BUSINESS ENVIRONMENT:Ist UNIT

According to Androse “The term business environment of a company is defined as a pattern of all external influences that affect its life and development.Business environment consist of all those factors that have a bearing on the business. The survival of a business firm depends on its innate (natural) strength resources at its command and its adaptability to the environment and te extent ot which the environment is favorable o development of the firm.

External Environment External Environment

Micro MacroEnvironment Environment

The survival and success of a firm, thus, depend on two major factors, viz, the internal environment – the external environment.

A SWOT analysis i.e. analysis of strengths and weaknesses of the orgnisation and opportunities and threats in the environment.

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

The external environment has two components : Opportunities and threats to business. The external factors such as economic factors, socio-cultural factors govt. and legal factors demographic factors geo-physical factors etc. are uncontrollable factors.

Business environment at 3 levels: Internal environment Micro/task/operating environment Macro/general/remote environment

Macro/general/remote environmentSocial Environment : This environment includes social factors such as attitudes of people, social customs and

traditions, education level, size of population, trade unions, occupational structure etc.,Political Environment :

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Political environment refers to the country’s political system, type of government Government policies towards business government, centre state relations, public opinion, law and order etc.

Legal /Regulatory Environment :Legal environment of business includes all the laws, legal system and judiciary system of the country. A

business has to work within framework of country’s laws and regulations.Socio-Cultural Environment :Social and cultural environment refers to the influence exercised by certain social factors which are ‘beyond the

company’s gate’. Such factors include, among others, attitude of people to work, attitude to wealth, family, marriage, religion, education, ethics and social responsibility of business.

Technology :Includes scientific and technological advancements in a specific industry as well as in society at large. E.g.

Computer industry, etc.,Technological advances can change the rule of the game; thus every business must by ready to respond. Legal and Political:The legal-political element includes the legal and governmental systems within which a business must function.a) Business must operate within the general legal framework of the countries in which they do business.b) Businesses are subject to an increase in lawsuits filed by customers or employees.c) The political issues which affect businesses include those which influence the extent of government

regulation.Natural Environment : Climatic & weather condition. Availability of Natural resources. Topographical factors : Physical features of place. Pollution ControlDemographic Environment : Age Composition Sex Composition Education Level Family size & structure Urban-rural population

Micro/task/operating environmentCustomers Those people & organizations in the environment who acquire goods or services from the business are

customers. As recipients of the business’ output, customers are important because they determine the business’s Types of Customers : Industrial Customers Institutional CustomerForeign Customer Retail Customer Multiple Customer Globalization Customer SegmentationCompetitors :Other firms in the same industry or type of business that provide goods & services to the same set of customers.In today’s environment most competitors are cooperating to achieve common goals. Suppliers.The people & organizations who provide the raw material the business uses to produce its output.The relationship among them must of cooperative in nature in order to save money, maintaining quality, and

speeding products to market. Reliability Multiple SupplierMarket Intermediates : Types of Market Intermediates Middlemen Marketing Agencies Financial Institution Physical IntermediatesPublic :

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Media Publics Local PublicSignificance of Business EnvironmentThere is a mutual interdependence between business and its environment. A business enterprises is an open

system. It continuously interacts with its environment. Business takes inputs raw materials, capital, labour, energy etc. from its environment and transforms them into goods and services and then send them back to the environment.

Business and its external environment interact in the following ways. Exchange of informationExchange of resources.Exchange of influence and power.

For incorporating dynamic behavior of environmentComplete knowledge of internal environmentTo understand international events, pressures & impactEconomic policies of the Government.To face business problems & challengesVigilant regarding dangersAdministrative SystemOptimum utilization of resourcesMarket conditionsScientific & industrial advancementDevelopment & success of business.Dimensions of Business Environment :

The main dimensions elements of business Environment are as follows : Economics Environment : The economics environment comprises of the factors and forces concerned with means of production and distribution of Wealth. It refers to the nature of economic system organization of capital and money markets, income level, price, level economic policies of the county etc.

Dimensions of International Business Environment : Environment means surrounding. Business environment means the factors the affect or influence the business. Study of environment helps the business to formulate strategies and run the business efficiently in the competitive global market. The environment dynamics. International business includes any type of business activity that crosses national borders.STEPIN factors which the business include social and Cultural factors. Technical factors Economic factors. Political factors international factors. Natural factors and Demographic and Regulatory environment factors etc.

Social and Cultural Environment : Social and cultural factors in various countries of the globe affect the international business. These factors include of the people to work, attitude to wealth, family, marriage religion, customs, traditions, beliefs, tastes and preference, living habits eating habits dress habits, education, ethics, human relations social responsibilities etc. social environment influences the level of consumption.

Technological Environment: Technology and global business are interdependent. International business spread technology from advanced countries to developing countries. Technological environment has significant and direct influence on business in general and international business in particular.

Economic Environment : International business is mostly and directly influenced by the economic environment of various countries. In fact international economic environment and global business interact with each other. The result of these changes is emergence of global markets, establishment of world Trade Organisation, emergence of global houses and global competitors rather than local competitors. International business houses establish their manufacturing centers in various countries and distribute the goods to the customers of a number of countries. Thus International business contributes of the economic development.The Economic environment is very significantly influenced by the following major agencies.

World Trade Organisation (WTO) International Monetary Fund (IMF) World BankPolitical Environment :

International political factors can also affect business, like war or political tensions or uncertainties strained political relations between the nation or other countries. Political environment factors also influence the operations of international business firms enormously.

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International Environment :Even domestic business is affected by certain global factors. The international environment is very important form the of view of certain categories of business. It is particularly important for industries directly depending on imports and exports.

Natural Environment :Natural environment encompasses natural resource endowments weather climate conditions, ecological factors, infrastructure factors like power, water resources, air ways, ports, surface transport ect. The natural invironmen is often a critical factor, for “ultimately it is the source and support of everything used by businesses (and almost any human activity) every raw material every energy source every life-sustaining factor even every waste disposal site.

Demographic Environment :Demographic factors such as size of the population, population growth rate, age composition, ethnic composition, density of population, rural – urban distribution, family size, nature of family, income levels, etc., have very significant implications for business.

Regulatory Environment :There are wide variations between countries in the policies and regulations regarding conduct of the business.

Challenges of International Business Environment :Maintaining Competitiveness : Many factors contribute to the competitiveness of a nation. It is being argued

that labour costs. Interest rates, exchange rates and economies of scale make a nation competitive.Government and Trade Regulations : The government of any country can influence its international business

significantly. For example, Government intervention for the purpose of protecting domestic industries usually results in less movement of goods and services across borders.

Development an International Perspective : Firms operating in cross border markets need to develop on international perspective. Three areas need special attention: experience focus and attitude.

Managing Diversity :Diversity is the outcome of globalization. Work forces of any MNC comprise people from different countries.

Within this diversity of national origins, there is even wider diversity of cultures, religions, languages, educational attainment, skill, values, ages, races genders and other differentiating variables. Managing such a cosmopolitan workforce is a challenging task for any executive.

Corporate Citizenship :As MNCs disperse their activities world wide they become highly visible and are required to operate under

diverse compulsions such as cultural, political economic and legal factors of different host countries. An international business will be successful if only it creates and sustains the image of a good corporate citizenship-the two hall marks of which are honesty and social responsiveness.

Recession :Temporary economic decline during which trade and industrial activity are reduced.Threats :Environment sometimes poses threats and challenges to the business. Business should enhance its strengths in

order to face the challenges posed by the environment. For example, China dumped steel at cheap prices in the Indian market and posed a threat to the Indian industry particularly to SAIL and TISCO. Consequetnly, Indian industry improved its technology in order to meet the Challenges.

Liberalization Policies :The liberalization polices pursued by the Government since July 1991 brought about a radical change in the

Indian business environment. The government also redefined the role of public sector as well as the process of planning. Greater reliance is now placed on market mechanism to bring about optimal allocation of economic resources.

UNIT – IIStructure of Indian economy

“Developing Countries” we use it to mean countries in which per capita real income is low when compared with per capita real incomes of United states of America, Canada Australia and Western Europe.

Characteristics of the Indian economy:General Poverty and Low per Capital IncomePredominance of AgricultureHigh Population PressureCapital DeficiencyUnemployment & Under EmploymentLow level of TechnologyUtilisation & Under Utilised Natural Resources

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Poor Quality of Human ResourcesDefective Economic OrganixationForeign Trade Orientation.Economic Systems :Introduction : The term economic system refers to an organization consisting of certain institutions.With a view to utilize productive resources for the purpose of the human wants.The Economic System of any nation is essentially man-made and influenced by the philosophy ideals, and

attitudes of its people.The different economic system prevailing in different out of the world can be broadly grouped into three

categories.Capitalist economic system, USA & JapanCommunist economic system, Soviet Union, China, Yugoslia, Poland & CubaMixed economic system, Britian, India, France Swedan & Holland.

I. Charactreristics of Capitalism : Freedom of enterprise Private ownership Profit motive Price mechanism Consumers Sovereignty Competition Freedom of contracts Limited Role of GovernmentII. Capitalism : Social ownership of the means of production Central planning Production for social welfare, No profit motive Key role of Government agencies Lack of economic freedom Full employment No Class, conflict Industrial peaceIII. Characteristics of Mixed Economy Co-existence of the private sector and the public sector Existence of Joint Sector (Co-operative Sector) Control over private sector Economic Planning Social Security Reduction of InequalitiesTypes of Planning : Perspective Plans : is a macro plan for formulated for a period of to 20 years. Five year plan : are designed for a period of five years Annual plan : is a part of one year plan. Rolling plan : don’t have a fixed period of time.First to Tenth Five Year Plans are given below :First Five-Year Plan (1951-56)Second Five – Year Plan (1956-61)Third Five – Year Plan (1961-66)Annual Plan (1966-67)Annual Plan (1967-68)Annual Plan (1968-69)Fourth Five – Year Plan (1969-74)Fifth Five – Year Plan (1974-79)Sixth Five – Year Plan (1980-85)Seventh Five-Year Plan (1985-90)Eight Five – Year Plan (1992-97)Ninth Five-Year Plan (1997-2002)Tenth Five-Year Plan (2002-2007)Eleventh Five – Year Plan (2007-2012)Economic Planning Industrial Development under plan periodsFirst Five Year Plan (1951-56) :

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In this plan much importance not given to industrial sector. But some steps were taken for the proper utilization of existing capacity of industries. In this plan some industries like Sindri fertiliser’s factory, Indian Telephone Industries, Penicillin factory etc. were established. In this first plan the annual growth rate of industrial output was 7 percent.

Second Five Year Plan (1956-61) :This plan envisaged an ambitious programme industrialization with emphasis on basic and heavy industries, so a strong base for rapid industrialization, self-reliance, technological development and so on. In this plan the industrial Policy Resolution, 1956 was introduced. The most important industrial achievement was the establishment of three public sector steel units at Bhili, Rourkela, & Durgapur. The annual growth of industrial output in this plan was nearly 7.2 percent.

Third Five Year Plan (1961-66) :Importance was given for the development of iron & steel, heavy machines & tools, electricity, heavy engineering, fertilizers etc. The Bokara Steel Plant was established in this plan The actual growth rate was nearly 7.8 percent per year.

Fourth Five Year Plan (1969-74) :1. Increase the use of installed capacity through heave investment.2. Increase exports & reduce the imports as much as possible3. Industrialisation of the country through establishment & development new industries

Firth Five Year Plan (1974-79) :1. Preference was given for the development of iron & steel, fertilizers some other large scale industries.2. Industries which will improve the exports must be developed.3. Steps must be taken for the development of consumer good industries.4. Special interest must be taken for the development of cottage & small industries.

Sixth Five Year Plan (1980-85) :Target was about 7 percent per year & actual growth rate achieved was about 5.5 percent.1. Importance has been given for substantial improvement of manufacturing capacities in public & private

sectors.2. Special attention has been given for the development of electronic & communication industries.

Seventh Five Year Plan (1986-91) :1. Adequate supply of wage goods & other consumer goods at reasonable prices.2. By up gradation of technology, the full capacity of industrial units must be utilized.3. Development of domestic market & export potential to emerge as world leader.Achieve self-reliance & high employment generation.Eight Five Year Plan (1992-97) :Annual growth rate of Industrial output was 8.1 percent.1. Rapid increase in gainful employment.2. Attainment of balanced regional growth3. Achieving international competitiveness & productivity with technological dynamism.4. Ninth Five Year Plan(1997-2002) : Target was 8.2% of industrial growth rate per annum. Actual growth rate

of industrial output in this plan was only 4.5%.5. Tenth Five Year Plan (2002-2007) : The industrial sector will have to grow at around 10% to achieve the

tenth plan target of 8% growth of GDP. After dismal performance in 2001-02, the industrial sector revived a bit in 2002-03 when it grew at a rate of 6.4%. In 2003-04 expected to grow at the same rate.

Ninth Five Year Plan (1997-2002) :Target was 8.2% of industrial growth rate per annum. Actual growth rate of industrial output in this plan was only 4.5%.

Tenth Five Year Plan (2002-2007):The industrial sector will have to grow at around 10% to achieve the tenth plan target of 8% growth of GDP. After dismal performance in 2001-2002 the industrial sector revived a bit in 2002-2003 when it grew at a rate of 6.4% . In 20030-04 is expected to grow at the same rate.

Eleventh Plan (2007-2012)The eleventh plan has the following objectives :

1. Income & Poverty:o Accelerate GDP growth from 8% to 10% and then maintain at 10% in the 12 th plan in order to double per

capita income by 2016-2017.o Increase agricultural GDP growth rate to 4% per year to ensure a broader spread of benefits.o Create 70 million new work opportunities.o Reduce educated unemployment to below 5%.o Raise real wage rate of unskilled workers by 20percent.

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o Reduce the headcount ratio fo consumption poverty by 10 percentage points.2. Education :o Reduce dropout rates of children form elementary school from 52.2% in 2003-04 to 20% by 2011-12.o Develop minimum Standards of education attainment in elementary school, and by regular tasting monitor

effectiveness of education to ensure quality.o Increase literacy rate for persons of age 7 year or more to 85% o Low gender gap in literacy to 10 percentage points.o Increase the percentage of each group going to higher education from the present 10% to 15% by the end of

the plan.3. Health :o Reduce infant mortality rate to 28 and maternal mortality ratio to 1 per 1000 live births.o Reduce Total Fertility Rate to 2.1o Provide clean drinking water for all by 2009 and ensure that there are no slip backso Reduce malnutrition among children of age group 0-3 to half its present level.o Reduce anaemia among women and girls by 50% by the end of the plan.4. Women and Childreno Raise the sex ratio for age group 0-6 to 935 by 2011-12 and to 950 by 2016-17.o Ensure that at least 33 percent of the direct and indirect beneficiaries of all government schemes are women

and girl children.o Ensure that all children enjoy a safe childhood. Without any compulsion to work.5. Infrastructure :o Ensure electricity connection to all village and BPL house holds by 2009 and round – the – clock power.o Ensure all-weather road connection to all habitation with population 1000 and above (500 in hilly and tribal

areas) by 2009 and ensure coverage of all significant habitation by 2015.o Connect every villages by telephone by November 2007 and provide broadband connectivity to all villages

by 2012.o Provide homestead sites to all by 2012 and step up the pace of house construction for rural poor to cover all

the poor by 2016-17.6. Environment :o Increase forest and tree cover by 5 percentage points.o Attain WHO standards of air quality in all major cities by 2011-2012. o Treat all urban waste by 2011-12 to clean river waters.o Increase energy efficiency by 20 percentage points by 2016-17.

Industrial Policy, 1948The term “ Industrial Policy “ refers to the policy adopted by the govt for

development of industries in the country. Establishment of new industries, expansion of existing industries, labour policy, policy of the govt towards foreign investment in India etc are included industrial policy. Before independence the British govt followed free trade policy which was responsible for industrial backwardness of the India. After Independence, govt. of India declared its first industrial policy on 6th April 1948. This policy is known as “ Industrial Policy, 1948 “ . Objectives :

1. Establishment of social order in which justice and equal opportunities will be provided for all people.

2. By exploiting the resources, the standard of the living of the people must be promoted.

3. The production of both agricultural & industrial sectors must be increased.

4. Employment opportunities must be provided to all people.5. Private sector must be regulated by taking suitable steps.6. Determination of responsibilities of state & private enterprises in

industrialization.Principles of Industrial Policy, 1948 : - 1. Classification of Industries : -

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First category : It consists of manufacture of arms and immunities, production and control of atomic energy & the ownership & the management of railways. This is under state monopoly.

Second category-Industries like coal, Iron & steel, Air craft manufacture, ship-builiding, telephone, telegraph, wireless apparatus & mineral oils etc, Started by the govt in future. The existing industries in private sector may be nationalized after 10 years.

Third category : - Industries like cotton, textile, sugar, cement, paper , heavy machines and machine tools, fertilizers etc. This are regulated and controlled by govt of India.

Fourth category : - All the remaining industries were included & which were open to private enterprise but control by the govt.

2. Role of cottage and small scale industries : - For the better utilization of local resources and to achieve self-sufficiency in consumer goods.

3. Labour – Management relations : - cordial & satisfactory relations between labourers & management.

4. Foreign capital : - Important for the development of industrialization in the country.

Industrial policy Resolution, 1956The term “ Industrial Policy “ refers to the policy adopted by the govt for

development of industries in the country. Establishment of new industries, expansion of existing industries, labour policy, and policy of the govt towards foreign investment in India etc are included industrial policy. Before independence the British govt followed free trade policy which was responsible for industrial backwardness of the India. After Independnece, govt. of India declared its first industrial policy on 6th April 1948. This policy which was responsible for industrial backwardness of the India. After Independnece, govt. of India declared its first industrial policy on 6th April 1948. This policy is known as “ Industrial Policy, 1948. New Industrial policy was introduced by the govt of India on 30th April, 1956.

Objectives : - 1. To accelerate the rate of economic development & speedup of

industrialization.2. To develop heavy industries & machine making industries which are

useful for industrial development.3. For the sake of welfare of the people & economic development, the

public sector must be expanded. 4. Development of co-operative sector which is needed for economic

development of country. Principles : - 1. Classification of Industries : -

First category : - 17 major industries developed by govt. Arms & immunities, atomic Energy, Iron & Steel, coal, mineral oils, aircrafts, shipbuilding etc.

b. Second category : - 12 industries owned by the state. Industries like machine tools, fertilizers, road transport, sea transport etc.

Third category : - Remaining industries which will be left to the Private sector . But the govt. will encourage for the development.

2. Role of cottage and small scale Industries : - For the better utilization of local resources and to achieve self-sufficiency

in consumer goods. Govt. thought of giving incentives, facilities of raw-materials, marketing facilities, cheap electricity, and finance.

3. Reduction of regional inequalities : -

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To reduce disparities in levels of development between different of regions. It well known that Maharashtra, Gujarat, West Bengal etc are industrially developed. Special interest must be taken for the development of backward regions.

4. Labour – management relations : - cordial & satisfactory relations between labourers & management.

5. Co-operation between public and private sectors : - Co-operation between public and private sectors in production and

inventions. For the sake & welfare of the people public sector controls private sectors.

6. Technical and managerial personnel : - The govt must take suitable steps for the development of technical and

managerial personnel. 7. Foreign Capital : -

Important for the development of industrialization in the country. The foreign capital should not create any harmful effects to national utilities.

New Industrial Policy, 1991After 1948 Industrial Policy and 1956 policy, In 1977, The Janatha govt

announced on 23rd July, 1989 by the govt of India. This policy has been announced on the basic of Industrial Policy Resolution 1956. Government of India on 24th July, 1991 announced a new Industrial Policy in our country. This policy is some what different from previous industrial policies which were announced by the govt. of India.

Objectives : - Improvement of employment opportunities in the country. To correct the weakness in the earlier policies. To achieve international competitiveness. Avoid social and economic inequalities. Eradication of poverty in which the Indian economy is facing from several

years. The country must attain the self-sufficiency in different aspects. To preserve the environment.Main Principles : - 1. Industrial Licensing Policy : - The New Industrial Policy, 1991 has made the

Industries Development Regulation Act (IDRA) almost ineffective. Except for few industries, industrial licensing has been abolished according to new Industrial Policy. The exemption from licensing has been abolished according to new Industrial Policy. The exemption from licensing will apply to all subsequent expansion of existing units.

2. Public Sector :- Reduced to only 4 industries. Earlier many core industries like ion, steel, electricity, air-transport, etc are reserved for public sector. But new industrial policy 1991 has removed above industries from the reserved list of public sector. Arms and ammunities, coal, atomic energy, railway, mineral oils are reserved for the public sector.

3. Silk units : - In order to re-organise & for rehabilitation of sick units & to give suggestions & to provide help to sick units, a separate board namely “ Industrial Finance Reconstruction “ .

4. Private sector : - Permission has been given to private sector to establish industries which were allotted to public sector previously. The govt imposed certain conditions on a private companies & foreign investors seeking entry into defence production.

5. Small scale industries : - For the better utlisation of locak resources and to achieve self-sufficiency in consumer goods.

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6. Foreign capital : - The foreign capital has been allotted to the extent of 51 % in the case of 34 industrial units. The Foreign Investment Promotion Board (FIPB) & The Foreign Investment Promotion Council (FIPC) have been constituted to make rulesand regulations relating to foreign investments more transparent.

7. M.R.T.P. act : - Under this act, all firms with assets worth above certain limit (Rs.100 crores) were called MRTP firms. MRTP act modified in 1991 industrial policy. According to this modification without the permission of the govt certain activities like establishment of new industries, expansion of old industries, amalgamation of industrial units, transfer of ownership rights etc can be under taken. But on the basis of consumers the MRTP commission may control the monopoly activites for the industrial units.

Arguments in favour of New Industrial Policy 1991 Increase in efficiency Industrial growth Increase of production Increase of competitive strength Increase in growth rate

UNIT - III

Indian CompaniesThe progress of industrialization during the four decdes and more since the beginning of the planning era (1951 0 56 was the first plan period) has been a siginificant feature of the Indian economic development. The process of industrialization, initiated as conscious and deliberate policy under industrial policy resolution of 1948 and 1956 involved heavy investments in basic and heavy industries besides those in consumer goods industries. As a result of efforts for rapid industrialization, a fine industrial base had most industrial country in the world. India now has a well-diversified industrial sector covering the entire range of consumer, intermediate and capital goods industries.

Classification of Indian Companies : Statutory Companies :

The companies which come into existence through special Acts of parliament of State Legislatures are know as statutory companies. E.g., RBI, LIC, SBI, State Trade Corporation, and Industrial Financial Corporation etc.

Government Company : A company owned by Central and State Government is called a

Government company. A Governemtn company is one in which not less than 51 percent of paid up capital is held by the Central Government or buy any State Governemtn.

Public Company : There must be at least 7 members while the maximum is the unlimited.

Its shares are freely transferable. It can invite public to its share or debentures. Private Company : Minimum number of member to from is 2, maximum limit

is 50 members. A private company is required to add the words private limited at the end its name, restricts the right to members to transfer shares. A private company must have its own articles of association.

Companies limited by Guarantee : Companies whose objective is not to earn profits are mostly registered as

guarantee companies. These companies are generally formed to promote art, commerce, science, culture, charity, religion, sports etc.

Holding company :A holding company is a which controls the policies of another company.

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Subsidiary Company :A company which is controlled and managed by some other company is

called subsidiary company. Subsidiary company cannot have an independent policy. It is controlled by the holding company.

Merger : Two companies come together and create a new entity. Foreign Company : A Company incorporated outside India is a foreign

company. Global Company : A global company is the one which has either global

marketing strategy or a global strategy. Global company either produces in home country or in a single country and focuses on marketing these products globally, or products globally or focuses on marketing these products domestically. Dr. Reddy’s Lab design and produces drugs in India and market globally.

Multinational Companies : The term multinational consists of two different word multi and “ national “. The prefix multi here means many, while the word national refers to nations or countries. Therefore, a multinational company may be defined as company that oprates in several countries.

International company : some of the domestic companies which grow beyond their production and domestic marketing capacities think of internationalizing their operations.

Transnational Company : Transnational company produces. markets, inverts and operates across the world, It is an integrated global enterprise which links global resources with global markets at profit.

Small Scale Industries : - Small – Scale industries unit can be defined as “ that industrial unit in which the investment limit on plant and machinery at cost is Rs.1 crore. Traditional cottage and household industries, viz., handloom, khaddar and village industries, Semi-culture, handicrafts an d coir. Modern small-scale industries including tiny unit and power looms. Sick Industries : A sick unit is one which is not healthy. A sick industry is being a company registered for less than 5 years, which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth. Industries may become sick at different stages stages and due to different reasons.

Join Sector Companies : It is a form of partnership between the Government and the private business houses.

Coopertion Organizations: Co-operation is a from of organization persons voluntarily effects together a sHuman being on th vesi equalitiy for the promotion of the economic interest of themselves an association for mutual benefit at is based on the “ motto each and each for all “ at aims at encumbering self help mutual help and thirty among members.

Domestic Company : Domestic company limits its operations, missions and vision to the national political boundaries. These companies focus its view on the domestic market opoortunities, domestic suppliers, domestic financial companies. domestic customers, etc.. these companies analyze the national environment of the country, formulate the strategies to explot the opportunities offered by the environment. Social Responsibilites of Business : Introduction & Concept :

The growth of large corporations with their professional managers has changed the nature of society through its effect on competitive forces and the ownership of private property.

The essence is that business as an entity has certain responsibilities to fulfill towards those who contribute their Labour, Capital, Skill, entrepreneurship and other in tangible materials for the success of business operations.

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The managers, who are in – charge of business, are really the trustees of the business and not its owners, disposing of its products as per their wishes.\

If business and society get stuck on the legalism of social responsibility. The ultimate need get stuck on the legalism of social responsibility. The ultimate need is business response which provides progress towards the

desirable end of a more effective society.Definitions : Brwen, Howard R, define.

“ The obligation of (managers) to puruse those policies to make those decisions or to blow those lines of action which are desirable in terms of the objectives and values of our society.

Adolph Berle has defined social responsibility as “ the managers responsiveness to public consensus “

Boone and Kurtz : Lave defined social responsibility as management’s consideration of social effects as well as economic effects in its decisions.

From the few definitions quoted above. It may be noted that social responsibility simply mean fulfilling the obligations

towards the society and the component of business, and improving its economic and social conditions by all possible means.

The basic moral rules for the business man in the earlier century’s economy were.1. To observe the principles of private property.2. To honor contracts3. To refrain form deception and fraud.4. To be efficient and to promote economic progress.5. To promote the life, limb and health of the workers and the general public.6. To complete strongly vigorously and in case of failure of competitions.7. To accept and respect the economic freedom of consumers, workers and

owners.8. To have regard for the human of workers.9. Areas of Social Responsibility of Business : 1. Economy and environmental Quality

Cleaning up of existing pollutionDesign of Processes to prevent pollutionTo task improvementDispersion of industry Control of Land useRequired recycling (of waste material)

2. Consumerism Truth in lending, in advertising, and all business activitiesProduct warranty and service (after – sales)Control of harmful products

3. Community NeedsUse of business expertise and community problems.Reduction of business’s role in community power structure.Aid with health – care facilitiesAid with urban renewal

4. Government Relations Restriction on lobbying Control of business political actionExtensive new regulation of businessRestrictions on international operations

5. Business Giving Financial support fir artistic activities – scholarship, educationGifts to education (bus

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Financial support for charity (temples, churches, home for aged persons6. Minorities and Disadvantaged Persons

Training of hard – core unemployedEqual employment opportunitiesOperation of programmes for to alcoholic and drug addictsBuiliding of plans and offices in minority areas etc

7. Labour Relations : Improvement of occupational health and safetyProvision of day – care centers for children of working mothers Expansion of employee rightsControl of persons

8. Stock Holder Relations Opening of Board of Directors to public members representing various interest groups.Prohibition of operation in nations with colonial governmentsImprovement of financial disclosure.

9. Economic Activities Control of agglomerates Break - up giant industry ( a being of huge )Restriction of patent use

Competition Act 2002In the present phase of economic reforms based on the 3 pillars of

liberalation, privatization, globalization, the Act as seen in its original spirit, appeared redundant. The Act did not address a number of present – day issues like the abuse of intellectual property rights. In many respects its provisions were draconian and the implementation and control structure was heavily bureaucratic in nature. The act was often cited as one of the main hindrances to foreign direct investment in the country. The MRTP act has been replaced by the competition act 2002 on the recommendations of the SVS Raghavan committee.

To provide in view of the economic development of the country To prevent practices having adverse effect on completion To promote & sustain competition in markets To protect the interests of consumers ; & To ensure freedom of trade carried on by other participation in ne market. To promote economic democracy so that all players are able to function with

out any hurdles. Provisions :

The Act seeks to establish competition commission of India. The Act also provides for the appointment of Director General and additional,

joint, deputy and assistant Director, advisers, consultants and officers to assist the commission in conducting enquiry in to any offences.

Any person, Consumer, Consumer associations, trade association, statutory authority, a State Govt. or Central Govt. may Lodge a complaint with the commission. The commission is empowered to Act Suomoto.

Anti Competitive Agreement : - Production, supply, distribution, storage, acquisition or control of goods and services, prices, technical development, investment etcinvestment etc

Abuse of Dominant Position : - 1. No Enterprise shall abuse its dominant position

a) Directly or indirectly, imposes unfair or discriminatoryb) Limits of restricts etc

Comibination : - Acquisition of one or more enterprises13

Regulation of combination : - No person of enterprise shall enter in to a Combination which courses or is likely to cause an appreciable adverse effect on

Competition within the relevant market India and such combination shall be avoid.

Benefits expected from competitive markets Growth of entrepreneurial culture leading to increase in the number of

producers and sellers in the market. Increase in investment & capital formation leading to increase in the supply

capabilities Greater customer focus and orientation. Increased possibility for entering & tapping foreign markets. Better resourses & capacity utilization. Reduction in wastage & improvement in

efficiency & productivity. Privatisation

Privatisation means transfer of ownership and / or management of an enterprise from the public sector the private sector.

It also meons the withdrawal of the state from industry or sector, partially or fully.

Another dimension of privatigation is opening up of an industry that has been reserved for the public sector to private sector. Benefits of privatigation (SOE = State and Enteyix)Countries like the U.K. have shown it could help solve the fiscal crista of the State and to usher in a new industrial democracy. The benefits of privatization may be listed down as follows. 1. It reduces the fiscal burden of the State by relieving it of the losseds of the

SOEs and reducing the size of the bureaucracy.2. Privatistion of SOE’s enables the governemtn to mop up funds. Government

of India’s Budget for 2000 – 2001 proposed to raise Rs.10,000 crore during the year through privatization. (The achievement, however, was dismal as the privatization plan could not be carried out in real earnest due to various reasons )

3. Privatization helps the State to trim the size of the administrative machinery.

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

5. Privitisation helps accelerate the pace of economic development as it attracts more resources from the private sector development

6. It may result in better management of the enterprises.7. Privatisation may also encourage entrepreneurship.8. Privatisation may increase the number of workers and common man who

are shareholders. This could make the enterprises subject to more public vigilance. Agruments Against Privatisation

There is strong opposition to privatization from different corners, based on economic, political, social and management rational and on vested interests. Some of the important argument against privatization are as follows :1. The public sector has been developed with certain noble objectives and

privatization means discarding them in one stroke.2. Privatisation will encourage concentration of economic power to the

common detriment.

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3. If privatization results in the substitution of the monopoly power of the public enterprises by the monopoly power of private enterprises it will be very dangerous.

4. Privatisation many a time results in the acquisition of national firms by foreign firms.

5. Privatisation of profitable enterprises, including potentially profitable, means foregoing future streams of income for the government.

6. Privatisation of strategic and vital sector is against national interests. 7. There are well managed and ill managed firms both in the public and

private sectors. It is not the sector that matters, but the quality and commitment of the management.

8. The capital markets of developing countries are not developed enough for efficiently carrying out privatization.

9. Privatisation in many instances is a half-hearted measures and therefore it is not properly carried out with the result that the expected results may not be achieved.

10. In many instance, there are vested interests behind privatization and it amounts : deceiving the nation. The UNDP’s Human Development Report 1993 observes that in many countries privatization often has been a “ garage sale “ to favoured individuals and groups.

PrivatisationPrivatisation, which has gathered momentum since around the

1980’s has become the hallmark of the new wave of economic reforms sweeping across the world. More than 8,500 public enterprises have been privatized in over 80 countries during 1980-92. The trend towards privatization has been observed in developed and developing economies ; in market oriented and socialist, including communist countries.

Due to the inability of public enterprises in generating adequate resources for sustaining the growth process and due to other weaknesses, there has been an increasing demand for their privatization. Privatization means transfer of ownership and management of an enterprise from the public sector. It also means the withdrawal of the state from an industrial sector, partially or fully.

Definitions :According to D.R. Pendse : Privatisation is a process that

reduces the involvement of the state or the public sector in the nation’s economic activities.

According to B.L. Johan Nellis : Privatisation is the general process of involving the private sector in the ownership or operation of a state owned enterprise.Forms of Privatization : Privatization can be achieved in many ways-franching, leasing, contracting and divesture. Of the many forms privatization could take, divesture through equity sale is the most significant, since ownership is transferred to corporate entities. It covers three sets of measures. i) Ownership Measures : The set of measures which transfer

ownership of public enterprises, fully or party, lead to privatization. The higher the proportion of transfer or ownership to the individual, co-operative or corporate sector, the greater is the degree of privatization. This can take three forms:a) Total denationalization : This implies a complete transfer of

ownership of a public enterprise to private hands.b) Joint Venture : This implies partial introduction of private

ownership. 15

c) Liquidatint : This implies a sale of assets to someone who may use them for the same purposes or some other purpose depending upon the preferences of the buyer.

ii) Organisational Measures : A number of organizational measure are conceived to limit state control. They include :

a) Leasing : A public enterprise while retaining ownership may be leased out a private holder for a specified period of time.

b) Restructuring : To bring public sector enterprises under market discipline, it would be desirable to go in for two forms of restructuring (1) Financial restricting can be effected in the sense that accumulated losses are written off and capital composition is rationalized in respect of debt-equity ratio. (2) Basic restructuring may be effected by redefining the set of commercial activities which the enterprise will undertake henceforth. iii) Operational Measures : These measures are intended to improve efficiency of the organization even when full denationalization has not been undertaken. The basic purpose of these measures is to bring about a drastic reform to reduce government control over the enterprise. The operational measures include grant of autonomy to PES in decision-making, provision of incentives to employees consistent with increase in efficiency or productivity , freedom to acquire certain inputs from the market by a system of contracting instead of producing them within the enterprise, development of proper investment criteria permitting PES to go to the capital markets to raise funds, etc.

Sometimes even token privatization in the sense of disinvestment has also been mentioned as a measure of privatization. Advantages of Privatisation : Some f the important arguments in favour of privatization are as follows :1. It reduces the fiscal burden of the state by relieving it of the losses.2. Privatization enables the government to mop up funds.3. Privatisation helps to reduce the size of the administrative machinery.4. It enables the government to concentrate on the essential state

functions.5. Privatisation helps accelerate the pace of economic development.6. It may result in better management of the enterprises.7. Privatisation may also encourage entrepreneurship.Disadvantages of Privatization : 1. The public actor has been developed with certain noble objectives and

privatization means discarding them on one stroke. 2. Privatization will encourage concentration of economic power to the

common detriment.3. If privatization results in the substitution of the monopoly power of the

public enterprises by the monopoly power of private enterprises, it will very dangerous.

4. Privatization many a time results in the acquisition of national firms by foreign firms.

5. Privatisation of profitable enterprises, including potentially profitable, means foregoing future streams of income for the government.

6. Privatization of strategic and vital sectors is against national interests.7. There are well-managed and ill-managed firm both in the public and

private sectors. It is not the sector that matters, but the quality and commitment of the management.

8. The capital markets of developing countries are not developed enough for efficiently carrying out privatization.

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9. Privatisation in many instances is a half-hearted measure and there, it is not properly carried out with the result that the expected results may not be achieved.

10. In many instances, there are vested interests behind privatization and it amounts to deceiving the nation . It is observed that in many countries privatization often has been a garage safe to favoured individuals and groups.

Privatization offers both opportunities and threats to the country.Privatisation in India : In India, the public sector expanded indiscriminately and it was extended to less priority sector and sectors where the private sector would perform better. Privatization of certain sectors and enterprises are therefore necessary to reduce the budgetary burden on the public and to make available more resources for the development activities. Now that the nation has achieved a certain level of industrial development and private entrepreneurship is plenty, the state should curtail its entrepreneurial role and concentrate on other roles.

Much before the introduction of economic reforms suggested by Intrnational Monetary Fund and World Bank, there were a few instances of privatization of State level public enterprises. Andhra Pradesh Governemtn took the bold step to privatize Allwyn Nissan by handling it over to Mahindra who have changed its name to Mahindra Nissan from Allwyn. Similarly, government of Maharastra Scooters to Bajaj auto. The Karnataka Governement has also privatized its sick unit, Mangalore chemicals and fertilizers Ltd, by transferring its shareholders to the U.B. Groups. In 1991, Kerala Government announced to privatize Kerala Development Corporation. Although, in India there were some isolated cases of privatization, no clear policy ws taken till recently in this connection. Meanwhile, the Government of Uttar Pradesh decided to invite theprive sector to bid for various government-owned enterprises including U.P. State Cement Corporation and U.P. Instruments Ltd. Likewise, the Government of Bihar planned to privatize and hand over several sick units, a few of them in the sugar sector, to private companies. Manufacturing of telecommunications equipment was opened up to the prive sector in 1984 and private participation in the industry was encouraged in 1988. Government’s decision to invite participation in the industry was encouraged to stemmed from the necessary of augmenting power supply in the light of existing and impending shortfalls.

The privatization wave that swept the world had its impact on India too. With the new industrial policy announced on July 24, 1991, and modifications introduced thereafter, the role of the private sector has been tremendously increased. The move for privatization gained considerable ground in the liberalized economic policy of 1991. The new industrial policy is a significant step, towards privatization. The new industrial policy which abolishes the public sector monopoly in several industries in Schedule –A is a significant step towards privatization . The scrapping of the Schedule – B is also an important policy change. The polic is to abolish the monopoly of any sector in the field of manufacture, except orstragetic or military considerations, and open all manufacturing, ecept on strategic or military considerations and open all manufacturing except on strategic or military considerations, and open all manufacturing activity to competiton. The new policy also proposed privatization of enterprises by selling shares to mutual funds, workers and the public.

The government , however has allowed private sector investment by India and foreign companies in certain sectors. Three important areas

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opened for the private foreign investment are power, gas and oil. Government has opened telecommunication sector in India by agreeing to allow switching, equipment and value-added services like car , phones paging, videotext, and other services to foreign investment. Railway are also palnning to go in for massive privatization in such areas as building of locos, wagons, coaches, rails and a large number of components being presently important. Catering services are also sought to be privatized. Indian airlines is also thinking to partial privatization by having a strategic partner with 26 percent stake in equity. Although the government intends to privatize Vayudoot, there are not takers for this heavy loss-maing unit. Maruti Udyog has been privatized. Privatisation / Disinvestment in India In India, although there were some isolated cases of privatization, no define policy decision taken until the new economic policy was been ushered in. Disinvestment Polciy :The policy of the Government on disinvestment has evolved over a period. A brief account is given below in the chronological order: a ) Phase

The divestmenet policy, as enunciated by the Chandrasekhar Government in the Intermediate budget 1991 – 92, was to divest up to 20 % of the Government equity in selected PSEs in favour public sector institutional investors. The objective of the policy was stated to be to broad-base improve management, enhance availability of resources for three PSEs and yield resources the exchequer.

The Industrial Policy Statement of 24th July 1991 started that the government would divest of its holdings in selected PSE’s but did not place any cap on the extent of disinvestment They did it restrict disinvestment in favour of any particular class of investors. The objective for investment was stated to be to provide further market discipline to the performance of public purposes. However, Budget speech 1991 – 92, reinstated the cap of 20 % for disinvestment and eligible investors universe was again modified to consist of mutual funds and investment sections in the public sector and the workers in these firms. The objectives too were modified , modified objectives being : “ to raise resources, encourage wider public participation and note greater accountability “.

In 1993 Governement of India set up a Committee on Disinvestment in Public Secotr Enterprises of the chairmanship of C. Rangarajan.

The Common Minimum Programme of the United Front Government : 1996, sought to carefully examine the public secotr non-core strategic areas and to set up a Disinvestmenet mission for advising on the disinvestment related matters : to take and implement decisions invest in a transparent manner ; and to ensure job security , opportunities for retraining and employment. No disinvestment objective was, however, mentioned in the policy statement.

Pursuant to the above policy of the United Front Government a Disinvestment Commission was formed in 1996. It made recommendations on 58 PSEs. The recommendations indicated shift from public offering to strategic / trade sales, with transfer of management.

The Second Phase In its first budgetary pronouncement (1998 – 99), the new Government

decided to bring down Government shareholding in the PSU’s to 26 % in the generality of cases, (thus facilitating ownership changes, as was recommended by the Disinvestment Commission). It however stated that the interests of the workers would be protected in all cases. The policy for

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1999 – 2000, enunciated by the Government in the Budget Speech, was to strengthen strategic PSU’s private non-strategic PSUs through gradual disinvestmenet or strategic safe and devise viable rehabilitation strategies for weak units. A highlight of the policy ws that the expression ‘privatisation’ was used for the first time.

Strategic & Non-stratetic Classification : On 16th March 1999 , the Government classified the Public Sector Enterprises into strategic and non-strategic areas for the purpose of disinvestment.

It was decided that the strategic Public Sector Enterprises would be those in the areas arms and ammunitions and the allied items of defence equipment, defence air-crafts and warship atomic energy (except in the areas related to the generation of nuclear power and application of radiation and radio-isotopes to agriculture medicine and non-strategic industries) ; and railway transport.

All other Public sector Enterprises were to be considered non-strategic . For the non-strategic Public Sector Enterprises. It was decided that the reduction of Government stake to 26 percent would not be automatic and the manner and pace of doing so would be worked out on a case-to-case basic. A decision in regard to the percentage of disinvestmenet i.e., Govermenet state go down to less than 51 per cent or to 26 per cent., would be taken on the following consideration to prevent concentration of power in private hands, and whether the industrial sector required proper regulatory mechanism to protect the consumer interests before public sector enterprise are privatized.

The highlights of the policy for the year 2000-01 were that for the first time the Governement made the statement that it was prepared to reduce its stake in the non-strategic PSE’s even below 26 % if necessary, that there would be increasing emphasis on strategic sales and that the enlarge proceeds from disinvestmenet / privatization would be deployed in social sector, restructuring PSEs and retiremenet of public debt.

RANGARAJAN COMMITTEEThe recommendations of the Report of the Committee on the

Disinvestmenet of Shares PSE’s (Rangarajan Committee) submitted in April 1993, emphasized the need for substantial disinvestment. The Committee suggested that the percentage of equity to be diversted could be to 49 per cent for industries explicity reserved for the public sector. It recommended that exceptional cases, such as the enterprises which had a dominant market share or where separate identity had to be maintained for stragic reasons, the target public ownership level could kept at 26 per cent, that is, disinvestment could take place to the extent of 74 per cent. In other cases, it recommended 100 per cent divestment of Goverment state. Holding of 51 percent or more equity by the Government was recommended only for 6 Schedule industries namely, coal and lignite ; mineral oils; arms, ammunition and defence equipment, atomic energy radioactive minerals, and railway transport.

Other important recommendations of the Committee include the following :

The best method for disinvestment is offering shares to the general public at a fixed price though a general prospecting. However, since these shares have not been traded so far the stock markets, it would be difficult to decide the ‘ fixed rate ‘ at which they should be offered to the public. Once a reasonable time had elapsed and a normal trading atmosphere established in the market, this indeed would be the best method. Till, then the auction method with wide participation may be adopted.

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Instead of year-wise targets of disinvestment, a clear action plan should be evolved.

Disinvestment shall be in stages and sales shall be staggered so as to get the best possible price.

A number of step need to be undertaken for efficiently carrying out privatization. These may include corporatization of the public enterprises, restructuring of finance with a proper debt-equity gearing and on dependent Regulatory Commission for the concerned sector if necessary.

A Scheme of preferential offer of shares to workers and employee may be devised.

Ten pecent of the proceeds of the privatization may be sent apart for lending to the public enterprises on concessional terms for meeting their expansion and rationalization needs.INVESTMENT COMMISSIONpursuance of the Common Minimum Programme of the United Front, Government of instituted a Public Sector Disinvestmenet Commission on 23rd Augut, 1996, with the broad terms of reference.1. To draw a comprehensive overall long term disinvestment programme

within 5 – 10 years for the PSU’s referred to it by the Core Group.2. To determine the extent of disinvestment (tota/partial indicating

percentage) in each of the PSU. 3. To prioritise the PSUs referd to it by the Core group in terms of the

overall disinvestment programme. 4. To recommend the preferred mode(s) of disinvestment (domestic capital

markets/ international capital markets / auction / private safe to identified investors / any other) for each of the identified PSUs . Also to suggest an appropriate mix of the various alternatives taking into account the market conditions.

5. To recommend a mix between primary & secondary disinvestments taking into account Government’s objectivies, the relevant PSu’s funding requirement and the market conditions.

6. To supervise the overall sale process and take decisions on instrument, pricing, timing etc., as appropriate.

7. To select the financial advisers for the specified PSUs to facilitate the disinvestment process.

8. To ensure that appropriate measures are taken during the disinvestment process to protect the interests of the affected employee including encouraging employees participation in the sale process.

9. To monitor the progress of disinvestment process and take necessary measures and periodically to the Government on such progress.

10. To assist the Government to create public awareness of the Government’s disinvestment policies and programmes with a view to developing a commitment by the people participation in the shareholding of the enterprise; and

11. To give wide publicity to the disinvestment proposals so as to ensure larger participation in the shareholding of the enterprises ; and

12. To advise the Government on possible capital restricting of the enterprises by man investments, if required, so as to ensure enhanced realization through disinvestment.

The Disinvestment Commission is an advisory body and its role and function would advise the Government on Disinvestment in those public sector units that are reffered to it be Government. The Commission shall also adivse the Government on any other matter relative disinvestment as may be specifically referred to it by the Government , and also carry

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or other activities relating to disinvestment as may be assigned to it by the Government and also carry out other activities relating to disinvestmenet as may be assigned to it by the Government. In the other activities relating to disinvestment as may be assigned to it by the Governement . In its recommendations, the Commission is also required to take into consideration the intel workers, employees and others stake holders, in the public sector unit(s). The final decision the recommendations of the Disinvestment Commission vests with the Government.

The Commission has recommended disinvestmenet at varying levels for a number of (E.g. MFIL, GAIL, MTNL, CONCOR, PHL, ET & T, HVOC, HCIL, RICL, R-Ashok and U-Ashok , NALCO)

Straitegic sales in various proportions have been recommended for mahy enterprises BALCO, ITI, HTL, KIOCL, ITDC, BRPL, MFL, HCL, SCI, EIL, EPIL, HPL, IBP, NEPA, HZL, FACT, HILL, IPCL, NFL and SAIL.

For several enterprises namely, ONGC, MOIL, OIL, RITES, PGNL, NTPC, NLC and the Commission has advocated no disinvestment for the present.

PROGRESS The privatization process began in India 1991-92 with sale of minority stakes in some From 1999 – 2000 onwards, the focus shifted to strategic sales. Table 14.1 highlights the disinvestment proceeds as compared with targets for the year.UP A GOVERNMENT’S POLICY

The communist parties, with whose support the United Progressive Alliance Government was formed in May 2004, have tried to control the progress of privatization. The statement Common Minimum Programme (CMP) made by the Government has proposed a case approach towards privatization. It has been stated the Government is ‘ generally ‘ against private of profit making public sector undertakings. It was also decided to winup the min Disinvestment.

The policy reforms, however, has set the stage for privatization. For instance, ever government will shy away from privatization of the banking sector, it is likely to take rapid growth of existing private sector banks, establishment of new private sector bank expansion of business of the foreign banks.

Grow of public enterprises in IndiaGrowth of Investment :1. The investmenet in public sector enterprises has thus grown

enormously from Rs.29 crore as on 1.4.1951 to Rs.2,74,114 crore as on 31.3.2001. The growth of investment in the central public sector enterprises, including those enterprises that are under construction over the years, is given below. Investment in Public Sector Enterprises

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Particulars Total Investment(Crore)

Enterprises(Numbers)

At the commencement of the 1st 5 – year Plan (1.4.1951)

29 5

At the commencement of the 2nd 5 – year Plan (1.4.1956)

81 21

At the commencement of the 3rd 5 – year Plan (1.4.1961)

949 47

At the end of the 3rd 5 – year Plan (31.3.1966)

2,410 73

At the commencement of the 4th 5 – year Plan (1.4.1969)

3,897 84

At the commencement of the 5th 5 – year Plan (1.4.1974)

6,2373 122

At the end of 5th 5 - Year Plan (31.3.1979)

15,534 169

At the commencement of the 6th 5 – Year Plan (1.4.1980)

18,150 179

At the end of 7th – 5 Year Plan (1.4.1985) 42,673 215At the end of 7th 5 Year Plan (31.3.1990) 99,329 244At the commencement of the 8th 5 – Year Plan (1.4.1992)

1,35,445 246

At the end of 8th 5 – Year Plan (31.3.1997)

2,13,610 242

As on 31.3.1998 2,31,024 240As on 31.3.1999 2,39,167 240As on 31.3.2000 2,52,554 240As on 31.03.2001 2,74,114 242

Source : Public Enterprise Survey, 2000 – 2001

Multinational CorporationsIntroduction

The dynamics of the business environment fostered by the drastic changes in the communist and socialist countries and the economic liberalization across the world has enormously expanded the opportunities for the multinational corporations, also known by such names as international corporation transnational corporation, global corporation (or firm, company or enterprise) etc.

The rapidly with which the MNCs are growing is indicated by the fact that while according to the World Investmenet Report 1977 there were nearly 82,000 of them with over 8 lakh affiliates. Only on-third these affiliates were in the developed countries. China was host to about 2.8 lak of the affiliates (i.e., about 36 per cent of the total) compared to more than 2,200 in India.

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The MNCs account for a significant share of the world’s industrial investment, production, employment and trade. See Box No.1

Box No.401 : The Prowess of MNCsInternational production by transnational . Corporations (TNC’s) now

numbering some 63,000 parent firms with around 800,000 foreign affiliates and a plethora of inter-firm arrangements, spans virtually all countries and economic activities, rendering it a formidable force in today’s world economy.

The world’s top 100 (non-financial) TNCs, based almost exclusively in developed countries, are the principal drivers of international production. The $ 2 trillion in assets of their foreign affiliates of the top 100 TNC’s employ over 6 million persons, and their foreign sales are of the order of $ 2 trillion. They are concentrated mainly in electronic and electrical equipment, automobiles, petroleum, chemicals and pharmaceuticals.

Despite the prominence of the top the universe of TNC’s is quite drivers, and includes a growing number of small and medium-sized enterprises, TNC’s from countries in Central and Eastern Europe that have only recently begun to engage in international production, and large TNC’s based in the developing-country TNC’s are quite sizeable-witness, for example, the size of the foreign assets ($80 billion) of Petroless de Venezuelo. the largest TNC from the developing world and the only-developing country firm to appear in the top 100 list.

Evidence on the expansion of international production over the past two decades abounds. Cross product associated with international production and foreign affinate sales worldwide, two measure of international production increased faster than global exports, respectively. Sales of foreign affiliates worldwide ($14 trillion in 1999, $ 3 trillion in 1980) are now nearly-twice as high as global exports, and the gross product associated with international production is about one-tenthof global GDP compared with one-twetith in 1982.

Although the multinational corporation took birth in the early 1860’s it was after the Second World War that multinationals have grown rapidly, in the early days, the United States was the home of most of the MNC’s. Now there are a large number of Japanese and European multinationals. Multinationals have been emerging from the developing countries too . South Korea has, for example, well known MNCs like Samsung, Hyundai, LG and Daewoo.

MNC’s of the US are more focused i.e., they confine their business to one industry or product category. In fact, several American MNC’s which attempted diversion, mostly the acquisitions route, reverted to focus, after bitter experiences with the diversification. Compared with the US MNC’s most European companies have a much broader product line. Japanese companies generally, have product lines that are much too broad. Of the top ten corporation in the U.S., only one (General Electric) is the a classic conglomerate, while in Japan eight are conglomerates and only two are not (Toyota Motor and Nippon Telegraph & Telephone). Similarly the Korean corporations are far too diversified. Recent trends indicate that the diversified corporations have many odds against them and the focus strategy is more successful. Definition and meaning :

As the concept of multinationality has several dimensions there is no single universally agreed definition of them multinational corporation. According to an ILO report, “ the essential nature of the multinational enterprises lie in the fact that its managerial headquarters are located in one country (referred to for convenice as the (* home countries *) while the enterprise carries out operations in a number of other countries as well ( * host countries *) . Obviously what is meant is “ a corporation that controls

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productions facilities is more than one country, such participate in international business, however large they may be, solely by exporting or by licensing technology are not multinational enterprises.

Among the various other benchmarks sometimes used to define “ multinationality “ are that the company in questin must.

Produce (rather than just distribute) abord as well as in the headquarters country.

Operate in a certain minimum number of nations (six for example) Dervice some minimum percentage of its income from foreign operations (e.g.,

25 per cent Have a certain minium ratio of foreign intotal number of employees, or

offoreign total value of assets. Posses a management team with geometric orientations. Directly control foreign investments (as opposed simply to holding shares in

foreign companies).The definitions of the term transnational corporation (used to mean the

same thing as MNC and similar terms) foreign affiliate, subsidiary and branch given in the UN’s World Investmenet Report are as follows :

`Transnational Corporations are incorporated or unincorporated enterprises comprising parent enterprises and their foreign afflitates. A parent entries is deemed as a enterprise that control assets of ther entities in countries other than its home country usually by owning a certain equity capital state. An equity capital state 10 per cent or more of the ordinary shares or voting power for an incorporated enterprise, or its equivalent for an unincorporated enterprise. Normally considered as a threshold for the control of assets (In some countries such as German and United Kingdom, the threshold is a stake of 20 per cent or more …)

A foreign Affiliate is an incorporated or unincorpated enterprise in which an investment who is resident in another economy, owns a stake that permits a lasting interest in the management of that enterprise (an equity stake of 10 percent for an incorporated enterprise or its equivalent for an un incorporated enterprise. In the World Investmenet Report, subsidiary enterprise, a subsidiary enterprise, associate enterprise and branches ware all referred to as foreign affiliaties.

A subsidiary is an incorporated enterprise is the host country in which another entire directly owns more than a half of the shareholders voting power and has the right to appointment remove a majority of the members of the administrative, management or supervisory body.

An Associate is an incorporated enterprise in the host country, in which an investor owned a total at least 10 per cent, but not more than a half, of the shareholder’s voting power company shipments. The sale of foreign subsidiaries in the host countries in which they are located are there to four times as large as total world exports.

There was a very significant increase in the export intensity, (i.e, the percentage of exports in total sales) of the foreign affiliates of many MNC’s. The export intensity of foreign affiliates of US MNC’s for example, increased from less than 20 percent in the mid sxties to over 40 per cent in the early 1990’s for all economics. It doubled from about 20 to 40 percent in the case of developed economies, jumped from about six to 22 per cent in the case of the Latin American affiliates and from 23 to 64 per cent for developing Asia. The average export intensity of all the affiliates has, however, remained between 21 – 24 per cent for a long time. In the case of India, however, it has very low. More than 40 per cent of the total exports of China is done by MNC affilities .

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The export contribution of foreign affiliates in China is far larger than the total exports of India.

Apart from trade in commodities, other transactions also take place extensively between the different parts of these enterprises – for example, the granting of loans, the licensing of technology and the provision of services. In all such transactions, transfer prices may be settled which are diffferent from the price which would have been the case between independent parties operating it arm’s length. Such differences may reflect the legitimate concerns of the companies but are also capable of being used in order to ship profits from high to low tax countries o rto get around exchange or price controls or customs duties. As the Bradt Commission observes, the ability of multinationals to manipulate financial flows by the use of artificial transfer prices is bound to be a matter of concern to Governments. The monitoring and control of transfer prices involves inter Governmental coopration and measures to secure due disclosure of relevant information by companies. This is necessary to make effective tax laws covering transfer prices which exist in many countries. Intra-firm trade also opens up the possibility for corporations to impose restrive business practices within their own organization ; they can limit the exports of their affiliates, allocate their market between nationsl are restrict the use of their technology or that developed by their affilities. Such practices although best pursued in the best business interests of the companies, may conflict with the development objectives and national interests of host countries. Merits of MNC’s

As the preface to the ILO report on Multinational Enterprises and Social Policy observes “ for home, the multinational companies are an invaluable dynamic force and instrument for wider distribution of capital, technology and employment for others, they are monsters which our present institutions, national or international cannot adequately control, a law to themselves wioth to reasonhable concept, the public interst or social policy can accdept.

The important arguments in favour of and against the MNC’s are mentioned below.1. MNC’s help increase the investmenet level and thereby the income and employment in host country.2. The transnational corporations have become vehicles for the transfer technology, especially to the developing countries.3. They also kindly a managerial revolution in the host countries through professional management and the employment of highly sophisticated management techniques.4. The MNC’s enable the host countries to increase their exports and decrease their import requirements. 5. They work to equalize the cost of factors of production around the world.6. MNCs provide an efficient means of integrating national economies.7. The enormous resources of the multinational enterprises enable them to have efficient research and development systems. Thus, they make a commendable contribution to inventions and innovations.8. MNC’s also stimulate domestic enterprise because to support their own operations, till MNC’s may encourage and assist domestic suppliers.9. MNC’s help increae competition and break domestic monopolies.Dermerits of MNC’sMNC’s have however been subject to a number of criticisms, like those mentioned below. 1. As Leonard Games point out, the MNC’s technology is designed for world-

wide profit maximization, not the development needs of poor countries, in particular employment needs and relative factor scarcities in these

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countries. In general, it is asserted , the imported technologies are not adapted to (a) the consumption needs (b) the size of domestic markets (c) resource availabilities, and (d) stage of development of many of the LDC’s.

2. Through their power and flexibility, MNC’s can evade or undermine national economic autonomy and control, and their activities may be inimical to the national interests and particular countries.

3. MNC’s may destroy competition and acquire monopoly powers.4. ‘The tremendous power of the global corporations poses the risk that they

may threatmentthe sovereignty of the nations in which they do business. On political involvement MNC’s have been accused on occasion of supporting repressive regimes ; paying bries to secure political influences ; not respecting human rights ; paying protection money to terrorist groups; and destabilizing national governments of which they do not approved.

5. MNCs retard growth of employment in the home country.6. The transnational corporations cause fast depletion of some of the non-

renewable natural resources in the host country. They have also been accused of the following environment problems ; polluting the environment ; not paying compensation for the environment damages ; causing harmful changes in the local living conditions; and paying little regard to the risks of accidents causing major environmental catastrophes.

7. The transfer pricing enables MNCs to avoid taxes by manipulating prices on intra company transactions.

8. The mNcs have been criticized for their business strategies and practices in the host countries. They undermine local cultures and traditions, change the consumption habit for their benefit against the long term interests of the local community, promoted conspicuous consumption, dump harmful products in the developing countries etc.

A stock exchange is a market where securities, ie., shares, debentures and government securities are bought and sold. The Securities Contracts (Regulation) Act, 1956, defines a stock exchange as “an association, organization, or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities.”

A share market exists because certain owners of securities wish to sell them, others wish to buy them and the titles to the securities are transferable. A securities exchange does not itself engage in the purchase or sale of securities are transferable. A securities exchange does not itself engage in the purchase or sale of securities. Rather, its function is to make such trading as smooth and efficient as possible. Stock exchange is a market in which securities are brought and sold and it is an essential component of a developed capital market. It provides necessary mobility to capital and directs the flow of capital into profitable and successful enterprise. It is the barometer of general e on economic progress in a country and exerts a powerful and significant influence a s a depressant or stimulant of business activity. It may e defined as the place or market where securities of joint stock companies and of government r semi-government bodies are dealt in.The economic services, which a well constituted and efficiently run securities market can render to a country with a large provate4 sector, operating under the normal incentives and impulses of private enterprises are considerable.

In the first place, it is only an organized securities market which can provide sufficient marketability and price continuity for shares, so necessary for the needs of investors.

Secondly, it is only such a market that can provide a reasonable measure of safety and fair dealing in the buying and selling of securities.

Thirdly, through the interplay of demand for and supply of securities, properly organized stock exchange assists in a reasonably correct evaluation of securities in terms of their real worth.

Lastly, through such evaluation of securities the stock exchange helps in the orderly flow and distribution of savings as between different types of competitive investment.

Functions of the Stock Exchange: The Share market performs certain essential economic functions. It: Provides a ready market for buying and selling of securities.

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Performs of ‘act of magic’ as it enables long-term investments to be financed by funds provided by individuals who are otherwise interested in short-term or medium-term investment.

Directs the flow of capital in the most profitable channels. Induces corporate enterprises to raise their standards of performance Offers an easily understood evaluation of the financial conditions and prospects of listed firms, Facilitates speculation Prmotes the habit of saving and investment among the general public

and thereby helps capital formation, and Promotes industrial growth and economic development of the country

by encouraging industrial investments rather than hoarding or investing in gold.

Because of its function, the stock exchange is regarded as an essential concomitant of the capitalist system of economy. It is indispensable for the proper functioning of an corporation enterprise. It brings together large amounts of capital necessary for the economic progress of a country. It is the citadel of capital and the pivot of the money market. It provides necessary mobility to the capital and directs the flow of capital into profitable and successful enterprises. It is the barometer of general economic progress in a country and exercise a powerful and significant influences as a depressant or stimulant of business activity. Stock exchange provide a market for the government to sell its

securities in order raise funds for meeting developmental activities. Stock market acts as a mirror through which the general economic

condition is clearly reflected.Dealings on Stock Exchange : Stock exchange dealings are subject to the rules and regulations of the market and the provisions of the Securities Contracts (Regulation) Act, 1956. Dealings on the floor of any market are permitted only in the listed securities through the member and their authorized clerks during fixed working hours. Membership is limited to Indian citizens. To become a member of a stock exchange, one should be above 21 years of age. Only on individual (not a firm or a company) can become a member. The application for membership should be sponsored atleast by two existing members.

There are two important types of trading on the stock exchange namely Ready Delivery Contract and Forward Delivery Contact. The important differences between these two dealings are the following . Ready Delivery Contracts, also known as Cash Trading or Cash Transactions, are to be settled either on the same date or within a short period that may extend at best up to seven days. As against these, the forward can be made in respect of all securities whereas forward delivery contracts are confined to these securities which are placed of the forward list. Speculation on the Stock Exchange : Transactions on a stock exchange are carried on either for investment or for speculation. Investment transactions are made with the intention of holding the

investments more or less permanently . Ready delivery contracts, referred to above, are generally for investment purposes.

Speculative transactions, on the other hand, are made with the intention of making quick money by selling securities when their prices shoot up. Forward transactions, described above, are generally carried for speculative gains. Speculative transactions are more in number, and they keep stock exchanges active and busy. SEBI

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The establishment of the Securities and Exchange Board of India (SEBI) was a land mark government measure to monitor and regulate capital market activities and to promote healthy development of the market.The SEBI was constituted in 1988 by a resolution of Government of India and it was made statutory body by the Securities and Exchange Board of India Act, 1992. Management :Section 4 of the Act lays down the constitution of the management of SEBI. The Board of members of SEBI shall consist of a Chairman, two members from amongst the officials of the Ministeries of the Central Government dealing with Finance and Law, one member from amongst officials of the Reserve Bank of India, two other members to be appointed by the Central Government, who shall be professionals and interialia have experience or special knowledge relating to securities market.

The Act empowers the Central Government to supersede SEBI, if on account of grave emergency, SEBI is unable to discharge the functions and duties under any provisions of the Act, SEBI persistently defaults in complying with any direction issued by the Central Government under the Act, or the discharge of its function and duties under the Act, and as a result of such deault the financial position of SEBI or its administration hs deteriorated, or in public interest.

ObjectivesAccording to Act, the objectives of SEBI are to protect the interests of investors in securities and to promote the development of, and regulate, the securities market for matters connected therewith or incidental therewith.Powers and Functions The SEBI Act casts upon SEBI the duty to protect the interests of investors I securities and promote the development of and to regulate the securities market through appropriate measures, these measures provide for :1. Regulating the business in stock exchanges and any other

securities market.2. Registering and regulating the working of stock brokers, sub-

brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities market in any manner.

3. Registering and regulating the working of collective investment schemes, including mutual funds.

4. Promoting and regulating self-regulatory organization.5. Prohibiting fraudulent and unfair trade practices in securities

market.6. Promoting investors education and training of intermediaries in

securities market. 7. Prohibiting insides trading in securities.8. Regulating substantial acquisition of shares and take-over of

companies.

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9. Calling far information from, undertaking inspection, conducting enquiries and audits of the stock exchanges and intermediaries and self-regulatory organizations in the securities market.

10. Performing such functions and exercising such powers under the provisions of the capital issues (Control) Act 1947, (subsequently repealed) and the Securities Contract (Regulations) Act, 1956, as may be delegated to it by the Central Government.

11. Leying fees or other charges for carrying out the purposes of Section 11 of the Act.

12. Conducting research for the above purpose.13. Performing such other functions as may be prescribed by the

Government. The Sebi is also empowered to issues such directions as may be appropriate to certain period or class of persons, or company, intermediary or other persons referred to in section 12 (stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, merchant banker, underwriter, registrar to an issue investment adviser, portfolio manger etc., (i) in the inter of investors, or orderly development of securities market, or (ii) to prevent the affairs of any intermediary or other development referred to in section 12, being conducted in a manner detrimental to the interests of investors or securities market ; or (iii) to secure the proper management of any such intermediary or person.

Capital Market Reforms and Developments :The number of Stock Exchanges has increased and the capital market has expanded substantially. However, the functioning of the stock exchanges were characterized by the shortcomings with long delays, lack of transparency in procedures and vulnerability to pop rigging and inside trading. A number of measures have been taken to overcome these problems. The objectives of these measures, broadly have been to :

Provide for effective control of the stock exchange operations. Increase the information flow and disclosures so as to enhance the

transarencys Protect the interests of investors. Check insider trading Improve the operational efficiency of the stock exchanges. Promote healthy development of the capital market.

Important measures of reform and development include the following Free Pricing :Raising of capital from the securities market before 1992 was regulated

under the Capital Issues (Control) Act, 1947, which required companies to obtain approval from the Control Capital Issues (CCI) for raising resources in the market. New companies were allowed to shares only at par. Only the existing companies with substantial reserves could issue share premium, which was based on some prescribed formula. In 1992, the Capital Issues (Control) 1947 was repeated and with this ended all controls relating to raising of resources from market. Since then the issues of securities could raise the capital from the market . With requiring any consent from any authority either for making the issue or for pricing it. Restrict of on right and bonus issues have also been removed. New as well as established companies. Regulation of foreign exchange transactions

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Foreign exchange transactions were regulated in India by the Foreign Exchange Regulations Act (FERA) 1973. This Act also sought to regulate certain aspects of the conduct of business outside the country by Indian companies and in India by foreign companies. The FERA was widely described as a draconian and obnoxious law. Following the economic liberalization ushered in 1991, some amendments to the FERA were effected in 1993.The main objective of FERA framed against the background of severe foreign exchange problem and the controlled economic regime, was conservation and proper utilization of the foreign exchange resources of the country.There was a lot demand for a substantial modification of FERA in the light of the ongoing economic liberalization and improving foreign exchange reserves position. Accordingly, a new Act, the Foreign Exchange Management Act (FEMA), 1999, replaced the FERA.Foreign Exchange Management Act The FEMA, which came into effect from January 1, 2000 extends to the whole of India and also applied to all branches, offices and agencies outside India, owned or controlled by a person resident in India. Objectives The objectives of FEMA are

To facilitate external trade and payments To promote the orderly development and maintenance of foreign

exchange market Dealing in Foreign Exchange etc.Section 3 FEMA imposes restrictions on dealings in foreign exchange and foreign security and payments to and receipts from any person outside India. Accordingly, except as provided in terms of the Act, or with the general or special permission of the Reserve Bank, no person shall.

a) deal in any foreign exchange or foreign security with any person other than an authorized person ;

b) make any payment to or for the credit of any person resident outside India in any manner ;

c) receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner.

d) enter in to any financial transaction in India as a consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person.

Further, save as otherwise provided in this act, no person resident in India shall acquire, hold, own posses or transfer any foreign exchange, foreign security or any immovable property situated outside India. Holding of Foreign Exchange etc.Save as otherwise provided in this act, no person resident in India shall acquire, hold, own posses or transfer any foreign exchange foreign security or any immovable property situated outside India. Current Account Transactgions FEMA permits dealings in foreign exchange through authorized persons for current account transactions permitted by the Central Government can impose reasonable restrictions in public interest. Capital account Transactions Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction permitted by the Reserve Bank in consultation with the Central Government. The Reserve Bank may, however, without prejudice to the generally of this, prohibit, restrict or regulate the following .

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a) transfer or issue of any foreign security by a person resident in India. b) transfer or issue of any security by a person resident outside India.c) transfer or issue of any security or foreign security by any branch,

office or agency in India of a person resident outside india. d) any borrowing or lending in foreign exchange in whatever form or by

whatever name called ; e) any borrowing or lending in rupees in whatever form or by whatever

name called between a person resident in India and a person resident outside India;

f) deposits between persons resident in India and persons resident outside India;

g) export, import or holding of currency or currency notes; h) transfer of immovable property outside India, other than a lease not

exceeding five years, by a person resident in India. i) acquisition or transfer of immovable property in India, other than a

lease not exceeding five years, by a person resident outside India ; j) giving of guarantee or surely in respect of any debt, obligation or

other liability incurred – 1. by a person resident in India and owed to a person resident outside

India ; or 2. by a person resident outside India.A person resident in India may hold own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. A person resident outside India may hold, own transfer or invest in India currency, security or any immovable property situated in India if such currency, security or property was acquired held or owned by such person when he was resident in India or inherited from a person who was resident in India. The Reserve Bank may prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business.The Reserve Bank shall not impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business.Export of Goods and Services :1. Every exporter of goods shall –

a) furnish to the Reserve Bank or to such other authority a declaration as specified, containing true and correct material particulars, including the amount representing the full export value or if the full export value of the goods is not ascertained at the time of export, the value which the explorer, having regarding to the prevailing market conditions, expects to receive on the scale of the goods in a market outside India.

b) furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realization of the export proceeds by such exporter.

For the purpose of ensuring that export value of the goods is received without any delay, the Reserve Bank may direct any exporter to comply with such requirements as it deems fit.

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Every exporter of services shall furnish to the Reserve Bank or to such other authorities a declaration as specified, containing the true and correct material particulars in relation to payment for such services.Realisation and Repatriation of Foreign Exchange :Where any amount of foreign exchange is due or has accused to any person, he shall take all reasonable steps to realize and repatriate it to India with in the time and in the manner prescribed by the RBI. Several exemptions are, however, granted to this clause.Contravention and Penalities Under this chapter, penality for any kind of contravention under this Act is liable to a pentalty up to thrice the amount involved where it is quantiliable or up to Rs.2 lakhs where it is not quantifiable and where such contravention is continuing one, further penality which may extend to five thousand rupees for every day after the first day during which contravention continues,. This provision is in total contrast to the respective provision in the erstwhile FERA which provided for imprisonment and no limit on line. Under FEMA, a person will be liable to civil imprisonment only if he does not pay the fine within 90 days from the date of notice and that too after formalities of show cause notice and personal hearing. If he does not respond to the notice, there can be a warrant of arrest. Admiistration of the Act :The FEMA has assigned an important role of the Reserve Bank of India in the administration of this Act. The rules regulations and norms pertaining to several sections of the Act are to be laid down by the RBI, inconsultion with the Central Governement. The Act requires the Central Government to appoint as many officers of the Central Government as Adjudicating Authorities for holding inquiries pertaining to contravention of the Act. There is also a privision for appointing one or more Special Directors (Appeals) to hear appears against the order of the Adjudicating Authorities. The Central Government shall also establish an Appellate Tribunal For Foreing Exchange to hear appeals against the orders of the Adjudicating Authorities and the Special Director (Appeals).

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