Socio Culturala Polical Environment

MS-3
Economic and
Social Environment
Block
1
ECONOMIC AND SOCIAL ENVIRONMENT
NIT 1
Economic Environment of Business
1
Indira Gandhi
National Open University
School of Managements Studies
NIT !
Socio-cultural and olitico-legal Environment
art ! I Socio-cultural Environment
art ! II olitico-legal Environment
NIT 3
"hanging #ole of Government
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CORSE DESI"N COMMITTEE#
CORSE $RE$ARATION TEAM
CORSE REVISION TEAM %!&&'(#
Lan)*a)e Editin)
$rint $rod*ction
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BLOC+ 1 ECONOMIC AND SOCIAL
ENVIRONMENT
&ou 'ill appreciate that a thorough understanding of the economic and social
environment of (usiness is essential for running (usiness enterpries successfully)
Needless to say* any (usiness enterprise* 'hether large or small* pu(lic or praise* is
affected (y the environment in 'hich it operates) +he purpose of this (loc, is to ac-uaint
you 'ith as many aspects of the environment of (usiness as possi(le) +his Bloc, has
three units)
nit 1 Economic Environment of Business* e.plains the total environment of (usiness in
general and then discusses the (asic propositions a(out (usiness) It e.plain the chief
constituents of an economic environment) +he main points of Indian economic
environmental re (riefly highlighted) +he interrelationship (et'een economic
environment and (usiness management is e.plored) /inally* the devise of Interaction
Matri. for understanding the relationship (et'een t'o sets of varies* e)g)* economic and
non-economic environments* is e.plained)
nit ! is concerned 'ith Socio-cultural and olitico-legal Environment) +his unit has
t'o parts)
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$art I deals 'ith eh Socio-cultural Environment) +he critical elements of Social
Environment are first e.plained) +hereafter the various social movements 'hich have
affected social institutions and are thus important constituents of the social environment
are (riefly e.amined) +he movements discussed are 1 the +rade Union Movement* the
"onsumer Movement* the Shareholders2 Movement* the management Movement* and the
Environment Movement* /inally* the social responsi(ility of (usiness is discussed)
$art II of this presents olitico-legal Environment) Some critical elements of politico-
legal environment are e.plained) +he Government machinery dealing 'ith industrial
economy of the country is (riefly presented) +hereafter the salient features of the various
la's constituting the legal environment of (usiness are discussed) It goes 'ithout saying
that a thorough understanding these la's is indispensa(le for a (usiness manager 'ithout
'hich she might stum(le and fall) +he various la's discussed include 1 +he "ompanies
3ct* the Securities "ontracts 4#egulation5 3ct* the /oreign E.change #egulation 3ct
4/E#35* the Sic, Industrial "ompanies 3t* the Monopolies and #estrictive +rade
ractices 3ct 4M#+5* the "onsumer rotection 3ct* and the Environment rotection
3ct)
nit 3, "hanging #ole of Government* presents different perspectives a(out the role of
Government in capitalistic and socialistic6communicates economics) +he unit e.amines
the assumptions implicit in the capitalistic economic system) +he unit then proceeds to
e.amine the pitfalls of the communistic economic system) +hereafter the unit highlights
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the Indian e.perience 'ith regard to the changing role of the Government) +o'ards the
end* the unit (riefly tal,s a(out the consensus that seems to (e emerging a(out the role of
the Government all over the 'orld)
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NIT 1 ECONOMIC ENVIRONMENT O- BSINESS
O./ective0
3fter studying this unit* you should (e a(le to 1
9efine 'hat you mean (y :environment;
"lassify the comple. environmental varia(le on the (asis of o(<ective criteria
Identify the critical elements of economic environment of (usiness
3nalyse the interactions (et'een economic and non-economic environment
E.plain the impact of economic environment on (usiness management2 and
Illustrate your understanding of economic environment 'ith reference to the Indian
(usiness situation)
Str*ct*re
1)1 Introduction
1)$ Environment of Business
1)% Some Basic ropositions
1)0 Economic Environment
1)7 "ritical Elements
1)8 Indian Economic Environment
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1)= Economic Environment and Business Management
1)> Economic and Non-Economic Environment 1 +he Interaction Matri.
1)? Summary
1)1@ Aey Bords
1)11 /urther #eading
1)1$ Self-assessment Cuestions
111 INTRODCTION
&ou may have a variety of reasons for studying this course* (ut the main reason* 'e
presume* is to (ecome a successful manager) &our success or failure as a manager
depends on a num(er of factors and these factors may not al'ays (e 'ithin your control2
very often such factors constitute your 'or, environment) +hese include your <o(* your
department* your organisation* your nation and the 'orld around you) 3fter all* as a
manager you do not function in a vacuum) &ou e.ist and operate 'ithin and not 'ithout*
an environment) +herefore as a manger 'hen you thin,* or ta,e decisions* you cannot
neglect the limitations of your environment) Dust thin, for a 'hile and then ans'er)
9onEt you arrive at decisions after e.amining the possi(le reactions from the environment
in 'hich you are placed F Say* as a mar,eting manager* 'ould you not study your
mar,et environment (efore launching a ne' product F Or* as a finance manager*
'ouldnEt you study ho' the capital and money mar,ets of the country are structured and
organised (efore deciding on the sources and uses of your funds F Or* as a personnel
managers 'ouldnEt you care to find the rules and regulations laid do'n (y the
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government on su(<ects li,e reservation (efore underta,ing recruitment and selection of
your re-uired staffF Bhen you have ans'ered these -uestions* you 'ill discover that all
your ans'ers are in the affirmative 1 :&es* I 'ould;) &ou canEt do 'ithout thin,ing
a(out your environment) 3s a (usiness manager* you have to constantly evaluate your
(usiness environment)
+his opening unit aims to set you thin,ing a(out thee ideas) It aims to help you to 1
precisely define :environment;* classify your (usiness environment on tu(e (asis of
some criteria2 identify some of the critical elements of economic environment of (usiness
esta(lish the nature of interaction (et'een economic environmental and (usiness
management2 and analyse the interaction (et'een economic and non-economic
environment varia(les)
In pursuing these aims and o(<ectives* our focus 'ill primarily (e on the Indian
environment of (usiness) Be shall trey to identify* descri(e and analyse the Indian
situation to understand its impact on our (usiness) Our ultimate purpose is to train our
(usiness mangers to face the macro-level environment of (usiness) 3s managers*
'herever you are (e it in the pu(lic or the private sector* you have to remain alive and
alert to your environment so that you are successful in your day-to-day (usiness
operations)
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11! ENVIRONMENT O- BSINESS
+he term :environment; refers to the totality of all the factors 'hich are e.ternal to and
(eyond the control of individual (usiness enterprises and their managements)
Environment furnishes the macro-conte.t* the (usiness firm is the micro-unit) +he
environmental factors are essentially the :givens; 'ithin 'hich firms and their
managements must operate) /or e.ample* the value system of society* the rules and
regulations laid do'n (y the Government* the monetary policies of the central (an,* the
institutional set up of the country* the ideological (eliefs of the leaders* the attitude
to'ards foreign capital and enterprise* etc)* all constitute the environment system 'ithin
'hich a (usiness firm operates) +hese environmental factors are many in num(ers and
various in form) Some of these factors are totally static* some are relatively static and
some are very dynamic ! they are changing every no' and then) Some of these factors
can (e conceptualiGed and -uantified* 'hile other can (e only referred to in -ualitative
terms) +hus* the environment of (usiness is an e.tremely comple. phenomenon)
+he environmental factors generally vary from country to country) +he environment that
is typical of India may not (e found another countries li,e the US3 the 4former5 USS#*
the UA* and Dapan) Similarly* the 3merican6Soviet6British6Dapanese environments may
not (e found in India) +here may (e some factors in common* (ut the order and intensity
of the environmental factors do differ (et'een nations) Bhat to say of countries* the
magnitude and direction of environmental factors differ over regions 'ithin a country*
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and over localities 'ithin a region) +hus* one may tal, of local* regional* national
4domestic5 and international 4foreign5 environment of (usiness) /or e.ample* the local
custom of :coolie; la(our* the climate of the northern region of 3ssam* the policies of the
State and "entral Governments in India and the siGe of the 'orld mar,et 1 all these
factors together 'ill have an important (earing on tea industry) +he production*
consumption and mar,eting of tea 'ill (e affected (y environmental factors)
+he environment differs not only over space (ut also over time 'ithin a country) 3s
such* 'e can tal, of temporal patterns of environment* i)e)* past* present and future
environment) /uture environment is the product of past and present environments) +he
Indian economy of tomorro' 'ill (e influenced (y 'hat the state of the economy is at
present and 'hat it 'as in the past)
Sometimes the environment may (e classified into mar,et environment and non-mar,et
environment depending upon 'hether a (usiness firmEs environment is influenced (y
mar,et forces li,e demand* supply* num(er of other firms and the resulting price
competition* or non-price competition* etc)* or (y non-mar,et forces li,e Government
la's* social traditions* etc)
/inally* 'e may classify the environment into economic and non-economic) Non-
economic environment refers to social* political* legal educational and cultural factors
that affect (usiness operations) Economic environment* on the other hand* is given shape
and form (y factors li,e the fiscal policy* the monetary policy* the industrial policy
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resolution* physical limits on output* the price and income trends* the nature of the
economic system at 'or,* the tempo of economic envelopment* the national economic
plan* etc) +he non-economic environment has economic implications <ust the economic
environment may have non-economic implications) Since the environment is the sum
total of the history* geography* culture* sociology* politics and economic of a national* the
interaction (et'een economic and non-economic forces is (ound to ta,e place)
Activit2 1
"an you no' recapitulate the various criteria on the (asis of 'hich a (usiness
environment may (e classified F lace the criterion on the left and side and the suggested
classification of environment according to that specific criterion on the right hand side)
HHHHHHHHHHHHHH H)HHHHHHHHHHHHHHHHH
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No'* thin, of your o'n organisation and its (usiness operations) If you are not 'or,ing
in any organisation* then thin, of a firm* farm factory* esta(lishment or institution you
are familiar 'ith) "onsidering its present operations* identify some of its environmental
factors as in the model given (elo')
Or)ani0ation 3 Indian Airline0 %IA(
Environmental factors6forces 'ithin 'hich I3 is operating 1
Social $olitical Economic $420ical
I3 carries various
types of passengers1
Businessmen*
government
officials* private
individuals and
tourists)
I3 comes under the
Ministry of "ivil
3viation2 it is
su(<ect to
parliamentary
control)
I3Es traffic is
gro'ing despite
the fact that air
travel is
(ecoming
costlier)
/uel economy is
I3Es primary
concern today)
+he fleet
composition of I3 is
-uite modern)
Io'ever* I3 cannot
use the 3ir(us for
all its sectors
(ecause the airport
facilities are not
ade-uate)
&our Organisation HHHHHHHHHHHHHHHHHHHHHHHHHHHH)
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Environmental factors6forces :
Social $olitical Economic $420ical
9o not proceed further 'ithout completing this 3ctivity) It should (e emphasised at this
initial stage that you 'ill must much of the potential (enefit of the course if you do not
attempt the 3ctivities given in this unit) If you have 'or,ed through the a(ove 3ctivity
as directed* you 'ill find that it is easier to descri(e then to identify and classify the
environmental factors)
In this unit* our primary concern is the study of economic environment of (usiness) &ou
may (e 'ondering 'hy 'e have chosen the economic environment to (egin 'ith) Jet us
e.amine some of its (asic propositions)
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113 SOME BASIC $RO$OSITIONS
3s a prelude to the description and analysis of the (usiness environment in any economy*
you may e.amine the three (asic propositions given (elo' 1
1) Business is an economic activity)
$) 3 (usiness firm is an economic unit)
%) Business decision-ma,ing is an economic process)
+hese propositions may (e e.amined separately or <ointly to <ustify the study of the
economic environment of (usiness in any country)
B*0ine00 i0 an economic activit2
3n economic activity involves the tas, of ad<usting the mans 4resources5 to the ends
4targets5* or the ends to the means) 3n economic activity may assume different forms
such as consumption* production* distri(ution* and e.change) +he nature of (usiness
differs deepening upon the form of economic activity (eing underta,en and organised)
/or e.ample* manufacture is primarily concerned 'ith production2 the stoc, e.change)
/or e.ample* manufacture is primarily concerned 'ith production2 the stoc, e.change
(usiness of Government is to run the administration) +he Government may also o'n*
control and mange pu(lic enterprises) +he (usiness of (an,s is to facilitate transactions
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'ith short-arm and long-term ends) +hese e.amples can (e easily multiplied) +he point
to (e noted is that each (usiness has a target to achieve* and for this purpose each
(usiness has some resources at its disposal) Sometimes the target has to (e matched 'ith
the given resources* and sometimes the resources have to (e matched 'ith the given
target* Either 'ay* the tas, of (usiness is to optimiGe the outcome of economic activities)
A .*0ine00 5irm i0 an economic *nit
3 (usiness firm is essentially a transformation unit) It transforms input into outputs of
goods or services* or a com(ination of (oth) +he nature of input re-uirements and the
type of output flo's are determined (y the siGe* structure* location and efficiency of the
(usiness firm under consideration) Business firms may (e of different siGes and forms)
+hey may underta,e different types of activities such as mining* manufacture* farming*
trading* transport* (anding etc) +he motivational o(<ective underlying all these activities
is the same viG)* profit ma.imiGation in the long run) rofit is essentially :a surplus
value;- the value of outputs in e.cess of the values of inputs or the surplus of revenue
over the cost) 3 (usiness firm underta,es the transformational progress to generate this
:surplus value;) +he firm can gro' further if the surplus value is productively invested)
+he firm* therefore* carefully plans the optimum allocation of resources 4i)e)* men*
money* material* machineEs time* energy* etc)5 to get optimum production) +he entire
process of creating* mo(ilisation and utilisation of the surplus constitutes the economic
activity of the (usiness firm)
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B*0ine00 deci0ion-makin) i0 an economic 6roce00
9ecision-ma,ing involves ma,ing a choice from a set of alternative courses of action)
"hoice is at the root of all economic activity) +he -uestion of choice and evaluation
arises (ecause of the relative scarcity of resources) If the resources had not (een scarce*
an unlimited amount of ends could have (een met) But the situation of resources
constraint is very real) 3 (usiness firm thin,s seriously a(out the optimum allocation of
resources (ecause resources are limited in supply and most resources have alternative
uses) +he firm* therefore* intends to get the (est out of given resources or to minimise the
use of resources for achieving a specific target) In other 'ords* 'hen :input; is the
constraining factor* the firmEs decision varia(le is the :output;) 3nd 'hen :output; is
the constraining factor* the firmEs decision varia(le is the :input;) Bhatever may (e the
decision varia(le* procurement or production* distri(ution or sale* input or output*
decision-ma,ing is invaria(ly the process of selecting the (est availa(le alternative) +hat
is 'hat ma,es it an economic pursuit)
Since (usiness is an economic activity* a (usiness firm an economic unit* and (usiness
decision-ma,ing an economic process* it is the economics environment of (usiness 'hich
is the primary consideration in evaluating the (usiness policies* (usiness strategies and
(usiness tactics of a corporate entity in any national economy)
1=
Activit2 !
1) Bhat is an economic pro(lem F
HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
$) Bhat is the optimum economic activity F
%) Bhy* or 'hy not* should the organisation you 'or, for (e treated as an economic
unit F
Activit2 3
Get some printed literature concerning your o'n organisation or any other (usiness
organisation* or you can even read the :corporate ne's; in magaGines li,e Business
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India* Business Borld* Business +oday) 3ttempt an economic interpretation of the facts
and figures that you at your disposal) &ou may (egin (y as,ing similar -uestions as
given in 3ctivity $) Briefly <ot do'n the points)
&ou may ela(orate and su(stantiate these points* 'herever re-uired)
11' ECONOMIC ENVIRONMENT
&ou may no' consider a firm as an economic institution in a mar,et system) +he mar,et
(ehaviour of the firm reflects the nature of the economic decisions ta,en (y the manger
of the firm) Micro-economic decision-ma,ing (y the firm had nevertheless to (e made
'ithin the (roader macro-economic environment) +he economic environment of
(usiness refers to the (road characteristics of the economic system in 'hich a (usiness
firm operates)
1?
+he present day economic environment of (usiness is a comple. phenomenon) +he
(usiness sector has economic relations 'ith the Government* the capital mar,et* the
household sector and the foreign sector) +hese different sectors* together* influence the
trends and structure of the economy) +he form and functioning of the economy varies
from country to country) +he design and structure of an economic system is conditioned
(y socio-political arrangements) Such arrangements are relevant from the standpoint of
macro-economic decision-ma,ing)
/or e.ample* in a democratic set up* people e.ercise an influence* direct or indirect*
through the system of casting votes* on the nature of the decisions ta,en (y the
Government) In a parliamentary system* most decisions are processed (y "a(inet
ministers* 'hereas under a presidential form of Government the resident acts as the real
manager of the state1 It is he 'ho ta,es or ma,es decisions) Similarly* macro-real
manager of the State 1 it is he 'ho ta,es or ma,es decisions) Similarly* Marco-decision-
ma,ing is more decentraliGed in a federal form of Government than in unitary form of
Government)
&ou may argue that the decisions (eing referred to are political decisions) +rue* (ut it
must (e emphasised that political decisions have far-reaching economic implications)
3fter all* the Government is the manger of the economy) +he nature of Government
o'nership* control and regulation of the economic activities of a country provides form
and shape to the nature of economic organisations) In a capitalist society* the private
sector induced (y the profit motile and led (y the free mar,et* ta,es the ma<or economic
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decisions of investment* production and distri(ution) In a socialist society* most of the
economic decisions are ta,en (y the Government 'hich is glided (y the social 'elfare
motive and central planning) In a communist society* economic decisions* including
those of consumption* are ta,en (y the state in the interest of the community as a 'hole)
In a mi.ed economy* the private* pu(lic and <oint sectors and the li,e all have some say
in the ma<or decisions that influence the functioning of an economy)
3ll modern economics* 'hether capitalist* socialiGed* communist or missed* have certain
fundamental economic pro(lems to deal 'ith) In each and every economy* including the
so-called :affluent society;* some or many resources are scarce) "onse-uently* choices
concerning the resource use have to (e made together (y individuals* (y (usiness
corporations* and (y society) It is the social choice and community preferences 'hich
give su(stance to the -uestion of macro-economic decisions) /rom the standpoint of
resources* the (asic economic pro(lem of every economy is that of <ust allocation of
resources and su(se-uent optimum production) +hee are may aspects to this pro(lem 1
Bhat to produce F Io' to produce F /or 'hom to produce F Bhen to produce F
Every economy has to decide on the -uality and -uantity of the goods and services to (e
produced) It has to decide on the nature of the technology and techni-ue of production in
vie' of factor endo'ment) It has to decide on the course and pattern of distri(ution of
goods and services produced) It has to decide on the timing of production) +he process
of decision-ma,ing differs depending on ho' these pro(lems are solved in different
economies) +his is 'hat constitutes the functioning of the economy* or the nature of the
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economic environment) 3t the ris, of over-implication* certain points can (e made a(out
the organisation and functioning of modern economics 1
i5 In most economies* (oth :free mar,et mechanism; and :"entralised planning;
e.ist in different degrees even today) By :free mar,et mechanism; or :price
mechanism;* 'e mean a free play of the mar,et forces of demand and supply
to determine an e-uili(rium solution of the allocation pro(lem) Mar,et
mechanism determines commodity prices* factor prices* and income
distri(ution) By :planning;* 'e mean a programme of action (ased upon
consistency and feasi(ility of attaining a set of targets in vie' of a set of
o(<ectives through a set of instruments) In the present day 'orld around us*
planning is com(ined 'ith free pricing to arrive at macro-economic decisions
yielding :the ma.imum good to the ma.imum num(er;) +hus* the economy
in 'hich a (usiness firm operates today is not an e.clusively free economy
ma,ing an indiscriminate use of prices and the mar,ets) #ather* it is directed
(y a system of planning* control* regulation and coordination)
ii5 In most economies* positive intervention (y the Government in day-to-day
economic affairs has e.isted over several decades in the past) lanning is a
form of Government intervention) Besides this* the Government can also
intervene through a system of controls and regulations) +he :'elfare state;
principle induces the Government to enforce minimum 'ages* commodity
controls* fair trade practices* etc* through legislation) +he (asic o(<ectives of
such economic legislations and policies are 1 gro'th* efficiency and e-uity) It
$$
is the intervene role fonder government that has made most (usiness firms
socially responsi(le) Io'ever* intervention (y the Government is no' on the
decrees) Many economics have rela.ed regulations and controls through
economic reforms* and are allo'ing a free play of mar,et forces)
iii5 Modern economies age not :closed; and :open;2 they are actively engaged in
international trade and cooperation) So* the international transmission effect
today is stronger than ever (efore) +hough three are disparities in the levels
of income and standards of living over space and time* there is a conscious
effort to develop the port nations) +he maintenance of steady gro'th and
enveloped countries dependent on the acceleration of gro'th in
underdeveloped countries) +his idea has given ne' dimensions to issues li,e
the role of multinational corporations* the ecological (alance* the recycling of
petrodollars* and the transfer of technology) +he technological revolution is
ma,ing strident moves) In order to ,eep their dynamism* the economics are
determined to develop science and technology* and to (alance environment
and economy* and this is going to act as a unifying force for the 'orld
economic order)
+hese facts define the environment and set the constraints 'ithin 'hich
modern (usiness firms must operate) +he managements cannot overloo, the
environment* 'hether mar,et or non-mar,et) No management can ignore the
functioning of mar,ets* the o(<ectives of national planning* the polices of the
Government or their social responsi(ilities* or the rate* pattern and structure of
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economic changes* or the forms of international cooperation) rogressive
managements must ,eep themselves continuously informed a(out the
magnitude and direction of changes in the national as 'ell as international
economic environment) Of course* (oth economic and non-economic
environment have an important (earing on managerial decisions)
Activit2 '
Jist some of the (asic o(servations concerning the nature and functioning of modern
economics in general)
1) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
$) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
%) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
Activit2 7
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#ead the latest Borld 9evelopment #eport of the Borld Ban,) It is not accessi(le2 you
may fall (ac, on your general ,no'ledge) Brite do'n the firsthand information
availa(le to you on)
8orld Econom2 Indian Econom2
Note that you are re-uired to ta,e stoc, of the latest developments i)e)* the current
situation)
Jet us no' move to more specific issues) Bhen you attempt to analyse the economic
environment of (usiness in any country* first of all* you have to identify the critical
elements of that environment)
117 CRITICAL ELEMENTS
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In 'hat follo's* 'e intend to identify and descri(e a fe' critical elements of the
economic environment) +hese critical elements are relevant from the standpoint of (oth
corporate (usiness management and national economic management in India)
+he critical elements of macro-economic environment are 1
economic system
nature of the economy
anatomy of the economy
functioning of the economy
economic planning and programmes
economic policy statements and proposals
economic controls and regulations
economic legislations
economic trends and structure* and
economic pro(lems and prospects
+hese critical elements may not al'ays (e mutually e.clusive) But you may treat them
separately for analytical purposes)
3n economic system defines the institutional frame'or, of the environment) +he
o'nership control and management of enterprises reveals the nature of the economic
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system) +he role and responsi(ility of the private sector* pu(lic sector* <oint sector* etc)
thro' light on the philosophy and practice of an economic system ! capitalist* socialist
or missed) +he mi.ed economic system operates through a com(ination of planning and
pricing)
+he level of economic development and the structure of the economy defiant he physical
frame'or, of the environment) +he level and composition of per capita income indicate
the level of gro'th and development) 3vaila(le natural resources* human resources and
material resources of a country set a limit to its factor endo'ment 'hich determines its
production) +he occupational distri(ution of the la(our force* the structure of the
national output* the composition and pattern of foreign trade* the structure of savings
investment and capital formation* the pattern of income distri(ution 4interpersonal and
inter-regional5* and the degree of ur(aniGation ! all thee (ring out the significance of the
agriculture* industry* and service sectors in the national economy)
+he structure of the national economy can also (e disused in terms of its physical
anatomy) +he national economy is* after all* a com(ination of the household sector* the
corporate (usiness sector* the Government administration* the capital mar,et* and the
foreign sector) +his is suggested (y the national income and the social accounting
approach) +he order and strength of each of these sectors* therefore* also thro's light on
our understanding of the macro-economic environment)
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If you can descri(e the economic environment 'ith reference to the terms discussed
a(ove* you may no' attempt an e.planation of its functioning) &ou 'ill discover that
money is the life and (lood of (usiness activity and of the economic system) +he flo's
of consumption* investment* saving* income* employment and output are all affected (y
transactions of money) Monetary transactions affect the price level* there(y influencing
the real value of al macro-economic varia(les) Significant developments have ta,en
place in macro-economics to define the role of money) +he essential -uestion is 1 9oes
money matter F
+here are different ans'ers to this -uestion1 15 Money does not matter at all
4"lassical52 4$5 Money matters least 4Aeynesian52 and 4%5 Money matters most
4monetarist5) +he theoretical de(ate is -uite interesting) But you have to e.amine its
empirical relevance in the economic environment of a country li,e India) +his 'ill
provide you 'ith a further insight into the role of centralised planning in the present
conte.t* administered price system as 'ell as free mar,et pricing* and central (an,ing)
Economic planning is supposed to give a direction to the changes in the economic
environment*) Most countries function today on the (asis of planning) Either it is
planning (y direction ! typical of a socialist economy* or it is planning (y incentives* i)e)*
democratic planning typical of a mi.ed economy* or it is indicative planning typical of
the /rench economy) It is through the system of a perspective planning* five year
planning and annual planning that the economies try to overcome their environmental
constraints and optimiGe their achievements over a period to time)
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lanning is a programme of action* it is not a guarantee in itself) +he formulation of
plans and programmes must* therefore* (e flo'ed (y proper implementation) +his calls
for economic policy statements and legislations) 3part from having general policy
statements affecting industry and agriculture* the Government often formulates and
e.ecutes fiscal-cum-(udgetary policies) +he central (an, 'ill 'or, through the
instruments of money and credit policies* e.change rate policies* etc) Some sort of
physical policies of controls and regulations may also (e needed) rice control* trade
control and e.change control are all moves in the same direction) Sometimes legislations
and enactments (ecome necessary for effective implementation of all these policy
statements are proposal) +he national economic environment of (usiness is determined
(y the e.isting macro-economic policy frame'or,)
+hese policies* planning and pricing together ma,e the economy function effectively)
+he functioning of a economy is reflected in short-period fluctuations and long-term
trends in macro-economic varia(les li,e income* money supply* prices* production*
employment* (alance of trade and payments* foreign e.change earnings* etc) +hese
trends decide the course of the prevailing economic environment) Some of these
economic trends may define the nature and dimension of various macro-economic
pro(lems li,e inflation* unemployment* recession and the li,e) +he pro(lems have to (e
analysed 'ith the o(<ective of ma,ing the national economic management efficient)
Economic pro(lems and economic prospects in the environment thro' challenges to the
corporate (usiness management as 'ell as national economic management)
$?
Activit2 9
Some(ody pic,ed up at random the follo'ing headlines from ne'spapers and magaGines
pu(lished in India) Identify each one of them and place it under the (road categories of
critical elements of the economic environment)
Ieadlines1 :/inance Minister announces drought relief measures;
:MO9K3+ (eing revie'ed;
:$@-point Economic rogramme;
:Bonus Ordinance;
:Bholesale rice Inde. still rising;
:/E#3 3mnesty Scheme;
:Non-resident IndiansE investment incentives;
:o'er in the private sector;
:Ji-uidation of sic, units 'ithin pu(lic sector;
:u(lic sector units to flat (onds;
:More autonomy for the #BI;
:Len-(ase (udgeting introduced (y the Government;
:More items of import under OGJ;
:Industrial relations climate (etter;
:3 mid-term revie' of the >
th
lan (y the end of 1??$;
:ay "ommission #eport released;
:+rade unions on 'ar path;
%@
:9epartment of Environment for Ecological Balance;
Economic System
Economic lanning and olicies
Economic controls and #egulations
Economic Jegislations
Economic +rends and Structures
Economic 3natomy
119 INDIAN ECONOMIC ENVRIONMENT
No'* you may (e an.ious to evaluate the Indian economic environment in terms of the
conceptual frame'or, <ust suggested) &ou may note that the national economic
environment of a country can (e descri(ed and analysed in terms of its 4a5 data
environment* and 4(5 system environment) In su(se-uent units you 'ill (e e.posed to the
details of the Indian economyEs data environment* i)e)* the physical trends and structural
co-efficient) +he system environment of the Indian economy 'ill also (e dealt 'ith in
details* in terms of various policy statements* planning techni-ues* organisation and
structure of the capital mar,et* role and responsi(ility of the private and pu(lic sector*
etc) +he system environment encompasses the entire institutional frame'or, of the
economy) 3n overvie' of this system environment is presented in this section) /or the
%1
time (eing* you should (e more interested in the evaluation rather than evolution of the
present Indian economic system)
&ou might have come across the statement that IndiaEs is a mi.ed economy) In fact*
Indian has a very comple. mi.ed economic system) Jet us ela(orate this further)
/irstly* a simple mi.ed economic system is characteriGed (y the e.istence of the private
and pu(lic sectors) India has a multiplicity of sectors1 private and pu(lic sectors) India
has a multiplicity of sectors1 4dominant underta,ings* foreign companies* etc)5* pu(lic*
<oint* co-operative* 'or,ersE sectors and also :tiny sector;) Be hear of different sectors
in different areas of the Indian economy1 (ig sector* small sector* heavy sector* light
sector* licensed sector* deli censed sector* national sector* core sector* reserved sector*
etc) India is a comple. vector of sectors)
Secondly* a simple mi.ed economy is characteriGed (y complementarily (et'een central
planning and pricing) India has a multiplicity of mechanisms at 'or,1 five-year plans*
annual plans during plan holidays* pointed economic reform and reconstruction
programmes during and after plan vacations* ideas of rolling plans2 an ela(orate system
of controls and regulatory measures* attempts to'ards streamlining and simplification of
procedures* private traders and pu(lic distri(utors for the same product and hence a
system of dual prices* ceiling prices* floor prices* su(sidiGed prices* statutory prices*
retention prices* procurement prices* levy prices* and free mar,et prices2 concretionary
monetary policies and e.pansionary fiscal policies* etc) In India there is a comple.
%$
system of li(eral rules* strict regulations* control mechanisms* planning and a host of
price regulations 4'hich of course are (eing gradually rela.ed5)
/inally* a simple mi.ed economy is e.pected to reach a target level of social 'elfare* and
for this tas,* the profit policies are to (e designed according to a social purpose) +he
social 'elfare function in India is defined (y the multiplicity of o(<ectives 'hich are
sometimes conflicting in nature) /or e.ample* in terms of our five-year plans* India is
aiming at efficiency* <ustice and sta(ility) roductive efficiency in a static sense refers to
the efficiency-allocation of the given resources) roductive efficiency in its dynamic
sense refers to economic gro'th) +his fruits of economic gro'th have to (e distri(uted)
/airly among the masses2 social <ustices is to (e so attained so as not to endanger sta(ility
of prices* incomes* (alance of payments* etc) +he Indian plans have al'ays emphasiGed
o(<ectives li,e full employment of la(our* full capacity utiliGation of plant and
e-uipment* and self-sufficiency) In the long run* these o(<ectives may (e compati(le
'ith each other* (ut operationally these o(<ectives come in conflict 'ith each other) /or
e.ample* in order to promote a higher rate of gro'th* heavy industrialiGation and large
investments are underta,en) Such investments increase the flo' of money faster than the
flo' of output) +his generates inflationary forces) +hus* price sta(ility comes in conflict
'ith economic gro'th) Similarly* economic gro'th comes in conflict 'ith social <ustice)
3 progressive ta. system is used as a means to reduce income ine-ualities* (ut the same
ta. policy hampers private incentives to invest and to generate the gro'th forces there(y)
/oreign e.change remittances help the country in overcoming (alance of payments
%%
difficulties* (ut they increase the domestic conflict among the o(<ectives 'hich the mi.ed
economy of India hopes to achieve) +o top it all* different instrument have (een used to
attain different target varia(les ! fiscal polices for gro'th 'ith <ustice* monetary polices
for price sta(ility 'ith gro'th* price and output controls for price sta(ility 'ith <ustice)
+his has led to further confusion)
+o sum up* the so-called mi.ed economic system of India sometimes gives the
impression of a mi.ed-up economic system that is characteriGed (y a multiplicity of
sectors* a multiplicity of instruments* a multiplicity of o(<ectives* and a multiplicity of
ad<ustments to resolve the conflict (et'een various sectors* (et'een instruments and
(et'een o(<ectives)
+he present day mi.ed economy of India has evolved through a series of policy
formulations and legislations) It started 'ith the Industrial olicy #esolution of 1?0>)
+his 'as follo'ed (y the Industries 49evelopment and #egulation5 3ct 1?71* the
9irective rinciples of State olicy 1?7@* the Industrial olicy #esolution 1?78* the
Monopolies and #estrictive +rade ractices 4M#+5 3ct 1?8? and its su(se-uent
amendments* the Industrial Jicensing olicy* 1?=@* and its su(se-uent amendments and
the /oreign E.change #egulation 3ct 4/E#35 1?=% and its su(se-uent amendments)
+hese enactments and policy formulations have (een modified or supplemented from
time to time (y comprehensive five-year plans* the $@-point programme* controls and
regulations on prices* output* production* distri(ution and trade* various nationaliGation
schemes* anti-poverty schemes* and finally the economic reforms initiated in 1??1)
%0
9uring the decade of the 1?>@s the Indian mi.ed economy too, a decisive direction) It
all started 'ith the announcement of the Industrial olicy Statement of 1?>@) +he
purpose of this policy 'as to ensure attainment of socio-economic o(<ectives such as
optimum utiliGation of capacity* ma.imum production** employment generation* e.port
promotion* import su(stitution* consumer protection* correction of regional im(alances
through the development of industrially (ac,'ard areas and :economic federalism; 'ith
an e-uita(le spread of investment among large and small units* among ur(an and rural
units* etc) Some important provisions of the 1?>@ policy 'ere1
#egulariGation of e.cess capacity
3n automatic e.pansion at the rate of 7M per annum to the ma.imum of $7M in
five years* in all the industries of (asic* critical and strategic importance
romotion of 1@@M e.port-oriented units
#evival of sic, units through a pac,age of moderniGation measures
9evelopment of :nucleus plants; 4on the lines of 9istrict Industries "entres5
#eorientation of the pu(lic sector* including the development of its managerial
cadres)
3s a follo'-up of the 1?>@ Statement* the Government announced some further
concessions on 3pril $1* 1?>$) 3mong these* the important ones 'ere the follo'ing1
%7
+he list of :core sector; industries 'as revised (y including five more industries)
It implied that the /E#3 companies and large houses 'ould (e allo'ed to set up
industries in those areas)
Industry 'as allo'ed %%)%)M capacity over the (est production during the
previous five years over and a(ove the $7M e.cess production)
Jarge houses and multinationals 'orld (e permitted to set up units outside the
core sector if the units 'ere predominantly e.port-oriented* i)e) 8@M e.port in
respect of items not reserved and =7M for items reserved for the small-scale
sector)
Such li(eraliGation measures 'ere supplemented (y rela.ation in price and distri(ution
controls* amendments in the provisions of the M#+ 3ct relating to the definition of
:mar,et dominance;* e.emption from the need to o(tain M#+ clearance for production
in sectors of :national priority;* etc) such measures 'ere specifically designed to assist
the e.pansion of industrial production during 1?>$* 'hich 'as designated the
roductivity &ear)
9uring 1?>%->7* the Industrial olicy pursued (y the Government of India placed
emphasis on moderniGation and technological upgrdation for (etter capacity utiliGation
and larger production) /or e.ample* in order to promote demand* e.cise duties 'ere
reduced on commercial vehicles* refrigerators* (atteries* tyres and tu(es) Ma<or
concession sin e.cise and import duties 'ere given for the (enefit of the electronics
industry 'ith effect from Octo(er 1* 1?>%)
%8
9uring 1?>7->=* the Government too, a large num(er of measures to encourage the
private sector) Some of these measures 'hich 'ere (roadly referred to as :privatiGation;
and :li(eraliGation; included1 Inviting private (ids for oil drilling (y (oth the Oil and
Natural Gas "ommission and the Oil India Jimited on a contract (asis2 setting up of tee
Mangalore and Aarnal refineries in the <oint sector2 setting up of ne' po'er units in the
private sector2 decision in principle to encourage private funds including foreign capital
for setting up container terminals and port development2 acceptance of an Nair ta.i
serviceE in the private sector2 permitting private and co-operative (odies to put up +K
terminals* and to run ost Offices2 enlisting private enterprises in the field of (uilding
roads and (ridges2 permitting the private sector to manufacture solar cells 'hich 'ere
hitherto the monopoly of pu(lic underta,ings namely* Bharat Ieavy Electricals Jtd)* and
"entral Electronics Jtd)2 and a decision to reconstitute the Board of 9irectors for units
li,e 3ir Indian and Indian 3irlines* so as to run them on the principle of professional
management (y e.perts dra'n from (oth the private and pu(lic sectors)
+he Ne' economic olicy
+he ne' economic policy 'as announced in Duly 1??1 'hich is of far reaching
importance) +he ne' economic policy* among other things* has a (aring on1 415
Industrial Jicensing* 4ii5 /oreign Investment and /oreign +echnology 3greements* 4iii5
M#+ regulations* and 4iv5 u(lic Sector) Our purpose is to ac-uaint you 'ith the main
ideas or philosophy (ehind the economic policy) 3nd this 'e intend to do (y ta,ing up
%=
all these aspects (riefly) 4all these aspects 'ill (e ta,en up for further discussion in the
appropriate units5)
Industrial Jicensing2 +he statement of ne' economic policy emphasiGed that the system
of industrial approval needed a num(er of changes to actively encourage and assist Indian
entrepreneurs to e.ploit and meet the emerging domestic and glo(al opportunities and
challenges) +he (edroc, of policy measures must (e to let the entrepreneurs ma,e
investment decisions on the (asis of their o'n commercial <udgments) Government
policy and procedures must (e geared to assist the entrepreneurs in their efforts (y
ma,ing essential procedures fully transparent* (y eliminating delays and removing
restraints on capacity creation* 'hile* at the same time* ensuring that overriding national
interests are not <eopardiGed)
+he decisions ta,en in this respect are listed as under1
3(olition of industrial licensing for all pro<ects e.cept for a short list of
industries related to security and strategic concerns* social reasons* haGardous
chemicals and overriding environmental reasons and items of elitist consumption)
Industries reserved for the small-scale sector 'ould continue to (e so reserved)
3reas 'here security and strategic concerns predominate 'ill continue to (e
reserved for the pu(lic sector)
%>
in pro<ects 'here imported capital goods are re-uired* automatic clearance 'ill (e
given in certain cases)
In locations other than cities of more than 1@ la,hs 41 million5 population* there 'ill
(e no need for o(taining industrial approvals from the "entral government e.cept fro
industries su(<ect to compulsory licensing)
E.isting units 'ill (e provided a ne' (road-(anding facility to ena(le them to
produce any article 'ithout additional investment)
E.emption from licensing 'ill apply to all cases of su(stantial e.pansion of e.isting
units)
+he mandatory converti(ility clause 'ill no longer (e applica(le for term loans from
the financial institutional for ne' pro<ects)
/oreign Investments and /oreign +echnology 3greements 1 #egarding direct foreign
investment* the Government announced its decision to grand approval for investment up
to 71M foreign e-uity in high priority industries 'ithout any (ottlenec,s in the progress
%?
of approval) +his 'as intended to invite foreign investment in industrial re-uiring large
investment and foreign technology) +he list of high priorities industries identified for the
purpose include %0 (road areas li,e metallurgy* electrical e-uipment* transportation* food
processing* and hotel and tourism industry) Io'ever* clearance 'ill (e given if foreign
e-uity covers the foreign e.change re-uirements for imported capital goods) roposals
'hich do not meet the a(ove criteria 'ill continue to need prior clearance) But foreign
e-uity proposals need not necessarily (e accompanied (y foreign technology agreements)
ayment of dividends on foreign e-uity 'ould (e monitored through the #eserve Ban, of
India so as to ensure that outflo's on that account are (alanced (y e.port earnings over a
period of time)
9irect foreign investment up to 71M foreign e-uity is allo'ed for trading companies
primarily engaged in e.port activities to provide access to international mar,ets)
/oreign Institutional Investors 4/IIs5 have (een permitted to enter the Indian capital
mar,et and allo'ed to trade (oth in the primary and secondary mar,ets* 'ithout any
restriction on the total volume of investment and loc, in period)
Bith the amendment of the /oreign E.change #egulation 3ct in Danuary 1?$* there 'ere
further changes in the policy frame) +he limits on the operations of /E#3 companies in
non-priority sectors 'ere removed) +hese companies 'ere also ena(led to ta,e up any
trading* commercial and industrial activity* as also ac-uire any company in India* or
ac-uire shares in any company 'ithout prior approval of the #eserve Ban,) +heir e.port
0@
o(ligations and commitments stood annulled) Earlier* /E#3 companies having =0M
sta,e 'ere to commit =0M of turnover to priority sector activity) +o retain 71M to 8@M
sta,e* such companies 'ere re-uired to commit 8@ per cent of turnover to priority or
sophisticated technology industries 'ith a minimum1@ per cent e.port commitment* or
e.port commitment of 8@ per cent of turnover)
/oreign +echnology 3greements 1+he olicy statement emphasised that there is a great
need for promoting an industrial environment 'here the actualiGation of technological
capa(ility receives priority) +o'ards that end* governmental interference 'ith
commercial technology relationships of Indian entrepreneurs 'ith foreign technology
supplies 'as unnecessary)
3s vie'ed (y the Government* in the fast-changing 'orld of technology the relationship
(et'een the supplies and users of technology must (e a continuous one* 'hereas
governmental interference on a case-to-case (asis involved inordinate delays and fostered
uncertainty) +he Indian entrepreneur had come of age and no longer needed (ureaucratic
clearances of technology relationships)
+hus* Indian companies 'ill* hereafter* (e free negotiate the terms of technology transfer
'ith their foreign counterparts according to their o'n commercial <udgement 'ithin the
specified parameters) +his is e.pected to induce industry to develop indigenous
competence for the efficient a(sorption of foreign technology* and invest more in # O 9
due to greater competitive pressure)
01
"hanges in M#+ #egulations 1 3 significant change initiated (y the ne' policy 'as the
removal of the threshold limits of assets in respect of M#+ companies and dominant
underta,ings) Bith this decision* prior approval of the "entral Government 'ill not (e
re-uired for the esta(lishment of ne' underta,ings* e.pansion of underta,ings* merger*
amalgamation and ta,eover of companies) Instead* emphasis 'ill (e on controlling and
regulating monopolistic* restrictive and unfair trade practices as provided under the
M#+ 3ct) 3t the same time* the M#+ "ommission 'ill (e empo'ered and authorised
to imitate investigations sue motto or on complaints received from individual consumers
or classes of consumers in regard to monopolistic* restrictive and unfair trade practices)
u(lic Sector olicy 1 In the conte.t of massive investments made* the policy statement
noted t'o aspects of the performance of pu(lic enterprises) +he mature enterprises have
successfully e.panded production* opened up ne' areas of technology and (uilt up a
reserve of technical competence in a num(er of areas) On the other hand* in many of the
enterprises* serious pro(lems have manifested themselves* 'hich are o(served in
insufficient gro'th of productivity* poor pro<ect management* over-manning* lac, of
continuous technological upgrdation* and inade-uate attention to # O 9 and human
resource development) +he conse-uent lo' rate of return has inhi(ited the a(ility of
such enterprises to regenerate themselves in terms of ne' investment as 'ell as in
technology development) +hus* many of the pu(lic enterprise have (ecome a (urden on
rather than on asset to the Government)
0$
+he original concept of pu(lic sector has undergone considera(le dilution) +he ta,e-over
of sic, units from the private sector has resulted in losses of a certain category of pu(lic
sector units amounting to almost one third of the total losses of "entral Government
enterprise) 3 num(er of enterprises in the consumer goods and services sector do not fit
into the original idea of the pu(lic sector (eing at the commanding heights of the
economy)
+he policy decision in the a(ove conte.t are (ased on a ne' approach as follo's 1
+he portfolio of pu(lic sector investments 'ill (e revie'ed 'ith a vie' to focus the
pu(lic sector on strategic* high-tech and essential infrastructure)
u(lic enterprises 'hich are chronically sic, and 'hich re unli,ely to (e turned
around 'ill (e referred to the Board for Industrial and /inancial #econstruction
4BI/#5* or other similar institutions created for the purpose* for the formulation of
revival6reha(ilitation schemes) 3 social security mechanism 'ill (e created to protect
the interest of 'or,ers li,ely to (e affected (y such reha(ilitation pac,ages)
In order to raise resources and encourage 'ider pu(lic participation* a part of the
GovernmentEs shareholding in the pu(lic sector 'ould (e offered to mutual funds*
financial institutions* general pu(lic and 'or,ers)
Boards of pu(lic sector companies 'ould (e made more professional and given
greater po'ers)
+here 'ill (e a greater thrust on performance improvement through the Memorandum
of Understanding 4MoU5 (y 'hich managements 'ould (e grated grater autonomy
0%
and 'ould (eheld accounta(le) +echnical e.pertise on the part of the Government
'ould (e upgraded to ma,e the MoU negotiations and implementation more
effective)
+o facilitate a fuller discussion on performance* the MoU signed (et'een the
Government and the pu(ic enterprises 'ould (e placed in arliament) Bhile
focusing on ma<or management issues* this 'ould also help place matters of day-to-
day operations of pu(lic enterprise in their correct perspective)
In /e(ruary 1??$* the Government of India announced its decision to permit pu(lic sector
underta,ings to float (onds) +he move 'as aimed at mo(iliGing e.tra-(udgetary
resources for the pu(lic sector and 'as applica(le to all state enterprises fully o'ned (y
the "entral government) Guidelines 'ere issued (y the "ontroller of "apital Issues in
this connection for floatation of (onds (y e.isting as 'ell as ne' corporate underta,ings
including finance corporations) Be shall no' tal, a(out competition and -uality)
"hallenge of Glo(al "ompetition and Cuality Standards 1 Industrial enterprises in India*
after years of protection from foreign competition* have (een e.posed to competitive
mar,ets (oth 'ithin and outside since the policy of li(eralisation 'as initiated in 1??1)
Bith the entry of MN"s and gro'th of foreign companies* domestic product mar,ets are
(eing increasingly su(<ected to forces of competition) On the other hand* e.port
promotion is directly lin,ed 'ith the competitiveness of India products in mar,et a(road)
00
rice and -uality are t'o ma<or factors (y 'hich the competitive strength of a company
is determined) E.cept for elitist products* price has (een the more important factor
determining the sales performance of firms) Io'ever* (rand images of foreign
companies are ma,ing a dent in the domestic mar,et 'ith (uys (ecoming more -uality
conscious) In e.port mar,ets* although price influences (uying decisions to a large
e.tent* the -uality of the product is an e-ually important factor in e.port mar,eting)
It is in the a(ove conte.t that the significance of -uality standards has (een recognised
'idely in India industries) 3t the national level -uality standards have (een developed
(y the Bureau of Indian Standard 4BIS5 for a large num(er of products and components)
BIS* at present* manages 18*@@@ standards developed over the years fro over 10*@@@
products) +he Standards Mar, of "ertification ! the ISI Mar, - is granted (y the Bureau
'here the goods conform strictly to the relevant standards set (y it) +he certification
scheme is designed to ensure the -uality of goods* particularly those affecting the health
and safety of consumers) It also ensures that mass-produced and mass-consumed
products conform to the re-uired standards of -uality* safety and dura(ility)
Grading and standardiGation of agricultural commodities is provided for under the
3gricultural roduce and Mar,eting 3ct 1%=) /or fi.ing grade standards there are
si.teen regional la(oratories (esides the "entral 3gmar, Ja(oratory at Nagpur) 3mong
others* commodities graded included vegeta(le oil* (utter eggs* 'heat flour* rice* cotton*
potatoes* gur* maiGe* honey and ground spices) +he graded products are stamped 'ith the
07
seal of the 3gricultural Mar,eting 9epartment ! 3GM3#A* "ompulsory grading is done
after e.port in the case of %0 commodities)
Of late* a great deal of importance has come to (e attached to -uality Systems Standards
! the ISO ?@@@ series of Standards ! 'hich the International OrganiGation for
StandardiGation 4IS5 (rought out in 1?>=* and 'ere pu(lished in India (y the BI3S in
1?>> as IS 10@@@ series of standards) +hese standards are (ased on Cuality Management
Systems* re provide an effective means of ensuring that the producer is consistently
capa(le of delivering goods of the desired -uality at optimum cost) +he emphasis is to
provide for -uality not only in manufacturing (ut in every other activity of the
organisation from mar,eting to delivery and fee(ac, from after sales services) +he BIS
launched the Cuality Systems "ertification Scheme in Septem(er 1??1 under the
provision s of BIS 3ct* 1?>8) +he operation of the scheme entails initial assessment and
su(se-uent surveillance of the -uality systems installed and implemented (y the firm for
verification of this conformity to the prescri(ed re-uirements) +he operation of the
scheme is in harmony 'ith international practices) It meet the criteria enunciated (y ISO*
the European "ommunity and its accreditation from Ms) #aad Koor de certificates*
Netherlands)
Io'ever* ISO ?@@@ certification (y itself cannot yield results unless people on the shop
floor and in Board rooms are continuously motivated to ,eep their performance levels
high) +he demand for certification of -uality systems from a 'ide cross-section of
industry is increasing* primarily from e.port-oriented units) 3 num(er of certification
08
(odies ! companies catering to -uality management systems certification ! have come up
and are reported to (e (uying 'ith each other to offer their services) In the a(sence of a
national -uality accreditation (ody* it is feared that -uality systems certify action (y
different agencies may (e lac,ing in credita(ility)
11: ECONOMIC ENVIRONMENT AND BSINESS
MANA"EMENT
If you have underta,en 3ctivity 8 seriously* you 'ould realise that thee is a lot of
overlapping* i)e)* one item may fall under different heads) +his suggests a difficulty in
the classification of environmental varia(les) 3t the same time* it points to'ards
interaction among environmental factors)
Jet us no' e.amine the iteration (et'een Economic Environment and Business
Management)
+he (usiness environment influences (usiness managements) +he critical elements of the
(usiness environment often interact 'ith the critical elements of (usiness management)
+he critical elements of (usiness management are 1 planning* direction* organisation*
control or coordination* leading and motivation and evaluation) Management all levels*
top* middle as 'ell as supervisory* is concerned 'ith these critical elements to certain
degree) Similarly* these very critical elements are the concerns of the movement that
0=
specialties in different functions such as production* finance* mar,eting* purchase*
inventory control* personnel* pu(lic relations* research and development etc)
Management at all levels of specified functions is influenced (y the critical elements of
the (usiness environment) /or e.ample* 'hen an industry faces (usiness recession* the
management may decide to cut do'n the rate of production or to pile up invention)
Bhen the mar,et is (eing invaded (y an increasing num(er of closely su(stituta(le
products* the management may decide to go in for aggressive advertising to face cut-
thread competition) Bhen the financial institutions start interfering too much 'ith the
day-to-day (usiness operations of a firm* the firmEs management may decide to do a'ay
'ith (orro'ed capital and depend upon its o'n resources) Bhen the Government
enforces minimum 'age legislating and other social security measures for all permanent
'or,ers* the management may decide to recruit only casual 'or,ers through a la(or
contractor) Such e.amples can (e multiplied) +he point is that the management al'ays
studies the environmental then ma,es6ta,es a decision accordingly)
+he e.isting (usiness environment may act either as a stimulant or as a constraint for
(usiness management) If the prevailing environment is favora(le to (usiness gro'th and
prosperity* then the management feels happy and responds positively) Small (usiness
o'ns* for e.ample* are often encouraged to produce more 'hen the government pays
them a su(sidy) On the other hand* 'hen the prevailing environment is unfavoura(le* it
acts as a disincentive) /or e.ample* 'hen the Government tries to impose a high ta. rate
on corporate profits* many (usiness concerns try to evade ta. (y under-reporting their
0>
profits) It is interesting to note that the same environment may act (oth as* stimulant and
constraint ! stimulating for some and constraining for other #econsider the last e.ample)
3 high ta. rate increases the propensity to evade ta.es2 it induces the corporate ta. payer
to restrict their output sales or profits) 3t the same time* this very situation provides an
opportunity to the ta. consultant for a thriving (usiness)
/or the management* the environment is not limited to the institution of the Government)
+here are other institutions and forces as 'ell) +he management has to ta,e care of the
interests of other groups also such as the 'or,ers* suppliers and contractors* consumers*
shareholders and many others) +he 'or,ers* organised in trade unions* often as, for
higher 'ages) +he salaried middle-level managers* through their associations* may also
as, for a particular pac,age of pay and per,s) +he suppliers* organised in guilds* may not
al'ays supply materials as per the specifications father management* and they may see,
revised rates or change the -uality and schedules of delivery) +he shareholders may as,
for higher dividends or may li,e to have a greater say in management) +he consumer
cooperative may see, lo'er prices and (etter -uality for the products they (uy) 3ll in all*
the top management has to (alance the interest of all the sta,eholders ! Government*
trade unions* manufacturesE association* financial institutions* consumer cooperatives and
so on) Kery often* the managementEs o'n economic aspirations may come in conflict
'ith those of other groups) If the management can easily resolve thee conflicts* it get the
(etter of the environment) 3nd if the management accentuates thee conflicts* it (ecomes
the city of the environment) +he management may dictate or (e dictated to (y the
negative6positive foresee the environment)
0?
3 good amount of managerial s,ills is re-uired in ad<usting to the environment) +he
managers must have a thorough ,no'ledge and understanding of the immediate (usiness
environment) Bith e.perience and maturity* the alert managers ac-uire the s,ill to deal
'ith the environment) Bhen an environment repents itself* e.perienced managers
effectively display their capa(ility to ta,e care of it) Bhen the changing dimensions of
the environment esta(lish a sudden departure from past trends and tendencies* the
managers are called upon to demonstrate their capa(ility to deal 'ith the situation of ris,
and uncertainty) +he environment* thus* poses a challenge to the management)
Managerial efficiency and6or effectiveness is a measure of adapta(ility to the e.isting
(usiness environment)
Environmental scanning* thus* (ecomes an important step to'ards corporate planning and
(usiness policy decisions) "orporate mangos analyse the Strengths 4S5* Bea,ness 4B5*
Opportunities 4O5 and +hreats 4+5 that e.ist for their organisation in the conte.t do its
environment) +he SBO+ analysis precedes the ma,ing6ta,ing of strategic and tactical
decisions (y the management)
Irrespective of the factor 'hether it is office management* factory management* farm
management* hospital management (an, management or any other management*
(usiness management every'here is determined (y* and determines* the (usiness
environment) Be have so far treated a firm (andits management as a dependent varia(le*
the e.planatory varia(le (eing the environment) Jet us no' consider the opposite
situation) +he totality of (usiness (ehaviour of different corporate entities may also
7@
determine the form and content of the environment) If the managements of different
pu(lic enterprises as, for more autonomy* there emerges as possi(ility to'ards a laisseG
faire (usiness environment) Or suppose management la(our relations deteriorate day-(y-
day first in one firm* then in other firms* then in one industry* then in different industries
(ecause of some sort of demonstration effect* then the national economic environment
sooner or later 'ill (e affected (y such unhealthy industrial relines) 3nother e.ample is
that the preparation of the (alance-sheets of a gro'ing num(er of companies is directed
(y considerations of accounting convenience* rather than accounting conventions) 3
study of such (alance-sheets may present a distorted picture of the national investment
climate) Bith the help of these e.amples* you may argue that the (ehaviour patterns of
individual firms and their respective managements together determine the macro-level
environment of (usiness and industry)
+he environment and management thus influence each other) +he e.isting environment
influences corporate level planning* (usiness strategy and (usiness tactics2 it also affects
the siGe* structure* location integration and gro'th of (usiness) +he managementEs
success or failure is determined (y its ad<ustment to favoura(le6adverse environmental
factors) +he nature of such realisation* its fre-uency and duration induces corporate
managers to cultrate some standards of (usiness philosophy* (usiness ethics and (usiness
practices) Simultaneously* Government mangers* the la(our managers and the li,e also
start ad<usting to the changing organisation-culture) +his yields a ne' (usiness
environment) 3nd so the process continues) It is thus* a never-needing process of
interactions 1 Environment - P Management -P Environment -P) It is li,e a (iological
71
organism 'hich ,eeps (oth the environment and the management continuously
responsive to each other)
Activit2 :
+hin, a(out your o'n organisation or any other) &ou may no' attempt a SO+ analysis of
its (usiness environment) 9o name the organisation and the industry it (elongs to (efore
you start)
Name 1
Strengths 1
Bea,nesses 1
Opportunities 1
+hreats 1
7$
Jet us no' turn our attention to interaction (et'een the economic environment and
Business Management) &ou may also li,e to consider the interaction (et'een the
economic and non-economic environment) B) M) #ichman and M) #) "opan* in their
(oo, International Management and Economic 9evelopment* have* in fact* developed the
conceit of Interaction Matri. to stress the significance of this or other forms of inter-
dependence among environmental varia(les)
11;ECONOMIC AND NON-ECONOMIC ENVIRONMENT 3 T<E
INTERACTION MATRI=
+he economic environment of (usiness e.ercise a strong influence on the non-economic
environment of (usiness <ust as the non-economic environment influences the economic
environment) +he economic environment is* thus* (oth e.ogenous and indigenous* it
determines as 'ell as it is determined (y the non-economic environment) Jet us consider
a fe' specific interactions)
+he social environment affects and gets affected (y the economic environment of
(usiness)
Social attitudes to'ards (usiness and management determine ho' many people get
attracted to private (usiness as an activity and to management as a career) If (usiness
gets social sanction as a respecta(le profession* the occupational structure of a country
'ill reflect a siGa(le category of professional mangers) On the other hand* if more and
7%
roe of the active la(our force <oins professional management* the social attitude to'ards
(usiness and its management also changes)
Jet us ta,e another e.ample 1 Social movements largely determine the economic system)
If the 'or,ers cultivate an attitude of confrontation* rather than cooperation* 'ith
management* a repressive economic system may (e needed to cope 'ith industrial
disorder) On the other hand* if the attainment of rapid economic gro'th is the target* the
management must (ring a(out a la(our productivity revolution and the 'ages may (e
(ase don productivity of la(our rather than profita(ility of (usiness) +o operate on
productivity-(ased 'ages is cooperate on the system of incentives and positive attitudes
of la(our) +he attainment of a specific economic o(<ectives is* thus* conditioned (y a
specific social attitude and discipline)
+he educational cultural environment and the economic environment of (usiness are also
interdependent) +he state of economic development acts as a decisive factor in the
choice of a system of education) /or e.ample* only a relatively high-income country can
afford to impart costly higher education in science and technology) +he system of
education* on the other hand* may (e responsi(le for a given economic environment) /or
e.ample* the emphasis on education in the arts and a lac, of vocational course may (e
held responsi(le for the economic pro(lem of unemployment in many countries) 3t the
corporate level* the interdependence (et'een educational and economic environmental
factor may at times ta,e the form of a vicious circle) /or e.ample* a (usiness concern
'hitlo' profits may not find resources of finance management training or e.ecutive
70
development programme) 3s a result* there may (e a shortage of highly -ualified and
trained management personnel) +hus* lac, of trained competent managers may lead to
(usiness inefficiency)
+he politico-legal environment and economic environment of (usiness are also
interloc,ed to such an e.tent that 'e sometimes thin, of political economy (usiness) In a
situation of political sta(ility* (usiness enterprises happen to (e forthcoming and
(usinessmen are 'illing to ta,e more economic ris,) But if there is political insta(ility*
(usiness uncertainties multiply and* therefore* entrepreneurs may not li,e to ta,e up ne'
(usiness ventures) +he state of (usiness in un<a( during the period of terrorism is a
recent e.ample) Similarly* the ideology of the ruling party influ.es the economic system)
+he ruling party 'hich (elieves in using socialism as a strategy and nationaliGation of
enterprises as a tactic to strengthen the economy may not (e favoura(ly vie'ed (y the
private (usiness sector) On the other hand* sometimes a series of political legislations
may (e necessary to cope 'ith the economic environment) +o fight economic and
industrial recession* the strategy of streamlining the administration and simplifying the
procedure my (e adopted) In fact* different legislations of the Government 4li,e M#+
3ct* /E#3* and Ur(an Jand "eiling 3ct5 are often politico-economic in character) +his
is (orne out (y 3na analysis of the content and intent of different legislations and
political announcements) 3lso the state of economic environment decides the continuity
or discontinuity of a particular political administrating) +he state of the political
environment* in its turn* decides the pattern of economic legislations)
77
+he historical environment and the economic environment f (usiness are also
interdependent) +he print 4economic5 environment of (usiness can (e treated as a legacy
of its past 4historical5 environment) Every (usiness has a history* and history al'ays has
a lesson to teach) 3s such* the repent is a reflection of the past* and the repent can also (e
handled in terms of the e.periences of the past) 3 num(er of e.amples may (e -uoted)
+he present economic environment of a country is partly determined (y the availa(le
structure of industry in that country) +hese industries can (e traced (ac, to the colonial
pattern of investment in the past) +he British empire 'as interested in the colonies so
that it could easily 4a5 get the ra' materials for its industries* and 4(5 dump the finished
manufactured products in the colonial mar,ets) +he colonies* thus* supplied the mar,et
as 'ell as the ra' materials) In other 'ords* the economic environment of (usiness in the
ne'ly independent nation-states is the outcome of the colonial infrastructure 'hich those
countries had in the past) Similarly* history is a record of events and a storehouse of
lessons 'hich can provide guidelines for present economy policy deisms) +he
achievements of the /ive-&ear lans in the past may provide a direction to the
formulation and implementation of the current /ive-&ear lan of an economy) 3n the
present performance of a plan 'ill decide the future course of planning) It suggests that
the environments factors are interrelated on the time scale too)

/inally* 'e come to the interaction (et'een the physical environment of a country and
the economic environmental (usiness in that country) 3 num(er of legislations have
(een enacted in many countries to conserver natural resources and to preserve natural the
78
physical environment) +hese environment allegislatins may impose a constraint on the
e.pansion of a given (usiness concern li,e a factory) +hus environmental considerations
limit the e.pansion activities of a (usiness firm) On the other hand* the siGe of a plant*
the scale of output* the organisation of firms* the structure and action of industries may
lie at the root of either environmental improvement or environmental delay) +hus* the
social responsi(ility of (usiness today means ta,ing care of the environmental impact of
various economic and technological activities) +o the e.tent this social responsi(ility is
not discharged* la's rating to (usiness and industry 'ill increasingly turn out to (e la's
relating to the physical environment of (usiness) /rom the standpoint* one may feel that
in that in addition to the e.isting functional 3res of management 4prod finance* personnel
and mar,eting5* 'e are soon going to have a fe' area of environment) +he point remains
that the physical environment as a factor is (ecoming so significant day (y day that it
may (e treated as a critical element 'ithin the economic environment of (usiness)
In the foregoing pages* 'e have discussed ho' the economic environment in general
interacts 'ith non-economic environmental factors) If you thin, a little more* you 'ill
discover that individually each critical element of the economic environment 4namely*
economic system* economic structure* functioning of the economy through sectors*
economic polices* programmes and controls5 interacts 'ith each critical element of the
non-economic environment 4namely* sociological* political* historical and physical5 and
their respective su(-elements) Be can conceptualise this interdependence or interloc,ing
of various environmental factors in terms of an Interaction Matri.) /or e.ample* in
7=
Interaction Matri. (elo' 'e have listed the critical elements of the non-economic
environment along the ro's and the critical elements of the economic environment along
the columns thus yielding a sever (y five matri.) Bhen a given element of the economic
environment influences a given element of the non-economic environment* you dra' a
short line vertically* and 'hen an element of the non-economic environment influences a
given element of the economic environment* you dra' a short line horiGontally) +hus in
case of interdependence among the environmental elements* you end up 'ith a plus sign
'hich suggests a t'o-'ay interaction) +he Interaction Matri. serves as ready-reference
for understanding environmental relations and relations)
Interaction Matri>
Economic
Environment
Non-Economic
Environment
Economic
S20tem
Economic
Str*ct*re
%Anaom2(
-*nctionin)
o5 t4e
Econom2
Via 0ector0
Economic
$lannin)
Economic
$ro)ramme0
%04ort-term
Economic
Control ?
Re)*lation0
Economic
"ro@t4 ?
Develo6ment
415
Sociological
Q Q Q Q Q Q Q
4$5
Educational
! cultural
Q Q Q Q Q Q Q
4%5
olitical-
legal
Q Q Q Q Q Q Q
405
Iistorical
Q Q Q Q Q Q Q
7>
475
hysical-
Geographical
Q Q Q Q Q Q Q
Activit2 ;
+reat the preceding Interaction Matri. as a model and figure out a fe' more Interaction
Matrices) &ou should try to inter-relate the environmental varia(les classified on various
criteria such as space* time* factors and forces) "orresponding to each element in a given
matri.* thin, of a real specific e.ample from the Indian (usiness 'orld)
11A SMMARB
7?
+he environment is a comple. phenomenon) +he term environment consists of several
su(sets* e)g)* economic environment* socio-cultural environment* politico-legal
environment* technological environment* etc) It thus represents the totality of all ,inds of
environments 'hich have an impact on (usiness) +o a large e.tent* the environment is
e.ternal to the firm* Business firms in general have little influence on e.ternal forces)
9epending upon the nature and composition of several su(sets of the environments* the
(usiness environment varies from country to country* and may even vary in the same
country from one point of time to another) 3 num(er of pro(lems are involved in the
identification* description* e.planation and prediction of environmental factors) +he
environmental factors are dynamic) It is difficult to conceptualise and6or -uantify the
proportion of change as 'ell as the direction of change in environmental factors)
Some (asic propositions a(out (usiness are 1 it is an economic activity2 the (usiness
firm is an economic unit2 and (usiness decision ma,ing is an economic process)
+he environment may (e classified 4for convenience of analysis5 (ased on different
criteria such as1
Space ! Jocal* regional* national and international environment)
+ime ! ast* present and future environment)
8@
/orces ! Mar,et ad non-mar,et environment
/actors ! Economic and non-economic environment
+he environmental factors can (e treated as e.ogenous as 'ell as endogenous) +he
factors are inter-loc,ed to such an e.tent that you may li,e to ma,e use of the concept of
Interaction Matri. to illustrate their interdependence)
+he environment consist of all economic institutions* the structure of the economic
system* mar,et forces* GovernmentEs economic polices and plans) 3ll modern
economies have certain fundamental economic pro(lems to deal 'ith) Most of the
countries of the 'orld have mi.ed economies) +here is a tendency to'ards the
mar,etisation of economic institutions and opening up of economies)
+he critical elements of any economy are 1 the nature of the economic system* the
structure of the economy2 mode of functioning of the economy* economic planning and
programmes* policy statements* controls and regulations* economic legislations*
economic trends and structures* current economic pro(lems and prospects) +he national
economic environment under 'hich (usiness operates may act either as a positive
stimulant or as a negative constraint for the management* thus affecting (usiness
efficiency)
3fter independence* India em(ar,ed upon a system of mi.ed economy (ased on the
concept of central planning 'ith socialistic (ias) Bith economic reforms initiated in
81
1??1 the economy is gradually (eing opened up in order to integrate it 'ith the
economies of the rest of the 'orld) +he main purpose of economic li(eralisation is to
attract foreign direct investment and modern technology for speedy economic progress)
Several significant changes have (een made in the M#+ 3ct* pu(lic sector policy*
industrial licensing* trade policies* etc)* to (ring them in tune 'ith the ne' realities)
Since the environment and the economic institutional frame'or, affect (usiness
organisations* it is imperative on the part of the management to scan the environment
(efore ta,ing any decisions) +he success of any (usiness enterprise in a large measure*
'ould depend upon the proper understanding of the (usiness environment)
3 device called Interaction Matri. can (e helpful in understanding the relationship
(et'een t'o sets of varia(les* e)g)* economic and non economic factors)
111& +EB 8ORDS
Environment 3 +he totality of all factors or forces affecting (usiness and e.ternal to and
often (eyond the control or influence of individual (usiness enterprises) +he
environment comprise several su(sets* e)g)* economic environment* socio-cultural
environment* politico-legal environment* technigological environment* etc)
8$
Economic Activit2 3 3ny activity underta,en 'ith economic or financial motive or
consideration) In the (usiness conte.t* it is the tas, of ad<usting the means6resources to
the needs6targets)
Deci0ion-Makin) 3 Ma,ing a choice from a set of alternative courses of action)
Economic Environment 3 3 su(set of the environment consisting of economic
institutions* frame'or,s* nature and structure elf the economic system* mar,et forces*
economic fiscal and monetary policies* planning and programmes of the Government*
etc)
Interactive Matri> 3 3 t'o-dimensional ta(ular device shooing the relationship or
interdependence (et'een t'o sets of factors or varia(les* e)g)* economic and non-
economic factors* economic and social factors* etc)
1111-RT<ER READIN"
3dhoc,ery* M)* 1??=) Economic Environment of Business* 4"h) I O KIII5* Sultan "hand
O Sons 1 9elhi)
Ghosh* 3la,* 1??=* Indian Economy 1 Its nature and ro(lems* +he Ne' Boo, Stall*
"alcutta)
8%
111! SEL--ASSESSMENT CESTIONS
1) Io' 'ould you classify (usiness environment F Bhat could (e some
criteriaF E.plain)
$) E.amine the (asic proposition a(out (usiness F
%) 9iscuss some important points a(out ho' modern economies are organised
and function)
0) :3ll modern economies have certain fundamental economic pro(lems to deal
'ith;) E.amine and illustrate the statement)
7) E.plain the critical elements of economic environment 'ith e.amples dra'n
from Indian e.perience)
8) Briefly revie' the development of the economic environment in India) Bhat
to you thin, 'ere the landmar, development F
=) 9iscuss the salient feature soft ne' economic policy of 1??1 and the
initiatives ta,en (y the Government for economic restructuring)
>) Io' does the economic environment impinge upon (usiness management F
e.plain 'ith suita(le e.amples)
?) Io' are economic and non-economic environment interrelated F E.plain)
80
NIT ! SOCIO-CLTRAL AND $OLITICO-LE"AL
ENVIRONMENT
$ART D I SOCIO-CLTRAL ENVRIONMENT
O./ective0
3fter reading this unit* you should (e a(le to !
9efine the socio-cultural environment of (usiness
Identify the critical element of social environment
E.plain the interaction (et'een social and economic environment
9escri(e the social responsi(ilities of (usiness* and
Outline the current socio-cultural environment of Indian (usiness and industry)
Str*ct*re
$)1 Introduction
$)$ Social Environment
$)% "ritical elements
$)0 Understanding the Social Environment of Business
$)7 Social #esponsi(ilities of Business
87
$)8 Summary
$)= Aey Bords
$)> /urther #eading
$)? Self-3ssessment Cuestions
A66endi> 1 3 Social Re06on0i.ilitie0 o5 B*0ine00 D T4e Indian Dilemma
!11 INTRODCTION
In the previous unit* 'e concentrated on the economic environment of (usiness)
Business is an economic process) Io'ever you 'ill recall that 'e could not confine
ourselves <ust to the economic and non-economic environment of (usiness) &ou 'ill
appreciate that the (usiness environment is -uite comple.* 'ith heterogeneous elements
in the environment) +hese elements* economic and non-economic* mar,et and non-
mar,et* often interact 'ith each other) 3 manger must understand and analyse this
process of interaction) In particular* you must note that all non-economic environmental
varia(les shave economic implications* and that is 'hy these varia(les* singly or <ointly*
affect (usiness activity) In this unit* 'e have therefore* decided to d'ell on the non-
economic environment of (usiness)
+he present unit aims to help you define the socio-cultural environment of (usiness2
identify the critical elements of the scion-cultural environment2 e.plain the interaction
88
(et'een the social and economic environment2 and outline some of the emerging trends
in our society 'hich ache a (earing on Indian (usiness)
!1! SOCIAL ENVIRONMENT
Business must have a social purpose2 (usiness concerns must discharge social
responsi(ility and social o(ligations and have social commitment) Other'ise* (usiness
cannot en<oy social sanction) +his ma,es it necessary for us to understand the social
environment of (usiness) &ou may -uestion 1 'hat factors constitute this environment F
+here are a host of factors li,e social values* culture* (eliefs* tradition and convention*
social attitudes* social institutions* class structure* social group pressure and dynamics*
and 'hat have you) +he nature of social o(<ectives and priorities* along 'ith the set of
social constraints* give form and content to several social movements* social systems and
social preferences) IN a very (road sense* therefore* the social environment happens to
(e the culmination of forces operating from different platforms such as history* culture*
polity* ethics and morality* values and institutions* geography and ecology* and the li,e)
Society itself has to (alance the achievements and aspirations of various individuals*
groups* communities and institutions) No (usiness can survive and gro' 'ithout social
harmony) 9ifferent countries* over different time periods* attain social harmony and
order of different forms* through different 'ays and means) +hus the social environment
differs over space* time and methods)
8=
Activit2 1
Suppose you encounter a foreigner 'ho is interested to ,no' a(out :Indian Society;)
Jist the points of o(servation you 'ould li,e to share 'ith him)
1) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
$) ) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
%) ) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
0) ) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
Activit2 !
+he same foreigner is also interested to ,no' something a(out the :Indian (usiness
community;) Jist the points of o(servation you 'ould li,e to share 'ith him)
1) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
$) ) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
%) ) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
8>
!13 CRITICAL ELEMENTS
Based on your e.perience in 3ctivity 1 and 3ctivity $* you 'ill appreciate that from the
standpoint of description and analysis* it is important to (egin (y identifying the critical
elements of any environment) &ou 'ill recall that in the preceding that 'e identified the
critical elements of the economic environment) In the same 'ay* 'e may also identify
the critical elements of the sociological environment of (usiness) +hese elements are 1
Social institutions and systems
Social values and attitudes
Education and culture
#ole and responsi(ility of the Government
Social groups and movements
Socio-economic order
Social pro(lems and prospects)
+his is <ust a suggested classification 'hich may help you to analyse the socio-cultural
environment of (usiness)
8?
Social institution and system develop through history* culture and heritage) +he caste
system* the <ointly family system* child marriage* sati* and the patriarchal family are all
e.amples of social institutions and systems) Until the recent past the caste system
ensured a very simple occupational division of la(our in our society) +he place of the
individual 'as very clearly defined in the social hierarchy of the <oint family system
'here decision-ma,ing 'as centraliGed in the head of the family 'ho commanded
respect for his age and e.perience) +he position of 'omen and children 'as also defined
(y the then social set up)
In India today* most of thee age-old social institutions are dying fast) It is (ecause the
social values and attitudes are changing very fast) +he Bestern values of individualism
have caught our imagination) Indian 'omen no longer remain satisfied as house'ives)
Business does not remain confined any more 'ithin a given community or caste)
"ustoms traditions and conventions are no longer rigid) +hey have (ecome fle.i(le)
SocietyEs vie' of its authorities* responsi(ilities and delegation* its attitude to'ards
(usiness as a profession* to'ards achievement and 'or,* to'ards o'nership and
management ! all have very definite implications for the sociological environment of
(usiness)
+hen come education and culture as an ingredient of the sociological environment) In
this category you may list the attitude to'ards education2 the need for (usiness education2
=@
education matching the s,ill re-uirement of industry and manpo'er utilisation2 the role
of (usiness schools and e.ecutive development programmes2 education viruses training2
correlation (et'een formal literacy and the level of culture2 the spared of education and
itEs the impact on (usiness ethics2 material progress and (usiness morality2 (usiness
culture and organisational culture)
3t a given point o time* society has a level of achievements and aspirations) Such
achievements and aspirations have to (e defined clearly and categorically* and any
divergence (et'een the t'o has to (e (ridged through relentless social effort ta,ing care
of social 'elfare and social constraints) +his is 'here the role of the government as a
'elfare state comes in) +he government is the ape. social institution) articularly in a
democracy the Government has the very responsi(le function of maintaining social order
and harmony in vie' of the interests of the ma<ority) It is the Government 'hich has to
ma,e sure that social progress is not handicapped (y the tyranny of the ma<ority*
other'ise social tensions 'ill mount event under democracy) "ertainly* (usiness cannot
gro' under social tension)
Social tension originates in groups composed of frustrated individuals) In a society*
individuals form groups on the (asis of caste* creed* religion* language* trade and
profession and similar other factors) Social groups and the social movements that they
engineer are a critical varia(le o the non-economic environment) Some of these groups
have direct (usiness interests) +hus* consumerism* trade unionism* the cooperative
=1
movement* professional management* and shareholdersE associations all pose challenges
fro (usiness operation)
In a country li,e India* 'e have a plural society) Ours is a land of a variety of goods*
dress* languages* religions and culture) Be also have a dual economy 'ith the traditional
4su(sistence or unorganiGed5 sector co-e.isting 'ith the modern 4commercialiGed or
organised5 sector) +echnological dualism in India is very pronounced) Bulloc, carts ply
on the road and the 3ir(us files through the s,y) 3ll these ma,e a very uni-ue socio-
economic order for India today) /rom time to time* this social order gets distri(uted and
modified* hopefully for the (etter* through social movements and social policy
formulation on su(<ects li,e science and technology* ecology and forestry* family
planning* animal hus(andry* etc)
Social pro(lems and prospects are <ut offshoots of a changing socio-economic order)
&ou might (e a'are that conse-uent to industrialism and socio-economic development in
many developing countries* the death rate has fallen faster than the (irth rate* and this has
resulted in an e.plosive gro'th of population) +his in turn has (rought a(out gro'ing
unemployment and poverty* poor housing and sanitation* ur(an congestion* popullution
and increasing incidence of anti-social activities) Economists* therefore* suggest that you
should al'ays attempt a social cost-(enefit analysis of industrial development) 3s
society moves from the pre-industrial stage to the post-industrial stages of development*
social (enefits must out'eigh social costs* other'ise the merging ne' social order 'ill
prove unsta(le)
=$
Activit2 3
&ou have no' some idea of the critical elements of the social environment of a country)
&ou may have noted that 'e have used e.pressions li,e :socio-economic order; and
:social cost-(enefit analysis;) +he pint is that the command sociology interact 'ith each
other) It 'ill not (e difficult for you to conceive in this conte.t an interact 'ith each
other) It 'ill not (e difficult for you to conceived in this conte.t an Interaction Matri.)
"an you no' thin, of live Indian e.amples 'hich may su(stantiate each element in this
Matri. F +o have direction* you may li,e to o(serve the ,ind of e.ample 'e have
incorporated for some of the diagonal elements in this Matri.)
Economic
Sociology
Economic
System
Economic
lanning
Economic
olitics6rogramme
Economic
Jegislations
"ontrols6#egulations
Social
Institutions
Big
(usiness
facilities
li,e the
Burlaps and
+atars have
provided
=%
private
sector in our
mi.ed
economy
Social values anchayati
#a< 4at
village level5
upholds
democratic
values of
<oint
consultation
and
committee
decision
Education O
"ulture
Manpo'er
planning is (eing
redesigned in vie'
of the Ne'
Education olicy*
<o(s declined from
degrees
Social
groups
"onsumer
rotection 3ct is
intended to protect
=0
the consumers
Social
ro(lems

HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
H
HHHHH
!1' NDERSTANDIN" T<E SOCIAL ENVIRONMENT O-
BSINESS
Surely you have not run out of your stoc, of e.amples) +here are plenty of e.amples)
3renEt thereF +he more you thin, of such e.amples* the move you find ho' comple.
and varied our society is) &ou also find ho' the economic and social environments react
'ith each other) #ead the follo'ing statements 1
:Social <ustice and economic gro'th must go together;)
=7
:Socio-economic pro(lems have to (e tac,led in one go;)
:3ll social movements are (asically economic in content and intent;)
:Social 'elfare is the ultimate goal of economic planning;)
:3ll (usiness and economic activity must (e tinged 'ith a sense of social responsi(ility;)
:Society cannot materially progress 'ithout a significant structural development of the
economy;)
&ou must have come across thousand of statement li,e these) &ou may note that these
statements are not emotional out(ursts2 these are facts concerning the interaction (et'een
sociology and the economy) In 'hat follo's* 'e 'ould li,e you to familiarse yourself
'ith certain specific social developments* social movements and social policy
formulations so that you may 'or, out their (usiness implications in the Indian conte.t)
+his is a tas, 'hich 'ill esta(lish more clearly the interaction (et'een the sociological
environment and (usiness economic activity)
Social 9evelopments* Industrialisation rocess and Management "ulture
+he Industrialisation process in every society in the modern era can (e traced to the 'or,
of a small elite group) +he group 'hich assumes leadership in the initial period of
Industrialisation has certain general characteristics1
Some ,no'ledge of (usiness* trade and commerce
=8
3ccess to capital or saving* or a(ility to mo(iliGe such resources
+hrifty ha(its and (ourgeois spirit)
+he Industrialisation rocess
4+he Elite Jeadership in different countries5
+he UA Dapan +he former Soviet
Union and other
Socialist countries
India and other e.-
colonies and
developing countries
+he puritan* thrifty
middle class elite
4the British
aristocracy lived
(eyond its means
and id not have
capital or aptitude to
assume leadership
in (usiness5
+he feudal elite
4'ith traditional
discipline* resources
from land* and a
loyal 'or, force
provided (y the
tenantry5)
+he multi-nationals*
and their
su(sidiaries)
4Io'ever limited*
their operations
have also helped the
industrialiGation
process5)
)
/oreign colonial
elite) 4British capital
set up the first
+he domestic
dynastic elite) 4+he
family concerns
+he multinationals*
and their
su(sidiaries)
+he State as
entrepreprenur) +he
(iggest entrepreneur
==
modern industries*
(uilt up rail'ays*
opened up mines*
plantations etc)* it
also developed the
managing agency
system)5
(elonging to certain
castes and
communities
traditionally
engaged in (usiness2
Kanishes* Gu<arat
is* "hatters* aims*
Mar'aris* arsis*
Aho<as* Bhal(andhs*
Suvama Ban,s* etc)
In this group the
son succeeds the
father not (ecause
of any superior
professional
competence (ut (y
virtue of (irth2 or
top management is
confined to close
realties) +his type
of entrepreneurship
is true even of the
small-scale
4Io'ever limited*
their operations
have also helped the
industrialiGation
process)5
in India till the
recent past has (een
the "entral and State
Governments 'ith
investments larger
than those in
organised private
sector
=>
enterprises* using
modern
technology)5
Source 1 N) N) "hatter<ee* 1?=7* Management of ersonnel in Indian Industries* 3llied
Boo, 3gency* "alcutta)
Each ,ind of industrial elite (uilt up its o'n management style and managerial personnel
in India)
+he foreign-colonial elite gtroup and their successor* the foreign firms operating in India*
including the su(sidiaries of multinationals* used the ethnocentric or racial approach to
recruiting managerial talents) &oung Briton used to (e recruited on contract 4,no'n as
"ovenanted Officers5 and (rougth over to India to manage the various interests of
companies incorporated in the U)A) Similarly* other foreign firms recruited managers
from tier o'n race and cultural (ac,ground) +hey have Indianans fast under the pressure
of the government) No' Indians even head the su(sidiaries of some multinationals)
+he same practice 'as follo'ed in India (y the (ig family concerns till recently) If the
original family could not provide the talents needed* the e.tended family 4)e)* close
preservatives and ,insmen5 'as dra'n upon) /ailing that* the community to 'hich the
family (elonged provide the recruits) Io'ever* li,e the foreign firms* these also
gradually had to recruit professional mangos 'ho had no ties of (lood or community 'ith
the o'ners* though in family concerns such professional are rarely the real decision-
ma,ers even today)
=?
+he practice of recruiting the (est talent availa(le from the country of operations may (e
descri(ed as polycentric) In <oint stoc, companies 'hich are not controlled (y family
concerns and in the pu(lic sector enterprises* professionals are no' gradually coming
into their o'n) +he pu(lic sector initially dre' upon the civil services* (ut the transfer
of the (ureaucratic culture to (usiness operations* (y the large* proved unre'arding) +he
emphasis is no' largely on professional talent (uilt up from 'ithin or recruited from the
open mar,et or dra'n from the Industrial Management ool of the Government 4'hile it
lasted@) 9uptationists from the I3S cadre had (een given the option to get merged 'ith
the managerial cadre of the limit they had (een serving)
+he multinationals do try to ma,e a geocentric approach* i)e)* they try to tap any effective
source availa(le any'here) But in practice* they do not often flout national sentiments)
In India* the preference has generally (een for Indians)
It follo's from the a(ove o(servation that the process of industrialiGation and the
management style or recruitment culture eared dictated (y social convenience and
compulsions) +he history of social movements in other countries also is in different) +he
development of capitalist enterprises in India and else'here 'as very much conditioned
(y the moves and motivations of the (usiness community ! their :capitalist spirit; of
:earning li,e a ,ing and living li,e a sage;) 3s and 'hen the philosophy of capitalism
'as replaced (y the social 'elfare motive) +he private property rights 'ere replaced (y
the social o'nership ! the state sector 'as created through the process of nationaliGation)
+he free mar,et price mechanism 'as replaced (y comprehensive planning toy the
>@
"entral government) Iistorically* neither pure capitalism nor purr socialism could
survive as a sta(le social movement* and so came the philosophy of a :mi.ed economy;)
+he resultant social movement 'as to com(ine the private and pu(lic sectors* the mar,et
mechanism and "entralised planning* commercial profita(ility and social desira(ility)
Bhatever may (e the nature of the mi.ed economy 'e find today in India* it has (een the
outcome of a long-dra'n process of social development and ideological revolution) If
you loo, (ac, on the history of such social development 4capitalist* socialist or mi.ed5 in
any country including India* you 'ill find that corresponding to different stages of
development* there developed defend patterns of industry and (usiness culture) 3nd the
culture in its turn also influenced the process of social development)
Activit2 '
If you are interested in the historical perspective of the socio-cultural environment of our
(usiness* you may give a -uic, loo, to some of these classics1
1) 9) I) Buchanan* +he 9evelopment of "apitalistic Enterprise in India
$) Guar Myra* 3sian 9rama) Kol) II 4Aalian u(lishers* 1?>$5
%) Maurice Lincing* 9evelopment of the /ree 3sia
In these 'or,s* you may e.pect to find some critical (ut 'ell documented o(servations
on the operations of private enterprises in India)
>1
Jet us no' move from the historical social development process to a fe' current social
movements) Bith the passage of time* as industrialiGation proceeded either in the form
of a revolution or evolution* sooner or later organised movements 'ere engineered (y
various social groups to protect their o'n class interest) +he class-conflict gre' in
intensity* and conse-uent upon that gre' a variety of social movements) 3s a result
today* in every country 'ithout an e.ception* on the industrial front 'e are face to face
'ith the trade union movement* the consumer movement* the professional management
movement* the shareholdersE movement and so on) Jet us revie' some of these
movements in the Indian conte.t)
+he +rade Union Movement
+rade unionism is the child of industrialiGation) Bith the gro'th of the industrial
culture* 'or,ers have felt that their socio-economic interests cannot (e protected if they
do not come together in some sort of organised union)
+he history of trade union movement in India dates (ac, to the first -uarter of the
t'entieth century) +he t'o important landmar,s 'ere the formation of the 3ll India
+rade Union "ongress 43I+U"5 in 1?$@ and the enactment of the +rade Union 3ct*
1?$8) But due to ideological differences among several socio-political gropes* the
movement did not gather momentum during the inception stage2 it only got split from
time to time) 3fter independence* the disunity in the movement 'as aggravated (y the
starting of three central organisations ! the Indian national +rade Union "ongress
>$
4IN+U"5 (y the "ongress arty 41?0=5* the Iind Ma.tor Sa(ha 4IMS5 (y the raia
Socialist arty 41?0>5* the United +rade Union "ongress 4U+U"5 (y some radicalisms
41?0?5* the Bharat Ma.tor Singh 4BMS5 in 1?77 and the Iind Ma.tor enchant 4IM5
in 1?87) 9espite the e.istence of different unions 'ith different ideologies* the trade
union movement is no' (etter organised* more 'idespread and on a more permanent
footing)
+he present position of the trade union movement may (e summarised as follo's 1 the
num(er of registered trade unions in the country is around $7*@@@ of 'hich a(out %*@@@
are affiliated to IN+U"* 3I+U"* U+U" and IMS) IN+U" and 3I+U" are more
popular than others) +he mem(ership of the unions su(mitting returns is around 7@
la,hs)
+he ma<or defects of the present trade union movements may (e listed as follo's 1
+he predominance of small siGed unions ! nearly %)0ths of the unions have a
mem(ership of less than 7@@
oor financial position (ecause of the small siGe and also (ecause of the small
su(scription)
+he a(sence of 'hole time paid officers
Jeadership (y professional politicians and hence political* inter-inions and tiara-union
rivalry
>%
Illiteracy and ignorance* migratory character* differences in language* caste* creed
and customs and hence lac, of harmony and unity among 'or,ers* lo' 'ages and
productivity* hectare characteristics of Indian la(our
reoccupation 'ith stri,es 4rather than social security (enefits5
Multiplicity of unions and ideologies causing a decline in the average siGe of unions
It is o(vious that unless the a(ove defects are removed and the trade union movement is
strengthened* the socio-economic environment of (usiness cannot (e improved) +he
interests of employees can (e protected and promoted (y the creation of a la(our union
having a (argaining po'er matching that of managements) +he present idea of
:participative management; or 'hat is called :industrial democracy; through 'or,ers
participation can (e successfully implemented only if the economy has strong and
responsi(le trade unions in all spheres of activities rather than in industry along) On a
country li,e ours* 'here there is a vast unorganiGed sector in agriculture* agricultural
unions are conspicuous (y tier a(sence) Be need to 4a5 promote unioniGation of
agricultural 'or,ers* and 4(5 cur( politicisation of la(our unions)
Before 'e conclude this section* 'e 'ould li,e to ma,e a passing reference to the ne'ly
emerging phenomenon of managerial unionism) In India* mangers and officers are
increasingly (anding themselves into associations 'hich re gaining the aspect of trade
unionism) Such managers and officers hail from diverse organisations such as
manufacturing etnerpries* (an,s* insurance companies* universities* electricity (oards*
trading corporations* the merchant navy* the civil service and the li,e) +hus managers
>0
unions or 'hat may (e called officers2 associations are goring stronger (oth in the
private and pu(lic sectors) Such a gro'th and transformation in the character of
unionism is suggested to (e the natural outcome of the development of an economy 'ith
proliferation of the service sector) +he Industrial #evolution 'itnessed the gro'th of
(lue collar trade unions) +he post-industrial society 'ill e.perience the rise of 'hite
collar unions) +his is the glo(al trend) India cannot escape it) +hus managing the 'or,
and 'or,er is the pro(lem of day and tomorro'2 (ut managing the managers is the
challenge of the future)
T4e Con0*mer Movement
Ji,e the la(our movement* the consumer movement also e.ercises a considera(le
influence on the socio-economic environment of (usiness) 3 strong consumer movement
is the sine -ua non of a healthy household sector in an economy)
In the Indian economy today* (ecause of imperfections in (oth the product and factor
mar,ets* some sort of e.ploitation of consumer often results)
In a country li,e India* 'here a large of imperfections in (oth the product and factor
mar,ets* some sort of e.ploitation of consumers often results)
In a country li,e India* 'here a large percentage of thermoses are illiterate and poorly
informed and have limited purchasing po'er* 'here most of the critical goods are al'ays
>7
in short supply and 'here gro'th for social <ustice is the guiding principle of national
planning* the Government has a significant role in safeguarding the interests of the
consumer (y promoting a climate of fair competition and influencing (usiness decisions
concerning 'hat to produce* promote and sell)
Some legislative measures have already (een ta,en (y the "entral Government to
safeguard the interests of the Indian consumer) +here are a 'ide range of enactments to
protect the consumer) Some are of general application covering particular aspects of a
'ide range of products 2 Other apply only to specific products) +he first category
consists of the Standard of BightEs and Measures 3ct* 1?78* the Sale of Goods 3ct*
1?%@* the +rade and Merchandise Mar,s 3ct* 1?7>* the 9isplay of rices Order* 1?=%*
the ac,aged commodities 4#egulation5 Order* 1?=?* the Standard Institutions
"ertificate Mar,s 3ct* 1?7$* etc* etc) Some of the important legislations relating to
particular goods and transactions are the Essential "ommodities 3ct* 1?77* the
revention of /ood 3dulteration 3ct* 1?7?* the 9rugs and Magic remedies
4O(<ectiona(le 3dvertisement5 3ct* 1?70* and the "igarettes 4#egulation of roduction*
Supply and 9istri(ution5 3ct* 1?=7) Jately* our Government has (rought in the
"onsumer rotection 3ct 1?>8) +hrough this 3ct* an attempt is (eing made to strengthen
the institutional frame'or, to protect the consumer at the local2 state and central levels)
+here are various institutional factors 'hich account for gro'ing concern a(out
consumer protection in India)
>8
/irst* the Indian Government is concerned 'ith protection of vulnera(le sections of the
community through schemes li,e streamlining the pu(lic distri(uting system) Over the
years* (ecause of chronic inflation* different anti-social elements have emerged to e.ploit
the vat ma<ority of poor consumers through unethical trade practices li,e adulteration*
under'ighment* high prices* etc)* of goods in short supply) +he Government has*
therefore* (ecome more alert to protect consumers through the 9efence
+here are different ans'ers to this -uestion1 15 Money does not matter at all
4"lassical52 4$5 Money matters least 4Aeynesian52 and 4%5 Money matters most
4monetarist5) +he theoretical de(ate is -uite interesting) But you have to e.amine its
empirical relevance in the economic environment of a country li,e India) +his 'ill
provide you 'ith a further insight into the role of centralised planning in the present
conte.t* administered price system as 'ell as free mar,et pricing* and central (an,ing)
Economic planning is supposed to give a direction to the changes in the economic
environment*) Most countries function today on the (asis of planning) Either it is
planning (y direction ! typical of a socialist economy* or it is planning (y incentives* i)e)*
democratic planning typical of a mi.ed economy* or it is indicative planning typical of
the /rench economy) It is through the system of a perspective planning* five year
planning and annual planning that the economies try to overcome their environmental
constraints and optimiGe their achievements over a period to time)
lanning is a programme of action* it is not a guarantee in itself) +he formulation of
plans and programmes must* therefore* (e flo'ed (y proper implementation) +his calls
>=
for economic policy statements and legislations) 3part from having general policy
statements affecting industry and agriculture* the Government often formulates and
e.ecutes fiscal-cum-(udgetary policies) +he central (an, 'ill 'or, through the
instruments of money and credit policies* e.change rate policies* etc) Some sort of
physical policies of controls and regulations may also (e needed) rice control* trade
control and e.change control are all moves in the same direction) Sometimes legislations
and enactments (ecome necessary for effective implementation of all these policy
statements are proposal) +he national economic environment of (usiness is determined
(y the e.isting macro-economic policy frame'or,)
+hese policies* planning and pricing together ma,e the economy function effectively)
+he functioning of a economy is reflected in short-period fluctuations and long-term
trends in macro-economic varia(les li,e income* money supply* prices* production*
employment* (alance of trade and payments* foreign e.change earnings* etc) +hese
trends decide the course of the prevailing economic environment) Some of these
economic trends may define the nature and dimension of various macro-economic
pro(lems li,e inflation* unemployment* recession and the li,e) +he pro(lems have to (e
analysed 'ith the o(<ective of ma,ing the national economic management efficient)
Economic pro(lems and economic prospects in the environment thro' challenges to the
corporate (usiness management as 'ell as national economic management)
Activit2 9
>>
Some(ody pic,ed up at random the follo'ing headlines from ne'spapers and magaGines
pu(lished in India) Identify each one of them and place it under the (road categories of
critical elements of the economic environment)
Ieadlines1 :/inance Minister announces drought relief measures;
:MO9K3+ (eing revie'ed;
:$@-point Economic rogramme;
:Bonus Ordinance;
:Bholesale rice Inde. still rising;
:/E#3 3mnesty Scheme;
:Non-resident IndiansE investment incentives;
:o'er in the private sector;
:Ji-uidation of sic, units 'ithin pu(lic sector;
:u(lic sector units to flat (onds;
:More autonomy for the #BI;
:Lem-(ase (udgeting introduced (y the Government;
:More items of import under OGJ;
:Industrial relations climate (etter;
:3 mid-term revie' of the >
th
lan (y the end of 1??$;
:ay "ommission #eport released;
:+rade unions on 'ar path;
:9epartment of Environment for Ecological Balance;
>?
Economic System
Economic lanning and olicies
Economic controls and #egulations
Economic Jegislations
Economic +rends and Structures
Economic 3natomy
INDIAN ECONOMIC ENVRIONMENT
No'* you may (e an.ious to evaluate the Indian economic environment in terms of the
conceptual frame'or, <ust suggested) &ou may note that the national economic
environment of a country can (e descri(ed and analysed in terms of its 4a5 data
environment* and 4(5 system environment) In su(se-uent units you 'ill (e e.posed to the
details of the Indian economyEs data environment* i)e)* the physical trends and structural
co-efficient) +he system environment of the Indian economy 'ill also (e dealt 'ith in
details* in terms of various policy statements* planning techni-ues* organisation and
structure of the capital mar,et* role and responsi(ility of the private and pu(lic sector*
etc) +he system environment encompasses the entire institutional frame'or, of the
economy) 3n overvie' of this system environment is presented in this section) /or the
time (eing* you should (e more interested in the evaluation rather than evolution of the
present Indian economic system)
?@
&ou might have come across the statement that IndiaEs is a mi.ed economy) In fact*
Indian has a very comple. mi.ed economic system) Jet us ela(orate this further)
/irstly* a simple mi.ed economic system is characteriGed (y the e.istence of the private
and pu(lic sectors) India has a multiplicity of sectors1 private and pu(lic sectors) India
has a multiplicity of sectors1 4dominant underta,ings* foreign companies* etc)5* pu(lic*
<oint* co-operative* 'or,ersE sectors and also :tiny sector;) Be hear of different sectors
in different areas of the Indian economy1 (ig sector* small sector* heavy sector* light
sector* licensed sector* delicensed sector* national sector* core sector* reserved sector* etc)
India is a comple. vector of sectors)
Secondly* a simple mi.ed economy is characteriGed (y complementarily (et'een central
planning and pricing) India has a multiplicity of mechanisms at 'or,1 five-year plans*
annual plans during plan holidays* pointed economic reform and reconstruction
programmes during and after plan vacations* ideas of rolling plans2 an ela(orate system
of controls and regulatory measures* attempts to'ards streamlining and simplification of
procedures* private traders and pu(lic distri(utors for the same product and hence a
system of dual prices* ceiling prices* floor prices* su(sidiGed prices* statutory prices*
retention prices* procurement prices* levy prices* and free mar,et prices2 concretionary
monetary policies and e.pansionary fiscal policies* etc) In India there is a comple.
system of li(eral rules* strict regulations* control mechanisms* planning and a host of
price regulations 4'hich of course are (eing gradually rela.ed5)
?1
/inally* a simple mi.ed economy is e.pected to reach a target level of social 'elfare* and
for this tas,* the profit policies are to (e designed according to a social purpose) +he
social 'elfare function in India is defined (y the multiplicity of o(<ectives 'hich are
sometimes conflicting in nature) /or e.ample* in terms of our five-year plans* India is
aiming at efficiency* <ustice and sta(ility) roductive efficiency in a static sense refers to
the efficiency-allocation of the given resources) roductive efficiency in its dynamic
sense refers to economic gro'th) +his fruits of economic gro'th have to (e distri(uted)
/airly among the masses2 social <ustices is to (e so attained so as not to endanger sta(ility
of prices* incomes* (alance of payments* etc) +he Indian plans have al'ays emphasiGed
o(<ectives li,e full employment of la(our* full capacity utiliGation of plant and
e-uipment* and self-sufficiency) In the long run* these o(<ectives may (e compati(le
'ith each other* (ut operationally these o(<ectives come in conflict 'ith each other) /or
e.ample* in order to promote a higher rate of gro'th* heavy industrialiGation and large
investments are underta,en) Such investments increase the flo' of money faster than the
flo' of output) +his generates inflationary forces) +hus* price sta(ility comes in conflict
'ith economic gro'th) Similarly* economic gro'th comes in conflict 'ith social <ustice)
3 progressive ta. system is used as a means to reduce income ine-ualities* (ut the same
ta. policy hampers private incentives to invest and to generate the gro'th forces there(y)
/oreign e.change remittances help the country in overcoming (alance of payments
difficulties* (ut they increase the domestic conflict among the o(<ectives 'hich the mi.ed
economy of India hopes to achieve) +o top it all* different instrument have (een used to
attain different target varia(les ! fiscal polices for gro'th 'ith <ustice* monetary polices
?$
for price sta(ility 'ith gro'th* price and output controls for price sta(ility 'ith <ustice)
+his has led to further confusion)
+o sum up* the so-called mi.ed economic system of India sometimes gives the
impression of a mi.ed-up economic system that is characteriGed (y a multiplicity of
sectors* a multiplicity of instruments* a multiplicity of o(<ectives* and a multiplicity of
ad<ustments to resolve the conflict (et'een various sectors* (et'een instruments and
(et'een o(<ectives)
+he present day mi.ed economy of India has evolved through a series of policy
formulations and legislations) It started 'ith the Industrial olicy #esolution of 1?0>)
+his 'as follo'ed (y the Industries 49evelopment and #egulation5 3ct 1?71* the
9irective rinciples of State olicy 1?7@* the Industrial olicy #esolution 1?78* the
Monopolies and #estrictive +rade ractices 4M#+5 3ct 1?8? and its su(se-uent
amendments* the Industrial Jicensing olicy* 1?=@* and its su(se-uent amendments and
the /oreign E.change #egulation 3ct 4/E#35 1?=% and its su(se-uent amendments)
+hese enactments and policy formulations have (een modified or supplemented from
time to time (y comprehensive five-year plans* the $@-point programme* controls and
regulations on prices* output* production* distri(ution and trade* various nationaliGation
schemes* anti-poverty schemes* and finally the economic reforms initiated in 1??1)
9uring the decade of the 1?>@s the Indian mi.ed economy too, a decisive direction) It
all started 'ith the announcement of the Industrial olicy Statement of 1?>@) +he
?%
purpose of this policy 'as to ensure attainment of socio-economic o(<ectives such as
optimum utiliGation of capacity* ma.imum production** employment generation* e.port
promotion* import su(stitution* consumer protection* correction of regional im(alances
through the development of industrially (ac,'ard areas and :economic federalism; 'ith
an e-uita(le spread of investment among large and small units* among ur(an and rural
units* etc) Some important provisions of the 1?>@ policy 'ere1
#egulariGation of e.cess capacity
3n automatic e.pansion at the rate of 7M per annum to the ma.imum of $7M in
five years* in all the industries of (asic* critical and strategic importance
romotion of 1@@M e.port-oriented units
#evival of sic, units through a pac,age of moderniGation measures
9evelopment of :nucleus plants; 4on the lines of 9istrict Industries "entres5
#eorientation of the pu(lic sector* including the development of its managerial
cadres)
3s a follo'-up of the 1?>@ Statement* the Government announced some further
concessions on 3pril $1* 1?>$) 3mong these* the important ones 'ere the follo'ing1
+he list of :core sector; industries 'as revised (y including five more industries)
It implied that the /E#3 companies and large houses 'ould (e allo'ed to set up
industries in those areas)
Industry 'as allo'ed %%)%)M capacity over the (est production during the
previous five years over and a(ove the $7M e.cess production)
?0
Jarge houses and multinationals 'orld (e permitted to set up units outside the
core sector if the units 'ere predominantly e.port-oriented* i)e) 8@M e.port in
respect of items not reserved and =7M for items reserved for the small-scale
sector)
Such li(eraliGation measures 'ere supplemented (y rela.ation in price and distri(ution
controls* amendments in the provisions of the M#+ 3ct relating to the definition of
:mar,et dominance;* e.emption from the need to o(tain M#+ clearance for production
in sectors of :national priority;* etc) such measures 'ere specifically designed to assist
the e.pansion of industrial production during 1?>$* 'hich 'as designated the
roductivity &ear)
9uring 1?>%->7* the Industrial olicy pursued (y the Government of India placed
emphasis on moderniGation and technological upgrdation for (etter capacity utiliGation
and larger production) /or e.ample* in order to promote demand* e.cise duties 'ere
reduced on commercial vehicles* refrigerators* (atteries* tyres and tu(es) Ma<or
concession sin e.cise and import duties 'ere given for the (enefit of the electronics
industry 'ith effect from Octo(er 1* 1?>%)
9uring 1?>7->=* the Government too, a large num(er of measures to encourage the
private sector) Some of these measures 'hich 'ere (roadly referred to as :privatiGation;
and :li(eraliGation; included1 Inviting private (ids for oil drilling (y (oth the Oil and
Natural Gas "ommission and the Oil India Jimited on a contract (asis2 setting up of tee
?7
Mangalore and Aarnal refineries in the <oint sector2 setting up of ne' po'er units in the
private sector2 decision in principle to encourage private funds including foreign capital
for setting up container terminals and port development2 acceptance of an Nair ta.i
serviceE in the private sector2 permitting private and co-operative (odies to put up +K
terminals* and to run ost Offices2 enlisting private enterprises in the field of (uilding
roads and (ridges2 permitting the private sector to manufacture solar cells 'hich 'ere
hitherto the monopoly of pu(lic underta,ings namely* Bharat Ieavy Electricals Jtd)* and
"entral Electronics Jtd)2 and a decision to reconstitute the Board of 9irectors for units
li,e 3ir Indian and Indian 3irlines* so as to run them on the principle of professional
management (y e.perts dra'n from (oth the private and pu(lic sectors)
T4e Ne@ Economic $olic2
+he ne' economic policy 'as announced in Duly 1??1 'hich is of far reaching
importance) +he ne' economic policy* among other things* has a (aring on1 415
Industrial Jicensing* 4ii5 /oreign Investment and /oreign +echnology 3greements* 4iii5
M#+ regulations* and 4iv5 u(lic Sector) Our purpose is to ac-uaint you 'ith the main
ideas or philosophy (ehind the economic policy) 3nd this 'e intend to do (y ta,ing up
all these aspects (riefly) 4all these aspects 'ill (e ta,en up for further discussion in the
appropriate units5)
Industrial Jicensing2 +he statement of ne' economic policy emphasiGed that the system
of industrial approval needed a num(er of changes to actively encourage and assist Indian
entrepreneurs to e.ploit and meet the emerging domestic and glo(al opportunities and
?8
challenges) +he (edroc, of policy measures must (e to let the entrepreneurs ma,e
investment decisions on the (asis of their o'n commercial <udgments) Government
policy and procedures must (e geared to assist the entrepreneurs in their efforts (y
ma,ing essential procedures fully transparent* (y eliminating delays and removing
restraints on capacity creation* 'hile* at the same time* ensuring that overriding national
interests are not <eopardiGed)
+he decisions ta,en in this respect are listed as under1
3(olition of industrial licensing for all pro<ects e.cept for a short list of
industries related to security and strategic concerns* social reasons* haGardous
chemicals and overriding environmental reasons and items of elitist consumption)
Industries reserved for the small-scale sector 'ould continue to (e so reserved)
3reas 'here security and strategic concerns predominate 'ill continue to (e
reserved for the pu(lic sector)
?=
In India* 'e have the so-called :closely-held companies; and the :'idely-held
companies;) In the 'idely-held companies* management is supposed to (e diffused over
the representatives of a large (ody of shareholders) +ill very recently* even in 'idely-
held companies* the o'ners of minority shares have (een occupying the top e.ecutive
position of the company and have (een perpetuating the traditional family management
culture) 3 large ma<ority of shareholders have thus (een left outside the am(it of top
management2 they have not en<oyed their legitimate rights of having decisive
participation in management)
3s someone o(served* in India 3rms are a corporate farce) 3 shareholder is supposed to
ma,e relevant statements at an 3GM* (ut instead one find people clamoring for fights*
refreshments and discount coupons) +hus the shareholders themselves fritter a'ay their
right to (e heard) Over the years* managements have come to adopt the attitude ! :Give
them a good divided and close their mouths 'ith a sand'ich; H 3s long as the dividend
che-ue comes through periodically and the company is doing 'ell* the over'helming
ma<ority of shareholders rarely come to attend 3rms)
Of late* ho'ever* the situation is changing) +he 3rms have to (e ta,en seriously) +he
shareholders today are an enlightened (ody of investors) +he gifts and meals given at the
3rms cannot (uy the many longer* though those things do have some good'ill value)
+odayEs shareholders are ,no'ledgea(le and are -uite conscious of their rights) +hey are
-uite an.ious to e.ercise their legitimate rights) If they so desire* they can supply (oth
ris, capital and effective management on professional lines) In fact* they may even
?>
desta(iliGe the e.isting management through ta,eover (ids) +a,eover (ids as e.perience
sho's* may originate 'ith resident Indians as much as 'ith non-resident Indians) +he
nominee directions 4of the financial institutions5 on the Board need not al'ays support
the e.isting management2 they may have a strategic alignment 'ith the shareholders as
'ell) 3ll thee have no' come into the limelight through a num(er of recent 3rms) /or
Escorts "hairman I) ) Nunda* the three 3GMS during the early >@s and the much
pu(licised e.traordinary general meeting of 1?>0 'ere a rich e.perience) +hought he
Escort-Sara aul affair ultimately ended as much ado a(out nothing* it did provide some
direction to the shareholdersE movement) In the same 'ay* the 8%
rd
3GM of 9harma
Moray "hemicals "ompany Jtd)* lasting ten house 'ith a pac,ed gathering of 0@@ odd
shareholders* is another recent e.ample 'hich sho's that the 3GM can (e used to decide
issues one 'ay or the other) &ou can discover many instances if you read magaGines li,e
Business India* Busienss Borld and India +oday)
Activit2 7
#ead these magaGines regularly and try to get some latest facts and figures concerning
developments 'ithin the Indian corporate 'orld) "hoose some selected companies that
interest you most)
??
#eproduced on the ne.t page is a chart 'hich sho's the siGe of shareholders in a fe'
'idely-held companies) 3dditionally* yummy also note that as per the latest figures of
the #eserve Ban, of India 4#BI5 the num(er of (loc, shareholders has increased to
nearly %@ misinform a mere 8 million in 1?=>) It is thus o(vious that the shareholders
can no longer (e neglected) "ompanies have (een increasingly turning to the capital
mar,et for their financial needs) "apital raised through ne' issues during 3pril-
9ecem(er 1??8 'as around #s) 1@*0@@ crore 'hich means around #s) 17*@@@ crore are
raised currently through capital mar,ets on an annual (asis) Bith so much at sta,e
3GMs can no longer (e considered a residual activity to (e dispensed 'ith on a laGy
afternoon) +he shareholders2 movement is gaining momentum and* therefore* you may
hope that in the near future the -uality of the 3GM 'ill improve su(stantially) Be should
'elcome this as a healthy development in the socio-economic environment of Indian
1@@
(usiness) ShareholdersE movement is partly responsi(le for necessary modifications in
the "ompanies 3ct form time to time and in the enactment of SEBI 3ct*1??$)
T<E MOST 8IDELB <ELD COM$ANIES
#eliance Industries Jimited =*@@*@@@ Shareholders
GN/" 0*$$*1@0 :
Jogia Machines $*$7*1@7 :
+IS"O $*1@*@@@ :
G'alior #ayon 1*?1*0>7 :
I+" 1*87*>1@ :
+EJ"O 1*7$*@@@ :
D) A) Synthetics 1*0=*>81 :
3m(le Sura(aya
Enterprises
1*00*87 :
+he Indian #ayon
"orporation
1*1>*8>? :
Jipton 4India5 Jimited 1*1=*11$ :
Gla.o 1*17=88 :
Iindustan Jever 1*@>*@@@ :
Activit2 9
Ma,e a list of companies in India 'hich you thin, are professionally managed)
rivate Sector companies u(lic sector units
9omestic /oreign "entral State
1@1
Bhat criteria have no' used in selecting your companies6enterprises6units in the a(ove
list F
1@$
Activit2 :
Name the national level trade unions in India and also name the political parties to 'hich
they are affiliated)
+rade Unions olitical arties
1@%
Environment Movement
Issues related to protection of the environemtn and ecology have received 'orld 'ide
attention not only in developed countries (ut also in the developing countries) Increasing
concern has (een e.pressed a(out environmental degradation 'hich can ris, human life
and e.istence) +hough environmental pro(lems are not ne'* the scale* in spite of
technological advances* on 'hich environmental degradation has (een ta,ing place has
assumed alarming proportions) /or e.ample* of the $88 mha of land considered
productive in India* a(out 1=7 mha are degraded in varying degrees 4arid* al,aline* saline*
'ater-logged* ravines* etc)5) 3(out ?@ mahs are acutely degraded* chiefly on account of a
loss of tree cover and top soil* leading to floods and droughts) Similarly* the forest cover
has (een depleted to a(out 1? per cent of the total geographical area* instead of the
desira(le %% per cent) India has only $ per cent of the forest land of the 'orld (ut
supports 18 per cent of the 'orld population)
+he terms ecology and environment are interlin,ed) Ecology is the study of plants*
animals* people* and institutions in relation to the environment) It thus refers to the
interrelationship (et'een people* the fauna 4(irds and animals5*the flora 4plants and
forests5 and their physical surroundings) +he eco-system em(races the sea* forests*
reservoirs of 'ater* plants* trees* flora and fauna 'hich* in facts* comprose an eco-chain
underlining their interdependence) +he ecosystem is the totality of living and non-living
elements in the iconological community communicating 'ith one another and their
1@0
environment) +he term environment is defined as the comple. or seraphic 4soil related5*
climatic and (iotic 4(iological5 factors that act upon an organism or a community)
It is important for us to understand the interrelationship (et'een iconology and
development) &ou might (e a'are of the rapid decline in the -uality of the environment
ore the recent past) Imprudent use of natural resources resulting from the developments in
science and technology has led to negative conse-uences 'hich have promoted many a
thin,er to advocate a slo' do'n of economic gro'th for the sa,e of environmental
protection) Modern developments in agriculture and industry have (rought a(out
fundamental changes in the consumption ha(its of people 'hich have given rye to several
pro(lems ! pollution of the air and 'ater* soil erosion* deforestation* e.huastation of
traditional sources of energy etc) ! affecting the -uality of life and 'ell-(eing of human
(eings) +oday* society faces a strange dilemma) Bhile uncontrolled and unplanned
industrial development may destroy the health of society and may have a negative impact
on the -uality of life* e.cessive concern 'ith environmental issues may half the process
of technological and industrial gro'th) It is* therefore* necessary to follo' a (alanced
approach 'herein the conservation of natural resources and -uality of environment
complement the o(<ectives of economic gro'th)
Environmental deterioration has (een a matter of serious concern in India and has gained
'idespread attention during the last t'o-three decades) Environmental pro(lems 3my
partly (e attri(uted to the negative effects of the process of industrialiGation and
economic development2 they are partly attri(uta(le to the continuing state of poverty and
1@7
underdevelopment) overty is directly lin,ed 'ith the gro'th of population)
Environmental degradation ta,es place if development efforts do not provide the
necessary life support systems) Undou(tedly* scientific and technological progress have
raised the pace of economic gro'th 'ith considera(le increase in the production of food
grains and agricultural crops* and the development of the infrastructure* transport and
communication facilities* (ut poverty and unemployment continue to pervade the
nationEs ma<ority due to im(alances)
On the other hand* development efforts have put a continuing pressure and have imposed
strains on the limited supply of natural resources* and the negative effects of development
have crated environmental pro(lems)
In ur(an areas* more particularly in metropolitan cities* the -uality of the environment is
steadily deteriorating) 3ir pollution is increasing due to congestion of traffic and the fast
increasing num(er of automo(iles 'hich release fuel e.hausts and add dangerous
pollutants li,e car(on mono.ide* nitrogen o.ide* organic vapors* lead* smo,e and other
particulates and non-particulates effluents to the ur(an atmosphere) 9ischarge of fly ash
from thermal po'er stations and emission of smo,e from industrial esta(lishments in and
around cities continue to increase the level of atmospheric polluting in spite of devices to
regulate their impact)
+he pollution of river 'ater ta,es place in and around cities as 'ell as su(ur(an to'ns
due to lac, of se'erage* discharge of se'age* and effluents from industries 'hich do not
1@8
heave ade-uate 'ater treatment e-uipment installed) 9ischarge of industrial 'astes and
chemicals causes to.ic effects and inhi(its the gro'th of fish) Safe drin,ing 'ater is not
availa(le to the ma<ority of city d'ellers due to the contamination of su(soil 'ater on
account of lea,ing or cho,ed se'erage and overflo'ing drains) +he pro(lems of gar(age
disposal persists) Open gar(age dumps 'ith overflo'ing filth and rags are a common
sight in many cities* adding to the unsanitary living conditions) "ontaminated drin,ing
'ater and lac, of sanitary facilities ma,e people suffer from 'ater-(orne and air(orne
diseases)
3 num(er of man-made chemicals are ,no'n to have harmful effects on various
components of the ecosystem (esides (eing to.ic for human life) "hemicals used as
pesticides and insecticides in agriculture are ,no'n to have harmful side effects 'hen
applied indiscriminately) Some of thee 'hen ingested (y human (egins are suspected to
have cancer-producing effects) 3ccording to BIOEs International 3gency for #esearch
in "ancer* :there is good circumstantial evidence that >@-?@ p)c) of all cancers are
dependent* directly or indirectly* on environmental factors* and at least >? oRo),) of these
factors are chemicals in nature;)

Industrial effluents are not easily (iodegrada(le and are often (eyond the natural
assimilation capacity of rivers* 'ith the result that 'ater (odies remain polluted* affecting
the health of people) 3ccording to a survey underta,en (y the "entral ollution "ontrol
1@=
Board* in $01 "lass II cities spread over 1= States* a(out ?@ per cent of the 'ater
supplied is polluted)
+he fragile ecosystems of the country have (een distur(ed in various 'ays) "oral reefs
have (een adversely affected (y discriminate e.ploitation* mangroves have (een under
(iotic pressure due to fishing and pollution of 'ater caused (y oil spillage from ships and
coastal refiners and discharge of domestic se'age and industrial effluents) +he countryEs
uni-ue 'etlands* covering an area of 1)07 million hectares 4'hich are rich in acetic and
(ird life and provide food and shelter as 'ell as (reeding and spa'ning ground for
marine and fresh 'ater fish5 have (een confronted 'ith pro(lems of 'eed infestation*
salutation* chemical and organic pollution* conversion to industrial sites* ur(aniGation and
ha(itation) Out of >7 'etlands of international importance in the country* 07 percent are
su(<ect to moderate or high threats) Mountain ecosystems have also (een 'itnessing
serious pressures) +he "hic, movement launched (y Sunderlala Bahuguna for
preservation of Iimalayan ecology is 'ell ,no'n)
&ou 'ould (e glad to ,no' that a rich (iological diversity e.ists in India 'ith the 'idest
variety of (iomass and over =7*@@@ species of fauna and 07*@@@ species of flora) Of these
according to the Union Government =? speccies of mammals* 00 of (irds* 17 of reptiles
and three of amphi(ians plus 17@@ plant species face the threat of e.tinction)
Several pressure or activist groups have emerged to champion the cause of the
preservation and protection of the ecology and the environment in the country) Or
1@>
e.ample* the Narmada Bachao 3ndolan; launched (y Media at,ar and the cause of
animal 'elfare and environment espoused (y non-Government organisations li,e eople
for 3nimals 4initiated (y Mane,a Gandhi5* and A3#E are 'ell ,no'n)
Environmental Mana)ement
Environmental deterioration is a multi-dimensional pro(lem of 'hich resource depletion
is only a part) Business leader in general have a significant and practical role to play in
managing the environment) No organisation can no' sensi(ly ignore its Environmental
o(ligations)
Environmental Management encompasses environmental planning* protection*
monitoring* assessment* research* education* conservation and sustaina(le use of
resources) It can (e accepted as ma<or guiding factor for the sustaina(le development of
the nation) It is realised that 'hile environment pro(lems attri(uta(le to poverty 4and
underdevelopment5 could (e tac,led (y more rapid development* the unintended side-
effects of the process of development itself have given rise to many of the environmental
pro(lems confronting the nation today) +hus* to achieve the long-term goal of ma,ing
development sustaina(le* environmental and ecological imperatives need to (e (uilt into
the total planning process right from the (eginning) +he logic is simple) +he degree to
'hich a nation can proper depends on its productivity) I)e))* the efficiency 'ith 'hich it
is a(le to utiliGe the resources of the environment to satisfying human needs and rising
aspirations) +his re-uires that* 'hile providing for current needs* the resource (ase
1@?
should (e managed in such a manner that it achieves sustaina(le development in harmony
'ith the environment)
"overnment $olic2 and Mea0*re0
&ou 'ould appreciate that no civiliGed government could afford to neglect the pro(lems
posed (y environmental degradation) Bhile legislation 'ere passed in the seventies and
eighties aimed at conservation of natural resources and prevention and control of
environmental pollution* more concerted efforts have since (een made (y the
Government to'ards these ends) +he creation of a separate 9epartment of Environment
in 1?>@ and an integrated Ministry of Environment and /orests in 1?>7 at the "entre
indicates the GovernmentEs recognition of the seriousness of environmental pro(lems)
Bhile it is not possi(le to list all the measures ta,en (y the Government* 'e shall focus
our attention on some ma<or steps ta,en in this respect)
3 policy statement 'as announced (y the Union Ministry of Environment and /orests in
Dune 1??$) It outland IndiaEs National "onservation Strategy on Environment and
9evelopment) It emphasised sustaina(le development as the ,ey element in the
MinistryEs action plan) +he tas, set (efore the Ministry 'as :to ensure sustaina(le and
e-uita(le use of resources for meeting the (asic needs of the present and future
generations 'ithout casting damage to the environment;)
11@
Based on the a(ove policy statement* an integrated strategy has (een adopted (y the
Government for (etter protection of the environment) +he strategy is aimed at
strengthening the e.isting programmes of pollution control* ensuring (etter disposal of
solid 'astes and haGardous su(stances* and conserving forests* (io-diversity and the rich
ecosystem) 3ll these measures form part of the National "onservation Strategy and the
National /orest olicy 'hich 'as formulated in 9ecem(er* 1?>> 'ith the primary
o(<ective of ensuring environmental sta(ility and maintenance of the ecological (alance)
+he Government has set up the National /orestation and Eco-9evelopment Board
4N3EB5 to underta,e a programme of natural regeneration in degraded forest land sin the
country)
+o (ring a(out a -ualitative change into eh forestation programme a National Bastelands
9evelopment Board 'as set up (y the Government in Dune 1?>7 'ith the principal aim of
reclaiming 'astelands through a massive programme of afforest ration 'ith peopleEs
participation)
+he National olicy for 3(atement of ollution stresses on utilising economic and policy
instruments for the introduction of pollution control measures) Seventeen
environmentally critical and highly polluting industries have (een identified (y the
Ministry for special monitoring and enforcement efforts) +hese 1= industries include
sugar* fertiliGer* cement* fermentation and distilleries* aluminum* petrol-chemical*
111
thermal po'er* caustic soda* oil refineries* tanneries* copper smelter* Ginc smelters* iron
and steel* pulp and paper* dye and dye intermediates* pesticides and pharmaceuticals)
One of the ma<or sources of air pollution is vehicular e.haust fumes) +his pro(lems have
assumed serious proportions in the metropolitan cities) +he Government has laid do'n
misinforms for automo(iles under the Motor Kehicles #ules* 1?>?) +o'ards reducing the
pollution effect of automo(ile e.haust* the Government has also notified that all petrol-
engine cars sold in the four metropolitan cities should (e fitted 'ith catalytic converters !
an efficient device to clean up e.haust emission)
+he main strategy for conservation of (iodiversity in the country is protein of via(le
ha(itats for 'ild life) +he Government maintains =7 National ar,s 0$1 Bildlife
Sanctuaries* $1 ro<ect +iger areas and Biosphere #eserves for converting of 'ildlife
species and preserving genetic diversity in representative ecosystems)
+ying up the environmental issues* the Government has dra'n up an Environmental
3ction rogramme 4E35 focusing on the follo'ing priority areas 1
i5 "onservation of (iodiversity including forests* marine life and mountain
ecosystems)
ii5 "onservation of soil and moisture and ensuring that 'ater sources do not get
polluted)
iii5 "ontrol of industrial pollution and 'astes
11$
iv5 3ccess to clan technologies
v5 +ac,ling ur(an environmental issues)
vi5 Strengthening environmental education* training* a'areness and resource
management)
vii5 3lternative energy plan)
+he underlying thrust of the E3 is to strengthen the environmental impact
assessment of the a(ove areas through an organised system of natural resource
accounting environmental statistics)
In the ne.t part of this unit* 'e 'ill familiarise you 'ith some details of the
Environment rotection 3ct)
Activit2 ;
a5 Enumerate the main causes of environmental degradation) Bhom 'ould you
hold responsi(le for such degradation F Jist some causes (elo' 1
S) No) "ause of Environmental eople #esponsi(le
9egradation
415 4$5 4%5
HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH))
11%
(5 3rrange intervie's 'ith top managers of at least three large organisations*
prefera(ly engaged in the chemicals* pharmaceuticals or cement industry)
Bhat measures have they ta,en or purpose to present pollution F Offer your
comments)
!17 SOCIAL RES$ONSIBILITIES O- BSINESS
110
&ou have o(served ho' (usiness and society interact 'ith each other) Business e.its in
the conte.t of a society) IN a 4traditional5 pre-industrial society* (usiness transactions are
negligi(le or nil2 in that society production is mainly done for self-consumption and the
need for e.change is minimum) In a modern industrial society* (usiness gro's (y leaps
and (ounds2 production is meant for the mar,et2 the su(sistence system is replaced (y the
commercialiGed system and* therefore* e.change transaction multiply) In a post-
industrial 4#ecent5 society (usiness gets specialised and professionalised) Bith gro'ing
Monet satin* (oth primary and secondary* the comple.ity of (usiness gro's manifold)
Business gro's in variety) Business (ecomes more and more services-oriented from
(eing production-oriented) +hus as transition ta,es place in a society through various
stages* (usiness changes in arms of siGe* structure* strategy and system) On the other
hand* as (usiness changes in terms of its form and organisation* society also undergoes
changes) Soil values social intuitions* social order social contract* social conflict* social
pro(lems ! everything changes along 'ith a change in the (usiness culture) In other
'ords* (usiness determines society as much as society determines (usiness) +herefore*
(usiness must (e socially responsi(le)
Over t'o decades age* eter duc,er stated in the conte.t of 3merican (usiness* :If there
is one development during the last ten years that stands out a(ove all others* it is the
eagerness 'ith 'hich (usiness has em(raced social responsi(ilities;) +his is rule of
Indian or any other national (usiness today) It is no longer fashiona(le for (usiness
corporations the rod over to ta,e a gleeful pride in ma,ing money) Bhat is more
117
fashiona(le is to sho' that it is a great innovator* more specially a great pu(lic (enefactor
and that it e.ists to serve the pu(lic)
/rom the standpoint of (usiness* 'e have already identified each element of this pu(lic)
+hey are 1 o'nes6shareholder* managers* 'or,ers* suppliers* distri(utors* consumers*
Government officials and similar social groups) 3ll these have a sta,e in (usiness and
can (e ,no'n as sta,eholders)
118
Each and every social group has a very definite e.pectation from (usiness) +he
shareholders* promoters* and o'ners e.pect a fair return on their investment2 unless
lucrative dividends are paid* they do not 'ant to supply venture capital for (usiness)
+he 'or,ers e.pect fair 'ages and (onus* other'ise they feel e.ploited 'hen they
produce output more in value than the input) +he salaried managers li,e'ise e.pect a
ruminative pac,et of pay and per,s* other'ise they do not find any incentive to 'or, had
and long for their (usiness concern) +he consumers e.pect a -uality product and service
at fair pries* other'ise they feel cheated) +he suppliers e.pect a prompt steeliest of their
(ills) +he distri(utors e.pect after sales service as 'ell as fair commission on sales*
other'ise they do not find incentives to promote sales) +he government e.pects (usiness
to pay ta.es and tu(e accounta(le for su(sidies) 3nd* importantly* there are others 'ho
are not directly concerned 'ith (usiness* yet they have a lot of e.pectations of some type*
e.pecting charita(le donations for promoting education and culture2 the ecologist 'ho
'ant (usiness to minimiGe* if not avoid totally* pollution and degradation of the physical
environment2 the social 'or,ers 'ho 'ant (usiness to adopt (ac,'ard villages and
underta,e all round development of housing* health* and sanitation) +here is no end to the
e.pectations of these various social groups) +he more you come up to their e.pectations*
the more they e.pect from you and your (usiness)
Business has to (alance these manifold e.pectations and optimiGe a general social
'elfare function su(<ect to the constraint of maintaining social harmony) +his is a
11=
difficult and stupendous tas, and it involves a measure of social efficiency of (usiness
operations) Normally* private (usiness enterprise do not (other a(out social efficiency*
they are guided (y the commercial profita(ility criterion) /orm them* social
responsi(ility is more a faSade and a decoration2 it is mostly a means of ma.imiGing the
long-run return on investment) But* for pu(lic enterprises* social desira(ility is an
important consideration) +herefore* they have to attempt a detailed social cost-(enefit
analysis of their pro<ects and operations) Such enterprises 'hcih produce pu(lic goods
and services have to ma.imise net social return) Io'ever* social responsi(ility does not
mean that they should continue to run losses) 3fter all* they are not meant for supplying
free or Su(sidised social service) Social o(ligations should not eclipse their economic
via(ility* 'hich in itself is a social purpose) +hus* even pu(ic enterprises have social as
'ell as commercial o(ligations) In fact* in India 'e 'ant our pu(lic enterprises
degenerate surplus for development finance) +he profit of a pu(ic enterprise is
unimportant source of financing planned economic development) 3 losing pu(ic
enterprise is ultimately a (urden on society* and therefore if the unit is sic,* even if it is a
pu(lic unit* it is (etter to li-uidate it) Such li-uidation certainly 'ould cause
unemployment and hardship in the short run (ut in the long run it 'ill (e good for
society) Social achievements li,e employment creation and import su(stitution should
never (e made an ali(i for an unsatisfactory economic and financial performance)
u(lic enterprises in a democracy li,e ours are accounta(le 4a5 to arliament* 4(5 through
audit and 4c5 through annual reports) arliamentary control over pu(lic enterprises is a
'ell esta(lished from of social control) Similarly* as an instrument of accounta(ility*
11>
pu(lic enterprises are su(<ect to financial audit* efficiency audit and prosperity audit)
/inally* a 'ell-drafted annual report is an important medium of communication (et'een
the enterprises and the pu(lic)
u(lic accounta(ility of private enterprises is also statutorily re-uired) Kery often* the
3nnual General Meeting 43GM5 is an occasion 'here annual reports6(alance-sheets can
(e seriously e.amined and the shareholders can ta,e their pu(lic limited company to tas,)
But this re-uires the shareholdersE movement to (e organised and strong) In fact* strong
trade unionism* a strong conservationist movement* and a strong consumer movement are
additional re-uirements to ena(le any (usiness ! private or pu(lic* national or
multinational* small or (ig ! to discharge its social o(ligations and commitment)
/inally you must note that as society has e.pectations from (usiness* so does (usiness
have from society) Society must also act responsi(ility) Social groups* through violent
and irresponsi(le methods* may hold the (usiness to ransom and ruin it) Ultimately* that
'ill (e a social loss) Business can discharge its responsi(ility* provided it en<oys some
authority and support facilities) Social movements should support (usiness (y indicating
right directions in the national interest) In 3ppendi. I 'e present the Indian dilemma
regarding the social responsi(ility of (usiness)
Activit2 A
11?
3n I9BI sponsored study* the first of its ,ind in Indian Industry* has figured out :IndiaEs
most e.cellent companies;)
rivate Sector T 3sian aints Jtd
T Ba<a< 3uto Jtd)
T Iindustan Jever Jtd)
T I+" Jtd
T Jarsen O +ou(ro Jtd
T #eliance Industries Jtd
u(lic Sector T BIEJ
T IM+ Jtd
"ooperative Sector T Gu<arat "ooperative Mil, Mar,eting
/ederation Jtd) 4Maul5
+his study is reported in Business Borld* Kol) 7* Issue $@* 9ecem(er $%* 1?>7 ! Danuary
7* 1?>8) Jocate this reference and find out the criteria of :e.cellence;)
Activit2 1&
ic,up the "hairmanEs speech 4normally it is pu(lished in the Economic +imes or the
/inancial E.press and in some other ne'spapers5 for any three companies listed a(ove
1$@
for the latest year) #ead them through) No'* attempt to 'rite t'o lucid paragraphs* one
each on 1
1) Socio-cultural Environment in India
$) Economic Environment in India
#eminder* different speeches may highlight different factors) +ry to 'or, out the
common factors) If you underta,e this activity* you 'ill realise ho' the same
environment may(e vie'ed differently (y different)
!19 SMMARB
+he social environment includes a host of factors li,e social values* cultures* (eliefs*
traditions* social institutions class structure* social group pressures* or social dynamics*
etc) +he nature of the social o(<ectives and priorities* along 'ith the et of constraints*
give from and conte.t to several social movements)
+he critical elements of the socio-cultural environment are 1Social institutions and
systems* social values and attitudes* education and culture* social groups and movements*
the socio-economic order* social pro(lems and prospects* etc) Ever since the country
1$1
(ecame independent* India has (een 'itnessing changes on several fronts of the socio-
cultural environment)
+he nation has 'itnessed several social movements) +he trade union movements) +he
trade union movement has emerged as a result of the process of industrialiGation) +he
movement aims to protect the interest of the 'or,ing class (y forming organised unions)
3 consumer movement* to protect the consumer from the e.ploitation of the (usiness
community in India has emerged 'hich in a large measure is reflected in the "onsumer
rotection 3ct) Several ne' trends can (e discerned in the Indian management
movement) In the current competitive scenario* there is more emphasis on efficiency*
productivity* -uality and participation in management) Bith the investor (ase (ecoming
(road* the shareholders have (ecome conscious of their rights) +his has resulted in the
Government ta,ing several measures through legislation to protect the interests of the
investing pu(lic)
Over the last t'o decades in particular* an environmental movement has emerged on the
Indian scene) +he movement aims to protect the environment for the present and future
generations) Inspire of remar,a(le advances in science and technology* unfortunately
thee has (een tremendous degradation of the environment caused to a large e.tent (y
e.cessive industrialist ion) Business firm cannot shirt the responsi(ility of minimiGing
the polluting affect and promoting the protection of the environment) +he Government
has ta,en several policy measures to preserver the ecology and environment)
1$$
It is not merely the shareholders (ut several other groups 'ho are interested in the
running of a (usiness enterprise) +he management of the enterprise has therefore to stri,e
a (alance (et'een the interests of all these groups or sta,eholders) +he (usiness has
therefore to (e run in a socially responsi(le manner) +his is necessary if the (usiness has
to survive and gro' in the long run)
!1: +EB 8ORDS
Social Environment 1 3 su(set of the environment consisting of and affected (y social
factors such as social institutions and systems* social structures and formations* social
values and attitudes* educational and cultural influences* etc)
Ethnocentric 1 +he practice of recruiting personnel or important position from among the
nationals of the country of the parent company)
olycentric 1 +he practice of recruiting personnel for important positions from among the
nationals of the country of operation)
Geocentric 1 +he practice of recruiting the (est talent for important positions from any
country 4country of origin* host country or any third country5* regardless of nationality)
Social #esponsi(ility 1 consideration of the impact of the firmEs action on society)
!1; -RT<ER READIN"
1$%
Nad,arni* M) K)* 3) S) Seetharamu and 3(dul 3GiG* 1??1* India ! +he Emerging
"hallenges* Sage India)
Arishna* Sumi* 1??8* Environmental olitics* Sage India)
!1A SEL--ASSESSMENT CESTIONS
1) Bhat do you understand (y the socio-cultural environment of (usiness and
ho' is it important for (usiness F
$) Bhat are the critical elements of the social environment of (usiness F E.plain
each element 'ith e.amples)
%) E.plain the lin, (et'een social developments* the Industrialisation process
and the management culture) Give e.amples)
0) Brite e.haustive notes on the follo'ing 'ith your critical comments1
a5 +he +rade Union Movement in India
(5 +he "onsumer Movement
c5 +he Management Movement
d5 +he ShareholdersE Movement
e5 +he Environmental Movement
7) Bhat do you mean (y the social responsi(ility of (usiness F Bhat could (e
some arguments for and against (usiness assuming social responsi(ility F
1$0
8) :Business must (e run in a socially responsi(le manner;) "omment on the
statement in the conte.t of Indian (usiness)
1$7
A$$ENDI= 1 3 SOCIAL RES$ONSIBILITIES O- BSINESS D T<E
INDIAN DILEMMA
4Iere is an e.tract from the 'ritings of the late rof) N) N) "hatteree* Management of
ersonnel in Indian Enterprise* 4"h) 1* t) III5* 3llied Boo, 3gency 1??7*"alcutta)
+he piece 'as 'ritten a(out t'o decades ago* (ut is still relevant)5
:3+ this every moment* the environmentalistsE lo((y in the US3 is strongly opposing the
allo'ing of the supersonic /ranco-British "oncord to fly in to 3merican airports) +he
environmentalists charge that the aircraft is too noisy* (urns too much fuel and is a threat
to the oGone layer2 the "oncordEs high altitude emission of nitrogen gas could
significantly affect the oGone screen that protects the earth from an overdose of the sunEs
ultra-violet rays and 'ould pose a cancer ris,) In the meantime the #ussian +U-100*
curiously enough called "oncorde* is already operating on domestic flights;)
:+he #achel "arsons and #alph Naders of Nost-IndustrailEsocietes have a large audience
every'here) Of late -uite a fe' distinguished ecologists and futurologists have visited
India and de(ated 'ith their opposite num(ers here the developing symptoms of the final
collapse of human civiliGation) One has even heard from eminent ecologists a 'istful
reference to Gandhian values of restraint of consumption and to the co trusteeship pattern
in industrial management) +he pursuit of N-uality of lie2 rather than that of material
progress is also mush tal,ed a(out) rof) 9ennis Meado's has found a solution in 'hat
he calls NGero-gro'thE) Be have (een 'arned to avoid the ,ind of unplanned industrial
1$8
gro'th and ur(an planning such as have polluted their* 'ater and vegetation in large
areas of Dapan* the U)S)* the Mediterranean and Baltic sea(oards* etc) (y the discharge of
industrial effluents and to.ic emissions) Be have (een told that the Ntunnel visionE of the
modern industrialist for the ma.imiGation of profit is a menace to the human reface) But
this 'arning ahs (een cantered (y citing the pollution of the Kolga river system and the
Baltic sea(oard and of the "aspian sea* large-scale deforestation creating dust (o'l
conditions in several regions* etc)* (y the industrial activities of the socialist society of the
USS#)
:+he glo(al conte.t of the distur(ance of the ecological (alance and the predictions of the
Ndom-sayersE cannot* ho'ever* produce much of an impact on the planners of developing
economies) It 'ill (e e.tremely naUve also to assume that all 'ill (e 'ell if the affluent
societies consumed ells and diverted their surpluses to supporting the developing
economics in their struggle for gro'th) In other 'ords* the social responsi(ility of
(usiness in these societies is seen as a responsi(ility to the 'orld community) +he highly
mechaniGed U)S) agriculture industry perhaps does play a role here* (ut not out of any
altruistic motive) +o argue that India need not intensity her programme of
industrialiGation in e.pectation of sharing su(stantially in the 3merican GN 'ould at
(est provide an ali(i for not (eing a(le to mo(iliGe our national resources for gro'th
activities;)
:+his is not to say that industrial pollution has not yet (ecome much of a pro(lem 'ith
us) Aanpur* Bom(ay and "alcutta contri(ution have already (een studied from this angle
1$=
and provide startling data) Jet us have a lot at our river systems) +he effluents from
chemicals-chemicals* pulp-paper* te.tile* distilleries* sugar factories* coal 'ateriest*
hydrogenated vegeta(le oil plants* tanneries* 99+ factories* tic)* have dangerously
polluted long stretches of the Gaga and Bhagirthi* the Sone at 9almiangar* the 9eh at
Si'an 4Bihar5* the Aali at Meerut* the Gomti at luc, no'* the &amuna at 9elhi* the
9amodar I the coal (elt of Bihar* the Arishna at Bhadravati 4Aarnata,a5* the Godavari at
#a<ahmundry* the Bay of Bengal and so on) Ieavy mortality of fish has (een reported
from many of these areas) 3 fe' years ago* a num(er of people died of drin,ing the
polluted 'ater of the Ganga (elo' the Bara unit #efinery) 3s for air pollution* a surgeon
attached to the "oronerEs "ourt of Bom(ay made this statement to a team of researchers
recently 1
I have performed till no' a(out 0@@@ post-mortems) +he lunch of every adult indicates
e.istence of pollutants li,e car(on though of course the car(on contents are not fatal)
+he (ody has got used to it) But it ma,es people prone to cough* (ronchitis and diseases
of the respiratory tract) +he only people in 'hose lungs car(on is not found are infants
(elo' the age of %) 4Sunday Standard* 3ugust %1* 1?=75)
+he study made (y the National Environmental Engineer #esearch Institute 4NEE#I5 in
1?=0 a(out pollution (y auto-e.haust fumes in Bom(ay is also revealing);
1$>
V+he 9elhi'alahsE gro'ing disgust at the long plumes of smote emitted (y a thermal
po'er station and hanging over the large par,s planned round the national monuments of
#ight* Ki<ay hat and sativa* has et to result in the installation of any filtration device);
:No' a ma<or Indian dilemma is that industries 'hich have (igger pollution potential are
the very industries 'e need most 4e)g)* fertiliGer plant of the Ngreen revolutionE* thermal
plants for electricity* 99+ factors chemicals factors for pest control etc)5) Be cannot <ust
do 'ithout them) But the Indian predicament is that the largest pollution potential
industries and ache to (e thereafter in the pu(lic sector and not in the profit-motivated
free enterprise sector) 3ll metropolitan transport system 'hich pollute the air in
congested areas are no' in the pu(lic sector and most of them have to (e su(sidiGed (y
the E.che-uer;)
:Io'ever* there is a ray of hope as ne' enterprises can (e planned along 'ith ur(an
development and (ac,ard area development plans) 3nti-pollution technology is also
availa(le and pu(lic sector enterprise can afford to invest in it;)
:+he country is also conscious of the nature of the pro(lem and some significant steps
have already (een ta,en) +he reconstituted National "ommittee on Environmental
lanning and "oordination* for 'hich the 9epartment of Science and +echnology
provides the secretariat* has sho'n some dynamism of late) +he "entral u(lic Iealth
Engineering #esearch Institute 4"IIE#I5 at Nagpur has developed a measure of
e.pertise in effluent disposal and control) +he "entral Bater 4revention and "ontrol of
1$?
ollution5 3ct of 1?=0 has no' one off the ground) +he Ba(y Smo,e Nuisances 3ct*
recently e.tended to 9elhi* if implemented 'ith grater Geal could produce results* 3
N"lear 3ir 3ctE is also in the offing* modeled no dou(t on the UA 41?7$5 3N9 us 41?8%5
acts) Idea* if 'e act in time* may not need such draconian measures as thus /ederal
Bater ollution 43mendment5 3ct* 1?=%* DapanEs +hree -olicyE 4olluters ay for
ollution5) It is a hopeful sign that at last yearEs Science "ongress 4Danuary 1* ?=75* a
num(er of young scientists red valua(le papers (ased on research data on the harmful
effects on insecticides and pesticides and of industrial pollution on fresh 'ater animally);
:But the story of the Indian dilemma does not end here) +here is a much (igger dilemma
! ho t'o harmonies the age long ha(its and cultures forfeit-earning enterprises 'ith the
re-uirements of social responsi(ility and the needs of rapid gro'th) +ill recently* the
t'o most profita(le and least arduous private sector enterprises in India 'ere money
lending and food adulteration) ure mil, and pure ghee are no' mere concepts -
particularly in ur(an areas) Short 'eighment* under invoicing* smuggling* (lac,-
mar,eteering* rac, renting and varios auother (usiness malpractices prevail earning-
earning (usiness activities ! 'hether small* medium or large scale ) E.ploitation of
contract la(our and (onded la(our is still not under control) 3 large scale private sector
(usiness enterprise may solve its conscience (y NadoptingE a village or ta,ing to
landscape gardening around a ne' plant* or (uilding a temple or a phrasal (ut this
impresses none) +he roots of these maladies go deep do'n into the Indian soil) Modern
(usiness is supposed to (e multi-allegiant ! its allegiance is to the shareholders* to the
employees* to ethical community and to the State) +he ela(orate N9eclaration note Social
1%@
responsi(ilities of BusinessE adopted at the International Seminar held at 9elhi in 1?87*
under the "hairmanship of the late 3ll 3(rader "astro* the then rime Minister of India*
only discussed the Indian myth of (usinessmanEs dharma) India /irst +rade ractices for
Indian (usinessmen) But that 'as in the si.ties) Io' many of our (usinessmen are even
a'are of this codeF Be have al'ays (een good at formulating e.cellent code of conduct
! only the implementation has (een e.traordinary fee(le) One hopes and prays that at
last 'e are (eginning to ma,e an earnest effort to implement some of them)
&ou may note ho' relevant it is even today)
1%1
$ART D II $OLITICO D LE"AL ENVIRONMENT
O./ective0
3fter reading this unit* you should (e a(le to 1
define the politico-legal environment of (usiness2
descri(e the critical elements of this environment2
e.amine the interaction (et'een political environment and (usiness management2
overvie' Indian Government philosophy 'ith regard to our industry or (usiness2 and
overvie' various socio-economic legislations in India 'hich re reliant for (usiness
management)
Str*ct*re
$)1@ Introduction
$)11 Some "ritical Elements
$)1$ Government Machinery for Indian Industrial Economy
$)1% Understanding the Jegal Environment of Business
$)10 Summary
$)17 Aey Bords
$)18 /urther #eadings
$)1= Self-assessment Cuestions
1%$
3ppendi. $ 1 SEBI Guidelines for "apital Issue
3ppendi. % 1 O+"EI Guidelines for listing of "ompany Securities
3ppendi. 0 1 SEBI Guidelines for Issue of Shares through O+"EI
3nne.ure 1
!11& INTRODCTION
Business is an economic activity) But (usiness mangers* to (e effective* must also
consider the non-economic environment of (usiness) Bith this assumption* 'e ache
considered the socio-cultural environment of (usiness in the preceding unit) No' 'e
'ould li,e you to spend some time on the politico-legal environment of (usiness)
Broadly spea,ing* 'e are still 'ithin the compass of sociology) +he Government is a
political institution* (ut it has a social purpose* it enacts and e.ecutes social policies* it
e.ists 'ith social consent* it provides the 'ays means of ma.i misting social (enefits and
minimiGing social costs) In other 'ords* the Government itself has a social value and
culture) &ou must consider the structure and style of Government and e.amine its impact
on (usiness) +he present unit* therefore* aims to help you !
9efine politico-legal environment*
Understand the parameters of this environment* and
9escri(e the cardinal features of IndiaEs politico-legal environment)
1%%
In the modern 'orld* (usiness of any type and any siGe is often affected (y Government
polices* programmes and legislations) +he Government has its o'n form* structure* style
and philosophy) 9epending on the nature of the Government at 'or, (usiness has to
organise its activity* the (usinessmen have to define their respective (usiness strategy and
(usiness tactics) In other 'ords* (usiness policy decisions are designed in the realm of
the GovernmentEs overall policy and the system environment)
Starting 'ith a particular ideology or philosophy* the government of every country
formulates and e.ecutes a set of policies and programmes) Cuite a fe' of thee policies
are e.ecuted through legislations) +hese legislations and enactments* rules and
regulations* systems and procedures* policies and plans* statements and announcements*
directives and guidelines (y the Government* constitute the politico-legal environment)
I/ you 'ant to (ecome a successful manger* you must ta,e stoc, of the relevant politico-
legal environment of your (usiness* and then capitalise on the opportunity availa(le in
that environment)
!111 SOME CRITICAL ELEMENTS
+he politico-legal environment of (usiness contains a num(er of critical elements 1
+he form of Government
+he ideology of the ruling party
+he strength of the opposition
1%0
+he role and responsi(ility of the (ureaucracy
olitical sta(ility
+he velocity of Government policies* plans and programmes
Solo-economic legislations
olitico-legal institutions
Gone are the days of JaisseG fare* Business is no longer left alone) Government
intervention to some e.tent in (usiness activity all over the 'orld is a rule rather than an
e.ception) +herefore* the form and structure of the Government is a very important and
decisive factor for the (usiness sector) 3 couple of e.amples may (e cited to illustrate
this point) Under democracy* 'e have a :government of the people* (y the people and
for the people;) eopleEs participation is so important that even at the enterprise level* 'e
see, 'or,ersE participation in management* i)e)* industrial democracy) Similarly* under a
federal form of government* 'e tend to confine the authority of the "entral Government
'ith the functional autonomy of the State Governments and* therefore* 'e allo' (oth
"entral as 'ell as State level pu(lic enterprises) In the same 'ay* 'hen 'e accept the
principle of democratic decentralisation* 'e authorise even the local Government to
collect some (usiness ta.es and spend money on local activities) +hus* the system of
government and the structure of administration affects (usiness) In its turn* in order to
secure ma.imum favour from the e.isting Government* (usinessmen also create their
o'n lo((y and it is the strength of this lo((y 'hich partly decides 'hether the
Government adopts pro (usiness or anti (usiness measures)
1%7
In a democratic set up* the ideology of the ruling party influences o'nership*
management structure and siGe of (usiness) 3 ruling party* 'ith a Nrightist inclination
may formulate li(eral pro-(usiness policies* 'hereas a ruling party 'ith a leftist (ias 'ill
go in form measures li,e nationalisaiton and e.cessive centralisation) +he philosophy of
the ruling party thus may help or hurt the core of (usiness activity) Earlier* under the
leader of Mr) #a<iv Gandhi* and then 'ith the significant economic reforms initiated
under the regime of Mr) ) K) Narasimham #ao and 9r) Manmohan Singh 4'hich 'ere
continued (y the 1% party coliton Government led (y Mr I) 9) 9eve Go'da and no' (y
Mr) I)A) Gu<ral5 thee seems to (e more stress on :efficiency; rather than :e-uity;
considerations) +his in turn has affected 'ith 'or, ethos in the day to day operations of
pu(lic enterprises)
Under democracy the Opposition has a very significant role to play) Under the t'o-party
system* the party 'hich gets an a(solute ma<ority forms the Government) Under the
multi-party system* the party 'hich gets a relative ma<ority forms the Government 'ith
the colla(oration or support of some other political parties) Others 'hich do not
command ma<ority form the Opposition) +he strength of the Opposition very often
depends on 'hether or not the Opposition parties are united or divided) +hey may (e
ideological differences (et'een parties (ut the Opposition must act as a 'hole* and the
parties must rise a(ove their ideological differences and should <udge every move of the
ruling party critically) If the Opposition is fair* firm and consistent* it can ma,e
constructive criticism of Government polices affecting (usiness) 3s a result* the
Government cannot afford to act irresponsi(ly 'ith regard to the (usiness sector in the
1%8
economy) Sometimes* (usiness donations to political parties* in this conte.t* (ecome a
de(ata(le issue) +he -uestion is 1 Bill such political donations strengthen or 'ea,en the
de(ata(le issue) +he -uestion is 1 Bill such political donations strengthen or 'ea,en the
Opposition F In a democracy* an effective Opposition is as important as dedicated
Government to protect* promote and regulate (usiness in the (est interest of society)
+he Government 'or,s through the (ureaucracy) In a democratic set up* different
parties may (e voted in or out of the Government as and 'hen elections are held) Even if
the same party rules* thee is no guarantee that the same person 'ill hold charge of a
Ministry) Ministers change from time to time* (ut Government administration must run
'ithout any (rea,) +his is 'here the (ureaucracy comes in) +he permanent machinery of
the Government* it is meant to ,eep up continuity in Government operating in relation to
(oth (usiness and non-(usiness sectors) In a system 'here the Government controls and
regulations (usiness e.tensively* the (ureaucracy is very po'erful in enforcing
Government rules and regulations* systems and procedures* licenses and restrictions)
Businessmen* therefore* tend to o(lige the (ureaucracy in a num(er of 'ays)
3 common e.ample is of successful (ureaucrats 'ho after retirement are appointed
advisers to private (usiness concerns) Sometimes* thee (ureaucrats* after retirement* flit
consultancy firms from 'heel they render valua(le consultancy services tot heir clients*
(usiness as 'ell as Government) "onsultancy service itself has (ecome an important
form of (usiness today) It must (e repeated that the (ureaucracy en<oys tremendous
po'er in the conte.t of a system environemtn (ased on a host of controls and regulations)
1%=
No(ody 'ants to give up this po'er) So 'hen the Government purpose li(eralisation*
rela.ation of rule sand regulations* streamlining of systems and procedures* control
(ecomes redundant and meaningless) +he (ureaucracy suddenly finds that it is going to
(e denied its age old role and responsi(ility of enforcing controls* as has happened 'ith
economic reforms) o'erlessness is a terri(le situation for the (ureaucracy) SO it
opposed the GovernmentEs tendency to'ards li(eralisation) +he (ureaucracy en<oys
imposition and e.ecution of controls and regulations and the su(<ect of controls and
regulations had profound implications for (usiness) /or e.ample* professional
management of -uite a fe' of our pu(lic enterprises has (ecome a perpetual tussle
(et'een (ureaucrats and technocrats)
olitical sta(ility is another critical element 'hich affects (usiness operations) Business
gro's in a region 'hich is politically sta(le) 3 fe' decade ago* many industries and
(usinesses moved out of Best Bengal (ecause of the Nasality movement) Similarly a
fe' years ago 'hen un<a( 'as infested 'ith territories* (usiness came to a halt
Business ethics also depend on the political situation) 9uring the Emergency 41?=7-=85
the standard of our (usiness ethics and morality did improve to an e.tent) In the same
'ay* residentEs rile or GovernorEs rule in a state affects (usiness ventures) 3lso* our
may note that 'henever the nation (ecomes politically unsta(le* the flo' of foreign
capital and entropies is adversely affected* and this in turn tells on (usiness* (oth national
multinational) olitical sta(ility in a nation is read not only in terms of physical events
and happenings (ut also in terms of the sta(ility of the Government machinery and
policies in relating to (usiness) +he Government formulates and e.ecutes a num(er of
1%>
policies and programmes) If the Government fre-uently changes its industrial licensing
policy* ta. policy or trade policy and the li,e* then it unnerves the (usiness sector and
there(y adversely affects (usiness investment and related activities) If policies and
programmes are sta(le then (usiness can plan its activities* other'ise it faces a
tremendous amount of 'hat is called :non-mar,et; ris,s and uncertainties) Sta(le
polices (uild up (usiness confidence and help corporate planning) +his is one of the
reasons 'hy the Government of India has recently gone for a long-term fiscal policy
statement or a -uasi-long-term E.port-Import policy)
Io'ever* 'hen policies are formulated 'ith tremendous :speed* they come one after
another thought he :direction may not (e very clear) Sometimes* policies are formulated
'ith a clear :direction; (ut at a snailEs :speed;2 'e suffer on account of lac, of
:velocity; of such policies and this affects (usiness unfavora(ly) articularly in a country
'here there are so many distinct groups at 'or,* such as policy-thin,ers policy-planners*
policy-ma,ers* policy-e.ecuters* policy-ad<udicators* and son on* the (usiness sector
often vie's policies 'ith suspicion* as if all polices are meant to cur( and control
(usiness) Such (usiness psychology is not conducive to (usiness gro'th) olices once
formulated have tu(e implemented) /or effective implementation 'e need legislations or
enactmentEs (ut more than that 'e need political and (ureaucratic 'ill)
olicies are statutorily enforced through la's) Karious socio-economic legislations
su(<ect to 'hich (usiness operation constitute the legal environment) +oday there are so
many la's that at eerie turn a (usiness man meet la'2 modern (usinessmen need legal
1%?
advice constantly) Modern (usiness is more in the nature of a :legal contract; than a
:social contract;) Business la's are many in num(er and various in form) +he la's are
enacted to protect the (usiness interests of various groups in society) &ou may recall
from the preceding unit that la's are needed to protect consumers* 'or,ers* mangers*
o'ners* shareholders and society at large) Su(se-uently* you 'ill (e e.posed to details
of (usiness legislations such as M#+*/E#3* I9#3 and so on) It is through this set of
legislations that order is maintained in the industrial economy) Industrial order and
harmony is a condition for survival and e.pansion of (usiness) Ja's not only protect
(usiness* sometimes they also create (usiness) +a,e the e.ample of +a. la's) +he more
the num(er and the more the complications of ta. la's the more 'ill (e the (usiness of
ta. consultants) +hus economic legislations and (usiness environment interact 'ith each
other)
Jast (ut not the least* you must also count the legal-legal institutions as a part of the non-
economic environment of (usiness) +he functioning of the legislative* e.ecutive and
<udicial organs of the Government effects (usiness environment directly and indirectly)
3ll these organs run through organisations and institutions) /or e.ample* the <udiciary
runs through organisations and institutions) /or e.ample* the <udiciary runs through the
Supreme "ourt* the Iigh "ourts and the lo'er courts) Unless these courts function
efficiently* ad<udication of (usiness matters* 'ill (e at sta,e) Similarly* unless the police
department acts 'ith vigilance* economic offences 'ill increase)
10@
+he successful operation of (usiness depends on cooperation and coordinating among a
num(er of Government departments li,e 9G+9* 9GS O 9 BE* etc) <ust to name a fe')
Sometimes* (usiness suffers (ecause of inter-ministerial or inter-departmental conflict)
+o avoid this ,ind of conflict* very often coordinating cells are created) If these cells
'or,* (usiness prospers 'ithout constraints* other'ise* red-tapism* procedural delay*
e.cessive centralisation* lac, of dedication and a(sence of departmental coordination
frustrate (usiness activity)
Activit2 11
E.plain (riefly the impact of the politico-legal environment on (usiness organisations)
Illustrate your arguments 'ith reference to the organisation you are 'or,ing for) If you
are not 'or,ing at present* 'hose an organisation you 'ould li,e to 'or, for)
101
Activit2 1!
+a,e a political map of India) 9ivide the states into four Gones 1 North* South* East and
Best) Name the political party 'hich is ruling each state) 9o you o(serve any
contrasting Gonal difference 'ith respect to political ideology or philosophy F 9o you
o(serve any contrasting Gonal difference 'ith respect to pattern of Industrialisation and
(usiness culture F Bould you dra' any conclusion on the su(<ect of the relationship
(et'een policies and (usiness F
10$
Activit2 13
/igure out some (usinessmen 'ho are active mem(er of either the Union legislature or
state legislature) Bhat are their (usiness interests F "ritically e.amine the contri(ution
of the (usiness lo((y to the national policies of India)
10%
100
107
!11! "OVERNMENT MAC<INERB -OR INDIAN INDSTRIAL
ECONOMB
/orm the standpoint of having an ideal a(out the non-mar,et institutional environment
'ithin 'hich Indian industry and (usiness operates* 'e may refer here to a fe' selected
organisational set ups)
A T4e Mini0tr2 o5 Ind*0tr2
+he Ministry of Industry 'as constituted on 3ugust $0* 1?=8) It comprises t'o
9epartments 1
i5 9epartment of Industrial 9evelopment
ii5 9epartment of Ieavy Industry6u(lic Sector Underta,ings)
+he 9epartment of Industrial 9evelopment is the primary Government agency for the
formulation and implementation of GovernmentEs industrial policy including the
promotion and Industrialisation of the country in accordance 'ith the GovernmentEs
industrial policy* the national priorities and the o(<ectives the five year plans) +he
9epartment revie's from time to time the measures 'hich are needed for the promotion
of industrialiGation including (alanced regional development* promotion of small-scale)
Killage and rural industries as also for securing higher employment generation and
ma.imiGing production) One of the instruments employed for securing these o(<ectives is
108
industrial licensing 'hich stems room the Industries 49evelopment and #egulation 3ct*
1?71* and the rules made hereunder) +he 3ct and the rules are also administered (y this
9epartments) 3 num(er of promotional regulatory* technical and advisory functions are
also discharged (y this 9epartment)
3part from heave functions* this 9epartment is also administering certain industries as
allocated to it under the 3llocation of Business #ules of the Government of India)
+he principal functional division6des,s in the 9epartment is also administering certain
industries as allocated to it under the 3llocation of Business #ules of the Government of
India)
+he principal functional divisions6des,s in the 9epartment of Industrial 9evelopment
are1
Secretariat for Industrial 3pprovals
olicy 9es, for the /ormulation and Implementation of Industrial and Jicensing
olicies
Industries 9ivision
/inance 9ivision
3dministration and General 9ivision
Jet us descri(e each of them separately 1
10=
+he Secretariat for Industrial 3pprovals is functioning as an unified agency for
processing applications for 4a5 industrial licenses* 4(5 foreign colla(oration* and 4c5
import of capital goods) +his division is also an Entrepreneurial 3ssistance Unit for
assisting entrepreneurs and for redressal of pu(lic grievances)
+he olicy 9es, for /ormulation and Implementation of Industrial and Jicensing olicy
oversees the effect of the policy measures ta,en from time tot time and formulates the
changes that may (e called for in the licensing policy* procedures for industrial
approvals* protective measures needed for the small-scale sector* reduction of disparities
in regional development* promoting of investment in the desired channels* etc)
+he Industries 9ivisionism concerned 'ith promotion of industrial gro'th in the large*
medium and small scale sectors for industrial productivity and industrial management)
Besides* it deals 'ith certain industrials specifically allocated to the 9epartment)
+he /inance 9ivision is headed (y a /inancial 3dvisor of the status of additional
secretary and handles 'or, relating to (udget and accounts* financial advice* methods
and 'or, measurement studies* etc) +his division also conducts internal audit to ensure
(oth accuracy in accounts and efficiency in operation)
10>
+he 3dministration and General 9ivision deals 'ith personnel and esta(lishment
functions and allied matters such as "areer Management and +raining* Kigilance*
Security* Belfare* etc)
+he 9epartment of Ieavy Industry or 'hat is no' called the 9epartment of u(lic
Sector Underta,ings is e.clusively concerned 'ith (asic and capital goods industries)
One of the important activities of the 9epartment relates to coordination 'ith other
ministries and agencies responsi(le for the gro'th of the infrastructure or of producer
goods industries) 3n important piece of our GovernmentEs control mechanism is the
"G 4"apital Goods5 clearance effected through this department)
+here are other developmental and promotional organisations under the Ministry of
Industry) +he organisational set up and functions of some of these units are descri(e
(elo')
+he 9irectorate-General of +echnical 9evelopment 49G+95
+he 9irectorate-General of +echnical 9evelopment 49G+95 is the technical advisory
organisation in the industrial field to various ministers6departments of the Government)
It gives technical advice on matters relating to industrial technology and licensing*
foreign colla(oration* capital goods re-uirements* import and e.port policy* tariff
structure and other related matters in respect of most of the industries e.cepting iron and
steel* te.tiles* <ute* sugar and vansapati)
10?
+he organisation has t'o functional 'ings ! engineering and non-Engineering including
"hemicals) Each 'ing has t'o 9eputy 9irectors-Generals and a num(er of Industrial
3dvisers 'ho loo, after different industries disciplines)
#egional offices of the 9G+9 have (een esta(lished at "hennai and "alcutta) +hese
offices render technical assistance to entrepreneurs and advise the Doint "hief "ontroller
of Imports and E.ports* the 9epartment of "ustoms and other organisations regarding
import of capital goods up to the value of #s) $@ la,hs) N con<unction 'ith the state
directorates of industries* thee also provide information to the head-uarters on the
progress of various schemes and provide feed(ac, information on technology* -uality
upgrdation* standardiGation and development of ancillaries)
+he +echnology Information "entre in the 9G+9 collects data on technology* # O 9
and consultancy) Such data are utilised in processing proposals for foreign colla(oration*
entrepreneurial guidance* choice of technologies* etc)
+he +echnology 9evelopment 9avison of the 9G+9 acts as the secretariat fro the
+echnical Evaluation "ommittee for e.amining all proposals for foreign colla(oration
and technical consultancy services* etc) In order to ta,e an o(<ective vie' of foreign
colla(oration proposals from the angle of availa(ility of indigenous ,no'-ho'* and the
feasi(ility for horiGontal transferor indigenous technology)
17@
T4e O55ice o5 t4e Economic Advi0er
It is an attached office under the 9epartment of Industrial 9evelopment in the Ministry of
Industry) It assists in the formulation of Industrial and Import policies and renders
advice and assistance on allocation of foreign e.change for the import of ra' materials
and other maintenance inputs)
+he office of the economic 3dviser deals 'ith macro-aggregates such as industrial
production and trends in industrial gro'th and capacity utilisation) +he office prepares
monthly revie' of industrial production and e.amines and monitors trends in industrial
production and capacity utilisation)
#elevant issues concerning industrial finance and resource availa(ility and mo(iliGation
'ith reference to plan targets fro the industrial sector are death 'ith (y this office)
Matters pertaining to credit policy* credit planning and availa(ility 'ith reference to the
industrial sector and specific industries are e.amined in this office) /iscal proposals in
general and duty levies in particular are e.amined ,eeping in vie' the need for
stimulating investment and industrial production in the conte.t of overall economic
development)
+his office complies and pu(lishes the official Bholesale rice Inde. in India and also
revie's trends in 'holesale prices periodically) It (rings out 'ee,ly and monthly indices
171
of 'holesale prices* a -uarterly Bulletin of Industrial Statistics and a monthly Economic
#evie')
3dditionally this office collects compiles and analyses information on employment of
Indians and non-Indians in companies 'ith foreign ma<ority shareholding and of non-
Indians in pu(lic and private sector companies in India) /inally* the office prepares from
time to time analytical notes on different aspects pertaining to the Industrial sector)
B*rea* o5 Ind*0trial Co0t0 and $rice0 %BIC$(
In pursuance of a recommendation made (y the 3dministrative #eforms "ommission* the
Government of India esta(lished in 1?=@ the Bureau of Industrial "osts and rices
4BI"5) It is an attached office under the 9epartment of Industrial 9evelopment) It
advices the Government on a continuing (asis on various aspects of the price structure
eon relation to industrial costs* cost reduction and productivity)
T4e Directorate "eneral o5 Ind*0trial Contin)enc2
+he 9irectorate ! General of Industrial "ontingency 49IG"5 'as esta(lished in
9ecem(er 1?=8 so that industrial production in the country does not suffer on account of
stri,es* threats of stri,es* lay-offs and loc,-outs* etc) "ontingency plans are dra'n up on
the advice of this directorate in pu(lic sector and important private sector underta,ings
17$
and the 9irector-General of Industrial "ontingency ensures effective implementation of
these plans) +he 9irectorate ,eeps a close 'atch on the la(our situation to repent any
interruption in production (y getting the genuine grievances of the 'or,ers redressed (y
the management intimae) It helps provide effective assistance from state* civil and police
administrations so also from the Ja(our 9epartment for the implementation of the
contingency plans)
Directorate-"eneral o5 S*66lie0 and Di06o0al0 %D"S ?D(
IndiaEs huge government machinery is a potentially important and gro'ing customer) +he
9GSO9 is the GovernmentEs central purchasing organisation) It (uys all ,inds of
products from (rooms to heavy machinery on (ehalf of all "entral Government ministries
and agencies) State* local* -uasi-pu(lic* statutory* and pu(lic sector may also use 9GS=
9* if they so 'ish)
"ertain products 4e)g)* food* leather goods* coal and 'ooden furniture5 fall outside the
scope of 9GSO9* and several Government or -uasi-government (odies 4e)g) 3ir India*
Indian 3irlines* and the Oil and Natural Gas "orporation do their o'n (uying)
+he 9GSO9 uses the follo'ing four (asic contract types 1
17%
1) /i.ed -uantity contracts* usually termed :3cceptance to +ender;* call for the
firm to supply a specific -uantity of items at agreed-upon prices and delivery
schedule)
$) #ate contracts set specific rates and contract period (ut do not mention
-uantities) +he contractor is (ound to fill any order placed during the contract
period)
%) #unning contracts set -uantity* price and a fi.ed term of usually a year* (ut
the ordered -uantity may vary usually (y $7 per cent of the contracted
-uantity) Some contracts include price variation clauses)
0) rice agreements specify prices for monthly rate of supply and serve as a
standing offer to the purchaser)
Develo6ment Commi00ioner %Small-Scale Ind*0trie0(
+his is an office attached to the Ministry of Industry) It is the nodal agency to coordinate
the polices and programmes for the development of small-scale industries) It provides a
'ide range of facilities and services including consultancy in the techno-managerial
aspects to small units through the net'or, of Small Industries Service Institution 4SISI5*
roduction "entres* +esting "entres* roduct-cum-rocess 9evelopment "entres* etc)
170
B1 T4e Mini0tr2 o5 Civil S*66lie0
+he current strategy of industrial development in India is to place heavy emphasis on
heavy industry and at the same time to ensure large-scale production 4or distri(ution 5 of
mass-consumption goods) roduction is conducted ( the availa(ility of re-uired inputs
landform this point of vie'* the purchase function is important) Be have already referred
to the role of the purchasing organisation 'hich functions under the a(ove ministry* i)e)*
9GSO9)
C1 T4e Mini0tr2 o5 Commerce
Iere is another Government organ affecting the politico-economic environment of
(usiness indicia) +he ministry is vested 'ith the tas, of formulating and gliding IndiaEs
trade policy) +he ministry consists of the 9epartment of "ommerce and the 9epartment
of +e.tiles)
+he 9epartment of "ommerce is the primary Government agency responsi(le for IndiaEs
foreign trade introducing commercial relations 'ith other countries state trading* trade
promotional measures* and regulation of certain e.port-oriented industries and
commodities)
+he functional division of the department of "ommerce are 1
4i5 3dministrative and General 9avison2
177
4ii5 /inance 9avison2
4iii5 Economic 9ivision2
4iv5 +rade olicy 9avison2
4v5 /oreign +rade +erritorial 9ivision2
4vi5 E.port products 9ivision2
4vii5 E.port Industries 9avison2
4viii5 E.port Services 9ivision* and
4i.5 Kigilance 9ivision
+here are a num(er of autonomous (odies under the 9epartment* li,e "ommodity
Boards* E.port romotion "ouncilEs E.port Inspect "ouncil* +rade 9evelopment
3uthority* +rade /air 3uthority* etc)
3 num(er of pu(lic sector underta,ings are functioning under the direct administrative
control of the department li,e the State +rading "orporation 4S+"5* the Minerals and
Metals +rading "orporation 4MM+"5* the ro<ect and E-uipment "orporation +he
E.port "redit and Guarantee "orporation* etc)
Some of the attached and su(ordinate offices under the 9epartment are 1 4i5 Office of the
"hief "ontroller of Imports and E.ports*4ii5 9irectorate General of "ommercial
Intelligence and Statistics* 4ii5 9evelopment "ommissioner* Aendal /ree +rade Lone* etc)
178
Activit2 1'
Suppose you are to start a ne' (usiness in India) +hin, of any specific small scale
entree) Ma,e a list of Government 9epartments* including financial isnttiutions* 'hich
you thin, you may have to contact6visit) Briefly indicate the specific purpose of your
visit 4 In this connect* you may consult Guidelines to Industries* Government of India5)
1) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH)))
$) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH)))
%) ) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH)
0) ) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH)))
=) ) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH)))
>) ) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH)))
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1@) ) HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH)))
17=
!113 NDERSTANDIN" T<E LE"AL ENVIRONMENT O-
BSINESS
/or descri(ing and analysing the legal environment of (usiness in India* 'e present here
(riefly an overvie' of some specific socio-economic legislations) Some of these
legislations 'ill (e ta,en up for a detailed discussion in su(se-uent units) In this unit*
you should (e interested in (road overvie' rather than details) Be may list these
legislation 'hich define the legal environment of (usiness in India 1
"ompany la's
Ja's relating to capital mar,et
M#+ 4Monopolies and #estrictive +rade ractice 3ct5
/E#3 4/oreign E.change #egulation 3ct5
I9#3 4Industrial 9evelopment and #egulation 3ct5
+rade Unions 3ct
17>
Bonus Ordinance
/actory Jegislations
Social Security Enactments
Ja's for "onsumersE rotection
+his list is not e.haustive* it is <ust illustrative) +here are many more legislations 'hich
are important from the standpoint of (usiness and industry in India)
A1 Com6an2 La@0
In the present politico-legal environment* company la's include represents the principal
la's affecting the organisation and management of corporate (usiness) Originally this
la' used to (e concerned 'ith <oint companies only* (ut today its scope has increased) It
covers different types of companies ! their incorporation* their constitutions* their
management and even the manner of their dissolution)
+he history of our company la' dates (ac, to 1>7@) Bade on the British model* it had a
modest (eginning2 it 'as only cocnerned 'ith the restration of <oint stoc, companies)
"hanges 'ere introduced su(se-uently in 1>8@*1>88* 1>?$ and 1?1% closely reflecting
changes in the British la' from time to time such as the introduction of limited lia(ility)
+he "ompanies 3ct* 1?1%*had some special provision to ta,e care of the Managing
3gency System (ut 'ithout much success) +he 3ct came under vehement criticism
during Borld Bar I 'hen there 'ere serious complaints of malpractices and
17?
manipulations in company formation and management) Eventually* the advent of
Independence* the adoption of the "onstitution 'ith its 9irective rinciples of State
olicy and the acceptance of the socialistic pattern of society as our goal further highlight
the need for revision of the 1?1% 3ct) Based o the recommendations of the Ia(ra
"ommittee 41?7@5* the "ompanies 3ct 'as thoroughly amended in 1?78* are listed
follo's 1
Minimum standard of (usiness integrity and conduct in the promotion and
management of companies
/ull and fair disclosure of all reasona(le information relating to the affairs of the
company
Effective participation and control (y shareholders and the protection of their
interests
+he stateEs po'er of intervention and investigation into the affairs of companies
regarding the interests of the shareholders and the pu(lic)
3 num(er of amendments 'ere introduced in the 3ct of 1?78 from time to time
particularly to (ring an end to the Managing 3gency System) Such amendments 'ere
effected in 1?8@* 1?8%* 1?8? and 1?=@)
+he 'ord :"ompany; as it has come to meant in the conte.t of the Indian "ompanies 3ct
refers to a (usiness organisation 'ith features of 4a5 a corporate personality* 4(5 limited
18@
lia(ility* and 4c5 transfera(ility of shares) In outla'* there are three (asic types
companies2 4i5 "ompanies limited (y shares* popularly ,no'n as :limited companies;*
4ii5 "ompanies limited (y guarantee* popularly ,no'n as :guarantee companies 4iii5
"ompanies 'ith unlimited lia(ility* 'hich is more of theory than practice) Each of these
three types may again (e termed as either pu(lic company or private company) +he
general presumption in our 3ct is that a company is a :pu(lic company; unless it is
clearly from its constitution that it is a :private company;) 3 private company is defined
to (e one 'hich
i5 restricts the right to transfer its shares*
ii5 limits the num(er of its mem(ers to fifty* e.cluding present or part employees*
and <oint shareholder (eing counted as one mem(er* and
iii5 prohi(its any invitation to the pu(lic to su(scri(e for any share or de(enture of
the company)
+he 3ct lays do'n a simple procedure for conversion of a private company into a pu(lic
company) 3dditionally* there is a category of deemed pu(lic companies 1 if $7M or
more of the paid up capital of a private company is held at any time (ygone or more
corporate (odies* it 'ould (e :deemed1 to have (ecome a pu(lic company* su(<ect to
certain restrictions)
+hen there is a classification entitled :holding; and :su(sidiary; companies) +he former
controls the composition of the Board of 9irectors of the latter or it controls more than
181
half of the voting po'er of the alter* or the latter is a su(sidiary of another company
'hich itself is a su(sidiary company of the holding company)
+here is another concept introduced (y our "ompanies 3ct) +his is the concept of
:Government company; i)e)* a company in 'hich not less than 7@M of the paid up capital
is held (y the Government* "entral or state or (oth)
+here are special provisions for foreign companies) 3 :foreign company; is one 'hich is
incorporated outside India* (ut 'hich has an esta(lished place of (usiness in India)
Given the defining of various types of companies* our "ompanies 3ct see,s to provide
for a certain degree of ultimate control to the shareholders* to democratiGe company
management and also to prevent certain ,no'n malpractices in company management)
/or e.ample* the 3ct contains provisions for Government control over the appointment
and remuneration of managing directors* 'hole-time directors and managers) +he 3ct
also places certain restrictions on loans made or guarantees given (y one company to
another) +he 3ct is thus directed against practices li,e interlocutory directorships and
interloc,ing of funs) +he 3ct also constrains a fe' provision or the maintenance of
proper (oo,s of account)
3 significicant development in the conte.t of Indian company la's 'as incorporated in
the companies 43mendment5 3ct* 1?=0) Bith this enactment* the process of gradual
18$
tightening of the GovernmentEs control over the functioning of <oint stoc, companies
seemed to have reached a clima.) Some important amendments are enumerated (elo' 1
1) 3 large num(er of functions hitherto performed (y Iigh "ourts are no'
transferred to the "entral Government or the "ompany Ja' Board)
$) 3 ne' defection of :groupE; in Section $41>3@ has (een introduced in line
'ith a parallel amendment of Section $4g5 of the M#+ 3ct so as to tighten
control over (ig (usiness)
%) Some e.planation of the definition of the managing agents* secretaries and
treasures has (een suggested (y 'hich the actives of the former managing
ageists 4as consultants or advises5 can (e controlled)
0) +he definition of :deemed;1 pu(lic limited companies has (een enlarged so
as to restrict the operation of privet limited companies)
7) +he ne' Section 1@>3 imposes restriction on the transfer or ac-uiring of
shares (y groups* firms* etc) under the same management)
8) +he ne' Sections 1>=" and 1>=9 provide for investigation into the
(eneficial o'nership of shares)
=) +he ne' Sections $@73 and $@7B provide inner alia for unpaid dividends to
(e transferred to a special unpaid dividend into a scheduled (an, and after
three years* if still unpaid* to the general revenue account of the "entral
Government)
18%
>) Section $1= provides for the inclusion of the name of very company official
dra'ing a Salary of #s) %*@@@ per month in the BoardEs #eport (efore the
annual general meeting)
?) Section %$0 is amended to put ceiling on the num(er of companies 'here a
person or firm can hold appointment as auditors) +his ceiling is t'enty
'here the companies have a paid up share capital of less than #s) $7 la,hs
each) In any other case* not moa than ten out of thee t'enty should (e
companies each of 'hich having a paid up share capital of #s) $7 la,hs or
more)
1@) Section $8? 'as amended to ma,e prior approval of the "entral Government
to the appointment of managing directors and 'hole time directors in pu(lic
companies o(ligatory* even in the case of reappointment and not only first
appointment* as previously)
11) +here is a ne' Section $?03 under 'hich the "entral Government has ta,en
po'ers to prohi(it the appointment of sole selling agents 'here the demand
for the goods produced (y a company is su(stantially in eases of the
production or supply of such goods)
1$) Section %10 strengthens the restrictions on the appointment of partners or
relatives* etc)* of directors of private companies and ma,es prior approval of
the "entral Government to such appointments o(ligatory)
1%) +he amendment inserted in Section %>% ma,es it o(ligatory for companies
'ith a paid up share capital of #s) $7 la,hs to have a 'hole time secretary)
180
10) Section 0@> 'as amended to strengthen the GovernmentEs po'er of
intervention to safeguard minority interest* or the pu(lic interest) No' the
government can appoint an unlimited num(er of directors in pu(lic
companies)
3 fe' other important changes 'ere made through the "ompanies 3mendment 3ct of
1?== 1
It authorised the "entral government to grant e.emption to companies from the
operation of Section 7>3 'hich restricted the acceptance to deposits from the pu(lic
It empo'ered the company to denote up to #s) 7@*@@@ for charita(le purpose or for
employeesE 'elfare in a General Meeting
It empo'ered the "ompany Ja' Board to enforce its order as the decree of a court
of la')
It may (e mentioned that strict company enactments* 'ith of course necessary fle.i(ility
and fairness* are consistent 'ith the emerging trends in our socio-economic environment)
+hese trends and tendencies may (e recounted) /irst* the gro'th of (ig (usiness at the
national and multinational level has to (e property regulated and directed) Secondly* the
gro'th of corporate giants such as S3IJ* BIEJ* ONG"* /"I and S+" 'as created a
challenging sector of Government companies) +hirdly* the social responsi(ility of
(usiness toddy is to protect the interests of all1 shareholders* 'or,ers* consumers*
managers* the community and the Government) In vie' of these factors* the ne'
187
amendments incur "ompanies 3ct seem to (e -uite appropriate* (ut 'e must remem(er
that amendments (y themselves do not guarantee the successful operation of the la')
Recentl2 $ro6o0ed C4an)e0
3 Bor,ing Group 'as constituted (y the Government of India to suggest
changes6modiciations into eh "ompanies 3ct 1?78) Based on the recommendations of
this group* the Government introduced in early May 1??= a 9raft "ompanies Bill in
arliament) +he main points of the "ompanies Bill are as follo's 1
+he total sections have (een compressed from 8=> to 07=* and the total num(er of
Schedules from 17 to only %)
+he (ill proposes a su(stantial reduction in the depreciation rate of plant and
machinery from 7)17 per cent to 0)=7 per cent in case 'here the :straight line;
method is follo'ed* and from 17 per cent to 1%)?1 per cent 'here the :'ritten do'n
value; method is follo'ed) +his 'ill have the effect of prolonging the lifespan of
plant and machinery for deprecation purposes)
It restricts corporate in issuing inter-corporate loans and investment up to the
ma.imum of 8@M of their paid up capital and free reserves* or 1@@ percent of free
reserves* 'hichever is higher)
+he corporate can (uy (ac, their o'n shares or other specified securities out of free
reserves* securities premium account* or from the proceeds of prior issues floated
specially for the purpose of (uy (ac,) +hus* a company can issue forms of securities
188
li,e de(t or preference shares* or even non voting shares* to (uy (ac, the voting
shares* there(y maintaining the same level of floating stoc, (ut not the voting shares)
It purposes to reduce the period of payment of dividend from 0$ days to %@ days of
the rate of declaration)
3 company cannot invite deposits in case it has defaulted in the repayment of any
prior deposit or part thereof or any interest thereon in accordance 'ither terms and
conditions of such deposits)
3 director proposed for appointment 'ill (e considered to (e dis-ualified if he is
guilty of contravention of the provisions of the Securities and E.change Board of
India unless a period of % years has elapsed from the date of his conviction)
+he (ill see,s to rationaliGe the classification of companies) +he provision 'ith
regard to deemed companies is sought to (e deleted)
It proposes the recruitment age for 'hole-time directors* managing directors* or
managers of a company at 8@ years* and for directors at =@)
+he 9raft Bill had dra'n 'ide spread applause from the "ham(ers of "ommerce and
Industry for addressing contemporaneous issuing (eing faced (y the corporate 'hich it
see,s to resolve in a pragmatic and result appointed manner) It has (een claimed that the
(ill provides for greater fle.i(ility* self-graduation (y companies and ensures
transparency)
18=
B1 Ca6ital Market
Iaving discussed the "ompanies 3ct* 'e shall no' present them main points of some
important la's relating to the functioning and operation of capital mar,ets in India)
+he Securities "ontracts 4#egulation 3ct* 1?78
+he Securities "ontract 4#egulation5 3ct 4S"# 3ct 1?78 is designed to regulate the
functioning of stoc, e.changes in India and to prevent undesira(le transactions6dealings
in securities) +he 3ct provides for 1 I5 recognition of stoc, e.changes su(<ect to
fulfillment of certain conditions relating to mem(ership and rules and (ye-la's2 ii5
general control over trading methods and practices2 ii5 regulation of contracts adopting in
securities2 and iv5 procedures relating to listing of securities (y pu(lic companies)
3 stoc, e.change has (een defined as a (ody of individuals* 'hether incorporated or not*
constituted for the purpose of assisting* regulating or controlling the (usiness of (uying*
selling* or dealing in securities) +here are at present $1 recognised stoc, e.changes
functioning at various places in the country) Bhile some stoc, e.changes may (e
recognised on a permanent (asis* others may (e on a temporary 4(ut e.tenda(le5 (asis)
+he $1 stoc, e.changes are located at 1 Bom(ay* 3hmeda(ad* "alcutta* Madras* 9elhi*
Iydera(ad Indore* Bangalore* "ochin* Aanpur* ine* Jothian* Gu<arat* Mangalore*
atina* Daipur* Bhu(anes'ar* #ac,et* Kododara* "oim(atore* and Meerut) In addition* a
national Stoc, E.change of India* 'ith head-uarters in Bom(ay has also (een set up)
18>
+he National Stoc, E.change 4NSE5 has all-India <urisdiction) 3fter the esta(lishment of
the Securities E.change Board of India 4SEBI5 under the SEBI 3ct 1??$* certain po'ers
'hich 'ere earlier e.ercised (y the "entral Government under the S"# 3ct have no'
(een transferred to SEBI)
Every stoc, e.change must have rules approved (y the "entral Government6SEBI)
Sec*ritie0 and E>c4an)e Board o5 India Act, 1AA!
romulgated as an ordinance on Danuary %@* 1??$* the SEBI Bill 'as passed (y (oth
Iouses of arliament and (eamed effective on 3pril 0* 1??$)
+he o(<ects of the SEBI 3ct are to develop the securities mar,et on healthy and orderly
lines and to provide ade-uate protection to investors) +o this end* it is necessary to
promote a mar,et 'hich ensures 1
/airness 1 +he mar,et must promote integrity in dealings* a high standard of conduct and
good (usiness practices)
Efficiency 1 +he mar,et should (e professionalised and 'ell informed* offering high
standards of service at reasona(le cost
18?
"onfidence 1 +he mar,et must inspire confidence in (oth investors and issuers to actively
participate in and rely more on the security mar,et)
/le.i(ility 1 +he mar,et should (e resilient* innovative and continuously responsive to the
needs of hallmar,ed participants)
+he capital mar,et in India has 'itnessed tremendous gro'th in the recent past) +here is
increasing participation (y the investing pu(lic) It is* therefore* imperative to sustain the
confidence of investors (y protecting their interests) +he Government has vested SEBI
'ith necessary statutory po'ers to deal effectively 'ith all matters relating to the capital
mar,et) SEBI has (een esta(lished on the pattern of the Securities and E.change
"ommission 4SE"5 of the US3) +he head-uarters of SEBI are located in Bom(ay 4Metal
"ourt* B) Bing* Ist floor* $$0* Marian oint* Bom(ay ! 0@@ @$15)
+he SEBI has (een constituted as a (ody corporate having perpetual succession and a
common seal* 'ith po'ers to ac-uire* hold and dispose of property* (oth mova(le and
immova(le* and to contract) It can sue or (e sued in its o'n name) +he Board consists of
1 I5 3 chairman to (e appointed (y the "entral Government2 ii5 t'o mem(ers from
among the officers of the Ministries of the "entral Government dealing 'ith finance and
la' to (e nominated (y the "entral Government2 iii5 one mem(er from among the
officers of the #eserve Ban, of India* to (e nominated (y the #BI2 and iv5 t'o other
mem(ers appointed (y the "entral government) Su(<ect to the provisions of the 3ct* it is
the duty of the Board to protect the interests the interests of inventors in securities and to
1=@
promote the development of and to regulate the security mar,et (y such measures as it
thin,s fit) Bith these o(<ects and features* the Board has (een entrusted 'ith the
follo'ing functions 1
a5 #egulating the (usiness in stoc, e.changes and any other securities
mar,ets)
(5 #egistering and regulating the 'or,ing of stoc, (ro,ers* su(-(ro,ers*
share transfer agents* (an,ers to pu(lic issues* trustee of trust deeds*
registrars to pu(lic issues* merchant (an,ers* under'riters* portfolio
managers* investment advisers and such other intermediaries 'ho may
(e associated 'ith securities mar,ets in any manner)
c5 #egistering and regulating the 'or,ing of collective investment
schemes including mutual funds)
d5 romoting and regulating self-regulatory organisations)
e5 rohi(iting fraudulent and unfair trade practices relating to securities
mar,ets)
f5 romoting investorsE education and training of intermediaries of
securities mar,ets)
g5 rohi(iting insider trading in securities)
h5 #egulating for su(stantial ac-uisition of shares and the ta,eover
companies)
1=1
i5 "alling for information from* underta,ing inspection* conducting
in-uiries and audits of* the stoc, e.changes and intermediaries and
self-regulatory organisations in the securities mar,et)
<5 erforming such functions and e.ercising such po'er under the
provisions of the Securities contracts 4#egulation5 3ct* 1?78* as may
(e delegated to it (y the "entral Government)
,5 Jevying fees or other charges for carrying out the purposes of this
section)
l5 "onducting research for the a(ove purposes)
m5 erforming such other functions* as may (e prescri(ed)
SEBI Guidelines for capital Issues 1 Bith the repeal of the "apital Issues 4"ontrol5 3ct*
1?0=* the guidelines* notifications* circulars etc) issued (y the office of the "ontroller of
"apital Issues have (ecome defunct) +he companies are free to mar,et issues of capital
in any form they li,e* at any price* and su(<ect to such other terms and conditions as they
may decide) Io'ever* such companies are re-uired to conform to the Guidelines issued
(y the SEBI on Dune 11* 1??$* called the :Guidelines for 9isclosure and InvestorsE
rotection;) 3fter these guidelines 'ere issued* several clarifications have (een issued
on these guidelines) +hese guidelines are presented in 3nne.ure ! $)
1=$
Over-t4e-Co*nter E>c4an)e o5 India %OTCEI(
+he term :Over-the-counter; is an anachronism) It has counted at a time 'hen securities
'ere traded over the counter of different dealers from their inventories) Io'ever*
no'adays the over-the-counter mar,et is a 'ay of doing (usiness rather than a place) It
is a 'ay of trading securities other than at an organised stoc, e.change) +rading of
securities is carried on (y (ro,ers and dealers 'ho are scattered over different locations
and regions through a net'or, of telephones* telegraphs* teletype'rites* tele.* fa. and
computers) +hus* 'ith the help of the communication net'or,* 'ith 'hich every dealer-
computers) +hus* 'ith the help of the communication net'or,* 'ith 'hich eerie dealer-
(ro,er is lin,ed* the prices are arrived at and investors are allo'ed to select among
competing mar,et mar,ets) 3 mar,et ma,er -uotes t'o-'ay prices at 'hich the
mem(er6dealer is 'illing to (uy or sell a standard -uantity of scraps 'hich 'ill (e
continuously -uoted for a certain period* say* three months)
+hus* over-the counter 4O+"5 mar,ets are envisaged as a floorless security trading
system e-uipped 'ith an electronic or computer net'or, through 'hich nationally and
internationally scattered (uyers and sellers can conduct (usiness more efficiently and
economically)
In India* O+"EI has (een promoted (y the U+I* I"I"I* I9BI* I/"I* JI" GI" and its
su(sidiaries* SBI "apital Mar,ets Jimited and "an (an, /inancial Services Jimited)
O+"EI has (een incorporated as a company under Section $7 of the "ompanies 3ct*
1=%
1?78* 'hich means that it cannot distri(ute its income among its mem(ers (y 'ays of
dividend2 instead* it has to use its income for furthering its o(<ectives)
+he (asic o(<ectives of creating O+"EI is to provide a securities mar,et to ena(le
small6start-up companies 'ith potentially via(le green field ventures to o(tain their
capital re-uirements from investors to 'hom such investment 'ould (e accepta(le (ut
'ho 'ould also li,e to have some li-uidity for their investment)
Need and O(<ectives of O+"EI 1 3t present* the stoc, e.changes function as a single
door mar,et in 'hich the securities of companies engaged in different industries and
trades of varied siGes are limited 'ith identical -ualifying criteria and are traded
simultaneously in the same trading hall) +he result of this is that 'hile (ig and important
companies receive all the attention* theology (ul, of companies* particularly the ne' and
small companies* remain unnoticed and conse-uently* their shares remain largely
untraced) 3ccording to one estimate* only 1@ per cento the enlisted scraps are regularly
traded on Indian stoc, e.changes) +hus the li-uidity of the scripts of small companies
tends to suffer)
+he O+"EI aims at creating a stoc, e.change 'hich 'ill 1
i5 provide faculties to small companies to raise funds form the capital mar,et in a
cost-effective manner2
1=0
ii5 provide a convenient and efferent avenue of capital mar,et investment for small
investors2
iii5 strengthen investorsE confidence in the mar,et to provide the (est prices to
investors2
iv5 ensure transparency* redress investorsE complaints* unify the countryEs
security mar,et to cover even those places 'hich do not have a stoc, e.change2
and
v5 provide li-uidity to (oth shares
-eat*re0 o5 OTCEI
O+"EI is remedy for investors 'ho face pro(lems li,e lac, of li-uidity or price
information* delayed settlement* etc) +he salient features of O+"EI are 1
3ccessi(ility 1 "ounters are opened at different locations and interlin,ed (y computer
communication systems* initially* counters 'ere opened at Bom(ay and have no' (een
opened at other replaces also) 3 pu(lic notice is given as to the availa(ility of counters
'here tiding ta,es place) /acilities for trading are availa(le at the counters of the sponsor
and the mar,et ma,er 'hose names and addresses are given in the ne' issue application
form attached to the offer for sale documents and 'ith all the dealers of O+"EI)
1=7
#eady Ji-uidity 1 +he compulsory mar,et ma,ing (y the sponsor for every scrip ensures
that (uy and sell -uotes are availa(le every day for a period of % years) 3fter the initial
period of % years* another mar,et ma,er ta,es over)
Investor #egistration 1 /or the purpose and the sale of securities* every investor has to
o(tain an :Invest O+" "ard;) 3pplication for such a card can (e made at any of the
counters of O+"EI at the time of ma,ing an application for the ne' issue on the O+"EI)
In fact* the share application form includes the necessary details to (e filled in for
o(taining; Invest O+" "ard;)
#inglets +rading 1 +rading does not ta,e place on any specific floor of a stoc, e.change)
+he mem(ers and dealers open counters at various places 'here investors can purchase
and sell the listed sectors)
rice 9isplay 1 In a traditional stoc, e.change*the investor has no means of verifying the
price at 'hich eat transaction 'as effected (y the (ro,er) +he O+"EI continuously
displays current prices on screen installed at each O+" E.change counter to ena(le the
investor ta,e on the spot decisions for the pruchase or sale of securities)
3uthorised 9ealers 1 3ll mem(ers and dealers are authorised and approved (y the O+EI
and their list is availa(le to the pu(lic)
1=8
Instant E.ecution of Orders 1 +he investorsE orders are e.ecuted immediately) If there
are no (uyers or sellers on the O+" E.change* the mar,et ma,er shall deal 'ith the
investor)
Information 3(out the "ompany 1 +he compulsory mar,et mar,er carries out research on
the scrip sponsored (y him and* hence* al vital information pertaining to the company is
readily availa(le)
O+"EI has prescri(ed certain Guidelines for listing of securities at O+"EI 'hich are
given in 3nne.ure %) In addition* SEBI have also issued Guidelines on the issue of
shares through O+"EI 'hich are given in 3nne.ure 0)
Activit2 17
a5 9istinguish (et'een a regular stoc, e.change 4li,e Bom(ay Stoc, E.change
or 9elhi Stoc, E.change5 and O+"EI) Bhat is the rationale of esta(lishing
O+"EI F
HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
H
HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
1==
(5 Meet at lest 1@ individual investors* i)e)* mem(ers of the pu(lic 'ho have
invested their savings6surplus money in shares* de(entures or other securities
'hich are dealt on stoc, e.changes)
i5 Bhen did they feel interested in such investments for the first time F
ii5 Bhat has (een their e.perience as investors* particularly 'ith regard to
investment in e-uity shies 4ne' issues or secondary mar,et shares5)
iii5 3re they a'are of O+"I F Io' many of them have traded through O+"EI
and through National Stoc, E.change of India F resent your findings and
discuss 'ith your colleagues F
c5 3rrange intervie' 'ith the finance mangers of at least three pu(lic limited
companies and discuss 'ith them present sate of the capital mar,et in India
and the prospects of improvement)
1=>
C1 -orei)n E>c4an)e Re)*lation Act %-ERA(
In the present day Indian politico-economic environment* /E#3 has emerged as a very
important piece of legislative control over 4a5 the activities of multinational (usinesses2
4(5 the flo' of foreign capital* technology and managerial enterprise2 and 4c5foreign
colla(oration and <oint ventures) In short* /E#3 regulates the stoc, and flo' of foreign
investment in India)
/oreign e.change control in India 'as introduced for the first time in the 9efence of
India #ules* 1?%?) +hen came the /oreign E.change #egulation 3ct* 1?0=* as the (asic
la' of e.change control and as the main legal instrument regulating the operation of
foreign controlled companies in India) +his 3ct 'as amended in 1?7= and 1?87) 3
ma<or change 'as effected through the /oreign E.change #egulation 43mendment5 3ct
1?=%) +he ne' 3ct came into force 'ith effect from Danuary 1* 1?=0) +he main features
of 1?=%) +he ne' 3ct came into force 'ith effect from Danuary 1* 1?=0) +he main
features of this 3ct suggesting a host of guidelines for foreign (usiness in India are as
follo's 1
1=?
1) 3ll (ranches of foreign companies 4e.cept airlines and shipping companies5
see,ing approval under /E#3 have to convert themselves into Indian
companies)
$) 3 minimum permissi(le foreign shareholding limit of =0 per cent 'ill (e
allo'ed to companies 'hich are either engaged in manufacturing of curtail
listed items under the 1?=% Industrial olicy* or predominantly* or engaged in
trading not e.ceeding $7 per cent of the e.-factory value of the production of
having a turnover of less than #s) 7 crores)
%) 3 permissi(le foreign shareholding of 0@ per cent 'ill (e allo'ed for
companies engaged in :other manufacturing items;* construction and
consultancy trading companies* plantation companies 4other than tea5* and
other miscellaneous activities not mentioned in the guidelines)
0) +he e.planation to the guidelines also constrains a provision that if a company
is 1@ per cent e.port-oriented* a foreign shareholding e.ceeding =0 per cent
may (e allo'ed depending on the merits of each case)
7) 3irlines and shipping companies* 'hich are e.cluded from the provisions of
Section $? of the 3ct* 'ill (e treated on a reciprocal (asis)
8) Ban,ing companies* 'hich are also e.cluded* 'ill (e governed (y guidelines
issued (y the #eserve Ban, of India and the Ban,ing 9epartment)
+he guidelines listed a(ove 'ere further revised in 3ugust 1?=8 to assist the reserve
Ban, of India in administering Section $? of /E#3 41?=%5) +he main features of the
revised /E#3 Guidelines 1?=8 'ere as follo's 1
1>@
1) If the activities of a company under 3ppendi. I* together 'ith activities
re-uiring sophisticated technology and e.erts* account toe not less than =7M
of its total annual turnover* such a company 'ill (e allo'ed to continue its
activities su(<ect to the condition that it 'ill increase India participating*
'ithin a specified period* to not less than $8 per cent of the e-uity capital of
the company)
$) If the activities of a company under 3ppendi. I together 'ith activities
re-uiring sophisticated technology and e.ports account for not less than 8@
per cent of the total annual turner* such a company 'ill (e allo'ed to continue
its activities* su(<ect to the condition that it 'ill increase* 'ithin a specified
period* Indian participation to not less than 0? per cent of the e-uity of the
company) In such cases a condition 'ill (e stipulated that the company
concerned should underta,e to e.port a minimum of 1@ per cent of its total
annual turnover 'ithin a period of t'o years commencing form the date of
approval (y the #ecovered (an, of India)
%) if the e.port of a company account for more than 0@ per cent of the total
annual turnover* such a company 'ill (e allo'ed to continue its activities
su(<ect to the condition that it 'ill increase* 'ithin a specified period* Indian
participation to not less than 0? per cent of the e-uity of the company)
0) "ases of companies coming 'ith proposals fro su(stantial e.ports could (e
considered on merits for higher level of e-uity participation provided such
participation is in the overall interest of the economy of the country)
1>1
7) +he limit of #s) 7 crores for permissi(le trading activity (y multi-activity
companies 'ill (e applica(le only in the case of tiding activities)
8) +he ceiling of $7 per cent of the e.-factory value of the annual production for
permissi(le trading activity (y multi-activity companies 'ill (e raised to 0@
per cent and 8@ per cent respectively in the types of cases mentioned in 4$5
and 4%5 a(ove)
/oreign investments and enterprises 'hich are (ranches or su(sidiaries of foreign
companies as 'ell as <oint ventures involving foreign colla(oration 4financial* technical
or managerial5 are su(<ect all the la's governing Indian enterprises @ the M#+ 3ct* the
"ompanies 3ct* the Income-ta. 3ct* the Industries 4#egulation and 9evelopment5 3ct*
etc)* as 'ell as /E#3) +O a casual o(serve* it appears that control is stricter over foreign
companies than on Indian companies) +his o(servation is not -uite correct) Every
independent nation State has the right to design its (usiness and industrial policies
primarily in vie' of the national interest)
+he emerging national interest of the Government has (een to encourage IdealiGation
'here feasi(le and attract foreign capital* technology and enterprises 'herever desira(le*
It is realised that foreign investment does play an important role in generating income*
employment and output2 it helps the transfer of technology and managerial s,ill) In us*
foreign investment e.poses the economy to 'hat the economists term :e.ternal economy
effect; as 'ell as the domestic :multiplier effects; 4(oth primary and secondary5) Bhile
resigning these effects* the Government of India is determined to ma,e sure that the flo'
1>$
of foreign capital and technology does not stand in the 'ay of our :self-sustained
economic gro'th;2 and* therefore its (asic policy has (een one of strict selectivity
to'ards private foreign investment and foreign colla(oration)
+he fundamental error of /E#3 policy has (een to treat the introduction of Indian e-uity
shareholding in foreign companies as an o(<ective in itself) +his has led to the folly of
compelling them to finance their (usiness in India 'ith our scarce rupee capital 'ithout
any increase in our po'er of regulation or improvement in the -uantum or -uality of
foreign investment in India) In fact* it is argued that shareholding is not the (est method
of regulation2 /E#3 survives on the platform of myth2 perhaps* this is the (est method of
regulation2 /E#3 survives on the platform of myth2 perhaps* this is the reason 'hy there
has of late (een a tendency to'ards li(eralisation of /E#3)
3s mentioned a(ove the /E#3 3ct of 1?=% reflected the re-uirements of a highly
regulatory system) +he recent changes in economic policy* especially the li(eralisation
of the industrial sector and the moves to open up the economy through changes in trade
policy and encouragement of foreign investment* have made it necessary to modify
several provision of the 3ct to (ring them in line 'ith current economic realities)
3ccordingly* it 'as announced in the Budget speech of 1??$-?% that the Government
proposed to introduced comprehensive amendments to the /oreign E.change #egulation
3ct)
1>%
In pursuit of these o(<ectives* and pending legislative changes* some important steps 'ere
ta,en in 1??$ to reduce the rigors of /E#3 through certain notifications issued (y the
#eserve Ban, of India) Karious facilities 'ere e.tended to foreign6/E#3 companies on
the appointment of technical and management advisors* opening of (ranches* ac-uisition
of immova(le property* (orro'ing of money or acceptance of deposits* etc) /acilities
'ere also e.tended to non-resident IndianEs Indian companies and residents for the
opening of foreign currency accounts in India follo'ing the introduction of patricidal
converti(ility of the rupee on current account since March 1* 1??$) Notifications 'ere
also issued e.empting non-resident Indians returning to the country form ma,ing a
declaration not heir arrival in India regarding their assets a(road and from the
re-uirement of prior approval for the ac-uisition of immova(le property in India)
3n amendment to Section $? of /E#3* effected on Danuary $?* 1??$* frees /E#3
companies from any limits imposed on their non-priority sector operations) +his
amendment also ena(les /E#3 companies to ta,e up any trading* commercial and
industrial activities* as also ac-uire any company in India or ac-uire shares of any
company* 'ithout o(taining #BI permission)
/urther* /E#3 companies have (een permitted to use their trade mar,* accept
appointment as agent or technical or management advisers* (orro' and accept deposits
from the pu(lic* open (ranches and liaison offices* ac-uire and sell immova(le property
provided the proceeds are not remitted a(oard* and e.port goods on a rental* hire or lease
(asis as long as these goods are riposted after the e.piry of the contract)
1>0
+hey have also (een granted freedom to invest and disinvest their stoc,s at the mar,et
price) Earlier* the price at 'hich these companies 'ere allo'ed to sell their stoc,s 'as
decided (y the "ontroller of "apital Issues)
/E#3 'as further amended in 1??% through the /oreign E.change #egulation
43mendment5 3ct 1??%) Some of the important changes (rought a(out (y this
amendment are as follo's 1
i5 #estrictions regarding assets held (y non-residents have (een a(olished)
ii5 #estriction on import and e.port of currency and (ullion have (een removed)
ii5 Iospitality to non-residents on visits to India has (een allo'ed)
iii5 Iospitality to non-residents on visits to India has (een allo'ed)
iv5 +he po'er the "entral Government to ac-uire foreign securities for purposes of
strengthening the foreign e.change position has (een done a'ay 'ith)
v5 #estrictions of the holding of immova(le property outside India have (een eased)
vi5 #estrictions on /E#3 conies in the matter of (orro'ing funds or raising deposits
(y them in India as 'ell as ta,ing other or creating any interest in (usiness (y
'ay of transfer from a person resident in India in favour have (een implied)
vii5 #estrictions on persons resident in India associating 'ith themselves or
participating in concerns outside India have (een done a'ay 'ith)
viii5 #estrictions on the appointment of certain persons and companies as agents or
technical or management advisers in India have (een done a'ay 'ith)
1>7
i.5 #estriction on the esta(lishment of places of (usiness 4(ranch offices or a liaison
offices in India have (een removed5)
.5 rior permission for foreign nationals (efore ta,ing up employment in India has
(een done a'ay 'ith)
i5 #estriction on the ac-uisitions* holding etc)* of immova(le property in India have
(een removed)
.ii5 #estrictions on (oo,ing of passage outside India and restriction on foreign travel
have (een done a'ay 'ith)
"urrently* a -uestion is (eing raised in several (usiness 'hether 'e really need a
legislation li,e /E#3) +he focus of /E#3 has (een on conserving foreign e.change and
controlling its use 'hich have lot much of their validity in the present scenario)
D1 T4e Stick Ind*0trial Com6anie0 %S6ecial $rovi0ion0( Act 1A;7
%SICA, 1A;7(
It is unfortunate that many of our industrial unit* (oth in the large and small sectors* have
fallen sic,) +he ill effects of industrial sic,ness are pervading) Industrial sic,ness results
into loss of production* loss of employment and loss of revenue to the "entral or State
Government Besides* ingesti(le funds of (an,s and financial institutions get loc,ed up)
+he increasing incidence of industrial sic,ness has dra'n the attention of economic
planers and industrial researchers) It is necessary to revie' and reha(ilitate the potentially
via(le sic, industrial companies as -uic,ly as possi(le) It is e-ually imperative to
1>8
salvage the productive assets and realise as much money as it possi(le and pay (ac, loans
advanced (y (an,s and financial institutions (y li-uidating the non-varia(le sic,
industrial companies) +he Sic, Industrial "ompanies 4Special rovisions5 3ct 1?>7 'as
enacted to address the pro(lem of industrial sic,nesses +he o(<ects of SI"3 are 1
i5 securing the timely detection of sic, an potentially sic, industrial underta,ings2
ii5 speedy determination* (y a panel of e.perts* of the preventive*
ameliorative* remedial another measures 'hich need to (e ta,en 'ith
respect to such companies2
iii5 e.peditions enforcement of the measures so determined2
iv5 providing for matters connected 'ith or incidental to the a(ove
mentioned o(<ectives)
BI-R and it0 5*nction0
Under the 3ct* the "entral Government constituted the Board for Industrial and /inancial
#econstruction 4BI/#5 'ith effect from Danuary 1$* 1?>=) BI/# is a -uasi-<udicial (ody)
It consists of e.ports in various relelvant fields 'ith po'ers to en-uire into and determine
the sic,ness in industrial companies and devise suita(le remedial measures through
appropriate schemes or other proposals and for proper implementation thereof)
BI/# is empo'ered to loo, into all matters relating to industrial sic,ness including 1
1>=
i5 intuitional fiancW2
ii5 reha(ilitation of sic, industrial companies2
iii5 revival of sic, industrial companies2
iv5 amalgamation of sic, industrial companies2
v5 sale6lease of part or 'hole of the underta,ing of sic, industrial companies2
vi5 li-uidation6'inding up of sic, industrial companies2 and
vii5 other allied matters)
+he BI/# has (een vested 'ith po'ers to institute the necessary en-uiries to determine if
or not the company is sic,) If the BI#/ comes to the conclusion that the company has
(ecome sic, it can either give reasona(le time to the company concerned to ma,e its net
'orth positive or it can devise suita(le measures* including change of managements* the
3ct also contains a provision that if BI/# is satisfied that a person has (een responsi(le
for diversion of funds or for managing the affairs of the company in a manner detrimental
to the interests of the company then the BI/# can direct (an,s and financial institutions
not to e.tent any financial assistance for a period of ten years to such a person or to a
firm in 'hich such a person is a partner or to a company in 'hich such a person is a
director)
+he e.pression :sic, industrial company; has (een defined under the 3ct to mean an
industrial company 4(eing a registered for not less than7 years5 'hich has at the end of
any financial year accumulated losses e-ual to or e.ceeding its entire net 'orth)
1>>
84o can make a re5erence in re06ect o5 a 0ick com6an2 E
#eference can (e made to the B#I/ 4Board for Industrial and /inancial #econstruction5
(y any of the follo'ing agencies it if has sufficient reasons to (elieve that the Industrial
company under reference has (ecome a sic, industrial company 1
1) +he Board of 9irectors foot he sic, company
$) +he "entral Government
%) #eserve Ban, of India
0) 3 State Government
7) 3 pu(lic financial institution
8) 3 State-level institution
=) 3 scheduled (an,
3 #eference (y the Board of 9irectors is mandatory and therefore must (e made2
other'ise* penal conse-uences are attracted) Io'ever* reference (y persons listed 4$5 to
4=5 a(ove is optional)
1>?
O6eratin) A)enc2
Operating agency means any pu(lic financial intuitions* State-level institution* scheduled
(an, or any other person as may (e specified (y general or special order as its agency (y
the Board for Industrial and /inancial #econstruction 4BI/#5)
+he follo'ing have (een specified as operating agencies 1
1) +he Industrial "redit and Investment "orporation of India Jimited 4I"I"I5)
$) +he Industrial /inance "orporation of India 4I/"I5)
%) +he Industrial 9evelopment Ban, of India 4I9BI5)
0) +he Industrial #econstruction Ban, of India 4I#BI5)
7) +he Sate Ban, of India 4SBI5)
8) +he "entral Ban, of India
=) +he Ban, of India 4BOI5)
>) +he Ban, of Baroda)
?) +he un<a( National Ban, 4NB5
1@) +he "anara Ban,
11) +he United Ban, of India* and
1$) +he Indian Ban,
$otentiall2 Sick Ind*0trial Com6an2
1?@
SI"3 1?>7 for the first time provided for identification of potentially sic, industrial
companies to provide for timely treatment and care (efore they reach the stage of no
return) +he criterion for identifying a potentially sic, industrial company has (een spelt
out) 3 potentially sic, industrial company is one 'hose accumulated losses* as at the
end of any financial year* have resulted in erosion of 7@M or more of this pea, net 'orth
during the immediately preceding four financial years)
Binding up of the Sic, Industrial "ompany
Bhere the Board* after ma,ing in-uiry and after consideration of all the relevant facts
and circumstances and after going inopportunity of (eing heard to all concerned particles*
is of opinion that the sic, industrial company is nutli,e to ma,e its net 'orth e.ceed the
accumulated losses 'ithin a reasona(le time 'hile meeting allots financial o(ligations
and that the company as a result thereof is not li,ely to (ecome via(le in future and it is
<ust and e-uita(le that the company should (e 'ound up* it may record and for'ard its
opinion to the concerned Iigh "ourt)
E1 Mono6olie0 and Re0trictive Trade $ractice0 %MRT$( Act 1A9A %MRT$ ACT(
+he Monopolies and #estrictive +rade ractices 4M#+5 3ct has its genesis in the
9irective rinciples of State olicy em(odied in the "onstitution of India) 3rticle %?4(5
and 4c5 thereof lays do'n that the State shall direct its policy to'ards ensuring 1
1?1
i5 that the o'nership and control and material resources of the community are so
distri(uted as (est to su( serve the common good* and
ii5 that the operation of the economic system does not result in the concentration of
'ealth and means of production to the common detriment)
+he O(<ectives of the M#+ 3ct are 1
a5 +o prevent concentration of economic po'er to the common detriment and
control of monopolies2
(5 +o prohi(it monopolistic trade practices2 and
c5 +o prohi(it restrictive trade practices and unfair trade practices)
Monopolies usually (enefit a fe' and cause detriment to many) Monopolies have a
tendency to restrict competition 'ith the result that the monopolistic concerns have a
hold on the prices of commodities in the mar,et 'hich ultimately results in the
e.ploitation of many at the hands of a fe')
Bith the initiation of the mar,et economy and the conse-uent since 1??1* this o(<ective
has (een su(stantially diluted) +he M#+ 43mendment5 3ct* 1??1* has omitted
provisions regarding the "entral GovernmentEs permission for su(stantial e.pansion*
esta(lishment of a ne' underta,ings* mergers* ta,e-over* etc) Esta(lishments* ho'soever
1?$
(ig or small* are no' free to e.pand* or esta(lish ne' underta,ings* or effect mergers)
"onse-uently* the strategic alliance (et'een Godre< Soap and roctor and Gam(le could
not (e -uestioned) Ji,e'ise* the merger of Iindustan Jever and +OMO"* though
o(<ected to (y certain -uarters including the employees of +OM"O* 'as follo'ed (y the
Supreme "ourt)
Io'ever* chec,ing the concentric of economic po'er still remains one of the o(<ectives
of the M#+ 3ct (ut only in so far as a large underta,ing is li,ely to result in the practice
of monopolistic* restrictive or unfair trade practices) Sections $= and $=3 of the 3ct in
such cases empo'er the "entral Government in order the division of an underta,ing or
severance of an inter-connection on a recommendation (y the M#+ "ommission after
due in-uiry in this regard)
Under the 3ct M#+ "ommission has (een set up) +he "ommission is to consist of a
"hairman and not less than t'o and not more than eight other mem(ers)
+he 3ct empo'ers the "entral Government to appoint a 9irector-General of
Investigation and #egistration 49GI#5 and as many 3dditional Doint* 9eputy or 3ssistant
9irectors-General of Investigation and #egistration for ma,ing investigation fro the
purposes of the 3ct and for maintaining a register of agreements as needed) +he M#+
"ommission acts as a (ody protecting the interest of the consumers) +he "ommission
can en-uire into monopolistic* restrictive or unfair trade practices) It has the po'ers of
the civil court and can call in nay person for e.amination* etc)* can ma,e en-uiries and
1?%
pass a final order in matters related to restrictive and unfair trade practices) It has the
po'er to ma,e an en-uiry and e.press an opinion on matters relating to monopolistic
trade practices* division and severance of inter-connection) It can grant temporary
in<unction and a'ard compensation)
Mono6oli0tic Trade $ractice0
3ny trade practice 'hich leads or is li,ely to lead to any of the follo'ing effects is
regarded as a monopolistic trade practice 1
i5 Unreasona(ly high price2
ii5 Unreasona(ly high cost of the production of goods or the provision of
services2
iii5 Unreasona(ly high profits2
iv5 revention or reduction of competition2
v5 Jimited technical development2
vi5 Jimited capital investment2 and
vii5 9eterioration in the -uality of goods
+he role of the M#+ "ommission in regard to control of monopolistic trade practices is
investigator and advisory) +he "ommission* on initiation of an in-uiry* merely
investigates the practice and su(mits its report to the "entral Government) It is only the
1?0
"entral Government 'hich is vested 'ith the po'er to pass an appropriate order on
receipt of the report from the "ommission)
3ny in-uiry into a monopolistic trade practice can (e initiated (y the "ommission1
i5 on a reference made to it (y the "entral Government2
ii5 on its o'n motion* on receipt of any information that the o'ner of any
underta,ing is indulging in any trade practice 'hich may (e monopolistic trade
practice or upon a ,no'ledge that monopolistic trade practices prevail in respect
of any goods or services2
iii5 on an application made to it (y the 9GI#2 and
iv5 if during the course of its in-uiry into restrictive trade practice* the "ommission
finds that the o'ner of any underta,ing is indulging in monopolistic trade
practices)
Re0trictive Trade $ractice0
+he term restrictive trade practice is defined t mean a trade practice 'hich has or may
have the effect of preventing* distorting or restricting competition in any manner and in
particular if it1
i5 tends to o(struct the follo' of capital or resources into the stream of
production2 or
1?7
ii5 tends to (ring a(out manipulation of prices or conditions of delivery or to
affect the flo' of supplies in the mar,et relating to goods or services in such
manner as to impose on the consumers un<ustified costs or restrictions)
Every agreement falling 'ithin the one or more of the follo'ing categories is deemed to
(e an agreement relating to restrictive trade practices and is su(<ect to registration under
the 3ct 1
#efusal to deal
+ie-up sales
E.clusive dealing
"oncert in prices and terms and conditions of purchase or sale
9iscriminatory dealings
#esale price maintenance
+erritorial restriction6restrictions or 'ithholding of output or supply
"ontrolling manufacturing process
Boycott
3greement having the effect of eliminating competition6competitors etc)
+he M#+ "ommission can en-uire into any restrictive trade practice 'hether the
agreement relating to the practice has (een registered or not) +he commission may
1?8
en-uire into the practice on its o'n initiative or in response to specific complaints (y
consumers or consumersE associations or on a reference made (y the "entral or State
Governments* or an application made (y the 9irector-General)
n5air Trade $ractice0
3n unfair trade practices has (een defined under the 3ct to mean a trade practice 'hich
for the purpose of promoting sales* use or supply of any goods or for the provision of any
services* adopts any unfair method or unfair or deceptive practice* including 1 I5 (argain
sale* ii5 (ait and s'itch selling* iii5 offering gist or priGes 'ith the intention of not
providing them and conducting promotional contests* etc)
+he "ommission may in-uire into any unfair trade practice 'hich may come (efore it for
in-uiry) If* after such in-uiry* the "ommission is of opinion that the practice is
pre<udicial to the pu(lic interest* or to the interest of any consumer or consumers
generally it may* (y order direct that 1
a5 the practice shall discontinued or shall not (e repeated 4that is* pass a
cease and desist order52
1?=
(5 any agreement relating to such unfair trade practice shall (e void or
shall stand modified in respect thereof in such a manner as may(e
specified in the order2
c5 any information* statement or advertisement relating to such unfair
trade practice shall (e disclosed* issued or pu(lished* as the case may
(e* in such manner as may (e specified in the order)
+he Monopolies and #estrictive +rade ractices 4M#+5 "ommission has not much of
its teeth 'hich 'ere provided mainly to cur( concentration of economic po'er) +here
has (een a su(stantial increase in the num(er of cases ta,en up (y the M#+
"ommission on allegation of companies resorting to restrictive trade practices) But cases
alleging violation of clauses relating to mar,et dominance* etc)* have (een very fe') 3
large num(er of companies have got deregistered follo'ing the announcement of
rela.ations in the 3ct) +his deregistration trend is in turreted as a clear induction of the
(ig houses gradually getting out of the M#+ 3ctEs net)
-1 Con0*mer $rotection Act, 1A;9
+here has visually (een a tradition of e.ploitation of consumers in India due to shortages
and sellersE mar,ets) +he consumers as (uyers al'ays had a poor (argaining po'er)
Manufacturers and traders often follo' unfair and unethical practices) +hough many
legislations have (een enacted* they have failed to provide any effective protection to
consumers due to lac, of effective implementation) It is common ,no'ledge that a
1?>
num(er of deaths ta,e place every year due to food adulteration* spurious li-uor* and
contaminated6su(standard medicines* etc) Many manufactures and traders* including
multinationals* indulge in unethical practices) +hey ma,e tall claims for their products
'hich turn out to (e false) +he service sector is no e.pectation to unethical practices and
allurements)
+o chec, the on sleight on consumers* a host of legislations had (een enacted from time
to time) +hese include Sale of Goods 3ct* 1?%@2 Essential "ommodities 3ct* 1?772 the
revention of /ood 3dulteration 3ct* 1?702 revention of Blac, Mar,eting and
Maintenance of Supplies of Essential "ommodities 3ct* 1?>@2 Standards of Beights and
Measures 3ct* 1?782 3gricultural roducts Grading and Mar,eting 3ct 43GM3#A5*
1?%=2 Indian Standards Institution "ertification 3ct* 1?7$2 M#+ 3ct* 1?8?* etc)
M#+ 3ct ac-uired the elements of consumer protection legislation 'ith the
amendments in 1?>0 'hen unfair trade practices 'ere (rought in its fold) Io'ever* in
spite of thee changes in the M#+ 3ct* tuned 'as felt for a more comprehensive
consumer protection legislation) 3s a conse-uence the "onsumer rotection 3ct* 1?>8
'as (orn) It is descri(ed as a uni-ue legislation of its ,ind in India to offer protection to
consumers) +he 3ct 'as designed after an in-depth study of consumer protetion la's
and arrangement in U)A) * the U)S)3)* 3ustralia and Ne' Lealand) +he main o(<ective of
the 3ct is to provide (etter protection to consumers) Unli,e other la's 'hich are
punitive or preventive in nature* the provisions of this 3ct age compensatory in nature)
1??
+he 3ct intends to provide smile speedy and ine.pensive redressal to consumersE
grievances)
Other salient features of the 3ct are 1
It applies to all goods and services unless specially e.empted (y the central
Government)
It covers all sectors 'hether private* pu(lic or co-operative)
It confers certain rights on consumers)
It envisages esta(lishment of consumer protection councils at the "entral* state and
district levels 'hose main o(<ects are to promote and protect the rights to consumers)
+he provisions of this 3ct are in addition to and not in derogation of the provisions of
any other 3ct)
:"onsumer; under the 3t means nay of the follo'ing persons 1
15 3 person 'ho (uys any goods for a consideration 'hich has (een paid or
promised or partly paid and partly promised or under any system of deferred
$@@
payment) +he term includes any other user of such goods 'hen such use is
made 'ith the approval of the (uyer)
+he e.pression :consumer;* ho'ever* does not include a person 'ho o(tains
such goods for resale or for any commercial purpose)
$5 3 person 'ho hires or avails of any services for a consideration 'hich has
(een paid or promised or partly paid and partly promised* or under any
system of deferred payment) +he term includes any other (eneficiary of such
services 'ith the approval of the first mentioned person)
In addition* the 3ct is understood to include the follo'ing persons as :consumers; 1

15 ersons allotted plots or houses (y a housing and development (oard6authority
4e)g)* 9935)
$5 atients receiving medical treatment in a Government hospital) Io'ever*
there is a contrary <udgement also on this point)
%5 atients getting treatment at a private nursing home)
05 ersons selling6purchasing shares to6from a share (ro,er)
75 User of services 4li,e electricity* telephone* telecommunications* etc)5 from
pu(lic6private utility (odies or agencies)
$@1
#ights of "onsumers 1 /or the first time in the history of consumer legislation in India*
the "onsumer rotection 3ct* 1?>8* e.tends statutory recognition to the rights of
consumers) +he 3ct recogniGes the follo'ing si. rights of consumers 1
1 #ight to safety* i)e)* the right to (e protected against the mar,eting of
goods and services 'hich are haGardous to life and property)
$ #ight to (e informed * i)e)* to (e informed a(out the -uality* -uantity*
potency* purity* standard and price of goods or services* as the case
may (e* so as to protect the consumer against unfair trade practices)
% #ight to choose* i)e)* the right of access to a verity of goods and
services at competitive prices) In case of monopolies* say rail'ays*
telephones* etc)* It means right to (e assured of satisfactory -uality and
service at a fair price)
0 #ight to (e heart* i)e)* the consumers2 interests 'ill receive due
consideration at appropriate forums) It also includes the right to (e
represented in various forums formed to consider consumersE 'elfare)
7 #ight to see, redressal* i)e)* the right to see, redressal giant unfair
practices or restrictive trade practices or unscrupulous e.ploitation of
consumers)
8 #ight to consume education* i)e)* the right to ac-uire the ,no'ledge
and s,ill to (e an informed consumer)
Bho can file a complaint
$@$
3ny of the follo'ing persons may file a complaint under the 3ct 1
1) +he consumer to 'hom such goods are sold or delivery or agreed to (e sold or
delivered or such service provided or agreed to (e provided)
+he e.pression :consumer; means 1
3 son 'ho (uys any goods or hires* avails of any services for a consideration) It is*
ho'ever* not necessary that the consideration must have (een aid) +he person shall still
(e regarded a consumer 'here either the 'hole consideration is promised to (e paid in
future or it has (een paid partly and the (alance is promised to (e paid in future) +he
term also includes 1
4i5 a (uyer under any system of deferred payments 2
4ii5 any other user of goods or services provided such use is made 'ith the
approval of the (uyer)
+he e.pression :consumer; does not include a person 'ho o(tains such goods for resale
or for any commercial purpose)
$) 3ny recognised consumer association namely* any voluntary consumer
association registered under the "ompanies 3ct* 1?78* or any other la' for
$@%
the time (eing in force) It is not necessary that the consumer is a mem(er
such as association)
%) One or moor consumer* 'here there are num(ers consumer having the same
interest* 'ith the permission of the 9istrict /orum* on (ehalf of* or for the
(enefit of* all consumes so interested)
0) +he "entral or State Government)
84at com6laint0 ma2 .e lod)ed
3 complaint may relate to one or more of the follo'ing 1
4i5 that an unfair trade practice or a restrictive trade practice ahs (een adopted (y
any trader2
4ii5 that the goods (ought (y him or agreed tu(e (ought (y him suffer from one or
more defects2
4iii5 that the services hired or availed of or agreed to (e hired or availed of (y him
suffer from deficiency in any respect2
4iv5 that a trader has charged for the goods mentioned in the complaint a price in
e.cess of the price fi.ed (y or under any la' for the time (eing in force or
displayed on the goods or on any pac,age constraining such goods)
4v5 +hat goods 'hich 'ill (e haGardous to lie an safety 'hen used age (eing
offered for sale to the pu(lic in contravention of the provisions of any la' for
$@0
the time (eing in force re-uiring traders to display information in regard to the
content* manner and effect of the use of such goods)
<o@ to 5ile a com6laint
+here is no fee for filing a complaint (efore any of the aforesaid (odies) +he
complaint or his authorised agent can present the complaint in person) +he complaint
can also (e sent (y post to the appropriate forum6commission) +he complaint should
(e addressed to the president of the forum6commission)
3 complaint should contain the follo'ing information 1
4a5 the name* description and address of the complainant2
4(5 the name* description and address of the opposite party or parties* as the case
may (e* as far as they can (e ascertained2
4c5 the facts relating to the complaint and 'hen and 'here it arose2
4d5 documents* if any* in support of the allegations contained in the complaint2
4e5 the relief 'hich the complaint is see,ing)
+he complain should (e signed (y the complaint or his authorised agent) 3 minimum of
four copies of the complaint should (e filed)
Con0*mer di06*te0 and redre00al a)encie0
$@7
+O provide simple* speedy and ine.pensive redressal of consumer grievances* the 3ct
envisages a three-tier -uai-<udical machinery at the district* state and national levels)
"onsumer disputes agencies esta(lished under the 3ct* have a hierarchical pattern similar
to the <udiciary) +he follo'ing redressal agencies have (een esta(lished at various
levels 1
a5 9istrict /orum 1 3 9istrict /orum is set up (y the State Government for each
9istrict) Each 9istrict /orum is headed (y a 9istrict Dudge 'ith t'o other
mem(ers) +he 9istrict /orums have <urisdiction to entertain complaints
'here the value of the goose or services and the compensation claimed does
not e.ceed #s) 7 la,hs)
(5 State "ommission 1 3 Sate "ommission is set up (y the State Government for
the respective State) +he State "ommission is headed (y a Dudge of a Iigh
"ourt and has t'o other mem(ers) +he State "ommission has <urisdiction to
entertain complaints 'here the value of goods or services and compensation*
if any* claimed e.ceeds #s) 7 la,hs (ut isles than #s) $@ la,hs) +he State
"ommission also hears appeals against the reorders of the 9istrict /orums
'ithin the State)
c5 National "ommission 1 3 National "ommission is set up (y the "entral
Government) +he National "ommission is headed (y a <udge of the Supreme
court and consists of four other mem(ers) +he National "ommission has
<urisdiction to hear complaints 'here the value of goods or services and
$@8
compensation* if any* claimed e.ceeds #s) $@ la,hs) It also hears appeals
against the ruder of any State "ommission)
Ji(eraliGation and "onsumer rotection 1 3 Ji(eralised economic regime* it must (e
stated* is in itself a 'ay of protecting the interests of consumers) Ji(eralisation affords
the consumers an opportunity of choosing from a 'ide range of products and services*
and this* coupled 'ith competition* (rings in sharp focus the fundamental aspects of
caveat emptor) Ji(eralisation encourages domestic manufactures to produce goods
compara(le to international standards) Unli,e the protected regime of the past 'hen
manufactures had almost the license to charge ar(itrary prices* they are no' constrained
to charge competitive or reasona(le prices due to the greater play of mar,et forces) Bith
the advent of the "onsumer rotection 3ct 1?>8 and a li(eraliGed economic regime*
manufacturers and traders are e.pected to e.ercise due caution2 the goods and services
offered should (e true to the description in terms of 'eight* content and -uality)
"1 T4e Environment $rotection Act, 1A;9
+he "onstitution of India re-uires every citiGen of India to protect and improve the
natural environment including forests* la,es* rivers and 'ild life* and to have compassion
for living creatures) +he 9irective rinciples of State olicy contained in the
"onstitution direct the State to endeavour to protect and improve the environment and to
safeguard the forests the 'ild life of the country)
$@=
+he Environment rotection 3ct* 1?>8* came into effect in Novem(er 1?>8 and is in
addition to the t'o allied 3cts* viG)* Bater 4revention and "ontrol of ollution5 3ct*
1?=0* and 3ir 4resentation and "ontrol of ollution5 3ct* 1?>1)
+he o(<ectives of the 3ct is to provide for the protection and improvement of the
environment and matters connected there'ith) +he la' covers not only land and 'ater or
air (ut all aspects of the environment)
Environment includes 4i5 'ater* air and land* and 4ii5 the interrelationship 'hich e.its
among and (et'een 'ater* air and land* and human (eings* other living creatures* plants*
micro-organisms and property) Environment pollutant means any solid* li-uid or gaseous
su(stance present in such concentration as may (e* or tend to (e* in<urious to the
environment) Environment pollution means the presence in the environment of any
environment pollutant)
Under the 3ct* the "entral Government has general po'ers to ta,e measures for
protecting and improving the -uality of the environment* and preventing* controlling and
a(ating environmental pollution) It can constitute* (y order* the necessary authorities to
'hom it can delegate the re-uired po'ers) /urther* it has po'ers to appoint offices 'ith
such designation as it thin,s fit for the purpose of the 3ct) It can ma,e rules to regulate
environmental pollution) +he Government can call for information from any person*
$@>
officer* State Government or other authority to furnish information etc)* in relation to its
functions under the 3ct)
Environment 3udit #eport 1 3s a result of introduction of #ule 10 in March 1??$ in the
Environment 4rotection5 #ules* 1??$* every person carrying on an industry* operation or
process re-uiring consent under Sec) $7 of the Bater 4pretension and "ontrol of
ollution5 3ct* 1?=0* or under Sec) $1 of the 3ir 4revention and "ontrol of ollution5
3ct* 1?>1* or (oth or authorisation under the IaGardous Baters 4Management and
Iandling5 #ules* 1?>?* issued under the Environment 4rotection5 3ct* 1?>8 is re-uired
to su(mit* (eginning 1??%* an Environment 3udit #eport for the financial year ending
March %1 to the concerned State olluting "ontrol Board on or (efore the 17
th
day of
May every year)
<1 A -e@ Ot4er Le)i0lation0
Iere is a reference to a fe' other legislations 'hich have a direct or indirect (earing on
the (usiness environment in India)
1) +he Essential "ommodities 43mendment5 3ct* 1?=0) It provides for stricter
enforcement of the provisions of the 3ct and stringent punishment for
economic offenders under the 3ct) I+ is particularly directed against anti-
social elements li,e hoarders* profiteers* smugglers and (lac,-mar,eters)
$) +he +rade and Merchandise Mar,s 3ct) 1?7>)
$@?
%) +he atents 3ct* 1?=@)
0) +he Ur(an Jand 4"eiling and #egulation5 3ct* 1?=8)
+here are other legislations relating to 1
i5 a(olition of (onded and contract la(our
ii5 redemption of past inde(tedness
iii5 regulation of moneylendersE activities
iv5 rent control
v5 provision of minimum 'ages
vi5 employeesE state insurance and social security schemes
vii5 settlement of industrial disputes
viii5 trade union activities and organisation
i.5 cooperative credit* mar,eting* etc)
.5 control of prices and pu(lic distri(ution
.i5 anti-pollution 4of 'ater* air* etc)5
.ii5 restriction on dividend payments)
Activit2 19
Suppose you are a factory manager engaged in some manufacturing process 'hich is
highly la(our intensive) Ma,e a list of Government legislations* other than those 'hich
$1@
have (een discussed in this unit* 'hich 'ill (e direct relevance to you) /or e.ample* you
consider6factory legislations and social security legislations
1) HHHHHHHHHHH) =) HHHHHHHHHHH)
$) HHHHHHHHHHH) >) HHHHHHHHHHH)
%) HHHHHHHHHHH) ?) HHHHHHHHHHH)
0) HHHHHHHHHHH) 1@) HHHHHHHHHHH)
7) HHHHHHHHHHH) 11 HHHHHHHHHHH)
8) HHHHHHHHHHH) 1$ HHHHHHHHHHH)
Activit21:
"an you also (riefly recall from the unit the legislations protecting 'or,ers and
consumers and list them F 9o these legislations hamper (usiness autonomy and
efficiency F
Bor,ers "onsumers
$11
1) HHHHHHHHHHH) 1) HHHHHHHHHHH)
$) HHHHHHHHHHH) $) HHHHHHHHHHH)
%) HHHHHHHHHHH) %) HHHHHHHHHHH)
0) HHHHHHHHHHH) 0) HHHHHHHHHHH)
=) HHHHHHHHHHH) =) HHHHHHHHHHH)
>) HHHHHHHHHHH) >) HHHHHHHHHHH)
?) HHHHHHHHHHH) ?) HHHHHHHHHHH)
!11' SMMARB
+he politico-legal environment of (usiness consists of several critical elements* e)g)* the
nature and form of government* the ideology of the ruling party* the strength of the
$1$
opposition* the role and responsi(ility of the (ureaucracy* political sta(ility* the
effectiveness of the Government* its plans and programmes* the socio-economic
legislations* and politico-legal institutions* etc) In spite of all the policies of li(eralisation
follo'ed (y several countries* the need for some ,ind of government intervention in
economic affairs 'ill al'ays (e felt)
+he polices of the Government are reflected in socio-economic legislations 'hich have a
direct (earing on the functioning of (usiness firms) 3 thorough understanding of socio-
political legislations therefore is imperative for (usiness enterprises) It is also necessary
for (usiness enterprises to (e fully conversant 'ith the e.isting Government machinery
for dealing 'ith the industrial economy)
+here are several legislations 'ith 'hich either (usiness firms in vernal or a certain class
of (usiness firms are intimately concerned) +he "ompanies 3ct is concerned 'ith the
regulation of corporate (usiness enterprises) 3 thorough understanding of company la's
is therefore necessary for corporate mangers)
+he Securities "ontracts 4#egulation5 3ct see,s to regulate the functioning of stoc,
e.changes in India and prevent undesira(le transaction in securities) +he Securities and
E.change Board of India 3ct aims at developing the securities mar,et in India on healthy
and orderly lines and is meant to provide ade-uate protection to investors) SEBI has
'ide ranging po'ers) It has issued Guidelines for capital issues* etc) Over the "ounter
E.change of India 4O+"EI5 is a floorless security tiding system 4or mar,et5 e-uipped
$1%
'ith an electronic net'or, through 'hich the (uyers and sellers scattered allover the
nation can conduct (usiness more efficiently and economically) +he (asic purpose of
creating O+"EI is to provide a securities mar,et to ena(le small6start-up companies 'ith
potentially via(le green field ventures to o(tain capital from inventors 'ho li,e to have
li-uidity for their investments)
+he /oreign E.change #egulation 3ct 4/E#35 purposes to regulate dealings in foreign
e.change and securities* import and e.port of currency and to conserve the foreign
e.change resources of the country) Its primary purpose is to regulate foreign companies)
+he relevance of /E#3 in the present economic scenario is (eing -uestioned)
+he Sic, Industrial "ompanies 4Special rovisions5 3ct 4SI"35 aims to secure timely
detection of sic, an potentially sic, industrial underta,ings and to provide for suita(le
machinery for speedy recovery of such enterprises) Under the 3ct a Board of Industrial
and /inancial #econstruction 4BI/#5 has (een created 'ith po'ers to in-uire into and
determine the sic,ness of industrial companies and devise suita(le remedial measures for
their proper implementation)
+he Monopolies and #estrictive +rade ractices 3ct 4M#+5 came into force in 1?8?
'ith the o(<ectives of preventing concentration of economic po'er to the common
detriment and control of monopolies* and to prevent monopolistic* restrictive and unfair
trade practices) Bith fundamental changes made in 1?$* its main o(<ective of preventing
concentration of economic po'er has (een practically done a'ay 'ith) It has no'
$10
(ecome more a la' to regale the undesira(le practices of manufacturers and traders and
to protect the interest of the consumers)
+he "onsumer rotection 3ct is meant to provide protection to consumers) It provides
for necessary machinery for speedy redressal of consumer disputes6grievances)
+he Environment rotection 3ct is meant to provide for the protection and improvement
of the environment) +he la' covers land* 'ater* air and other aspects of the environment)
+hus* you 'ill find that a comprehensive legislative frame'or, e.ists in India fro
protecting the interests of investor* consumers and society in general) Bhat is re-uired is
the proper enforcement and effective implementation of these 'ays)
!117 +EB 8ORDS
olitico-legal Environment 1 3 su(set of the environment consisting of politico-legal
institutions* legislations* form of government and prevailign ideologies* values* attitudes
and style of functioning of the (ureaucracy etc)
"ompanies 3ct 1 3n 3ct to guide and regulate the organisation* functioning and
management of corporate (usiness)
Securities "ontracts 4#egulation5 3ct 1 3n 3ct designed torr regulate the functioning of
stoc, e.changes in India and to prevent undesira(le transactions in securities)
$17
/oreign E.change #egulation 3ct 1 3n 3ct to regulate the dealings in foreign e.change
and securities* import and e.port of currency* and to conservation of the foreign
e.change resources of the country and other related matters) It is concerned 'ith the
regulation of the foreign companies)
Monopolies and #estrictive +rade ractices 3ct 1 3n 3ct to prevent concentration of
economic po'er* and to prevent monopolistic* restrictive and unfair trade practices) +he
o(<ectives of preventing concentration of economic po'er has since (een significantly
diluted)
"onsumer protection 3ct 1 3n 3ct to protect the interests of consumers and to provide for
consumer disputesE settlement machinery
Environment rotection 3ct 1 3n 3ct to provide for the protection and improvement of
the environment 4covering land* 'ater* air and all aspects of the environment5)
!119 -RT<ER READIN"
9isrupt* 3) and Signups* N) A) 1?>? Government and Business* Ki,as u(lishing Iouse*
Ne' 9elhi)
!11: SEL--ASSESSMENT CESTIONS
$18
1) In 'hat 'ays does the politico-legal environment in a country affect (usiness
firms F E.plain)
$) E.plain the critical elements of the politico-legal environment of (usiness
citing relevant e.amples)
%) Brite a note on the Government machinery for the industrial economic in
India)
0) Bhat changes are proposed in the 9raft "ompanies Bill 1??= in relation to the
"ompanies 3ct 1?78 F 9iscuss the rationale of the proposed changes)
7) Bhat are the o(<ectives of M#+ 3ct F Bhat fundamental changes have
recently (een (rought a(out in the 3ct and 'hy F
8) +he :/oreign E.change #egulation 3ct 4/E#35 has outlived its utility;) 9o
you agree F Bhy or 'hy not F
=) Brite notes on the follo'ing 1
a5 Sic, Industrial "ompanies 4Special rovisions5 3ct* 1?>7
(5 "onsumer rotection 3ct* 1?>8
c5 +he Environment rotection 3ct* 1?>8
d5 +he Securities "ontracts 4#egulation5 3ct* 1?78
>) Bhat are the o(<ectives (ehind the esta(lishment of SEBI F Briefly e.plain
the function and po'er of SEBI F
?) :+he (est protection to consumer is the full and fair play of mar,et forces;)
"omment)
$1=
A$$ENDI= ! 3 SEBI "IDELIENS -OR CA$ITAL ISSE
ricing* romoters "ontri(ution and Joc, in eriod
+he guidelines for the purpose of pricing of issues* promoter contri(ution and loc, in
period divide the companies into the follo'ing categories)
3) Ne' "ompanies
3 ne' company is defined to mean a company 1
4a5 Bhich has not completed 1$ months of commercial production* and
4(5 Bhose audited operative results are not availa(le)
+he ne' companies have (een further su(-divided into the follo'ing categories 1
4i5 Ne' companies set up (y entrepreneurs 4i)e) individuals5 'ithout a trac,
record)
4ii5 Ne' companies set up (y e.isting company6companies 'ith a five year trac,
record of consistent profita(ility)
4iii5 Ne' compels set up (y several promoting companies)
4iv5 Ne' companies set up <ointly (y e.isting private sector company6companies
and a state level agency6Government company6foreign colla(orator)
$1>
B) E.isting private6closely-held6unlisted companies
+he companies under this category have (een further divided into five su(-heads
namely 1
4i5 "ompanies 'ithout three-year record of consistent profita(ility)
4ii5 "ompanies 'ith a three-year trac, record of consistent profita(ility)
4iii5 "ompanies 'ithout a trac, record (ut promoted (y e.isting companies 'ith a
five-year trac, record of consistent profita(ility)
Bhere there are more than one promoter companies* each of them should
satisfy the re-uirement of five-year trac, record of consistent profita(ility)
4iv5 "ompanies 'ithout three-year trac, record of consistent profita(ility see,ing
9isinvestment (y offer to pu(lic 'ithout issuing fresh capital)
4v5 "ompanies 'ith a three-year trac, record of consistent profita(ility see,ing
9isinvestment (y offer to pu(lic 'ithout issuing fresh capital)
") E.isted Jisted "ompanies i)e)* companies 'hich are already listed on one or
more stoc, e.changes)
+he aforesaid division of companies has (een made for the follo'ing purposes 1
$1?
4i5 pricing of the issue2
4ii5 promoters contri(ution2 and
4iii5 loc,-in period in respect of promoters contri(ution)
Divi0ion o5 Com6anie0 5or $*r6o0e0 o5 $ricin),
$romoter0F Contri.*tion0 and lock-in $eriod
Ne' "ompanies E.isting private6closely
held) unlisted companies
E.isting listed companies
"ompanies set up (y
entrepreneurs 4individuals5
'ithout a trac, record
"ompanies 'ithout three-
year record of consistent
profita(ility
"ompanies set (uy e.isting
company6companies 'ith a
five year tac, record
"ompanies 'ith a three-
year trac, record of
consistent profita(ility
"ompanies set up (y
several promoting
companies
"ompanies 'ithout a tract
record (ut promoted (y
companies 'ith a five-year
trac, record of consistent
profita(ility
"ompanies set up <ointly (y
e.isting privet sector
"ompany4is5 and a State
"ompanies 'ithout three-
consistent profita(ility
$$@
level agency6Government
"ompany6/oreign
"olla(orator
see,ing 9isinvestment (y
offer to pu(lic 'ithout
issuing fresh capital
"ompanies 'ith three-year
trac, record of consistent
9isinvestment (y offer to
pu(lic 'ithout issuing fresh
capital)
I) Issue of Ne' companies set up (y Entrepreneurs 4individuals5 'ithout
a trac, record)
3 ne' company set-up entrepreneurs 4individuals 'ithout a tract record 'ill (e permitted
to issue capital to pu(lic only at par)
+he promoters contri(ution shall not (e less than $7M or $@M of the total issued capital)
It shall not (e eels than $7M if the total issued capital is upto #s) 1@@ crores and $@ if the
total issued capital is a(ove #s) 1@@ crores) Besides* the guidelines specify the minimum
amount to (e (rought in (y the promoters) +he amount is fi.ed at #s) 7@*@@@ (y each of
the friends* relatives* and associates)
/urther SBI* vide its ress release dated $>-1-1?0* has clarified that the promoters of ne'
companies or of those 'hich are going pu(lic for the first time must contri(ute to the
$$1
re-uired e.tent to each class or ,ind of securities offered to the pu(lic) +hus* if a
company issues e-uity shares for* say * #s) 7@crores and partly converti(le de(entures for
#s) 7@ crores* the promoters must pic, up a minimum $7M of each of these amounts)
Io'ever* the ress release of $?-0-?0 suggests that it shall (e sufficient if in such a case
the promoters (ring in the minimum re-uired percentage of their contri(ution in the form
of e-uity 'hile $7M of each class of securities is offered to the pu(lic 4Economic
+imes*%@
th
3pril* 1??05)
$) Ne' "ompanies set up (y e.isting company6companies 'ith a five year trac,
record of consistent profita(ility
Bhere a ne' company is (eing set up (y e.isting companies 'ith a five year trac, record
of consistent profita(ility1* it 'ill (e free to price its issued provided 1
4i5 the participation of the promoting companies is not less than 7@M of the
e-uity of the ne' company2
4ii5 the issue price is made applica(le to all ne' investors uniformly2
4iii5 the prospectus or offer document contains <ustification for issue price)
"larification No) KII dated 1@->-?% provides that if the premium amount is outface value
of the share only* the particiaption of the promoting company must not (e less than1
7@M for the first 1@@ crores
$$$
0@M for the ne.t $@@ crores
%@M for another %@@ crores
and 17M for the remaining portion)
In order to ta,e advantage of the aforesaid sla( system* the follo'ing conditions shall
have to (e satisfied1
4i5 pro<ects appraisals must (e got done (y financial institutions2
4ii5 calculations of future earnings per share must (e (ased on e.panded e-uity2
and
4iii5 promotersE contri(ution shall (e at the same price as other investors
%) Ne' companies set-up several promoting companies
Bhere the ne' company is set up (y several promoting companies* each of the
companies should satisfy the criteria of five year trac, record of consistent profita(ility as
clarified a(ove)
0) Ne' companies set up <ointly (y e.isting private sector companies and a Sate
level agency6Government company6foreign colla(orator
Bhere a ne' company is set up (y e.isting private sector company or companies and a
State level agency6Government company6foreign colla(orator* it 'ill (e sufficient if each
$$%
of the promoting private sector company or companies satisfy the re-uirement of five
year trac, record of consistent profita(ility)
Other guidelines relevant to issue of ne' companies 4all the aforesaid ,inds5 are 1
1) 3 draft prospectus containing the disclosures 'ill (e vetted (y SEBI (efore a
pu(lic issue is made)
$) No private placement of the promotersE share shall (e made (y solicitation of
share contri(ution from unrelated investors through any ,inds of mar,et
intermediaries)
%) +he shares of the a(ove companies can either (e listed on the Over the "ounter
E.change of India 4O+"EI5 or any other stoc, e.change)
0) +he issue price shall (e applica(le uniformity to all investors including promoters)
7) +he promotersE contri(utions shall (e su(<ect to loc,-in period of five years
4"larification 1* dated 1=-8-?$5)
D1 -ir0t i00*e .2 e>i0tin) 6rivateGclo0el2 4eld com6anie0
1) Such companies 'ith a three-year trac, record of consistent profita(ility shall (e
permitted to feely price the issue and lit their securities on the stoc, e.changes)
1) +he e.pression Ntrac, record of consistent profita(ilityE is to (e constructed as
distinct from continuous profita(ility) +he spirit of the guidelines 'ill (e satisfied
if the promoting companies concerned have sho'n profits in their respective
audited profits O loss accounts after providing for interest* ta. and deprecation in
$$0
five out of seven years 'ith profits during the last* t'o years prior to the issue
4"larification II* 18)=)1??$56
$) N+hree year trac, recordE of 'hich at least t'o should (e completed years of 1$
months each and one should (e not less than 8 months 4clarification I* dated
1=)8)1??$5)
%) +he e.pression three-year tract record of consistent profita(ility * shall mean that
the concerned companies have sho'n profits in their respective audited profit and
loss account after providing for interest* ta. and depreciation in three out of 7
years 'ith profits during the last t'o years prior to the issue) clarification I* dated
1=)8)1??$5)
$) Not less than $@ per cent of the e-uity 4i)e)* issued capital5 should (e offered)
%) +he draft prospectus 'ill (e vetted (y SEBI to ensure ade-uacy of the disclosures)
0) +he pricing 'ould (e determined (y the issuer and the lead mangers to the issue
and 'ould (e su(<ect disclosure re-uirements including1
4a5 disclosure of the nest asset value of the company as per the last audited
(alance-sheet* and
4(5 <ustification for the issue price)
$$7
7) 3n e.isting private6closely held6other unlisted company 'hich does not have
three year trac, record of consistent profita(ility* can ma,e an issue to pu(lic
for raising additional capital only at par provided not less than $@ per cent of
the total issued capital 4e.panded capital5 is offered to the pu(lic
4"larification II* dated 18-=-1??$5)
8) 3 company 'hich does not have a three year trac, record (ut has (een
promoted (y other compny6ies 'ith a tract of consistent profita(ility 'ill have
freedom to price the shares2 provided that the participation of the promoting
companies is not less than 7@ per cent of the total issued capital* su(<ect to
loc,-in period of 7 years) /or reaching minimum percentage of 7@ per cent* if
the promoting company has to ta,e additional e-uity out of the pu(lic issue* it
'ill (e at the same price at 'hich the shares are offered to pu(lic 4clarification
II* acted 18)=)1??$5
=) Bhen an issue of shares is to (e made at a premium for rec,oning the
minimum specified percentage of 7@ percent to (e (rought in (y the
promoting companies* only such portion of the issued capital as have (een
held (y the promoting companies pursuant to the allotment made prior to 1$
months of the proposed pu(lic issue 'ould (e ta,en into account)
3ccordingly* in case 'here t is not possi(le for the promoting companies to
(ring in additional e-uity to ma,e up the specified percentage of 7@ per cent
in the issued capital after e.cluding the allotment of shares med 'ithin 1$
months prior to the proposed pu(lic issue* such pu(ic issue shall (e made only
at par 4"larification K* dated 0-11-?$5
$$8
>) 3 closely held company 'ishing to enhance its foreign share holdings upto 71
percent or more as permissi(le under the relevant guidelines of
#eserve6#eserve Ban, of India can ma,e an issue at the price determined (y
the shareholders in a special resolution under Section >1415 435 of the
"ompanies 3ct* 1?78)
?) Bhere private 6closely held and unlisted companies having three-year trac,
record of consistent profita(ility desire to get listed through 9isinvestment of
the e.isting shareholding i)e)* 'ithout raising additional capital* there is no
prohi(ition against free pricing) 3ccordingly* the e.isting shareholders in
such companies freely price their shares offered to the pu(lic) Io'ever*
promotersE shareholding after the 9isinvestment must not fall (elo' $7 per
cent of the total issued capital of the company su(<ect to the loc,-in period of
7 years)
E) u(lic issue (y e.isting listed companies
1) +hese companies 'ill (e allo'ed to raise fresh capital (y
freely pricing their further issues)
$) +he issue price 'ill (e determined (y the issuer in
contri(ution 'ith the lead manger4s@ to the issue)
%) +he draft prospectus 'ill (e vetted (y SEBI to ensure
ade-uacy of disclosures)
0) +he prospectus or offer document shall contain 1
$$=
4i5 the net asset value of the company2
4ii5 a <ustification for the price of the issue2 and
4iii5 high and lo' prices of the shares for the last t'o
years)
7) "ompanies 'ishing to enhance their foreign shareholding
upto 71 per cantor more as permissi(le under the relevant
guidelines of #eserve6#eserve Ban, of India can ma,e issues
at the price determined (y the shareholder in a special
resolution under Sec) >1 415 435 of the "ompanies 3ct)
I00*e o5 04are0 t4ro*)4 OTC E>c4an)e o5 India %OTC(
Bhere a direct pu(lic issue is made through O+" 'ithout the sponsor ta,ing any share*
the normal guidelines for disclosure and ivnestorsE protection shall apply)
Bhere the shares of a company have (een ta,en (y the sponsor* such shares may (e
offered to the pu(lic at a later date at such price as the sponsor may deem fit in
accordance 'ith the regulations of O+" su(<ects to the follo'ing conditions 1
4i5 the promoters after such offer retain at least $7M of the total
issued capital 'ith loc,-in period of 7 years from the date of
sponsor ta,ing up the shares2
$$>
4ii5 the sponsor agrees toast as mar,et ma,er for the shares at
least for period of three years on compulsorily (asis and also
finds an additional mar,et ma,er fro such compulsory mar,et
mar,ing2 and
4iii5 the sponsor compulsory gives t'o-'ay -uotes (ased on
minimum and ma.imum trading prices as may (e stipulated
(y +O" in respect of the scrip) 4"larification II dated
18)=)?$5)
-1 nder@ritin)
4iv5 1) 3s per the SEBI guidelines of Dune 1??$
under'riting 'as mandatory for the full issue) In this
regard* SEBI further clarified that under'riting should (e
only for issue to the pu(ic 'hich 'ill e.clude
reserved6preferential allotment to reserved categories) In
other 'ords* under'riting 'as mandatory only to the e.tent
of net offer to the pu(lic 4"larification II dated 18)=)?$5)
SEBI has no revised this aforesaid guidelines (y ress relapse dot) 1@)1@)?0 there(y
ma,ing underrating optional) Io'ever* it has (een clarified that if the issue is not
udner'ritten and the minimum su(scription of ?@M of the offer to the pu(lic is not
received* the ensure amount received as su(scription 'ould have to (e refunded infill)
$$?
$) Num(er of under'riters shall (e decided (y the issuers)
%) "ompanies shall (e re-uired torr aisle minimum su(scription of ?@M
in respect of each issue and it shall (e applica(le for pu(lic as 'ell as
right issues)
0) If the company does not receive ?@M of the issued amount from pu(lic
su(scriptions plus accepted development from under'riters 'ithin 1$@
days from the date of opening of the issue* the company shall refund
the amount of su(scriptions) In the case of the disputed development*
the company shall refund the amount of su(scriptions) In the case of
the disputed development* the company should refund the
su(scriptions if the a(ove conditions are not met)
7) +he lead manger4s5 must satisfy himself a(out the net 'orth of the
under'riters and the outstanding commitments and disclose the same
to SEBI) +he intension is that the lead manager should satisfy himself
in 'hatever manner he deems fit a(out the a(ility of under'riters to
discharge their under'riting (olections) +here is no need for lead
mangers to furnish any certificat to SEBI in this (ehalf) 3 statement to
the effect that in the onion of the lead managers* the under'ritersE
asset are ade-uate to meet their o(ligations should (e incorporated in
the prospectus)
8) +he under'ritersE agreement may (e filed 'ith the stoc, e.changes)
$%@
"1 Com6o0ite I00*e0
1) In case of composite issue* i)e)* rights-cum-pu(lic issue* (y an e.isting
company* differential pricing shall (e allo'ed) In other 'ords* issue to the
pu(lic can (e priced differentially as compared to issue to the rights
shareholders)
Io'ever* differential pricing shall (e permissi(le only in respect of issues made (y
e.isting listed companies) Io'ever* <ustification for the price differences should (e
given in the offer documents)
In respect of reservations to various categories* SEBI vide its guidelines 4"larification
KIII acted 11)1@)1??%5 has clarified that in composite issues the reservations to various
categories shall (e computed 'ith reference to the amount of pu(lic issue and not the
total amount of composite issue as stated in SEBI "larification K) dt)0-11-?$)
<1 Re0ervation in I00*e0
1) Unreserved offer of e-uity or instrument converti(le into e-uity shall not (e
less than the minimum re-uired for listing purpose in case of ne' issues mea
either (y the ne' company or (y the e.isting closely held6private companies
going pu(lic)
$%1
SEBI* has clarified that reservations and firm allotments together 'ith the promotersE
contri(ution should not e.ceed =7 per cent of the total issue amount 4"larification KIII
dated 11-1@-1??%5) +his clarification has (een issue din the 'a,e of the notification
amending #ule 14$5 4(5 of Securities "ontract 4#egulation5 #ules* 1?7=) Under these
#ules* it 'ould not suffice if at least $7 percent of such securities 'ere offered to pu(lic)
3s per "larification KIII dated 11-1@-1??%* reservations in pu(lic issue for various
categories of persons may (e made as follo's 1
S)
NO)
"ategory of persons Ma.imum
permissi(le
allotment 4M5
4i5 ermanent employees 4including 'or,ing directors5 of the
company and in the case of a ne' company the permanent
employees of the promoting companies
1@MX
4ii5 Shareholders of the promoitng companies in the case of a ne'
company and shareholders of group companies in the case of
an e.isting company
1@M
4iii5 Indian Mutual /unds $@M
4iv5 /oreign Institutional Investors 4including non-resident Indians
and overseas corporate (odies5
17M
4v5 Indianan Multilateral 9evelopment /inancial Institutions $@M
$%$
1) +he /inance Ministry has restricted this overall percentage to 17M 4earlier
$0M5 4Economic +imes* Ist May 1??05)
+he aforesaid reservations shall (e su(<ect to the follo'ing 1
4a5 Ma.imum allotment per employees6shareholder shall not e.ceed $@@
shares of #s) 1@ each)
Bhere the 9evelopment /inancial Institutions6"entral and State
Industrial 9evelopment "orporations <oin hands 'ith private
promoters for setting up a company* no reservation may (e made for
allotment to the employees of such 9evelopment /inancial Intuitions)
4(5 #eservations to Indian /inancial Institutions* Indian mutual funs*
/oreign Institutional Investors 4including non-resident Indian s and
overseas coronate (odies5 shall (e on a competitive (asis)
N"ompetitive (asisE means in proportion to the shares applied for (y
the concerned reserved categories)
4c5 +he investments (y /oreign Instititutional Investors shall (e su(<ect to
the individual and overall ceiling indicated in the /oreign Institutional
InvestorsE Guidelines issued (y the Government of Idea)
$%%
In this regard SEBI guidelines of Dan) 11* 1??0 stipulate that listed companies can ma,e
private placements of shares 'ith registered /oreign Institutional Investors 4/IIEs5 after
o(taining the shareholders consent in a general (ody meeting under Section >14I35 of the
"ompanies 3ct) +he allotment* ho'ever* should not e.ceed 7M to a single /II and (e
su(<ect to a ma.imum of 17M 4including N#IEs and overseas corporate (odies5 of the
issued capital)
In respect of pricing* guidelines stipulate that it should not (e lo'er than the highest
price during the preceding $8 'ee,s in the domestic mar,ets)
4d5 3ny unsu(scri(e portion in any reserved category may (e added to
any other reserved category su(<ect ho'ever to the condition that on
final allotment* shares allotted in respect of each of the categories does
not e.ceed individual ceilings mentioned a(ove)
4e5 +here 'ill (e no loc, in period for reservations made to the category
of persons mentioned a(ove) +he promoters contri(uting shall*
ho'ever* (e su(<ect to loc,-in period)
+he loc,-in period for the promoters contri(ution shall (e 7 years from the date of
allotment in pu(lic issue or date of commencement of commercial prodction14 in case of
manufacturing company5* 'hichever is later)
$%0
Re0ervation in Ri)4t I00*e
If at the time of mar,eting a right issue the company desires to ma,e any separate
reservations* such reservation shall (e restricted only to the permanent employees of the
issuer company* su(<ect to a ceiling of 1@M 4earlier 77@ of the issue siGe)
/urther* SEBI in its "larification KI dated $%-1$-1??$ allo'ed companies to ma,e
preferential offers in respect of their rights issues to financial institutions and other
identified persons (elonging to the management group su(<ect to compliance of certain
contains)
+he aforesaid guidelines 'ith respect to reservations in right issue 'ere modified (y
"larification KIII dated 11-1@-1??% (y providing that no preferential allotment shall (e
made along 'ith any right issue) If the company desired to ma,e any preferential
allotments to the employees or any identified persons they may do so independent of
right issue (y complying 'ith provisions of the "ompanies 3ct* 1?78)
Re0ervation in Com6o0ite I00*e
Io'ever* as per "larification No) KIII dated 11-1@-?% reservation is to (e computed itch
reference to the amount of pu(lic issue along and not the amount of composite issue as
stated in "larification No) K* dated 0-11-?$) +his is -uite consistent 'ith the 'ithdra'al
of reservations for permanent employees in right issues)
$%7
I De6lo2ment o5 I00*e $roceed0
In case of issues* 'here on application and on allotment an amount together e.ceeding
#s) 7@@ crores$ is raised* thesauri 'ill voluntarily disclose and ma,e arrangements for
the use of proceeds of the issue as per disclosure to remaindered (y one of the financial
institutions) 3 copy of their monitoring report shall (e filed 'ith SEBI (y the institution
and (y the company for purpose of record)
In respect of issue of a(ove siGe and (eyond* the amount to (e called up on appliaiton)
allotment and on various calls should not e.ceed $7M of the total -uantum of issue)
D) Minimum +ime Interval (et'een +'o Issues
SEBI has issued the follo'ing guidelines* in this regard 1
4a5 No (onus issue shall (e made 'ithin 1$ months of any
pu(lic6rights issue) Issue of (onus shares after 1$ months
shall (e su(<ects to Section M4o5 of the guidelines
$%8
1) 9ate of commencement of commercial production means the last date of the
month in 'hich commercial production in a manufacturing company is
e.pected to commence and declared in the offer documents)
$) #aised from #s) $7@ crores vide SeriEs "larification I dot) 1=8)?$)
Bhich states that no (onus shall (e made 'hich 'ill dilute the value of rights of the
holders of fully converti(le de(entures6partially converti(le de(entures)
It has (een further clarified (y SEBI that no company shall* pending conversion of fully
or partly converti(le de(entures* issue any (onus shares unless a similar (enefit is
e.tended to the holders of such /"9s6"Ss through reservation of shares in proportion to
such converti(le part of /"9s6"9s) +he shares so reserved may (e issued at the time of
conversion of such de(entures on the same terms on 'hich the (onus issue 'ere made)1
4(5 +he promoters shall (ring capital in full (efore a pu(lic issue)
Y +he capital issued should (e made fully paid up 'ithin 1$ months from the date
of issue e.cept in cases 'hich are su(<ect to monitoring re-uirements)
+1 Em6lo2ee0 Stock O6tion Sc4eme
$%=
+his is a voluntary scheme on the part of the company to encourage employees to have a
higher participation in the company) Suita(le percentage of reservation can (e made (y
the issuer company for its employees or that of the promoter company) #eservation
should not (e more than 1@7 4"larification KIII dated 11-1@-?%5) E-uita(le distri(ution
of shares among the employees 'ill contri(ute to the smooth 'or,ing of the scheme)
+he issuer may li,e to have non-transfera(ility at his discretion in ne' issues) In other
cases employees participation upto 1@M su(<ect to a ma.imum of $@@ shares shall (e
non-transfera(le for a period of % years)
+he 9epartment of "ompany 3ffairs vide its ress Note dated 10-1@-1??$ has stated that
an offer of shares to the employees on preferential (asis under the employees stoc,
option scheme 'as miscued (y some companies (uy allotting shares to non-employees or
in the <oint names of employees and non-employees) "ompanies have (een advised to
ensure that the shares reserved under the employees -uota are allotted only to the
(onafide employees* su(<ect to the guidelines issued (y SEBI and share remaining
unsu(scri(e (y the employees may (e offered to the general pu(lic through prospectus in
terms of the issue* if any)
L $romoter0F Contri.*tion and Lock-in 6eriod
+he term promoters contri(ution 'ill mean contri(ution (y promoters* directors friends*
relatives and associates) In respect of further issues* if there are not promoters* the
promotersE contri(ution 'ill mean contri(ution (y directors* friends* relatives* associates)
$%>
+he follo'ing guidelines and clarifications have (een issued (y SEBI in this regard1
4a5 E-uity capital to (e su(scri(ed in any issue to the
pu(lic (y the promoter* i)e)* those descri(ed in the
prospectus as promoters* directors* friends* relatives
and associates should not (e less than $7M of the total
issue of e-uity capital upto #s) 1@@ crores and $@M fro
the issues a(ove #s) 1@@ crores) Minimum su(scription
(y each of the friends6relatives and associates under
promotersE -uota should not (e less than #s) $7*@@@$
4')e)f) 1@->-1??%HH) "larification No) KII* earlier
this minimum su(scription under promoters2 -uota 'as
#s) 1 la,hs5) Io'ever* the minimum su(scription of
#s) 1 la,hs shall continue to apply in respect of
contri(ution made (y firms or corporate (odies not
(eing (usiness associates* li,e dealers and distri(utors)
4(5 Bhere a company process to issue e-uity capital a
premium promotersE contri(ution shall (e 7@M of the
total issued capital) Io'ever* "larification KII dated
1@->-?% has rela.ed this re-uirement in respect of
issues e.ceeding #s) 1@@ crores) 3ccordingly*
$%?
promotersE contri(ution in case of an issue of over #s)
1@@ crores
1) +imes of India* dt 10)0)?0
$) In case of ne' companies promoted (y individuals* minimum su(scription
(each of the friends* relatives and associates shall (e #s) 7@*@@@)
"rores at a premium 4not e.ceeding the face value of the shares5 shall (e as given in
the follo'ing ta(le 1
SiGe of the capital Issue
4including premium5
ercentage of
"ontri(ution
/irs #s) 1@@ crores of Issue 7@
Ne.t #s) $@@ crores 0@
Ne.t #s) %@@ crores %@
Balance Issue amount 17
Io'ever* the (enefit of sla( system mentioned in the a(ove ta(le shall (e availa(le
only if the follo'ing conditions are satisfied 1
4i5 romoters2 contri(ution shall (e at the same price as applica(le to the
investing pu(lic)
4ii5 Joc,-in period of 7 years from the date of allotment or commencement of
commercial production* 'hichever is alter* shall (e applica(le even in
respect of e-uity ac-uired on conversion of optional instruments in future)
$0@
4iii5 ro<ects should (e appraised (y the lending 9evelopment financial
Institutions) ES* (oo, value* etc)* given in the offer documents for future
pro<ections should (e calculated 'ith reference to the e.panded capital)
4c5 +he promoters contri(ution shall not (e diluted for loc,-in period of 7 years from
the date of commencement of the production or date of allotment* 'hichever is later)
4d5 romotersE must (ring in their full su(scription to issue in advance (efore the
pu(lic issue)
4e5 3ll firm allotments* preferential allotment to colla(orators* shareholders or
promoters companies 'hether corporate or individual* shall not (e transferred for %
years from the date of commencement of production or date of allotment* 'hichever
is later)
4f5 +he share certificates issued to promoters* friends* relatives and associates* etc)*
should carry inscription :not transfera(le; for a period of % or 7 years* as may (e
applica(le* from the date of commencement of production or date of allotment*
'hichever is later)
romotersE contri(ution in case of professionally managed companies
SEBI has clarified that in case of professionally managed compels 'ith no
identifia(le promoters* the promotersE contri(ution should (e (rought in (y persons
$01
in-charge of the management of the affairs of the company to the e.tent of the
minimum specified percentage either (y themselves or from other persons including
their friends* relative and associates (efore the pu(lic is called upon to su(scri(e to
the issue)
Joc,-in period for e.cess contri(ution (y promoters
+he specified percentages of promoters contri(ution are the minimum 'hich the
promoters are e.acted to ta,e and the same shall (e su(<ect to a loc,-in period of 7
years) Bhere* ho'ever* the promoters contri(ute to the proposed issue more than the
minimum percentage* such additional percentage 'ill (e treated as firm allotment and
'ill (e su(<ect to a loc,-in period of % years from the date of allotment in pu(lic
issue)
Joc,-in period 'here promoters contri(ution includes holdings prior to issue
Bhere the aggregate percentage held (y the promoters prior to the proposed issue is
e-uivalent to or e.ceeds the minimum specified percentage of the promoters
contri(ution in the past-issue capital and the promoters do not contri(ute in the
proposed issue* the loc,-in period in respect of such prior holdings shall (e 7 years as
reduced (y the period of such prior holding e.cept than tuc, prior holdings to the
e.tent of minimum specified percentage shall remain loc,ed in at least for a
minimum period of t'o years) +he loc,-in period shall commence from the date of
$0$
allotment in pu(lic issue or* in case the company is a manufacturing company* from
the date of such allotment or date of commencement of commercial production*
'hichever is later)
romoters2 contri(uting in case of rights issue at premium and loc,-in period)
"larification KIII* dot) 11)1@)1??% provides that in case of rights issue of shares at a
premium* the follo'ing re-uirements in regard to promotersE contri(utors in the
-uietly of the company must (e fulfilled 1
4a5 If the promotersE shareholding in the e-uity at the time of the rights issue is more
than $@ percent of the issued capital of the company* the promoters shall ensure
that their e-uity holdings do no fall (elo' $@M of the e.panded capital)
4(5 If the promotersE e.isting e-uity holding is less than $@ per cento the issued
capitol in the even of rights issue not (eing fully su(scripted* the promoters shall
su(scri(e to the unsu(scri(e portion in the follo'ing manner 1
4i5 +hat the promoters holdings are (rogue to the level of $@M of the
e.panded capital) Balance may (e allotted (y the Board of directors as
they deed fit)
4ii5 If the unsu(scri(e portion is not sufficient to ena(le the promoters
reach $@M of the e.panded issued capital the promoters shall ta,e the
entire issue)
$0%
4c 5 +he promotersE shareholding under calluses 4a5 and 4(5 shall* to the e.tent
of $@M of the post issue capital (e su(<ect to loc,-in period as follo's 1
4i5 Shareholding falling under clause 4a5 +'o years from the date of allotment in
the rights issue
4ii5 Shareholding falling under clause 4(
4c5
- Shareholding falling under the rights
issues
! shares ac-uired (y 'ay of additional
contri(ution
+'o years from the date of allotment in
the rights issue
+hree years from the date of allotment
in the rights issue
4d5 the aforesaid guidelines shall also apply to companies 'hich are professionally
managed)
romotersE contri(ution for different classes of companies
+he e.tent of promotersE contri(ution tu(e (rought in (y the promoters* directors*
friends* relatives and associates and the loc,-in period applica(le for different
categories of companies are summarised in 3nne.ure I)
M) General
1) Su(scription list
$00
4a5 Su(scription list for pu(lic issues should (e ,ept open for at least %
'or,ing days and disclosed in the prospectus)
4(5 #ights issues should not (e ,ept open for more than 8@ days)
$) "ertificate realign to promoters2 contri(ution
SEBI has vide its circular dated $0-1-1??$ desired that at least one day prior to the issue
to the date of opening of the issue* a certificate from the "hartered 3ccountant6"ompany
Secretary in practice to the effect that the promoters -uota* along 'ith the amount of
su(scription made (y each of them)
%) 3nnouncement and advertisement
3nnouncement regarding proposed issue should (e made at least 1@ days (efore the
su(scription list opens) SEBI has vide its circular dated $0-1$-?$ provided that once
NSEBI 3c,no'ledge "ardE is issued* no advertisement relating to the issue should (e
released 'ithout giving N#is, factorsE in respect of the concerned issue) 3lso* no
advertisement should include Brand names for the issue e.cept the normal commercial
name of the company or commercial (rand names of its products already in use)
'1 $rintin) and Di0tri.*tion o5 6ro06ect*0 and a66lication 5orm0
$07
3fter the receipt of N3c,no'ledgment "ard2 from SEBI and the initiation from the
#egistrar 4#O"5 regarding registration of prospectus* the company should ta,e stapes for
the issue of the prospectus 4no' to reprinted overleaf or to (e appended through
perforation5 should (e distri(uted to the (ro,ers* under-'riters* merchant (an,ers* lead
managers* (an,ers* etc) to the issue)
71 Over 0*.0cri6tion
No rent ion of over su(scription is permitted under any circumstances) +herefore* the
-uantum of issue* 'hether through a right or pu(lic issue* shall not e.ceed the amount
specified in the prospectus6letter of the offer e.cept to the e.tent necessary for ad<ustment
'ith respect to proportionate allotment (ut not e.ceeding 1@ per cent)
91 Com6liance re6ort
Bith 07 days of the closure of an issue* a report in a prescri(ed form 'ith a compliance
certificate from the auditor6chartered accountant6practicing company secretary should (e
for'arded to SEBI (y the lead managers)
=) Gap (et'een closure dates of various issues*)e)g)* rights and Indian
pu(lic should not e.ceed %@ days)
$08
SEBI guidelines for issue of Bonus Shares
4a5 No (onus issue shall (e made 'ithin 1$ months of any pu(lic6right issue)
4c5 +he (onus issue shall only (e made out of free reserved
(uilt out of the genuine profits or share premium collected in cash only)
4d5 #eserves created (y revaluation of fi.ed assets are not
to (e capitaliGed)
4e5 +he declaration of (onus issue* in lieu of dividend is
not made)
4f5 +he (onus issue is not made unless the paid-paid
shares* if any* e.isting* are made fully paid up)
4g5 +he company
4i5 has not defaulted in payment of interest or principal in respect of fi.ed
deposits and interest on e.isting de(enture soar principal on redemption thereof*
and
4iii5 has sufficient reason to (elieve that it has not defaulted in respect of
the payment of statutory dues of the employees such as contri(ution to
provident funds* gratuity* (onus* etc)
4g5 3 company 'hich announces its (onus issue after the approval of the Board of
9irectors must implement the proposal 'ithin a period of 8 months from the date
of such approval and shall not have the option of changing the decision)
$0=
4h5 +here should (e provision in the 3rticles of 3ssociation of the company for
"apitalisation of reserves* etc)* and if not* the company shall pass a resolution at
its general (ody meeting ma,ing provisions in the 3rticles of 3ssociation for
"apitalisation)
4i5 "onse-uent to the issue of (onus shares* if the su(scri(ed and paid-up capital
e.ceed the authorised share capital* resolution shall (ypassed (y the company at
its general (ody meeting for increasing the authorised capital)
4<5 +he company shall get a resolution passed at its general (ody meeting for
(onus issue and in the said resolution the managements intention regarding
the rate of dividend tu(e declared in the year immediately after the (onus
issue should (e indicated)
4,5 No (onus issue shall (e made 'hich 'ill dilute the value or rights of the
holders of de(entures* converti(le fully or parley)
+hus* no company may* pending of /"9s6"9s issue any shares (y 'ay of
(onus* unless similarly (enefit is e.tended to the holders of such /"9s6"9s*
through reservation of shares in proportion to such converti(le part of
/"9s6"9s) +e shares so reserved may (e issued at the time of conversation
of such de(entures on techs amen terms on 'hich he (onus issues 'ere made
4+imes of India dt) 10)0)?05)
4h5 +he company should file 'ith SEBI a statement of the
(onus issue conveying the details of the (onus issue
$0>
and certifying that the (onus issue is (eign made as per
the guidelines 43s per earlier SEBI guidelines5)
4i5 +he statement* as aforesaid* should (e accompanied (y
a certificate from the auditors of the company as 'ell as
a practicing company Secretary 'ho shall (e a mem(er
of the Institute of "ompany Secretaries of India to the
effect that (onus guidelines have (een duly complied
'ith)
SEBI Guidelines regarding #ights Issues
11 Di55erential $ricin)
3n e.cising listed company 'hile ma,ing a composite issue may price its pu(ic and
rights issue at different amounts) Io'ever* <ustification for price different must (e given)
!1 "a6 .et@een Ri)4t and $*.lic I00*e
+he gap (et'een the closure dates of rights issue and pu(lish should not e.ceed %@ days)
31 A66ointment o5 Merc4ant Banker
$0?
/or rights issues of listed companies e.ceeding #s) 7@ la,hs* the issue should (e managed
(y an authorised merchant (an,er)
'1 nder@ritin)
Under'riting of rights issues 'hich had (een made compulsory (y SEBI guidelines of
Dune* 1??$ has no' (een made optional 4SEBI ress relapse dt) 1@)1@)?05)
71 I00*e not to .e ke6t o6en .e2ond 9& da20
3 right issue should not (e ,ept open for more than 8@ days)
91 Minim*m S*.0cri6tion
3 "ompany ma,ing any rights issue of securities 'ill allot the shares* de(entures etc)*
only if it has received a minimum of ?@ per cent su(scription against the entire issue) If
minimum su(scription is not received 'ith 1$@ days from the date of opening father
su(scription list* the entire money collected 'ith applications must (e returned forth'ith)
Incase the amount is not refunded 'ithin ne.t 1@ days* the company shall (e lia(le to
repay the amount alogn'ith interest Z 17M per annum)
:1 No re0ervation in ri)4t0 i00*e0
$7@
SEBI* in its revised guidelines on the su(<ect* dt) 11)1@?% has prohi(ited any rpeferncetial
allotment in favour of its permanent employees and financial institutions 4allo'ed earlier
as per guidelines of Dune 1??$ and $%-1$-?$5) It no' provides that if the company
desired tome any preferential allotments to the employees or any identified persons they
may do so independent of rights issue (y complying 'ith the provisions father
"ompanies 3ct* 1?78)
;1 Re0ervation0 in Com6o0ite I00*e
3s per "larification No) KIII dt 11)1@)?%* in case of composite issues* reservation in
favour of permanent employees is to (e computed 'ith references to the amount of pu(lic
issue along and not the amount of composite issue)
+his is -uite consistent 'ith the 'ithdra'al of reservation for permanent employees
insights issues)
)
1&1 Ri)4t0 o5 -CD0G$CD0 4older
+he proposed rights issue should not dilute the value or rights of the fully or partly
converti(le de(entures holders)
If the conversion of /"9s6"9s is due 'ithin 1$ months from the date of rights issue the
reservation of shares out of rights issue is tu(e made in proportion to the converti(le part
$71
of /"9s or "9s) +he shares so reserved may (e issue at the time of conversion of such
de(entures on the same terms on 'hich the rights issue 'as made
111 Vettin) o5 Letter o5 O55er .2 SEBI
+he letter of offer pertaining to rights issue has to (e vetted (y SEBI and the concerned
lead manger has to o(tain clearance from SEBI for the draft letter of offer (efore
approaching stoc, e.change for fi.ing the date for the proposed issue) Bhere managers
to the issue have not (een appointed ?in case of rights issue not e.ceeding #s) 7@ la,hs5*)
3 copy f the letter of offer is to (e for'arded to SEBI for information)
+he aforesaid procedures has not (een modified ')e)f) 1-=-1??7 "larification [ issued (y
SEBI vide ress #elease* dt) 17)7?7 provides for vetting of offer documents (y Jead
Mangers su(<ect to satisfaction of certain conditions) +he details as contained in
classification No) [ are (eing given hereunder 1
Since a rights issue essentially affects the e.isting shareholder of a company unli,e a
pu(lic issue* it has (een decided as a first step that rights issues 'hich are not
accompanied (y pu(lic issues three months prior or su(se-uent to the date of the rights
issue 'ill not (e re-uired tu(e vetted (y SEBI) +he procedure in this (ehalf shall (e as
follo's 1
$7$
+he lead manager 'ill (e re-uired to file the letter roof offer for a right issue 'ith SEBI
si. 'ee,s prior to the date on 'hich the offer is scheduled to open) If SEBI does not as,
for clarifications 'ithin $1 days 4)e)* % 'ee,s5 from such filing* the issuer and the Jead
Manger can go ahead 'ith the proposed offer) If clarifications are as,ed for (y SEBI on
such a document* the propose doffer shall not open till the clarifications have (een given
and the draft document amended suita(ly) +he Jead Manger 'ould (e re-uired to file
'ith SEBI a copy of the letter of offer alogn'ith a due diligence corticated at least t'o-
'ee, (efore he issue opens for su(scription)
111 Ne@ -inancial In0tr*ment
In regard to ne' financial instruments* 'hether iced (y 'ay of rights or other'ise* the
disclosure re-uirements shall (e vetted (y SEBI 4"larification I* dt) 1=)8)1??$5)
1!1 Com6liance Re6ort
Bithin 07 dyes of the closure of the issue* a report in the prescri(ed from alogn'ith
the compliance certificate from statutory auditor6practising chartered
secretary6practicing chartered accountant is to (e for'arded to SEBI (y the lead
$7%
mangers) Bhere the right issue siGe is up to #s) 7@la,hs* the compliance
report6certificate shall (e sent to the SEBI directly (y the company)
131 -ilin) certi5icate re)ardin) minim*m 0*.0cri6tion
"ompanies are also re-uired to su(mit certificate to the regional recognised stoc,
e.change* 'ith a copy to SEBI signed (y the merchant (an,er and the "hief
E.ecutive6"ompany Secretary of the company* to the effect that the issue has (een
su(scri(ed upto ?@ per cent of the total for getting approval of the stoc, e.change for
allotment)
"*ideline0 5or $re5erential Allotment0
+o cu( the practice follo'ed (y companies of ma,ing preferential allotments of shares*
de(entures* etc) to selected person 'ho are considered to (e promoters at a price
unrelated to the prevailing mar,et price) SEBI has issued a separate set of guidelines
relating to preferential issues vide is ress note dt) 0)>)1??0) +hese guidelines aim at
protecting the interest of investors 'ho do not receive preferential treatment (y ensuring
that the pricing of preferential allotment is mar,et related) +hese guidelines are
applica(le to preferential allotment to /i<is as 'ell as promoters and other persons)
referential allotment to /i<is shall* in addition to these guidelines* (e governed (y
guidelines issued (y #BI) +herefore* a listed company ma,ing issue of capital (y 'ay
shares6/"9s6"9s6'arrants and any other financial instrument on a preferential (asis to
$70
any select group of persons must fulfil the follo'ing re-uirements as prescri(ed in the
guidelines 1
1) referential issue of shares have to (e priced either at the average of
the 'ee,ly higher lo' of the closing prices of the shares in the si.
months preceding the relevant date or the t'o 'ee,ly average of high
and lo' of the closing prices* 'hichever is higher)
+he same formula is to (e used for calculating price for the conversion of
"9s or /"9s) +he prices of shares should (e ta,en from the stoc,
e.change 'here the highest trading volume has (een recorded during the 8
months prior to the relevant date) +he relevant date for this purpose* shall
(e the date %@ days prior to the date on 'hich the meeting of the general
(ody is convened) In the case of 'arrants* ho'ever* the 'arrant holder
shall have the option of fi.ing the relevant date at %@ days prior to the date
on 'hich the 'arrant holder (ecomes entitled to apply for the shares)
$) +he promoters issuing 'arrants for augmenting their shareholdings in
companies 'ill have to ma,e an upfront payment of 1@M of the price
fi.ed 'ith a loc,-in period of 7 years from the date of allotment)
%) "onverti(le instruments li,e 'arrants and de(entures shall not have a
currency of more than 1> months)
0) +he upfront payment amount 'ill (e ad<usted against the price to (e
paid (y the promoters) +his amount 'ould stand forfeited if the option
$77
to ac-uire shares is not e.ercised) +he 'arrants should (e converted
into e-uity shares 'ithin 1> months from the date of issue of such an
instrument)
7) +he shares allotted on preferential (asis or on conversion 'ill have
non-transfera(le loc,-in period of 7 years)
8) +he process of allotment of shares6'arrants 'ill have to (e started
'ithin % months of the annual general meeting 'here the shareholders
pass the resolution)
SEBI "*ideline0 $ertainin) to De.ent*re0
11 $*r6o0e o5 I00*e
"ompanies can issue de(entures for any purpose) Io'ever* de(entures issued (y a
company for financing replenishing funds or ac-uiring shareholding of other companies
in the same group is not permitted) It must* therefore* (e ensured that the company does
not issue de(entures for ac-uisition of shares or for providing loan to any company
(elonging to the same group) +he restriction is* ho'ever* not applica(le to the issue of
fully converti(le de(entures providing conversion 'ith a period of 1> months)
!1 I00*e o5 -*ll2 Converti.le De.ent*re0 @it4 a Conver0ion $eriod o5 more
t4an 39 mont40
$78
If the /"9s are proposed to (e issued having a conversion period of more than %8
months* the conversion is to (e made optional 'ith NputE and NcallE option)1
%) Com6*l0or2 Credit Ratin)
+he company should o(tain credit rating from "#ISIJ or any other recognised credit
rating agency if conversion of /"9s is after 1> months or the maturity period of
Nods6"9s e.ceeds 1> months) /resh credit rating 'ould (e re-uired 'hen de(entures
are sought to (e rolled over)
1) 3n option to (uy is called Ncall optionE and adoption to sell is called a Nput
optionE) 3n option Neither to (uy or sellE miscalled Nput and call optionE)
0) re-determination of remium "onversing and +ime of "onversion
+he premium on conversion of /"9s and "9s and time of conversion* in states* if any*
is tu(e pre-determined and stated in the prospectus)
8) Interest rate
+he interest rate on de(entures if freely determina(le)
$7=
=) 3ppointment of 9e(entures +rustees
+he names of de(entures trustees should (e stated in the prospectus and the trust deed
should (e e.ecuted 'ith si. months of the closure of the issue) In the case of de(entures
'ith maturity period of 1> months or less* the appointment of de(entures trustees is not
re-uired) +he trustees must (e vested 'ith the re-uisite po'er for protecting the interest
of de(enture holders including a right to appoint a nominee director in consultation 'ith
institutional de(entures)
=) 9e(entures #edemption #eserve
"reation of 9e(enture #edemption #eserve 49##5 is compulsory e.cept for de(entures
'ith maturity period of 1> months or less) "reation of 9## is re-uired to (e done on the
follo'ing (asis 1
i5 3 moratorium upto the date of commercial production can (e
provided for creation of 9## in respect of de(entures raised
for pro<ect finance)
ii5 +he 9## may (e created in e-ual instalments)
iii5 In the case of "9s* 9## should (e created in respect of
non-converti(le portion of de(entures issue on the same lines
as applica(le for fully non converti(le de(entures issue) In
respect of converti(le issues (y ne' companies* the creation
$7>
of 9## should commence from the year the company earns
profits for the remaining life of de(entures)
iv5 "ompanies may distri(ute dividends out of general reserves
in certain year if residual profits after transfer to 9## are
inade-uate to distri(ute reasona(le dividends)
v5 In case of ne' companies* distri(ution of dividend shall
re-uire approval of the de(enture trustee and the lead
institutions* if any)
vi5 "ompany must create 9## e-uivalent to 7@ per cent of
de(entures (efore de(enture redemption commences)
9ra'al from 9## is permissi(le only after 1@ per cent on the
de(enture lia(ility has (een actually redeemed (y the
company)
vii5 In the case of e.isting companies* prior permission of the
lead institution of declaring dividend e.ceeding $@ per cent
or as per loan covenants is necessary if the company does
not comply 'ith institutional condition regarding interest and
de(t service coverage ratio)
viii5 "ompany may redeem de(ars in greater num(er of
instalments) +he its instalment may start from 7
th
instead of
=
th
year)
>) "onversion Optional
$7?
Bhere the conversion of de(entures 4in part or 'hole5 is to ta,e place at or after 1>
months from the date of allotment (ut (efore %8 months* such conversion should (e made
optional at the hands of the de(entures holders)
?) 9isclosure of #edemption 3mount* eriod of Maturity* &ield
#edemption amount* period of maturity* yield on redemption for the "9s6Nods age to
(e indicated in the prospectus)
1@ 9iscount on Non-converti(le portion of "9
9iscount on the non-converti(le portion of "9 incase they are traded and procedure fro
their purchase on spon trading (asis should (e disclosed in the prospectus)
11) #oll over of "96N"9
If the non-converti(le portion of "96N"9 are to (e rolled over 'ither 'ithout change
in the interest rate* a compulsory option is to (e given to those de(enture holders 'ho
'ant to 'ithdra' and encash from the de(enture holders 'ho 'ant to 'ithdra' and
encash from the de(enture programme) #oll over must (e done only in cases 'here the
$8@
de(enture holders have sent their positive consent and not on the (asis of the non-receipt
on their negative reply)
Before rollover of any Nods or non-converti(le portion of the "9s* fresh credit ration
must (e o(tained 'ithin a period of si. months (efore roll over and fresh trust deed
should (e made) +here is* ho'ever* no need to create fresh security in event of roll over
of de(entures* if the e.isting trust deed or the securities documents provide for
continuation on the security till redemption of de(entures)
Jetter of information regarding roll over is re-uired to (e vetted (y SEBI 'ith regard to
credit rating) 9e(enture holders resolution* option for conversion and such other items
'hich SEBI may prescri(e from time to time)
+he latter of option for roll over or conversion of de(entures* value of 'hich e.ceeds #s)
7@ la,hs issued (y a listed company* must (e for'arded to SEBI for vetting through lead
managers or a mercahnt (an,er)
1$) Other 9isclosures
+he disclosures must include the e.isting and future e-uity and long-term de(t-ratio*
servicing (ehaviour or e.isting de(entures* payment of interest due on due dates on term
loans and de(entures and a certificate from a financial intuition or (an,ers a(out their no
$81
o(<ection for a second or pair passW charge (eing created in favour of the trustees to the
proposed de(enture issue
1%) "reation of "harge
Bhere the de(entures have (een issued having a maturity period not e.ceeding eighteen
months* it is not necessary to appoint a trustee) If the company proposes to create a
charge for such de(entures* it must (e filed 'ith #O") Bhere no charges is to (e crated*
the compliance of the provisions of 9eposit #ules must (e ensured)
+he proposal to create a charge or other'ise must (e disclosed in the prospectus
alogn'ith its implications)
10) Monitoring
+he lead investment6investment institution is re-uired to monitor the progress in respect
of de(enture for pro<ect finance6moderniGation6e.pansion6diversification6normal capital
e.penditure) If de(entures are raised for 'a,ing capital funds* the lead (an, should
monitor)
17) "ertificate from 3uditor
$8$
Institution de(entures and trustee should o(tain from the auditors a certificate in respect
of utiliGation of funds during implementation period of pro<ects) In the case of
de(entures for 'or,ing capital* certificate should (e o(tained at the end of each
accounting year)
18) "reation of Security
+he security must (e created 'ithin si. months from the date of issue of de(entures) If
for any reasons* the company is not in a position to create security 'ithin 1$ months from
date of issue of de(entures* the company shall (e lia(le to pay $ per cent penal interest to
de(entures) If security is not created even after 1> months a meeting of the de(entures
holders should (e called 'ithin $1 as to e.plain the reasons and date (y 'hich the
security 'ould (e created) +he trustees re re-uired to supervise the information of the
conditions regarding creation of security and the de(entures redemption reserve)
+he company is also re-uired to file 'ith SEBI alogn'ith the prospectus* a certificate
from the (an,ers than the assets on 'hich security is to (e created are free from any
encum(rances and the necessary permission to mortgage the assets* has (een o(tained or
a no o(<ection corticated has (een o(tained from the financial institution or (an,s for a
second or pair pause charge* if the assets are encum(ered)
$8%
A$$ENDI= 3 3 OTCEI "IDELIENS -OR LISTIN" O-
COM$ANB SECRITEIS
+he O+"EI has prescri(ed the follo'ing guidelines for listing of securities on O+"EI 1
1) +he company must appoint one of the mem(er of O+"EI as its sponsor) /or
the purpose of o(taining listing* the sponsor has to appraise the pro<ect and6or
the company and certify to the O+EI than having e.amined the technical*
managerial commercial economic and financial aspects of the pro<ect and or
the company* and having satisfied that the company has or 'ill have the
necessary infrastructure as regards land* manpo'er ra' material* supplies
po'er* 'ater* sprees and mar,et necessary fro its operations* the pro<ect
and6or company is via(le and investment 'orthy)
$) +he sponsor 'ill udnerta,e to the O+"EI that it shall ma,e the necessary
arrangements ensure that the proposed issue of securities to the pu(lic 'ile
fully su(scri(ed)
Jisting 'ill (e granted on the issue (eing fully su(scri(ed) In the even of the
issue not (eing fully su(scri(ed (y the pu(lic* the sponsor 'ill (e responsi(le for
su(scri(ing to the unsu(scri(ed portion of the terms envisaged (y the sponsor and
the company)
$80
%) +he sponsor 'ill underta,e to the O+"EI that it 'ill ensure that the securities
are offered and allotted to the pu(ic in a fair manner su(<ect to the approval
father O+"EI* and the Government Guidelines currently in force in this
regard)
0) +he sponsor 'ill underta,e to the O+"EI that it 'ill compulsorily and
continuously 4on all 'or,ing nsessio of the O+"EI5 ma,e mar,et in the
crudity (y offering t'o 'ay -uotes for (uying and selling of the security)
Such ma,ing-ma,ing 'ill (e su(<ect to such rules and regulating 'hich 'ill
(e prescri(ed (y the O+"EI from time to time) Such compulsory mar,et
ma,ing 'ill continue for all such time as the scraps are listed provided
ho'ever* that the sponsor can 'ithdra' from such mar,et ma,ing after a
period of % years from the commencement of pu(lic trading* if it arranges for
another mem(er6dealer to ma,e mar,et compulsorily in the security)
7) +he sponsor shall arrange 'ith one mem(er or dealer of the O+"EI for
ma,ing mar,et compulsorily in the security for a period of one year from the
date of commencement of pu(lic trading)
8) +he company must authorise the O+"EI or any of its nominees or agents to
transfer shires 4called Nsmall derailE5 upto such num(er of shares per day per
folio as may (e prescri(ed (y O+"EI at the time of admission of a companies
security for listing* 'ith a vie' to e.pedite transactions)
$87
=) +he company 'ill underta,e to process applications for transfer of shares
lodged 'ith or its nominees or agents 'ith 1> days 4including holidays5 from
theater of lodgment) +his period may (e reduced at a future date after due
notice) /ailure to adhere tot his time limit 'ould lead to payment of find as
may (e decided (y O+"EI)
>) +he O+"EI 'ill list securities including e-uity shares* redeema(le preference
shares* converti(le cumulative preference shares* converti(le de(entures*
non-converti(le de(entures* (onds and 'arrants of companies) +he face value
of e-uity shares 'ill (e of the value of #s) 1@) +he face value of any type of
preference shares and non-covneti(le de(entures 'ill (e #s) 1@@) the face
value of all other securities could (eef any value as may (e decided (y the
company)
?) +he standard lot of securities for trading 'ill (e 1@@) Mar,et ma,ers shall (e
o(liged to trade in non-standard lots also (ut they may -uote different price
for such lots)
1@) +he company 'ill declare to O+"EI* the portion of its share capital 'hich is
no intended to (e traded) Such certificates shall (e mar,ed Nnot good for
tradingE) If at a later date* it 'ishes to ma,e those shares tradea(le* the
$88
company 'ould give a notice of = days (efore those shares are offered for
trading on the O+"EI)
11) 3ny offer made to pu(lic either directly (y the company or (y the mem(ers
or dealers of the O+"EI* through an offer for sale* 'ill (e accompanied (y a
prospectus conforming to such specification as may (e laid do'n (y O+"EI)
1$) Jisting on O+"EI 'ill (e permitted only ate the company has o(tained
necessary statutory approvals and after o(tain necessary Government
clearances such as the licence6registration* capital goods clearance* foreign
colla(oration clearance* etc)* as are applica(le)
1%) +he sponsors may themselves (e or appoint other remem(ers6dealer of
O+"EI as mangers to the issue of securities for pu(lic su(scriptions)
10) u(licity to an issue of security to the pu(lic 'ill (e su(<ect to the approval of
O+"I and guidelines issued (y the Government and SEBI)
17) +he O+"EI 'ill from time to time prescri(e such time limit not e.ceeding
current statutory provision on the companies and its sponsors to complete the
process of allotment of securities* compilation of the list of allottee and
refunds* mailing of allotment advice6letter of allotment* mailing of refunds
and mailing of share certificates)
$8=
18) +he O+"EI 'ill prescri(e from time to time the interest to (e paid for delay
in delivery of allotment advice6letter of allotment6share certificate6refund)
1=) 3pplication for listing should (e made n the prescri(ed format)
1>) +he company 'ill pay a one-time listing fee of #s) 8*@@@ and an annual
listing fee of @)@7M of the paid up e-uity share capital o he company in case
of listing of e-uity shares and @)@7M of the gross amount of securities issued
in case folioing of any other security)
1?) 4a5 In case a company 'ishes to issue further capital* re-uired resolution
under Section >1 'ill (e attached 'ith the listing application)
4(5 9ue notice of clear 17 'or,ing days 'ill (e given for the purpsoe of
fi.ing record ate to ascertain list of mem(ers eligi(le for such offering of
further capital) +he notice 'ould constrain information on the (asis and
method of offer)
$@) +he letter of offer or prospectus or nay other issue document 'ill (e su(<ect
to the clearance (y the O+"EI)
$1) +he conditions for delisting shall (e specified in the listing agreement)
$$) +he OctetEs decision for granting6not granting listing 'ill (e final)
$8>
$%) +he O+"EI shall have the right toenails the company* its sponsor and every
officer in default for not complying 'ith any of this guidelines* (yela's*
regulations etc)
$0) +he O+"EI may revise* delete or add ne' conditions in consultation 'it hand
su(<ect to approval of the Government of India)
$8?
A$$ENDI= ' 3 SEBI "IDELINES -OR ISSE O-
S<ARES T<RO"< OTC E=C<AN"E O- INDIA %OTCEI(
Bhere a direct pu(is issue is made through O+" 'ithout the sponsor ta,ing any shares*
the normal guidelines for disclosure and investor protection shall apply)
Bhere the shares of a company have (een ta,en (y the sponsor such shies may (e offered
to the pu(ic at a later date at such price as the sponsor may deem fit in accordance 'ith
the regulation of O+" su(<ect to the follo'ing conditions 1
4i5 +he promoters after such offer retain at least $7M of the total issued capital
'ith loc,-in period of 7 yeas from the date of the sponsor ta,ing up the
shares2
4ii5 +he sponsor agrees to act as mar,et ma,er for the shares at least for a period
of three years on a compulsory (asis and also funds an additional mar,et
ma,er for such compulsory mar,et ma,ing2 and
4iii5 Ie sponsor compulsorily gives t'o-'ay -uotes (ased on minimum or
ma.imum trading prices as may (e stipulated (y O+" in respect of scrip)
"larification II) dated 18-=-1??$)
"lass of "ompanies ricing of pu(lic romotersE Joc,-in period
$=@
Issue "ontri(ution
Section 3
4i5 Ne' companies
esta(lished (y
individual promotes
and entrepreneurs
3t par $7M or $@M of the
total issued capital*
as the case may (e*
'hich a minimum
su(scription of #s)
7@*@@@ (y each of
the relatives* friends
and associates
7 years from the
date of allotment in
pu(lic issue on the
date of
commencement of
commercial
production 4in case
of a manufacturing
company5*
'hichever is earlier)
4ii5 Ne' companies
set up (y e.isting
companies 'ith a 7
consistent
profita(ility
3t premium 7@M of total issued
capital 4under the
ne' Guidelines
dated 1@->-?%* if the
premium amount
does not e.ceed the
face value the
promoters
contri(ution shall (e
7@M for the first
#s)1@@ crores* 0@
percent for the ne.t
#s) $@@ crores* %@\
7 years from the
pu(lic issue or the
ate of
commencement of
commercial
production 4in case
of a manufacturing
company5)
Bhichever is later)
$=1
for another #s)%@@
crores and 17M for
the remaining
portion5)
Section B
4i5 E.isting
private6closely held
and other unlisted
companies 'ithout
three-year trac,
record of consistent
profita(ility
3t par $7M or $@M of the
total issued capital*
as the case may (e*
'hich a minimum
su(scription of #s)
$7*@@@ 4')e)f) 1@->-
?%5 from each of
and associates
4(5 Su(<ect to clause
4(5 (elo' 7 yeas
from the date of
allotment in pu(ic
issue or from the
date of
commencement of
commercial
production 4incase
of a manufacturing
company5*
'hichever is later)
4(5 Bheel minimum
specified percent-
age includes
shareholding held
prior to the pu(lic
issue* the loc,-in
period referred to in
$=$
clause 4a5 shall in
respect of such prior
shareholdings stand
reduced (y the
period of such
holding e.cept that
the aggregate of
minimum
percentage holdings
shall remain loc,ed
in for a minimum
period of $ years
from the date of
allotment in the
pu(lic issue)
4ii5 E.isting
and other unlisted
companies 'ith
three-year trac,
record (ut had (een
promoted (y
e.isting companies
3t remium 4Same as 4i5 a(ove5 4Same as 4i5 a(ove5
$=%
'ith a five year
trac, record of
consistent
profita(ility
4iii5 3 company
'hich does not have
three year trac,
record (ut had (een
promoted (y
e.isting companies
'ith a five year
trac, record of
consistent
profita(ility
3t remium 7@M of total issued
capital 4under the
ne' Guidelines
dated 1@->-?%* if the
premium amount
does not e.ceed the
face value the
promoters
contri(ution shall (e
7@M for the first
#s)1@@ crores* 0@
percent for the ne.t
#s) $@@ crores* %@\
for another #s)%@@
crores and 17M for
the remaining
portion5)
4Same as 4i5 a(ove5
4ii5 E.isting
and other unlisted
3t par Minimum sta,e of
$7M of the total
issued capital to (e
7 years from the
pu(ic offer
$=0
companies 'ith
three-year trac,
record of consistent
profita(ility see,ing
9isinvestment (y
offer to pu(lic
'ithout issuing
fresh capital)
maintained after the
pu(lic offer
v5 E.isting
closely6closely held
and other unlisted
companies 'ith
three-year trac,
recur doff consistent
profita(ility see,ing
disinvestment (y
offer to pu(lic
'ithout issuing
fresh capital
3t premium 4Same as 4iv5 a(ove5 4Same as 4iv5 a(ove5
Section "
4i5 E.iting listed
companies ma,ing
pu(lic issue
3t part of premium 4(5 $7M or $@M of
the total issued
capital* as the case
may (e* 'ith a
minimum
4a5 7 years from the
pu(lic issue or the
date of
commencement of
$=7
su(scription of #s)
$7*@@@ (y each of
and associates
O#
4(5 $7M or $@M of
the total issued
capital 4e.panded
capital5* as the case
may (e* 'hich a
minimum
su(scription of #s)
$7*@@@ 4')e)f)
1@)>)?%5 from each
of the relatives*
friends and
associates
commercial
production 4in case
of a manufacturing
company5)
Bhichever is later)
O#
4(5 +he loc,-in
period shall su(<ect
to clause 4c5 (elo'
apply to the
aggregate of the
contri(ution mad in
the pu(lic issue and
so much of the prior
shareholdings as is
necessary to
constitute $7M of
the total issued
capital
Y the loc,-in period
in respect of the
$=8
contri(ution made in
the pu(ic issue shall
(e 7 years froth date
of allotment in such
issue or from the
date of
commencement of
commercial
production 4in case
of manufacturing
company5*
'hichever is later*
and in respect of
holdings prior to the
date of the pu(lic
issue shall (e 7 year
as reduced (y the
period of such prior
holdings e.cept that
such prior holdings
shall remain loc,ed-
in at least for a
minimum period of
$==
$ years from the
date of the allotment
in the pu(ic issue)
Note 1 :9ate of commencement of commercial production1 means the last date of the
month in 'hich commercial production in a manufacturing company is e.pected to
commence as declared in the offer documents)
$=>
NIT 3 C<AN"IN" ROLE O- "OVERNMENT
O./ective0
3fter going through this unit* you should (e in a position to understand
+he different vie'points a(out the role of the government in an economy*
+he manner in 'hich ideas in this regard have changed over time*
+he areas of the economy 'here government intervention is considered desira(le
currently*
+he accepted manner of government intervention* and
3 (rief overvie' of the Indian e.perience in this regard)
Str*ct*re
%)1 Introduction
%)$ #ole of Government in "apitalist Economies
%)% itfalls of "ommunism
%)0 Indian E.perience
%)7 Emerging "onsensus on the "hanged #ole of Government
%)8 Summary
$=?
%)= Aey Bords
%)> /urther #eading
%)? Self-3ssessment Cuestions
311 INTRODCTION
It 'ill (e an interesting e.ercise for your to compare the role played (y the governments
in t'o 3sian countries ! Dapan and "hina) +hese t'o countries differ from each other
tidally in terms of their political and economic ideologies) +he tiny Dapanese nation is
considered to (e a capitalist giant) +he populous "hinese nation is one of the very fe'
countries 'hich still* (y and large* practice communism)
Of course* (oth in Dapan and "hina* <ustice* police and defence are part of the
responsi(ilities of the government) But as regards the economic role of the government*
the situations in the t'o counties are stri,ingly different) In Dapan* there are hardly any
government enterprises and the means of production are almost entirely in closely hands)
+he government at present has a very negligi(le role in the Dapanese economy) In "hina
the situation is almost e.actly the opposite) +he means of production are almost entire in
government hands and the government plays a very prominent economic role even these
days)
$>@
3ctually* if you scan (oo,s of economics* you 'ill decipher t'o diametrically opposite
vie'points a(out the economic role of government) One is the laisseG-faire vie' as
propounded (y 3dam Smith) 3ccording to this* a government that interferes lest 'ith the
economy is the (est) In such an economy* everyone acts according to his or her o'n self-
interest) But the invisi(le hand operating through the mar,et mechanism ensures that
social interest gets promoted in this process) In stri,ing contract is the vie' held (y Aarl
Mar. and his group of scientific scoliosis) "orroding to the Mar.ists* centraliGed
planning 'ith pu(lic o'nership of the means of production leads to an ideal economic
and social set up)
Jet us not ta,e a (rief loo, at the economic history of the developed nations of today)
+his is necessary to understand the prevalence of the different vie'points on the
economic role of government) It 'ill also reveal the process of change in these
vie'points over time) In fact there is ade-uate historical evidence that* (asically*
economic poleis of laisseG-faire helped the countries of Bestern Europe and the United
States of 3merica attain high levels of economic development) 3ctually* till the early
parts of the t'entieth century* scientific socialism 'as loo,ed upon as something
theoretically sound* (ut impractical and utopian)
&ou 'ill notice that the (irth of the Soviet Union in 1?1= (ased on scientific socialism
changed all this considera(ly) /urther* since the late 1?$@s the lacunae father laisseG-
faire economies started looming larger and larger) 3s a result* government intervention
(ecame increasingly popular even in traditional lassie-faire economies) 3 num(er of
$>1
countries turned communist for various reasons particularly after the Second Borld Bar)
9ue to all this a num(er of 3sian and 3frican countries* regarding independence in the
1?7@s and 1?8@s* opted for considera(le government intervention in their economies)
+he pendulum has* ho'ever* s'ung the other 'ay particularly since the 1?=@s) Many
countries of Easter Europe found central planning of the communist variety difficult to
practice and hence ineffective) Many of them li,e oland* Iungary and &ugoslavia
started (eing less rigid forms of "entralised planning) rivate o'nership omens of
production also (egan to (e allo'ed in some sector soft the economy in these countries)
Moreover* (oth the Soveit Union and "hina started inducting mar,et forces to
supplement "entralised planning) +he (rea,up of the Soviet Union of &ugoslavia and
the pulling do'n of the Berlin Ball are ta,en as further manifestations of this 'ind of
change) +he magic formulae on every(odyEs lips these days are li(eralisation and
glo(alisation) It loo, as if the laisseG-faire economic philosophy has (een reinstated)
3lmost all countries of the 'orld* including* India* have (een s'ept off their feet as a
result) +he changes* particularly* since the 1??@s* of the economic role foot he
Government in India (ear ample testimony to this)
It is* ho'ever* (eing increasingly realiGed that there are no simple panacea for improving
for the levels of living of the people) Most analysis agree that neither laisseG-faire nor
"entralised planning of the communist verity can deliver the goods) It has* of cause*
(een admitted for years that even capitalist countries there are certain aspect 'here
$>$
government intervention in the economy impose its performance) Be are living in an age
'hich is also 'itnessing attempts to ma,e scientific socialism mar,et friendly) &ou
might have come across the popular saying that 'e are in the ear of Aarl Smith and
3dam Mar. these days)
In vie' of allot his* 'e no' em(ar, on a more detailed analysis of the role of
government in todayEs 'orld)
31! ROLE O- "OVERNMENT IN CA$ITALIST ECONOMIES
&ou 'ill find that the laisseG-faire economic philosophy underlying the capitalist
economies has come inform strong analytical <ustification) +his is done (y point out that
such polices 'ould lead to a areto-optimal allocation of resources in the economy
concerned) 3 areto-optimal situation e.ists in any economy if one person cannot (e
made (etter off 'ithout ma,ing someone else 'orse off in their respective options)
Under certain assumptions the proponents of liaises-fire have promoted that such a
areto-optimal situation 'ill emerge in a free mar,et economy 'ith no government
intervention) But the assumptions made inderiving the areto-optimal solution from
laisseG-faire economic logic are far from reality) /urther* the actual results in coutnries
follo'ing laisseG-fare economic polices reveal serious dra'(ac,s) &ou 'ill hence find
that on (oth these counts* even confirmed protagonist of laisse-faire favour economic
intervention (y government) Be ta,e up these issues one (y one no')
$>%
a5 Unrealistic assumptions
+hree (asic assumptions underlie the <ustification of a laisseG-faire economic philosophy)
/irstly it is assumed that mar,ets are characterised (y perfect competition) Secondly* it is
ta,en for granted that there are no e.ternalists) +hirdly* not all types of goods can (e
ta,en into account in the analysis) +he meanings and implications of each of these are
discussed (elo')
4i5 erfect competition 1 erfect competition has a num(er of
characteristics) +here are a large num(er of (uyers and sellers each
(uying and selling only a small -uanity of the product) +he product
produced is perfectly homogenous and (oth (uyers and seller are
guided solely (y economic considerations) +here is perfect ,no'ledge
and perfect mo(ility of consumes and of the factors of production) the
net result of all this is that there 'ell (e only one price for the
commodity at one point of time in a mar,et) /urther no single (uyer
or seller can affect the price or the demand or the supply* as the case
may (e* (y his independent action)
&ou can see (y no' that the actual situation in most mar,et is a far carry from this) M#s
Doan #o(inson and E) "ham(rlin had pointed this out even in this late 1?%@s) +hey (uild
alternative models of mar,et structure* namely imperfect competition and monopolistic
$>0
competition) Jater 'riters have gone on to (uild even more realistic models of mar,et
structure) +hese oligopoly models visualiGe the e.istence of a ra' large producers in each
industry 'ith some of these 'or,ing even in collusion)
3 areto-optimal situation in the allocation of resources even does not emerge 'ith
laisseG-faire polices under any of these alternative and more realistic forms of mar,et
structure) Ience 'e find that government intervention to prevent non-optima allocation
of resources* and higher prices* e.cessive advertising e.penditure* etc)* under these forms
of mar,et structures* is universally accepted)
4ii5 3(sence of e.ternalities 1 E.ternalities are defined as incidental
(enefits and detriments accruing out of nay economic activity) If your
neigh(our sets u a motor cycle repair shop* the noise 'ill (other you)
+he setting up of their repair shop 'ill thus lead to a deter mental
e.ternality for the entire neigh(ourhood) In contrast* assume that one
of your neigh(ours has a (eautiful garden) Bhenever you pass (y the
garden* you 'ill feel happy and refreshed) +he neigh(our cannot
charge you for this happiness that he* incidentally* provides you) +he
setting up of a (eautiful garden (y someone in the neigh(ourhood thus
generates this (eneficial e.ternality)
&ou 'ill certainly agree that if societyEs interest is to (e promoted* these e.ternalities
have also to (e ta,en into account in determining economic activities) /or this purpose*
$>7
economic activities have to (e (ased on calculations of social cost and social (enefit and
not on mere private cost and private (enefit)
In laisseG-faire logic* ho'ever* 'e find that costs and (enefits are considered 'ithout
ta,ing into account these e.ternalities) 3s a result* the output of those goods and services
'hich cause (eneficial e.ternalities 'ill (e tool little) 3s against this the output of these
goods and services 'hich have detrimental e.ternalities 'ill (e too much) Government
intervention to correct this anomaly is therefore an accepted practice even in capitalist
economics)
4iii5 u(lic goods e.cluded 1 &ou find that economists ma,e a distinction
(et'een private and pu(ic goods) 3ccording to them* private goods
posses the attri(utes of (oth delecta(ility and e.cluda(ility) On the
contrary* pu(lic goods are conspicuous (y the fact that they have
neither of these attri(utes) Be 'ill not proceed to e.plain each of
these attri(utes)
3ssume that an item has the attri(ute of delecta(ility) If so* the use of threat item an
individual 'ill reduce the total availa(le supply for use (y others* to that e.tent* at least
temporarily) 3 goods is e.cluda(le if a person not paying for it can (e prevented from
en<oying it) &ou notice that the goods that 'e (uy from the mar,et posses (oth these
attri(utes) In contrast* many thins that 'e collectively consume li,e street lighting are
devoid of (oth) /or a private goods* mar,et mechanism determines the price to (e
$>8
charged and the -uantity to (e produced) But the mar,et mechanism cannot help us on
(oth these counts in the case of pu(lic goods) u(lic goods are hence the responsi(ility
of governments the 'orld over)
B5 Jacunae in performance
&ou 'ill agree 'ith the statement that the proof of the pudding is in the eating) It is
indeed true that some countries follo'ing laisseG-faire economic polices have attained
very high eels of gro'th in terms of per captain real income) But it has also to (e
admitted that the laisseG-faire economic pudding has actually turned out to (e some'hat
less tasty than it 'as supposed to (e) In fact* three serious lacunae have (een noticed in
the economic performance of free mar,et economies) /irstly* these have (een
e.periencing periodic ups and do'ns in national income* employment and prices)
Secondly* thee are hug ine-ualities of income and prevalence of considera(le poverty)
+hirdly* there is also enough reason to (elieve that such economics do not ma,e ade-uate
provision for the future at least on t'o counts* namely in promoting developing and in
ma,ing development environmentally sustaina(le) Be no ta,e up these three issues one
(y one)
4i5 "yclic /luctuations 1 periodical up'ard and do'n'ard changes in national
income* employment and prices have characterised free mar,et economies)
+he laisseG-faire economists over refused to accept this reality and 'ent on
$>=
harping the theme that there is an automatic tendency to'ards full
employment in a free mar,et economy) 3n e.treme do'ns'ing- the great
depression of the 1?%@s ! made Dohn Maynard Aeynes -uestion the vie' and
propound an alternative theory) 3ccording to Aeynes* thee 'ill (e
e-uili(rium at less than full employment in a free-mar,et economy) Iis vie'*
'ith minor modifications* have come to (e accepted (y a large num(er of
countries)
Ience government intervention through a com(ination of monetary and fiscal polices is
considered essential for free mar,et economics) +he purpose of such polices it ego ensure
sta(ility in national income* employment* and prices)
4ii5 Ine-ualities 1 9eveloped free mar,et economies are characterised (y
considera(le interpersonal ine-ualities of income and 'ealth) +his causes
concern (ecause people in the lo'est income groups are often found to (e
living in poverty) It is also seen that distri(ution is not e-uita(le (et'een
different regions 'ithin a nation) Some regions are poc,ets of poverty)
/urther* there is usually a gender (ias in distri(ution) +he ma<ority of the poor
in developed free mar,et economies are often found to (e 'omen)
3 little analysis 'ill convince you that this is not very surprising) It is true that there is a
direct relationship (et'een effort and re'ard in a free mar,et economy) But the effort is
<udged (y the means of production that an individual or a region has) If these are not
$>>
initially distri(uted e-uita(ly* ine-ualities arise and are li,ely to get compounded over
time)
Ience* 'e see that measures to lessen e.treme ine-ualities in come and 'ealth are part of
the agenda set (efore the governments of free mar,et economies) 3nd in these measures*
particular attention is paid to the removal of poverty in the less developed regions and of
the less advantaged groups) +he last t'o aspects of the dsitri(utional issue have come
into policy focus only in the part fe' years)
4iii5 Inade-uate provision for the future 1 Generally* 'e also fid that a laisseG-faire
economic policy does not result in ade-uate economic provision for the future)
+his is so from t'o important points of vie') /irstly you 'ill agree that most
+hird Borld countries cannot attain a high level of economic development
'ithout he adoption of specific policy measures in this regard (y their
government) Secondly* inter-generational e-uity in terms of attaining
environmentally sustaina(le development is conspicuous (y its a(sence in
almost all countries of the 'orld) +hese points* 'e (elieve* need to (e
discussed in slightly greater detail)
9eveloping countries need a lot of investment in area li,e heavy industries and
infrastructure) +hese arras need su(stantial capital and yield returns only in the long run)
/urther* they are often highly ris, and are* often in the form of pu(ic goods 'ith a good
$>?
deal of (eneficial e.ternalities) Moreover* the political* social and economic institutional
structure in these countries is far from congenial for the promotion of economic
development) It is therefore accepted that 'ithout the government playing a positive
role* these institutional constraints cannot (e overcome nor can heavy industries or
re-uisite infrastructure come up)
3s regards the environment* 'e find that in private cost-(enefit calculations in free
mar,et economies* this aspect never used to (e ta,en into considerations +his is hardly
surprising (ecause leaving a (etter environment for the succeeding generations ahs
(ecome an economic policy o(<ective only in recent years) Even centrally planned
soloist economies have a misera(le record on this count) It must ho'ever to (e admitted
that environmental impact assessment is a gray area even today) +here are umpteen
pro(lems in 'or,ing out the cot of detrimental e.ternalities on the environment resulting
from economic activity) But the environmental aspect is (eing increasingly recognised
the 'orld over) 3s a result* even in free mar,et economies* governments insist on
pro<ect getting environmental clearance)
313 $IT-ALLS O- COMMNISM
Be have* (y no'* discussed 'hat are called cases of mar,et failure in free mar,et
economies* <ustifying government intervention) 3 -uestion that naturally 'ould arise in
your mind is 'hether 'e can go to the other e.treme and leave all aspects of the
economies in government hands) It may appear that ideal solutions from the social point
$?@
of vie' 'ould emerge in the economy if this is done) +he e.perience of communist
economies suggests that this is simply torture) Economies praising central planning under
scientific socialism have had serious difficulties on at least three counts) /irstly* there
have (een pro(lems in finding out the consumerEs tastes) Secondly* in a num(er of cases*
there have (een difficulties in seeing to it that ade-uate inputs are made availa(le to
produce planned outputs) Jastly* it has also (een noticed that these economies have
lagged far (eing the others in terms of technology) Be shall ta,e up these issues in
greater detail one (y one no')
Activit2 1
1 4a5 Name some countries 'hich have predominantly a capitalistic system of
economy) Give some facts and figures 'ith regard to their economic* scientific
and research achievements)
4(5 Bhat factors could (e attri(uted to the high levels of income leading to a higher
standard of living in such countries F
$?1
HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
4c5 Meet some people 'ho have (een for some time in any of the Bestern countries
'ith capitalistic economic system and discuss the 'or, climate that prevails in
such a country and compare it 'ith the 'or, climate in India) Bhat implications*
if any* such contrasts have had on IndiaEs economic performance F
4d5 Bhat are some of the pro(lems 'hich countries follo'ing the capitalistic
economic system have had to face F
4a5 Good produced not in line 'ith consumerEs preferences
In communist countries* the planning authorities decide the (as,et of commodities to (e
produced) rice again are fi.ed not (y mar,et forces* (ut (y these authorities) +hus the
$?$
mar,et mechanism of the type that operates in after mar,et economy is conspicuous (y
its a(sence in these economies)
+he result is that thee is often a large unsold stoc, of goods un'anted (y consumers in
shops) +here are also (ig lines in front of shops of people 'anting to (uy goods 'hich
are much in demand (ut not produced in ade-uate -uanity (y the planners) Infact one of
the ma<or reasons for the so-called (rea,do'n of communism is that the strong
preference of consumers for K"#s* fast foods* cameras* etc)* had not (een ade-uately
met (y the planners in these countries)
Ience* many of the former communist countries are ma,ing efforts these days to
overcome this lacunae (y giving the mar,et mechanism its due place in their economies)
4(5 9ifficulties in training martial (alancing
+he planners in a communist country have to see that ade-uate resources are made
availa(le at the proper time and place) +his is to ensure that the production of outputs
ta,es place according to the plan) Ience such planning for internal consistency ta,es
care of material (alancing according to 'hich inputs supplied e-ual inputs demanded)
Material (alancing is sought to (e achieved in communist countries (y the use o the
input-output techni-ue) +he input-output ta(le is 'or,ed out on the (asis of the
information regarding the inputs re-uired for producing outputs in the different sectors of
$?%
the economy) On the (asis of such a ta(le* the input re-uirements needed to produce the
targeted output of all sectors together can (e mathematically 'or,ed out)
+he detailed information re-uired for (uilding such a ta(le is seldom availa(le) It has
also to (e (orne inside that if information a(out input re-uirements is collected from
particular enterprises* there is al'ays a danger of deli(erate misinformation) "ommunist
countries are often (edeviled 'ith serious input (ottlenec,s) More often than not*
planners in these countries are consternated to solve thee pro(lems (y mere trail and
error) Other such attempts to minimise input (ottlenec,s result in scarce inputs (eing
diverted to :priority; sectors li,e spacecraft to the ultra neglect of sectors producing
consumer dura(les) 9ue to all this* communist countries also 'itness the strange
phenomenon of some enterprises ,eeping unusually high levels of stoc, scarce ra'
material to fulfil their production -uotas as determined (y the planning authorities)
I the light of all this* communist countries these days are attempting to ma,e socialism
mar,et friendly) +his is done (y gradually introducing private o'nership of means of
production and using mar,et mechanisms to (ring a(out material (alances)
4c 5 Outdated technologies
It is true that countries 'hich too, to communism earlier (egan their process of economic
development (y (orro'ing state of art technologies from other countries) &ou may
$?0
notice* ho'ever* that the communist system 'as such that there are little incentive for
enterprises in these countries to go in for continuous technological upgrdation) Be can
thin, of at last three important reasons fro this lac, of incentive) One is the fact that
enterprises in communist are static monopolies) Secondly* there is the unpleasant reality
that technological upgrdation (y an enterprise is often not an unmi.ed (lessing for it)
+he (enefits of upgrdation may not necessarily accrue to that particular enterprise) Be
shall no' (riefly d'ell on the reasons for the unpleased conse-uences)
4i5 No spur of competition 1 In free mar,et economies* the enterprise compete
'ith each other to capture the mar,et) +his ena(les customers to loo, for
other producers if the -uality of the product of one of the producers is not up
to the mar,) +he prdoucer 'ith poor -uality product is forced either to
improve his -uality or leave the industry)
In communist countries* scene enterprise are state monopolies* the consume has no such
choice) +he state decides ho' much each producer has to produce and there is no
continuous rivalry (et'een the producers to improve -uality and capture the mar,et) It is
found that in a num(er of these countries* the -uality of the products has instead
improving gone do'n over time)
4ii5 technological improvement causes pro(lems 1 In free mar,et economies* a
good deal of technological upgrdation ta,e place on shop floors) Such
$?7
improvements come in favour acclaim and often result in less input (eing
used to produce the same output)
It is true that in a community se top too such an improvement may result in a part on the
(ac, of the concerned enterprise) It may* ho'ever* not (e an unmi.ed (lessing for it)
+his is so (ecause it may often imply a much large -uote of output to (e produced (y it)
Getting the e.tra volume of input in time 'ould often cause much greater* if not
insurmounta(le* difficulties to the management) +his may act as a strong disincentive to
the management touring a(out technological improvements)
3s a result of all these factors* countries 'hich too, to communism early are facing
pro(lems of outdated technology) +his is particularly so in their non-priority sectors
'here government # O 9 efforts have not (een underta,en) More or less the same is the
situation in countries 'hich too, to communism later on) +hese coteries* for political
reasons* had to adopt outdated technologies prevalent another communist countries)
Activit2 !
1) 4a5 Jist (elo' the names of the countries 'hich till recently (elonged to the
communist (loc)
$?8
4c5 Bhich of the a(ove countries have changed their economic systems and 'hich of
the countries continue to treat the same path F
4c 5 Bhat is the e.act position of "hina in so far as its economic system6structure and
the role of the Government are concerned F Io' 'ould you descri(e its economic
system F 4&ou may discuss this 'ith your colleagues 'ith other ,no'ledgea(le people5)
HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
$?=
31' INDIAN E=$ERIENCE
+he Indian economy has also 'itnessed a (ight change in the role of the Government
over time) Ever since independence till around the 1?>@s* as 'e discussed in the
previous units* our o(<ectives 'as to have planned economic development 'ithout
adopting e.treme forms of capitalism or communism)
Ieavy industry and infrastructure 'ere left in the hands of the government to develop)
riority sectors 'ere decided upon (y the Government) In agriculture* development 'as
encouraged along capitalistic lines) +o prevent monopoly* motivate cyclical fluctuations*
lessen interpersonal ine-ualities of income and 'ealth and promote economic
development* measures of command and control 'ere fre-uently resorted to* though
some measures operating through the mar,et mechanism 'ere also adopted) Jittle
attention 'as ho'ever paid (y the Government to prevent environmental degradation or
reduce inter-regional or gender-(ased ine-ualities)

+he situation in 'hich 'e found ourselves (y the 1?>@s 'as not a happy one) Our
Government could not provide ade-uate infrastructural facilities) Bhile 'e had some
success in increasing agricultural production* even no'* seems affected (y the vagaries of
the 'eather* causing cyclic fluctuations in the economy) &ou 'ill find that thee have
(een official statements that 'hile the Indian economy has gro'n* this gro'th has not
tric,led do'n sufficiently) /urther* Government-o'ned enterprises in (asic and heavy
$?>
industries 'ere functioning far from efficiently and have mostly (een using outdated
private sector units of the Indian economy 'ere also more or less in the same (oat) +here
'ere hence slo' rum(lings of change in IndiaEs economic policy from the >@s)
It soon (ecame clear* ho'ever* that such gradual changes 'ill simply not 'or,) +he
unprecedented crisis in the Indian economy in 1??@-?1 'as the last stra' on the camelEs
(ac,) Our foreign e.change reserves fell to an all-time lo' level o \0$)$ (illion)
Inflation rate had already crossed the dou(le-digit figure and 'as actually at 10M) /iscal
deficit had risen to >)0M of the Gross 9omestic roduct) +he current account deficit on
(alance of payments 'as as high as \ ?)? (illion) International "redit #ating agencies
'ent on to considera(ly do'ngrade IndiaEs credit'orthiness)
+he Government and many economists agreed that a shoc, therapy 'as immediately
re-uired to pull the Indian economy out of the 'oods) +he Borld Ban, agreed to (ail
India out* (ut imposed certain conditionality for doing so) It 'anted t'o ma<or types of
programmes to (e carried out) /irstly* there 'ere to (e short-term Sta(ilisation measures
to control inflation and 'ipe out the (alance of payments deficit) +hese 'ere agreed
upon) &ou are a'are that attempts are (eing made to rationalist su(sidies and cut do'n
'asteful Government e.penditure to reduce the fiscal deficit) +he rupee has (een
devalued to correct the (alance of payment deficit) Secondly* there had to (e structural
reforms to ma,e the Indian economy competitive and attain a high rate of gro'th 'ith
social <ustice) +hese have also (een accepted and measures are (eing ta,en to li(eraliGe
and glo(alise the Indian economy)
$??
3s a result of all this* there 'as considera(le rethin,ing* reinforced (y the conditionality
imposed (y the Borld (an, to help India out of her difficulties) Steps Began to (e
initiated in the 1?>@s and these gathered considera(le momentum in the 1??@s) 3 sea
change has thus come a(out in the economic role of the Government in India since the
1??@s) Many of the sectors reserved for the pu(lic sector have no' (een thro'n open to
the private sector) More and more physical controls are (eing replace (y measures to
guide the economy through the mar,et mechanism) #estraints in the 'ay of international
trade and factor movements are (eing gradually reduced) +he seeming intention is to
ma,e the Indian economy face international competition and (ecome efficient in
performance) +he Government role in the provision of pu(lic goods is not li,ely in
increase* (ut as regards the protection of the environment* the Government is li,ely to
play an increasing role)
Activit2 3
1) 3rrange a meeting 'ith the General Manager of one large company and one
medium o small-scale company and discuss 'ith them ho' economic reforms
since 1??1 have affect them) Jist their responses in terms of more freedom*
greater fle.i(ility* the attitude and (ehaviour of the
administration6(ureaucracy* etc)
%@@
317 EMER"IN" CONSENSS ON T<E C<AN"ED ROLE O-
"OVERNMENT
&ou might have noted (y no' that the vast difference that e.isted (et'een capitalist and
communist countries regarding the role of government in their economies has almost
disappeared) 3 certain consensus seems to (e emerging these days on the role the
government is supposed to play on the economic front)
"apitalist countries are increasingly accepting the fact that governments have to play an
important role in their economies) +he governments come into the picture to provide
pu(lic goods and to ensure that competitive forces are not impeded in play their role)
+he governments promote the production of commodities 'ith (eneficial e.ternalities
and cur( the production of commodities 'ith detrimental side effects) Measures to
reduce interpersonal ine-ualities in income and 'ealth* 'ith particular focus on the
removal of poverty* especially among disadvantaged groups* are part of government
agenda) So steps to foster economic development and to prevent 'idespread fluctuations
in national income* employment and price level)
"ommunist countries are similarly 'a,ing up to the fact that every thing a(out the
economy cannot (e left to the state) It is* (y and large* agreed that the record of these
countries in overcoming cases of mar,et failure as regards cyclic fluctuations* poverty
removal and provision of pu(lic goods has (een some'hat good) But there have (een
glaring cases of state failure in such countries regarding production of commodities
%@1
'anted (y the people* material (alances 4or stoc,s 5 and technological up gradation) +o
overcome these difficulties the governments of these countries are getting slo'ly out of
the responsi(ility of running productive enterprises) +hey are also gradually introducing
mar,et forces and adopting more decentralised planning techni-ues)
It has also to (e noted that in (oth sets of countries* increasing attention is (eing paid (y
governments to tac,le pro(lems of environmental degradation) 3s regards the modus
operandi of government intervention in this and other areas* the tendency is to adopt
measures operating through the mar,et mechanism in preference to command and control
measures)
319 SMMARB
+his unit gave you a (rief overvie' of the change in the role of government in the
economies of the 'orld guided (y different politico-economic systems)
Be sa' ho'* in capitalist economies* the economic role of government had increased
over time) +his attri(uted to mar,et failure on t'o counts) /irstly* the assumptions of
perfect competition* a(sence of e.ternalities and non-e.istence of pu(lic goods have (een
found to (e not (ased on realities) Secondly* there have (een lacunae in the performance
of these economies in terms of cyclic fluctuations of income* employment and prices*
e.istence of ine-ualities* poverty and inade-uate provision for future)
%@$
Be 'ent further to give you the pitfalls of communism to indicate that cases of mar,et
failure cannot (e rectified (y ma,ing the government responsi(le for everything in the
economy) +hree aspects of state failure in such economies 'ere highlighted1 inade-uate
provision of goods 'anted (y consumers* lac, of material (alances* and a(sence of
continuous technological upgrdation) It 'as pointed out ho' private o'nership of means
of production and mar,et mechanism are (eing gradually introduced in the economies of
the communist countries to overcome these lacunae) Be also discussed the change over
time in the role of government in the Indian economy)
In the light of 'hatever has (een discussed* it can (e inferred that the respective
economic roles of government in the capitalist and communist countries of the 'orld are
(ecoming less and less dissimilar) 3s has (een pointed out* 'e are leaving the age of
3dam) Smith and Aarl Mar. to enter the modern era of 3dam Mar. and Aarl Smith)
+here is an emerging consensus on the economic role of government in countries of the
'orld 'ith totally different ideologies) It is admitted that governments have to ta,e e.tra
care that there are neither mar,et nor state failures in their economies)
319 +EB 8ORDS
3dam Mar.1 3n intentional mi.-up in the names of 3dam Smith and Aarl Mar. to
indicate that the distinction (et'een capitalism and communism is (ecoming (lurred)
%@%
"ommunism1 3n economic and political structure 4or system5 'ith central planning and
means of production in government hands* providing no scope for mar,et mechanisms)
+he system is (ased on scientific socialism propounded (y Aarl Mar.)
E.ternalities1 Unintended side effects of economic activities 'hich may (e detrimental
or (eneficial* (ut in any case not ta,en into account (y the unit carrying out the activity)
Aarl Smith1 3n intentional mi. up in the names of Aarl Mar. and 3dam Smith to
indicate that the distinction (et'een capitalism and communism is (ecoming thin)
JaisseG-faire1 3n economic philosophy that a government interfering least 'ith the
economy is the (est) 3dam Smith 'as the most famous proponent of this philosophy)
+he term laisseG-faire has (een used in this unit as synonymous 'ith capitalism or free
mar,et economy)
Mar,et failure1 Situations 'here the mar,et mechanism fails to ena(le the economy to
function efficiently)
Material Balance1 3 situation in 'hich demand and supply of inputs is almost e-ual or
tallies)
areto-optimality1 3 situation in an economy 'here one person cannot (e made (etter off
'ithout ma,ing someone else 'orse off in their respective opinions)
erfect competition1 3 mar,et structure in 'hich a commodity has <ust one price in the
entire mar,et at one point of time and no single individual can influence the demand*
supply or price of the commodity (y his independent action)
%@0
u(lic goods 1 Goods 'hose use (y those 'ho do not pay the price of the commodity
cannot (e prevented and goods 'hose use (y one person does not reduce their supply
availa(le for to others)
State failure 1 /ailure of the state arising from the difficulties faced (y and due to the
assumption (y the are of the entire responsi(ility for the economy) +he state tries to ta,e
the place of the mar,et mechanism)
31: -RT<ER READIN"
Baurnle* B) D)* 3) SP Blinder and B) M)Scarth 41?>755* Economics 1 rinciples and
olicy* 3cademic ress "anada* +oronto* "hapters $8* %0* %>* 0@ and 01)
lanning "ommission 41??=5 3pproach paper to the Ninth /ive &ear lan* Government
of India* Ne' 9elhi* "hapter !1)
S'amy* 9) S) 41??0* +he olitic cal Economy of IndustrialiGation* Sage u(lications*
Ne' 9elhi* Introduction* "hapter ! I* and "onclusion)
31; SEL--ASSESSMENT CESTIONS
1) Give a historical vie' of the role of government in the capitalistic economics
and communist economies)
%@7
$) Bhat do you mean (y areto-optimality F 3re the re-uirement of areto-
Optimality ment in a capitalistic economy F 9iscuss)
%) Bhat assumption are implicit in the laisseG-faire or capitalistic economy F
3re these assumptions met in reality F 9iscuss)
0) Bhat is meant (y e.ternalities F Bhat is the significance of e.ternaliGes in
economic analysis F
7) Bhat have (een the main pitfalls of communist regimes F 9iscuss 'ith
e.amples
8) 9iscuss the role of the Government in India in the economic domain from a
historical point of vie')
=) :+here has (een a -ualitative change in the role of the Government after the
economic reforms of 1??1;) In 'hat 'ay has the role of the Government
changed F 9iscuss)
>) Briefly discuss the forces 'hich promoted the Government of India to usher in
economic reforms in 1??1) Io' have these economic reforms affected the
role of the Government F E.plain fully 'ith e.amples6illustrations)
?) Bhat ,ind of consensus seems to (e emerging 'ith regard to the role of
government in the present scenarioF 9iscuss 'ith e.amples)
%@8

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