notes mod 4, 5

Entrepreneurship and New Venture Creation

KSOM notes by Dr. Sneha

Semester 3

Notes Module 4 (complete) and module 5

Bangalore University


Q What is Creativity? (2 marks)

Creativity In this fiercely competitive, fast-faced, global economy, creativity is not only an important

source for building 3 competitive advantages but it is also necessary for survival. Creativity refers to

mental orientation and capability of persons to evolve and develop new and superb solutions to

problems that are regarded as complex, ambiguous or unclear. Creativity is a mental and social process

involving the discovery of new ideas or concepts, or new associations of the creative mind between

existing ideas or concepts. Creativity is fueled by the process of either conscious or unconscious insight.

An alternative conception of creativeness (based on its etymology) is that it is simply) the act of making

something new.

Creativity is a sub-set of intelligence, meaning a group of basic relational or elemental functions with a

high association of reliability; i.e., a particular sub-set of conditional intelligence. Strictly speaking, this

last requirement is essential for intelligence; if the brain's functions responsible for creating logical

relations often make mistakes, this would not be intelligence, but rather something else that is intuition,

but mistakes we almost always made, this would be called a lack of intelligence.

Q. What are the Components of Creativity (2 marks)

I) Conceptual Fluency: It is the ability to generate a large number of relevant ideas relatively rapidly with

reference to a given problem/ situation/ issue under consideration.

2) Conceptual Flexibility: It is the ability to shift perspectives/viewpoints, to move from one frame of

reference to another, and to change or vary the approaches to solutions to problems.

3) Originality: It is the ability of produce unusual, novel, atypical answers to questions, responses to

problems, and interpretation of issues, situations, and events.

4) Complexity Orientation: It is the ability to challenge, and find meaning, in complex and ambiguous

problems/situations, and to enjoy the efforts to analyze, integrate, clarify, and resolve them. These four

elements of creativity are inextricably linked with individuals' knowledge, experience, and imagination

on the one hand, and high level of motivation and interest towards problem solving, on the other.

Q. What are the attributes of Creative Individuals? (2 marks)

Psychological research has in fact identified and highlighted the distinguishing attributes of creative

individuals.



These are as follows:

I) A strong sense of curiosity.

2) Openness and independence of thinking and judgment.

3) The ability to see things in unusual ways.

4) Accepting and reconciling apparent opposites or paradoxes.

5) Tolerance of ambiguity.

6) Keen sensitivity, fostering intuition.

7) A strong sense of autonomy.

8) Not bound by group standards and control.

9) Persistence and motivation

10) Highly developed imagination and visualization ability.

II) The ability to generate a large number of ideas and viewpoints.

12) Flexibility.

13) Originality.

14) The ability to focus and concentrate.

As a matter of fact, creative individuals are characterized by a Janusian mode of thinking. The latter

refers to "the capacity for conceiving and Utilizing two or more opposite or contradictory ideas,

concepts, or images simultaneously"

Q. Explain the Creative Process (12 marks)

Clearly, action by itself has no meaning; it is of little value to simply "do things" without having

inspiration and direction. Entrepreneurs need ideas to pursue and ideas seldom materialize accidentally.

Ideas usually evolve through a creative process whereby imaginative people germinate ideas, nurture

them, and develop them successfully. Various labels have been applied to stages in the creative process,

but most social scientists agree on five stages, i.e., idea germination, preparation, incubation,

illumination, and verification. In each stage, a creative individual behaves differently to move an idea

from the seed stage of germination to verification; behavior varies greatly among individuals an ideas:

1) Idea Germination: The germination stage is a seeding process. It is not like planting seed as a farmer

does to grow corn, but more like the natural seeding that occurs when pollinated flower seeds,

scattered by the wind, find fertile ground to take root. Exactly how an idea is germinated is a mystery; it



is not something that can be examined under a microscope. However, most creative ideas can be traced

to an individual's interest in or curiosity about a specific problem or area of study.

2) Preparation: Once a seed of curiosity has taken form as a focused idea, creative Idea people embark

on a conscious search for Germination answers. If it is a problem they are trying the seeding stage to

solve, then they begin an intellectual journey, seeking information about the Recognition problem and

how others have tried to resolve it. If it is an idea for a new product or service, the business equivalent is

market research. Inventors will set up laboratory experiments, - designers will begin engineering new

product ideas, and marketers will study

3) Incubation: Individuals sometimes concentrate intensely on an idea, but, more often, they simply

allow consumer buying habits, ideas time to grow without intentional effort. All have heard about the

brilliant, sudden "flashes" of genius, i but 'few great ideas come from thunderbolts of insight. Most

evolve in the minds of creative people while they go about other activities. The idea, once seeded and

given substance through preparation, is nit on a back burner; the subconscious mind is allowed time to

assimilate information.

4) Illumination: In this stage the idea resurfaces as a realistic creation. The fable of the thunderbolt is

captured in this moment of illumination-even though the often long and frustrating years of preparation

and, incubation has been forgotten. Illumination may be triggered by an opportune incident. The

important point is that post creative people go through many cycles of preparation and incubation

searching for that incident as a catalyst to give their idea full meaning. When a cycle of creative behavior

does not result in a catalytic event, the cycle is repeated until the idea blossoms or dies. This stage is

critical for entrepreneurs because ideas by themselves have little meaning.

5) Verification: An idea once illuminated in the mind of an individual still has little meaning until verified

as realistic and useful. Entrepreneurial effort is essential to translate an illuminated idea into a verified,

realistic and useful application. Verification is the development stage of refining knowledge into

application.

Q. Give an account of creative thinking (12 marks)

In order to develop a creative approach to problems and ways of coping with them innovatively,

organization personnel need to cultivate certain basic thinking skills.

These skills are vital for gaining insights and formulating solutions to a wide spectrum of problems.

These essential skills are:

1) Convergent Thinking: Convergent thinking consists of those abilities which enable one to reach a right

solution to problems which mostly have one right solution. Problems that may potentially have plural

solutions require the exercise of divergent thinking mechanisms. The mechanisms of convergent

thinking may be outlined as follows:

i) Classification and/or Categorization: It involves listing the components/elements of a problem, using

analogies, making comparisons, and displaying the situation through tables, charts, and diagrams.



ii) Analysis: It involves breaking down or factoring a problem into sub-problems, seeking relationships

among components, establishing relative priorities or importance of elements or relationships, making

cross classifications, identifying methods/procedure(s) or steps to a possible solution, and transforming

the problem into an abstract or symbolic form of a model on which symbolic manipulations may be

performed. The latter may enable exploration and assessment of alternatives as in a computer

simulation model or sensitivity analysis. Analysis also involves identification and definition of issues,

constraints, and variables. It may also impose constraints on a problem by making assumptions and

formulating criteria of evaluation. Analysis also focuses on selecting and evaluating alternatives, and

may involve working backward from a solution.

iii) Synthesis: It is concerned with seeing patterns among components or elements and involves

aggregation and juxtaposition of elements in terms of their similarity, proximity, consistency,

relationships and so on. It also attempts to use a broad conceptual model to organize facts and

information. It may sometimes be facilitated by bringing together or highlighting contradictory or

extreme elements in a problem situation. Such a focus may sensitize a problem-solver to seek a solution

that harmonizes the contradictions and inconsistencies.

iv) Optimization: It is essentially concerned with refining a solution. It may thence involve substitution of

parts, addition of components/elements, deletion of superfluous, items, modification of elements, and

alternation of connecting points or relations in terms of the evaluative criteria for a solution.

2) Divergent Thinking: It involves approaches or perspectives that may be uncommon or unusual,

resulting in novel solutions. The mechanisms of divergent thinking may he outlived as follows:

i) A working definition of the problem is sought to be developed by identifying the key terms, concepts

and their meanings, the requirements of what needs to be done resolve the problem, and by factoring

the problem into sub-problems.

ii) Search for solution(s) begins with the most familiar, and is expanded through associative thinking (A

suggests B, B suggests D, etc.). The latter may bring out different and far-out alternatives for

consideration. Making a list of relevant objects or elements also often serves to activate divergent

thinking.

iii) The problem may be restated or redefined by relaxing and/or reinterpreting the constraints. Such a

redefinition often leads to the emergence of new perspectives or frames of reference.

iv) Imagination and intuition are heavily relied on in search for possible unconventional solutions or

towards evolving new syntheses.

v) Questions like the following stimulate divergent thinking:

a) What is the opposite of the known or conventional approach (es) or solution(s)?



b) What would happen if the current basic assumptions were changed in part or replaced by another

set? c) What would happen if the given constraints in a problem situation were amplified or reduced or

eliminated in whole or part?

vi) Using analogies from one or more different fields and trying to understand their structure and

functions may produce new and unforeseen insights into the nature of the given problem (examples:

whales and submarines, birds and aircraft, computer and brain, etc.).

3) Making Forced Relationships: A distinctive characteristic of the creative process is the ability to

connect two or more apparently different or disparate ideas, concepts, elements, or entities. This aspect

or characteristic of the creative process is called forcing relationships. Most of our thinking proceeds

automatically along habitual lines. Such an accustomed mode of thinking is natural' for most of us. It is,

however, unproductive in respect of providing us with new and interesting or unconventional ideas. To

get out of our automatic mode of thinking, we must discover, make or seek out non-familiar and non-

habitual linkages among unrelated facts and objects. We make these linkages or relationships by

identifying common or similar elements in uncommon comparisons of dissimilar things. Making forced

relationships stimulates new insights towards problem solving. These insights emerge from comparisons

of the dissimilar objects or entities depending on what the insights are wanted for. Forcing relationships

may often be difficult to start with because people are unaccustomed to thinking in this manner. But it

becomes much easier with practice.

4) Recognizing Positive Potential in a Problem: There are always at least two sides to every problem. The

first and the most obvious side is that which is causing worry and concern. The other side is less obvious

and less often experienced. In every problem which produces tension arid anxiety, there are elements

which need to be found and recognized for their possible positive potential or significance. The ability to

find the positive potential in a problem is a mark of creative openness, receptivity, and flexibility.

Recognition of positive potential may sensitize a person to new opportunities and useful courses of

action which may compensate for the negative aspects, or enable a person to make the best of a bad

situation.

5) Dissecting Ideas: Dissecting an idea implies developing a list of what is useful or relevant, and then

identifying what is missing. The list of what is useful may be prepared by using insights from convergent

and divergent thinking or by making forced relationships. The identification of what is missing is

attempted in terms of "How to ..." statements. These statements may relate to disaggregating, planning,

organizing, managing, carrying forward, conveying, transmitting, or implementing an idea and/or its

implications. They may relate to a whole range of connective issues focusing on the translation of ideas

into practice or their testing and assessment against real world conditions. The gaps brought to light by

"How to ...." statements are sought to be filled by generating new ideas. These new ideas may also lead

to a redefinition of the problem or a revision of its underlying assumptions.

6) Visualizing Future Solution State(s): Creative individuals usually envision solutions to the problems

exercising them. They try to create a vision of what a solution might look like. Such an orientation is also

essential. Visualizing one or more future solution states of a complex problem calls for developing a



clear and detailed picture of the future with a successful Solution being implemented. This process

enables one to move away from one's normal or usual thinking patterns. It helps one find pathways

leading from the present towards that desired future state. It disregards the exact nature of the solution

in the initial stage, focusing only on what happens as a consequence of the successful solution. If one

can get a rather clear and specific mental picture of what will happen because of a successful solution, it

would be easier for him/her to understand the kinds of changes needed to bring that picture to life.

Q. Explain the Barriers to Creativity (8 marks)

1) Fear of Rejection: An idea is not just a thought; it has a person's feelings attached to it.

2) Fear of Risk: Risks are intimate friends with innovation. Make it safe for responsible risks and the

ideas will flow. Discovery requires risk.

3) No Expectation that Ideas are Everyone's Responsibility: Improvement thinking is a part of everyone's

job. A manager's continuous expectation and demonstration how every problem is a candidate for an

idea, will keep them coming. An idea a month per employee is achievable.

4) Un-Fun: Ideas flow easier on the fun-side of the brain.

5) Too Much Time between Creation and Implementation: Delay in implementation works against the

trust that the system is serious about ideas.

6) Neglect: If the supervisor does not communicate the status, and often to the worker, it infers the

system does not care. And that wounds future idea generation.

7) No Support Structure to Transform the Idea through Implementation: If implementation is always an

upstream swim, it will dry-up the idea flow.

8) Only Left Brains: Right brain (high creation) people are able to generate and left brain (high

organization) people to make it work.

9) Acknowledgement: The best acknowledgement for a worker is to see their manager fighting for the

idea, or it implemented and making a difference in the workplace.

10) Valuing only Big Ideas: Anyone can come-up with a small idea and every idea is a step closer to a

more productive work environment.

1 1) Short Termism: A drive to meet short-term financial goals rather than to invest in the future.

12) Over Allegiance: An over allegiance to past successes, proven experience and tried and tested

methods.

Q. Explain Techniques for Improving the Creative Process (12 marks)

Creativity is the result of creative process which is an important skill of successful entrepreneurs. It

tends to decline with the age, education, time, use etc. So there is a need of technique which improves



the creativity of entrepreneurs. It is also known as idea generation technique. Some techniques require

groups of two or more people while other techniques can be accomplished alone. These methods

include word games, written exercises and different types of improvisation. Creativity techniques can be

used to develop new materials for artistic purposes or to solve problems. Most creativity techniques use

associations between the goal (or the Problem), the current state (which may be an imperfect solution

to the problem), and some stimulus (possibly selected randomly).

Following are the important techniques which improve the creativity:

1) Idea Box or Matrix Analysis: In matrix analysis, a two-dimensional "idea box" is used to explore new

ideas or alternatives. There are four steps to generating an idea box:

i) Specifying the purpose or what you are trying to accomplish,

ii) Identifying the parameters of the problem,

iii) Listing variations, and

iv) Trying different combinations.

Consider a situation in which the purpose is to gain citizen input and involvement in the city's recreation

department, but one is not sure how to do it and resource limitations are such that they will be limited

in the number of approaches they can use. They could begin by asking themselves what the parameters

of the problem might be.

For example, perhaps consider methods of input, timing/frequency, subjects and target groups as your

parameters. For each of those parameters, there is a need of options. Methods of input might include

citywide open meetings, neighborhood forums, mailed questionnaires and/or suggestion boxes. For

target groups, they might think about seniors, teenagers, pre-school children and businesspeople. The

resulting table might look something like this:

Using the idea box, they would randomly combine one item from each column (for example, a forum

held semi-annually on volunteering for seniors, a questionnaire mailed quarterly on facility construction

to businesspeople).

2) Heuristic: Heuristic is an adjective for experience-based techniques that help in problem solving,

learning and discovery. A heuristic method is particularly used to rapidly come to a solution that is

hoped to be close to the best possible answer, or 'optimal solution'. Heuristics are "rules of thumb",

educated guesses, intuitive judgments or simply common sense. Heuristics as a noun is another name

for heuristic methods. It may be argued that the most fundamental heuristic is "trial and error", which

can be used in everything from matching bolts to bicycles to finding the values of variables in algebra

problem.

3). Mind mapping: Mind mapping is a technique designed to help in thinking visually and spatially about

issues and problems. Mind maps helps through mental explorations in much the same way as ordinary



maps helps in travels. Mind mapping uses pictures and images to define a vision, a problem, or a

situation. It can be a simple, representation intended to be used as a memory trigger or as a detailed

representation of a situation, process, or "territory". A mind map should begin with a central image in

the middle of the page, then colors, pictures, and symbols should be used to map the situation, using

only one keyword per image. All lines branch from the central image. Mind mapping can be done

individually or in a group. One possibility is to draw individual maps and then pair people-off to explain

their maps to each other and create a shared map. The map can be a depiction of a process, a goal, an

interaction, or the multiple facets of a complex problem.

4) Synectics: Synectics is a technique developed by Gordon for improving creative problem solving. The

word synectics means joining together different and apparently Unconnected or irrelevant elements. In

synectics, problems are defined by "making the strange familiar," ideas are sought by "making the

familiar strange". In the former case, the aim is to understand or define the problem using terms that

are familiar to you. In the latter case, the purpose is to make the familiar strange by purposely

distorting, inverting or transposing the problem to something unfamiliar. This can "transpose both our

usual ways of perceiving and our usual expectations about how we or the world will behave". Synectics

uses four types of metaphors in this process:

i) Personal Analogy: Personal analogy is the use of emotions and feelings to identify an individual with

the subject of a problem.

ii) Direct Analogy: The direct analogy compares the problem with homogenous facts, information or. -

technology. A heating system might be compared with a volcano and from this new ideas may arise.

iii) Symbolic Analogy: Symbolic analogy is the use of objectives and personal images. Symbolic analogy

involves making use of objectives and personal images to describe a problem (for example, like an Indian

rope trick, like a thief in the night, like a pirate).

iv) Fantasy Analogy: This is based on Freud's notion that creative thinking and wish fulfillment are

strongly related.

5) Metaphor: Metaphorical thinking is the ability to link two different things by recognizing that in some

way they share a common trait or shows a common principle; for example, a revolution is compared to a

volcano (a build-up of pressure leading to an explosion) and electricity is compared to water flowing

through pipes. The ability to play with ideas and concepts is basic to problem solving and creativity.

Metaphor allows this type of play to occur. So making comparisons between problems in business and in

biology, science and so on may help to unlock solutions.

6) Brainstorming: Brainstorming is a group creativity technique designed to generate a large number of

ideas for the solution of a problem. The method was first popularized by Alex Faickney Osborn in a book

called Applied Imagination. Osborn proposed that groups could double their creative output with

brainstorming. Because of such problems as distraction, social loafing, evaluation apprehension, and

production blocking, brainstorming groups are little more effective than other types of groups, and they



are actually less effective than individuals working independently. The four basic rules of brainstorming

are as under: ;

Advantages of the Brainstorming Technique

i) The main advantages of this technique are broader participation, enthusiasm, deferred judgment,

greater task orientation, team work and stimulated thinking.

ii) This technique is very effective when the problem is comparatively specific and can be simply

defined. A complex problem can be broken up into in many parts and each part can be taken up

separately at a time.

Disadvantages of the Brainstorming Technique The process is very time, consuming and it is quite

possible that none of the ideas generated would be optimal. But the wasted time can be minimized if

the members of the group are chosen carefully so that they understand the problem and feel that their

contribution towards idea generation will be substantial.

7) Forced Relationships: If two objects or ideas are combined, what will be the outcome? This technique

may be useful in many, areas including new product development; for example, the combination of a

video cassette recorder with a television for a new type of equipment. Another example might be

combining a desk and a chair which is a common piece of furniture in modern colleges.

8) Parameter Analysis: The three types of activity - within parameter analysis form an iterative loop:

i) Parameter Identification: It consists primarily of the recognition of the dominant parameters or issues

or issues in a problem. The word "parameter" is used to describe in a very general way any issue, factor,

concept, or influence that plays an important part in developing an understanding of the problem and

pointing to potential solutions.

Q. What is Innovation (2 marks)

Creativity is the seed that leads entrepreneurs to innovate. It precedes the innovation. Innovation is the

process of entrepreneurship. Innovation is a key function in the entrepreneurial process. Innovation and

Entrepreneurship

Innovation can be defined as the ability to create something new based on knowledge that has been

attained. In Order for something to be new, it must be radically different from things which are already

in existence. The nature of innovation is important when it comes to problem solving. Often, the goal of

those who use innovation is to solve problems. Innovation plays an important role in virtually every

aspect of life. Though it is usually connected to business, technology, or engineering, and can even be

useful on a personal level.

According to Peter Drucker, "Innovation is the means by which the entrepreneur either creates new

wealth producing resources or endows existing resources with enhanced potential for creating wealth".

Q. Explain the Essential Ingredients of Innovation (2 marks)



Four essential ingredients to a definition of innovation:

1) Something New: Everyone likes something new. All body wants the latest and greatest products and

ways of doing things. Newness, however, is just the beginning.

2) Better Than What Exists: New for the sake of being new is of little value. It must also be improved.

New and improved toothpaste must have a new thing/feature that increases its perceived value. A new

office procedure must actually do something better than the old way.

3) Economically Viable: Does it make or save money? If it doesn't then it shouldn't be implemented. If

the new and improved toothpaste makes more sales that in turn makes more profits, it is a profitable

addition. If new office procedure improves the efficiency of the work place and therefore saves labor

costs, it makes the organization more profitable.

4) Widespread Appeal: All the first 3 elements are very important and even related to this one.

However, there needs to be a basic appeal to the new innovation. If not it won't sell. If new and

improved toothpaste is licorice flavored, then it might have very limited appeal. It is new and improved.

Licorice may even be a cheaper flavor to implement that any others. If nobody wants it, then it is not a

true inn/ovation.

Q. Explain Types of Innovation (8 marks)

1) Product Innovation: It means new products or improvements on products. The new Mini or the

updated Car, new models of mobile phones, and so on.

2) Process Innovation: Where some part of the process is improved to bring benefit. For example, Just-

in-Time.

3) Paradigm Innovation: Where major Shifts in thinking cause change. During the time of the expensive

mainframe, Bill Gates and others aimed to provide a home computer for everyone.

4) Radical Innovation: It is a major breakthrough as a result of technological invention that offsets

industry as a whole. For example, invention of microchips has changed the face of computer industry

from large-sized punched card based to small-sized chips based computers with more memory and data

processing.

5) Systems Innovation: It creates a new functionality by assembling parts in new ways. For example,

creation of automobile engine was radical innovation and became a system innovation when it was

combined with bicycles to create different types of two-wheelers.

6) Incremental Innovation: It is the technical improvement and extends the application of radical and

system innovations. Incremental innovations force organizations to continuously improve their products

and services and keep abreast or ahead of the competition. The creativity and innovation should be

planned in a strategic context.



7) Additive Innovation: It is fully exploiting already existing resources, such as product-lines extensions,

can achieve good results. These opportunities should rarely be treated as high priority efforts. The risks

should be small and they should not take resources away from complementary or breakthrough

opportunities.

8) Complementary Innovation: It offers something new and changes the structure of the business.

9) Technology Innovation: The goal of technology innovations is to generate new product with

significant technology advancement.

Q. Explain the Seven Sources of Innovation (2 marks)

The seven sources of innovation are as follows:

1) Unexpected occurrences,

2) Incongruities,

3). Process need,

4) Industry and market changes,

5) Demographic changes,

6) Changes in perception,

7) New knowledge.

Q. Argue Creativity versus Innovation (2 marks)

If creativity is the seed that inspires entrepreneurship, innovation is the process of entrepreneurship.

This was Schumpeter's conclusion when they wrote about the economic foundations of free enterprise

and entrepreneurship.

It can be deduced that innovation cannot take place without creativity, because creativity initiates

innovation. Innovation can define as the commercialization of ideas by changing the existing products,

systems, and resources.

Q. Argue Invention versus Innovation (2 marks)

An important distinction is normally made between invention and innovation. Invention is the first

occurrence of an idea for a new product or process, while innovation is the first attempt to carry it out

into practice. It is useful, when conceptualizing innovation, to consider whether other words suffice.

Invention is the creation of new forms, compositions of matter, or processes and often confused with

innovation. An improvement on an existing form, composition or processes might be an invention, an

innovation, both or neither, if it is not substantial enough. It can be difficult to differentiate change from

innovation.



According to business literature, an idea, a change or an improvement is only an innovation when it is

put to use and effectively causes a social or commercial re-organization. Innovation occurs when

someone uses an invention or an idea to change how the world works, how people organize themselves,

or how they conduct their lives. In this view innovation occurs whether or not the act of innovating

succeeds in generating value for its champions. Innovation is distinct from improvement in that it

permeates society and can cause reorganization. It is distinct from problem solving and may cause

problems. Thus, in this view, innovation occurs whether it has positive or negative results. Innovation is

the process of doing new things. It is important to recognize that innovation implies action, not just

conceiving new ideas. When people have passed through the illumination and verification stages of

creativity, they may have become inventors, but they are not yet innovators.

Q. Explain the Conditions for Innovation (8 marks)

The ability as an entrepreneur to carry-out innovation strategies is dependent on the existence of

certain conditions in the organization. Most of the following conditions are typical of innovative

organizations. Top management is responsible for the overall innovation strategy and provides the

necessary leadership.

1) Top managers recognize that they cannot build their organizations on a model of top-down direction

and - delegation and are committed to encouraging bottom-up ideas and initiatives.

2) Innovation is not only seen as a priority but the entire organizational culture is based on innovation.

3) Creativity is allowed and fostered.

4) Employees are placed in jobs that fit their cognitive skills and abilities.

5) Those who do not learn to use the innovation are re-assigned to other jobs.

6) Innovative people are identified and recognized and continuity and experimentation are assured.

7) The existence of creative people who initiate innovative processes is ensured by recruiting creative

talents.

8) There is flexibility with regard to the allocation of priorities, patterns of working, and normal control

systems.

9) Innovation is seen as a long-term investment.

10) Disincentives are given for innovation avoidance.

11) Organizational systems that recognize and support viable innovation are created.

12) Attention is paid to integrating the function of innovation with the rest of the organization's

activities, for exam*, through the management information system, by creating cross-functional teams,

or by using some managers in special integrating roles.



13) The exchange of ideas using intra- or inter-organizational networks is encouraged.

14) Managers at all levels support the implementation of the innovation and have an in-depth

understanding of the innovation. They are also provided with the necessary authority and resources to

create a strong climate for implementation.

15) Innovation is seen as the responsibility of all staff, irrespective of their function. Proposals move

quickly through the approval process.



Module 5 notes

Introduction

Running a successful business can be very difficult without the right tools. As more and more people

start or consider starting their own business, it is important that they understand the core steps that are

required to launch successful ventures. These steps include spotting, assessing, selecting, and executing

opportunities presented. Business entrepreneurs must also have a thorough knowledge of the laws and

statutes that pertain to the ownership and operation of their business, in order to maintain business

operations in the long-term. Laws affect almost every aspect of the business including, dealings with

employees, customers, suppliers, and governmental bodies. Laws affect where one can set-up their

business and how much of its profit they can keep. Advertising claims regarding the products or services

also are governed by laws. Without this knowledge they are subject to fines, litigation, lawsuits and a

host of other problems concerning employees, clients, vendors, and other associates that can destroy

their daily operations very quickly. As an entrepreneur, they will have to know the legal forms of

business organization, various statutory requirements, intellectual property rights, registrations and

various clearances required for establishing an organization.

Q. Write in brief about various forms of organization (2 marks)

Entrepreneurs have a number of legal forms of business to choose from, such as sole proprietorships,

partnership, co-operative, C-corporations, or Limited Liability Companies (LLCs). Entrepreneurs should

determine which business form is best for them based on their short and long-term needs. Because

there are significant tax and non-tax differences among the forms, entrepreneurs should carefully

consider the results and requirements of each form to ensure that the business form they choose best

meets their requirements. In choosing a form of ownership, entrepreneurs must remember that there is

no single best form, what is best depends on the business's particular circumstances. Ownership can be

classified into two categories Individual and collective ownership.

Q. Explain Sole Trading/Sole Proprietorship (2 marks)

Sole proprietorship is a one-man business. It is the simplest, the oldest, and in some respects the most

natural form of business in the private sector. In this form of business, a single individual is solely

responsible for providing the capital, for bearing the risks, and for the control of the enterprise. It is a

one-man show. Sole proprietorship means a business owned, financed, and controlled by a single

person. The owner, called the proprietor, alone is responsible for the profits and losses of the business.

If entrepreneurs plan to start a business under a name other their own, they must register the name,

called DBA (Doing Business As). If the business has a trade name, a "Certificate of Doing Business under

an Assumed Name" can be obtained from the state in which the business will operate.

Q. Explain Features /Characteristics of Sole Proprietorship (2 marks)

The distinguishing characteristics of sole proprietorship are as follows:



1) Single Ownership: A sole proprietorship is wholly-owned by one individual. The individual supplies the

total capital from his own wealth or from borrowed funds.

2)One-Man Control: The proprietor alone takes all the decisions pertaining to the business. He is not

required to consult anybody. Ownership and management are vested in the same person. Some persons

may be employed to help the owner but ultimate control lies with him.

3)No Separate Legal Entity: A sole proprietorship has no legal identity separate from that of its owner.

The law makes no distinction between the proprietor and his business. The business and the owner exist

together. If the owner dies or becomes insolvent the business is dissolved. The proprietor and his

business are one and the same.

4) Unlimited Liability: The proprietor is personally liable for all the debts of the business. In case the

assets are insufficient to meet its debts, the personal property of the proprietor can be attached.

5) No-Profit Sharing: The sole proprietor alone is entitled to all the profits and losses of business. He

bears the complete risk and there is nobody to share the profits or losses.

6) Small Size: The scale of operations carried-on by a sole proprietorship is generally small. A sole trader.

can arrange limited funds and managerial ability. Therefore, the area of operations is generally local and

limited.

7) No Legal Formalities: No legal formalities are required to start, manage, and dissolve sole trader

business. Only a license is necessary in certain types of business.

Q. State the advantages of Sole Proprietorship (8 marks)

The system of Sole Proprietorship has the following advantages:

1) Low Cost of Production: Since the business is exclusively his own, the single entrepreneur works day

and night for the success of his enterprise. He allows no wastage of materials and keeps a strict, vigil on

the 'activities of his workers. All this results in very low cost of production.

2) Promptness in Decisions: A single entrepreneur does and holds any consultations with anyone on

important issues facing him. He, therefore, takes decisions promptly on the spur of the moment

3) Personal Contact: As the sole proprietorship is a very small form of business organization, its owner,

entrepreneur, maintain close contact with his customers and attempts to provide maximum satisfaction

to them. Since he comes in contact with his workers daily, there is little possibility of any

misunderstanding arising among them, with the result that the labor management relations remain

quite happy and cordial.

4) Easy to Start and Wind-up: The individual proprietorship is the easiest form of business organization.

For starting it, there are no legal formalities or government sections to be required. If one wants to start

a hotel or a dairy farm, the only formality he as to undergo is to take a license from the Health

Department of the Municipal Board or Corporation.



5) Incentive for Hard Work: As the individual proprietor is the whole sole owner of his business, he

works very hard and with full interest in order to get the best possible results of his endeavor. He does

not care for the hours of leisure or rest. This kind of hard and sincere work enables him to earn good

results. A shopkeeper or a hotel owner, for example, works very hard to increase his profit.

6) Business Secrecy: In every business, there are certain secrets. They may be regarding the manufacture

of some particular variety of products or regarding the purchase of the equipment or raw material or

the sale of the products. In this form of business organization, as the individual proprietor is the only

man who knows these secrets, he has no risk of their being disclosed to outsiders.

7) Flexibility in Business: This type of occupation can be promptly adjusted to the new circumstances.

The sole proprietor can adjust the quantity and quality of his products promptly and without any delay

according to the changes in demand and supply of goods; it is because there is no one to interfere or

obstruct in his decision.

8) Independence: Since the sole proprietor is the whole sole owner of his business, he enjoys full

independence in his business affairs

Q. Explain the Disadvantages of Sole Proprietorship (8 marks)

The sole proprietorship business is also subject to certain disadvantages. Some of these are as follows:

I) Limited Means of Production: The firm has very limited resources. The single person cannot raise the,

.entire requirement that is needed for expanding his business. As a result of this his business unit can be

expanded only within the limits of his financial standing.

2) Limited Skills: The sole proprietor has only small business, where he uses his own limited managerial

or technical skills. Beside, because of the limited funds, he cannot think of employing highly paid

manager, technical experts, legal adviser and accountants. He also cannot manage for modern methods

of marketing, sales and advertisement.

Thus, the sole trader remains incapable of n.ai, the use of highly specialized and technically advanced

processes in his small business unit.

3) No Economies of Large-scale Production: The sole proprietor has only a small-scale unit where the

land, capital investment, machines, raw materials, etc., are required only in meager quantities.

As such, he is unable to reap the benefits of internal and external economies like that of large-scale

units. Consequently, the costs of production of his products are comparatively much more than those of

the same type of products of the large-scale units. Thus, the sole proprietor cannot compete in the

market, where there are similar products of large-scale units.

4) No Division of Labor: In the sole proprietary business, the production is only of small size, and the

proprietor does everything single-handed or with the help of only a few workers. As such, there is no



possibility of modern type of complex division of labor. The result is that one-man productive unit does

not get any benefit accruing from the modern system of division of labor.

5) Small Income: With the limited resources at his disposal, the sole trader cannot think of many

profitable large-scale ventures. Consequently, his business remains of small size that brings him only a

small earning.

6) Instability: The sole proprietorship continues till the good health or the life of the proprietor. In the

case of the illness or death of the proprietor, the one-man business comes to an end. Thus, the sole

proprietary business has no stability for its continuance.

7) Unlimited Liability: The sole proprietor has unlimited liability, which checks him from expanding his

business further. In case there is loss in the business, than he has to pay-off all debts and loans of the

business not only from the assets of the business but also from his private property.

8) Keeps a Country Economically Backward: If a country has only such units of business organization,

then she can never advance in economic and industrial fields; she will rather remain backward. Big basic

industries, like iron and steel plants, oil refineries, coal mining, railways, etc. which play a key role in the

economic and industrial development of a country, cannot be started b) the sole proprietor.

Q. Explain the concept of Family Business (2 marks)

A family business is a business in which one or more members of one or more families have a significant

ownership interest and significant commitments toward the business's overall well-being. A firm is said

to be family-owned if a person is the controlling shareholder; that is, a person (rather than a state,

corporation, management trust, or mutual fund) can garner enough shares to assure at least 20% of the

voting rights and the highest percentage of voting rights in comparison to other shareholders.

Q. Explain the Features /Characteristics of Family Business (8 marks)

1) Clearly separate management and ownership.

2) Have a clearly defined vision.

3) Take time to understand the family's concerns and the needs of individuals.

4) Have a common language of trust inside and outside the family business.

5) Speak with one voice. 6) Live their values as well as espouse them

7) Have defined roles and responsibilities for family members, shareholders, and employees.

8) have high staff loyalty and low staff turnover.

9) Consider appointing non-executive directors to help bring objectivity

10) It always considers the family business members who aren't involved in the business.



Q. State the Advantages of Family Business (8 marks)

1) Commitment: People who set-up a business can become very passionate about it — it is their

creation, they nurtured it, built it up and for many such entrepreneurs business is their life. This very

deep affection translates naturally into dedication and commitment, which extends to all the family

members who come to have a stake in the success of the business. They feel they have a family

responsibility to pull together and, provided there are no conflicts, everyone is happy to put in far more

time and energy working for the company's success than they would dream of devoting to a normal job.

Family enthusiasm develops added commitment and loyalty from their workforces, people care more

and feel they are part of a team, all contributing to the common purpose.

2) Knowledge: Family businesses often have particular ways of doing things — special technological or

commercial know-how not possessed by their competitors; knowledge that would soon become general

in a normal commercial environment, but which can be coveted and protected within the family. This

idea of knowledge is also relevant in relation to the founder's sons or daughters joining the business.

Children grow-up learning about the business, infected by the founder's enthusiasm, and when the time

comes for them to consider joining they may already have a very deep understanding of what the

business is all about.

3) Flexibility in Work, Time and Money: Essentially, this factor boils-down to put the work and time into

the business that is necessary and taking out money when you can afford to. A further aspect of

commitment is that if work needs to be done and time spent in developing the business, then the family

puts in the time and does the work — there is no negotiating of overtime rates or special bonuses for a

rushed job. The same flexibility applies concerning money, and here lies another important distinction

between entrepreneurial and non-business families. Most families have a set income derived from

wages or salaries paid by an employer, and the only decisions the family take concern how this income is

to be spent. But for families in business, income is not a fixed element in the domestic equation. They

must decide how much money they can safely take from the business for their own needs while at the

same time preserving the firm's financial flexibility and its scope for investment. The privately held

family business is the only entity that can truly build for the long-run.

4) Long-Range Thinking: But although families are good at thinking, long-term, they are not so good at

formalizing their plans, writing them down, analyzing the assumptions they are making, testing past

results against earlier predictions in short, the strength means that-the long-range thinking is there,

while the weakness is that this thinking is undisciplined. If the right environment exists for a family to

build on its vision of the future and to focus on and get behind the type of long-term to focus on and get

behind the type of long-term strategic intent that has characterized Japanese businesses then the

possibilities are immense.

5) Stable Culture: For a variety of reasons, family businesses tend to be stable structures. The Chairman

or Managing Director has usually been around for many years and the key management personnel are

all committed to the success of the business and they too are there for the long-term. Relationships

within the company have usually had ample time to develop and stabilize, as have the company's



procedural ethics and working practices, everybody knows how things are done. Like some of the other

factors working in favor of family businesses, however, a strong, stable culture can be a two-edged

sword.

6) 'Speedy Decisions: In a family controlled business, responsibilities are usually very clearly defined and

the decision-making process is deliberately restricted to one or two key individuals. In many cases, this

means that if you want the company to do something you go and ask the boss and the boss will either

say 'yes' or 'no'. The contrast with this process is at its most stark if one looks at the example of a public

company deciding to shift its operations into new trading areas. If the decision is likely to change the

shape of the business significantly then it will involve rather more than a 'yes' or 'no' from the boss.

Typically, the process will begin with an 'in principle' board decision to investigate the move, feasibility

studies will be undertaken which will then be examined by specially appointed board committees, the

company's banking, accounting and legal advisers will all become involved in the process, a board

decision will be taken to approve the move, but even then shareholder approval may have to be sought

via a lengthy and elaborately detailed circular designed to summarize the arguments and quantify the

financial impact of the change. Of course, this is not to say that advice from outsiders on important

decisions is a waste of time, or that the consequences of such a major move should not be extremely

carefully evaluated. But speed does have a commercial value and, in this example, if a lot rested on the

speed with which a decision could be taken and implemented, then the family business would definitely

have the edge.

7) Reliability and Pride: Commitment and a stable culture lie behind the fact that family businesses are

generally very solid and reliable structures and are perceived as such in the marketplace. Many

customers prefer doing business with a firm that has been established for a long time, and they will have

tended to build-up relationships with a management and staff that are not constantly changing jobs

within the firm or being replaced by outsiders. Also, the commitment within the family business,

discussed earlier, is not just a hidden force; it reveals itself to customers all the time in the form of a

friendlier, more knowledgeable, more skillful and generally much higher standard of service and

customer care. Closely connected with reliability is the notion of pride; the people who run family

businesses, proud of their achievement in having established and build it and their staff are proud to be

associated with the family and what they are doing. This pride, which in some circumstances can tend to

almost institutionalize the business, is often translated into a powerful marketing tool.

Q. State the Disadvantages of Family Business (8 marks)

1) Rigidity: Walking through the doors of some family businesses can be like g a time tunnel Sentiments

such as, 'Things are done this way because Dad did them this way and 'You cannot teach an old dog new

tricks', reflect the ways in which behavior patterns can become ingrained and family businesses become

tradition-bound and unwilling to change. It is all too easy to find ourselves doing the same thing, in the

same way, for too long, and in a family business it is easier still: change not only carries with it the usual

disruption and an array of commercial ricks, but it can also involve overturning philosophies and

upsetting practices established by relatives.



2) Business Challenges: The business challenges that particularly affect family firms can be divided into

three categories:

i) Modernizing Outdated Skills: Very often the skills possessed by a family business are a product of

history

ii) Managing Transitions: It represents another major challenge for family businesses; it can often be the

make or break for a family firm. In summary, the challenge to the business is typified by a situation in

many companies where the founder is getting-on in years and his son, the heir apparent, is convinced

that things need to be done differently. The merest hint of this potential conflict can be disruptive,

causing enormous uncertainty among staff, suppliers and customers. In many cases, the damage

becomes even more serious when the son actually begins introducing his program of radical change. So,

managing transitions is a difficult challenge to the business and, because of the added dimension of

possible infra-family upset and conflict, it is a much bigger challenge for a family business than it is for

other kinds.

iii) Raising Capital: In comparison with the wide range of funding alternatives open to publicly held

companies with a diversified shareholder base, family businesses obviously have much more limited

options when it comes to raising capital. But over and above these family businesses commonly have a

problem with the very concept of raising money from outside sources. This tends to occur most

frequently in relation to longer-term capital for significant projects, like opening a new plant or creating

a new division of the business, but it also shows itself in a reluctance to go to outsiders for bank

overdrafts or other short-term funding that would help the firm through quite minor cash flow owned

secret ambitions or succeeding when their father rears; and the father himself is often ambivalent about

succession because he is worried about the ability of his children and how he is to approach favoring

one at the expense of the others.

Q. Explain Partnership (2 marks)

Partnership is a business relation between two or more persons who have agreed to share the profits of

a business carried-out by all or any one of them acting for all. In simple words, when by means of a

contractual agreement several individuals associate with common ownership and management of a

venture, such a business relationship is termed as partnership. A partnership venture can be set-up with

minimum 2 and maximum 10 members in banking business and 20 in other cases.

This restriction on upper limit is due to the provision contained under Section 11 of the Indian

Companies Act 1956, which stipulates that an unregistered company, association or partnership having

more than 20 members (10 in case of banking) must be registered under the said Indian Companies Act.

According to Section 4 of the Indian Partnership Act, 1932, "The relation between persons who have

agreed to share profits of a business carried-on by all or any of them acting for all".



Q. Explain the Features of Partnership (8 marks)

The following are the main characteristics of a partnership firm:

1) Two or More Persons: There must be at least two persons to form a partnership. A person cannot

enter into partnership with himself. The maximum number of persons is 10 in case of banking business

and 20 in other types of business. If the number of partners exceeds the prescribed maximum, it would

become an illegal association of persons.

2) Contract or Agreement: A partnership firm is an agreement between two or more persons for running

a business and earning profits. The maximum limit of the numbers of partners is twenty, if the business

is of general type and ten partners if it is a banking concern. Generally, there are no legal problems

involved in such a kind of contract or agreement, though mostly partnership agreements are registered

under terms.

3) Lawful Business: The purpose of the partnership agreement must be to run a business, which is legally

allowed by the government to earn profits. A partnership to carry on some charitable or social works or

some unlawful activity, for example, black marketing or smuggling is not included in it.

4) Sharing of Profits: In the partnership organization, the partners share the profits according to the

proportion written in the Agreement. In case the business faces a loss, even then they will share it

proportionately.

5) Control is shared by All the Partners: In a partnership, the decisions are taken unanimously. Some

partners may be dormant or sleeping partners and may not take active part in the management, but

they have the right to control the functioning of the business. The business is carried on by all or any of

them acting for all.

6) Mutual Agency: The relations between the partners are based upon mutual trust, confidence, and

good faith. Mutual agency is an essential characteristic of partnership.

7) Unlimited Liability: In the partnership business, the liability of every partner is unlimited. This means

that every partner is responsible for the acts of all the partners. This can be explained with the help of

an example. Suppose, a partner enters into an agreement with some other firm or the government for

some debt. Then the agreement of that one partner will bind all the partners of that firm. By that each

partner will be responsible to pay-off the debt not only to the extent of his share in the business but to

full extent of even his private resources. If some of the partners are not in a position to meet their share

of loss, then all other partners will have to pay the entire debt.

Q. Explain Types of Partnership (2 marks)

A partnership may be formed as follows:

1) Fixed Partnership: It is constituted for a fixed-term, i.e., for a particular period of time and comes to

an end after the expiry of the fixed period. If the partners decide to continue the business even after the



expiry of the fixed-term, the mutual rights and obligations of the partners will continue to be the same

as they were before the expiry of the term.

2) Partnership at Will: When the tenure of the partnership is not fixed, it is called partnership at will. It

can be dissolved by any partner at any time by giving a notice of dissolution to other partners.

3) Particular Partnership: It is constituted for a particular work and comes to an end with the

completion of that work. It will become partnership at will, if the partners agree to continue with it even

after the completion of its primary object and the rights and obligations of the partners will continue as

before.

Q. Explain types of Partners (8 marks)

A partnership business organization may have several types of partners. They have been classified as

follows:

1) Active Partners: These are those partners, who take active interest in the various affairs of the firm.

They are well-known to those who deal with the firm.

2) Sleeping Partners: These are those partners who bring in some capital and share the profits, but do

not take active interest in the affairs of the firm. They are not well-known to the persons who deal with

the firm

3) Secret Partners: These partners take active interest in all the affairs of the firm, but they keep their

connections with the firm quite secret. The public and the dealers with the firm know nothing about

them.

4) Nominal Partners: These are those partners who neither contribute capital not take any active

interest in the conduct of the business of the firm. They fist lend their names and reputation for the

benefit of the firm. These partners are not entitled to earn any profits from the firm, but they can be

held liable for all the debts of the firm.

5) Partners by Estoppels: Partners by Estoppels is a person, who, in fact is not a partner of the firm; he

neither contributes any capital nor takes any part in the management of the firm. But he acts or

represents himself in such a way that the outsiders have an impression that he is a partner in the firm.

This type of outsiders has an impression that he is a partner in the firm. This type of partner can be held

liable by any outsider for any losses suffered by the outsider who might have dealt with the firm.

6) Minor Partners: A minor can also be admitted to the benefits of partnership firm with the consent of

all the partners of the firm. A minor partner is entitled to get an agreed share in the profits and property

of the film. He has a right to inspect and get a copy of the accounts of the firm. But the liability of a

minor partner remains limited to the extent of this share in the assets of the firm. Then a minor partner

attains major, he has the option to become a partner or serve his connections with the firm. If he

decides to continue as a partner, then he becomes entitled to all the rights of a partner and his liability

ceases to be limited.



Q. Explain Advantages of Partnership (8 marks)

The partnership has the following important advantages:

1) Easy to Form: A partnership firm can be started very easily, as there is no need of taking any special

permission from the government. The only thing required is that the partners should draw up the

agreement and get the firm registered. Registration of a partnership firm is not compulsory; it is on the

discretion of the partners to get it registered or not.

2) Commands Larger Resources: Since, in the partnership firm, each partner contributes his share of

capital investment, the financial resources become much larger than in the sole proprietary business.

Moreover, because of its characteristic of unlimited liability, they can easily borrow sufficient money

from banks and other financial institutions. Hence, the partnership firms command larger financial

resources.

3) Prompt and Correct Decisions: As the partners are only few in numbers, they remain in continuous

and intimate touch with one another. As such, any kind of decision regarding the business activity can

be taken promptly. Moreover, as every problem is examined by all the members of the firm, there is less

possibility of wrong decision or judgment. The decisions of the partnership organization are, therefore,

more useful and profitable than those in the sole proprietorship.

4) Use of Diverse Skills and Talents: In a partnership, partners are of diverse talent and skill, and so it

provides opportunity for division of work among partners. One partner can look after the work of

production, another looks after store, the third is in charge of office, the fourth deals with sales and the

fifth supervises the labor and soon. The kind of division of labor increases the total efficiency of the

business organization.

5) Business Secrecy: For a partnership firm there is no need to publish its annual account of investment,

expenditure, profit or loss, etc., as such, its business position can be kept secret.

6) Highly Adaptable to Changes: A partnership firm responds promptly to the changes in business

conditions. In case, there is possibility of losses, a line of business can easily be changed. This kind of

change can be made very conveniently so no legal permission is needed for it.

7) Personal Contacts: Since a partnership concern is only of medium size, it is possible to establish wider

personal contacts with the workers and customers. This helps in supervision of workers and in removing

the problems and difficulties of workers and customers.

8) Personal Interest and Initiative: In a partnership concern, the partners are personally liable to profit or

loss; as such, they show keen interest and initiative to avoid wastage and to make the firm efficient and

successful in its working.

9) Scope of Large-Scale Production: In a partnership firm, because the management is better and more

efficient and there is scope of larger capital resources by admitting more partners, there is possibility of

making it a large-sale unit. Large-scale production helps in reaping all its advantages.



10) Sharing of the Risks: In the sole proprietary firm, the owner has to bear all the risks of the business

himself. But in the case of partnership concern, since there are several partners, the risks are shared by

all the partners. In case, the firm fails or suffers losses, then the debts and losses will be shared by all the

partners.

11) Benefits of Unlimited Liability: The partnership concern runs on the principal of unlimited liability.

This prevents the partners from the launching of rash and risky enterprises. At the same time, it enables

the partnership firm to borrow sufficient capital very easily from banks and other financial institutions. It

is because the creditors know that they can recover their due even from the private property of the

partners. The above mentioned advantages of partnership indicate clearly that a partnership concern is

definitely superior in many ways to a sole proprietary firm.

Q. Explain the Disadvantages of Partnership (8 marks)

No doubt, partnership is far superior to an individual ownership; still it suffers from many defects.

The following are some of its main disadvantages:

I) Uncertain Existence: The greatest defect of partnership is that its existence is not permanent. In the

event of a partner's retirement, death or insanity of any partner, the partnership has to be dissolved.

There is, thus, no continuity co-existence of partnership firm.

2) Disharmony among Partners: The partnership firm can run successfully only when there is harmony

and cordial co-operation among the partners Sometimes, because of misunderstanding and

disagreements on any issue, a conflict or any clash may develop and may reach a breaking point and

may often lead to the - dissolution of the firm.

3) Not Suitable for very Large-Scale Business: A partnership concern has limited capital resources and

managerial ability; there is limit to the number of partners. As such, it is incapable of undertaking very

large industrial units and businesses like banks, steel plants, shipping, insurance, etc. This is because

these businesses require hundreds of crore of rupees, which cannot be arranged by a partnership firm.

4) Weak Management: Verify often some partners, who also act as in charge of some kind of work in the

- concern, behave in a selfish manner. They want to do the minimum and try to get the maximum out of

the business. This weakens the solidarity of the concern and may lead to serious consequences-it may

even ruin the business, making others liable to risks.

5) Non-Transferability of Partners* Shares: In partnership, a partner cannot transfer or sell his share to

any outsider without the consent of all other partners. Thus, he remains locked-up in the concern for

ever.

6) Unlimited Liability: It is the greatest handicap of partnership. The principle of unlimited liability often

makes all the partners suffer great losses because of the foolish and irresponsible action of anyone of

the partners. Due to unlimited liability, those who have ability but no capital cannot join a partnership



concern. Besides, it has been formed that, owing to unlimited liability, a partnership follows a "play

safe" policy; the result is that the business progress remains very slow.

Q. Explain Joint Stock Company (2 marks)

The Joint Stock Company is legal business owned by the shareholders having limited, liability, and

managed b) an elected "Board of Directors". The most important type of business organization today is

the joint stock company. In fact, a business on respectable scale can be organized only in this manner. A

company is an artificial person having an independent legal entity and a perpetual succession with

distinctive name and a common seal having a common capital divided into shares of fixed value which

transferable and carry limited liability.

Q. Explain the Features of Joint Stock Company (8 marks)

1) Artificial Person with a Separate Legal Entity: A Joint Stock Company is an artificial person (Since it

has no physical existence) with a separate legal entity. It can own properties, and can purchase and sell

them under its own seal. It can conduct a bank account or any other business, and can enter into

contract with others. It can file a suit in court against other and others can file a suit against it. Thus, it is

just like a distinct individual, though it has no physical existence.

2) Voluntary Association: A Joint Stock Company is totally a voluntary association. It is created and

formed by the people on own. There is no kind of compulsion by the law of the government to form it.

3) Legal Sanction: A Joint Stock Company has to be incorporated with due process of law. In our country,

the Companies Act of 1956 lays down the procedure and basic conditions which have to be fulfilled to

start a company. When these conditions are fulfilled, the company must be registered under the Act.

(The Registration of the Company is done by the Registrar, Joint Stock Companies).

4) Perpetual Character: The existence of a company is of perpetual nature. It goes on forever until it is

wound-up. Shareholders may come and go, and may change hand any number of times, but the

company goes on forever.

5) Shares are Freely Transferable: The shareholders of a Joint Stock Company are free to sell or transfer

their shares. No shareholder is permanently or necessarily tied for life to the fortunes of a company.

6) Common Seal: A company is only an artificial person. It has no physical existence. As such, it cannot

sign any document. A common seal with the name of the company engraved on it, therefore, serves the

purpose of signature. Whenever this seal is affixed or used by the company on any document, as a

substitute for its signature, it has to be witnessed by two directors. The common seal is always kept in

safe custody.

7) Limited Liability: In a company form of organization, the liability of owners (shareholders) is limited up

to the amount of capital they invest in the business individually.



8) Management by Elected Representatives: Since a company is only an artificial person, and has no

physical existence, it cannot manage its business by itself. So it is managed by g Board of Directors. The

members of this Board are elected by the shareholders. The elected members are generally the men

well-known in business and industrial circles. All the important decisions and day-to'-day working are

carried on by management or the Board of Directors.

9) Business: A company can conduct only such business as stated in its memorandum of association. 10)

Ownership: Ownership of a company is in the hands of a large number of people. Unlike partnership, in

which case, membership of members is limited to 10 in case of banking and 20 in case of other business,

a company can have large number of members. In case of Private Ltd. Company, the upper limit is put to

50, though in actual practice there can be much larger number than this. In case of a Public Ltd.

Company, there is no upper limit to the number of members.

Q. Explain the types of Joint Stock Company (12 marks)

Various types of joint stock companies may be classified as under:

1) On the Basis of Mode of Incorporation

i) Chartered Companies: A chartered company is established by the Royal Charter or special sanction

panted by the head of the state. It is granted certain exclusive privileges and powers. For example, the

British East India Company was created by a Charter of the Queen of England. The Bank of England, the

Hudson's Bay Company, and the Dutch East India Company are other examples of chartered companies.

This type of company is rare now due to the decline of monarchies

ii) Statutory Companies: A statutory company is established by a special Act of the Central or State

legislature. Its objectives, powers, and activities are defined by the special law under which it is created.

The Reserve Bank of India and State Bank of India are some examples of statutory companies in India.

iii) Registered Companies: Company is established by registering (incorporating) it with the Registrar of

Companies under the Companies Act. The formation, working and winding-up of such a company are

governed by the provisions of the Act. Registered companies are the most common type of 'companies

in India. For example, Tata iron and Steel Company, Reliance Industries Ltd., Hindustan Steel Ltd., and

Maruti Udyog Ltd.

2) On the • Basis of Liability

i) Company Limited by Shares: It is a company which is registered with a specific amount of share capital

divided into a specified number of shares. The liability of every member is limited to the amount, if any

unpaid on shares held by him. For example, X Ltd has a share capital of Rs5 lakh divided into 50,000

shares of Rs.10 each X has purchased 5,000 on which he has paid 6 per cent. The, liability of X is, now,

limited to 4 (unpaid amount) per share. Even (the assets of the company are not sufficient to fully Meet

the claims of its creditors, X cannot be called upon to pay anything more than 20,000 (5,000 shares x 4

each). This type of company is most common in actual practice.



ii) Company Limited by Guarantee: In this type of company, the liability of every member is limited to

the amount which he had undertaken to contribute, if necessary, to the assets of the company at the

time of winding-up. This amount called guarantee is specified in the Memorandum of Association of the

company. The amount of guarantee may differ from member to member. Such a company may or may

not have share capital. If the company has share capital, every member is liable to pay the amount

unpaid on the shares held by him in addition to the amount of guarantee. The guaranteed amount is in

the nature of reserve capital which can be called upon only at the time of winding-up. The Articles of

Association of such company must state the number of members with which the company is registered.

This type of company is generally formed to promote art, literature, sports, education, and other non-

business activities. Members are admitted on payment of admission and subscription fees.

3) Unlimited Company: It is a company in which the liability of members is unlimited like that of partners

in a partnership firm. If the company's assets are insufficient for satisfying the claims of its creditors the

personal property of members can be attached to meet the obligations. However, the creditors of the

company cannot directly sue the members. It is only the liquidator who, at the time of winding-up, can

call upon the members to contribute towards the assets of the company. An unlimited company may or

may not have share capital. The Articles of Association of such a company must state the number of

members with which the company is to be registered. The amount of share capital, if any, must also be

stated in the Articles.

On the Basis of Nationality

i) Indian Company: A company incorporated in India under the Companies Act, 1956 is known as an

Indian company. However, it may have foreign shareholders and it may also carry-on business outside

India

Ii) Foreign Company is any company incorporated outside India which:

a) Had a business in India prior to the commencement of the Companies Act 1956 and continues to have

the same place, or

b) Establishes a place of business in India after the commencement of the Companies Act 1956.

A foreign company must conspicuously exhibit the name of the company and the country in which it is

incorporated on the outside of every office or pi* whore it carries-on business in India. It should be

conveyed in English and in one of the local languages. It must deliver the prescribed documents to the

Registrar of Companies within 30 days of establishing .a place of business in India.

4) On the Basis of Membership

i) Government Company: A government company is a company in which not less than 5 the paid-up

share capital is held by the Central Government, by any, State Government(s) the Central and State

Governments. Steel India Limited (SAIL), Bharat Heavy Electricals Limited (BHEL), etc.



ii) Public Company: According to the Companies (Amendment) Act, .200, a public company means a

company which:

a) Has a minimum of seven members and puts no limit on the number of members;

b) Does not restrict the light of its members to transfer its shares;

c) Is not prohibited from inviting the general public to subscribe to its bares and debentures;

d) Is not prohibited from inviting the public to subscribe to its deposits;

e) Has a minimum paid-up capital of five lac rupees, higher capital as may be prescribed

iii) Private Company: According to the Companies (Amendment) Act, 2000; a private company means

who

a) Restricts the right of its members to transfer shares, if any;

b) Limits the number of its members to fifty, excluding members who are or were employed by the

company;

c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of the company;

and

d) Prohibits any invitation or acceptance of deposits from the public (persons other than its members,

directors or their relations. A private company must have at least two members. For example, Tata Sons,

Hyundai Motors India, Jet Airways, Citibank and LG Electronics

Q. What are Advantages of Joint Stock Company (8 marks)

In modem times, the company form of business organization has become very popular. It is because it

commands many advantages. Its main advantages are as follows:

I) Perpetual Existence: A Joint Stock Company is permanent *character. It is a legal person, and has an

existence of its own. It is unaffected by` its shareholder with creditors. It can sue, and can be sued in the

court of law

2) Large Funds: A Joint Stock Company can raise plenty of funds by issuing various types of shares or

through the sale of debentures or bonds.

3) Transferability of Shares: A shareholder of a Joint Stock Company can sell his shares whenever he

likes. He can also buy additional shares, if he So wishes; The buying and selling of shares can be done

very conveniently in a special market known as the Stock Exchange, because of this convenience of

transferability of shares, the shareholders are not tied permanently to the fortunes of a company.

4) Limited Liability: Unlike individual proprietorship and partnership organizations, the shareholders of a

Joint Stock Company have limited liability.



5) Suitable to all Pockets: The shares of a Joint Stock Company are, generally, of low denominations; so,

even the smallest saver can purchase the shares of many new companies. Thus, this type of organization

'affords opportunities of investment to men of small means. This encourages the habit of thrift and

saving among the people of the country. Further, because of the principle of limited liability, the rich are

also very much interested in buying shares of various companies.

6) Spreading Out of Risk: Since this type of organization enables people to buy shares of different

companies, their risk is spread out. The laws of a company of which a person is a shareholder, does not

make him totally bankrupt. It is because he holds shares of those companies also which are earning

great profits.

7) Democratic Organization: In a company form of organization the directors are elected by the

shareholders. It is, therefore, a democratic organization. If the policies and administration of the

directors are not found beneficial to the company, they can be removed by the shareholders. Such

matters are decided every year in the annual meeting of the General Body.

8) Efficient and Economical Management: The management of a Joint Stock Company is carried on by

the directors, who are elected representatives of the shareholders. The directors are generally, the

persons of wider vision, outstanding administrative ability and business acumen. They are not to be paid

high salaries. Only they get nominal fee for attending the Board's meetings. Thus, the management of a

company form of organization is efficient as well as economical.

9) Suitable for Large Enterprise: A Joint Stock Company can raise plenty of capital by selling shares and

debentures or bonds, and can provide very efficient and economical management. These two things are

very essential for running a large-scale concern. As such, the company form of business organization is

best suited of run large-scale enterprises. Individual proprietorship and partnership firms, which have

limited funds, cannot run large-scale concerns.

10) Effective Control by the Government: A Joint Stock Company is run according to the rules and

regulations of the government. It has to submit — its accounts and balance sheet to the government

every year. Thus, it remains in effective control of the government. If it is found that a company is not

functioning properly, the government may cancel the certificate of corporation of the company, and

may take over its control in her own hands.

Q. Disadvantages of Joint Stock Company (8 marks)

The company form of business organization has no doubt a numbers of advantages, but it has several

defects too. Main defects/disadvantages are as follows:

1) Complication in Formation: The formation of a Joint Stock Company involves several long and

complicated legal formalities. Thus, a considerable cost is to be incurred before the company starts its

business.

2) Democratic only in Theory: The management of a company is democratic only in theory. It is because

only a small group of powerful shareholders get control of the company, and their nominees get



themselves re-elected as the directors every time. The ordinary shareholders have little voice at the

time of election. The company management is actually oligarchic and not democratic.

3) Lack of Motivation: In the company form of organization, there is a separation between ownership

and management. The ownership is with the shareholders, who do practically nothing in the

management of the company. The management is in the hands of directors and paid managers, who,

generally, do not watch the interest of the shareholders. Besides, the paid managers may lack, in

motivation, since they have not to get any share in the profits. Nowadays, the bonus facilities have been

implemented in Joint Stock Companies in order to motivate the salaried managers and other employees

to work hard and produce large profits for the company.

4) Limited Liability: The Joint Stock Company is based on the principle of limited liability. Because of the

shareholders may not take as much interest as they should. The directors may become irresponsibly.

They may also be tempted to undertake risky enterprises at the cost of shareholders.

5) Delay in Decision: The company organization is too ponderous and weighty. It cannot take any kind of

quick decision. It is, therefore, fit to a business where changing conditions require constant changes in

the policy of production.

6) No Personal Touch with Employees: In this form of business organization, the owners of the

organization have any personal touch with their employees. The owners, i.e., the shareholders are

concerned only with their profits, and they hardly show any, concern for the welfare of employees. The

paid managers work only to satisfy their directors and express their helplessness in matters relating to

the employees' welfare. Thus, the welfare of the employees is totally neglected. This attitude often

leads to labor troubles.

7) Lack of Secrecy: In the company form of organization all kinds of decisions are taken by the Board of

Directors; as such, it is difficult to maintain any kind of secrecy. A public company publishes its balance

sheet every year, showing the details of its financial position and also the position of profits and losses.

In that way, also the secrecy of a Joint Stock Company cannot be maintained.

8) Concentration of Wealth and Power in Few Hands: The company form of business organization is

responsible for concentration of wealth and power in the hands of a few persons only. This has serious

disadvantages from the point of view of the country's economy as a whole. In this form of organization,

a few rich capitalists, who can afford to purchase a large number of the company's shares, become all in

all. In the U.S.A. and many countries of Western Europe few rich financiers control the majority of the

banks, insurance companies and industrial concerns because of this form of business organization

Q. Explain Co-operative Sector. Enterprises/ Organizations/Society (2 marks)

Co-operation is a form of organization, wherein persons, irrespective of caste, creed and religion,

voluntarily associate together, as human beings, on the basis of equality for the fulfillment of their

common economic interests. Co-operative society is a voluntary association of people registered under

the provisions of the Co-operative Societies Act, 1912. It is a legal entity distinct and independent of its



members. It has a perpetual succession with limited liability of the members. It is managed _on

democratic lines, by the elected representatives of the members.

Q. Explain the main characteristics of Co-operative societies

The following are the main characteristics:

1) Voluntary Association: A co-operative organization is totally based on voluntary membership. There

is no compulsion either to become its member.

2) Legal Entity: A cooperative society after registration acquires a corporate personality with perpetual

succession and common seal. It acquires an identity quite distinct and independent of its members. It

begins to function as an artificial man -Created by law and is very much placed in a position quite similar

to a joint stock company. It is an autonomous, self-governing, and self-controlling organization.

3) Equal Voting Right The organization of a cooperative society is completely democratic as each

member has only one vote irrespective of the number of shares held by him. This ensures that nobody is

allowed to dictate his terms simply because he is rich and holds more shares.

4) Service Motive: A cooperative society is formed primarily with the object of rendering maximum

service to its members. Service and not profit is the main aim of a cooperative society. However, such

societies can earn profits by extending their services to non-members.

5) Disposal of Profits: Unlike a commercial concern which distributes its profits among the owners in the

ratio of their capital or in some other agreeable form cooperative society does not distribute its entire

surplus in the form of dividend on shares held by its Members. Rather it gives them in the form of a

bonus which need not be in proportion to the capital contributed by the members. In case of

consumer's cooperatives, the bonus is generally paid to the members in proportion to the purchases

made by them during the year, while in case of producers' cooperative stores; the goods delivered for

sale may form the basis of distributing bonus. In fact, the whole of the surplus is not distributed among

the members, but a portion of this is usually utilized in extending amenities and facilities to the

members. Law; however, requires that each society must transfer at least one-fourth of its profits to a

general reserve and provides that it may utilize a portion of the profit, not exceeding 10 per cent, for the

welfare of the locality in which the society is functioning.

6) Other Membership: There is no restriction of any kind to become a Member of co-operative

enterprise. This means the membership is open to all irrespective of the caste, creed, religion and

political affiliations.

7) Economic Motive: Co-operative organization is always formed with some economic motive, for

example, for the arrangement of cheap credit facilities, distribution of improved seeds, fertilizers, etc.,

providing marketing facilities, making available land for construction houses, providing consumer goods

on proportionate, etc.



8) Distributive Justice: In the co-operative form of organization, capital is not given any undue

preference. The rate of interest payable on the capital, contributed by the members, is normally of

restricted nature, and the profits are distributed equitably amongst its members to the extent of the

business transacted with it by the respective members.

9) Mutual Help and Welfare: The co-operative form of organization is based on the principle of mutual

help a welfare. "Each for all, all and all for (each", is the famous slogan of co-operatives. The co-

operative organization does not function totally on the profit-making motive.

Q. Explain the Types of Cooperative Society (8 marks)

Cooperative societies may be formed practically for every purpose and in every walk of life.

Some cooperatives are formed with the purpose of social service of their members, while others are

formed for the achievement of some common economic objectives. The principle types of business

cooperatives are as follows:

1) Consumers' Cooperative Societies: Consumers' cooperative is an attempt on the part of the

consumers to eliminate middlemen and to establish direct relation with the manufacturers or

wholesalers. These societies are formed by the consumers for obtaining their requirements to

reasonable prices. The profit or surplus of the organization, after making necessary provisions, is

returned back to the members in the ratio of the purchases made by them during the year A portion of

the surplus is also utilized for providing social services like education, medical aid, sanitary

improvement, etc., to raise the standard of -living of the members. These societies are usually managed

by honorary members, although sometimes paid managers may also be appointed. 'Consumers' Stores'

and 'Super Bazaars' are the most popular examples of organizing distribution of goods through the

Consumers' Cooperative Societies.

2) Producers' Cooperative Societies: These societies, sometimes also, known as industrial cooperatives,

are the voluntary associations of small producers who join hands to face the powerful capitalists.

3) Cooperative Credit Societies: These are voluntary associations of people with moderate means,

formed with the purpose of providing short-term financial accommodation to their members and for,

cultivating the habit of thrift among members. These societies are formed with the idea of saving their

members from the clutches of the moneylenders, who charge exorbitant rates of interest The

importance of such societies is very great particularly in villages, where farmers are usually exploited by

the moneylenders, because of their weak financial position. The funds of these societies consist of share

capital contributed by the members and the deposits made by members and outsiders. The liability of

the members may be unlimited or limited to a particular multiple of the value of their capital

contribution. Loans are generally granted for productive purposes only and the rate of interest is kept as

low as possible.

Credit cooperatives may be divided into two categories:



i) Agricultural Credit Societies: An agricultural credit society provides credit facilities to the members

belonging to the village community both for productive and non-productive purposes State and Central

Government also help such societies by giving them cheap loans.

ii) Non-Agricultural Credit Societies: A non-agricultural society is formed in towns or in cities by people

of moderate means to provide bank accommodation to the members.

4) Marketing Cooperatives: These are voluntary associations of independent producers who want to sell

their output through some centralized agency for profit. These societies are organized to ensure a

steady and favorable market for the output of its members. Besides eliminating middlemen, these

societies ensure fair and honest trading practices in weighing, measuring, and accounting. Such

cooperative societies are organized to increase the bargaining power of the small producers vis- a-vis

the customers. As a central sales organization," such societies also, many-a-times, perform important

marketing functions as processing and grading of the output delivered by the members. The sale-

proceeds are distributed among the members in the ratio of their contribution to the pool.

5) Cooperative Farming Societies: These are voluntary associations of small farmers who join hands with

the object of achieving the economies of large-scale farming and maximizing agricultural output. They

pool their resources for cultivating their lands collectively. Such societies are particularly important in

the case of countries like India, where agriculture suffers from excessive fragmentation and sub-

divisions of ,agricultural holdings and where farmers are 'economically weak and, thus, unable to use

modern tools and implements, good seeds and fertilizers, etc.

6) Housing Cooperatives: Such societies are formed in urban areas by the people who are interested

either in ownership of a house or in obtaining residential or business accommodation at reasonable

rates. Each member has to buy at least one share and his liability is generally limited to the value of his

capital contribution. These societies help their members in acquiring houses or finances to acquire

houses for themselves.

Q. Explain the Advantages of Co-operative Organization (8 marks)

A co-operative form of business organization has the following advantages:

1) Easy Formation: Formation of a co-operative society is very easy compared to a joint stock company.

Any ten adults can voluntarily form an association and get it registered with the Registrar of Co-

operative Societies.

2) Open Membership: Persons having common interest can form a co-operative society. Any competent

person can become a member at any time he/she likes and can leave the society at will.

3) Democratic Control: A co-operative society is controlled in a democratic manner. The members cast

their vote to elect their representatives to form a committee that looks after the day-to-day

administration. This committee is accountable to all the members of the society.



4) Limited Liability: The liability of members of a co-operative society is limited to the extent of capital

contributed by them. Unlike sole proprietors and partners, the personal properties of members of the

co-operative societies are free from any kind of risk because of business liabilities.

5) Elimination of Middlemen's Profit: Through co-operatives the members or consumers control their

own supplies and thus, middlemen's profit is eliminated.

6) State Assistance: Both Central and State governments provide all kinds of help to the societies. Such

help may be provided in the form of capital contribution, loans at low rates of interest, exemption in tax,

subsidies in repayment of loans, etc.

7) Stable Life: A co-operative society has a fairly stable life and it continues to exist for a long period of

time. Its existence is not affected by the death, insolvency, lunacy or resignation of any of its members.

Q. Explain Disadvantages of Co-operative Organization (8 marks)

Besides the above advantages, the co-operative form of business organization also suffers from various

1) Limited Capital: The amount of capital that a co-operative society can raise from its member is very

disadvantages such as: limited because the membership is generally confined to a particular section of

the society. Again due to low rate of return the members do not invest more capital. Government's

assistance is often inadequate for most of the co-operative societies.

2) Problems in Management: Generally it is seen that co-operative societies do not function efficiently

due to lack of managerial talent, The members of their elected representatives are not experienced

enough to manage the society. Again, because of limited capital they are not able to get the benefits of

professional management.

3) Lack of Motivation: Every co-operative society is formed to render service to its members rather than

to earn profit. This does not provide enough motivation to the members to put in their best effort and

manage. the society efficiently.

4) Lack of Co-operation: The co-operative societies are formed with the idea of mutual co-operation. But

it is often seen that there is a lot of friction between the members because of personality differences,

ego clash, etc. The selfish attitude of members may sometimes bring an end to the society.

5) Dependence on Government: The inadequacy of capital and various other limitations make co-

operative societies dependent on the government for support and patronage in terms of grants, loans

subsidies, etc. Due to this, the government sometimes directly interferes in the management of the

society and also audits their annual accounts.

Q. Explain in brief about the legal issues that entrepreneurs face? (8 marks)

For establishment and management of a new venture or setting-up of a small-scale enterprise,

entrepreneurs come across a number of situations to follow laws of the land. Right from the conception



stage in promoting the enterprise, entrepreneurs should be careful to obey the legal formalities,

procedures, policies and plans for the government so as to make themselves free from any sort of legal

hassles in future. As it has been rightly known that small-scale industries are an integral, part of

economic development, small-scale entrepreneurs should adhere to the rules of the land. Thus, an

attempt has been made to elucidate some of the legal issues relating to setting up the organization:

I) Intellectual Property Rights: Intellectual property rights which includes patents trademarks,

copyrights, design and trade secrets represents important assets to the entrepreneur and should be

understood even before engaging the services of an attorney. Lack of understanding of intellectual

property; ignore important steps that they should have taken to protect these assets. So understanding

the intellectual property right is very important for entrepreneurs.

2) Registration of the Unit in DIC: Small-scale units are required to be registered with the District

Industries Centers (DICs) which function under Directorate of Industries of the state in which the

industries' 4re established. As a rule, entrepreneurs are assisted with two types of registration, viz.,

provisional registration and permanent registration. As the name implies provisional registration is

provisional in nature and unit gets a PRC (Provisional Registration Certificate) from the DIC as an

incipient unit to grow for production in future normally within a period of five years. Permanent

registration certificate is provided when the industry has 'gone into production'. The above registration

certificates are necessary to make the unit eligible to get the incentives, subsidies, exemptions provided

by the government as per the benefit envisaged in the Industrial Policy Resolutions (IPRs) of the

government.

3)Statutory License or Clearance: All industrial undertakings are exempted from industrial licensing

except those industries which are coming under public sector or in respect of which the licensing is

compulsory. The Industries Development and Regulation Act (IDRA), 1951 provides the basic framework

for directing the flow of investments into different types of industries. Thus, industrial licensing is

utilized as an important instrument for the above purpose. In our country, a number of administrative

bodies in government are established for considering the proposal for the issue of industrial license and

a time limit exists for issue of the license. In general, a letter of intent is issued initially with prescribed

condition subject to which license is issued after fulfillment of these conditions. However, after the

announcement of New Industrial Policy in July 1991, industrial licensing is abolished for all projects

except for eighteen industries related to security and strategic concern, social reasons, hazardous

chemicals and overriding environmental reasons and items of elitist consumption. Thus, the process of

liberalization has played a significant role in abolition of industrial licensing for a large number of

industrial items of manufacturing.

4) No Objection Certificate (NOC) from Local Body/Panchayat/Municipality: While promoting a new

venture, the entrepreneur has to obtain No Objection Certificate from local body/NAC/panchayat or

municipality as well as the requisite permission to start the SSI. This is done for the purpose of

construction of industrial sheds and for land utilization as well as for the benefit which may be given to

the enterprise in course of its operation by the government.



Q. Explain in brief about Intellectual Property Rights (8 marks)

Intellectual property rights are a bundle of exclusive rights over creations of the mind, both artistic and

commercial. The former is covered by copyright laws, which protect creative works, such as books,

movies, music, paintings, photographs, and software, and give the copyright holder exclusive right to

control re-production or adaptation of such works for a certain period of time. Intellectual property

rights include patents trademarks, copyrights, design, trade secrets and Licensing. The second category

is collectively known as "industrial properties", as they are typically created and used for industrial or

commercial purposes. A patent may be granted for a new, useful, and non-obvious invention and gives

the patent holder a right to prevent others from practicing the invention without a license from time. A

trademark is a distinctive sign which is used to prevent confusion among the inventor for a certain

period of products in the marketplace. An industrial design right protects the appearance, style or

design of an industrial object from infringement. A trade secret is an item of non-public information

concerning the commercial practices or proprietary knowledge of a business. Public disclosure of trade

secrets may sometimes be illegal. 'Thus, the term intellectual property denotes the specific legal rights

and not the intellectual work itself.

Nature of Intellectual Property Rights (IPR)

1) Intellectual property rights i.e. patents, trademarks, copyrights, registered industrial designs,

integrated circuit topographies, etc., are the key factors in fostering innovation and growth in today's

economy. By providing a limited ability to exclude others from making, or enjoying the benefits of, the

protected ideas/materials, IPRs provide vital incentives for research and development leading to new

products and production processes, and facilitate the diffusion of new technology or creative works. The

precise terms of - protection vary with the particular type of IPR.

2) Intellectual property rights are extensively employed by firms that view them as important strategic

assets. The use of IPRs, however, varies considerably across industries and firms.

3) intellectual property rights give the holder an exclusionary, and sometimes exclusive, right to the

exploitation of an emanation of the intellect. The nature of the right varies from one type of intellectual

property to another.

4) Intellectual property rights vary in duration. Some arise only upon registration, while others arise

from the act of creation itself. In the absence of harmonization, Community law does not regulate the

conditions upon which National law grants intellectual property rights, although it may curtail the

exercise of them.

Types of Intellectual Property Rights Intellectual property rights are of following types:

1) Industrial Design,

2) Patents,

3) Trademarks,



4) Copyright,

5) Trade Secrets.

Q. Explain in brief about protecting industrial design (8 marks)

Requirements for Protection

On general terms, for a design to be protected it must be new. This means that it must not already exist

that is, there must not already be the same product that has the same or very similar design. Design

protection usually arises upon registration. To obtain registration, an application is made to a state

registration authority, specifying the design and the product to which the design applies. The application

is examined by the authority, to determine if the design is new. Details of registered designs are

published by the state registration authority. Some countries provide, in addition to design registration,

a system of protection for designs that does not involve registration. Such unregistered design

protection usually arises by virtue of the copyright legislation. It is possible, for example, for a designed

product to be protected under copyright as a 'work of artistic craftsmanship'. It is also possible, in

certain circumstances, for design drawings of a product to be protected under copyright as an 'artistic

work'.

Exclusive Rights Upon registration,

The owner of a design registration is granted the exclusive right to make, use and sell a product in

respect of which the design has been registered and to which the design has been applied. Excepted

from infringement are acts done for private and non-commercial purposes, acts done for experimental

purposes and acts done for teaching purposes. The maximum duration of registered design projection

varies from country to country, but is commonly shorter than the maximum period of protection

provided by copyright law. For example, In India, protection lasts for a maximum of /1/5 years from

application for registration; whereas in the UK it lasts for a maximum of 25 years from registration.

Benefits of Creative Designs in Business Enterprises often devote a significant amount of time and

resources to enhancing the design appeal of their products. New and original designs are often created

to:

1) Customize Products to Appeal to Specific Market Segments: Small modifications to the design of some

products (for example, a watch) may make them suitable for different age groups, cultures or social

groups. While the main function of a watch remains the same, children and adults generally have very

different tastes in design.

2) Create a New Niche Market: In a competitive marketplace, many companies seek to create a niche

market by introducing creative designs for their new products to differentiate them from those of their

competitors. This could be the case for ordinary items such as locks, shoes, cups and saucers to

potentially expensive items such as jewelry, computers or cars.



3) Strengthen Brands: Creative designs are often also combined with distinctive trademarks to enhance

the distinctiveness of a company's brand(s). Many companies have successfully created or redefined

their brand image through a strong focus on product design.

Duration of the Registration of a Design

The total term of a registered design is 15 years. Initially the right is granted for a period of 10 years,

which can be extended, by another 5 years by making an application and by paying a fee of 2000 to the

Controller before the expiry of initial 10 years period. The proprietor of design may make the application

for such extension even as soon as the design is registered.

Q. Give an account of Patents (12 marks)

Patent is a government license that gives the holder exclusive rights to a process, design or new

invention for a designated period of time. Patents are legal instruments intended to encourage

innovation by providing a limited "monopoly" to the inventor (or their assignee) in return for the

publication of the details of the invention protected by the patent. Innovation is encouraged because an

inventor can secure exclusive rights, and therefore financial rewards in the market place, in return for

the development and disclosure of new technology. Patent is a grant for an invention, by the

government to the inventor, in exchange for full disclosure of the invention.

What can be Patented: Any invention concerning with composition, construction or manufacturing of a

substance, of an article or of an apparatus in an industrial type of process can be patented.

What cannot be Patented: Any artistic creation, mathematical methods, any business scheme cannot be

patented. Patent is an agreement between the government and an inventor whereby, in exchange for

the inventor's complete disclosure of the invention, the government gives the inventor the right to

exclude others from making, using, or selling the invention for a period of 20 years.

Aims of Patent

The main aims of patents are as follows:

1) To encourage technology innovation.

2) To protect inventors and investments made to get the invention by rewarding for the intellectual

activity.

3) Patents protect inventions in all technological fields as long as they have industrial applicability. Such

as machines, chemical compounds and electronic systems. 4) In short patents encourage technological

economic and intellectual work creativity by protecting inventors and their inventions.

Applying for a Patent Right In India



Patent rights are granted on a first-to-apply basis. Application for a patent right can be filed by the

inventor or by the inventor's representative. Here also, foreign applicants are treated at par with Indian

applicants. The entire process of obtaining patent rights is discussed below:

1) Filing Application: The application is numbered on the day it is filed. In case there are some obvious

errors in the application, the patent office sends a preliminary objection letter within a month of filing

the application. A reply to these objections has to be sent within the specified time.

2) Publication of the Application: The application is published in the official gazette after 18 months of

filing the application. Now, the patent is in public view and any person can file for opposition of the

grant. Within 36 months of filing the application, the applicant can request for an examination.

3) First Examination Report: The examiner of patents issues a first examination report, which contains

views on any opposition filed till date. This report may raise a variety of objections and the applicant has

up to six months to reply to these objections.

4) Grant: Patent rights are granted if the applicant complies with all the objections raised within six

months. Otherwise, the application is deemed to have been abandoned.

5) Post-Grant Opposition: Any interested person may file an opposition on tenable grounds, within one

year of the date of publication of grant of a patent.

Benefits of a Patent Holder Here is a list of main benefits of a patent holder:

1) Patent holder can prevent others from selling, importing, making, marketing or using the invention.

2) These rights remain for the patent holder for 20 years from the date in which the application is filed.

3) Since the patent holder has this right for certain years, full disclosure to the public of using and

making the patent occurs after the protection period expires. The patent holder is responsible for taking

the initiative to enforce a patent. Things that are discovered in the nature and not invented are not

patentable, such as the astrological discoveries and natural laws. Human genes cannot be patented also,

moreover, inventions that violate laws of nature such as a perpetual motion machine. Trade Related

Aspects of Intellectual Property Rights (TRIPS) agreement does not allow patents to be granted to

scientific theories, business or playing, games schemes, and medical treatment and diagnostics

methods.

Patent Infringement

It is important for the entrepreneur to be sensitive about whether he or she is infringing on someone

else's patent. The fact that someone else already has a patent does not mean the end of any illusions of

starting a business. Many businesses, inventions, or innovations are the result of improvements on, or

modifications of, existing products. Copying and improving on a product may be perfectly legal (no

patent infringement) and actually good business strategy. If it is impossible to copy and improve the



product to avoid patent infringement, the entrepreneur may try to license the product from the patent-

holder.

Q. Explain Trademarks (8 marks)

Trademark is a sign (such as logos, words, letters, abbreviations, symbols, drawings or any combination)

that distinguishes someone's (companies, traders, service providers, manufacturers, etc.) goods or

services from others (usually competitors) goods or services in the market place. Trademark is a

property of a single person, company or even institute that registers it. The two main requirements of a

Trademark to be registered under Madrid agreement terms are:

1) Mark must be Distinctive: This means that the mark should not be generic and not describing the

good. Instead the mark should distinguish ones goods or services from another. For example, the word

computers cannot be registered as a mark for computers shop since it describes the shop but it can be

used for other kinds of shops.

2) Mark must not be Deceptive: This means the mark must not specify by the name that the product has

-certain quality or feature. An example of such deceptive marks is "Northern Olive Oil" which is not from

the Northern area.

Registration The process for registration of the trademark can be carried-out by the business owner or

their representative. Though entrepreneurs prefer to use an agent or a lawyer for filing an application

for registration, there is no reason why it cannot be done by the entrepreneur or his/her employees.

The entire registration process can be described in the following steps:

1) Trademark Search: Before applying for registration, an applicant can opt for a paid search at the

registrar's office. On payment of a fee, the office will browse through their records to find out the

existence of any previously registered trademarks that are identical or similar to the mark for which the

registration is sought. Even though a prior search to find a conflicting trademark is not a pre-requisite

for filing an application, it is advisable to carry-out a search and maintain the search results. In case

there is opposition to the use of the trademark sometime later, such search reports can act as proof of

good faith in the adoption of the marks. In a move to curb the spread and sale of counterfeit drugs, the

Drugs Control Department of the National Territory of Delhi has made search reports from the Registrar

of Trademarks mandatory before approving any drug-manufacturing license under a particular brand

name. It is likely that such approvals for drugs will become mandatory all over the country. The

application for search has to be accompanied with three representations of the mark and the search fee.

2) Application for Registration: The request for the registration should be in the prescribed form. Three

completed copies Of the form are submitted along with ten additional representations of the

trademark. The representation of the trademark must contain a clear re-production of the sign. Even

though a bare representation may be sufficient, it is advisable to include any colors, forms, or three-



dimensional features. In addition to details of the applicant, the application must also indicate the class

of goods/services to which it would apply.

The following information should be mentioned in the form:

i) The class of goods for which the mark is sought should be specified. Classes can be textiles, food and

confectionery, machine tools, etc. Separate applications are required for applying in different classes.

ii) Definition of goods that is sought to be registered should be given.

iii) Details of the applicant inducting name, age, occupation, address, and nationality should be given.

iv) Whether the trademark is in use or is proposed to be used. If it is in use, then applicant must specify

by.

Whom it is being used and for what period.

3) Receipt and Examination: Receipt of the application is acknowledged by returning a copy of the

application along with a representation of the mark. An official number is given to the application. The

date of receipt of application can become very important in possible infringement proceedings later.

The office considers all documents and evidences and searches among existing trademarks.

After such searching, the registrar can respond in the following ways:

i) Absolute acceptance,

ii) Acceptance subject to modifications in the mark, and

iii) Refusal.

In case modifications have been asked for, the applicant must comply with them within the stipulated

period of three months.

4) Acceptance, Advertisement and Opposition: After the application has been accepted, it will be

published in the Trademark Journal. The advertisement will include all details of the acceptance

including representation of the mark, date of filing, particulars of applicant, and conditions or

limitations, if any. Opposition has to be done within three months of the date of the advertisement.

Opposition must be in the prescribed form, in triplicate and with the prescribed fee. Usually “the entire

process of registration takes more than a year after application. Although after receipt of the official

number of an application, the applicant can request an expedited (Tatkal) examination of the

registration application, together with a declaration stating the reason for the request and a payment of

the fee five times the application fee.

Q. Explain what are copyrights (8 marks)



Copyright is a form of protection provided to the authors of "original works of authorship" including

literary, dramatic, musical, artistic, and certain other intellectual works, both published and

unpublished.

The Copyright Act, 1976 generally gives the owner of copyright the exclusive right to reproduce the

copyrighted work, to prepare derivative works, to distribute copies or phonorecords (a material object

in which embodies sounds such as tapes, CDs) of the copyrighted work, to perform the copyrighted

work publicly, or to display the copyrighted work publicly

Aims of Copyright

The aims of the copyright are as follows:

1) To protect works of human intellect and thoughts' expressions. drawings, diagrams, photos,

sculptures, music, songs and even computer software.

2) Copyright laws protect the expressions of literary and artistic works. This covers any written material,

3) Copyright laws prevent anyone from using copyrighted work without the permission of its owner.

4) The copyright protects the expressions of the ideas not the ideas themselves, that is why different

authors can write books or music about the same idea but in different ways and each one has his

copyrighted work.

. Works Protected by Copyrights

The following are some types of works that are protected by copyright laws:

1) Literary works.

2) Musical works.

3) Sound recordings and songs.

4) Movies-, plays and TV programs.

5) Architectural works.

6) Paintings, drawings and maps.

7) Pictorial and sculptural works. All such works should be original works of authorship. The copyright

holder has the full control over his/her work and can prevent others from using it without

Rights of Copyright Holder

1) Reproduction of the Work Right: Reproduction of the work right covers all forms of reproducing the

permission. The following are some of the rights one can have: work in any form such as printing,

photocopying or converting books to other medium such as audio or digital format. This right also



protects duplicating computer media such as disks, CD-ROMs and so on. This applies also to copying

tapes and video tapes.

2) Performance Right: Performance right covers all rights related to performing the work such as playing

music or orchestras, acting on stages, singing songs. This also covers all rights related to communication

to the public like broadcasting and distribution over-cables or Internet. In short it is the right of

presenting the

3) Translation and Adoption Rights: Translation and adoption rights cover all activities or transferring the

work to open public. work into language other than its original one. The adoption right includes any

modification of the work to create new one. For example, making movie based on novel. Related rights

protect those who involve with the copyrighted work to bring it to the public.

Q, what are trade secrets (8 marks)

A trade secret refers to data or information relating to the business which is not generally known to the

public and which the owner reasonably attempts to keep secret and co4dential. Trade secrets generally

give the business a competitive edge over their rivals. Almost any type of data, processes, or information

can be referred to as trade secrets so long as it is intended to be and kept a 4'ccret, and involves an

economic interest of the owner.

For example, a business may have certain internal business processes that it follows for its day-to-day

operations that give it an edge over its competitors. This could be regarded as a trade secret.

The Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) under the auspices of

the World Trade Organization lays down the following, three criteria for regarding any information as

undisclosed information (or trade secrets):

I) It must not be generally known or readily accessible by people Who normally deal with such type of

information.

2) It must have commercial value as a secret

3) The lawful owner must take reasonable steps to keep it secret. A trade secret is a formula, practice,

process, design, instrument, pattern, or compilation of information which is not generally known or

reasonably ascertainable. In some jurisdictions, such secrets are referred to as "confidential

information" or "classified information".

It is important to bear in mind that a trade secret need not be something that is novel nor should it have

any real or intrinsic value to be protected. The only important requirement is that it must be a secret.

Trade secret protection can, in principle, extend indefinitely and in this may offer an advantage over

patent protection, which lasts only for a specifically limited period of time Coca-Cola, the most famous

trade secret example, has no patent for its formula and has been very effective in protecting it for many

more years than the twenty years of protection that a patent would have provided. In fact, Coca-Cola



refused to reveal its trade secret under at least two judges' orders. However, the "down side" of such

protection is that it is comparatively easy to lose (for example, to reverse engineering, which a patent

will withstand but a trade secret will not) and conies equipped with no minimum guaranteed period of

years.

Trade Secrets Infringement

Misappropriate use of trade secrets can be called an unfair practice. Misappropriation includes:

1) Acquiring trade secrets related of other by a person who has strong belief or reason that it was

acquired by wrongfully doings.

2) Disclosing or using trade secrets of other person without any implied consent of its owner. 3) Theft,

bribery, misrepresentation, breach of duty to maintain secrecy, or espionage through electronic or other

means.

Q. Explain Licensing territory or the nature of business or improving the quality of the goods or

services of SME and its market position. (8 marks)

In many situations, licensing of intellectual property rights is an effective tool for achieving these

business goals. A licensing agreement is a partnership between an intellectual property right's owner

(licensor) and another who is authorized to use such rights (licensee) in exchange for an agreed payment

(fee or royalty). A variety of such licensing agreements are available, which may be broadly categorized

as follows:

1) Technology Licensing Agreement,

2) Trademark Licensing and Franchising Agreement,

3) Copyright Licensing Agreement.

In practice, all or some of these agreements often form part of one single contract since in transfers of

this nature many rights are involved and not simply one type of intellectual property right. They may

also come across licensing agreements in other circumstances, such as, during a merger or acquisition,

or in the course of negotiating a joint venture. All of these, mechanisms either on their own or in

combination will provide the SME, as a licensor or licensee, a wide variety of possibilities in conducting

business in their own country or elsewhere. As an intellectual property owner and a licensor, the SME

can expand its business to the frontiers of the partners' business and ensure a steady stream of

additional income. As a licensee, the SME can manufacture, sell, import, export, distribute and market

various goods or services which it may be prevented from doing otherwise.

Type of Licensing

I) Technology Licensing Agreement: If the SME is interested in:



i) Improving the quality of the product or manufacturing a new product by using the rights owned by

others in the form of a patent, utility model, Or know-how protected by a trade secret, then acquiring

such rights through a technology licensing agreement may be the right solution; or

ii) Entering a market or extending the existing market for a product for which the SME owns the rights

to a patent, utility model or know-how protected by a trade secret, then authorizing another to use the

process or product through a technology licensing agreement may be the right solution.

iii) By a technology licensing agreement the licensor authorizes the licensee to use the technology

under certain agreed terms and conditions. It is, therefore, a contract freely entered into between two

parties and contains terms and conditions so agreed:

2) Franchise or Trademark Licensing Agreements: If the SME is interested in: i) Marketing a product or

service and the brand (trademark) or design (industrial design) of that product is owned by others; or ii)

Entering or expanding the existing market for the product or service for which the SME owns the rights

conferred by a trademark, or industrial design. The principle function of a trademark or service mark is

to distinguish the goods and services of one enterprise from that of another, thereby often identifying

the source and making an implied reference to quality and reputation. This function is to some extent

prejudiced if the trademark owner licenses another enterprise to use the trademark through a

trademark license agreement. Therefore, the trademark owner is well-advised, and often by law or

contract required, to maintain a close connection with the licensee to ensure that the quality standards

are maintained so that the consumer is not deceived. Through a franchise agreement the owner of

certain technical or other expertise who has usually gained a reputation in connection with the use of a

trade or service mark (the franchiser) may team-up with another enterprise (franchisee) who will bring

in expertise of his own or financial resources to provide goods or services directly to the consumer. The

franchiser will ensure, through the supply of technical and management skills, that the franchisee

maintains the quality and other standards in relation to the use of the trade or service mark which often

require certain standardized features like, for example, a uniform trade dress.

3) Copyright Licensing Agreements: If the SME is interested in: i) Manufacturing, distributing or

marketing the results of the literary and artistic efforts of creators; or ii) Entering a market or expanding

or extending the existing market for the literary and artistic efforts for the enterprise.

There is a copyright license agreement. Many owners find it difficult to manage their rights on their own

and they have formed collective management organizations that represent them and manage their

rights for them. If anyone is interested in acquiring these rights they may have to address themselves to

the appropriate collective management organization that will be authorized to license the various rights

of their members.

Q. Explain Insurance (8 marks)

Insurance can be defined as a legal contract between two parties whereby one party called insurer

under-takes to pay a fixed amount of money on the happening of a particular event, which may be

certain or uncertain. The other party called insured pays in exchange a fixed sum known as premium.



The insurer and the insured are also known as underwriter, and assured, respectively. The document

which embodies the contract is called the policy. Insurance may be described as a social device to

reduce or eliminate risk of loss to life and property. Insurance is a collective bearing of risk. Insurance

spreads the risks and losses of few people among a large number of people as people prefer small fixed

liability instead of big uncertain and changing liability. Insurance is a scheme of economic cooperation by

which members of the community share the unavoidable risks.

Types of Insurance

1) Property Insurance: It provides protection against most risks to property, such as fire, theft, and some

weather damage. This includes specialized forms Of insurance such as fire insurance, flood insurance,

earthquake insurance, hom6insuraiice or boiler insurance. Property is insured in two main ways:

i) Open Perils: Open perils cover all the causes of loss not specifically excluded in the policy. Common

exclusions on open peril policies include damage resulting from earthquakes, floods, nuclear incidents,

acts of terrorism and war.

ii) Named Perils: Named perils require the actual cause of loss to be listed in the policy for insurance to

be provided. The more common named perils include such damage-causing events as fire, lightning,

explosion, and theft.

2) Casualty Insurance: It often equated to liability insurance, is used to describe an area of insurance not

directly concerned with life insurance, health insurance, or property insurance. Strictly defining casualty

insurance has become problematic in recent years With the rising popularity of multi-line insurance

policies. It is mainly used to describe the liability converge of an individual or organization's for negligent

acts or omissions. However, the "elastic" term has also been used to describe property insurance for

aviation insurance, boiler, and machinery insurance, and glass and crime insurance. It may include

marine insurance for shipwrecks or losses at sea or fidelity, insurance

3) Life Insurance: It protects the continuity of the business. It also provides financial protection for

survivors of a sole proprietorship or for loss of a key corporate executive.

4) Workers' Compensation: It (colloquially known as workers' comp or workman's comp in North

America and compo in Australia) is a form of insurance that provides compensation medical care for

employees who are injured in the course of employment, in exchange for mandatory relinquishment of

the employee's right to sue his or her employer for the negligence.

5) Bonding Insurance: It is a Service whereby issuers of a bond can pay a premium to a third party, who

will provide interest and capital repayments at `Specified in the bond in the event of the failure of the

issuer to do so. The effect of this is to raise the rating of the bond to the rating of the insurer;

accordingly, a bond insurer's credit rating must be almost perfect. The entrepreneur, in starting a new

venture, will be involved in a number of negotiations and contracts with vendors,

Q. Explain the purpose of the Various Statutory Registrations (8 marks)



The main purpose of Registration is to maintain records and maintain a roll of such units for the

purposes of providing incentives and support services. Government has generally adopted the uniform

registration procedures as per the guidelines. However, there may be some modifications done by

States. It must be noted that small industries is basically a state subject. States use the same registration

scheme for implementing their own policies. It is possible that some states may have a "SIDO

registration scheme" and a "State registration scheme" or other.

Obtain SSI Registration Small-scale industry i.e., undertakings with investment in plant and machinery

does not exceed 5 crore should seek registration- with the Director of Industries of the concerned State

government. Entrepreneurs desiring to start a small-scale industry have to initially obtain a Provisional

Registration Certificate (PRC). Once the unit goes into production, the PRC has to be converted into a

Permanent Registration Certificate (PMT

Provisional Registration Certificate (PRC) A Provisional Registration Certificate is the initial registration

for starting a small-scale industry. It enables the entrepreneur to initiate necessary steps to bring the

unit into existence. The entrepreneur should apply and obtain a PRC after selection of the project and

deciding on the location of the unit. A PRC is necessary for applying for infrastructure facilities (such as

land, shed, etc.), finance, and so on. Registration Formalities

The entrepreneur should make an application in the prescribed application form (in duplicate) along

with the following:

1) Prescribed court fee stamp;

2) Copy of the project profile;

3) Partnership deed/Memorandum and Articles of Association, as the case may be;

4) Affidavit, as per format on appropriate stamp paper.

The PRC will be normally issued immediately, across the table on submission of the application. The

initial validity of the PRC is for two years and it can be renewed subsequently, if needed.

The benefits of getting Provisional Registration Certificate are given below:

1) This is given for the pre-operative period and enables the units to obtain the term loans and working

capital from financial institutions/banks under priority sector lending.

2) To obtain facilities for accommodation, land, other approvals, etc.

3) To obtain various necessary No Objection Certificates and clearances from regulatory bodies such as

Pollution Control Board, Labor Regulations and so on.

Q Explain Permanent Registration Certificate (2 marks)



An SSI unit can get a Permanent Registration Certificate (PMT) when it goes into commercial production.

In the initial stages it would have obtained a Provisional Registration Certificate and it would be

converted to PM when the unit goes into production.

The PMT registration will help SSI units in several ways, which are listed below:

1) To apply for scarce raw materials and for imported raw materials.

2) To get working capital from banks/financial institutions.

3) To obtain Central excise duty concessions

. 4) for apply for registration under the Government Stores Purchase Program/Ancillary Development

Program/Export Promotion Program and to get purchase and price preferences.

5) To apply for incentives including sales tax exemption, wherever applicable.

A Permanent Registration Certificate enables the unit to get the following incentives/concessions:

1) Income-tax exemption and sales tax exemption as per State government policy.

2) Incentives and concessions in power tariff and so on.

3) Price and purchase preference for goods produced.

4) Availability of raw material depending on existing policy.

5) Permanent registration of tiny units should be renewed after five years.

Registration Formalities The applications in the prescribed form (in duplicate) along with the following

are to be submitted by the entrepreneur: I) Prescribed court fees stamp. 2) Affidavit, as per format on

appropriate stamp paper.

The Permanent Registration Certificate is normally issued immediately, across the table on submission

of the application.

Benefits of Registering The registration scheme has no statutory basis. Units normally get registered to

avail some benefits, incentives or support given either by the Central or State Government. Registering

has the following benefits:

1) Credit prescription (priority sector lending) „ differential rates of interest, and so on;

2) Excise exemption scheme;

3) Exemption under direct tax laws;

4) Statutory support such as reservation and Interest on Delayed Payments Act;

5) Apply for a shed or plot in an industrial estate or a developed area;



6) Apply for Corporation/Municipality for other licenses;

7) Apply for power/water connection;

8) Apply for financial assistance from banks and other institutions,

9) Apply to the National Small Industries Corporation. /State Small-Scale Industries basis;

10) Obtain sales tax, excise registration, etc., wherever required;

11) Take other steps/approvals that may be necessary to import license for capital goods/raw materials.

States/UTs have their own package of facilities and incentives for small-scale units. They relate to

development of industrial estates, tax subsidies, power tariff subsidies, capital investment subsidies and

other support. Both the Center and the State, whether by law or otherwise, generally target their

incentives and support packages to units registered with them

notes mod 4, 5

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