
(a) Equity Shares and Debentures
(b) Preference Shares and Debentures
(c) Equity Shares and Preference Shares
(d) None of the above
18. The term redeemable' is used for:
a) Preference shares
(b) Commercial paper
c) Equity Shares
(d) Public deposits
19. Funds required for purchasing current assets is an example of:
(a) Fixed capital requirement
(b) Ploughing back of profits
(c) Working capital requirement
(d) Lease financing
20. Public deposits are the deposits that are raised directly from:
(a) The public
(b) The directors
c) The auditors
d) The owners
FILL IN THE BLANKS
1. __________ capital refers to that part of total capital, which is required for holding
current assets.
2. ___________ funds are permanent source of finance, while ____________ funds
provide funds for a specified period.
3. The capital of a company is divided into small units called ___________.
4. The return earned by equity shareholders is known as______________
(Dividend/Interest).
5. Preference shareholders have ____________ right as to the redemption of capital
at the time of winding up of company.
6. The acceptance of public deposits is regulated by the ____________ (RBI/SEBI)
in India.
7. Equity shares provide ______________ (Permanent/Temporary) capital to the
company.
8. The liability of equity shareholders is ____________ (Limited/Unlimited).
9. ______________is the credit extended by one trader to another for the purchase
of goods and services.
 10. As per the RBI guidelines, the minimum period of Inter-Corporate-Deposit
is ____________ days which can be extended to _____________ year.

TRUE OR FALSE
1. Equity shares create a charge on the assets of the company.
2. Loan money is involved in inter-corporate deposits as it is a secured deposit made
by one company with another company.
3. Equity shareholders are paid dividend only when the company earns sufficient
profits.
4. No charge is created against firm assets for obtaining the trade credit.
5. The issue of preference shares reduces the capacity of the company to further
borrow funds.
6. Inter-corporate deposits are free from bureaucratic and legal hassles.
7. There is tax saving in case of dividend on preference shares as they are deductible
from profits as expense.
8. Preference shareholders enjoy the right to receive a fixed rate of dividend before
any dividend is paid to equity shareholders.
9. Trade Credit may be used to enhance the inventory level of a business enterprise.
10. Interest rates offered on public deposits are usually higher than that offered on
bank deposits.
11. The issue of public deposits dilutes the control of the company.
12. In case of lower earnings of the company, interest to debenture holders is paid
at a lower rate.

ASSERTION REASON QUESTIONS (ARQs)

1. Read the following statements: Assertion and Reason. Choose one of the correct
alternatives given below:
Assertion (A): The importance of business finance has increased tremendously these
days.
Reason (R): Goods are produced on large scale and capital-intensive techniques are
used.
Alternatives:
(a) Both Assertion (A) and Reason (R) are True and Reason (R) is the correct
explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are True and Reason (R) is not the correct
explanation of Assertion (A).
(c) Assertion (A) is True but Reason (R) is False.
(d) Assertion (A) is False but Reason (R) is True.
2. Read the following statements: Assertion and Reason. Choose one of the correct
alternatives given below:
Assertion (A): Equity share capital act as a temporary source of capital for the
business. Alternatives:
Reason (R): Equity Capital is to be repaid at the time of liquidation of a company.
(a) Both Assertion (A) and Reason (R) are True and Reason (R) is the correct
explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are True and Reason (R) is not the correct
explanation of Assertion (A).
(c) Assertion (A) is True but Reason (R) is False.
(d) Assertion (A) is False but Reason (R) is True.
3. Read the following statements: Assertion and Reason. Choose one of the correct
alternatives given below:
Assertion (A): The providers of Owners' Funds have a control over the management
of business.
Reason (R): There is a risk involved in the refund of Owners' Funds as they are the
primary risk bearer,
Alternatives:
(a) Both Assertion (A) and Reason (R) are True and Reason (R) is the correct
explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are True and Reason (R) is not the correct
explanation of Assertion (A).
(c) Assertion (A) is True but Reason (R) is False.
(d) Assertion (A) is False but Reason (R) is True.
4 Read the following statements: Assertion and Reason. Choose one of the correct
alternatives given below:
Assertion (A): Retained Earnings can only be used by an established firm and not by
a new firm.

Reason (R) : Newly established firm has not yet earned any profits to be used as
reserves.
Alternatives:
 a) Both Assertion (A) and Reason (R) are True and Reason (R) is the correct
explanation of Assertion (A)
b) Both Assertion (A) and Reason (R)are True and Reason (R) is not the correct
explanation of Assertion (A)
c) Assertion (A) is True but Reason (R) is False.
d)Assertion (A) is False but Reason (R) is True.

STATEMENT BASED QUESTIONS

1. Read the following statements carefully and choose the correct alternative from
the following:

Statement 1: Borrowed Funds are permanent source of finance.

Statement 2: Borrowers are under legal obligation to pay interest even in case of
losses.
Alternatives:
a. Both the statements are true.
b. Both the statements are false.
c. Statement 1 is true and Statement 2 is false.
d. Statement 2 is true and Statement 1 is false.
2. Read the following statements carefully and choose the correct alternative from
the following:

Statement 1: Owners’ Funds does not require any security.

Statement 2: The providers of borrowed funds do not get the right to control.
Alternatives:
(a) Both the statements are true.
(b) Both the statements are false.
(c) Statement 1 is true and Statement 2 is false.
(d) Statement 2 is true and Statement 1 is false.
3. Read the following statements carefully and choose the correct alternative from
the following:
Statement 1: Retained earnings is an economical method of financing.
Statement 2: Retained earnings have characteristics of both equity shares and
debentures.
Alternatives:
(a) Both the statements are true.
(b) Both the statements are false.
(c) Statement 1 is true and Statement 2 is false.
(d) Statement 2 is true and Statement 1 is false.
4. Read the following statements carefully and choose the correct alternative from
the following:
Statement 1: Raising finance through equity capital is less costly as compared to
debentures.
Statement 2: The liability of equity shareholders is unlimited.

Alternatives:
a) Both the statements are true.
b) Both the statements are false.
c) Statement 1 is true and Statement 2 is false.
d) Statement 2 is true and Statement 1 is false.
5. Read the following statements carefully and choose the correct alternative from
the following:

Statement 1: Interest is not payable on trade credit.

Statement 2: The control of the company is not diluted in case of public deposits.
Alternatives:
a. Both the statements are true.
b. Both the statements are false.
c. Statement 1 is true and Statement 2 is false.
d. Statement 2 is true and Statement 1 is false.

ANSWERS OF OBJECTIVE QUESTIONS

Multiple Choice Questions (MCQs)

1. c 2. d 3. A 4. c
5. c 6. b 7. A 8. b
9. a 10. b 11. c 12. d
13. b 14.c 15. D 16. d
17. c 18.a 19. C 20. a
21. d
Fill in the Blanks
1. Working
2. Owner’s, Borrowed
3. Shares
4. Dividend
5. Preferential
6. RBI
7. Permanent
8. Limited
9. Trade Credit
10. Seven, one
True or False
True 3 4 6 8 9 10
False 1 2 5 7 11 12

Assertion Reason Questions (ARQs)

1.a 2.d 3.b 4.a

Statement Based Questions

1. (d) 2. (a) 3. (c) 4. (b) 5. (a)

VERY SHORT ANSWER TYPE QUESTIONS

Q. 1. What do you mean by business finance?
Ans. Business finance refers to the money required for carrying out business activities.
Q. 2. What is meant by fixed capital?
Ans. Fixed capital is the money invested in fixed assets.
Q. 3. Out of a trading concern and a manufacturing concern, which will have large
amount of fixed capital?
Ans. Manufacturing Concern.
Q. 4. Name the funds needed for day-to-day operations of business.
Ans. Working Capital.
Q. 5. What do you mean by working capital?
Ans. Working capital refers to that part of total capital, which is required for holding
current assets, such as stock, bills receivables, etc.
Q.6. Out of long-term & short-term sources of finance, which source should be
preferred to finance fixed assets?
Ans. Long-term sources.
Q.7. Give any two examples of long-term sources of finance.
Ans. (i) Shares; (ii) Debentures.
Q.8. Mention any two examples of short-term sources of finance.
Ans. (i) Trade Credit; (ii) Loans from commercial banks.
Q. 9. How can you classify sources of funds on the basis of ownership?
Ans. (i) Owners’ Funds; (ii) Borrowed Funds.
Q. 10. What do you mean by owners’ funds?
Ans. The funds provided by the owner of the business enterprise are known as owners’
funds.
Q. 11. What is meant by borrowed funds?
Ans. The funds raised through loans or borrowings, are known as borrowed funds.
Q. 12. Out of owners’ funds and borrowed funds, which one is a permanent source of
finance? Ans. Owners’ Funds.
Q. 13. Give two examples of owners’ funds.
Ans. (i) Equity Shares; (ii) Preference Shares.
Q. 14. Give two examples of borrowed funds.
Ans. (i) Debentures; (ii) Loans from commercial banks.
Q.15. What do you mean by equity shares?
Ans. Equity shares are those shares which do not carry any special or preferential
rights in respect of payment of annual dividend and repayment of capital.
Q. 16. How does equity share capital act as a fixed or permanent capital for the
business?
Ans. Because it is to be repaid only at the time of liquidation of a company.
Q. 17. What are ‘Preference Shares’?
Ans. Preference shares are those shares, which enjoy preferential right in payment of
dividend and repayment of capital.
Q. 18. What is the position of debenture holders in relation to the company?
Ans. Debenture holders are the creditors of the company.
Q. 19. Mention the two preferential rights which preference shareholders enjoy over
equity shareholders.
Ans. (i) Right to receive fixed rate of dividend; (ii) Right to receive repayment of capital
on winding up of the company.
Q. 20. Distinguish between equity shares and preference shares on the basis of ‘Voting
Rights!
Ans.
Basis Equity Shares Preference Shares
Voting Rights Equity shareholders enjoy voting They do not carry voting rights
rights in company. except when dividend remains
unpaid for a specified period.

Q. 21. Distinguish between equity shares and preference shares on the basis of ‘Face
Value.
Basis Equity Shares Preference Shares
Face Value The face value of equity The face value of
share is generally low. preference share is
generally high.

Q. 22. What are retained earnings?

Ans. Retained earnings refer to that part of profits which is kept as reserve for use in
the future.
Q. 23. Why retained earnings cannot be used by a newly established company?
Ans. Because it has not yet earned any profits to be used as reserves.
Q. 24. What do you mean by trade credit?
Ans. Trade credit is the credit extended by one trader to another for the purchase of
goods and services.
Q. 25. How does issue of debentures not affect the control of equity shareholders?
Ans. As debenture holders do not have voting rights.
Q. 26. Distinguish between shares and debentures on the basis of ‘Rate of Return!
Ans.
 Basis Shares Debentures
Rate of Return Dividend fluctuations Interest rate is fixed
depending on residual irrespective of profits.
profits.

Q. 27. Distinguish between shares and debentures on the basis of ‘Degree of risk!
Ans.
Basis Shares Debentures
Degree of risk Shareholders bear a Debenture holders bear
high degree of risk. minimum degree of risk.

Short Answer Type Questions

1. What is business finance? Why do businesses need funds? Explain.

Hint: Business finance refers to the money required for carrying out business
activities. Also discuss “Significance of Business Finance.

2. List sources of raising long-term and short-term finance.

Hint: Long-term Finance: Shares, Debentures, Long-term Borrowings and Loans from
Financial Institutions Short-term Finance: Trade Credit, Loans from Commercial
Banks, etc.

3. What preferential rights are enjoyed by preference shareholders? Explain.

Hint: Preference shareholders enjoy 2 preferential rights: (i) Right to receive fixed rate
of dividend; (ii) Right to receive repayment of capital on winding up.
4. Name any three special financial institutions and state their objectives.
Hint: Refer the heading ‘Special Financial Institutions in India.
Long Answer Type Questions
1. Explain trade credit and bank credit as sources of short-term finance for
business enterprises.

Hint: For explanation of trade credit, refer the heading Trade Credit: For explanation
of bank credit, refer the heading ‘Loans from Commercial Banks.
2. Discuss the sources from which a large industrial enterprise can raise capital
for financing modernisation and expansion.
Hint: Discuss the following sources: Equity Shares, Preference Shares, Debentures
and Loans from Financial Institutions.
CASE STUDY QUESTIONS
Q.1. State with reasons whether the following statements are True or False:
(a) Equity shareholders are to be given dividend irrespective of the fact whether
the company has earned sufficient profits or not.
(b) Retained Earnings can be used by both new as well as old company.
(c) As per the RBl guidelines, the minimum period of Inter-Corporate Deposits
is 30 days.
Ans.
(a) False. There is no obligation on the company to pay dividend as it
depends on the profits available and the decision of directors and
members.
(b) False. Retained earnings cannot be used by a newly established
company and it has to rely on external sources of finance.
(c) False. As per the RBl guidelines, the minimum period of lnter-
Corporate-Deposits is 7 days.

Q. 2. A company needs to increase its stock of raw material and finished goods, which
will require funds of 5 lakhs. What are the various options available with the company
to finance this amount?
Ans. The various options available with the company to finance the working capital
needs of 5 lakhs are:
(i)Trade Credit; (ii) Loans from Commercial Banks; (iii) Public Deposits.
Q. 3. Identify the source of finance highlighted in the following cases:
(i)It facilitates the purchase of goods and services without making immediate payment.
(ii) It refers to that part of profits which is kept as reserve for use in the future.
(iii) This source has characteristics of both equity shares and debentures.
(iv) It is also known as ploughing back of profits.
(v) It is a permanent source of capital and is not redeemed during the life time of the
company.
Ans. (i)Trade Credit; (ii) Retained Earnings; (II) Preference Shares; (iv) Retained
Earnings, (v) Equity Shares.
Q.4. After completing the studies, Priyanka decided to start her own business of
homemade chocolates. After analysing all the pros and cons, she came to a conclusion
that total funds required are 12,00,000. She had 2,00,000 in her savings bank
account. As these funds were insufficient to start the business, she approached Axis
Bank for obtaining a loan of 10,00,000. The loan was approved within a month. On
the basis of given case, answer the following questions:
(a) Categorise the two types of funds on the basis of ownership.
(b) Out of the two sources of funds, which one is a permanent source of
finance?
(c) Which source of funds require legal obligation to pay interest at a fixed
rate at regular intervals?

Ans. (a) On the basis of ownership, 2,00,000 in Priyanka’s Savings bank

account constitute the Owner’s Funds, while loan of 10,00,000 constitute the
Borrowed Funds.
(b) Owner’s Funds of 2,00,000 is a permanent source of finance.
(c) Borrowed Funds of 10,00,000 require legal obligation to pay interest at a
fixed rate at regular intervals.
Q. 5. The directors of a company have decided to expand the business activities by
purchasing fully automatic machinery worth 50 crores. As a finance manager, advise
the directors about the various sources of finance available to the company.

Ans. The directors should use long-term sources to finance the purchase of fixed asset,
i.e. machinery. The various sources available are: (i) Equity Shares; (ii) Retained
Earnings; (iii) Preference Shares; (iv) Debentures; (v) Loans from Financial Institutions;
(vi) Loans from Banks.

Q. 6. To meet the problem of short-term capital inadequacy, Tizen Ltd. Borrowed 5

crores from Sky Ltd., which had surplus funds. Although Sky Ltd. Charged higher
interest rates as compared to bank borrowings still Tizen Ltd. Preferred this source as
no security had to be given to raise funds. Identify the source of finance being
discussed in the given case. Also, state its three features.

Ans. The source of finance discussed is Inter-Corporate Deposits (ICD).

Discuss ‘Features of ICD:

Q.7. State with reasons whether the following statements are ‘True’ or ‘False’:

(i) Funds needed for day-to-day operations of business is termed

as fixed capital.
(ii) Debenture holders are paid interest only when the company
earns sufficient profits.
 (iii) Retained earnings are dependable source of finance.
(iv) Preference shares create a charge on the assets of the
company.
(v) Equity capital is a source of permanent capital for the
company.

Ans.

(i) False. It is termed as working capital.

(ii) False. Debenture holders are paid fixed rate of interest at specified
Intervals, irrespective of the fact whether the company has earned
sufficient profits or not.
(iii) True. Retained earnings are dependable source of finance as they do
not depend on investors preference and market conditions and are
permanent funds.
(iv) False. Preference shares are issued without creating any charge on the
fixed assets of the company.
(v) True. Equity capital serves as permanent capital as it is to be repaid
only at the time of liquidation of a company.

Q.8. Jupiter Ltd. is a well-known manufacturer of sanitary fittings. Recently, company

was short of funds for meeting its day-to-day expenses. So, the company approached
one of its suppliers to grant 60 days credit on purchase of raw material. On the basis
of creditworthiness of Jupiter Ltd., the supplier granted the credit. Identify the source
of finance highlighted in the given case. Also, state its four features.

Ans. The source of finance highlighted is Trade Credit: Discuss ‘Features of Trade
Credit'.

*******************

CHAPTER – 8
SMALL BUSINESS AND ENTERPRISES
ENTREPRENEURSHIP DEVELOPMENT
Entrepreneurship Development is the process of improving the skills and knowledge of
entrepreneurs through various training and classroom programs.
Entrepreneurship is a systematic, purposeful and creative activity of identifying a need,
mobilizing resources and organizing production with a view to delivering value to the
customers, returns for the investors and profits for the self in accordance with the risk and
uncertainties associated with business.
An entrepreneur is a person or group of persons who establishes an enterprise, takes the
risk, accumulates all the resources required to carry out production or perform services and
creates an innovative product or service.
Characteristics of Entrepreneurship
1. Systematic activity – Entrepreneurship is a systematic, step by step and purposeful
activity. It requires skill, knowledge and competency which can be acquired, learnt and
developed through education, training, observation and experience. Thus we can say the
entrepreneurs are made but not born.
2. Lawful and purposeful activity – The aim of entrepreneurship is to run a lawful
business to create value for personal profit and social gain.
3. Brings innovation and creativity – Entrepreneurship is innovative as it involves
introduction of new products, discovery of new markets and source of supply of inputs,
technological breakthroughs as well as introduction of newer organizational forms for
doing things better, cheaper, faster and in a manner that causes the least harm to the
environment.
4. Organizes production – Production requires the combined utilization of diverse
factors of production, land, labour, capital and technology. The entrepreneur brings the
idea of business and the factors of production; thus, he organizes the production
activities.
5. Risk taking – The entrepreneur takes all the risks in the business as he brings the
factors of production including capital. The essence of entrepreneurship is the
‘willingness to assume risk’ arising out of the creation and implementation of new
ideas.

NEED FOR ENTREPRENEURSHIP

1. Contribution to Gross Domestic Product (GDP): - Increase in GDP is considered
as the most common indicator for economic development. Entrepreneurs generate
income through organisation of production.
2. Capital Formation: - Entrepreneurial decision is an investment decision that
enhances the productive capacity of the economy, which results in capital
formation.
3. Generation of employment: - Entrepreneurship is a source of employment to
people with different abilities, skills and qualifications. It provides livelihood to those
who have capital to earn interest and the land to earn rent.
4. Generation of business opportunities for others: - Every new business creates
opportunities for the suppliers of inputs and marketers of output.
5. Improvement of Economic Efficiency: - Entrepreneurs improve economic
efficiency by improving process, reducing wastes, increasing yield and bringing
technological progress by altering labour capital ratio.

6. Improving spectrum and scope of economic activities:

 -Diversification of economic activities across the geographic, sectoral and technological
scope leads to development of an economy. Entrepreneurs mobilise local and even
overseas resources to augment the productive capacity of a country.
7. Impact on local communities: - As there are no entry barriers in terms of
educational qualifications, entrepreneurship is an attractive career option for
marginalized groups to pursue their economic dreams.

PROCESS OF ENTREPRENEURSHIP DEVELOPMENT

The process of entrepreneurship development consists of the following stages:

I. Idea Generation: - This is the first step in the entrepreneurial process.

An idea can be a problem or solution. Here, the entrepreneur identified
an idea worth pursuing. The entrepreneur will conduct the feasibility
study and take input from other stakeholders.
II. Opportunity Analysis: - After identifying the opportunity, the
entrepreneur will evaluate it. They will see if the opportunity provides any
value to the business or the consumer, whether it will be sustainable in
the long term if the profit is healthy, the market competition, the risks
associated with the opportunity, and whether the entrepreneur’s product
or service will be different or better than the competitor.
III. Developing Plan: - After analyzing the opportunity, the
entrepreneur develops a plan to realize it and launch the company. This is
a crucial step in the entrepreneurial process..
IV. Collecting Resources: - Launching a new business requires resources,
including financing, human labor, materials, and more. If the
entrepreneur is self-sufficient, they can self-finance. However, they may go
to investors or financial institutions to get the funds.
V. Forming Organization: - Once the entrepreneur secures the funds and
resources, they will launch the company and form a legal entity. The
structure of the organization will depend on its requirements.
VI. Growing Business: - After launching the company, it will start
 producing products or offering services. The entrepreneur will ensure
that the business is running smoothly and growing.
START-UP INDIA SCHEME
Startup India Scheme is an important initiative by Govt. of India to promote a strong
eco-system for nurturing innovation and startup (new enterprises) in the country.
This drive will towards sustainable economic growth and generate large scale
employment opportunities.
The main objectives of this scheme are:
(i) To initiate an entrepreneurial culture and inculcate entrepreneurial values in the
society at large and influence the mindset of people towards entrepreneurship.
(ii) To create awareness about the charms of being an entrepreneur and the process of
entrepreneurship.
(iii) To encourage more dynamic startups by motivating educated youth, scientists
and technologists to consider entrepreneurship as a lucrative, preferred and viable
career.
(iv) To Broad base the entrepreneurial supply by meeting specific needs have
underrepresented target groups, like women, socially and economically backward
communities, under-represented regions to achieve inclusiveness and sustainable
development to address the needs of the population at the bottom of the pyramid.
(v) To support the early phase of entrepreneurship development, including the pre-
startup as well as early post startup phase and growth enterprises.
WAYS TO FUND START-UP
The funding for start-ups can be available in the following ways:
1. Boot Strapping – Bootstrapping in business means starting a business without
external help or capital. It is considered as the first funding option because by using
personal savings and resources, entrepreneur is tied to his business.
2. Crowd Funding – Crowd funding refers to the practice of funding a project or
venture by raising money from a large number of people for a common goal. Pooling
resources by a group of people for a common goal especially through internet
platforms.
3. Angel Investment – Angel investors are the individuals with surplus cash who
have keen interest to invest in upcoming startups. They also offer mentoring or
advice along with capital.
4. Venture Capital – Venture capitalists provide professionally managed funds to
companies and startups that have huge potential. It is also called risk capital as it
is invested in new ventures. Venture capitalists provide expertise, mentorship and
evaluate business from sustainability and scalability point of view. Eg: Accel
Partners, Blume Ventures etc.
5. Business Incubators and Accelerators – Incubators provide funds for startups in the
early stage of their business, whereas accelerators help the startups to run or to take
a giant leap in business. Eg: Angel Prime, Khosla Labs, Startup Village
6. Microfinance and NBFCs – Microfinance is a category of financial services
targeted at individuals and small businesses who lack access to conventional
banking or who have not qualified for a bank loan. Eg: BSS Microfinance P Ltd.,
 Asirvad Microfinance Pvt. Ltd. etc.
NBFCs (Non-Banking Financial Companies) are registered under Indian Companies Act
and they perform only lending functions to the public and they cannot accept
demand deposits such as SB A/c, Current A/c etc. Eg: Mahindra & Mahindra
Financial Services Ltd., Muthoot Finance Ltd., Bajaj Finance Ltd. etc.

INTELLECTUAL PROPERTY RIGHTS AND ENTREPRENEURSHIP

Intellectual Property is a category of property that includes intangible creations of
human intellect. Intellectual property (IP) refers to the creations of the human mind,
like inventions, literary and artistic works, symbols, names, images and designs used
in business.
All inventions of creations begin with an ‘idea’. Once the idea becomes an actual
product, i.e., Intellectual Property, one can apply to the authority concerned under
the Government of India for protection. Legal rights conferred on such products are
called ‘Intellectual Property Rights’ (IPR). Once it is allotted to a person by the Govt.
authority, he/she can rent, give or sell it to others.
Intellectual property is divided into two broad categories:
1. Industrial property, which includes inventions (patents), trademarks, industrial
designs and geographical indications,
2. Copyrights, which includes literary and artistic works, such as novels, poems,
plays, films, musical works, artistic works, such as drawings, paintings,
photographs and sculptures and architectural designs.
SMALL SCALE ENTERPRISES
Small scale industries, Micro, Small and Medium Enterprises (MSME), contribute
significantly to the development process and act as a vital link in industrialization in
terms of production, employment and exports for economic prosperity by widening
the entrepreneurial base and use of local raw materials and indigenous skills.
SMALL SCALE INDUSTRIES AS PER MSMED Act, 2006
Small business is generally defined in terms of size of the business enterprises. The
definition used by the Government of India to describe MSME is based on the
investment in plant and machinery and turnover.
Classification of Manufacturing and Service Enterprises.
According to MSMED Act 2006(Revised with effect from 1st July 2020) an enterprise,
engaged in providing or rendering of services or manufacture or production of goods
pertaining to any industry specified in the first schedule to the Industries
(Development and regulation) Act, 1951, there are three types of enterprises.
Manufacturing industries are defined in terms of investment in plant and machinery
while service Enterprises are defined in terms of investment in equipment.
● Micro Enterprise: Investment in plant and machinery or equipment does not
exceed ₹ 1 crore and annual turnover does not exceed ₹ 5 crores.
● Small Enterprise: Investment in plant and machinery or equipment is more
than ₹ 1 crore but does not exceed ₹ 10 crores and annual turnover does
not exceed ₹ 50 crores.
● Medium Enterprise: Investment in plant and machinery or equipment
 is more than ₹ 10 crores but does not exceed ₹ 50 crores and annual
turnover does not exceed ₹ 250 crores.
Types of Business Investment in Plant Turnover
and
Machinery
Micro Enterprise 1 Crore Does not exceed 5 crores
Small Enterprise 1 crore >10 Crores Does not exceed 50 crores
Medium Enterprise 10 crores>50 Crores Does not exceed 250 crores

ROLE OF SMALL BUSINESS IN INDIA WITH SPECIAL REFERENCE TO RURAL AREAS

Small business organizations play an important role in the socio-economic development
of the country. Some of them are as follows:

1. It helps the balanced regional development of our country. Small industries in

India account for 95 per cent of the industrial units in the country
2. MSME are the second largest employers of human resources, after agriculture.
They generate a greater number of employment opportunities per unit of capital
invested compared to large industries. It is considered as more labour intensive
and less capital intensive.
3. MSME in our country supplies an enormous variety of products which
include mass consumption goods, readymade garments, hosiery goods,
stationery items etc.
4. MSME which produce simple products using simple technologies and depend
on locally available resources both material and labour can be set up anywhere
in the country. It contributes significantly to the balanced development of the
country.
5. MSME provides ample opportunity for entrepreneurship. The latent skills and
talents of people can be channeled into business ideas which can be converted
into reality with little capital investment.
6. MSME also enjoys the advantage of low cost of production. Locally available
resources are less expensive.
7. Due to the small size of the organisation, quick and timely decisions can be
taken.

GOVERNMENT SCHEMES AND AGENCIES FOR SMALL SCALE INDUSTRIES

Some of the support measures and programmes meant for the promotion of small and
rural industries are as follows.

1. NATIONAL SMALL INDUSTRIES CORPORATION (NSIC)

National Small Industries Corporation (NSIC) is a Government of India enterprise
under the Ministry of Micro, Small and Medium Enterprise. It was set up in 1955
to promote the growth of small business units in the country.

The main functions of NSIC are:

ͼ To Supply indigenous and imported machines on hire purchase basis.
 ͼ To procure and supply indigenous and imported raw materials.
ͼ To support the export of products.
ͼ To provide monitoring and advisory services.
ͼ To serve as technology business incubators.
ͼ To create awareness on technological upgradation.
NSIC has implemented a new scheme of ‘performance and credit rating’ of small
businesses to achieve two objectives.
(i) Sensitising the small industries about the need for credit rating and
(ii) Encouraging the small business units to maintain a good
financial track record.
In addition to this, NSIC has been providing marketing support to Micro and
small enterprises under marketing assistance schemes.

2. DISTRICT INDUSTRIES CENTRES (DICS)

DIC programme was launched on 1st May, 1978 at the district level to provide services
and support facilities to the entrepreneurs for setting up small and village industries.
It provides different kinds of assistance to entrepreneurs.
a. To support small entrepreneurs at district level.
b. To provide all facilities and support to set up small and village
industries.
c. To help the identification of suitable schemes for entrepreneurs by Central
and State Govts.
d. To prepare feasibility reports on each industry.
e. To arrange credit facilities and equipment.
f. To Arrange raw materials.
g. To impart training for artisans, entrepreneurs etc.

MCQ/True or False/Fill in the Blanks (1 mark)

1. Intellectual property is tangible. (True or False)

2. Small businesses generally have a short gestation period. (True or False)
3. ______are individuals with surplus cash who have keen interest to invest in upcoming
start-ups.
4. (Bootstrapping / Angel Investment) in business means starting a business
without external help and is commonly known as self-financing.
5. is the practice of funding a project by raising money from a large number of people for
a common goal.
6. While calculating the investment in plant and machinery, the cost of pollution
control, research and development, industrial safety devices and such other
items shall be (Excluded/Included)
7. Small industries are the second largest employers of human
 resources, after agriculture. (True or False)
8. As per Ministry of Commerce and Industry, a start-up means an entity
incorporated or registered in India which is not older than five years and its
annual turnover does not exceed 20 crores in any preceding year.
9. Entrepreneurs improve the standard of living of many people, directly and
indirectly.
10. In the case of Manufacturing Enterprise, investment in Plant and
Machinery is more than 1 crore but does not exceed 10 crores.

MATCHING TYPE QUESTIONS

11. Match the statements given under A with the correct options given under B.
A B

1) Medium Manufacturing a. Investment in equipment is

Enterprise more than 10 crores but does not exceed 50 crores

ii) Medium Service Enterprise b. Investment in equipment

does not exceed 10 crores
c. Investment in Plant and
Machinery is more than 10 crores but does not exceed 50
crores

i) Angel Investment a. Self-financing.

ii) Crowdfunding b. Professionally managed funds
which are invested in companies that have huge potential.

iii) Bootstrapping c. Individuals with surplus cash

who invest in upcoming start-ups.

iv) Venture Capital d. Raising money from a large

number of people for a common goal.

Match the statements given under A with the correct options given under B.

12. Which of the following points highlight the role of small-scale business in
the development of the country?
(a) Promotes Balanced Regional Development (b)Employment Generation
(b) Low Cost of Production
(c) All of these
13. Performance and credit rating' scheme is implemented by:
 (a) District Industries Centers
(b) National Small Industries Corporation
c) National Bank for Agriculture and Rural Development
(d) Small Industries Development Bank of India
14. As per the Ministry of Commerce and Industry, a start-up means an entity
incorporated or registered in ------------------- years.
a) Two (b) Three (c) Four (d) Five
15. Which of the following methods can be used to fund a Start-up?
(a) Crowdfunding (b) Angel Investment
(c) Bootstrapping (d) All of the above
Read the following statements: Assertion and Reason. Choose one of the correct
alternatives given below:
Alternatives:
a) Both Assertion (A) and Reason (R) are True and Reason(R) is the correct explanation of
Assertion (A).
(b) Both Assertion (A) and Reason (R) are True and Reason (R) is not the correct
explanation of Assertion (A)
(c) Assertion (A) is True but Reason (R) is False.
(d) Assertion (A) is False but Reason (R) is True.
16. Assertion (A): Small business is defined on the basis of investment in plant and
machinery or equipment in India.
Reason (R): In India, there is scarcity of capital and abundance of labour.
17. Assertion (A): Small industries promote balanced regional development of the
country.
Reason (R): In case organisation of small industries, quick and timely decisions can
be taken due to small size of the organization
18. Assertion (A): Small business is an important source of employment generation.
Reason (R): Entrepreneurs of small business command huge capital.
19. Assertion (A): Products of small industries give a tough competition to products of
large companies.
Reason (R): Small industries are unable to use modern technology and it is
difficult for them to invest in quality research.
STATEMENT BASED QUESTIONS
Read the following statements carefully and choose the correct alternative from the
following:
(a) Both the statements are true.
(b) Both the statements are false.
(c) Statement 1 is true and Statement 2 is false.
(d) Statement 2 is true and Statement 1 is false.
20. Statement 1: Boot Strapping refers to the practice of funding a project or venture
 by raising money from a large number of people for a common goal.
Statement 2: Boot Strapping is a good option of funding only if the initial
requirement is small and handy.
21. Statement 1: Micro Enterprise is an enterprise in which
investment in plant and machinery or equipment does not exceed 5 crore and
annual turnover does not exceed 10 crores.
Statement 2: In India, MSMED Act, 2006 was established for
developing and enhancing the competitiveness of large industries.
(a) Statement 1: Small industries are the largest employers of human
resources.
Statement 2: Sm all industries promote balanced regional development of the
country.
22. Statement 1: Medium Enterprise is an enterprise in which investment in
plant and machinery or equipment is more than 10 crores but does not exceed
50 crores and annual turnover does not exceed 250 crores.
Statement 2: In India, small business is defined on the basis of investment in land
and building.
23. Statement 1: Entrepreneurs improve the standard of living of many
people, directly and indirectly.
Statement 2: Entrepreneurship involves bigger risk as compared to career in
employment or practice of a profession.

Answer key

Question No: Question No: Question

No:

1-False 11 -- i-c, ii- a 21 – D

2 - True 12 – i) – c, ii) – d, iii) - a, 22 – B

iv) - b

3 - Angel Investors 13 - D 23 – D

4 - Boot Strapping 14- B 24 – C

5-crowd funding 15 - D 25- A

6 -Excluded 16 - D

7 - True 17 - A

8- False 18 – B
 9 - True 19- C

10- False 20- D

Short Answer Questions/ Long Answer Questions

24. “Small scale industries play a significant role in the developing countries
like India”. Justify statement by giving suitable reasons.
Ans: Yes, I agree with the given statement.
a) It helps the balanced regional development of our country. Small industries
in India account for 95 per cent of the industrial units in the country
b) MSME are the second largest employers of human resources, after
agriculture. They generate a greater number of employment opportunities
per unit of capital invested compared to large industries. It is considered as
more labour intensive and less capital intensive.
c) MSME in our country supply an enormous variety of products which
include mass consumption goods, readymade garments, hosiery goods,
stationery items etc.
d) MSME which produce simple products using simple technologies and
depend on locally available resources both material and labour can be set up
anywhere in the country. It contributes significantly to the balanced
development of the country.
e) MSME provide ample opportunity for entrepreneurship. The latent skills and
talents of people can be channeled into business ideas which can be
converted into reality with little capital investment.

25. Why do banks hesitate to lend money to small scale industries?

Ans: banks hesitate to lend money to small scale industries because of
low creditworthiness and lack of collateral security.
26. Why are small industries unable to supply good quality products?
Ans: small industries are unable to supply good quality products because
of lack of modern technology and shortage of resources to invest in research
and development.
27. “Entrepreneurs succeed by thinking and doing new things or old things in
new ways. Entrepreneurs are those who marry their creative ideas with the
purposeful action and structure of a business. They are able to not only come up
with indigenous ideas, but also turn those ideas into profits:. Which
characteristic of entrepreneurship is being highlighted in the given para?

Ans: Brings innovation and creativity – Entrepreneurship is innovative as it

involves introduction of new products, discovery of new markets and source of
supply of inputs, technological breakthroughs as well as introduction of newer
organizational forms for doing things better, cheaper, faster and in a manner
 that causes the least harm to the environment.

28. There are various types of Intellectual Property Rights which have been
recognised in India. Identify the type in the following statements.
a) It is a right conferred upon the creators of literary, artistic, musical,
sound recording and cinematographic film.
b) It represents collective goodwill of a geographical region, which has built itself
over centuries.
c) It helps in distinguishing similar products in the market from its
competitors.
d) It is a protection given to aesthetic appearance or eye- catching features
and item of its production is valid for 10 years.
e) It is an exclusive right granted by the government which provides the
exclusive right to exclude all others and prevent them from making, using,
offering for sale, selling or importing the invention. Ans: a)
Ans:
Copyright: Copyright is the right to “not copy”.

It is offered when an original idea is expressed by the creator or

author. It is a right conferred upon the creators of literary, artistic, musical,
sound recording and cinematographic film. The copyright is an exclusive right
of the creator to prohibit the unauthorized use of the content which includes
reproducing and distributing copies of the subject matter.
b) Geographical Indication: A Geographical Indication (GI) is
primarily an indication which identifies agricultural, natural or manufactured
products (handicrafts, industrial goods and food stuffs) originating from a
definite geographical territory, where a given quality, reputation or other
characteristic are essentially attributable to its geographical origin.
c) Trademark : A trademark is any word, name, or symbol (or
their combination) that helps us identify the goods made by an individual,
company, organization, etc. Trademarks also let us differentiate the
goods of one company from another.
d) Design: A ‘design’ includes shape, pattern, and arrangement of
lines or colour combination that is applied to any article. It is a protection
given to aesthetic appearance or eye-catching features. The term of protection
of a design is valid for 10 years, which can be renewed for further 5 years
after expiration of this term, during which a registered design can only be
used after getting a license from its owner and once the validity period is over,
the design is in public domain.
e) Patent: A patent is a type of IPR which protects the scientific
 inventions (products and or process) which shows technical advancement
over the already known products. A ‘patent’ is an exclusive right granted by
the Government which provides the exclusive ‘right to exclude’ all others and
prevent them from making, using, offering for sale, selling or importing the
invention.
29. “Entrepreneurs are frequently thought of as national assets to be cultivated,
motivated, and remunerated to the greatest possible extent. In fact, some of the
most developed nations such as United States are world leaders due to their
forward-looking innovation, research and entrepreneurial individuals. Great
entrepreneurs have the ability to change the way we live and work, on local and
national bases. If successful, their innovation may improve standard of living and
in addition to creating wealth with entrepreneurial ventures, they also create jobs
and contribute to a growing economy. The importance of entrepreneurship is not
to be underestimated.”
Do you agree with this? Give reasons to justify your answer.
Ans: Yes, I agree that entrepreneurship is very important. Explain the NEED FOR
ENTREPRENEURSHIP.

30. After completing MBA from FMS, Delhi, Raveena decided to enter into a startup
business. She wants to explore the diary product business after hearing news of
adulteration being found in the milk all over Delhi. She does feasibility studies and
finds there is a demand for healthy and quality products in the market. She is
confused about the options available to her for her startup. Suggest any 6 ways
through which she can finance it.
Ans: The funding for start-ups can be available in the following ways: (Explain the
following)
1. Boot Strapping.
2. Crowd Funding.
3. Angel Investment.
4. Venture Capital.
5. Business Incubators and Accelerators.
6. Microfinance and NBFCs

31. Sushant Singh done his B.Tech in electrical engineering. He has no business
experience but wants to start a small-scale manufacturing unit. He has chosen
to manufacture light engineering goods which will be marketed to manufacturers
and in replacement markets.
Which Govt. agency should he approach for receiving suitable guidance for
stating his unit?
What type of facilities will he be able to get from concerned agency.
 Ans: (a) DIC (b) Role of DIC

32. Preet food Industries set up food and beverages processing plant in the rural
area of Tamil Nadu and opted for labour intensive technique due to easy
availability of labour and to provide employment to local people. Board of director
decided to invest 50 lakhs to acquire plant & machinery, Rs. 1 crore to buy land,
Rs. 20 Lakhs to buy raw material and Rs. 20 lakhs to maintain day to day
expenses.
(a) Name the Act of Industries which is applicable to the above industry.
(b) which category of part (a) will the above industry came?
(c) State the investment limit in this category.
Ans: (a) MSMED Act, 2006. Small Scale Industry, Rs. 10 crores.

33. After completing the graduation, three close friends (Raghav, Madhav and
Manohar) decided to start their own business.
a) Raghav established a factory to produce readymade garments and invested ₹
9 crores in plant and machinery.
b) Madhav set up a manufacturing unit to produce sanitary fittings.
He invested ₹ 35 crores in plant and machinery.
c) Manohar started a manufacturing unit to produce stationary items and
invested Manohar started a manufacturing unit to produce stationary items
and invested ₹ 80 lakhs in plant and machinery.
Ans: a) Raghav: Small Enterprise.
b) Madhav: Medium Enterprise.
c) Manohar: Micro Enterprise.
 CHAPTER 9 :

INTERNAL TRADE

MEANING

Internal Trade is the buying and selling of goods and services within the boundaries
of a nation. Internal trade is also known as ‘Home Trade’ or ‘Inland Trade’ or
Domestic trade.

TYPES OF INTERNAL TRADE

Internal Trade can be classified into two broad categories.

(1) Wholesale Trade
(2) Retail

WHOLESALE TRADE

Wholesale trade refers to the buying and selling of goods and services in
large quantities for the purpose of resale or intermediate use. The traders
who deal in wholesale trade are known as wholesalers.

Services of Wholesalers
Wholesalers provide various services to the manufacturers as well as retailers

(a) Services to Manufacturers

1. Facilitates large scale production

As the wholesalers purchase goods from the manufacturers in bulk
quantities, producers are able to undertake production on a large scale and take
advantage of the economies of scale.
2. Bearing risk
The wholesalers deal in goods in their own name, take delivery of the goods
and keep the goods in large quantities in their warehouses. In this process they
bear variety of risks such as the risk of fall in prices, theft, spoilage, fire etc.
3. Financial Assistance
Wholesalers generally purchase goods from manufacturers on cash basis
and sometimes even give advance for bulk orders. In this way wholesalers provide
financial help to the manufacturers.
 4. Expert Advice
As the wholesalers are in direct contact with the retailers, they are in a
position to advice the manufacturers about various aspects including
customer’s taste and preferences, market conditions, competitive activities
and the features preferred by the buyers.
5. Help in marketing function
The wholesalers collects orders from large number of retailers and supply
goods to them, who in turn sells the goods to the consumers. As a result,
wholesaler allows the manufacturer to concentrate more on production activity
and relieves him
from marketing of goods.
6. Facilitates production continuity
The wholesalers purchase goods from producers as and when these are produced.
It helps the manufacturers in maintaining continuity of production
activity.
7. Storage
The wholesaler takes delivery of goods when these are produced in the factory and
store them in their own warehouses. It relieves the manufacturers of the storing
problems.

(b) Services to Retailers

(1) Availability of goods

The wholesalers provides the products of various manufacturers to the
retailers and saves them from keeping large quantities of each product.
(2) Marketing Support
The wholesalers perform various marketing functions and provide support to
the retailers. They undertake advertising and other sales promotional activities
to induce customers to purchase the goods.
(3) Grant of credit
Wholesalers provide financial help to retailers by selling them goods on credit.
They can make payment after receiving the payment from the customers.
(4) Specialised knowledge
Wholesalers specialize in a particular line of products and have expert
knowledge of the market conditions relating to such products. They pass on the
benefit of
their specialized knowledge to the retailers and inform them about new
products, their uses, quality, prices etc.
(5) Risk Sharing
The wholesalers purchase in bulk and sell in relatively small quantities to the
retailers. Being able to purchase merchandise in smaller quantities, retailers
are
in a position to avoid the risk of storage, pilferage, obsolescence, reduction in
prices and demand fluctuations.
RETAIL TRADE
Retail Trade refers to buying of goods and services in relatively small quantities from
wholesalers and selling them to the ultimate consumers. The traders who deal in retail
trades are known as retailers.
Services of Retailers
(a) Services to Manufacturers and wholesalers

1. Helps in distribution of goods

Retailers provide access to the market to manufacturers and wholesalers through
distribution of goods to the final consumers, who may be scattered over a large
geographical area.
2. Personal Selling
By undertaking personal selling efforts, the retailers relieve the producers of this
activity and greatly help them in the process of actualizing the sale of the products.
3. Enabling large scale operations
On account of retailer’s services, the manufacturers and wholesalers are free
from the trouble of making individual sales to consumers in small quantities.
This enables them to operate on, at relatively large scale, and thereby fully
concentrate on their other activities.
4. Collecting market information
As retailers remain in direct and constant touch with the buyers, they
serve as an important source of collecting market information about the
tastes, preferences and the attitude of customers.
5. Helps in promotion
Retailers participate in the promotional activities of the manufacturers and
wholesalers in various ways and thereby help in promoting the sale of the products.
(b) Services to Consumers
1. Regular availability of products.
Consumers are assured of continuous supply of goods and they need not
store the goods in large quantities. A retailer makes available to the customers
all types of commodities.
2. New product information
By arranging for effective display of products and through their personal efforts,
retailer provide important information about the arrival, special features etc. of new
products to the consumers.
3. Convenience in buying
Retailers offer great convenience to the customers in buying small
quantities of products according to their requirements. Retail shops are
usually situated near to residential areas and remain open for long hours.
4. Wide Selection
Retailers generally keep stock of a variety of products of different manufacturers.
This enables the consumers to make their choice out of a wide selection of goods.
5. After sale service
Retailers provide important after sale services in the form of home delivery
, repair of goods in the case of durable items, supply of spare parts and
attending to customers.
6. Provide credit facilities
The retailers sometimes provide credit facilities to their regular buyers. It
enables the customers to increase their consumption level and standard of living.

TYPES OF RETAIL TRADE

The retail trade may be classified into two main categories:
1. Itinerant Retailers 2. Fixed Shop Retailers
Itinerant Retailers
 Itinerant retailers are those traders who do not have a fixed place of business
to operate from. They keep on moving with their wares from street to street or place to
place, in search of customers.
Main features of Itinerant Retailers are:
● They are small traders operating with limited resources.
● They normally deal in consumer products of daily use.
● They mostly sell goods on a cash basis.
● They operate with a very small amount of capital.
● They generally sell goods at prices lower than charged by fixed shop retailers.
● They provide greater service to customers by making the products
available to their doorsteps.

TYPES OF ITINERANT RETAILERS

(1) Hawkers and Pedlars

Hawkers and Pedlars move from street to street in search of customers. The
Hawkers carry their goods in a wheeled vehicle, while the pedlars carry the goods
on their head and back.
They generally deal in non -standardized and low value products such as
fruits vegetables, toys, fabrics, snacks and ice cream etc. The main advantage
of this form Retailing is convenient service to customers.
(2) Market Traders
Market traders are the small retailers who open their shops at different places
on fixed days. These retailers sell their goods at periodical markets such as weekly,
monthly or annually.
Generally they display their goods on temporary structures made outside the
shops which are closed for a weekly holiday. They are mainly catering to lower
income group of customers and deal in low priced consumer items of daily use.
(3) Street Traders (Pavement vendors)
These retailers arrange or display their goods at busy street corners,
pavements and other busy public places like bus stands, railway stations,
cinema halls etc.
They sell consumer items of common use, such as stationery items, eatables,
readymade garments, newspapers and magazines etc.
(4) Cheap Jacks
Cheap Jacks display their goods in hired shops or in tents for a temporary
period in different localities. They keep on changing their business from one
locality to another, depending upon the potentiality of the area. They generally
deal in house hold articles, readymade garments and other low priced goods.

FIXED SHOP RETAILERS

The retailers having a fixed place of sale are known as fixed shop retailers. They
do not move from one place to another in search of customers. Fixed shop retailers
can be further classified into two categories.
(1) Small-scale fixed retail shops
(2) Large scale fixed retail shops

(1) Small-scale fixed retail shops

Small scale fixed retailers are the most common form of retailers. They are mostly
situated in localities to fulfill the needs of people residing in local areas.

TYPES OF SMALL SCALE FIXED RETAIL SHOPS

(a) General Stores
General stores are small shops located in residential areas deals with items of
daily use such as grocery items, soft drinks, toiletry products, stationary and
confectionery. They have a large variety in each line of product. They also provide free
home delivery credit facility and other services to regular customers.
(b) Specialty Shops
These retail shops specialize in sale of a specific line of products. For ex. Men’s
wear shops, stationery shops, medical shops etc.
(c )Street Stall holders
These small vendors are commonly found at street crossing or other places
where the flow of traffic is heavy. They attract floating customers and deal mainly
in goods of cheap variety like hosiery products, toys, magazines, soft drinks etc.

(c) Second hand goods shops

These shops deals in second hand or used goods like books, cloths,
furniture and other household goods. The goods are sold at lower prices.
Generally persons with modest means purchase goods from such shops.

(2) Large scale fixed retail shops

Large scale fixed retailers operate on large scale as they maintain large stock of
goods and purchase of goods in bulk. Two important types of large scale fixed shop
retailers are:
(a) Departmental Stores
(b) Chain Stores or Multiple Shops.

(a) Departmental Stores : A departmental store is a large establishment, which sells a

wide variety of products and aims to satisfy all needs of the customers under one roof.
The store is divided into a number of departments and each department deals in a
particular variety of goods. They satisfy diverse market segments with a wide variety
of goods and services.
Important features of a departmental store:
(i) Central Location: It is generally located at a central place in the city so that
people living in different areas may reach there easily.
(ii) Large variety of goods: These stores maintain a large variety of
goods and customers can purchase almost all their requirements
from these stores.
(iii) Large Size: As the size of these store is very large, they are generally
formed as a joint stock company managed by a board of directors.
(iv) Centralised Purchasing: All the purchases in a departmental store
are made centrally by the purchase department.
(v) Elimination of middlemen: A departmental store purchase goods directly
from the manufacturers, which sells them to the ultimate consumers and
eliminates middlemen.
(vi) Services: A departmental store provide a number of services and facilitates to
the customers such as restaurant, travel and information bureau, rest rooms,
telephone booth etc.

(b) Chain Stores or Multiple shops Chain stores or multiple shops are networks
of retail shops, which are owned and operated by manufacturers or
intermediaries. All the retail shops deal in similar line of standardized and
 branded consumer products. They all have identical merchandising strategies,
with identical products and displays. Bata, Pizza hut, Raymonds etc. are
examples of multiple shops.
Important features of Multiple shops are:
(i) Large Size: Chain stores operate on a large scale. Huge investment is
required to to set up identical shops in different parts of the country.
(ii) Location: These shops are located in fairly populous localities where sufficient
number of customers can be approached.
(iii) Centralised Purchases: The head office makes all the purchases for
all these multiple shops. Thereafter goods are dispatched to different
shops as per their requirements.
(iv) Centralised control: All stores are controlled by the head office, which
formulates policies and get them implemented in different shops.
(v) Specialised in one line: Generally chain stores specialize in one line of
product and variety in that line only is available at all the shops located in
different areas.
(vi) Uniform Prices: The prices of the product charged by chain stores
located in different parts of the country are the same and they sell goods
at a fixed price.
(vii) Elimination of middlemen: Chain stores are generally owned by
manufacturers who sell their goods directly to consumers, so middlemen are
eliminated.
(viii) Cash Sales: In chain stores no credit is given. Goods are sold on cash basis only.

MAIL ORDER BUSINESS: Mail Order Houses are the retail outlets
that sell their merchandise through mail usually without any direct personal
contact between buyers. For obtaining orders, potential customers are
approached through advertisements in newspapers or magazines, circulars,
catalogues, samples and bills and price lists sent to them by post. On receiving
the orders, the items are carefully scrutinized with respect to the specifications
asked for by the buyers and are compiled with through the post office.

GOODS AND SERVICES TAX (GST)

GST or Goods and Services Tax is a comprehensive indirect tax which has
replaced many indirect taxes in India. GST was introduced in India with effect from
1st July 2017. The Government of India, following the credo of ‘One Nation and One
Tax’, and wanting a unified market in order to ensure the smooth flow of goods
across the country implemented GST. GST is a destination based single tax on the
supply of goods and services from the manufacturer to the consumer, and has
replaced multiple indirect taxes levied by the Central and the State governments,
thereby converting the country into a unified market.

Key features of GST:

1. The territorial spread of GST is the whole country.

2. GST is applicable on the supply of goods or services as against the earlier
concept of tax on the manufacture or sale of goods or on the provision of
services.
3. It is based on the principle of destination based consumption tax against the
earlier principle of origin based taxation.
4. Import of goods and services is treated as Inter-state supplies and would be
subject to IGST in addition to the applicable customs duties.
 5. CGST, SGST and IGST are levied at rates mutually agreed upon by the Centre
and the states under the aegis of the GST council. There are four tax slabs
namely 5%, 12%, 18% and 28% for all goods or services.
6. Exports and supplies to SEZ are zero rated.
7. There are various modes of payment of tax available to the tax payer,
including internet banking, debit/credit card and National Electronic Funds
Transfer (NEFT) or Real Time Gross Settlement (RTGS)

*****************************************************************

MULTIPLE CHOICE QUESTIONS

1. Which of the following is not a type of Itinerant retailer?
(a) Hawkers (b) Market Traders
(c) Street Traders (d) Street Stalls

2........................... deal in similar line of standardized and branded consumer

products and have identical merchandising strategies, with identical
products and displays.
(a) Departmental Stores (b) Chain Stores
(c) General Stores (d) Speciality shops

3. Which among the following is not a feature of wholesalers ?

(a) Wholesalers acts as a link between producers and retailers
(b) Wholesalers maintain personal relations with the customers.
(c) Wholesalers deal with large quantities of goods.
(d) Wholesalers generally specialize in one line of product.

4. Gopakumar sells vegetables in a cycle rickshaw and moves from place to place.
He provides them at the doorstep of his customers. Which type of itinerant trader
he is?
a) Hawkers b)Pedlars c) Cheap jacks d) Market traders
5. Hameed is the proprietor of a Men’s wear shop located in the city. Which
type of Retail shop is it ?
(a) General Stores (b) Speciality shops
(c) Street Shops (d) Second hand goods shops

6. ‘Bata stores’ is an example for which type of retail shops ?

(a) Departmental Stores (b) General stores
(c) Multiple Shops (d) Speciality shops.

7. Read the following statements, Assertion and Reason and choose the
correct alternative from the given below.
Assertion (A) : The departmental Stores are generally formed as joint stock
company.
Reason (R): All the purchases in a departmental store are made centrally by the
Purchase department.
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason(R) is the
correct explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true and Reason(R) is not the
correct explanation of Assertion (A)
(c) Assertion(A) is true, but Reason (R) is false
 (d) Assertion (A) is false, but Reason (R) is true

8. Read the following statements carefully and choose the correct alternative from the
following.
Statement 1: Import of goods and services is treated as inter-state supplies
and would be subject to IGST under GST.
Statement 2: GST is a destination based consumption tax with facility of Input
Tax Credit in the supply chain.
Alternatives:
(a) Both the statements are true.
(b) Both the statements are false.
(c) Statement 1 is true and Statement 2 is false.
(d) Statement 1 is false and Statement 2 is true.
9. Observe the image given below and name the type of itinerant trader

(a) Pedlars (b) Hawkers (c)Market trader (d) Street

trader

10. Government of India, following the credo of “One Nation and One Tax”,
and wanting a unified market in order to ensure the smooth flow of goods across the
country implemented the Goods and Service Tax (GST) from ………………..

(a) April 1, 2020 (b) November 15, 2018

(c) July 1, 2017 (d) August 15, 2016

ANSWER KEY –MULTIPLE CHOICE QUESTIONS

7. (d) 2.(b) 3.(b) 4.(a) 5.(b) 6.(c) 7.(b) 8.(a) 9.(a) 10. (c)

SHORT ANSWER QUESTIONS

1. Ajay is a small trader who sells items of daily use in the weekly market. He has fixed
different days for different places, like Monday, he set up his shop with
temporary Structure in ‘Som Bazar’. On Tuesday, he set up his shop in ‘Mangal
Bazar’ and so on.
(a) Ajay’s shop will be classified under which retail shop ?
(b) State any two
features of it Ans:
Market Traders
Important features of market traders:
● Market traders are the small retailers who open their shops at different
places on fixed days.
● These retailers sell their goods at periodical markets such as weekly,
monthly or annually.
● Generally they display their goods on temporary structures made
 outside the shops which are closed for a weekly holiday.
● They are mainly catering to lower income group of customers and deal
in low priced consumer items of daily use.

2. State any three features of Goods and Service

Tax (GST)
Ans: Key features of GST:
1. The territorial spread of GST is the whole country.
2. GST is applicable on the supply of goods or services as against the earlier
concept of tax on the manufacture or sale of goods or on the provision of
services.
3. It is based on the principle of destination based consumption tax against the
earlier principle of origin based taxation.
4. Import of goods and services is treated as Inter-state supplies and would be
subject to IGST in addition to the applicable customs duties.
5. CGST, SGST and IGST are levied at rates mutually agreed upon by the Centre
and the states under the aegis of the GST council. There are four tax slabs
namely 5%, 12%, 18% and 28% for all goods or services.

3. “These retailers are generally seen in areas having high population like bus
stands, Railway stations etc. They deal in common use products, like news
papers, magazines Toys, stationery items etc.”
(a) Identify the type of retailer and state any two features of it.

Ans:
Street Traders (Pavement Vendors)
● These retailers arrange or display their goods at busy street corners,
pavements and other busy public places like bus stands, railway stations,
cinema halls etc.
● They sell consumer items of common use, such as stationery items,
eatables, readymade garments, newspapers and magazines etc.
● They deal in low priced products of common use.
4. Prakash is a retailer, who runs a small retail shop in his locality dealing with a
variety of products required to satisfy the day to day needs of the people in his
locality. He sells on credit to trusted customers and free home delivery also.

(a) Which type of retail shop is run by Prakash ?

(b) Briefly explain any other three small scale fixed retail shops.

Ans: (a) General Stores

(b) (a) Speciality Shops
These retail shops specialize in the sale of a specific line of products. For
example, Men’s wear shops, stationery shops, medical shops etc. The speciality
shops are generally located in a central place in order to attract large number of
customers, and they provide a wide choice to the customers in the selection of
the goods.
(b) Street Stall holders
These small vendors are commonly found at street crossing or other places
where flow of traffic is heavy. They attract floating customers and deal mainly in
goods of cheap variety like hosiery products, toys, magazines, soft drinks etc.
(c) Second hand
goods shops
 These shops deals in second hand or used goods like books, cloths,
furniture and other household goods. The goods are sold at lower prices.
Generally persons with modest means purchase goods from such shops.
5. Briefly explain any four services provided by Retailers to
consumers
Ans: Retailers Services to Consumers

1. Regular availability of products.

Consumers are assured of continuous supply of goods and they need not
store the goods in large quantities. A retailer makes available to the customers
all types of commodities.
2. New product
information
By arranging for effective display of products and through their personal efforts,
retailer provide important information about the arrival, special features etc. of new
products to the consumers.
3. Convenience in buying
Retailers offer great convenience to the customers in buying small
quantities of products according to their requirements. Retail shops are
usually situated near to residential areas and remain open for long hours.
4. Wide Selection
Retailers generally keeps stock of a variety of products of different manufacturers.
This enables the consumers to make their choice out of a wide selection of goods.
5. After sale service
Retailers provide important after sale services in the form of home delivery
, repair of goods in the case of durable items, supply of spare parts and
attending to customers.
6. Provide credit facilities
The retailers sometimes provide credit facilities to their regular buyers. It
enables the customers to increase their consumption level and standard of living.

LONG ANSWER TYPE QUESTIONS

1. Rajesh has decided to launch an instant food range by the name of ‘Delicia’. He
has decided to initially launch instant idli mix, dosa mix, gulab jamun mix and
pakoda mix in the market at national level. However, he is not able to decide on
the distribution level. He has the following options available.

(i) Place his products at departmental stores all across the country.
(ii) Set up own retail outlets across the country
(iii) Start an e-portal
(iv) Appoint wholesalers across the country.
He has discussed the various options with his stakeholders and after discussion, he
decided to appoint
wholesalers all over India.
On the basis of the above case , answer the following.
(a) Briefly explain any three services availed by Rajesh by appointing wholesalers across the
country
(b) Briefly explain any three services provided by wholesalers to retailers.
Ans: (a) Services to Manufacturers

1. Facilitates large scale production

As the wholesalers purchase goods from the manufacturers in bulk quantities, producers
are able to undertake production on a large scale and take advantage of the economies of scale.
2. Bearing risk
The wholesalers deal in goods in their own name, take delivery of the goods and keep the
goods in large quantities in their warehouses. In this process they bear variety of risks such as
the risk of fall in prices, theft, spoilage, fire etc.
3. Financial Assistance
Wholesalers generally purchase goods from manufacturers on cash basis and sometimes
even give advance for bulk orders. In this way wholesalers provide financial help to the
manufacturers.
4. Expert Advice
As the wholesalers are in direct contact with the retailers, they are in a position to advice
the manufacturers about various aspects including customer’s taste and preferences, market
conditions, competitive activities and the features preferred by the buyers.

5. Help in marketing function

The wholesalers collects orders from large number of retailers and supply goods to them, who
in turn sells the goods to the consumers. As a result, wholesaler allows the manufacturer to
concentrate more on production activity and relieves him from marketing of goods.

6. Facilitates production continuity

The wholesalers purchases goods from producers as and when these are produced.
It helps the manufacturers in maintaining continuity of production activity.

7. Storage
The wholesaler takes delivery of goods when these are produced in the factory and store them in
their own warehouses. It relieves the manufacturers of the storing problems.

(b) Wholesalers Services to Retailers

(1) Availability of goods
The wholesalers provides the products of various manufacturers to the retailers and saves
them from keeping large quantity of each product.

(2) Marketing Support

The wholesalers perform various marketing functions and provide support to the Retailers.
They undertake advertising and other sales promotional activities to Induce customers to
purchase the goods.
 (3) Grant of credit
Wholesalers provide financial help to retailers by selling them goods on credit.
They can make payment after receiving the payment from the customers.
(4) Specialised knowledge
Wholesalers specialize in a particular line of products and have expert knowledge of the
market conditions relating to such products. They pass on the benefit of their specialized
knowledge to the retailers and inform them about new products, Their uses, quality, prices
etc.

(5) Risk Sharing

The wholesalers purchase in bulk and sell in relatively small quantities to the retailers. Being
able to purchase merchandise in smaller quantities, retailers are in a position to avoid the risk
of storage, pilferage, obsolescence, reduction in prices and demand fluctuations.

2. “Steps Footwear (P) Ltd.” deals in manufacturing of footwear. This company had opened 10 new
branches to sell its products directly to its customers in different parts of the country. The speciality
of these shops is that all its shops the goods available are of the same type and their price is also
same. The layout of the shop is also same for all these shops. The people are happy to buy quality
products directly from producer or manufacturer.
(a) Identify the type of retail shop opened by “Steps footwear (P) Ltd.”
(a) Briefly explain its important features.
Ans: a) Multiple Shops/Chain Stores

Important features of Multiple shops are:

(i) Large Size: Chain stores operate on a large scale. Huge investment is required to to set up
identical shops in different parts of the country.
(ii) Location : These shops are located in fairly populous localities where sufficient number
of customers can be approached.
(iii) Centralised Purchases: The head office makes all the purchases for all these multiple
shops. Thereafter goods are dispatched to different shops as per their requirements.
(iv) Centralised control: All stores are controlled by the head office, which formulates policies
and get them implemented in different shops.
(v) Specialised in one line: Generally chain stores specialize in one line of product and variety
in that line only is available at all the shops located in different areas.
(vi) Uniform Prices: The prices of the product charged by chain stores located in different
parts of the country are the same and they sell goods at a fixed price.
(vii) Elimination of middlemen: Chain stores are generally owned by manufacturers who
sell their goods directly to consumers, so middlemen are eliminated.
(viii) Cash Sales: In chain stores no credit is given. Goods are sold on cash basis only.

3. Ganesh Kumar owns a large scale retail outlet at a central location in Mumbai. The outlet is
divided into a number of sections and each section deals in a particular variety of goods. They
provide number of facilities and services to their consumers such as restaurant, telephone
booth, kids play area etc.
(a) Identify the type of retail outlet being highlighted in the above case.
(b) State the important features of it
Ans: (a) Departmental Stores
Important features of a departmental store:

(i) Central Location: It is generally located at a central place in the city so that people living in
different areas may reach there easily.
(ii) Large variety of goods: These stores maintain a large variety of goods and
customers can purchase almost all their requirements from these stores.
(iii) Large Size: As the size of these store is very large, they are generally formed as a joint
stock company managed by a board of directors.
(iv) Centralised Purchasing: All the purchases in a departmental store are made centrally
by the purchase department.
(v) Elimination of middlemen: A departmental store purchase goods directly from the
manufacturers, which sells them to the ultimate consumers and eliminates middlemen.
(vi) Services: A departmental store provide a number of services and facilitates to the customers
such as restaurant, travel and information bureau, rest rooms, telephone booth etc.

***************************
 CHAPTER 10
INTERNATIONAL TRADE

International Business:
Manufacturing and trade beyond the boundaries of one’s own
country is known as international business. International or
external business can, therefore, be defined as those business
activities that take place across the national frontiers. It involves
not only the international movements of goods and services, but
also of capital, personnel, technology and intellectual property
like patents, trademarks, know-how and copyrights.

Scope of International Business – Major areas of operations of

international business are briefly discussed below:

1. Merchandise exports and imports – Merchandise means goods

which are tangible, ie, those that can be seen and touched.

2. Service exports and imports – It means trade in intangibles,

i.e., those that cannot be seen or touched. It is also known as
invisible trade. Eg. Tourism and travel, transportation,
entertainment, communication, educational service etc.

3. Licensing and franchising – Permitting a person/firm in a

foreign country to produce and sell goods under your trademarks,
patents or copyrights for a fee is another way of operating
international business. Eg. Pepsi, Coca-Cola etc. Franchising is
somewhat similar to licensing with the difference that it is
connected with provision of services. Eg. Mc Donald (fast food
restaurants), KFC etc

4. Foreign Investments – It means investment abroad in exchange

for financial return. It can be in FDI (Foreign Direct Investment)-
directly invested in properties, and FPI (Foreign Portfolio
Investment)- investing by way of acquiring shares or granting
loans.
 Difference between International business vs. Domestic business
Basis International Business Domestic Business
1. Nationality of Buyers & sellers come from Buyers & sellers are from the
buyers & Sellers different countries. same country.
2. Nationality of Belong from various Belong to one country &
other stakeholders countries & hence have hence consistency in their
wider set of values and value system and behaviour.
aspirations.
3. Mobility of Mobility with various Free mobility.
factors restrictions.
of production.

4. Customer Difference in taste and Difference in taste and

heterogeneity across preference complicate the task preference does not
markets of designing product in complicate the task of
international market. designing product in
domestic market.

5. Differences in The differences in business The differences in business

business systems & systems and practices are systems and practices are
practices considerably much more considerably less within a
among different countries. country.

6. Political system Political environment differs Predict the impact of political

& risk from one country to another. environment on business
Special efforts are needed. operations.
7. Business Business laws, regulations Business laws, regulations ,
regulations & policies and economic policies differ economic policies are less
among different countries. uniformly applicable within a
country.
8. Currency used The price of one currency No such problem is faced as
in Business expressed in relation to that only home currency is used.
transactions of another country’s currency,
keeps on fluctuating.
Benefits of International Business:-
Benefits to Nations:-
a) International business helps a country to earn foreign exchange
which it can later use for meeting its imports of other goods.
b) Produce what your country can produce more efficiently, and
trade the surplus production so generated with other countries
to procure what they can produce more efficiently.
c) Exporting and flourishing in International trade helped in
improving their growth prospects and created opportunities for
employment of people.
d) Due to International business people in the world community are
able to consume and enjoy a higher standard of living.

Benefits to Firms:-
a) When the domestic prices are lower, business firms can earn more
profits by selling their products in countries where prices are
high.
b) Making use of surplus production capacities & thereby
improving the profitability of operations.
c) When demand in home country gets saturated, the company can
think of growth prospects in developing countries.
d) When competition in the domestic market is very intense,
internationalization seems to be the only way to achieve
significant growth.
e) The vision to become international comes from the urge to grow,
the need to become more competitive, the need to diversify and
to gain strategic advantages of internationalization.

Export Trade
Exporting refers to selling of goods and services from the home
country to a foreign country. Export trade is a function of
international trade whereby
goods produced in one country are shipped to another country for
sale or trade.

EXPORT PROCEDURE:

1. Receipt of enquiry and sending quotation – The exporter gets an enquiry

from prospective buyers from a foreign country and sending quotation in
the form of a proforma invoice, which is a document containing all
description about the product such as price, quality, grade, size, weight,
mode of delivery, type of packing, payment terms etc.

2. Receipt of order or indent – If the buyer is satisfied with the conditions in

the proforma invoice, an order will be placed. This order is also called indent.
It contains the description of goods, price, quality etc.
 3. Assessing importer’s creditworthiness and securing a guarantee for
payments – After receiving indent, the exporter conducts an enquiry about
the financial capacity of the importer to ensure the promptness in
settlement. Usually, exporters may demand a letter of credit in this regard.

4. Obtaining export license – In order to get the export license from the
Import-Export Licensing Authority, the exporter has to fulfill the following
formalities:

a. Open a bank account.

b. Obtaining Import Export Code (IEC) number from the Directorate General of
Foreign Trade or Regional Import Export Licensing Authority.
c. Registering with appropriate export promotion council. Eg: Apparel Export
Promotion Council, Council for Leather Exports etc.
d. Registering with Export Credit and Guarantee Corporation (ECGC) to cover the
risk of non-payment

5. Obtaining pre-shipment finance – After the confirmation of order the

exporter may approach his bank for getting pre-shipment finance to carry
out export production.

6. Production or procurement of goods – The exporter makes ready the

goods as per specification either by production or by purchasing it from the
market.

7. Pre-shipment inspection – In foreign trade the quality of goods must

conform to international standards. For this compulsory inspection by
Export Inspection Agency – EIA (Govt. of India undertaking) should be done.

8. Excise Clearance – All goods produced are subject to excise duty under
Central Excise and Tariff Act, but exported goods are either exempted or if
paid, it is later refunded. So the exporter has to apply to the Excise
Commissioner for export clearance. If the authority is satisfied, the excise
clearance is given or the claim for refund is allowed. Such refund of duty is
called duty drawback.

9. Obtaining certificate of origin – Some importing countries provide tariff

concession or other exemptions for goods imported from certain countries.
To avail such benefits the exporter has to obtain and submit certificate of
origin along with other export documents. Certificate of Origin is a proof
that the goods are actually been produced in the country from where it is
exported.

10. Reservation of shipping space – The exporter has to apply for this by
 furnishing complete information about the goods, probable date of shipment
and port of destination. On acceptance, the shipping company issues a
shipping order

11. Packing and forwarding – Goods are packed and marked with details
such as name and address of importer, gross and net weight, destination
port, country of origin etc. A packing list is attached herewith all other
documents.

12. Insurance of goods – The exporter has to insure the goods with an
insurance company to cover the risk due to sea perils in transit.

13. Customs clearance – Before loading the goods on the ship, customs clearance
should be obtained by the exporter. For this the exporter prepares a shipping
bill.

14. Obtaining mates receipt – After the goods are loaded on the ship, the captain
or mate of the ship issues a certificate called mate’s receipt.

15. Payment of freight and insurance of bill of lading – The C&F agent
(Clearing and Forwarding agent) submits the mate’s receipt to the shipping
company for computation of freight. After the payment of freight, the shipping
company issues a bill of lading.

16. Bill of lading – It is document issued by the shipping company after the cargo
is loaded on the ship. It is prepared on the basis of Mates Receipt. The shipping
company undertakes the delivery of goods to the buyer by producing this
document.

17. Preparation of invoice – The exporter has to prepare an invoice of the goods,
which contains the details such as quantity and the amount to be paid by the
importer.

18. Securing payment – After shipment of goods, the exporter sends the relevant
documents like Bill of lading, bill of exchange, letter of credit, invoice, etc. to the
bank for completing the formalities to receive payment from the importer

IMPORT TRADE:
Import trade refers to buying goods and services from another country.
Countries are most likely to import goods that domestic industries
cannot produce as efficiently or cheaply.
Import trade procedure:
1. Trade enquiry – The importer has to collect information about the
exporters of the products he needs from various sources like trade
directories, trade associations, websites etc. After identifying the
 exporter, he sends the trade enquiry. Trade enquiry is a written request
by the importer to the overseas supplier for getting information such
as price, quality and other terms and conditions for export.
2. Obtain the import license – Certain goods can be imported freely,
while others require license. He has to apply for the import license at DGFT
and obtain IEC number.
3. Obtaining foreign exchange – In import trade, payment is made in
foreign currency, all foreign exchange transactions are regulated by RBI
in India. So that the importer has to get prior sanction for foreign
exchange.
4. Placing order or indent – The importer has to place an order or indent
for the supply of goods. It should contain price, quality, quantity, size,
grade and instructions relating to packing, shipping, delivery schedule,
insurance and mode of payment etc.
5. Obtaining letter of credit – The importer should obtain the letter of
credit from his bank and forward it to the exporter.
6. Arranging finance – Importer should arrange fund in advance to pay
to the exporter on arrival of goods.
7. Receipt of shipment advice – It is a document sent by the exporter to
the importer containing information about the shipment of goods after it
is being loaded on the ship.
8. Retirement of import documents – After the goods are shipped, the
exporter submits all the necessary documents with his banker for getting
payment. Here the importer has to retire (receive) the documents either by
ready payment or by accepting a bill of exchange.
9. Arrival of goods – On arrival of goods the person in charge of the ship
informs the officer at the dock through a document called import general
manifest. Import General Manifest is a document contains the details of
imported goods and on the basis of which the cargo is unloaded.

10. Customs clearance and release of goods – After fulfilling all the
formalities at the dock and payment of dock dues, freight if any and the
customs duty, the importer can release the goods from the port.

Documents involved in International Trade

1. Shipping Bill: It is the main document on the basis of which

 permission is granted for the export of goods by the custom office. It
contains full details regarding the goods being exported, name of the
vessel, exporters name & address, country of final destination etc.
2. Mate’s Receipt: This receipt is issued by the captain or mate of the ship
to the exporter after the goods are loaded on board of the ship. It
contains the name of the vessel, description of packages, marks,
conditions of the cargo at the time of receipt onboard the ship etc.
3. Letter to credit: It is a guarantee letter issued by the importer bank stating
that it will honour the export bills to the bank of the exporter up to a certain
amount

4. Indent: It is a document in which the importer orders for supply of requisite

goods to the supplier. The order contains the information such as quantity
& quality of goods, price, method of forwarding the goods, nature of packing,
mode of payment etc.
5. Shipping Order: The exporting firm applies to the shipping company for
provision of the shipping space. It is an instruction to the captain of the ship
that the specified goods, after customs clearance at a designated port, be
received on board
World Trade Organization (WTO)
It came into existence on 1st January 1995. The headquarters of
WTO is situated at Geneva, Switzerland. It is a permanent
organization created by an international treaty rectified by the
Governments and legislatures of member states. It is concerned
with solving trade problems between countries and providing a
forum for multilateral trade negotiations.
Objectives of WTO:
1. To reduce the trade tariffs and barriers imported by
different countries in the smooth flow of international
trade.
2. To improve the standard of living, create employment, increase
income and effective demand and facilitate higher production
and trade.
3. To maintain sustainable development by optionally using the
world's resources.
4. To promote an integrated, more viable and durable trading
system among nations.

Role/ Functions of WTO:

1. To remove barriers of International trade.
2. To Act as a dispute settlement body by settling trade related
disputes among member nations.
3. To ensure that all the rules and regulations prescribed in the Act
are duly followed by the member countries for settling their
disputes.
4. Laying down a commonly accepted code of conduct for international
trade aiming at reducing tariff and non-tariff barriers in
international trade.
5. To consult other agencies to bring better understanding
cooperation in global economic policy making.
6. Providing technical assistance and guidance related to
management of foreign trade and fiscal policy to its member
nations.
7. Taking special steps for the development of the poorest nations.
8. Reviewing trade related economic policies of member countries
with the help of its Trade Policy Review Body.
9. Co-operating with IMF and World Bank and its associates for
establishing coordination in global trade policy making.
10. Acting as a forum for trade liberalization.
MULTIPLE CHOICE QUESTIONS (MCQs)

1. Certificate of Inspection is issued by:

(a) Captain of the ship (b) Exporter’s Bank
(c ) Insurance Company (d) Export Inspection Council of
India
2. Which of the following is not an objective of import trade?
(a) (a) To overcome famine (b) To improve standard of living (c
) To earn foreign exchange (d) To speed up industrialization

3. Cart ticket is also known as:

(a) Cart chit (b) Gate Pass
(b) (c ) Vehicle Pass (d) All of these
 4. The exporter has to open a bank account in any
bank authorised by to deal in foreign
exchange.
(a) State Bank of India (b) Reserve Bank of India
(c ) Central Government (d) State Government
5. Pre-shipment Inspection is not compulsory for:
(a) Export Houses (b) 100% Export Oriented Units
(c ) Star Trading Houses (d) All of these

6 _________ is subject to rules, laws or taxation policies of various

countries.
(a) International business (b) Domestic Business
(c ) both (a) and (b) (d) None of these

7. Which of the following documents are not required for

obtaining an
export licence?
(a) IEC number
(b) Letter of credit
(c ) Registration cum membership certificate
(d) Bank account number

8.Which of the following documents is not

required in connection with an import transaction?
(a) Bill of lading (b) Shipping bill
(c ) Certificate of origin (d) Shipment advice
9. Which of the following do not form part of the duty drawback
scheme?
(a) Refund of excise duties
(b) Refund of customs duties
(c) Refund of export duties
(d) Refund of income dock charges at the port of shipment.

10. Which one of the following is not a part of export documents?

(a)Commercial invoice (b) Certificate of origin
(c ) Bill of entry (d) Mate’s receipt

Answers:

1 2 3 4 5 6 7 8 9 10

d c d b d a b b d c

ASSERTION REASON QUESTIONS (ARQs)

 Read the following statements: Assertion and Reason.
Choose one of the correct alternatives given below:
Alternatives:

(a) Both Assertion (A) and Reason (R) are True and
Reason (R) is the correct explanation of Assertion
(A).
(b) Both Assertion (A) and Reason (R) are True and
Reason (R) is not the correct explanation of Assertion
(A).
(c) Assertion (A) is True but Reason (R) is False.
(d) Assertion (A) is False but Reason (R) is True.

1.
Assertion (A) : International Business and
International Trade are one and the
same thing.
Reason (R) : International Business involves the international
movements of goods and services,
capita" personnel, technology and
intellectual property.

2. Assertion (A) : International business is subject to rules,

laws
or taxation policies of various countries.
Reason (R) : Business systems and practices are less homogeneous
in the case of International business.

3.
Assertion (A) : Letter of Credit is the most appropriate
and secure method of payment to
settle international transactions.
Reason (R) : Letter of credit is a guarantee issued by the
exporter's
bank.
Answers

1 2 3

d b c

Short Answer Type Questions

1. Differentiate between international trade and international
 business.

Ans: International Business is a much broader concept as

compared to International Trade. International Business
involves not only international movements of goods and services
(ie. international trade), but also of capital, personnel, technology
and intellectual property like patents, trademarks, knowhow
and copyrights.
2. What is the major reason underlying trade between nations?
Ans: Uneven distribution of natural resources and factors of
production.
3. What is bill of lading? How does it differ from bill of entry?
Ans: Bill of Lading is a document prepared by the shipping company
to
acknowledge the receipt of goods on board the ship and
gives an undertaking to carry them to the port of
destination.
On the other hand, bill of entry is a document prepared
by the importer to show the details of goods imported
and is used by custom authorities determine import
duty.
4. Explain the meaning of mate’s receipt.
Ans: Mates receipt is the receipt issued by the
commanding officer of the ship to the exporter after the
cargo is loaded on the ship.
5. What is a letter of credit? Why does an exporter need this document?
Ans: Letter of credit is a guarantee issued by the importer's bank
that it will honour payment up to a certain amount of export bills
to the bank of the exporter. Exporter needs this document to
minimise the risk of non-payment.

LONG ANSWER QUESTIONS/CASE STUDIES

Q.1. Ram is a successful businessman who is engaged in

manufacturing of auto spare parts. The products manufactured by him
are sold not only in India, but are also exported to various countries like
Singapore, Switzerland, Belgium, etc. On the basis of given case, answer
 the following questions:
(a) Identify the two kinds of business in which Ramakant is engaged.
(b) Differentiate between the two types of business as
identified in part (a) of the question.
Ans: a) The two kinds of business in which Ram is engaged are:
(i) Domestic Business; (ii) Inter-national Business.
(b)For differences between the two, refer ' Domestic Business
Vs International Business.
Q.2. International business encompasses all commercial activities
that take place to promote the transfer of goods, services, resources,
people, ideas, and technologies across national boundaries. The
Internet and technology have made it much easier for businesses of
all sizes to profit from the international business. Going
international provides access to a world of opportunities to the
business: Do you think that domestic business firms can derive any
benefit from International Business. Give reasons to justify your
answer.
Ans: Yes, according to me, domestic business firms can derive
many benefits from International Business. Discuss Benefits
to business.
Q3. Prateek wants to export auto spare parts to Mr. Dev in Switzerland.
Mr. Dev has asked for an enquiry to seek information about availability
of goods, price, quality and terms and conditions for export of goods. In
response to the enquiry, Pradeep sends a reply in the form of Proforma
Invoice. Mr.Dev found the price and terms and conditions acceptable.
So, he placed the order for goods. After verifying the creditworthiness of
Mr.Dev, Pradeep obtains an export license and arranges the pre-shipment
finance. On the basis of given case study, state the next steps to be
followed by Prateek related to the procedure of export trade.

Ans: The next steps to be followed by Prateek in the export trade are:
(i) Production or Procurement of Goods
(ii) Pre-shipment Inspection
(iii) Excise Clearance
(iv) Obtaining Certificate of Origin
(v) Reservation of Shipping Space
(vi) Packing and Forwarding
(vii) Insurance of Goods
(viii) Customs Clearance
(ix) Obtaining Mates Receipt
(x) Payment of Freight and Issuance of Bill of Lading
(xi) Preparation of Invoice
(xii) Securing Payment.

Q.4. Identify the document highlighted in the following statements:

i. This certificate specifies the origin of goods exported.
ii. This document is issued by the commanding officer
of the ship to the exporter after the cargo is loaded on
the ship.
iii. This document is prepared by shipping company
to acknowledge the receipt of goods on ship and gives
an undertaking to carry them to port of destination.
iv. This document is the most appropriate and secure
method of payment to settle international transactions.
v. On the basis of this document, customs office grants
permission for the export.
vi. This document is prepared by the importer and it
shows the details of goods imported and is used by
custom authorities to determine import duty.
vii. On the basis of this document, imported goods are
unloaded from the carrier.
Ans:
(i) Certificate of Origin; (ii) Mates Receipt; (iii) Bill of Lading; (iv) Letter
of Credit; (v) Shipping Bill; (vi) Bill of Entry; (vii) Import General
Manifest.

Q.5. It is an international organisation established to

supervise and liberalize world trade. It is the successor to the
General Agreement on Tariffs and Trade (GATT). Although
GATT proved remarkably successful in liberalizing world
trade over the next five decades, but by late 1980s, there were
calls for a stronger multilateral organisation to monitor trade
and resolve trade disputes. Following the completion of the
Uruguay Round (1986-94) of multilateral trade negotiations,
this Organisation began operations on January 1 st , 1995.
(i) Identify the Organisation highlighted in the given case.
(ii) How many countries are members of the organisation
identified in (i) above.
(iii) State any three objectives of the organisation
identified in (i) above. Ans:
1. (i) The Organisation is World Trade Organization (WTO):
(ii) 164 Members.
(iii) Discuss Objectives of WTO:

………………………………