UGC

JRF/NET/SET
COMMERCE
KIRAN. A. S
GOVERNMENT FIRST GRADE COLLEGE
KRISHNARAJAPET
MANDYA

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 UNIT 1
BUSINESS ENVIRONMENT AND INTERNATIONAL BUSINESS

❖ Modul 1:
1. Concepts and elements of business environment
2. Economic environment- Economic systems, Economic policies (Monetary and fiscal policies)
3. Political environment- Role of government in business
4. Legal environment- Consumer Protection Act, FEMA
5. Socio-cultural factors and their influence on business
6. Corporate Social Responsibility (CSR)
❖ Modul 2:
1. Scope of international business
2. Importance of international business
3. Globalization and its drivers
4. Modes of entry into international business
❖ Modul 3:
1. Theories of international trade
2. Government intervention in international trade
3. Tariff and non-tariff barriers
4. India’s foreign trade policy
❖ Modul 4:
1. Foreign direct investment (FDI) and Foreign portfolio investment (FPI)
2. Types of FDI, Costs and benefits of FDI to home and host countries
3. Trends in FDI
4. India’s FDI policy
❖ Modul 5:
1. Balance of payments (BOP)
2. Importance and components of BOP
❖ Modul 6:
1. Regional Economic Integration
2. Levels of Regional Economic Integration
3. Trade creation and diversion effects
4. Regional Trade Agreements: European Union (EU), ASEAN, SAARC, NAFTA
❖ Modul 7:
1. International Economic institutions
2. IMF, World Bank, UNCTAD
❖ Modul 8:
1. World Trade Organisation (WTO)
2. Functions and objectives of WTO
3. Agriculture Agreement
4. GATS, TRIPS, TRIMS

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CONCEPT OF BUSINESS ENVIRONMENT
• Business Environment is the blend of all internal and external factors on which the
business directly (employees, suppliers) or indirectly (rules and regulations, market
competition) depends
• Business Environment can be defined as a combination of internal and external factors
that influence a company’s operating situation.
• Business Environment The total of all thigs external to firm and industries, which affect
their organisation and operation. The Relationship between an Organization and its
Environment are;
o Exchanging Information
o Exchanging Resources: Men or Manpower, Money, Method, Machine, Material
o Exchanging Influence and Power
IMPORTANCE OF BUSINESS ENVIRONMENT
• Helps in knowledge of natural environment
• Helps in long term planning
• Analysis and evaluation of planning
• Helpful in proper utilisation of resources
• Develops competition Ability
COMPONANTS OF BUSINESS ENVIRONMENT
• Internal environment
o Financial Capability
o Marketing Capability
o Operational Capability
o General management Capability
o Personnel Capability
• External environment
o Micro: Competitors, Organization, Suppliers, Market Intermediaries and
Customers.
o Macro: Population & Demographic, Economic, Socio-Cultural, Technological, Legal
& Political and Environmental

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ELEMENTS OF BUSINESS ENVIRONMENT
INTERNAL ENVIRONMENT
• This environment factor existing within a business firm.
• These factors are generally controllable
• These factors after being figured out are grouped into the strengths and weaknesses of
the company.
INTERNAL ENVIRONMENT FACTORS
Financial Capability Marketing Capability Operational Capability
• Availability of funds • Pricing policy • Production of product and
• Usage of funds • Sales promotion policy services
• Capital structure • Distribution of products • Use of available material
• Procedure of Capital • Services resources
• Financing Pattern • Variety of product • Ability to implement
• Working capital • Mixed quality Operational strategies
availability • Positioning • Location
• Borrowing capital • Packaging • Layout
availability • Pricing objective policy • Product and service design
• Borrowing of capital • Pricing changes • Work system
• Credit availability • Advertising • Degree of automation
• Reserve and surplus • Public relations • Aggregate production
• Relationship with lenders • Marketing Mix planning
• Banks and financial • Marketing network • Material supply
institution • Distribution system • Inventory
• Capital investment • Marketing standing • Cost and quality control
• Fixed asset acquision • Company reputation • Maintenance and
• Current asset • Marketing organisation procedure
• Loans and advances • Marketing system • Product development
• Dividend distribution • Marketing management • Patent rights
• Relationship with • Information system • Level of technology used
shareholders • Collaboration and support
• Financial Accounting
• Budgeting
• Management Control
system
• State of Financial stability
• Cash
• Inflation
• Return and risk
management
• Cost reduction and control
• Tax planning

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 Personal Capability General Management Capability
• Existence of Human resource • Integration
• Use of human resources and Skill • Vision, Mission
• Manpower planning • Co- ordination and direction
• Selection policy • Strategic management system
• H. R. development • Process related to mission
• Compensation • Goal and objective setting
• Communication and Appraisal • Strategy formulation and implementation
• Position of personal department machinery
• Employees Characteristics • Strategic evaluation system
• Quality of managers, staff and workers • Management Information System
• Working conditions • Corporate Planning System
• Availability of development opportunity • Rewards and Incentives system for top,
for employees Middle and Lower Manages and Officers
• Union management relationship • Orientation
• Collective bargaining • Risk Propensity
• Safety • Values
• Welfare and security • Rules and Provisions
• Employee satisfaction • Personal Goal
• Employee morality • Competence for work

EXTERNAL ENVIRONMENT
• This environment factor Non existing within a business firm.
• These factors after being figured out are grouped into the threats and opportunities of
the company.
• Micro and Macro environment are Types of External Environment factors
Micro Environment Factors:
• It’s also called Task environment.
• Micro environment refers to the environment which is in direct contact with the
business organization and can affect the routine activities of business straight away.
• It is associated with a small area in which the firm functions.
• Micro environment forces can influence the performance and day to day operations of
the company, but for a short term only.
• Micro environment factors are controllable factor.
• Elements are COSMIC - Competitors, Organization, Suppliers, Market Intermediaries
and Customers.

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Macro Environment factors:
• It’s also called General environment or Mega environment.
• These are Non controllable factor.
• It is dynamic in nature.
• Elements are PESTLE - Population & Demographic, Economic, Socio-Cultural,
Technological, Legal & Political and Environmental.
• Also include International Dimension, Natural or Physical Dimension and Financial
Dimension
EXTERNAL ENVIRONMENT FACTORS
Social Environment Political Economic Regulatory
Environment Environment Environment
• Education • Standard of • Growth strategy • Constitutional
• Family and product • Industry framework
Marriage • Role of legislation • Economic system • Directive principles
• Authority • Role of • Inflation and • Fundamental rights
• Values and Ethics government Deflation • Divisions of legislative
in business • Role of Judiciary • Agriculture power between
• Social • Constitution of • Transportation central and state
responsibility India • Money and capital government
• Cost system • Consumer market • Policies related to
• Culture creates education • Per capita national licensing and
people • Industrial licensing income monopolies
• Cultures • Location of • New economic • Foreign investment
determines goods business policy and financing of
and services • Import and Export • National textile industries
• People attitude Licensing policy • Control of
towards business • Procedure of • Annual budgets environment
• Spirit of capital • Monetary and fiscal pollution
collectivism and • Size of plant policies • Customer protection
Individualisation • Pollution • Distribution of • Business law
• Social Audit control/Reduction Income • Competition Act,
• Social Awareness • Packaging • Rate of growth 2002
• Role of women in • Promotions • GNP • The sale of goods Act,
society • Advertising • Rate of savings 1930
• Tradition and restriction • Balance of payments • FEMA 2000
Customs • Mixed economy • Consumer protection
• Privatisation Act. 1986
• Centralisation • Essential Commodity
• Nationalisation Act, 1955
• Population policy • Competition Act,
2002

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Market environment Supplier environment Technological environment
• Buying behaviour • Relation with suppliers • Fast changing technology
• Satisfaction of customers • Distance between business • Deed to speed on research
• Design of product and supplier and development
• Fashion changing • Credit facility • Rise and decline of product
• Product life cycle • Regulatory in material organisation
• Availability of substitutions supplying • High expectation of
of product or services • Cost of supply of raw consumers
• Marketing channels materials • Problem of techno-structure
• Marketing Networks • Availability of supply or raw • Social change
• Distribution channels materials sub-assemblies • Technology acquisition
• Logistics and other parts • Collaboration in and transfer
• Transportation of technology
• Advertising policies • Technology development
• Means of Advertisement • Management strategies of
• Competitor technology
• Marketing strategies
• Customer relationship
management
• Online marketing
• Internal marketing
• Social marketing
• Digital marketing

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ECONOMIC ENVIRONMENT
• The economic environment is the total sum of the economic conditions and the nature
of the economy in which the business has to operate and compete.
• Economic environment refers to all factors/forces which have an economic impact
either negative or positive on business organization
• There is close relationship between business organization and its economic environment
• The economic environment consists of following components:
o Economic System
o Economic Policy
o Economic Conditions
ELEMENTS OF ECONOMIC ENVIRONMENT
ECONOMIC CONDITIONS
The economic conditions of the country also have a huge impact on the firms that exist
within the economy. Furthermore, economic conditions are the sum total of many factors that
can greatly affect a business. Such factors include
a. GDP of the economy
b. Per capita income
c. Availability of capital
d. Utilization of resources
e. Interest rates
f. Unemployment levels

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ECONOMIC SYSTEM
• An economic system, or economic order, is a system of production, resource allocation
and distribution of goods and services within a society or a given geographic area.
• An economic system is a type of social system.
• The economic system under which the economy operates has a huge impact on its
economic environment.
Let us take a look at the three modern economic systems are;
1. Market Economy or Capitalism:
• The economic system, in which business units or factors of production are
privately owned and governed is called capitalism
• "Hands off" systems, such as laissez-faire capitalism
• Government of that country does not interfere in the economic activities of the
country
• It’s also known as Free market economy
• The market forces operate freely, demand and supply will decide the prices in the
market
• This economy has a high degree of operative efficiency
• Examples: Germany, Japan, Mexico, Singapore, etc.
• Characteristics:
i. Private ownership
ii. Free enterprise
iii. Consumer sovereignty
iv. Competition
v. Price Mechanism
vi. Right to private property.
vii. Freedom to form enterprise.
viii. Freedom of economic choice.
ix. Profit motive.
x. Absence of government interference

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 2. Command Economy or Socialism or Centrally Planned Economy:
• All the economic activities of the country are controlled and regulated by the
government in the interest of the public.
• Resources are allocated according to the commands of the Central planning
authority.
• "Hands on" systems, such as state socialism, also known as "command economy"
when referring to the Soviet model
• Its owned by the community or state as a whole.
• The first country to adopt this concept was Soviet Russia
• Examples: North Korea, Cuba, China, USSR
• The two main forms of socialism are Democratic socialism and Totalitarian
Socialism
i. Democratic socialism activities are controlled and regulated by the
government but the people have the freedom of choice of occupation and
consumption.
ii. Totalitarian socialism is also called Communism. Under this, people are
obliged to work under the directions of government
• Characteristics:
o Government ownership
o Social welfare
o Fixation of wages and prices
o Absence of competition
o Abolition of exploitation of labour
3. Mixed Economy:
• It is the mixture of both capitalism and Socialism economy system
• In which both public and private sectors are co-exist
• Some factors of production are privately owned and some are owned by
government
• A hybrid that blends some aspects of both market and planned economies
• There exist freedom of choice of occupation and consumption
• Characteristics:
i. Co-Existence of public and private sector
ii. Classification of Industries
iii. Interventionist role of the state
iv. Profit motive – cum social welfare

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ECONOMIC POLICIES
The economic policy of governments covers the systems for setting levels of taxation,
government budgets, the money supply and interest rates as well as the labour market,
national ownership, and many other areas of government interventions into the economy.
Economic policies are;
1. MONETARY OR CREDIT POLICY:
• This policy will decide the supply of money to the market.
• It will decide the levels of savings and investments.
• It will also control the credit supply in the economy.
• It is formulated and announced by the Central Bank of the Country
• The Monetary Policy Committee of India comprises six members
• That includes credit, cash, checks, and money market mutual funds.
• It includes loans, bonds, and mortgages.
• Monetary policy increases liquidity to create economic growth. It reduces liquidity
to prevent inflation.
• Objectives of Monetary policy:
o Raise national income is one of the main objectives of monetary policy
o Monetary policy provide stability in exchange rate
o It promotes skill payment system
o Collection of saving of society and expansion of saving amount
• Central banks have three monetary policy objectives;
o Manage inflation.
o Reduce unemployment, but only after controlling inflation.
o To promote moderate long-term interest rates.
• Central bank use there are two types of Monetary policy;
o Contractionary monetary policy:
▪ It’s uses to reduce inflation.
▪ They reduce the money supply by restricting the amount of money
banks can lend.
▪ The goal of a contractionary monetary policy is to decrease the money
supply in the economy
▪ The banks charge a higher interest rate, making loans more expensive.

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 o Expansionary monetary policy:
▪ It’s uses to lower unemployment and avoid recession.
▪ They increase liquidity by giving banks more money to lend.
▪ Banks lower interest rates, making loans cheaper.
▪ Businesses borrow more to buy equipment, hire employees, and
expand their operations. Individuals borrow more to buy more homes,
cars, and appliances.
▪ Its increases demand and spurs economic growth.
QUANTITATIVE MEASURES
1. Repo Rate or Repurchase rate
• The term ‘repo’, is an acronym for repurchase option
• When a commercial bank sells the security to Central Bank to raise money then
banks promises to buy back the same security from Central Bank
• Introduced in Dec 1992.
• It is the rate of interest levied by RBI from its clients on their short-term
borrowings.
• Repo rate is the rate at which banks borrow funds from the Reserve Bank against
eligible collaterals under the liquidity adjustment facility (LAF).
• Loan tenure under the repo rate is shorter generally One day
• Currently at 5.40%
2. Reverse Repo or Fixed cut-off rate
• The rate of interest at which the commercial banks lends money to the central
bank, i.e. RBI, is known as reverse Repo.
• It was established in 1996.
• The reverse repo rate is the rate at which banks place their surplus funds with the
RBI under the liquidity adjustment facility (LAF)
• It is the rate of interest the RBI pays to its clients who offer short term loan to it.
• Currently at 5.15%
3. Bank Rate or Discount Rate
• Bank Rate is the rate of interest which a central bank charges on the loans and
advances to a commercial bank, without selling or buying any security
• This is the rate of interest which the Central Bank (RBI) charges on commercial
banks for long-term loans.
• Credit at this rate is allowed only for the long-term.
• Loan tenure under the bank rate is longer generally 28 days
• The rate at which the Reserve Bank is prepared to buy or re-discount bills of
exchange or other commercial paper eligible for purchase
• Currently at 5.65%
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 4. Cash Reserve Ratio or Reserve requirement (CRR)
• This is the amount of cash that the commercial banks are required to keep with
the Central Bank.
• According to Section 42 of the Reserve Bank of India Act, 1934, each scheduled
commercial bank has to maintain a minimum cash balance with the Reserve Bank
as cash reserve ratio
• The RBI determines this ratio, and no interest is paid by the RBI on this cash.
• Currently at 4% of Net Demand and Time Liabilities (NDTL)
• Banks have to maintain minimum 95 per cent of the required CRR on a daily basis
and 100 per cent on an average basis during the fortnight
5. Statutory Liquidity Ratio (SLR)
• In terms of Section 24 of the Banking Regulations Act, 1949, scheduled
commercial banks have to invest in unencumbered government and approved
securities certain minimum amount as statutory liquidity ratio (SLR) on a daily
basis
• The Statutory Liquidity Ratio is the ratio of deposits which a commercial bank
needs to maintain with itself in cash and gold as prescribed by the government.
• Qualified liquid assets for purpose of SLR are: unencumbered government and
other approved securities, gold, cash and excess CRR balance
• Currently at 18.75% of Net Demand and Time Liabilities (NDTL)
6. MSF (Marginal Standing Facility)
• It was introduced in May 2011.
• Under this scheme, banks can borrow money overnight up to 1% of their NDTL
(Net Demand Time Liabilities) from RBI at the interest rate 3% higher than the
current repo rate
• The rate at which banks can borrow against their excess SLR securities to meet
additional liquidity requirements
• Marginal standing facility (MSF) is a window for banks to borrow from the Reserve
Bank of India in an emergency situation when inter-bank liquidity dries up
completely
• Current rate at 5.65%
7. Base Rate/Prime Lending Rate
• It is the interest rate below which scheduled commercial banks will lend no loans
to its customers.
• A prime rate or prime lending rate is an interest rate used by banks, usually the
interest rate at which banks lend to customers with good credit

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 BASIS BANK RATE REPO RATE

Meaning Bank Rate is the rate of interest, which is The rate at which the Central bank
charged by the Central bank on the loans, it grants short term loans to
advanced to commercial banks and other commercial banks, against collateral are
financial institutions. known as Repo Rate.

Repurchase No Yes

Deals with Loans Securities

Time Frame Long Term Short Term

Collateral Not involved Involved

Which is Higher Relatively lower

higher?

✓ An increase in Bank Rate generally indicates that the market rate of interest is likely to
fall because Central bank is following a tight money policy
✓ When RBI reduces Statutory Liquidity Ratio (SLR), Scheduled Commercial Banks may cut
their lending rates.

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QUALITATIVE MEASURES
1. Credit Rationing
• Under this method, the RBI asks commercial banks to limit their lending’s as per
the credibility of the customer or the loan seeker.
• A situation in which banks do not lend money to all those who would like to
borrow, or lend less than borrowers want
• Here RBI also directs the commercial banks to lend money at lower rates to the
weaker sections of the society for some specific purposes as and when stated.
2. Margin Requirements
• Fixation of margin requirements was introduced for the first time in India in 1956
• Whenever a loan is granted, some collateral security needs to be kept with the
commercial banks. The RBI sets a ratio for the percentage that can be given as a
loan
3. Moral Suasion
• The RBI requests in oral and written to the commercial banks not to lend money
for any speculative purposes and for unimportant purposes.
4. Direct Action
• Here, the RBI directly intervenes and takes actions if the commercial banks do not
work as per the directions of the Reserve Bank of India.
LIQUIDITY ADJUSTMENT FACILITY
• The RBI introduced the LAF as a result of the Narasimhan Committee on Banking Sector
Reforms (1998).
• Repo Rate, Reverse Repo Rate, Marginal Standing Facility (MSF)
MONEY SUPPLY OR MONETARY SUPPLY
• The money supply is the total stock of money that is in circulation in an economy on any
specific day.
• This includes all the notes, coins and demand deposits held by the public on such a day.
Such as money demand, money supply is also a stock variable
• Three main sources of money supply in our economy
o The government who produces all the coins and the one-rupee notes
o The Reserve Bank of India (RBI) which issues all the paper currency
o And commercial banks as they create the credit as per the demand deposits
• Money multiplier
o Money multiplier is a ratio used by the RBI.
o It is the ratio of Broad Money (M3) and Reserve Money with the RBI, which is also
known as M0.
o Ratio of M3 and M0
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MEASURES OF MONEY SUPPLY
• M1 (Narrow Money)
o M1 includes all the currency notes being held by the public on any given day.
o It also includes all the demand deposits with all the banks in the country, both
savings as well as current account deposits.
o It also includes all the other deposits of the banks kept with the RBI.
o So, M1 = CC + Demand Deposit + Other Deposit
• M2
o M2 also narrow money,
o It includes all the inclusions of M1 and additionally also includes the saving
deposits of the post office banks.
o So M2 = M1 + Savings Deposits of Post Office Savings
• M3 (Broad Money)
o M3 consists of all currency notes held by the public, all demand deposits with the
bank, deposits of all the banks with the RBI
o The net Time Deposits of all the banks in the country.
o So M3 = M1 + time deposits of banks.
• M4
o M4 is the widest measure of money supply that the RBI uses.
o It includes all the aspects of M3 and also includes the savings of the post office
banks of the country.
o It is the least liquid measure of all of them.
o M4 = M3 + Post office savings
• M0 (Reserve Money)
o Base money or High-powered money or Reserve Money or Central Bank Money
o M0 = Currency in Circulation + Bankers’ Deposits with RBI + ‘Other’ Deposits with
RBI

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MARGINAL COST OF FUNDS LENDING RATE (MCLR)
• Announced by RBI
• MCLR (Marginal Cost of funds-based Lending Rate) replaced the earlier base rate system
to determine the lending rates for commercial banks.
• RBI implemented MCLR on 1 April 2016 to determine rates of interests for loans.
• The four main elements of MCLR are made up of the following
o Tenor premium
o The marginal cost of funds
o Operating Cost
o Negative carry on account of CRR
• As per the RBI, the MCLR will bring in the following benefits:
o Transmission of policy rate into the lending rates of banks to improve;
o Computation of the interest rates by banks will get more transparent;
o Cost of loan will be fairer to the borrowers as well as the banks.
o It will help the banks to become more competitive and enhance their long-run
value.
MARKET STABILISATION SCHEME (MSS)
• This instrument for monetary management was introduced in 2004.
• The instrument thus has features of both, SLR and CRR.
The monetary management regulates:
• Availability of Money and Credit
• Cost of Money and Credit
• Use of Money and Credit
STERLIZATION:
• Sterilization means re-cycling of foreign capital inflows to prevent appreciation of
domestic currency and to check the inflationary impact of such capital
• Sterilization is carried out through open market operations.
• To reduce the hurdles for implementation of sterilization, RBI uses a variety of other
measures to manage interest rates.
• Credit Authorization Scheme was introduced in November, 1965

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 2. FISCAL OR BUDGETARY POLICY:
• This is the government policy with regard to public expenditure, taxation, and
public debt.
• This also greatly affects the businesses functioning in the economy.
• It is used in conjunction with the monetary policy implemented by central banks
• Objectives of fiscal policy:
o Fiscal policy was implemented for promotion of import and export in trade
o Fiscal policy was formulated to bring price stability and to control inflation
o National income plays an important role in an economy
o Fiscal policy helps in increasing national income of the country
o Fiscal policy emphasises on equitable distribution of income and wealth
o Fiscal policy reduces the deficit in the balance of payment
• Instruments of fiscal policy are as follows:
o Budget
o Taxation
o Public Expenditure and revenue
o Public Debt
o Fiscal Deficit in the economy.
• Types of Fiscal Policy:
o Expansionary Fiscal Policy:
▪ It’s most widely-used
▪ In this policy consumers get more money in their hands and as a result
their purchasing power increases drastically.
▪ An expansionary fiscal policy is impossible for state and local
government.
o Contractionary fiscal policy:
▪ It's rarely used
▪ Taxes are increased, and spending is cut.
▪ Only lame duck politicians could afford to implement contractionary
policy.
▪ The rate of taxes is increased so that the purchasing power of the
consumer gets reduced.
• Tools of Fiscal Policy:
o The first tool is taxation.
o The second tool is government spending.

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POLITICAL ENVIRONMENT
• Politics plays an important role in shaping business worldwide
• Manager need to know how to interact between business and government and know
how to react in case of conflict
• It includes all laws, government agencies and groups that influence or restrict individuals
or organisation
• The political-legal environment is a combination of a lot of factors such as
o The current political party in power
o The degree of politicization of trade and industry
o The efficiency of the current government
o Government policies, current legal framework
o The public attitude towards the economy
o Political stability
o Political principles and ideologies
o Current and future taxation policy
o Regulatory bodies and processes
o Government term and change
• According to the Business Dictionary the political environment is the government
actions which affect the operations of a company or business.
• Government actions can be present on several different levels including the local, state,
regional, national, and international level.
• The political environment of business often affects the choice of foreign market that a
company will enter.

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ROLE OF GOVERNMENT IN BUSINESS
• Government is Regulator of Business: The regulatory functions of the Government
include
o Restraints on private activities
o Control of monopoly and big business
o Development of public enterprises as an alternative to private enterprises to
ensure competitive dualism
o Maintenance of a proper socio-economic infrastructure.
• Government is Promoter of Business: The promotional role of the government in
relation to industries can be seen as
o Providing finance to industry
o Granting various incentives
o Creating infrastructure facilities for industrial growth
o Investment
• Government as the Planner: In its role as a planner
o The government indicates various priorities in the Five-Year Plans
o The sectoral allocation of resources.
o Mixed economies are democratically planned economies
• Government Other role in Business:
o Permission to Business Form and Operate
o Creating and Enforcing Contracts
o Consumer Protection and Safety
o Employee Rights and Protections
o Environmental Regulations and Protection
o Revenue and Taxation
o Investor Rights and Protection

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LEGAL ENVIRONMENT
• Legal system of a country is framed by the government.
• The laws which are passed by the government for business operation is called legal
environment.
• It is also called Regulatory environment
• Following are some of the government Acts & government policies relating to legal or
regulatory environment for business operations;
o The Sale of Goods Act, 1930.
o Indian Companies Act, 1956.
o Income Tax Act, 1961.
o The Consumer Protection Act, 1986.
o The Weights & Measures Act, 1958.
o Environment Protection Act, 1986.
o Foreign Exchange Management Act,
o Industrial Policy, Foreign Investment Policy, Monetary Policy.
CONSUMER PROTECTION ACT 1986
• It can bring into existence to protect the rights of a consumer
• It is known as COPRA. COPRA was amended twice in 1993 and 2002
• It was introduced in 1986 to protect the interest of the consumer and to check their
exploitation from producers.
• It came into force on 1st July 1987 all over in India except Jammu and Kashmir
• National Consumers Day is celebrated on 24 December in India.
Consumer Organisations:
• Consumer Education and Research Centre (Gujarat)
• Bureau of Indian Standards
• Federation of Consumer Organisation in Tamil Nadu
• Mumbai Grahak Panchayat
• Consumer Voice (New Delhi)
• Legal Aid Society (Kolkata)
• Akhil Bhartiya Grahak Panchayat
Objectives: The major objectives of consumer protection act are:
• To protect the consumers against immoral and unfair activities of the traders.
• For Compensation to the consumers.
• Setting up of consumer forums and council for the disposal of consumer disputes.
• To educate the consumers for their rights controlling to markets.

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Six rights of the consumers:
• Right to safety
• Right to be informed
• Right to choose
• Right to be heard
• Right to redressal
• Right to consumer education
Redressal agencies or Three Tier system (Section 9)
1. DISTRICT FORUM
• The Consumer Disputes Redressal Forum, better known as District Forum is the
first stage of courts at the bottom of the hierarchy of the consumer redressal
courts.
• The sections 10 to 15 of the Consumer Protection Act, 1986 deal with this forum
• The complaining party should not make a complaint more than 20 lakh.
• There is a President with the qualification of a District judge appointed by the
state government.
• Apart from the President, there are two other members, one being a woman
• These members are to be chosen based on three grounds.
▪ They must be at least 35 years of age
▪ They must have a degree from a recognized university
▪ They must have at least 10 years of experience in law, economics, commerce
and so on.
• Section 10 1(A) of the Act prescribes that every appointment mentioned above
will be made by a committee with is composed of:
▪ The President of the State Commission as the Chairman
▪ The Secretary of the Law Department of the State as a Member
▪ The Secretary dealing in consumer affairs in the State as a Member
▪ In the absence of the President, the Chief Justice of the High Court may
nominate in his place
• Every member of the District Forum needs to have the following qualifications:
▪ The term is five years or 65 years, whichever is earlier
▪ Reappointment is possible through the Selection Committee’s
recommendation
▪ Resignation can be done with a letter addressed to the State Government
▪ The State Government decides the salary structure of the Forum
• Section 15 of the Act grants an appeal against the decision of the District Forum
within 30 days to the State Commission.
• Also, the appellant must have paid 50 per cent of the compensation decided
against him or ₹25000, whichever is less.
22 | K I R A N . A . S
 2. STATE FORUM
• Complain should be at least 20 lakh and not more than 1 crore
• The Consumer Disputes Redressal Commission, better known as State Commission
is the second stage of courts from the bottom of the hierarchy.
• The sections 16, 17, 18 and 19 of the Consumer Protection Act, 1986 deal with this
Commission.
• There is a President who is or was a judge of the High Court, appointed by the
State Government
• Apart from the President, there are two other members, one being a woman.
• These members are to be chosen based on three grounds.
▪ They must be at least 35 years of age
▪ They must have a bachelor’s degree from a recognized university
▪ They must have at least 10 years of experience in law, economics, commerce
and so on.
• Not more than fifty per cent of the members should have a judicial background.
• The State Government determines the remuneration of the members.
• The President can choose the size of the Commission as one or more
• Decisions are of the majority, with the President intervening in case of an equal
division in opinion.
• Section 16 1(A) of the Act prescribes that every appointment mentioned above
will be made by a committee with is composed of:
▪ The President of the State Commission as the Chairman
▪ The Secretary of the Law Department of the State as a Member
▪ The Secretary dealing in consumer affairs in the State as a Member.
▪ In the absence of the President, the Chief Justice of the High Court may
nominate a sitting judge of the High Court in his place.
• Every member of the District Forum needs to have the following qualifications:
▪ The term is five years or 67 years, whichever is earlier
▪ Reappointment is possible through the Selection Committee’s
recommendation
▪ Resignation can be done with a letter addressed to the State Government
• The State Commission may transfer a complaint to it from the District Forum at
any stage of the proceeding. The State Commission may also outside of its ordinary
place of the capital. These are called Circuit Courts.
• Section 19 of the Act grants an appeal against the decision of the National
Commission within 30 days to the State Commission.
• Also, the appellant must have paid 50 per cent of the compensation decided
against him or Rs. 35000, whichever is less

23 | K I R A N . A . S
 3. NATIONAL FORUM
• The complaint must exceed an amount of 1 crore
• The National Consumer Disputes Redressal Commission, better known as National
Commission is the highest structure of redressal agencies, subordinate to the
Supreme Court
• It is the court that deals with the appeals against the State Commission.
• There is a President who is or was a judge of the Supreme Court, appointed by the
Central Government
• There must be 4 members at least, one being a woman.
• These members are to be chosen based on three grounds.
▪ They must be at least 35 years of age
▪ They must have a bachelor’s degree from a recognized university and they
must have at least 10 years of experience in law, economics, commerce and
so on.
• Not more than fifty per cent of the members should have a judicial background.
• The Central Government determines the remuneration of the members.
• The President can choose the Bench of the Commission as one or more
• Decisions are of the majority, with the President intervening in case of an equal
division in opinion.
• Section 16 1(A) of the Act prescribes that every appointment mentioned above
will be made by a committee with is composed of:
▪ A judge of the Supreme Court nominated by Chief Justice of India as the
Chairman
▪ The Secretary in Department of Legal Affairs of the Government of India as
a Member
▪ The Secretary of the department dealing in consumer affairs in the
Government of India as a Member.
• Every member of the District Forum needs to have the following qualifications:
▪ The term is five years or 70 years, whichever is earlier
▪ Reappointment is possible through the Selection Committee’s
recommendation
▪ Resignation can be done with a letter addressed to the Central Government
• The National Commission may also outside of its ordinary place of the capital of
India, New Delhi. These are called Circuit Benches.
• Section 19 of the Act grants an appeal against the decision of the National
Commission within 30 days to the Supreme Court.
• Also, the appellant must have paid 50 per cent of the compensation decided
against him or Rs. 50000, whichever is less.

24 | K I R A N . A . S
 BASIS FERA FEMA

Meaning An act promulgated, to regulate FEMA an act initiated to facilitate external trade
payments and foreign exchange and payments and to promote orderly
in India, is FERA. management of the forex market in the country.

Enactment Old New

Number of sections 81 49

Introduced when Foreign exchange reserves were Foreign exchange position was satisfactory.
low.

Approach towards Rigid Flexible

forex transactions

Basis for Citizenship More than 6 months stay in India

determining
residential status

Violation Criminal offence Civil offence

Punishment for Imprisonment Fine or imprisonment (if fine not paid in the
contravention stipulated time)

25 | K I R A N . A . S
FOREIGN EXCHANGE MANAGEMENT ACT (FEMA) 1999
• This Act replacing the Foreign Exchange Regulation Act (FERA) 1973
• This act makes offences related to foreign exchange civil offenses.
• It enabled a new foreign exchange management regime consistent with the emerging
framework of the World Trade Organization (WTO).
• It also paved the way for the introduction of the Prevention of Money Laundering Act,
2002, which came into effect from 1 July 2005
• FEMA is a regulatory mechanism that enables the Reserve Bank of India to pass
regulations
• The Central Government to pass rules relating to foreign exchange in tune with the
Foreign Trade policy of India.
• FEMA was introduced because the FERA didn’t fit in with post-liberalisation policies.
• The FEMA head-office, also known as Enforcement Directorate is situated in New Delhi
• The Directorate is further divided into 5 zonal offices in Delhi, Mumbai, Kolkata, Chennai
and Jalandhar
• As per Section 2(1)(h) of FCRA, 2010, "foreign contribution" means the donation,
delivery or transfer made by any foreign source
Feature:
• Activities such as payments made to any person outside India or receipts from them,
along with the deals in foreign exchange and foreign security is restricted. It is FEMA
that gives the central government the power to impose the restrictions.
• Without general or specific permission of FEMA, MA restricts the transactions involving
foreign exchange or foreign security and payments from outside the country to India –
the transactions should be made only through an authorised person.
• Deals in foreign exchange under the current account by an authorised person can be
restricted by the Central Government, based on public interest generally.
• Although selling or drawing of foreign exchange is done through an authorized person,
the RBI is empowered by this Act to subject the capital account transactions to a number
of restrictions.
• Residents of India will be permitted to carry out transactions in foreign exchange,
foreign security or to own or hold immovable property abroad if the currency, security
or property was owned or acquired when he/she was living outside India, or when it was
inherited by him/her from someone living outside India.

26 | K I R A N . A . S
Guidelines:
• FEMA did not apply to Indian citizens who resided outside India. This criterion was
checked by the number of days a person resided in India during the previous financial
year (182 days or more to be a resident)
• FEMA authorized the central government to impose restrictions on and supervise three
things;
o Payments made to any person outside India or receipts from them
o Forex or Foreign Exchange
o Foreign security deals
• It specified the areas around acquisition/holding of forex that required specific
permission of the Reserve Bank of India (RBI) or the government
• FEMA put foreign exchange transactions into two categories;
o Capital account: A capital account transaction altered the assets and liabilities
outside India or inside India but of a person resident outside India.
o Current account: Remaining any other transaction fell into the current account
category.

27 | K I R A N . A . S
SOCIO – CULTURAL ENVIRONMENT
• The socio - cultural environment of a business is the customs and values that guide the
business’s practices.
• It is created by the demographic characteristics of its leaders along with its employees.
• It can be evident in the company’s vision and mission statement. A company’s values
are reflected in its policies.
• Social and cultural environment refers to the formation and change of social structure,
social customs and habits, beliefs and values, codes of conduct, lifestyle, cultural
traditions, population size and geographical distribution
Social factors affecting business
• Social classes and their influence on the society
• Average disposable income level
• Wealth of people
• Economic inequalities
• Level of education
• Reputation of company in society
• Conflicts within society
• Susceptibility to influence
• Social organization
• Uncertainty avoidance dominating in society
Cultural factors affecting business
• Fashion trends
• Lifestyle,
• Social media influence (blogging, etc.) vs traditional media (Press, TV, radio)
• Dominant communication technology in social groups
• Participation in cultural events
• Popular actors, music styles, design forms, etc.
• Creativity of people
• Various other determinants of culture.
DEMOGRAPHIC ENVIRONMENT
• Demography is the statistical study of human populations and sub-populations.
• Demographics is about the characteristics of the population in a specific area and
includes multiple factors like age, race, income, etc.
• Factors are the size of the population, the age and sex distribution of the population,
Other structural characteristics, Population change, changing household partner,
Increasing diversity.
28 | K I R A N . A . S
CORPORATE SOCIAL RESPONSIBILITY
• Corporate social responsibility (CSR) also called corporate sustainability, sustainable
business, corporate conscience, corporate citizenship, conscious capitalism, or
responsible business
• By practicing corporate social responsibility, also called corporate citizenship
• It has a positive impact on social, economic and environmental factors.
• CSR can positively impact your business by improving your company image, building
your brand and motivating you as a business owner.
Types of Corporate social responsibilities:
• Environmental efforts: One primary focus of corporate social responsibility is the
environment. Businesses, regardless of size, have large carbon footprints. Any steps they
can take to reduce those footprints are considered good for both the company and
society.
• Philanthropy: Businesses can practice social responsibility by donating money, products
or services to social causes and non-profits. Larger companies tend to have a lot of
resources that can benefit charities and local community programs.
• Ethical labour practices: By treating employees fairly and ethically, companies can
demonstrate their social responsibility. This is especially true of businesses that operate
in international locations with labour laws that differ from those in the United States.
• Volunteering: Attending volunteer events says a lot about a company's sincerity. By
doing good deeds without expecting anything in return, companies can express their
concern for specific issues and commitment to certain organizations
According to Companies Act 2013 (Schedule VII)
• Applicability of CSR Provisions: On every Company including its holding or subsidiary
having
o Net worth of Rs. 500 Crore or more or
o Turnover of Rs. 1000 crore or more or
o Net Profit of Rs. 5 crore or more
• Every qualifying company requires spending of at least 2% of its average net profit for
the immediately preceding 3 financial years on CSR activities

29 | K I R A N . A . S
SCOPE OF INTERNATIONAL BUSINESS
• Merchandise (Tangible Goods) exports and imports: Merchandise exports mean
sending tangible goods abroad and Merchandise imports means bringing tangible goods
from a foreign country to one’s own country.
• Service exports and imports: Service exports and imports involve trade in intangibles. It
is because of the intangible aspect of services that trade in services is also known as
invisible trade.
• Licensing and franchising: Permitting another party in a foreign country to produce and
sell goods under your trademarks, patents or copyrights in lieu of some fee is another
way of entering into international business.
• Foreign investments: It is another important form of international business. Foreign
investment involves investments of funds abroad in exchange for financial return.
• Monopoly Power: It might arrive from patent rights, technological advantages, product
segregation etc. Another reason for internationalization is limited market information.
• Benefiting from currency exchange: Those who add an international business to their
assortment may also advantage from currency fluctuations
• Limitations of Domestic Market: When the domestic market is small, international
business is the option for growth. Depression in the home market drives companies to
explore foreign markets.
• Increased revenues: Each country you add to your list can open up a new path to
business growth and increased revenues.
• Expand and diversify: International business can enlarge and expand its activities. This
is because it earns very high profits. It also gets financial help from the government.
IMPORTANCE OF INTERNATIONAL BUSINESS
• Market expansion
• Non-availability of product in new market
• Cost advantage
• Product Differentiation
• Economic recession in one’s own country
• Growth in Demand in other markets
• Excess capacity of Production
• A great extent is Economies of scale
• the purchasing power rising in target markets
• The company in a big way and give fresh revenue to the company
• It can help it fight in the local market as well.

30 | K I R A N . A . S
INDUSTRIAL POLICIES OF INDIA
1. The Industrial Policy Resolution, 1948
• On April 30, 1948, the Government of India passed a policy resolution – The
Industrial Policy Resolution, 1948 (IPR, 1948).
• It divided the industrial sector into four broad groups:
Group 1: Public Sector: Controlled and Governed by Government, Basic and
strategic industries like arms and ammunition, atomic energy, railways, etc.
Further, these were in the exclusive monopoly of the State.
Group 2: Public Cum Private: Established by Government but managed by
private, Key industries like coal, iron and steel, shipbuilding, manufacture of
telegraph, telephone, mineral oils, etc. Also, the existing industries were allowed
to function for 10 years. After the end of the tenure, the State would review and
take adequate decisions.
Group 3: Private Sector: A total number of 18 industries including automobiles,
tractors, machine tools, etc. The private sector was allowed to open these
industries subject to government regulation and supervision.
Group 4: Private and Cooperative: All the remaining industries. However, the
government can participate or intervene if the need arises.
2. The Industrial Policy Resolution, 1956
• On April 30, 1956, the Government revisited the IPR, 1948 and announced the
Industrial Policy Resolution, 1956 (IPR, 1956).
• There were three reasons behind the revision:
▪ The introduction of the Constitution of India
▪ The adoption of a planning system
▪ The Parliament ‘s declaration of adopting a socialist pattern of the society
• According to the IPR, 1956, the industries were classified in the following
categories:
Schedule A: Public Sector– A list of 17 industries as the exclusive responsibility
of the State.
Schedule B: Public Cum Private: A list of 12 industries open to both the public
and private sectors. However, these industries are progressively State-owned.
Schedule C: Private Sector: All the remaining industries.

31 | K I R A N . A . S
 3. The Industrial Policy Resolution, 1977
• The main trust was in favour of small-scale sector, classified 3 sub sectors
▪ Household and cottage industries
▪ Tiny sector (Upto 1 lakh investment)
▪ Small scale industries (Above 1 Lakh and Upto 15 Lakh investment)
• Large scale sectors
▪ Basic industries
▪ Capital goods industries
▪ High technology industries
4. The Industrial Policy Resolution, 1991
• Also called New economic Policy
• Manamohan Singh is called Father of NEP of India
• Objectives:
▪ NEP brings down the rate of inflation
▪ Higher economic growth
▪ Build sufficient foreign exchange reserves
▪ Achieve economic stabilities
▪ To permit the international flow of goods and services, capital, HR and
technology
▪ To increase the participation of private players in the all sectors of the
economy
▪ Free determination of interest rate by the commercial bank
• Increase in the investment limit for SSIs Above 5 Lakh and up to 1 Crore
• Abolition of MRTP Act 1969
• Public sector was reduced 17 to 8 industries
• Currently 2 Public industries Atomic energy and Railway
• Tiny Unit limit Less than 5 lakhs

32 | K I R A N . A . S
NEW ECONOMIC POLICY
New Economic Policy (NEP) which consisted wide range of reforms. Broadly we can
classify the measures in two groups:
1. Structural Reforms:
• These measures were long-term perspective
• Eyeing for improvement of the economy
• Enhancing the international competitiveness
• Reforms were made to remove rigidity in various segments of Indian
economy.
2. Stabilization Measures
• Short – Term structural Reform: Measures were undertaken to correct the
inherent weakness that has
i. Developed in Balance of Payments
ii. Control the inflation.
• Long-Term Structural Reforms:
i. Liberalization
ii. Privatization and
iii. Globalization
LIBERALIZATION
The loosening of government control in a country and when private sector companies’
start working without or with fewer restrictions and government allow private players to
expand for the growth of the country depicts liberalization in a country.
Objectives of Liberalization Policy
• To increase competition amongst domestic industries.
• To encourage foreign trade with other countries with regulated imports and exports.
• Enhancement of foreign capital and technology.
• To expand global market frontiers of the country.
• To diminish the debt burden of the country.

33 | K I R A N . A . S
PRIVATIZATION
• This is the second of the three policies of LPG.
• Its transfer of ownership of property or business from a government to Private company
• It is the increment of the dominating role of private sector companies and the reduced
role of public sector companies.
• Government companies can be converted into private companies in two ways:
o By disinvestment
o By withdrawal of governmental ownership and management of public sector
companies.
Forms of Privatization
• Denationalization or Strategic Sale: When 100% government ownership of productive
assets is transferred to the private sector players, the act is called denationalization.
• Partial Privatization or Partial Sale: When private sector owns more than 50% but less
than 100% ownership in a previously construed public sector company by transfer of
shares, it is called partial privatization.
• Deficit Privatization or Token Privatization: When the government disinvests its share
capital to an extent of 5-10% to meet the deficit in the budget is termed as deficit
privatization.
Objectives of Privatization
• Improve the financial situation of the government.
• Reduce the workload of public sector companies.
• Raise funds from disinvestment.
• Increase the efficiency of government organizations.
• Provide better and improved goods and services to the consumer.
• Create healthy competition in the society.
• Encouraging foreign direct investments (FDI) in India.

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GLOBALIZATION
• It is the last policy of LPG to be implemented.
• Globalization means the interaction of the domestic economy with rest of the world
with regard to foreign investment, trade, production and financial matters
• It means to integrate the economy of one country with the global economy.
• During Globalization the main focus is on foreign trade & private and institutional
foreign investment.
• Globalization as a term has a very complex phenomenon.
• The main aim is to transform the world towards independence and integration of the
world as a whole by setting various strategic policies.
• Globalization is attempting to create a borderless world, wherein the need of one
country can be driven from across the globe and turning into one large economy
• Globalization or globalisation is the process of interaction and integration among
people, companies, and governments worldwide.
• Its unregulated market economy
• Globalization has grown due to advances in transportation and communication
technology.
• Globalization is primarily an economic process of interaction and integration that's
associated with social and cultural aspects
• In 2000, the International Monetary Fund (IMF) identified four basic aspects of
globalization:
o Trade and transactions
o Capital and investment movements
o Migration and movement of people
o The dissemination of knowledge
• Academic literature commonly subdivides globalization into three major areas:
o Economic globalization
o Cultural globalization
o Political globalization.

35 | K I R A N . A . S
DIVERS OF GLOBALIZATION
1. Technological drivers
• Technology shaped and set the foundation for modern globalization.
• Innovations in the transportation technology revolutionized the industry.
• The most important developments among these are the commercial jet aircraft
and the concept of containerisation in the late 1970s and 1980s.
• Inventions in the area of microprocessors and telecommunications enabled highly
effective computing and communication at a low-cost level.
• Finally, the rapid growth of the Internet is the latest technological driver that
created global e-business and e-commerce.
2. Political drivers
• Liberalized trading rules and deregulated markets lead to lowered tariffs and
allowed foreign direct investments in almost all over the world.
• The institution of GATT (General Agreement on Tariffs and Trade) 1947 and the
WTO (World Trade Organization) 1995 as well as the ongoing opening and
privatization in Eastern Europe are only some examples of latest developments.
3. Cost drivers
• Sourcing efficiency and costs vary from country to country and global firms can
take advantage of this fact.
• Cost drivers to globalization are the opportunity to build global scale economies
and the high product development costs nowadays.
4. Market drivers
• As domestic markets become more and more saturated, the opportunities for
growth are limited and global expanding is a way most organizations choose to
overcome this situation.
• Common customer needs and the opportunity to use global marketing channels
and transfer marketing to some extent are also incentives to choose
internationalization.
5. Competitive drivers
• With the global market, global inter-firm competition increases and organizations
are forced to “play” international.
• Strong interdependences among countries and high two-way trades and FDI
actions also support this driver.

36 | K I R A N . A . S
MODES OF ENTRY INTO INTERNATIONAL BUSINESS
There are two major types of market entry modes: equity and non-equity modes. The
non-equity modes category includes export and contractual agreements. The equity modes
category includes: joint venture and wholly owned subsidiaries
1. EXPORTING: Exporting is the process of selling of goods and services produced in one
country to other countries. There are two types of exporting;
• Direct Exports: The main characteristic of direct exports entry model is that there
are no intermediaries.
Types are follows;
i. Sales representatives: Sales representatives represent foreign
suppliers/manufacturers in their local markets for an established
commission on sales. Provide support services to a manufacturer regarding
local advertising, local sales presentations, customs clearance formalities,
legal requirements. Manufacturers of highly technical services or products
such as production machinery, benefit the most from sales representation.
ii. Importing distributors: Importing distributors purchase product in their
own right and resell it in their local markets to wholesalers, retailers, or both.
Importing distributors are a good market entry strategy for products that
are carried in inventory, such as toys, appliances, prepared food.
Advantages
• Control over selection of foreign markets and choice of foreign
representative companies
• Good information feedback from target market, developing better
relationships with the buyers
• Better protection of trademarks, patents, goodwill, and other intangible
property
• Potentially greater sales, and therefore greater profit, than with indirect
exporting.
Disadvantages
• Higher start-up costs and higher risks as opposed to indirect exporting
• Requires higher investments of time, resources and personnel and also
organizational changes
• Greater information requirements
• Longer time-to-market as opposed to indirect exporting

37 | K I R A N . A . S
 • Indirect exports: Indirect export is the process of exporting through domestically
based export intermediaries. The exporter has no control over its products in the
foreign market.
Types are follows;
i. Export trading companies (ETCs): These provide support services of the
entire export process for one or more suppliers. Attractive to suppliers that
are not familiar with exporting as ETCs usually perform all the necessary
work: locate overseas trading partners, present the product, quote on
specific enquiries, etc.
ii. Export management companies (EMCs): These are similar to ETCs in the
way that they usually export for producers. Unlike ETCs, they rarely take on
export credit risks and carry one type of product, not representing
competing ones. Usually, EMCs trade on behalf of their suppliers as their
export departments.[9]
iii. Export merchants: Export merchants are wholesale companies that buy
unpackaged products from suppliers/manufacturers for resale overseas
under their own brand names. The advantage of export merchants is
promotion. One of the disadvantages for using export merchants result in
presence of identical products under different brand names and pricing on
the market, meaning that export merchant's activities may hinder
manufacturer's exporting efforts.
iv. Confirming houses: These are intermediate sellers that work for foreign
buyers. They receive the product requirements from their clients, negotiate
purchases, make delivery, and pay the suppliers/manufacturers. An
opportunity here arises in the fact that if the client likes the product it may
become a trade representative. A potential disadvantage includes supplier's
unawareness and lack of control over what a confirming house does with
their product.
v. Nonconforming purchasing agents: These are similar to confirming houses
with the exception that they do not pay the suppliers directly – payments
take place between a supplier/manufacturer and a foreign buyer.

38 | K I R A N . A . S
 Advantages
• Fast market access
• Concentration of resources towards production
• Little or no financial commitment as the clients' exports usually covers most
expenses associated with international sales.
• Low risk exists for companies who consider their domestic market to be
more important and for companies that are still developing their R&D,
marketing, and sales strategies.
• Export management is outsourced, alleviating pressure from management
team
• No direct handle of export processes.
Disadvantages
• Little or no control over distribution, sales, marketing, etc. as opposed to
direct exporting
• Wrong choice of distributor, and by effect, market, may lead to inadequate
market feedback affecting the international success of the company
• Potentially lower sales as compared to direct exporting (although low
volume can be a key aspect of successfully exporting directly).
• Export partners that incorrectly select a specific distributor/market may
hinder a firm's functional ability.
2. LICENSING:
• An international licensing agreement allows foreign firms, either exclusively or
non-exclusively to manufacture a proprietor's product for a fixed term in a specific
market.
• In this foreign market entry mode, a licensor in the home country makes limited
rights or resources available to the licensee in the host country.
• The rights or resources may include patents, trademarks, managerial skills,
technology, and others that can make it possible for the licensee to manufacture
and sell in the host country a similar product to the one the licensor has already
been producing and selling in the home country without requiring the licensor to
open a new operation overseas.
• The licensor earnings usually take forms of one-time payments, technical fees and
royalty payments usually calculated as a percentage of sales.

39 | K I R A N . A . S
 Advantages
• Obtain extra income for technical know-how and services
• Reach new markets not accessible by export from existing facilities
• Quickly expand without much risk and large capital investment
• Pave the way for future investments in the market
• Retain established markets closed by trade restrictions
• Political risk is minimized as the licensee is usually 100% locally owned
• Is highly attractive for companies that are new in international business.
Disadvantages
• Lower income than in other entry modes
• Loss of control of the licensee manufacture and marketing operations and
practices leading to loss of quality
• Risk of having the trademark and reputation ruined by an incompetent partner
• The foreign partner can also become a competitor by selling its production in
places where the parental company is already in
3. FRANCHISING:
• The franchising system can be defined as: "A system in which semi-independent
business owners (franchisees) pay fees and royalties to a parent company
(franchiser) in return for the right to become identified with its trademark, to sell
its products or services, and often to use its business format and system."
• Compared to licensing, franchising agreements tends to be longer and the
franchisor offers a broader package of rights and resources which usually includes:
equipment, managerial systems, operation manual, initial trainings, site approval
and all the support necessary for the franchisee to run its business in the same
way it is done by the franchisor.
• In addition to that, while a licensing agreement involves things such as intellectual
property, trade secrets and others while in franchising it is limited to trademarks
and operating know-how of the business
Advantages
• Low political risk
• Low cost
• Allows simultaneous expansion into different regions of the world
• Well selected partners bring financial investment as well as managerial capabilities
to the operation.

40 | K I R A N . A . S
 Disadvantages
• Maintaining control over franchisee may be difficult
• Conflicts with franchisee are likely, including legal disputes
• Preserving franchisor's image in the foreign market may be challenging
• Requires monitoring and evaluating performance of franchisees, and providing
ongoing assistance
• Franchisees may take advantage of acquired knowledge and become competitors
in the future
4. TURNKEY PROJECTS
• A turnkey project refers to a project when clients pay contractors to design and
construct new facilities and train personnel.
• A turnkey project is a way for a foreign company to export its process and
technology to other countries by building a plant in that country.
• Industrial companies that specialize in complex production technologies normally
use turnkey projects as an entry strategy.
Advantages: Turnkey projects is the possibility for a company to establish a plant and
earn profits in a foreign country especially in which foreign direct investment
opportunities are limited and lack of expertise in a specific area exists.
Disadvantages: Turnkey project for a company include risk of revealing companies’
secrets to rivals, and takeover of their plant by the host country. Entering a market with
a turnkey project CAN prove that a company has no long-term interest in the country
which can become a disadvantage if the country proves to be the main market for the
output of the exported process
5. WHOLLY OWNED SUBSIDIARIES (WOS)
A wholly owned subsidiary includes two types of strategies:
i. Greenfield investment:
• Greenfield investment is the establishment of a new wholly owned
subsidiary
• Greenfield investment is high risk due to the costs of establishing a new
business in a new country
ii. Acquisitions
• Acquisition strategy offers the fastest, and the largest, initial international
expansion of any of the alternative.
• Acquisition is lower risk than Greenfield investment because of the
outcomes of an acquisition can be estimated more easily and accurately
• Acquisition is attractive if there are well established firms already in
operations or competitors want to enter the region.

41 | K I R A N . A . S
 6. JOINT VENTURE
There are five common objectives in a joint venture:
• Market entry
• Risk/Reward sharing
• Technology sharing
• Joint product development
• Conforming to the government regulations
7. STRATEGIC ALLIANCE
• Strategic alliance is a type of cooperative agreements between different firms,
such as shared research, formal joint ventures, or minority equity participation.
• The modern form of strategic alliances is becoming increasingly popular and has
three distinguishing characteristics:
i. They are frequently between firms in industrialized nations.
ii. The focus is often on creating new products and/or technologies rather than
distributing existing ones.
iii. They are often only created for short term duration, non-equity-based
agreement in which companies are separated and are independent
Advantages
• Technology exchange
• Global competition
• Industry convergence
• Economies of scale and reduction of risk
• Alliance as an alternative to merger
Disadvantages
• Difficult to find a good partner
• Risk of unequal partnership
• Loss of control
• Relationship management across borders

42 | K I R A N . A . S
Three different rules of entry mode selection
1. Naïve rule:
• The decision maker uses the same entry mode for all foreign markets.
• The companies use this rule as the entry mode selection ignore the differences of
individual foreign markets.
• The performance of this selection could not be calculated, because it highly
depends on the luck of the manager.
2. Pragmatic rule:
• The decision maker uses a workable entry mode for each foreign market, which
means that the manager uses different entry modes depend on the time stage or
the business stage.
3. Strategy rules:
• This approach means that the company systematically compared all of the entry
modes and evaluated the value before any choice is made.
• This approach is common in large firms, because the research requires resources,
capital and time.
• It is rarely to see a small or medium-sized company use this approach.

43 | K I R A N . A . S
LEVELS OF INTERNATIONAL BUSINESS
• Domestic Company
o A domestic corporation is a company that conducts its affairs in its home country’s
company
• International company
o International companies have no foreign direct investments (FDI) and make their
product or service only in their home country.
o In other words, they're exporters and importers.
o They have no staff, warehouses, or sales offices in foreign countries.
o Do not have any foreign set up or branches, key decision making is always
domestically
o Product development process are accomplished in the domestic country
• Multinational Company (MNC)
o Multinational refers to a corporation that has assets and facilities in one or more
countries, other than the home country
o Have a centralized office where global management been coordinated
o Different strategy for different market
o Any company, which is having operation and trading in two or more countries
across the globe is called as an MNC
o While multinationals have subsidiaries in other countries
o The number of countries in this case, would be in the medium range from 2 to 10
o MNCs may have foreign direct investment
o The product development process is generally taken up by the parent company
and distributed to various subsidiary companies
• Global company
o Any company, which is having operation and trading in many countries across the
world is called Global company
o The number of countries in this case, would be in the high range from 15 to 20+
o Global company have an FDI
o Either produce in one country and market globally or produce globally and market
domestically
• Transnational Company (TNC)
o These types of companies can be considered as a mixture of Global, Multinational
and International companies
o Transnational Company have an FDI
o Transnational company produces, markets, invests and operates across the world
o It is an integrated global enterprise that links global resources with global markets
at profit
o For example, Coca-Cola, Pepsi-Cola etc
44 | K I R A N . A . S
 DIFFERENCE BETWEEN MNC AND TNC

45 | K I R A N . A . S
EPRG FRAMEWORK
• International business approaches are similar to the stages of internationalisation or
globalisation.
• EPRG Framework was developed and introduced by Wind, Douglas, and Perlmutter
o Ethnocentric Approach – International Company (Home country oriented)
o Polycentric Approach – Multinational Company (Host country oriented)
o Regiocentric Approach -
o Geocentric Approach – Global Company

46 | K I R A N . A . S
THEORIES OF INTERNATIONAL TRADE
• International trade theories are simply different theories to explain international trade.
• Trade is the concept of exchanging goods and services between two people or entities.
• International trade is then the concept of this exchange between people or entities in
two different countries.
• International trade theory is a sub-field of economics which analyses the patterns of
international trade, its origins, and its welfare implications.
• Trade is also called the exchange of goods economy, is to transfer of the commodities
from one person to another.
• Sometimes trade is also called in simple terms as commerce or financial transaction of
barter
• The Physiocrats were the sitter criticisers of Mercantilists or Mercantilism who
supported foreign trade blindly without understanding the real or natural order.
Trade Theory and Profounder
1. Absolute Advantage Theory – Adam Smith
2. Mercantilism Theory – Michel Hume
3. Comparative Theory – David Ricardo
4. Leontief paradox Theory – Wassily W Leontief
5. Factor Endowment Theory – Heckscher Ohlin
6. National Competitive Advantage – Michel Porter
7. Countries Similarity or Volume of Trade – Stefan Linder
8. Product Life Cycle – Raymond Vernon
9. Global Strategic Rivalry – Paul Krugman and Kelvin Lancaster
10. Opportunity Cost Theory – Habler
11. Reciprocal Demand Theory – J. S. Mill
12. Availability Theory – I. S. Kravis
13. Technical gap or Imitation Gap Theory – M. V. Posner
Note:
• Classical country-based theory – 1, 2, 3, 4, 5
• Modern firm-based theory – 6, 7, 8, 9
• Interventionalist theory – 2
• Free trade theory – 1, 3
• Trade pattern theory – 5, 7
• Trade dynamics theory – 7, 8

47 | K I R A N . A . S
ABSOLUTE ADVANTAGE THEORY
• This theory proposed by Adam Smith
• Adam Smith advocated the Laissez fair economic policy
• This theory based on principle of division of labour
• When one country produces one product at less cost and another country produce
another product at less cost both can exchange required quantity and can enjoy benefit
of absolute cost advantage
• The Principle of Absolute Advantage refers to the capacity or an ability of a party (an
individual, or firm or a country) to produce the maximum goods or services than
competitors using the same amount of resources.
• In the Principles of Absolute Advantage only one input i.e. labour is used
Assumption:
• Cost of production of two communities in the two countries is absolutely different.
• There are only two countries.
• Free trade exists between the countries
• Both the countries can produce only two goods.
• Labour is homogenous and is only the factor of production.
• Labour can move within a country but immobile internationally.
• Labour is used in fixed proportions in both the countries.
• No Transportation cost occurred.
• Use of constant technology took place.
• Constant cost of production and both the countries involved in barter trade.

COMPARATIVE COST THEORY

• This theory proposed by David Ricardo
• David Ricardo opposed the analysis of Adam Smith Theory of Absolute Advantage which
is also known as the Ricardian theory of comparative cost
• Comparative cost advantage model is a refinement of Smith’s theory.
• Comparative cost theory has been based upon the labour theory of value
• In this respect the model of comparative advantage is quite similar to absolute
advantage model but only the difference is that in the comparative advantage model is
that if the one country is either efficient in producing both the commodities and the
other country is inefficient in producing both the commodities as compared to the first.

48 | K I R A N . A . S
NEO- CLASSICAL THEORY
• As the classical approach of International Trade is based upon some unrealistic and
many restrictive assumptions.
• The Neo-classical model of International Trade came to advocate the Theory on some
basic and real concepts
• The Neo-Classical started their theory with the basic concepts like opportunity cost and
production possibility frontier.
• Especially the economists like, Haberler, Leontief, Lerner Marshall, Edgeworth and
Meade had contributed for the Neo-classical model of international trade
THE OPPORTUNITY COST APPROACH
• This theory proposed by Haberler
• The Haberler theory of opportunity cost is the restatement of Ricardo’s theory of
comparative costs in terms of the opportunity cost.
• A remarkable attempt has been made by Haberler to reformulate the theory of
comparative cost advantage. Therefore, the theory can be also said the Alternate cost
theory
• According to the opportunity cost theory if a country can produce either of the
commodity x or y, the opportunity cost of the community x is the amount of other
community y that must be given up in order to get one additional unit of community x.
Thus, the exchange ratio between the two commodities is expressed in terms of their
opportunity costs
• Haberler opportunity cost theory overcome these short comings and explains the
doctrine of comparative cost in terms of what call the substitution curve or what
Samuelson terms ‘Productive Possibility curve or ‘Transformation curve’ or what Lerner
calls ‘Production indifference curve’ or Production Frontier.
Assumption
• Only two countries say A and B took place in trade according to this theory.
• Two commodities and two factors of production (labour and capital are taken).
• The supply of Factors is fixed.
• There is full employment.
• Free trade exists between the two countries.
• The price of each factor equals its marginal value productivity in each employment.

49 | K I R A N . A . S
THEORY OF RECIPROCAL DEMAND
• This theory proposed by J S Mill
• Its reformulated the theory of comparative cost advantage
• The term ‘reciprocal demand’ was introduced by mill to explain the Determination of
the equilibrium terms of trade.
• It is used to indicate a country’s demands for one community in terms of the quantities
of the other commodities it is prepared to give up an exchange
Assumption
• In this model two countries, two commodities and only one factor of production took
place. (2 x 2 x 1) model.
• There are constant Returns to scale.
• Transportations costs are totally absent.
• There is perfect competition.
• Full employment exists in both the countries.
• Absence of restrictions, free trade book place between the two countries
MODERN THEORY OF INTERNATIONAL TRADE
• This theory proposed by Bertel Ohlin
• The famous book ‘Interregional and International Trade’ is Classical theory of Bertel
Ohlin
• He formulated the General equilibrium or factor Endowment theory of International
trade. It is also known as the modern theory of International trade or the Heckscher-
Ohlin
• According to this theory the Relative availability of factor supplies mainly determines
the pattern of production, specialization and trade among the regions
• According to this theory Different countries or the different Regions lane the different
factor endowments and supplies of factors.
• The theory says that the countries that are rich in capital will export capital intensive
goods and the countries which have much labour will export labour intensive goods
Assumption
• The main cause of trade between the Regions is the difference in prices of the
commodities.
• The model is carried up by the two countries, two commodities and the two factors of
production (labour and capital).
• In commodity and factor markets there exists the perfect competition.
• The production functions are different for different commodities.
• Each commodity is produced by the constant returns to scale.
50 | K I R A N . A . S
 • Transport and Insurance costs are free.
• There is an immobility in the factors of production between the countries but freely
mobile within the countries.
• There is full employment of both the factors of production in each country.
• The theory openly advocates the free trade between the two countries.
• The technological knowledge remains unchanged.
• Identical Demand Patterns and Preferences of consumers in both the countries.
• The Heckscher-Ohlin theorem can be discussed on the two main bases are, the factor
abundance (or scarcity) in terms of the Price criterion: and the factor abundance (or
scarcity) in terms of physical criterion.
THEORY OF AVAILABILITY
• This theory proposed by I.B. Kravis
• The Kravis propounded the theory that the composition of commodity of trade is
determined primarily by ‘availability’ which means an elastic supply
• There are some factors responsible for the availability has been explained by
• Kravis are as: Natural Resources, Technical Change, Product differentiations and
Government Policy
THEORY OF THE VOLUME OF TRADE
• This theory proposed by S.B Linder
• A theory that explains the volume of trade in manufactures as proportion of national
income between different pairs of trading countries.
• According to Linder the country will preferably export to those countries whose income
levels and demand patterns are similar to the exporting country. This is known as
‘Preferer nee similarity’ according to him.

51 | K I R A N . A . S
TECHNOLOGICAL GAP THEORY
• This theory proposed by M.V Posner
• It’s also called Posner’s Imitation Gap theory
• The process of technological change leads to the imitation gap which influences the
patterns of international trade.
• The imitations Gap theory explains the sequence of innovation and imitation as it affects
the pattern of trade.
• Posner proposed that the imitation gap theory has basic three components also called
imitation lag
o Foreign Reaction Lag
o Domestic Reaction Lag
o Learning Period Lag
o Demand Lag
• Posner also formulated a new concept ‘Dynamism’ which is built by the combination of
two concepts of innovation and imitation lag
• The imitation gap theory is more realistic then the traditional theories because it
analyses the effects of technology on the pattern of trade.
Assumption
• There are two countries.
• The factors endowments are similar in both the countries.
• Condition of demand is similar in both the countries.
• Both the countries have different technologies
GRAVITY MODEL
• There is a strong empirical Relationship between the size of a country’s economy and
the volume of both its imports and exports.
• The name has been put down for this model by the Newton Law of Gravitation in which
he proves that the gravitational attraction between any two objects is proportional to
the product of their masses and diminishes with distance
• The equation has been framed by the economists of which accurately and firmly period
of volume of trade between any two countries.
Tij = A X Yi X Yj/Dij
Where,
Tij - is the volume value of trade between country i and county J,
A - is the constant form
Yi - is the country’s i GDP.
Yj - is the country J’s GDP
Dij - is the distance between the two countries.
52 | K I R A N . A . S
TRADE BARRIERS
• Trade barriers unjustifiably prevent your business succeeding in exporting. You may
have different ways of describing them
• Red Tape is one of the trade barriers:
o Bureaucracy and excessive regulation, commonly known as red tape
o Red tape includes all sorts of rules, paperwork, permits, taxes, procedures or
requirements which can be crucial when setting up a company or doing business
in a new market.
• There are two types of trade barriers:
o Tariff barriers
o Non-Tariff barriers
TARIFF AND NON-TARIFF BARRIERS
• Tariff and Non-Tariff barriers are restriction imposed on movement of goods between
countries.
• It can levy on import and export
• Tariff and Non-Tariff barriers are imposed on various reasons such as:
o National security: Countries enforce tariff and Non-Tariff barriers to protect the
security of the nation. For example, defence sector in India
o Retaliation: Government of country intervenes in the trade policy in order to act
as a bargaining tool. Retaliation agreement help to countries to allow free trade
among them.
o Protecting Jobs: Government aims to protect domestic employment. Domestic
employment is affected from foreign competition as domestic industries start to
import service from abroad in order to keep up with the competition.
o Protecting Infant Industries: competition from imported goods threatens the
infant industries of a country. In order to develop and grow certain industries
government may impose heavy tariffs on imported goods to increase prices and
help the infant industries.
o Protecting customers: Government may levy a heavy tax on goods which are
against the welfare of the country and its citizens.

53 | K I R A N . A . S
TARIFF BARRIERS
• Tariff is a custom, duty or a tax imposed on products that move across borders.
• The words tariff/custom/duty are interchangeable
• It is the most common instrument used for controlling imports and exports
Types of tariff barriers:
• Import tariff/duty: It is the custom duty imposed by the importing country i.e. the tax
imposed on goods imported. It is levied to raise revenue and protect domestic
industries.
• Export tariff/duty: It is the duty imposed on goods by the exporting country on its
exports. Generally certain mineral and agricultural products are taxed.
• Transit duties: It is levied on commodities that originate in one country, cross another
and are consigned to another. Transit duties are levied by the country through which
the goods pass. It results in increased cost of products and reduction in number of
commodities traded.
• Specific duty: It is based on (specific attribute) physical characteristics of goods. It is a
fixed or specific amount of money that is levied as tax keeping in view the weight
(quantity)/measurement (volume) of the commodity.
• Ad valorem duty: These are duties that are imposed according to the value of
commodities traded between countries. It is generally a fixed percentage of the invoice
value of the goods traded.
• Compound duty: It is a combination of specific duty and ad valorem duty on a single
product. It is party based on quantity and party on the value of goods.

54 | K I R A N . A . S
NON-TARIFF BARRIERS
• These are non-tax restriction such as;
o Government regulation and policies
o Government procedures which effect the overseas trade. It can be form of quotas,
subsidies, embargo etc.
Types of Non-tariff barriers:
• Quotas: It is a numerical limit on the quantity of goods that can be imported or exported
during a specified time period. The quantity may be state in the license of the firm. If the
importer imports more than specified amount, he has to pay a penalty or fine.
• VER (Voluntary Export Restraint): It is a quota on exports fixed by the exporting country
on the request of the importing country. The exporting country fixes a quota regarding
the maximum amount of quantity that will be exported to the concerned nation.
• Subsidies: It is the payment made by the government to the domestic producer so that
they can compete against foreign goods. It can be a cash grant, subsidized input prices,
tax holiday, government equity participation etc. It helps a local firm to reduce costs and
gain control over the market.
• Administration dealings: These are regulatory controls and bureaucratic rules and
regulations which affect the flow of imports. It can be a delay at custom offices, safety
inspection, environment regulatory inspection etc.
• Local content requirement: Legal content requirement is a legal regulation which states
that a specified amount of commodity must be supplied in the domestic market by the
producer. It is used to help local labour and domestic suppliers of goods. Government
may state a;
o Labour requirement
o Input requirement
o Component required at a local level
• Currency Control: Government may impose restrictions on currency convertibility. In
order to import goods countries, have to make payment in foreign currency which is
acceptable worldwide. US dollar, European euro, Japanese Yen. The government can put
a limit on the amount of money that can be converted in foreign currency or ask a
company to apply for a license to obtain such currency.
• Embargo: It means a complete ban on certain commodities. A country may ban import
and export of certain goods in order to achieve some political or religious goals.
• Product testing and Standardization: Standards are set for health, welfare, safety,
quality, size and measurements which have to be complied with in order to enter a
foreign market. The products have to meet international quality standards. All products
must meet the quality standards of the domestic country before they are offered for
trade. Inspection is very extensive in case of electronic goods, vehicles and machinery.
55 | K I R A N . A . S
TYPES OF DUMPING
• Sporadic dumping
o Sporadic dumping occurs when an international company sells its unsold
inventories in a foreign country to get rid of them.
o Manufactures practice sporadic dumping to get rid of excess merchandise.
o Sporadic dumping is aimed at liquidating excess stocks that may arise
occasionally.
• Predatory dumping or Intermittent dumping
o Predatory dumping is selling the product in a foreign market at a loss as a strategy
of entering the market.
o While sporadic dumping is occasional, predatory dumping is permanent.
o Its purpose is to kill the competition and capture the market by inflicting heavy
losses on the competing firms.
o This is selling at a loss to gain access to a market and eliminate competition.
o After the competition is eliminated, the company becomes a monopolist.
• Persistent dumping or Long period dumping
o Persistent dumping involves consistently selling the product at lower prices in one
market than in other markets.
o The product sold at a High price in domestic markets and Low price in
international markets
o Japan sells its electronic products at high prices in Japan and sells the same
products consistently at lower prices in the USA and India.
• Reverse dumping
o Under reverse dumping the product is sold at a high price in international markets
and at a low price in the domestic market

56 | K I R A N . A . S
FOREIGN TRADE POLICY OF INDIA
• Foreign trade policy is also known as Export-Import policy or EXIM Policy.
• Duration of Foreign Trade Policy (FTP) 2015 – 2020
• The policies of export import are regulated by Director General of foreign track (DGFT)
under the act of 1992.
• Foreign trade in India comprises of all imports and exports to and from India. The
Ministry of Commerce and Industry at the level of Central Government has responsibility
to manage such operations.
• The Directorate General of Foreign Trade (DGFT) is the agency of the Ministry of
Commerce and Industry of the Government of India responsible for administering laws
regarding foreign trade and foreign investment in India.
• DGFT also known as Chief Controller of Imports & Exports till 1991
• Foreign trade accounted for 48.8% of India's GDP in 2015
• Trade policies can be of two types:
o The free trade policy
o The protective trade policy
• Niryat Bandhu scheme:
o DGFT (Director General of Foreign Trade) introduced a new “Niryat Bandhu”
scheme for International Business mentoring for young Turks in international
business enterprises.
o Under the scheme, officers of DGFT will be investing time and knowledge to
mentor the interested individuals who want to conduct the business in a legal way.
Types of foreign Investment (FDI)
FOREIGN DIRECT INVESTMENT
• Foreign direct investment (FDI) is when a foreign company or individual makes an
investment in India that involves either
o Establishing new business operations (known as green-field FDI) or
o Acquiring business assets, including controlling interests, in an already existing
Indian company. (known as brown-field FDI)
• As per the Companies Act 2013, if a foreign investor owns more than 10 % shares in a
listed company, it will be treated as FDI.
• The rationale behind the rule is that the higher equity ownership will result in substantial
control over the decision-making of the company.
• Government of India launched Make in India initiative in which policy statement on 25
sectors of FDI were released with relaxed norms on each sector

57 | K I R A N . A . S
TYPES OF FDI
• Greenfield Investments: A greenfield investment (GI) refers to a type of foreign direct
investment (FDI) where a company establishes operations in a foreign country. In a
greenfield investment, the company constructs new facilities (sales office,
manufacturing facility, etc.) cross-border from the ground up.
• Brownfield Investment: This is one strategy used in foreign-direct investment. A
brownfield (also known as "brown-field") investment is when a company or government
entity purchases or leases existing production facilities to launch a new production
activity.
• Horizontal FDI: It arises when a firm duplicates its home country-based activities at the
same value chain stage in a host country through FDI
• Vertical FDI: It takes place when a firm through FDI moves upstream or downstream in
different value chains i.e., when firms perform value-adding activities stage by stage in
a vertical fashion in a host country.
• Platform FDI: Foreign direct investment from a source country into a destination
country for the purpose of exporting to a third country.
• Inward FDI: It is when foreign companies or individuals invest in India.
• Outward FDI: It is when Indian companies or individuals invest in foreign countries
COST OF FDI TO HOME COUNTRY
• Risk from political changes
• Hindrance to domestic Investment
• Economic Non-Viability
• Expropriation
BENEFITS OF FDI TO HOME COUNTRY
• Access to market
• Access to resource
• Reduce cost of production
• It’s also likely that investors may get investment incentives, promotion, social amenities
COST OF FDI TO HOST COUNTRY
• Cultural and Political interference
• Unhealthy competition to domestic players
• Over utilization of local resources (Both natural and Human resource)
• Violation of human rights
• Threat to indigenous technology
• Threat to local products
• Adverse Effect on Balance of Payments
58 | K I R A N . A . S
BENEFITS OF FDI TO HOST COUNTRY
• Improving Balance of payment
• Providing Employment
• Sources of tax revenue
• Effect on resource transfer - Capital transfer, Management etc
• Technology transfer
• Building of economic and social infrastructure
• Strengthening of the government budget. Stimulation of national economy
TRENDS IN FDI
• There are two routes by which India gets FDI;
o Automatic route:
▪ By this route FDI is allowed without prior approval by Government or
Reserve Bank of India.
▪ Following sectors are 100% allowed FDI under automatic route;
Infrastructure, Automotive, Railways, Chemicals, Textile, Airlines
o Government route:
▪ Prior approval by government is needed via this route.
▪ The application needs to be made through Foreign Investment Facilitation
Portal, which will facilitate single window clearance of FDI application under
Approval Route.
▪ The application will be forwarded to the respective ministries which will act
on the application as per the standard operating procedure.
▪ Foreign Investment Promotion Board (FIPB) which was the responsible
agency to oversee this route was abolished on May 24, 2017.
• Trends of foreign direct investment in the service sector;
o FDI in service sector was increased by 46% in 2014–15 (Service sector includes
banking, outsourcing, research & development, courier and technology testing)
o FDI limit in insurance sector was raised from 26% to 49% in 2014
• Trends of foreign direct investment in the construction industry;
o Various initiatives introduced by the Indian government such as Make in India
helps to attract a large amount of foreign direct investment in this sector
o Its cumulative inflows from the year 2000 have been the second highest, only after
service sector.
o The rise of foreign direct investment in such sector owes it to the rising
opportunities in the power sector including power generation, distribution,
transmission and equipment.
o Foreign direct investment in the construction sector contributes 9% to the total
foreign direct investment inflows in the country
59 | K I R A N . A . S
 • 74% FDI is permitted in Pharmaceuticals sector
• The business environment in India has become investor friendly because of the
various policies formed by the government that are promising in this regard.
• The construction industry is going to have a higher reach in the country as the
Government has proposed to work under the Public Private Partnership projects in the
infrastructure projects.
• The government has also proposed some major reforms in the IT sector by making the
fundraising norms easier and simplifying the taxation rules
• Investment in financing, insurance, business sector and the real estate sector attracted
towards the tax haven countries as the rules for foreign investors were complex.
• Allowing 100% foreign direct investment in Asset Reconstruction Companies will surely
help in extending the roots of foreign investments in the country.
• The service sectors including the health, transport, tourism, communication and
education has only led to such sector becoming the topmost sectors for investments in
the country
• Share of top five investing countries in India stood at 69%
• Services sector (Financial and Non-financial) attracted the largest FDI equity flows
(20.5 per cent) Other high share sectors in top five were
o Telecom (8 per cent).
o Computer Software and Hardware (7 per cent).
o Housing and Real Estate (7 per cent)
o Construction (7 per cent).
• Automatic route has become the most used entry route for FDI investments in India
• 64 per cent of Equity FDI inflows in India came via “Automatic Route”

60 | K I R A N . A . S
INDIA’S FDI POLICY
Government of India has taken various effective steps to simplify the Foreign Direct
investment policy. The Foreign Direct Investment Policy (FDI Policy) of the Government of
India prescribes the foreign investment cap in specified industrial sectors. But in the recent
times many activities have been transferred to unrestricted sectors in which 100% Foreign
Direct investment is permitted. Broadly, the industrial sectors are categorized as:
• Unrestricted Sectors (Up to 100% foreign ownership)
• Restricted
• Prohibited
1. UNRESTRICTED SECTORS
• Mining (except Mining and mineral separation of titanium bearing minerals and ores,
its value addition and integrated activities)
• Manufacturing related commercial activities
• Information Technology related activities
• E-commerce (permitted in marketplace model and not the inventory-based model.
Also, it applies only to Business to Business e-commerce and not business to
consumer e-commerce)
2. RESTRICTED SECTORS

SECTOR ENTRY ROUTE

Up to 20% foreign ownership

Banking- Public Sector (Subject to Banking Companies Acquisition & Transfer of Government permission necessary
Undertakings)

Up to 26% foreign ownership

Broadcasting Content Service (Terrestrial Broadcasting FM Radio and Up-linking Government permission necessary
of ‘News & Current Affairs’ TV)

Channels (Other conditions specified by Ministry of Information and Broadcasting, Government permission necessary
Government of India)

Print Media (Publishing of newspaper and periodicals dealing with news and Government permission necessary
current affairs and Publication of Indian editions of foreign magazines dealing with
news and current affairs)

Up to 49% foreign ownership

Defense Industry (subject to Industrial License under the Industries (Development Automatic up to 49% and above 49%
& Regulation) Act, 1951) and other regulations) under Government route with
approval of Cabinet Committee on
Security for state-of-the-art
technology

Cable Networks (Other Multi System Operators not undertaking upgradation of Automatic route
networks towards digitalization and addressability and Local Cable Operators)

61 | K I R A N . A . S
Petroleum and Natural Gas (Petroleum refining by the Public Cabinet Committee Automatic route
Sector Undertakings (PSU), without any disinvestment or dilution of domestic
equity in the existing PSUs.)

Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline Automatic route

Insurance Automatic route

Private Security Agencies Automatic route

Telecom & related Services (including Telecom Infrastructure Providers Category- Automatic up to 49% and
I) All telecom services including Telecom Infrastructure Providers Category-I, viz. Government route beyond 49% and
Basic, Cellular, United Access Services, Unified License (Access Services), Unified up to 100%.
License, National/International Long Distance, Commercial V-Sat, Public Mobile
Radio Trunked Services

Commodity Exchange Automatic route

Single Brand product retail trading Automatic up to 49% and

Government route beyond 49%

Asset Reconstruction Company Automatic up to 49% and

Government route beyond 49%

Pension Sector Automatic route

Power Exchanges (Power Exchanges registered under the Central Electricity Automatic route
Regulatory Commission (Power Market) Regulations, 2010.)

Infrastructure Company in the Securities Market (namely, stock exchanges, Automatic route
depositories and clearing corporations, in compliance with SEBI Regulations)

Up to 51% foreign ownership

Multi Brand Retail Trading Government

Up to 74% foreign ownership

Credit Information Companies Automatic route

Civil Aviation (Ground Handling Services subject to sectoral regulations and Automatic up to 49% and
security clearance) Government route beyond 49% and
up to 74%

Airports (Existing projects) Automatic up to 74% and

Government route beyond 74%

Satellites (Establishment and operation, subject to the sectoral guidelines of Government

Department of Space/ISRO)

Banking & Finance - Private Sector Automatic up to 49% and

Government route beyond 49% and
up to 74%.

62 | K I R A N . A . S
 3. PROHIBITED SECTORS
• Lottery Business including Government/private lottery, online lotteries etc.
• Gambling and Betting including casinos etc.
• Chit funds
• Nidhi company
• Trading in Transferable Development Rights (TDRs)
• Real Estate Business or Construction of Farm Houses
• Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes
• Activities/sectors not open to private sector investment are Atomic Energy and
Railway Operations

FOREIGN PORTFOLIO INVESTMENT (FPI)

• In the Indian context, FIIs (along with sub-accounts with FIIs) and QFIs can be collectively
classified as Foreign Portfolio Investment (FPI).
• Foreign portfolio investment (FPI) refers to investing in the financial assets of a foreign
country, such as stocks or bonds available on an exchange.
• Portfolio investments can be sold off quickly and are at times seen as short-term
attempts to make money
• Equity investments where the owner holds less than 10% of a company's shares are
classified as portfolio investment. These transactions are also referred to as "portfolio
flows"
FOREIGN INSTITUTIONAL INVESTMENT (FII)
• FII is when foreign institutional investors invest in the shares of an Indian company, or
in bonds offered by an Indian company. So, if a foreign investor buys shares in Reliance,
it is an FII.
• These investors have to get a license from SEBI.
• India allows only wealthy foreign individuals or high net worth individuals (HNIs) who
have a minimum net worth of $50 million to be registered as a sub-account of a foreign
institutional investor (FII).
• Foreign institutional investors are also known as ‘Hot money’ because it is not stable in
nature.
QUALIFIED FOREIGN INVESTMENT (QFI)
• Foreign individuals cannot invest directly in India’s markets without sub-accounts with
an FII. As an alternative, QFI was introduced in the year 2002. A Qualified Foreign
Investor can invest in India without sub-account.
• However, they have to open a D-Mat account and Trade account with a depository
participant in India.

63 | K I R A N . A . S
 BASIS FOR
FDI FPI
COMPARISON

Meaning FDI refers to the investment made by When an international investor, invests
the foreign investors to obtain a in the passive holdings of an enterprise
substantial interest in the enterprise of another country, i.e. investment in
located in a different country. the financial asset, it is known as FPI.

Role of investors Active Passive

Degree of control High Very less

Term Long term Short term

Mgt of Projects Foreign direct investment is building Foreign portfolio investment is

or purchasing businesses and their purchasing securities of foreign
associated infrastructure in a foreign countries, such as stock and bonds, on
country. an exchange.

Investment in Physical assets Financial assets

Entry and exit Difficult Relatively easy.

Results in Transfer of funds, technology and Capital inflows

other resources.

Ways The investment may result in the The investment is made in the
transfers of funds, resources, securities of the company, i.e. stock,
technical know-how, strategies, etc. bonds, etc

Considered More than 10% of Shares is called Less than 10% Shares is called FPI
FDI

Implies FDI implies investment by foreign FPI / FII means investing in financial
investors directly in the productive assets, such as stocks and bonds of
assets of another nation. entities locate in another country

Market Foreign investments are allowed to Investments in listed/unlisted

take the form of investments companies other than through
(through the capital market) in listed Exchanges, are referred as FDI
companies referred as FII/FPI
investments

64 | K I R A N . A . S
BALANCE OF PAYMENT
• The balance of payments, also known as balance of international payments and
abbreviated B.O.P. or BoP, of a country is the record of all economic transactions
between the residents of the country and the rest of the world in a particular period of
time
• The balance of payments accounts keeps systematic records of all the economic
transactions (visible and non-visible) of a country with all other countries in the given
time period.
• These transactions are made by individuals, firms and government bodies
• The balance of payments provides detailed information concerning the demand and
supply of a country's currency
• Balance of payments data can be used to evaluate the performance of the country in
international economic competition
• It is prepared in a single currency, typically the domestic currency for the country
concerned
• In the BoP accounts, all the receipts from abroad are recorded as credit and all the
payments to abroad are debits.
• The accounts are maintained by double entry bookkeeping, they show the balance of
payments accounts are always balanced.
• When all components of the BoP accounts are included, they must sum to zero with no
overall surplus or deficit
• A BoP surplus (or deficit) is accompanied by an accumulation (or decumulation) of
foreign exchange reserves by the central bank
• Balance of payments deficit indicates that a country’s imports are more than its exports.
• Balance of payments surplus means the country exports more than it imports
• BOP of a country reveals its financial and economic status.
• BOP statement can be used as an indicator to determine whether the country’s currency
value is appreciating or depreciating.
• BOP statement helps the Government to decide on fiscal and trade policies.
• The BOP is reported for a quarter or a year.
• Difference between Visible Goods Export and Visible Import Good is called Balance of
Trade

65 | K I R A N . A . S
IMPORTANCE OF BOP
• It analyses the business transactions of any economy into exports and imports of goods
and services for a particular financial year
• It helps to the government can identify the areas that have the potential for export-
oriented growth and can formulate policies supporting those domestic industries.
• It helps to the government can adopt some protective measures such as higher tariff
and duties on imports so as to discourage imports of non-essential items and encourage
the domestic industries to be self-sufficient.
• The government can also use the indications from Balance of Payments to discern the
state of the economy and formulate its policies of inflation control, monetary and fiscal
policies based on that.
• The government can also use the indications from Balance of Payments to discern the
state of the economy and formulate its policies of inflation control, monetary and fiscal
policies based on that.
• The BoP statement provides a clear picture of the economic relations between different
countries.
• It is an integral aspect of international financial management.
• The BoP statement provides information pertaining to the demand and supply of the
country’s currency.
• The country’s BoP determines its potential as a constructive economic partner
• A country’s BoP indicates its position in international economic growth.
• The Balance of payment is an economic barometer, which is properly handled by the
economic analyst
• It helps to evaluate the degree of its International solvency and to determine the
appropriate foreign exchange rate of the money unit of a nation.

66 | K I R A N . A . S
COMPONANTS OF BOP
1. CURRENT ACCOUNT
• The current account measures international trade, Net income on investments,
and Direct payments.
• Current Account is also known as Balance of Trade
• It accounts for the major portion of Balance of Payments as it contains
transactions pertaining to the exchange of goods and services entailing monetary
transfers. These transactions include the following:
▪ Export of goods and import of goods in the economy
▪ Export and import of services such as consultancy services, outsourcing
contract payments, banking, insurance etc.
▪ Unilateral transfers such as remittances by workers who are abroad to their
families, gifts, donations etc.
▪ Income on investments abroad as well as payments made in connection with
foreign investments on native soil.
• A current account deficit is when a country's residents spend more on imports
than they save.
• A current account trade deficit results when a country's imports more than it
exports.
• The current account deficit continues for a long time, it will slow economic growth
• Trade balance is the largest component of the current account
• Most countries try to avoid a trade deficit, but it's a good thing for emerging
market countries
• If payments are greater than receipts, there is a deficit which is undesirable.
• This account is subdivided into;
▪ Visible Trade — trade in goods: The money earned from Indian exports of
goods
▪ Invisible Trade — trade in services: The income earned from the sale of
Indian services abroad is known as an invisible export
• The main invisibles are as follows;
▪ Government expenditure: Government expenditure on emba-ssies,
contributions to IMF or ADB and other international bodies etc. All these
create a substantial deficit
▪ Interest, profits and dividends: The earnings from loans, companies and
shares, respectively, earn substantial surpluses for the Indian economy
▪ Other financial services: The earnings of solicitors, brokers, merchants and
pen-sioners also contribute benefits to the invisible account.
▪ Transport: The earnings on passenger carrier by sea and air are two major
items.
▪ Tourism: This covers the expenditure of travelers abroad.
▪ Private transfers: Individuals transfer money to other countries

67 | K I R A N . A . S
 2. FINANCIAL ACCOUNT
• The financial account describes the change in international ownership of assets.
• The financial account measures:
▪ Changes in domestic ownership of foreign assets
▪ Foreign ownership of domestic assets.
• If foreign ownership increases more than domestic ownership does, it creates a
deficit in the financial account.
• Financial account deficit means the country is selling off its assets, like gold,
commodities, and corporate stocks, faster than it is acquiring foreign assets.
3. CAPITAL ACCOUNT
• The capital account is the smallest component of the balance of payments.
• This account includes investment and other capital movements
• Any deficit or surplus in Balance of Trade or Current Account above is transferred
to Capital Account
• The following are the transactions that get accounted for in Capital Account:
▪ Loans disbursed and received from abroad – other countries as well as
international institutions in both public and private sector.
▪ Investments made or liquidated in other countries or made by non-residents
in native country
▪ Reserves of foreign currencies maintained by central banks of respective
countries
• Capital flows may be short-term or long term.

FORMATE OF BALANCE OF PAYMENT

68 | K I R A N . A . S
REGIONAL ECONOMIC INTEGRATION
• Regional Economic Integration refers to cooperation between various countries of a
particular region in order to develop that particular area.
• It includes economic integration of various trading areas of different countries.
• Economic integration aims to reduce costs for both consumers and producers and to
increase trade between the countries involved in the agreement.
• It also known as Regional trade block, regional economic forces and Regional grouping
• Regional trade block is a type of inter – governmental agreement
• European union, NAFTA, ASEAN, SAARC are trading blocks
• The degree of integration depends upon the willingness and commitment of
independent sovereign states to share their sovereignty.
• Regional integration has been organized either via supranational institutional structures
or through intergovernmental decision-making, or a combination of both.
• Regional integration has often focused on removing barriers to free trade in the region,
increasing the free movement of people, labor, goods, and capital across national
borders, reducing the possibility of regional armed conflict etc.
• Intra-regional trade refers to trade which focuses on economic exchange primarily
between countries of the same region or economic zone
• Regional integration initiatives, according to Van Langenhoven, should fulfill at least
eight important functions:
o The strengthening of trade integration in the region
o The creation of an appropriate enabling environment for private sector
development
o The development of infrastructure programs in support of economic growth and
regional integration
o The development of strong public sector institutions and good governance;
o The reduction of social exclusion and the development of an inclusive civil society
(Social exclusion, marginalization or Social marginalization is the social
disadvantages or process of blocked from various rights, opportunities and
resources)
o Contribution to peace and security in the region
o The building of environment programs at the regional level
o The strengthening of the region’s interaction with other regions of the world
• The main objective of these agreements is to reduce trade barriers among those nations
concerned
• The number of agreements agreed under the rules of the GATT and the WTO
• The last few years have experienced huge qualitative as well as quantitative changes in
the agreements related to the Regional Integration Scheme. The top three major
changes were the following:
o Deep Integration Recognition
o Closed regionalism to open model
o Advent of trade blocks
69 | K I R A N . A . S
LEVELS OF REGIONAL ECONOMIC INTEGRATION

• Preferential Trade Area

o Preferential Trade Areas (PTAs) exist when countries within a geographical region
agree to reduce or eliminate tariff barriers on selected goods imported from other
members of the area.
o This is often the first small step towards the creation of a trading bloc.
o Agreements may be made between two countries (bi-lateral), or several countries
(multi-lateral)
o Example: The European Union has a preferential trading agreement with the
Middle East and Latin America
• Free trade area
o Free Trade Areas (FTAs) are created when two or more countries in a region agree
to reduce or eliminate barriers to trade on all goods coming from other members
o A free trade area is a group of countries who have mutually agreed to limit or
eliminate trade barriers among them.
o Independent external tariff, each country has own policies for non-member
countries
o This is the most basic form of economic cooperation. Member countries remove
all barriers to trade between themselves but are free to independently determine
trade policies with nonmember nations.
o An example is the North American Free Trade Agreement (NAFTA) and European
Free Trade Association (EFTA)

70 | K I R A N . A . S
 • Customs union
o This type provides for economic cooperation as in a free-trade zone. Barriers to
trade are removed between member countries.
o Common External tariff, set common trade policies against non-member
countries
o The primary difference from the free trade area is that members agree to treat
trade with nonmember countries in a similar manner.
o An example is the Gulf Cooperation Council (GCC), Association of Southeast Asian
Nations (ASEAN)
• Common market
o Trade barriers are removed, as are any restrictions on the movement of goods,
services, labor and capital, technology between member countries.
o Like customs unions, there is a common trade policy for trade with nonmember
nations.
o The key feature of a common market is the extension of free trade from just
tangible goods, to include all economic resources.
o An example is the Common Market for Eastern and Southern Africa (COMESA),
Common Agricultural Policy (CAP) and Common Fisheries Policy (CFP), European
economic community
• Economic union
o Remove barriers to trade, labour and capital, set a common trade policy against
non-member countries and set common economic policies.
o Use common currency
o This type is created when countries enter into an economic agreement to remove
barriers to trade and adopt common economic policies.
o An example is the European Union (EU) or Treaty of Europe
• Political Union
o A political union is a type of state which is composed of or created out of smaller
states. The process of creating such a state out of smaller states is called
unification.
o Unification of states that used to be together and are reuniting is referred to as
reunification
o A political union may also be called a legislative union or state union
o Political Union involves all features of Economic Union and also complete political
integration between member countries.
o The member countries share a common decision making and judicial body and
there is complete unity between member nations.
o The best example is United States of America which includes thirteen separate
colonies operating under Article of Confederation.
o A larger and consolidated group of nations or states that share a joint government
that is internationally acknowledged.

71 | K I R A N . A . S
 List Year Headquarter No of Remarks
Members
IMF 1945 Washington D.C. (USA) 189 (29FC) Breton wood Twin
IBRD 1944 Washington D.C. (USA) 189 Breton wood Twin (WB)
IFC 1956 Washington D.C. (USA) 184 World Bank Group
IDA 1960 Washington D.C. (USA) 173 World Bank Group
ICSID 1966 Washington D.C. (USA) 163 World Bank Group
MIGA 1988 Washington D.C. (USA) 181 World Bank Group
GATT 1947 Geneva, Switzerland 123 (23FC)
OPEC 1960 Vienna, Austria 14 (5) Iran, Iraq, Kuwait, Saudi
(Started Baghdad, Iraq) Arabia, and Venezuela
UNCTAD 1964 Geneva, Switzerland 194 List A: 100, List B: 31,
List C: 33, List D: 24,
Unassigned: 6
ASEAN 1967 Jakarta, Indonesia 10 (5FC) Indonesia, Malaysia,
(Started in Bangkok) Philippines, Singapore, and
Thailand (Founding
members), Brunei, Cambodia,
Laos, Myanmar, and Vietnam.
SAARC 1985 Kathmandu (Nepal) 8 Afghanistan, Bangladesh,
(Started in Dacca) Bhutan, India, Nepal,
Maldives, Pakistan and Sri
Lanka
AFTA 1992 Singapore 10 ASEAN Members
EU 1993 Brussels, Belgium 27 (6FC) Belgium, Germany, France,
(Started in Maastricht, Italy, Netherlands and
Netherland) Luxemburg
NAFTA 1994 Mexico City (Mexico), 3 Canada, Mexico, United
Ottawa (Canada), States
Washington D.C. (USA)
WTO 1995 Geneva, Switzerland 164
TRIPS 1995 Geneva, Switzerland 164 WTO Members
TRIMS 1995 Geneva, Switzerland 164 WTO Members
SAFTA 2004 Islamabad, Pakistan 8 SAARC Members

72 | K I R A N . A . S
REGIONAL TRADE AGREEMENTS OR REGIONAL ECONOMIC BLOC

1. EUROPEAN UNION (EU)

• The origin of the European Union goes back to the European Coal and Steel
Community (ECSC) which was formed with the then West Germany, France, Italy,
Belgium, Netherlands and Luxembourg in 1952.
• The aim of the ECSC was to eliminate import duties and quotas on coal, iron ore,
steel and scrap regarding the international trade among the member countries
• The successful functioning of ECSC stimulated the member countries to extend
this facility to all commodities by the Treaty of Rome in 1957. This Treaty gave
birth to European Economic Community
• In 1957, 6 countries are signed the “Treaty of Rome” which created the
European Economic Community and Established a custom union
• In 1992, Treaty on European Union signed in Maastricht and sent to member
states for ratification. First referendum in Denmark rejects the Treaty.
• The European union was created by the Maastricht Treaty on November 1st 1993.
• The Maastricht Treaty also known as the Treaty on European Union established
the EU.
• European Union replace the European Community
• The European Economic Community is also known as European Common Market
• The European Union was formerly called as European Economic Community and
as European Common Market
• The European Union is a unification of 27 members states united to create an
Economic and Monetary Union (EMU) and political union throughout Europe
• The European Union (EU) is supranational and intergovernmental union of 27
states in Europe.
• The six nations involved in this initial treaty were Belgium, Germany, France, Italy,
Netherlands and Luxemburg
• These 6 countries are called Founding members
• The flag of the union, which is a circle of twelve gold stars on a blue background
• The anthem of the union, which is based on the ‘Ode to Joy’
• 19 European Union member states which use the Euro currency
• 9 May, which is celebrated throughout the Union as Europe Day
• The first summit between India – European Union was held in Lisbon, Portugal on
28th June 2000.
• “Inner Six” related to European Community Market
• The Single European Act (SEA), which entered into force on July 1, 1987
• “Treaty of Nice” prepared the EU for enlargement
• “Treaty on European” established European citizenship
• The European Economic Community was created by the Treaty of Rome 1957
• The constitutional structure of European Union, as established by the Treaty on
European Union 1992, is often described as a Europe of 'variable geometry'
73 | K I R A N . A . S
 • Subsidiarity is a general principle of Union law. Where decisions or action are
taken at Union level, rather than at national, regional, or local level, this must be
justified
• Qualified majority voting operates as a system of weighted voting.
• The genesis of the European Union is in the Coal and Steel Treaty
• The Treaty on European Union (Maastricht Treaty) and the Treaty on the
Functioning of the European Union (Treaty of Rome)
• The European Union’s ‘’four freedoms’’
▪ Freedom of movement of goods
▪ Freedom of movement of services
▪ Freedom of movement of capital
▪ Freedom of movement of labour
• The European Union was set up as a three-pillar structure
▪ Comprising the three Communities (the first pillar)
▪ A Common Foreign and Security Policy (the second pillar)
▪ Co-operation on Justice and Home Affairs (the third pillar)
• Structure of European Union
▪ The European commission
▪ The council of the European union
▪ The European Parliament
▪ European council
▪ The Court of Justice of the European Union
▪ The European Central Bank
▪ The European Court of Auditors
• To summarize, decisions in the EU are taken through A mixed of ‘’supranational’’
institutions (including the European Commission) and ‘’intergovernmental’’
negotiations
• Institutions of the European Union are European Central Bank, European
Commission, European Council
• Maastricht Treaty established the politico-economic union known as European
Union
• Parliament of European Union was elected by European Union Citizens
• Parliament of European Union was elected after 5 years
• United Kingdom has a reputation for being a 'reluctant' member of the European
Union
• European Currency Unit (ECU) was the former name of the currency for Europe,
now known as the Euro
• The number twelve is traditionally the symbol of perfection, completeness and
unity (12 hours in day, 12 months in a year, etc).
• The correct order in which these treaties were signed
▪ Single European Act, Treaty on European Union, Treaty of Amsterdam, Nice
Treaty
74 | K I R A N . A . S
 • In recent history, such agreements have been signed as part of two EU policies:
▪ Stabilisation and Association Process (SAP)
▪ European Neighbourhood Policy (ENP)
• Types of EU agreements:
▪ Economic Partnership Agreements (EPAs)
▪ Free Trade Agreements (FTAs)
▪ Association Agreements (AAs)
• EU consists of three organisations
▪ The European Coal and Steel Community (ECSC),
▪ The European Economic Community (EEC)
▪ The European Atomic Energy Community (Euratom).
• Objective:
▪ Establishing an economic and a monetary union
▪ Implementing a common foreign and defence policy
▪ Strengthening of its economic and political institutions
▪ Developing relations in the spheres of’ home affairs and justice
▪ To establish European citizenship
▪ To ensure civil rights of European citizens
▪ To promote social progress
▪ To protect European security and ensure justice

75 | K I R A N . A . S
 2. ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN)
• ASEAN formed in 8 August 1967 in Bangkok
• Jakarta, Indonesia are Headquarters
• ASEAN was preceded by an organization called the Association of Southeast Asia,
commonly called ASA
• Founding countries are Indonesia, Malaysia, Philippines, Singapore and Thailand
• AFTA now comprises the ten countries of ASEAN
• The ASEAN Summit was first held in Bali, Indonesia in 1976
• The ASEAN Summit will be held twice in a year
• In January 1992 ASEAN members agreed to establish a free trade area and to cut
tariffs on non-agricultural goods over a period of 15 Years
• The Association of Southeast Asian Nations is a regional organization which was
established to promote political and social stability amid rising tensions among the
Asia-Pacific’s post-colonial states.
• The motto of ASEAN is “One Vision, One Identity, One Community”.
• 8th August is observed as ASEAN Day.
• The Kuala Lumpur declaration is related to ASEAN Economic Community
• ADMM - ASEAN Défense Ministers Meeting
• Forums
▪ ASEAN Regional Forum (ARF): Launched in 1993
▪ ASEAN Plus Three: The consultative group initiated in 1997
▪ East Asia Summit (EAS): First held in 2005
• Funds: ASEAN and India
▪ ASEAN-India Cooperation Fund
▪ ASEAN-India S&T Development Fund
▪ ASEAN-India Green Fund
• Visions constitute ASEAN 2025?
▪ ASEAN Political-Security Community Blueprint 2025
▪ ASEAN Economic Community Blueprint 2025
▪ ASEAN Socio-Cultural Community Blueprint 2025
• Free-trade agreements (FTAs) with China, Japan, South Korea, India, Australia and
New Zealand.
• 3rd largest market in the world - larger than EU and North American markets
• Objectives of ASEAN:
▪ The main objective to accelerate economic progress in Southeast Asia
▪ To accelerate the economic growth, social progress and cultural
development in the region through joint endeavours.
▪ To promote regional peace and stability through abiding respect for justice
and the rule of law.
76 | K I R A N . A . S
 ▪ To encourage active collaboration and mutual assistance on matters of
common interest in Economic, Social, Cultural, Technical, Scientific and
Administrative fields.
▪ To provide assistance to each other in terms of training and research
facilities in the educational, professional, technical and administrative areas.
▪ To work together for a greater utilisation of agriculture and industries in
order to expand the trade both locally and internationally.
▪ To study the problems of international community trade, the improvement
of their transportation and communications facilities and the raising of the
living standards of the nations.
▪ To promote Southeast Asian studies.
▪ To maintain close and positive co-operation with existing international and
regional organisations with similar aims and purposes.
▪ To integrate the economies of the region to make region more attractive for
investors
▪ To promote economic cooperation in South East Asia and ensure economic
stability in the region.
▪ It’s not an increase competition among the members countries for better
products
• The Asia-pacific economic co-operation (APEC) forum was launched in 1989
• A scheme of trade liberalisation, called as the common effective preferential tariff
(CEPT) (0 to 5 %)
• The CEPT also provides for the elimination of non-tariff barriers in five years’ time.
• Common Effective Preferential Tariff (CEPT): It means AFTA does not apply a
common external tariff on imported goods. Each ASEAN member may impose
tariffs on goods entering from outside ASEAN based on its national schedules.
However, for goods originating within ASEAN, ASEAN members are to apply a tariff
rate of 0-5 %
• The CEPT only applies to goods originating within ASEAN.
• The implementation of CEPT is expected to facilitate:
▪ Harmonisation of standards
▪ Reciprocal recognition of tests and certification procedures
▪ Removal of barriers to foreign investments
▪ Macro-economic consultations
▪ Promotion of venture capital, etc.

77 | K I R A N . A . S
 • ASEAN members have the option of excluding products from the CEPT in three
cases;
o Temporary exclusions
o Sensitive agricultural products
o General exceptions
• The exporter must obtain a “Form D” certification from its national government
attesting that the good has met the 40% requirement
• The Form D must be presented to the customs authority of the importing
government to qualify for the CEPT rate
• ASEAN Plus Three (APT) is a forum that functions as a coordinator of co-operation
between the
o Association of Southeast Asian Nations (10 Members)
o The three East Asian nations of China, South Korea, and Japan (3 Members)
• ASEAN Plus Three, in establishing the Chiang Mai Initiative
• The Asian Currency Unit (ACU) is a proposed weighted index of currencies for
ASEAN+3. The ACU was inspired by EU
• The ACU as it is proposed is a currency basket and not a real currency
• The ASEAN member states have adopted the following fundamental principles;
o Mutual respect for the independence, Sovereignty, Equality, Territorial
Integrity and National Identity of the all nations
o The right of every state to lead its national existence free from external
interference, subversion or coercion
o Non – Interference in the internal affairs of one another
o Settlement of differences or disputes by peaceful manner
o Renunciation of the threat or use of force
o Effective cooperation among themselves
• The ASEAN community is comprised of three pillars (Launch 2015)
o ASEAN Political – Security Community
o ASEAN Economic Community
o ASEAN Socio – Cultural Community
• AFTA - The ASEAN Free Trade Area
• The AFTA agreement was signed on 28 January 1992 in Singapore
• Vietnam joined in 1995, Laos and Myanmar (Burma) in 1997 and Cambodia in 1999
• The primary goals of AFTA seek to:
o Increase ASEAN's competitive edge as a production base in the world market
through the elimination, within ASEAN, of tariffs and non-tariff barriers; and
o Attract more foreign direct investment to ASEAN

78 | K I R A N . A . S
 • AFTA does not apply a common external tariff on imported goods.
• Administration of AFTA is handled by the national customs and trade authorities
in each ASEAN member
• ASEAN has attempted to improve customs co-ordination through the
implementation of the ASEAN Single window project.
• The ASEAN Single Window would allow importers to submit all information related
to the transaction to be entered electronically once. This information would then
be shared with all other ASEAN national customs authorities.
• An ASEAN Protocol on Enhanced Dispute Settlement Mechanism governs formal
dispute resolution in AFTA
• SEOM (Senior Economic Officials Meetings) to establish panel of independent
arbitrators to review the dispute.
• Panel decisions can be appealed to an appellate body formed by the ASEAN
Economic Community Council.

79 | K I R A N . A . S
 3. SOUTH ASIAN ASSOCIATION FOR REGIONAL COOPERATION (SAARC)
• Bangladeshi President Ziaur Rahman proposed the creation of a trade block
consisting of South Asian countries.
• SAARC was founded in Dhaka on 8 December 1985
• Headquarter Kathmandu
• The Member States of SAARC Afghanistan, Bangladesh, Bhutan, India, Maldives,
Nepal, Pakistan and Sri Lanka
• The agreement on SAARC preferential trading Agreement (SAPTA) was signed on
11 April 1993 to promote and Sustain mutual trade and economic cooperation
within SAARC region through the exchange of concessions
• Member States observe 8 December as the SAARC Charter Day.
• Areas of Cooperation
▪ Human Resource Development and Tourism
▪ Agriculture and Rural Development
▪ Environment, Natural Disasters and Biotechnology
▪ Economic, Trade and Finance
▪ Social Affairs
▪ Information and Poverty Alleviation
▪ Energy, Transport, Science and Technology
▪ Education, Security and Culture and Others
• The Objectives of the SAARC
▪ To promote the welfare of the people of South Asia and to improve their
quality of life.
▪ To accelerate economic growth, social progress and cultural development in
the region and to provide all individuals the opportunity to live in dignity and
to realize their full potentials.
▪ To promote and strengthen collective self-reliance among the countries of
South Asia.
▪ To contribute to mutual trust, understanding and appreciation of one
another’s problems.
▪ To promote active collaboration and mutual assistance in the economic,
social, cultural, technical and scientific fields.
▪ To strengthen cooperation with other developing countries.
▪ To strengthen cooperation among themselves in international forums on
matters of common interests; and
▪ To cooperate with international and regional organizations with similar aims
and purposes.

80 | K I R A N . A . S
 • The Declaration on South Asian Regional Cooperation was adopted by the Foreign
Ministers in 1983 in New Delhi. During the meeting, the Ministers also launched
the Integrated Programme of Action (IPA) in nine agreed areas, namely,
▪ Agriculture;
▪ Rural Development;
▪ Telecommunications;
▪ Meteorology;
▪ Health and Population Activities;
▪ Transport;
▪ Postal Services;
▪ Science and Technology;
▪ Sports, Arts and Culture.
• The SAARC member nations are guided by the following principles:
▪ Cooperation within the framework of the Association shall be based on
respect for the principles of sovereign equality, territorial integrity, political
independence, non-interference in internal affairs of other states and
mutual benefit.
▪ Such cooperation shall not be a substitute for bilateral and multilateral
cooperation but shall complement them.
▪ Such cooperation shall not be inconsistent with bilateral and multilateral
obligations.

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 4. NORTH AMERICAN FREE TRADE AREA (NAFTA)
• NAFTA was formed to reduce trading costs, increase business investment and help
North America be more competitive in the global market place
• NAFTA was formed in January 1994
• Member nations are “USMCA” United States, Mexico and Canada agreement
• USA played the dominant role in this established
• Th NAFTA secretariat is comprised of;
▪ The Canadian section located in Ottawa
▪ The Mexican section located in Mexico City
▪ The united states section located in Washington
• 6 Objectives
▪ Eliminate barriers to trade in, and facilitate the cross-border movement of,
goods and services between the territories of the parties.
▪ Promote conditions of fair competition in the free trade area.
▪ Increase substantially investment opportunities in the territories of the
parties.
▪ Provide adequate and effective protection and enforcement of intellectual
property rights in each party's territory.
▪ Create effective procedures for the implementation and application of this
agreement, for its joint administration and for the resolution of disputes.
▪ Establish a framework for further trilateral, regional and multilateral
cooperation to expand and enhance the benefits of this agreement
• The NAFTA trade bloc is one of the largest trade blocs in the world by gross
domestic product.
• All three countries ratified NAFTA in 1993 after the addition of two side
agreements;
▪ The North American Agreement on Labour Cooperation (NAALC)
▪ The North American Agreement on Environmental Cooperation (NAAEC)
• NAFTA also sought to eliminate non-tariff trade barriers and to protect the
intellectual property rights on traded products.
• Chapter 20 provides a procedure for the international resolution of disputes over
the application and interpretation of NAFTA

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INTERNATIONAL ECONOMIC INSTITUTIONS
1. INTERNATIONAL MONETARY FUND(IMF)
• An international organization headquartered in Washington
• Formed in 1944 at the Bretton Woods Conference primarily by the ideas of Harry
Dexter White and John Maynard Keynes
• It came into formal existence in 1945 with 29 member countries
• The goal of reconstructing the international payment system.
• All member countries of the IMF are not sovereign states
• It can grant loans to the central bank of a country
• The organisation's objectives stated in the Articles of Agreement are;
▪ To promote international monetary co-operation
▪ To promote International trade
▪ To promote high employment
▪ To promote exchange-rate stability
▪ To promote sustainable economic growth
▪ Making resources available to member countries in financial difficulty
• Functions of International Monetary Fund
▪ Exchange Stability
▪ Eliminating BOP Disequilibrium
▪ Determination of Par Value
▪ Stabilize Economies
▪ Credit Facilities
▪ Maintaining Balance Between Demand and Supply of Currencies
▪ Maintenance of Liquidity
▪ Technical Assistance
▪ Reducing Tariffs
▪ General Watch
• IMF funds come from two major sources;
▪ Quotas
▪ Loans
• The size of a member's quota depends on its economic and financial importance
in the world
• Gita Gopinath was appointed as Chief Economist of IMF from 1 October 2018.
• All members of the IMF are also International Bank for Reconstruction and
Development (IBRD) members and vice versa
• IMF and IBRD are called Bretton Woods twines
• Voting power in the IMF is based on a quota system.
• Quotas are based on the relative economic position of the country in the world
• Indian quota in the IMF stands at 2.79% of the total quota
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SPECIAL DRAWING RIGHT
• Special drawing rights, or SDR, are an artificial currency instrument created by the
International Monetary Fund, which uses them for internal accounting purposes
• The SDR was introduced by the IMF in 1969
• SDRs, sometimes known as ‘Paper gold’ or ‘Gold paper’
• Special Drawing Rights, often referred to as SDRs, are an interest-bearing international
reserve asset used by the International Monetary Fund (IMF).
• The SDR is based on a basket of currencies and comes with the currency code, XDR
• The SDR was created as a supplementary international reserve asset in the context of
the Bretton Woods fixed exchange rate system
• The main purpose of creating SDRs was for use as a supplementary foreign exchange
reserve.
• The value of the SDR is calculated from a weighted basket of major currencies, including
the U.S. dollar, the euro, Japanese yen, Chinese yuan, and British pound.
• A country participating in this system needed official reserves, government or central
bank holdings of gold and US Doller
• The composition of this basket of currencies is reviewed every five years wherein the
weightage of currencies sometimes gets altered
• The SDR was the equivalent of one US dollar, or 0.888671 grams of gold, and was
intended to be used in the context of the Bretton Woods fixed exchange rate system
• After the collapse of the Bretton Woods system in 1973, the SDR was redefined as a
basket of currencies.
• The two positions are the “SDR holdings” and the “SDR allocations.”
• Countries receive interest on their holdings and pay interest based on their allocations
position.
• “Crawing Peg System” means hybrid of fixed and floating exchange rate system
• Five baskets of currencies

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 INTERNATIONAL MONETARY FUND
• World Economic Outlook
• Global Financial Stability Report
WORLD BANK
• Ease of doing business
• World development report
• Global economic prospectus
RESERVE BANK OF INDIA
• Financial Stability Report
• Monetary Policy (India)
• Handbook of Statistics on Indian Economy
• Quarterly Statistics on Deposits & Credit of
• Scheduled Commercial Banks in India
• Report on Trend and Progress of Banking in India
WORLD ECONOMIC FORUM
• Inclusive growth & Development Report
• Engaging Tomorrow Consumer Report
• Environmental Performance Index
• Global Competitive Index
• Global Energy Architecture Performance Index Report
• Global Gender Gap Report
• Global Information Technology Report
• Human Capital Report
• Inclusive growth & Development report
• Outlook on Global Agenda
• The Global Risk Report
UNITED NATIONS DEVELOPMENT
• Human Development Index
• Gender Inequality Index
• World Economic Situation and Prospects United Nations Organizations (UN)
• World Happiness Report Sustainable Development Solution Network (SDSN)
• Asian Development Outlook Asian Development bank

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 2. WORLD BANK
• The World Bank (French: Banque Mondial) is an international financial institution
that provides loans and grants to the governments of poorer countries for the
purpose of pursuing capital projects
• It comprises two institutions:
▪ The International Bank for Reconstruction and Development (IBRD)
▪ The International Development Association (IDA)
• The World Bank is a component of the World Bank Group.
• The World Bank's most recent stated goal is the reduction of poverty
• The World Bank Group is an extended family of five international organizations.
The World Bank Group consists of
o The International Bank for Reconstruction and Development (IBRD),
established in 1945, which provides debt financing on the basis of sovereign
guarantees;
o the International Finance Corporation (IFC), established in 1956, which
provides various forms of financing without sovereign guarantees, primarily
to the private sector;
o the International Development Association (IDA), established in 1960, which
provides concessional financing (interest-free loans or grants), usually with
sovereign guarantees;
o the International Centre for Settlement of Investment Disputes (ICSID),
established in 1965, which works with governments to reduce investment
risk;
o the Multilateral Investment Guarantee Agency (MIGA), established in 1988,
which provides insurance against certain types of risk, including political risk,
primarily to the private sector.
• The WBG came into formal existence on 27 December 1946 following
international ratification of the Bretton Woods agreements, which emerged from
the United Nations Monetary and Financial Conference (1–22 July 1944)
• It also provided the foundation of the Osiander Committee in 1951, responsible
for the preparation and evaluation of the World Development Report.
• The term "World Bank" generally refers to just the IBRD and IDA, whereas the
term "World Bank Group" or "WBG" is used to refer to all five institutions
collectively
• The president of the World Bank is, traditionally, an American.
• The World Bank and the IMF are both based in Washington
• The first country to receive a World Bank loan was France.
• The President of the Bank is the president of the entire World Bank Group.

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 • The managing director of the International Monetary Fund having always been a
European
• The International Bank for Reconstruction and Development (IBRD) has 189
member countries
• The International Development Association (IDA) has 173 members
• Member state of IBRD should also be a member of the International Monetary
Fund (IMF)
• Voting powers at the World Bank is India (2.91%)
• The World Bank Group is run by a Board of 25 Executive Directors
• The activities of the IFC and MIGA include investment in the private sector and
providing insurance respectively
• The Board of Executive Directors consists of 21 members, 6 of them are appointed
by the six largest shareholders, namely the USA, the UK, West Germany, France,
Japan and India. The rest of the 15 members are elected by the remaining
countries
• The board of Executive Directors meets regularly once a month to carry on the
routine working of the bank.
• The president of the bank is appointed by the Board of Executive Directors.
• Chief Executive of the Bank and he is responsible for the conduct of the day-to-
day business of the bank.
• The Advisory committees appointed by the Board of Directors
• Loan committee is consulted by the bank before any loan is extended to a member
country.
• International Development Agency known as ‘soft loan window’ of the World Bank
• The world Bank normally gives Medium term Loan
• Objectives:
o To provide long-run capital to member countries for economic
reconstruction and development.
o To induce long-run capital investment for assuring Balance of Payments
(BoP) equilibrium and balanced development of international trade.
o To provide guarantee for loans granted to small and large units and other
projects of member countries.
o To ensure the implementation of development projects so as to bring about
a smooth transference from a war-time to peace economy.
o To promote capital investment in member countries by the following ways;
▪ To provide guarantee on private loans or capital investment.
▪ If private capital is not available even after providing guarantee, then
IBRD provides loans for productive activities on considerate
conditions.
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 • Functions:
o World Bank is playing main role of providing loans for development works
to member countries, especially to underdeveloped countries.
o The World Bank provides long-term loans for various development projects
of 5 to 20 years duration
• Member countries repay the share amount to the World Bank in the following
ways:
o 2% of allotted share are repaid in gold, US dollar or Special Drawing Rights
(SDR).
o Every member country is free to repay 18% of its capital share in its own
currency.
o The remaining 80% share deposited by the member country only on
demand by the World Bank.
• Organisation: Like the Fund, the Bank’s structure is organised on a three-tier
basis;
o A Board of Governors
o Executive Directors and a President.
o The Board of Governors is the supreme governing authority.
• The Bank usually performs its functions with the help of two committees, i.e.,
Advisory Committee and the Loan Committee
• The Advisory Committee is consisting of seven experts appointed by the Board of
Governors.
• Its loan provisions are:
o Project loans,
o Sectoral loans, and
o Structural adjustments loans (SALs)
• Every member country of the IMF automatically becomes the member of the
World Bank
• The forms of assistance that the World Bank provides to its members are:
Technical and financial
• Goals of the World Bank includes
o Promotion of foreign investment
o Promotion of international trade
o Facilitation of capital investment
• World Bank is a recognized member of United Nations Development Group

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 3. THE UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD)
• UNCTAD was established in 1964 as a permanent intergovernmental body.
• UNCTAD is the part of the United Nations Secretariat dealing with trade,
investment, and development issues.
• The organization's goals are to: "maximize the trade, investment and development
opportunities of developing countries and assist them in their efforts to integrate
into the world economy on an equitable basis".
• UNCTAD was established by the United Nations General Assembly in 1964 and it
reports to the UN General Assembly and United Nations Economic and Social
Council
• The primary objective of UNCTAD is to formulate policies relating to all aspects of
development including trade, aid, transport, finance and technology.
• The conference ordinarily meets once in four years; the permanent secretariat is
in Geneva
• The first UNCTAD conference took place in Geneva in 1964
• UNCTAD was closely associated with the idea of a New International Economic
Order (NIEO).
• UNCTAD has 194 member states and is headquartered in Geneva, Switzerland
• It is a member of the United Nations Development Group
• UNCTAD signed members are divided into four lists;
▪ List A (100 Members) consists mostly of countries in the African and Asia-
Pacific Groups of the UN. India is the List A
▪ List B (31 Members) consists of countries of the Western European and
Others Group.
▪ List C (33 Members) consists of countries of the Group of Latin American and
Caribbean States (GRULAC).
▪ List D (24 Members) consists of countries of the Eastern European Group.
• The division being based on United Nations Regional Groups with six members
unassigned (6 Members): Armenia, Kiribati, Nauru, South Sudan, Tajikistan,
Tuvalu.

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WORLD TRADE ORGANISATION (WTO)
• The International Trade Organization (ITO) was proposed to be set up along the World
Bank and the IMF on the recommendation of the Bretton wood conference in 1944.
• ITO was not fully setup but, in its place, GATT was established by the US, UK and some
other countries in 1947.
• The GATT was later on succeeded by WTO on 1st January 1995 under Marrakesh
agreement under the Uruguay round.
• The WTO officially commenced on 1 January 1995 under the Marrakesh Agreement,
signed by 123 nations on 15 April 1994, replacing the General Agreement on Tariffs and
Trade (GATT)
• The World Trade Organization (WTO) is an intergovernmental organization that is
concerned with the regulation of international trade between nations.
• It is the largest international economic organization in the world
• The WTO secretariat (numbering 625 of many nationalities) is headed by Director
General.
• At the heart of WTO is multilateral trading system
• Structure of WTO;
o Ministerial Conference: The topmost decision-making body WTO is Ministerial
Conference. It meets once in two years.
o General Council: The second level of WTO is General Council. It consists of
members, ambassadors and heads of delegations. It meets several times a year in
Geneva.
o Other Councils: There are many other types of council like
▪ Goods Council,
▪ Services Council,
▪ Intellectual Property Council
▪ Trade Negotiations Committee
• There is a total of 164 member countries in the WTO, with Liberia and Afghanistan being
the newest members as of 2018.
• WTO difference from GATT;
o GATT was agreement between contracting parties and was not an international
organisation dealing in global trade
o GATT deals with trade in good only while WTO covers trading of services as well
as Intellectual Property (IP)

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FUNCTIONS OF WTO
• It shall facilitate the implementation, administration and operation of the WTO trade
agreements, such as multilateral trade agreements, plurilateral trade agreements.
• It shall provide forum for negotiations among its members concerning their multilateral
trade relations.
• It shall administer the ‘Understanding on Rules and Procedures’ so as to handle trade
disputes.
• It shall monitor national trade policies.
• It shall provide technical assistance and training for members of the developing
countries.
• It shall cooperate with various international organisations like the IMF and the WB with
the aim of achieving greater coherence in global economic policy-making.
• To implement rules and provisions related to trade policy review mechanism.
• To provide a platform to member countries to decide future strategies related to trade
and tariff.
• To administer the rules and processes related to dispute settlement.
• To ensure the optimum use of world resources.
• To assist international organizations such as, IMF and IBRD for establishing coherence in
Universal Economic Policy determination.
• Administering trade agreements
• Acts as forum for trade negotiations
• Settling trade disputes
• Reviewing national trade policies
• Assisting developing countries in trade policy issues, through technical assistance and
training programmes
• Cooperating with other international organisations
• To deal with regulation of trade between participating countries
• To provide a framework for negotiations and formalization of trade agreements
• It is responsible for enforcing trade laws and agreements
• It monitors trade services and trade related aspects at intellectual property rights
• To assist international organisations such as IMF and IBRD
Principles of the trading system
• Non-discrimination
• Reciprocity
• Binding and enforceable commitments
• Transparency
• Safety values

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OBJECTIVES OF WTO
• To improve the standard of living of people in the member countries.
• To ensure full employment and broad increase in effective demand.
• To enlarge production and trade of goods.
• To increase the trade of services.
• To ensure optimum utilization of world resources.
• To protect the environment.
• To accept the concept of sustainable development
BENEFITS OF WTO
• The system helps promote peace
• Disputes are handles constructively
• Free trade cuts the cost of living
• Provides more choice of products and quality
• Trade raises incomes and stimulates economic growth
• Governments are shielded from lobbying
• The system encourages good governance
• Trade liberalization has helped in economic growth
• It provides a platform for multilateral discussions
• It has helped in reducing various tariff and non-tariff barriers
• It reviews economic policies and formulate new ones through trade reviews
WTO AGREEMENT ON AGRICULTURE
• The Agreement on Agriculture (AOA) constitutes of three pillars Domestic subsidy or
support, Market access and Export subsidies
Market Access:
• On market access, the Agreement has two basic elements:
o Tariffication of all non – tariff barriers: Convert non-tariff barriers to tariffs—a
process called Tariffication—or "bind" their tariffs.
o Market access refers to the reduction of tariff (or non-tariff) barriers to trade by
WTO members. The 1995 Agreement on Agriculture consists of tariff reductions
of:
▪ 36% average reduction - developed countries - with a minimum of 15% per-
tariff line reduction in next six years.
▪ 24% average reduction - developing countries - with a minimum of 10% per-
tariff line reduction in next ten years
o Setting up of a minimum level for import of agricultural products by member
countries
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Domestic support:
• AOA divides domestic support into two categories:
o Trade-distorting
o Non-trade-distorting (or minimally trade-distorting).
• Aggregate Measurement of Support (AMS) means quantifying the aggregate value of
domestic support or subsidy given to each category of agricultural product
• Commitment made requires 20% reduction in total AMS for developed countries over 6
years
• For developing countries, this percentage is 13% and no reduction is required for the
least developed countries.
• AMS consists of two parts;
o Product specific subsidies
o Non product specific subsidies
• In WTO terminology, subsidies in general are identified by “Boxes” which are given the
colours of traffic lights are Green, Amber, Blue Red (Agricultural agreement has no red
box)
o The amber box (Slow down, be reduced):
▪ Most directly linked to production levels.
▪ All domestic support measures considered to distort production and trade
(with some exception) fall into the amber box.
▪ The total value of these measures must be reduced
▪ There are 34 WTO members who have commitments to reduce their trade
– distorting domestic supports in the amber box (To reduce the total AMS)
o The Green box (Permitted):
▪ Detailed rules for green box payments are set out in Annex 2 of the AOA
▪ In order to qualify for the “green box”, a subsidy must not distort trade or
at the most cause minimal distortion
▪ It’s also included environmental protection and regional development
programs
▪ It is must not involve price support
o The Blue box:
▪ Production-limiting programmes that still distort trade
▪ The blue box is an exemption from the general rule that all subsidies linked
to production must be reduced or kept within defined minimal levels.
▪ It covers payments directly linked to acreage or animal numbers
▪ The blue box is a permanent provision of the agreement.
▪ Have used the blue box are EU, Iceland, Norway, Japan, Slovak Republic,
Slovenia and US

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Export subsidies:
• The 1995 Agreement on Agriculture required developed countries to reduce export
subsidies by at least 36% (by value) or by 21% (by volume) over six years.
• For developing countries, the agreement required cuts were 14% (by volume) and 24%
(by value) over ten years.
• It is also worth noting that developing countries are free to provide three of the listed
subsidies namely:
o Reduction of export marketing costs
o Internal and International Transport
o Fright charges
• The Agreement was criticised by NGOs for categorizing subsidies into;
o Trade-distorting domestic subsidies (the "amber box")
o Which have to be reduced, and non-trade-distorting subsidies (blue and green
boxes)
• Export subsidies also became a major factor in depressing or destabilising world market
prices for many agricultural commodities.

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

• GATT can be described as a set of rules, multilateral trade agreement, that came into
force, to encourage international trade and remove cross-country trade barriers.
• The General Agreement on Tariffs and Trade was a free trade agreement between 23
countries that eliminated tariffs and increased international trade
• It was the first worldwide multilateral free trade agreement.
• GATT is a legal agreement between many countries, whose overall purpose was to
promote international trade by reducing or eliminating trade barriers such as tariffs or
quotas
• GATT was signed by 23 nations in Geneva on 30 October 1947, and took effect on 1
January 1948.
• It was in effect from January 1, 1948 until January 1, 1995. It ended when it was replaced
by the more robust World Trade Organization.
• GATT held a total of nine rounds. The 1st round is Geneva
• GATT grew out of the Bretton Woods Agreement.
• In the mid-1960s, the Kennedy round added an Anti-Dumping Agreement

94 | K I R A N . A . S
 • Objectives:
o Expansion of international trade
o Increase of world production by ensuring full employment in the participating
nations
o Development and full utilisation of world resources
o Raising standard of living of the world community as a whole
• Eight GATT sessions took place (Multilateral trade rounds)
o 1st Round: Geneva Round, 1947
o 2nd Round: Annecy Round, 1949
o 3rd Round: Torquay Round, 1950-51
o 4th Round: Geneva Round, 1955-56
o 5th Round: Dillon Round, 1960-61
o 6th Round: Kennedy Round, 1963-67
o 7th Round: Tokyo Round, 1973-79
o 8th Round: Uruguay Round, 1986-94
Uruguay Round
• The Uruguay Round was the 8th round of multilateral trade negotiations within the
framework of the GATT
• From 1986 to 1994 and embracing 123 countries as "contracting parties “
• The Round led to the creation of the World Trade Organization (WTO), with GATT
remaining as an integral part of the WTO agreements.
• The Round came into effect in 1995
• Objectives:
o To reduce agricultural subsidies
o To lift restrictions on foreign investment
o To begin the process of opening trade in services like banking and insurance.
o To include the protection of intellectual property
• 7 Agreements
o Agreement on Manufactured Goods
o Agreement on Agriculture
o Agreement on Trade in Textiles and Clothing
o Agreement on Trade-related Investment Measures (TRIMs)
o Agreement on Trade-Related Intellectual Property Rights (TRIPs)
o Agreement on Trade in Services
o Agreement on Anti-dumping

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GATT had three main provisions;
• First provision, all members must be treated equally when it comes to tariffs. It excluded
the special tariffs among members of the British Commonwealth and customs unions. It
permitted tariffs if their removal would cause serious injury to domestic producers
• Second, GATT prohibited restriction on the number of imports and exports. The
exceptions were:
o When a government had a surplus of agricultural products.
o If a country needed to protect its balance of payments because its foreign
exchange reserves were low.
o Emerging market countries that needed to protect fledgling industries
• The third provision was added in 1965. Developed countries agreed to eliminate tariffs
on imports of developing countries to boost their economies. It would increase the
number of middle-class consumers throughout the world.

BASIS GATT WTO

Meaning GATT can be described as a set of rules, WTO is an international

multilateral trade agreement, that came into organization, that came into
force, to encourage international trade and existence to oversee and liberalize
remove cross-country trade barriers. trade between countries.

Institution It does not have any institutional existence, It has permanent institution
but have a small secretariat. along with a secretariat.

Participant Contracting parties Members

nations

Commitments Ad hoc and Provisional Full and Permanent

Application The rules of GATT are only for trade in The rules of WTO include services
goods. and aspects of intellectual
property along with the goods.

Agreement Its agreement is originally multilateral, but Its agreements are purely
plurilateral agreement are added to it later. multilateral.

Domestic Allowed to continue Not allowed to continue

Legislation

Dispute Slow settlement and ineffective Fast settlement and effective

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TRADE-RELATED ASPECTS OF INTELLECTUAL PROPERTY RIGHTS (TRIPS)
• TRIPS is an international legal agreement between all the member nations of the World
Trade Organization (WTO)
• It sets down minimum standards for the regulation by national governments of many
forms of intellectual property (IP) as applied to nationals of other WTO member nations
• TRIPS was negotiated at the end of the Uruguay Round of GATT
• The TRIPS agreement introduced intellectual property law into the multilateral trading
system for the first time
• The TRIPS Agreement specifically mentions that software and databases are protected
by copyright, subject to originality requirement
• TRIPs provide minimum standards in the form of common set of rules for the protection
of intellectual property globally under WTO system.
• The TRIPs agreement gives set of provisions deals with domestic procedures and
remedies for the enforcement of intellectual property rights.
• Member countries have to prepare necessary national laws to implement the TRIPs
provisions.
• TRIPs cover eight areas for IPRs legislation including patent, copyright and geographical
indications.
• The TRIPS Agreement provides for a minimum term of protection of 20 years counted
from the date of filing

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AGREEMENT ON TRADE-RELATED INVESTMENT MEASURES (TRIMs)
• TRIMs are rules that are applicable to the domestic regulations a country applies to
foreign investors, often as part of an industrial policy.
• The Agreement on TRIMs of the WTO is based on the belief that there is strong
connection between trade and investment
• Restrictive measures on investment are trade distorting. Several restrictive measures on
investment are prohibiting trade and hence are not allowable.
• According to the TRIMs provision, countries should not adopt the investment measures
which restrict and distort trade.
• TRIMs instruct that WTO members may not apply any measure that discriminates
against foreign investment
• The objective of TRIMs is to ensure fair treatment of investment in all member countries
• Prohibited terms of the TRIMs Agreement
o Local content requirement
o Trade balancing requirements
o Foreign exchange restrictions
o Export restrictions (Domestic sales requirements)
• Exceptional Provisions of the TRIMs Agreement;
o Transition period
o Exceptions for developing countries
o Equitable provisions

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MISCELLANEOUS
• “To prevent illegal and unauthorised pooling of funds by firms”, RBI launched a website
called sachet.rbi.org.in which alerts people regarding entities allowed to collect
deposits.
• The Reserve Bank today relaxed norms for issuance of rupee-denominated overseas
bonds, popularly known as masala bonds.
• The Reserve Bank of India (RBI) has tightened the rules around making the Joint
Lenders’ Forum (JLF) more effective.
• The Reserve Bank has opened a new ombudsman office in Jammu and New Delhi
• The Union Finance Ministry has given permission to the Reserve Bank of India to conduct
field trials of plastic (Polymer) currency notes of INR 10 denomination.
• The Reserve Bank of India (RBI) has opposed a move to establish a separate entity to
regulate payments and settlements as recommended by Ratan Watal Committee for
Digital Payments.
• RBI kept repo rate unchanged at 6.25 percent. It abolishes - Temporary 100 percent CRR
• RBI has released the Monetary Policy on Oct 4th 2016. 25 basis points has it cut the repo
rate
• RBI has launched a website called Paisa-Bolta-Hai, the purpose of that website: To
create awareness of counterfeit currency among users of the INR.
• Trade creation is the increased trade that occurs between member countries of trading
blocs following the formation or expansion of the trading bloc. This comes about as the
removal of trade barriers allows greater specialization according to comparative
advantage. This means that prices can fall and trade can thus expand.
• Trade diversion is the decrease in trade following the formation of a trading bloc as
trade with low cost non-trading bloc members is replaced by trade with relatively high
cost trading bloc members. Trade creation and diversion are important direct effects of
the formation of a customs union
• On the basis of the size and composition of external debt, world bank has classified India
as a moderate indebted country
• The balance of payments of a country on current account is equal to Balance of trade
plus net invisible exports
• “De – coupling” may also refer to a disconnect between a country's investment market
performance and the state of its underlying economy.
o One example can be seen with oil and natural gas prices, which typically rise and
fall together. Decoupling occurs when oil moves in one direction and natural gas
moves in the opposite direction
o In organizations, de-coupling refers to a separation of causal connection between
two organizational elements

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 • The main objective of International Monetary Fund (IMF) was to Help economically
backward countries
• Correct matching

• In balance of payment accounts, all goods exported and imported are recorded in
Visible Account
• 'World Customs Organisation' members 183 in Brussels, Belgium (1952)
• Euro- III: Pollution central scale
• BRICS - Brazil, Russia, India, China and South Africa
• "To export was good and to be encouraged but to import was bad and to the
discouraged" - Mercantilist theory
• A letter of credits means a bank agreeing to accept and pay on due date
• Important bodies of WTO
o Dispute settlement body
o Trade Policy Review Body
o Council for Trade in Goods
o GATT
• “PPP” related to IMF - Purchasing Power Parity
• The 21st member to join the G-20 (Group of 20 Countries) is Sri Lanka
• The double Taxation Avoidance convention (DTAC) part was signed between India,
Serbia and Montenegro
• International trade theory was the contribution of Bertie Ohlin
• Foreign Exchange and Foreign currencies in India are governed by FEMA
• If a country has deficit in balance of current account balance of capital account will be
Surplus
• Physical delivery of foreign exchange has to lake place in case of Spot market
• EPCG - Export promotion and credit guarantee
• IDA is known as the 'soft loan window' of world bank
• The basic objective of the world bank - To provide financial assistance
• "Happiness Index" or "Happy Planet Index" has been envolved jointly by the "New
Economic Foundation" and "Friends of Earth", Both are located in United Kingdom
• The amount of gold, reserve currencies and special drawing rights available for the
finance of international trade is known as International Liquidity
100 | K I R A N . A . S
 • IMF raised the quota and voting share of India at the 10th place among 184 members
of the organisation
• IMF: To remove unfavourable balance of payment and to provide financial assistance
• WTO: Does not allow quantitative restriction on trade.
• SAARC: Encourages trade between south Asian countries.
• Bilateral arrangements instituted to restrain the rapid growth of exports of specific
manufactured goods, are called Voluntary export restraints
• International Finance Corporation (IFC)?
o IFC make its investments in partnership with the private investors from the capital
exporting country.
o The minimum investment that the IFC will make in an enterprise is fixed at $10,000
o Rate of interest in each case would be a matter of negotiations depending on the
risk.
• Nominal tariff
o The rate associated with duties imposed on goods that do not reflect price changes
of the goods due to inflation, taxes, etc. Also called effective tariff rate.
o The nominal rate of protection is the percentage tariff imposed on a product as it
enters the country.
o For example, if a tariff of 20 percent of value is collected on clothing as it enters
the country, then the nominal rate of protection is that same 20 percent.
• The permanent facility for specific purpose of IMF
o The compensatory and contingency financing facility (CCFF) - 1963
o The buffer stock financing facility (BSFF)
o The extended Fund facility (EFF) - 1974
o Supplementary Fund facility (SFF) - 1979
• Buffer stock
o A supply of inputs held as a reserve to safeguard against unforeseen shortages or
demands.
o A reserve of a commodity that can be used to offset price fluctuations.
o A loan facility used to finance a buffer stock programme. It is normally secured on
the commodity being purchased is called buffer stock financing facility
• According to the credit tranche policy of the IMF, credit is made available in Four
tranches, each equivalent to 25% of country's quota
• Credit tranche refers to a system of releasing loan funds in phases that the International
Monetary Fund (IMF). An International Monetary Fund loan usually lasts between 18
months and three years.
• A reserve tranche is a portion of the required quota of currency each member country
must provide to the International Monetary Fund (IMF)

101 | K I R A N . A . S
 • The licence necessary to obtain foreign exchange to pay for the imports, is called Import
Licence
• Aspects of the Uruguay Round Agreement on agriculture
o Tariff binding
▪ A promise by a country not to raise its tariffs for the foreseeable future
▪ Each country has committed itself to a maximum tariff rate – called a tariff
binding – for each product category
▪ A bound tariff is one which has a "ceiling" beyond which it cannot be
increased.
o Tariffication
▪ Tariffication is an effort to convert all existing agricultural Non-tariff barriers
to trade into bind tariffs
▪ To reduce these tariffs over time
o Tariff cuts
o Reduction in subsidies and domestic support
• The Uruguay Round Agreement deal with subsidies which are
o Part I – General Provision
o Part II - Prohibited subsidies (Red Box)
o Part III - Actionable subsidies (Yellow or Amber)
o Part IV - Non-Actionable subsidies (Green)
o Part V – Countervailing duty measure
• A tariff fails to restrict imports when the demand for imports is Price inelastic
• Quotas can be used against recession induced exports into the country
• The value of SDR tends to be more stable than that of any single currency in the
"Standard basket valuation" because It is a weighted average of the exchange rates of
the five major currencies.
• Quotas of all IMF members are reviewed at intervals of not more than 5 years
• Organization of the Petroleum Exporting Countries (OPEC) is the best example of
Agreement between Oligopolists
• 11 countries have been undertaken to lend to IMF if there is need to cope with an
impairment of the International monetary system
• Each member of IMF, is assigned a quota expressed in SDR
• Every member of the IMF is required to subscribe to the fund an amount Equivalent to
its quota
• By general account of the IMF all its business in national currencies is conducted
• In independent India, the first major foreign exchange crisis occurred in the year 1956
• A currency crisis can be broadly defined as any situation in the foreign exchange markets
where a currency suddenly and/or unexpectedly loses (Decline value of currency)
substantial value relative to other currencies
102 | K I R A N . A . S
 • DFEC Stand for Duty Free Exchange Credit
• An international reserve asset created by the IMF taking into account the global need to
supplement existing reserves is called SDR
• To formulate principles and policies on international trade UNCTAD
• The international monetary system introduced by Bretton Woods rested on Principle of
gold standard
• Under the "Par value system" each member country of IMF was required to define the
value of its currency in terms of gold or the US dollar and to maintain the market value
of its currency within ± 1 % of the par value
• Where do the members allow full freedom of factor flows among themselves, in addition
to having a free-trade area common market
• Telegraphic Transfer method is the quickest method of transmitting funds from one
centre to another
• By which method, a sum can be transferred from a bank in one country to a bank in
another part of the world by cable Telegraphic Transfer
• If the forward exchange rate quoted is exactly equivalent to the spot rate at the time of
making the contract, the forward exchange rate is said to be At Par
• Total value of export earnings depends on - Volume of exports, Price paid for exports
• The domestic price of imported goods exceeds what their price would be in the absence
of protection is given by Nominal rate of protection
• Ratio of a country's export prices to its import prices is called Term of Trade
• Factor-price equalisation theorem states that under certain assumptions “Free trade
equalises not only commodity prices but also factor prices”
• GATT prescribes export subsidies as Unfair Competition
• A current account surplus represents Net foreign drain
• Exchange rates relate to demand and supply of National Money
• Marginal propensity to import is the ratio of change in imports to change in exports
• The nominal exchange rate weighed by the consumer price indeed in the two nations or
rate between two currencies is the product of the nominal exchange rate is Real
exchange rate
• Reciprocal exchange rate is a quotation of a foreign exchange rate using the opposite
convention to the market's normal standard.
• The extra return that investors require to purchase or hold on to foreign bonds to
compensate them for the additional currency and country risks involved in holding
foreign bonds is called Risk premium
• Pro trade production and consumption means - Increases in production and
consumption that lead to greater than proportionate increases in the volume of trade.

103 | K I R A N . A . S
Types of exchange rates
• Fixed Exchange Rate System
o Also called ‘Pegged Exchange Rate System’
o Fixed exchange rate system refers to a system in which exchange rate for a
currency is fixed by the government.
o Its pegged or linked to another currency or asset (Gold) to derived the value
o When value of domestic currency is tied to the value of another currency, it is
known as ‘Pegging’.
o When value of a currency is fixed in terms of some other currency or in terms of
gold, it is known as ‘Parity value’ of currency.
o Devaluation refers to reduction in price of domestic currency in terms of all
foreign currencies under fixed exchange rate regime.
• Flexible Exchange Rate System
o Also called ‘Floating Exchange Rate System’
o Flexible exchange rate system refers to a system in which exchange rate is
determined by forces of demand and supply of different currencies in the foreign
exchange market.
o There is no official (Government) intervention in the foreign exchange market.
o Depreciation refers to fall in market price of domestic currency in terms of a
foreign currency under flexible exchange rate regime.
• Managed Floating Rate System
o It is also known as ‘Dirty Floating System’
o The end of Bretton Woods’s system, many countries have adopted the method
of Managed Floating Exchange Rates.
o It is a hybrid of a fixed exchange rate and a flexible exchange rate system.
o Central bank intervenes in the foreign exchange market to restrict the fluctuations
in the exchange rate within certain limits
• Forward Exchange rate
o It stipulates the purchase or sale of a foreign currency at a predetermined rate at
some date in the future.
• Spot exchange rate
o The spot rate is the current exchange rate for any currency.
o They represent the day-to-day exchange rate and vary by a few bases points every
day.
• Dual Exchange rate
o In this type of system, the currency rate is maintained separately by two values-
one rates applicable for the foreign transactions and another for the domestic
transactions

104 | K I R A N . A . S
 • Trade deflection
o The idea of trade deflection was introduced by Bown and Crowley
o The entry of imports from the rest of the world into the low-tariff member of a
free trade area to avoid the higher tariffs of other members is called Trade
deflection
o Redirection of international trade due to the formation of a free trade area
o For example, Italy and France are part of a regional trade agreement, namely the
European Union but Turkey is not. If a Turkish car manufacturing company XYZ is
able to move its production to Italy and then export to France, then XYZ has
participated in trade deflection.
• Purchase of goods from one country with the object of selling than to another country
is called Enterpot trade
• Function of IMF
o Regulatory function
o Consultative function
o Financial function
• Multifibre Arrangements (MFA) restrict on Imports of textiles to developed economies
• In the trade between two countries, the gains are divided between nations in a way that
depends on whose
o Exports are expensive
o Imports are cheap
• The demand effect of economic development refers to the “Increase in demand for
imports”
• Opening by the importer of a credit in favour of the exporter at a bank in the exporter's
country, is a distinctive feature of Reimbursement method
• Joint venture modes of entry require higher level of risks (Closest to international
market)
• Exporting mode of entry requires lower level of risks
• Hyper globalization is a process of globalization which emphasizes the rise of the TNC
and decline of the nation state
• Cultural homogeneity refers to “Cultural uniformity”
• The process of glocalization is an amalgamation of the global and the local
• Political globalization is the process of changes in the rules and structures of global
governance
• BOP Disequilibrium
o BOP surplus or deficit indicate imbalance in the BOP, these imbalances is called
BOP disequilibrium
o When its autonomous receipt (Credits) are not equal to autonomous payment
(Debits) it’s called BOP disequilibrium
105 | K I R A N . A . S
 • Monetary measure for correction of balance of payments disequilibrium
o Monetary expansion / contraction
o Exchange control
o Devaluation
• Trade measures for correction of balance of payments disequilibrium include
o Export promotion
o Import control
• NASSDOC law controlled over merger, Amalgamation, takeover etc
• National Social Science Documentation Centre (NASSDOC), was established in 1970
• Purchase merger – When one company purchase other one
• Conglomeration merger – Merger between two companies having no common business
area
• Consolidation merger – Two companies are bought and combined under new entity
• Market extension merger – Merger between two companies that sell the same product
in different markets
• GATT applied only to trade in merchandise goods, WTO covers trade in goods, services
and trade in ideas or intellectual properties
• Balance of trade is a flow concept
• Balance of capital account is change in stock concept

106 | K I R A N . A . S
WORLD CURRENCY
• Algeria Algerian dinar
• Argentina Argentine peso
• Australia Australian dollar
• Austria European euro
• Bangladesh Bangladeshi taka
• Bhutan Bhutanese ngultrum
• Brazil Brazilian real
• Brunei Brunei dollar
• Bulgaria Bulgarian lev
• Cambodia Cambodian riel
• Canada Canadian dollar
• Netherlands United States dollar
• Chile Chilean peso
• China Chinese Yuan Renminbi
• Colombia Colombian peso
• Cuba Cuban peso
• Denmark Danish krone
• Egypt Egyptian pound
• Ethiopia Ethiopian birr
• Finland European euro
• France European euro
• Georgia Georgian lari
• Germany European euro
• Greece European euro
• Greenland Danish krone
• Hong Kong Hong Kong dollar
• Hungary Hungarian forint
• Iceland Icelandic krona
• India Indian rupee
• Indonesia Indonesian rupiah
• IMF SDR
• Iran Iranian rial
• Iraq Iraqi dinar
• Ireland European euro
• Israel Israeli new shekel
• Italy European euro
• Japan Japanese yen
• Jordan Jordanian dinar

107 | K I R A N . A . S
 • Kenya Kenyan shilling
• Laos Lao kip
• Luxembourg European euro
• Malaysia Malaysian ringgit
• Maldives Maldivian rufiyaa
• Mexico Mexican peso
• Myanmar (Burma) Myanmar kyat
• Nepal Nepalese rupee
• Netherlands European euro
• New Zealand New Zealand dollar
• Nigeria Nigerian naira
• North Korea North Korean won
• Norway Norwegian krone
• Pakistan Pakistani rupee
• Peru Peruvian sol
• Philippines Philippine peso
• Russia Russian ruble
• Saudi Arabia Saudi Arabian riyal
• Singapore Singapore dollar
• Slovakia European euro
• Slovenia European euro
• South Africa South African rand
• South Korea South Korean won
• South Sudan South Sudanese pound
• Spain European euro
• Sri Lanka Sri Lankan rupee
• Sudan Sudanese pound
• Sweden Swedish krona
• Switzerland Swiss franc
• Thailand Thai baht
• Turkey Turkish lira
• Uganda Ugandan shilling
• United Arab Emirates UAE dirham
• United Kingdom Pound sterling
• United States of America United States dollar
• Uruguay Uruguayan peso
• Vietnam Vietnamese dong
• Vatican City (Holy See) European euro
• Zimbabwe United States dollar

108 | K I R A N . A . S
 UNIT 2
ACCOUNTING AND AUDITING
❖ Modul 1: Basic accounting principles
1. Concepts
2. Postulates
❖ Modul 2: Partnership Accounts
1. Admission
2. Retirement
3. Death
4. Dissolution
5. Insolvency of partnership firms
❖ Modul 3: Corporate Accounting
1. Issue, forfeiture and reissue of shares
2. Liquidation of companies
3. Acquisition, merger, amalgamation and reconstruction of companies
❖ Modul 4: Holding company accounts
❖ Modul 5: Cost and Management Accounting
1. Marginal costing and Break-even analysis
2. Standard costing
3. Budgetary control
4. Process costing
5. Activity Based Costing (ABC)
6. Costing for decision-making
7. Life cycle costing, Target costing, Kaizen costing and JIT
❖ Modul 6: Financial Statements Analysis
1. Ratio analysis
2. Funds flow Analysis
3. Cash flow analysis
❖ Modul 7: Human Resources Accounting
1. Inflation Accounting
2. Environmental Accounting
❖ Modul 8: Indian Accounting Standards and IFRS
❖ Modul 9: Auditing
1. Independent financial audit
2. Vouching
3. Verification ad valuation of assets and liabilities
4. Audit of financial statements and audit report
5. Cost audit
• Modul 10: Recent Trends in Auditing
o Management audit
o Energy audit
o Environment audit
o Systems audit
o Safety audit
1
ACCOUNTING
• The American Institute of Certified Public Accountants (AICPA) had defined accounting
as the art of recording, classifying, and summarising in a significant manner and in terms
of money
• The American Accounting Association (AAA) defined accounting as “the process of
identifying, measuring and communicating economic information to permit informed
judgments and decisions by users of information”
• The seeds of accounting were most likely first sown in Babylonia and Egypt around 4000
B.C
• Luca Piccioli’s, a Franciscan friar (merchant class), book Summa de Arithmetica,
Geometria, Proportion at Proportionality (Review of Arithmetic and Geometric
proportions) in Venice is considered as the first book on double entry bookkeeping
• In his book, he used the present-day popular terms of accounting Debit (Dr.) and Credit
(Cr.). These were the concepts used in Italian terminology
• Debit comes from the Italian “debito” which comes from the Latin debita and debeo
which means owed to the proprietor.
• Credit comes from the Italian “credito” which comes from the Latin ‘credo’ which means
trust or belief (in the proprietor or owed by the proprietor
• Business organisations involves economic events. An economic event is known as a
happening of consequence to a business organisation which consists of transactions and
which are measurable in monetary terms
BASIC TERMS IN ACCOUNTING
• Entity: Entity means a reality that has a definite individual existence
• Transaction: A event involving some value between two or more entities
• Assets: Assets are economic resources of an enterprise that can be usefully expressed
in monetary terms. Assets are items of value used by the business in its operations
• Liabilities: Liabilities are obligations or debts that an enterprise has to pay at some time
in the future.
• Capital: Amount invested by the owner in the firm is known as capital
• Sales: Sales are total revenues from goods or services sold or provided to customers.
Sales may be cash sales or credit sales
• Revenues:
o These are the amounts of the business earned by selling its products or providing
services to customers, called sales revenue
o Other items of revenue common to many businesses are: commission, interest,
dividends, royalties, rent received, etc.
o Revenue is also called income.

2
• Expenses:
o Costs incurred by a business in the process of earning revenue are known as
expenses.
o Generally, expenses are measured by the cost of assets consumed or services used
during an accounting period.
o The usual items of expenses are: depreciation, rent, wages, salaries, interest, cost
of heater, light and water, telephone, etc.
• Expenditure:
o Spending money or incurring a liability for some benefit, service or property
received is called expenditure.
o Purchase of goods, purchase of machinery, purchase of furniture, etc. are
examples of expenditure.
o If the benefit of expenditure is exhausted within a year, it is treated as an expense
(also called revenue expenditure).
o On the other hand, the benefit of an expenditure lasts for more than a year, it is
treated as an asset (also called capital expenditure) such as purchase of
machinery, furniture, etc
• Profit:
o The excess of revenues of a period over its related expenses during an accounting
year is profit.
o Profit increases the investment of the owners.
• Gain: A profit that arises from events or transactions which are incidental to business
such as sale of fixed assets, winning a court case, appreciation in the value of an asset.
• Loss
o The excess of expenses of a period over its related revenues its termed as loss.
o It decreases in owner’s equity.
o It also refers to money or money’s worth lost (or cost incurred) without receiving
any benefit in return, e.g., cash or goods lost by theft or a fire accident, etc.
o It also includes loss on sale of fixed assets.
• Voucher: The documentary evidence in support of a transaction is known as voucher
• Drawings: Withdrawal of money and/or goods by the owner from the business for
personal use is known as drawings. Drawings reduces the investment of the owners
• Stock
o Stock (inventory) is a measure of something on hand-goods, spares and other
items in a business.
o It is called Stock in hand.
o In a trading concern, the stock on hand is the amount of goods which are lying
unsold as at the end of an accounting period is called closing stock (ending
inventory)

3
BASIC ACCOUNTING PRINCIPLES
• GAAP - Generally Accepted Accounting Principles
• In order to maintain uniformity and consistency in accounting records, certain rules or
principles have been developed which are generally accepted by the accounting
profession.
• These rules are called by different names such as principles, concepts, conventions,
postulates, assumptions and modifying principles.
• The term ‘principle’ has been defined by AICPA as ‘A general law or rule adopted or
professed as a guide to action, a settled ground or basis of conduct or practice’.
• Generally Accepted Accounting Principles (GAAP) refers to the rules or guidelines
adopted for recording and reporting of business transactions, in order to bring
uniformity in the preparation and the presentation of financial statements
• These principles are also referred as concepts and conventions
ACCOUNTING CONCEPTS
• The term concept refers to the necessary assumptions and ideas which are fundamental
to accounting practice
• The basic accounting concepts are referred to as the fundamental ideas or basic
assumptions underlying the theory and practice of financial accounting and are broad
working rules for all accounting activities and developed by the accounting profession
BUSINESS ENTITY CONCEPT
• The concept of business entity assumes that business has a distinct and separate entity
from its owners.
• It means that for the purposes of accounting, the business and its owners are to be
treated as two separate entities.
• Keeping this in view, when a person brings in some money as capital into his business,
in accounting records, it is treated as liability of the business to the owner. Here, one
separate entity (owner) is assumed to be giving money to another distinct entity
(business unit).
• Similarly, when the owner withdraws any money from the business for his personal
expenses(drawings), it is treated as reduction of the owner’s capital and consequently
a reduction in the liabilities of the business.
• The accounting records are made in the book of accounts from the point of view of the
business unit and not that of the owner.
• The personal assets and liabilities of the owner are, therefore, not considered while
recording and reporting the assets and liabilities of the business.
• Similarly, personal transactions of the owner are not recorded in the books of the
business, unless it involves inflow or outflow of business funds.
4
MONEY MEASUREMENT CONCEPT
• The concept of money measurement states that only those transactions and happenings
in an organisation which can be expressed in terms of money such as sale of goods or
payment of expenses or receipt of income, etc. are to be recorded in the book of
accounts.
• All such transactions or happenings which cannot be expressed in monetary terms, for
example, the appointment of a manager, capabilities of its human resources or creativity
of its research department or image of the organisation among people in general do not
find a place in the accounting records of a firm
• Another important aspect of the concept of money measurement is that the records of
the transactions are to be kept not in the physical units (land measuring 2 acres, office
building containing 10 rooms) but in the monetary unit (land may be saying Rs. 2 crores;
office building Rs. 1 crore)
• The money measurement assumption is not free from limitations
• We are in fact adding heterogeneous values in money measurement concept, which
cannot be clubbed together
• As the change in the value of money is not reflected in the book of accounts, the
accounting data does not reflect the true and fair view of the affairs of an enterprise
GOING CONCERN CONCEPT
• The concept of going concern assumes that a business firm would continue to carry out
its operations indefinitely, i.e. for a fairly long period of time and would not be liquidated
in the foreseeable future.
• This is an important assumption of accounting as it provides the very basis for showing
the value of assets in the balance sheet.
• An asset may be defined as a bundle of services
ACCOUNTING PERIOD CONCEPT
• Accounting period refers to the span of time at the end of which the financial statements
of an enterprise are prepared
• The financial statements are prepared at regular interval, normally after a period of one
year. This interval of time is called accounting period.
• The Companies Act 2013 and the Income Tax Act require that the income statements
should be prepared annually

5
COST CONCEPT
• The cost concept requires that all assets are recorded in the book of accounts at their
purchase price, which includes cost of acquisition, transportation, installation and
making the asset ready to use
• The concept of cost is historical in nature as it is something, which has been paid on the
date of acquisition and does not change year after year.
• An important limitation of the historical cost basis is that it does not show the true
worth of the business and may lead to hidden profits
DUAL ASPECT CONCEPT
• Dual aspect is the foundation or basic principle of accounting
• This concept states that every transaction has a dual or two-fold effect and should
therefore be recorded at two places
• In other words, at least two accounts will be involved in recording a transaction.
• It’s also called duality
• Duality include Debtors (Dr) and Creditors (Cr)
• The duality principle is commonly expressed in terms of fundamental Accounting
Equation
Assets = Liabilities + Capital
• The two-fold effect in respect of all transactions must be duly recorded in the book of
accounts of the business
• This concept forms the core of Double Entry System of accounting
REVENUE RECOGNITION (REALISATION) CONCEPT
• The concept of revenue recognition requires that the revenue for a business transaction
should be included in the accounting records only when it is realised.
• Revenue is the gross inflow of cash arising from
o The sale of goods and services by an enterprise
o Use by others of the enterprise’s resources yielding interest, royalties and
dividends
o When goods have been sold or service has been rendered.
MATCHING CONCEPT
• It states that expenses incurred in an accounting period should be matched with
revenues during that period
• It follows from this that the revenue and expenses incurred to earn these revenues must
belong to the same accounting period.

6
OBJECTIVITY CONCEPT
• The concept of objectivity requires that accounting transaction should be recorded in an
objective manner, free from the bias of accountants and others. This can be possible
when each of the transaction is supported by verifiable documents or vouchers.
• One of the reasons for the adoption of ‘Historical Cost’ as the basis of recording
accounting transaction is that adherence to the principle of objectivity is made possible
by it.
ACCOUNTING CONVENTION
• The term convention connotes customs or traditions as a guide to the preparation of
accounting statements. In practice, the same rules or guidelines have been described by
one author as a concept, by another as a postulate and still by another as convention.
FULL DISCLOSURE CONCEPT
• Information provided by financial statements are used by different groups of people
such as investors, lenders, suppliers and others in taking various financial decisions.
• Financial statements make a full, fair and adequate disclosure of all information which
is relevant for taking financial decisions.
• The principle of full disclosure requires that all material and relevant facts concerning
financial performance of an enterprise must be fully and completely disclosed in the
financial statements and their accompanying footnotes
CONSISTENCY CONCEPT
• Accounting policies and practices followed by enterprises are uniform and are consistent
over the period of time.
• Consistency eliminates personal bias and helps in achieving results that are comparable.
CONSERVATISM CONCEPT
• The concept of conservatism also called ‘prudence’
• The concept of conservatism requires that profits should not to be recorded until
realised but all losses, even those which may have a remote possibility, are to be
provided for in the books of account.
• This approach of providing for the losses but not recognising the gains until realised is
called conservatism approach.
• This may be reflecting a generally pessimist attitude adopted by the accountants
• It helps to protecting the interests of creditors against an unwanted distribution of firm’s
assets

7
MATERIALITY CONCEPT
• The concept of materiality requires that accounting should focus on material facts.
• Efforts should not be wasted in recording and presenting facts, which are immaterial in
the determination of income.
• The question that arises here is what is a material fact. The materiality of a fact depends
on its nature and the amount involved.
ACCOUNTING ASSUMPTION
• Business Entity
• Money Measurement
• Accounting Period
• Going Concern
CONCEPT OR PRINCIPLES
• Dual Aspect
• Revenue Recognition
• Historical Cost
• Matching
• Full Disclosure
• Objective Evidence / Verification
MODIFYING PRINCIPLES / CONSTRAINTS
• Cost benefit
• Materiality
• Consistency
• Industry Practice
• Timeliness
• Substance over Legal form
• Variation in Accounting Practice
Key Note:
• Essence of financial Accounting – Accounting Concept and Standards
• Essence of Management – Coordination
• Essence of Auditing – Vouching
• Essence of Marketing – Exchange

8
PARTNERSHIP ACCOUNTS
• When two or more persons join hands to set up a business and share its profits and
losses, they are said to be in partnership
• Section 4 of the Indian partnership Act 1932 defines a partnership as “the relation
between persons who have agree to share the profits of a business carried on by all or
any of them acting for all”
• A partnership is an association of two or more persons who agree to carry on business
jointly and share the profits of such a business.
• The persons who form the partnership are called “Partners” individually and a “Firm”
collectively
FEATURES OF PARTNERSHIP
• There must be two or more persons to form a partnership.
• The maximum number of persons permitted in a partnership is 10 in a banking business
and 20 in any other business
• There must be an agreement between the persons to form a partnership
• There agreement between the persons to form the partnership can be Oral or Written
(Usually Writing)
• The partners must carry on a joint business
• The partnership business must be carried on for the purpose of making profits
• The profits or losses of the partnership business must be shared by all the partners in
the agreed proportion
• The partnership business can be carried on by all the partners or by any of them acting
for all
• In the eyes of law, the partnership firm and the partners are one and the same
• The liability of the partners is unlimited.
• Each of the partners is jointly and severally liable for all the debts of the firm
• A partner acts as Agent of a firm
• P/L appropriation account is prepared for partnership firm not for partner
• Interest is paid on capital account balances not current account balance
• Partnership have limited life

9
PARTNERSHIP DEED
• Partnership deed also called “Articles of Partnership”
• When the partnership agreement is written and signed by all the partners and is duly
stamped according to the stamp Act, it is called the “Partnership Deed” and the
particulars continued in the partnership Deed are called the “Articles of Partnership”
• Partnership deed is registered in the court of law but partnership agreement is not
registered
• Partnership deed should be written, assented and signed by all partner
• Interest on capital (in deed) paid to partner from only current profit
• According to partnership Act 1932 Rules to be followed in the absence of partnership
Deed:
o The partners are entitled to share the profits or loss equally
o The partners are not entitled to interest on their capitals
o No interest is chargeable on partners drawings
o No partner is entitled to salary or any other remuneration for any extra work done
to the firm
o Every partner entitled to interest at 6% per annum on any loan granted by to the
firm
o Every partner has a right to take part in the management of the firm
o Every partner has a right to inspect and copy any books of accounts of the firm
o No person can be admitted as a partner into the firm without the consent of all
the existing partners
o Every partner must compensate the firm for any loss caused to it by fraud
o Every partner should use the partnership property for the benefit of the firm.
o He must not use the partnership property for his private purposes
o If any partner earns personal profits by using the partnership property, he must
hand over such profits to the firm
Provisions of partnership Act. 1932 in absence of Partnership deed
• Partners have equal share in the profit and loss
• Partners are not entitled for Interest on capital
• Partners are not entitled for Interest on drawings
• No entitled to get salary or remuneration
• Interest on Loan is 6% per annum
• Every partner is entitled to be indemnified
• Every partner right to take active part
• No can admit without consent of partner

10
KINDS OF PARTNERS
• Active or Working Partners: Those who contribute capital and take an active part in the
management of the partnership business are called Active or Working Partners
• Sleeping, Dormant or Financing Partners: Those who do not take an active part in the
management of the partnership business but merely contribute capital or finance for
the business are called Sleeping Partners. Their liability is the same as that of the active
partners
• Nominal partners or Partners in Name only: Those who neither contribute capital for
the business nor take an active part in the management of the business but merely lend
their names and credit to the firm are called Nominal Partners. They are not entitled to
the profits of the firm but they are liable to third parties like the other partners to an
unlimited extent
• Partners in Profits only: Generally, a partner who is entitled to share the profits of a firm
is also liable to share the losses of the firm but sometimes, a person becomes a partner
of a firm on a specific agreement with the other partners that he should be given his
share of the profits of the firm without being held liable for losses. Such a partner is
called Partner in Profits only. A partner in profits only is not entitled to take part in the
management of the partnership business but he is liable to third parties for all the debts
of the firm.
• Partners by Estoppel: If a person represents himself either by words or by conduct () to
be a partner of a firm, though he is really not a partner, he is estopped (prevented) from
denying the role which he has assumed and becomes a Partner by Estoppel. He is not a
true partner of the firm. So, he is not entitled to the profits of the firm but he is liable to
an unlimited extent to the third parties who grant credit to the firm on the strength of
that representation.
• Partners by holding out: If a person is held out or represented to the public as a partner
of a firm and if he does not deny the fact that he is a partner even after knowing that his
name is used as a partner, he becomes a partner by holding out. He is not a true partner
of the firm. So, he does not have the right to share the profits of the firm but he will be
liable to all outsiders who give credit to the firm in the belief that he is a partner.
• Minor partner: A partnership is based on a contract between two or more persons. As
a minor is not competent to enter into a contract, he cannot become a partner in a firm
but he can be admitted to the benefits of a partnership with the consent of all the
partners

11
ACCOUNTS OF PARTNERSHIP FIRM
• Partners’ contributes towards the business of the firm are called their capital
• Methods of maintaining the capital accounts:
o Fixed capital system
▪ If there are partners’ current accounts in the problem, the capital accounts
of the partners have to be maintained on the fixed capital system.
▪ Under the fixed capital system, only the capital contributed by a partner is
entered in his capital account. The other items, such as drawings, interest
on capital, interest on drawings are entered in a separate account.
▪ Under the fixed capital system, the capital account of a partner will always
show a credit balance
▪ Under the fixed capital system, there will be two balances capital account
balance and current account balance for each partner
▪ In the accounts of the partners are kept on the fixed capital system, interest
on capital account is debited and each partner current account credited
o Fluctuating or Floating capital system
▪ As partners’ capital accounts are generally maintained on the fluctuating
capital account system
▪ If there are no current accounts of the partners in the problem, then the
capital accounts of the partners have to be maintained on the fluctuating
capital system
▪ Under the fluctuating capital system all the items are entered in his capital
account
▪ Under fluctuating capital system, the capital account of a partner may
sometimes show a debit balance because of his huge drawings, losses etc.
▪ Under fluctuating capital system, there will be only one balance capital
account balance for each partner
▪ If the capital account of the partners is kept on the fluctuating capital
system, interest on capital account is debited and each partners capital
account is credited.
• Drawings account show always debit balance
• The interest of each partner’s capital should be calculated at the agreed rate on the
amount of capital contribution by him from the date of contribution till the end of the
accounting year.
• If the rate of interest on loans is not mentioned in the partnership deed, then interest
on partners loans is allowed at 6% per annum as per the partnership Act

12
HOLDING COMPANY ACCOUNTS
• As per the companies Act, a holding company is a company, which holds (directly or
indirectly) more than 50% of the nominal value of the equity share capital of another
company and thereby, secures a controlling interest in such a company.
• The other company, which is controlled by the holding company is known as the
subsidiary company
• Holding company also called parent company
• Control by a holding company on a subsidiary company can be exercised in any one of
the following ways:
o By holding directly or Indirectly, in the subsidiary company, more than half of the
shares having voting powers
o By controlling the composition of the board of directors of the subsidiary company
o By controlling a holding which controls a subsidiary company. For instance, if C
Ltd., is the subsidiary of B Ltd., and B Ltd., is the subsidiary of A Ltd., then C Ltd., is
also the subsidiary of A Ltd.
• Accounting standard 21 deals with consolidated financial statements
• Preparation of group accounts or consolidated of the financial statements of the holding
company and its subsidiary or subsidiaries is compulsory under English Law
• In India, the companies Act has not made the preparation and presentation of
consolidated financial statements compulsory on the part of the holding company
(Companies Act 1956)
• As per section 212 of the Companies Act 1956, a holding company is required to attach
to its balance sheet the following documents relating to each subsidiary:
o A copy of the balance sheet of the subsidiary
o A copy of the profit and loss account of the subsidiary
o A copy of the report of the board of directors of the subsidiary
o A copy of the auditor’s report of the subsidiary
o A statement indicating the extent of the holding companies’ interest in the
subsidiary at the end of the accounting year of the subsidiary
• Following terms used in connection with consolidation of financial statement:
o Wholly – owned subsidiary company: When all the shares of a subsidiary
company are held or owned by the holding company, the subsidiary company is
known as a wholly – owned subsidiary company
o Party – owned subsidiary company: When a majority of shares but not all the
shares of a subsidiary company are owned by the holding company, the subsidiary
company is known as a partly – owned subsidiary company
o Minority Interest or Outsider’s Interest: Minority interest refers to the claim or
interest of the minority or outside shareholders in the net assets of the subsidiary
company

13
o Minority shareholders or Outside shareholder: Who hold the less than 50%
(Minority) shares of the subsidiary company or the outsiders who hold the
minority of the shares of the subsidiary company are called minority shareholders
or Outsider shareholders
o Majority interest or holding company interest: The interest of the holding
company in the net asset of the subsidiary company is called the majority interest.
o Pre – acquisition period: Pre – acquisition period is the period which falls on or
before the date on which the shares of the subsidiary company are acquired by
the holding company
o Post – acquisition period: Post – acquisition period is the period which falls after
the date on which the shares of the subsidiary company are acquired by the
holding company
o Revaluation Profit/Loss of the subsidiary company: The profit/Loss resulting from
the revaluation of the assets and the liabilities of the subsidiary company, whether
before or after the date of acquisition of the shares of the subsidiary company by
the holding company
o Cost of control or Goodwill: The excess of the price paid by the holding company
for the equity shares of the subsidiary company over the paid-up value of those
share is generally considered as the cost of control or payment for the goodwill.
Cost of control or goodwill also include the excess of the price paid by the
holding company for the preference share and debenture of the subsidiary
company over their paid-up value
o Inter – company debts or Mutual Indebtedness: Transaction do take place
between a holding company and its subsidiary. On account of such transactions
one company may be indebted to another company, either the holding company
may be indebted to the subsidiary company or vice versa. Such are called Inter –
company debt or mutual indebtedness or inter – company balances.
o Contingent liability: Contingent liabilities whose occurrence is uncertain. The
contingent liabilities are divided into two categories:
▪ External contingent liabilities: It refers to contingent liabilities due either
from the holding company or the subsidiary company or from both
▪ Internal contingent liabilities: It refers to inter contingent liabilities or due
from the holding company to the subsidiary company or vice versa.
o In – transit items:
▪ In – transit items refer to cash or goods sent by one company to the other
but not received by the other company by the end of financial year.
▪ Usually, there are two in – transit items
• Goods in transit
• Cash in transit
14
COST AND MANAGEMENT ACCOUNTING
• Cost can be defined as the expenditure (actual or notional) incurred on or attributable
to a given thing
• Costing may be defined as ‘the technique and process of ascertaining costs’
• Cost Accounting primarily deals with collection, analysis of relevant of cost data for
interpretation and presentation for various problems of management. Cost accounting
accounts for the cost of products, service or an operation.
• Cost Accountancy is a broader term and is defined as, ‘the application of costing and
cost accounting principles, methods and techniques to the science and art and practice
of cost control and the ascertainment of profitability as well as presentation of
information for the purpose of managerial decision making

Basis Cost center Profit center

Cost center is a subunit/department Profit center is a subunit of a

Meaning of a company which takes care of business which is responsible for
the costs. profits.

Responsible for Cost control and cost reduction. Maximizing revenues and profits.

Area of influence Narrow. Wide.

Complex since it focuses on

Type of work Simple since it only focuses on costs.
revenues, profits, and costs.

Doesn’t directly generate/maximize Directly generate and maximize

Generation of profits
profits. profits.

Approach Long term. Short term & long term both.

Cost centers is directly responsible Profit centers are backed by cost

The health of business to ensure good health of the center to ensure the perpetuity of
business in the long run. business.

Computation Standard Costs – Actual Costs Budgeted Costs – Actual Costs

Used for Internal (mainly) Internal & external (both)

Example Customer Service Facility Sales division

15
COSTING SYSTEMS
• Historical Costing: In this system, costs are ascertained only after they are incurred and
that is why it is called as historical costing system
• Absorption Costing: In this type of costing system, costs are absorbed in the product
units irrespective of their nature
• Marginal Costing: In Marginal Costing, only variable costs are charged to the products
and fixed costs are written off to the Costing Profit and Loss A/c.
• Uniform Costing: This is not a distinct method of costing but is the adoption of identical
costing principles and procedures by several units of the same industry or by several
undertakings by mutual agreement
METHODS OF COSTING
• Job Costing: This costing method is used in fi rms which work on the basis of job work.
There are some manufacturing units which undertake job work and are called as job
order units.
• Batch Costing: This method of costing is used in those fi rms where production is made
on continuous basis. Firms producing consumer goods like television, air-conditioners,
washing machines etc use batch costing
• Process Costing: Some of the products like sugar, chemicals etc involve continuous
production process and hence process costing method is used to work out the cost of
production
• Operating Costing: This type of costing method is used in service sector to work out the
cost of services offered to the consumers. For example, operating costing method is
used in hospitals, power generating units, transportation sector etc
• Contract Costing: This method of costing is used in construction industry to work out
the cost of contract undertaken. For example, cost of constructing a bridge, commercial
complex, residential complex, highways etc
• Note: Contract costing is actually similar to job costing, the only difference being that in
contract costing, one construction job may take several months or even years before
they are complete while in job costing, each job may be of a short duration.
• In contract costing, as each contract may take a long period for completion

16
CLASSIFICATION OF COSTS
• Costs can be classified according to the elements:
o Material
o Labour
o Expenses
• Classification according to nature:
o Direct Cost:
▪ Direct cost is the material which is identifiable with the product.
▪ The total of direct expenses is known as ‘Prime Cost’
▪ Direct Material, Direct Labour and Direct Expenses
o Indirect Cost:
▪ Indirect cost cannot be identified with the product.
▪ The total of all indirect expenses is known as ‘Overheads’.
▪ Indirect Material, Indirect Labour and Indirect Expenses
• Classification according to behaviour:
o Fixed Cost:
▪ Some costs remain fixed irrespective of changes in the production volume.
▪ The feature of these costs is that the total costs remain same
▪ While per unit fixed cost is always variable
o Variable Cost:
▪ They change according to the volume of production.
▪ The variable cost is that per unit variable cost remains same
▪ While the total variable costs will vary
o Semi Variable:
▪ Certain costs are partly fixed and partly variable
▪ These costs are neither totally fixed nor totally variable
▪ These costs are also called as stepped costs.
• Classification according to functions:
o Production Costs: All costs incurred for production of goods are known as
production costs.
o Administrative Costs: Costs incurred for administration are known as
administrative costs.
o Selling and Distribution Costs: All costs incurred for procuring an order are called
as selling costs while all costs incurred for execution of order are distribution costs
o Research and Development Costs: Not include Marketing research

17
• Classification according to time:
o Historical Costs:
▪ These are the costs which are incurred in the past, i.e. in the past year, past
month or even in the last week or yesterday.
▪ It becomes a post-mortem analysis of what has happened in the past
o Predetermined Cost:
▪ These costs relating to the product are computed in advance of production,
on the basis of a specification of all the factors affecting cost and cost data.
▪ Predetermined costs may be either standard or estimated.
• Classification of costs for Management decision making:
o Marginal Cost:
▪ Marginal cost is the change in the aggregate costs due to change in the
volume of output by one unit
▪ Marginal cost is also termed as variable cost
▪ Per unit marginal cost is always same
o Differential Costs:
▪ Differential costs are also known as incremental cost
▪ This cost is the difference in total cost that will arise from the selection of
one alternative to the other.
▪ In other words, it is an added cost of a change in the level of activity
o Opportunity Costs: Opportunity cost of goods or services is measured in terms of
revenue
o Relevant Cost
▪ The relevant cost is a cost which is relevant in various decisions of
management.
▪ In other words, costs which are going to be affected matter the most and
these costs are called as relevant costs
▪ Relevant cost is a future cost which is different for different alternatives.
o Replacement Cost:
▪ This cost is the cost at which existing items of material or fixed assets can be
replaced.
▪ This is the cost of replacing existing assets at present or at a future date.
o Abnormal Costs:
▪ It is an unusual or a typical cost whose occurrence is usually not regular and
is unexpected
▪ They are not taken into consideration while computing cost of production
or for decision making.
o Controllable Costs:
▪ Controllable costs are those which can be controlled or influenced by a
conscious management action
18
 o Shutdown Cost:
▪ These costs are the costs which are incurred if the operations are shut down
and they will disappear if the operations are continued
▪ Example: Construction of sheds for storing exposed property.
o Capacity Cost:
▪ These costs are normally fixed costs.
▪ The cost incurred by a company for providing production, administration
and selling and distribution capabilities in order to perform various
functions.
▪ These costs are in the nature of long-term costs
▪ Capacity costs include the costs of plant, machinery and building for
production, warehouses and Vehicles etc
o Urgent Costs:
▪ These costs are those which must be incurred in order to continue
operations of the fi rm.
▪ For example, cost of material and labour must be incurred if production is
to take place
THE STEPS IN PURCHASE PROCEDURE
• Purchase Requisition
• Purchase Order
• Receiving Material
• Approval of Invoice
• Making the Payment
SCRAP: Scrap is a residual material resulting from a manufacturing process. It has a recovery
value and is measurable.
• Legitimate Scrap: This is predetermined or anticipated in advance due to experience in
manufacturing operations.
• Administrative Scrap: This results from administrative decisions, e.g. change in design
of a product or discontinuation of existing product lines.
• Defective Scrap: This results from poor quality of raw material, negligent handling of
material etc.
• Defectives: The defectives are part of production units which do not confirm to the
standards of quality but can be rectified with additional application of materials, labour
and/or processing

19
SPOILAGE
• Spoilage is the production that fails to meet quality or dimensional requirements and so
much damaged in manufacturing operations that they are not capable of rectification
and hence has to withdraw and sold off without further processing.
• The cost of normal spoilage is spread over to the good production by charging either to
the specific production order or to the product overheads.
• The cost of abnormal spoilage is charged to the Costing Profit and Loss Account.
ECONOMIC ORDER QUANTITY

LABOR TURNOVER
• Labor turnover, which is also called as ‘attrition’ is a major problem in the modern times.
• Labor turnover can be defined as, a change in the labour force as compared to the total
labour force
• If labour turnover is reduced to zero, it will indicate that the employees do not have any
opportunity outside and hence they are surviving. Therefore, some degree of labour
turnover is always desirable
• Measurement of Labor Turnover
o Additions Method: Number of employees added during a particular period is
taken into consideration for computing the labour turnover
o Separations Method: Number of employees left during the period is taken into
consideration.
o Replacement Method: In this method neither the additions nor the separations
are taken into consideration.
o Flux Method: Under this method labour turnover is computed by taking into
consideration the additions as well as separations. The turnover can also be
computed by taking replacements and separations also.

20
METHODS OF TIME KEEPING
• Time Recording Clocks or Clock Cards: This is mechanized method of time recording.
Each worker punches the card given to him when he comes in and goes out. The time
and date are automatically recorded in the card.
• Disc Method: This is one of the older methods of recording time. A disc, which bears the
identification number of each worker, is given to each one. When the worker comes in,
he picks up his disc from the tray kept near the gate of the factory and drops in the box
or hooks it on a board against his number. Same procedure is followed at the time of
leaving the factory.
• Attendance Records: This is the simplest and the oldest method of marking attendance
of workers. In this method, every worker sign in an attendance register against his name
TIME BOOKING METHODS
• Daily or Weekly Time Sheet
• Job Ticket
• Labor Cost Card
• Time and Job Card
DIFFERENCE BETWEEN MERIT RATING AND JOB EVALUATION
• Job evaluation is the assessment of the relative worth of jobs within a business
enterprise and merit rating is the assessment of the employers with respect to a job.
• Job evaluation helps in establishing a rational wage and salary structure. On the other
hand, merit rating helps in fixing fair wages for each worker in terms of his competence
and performance.
• Job evaluation brings uniformity in wages and salaries while merit rating aims at
providing a fair rate of pay for different workers on the basis of their performance.
METHODS OF WAGES PAYMENT
• Time Rate System
o At ordinary levels: Rate of payment of wages per hour is fixed and payment is
made accordingly on the basis of time worked irrespective of the output produced
o At high wage levels: Workers are paid at time rate but the rate is much higher
than that is normally paid in the industry or area. In this method, the workers are
paid according to the time taken and overtime is not normally allowed.
o Graduated time rate: Under this method payment is made at time rate, which
varies according to personal qualities of the workers.

21
• Piece Rate Method/ Payment by results
o Straight Piece Rate: In this method, rate per unit is fixed and the worker is paid
according to this rate.
o Differential Piece Rates: Under these methods, the rate per standard per hour of
production is increased as the output level rises. The major systems of differential
piece rate system: Taylor, Merrick, Gantt Task and Bonus
o Taylor’s Differential Piece Rate System
▪ According to him, there are only two classes of workers, efficient and
inefficient
▪ If the workers are efficient, they should be paid @ 120% of the normal piece
rate
▪ If they are inefficient, they should be paid @ 80% of the normal piece rate
o Merrick Differential Piece Rate System: Merrick’s system is modification of
Taylor’s system and is comparatively less harsh on the workers

o Gantt Task Bonus Plan: In this method, there is a combination of time rate,
bonus and piece rate plan.

• The individual bonus schemes.

o Halsey Premium Plan
▪ This plan was introduced by F.A. Halsey
▪ In this plan, bonus is paid on the basis of time saved
▪ Standard time is fixed for a job and if the actual time taken is less than the
same, the worker becomes eligible for bonus.
▪ However, bonus is paid equal to wages of 50% of the time saved
▪ Total Earnings = H x R + 50% [S – H] R Where, H = Hours worked, R = Rate
per hour, S = Standard time

22
 o Halsey-Weir Premium Plan

o Rowan Plan
▪ This premium bonus plan was introduced by Mr. James Rowan.
▪ Bonus hours are calculated as the proportion of the time taken which the
time saved bears to the time allowed and they are paid for at time rate.
▪ Total Earnings = H x R + [S – H]/S x H x R Where H = Hours worked, R = Rate
per hour, S = Standard time
o Barth Variable Sharing Plan
▪ Total Earnings = Rate per hour x / Standard hours x Actual hours worked
• Group Bonus Plan
o Budgeted Expenses Bonus
o Cost Efficiency Bonus
o Priestman System
▪ If the actual production exceeds the standard, the workers are paid
additional wages equal to the percentage in output over standard.
▪ Obviously, no bonus is payable if actual production does not exceed the
standard production.
▪ This method is mainly used in foundries
o Towne Profit Sharing Plan
▪ In this method standards are set for costs [mainly labour cost] and the
actual cost is compared with the standards.
▪ If there is a saving in the costs, the saving is shared by workers and
supervisory staff in agreed proportion.
o Waste Reduction Bonus
▪ This system of bonus is based on savings in the material cost.
▪ If there is a saving in the material cost, the workers share the same in the
agreed proportion.
o Rucker Plan
▪ The amount of bonus is linked with ‘value added’ in this system.
▪ The ‘value added’ is obtained by deducting the cost of material and services
from sales value
o Profit Sharing
▪ In this system, the profits of the organization are shared by workers in
agreed proportion.
▪ The Payment of Bonus Act in India makes it mandatory to pay minimum
bonus of 8.33% of salary & Maximum bonus of 20% of salary to the workers.
23
THE IMPORTANT STEPS INVOLVED IN OVERHEAD ACCOUNTING
• Collection of overheads
• Classification of overheads
• Codification of overheads
• Departmentalization of overheads
• Allocation of overheads
• Apportionment of overheads
• Reapportionment of overheads
o Non-Reciprocal Methods
▪ Services Rendered
▪ Ability to Pay
▪ Survey or analysis Method
o Reciprocal Method
▪ Repeated Distribution Method
▪ Simultaneous Equation Method
• Absorption of Overheads

24
MARGINAL COSTING
• This technique of costing is also known as “Variable Costing”, “Differential Costing” or
“Out-of-pocket” costing
• Costs are separated into the fixed and variable elements and semi-variable costs are also
differentiated like wise.
• Marginal Cost is a variable cost of one unit of a product or a service i.e. a cost which
would be avoided if that unit was not produced.
• Only the variable costs are taken into account for computing the value of stocks of work-
in-progress and finished products.
• Fixed costs are charged off to revenue wholly during the period
• It combines the techniques of cost recording and cost reporting.
• Profitability of departments or products is determined in terms of marginal contribution.
• Equation: Sales – Variable Cost = Fixed Cost + Profit or [S – V = F +P]
BREAK EVEN POINT (BEP)
• Break-Even Analysis/Cost-Volume Profit Analysis
• B.E.P. is a level where total revenue is equal to total cost
• “The study of the effects on future profit of changes in fixed cost, variable cost, sales
price, quantity and mix”
• Cost-volume-profit analysis is useful in setting up flexible budgets
• Methods for determining Break Even Points
o Algebraic methods:
▪ Contribution Margin Approach
▪ Equation technique
o Graphic presentation:
▪ Break-even chart
▪ Profit volume chart
• The break-even chart means “a chart which shows profit or loss at various levels of
activity, the level at which neither profit nor loss is shown being termed as the break-
even point”.
• On the X-axis of the graph is plotted the volume of productions or the quantities of sales
• On the Y-axis (vertical line) costs and sales revenues are represented
• At break-even point, the contribution will be equal to fixed costs
• Excess of budgeted revenues over the break-even revenue is called Margin of Safety
• Break-even analysis is the categorization of costs into variable and fixed elements and
their relationship with sales and profits.
• BEP (%) + Margin of Safety (%) = 100%
• Variable Cost ratio (%) + P/V Ratio (%) = 100%

25
STANDARD COSTING
• Standard costs are the scientifically pre-determined costs of manufacturing a single unit
or a number of units of product or of rendering a service during a specified future period
• The Chartered Institute of Management Accountants, London, defines standard cost as
“a standard expressed in money”
• Standard costing is a technique which uses standards for costs and revenues for the
purpose of control through variance analysis.
• It is a Control technique
• Valuation, planning, controlling is the main function of standard costing system
• Variances is the difference between the actuals and the standards.
• Variance is the difference between planned, budgeted, or standard cost and actual cost;
and similarly, for revenue
• As each element of cost is analysed into two broad groups. It is known as “Two- way
Analysis”.
• Each variance has to be analysed as Incurring variance and Recovery variance
• Variance can divide into two part: Variance related to cost & Variance related to sales
o Material cost variance: Material Price variance and Material usage variance
o Labour cost variance: Labor rate variance and Labour time variance
o Overhead cost variance: Overhead expenditure variance and Volume variance
BUDGETARY CONTROL
• A budget is a precise statement of the financial and quantitative implications of the
course of action that management has decided to follow in the immediate next period
of time
• The budget is a blue-print of the projected plan of action expressed in quantitative terms
and for a specified period of time.
• Budgeting is the complete process of designing, implementing and operating budgets
• Budgeting is the art of planning; budgetary control is the act of adhering to the plan.
• Budgetary control involves continuous comparison of actual results with the budgets
and taking appropriate remedial action promptly
• "50/20/30 budget rule"
o Given by Senator Elizabeth Warren
o This budget rule is an intuitive and simple plan to help people reach their financial
goals
o The basic rule is to divide up after-tax income and allocate it to spend
o 50% on needs, 30% on wants and socking away 20% to savings

26
INSTALLATION OF BUDGETARY CONTROL SYSTEM
• Organisation Chart
o An organizational chart, also called organigram or organogram
o It is a diagram that shows the structure of an organization and the relationships
and relative ranks of its parts and positions/jobs
• Budget Centre
o A part of an organisation for which a separate budget is prepared
o A budget centre is a unit in an organization whose managers are responsible for
all of the unit's associated costs and for ensuring adherence to its budgets.
• Budget Manual
o A budget manual is a set of rules and instructions used by large organizations to
prepare their budgets and related reports
o Budget manual is a small booklet that contains the details relating to budgeting
organization and procedure.
• Budget Controller
o A budget controller is a financial expert who provides leadership in areas of
budgeting and financial planning
o The Budget Controller does not control; he is staff man; he advises but does not
issue instructions.
• Budget Committee
o The budget committee is a group of representatives of various functions in an
organisation
o The budget manual should specify the responsibilities and duties of the budget
committee
• Budget Period
o It refers to the period of time covered by a budget
o “The period for which a budget is prepared and used, which may then be sub-
divided into control periods”
• Budget Key Factor
o Budget key factor or principal budget factor
o “A factor which will limit the activities of an undertaking and which is taken into
account in preparing budgets”.
• Budget Reports
o A budget report is an internal report used by management to compare the
estimated, budgeted projections with the actual performance number achieved
during a period.

27
• Functional budget
o This is a budget that relates to any of the functions of an enterprise.
o Functional budgets are subsidiary to the master budget.
o Examples include sales budget, production budget, purchases budget and cash
budget.
• Master budget
o A summary budget becomes master budget.
o This is the overall quantification of the budgeting plan of an organisation.
o It is a consolidation of all the functional budgets into one overall budget but for
the organisation as a whole
o It is the summary budget as approved and accepted by management.
o It comprises the functional budget summaries as in the form of budgeted profit
and loss account and budgeted balance sheet.
o It is the summary budget as approved and accepted by management.

28
• Fixed Budget
o A fixed budget is a budget designed to remain unchanged irrespective of the level
of activity actually attained
o A fixed budget is prepared for single level of activity.
o Fixed budget does not change when production level changes.
o Fixed budget is rarely prepared and used. The reason is that the actual output is
differing from the budgeted output
o Fixed budgets can be established only for a small period of time
• Flexible budget
o A budget, prepared for different levels of activities is called flexible budgeting.
o The flexible budget is otherwise called as variable budget, dynamic budget, sliding
scale budget, step budget, expenses formula budget and expenses control budget.
o A flexible budget is prepared according to the relevant range of production
o More accurate budget
o A flexible budget brings co-ordination among various departments.
o It is a budget which by recognising the difference between fixed, semi-fixed and
variable cost is designed to change in relation
o They provide a tailor-made budget for a particular volume
o Flexible budgets may be prepared in the following method:
▪ Tabular method or multi-activity method
▪ Formula method or ratio method and
▪ Graphic method
• Basic Budget
o Basic budget has been defined as a budget which is prepared for use unaltered
over a long period of time.
o This does not take into consideration current conditions and can be attainable
under standard conditions.
• Current Budget
o A current budget can be defined as a budget which is related to the current
conditions and is prepared for use over a short period of time.
o This budget is more useful than basic budget, as the target it lays down will be
corrected to current conditions.
• Rolling budgets
o A rolling budget (continuous) is a budget that is continuously updated by adding a
period when the earlier budget period has lapsed or expired.
• Incremental budget
o This is a budget based on the previous year activity which is then adjusted for
volume and price effects.
o It is concerned mainly with the increments in costs and revenue of coming period

29
 • Zero based budgeting
o The ZBB was developed by Peter A. Pyhrr
o ZBB is a method of budgeting in which all expenses must be justified and
approved for each new period
o A budget is prepared by taking previous year budget as base.
o It is highly useful to non-profit or service organizations
o It does not carry any inefficiency and forward the same to next year.
o It promotes operational efficiency
o It is not based on incremental approach.
o Zero base budgeting is a revolutionary concept of planning
o The process of zero-based budgeting starts from a "zero base"
o May be better termed as “De nova budgeting” or budgeting from the beginning
without any reference to any base-past budgets and actual happening
• Performance budgeting involves evaluation of performance of an organization in the
context of both specific as well as overall objectives of the organization
• A program budget is a budget designed for a specific activity or program. This budget
includes only revenue and expenses for a specific program.
PROCESS COSTING
• Process costing is used when there is mass production of similar products
• This cost involves continuous production industry
• Process costing is an accounting methodology that traces and accumulates direct costs,
and allocates indirect costs of a manufacturing process
• Example, Sugar, Cement, Chemical industry
• Process costing is a type of operation costing
• CIMA defines process costing as "The costing method applicable where goods or services
result from a sequence of continuous or repetitive operations or processes”
• Process costing is suitable for industries producing homogeneous products and where
production is a continuous flow
• The costs associated with individual units of output cannot be differentiated from each
other
• In other words, the cost of each product produced is assumed to be the same as the cost
of every other product.
• Process costing is the only reasonable approach to determining product costs
• Types of Process Costing
o Weighted average costs
o Standard costs
o FIFO

30
ACTIVITY BASED COSTING (ABC)
• “The collection of financial and operation performance information tracing the
significant activities of the firm to product Costs”.
• Activity-based costing is based on the concept that products consume activities and
activities consume resources.
• Activity-based costing (ABC) is a two-stage product costing method assign the costs to
activities and then allocates
• Activities basically fall into four different categories, known as the manufacturing cost
hierarchy. These categories were first identified by Cooper
o Unit level activities
o Batch level activities
o Product level activities
o Facility Level Activities
• Activity-based costing is more expensive to implement than traditional costing
• ABC improves control over overhead costs.
• In an ABC each cost pool has its own predetermined overhead rate So, ABC uses multiple
activity rates
• It is the inventory management techniques that divide inventory into three categories
based on the value and volume of the inventories;
o 10% of the inventory’s item contributes to 70% of value of consumption and this
category is known as A category.
o About 20% of the inventory item contributes about 20% of value of consumption
and this category is called category B and
o 70% of inventory item contributes only 10% of value of consumption and this
category is called C category.

31
INVENTORY MANAGEMENT TECHNIQUES

• Stock Level
o The business concern must maintain optimum level of stock to smooth running of
the business process.
o Different level of stock can be determined based on the volume of the stock.
o Minimum Level:
▪ The business concern must maintain minimum level of stock at all times.
▪ If the stocks are less than the minimum level, then the work will stop due to
shortage of material.
o Maximum Level
▪ It is the maximum limit of the quantity of inventories, the business concern
must maintain.
▪ If the quantity exceeds maximum level limit then it will be overstocking.
▪ Maximum level = Re-order level + Re-order quantity – (Minimum
consumption × Minimum delivery period)
o Re-ordering level/ Optimum Level
▪ It is fixed between minimum level and maximum level.
▪ Re-order level is the level when the business concern makes fresh order at
this level.
▪ Re-order level=maximum consumption × maximum Re-order period.
o Danger Level
▪ It is the level below the minimum level.
▪ It leads to stoppage of the production process.
▪ Danger level = Average consumption × Maximum re-order period for
emergency purchase

32
 o Average Stock Level
▪ Average stock level = Minimum stock level + ½ of re-order quantity
maximum level

LEAD TIME
• The time between the design of a product and its production
• The time between ordering a product and receiving it
• Lead time is the time normally taken in receiving delivery after placing orders with
suppliers.
• The time taken in processing the order and then executing it is known as lead time.
Economic Order Quantity (EOQ)
• EOQ refers to the level of inventory at which the total cost of inventory comprising
ordering cost and carrying cost.
• Determining an optimum level involves two types of cost such as ordering cost and
carrying cost.
• The EOQ is that inventory level that minimizes the total of ordering of carrying cost.
• EOQ can be calculated with the help of the mathematical formula: EOQ = 2ab/c
Aging Schedule of Inventories
• Inventories are classified according to the period of their holding
• This method helps to identify the movement of the inventories.
• This analysis is mainly calculated for the purpose of taking disposal decision of the
inventories
• Hence, it is also called as, FNSD analysis
o F = Fast moving inventories
o N = Normal moving inventories
o S = Slow moving inventories
o D = Dead moving inventories
33
VED Analysis
• This technique is ideally suited for spare parts in the inventory management like ABC
analysis.
• Inventories are classified into three categories on the basis of usage of the inventories.
o V = Vital item of inventories
o E = Essential item of inventories
o D = Desirable item of inventories
HML Analysis
• Under this analysis, inventories are classified into three categories on the basis of the
value of the inventories.
o H = High value of inventories
o M = Medium value of inventories
o L = Low value of inventories
Valuation of Inventories
• Inventories are valued at different methods depending upon the situation and nature
of manufacturing process.
• Some of the major methods of inventory valuation are mentioned as follows:
o First in First Out Method (FIFO)
o Last in First Out Method (LIFO)
o Highest in First Out Method (HIFO)
o Nearest in First Out Method (NIFO)
o Average Price Method (AP)
o Base Stock Method
o Standard Price Method
o Market Price Method

34
COST CONCEPTS USED IN DECISION MAKING
• Marginal Cost:
o Marginal cost is the total of variable costs
o Prime cost-plus variable overheads.
o It is based on the distinction between fixed and variable costs.
o Fixed costs are ignored and only variable costs are taken into consideration for
determining the cost of products and value of work-in-progress and finished
goods.
• Out of Pocket Costs
o This is that portion of the costs which involves payment to outsiders,
o It gives rise to cash expenditure as opposed to such costs as depreciation, which
do not involve any cash expenditure.
o Such costs are relevant for price fixation during recession or when make or buy
decision is to be made.
• Differential Cost
o The change in costs due to change in the level of activity or pattern or technology
or process or method of production is known as differential costs.
o It is the increase or decrease in total cost as a result of this decision is known as
differential cost.
o If the change increases the cost, it will be called incremental cost.
o If there is decrease in cost resulting from decrease in output, the difference is
known as decremental cost.
• Sunk Costs
o A sunk cost is an irrecoverable cost
o It is caused by complete abandonment of a plant.
o It is the written down value of the abandoned plant less its salvage value.
o Such costs are historical which are incurred in the past
o It is not relevant for decision-making
o Sunk cost are not affected by increase or decrease in volume.
o Thus, expenditure which has taken place and is irrecoverable in a situation is
treated as sunk cost.
o Sunk cost and will be irrelevant cost for taking decision of the replacement of the
existing plant.
o Examples of such costs include depreciated fixed assets, development cost already
incurred etc.

35
• Opportunity Cost
o It is the advantage, in measurable terms, which has been foregone due to not
using the facility in the manner originally planned.
o It refers to the value of sacrifice made or benefit of opportunity foregone in
accepting an alternative course of action.
• Imputed Costs
o Notional costs or imputed costs are those costs which are notional in character
o Do not involve any cash outlay
o “The value of a benefit where no actual cost is incurred.”
o Even though such costs do not involve any cash outlay but are taken into
consideration while making managerial decisions.
• Replacement Cost
o It is the cost at which there could be purchase of an asset or material identical to
that which is being replaced or revalued.
o It is the cost of replacement at current market price.
• Avoidable Cost
o Avoidable costs are those which can be eliminated if a particular product or
department, with which they are directly related, is discontinued.
o For example, salary of the clerks employed in a particular department can be
eliminated, if the department is discontinued.
• Unavoidable Cost
o Unavoidable cost is that cost which will not be eliminated with the discontinuation
of a product or department.
o For example, salary of factory manager or factory rent cannot be eliminated even
if a product is eliminated.
• Relevant Cost
o A cost that is relevant to a decision is called relevant cost.
o Past costs are not generally relevant costs because they are sunk costs or costs
already incurred.
o Similarly, in the case of materials regularly in use, the relevant cost is its
replacement cost and not the book value or the realizable value.
o For material that is not in regular use; the realizable value is the relevant cost.
o In this sense the relevant cost is the opportunity cost.
o Generally relevant costs are the expected future costs relevant to a decision and
they differ among different alternatives.
• Irrelevant Cost
o A cost that is not relevant to a decision is called relevant cost.
o Past costs are generally irrelevant costs because they are sunk costs or costs
already incurred

36
LIFE CYCLE COSTING
• Life cycle costing, or whole-life costing, is the process of estimating how much money
you will spend on an asset over the course of its useful life.
• Conducting a life cycle cost assessment helps you better predict how much your
business will pay when you acquire a new asset
• It applies both tangible and Intangible assets
• Product life cycle costing involves tracing of costs and revenues of a product over
several calendar periods throughout its life cycle.
• LCC is “The total cost throughout its life including planning, design, acquisition and
support costs and any other costs directly attributable to owning or using the asset”.
• Life-Cycle Costs are all the costs associated with the product for its entire life cycle.
• Life-cycle cost analysis (LCCA) is a tool to determine the most cost-effective option
among different competing alternatives to purchase, own, operate, maintain and,
finally, dispose of an object
• Whole-life cost is the total cost of ownership over the life of an asset.
• The concept is also known as life-cycle cost (LCC) or lifetime cost and is commonly
referred to as "cradle to grave" or "womb to tomb" costs
• To calculate an asset’s life cycle cost, estimate the following expenses:
o Purchase
o Installation
o Operating
o Maintenance
o Financing (e.g., interest)
o Depreciation
o Disposal
• The costs are included in different stages of the product life cycle.
o Development phase -R&D cost/Design cost.
o Introduction phase – Promotional cost/Capacity costs.
o Growth phase/Maturity – Manufacturing cost/Distribution/Product support cost.
o Decline/Replacement phase – Plants reused/sold/scrapped/related costs.

37
LIFE CYCLE COSTING WITH PRODUCT LIFE CYCLE

38
TARGET COSTING
• Target costing origin from Japan
• Target costing is a management technique aimed at reducing a product’s life-cycle costs
• CIMA defines target cost as “a product cost estimate derived from a competitive market
price”
• The fundamental objective of target costing is to enable management to use proactive
cost planning, cost management and cost reduction practices
• Target costing is primarily used and most effective in the product development and
design stage
• Target Cost = Expected selling price – Desired profit
• The target cost is normally less than the current cost
• Target costing can be viewed as a proactive cost
• A target costing system has three objectives
o To lower the costs of new products
o The new products meet the levels of quality, delivery timing and price required by
the market.
o To motivate all company employees to achieve the target profit during new
product development by making target costing
• Methods of Establishment of Target Costs
o The subtraction method which is based on the price of competitor’s product
o The addition method which is based on the existing technology and past cost data
of the company.
o Integrated method, a mixture of the subtraction and addition methods.
• Target Costing Principles
o Price-led costing
o Cross functional teams
o Customer focus
o Focus on product design and process
o Lifecycle cost reduction
o Value Chain involvement

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KAIZEN COSTING
• Kaizen is a Japanese term which means “continuous improvement”
• Kaizen costing is a cost reduction system
• Kaizen Costing, also referred as continuous improvement costing, is a mechanism for
reducing and managing costs.
• Kaizen costing is applied during the manufacturing, Introduction and growth stage of a
product’s life.
• Kaizen costing is a technique of controlling the cost incurred over unproductive activities
and resources which does not add any value to the organization.
• In simple words, it is a practical approach to solving cost-related problems to improve
the overall efficiency of the organization.
• The objective of Kaizen costing is to reduce actual costs to manufacture a product below
the standard cost.
• Kaizen costing tracks the cost reduction plans on a monthly basis.
• The Kaizen costing targets are expressed in the physical resource’s terms.
• Types of Kaizen Costing
o Asset Specific: The asset and organization-specific kaizen costing focuses on the
need for a particular deal or the business unit.
o Product Specific: The activity which is project or product-oriented, aiming at value
analysis is termed as product-specific kaizen costing.
• 5S in Kaizen Costing
o Sort (Seiri)
o Straighten (Seiton)
o Shine (Seiso)
o Standardize (Seiketsu)
o Sustain (Shitsuke)

40
JUST-IN-TIME (JIT)
• JIT is a Japanese origin and a creation of Toyota Corporation.
• In Japan, JIT systems are called kanban.
• Taiichi Ohno of Japan is referred as the father of Just in Time
• The just-in-time (JIT) inventory system is a management strategy that minimizes
inventory and increases efficiency
• Just-in-time (JIT) manufacturing is also known as the Toyota Production System (TPS)
• Just-in-time (JIT) purchasing is a cost accounting strategy where you purchase the
minimum amount of goods to meet customer demand
• JIT is a demand-pull system
• Production activities are “pulled” not “pushed” into action
• In JIT system, production of an item does not commence until the organisation receives
an order.
• When an order is received for a finished product, productions people give orders for raw
materials.
• As soon as production is complete to fill the order, production ends
• JIT here is no need for inventories
• Just in Time adoption result in the elimination of overproduction.
• Objectives of Just-In-Time (JIT) Method
o Zero inventory
o Zero breakdowns
o 100% on time delivery service
o Elimination of non-value-added activities
o Zero defects.
• JIT is based on three norms:
o Few suppliers
o Small deliveries
o Quality at source

41
MISCELLANEOUS
• No distinction is made between direct and indirect materials in Process Costing.
• Opportunity cost is the value of benefit sacrificed in favour of an alternative course of
action
• The EOQ is a company's optimal order quantity that minimizes its total costs related to
ordering, receiving, and holding inventory
• The EOQ formula is best applied in situations where demand, ordering, and holding costs
remain constant over time
• LIFO method of pricing issues is useful during periods of inflation.
• LIFO is a good method of avoiding tax.
• LIFO reveals real income in times of rising prices.
• Uniform costing is a must for meaningful inter fi rm comparison
• The most powerful tool used to analyse and interpret the health of an enterprise is Ratio
Analysis
• Idle time variance is always Adverse
• Contribution earned after reaching BEP is profit of the fi rm.
• Two methods used for calculation of equivalent production are FIFO and Average
Method
• Economic Batch Quantity depends on Set up cost and Storage
• Flexible budget recognizes the difference between Variable and Fixed Cost
• Two broad methods of costing are Specific order costing and Operation Costing
• A cost which does not involve any cash out fl ow is called Notional Cost or Imputed Cost
• Notional cost expenses are excluded from cost.
• Sunk Cost are not useful for decision making as all past costs are irrelevant.
• Material usage variance is the sum of Mix variance and Yield variance
• Integral accounts merge financial and cost accounts in one set of accounts
• In activity-based costing, costs are accumulated by Cost Pool
• Transfer Pricing have a significance for the purpose of measurement of divisional
performance.
• Efficiency is basically a ratio of Input and Output
• Profit volume graph shows the relationship between sales and profit
• Production budget is prepared before sales budget
• Quantitative records of receipts, issue and balance items of material in stores are
entered in Bin Card
• Two important opposing factors in fixing the economic order quantity are Ordering cost
and Carrying Cost
• The process of physical verification of stores throughout the year is known as perpetual
Inventory System
42
• A system that keeps a running and continuous record that tracks inventories and cost of
goods sold on day-to-day basis is called perpetual Inventory System
• Continuous stock taking is a part of perpetual Inventory System
• Administration overheads are recovered as a percentage of works cost
• Standing order number is a code number given to a factory overhead item.
• Service costing is also known as Operating Costing
• Sunk costs are not relevant for decision making
• Bin card is a quantitative record of material received, issued and balance
• Store ledger is a quantitative as well as value wise records of material received, issued
and balance
• Economic order quantity is that quantity at which cost of holding and carrying inventory
is Minimum and Equal
• ABC Analysis is inventory is classified into A, B and C Category with A being the lowest
quantity, highest value
• In case of rising prices (inflation), FIFO method will provide highest value of closing stock
and profit
• In case of rising prices (inflation), LIFO will provide lowest value of closing stock and
profit
• Costs associated with the labour turnover can be categorised into: Preventive Costs and
Replacement costs
• Allotment of whole item of cost to a cost centre or cost unit is known as Cost allocation
• Service departments costs should be allocated to both Production and service
departments
• Blanket overhead rate is one single overhead absorption rate for the whole factory
• Materials requisition note is used to record the issue of direct material to a specific job.
• The job costing method can be applied in costing batches
• Capital gearing ratio is Long-term solvency ratio
• A budget which is prepared in a manner so as to give the budgeted cost for any level of
activity is known as Flexible budget
• Current ratio is also known as working capital ratio

43
FINANCIAL STATEMENTS ANALYSIS
• Financial statement analysis is interpreted mainly to determine the “financial and
operational performance” of the business concern
• Horizontal Analysis
o It is the current year’s figures are compared with the base year (base year is
considered as 100) and how the financial information is changed from one year
to another.
o This analysis is also called as Dynamic analysis.
• Vertical analysis
o Financial statements measure the quantities relationship of the various items in
the financial statement on a particular period (Base Sale is 100).
o It is also called as Static analysis

• Comparative statement analysis

o It is an analysis of financial statement at different period of time.
o This statement helps to understand the comparative position of financial and
operational performance at different period of time.
o Comparative balance sheet analysis may be “Horizontal or Vertical basis”
• Trend Analysis
o It is the financial statements may be analysed by computing trends of series of
information.
o It is a Horizontal Analysis
o It may be upward or downward directions which involve the percentage
relationship of each and every item of the statement with the common value of
100% (For Example Base year 100%)
• Common size analysis
o In which figures reported are converted into percentage to some common base.
o In the balance sheet the total assets and Liabilities figures is assumed to be 100%
and all figures are expressed as a percentage of this total.

44
RATIO ANALYSIS
• Ratio is a mathematical relationship between one number to another number.
• Ratio is used as an index for evaluating the financial performance of the business
concern.
• Liquidity Ratio / Short term Solvency
o It is also called as short-term ratio.
o This ratio helps to understand the liquidity in a business which is the potential
ability to meet current obligations.
o This ratio expresses the relationship between current assets and current liability
of the business concern during a particular period.

• Activity Ratio
o It is also called as turnover ratio.
o This ratio measures the efficiency of the current assets and liabilities in the
business concern during a particular period.
o This ratio is helpful to understand the performance of the business concern
o Measured in Times

45
• Solvency Ratio
o It is also called as leverage ratio
o Which measures the long-term obligation of the business concern.
o This ratio helps to understand, how the long-term funds are used in the business
concern.
o Short-term Solvency Ratios (Liquidity Ratios)
o Long-term Solvency Ratios (Capital Structure Ratios).

• Profitability ratio
o Helps to measure the profitability position of the business concern.
o Measured in Percentage

46
FUNDS FLOW STATEMENT
• Fund means working capital
• If current assets of company are more than current liability of business, it is called
working capital and working capital’s other name is Fund
• Fund/Working capital = Current assets – Current liability
• Helps to understand the changes in the financial position of a business enterprise
between the beginning and ending financial statement dates.
• It is also called as statement of sources and uses of funds.
• In a funds flow statement increase or decrease in working capital is recorded.
• The term “flow of funds” means “Transfer of economic values from one asset to another
and one liability to another.”
• Flow of fund takes place whenever there is change in working capital.
• If fixed assets are converted into current asset or fixed liability is converted into current
liabilities, these are the flow of fund.
• Shows sources and application or uses of funds during a specified period
• It is also known as
o Sources and Application of funds;
o Statement of changes in financial position:
o Sources and uses of funds:
o Summary of financial operations:
o Where got, where gone statement
• Where got = Sources of fund.
• Where gone = Application of fund
• Inflow of Funds
o Issue of Equity Share Capital
o Issue of Preference Share Capital
o Issue of Debentures/Long term Loans
o Premium on issue of shares/debentures
o Sale of Investments
o Sale of Fixed Assets
• Outflow of Funds
o Redemption of Preference Share Capital
o Redemption of Debentures
o Repayment of Long-term Loans
o Premium on redemption of preference shares/debentures
o Purchase of Investments/Fixed Assets
o Dividend Paid
o Taxes Paid
o Drawings by proprietor/partner
47
CASH FLOW STATEMENT
• It is a statement which shows the sources of cash inflow and uses of cash out-flow of the
business concern during a particular period of time.
• It is the statement, which involves only short-term financial position of the business
concern.
• In a cash flow statement only cash receipt and payments are recorded
• ‘Cash Flow Statements’ in suppression of Accounting Standard-3
• Cash: Cash comprises cash in hand and demand deposits with banks.
• Demand deposits mean those deposits which are repayable by bank on demand by the
depositor
• Cash equivalents: Cash equivalents are short term, highly liquid investments that are
readily convertible into known amounts of cash
• Cash equivalents are held for the purpose of meeting short term cash commitments
rather than for investments or other purposes
• Cash flows: Cash flows are inflows and outflows of cash and cash equivalents. It means
the movement of cash into the organisation and movement of cash out of the
organisation
• The difference between the cash inflows and outflows is known as net cash flow which
can be either net cash inflow or net cash outflow
• The Applicability of Cash Flow Statements is governed by the Companies (Accounting
Standards) Rules, 2006. However as per the company act 2013

48
THREE MAIN CATEGORIES OF CASH INFLOWS AND CASH OUTFLOWS
• Operating activity
o Operating activities are the principal revenue-producing activities of the
enterprise
o Operating activities include cash effects of those transactions and events that
enter into the determination of net profit or loss.
o Cash receipts from the sale of goods and the rendering of services, cash receipts
from royalties, fees, commissions, and other revenues, cash payments or refunds
of income taxes.
o Cash receipts and payments of an insurance enterprise for premiums and claim
o Cash receipts and payments relating to future contracts, forward contracts, option
contracts, and swap contracts when the contracts are held for dealing or trading
purposes
• Investing activity
o Investing activities are the acquisition and disposal of long-term assets and other
investments not included in cash equivalents.
o Investing activities include transactions and events that involve the purchase and
sale of long-term productive assets not held for resale and other investments
o Cash payments to acquire fixed assets, cash receipts from disposal of fixed assets,
cash payments to acquire shares, warrants, or debt instruments,
o Cash receipts and payments relating to future, forward, option, and swap
contracts except when the contracts are held for dealing or trading purposes
• Financing activities
o Financing activities are activities that result in changes in the size and composition
of the owners’ capital (including preference share capital in the case of a company)
and borrowings of the enterprise
o Cash proceeds from issuing shares or other similar instruments
o Cash proceeds from issuing debentures, loans notes, bonds and other short-term
borrowing. Cash repayments of amounts borrowed i.e. redemption of debentures,
bonds etc.

49
SPECIAL ITEMS
• Foreign Currency Cash Flows amount is presented separately from cash flows from
operating, investing and financing activities and includes the differences
• Extra-ordinary items
o Such as bad debts recovered, claims from insurance companies, winning of a law
suit or lottery etc.
o These are disclosed separately as arising from operating, investing or financing
activities
• Interest and Dividends
o In the case of financial enterprises: Cash flows arising from interest paid and
interest and dividends received, should be classified as cash flows from operating
activities.
o In the case of other enterprises
▪ Cash flows arising from interest paid should be classified as cash flows from
financing activities.
▪ Cash flows arising from interest and dividends received should be classified
as cash flows from investing activities;
▪ Dividends paid should be classified as cash flows from financing activities.
▪ In all cases, cash flows from interest and dividends received and paid should
be disclosed separately
• Taxes on Income
o Cash flows arising from taxes on income should be separately disclosed
o Taxes paid are usually treated as cash flows from operating activities
o Tax expense may be readily identifiable with investing or financing activities
• Acquisition and Disposals of Subsidiaries and other Business Units
o The aggregate cash flows arising from acquisitions and from disposals of
subsidiaries or other business units should be presented separately and classified
as investing activities.

50
 BASIS CASH FLOW FUND FLOW

Meaning A cash flow statement is a A fund flow statement is a statement

statement showing the inflows and showing the changes in the financial
outflows of cash and cash position of the entity in different
equivalents over a period. accounting years.

Purpose of To show the reasons for To show the reasons for the changes
Preparation movements in the cash at the in the financial position, with respect
beginning and at the end of the to previous year and current
accounting period. accounting year.

Basis Cash Basis of Accounting. Accrual Basis of Accounting.

Analysis Short Term Analysis of cash Long Term Analysis of financial

planning. planning

Discloses Inflows and Outflows of Cash Sources and applications of funds

Opening and Contains opening and closing Does not contains opening balance of
closing balance balance of cash and cash cash and cash equivalents.
equivalents.

Part of Yes No
Financial
Statement

51
HUMAN RESOURCES ACCOUNTING
• Human resources are considered as important assets and are different from the physical
assets.
• The concept of human resource accounting has been defined by the committee on
Human Resource Accounting of the American Accounting Association
• The American Association of Accountants (AAA) defines, “HRA is a process of identifying
and measuring data about human resources and communicating this information to
interested parties”
• All expenses on human resources are to be treated as investments, since the benefits
are accrued over a period of time.
• If the value of human resources is not duly reported in profit and loss account and
balance sheet
• Expenses on recruitment, training, etc. are treated as expenses and written off against
revenue under conventional accounting.
• In simple terms, it is an extension of the accounting principles of matching costs and
revenues and of organizing data to communicate relevant information in financial
terms.
• Human resources accounting is basically an information system that tells management
what changes are occurring over time to the human resources of the business.
• Rensis Likert described the following objectives of HRA
o Providing cost value information about acquiring, developing, allocating and
maintaining human resources.
o Enabling management to monitor the use of human resources.
o Finding depreciation or appreciation among human resources.
o Assisting in developing effective management practices.
o Increasing managerial awareness of the value of human resources.
o For better human resource planning.
o For better decisions about people, based on improved information system.
o Assisting in effective utilization of manpower

52
MODELS OF HRA
• Cost Based Models
o Capitalisation of Historical Costs by William C. Pyle
o Replacement Costs by Eric G. Flamholth
o Opportunity Cost Model
• Economic Value Models
o Present Value of Future Earnings Model by Lev and Schwartz
o Reward Valuation Model by Flamholtz
o Valuation on Group Basis
THERE ARE THREE COST INVOLVE IN HRA
• Acquisition Cost
o Recruitment cost
o Selection cost
o Placement cost
• Training and Development Cost
o Formal training cost
o On the job training cost
o Special training cost
o Development programme cost
• Welfare Cost
o Welfare and amenities within the organisation
o Welfare outside the organisation

53
METHODS OF ACCOUNTING VALUATION OF HR
• Historical Cost Approach
o This approach was developed by William C. Pyle
o In this approach the actual cost incurred on recruiting, selecting, hiring, training
and development of human resources, of the organisation is maintained and a
proportion of it is written off to the income of the next and expected useful life of
human resources.
o The approach of the cost of human resources is very similar to the book value of
the other physical assets.
o This method is simple to understand and easy to work out.
o It is based on traditional accounting concept of matching cost with revenue.
• Replacement Cost Approach
o This approach was first opined by Rensis Likert and was developed by Eric G.
Flamholth
o According to this model the value of employee is estimated as the cost of
replacement with a new employee of equivalent ability and efficiency.
o There are two costs, individual replacement cost and positional replacement cost
o The cost of recruiting, selecting, training and development and familiarisation cost
are account in individual replacement cost.
o When an employee changes the present position to another or leave the
organisation then the cost of moving, vacancy, carrying and other relevant costs
reflect in individual replacement cost.
o Positional replacement cost refers to the cost of filling different position in an
organisation.
• Opportunity Cost Approach
o This approach analyses the alternative earning sources from the productive
capacity of human resources by putting some alternative use.
o Opportunity cost is the value of an asset (HR) when there is an alternative use of
it.
• Standard Cost Approach
o This approach is based on the line and staff as well as functional relationship of
employees in an organisation
o The employees of an organisation are categorised and divided into different
groups with hierarchical levels or positions.
o Standard cost is fixed for each category of employees and their worthwhile role
may be calculated
o Due to some of the static position of employees on account of their status and
position
o It does not take any differences of them put in the same group.
54
INFLATION ACCOUNTING
• Inflation normally refers to the increasing trend in general price levels
• In economic sense it refers to a state in which the purchasing power of money goes
down or conversely there is more money in circulation than is justified by goods and
services
• Inflation accounting as a system of accounting, which purports to record as a built-in
mechanism, all economic events in terms of current cost.
• It is a method designed to show the effect of changing costs and prices on affairs of a
business unit during the course of relative accounting period.
• The inflation accounting has an inbuilt and automatic mechanism to match the cost and
revenue at current values.
• The inflation accounting has an inbuilt and automatic recording procedure.
• The unit of measurement is not stable like traditional or historical accounting.
• The realization principle is not rigidly followed
• Five methods of price level accounting
o Current Purchasing Power Technique (CPP): Price index is used as conversion
factor for re-stated of historical statements
o Replacement Cost Accounting Technique (RCA): Index used are those directly
relevant to the company’s particular assets and not the general price index.
Conversion on replacement value
o Current Value Accounting Technique (CVA): Price level accounting all assets and
liabilities are shown in the balance sheet at their current values.
o Current Cost Accounting Technique (CCA): The preparation of financial
statements on the current values of individual items and not on the historical or
original cost.
o Hybrid Method: Hybrid method combines some of the features of CPP method
and CCA method

55
METHODS OF ACCOUNTING FOR CHANGING PRICES
• Current Purchasing Power (CPP) Method
o The CPP method also termed as Constant rupee method
o All items in the financial statements in terms of units of equal purchasing power
o It is important to note that under CPP method only the changes in the general
purchasing power of money is relevant and not the value of individual asset
o In such a case, the value of such an asset will be raised in accordance with the
general price index.
o The index numbers are statistical averages and the CPP method is based on
indices.
o The method deals with changes in the general price level and not with the changes
in prices of individual firms.
There are two approaches to determine the profit under CPP method.
o Net Change Method
▪ This approach is based on normal accounting concept that profit is equal to
change in equity during an accounting period.
▪ Opening balance sheet based on historical cost is converted into CPP
balance sheet by using index numbers.
▪ When equity capital is also converted, then the difference in the balance
sheet is taken as reserves.
▪ When equity is not converted, then the difference in the balance sheet is
taken as equity
o Restatement of Income Method.
o Under this method the historical profit and loss account is restated in CPP
terms.
o All the items of Income Statement are converted into CPP values on the
following basis:
▪ Sales and operating expenses are restated at the average index
applicable for the year.
▪ Cost of sales is converted as per the cost flow assumption as explained
above.
▪ Net gain or loss on monetary items will have to determined and shown
separately in the restated income statement.
▪ Fixed assets and their depreciation are converted on the basis of the
indices prevailing at the dates of purchase of such assets.
▪ Taxes and dividends paid are converted on the basis of indices
prevailing at the dates of payment

56
• Current Cost Accounting [CCA] Method
o The Sandilands Committee recommended the current cost accounting system as
a method for correcting the deficiencies of historical cost accounting.
o The Accounting Committee of U.K has issued a Statement of Standard Accounting
Practice 16 [SSAP – 16] relating to CCA method.
o The crux of the current cost accounting technique is the preparation of financial
statements (Balance Sheet and Profit and Loss Account) on the current values of
individual items and not on the historical or original cost.
o Money remains to be the unit of measurement
o The items of the financial statements are restated in terms of current value of that
item and in terms of general purchasing power of money.
o Computation of depreciation based on the fixed assets current value [or value to
the business] provides a realistic measure of the resources used in a period.
o This method ignores materiality factor.
o This method ignores purchasing power gains and losses on the monetary items of
the firm.
o This requires carrying out the following adjustments:
▪ Revaluation Adjustment,
▪ Depreciation Adjustment,
▪ Cost of Sales Adjustment [COSA]
▪ Monetary Working Capital Adjustment (MWCA)
• Hybrid Method
o Hybrid method combines some of the features of CPP method and CCA method
o According to this method, the relevant adjustments are made with reference to
specific indices in the place of general index as in the case of CPP method.
o The purchasing power gains and losses on monetary items are also taken into
consideration.
o It is still in the evolutionary stage and not suitable for practical application.

57
ENVIRONMENTAL ACCOUNTING
• Environmental Accounting also called Sustainable accounting, Green Accounting and
Ecological accounting
• Environmental accounting, also called green accounting, refers to modification of the
System of National Accounts (SNA) to incorporate the use or depletion of natural
resources.
• Norway was the first country in the world to prepare environmental accounts
• Green accounting is a type of accounting that attempts to include factor environmental
costs into the financial results of operations
• “Environmental accounting is the identification, measurement and allocation of
environmental costs, the integration of these environmental costs into business
decisions, and the subsequent communication of the information to a company’s
stakeholders”
• Valuation of natural resources is an essential input into both social cost-benefit analysis
and some approaches to environmental accounting.
• Environmental accounting is the Kyoto Protocol.
• Environmental accounting (EA) is a crucial dimension in the process of measuring
environmental performance.
• EA provides a framework to analyze the environmental costs
• Integrated Economic and Environment Accounting (SEEA).
• Methods of environmental Accounting:
o Monetary environmental management accounting (MEMA)
o Physical environmental management accounting (PEMA)
o External monetary environmental accounting (EMEA)
o External physical environmental accounting (EPEA)

58
INDIAN ACCOUNTING STANDARDS
• Accounting Standards (ASs) are written policy documents issued by expert accounting
body or by government or any other regulatory body.
• Accounting Standards covers the aspects of recognition, measurements, treatment,
presentation and disclosure of accounting transactions in the financial statements
• Thus, accounting standards are guidelines for financial accounting, as how firms prepare
and present its business income and expense, assets and liabilities.
• According to section 2(2) of the Companies Act 2013 “accounting standards” means the
standards of accounting or any addendum thereto for companies or class of companies
referred to in section 133
• The Central Government may prescribe the standards of accounting as recommended
by the Institute of Chartered Accountants of India, constituted under section 3 of the
Chartered Accountants Act, 1949, in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority
• Objective of Accounting Standards
o To harmonise different accounting policies and used in a country.
o To reduce the accounting alternatives in the preparation of financial statements
o To ensure comparability of financial statements of different enterprises
o To call for disclosures beyond that required by the law.

59
THE ENTERPRISES ARE CLASSIFIED
• Level I Enterprises
o Enterprises whose equity or debt securities are listed whether in India or outside
India
o Banks including co-operative banks
o Financial institutions
o Enterprises carrying on insurance business
o All commercial, industrial and business reporting enterprises, whose turnover
excluding ‘other income’ for the immediately preceding accounting period on the
basis of audited financial statements exceeds Rs. 50 crores
o All commercial, industrial and business reporting enterprises having borrowings,
including public deposits, in excess of Rs. 10 crores at any time during the
accounting period
o Holding and subsidiary enterprises of any one of the above at any time during the
accounting period
• Level II Enterprises
o All commercial, industrial and business reporting enterprises, whose turnover
(excluding ‘other income’) for the immediately preceding accounting period on
the basis of audited financial statements is greater than Rs. 40 lakhs but less than
Rs. 50 crores
o All commercial, industrial and business reporting enterprises having borrowings,
including public deposits, is greater Rs. 1 crore but less than Rs. 10 crores at any
time during the accounting period
o Holding and subsidiary enterprises of any one of the above at any time during the
accounting period
• Level III Enterprises:
o Enterprises which do not fall under Level I and Level II, are considered as Level III
enterprises

60
 APPLICABILITY OF ACCOUNTING STANDARDS

Accounting Standard Level I Level II Level III

AS 1 Disclosure of Accounting Principles Yes Yes Yes

AS 2 Valuation of Inventories Yes Yes Yes

AS 3 Cash Flow Statements Yes No No

AS 4 Contingencies and Events Occurring After the Balance Sheet Date Yes Yes Yes

AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in
Yes Yes Yes
Accounting Policies

AS 6 Depreciation (Withdraw)AS 6 Depreciation Accounting YesYes YesYes YesYes

AS 7 Construction Contracts (Revised 2002) Yes Yes Yes

AS 9 Revenue Recognition Yes Yes Yes

AS 10 Accounting for Fixed Assets Yes Yes Yes

AS 11 The Effects of Changes in Foreign Exchange Rates (Revised 2003) Yes Yes Yes

AS 12 Accounting for Government Grants Yes Yes Yes

AS 13 Accounting for Investments Yes Yes Yes

AS 14 Accounting for Amalgamations Yes Yes Yes

AS 15 Employee Benefits (Revised 2005) Yes Yes Yes

AS 16 Borrowing Costs Yes Yes Yes

AS 17 Segment Reporting Yes No No

61
AS 18 Related Party Disclosures Yes No No

AS 19 Leases Yes Partial Partial

AS 20 Earnings Per Share Yes Partial Partial

AS 21 Consolidated Financial Statements Yes No No

AS 22 Accounting for taxes on income Yes Yes Yes

AS 23 Accounting for Investments in Associates in Consolidated Financial

Yes No No
Statements

AS 24 Discontinuing Operations Yes No No

AS 25 Interim Financial Reporting Yes No No

AS 26 Intangible Assets Yes Yes Yes

AS 27 Financial Reporting of Interests in Joint Ventures Yes No No

AS 28 Impairment of Assets Yes Yes Yes

AS 29 Provisions, Contingent Liabilities and Contingent Assets Yes Partial Partial

62
INTERNATIONAL FINANCIAL REPORTING STANDARDS
• IFRS, are accounting standards issued by the IFRS Foundation and the International
Accounting Standards Board (IASB).
• IFRS are now becoming the global financial reporting language
• The accounting standards issued by IASB
• The International Accounting Standards Board (IASB), is an independent body formed in
2001
• IASB is based in London

63
Standard No. Standard Title

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 4 Insurance Contracts

IFRS 5 Non-current Assets Held for Sale and Discontinue Operations

IFRS 6 Exploration and Evaluation of Mineral Resources

IFRS 7 Financial Instruments: Disclosures

IFRS 8 Operating Segments

IFRS 9 Financial Instruments

IFRS 10 Consolidated Financial Statements

IFRS 11 Joint Arrangements

IFRS 12 Disclosure of Interests in Other Entities

IFRS 13 Fair Value Measurement

IFRS 14 Regulatory Deferral Accounts

IFRS 15 Revenue from Contracts with Customers

IFRS 16 Leases

IFRS 17 Insurance Contracts

64
AUDITING
• The term audit is derived from the Latin term ‘audire,’ which means to hear.
• Chapter X of the Companies Act, 2013 (Sections 139-148) deals with the provisions
related to Audit & Auditors.
• An audit is an examination of accounting records undertaken with a view to establishing
whether they correctly and completely reflect the transactions to which they purport to
relate.’
• “Auditing is a systematic examination of the books and records of business or other
organization, in order to ascertain or verify and to report upon the facts regarding its
financial operations and the result thereof.
• The meaning of an Audit contains
o An intelligent and critical examination of the books of accounts of business.
o It is done by an independent qualified person.
o It is done with the help of vouchers, documents, information and explanations
received from the clients.
o The auditor satisfies himself with the authenticity of the financial accounts
prepared for a particular period.
• Primary Objective
o To Examine the Accuracy of Books of Accounts
o To Express Opinion on Financial Statements
• Secondary objective / Incidental objective / Subsidiary objectives
o Detection and prevention of frauds
o Detection and prevention of errors
• In India the Auditing and Assurance Standards Board of the Institute of Chartered
Accountants of India formulates the auditing standards
• International Auditing standards are issued by the International Auditing and Assurance
Standards Board (IAASB).
• Book keeping (Recording & Balancing): Is the art of recording day to day transactions
systematically in the books of accounts
• Accountancy (Summary and Analysis): Work of accountancy begins where book
keeping ends.
• Auditing (Verification of records): Auditing begins where accountancy ends
FEATURES OF AUDITING
• A systematic and scientific examination of the books of accounts
• An undertaken by an independent person or body of persons who are duly qualified
• A critical review of the system of accounting and internal control
• Audit is done with the help of vouchers, documents, information
• The auditor has to satisfy himself with the authenticity of the financial statements
65
66
AUDIT OF COMPANIES UNDER THE COMPANIESACT 2013
• According to section 139(6) of Companies Act, the first auditor of a company, other than
a Government company, shall be appointed by the Board of Director within thirty days
from the date of registration of the company
• The remuneration of the first auditor appointed by the board may be fixed by the Board.
• The report of internal audit shall be submitted to the Board of the company.
• A Secretarial Audit has to be conducted by a Practising Company Secretary in respect of
the secretarial and other records of the company.
• When two or more auditors are appointed for the execution of same audit assignment,
it is termed as joint audit.
• CPA – Certified Public Accountant
• External Audit also called Independent Audit
• Types of Audit under Companies Act
o Statutory Audit
o Internal Audit
o Secretarial Audit
o Cost Audit
• Mandatory Rotation of Auditors
• All unlisted public companies having paid up share capital of rupees ten crore or
more;
• All private limited companies having paid up share capital of rupees twenty crore or
more;
• All companies having paid up share capital of below threshold limit mentioned in (a)
and (b) above, but having public borrowings from financial institutions, banks or
public deposits of rupees fifty crores or more
• If an individual auditor who has completed his one term of 5 years, shall not be
eligible for reappointment as auditor in the same company for 5 years from the
completion of his term.
• In an audit firm/LLP which has completed its one term of 10 years, shall not be eligible
for reappointment as auditor in the same company for 5 years from the completion
of its term.
• The provisions with regard to the appointment of an auditor can be divided into three
categories:
o First auditor: the first auditor or auditors are to be appointed by the Board of
directors within 30 days from the date of the registration of the company
o Subsequent auditor: Subsequent auditors are the auditors appointed in the
AGM for the audit of the next financial statements (6th AGM)
o Filling of casual vacancy: Filled by the Board within thirty days of such vacancy.
Vacancy caused by auditor death, Resignation etc
67
INDEPENDENT FINANCIAL AUDITING
• An independent auditor is a certified public accountant (CPA) or chartered accountant
(CA) who examines the financial records and business transactions of a company with
which he is not affiliated/ not an employee of a company
• Independent financial audit performed by registered auditors
• Independent auditors, also known as external auditors, are not employees of the
company
• Companies often use independent auditors instead of internal auditors to avoid
potential conflict-of-interest situations.
FRAUD
• As per SAP – 4, issued by ICAI, “Intentional misrepresentation of financial information
by one or more individual among management, employees or third parties”
• Fraud may involve:
o Manipulation, Falsification or alteration of records or documents
o Misrepresentation of assets
o Suppression or omission of effect of transaction from record or documents
o Recording of transaction without substance
o Misapplication of accounting policies
• Fraud may be divided:
o Embezzlement or misappropriation of cash
o Misappropriation of goods
o Manipulation of accounts
ERRORS
• As per SAP – 4, issued by ICAI, an error is an unintentional mistake or misdescription in
the books of accounts or records where by way of:
o Clerical or mathematical mistake in record or data
o Oversight or misrepresentation of facts
o Manipulation of accounting policies
• Clerical Errors: Error of Omission and Error of Commission
• Error of Principle: When principle of book keeping, accountancy and accounting is not
followed
• Error of omission: When a transaction is omitted fully or partially from books of
accounts
• Error of Commission: When entries made in the books of original entry or ledger are
incorrect, wholly or partially (Purchase Rs. 1000 but enter Rs. 100)
• Error of Duplication: When a transaction is recorded twice and also posted twice
• Error of compensating: When error offsets the effect of another
68
69
70
TYPES OF AUDIT
• Statutory Audit
o Statutory Audit is often called financial Audit
o It is a compulsory audit
o The statutory audit is normally performed by external audit
o A statutory audit is a legally required review of the accuracy of a company's or
government's financial statements and records.
o The audit report will be issued by the auditor and submit to the government body
by the entity
o A statutory audit is an audit, which is made mandatory by law.
o In India, the laws regarding a statutory audit are in the Companies Act, 2013
o The appointment of auditors, his removal, rights and duties, remuneration, are set
according to the provisions of the law, as applicable to the organisation.
o It is a complete audit, not a partial audit
o Auditor must be qualified accountant
o The auditor must not be disqualified as per the provisions of law
o Auditor is an independent person. Management has no control over his work
o The rights, duties and liability of the auditor are laid in the statute. These cannot
alter
o Section 139 contains that at the first annual general meeting every company shall
appoint an individual or firm as its auditor
o Company, Cooperative, Trust, Banking company, Insurance company and
Statutory corporation
o The Applicability of Statutory Audit
▪ For LLP: Statutory audit is applicable if turnover in any financial year exceeds
Rs. 40 Lakhs or its contribution exceeds Rs. 25 Lakhs.
▪ For Private Company/ Public Company: Mandatory irrespective of
Turnover, profits etc. If the company is incurring loss even then statutory
audit is required.
• Non-Statutory Audit
o Also known as Private Audit
o This audit is not statutory requirement but conducted by desired owner
o The audit is conducted generally own interest
o Sole trader, One-person company, Firm, Individual and others

71
• Internal Audit: According to Rule 13 of The Companies (Accounts) Rules, 2014 following
class or classes of companies shall be required to appoint an internal auditor or firm of
internal auditors, namely:
o Every listed company
o Every unlisted public company having (In Preceding Financial Year)
▪ Paid up share capital of 50 crore rupees or more
▪ Turnover of 200 crore rupees or more during the preceding financial year
▪ Outstanding loans or borrowings from banks or public financial institutions
exceeding 100 crore rupees or more
▪ Outstanding deposits of 25 crore rupees or more
o Every private company having
o Turnover of 200 crore rupees or more during the preceding financial year
o Outstanding loans or borrowings from banks or public financial institutions
exceeding 100 crore rupees or more
• Secretarial Audit
o Secretarial Audit is a compliance audit
o A Secretarial Audit is a mechanism to check the compliance of an organization to
the laws, rules, regulations, notifications etc prevalent at the time of the audit.
o It is a part of total compliance management in an organisation
o A Company Secretary in Practice has been assigned the role of Secretarial Auditor
as per the Company Secretaries Act, 1980
o The secretarial Auditor will submit his report in Form MR- 3
o As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014,
Secretarial Auditor is required to be appointed by means of resolution passed at a
duly convened Board meeting
o Resolution for appointment shall be filed with Registrar of Companies within 30
days in E-form MGT-14.
o Only a member of the Institute of Company Secretaries of India (ICSI) holding
certificate of practice (company secretary in practice) can conduct Secretarial
Audit
o Secretarial Audit Is Mandatory for
▪ Every listed company
▪ Public company with paid-up capital greater than 50 crores
▪ Public company with turnover greater than 250 crores
▪ Any private company who is a subsidiary of a public company which falls
under the above two categories
o It is necessary to have a secretarial auditor and manage the compliance with such
laws for
▪ Protection of the shareholder’s interests
▪ Avoid any legal action against the company
72
• Cost Audit
o The Cost and Works Accountants of India (ICWA) actually defines a cost audit as a
system that reviews and examines cost accounting records.
o Cost audit is “the verification of the correctness of cost accounts and of adherence
to the Cost Accounting plan.
o Audit which is conducted to check the cost accounts, techniques and methods as
per the provisions of Cost and Work Accountants Act, 1939.
o Ministry of Corporate Affairs / Companies Act has issued mandatory cost audit
orders on Companies engaged in Bulk drugs, fertilization, sugar,
telecommunications, industrial alcohol, and electricity & petroleum
o Cost audit has to be conducted by a Cost Accountant in Practice who is required
to comply with cost auditing standards
o Cost auditor has to submit his report to the Board of Directors who in turn shall
file it with the Central Government within 30 days of the receipt of the report.
o Section 148 of the Companies Act has provisions regarding cost audits of
companies.
o The provisions state that cost audit is applicable in the following two situations:
▪ Table A of specified goods and services,
• Where turnover from the goods and services is more than 50 crores
• Aggregate turnover from the individual product for which cost records
are necessary is 25 crores or more
▪ Table B of specified goods and services
• Where turnover from the goods and services is more than 100 crores
• Aggregate turnover from the individual product for which cost records
are necessary is 35 crores or more
• Management Audit: Audit which is conducted to review the past performance with the
predetermined objectives, plans and policies and suggests steps to overcome the
inefficiencies.
• Social Audit: Audit conducted to protect the interests of consumers, employees and
Contribution of a company to the society is reviewed. Now this audit is receiving
worldwide acclaim and is declared all over the world.
• Operational Audit: Audit which is conducted to make a detailed examination of various
operations or functional areas of the business.
• Balance Sheet Audit
o Auditor verifies the balance sheet items such as capital, liabilities, reserves and
provisions, assets and other items given in the balance sheet.
o The term balance sheet audit is American contribution
• Post and Vouch Audit: Post and Vouch audit refers to verification of all transactions
from books of original entry and its posting in the ledger.

73
 INTERNAL AND EXTERNAL AUDIT

BASIS INTERNAL AUDIT EXTERNAL AUDIT

Meaning Internal Audit refers to an ongoing External Audit is an audit function

audit function performed within an performed by the independent
organization by a separate internal body which is not a part of the
auditing department. organization.

Objective To review the routine activities and To analyze and verify the financial
provide suggestion for the statement of the company.
improvement.

Conducted Employees Third Party

by

Auditor is Management Members (Shareholder Vote)

appointed by

Users of Management Stakeholders

Report

Opinion Opinion is provided on the effectiveness Opinion is provided on the

of the operational activities of the truthfulness and fairness of the
organization. financial statement of the
company.

Scope Decided by the management of the Decided by the statute.

entity.

Obligation No, it is voluntary Yes, according to Indian

Companies Act, 1956.

Period Continuous Process Once in a year

Checks Operational Efficiency Accuracy and Validity of Financial

Statement

CPA Do not Have Must have

74
• Continuous Audit
o Continuous audit implies a detailed examination of all the transactions by auditor
continuously throughout the year
o The auditor visits the business concern at frequent intervals, say, weekly or
fortnightly or monthly during the period of audit.
o Continuous audit is done simultaneously with the preparation of accounts.
• Periodical (or) Final (or) Complete Audit
o Annual or Periodical audit is conducted after closing the books of accounts and
preparing the financial statements
o The auditor visits only once in a year and checks the accounts in one visit.
o Errors and frauds cannot be detected easily and quickly
o Periodical audit work is done and completed in a continuous session
o Periodical audit is suitable in case of small business concerns
• Interim Audit
o Interim audit is an audit which is conducted in between two annual audits to find
out interim profits to enable the company to declare an interim dividend
o It is an audit which is conducted in between two balance sheet audits
o It is conducted for a specific period with an object of declaring interim dividend
o Audit for a period of six months or half yearly audit
• Occasional Audit
o Occasional audit is conducted as a special event, normally in those organisations
when routine audit is not taken place
o For example, audit conducted in a partnership firm on admission or on retirement
of a partner.
o Occasional audit is also performed when Government orders for a special audit to
investigate into certain matters.
• Standard Audit
o Standard Audit refers to detailed checking and analysis of certain transactions only
and the remaining transactions are subjected to sample checking provided there
is a good and effective system of internal check in operation.
o In other words, it is a sample checking after a satisfactory and detailed checking
of some of the items.
• External Audit: Audit which is undertaken by an individual person who is appointed by
the shareholders and not by the management is External Audit.
• Internal Audit: Audit which is conducted internally i.e., on behalf of the management of
the company is Internal Audit
• Special Audit: Special Audit is a type of audit conducted by the Central Government for
some special objectives.

75
RIGHTAND DUTIES OFAUDITOR [Section 143(1) of the Companies Act, 2013]
• Right to Access to Books, Accounts and Vouchers
• Right to obtain Information and Explanation
• Right to Sign the Audit Report
• Right to Receive Notice and Attend General Meeting
• Right to visit Branch Office and right of Access to Books
• Right to Receive Remuneration
• Right to Correct Any Wrong Statement
• Right to Being Indemnified
• Right to seek Legal and Technical Advice
DUTIES OFAUDITOR [Section 143(1) of the Companies Act, 2013]
• Report shareholders about true and fair state of affairs of the company
• State that balance sheet and profit and loss a/c agree with all the necessary information
• State whether the company has maintained all books as required by law
• State the reasons of qualification in his report
• State that he has received the audit report on the branch accounts audited by other
auditor
• Transactions recorded as book entry are not against the interests of the company
• Personal expenses of directors have not been charged to revenue a/c of company;
• The company fulfils the requirements of Company Auditor's Report Order (CARO) 2003.
• He should certify the contents of the statutory report.
• An auditor must know the provisions of memorandum and articles of association of the
company.
LIABILITIES OF AN AUDITOR
• He is responsible on account of negligence in performance of his duties.
• Any clause in the agreement between the company and the auditor whereby the auditor
is freed from liability has been declared void

76
VOUCHING
• Vouching is a technical term, which refers to the inspection of documentary evidence
supporting and substantiating a transaction, by an auditor.
• Vouching can be described as the essence or backbone of auditing.
• A voucher is a documentary evidence in support of a transaction in the books of account
• There are two types of vouchers
o Primary Voucher − Original copy of written supporting document is called primary
voucher. Like purchase Bill, cash memo, pay-in-slip, etc.
o Collateral Voucher − Copies of supporting documents which are not available in
original are collateral voucher like duplicate or carbon copy of sale invoice.
• Involves verification of transactions
• Unearths fraud
• Examines the documentary evidence in support of the transactions
• A number of vouchers or supporting documentary evidences are not available for the
entries made in the books of account, such non-availability of vouchers is called as
missing vouchers
• Routine checking is a part of Vouching
• Process of checking the evidence of the entries called Vouching
• Voucher should be addressed to the Clint
• Serial number of vouchers should be Continuous
AUDITOR REPORT
• The auditor's report is a written letter from the auditor containing the opinion of
whether a company's financial statements comply with GAAP.
• The independent audit report is typically published with the company's annual report.
• The audit report will contain detailed information on various aspects of their findings in
the process of audit
• Essentials of Audit Report
o Title
o Addressee: Shareholder or Board of director
o Identification
o Reference to Auditing Standards
o Auditor’s Responsibility
o Opinion
o Signature
o Auditor’s Address
o Date of Report

77
OPINION IN AN AUDIT REPORT
• Unmodified Opinion
o It is also called Unqualified report
o Where auditor does not have any reservation, objection regarding the information
under audit, then he issues an unqualified opinion.
o Unmodified Opinion is also known as a ‘Clean Report’.
o In addition, an unqualified opinion indicates that the financial records have been
maintained in accordance with the standards known as GAAP
o An Unmodified report develops confidence among users of Financial statements
o The financial statements are reasonably free from any misstatements
o The results as appearing there are true and fair.
• Modified Opinion
o It is also called Qualified report
o Where neither the unqualified, nor adverse opinion
o In situations when a company’s financial records have not been maintained in
accordance with GAAP but no misrepresentations are identified, an auditor will
issue a qualified opinion
o There are two basic reasons due to which an auditor concludes on issuing a
Modified Opinion:
▪ Based on the audit and evidence, finds out that the financial statements
contain a certain degree of material misstatements.
▪ Unable to obtain sufficient and appropriate evidences to conclude that the
financial statements are free from material misstatements.
o There are two kinds of modified opinions
▪ Adverse Opinion
▪ Disclaimer of Opinion
• Adverse opinion
o Also called Negative Opinion
o The worst type of financial report that can be issued to a business is an adverse
opinion
o This indicates that the firm’s financial records do not conform to GAAP.
o In addition, the financial records provided by the business have been grossly
misrepresented.
o Although this may occur by error, it is often an indication of fraud.
o When this type of report is issued, a company must correct its financial statement
and have it re-audited,
o As investors, lenders and other requesting parties will generally not accept it.

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 • Disclaimer of Opinion
o An auditor is unable to complete an accurate audit report.
o This may occur for a variety of reasons, such as an absence of appropriate financial
records.
o When this happens, the auditor issues a disclaimer of opinion, stating that an
opinion of the firm’s financial status could not be determined.
o A Disclaimer of Opinion is to be issued by an auditor in cases where the auditor
concludes that he / she is not able to obtain sufficient and appropriate evidences
o A situation when auditor is not in a position to give his opinion.
MANAGEMENT AUDIT
• It has been originated from America
• Management audit is an act of evaluation of all the activities of all the departments with
a view to provide appropriate suggestions to the management to help their work
• Management audit identifies the objectives of an organization if such objectives are not
set up
• Management audit allocates the overall objectives of an organization in small parts.
• Management audit reviews the structure of organization and asset of the organization
and decides whether goals can be obtained or not.
• Management audit examines all the scope of work and liability centres.
• Management audit provides valuable suggestions to the management after the
evaluation of all above facts.
• Management audit is a systematic examination of decisions and actions of the
management to analyse the performance.
• Management audit involves the review of managerial aspects like organizational
objective, policies, procedures, structure, control and system in order to check the
efficiency or performance of the management over the activities of the Company.
• Management audit mainly examine the non-financial data to audit the efficiency of the
management
• Management Audit is an important tool for the continuous appraisal and evaluation of
the methods and performance of an enterprise.
• To suggest improved methods of operations.

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ENERGY AUDIT
• An energy audit is an inspection survey and an analysis of energy flows for energy
conservation in a building
• Energy audits are way for businesses to understand how and where they use energy
• An energy audit requires a detailed survey of a business’s equipment and an analytical
understanding of a business’s operating patterns
• Assessing present pattern of energy consumption in different cost centres of operations
• Identifying potential areas of thermal and electrical energy economy.
• Highlighting wastage in major areas
• Identifying areas of improvement and formulation of energy conservation measures
• Identifying areas requiring major investment by incorporation of modern energy
efficient equipment and up-gradation of existing equipment.
• Energy audit (inspection) is a series of actions and measures organized by professionals
to understand the opportunities for saving energy and money
TYPES OF ENERGY AUDITS
• Benchmarking
o Consisting of a whole building energy use analysis, based on the historic utility
use and cost and the comparison of the performances of the buildings to those of
similar buildings.
o Through this audit method buildings performance, whether good or poor, can be
assessed at a high level and provide broad evidence for more detailed energy
audits.
• Walkthrough Audit
o This involves a visit of the building in order to identify energy conservation
measures and energy saving opportunities.
o This involves analysis of utility billing information, building equipment and
operating data.
• Detailed Audit
o This energy audit consists of a detailed site walkover to identify the energy profile
of the building by completing surveys in great detail, detailed analysis of energy
conservation measures and energy saving opportunities.
• Investment-grade audit
o This type of energy audit involved detailed analysis of capital-intensive
improvements and require rigorous engineering analysis.

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ENVIRONMENT AUDIT
• An environmental audit is a type of evaluation intended to identify environmental
compliance and management system implementation gaps, along with related
corrective actions.
• The Supreme Audit Institution (SAI) in India is headed by the Comptroller and Auditor
General (CAG) of India who is a constitutional authority.
• Environmental audit by SAI India is conducted within the broad framework of
compliance and performance audit.
• The government can impose taxes on the polluting industries by verifying the
environmental audit report.
• Environmental audit is an excellent management tool to assess the activities of an
industry from a pollution angle and measures the efficiency of control measures.
• Environmental Audits play a significant role in Sustainability.
TYPES OF ENVIRONMENTAL AUDIT
• Compliance Audits (A): Assessing compliance with current and future legal standards.
• Compliance Audits (B): Assessing compliance with consent, industry and guideline
standards.
• Compliance Audits (C): Assessing compliance with corporate policy and standards.
• Site Audits: Reviewing every aspect of a site or spot checks on sites having actual or
potential problems.
• Safety Audits: Hazards and risks arising from processes and safety.
• Energy Audits: An inspection survey and an analysis of energy flows for energy
conservation in a building
• Waste Audits.
3 PHASES OF ENVIRONMENTAL AUDIT
• Preaudit activity: Pertaining to collection of information.
• Activity at site: Pertaining to evaluation of information collected.
• Post audit activity: Pertaining to drawing conclusion and identifying areas of
improvement if any.
A safety audit is a structured process whereby information is collected relating to the
efficiency, effectiveness, and reliability of a company's total health and safety management
system.

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SYSTEM AUDIT
• System audit is also defined as “A systematic, independent and documented process for
obtaining audit evidence and evaluating it objectively to determine the extent to which
audit criteria are fulfilled.”
• To evaluate the organization system against a system standard
• To determine the effectiveness of the implemented system in meeting the specified
objectives
• An information technology audit, or information systems audit, is an examination of the
management controls within an Information technology (IT) infrastructure
• IT audits are also known as automated data processing audits (ADP audits) and
computer audits.
• They were formerly called electronic data processing audits (EDP audits).
• It is an investigation to review the performance of an operational system.
• Auditing in a computerised environment is EDP (Electronic Data Processing) audit which
is processing of data by the computer and its program in an environment involving
electronic communication.
APPROACH IN SYSTEM AUDIT
• Auditing Around the Computer
o It is the type of auditing done in a traditional method.
o “The auditor summarises the input data and ignores the computer’s processing
but ensures the correctness of the output data generated by the computer, this
approach is generally referred to as “auditing around the computer”.
o This methodology was primarily focused on ensuring that source documentation
was correctly processed and this was verified by checking the output
documentation to the source documentation
• Auditing Through the Computer
o In this approach, the reliability and accuracy of the results are analysed through
the computer.
o This involves the auditor to perform tests on the information technology controls
to evaluate their effectiveness like Compliance test, Test Packs, Reprocessing.
• Auditing with the Computer
o The utilization of computer by the auditor for some audit work and he uses some
general software for the purpose of calculating depreciation, printing letters, and
duplicate checking and files comparison.
o The computer is not used for all the audit work and it is done manually

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MISCELLANEOUS
• Comptroller and Auditor General (CAG) of India is an authority who audits all receipts
and expenditure of the Government of India and the state governments.
• Manipulation of accounts is the procedure to alter the books of accounts in such a way
that there will be an increase or decrease in the amount of profit to achieve some
personal objectives of the high officials.
• Window Dressing: It is manipulating the accounts with a view to present better picture
of the state of financial affairs than the actual.
• Accounts seem to indicate much better and sound financial position of the business
enterprises Window Dressing
• The effect of window dressing results in Inflating profit
• Teeming and Lading of Fraud: Teeming and Lading of Fraud means cash received from
one customer is misappropriated and remittance received from another debtor is
posted to the first debtors account.
• Audit is compulsory for Joint Stock Company
• Audit conducted for the benefit of beneficiaries is Trusts
• Partnership Firm audit helps in settlement of claims and in resolving disputes among
partners.
• Trusts audit is conducted based on the Indian Trust Act and Deed
• Sole proprietorship is a person who solely owns, manages and controls a business
• Audit of accounts is not compulsory but optional for Sole proprietorship, Partnership
Firm and Trusts
• Person who conducts audit according to the provision of the Companies Act is called as
External Audit
• External or Statutory audit are determined by Companies Act
• MOA is the basic document of the Company.
• An invitation to the public to subscribe for shares and debentures is Prospectus
• Transposition of figure is an error of Commission
• Incorrect addition, wrong postings and entries are errors of Commission
• Drawing conclusion about the universe/population by testing a few transactions of
representative character is Sampling
• Auditing and Assurance Standards (AAS 3) issued by ICAI
• Records maintained and preserved in the audit process is called Documentation
• Purchases book records Credit purchases only
• Verification refers to examining the physical existence and valuation of assets
• Valuation is a part of verification and Verification is not a part of valuation
• Debit Note is raised by the Trader who returns the goods
• Credit Note is raised by the Trader who receives back goods

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• Materials transformed from one department to another department is entered through
the document called Materials transfer Note
• Audit Planning
o The audit plan is the description of the activities and arrangements for an audit.
o It is a considered as a blue print for the process of carrying out the audit.
• Test checking
o Test checking is also known as Sampling process and Selective process
o It is a process of selecting and checking of a few transactions from a large volume
of transactions
o A process of examining a few transactions of representative character to arrive at
conclusion
o A sample of transactions of representative character is checked under Test
Checking
o The technique is based on the theory of sampling which is commonly used as a
statistical method
o Test Checking or Selective Verification is a substitute for detailed checking. It
involves only a partial checking, checking the entries at random.
• An audit programmes
o It is a detailed, written statement designed by the auditor indicating the work to
be performed by the audit
o A written plan containing the details regarding the conduct of a particular audit is
known as Audit programmes
o Audit Programme is a written scheme prepared by the auditor to distribute work
to be followed during the audit.
o Audit Planning enables an auditor to cover different aspects of audit work in a
systematic manner within a preset time frame
o An audit program includes all the activities necessary for planning, organizing, and
conducting audits.
o It is a plan of action of an Auditor.
o Audit program is a document discloses the detailed plan of work, auditing
techniques and procedures to be applied to a given audit
o The program typically includes an annual schedule of audits.
o General or Fixed Audit Programme: It refers to an audit programme which
contains general guidelines common for all audits.
o Specific or Flexible Audit Programme: It refers to an audit programme designed
for certain specific functional areas like purchases, stores, inventory control,
production control etc.
o Audit programme is prepared by the auditor and his audit assistants
o A written plan prepared by the auditor to determine the period, distribution of
work among the audit staff etc.
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• Audit Note Book
o Audit Note Book is a register maintained by the audit staff to record important
points observed, errors, doubtful queries, helps explanations and clarifications to
be received from the clients
o It also contains definite information regarding the day-to-day work performed by
the audit clerks
o In short, audit note book is usually a bound note book in which a large variety of
matters observed during the course of audit are recorded
o Book maintained for recording the audit remarks.
o The period of commencement and completion of audit are specified in audit Note
book
o This book helps in evaluating the efficiency of audit staff
o The book which helps the auditor, for conducting his audit work is Audit Note Book
• Auditing in-depth
o It refers to an examination of a few selected transactions from the beginning to
the end through the entire flow of the transaction.
o It is a method of auditing under which a few selective transactions are thoroughly
examined to arrive at accuracy of the accounting data.
o The auditor adopts this technique to evaluate the operation of internal control
and internal check system.
o Auditing in-Depth is a technique which facilitates test checking.
o Audit in depth implies a detailed and step by step examination of transactions
through its processes of the activity from origin to conclusion.
• Audit Working Papers
o Papers and documents which contain important facts about accounts which are
under audit are called as Audit Working Papers
o The reports, queries made and explanations received during the audit are called
Audit working Papers
o Working papers provide the basis of conclusions and summarizations of the report
prepared by the auditor at the end of the audit work.
o Working papers collected by the auditor from the client
o “The term working paper is a comprehensive one and includes all the evidences
gathered by the auditor to show the work he has done, the methods and
procedures he has followed and the conclusions he has developed”
o It is the duty of the auditor to retain and preserve the working papers for a period
of 7 years
o Summaries of audit works, statements and reports collected from the client.
o The owner of working paper is Auditor

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 UNIT 03
BUSINESS ECONOMICS
❖ Modul 1: Meaning and scope of business economics
❖ Modul 2: Objectives of business firms
❖ Modul 3: Demand analysis
1. Law of demand
2. Elasticity of demand and its measurement
3. Relationship between AR and MR
❖ Modul 4: Consumer behaviour
1. Utility analysis
2. Indifference curve analysis
❖ Modul 5: Law of Variable Proportions
1. Law of Returns to Scale
❖ Modul 6: Theory of cost
1. Short-run curves
2. long-run cost curves
❖ Modul 7: Price determination under different market forms
1. Perfect competition
2. Monopolistic competition
3. Oligopoly- Price leadership model
4. Monopoly
5. Price discrimination
❖ Modul 8: Pricing strategies
1. Price skimming
2. Price penetration
3. Peak load pricing

1
INTRODUCTION
• The word economics has originated from a Greek word “oikonomikos”
• Which can be divided into two parts:
o oikos means home
o nomos means management.
• “If economics were laid end to end, they would not reach a conclusion” – Bernard Saw
• Positive economics: Deals with scientific issues, questions and problems, solve without
value judgement
• Normative economics: Deal with ethical issues, questions and problems, solve with
value judgement
• Micro Economics: Analysis of any single unit of economics
• Macro Economics: Analysis of all unit of economics
DIFFERENT VIEWPOINTS ON ECONOMICS
• Wealth viewpoint
o This is a classical viewpoint on economics
o It was given by Adam Smith
o Adam Smith considered as the father of modern economics
o His Book “An enquiry in to the nature and cause of the wealth of nation”
o According to Adam Smith, Economics is “the study of the nature and causes of
nations wealth or simply as the study of wealth”.
o Along with J. B. Say and Walker defined economics as the science of wealth
o Characteristics
▪ Exaggerated emphases on wealth
▪ Enquiry in to the creation of wealth
▪ A study on the nature of wealth
• Material Welfare viewpoint
o It is a neo-classical viewpoint on economics
o It was given by Alfred Marshall
o His Book “Principles of Economics”
o According to Alfred Marshall, “Economics is a study of man in the ordinary
business of life. It enquires how he gets his income and how he uses it. Thus, it is
on the one side, the study of wealth and on the other and more important side, a
part of the study of man”
o Characteristics
▪ Study of material requisites of well being
▪ Concentration on the ordinary business of life
▪ Stress on the role of man

2
 • Scarcity and Choice viewpoint:
o It is a pre-Keynesian thought of economics
o It was given by Lionel Robins
o His book “Essays on the Nature and Significance of the Economic Science”
o “Economics is a science which studies human behaviour as a relationship between
ends and scarce means which have alternative uses”.
• Development and Growth viewpoint:
o This is the modern perspective of economics
o It was given by Paul Samuelson
o He provided the growth-oriented definition of economics.
o His book “Economics: An introductory Analysis”
o Given by “Production Possibility Curve”
o Professor Samuelson used the concept of the production possibility curve to
explain the economic problem of a society. There are 3 problems
▪ What to produce
▪ How to produce
▪ Whom to produce
o The definition outlines three main aspects
▪ Human behaviour
▪ Allocation of resources
▪ Alternative uses of resources
• Matching
o Wealth – Adam Smith
o Welfare – Alfred Marshall
o Scarcity – Leonel Robins
o Growth – Paul Samuelson
SCOPE OF ECONOMICS
• International arena
• Public finance
• Welfare
• Health
• Environmental studies
• Urban and rural development
• Development economics
NATURE
• A science
• An Arts
• A Social Science
3
ASSUMPTIONS IN ECONOMICS
• Consumers have rational preferences
• Existence of perfect competition
• Existence of equilibrium
BUSINESS ECONOMICS / MANAGERIAL ECONOMICS
• The application of economic concepts, theories, and tools in business decision making is
called business economics or managerial economics.
• According to Mansfield, “Managerial economics is concerned with the application of
economic concepts and economics to the problems of formulating rational decision
making”
SCOPE OF BUSINESS ECONOMICS
• Demand analysis and forecasting
• Cost and benefit analysis (CBA)
• Pricing decisions, policies, and practices
• Profit maximisation
• Capital management
DIFFERENCE BETWEEN ECONOMICS AND BUSINESS ECONOMICS
• Economics is a traditional subject that has prevailed from a long time
• Business economics is a modern concept and is still developing.
•
• Economics mainly covers theoretical aspects
• Business economics covers practical aspects.
•
• In economics, the problems of individuals and societies are studied.
• In business economics, the main area of study is the problems of organisations.
•
• In economics, only economic factors are considered
• In business economics both economic and no-economic factors are considered
•
• Both microeconomics and macroeconomics fall under the scope of economics.
• Only microeconomics falls under the scope of business economics.
LAW OF ECONOMICS
• Laws of economics are based on a set of generalisations assumed to govern an
economic activity
• In economics, there are two basic laws: Law of demand and Law of supply
4
GROSS NATIONAL PRODUCT (GNP)
• The most important measure of national income is Gross National Product (GNP)
• National income can be defined as combined factor income arising from the current
production of goods and services in a country.
• GNP can be defined as the market value of all products and services that are produced
in a particular year by a country.
• In GNP, the word gross indicates total national product including depreciation
• Depreciation is also called consumption of fixed capital.
• Net National income or Revenue of the country or the national dividend.
• GNP = GDP + Net factor from abroad
• In the calculation of GNP, the following aspects are included:
o Consumer goods and services
o Gross private domestic income
o Goods and services produced by the government
o Net income from abroad
INFLATION
• Inflation can be defined as the persistent increase in the price level of goods and services
in an economy over a period of time
• “Inflation is a rise in the general level of prices.”
• “Too much money chasing too few goods.”
• “Inflation is an upward movement in the average level of prices”
• “Downward movement in the average level of prices.”
• The boundary between inflation and deflation is price stability
• “Inflation is an increase in the quantity of money faster than real national output is
expanding.”
• Inflation is followed by price rise
• Caused by inflation is increase in money supply
• Inflation is also an economic and monetary phenomenon.
• Inflation is always scarcity oriented and occurs in disequilibrium state of economy
• Inflation is persistent in nature.
• The rise in prices in inflation cannot be reversed
• Inflation is a situation in which the general price level rises or it is the same thing as
saying that the value of money falls.
• “Too much money chasing too few goods”
• Inflation is a state in which the value of money is falling
• Inflation exists when money supply exceeds available goods and services.

5
TYPES OF INFLATION
On the Basis of Causes:
• Currency inflation: This type of inflation is caused by the printing of currency notes
• Credit inflation: Being profit-making institutions, commercial banks sanction more loans
and advances to the public than what the economy needs. Such credit expansion leads
to a rise in price level.
• Deficit-induced inflation: The budget of the government reflects a deficit when
expenditure exceeds revenue. To meet this gap, the government may ask the central
bank to print additional money.
• Demand-pull inflation (DPN): An increase in aggregate demand over the available
output leads to a rise in the price level. Such inflation is called demand-pull in-flation
• Cost-push inflation (CPI):
o Inflation in an economy may arise from the overall increase in the cost of
production. This type of inflation is known as cost-push inflation
o Cost of pro-duction may rise due to an increase in the prices of raw materials,
wages, etc.
o Higher wage means high cost of production. Prices of commodities are thereby
increased.
o We have two important variants of CPI: Wage-push inflation and Profit-push
inflation.
On the basis of speed or intensity:
• Creeping / Mild inflation
o If the rate of annual price increase lies between 2 % and 3 % or Less than 3%
inflation
• Walking Inflation / Trotting Inflation:
o If the rate of annual price increase lies between 3 % and 6 %
o The rate of rise in prices is in the intermediate range of 3 to 6 per cent per annum
or less than 10 per cent.
• Moderate Inflation
o Creeping and walking inflation are called Moderate inflation
o One-digit inflation rate is called ‘moderate inflation’
o It is controllable inflation
• Running Inflation:
o When prices rise rapidly like the running of a horse at a rate or speed of 10 to 20
percent per annum, it is called running inflation.
o Such an inflation affects the poor and middle classes adversely.
o Its control requires strong monetary and fiscal measures, otherwise it leads to
hyperinflation.
6
• Galloping inflation / Jumping inflation / Hyper inflation
o This type of inflation takes place at the time of the rise in the prices of goods and
services at two-digit or three-digit rate per annum.
o Inflation in the double- or triple-digit range of 20, 100 or 200 Percentage a year is
labelled “galloping inflation”.
o Walking inflation may be converted into running inflation
o Running inflation is dangerous. If it is not controlled
o The cause behind hyperinflation is the unrestricted increase in the supply of
money in the market.
o This results in a situation of imbalance in the supply and demand for money.
• True inflation: Any increase in aggregate expenditure will raise the price level in the
same proportion
• Open Inflation:
o Inflation is open when “markets for goods or factors of production are al­lowed to
function freely, setting prices of goods and factors without normal interference
by the authorities”
o There are no checks or controls on the distribution of commodities by the
government.
• Suppressed Inflation: The government imposes physical and monetary controls to check
open inflation, it is known as repressed or suppressed inflation

7
DEMAND ANALYSIS
• The working of a market is governed by two forces, which are demand and supply.
• Demand refers to how much (quantity) of products or services desired by buyer
• Essentials of effective demand:
o Desire for a commodity
o Willingness to pay
o Ability to pay for the commodity
o The quantity to be purchased
o The price at which the commodity is to be purchased
o The time period when the commodity is purchased
DIFFERENT TYPES OF DEMAND
• Price demand
o Price demand refers to the different quantities of the commodity or service which
consumers will purchase at a given time and at given prices, assuming other things
remaining the same.
o Price demand has inverse relation with the price. As the price of commodity
increases its demand falls and as the price decreases, its demand rises.
• Income demand
o Income demand refers to the different quantities of a commodity or service which
consumers will buy at different levels of income, assuming other things remaining
constant
o Usually the demand for a commodity increases as the income of a person
increases
• Cross demand
o When the demand for a commodity depends not on its price but on the price of
other related commodities, it is called cross demand.
o Here we take closely connected or related goods which are substitutes for one
another.
• Direct demand
o Commodities or services which satisfy our wants directly
o Direct demand is the demand for commodities or services meant for final
consumption
• Derived demand: It refers to the demand for a product that arises due to the demand
for other products
• Joint demand: It is the quantity demanded for two or more commodities or services that
are used jointly
• Composite demand: It is the demand for commodities or services that have multiple
uses
8
LAW OF DEMAND
• Inverse relationship between the demand and price of a commodity is called the law of
demand
• The law of demand represents a functional relationship between the price and quantity
demanded of a commodity or service.
• The quantity demanded of a commodity increases with a fall in the price of the
commodity and vice versa
• Factors of production: These are inputs used in the production of goods or services in
an attempt to earn an economic profit.
• Law of demand is an empirical (statistical) law
• Demand is a dependent variable, while price is an independent variable.
• Demand is a function D= f (P), Where D= Demand, P= Price, f = Functional Relationship
• Assumptions in the Law of demand
o The income of the consumer remains constant.
o Consumer tastes and preferences remain constant.
o Price of related goods remains unchanged.
o Population size remains constant.
o Consumer expectations do not change.
o Credit policies remain unchanged.
o Income distribution remains constant.
o Government policies remain unchanged.
o The commodity is a normal commodity
• Three Alternative way of expressing Demand
o Demand Schedule
o Demand Curve
o Demand Function
DEMAND SCHEDULE
• Demand schedule is a tabular representation of different quantities of commodities
that consumers are willing to purchase at specific price and time while other factors
are constant.
• Individual demand schedule: It is a tabular representation of quantities of a commodity
demanded by an individual at a particular price and time, provided all other factors
remain constant.
• Market demand schedule: There is more than one consumer of a commodity in the
market. Each consumer has his/her own individual demand schedule. If the quantities
of all individual demand schedules are consolidated, it is called market demand
schedule.

9
DEMAND CURVE
• A demand curve is a graphical representation of the law of demand
• The demand schedule can be converted into a demand curve by graphically plotting the
different combinations of price and quantity demanded of a product
• The demand curve represents different quantities of a commodity demanded at specific
price and time while other factors remain constant
• The negative slope of a demand curve is a reflection of the law of demand
• Demand curve is slopes downwards to the right
• X – axis is Quantity of demand
• Y – axis is Price of the commodity
• Change in quantity demanded refers to change in the quantity purchased due to rise or
fall in product prices while other factors are constant.
• Change in demand refers to increase or decrease in demand for a product due to various
determinants of demand other than price
• Reasons why the demand curve slopes downwards to the right.
o Law of diminishing marginal utility
o Increase Income effect
o Substitution effect
o Change in the number of consumers
o Multiple uses of a commodity
DEMAND FUNCTION
• An algebraic form of expressing Demand behaviour
• Mathematically, a function is a symbolic representation of the relationship between
dependent (Demand) and independent variables (Price)
• Function Dx = f (Px)
• Individual Demand Function: Dx= f (Px, Pr, Y, T, F)
• Market Demand Function: Dx= f (Px, Pr, Y, T, F, Po, S, D)
o Dx = Demand for commodity x;
o f = Functional relationship
o Px = Price of the given commodity x;
o Pr = Price of related goods;
o Y = Income of the individual consumer;
o T = Tastes and preferences;
o F = Expectation of change in price in the future;
o Po = Size and composition of population;
o S = Season and weather;
o D = Distribution of income.

10
EXCEPTIONS TO THE LAW OF DEMAND
• There are certain exceptions that with a fall in price, the demand also falls and there is
an increase in demand with an increase in price
• This situation is paradoxical in nature
• In simple words, exception to law of demand refers to conditions where the law of
demand is not applicable.
• In case of exceptions, demand curve shows an upward slope
• Giffen goods: Robert Giffen
• Veblen goods / Articles of distinction: Thorstein Veblen
• Conspicuous necessities
• Consumers’ ignorance
• Situations of crisis
• Future price expectations
• Change in Fashion
• Complementary Goods and Expected Change in the Price of a Good
SUPPLY ANALYSIS
• Supply can be defined as the quantity of a product that a seller is willing to offer in the
market at a particular price within specific time
• It is governed by the law of supply
• The law of supply explains the relationship between price and supply of a product.
• The law of supply states that the supply of a product increases with an increase in its
price, while other factors at constant and vice versa.
• Supply is always referred in terms of price
• Supply is referred in terms of time
• Supply considers the stock and market price of the product.
• Individual supply is the quantity of goods a single producer (a single producer is known
as a firm) is willing to supply at a particular price and time in the market.
• Market supply is the quantity of goods supplied by all firms in the market during a
specific time period and at a particular price.
• Market supply is also known as industry supply as firms collectively constitute an
industry.
• Supply does not remain constant all the time in the market

11
EXCEPTIONS TO LAW OF SUPPLY
• Agricultural products
• Goods for auction
• Perishable Goods
• Expectation of change in prices in the future
• Supply of labour
• Monopoly
• Expected Change in the Price of a Good
• Competition
• Legislation Restricting Quantity
• Artistic and Auction Goods
SUPPLY CURVE
• The graphical representation of supply schedule is called supply curve.
• The price of a product is represented on y-axis
• Quantity supplied is represented on X-axis.
• Supply curve can be of two types, individual supply curve and market supply curve
• The slope moving upwards to the right
• Supply Function: Qs = f (Pa, Pb, Pc, T, Tp)
• Change in quantity supplied occurs due to rise or fall in product prices while other
factors are constant. Expansion or Contraction of demand
• Change in supply refers to increase or decrease in the supply of a product due to various
determinants of supply other than price. Increase or Decrease in demand
MARKET EQUILIBRIUM
• The interaction between demand and supply helps in determining the market
equilibrium price of a product.
• Equilibrium price is a price where the quantity demanded of a product by buyers is equal
to the quantity supplied by sellers.
• In simple terms, equilibrium price is a price when there is a balance between market
demand and supply
• Equilibrium means state of rest, Market equilibrium is expressed as: Qd (P) = Qs (P)

12
 • Cost Price: It refers to the price at which the product is bought from a manufacturer by
sellers and retailers.
• Fast moving consumer Goods (FMGG): These are goods that are sold frequently at
relatively low prices. Examples are cold drinks, biscuits, etc.
• Market price: It refers to the price at which a product is available for sale in the market.
ELASTICITY OF DEMAND
• Elasticity is a measure of how much the quantity demanded or supplied would be
affected by a proportionate change in its determinants.
• The concept of elasticity was first introduced by Dr. Alfred Marshall
• Elasticity can be defined as the responsiveness of a variable (demand or supply) with
respect to its various determinants.
• “Elasticity of demand may be defined as the ratio of percentage change in demand to
the percentage change in the price”.
• Elasticity of demand for necessities is Less than one
• Price discrimination is possible and profitable when different markets have different
elasticity of demand
• Elasticity of demand is equal to 1, Marginal revenue equal to 1
• Economists have divided the elasticity of demand in three main categories
o Price elasticity of demand
o Income elasticity of demand
o Cross elasticity of demand

13
PRICE ELASTICITY OF DEMAND
• Price elasticity of demand is a measure of a change in the quantity demanded of a
product due to change in the price of the product in the market
• It can be defined as the ratio of the percentage change in quantity demanded to the
percentage change in price
• A percentage change in demand and price is denoted with a symbol Δ.

14
DIFFERENT TYPES OF PRICE ELASTICITY
• Perfectly Elastic Demand
o When a small change (rise or fall) in the price results in a large change (fall or rise)
in the quantity demanded, it is known as perfectly elastic demand
o A small rise in price results in a fall in demand to zero
o A small fall in price causes an increase in demand to infinity
o The demand is perfectly elastic or ep = ∞.
o In perfectly elastic demand, the demand curve is represented as a horizontal
straight line (parallel to x - axis)
• Perfectly Inelastic Demand
o When a change (rise or fall) in the price of a product does not bring any change
(fall or rise) in the quantity demanded, the demand is called perfectly inelastic
demand.
o In this case, the elasticity of demand is zero and represented as ep = 0.
o Graphically, perfectly inelastic demand curve is represented as a vertical straight
line (parallel to y - axis)
• Relatively Elastic Demand
o When a proportionate or percentage change (fall or rise) in price results in greater
than the proportionate or percentage change (rise or fall) in quantity demanded,
the demand is said to be relatively elastic demand.
o In other words, a change in demand is greater than the change in price.
o Therefore, in this case, elasticity of demand is greater than 1 and represented as
ep > 1.
o The demand curve of relatively elastic demand is gradually sloping
• Relatively Inelastic Demand
o When a percentage or proportionate change (fall or rise) in price results in less
than the percentage or proportionate change (rise or fall) in demand, the demand
is said to be relatively inelastic demand.
o In other words, a change in demand is less than the change in price.
o Therefore, the elasticity of demand is less than 1 and represented as ep < 1.
o The demand curve of relatively inelastic demand is rapidly sloping
• Unitary Elastic Demand
o Unitary elastic demand occurs when a change (rise or fall) in price results in
equivalent change (fall or rise) in demand.
o Unitary elastic demand is equal to one and represented ep =1.
o The demand curve for unitary elastic demand is a rectangular hyperbola

15
METHODS FOR MEASURING PRICE ELASTICITY OF DEMAND
• Total outlay method
o This method was introduced by Dr. Alfred Marshall.
o According to this method, the price elasticity of a product is measured on the basis
of the total amount of money spent (total expenditure) by consumers on the
consumption of that product.
o Using this method, price elasticity is determined by comparing consumers
expenditure or outlay before change in the price with that of after change in the
price.
o In the total outlay method, three cases are considered, which are:
▪ If the total outlay remains unchanged after there is a change in the price of
the good, the price elasticity equals one (ep= 1).
▪ When a fall in the price of the good results in a small increase in the quantity
demanded leading to a decline in total outlay, the elasticity of demand is
less than one (ep < 1).
▪ When a fall in the price of the good brings a large increase in the quantity
demanded resulting in the rise of total expenditure, elasticity of demand is
greater than one (ep >1).

16
• Percentage method
o It is also known as the ratio method.
o A ratio of proportionate change in quantity demanded to the price of the product
is calculated to determine the price elasticity

• Point elasticity method

o This method is used to measure the elasticity at a specific point on a demand
curve.
o The point elasticity method is also known as geometric method or slope method.
o In this method, different points are taken on the demand curve to find the price
elasticity of demand at different prices.
o The points at which elasticity is measured are lower and upper segments of the
curve
o The point price elasticity of demand is measured on linear curves and non-linear
curves

▪ “L” is lower segment of the demand curve

▪ “U” is the upper segment of the demand curve
o Linear demand curve: It is a curve where demand is represented as a straight line.
o Non-linear demand curve: In this curve, a tangent is drawn that touches point P
(price elasticity) at the demand curve. By drawing the tangent, the curve is
separated into two parts, namely the upper segment and the lower segment.

17
 • Arc elasticity method
o This method is used to calculate the elasticity of demand at the midpoint of an
arc on the demand curve.
o In this method, the average of prices and quantities are calculated for finding
elasticity.
o It is assumed that the elasticity would be same over a range of values of variables
considered.

FACTORS INFLUENCING PRICE ELASTICITY OF DEMAND

• Relative need for the product
• Availability of substitute goods
• Impact of income
• Time under consideration
• Perishability of the product
• Addiction
SIGNIFICANCE OF PRICE ELASTICITY OF DEMAND
• Price determination
• Price discrimination
• Formulation of taxation policies
• International trade
• Formulation of agricultural policies

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INCOME ELASTICITY OF DEMAND
• An increase in the income of consumers increases the demand for the product even if
the price remains constant.
• The responsiveness of quantity demanded with respect to the income of consumers is
called the income elasticity of demand.
• “Income elasticity of demand means the ratio of the percentage change in the quantity
demanded to the percentage in income.”

TYPES OF INCOME ELASTICITY OF DEMAND

• Positive income elasticity of demand
o When a proportionate change in the income of a consumer increases the demand
for a product and vice versa, income elasticity of demand is said to be positive.
o The income elasticity of demand is generally found positive
o Demand curve is Upward slop left to right
o There are three types of positive income elasticity of demand
o Unitary income elasticity of demand
▪ The income elasticity of demand is said to be unitary when a proportionate
change in a consumer’s income results in an equal change in the demand
(increase) for a product.
▪ For example, if there is 25% increase in the income of a consumer, the
demand for milk consumption would also be increased by 25%.
▪ Thus 25/25 So, ey = 1
o Less than unitary income elasticity of demand
▪ The income elasticity of demand is said to be less than unitary when a
proportionate change in a consumer’s income causes comparatively less
increase in the demand for a product.
▪ For example, if there is an increase of 25% in consumer’s income, the
demand for milk is increased by only 10%.
▪ Thus 10/100 (0.1) So, ey= < 1
o More than unitary income elasticity of demand
▪ The income elasticity of demand is said to be more than unitary when a
proportionate change in a consumer’s income causes a comparatively large
increase in the demand for a product.
▪ For example, if there is an increase of 25% in consumer’s income, the
demand for milk is increased by only 35%.
▪ Thus 35/25 (1.4) So, ey > 1
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 • Negative income elasticity of demand
o When a proportionate change in the income of a consumer results in a fall in the
demand for a product and vice versa, the income elasticity of demand is said to be
positive.
o Demand curve downward slop Left to right
o It generally happens in case of inferior goods.
o Goods are not inferior or superior rather the inferiority or superiority of goods is
decided by consumers based on their income level, perceptions, and preferences.
o For example, consumers may prefer small cars with a limited income. However,
with a rise in income, they may prefer using luxury cars.
• Zero income elasticity of demand
o When a proportionate change in the income of a consumer does not bring any
change in the demand for a product, income elasticity of demand is said to be
zero.
o Demand Curve is Vertical
o It generally occurs for utility goods such as salt, kerosene, electricity.
FACTORS INFLUENCING INCOME ELASTICITY OF DEMAND
• Income of consumers in a country
• Nature of products
• Consumption pattern
ADVERTISEMENT ELASTICITY OF DEMAND

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CROSS ELASTICITY OF DEMAND
• The cross elasticity of demand can be defined as a measure of a proportionate change
in the demand for goods as a result of change in the price of related goods.

• Positive cross elasticity of demand

o When an increase in the price of a related product results in an increase in the
demand for the main product and vice versa, the cross elasticity of demand is said
to be positive.
o Cross-elasticity of demand is positive in case of substitute goods.
o For example, the quantity demanded for tea has increased from 200 units to 300
units with an increase in the price of coffee from 25 to 30.
• Negative cross elasticity of demand
o When an increase in the price of a related product results in the decrease of the
demand of the main product and vice versa, the negative elasticity of demand is
said to be negative.
o In complementary goods, cross elasticity of goods is negative.
o For example, if the price of butter is increased from 20 to 25, the demand for
bread is decreased from 200 units to 125 units.
• Zero cross elasticity of demand
o When a proportionate change in the price of a related product does not bring any
change in the demand for the main product
o In simple words, cross elasticity is zero in case of independent goods.
o In this case, ec becomes zero

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ELASTICITY OF SUPPLY
• The elasticity of supply is a measure of change in the quantity supplied of a product in
response to a change in its price.
• The elasticity of supply is categorised into five types, namely perfectly elastic supply,
perfectly inelastic supply, relatively elastic supply, relatively inelastic supply, and unitary
elastic supply
• The elasticity of supply is measured using two methods namely proportionate method
and point method

• Elasticity of demand: It is a measure of responsiveness of the quantity demanded for a

product with respect to a change in its price.
• Elasticity of supply: It is a measure of responsiveness of the quantity supplied for a
product with respect to a change in its price.

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DEMAND FORECASTING
• “Demand estimation (forecasting) may be defined as a process of finding values for
demand in future time periods.”
• Level of forecasting: Demand forecasting can be done at the firm level, industry level,
or economy level.
o At the firm level, the demand is forecasted for the products and services of an
individual organisation in the future.
o At the industry level, the collective demand for the products and services of all
organisations in a particular industry is forecasted.
o At the economy level, the aggregate demand for products and services in the
economy as a whole is anticipated.
• Time period involved: On the basis of the duration, demand is forecasted in the short
run and long term
o Short-term forecasting: It involves anticipating demand for a period not exceeding
one year. It is focused on the short-term decisions (for example, arranging finance,
formulating production policy, making promotional strategies, etc.) of an
organisation.
o Long-term forecasting: It involves predicting demand for a period of 5-7 years and
may extend for a period of 10 to 20 years. It is focused on the long-term decisions
(for example, deciding the production capacity, replacing machinery, etc.) of an
organisation.
• Nature of products: Products can be categorised into consumer goods or capital goods
on the basis of their nature.
o Consumer goods: The goods that are meant for final consumption by end users
are called consumer goods. These goods have a direct demand. Generally, demand
forecasting for these goods is done while introducing a new product or replacing
the existing product with an improved one.
o Capital goods: These goods are required to produce consumer goods; for
example, raw material. Thus, these goods have a derived demand. The demand
forecasting of capital goods depends on the demand for consumer goods. For
example, prediction of higher demand for consumer goods would result in the
anticipation of higher demand for capital goods too
STEPS IN DEMAND FORECASTING
1. Specifying the objective
2. Determining the time perspective
3. Selecting the method for forecasting
4. Collecting and analysing data
5. Interpreting outcomes

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TECHNIQUES OF DEMAND FORECASTING
• Qualitative Techniques
o Survey methods
▪ Complete enumeration survey / Census method
▪ Sample survey
o Opinion poll methods
▪ Expert opinion method
▪ Delphi method
▪ Market studies and experiments
• Quantitative techniques
o Time series analysis
▪ Trend component
▪ Cyclical component
▪ Seasonal component
▪ Irregular component
o Smoothing Techniques
▪ The simple moving average method
▪ Weighted moving average method.
o Barometric Methods (Index of relevant economic indicator)
▪ Leading indicators
▪ Coincident indicators
▪ Lagging indicators
o Econometric Methods
▪ Econometric methods make use of statistical tools combined with
economic theories to assess various economic variables
▪ An econometric model for demand forecasting could be single equation
regression analysis or a system of simultaneous equations
o Regression analysis method
▪ Demand forecasting measures the relationship between two variables
▪ Regression analysis a relationship is established between the dependent
(quantity demanded) and independent variable (income of the consumer,
price of related goods, advertisements, etc.)
▪ Formula: y = a + bx
• The effectiveness of demand forecasting depends on the selection of an appropriate
demand forecasting technique.

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CONCEPT OF REVENUE
• The profit earned by a firm can be increased either by reducing the cost of production
or by increasing the revenue.
• Revenue is the total amount of money received by an organisation in return of the goods
sold or services provided during a given time period
• Total Revenue (TR)
o Total revenue of a firm refers to total receipts from the sale of a given quantity of
a commodity.
o In other words, total revenue is the total income of a firm.
o Total revenue is calculated by multiplying the quantity of the commodity sold with
the price of the commodity
o Total Revenue = Quantity × Price
• Average Revenue (AR)
o Average revenue of a firm refers to the revenue earned per unit of output sold.
o It is calculated by dividing the total revenue of the firm by the total number of
units sold.
o Average Revenue and Price of a commodity are equal in value

• Marginal Revenue
o Marginal Revenue (MR) of a firm refers to the revenue earned by selling an
additional unit of the commodity.
o In other words, the change in total revenue resulting from the sale of an additional
unit is called marginal revenue
o MRn = TRn-TRn-1
o MRn = marginal revenue of nth unit (additional unit)
o TRn = Total revenue from n units,
o TRn-1 = Total revenue from (n – 1) units
o n = Number of units sold.
o For example, if the total revenue realised from the sale of 10 fans is RS. 2,000 and
that from sale of 11 fans is Rs. 2,500: MR11 = 2,500 – 2,000 = 500
o MR is the change in TR when an additional unit is sold. However, when change in
units sold is more than one, MR can also be computed using the following method

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 o Suppose the total revenue realised from sale of 10 fans is Rs. 2,000 and that from
sale of 14 fans is Rs. 4,000, marginal revenue will be calculated as follows:

RELATIONSHIP BETWEEN MR AND TR

• If MR is greater than zero, the sale of an additional unit increases the TR.
• If MR is below zero, then the sale of an additional unit decreases the TR.
• If MR is equal to zero, then the sale of an additional unit results in no change in the TR
• The TR curve is shaped like an inverted U - Slope of a curve
• The rise in the slope of the TR curve represents the change in TR
• When price remains same at all output levels, then TR increases at a constant rate (due
to constant MR). As a result, TR curve is a 45° positively sloped straight line
• MR cannot be zero or negative when price remains constant at all levels of output.
RELATIONSHIP BETWEEN MR AND AR
• General Relationship between MR and AR
o AR increases as long as MR is higher than AR (or when MR > AR, AR increases).
o AR is maximum and constant when MR is equal to AR (or when MR = AR, AR is
maximum).
o AR falls when MR is less than AR (or when MR < AR, AR falls)
• Marginal revenue is less than average revenue (MR < AR)
o Under imperfect competition and monopoly, where there is sufficient market
control, marginal revenue is less than average revenue (MR < AR) and the average
revenue falls or decline
o Where a single firm sells to several customers (Monopoly)
o Both MR and AR Negatively-sloped demand curve
o The negatively-sloped MR curve lies below the negatively-sloped AR curve
o As the marginal revenue is less than the average revenue, the average revenue
curve declines.
• Marginal revenue is equal to average revenue (MR = AR)
o In a perfectly competitive market, where there is no market control, marginal
revenue is equal to average revenue (MR = AR) and the average revenue remains
constant
o Where there are several sellers and several buyers of a given product.
o The marginal revenue is equal to the per unit price, which is equal to AR
o MR and AR curve are horizontal straight line (Both Single line) parallel to the X-axis
26
UTILITY ANALYSIS
• The level of satisfaction derived by a consumer after consuming a good or service is
called utility
• In other words, utility can be defined as a measure of consumer satisfaction received on
the consumption of a good or service
• The utility of a good differs from one consumer to the other
• Utility analysis is a systematic process of measuring utility derived by a consumer after
the consumption of a good.
• It involves analysing factors that influence consumer behaviour for a particular good
• There are two approaches to the measurement of utility namely
o Cardinal utility approach
o Ordinal utility approach
• Neo-classical economists have given cardinal utility
• Modern economists have given the concept of ordinal utility for measuring utility
• Consumer demand analysis is a process of assessing consumer behaviour based on the
satisfaction of wants and needs generated by a consumer from the consumption of
various goods. The satisfaction that consumers gain out of the consumption of a
commodity or service is called utility
• The study and analysis of consumer behaviour is based on three main assumptions
o Decisiveness
o Transitivity
o Non-satiation
• The concept of utility may be looked upon from two perspectives
o Product perspective: Utility is the ability of a product to satisfy want
o Consumer perspective: Utility is the psychological feeling of satisfaction,
happiness, well-being, etc.
• Mathematically, utility can be expressed as a function: U = f (m1, n1, r1)
• Total utility is defined as the sum of the utility derived by a consumer from the different
units of a commodity or service consumed at a given period of time
• Marginal utility is defined as the utility derived from the marginal or additional unit of
a commodity consumed by an individual

27
LAW OF DIMINISHING MARGINAL UTILITY
• When an individual continues to consume more and more units of a commodity per unit
of time, the utility that he/she obtains from each successive unit continues to diminish.
• For example, the utility derived from the first glass of water is high, but with successive
glasses of water, the utility would keep diminishing.
• The law of diminishing marginal utility is applicable to all kinds of goods such as
consumer goods, durable goods, and non-durable goods
• The law of diminishing marginal utility is based on certain assumptions
o Rationality
o Measurement of utility
o Constant marginal utility of money
o Homogeneity of commodity
o Continuity
o Ceteris paribus
CARDINAL UTILITY ANALYSIS
• The cardinal utility theory or approach was proposed by classical economists Gossen,
William Stanley Jevons, Leon Walras, Karl Menger
• Later on, a neo-classical economist, Alfred Marshall
• Neo-classical economists have given cardinal utility
• Cardinal utility theory is also known as Neo-classical utility theory.
• The utility can be measured in cardinal numbers such as 1, 3, 10, 15, etc
• Neo-classical economists believed that utility is cardinal or quantitative like other
mathematical variables, such as height, weight, velocity, air pressure, and temperature
• They developed a unit of measuring utility called utils
• Example 10 utils from Coffee and 15 utils from tea
• Neo-classicists assumed that one util equals one unit of money and the utility of money
remains constant

28
ORDINAL UTILITY APPROACH
• John Hicks and R.J. Allen argued that the theory of consumer behaviour should be
developed on the basis of ordinal utility.
• According to the ordinal theory, utility is a psychological phenomenon like happiness,
satisfaction, etc
• Ordinal utility approach is purely subjective and is immeasurable
• It is highly subjective in nature and varies across individuals.
• Its cannot be measured in quantifiable terms.
• As per the ordinal utility approach, utility can be measured in relative terms such as less
than and greater than
• The approach advocates that consumer behaviour can be explained in terms of
preferences or rankings
• For example, a consumer may prefer ice-cream over soft drink. In such a case, ice-cream
would have 1st rank, while 2nd rank would be given to soft drink
• This implies that utility can be ranked qualitatively and not quantitatively
INDIFFERENCE CURVE (IC)
• The consumer is indifferent to any combination of two commodities if he/she has to
make a choice between them.
• The indifference curve represents consumers’ preferences for a combination of two
goods that are substitutes of each other
• When these combinations are plotted on the graph is called indifference curve.
• Indifference curve is also called the iso-utility curve or equal utility curve.
• When more than one indifference curve is plotted on the same graph, the family of
curves is called an indifference map.
• Marginal rate of substitution (MRS) refers to the rate at which one commodity can be
substituted for another commodity maintaining the same level of satisfaction
• Properties or characteristics of Indifference curve
o ICs are negatively sloped
o Higher IC represents higher satisfaction level
o ICs are convex to the origin
o ICs do not intersect
o IC analysis is based on the combinations of two commodities.
• The demonstration effect states that an individual’s consumption pattern is affected by
the level of consumption of other individuals
• Demonstration effect given by James Stemble Duesenberry

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BUDGET LINE / PRICE LINE
• The budget line is derived on the basis of the income of a consumer and the prices of
commodities in the market
• Any change in the consumer’s income or the prices of commodities would result in a
change in the budget line is called a shift in the budget line.
• A rise in the consumer’s income results in an upward shift in the budget line with an
assumption that the prices of commodities remain the same
• When the prices of commodities change, the budget line shifts from its original position
while income remains unchanged.
CONSUMER EQUILIBRIUM EFFECT
• A consumer reaches a state of equilibrium when he/she attains maximum total utility
at the given income level and market price of commodities.
• Income effect on consumer equilibrium
o The effect caused by changes in consumer’s income on his/her purchases
o The prices of commodities remain unchanged
• Substitution effect on consumer equilibrium
o It can be defined as the prices of both the commodities change.
o One commodity is increase and Another one is decrease
o The income of the consumer remains unchanged
o Consumer tends to purchase more units of commodity X and fewer units of
commodity Y
• Price Effect on Consumer Equilibrium
o The price of only one commodity changes
o Consumer’s money income remains constant
o Joining all equilibrium points Price consumption curve (PCC)
REVEALED PREFERENCE THEORY
• The revealed preference theory was proposed by Paul Samuelson
• The theory states that consumers’ preferences can be revealed by the purchases they
make under different income and price circumstances
• This theory does not take into account utility approaches or indifference curve to explain
consumer behaviour.
• The basic hypothesis of the revealed preference theory is that ‘choice reveals
preference’

30
LAW OF RETURN TO SCALE
• Law of returns to scale explains the proportional change in output with respect to
proportional change in inputs.
• Returns to scale implies the behaviour of output when all the factor inputs are changed
in the same proportion given the same technology
• The assumptions of returns to scale are as follows:
o The firm is using only two factors of production that are capital and labour.
o Labour and capital are combined in one fixed proportion.
o Prices of factors do not change.
o State of technology is fixed.
• There are three aspects of the laws of returns:
o Increasing returns to scale: A situation in which output increase by a greater
proportion than increase in factor inputs is called increasing returns to scale
o Constant returns to scale: A constant return to scale implies the situation in which
an increase in output is equal to the increase in factor inputs
o Diminishing returns to scale: Diminishing returns to scale refers to a situation in
which output increases in lesser proportion than increase in factor inputs

31
CONCEPT OF COST
• Cost refers to the amount of resources required for the production of commodities and
services.
• Cost is the expenditure, measured in monetary terms, incurred or to be incurred in order
to achieve a specific objective
• Cost is an important factor in business analysis and decision making
o Identifying the weak points in production management
o Minimising the cost of production
o Finding the optimum level of production
o Estimating the cost of business operations
o Determining the price margins for selling the goods produced
TYPES OF COST
• Opportunity cost
o Opportunity cost is also referred to as alternative cost
o It can be put to alternative uses having different returns
• Explicit Costs
o Explicit costs, also referred to as actual costs, include those payments that the
employer makes to purchase or own the factors of production.
o These costs comprise payments for raw materials, interest paid on loans, rent paid
for leased building or machinery and taxes paid to the government
o It is clearly reported in accounting books as a separate cost
• Implicit Costs
o Implicit costs are also referred to as imputed costs, implied costs or notional costs.
o There are certain other costs that cannot be reported as cash outlays in accounting
books.
o Opportunity costs are examples of implicit cost borne by an organisation
• Accounting costs
o Accounting costs include the financial expenditure incurred by a firm in acquiring
inputs for the production of a commodity.
o It is record in the books of Accounts
o Accounting costs include all explicit costs along with certain implicit costs
• Economic costs
o Economic costs include the total cost of opting for one alternative over another.
o Cost include both opportunity cost (implicit) and Accounting cost (Explicit)
• Business costs
o Business costs include all the expenditures incurred to carry out a business.
o The concept of business cost is similar to the explicit costs.
o These costs are used to calculate the profit or loss made by a business
32
 • Full costs
o The full costs include the business costs, opportunity costs and normal profit.
• Fixed costs
o It refers to the costs borne by a firm that do not change with changes in the output
level.
o Even if the firm does not produce anything, its fixed costs would still remain the
same
• Variable costs
o It refers to the costs that are directly dependent on the output level of the firm
o Variable costs vary with the changes in the volume or level of output.
• Incremental costs
o It involves the additional costs resulting due to a change in the nature of level of
business activity
o It characterises the additional cost that would have not been incurred if an
additional unit was not produced
o As these costs may be avoided by avoiding the possible variation in the production
o They are also referred to as avoidable costs or escapable costs
SHORT RUN COSTS OF PRODUCTION
• The total cost refers to the actual cost that is incurred by an organisation to produce a
given level of output
• A short-run period refers to a certain period of time where at least one input is fixed
while others are variable
• In the short-run period, an organisation cannot change the fixed factors of production
• The firm cannot expand its plant size or increase the plant capacity in the short run
• The firm would reduce the work hours or output, but cannot downsize its plant.
SHORT-RUN TOTAL COST
• SRTC is obtained by adding the total fixed cost and the total variable cost.
• SRTC = TFC + TVC
• Total Fixed cost (TFC)
o These costs do not change with the change in output.
o TFC remains constant even when the output is zero.
o TFC is represented by a straight line horizontal to the x-axis (output).
• Total Variable cost (TVC):
o These costs are directly proportional to the output of a firm.
o This implies that when the output increases, TVC also increases and when the
output decreases, TVC decreases as well.
• As the TFC remains constant, the changes in SRTC are entirely due to variations in TVC.

33
SHORT-RUN AVERAGE COST
• The average cost is calculated by dividing total cost by the number of units a firm has
produced.
• The short-run average cost (SRAC) of a firm refers to per unit cost of output at different
levels of production
• To calculate SRAC, short-run total cost is divided by the output
• SRAC = AFC + AVC
• SRAC of a firm is U-shaped
• It declines in the beginning, reaches to a minimum and starts to rise
• The downward-slope of the SRAC curve indicates that as the output increases, average
costs decrease
• SRAC curve begins to slope upwards, indicating that at output levels above Q1, average
costs start to increase
SHORT-RUN MARGINAL COST
• Marginal cost (MC) can be defined as the change in the total cost of a firm divided by
the change in the total output.
• Short-run marginal cost refers to the change in short-run total cost due to a change in
the firm’s output.

• Short-run marginal cost on a graph is the slope of the short-run total cost and depicts
the rate of change in total cost as output changes
• The short-run marginal cost (SRMC), short-run average cost (SRAC) and average variable
cost (AVC) are U-shaped due to increasing returns in the beginning followed by
diminishing returns.
• SRMC curve intersects SRAC curve and the AVC curve at their lowest points.
34
LONG RUN COSTS OF PRODUCTION
• Long run refers to the time period in which all factors of production are variable.
• Long-run costs are incurred by a firm when production levels change over time.
LONG-RUN TOTAL COST
• Long-run total cost (LRTC) refers to the total cost incurred by an organisation for the
production of a given level of output when all factors of production are variable.
• The shape of the long-run total cost curve is S-shaped
LONG-RUN AVERAGE COST
• Long-run average cost (LRAC) refers to per unit cost incurred by a firm in the production
of a desired level of output when all the inputs are variable.
• The LRAC of a firm can be obtained from its individual short-run average cost curves
• The shape of the LRAC curve is similar to the SRAC curve although the U-shape
• The negative slope of the LRAC curve depicts economies of scale and increasing returns
to scale.
• The positive slope of the LRAC curve represents diseconomies of scale or decreasing
returns to scale.
LONG-RUN MARGINAL COST
• Long-run marginal cost (LRMC) refers to the incremental cost incurred by an
organisation for producing a given output level when none of the input is constant.
• The LRMC is the slope of the LRTC curve.
• LRMC curve is similar to the SRMC curve although the U-shape
• The negative slope of the LRMC curve depicts economies of scale and increasing returns
to scale
• Positive slope of the LRMC curve represents diseconomies of scale or decreasing returns
to scale
• LRMC curve can be derived from the LRAC curve.

35
ECONOMIES OF SCALE
• Economies of scale result in cost saving for a firm as the same level of inputs yield a
higher level of output
• Higher level of output results in lower average costs as the total costs are shared over
the increased output.
INTERNAL ECONOMIES OF SCALE
• These refer to the economies that a firm achieves due to the growth of the firm itself.
• Internal economies of scale refer to the lower per unit cost that a firm obtains by
increasing its capacity.
o Bulk-buying economies
o Technical economies
o Financial economies
o Marketing economies
o Managerial economies
EXTERNAL ECONOMIES OF SCALE
• These refer to the economies in production that a firm achieves due to the growth of
the overall industry in which the firm operates
• External economies of scale transpire outside a firm
o Improvement in transport
o Communication network
o Focus on training and education within the industry
o Support of other industries
DISECONOMIES OF SCALE
• Diseconomies of scale refer to the disadvantages that arise due to the expansion of a
firm’s capacity leading to a rise in the average cost of production.
• Internal diseconomies
o Managerial inefficiency
o Labour inefficiency
• External diseconomies
o Demand for raw materials
o Demand for skilled labour
o Problems of waste disposal
o Excessive need for advertising and promotion

36
MARKET STRUCTURES
• Market structure can be defined as a group of industries characterised by number of
buyers and sellers in the market, level and type of competition, degree of differentiation
in products and entry and exit of organisations from the market
PURE COMPETITION
• Pure competition exists in a market when there is large number of sellers offering
homogenous products to equal population of buyers.
• Buyers can purchase products from any seller as there is no difference in the price and
quality of products of different sellers
• Making sellers as price takers
• All the products are considered as substitutes of one another
• If there is a rise in the price of a product from one producer, buyers can easily purchase
the similar product from the other seller.
• Due to the absence of legal, technological, financial or other barriers
• It is easy for a new organisation to enter or exit the market
• The existence of pure competition is not possible in the real world.
• In pure competition, the homogeneity of the products with a fixed market price is shown
by the average revenue curve or the demand curve as a horizontal straight line
PERFECT COMPETITION
• A perfect competition is an extension of pure market subject to wider scope.
• Large number of buyers and sellers
• All engaged in the purchase and sale of a homogeneous commodity
• Free entry and exit from the market
• Full and Perfect knowledge of market
• No transportation costs
• Economic Rationality
• Similarity in Price
• The perfect competition is characterised by the presence of many firms
• They all sell identical products
• The seller is a price taker, not price maker
• Perfect competition is a market where various firms selling identical products exist along
with a large number of buyers who are well aware of the prices
• The existence of perfect competition is not possible in the real world
• Optimum size of the firm exists only under Perfect competition
• A seller can sell additional quantity of his product without reducing the price

37
IMPERFECT COMPETITION
• Imperfect competition is a competitive market where a large number of sellers are
engaged in selling heterogeneous (dissimilar) goods
• Opposed to the perfectly competitive market
• The concept of imperfect competition was first explained by Joan Robinson.
• Under imperfect competition both buyers and sellers are unaware of the prices
• Imperfect competition can be classified into three categories Monopolistic competition,
Monopoly, Oligopoly.
MONOPOLISTIC COMPETITION
• The term monopolistic competition was given by Prof. Edward H. Chamberlin
• Monopolistic competition is the most realistic situation that exists in the market
• Products are not perfect substitute of each other and differ from each other in one
aspect or the other
• The conditions of monopolistic competition resemble with that of perfect competition
• Large number of sellers and buyers
• Product differentiation
• Ease of entry and exit
• Restricted mobility
• Organisation’s willingness to pay heavy transportation costs
• Difference in the prices of products of organisations
• Price control policy
• Organisations do not have much control over the price of the product
OLIGOPOLY
• There are few sellers dealing either in homogenous or differentiated products
• Greek words, oligoi means few and poly means control. It means the control of the few
organisations in the market.
• The prices are affected by the prices of the competitors’ products
• Oligopoly is a market situation in which a firm determines its marketing policies on the
basis of expected behaviour of close competitors
• Impediments in entry
• Organisations cannot easily enter the market; nor can they make an exit from the market
• Under oligopolistic market structure, the government has a greater role
• In oligopoly, no organisation can make an independent decision.
• Mutual interdependence
• Existence of price rigidity
• Under oligopolistic market, organisations do not prefer to change the prices of their
products as this can adversely affect the profits of the organisation
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MONOPOLY
• Wherein a single producer or seller has a control on the entire market
• Greek word Monopolian, which means a single seller
• In the words of Prof. chamberlain, “Monopoly refers to the control over supply.”
• The demand, supply and prices of a product are controlled by a single seller in monopoly
• The slope of the demand curve moves downward towards the right.
• Monopoly is the absence of substitutes of the products in the market
• Barriers to entry: Restrictions imposed by the government
• Limited information: Information is not easily available to public or other organisations.
This type of information generally comes in the form of patents, copyrights or
trademarks
• “Price discrimination refers strictly to the practice of a seller to charge different prices
from different buyers for the same goods.”
o Geographical price discrimination
o Personal price discrimination
o Utility based price discrimination
PROFIT MAXIMISATION
• Profit maximisation can be defined as a process in the long run or short run to identify
the most efficient manner to increase the profits.
• Profit is maximum when the difference between the total revenue and total cost is
maximum.
• For profit maximisation, two conditions must be fulfilled
o First order condition, Marginal Revenue (MR) should be equal to Marginal Cost
(MC) or MR = MC
o Second order condition requires that the first order condition must be satisfied in
case of decreasing MR and rising MC. MC must have a steeper slope than MR or
MC must intersect from below.
• Profit is maximised when both the first and second order conditions are satisfied.
• Profit maximisation happens both in the short run as well as long run.
• Short run can be defined as a time period in which at least one input is fixed
• Long run can be described as the time period in which all the inputs are variable

39
MARKET POWER
• Market power can be defined as the ability of an organisation to raise the market price
of a good or service over marginal cost to achieve profits
• It can also be defined as the degree of control an organisation has over the price and
output of a product in the market
• Control generally occurs in imperfect competition. Organisations having total market
power are also known as price makers
• Organisations have no market power in perfectly competitive markets. Such
organisations are known as price takers.
• In the market, the share of an organisation can be determined by measuring its market
power
• The most common measure for determining the market power is concentration ratios
• Concentration ratios can be defined as a measure of market power in relation to the
size of the business firm with that of product’s size
• There are two types of concentration ratios
o Four firm concentration ratios: It can be defined as the fraction of output
produced by the top four organisations in an industry.
o Eight firm concentration ratios: It can be defined as the fraction of output
produced by the top eight organisations in an industry
• Low concentration
o An industry is considered to be under low concentration ratio if its concentration
ratio falls between 0 and 50 percent.
o Monopolistic competition falls into the bottom of this with oligopoly emerging
near the upper end.
• Medium concentration
o An industry is considered to be under medium concentration if its concentration
ratio is from 50 to 80 percent.
o Example of such industries are very much oligopoly
• High concentration
o An industry is considered to be highly concentrated if its concentration ratio falls
between 80 and 100 percent.
o Monopoly, Government regulators generally fall under this category.
• Herfindahl-Hirschman index (HHI)
o This index is used as an indicator of competition among organisations in an
industry
o The HHI is calculated by squaring the market share for each firm (up to 50 firms)
and then summing the squares
o Example: Market share of different firms. A = 25%, B = 50%, C = 20%, D = 5%
Then, HHI = 252 + 502+ 202+ 52 = 3550
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DETERMINANTS OF MARKET POWER
• Economies of scale
• Governmental regulations
• Control of raw materials
• Customer loyalty
MARKET FAILURE
• Market failure can be defined as a situation where the quantity of a product demanded
by consumers is not equal to the quantity supplied by suppliers
• In simple words, market failure can be referred to as imperfections occurring in
exchange of products and services between buyers and sellers
• It occurs mainly due to inefficient allocation of goods and services in the free market
• The social cost incurred in the production of goods are not minimised, resulting in
wastage of resources.
• Equilibrium between supply and demand of the product is not reached.
• Market failures are corrected by governmental interventions only
CAUSES OF MARKET FAILURES
• Externalities: These can be defined as an impact of production and consumption of
products affecting the third-part. Externalities can be either positive or negative.
o Positive externality
▪ It can be defined as the positive impact of the consumption of a product on
the third-party.
▪ Positive externality is also known as an external benefit
o Negative externality
▪ It can be defined as the negative impact of the consumption of a product on
the third-party.
▪ In this case, social cost of an activity exceeds the private cost
▪ Negative externalities are also known as an external cost.
• Public goods: These are the goods that are characterised by non-excludability and non-
rivalry
• Information asymmetry
• Imperfect market conditions: Market failure is also caused due to imperfect market
conditions, such as monopoly (existence of a single supplier in the market) and oligopoly
(existence of few firms that control the market).

41
PRICE REGULATIONS
• Commonly two price regulations are used namely price ceiling and price floors.
• Price ceiling: A price ceiling can be defined as the price that has been set by the
government below the equilibrium price and cannot be soared up above that.
• This results in increased demand of the commodity than the quantity supplied
• Marginal costs are exceeded by marginal benefits
• Price floor: A price floor is said to exist when the price is set above the equilibrium price
and is not allowed to fall.
CONCEPT OF PRODUCTION
• Production is a process of transforming tangible and intangible inputs into goods or
services
• These inputs are also known as factors of production
• The four major factors of production are land, capital, labour and enterprise
• The technical relationship between the inputs and the output is expressed by
production function
PRODUCTION POSSIBILITY CURVE
• Production Possibility Curve (PPC) is a curve that shows the alternative combinations of
two goods and services by using all the available factor resources, efficiently
• It is also known as Production Possibility Frontier (PPF) or transformation curve
• The goods and resources plotted on the production possibility curve are considered as
technically efficient
• While the goods and resources that are lying beneath the curve are regarded as
inefficient.
• In the production possibility curve, only two goods are taken into account
• As large number of goods cannot be represented on a two-dimensional graph.

42
CONVEX CURVES
• Convex implies a curve that extends outward
• A convex function can be defined as a real valued function
• f(X) = X2
• The convex function is represented as a line segment between two points and never lies
below the graph

CONCAVE CURVES
• Concave implies a curve that extends inward.
• A concave function is the negative of the convex function.
• f(X) = - X2
• The concave function is represented as a line segment between two points on the graph
and never lies above the graph

43
PRODUCTION FUNCTION
• Production function can be defined as a technological relationship between the
physical inputs and physical output of the organisation.
• It implies functional relationship between inputs and output of production
• “production function is the name given to the relationship between the rates of input
of productive services and the rate of output”
• There are only two factors of production, labour and capital
• Inelastic supply of factors in the short-run period.
• Production function assumes technology as fixed
• Helps in making short-term decisions, such as optimum level of output.
• Helps in making long-term decisions, such as deciding the production level.
• The long-run production function (Q) is usually expressed as follows:

• The short run refers to a time period in which the supply of the inputs, such as plant
and machinery is fixed
• The law of production studied under short-run production is called the law of variable
proportions or the law of diminishing marginal returns
• The short-run production function is given as

44
 • Total Product (TP)
o It can be defined as the total quantity of output produced by an organisation for a
given quantity of input.
o It is also known as total physical product.
• Average Product (AP)
o It refers to the ratio of the total product to the variable input used for obtaining
the total product.
o It is the product produced per unit of variable input employed when fixed inputs
are held constant.
o Average Product = Total Product/ variable inputs employed
• Marginal Product (MP)
o Marginal product refers to the product obtained by increasing one unit of input.
o In terms of labour, the change in total quantity of product produced by including
one more worker is termed as marginal product of labour.
o MPL = ∆Q/ ∆L
Where, ∆Q = Change in output, ΔL = Change in labour,
∆Q = new product – old product, ∆L = new labour – old labour
COBB-DOUGLAS PRODUCTION FUNCTION
• Given by American economists, Charles W. Cobb and Paul. H Douglas
• Production function Q = AKa Lb
• Studies the relation between the input and the output.
• Cobb-Douglas production function is that type of production function wherein an input
can be substituted by other to a limited extent
• It acts as a homogeneous production function
• It depicts the non-existence of production at zero cost.
CES PRODUCTION FUNCTION
• CES stands for constant elasticity substitution.
• CES production function displays a constant change produced in the output due to
change in input of production
• This implies that CES production function is homogeneous with degree one.
LEONTIEF PRODUCTION FUNCTION
• Given by W. Wassily Leontief
• It implies that if the input-output ratio is independent of the scale of production
• It assumes strict complementarity of factors of production
• It uses fixed proportion of inputs having no substitutability between them
• Leontief production function is also called as fixed proportion production function
• q= min (z1/a, z2/b)
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ISOQUANT CURVES
• A technical relation that shows how inputs are converted into output is depicted by an
isoquant curve
• The term ISO implies equal and quant means quantity or output
• Isoquant curves are also called as equal product curves or production indifference
curves.
• It depicts equal quantity of total product that can be produced with different
combinations of capital and labour.
• Assumptions of an isoquant curve
o There are only two factor inputs, labour and capital
o Capital, labour and goods are divisible in nature
o Capital and labour are able to substitute each other up to a certain limit.
• Properties
o Isoquant curves are convex to origin
o Isoquant curves slope downwards
o Isoquant curves cannot intersect each other
o The higher the isoquant the higher the output
• Linear isoquant: It is a straight-line isoquant and represents a perfect substitutability
between the inputs, capital and labour of the production function
• L-shaped isoquant: This is the case of perfect complements. Under this, the combination
between capital and labour is in a fixed proportion
ISO-COST CURVES
• Iso cost represent the price of factor
• Iso cost is the locus of all combination of factor of production the firm can purchase with
a given monetary cost outlay
• Iso-cost line represents the price of factors along with the amount of money an
organisation is willing to spend on factors.
• The slope of the iso-cost line depends upon the ratio of price of labour to the price of
capital.
• The line that represents the price at which various factors of production are purchased
by an entrepreneur.
• The expansion path is also called scale line as the expansion of the organisation is based
upon the scale of operation.
• Expansion path can be defined as the locus of all the points that show the least
combination of the factors corresponding to different levels of output.
• MRTS: It is a rate at which one input can be substituted by the other input.

46
SKIMMING PRICE
• Price skimming is a pricing strategy in which a marketer sets a relatively high initial price
for a product or service at first, then lowers the price over time
• Skimming price policy sets high initial price to first profit from price inelastic customers
• Successively lowering the prices, often under increasing competitive conditions, to the
levels that more price sensitive customers are willing to pay.
• It sets introductory prices at high levels relative to costs to “skim the cream” off the
market.
• It is a temporal version of price discrimination/yield management
• It allows the firm to recover its sunk costs quickly before competition steps in and lowers
the market price.
• Price skimming is sometimes referred to as riding down the demand curve
• The objective of a price skimming strategy is to capture the consumer surplus early in
the product life cycle
• In order to exploit a monopolistic position or the low-price sensitivity of innovators
• It is effective only when the firm is facing an inelastic demand curve
• Price skimming commonly occurs in technological markets
• It’s Not a Great Strategy in a Crowded Market
• It Can Infuriate Your Early Adopters
PENETRATION PRICING
• As opposed to the concept of skimming price strategy, it is an attempt to set new
product prices low relative to the costs.
• It involves setting low initial price to establish market share, pre-empt the competitors
and/or to capitalize production economies.
• By setting low initial prices, the competitors are kept away and this makes possible for
the firm to enlarge its share by generating larger sales volume.
• Where there is high price elasticity of demand. That is, the firm is depending on low
prices to attract more customers to new product.
• Where market segments are not there so that high price may be accepted
• The product is suitable for a mass market

47
PEAK LOAD PRICING
• The Peak Load Pricing is the pricing strategy wherein the high price is charged for the
goods and services during times when their demand is at peak.
• In other words, the high price charged during the high demand period is called as the
peak load pricing
• A firm discriminates on the basis of high usage, high-traffic, high demand times and low
demand times.
• The peak load pricing is widely used in the case of non-storable goods such as electricity,
transport, telephone, security services, etc.
• MC is also high during these peak periods because of capacity constraints.
• The electricity consumption is highest during the daytime as several offices and
educational institutes are operational during the day time, called as a peak-load time.
• The electricity consumption is lowest during the night as all the office establishments
and educational institutes are closed by this time, called as off-peak time.
• A firm will charge a relatively higher price during the daytime as compared to the price
charged at night.
• Peak-load pricing is different from third-degree price discrimination

48
 UNIT 04
BUSINESS FINANCE

❖ Modul 1: Scope and sources of finance; Lease financing

❖ Modul 2: Cost of capital and time value of money
❖ Modul 3: Capital structure
❖ Modul 4: Capital budgeting decisions: Conventional and scientific techniques of capital budgeting
analysis
❖ Modul 5: Working capital management; Dividend decision: Theories and policies
❖ Modul 6: Risk and return analysis; Asset securitization
❖ Modul 7: International monetary system
❖ Modul 8: Foreign exchange market; Exchange rate risk and hedging techniques
❖ Modul 9: International financial markets and instruments: Euro currency, GDRs, ADRs
❖ Modul 10: International arbitrage; Multinational capital budgeting

1|KIRAN.A. S
MEANING OF FINANCE
• Finance may be defined as the art and science of managing money.
• It includes financial service and financial instruments.
• Finance also is referred as the provision of money at the time when it is needed.
• Finance function is the procurement of funds and their effective utilization in business
concerns.
• The concept of finance includes capital, funds, money, and amount. But each word is
having unique meaning. Studying and understanding the concept of finance become an
important part of the business concern
• According to Khan and Jain, “Finance is the art and science of managing money”.
• According to Oxford dictionary, the word ‘finance’ connotes ‘management of money’.
BUSINESS FINANCE
• According to the Wheeler, “Business finance is that business activity which concerns
with the acquisition and conversation of capital funds in meeting financial needs and
overall objectives of a business enterprise”.
• According to the Guthumann and Dougall, “Business finance can broadly be defined as
the activity concerned with planning, raising, controlling, administering of the funds
used in the business”.
• Corporate finance is concerned with budgeting, financial forecasting, cash
management, credit administration, investment analysis and fund procurement of the
business concern and the business concern needs to adopt modern technology and
application suitable to the global environment
FINANCIAL MANAGEMENT
• The term financial management has been defined by Solomon, “It is concerned with the
efficient use of an important economic resource namely, capital funds”.
• Howard and Upton: Financial management “as an application of general managerial
principles to the area of financial decision-making.
• Modern approaches of the financial management applied large number of mathematical
and statistical tools and techniques. They are also called as econometrics.

2|KIRAN.A. S
SOURCES OF FINANCE

3|KIRAN.A. S
PERIOD BASIS SOURCES
On the basis of the period, the different sources of funds can be classified into three parts.
Which are:
1. Long-term sources
• It fulfils the financial requirements of a business for a period more than 5 years.
• It includes various other sources such as shares and debentures, long-term
borrowings and loans from financial institutions.
• Such financing is generally required for the procurement of fixed assets such as
plant, equipment, machinery etc.
2. Medium-term sources
• These are the sources where the funds are required for a period of more than one
year but less than five years.
• The sources of the medium term include borrowings from commercial banks,
public deposits, lease financing and loans from financial institutions.
3. Short-term sources:
• Funds which are required for a period not exceeding one year are called short-
term sources.
• Trade credit, loans from commercial banks and commercial papers are the
examples of the sources that provide funds for short duration.

4|KIRAN.A. S
OWNERSHIP BASIS SOURCES
On the basis of ownership, the sources can be classified into Owner’s funds and Borrowed
funds.
1. Owner’s funds
• It means funds which are procured by the owners of a business, which may be a
sole entrepreneur or partners or shareholders of a business.
• It also includes profits which are reinvested in the business.
• The owner’s capital remains invested in the business for a longer duration and is
not required to be refunded during the life period of the business.
• Equity shares and retained earnings are the two important sources from where
owner’s funds can be obtained.
2. Borrowed funds
• It refers to the funds raised with the help of loans or borrowings.
• This is the most common type of source of funds and is used the majority of the
time.
• The sources for raising borrowed funds include loans from commercial banks,
loans from financial institutions, issue of debentures, public deposits and trade
credit.
• These sources provide funds for a specific period, on certain terms and conditions
and have to repay the loan after the expiry of that period with interest.
• A fixed rate of interest is paid by the borrowers on such loans.
GENERATION BASIS SOURCES
1. Internal sources of funds
• These are those that are generated inside the business.
• A business, for example, can generate funds internally by speeding collection of
receivables, disposing of surplus inventories and increasing its profit.
• The internal sources of funds can fulfil only limited needs of the business.
2. External sources of funds
• These are the sources that lie outside an organization, such as suppliers, lenders,
and investors.
• When a large amount of money is needed to be raised, it is generally done through
the external sources.
• External funds may be costly as compared to those raised through internal
sources.

5|KIRAN.A. S
LEASE FINANCING
• A finance lease (also known as a capital lease or a sales lease) is a type of lease in which
a finance company is typically the legal owner of the asset for the duration of the lease,
while the lessee not only has operating control over the asset, but also has a some share
of the economic risks and returns from the change in the valuation of the underlying
asset.
• Lease financing is one of the popular and common methods of assets-based finance,
which is the alternative to the loan finance.
• Lease is a contract.
• Lease financing is one of the important sources of medium and long-term financing
where the owner of an asset gives another person, the right to use that asset against
periodical payments.
• The owner of the asset is known as lessor and the user is called lessee.
• The periodical payment made by the lessee to the lessor is known as lease rental.
• Under lease financing, lessee is given the right to use the asset but the ownership lies
with the lessor and at the end of the lease contract, the asset is returned to the lessor
or an option is given to the lessee either to purchase the asset or to renew the lease
agreement.
• Elements of Leasing
o Parties: These are essentially two parties to a contract of lease financing, namely
the owner and user of the assets.
o Leaser: Leaser is the owner of the assets that are being leased. Leasers may be
individual partnership, joint stock companies, corporation or financial institutions.
o Leasee: Leasee is the receiver of the service of the assets under a lease contract.
o Lease broker: Lease broker is an agent in between the leaser (owner) and lessee.
He acts as an intermediary in arranging the lease deals. Merchant banking
divisions of foreign banks, subsidiaries Indian banking and private foreign banks
are acting as lease brokers.
o Lease assets: The lease assets may be plant, machinery, equipment’s, land,
automobile, factory, building etc.

6|KIRAN.A. S
DIFFERENT TYPES OF LEASE
1. Finance Lease
• It is the lease where the lessor transfers substantially all the risks and rewards of
ownership of assets to the lessee for lease rentals.
• In other words, it puts the lessee in the same condition as he/she would have been
if he/she had purchased the asset.
• Financing lease is also called as full payout lease.
• It is one of the long-term leases and cannot be cancellable before the expiry of
the agreement.
• It means a lease for terms that approach the economic life of the asset, the total
payments over the term of the lease are greater than the leaser’s initial cost of the
leased asset.
• For example: Hiring a factory, or building for a long period. It includes all
expenditures related to maintenance.
• Finance lease has two phases:
▪ The first one is called primary period. This is non-cancellable period and, in
this period, the lessor recovers his total investment through lease rental.
The primary period may last for indefinite period of time.
▪ The lease rental for the secondary period is much smaller than that of
primary period.
• Features of Finance lease:
▪ A finance lease is a device that gives the lessee a right to use an asset.
▪ The lease rental charged by the lessor during the primary period of lease is
sufficient to recover his/her investment.
▪ The lease rental for the secondary period is much smaller. This is often
known as peppercorn rental.
▪ Lessee is responsible for the maintenance of asset.
▪ No asset-based risk and rewards is taken by lessor.
▪ Such type of lease is non-cancellable; the lessor’s investment is assured

7|KIRAN.A. S
 2. Operating Lease
• Lease other than finance lease is called operating lease.
• Here risks and rewards incidental to the ownership of asset are not transferred by
the lessor to the lessee.
• The term of such lease is much less than the economic life of the asset and thus
the total investment of the lessor is not recovered through lease rental during the
primary period of lease.
• In case of operating lease, the lessor usually provides advice to the lessee for
repair, maintenance and technical knowhow of the leased asset and that is why
this type of lease is also known as service lease
• Operating lease is also called as service lease.
• Operating lease is one of the short-term and cancellable leases.
• It means a lease for a time shorter than the economic life of the assets, generally
the payments over the term of the lease are less than the leaser’s initial cost of
the leased asset.
• For example: Hiring a car for a particular travel. It includes all expenses such as
driver salary, maintenance, fuels, repairs etc.
• Features of Operating Lease:
▪ The lease term is much lower than the economic life of the asset
▪ The lessee has the right to terminate the lease by giving a short notice and
no penalty is charged for that.
▪ The lessor provides the technical knowhow of the leased asset to the lessee.
▪ Risks and rewards incidental to the ownership of asset are borne by the
lessor.
▪ Lessor has to depend on leasing of an asset to different lessee for recovery
of his/her investment.
3. Sale and lease back
• Sale and lease back are a lease under which the leasee sells an asset for cash to a
prospective leaser and then leases back the same asset, making fixed periodic
payments for its use.
• It may be in the firm of operating leasing or financial leasing.
• It is one of the convenient methods of leasing which facilitates the financial
liquidity of the company.
• For example, X owns a land. Under the leaseback transaction, X will sell the land
to Y and will get a lease on the same land from Y for a long term

8|KIRAN.A. S
 4. Direct lease
• When the lease belongs to the owner of the assets and users of the assets with
direct relationship it is called as direct lease.
• Direct lease may be Dipartite lease (two parties in the lease) or Tripartite lease.
(Three parties in the lease)
5. Single investor lease
• It is a lease in which the lessor funds the entire investment by an appropriate mix
of debt and equity funds.
• The debts raised by the lessor to finance the asset are without recourse to the
lessee
• In the case of default in servicing the debt by the leasing company, the lender is
not entitled to payment from the lessee.
6. Leveraged lease
• This type of lease is used to acquire the high-level capital cost of assets and
equipment’s.
• Under this lease, there are three parties involved; the leaser, the lender and the
lessee.
• Under the leverage lease, the leaser acts as equity participant supplying a fraction
of the total cost of the assets while the lender supplies the major part.
• In this the lessor has no risk on the finance the lender gave.
7. Domestic lease
• In the lease transaction, if both the parties belong to the domicile of the same
country it is called as domestic leasing.
8. International lease
• If the lease transaction and the leasing parties belong to the domicile of different
countries, it is called as international leasing.
PUBLIC SECTOR LEASING FINANCE INSTITUTIONS IN INDIA
• Leasing by Development Institutions
o Industrial Credit & Investment Corporation of India (ICICI)
o Industrial Finance Corporation of India (IFCI)
o Industrial Investment Bank of India (IIBI)
o Small Industries Development Corporation (SIDC)
o State Industrial Investment Corporation (SIIC)
• Leasing by Specialized Institutions
o Life Insurance Corporation of India (LIC)
o General Insurance Corporation of India (GIC)
o Unit Trust of India (UTI)
o Housing Development Finance Corporation of India (HDFC)

9|KIRAN.A. S
ADVANTAGES OF LEASE FINANCING
To Lessor
• Assured Regular Income
• Preservation of Ownership
• Benefit of Tax
• High Profitability
• High Potentiality of Growth
• Recovery of Investment
To Lessee
• Use of Capital Goods
• Tax Benefits
• Cheaper
• Technical Assistance
• Inflation Friendly
• Ownership
DISADVANTAGES OF LEASE FINANCING
To Lessor
• Unprofitable in Case of Inflation
• Double Taxation
• Sales tax may be charged twice
• Greater Chance of Damage of Asset
To Lessee
• Compulsion
• Ownership
• Costly
• Understatement of Asset

10 | K I R A N . A . S
COST OF CAPITAL
• The cost of capital may be defined as “the rate of return the firm requires from
investment in order to increase the value of the firm in the market place”.
• “Cost of Capital is the minimum required rate of earnings or the cut-off rate of capital
expenditure”.
• The term cost of capital refers to the minimum rate of return a firm must earn on its
investments. This is in consonance with the firm’s overall object of wealth maximization.
• Hampton J, the cost of capital may be defined as “the rate of return the firm requires
from investment in order to increase the value of the firm in the market place”.
• Cost of capital is also called as cut-off rate, target rate, hurdle rate and required rate of
return.
• It is closely associated with the value of the firm and the earning capacity of the firm.
• Cost of capital is the required rate of return on its investments which belongs to equity,
debt and retained earnings.
• If a firm fails to earn return at the expected rate, the market value of the shares will fall
• Solomon Ezra, “Cost of capital is the minimum required rate of earnings or the cut-off
rate of capital expenditure”.
• Assumption of Cost of Capital
o It is not a cost as such. It is merely a hurdle rate.
o It is the minimum rate of return.
o It consists of three important risks such as
▪ Zero risk
▪ Business risk
▪ Financial risk.
IMPORTANCE OF COST OF CAPITAL
• Capital budgeting decisions
• Capital structure decisions
• Evaluation of final Performance: Cost of capital is also useful in making financial
decisions as dividend policy, capitalization of profits, making the rights issue, etc.
COMPUTATION OF COST OF CAPITAL
Computation of cost capital of a firm involves the following steps:
1. Computation of cost of specific sources of a capital, viz., debt, preference capital, equity
and retained earnings
2. Computation of weighted average cost of capital.

11 | K I R A N . A . S
CLASSIFICATION OF COST OF CAPITAL
• Historical Cost
o Historical costs are book costs relating to the past
o It has already been incurred for financing a particular project.
o It is based on the actual cost incurred in the previous project
• Future Cost
o These costs are estimated costs act as guide for estimation of future costs.
o Future cost is the expected cost of financing in the proposed project.
o Expected cost is calculated on the basis of previous experience
• Specific Costs
o Specific cost is the cost if a specific source of capital
o The cost of each sources of capital such as equity, debt, retained earnings and
loans is called as specific cost of capital.
o It is very useful to determine the each and every specific source of capital.
• Composite Costs
o Composite cost, also known as the weighted average cost of capital, should be
considered in capital and capital budgeting decisions.
o The composite or combined cost of capital is the combination of all sources of
capital. It is also called as overall cost of capital.
o It is used to understand the total cost associated with the total finance of the firm.
• Explicit cost
o Explicit cost of any source of finance is the discount rate which equates the present
value of cash inflows with the present value of cash outflows.
o Pay interest on capital, dividends at fixed rate on preference share and expected
dividend on equity shares these payments reference to the explicit cost of capital
• Implicit cost
o Implicit cost also known as the opportunity cost is the of the opportunity foregone
in order to take up a particular project.
o Retain Earnings is the best example for implicit cost of capital
• Average Cost
o An average cost is the combined cost or weighted average cost of various sources
of capital.
o Average cost of capital is the weighted average cost of each component of capital
employed by the company.
• Marginal cost
o It refers to the average cost of new or additional funds required by a firm.
o It should be taken into consideration in investment decisions.
o Marginal cost is the weighted average cost of new finance raised by the company.
o It is the additional cost when the company goes for further raising of finance.
12 | K I R A N . A . S
TIME VALUE OF MONEY
• Time value of money (TVM) is the idea that money that is available at the present time
is worth more than the same amount in the future, due to its potential earning capacity.
• This core principle of finance holds that provided money can earn interest, any amount
of money is worth more the sooner it is received.
• One of the most fundamental concepts in finance is that money has a time value
attached to it.
• In simpler terms, it would be safe to say that a dollar was worth more yesterday than
today and a dollar today is worth more than a dollar tomorrow.
• The time value of money is also related to the concepts of inflation and purchasing
power. Both factors need to be taken into consideration along with whatever rate of
return may be realized by investing the money.
• Future money = Present money + Time
• The time value of money is an important concept not just for individuals, but also for
making business decisions.
• Companies consider the time value of money in making decisions about investing in new
product development, acquiring new business equipment or facilities, and in
establishing credit terms for the sale of their products or services.
• A specific formula can be used for calculating the future value of money so that it can
be compared to the present value time Value of Money Formula: FV=PV[1+i] n
• Time value of money principle also applies when comparing the worth of money to be
received in future and the worth of money to be received in further future.
• In other words, TVM principle says that the value of given sum of money to be received
on a particular date is more than same sum of money to be received on a later date.
There are five (5) variables that you need to know:
• Present value (PV) - This is your current starting amount. It is the money you have in
your hand at the present time, your initial investment for your future.
• Future value (FV) - This is your ending amount at a point in time in the future. It should
be worth more than the present value, provided it is earning interest and growing over
time.
• The number of periods (N) - This is the timeline for your investment (or debts). It is
usually measured in years, but it could be any scale of time such as quarterly, monthly,
or even daily.
• Interest rate (I) - This is the growth rate of your money over the lifetime of the
investment. It is stated in a percentage value, such as 8% or .08.
• Payment amount (PMT) - These are a series of equal, evenly spaced cash flows.

13 | K I R A N . A . S
CAPITAL STRUCTURE
• The term ‘structure’ means the arrangement of the various parts. So capital structure
means the arrangement of capital from different sources so that the long-term funds
needed for the business are raised.
• Thus, capital structure refers to the proportions or combinations of equity share capital,
preference share capital, debentures, long-term loans, retained earnings and other long-
term sources of funds in the total amount of capital which a firm should raise to run its
business.
• Capital Structure: It is the proper mix of different sources of long-term sources such as
equity shares, preference shares, debentures, long-term loans and retained earnings
• “Capital structure refers to the mix of long-term sources of funds, such as, debentures,
long-term debts, preference share capital and equity share capital including reserves
and surplus”—I. M. Pandey.
• The capital structure is the careful balance between equity and debt that a business uses
to finance its assets, day-to-day operations, and future growth.
• Capital Structure is the mix between owner’s funds and borrowed funds.
• FUNDS = Owner’s funds + Borrowed funds.
o Owner’s funds = Equity share capital + Preference share capital + reserves and
surpluses + retained earnings = EQUITY
o Borrowed funds = Loans + Debentures + Public deposits = DEBT
• In short, Capital Structure is the mixture of long-term sources of funds.
• the capital structure of a firm is a part of its financial structure
Capital Structure, Financial Structure and Assets Structure:
• The term capital structure should not be confused with Financial structure and Assets
structure.
• While financial structure consists of short-term debt, long-term debt and share holders’
fund i.e., the entire left-hand side of the company’s Balance Sheet. But capital structure
consists of long-term debt and shareholders’ fund.
• Capital structure is different from financial structure. It is a part of financial structure.
• Capital structure refers to the proportion of long-term debt and equity in the total
capital of a company. On the other hand, financial structure refers to the net worth or
owners’ equity and all liabilities (long-term as well as short-term).
• Capital structure does not include short-term liabilities but financial structure includes
short-term liabilities or current liabilities.
• Assets structure implies the composition of total assets used by a firm i.e., make-up of
the assets side of Balance Sheet of a company.
• It indicates the application of fund in the different types of assets fixed and current.
• Assets structure = Fixed Assets + Current Assets.
14 | K I R A N . A . S
 • Capitalization
o “Capitalization is the sum total of the par value of all shares”
o Capitalization is only the par value of share capital and debenture and it does not
include reserve and surplus
o Over capitalization is more capital than actually required and the funds are not
properly used.
▪ To solve Redemption of preference share capital which consists of high rate
of dividend.
o Under capitalization will occur when the company’s actual capitalization is lower
than the capitalization as warranted by its earning capacity. Under capitalization
is not the so-called inadequate capital.
▪ Increasing the par value of share may help to reduce under capitalization.
o If the stock or capital of the company is not mentioned by assets of equivalent
value, it is called as watered stock.
▪ In simple words, watered capital means that the realizable value of assets
of the company is less than its book value.
▪ “A stock is said to be watered when its true value is less than its book value”
• Optimum capital structure is the capital structure at which the weighted average cost
of capital is minimum and thereby the value of the firm is maximum.

15 | K I R A N . A . S
IMPORTANCE OF CAPITAL STRUCTURE
• Increase in value of the firm
• Utilisation of available funds
• Maximisation of return
• Minimisation of cost of capital
• Solvency or liquidity position
• Flexibility
• Undisturbed controlling
• Minimisation of financial risk
CAPITAL STRUCTURE THEORIES

Traditional Approach
• It is the mix of Net Income approach and Net Operating Income approach
• It is also called as “Intermediate approach”
• According to the traditional approach, “Mix of debt and equity capital can increase the
value of the firm by reducing overall cost of capital up to certain level of debt”
• Traditional approach states that the Ko decreases only within the responsible limit of
financial leverage and when reaching the minimum level, it starts increasing with
financial leverage
• Assumptions
o There are only two sources of funds used by a firm; debt and shares.
o The firm pays 100% of its earning as dividend.
o The total assets are given and do not change.
o The total finance remains constant.
o The operating profits (EBIT) are not expected to grow.
o The business risk remains constant.
o The firm has a perpetual life.
o The investors behave rationally.

16 | K I R A N . A . S
Net Income (NI) Approach
• Net income approach suggested by the Durand.
• According to this approach, the capital structure decision is relevant to the valuation of
the firm.
• In other words, a change in the capital structure leads to a corresponding change in the
overall cost of capital as well as the total value of the firm.
• Assumptions:
o There are no corporate taxes.
o The cost debt is less than the cost of equity.
o The use of debt does not change the risk perception of the investor.
Net Operating Income (NOI) Approach
• Another modern theory of capital structure, suggested by Durand
• This is just the opposite to the Net Income approach.
• Capital Structure decision is irrelevant to the valuation of the firm.
• The market value of the firm is not at all affected by the capital structure changes.
• According to this approach, the change in capital structure will not lead to any change
in the total value of the firm and market price of shares as well as the overall cost of
capital.
• Assumptions;
o The overall cost of capital remains constant
o There are no corporate taxes
o The market capitalizes the value of the firm as a whole
Modigliani and Miller Approach
• Modigliani and Miller approach states that the financing decision of a firm does not
affect the market value of a firm in a perfect capital market
• In other words, MM approach maintains that the average cost of capital does not change
with change in the debt weighted equity mix or capital structures of the firm.
• Assumptions:
o There is a perfect capital market.
o There are no retained earnings.
o There are no corporate taxes.
o The investors act rationally.
o The dividend payout ratio is 100%.
o The business consists of the same level of business risk

17 | K I R A N . A . S
CAPITAL BUDGETING DECISIONS
• Capital budgeting, and investment appraisal, is the planning process used to determine
whether an organization's long-term investments such as new machinery, replacement
of machinery, new plants, new products, and research development projects are worth
the funding of cash through the firm's capitalization structure (debt, equity or retained
earnings).
• It is the process of allocating resources for major capital, or investment, expenditures.
• One of the primary goals of capital budgeting investments is to increase the value of the
firm to the shareholders.
• Capital budgeting is a company’s formal process used for evaluating potential
expenditures or investments that are significant in amount
• It involves the decision to invest the current funds for addition, disposition, modification
or replacement of fixed assets
• The large expenditures include the purchase of fixed assets like land and building, new
equipment’s, rebuilding or replacing existing equipment’s, research and development,
etc.
• The large amounts spent for these types of projects are known as capital expenditures.
CAPITAL BUDGETING PROCESS
• Project identification and generation
• Project Screening and Evaluation
• Project Selection
• Project Implementation
• Performance review
FACTORS AFFECTING CAPITAL BUDGETING
• Availability of Funds
• Working Capital
• Structure of Capital
• Capital Return
• Management decisions
• Need of the project
• Accounting methods
• Government policy
• Taxation policy
• Earnings
• Lending terms of financial institutions
• Economic value of the project

18 | K I R A N . A . S
IMPORTANCE OF CAPITAL BUDGETING
• Achieve strategic growth
• Explore new investment avenues
• Forecast future cash flows
• Facilitate flow of information
• Expenditure management
• Establish decision rules
CHALLENGES OF CAPITAL BUDGETING
• Value maximization
• Monetary expression
• Time value money
• Evaluation of money
• Capital rationing
• Inflation
• Cost of capital
• Risk
• Lease option
• Tax Consideration

19 | K I R A N . A . S
CAPITAL BUDGETING TECHNIQUES (INVESTMENT APPRAISAL CRITERIA)
1. Capital budgeting techniques under certainty
a. Non-Discounted (Traditional techniques) Cash Flow Criteria
i. Pay Back Period (PBP)
ii. Accounting Rate of Return (ARR)
b. Discounted Cash Flow Criteria
i. Net Present Value (NPV)
ii. Internal Rate of Return (IRR)
iii. Profitability Index (PI)
2. Capital budgeting techniques under uncertainty
a. Statistical Techniques for Risk Analysis
i. Probability Assignment
ii. Expected Net Present Value
iii. Standard Deviation
iv. Coefficient of Variation
v. Probability Distribution Approach
vi. Normal Probability Distribution
b. Conventional Techniques for Risk Analysis
i. Payback
ii. Risk-adjusted Discount Rate
iii. Certainty Equivalent
c. Other Risk Analysis Techniques
i. Sensitivity Analysis
ii. Scenario Analysis
iii. Break Even Analysis
iv. Simulation Analysis
v. Decision Tree Approach
• Capital Rationing
o It is the act of placing restrictions on the amount of new investments or projects
under taken by the company
o The company has only limited investment the project is selected according to the
profitability
o The process of putting restrictions on the projects or investments that taken by
the company
o This aims in choosing only the most profitable investments for the capital
investment

20 | K I R A N . A . S
PAYBACK PERIOD
• It is the number of years required to recover the original cash outlay invested in a
project.
• Considering the receivable after the pay-back period. These returns are called post
pay-back profits.
• Decision Rule:
o If the PBP is less than the maximum acceptable payback period, accept the
project.
o If the PBP is greater than the maximum acceptable payback period, reject the
project.
ACCOUNTING/AVERAGE RATE OF RETURN (ARR)
• This method is also known as the return on investment (ROI), return on capital employed
(ROCE) and is using accounting information rather than cash flow.
• The ARR is the ratio of the average after tax profit divided by the average investment.
• Decision Rule:
o If the ARR is higher than the minimum rate established by the management,
accept the project.
o If the ARR is less than the minimum rate established by the management, reject
the project
NET PRESENT VALUE (NPV)
• The NPV is the difference between the present value of future cash inflows and the
present value of the initial outlay, discounted at the firm’s cost of capital.
• The procedure for determining the present values consists of two stages. The first stage
involves determination of an appropriate discount rate. With the discount rate so
selected, the cash flow streams are converted into present values in the second stage.
• Decision Rules:
o If the NPV is greater than 0, accept the project.
o If the NPV is less than 0, reject the project.

o PV > C → Accept [NPV > 0]

o PV < C → Reject [NPV < 0]
o Where, PV is present value of inflows and C is the outlays

21 | K I R A N . A . S
PROFITABILITY INDEX (PI)
• Profitability Index (PI) or Benefit-cost ratio (B/C) is similar to the NPV approach.
• PI approach measures the present value of returns per rupee invested.
• The PI method provides solution to this kind of problem.
• It is a relative measure and can be defined as the ratio which is obtained by dividing the
present value of future cash inflows by the present value of cash outlays.
Mathematically
• Decision Rule:
o Accept the project when PI>1
o Reject the project when PI<1
o May or may not accept when PI=1, the firm is indifferent to the project.
INTERNAL RATE OF RETURN (IRR)
• This technique is also known as yield on investment, marginal productivity of capital,
marginal efficiency of capital, rate of return, and time-adjusted rate of return and so on.
• It also considers the time value of money by discounting the cash flow streams, like NPV.
• While computing the required rate of return and finding out present value of cash flows-
inflows as well as outflows- are not considered. But the IRR depends entirely on the
initial outlay and the cash proceeds of the projects which are being evaluated for
acceptance or rejection.
• It is, therefore, appropriately referred to as internal rate of return. The IRR is usually the
rate of return that a project earns.
• The internal rate of return (IRR) is the discount rate that equates the NPV of an
investment opportunity with Rs.0 (because the present value of cash inflows equals the
initial investment). It is the compound annual rate of return that the firm will earn if it
invests in the project and receives the given cash inflows.
• Decision Rules:
o If the IRR is greater than the cost of capital, accept the project. (r >k)
o If the IRR is less than the cost of capital, reject the project. (r<k)
COMPARISON OF NPV AND IRR
• NPV will be positive only if r > k
• NPV will be negative only if r < k
• NPV would be zero only if r = k
COMPARISON OF NPV AND PI
• PI will be greater than one, only when NPV will be positive i.e. (PI>1 when NPV +ve)
• PI will be less than one, only when NPV will be negative i.e. (PI<1 when NPV -ve)

22 | K I R A N . A . S
WORKING CAPITAL MANAGEMENT
• Working capital refers to the funds required to meet the day-to-day obligations of
business operations.
• Hence, working capital is said to be the life-blood of an enterprise.
• Working Capital Management is managing the Current Asset and Current Liabilities
effectively
• Maintaining adequate amount of both Current Asset and Current Liabilities.
• Simply it is called Administration of Current Asset and Current Liabilities of the business
concern.
• The fact remains that it is working capital that keeps the wheel of enterprise on. Working
capital, therefore, needs to be maintained at an adequate level.
• his is related to short-term assets and short-term sources of financing
• It deals with both, assets and liabilities
• The funds invested in current assets are termed as working capital.
• There are two concepts in respect of working capital:
o Gross working capital
o Networking capital.

Operating cycle consists of the following important stages:

1. Raw Material and Storage Stage, (R)
2. Work in Process Stage, (W)
3. Finished Goods Stage, (F)
4. Debtors Collection Stage, (D)
5. Creditors Payment Period Stage. (C)
23 | K I R A N . A . S
CLASSIFICATION OF WORKING CAPITAL
1. Gross Working Capital
o The sum total of all current assets of a business concern is termed as gross working
capital.
o Gross working capital = Stock + Debtors + Receivables + Cash
2. Net Working Capital
o The difference between current assets and current liabilities of a business
con-cern is termed as the Net working capital.
o Net Working Capital = Stock + Debtors + Receivables + Cash – Creditors – Payables.
3. Positive Working Capital: This refers to the surplus of current assets over current
liabilities.
4. Negative Working Capital: Negative working capital refers to the excess of current
liabilities over current assets.
5. Permanent Working Capital: The minimum amount of working capital which even
required during the dullest season of the year is known as Permanent working capital.
6. Temporary or Variable Working Capital: It represents the additional current assets
required at different times during the operating year to meet additional inventory, extra
cash, etc.
7. Zero Working Capital: If the current assets are equal to current liabilities, it is called zero
or nil working capital.
WORKING CAPITAL MANAGEMENT POLICY
The management established three policies based on the relationship between Sales and
Working Capital.
• Conservative working capital policy:
o Conservative Working Capital Policy refers to minimize risk by maintaining a
higher level of Working Capital.
o This type of Working Capital Policy is suitable to meet the seasonal fluctuation of
the manufacturing operation.
• Moderate working capital policy:
o Moderate Working Capital Policy refers to the moderate level of Working Capital
maintenance according to moderate level of sales.
o It means one percent of change in Working Capital, that is Working Capital is
equal to sales.
• Aggressive working capital policy:
o Aggressive Working Capital Policy is one of the high risky and profitability policies
o Which maintains low level of Aggressive Working Capital against the high level of
sales, in the business concern during a particular period.

24 | K I R A N . A . S
WORKING CAPITAL FINANCE MIX
• Hedging Approach
o Hedging approach is also known as matching approach.
o Under this approach, the business concern can adopt a financial plan which
matches the expected life of assets with the expected life of the sources of funds
raised to finance assets.
o When the business follows matching approach,
▪ Long-term finance shall be used to fixed assets and permanent current
assets
▪ Short-term finance use to temporary finance or variable assets.
• Conservative Approach
o This approach is called as “Low Profit – Low Risk” concept.
o The entire estimated finance in current assets should be financed from long-term
sources
o The short-term sources should be used only for emergency requirements.
• Aggressive Approach
o This approach makes the finance mix more risky, less costly and more profitable.
o The entire estimated requirement of current assets should be financed from short-
term sources
o Even a part of fixed assets financing be financed from short- term sources
ADVANTAGES OF WORKING CAPITAL
• Smooth Flow of Production
• Increase in Liquidity and Solvency Position
• Goodwill
• Advantages of Cash Discount
• Easy Loan
• Regular Payment of Wages and Salaries
• Security and Confidence
• Efficient Use of Fixed Assets
• Meeting of Contingencies
• Completing operating cycle
• Timely Payment of Dividend

25 | K I R A N . A . S
SOURCES OF WORKING CAPITAL
• Long-Term Sources: Every business organisation is required to maintain a minimum
balance of cash and other current assets at all the times—irrespective of the ups and
downs in the level of activity. The portion of working capital which is continuously
maintained by the business at all times to carry on its minimum level of activities is called
permanent working capital. This type of working capital should be arranged from long-
term sources of fund
• The following are the long-term sources of financing permanent working capital:
o Issue of Equity shares
o Issue of Preference shares
o Retained earnings (ploughed-back profits)
o Issue of Debentures and other long-term bonds
o Long-term loans taken from financial institutions etc.
• Short-Term Sources: The short-term financing of working capital is generally used to
support the temporary working capital which is usually needed to meet the seasonal
increase or sudden spurt in demand.
• Various short-term sources of financing of temporary working capital are:
o Bank credit (e.g., cash credit, letter of credit, bills finance, working capital demand
loan, overdraft facility etc.)
o Public deposits
o Trade credit
o Outstanding expenses
o Provision for depreciation
o Provision for taxation
o Advances from customers
o Loans from directors
o Security money received from employees
DETERMINANTS OF WORKING CAPITAL
• Nature of Business
• Size of the Business
• Production Cycle
• Business Cycle
• Credit terms of Purchase and Sale
• Seasonal Variations
• Operating Efficiency
• Price level changes
• Growth and Expansion of the Business
• Profitability and Retention Money
26 | K I R A N . A . S
MOTIVES FOR HOLDING CASH
• Transaction motive
o It is a motive for holding cash or near cash to meet routine cash requirements to
finance transaction in the normal course of business.
o Cash is needed to make purchases of raw materials, pay expenses, taxes, dividends
• Precautionary motive
o It is the motive for holding cash or near cash as a cushion to meet unexpected
contingencies.
o Cash is needed to meet the unexpected situation like, floods strikes etc.
• Speculative motive
o It is the motive for holding cash to quickly take advantage of opportunities
typically outside the normal course of business.
o Certain amount of cash is needed to meet an opportunity to purchase raw
materials at a reduced price or make purchase at favourable prices.
• Compensating motive
o It is a motive for holding cash to compensate banks for providing certain services
or loans.
o Banks provide variety of services to the business concern, such as clearance of
cheque, transfer of funds etc.
CASH MANAGEMENT MODELS
• Baumol model
• Miller-Orr model
• Orgler’s model
CASH MANAGEMENT TECHNIQUES
• Speedy Cash Collections.
o Prompt Payment by Customers
o Early Conversion of Payments into Cash
o Concentration Banking
o Lock Box System:
▪ It is a service provided by banks to companies for the receipt of payment
from customer.
▪ The payment made by customers are directed to a special post office box
instead of going to the company
• Slowing Disbursements
o Avoiding the early payment of cash
o Centralised disbursement system

27 | K I R A N . A . S
DIVIDEND DECISION
• The word ‘Dividend’ is derived from the Latin word ‘Dividendum’ which means ‘that
which is to be divided’
• According to the Institute of Chartered Accountants of India, dividend is, “a distribution
to shareholders out of profits or reserves available for this purpose.”
• A dividend is a payment made by a corporation to its shareholders, usually as a
distribution of profits
• When a corporation earns a profit or surplus, the corporation is able to re-invest the
profit in the business (called retained earnings) and pay a proportion of the profit as a
dividend to shareholders.
• The company's Board of Directors makes dividend decisions
• Dividend policies must always consider two basic objectives:
o Maximizing owners' wealth
o Providing sufficient financing
TYPES DIVIDEND

• Preference dividend
o Preference dividend is paid on preference shares.
o It is paid at the fixed rate which is mentioned at the time of issue of preference
share.
o This dividend is paid before the payment of equity dividend.
o The decision to pay or not to pay preference dividend is taken by Board of Director
but the BOD has no freedom of choice to reduce the rate of preference dividend.

28 | K I R A N . A . S
 • Equity Dividend
o Equity dividend is paid on equity shares at the rate of recommended by the board
of directors and approved by the shareholders in annual general meeting.
o The board of directors have freedom of choice with regard to payment or non -
payment of dividend, the rate of dividend and the medium of dividend i.e. cash
dividend and non- cash dividend. Because of the maximum managerial freedom
available in the case of equity dividend, most of the discussion on dividend policy
relates to equity dividend.
• Interim Dividend
o Interim dividend is a dividend which is declared between two annual general
meetings.
o If the profits are good in a firm the board of director may from time to time pay
interim dividend to its shareholders.
• Cash Dividend
o This is the payment of actual cash from the company directly to the shareholders
and is the most common type of payment.
o The payment is usually made electronically (wire transfer), but may also be paid
by check or cash.
o According to sec.205 (3) of the companies ACT also dividend is payable in cash
only.
• Stock Dividend or Bonus Shares
o Stock dividends are paid out to shareholders by issuing new shares in the
company.
o These are paid out pro rata, based on the number of shares the investor owns.
• Scrip or Bond Dividend
o Scrip dividend is the dividend paid by a company to its shareholders in the form of
scrip’s i.e. shares and debentures of other companies or a promissory note.
o In case of scrip dividend, the time period is short term whereas in bond dividends
are not in practice in India after the companies Amendments Act, 1960.
• Assets: A company is not limited to paying distributions to its shareholders in the form
of cash or shares. A company may also pay out other assets such as investment
securities, physical assets, real estate, and others.
• Special: In special circumstances Company declares Special dividends. Generally,
company declares special dividend in case of abnormal profits.
• Common: This refers to the class of shareholders (i.e., common shareholders), not
what’s actually being received as payment.
• Other: Other, less common, types of financial assets can be paid out such as options,
warrants, shares in a new spin-out company, etc.

29 | K I R A N . A . S
DIVIDEND THEORIES AND POLICY
• Dividend refers to the business concerns net profits distributed among the shareholders
• According to the Institute of Chartered Accountant of India, dividend is defined as “a
distribution to shareholders out of profits or reserves available for this purpose”.
• Dividend policy refers the determination of the principles rules and procedure for the
planning of distribution dividend after deciding the rate of dividend.
• As per Weston and Brigham, “Dividend policy determines the division of earnings
between payments to shareholders and retained earning”.
• Dividend policy is a method or technique or approach by the management of the firm
towards some constant payment to the shareholders out of the profits of the company.
• Dividend decisions, may be for a short-term purpose, also called ad-hoc decisions or
may be made for a longer-term period
• The determinants of a dividend policy should be towards regularity of income, stability
of income, and safety during the period of contingencies. The legal constraints should
also be looked upon by the directors.
TYPES OF DIVIDEEND POLICY
1. Stable Dividend Policy
o Stability of dividend means similarity or no change in dividend payment over a
year.
o In other words, when a company pays dividend at a fixed rate
o Stable dividend policy increases credibility of the management in the market
o The stability of dividend is described in two different way: Constant dividend per
share and Constant payout ratio
o Constant dividend per share policy: the firm pays a fixed amount per share as
dividend to its shareholder. The dividend per share is not increased or decreased
for a temporary increase or decrease in earning
o Constant payout ratio: A fixed percentage of net earnings are paid as dividend
every year that is constant payout ratio. For example, a company adopts 60%
payout that is 60% of net earnings of the company will be paid as dividend and
40% of net earnings will be transferred to reserves.
2. Policy of Regular Plus Extra Dividend
3. Policy of regular bonus dividend
4. Policy to pay Irregular Dividend
5. Policy of no immediate dividend
DIVIDEND THEORY
• Irrelevant Theory: Solomon Approach and MM Approach
• Relevant Theory: Walter’s Model and Gordon’s Model

30 | K I R A N . A . S
DIVIDEND POLICY THEORYS

WALTER’S MODEL ON DIVIDEND DECISION

• Professor James E. Walter argues that the choice of dividend policies almost always
affects the value of the enterprise.
• His model shows clearly the importance of the relationship between the firm’s internal
rate of return (r) and its cost of capital (k) in determining the dividend policy that will
maximise the wealth of shareholders.
• Assumption are fallows:
o The firm finances all investment through retained earnings; that is debt or new
equity is not issued;
o The firm’s internal rate of return (r), and its cost of capital (k) are constant;
o All earnings are either distributed as dividend or reinvested internally
immediately.
o Beginning earnings and dividends never change. The values of the earnings per
share (E), and the divided per share (D) may be changed in the model to determine
results, but any given values of E and D are assumed to remain constant forever in
determining a given value.
o The firm has a very long or infinite life.
o Walter’s formula to determine the market price per share (P) is as follows:
P = D/K +r(E-D)/K/K

31 | K I R A N . A . S
GORDON’S MODEL ON DIVIDEND DECISION
• One very popular model explicitly relating the market value of the firm to dividend
policy is developed by Myron Gordon.
• Gordon’s model is based on the following assumptions:
o The firm is an all Equity firm
o No external financing is available
o The internal rate of return (r) of the firm is constant.
o The appropriate discount rate (K) of the firm remains constant.
o The firm and its stream of earnings are perpetual
o The corporate taxes do not exist.
o The retention ratio (b), once decided upon, is constant. Thus, the growth rate (g)
= br is constant forever.
o K > br = g if this condition is not fulfilled, we cannot get a meaningful value for
the share.
o Cost of capital remains constant and is greater than growth rate
o The company has perpetual life

The mode provided by Walter and Gordon Growth Model lead to the following
implications:
• If r > k price per share increases as dividend payout ratio decrease.
• If r < k price per share increases as dividend payout ratio Increase.
• If r = k price per share remains unchanged with change in dividend payout ratio.

32 | K I R A N . A . S
MODIGLIANI AND MILLER’S HYPOTHESIS
• According to Modigliani and Miller (M-M), dividend policy of a firm is irrelevant as it
does not affect the wealth of the shareholders.
• They argue that the value of the firm depends on the firm’s earnings which result from
its investment policy.
• Thus, when investment decision of the firm is given, dividend decision the split of
earnings between dividends and retained earnings is of no significance in determining
the value of the firm.
• M – M’s hypothesis of irrelevance is based on the following assumptions:
o The firm operates in perfect capital market
o There are no personal or corporate income taxes
o There are no stock floatation or transaction costs
o The firm has a fixed investment policy
o Dividend policy has no effect on the firm’s cost of equity
o The firm’s capital invest policy is independent of its dividend policy.
o Investors and managers have the same set of information regarding future
opportunities.
o Risk of uncertainty does not exist. That is, investors are able to forecast future
prices and dividends with certainty and one discount rate is appropriate for all
securities and all time periods.
Thus, r = K = Kt for all t.

DIVIDEND AND FIRM’S LIFE CYCLE

33 | K I R A N . A . S
 • Irrelevance of Dividend
o According to professors Solomon, Modigliani and Miller, dividend policy has no
effect on the share price of the company.
o There is no relation between the dividend rate and value of the firm.
o Dividend decision is irrelevant of the value of the firm.
• Modigliani and Miller’s Approach
o According to MM, under a perfect market condition, the dividend policy of the
company is irrelevant and it does not affect the value of the firm.
o Assumptions:
▪ Perfect capital market.
▪ Investors are rational.
▪ There is no tax.
▪ The firm has fixed investment policy.
▪ No risk or uncertainty.
▪ Does not consider floatation cost and transaction cost
• Relevance of Dividend
o As per this concept, dividend policy is considered to affect the value of the firm.
o Dividend relevance implies that shareholders prefer current dividend and there is
no direct relationship between dividend policy and value of the firm.
o Relevance of dividend concept like Walter and Gordon
• Walter’s Model
o Prof. James E. Walter argues that the dividend policy affects the value of the firm.
o Assumptions:
▪ The firm uses only internal finance.
▪ The firm does not use debt or equity finance.
▪ The firm has constant return and cost of capital.
▪ The firm has 100 recent payout.
▪ The firm has constant EPS and dividend.
▪ The firm has a very long life.
• Gordon’s Model
o Myron Gorden dividend policy of a firm affects its value
o Assumptions:
▪ The firm is an all equity firm.
▪ The firm has no external finance.
▪ Cost of capital and return are constant.
▪ The firm has perpetual life.
▪ There are no taxes.
▪ Constant relation ratio (g=br).
▪ Cost of capital is greater than growth rate (Ke>br).

34 | K I R A N . A . S
RISK AND RETURN ANALYSIS

RISK ANALYSIS TECHNIQUES IN CAPITAL BUDGETING

35 | K I R A N . A . S
ASSET SECURITIZATION
• Securitization is the process of taking an illiquid asset or group of assets and, through
financial engineering, transforming it (or them) into a security.
• Securitization is the process of turning assets into securities
• Securitization is the process of taking an illiquid asset, or group of assets, and through
financial engineering, transforming them into a security.
• Securitisable Assets
o Term loans
o Commercial loan
o Receivables from government
o Vehicle loans
o Lease finance
o Mortgage Loans
o Credit card receivable
EURO EQUITY
• Euro equity represents shares that are denominated in dollars and are issued by either
non-American or non-European companies. These shares are then listed on American
and European stock exchanges by complying to their regulations.
TOP 3 GOALS OF FLOATING DR
• Diversify investor base
• Enhance visibility and global presence
• Increase liquidity
4 DIFFERENT FORMS OF EURO EQUITY ISSUE
• Global Depository Receipts (GDR)
• American Depository Receipts (ADR)
• European Depository Receipts
• Singapore Depository Receipts

36 | K I R A N . A . S
GLOBAL DEPOSITORY RECEIPTS (GDR)
• GDR represents certain number of equity shares denominated in dollar terms
• The issuer collects the proceeds in foreign currency
• GDRs are traded on stock exchanges of Europe and USA
• All shares to be issued are deposited with an intermediary called ‘depository’ located in
the listing country and The Depository issues a receipt against these shares
• Intermediary called ‘custodian’ who acts as depositor’s agent.
• The GDR does not appear in the books of the issuing company
• ADR or GDR holders do not have voting rights
• The issue of GDR is governed by international laws
• GDR is also denominated in rupees
• GDRs are listed at Luxembourg and traded at two other stock exchanges namely, The
OTC market in London and in the USA by private placement
• NRIs and foreign residents can buy GDR by using their regular share trading account
• Typically, 1 GDR is equal to 10 underlying shares
• It is an unsecured security
• GDR can be issued in both America and Europe.
• GDR can be traded in all around the world.
• Rule 144A GDRs
o These GDRs are those which operate through the rule 144A of the Securities
Exchange Commission (SEC) of the US.
o This rule allows non-American companies to trade and raise capital in the
American Markets.
• Regulation S GDRs
o These GDRs are those which help non-American companies raise funds and
establish a trading presence in the European markets only.
o These GDRs usually trade on the London or Luxembourg Stock Exchange only, and
are popularly known as Reg S GDRs. Only non-American investors can trade in Reg
S GDRs.

37 | K I R A N . A . S
AMERICAN DEPOSITARY RECEIPT (ADR)
• The first ADR was introduced by J.P. Morgan in 1927
• ADR Market is more liquid as compared to GDR market
• A sponsored ADR
o It is created through an agreement between a non-American company and an
American bank
o Offer voting rights to their holders.
o Level I ADRs ("OTC" facility): These are the lowest level of sponsored ADRs that
can be issued.
o Level II ADRs ("Listing" facility): These programs are more complicated for a
foreign company.
o Level III ADRs ("offering" facility): These programs are the highest level a foreign
company can sponsor.
• Unsponsored ADRs
o These are created by American banks without the involvement or the permission
of a non-American company
o They also don’t offer voting rights to their shareholders
o Type I ADR: These are only to establish a presence in the American market. They
don’t permit the raising of funds.
o Type II ADR: These cannot be used to raise funds, but they are permitted to have
a higher visibility and trading volume than Type I ADRs.
o Type III ADR: These are a prestigious category of ADRs. The companies issuing
these are allowed to raise funds and float an IPO on the American stock markets
as well.

38 | K I R A N . A . S
 BASIS FOR
ADR GDR
COMPARISON

Acronym American Depository Receipt Global Depository Receipt

Meaning ADR is a negotiable instrument GDR is a negotiable instrument

issued by a US bank, issued by the international
representing non-US company depository bank, representing
stock, trading in the US stock foreign company's stock trading
exchange. globally.

Relevance Foreign companies can trade in Foreign companies can trade in

US stock market. any country's stock market other
than the US stock market.

Issued in United States domestic capital European capital market.

market.

Listed in American Stock Exchange such Non-US Stock Exchange such as

as NYSE or NASDAQ London Stock Exchange or
Luxemburg Stock Exchange.

Negotiation In America only. All over the world.

Disclosure Onerous Less onerous

Requirement

Market Retail investor market Institutional market.

39 | K I R A N . A . S
LEVERAGE
• leverage refers to furnish the ability to use fixed cost assets or funds to increase the
return to its shareholders
• James Horne has defined leverage as, “the employment of an asset or fund for which
the firm pays a fixed cost or fixed return.
• Operating Leverage:
o The leverage associated with investment activities is called as operating leverage.
o It is caused due to fixed operating expenses in the company.
o Operating leverage consists of two important costs viz., fixed cost and variable
cost.
o The degree of operating leverage may be defined as percentage change in the
profits resulting from a percentage change in the sales
o Operating leverage helps to identify the position of fixed cost and variable cost.
o Operating leverage describes the overall position of the fixed operating cost.
• Financial leverage:
o Leverage activities with financing activities is called financial leverage.
o Financial leverage represents the relationship between the company’s earnings
before interest and taxes (EBIT) or operating profit and the earning available to
equity shareholders.
o Financial leverage is defined as “the ability of a firm to use fixed financial charges
to magnify the effects of changes in EBIT on the earnings per share”.
o Favourable financial leverage occurs when the company earns more on the assets
purchased with the funds, then the fixed cost of their use. Hence, it is also called
as positive financial leverage.
o Unfavourable financial leverage occurs when the company does not earn as much
as the funds cost. Hence, it is also called as negative financial leverage
o Degree of financial leverage may be defined as the percentage change in taxable
profit as a result of percentage change in earnings before interest and tax (EBIT)
o Financial leverage helps to examine the relationship between EBIT and EPS.
• Combined Leverage:
o When the company uses both financial and operating leverage to magnification of
any change in sales into a larger relative change in earning per share.
o Combined leverage is also called as composite leverage or total leverage.
o Combined leverage expresses the relationship between the revenue in the
account of sales and the taxable income
o Degree of Combined leverage: The percentage change in a firm’s earning per
share (EPS) results from one percent change in sales.

40 | K I R A N . A . S
FACTORING
• Factoring is a service of financial nature involving the conversion of credit bills into cash.
• Factoring is also called “Invoice Agent” or purchase and discount of all “receivables”.
• Low service charges (0.1% to 0.3%).
• The factor prepays 80% of the invoice value.
• The balance 20% less the cost of factoring is paid by the factor to the client. Low
margin (20%onwards).
• Recourse factoring: The client will carry the credit risk in respect of debts sold to the
factor
• The Non-Recourse
o Factoring also called as ‘Old-line factoring’.
o It is an arrangement whereby he factor has no recourse to the client when the bill
remains unpaid by the customer.
o Thus, the risk of bad debt is absorbed by the factor.
• The payment is made by the factor immediately is called Advance Factoring
• Supplier Guarantee Factoring is also known as ‘drop shipment factoring’.
CREDIT RATING
• “Credit rating is designed exclusively for the purpose of granting bonds according to
their investment quality”
• Agencies:
o Credit Rating Information Service of India Limited (CRISIL)
o Investment Information and Credit Rating Agency of India Limited (ICRA)
o Credit Analysis and Research Limited (CARE)
41 | K I R A N . A . S
MISCELLANEOUS
• Finance is the lifeblood of business organization
• Financial management is not a revolutionary concept but an evolutionary.
• Profit is the measuring techniques to understand the business efficiency of the concern.
• Profit maximization is also called as “Cashing per share maximization”
• Profit maximization objectives help to reduce the risk of the business.
• Profit maximization objective consists of certain drawback:
o It is vague
o It ignores the time value of money
o It ignores risk
• Profit maximization is also the traditional and narrow approach
• Wealth maximization is one of the modern approaches
• Wealth maximization is also known as “Value maximization or Net present worth
maximization”
• Wealth maximization is superior to the profit maximization
• Wealth maximization considers both time and risk of the business concern.
• Wealth maximization is nothing, it is also profit maximization, it is the indirect name of
the profit maximization.
• A person who deals finance related activities may be called finance manager.
• Financial management is also popularly known as “Business finance or Corporate
finances”
• Income Statement determines the entire “operational performance” of the concern
• Statement of Changes or Position in Owner’s Equity is also called as statement of
retained earnings. Prepare based on Income Statement
• Income statement and position statement shows only about the position of the finance
• Statement of changes in financial position helps to understand the changes in financial
position from one period to another period.
• “Statement of changes in financial position” involves two important areas such as
o Fund flow statement which involves the changes in working capital position
o Cash flow statement which involves the changes in cash position.

42 | K I R A N . A . S
 • Equity
o Equity shares have permanent nature of capital
o Which has no maturity period.
o It cannot be redeemed during the lifetime of the company.
o The pre-emptive right is the legal right of the existing shareholders. It is attested
by the company in the first opportunity to purchase additional equity shares in
proportion to their current holding capacity.
o If the shareholders are having fully paid up shares, they have no liability
o It consists of less cost of capital (Ke) while compared to other sources of finance.
o The company cannot take the advantage of trading on equity.
• Preference
o The parts of corporate securities are called as preference shares.
o Cumulative preference shares, If the company does not earn any profit in any
previous years, it can be cumulative with future period dividend
o Non-cumulative preference shares eligible to get only dividend if the company
earns profit during the years. Otherwise, they cannot claim any dividend.
o Preference shares have no fixed maturity period except in the case of redeemable
preference shares
o Preference shares have high expensive source of finance while compared to
equity shares
o Cumulative preference shares become a permanent burden Because the company
must pay the dividend for the unprofitable periods also.

• Deferred shares also called as founder or promoter or management shares because

these shares were normally issued to founders
• The shareholders have a preferential right to get dividend before the preference shares
and equity shares
• According to Companies Act 1956 no public limited company or which is a subsidiary of
a public company can issue deferred shares
• Deferred shares have disproportionate (unequal) voting rights
• These shares have a small denomination or face value
• Rate of dividend is not fixed

• The company cannot raise further finance through debentures as the debentures are
under the part of security of the assets already mortgaged to debenture holders.

• Internal source of finance: Depreciation Funds, Retained earnings

43 | K I R A N . A . S
 • Retain Earnings
o Retain Earnings is called as accumulation of profits by a company for its expansion
and diversification activities.
o Retained earnings are called under different names such as; Self finance, inter
finance, and plugging back of profits.
o According to the Companies Act 1956 certain percentage, as prescribed by the
central government (not exceeding 10%) of the net profits after tax of a financial
year have to be compulsorily transferred to reserve by a company before declaring
dividends for the year.
o It does not involve any floatation cost as in the case of raising of funds by issuing
different types of securities.
o Retained earnings lead to tax evasion. Since, the company reduces tax burden
through the retained earnings
• Short term Advances from commercial banks: Cheap source of finance, which is in the
form of pledge, mortgage, hypothecation and bills discounted and rediscounted
• Development banks are also called as financial institutions or statutory financial
institutions or statutory non-banking institutions.

44 | K I R A N . A . S
 UNIT 5
BUSINESS STATISTICS AND RESEARCH METHODS

❖ Modul 1: Measures of central tendency

❖ Modul 2: Measures of dispersion
❖ Modul 3: Measures of skewness
❖ Modul 4: Correlation and regression of two variables
❖ Modul 5: Probability
1. Approaches to probability
2. Bayes’ theorem
❖ Modul 6: Probability distributions
1. Binomial distribution
2. Poisson distribution
3. Normal distributions
❖ Modul 7: Research
1. Concept and types
2. Research designs
❖ Modul 8: Data
1. Collection of data
2. Classification of data
❖ Modul 9: Sampling and estimation
1. Concepts
2. Methods of sampling - probability and nonprobability methods
3. Sampling distribution
4. Central limit theorem
5. Standard error
6. Statistical estimation
❖ Modul 10: Hypothesis testing
1. z-test
2. t-test
3. ANOVA
4. Chi–square test
5. Mann-Whitney test (U - test)
6. Kruskal-Wallis test (H-test)
7. Rank correlation test
❖ Modul 11: Report writing

1|KIRAN.A. S
STATISTICS
• The word statistics is derived from Latin word ‘status’ which means a political state
• The Italian word ‘Statista’ which means statesman
• The German word ‘Statistic’ which means a political state
• Prof. Gottfried Achenwall was the first to use the word statistics in 1749. He defined
statistics as “the political science of several countries”
• Statistics developed gradually as a king of subjects or ‘as a science of king’
• Captain John Grant of London (1620 - 1674), known as the 'father of Vital Statistics’
• “Statistics may be defined as the science of collection, presentation, analysis and
interpretation of numerical data” Croxton and Cowden
• “Statistics is a science of estimation and probability” Boddington
• “Statistics may be called the science of counting” A. L. Bowley
• Fundamental Law of statistics:
o The law of statistical regularity
o The law of Inertia of large numbers

2|KIRAN.A. S
RESEARCH CONCEPT
• Research is a process of investigation. An examination of a subject from different
points of view.
• Research refers to a search for knowledge. Research is an art of scientific investigation.
• In simple words Re – Search means “Search Again”
• Research is the collection and evaluation of information about a particular subject.
• According to the American sociologist Earl Robert Babbie, “Research is a systematic
inquiry to describe, explain, predict and control the observed phenomenon”.
• Characteristics of Research:
o Research begins with a problem in the form of a question in the mind of the
researcher.
o Research demands the identification of a problem, stated in clear, unambiguous
terms.
o Research requires a plan.
o Research deals with the main problem through appropriate sub-problems.
o Research seeks direction through appropriate hypotheses and is based upon
obvious assumptions.
o Research deals with facts and their meaning.
o Research is circular
• Features of good research:
o Research is based on the scientific method.
o Helps in answering various pertinent questions.
o It is an organized
o It is a planned
o It is a patient investigation or a critical enquiry.
o It has logical roots, helping to establish facts or principles
o Research deals with facts and their meaning
o Research deals with the main problem through appropriate sub-problems

3|KIRAN.A. S
PROCESS OF RESEARCH
1. Defining the Research problem & Research Objective: Two steps are involved defining
the research problem
a. Understanding the problem thoroughly
b. Rephrasing the same into meaningful terms from analytical point of view
2. Review of theories, concepts and previous research findings:
a. Techniques for preliminary investigation
i. Situation Analysis
ii. Informal investigations
b. Researcher can review two types of literature
i. The conceptual literature
ii. The empirical literature
3. Development & Making Working Hypothesis: Working hypothesis is tentative
assumption made in order to draw out and test its logical or empirical consequences.
a. Discussion with colleagues and experts
b. Examination of data and records
c. Review of the same
d. Exploratory personal investigation which involves original field interviews
4. Preparing Research designs: Research Design is the basic framework which provides
guidelines for the rest of the research work. It is a map or a blueprint according to which
the research is to be conducted. Research design categories are
a. Exploratory research designs
b. Descriptive research designs
c. Causal research designs
5. Sample designs – A sample design is a definite plan determined before any data is
actually collected for obtaining a sample from a given population. The sample may be of
two types
i. Probability Sampling
ii. Non-probability Sampling

4|KIRAN.A. S
 6. Data collection: Data collection is the most important work. The collection of
information must be containing on facts which is from the following two types of
researcher.
a. Primary Data Collection:
i. Experiment
ii. Questionnaire
iii. Observation
iv. Interview
v. Schedule
b. Secondary data collection:
i. Review of literature
ii. Official and non-official reports
iii. Library approach
7. Analysis of data: The researcher should classify the raw data into some purposeful and
usable categories. Data analysis may be divided into following categories.
a. Data Processing:
i. Data editing
ii. Data coding
iii. Data classification
iv. Data tabulation
v. Data presentation
vi. Data measurement
b. Data Exposition:
i. Description
ii. Explanation
iii. Narration
iv. Conclusion/Findings
v. Recommendations/Suggestions
8. Hypothesis Testing: Research data is then forwarded to test the hypothesis. Do the
hypothesis are related to the facts or not? To find the answer the process of testing
hypothesis is undertaken which may result in accepting or rejecting the hypothesis. For
example
a. Chi Square test
b. F- test
c. Z test
9. Generalization and Interpretation: The acceptable hypothesis is possible for researcher
to arrival at the process of generalization or to make & theory. Some types of research
have no hypothesis for which researcher depends upon on theory which is known as
interpretation.

5|KIRAN.A. S
 10. Preparation of Report: A researcher should prepare a report for which he has done is
his work. He must keep in his mind the following points:
a. Report Design in Primary Stages: The report should carry a title, brief introduction
of the problem and background followed by acknowledgement. There should be
a table of contents, grapes and charts.
b. Main Text of the Report: It should contain objectives, hypothesis, explanations
and methodology of the research. It must be divided into chapters and every
chapter explains separate title in which summary of the findings should be
enlisted. The last section would be clearly of conclusions to show the main theme
of the Re - study.
c. Closing the Report: After the preparation of report, the last step in business
research process contains of bibliography, references, appendices, index and
maps or charts for illustration. For this purpose, the information should clearer
TYPES OF RESEARCH
➢ BASIC RESEARCH
• Basic research, also called Pure research or Fundamental research or Theoretical
research
• Basic research is an investigation on basic principles and reasons for occurrence
of a particular event or process or phenomenon.
• Study or investigation of some natural phenomenon or relating to pure science
are termed as basic research.
• Basic researches sometimes may not lead to immediate use or application.
• It is not concerned with solving any practical problems of immediate interest. But
it is original or basic in character.
• It helps build new frontiers of knowledge.
• Basic research fuels applied science's innovations
• Pure research is the source of most new scientific ideas and ways of thinking
about the world
• Basic research generates new ideas, principles, and theories, which may not be
immediately utilized
• Fundamental research is driven by curiosity and the desire to expand knowledge
in specific research area
• The applicability of basic research is greater than the applied research
• Basic Research deals with generalization and formulation of theory about human
behaviour
• Basic research helps in adding new knowledge to the already existing knowledge.
• The primary concern of the basic research is to develop scientific knowledge and
predictions.

6|KIRAN.A. S
 • Basic research is
▪ Seeks generalization
▪ Aims at basic processes
▪ Attempts to explain why things happen
▪ Tries to get all the facts
▪ Reports in technical language of the topic
➢ APPLIED RESEARCH
• Also called Professional Research
• Applied Research is the research that is designed to solve specific practical
problems or answer certain questions.
• Most of the experimental research, case studies and inter-disciplinary research
are essentially applied research.
• Applied research is helpful for basic research
• A research, the outcome of which has immediate application is also termed as
applied research.
• Such a research is of practical use to current activity.
• Problems tend to be more practical
• Seeks to find solutions to immediate problems and issues
• This research is also known as empirical, since it seeks the application of acquired
knowledge with the idea of consolidating knowledge to solve a situation.
• It is directed towards providing a solution to the specific practical problems and
develop innovative technology.
• It is the research that can be applied to real-life situations.
• Applied research stresses on the development of technology and technique with
the help of basic science.
• Applied research is:
▪ Studies individual or specific cases without the objective to generalize
▪ Aims at any variable which makes the desired difference
▪ Tries to say how things can be changed
▪ Tries to correct the facts which are problematic
▪ Reports in common language

7|KIRAN.A. S
 BASIS FOR
BASIC RESEARCH APPLIED RESEARCH
COMPARISON

Meaning Basic Research refers to the Applied Research is the research

study that is aimed at expanding that is designed to solve specific
the existing base of scientific practical problems or answer
knowledge. certain questions.

Nature Theoretical Practical

Utility Universal Limited

Concerned with Developing scientific knowledge Development of technology and

and predictions technique

Goal To add some knowledge to the To find out solution for the
existing one. problem at hand.

8|KIRAN.A. S
 ➢ QUALITATIVE RESEARCH:
• This is the type of business research, which involves getting data through the
means of communication by employing open-ended questions or such resources.
• The qualitative research relies on verbal narrative like spoken or written data
• It is an unstructured
• Research paradigm is least concerned about generalizing its findings is called
qualitative research
• Interviews: Interviews are similar in their nature to service in the way that they
have similar questions. Interviews help the researchers to understand a detailed
perspective and opinions from the subjects of research. These types of business
research also help to understand the experts and can give some critical insights
related to businesses while conducting the interviews.
• Focus group: Focus groups are the types of business research which involves a
small set of selected individuals to understand their opinion and behaviour. Focus
groups can also be conducted by online surveys. The primary intention of the focus
group has to launch the new product to a very small targeted audience before
launching date in the entire market. Their reactions are studied, suggestions are
taken and improvements are made in the product before launch.
• Ethnographic Research: Ethnographic researches are considered to be one of the
most expensive and time-consuming research. These researches involve the
researcher to adapt to the natural environment of the target audience and
observe them naturally and collect the data. Such a method is considered when
there is a need to understand the challenges or cultures are other crucial things
that can occur only in a particular setting.
• Case study research: Case study research is considered one of the most crucial
types of business research. If research is conducted with intention of assessing the
customer satisfaction, the challenges that the customers faced and the solutions
that the firm can give them after case studies.
• Website Visitor Research: It is one of the best methods to collect feedback from
the visitor visiting your website which using a survey which hat is considered
innovative and its approach for direct collection of feedback.

9|KIRAN.A. S
 ➢ QUANTITATIVE RESEARCH:
• As the name suggests these types of business research deals with numbers.
• These types of business research use a systematic investigation by the use of
mathematical techniques or statistical tools which usually begin with data
collection.
• The quantitative research uses logical or statistical observations to draw
conclusions.
• It aims at establishing cause and effect relationship between two variables by
using mathematical, computational and statistical methods.
• The research is also known as empirical research as it can be accurately and
precisely measured.
• An attempt to confirm the researcher’s hypotheses is called quantitative research
• Survey Research: This method is one of the most widely used methods for
collection of data. This is specially used in business research. This method involves
asking questions to set of audience by using various methods like online surveys,
questionnaires, online polls, and others. Many companies have been using this
method to collect data to understand the nature of the market.
• Correlational research: These types of business research are conducted to know
the relationship between two different entities and how the impact over each
other. As the name suggests correlational research suggests the correlation
between the two entities. These types of business research help to understand
patterns trends relationships etc.
• Causal-Comparative research: Causal-comparative research is a type of business
research which is based on comparison as the name suggests, and is used to
conclude cause and effect relationship between different variables. This research
is also known as quasi-experimental research. Part of the research involves
establishing a variable and studying the effects of that independent variable on
the dependent variable.
• Experimental research: As the name suggests, this type of business research is
purely based on proving a theory. These resources are very useful since they help
to understand the behavioural traits of customers which in turn lead to more
revenue generation. A set of the audience is observed and then analysed in their
behaviour.
• Online Research: Also known as literature research address considered as one of
the oldest types of business research. This research involves the gathering of
information from documents which are already existing and studies which are
already been done like annual reports, libraries and old documents.

10 | K I R A N . A . S
 BASIS FOR
QUALITATIVE RESEARCH QUANTITATIVE RESEARCH
COMPARISON

Meaning Qualitative research is a method Quantitative research is a research

of inquiry that develops method that is used to generate
understanding on human and numerical data and hard facts, by
social sciences, to find the way employing statistical, logical and
people think and feel. mathematical technique.

Nature Holistic Particularistic

Approach Subjective Objective

Research type Exploratory Conclusive

Reasoning Inductive Deductive

Sampling Purposive Random

Data Verbal Measurable

Inquiry Process-oriented Result-oriented

Hypothesis Generated Tested

Elements of Words, pictures and objects Numerical data

analysis

Objective To explore and discover ideas To examine cause and effect

used in the ongoing processes. relationship between variables.

Methods Non-structured techniques like Structured techniques such as

In-depth interviews, group surveys, questionnaires and
discussions etc. observations.

Result Develops initial understanding Recommends final course of action

11 | K I R A N . A . S
 ➢ MIXED RESEARCH
• Mixed research- research that involves the mixing of quantitative and qualitative
methods or paradigm characteristics.
• Nature of data is mixture of variables, words and images.
➢ EXPLORATORY RESEARCH
• Exploratory research is defined as a research used to investigate a problem which
is not clearly defined.
• Exploratory research also called Formulative research
• It is conducted to have a better understanding of the existing problem, but will
not provide conclusive results.
• Preliminary data collection is a part of the exploratory research
• They are not structured studies
• It is usually low cost, interactive and open ended.
• Research is usually carried out when the problem is at a preliminary stage.
• The exploration of new phenomena in this way may help the researcher’s need
for better understanding.
• The objective of exploratory research is to identify key issues and key variables.
• It should draw definitive conclusions only with extreme caution.
• Exploratory research is not typically generalizable to the population at large
➢ DESCRIPTIVE RESEARCH
• Descriptive research is defined as a research method that describes the
characteristics of the population or phenomenon that is being studied.
• Findings out who, what, where, when, how then the study of descriptive research
• It does not answer questions about how/when/why the characteristics occurred
• Descriptive research primarily focuses on describing the nature of a demographic
segment, without focusing on “why” a certain phenomenon occurs.
• Process of developing a clear and precise statement of the research problem
rather than in providing a definite answer is called descriptive research
• In other words, it “describes” the subject of the research, without covering “why”
it happens.
• Descriptive research can be used in multiple ways and for multiple reasons.
• It includes research related to specific predictions, features or functions of person
or group, the narration of facts, etc.
• It uses methods like quantitative analysis of secondary data, surveys, panels,
observations, interviews, questionnaires, etc.

12 | K I R A N . A . S
 BASIS FOR
EXPLORATORY RESEARCH DESCRIPTIVE RESEARCH
COMPARISON

Meaning Exploratory research means a Descriptive research is a

research conducted for formulating research that explore and
a problem for more clear explain an individual, group or a
investigation. situation.

Objective Discovery of ideas and thoughts. Describe characteristics and

functions.

Overall Design Flexible Rigid

Research process Unstructured Structured

Sampling Non-probability sampling Probability sampling

Statistical Design No pre-planned design for analysis. Pre-planned design for analysis.

➢ EXPERIMENTAL RESEARCH
• It is also called Causal research or Explanatory research
• It’s based on the cause and effect
• Manipulation of independent variable is called as Experimental research
• Experimental research is one of the founding quantitative research methods.
• Controlled group condition is applied in experimental research
• The simplest example of an experimental research is conducting a laboratory test.
• As long as research is being conducted under scientifically acceptable conditions
– it qualifies as an experimental research.
• Experimental research is conducted in the following situations:
▪ Time is a vital factor for establishing a relationship between cause and
effect.
▪ Invariable behaviour between cause and effect.
▪ The eminence of cause-effect relationship is as per desirability.

13 | K I R A N . A . S
 • There are three primary types of experimental research design:
▪ Pre-experimental research design
▪ True experimental research design
▪ Quasi-experimental research design
• Pre-Experimental Research Design
▪ A group, or various groups, are kept under observation after factors are
considered for cause and effect.
▪ The pre-experimental research design is further bifurcated into three types:
• One-shot Case Study Research Design
• One-group Pretest-posttest Research Design
• Static-group Comparison
• True Experimental Research Design
▪ True experimental research is the most accurate form of experimental
research design as it relies on statistical analysis to prove or disprove a
hypothesis.
▪ It is the only type of Experimental Design that can establish a cause-effect
relationship within a group/s.
▪ This experimental research method is commonly implemented in physical
sciences
▪ In a true experiment, there are three factors which need to be satisfied:
• Control Group (Group of participants for research that are familiar to
the Experimental group but experimental research rules do not apply
to them.) and Experimental Group (Research participants on whom
experimental research rules do apply.)
• Variable which can be manipulated by the researcher
• Random distribution
• Quasi-Experimental Research Design
▪ The word “Quasi” indicates resemblance.
▪ A quasi-experimental research design is similar to experimental research but
is not exactly that.
▪ The difference between the two the assignment of a control group.
▪ In this research design, an independent variable is manipulated but the
participants of a group are not randomly assigned as per conditions.
▪ The independent variable is manipulated before calculating the dependent
variable and so, directionality problem is eliminated.
▪ Quasi-research is used in field settings where random assignment is either
irrelevant or not required.

14 | K I R A N . A . S
 ➢ LONGITUDINAL RESEARCH
• A longitudinal study (or longitudinal survey, or panel study) is a research design
that involves repeated observations of the same variables over short or long
periods of time
• Research carried out longitudinally involves data collection at multiple points in
time.
• Longitudinal studies may take the form of:
▪ Trend study- looks at population characteristics over time, e.g.
organizational absenteeism rates during the course of a year
▪ Cohort study- traces a sub-population over time, e.g. absenteeism rates for
the sales department;
▪ Panel study- traces the same sample over time, e.g. graduate career tracks
over the period 1990 – 2000 for the same starting cohort.
• A research describing development changes in personality characteristics by
studying the same group at different age level is called longitudinal research
➢ CROSS-SECTIONAL RESEARCH
• One-shot or cross-sectional studies are those in which data is gathered once,
during a period of days, weeks or months.
• A studying different groups of children of different ages simultaneously and
describing their development features is called cross sectional research
• A cross-sectional study (also known as a cross-sectional analysis, transverse study,
prevalence study) is a type of observational study that analyses data from a
population, or a representative subset, at a specific point in time—that is, cross-
sectional data.
• The participants in this type of study are selected based on particular variables of
interest
• The study takes place at a single point in time
• It does not involve manipulating variables
• It allows researchers to look at numerous characteristics at once (age, income,
gender, etc.)
• It's often used to look at the prevailing characteristics in a given population
• It can provide information about what is happening in a current population
• This type of research is frequently used to determine the prevailing characteristics
in a population at a certain point in time

15 | K I R A N . A . S
 Cross-sectional study Longitudinal study

One point in time Several point in time

Different sample Same sample

Snapshot of a given point in time, change at a societal

Change at the individual level
level
Cross-sectional studies are quick to conduct as Longitudinal studies may vary from a few years to even
compared to longitudinal studies. decades.
A cross-sectional study is conducted at a given point in A longitudinal study requires a researcher to revisit
time. participants of the study at proper intervals.
Cross-sectional study is conducted with different Longitudinal study is conducted with the same sample
samples. over the years.
Cross-sectional studies cannot pin down cause-and- Longitudinal study can justify cause-and-effect
effect relationship. relationship.
Multiple variables can be studied at a single point in
Only one variable is considered to conduct the study.
time.
Since the study goes on for years longitudinal study
Cross-sectional study is comparatively cheaper.
tends to get expensive.

➢ ACTION RESEARCH
• Kurt Lewin, then a professor at MIT, first coined the term "action research" in 1944
• A research initiated to solve an immediate problem is called Action research
• Used to solve the instant problems especially in education is known as Action
research

➢ HISTORICAL RESEARCH
• Historical research is a qualitative technique.
• It’s based on past events
• Formulation of hypotheses may not be required in historical study
• Historical research studies the meaning of past events in an attempt to interpret
the facts and explain the cause of events, and their effect in the present events
• The research is not involved in the situation that is studied
• The researchers do not interact with the subjects of study
• Analysis of historical data may help explain current and future events
• Historical data is incomplete and vulnerable to time

16 | K I R A N . A . S
 ➢ EX POST FACTO RESEARCH
• Also known as "after the fact" research
• The researcher predicts the possible causes behind an effect that has already
occurred
• An ex post facto research design is a method in which groups with qualities that
already exist are compared on some dependent variable
• An ex post facto design is considered quasi-experimental because the subjects are
not randomly assigned - they are grouped based on a particular characteristic or
trait.
• After-the-fact research is a category of research design in which the investigation
starts after the fact has occurred without interference from the researcher.

➢ EMPIRICAL RESEARCH
• Empirical research is research using empirical evidence.
• It is a way of gaining knowledge by means of direct and indirect observation or
experience
• Empirical evidence (the record of one's direct observations or experiences) can be
analysed quantitatively or qualitatively
• Empirical research is defined as any research where conclusions of the study is
strictly drawn from concretely empirical evidence, and therefore “verifiable”
evidence.
• It is used to authenticate traditional research through various experiments and
observations.
• Following is the empirical cycle:
▪ Observation
▪ Induction
▪ Deduction
▪ Testing
▪ Evaluation

17 | K I R A N . A . S
 ➢ CONCLUSIVE RESEARCH
• Conclusive research design, as the name implies, is applied to generate findings
that are practically useful in reaching conclusions or decision-making.
• In this type of studies research objectives and data requirements need to be
clearly defined.
• Findings of conclusive studies usually have specific uses.
• Conclusive research design provides a way to verify and quantify findings of
exploratory studies.
• Conclusive research design usually involves the application of quantitative
methods of data collection and data analysis
• Conclusive research is meant to provide information that is useful in reaching
conclusions or decision-making.
RESEARCH DESIGN
• A research design is the set of methods and procedures used in collecting and analysing
measures of the variables specified in the problem research.
• The sketch of how research should be conducted can be prepared using research design
• According to Miller, "Research Design as the planned sequence of the entire process
involved in conducting a research study".
CLASSIFICATION OF RESEARCH DESIGN
A. Qualitative Research design: Qualitative research is implemented in cases where a
relationship between collected data and observation is established on the basis of
mathematical calculations.
a. Exploratory research: Qualitative Research is primarily exploratory research.
Exploratory research is defined as a research used to investigate a problem which
is not clearly defined. It is conducted to have a better understanding of the existing
problem, but will not provide conclusive results. Qualitative data collection
methods vary using unstructured or semi-structured techniques.
i. Primary research: It is information gathered directly from the subject. It can
be through a group of people or even an individual.
For Example: Surveys/polls, Interviews, Focus groups, Observations
ii. Secondary research: Secondary research is gathering information from
previously published primary research.
For Example: Online research, Literature research, Case study research,
Magazines, Newspapers, Books etc.

18 | K I R A N . A . S
 B. Quantitative design: Quantitative research is implemented in cases where it is
important for a researcher to have statistical conclusions to collect actionable insights.
Numbers provide a better perspective to make important business decisions.
a. Explanatory Research Design: In exploratory research design, the researcher’s
ideas and thoughts are key as it is primarily dependent on their personal
inclination about a particular topic. Explanation about unexplored aspects of a
subject is provided along with details about what, how and why related to the
research questions.
b. Descriptive Research Design: Descriptive research is defined as a research method
that describes the characteristics of the population or phenomenon that is being
studied.
c. Experimental Research Design: Experimental research design is used to establish
a relationship between the cause and effect of a situation. It is a causal research
design where the effect caused by the independent variable on the dependent
variable is observed.
d. Correlational Research Design: Correlational research is a non-experimental
research design technique which helps researchers to establish a relationship
between two closely connected variables. Two different groups are required to
conduct this research design method. There is no assumption while evaluating a
relationship between two different variables and statistical analysis techniques
are used to calculate the relationship between them.
e. Diagnostic Research Design: In the diagnostic research design, a researcher is
inclined towards evaluating the root cause of a specific topic. Elements that
contribute towards a troublesome situation are evaluated in this research design
method. There are three parts of diagnostic research design;
i. Inception of the issue
ii. Diagnosis of the issue
iii. Solution for the issue

19 | K I R A N . A . S
DATA
• Data constitutes foundation for any statistical analysis
• The process of searching for answer to a given problem is called data collection
• Data are facts and other relevant information, past and present, serving as bases for
study and analysis
• Data which can be expressed numerically are called ‘Quantitative data’
• Data which cannot be expressed numerically are called ‘Qualitative data’
• The characteristics of a quantitative data vary from unit to unit is called variable
• The characteristics of qualitative data vary from unit to unit is called attribute
• Discrete variable is a variable which can take only certain fixed integer value. In other
words, a variable which assumes only some specified values is called a discreate variable
• Continuous variable is a variable which can take any numerical value or which assumed
all the values in a range
• The process converting qualitative data into quantitative is called Quantification of data
COLLECTION OR SOURCES OF DATA
SOURCES OF PRIMARY DATA
• Data that has been collected from first-hand-experience is known as primary data.
• Primary data has not been published yet and is more reliable, authentic and objective.
• Primary data has not been changed or altered by human beings
• Its validity is greater than secondary data.
• The following are some ways of collecting primary data:
o Experiments: Experiments require an artificial or natural setting in which to
perform logical study to collect data. Experiments are more suitable for medicine,
psychological studies, nutrition and for other scientific studies.
o Survey: Survey is most commonly used method in social sciences, management,
marketing and psychology to some extent. Surveys can be conducted in different
methods.
o Questionnaire: It is the most commonly used method in survey. Questionnaires
are a list of questions either open-ended or close-ended for which the
respondents give answers. Questionnaire can be conducted via telephone, mail,
live in a public area, or in an institute, through electronic mail.
o Interview: Interview is a face-to-face conversation with the respondent. In
interview the main problem arises when the respondent deliberately hides
information otherwise it is an in-depth source of information. The interviewer can
not only record the statements the interviewee speaks but he can observe the
body language, expressions and other reactions to the questions too. This enables
the interviewer to draw conclusions easily.
20 | K I R A N . A . S
 o Observations: Observation can be done while letting the observing person know
that s/he is being observed or without letting him know. Observations can also be
made in natural settings as well as in artificially created environment.
• Advantages of primary data:
o The primary data are original and relevant to the topic of the research study
o The degree of accuracy is very high.
o Primary data is that it can be collected from a number of ways like interviews,
telephone surveys, focus groups etc.
o It can be also collected across the national borders through emails and posts.
o It can include a large population and wide geographical coverage.
o Moreover, primary data is current and it can better give a realistic view to the
researcher about the topic under consideration.
o Reliability of primary data is very high because these are collected by the
concerned and reliable party.
• Disadvantages of primary data:
o For collection of primary data where interview is to be conducted the coverage is
limited and for wider coverage a greater number of researchers are required.
o A lot of time and efforts are required for data collection.
o It has design problems like how to design the surveys. The questions must be
simple to understand and respond.
o Some respondents do not give timely responses. Sometimes, the respondents may
give fake, socially acceptable and sweet answers and try to cover up the realities.
o With more people, time and efforts involvement the cost of the data collection
goes high. The importance of the research may go down.
o In some primary data collection methods, there is no control over the data
collection. Incomplete questionnaire always gives a negative impact on research.
o Trained persons are required for data collection. In experienced person in data
collection may give inadequate data of the research

21 | K I R A N . A . S
SOURCES OF SECONDARY DATA
• Data collected from a source that has already been published in any form is called as
secondary data.
• The review of literature in any research is based on secondary data.
• The following are some ways of collecting secondary data:
o Books
o Records
o Biographies
o Newspapers
o Published censuses or other statistical data
o Data archives
o Internet articles
o Research articles by other researchers (journals)
• Advantages of Secondary Data:
o It is economical. It saves efforts and expenses.
o It is time saving.
o It helps to make primary data
o It helps to improve the understanding of the problem.
o It provides a basis for comparison for the data that is collected by the researcher.
• Disadvantages of Secondary Data:
o The data collected by the third party may not be a reliable party
o Data collected in one location may not be suitable for the other
o With the passage of time the data becomes obsolete and very old.
o Secondary data collected can distort the results of the research.
o Secondary data can also raise issues of authenticity and copyright

22 | K I R A N . A . S
CLASSIFICATION OF DATA
• The process of arranging data into homogenous groups or classes according to some
common characteristics present in the data is called classification
• Semi-structured data classification also called Poly-structured data classification
• Relational data classification also called Tabular data classification
• Bases of Classification:
o Qualitative Base: When the data are classified according to a quality or attribute
such as sex, religion, literacy, intelligence, etc.
▪ Nominal, Attribute, or Categorical Data:
✓ Descriptive Statistics used: mode (most often observed data
category), and percent.
✓ Averages (mean) and standard error are not appropriate
✓ Example: Gender (female, male), Medication (aspirin, Tylenol, Advil,
none), Religion (Buddhist, Islamic, Jewish, Christian, Hindu, none,
etc.), Countries (Iraq, Iran, Israel, Zimbabwe, Canada, etc.)
▪ Ordinal or Ranked Data: one value is greater or less than another, but the
Magnitude of the difference is unknown
✓ Descriptive Statistics used: mode and percent.
✓ Averages (mean) and standard error are not appropriate
✓ Example: Muscle response (none, partial, complete), Tree vigoro
(Healthy, sick, dead), Income (<$9,999 $10,000-$19,999>)
o Quantitative Base: When the data are classified by quantitative characteristics like
height, weight, age, income, etc.
▪ Discrete or Meristic Data:
✓ Whole number counts
✓ Descriptive Statistics used: mean, mode, median, percent.
✓ Examples: Number of petals on flower, Number of pets at home
▪ Continuous measurements:
✓ Rational numbers, limited by the accuracy of your measurements
✓ You should be able to recognize what Data Types are used in these
graphs.
✓ Examples: Height, Weight, Light-years, Blood pressure
o Geographical Base: When the data are classified by geographical regions or
location, like states, provinces, cities, countries, etc.
o Chronological or Temporal Base: When the data are classified or arranged by their
time of occurrence, such as years, months, weeks, days, etc.

23 | K I R A N . A . S
 • Bases of classification should also be evaluated across three dimensions:
o Identifiability: how easily can this data be used to identify an individual?
o Sensitivity: how much damage could be done if this data reached the wrong
hands?
o Scarcity: how readily available is this data?
• Types of Classification:
o One -way Classification: If we classify observed data keeping in view a single
characteristic, this type of classification is known as one-way classification.
For example: The population of the world may be classified by religion as Muslim,
Christian, etc.
o Two -way Classification: If we consider two characteristics at a time in order to
classify the observed data then we are doing two-way classification.
For example: The population of the world may be classified by religion and sex.
o Multi -way Classification: We may consider more than two characteristics at a
time to classify given or observed data. In this way we deal in multi-way
classification.
For example: The population of the world may be classified by religion, sex and
literacy

24 | K I R A N . A . S
SAMPLING AND ESTIMATION
• In order to answer the research questions, it is doubtful that researcher should be able
to collect data from all cases. Thus, there is a need to select a sample.
• The entire set of cases from which researcher sample is drawn in called the population.
• Sampling means selecting a particular group or sample to represent the entire
population.
PROCESS OF SAMPLING
1. Clearly Define Target Population: The first stage in the sampling process is to clearly
define target population. Population is commonly related to the number of people living
in a particular country.
2. Select Sampling Frame: A sampling frame is a list of the actual cases from which sample
will be drawn. The sampling frame must be representative of the population.
3. Choose Sampling Technique: Prior to examining the various types of sampling method,
it is worth noting what is meant by sampling, along with reasons why researchers are
likely to select a sample. Taking a subset from chosen sampling frame or entire
population is called sampling. In essence, this depends on choice of sampling technique.
In general, sampling techniques can be divided into two types;
a. Probability or random sampling
b. Non- probability or non- random sampling
4. Determine Sample Size: In order to generalize from a random sample and avoid
sampling errors or biases, a random sample needs to be of adequate size. What is
adequate depends on several issues which often confuse people doing surveys for the
first time. larger sample sizes reduce sampling error but at a decreasing rate. Several
statistical formulas are available for determining sample size. The sample sizes reflect
the number of obtained responses.
5. Collect Data: Once target population, sampling frame, sampling technique and sample
size have been established, the next step is to collect data.
6. Assess Response Rate: Response rate is the number of cases agreeing to take part in the
study. These cases are taken from original sample. In reality, most researchers never
achieve a 100 percent response rate. Response rate is important because each non
response is liable to bias the final sample.

25 | K I R A N . A . S
METHODS OR TYPES OF SAMPLING
A. Probability Sampling: Probability sampling means that every item in the population has
an equal chance of being included in sample.
a. Simple random sampling: The simple random sample means that every case of
the population has an equal probability of inclusion in sample. In simple random
sampling the standard errors of estimators can be high.
b. Systematic sampling: Systematic sampling is where every nth case after a random
start is selected. Systematic sampling is a probability sampling method where the
elements are chosen from a target population by selecting a random starting point
and selecting other members after a fixed ‘sampling interval’. Sampling interval is
calculated by dividing the entire population size by the desired sample size. For
example, if surveying a sample of consumers, every fifth consumer may be
selected from your sample. The advantage of this sampling technique is its
simplicity
c. Stratified random sampling: Stratified sampling is where the population is divided
into strata (or subgroups) and a random sample is taken from each subgroup. A
subgroup is a natural set of items. Subgroups might be based on company size,
gender or occupation.
d. Cluster sampling: It is where the whole population is divided into clusters or
groups. Subsequently, a random sample is taken from these clusters, all of which
are used in the final sample. The stages to cluster sampling can be summarized as
follows;
i. Choose cluster grouping for sampling frame, such as type of company or
geographical region
ii. Number each of the clusters
iii. Select sample using random sampling
e. Multi-stage sampling: Multi-stage sampling is a process of moving from a broad
to a narrow sample, using a step by step process.
For example: A Malaysian publisher of an automobile magazine were to conduct
a survey, it could simply take a random sample of automobile owners within the
entire Malaysian population. In essence, this would involve dividing Malaysia into
a number of geographical regions. Subsequently, some of these regions are
chosen at random, and then subdivisions are made, perhaps based on local
authority areas. Next, some of these are again chosen at random and then divided
into smaller areas, such as towns or cities. The main purpose of multi-stage
sampling is to select samples which are concentrated in a few geographical
regions. Once again, this saves time and money.

26 | K I R A N . A . S
 B. Non-Probability sampling: All the individuals of the universe are not given an equal
opportunity of becoming a part of the sample, the method is said to be Non-probability
sampling.
a. Quota sampling: Quota sampling is a non-random sampling technique in which
participants are chosen on the basis of predetermined characteristics so that the
total sample will have the same distribution of characteristics as the wider
population.
b. Snowball or Chain referral sampling: Snowball sampling is a non-random sampling
method that uses a few cases to help encourage other cases to take part in the
study, thereby increasing sample size. This approach is most applicable in small
populations that are difficult to access due to their closed nature.
c. Convenience or Grab or Accidental or opportunity or Availability Sampling:
Convenience sampling is selecting participants because they are often readily and
easily available. Typically, convenience sampling tends to be a favoured sampling
technique among students as it is inexpensive and an easy option compared to
other sampling techniques. Convenience sampling often helps to overcome many
of the limitations associated with research. For example, using friends or family
as part of sample is easier than targeting unknown individuals.
d. Purposive or Judgmental or Authoritative sampling: Purposive or judgmental
sampling is a strategy in which particular settings persons or events are selected
deliberately in order to provide important information that cannot be obtained
from other choices. It is where the researcher includes cases or participants in the
sample because they believe that they warrant inclusion.
SAMPLING DISTRIBUTION
• In statistics, a sampling distribution or finite-sample distribution is the probability
distribution of a given random-sample-based statistic
• The sampling distribution is the probability distribution of the values that the statistic
takes on
• Sampling distributions are important in statistics because they provide a major
simplification end route to statistical inference
• A sampling distribution is a graph of a statistic for your sample data. While, technically,
you could choose any statistic to paint a picture, some common ones you’ll come across
are:
o Mean
o Mean absolute value of the deviation from the mean
o Range
o Standard deviation of the sample
o Unbiased estimate of variance
o Variance of the sample
27 | K I R A N . A . S
HYPOTHESIS TESTING
• The word ‘hypothesis’ derives from Greek word ‘Hypo’ and ‘Thesis’. ‘Hypo’ means
tentative or subject to the verification and ‘Thesis’ means Statement about solution of
a problem.
• A hypothesis is a proposed or tentative explanation for an observation, phenomenon or
scientific problems.
• “It is a tentative prediction about the nature of the relationship between two or more
variables.”
• According to Bruce W Tuckman, “A hypothesis then could be defined as an expectation
about events based on generalization of the assumed relationship between variables”.
CHARACTERISTICS OF GOOD HYPOTHESIS
• A good hypothesis is in agreement with the observed facts.
• A good hypothesis does not conflict with any law of nature which is known to be true.
• A good hypothesis is stated in the simplest possible term.
• A good hypothesis permits of the application of deductive reasoning.
• A good hypothesis shows very clear verbalization. It is different from what is generally
called hunch.
• A good hypothesis ensures that the methods of verification are under control of the
investigator
• A good hypothesis guarantees that available tools and techniques will be effectively
used for the purpose of verification.
• A good hypothesis takes into account the different types controls which are to be
exercised for the purpose of verification.
• A good hypothesis ensures that the sample is readily approachable.
• A good hypothesis indicates clearly the role of different variables involved in the study.
• A good hypothesis maintains a very apparent distinction with what is called theory law,
facts, assumption and postulate.

28 | K I R A N . A . S
PROCESS OF FORMULATING TESTING HYPOTHESIS
1. Define your problem: Defining your problem is the first thing that needs to be done.
What is it that you want to test or solve?
2. Find out the reasons behind the numbers: Now that you have defined your problem
and you have a clear picture of what it is you want to achieve, the next thing that follows
is an in-depth analysis of the current problem. Basically, you want to take as much time
as possible to learn the reasons behind your numbers.
3. Talk to your visitors: It is important to get real feedback from your visitors. One way is
to use surveys—both entry surveys and exit surveys that are used to discover your
visitor’s objectives and determine whether their goals have been met respectively this
is aimed at understanding what they want or what their desires are.
4. Use segmentation to get actionable data: segmentation gives you actionable data,
which would otherwise be useless without it.
5. Articulate a Hypothesis for your test: Now that you have gathered enough evidence to
show what or where the problems are, it is time to state why you think the problem
occurs. Your hypothesis should have the following characteristics:
a. It is goal oriented—it clearly states what needs to be accomplished
b. It can be tested—it can easily be implemented
c. It is insightful—looking at the hypothesis, one should learn something about the
problem.
6. Test substantial variations based on your Hypothesis: We can call this the
brainstorming stage. After determining the problem and articulating a hypothesis. The
next thing that follows is coming up with substantial variations based on your
hypothesis.
7. Analyse results to validate your hypothesis and Repeat: Once you’ve managed to
articulate your hypotheses and test substantial variations, it’s time to analyse results to
validate your hypothesis. You need to have sufficient test results in order to analyse and
compare.

29 | K I R A N . A . S
TYPES OF HYPOTHESIS
1. Simple Hypothesis: Simple hypothesis is that one in which there exists relationship
between two variables one is called independent variable or cause and other is
dependent variable or effect
2. Complex Hypothesis: Complex hypothesis is that one in which as relationship among
variables exists. I recommend you should read characteristics of a good research
hypothesis. In this type dependent as well as independent variables are more than two.
3. Empirical Hypothesis: Working hypothesis is that one which is applied to a field. During
the formulation it is an assumption only but when it is pat to a test become an empirical
or working hypothesis.
4. Null Hypothesis: Null hypothesis is contrary to the positive statement of a working
hypothesis. According to null hypothesis there is no relationship between dependent
and independent variable. It is denoted by “Ho”.
5. Alternative Hypothesis: Firstly, many hypotheses are selected then among them select
one which is more workable and most efficient. That hypothesis is introduced latter on
due to changes in the old formulated hypothesis. It is denoting by “HI”.
6. Logical Hypothesis: It is that type in which hypothesis is verified logically. J.S. Mill has
given four cannons of these hypothesis e.g. agreement, disagreement, difference and
residue.
7. Statistical Hypothesis: A hypothesis which can be verified statistically called statistical
hypothesis. The statement would be logical or illogical but if statistic verifies it, it will be
statistical hypothesis.

DECISION ERRORS
Two types of errors can result from a hypothesis test.
1. Type I error:
• A Type I error occurs when the researcher rejects a null hypothesis when it is true.
• The probability of committing a Type I error is called the significance level.
• This probability is also called alpha, and is often denoted by α.
2. Type II error:
• A Type II error occurs when the researcher accepts or fails to reject a null
hypothesis that is false.
• The probability of committing a Type II error is called Beta, and is often denoted
by β.
• The probability of not committing a Type II error is called the Power of the test.

30 | K I R A N . A . S
TAILED TESTS
1. One-Tailed test:
• A test of a statistical hypothesis, where the region of rejection is on only one side
of the sampling distribution, is called a one-tailed test
• For example, suppose the null hypothesis states that the mean is less than or equal
to 10. The alternative hypothesis would be that the mean is greater than 10. The
region of rejection would consist of a range of numbers located on the right side
of sampling distribution; that is, a set of numbers greater than 10.
2. Two-Tailed Tests:
• A test of a statistical hypothesis, where the region of rejection is on both sides of
the sampling distribution, is called a two-tailed test.
• For example, suppose the null hypothesis states that the mean is equal to 10. The
alternative hypothesis would be that the mean is less than 10 or greater than 10.
The region of rejection would consist of a range of numbers located on both sides
of sampling distribution; that is, the region of rejection would consist partly of
numbers that were less than 10 and partly of numbers that were greater than 10.
POWER OF A HYPOTHESIS TEST
• The probability of not committing a Type II error is called the power of a hypothesis test.
• Effect size to compute the power of the test, one offers an alternative view about the
"true" value of the population parameter, assuming that the null hypothesis is false.
• The effect size is the difference between the true value and the value specified in the
null hypothesis.
• Effect size = True value - Hypothesized value

31 | K I R A N . A . S
PARAMETRIC AND NON-PARAMETRIC TESTS
• Parametric test:
o T – Test
o F – Test
o Z – Test
• Non – Parametric test
o X2 Chi square test
o H – Test
o U – Test

BASIS FOR
PARAMETRIC TEST NONPARAMETRIC TEST
COMPARISON

Meaning A statistical test, in which specific A statistical test used in the case of non-
assumptions are made about the metric independent variables, is called
population parameter is known as non-parametric test.
parametric test.

Basis of test Distribution Arbitrary

statistic

Measurement Interval or ratio Nominal or ordinal

level

Measure of Mean Median

central tendency

Information about Completely known Unavailable

population

Applicability Variables Variables and Attributes

Correlation test Pearson Spearman

32 | K I R A N . A . S
Z – TEST
• Z – test is large sample test
• Developed by Fisher
• Size of sample n>30 (more than 30)
• When correlation coefficient of population is not zero use Z – test
• Z = Zr -Zp/SEz
• Z – test is used to determine whether two population means are different and when
population variance is known
• Z – test is based on standard normal distribution
• Critical value 1.96 for 5% two tailed
T – TEST
• It’s also called student T – test
• T – test also called Welch t - test
• T – test is small sample test
• Developed by William Gosset
• When correlation coefficient of population is zero use T – test
• Size of sample is small n<30 less than 30
• Degree of freedom is V = n – 1
• T – test used for test of significance of regression co -efficient in regression model
• In multiple regression with 3 individual variable the regression co – efficient are to be
tested by T – test
• We used t – statistics when parameter of population is normal and when population
variance is unknown
CHI SQUARE TEST
• Chi square test is introduced by Karl Pearson
• It’s a sampling analysis for testing significance of population variance
• It can be used for test of Goodness of fit r2
• It is used simple random sampling method
• Its value lies between 0 to 1
• Sample size is large n>50
• Samples are independent
• Cell frequency are linear

33 | K I R A N . A . S
ANOVA (F - TEST)
• F – Test also called Variance ratio test
• Developed by Fisher
• F – test is used to the two-independent estimation of population variance
• Two sample have same variance in F – test
• F – test is small sample test
• F = Larger estimate of population variance / Smaller estimate of population variance
• F – test use by comparing the ratio of the two variances
• The sample must be Independent
• F – test never be negative value
• Testing of overall significance of regression by F – test
• F – test value lies between ‘0’ to Infinite
• Analysis of variance
• ANOVA given by Fisher
• Assumption of ANOVA:
o Independence of sample
o Normal population
o Same population variance
o Based on Qualitative data
H – TEST
• Developed by Kruskal-Wallis
• It’s a non parametric test
• Three or more independent samples are use
• Null hypotheses (H0): There is no difference in the distribution of the population
• Alternative (Ha): There is a difference in the distribution of the population
• It is equivalent to the one – way ANOVA
• Its extension of the Mann Witney U -test
• H -test will tell you significant difference between groups
• Assumption:
o Must be randomly selected
o Size of sample at least 5
o Observation should be independent
o Two variables should be measured on an ordinal scale or a continuous scale or an
Internal scale or Ratio scale
o Degree of freedom is K -1

34 | K I R A N . A . S
U – TEST
• Developed by Mann – Whitney
• It’s a non parametric test
• It’s called Wilcoxon Rank sum test
• It’s equivalent of the two sample T – test
• U – test used when the assumptions of the t – test are not met
• It is comparing the medians between the two or more population
• Data must be measured at least at the ordinal level

35 | K I R A N . A . S
RESEARCH REPORT WRITING
• Research report is a mannerly written document regarding the findings of any kind of
research.
• It is the final product or output of any systematic investigation which is prepared to
submit to the authentic body or funding agency.
• Report is a clear and concise documentation and presentation of envisaged facts.
• “Research report is a research document that contains basic aspects of the research
project”.
TYPES OF RESEARCH REPORT
1. Technical Report: In the technical report the main emphasis is on the methods
employed, Assumptions made in the course of the study, the detailed presentation of
the findings including their limitations and supporting data. A general outline of a
technical report can be as follows:
a. Summary of results: A brief review of the main findings just in two or three pages.
b. Nature of the study: Description of the general objectives of study, formulation of
the problem in operational terms, the working hypothesis, the type of analysis and
data required, etc.
c. Methods employed: Specific methods used in the study and their limitations. For
instance, in sampling studies we should give details of sample design viz., sample
size, sample selection, etc.
d. Data: Discussion of data collected, their sources, characteristics and limitations. If
secondary data are used, their suitability to the problem at hand be fully assessed.
In case of a survey, the manner in which data were collected should be fully
described.
e. Analysis of data and presentation of findings: The analysis of data and
presentation of the findings of the study with supporting data in the form of tables
and charts be fully narrated. This, in fact, happens to be the main body of the
report usually extending over several chapters.
f. Conclusions: A detailed summary of the findings and the policy implications drawn
from the results be explained.
g. Bibliography: Bibliography of various sources consulted be prepared and
attached.
h. Technical appendices: Appendices be given for all technical matters relating to
questionnaire, mathematical derivations, elaboration on particular technique of
analysis and the like ones.
i. Index: Index must be prepared and be given invariably in the report at the end.

36 | K I R A N . A . S
 2. Popular Report: The popular report is one which gives emphasis on simplicity and
attractiveness. The simplification should be sought through clear writing, minimization
of technical, particularly mathematical, details and liberal use of charts and diagrams.
Attractive layout along with large print, many subheadings, even an occasional cartoon
now and then is another characteristic feature of the popular report. Besides, in such a
report emphasis is given on practical aspects and policy implications. We give below a
general outline of a popular report.
a. The findings and their implications: Emphasis in the report is given on the findings
of most practical interest and on the implications of these findings.
b. Recommendations for action: Recommendations for action on the basis of the
findings of the study is made in this section of the report.
c. Objective of the study: A general review of how the problem arise is presented
along with the specific objectives of the project under study.
d. Methods employed: A brief and non-technical description of the methods and
techniques used, including a short review of the data on which the study is based,
is given in this part of the report.
e. Results: This section constitutes the main body of the report wherein the results
of the study are presented in clear and non-technical terms with liberal use of all
sorts of illustrations such as charts, diagrams and the like ones.
f. Technical appendices: More detailed information on methods used, forms, etc. is
presented in the form of appendices. But the appendices are often not detailed if
the report is entirely meant for general public.
STEPS IN REPORT WRITING
There are many different types of reports, including business, scientific and research
reports, but the basic steps for writing them are the same. These are outlined below.
1. Decide on the Terms of reference: To decide on the terms of reference for your report,
read your instructions and any other information you've been given about the report,
and think about the purpose of the report. Followings are will help you draft your Terms
of reference:
• What is it about?
• What exactly is needed?
• Why is it needed?
• When do I need to do it?
• Who is it for, or who is it aimed at?

37 | K I R A N . A . S
 2. Decide on the procedure: This means planning your investigation or research, and how
you'll write the report. Answering these questions will help you draft the procedure
section of your report, which outlines the steps you've taken to carry out the
investigation:
• What information do I need?
• Do I need to do any background reading?
• What articles or documents do I need?
• Do I need to contact the library for assistance?
• Do I need to interview or observe people?
• Do I have to record data?
• How will I go about this?
3. Find the information: The next step is to find the information you need for your report.
To do this you may need to read written material, observe people or activities, and/or
talk to people. Make sure the information you find is relevant and appropriate. Check
the assessment requirements and guidelines and the marking schedule to make sure
you're on the right track. If you're not sure how the marks will be assigned contact your
lecturer.
4. Decide on the structure: Reports generally have a similar structure, but some details
may differ. How they differ usually depends on:
• The type of report – if it is a research report, laboratory report, business report,
investigative report, etc.
• How formal the report has to be?
• The length of the report.
Depending on the type of report, the structure can include:
• A title pages.
• Executive summary.
• Contents.
• An introduction.
• Terms of reference.
• Procedure.
• Findings.
• Conclusions.
• Recommendations.
• References/Bibliography.
• Appendices.
• The sections, of a report usually have headings and subheadings, which are usually
numbered

38 | K I R A N . A . S
 5. Draft the first part of your report: Once you have your structure, write down the
headings and start to fill these in with the information you have gathered so far. By now
you should be able to draft the terms of reference, procedure and findings, and start to
work out what will go in the report’s appendix.
• Findings: The findings are result of your reading, observations, interviews and
investigation. They form the basis of your report. Depending on the type of report
you are writing, you may also wish to include photos, tables or graphs to make
your report more readable and/or easier to follow
• Appendices: As you are writing your draft decide what information will go in the
appendix. These are used for information that:
i. Is too long to include in the body of the report
ii. Supplements or complements the information in the report. For example,
brochures, spreadsheets or large tables.
6. Analyse your findings and draw conclusions: The conclusion is where you analyse your
findings and interpret what you have found. To do this, read through your findings and
ask yourself:
• What have I found?
• What's significant or important about my findings?
• What do my findings suggest?
7. Make recommendations: Recommendations are what you think the solution to the
problem is and/or what you think should happen next. To help you decide what to
recommend:
• Reread your findings and conclusions.
• Think about what you want the person who asked for the report should to do or
not do; what actions should they carry out?
• Check that your recommendations are practical and are based logically on your
conclusions.
• Ensure you include enough detail for the reader to know what needs to be done
and who should do it.
Your recommendations should be written as a numbered list, and ordered from most to
least important.
8. Draft the executive summary and table of contents: Some reports require an executive
summary and/or list of contents. Even though these two sections come near the
beginning of the report you won't be able to do them until you have finished it, and have
your structure and recommendations finalised. An executive summary is usually about
100 words long. It tells the readers what the report is about, and summarise the
recommendations.
9. Compile a reference list: This is a list of all the sources you've referred to in the report
and uses APA referencing.

39 | K I R A N . A . S
 10. Revise your draft report: It is always important to revise your work. Things you need to
check include:
• If you have done what you were asked to do. Check the assignment question, the
instructions/guidelines and the marking schedule to make sure.
• That the required sections are included, and are in the correct order.
• That your information is accurate, with no gaps.
• If your argument is logical. Does the information you present support your
conclusions and recommendations?
• That all terms, symbols and abbreviations used have been explained.
• That any diagrams, tables, graphs and illustrations are numbered and labelled.
• That the formatting is correct, including your numbering, headings, are consistent
throughout the report.
• That the report reads well, and your writing is as clear and effective as possible.
• You might need to prepare several drafts before you are satisfied. If possible, get
someone else to check your report.
LAYOUT OF RESEARCH REPORT
Research report is divided into three parts as:
1. Formality Part (First Part):
• Cover page
• Title page
• Certificate or statement
• Index (brief contents)
• Table of contents (detailed index)
• Acknowledgement
• List of tables and figures used
• Preface/forwarding/introduction
• Summary report
2. Main Report (Central Part):
• Statement of objectives
• Methodology and research design
• Types of data and its sources
• Sampling decisions
• Data collection methods
• Data collection tools
• Fieldwork
• Analysis and interpretation (including tables, charts, figures, etc.)
• Conclusions and recommendations

40 | K I R A N . A . S
 3. Appendix (Additional Details):
• Copies of forms used
• Tables not included in findings
• A copy of questionnaire
• Detail of sampling and rate of response
• Statement of expenses
• Bibliography – list of books, magazines, journals, and other reports
• Any other relevant information
Key Considerations/Factors: While preparing research report, following issues must be
considered:
• Objectives
• Type of problem/subject
• Nature and type of research
• Audience or users of research work
• Size of report
• Form of writing – handwritten, typed, or computerized.
• Time and cost
• Language
• Contents of report
• Order of contents
• Number of copies
• Format – type and size of paper; lengths width, and depth of report; and pattern of
writing including paragraph, indent, numbering, font size and type, colouring, etc.
• Binding (for soft, and, particularly, for hard copy) – type, quality of material, colour, etc.,
related issues.

41 | K I R A N . A . S
LANGUAGE TO USE FOR A RESEARCH PAPER
A research paper is not like the average written assignments. It is a vital form of
academic writing and must be written in a proper language. You may use informal style in
essay writing or other creative writing assignments but it is strongly prohibited for research
paper writing. The language of the research paper must sound professional and free of
mistakes. Avoid long sentences as they ought to create confusion. Here are a few things that
will help you adopt proper language for the research paper writing.
• A formal and professional tone
• Keep the writing consistent
• Correct use of tense
• Avoid first person pronoun
• Use conjunctions carefully
• Proof read your work
BIBLIOGRAPHY
Meaning:
“A list of reference materials (involving any kind of content; text, music, paintings, video
etc.) elucidating the type, nature and other detailed information on the basis of name, date,
place and genre of the materials”.
Bibliography, also known as works cited, reference list is basically an orderly study and
referencing of books and source materials used in academic research. It might or might not
include any information on the literary analysis or criticism of the materials cited.
STANDARD BIBLIOGRAPHY FORMAT
1. Bibliography Format for a Book: A standard bibliography for a book typically consists of
the following information:
a. Author(s)
b. Title
c. Publisher
d. Date of Publication
2. Bibliography Format for a Periodical & Journal Article: An entry for a journal or
periodical article contains the following information:
a. Author(s)
b. Article Title
c. Journal Title
d. Volume Number
e. Pages
f. Date of Publication
42 | K I R A N . A . S
 3. Bibliography Format for Internet Sources: Format for internet sources usually includes
the following information:
a. Author (Website)
b. Article Title
c. Publication Information
d. Version
e. Date of Publication
f. Location (Digital Object Identifier – DOI or URL)
TYPES OF BIBLIOGRAPHIES
Bibliographies for Book Source:
1. Annotated Bibliography: This provides a brief description or annotation of the cited
sources. The annotation comprises of a brief summary of content along with a short
analysis or evaluation
2. Current Bibliography: It provides a list of published material and sources which are
recently published or currently recorded material. The purpose of a current bibliography
is to report recent literature as soon as it is published.
3. Serial Bibliography: It is published over a period of known and pre-defined time slots.
Time intervals for serial bibliographies normally range from weekly to annual basis and
informs on the updates of book and research article titles
4. National Bibliography: This provides a list of documents and sources published in a
particular country and are produced in the national or local language of a country.
5. International Bibliography: This provides a list of works, sources, publications, manuals,
books, notes, articles and websites collected from worldwide sources.
6. Subject Bibliography: This provides a list of works and sources relates to a specific
subject.
7. Period Bibliography: It provides a list of works and publications produced within a
specific period range.
8. Analytical Bibliography: It refer to the collection of sources and material for the purpose
of critical study and evaluation and refers to the following categories:
a. Descriptive (Physical) Bibliography: This provides a list of detailed facts for a book
analysis by listing its size, format, binding, and publication details.
b. Historical Bibliography: It provides a list of contextual factors related to the
production of a book i.e. printing details, publishing, bookselling and binding etc.
c. Textual Bibliography: It provides a list of literary materials, concerned with
identification and editing of transcription errors from manuals, manuscripts,
transcripts, scribes and inscriptions

43 | K I R A N . A . S
 9. Enumerative (Systematic) Bibliography: It provides a list of the list of books according
to some system, common theme or reference plan and includes information on by
author, by subject, or by date
Bibliographies for Non-book Sources
1. Discography: A discography is the systematic process which involves listing,
categorization and branding of musical materials or phonographs on the basis of artists,
composers, conductors, genres and era.
2. Filmography: A filmography provides a list of films, documentaries and movies collected
and grouped w.r.t a certain topic or theme.
3. Webography (Webliography) or Internet Bibliography: A webography, webliography or
internet bibliography provides a list of websites related to a certain topic or subject. A
website bibliography is limited to the listing and citation of online sources.
4. Arachniography: An arachniography provides a reference list of URLs collected on a
specific subject or topic. The term has been coined by NASA research historian Andrew
J. Butrica

44 | K I R A N . A . S
 UNIT 06
BUSINESS MANAGEMENT AND HUMAN RESOURCE MANAGEMENT
❖ Modul 1: Principles and functions of management
❖ Modul 2: Organization structure
1. Formal and informal organizations
2. Span of control
❖ Modul 3: Responsibility and authority
1. Delegation of authority
2. Decentralization
❖ Modul 4: Motivation and leadership
1. Concept and theories
❖ Modul 5: Corporate governance and business ethics
❖ Modul 6: Human resource management
1. Concept, role and functions of HRM
2. Human resource planning
3. Recruitment and selection
4. Training and development
5. Succession planning
❖ Modul 7: Compensation management
1. Job evaluation
2. Incentives
3. Fringe benefits
❖ Modul 8: Performance appraisal including 360-degree performance appraisal
❖ Modul 9: Collective bargaining and workers’ participation in management
❖ Modul 10: Personality
1. Perception
2. Attitudes
3. Emotions
4. Group dynamics
5. Power and politics
6. Conflict and negotiation
7. Stress management
❖ Modul 11: Organizational Culture
1. Organizational development
2. Organizational change

1|KIRAN.A. S
PRINCIPLES OF MANAGEMENT
• The word Management derives its origin from a Greek Word “nomos” which means
management.
• Management can be divided as Manage-men-t (manage-men- tactfully).
• It means managing men tactfully to get things done.
• In other words, management involves the art of getting things done through people.
• Management brings together all Six Ms i.e. Men, Money, Machine, Materials, Methods
and Markets.
DEFINITIONS
• Koontz and O Donnell state that management means “Getting things done through and
with people”.
• According to Henry Fayol “To manage is to forecast and to plan, to organize to
command, to coordinate and to command”
• According to F.W. Taylor “Management is the art of Knowing exactly. What you want
your men to do and then they do it in the best and cheapest way”.
• According Mary Parker Follett defines “Management is the art of getting things done
through people”
• According to Stephen Robbins “Management is the universal Process of efficiently
getting activities completed with through other people”
CHARACTERISTICS OF MANAGEMENT
• Management is a goal-oriented process
• Management is all pervasive
• Management is multidimensional
• Management is a continuous process
• Management is a dynamic function
• Management is an intangible force
• Management is Group Activities
• Management is Social Process
• Management is Purposeful Activities
• Management involves Decision Making
• Management is Art
• Management is Science
• Management is Universal Process
• Management is an Interdisciplinary Approach
• Management is Creative
• Management is Integrating Process

2|KIRAN.A. S
MANAGEMENT THEORIES
• Classical Management Theory
o Scientific Management Theory by Frederick Taylor
o Administrative Management Theory was by Henri Fayol
o Bureaucracy Theory by Max Weber
• Behavioural Management Theory
o Human Relations Theory, Hawthorne Studies by Elton Mayo
o Behavioural Science Theory
o Group Influence by Mary Parker Follet
o Maslow Need Theory by Abraham Maslow
o Theory X and Theory Y by Douglas Mc Gregor
o Model I and Model II value by Chris Argyris
• Modern Management Theory
o Quantity Management
o Systems Theory by John Boyd Dunlop
o Contingency Theory by Joan Woodward
o Emerging Approach: Theory Z
• Quantitative Approach
o Management Science
o Operations Management
o Management Information System
14 PRINCIPLES OF MANAGEMENT
Henri Fayol ‘s 14 principles of management and research were published in the book
“General and Industrial Management” (1916).
1. Division of Work
2. Authority and Responsibility
3. Discipline
4. Unity of Command
5. Unity of Direction
6. Subordination of Individual Interest
7. Remuneration
8. The Degree of Centralization
9. Scalar Chain
10. Order
11. Equity
12. Stability of Tenure of Personnel
13. Initiative
14. Esprit de Corps
3|KIRAN.A. S
 1. DIVISION OF WORK
• This principle of Fayol tells us that as far as possible the whole work should be
divided into different parts and each individual should be assigned only one part
of the work according to his ability and taste rather than giving the whole work to
one person.
• Work is divided into small tasks/jobs
• Fayol applied the principle of division of work or specialization to both the
managerial as well as technical activities
• When a particular individual performs the same job repeatedly, he will become an
expert in doing that particular part of the whole job. Consequently, the benefits
of specialisation will become available
• This principle implies that every employee should be assigned only one type of
work so as to bring about specialisation in every activity
• In practice, employees are specialized in different areas and they have different
skills.
• Personal and professional developments support this
• Specialization promotes efficiency of the workforce and increases productivity.
• In addition, the specialization of the workforce increases their accuracy and speed.
• Division of work tends to increase efficiency.
• It helps to avoid waste of time and effort caused by changes from one work to
another
• For example:
i. Furniture manufacturer gets an order for manufacturing 100 lecture stands.
He has five workers who will do the job. There are two ways to complete
this order. First, every worker should be asked to complete 20 lecture
stands.
ii. The second method can be distributing different parts of the lecture stand-
legs, top board, centre support, assembling and polishing-to all the five
workers in a manner that only one worker does the same job for all the 100
lecture stands. Here, Fayol’s indication is to the second way to do this job
and not the former one.
• The principle of division of labour applies not only to the workers but also equally
to the managers
• Positive Effect advantages of specialisation are obtained, such as increase in the
quality of work, increase in the speed of production, decrease in the wastage of
resources

4|KIRAN.A. S
 2. AUTHORITY AND RESPONSIBILITY
• Authority is the right to give order to the subordinates.
• Responsibility means the duty which the subordinate is expected to perform by
virtue of his position in the organization.
• “Authority is the right to give orders and obtain obedience, and responsibility is
the corollary of authority”
• The two types of authority are official authority, which is the authority to
command, and personal authority which is the authority of the individual
manager.
• Authority is both formal and informal
• Responsibility must be expressed either in terms of functions or in terms of
objectives.
• There should be parity of authority and responsibility. In other words, authority
and responsibility should bear a logical relation to each other
• According to this principle, authority and responsibility should go hand in hand
• It means that when a particular individual is given a particular work and he is made
responsible for the results, this can be possible only when he is given sufficient
authority to discharge his responsibility.
• It is not proper to make a person responsible for any work in the absence of
authority
• In the words of Fayol, “The result of authority is responsibility”
3. DISCIPLINE
• Discipline means getting obedience to rules and regulations of the organisation.
• According to Fayol, discipline is obedience, application, energy, outward mark of
respect, respect for authority and observance of established rules
• Discipline is the obedience to organisational rules and employment agreement
which are necessary for the working of the organisation
• According to Fayol, discipline requires good superiors at all level
• Discipline is necessary for the smooth running of the organisation.
• Maintenance of discipline in the organisation depends upon the quality of
leadership
• According to Fayol, discipline can best be maintained by:
i. Having good superiors at all levels;
ii. Entering into agreements (either with the individual employees or with the
union, as the case may be) that are as clear and fair as possible
iii. Ensuring that penalties are judiciously imposed.
• Discipline can be established by providing good supervision at all levels, clearly
explaining the rules, and implementing a system of reward and punishment

5|KIRAN.A. S
 4. UNITY OF COMMAND
• According to the principle of unity of command, an individual employee should
receive orders from only one superior at a time and that employee should be
answerable only to that superior.
• According to Fayol there should be one and only one boss for every individual
employee.
• If an employee gets orders from two superiors at the same time the principle of
unity of command is violated
• If he receives orders from more than one superior, he will not be able to carry out
orders in a proper manner
• Dual command is the permanent source of conflict
• His will help him in achieving the following benefits:
i. Each subordinate shall receive clear-cut orders from one boss only. This will
improve his performance
ii. Authority-responsibility relations will be clear to everybody.
iii. Orders and instructions of every executive will be honoured. It would be
easy to fix responsibility in case of default.
iv. There will be harmonious relations between the superiors and the
subordinates
5. UNITY OF DIRECTION
• Unity of direction means that there should be one head for one plan for a group
of activities having the same objective.
• All the units of an organisation should be moving towards the same objectives
through coordinated and focussed efforts
• Each group of activities having the same objective must have one head and one
plan.
• In other words, there should be one plan of action for a group of activities having
the same objective and there should be one manager to control them.
• By unity of direction Fayol meant, “One unit and one plan” for the group of
activities having the same objective.
• Fayol perceived unity of direction as related to the functioning of the business
undertaking as a whole, while unity of command is related to the functioning of
personnel.
• Unity of direction means one unit, one plan; and unity of command means one
employee should receive orders from one superior only.
• Unity of direction is necessary for sound organization whereas unity of command
is necessary to fix responsibility of the subordinates and to avoid conflicts in the
enterprise.

6|KIRAN.A. S
 6. SUBORDINATION OF INDIVIDUAL INTEREST TO GENERAL INTEREST
• The interests of an organisation should take priority over the interests of any one
individual
• This principle can be named ‘Priority to General Interest over Individual Interest.’
• According to this principle, the general interest or the interest of the organisation
is above everything. If one is asked to place individual interest and the general
interest in order of priority, definitely the general interest will be placed at the first
place.
• In all the situations the interests of the group/company will supersede the interest
of any one individual
• The interests of the business organisation must prevail upon the personal interests
of the individuals.
• This principle calls for reconciliation of goals of individuals with those of the
organization.
• When the individual and the organizational interest’s conflict, the latter must
prevail.
• The employees should subordinate their interests to the general interests of the
concern.
• The goals of the concerns must not be sacrificed for the promotion of personal
interests of individuals.
• If some decision helps the manager personally but results in a great loss to the
company, then such a decision should never be taken.
7. REMUNERATION OF PERSONNEL
• Fayol is of the opinion that the employees should get a fair remuneration so that
the employees and the owners find equal amount of satisfaction
• It is the duty of the manager to ensure that employees are being paid
remuneration according to their work
• Fayol feels that in order to motivate the employees, apart from general
remuneration, they should be given some monetary and non-monetary
incentives.
• The overall pay and compensation should be fair to both employees and the
organisation.

7|KIRAN.A. S
 8. CENTRALISATION AND DECENTRALISATION
• The concentration of decision-making authority is called centralisation whereas its
dispersal among more than one person is known as decentralisation.
• Fayol referred to the centralization in the context of authority.
• It means concentration of authority at one place or at one level in the organization
• Decentralization means dispersal of authority to the lower levels in the
organization.
• In general, large organisations have more decentralisation than small
organisations
9. SCALAR CHAIN
• An organisation consists of superiors and subordinates. The formal lines of
authority from highest to lowest ranks are known as scalar chain
• According to Fayol, “Organisations should have a chain of authority and
communication that runs from top to bottom and should be followed by managers
and the subordinates.”
• It refers to a formal line of authority which moves from highest to the lowest ranks
in a straight line
• It means each communication must move from top to bottom and vice versa in a
straight line
• Gang Plank is the exception of the principle of scalar chain. This concept was
developed to establish a direct contact with the employee of equal rank in case of
emergency to avoid delay in communication.
• Communication through the scalar chain may involve delays when two
subordinates or employees at the same level want to exchange’ information. Thus,
Fayol suggested the concept of ‘Gang Plank’ to avoid delays and allow direct
communication between two subordinates at the same level
• Gang Plank is useful as it helps in making direct contact in case of emergency.
• In the figure shown, F and G can directly communicate in case of urgency, as per
the concept of Gang Plank, without following the formal lines of communication.

8|KIRAN.A. S
 10. ORDER
• According to the principle of order, a right person should be placed at the right job
and a right thing should be placed at the right place
• Materials and people should be in the right place at the right time
• According to Fayol, every enterprise should have two different orders;
i. Material Order for Physical Resources
ii. Social Order for Human Resources.
• Keeping the physical resources in order means that ‘a proper place for everything
and everything in its right place’ Similarly, keeping the human resources in order
means ‘a place for everyone and everyone in his appointed place’.
11. EQUITY
• Managers should treat subordinates equally and fairly
• Managers must treat employees with “kindness.”
• “A manager should strive to install a sense of equity throughout all levels of the
scalar chain”
• There should be no discrimination against anyone on account of sex, religion,
language, caste, belief or nationality etc
12. STABILITY OF PERSONNEL
• Fayol thinks that instability in the tenure of employees is a cause of poor
management and results.
• High rate of labour turnover will result in increased expenses because of selecting
them time and again, and giving them training afresh.
• High turnover of employees, which is not good for the efficient functioning of the
organisation, should be avoided.
• “Employee turnover should be minimised to maintain organisational efficiency”,
according to Fayol
13. INITIATIVE
• Managers should give subordinates the freedom to formulate and implement
plans after the plans have been finalised by management.
• Increase in the thinking power of the employees
• Cooperation of the employees in implementing decisions
• Increase in the sense of attachment to the organisation Violating Effect
• Decline in the thinking power of the employees
• An atmosphere of non-cooperation
• Decline in the employees’ attachment to the company

9|KIRAN.A. S
 14. ESPRIT DE CORPS
• Management should encourage harmony, team spirit, and togetherness, thereby
helping to give the organisation a sense of unity
• As per this principle, a manager should continuously make efforts to develop a
team spirit among the subordinates.
• This principle states that “union is strength”
• A manager should replace ‘I’ with ‘We’ in all his conversations with workers to
foster team spirit.

10 | K I R A N . A . S
SCIENTIFIC MANAGEMENT
• Scientific management is a theory of management that analyses and synthesizes
workflows.
• Taylor emerged as the ‘Father of Scientific Management’
• Taylor proposed scientific management as opposed to rule of thumb
• Its main objective is improving economic efficiency, especially labour productivity.
• Scientific management is sometimes known as Taylorism after its founder, Frederick
Winslow Taylor
• It means the application of the method of scientific investigation for the solution of the
problems of industrial management
• Taylor defined ‘Scientific Management as “the art of knowing exactly what you want
men to do, and then seeing that they do it in the best and cheapest way”
• The main contents of Scientific Management are the substitution of ‘rule-of-thumb’
method or quack system of production by adopting scientific principles
The main techniques are the following:
1. Introduction of Functional Organisation: It is done by separating the functions of
planning and implementation between two sets of foremen
o Planning Foremen
• Route clerk
• Instruction card clerk
• Time and cost clerk
• Shop disciplinarian
o Production Foremen
• Gang boss
• Speed boss
• Repair boss
• Inspector
2. Differential Piece Plan of Wage Payment:
o The workers can then be classified as efficient or inefficient on the basis of these
standards
o Under this system, the workers performing the standard task within the
prescribed time are paid a much higher rate than those who are not able to come
up to the standard set

11 | K I R A N . A . S
 3. Work Study: It involves work measurement and work improvement through
scientifically conducted time, motion, method and fatigue studies.
o Time Study
• It involves the careful measurement of the time required to do each detailed
part of an industrial operation.
• The basic purpose of time study is to determine the proper time for
performing the operation
o Method study
• The objective of method study is to find out one best way of doing the job.
• It involves the determination of the standard task to be performed by the
workers.
o Motion Study
• Motion study refers to the study of movements like lifting, putting objects,
sitting and changing positions etc
• Unnecessary movements are sought to be eliminated so that it takes less
time to complete the job efficiently
• If is study of the movements of an operator (or even of a machine) in
performing an operation for eliminating useless motions.
• The purpose of such a study is to find out the best method of job
performance which every worker will be expected to follow.
o Fatigue Study
• Fatigue study seeks to determine the amount and frequency of rest intervals
in completing a task
• Extreme tiredness resulting from mental or physical exertion or illness
• It is necessary to regulate the working hours and provide for rest to the
workers at scientifically determined intervals.
• This would provide the workers an opportunity to restore the energy lost in
continuous work.
4. Standardisation
o Standardisation of Tools and Equipment’s for workers, machine speeds, materials
and working conditions.
o Scientific Selection, Placement and Training of the workers by a centralised
personnel department.
5. Mental Revolution
o Mental revolution on the part of the Employers and the Workers in regard to the
mutual co-operation for increased productivity.
o Total attitude change in the both management and worker

12 | K I R A N . A . S
The fundamental new principles of scientific management
• Science, not the rule of the thumb
• Harmony, not discord.
• Co-operation, not individualism.
• Maximum production, in place of restricted production.
• Development of each person to the greatest of his capabilities.
• A more equal division of responsibility between management and workers.
• Mental revolution on the part of management and workers.
Scientific Management is subject to the following criticisms
• Production Management Only
• Objections of the Employers
• Unsuitable for Small-Scale Firm
• Dissatisfaction of the Workers
• Objection of the Managers
• Impractical
• Misconception about ‘One Best Way’
• Undemocratic
• Mechanical Approach
• Other Defects

13 | K I R A N . A . S
FUNCTIONS OF MANAGEMENT
• According to George & Jerry
o Planning
o Organizing
o Actuating
o Controlling
• According to Henry Fayol
o Planning
o Organizing
o Commanding
o Coordinating
o Controlling
• According to Luther Gulick has given a keyword ‘POSDCORB’
o Planning
o Organizing
o Staffing
o Directing
o Co-ordination
o Reporting
o Budgeting.
• According to Koontz and O’Donnell
o Planning
o Organizing
o Staffing
o Directing
o Controlling
PLANNING
• Planning is deciding in advance what to do and how to do.
• It is one of the basic managerial functions
• The meaning of the word ‘planning’ is a paradox
• Plan is a commitment to particular course of actions
• Planning is an activity consisting of a process.
• Planning, an Intellectual Process

14 | K I R A N . A . S
FEATURES OF PLANNING
• Planning is focuses on achieving objectives
• Planning is a primary function of management
• Planning is pervasive
• Planning is continuous
• Planning is futuristic
• Planning involves decision making
• Planning is a mental exercise
IMPORTANCE OF PLANNING
• Planning provides directions
• Planning reduces the risks of uncertainty
• Planning reduces overlapping and wasteful activities
• Planning promotes innovative ideas and creativity
• Planning facilitates decision making
• Planning establishes standards for controlling
• It focuses on organizational objectives and goals
• It helps in optimum utilization of resources
• Establishes a sound organization
• Improves standard of living of people
• Reduces costs
LIMITATIONS OF PLANNING
• Planning leads to rigidity
• Planning may not work in dynamic environment
• Planning reduces creativity
• Planning involves huge costs
• Planning is a time-consuming process
• Planning does not guarantee success
THE SIX P’s OF PLANNING
• Purpose
• Philosophy
• Promise
• Policies
• Plans
• Priorities

15 | K I R A N . A . S
APPROACHES TO PLANNING
• Top-Down Approach
o This approach means that all types of planning is done at the top of hierarchy and
implementation is done at lower levels of management
o Top- down approach is generally followed in family managed organisations or by
traditional or conservative managers
o The top-level management determines objectives, formulates basic policies,
devises courses of action for achieving the goals.
• Bottom-up Approach
o The top-level management reviews the figures received from lower levels and
then approves the plans.
o The managers at lower levels will not only implement the plans but will be helping
in initiating them also.
o Such plans may contain information on:
▪ Major opportunities and threats
▪ Major objectives
▪ Strategies to achieve the objectives
▪ Specific data on sales/profits/market share sought
▪ Capital requirements, etc.
• Composite Approach
o Mixture of the Top-Down and Bottom-Up Approaches
o This is practised in most large decentralised companies.
o In composite approach top executives provide guidelines, parameters and
limitations under which middle and lower level managers are expected to
formulate tentative plans
o This approach has the advantage of involving lower level managers in thinking
process and prepare tentative plans in given parameters.
• Team Approach
o In team approach more and more managers are involved in formulating plans
o The final approval of plans is given by the Chief Executive.

16 | K I R A N . A . S
PLANNING PROCESS
1. Recognizing Need for Action
2. Setting Objectives
3. Developing Premises
4. Identifying Alternatives
5. Examining Alternate Course of Action
6. Selecting the Alternative
7. Formulating Supporting Plan
8. Implementation of the Plan
ELEMENTS OF A PLAN
• Objectives
o Objectives are the goals towards which all managerial activities are aimed at
o Objectives are goals established to guide the activities of the enterprise.
• Forecasting
o It is the analysis and interpretation of future in relation to the activities and
working of an enterprise
• Policies
o Policies are statements or principles that guide and differential managers at
various levels in making decision
o Policy provides the necessary basis for executive operation
o A policy is a basic statement that guides action and decision making. It sets
behavioural limits on managers.
o Policy provides guidelines to thinking and action
• Procedures
o Procedures outline a series of tasks for a specified course of action
o A procedure is a well thought out course of action.
o Procedure are definite and specific steps to thinking and action
o It prescribes the specific way to do a particular job.
• Methods
o Methods are sub units of procedure.
o They indicate the techniques to be used to make the procedure effective.
• Schedules
o Establishing a time sequence
• Rules
o A rule specified necessary course of action in respect of a situation.
o It prescribes restriction and a definite and rigid course of action.
• Strategy
o It is a plan of action designed to achieve long term or overall aim.
17 | K I R A N . A . S
 • Programs
o Programs are closely integrating with the objectives
o Programs are precise plans of action followed in proper sequence in accordance
with objectives, policies and procedures.
• Budgets
o Budget indicate the size of the programme
o A budget is an estimate of men, money, material and machine required for
successful implementation of plans.
• Projects
o A project is a particular job that needs to be done in connection with the general
programme.
o It is single use of plan which is a part of a general program
TYPES OF PLANNING
• Corporate Planning
o The term corporate planning denotes planning activities for the entire enterprise.
o The basic focus of corporate planning is to determine the long-term objectives of
the organisation as a whole.
o Corporate planning is generally carried out at the top level of management.
o Corporate planning is the total planning activities in the organisation and not the
total management functions
o The corporate planning is of two types:
▪ Strategic Planning
▪ Operational Planning
• Strategic Planning
o Strategic Planning consists of the process of developing strategies to reach a
defined objective
o The strategic planning may be carried out in series of steps that include the
▪ Specifying Missions and Objectives.
▪ Elaborate Environmental Scanning.
▪ Strategy Formulation.
▪ Strategy Implementation
▪ Evaluation and Control
• Operational or Tactical or coordinated planning
o Operational planning, is also known as tactical or short-term planning, usually,
covers one year or so.
o Operational planning involves the conversion of strategic plans into detailed and
specific action plans.
o Operational planning is concerned with the efficient use of resources already
allocated
18 | K I R A N . A . S
 • Functional Planning
o The purpose of functional planning is to promote standardised management
practices for corporate functions in the department’s decentralised corporate
management structure.
o It involves planning for a particular unit. Deals with parts such as – marketing,
finance, production, HR in a related manner.
o The following three basic activities have to be carried out in functional planning:
▪ Functional Guidance
▪ Goal Setting
▪ Functional Assessments
• Proactive Planning
o Managers anticipate the challenges and risks of the future and prepare alternative
plans and take suitable steps in order to adapt with unforeseen changes.
o The organisation that favours this kind of planning often anticipates the future and
takes necessary steps before the happening of the events
• Reactive Planning
o As the name suggests, this kind of planning is not in the anticipation of the future
but becomes active only when the problem is confronted or has already occurred.
o This approach of planning is useful in an environment which is fairly stable over a
long period of time.
o Managers plan to react to an external event.
• Formal Planning
o Formal Planning exists in the formal hierarchy of the organisation and is always
carried out in the stepwise process.
o It is according to the pre expressed policies and the rules of the organisation.
o This type of planning is done at a large scale and is based on the logical thinking.
o The planning process that is adopted is documented, and regular.
o It is a well-planned document with written record of what the organization intends
to do within a given time frame
• Informal Planning
o It is an unstructured, poorly designed plan which are orally communicated and not
recorded
o Informal Planning is usually carried out in very small organisations where the
formal organisation structure may or may not exist.
o The planning is usually intuitive in nature and is short termed.
o Since the environment for smaller organisations is not complex, they do
reasonably well with informal planning process.

19 | K I R A N . A . S
 • Automated Planning
o Automated planning and scheduling are a branch of artificial intelligence that
concerns the realisation of strategies or action sequences, typically for execution
by intelligent agents, autonomous robots and unmanned vehicles.
o This type of planning is normally found in the technologically advanced
organisations.

ORGANISING
• Organisation is an organized group of people with a particular purpose, such as a
business or government department.
• Organizing or organising is the establishment of effective authority relationships among
selected work, persons and work places in order for the group to work together
efficiently.
• Organization in a formal sense refers to a collectively of persons engaged in pursing
specified objective.
• Organization as comprising human relationship in group activity.
• The process of dividing work into sections and departments.
• Organizing is a arranging several elements into a purposeful sequential or spatial order
or structure.
• Organizing is an assembling required resources to attain organizational objectives.

20 | K I R A N . A . S
STEPS IN THE PROCESS OF ORGANISING
1. Determination of the Total Work-Load
2. Creation of Departmentation (Grouping and Sub-Grouping of Activities)
3. Delegation of Authority (Creation of Manager-Ship)
4. Set-Up-Human Organization (Division of Work within the Departmental)
5. Set-Up-Material Organisation (Arrangement of Physical Facilities to Personnel within
the Departmental)
6. Definition and Establishment of Authority-Responsibility Relationships

IMPORTANCE OF ORGANISING
• Benefits of specialisation
• Clarity in working relationships
• Optimum utilization of resources
• Adoption to change
• Effective administration
• Development of personnel
• Expansion and growth

21 | K I R A N . A . S
PRINCIPLES OF ORGANISATION
1. Overall Principles:
• Principle of unity of objective, Principle of simplicity, Principle of flexibility
2. Structural Principles:
• Principle of division of work
• Principle of functional definition
• Principle of optimum departmentation
• Principle of unity of direction
• Span of management principle
3. Operational Principles:
• Principle of adequate delegation, Scalar chain principle, Principle of unity of
comment, Authority-level principle
MAIN PRINCIPLES
• Chain of Command: Chain of command clarifies who reports to whom within the
organization.
• Span of Control: Span of control refers to the number of subordinates who report
directly to an executive or supervisor.
• Centralization: If decision-making power is concentrated at a single point, the
organizational structure is centralized.
• Decentralization: If decision-making power is spread out, the structure is decentralized.
• Specialization: Also known as division of labour, specialization is the degree to which
activities or tasks in an organization are broken down and divided into individual jobs.
• Formalization: Similar to specialization, formalization deals with how jobs are structured
within an organization. The key differentiator here is that formalization also takes into
account the degree to which an employee’s tasks and activities are governed by rules,
procedures, and other mechanisms.
• Departmentalization: Departmentalization refers to the process of grouping jobs
together in order to coordinate common activities and tasks
• Delegation: Delegation is the assignment of new or additional responsibilities to a
subordinate at a lower level.
o Responsibility means that a person who is assigned a task that he or she is
supposed to carry out must perform that task.
o Authority means that the person has the power and the right to make decisions,
give orders, draw upon resources, and do whatever else is necessary to satisfy the
responsibility.
o Accountability means that the subordinates manager has the right to expect the
subordinate to perform the job, and the right to take corrective action in the event
the subordinate fails to do so.
22 | K I R A N . A . S
TYPES OF FORMAL ORGANIZATION
1. LINE ORGANIZATION
• Under such structure all managers have direct authority over their respective
subordinates through a chain of command.
• Under such organizational design, authority flows downwards and responsibility
flows upwards throughout the organization.
• It represents a direct vertical relationship through which authority flows
• Line organisation is the simplest and the oldest type of organisation. It is also
known as scalar organisation or military type of organisation.
• Simple or Pure line organisation all persons at a given level perform the same
type of work. The divisions primarily exist for the purpose of control and
direction
• The departmental line organisation divides the enterprise into different
departments which are convenient for control purposes.

2. STAFF OR FUNCTIONAL AUTHORITY ORGANISATIONAL STRUCTURE

• F.W. Taylor, who is better known as the father of scientific management
developed the concept of “Functional Organisation”
• Under this system the whole task of management and direction and subordinates
is divided according to the type of work involved.
• Functional Organization Design involves grouping of similar jobs under functions
and organizing these major functions as separate departments.
• Each functional unit has different set of duties and responsibilities and all
departments report to a single coordinating head.
• Under such an organization design, line authority, staff authority and functional
authority exist together
• A functional organization structure is a hierarchical organization structure wherein
people are grouped based on their area of specialization.
• All departments report to a coordinating head.

23 | K I R A N . A . S
 3. LINE AND STAFF ORGANISATION
• The line and staff systems are balance between line and functional. Under this
organization line is supplemented by staff. When staff specialists are added to a
line organization to "advise; "serve;" or "support" the line in some manner, we
have a line and staff organization.
• Most large organisations belong to this type of organisational structure.
• These organisations have direct, vertical relationships between different levels
and also specialists responsible for advising and assisting line managers.
• Such organisations have both line and staff departments.
• Staff departments provide line people with advice and assistance in specialized
areas
• Features
o Line and staff have direct vertical relationship between different levels.
o Staff specialists are responsible for advising and assisting line
managers/officers in specialized areas.
o These types of specialized staff are (a) Advisory, (b) Service, (c) Control

24 | K I R A N . A . S
 4. DIVISIONAL ORGANISATIONAL STRUCTURE
• Dividing the whole organisation according to the major products to be
manufactured by them is known as Divisional Organizational Structure.
• In a divisional structure, the various departments or divisions are created on the
basis of different products manufactured in the enterprise
• In each department or division, different functions like production, purchase,
finance, sales etc. are performed in order to achieve organisational goals.
• In this type of structure, the organisation can have different basis on which
departments are formed. They are:
o Function
o Product
o Geographic territory
o Project
o Combination approach

5. PROJECT ORGANISATIONAL STRUCTURE

• The project organisation consists of a number of horizontal organisational units
to complete projects of a long duration.
• Project organization is not a separate type of organization like the line and staff or
functional organization.
• Project organization may involve development and introduction of new product,
complete redesigning of an existing product line, installing a new plant etc
• The project staff is separate and is independent of the functional departments.
• A project team is a temporary set up.
• A project organisation is a temporary organisation designed to achieve specific
results by using teams of specialists from different functional areas in the
organisation.
• Once the project is complete, the team is dissolved and the functional specialists
are assigned some other projects.

25 | K I R A N . A . S
 6. MATRIX ORGANISATIONAL STRUCTURE
• Matrix organisation = Dual line of command + matrix culture + matrix behaviour
• “Matrix organisation represents a combination of functional departmental
organisation and project organisation.”
• Matrix organisation or grid organisation is a hybrid structure combining two
complementary structures functional departmentation with pure project
structure
• Matrix organization combines functional department with project organization or
product.
• In a matrix organization, the team members report into two bosses: the functional
manager and the project manager.
• Functional structure is a permanent feature of the matrix organisation
• Project manager’s authority flows horizontally while functional manager’s
authority flows vertically

26 | K I R A N . A . S
TYPES OF FORMAL ORGANIZATION
1. Horizontal Groups
• Persons whose positions are on the same level of the organization belong to
horizontal groups.
• Such informal groups may consist of all the member (managers and nonmanagers)
in the same department or different members across departmental lines (by virtue
of the case of accessibility).
• It emphasizes an employee-cantered approach with emphasis on teamwork and
collaboration.
2. Vertical Groups
• Vertical groups are often the result of outside interest or various employment
relationships within the same department. Such groups include people on
different levels of the formal organization’s hierarchy.
• Usually these people voluntarily come together within the same work areas.
• For example, in a production department a vertical group might include a
supervisor and one (or more) of his subordinates.
3. Mixed Groups
• A mixed group may be formed by two or more people who belong to different
levels of the formal organization and in different work areas.
• For instance, the vice-president (finance) may develop a close relationship with
the director of computer services for getting preferential treatment
STAFFING
• The term ‘Staffing’ relates to the recruitment, selection, development, training and
compensation of the managerial personnel.
• Staffing deals with appointing people and placing them at the appropriate jobs.
• It is “filling, and keeping filled, positions in the organisation structure.”
• Staffing is related to performing a set of activities which aim at inviting, selecting, placing
and retaining individuals at various jobs to achieve the organisational goals.
• This is done by performing a number of functions like manpower planning, recruitment,
selection, training and development, performance appraisal, compensation and
maintenance.
• “The managerial function of staffing involves manning the organisational structure
through effective and proper selection, appraisal, and development of personnel to fill
the roles designed into the structure.” — Koontz and O’Donnell

27 | K I R A N . A . S
IMPORTANCE OF STAFFING
• Emphasis on human element
• Facilitates leadership
• Facilitates control
• Motivation to work
• Increase in efficiency
• Develops potential managers
• Competitive advantage
PROCESS OF STAFFING
1. Manpower Planning: Manpower planning may be regarded as the quantitative and
qualitative measurement of labour force required in an enterprise.
2. Recruitment: Recruitment is a positive process of searching for prospective employees
and stimulating them to apply for the jobs in the organisation.
3. Selection: Selection is process of eliminating (among all the candidates considered for
possible employment) those who appear unpromising.
4. Placement: Placement means putting the person on the job for which he is selected. It
includes the introduction of the employee with the job
5. Training: Training is a program that helps employees learn specific knowledge or skills
to improve performance in their current roles
6. Development: Development is a process that creates growth, progress, positive change
or the addition of physical, economic, environmental, social and demographic
components.
7. Promotion: “A promotion involves a change from one job to another that is better in
terms of status and responsibilities”. —Edwin B. Flippo
8. Transfer: Transfer implies movement of an employee from one job to another without
any increase in pay, status or responsibilities.
9. Appraisal: Performance Appraisal is the systematic evaluation of the performance of
employees and to understand the abilities of a person for further growth and
development.
10. Determination of Remuneration: Remuneration is payment or compensation received
for services or employment.

28 | K I R A N . A . S
DIRECTING
• Direction is called management in action
• “The heart of administration is the directing function which involves determining the
course, giving order and instructions, providing the dynamic leadership.”
NATURE OR CHARACTERISTICS OF DIRECTION
• It is a Dynamic Function
• It Initiates Action
• It Provides Necessary Link between Various Managerial Functions
• It is a Universal Function
• It is Concerned with Human Relationships
PRINCIPLES OF EFFECTIVE DIRECTION
• Principle of Maximum Individual Contribution
• Principle of Harmony of Objectives
• Principle of Unity of Command
• Principle of Unity of Direction
• Appropriate Direction Technique
• Principle of Managerial Communication
• Principle of Use of Informal Organisation
• Principle of Leadership
• Principle of Follow Through
• Direct Supervision
• Participative or Democratic Management
• Use of informal organisation
• Follow through
IMPORTANCE OF DIRECTION
• Initiates Action
• Improves Efficiency
• Ensures Co-ordination
• Helpful in Implementing Changes
• Provides Stability
• Motivation
• Supervision
• Co-ordination

29 | K I R A N . A . S
CONTROLLING
• The meaning of controlling function can be defined as ensuring that activities in an
organization are performed as per the plans.
CHARACTERISTICS
• Control is a continuous process
• Control is a management process
• Control is forward looking
• Control is closely linked with planning
• Control is a tool for achieving organizational activities
• Control is an end-to-end process
• Control compares actual performance with planned performance
• Control point out the error in the execution process
• Control minimizes cost
• Control achieves the standard
• Control saves time
• Control helps management monitor performance
• compares performance against standards
PROCESS
1. Establishment of Standard: Standards are the criteria against which actual performance
will be measured. Standards are set in both quantitative and qualitative terms.
2. Measurement of actual performance: Performance is measured in an objective and
reliable manner. It should be checked in the same unit in which the standards are set.
3. Comparing actual performance with standards: This step involves comparing the actual
performance with standards laid down in order to find the deviations.
4. Analysis the cause of deviations: Managers must determine why standards were not
met. This step also involves determining whether more control is necessary or if the
standard should be changed.
5. Taking corrective action: After the reasons for deviations have been determined,
managers can then develop solutions for issues with meeting the standards and make
changes to processes or behaviours.

30 | K I R A N . A . S
IMPORTANCE OF CONTROL
• Increasing size of business
• Motivation for efficient employees
• For complete discipline
• Helpful in future planning
• Aids efficiency
• Decrease in risk
• Helpful in coordination
• Helpful in decentralisation
Traditional Types of Control Techniques in Management
• Budgetary Control
• Standard Costing
• Financial Ratio Analysis
• Internal Audit
• Break-Even Analysis
• Statistical Control

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FORMAL ORGANIZATIONS
• When the managers are carrying on organising process then as a result of organising
process an organisational structure is created to achieve systematic working and
efficient utilization of resources. This type of structure is known as formal organisational
structure.
• A formal organization is an organization with a fixed set of rules of intra-organization
procedures and structures.
FEATURES OF FORMAL ORGANISATION
• The formal organisational structure is created intentionally by the process of organising.
• The purpose of formal organisation structure is achievement of organisational goal.
• In formal organisational structure each individual is assigned a specific job.
• In formal organisation every individual is assigned a fixed authority or decision-making
power.
• Formal organisational structure results in creation of superior-subordinate relations.
• Formal organisational structure creates a scalar chain of communication in the
organisation.
• Well defined rules and regulations
• Determined objectives and policies
• Status symbol
• Limitation on the activities of the individual
• Strict observance of the principle of co-ordination
• Messages are communicated through scalar chain
• It is to best attain the objectives of the enterprise.
• Hierarchical work distribution or clear division of labour
ADVANTAGES OF FORMAL ORGANISATION
• Systematic Working
• Achievement of Organisational Objectives
• No Overlapping of Work
• Co-ordination
• Creation of Chain of Command
• More Emphasis on Work

32 | K I R A N . A . S
INFORMAL ORGANIZATIONS
• The informal organisational structure gets created automatically and the main purpose
of such structure is getting psychological satisfaction.
FEATURES OF INFORMAL ORGANISATION
• Informal organisational structure gets created automatically without any intended
efforts of managers.
• Informal organisational structure is formed by the employees to get psychological
satisfaction.
• Informal organisational structure does not follow any fixed path of flow of authority or
communication.
• Source of information cannot be known under informal structure as any person can
communicate with anyone in the organisation.
• The existence of informal organisational structure depends on the formal organisation
structure.
DIFFERENCE

33 | K I R A N . A . S
 BASIS FOR
FORMAL ORGANIZATION INFORMAL ORGANIZATION
COMPARISON

Meaning An organization type in which the job of each An organization formed within the formal
member is clearly defined, whose authority, organization as a network of interpersonal
responsibility and accountability are fixed is relationship, when people interact with each
formal organization. other, is known as informal communication.

Creation Deliberately by top management. Spontaneously by members.

Purpose To fulfill, the ultimate objective of the To satisfy their social and psychological needs.
organization.

Nature Stable, it continues for a long time. Not stable

Communication Official communication Grapevine

Control mechanism Rules and Regulations Norms, values and beliefs

Focus on Work performance Interpersonal relationship

Authority Members are bound by hierarchical structure. All members are equal.

Size Large Small

34 | K I R A N . A . S
SPAN OF CONTROL
• Span of control is the term now used more commonly in business management,
particularly human resource management.
• Span of control refers to the number of subordinates a supervisor has
• In simple words, span of control means the manageable number of subordinates of a
superior
• A span of control is a concept that describes the number of people that are managed by
someone
TYPES OF SPAN OF CONTROL
1. Narrow span of management
• This means a single manager or supervisor oversees few subordinates.
• This gives a rise to a tall organisational structure
• According to narrow span the manager supervises a selected number of
employees at one time
• It is the difficult to get effective co-ordination
2. Wide span of management
• This means a single manager or supervisor oversees a large number of
subordinates.
• This gives a rise to a flat structure
• According to wide span the manager supervises and control effectively a large
group of persons at one time
• It is the easy to get effective co-ordination, better communication
FACTORS AFFECTING SPAN OF CONTROL
• Capacity of superior
• Capacity of subordinates
• Nature of work
• Degree of decentralization
• Degree of planning
• Communication technique
• Use of staff assistance
• Supervision from others

35 | K I R A N . A . S
SPAN OF CONTROL MANAGEMENT
• In 1933 V. A. Graicunas a pairs-based consultant formulated the span of control based
on number of direct and indirect relationship that a superior has to manage.
• Graicunas identified three relationship.
o Direct single relationship:
▪ Number of direct relationships between manager and subordinate It
represent the span of control.
o Direct group relationship:
▪ Number of Peer- to peer relationships it represents issues due to
interpersonal conflicts.
▪ This is the relationship of superior with subordinates in the presence of
other subordinates.
▪ All possible combinations of superior and subordinate relationship-exist in
group relationships.
▪ It represents contact of the superior with one or more subordinates while
others (one or more) assist the relationships
o Cross relationship:
▪ While the subordinates work under the same superior, they also interact
amongst themselves.
▪ These are the relationships amongst subordinates.
▪ Based on the formula n (n - 1), with 3 subordinates, 6 such relationships will
be formed.

36 | K I R A N . A . S
DELEGATION
• Sharing of work and authority, between a manager and his subordinates, is known as
delegation
• It helps in completing the work in time, reduces the workload of managers and
motivates and develops subordinates.
• In other words, delegation is a process that enables a person to assign a work to others
and delegate them with adequate authority to do it
• “Delegation means assigning work to others and giving them authority to do it.”
• Process of Delegation of Authority:
o Assignment of Work
o Granting of Authority
o Creation of Accountability
• The significance of delegation can be summarized as:
o Delegation leads to better decisions.
o Delegation relieves the manager from heavy work load.
o Delegation helps to improve the motivation and morale of subordinates.
o Delegation speeds up decision making.
o Delegation facilitates training of subordinates.
o Delegation creates a formal organisation structure
• Basic Principles of Delegation of Authority
o Functional Definition
o Delegation by Result Expected
o Clarity of Lines of Authority
o Level of Authority
o Absoluteness of Responsibility
o Parity of Authority and Responsibility
o Motivation
• Types of Delegation
o General or Specific Delegation: The specific delegation may relate to a particular
function or an assigned task.
o Formal and Informal Delegation: In formal delegation, every person is
automatically given authority as per his duties. Informal delegation does not arise
due to position but according to circumstances.
o Lateral Delegation: When the authority is delegated informally it is called lateral
delegation.
• Delegation of authority consists of three elements:
o Responsibility
o Authority
o Accountability
37 | K I R A N . A . S
RESPONSIBILITY
• Responsibility refers to an obligation to do something
• It is the duty of the subordinate to perform organisational tasks, functions or activities
assigned to him.
• Responsibility is the obligation of a subordinate to properly perform the assigned duty.
• When a superior assign a job to his subordinate it becomes the responsibility of the
subordinate to complete that job.
• This means that the word responsibility comes into play only after the job has been
assigned. Thus, to assign job can be called to assign responsibility.
• “Responsibility is the obligation of a subordinate to carry out the duties assigned to
him.” —Knootz and O’Donnel
• “Responsibility is the obligation to carry out assigned activities to the best of his
abilities.” —George Terry
• Features:
o Responsibility can be assigned to some other person.
o The essence of responsibility is to be dutiful.
o It gets originated because of superior-subordinate relationship.
o Responsibility comes from superior-subordinate relationship.
o It always flows upward from juniors to seniors.
o It arises from duty assigned.
o It cannot be delegated.
o It is the obligation to complete the job as per instructions.
o Responsibility may be continuing obligation or it may be discharged by
accomplishing single task.
o Responsibility is a personal attribute.
o No person can shift his responsibility by delegating his authority to others.

38 | K I R A N . A . S
Types of Responsibility Centres
• Cost Centre
o A cost or expense centre is a segment of an organisation in which the managers
are held responsible for the cost incurred in that segment but not for revenues.
o Responsibility in a cost centre is restricted to cost.
o Cost centres are widely used forms of responsibility centres
• Revenue Centre
o A revenue centre is a segment of the organisation which is primarily responsible
for generating sales revenue
o The performance of a revenue centre is evaluated by comparing the actual
revenue with budgeted revenue and actual marketing expenses with budgeted
marketing expenses
• Profit Centre
o A profit centre is a segment of an organisation whose manager is responsible for
both revenues and costs.
o The main purpose of a profit centre is to earn profit.
o Profit centre managers aim at both the production and marketing of a product.
o Profit centres make managers more concerned with finding ways to increase the
centre’s revenue by increasing production or improving distribution methods.
• Investment Centre
o An investment centre is responsible for both profits and investments.
o The investment centre manager has control over revenues, expenses and the
amounts invested in the centre’s assets
o The manager of an investment centre has more authority and responsibility than
the manager of either a cost centre or a profit centre.
o ‘Investment on asset’ responsibility means the authority to buy, sell and use
divisional assets.
• Contribution Centre
o It is centre whose performance is mainly measured by the contribution it earns.
o Contribution is the difference between sales and variable costs.
o The main responsibility of the manager of such a responsibility centre is to
increase contribution.
o Higher the contribution better will be the performance of the manager of a
contribution centre.
o A manager has no control on fixed expenses because these expenses are constant
and depend on policy decisions of the higher level of management.
o He can control contribution by increasing sales and by reducing variable costs.

39 | K I R A N . A . S
AUTHORITY
• Authority is the formal right to do the work
• “The power to make decisions which guide the actions of another”
• It is a relationship between two individuals—one supervisor, the subordinate.
• The concepts of power and authority are synonymous
• Authority is the right to exercise discretion in making decisions affecting others.
• Characteristics of Authority
o Legitimacy
o Dominance
o An informal power
o Rationality
o Accountability.
• Types of Authority
o Legal Authority.
o Traditional or Formal or top-down Authority.
o Acceptance or Bottom-up Authority.
o Charismatic Authority.
o Competence or personal Authority
• The types of political authority were first defined by Max Weber in his essay "Politics as
a Vocation"
o Traditional authority: Power legitimized by respect for long-established cultural
patterns.
o Charismatic authority: Power legitimized by extraordinary personal abilities that
inspire devotion and obedience.
o Rational-legal authority: Also known as bureaucratic authority, is when power is
legitimized by legally enacted rules and regulations such as governments.
Types of Authority in Organization
• Line Authority
o Line authority is the heart of the relationship between superiors and subordinates.
o line authority’ is the direct authority which a superior exercise over his
subordinates to carry out orders and instructions.
o This authority creates a direct relationship between a superior and his
subordinates.
o It Acts as a Chain of Command
o Line Authority is a Carrier of Accountability
o As a Channel of Communication

40 | K I R A N . A . S
 • Functional Authority
o This means the authority of staff department members to control the activities of
other departments that are related to specific staff responsibilities.
o It occupies a midway position between line and staff authority
o The functional authority is granted to people for maintaining quality and
uniformity of functions in an organisation
• Staff Authority
o Louis. A. Allen has defined staff authority “refers to those elements which have
responsibility and authority for providing advice and services to line” in the
attainment of objectives
o They refer to those groups of individuals who provide line managers with advice
and services
o The nature of staff in advisory
o The staff authority is classified as pure staff, personal staff and specialised staff
o Pure staff authority has no right to command except within the department. They
cannot issue orders to Line authority
o Personal Staff refer to staff officers attached to the chief Executive to assist him
in carrying out his reserved responsibilities.
o Special Assistants mean the staff authority who has been appointed to assist
executives in some specific branch or in the performance some aspect of their
responsibilities is called special assistants.
ACCOUNTABILITY
• Accountability means the answerability of the subordinate to his superior for his work
performance.
• Accountability is answerability, blameworthiness, liability, and the expectation of
account-giving
• Features:
o Accountability cannot be delegated
o Accountability cannot be reduced
o Accountability is always upward
o Accountability is unitary
o Accountability standards
o The extent of accountability
o It is only towards the delegators.
o Its base is senior-subordinate relationship.
o It originates because of delegation of authority

41 | K I R A N . A . S
 BASIS FOR
AUTHORITY RESPONSIBILITY
COMPARISON

Meaning Authority refers to the power Responsibility denotes duty or

or right, attached to a obligation to undertake or accomplish
particular job or designation, a task successfully, assigned by the
to give orders, enforce rules, senior or established by one's own
make decisions and exact commitment or circumstances.
compliance.

What is it? Legal right to issue orders. Corollary of authority.

Results from Formal position in an Superior-subordinate relationship

organization

Task of manager Delegation of authority Assumption of responsibility

Requires Ability to give orders. Ability to follow orders.

Flow Downward Upward

Objective To make decisions and To execute duties, assigned by

implement it. superior.

Duration Continues for long period. Ends, as soon as the task is

accomplished.

42 | K I R A N . A . S
DECENTRALISATION
• Decentralisation can be viewed as an extension of delegation
• When a part of the work is entrusted to others, it is known as delegation.
Decentralisation extends to the lowest level of the organisation.
• “Decentralisation refers to tire systematic effort to delegate to the lowest levels all
authority except that which can only be exercised at central points.” —Louis A. Allen
• “Decentralisation is simply a matter of dividing up the managerial work and assigning
specific duties to the various executive skills.”
• Decentralisation is concerned with the decentralisation of decision-making authority to
the lower levels in managerial hierarchy.
• The degree of decentralisation is determined by:
o Nature of the authority delegated,
o How far down in the organisation it is delegated,
o How consistently it is delegated.
• Advantages of Decentralisation
o Reduces the burden on top executives
o Facilitates diversification
o To provide product and market emphasis
o Executive Development
o It promotes motivation
o Better control and supervision
o Quick Decision-Making
• Disadvantages of Decentralisation
o Uniform policies not Followed
o Problem of Co-Ordination
o More Financial Burden
o Require Qualified Personnel
o Conflict

43 | K I R A N . A . S
The factors affecting decentralisation can be
• Internal Factors
o Size of the organisation
o Cost control
o Philosophy of management
o History of the enterprise
o Ability of subordinates
o Functional areas and Growth of enterprise
o Communication and Control system
• External Factors
o Environment
o Regulation of the Government
o Market features
o Bargain with trade unions
MOTIVATION
• The word Motivation derives from the Latin word “Movere”. The Latin word “Movere”
means “To move”, “To drive” or “To drive forward” etc
• A motive is an inner state that energises, activates or moves and directs behaviour
towards goals.
• Motivation is the process of stimulating people to action to accomplish desired goals.
• Motivation depends upon satisfying needs of people
• Motivation can be defined as stimulating, inspiring and inducing the employees to
perform to their best capacity
• Berelson and Steiner: “A motive is an inner state that energizes, activates, or moves and
directs or channels behaviour goals”
• Intrinsic motivation is a type of motivation in which an individual is being motivated by
internal desires.
• Extrinsic motivation, on the other hand, is a type of motivation in which an individual is
being motivated by external desires
• Positive motivation or incentive motivation is based on reward.
• Negative motivation or fear motivation is based on force or Fear causes employees to
act in a certain way.

44 | K I R A N . A . S
FEATURES
• Motivation is a psychological phenomenon
• Motivation produces goal directed behaviour
• Motivators can be positive as well as negative.
• Motivation is a complex process.
• Motivation is a dynamic process
• Motivation is a continuous process
• Motivation is different from Satisfaction, Inspiration, and Manipulation
TYPES OF MOTIVATION
• Achievement Motivation
• Affiliation Motivation
• Competence Motivation
• Power Motivation
• Attitude Motivation
• Incentive Motivation
• Fear Motivation
MOTIVATION PROCESS AND CLASSIFICATION

45 | K I R A N . A . S
MOTIVATION THEORIES
1. Maslow’s Need Hierarchy Theory
• Maslow’s theory is based on the human needs
• Maslow's hierarchy of needs is a motivational theory in psychology comprising a
five-tier model of human needs, often depicted as hierarchical levels within a
pyramid
• Physiological Needs, Safety Needs, Social Needs, Esteem Needs, Self-Actualization
Needs

• This five-stage model can be divided into Deficiency needs (D - Needs) and
Growth or Being needs (B - Needs).

46 | K I R A N . A . S
 • Biological and physiological needs - air, food, drink, shelter, warmth, sex, sleep, etc.
• Safety needs - protection from elements, security, order, law, stability, Employment,
Health etc.
• Social Needs: Love and belongingness needs, friendship, intimacy, trust, and
acceptance, receiving and giving affection and love. Affiliating, being part of a group
(family, friends, work).
• Esteem needs - which Maslow classified into two categories:
o Esteem for oneself: dignity, achievement, mastery, independence
o The desire for reputation or respect from others: status, prestige, Recognition,
Respect
• Cognitive needs - knowledge and understanding, curiosity, exploration, need for
meaning and predictability.
• Aesthetic needs - appreciation and search for beauty, balance, form, etc.
• Self-actualization needs - realizing personal potential, self-fulfilment, pursue, talent,
seeking personal growth and peak experiences.
• Transcendence needs - A person is motivated by values which transcend beyond the
personal self: Helping others to achieve self-actualization, mystical experiences and
certain experiences with nature, aesthetic experiences, sexual experiences, service to
others, the pursuit of science, religious faith, etc

47 | K I R A N . A . S
 2. Herzberg’s Motivation Hygiene (Two factor) Theory
• The psychologist Frederick Herzberg extended the work of Maslow and proposed
a new motivation theory popularly known as Herzberg’s Motivation Hygiene (Two-
Factor) Theory.
• Herzberg labelled the job satisfiers motivators, and he called job dissatisfies
hygiene or maintenance factors.
• Taken together, the motivators and hygiene factors have become known as
Herzberg’s two-factor theory of motivation
• The opposite of ‘satisfaction’ is ‘no satisfaction’ and the opposite of
‘dissatisfaction’ is ‘no dissatisatisfaction’.
• Motivating Factors: Achievements, Recognition, Responsibility, Challenge,
Promotion, Growth
• Hygiene factors: Company policy, Supervision, Relations with Boss, Work
Condition, Pay and Benefit, co – workers, Job security

48 | K I R A N . A . S
 3. McClelland’s Need Theory
• Another well-known need-based theory of motivation, as opposed to hierarchy of
needs of satisfaction-dissatisfaction, is the theory developed by McClelland and
his associates’.
• McClelland’s need-theory is closely associated with learning theory, because he
believed that needs are learned or acquired by the kinds of events people
experienced in their environment and culture.
• His theory focuses on three needs; achievement, power and affiliation.
• In the literature, these three needs are abbreviated “n Ach”, “n Pow”, and “n Aff”
respectively’

49 | K I R A N . A . S
 4. McGregor’s Participation Theory
• Prof. Douglas McGregor put forward a theory of motivation, called as theory X and
theory Y.
• Theory X is a conventional approach to motivation, based on negative
assumptions
• Theory Y is diametrically opposite to theory X which shows the modern and
dynamic approach (Positive) to individuals and relies on the assumptions that are
practical in nature.
• Theory X is based on the following assumptions:
▪ People are by nature indolent. That is, they like to work as little as possible.
▪ People lack ambition, dislike responsibility, and prefer to be directed by
others.
▪ People are inherently self-centred and indifferent to organisational needs
and goals.
▪ People are generally gullible and not very sharp and bright.
• On the contrary, Theory Y assumes that:
▪ People are not by nature passive or resistant to organisational goals.
▪ They want to assume responsibility.
▪ They want their organisation to succeed.
▪ People are capable of directing their own behaviour
▪ They have need for achievement.

50 | K I R A N . A . S
 BASIS FOR
THEORY X THEORY Y
COMPARISON

Meaning Theory X is a motivational Theory Y, is an advanced

theory, which involves theory, wherein it is assumed
high supervision and that the workers are self-
control over the directed and self-motivated,
subordinates, and greater for growth and development
degree of centralization. and takes active part in
decision making.

Work Dislikes work Work is natural

Ambition Little to no ambition Highly ambitious

Responsibility Avoids responsibility. Accept and seek

responsibility.

Leadership style Autocratic Democratic

Direction Constant direction is Little to no direction is

required. required.

Control Tight Lenient

Authority Centralized Decentralized

Self-motivation Absent Present

Focuses on Psychological needs and Social needs, esteem needs

Security needs and self-actualization needs.

51 | K I R A N . A . S
 5. Urwick’s and Ouchi Theory Z
• Much after the propositions of theories X and Y by McGregor, the three theorists
Urwick, Rangnekar, and Ouchi-propounded the third theory libelled as Z theory.
• The two propositions in Urwicks’s theory are that:
▪ Each individual should know the organisational goals precisely and the
amount of contribution through his efforts towards these goals.
▪ Each individual should also know that the relation of organisational goals is
going to satisfy his/her needs positively.
• In Urwick’s view, the above two make people ready to behave positively to
accomplish both organisational and individual goals.
• Theory Z is based on the following four postulates:
▪ Strong Bond between Organisation and Employees
▪ Employee Participation and Involvement
▪ No Formal Organisation Structure
▪ Human Resource Development
• William Ouchi developed Theory Z after making a comparative study of Japanese
and American management practices.
• Theory Z is an integrated model of motivation.
• Theory Z suggests that large complex organisations are human systems and their
effectiveness depends on the quality of humanism used.
• A type Z organisation has three major feature - trust, subtlety and intimacy.
• Feature of William Ouchi Z theory

52 | K I R A N . A . S
53 | K I R A N . A . S
 6. Argyris’s Theory
• Argyris Maturity Theory, presented by Chris Argyris in Personality and
Organization
• According to this theory, a persons’ development is processed along a
continuous break of an immaturity situation to a maturity situation
• According to Argyris, seven changes should take place in the personality of
individuals if they are to develop into mature people over the years. The seven
changes are:
1. Individuals move from a passive state as infants to a state of increasing
activity as adults
2. Individuals develop from a state of dependency upon others as infants to a
state of relative independence as adults
3. Individuals in only few ways as infants, but as adults they are capable of
behaving in many ways
4. Individuals have erratic, casual, and shallow interests as infants but
develop deeper and stringer interests as adults
5. The time perspective of children is very short, involving only the present,
but as they mature, their time perspective increases to include past and
future
6. Individuals as infants are subordinate to everyone, but they move to equal
or superior positions with others as adults
• As children, individuals lack an awareness of a “self”, but as adults not only they
are aware of, but they are able to control “self”

54 | K I R A N . A . S
 7. Vroom’s Expectancy Theory
• One of the most widely accepted explanations of motivation is offered by Victor
Vroom in his “Expectancy Theory”
• It is a cognitive process theory of motivation.
• The theory is founded on the relationships between notions of effort,
performance, and reward

• MOTIVATION = VALENCE x EXPECTANCY x INSTRUMENTALITY

• Motivation = V x E x I
• Valence:
o Valence means the attraction (or repulsion) of an outcome to the individual.
o Whenever an individual has preference for a reward valance is the strength
of that preference.
o Valence, according to Vroom, means the value or strength one places on a
particular outcome or reward.
• Expectancy:
o Expectancy is also referred to as the Effort-Performance Probability
o It relates efforts to performance
• Instrumentality:
o Performance-Reward Probability
o Instrumentality refers to the belief and expectation of a person that his
performance will lead to a particular desired reward.

55 | K I R A N . A . S
 8. Porter and Lawler’s Expectancy Theory:
• Lyman Porter and Edward Lawler came up with a comprehensive theory of
motivation
• Porter and Lawler’s theory is an improvement over Vroom’s expectancy theory
• They posit that motivation does not equal satisfaction or performance.
• The model suggested by them encounters some of the simplistic traditional
assumptions made about the positive relationship between satisfaction and
performance.
• Porter and Lawler’s model is that effort or motivation does not lead directly to
performance.
• Porter and Lawler’s model is a more complete model of motivation
• Elements:
▪ Effort
▪ Value of Reward
▪ Perceived Effort Reward Probability
▪ Performance
▪ Rewards
▪ Satisfaction
• The theory proposed two types of reward:
▪ Intrinsic Rewards: Intrinsic rewards are given to an individual by himself for
good performance. Intrinsic reward is directly related to good performance
only if the job structure is varied and challenging so an individual can reward
himself if he feels he has performed well
▪ Extrinsic Rewards: Extrinsic rewards are given by the organization and
satisfy mainly lower-level needs. They include such things as pay, promotion,
status, and job security. extrinsic rewards are weekly connection to
performance

56 | K I R A N . A . S
LEADERSHIP
• Leadership is an action of leading a group of people or an organization.
• A simple definition is that leadership is the art of motivating a group of people to act
towards achieving a common goal.
• According to Keith Davis, “Leadership is the process of encouraging and helping others
to work enthusiastically towards objectives.”
• Koontz and O’Donnell defined leadership as, “influence, the art or process of influencing
people so that they will strive willingly towards the achievement of group goals.”
ESSENCES OF LEADERSHIP
• Leadership is the process of influencing behaviour of others.
• Leadership uses non-coercive method to direct and coordinate the activities of the
members.
• Leadership directs the people to attain some goal.
• Leadership occupies a role for a given time and for a group.
• A leader possesses qualities to influence others.
• Leadership gives people a vision for future.
• It is a group activity.
• Leader influences his followers and followers also exercise influence over his leader.
Leadership interacts.
• Leadership is meant for a given situation.
• Leadership is continuous process of influencing behaviour. It installs dynamism in the
group.
• It is a psychological process and multi-dimensional in character
TYPES OF LEADERSHIP
The Personnel Research Board of the Ohio University has classified leadership into five types
as Bureaucrat, Autocrat, Diplomat, Expert, and Quarter-back.
1. Bureaucrat: He is the leader who follows rules and regulations and engages himself in
pleasing his superiors and deliberately avoids his subordinates.
2. Autocrat: He issues directives and wants obedience. Subordinates oppose his attitudes.
3. Diplomat: A most opportunistic type of leadership. He exploits people. People do not
trust him.
4. Expert: He is more concerned about his area of specialization. He is fair to his
subordinates and treats them on par.
5. Quarter-back: He does not make any difference between him and subordinates. This
attitude brings him more enemies from superior ranks.

57 | K I R A N . A . S
AUTOCRATIC LEADERSHIP
• This style of leaderships is also known as authoritarian or dictatorial
• These types of leaders as military commanders.
• A leadership style characterized by individual control over all decisions and little input
from group members
• Autocratic leadership allows autocratic leader to take the ultimate control of taking
decisions without consulting others
• Little or no input from group members
• Leaders make almost all of the decisions
• Group leaders dictate all the work methods and processes
• Group members are rarely trusted with decisions or important tasks
• Work tends to be highly structured and very rigid
• Creativity and out-of-the box thinking tend to be discouraged
• Rules are important and tend to be clearly outlined and communicated
• Can make decisions quickly, especially in stress-filled situations
• May impair or ignore creative solutions and expertise from subordinates
• Discourages group input
• It can be effective in small groups where leadership is lacking.
• Edwin. B. Flippo has divided autocratic style of leadership into following three:
o Hard Boiled or Strict Autocrat: He uses negative influence and expects that his
orders should be obeyed by the employees immediately. His outlook is “pay for
performance”.
o Benevolent Autocrat: He uses positive influences and develops effective human
relations. He is known as paternalistic leader.
o Manipulative Autocrat: He is manipulative by nature and creates a feeling in the
minds of his subordinates and workers that they are participating in decision
making process.
LAISSEZ-FAIRE OR HANDS-OFF LEADERSHIP
• Laissez-faire leadership, also known as delegative or Free Free-Rein leadership
• In this leadership style in which leaders are hands-off and allow group members to make
the decisions
• Laissez-faire leadership is characterized by:
o Very little guidance from leaders
o Complete freedom for followers to make decisions
o Leaders provide the tools and resources needed
o Group members are expected to solve problems on their own
o Power is handed over to followers, yet leaders still take responsibility for the
group's decisions and actions
58 | K I R A N . A . S
DEMOCRATIC LEADERSHIP
• Democratic leadership, also known as group centred or consultative leadership or
participative leadership or shared leadership
• It is a combination of the autocratic and laissez-faire types of leaders.
• Some of the primary characteristics of democratic leadership include:
o Group members are encouraged to share ideas and opinions, even though the
leader retains the final say over decisions.
o Members of the group feel more engaged in the process.
o Creativity is encouraged and rewarded
BUREAUCRATIC OR RULES-CANTERED LEADERSHIP
• It is a type of leadership where everything is influenced by rules, regulations and
procedures.
• Decisions are taken on the basis of rules and regulations
• Features:
o Dependence on rules and regulations.
o Decisions are taken in a framework of rules and procedures.
o There is too much of paper work and always a desire to play safe.
o Subordinates perform jobs in a mechanical way.
o New ideas and initiatives are not encouraged.
o There are delays in taking decisions
PATERNALISTIC STYLE LEADER
• This style of leadership is based upon the sentiments and emotions of people.
• A paternalistic leader is like a father figure to the subordinates.
• The leader looks after the needs and aspirations of subordinates and also helps their
families.
• He helps, guides and protects all of his subordinates but they do not grow under him.
• The subordinates become dependent on the leader

59 | K I R A N . A . S
 BASIS FOR TRANSACTIONAL TRANSFORMATIONAL
COMPARISON LEADERSHIP LEADERSHIP

Meaning A leadership style that employs A leadership style in which the leader
rewards and punishments for employs charisma and enthusiasm to
motivating followers is inspire his followers is
Transactional Leadership. Transformational Leadership.

Concept Leader lays emphasis on his Leader lays emphasis on the values,
relation with followers. ideals, morals and needs of the
followers.

Nature Reactive Proactive

Best suited for Settled Environment Turbulent Environment

Works for Developing the existing Changing the existing organizational

organizational culture. culture.

Style Bureaucratic Charismatic

How many leaders Only one More than One

are there in a
group?

Focused on Planning and Execution Innovation

Motivational tool Attracting followers by putting Stimulating followers by setting group

their own self-interest in the interest as a priority.
first place.

60 | K I R A N . A . S
BUSINESS ETHICS
• Business Ethics is the application of ethical principles and methods of analysis to
business.
• The term ‘Business Ethics’ refers to the system of moral principles and rules of the
conduct applied to business.
• There are 5 myths
o Business and ethics do not go together
o Ethics in business is relative
o Good business makes good ethics
o Management information systems (MIS) is neither immoral nor moral.
o Ethics is an individual matter
• These sources are discussed as follows:
o Religion
o Culture
o Law
There are a number of moral principles prescribed by different associations and
governments. They include:
• Do not cheat customers by defective or inferior products.
• Avoid black marketing, hoarding, profiteering and speculation for the interest of buyers.
• Refrain from unhealthy competition, or promote healthy competition.
• Ensure honesty and precision while packaging, labelling, and advertising the products.
• Do not defame the image and reputation of other rival firms by improper methods.
• Create and maintain up-to-date records of economic transactions and produce them
when asked by the relevant authority.
• Pay taxes and duties honestly in time.
• Discharge social responsibilities towards suppliers, governments, investors, employees,
service providers, etc.
• Do not make any contracts with others that affect adversely the long-term social interest
and welfare of people. Do not work against national interest.
• Extend all possible support and cooperation to the governments in implementing social
and economic plans.
• Contribute liberally for promoting socially significant activities.
• Protect ecological environment in all possible ways.

61 | K I R A N . A . S
CORPORATE GOVERNANCE
• The term ‘governance’ derives from the Latin word ‘gubernare’ means ‘to steer’ usually
applying to the steering of a ship
• Corporate Governance is the set of process, customs, policies, laws and institutions
affecting the way in which a corporation in directed, administered or controlled.
• The OECD provides a functional definition of corporate governance, Corporate
governance is the system by which business corporations are directed and controlled.
• According to Adrian Cadbury, “Corporate governance is concerned with holding the
balance between economic and social goal and between individual and communal goal.”
GENERAL PRINCIPLES OF CORPORATE GOVERNANCE
• Accountability
• Fairness
• Transparency
• Responsibility
OECD PRINCIPLES
• Ensuring the basis for an effective corporate governance framework
• The rights of key ownership functions
• Equitable treatment of shareholders
• The role of stakeholders in corporate governance
• Disclosure and transparency
• The responsibilities of the board

62 | K I R A N . A . S
COMMITTEE REPORT
• Cadbury Committee Report 1992
o The Cadbury Report, formally entitled ‘The Report of the Committee on the
Financial Aspects of Corporate Governance’ was published in December 1992.
o The establishment of the Committee in May 1991 by the Financial Reporting
Council, the London Stock Exchange.
o Chairman of this committee Andrain Cadbury
o The Cadbury Code of Best practices had 19 recommendations
• Sarbanes – Oxley Act 2002
o The Sarbanes – Oxley Act of 2002 also known as, “Corporate and Auditing
Accountability, Responsibility and Transparency Act” in the House.
o “Public Company Accounting Reform and Investor Protection Act” in the Senate.
o In 2002 Sarbanes – Oxley was named after bill sponsors U.S senator Paul Sarbanes
and U.S Representative Michael G Oxley
• Kumar Mangalam Birla Committee Report 1999
o Securities and Exchange Board of India (SEBI) in 1999 set up a committee under
Shri Kumar Mangalam Birla
• J.J Irani Committee Report
o On December 2, 2004, the Ministry constituted an Expert Committee on Company
Law (the Committee) under the Chairmanship of Dr. J. J. Irani
o Issues arising from the revision of the Companies Act, 1956 (the Act).
o The Report comprises of 13 chapters divided into seven parts.
• Narayana Murthy Committee Report 2003
o The committee on corporate governance set up by SEBI
• Naresh Chandra Committee Report, 2002
o The Naresh Chandra committee was appointed as a high-level committee to
examine various corporate governance issued by the department of company
affairs on 21 Aug 2002

63 | K I R A N . A . S
HUMAN RESOURCE MANAGEMENT
• Human resources mean the people.
• The term ‘resource’ or ‘hu­man resource’ signifies potentials, abilities, capacities, and
skills, which can be developed through continuous interaction in an organizational
setting
• Edwin Flippo defines- HRM as “planning, organizing, directing, controlling of
procurement, development, compensation, integration, maintenance and separation of
human resources to the end that individual, organizational and social objectives are
achieved.”
• The National Institute of Personnel Management (NIPM) of India has defined human
resource/personnel management as “that part of management which is concerned with
people at work and with their relationship within an enterprise”

64 | K I R A N . A . S
HUMAN RESOURCE PLANNING
• Human resource planning is a process that identifies current and future human
resources needs for an organization to achieve its goals
• The Human Resource Planning is a process of forecasting the organization’s demand for
and supply of manpower needs in the near future
• Getting the right number of qualified people into the right job
• Human resource planning is the process of analysing and identifying the needs for and
availability of human resources so that the organisation can meet its objectives.
• It ensures the right type of people, in the right number, at the right time and place, who
are trained and motivated to do the right kind of work at the right time, there is generally
a shortage of suitable persons.
• According to E.W. Vetter, human resource planning is “the process by which a
management determines how an organisation should make from its current manpower
position to its desired manpower position.
• Human resource planning is the responsibility of both the line and the staff manager.
• The line manager is responsible for estimating manpower requirements.
• The staff manager provides the supplementary information in the form of records and
estimates.
• Human capital is the collective value of the capabilities, knowledge, skills, life
experiences, and motivation of an organizational workforce.
• Sometimes it is called intellectual capital to reflect the thinking, knowledge, creativity,
and decision making that people in organizations contribute
OBJECTIVES OF HRP
• Proper assessment of human resources needs in future.
• Anticipation of deficient or surplus manpower and taking the corrective action.
• To create a highly talented workforce in the organization.
• To protect the weaker sections of the society.
• To manage the challenges in the organization due to modernization
• To facilitate the realization of the organization’s objectives by providing right number
and types of personnel.
• To reduce the costs associated with personnel by proper planning.
• To determine the future skill requirements of the organization.
• To plan careers for individual employee.
• Determining the training and development needs of employees.

65 | K I R A N . A . S
FACTORS AFFECT HRP
• External Factors
o Government Policies
o Level of Economic Development
o Business Environment
o Level of Technology
o International Factors
o Outsourcing
• Internal Factors
o Company policies and strategies
o Human resource policies
o Job analysis
o Time horizons
o Type and quality of information
o Company’s production operations policy
o Trade unions
HUMAN RESOURCE PLANNING AT DIFFERENT LEVELS
• National level – Generally, government at the centre plan for human resources at the
national level. It forecasts the demand for and supply of human resource, for the entire
nation.
• Sector level – Manpower requirements for a particular sector like agricultural sector,
industrial sector or tertiary sector are projected based on the government policy,
projected output/operations, etc
• Industry level – Manpower needs of a particular industry like cement, textiles, chemical
are predicted taking into account the output/operational level of that particular
industry.
• Unit level – This covers the estimation of human resource needs of an organisation or
company based on its corporate/business plan.
• Departmental level – This covers the manpower needs of a particular department in a
company.
• Job level – Manpower needs of a particular job family within department like
Mechanical Engineer is forecast at this level.
• Information technology – The impact of information technology on business activities,
human resource requirement and human resource plan is significant.

66 | K I R A N . A . S
HUMAN RESOURCE PLANNING PROCESS
1. Determining the Objectives of Human Resource Planning
2. Analyzing Current Manpower Inventory
3. Forecasting Demand and Supply of Human Resources
4. Analyzing the Manpower Gaps
5. Employment Plan/Action Plan
6. Training and Development
7. Appraisal of Manpower Planning
TECHNIQUES OF HRP
I. Some of the devices and techniques used for human resource planning are:
1. Mission
2. Objectives
3. Policy
4. Procedures
5. Methods
6. Rules
7. Standards
8. Budgets
9. Strategy
II. Some of the well-known models and techniques used in:
1. Social Demand Approach
2. Manpower Requirement Approach
3. Rate of Return Approach
III. Some of the popular techniques and methods of forecasting human resource planning:
1. Demand Side of HR Forecasting
• Trend Analysis
• Ratio Analysis
• Scatter Plot
• Regression Analysis
• Macroeconomic Modelling
• Computerised Forecast
• Work-Study Technique
• Delphi Technique
• Nominal Group Technique
• Management Judgement
2. Supply Side of Forecasting
• Internal Supply
• External Supply
67 | K I R A N . A . S
IV. The main techniques of human resource planning are as follows:
1. Qualitative Techniques
• Replacement Chart
• Succession Planning
• Executive Assessment
2. Quantitative Techniques
• Span of Control Method
• Ratio Trend Method
• Regression Technique
• Markov Method
DELPHI METHOD
• It’s also known as Estimate-Talk-Estimate [ETE]
• The technique can also be adapted for use in face-to-face meetings, and is then called
mini-Delphi or Estimate-Talk-Estimate (ETE)
• The Delphi method was invented by Olaf Helmer and Norman Dalkey of the Rand
Corporation
• The aim of the Delphi method is to construct consensus forecasts from a group of
experts in a structured iterative manner

68 | K I R A N . A . S
RECRUITMENT
• Recruitment is a positive process of searching for prospective employees and
stimulating them to apply for the jobs in the organisation.
• When more persons apply for jobs then there will be a scope for recruiting better
persons
• According to Edwin B. Flippo, “It is a process of searching for prospective employees and
stimulating and encouraging them to apply for jobs in an organisation”
SOURCES OF RECRUITMENT
• Internal Sources
• Promotion
• Transfer
• Retired or Ex-Employees
• Job Posting
• Internal Advertisement
• Employee referral
• Departmental Exam
• External Sources
• Advertising in Newspapers and Journals
• Employment Exchange
• Internet (E-Recruitment)
• Educational/Professional/Technical Institutions
• Executive Search Firms
• Unsolicited or Walk-in Applicants
• Direct Recruitment
• Casual Callers
• Campus Recruitment
• Placement Agencies and Management Consultants
• Recommendations of Employees
• Labour Contractors
• Web Publishing
• Job Fairs
• Personal Contacts
• Poaching and Raiding
• Service Commissions
• Nepotism
• Leasing
• Data Banks.
69 | K I R A N . A . S
 ✓ Employment Exchange: Employment exchanges have been set up by the government
for bring-ing together job seekers and employers who are looking for employees. The
enactment of Employment Exchanges (compulsorily notification of vacancies) Act, 1959
✓ Executive Search Firms: Executive search firms, popularly known as head hunters,
specialize in the recruitment of technical, professional, and managerial personnel
✓ Union as a Source: Workers’ unions are likely to play an important role as a source of
labour supply (sort of formalized ‘union shop’ or ‘closed shop’ practice). This was noted
by the National Commission on Labour.
✓ Walk-Ins: Walk-in interviews, popularly known as walk-ins, have become quite popular
method of recruiting in recent years. In the advertisement, details of positions to be
filled, required qualifications, date and venue of interview, etc. are given. Candidates
who meet the eligibility criteria are advised to report on the venue on prescribed date
and time. They are also advised to bring their bio-data, testimonials, photographs, etc.
along with them. The candidates are interviewed, and those selected are offered
employment on the same date.
AIDA emphasizes on the following:
A — Attract the reader’s ‘attention’
I — Generate ‘interest’ in the vacancy
D — Create ‘desire’ for the job
A — Stimulate the reader to take ‘action’
The five steps involved in recruitment process are as follows:
1. Recruitment Planning
2. Strategy Development
3. Searching
4. Screening
5. Evaluation and Control.

70 | K I R A N . A . S
SELECTION
• The selection process starts immediately after recruitment. It is a process of eliminating
(among all the candidates considered for possible employment) those who appear
unpromising.
• Selection is the process of picking or choosing the right candidate, who is most suitable
for a vacant job position in an organization
• In others words, selection can also be explained as the process of interviewing the
candidates and evaluating their qualities, which are required for a specific job and then
choosing the suitable candidate for the position.
• Employee selection is a process of putting a right applicant on a right job.
• Selection of an employee is a process of choosing the applicants, who have the
qualifications to fill the vacant job in an organization.
• Selection is a process of identifying and hiring the applicants for filling the vacancies in
an organization.
• Employee selection is a process of matching organization’s requirements with the skills
and the qualifications of individuals.
• Selection is a process of hiring employees among the shortlisted candidates and
providing them a job in the organization.
SELECTION PROCESS

71 | K I R A N . A . S
TYPES OF SELECTION TEST
• Trade test: For jobs requiring technical skill, a trade test is necessary to find out their
capabilities for the type of job. It is done under the supervision of an experienced
supervisor.
• Psychological Tests: It is an objective and standard measure of a sample of human
behaviour. The main object of psychological testing is to provide a device for measuring
quantitatively a typical sample of mental performance in order to predict what an
individual will do under certain circumstances.
o Aptitude Test: Such tests are designed to measure the aptitude of applicants and
their capacity to learn the skills required on a particular job. It is more useful for
clerical and trade positions.
o Intelligent Test: To measure the mental alertness and capacity of a person to grasp
and put together the elements of a novel or abstract situation.
o Interest Test: Determine the preferences but not the ability of an applicant for
occupation of different kinds.
o Knowledge Test: To measure the depth of knowledge and proficiency in certain
skills already achieved by the applicant such as engineering, accounting etc.
o Projective Test: Which use the projective technique whereby the applicant
projects his personality into free responses about pictures shown to him, which
are ambiguous.
o Personality Test: It is designed to judge the emotional balance, maturity and
temperamental qualities of a person. It may follow experimental methods—rating
method, question-answer method.
o Judgement Test: For evaluating the ability to apply knowledge judiciously in
solving a problem.
o Dexterity Test: To determine an individual’s capacity to use his fingers and hands
in industrial work.

72 | K I R A N . A . S
 BASIS FOR
RECRUITMENT SELECTION
COMPARISON

Meaning Recruitment is an activity of Selection refers to the process

searching candidates and of selecting the best candidates
encouraging them apply for it. and offering them job.

Approach Positive Negative

Objective Inviting more and more Picking up the most suitable

candidates to apply for the vacant candidate and rejecting the
post. rest.

Key Factor Advertising the job Appointment of the candidate

Sequence First Second

Process Vacancies are notified by the firm The firm makes applicant pass
through various sources and through various levels like
application form is made submitting form, written test,
available to the candidate. interview, medical test and so
on.

Contractual As recruitment only implies the Selection involves the creation

Relation communication of vacancies, no of contractual relation between
contractual relation is the employer and employee.
established.

Method Economical Expensive

73 | K I R A N . A . S
TRAINING AND DEVELOPMENT
• Training and development are concerned with bettering the performance of individuals
and groups in organizational settings.
• Dale S. Beach defines training as ‘the organized procedure by which people learn
knowledge and/or skill for a definite purpose’.
• According to Edwin Flippo, ‘training is the act of increasing the skills of an employee for
doing a particular job’
• It is being known by several names, including employee development, human resource
development, and learning and development.
• The need for training & development is determined by the employee’s performance
deficiency or gap, calculated as under:
Need for Training & Development = Standard Performance – Actual Performance
• Training – Education – Development
• Training: It is focused upon and evaluated against the current jobs.
• Education: It focuses upon and evaluated against the potentially hold job in the future.
• Development: It focuses upon the future activities, and is almost impossible to evaluate.
BASIS FOR
TRAINING DEVELOPMENT
COMPARISON

Meaning Training is a learning process in which employees Development is an educational process

get an opportunity to develop skill, competency which is concerned with the overall growth
and knowledge as per the job requirement. of the employees.

Term Short Term Long Term

Focus on Present Future

Orientation Job oriented Career oriented

Motivation Trainer Self

Objective To improve the work performances of the To prepare employees for future
employees. challenges.

Number of Many Only one

Individuals

Aim Specific job related Conceptual and general knowledge

74 | K I R A N . A . S
TYPES OF TRAINING
I. On-the-job training methods
• Job rotation: This training method involves movement of trainee from one job to
another gain knowledge and experience from different job assignments.
• Coaching: Coaching is a one-to-one training. Under this method, the trainee is
placed under a particular supervisor who functions as a coach in training and
provides feedback to the trainee
• Job Instructional Technique (JIT): Also known as step-by-step training in which
the trainer explains the way of doing the jobs to the trainee and in case of
mistakes, corrects the trainee.
• Committee assignments: A group of trainees are asked to solve a given
organizational problem by discussing the problem. This helps to improve team
work
• Internship training: Under this method, instructions through theoretical and
practical aspects are provided to the trainees.
• Mentorship: It is a relationship in which a more experienced or more
knowledgeable person helps to guide a less experienced or less knowledgeable
person. It is also one-to- one interaction, like coaching.
• Apprenticeship: An apprenticeship is a paid job. They have to work in direct
association with and also under the direct supervision of their masters
• Understudy: In this method, a superior gives training to a subordinate as his
understudy like an assistant to a manager or director (in a film director).
II. Off-the-job Training Methods
• Lectures and Conferences: Lectures and conferences are the traditional and direct
method of instruction. It’s a verbal presentation for a large audience. In the
colleges and universities, lectures and seminars are the most common methods
used for training.
• Vestibule Training: The Vestibule training is called, “near the job training”. Where
the technical staff, especially those who deal with the tools and machinery, are
given the job education training in the workplace other than the main production
plant.
• Simulation Exercises: Simulation is any artificial environment exactly similar to
the actual situation. There are four basic simulation techniques used for imparting
training: management games, case study, role playing, and in-basket training.
• Role Playing: Types of role play may be multiple role play, single role play, role
rotation, and spontaneous role play
• In-basket training: In-basket exercise, also known as in-tray training, consists of a
set of business papers which may include e-mail SMSs, reports, memos, and other
items
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 • Sensitivity Training: Sensitivity training is also known as laboratory or T-group
training.
• Conferences: A meeting of several people to discuss any subject is called
conference
• Management education: At present universities and management institutes gives
great emphasis on management education.
• Case study method: Usually case study deals with any problem confronted by a
business which can be solved by an employee.
• Incident method: Incidents are prepared on the basis of actual situations which
happened in different organizations and each employee in the training group is
asked to make decisions as if it is a real-life situation.
SUCCESSION PLANNING
• Succession planning is a process for identifying and developing new leaders who can
replace old leaders when they leave, retire or die
• Taken narrowly, "replacement planning"
• Succession planning acknowledges that the staff will not be with an organisation
indefinitely and it provides a plan and process for addressing the changes that will occur
when they leave.
• Most of the times, succession planning focuses on the senior management
• A good succession plan ensures that the organisation is prepared with a plan to support
service continuity when the key people leave
• Succession plan is much more than knowing who will replace your CEO upon retirement.
PROCESS OF SUCCESSION PLANNING

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JOB EVALUATION
• Edwin B. Flippo defines job evaluation as “a systematic and orderly process of
determining the worth of a job in relation to other jobs”
• In simple worlds, job evaluation is the rating of jobs in an organization.
• This is the process establishing the value or worth of jobs in a job hierarchy and
compares the relative intrinsic value or worth of jobs within an organization.
• The main objective of job evaluation is to ensure equitable remuneration for relative
worth of a job
THE OBJECTIVES OF JOB EVALUATION
• Establish a standard procedure for determining the relative worth of each job in an
organization
• Ensure equitable wage for a job and reasonable wage differentials between different
jobs in a hierarchical organization
• Determine the rate of pay for each job which is fair and equitable with relation to other
jobs in the plant, community or industry
• Eliminate wage inequalities
• Use as a basis for fixing incentives and different bonus plans
• Promote a fair and accurate consideration of all employees for advancement and
transfer
• Provide information for work organization, employees‟ selection, placement, training
and other similar purposes
• Provide a benchmark for making career planning for the employees in the organization
and
• Ensure that like wages are paid to all qualified employees for like work.
JOB EVALUATION PROCESS
• Job Description
• Approval
• Review
• Evaluation
• Confirmation

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METHODS OF JOB EVALUATION
Non-quantitative Methods:
1. Ranking Method or Job Comparison
• The method involves ranking each job relative to all other jobs, usually based on
some overall factor like “job difficulty”
• Each job as a whole is compared with other and this comparison of jobs goes on
until all the jobs have been evaluated and ranked.
• All jobs are ranked in the order of their importance from the simplest to the
hardest or from the highest the lowest.
• The importance of order of job is judged in terms of duties, responsibilities sand
demands on the job holder.
• The following steps are involved in ranking jobs
o Obtain job information
o Select ratters and jobs to be rated
o Select Compensable factors
o Rank jobs
o Combine Rating

2. Job Classification or Grading Method

• This method of job evaluation was made popular by the U.S. Civil Service
Commission
• Under this method job grades or classes are established by an authorised body or
committee appointed for this purpose
• A job grade is defined as a group of different jobs of similar difficulty or requiring
similar skills to perform them.
• Job grades are determined on the basis of information derived from job analysis.
• The example of job grades may include, depending on the type of jobs the
organisation offers, skilled, unskilled, account clerk, clerk-cum-typist, steno typist,
office superintendent, laboratory assistant and so on.
• Factors: Difficultly and variety of work, Supervision received and exercised,
Judgement exercised, Originality required, Nature and purpose of interpersonal
work relationships, Responsibility, Experience and Knowledge required

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Quantitative Methods
3. Point Rating Method
• This is the most widely used method of job evaluation
• The method evaluates the compensable factors of each job
• Under this method jobs are breaking down based on various identifiable factors
such as skill, effort, training, knowledge, hazards, responsibilities and so on
Thereafter, points are allocated to each of these factors

4. Factors Comparison Method

• This is a combination of both rating and point rating methods.
• This system is usually used to evaluate white collar, professional and managerial
positions.
• Method involves the flowing steps
o Determine the compensable factors
o Determine key jobs
o Allocation present wages for key jobs

o Place key jobs on a factor comparison chart

o Evaluate other jobs

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80 | K I R A N . A . S
JOB ANALYSIS
• Job analysis is the process of collecting information related to specific job. Such
information helps in the preparation of job description and job specification.
• It involves collection of information that should include knowledge, skill and ability the
incumbent should possess to discharge a job effectively.
• This also includes information about the use of tools, equipment and machinery.
• It helps in finding out required level of education, skills, knowledge, training, etc for the
job position.
• Job analysis activities:
o Work activities
o Human behaviour
o Machines, tools, equipment’s and work aids
• Methods of job analysis:
o Interview
o Critical Incident Method
o Questionnaire Method
o Observation or Personal note
o Log records
o HRD issues
• Process of job analysis
o Information collection
o Review background information
o Selection of representative position to be analysed
o Analysis of job by collecting data
o Develop Job Description
o Develop Job Specification
JOB DESCRIPTIONS
• A job description is a written statement of the content of any particular job and derived
from the analysis of that job.
• It is an organized, factual statement of the duties and responsibilities of a specific job.
• In brief, it should tell what is to be done, how it is to be done, and why. It is a standard
of function, in that it defines the appropriate and authorized content of a job
• There is no standard format for writing a job description.

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 • However, most description contain sections that cover:
o Job identification: It’s contains several types of information. The job title specifies
the name of the job, such as supervisor of data processing operation or inventory
control clerk. Date is the date the job description was actually approved.
o Job summary: It’s should summarize the essence of the job and include only its
major functions or activities.
o Relationship: There may be a “relationship” statement that shows the job holder’s
relationship with others inside and outside the organization.
o Responsibilities and Duties: This is the heat of the job description. It should
present a list of the job’s significant responsibilities and duties.
o Standard of performance and working condition: A ‘standard of performance’
section lists the standards the company expects the employee to achieve for each
of the job description’s main duties and responsibilities.
JOB SPECIFICATION
• It is a statement of the minimum acceptable human qualities necessary to perform a job
properly.
• It can include things like educational requirements, experience, personality traits or
characteristics and physical abilities.
• These qualifications are often grouped into three categories: skills, knowledge and
ability
• The job specification provides detailed characteristics, knowledge, education, skills, and
experience needed to perform the job, with an overview of the specific job
requirements.
• Also known as employee specifications, a job specification is a written statement of
educational qualifications, specific qualities, level of experience, physical, emotional,
technical and communication skills required to perform a job,' responsibilities involved
in a job and other unusual sensory demands.
• It also includes general health, mental health, intelligence, aptitude, memory, judgment,
leadership skills, emotional ability, adaptability, flexibility, values and ethics, manners
and creativity, etc.

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PURPOSE OF JOB SPECIFICATION
• Job specification helps candidates analyse whether are eligible to apply for a particular
job vacancy or not.
• It helps recruiting team of an organization understand what level of qualifications,
qualities and set of characteristics should be present in a candidate to make him or her
eligible for the job opening
• Job Specification gives detailed information about any job including job responsibilities,
desired technical and physical skills, conversational ability and much more.
• It helps in selecting the most appropriate candidate for a particular job
JOB SPECIFICATION INFORMATION
• Physical specifications: Physical specifications include the physical qualification
capacities which vary from job to job. Physical qualification or capacities include physical
features like height, weight, chest, vision, hearing, ability to lift weight, ability to carry
weight, health, age capacity to use or operate machines, tools, equipment’s etc.
• Mental specifications: Mental specifications include ability to perform, arithmetical
calculations to interpret data, information blueprints, to read electrical circuits, ability
to plan, reading abilities, scientific abilities, judgment, ability to concentrate, ability to
handle variable factors, general intelligence, memory etc.
• Emotional and social specifications: Emotional and social specifications are more
important for the post of mangers, supervisors, foremen etc. These include emotional
stability, flexibility, and social adaptability in human relationships, personal appearance
including dress, posture, poise, features and voice required by the job.
• Behavioural specifications: Behavioural specifications play an important role in
selecting the candidates for higher level jobs in the organizational hierarchy. These
specifications include judgments, research, creativity, teaching ability, maturity (capable
of accepting responsibility), trial of conciliation, self-reliance (self-starter sticks to own
decisions), dominance (giving orders in a personal way) etc.

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METHODS/TECHNIQUES OF JOB DESIGN
• Job Simplification:
o The job is simplified by breaking it down into small sub-parts
o The Job Simplification means breaking the job into relatively easier sub-parts with
the intention to enhance the individual’s productivity by minimizing the physical
and mental efforts required to perform a complex job.
o Job simplification involves:
▪ Mechanical processing of work
▪ Repetitive work process (assembly lines)
▪ Working on only one part of a product
▪ Predetermining tools and techniques
▪ Few skill requirements.
• Job Rotation:
o Job rotation implies the shifting of an employee from one job to another without
any change in the job
o One solution to boredom, as seen in work simplification, is job rotation’.
o Job rotation implies the moving of employees from job to job without any change
in the job
o The advantages of job rotation are:
▪ It removes boredom
▪ It broadens employee’s knowledge and skill.
▪ Employees become competent in several jobs rather than only one
• Job Enrichment:
o Frederick Herzberg, an American psychologist, originally developed the concept of
'job enrichment' in 1968
o Job enrichment is a common motivational technique used by organizations to give
an employee greater satisfaction in his work.
o It means giving an employee additional responsibility previously reserved for his
manager or other higher-ranking positions.
o Job enrichment involves adding motivating factors to job
o job enrichment is a vertical expansion of a job by adding more responsibility and
freedom to do it
o Job enrichment increases job depth, which refers to the degree of control
employees have over their work.
o Job enrichment can improve the quality of work output, employee motivation, and
satisfaction.

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 • Job Enlargement
o Job enlargement involves adding more tasks to a job
o This is a horizontal expansion in a job.
o By adding more tasks to job, job enlargement expands job scope and gives variety
of tasks to the job holder
o Job enlargement reduces monotony and boredom.
o It helps increase interest in work and efficiency
o involves expanding the number of tasks or duties assigned to a given job.
o Job enlargement therefore, naturally is opposite to work simplification
o Job enlargement means increasing the scope of a job through extending the range
of its job duties and responsibilities generally within the same level and periphery.
INCENTIVES
• An incentive is a contingent motivator
• The incentive is a positive motivational influence on a person that helps improve his
performance.
• It consists of monetary and non-monetary elements
• Usefulness and success of incentive plan depends on time, frequency and accuracy.
• Incentives increase the earnings of employees. At times more than wages.
• Payment of incentives leads to minimum per unit cost of product as there is an increased
efficiency and greater output.
• Increase in production capacity of the plant takes place.
• It saves manager’s time for supervision because employees are motivated for better
performance.
• According to Milton L. Rock, incentives are defined as ‘variable rewards granted
according to variations in the achievement of specific results’
• Essential characteristics of a good incentive plan
o Simple to Understand
o Just and Equitable
o Attraction for Workers
o Attainable Standards
o Conducive to Health
o Willingness of Workers
o Clarity of Objectives
o Incentive for Quantity and Quality
o Standardization
o Worker’s Incentive Earnings
o Intimation of Efficiency
o Right to Change Standards.

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TYPES OF INCENTIVES
I. Monetary or Financial Incentives
• Pay and allowances: Regular increments in salary every year and grant of
allowance act as good motivators.
• Profits sharing: Under profits sharing schemes generally the companies fix a
percentage of profits, and if the profits exceed that percentage then the surplus
profits are distributed among the employees.
• Co-partnership/stock option: The co-partnership is offered by issue of shares on
exceeding a fixed target.
• Bonus: Bonus is a onetime extra reward offered to the employee for sharing high
performance. Generally, when the employees reach their target or exceed the
target then they are paid extra amount called bonus.
• Commission: Commission is the common incentive offered to employees working
under sales department. Generally, the sales personal gets the basic salary and
also with this effort put in by them. More orders mean more commission.
• Suggestion system: Under suggestion system the employees are given reward if
the organization gains with the suggestion offered by the employee.
• Productivity linked with wage incentives. These are wage rate plans which offer
higher wages for more productivity. Under differential piece wage system efficient
workers are paid higher wages as compared to inefficient workers. To get higher
wages workers perform efficiently.
• Retirement benefits: Some organizations offer retirement benefits such as
pension, provident fund, gratuity etc. to motivate people.
• Perks/ fringe Benefits/ perquisites: If refers to special benefits such as medical
facility, free education for children, housing facility etc. these benefits are over
and above salary.
II. Non-Monetary/Non-Financial Incentives
• Status: Status refers to rank, authority, responsibility, recognition and prestige
related to job. By offering higher status or rank in the organization managers can
motivate employees having esteem and self- actualization need active in them.
• Organizational climate: It refers to relations between superior/ subordinates.
These are the characteristics which describe and organization. These
characteristics have direct influence over the behaviour of a member. A positive
approach adapted by manager creates better organizational climate
• Career advancement: Managers must provide promotional opportunities to
employees. Whenever there are promotional opportunities employees improve
their skill and efficiency with the hope that they will be promoted to high level.
Promotion is a very big stimulator or motivator which induces people to perform
to their best level.
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 • Job enrichment/ assignment of challenging job: Employees get bored by
performing routine job. They enjoy doing jobs which offer them variety and
opportunity to show their skill. By offering challenging jobs, autonomy to perform
job, interesting jobs, employees get satisfied and they are motivated. Interesting,
enriched and challenging job itself is a very good motivator or stimulator.
• Employee’s recognition. Recognition means giving special regard or respect which
satisfies the ego of the subordinates. Ego-satisfaction is a very good motivator.
Examples of employee’s recognition are congratulating employee for good
performance, displaying the achievement of employee, giving certificate of
achievement, distributing mementos, gifts etc.
• Job security. Job security means life time bonding between employees and
organization. Job security means giving permanent or confirmation letter.
• Employee’s participation: It means involving employee in decision making
especially when decisions are related to workers. Employees follow the decision
more sincerely when these are taken in consultation with them.
• Autonomy/ employee empowerment. It means giving more freedom to
subordinates. This empowerment develops confidence in employees. They use
positive skill to prove that they are performing to the best when freedom is given
to them.

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FRINGE BENEFIT
• In addition to compensation in the form of wages and salaries, organisations provide
workers with various services and programmes known as employee benefits. Previously
these services and programmes were known as fringe benefits.
• Besides base compensation and incentives, employees are provided various types of
benefits and services by the organizations. These benefits and services are not linked to
employees’ productivity but are provided to different classes of employees either as a
matter of statutory requirement or on voluntary basis or a combination of both is called
Fringe Benefit
• Such benefits are called by various names such as ‘fringe benefits’, ’employee welfare’,
‘wage supplements’, ‘sub-wages’, ‘supplementary compensation’, ‘social security’, etc
• In Indian context, fringe benefits as defined by Employers’ Federation of India in 1968
are taken into account
• The Internal Revenue Service (IRS) maintains a list called the Tax Guide to Fringe
Benefits. As of 2019, the list of fringe benefits excluded from income taxes includes:
o Accident and health benefits
o Achievement awards
o Adoption assistance
o Athletic facilities
o Commuting benefits
o De minimis (minimal) benefits
o Dependent care assistance
o Educational assistance
o Employee discounts
o Employee stock options
o Employer-provided cell phones
o Group-term life insurance coverage
o Health savings accounts (HSA)
o Lodgings on business premises
o Meals
o No-additional-cost services
o Retirement planning services
o Tuition reduction
o Working conditions benefits

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PERFORMANCE OF APPRAISAL
• Performance appraisal is the process of evaluation of an employee at higher levels.
• Promotion, transfer, salary increase etc. are some of the matters that are dependent
upon the evaluation of the performance of an employee.
• Performance appraisal is a systematic, periodic and so far, as humanly possible, the
impartial rating of an employee’s excellence in matters pertaining to his present job and
to his potentialities for a better job”—Edwin B, Flippo
• “It is the evaluation or appraisal of the relative worth to the company of a man’s services
on his jobs.” —A1 ford & Beatty
OBJECTIVES
• To provide employees feedback on their performance.
• Identify employee training needs.
• Document criteria used to allocate organisational rewards.
• A basis for decisions relating to salary increases, promotions, disciplinary actions,
bonuses, etc.
• Provide the opportunity for organisational diagnosis and development.
• Facilitate communication between employee and employer.
• Validate selection techniques and human resource policies to meet regulatory
requirements.
• To improve performance through counselling, coaching and development.
• To motivate employees through recognition and support.
PROCESS OF PERFORMANCE APPRAISAL
1. Establish Performance Standards
2. Communicate Performance Expectation to Employee
3. Measure Actual Performance
4. Compare Actual Performance with Standards
5. Discuss the Appraisal with the Employee
6. Initiate Corrective Actions.
Classified differently by different authors.
• DeCenzo and Robbins have classified appraisal methods into three categories: absolute
meth-ods, relative methods and objective methods;
• Aswathappa: Past-oriented and Future-oriented.
• Rock and Levis”: Narrow interpre-tation and Broad interpretation.
• Beatty and Schneier: Comparative methods, Absolute methods, Goal setting and Direct
indices.
• Strauss and Sayles: Traditional methods and Modem methods
89 | K I R A N . A . S
METHODS OF PERFORMANCE APPRAISAL

• Ranking Method:
o It is the oldest and simplest formal systematic method of performance appraisal
o Employee is compared with all others for the purpose of placing order of worth.
o The employees are ranked from the highest to the lowest or from the best to the
worst.
o Thus, if there are ten employees to be appraised, there will be ten ranks from 1 to
10.

• Paired Comparison:
o In this method, each employee is compared with other employees on one- on one
basis, usually based on one trait only.
o The ratter is provided with a bunch of slips each coining pair of names, the ratter
puts a tick mark against the employee whom he insiders the better of the two.
o The number of times this employee is compared as better with others determines
his or her final ranking.
o N (N-1) ÷ 2, where N = No. of employees

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 • Grading Method:
o In this method, certain categories of worth are established in advance and
carefully defined.
o There can be three categories established for employees: outstanding,
satisfactory and unsatisfactory.
o There can be more than three grades. Employee performance is compared with
grade definitions.
o The employee is, then, allocated to the grade that best describes his or her
perfor-mance.
• Forced Distribution Method: The method assumes that employees’ performance level
confirms to a normal statistical distribution i.e., 10,20,40,20 and 10 per cent.
o Positive statements
▪ Communicates well with superiors.
▪ Plays active role in meetings and other office events.
o Negative statements
▪ Consistently over-promises and under-delivers.
▪ Isn’t punctual, often comes late to the office
• Forced-Choice Method:
o The forced-choice method is developed by J. P. Guilford.
o It contains a series of groups of statements and ratter rates how effectively a
statement describes each individual being evaluated.
o Common method of forced-choice method contains two statements, both
positive and negative.

• Essay Method: In this method, the rater writes a narrative description on an employee’s
strengths, weaknesses, past performance, potential and suggestions for improvement.
• Field Review Method:
o Field review method of performance appraisal is conducted by the rater who does
not belong to the employees’ department.
o The rater is someone from the corporate, especially from HR department

91 | K I R A N . A . S
 • Check-List Method:
o The basic purpose of utilizing check-list method is to ease the evaluation burden
upon the rater.
o In this method, a series of statements, i.e., questions with their answers in ‘yes’
or ‘no’ are prepared by the HR department.
o The check-list is, then, presented to the rater to tick appropriate answers relevant
to the appraisee.

• Critical Incidents Method:

o There are three steps involved in appraising employees using this method.
▪ First, a list of noteworthy (good or bad) on-the-job behaviour of specific
incidents is prepared.
▪ Second, a group of experts then assigns weightage or score to these
incidents, depending upon their degree of desirability to perform a job.
▪ Third, finally a check-list indicating incidents that describe workers as “good”
or “bad” is constructed. Then, the check-list is given to the rater for
evaluating the workers.

• Confidential Report:
o It is the traditional way of appraising employees mainly in the Government
Departments
o Evaluation is made by the immediate boss or supervisor for giving effect to
promotion and transfer
o Usually a structured format is devised to collect information on employee’s
strength weakness, intelligence, attitude, character, attendance, discipline, etc.
report
o Confidential report usually highlights the strengths and weaknesses of the
employees

92 | K I R A N . A . S
 • Graphic Rating Scale Method:
o The graphic rating scale is one of the most popular and simplest techniques for
appraising performance.
o It is also known as linear rating scale.
o In this method, the printed appraisal form is used to appraise each employee

• Management by Objectives (MBO)

o Peter F. Drucker propounded a new concept, Management by objectives (MBO)
o “Process whereby the superior and subordinate managers of an organization
jointly identify its common goals, define each individual’s major areas of
responsibility in terms of results expected of him and use these measures as
guides for operating the unit and assessing the contribution of each its members”.
o MBO requires the manager to goals with each employee and then periodically
discuss his or her progress toward these goals.
o The employees work upon achieving their set goals and employers keep a record
of how close they are to accomplishment of the goals
o An MBO programme consists of four main steps:
▪ Goal setting,
▪ Performance standard
▪ Compari-son
▪ Periodic review
• Behaviourally Anchored Rating Scales (BARS)
o Behaviourally Anchored Rating Scales (BARS) are designed to bring the benefits of
both qualitative and quantitative data to the employee appraisal process.
o Behaviourally anchored rating scales (BARS) are scales used to rate performance.
o BARS are normally presented vertically with scale points ranging from five to nine.

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 • Assessment Centres:
o The Germany used to appraise its army officers
o Assessment centres are mainly used for evaluating executive or supervisory
potential
o They are assessed by senior managers supple-mented by the psychologists and
the HR specialists for 2-3 days
o These include a trained group of assessors, situational tests or exercises that
participants must complete, and an assessment method that involves pooling the
judgments of the assessors to reach a final evaluation of each participant.
• 360 – Degree Appraisal:
o A 360-degree feedback also known as multi-rater feedback, multi-source
feedback, or multi source assessment
o This method was first developed and formally used by General Electric Company
of USA
o An employee is appraised by his supervisor, subordinates, peers, and customers
with whom he interacts in the course of his job performance.
o All these appraisers provide information or feedback on an employee by
completing survey questionnaires designed for this purpose
o It is a system in which employees will get feedback from all the people they work
with.
o A survey is conducted to get close understanding of-on the job performance of
the employees.
o A 360-degree appraisal has four stages in it:
▪ Self-Appraisal
▪ Superior’s Appraisal
▪ Sub-ordinates Appraisal
▪ Peer Appraisal
• Cost Accounting Method:
o This method evaluates an employee’s performance from the monetary benefits
the employee yields to his/her organisation.
o This is ascertained by establishing a relationship between the costs involved in
retaining the employee, and the benefits an organisation derives from Him/her.

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PROMTION
• Promotion is vertical movement of an employee within the organisation.
• In other words, promotion refers to the upward movement of an employee from one
job to another higher one, with increase in salary, status and responsibilities.
• Promotion may be temporary or permanent, depending upon the needs of the
organisation.
TYPES OF PROMOTION
• Horizontal promotion
o When an employee is shifted in the same category, it is called ‘horizontal
promotion’.
o A junior clerk promoted to senior clerk is such an example.
o It is important to note that such promotion may take place when an employee
shifts within the same department, from one department to other or from one
plant to another plant.
• Vertical Promotion:
o This is the kind of promotion when an employee is promoted from a lower
category to higher category involving increase in salary, status, authority and
responsibility. Generally, promotion means ‘vertical promotion’.
• Dry Promotion:
o When promotion is made without increase in salary, it is called ‘dry promotion’.
o For example, a lower level manager is promoted to senior level manager without
increase in salary or pay

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TRANSFER
• Transfer implies movement of an employee from one job to another without any
increase in pay, status or responsibilities.
TYEPES OF TRANFER
• Production Transfers: An employee may be transferred from one department to
another department. Such a transfer is known as production transfer.
• Replacement Transfers: An employee with a long service may be transferred in some
other department to replace a person with a shorter service.
• Versatility Transfers: The versatility transfers are made for the purpose of preparing the
employees for production and replacement transfer. This helps the employee through
job enlargement.
• Shift Transfers: In case of manufacturing concerns, there are normally three shifts.
Usually these shifts are rotating. In case shift assignments are not rotating, an employee
may be transferred from one sift to another shift.
• Remedial Transfers: In case an employee does not feel comfortable on his job, he may
be transferred to some other job. His initial placement might be faulty; his health might
have gone down; he may not be getting along with his supervisor or workers i.e. he
might have developed personal friction with his boss or fellow employees.
• Penal Transfer: Transfers initiated as a punishment to in disciplinary action of
employees. This type of transfer should better be called downgrading or bumping
• Miscellaneous Transfers:
o Transfers may also be classified as temporary or permanent transfers.
o If a transfer is from one department to another, it is known as departmental
transfer.
o If a transfer is made within the department, such a transfer is known as sectional
transfer.
o An employee may be transferred from one plant to another plant, such a transfer
is known as inter-plant transfer.

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COLLECTIVE BARGAINING
• Collective bargaining means negotiation.
• “Collective Bargaining is concerned with the relations between unions reporting
employees and employers”
• The phrase ‘collective bargaining’ was coined by Sydney and Beatrice Webb
• Collective Bargaining is an industrial dispute between the employee and employer can
also be settled by discussion and negotiation between these two parties in order to
arrive at a decision.
• Collective bargaining is a technique where the problems related to the employment and
wages is resolved harmoniously by a contract or agreement, not by coercion.
• Collective bargaining is a process of negotiation between employers and a group of
employees aimed at agreements to regulate working salaries, working conditions,
benefits, and other aspects of workers' compensation and rights for workers.
• Collective Bargaining Involves:
o Negotiations
o Drafting
o Administration
o Interpretation of documents written by employers, employees and the union
representatives
o Organizational Trade Unions with open mind.
• 4 Main Participants
o Employer
o Employees
o Government
o Financial Institutions/Banks
• In the situation of non-settlement of the issues, the third party-the government-came
into picture
FORMS OF COLLECTIVE BARGAINING
• In the first place, bargaining may be between the single employer and the single union,
this is known as single plant bargaining. This form prevails in the United States as well
as in India.
• Secondly, the bargaining may be between a single firm having several plants and
workers employed in all those plants. This form is called multiple plants bargaining
where workers bargain with the common employer through different unions.
• Thirdly, instead of a separate union bargaining with separate employer, all the unions
belonging to the same industry bargain through their federation with the employer’s
federation of that industry. This is known as multiple employer bargaining which is
possible both at the local and regional levels.
97 | K I R A N . A . S
TYPES OF COLLECTIVE BARGAINING
• Distributive Bargaining
o This type of bargaining is also known as conjunctive bargaining.
o It involves the distribution of surplus. Under it, the economic issues like wages,
salaries and bonus are discussed.
o In distributive bargaining, one party’s gain is another party’s loss.
o This is most commonly explained in terms of a pie.
• Integrative Bargaining
o This type of bargaining is also known as cooperative bargaining
o This involves negotiation of an issue on which both the parties may gain, or at least
neither party loses.
o For example, representatives of employer and employee sides may bargain over
the better training programme or a better job evaluation method. Here, both the
parties are trying to make more of something. In general, it tends to be more
cooperative than distributive bargaining.
• Attitudinal Restructuring
o This involves shaping and reshaping some attitudes like trust or distrust,
friendliness or hostility between labour and management.
• Intra-Organizational Bargaining
o It generally aims at resolving internal conflicts.
o Even within the union, there may be differences between groups.
WORKERS PARTICIPATION IN MANAGEMENT
• According to Keith Davis, “Workers’ participation refers to the mental and emotional
involve-ment of a person in a group situation which encourages him to contribute to
group goals and share in responsibility of achieving them”
• Ways of Workers’ Participation in Management:
o Participation through Ownership
o Participation through Complete Control
o Participation through Staff or Works Councils
o Participation through Joint Councils and Committees
o Participation through Collective Bargaining
o Participation through Suggestion Schemes
o Participation through Quality Circles
o Participation through Total Quality Management
o Participation through Empowered Teams
o Financial Participation

98 | K I R A N . A . S
Forms of Workers’ Participation in Management
• Joint consultation model: In the joint consultation model the management consults
with the workers before taking decisions. The workers represent their view through
‘Joint consultative Committees’.
• Joint decision model: In this form both the workers and management jointly decide and
execute the decisions.
• Self-management of auto management: In this model, the entire control is in the hands
of workers. Where the state industrial units are run by the workers under a scheme
called ‘Self-Management or Auto Management Scheme’.
• Workers’ representation on board: Under this method, the workers elect their
representative and send them to the Board to participate in the decision-making process
PERSONALITY
• The term ‘personality’ is derived from the Latin word ‘persona’ which means a mask.
• Personality is defined as the characteristic sets of behaviours, cognitions, and emotional
patterns that evolve from biological and environmental factors
• Personality, a characteristic way of thinking, feeling, and behaving
• “A person’s pattern of habits, attitudes, and traits which determine his adjustment to
his environment.”
TYPES OF PERSONALITY
• Type-A personality
o Type A personality is one which is stress prone, in a hurry, impatient and fast in
whatever they do.
o It’s Sensitive and proactive in nature
o Low patience
o Highly-competitive
o Stress level is High
o They move, walk and eat fast.
o Great at multitasking.
o Feels impatient with the pace of things, dislikes waiting.
o They have a busy schedule and does not have time to enjoy life.
o They are high-achievers, perform beyond par.
o They do not easily accept failure.
o Competitive, ambitious, impatient, aggressive, fast talking.

99 | K I R A N . A . S
 • Type -B personality
o Type B personality is one which is less stress prone patient, relaxed and easy going.
o It’s Reflective and innovative in nature
o High patience
o Less-competitive
o Stress level is Low
o They are not concerned about time.
o They compete for fun, not to win.
o Never in a hurry and has no pressing deadlines.
o Focus on quality rather than quantity.
o Live a stress-less life.
o Relaxed, non-competitive
• Introvert personality
o When a person is reserved and does not open up easily, he or she is said to be an
introvert.
o They think before speaking.
o Spends more time with themselves
o Have few friends
o Do not accept change easily.
o Openly communicate about themselves with people they know and trust.
• Extrovert personality
o When a person is social, talkative and makes friends quickly, then his personality
type is extrovert.
o They reason things out by speaking them
o Spends more time with family and friends
o Have so many friends
o Accept change easily
o Openly communicate about themselves with anyone
• Ambivert personality
o An ambivert is someone who falls in the middle of the introvert/extrovert
continuum
PERCEPTION
• “Perception is the process through which the information from outside environment is
selected, received, organised and interpreted to make it meaningful to you. This input
of meaningful information results in decisions and actions.”
• “Perception may be defined as a process by which individuals organize and interpret
their sensory impressions in order to give meaning to their environment.”
• “The process of receiving, selecting, organising, interpreting, checking and reacting to
sensory stimuli or data.”
100 | K I R A N . A . S
ATTITUDE
• An Attitude may be defined as a feeling or disposition to favour or to be against objects,
persons and situations
• “An attitude denotes the sum total of man’s inclinations and feelings, prejudice or bias,
pre-conceived notions, ideas, fears, threats and other any specific topic.”
• An attitude has aspects such as direction, intensity, generality or specificity
• Attitudes refer to feelings and beliefs of individuals or groups of individuals.
• ABC Model of Attitude
o A stand for Affective component,
o B for Behavioural
o C for the cognitive component.
• Sources of Attitudes
o Direct Personal Experience
o Association
o Family and Peer Groups
o Neighbourhood
o Economic Status and Occupations
o Mass Communications
• Process of group development
1. Forming
2. Storming
3. Norming
4. Performing
5. Adjourning
• Types of group
o Formal group: Command Groups, Task Groups, Functional Groups
o Informal group: Interest Group, Friendship Groups, Reference Groups
CONFLICT

101 | K I R A N . A . S
 UNIT 07
BANKING AND FINANCIAL INSTITUTIONS

❖ Modul 1: Overview of Indian financial system

❖ Modul 2: Types of banks
o Commercial banks
o Regional Rural Banks (RRBs)
o Foreign banks
o Cooperative banks
❖ Modul 3: Reserve Bank of India
o Functions
o Role and monetary policy management
❖ Modul 4: Banking sector reforms in India
o Basel norms
o Risk management
o NPA management
❖ Modul 5: Financial markets
o Money market
o Capital market
o Government securities market
❖ Modul 6: Financial Institutions
o Development Finance Institutions (DFIs)
o Non-Banking Financial Companies (NBFCs)
o Mutual Funds
o Pension Funds
❖ Modul 7: Financial Regulators in India
❖ Modul 8: Financial sector reforms including financial inclusion
❖ Modul 9: Digitisation of banking and other financial services
o Internet banking
o Mobile banking
o Digital payments systems
❖ Modul 10: Insurance
o Types of insurance- Life and Non-life insurance
o Risk classification and management
o Factors limiting the insurability of risk
o Re-insurance
o Regulatory framework of insurance- IRDA and its role

1
OVERVIEW OF INDIAN FINANCIAL SYSTEM
• A 'financial system' is a system that allows the exchange of funds between lenders,
investors, and borrowers. Financial systems operate at national and global levels
• Money, credit, and finance are used as medium of exchange in financial systems.
• A modern financial system may include banks (public sector or private sector), financial
markets, financial instruments, and financial services.
• Financial systems allow funds to be allocated, invested, or moved between economic
sectors.
• It facilitates the flow of funds form the households (savers) to business firms (investors)
to aid in wealth creation and development of both the parties
• According to Robinson, the primary function of a financial system is “to provide a link
between savings and investment for creation of wealth and to permit portfolio
adjustment in the composition of existing wealth”
• A Financial System consists of various financial Institutions, Financial Markets, Financial
Transactions, rules and regulations, liabilities and claims etc.
• The financial system of a country is concerned with:
o Allocation and Mobilization of savings
o Provision of funds
o Facilitating the Financial Transactions
o Developing financial markets
o Provision of legal financial framework
o Provision of financial and advisory services
FEATURES OF FINANCIAL SYSTEM
• The system allows transfer of money between savers and borrowers.
• It includes Financial Institutions, markets, instruments, services, practices and
transactions.
• The main objective is to formulate capital, investment and profit generation.
• It is also termed as financial intermediaries because they act as middlemen between
the savers and borrowers
• It bridges the gap between savings and investment
• It helps a business in capital formation
• It helps in minimising risk and allocating risk efficiently.
• It helps business to liquidate tied up funds.
• It facilitates trading of financial assets/ instruments by developing and regulating
financial markets.
• It helps in economic development and raising the standard of living of people.
• It provides effective financial as well as advisory services.
• It protects investors through regulatory bodies like RBI, SEBI etc
2
STRUCTURE/COMPONANTES OF FINANCIAL SYSTEM

FINANCIAL INSTITUTIONS
• Financial institutions are intermediaries of financial markets which facilitate financial
transactions between individuals and financial customers
• It simply refers to an organization that collects money from individuals and invests that
money in financial assets such as stocks, bonds, bank deposits, loans etc.
• Financial Institutions may be classified into three categories:
o Regulatory: It includes institutions like SEBI, RBI, IRDA etc. which regulate the
financial markets and protect the interests of investors.
o Intermediaries: It includes commercial banks such as SBI, PNB etc. that provide
short term loans and other financial services to individuals and corporate
customers.
o Non – Intermediaries: It includes financial institutions like NABARD, IDBI etc. that
provide long-term loans to corporate customers
• There can be two types of financial institutions:
o Banking Institutions or Depository institutions: These are banks and credit unions
that collect money from the public in return for interest on money deposits and
use that money to advance loans to financial customers
o Non- Banking Institutions or Non-Depository institutions: These are brokerage
firms, insurance and mutual funds companies that cannot collect money deposits
but can sell financial products to financial customers

3
FINANCIAL MARKETS
• It refers to any marketplace where buyers and sellers participate in trading of assets
such as shares, bonds, currencies and other financial instruments.
• A financial market may be further divided into capital market and money market.
• The capital market deals in long term securities having maturity period of more than
one year
• The money market deals with short-term debt instruments having maturity period of
less than one year
FINANCIAL ASSETS/INSTRUMENTS
• Financial assets include cash deposits, checks, loans, accounts receivable, letter of
credit, bank notes and all other financial instruments that provide a claim against a
person/financial institution to pay either a specific amount on a certain future date or
to pay the principal amount along with interests
FINANCIAL SERVICES
• Financial Services are concerned with the design and delivery of financial instruments
and advisory services to individuals and businesses within the area of banking and
related institutions, personal financial planning, leasing, investment, assets, insurance
etc.
• It involves provision of a wide variety of fund/asset based and non-fund based/advisory
services and includes all kinds of institutions which provide intermediate financial
assistance and facilitate financial transactions between individuals and corporate
customers.

4
FUNCTIONS OF INDIAN FINANCIAL SYSTEM
• It bridges the gap between savings and investment through efficient mobilization and
allocation of surplus funds
• A financial system acts as a link between borrowers and investors thereby helping and
mobilising savings an efficiently and effectively.
• It helps a business in capital formation
• It helps in minimising risk and allocating risk efficiently
• It helps a business to liquidate tied up funds
• It facilitates financial transactions through provision of various financial instruments
• It facilitates trading of financial assets/instruments by developing and regulating
financial markets
• Financial systems help overcome an information asymmetry between borrowers and
lenders.
• IDBI provides industrial finance and coordinates activities of all financial institutions
• IFCI is India’s only term lending institution
IMPORTANCE OF INDIAN FINANCIAL SYSTEM
• It accelerates the rate and volume of savings through provision of various financial
instruments and efficient mobilization of savings
• It aids in increasing the national output of the country by providing funds to corporate
customers to expand their respective business
• It protects the interests of investors and ensures smooth financial transactions through
regulatory bodies such as RBI, SEBI etc.
• It helps economic development and raising the standard of living of people
• It helps to promote the development of weaker section of the society through rural
development banks and co-operative societies
• It helps corporate customers to make better financial decisions by providing effective
financial as well as advisory services
• It aids in Financial Deepening and Broadening:
o Financial Deepening – It refers to the increase in financial assets as a percentage
of GDP
o Financial Broadening – It refers to increasing number of participants in the
financial system.

5
BANKING SYTEM
• The word bank was taken Middle English from Middle French banque, from Old Italian
banco, meaning "table", from Old High German banc, bank "bench, counter".
• A bank is a financial institution that accepts deposits from the public and creates credit.
• The concept of banking may have begun in ancient Babylonia and Old Sanghvi
• “Banking is the business of accepting for the purpose of lending or investment, of
deposits of money from the public repayable on demand or otherwise and withdraw-
able by cheque, draft, and order or otherwise.” Indian Banking Regulation Act, 1949
HISTORY
1. Banking system commenced in India with the foundation of Bank of Hindustan in
Kolkata in 1770
2. The General Bank of India was established in the year 1786.
3. The East India Company established The Bank of Bengal/Calcutta (1809),
4. Bank of Bombay (1840)
5. Bank of Madras (1843)
6. These three individual units (Bank of Calcutta, Bank of Bombay, and Bank of Madras)
were called as Presidency Banks.
7. The next bank was Bank of Hindustan which was established in 1870
8. Allahabad Bank which was established in 1865, It is first time completely run by Indians
9. Oudh Commercial Bank- First commercial bank in India (1881)
10. Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.
11. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara
Bank, Indian Bank, and Bank of Mysore were set up.
12. In 1921, all presidency banks were amalgamated to form the Imperial Bank of India
which was run by European Shareholders.
13. After that the Reserve Bank of India was established in April 1935 Based on Hilton
Young Commission (set up 1926)
14. After Independence, in 1951, the All India Rural Credit survey, committee of Direction
with Shri. A. D. Gorwala as Chairman recommended amalgamation of the Imperial
Bank of India and ten others banks into a newly established bank called the State Bank
of India (SBI).
15. In 1955, the Imperial Bank of India was nationalized and was given the name "State
Bank of India", to act as the principal agent of RBI and to handle banking transactions
all over the country. It was established under State Bank of India Act, 1955
16. Seven banks forming subsidiary of State Bank of India was nationalized in 1960.
17. On 19th July, 1969, major process of nationalization was carried out. At the same time
14 major Indian commercial banks of the country were nationalized.
18. In 1980, another six banks were nationalized

6
The following are the major steps taken by the Government of India to Regulate Banking
institutions in the country:
1. 1949: Enactment of Banking Regulation Act.
2. 1955: Nationalisation of State Bank of India.
3. 1959: Nationalization of SBI subsidiaries.
4. 1961: Insurance cover extended to deposits.
5. 1969: Nationalisation of 14 major Banks.
6. 1971: Creation of credit guarantee corporation.
7. 1975: Creation of regional rural banks.
8. 1980: Nationalisation of seven banks with deposits over 200 Crores.
9. On the suggestions of Narasimhan Committee, the Banking Regulation Act was amended
in 1993
SOME OF THE OLD BANKS
• Allahabad Bank was established in 1865 at Allahabad (Uttar Pradesh). It is the oldest
joint stock bank
• Oudh Commercial Bank was established in 1881 at Faizabad (Uttar Pradesh). It is the
First limited liability Bank in India and also first joint stock bank
• Punjab National Bank was established in 1895 at Lahore (Pakistan) and it was also the
first bank to be managed solely by Indians.
INDIAN BANKING STRUCTURE

7
SCHEDULED BANKS
• These are those which are included in the second scheduled of Banking Regulation Act
1965 and others are non-scheduled banks.
• To be included in the second scheduled of the Banking regulation act the bank full fill
the following conditions:
o Must have paid up capital and reserves of not less than Rs. five lakhs.
o It must also satisfy the RBI that its affairs are conducted in a manner.
o It is required to maintain a certain amount of reserves with the RBI
• Every Scheduled Bank enjoys two principal facilities
o It becomes eligible for a Loan from RBI at Bank Rate.
o It automatically acquires the membership of Clearing House.
• Scheduled Banks comprises of two Types
o Commercial Banks
o Cooperative Banks
NATIONALISED BANKS
• The government of India nationalised 20 commercial banks during the tenure of Prime
Minister of Indira Gandhi
• On July 19, 1969, the first nationalisation of 14 banks
• On April 15, 1980 the second nationalisation of 6 banks
• At present there are only 19 nationalised banks in the country besides the RBI.
• The largest Public sector bank of India which was created after nationalisation of
Imperial Bank of India in 1955
• The foreign banks have market share of 8.5% of total deposits into banking industry
• The domestic private banks have a share of 5.8% of total deposits of the banking
industry.
• Presently 31 private domestic banks and 33 foreign banks are functioning in India.
• SBI has 5 associate banks, State Bank of Bikaner & Jaipur, Hyderabad, Mysore, Patiala
and Travancore.

8
COMMERCIAL BANK
• Commercial Banks are regulated under the Banking Regulation Act, 1949 and their
business model is designed to make profit.
• Commercial Banks are both Scheduled and Non-scheduled commercial banks regulated
Banking Regulations Act 1949.
• Commercial Banks works on a ‘Profit Basis’s and are engaged in the business of
accepting deposits for the purpose of advances/loans
• Their primary function is to accept deposits and grant loans to the general public,
corporate and government.
• A commercial bank is a type of bank that provides services such as accepting deposits,
making business loans, and offering basic investment products that is operated as a
business for profit
• Commercial banks make money by providing loans and earning interest income from
those loans.
• A commercial bank is a financial institution which performs the functions of accepting
deposits from the general public and giving loans for investment with the aim of earning
profit
• In fact, commercial banks, as their name suggests, axe profit-seeking institutions
• Most of the Indian joint stock Banks are Commercial Banks such as Punjab National Bank,
Allahabad Bank, Canara Bank, Andhra Bank, Bank of Baroda, etc.
FOUR TYPES OF SCHEDULED COMMERCIAL BANKS (SCBS)
1. Public sector banks
o Banks where Government is the owner or having more than 51% stake in capital.
o SBI and all Nationalised Banks are Public Sector Banks.
o The words such as “The” or “Ltd” will not be found in their names
o The ownership of these banks is with the government and
o The liability is unlimited in nature
o Other Nationalised Banks - 19
o Other Public Sector Banks - 1
o IDBI and Bhartiya Mahila Bank (BMB) – 1
o BMB also now merged with SBI
o Total Public Sector Banks 21
2. Private sector banks
o Private Banks are owned by private individuals/institutions.
o These are registered under the Companies Act 1956 as Limited Companies
o New Generation Private Banks: HDFC Bank, ICICI Bank, AXIS Bank, Yes Bank
o Old Private Sector Banks: Karur Vysaya Bank, South Indian Bank etc.

9
3. Foreign banks
o Which are incorporated outside India and are operating branches in India also.
o For example:
▪ UK Banks: HSBC, Barclays Banks Standard Chartered Bank Royal Bank of
Scotland
▪ US Banks: Bank of America Citi Bank American Express
o Some foreign banks are also having their representative offices in India
4. Regional Rural Banks (RRB)
o RRBs were established in 1975 under RRB Act 1976.
o Main focus on Rural Area Development and elimination of money lenders
o RRBs are jointly owned by State, Central and Sponsored bank
o Recommendations: Narsimham Committee
o First RRB: Pratham Gramin Bank by Syndicate Bank in Moradabad (UP).
o Regulated By: NABARD
o Minimum Capital: Rs. 5 crores
o Maximum authorized capital of Rs. 5 crores
o An issued capital of minimum Rs. 25 lacs and maximum Rs. 1 crore
o The share capital of an RRB is subscribed by the Central Government, the State
Government and the sponsoring bank in the ratio of 50:15:35 respectively
o NABARD training centres to conduct training programmes for RRBs staff in keeping
with the requirements of the day.
o 75% of total outstanding advances should be to Priority Sector:
▪ Agriculture incl. Small & Marginal - 18%
▪ Weaker Sector - 15%
▪ MSME - 7.5%
▪ Education
▪ Housing
▪ Social Infrastructure
▪ Renewable Energy

10
COOPERATIVE BANKS
• Cooperative Banks are small sized banks operating in rural and urban areas.
• They also perform fundamental banking activities but they are different from
commercial banks.
• Coop. Banks are registered under Coop. Societies Act 1965 with RCS of the State.
• Coop. Banks are regulated by RBI under Banking Regulations Act 1949.
• Coop. Banks have limited products like – No ATM, Internet / Mobile Apps. Banking,
RTGS/NEFT, Lesser Network of Branches etc.
• Coop. Banking Structure is divided into 5 categories:
1. Primary Coop. Credit Society – Association of borrowers and non-borrowers.
Funds of society are derived from members.
2. District Central Coop. Bank – Functions at District level only
3. State Coop. Bank – Apex Body the State Govt.
4. Land Development Bank – Long term loans to farmers. No deposits from public.
5. Urban Coop. Bank – general banking activities at State level.
The following points highlight the significance of commercial banks:
• They promote savings and accelerate the rate of capital formation.
• They are source of finance and credit for trade and industry.
• They promote balanced regional development by opening branches in backward areas.
• Bank credit enables entrepreneurs to innovate and invest which accelerates the process
of economic development.
• They help in promoting large-scale production and growth of priority sectors such as
agriculture, small-scale industry, retail trade and export.
• They create credit in the sense that they are able to give more loans and advances than
the cash position of the depositor’s permits.
• They help commerce and industry to expand their field of operation.
• Thus, they make optimum utilisation of resources possible.

11
FUNCTIONS OF COMMERCIAL BANKS
A. Primary Functions
• It accepts deposits
▪ A commercial bank accepts deposits in the form of current, savings and fixed
deposits.
▪ The first task is, therefore, the collection of the savings of the public.
▪ Deposits are the lifeline of banks.
• It gives loans and advances
▪ Cash Credit: Interest is charged by the bank on the drawn or utilised portion
of credit (loan).
▪ Demand Loans: A loan which can be recalled on demand is called demand
loan
▪ Short-term Loans
B. Secondary Functions
• Discounting bills of exchange or bundles
• Overdraft facility
• Agency functions of the bank
▪ Transfer of funds
▪ Collection of funds
▪ Payments of various items: It makes payment of taxes. Insurance premium,
bills, etc.
▪ Purchase and sale of shares and securities
▪ Collection of dividends, interest on shares and debentures is made on behalf
of its customers.
▪ Acts as Trustee and Executor of property of its customers on advice of its
customers.
▪ Letters of References
• Performing general utility services
▪ Traveller’s cheques
▪ Locker facility
▪ Underwriting securities issued by government, public or private bodies.
▪ Purchase and sale of foreign exchange (currency)

12
FUNCTIONS OF BANKS

TYPES OF BANK ACCOUNTS

• Savings Account
o Basic Savings Bank Deposit Accounts (BSBDA)
▪ This account will be considered as normal banking service.
▪ For this account, maintenance of minimum balance is not required.
▪ ATM card/ ATM cum Debit card, Rupay card will be given for the account
▪ There are going to be no limit on the number of deposits made in a month
▪ Account holders will be allowed most of 4 withdrawals in a month, which
includes ATM withdrawals also.
▪ The above facilities will be given without any charge.
▪ For this account, overdraft facility will be provided up to Rs. 5000/-
o Basic Saving bank Deposit Accounts Small scheme (BSBDS)
▪ Accounts with relaxed Know your customer (KYC), with a minimum
document requirement of self-attested address proof & photograph.
▪ Total credit should not exceed 1 Lakh rupees in a year.
▪ Maximum balance should not exceed Rs. 50,000/- at any time.
▪ Cash withdrawals & transfers must not exceed Rs.10, 000/- in a month.
▪ This account can be opened only at Core Banking Solution linked branches
of banks
13
• Regular Savings Bank Account
o Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, clubs etc., are eligible for this account.
o Two free cheque books will be issued per year.
o Internet banking facility will be provided without any charge.
o NEFT, Bill payment, Mobile recharge etc., are provided through mobile phones.
o Students can open this account with zero balance
• Current Account
o Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, Limited companies, Religious Institutions, Educational Institutions,
Charitable Institutions, clubs etc., are eligible for this account.
o Payments can be done unlimited number of times.
o Funds can be remitted from any part of the country to the corresponding account.
o Overdraft facility will be available.
o Internet banking facility is available
• Recurring Deposit Account/ Cumulative Deposit Scheme
o Any resident individual- single accounts, two or more individuals in joint accounts,
Associations, clubs, Institutions/Agencies specifically permitted by the RBI etc., are
eligible to open this account in single/joint names.
o Periodic/Monthly instalments can be for any amount starting from as low as
Rs.50/- onwards.
o Account can be opened for any period ranging from 6 months to 120 months, in
multiple of 1 month.
o The amount selected for instalment at the start of the scheme will be payable
every month.
o The number of instalments once fixed, cannot be altered.
o Approved rate of interest is compounded every quarter.
o The amount after maturity will be paid to customers one month after the deposit
of the last instalment.
o Pass book will be given to the depositor.
o TDS will be applicable on the interest, as per the latest changes in the Income Tax
Act on cumulative deposits also

14
• Fixed Deposit Account
o Short Deposit Receipt
▪ Banks accepts deposits from customers varying from 7 days to a maximum
of 10 years.
▪ The period of 7 days & above but not exceeding 179 days deposits is
classified as ‘Short Deposits’.
▪ The minimum amount that can be deposited under this scheme is Rs. 5 lakhs
for a period of 7-14 days.
o Fixed Deposit Receipt
▪ Any resident individual- single accounts, two or more individuals in joint
accounts, Associations, Minors, societies, clubs etc., are eligible
▪ The minimum FDR in metro & Urban branches is Rs. 10,000/- & in rural &
semi urban & for Senior citizens is Rs.5000/-
▪ For the subsidy kept under the government sponsored schemes, Margin
money, earnest money & court attached/ordered deposits, minimum
amount criteria will not be applicable.
▪ Depositors may ask for repayment of their deposits before maturity.
Repayment of amount before maturity is allowable.
▪ Interest rate differs from bank to bank depending upon the tenure of the
deposits & as when the bank changes the rate.
▪ Additional interest of 0.50% is offered for senior citizens on deposits placed
for a year & above.
• De - Mat Account
o Used to conduct stress-free transactions on the shares.
o An individual, Non-Resident Indian, Foreign Institutional Investor, Foreign
National, Corporate, Trusts, Clearing Houses, Financial Institution, Clearing
Member, Mutual Funds, Banks and Other Depository Account.
o For opening this account, an individual has to fill a form, submit a photo of the
applicant along with a photocopy of Voter ID/ Passport/ Aadhar card/ Driving
License & Demat account number will be provided to the applicant immediately
after the completion of processing of the application.
o Facilities provided under this account are- Opening & maintaining of Demat
accounts, Dematerialization, Rematerialization, Purchases, sales, Pledging &
Unpledging, safe custody
• NRI Accounts
o NRO (Non-Resident Ordinary Rupees) Account
o NRE (Non-Resident External Rupees) Account
o FCNR (Foreign Currency Non-Resident) Account

15
TYPES OF CARDS
• Debit Cards
o A debit card is also known as "check card".
o A debit card can be used to withdraw cash up to the customer’s bank account’s
limit. Therefore, debit cards are linked to bank accounts and issued by banks.
o A debit card is a plastic card which is issued by the bank to pay for the purchase of
goods and services at any time.
o Debit card facilitates the card owner to make transactions electronically and
transfer the fund from the account while making a purchase
o Debit cards are used for withdrawing cash from an ATM, Point of Sale (POS)/ E-
commerce (online purchase) both domestically and internationally.
o Also used for domestic fund transfer from one person to another.
• Credit Cards
o In the case of credit cards, a customer can withdraw money beyond the amount
of money present his bank account. However, there is a credit limit for the
cardholder up to which the extra money can be withdrawn.
o Also, the withdraw money will have to be paid back as dues along with interest
charges as applied by the issuer of card within a time limit.
o It issued by banks / other entities approved by RBI.
o These cards are used to purchase goods and service at E-commerce (online
purchase)/ Point of Sale (POS) through recurring transaction/ Interactive Voice
Response (IVR) or Mail Order Telephone Order (MOTO). In addition, it can be used
domestically and internationally (provided it is enabled for international use).
o It can be used to withdraw money from ATM and for transferring money to bank
accounts, credit cards, debit cards, prepaid cards within the country
• Prepaid Cards
o The usage of Prepaid cards depends on who has issued the card. It issued by
banks/non-bank entities.
o For issuing a prepaid card, one has to pay the amount in advance for using the
money whenever required. Therefore, this type of card is never linked to any bank
account.
o The prepaid cards issued by banks can be used to withdraw money from ATM,
purchase of goods and services at E-commerce (online purchase)/ Point of Sale
(POS) and for domestic fund transfer from one person to another.
o This one known as open system prepaid cards.
o When it issued by authorized non-bank entities for the same usage it is known as
semi-closed system prepaid cards.
o It can be used only domestically.
o One can store maximum Rs. 50,000/- at any point of time.
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17
DIFFERENT TYPES OF BANKING
• Para Banking:
o Para banking activities are defined as those banking activities which a bank
performs apart from its daily activities like withdrawal or deposit of money.
o Banks can undertake activities either departmentally or by setting up subsidiaries
is called Para banking
o The Para Banking activities are such as insurance business, portfolio management
services, to become pension fund managers, mutual funds business, money
market mutual funds, underwriting of bonds of PSUs, investment in venture
capital funds, etc
• Narrow Banking:
o Narrow bank also called a safe bank
o This is a type of banking in which banks invest money mostly in government bonds
and securities.
o Narrow banking would restrict banks to holding liquid and safe government bonds.
o This is done to avoid risk in the market.
o Banks dedicated to such type of banking are also known as Narrow Banks.
• Offshore Banking
o When a bank accepts currencies of countries abroad, such an activity is known as
Offshore banking
o An offshore banking is one which is located in a different jurisdiction from its
investors or depositors reside.
o Sometimes people require more than their local banks can offer. In such cases,
they opt for Offshore banking.
o It provides financial and legal benefits like privacy and minimal taxation.
o In offshore banking, the stability remains neutral in any situation like wars,
economic up-down, rules and regulations and political changes.
o An offshore bank account has no tax or a negligible tax.
o Offshore banks are banks that are located outside a customer’s resident country
o if you are resident in one country but have a bank account in another country, this
account is technically an “offshore” account
• Onshore Banking
o It is similar to Offshore banking
o Onshore Banking is the banking activities which are undertaken within the
jurisdiction and territories of a nation or a sovereign state.
o In onshore banking, the stability adverse in any situation like wars, economic up-
down, rules and regulations and political changes
o An onshore bank account has standard tax rules.
o Onshore banking is situated inside the country of domicile.
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• Green Banking
o Sometimes referred to as green investment bank, clean energy finance authority,
or clean energy finance corporation
o The concern for environmental sustainability by the banks has given rise to
concept of Green Banking.
o Green banking promotes deployment of clean energy technologies.
o Green banking means promoting environmentally friendly practices and reducing
your carbon footprints from your banking activities.
o These activities seek to reduce costs of energy for ratepayers, private sector
investments and other economic activities.
• Retail Banking
o Retail banking in which direct dealing with the retail customers is done.
o It is also popularly known as consumer banking or personal banking
o Retail banking is the visible face of banking to the general public.
o Retail Banking v/s Corporate Banking
• Wholesale Banking
o Wholesale banking can be referred to as the services provided by banks to
organisations like Mortgage Brokers, corporate clients, medium scale companies,
real estate developers and investors, international trade finance businesses,
institutional customers (such as pension funds & government agencies) and
services offered to other banks or financial institutions.
• Universal Banking
o The recommendation of the concept of Universal Banking was done by the R H
Khan committee.
o This is a type of banking in which banks are allowed to undertake all types of
financial activities regarding banking or development in accordance with the
statutory and other requirements of RBI, Government and related legal Acts.
o Universal Banking includes activities like accepting deposits, issuing credit cards,
investing in securities, merchant banking, foreign exchange operations, etc.
• Islamic Banking
o Islamic banking is a kind of banking activity which strictly follows the principles of
the Islamic law (Sharia) and its application practically through the development in
Islamic economics
o A better and more apt term for Islamic banking is Sharia Compliant Finance.
• Chain Banking:
o Chain banking is a type of banking which is a group of minimum 3 banks held
together by a group of people to carry out effective banking activities.
o Instead of having a holding company the bank functions independently.
o The revenue is maximised since there is no overlap of activities.

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• Unit Banking
o USA is where such type of banking was first introduced.
o In such a type of banking, all the operations are performed from a single branch.
o A customer having an account in a specified branch has to undergo all banking
activities through that branch.
o Examples are Regional Rural Banks and Local Area Banks.
o Unit Bank is a type of bank under which the banking operations are carried by a
single branch with a single office and they limit their operations to a limited area
o There may be many central banks and they control the unit banks operating in
their States.
o Collectively the central banks are called Federal Reserve Banks.
• Mixed Banking
o Mixed banking is a type of banking in which deposits and investment activities
take place simultaneously.
o Chain Banking is a form of banking when a small group of individuals control three
or more banks which are independently chartered.
o It can also be described as the dual functioning of investment banking and
commercial banking.
• Relationship Banking
o In such a type of banking, the major needs of the customers are understood by
the bank and accordingly banking services are provided to the individual.
o Banks get to know if the customer is credit worthy since they have to gather
information about its customers.
o Relationship banking is strategy used by banks to offer a variety of different
products, strengthen customer loyalty, and generate additional revenue.
• Correspondent Banking
o In more than 200 countries, this type of banking is prevalent and is considered the
most profitable way of doing business.
o In such a type of banking, the bank does not have a physical presence or any
limitations in the permission of operations.
o It acts as a banking agent for a home bank. (Correspondent Banking)
o Correspondent banks are financial institutions that act as an agent on behalf of
other financial institutions, usually foreign banks
o A Correspondent Bank is a financial institution that offers services to a customer
on behalf of any other bank or financial institution, usually in a foreign country.
o Correspondent Bank is a bank which link two banks of different stature or size.
o Many Indian banks act as correspondent banks for many foreign banks.

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• Indigenous Banks
o It refers to money lenders and Sahukars.
o The money lenders using their own funds and deposits mobilized from public,
grant loans to the needy people.
o They are more popular in villages and small towns.
o Usually, they act as traders and bankers simultaneously.
o In India, we have well known Indian communities such as Marwaris, Multani run
their indigenous banks.
o These banks are deals with Hundi
• Central / Federal / National Bank
o It is a leader of all the banks in a country. Every county has a central bank.
o The prime responsibility of a Central Bank is to regulate the banking system and
control monetary policy.
o These banks are called as banker to the bankers as they give financial
accommodation to commercial banks.
o They are non-profit making institutions and they also act as banker to the
government, issue currency notes, etc.
o They maintain foreign exchange reserves of the country and all the government
accounts are maintained with them.
o They help in money circulation in the economy and provide financial
accommodation to the government
o In India, Reserve Bank of India, in USA, Federal Reserve (a group of central banks),
in UK, Bank of England are the central banks.
• Exchange Banks
o These are also called as foreign exchange banks and they are incorporated outside
the country but carry out business in India.
o They provide foreign exchange subject to the rules and regulations of the country
in which they are operating.
o They also provide finance to exporters and letter of credit/guarantee to importers.
o They help in remitting of funds from one country to another country, discount
foreign bills, buy and sell gold silver, promote foreign trade.
o Examples of exchange bank include Bank of America, Hong Kong Bank, etc.
• Consumers Banks
o Operate only in advanced countries like USA and Germany.
o The primary objective of these banks is to provide loans to customers to purchase
consumer durables like Car, TV, Washing Machine, Furniture, etc.
o The consumers repay the loans in easy instalments.

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 • Shadow Banking
o The term Shadow Banking first came into an existence in 2007.
o Used this concept Economist Paul McCulley
o Investment funds, mortgage lenders, hedge funds are all deal with shadow
banking.
o The shadow banking system is a term for the collection of non-bank financial
intermediaries that provide services similar to traditional commercial banks but
outside normal banking regulations
o Shadow banking means financial intermediation outside the regulated banking
system.
o Shadow banking refers to non-bank financial intermediation activities taking place
outside the regulated banking system.
• Niche Banks
o Those banks which serve the needs of a specific demographic segment of the
population.
o They typically target a specific market or type of customer (just like small finance
banks).
o In India we have two categories of Niche Bank-
▪ Payments Banks
▪ Small Finance Banks
• Payments Banks
o It is a new model of banks conceptualised by the Reserve Bank of India (RBI).
o This type of bank can only accept (cannot lend) a limited amount of deposit.
o Currently, this amount is limited to Rs. 1 lakh per customer.
o These banks can also issue ATM cards
o They have no permission of issuing Credit Cards.
Miscellaneous points
• Largest public sector bank in India – State Bank of India
• Largest private sector bank in India – ICICI
• Largest foreign bank in India – Standard Chartered Bank
• Bank with more branches in India – State Bank of India
INDIAN FINANCIAL SYSTEM CODE (IFSC)
• Indian financial system code is an alphanumeric code
• IFSC have 11-digit codes
• The first 4 alpha characters representing the bank
• The last 6 numeric characters represent the branch.
• The 5th character is 0.

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FIRST BANKS
• First bank in India- Bank of Hindustan (1770)
• First Bank managed by Indians- Oudh Commercial Bank
• First Bank with Indian Capital- Punjab National Bank (Founder is Lala Lajpat Rai)
• First Foreign Bank in India – HSBC
• First bank to get ISO certificate – Canara Bank
• First Indian bank outside India –Bank of India
• First Bank to introduce ATM – HSBC (1987, Mumbai)
• First Bank to have a joint-stock public bank (Oldest) – Allahabad Bank
• First Universal bank – ICICI (Industrial Credit and Investment Corporation of India)
• First bank to introduce saving account – Presidency Bank (1833)
• First Bank to Introduce Cheque system – Bengal Bank (1833)
• First bank to give internet banking facility – ICICI
• First bank to sell mutual funds – State Bank of India
• First bank to issue credit cards - Central Bank of India
• First Digital Bank - Digibank
• First Rural Regional Bank (Grameen Bank) – Prathama Bank (by Syndicate Bank)
• First bank to get ‘in principle’ banking license – IDFC and Bandhan Bank
• First Bank to introduce merchant banking in India – Grind lays bank
• First bank to introduce blockchain technology – ICICI
• First bank to introduce voice biometric – Citi Bank
• First bank to introduce robot in banking service- HDFC

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NATIONAL ELECTRONIC FUND TRANSFER (NEFT)
• It is a nation-wide payment system.
• One can transfer funds to others though self-account.
• Applicable to both Account holders and Non-Account holders.
• Funds can be transferred through electronic media
• From July 10, 2017 settlements of fund transfer requests in NEFT system is done on half-
hourly basis.
• There are twenty-three half-hourly settlement batches run from 8 am to 7 pm on all
working days of week (Except 2nd and 4th Saturday of the month).
• Applicable for those customers, Corporates, Firms, whose bank is entitled with NEFT
payment system.
• There is no minimum or maximum limit while transferring through NEFT platform.
• If you have Bank account in any NEFT enabled branches, then you can transfer fund
through internet or bank branches directly.
• If you don’t have an account, then there are few norms you need to follow, RBI sets an
upper limit ceiling i.e. one can transfer up to Rs.50,000 per transaction.
• NEFT mode can also be used while transferring fund to Nepal under Indo- Nepal
Remittance Facility scheme. Here also RBI sets an upper limit ceiling i.e. one can transfer
up to Rs.50,000 per transaction.
• For these schemes, Banks charges as a service charge or processing fee for each NEFT
transactions.
• While transferring NEFT fund you to anyone you must have His/her Bank Accounts
Details like Account Number, Account Holders Name, IFSC code.
REAL TIME GROSS SETTLEMENT (RTGS)
• Processing of instructions starts at the same time
• Settlement of fund transfer occurs according to individual’s basis or it can be transferred
instantly. There is no such time slot.
• Funds can be transferred in Real-Time Basis.
• RBI sets a limit; one can transfer a minimum of Rs.2 Lakh
• The scheme is only applicable for those customers, Corporates, Firms, whose bank is
entitled with RTGS Payment platform system.
• Only Account Holders can enjoy the service. There is no provision to transfer funds for
Non-Account holders.
• The customer can transfer funds in Between 7AM to 6 PM
• As per RBI guidelines, Banks charges Rs.25 + Application time charge (Rs.5) A total of
Rs.30 for each transaction in-between Rs.2 lakh to Rs.5 lakh.
• However, Above Rs.5 lakh Bank charges Rs.50 + Application time charge

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IMMEDIATE PAYMENT SERVICES (IMPS)
• IMPS is an instant interbank electronic fund transfer service through mobile phones.
• This service is available 24x7 for a transaction between interbank.
• It doesn’t require any “batches”. Though IMPS offer Instant Transfer.
• To be able to transfer fund through IMPS route you must first register for the immediate
payment services with your bank.
• After successful registration, the bank will provide you “Mobile Money Identifier (MMID)
and Mobile Personal Identification number (MPIN).
• For transferring of funds, the Minimum & Maximum amount is to be Rs.1 and
Rs.2,00,000.
AADHAR ENABLED PAYMENT SYSTEM (AEPS)
• It is a payment system which uses Aadhar card number and individuals online UIDAI
authentication, which are linked to a customer's Bank account.
• A customer will have to register his/her Aadhar number to their existing bank account,
provided their bank is AEPS enabled.
• Through AEPS, the customer can withdraw or deposit cash, make the balance enquiry,
and transfer funds.
• The maximum amount of transaction per account per day is Rs.50,000.
• These transactions are normally conducted by Business Correspondents (BCs) service
centres.
MONEY TRANSFER SERVICE SCHEME (MTSS)
• It is a system of money transfer for transferring personal remittances from abroad to
beneficiaries in India.
• Through this only inward remittance into India are permissible.
• No outward remittance allowed.
• A maximum of Rs.50,000 can be remitted inwards as per the money value. And a
maximum of 30 transactions per the calendar year.
CHEQUE TRUNCATION SYSTEM (CTS)
• It is a Cheque clearing system.
• Clearinghouse sends the electronic image of the cheque and related information to the
paying branch to eliminate the flow of physical cheque.
• It speeds up the process of collection of cheques.

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RESERVE BANK OF INDIA
• RBI was established on 1st April ,1935 in accordance with the RBI act, 1934.
• It was established under the recommendations of the “Hilton Young Commission” also
known as “Royal Commission on Indian Currency and Finance”.
• Initially it was setup in Calcutta and permanently moved to Mumbai in 1937
• Initially the RBI was started with private shareholder’s fully paid up capital of Rs.5 crores.
• It also acted as central banking institute for Myanmar till 1948 and till 1947 for Pakistan.
• The RBI was nationalized on 1st January, 1949 in accordance with the RBI (Transfer to
Public Ownership) act, 1948.
• Its empowered RBI to act as central banking institution to control monetary policy of
Indian Rupee and to control, regulate, monitor, inspect banks in the country as
mentioned in the 2nd schedule of RBI act 1934.
SUBSIDIARIES OF RBI
• Deposit Insurance and Credit Guarantee Corporation (DICGC) was set up in 1978.
• National Agriculture and Rural Development Bank (NABARD) was set up in 1982.
• National Housing Bank was set up on 1988.
• Bhartiya Reserve Bank Note Mudran Private Limited (BRBNMPL) was set up in 1995.
ABOUT RBI
• First Governor of Reserve Bank of India (RBI) – Osborne Smith
• First Deputy Governor of Reserve Bank of India (RBI) – James B. Taylor
• Present Governor of RBI – Shaktikanta Das
• Present Deputy governor of RBI – Shri M. K. Jain, Shri B.P. Kanungo, Dr. Viral V. Acharya
and Shri N. S. Vishwanathan
• Established – 1st April 1935 under RBI Act 1934
• RBI Established on the recommendations of - Hilton Young commission.
• Headquarter – It is located at Mumbai
• Nationalisation of Reserve Bank of India (RBI) – In 1949 under banking Regulation Act
1949
• Zonal offices of RBI Located at – 4 Places, Namely Chennai, Kolkata, Mumbai & Delhi
• Total number of Regional Offices – 19
• Total number of sub-offices – 9, currently RBI has opened 2 more sub-offices at Aizawl
& Imphal (Capital city of Manipur)
• Each of these local boards consists of 5 members who represent regional interests, and
the interests of co-operative and indigenous banks
• Total number of Regional Offices in India – 22 mostly in states capital

26
THE COMPOSITION OF RESERVE BANK OF INDIA
• It has 2 Member from Ministry of Finance
• It has 5 Local Representative in Regional Offices
• It has 10 Board of Directors
FUNCTION OF RBI
• Monetary Authority
o Formulates, Implements & amp; monitors the credit policy
o It provides market stability
o It ensures the flow of credit to the productive sectors
• Supervisory Function
o To protect depositors’ interests
o Provide effective customer services
o Maintain public confidence
• The issue of Currency Notes
o RBI has the sole authority to issue currency notes in India
o They also have the power to destroy old notes
o Last time RBI launched new notes known as MG-2005 series
• Banker’s to other Banks or Banker’s Bank
o RBI lends money to other banks in time of need
o The other banks can borrow the money from each other or from the market, if
they failed everywhere then the last option is to borrow from RBI.
o For this specific reason, RBI is known as “Lenders of the Last Resorts”'
• Bankers to Government
o RBI act as a banker to the Government of India &amp; also, to the governments of
the constituent units of India’s federal system.
o The bank has the responsibility to transact all the banking business of the
Government of India on behalf of Government, like:
▪ Bank accepts money on account of the government
▪ Bank makes payment on behalf of the government, etc.
• Custodian of Foreign Reserves
o RBI has the power of custodian regarding foreign exchange
o RBI maintain the record of all transactions done in foreign exchange, also keep an
eye on CAD (Current Account Deficit)
• Promotional function
o RBI performs various promotional functions.
o They actively participate in Government various initiative like financial Inclusion,
Surgical strike on Black money, etc.

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MONITORY POLICY OF RBI
• Monetary policy also known as the credit policy
• Monetary policy is governed by RBI
• Monetary policy through both monetary and non-monetary measures influence savings,
investment, output, income & price level in the economy.
• The main aim of the monetary policy is Macro-Economic stability by maintaining price
stability and adequate flow of credit to the productive sectors of the economy
• RBI (Reserve bank of India) is to control inflation and liquidity in the economy.
• The Main important objectives of monetary policy:
o Price Stability
o Exchange stability
o Neutrality of Money
o Economic development

CASH RESERVE RATIO

• CRR is the minimum percentage of deposits with commercial banks that they need to
deposit with the central bank of RBI.
• Impact of increased CRR
o It is a quick fix to control inflation.
o By increasing CRR, commercial banks need to deposit more money with RBI.
o Thus, commercial banks left with less money.
o Less money with Commercial banks and people
o Lower demand for goods and services
o Lower prices
o Higher CRR simply sucks money from the economy.
• Impact of decreased CRR
o More money with Commercial banks
o More money with people
o Higher demand for goods and services
o Higher prices
o CRR should be aligned with supply and production levels.
o If people are producing more then they deserve to spend more.
o Higher demand for goods and services
28
STATUTORY LIQUIDITY RATIO
• This is the percentage of liabilities and time deposits that commercial banks need to
keep with them in form of cash, gold or government approved securities.
• Impact of increase in SLR
o Commercial banks need to keep more liquid funds
o Provides less loans to people
o Lower demand for goods and services
o Lower prices
• Impact on decrease in SLR
o Commercial banks need to keep less liquid funds
o Provides more loans to people
o Higher demand for goods and services
o Higher prices
REPO AND REVERSE REPO RATES
• Repo rate: It is the rate at which RBI lends money to commercial banks against securities
in case commercial banks fall short of funds.
• Reverse Repo Rate: Rate at which RBI borrows money from commercial banks.
• Impact: If commercial banks get more money, they will lend more money to people
which will lead more demand in economy. Thus, prices will increase.
BANK RATE
• It is a rate at which RBI lends money to commercial banks without any security.
• Impact: When bank rate is increased interest rate also increases which have negative
impact on demand thus prices increases.
MARGINAL STANDING FUNDING
• By this mechanism commercial banks can get loans from RBI for their emergency needs.
• Commercial banks can take loan only up to 1% of their liabilities and time deposits.
OPEN MARKET OPERATIONS
• Buying and selling government securities and bonds in order to manage liquidity in the
economy.
• Impact of purchasing securities
o More money in economy → More demand → Higher growth rate
• Impact of selling securities
o Less money in economy → Less demand → Lower prices

29
RESERVE SYSTEM
• The Reserve bank of India has the authority to issue currency.
• The current system of Indian government to issue notes is “Minimum Reserve System”.
• The minimum reserves to be maintained in the form of gold and foreign exchange should
consists of rupees 200 crore.
• Out this reserve, the value of gold to be maintained is rupees 115 crore.
• The issue of currency note is under the RBI Act of 1935
CLEAN NOTE POLICY
• RBI introduced the Clean Note Policy in 2001 in an order to increase the life of currency
notes.
• The main objective of this Clean Note Policy is to provide good quality currency notes
and coins to the citizens of our country.
• Also, the objective of this policy is to avoid the circulation of spoiled notes in the
economy.
• According to this policy packets of notes are not stapled with a pin while the banding of
such packets should be done by paper or polyethene bands so as to increase the life of
the currency notes
• The note packets can also be bound by rubber bands in order to minimise the damage
of currency notes.
• Banks should sort the notes in two parts like re-issuable and non-issuable.
• Banks are instructed to provide clean currency in exchange of spoiled notes.
• RBI also provided the guideline for citizens of a country which says that avoid spoiling
notes by oil, water etc. Do not write anything on the currency notes
• According to RBI, the clear objective of providing good clean quality notes to the public
by the banks is provided under the section 35A of banking regulations act 1949
• If the bank does not follow this then that bank may be punishable and the license of
such bank can be cancelled.
• To stop such spoiled currency RBI developed Currency Verification and Processing
System (CVPS) to speed up this process
• CVPS something is written on watermark then this machine automatically rejects such
note.
• This CVPS machine is capable of processing about 50,000 to 60,000 pieces of spoiled
notes per hour.

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BASEL NORMS
• Basel is a city in Switzerland which is also the headquarters of Bureau of International
Settlement (BIS)
• The Basel Committee on Banking Supervision is an international banking regulatory
committee formed to develop banking supervisory regulations.
• The Chairman of the BCBS is Stefan Ingves, Governor of the central bank of Sweden.
• BIS fosters co-operation among central banks with a common goal of financial stability
and common standards of banking regulations.
• The Bank for International Settlements (BIS) established on 17 May 1930, is the world's
oldest international financial organisation.
• There are two representative offices in the Hong Kong and in Mexico City
• In total BIS has 60 member countries from all over the world and covers approx. 95% of
the world GDP.
• The set of the agreement by the Basel Committee on Banking Supervision (BCBS), which
mainly focuses on risks to banks and the financial system are called Basel accord.
• India has accepted Basel accords for the banking system.
• Basel Accord has given us Three Basel Norms
• The predecessor of BASEL III
• The successor of BASEL I

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BASEL-I
• India adopted Basel 1 guidelines in 1999.
• In 1988, The Basel Committee on Banking Supervision (BCBS) introduced capital
measurement system called Basel capital accord, also called as Basel 1.
• It focused almost entirely on credit risk
• It defined capital and structure of risk weights for banks.
• BASEL committee on Banking supervision (BCBS) identified two risks are as follows:
o Credit Risk.
o Market Risk
• BCBS sets Banks should maintain a minimum capital adequacy requirement of 8% of risk
assets. But Reserve Bank of India in India fixed it at 9%.
• Tier -1: Capital is the core capital: Which can be easily liquidated like Gold, Shares
&amp; bonds. It is also termed as Core capital.
• Tier-2: Capital is the subordinate capital: Which cannot be easily liquidated like fixed
assets i.e. lands, buildings, etc. It can be termed as subordinate capital.
• Tier-3: Which can never be liquidated like CRAR, SLR
• Tits Bits
o CRAR – Capital to risk waited assets ratio
o CAR- Capital adequate ratio
o RWA- Risk Weighted Assets
• CAR: Now, Total Capital = Tier 1 Capital + Tier 2 Capital
BASEL-II
• In 2004, Basel II guidelines were published by BCBS
• It has mainly 3 pillar concepts
o Minimum Capital Requirement (Addressing Risk)
o Supervisory Review
o Market discipline
• In that meeting, BCBS made the BASEL-I rules compulsory. They also introduced 3 pillar
concepts to support the risk management.
• Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
• Banks were needed to develop and use better risk management techniques
• The three types of risk are- operational risk, market risk, capital risk.
• Banks need to mandatory disclose their risk exposure, etc to the central bank.
• Basel II norms in India and overseas are yet to be fully implemented.
• Two Supervisory Review:
o ICAAP – Internal Capital adequacy &amp; assessment process (By the Bank Itself)
o SREP – Supervisory review 7 evaluation process (By the Central Bank)

32
BASEL III
• The third meeting was held in 2010 in that meeting BCBS introduce extra precautionary
measures.
• These guidelines were introduced in response to the financial crisis of 2008.
• In 2008, Lehman Brothers collapsed in September 2008, the need for a fundamental
strengthening of the Basel II framework had become apparent.
• Basel III norms aim at making most banking activities such as more capital-intensive.
• The guidelines aim to promote a more resilient banking system by focusing on four vital
banking parameters viz. capital, leverage, funding and liquidity.
• Presently Indian banking system follows Basel II norms.
• In India BASEL-III was implemented in 2013.
• RBI has full implementation of the Basel III capital regulations in March 31, 2019.

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NON-PERFORMING ASSETS (NPA)
• All those assets which don't generate regular income are known as NPA.
• NPA are also termed as bad loans or defaults
• Non-Performing Assets are loans given by a Bank or financial intuitions where the
borrower defaults or delays interest or principal payments.
• According to RBI, any loan repayment which is delayed beyond 90 days in continuation
has to be identified as an NPA.
• Sub-standard assets, Doubtful assets and Loss assets are NPA
• Standard assets
o Assets which are generating regular income to the bank
o Are those assets which are ‘regular’ and have no defaulting in instalment
payments – they are the good assets!
• Sub-standard assets
o Has been classified as NPA for a period not exceeding 12 months
o An asset which is overdue for a period of more than 90 days but less than 12
months
• Doubtful assets:
o An asset which is overdue for a period of more than 12 months.
o Are those assets which has remained sub-standard for more than 12 months
• Loss assets:
o Loss assets are those which have been ‘classified’ as loss assets by the
Bank/Internal Auditors of the Bank/External or Statutory Auditors/RBI inspectors
SARFAESI Act, 2002
• Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002
• Objectives
o The SARFAESI Act provides for setting up of asset reconstruction companies for
acquiring financial assets including NPAs which helps in clearing balance sheet
o Efficient or rapid recovery of non-performing assets (NPAs) of the banks and FIs.
o Allows banks and financial institutions to auction properties when borrower fail to
repay their loans.
• To enforce the security as aforesaid, the following conditions need to be fulfilled
o The borrower has committed a default in payment & account is classified as NPA.
o The secured creditor has given a notice in writing to the borrower to discharge his
liabilities within 60 days from the date of receipt of such notice.
o The borrower has failed to comply with the said notice.
o The amount due from the borrowers in more than Rs. 1 lakh.

34
 TRANSACTIONS LIEN SET-OFF

SUBJECT MATTER Goods and Securities Bank Deposit

Creditor/debtor and
RELATIONSHIP Creditor and Debtor
Creditor/debtor simultaneously

If available for time barred loans Yes, If otherwise lawful and due Yes, If otherwise lawful and due

Receipt of garnishee or attachment Right can be exercised for lawful

Not applicable
order and due debts

Possession of deposit receipt or

POSSESSION With the bank is must
pass book not necessary with bank

It is available by treating the It is available by treating the

Account with different branches
branches as one bank branches as one bank

SINKING FUND
• A sinking fund is created by the company to revoke the debt.
• This sinking fund is used to make payments to the investors when a company redeems
the debt securities or a preferred stock.
• Example: If a company has issued a bond with a maturity of 10 years, so to pay the bond
amount after 10 years a company starts putting some money from the starting on a
regular basis into a sinking fund so at the end of 10 years company is able to pay on time
• A sinking is used to pay the liability of a company that will come in future.
• A sinking is used to redeem burden of a company, to replace fixed assets, a redemption
of stock etc.
• In sinking fund, money is regularly added constantly to assure the investor's confidence.
• A sinking fund is a collection of money done by the company to write off the debt.
• A sinking fund is kept aside by setting a revenue over a certain period of time for the
future expense like capital expense repayment of debt etc.
• A sinking fund is generally used when company issue a bond.
• A company has to pay an interest on the issued bonds to the bondholders.
• A company anyhow manage to pay interest from the profit but the time comes when a
company has to pay back the principal amount, at that time company use a sinking fund.
• So, the main purpose of a sinking fund is to pay the debt in time.

35
CAPITAL MARKET INSTRUMENTS
Financial instruments mean documents that evidence the claims and income or asset
SECURITIES
• ‘Securities’ is a general term for a stock exchange investment.
• Securities are generally classified into ownership securities and creditorship securities.
• Equity shares and preference shares are ownership securities. They are also known as
capital stock.
• Creditorship securities are bonds, debentures etc. They are referred to as debt capital
• Securities Contract (Regulation) Act, 1956 defines securities as to include:
o Shares, Scripts, Stocks, Bonds, Debentures.
o Government Securities.
o Such other instruments as may be declared by the Central government to be
securities.
o Rights or interests in securities and
o Derivatives
o Securitized instruments
EQUITY SHARES
• Equity Shares are the ordinary shares of a limited company.
• It is an instrument, a contract, which guarantees a residual interest in the assets of an
enterprise after deducting all its liabilities- including dividends on preference shares.
• Equity shares constitute the ownership capital of a company.
• Equity holders are the legal owners of a company.
• Equity shares are regarded as the cornerstones of the capital structure of a company
• Advantages of Equity Shares:
o Permanent Capital
o No Fixed Charge on Income
o Base for Further Borrowings
o Trading on Equity is Possible
o Voting Rights
• Blue Chip Shares
o Blue Chip Companies are growth-oriented companies showing signs of expansion,
diversification, modernization of technology etc.
o Blue chips are of two types viz. emerging blue chip and established blue chips.
o Emerging blue-chip companies are those which are turn-around companies and
exhibit potentiality to grow and expand in sales and in net profit.
o Established blue chips are those companies who are leaders in the Industry like
Reliance, Raymond’s, TISCO etc.
36
 • Equity Shares with Detachable Warrants:
o Fully paid up shares can be issued with detachable warrants.
o This will enable the warrant holder to apply for specified number of equity shares
at determined price.
o Detachable warrants are registered separately with the stock exchange and traded
separately.
Types of Equity shares
1. Authorized Share Capital
• It is the maximum amount of capital which a company can issue.
• The companies can increase it from time to time.
• For that we need to comply with some formalities also have to pay some fees to
the legal bodies.
2. Issued share capital: It is that part of authorized capital which the company offers to the
investors.
3. Subscribed Share Capital: It is that part of issued capital which an investor accepts and
agrees upon
4. Paid-up capital is the amount of money which a company actually invests in the
business.
5. Rights Shares
• These shares are those which a company issues to its existing shareholders.
• The company issues such kind of shares in order to protect the ownership rights
of the existing investors
6. Bonus Shares: When the company issues share to its shareholders in the form of a
dividend, we shall call them bonus shares.
7. Sweat Equity Share
• Sweat equity shares are issued to exceptional employees or directors of the
company for their exceptional job in terms of providing know-how or intellectual
property rights to the company.
• Sweat Equity Shares are those which are issued by companies to their employees
or directors as a consideration

37
PREFERENCE SHARES
• The Companies Act (Sec, 85), 1956 describes preference shares as those which Carry a
preferential right to payment of dividend during the life time of the company and Carry
a preferential right for repayment of capital in the event of winding up of the company.
• Preference shares have the features of equity capital and features of fixed income like
debentures.
• They are paid a fixed dividend before any dividend is declared to the equity holders.
• Features of Preference Shares
o Priority to Dividend
o Cumulative Nature
o Non-Participatory
o Preference as to Assets on Winding Up
o Convertibility
o Non-Voting
Types of Preference Shares
1. Redeemable Preference Shares
• These shares are redeemed after a given period.
• A company may opt for redeemable preference shares to avoid fixed liability of
payment, increase the earnings of equity shares, to make the capital structure
simple or such other reasons.
• Such shares can be repaid by the company on certain conditions, viz.;
▪ The shares must be fully paid up.
▪ It must be redeemed either out of profit or out of reserve fund for the
purpose.
▪ The premium must be paid if any.
2. Irredeemable Preference Shares: These shares are not redeemable except on the
liquidation of the company.
3. Convertible Preference Shares
• Such shares can be converted to equity shares at the option of the holder.
• Hence, these shares are also known as quasi equity shares.
• Conversion of preference shares in to bonds or debentures is permitted if
company wishes.
4. Non-Convertible preference shares: These are those shares which do not carry the right
of conversion into equity shares.

38
5. Participating Preference Shares
• Participating preference shares are those shares which are entitled in addition to
preference dividend at a fixed rate, to participate in the balance of profits with
equity shareholders after they get a fixed rate of dividend on their shares.
• The participating preference shares may also have the right to share in the surplus
assets of the company on its winding up.
• Such a right may be expressly provided in the memorandum or articles of
association of the company.
6. Non-participating preference shares
• Non- participating preference shares are entitled only to a fixed rate of dividend
and do not share in the surplus profits.
• The preference shares are presumed to be non-participating, unless expressly
provided in the memorandum or the articles or the terms of issue.
7. Cumulative Preference Shares: If the shares are cumulative preference shares, the
dividends are accumulated and therefore paid before anything paid to equity
shareholders.
8. Non-cumulative preference shares: If a company does not pay the dividend in the
current year, the claim of preference shareholder is lost to that extent.
9. Preference Shares with Warrants
• This instrument has certain number of warrants. The holder of such warrants can
apply for equity shares at premium.
• The application should be made between the third and fifth year from the date of
allotment.
10. Fully Convertible Cumulative Preference Shares
• Part of such shares, are automatically converted into equity shares on the date of
allotment.
• The rest of the shares will be redeemed at par or converted in to equity after a
lock in period at the option of the investors.

39
DEBENTURES
• Debenture is an instrument under seal evidencing debt.
• The essence of debenture is admission of indebtedness.
• It is a debt instrument issued by a company with a promise to pay interest and repay the
principal on maturity.
• Debenture holders are creditors of the company.
• Sec 2 (12) of the Companies Act, 1956 states that debenture includes debenture stock,
bonds and other securities of a company.
Types of Debentures
1. Secured Debentures
• Secured Debentures also called Mortgage Debentures
• Debentures which create a charge on the property of the company is a secured
debenture.
• The charge may be floating or fixed.
• The floating charge is not attached to any particular asset of the company. But
when the company goes into liquidation the charge becomes fixed.
• Fixed charge debentures are those where specific asset or group of assets is
pledged as security.
2. Unsecured Debentures
• These are not protected through any charge by any property or assets of the
company.
• They are also known as Simple or naked debentures.
• Well established and credit worthy companies can issue such shares.
3. Redeemable debentures are those debentures which will be repaid by the company at
the end of a specified period or in instalments during the lifetime of the company.
4. Irredeemable debentures are those which are repaid only when the company goes into
liquidation.
5. Bearer Debentures
• Which are payable to bearer and whose names do not appear in the register of
debenture holders are known as “Bearer Debentures”.
• Coupons for interest are attached to the document and interest is paid to the
holders as it falls due.
• Bearer debentures are those which are transferable by mere delivery.
• In this case, the company does not keep any record of the debenture holders.

40
 6. Registered Debentures
• In the case of registered debentures, the name and address of the holder and date
of registration are entered in a book kept by the company.
• The holder of such a debenture bond has nothing to do except to wait for interest
payment which is automatically sent him on every payment date.
• When such debentures are registered as to principals only, coupons are attached.
• The holder must detach the coupons for interest payment and collect them as in
the case of bearer bonds.
7. Convertible debentures are those which can be converted into equity shares either
wholly or in part at the option of the debenture holder.
8. Non-convertible debentures are those which cannot be converted into equity shares.
BONDS
• Bonds are debt instruments that are issued by companies/governments to raise funds
for financing their capital requirements.
• By purchasing a bond, an investor lends money for a fixed period of time at a
predetermined interest (coupon) rate.
• Bonds have a fixed face value, which is the amount to be returned to the investor upon
maturity of the bond.
• During this period, the investors receive a regular payment of interest, semi-annually or
annually, which is calculated as a certain percentage of the face value and known as a
‘coupon payment.
• Bonds can be issued at par, at discount or at premium.
• A bond, whether issued by a government or a corporation, has a specific maturity date,
which can range from a few days to 20-30 years or even more.
• Both debentures and bonds mean the same. In Indian parlance, debentures are issued
by corporates and bonds by government or semi-government bodies

41
The different types of bonds
1. Zero coupon bonds
• No interest (coupon) is paid to the holders.
• The difference between issue price (discounted price) and redeemable price (face
value) itself acts as interest to holders.
• These types of bonds are also known as Deep Discount Bonds.
• The zero-coupon bonds are issued at a price lower than the face value
2. Mortgage Bonds
• This is the common type of bond issued by the corporates.
• Mortgage bonds are secured by physical assets of the corporation such as their
building or equipment
3. Step-Up Bonds
• A bond that pays a lower coupon rate for an initial period which, then increases to
a higher coupon rate
• These are bonds where the coupon usually steps up after a certain period.
• They may also be designed to step up not once but in a series too
• These are also called as a dual coupon or multiple coupon bonds.
4. Floating rate bonds are so called because they have a coupon which is not fixed but
rather linked to a benchmark.
5. Plain vanilla bond
• A plain vanilla bond is a bond without any unusual features
• It is one of the simplest forms of bond
• It is also known as a straight bond or a bullet bond
• Coupon rate, Time of coupon payment, Date of maturity, Face/Par value are fixed
6. Inverse floaters: In simple words, if the benchmark rate goes up; the coupon rate comes
down and vice versa.
7. A participatory bond is a bond whereby the issuer promises a fixed rate but the coupon
cash flow may increase if the profit/ income levels of the company rise
8. Income bonds are similar to participatory bonds however these types of bonds do not
have a reduction in interest payments if income/ revenue reduces.
9. Extendable bonds are bonds that allow the holder to enjoy the right to extend the
maturity if required
10. Yankee bonds: A dollar-denominated bond issued in the US by an issuer who is outside
the US is called as Yankee bond.
11. Samurai bond: A yen-denominated bond issued in Japan by an issuer who is outside
Japan is called as Samurai bond.
12. Shogun Bonds: A non-Yen denominated bond issued in Japan by an issuer who is
outside Japan is called as Shogun bond.

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 BASIS FOR
BONDS DEBENTURES
COMPARISON

Meaning A bond is a financial A debt instrument used to

instrument showing the raise long term finance is
indebtedness of the issuing known as Debentures.
body towards its holders.

Collateral Yes, bonds are generally Debentures may be secured

secured by collateral. or unsecured.

Interest Rate Low High

Issued by Government Agencies, Companies

financial institutions,
corporations, etc.

Payment Accrued Periodical

Owners Bondholders Debenture holders

Risk factor Low High

Priority in repayment First Second

at the time of
liquidation

GOVERNMENT SECURITIES (Long Term G- Secs)

• Tradable instruments issued by the central government or state governments.
• They are both short term (T- bills) and long term (Dated bonds or Govt bonds)
• Do not carry any risk of default and are hence called 'risk-free gilt-edged securities'.
• The maturity of these securities can be up to 30 years.
• Floating Rate Bonds carry variable interest rates with fixed percentage pegged to some
benchmark rate.
• Capital Indexed Bonds carry a fixed interest rate over wholesale price index or consumer
price index.
• Inflation Indexed Bonds carry interest rates linked to inflation rates so that real return
is positive from investments.

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MUTUAL FUNDS
• Mutual funds raise money from the public, pool them and invest in stock market.
• They are regulated by SEBI.
• Structure of a mutual fund is as follows:
• Sponsor - the person who alone or in association with another organisation establishes
a mutual fund.
• Trust - It is registered as a trust according to provisions of Indian Trust Act, 1882 (for
private trusts)
• Trustee -a corporate body which safeguards the interests of unit holders
• Custodian - A bank or a financial institution registered with SEBI which holds and
safeguards the securities owned within a mutual fund. E.g. SBI is the custodian of SBI
mutual fund.
HEDGE FUNDS
• A pooled investment which is professionally administered by a firm.
• They invest in diverse markets and use various investment styles.
• They are comparatively more risk prone, aim at faster returns and generally avoid
regulatory oversight.
• Available only to certain investors and can't be sold to general public.
• They are a form of Alternate Investment Funds (AIFs).
ANGEL INVESTORS
• An individual who provides capital for a business starts up.
• Usually, the investment is in exchange for convertible debt or ownership equity.
• They invest their own money, unlike venture capitalist who invests public money.
• AIs can register themselves as AIFs as per SEBI.
• Minimum investment should be Rs 25 lacs.
EXCHANGE TRADED FUNDS (ETFS)
• These are index funds listed and traded on stock exchanges.
• They comprise of a basket of stocks that has a composite index and the value of that
depends on underlying stocks.
• The major benefit is that you can invest in a diverse portfolio with the simplicity of
trading a single stock.
• ETFs are increasingly becoming a popular investment option throughout the globe

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CHIT FUNDS
• An arrangement that a group of people arrive at to contribute money in a manner at
periodic intervals into a kitty.
• A member can withdraw that money through a lucky draw, auction or other ways.
• In Rural India, Tier2 and Tier3 cities due to under penetration of banking services.
• Chit funds are established under Central chit funds act, 1982.
• An office "Registrar of Chit funds' in every state monitors their operations.
• The concept of mutual funds was found in Belgium.
• A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds,
or other securities.
• A mutual fund is a collection of stocks, bonds, or other securities.
• When you buy a mutual fund, you own the share of the mutual fund.
• The price of each mutual fund share is called its NAV or net asset value
• All the mutual funds are registered with SEBI
• Unit Trust of India is one of the public sector mutual funds operating from 1964
• When the units are sold and redeemed at any time on-going basis at the price
determined by the fund’s Net Assets Value (NAV) is called as open-ended mutual fund.
These mutual funds have no fixed maturity periods
• Closed ended mutual funds have fixed maturity period ranging from two to 15 years.
The units of closed ended mutual funds are not repurchased or redeemed by mutual
funds before the maturity period.
• Mutual fund investments which are reinvested in highly growth-oriented equity shares
are called as growth oriented mutual fund
• Balanced mutual fund is a combination of mutual fund investment in company
securities as well as the government bonds
• When the mutual fund consists of a particular region or a country is called Regional
Mutual Fund and it is also called as off shore mutual fund.

45
VENTURE CAPITAL
• It is a long-term financial assistance provided to projects, which are established to
introduce new products, inventions, idea and technology.
• Venture capital finance is more suitable to risky oriented business which consists of
huge investment and provides results after 5 to 7 year.
• The term Venture Capital fund is usually used to denote Mutual funds or Institutional
investors
• They provide equity finance or risk capital to little known, unregistered, highly risky,
young and small private business, especially in technology oriented and knowledge
intensive business.
• Venture Capital termed as long-term funds in equity or semi-equity form to finance hi-
tech projects involving high risk and yet having strong potential of high profitability.
• 1995 finance bill define Venture Capital as long-term equity investment in novel
technology-based projects with display potential for significant growth and financial
return.
• Venture Capital consists of high risk and high return-based financing.
• Venture Capital financing is equity and quasi equity financing instruments
• Venture Capital provides moderate interest-bearing instruments.
• Venture Capital reduces the financial burden of the business concern at the initial stage.
• Venture Capital is suitable for risky oriented and high technology-based industry
• ICICI Venture Capital is the first Venture Capital Financing in India. It was started in 1988
by the joint venture of ICICI and UTI.
• The UTI launched Venture Capital Unit Scheme (VECAUS-I) to raise finance in 1990.
• ANZ Grindlays Bank has set up India’s first private sector Venture Capital fund.

46
SOVEREIGN GOLD BOND SCHEME
• Govt Issues Sovereign Gold Bond Scheme 2019-2020
• These are bonds issued on payment of money and are linked to price of gold which earns
you additional income.
• To offer a discount of ₹50 per gram less than the nominal value
• The issue price of Gold Bond will be ₹3,393/- per gram of gold.
• The Bonds shall bear interest rate of 2.50% (fixed rate) per annum on the nominal value
• The Bonds shall be issued in the form of Government of India Stock in accordance with
section 3 of the Government Securities Act, 2006.
• The Bonds shall be eligible for conversion into de-mat form.
• Minimum investment in the Bonds shall be one gram
• Maximum limit of subscription per fiscal year of 4 kg for individuals and Hindu Undivided
Family (HUF)
• 20 kg for trusts and similar entities notified by the government from time to time
• Payment shall be accepted in Indian Rupees through cash up to a maximum of ₹ 20,000/-
or Demand Drafts or Cheque or Electronic banking
• The Bonds shall be repayable (Redemption) on the expiration of eight years from the
date of issue of the Bonds.
• The capital gains tax arising on redemption of SGB to an individual has been exempted.
• Subscription for the Bonds may be made in the prescribed application form (Form ‘A’)
• The Receiving Office shall issue an acknowledgment receipt in Form ‘B’ to the applicant.
• The investors will be issued a Holding Certificate (Form C).
• Nomination of and its cancellation shall be made in Form ‘D’ and Form ‘E’
• The Bonds issued in the form of Stock Certificate shall be transferable by execution of
an Instrument of transfer as in Form ‘F’

47
SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATION (SWIFT)
• SWIFT provides a network that helps financial institutions worldwide to send and receive
information about financial transactions in a secure and reliable environment.
• SWIFT is a standard format of Business identifier codes approved by the International
Organization for Standardization (ISO).
• The SWIFT secure messaging network is run from two redundant data centers one in the
United States and one in the Netherland
• These two centers share information in real-time basis.
• A set of connection software and services allowing financial institutions to transmit
messages over SWIFT network.
• There are four major SWIFT services. They are
o Securities
o Treasury & Derivatives
o Trade Services
o Payments & Cash Management
• Swift Code is a standard format of Bank Identifier Codes (BIC)
• Business Identifier Codes (BIC) are also known as SWIFT codes
• The Swift code consists of 8 or 11 characters. When 8-digits code is given, it refers to the
primary office
o First 4 characters - bank code (only alphabets)
o Next 2 characters - ISO 3166-1 alpha-2 country code (only alphabets)
o Next 2 characters - location code (letters and digits)
o Last 3 characters - branch code, optional (letters and digits)
o The last three codes are 'XXX' for primary office.

48
MONEY MARKET INSTRUMENTS
• The short-term financial market is known as money market
• Chakravarthy committee (1985) for first time underlined the need of an organised
money market
• Vahul Committee (1987) laid the blueprint for that.
• RBI regulates money market in India vide powers vested in it by virtue of Sections 45K,
45L and 45W of the RBI Act 1934
• RBI regulates the money market through the following ways:
o Specifying market players and their eligibility for different products
o Setting prudential limits for overall transactions
o Setting up of Self-regulatory bodies
o Setting up of support systems for dealings and settlements
INSTRUMENTS OF MONEY MARKET
BANK FIXED DEPOSITS (FDs)
• Scheduled Commercial Banks (SCBs) and Co-operative banks accept term deposits for a
period of 7 days and above.
• The rates of interest on such deposits vary from bank to bank.
• Deposits are issued by bank branches.
GOVERNMENT SECURITIES (Short Term G- Secs)
• Government Securities are securities issued by the Government for raising a public loan
or as notified in the official Gazette.
• G-secs are sovereign securities mostly interest-bearing dated securities which are issued
by RBI on behalf of Govt. of India (GOI).
• GOI uses these borrowed funds to meet its fiscal deficit, while temporary cash
mismatches are met through treasury bills of 91 days.
• G-secs consist of Government Promissory Notes, Bearer Bonds, Stocks or Bonds,
Treasury Bills or Dated Government Securities
CASH MANAGEMENT BILLS (CMBS)
• It's a comparatively new short-term instrument issued by RBI on behalf of Govt.
• Issued to meet temporary mismatches in cash flow of Govt.
• They resemble T-bills in character but are issued for less than 91 days only.

49
CALL MONEY
• Borrower and Lender
o Call Money is the short-term finance raised by commercial banks as inter-bank
transactions with an aim to maintain the cash reserve ratio.
o It is also known as inter-bank call money market as majority of the transactions
take place only between banks
o Mutual funds, scheduled commercial & cooperative banks act as both borrowers
and lenders.
o LIC, GIC, NABARD, IDBI act only as lenders.
• Tenure
o Interbank market where funds are borrowed and lent for 1 day or less.
o Under call money market, funds are lent overnight basis.
NOTICE MONEY
• If money is borrowed or lend for period between 2 days and 14 days it is known as
Notice Money.
• If >1 day and up to 14 days, it is called notice money.
• The participants are banks & all other Indian Financial Institutions as permitted by RBI.
TERM MONEY
• It refers to borrowing/lending of funds for period between 15 days and one year.
COMMERCIAL BILLS
• Commercial Bill is a short-term, negotiable, self-liquidating bill of exchange or trade bill
accepted by a commercial bank for the purpose of discounting.
• The trade bills can be discounted with a bank before the maturity of the bill.
• Tenure
o The maturity period of the bills varies from 30 days, 60 days or 90 days,
• Borrower
o Negotiable instruments which are issued by all India FIs, NBFCs, SCBs, Merchant
banks & Mutual funds.
o They are issued to meet the working capital requirements of business firms.
• Lender
o They are issued by business firms to its buyers against goods sold on credit.
o Drawn by seller on the buyer (buyer gives seller), hence also called trade bills.

50
COMMERCIAL PAPER
• It is a promissory note introduced in the year 1990
• CPs can be issued in the form of a promissory note (Unsecured)
• It can also be issued in the dematerialized form.
• Its usage is limited to only blue-chip companies.
• Borrower
o Well established companies are the borrowers through issue of CPs.
o They are joint stock companies whose listed on a recognized stock exchange
o Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are
eligible to issue CP
• Lenders
o The buyers of CPs are other joint stock companies, public sector companies and
corporations, banks etc.
o Insurance companies and term-lending institutions invest in long-term securities.
Therefore, they seldom invest in CPs.
o However, non-corporate bodies, non-resident Indians (NRIs) and foreign
institutional investors do invest in CPs.
• Net worth of Issuing Company
o The net worth of the company (capital + reserves) not be less than Rs.4 crore.
o The working capital limit of the company also be not less than Rs.4 crore.
• Denomination of CPs
o The minimum denomination for a single investor is Rs.25 lakh.
o Thereafter, it should be in multiples of Rs.5 lakh.
• Maturity
o Maturity period is between 7 days up to 1 year from date of issue.
o CPs of 3 months maturity are popular.
o CPs of 30 days are also gaining popularity.
• Issue Price
o The face value is the maturity value.
o The issue price is less than the face value. It is issued at a discount to its face value
o The discount rate can be freely decided by the issuing company.
o The subsequent discount is decided by the secondary market.
• Negotiability
o CP is a negotiable instrument.
o It is freely transferable and payable to bearer.
• Credit rating
o Credit rating should be obtained from any of the credit rating agencies like CRISIL,
ICRA, CARE or Fitch.
o The rating should not be less than P2 from CRISIL and A2 from ICRA.
51
TREASURY BILLS
• TB is a money market instrument issued by the central bank on behalf of the government
to borrow for the government’s short-term financial needs.
• It is similar to a bill of exchange
• It includes the interest component
• The face value represents its maturity value and it is sold at the point of issue at a lesser
price.
• T-bills are sovereign zero risk instruments.
• State govt cannot issue T-bills.
• They are issued by Market Stabilization Scheme (MSS).
• They are available in both Primary and Secondary market.
• TBs are eligible securities for maintenance of statutory liquidity ratio and Repo rate
• TBs are very important for the operation and development of money market
• They are also called as Zero-Coupon Bonds.
• Borrower
o The borrower is the Central Government.
o RBI issues the TBs on behalf of the government
• Investors
o Any person in India including Individuals, Firms, Companies, Corporate bodies,
Trusts and Institutions can purchase Treasury Bills.
o Eligible participants to invest are the banks, insurance companies like LIC, GIC etc.,
o NABARD and UTI, corporates and Foreign Institutional Investors (FII).
• Tenure
o The tenure is 14 days, 91 days, 182 days or 364 days.
o The RBI introduced different tenures at different points of time.
o The 91-day TB’s discount rate is the benchmark interest rate for the money
market.
• Denomination
o Available for a minimum amount of Rs 25000 or in multiples of that.

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THE CERTIFICATE OF DEPOSIT (CDs)
• In India, the RBI permitted banks to issue CDs from June, 1989.
• CD is a negotiable certificate issued by a bank on the receipt of a large deposit.
• It is like a fixed deposit receipt issued by the bank on the receipt of a deposit.
• The ordinary FD receipt is neither negotiable nor transferable.
• It is only assignable
• FD is not subject to restrictions like minimum amount, tenure etc
• Borrower
o Issued by scheduled commercial banks and other financial institutions.
o RRBs and local area banks cannot issue CDs.
o On receiving the deposit, the banks issue the negotiable receipt which can be
transferred or sold in the secondary market.
• Investors
o The investors are generally joint stock companies, institutions, high net-worth
individuals or any other funds.
o The purpose is to park the funds generally for a period of three months
• Tenure
o The tenure is usually between 3 months to one year.
o CDs issued by banks range from 3 months, 6 months and 12 months.
o The common tenure is three months.
o Financial Institutions are allowed to issue CDs for a period between 1 year and
up to 3 years.
• Denomination of CD
o The minimum denomination was Rs.1 crore and in multiples of Rs.5 lakh
o Later on, it was modified as a minimum denomination of Rs.10 lakh and multiples
of Rs.5 lakh thereafter.
• Issue price
o Issued at a discount to face value, the discount rate is negotiated between issuer
and investor.
LIBOR
• Developed and launched by British Bankers Association in the 1980s
• Average interest rate at which leading banks borrow or lend, estimated in London.
• Approximately $350 trillion funds are tied to LIBOR as per estimates.
MIBOR
• Developed and launched by NSE in 1998.
• It is the weighted average interest rate at which banks/institutions in Mumbai lend in
the call money market.
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FINANCIAL INSTITUTIONS

54
DEVELOPMENT FINANCIAL INSTITUTION
• Development Banks or Development Financial Institutions (DFIs) were established
mainly to provide long-term capital for industry and agriculture.
• Category I: All India Developmental Financial Institutions
o Industrial Finance Corporation of India (IFCI)
o Industrial Credit Investment Corporation of India (ICICI)
o Industrial Development Bank of India (IDBI)
o Small Industries Development Bank of India (SIDBI)
o Industrial Investment Bank of India (IIBI) or
o Erstwhile Industrial Reconstruction Bank of India (IRBI)
• Category II: State Level Financial Institutions
o State Financial Corporations (SFCs)
o State Industrial Development Corporations (SIDCs)
• Category III: Specialized Financial Institutions
o Export and Import Bank of India
o Risk Capital and Technology Finance Corporation Ltd (RCTC)
o Technology Development and Information Company of India Ltd. (TDICI)
o Shipping Credit and Investment Company of India Ltd. (SCICI)
o Tourism Finance Corporation of India Ltd. (TFCI)
o Housing and Urban Development Corporation of India (HUDCO)
o Housing Development and Finance Corporation (HDFC)
• Category IV: Agricultural and Micro Financial Institutions
o National Bank for Agricultural and Rural Development (NABARD)
o Micro Financial Institutions (MFIs)
• Category V: Investment Institutions
o Unit Trust of India (UTI)
o Life Insurance Corporation (LIC)
o General Insurance Corporation (GIC)

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INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)
• The first development bank in India was set up in July, 1, 1948 by passing a special Act
as Industrial Finance Corporation of India Act 1948 in the parliament
• The share capital was contributed by Reserve Bank of India, scheduled banks. Insurance
companies, investment trust and co-operative banks
• Functions:
o Granting loans and advances.
o Subscribing to the shares and debentures floated by industrial concern.
o Guaranteeing loan taken from capital market.
o Guarantee deferred payment in respect of import of capital goods by approved
concerns.
o Involves merchant banking activities.
o Special assistance to women, SSI and backward area.
o Consultancy for technical, marketing and financial.
INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)
• It was started in January, 5 1955 as a Public Ltd. Companies under the companies act.
• It is only development bank which has participation by foreign investors.
• ICICI had a large proportion of Non-Performing Loans
• The bank is aggressively targeting the NRI (Non-Resident Indian) population for
expanding its business.
• Capital contributed by commercial banks, insurance companies, foreign investors from
UK, USA, Germany, France and Japan
• Functions:
o Expansion of private sector industries.
o To give loans or guarantee of loans either in rupees or foreign currency.
o To underwrite shares and debentures and subscribes directory to share issued.
o To encourage and promote private capital.
o To promote private ownership of industrial investment along with the expansion
of investment market.

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THE INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
• It was set up as a wholly owned subsidiary of the RBI on July 1st 1964 under an act of
parliament
• Functions:
o Direct finance: Project loan, soft loan, technical development loan, equipment
finance etc.
o Indirect finance: Refinancing, rediscounting of bills, seed capital to new
entrepreneurs.
o Special assistance: Promotion of development assistance funds.
o General assistance: Non-financial promotional activities like marketing, research,
consultancy etc.
INDUSTRIAL RECONSTRUCTION CORPORATION OF INDIA (IRCI)
• In April 1971, IRCI was set up by IDBI and other development and public sector banks.
• IRCI was reconstituted and renamed as Industrial Reconstruction Bank of India in 1985
with a special Act in the parliament.
• Objectives:
o To identify and remedial measures to sick industries.
o To provides financial assistance to reconstruction of sick industrial units.
o To promote the sick units into profitable units.
STATE FINANCE CORPORATION (SFC)
• Origin Central government decided to promote the Small-Scale Industries and Medium
Scale Industries at the state level by establishment of State Finance Corporation under
a special Act. It is called as State Finance Corporation Act 1951.
• According to this act, state government have been empowered to set up State Finance
Corporation.
• At present these are 18 State Finance Corporation in India
• Objectives:
o To provides financial assistance to Small scale industries
o To promote tiny, village and cottage Industries
o To provides infrastructure facilities to SSI
UNIT TRUST OF INDIA
• Unit trust was set up in 1964 by a special act passed in the parliament under the name
of Unit Trust of India Act 1963,
• For the purpose to promote and regulate the mutual fund activities in India.

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SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)
• It was established under SIDBI Act 1988
• It as subsidiary of IDBI
• The preamble to the Small Industries Development Bank of India Act, 1989 defines the
objective of SIDBI as: “The principal financial institution for the promotion, financing
and development of industry in the small scale sector and to coordinate the functions
of the institutions engaged in the promotion and financing or developing the industry in
the small scale sector and for the matters connected therewith or incidental thereto.”
• In the SIDBI charter, four basic objectives are set out. They are:
o Financing
o Promotion
o Development
o Coordination
EXIM BANK
• It was set up in January 1982 as a wholly owned by the central government.
• EXIM banks perform the following important functions:
o Grants direct loans in India and outside for import and export.
o Refinances loans and suppliers of credit. 3. Rediscounts usance export bills export
bills for banks.
o Provides overseas investment finance.
o Bulk import finance.
o Foreign currency pre shipment credit.
o Product equipment finance programme.
o Business advisory and technical assistance (BATA).

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NON-BANKING FINANCIAL COMPANY (NBFC)
• Non-bank financial companies (NBFCs) are financial institutions that provide some of the
banking services without the definition of a bank since it does not hold a banking license
• NBFC should be registered under Section 3 of the companies Act, 1954.
• It should have a minimum net owned fund of Rs 200 lakhs.
• Minimum capital required for setting up an NBFC: 100 crores.
• NBFCs can be classified into two broad categories:
o NBFCs accepting public deposit (they hold a deposit accepting certificate).
o NBFCs not accepting/holding public deposit (they do not hold such a certificate).
• A Non-Banking Financial Company has to be registered with the RBI and have certificates
of authorization to accept deposits from the public.
• NBFC cannot accept demand deposits
• NBFCs do not form part of the payment and settlement system
• It cannot issue cheques drawn on itself
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not
available to depositors of NBFC
• At present the maximum rate of interest which can be offered by an NBFC is 12.5%
• The NBFCs are allowed to accept/renew public deposits for a minimum period of 12
months and maximum period of 60 months.
SMALL FINANCE BANKS
• It shall be registered as a public limited company under the Companies Act, 2013.
• Committee on Small Banks: Usha Thorat Committee
• Validity: The “in-principle” approval granted will be valid for 18 months
• Eligibility: Resident individuals with 10 years of experience in banking and finance,
companies and Societies will be eligible as promoters to set up small banks
• NFBCs, micro finance institutions (MFIs), and Local Area Banks (LABs) can convert their
operations into those of a small bank.
• The minimum paid-up equity capital for small finance banks shall be Rs. 100 crores.
• Small banks will offer both deposits as well as loan products.
• They cannot set up subsidiaries to undertake non-banking financial services activities
• For the initial three years, prior approval will be required for branch expansion.
• Loans and advances of up to Rs 25 lakhs, primarily to micro enterprises,
• It should constitute at least 50 per cent of the loan portfolio.
• The maximum loan size and investment limit exposure to single/group
borrowers/issuers would be restricted to 15 per cent of total capital funds.

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MUTUAL FUND
• Mutual funds are investment companies that pool money from investors and offer to
sell and buy back
• Its shares on a continuous basis and use the capital thus raised to invest in securities of
different companies.
• A fund is “mutual” as all of its returns, minus its expenses, are shared by the fund’s
investors.
• As per SEBI, “Fund established in the form of a trust to raise money through the sale of
units to the public or a section of public under one or more schemes for investing in
securities, including money market instruments”.
• A mutual fund is a collective savings scheme
• The Association of Mutual Funds in India (AMFI) was established in 1993
• SEBI regulates the functioning of mutual funds in India
• Mutual funds play an important role in mobilising the savings of small investors and
channelizing the same for productive ventures in the Indian economy

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• Open-ended Schemes
o In case of open-ended schemes, a mutual fund continuously offers to sell and
repurchase its units at Net Asset Value (NAV) or NAV- related prices.
o Open-ended ones do not have to be listed on the stock exchange and can also
offer repurchase soon after allotment.
o Investors can enter and exit the scheme any time during the life of the fund.
o Liquidity is the key feature of open-ended schemes
• Close-ended Schemes
o Close-ended schemes have a fixed corpus and a stipulated maturity period ranging
between two to fifteen years.
o Investors can invest in the scheme when it is launched.
o The scheme remains open for a period not exceeding 45 days
o Investors can invest in the scheme at the time of the initial public issue
o They can buy or sell the units of the scheme on the stock exchanges where they
are listed.
o SEBI Regulations stipulate that at least one of the two exit routes are provided to
the investor
• Interval Schemes
o The Interval scheme combines the features of the open-ended and close-ended
schemes.
o They are open for sale or redemption during predetermined intervals at NAV-
related prices
• Income Funds
o It is to provide safety of investments and regular income to investors.
o Such schemes invest predominantly in income bearing instruments like bonds,
debentures, government securities, and commercial paper.
o The return as well as the risk is lower compared to growth funds.
o Income funds are ideal for capital stability and regular income.
• Growth Funds
o The objective of growth funds is capital appreciation over a medium-to-long-term.
o They invest most of the corpus in equity shares with significant growth potential
and offer a higher return to investors in the long-term.
o They assume the risks associated with equity investments.
o There is no guarantee or assurance of returns.
o These schemes are usually close-ended and listed on stock exchanges.

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• Balanced Funds
o The aim is to provide both capital appreciation and regular income.
o They divide the investment between equity shares and fixed income-bearing
instruments in a proportion indicated by their offer documents.
o They generally invest 40-60 per cent in equity and debt instruments.
o These funds are also affected because of fluctuations in share prices
o The portfolio of such funds usually comprises of companies with good profit and
dividend track records.
o Their exposure to risk is moderate and they offer a reasonable rate of return
• Money Market Mutual Funds
o These funds are also income funds and their aim are to provide easy liquidity,
preservation of capital and moderate income.
o They specialise in investing in short-term money market instruments like treasury
bills, certificates of deposits.
o Returns on these schemes fluctuate much less compared to other funds.
o These funds are appropriate for corporate and individual investors as a means to
park their surplus funds for short periods.
• Domestic Funds Fund
o Which mobilise resources from a particular geographical locality like a country or
region are regarded as domestic funds
• Offshore Funds
o Offshore funds attract foreign capital for investment in the country of the issuing
company.
o They facilitate cross-border fund flow which leads to an increase in foreign
currency and foreign exchange reserves.
o Such mutual funds can invest in securities of foreign companies
• Tax Saving Schemes
o Tax-savings schemes are designed on the basis of tax policy with special tax
incentives to investors.
o These are close-ended schemes and investments are made for ten years,
o Although investors can avail of encashment facilities after three years.
o These schemes are growth oriented and predominantly invest in equities.
o Growth opportunities and risks associated are like any equity-oriented scheme.
o Pension schemes launched by the mutual funds also offer tax benefits
• Gilt Funds
o Mutual funds which deal exclusively in gilts are called gilt funds.
o With a view to creating a wider investor base for government securities, the
Reserve Bank of India encouraged setting up of gilt funds.
o These funds are provided liquidity support by the Reserve Bank

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• Load Funds
o Mutual funds incur certain expenses such as brokerage, marketing expenses, and
communication expenses.
o These expenses are known as ‘load’ and are recovered by the fund when it sells
the units to investors or repurchases the units from withholders.
o In other words, load is a sales charge, or commission, assessed by certain mutual
funds to recover their selling costs
• Exchange Traded Funds
o (ETFs are a hybrid of open-ended mutual funds and listed individual stocks.
o Listed on stock exchanges and trade like individual stocks on the stock exchange.
o ETFs do not sell their shares directly to investors for cash.
o The shares are offered to investors over the stock exchanges
• Sector Specific Funds
o These funds invest in specific core sectors like, energy, telecommunications, IT,
construction, transportation, and financial services.
o The returns in these funds are dependent on the performance of the respective
sectors/industries.
o It may give higher returns; they are more risk compared to diversified funds.
o Investors need to keep a watch on the performance of those sectors/industries
and must exit at an appropriate time.
o They may also seek advice of an expert.
• Equity-Linked Savings Schemes (ELSS)
o In order to encourage investors to invest in the equity market, the government
has given tax concessions through special schemes.
o Investment in these schemes entitles the investor to claim an income tax rebate,
but these schemes carry a lock in period before the end of which funds cannot be
withdrawn

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MUDRA BANK
• Micro Units Development and Refinance Agency known as the MUDRA bank
• It is first set up as a subsidiary of the Small Industries Development Bank of India (SIDBI).
• MUDRA Bank is a public sector financial institution in India, it provides loan at low rates
to small entrepreneurs
• It was launched in 8th April 2015 with the objective of regulating micro and small
enterprise financing business
• Supporting them particularly those members who belongs from scheduled castes and
scheduled tribes.
• MUDRA Bank will also register MFIs (Micro Finance Institutions)
• The bank has categorized the amount of loan to be given in three different categories-
o SHISHU: This is the first stage and in it the loan will be given for upto 50000 Rs.
o KISHOR: The Second stage a loan amount will be ranging from 50,000 to Rs 5 lakh.
o TARUN: This is last category which will provide upto Rs 10 lakh.
FINANCIAL REGULATORS IN INDIA
• Reserve Bank of India (RBI)
o Established in 1 April 1935
o RBI Act, 1934
o Headquarter in Mumbai
• Securities and Exchange Board of India (SEBI):
o Established in April 12, 1992 (Form January 30, 1992)
o SEBI Act, 1992
o Headquarter in Mumbai
• Insurance Regulatory and Development Authority of India (IRDAI):
o Established in 1999
o IRDA Act, 1999
o Headquarter in Hyderabad
• Pension Fund Regulatory and Development Authority (PFRDA)
o Established in 23 August 2003
o PFRDA Act, 2013
o Headquarter in New Delhi
• Forward Markets Commission
o Established in 1953
o Forwards Contract Act, 1952
o Headquarter in Mumbai

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FINANCIAL SECTOR REFORMS IN INDIA
• Financial sector reforms refer to the reforms in the banking system and capital market.
o Regulators
o The banking system
o Non-banking finance companies
o The capital markets
o Mutual funds
o Overall approach to reforms
o Deregulation of banking system
o Capital market developments
o Consolidation imperative
• Committee (1991) on financial sector reforms, headed by Narasimham
• The committee found that banking system was both over-regulated and under-
regulated
TYPES OF FINANCIAL SECTOR REFORM
• Reduction in Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR)
• End of Administered Interest Rate Regime
• Prudential Norms: High Capital Adequacy Ratio
• Competitive Financial System
• Non-Performing Assets (NPA) and Income Recognition Norm
• Elimination of Direct Credit Controls
• Promoting Micro-Finance to Increase Financial Inclusion
• Setting up of Rural Infrastructure Development Fund (RIDF)

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ELECTRONIC BANKING IN INDIA
• Electronic banking in India, also known as Electronic Funds Transfer (EFT)
• EFT is use of electronic media to transfer funds directly from one account to another
• E-Banking refers to electronic banking or “Virtual Banking” or “Online Banking”.
• It is like business through electronic media through internet or mobile in the banking
industry.
• E-Banking involves information technology-based banking.
• Popular Services Covered Under E-Banking:
o ATM
o Credit Card, Debit Card and Smart Card
o Electronic Fund Transfer System (EFT)
o Cheque Truncation System
o Mobile Banking
o Internet Banking
o Telephone Banking

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ONLINE BANKING FRAUDS
• Phishing
o Phishing is an attempt by fraudsters to 'fish' for account holder's bank details.
o A phishing attempt in the form of an e-mail that appears to be from the bank.
o The e-mail usually encourages the Customers to click a link in it that takes them to
a fraudulent log-in page designed to capture customer details.
o Individual's email addresses can be obtained from publicly available sources or
through social networks.
o The fraudsters send fake e-mails claiming that customer information has been
compromised, due to which the bank account has been de-activated / suspended,
and ask customer to hence confirm the authenticity of their information /
transactions like credit card number, Personal Identification Number (PIN),
passwords or personal information, such as mother's maiden name.
o Fake e-mails promise a prize or gift certificate in exchange for individuals
completing a survey or answering a few questions
• Spoofing
o Spoofing is the act of creating a website, as a hoax, with the intention of
performing fraud.
o To make spoof sites seem legitimate, phishers use the names, logos, graphics and
even the code of the actual website.
o They can even fake the URL that appears in the address field at the top of your
browser window and the padlock icon that appears at the bottom right corner.
o Fraudsters send e-mails with a link to a spoofed website asking a customer to
update or confirm account-related information.
o This is done with the intention of obtaining sensitive account- related information
like Internet Banking user ID, password, PIN
• Vishing
o Vishing is a combination of Voice and Phishing that uses Voice over Internet
Protocol (VoIP) technology wherein fraudsters feigning to represent real
companies such as banks attempt to trick unsuspecting customers into providing
their personal and financial details over the phone.
o The fraudster sets up an automatic dialler, which uses a modem to call all the
phone numbers in a region
o When the phone is answered, an automated recording is played to alert the
customer that his/her credit card has had illegal activity
o A fisher may not have any real information about the customer and would address
the customer as 'Sir' and 'Madam' and not by name

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 • Skimming
o Skimming is a method used by fraudsters to capture customer's personal or
account information of credit card.
o Customer's card is swiped through the skimmer and the information contained in
the magnetic strip on the card is then read into and stored on the skimmer or an
attached computer.
o Skimming is a tactic used predominantly for credit-card fraud, but it is also a tactic
that is gaining in popularity among identity thieves.
o Fraudsters insert a skimming device to the ATM's card slot. This device scans the
card and stores its associated information. While a customer keys in his PIN, the
wireless skimming device transfers the data to the fraudsters. This information is
then used by the fraudsters for online shopping
• Money Mules
o A money mule, sometimes called a "Smurfer”
o Money Mule is a person who transfers money acquired illegally (e.g., stolen) in
person, through a courier service, or electronically, on behalf of others.
o Commonly, mules are recruited with job advertisements for "payment processing
agents", "money transfer agents", "local processors", and other similar titles
o A Money Mule is an unwitting participant in the fraud who is recruited by
fraudsters to launder stolen money across the globe.
o The Fraudster contacts prospective victims (money mules) with job vacancy ads
via spam e-mail, Internet chat rooms or job search websites. The crime rings even
persuade the victim to come and work for their fake company. Some fraudsters
even ask mules to sign official-looking contracts of employment. Once recruited,
money mules receive funds into their accounts
CORE BANKING SOLUTION (CBS)
• CBS is an acronym of Core Banking Solutions
• Core is also an acronym of "Centralized On-line Real-time Exchange".
• Core Banking Solution (CBS) is networking of branches, which enables Customers to
operate their accounts
• All CBS branches are inter-connected with each other.
CRYPTOCURRENCY
• Cryptocurrency are a form of virtual currency (digital)
• The first came into existence in 2009 in the name of Bitcoin
• It was introduced as means of peer to peer transaction method.

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INSURANCE SECTOR
• It can be found mentioned in the writings of Manu (Manusmrithi), Yagnavalkya
(Dharmasastra) and Kautilya (Arthasastra).
• Life Insurance in its modern form came to India from England in 1818
• The Oriental Life Insurance Company was the first insurance company to be set up in
India to help the widows of the European Community
• The first Indian insurance company, the Bombay Mutual Life Assurance Society
• The Life Insurance Corporation of India (LIC) was set up in the year 1956 by nationalizing
245 insurance companies
• The General Insurance Corporation of India (GIC) was formed as a government company
in 1972 under the General Insurance Business (Nationalization) Act 1972.
• Insurance Intermediaries
o Agents
o Surveyors and Loss Assessors
o Brokers
o Third Party Administrators (TPAs)
o Bancassurance

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CREDIT RATING
• ‘Credit rating’ the assessment of the creditworthiness of a borrower or a loan taker;
creditworthiness refers to the ability of a borrower to ‘service the loan’, i.e., pay back
the loan along with the interest.
• Ratings have an impact on the interest rates charged by the lenders/Banks.
• Higher credit rating = lower interest rate
• RBI allows the usage of ratings by these rating agencies for assigning Risk Weights in
calculating ‘Risk Weighted Assets
• In India the Credit rating agencies (CRA) are regulated by SEBI.
• In India the most popular credit rating agencies are:
o CRISIL – Credit Rating Information Services of India Ltd. HQ in Mumbai/ Subsidiary
of Standard and Poor’s
o CARE – Credit Analysis and Research Limited. HQ in Mumbai
o ICRA Ltd. – Indian Credit Rating Agency Ltd. HQ in Gurgaon/ An Associate of
Moody’s
o India Ratings – India Ratings and Research Pvt. Ltd. HQ in Mumbai.
o Brickwork Ratings India Pvt. Ltd. HQ in Bengaluru.
o SMERA – SME Ratings Ltd. – set up for Micro, Small and Medium Enterprises. HQ
in Mumbai.
• For Long-term loans the rating symbols are as follows:
o AAA – highest degree of safety – lowest credit risk
o AA – high degree of safety – low credit risk
o A – adequate degree of safety – low credit risk
o BBB – moderate degree of safety – moderate credit risk
o The above four are ‘Loan Worthy Ratings AAA, AA, A, BBB
o BB – Moderate risk
o B – High risk
o C – Very High risk
o D – Default – they are already defaulting!
• For short term loans the rating symbols are as follows:
o A1 – strong degree of safety – lowest credit risk
o A2 – strong degree of safety – low credit risk
o A3 – moderate degree of safety – credit risk higher than A1 and A2
o A4 – minimal degree of safety – high credit risk
o D – Defaulting already and expected to default

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MONEY LAUNDERING
• Money laundering is the illegal process of concealing the origins of money obtained
illegally by passing it through a complex sequence of banking transfers or commercial
transactions
• Money Laundering refers to converting illegal earned money into legitimate money.
• Money laundering is the illegal process of making large amounts of money generated by
a criminal activity, such as drug trafficking or terrorist funding, appear to have come
from a legitimate source.
• Money laundering is the process of making money earned from criminal activity appear
to have a legitimate source
• Stages of Money Laundering
o Placement: In this stage placement of money occurs through various channels like
Placing money in bank account, Smuggling money to abroad, etc.
o Layering: In this stage the money placed is transferred to various account in small
units so as to disrupt among various investments like in business, investments in
lands, share market, etc.
o Integration: It refers to the return of funds to the legal economy. Basically,
integration means merging, consolidate or joining.
• Anti-money Laundering
o To stop money laundering in India, Government introduced an act known as
“Prevention of Money laundering Act, 2002”.
o According to the act a convicted will force rigorous impersonated of 3 to 7 years
and fine up to Rupees 5 Lakh.
o India’s Bank also introduced various techniques to stop money laundering like
“Know Your Customer” norms.
KNOW YOUR CUSTOMER
The basic 3 points of KYC is listed below
• It is a process which is formulated by Central Bank of India i.e. RBI to avoid misused of
Banking service.
• This Guideline was introduced in 2002 by Central bank of India. In this guideline all banks
need to verify all accounts details.
• In this process each & every bank obtain information about the identity and address of
the customers for maintaining transparency.

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RISK WEIGHTED ASSETS
• These are an amount of funds which a bank should hold as any time ready liquid assets.
• The amount of such asset is determined by calculating the percent of assets that the
bank hold with respect to weighted risk to capital.
• Risk weighted Assets are such assets like Cash, investment, loans, etc., comprising total
assets owned by the Banks
Item of Asset Weighted Risk Percent
Cash 0%
Balance with Reserve Bank of India 0%
Central or state Government Guaranteed advances 0%
SSI advances up to CGF guarantee 0%
Loans against Fixed Deposits and LIC Policy 0%
Government approved Securities 2.5%
Balance with Bank (excluding RBI) which maintains the 9% CRAR 20%
Secured Loan to the Staff Members 20%
Housing Loans less than Rs. 30 Lakh 50%
Housing Loans more than Rs. 30 Lakhs 75%
Loans against Gold and Jewellery less than <Rs.1 Lakh 50%
Retail Lending up to Rs. 5 crores 75%
Loans Guaranteed by DGCGC / ECGC 50%
Loans to Public Sector Undertakings 100%
Foreign Exchange and Gold in open 100%
Claims on unrated corporates 100%
Commercial Real estate 100%
Consumer Credit 125%
Credit Cards 125%
Exposure to Capital Markets 125%
Venture Capital Investment 150%

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IMPORTANT BANKING & FINANCE COMMITTEES
• Abid Hussain Committee: On Small Scale Industries
• A C Shah Committee: For Reforms Relating to Non-Banking Financial Companies (NFBC)
• Athreya Committee: For Restructuring Of IDBI
• Basel Committee: For Banking Supervision
• Bimal Jalan panel: To scrutinize applications for new bank licenses.
• Bhandari Committee: For Reconstruction of RRBs
• Cook Committee: For Capital adequacy of banks.
• C Rangarajan committee: For poverty scale estimates in the country
• Damodaran Committee: For improvement of customer services in banks
• Dave Committee (2000): For Pension Scheme for Unorganized Sector
• Deepak Parekh committee: For Financing Infrastructure sector
• Janakiraman Committee: To investigate the security transactions of the bank
• Kelkar Committee: For Tax Structure Reforms
• MBN Rao Committee: To prepare the blueprint of India’s first women’s bank
• Mckinsey Report: For Merger Of 7 Associate Banks With SBI
• M. Narasimham Committee: For Banking Sector Reforms
• Naresh Chandra committee: For 14-member task force on security issues
• N Rangachari committee: To examine taxation policies for I.T. sector
• Parthasarathy Shame committee: Implementation of GAAR (General Anti Avoidance Rule)
• Prasad Panel: For International Trade and Services
• Raghuram Rajan Committee: For Financial Sector Reforms
• R V Gupta Committee: For Small Savings
• Raja Chelliah Committee: For Tax Reforms
• Rekhi Committee: For Indirect Taxes
• Shyamala Gopinath Committee: For Suggestions on Post office Small saving schemes
• S P Talwar Committee: For Restructuring of Weak Public Sector Bank
• SN Verma Committee (1999): For Restructuring the Commercial Banks
• UK Sharma Committee: For NABARD’s Role In RRB
• Vaghul Committee: For Money Market in India
• Vasudev Committee: For NBFC (Non-Banking Finance Corp) Sector Reforms
• Y B Reddy Committee (2001): For Review of Income Tax
• Gorwala committee: SBI

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 UNIT 08
MARKETING MANAGEMENT
❖ Modul 1: Marketing
1. Concept and approaches
2. Marketing channels
3. Marketing mix
4. Strategic marketing planning
5. Market segmentation, targeting and positioning
❖ Modul 2: Product decisions
1. Product Concept
2. Product line
3. Product mix decisions
4. Product life cycle
5. New product development
❖ Modul 3: Pricing decisions
1. Factors affecting price determination
2. Pricing policies and strategies
❖ Modul 4: Promotion decisions
1. Role of promotion in marketing
2. Promotion methods
▪ Advertising
▪ Personal selling
▪ Publicity
3. Sales promotion tools and techniques
4. Promotion mix
❖ Modul 5: Distribution decisions
1. Channels of distribution
2. Channel management
❖ Modul 6:
1. Consumer Behaviour
2. Consumer buying process
3. Factors influencing consumer buying decisions
❖ Modul 7: Service marketing
❖ Modul 8: Trends in marketing
1. Social marketing
2. Online marketing
3. Green marketing
4. Direct marketing
5. Rural marketing
6. CRM
❖ Modul 9: Logistics management

1|KIRAN. A. S
MARKETING
• In simple words, marketing is a process which carries goods from producer to ultimate
consumer.
• Marketing bridges the gap between consumer and producer.
• It is in this sense that marketing has been defined as “all the activities involved in the
creation of place, time and possession utilities.
• Marketing is thus concerned with handling and transportation of goods from the point
of production to the point of consumption
• Marketing is the study and management of exchange relationships.
• Marketing is the business process of creating relationships with and satisfying
customers.
• Marketing is defined by the American Marketing Association as "the activity, set of
institutions, and processes for creating, communicating, delivering, and exchanging
offerings that have value for customers, clients, partners, and society at large"
• Philip Kotler defines marketing as "Satisfying needs and wants through an exchange
process"
• The Chartered Institute of Marketing defines marketing as "the management process
responsible for identifying, anticipating and satisfying customer requirements
profitably"
• Deprivation: Someone not having enough things necessary for life
• Purchasing power - Ability to pay and willingness to buy
• Products (goods, services, ideas) is a bundle of utility, bundle of satisfaction
• Customer satisfaction is the main motive of Marketing
• Exchange process is the essence of marketing because without exchange there will be
no marketing
• Marketing involves the creation of four types of utilities:
o Place Utility: Goods are to be taken from the place of their origin or production to
the place where they are needed
o Time Utility: Goods are to be made available at the time when they are needed
by the consumers. It means that they are to be stored and protected against the
risks of fire, rain and pests etc.
o Possession Utility: The ownership and possession of these goods are to be
transferred from the producer to the ultimate consumer.
o The Form Utility: Form utility is the value a consumer sees in a finished product.
The customer sees value in the finished product, or the form created by each
product part
• 4 C’s – customer, channel, competitors, characteristics

2|KIRAN. A. S
 • Process of marketing
o Identification of customer needs
o Probable features of the product
o Portable form of product
o Modification in the product
o Final product
• Marketing myopia concept given by Theodore Levitt.
• Mega marketing concept- Philip Kotler
• Meta Marketing- Given by Eugene J Kelly. It focusses on all scientific, social, ethical and
managerial experiences of marketing
MARKET
• The word market has been derived from Latin word ‘Marcatus’ which refers to place of
trade or a place where business is carried on.
• In common usage the world ‘market’ refers to a place where goods are purchased and
sold
• In simple words, it refers to a place where actual buyers and sellers meet to effect
purchases and sales.
• ‘Market’ is not essentially concentrated at one particular point; it can scatter throughout
the region.
MARKETING CONCEPT
• The marketing concept is the strategy that firms implement to satisfy customer’s needs,
increase sales, maximize profit and beat the competition.
• 5 Marketing Concepts
o Production Concept
o Product Concept
o Selling Concept
o Marketing Concept
o Societal Marketing Concept

3|KIRAN. A. S
PRODUCTION CONCEPT
• The idea of production concept – “Consumers will favour products that are available and
highly affordable”.
• When the production concept was defined, a production-oriented business dominated
the market
• Products that are widely available and of low cost (Technology)
• This concept is the oldest of the concepts in business.
• This concept was founded during the production era of early Capitalism in the mid-
1950s.
• The manufactures concentrate themselves on the large-scale production so as to
achieve economic efficiency.
• The production concept, businesses were concerned primarily with production,
manufacturing, and efficiency issues.
• The production concept is based on the approach that a company can increase supply
as it decreases its costs
• The production concept highlights that a business can lower costs via mass production.
• As a whole, the production concept is oriented towards operations.
• It holds that consumers will prefer products that are widely available and inexpensive.
• The production concept can lead to “Marketing Myopia”
PRODUCT CONCEPT
• The product concept holds that the consumers will favour products that offer the most
in quality, performance and innovative features.
• Marketing strategies are focused on making continuous product improvements.
• Targeting only on the company’s products could also lead to marketing myopia.
• This concept works on an assumption that customers prefer products of greater quality
and price and availability doesn’t influence their purchase decision
• Products that are of various quality and features.
• This concept creates Marketing Myopia given by Theodore Levitt

4|KIRAN. A. S
SELLING CONCEPT
• The selling concept holds the idea- “consumers will not buy enough of the firm’s
products unless it undertakes a large-scale selling and promotion effort”.
• Typically, the selling concept is practiced with unsought goods (Unsought goods are that
buyers do not normally think of buying, such as insurance or blood donations)
• Selling concept focuses on making an actual sale of the product.
• Selling concept focuses on making every possible sale of the product, regardless of the
quality of the product or the need of the customer.
• Selling concept - Hardcore selling only (know customer so well that the product fits
himself and sell)
MARKETING CONCEPT
• The marketing concept holds- “achieving organizational goals depends on knowing the
needs and wants of target markets and delivering the desired satisfactions better than
competitors do”.
• The marketing concept is a customer-centred “sense and responds” philosophy.
• A company that believes in the marketing concept places the consumer at the centre of
the organization
• The marketing concept emphasizes the “Pull strategy"
• Marketing concept – design product according to the needs of customers. Customer
satisfactions
SOCIETAL MARKETING CONCEPT
• This is a relatively new marketing concept.
• While the societal marketing concept highlights the needs and wants of a target market
and the delivery of better value than its competitors, it also emphasizes the importance
of the well-being of customers and society as a whole (consumer welfare or societal
welfare).
• The societal marketing concept calls upon marketers to build social and ethical
considerations into their marketing practices
• The societal marketing concept holds “marketing strategy should deliver value to
customers in a way that maintains or improves both the consumer’s and society’s well-
being”.
• It calls for sustainable marketing, socially and environmentally responsible marketing
that meets the present needs of consumers and businesses while also preserving or
enhancing the ability of future generations to meet their needs.
• The Societal Marketing Concept puts the Human welfare on top before profits and
satisfying the wants.

5|KIRAN. A. S
 • The concept overlooks possible conflicts between consumer short-run wants and
consumer long-run welfare.
• Societal concepts – Produce those products which are safe for the society.
SOME OF THE MATCH
• Effective distribution – production concept
• Large scale selling & promotional effort – selling concept
• Produce what consumers want – marketing concept
• Product improvement – product concept
• Improve societal wellbeing – societal concept
APPROACH
• Marketing has two-fold meaning in traditional sense and in modern sense.
• Traditionally, “marketing consists of those efforts which effect transfer in ownership of
goods for their physical distribution”. —Clark and Clark
• In modern sense, marketing involves all efforts to create customers for the product and
to maintain them permanently. According to this concept the main aim of marketing is
to provide maximum satisfaction to consumers.
• Consumer is the focal point in the modern concept of marketing.
• Under the new approach marketing starts and ends with customers.
• Under the old approach, principle of “Caveat Emptor” let the buyer beware, operates.
• Under the new approach, principle of “Caveat Vendor” let the seller beware, operates.
• The aforesaid approaches have been classified as follows:
o Product or Commodity Approach
o Institutional Approach.
o Functional Approach.
o Decision Making Approach.
o Societal Approach.
o Systems Approach
PRODUCT OR COMMODITY APPROACH
• Under this approach, study of marketing is based on product or commodity which moves
from the original producer to the ultimate consumer as a flow in the market
• Marketing refers to the matching of product or commodity with the markets

6|KIRAN. A. S
INSTITUTIONAL APPROACH
• This approach is also known as middleman or intermediary approach.
• Under this approach, the study of marketing involves analysis and scanning of activities
of different institutions engaged in marketing of product.
• These institutions are engaged in performing specific functions collectively known as
marketing functions.
FUNCTIONAL APPROACH
• Under this approach, much importance is laid on the different marketing functions.
• Here the marketing functions consist of buying, selling, standardising, storing,
transporting, advertising, packing and pricing of product
DECISION-MAKING APPROACH
• The decision-making or management approach combines certain features of the three
approaches, and relates them from the decision-makers' viewpoint.
• This approach is based on scientific principles, as it lays emphasis on the decision-making
role of management in terms of marketing functions at the level of a firm.
SOCIETAL APPROACH
• The marketing activities are also society oriented for the entire process is looked upon
by the society as a means of satisfying its consumption needs.
• In a word, this approach studies the interactions between the environmental factors and
the marketing decision-making and finally the resultant effect of the said functions on
the society at large.
• The environmental factors here refer to ecological, sociological, cultural, political, Legal
etc. All these factors have been identified by Kotler as an approach to the study of
marketing.
SYSTEM APPROACH
• The modern sociological thought has developed the concept that the society attains its
goals through the creation of interrelated systems of action.

7|KIRAN. A. S
MARKETING CHANNELS
• A marketing channel is the people, organizations, and activities necessary to transfer the
ownership of goods from the point of production to the point of consumption.
• It is also known as a distribution channel
• There are four main types of marketing channels:
o Producer → Customer (Zero-level Channel)
o Producer → Retailer → Consumer (One-level Channel)
o Producer → Wholesaler → Retailer → Customer (Two-level Channel)
o Producer → Agent/Broker → Wholesaler → Retailer → Customer (Three-level
Channel)
MARKETING MIX
• The idea of Marketing Mix was conceived by Prof Neil h Borden of the Harvard business
school.
• According to Stanton Marketing mix is the term used to describe the combination of the
four inputs which constitute the core of company’s marketing system, the product, the
price structure, the promotional activities and the distribution system.
• Philip Kotler has given the marketing mix.
• Mc Karthy givens the concept of 4ps
o Product, Price, Place, Promotion
• Philip Kotler has given 7ps:
o Product, Price, Place, Promotion, People, Physical evidence, Process
• Broom Bitwler has given 3ps
o People, Physical evidence, Process
• Marketing mix is a dynamic concept as it changes according to the environment
• Factors determining Marketing Mix includes
o Nature of the product
o Stage of the product life cycle
o Degree of competition
o Efficiency of channel
o Availability of funds

8|KIRAN. A. S
4 P’S CONCEPTS

7 P’S CONCEPTS

9|KIRAN. A. S
STRATEGIC MARKETING PLANNING
• Marketing strategy is a long-term, forward-looking approach to planning with the
fundamental goal of achieving a sustainable competitive advantage
• By Philip Kotler, “Marketing Strategy is the marketing logic by which the business unit
expects to achieve its marketing objectives.”
MARKET SEGMENTATION
• Marketing segmentation is a process of grouping the customers into number of different
divisions on the basis of similar characteristics
• The term ‘market segmentation’ refers to subdividing a market along some commonality
and similarity.
• The heterogeneous market is divided into a number of relatively homogeneous unit
• Market segment strategy involves dividing the market into different group
• According to Philip Kotler, “Market segmentation is the sub-dividing of market into
homogeneous sub-sections of customers, where any sub-section may conceivably be
selected as a market target to be reached with a distinct marketing mix.”
• Mc Donald’s and other marketers have found market segmentation to be valuable
technique for the following reasons:
o Efficient use of marketing resources
o Better understanding of customer need
o Better understanding of the competitive situation
o Accurate measurement of goals and performance
• Traditional Segmentation: Geographic, Demographic
• Modern Segmentation: Psychographic, Behaviouristic

10 | K I R A N . A . S
PROCESS OF MARKETING SEGMENTATION

1. Identify the target market

2. Identify expectations of target audience
3. Creates subgroups
4. Identify suitable marketing mix for each group
5. Find out which group to focus
6. Select those segments which offer high potential

CRITERIA FOR MARKET SEGMENTATION

• Identity
• Accessibility
• Responsiveness
• Size
• Nature of Demand
• Measurability

11 | K I R A N . A . S
BENEFITS FROM SEGMENTATION
• Segmentation helps in focusing strategies more sharply on target groups.
• It helps the company to know demand pattern of each segment thus increased the sale
volume of the products.
• It helps the marketer to understand the needs, behaviour, habits, tastes and
expectation of consumers of different segments. Thus, marketing opportunities
increases.
• It is possible to satisfy a variety of customers with a limited product range by using
different promotional activities.
• Marketing can be more specialized when there is segmentation as the element of
marketing mix.
• Segmentation helps in adopting different policies, programmes and strategies for
different markets based on rival’s policies, programmes and strategies.
• New customers are attracted because of segmentation strategy and thus opportunities
are created for growth.
• Customers are benefitted as the products that serve customers interest and satisfy
their needs and wants.
• Segmentation supports the development of niche strategies.
• It helps to achieve a better competitive position for existing brands.
• Identify gaps in the market which represent new product opportunities.
• It is possible to pay proper attention to a particular area.
The marketers adopt several approaches to segmenting a market. The various approaches
are given below:

12 | K I R A N . A . S
LEVELS OF SEGMENTATION
1. Mass Marketing: Offering the same product and applying the same marketing-mix to all
customers assuming that there is no significant difference among consumers in terms of
their needs and wants. Total market as one segment. Same product to all consumer
(No segmentation)
2. Segment Marketing: A market segment consists of a large identifiable group within a
market with similar wants, purchasing power, geographical location, buying attitudes or
buying habits. Different products to one or more segment (Some segment)
3. Niche Marketing: A niche is a more narrowly defined group whose needs are not well
served. Different products to subgroups within segment (More segmentation). It has
the following characteristics:
a. The customers in the niche should distinct set of needs.
b. They will pay a premium to the firm that best satisfies their needs.
c. The niche is not likely to attract other competitors.
d. The niche gains certain economies through specialization.
e. The niche has size, profit and growth potential.
4. Micro Marketing: The target marketing is being changed to micro marketing. Micro
marketing occurs when target market is further bifurcated and the needs of the small
customer groups are addressed on a local basis. Serve one segment on local basis.
Products to suit the tastes of individual or location (Complete segmentation)

5. Local Marketing: Target is leading to marketing programmed being tailored to the needs
and wants of local customers. For example, different editions of newspapers for
different areas cover local news are good examples.
6. Individual Marketing: The ultimate level of segmentation leads to “one-to-marketing”
or “customized marketing”. Mass customization is the ability to prepare on a mass basis
individually designed products and communications to meet each customer’s
requirements. The concept of service has broadened to include both breadth of product
offerings and the ability to customize to meet specific needs.

13 | K I R A N . A . S
TARGET MARKETING
• Target marketing involves breaking a market into segments and then concentrating your
marketing efforts on one or a few key segments consisting of the customers whose
needs and desires most closely match your product or service offerings.
MARKET POSITIONING
• Market positioning means setting the competitive positioning for product with specific
marketing mix.

14 | K I R A N . A . S
PRODUCT DECISION
• For Kotler, the definition of a product goes way beyond being a physical object or a
service. He defines a product as anything that can meet a need or a want
FIVE PRODUCT LEVELS

1. Core Benefit: The core benefit is the fundamental need or wants that the customer
satisfies when they buy the product. Fulfill basic benefit of consumer wants. For
example, the core benefit of a hotel is to provide somewhere to rest or sleep when away
from home.
2. Generic Product: The generic product is a basic version of the product made up of only
those features necessary for it to function. It provides actual product with tangible
qualities. In our hotel example, this could mean a bed, towels, a bathroom, a mirror,
and a wardrobe.
3. Expected Product: The expected product is the set of features that the customers expect
when they buy the product. It offers generic product plus other attribute consumer
wants. In our hotel example, this would include clean sheets, some clean towels, Wi-fi,
and a clean bathroom.
4. Augmented Product: The augmented product refers to any product variations, extra
features, or services that help differentiate the product from its competitors. It gives
more than physical and set it apart from competitors. In our hotel example, this could
be the inclusion of a concierge service or a free map of the town in every room.
5. Potential Product: The potential product includes all augmentations and
transformations the product might undergo in the future. In simple language, this means
that to continue to surprise and delight customers the product must be augmented. It
provides additional tangible and Intangible benefits. For example, it could be some
chocolates on one occasion, and some luxury water on another. By continuing to
augment its product in this way the hotel will continue to delight and surprise the
customer.

Five Product Levels Advantages

• Match the features they create to what the customer wants.

• Match operational processes to what customers want.
• Match marketing efforts to appeal to customers wants.
15 | K I R A N . A . S
PRODUCT CONCEPT
• A product is any good, service, or idea that can be offered to a market to satisfy a want
or need
• A product is defined as a “thing produced by labor or effort” or the “result of an act or a
process”
• The word “Product” derived from Latin word “Produce”
• A product is anything that can be offered to a market that might satisfy a want or need.
• In retail, products are called merchandise.
• Product is a Goods, Services, or Ideas
o Goods are a physical product capable of being delivered to a purchaser and involve
the transfer of ownership from seller to customer.
o A service is a non-material action resulting in a measurable change of state for the
purchaser caused by the provider
o Ideas (intellectual property) are any creation of the intellect that has commercial
value, but is sold or traded only as an idea, and not as a resulting service or good.
This includes copyrighted property such as literary or artistic works, and ideational
property, such as patents, appellations of origin, business methods, and industrial
processes.

16 | K I R A N . A . S
CLASSIFICATION OF PRODUCT

1. Durable product
• A durable good or a hard good or consumer durable is a good that does not quickly
wear out, or more specifically, one that yields utility over time rather than being
completely consumed in one use
• Durable goods are expensive items that last three years or more
• Durable goods are those goods that don’t wear out quickly and last over a long
period.
• Example Land, furniture, Car, Bike, Jewelry, automobiles, books, household goods,
sports equipment, jewelry, medical equipment, firearms, and toys.
2. Non-Durable Product
• Nondurable goods or soft goods (consumables) are the opposite of durable goods.
• They may be defined either as goods that are immediately consumed in one use
or ones that have a lifespan of less than three years
• Nondurable goods last less than three years on average.
• While non-durable goods or soft goods are those goods that have a short life cycle.
• Example cosmetics and cleaning products, food, condiments, fuel, beer, cigarettes
and tobacco, medication, office supplies, packaging and containers, paper and
paper products, personal products, rubber, plastics, textiles, clothing, and
footwear.

17 | K I R A N . A . S
 3. Tangible Product (Goods)
• Tangible goods are merchandise that you can put your hands on.
• Tangible product is a which product can be touch and Feel
• Jewelry, cloth, paper
4. Intangible Product (Services)
• An intangible good is a good that does not have a physical nature
• Incapable of being touched
• Digital goods such as downloadable music, mobile apps or virtual goods used in
virtual economies are all examples of intangible goods
5. Consumer Product
• Consumer goods, also known as final goods, are those tangible goods which are
ready for consumption or purchased by individuals or households for final
consumption to satisfy their wants.
6. Convenience Product
• The items which are bought frequently, immediately and with minimum shopping
efforts are convenience goods.
• These include candy, ice-cream, cold drinks, cigarettes, magazines, medicines etc.
• The shops which keep the convenience goods are called convenience stores.
• Often convenience goods are non-durable.
• Features of Convenience goods:
i. Generally non-durable
ii. Purchased at convenient locations.
iii. Regular and continuous demands
iv. Generally small unit of purchase and low prices
v. Most of them are standardized in prices
vi. Advertisement, Sales promotion, schemes etc. are very important.
7. Shopping Goods
• Shopping is the activity of examination and selection of the goods or services from
retailers with the intent to purchase at that time.
• The selection & purchasing is a result of a comparison of products based upon
their suitability, quality, price, style and so on
• Most of the shopping goods are durable.
• Examples are furniture’s, dresses, electronic items & appliances etc.
18 | K I R A N . A . S
 • Some common features:
i. Generally durable
ii. Generally high price in contrast with convenience goods.
iii. Comparison is main factor in making purchase decisions.
iv. Purchase is generally pre planned
v. Retailers have very important role to play.
8. Specialty goods
• The specialty goods incur special purchasing efforts and the items possess some
special features.
• The buyers are willing to spend a lot of time & money to buy them in contrast with
the shopping goods.
• The rare arts collections, antiques, prestige brands, style goods, automobiles etc.
are the examples.
• The particular hotel, restaurant, hair salon, spa & resorts are examples of services.
• The comparison factor is absent in specialty goods
• Some common features:
i. Limited demand and limited number of buyers
ii. Costly products generally
iii. Sold at few places
iv. Aggressive promotion is required.
9. Unsought Goods
• Unsought Goods are goods that the consumer does not know about or does not
normally think of buying, and the purchase of which arises due to danger or the
fear of danger and lack of desire.
• The purchase of these goods may not be immediate and can be deferred
• Unsought goods require advertising and personal-selling support.
• An unsought goods is a new product that the consumer is not yet aware of or he
is aware of that product but does not want it at this moment
10. Industrial Goods
• Capital goods, alternately known as intermediate or producer goods, are the
goods which are deployed by the organization as input in the production of
consumer goods and services, such as plant and machinery, equipment, furniture,
vehicles, office building.
19 | K I R A N . A . S
 • Raw Material: They are those industrial goods which will become part of another
physical product and which have not been processed except for their physical
handling (e.g. egg, fruits, cotton, wheat, pulses)
• Fabricating material: These are partial or complete items which become part of
the final products. They have already been processed to some extent e.g. pig iron
going in to steel, yarn being move into cloth, leather to shoes.
• Accessories equipment: Includes industrial goods usually less expensive & having
shorter life than installations. They are required for the manufactures of fixed
product though they do not form part of finish products e.g. hand tools, portable
drills, lubricants.
• Operating suppliers: They are short life & low-priced items usually purchase with
minimum of efforts they are basically convenience goods of industries e.g. pen,
pencils, paper, and screw.
Consumer goods and Industrial Goods

BASIS FOR
CONSUMER GOODS CAPITAL GOODS
COMPARISON

Goods that are used by the Goods that are deployed to

Meaning end user for consumption is produce consumer goods is
called consumer goods. called capital goods.

Marketing Business to Consumer Business to Business

Bought for personal Bought for making other

Purpose
consumption. products.

Buyer Consumer Manufacturers

Demand High Comparatively less

Price determination By suppliers By companies

20 | K I R A N . A . S
PRODUCT LINE
• Product line is a group of product items that can satisfy the same needs and wants, they
have more or less similar features.
• For example, Bajaj Auto Ltd., in its two-wheeler product line, makes Discover, Boxer,
Boss, Pulsar, Cub scooter, Bajaj Sunny, etc.
• Philip Kotler, “Product line is a group of products that are closely related because they
function in a similar way, are sold to same customer groups, are marketed through the
same type of outlets, or fall within given price range.”
• Thus, product line is the group of similar products.
• The similarity may be seen in one or more ways.
• Product line consists of product items belonging to same class.
• The definition suggests following five ways the items are closely related:
o They function in similar manner.
o They offer similar benefits, or meet similar expectations.
o They are sold to similar customer groups.
o They are marketed by similar outlets.
o They fall within same price range.

CHARACTERISTICS OF PRODUCT LINE

• Product line consists of closely related product items. Difference is only found in terms
of color, size, shape, model, performance, weight, and capacity.
• It is a compose of various similar items.
• Product items are complementary to one another. For example, tube, tire, and related
materials.
• There is difference in price. For example, Hero Honda charges different price for
different models.
• The purpose of offering similar items in each of the product line may be to attract
customers by offering more varieties, and to create a good image or reputation.
• Different items of a product line can be manufactured using same technology and/or
inputs.
• Product items in each of the product lines are distributed in same distribution channel.
That is, similar outlets market them.

21 | K I R A N . A . S
 • Product items in each product line function in same manner. They need same technical
skills to use them.
• They are sold to similar customer groups. They satisfy needs of the same groups.
• They have more or less same use or utility. They are used for the same purpose.

PRODUCT LINE STRETCHING

• Line stretching is an expanding strategy by a company where the new products are
launched in the same product line but beyond the current product range with some
additional or different features.
• Line stretching can be done down market, up market and both ways
• Product stretching enables firm to fill any gaps they have identified in market

Product line stretching which is of three types

• Down Market product line stretching

• Up Market product line stretching
• Two-way Product line stretching

PRODUCT MIX DECISION

• The product mix, also called product portfolio, is the set of all product lines and items
that a company offers for sale
• Product mix or product portfolio is the combination of all products lines offered for sale
by a company.
• Product mix, also known as product assortment, is the total number of product lines
that a company offers to its customers
• All of these product lines when grouped together form the product mix of the company.
• The product mix is a subset of the marketing mix and is an important part of the business
model of a company

22 | K I R A N . A . S
DIMENSIONS OF PRODUCT MIX

1. Product Depth
• It refers to the number of versions offered for each product in the product line
• The width of the mix refers to the number of product lines the company has to
offer.
• Example Colgate toothpastes come in several tastes and variations
• The vehicle manufacturer’s 3-series in the car product line may be offered in
several versions: convertible, coupé, sedan, and so further.
2. Product Length
• The product length refers to the total number of items a company carries within
the product lines.
• Length of the product mix refers to the total number of products in the mix.
• That is if a company has 5 product lines and 10 products each under those product
lines, the length of the mix will be 50 [5 x 10].
• Example Colgate carries several different brands within each line.
• A car manufacturer may have several series in its car product line, such as 3-series,
5-series, and 7-series.
3. Product Width
• The width is all about the number of different product lines the company carries.
• The depth of the product mix refers to the total number of products within a
product line.
• Example Colgate has 3 product lines
4. Product Consistency
• The consistency of a product mix completes our four product mix decisions.
• Consistency refers to how closely related the product lines are in terms of end use,
production requirements, distribution channels or any other way
• Product mix consistency refers to how closely products are linked to each other.
• In Colgate’s case, we can observe a rather strong consistency, which is based on
the fact that all product lines constitute consumer products and go through the
same distribution channels.
• The vehicle manufacturer also has a relatively consistent product mix, since both
product lines contain consumer-vehicles, can be sold in the same way etc.
23 | K I R A N . A . S
PRODUCT LIFE CYCLE

• All products have certain length of life during which they pass through certain
identifiable stages.
• The product life cycle is a conceptual representation of product ageing process
• The Product Life Cycle Stages developed by Raymond Vernon
• According to Philip Kotler, “The product life cycle is an attempt to recognize the distinct
stages in the sales history of the product”
• According to William J. Stanton, “The product life cycle concept is the explanation of
the product from its birth to death as a product exists in different stages and in different
competitive environment”
• Following are the stages of PLC
o Introduction
o Growth
o Maturity
o Saturation
o Decline

24 | K I R A N . A . S
25 | K I R A N . A . S
NEW PRODUCT DEVELOPMENT

1. New Product Strategy: Innovators have clearly defined their goals and objectives for
the new product
2. Idea Generation: Collective brainstorming through internal and external sources.
3. Screening: Condense the number of brainstormed ideas.
4. Concept Testing: Structure an idea into a detailed concept.
5. Business Analysis: Understand the cost and profits of the new product and
determining if they meet company objectives.
6. Product Development: Developing the product.
7. Market Testing: Marketing mix is tested through a trial run of the product.
8. Commercialization: Introducing the product to the public.

PROCESS OF NEW PRODUCT DEVELOPMENT

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PRICING DECISION

• Pricing is the act of determining the exchange value between the purchasing power
utility or satisfaction an acquired by an individual, group or an organization through
the purchase of goods, services, rights, ideas etc.
• A price is a value in monetary terms that one party pays to another in a transaction in
exchange for some goods or services.
• Price is the amount of money the buyer will pay as consideration to the seller in
exchange for goods or services.

FACTORS AFFECTING PRICING DECISION

1. Internal Factors
• Top level management
• Elements of marketing mix
• The predetermined objectives
• Credit period offered
• Promotional activity
• Costs
• Objectives
• Stage of Product life cycle
• Product quality
• Brand Image
• Category or Class of product
• Market share
• Degree of product differentiation
2. External Factors
• Demand for the product
• Competition
• Consumers
• Price of raw materials and other inputs
• Buyer Behaviour
• Government rules and Regulations
• Channel intermediaries
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 • Ethical consideration or code of conduct
• Seasonal effect
• Economic condition

OBJECTIVE OF PRICING

• Profits-related Objectives
o Maximum Current Profit
o Target Return on Investment: Target return may be:
▪ Fixed percentage of sales
▪ Return on investment, or
▪ A fixed rupee amounts.
• Sales-related Objectives
o Sales Growth
o Target Market Share
o Increase in Market Share
• Competition-related Objectives
o To Face Competition
o To Keep Competitors Away
o To Achieve Quality Leadership by Pricing
o To Remove Competitors from the Market
• Customer-related Objectives
o To Win Confidence of Customers
o To Satisfy Customers
• Other Objectives
o Market Penetration
o Promoting a New Product
o Maintaining Image and Reputation in the Market
o To Skim the Cream from the Market
o Price Stability
o Survival and Growth

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PRICING POLICY AND STRATEGY

• A pricing policy is a standing answer to recurring question.

• Pricing policy of a company sets out the prices of their products or services
• The determination of the selling price of a product that takes into account the average
cost of production
• It is essential to establish policies for pricing of its products or services or ideas just as it
is for all the aspects of business decision-making
• Without definite price policies, each price decision is a time-consuming, tedious and a
pell-mell affair.
• A policy frame-work should lead to pricing that is consistent with the company
objectives, costs, competition and demand for the product
• A set of price policies and strategies will not only make price setting easier but also make
possible as series of prices at various levels of distribution that are rational and
justifiable.
• Pricing policies are the guidelines providing a focus within which the company
management administers the policies to match to the market needs.
• What does pricing policy involve?
o Defining the prices (pricing) of goods and services – the price level
o Price uniformity or dissimilarities for different types of customers, locations and
segments
o Price trends, change in price over time - introductory pricing, seasonal prices,
sales, discounts and the like
o Reasons for price changes - what strategic goals should be achieved by price level
adjustment or price changes

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Following are some of the pricing policies and strategies

PRICE VARIATION POLICIES

Price variation policies are those where in the firm attempts to vary the prices of its
products with a view to match them with the differing market needs. There can be three
variations of such price variation policies

1. Variable Price Policy

• It is that policy in which the company charges different prices for sale of its like
goods at a given time to similar buyers purchasing in comparable quantities under
similar conditions of sale.
• This is, prices charged differ from buyer to buyer.
• This variable price policy is more apt in small business and where products are not
standardized.
• It works well where the individual sale transactions of large sums and the
bargaining power of individual purchasers is differing with the size of the
transaction.
• The greatest advantage of this variable price policy is that it has the highest degree
of flexibility as a promotional tool
2. Non-Variable Price Policy
• It is also called as ‘one price’ policy because, the company charges similar price
for sale of like goods at a given time to a class of buyers purchasing in comparable
quantities under similar conditions of sale.
• Here, the price charged varies from class to class say, wholesalers, sub-
wholesalers, retailers and distributors.
• This non-variable price policy is less discriminatory as prices differ from class to
class than customer to customer.
• It is a popular price policy followed by all those firms which have indirect
marketing arrangements.
• There will be no question of price bargaining as the rates are applicable to the
class of buyers as a whole.
• The greatest satisfaction is that there is no cause for friction and heart-burning
among the buyers.
30 | K I R A N . A . S
 3. Single Price Policy
• It is that price policy wherein all the buyers irrespective of their class, size, or the
conditions of purchases are charged similar purchase price under similar
conditions of sale.
• This is the price policy that has no touch of discrimination and it is constructive in
the sense that it helps in building goodwill.
• It is equally easy to administer as there is no scope for bargaining.
• Instead of speaking on price of the product, the sales army can utilize its time on
product quality, service and outstand ability.
• This price policy does not find favor with quantity buyers who feel that they should
have been charged much lower prices than the small-lot purchasers.
• As a result, such buyers may be lost to competitors unless the product is really
known by its brand. This feeling is easily accommodated by product differentiation
and market segmentation.

GEOGRAPHIC PRICE POLICIES

Geographical price policies are fully reflective of the practical problems of consumers
and producers or the sellers locating geographically and the emergent transportation costs of
linking them. Take our own country where production centres are highly concentrated while
the consumption centres are widely dispersed.

Thus, the cities like Mumbai, Chennai, Calcutta, Delhi, Ahmadabad, Bangalore,
Hyderabad where we have industrial conglomeration while the demand for the products
produced in these comes from far off places. Taking transport costs as major thrust, pricing
policies are designed. The major geographical pricing policies are:

1. Point of Origin Price Policy

• It is that type of geographic pricing policy in which a firm quotes ex- factory price
and makes no allowance for the transportation costs necessary to move the goods
to the point of destination.
• There can be two variations in this policy namely, ‘ex-factory’ and ‘free on rail’
(F.O.R).

31 | K I R A N . A . S
 ▪ Price under ex- factory pricing holds buyer responsible for all the
transportation costs both freight and cartage from the factory point
▪ Free on rail price is the one in which the company bears cartage or carriage
till the transport agency or the railway station. The buyers are to meet
freight from the transport agency or the railway station to the point of
destination
• Point of origin price policy leads to the establishment of the geographical
monopoly for the firm because, the transportation costs separate those firms
located in distant areas from competing with the local producers
• It guarantees better price realization in local markets wherever the products enjoy
relatively inelastic demand.
2. Freight Absorption Price Policy
• Freight absorption price policy is one that absorbs the transportation costs fully or
partly.
• That is, the price quoted is inclusive of transportation costs.
• In other words, the buyers do not bear directly freight and other transportation
charges though the price includes such charges.
• There can be three variations of this freight absorption price policy namely:
▪ Uniform delivered price policy.
• ‘Uniform Delivered Price Policy’ is popularly known as ‘postage stamp’
price or ‘F.O.R. Destination’ price.
• It is one in which the firm absorbs full transportation costs and delivers
the goods to all the buyers at their ends at a uniform price irrespective
of location and distance.
• Thus, buyers from Goa, Mumbai, Kolkata, Chennai, and Delhi and so
on all are to pay a uniform price that includes full freight absorption
by the firm
• It implies that the firm’s net return differs from location to location of
the buyers.
• This policy is fully used to expand market as a non- price competitive
measure.
• This is of special significance in catching distant markets.
•
32 | K I R A N . A . S
 ▪ Zonal price policy
• ‘Zonal Price Policy’ is one under which the firm divides its markets into
zones and quotes uniform prices to all the buyers located in the
identified zone.
• That is, the prices quoted will differ from zone to zone rather than a
single price all over the country.
• The price arrived at is the addition of average transportation costs to
the basic price
• This, policy, therefore, stabilizes the prices within a zone and simplifies
calculation of transport charges.
▪ Base point price policy.
• ‘Base Point Price Policy’ like zonal pricing policy it implies partial
absorption of the transport costs by the firm.
• However, the price is quoted by adding transport costs computed up
to the buyers’ location by reference to one geographic location, not
necessarily the factory and that location is called as ‘base-point’.
• In other words, the buyers pay ex-factory price plus freight computed
from the nearest base point irrespective of the actual freight incurred
by the firm
• In such a deal, it is quite possible that the actual freight paid by the
company may be less than what is charged to the buyer. This
difference enjoyed by the pricing firm is known as ‘phantom freight’.
• Depending on the number of base points, such policy can be single
base-point price policy or multiple-base point price policy.
• This price policy is normally the collective decision of all the firms that
believe in base-point pricing.
3. Price Differential Price Policies
• The price policies that involve price differentials are those the pricing firm accepts
the gap between the price ‘quoted to the consumers or dealers and the actual
price charged.
• Thus, price differential represents the differences between the price quoted and
the price charged to the buyer.

33 | K I R A N . A . S
 • By ‘price differential’ we mean that the final price will be less than the quoted
price.
• It is not always true because, it may mean price hike too
• The forms of price differentials are:
▪ Discounts
• Discount is the price differential that reduces the quoted price so that
the buyer pays much less than the quoted price.
• Discount is an allowance made to the buyers in consideration on
marketing services rendered.
• Discount can be of three types namely, trade, quantity and cash.
• ‘Trade discount’ or functional discount is the deduction allowed of
the quoted price with reference to specific position enjoyed by the
buyers in the channel of distribution. It is a percentage deduction of
the quoted price.
• ‘Quantity discount’ is the deduction allowed off the quoted price to
the buyers on the basis of quantities bought. It is generally allowed on
the aggregate of all or specific classes of product purchases measured
in rupee value or physical units or in terms of purchases at time or
purchases over a period of time or beyond a specific floor volume.

• ‘Cash discount’ is the deduction from the invoice price granted to all
those who clear their bills within the desired dead-line. It is a reward
to the buyer for timely or prompt payment of the amount due. The
cash discount rates are based on the prevailing rates in the market at
a given point of time.

34 | K I R A N . A . S
 ▪ Rebates
• ‘Rebate’ is a deduction of the quoted price.
▪ Premiums
• All the earlier four points were those that reduced the net price
payable by the buyer.
• There are occasions where the actual price paid will be higher than the
quoted price.
• Thus, consumer durable manufacturing units can add premium to the
price quoted for one reason or the other.

LEADER PRICE POLICY

• Leader pricing is one where the firm in the industry initiates the price changes and these
price changes are so effective that other firms follow suit.
• It is the one of price approximation by followers to that of initiator in the industry.
• In marketing jargon the former is called as “price follower” and the latter as “price
leader”.
• This pricing policy works on the principle that there is some truth and wisdom in
following the established and giant units.
• This normally occurs in all those industries where the products are highly standardized
and produced on mass scale.
• It may be a cigarette, sugar, cement, fertilizer, steel, tea, soaps, paints, type-writers and
so on.
• The price leader has several options of effecting changes such as maintaining the price,
raising relative perceived quality, reduce price, increase and price improve quality or
launch low price fighter line.

PSYCHOLOGICAL PRICING

• Psychological pricing is to do with creating a typical consumer perception so that the

consumer is made to buy the product.
• That is, the prices fixed influence the psyche of customer and spur him to action.
• It is mostly the price policy followed by consumer durables.
• Example Rs. 399

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NEW PRODUCT PRICING POLICIES

• Basically, price determination process involved in case of new products need not be very
much different from those of existing products.
• However, there are distinct price objectives involved in case of new products.
• Larger latitude of pricing objectives is possible in case of new products; pricing flexibility
is also greater.
• There is growing competition and limited accepted prices when the new product is in
the growth, maturity and decline stage.
• In case of new products, there can be two possible price policies namely:
o Skimming Price Policy
▪ Skimming price policy sets high initial price to first profit from price inelastic
customers, and then successively lowering the prices, often under increasing
competitive conditions, to the levels that more price sensitive customers are
willing to pay.
▪ It sets introductory prices at high levels relative to costs to “skim the cream”
off the market.

o Penetration Price Policy

▪ As opposed to the concept of skimming price strategy, it is an attempt to set
new product prices low relative to the costs.
▪ It involves setting low initial price to establish market share, pre-empt the
competitors and/or to capitalize production economies.
▪ By setting low initial prices, the competitors are kept away and this makes
possible for the firm to enlarge its share by generating larger sales volume.
▪ Where there is high price elasticity of demand. That is, the firm is depending
on low prices to attract more customers to new product.
▪ Where market segments are not there so that high price may be accepted.

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PROMOTIONAL PRICING

The intention of promotional pricing is to stimulate early purchase on the part of

consumers. Companies follow good many strategies to achieve this goal. These are:

▪ Loss Leader Pricing

▪ Special Event Pricing
▪ Cash Rebates
▪ Low or Zero Interest Financing
▪ Longer Period Payments
▪ Warranties and Service Contracts
▪ Psychological Discounting

37 | K I R A N . A . S
PROMOTION DECISION

• Promotion is a type of communication between the buyer and the seller

• It helps in making the people aware of a product, service or a company
• It also helps to improve the public image of a company.
• This method of marketing may also create interest in the minds of buyers and can also
generate loyal customers.
• Promotions refer to the entire set of activities, which communicate the product, brand
or service to the user.
• Promotion is another part of the company’s total communication function.

ROLE OF PROMOTION IN MARKETING

• Increase Brand Awareness

• Provide Information
• Increase Customer Traffic
• Build Sales and Profits
• Creating an image of prestige, low prices, innovation,
• Information about the product and its characteristics,
• Preservation of the popularity of goods (services),
• Change the way you use the product,
• The creation of enthusiasm among market participants,
• Convince buyers to move to more expensive goods,
• Answers to consumer questions,
• Favorable information about the company.

PROMOTIONAL OBJECTIVES

• To increase Sales.
• To maintain or improve the company’s market share.
• To create or improve brand recognition acceptance or preference.
• To create a favorable climate for future Sales.
• To inform & educate the market.
• To create a Competitive difference.
• To improve the promotional efficiency
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THE ROLE OF PROMOTION WITHIN THE MARKETING MIX

1. Promotion and Product

• Promotions role within the product strategy is to communicate the benefit and
unique selling point of the product.
• Promotion may also focus on the features and packaging that are unique to the
product.
• The aim of promotion is to create a strong enough desire (for the product) to
generate a purchase.
2. Promotion and Price
• Promotion may communicate the quality and value of the product.
• Promotions can also highlight special offers such as buy one get one free (BOGOF),
free accessories and discounts.
3. Promotion and Place
• If the product is exclusive and only available in certain stores then the objective of
promotion is to inform consumers of where they can purchase the product.
• Promotion may emphasize that the product can be purchased online, mobile
phone or in store.
4. Promotion and People
• Staff can be a competitive advantage especially in the service sector.
5. Promotions and Process
• People lead very busy lives. If a firm can improve the buying process for their
consumers, it should be promoted.
• Many retail stores and supermarkets promote click and collect, highlighting in
their promotions the ease of doing so.
• Process may play a big factor in the purchase decision for many customers.
• Firms should highlight the benefits of their retail processes to customers.
6. Promotion and Physical Evidence
• Online a firm may promote how easy their website is to navigate and buy from,
both these factors are examples of how the physical evidence can be the
competitive advantage for a firm and the importance of promoting these factors.

39 | K I R A N . A . S
PROMOTION METHODS

• Promotion covers the following areas of activity:

o Advertising
o Sales promotion
o Public relations
o Direct marketing
o Personal selling.

ADVERTISING

• The word advertising is derived from two Latin words “Ad” (towards) and “Verto” (I
turn), literally it means to turn the people’s attention to a specific thing
• Advertising is any form of paid non personal presentation of idea, goods or services for
the purpose of inducting people to buy
• The process of delivering a message about ideas, goods and services through the media,
paid by an individual sponsor
• The first print ad is created in England (1472)
• It is a non personal promotion
• Thomas J. Barratt is known as the father of modern advertising

TYPES OF ADVERTISING

• Online advertising or digital advertising as a form in which the message is conveyed via
the internet. Digital Advertising and Online Advertising is one of the fastest growing
Types of Advertising.
• Surrogate advertising is a form of advertising which is used to promote banned
products, like cigarettes and alcohol, in the disguise of another product
• SMS advertising marketing is the major source of mobile advertising. The difference
between online ads and mobile advertising is that online ads can be accessed from any
device like computer or laptops, mobile advertising is only via mobile.
• Television Ads of almost all products are shown on television. he terms information
comes from the combination of words information and commercial. Although it is costly,
Television Ads are till date one of the best types of advertising and have the most
fantastic reach for a large audience.
40 | K I R A N . A . S
 • Ads in Theatres: The advertisements in movie theatres before all the movies start or
during the intimation are called movie ads. These are one of the costliest forms of
advertising since people cannot skip it change the channel or move away
• Product placement is a form of advertising in which branded goods and services are
featured in a video production that targets a large audience. Also known as "embedded
marketing" or "embedded advertising," product placements are typically found in
movies, television shows, personal videos, radio.
• Radio advertisements are the ones that are broadcast it through radio waves and heard
on radios all over the place.
• Print advertising is the slowly decreasing form of advertising. The main disadvantage of
print advertising is the shelf life of the ads is short.
o Magazine advertising
o Brochures or handouts
o Newspaper advertising
• Outdoor advertising consists of displaying large posters banners or hoardings with the
advertisement. These are displayed on the side of the road, on the glass of large
buildings, or on specifically targeted places that have huge inflow from the public.
• Global Advertising, a single Ad runs throughout all the countries where the product is
present, irrespective of the audience and their language. The ads are homogeneous and
run through the entire world in the English.
• Outdoor Blank Space Advertising: It is a newer form of advertising which ensures a large
reach of audience. Occupying the empty spaces for advertisements is known as space
advertising. Examples include the spaces of metros, buses, cabs, flight seats & movie
theatre seats
• E-mailers: While some have classified this under internet advertising E-mailers have
gained a separate category owing to the fact of personalization. he emails sent from
companies have a personalized message including a personalized greeting makes E-
mailers more effective than most of the forms of advertising.

41 | K I R A N . A . S
PROCESS OF ADVERTISING

1. Step 1 - Briefing: The advertiser needs to brief about the product or the service which
has to be advertised and doing the SWOT analysis of the company and the product.
2. Step 2 - Knowing the Objective: One should first know the objective or the purpose of
advertising. i.e. what message is to be delivered to the audience?
3. Step 3 - Research: This step involves finding out the market behavior, knowing the
competitors, what type of advertising they are using, what is the response of the
consumers, availability of the resources needed in the process, etc.
4. Step 4 - Target Audience: The next step is to identify the target consumers most likely
to buy the product. The target should be appropriately identified without any confusion.
5. Step 5 - Media Selection: Now that the target audience is identified, one should select
an appropriate media for advertising so that the customers who are to be informed
about the product and are willing to buy are successfully reached.
6. Step 6 - Setting the Budget: Then the advertising budget has to be planned so that there
is no short of funds or excess of funds during the process of advertising and also there
are no losses to the company.
7. Step 7 - Designing and Creating the Ad: First the design that is the outline of ad on
papers is made by the copywriters of the agency, then the actual creation of ad is done
with help of the art directors and the creative personnel of the agency.
8. Step 8 - Perfection: Then the created ad is re-examined and the ad is redefined to make
it perfect to enter the market.
9. Step 9 - Place and Time of Ad: The next step is to decide where and when the ad will be
shown. The place will be decided according to the target customers where the ad is most
visible clearly to them. The finalization of time on which the ad will be telecasted or
shown on the selected media will be done by the traffic department of the agency.
10. Step 10 - Execution: Finally, the advertise is released with perfect creation, perfect
placement and perfect timing in the market.
11. Step 11 - Performance: The last step is to judge the performance of the ad in terms of
the response from the customers, whether they are satisfied with the ad and the
product, did the ad reached all the targeted people, was the advertise capable enough
to compete with the other players, etc. Every point is studied properly and changes are
made, if any.
42 | K I R A N . A . S
43 | K I R A N . A . S
DISADVANTAGES

• Adds to Costs
• Undermines Social Values
• Confuses the Buyers
• Encourages Sale of Inferior Products
• Some Advertisement is in Bad Taste
• Misleading Claims About Products
• Encouragement of Monopoly
• High Prices of Products and Services
• Small Businesses Have Restricted Access
• Misdirection of Purchasing Power
• Dangerous Distractions
• Unfulfilled Desires
• Promotion of Social Evils
• Confusion About Characteristics of Products
• Advertising helps to sell bad products
• Advertising dictates media choices
• Advertising is too pervasive
• Degrading Moral Values
• It promotes materialism
• Advertising reinforces stereotypes

44 | K I R A N . A . S
PERSONAL SELLING

• Personal selling is also known as face-to-face selling in which one person who is the
salesman tries to convince the customer in buying a product.
• It is a promotional method by which the salesperson uses his or her skills and abilities
in an attempt to make a sale.
• According to Philip Kotler, “Personal selling is a broader concept and involves oral
presentation in a conversation with one or more prospective purchasers for the
purpose of making sales.”
• Personal selling can be defined as "the process of person-to-person communication
between a salesperson and a prospective customer, in which the former learns about
the customer's needs and seeks to satisfy those needs by offering the customer the
opportunity to buy something of value, such as a good or service.
• Personal selling is the process of communicating with a potential buyer (or buyers)
face-to-face with the purpose of selling a product or service.
• Personal Selling is a personal form of communication where direct face to face
conversation takes place between the buyer and the seller for the purpose of
exchanging goods and services.
• Salespersons are appointed by the companies to create awareness and develop
preference about their products with the eventual aim of making sale.

IMPORTANCE OF PERSONAL SELLING

1. Importance to Businessmen
• Effective Promotional Tool
• Flexible Tool
• Minimizes Wastage of Efforts
• Customer Attention
• Lasting Relationship
• Personal Rapport
• Role in Introduction Stage
• Link with Customers

45 | K I R A N . A . S
 2. Importance to Customers
• Helps in Identifying Needs
• Latest Market Information
• Expert Advice
• Induces Customers
3. Importance to Society
• Converts Latest Demand
• Employment Opportunities
• Career Opportunities
• Mobility of Sales People
• Product Standardization

TYPES OF PERSONAL SELLING

1. Retail Selling: In retail selling, the salesperson communicates directly with individual
customers. He/she sells product to the consumers through retail store or door to door
visit.
2. Business-to-Business Selling: In business-to-business selling, the salesperson sells
products to industrial buyers. It involves the sales of equipment, plants & machineries
etc. to the industrial buyer.
3. Trade Selling: In trade selling, the salesperson sells products to marketing
intermediaries such as retailers and wholesalers. Trade sales person should contact
regularly with the wholesaler and retailers to receive bulk order from them.

46 | K I R A N . A . S
PROCESS OF PERSONAL SELLING

1. PROSPECTING
• The first step of the personal selling process is called ‘prospecting’.
• Prospecting refers to locating potential customers.
• There are many sources from which potential customers can be found:
i. Observation
ii. Social contacts
iii. Trade shows
iv. Commercially-available databases
v. Commercially-available mail list and cold calling.
2. PRE-APPROACH
• The nest step in the personal selling process is called the ‘pre-approach’.
• The pre-approach involves preparation for the sales presentation.
• This preparation involves research about the potential customers, such as market
research. Research is useful in planning the right sales presentation.
• During the pre-approach the salesperson may also plan and practice their sales
presentation.
3. THE APPROACH
• The next step in the personal selling process is called the ‘approach’.
• The approach refers to the initial contact between the salesperson and the
prospective customer.
• During this stage the sales person takes a few minutes for “small talk” and get to
know the potential customer.
47 | K I R A N . A . S
 • The goal of the approach is to determine the specific needs and wants of the
individual customer, as well as allowing the potential customer to relax and open
up.
4. SALES PRESENTATION
• The next step in the personal selling process is called the ‘sales presentation’.
• The sales presentation involves the salesperson presenting the product or service,
describing its qualities and possibly demonstrating features of the product.
• Ideally the sales presentation will be individualized to match the needs and desires
of the potential customer.
5. HANDLING OBJECTIVES
• In some cases, after receiving the sales presentation, the potential customer will
have some questions or concerns.
• In order to secure a sale, the salesperson must address these questions or
concerns; this step is referred to as ‘handling objectives.’
6. CLOSING THE SALE
• The next step in the personal selling process is referred to as ‘closing the sale’.
• ‘Closing the sale’ refers to finalizing the sale and persuading the potential
customer to make the purchase.
• During the ‘closing the sale’ step, prices and payment options may be negotiated.
7. FOLLOW UP
• The final step in the personal selling process is referred to as the ‘follow up.’
• The follow up involves the salesperson contacting the customer after the sale to
ensure that the customer is satisfied.
• If the customer has any existing issues with the product, the salesperson will
address them.
• A successful follow up stage of personal selling can be very effective in ensuring
repeat sales, evaluating the effectiveness of the salesperson, and obtaining
additional referrals from the satisfied customer.

48 | K I R A N . A . S
PUBLICITY

• The word publicity is derived from the French word “publicité”.

• It is the movement of information to the general public from the media.
• The subjects of publicity include people (for example, politicians and performing artists),
goods and services, organizations, and works of art or entertainment
• Publicity is the public visibility or awareness for any product, service or company.
• It may also refer to the movement of information from its source to the general public,
often but not always via the media.
• The subjects of publicity include people of public interest, goods and services,
organizations, and works of art or entertainment
• Publicity is also a way of mass communication.
• It is not a paid form of mass communication that involves getting favorable response of
buyers by placing commercially significant news in mass media.
• Publicity is not paid for by the organization.
• Publicity comes from reporters, columnists, and journalists. It can be considered as a
part of public relations.
• Publicity involves giving public speeches, giving interviews, conducting seminars,
offering charitable donations, inaugurating mega events by film actors, cricketers,
politicians, or popular personalities, arranging stage show, etc., that attract mass media
to publish the news about them.
• Publicity is undertaken for a wide range of purposes like promoting new products,
increasing sales of existing product, etc.
• It also aimed at highlighting employees’ achievements, company’s civic activities,
pollution control steps, research and development successes, financial performance, its
progress, any other missionary activities, or social contribution.
• William J. Stanton, “Publicity is any promotional communication regarding an
organization and/or its products where the message is not paid for by the organization
benefiting from it.”
• Philip Kotler, “Non-personal stimulation of demand for the product or service, or
business unit by placing commercially significant news about it in public medium or
obtaining favorable presentation of it upon radio, television, or stage that is not paid for
by the sponsor.”
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CHARACTERISTICS OF PUBLICITY

• Publicity is not a paid form of mass communication that involves getting favorable
response of buyers by placing commercially significant news in mass media.
• It involves obtaining favorable presentation upon radio, newspapers, television, or stage
that is not paid for by the sponsor
• Publicity is not a paid form of communication. It is not directly paid by producer.
However, it involves various indirect costs.
• Mostly, publicity can be carried via newspapers, magazines, radio, or television.
• It is primarily concerning with publishing or highlighting company’s activities and
products.
• It is targeted to build company’s image. In a long run, it can contribute to increase sales.
• Company has no control over publicity in terms of message, time, frequency,
information, and medium
• Publicity has high degree of credibility or reliability as it comes from mass media
independently
• Publicity is a part of broad public relations efforts and activities.
• Publicity can be done at much lower cost than advertising. Company needs to spend a
little amount to get the event or function publicized.
• Publicity message is more likely to be read, viewed, heard, and reacted by audience. It
has a high degree of believability as it is given by the third party.
• Frequency or repetition of publicity in mass media depends upon its social significance
or the values for news.
• It is done by the third party

OBJECTIVES OF PUBLICITY

• Building Corporate Image

• Assisting Middlemen and Salesmen
• Information with High Creditability
• Removing Misunderstanding or Bad Image
• Building Interest on Product Categories
• Newsworthiness Information

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SALES PROMOTION

• Sales promotion is one of the elements of the promotional mix.

• Sales promotion uses both media and non-media marketing communications
• Examples include contests, exhibition, coupons, freebies, loss leaders, point of purchase
displays, premiums, prizes, product samples, and rebates
• Sales promotions targeted at the consumer are called consumer sales promotions.
• Sales promotions targeted at retailers and wholesale are called trade sales promotions.
• Sales promotion includes the short-term incentives offered to middlemen, salesmen,
and/or consumers.
• It can also reduce the degree of consumer dissatisfaction.
• Sales promotion covers those marketing activities other than advertising, publicity, and
personal selling that stimulate consumer purchasing and dealer effectiveness
• Sales promotion mainly involves short-term and non-routine incentives offered to
dealers as well as consumers.
• Philip Kotler, “Those marketing activities other than personal selling, advertising, and
publicity that stimulate consumer purchasing and dealer effectiveness, such as display,
shows, demonstrations, expositions, and various other non-current selling efforts, not
in ordinary routine.”
• Sales promotion involves non-routine promotional devices to stimulate and re-stimulate
demand of the products
• Sales promotion includes non-routine selling efforts (incentives) for temporary period
of time to maintain or increase sales during particular time interval.

CHARACTERISTICS OF SALES PROMOTION

• It is a part of market promotion. It involves all the promotional efforts other than
advertising, personal selling, and publicity.
• The primary purpose is to induce customer for immediate buying or dealer effectiveness
or both.
• It is optional. Many companies do not practice it.
• Sales Promotion – Pro-Active or Reactive

51 | K I R A N . A . S
 • It is directed for multiple objectives, like to maintain sales during off season, to increase
sales, to face competition, to clear stocks, to improve image, to promote new products,
etc.
• It consists of offering, wide variety of tools/incentives.
• It involves the non-recurrent selling efforts.
• They are not a part of daily activities. They are not undertaken repeatedly.
• Sales promotion incentives are imitative. Competitors can easily imitate them
• It supports personal selling and advertising efforts. It is like a bridge between advertising
and personal selling. It can increase effectiveness of other promotional efforts
• It includes impersonal incentives. They are offered openly to all.

IMPORTANCE OF SALES PROMOTION

• The basic objective of sales promotion is to maintain, increase, or regulate sales

• To introduce new products.
• To keep consumers satisfied.
• To attract new customers.
• To clear stocks of products. To sell out old stocks rapidly.
• To induce consumers to try and buy certain products
• To induce present customers to buy more quantity and/or times.
• To strengthen competitive position.
• To offset price competition.
• To speed up sales of slow-moving products.
• To induce consumers to switch from competitors’ brands.
• To maintain or increase sales during off-seasons.
• To inspires middlemen to keep more inventories/stocks.
• To encourage middlemen to put more efforts in attracting customers.
• To support personal selling. To motivate salesmen to work more.
• To increase effectiveness of advertising.
• To reduce the degree of dissatisfaction of customers.
• To increase familiarity and popularity of product, brand or company name.

52 | K I R A N . A . S
SALES PROMOTION TOOLS

1. Consumer Level Sales Promotion:

• Free samples
• Gift articles like balls, stickers, pens, cards, diaries, calendars, manuals, and other
literature
• Coupons
• Credit facilities
• Guarantee and warrantee
• Exchange offer
• Price discount and rebate or temporary price-cut
• Seasonal discount
• Loan facility
• Installment payment scheme
• Courtesy visit by sales representatives
• Free accessories and parts
• Extra quantity/excess product
• Free demonstration
• Display – arranging products in articulative and attractive manner
• Free trial – permitting consumers to use product for short time
• Premium – extra gift with product
• Money refund offer
• Cent-off promotion – reduction in regular price
• Contests and prizes
• Free home delivery and installation, instructions and other services.
2. Dealer/Channel Level Sales Promotion:
• Bonus
• Training to staff
• Trade discount and cash discount
• Credit facility
• Gifts on excess sales
• Parties and meetings
• Gifts on special social occasions and festivals
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 • Financial assistance during difficulties
• Storage facilities
• Free transportation and insurance
• Dealers’ symposium
• Free tour or visits to visiting places
• Awards, prizes, momentous, and certificates
• Sales contests
• Advertising materials
• Gifts articles and samples for consumers
• Premium on certain brand
• Dealership rights (franchises)
• Joint advertising, etc.
3. Salesman Level Sales Promotion:
• Extra commission – high rate or more amounts
• Free training
• Sales materials and samples for customers
• Gifts articles
• Offering products at free-of-costs or at concessional rate
• Bonus – extra payment for extra and/or excellent performance
• Profit sharing (exceptionally, not regularly)
• Special allowances and commissions
• Free holiday-home
• Customer entertainment allowances
• Participation in formulating sales policies and strategies
• Appreciation, recognition, and praise
• Sales contests among salesmen
• Awards, prizes and certificates
• Sales force conventions (conferences, meetings, seminars, discussion, etc.)
• Leave encashment etc.

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SALES PROMOTION TECHNIQUES

• Rebate: Under it in order to clear the excess stock, products are offered at some reduced
price. For example, giving a rebate by a car manufacturer to the tune of 12,000/- for a
limited period of time.
• Discount: Under this method, the customers are offered products on less than the listed
price. For example, giving a discount of 30% on the sale of Liberty Shoes. Similarly giving
a discount of 50% + 40% by the KOUTONS.
• Refunds: Under this method, some part of the price of an article is refunded to the
customer on showing proof of purchase. For example, refunding an amount of 5/- on
showing the empty packet of the product priced 100/-
• Product Combination: Under this method, along with the main product some other
product is offered to the customer as a gift.
• Quantity Gift: Under this method, some extra quantity of the main product is passed on
as a gift to the customers. For example, 25% extra toothpaste in a packet of 200 gm
tooth paste. Similarly, a free gift of one RICH LOOK shirt on the purchase of two shirts.
• Instant Draw and Assigned Gift: Under this method, a customer is asked to scratch a
card on the purchase of a product and the name of the product is inscribed thereupon
which is immediately offered to the customer as a gift. For example, on buying a car
when the card is scratched such gifts are offered – TV, Refrigerator, Computer, Mixer,
Dinner Set, Wristwatch, T-shirt, Iron Press, etc.
• Lucky Draw: Under this method, the customers of a particular product are offered gifts
on a fixed date and the winners are decided by the draw of lots. While purchasing the
product, the customers are given a coupon with a specific number printed on it. On the
basis of this number alone the buyer claims to have won the gift. For example, ‘Buy a
bathing soap and get a gold coin’ offer can be used under this method.
• Usable Benefits
o Under this method, coupons are distributed among the consumers on behalf of
the producer.
o Coupon is a kind of certificate telling that the product mentioned therein can be
obtained at special discount.
o It means that if a customer has a coupon of some product, he will get the discount
mentioned therein whenever he buys it.
55 | K I R A N . A . S
 o Possession of a coupon motivates the consumer to buy the product, even when
he has no need of it.
o Such coupons are published in newspapers and magazines. Some companies
distribute coupons among its shareholders. Sellers collect the coupons from the
customers and get the payment from the company that issues the same.
• Full Finance @ 0%: Under this method, the product is sold and money received in
installment at 0% rate of interest. The seller determines the number of installments in
which the price of the product will be recovered from the customer. No interest is
charged on these installments.
• Samples or Sampling:
o Under this method, the producer distributes free samples of his product among
the consumers. Sales representatives distribute these samples from door-to-door.
o This method is used mostly in case of products of daily-use, e.g., Washing Powder,
Tea, Toothpaste, etc. Thus, the consumers willy-nilly make use of free sample. If it
satisfies them, they buy it and, in this way, sales are increased.
• Contests: Some producers organize contests with a view to popularizing their products.
Consumers taking part in the contest are asked to answer some very simple questions
on a form and forward the same to the company. The blank form is made available to
that consumer who buys the product first.

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PROMOTION MIX

• In marketing, the promotional mix describes a blend of promotional variables chosen by

marketers to help a firm reach its goals.
• It has been identified as a subset of the marketing mix.

Promotion Mix Typically include the following:

• Advertising
o Advertising is defined as any paid form of non-personal presentation and
promotion of ideas, goods, and services by an identified sponsor
o Examples include print ads, radio, television, billboard, direct mail, brochures and
catalogs, signs, in-store displays, posters, mobile apps, motion pictures, web
pages, banner ads, emails
• Personal selling
o Personal selling includes face-to-face personal communication and presentation
with prospects (potential and actual customers) for the purpose of selling the
products.
o It involves personal conversation and presentation of products with customers.
o It is considered as a highly effective and costly tool of market promotion.
o Examples include sales presentations, sales meetings, sales training and incentive
programs for intermediary salespeople, samples, and telemarketing.
• Sales Promotion
o Sales promotion covers those marketing activities other than advertising,
publicity, and personal selling that stimulate consumer purchasing and dealer
effectiveness.
o Sales promotion mainly involves short-term and non-routine incentives, offered
to dealers as well consumers
o Examples include coupons, sweepstakes, contests, product samples, rebates, tie-
ins, self-liquidating premiums, trade shows, trade-ins, and exhibitions.

57 | K I R A N . A . S
 • Publicity
o Publicity is also a way of mass communication.
o It is a non-paid form of market promotion
o It is not a paid form of mass communication that involves getting favorable
response of buyers by placing commercially significant news in mass media.
o Examples include newspaper and magazine articles, TVs and radio presentations,
charitable contributions, speeches, issue advertising, seminars
• Public Relation
o The public relations are comprehensive term that includes maintaining
constructive relations not only with customers, suppliers, and middlemen, but also
with a large set of interested publics.
o Note that public relations include publicity, i.e., publicity is the part of public
relations.
o Public relations are a paid form of market promotion.
• Direct Marketing: It is a channel-agnostic form of advertising that allows businesses and
nonprofits to communicate directly to the customer, with methods such as mobile
messaging, email, interactive consumer websites, online display ads, fliers, catalog
distribution, promotional letters, and outdoor advertising.
• Corporate image campaigns have been considered as part of the promotional mix.
• Sponsorship of an event or contest or race is a way to generate further positive publicity.
• Guerrilla marketing tactics are unconventional ways to bring attention to an idea or
product or service, such as by using graffiti, sticker bombing, posting flyers, using flash
mobs, doing viral marketing campaigns, or other methods using the Internet in
unexpected ways.
• Product placement is paying a movie studio or television show to include a product or
service prominently in the show.
• Digital marketing is the marketing of products or services using digital technologies,
mainly on the Internet, but also including mobile phones, display advertising, and any
other digital medium

58 | K I R A N . A . S
GUERRILLA MARKETING

• Guerrilla marketing is an advertisement strategy in which a company uses surprise

and/or unconventional interactions in order to promote a product or service.
• It is a type of publicity.
• The term was popularized by Jay Conrad Levinson's 1984 book Guerrilla Marketing

DISTRIBUTION CHANNEL

• Distribution channel is a means used to transfer merchandise from the manufacturer

to the end user through retailer and other necessary intermediaries.
• An intermediary in the channel is called an agent/middleman.
• Channels normally vary from two-level channels without intermediaries to five-level
channels with three intermediaries.
• Distribution means the process by which we make the goods or the service available to
the end consumer
• Dual Distribution channel, when a manufacturer uses more than one marketing channel
simultaneously to reach the end user, he is said to be using the dual distribution strategy.

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CHANNEL LEVELS

1. A Zero Level Channel

• A zero-level channel, commonly known as direct marketing channel has no
intermediary levels (The remaining channels are known as indirect-marketing
channels)
• In this channel framework manufacturer sells merchandise directly to customers.
• Eureka Forbes, leaders in domestic and industrial water purification systems,
vacuum cleaners, air purifiers & security solutions is pioneered in direct selling
that makes it an Asia’s largest direct sales organization.
• Example: Door to door selling, Internet selling, Mail order selling, Company owned
retail outlets, Telemarketing

2. A One Level Channel

• A one level channel contains one selling intermediary.
• In consumer markets, this is usually a retailer.
• Sell their goods directly to large retailers and then sell the goods to the final
consumers.
• For example, Tata sells its cars through company approved retailers.

60 | K I R A N . A . S
 3. A Two-Level Channel
• A two-level channel encompasses two intermediary levels – a wholesaler and a
retailer.
• A wholesaler typically buys and stores large quantities of merchandise from
various manufacturers and then breaks into the bulk deliveries to supply retailers
with smaller quantities.
• For small retailers with limited financial resources and order quantities, the use of
wholesalers makes economic sense.
• This is the most commonly used channel for distributing goods like soap, rice,
wheat, clothes etc.

4. A Three Level Channel

• A third level channel, as the name implies, encompasses three intermediary levels
– a wholesaler, a retailer and a jobber.
• In the poultry industry, products like mutton, chicken, eggs etc. are first sold to
wholesalers; he then sells it to jobbers, who sell to small and unorganized retailers.
• The word “jobber,” they are now referred to by the more politically-correct term
– “Off-price specialists.”
• This level is usually used when a manufacturer deal in limited products and yet
wants to cover a wide market.

61 | K I R A N . A . S
MIDDEL MAN

1. Agents
• Agents are middlemen who represent the produces to the customer.
• They only work on fees and commissions.
2. Wholesalers
• Wholesalers buy the goods from the producers directly.
• One important characteristic of wholesalers is that they buy in bulk at a lower rate
than retail price.
• They store and warehouse huge quantities of the products and sell them to other
intermediaries in smaller quantities for a profit.
• Wholesalers generally do not sell to the end consumer directly. They sell to other
middlemen like retailers or distributors.
3. Distributors
• Distributors are similar to wholesalers in their function. Except they have a
contract to carry goods from only one producer or company.
• They do not stock a variety of products from various brands.
• They are under contract to deal in particular products of only one parent company
4. Retailers
• Retailers are basically shop owners.
• The only difference is in their sizes.
• Retailers will procure the goods from wholesaler or distributors and sell it to the
final consumers.

FUNCTIONS OF DISTRIBUTION CHANNELS

1. Sorting: Middlemen obtain the supplies of goods from various suppliers and sort them
out into similar groups on the basis of size, quality etc.
2. Accumulation: In order to ensure a continuous supply of goods, middlemen maintain a
large volume of stock.
3. Allocation: It involves packing of the sorted goods into small marketable lots like 1Kg,
500 grams, 250 grams etc.

62 | K I R A N . A . S
 4. Assorting: Middlemen obtain a variety of goods from different manufacturers and
provide them to the customers in the combination desired by them. For example, rice
from Dehradun & Punjab.
5. Product Promotion: Sales promotional activities are mostly performed by the producer
but sometimes middlemen also participate in these activities like special displays,
discounts etc.
6. Negotiation: Middlemen negotiate the price, quality, guarantee and other related
matters about a product with the producer as well as customer.
7. Risk Taking: Middlemen have to bear the risk of distribution like risk from damage or
spoilage of goods etc. when the goods are transported from one place to another or
when they are stored in the god-owns.

FACTORS DETERMINING CHOICE OF CHANNELS OF DISTRIBUTION

1. Product Related Factors

• Nature of Product
• Perishable (Like Fruits or vegetables are distributed through short channels)
• Non- Perishable Products (Like soaps, oils, sugar, salt etc. require longer channels)
• Value of Product
• Product Complexity
2. Company Characteristics
• Financial Strength
• Control
3. Competitive Factors
4. Market Factors
• Size of Market
• Geographical Concentration
• Quantity Purchased
5. Environmental Factor
• Economic factors
• Economic conditions
• Legal regulations

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PROCESS OF CHANNEL MANAGEMENT

1. Selecting Channel Members

2. Training Channel Partners
3. Motivating Channel Members
4. Evaluating Channel Members
5. Modifying Channel Arrangements

CONSUMER BEHAVIOUR

• Consumer Behaviour is the study of individual, group or organization and all the
activities associated with the purchase, use and disposal of goods and services, including
the consumer’s emotional, mental and behavioral responses.
• Consumer behaviour is the study of how individual customers, groups or organizations
select, buy, use, and dispose ideas, goods, and services to satisfy their needs and wants.
• Consumer Behaviour emerged in the 1940s and 1950s as a distinct sub-discipline in the
marketing area.
• In order to succeed in today’s dynamic and rapidly evolving marketplace, marketers
need to know everything about consumer – what they need, what they think, how they
work, how they spend their money and time.
• Consumer behaviour is an inter-disciplinary social science that blends elements from
psychology, sociology, social anthropology, anthropology, ethnography, marketing and
economics, especially behavioral economics

64 | K I R A N . A . S
CONSUMER BUYING PROCESS

65 | K I R A N . A . S
FACTORS INFLUENCING CONSUMER BUYING DECISIONS

TYPES OF BUYER BEHAVIOUR

1. Complex: High involvement, Significant differences between brand (Computer)

2. Variety Seeking: Low involvement, Significant differences between brand (Cookies)
3. Habitual: Low involvement, Few differences between brand (Salt, Sugar, Newspaper)
4. Dissonance: High involvement, Few differences between brands (Carpeting)

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SERVICE MARKETING

• Service marketing is marketing based on relationship and value.

• The American Marketing Association, Services are activities, benefits or satisfaction
which are offered for sale or provided in connection with sale of goods
• Marketing services is different from marketing goods because of the unique
characteristics of services namely, intangibility, heterogeneity, perishabil-ity and
inseparability.

FEATURES OF SERVICES

1. Intangibility:
• A physical product is visible and concrete. Services are intangible.
• The service cannot be touched or viewed
2. Inseparability:
• Personal services cannot be separated from the individual.
• Services are created and consumed simultaneously.
• The service is being produced at the same time that the client is receiving it
3. Heterogeneity (or variability):
• Services involve people, and people are all different. There is a strong possibility
that the same enquiry would be answered slightly differently by different people
(or even by the same person at different times).
• It is important to minimize the differences in performance (through training,
standard setting and quality assurance).
• The quality of services offered by firms can never be standardized.
4. Perishability:
• Services have a high degree of perishability.
• Unused capacity cannot be stored for future use. If services are not used today, it
is lost forever.
5. Changing demand:
• The demand for services has wide fluctuations and may be seasonal.
• Demand for tourism is seasonal, other services such as demand for public
transport, cricket field and golf courses have fluctuations in demand.
•
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 6. Pricing of services:
• Quality of services cannot be standardized.
• The pricing of services is usu-ally determined on the basis of demand and
competition.
7. Direct channel:
• Usually, services are directly provided to the customer.
• The customer goes directly to the service provider to get services such as bank,
hotel, doctor, and so on.

PROBLEMS IN MARKETING SERVICES

1. A service cannot be demonstrated.

2. Sale, production and consumption of services takes place simultaneously.
3. A service cannot be stored. It cannot be produced in anticipation of demand.
4. Services cannot be protected through patents.
5. Services cannot be separated from the service provider.
6. Services are not standardized and are inconsistent.
7. Service providers appointing franchisees may face problems of quality of services.
8. The customer perception of service quality is more directly linked to the morale,
motivation and skill of the frontline staff of any service organization

SERVICE MARKET TRIANGLE

68 | K I R A N . A . S
DIFFERENCE BETWEEN GOODS AND SERVICES

BASIS FOR
GOODS SERVICES
COMPARISON

Meaning Goods are the material items that Services are amenities,
can be seen, touched or felt and are facilities, benefits or help
ready for sale to the customers. provided by other people.

Nature Tangible Intangible

Transfer of Yes No
ownership

Evaluation Very simple and easy Complicated

Return Goods can be returned. Services cannot be returned

back once they are provided.

Separable Yes, goods can be separated from the No, services cannot be
seller. separated from the service
provider.

Variability Identical Diversified

Storage Goods can be stored for use in future Services cannot be stored.
or multiple use.

Production and There is a time lag between Production and Consumption

Consumption production and consumption of of services occurs
goods. simultaneously.

69 | K I R A N . A . S
TRENDS IN MARKETING

SOCIAL MARKETING

• Social marketing is the systematic application of marketing along with other concepts
and techniques to achieve specific behavioral goals for a social good.
• Social marketing has the primary goal of achieving "social good".
• The term “Social Marketing” was first coined by Philip Kotler and Zaltman
• For example, this may include asking people not to smoke in public areas, asking them
to use seat belts or prompting to make them follow speed limits.

ONLINE MARKETING

• Cyber marketing is one of the options for direct marketing. It is also known as online
marketing, e (electronic)-marketing, e-commerce, Internet marketing, or, simply, Net
marketing, Web marketing.
• It is the method connecting marketers and customers through Internet.
• Normally, commercial online channels and Internet are used for online marketing.
• Cyber marketing is used for both promotion tool as well as distribution tool.
• Cyber marketing concerns with information technology
• Cyber marketing is a system or arrangement of conducting marketing transactions
through Internet Technology.
• The management of digital customer data and electronic customer relationship
management systems are also often grouped together under the Internet marketing.

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GREEN MARKETING

• Green marketing is the marketing of products that are presumed to be environmentally

safe.
• Here, term ‘green’ is indicative of purity. Green means pure in quality and fair or just in
dealing
• Some call it eco-marketing or environmental marketing, and consumers recognize such
brands by terms like "organic," "eco-friendly," "recyclable," or "sustainable."
• For example, green advertising means advertising without adverse impact on society.
• Concept of green marketing concerns with protection of ecological environment
• Green marketing emphases on protection of long-term welfare of consumers and
society by production and use of pure, useful, and high-quality products without any
adverse effect on the environment
• Green marketing refers to the process of selling or marketing goods that are safe for the
environment.
• Such products are packed in sustainable packaging.
• Green marketing promotes a product that does not contain any toxic material.
• These goods can be easily recycled.
• Basically, green marketing concerns with three aspects:
o Promotion of production and consummation of pure/quality products
o Fair and just dealing with customers and society
o Protection of ecological environment
o Demonstrating social responsibility
o Reducing expenses (packaging, transportation, energy/water usage, etc.)
o Demonstrating how safe and mindful products or services are

GREEN MARKETING STRATEGY

1. Green design
2. Green positioning
3. Green pricing
4. Green logistics
5. Green disposal

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IMPORTANCE OF GREEN MARKETING

• Reducing use of plastics and plastic-based products.

• Increased consumption of herbal products instead of processed products
• Recommending use of leaves instead of plastic pieces; jute and cloth bags instead of
plastic carrying bags.
• Increasing use of bio-fertilizers (made of agro-wastes and wormy-composed) instead of
chemical fertilizers (i.e. organic farming), and minimum use of pesticides.
• Worldwide efforts to recycle wastes of consumer and industrial products.
• Increased use of herbal medicines, natural therapy, and Yoga.
• Strict provisions to protect forests, flora and fauna, protection of the rivers, lakes and
seas from pollutions.
• Global restrictions on production and use of harmful weapons, atomic tests, etc. Various
organizations of several countries have formulated provisions for protecting ecological
balance.
• More emphasis on social and environmental accountability of producers
• Strict legal provisions for restricting duplication or adulteration.

PRINCIPLES OF GREEN MARKETING

1. Prevent waste
2. Maximize the atom economy
3. Use less hazardous processes
4. Design safer chemicals
5. Design for energy efficiency
6. Use renewable feedstocks
7. Minimize derivatives
8. Monitor pollution in real time
9. Prevent accidents

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DIRECT MARKETING

• Direct marketing is also known as direct selling, mail-order Selling or Catalogue Selling.
• Direct marketing is a form of communicating an offer, where organizations
communicate directly to a pre-selected customer and supply a method for a direct
response.
• Direct marketing is a promotional method that involves presenting information about
your company, product, or service to your target customer without the use of an
advertising middleman.
• Among practitioners, it is also known as direct response marketing.
• By contrast, advertising is of a mass-message nature.
• Lester Wunderman, the founder of Wunderman, Ricotta & Kline, coined the phrase
Direct Marketing in 1958
• Direct marketing is a type of advertising campaign that seeks to bring an action in a
selected group of consumers in response a communication by the marketer.
• This communication can take many different formats, such as postal mail, telemarketing
• An essential aspect of direct marketing is that the consumer response is measurable
• Forms of Direct Marketing: Brochures, Catalogs, Fliers, Newsletters, Post cards,
Coupons, Emails, Targeted online display ads, Phone calls, Text messages
• Methods for direct marketing
o Selling products by sales force or face-to-face selling.
o Face-to-face selling at company’s showrooms or retail outlets.
o Direct mail to company for ordering or information (direct mail marketing).
o Fax mail or E-mail to company for placing order or getting information
o On-line marketing/cyber marketing. Connecting PCs with websites for dealings.
o M-mail (mobile mail) or MMS/SMS through mobile phone.
o Kiosk marketing (customer-order-placing machines). Electronic Kiosk provides
needed information to customers and accepts orders from customers.
o Automatic vending machine (for products like cold drinks, cigarette, travel tickets,
candy, coffee, money etc.)
o Telemarketing and voice mail, etc.

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RURAL MARKETING

• Rural marketing is a process of developing, pricing, promoting, and distributing rural

specific goods and services leading to desired exchange with rural customers to satisfy
their needs and wants, and also to achieve organizational objectives
• Rural marketing in Indian economy can be classified under two broad categories.
o The market for consumer goods that comprise of both durable and non-durable
goods
o The market for agricultural inputs that include fertilizers, pesticides, seeds, and so
on
• ‘Rural marketing’ is similar to simply ‘marketing.’ Rural marketing differs only in terms
of buyers.
• The Rural Marketing is a two-way process:
o Urban to Rural: FMCG Goods, Agricultural fertilizers, automobiles, etc. are offered
by the urban market to the rural market.
o Rural to Urban: The agricultural supplies viz. Fruits, vegetables, flowers, milk, etc.
is offered from the rural market to the urban market.

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CUSTOMER RELATIONSHIP MANAGEMENT (CRM)

• Customer relationship management (CRM) is an approach to manage a company's

interaction with current and potential customers.
• It uses data analysis about customers' history with a company to improve business
relationships with customers, specifically focusing on customer retention and ultimately
driving sales growth
• maintaining profitable relationships with customers by delivering superior customer
value & customer satisfaction
• Customer relationship management (CRM) is a technology for managing all your
company’s relationships and interactions with customers and potential customers.
• Need and Importance of CRM:
o Better service to customers
o Customization of market offerings
o Reduction in the customer defection rate
o Increase and improvement in long-term relationships
o Increase in customer equity
o Competitive advantage
o Building and maintaining corporate image
o Higher return on investment

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LOGISTICS MANAGEMENT

• Logistics management consists of the process of planning, implementing and controlling

the efficient flow of raw-materials, work-in-progress and finished goods and related
information-from point of origin to point of consumption; with a view to providing
satisfaction to the customer.
• Logistics means having the right thing, at the right place, at the right time
• The word “Logistics” is derived from French word “Loger”. It means art of war pertaining
to movement and supply of armies
• “Logistics means the art of managing the flow of raw materials and finished goods from
the sources to the user”
• Logistics is the designing and managing of a system in order to control the flow of
material throughout a corporation
• According to Phillip Kotler, “Market logistics involve planning, implementing and
controlling physical flow of material and final (finished) goods from the point of origin
to the point of use to meet customer requirements, at a profit.”
• There are four logistic concepts:
o The systems concept
o The total cost control concept
o After – tax concept
o The trade – off concept

Key Activities/Elements Involved in Logistics Management:

• Network Design
• Order Processing
• Procurement
• Material Handling
• Inventory Management
• Packaging and Labeling
• Warehousing
• Transportation

76 | K I R A N . A . S
Classification of Logistical Activities:

• Inbound logistics:
o Which is concerned with the smooth and cost-effective inflow of materials and
other inputs (that are needed in the manufacturing process) from suppliers to the
plant
o For proper management of inbound logistics, the management has to maintain a
continuous interface with suppliers (vendors).
• Outbound logistics:
o Also called physical distribution management or supply chain management
o It is concerned with the flow of finished goods and other related information from
the firm to the customer.
o For proper management of outbound logistics, the management has to maintain
a continuous interface with transport operators and channels of distribution.

OBJECTIVES OF LOGISTICS MANAGEMENT

• Cost Reduction and Profit Maximization

• Efficient Flow of Manufacturing Operations
• Competitive Edge
• Effective Communication System
• Sound Inventory Management

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MARKETING AUDIT

• The Marketing Audit refers to the comprehensive, systematic, analysis, evaluation and
the interpretation of the business marketing environment, both internal and external
• The marketing audit is generally conducted by a third person, not a member of an
organization.
• The firm conducting the Marketing Audit should keep the following points in mind:
o The Audit should be Comprehensive: It should cover all the areas of marketing
where the problem persists and do not take a single marketing problem under the
consideration.
o The Audit should be Systematic: An orderly analysis and evaluation of firm’s micro
& macro environment, marketing principles, objectives, strategies and other
operations that directly or indirectly influences the firm’s marketing performance.
o The Audit should be Independent: The marketing audit can be conducted in six
ways:
▪ Self-audit
▪ Audit from across
▪ Audit from above
▪ Company auditing office
▪ Company task-force audit
▪ Outsider audit (The best audit is the outsider audit)
o The Audit should be Periodical: The companies conduct the marketing audit when
some problem arises in the marketing operations. But it is recommended to have
a regular marketing audit so that that problem can be rectified at its source.

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COMPONENTS OF MARKETING AUDIT

1. Macro-Environment Audit: It includes all the factors outside the firm that influences the
marketing performance. These factors are Demographic, Economic, Environmental,
Political, and Cultural.
2. Task Environment Audit: The factors closely associated with the firm such as Markets,
Customers, Competitors, Distributors and Retailers, Facilitators and Marketing Firms,
Public etc. That affects the efficiency of the marketing programs.
3. Marketing Strategy Audit: Checking the feasibility of Business Mission, Marketing
Objectives and Goals and Marketing Strategies that have a direct impact on the firm’s
marketing performance.
4. Marketing Organization Audit: Evaluating the performance of staff at different levels of
hierarchy.
5. Marketing Systems Audit: Maintaining and updating several marketing systems such as
Marketing Information System, Marketing Planning System, Marketing Control System
and New-Product Development System.
6. Marketing Productivity Audit: Evaluating the performance of the Marketing activities in
terms of Profitability and Cost-Effectiveness.
7. Marketing Function Audit: Keeping a check on firm’s core competencies such as
Product, Price, Distribution, Marketing Communication and Sales Force.

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MARKETING MYOPIA

• Introduced by Theodor Levith

• Marketing Myopia is a situation when a company has a narrow-minded marketing
approach and it focuses mainly on only one aspect out of many possible marketing
attributes.
• E.g. focusing just on quality and not on the actual demand of the customer.
• The customer orientation has also been considered as a type of Marketing Myopia
• Product concept – Myopia
• Marketing Concept – No Myopia

FOUR PILLARS OF THE MODERN MARKETING CONCEPT

• Consumer orientation (may be said as consumer satisfaction)

• Target market
• Integrated marketing
• Profitability.

QUOTED PRICE

• The cost of coverage for a product or service that an authorized seller or provider offers
in good faith.
• This is a verbal or written agreement to sell the product at the stated amount
• It is not the same as retail price
• Quoted price is the most recent price at which a commodity would have been traded

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NEEDS, WANTS, DEMANDS

CORE ELEMENTS OF MARKETING

81 | K I R A N . A . S
TYPES OF DEMANDS

Demand in economics is the quantity of goods and services bought at various prices
during a period of time

1. Negative Demand
• Negative demand is a type of demand which is created if the product is disliked in
general
• The product might be beneficial but the customer does not want it.
• Example Insurance, which people should have but they delay buying an insurance
policy.
2. Unwholesome demand
• Unwholesome demand is the other side of Negative demand
• Unwholesome demand, the customer should not desire the product, yet the
customer wants the product badly.
• Best example of unwholesome demand are cigarettes, alcohol, pirated movies,
guns etc.
3. Latent Demand
• Latent demand is, as the name suggests, a demand which the customer realizes
later.
• Thus, while buying the product, he might not desire some features. But later on,
he might think about those features and buy the product.
• The best example of latent demand are normal phones vs smart phones.
4. Declining demand
• Declining demand is when demand for a product is declining.
• For example, when CD players were introduced and IPOD came in the market, the
demand for Walkman went down.
5. Irregular demand
• Irregular demand can be demand which is not consistent.
• The best example of irregular demand is seasonal products like umbrellas, air
conditioners or resorts.

82 | K I R A N . A . S
 6. Overfull demands
• Overfull demands happen when the companies manufacturing capacity is limited
but the demand is more than the supply.
7. Full demand
• In an ideal environment, a company should always have full demand.
• Full demand means that the demand is meeting the supply potential of the
company.
• It also means that the markets are happy with the products of the company and
that people want to buy from the same company.
8. No demands
• Certain products face the challenge of no demand.
• The best example for the same can be education courses where there is very low
demand or no demand at all.
• Such cases are very hard to counter

83 | K I R A N . A . S
 UNIT 9
LEGAL ASPECTS OF BUSINESS
❖ Modul 1: Indian Contract Act, 1872
1. Elements of a valid contract
2. Capacity of parties
3. Free consent
4. Discharge of a contract
5. Breach of contract
6. Remedies against breach; Quasi contracts
❖ Modul 2: Special contracts
1. Contracts of indemnity and guarantee
2. Contracts of bailment and pledge
3. Contracts of agency
❖ Modul 3: Sale of Goods Act, 1930
1. Sale and agreement to sell
2. Doctrine of Caveat Emptor
3. Rights of unpaid seller and rights of buyer
❖ Modul 4: Negotiable Instruments Act, 1881
1. Types of negotiable instruments
2. Negotiation and assignment
3. Dishonour and discharge of negotiable instruments
❖ Modul 5: The Companies Act, 2013
1. Nature and kinds of companies
2. Company formation
3. Management, meetings and winding up of a joint stock company
❖ Modul 6: Limited Liability Partnership
1. Structure and procedure of formation of LLP in India
❖ Modul 7: The Competition Act, 2002
1. Objectives
2. Main provisions
❖ Modul 8: The Information Technology Act, 2000
1. Objectives and main provisions
2. Cyber-crimes and penalties
❖ Modul 9: The RTI Act, 2005
1. Objectives
2. Main provisions
❖ Intellectual Property Rights (IPRs)
1. Patents, trademarks and copyrights
2. Emerging issues in intellectual property
❖ Modul 11: Goods and Services Tax (GST)
1. Objectives and main provisions
2. Benefits of GST
3. Implementation mechanism
4. Working of dual GST
1
SOURCES OF INDIAN LAW
• Constitution
• Legislation/Statute and Custom
• Case law/Common law
• Natural law and English law
• Ordinances
• Administrative law
• Dharma
• Law Merchant
• Equity
• Substantive Law includes the laws that create, define, and regulate rights and
obligations
• Procedural Law specifies the methods of enforcing rights and obligations created by
substantive law
• Article 246 read with Schedule 7 of Indian Constitution (Business Related Matters Only)
• Business law or commercial law is the body of rules that regulate and control the
everyday activities of exchange
• Business law also called merchantile law, is that branch of legal system, which regulates
business activities.
• Business law establishes a set of rules and prescribes conduct that enables us to avoid
misunderstanding and injury in our business relationships
BUSINESS AND COMMERCIAL LAW
• Consumer Protection Law
o Consumer Protection Act, 1986
o Essential Commodities Act, 1955
o Legal Metrology Act, 2009
• Property Law
o Transfer of Property Act, 1882
o Real Estate (Regulation and Development) Act, 2016
• Anti-Corruption Laws
o Benami Transaction Prohibitions (Act)
o Prevention of Money Laundering
• Business Laws
o Indian Contracts Act, 1872
o Specific Relief Act, 1963
o Sale of Goods Act, 1930
o Partnership Act, 1932
o Negotiable Instrument Act, 1881
2
INDIAN CONTRACT ACT, 1872
• The Act was passed by British India based on English common law principles
• In this Act have 238 sections but originally had 266 section and 11 Chapters
• Important chapters are;
I. Acceptance
II. Void agreement
III. Contingent contract
IV. Performance of contract
V. Relations resembling
VI. Consequence of breach of contract
VII. Sale of goods
VIII. Guarantee
IX. Bailment
X. Agency, Appointment
XI. Partnership
• Present Indian Contract Act may be divided into two parts;
I. Deals with general principles of law contract
II. Deals with special kinds of contract
• Contract is an agreement between two or more parties enforced by law
• Contract = Agreement + Enforced at Law
• Every set of promises is called as Agreement
• Agreement = Offer + Acceptance
• A proposal also called offer
• A proposal when accepted is called as Promise
• “All contracts are agreement but all agreements are not contract”
KINDS OF OFFER
• Express offer: It is an offer that is done through words that can be either oral or written
• Implied offer: It is an offer conveyed through action, acting or signs
• Specific offer: It is the offer made to a specific person or group of persons
• General offer: It is the offer made to public at large and not to any particular person
• Cross offer: When both the parties involved makes a similar offer to one another
without knowing the each other’s offer
• Standing offer or Open offer: The offer that is continuous in nature
• Counter offer: It is response given to an initial offer. It means the original offer was
rejected and replaced with another one (Bargaining)

3
ESSENTIAL ELEMENTS OF A VALID CONTRACT
• Offer and Acceptance
• Legal relationship
• Lawful consideration
• Capacity of parties
• Free consent
• Lawful objects
• Writing and Registration
• Certainty
• Possibility of performance
• Not expressly declared void
CLASSIFICATION OF CONTRACTS
A. On the basis of enforceability
1. Valid contract: It’s enforceable in a court of law are called valid contract
2. Void Contract: An agreement may be enforceable at the time when it was entered
but later on due to certain reasons illegality of the contract.
3. Voidable Contract: A voidable contract is a formal agreement between two
parties that may be rendered unenforceable for a number of legal reasons.
Reasons that can make a contract voidable include the following:
• Failure by one or both parties to disclose a material fact
• A mistake, misrepresentation or fraud
• Undue influence or duress
• One party's legal incapacity to enter a contract
• One or more terms that are unconscionable
• A breach of contract
4. Illegal contract: If the contract has unlawful object it is called illegal contract (All
illegal contracts are void but all void contracts are no illegal)
5. Unenforceable contract: A contract which has not properly fulfilled legal
formalities
B. On the basis of mode of creation
1. Express contract: Where the offer and acceptance of any promise is made in
words
2. Implied contract: A contract that is not written or spoken but which is assumed to
exist based on the action of the parties
3. Quasi contract: There e] will be no offer and acceptance so, actually there will be
no contractual relationship between the parties.

4
 C. On the basis of time of performance
1. Executed contract: There are contract where the parties perform their obligation
immediately as soon as the contract is formed
2. Executory contract: In this contract the obligations of the parties are to be
performed at a later time.
D. On the basis of parties of the contract
1. Bilateral contract: There must be at list two parties to the contract. Therefore, all
contracts are bilateral or multilateral contracts.
2. Unilateral contract: In certain contract one party has to fulfil his obligation
whereas the other party has already performed his obligations or it called as one
side contract
E. On the basis of formalities of the contract
1. Formal contract: A formal contract is a contract which is formatted by satisfied all
the essentials formalities of a contract
2. Informal contract: An informal contract is a contract which is failed to satisfy all
or any of the essential’s formalities of a contract
F. Other classification
1. Contingent contract: Which is collateral to do or not to do something, if some
event collateral to such contract, does or does not happen. Contingent contract is
an uncertain event. Example Insurance, Guarantee etc
CONSIDERATION
• When a party to an agreement promises to do something, he must get ‘something’ in
return is called Consideration
• When the consideration for a present promise was given before the date of promise is
called as past consideration
• Past consideration is not a valid consideration
• Future consideration also called executory consideration
• Consideration technical word meaning “Quid – Pro - Quo”

5
CAPACITY OF PARTIES
• Capacity of parties also called contractual capacity
• An agreement becomes a contract only if it is entered into between parties who are
competent to contract
• Contracts entered into by persons who are not competent to contract are void
• Capacity of parties to contract is an essential element of a valid contract
• Capacity to contract means the competence or competency of the parties to enter into
a valid contract.
• Section 10 require that the parties shall be competent to contract
• Section 11 of the Indian contract Act 1872 which deals with the capacity of the parties
to contract
• Person who are competent to contract?
o The age of major according to the law to which he is subject
o Sound mind person
o Not disqualified from contracting by any law to which he is subject is competent
to enter into contract
• Person who are Incompetent to contract
o Minors
o Persons of Unsound mind
o Persons disqualified by any law to which they are subject
MINORS
• According to section 3 of Indian Majority Act, 1875, a minor is a person who is not a
major
• A person attains majority on completion of 18 years
• The law relating to governing minor’s agreement is based on two fundamental principle.
They are:
o The law protects minors against their own inexperience and against the possible
improper designs of those of more experienced year
o In pursuing the above objective (in protecting the minors), the law should not
cause unnecessary hardship to persons who deal with minors
• Minor’s agreement is “Void ab initio” (Right from the very beginning)
• Minor’s agreements cannot be ratified by him on his attaining majority
• No question of specific performance of minor’s agreement
• No estoppel against a minor
• Restitution against a minor in certain cases: It means A minor cannot be made liable to
repay any money received by him or to compensate for any benefit received by him
under a void agreement

6
 • Contract of service by a minor is void
• Loan to a minor is void
• A minor and an adult jointly entered into a contract with another person, the minor is
not liable on the contract. But the contract as a whole can be enforced against the adult.
• A minor is liable for his tort which is independent of the contract (Example wrongful use
of another person’s property)
• A minor’s parents or guardians are not liable for the contract
• Marriage contracts entered into by a minor are void
• Minor cannot be adjudicated as an insolvent
• Minor cannot enter into a contract of partnership
PERSONS OF UNSOUND MIND
• There are two tests of soundness of mind of a person. They are:
o Capacity to understand the terms of the contract
o Ability to form a rational judgement as to its effect upon his interests
• Persons of unsound mind:
o Lunatics and idiots are regarded as persons of unsound mind
o Drunken persons also are regarded as persons of unsound mind
o Even persons who have been hypnotised, persons who are delirious from fever
and persons who have suffered mental decay on account of old age or disease
become persons of unsound mind
• Whether a party to a contract is of sound mind or of unsound mind is a question of fact
to be decided by the court.
• Capacity of persons of unsound mind to enter into contracts:
o A person who is usually of unsound mind but occasionally of sound mind may
make contracts when he is of sound mind
o A person who is usually of sound mind but occasionally of unsound mind may
make contracts when he is of sound mind
o A person who is usually of sound mind but occasionally of unsound mind cannot
make contracts when he is of unsound mind
o A person who is usually of unsound mind but occasionally of sound mind cannot
make contracts when he is of unsound mind

7
• The rules governing agreements entered into by the various persons of unsound mind
are as follows:
o Lunatics: A person who is mentally deranged due to some mental strain or other
personal experience
▪ Contract entered into during the period of sanity are valid and contract
entered into during the period of insanity are void
▪ A lunatic must prove the fact of lunacy to get a contract entered into by him
set aside as void
o Idiots: A person who completely lost his mental powers. He does not exhibit
understanding of even ordinary matters.
▪ Agreement entered into by an idiot are void
▪ Idiot is liable for necessaries of life supplied
(Lunacy is temporary but Idiocy is permanent. Lunacy is curable but Idiocy is
incurable)
o Drunken person: A drunken person is one who is under the influence of liquor. A
drunken person suffers from temporary incapacity to contract
▪ Contract entered into by a drunken person during the period of drunkenness
are void and contracts entered into by him after his recovery from the effect
of liquor are valid
▪ A drunken person is liable for necessaries of life supplied
o Person under the influence of hypnotism, Persons delirious from fever and
persons suffering from mental decay brought about by old age or disease:
▪ Who is delirious from fever is temporarily incapable of understanding the
terms of a contract and forming a rational judgement as to its effect on his
interest? So, he cannot contract temporarily during the period when he is
under the influence of delirious from fever and the contract entered into by
him during such period are void.

8
DISQUALIFIED PERSONS
• Disqualified persons refer to persons who are disqualified from contracting by any law
in force in the country. Such persons include:
o Alien enemies
o Foreign sovereigns, Ambassadors and Their diplomatic staff
o Convicts (Person who has been found guilty and sentenced or imprisoned by a
court of law)
o Insolvents or Bankrupts
o Company or Statutory bodies
• Marriage does not affect the contractual capacity of a women so a married woman is
competent to enter into any contract with respect to her personal or own property
• Statutory body will be valid only to the extent it is within its ‘Memorandum of
association’
FREE CONSENT
• Section 10 of the Indian contract Act deals with valid contract is “Free Consent”
• Section 13 of the Indian contract Act defines consent as “two or more persons are said
to consent when they agree upon the same thing in the same sense”
• According to Section 14, consent is said to be free, when it is not caused by:
o Coercion (Section 15)
o Undue Influence (Section 16)
o Fraud (Section 17)
o Misrepresentation (18)
o Mistake (Section 20, 21, 22)
• When there is no free consent of the parties, the contract may turn out to be voidable
or void, depending upon the nature of the flaw in the consent
COERCION
• It’s deals with section 15
• Coercion means “the committing or threatening to commit any act forbidden by the
Indian Penal code or the unlawful detaining or threatening to detain any property, to
the prejudice of any person whatever, with the intention of causing any person to enter
into an agreement”
• Coercion (in India) is also called Duress (in England)
• Example:
o ‘A’ makes ‘B’ to agree to sign a promissory note for Rs. 1000 in his favour.
o A threatens to shoot C

9
UNDUE INFLUENCE
• It’s deals with section 16
• “Undue influence is the unconscientious use by one person of power possessed by him
over another in order to induce the other party to enter into a contract”
• Sometimes it’s called moral coercion or equitable fraud
• Improper use by any power possessed by him
• As per the provision of section 16 (2) of the Indian contract Act, undue influence is
presumed by law in the following relationships, circumstances or cases:
o Income tax officer and assessee
o Husband and an illiterate wife
o Teacher and student
o Father and son
o Doctor and patient
• Example: X gave a loan of Rs. 100 to his servant Y and took his signature on blank paper.
Afterwards, X entered on the paper Rs. 200 as a loan given to Y. In this case undue
influence by X
MISREPRESENTATION
• If a contract representation is made by a party wrongly, it is called misrepresentation
• Misrepresentation refers to a false statement made by a party innocently without any
intention of deceiving the other party
• Essentials of Misrepresentation:
o The representation must not relate to the law of the country
o The representation must relate to some material fact essential to the formulation
of the contract
o The representation must have been made either before or at the time of the
contract
o The representation must have become untrue
o The representation must have been made innocently without an intent
FRAUD
• Intentional misrepresentation called as Fraud
• Fraud include any of the following acts committed by a party to a contract:
o A promise made without any intention of performing it
o Any other Act fitted to deceive
o Any such act or omission as the law specially declares to be a fraudulent

10
MISTAKE
• Mistake is a misrepresentation or error committed while entering into an agreement
• Kinds of mistake:
o Mistake of Law
▪ Mistake of general law of the country
▪ Mistake of foreign law
▪ Mistake of private rights
o Mistake of Fact
▪ Bilateral mistake: When both the parties to an agreement commit mistake
▪ Unilateral mistake: A mistake takes place in the mind of only one of the
contracting parties. It is also called mistake of one party
DISCHARGE OF A CONTRACT
• Discharge or termination of a contract means the termination of the contractual
relationship between the contracting parties.
• A contract may be discharged in any one of the following:
o By performance
o By agreement
o By impossibility of performance
o By laps of time
o By operation of law
o By breach of contract
DISCHARGE BY PERFORMANCE
• When the parties to a contract fulfil the obligations arising under the contract within the
time and manner prescribed, then the contract is discharged by performance
• The performance of a contract may be:
o Actual performance: When both the parties to a contract fulfil their respective
promises or obligations under the contract within the time at the place in the
manner prescribed, the contract is said to have been discharged by actual
performance
o Attempted performance or tender: When the promisor offers to perform his part
of the obligations under the contract but his offer of performance is not accepted
by the other party to the contract, it is called attempted performance, tender of
performance, offer of performance or tender

11
DISCHARGE BY MUTUAL AGREEMENT OR CONSENT
• All parties to a contract mutually agree to replace the contract with a new one or remit
or alter, then it leads to a discharge of original contract due to a mutual agreement is
called discharge by mutual agreement or consent
• Discharge of contract by mutual agreement or consent may be express or implied
• The various methods of discharging a contract by mutual agreement or consent:
o By Novation
▪ Substituting a new contract for an existing contract is known as novation.
▪ New contract may be between the same parties or different parties
▪ Novation cannot be compulsory
▪ The new contract must be valid and enforceable
▪ Novation should take place before the expiry of the time of performance of
the original contract
o By Alteration
▪ When one or more of the material terms of a contract is altered with the
consent of all the parties to the agreement
▪ There must be a material alteration
▪ The alteration, to be valid, must be made by the mutual consent of the
contracting parties
o By Rescission
▪ When cancellation of all or some of the terms of the original contract by the
consent of the parties to the contract
▪ Rescission may be total or partial
▪ Rescission may be express or implied
▪ Rescission may take place either by mutual consent of the parties
o By Remission
▪ Remission is the acceptance of a lesser sum than what was contracted for or
a lessor fulfilment of the promise made in discharge of the whole debt or
obligation
o By Waiver
▪ Waiver means deliberate or intentional abandonment, relinquishment or
giving up of a right which a person is entitled to under a contract
o By Merger
▪ When inferior right accruing to a party to contract merger into a superior
right accruing the same party
▪ For merger, the parties must remain the same
▪ The subject matter must also remain the same
▪ The securities or rights must be different, one of which must be inferior and
the other must be superior
12
DISCHARGE OF IMPOSSIBILITY PERFORMANCE
• Impossible for any of the parties to the contract to perform their obligations its leads to
discharge of the contract based on impossibility performance
• An agreement to do an act impossible in itself is void
• Impossibility of performance may be of four types. They are:
o Impossibility of performance existing at the time of the formation of the contract
and know to both the parties to the agreement (known as Absolute impossibility)
o Impossibility of performance existing at the time of the formation of the contract
but unknow to both the parties to the contract
o Impossibility of performance existing at the time of the formation of the contract
but know to only one of the parties to the contract
o Impossibility of performance arising after the formation of the contract or
supervening or subsequent impossibility of performance
• Cases covered by supervening or subsequent impossibility performance:
o Destruction of the subject matter of the contract
o Failure of the ultimate purpose or object of the contract or non-recurrence or
nonexistence of a particular state of things
o Death or personal incapacity of a contracting party (Promisor)
o Change of law
o Outbreak of war
DISCHARGE BY LAPS OF TIME
• As per the limitation Act, every contract must be performed within the specified period
called the period of limitation
• If the promisor fails to perform and the promise fails to take action within this specified
period, then the latter cannot seek remedy through law. It discharges the contract due
to the laps of time
DISCHARGE BY OPERATION OF LAW
• A contract gets discharged by operation of law in the following cases:
o By Death
o By insolvency
o By merger
o By unauthorised material alteration of the terms of a written contract
o By rights and liability being vested in the same party

13
DISCHARGE BY BREACH OF CONTRACT
• Breach of contract is called breaking the contract or contract is not perform or broken
promise
• When a promise or agreement is broken by any of the parties, we called it a breach of
contract
• Breach of contract may be:
o Actual breach of contract: When a party to a contract fails to perform his
obligations under the contract on the date when the performance is due or during
the time of the performance of the contract.
o Anticipatory or constructive breach of contract: A contract occurs when a party
to the contract declares his intention of not performing the contract before the
time fixed for its performance
• Anticipatory breach of contract also called as “Anticipatory repudiation”
REMEDIES AGAINST BREACH
• Remedy means recover a right or obtain redress for a wrong
• Following remedies against the defaulter or the guilty:
o Rescission of the contract
o Suit for damages
o Suit upon quantum meruit
o Suit for specific performance of the contract
o Suit for injunction
RESCISSION OF THE CONTRACT
• Rescission of the contract means setting aside the contract
• Rescission is an equitable remedy which allows a contractual party to cancel the contract
• Rescission is the “unwinding of a transaction”
• The court may grant rescission of contract in the following cases:
o Where the contract is voidable at the option of the plaintiff (Aggrieved party)
o Where the contract is unlawful and the plaintiff (Injured party) is unaware of it
SUIT FOR SPECIFIC PERFORMANCE OF THE CONTRACT
• In certain situation or cases of breach of contract, damages may not be an adequate
remedy. In such cases, the court may direct the party in breach for the specific
performance of the contract

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SUIT FOR DAMAGE
• Damages are monetary compensation allowed by the court to the aggrieved party for
the loss or injury suffered by him as a result of the breach of contract
• Damages may be:
o Compensatory damage: It’s a monetary damage that are awarded with the intent
of compensating the non – breaching party for any losses suffered as a result of a
breach of contract.
o Liquidated damage: Sometimes the parties to a contract will agree to the amount
payable in case of a breach is known as liquidated
o Unliquidated damage: Here the amount payable due to the breach of contract is
assessed by the court or any appropriate authorities
o Punitive damage: Are awarded in addition to actual damages in certain
circumstances. It’s considered punishment to a breaching party. This is awarded
in some tort or fraud cases.
o Nominal or contemptuous damage: It is a small amount of money awarded to a
plaintiff in a lawsuit to show he/she was right but suffered no significant losses or
a monetary loss
o General or Ordinary damage: These are damaging that stem from the ordinary,
natural and probable course of events in the breach of contract in cases when it is
difficult to calculate a value for the amount. Its related to pain, suffering,
accidents, wrongful death.
o Special damages: Those damages that are payable for the loss arising an account
of some special or unusual circumstances. Its indirect loss experienced by the
affected party out of breach of contract
Example: ‘A’ contracted with ‘B’ to supply machine at Rs. 5000 to be delivered on
a fixed day. ‘A’ did not deliver on the day. So ‘B’ purchases same machine from ‘C’
at Rs. 6000 so Rs. 1000 is the amount of special damage
o Vindictive or Exemplary damage: These damages are awarded in case of action
on lost or breach of promise. It’s also called Retributory damage
Example: Breach of contract to marry, dishonour of cheque by the bank
SUIT UPON QUANTUM MERUIT
• The term ‘quantum meruit’ literally means “as much as merited” or “as much as he
deserved” or “as much as earned”
• It means “reasonable value of services”
• It means payment in proportion of the value or amount of work done
• The elements of quantum meruit are determined by United states common law

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SUIT FOR INJUNCTION
• Injunction is a preventive relief.
• It is particularly useful in cases of anticipatory breach of contract, where damages would
not be an adequate relief
• Injunction is an order of the court restraining a party from doing a particular act which
he promised not to do.
• Where a party is in breach of a negative term of the contract (when a party doing
something which he has promised not to do), the court may issue an injunction
• Injunction may be:
o Temporary injunction
o Perpetual or Permanent injunction
QUASI CONTRACTS
• Quasi contract also called Constructive contract
• A quasi contract is one which is not intentionally entered into between the parties but
is created by law
• In quasi contract, the rights are not an outcome of an agreement but is imposed by law
• Quasi contract is a “Liquated sum of money”
• Quasi contract also called “Pseudo contract”
• Quasi contract deals with section 68 – 72 of the Indian contract Act, detail five
circumstances:
o Section 68 – Necessaries supplied to persons incapable of contracting
o Section 69 – Payment by an Interested person
o Section 70 – Obligation of person enjoying the benefits of a non – gratuitous Act
o Section 71 – Responsibilities of finder of goods
o Section 72 – Money paid by mistake or under coercion

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SPECIAL CONTRACTS
• Followings are maybe called special contracts:
o Contracts of indemnity
o Contracts of guarantee
o Contracts of bailment
o Contract of pledge
o Contracts of agency
CONTRACTS OF INDEMNITY
• A contract of Indemnity is one of the most important form of commercial contract
• Section 124 of the Indian contract Act deals with contract of Indemnity
• “A contract by which one party promises to save the other from loss caused to him by
the conduct of the promisor himself or by the conduct of any other person”
• It means that one party will compensate the other in case it suffers some losses.
• Insurance is similar to this contract
• The indemnifier is the person who promises to make good the loss caused to the
promisee
• Promisor are called Indemnifier
• The indemnity holder is the person whose loss is to be made good by the Indemnifier
• Promisee are called Indemnified or Indemnity holder
• Indemnity contract may be either Express or Implied
• Indemnity also called “Security against loss”
• Rights of the Indemnity Holder (Section 125):
o Right to recover damage
o Right to recover cost
o Right to recover amounts paid under compromise
o Right to demand payment from the indemnifier before he has met his liability
CONTRACT OF GUARANTEE
• Section 126 of the Indian contract Act deals with contract of guarantee
• “A contract to perform the promise or discharge the liability of a third person in case of
his default is called contract of guarantee”
• The guarantor or Surety is the person who gives the guarantee for the performance of
the promise or the discharge of the debt of a third person in case of his default
• The principal debtor is the person in respect of whose default the guarantee is given
• The creditor is the person to whom the guarantee is given
• When a debt is guaranteed by two or more sureties, either under the same contract or
under different contracts, the sureties are called co – sureties or co- obligants

17
• Kinds of guarantee:
o View of formation
▪ Express guarantee: By words, spoken, written
▪ Implied guarantee: It is inferred from the conduct of the parties
o View of debt
▪ Retrospective guarantee
▪ Prospective guarantee
o Other view
▪ Specific guarantee: When guarantee applied to a single or a particular
transaction or debt is called specific or simple or ordinary guarantee
▪ Continuing guarantee: When a guarantee extends to a series of distinct or
separate transactions between the creditor and the principal debtor within
an agreed amount over a certain period of time it is called a continuing of a
running guarantee
• Rights of the surety against the principal debtors:
o Right to be subrogated
o Right to indemnity
o Right to be relieved earlier
o Right to demand securities of the principal debtor held by the creditor
• Rights of the surety against the creditor:
o Right to request the creditor to sue the debtor first
o Right to be subrogated
o Right to claim securities held by the creditor
o Right to set off or counter claim
o Right to equities
o Right to demand the termination of services
• Right of the surety against the co – sureties
o Co - sureties are liable to contribute equal shares
o Co – sureties bound in different sums
o Right to the benefits of securities held by any of the co – sureties

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Difference between a contract of guarantee and a contract of indemnity
Guarantee
• In the case of a guarantee, there are three contracts
o A primary contract between the creditor and the principal debtor
o A secondary contract between the creditor and the guarantor
o A third contract between the guarantor and the principal debtor
• In a contract of guarantee, there are three parties
o The creditor
o The principal debtor
o The guarantor
• In a contract of guarantee, the liability of the promisor is secondary
• A guarantor has no other interest in the contract apart from his guarantee
Indemnity
• In case of indemnity, there is only one contract
o The contract between the promisor and the promisee
• In a contract of indemnity, there are only two parties
o The promisor
o The promisee
• In a contract of indemnity, the liability of the promisor is primary
• An indemnity may have some interest in the contract

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CONTRACT OF BAILMENT
• Section 148 of the Indian contract Act deals with bailment
• Bailment is derived from a French word “bailer” which means “to deliver”
• Bailment means delivery of goods from one person to another person for some purpose
• Delivery of goods for some purpose on condition that the goods shall be returned when
the purpose is achieved
• Example:
o A lends his book to B to be returned after the examination. There is a contract of
bailment between A and B
o M delivers his car to a garage for repair
• The person who deliver the goods is known as bailor
• The person who to whom the goods are is delivered known as bailee
• Bailment is concerned with movable property or goods
• Bailment involves delivery of goods by the bailor to the bailee
• Delivery of goods may be actual or constructive or symbolic
• A contract of bailment is, generally, supported by consideration in money payment
• In case of a contract of bailment, there is only the change of possession and not
ownership
• Bailor remains the owner of the good, bailee only gets the possession of such goods
• Duties or liabilities of the Bailor:
o To disclose all known faults in the goods bailed to the bailee
o To bear necessary expenses
o To bear extraordinary expenses
o To indemnity the bailee
• Rights of the bailor:
o Right to enforce bailee’s duties as his rights by suit
▪ Right to claim damages for loss caused by bailee’s negligence
▪ Right to claim compensation for unauthorised use
▪ Right to claim compensation for unauthorised mixing up
▪ Right to demand the return of the goods bailed after the expiry of the period
or after the accomplishment of the purpose
▪ Right to take action for damages against the bailee
▪ Right to get the natural accretion to the goods bailed
o Right to avoid or terminate the contract of bailment
o Right to demand the return of the goods bailed at any time in case of gratuitous
bailment

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• Duties or liabilities of the bailee:
o To take reasonable care of the goods bailed
o Not to make any unauthorised use of the goods bailed
o Not to mix the goods bailed with his own goods
o Not to set up an adverse title against the bailor
o To return any natural accretion to the goods bailed
o To return the goods bailed
• Rights of the bailee:
o Rights to enforce the bailor’s duties
▪ Right to claim damages
▪ Right to claim re – imbursement of necessary expenses incurred
▪ Right to claim re – imbursement of extraordinary expenses incurred
▪ Right to indemnity for loss sustained
▪ Right to claim compensation for expenses incurred for safe – custody
▪ Right to indemnity in the case of premature return of goods
o Right to return the goods to one of several joint bailors
o Right to deliver the goods to the bailor without title
o Right to apply to the court to decide the title to the goods
o Right to sue third party
o Bailee’s right of lien
• Kinds of bailment:
o Gratuitous bailment: In this type of bailment neither the bailor nor bailee receives
any remuneration or bailee receives no compensation
o Non gratuitous or Reward bailment: If is for the mutual benefit of both the bailer
and the bailee

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CONTRACT OF PLEDGE
• Section 172 of the Indian contract Act deals with Pledge
• Pledge is also called as Pawn
• Pledge is a bailment of goods as security for payment or performance of duty
• The person who pledges the movable property is called Pledgor or Pawnor
• The person to whom the movable property is pledged is called Pledgee or Pawnee
• The important rights of the pledgor are:
o Right to redeem the goods pledged
o Right to enforce pledgee’s duties
o Right of an ordinary debtor
o Right to enforce the preservation and maintenance of the property pledged
• The pledgee has the following rights:
o Right of retainer
o Right to retain the pledged goods for subsequent advances
o Right to recover the extraordinary expenses incurred
o Right against the true owner, when the pledgor’s title is defective
o Right of the pledgee when the pledgor makes default:
▪ He can file a suit against the pledgor for the recovery of the debt or for the
performance of the promise
▪ He can retain the goods pledged as a collateral security till the debt is repaid
or promise is performed
▪ He can file a suit for the sale of goods for the realisation of the money due
▪ He may sell the goods pledged after giving the pledgor a reasonable notice
of sale
• Duties of Pledgee or Pawnee:
o He is bound to take reasonable care of the goods pledged with him
o He must not make any unauthorised use of the goods pledged
o He must not mix the goods pledged with his own goods
o He must return the goods pledged on the realisation or receipt of the debt
o He must deliver the natural accretion to the goods pledged to the pledgor
• “Every pledge is a bailment but every bailment is not pledge”

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CONTRACT OF AGENCY
• Section 182 to 238 of the Indian contract Act deals with contract of agency
• ‘Agent’ as a person employed to do any act for another or to represent another in
dealings with third persons
• The person who is representative or employed is called Agent
• The person for whom such act is done or who is so represented is called the principal
• The person who is represented is called Principal
• The legal relationship that is created between the principal and the agent is called the
agency
• Agent is a connecting link between the principal and third party
• Modes of creation of agency
o Agency by Express Agreement
o Agency by Implied Agreement
▪ Agency by Estoppel:
• An implied agency may arise by estoppel
• An agency by estoppel is based on the doctrine of estoppel
• It is a legal term that refers to someone giving the impression that they
are an agent acting on behalf of an individual or a company. This
agency is not officially appointed is called agency estoppel
▪ Agency by Holding out: Agency by holding out is based on the doctrine of
holding out
▪ Agency by Necessity: Sometimes, circumstances force a person to act as an
agent for another without any express authority from him. In such a case,
there is said to be an agency by necessity
o Agency by ratification: The principal is not bound by the contract entered into by
the agent but sometimes, an agent contracts or acts on behalf of his principal
without his previous permission but later on the principal owns or approves the
act as if it were done with his authority or instructions. In such a case, there is said
to be an agency by ratification, expost facto agency or agency arising after the
event
• Rights of an Agent against the principal:
o Right to receive remuneration
o Right of retainer, right to retain
o Right of lien
o Right of indemnification
o Right to be indemnified for acts done in good faith
o Right to be compensated for any injury sustained by him due to the neglect or
want of skill on the part of the principal
o Right of stoppage in transit
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• Duties of an Agent to the Principal:
o Duty to carry out the work undertaken according to principal’s instruction
o Duty to carry out the work with reasonable care, skill and diligence
o Duty to render proper accounts to the principal
o Duty to communicate with the principal in case of difficulty
o Duty not to deal on his own account in the agency business
o Duty to pay all sums received in the course of agency business to the principal
o Duty not to set up an adverse title to the goods of the principal
o Duty not to make any secret profit from agency
o Duty not to delegate authority
o Duty not to disclose confidential information obtained in the course of agency to
others
o Duty not to put himself in a position where interest and duty conflict
o Duty to protect and preserve the interests of the principal on the termination of
agency by death or insanity of the principal
• Duties of principal to his Agent:
o Duty to indemnify the agent against the consequences of all lawful acts
o Duty to indemnify the agent against the consequences of acts done in good faith
o Duty to indemnify the agent for any injury caused to him by the neglect or want
of skill on the part of the principal
o Duty to pay the agent commission or any other remuneration agreed upon
• Right of a principal against an Agent:
o Right to receive damages
o Right to obtain the secret profit made by the agent
o Right to resist agent’s claim for indemnity against the liability incurred
o Right to revoke the agent’s authority
o Right to get proper accounts from the agent on demand or periodically
o Right to receive all money due to him from the agent
o Right to give instruction to the agent in case emergency or difficulty
o Right to claim the benefit arising from a transaction entered into by the agent on
his own account
o Right to see that agency business is conducted according to his instructions or
according to the customs and usages of trade

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SALE OF GOODS ACT, 1930
• The Indian Sale of Goods Act, 1930 is a Mercantile Law, which came into existence on 1
July 1930
• Contract/Agreement related to the sale of goods are governed sale of goods Act, 1930
• The law relating to sale of goods which was contained in Sec. 76 to 123 of the Indian
Contract Act, 1872.
• The Act applies to the whole of India except the state of Jammu and Kashmir
• The Sale of Goods Act is based on the principle of English Sale of Goods Act, 1893.
• It applies only to movable property other than actionable claims and money and not to
immovable which are governed by the Transfer of Property Act, 1882
• This act deals with only one kind of transfer namely "Sale".
• This act is not concerned with "Exchange" or hire - purchase or contract for labour.
• Again, the act deals with "movable goods"
• A contract of sale, according to Sec. 4 of the Act, is “a contract whereby the seller
transfers or agrees to transfer the property in goods to the buyer for a price.”
• A contract of sale involves transfer of ownership
• Movable goods are every kind of movable property and includes
o Stocks and shares
o Growing crops
o Grass
o Things attached to or under the contract of sale
• To be specific, things like goodwill, copyright, trademark, patents, water, gas, electricity,
ships, standing trees, grass; shares and stock, etc., are ‘goods’ for the purpose of this
section.
• Actionable claims and current money are not goods and cannot be bought and sold
under this Act.
• The stipulations are the essence of the contract of sale
• Auction sale is a public sale where intending buyers assemble at one place and offer the
price at which they are ready to buy the goods.
Elements/Essential of A Contract of Sale
• The presence of two parties is a must (Bilateral Contract)
• The contract of sale must limit their scope to only the movable property
• A price in value (currency and not in kind) has to be paid or promised.
• The price consideration or the actual payment could be partly in kind and partly in
money but never in kind alone.
• The ownership of the property of goods must change from the seller to the buyer
• The contract of sale may be absolute or conditional.

25
DIFFERENT TERMS OF ACT
• 'Sale' means transfer of property in the goods for a price
• Buyer: Section 2 (1) someone who buys or has agreed to buy goods
• Seller: Section 2(13) Someone who sells or has agreed to sell goods
• Goods: Section 2(7) All types of movable property
• Goods is a movable property other than actionable claims and money
• “Delivery” means voluntary transfer of possession from one person to another
• “Document of title to goods” includes a bill of lading, dock warrant, warehouse keeper’s
certificate, wharfingers’ certificate, railway receipt, warrant or order for the delivery of
goods and any other document used in the ordinary course of business as proof of the
possession or control of goods, or authorising or purporting to authorise, either by
endorsement or by delivery, the possessor of the document to transfer or receive goods
there by represented
• “Fault” means wrongful act or default
• “Future goods” means goods to be manufactured or produced or acquired by the seller
after the making of the contract of sale
• “Mercantile agent” means a mercantile agent having in the customary course of
business as such agent authority either to sell goods, or to consign goods for the
purposes of sale, or to buy goods, or to raise money on the security of goods
• “Price” means the money consideration for a sale of goods
• “Quality of goods” includes their state or condition
• “Property” means ‘ownership’ or the general property i.e. all ownership right of the
goods. A sale constitutes the transfer of ownership of goods by the seller to the buyer
or an agreement of the same.
• Ascertainment of price means to specify without ambiguity the price of a commodity.
The Act has two sections that discuss this – sec 9 and sec 10.

26
TYPES OF GOODS UNDER THIS ACT
1. Existing Goods: In sec 6 of the Act, the existing goods are those goods which are in the
legal possession or are owned by the seller at the time of the formulation of the contract
of sale. The existing goods are further of the following types:
• Specific Goods: According to the sec 2(14) of the Act, these are those goods that
are “identified and agreed upon” when the contract of sale is formed. For example,
you want to sell your mobile phone online. You put an advertisement with its
picture and information. A buyer agrees to the sale and a contract is formed. The
mobile, in this case, is specific good.
• Ascertained Goods: This is a type not defined by the law but by the judicial
interpretation. This term is used for specific goods which have been selected from
a larger set of goods. For example, out of 500 apples, you decide to sell 200 apples.
Thus, you specify 200 apples from a larger group of unspecified apples. These 200
apples are now the ascertained goods.
• Generic/Unascertained Goods: These are the goods that have not been
specifically identified but have rather been left to be selected from a larger group.
For example, from your 500 apples, you decide to sell 200 apples but you don’t
specify which ones you want to sell. A seller will have the liberty to choose any
200 apples from the lot. These are thus the unascertained goods.
2. Future Goods
• In sec 2(6) of the Act, future goods have been defined as the goods that will either
be manufactured or produced or acquired by the seller at the time the contract of
sale is made.
• The contract for the sale of future goods will never have the actual sale in it, it will
always be an agreement to sell.
• For example, you have an apple orchard with apples in it. You agree to sell 1000
apples to a buyer after the apples ripe. This is a sale that has to occur in the future
but the goods have been identified already and the agreement made.
3. Contingent Goods
• Contingent goods are actually a subtype of future goods in the sense that in
contingent goods the actual sale is to be done in the future.
• These goods are part of a sale contract that has some contingency clause in it.
• For example, if you sell your apples from your orchard when the trees are yet to
produce apples, the apples are a contingent good. This sale is dependent on the
condition that the trees are able to produce apples, which may not happen.

27
TYPES OF DELIVERY UNDER THIS ACT
1. Actual Delivery
o If the goods are physically given into the possession of the buyer, the delivery is
an actual delivery.
2. Constructive delivery
o The transfer of goods can be done even when the transfer is affected without a
change in the possession or custody of the goods.
o For example, a case of the delivery by attornment or acknowledgment will be a
constructive delivery. If you pick up a parcel on behalf of your friend and agree to
hold on to it for him, it is a constructive delivery.
3. Symbolic delivery
o This kind of delivery involves the delivery of a thing in token of a transfer of some
other thing.
o For example, the key of the godowns with the goods in it, when handed over to
the buyer will constitute a symbolic delivery.
PRICE OF A SALE IS DETERMINATION
• According to Section 2 of the Sale of goods Act, “price” means the money consideration
for a sale.
• Ascertainment of price is discussed in two sections under the Sales of Goods Act, 1930,
Section 9 and Section 10.
• Price can be fixed in the future. It is not necessary that the price is determined at the
time when the contract of sale is drafted.
• Future fixation of price is also valid under Section 29 of Indian Contract Act, 1872. Such
a contract is not void for uncertainty because the price was not fixed.
• Price in a contract maybe [Section 9 (1)]
o Fixed by the contract itself.
o Fixed by an agreed manner. Some agreed provision or procedure mentioned
explicitly in the contract of sale
o Determined in the course of dealing between the parties
• Sec 9 (2) says that if the price is not determined through either of the methods discussed
in sec 9 (1) then the buyer will have to pay the seller a reasonable price. This price will
be decided in accordance with the market value
• The mode of ascertaining the price through the help of a third party is discussed in the
Sec (10) of the Act.
• A contract of sale of goods is a contract by which the seller transfers or agrees to
transfer the property in goods to the buyer for a price.
• Transfer of property means the voluntary transfer of possession from seller to buyer

28
 BASIS CONDITION WARRANTY

A requirement or event that should A warranty is an assurance given by

be performed before the the seller to the buyer about the state
Meaning 1
completion of another action, is of the product, that the prescribed
known as Condition. facts are genuine.

Condition is a stipulation (in a Warranty is a stipulation which is

Meaning 2 contract), which is essential to only Collateral to the main purpose
the main purpose of the contract of the contract.
Section 12 (2) of Indian Sale of Section 12 (3) of Indian Sale of Goods
Defined in
Goods Act, 1930. Act, 1930.

It is directly associated with the It is a subsidiary provision related to

What is it?
objective of the contract. the object of the contract.

Result of breach Termination of contract. Claim damages for the breach.

Remedy available
Repudiate the contract as well as
to the aggrieved Claim damages only.
claim damages.
party on breach

A breach of condition may be Breach of warranty can’t be treated as

Breach
treated as a breach of warranty. a breach of condition.

• The Various Implied Conditions in The Contract of Sale

o Condition as to title
o Sale by description
o The Sale by sample
o Sale by a sample as well as by description
o Condition as to quality or fitness
o The Condition as to Merchantability
o Condition as to wholesomeness
o The goods are sold by trade mark, there is no implied condition as to fitness
• The several aspects or stipulations that are treated as Implied warranties
o Warranty as To Undisturbed Possession
o The Warranty as To Non-Existence of Encumbrances
o Warranty as To the Disclosure of Dangerous Nature of Goods
o The Warranty as To Non-Existence of Encumbrances
o Warranty as To Qualify or Fitness by Usage of Trade

29
DOCTRINE OF CAVEAT EMPTOR
• “Caveat Emptor” is a Latin phrase that translates to “let the buyer beware”.
• ‘Caveat Emptor’ is a fundamental principle of the law relating to sale of goods
• It means ‘Caution Buyer’, i.e., let the buyer beware’
• This means it lays the responsibility of their choice on the buyer themselves.
• This doctrine says that the seller will not be responsible for defective or of inferior
quality. The buyer himself is responsible for the choice he made.
• It is the duty of the buyer to check the quality and the usefulness of the product he is
purchasing.
• Example: A bought a horse from B. A wanted to enter the horse in a race. Turns out the
horse was not capable of running a race on account of being lame. But A did not inform
B of his intentions. So, B will not be responsible for the defects of the horse. The Doctrine
of Caveat Emptor will apply.
• The principle of doctrine of emptor, it’s not the seller but the buyer who must examine
the goods himself and find out their suitability for the purpose he buys them for
• The buyer can shift the responsibility to the seller if the three conditions are fulfilled.
o If the buyer shares with the seller his purpose for the purchase
o The buyer relies on the knowledge and/or technical expertise of the seller
o The seller sells such goods
• Exceptions to the Doctrine of Caveat Emptor
o Fitness of Product for the Buyer’s Purpose
o Goods Purchased under Brand Name
o Goods sold by Description
o Goods of Merchantable Quality
o Sale by Sample
o Sale by Description and Sample
o Usage of Trade
o Fraud or Misrepresentation by the Seller
• Passing of Property
o Once a property/Ownership is passed to the buyer, then the risk in the goods sold
is that of the buyer and not the seller
o Where there is a contract for the sale of unascertained goods, no property in the
goods is transferred to the buyer unless and until the goods are ascertained
• There are four primary rules that govern the passing of property
o Specific or Ascertained Goods
o Passing of Unascertained Goods
o Goods sent on approval or “on sale or return”
o Transfer of property in case of reservation of the right to disposal
• ‘Nemo dat quod non habet’ which means that no one can give what he doesn’t have.
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RIGHTS OF BUYER
• To have delivery of the goods as per contract.
• Right to repudiate contract if the seller commits any breach.
• To have reasonable opportunity to examine the goods.
• To sue the seller for damages for non-delivery of the goods.
• To recover price paid if the seller has failed to deliver the goods.
• To sue the seller for specific performance of the contract.
• To reject the goods. 8. to receive notice of insurance.
• To sue the seller for damages for breach of warranty.
DUTIES OF BUYER
• To pay for the goods and take delivery thereof.
• The seller is not bound to deliver the goods until the buyer applies for delivery.
• To compensate the seller for any loss occasioned by his neglect or refusal to take
delivery of the goods and also for reasonable charge for care and custody of the goods.
• To accept instalment delivery of goods and pay for the same.
• To accept risk of deterioration in course of transit.
• To intimate the seller if the goods are rejected
RIGHTS OF SELLER
• To receive the price of the goods.
• To receive compensation or sue for damages for any loss occasioned by neglect or
refusal of the buyer to take delivery of the goods.
• To receive reasonable charge for case and custody of the goods.
• If he is an unpaid seller
o To exercise right of lien.
o To exercise right of stoppage in transit.
o To exercise right of resale.
• To recover interest, from the buyer if there is a specific agreement to that effect or
charge interest on the price when it becomes due.
• To sue for the price of the goods.
• To sue for damages on buyer repudiating the contract.
DUTIES OF SELLER
• To deliver the goods when the buyer demands.
• To compensate the buyer for any breach of contract.
• To give unreasonable opportunity to the buyer to examine the goods.
• To refund price paid by the buyer in case he fails to deliver the goods.
• To compensate the buyer in case of delivery of wrong quantity of goods
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UNPAID SELLER
• The seller of goods is deemed to be an ‘unpaid seller’ when
o The whole of the price has not been paid or tendered
o When a bill of exchange or other negotiable instrument has been received as
conditional payment, and the condition on which it was received has not been
fulfilled by reason of the dishonour of the instrument or otherwise
o When even a part of the price has not been paid
• Unpaid seller has rights both against the goods as well as against the buyer.
THE UNPAID SELLER’S RIGHTS AGAINST GOODS
• Where property in the goods has passed to the buyer
• Where the property in the goods has not passed to the buyer

RIGHT OF LIEN (SEC.47)

• Right of lien means right to retain the possession of goods until certain charges due in
respect of them are paid.
• The unpaid seller has the right to retain the goods until tender or payment of price
• The right of lien of an unpaid seller depends solely on the possession of goods.
• Provides lien to the unpaid seller in the following cases, namely:
o Where the goods have been sold without any stipulation as to credit;
o Where the goads have been sold on credit, but the term of credit has expired;
o Where the buyer becomes insolvent

32
RIGHT OF STOPPAGE IN TRANSIT (SEC.50)
• This right consists in stopping the goods while they are in the possession of a carrier or
lodged at any place in the course of transmission to the buyer.
• The seller can resume possession of the goods and retain them until the price is
tendered or paid.
• To exercise the right of stoppage in transit four conditions must be satisfied, namely:
o The seller must be unpaid
o The buyer must be insolvent
o The seller must have parted with the possession of the goods
o The buyer must not have acquired possession of the goods, in other words, the
goods must be in transit.

RIGHT OF RE-SALE (SEC.54)

• An unpaid seller who has exercised his right of lien or stoppage in transit is also
empowered to resell the goods.
• This right is known as right of ‘resale’ since the goods are already sold once and the
property therein was also transferred.
• The right is applicable in two cases, namely:
o Where the goods are perishable in nature, the seller can resell them without even
giving notice to the buyer.
o If the goods are not of perishable nature, and the buyer does not pay the price
within reasonable time, the seller can resell the goods.
RIGHT TO WITHHOLD [SEC.46 (2)]
• A right of withholding delivery similar to and co-extensive with his right of lien and
stoppage in transit where the property has passed to the buyer
• Where the property in the goods has not passed to the buyer and the buyer becomes
insolvent before paying the price, the seller can have no such right as lien because a man
cannot have lien on his own goods. But he has the right to withhold delivery of goods.
• This right is analogous to a lien and is often called a quasi-lien.
33
UNPAID SELLER RIGHT AGAINST THE BUYER

BUYER’S REMEDIES AGAINST SELLER

34
NEGOTIABLE INSTRUMENTS ACT, 1881
• “A negotiable instrument” means a promissory note, bill of exchange or cheque payable
either to order or to bearer
• According to Section 13 of the Negotiable Instruments Act, "A negotiable instrument
means a promissory note, bill of exchange or cheque payable either to order or to
bearer.
• Section 1, it is also described that Local extent, saving of usage relating to hundis, etc.,
Commencement. But the Act does not affect
• Instruments written in oriental languages i.e. hundis are also negotiable instruments
• Hundi is an example of customary payment methods similar to NIs.
• Negotiable Instruments Act, 1881 is an act in India dating from the British colonial rule,
that is still in force largely unchanged.
• The Act was originally drafted in 1866 by the 3rd Indian Law Commission and introduced
in December 1867 in the Council
• These instruments are nothing but documents which have monetary value and are
exchangeable.
• The two main characteristics of Negotiable Instruments are financial worth and
transferability.
• It should be freely transferable either by simple delivery or by endorsement and delivery
• Principles relating to property transfers is ‘nemo dat quad non-habet’. Basically, means
nobody can pass a better title than that he himself possesses.
CLASSIFICATION OF NEGOTIABLE INSTRUMENTS
• Bearer Instruments
o A Promissory note, bill of exchange or cheque is payable to bearer when
▪ The Parties to the transactions must express it to be so payable. or
▪ The only or last endorsement on the instrument is an endorsement in blank
o These two requirements basically imply that any holder of such instruments can
obtain payment for them.
o A person who is a holder of a bearer instrument can obtain the payment of the
instrument and can demand their payment
• Order Instruments
o A promissory note, bill of exchange or cheque is payable to order
▪ Which is expressed to be so payable or
▪ Which is expressed to be payable to a particular person and
▪ Does not contain any words prohibiting transfer or indicating an intention
that it shall not be transferable
o The only requirement is that there should be no prohibition on their
transferability.
35
• Inland Instruments
o Section 11 of the NI Act deals with inland instruments.
o A promissory note, bill of exchange or cheque drawn or made in India and made
payable or drawn upon any person, resident in India shall be deemed to be an
inland instrument.
o Subject to this exception, an inland instrument is one which is either:
▪ Drawn and made payable in India, or
▪ Drawn in India upon some persons resident therein, even though it is made
payable in a foreign country.
o This provision basically regulates instruments drawn and made payable in India.
• Foreign Instruments
o An instrument which is not an inland instrument, is deemed to be a foreign
instrument.
o The essentials of a foreign instrument include that:
▪ It must be drawn outside India and made payable outside or inside India; or
▪ It must be drawn in India and made payable outside India and drawn on a
person resident outside India.
o Every instrument that is not inland automatically becomes a foreign instrument.
• Demand Instruments
o Demand Instruments deals with (Section 19)
o A promissory note or a bill of exchange in which no time for payment is specified
is an instrument payable on demand.
o Such instruments are generally payable whenever the bearer demands.
o Examples of such instruments include promissory notes and bills of exchange.
• Time Instruments
o Time instruments carry a fixed future date for payment.
o For example, a promissory note may carry a maturity date arising after 24 months
of its issue. Such instruments may even become payable upon the happening of a
specific future event.
o The expression “after sight” in a promissory note means that the payment cannot
be demanded on it unless it has been shown to the maker.
• Ambiguous Instruments
o Ambiguous Instruments deals with Section 17
o An instrument is basically 0ne that may be either a bill or a note for its holder.
o Under such circumstances, the holder of such instruments may treat them either
as bills of exchange or as promissory notes.
o Such situations arise in peculiar circumstances only.
o For example, sometimes the drawee may be a fictitious person or he may be
incompetent to contract.

36
 • Incomplete instruments
o Inchoate or Incomplete Instrument deals with Section 20
o When one person signs and delivers to another a paper stamped in accordance
with the law relating to negotiable instruments, and either wholly blank or having
written thereon an incomplete negotiable instrument
o The authority to fill up a blank or incomplete instrument may be exercised by any
“holder” and not only the first holder to whom the instrument was delivered
o The person signing and delivering the paper is liable both to a “holder” and a
“holder-in-due- course”.
TYPES OF NEGOTIABLE INSTRUMENTS
• Section 13 of the Negotiable Instruments Act states that a negotiable instrument is
o Promissory note
o Bill of exchange
o Cheque payable either to order or to bearer.
• Negotiable instruments recognised by statute are:
o Promissory notes, Bills of exchange, Cheques
o Trade Bill and Accommodation
o Fictitious Bill
o Documentary and Clean Bills
o Inchoate Instrument, Ambiguous Instrument, Inland and Foreign Instruments
o Instruments payable on Demand
o Escrow and Bills in Sets
• Negotiable instruments recognised by usage or custom are:
o Hundis, Share warrants, Dividend warrants
o Bankers draft, Circular notes, Bearer debentures
o Debentures of Bombay Port Trust, Railway receipts, Delivery orders

37
PROMISSORY NOTES
• Section 4 of the Act defines, “A promissory note is an instrument in writing (note being
a bank-note or a currency note) containing an unconditional undertaking, signed by the
maker, to pay a certain sum of money to or to the order of a certain person, or to the
bearer of the instruments.”
• As per Section 31 of the RBI Act, 1934, A promissory note cannot be made payable or
issued to bearer, no matter whether it is payable on demand or after a certain time
• Parties to a Promissory Note:
o The maker: This is basically the person who makes or executes a promissory note
and pays the amount therein.
o The payee: The person to whom a note is payable is the payee.
o The holder: A holder is basically the person who holds the notes. He may be either
the payee or some other person.
o Even endorsers and endorsees can be parties in certain cases.
ESSENTIALS OF A PROMISSORY NOTE
• A promissory note must always be in written and not oral
• It must contain an express promise or clear undertaking to pay. A promise to pay cannot
be inferred. A mere acknowledgement of debt is not sufficient.
• The promise or undertaking to pay must be unconditional.
• A promise to pay “when able”, or “as soon as possible”, or “after your marriage to D”, is
conditional. But a promise to pay after a specific time or on the happening of an event
which must happen, is not conditional, e.g. “I promise to pay Rs. 1,000 ten days after
the death of B”, is unconditional.
• The maker must sign the promissory note in token of an undertaking to pay to the payee
or his order.
• The maker must be a certain person, i.e., the note must show clearly who is the person
engaging himself to pay.
• The payee must be certain. The promissory note must contain a promise to pay to some
person or persons ascertained by name or designation or to their order.
• The sum payable must be certain and the amount must not be capable of contingent
additions or subtractions.
• Payment must be in legal money of the country.
• It must be properly stamped in accordance with the provisions of the Indian Stamp Act,
1899. Each stamp must be duly cancelled by maker’s signature or initials.
• It must contain the name of place, number and the date on which it is made. However,
their omission will not render the instrument invalid. A promissory note cannot be made
payable or issued to bearer, no matter whether it is payable on demand or after a certain
time (Section 31 of the RBI Act, 1934).
38
BILLS OF EXCHANGE
• Section 5 of the Act defines, A “bill of exchange” is an instrument in writing containing
an unconditional order, signed by the maker, directing a certain person to pay a certain
sum of money only to or to the order of, a certain person or to the bearer of the
instrument.
• The liability of the maker of a bill of exchange is Conditional
• Bills of exchange were originally used for payment of debts by traders residing in one
country to another country with a view to avoid transmission of coin
• Parties to bills of exchange
o Drawer: This is basically the person who draws the bill.
o Drawee: In contrast to the drawer, the drawee is the person in whose favour the
bill is drawn.
o Acceptor: This is the person who accepts a bill of exchange. Generally, the
acceptor is the drawee but a stranger may accept it too.
o Payee: Either the drawee or a stranger may be a payee, which is the person to
whom bills are payable.
o Holder: This is generally the payee of the bill. It could also be some other person
to whom the payer endorses the bill. In case of bearer bills, the bearer himself is
the holder.
o Endorser: The holder becomes an endorser when he endorses the bill to another
person.
o Endorsee: This is the person to whom a bill is endorsed by the endorser.
• Essentials of a Bill of Exchange:
o It must be in writing and not oral
o It must an unconditional order to pay money only and not merely a request.
o It must be signed by the drawer.
o The parties must be certain, the sum payable must also be certain.
o It must comply with other formalities e.g. stamps, date, etc.
• Forms of Bills of Exchange
o Inland Bills: A bill of exchange may be an inland instrument under two conditions.
Firstly, the bill must be drawn as well as payable within India. Secondly, it may also
be drawn in India upon an India resident but payable in a foreign country.
o Foreign Bills: All bills that are not inland bills are foreign bills by default. Generally,
foreign bills require three copies and different rules govern them.
o Trade Bills: A bill of exchange that comes into play during a genuine trade
transaction is a trade bill.
o Accommodation Bills: These are different from trade bills because they do not
involve any transactions of trade. In this bills, one person lends his name to oblige
a friend or some other person. This is basically similar to loan transactions.
39
 • Bills in Sets (Section 132 and 133)
o Foreign bills are usually drawn in sets to avoid the danger of loss.
o They are drawn in sets of three, each of which is called “Via”
BASIS BILL OF EXCHANGE PROMISSORY NOTE

A promissory note is a written

Bill of Exchange is an
promise made by the debtor to
instrument in writing showing
Meaning pay a certain sum of money to
the indebtedness of a buyer
the creditor at a future specified
towards the seller of goods.
date.

Section 5 of Negotiable Section 4 of Negotiable

Defined in
Instrument Act, 1881. Instrument Act, 1881.

Three parties, i.e. drawer, Two parties, i.e. drawer and

Parties
drawee and payee. payee.

Drawn by Creditor Debtor

Liability of Maker Secondary and conditional Primary and absolute

Can maker and payee be No (Cannot be made payable to

Yes (Called fictitious persons)
the same person? the maker himself)

Promissory Note cannot be

Copies Bill can be drawn in copies.
drawn in copies.

Notice is necessary to be given Notice is not necessary to be

Dishonor
to all the parties involved. given to the maker.

A bill there is an unconditional

A note contains an unconditional
order to the drawee to pay
Order/Promise promise by the maker to pay to
according to the directions of
the payee
the drawer

Foreign bill must be protested No such protest is necessary in

Protested
for dishonor the case of a note

Due notice of dishonor is to be

given by the holder to the No such notice needs to be given
Notice for dishonor
drawer and the intermediate in the case of a note
endorsee,

Payable on Demand It is not payable on demand It is payable on demand

40
CHEQUES
• Section 6 of the Act defines “A cheque is a bill of exchange drawn on a specified banker
and not expressed to be payable otherwise than on demand”.
• It is not payable otherwise than on demand
• It includes the electronic image of a truncated cheque and electronic cheque
• A truncated cheque is one which undergoes truncation during a clearing cycle.
• Truncation basically means the conversion of a physical cheque into digital format.
• Parties to a cheque generally include the drawer and the drawee (bank)
• Cheques are payable only on demand but Bill of exchange are payable either on demand
or on a specific date.
• “All cheques are bills of exchange but all bills are not cheques”
• A cheque must be signed by the person issuing the cheque.
• A cheque must be drawn upon a specified bank (Drawee)
• A cheque must have the name of the recipient (Payee) of the cheque
• The person issuing the cheque is known as Drawer
• Essentials of a Cheque
o It is always drawn on a banker.
o It is always payable on demand.
o It does not require acceptance. There is, however, a custom among banks to mark
cheques as good for purposes of clearance.
o A cheque can be drawn on bank where the drawer has an account.
o Cheques may be payable to the drawer himself. It may be made payable to bearer
on demand unlike a bill or a note.
o The banker is liable only to the drawer.
o A holder has no remedy against the banker if a cheque is dishonoured.
o A cheque is usually valid for fix months. However, it is not invalid if it is post-dated
or ante-dated.
o No Stamp is required to be affixed on cheques

41
 BASIS CHEQUE BILL OF EXCHANGE

A document used to make easy

A written document that shows the
payments on demand and can be
Meaning indebtedness of the debtor towards
transferred through hand delivery
the creditor.
is known as cheque.

Section 6 of The Negotiable Section 5 of The Negotiable

Defined in
Instrument Act, 1881 Instrument Act, 1881

Validity Period 3 months Not Applicable

Payable to bearer on Cannot be made payable on

Always
demand demand as per RBI Act, 1934

Not Applicable, as it is always

Grace Days payable at the time of 3 days of grace are allowed.
presentment.

A cheque does not require Bill of exchange needs to be

Acceptance
acceptance. accepted.

Stamping No such requirement. Must be stamped.

Crossing Yes No

Drawee Bank Person or Bank

If the cheque is dishonoured it If a bill of exchange is dishonoured

Noting or Protesting
cannot be noted or protested it can be noted or protested.

A cheque is a bill of exchange and A bill may be drawn on any one,

Drawn
always drawn on a banker including banker.

A bill may be drawn payable on

A cheque can only be drawn
Payment on demand demand, or on the expiry of a
payable on demand
specified period after sight or date

Notice of the dishonour of a bill is

Notice Not in the case of a cheque
necessary

42
CROSSING A CHEQUE
• A crossing is an instruction to the paying banker to pay the amount of cheque to a
particular banker and not over the counter.
• The crossing of the cheque secures the payment to a banker.
• Crossing a cheque refers to drawing two parallel transverse lines on the cheque with or
without additional words like “& CO.” or “Account Payee” or “Not Negotiable” between
the lines.
• General Cheque Crossing (Sec. 123)
o Two parallel transverse lines are drawn on the face of the cheque, generally, on
the top left corner of the cheque
o Word “& Company”, “Not Negotiable”, “A/C. Payee” may or may not be written
o The paying banker will pay money to any banker.
o “The holder of the cheque or the payee will receive the payment only through a
bank account and not over the counter”
o It can be converted into Special Crossing
o A crossed cheque on its own does not affect the negotiability of the instrument
• Special Cheque Crossing (Sec. 124)
o The cheque bears across its face an addition of the banker’s name, with or
without the words ‘& Co.’, ‘Account payee’ or ‘Not Negotiable’
o The paying banker will pay the amount of cheque only to the banker whose name
appears in the crossing or to his collecting agent.
o In special crossing two parallel transverse lines are not essential but the name of
the banker is most important.
o “Bank will pay to the banker whose name is written in between the crossing lines”
o Specially Crossed Cheques can never be converted to General Crossing.
o This type of crossing restricts the negotiability of the cheque
• Restricted Crossing or Account Payee’s Crossing
o Crossing of cheques is done by writing Account Payee or Account Payee only in
between the crossing lines.
o “Payment will be credited to the account of payee named in the cheque”
• Double Crossing
o When a cheque bears two special crossing, is called Double Crossing
o For e.g., a cheque is crossed specially in the name of ‘Canara Bank’, and further in
the name of ‘Bank of Baroda’.
o In this second bank act as agent of the first collecting banker

43
TYPES OF CHEQUES
• Open Cheque
o It is an uncrossed cheque which is payable at counter of the bank.
o Bearer Cheque
▪ A bearer cheque is one that does not have the word Bearer on the cheque
cancelled.
▪ It can be transferred by mere delivery and do not need endorsement.
▪ A Bearer cheque can be negotiated or pass to another person by mere
delivery
o Order Cheque
▪ This is a cheque whereby the printed word Bearer on the cheque is
cancelled.
▪ When the word Bearer is cancelled, the cheque becomes the order cheque.
▪ It can be transferred only by endorsement and delivery.
▪ An order cheque can be negotiated to another person by the endorsement
of the transferrer
• Crossed Cheque
o It is the cheque on which two parallel transverse lines are drawn across the top
left, with or without the word ' & Co.' Not Negotiable, A/c Payee
o It cannot be encashed at the counter of the bank, can only be credited to the
account of the payee.
• Stale – Dated Cheque
o The validity of cheque is for three months.
o Its cheque is not presented within the three months, it got expired and becomes
the Stale Cheque or Out-dated cheque.
o Earlier the validity of cheque was for six months, it has been reduced to three
months, with effect from April 1, 2012.
o As the name suggests, any cheque which is expired, hence not suitable to use
o Any cheque presented after this expiry period will be considered as stale cheque
• Ante – Dated Cheque
o Antedated means the date entered on any legal contract which is earlier than
actual date of occurrence of contract.
o If it bears a prior date or back date, it is called Ante-Dated cheque.
o Bank will honour this cheque until it exceeds the three months
o Any cheque with past date (not exceeding past 3 months) can be presented to
bank for clearance.
o Ante-dated cheques can be used when the contract is delayed to avoid
unnecessary trouble to party.

44
 • Post – Dated Cheque
o This cheque has postdating, or can say have future date.
o If any cheque has a date of next month, then it is post-dated.
o This cheque cannot be honoured before the date written on it.
• Multilated Cheque
o If a cheque is torn into two or more pieces such cheque is Mutilated Cheque
• Blank Cheque
o A cheque on which the drawer puts his signature and leaves all other columns
blank is called a blank cheque.
• Gift Cheques
o Gift cheque, it is a cheque in decorative form issued for a small extra charge by the
banks for use by customers who wish to give presents of money on special
occasions.
ENDORSEMENT OF INSTRUMENTS
• The act of a person who is a holder of a negotiable instrument in signing his or her name
on the back of that instrument, thereby transferring title or ownership is an
endorsement.
• The person to whom the instrument is endorsed is called the endorsee.
• The person making the endorsement is the endorser
• A forged endorsement involves forging the payee's signature for negotiation.
• Types of Endorsement
o Blank Endorsement/General Endorsement: Where the endorser signs his name
only and it becomes payable to bearer.
o Special Endorsement/Full Endorsement: Where the endorser puts his sign and
writes the name of the person who will receive the payment.
o Restrictive Endorsement
▪ Which restricts further negotiation.
▪ Example of restrictive endorsement: “Pay to Mrs. Geeta only” or “Pay to Mrs
Geeta for my use” or “Pay to Mrs Geeta on account of Reeta” or “Pay to Mrs.
Geeta or order for collection”.
o Partial Endorsement
▪ Which allows transferring to the endorsee a part only of the amount payable
on the instrument. This does not operate as a negotiation of the instrument.
▪ Mr. Mohan holds a bill for Rs. 5,000 and endorses it as “Pay Sohan or order
Rs. 2500”. The endorsement is partial and invalid.
o Conditional Endorsement/Qualified Endorsement: Where the endorser puts his
signature under such writing which makes the transfer of title subject to fulfilment
of some conditions of the happening of some events

45
NEGOTIATION BACK
• Where an endorser negotiates an instrument and again becomes its holder, we know it
as negotiation back to that endorser.
• For example, Ram, the holder of a bill endorses it to Bala, Bala endorses to Kala, and
Kala to Lala, and endorses it again to Ram
NEGOTIATION V/S ASSIGNMENT

BASIS NEGOTIATION ASSIGNMENT

Negotiation refers to the transfer of Assignment implies the transfer of

the negotiable instrument, by a rights, by a person to another, for
Meaning
person to another to make that the purpose of receiving the debt
person the holder of it. payment.

Governing Act Negotiable Instrument Act, 1881 Transfer of Property Act, 1882

Mere delivery in case of bearer

A written document duly signed by
Effected by instrument and, endorsement and
the transferor.
delivery in case of order instrument.

Consideration It is presumed It is proved

Transferee gets the right of holder in Assignee's title is subject to the title
Title
due course. of Assignor.

Must be served by assignee on his

Transfer notice Not required
debtor.

The transferee has the right to sue The assignee has no right to sue the
Right to sue
the third party, in his/her own name. third party in his/her own name.

46
DISHONOUR OF A NEGOTIABLE INSTRUMENT
• Dishonour of negotiable instrument means loss of honour or respect for the instrument
in question on the part of the maker, drawee, or acceptor
• If the bill of exchange is dishonoured either by non-acceptance or by non-payment, the
drawer and all the endorsers of the bill are liable to the holder
• The drawee is liable only when there is dishonour by non-payment.
• A cheque is dishonoured by non-payment as soon as a banker refuses to pay
• a liable holder should issue a notice of dishonour to all the concerned parties in order to
express his liability
• Dishonour by Non-Acceptance (Section 91): Dishonour by non-acceptance is a situation
of refusal to accept a negotiable instrument. Generally, observe in the case of a bill
o When the drawee does not accept it within 48 hours from the time of presentment
for acceptance.
o When presentment for acceptance is excused and the bill remains unaccepted.
o When the drawee is incompetent to contract.
o When the drawee is a fictitious person
o When we cannot find the drawee after a reasonable search.
o Where the acceptance is a qualified one.
• Dishonour by Non-Payment (Section 92):
o Promissory note, bill of exchange or cheque is said to be dishonoured by non-
payment when the maker of the note, acceptor of the bill or drawee of the cheque
makes default in payment upon required to pay the same
o a negotiable instrument is dishonoured by non-payment when presentment for
payment is excused and the instrument when overdue remains unpaid.

47
DISCHARGE OF THE INSTRUMENT
• The discharge in relation to negotiable instrument may be either
o Discharge of the instrument or
o Discharge of one or more parties to the instrument from liability
• Discharge of the Instrument
o by payment in due course;
o when the principal debtor becomes the holder;
o by an act that would discharge simple contract;
o by renunciation;
o by cancellation
• Discharge of a Party or Parties
o By cancellation by the holder of the name of any party to it with the intention of
discharging him.
o By release, when the holder releases any party to the instrument
o Discharge of secondary parties, i.e., endorsers.
o By the operation of the law, i.e., by insolvency of the debtor.
o By allowing drawee more than 48 hours to accept the bill, all previous parties are
discharged.
o By non-presentment of cheque promptly the drawer is discharged.
o By taking qualified acceptance, all the previous parties are discharged.
o By material alteration.
• Escrow: A bill, endorsed or delivered to a person subject to the understanding that it
will be paid only if certain conditions are fulfilled is called Escrow

48
NOTING
• Section 99 provides a convenient method of authenticating the fact of dishonour by
means of “Noting”.
• Noting is a minute recorded by a notary public on the dishonoured instrument or on a
paper attached to such instrument
• Noting and protesting is not compulsory but foreign bills must be protested for
dishonour
• Noting is an apparent proof which makes clear that the instrument is dishonoured.
• The noting or minute must be recorded by the notary public within a reasonable time
after dishonour and must contain
o The fact of dishonour
o The date of dishonour
o The reason for such dishonour
o The notary’s charges
o A reference to the notary’s register and the notary’s initial
PROTEST
• Protest is a formal certificate of the notary public attesting the dishonour of the bill by
non-acceptance or by non-payment.
• Cheque, Note, Bill are dishonoured by non-acceptance or non-payment, the holder may,
within a reasonable time, cause such dishonour to be noted and certified by a notary
public. Such dishonour to be noted and certified by a notary public. Such certificate is
called a protest
• The chief advantage of protest is that the court on proof of the protest shall presume
the fact of dishonour.
• Protest is the documentary evidence or proof which is accepted by the court.

49
THE COMPANIES ACT, 2013
• A company can be defined as a group of persons associated together for the purpose of
carrying on a business with a view to earn profits.
• the Companies Act, 2013 (Act No. 18 of 2013) a “company” means a company
incorporated under this Act or under any previous company law [Section 2(20)].
• An existing company means a company formed and registered under any of the previous
companies Act
• Incorporated as private company with minimum number of members with 2 and as
public company with minimum number of members with 7.
• The first Companies Act was passed in India in 1850.
• The Companies Act, 1956 – Based on H. C. Bhaba Committee Recommendations
• The Companies Act, 2013 – Based on J. J. Irani Committee
• The Companies Act, 2013 has undergone amendments four times
o The Companies (Amendment) Act, 2015,
o The Insolvency and Bankruptcy Code, 2016
o The Companies (Amendment) Act, 2017
o The Companies (Amendment) 2019
• Word ‘company’ is derived from the Latin word (Com = with or together; Panis = bread)
and it originally referred to an association of persons who took their meals together
APPLICABILITY OF COMPANIES ACT, 2013
• Companies incorporated under this Act or under any previous company law
• Insurance companies, except in so far as the said provisions are inconsistent with the
provisions of the Insurance Act, 1938 or Insurance Regulatory and Development
Authority Act, 1999
• Banking companies, except in so far as the said provisions are inconsistent with the
provisions of the Banking Regulation Act, 1949
• Companies engaged in the generation or supply of electricity, except in so far as the said
provisions are inconsistent with the provisions of the Electricity Act, 2003
• Any other company governed by any special Act for the time being in force, except in so
far as the said provisions are inconsistent with the provisions of such special Act
NON - APPLICABILITY OF COMPANIES ACT, 2013
• Companies Act, 2013 is not applicable to unincorporated companies
• Section 464 of the Companies Act, 2013, no association or partnership consisting of
more than such number of persons as may be prescribed shall be formed
• Section 464 of the Act does not apply to the case of a Hindu undivided family
• Section 464 is also not applicable to an association or partnership, if it is formed by
professionals who are governed by special Acts
50
FEATURES OF COMPANIES
• Voluntary Association or Organization of persons
• Incorporated Association
• Specific objects
• Artificial Person created by law: A company is the creation of law and is therefore called
as an artificial person
• Separate legal entity or Corporate personality
• Not a citizen
• Perpetual Succession: That the life of company is not related the with the life of
members. Law creates the company and dissolve it. The death of insolvency or transfer
of shares of members does not in any way affect the existence of a company
• Common seal
• Limited liability
• Transferability of shares: The shareholder of a public company can transfer his shares to
any person without the consent of other members
• Limitation of work
• Separate property
• Representative management: Board of director, who are elected amongst the members,
to represent the management on behalf of member
EXCEPTIONS TO THE PRINCIPLE OF LIMITED LIABILITY
• If at any time the number of members of a company is reduced, in the case of a public
company below seven, in the case of a private company below two and the company
carries on business for more than six months.
• When company incorporated as an Unlimited Company under Section 3(2)(c) of the Act
• Where a company has been got incorporated by furnishing any false or incorrect
information or representation or by suppressing any material fact or information

51
 BASIS PARTNERSHIP FIRM COMPANY

A company is an association of
When two or more persons agree to persons who invests money
carry on a business and share the towards a common stock, for
Meaning
profits & losses mutually, it is known carrying on a business and shares
as a Partnership firm. the profits & losses of the
business.

Governing Act Indian Partnership Act, 1932 Indian Companies Act, 2013

Partnership firm is created by The company is created by

How it is created? mutual agreement between the incorporation under the
partners. Companies Act.

Registration Voluntary Obligatory

Two in case of private company

Minimum number
Two and Seven in case of public
of persons
company.

200 in case of a private company

Maximum number
100 partners and a public company can have
of persons
unlimited number of members.

Audit Not Mandatory Mandatory

Management of the
Partners itself. Directors
concern

Liability Unlimited Limited

Contractual A partnership firm cannot enter into A company can sue and be sued in
capacity contracts in its own name its own name.

1 lakh in case of private company

Minimum capital No such requirement and 5 lakhs in case of public
company.

Must use the word 'limited' or

Use of word limited No such requirement.
'private limited' as the case

Legal formalities in
No Yes
dissolution/winding

Separate legal entity No Yes

Mutual agency Yes No

52
 A partnership firm is not distinct
A company is a distinct legal
Distinct from the several persons who form
person
the partnership.

The creditors of a company can

Creditors of a partnership firm are proceed only against the
Creditor’s Effect
creditors of individual partners company and not against its
members

Members are not the agents of the

Agent Partners are the agents of the firm
firm

A partner cannot contract with his A member can contract with his
Contract
firm company

A partner cannot transfer his share

A company’s share can ordinarily
Share Transfer without the consent of the other
be transferred
partners.

The death or insolvency of a

The death or insolvency of a partner
Dissolution shareholder or all of them does
dissolves the firm
not affect the life of the company.

TYPES OF COMPANIES
• Classification on the basis of Incorporation
o Charter companies
▪ A company which comes into existence under a special charter or
proclamation issued by a crown King or Queen or by a Monarch
▪ Example British east India company, Bank of England
o Statutory companies
▪ A statutory company is brought into existence under the separate Act
passed by the legislatures of the country or state.
▪ It is registered under separate Act & does not register under companies Act
▪ Example RBI, LIC, UTI
o Register companies
▪ A register companies are the companies which are formed and registered
under the provision’s companies Act
▪ The Company existence only after getting the “certificate of Incorporations”
▪ Example Infosys, Wipro

53
• Classification on the basis of liabilities of the member
o Limited companies
▪ Limited companies are companies in which the liability of the members is
limited to some extent and the members are not personally liable for the
debts of the company, personal properties of assets cannot be attached
against the debt of the company
Limited by shares
▪ The company in which the liability of member is limited to the extent of
nominal or face value of the shares held by him or the extent of unpaid
number of shares held by him is called companies limited by shares
▪ Companies limited by shares are may be either public or private companies
Limited by guarantee
▪ It means a company having the liability of its members limited by the
memorandum to such amount as the members may respectively undertake
to contribute to the assets of the company in the event of its wound up.
▪ Limited by guarantee such company are not formed for the purpose of profit
▪ Form for the promotion of art, science, sports and for cultural activities.
▪ Such companies may or may not have share capital
o Unlimited Companies
▪ These are companies, where the liability of the members is not limited.
▪ The members are liable for the debts of the company in proportion their
respective interest in the company
▪ Such companies may not have share capital
• Classification on the basis of number of members
o Private company
▪ Private company means a company which has maximum paid up capital of
Rs. 1 lakh or such higher paid up capital as may be prescribed and by its
articles of association
▪ Which restricts the rights of the members to transfer shares is Pvt Co.
▪ Maximum number of members 50
▪ The new requirement increases the number of members from 50 to 200.
▪ Minimum number of members 2
▪ Such company should always use the word “Pvt Ltd”
o Public company
▪ Public company means a company which has maximum paid up capital of
Rs. 5 lakh or such higher paid up capital as may be prescribed
▪ Maximum number of members unlimited
▪ Minimum number of members 7
▪ Such company should always use the word “Ltd
▪
54
• Classification on the basis of Nationality
o Domestic Company
▪ A domestic company is a company which is incorporated or registered under
the Indian Act
o Foreign Company
▪ A foreign company is a company which is incorporated or registered in a
foreign country but has running its business in India
▪ The term ‘foreign company’ is clearly laid down under Section 2 (42) of the
Companies Act, 2013
▪ A foreign company is any company incorporated outside India which
• Has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
• Conducts any business activity in India in any other manner
▪ ‘Foreign company’ was exclusively based on condition of having established
‘place of business’ in India
• Classification on the basis of control
o Holding company
▪ Under section 4 of Indian companies Act 1956, a holding company is a
company which is controlling a subsidiary company
▪ It is a company which holds more than 50% of the nominal value of equity
share capital of another company or
▪ It is a company which controls the composition of the board of directors of
another company or
▪ It is a company which exercises or control more than 50% of the total voting
powers of another company or
▪ It is a company where one company is a subsidiary of any company that is
another’s subsidiary
o Subsidiary Company
▪ Under section 4 of Indian companies Act 1956, a subsidiary company is a
company which is controlled by a holding company
▪ It is a company where in the other company holds more than 50% of the
nominal value of equity share capital or
▪ It is a company where in the other company controls the composition of the
board of directors or
▪ It is a company where in the other company exercises or control more than
50% of the total voting powers or
▪ It is a company where it is a subsidiary of any another company, which is
subsidiary of the controlling company

55
• Other kinds of companies
o One-man company
▪ In these types of company one man holds the entire share capital of such
company
▪ In order to fulfil the statutory requirements of minimum number of
members at least 2 members in case of private company or 7 members in
case of public company
▪ Some dummy names are inserted to form or create company by way of
getting registration
o Deemed public companies
▪ Under section 43A of Indian companies Act 1956, a private company is
deemed to be a public company, when 25% or more of its paid-up share
capital is held by one or more companies, which may either private or public
company
▪ When 25% or more of the paid-up share capital of a public company is held
by the private company
▪ When the private company’s average annual turnover during the three
preceding financial year become Rs. 10 crores
▪ When the private company, through an invitation, accepts public deposits
after the commencement of companies Act
o Small company
▪ Paid-up share capital of which does not exceed fifty lakh rupees or such
higher amount as may be prescribed which shall not be more than ten crores
▪ Turnover does not exceed two crore rupees or such higher amount as may
be prescribed which shall not be more than one hundred crore rupees
o Dormant company
▪ A company formed and registered under this 2013 for a future project or to
hold an asset or intellectual property and has no significant accounting
transaction such a company or an inactive company
▪ Minimum number of directors
• Public Company - 3
• Private Company - 2
• One Person Company – 1

56
o Nidhi Company
▪ Nidhi Company is a type of Non-Banking Financial Company (NBFC).
▪ It is formed to borrow and lend money to its members.
▪ It inculcates the habit of saving among its members and works on the
principle of mutual benefit.
▪ Minimum of seven members is required to start a Nidhi Company out of
which three members must be the directors of the company.
▪ A minimum of 5 lakh rupees, is required as the equity share capital to start
a Nidhi Company.
▪ Nidhi Company can’t issue preference shares.
o Associate Company
▪ In relation to another company, means a company in which that other
company has a significant influence, but which is not a subsidiary company
of the company having such influence and includes a joint venture company.
▪ “Significant influence” means control of at least 20% of total voting power,
or control of or participation in business decisions under an agreement;
▪ “Joint venture” means a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net assets

57
FORMATION OF A COMPANY
• A company is said to have been formed only when it has been incorporated or registered
under Indian Companies Act
• A company formed under Section 3(1) may be either
o A company limited by shares; or
o A company limited by guarantee; or
o An unlimited company.
• The process of formation of company may be divided into four stages:
o Promotional stage
o Incorporation or Registration stage
o Capital subscription stage
o Commencement of business stage
• Under section 149 of the Act first two stages are promotion and incorporation stages
necessary for the formation of both private and public companies which is not having
share capital
• They may commence its business immediately after obtaining a “Certificate of
Incorporation” from the registrar of companies. But public company which is having
share capital has to pass through all the four stages mentioned above before commence
its business
PROMOTIONAL STAGE
• Promotional stage is the first stage of formation of company
• The term “Promotion” refers to the process of by which a company is ‘incorporated’ or
brought into existence.
• The term promotion refers to the aggregate of activities designed to bring into being an
enterprise to operate of activities
• According to Honey, “Promotion is the process of organizing and planning the finance of
a business enterprise under the corporate form”
• We can classify promotional stage into four stages:
o Discovery of a business idea, proposition or opportunity
o Detailed investigation of the profitability and the practicability of the business
proposition
o Assembling the various requirements of the business proposition
o Financing the business proposition
• Preliminary contract: These are also called as pre - incorporation contracts which are
made by the promoters on behalf of the proposed company, before the incorporation
of the company

58
PROMOTOR
• The work of promotion is done by a person called “Promoter”
• According to Guthmann and Dougall. “Promoter is the person who assembles the men,
the money and the materials into a going concern.”
• Section 2(69) of the Companies Act, 2013 defines the term ‘promoter’ as under:
“Promoter” means a person
o who has been named as such in a prospectus or is identified by the company in
the annual return referred to in section 92;
o who has control over the affairs of the company, directly or indirectly whether as
a shareholder, director or otherwise;
o in accordance with whose advice, directions or instructions the Board of Directors
of the company is accustomed to act.
• A promoter is neither an agent of, nor a trustee for the company
• A promoter is not forbidden to make profit but he should not make any secret profit
• A promoter has no legal right to claim promotional expenses for his services unless there
is a valid contract.
FUNCTIONS OF PROMOTER
• To conceive an idea of forming a company and explore its possibilities.
• To conduct the necessary negotiation for the purchase of business in case it is intended
to purchase as existing business. In this context, the help of experts may be taken, if
considered necessary.
• To collect the requisite number of persons (i.e. seven in case of a public company and
two in case of a private company) who can sign the ‘Memorandum of Association’ and
‘Articles of Association’ of the company and also agree to act as the first directors of the
company.
• To decide about the following:
o The name of the Company
o The location of its registered office,
o Amount and form of its share capital,
o The brokers or underwriters for capital issue, if necessary,
o The bankers, The auditors, The legal advisers
• To get the Memorandum of Association (M/A) and Articles of Association (A/A) drafted
and printed.
• To make preliminary contracts with vendors, underwriters, etc.
• To make arrangement for the preparation of prospectus, its filing, advertisement and
issue of capital.
• To arrange for the registration of company and obtain the certificate of incorporation.
• To defray preliminary expenses And To arrange the minimum subscription.
59
INCORPORATION OR REGISTRATION STAGE
• Incorporation or registration is the second stage of formation of a company
• The certification of incorporation is conclusive evidence about registration and
compliance of all the legal requirements. Date of certificate of incorporation is date of
birth of a company.
• A company obtains separate legal existence only after it is registered under the
Companies Act
• Under such on 12 of the Act provides that, at least 2 members in case of a private
company and 7 members in case of public company is must for formation of a company
• Accordingly, the company formed under this section may be
o A company limited by shares
o A company limited by guarantee
o An unlimited company
• Preliminary Activities
o To decide the name of the company
o Licence under Industries Development and Regulation Act, 1951
• Filing of Document with the Registrar
o Memorandum of Association
o Articles of Association
o List of directors
o Written consent of directors
o Statutory declaration
• Steps to be taken for the incorporation or registration of public limited company
o Approval of name: A promoter can choose any name as he wishes. A promoter
has to submit an application to the Department of company Law Administration,
Government of India through the “Registration of companies” of the state, in
which state the company is to be incorporated
o Licence: An application under Industries development and regulation Act, 1951 for
getting licence
o Permission: An application has to be filed before the controller of capital issue,
ministry of finance, Department of economic affairs, New Delhi, if the capital of
the company exceeds Rs. 1 crore
o Preparation and print of basic documents: It are required to prepare and print
the documents of memorandum of Association and Articles of Association which
are the basic documents for incorporation or registration of a company to be filed
before the registrar of companies at the time of registration

60
o Filing of documents: A promoter has to file an application before the “Registration
of company”, for incorporation or registration of a proposed company, along with
the following documents:
▪ Memorandum of Association:
• It is life giving document
• which determine the nature, scope, power, liability of a company, has
to be filed with properly stamped and signed by at least 7 persons in
case of public company and 2 in case of private company. And attested
by the signatures of a witnesses
▪ Articles of association:
• It is a document which contain the rules and regulation of the
company, has to be filed with properly stamped and signed by all
those persons who have signed the memorandum of association.
• It is essential in case of an unlimited company, company limited by
guarantee and private company limited by share
• It is an optional to the public limited company having share capital
▪ List of directors Details: Name, Address, Occupations of persons
▪ Consent letter: A written consent letter of those persons who have agreed
the act as first directors of the company has to be failed along with a written
undertaking from them
▪ Particular of management: Particulars of managing director, manager
secretary etc, if any has to be filed
▪ Capital structure: Statement of the amount of capital, its division into
different classes of shares and nominal value of each shares has to be filed
▪ Statutory declaration: A statutory declaration should be made by any
advocate of Supreme court or High court or by an attorney general or by a
Charted Account.
o Payment of stamp duty: The above said documents should be filed by the
promoter the with payment of required stamp duty, filing fee and other charges
to the “Registrar of companies”, along with the application for registration
61
MEMORANDUM OF ASSOCIATION
• Life giving documents
• Constitution of the company
• MOA document, the relations of the company is governed with outsides and members
of the company
• MOA is called as the charter of the company
• Memorandum of Association is a public document
• Form of MOA: Under section 14 pf the Act lays down that the Memorandum of
Association shall be in accordance with prescribes form in given under schedule I of the
Act
o Table – B: MOA for the companies limited by shares
o Table – C: MOA for the companies limited by guarantee and not having a share
capital
o Table – D: MOA for the companies limited by guarantee and having a share capital
o Table – E: MOA for as unlimited companies
• Contents of MOA:
o Name clause
o Registered office clause
o Object clause
o Liability clause
o Capital clause
o Association or Subscription clause
• Doctrine of Ultra vires
o The word ultra means beyond and vires mean power
o It is a fundamental rule of company law
o Its state the objective of a company, as specified in its MOA
o Doctrine of ultra vires is the object clause of the MOA
o An act done outside the express or implied objects of the company is ultra vires.

62
ARTICLES OF ASSOCIATION
• It is the second important documents
• It prescribes the rules and regulations for the internal management of the company
• It contains the power of the directors and the officers of the company
• It contains the rights and duties of shareholders or member of the company
• It regulates the relationship between the company and its members
• AOA does not constitute a contract between the company and an outsider.
• Form of AOA: Under section 29 of the Act, lays down certain model form of articles for
different types of companies in its schedule I under different tables:
o Table – A: For public companies having share capital
o Table – C: For a company limited by guarantee and not having share capital
o Table – D: For company limited by guarantee and having share capital
o Table – E: For an unlimited company
• Presumed that, every person who deals with the company is deemed to know the
contents of MOA and AOA and he read and understood the contents of these
documents. These presumptions of notice are called as “Doctrine of constructive notice
of MOA and AOA”
• Doctrine of contractive notice protect a company against outsiders
• Doctrine of indoor management protects outsiders against the actions of a company
• A person who deal with a company is not bound to enquire into the regularity of the
internal proceedings or formalities of such company
• Doctrine of Indoor management also called “Turquand rules”

63
 BASIS MOA AOA

Memorandum of Association is a
Articles of Association is a
document that contains all the
document containing all the rules
Meaning fundamental information which are
and regulations that governs the
required for the incorporation of
company.
the company.

Defined in Section 2 (56) Section 2 (5)

Type of
Information Powers and objects of the company. Rules of the company.
contained

It is subordinate to the Companies It is subordinate to the

Status
Act. memorandum.

The memorandum of association of

Retrospective The articles of association can be
the company cannot be amended
Effect amended retrospectively.
retrospectively.

A memorandum must contain six The articles can be drafted as per

Major contents
clauses. the choice of the company.

A public company limited by

Obligatory Yes, for all companies. shares can adopt Table A in place
of articles.

Compulsory filing
at the time of Required Not required at all.
Registration

Alteration can be done, after

passing Special Resolution (SR) in Alteration can be done in the
Annual General Meeting (AGM) Articles by passing Special
Alteration
and previous approval of Central Resolution (SR) at Annual
Government (CG) or Company Law General Meeting (AGM)
Board (CLB) is required.

Regulates the relationship

Defines the relation between between company and its
Relation
company and outsider. members and also between the
members inter se.

Acts done beyond

Absolutely void Can be ratified by shareholders.
the scope

64
CAPITAL SUBSCRIPTION
During the capital subscription stage, the following arrangements are generally made:
• Once the Certificate of Incorporation is received, it means the company is registered.
Then the next step is to raise the required finances for running the company. The
company is ready for floatation.
• Floatation means raising the required finances for commencing and carrying on the
business, satisfactorily
• Convening the first board meetings:
o Appointment of the regular secretary of the company
o Appointment of bankers, auditors, solicitors, brokers etc
o Ratification or adoption of preliminary or pre – incorporation contracts
o Adoption of underwriting agreements, in the order to secure minimum on
subscription if any need
o Adoption of draft of “Prospectus” or “Statement in lieu of prospectus”
o Appointment of managing directors or Manager and other responsible officers of
the company
o Approval of the design of the common seal of the company and authorizing the
custody there of.
o Approval of listing of shares of the company in a recognised stock exchange
COMMENCEMENT OF BUSINESS/OBTAINMENT OF COMMENCEMENT CERTIFICATE
• Making of an application to the registrar
• Filling of documents and statements
• Payment of the required registration fees
• Obtainment of the business commencement certificate
• After getting the certificate of incorporation:
o A public company issues a prospectus of inviting the public to subscribe to its share
o A minimum subscription is fixed, and
o A minimum number of shares mentioned in the prospectus.

65
PROSPECTUS
• In general parlance prospectus refers to an information booklet or offer document on
the basis of which an investor invests in the securities of an issuer company
• The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus can be
defined as “any document which is described or issued as a prospectus”.
• This also includes any notice, circular, advertisement or any other document acting as
an invitation to offers from the public.
• Sec. 2(36) of the Companies Act describes a prospectus as “any document issued as a
prospectus and includes any notice, circular, advertisement or other document inviting
deposits from the public or inviting offers from the public for the subscription or purchase
of any share in, or debentures of a body corporate.”
• In other words, it is a document which invites deposits from the public or invites offers
from the public for the subscription of shares in, or debentures of, a company.
• Words “inviting deposits from the public” added by the Companies Act (Amend), 1974
• An invitation to offer should be for the purchase of any securities of a corporate body.
• Shelf prospectus and red herring prospectus are also considered as a prospectus.
• Every public company either issue a prospectus or file a statement in lieu of prospectus.
This is not mandatory for a private company.
• when a private company converts from private to public company, it must have to either
file a prospectus if earlier issued or it has to file a statement in lieu of prospectus.
• Mandatory for the Public Limited Company to distribute the Prospectus but it is not
compulsory in all aspects
• Characteristics of the prospectus are:
o It is a document issued as a prospectus;
o It is an invitation to the member of the public;
o The public is invited to subscribe to the shares or debentures of the company;
o It includes any notice, circular, advertisement inviting deposits from the public;
o It is a document by which the company procures its share capital needed to carry
on its activities.
• Fixed Price issue is one such issue wherein the company decides the issue price in the
first place and discloses the same in the prospectus (offer document).
• Book built issue is the type of issue in which the price of the issue is decided as per the
securities demanded by the potential investors at different price levels.

66
TYPES OF PROSPECTUS
SHELF PROSPECTUS
• In simple terms Shelf Prospectus is a single prospectus for multiple public
• A shelf prospectus can be issued by any public limited company raising funds through
multiple issues of bonds.
• The advantage of a shelf prospectus is that a new prospectus need not be issued every
time the company issues securities.
• A maximum of four issues of securities can be made using a shelf prospectus.
• A shelf prospectus should be used within a maximum of one year.
• A shelf prospectus can be filed only by companies issuing non-convertible debt bonds
(these are bonds which cannot later be converted into share capital).
• Any public issue is governed by the rules and regulations developed by the Securities
and Exchange Board of India (SEBI).
• The following kinds of companies are eligible to issue a shelf prospectus:
o Public Financial Institutions (Government have more than 51 % of share)
o Public sector banks
o Non-banking Finance Companies
o Listed companies (Company has its securities listed with BSE, NSE, CSE)
• Conditions
o The company’s net-worth should be more than Rs.500 crores.
o The company should have had distributable profit during the preceding 3 years
o An arrangement should be made for dematerialisation of securities. The
arrangement must be made with a depository registered with the SEBI.
o A merchant banker should be appointed for the issue. The merchant banker must
be registered with the SEBI.
o In case debentures are issued, a debenture trustee should be appointed.
o Credit rating should be obtained. The securities issued should have a credit rating
of AA- or more
o The company’s directors or promoters should not have been faced with any
regulatory action.
o The company should not have defaulted in repayment of deposits during the
preceding three years.
o The company should have honoured its listing agreement during the preceding
three years

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RED HERRING PROSPECTUS
• "Red Herring Prospectus" means a prospectus which does not include complete
particulars of the quantum (quantity) and price of the securities included therein.
• A red herring is a prospectus filed by a company with the Securities and Exchange
Commission (SEC), usually in connection with the company's initial public offering (IPO).
• In simple terms a red herring prospectus contains most of the information pertaining to
the company’s operations and prospects, but does not include key details of the issue
such as its price and the number of shares offered.
• A company proposing to make an offer of securities may issue a red herring prospectus
prior to the issue of a prospectus
• A red herring prospectus as a first or preliminary prospectus
• Company proposing to issue a red herring prospectus shall file it with the Registrar at
least three days prior to the opening of the subscription list and the offer.
• Red herring prospectus is issued during book building process
• The applicants bid for the shares quoting the price and the quantity
• It is issue for attracting investor in largely
DEEMED PROSPECTUS
• Section 25 provides that any document by which the offer for sale of shares or
debentures to the public or if the company agrees to allot or offer securities to the public
• The document Offer for Sale is an invitation to the general public to purchase the shares
of a company through an intermediary such as an issuing house or a merchant bank
• The issue house in turn makes an Offer for Sale to the public.
• The document by which an ‘Offer for Sale’ is made by Issue House, although not being
issued by the company, shall be deemed to be a prospectus issued by the company.
• ‘Offer for Sale’ either of the two conditions must be satisfied.
o Offer for Sale to the public was made within six months after the aliment or
agreement to allot; or
o At the date when the offer was made, the whole consideration to be received by
the company in respect of the securities had not been received by it.

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ABRIDGED PROSPECTUS
• Sec 2 (1) “abridged prospectus” means a memorandum containing such salient features
of a prospectus as may be specified by the Securities and Exchange Board by making
regulations in this behalf.
• It is issued together with the company’s application form of pubic issue.
• Abridged Prospectus is the actual summary of a prospectus
• The abridged prospectus contains all the important and materialistic information
• The original prospectus that a company files to the exchange regulator is too large.
Reading the entire prospectus may be too much time consuming for an investor.
Instead, they go through the abridged prospectus, which gives them the basic idea about
the company.
• Section 33 (1) states that every application form for the purchase of any of the securities
of a company should be accompanied by an abridged prospectus.
STATEMENT IN LIEU OF PROSPECTUS
• When a public company wants to raise capital privately it must file a statement called
“statement in lieu of prospectus” with the registrar at least 3 days before the first
allotment of shares (Section 70).
• The statement in lieu of prospectus is a document issued by the company when it does
not offer its securities for public subscription
• Its contents are the same as that of a prospectus
• The statement must contain the signatures of all the directors or their agents authorized
in writing
• Promoters are required to prepare a draft prospectus which is known as ‘Statement in
lieu of Prospectus’
• It shall be in the form and contain particulars set out in Schedule III of the Act.
BASIS PROSPECTUS LIEU OF PROSPECTUS

Prospectus refers to a legal-document Statement in lieu of prospectus is a

published by the company to invite document issued by the company
Meaning
general public for subscribing its when it does not offer its securities for
shares and debentures. public subscription.

Objective To encourage public subscription. To be filed with the registrar.

Used when Capital is raised from general public. Capital is raised from known sources.

It contains details prescribed by the It contains information similar to a

Content
Indian Companies Act. prospectus but in brief.

Minimum
Required to be stated Not required to be stated
subscription

69
The Doctrine of Indoor Management:
• It protects outsider against the company.
• It is confined to the internal position and affairs of the company.
• The internal affairs need not be registered
• They are not open to public and third parties.
• Third persons, who have no notice to any irregularity or want of authority, will be
protected on the principle called the ‘Turquand Rule’.
• It mitigates the effects of the “Doctrine of Constrictive Notice”.
• It is based on positive concept.
The Doctrine of Constructive Notice:
• It protects the company against the outsider.
• It is confined to the external position and affairs of the company.
• The memorandum and articles of association of the company are public documents.
They must be registered with the Registrar of Companies. These are open to public and
third parties to access.
• Third persons, who have no notice of an irregularity or want of authority, if they try, they
could know about that irregularity or want of authority, will not be protected on the
principle of ‘constructive notice’
• It operates as an estoppel against the outsider.
• It is based on negative concept.

70
SHARE CAPITAL
• “Share” means a share in the share capital of a company and includes stock
• The total share capital however divided into small parts and each part called as share
• Share considered the smallest part of the total capital of a company.
• Share capital thus known as owned capital of the company
• It denotes the amount of capital raised by the issue of shares, by a company
• Hence collected through the issue of shares and remains with the company till its
liquidation.
• It is the money of the shareholder and the shareholder are the owners of the company.
• The share capital of a company limited by shares shall be of two kinds, namely:
o Equity share capital
o Preference share capital
MODES OR METHODS OF ISSUING SHARES
• Public Issue or Initial Public Offer (IPO): Under this method, the company issues a
prospectus to the public inviting offers for subscription. The investors who are interested
in the securities apply for the securities they are willing to buy.
• Private Placement: In this method, the issuing company sells its securities privately to
one or more institutional brokers who in turn sell them to their clients and associates
• Offer for Sale: Under this method, the issuing company allots or agrees to allot the
security to an issue house at an agreed price. The issue house or financial institution
publishes a document called an ‘offer for sale’.
• Sale through Intermediaries: In this method, a company appoints intermediaries like
stock brokers, commercial banks and financial institutions to assist in finding market for
the new securities on a commission basis.
• Sale to Inside Coterie: A company may resort to subscription by promoters and
directors. This method helps to save the expenses of public issue.
• Privileged Subscriptions: When an existing company wants to issue further securities, it
is required to offer them to existing shareholders on prorate basis. This is known as
‘Rights Issue’.

71
MANAGEMENT
• The Companies Act 2013 does not contain an exhaustive definition of the term
“director”.
• Section 2(34) of the Act prescribed that “director” means a director appointed to the
Board of a company.
• Section 2(10) of the Companies Act, 2013 defined that “Board of Directors” or “Board”,
in relation to a company, means the collective body of the directors of the company.
• As per Section 149 of the Companies Act, 2013, the Board of Directors of every company
shall consist of individual only
• Section 149(1) of the Companies Act, 2013 requires that every company shall have
o a minimum number of 3 directors in the case of a public company,
o two directors in the case of a private company, and
o one director in the case of a One Person Company.
o A company can appoint maximum 15 fifteen directors.
• A company may appoint more than fifteen directors after passing a special resolution in
general meeting and approval of Central Government is not required.
• Duties of directors [Section 166]
o Duty to act as per the articles of the company
o Duty to act in good faith
o Duty to exercise due care
o Duty to avoid conflict of interest
o Duty not to make any undue gain
o Duty not to assign his office
• If a director of the company contravenes the provisions of this section such director shall
be punishable with fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees.
MODES OF ACQUIRING MEMBERSHIP [Section 2(55)]
• by subscribing to the Memorandum of Association (deemed agreement); or
• by agreeing in writing to become a member:
o by making an application to the company for allotment of shares; or
o by executing an instrument of transfer of shares as transferee; or
o by consenting to the transfer of share of a deceased member in his name; or
o by acquiescence or estoppel.
• by holding shares of a company and whose name is entered as beneficial owner in the
records of a depository (Under the Depositories Act, 1996)

72
MANAGERIAL PERSONNEL
• Officer: The definition of officer has been extended to include promoters and key
managerial personnel (section 2(59)).
• Key managerial personnel: The term ‘KMP’ has been defined in the Act which means
o The Chief Executive Officer or the managing director or the manager
o The company secretary
o The whole-time director
o The Chief Financial Officer
• Class Action Suits: The Act introduces a new concept of class action suits which can be
initiated by shareholders against the company and auditors
CORPORATE VEIL
• Lifting or piercing the corporate veil is an important doctrine in the company law,
according to which in certain circumstances the court ignore the separate legal entity of
the company and treat the company and its members as one person
• The corporate veil of a company may be lifted by the court under two sets of
circumstances
o Under judicial interpretation
o Under express statutory provisions
• Under judicial interpretation:
o Determination of character of the company
o Prevention of fraud of improper conduct
o Protection of revenue of the government
o Where a company is a sham
o For protecting public policy and for preventing avoidance of welfare legislation
o Company acts as an agent
o Avoiding of welfare laws and Contempt of court
• Under express Statutory exception
o Reduction of membership
o Misdescription of name and Misrepresentation in prospectus
o Failure to return application money and Failure the deliver share certificate
o For establishing the relationship and for investigation of ownership
o For investigation of affairs of the company
o Fraudulent conduct of business
o When there are holding and subsidiary companies
o Liability for pre – incorporation contracts
o Ultra vires contract: Ultra vires contract are those contracts which are enter into
beyond the power of the company. For such contract’s directors are personally
liable for all the loss or damages caused due to such contract
73
UNDERWRITING AGREEMENTS
• An underwriter is any party that evaluates and assumes another party's risk for a fee.
• The fee is often a commission, premium, spread, or interest.
• Underwriters are critical to the financial world including the mortgage industry,
insurance industry, equity markets, and common types of debt security trading.
• A lead underwriter is called a book runner.
• An underwriter is a member of a financial organization. They work for mortgage,
insurance, loan or investment companies.
• When a company wants to issue stock, bonds, or other publicly traded securities, it hires
an underwriter to manage what is often a long and complex process
• An underwriting agreement is a contract between a group of investment bankers who
form an underwriting group or syndicate and the issuing corporation of a new securities
issue.
TYPES OF UNDERWRITINGS
• Firm underwriting: Firm underwriting is an underwriting agreement where an
underwriter agrees to buy a definite number of shares or debentures in addition to the
shares or debentures he has already promised to subscribe under the underwriting
agreement.
• Complete underwriting: when the whole issue of shares or debentures of a company is
underwritten, it is called complete underwriting.
• Partial underwriting. When only a part of the issue of shares or debentures of a
company is underwritten, it is known as partial underwriting
• Syndicate Underwriting: When the issue is very big and it is impossible to be
underwritten by a single underwriter syndicate underwriting comes to rescue. In
syndicate underwriting, few underwriting firms form a syndicate and jointly undertake
to underwrite the issue.
• Joint Underwriting: In Joint underwriting, when the issue is too large, the issuer
company itself appoint more than one underwriter to reduce the burden from a single
underwriter.
• Sub-underwriting: If an underwriter has promised to underwrite an issue and later on
it feels that it is beyond his individual capacity, then he may appoint a sub-underwriter
to safeguard himself.

74
MEETINGS
• A company may be defined as gathering, assembling or coming together of two or more
persons
• The meeting is defined as “An assembly of people for a lawful purpose” or “the coming
together of at least two persons for any lawful purpose.”
• Requirement of a valid meeting
o Right convening authority
o Proper notice
o Proper publicity of agenda
o Legal purposes
o Requisite quorum
o Presence of right persons
o Proper presiding officer
o Conducting meeting according to the agenda

75
STATUTORY MEETING
• Every public company having share capital must convene a general meeting of
shareholders within a period of not less than one month and not more than six months
after the date on which it is authorised to commence its business.
• This is the first meeting of the shareholders of the company
• It is held once in the whole life of the company
• Notice: The directors are required to send a notice of the meeting to all the members of
the company at least 21 days before the date of the meeting
• Objective: It is held to inform the shareholders about matters relating to incorporation,
allotment of share, the details of the contracts concluded by the company etc.
• Statutory Report
o In this meeting the members are to discuss a report by the Directors, known as
the Statutory Report
o It contains particulars relating to the formation of the company.
o It is drafted by Directors and certified as correct by at least two directors
o A copy of the report must be sent to members at least 21 days before the meeting.
o A copy is also to be sent to the Registrar for registration.
• Statutory report information contains
o Shares allotted
o Cash received
o Abstract
o Directors, auditors and other managerial personnel
o Contracts and Underwriting contract
o Arrears of calls
o Commission and brokerage
• The following companies need not to hold statutory meeting:
o Private company.
o Company limited by Guarantee having no share capital.
o Unlimited liability company.
o A public company which was registered as a private company earlier.
o A company which has been deemed as a public company under Sec. 43 A.
• Punishment: Every Director or any other officer of the company who is in default shall
be punishable with a fine which may extend to Rs. 500.

76
ANNUAL GENERAL MEETING (AGM)
• General Meeting of a company means a meet-ing of its members for specified purposes.
• It is a meeting of shareholders which is held once in a year
• The object of holding this meeting is to review the progress and prospects of the
company
• The first annual general meeting of the company is held within 18 months of its
incorporation.
• After holding such meeting, it is not necessary to hold any other annual general meeting
in the year of its incorporation and in the next year.
• Subsequent annual general meeting must be held by the company each year within six
months of the closing of the financial year
• The interval between any two AGM must not be more than 15 months.
• The Registrar may, for any special reason, extend the time of holding an Annual General
Meeting by a period not exceeding 3 months.
• The time of holding of the Annual Gen-eral Meeting may be fixed by the arti-cles of the
company
• The Court has no power to direct the calling of the Annual General Meeting.
• There are two kinds of General Meetings:
o The Annual General Meeting and
o Other General Meetings.
• Notice: The Board of Directors has to call Annual General Meeting giving 21 days’ notice
to all the members entitled to attend the meeting.
• The Annual General Meeting may be called with a shorter notice if it is agreed to by all
the members entitled to vote in the meeting.
• Certified copies of Profit and Loss Account and Balance Sheet, Directors’ Report and
Auditor’s Report should also be forwarded to the members at least 21 days before the
holding of the meeting of the company.
• Punishment: Who is in default shall be punishable with a fine which may extend to five
hundred and in case of continued defaults, with a further fine which may extend to Rs.
250 for every day during which such default continues

77
EXTRAORDINARY GENERAL MEETING
• Extraordinary meeting is a general meeting which is held between 2 AGM
• Extraordinary General Meeting is Called to discuss any particular matter of urgent
importance to the company.
• This meeting is called for the consideration of any specific subject, decision of which
cannot be postponed to the next Annual General Meeting.
• Directors may call the Extraordinary General Meeting in accordance with the procedure
laid down in the Articles of Association of the company.
• Shareholders holding at least one-tenth of the paid-up share capital of the company can
make a requisition to the Board of Directors to convince such a meeting.
• The Extraordinary General Meeting may be called by the Directors or may be convened
by the Shareholders
• This meeting may also be called to discuss the following:
o Alteration of any clause of Memorandum of Association; or
o Changes in the Articles of Association; or
o Scheme of the reduction of share capital etc.
• Companies Act empowers the Company Law Board to call only extraordinary general
meeting and not the annual general meeting of the company.
• If no such meeting is convened within 21 days of their requisition, shareholders may
themselves convene the meeting within 3 months from the date of their requisition.
• The special resolutions passed at Extraordinary General Meeting have to be filed with
the Registrar within 15 days.
• Any general meeting of the company which is not an Annual General Meeting or a
Statutory Meeting is called Extraordinary General Meeting
CLASS MEETINGS
• When the meeting of a particular class of shareholders takes place such as preference
shareholder meeting, it is known as class meeting.
• Such a meeting can be attended only by that class of shareholders. The articles define
the procedure for calling such meeting.
• Such a meeting is called for the alteration in the rights and privileges of the shareholders
and for the purpose of conversion of one class of shares into another

78
MEETINGS OF BOARD OF DIRECTORS
• A meeting of the Board of Directors must be held:
o At least once in every three months, and
o At least four such meetings shall be held in every year.
o This provision may be exempted by the Central Govt.
• In other words, no three months should pass without directors’ meeting being held, and
no year should expire without at least four directors’ meetings having been held in it.
• Notice Of every meeting of the Board of Directors must be given in writing to every
director in India and at his usual address in India to every other director who is outside
India for the time being
• A director has no power to waive his right of notice
• There is no need to send notice, if the articles provide for meetings to be held at regular
intervals’ e.g., monthly, the time and place being fixed.
• Agenda
o The term ‘agenda’ means things to be done.
o It is the list of businesses to be transacted at the meeting
o It also sets out the order in which the business is to be dealt with.
o The Secretary prepares the agenda in consultation with the Chairman.
• Quorum
o The quorum for Board Meeting should be at least two directors or one-third of
total strength of the Board of Directors, whichever is more subject to a minimum
of two directors.
o Quorum is constituted by 5 members personally present in the case of a public
company and 2 members personally present in the case of other companies.
o While determining the total strength, the vacancies are not counted.
• Proxy
o Any member, entitled to attend and vote in a meeting, can appoint another person
to attend and vote on his behalf. The person appointed is called the Proxy
o The appointment of a Proxy must be made by a written instruction signed by the
appointer and deposited with the company, not more than 48 hours before the
meeting.
o A Proxy is not entitled to speak in the meeting and vote only in a poll unless the
articles provide otherwise
o A Proxy need not be a member of the company
o A member of a private company cannot appoint more than one Proxy to attend
on the same occasion

79
WINDING UP AN INDIAN COMPANY
• Winding up of a company is a process of putting an end to the life of a company.
• “The liquidation or winding up of a company is the process whereby its life is ended and
its property is administered for the benefit of its creditors and members.
• As per Section 2(94A) of the Companies Act, 2013, “winding up” means winding up
under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.
• Petition: Who can apply for Winding-up is known as Petition. A petition for the winding-
up of a company may be presented by any one of the following entities:
o By the Company [Sec. 439(1) (a)]
o By any Creditor [Sec. 439(1) (b)]
o By any Contributory [Sec. 439(1) (c)];
o By a Registrar [Sec. 439(1)(e)]; and
o By any person authorized by the Central Government [Sec. 439(1) (f)].
S.L
Winding Up Dissolution
No.
Winding up is one of the methods by
Dissolution is the end result of
1. which dissolution of a company is
winding up.
brought about.
Legal entity of the company Dissolution brings about an end
2. continues at the commencement of to the legal entity of the
the winding up. company
A company may be allowed to
continue its business as far it is Company ceases to exist on its
3.
necessary for the beneficial winding dissolution.
up of the company

80
MODES OF WINDING UP
• Compulsory winding up by the court
o A company may be wound up by an order of the court. This is called compulsory
winding up.
o Section 433 lays down the following grounds for the winding up of a company by
the court.
o High Court there must be attached an officer known as the Official Liquidator
appointed by the Central Government.
o Upon the presentation of a petition for winding-up, the Court may appoint the
official liquidator as the provisional liquidator.
o When the winding-up order is passed, the official liquidator becomes the
liquidator of the company
o The Statement of Affairs is required in both compulsory and voluntary winding-up
o Statement of Affairs Contains
▪ The assets of the company
▪ Names, addresses, occupations of its creditors
▪ Its debts and liabilities
▪ In case of secured debts, particulars of the securities held by the creditors,
their value and dates on which they were given.
▪ The debts due to the company and names and addresses of persons from
whom they are due and the amount likely to be realized.
▪ Any such further information as may be required by the official liquidators
o A company may be wound-up by the Court under the following cases:
▪ Special Resolution of the Company
▪ If a default is made in delivering the statutory report of the Registrar of
Companies or in holding the statutory meeting of the company
▪ If the company does not commence its business within a year from its
incorporation, or suspends its business for a whole year
▪ If the number of members falls below seven in case of a public company or
below two in case of a private company
▪ Inability to pay Debts
o Consequences of winding-up by the Court
▪ Intimation to official liquidator and Registrar
▪ Copy of Winding-up order to be filed with the Registrar
▪ Order for winding-up deemed to be notice of discharge
▪ Suits stayed
▪ Powers of the Court
▪ Effect of winding-up order
▪ Official Liquidator to be liquidator

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• Voluntary Winding-Up: According to Sec. 484 of the Companies Act, a company can be
wound-up voluntarily under the following circumstances:
o By an Ordinary Resolution: Passed in a general meeting in the following cases:
▪ Where the duration of the company was fixed by the articles and the period
has expired; and
▪ Where the articles provided for winding-up on the occurrence of any event
and the specified event has occurred.
o By a Special Resolution: Passed by the members in all other cases:
▪ When a resolution is passed for voluntary winding-up it must be notified to
the public by an advertisement in the Official Gazette and in a local
newspaper
o Voluntary winding-up is of two types:
▪ Members’ Voluntary Winding-up: If the company is, at the time of winding-
up, a solvent company, i.e., able to pay its debts and the directors make a
declaration to that effect; it is called a Members’ Voluntary Winding-up.
▪ Creditors’ Voluntary Winding-up: If the declaration of solvency is not made
and filed with the Registrar, it may be presumed that the company is
insolvent. In that case, the company must call a meeting of its creditors for
passing the resolution for winding-up.
• Voluntary Winding-up under the Supervision of Court
o At any time after a company has passed a resolution for voluntary winding-up, the
Court may make an order that the voluntary winding-up shall continue but subject
to the supervision of the court
o A supervision order is usually made for the protection of the creditors and
contributories of the company
• Winding-Up of Unregistered Companies
o Shall not include:
▪ A railway company incorporated by any Act of Parliament of the U.K.;
▪ A company registered under this Act; or
▪ A Company registered under any previous companies’ law and not being a
company, the registered office whereof was in Burma (Myanmar), Aden, or
Pakistan immediately before the separation of that country from India
o Shall include any partnership, association or company consisting of more than 7
members at that time when the petition for winding-up the partnership,
association, or company, as the case may be, is presented before the Court.
o The procedure is similar to the compulsory winding-up with certain minor
exceptions.
o Such companies cannot be wound-up voluntarily.
o If a foreign company, carrying on business in India, ceases to do so, it can be
wound-up according to the procedure applicable to unregistered companies
82
LIMITED LIABILITY PARTNERSHIP
• LLP is a hybrid between a company and a partnership
• LLP is governed by the Limited Liability Partnership Act 2008, which has come into force
with effect from April 1, 2009.
• The Indian Partnership Act, 1932 is not applicable to LLP.
• According to Section 3 of the Limited Liability Partnership Act (LLP Act), 2008, an LLP is
a body corporate formed and incorporated under the Act.
• It is a legal entity separate from its partners.
• A limited liability partnership can continue its existence even after the retirement,
insanity, insolvency or even death of one or more partners.
• All partners are agents of the LLP
• The rights and duties of all partners are governed by an agreement between them and
prescribed by LLP Act
• Only the designated partners are responsible for legal compliances.
• Limited Liability Partnerships cannot be formed for charitable or non-profit purposes.
• The power to investigate the affairs of a Limited Liability Partnership resides with the
Central Government.
• A private company, firm or an unlisted public company can convert into an LLP in
accordance with the provisions of the Act.
• An LLP cannot raise funds from Public
• Under some cases, liability may extend to personal assets of partners.
• No separation of Management from owners
• Currently registrations of LLP are centralized at Delhi
ESSENTIAL FOR THE INCORPORATION OF AN LLP
• Complete and submit the Incorporation document in the prescribed form, with the
Registrar electronically.
• Have at least two partners, either individual or body corporate
• Have a registered office in India for sending and receiving communication
• Every Limited Liability Partnership must have at least two partners and at least two
individuals as designated partners
• There is no maximum limit on the number of maximum partners in the entity.
• Appoint at least two individuals as designated partners. They will be responsible for
doing all acts, matters, and things as required to be done by the LLP.
• At any time, at least one designated partner should be resident in India.
• Each designated partner should hold a Designated Partner Identification Number (DPIN)
allotted by the Ministry of Corporate Affairs (MCA).
• The LLP cannot have a name which another LLP or Partnership firm or Company is
currently using.
83
PROCESS FOR THE INCORPORATION OF AN LLP
• Appoint/nominate partners and designated partners.
• Obtain the DPINs and Digital Signature Certificates (DSCs)
• Register a unique LLP name (applicant can indicate up to 6 choices)
• Draft the LLP Agreement
• File the required documents, electronically
• Apply for the Certificate of Incorporation along with LLPIN (Limited Liability Partnership
Identification Number)
STEPS FOR THE INCORPORATION OF AN LLP
• E – Form 1: Reserve the name of the LLP.
o Applicant files e-Form 1 to ascertain the availability & register the name of the LLP.
o Once the Ministry approves the name, it reserves it for the applicant for a period
of 90 days.
o Also, if the LLP is not incorporated within that time frame, the reservation is
removed and the name is made available to other applicants.
• E – Form 2: Incorporation of a new LLP
o Applicant files e-Form 2 which contains the details of the proposed LLP along with
details of the partners and designated partners
o Consent of the partners and designated partners to act in the said role.
• E – Form 3: File the Agreement of LLP
o File LLP Agreement with the Registrar within 30 days of incorporation of the LLP.
o Applicant files e-Form 3. According to Section 23 of the LLP Act, 2008, execution
of LLP Agreement is mandatory.
o On obtaining approval of the LLP Agreement, the process of Incorporation of LLP
is complete.

84
Step I Pre-incorporation • Identify designated partners

• Register user on MCA Portal

• Apply online for DIN for designated partners (DPIN has been
integrated into DIN). DIN application needs to be signed by
professional.

• Acquire Digital Signature (class 2 or class 3) of the proposed

designated partners

Step II Approval of Name • Check availability of name using name search facility on MCA
Portal

• Apply name reservation in Form 1

• Rule 18 of LLP Rules provides cases in which name will not be

reserved

• The name should not be one prohibited under the Emblems and
Names (Prevention of Improper Use) Act, 1950

Step III Incorporation • Apply for incorporation of LLP in Form 2

• Submission of Incorporation Document and Subscribers

statement along with various required information& documents

• Form 2 to be signed by designated partner and also to be

certified by Advocate/CA/CS/Cost Accountants in practice

Step IV Incorporation • Track online and rectify deficiency if any, pointed.

• Registrar after satisfying himself about completeness in

documents and various compliances, issue certificate of
incorporation in Form 16, within 14 days of submission of Form 2

Step V Post incorporation • Simultaneously at the time of filing Form 2 or within 30 days of
compliance the incorporation, file Form 3 — LLP Agreement & Form 4 details
of Partners

• Further every time any changes occur Forms 3 & 4 need to filed
within 30 days of changes

85
 LIMITED LIABILITY
BASIS PARTNERSHIP
PARTNERSHIP (LLP)

Partnership refers to an arrangement Limited Liability Partnership is a

wherein two or more person agree to form of business operation which
Meaning
carry on a business and share profits combines the features of a
& losses mutually. partnership and a body corporate.

Limited Liability Partnership Act,

Governed By Indian Partnership Act, 1932
2008

Registration Optional Mandatory

Charter
Partnership deed LLP Agreement
document

Limited to capital contribution,

Liability Unlimited
except in case of fraud.

Contractual It cannot enter into contract in its

It can sue and be sued in its name.
capacity name.

Partners are collectively known as

Legal Status firm, so there is no separate legal It has a separate legal status.
entity.

Name of firm Any name Name containing LLP as suffix

Maximum
100 partners No limit
partners

Property Cannot be held in the name of firm. Can be held in the name of the LLP.

Perpetual
No Yes
Succession

Mandatory, only if turnover and

Audit of
Not mandatory capital contribution overreaches 40
accounts
lakhs and 25 lakhs respectively.

Partners are agents of firm and other

Relationship Partners are agents of LLP only.
partners as well.

86
Features Company Partnership firm LLP
Not compulsory.
Compulsory registration with the
Unregistered Partnership Compulsory registration
Registration ROC. Certificate of Incorporation
Firm won’t have the ability required with the ROC
is conclusive evidence.
to sue.
At the end of the name word
Name to end with “LLP”
“limited” of the name of a public
Name No guidelines. Limited Liability
company, and “private limited”
Partnership”
with a private company.
Private company should have a
Capital minimum paid up capital of lakh
Not specified Not specified
contribution and Rs. 5 lakhs for a public
company
Legal entity A separate legal entity Not a separate legal entity A separate legal entity
Unlimited, can extend to Limited to the extent of
Limited to the extent of unpaid
Liability the personal assets of the the contribution to the
capital.
partners LLP.
No. of Minimum of 2. In a private
Minimum of 2. No
shareholders / company, maximum of 50 2- 20 partners
maximum.
Partners shareholders
Foreign
Nationals as Foreign nationals can be Foreign nationals cannot Foreign nationals can be
shareholder / shareholders. form partnership firm. partners.
Partner
Quarterly Board of Directors
Meetings meeting, annual shareholding Not required Not required.
meeting is mandatory
Annual statement of
Annual Accounts and Annual No returns to be filed with accounts and solvency &
Annual Return
Return to be filed with ROC the Registrar of Firms Annual Return has to be
filed with ROC
Required, if the
Compulsory, irrespective of share contribution is above 25
Audit Compulsory
capital and turnover lakhs or if annual turnover
is above 40 lakhs.
Perception is higher
High creditworthiness, due to Creditworthiness depends on
How do the compared to that of a
stringent compliances and goodwill and credit
bankers view partnership but lesser than
disclosures required worthiness of the partners
a company.
Less procedural compared
Very procedural. Voluntary or by By agreement of the
to company. Voluntary or
Dissolution Order of National Company Law partners, insolvency or by
by Order of National
Tribunal Court Order
Company Law Tribunal
Protection provided to
employees and partners
Whistle blowing No such provision No such provision who provide useful
information during the
investigation process.

87
THE LIMITED LIABILITY PARTNERSHIP ACT, 2008
• India introduced The Limited Liability Partnership Act in 2008 to legally authorize the
concept of Limited Liability Partnerships (LLP).
• The introduction of LLP has provided a platform to small and medium enterprises and
professional firms of company secretaries, chartered accountants, advocates etc
• A limited liability partnership (LLP) is a formal partnership between at least two business
partners.
• Each business partner is provided with limited liability, which means they aren’t fully
responsible for the business’ debts or liabilities
• Partners are agents of LLP but not the agents of other partners.
• LLP must maintain proper books of account. The accounts may be on cash basis or
accrual basis.
• Concept of ‘Whistle Blower’ is incorporated in the LLP Act.
• Have 81 Sections, 4 Schedules and 29 Forms
• 75 Sections (Except Provision of Winding up, Dissolution of partnership)
• Schedules of LLP
o Schedule I: Provisions regarding matters relating to mutual rights and duties of
partners in the absence of any agreement
o Schedule II: Conversion from firm into LLP
o Schedule III: Conversion from private company into LLP
o Schedule IV: Conversion from unlisted public company into LLP
PROVISIONS IN ABSENCE ON AN LLP AGREEMENT [SCHEDULE I]
• If there is no registered LLP agreement between the partners, provisions of Schedule I of
the LLP Act 2008 shall apply to all the partners.
• All partners of LLP shall share profits and losses equally.
• Partners shall have indemnity for any personal payments made by him in the ordinary
course of business or anything done for the preservation of assets of the business
• All partners can take part in the management of the firm
• No partner is entitled to any remuneration or salary for the management of the LLP
• Admission of any new partner will require the permission of all the partners
• Any other issue will be decided by a vote of all the partners, and a simple majority will
be needed to pass a resolution. But if the firm wants to change the nature of the
business, all the partners must consent.
• Majority of the partners cannot expel a partner unless there is an express agreement
between partners.
• Any disputes between the partners of an LLP which are not resolved amongst
themselves must be referred for arbitration as per the act.

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SL. Fees payable under the LLP Act, 2008 Fees
No.
1. For registration of Limited Liability Partnership including conversion of a
firm or a private company or an unlisted public company into Limited
Liability Partnership:
a) Limited Liability Partnership whose contribution does not exceed ₹1 lakh ₹500/-
b) Limited Liability Partnership whose contribution exceeds ₹1 lakh but ₹2,000/-
does not exceed ₹5 lakhs
c) Limited Liability Partnership whose contribution exceeds ₹5 lakhs but ₹4,000/-
does not exceed ₹10 lakhs
d) Limited Liability Partnership whose contribution exceeds ₹10 lakhs ₹5,000/-
2 For filing, registering or recording any document, form, statement, notice,
Statement of Accounts and Solvency, annual return
a) Limited Liability Partnership whose contribution does not exceed ₹1 lakh ₹50/-
b) Limited Liability Partnership whose contribution exceeds ₹1 lakh but ₹100/-
does not exceed ₹5 lakhs
c) Limited Liability Partnership whose contribution exceeds ₹5 lakhs but ₹150/-
does not exceed ₹10 lakhs
d) Limited Liability Partnership whose contribution exceeds ₹10 lakhs ₹200/-
3A. For filing, registering or recording notice of appointment, cessation, change ₹50/-
in name, address, designation of a partner or designated partner
3 Fee for any application other than application for conversion of a firm or a
private company or an unlisted public company into LLP shall be as under
a) An application for reservation of name u/s. 16 ₹200/-
b) An application for direction to change the name u/s. 18 ₹10,000/-
c) Application for reservation of name under rule 18(3) ₹10,000/-
d) Application for renewal of name under rule 18(3) ₹5,000/-
e) Application for obtaining DPIN under rule 10(5) ₹100/-
f) Application for striking off name of defunct LLP under rule 37 ₹500/-
4 Fee for filing any form or a Statement of Account and Solvency or a notice or
a document by foreign Limited Liability Partnership
a) For filing a document under rule 34(1) ₹5,000/-
b) Any other form or Statement of Account and Solvency or notice or ₹1,000/-
document

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THE COMPETITION ACT, 2002
• The Act is known as Competition Act, 2002 or Antitrust Law.
• Government of India appointed a committee on “Competition Policy and Law” under
the Chairmanship of Sri S.V.S. Raghavan
• In the year 2000, this committee submitted its report.
• This Act was enforced on 13th January 2003
• It replaced the archaic The Monopolies and Restrictive Trade Practices Act, 1969
• The Competition Commission of India was established to prevent the activities that have
an adverse effect on competition in India
• It extends to whole of country except for the State of Jammu and Kashmir.
• After its enactment The Competition Act, 2002 has been amended twice, The
Competition (Amendment) Act, 2007 and The Competition (Amendment) Act, 2009
• The MRTP Act prevent the expansion of the companies whose assets was 100 crores
• The Competition Act 2002 was provisioned to provide a healthy economic development
environment in the Indian market.
• The Act provides for the constitution of Competition Commission of India (CCI) which is
a corporate body with quasi-judicial powers.
• The order of this Commission can be challenged only in the Supreme Court.
• The Commission shall be headed by a Chairman and there would not be more than 10
members of the Commission to be appointed by the Government of India.
• The pending unfair Trade Practice (UTPs) cases have been shifted to concerned
consumer courts formed under consumer protection Act. 1986.
• Competition Act is a very smaller legislation which includes only 66 sections.
• Under this Act, “Competition Fund” has been created
OBJECTIVES OF THE COMPETITION ACT 2002
• To protect the interests of the consumers by providing them good products and services
at reasonable prices.
• To promote healthy competition in the Indian market.
• To prevent the interests of the smaller companies or prevent the abuse of dominant
position in the market.
• To prevent those practices which have adverse impact on competition in the Indian
markets.
• To ensure freedom of trade in Indian markets.
• To regulate the operation and activities of combinations (acquisitions, mergers and
amalgamation).
• Creating awareness and imparting training about the competition Act.

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PROVISIONS
• The Act identifies three ways which can have adverse effect on the competition
o Anti-competitive agreement (vertical agreement, horizontal agreement)
o Abuse of dominant position; enjoying a dominant position will not be crime but its
abuse will be a crime
o Elimination/reduction of competitors in the market achieved through acquisition,
mergers, and amalgamation
• Non-Applicability of Competition Act:
o Public Financial Institutions.
o Foreign Institutional Investors (FIIs).
o Banks.
o Venture capital Funds (VCFs).
o Agreements related to intellectual property rights (IPRs) such as trademarks,
patents, copyrights etc.
o Central Government has the authority to exempt any class of enterprises from the
provisions of Act in the common interest of national security or public interest.
• The Act mainly covers these aspects
o Prohibition of anti-competitive agreements
o Prohibition of abuse of dominance
o Regulation of combination (acquisition, mergers & amalgamation of certain size)
o Establishment of the competition commission of India
o Power and functions of the competition commission of India
• Prohibition of anti-competitive agreements
o This covers both the horizontal and vertical agreements.
o It states that four types of horizontal agreements between enterprises involved in
the same industry would be applied.
▪ Lead to price fixing
▪ Limit or control quantities
▪ Share or divide markets
▪ Result in bid-rigging
• Prohibition of abuse of dominance
o The Act lists five categories of abuse:
▪ Imposing unfair/discriminatory conditions in purchase of sale of goods or
services (including predatory pricing)
▪ Limiting or restricting production, or technical or scientific development;
▪ Denial of market access
▪ Making any contract subject to obligations unrelated to the subject of the
contract
▪ Using a dominant position in one market to enter or protect another.
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MONOPOLIES AND RESTRICTIVE TRADE PRACTICES (MRTP) ACT
• The Government adopted the Monopolies and Restrictive Trade Practices (MRTP) Act in
1969 and accordingly the MRTP Commission was set up in 1970
• Restrictive trade practice
o It means a trade practice which tends to bring about manipulation of price or its
conditions of delivery or to affect flow of supplies in the market relating to goods
or services
o is when the traders, in order to maximize their profits and to gain power in the
market, often indulge in activities that tend to block the flow of capital into
production.
o Restrictive trade practices include concerted action undertaken by a group of two
or more firms so as to avoid competition from the market irrespective of their
market share.
o These types of practices are “deemed to be prejudicial to public interests.”
• Unfair Trade Practice
o An unfair trade practice refers to that malpractice of a trader that is unethical or
fraudulent. These practices cause an inconvenience or grievance to consumers.
o Unfair trade practice is the false representation and misleading advertisement of
goods and services.
o It also includes falsely representing second-hand goods as new and misleading
representation regarding usefulness, need, quality, standard, style etc of goods
and services
• Monopolistic Trade practice
o Any practice which indicates misuse of one’s power to abuse the market in terms
of production and sales of goods and services.
o The objective of such practices is to eliminate competition, take advantage of
monopoly and charge unreasonably high prices.
o The monopolistic trade practices were described as “dominant firm practices”
o “Able to control the market by regulating prices or output or eliminating
competition.”

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The Competition Commission India, inter alia has the power to
• Issue cease and desist orders
• Grant interim relief
• Award compensation
• Impose fines
• Order the division of dominant undertakings

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INFORMATION TECHNOLOGY ACT, 2000
• Cyber laws are meant to set the definite pattern, some rules and guidelines that defined
certain business activities going on through internet-legal and certain illegal and hence
punishable
• Information Technology Act 2000 consisted of 94 sections segregated into 13 chapters.
Four schedules form part of the Act.
• If a crime involves a computer or network located in India, persons of other nationalities
can also be indicted under the law
• The Act provides a legal framework for electronic governance by giving recognition to
electronic records and digital signatures
• It also defines cybercrimes and prescribes penalties for them
• In 1996, the United Nations Commission on International Trade Law (UNCITRAL)
adopted the model law on electronic commerce (e-commerce) to bring uniformity in the
law in different countries.
• India became the 12th country to enable cyber law after it passed the Information
Technology Act, 2000.
• While the first draft was created by the Ministry of Commerce, Government of India as
the ECommerce Act, 1998, it was redrafted as the ‘Information Technology Bill, 1999’,
and passed in May 2000.
• Appeal against the order of Cyber Appellant Tribunal is possible only in the High Court
• Four schedules appended the Act that lay down the relative amendments made to the
o The Indian Evidence Penal Code of 1860 [First Schedule to the Act]
o The Indian Evidence Act of 1872 [Second Schedule to the Act]
o The Banker’s Books Evidence Act of 1891[Third Schedule to the Act]
o The Reserve Bank of India Act of 1934 [Fourth Schedule to the Act]
• Essence of Information Technology Act 2000
o Legal Recognition of Electronic Documents
o Legal Recognition of Digital Signatures
o Offenses and Contraventions
o Justice Dispensation System for Cyber crimes
• Digital Signatures will use an asymmetric cryptosystem and also a hash function
• Provisions for the constitution of a Cyber Regulations Advisory Committee to advise the
Central Government and Controller (CCA)
• Cyber-crimes are bailable

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Applicability [Section 1 (2)]
• Act extends to the entire country, which also includes Jammu and Kashmir.
• Act is applicable to any offence or contravention committed outside India as well
• If the conduct of person constituting the offence involves a computer or a computerized
system or network located in India, then irrespective of his/her nationality, the person
is punishable under the Act.
Non-Applicability [Section 1 (4)]
• Execution of Negotiable Instrument under Negotiable Instruments Act, 1881, except
cheques.
• Execution of a Power of Attorney under the Powers of Attorney Act, 1882.
• Creation of Trust under the Indian Trust Act, 1882.
• Execution of a Will under the Indian Succession Act, 1925 including any other
testamentary disposition by whatever name called.
• Entering into a contract for the sale of conveyance of immovable property or any
interest in such property.
• Any such class of documents or transactions as may be notified by the Central
Government in the Gazette.
PROVISIONS OF ACT
• The IT Act of 2000 passed in a budget session of parliament and signed by President K.R.
Narayanan in 2000.
• It underwent further finalization by India's Minister of Information Technology, Pramod
Mahajan.
• The original act addressed electronic documents, e-signatures, and authentication of
those records.
• In 2008, additions expanded the definition of "communication device" to include mobile
devices and placed owners of given IP addresses responsible for distributed and
accessed content.
• Penalties arrange from imprisonment of three years to life and fines.

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OBJECTIVES OF THE ACT
• Grant legal recognition to all transactions done via electronic exchange of data or other
electronic means of communication or e-commerce, in place of the earlier paper-based
method of communication.
• Give legal recognition to digital signatures for the authentication of any information or
matters requiring legal authentication
• Facilitate the electronic filing of documents with Government agencies and also
departments
• Facilitate the electronic storage of data
• Give legal sanction and also facilitate the electronic transfer of funds between banks and
financial institutions
• Grant legal recognition to bankers under the Evidence Act, 1891 and the Reserve Bank
of India Act, 1934, for keeping the books of accounts in electronic form.
DIFFERENT TERMS OF ACT
• E-Commerce, commonly known as (electronic marketing) electronic commerce or
eCommerce, consists of the buying and selling of products or services over electronic
systems such as the internet and other computer networks
• E-Governance is managing, controlling and reporting of processes, using electronic
systems such as computers, internet, etc. within a private as well as public organization.
• Access, means instructing or communicating with the logical, arithmetical or memory
function resources of a computer, computer system or computer network
• Addressee means a person who is intended by the originator to receive the electronic
record but does not include any intermediary
• Originator means a licence granted to a Certifying Authority under section 24.
• Affixing Digital Signature means adoption of any methodology or procedure by a person
for the purpose of authenticating an electronic record by means of digital signature.
• “Asymmetric crypto system” means a system of a secure key pair consisting of a private
key for creating a digital signature and a public key to verify the digital signature
• Private Key means the key of a key pair used to create a digital signature.
• Public Key means the key of a key pair used to verify a digital signature and listed in the
Digital Signature Certificate.
• Certifying Authority is a person who has granted a licence to issue a Digital Signature
• “Certification practice statement” means a statement issued by a Certifying Authority
to specify the practices that the Certifying Authority employs in issuing Digital Signature
Certificates.
• Computer Resources means computer, computer system, computer network, data,
computer database or software.

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 • Computer System means a device or collection of devices, including input and output
support devices and excluding calculators which are not programmable
• Digital Signature means authentication of any electronic record by a subscriber by
means of an electronic method or procedure in accordance with the provisions of
section 3 of IT Act, 2000.
• Electronic Form means any information generated, sent, received or stored in media,
magnetic, optical, computer memory, micro film, computer generated micro fiche or
similar device
• Electronic Gazette means where any law provides that any rule, regulation, order,
byelaw, notification or any other matter shall be published in the electronic form.
• Electronic record means data, record or data generated, image or sound stored,
received or sent in an electronic form or micro film or computer-generated micro fiche.
• Information includes data, text, images, sound, voice, codes, computer programmes,
software and databases or micro film or computer-generated micro fiche.
• Key Pair in an asymmetric crypto system
• "Hash function" means an algorithm mapping or translation of one sequence of bits into
another, generally smaller, set known as "hash result"
CYBER CRIME
• Cyber-crime is unlawful act wherein the computer is either a tool or a target or both.
• Cyber-crimes can involve criminal activities that are traditional in nature, such as theft,
fraud, forgery, defamation and mischief
• The Cyber Crimes are regulated by Cyber Laws or Internet Laws.
• Category of Cyber Crimes
o The Computer as a Target
▪ Using a computer to attack other computers.
▪ For example, Hacking, Virus/Worm attacks, distributed Denial of Service
(DOS) attack and the like.
o The Computer as a Weapon
▪ Using a computer to commit real world crimes
▪ For example, Cyber Terrorism, Intellectual Property Rights violations, Credit
card frauds, Electronic Fund Transfer frauds, Pornography and the like.

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VARIANTS OF CYBER CRIMES
• Unauthorized Access
o Access means gaining entry into, instructing or communicating with the logical,
arithmetical, or memory function resources of a computer, computer system or
computer network.
o Unauthorized access would therefore mean any kind of access without the
permission of either the rightful owner or the person in charge of a computer,
computer system or computer network
• Hacking
o Committed towards breaking into a computer and/or network is called hacking.
o Hackers write or use ready-made computer programs to attack the computer.
o Some hackers hack for personal monetary gains, such as to stealing the credit card
information, transferring money from various bank accounts to their own account
followed by withdrawal of money.
o By Hacking web server taking control on another person’s website called as web
hijacking.
o Hackers are kind of good peoples who does hacking for the good purpose and to
obtain more knowledge from it. Example White hat
o Crackers are kind of bad people who breaks or violates the system or a computer
remotely with bad intentions to harm the data and steal it. Example Black hat
o White hat hackers also known as Ethical hackers who works with private or
government organizations do their Security testing find the flaws or bugs in the
organization's network not work for their own malicious
o Black hat hackers are the hackers who does bad activities like hacking into
someone’s account, who work for their own malicious
o Grey hats are a hybrid between white and black hat hackers. Person who
sometimes acts legally and sometimes illegally
o The Red hats hack government mainframes
o The blue hats hack for revenge and fun. They’re mostly noobs.
o The green hats are the newbies who have recently started practicing the art of
hacking.
• Trojan Attack
o A Trojan is also known as Trojan horse.
o It is a type of malicious software developed by hackers to disguise as legitimate
software to gain access to target users' systems.
o Users are typically tricked by some attractive social media adds who then directed
to malicious website thereby loading and executing Trojans on their systems.
o The program that acts like something useful but do the things that are quite
damping
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• Virus and Worm Attack
o A program that has capability to infect other programs and make copies of itself
and spread into other programs is called virus.
o Programs that multiply like viruses but spread from computer to computer are
called as worms.
• E-Mail and Internet Related Crimes
o E-mail spoofing is the creation of emails with a forged/fake sender address.
o Email Spamming refers to sending e-mail to thousands and thousands of users -
similar to a chain letter. Spamming is the use of messaging systems to send an
unsolicited message (spam) to large numbers of recipients for the purpose of
commercial advertising
o Sending malicious codes through e-mail: E-mails are used to send viruses, Trojans
etc., through e-mails as an attachment or by sending a link of website which on
visiting downloads malicious code.
o Email bombing is characterized by abusers repeatedly sending an identical e-mail
message to a particular address
• Logic bombs: A logic bomb, also known as “slag code”, is a malicious piece of code which
is intentionally inserted into software to execute a malicious task when triggered by a
specific event. It’s not a virus, although it usually behaves in a similar manner
• Pornography is "describing or showing sexual acts in order to cause sexual excitement
through books, films, and the like."
• Forgery: Counterfeit currency notes, postage and revenue stamps, mark sheets etc. can
be forged/Fake using sophisticated computers, printers and scanners.
• Cybersquatting
o Also called also known as domain squatting
o Cybersquatting is registering, selling or using a domain name with the intent of
profiting from the goodwill of someone else's trademark
o Cybersquatting is the practice of registering as Internet domains identical or
similar to a third-party company name or trade mark, with bad faith intent to profit
from the goodwill of a third-party brand
o These include software piracy, copyright infringement, trademarks violations,
theft of computer source code, patent violations
o Cyber Squatters registers domain name identical to popular service provider's
domain

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 PENALTIES UNDER IT ACT, 2000

Section Offence Penalty

65 Tampering with computer source Imprisonment up to three years, or/and with fine up to ₹200,000
documents

66 Hacking with computer system Imprisonment up to three years, or/and with fine up to ₹500,000

66B Receiving stolen computer or Imprisonment up to three years, or/and with fine up to ₹100,000
communication device

66C Using password of another person Imprisonment up to three years, or/and with fine up to ₹100,000

66D Cheating using computer resource Imprisonment up to three years, or/and with fine up to ₹100,000

66E Publishing private images of others Imprisonment up to three years, or/and with fine up to ₹200,000

66F Acts of cyberterrorism Imprisonment up to life.

67 Publishing information which is Imprisonment up to five years, or/and with fine up to ₹1,000,000
obscene in electronic form.

67A Publishing images containing sexual Imprisonment up to seven years, or/and with fine up to ₹1,000,000
acts

67B Publishing child porn or predating Imprisonment up to five years, or/and with fine up to ₹1,000,000 on
children online first conviction.

Imprisonment up to seven years, or/and with fine up to ₹1,000,000

on second conviction.

67C Failure to maintain records Imprisonment up to three years, or/and with fine.

68 Failure/refusal to comply with orders Imprisonment up to 2 years, or/and with fine up to ₹100,000

69 Failure/refusal to decrypt data Imprisonment up to seven years and possible fine.

Imprisonment up to ten years, or/and with fine.

70 Securing access or attempting to
secure access to a protected system

71 Misrepresentation Imprisonment up to 2 years, or/and with fine up to ₹100,000

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THE RIGHT TO INFORMATION ACT, 2005
• Right to Information (RTI) is an act of the Parliament of India which sets out the rules
and procedures regarding citizens' right to information
• This law was passed by Parliament on 15 June 2005
• Came fully into force on 12 October 2005.
• It replaced the former Freedom of Information Act, 2002.
• The Act covers the whole of India except Jammu and Kashmir
• Under the provisions of RTI Act, any citizen of India may request information from a
"public authority"
• Private bodies are not within the Act's ambit directly
• RTI is a fundamental right for every citizen of India
• The citizens are not only free to ask for information from the Government, but also have
the right to get it
• The authorities under RTI Act 2005 are called quasi-judicial authorities
• Since RTI is implicit in the Right to Freedom of Speech and Expression under Article 19
of the Indian Constitution, it is an implied fundamental right.
• Information disclosure in India is restricted by the Official Secrets Act 1923 and various
other special laws
• Right to Information Act, 2005 (RTI) empowers a citizen to access the information for
disclosure from the public authority and bring transparency

• Third Party means a person other than the citizen making a request for information and
includes a public authority
• The Act gives the right to information only to the citizens of India.
• It does not make provision for giving information to Corporations, Associations,
Companies etc. which are legal entities/persons, but not citizens

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INFORMATION [SECTION 2(F)]: Information means any material in any form, including
records, documents, memos, e-mails, opinions, advices, press releases, circulars, orders,
logbooks, contracts, reports, papers, samples, models, data material held in any electronic
form and information relating to any private body which can be accessed by a public authority
under any other law for the time being in force
OBJECTIVES OF THE RTI ACT
• Greater Transparency in functioning of public authorities.
• Improvement in accountability and performance of the Government.
• Promotion of partnership between citizens and Government in decision making process
• Reduction in corruption in the Government departments.
• To operationalise the fundamental right to information;
• To set up systems and mechanisms that facilitate people's easy access to information;
• To promote transparency and accountability in governance;
• To minimize corruption and inefficiency in public offices and to ensure people's
participation in governance and decision making
NEED FOR RIGHT TO INFORMATION
• Translating Right into Reality
• People Kept Informed about Current Affairs and Broad Issues
• Information and Economic Development
• Right to know relations with other Basic Rights
• Transparency
TWO-TIER MECHANISMS FOR APPEAL
• The first appeal lies to an officer within the organization who is senior in rank to PIO.
• The second appeal lies in the Information Commission.
THE ACT SPECIFIES THAT CITIZENS HAVE A RIGHT TO
• Request any information (as defined).
• Take copies of documents.
• Inspect documents, works and records.
• Take certified samples of materials of work.
• Obtain information in the form of printouts, diskettes, floppies, tapes, video cassettes
'or in any other electronic mode' or through printouts.

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PUBLIC AUTHORITY: It means any authority or body or institution of self-government
established or constituted –
• By or under the Constitution;
• By any other law made by Parliament;
• By any other law made by State Legislature;
• By notification issued or order made by the appropriate Government, and includes any
o Body owned, controlled or substantially financed;
o Non-Government organization substantially financed
o Directly or indirectly by funds provided by the appropriate Government
RECORD INCLUDES
• Any document, manuscript and file
• Any microfilm, microfiche and facsimile copy of a document
• Any reproduction of image or images embodied in such microfilm
• Any other material produced by a computer or any other device
TIME LIMIT FOR REPLYING TO THE REQUEST
• If the request has been made to the Public Information Officer (PIO), the reply is to be
given within 30 days of receipt
• If the request has been made to an Assistant Public Information Officers (AIPO), the reply
is to be given within 35 days of receipt.
• If the PIO transfers the request to another public authority (better concerned with the
information requested), the time allowed to reply is 30 days but computed from the day
after it is received by the PIO of the transferee authority.
• Information concerning corruption and Human Rights violations by scheduled Security
agencies (those listed in the Second Schedule to the Act) is to be provided within 45 days
but with the prior approval of the Central Information Commission.
• If life or liberty of any person is involved, the PIO is expected to reply within 48 hours.
• In case the application is sent through the Assistant Public Information Officer or it is
sent to a wrong public authority, five days shall be added to the period of thirty days or
48 hours, as the case may be.
• If information is not provided within this period, it is treated as deemed refusal

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FEES STRUCTURE
• State Governments and High Courts fix their own rules.
• Right to Information (Regulation of Fee and Cost) Rules, 2005.
• For Central Departments as of 2006, there is a fee of Rs. 10 for filing the request
• Rs. 2 per page of information
• Rs. 5 for each hour of inspection after the first hour.
• A fee of rupees five (Rs. 5/-) for each subsequent hour (or fraction thereof) shall be
charged.
• If the applicant is a Below Poverty Card holder, then no fee shall apply.
• Such BPL Card holders have to provide a copy of their BPL card along with their
application to the Public Authority.
• Rupees two (Rs. 2/-) for each page (in A-4 or A-3 size paper) created or copied;
• Actual charge or cost price of a copy in larger size paper;
• Actual cost or price for samples or models;
• Information provided in diskette or floppy, rupees fifty (Rs. 50/-) per diskette or floppy;
• For information provided in printed form, at the price fixed for such publication or
rupees two per page of photocopy for extracts from the publication.

PROCESS OF INFORMATION GATHERING

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Three types of organizations exist on the basis of use of information technology.
• Low use of Information Technology: In these organizations most of the records are
maintained manually (paper work) and computer is not used to store information.
• Medium use of Information Technology: In these organizations moderate level of
information technology is used. Some of the records are maintained in computer and
some are maintained manually.
• High use of information Technology: This type of organizations high level of information
technology is used and the computerized records are stored at central place.

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106
107
INTELLECTUAL PROPERTY RIGHTS (IPRs)
• Intellectual property (IP) refers to the creations of the human mind like inventions,
literary and artistic works, and symbols, names, images and designs used in commerce
• Intellectual property is divided into two categories
o Industrial property: which includes inventions (patents), trademarks, industrial
designs, and geographic indications of source
o Copyright: which includes literary and artistic works such as novels, poems and
plays, films, musical works, artistic works such as drawings, paintings, photographs
and sculptures, and architectural designs
• Historically the first system of protection of intellectual property came in the form of
(Venetian Ordinance) in 1485
• The term ‘Intellectual Property Rights’ means the exclusive right that the owner has over
his intellectual property
• The TRIPS Agreement [1 January 1995] areas of intellectual property that it covers are:
o Copyright and related rights (i.e. the rights of performers, producers of sound
recordings and broadcasting organisations)
o Trade marks including service marks
o Geographical indications including appellations of origin
o Industrial designs
o Patents including protection of new varieties of plants
o The lay-out designs (topographies) of integrated circuits
o The undisclosed information including trade secrets and test data.
• The main three features of the TRIPS Agreement are as follows-
o Standards: The TRIPS Agreement sets out the minimum standards of protection
to be provided by each Member.
o Enforcement: The second main set of provisions deals with domestic procedures
and remedies for the enforcement of intellectual property rights. The Agreement
lays down certain general principles applicable to all IPR enforcement procedures.
o Dispute settlement: The Agreement makes disputes between WTO Members
about the respect of the TRIPS obligations subject to the WTO's dispute settlement
• TRIPS Complied Regime in India
o Copyright Act, 1957
o Patents Act, 1970
o Trade Mark Act, 1999
o The Geographical Indications of Goods (Registration and Protection) Act, 1999
o The Designs Act, 2000
o The Semi-Conductor Integrated Circuits Layout Design Act, 2000
o The Protection of Plant Varieties and Farmers’ Rights Act, 2001

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WORLD INTELLECTUAL PROPERTY ORGANISATION (WIPO)
• WIPO is the United Nations specialised agency that coordinates international treaties
regarding intellectual property rights.
• Its 184 member states comprise over 90% of the countries of the world
• WIPO to negotiate treaties and set policy on intellectual property matters such as
patents, copyrights and trademarks.
• The World Intellectual Property Organization (WIPO) was established by a convention
signed at Stockholm 14 July 1967 by 51 states.
• WIPO’s objective was “to promote the protection of intellectual property throughout
the world …”
• Headquartered in Geneva, Switzerland
• WIPO currently administers 24 treaties
• WIPO also maintains a close relationship with the Internet Corporation for Assigned
Names and Numbers (ICANN)
• The purposes of WIPO are twofold:
o To promote the protection of intellectual property throughout the world through
cooperation among states and, where appropriate, in collaboration with any other
international organization;
o To ensure administrative cooperation among the unions
• World Intellectual Property Organization (1967) gives the following list of the subject
matter protected by intellectual property rights:
o literary, artistic and scientific works;
o performances of performing artists, phonograms, and broadcasts;
o inventions in all fields of human endeavour;
o scientific discoveries;
o industrial designs;
o trademarks, service marks, and commercial names and designations;
o protection against unfair competition; and
o “all other rights resulting from intellectual activity in the industrial, scientific,
literary or artistic fields.”

109
 UNIT 10
INCOME-TAX AND CORPORATE TAX PLANNING

❖ Modul 1: Income-tax
1. Basic concepts
2. Residential status
3. Tax incidence
4. Exempted incomes
5. Agricultural income
6. Computation of taxable income under various heads
7. Deductions from Gross total income
8. Assessment of Individuals
9. Clubbing of incomes
❖ Modul 2: International Taxation
1. Double taxation and its avoidance mechanism
2. Double taxation avoidance mechanism
3. Transfer pricing
❖ Modul 3: Corporate Tax Planning
1. Concepts and significance of corporate tax planning
2. Tax avoidance versus tax evasion
3. Techniques of corporate tax planning
4. Tax considerations in specific business situations
▪ Make or buy decisions
▪ Own or lease an asset
▪ Retain
▪ Renewal or replacement of asset
▪ Shut down or continue operations
❖ Modul 4:
1. Deduction
2. Collection of tax at source
3. Advance payment of tax
4. E-filing of income-tax returns

1|KIRAN.A. S
BASIC CONCEPTS OF INCOME TAX
• Tax is the compulsory financial charge levy by the government on income, commodity,
services, activities or transaction.
• The word ‘tax’ derived from the Latin word ‘Taxo’.
• Taxes are the basic source of revenue for the government, which are utilized for the
welfare of the people of the country through government policies, provisions and
practices.
• The Income Tax was introduced in India for the first time in 1860 by British rulers
following the mutiny of 1857
• In India, Income Tax was first time introduced in the year 1860 by Sir James Wilson in
order to meet the loss caused on account of ‘military mutiny’ in 1857
• Income tax being direct tax happens to be one of the major sources of revenue for the
Central Government. The entire amount of income tax collected by the Central
Government is classified under the head:
o Corporation Tax (Tax on the income of the companies)
o Income tax (Tax on income of the non-corporate assessee)
• Income tax Act:
o Income-tax is a tax levied on the total income of the previous year of every
person.
o In the year 1886, a separate Income Tax Act was passed, this act was in force for a
long time, subject to the various amendments from time to time.
o In the year 1918, a new Income Tax Act was passed, but again, it was replaced by
another new act of 1992.
o The Act of 1922 became very complicated due to various amendments. This act
remains in force to the assessment year 1961-62.
o In the year 1956, the Government of India referred to the Law Commission in
order to simplify the law and also to prevent the evasion of Tax.
o The Law Commission submitted its report in September 1958 in consultation with
the Ministry of Law.
o At present, this law is governed by the Act of 1961 which is commonly known as
Income Tax Act, 1961 which came into force on and from 1st April 1962.
o Income Tax Act, 1961 It applies to the whole of India, including the state of Jammu
& Kashmir.
o Income Tax Act, 1961 is a comprehensive Act and consists of 298 Sections.
• Method of Accounting is relevant in computing Income
o Mercantile system: Income and Expenditure are recorded at the time of
occurrence during the previous year
o Cash system: Revenue or expenses are recorded only when received or paid

2|KIRAN.A. S
COMPONENTS OF INCOME TAX LAW
• Income Tax Act, 1961
o The Act contains the major provisions related to Income Tax in India.
o The levy of income-tax in India is governed by the Income-tax Act, 1961
o It came into force on 1st April, 1962
o It contains 298 sections and XIV schedules.
• Income Tax Rules, 1962
o Central Board of Direct Taxes (CBDT) is the body which looks after the
administration of Direct Tax.
o The CBDT is empowered to make rules for carrying out the purpose of this Act.
o For the proper administration of the Income-tax Act, 1961, the CBDT frames rules
from time to time. These rules are collectively called Income-tax Rules, 1962.
o It is important to keep in mind that along with the Income-tax Act, 1961, these
rules should also be studied
• Finance Act
o The Finance Act contains necessary amendments in the Direct taxes (e.g. Income
tax) and Indirect taxes (e.g. GST, custom duties) signifying the policy decisions of
the Union Government.
o Finance Bill is presented usually in the month of February every year
o This bill contains amendments in direct as well as indirect taxes.
o It is usually presented in the Parliament by the Finance Minister.
o Once this bill has been passed by the Parliament, it goes to the President for his
assent. After President’s assent, the finance bill becomes the Finance Act.
o Generally, the amendments by the Finance Act are made applicable from the first
day of the next financial year
o Example most of the amendments by Finance Act, 2018 are effective from 1st
April, 2018.
o The First schedule to the annual Finance Act is divided into four parts:
▪ Part I of the First Schedule to the Finance Act specifies the rates of tax
applicable for the current Assessment Year.
▪ Part II specifies the rates at which tax is deductible at source for the current
Financial Year.
▪ Part III gives the rates for calculating income-tax for deducting tax from
income chargeable under the head “Salaries” and computation of advance
tax.
▪ Part IV gives the rules for computing net agricultural income.

3|KIRAN.A. S
 • Circulars and Notifications
o Circular:
▪ Circulars are issued by the CBDT from time to time to deal with certain
specific problems and to clarify doubts regarding the scope and meaning of
certain provisions of the Act.
▪ Circulars are issued for the guidance of the officers and/or assessee.
▪ The department is bound by the circulars. While such circulars are not
binding on the assessee, they can take advantage of beneficial circulars.
o Notification: Notifications are issued by the Central Government to give effect to
the provisions of the Act.
IMPORTANT DEFINITIONS
• Assessment year [Section 2(9)]
o Period starting from April1 and ending on March 31 of the next year.
o Income of previous year of an assessee is taxed during the next following
assessment year.
o It is always a period of 12 months.
• Previous year [Section 2(34)]
o Previous year means the previous year as defined in section 3
o As per section 3 “previous year” means the financial year immediately preceding
the assessment year.
o Year in which income is earned is known as previous year.
o All assessee required to follow financial year (i.e. April 1 to March 31) as the
previous year.
• Previous year in the case of newly set-up business/ profession.
o The first previous year commences on the date of setting up of the business/
profession or the date on which the source of income newly comes into existence
and ends on the immediately following March 31.
o The first previous year is a period of 12 months or less than 12 months. It can never
exceed 12 months.
o The second and subsequent previous years are always of 12 months each (i.e. April
to March.)
• Exception to the previous year rule
o Income of a non-resident from shipping. [Section 172] (7.5% is taxable portion)
o Income of persons leaving India either permanently or for a long period of time.
[Section 174]
o Income of bodies formed for short durations. [Section 174A]
o Income of a person trying to alienate his assets with a view to avoiding payment
of tax; and [Section 175]
o Income of a discontinued business. [Section 176]
4|KIRAN.A. S
 • Previous year & assessment year will be same in the following cases:
o Shipping business of non-resident [Section 172]
o Persons leaving India [Section 174]
o AOA or BOI or Article Juridical Person formed for a particular eventor purpose
[Section 174A]
o Persons likely to transfer property to avoid tax [Section 175]
o Discontinued business [Section 176]
• Previous year for undisclosed sources of income
o Cash Credits [Section 68]
o Unexplained Investments [Section 69]
o Unexplained money etc. [Section 69A]
o Amount of investments etc., not fully disclosed in the books of account [Section
69B]
o Unexplained expenditure [Section 69C]
o Amount borrowed or repaid on hundi [Section 69D]
o Taxation of Cash Credits, Unexplained Money, Investments, etc. [Section
115BBE]
▪ Unexplained amounts treated as income under sections 68, 69, 69A, 69B,
69C and 69D of the Act will now be taxed at a flat rate of 60% (plus
surcharge@25% of tax and cess @4 % of tax and surcharge) without
granting any deduction of expenditure or allowance there against. Thus,
the effective rate of tax is 78%.
▪ The benefit of threshold exemption and lower slab rates for individuals and
HUFs will not be available to such amounts.
▪ Further, no set off of any loss shall be allowable against income brought to
tax under sections 68 or section 69 or section 69A or section 69B or section
69C or section 69D.
• Assessee [Section 2(7)]
o “Assessee” means a person by whom income tax or any other sum of money is
payable under this Act, and includes
o Every person in respect of whom any proceeding under the Act has been taken
for the assessment of his income or the income of any other person in respect of
which he is assessable
o Every person who is deemed to be an assessee, or
o Every person who is an assessee in default under any provision of this Act
• Books of account [sec. 2(12a)]: It includes Ledgers, Day Books, Cash Books, Account
Books and other books, whether kept in the written form or as printouts or data store
in a floppy, disc, tape or any other form of electromagnetic data storage device

5|KIRAN.A. S
PERSON [ SECTION 2(31)]
• Individual: It refers to a natural human being whether Male or Female, Minor or
Major.
• Hindu Undivided Family (HUF): It is a relationship created due to operation of Hindu
Law. The Manager of HUF is called “Karta” and its member are called “Coparceners”
• Company: It is an artificial person registered under Indian Companies Act 1956 or any
other Law.
• Firm: It is an entity which comes into existence as a result of partnership agreement.
The Income Tax accepts only these entities as Firms which are accessed as Firms under
Section 184 of the Act.
• Association of Persons (AOP) or Body of Individuals (BOI): Co-operative societies,
MARKFED, NAFED, etc are the example of such persons. When persons combine
together to carry on a joint enterprise and they do not constitute partnership under
the ambit of law, they are assessable as an Association of Persons. An A.O.P. can have
firms, companies, associations and individuals as its members. A Body of Individual
(B.O.I) cannot have non-individuals as its members. Only natural human being can be
members of a Body of Individuals.
• Local Authority: Municipality, Panchayat, Cantonment Board, Port Trust etc. are called
Local Authority.
• Artificial Judicial Person: Statutory Corporations like Life Insurance Corporation, a
University etc. are called Artificial Judicial Persons.
“INCOME” [ SECTION 2(24)]
• The Definition given u/s 2 (24) is inclusive and not exhaustive. According to English
dictionary, the term “Income” means periodical monetary return coming in regularly
from definite sources like one’s business, Land, Work, Investments etc”
• The term “Income” includes not only what is received by using the property but also the
amount saved by using it himself.
• Anything which is convertible into income can be regarded as source of accrual of
income.
• Rounding Off Income [Sec. 288A]: The Total Income computed under this Act, shall be
rounded off to the nearest multiple of Rs. 10
• Application of Income
o Income accrues to the assessee
o Income reaches to the assessee
o Income is applied to discharge an obligation, whether self-imposed or gratuitous

6|KIRAN.A. S
 • Income includes:
o Profit and Gains: For instance, Profit generated by a businessman is taxable as
“Income”.
o Dividend: For instance, “Dividend” declared/paid by a company to a shareholder
is taxable as “income” in the hands of shareholders.
o Voluntary contribution received by a Trust: In the hands of a Trust, income
includes voluntary contributions received by it. This rule is applicable in the
following cases.
▪ Such contribution is received by a trust created wholly or partly for
charitable or religious purpose; or
▪ Such contribution is received by a scientific research association; or
▪ Such contribution is received by any fund or institution established for
charitable purposes; or
▪ Such contribution is received by any university or other educational
institutions or hospital.
FEATURES OF “INCOME”
• Definite Source: Income has been compared with a fruit of a tree or a crop from the
field. Fruit comes from a tree and crop from fields. Thus, the source of income is definite
in both cases. The existence of a source for income is somewhat essential to bring a
receipt under the charge of tax.
• Income must come from Outside: No one can earn income from himself. There can be
no income from transaction between head office and branch office. Contributions made
by members for the mutual benefit and found surplus cannot be termed as income of
such group.
• Tainted Income: Income earned legally or illegally remains income and it will be taxed
according to the provisions of the Act. Assessment of illegal income of a person does not
grant him immunity from the applicability of the provisions of another Act. Any
expenditure incurred to earn such illegal income is allowed to be deducted out of such
income only.
• Temporary or Permanent: Whether the income is permanent or temporary, it is
immaterial from the tax point of view.
• Voluntary Receipt: The receipts which do not arise from the exercise of a profession or
business or do not amount to remuneration and are made for reasons purely of personal
nature are not included in the scope of total income.
• Dispute regarding the Title: In case a person is receiving some income but his title to
such receipts is disputed, it will not free him from tax liability. The receipt of such income
has to pay tax.
• Income in Money or Money’s worth: The income may be in Cash or in kind. It is taxable
in both cases.
7|KIRAN.A. S
TAX TREATMENT OF “INCOME”
For the purposes of treatment of income for tax purposes it can be divided into 3 categories:
• Taxable Income: These incomes form part of total income and are fully taxable. These
are treated u/s 14 to 69 of the Act. These are Salaries, Rent, Business Profits,
Professional Gain, Capital Gain, Interest, Dividend, Winning from Lotteries, Races etc.
• Exempted Incomes: These incomes do not from part of total income either fully or
partially. hence, No Tax is payable on such incomes. These incomes are given u/s 10(1)
to 10(32) of the Act.
• Rebateable (Tax Free) Incomes: These incomes form part of total income and are fully
taxable. Tax is calculated on total income out of which a Rebate of Tax at average Rate
is allowed. The Rebateable incomes given u/s 86 of the Act are:
o Share of income received by a member of an association of persons provided the
total income of such AOP is assessed to tax at the rates applicable to an individual.
o Share of income received by a partner of a firm assessed as an association of
persons (PFAOP) provided the total income of such PFAOP is assessed to tax at the
rates applicable to an individual.
INCOME TAX RATE FOR INDIVIDUALS – AY 2019-20
• Income Tax Rate AY 2019-20 | FY 2018-19 – Individuals less than 60 years
Taxable income Tax Rate

Up to Rs. 2,50,000 Nil

Rs. 2,50,000 to Rs. 5,00,000 5%

Rs. 5,00,000 to Rs. 10,00,000 20%

Above Rs. 10,00,000 30%

8|KIRAN.A. S
 • Income Tax Rate AY 2019-20 | FY 2018-19 – Individuals between 60 years and 80 years
Taxable income Tax Rate

Up to Rs. 3,00,000 Nil

Rs. 3,00,000 to Rs. 5,00,000 5%

Rs. 5,00,000 to Rs. 10,00,000 20%

Above Rs. 10,00,000 30%

• Income Tax Rate AY 2019-20 | FY 2018-19 – Individuals above 80 years

Taxable income Tax Rate

Up to Rs. 5,00,000 Nil

Rs. 5,00,000 – Rs. 10,00,000 20%

Above Rs. 10,00,000 30%

• The aforesaid amount of Rs. 2,50,000 or Rs. 3,00,000 or 5,00,000 is called “maximum
amount not chargeable to tax” or “basic exemption limit” applicable to the assessee.
• In addition to the Income Tax amount calculated, based on the above-mentioned tax
slabs, individuals are required to pay Surcharge and Cess.
o Surcharge: 10% of income tax, where total income exceeds Rs.50 lakh up to Rs.1
crore.
o Surcharge: 15% of income tax, where the total income exceeds Rs.1 crore.
o Health & Education Cess: 4% of Income Tax.

9|KIRAN.A. S
 • Tax Rates in case of assessee other than Individual, HUF, AOP, BOI
o In the case of every co-operative society:

Up to Rs. 10,000 10%

Next Rs. 10,000 20%

Balance 30%

• In case of other assessee:

Partnership firm (including Limited Liability Partnership)/ Local Authority 30%

Domestic Company

o If Total Turnover or Gross receipts of the company in the previous year 25%
2016-17 does not exceeds 250 crore rupees
o Other Case 30%

Foreign Company (irrespective of turnover or gross receipts) 40%

REBATE [SECTION 87A]

• A resident individual having total income up to Rs. 3.50 lac shall be eligible for a rebate
of Rs. 2,500 restricted to the amount of tax payable by him.
• Rebate u/s 87A not available to any other assessee.
• This rebate is available before charging education cess.

10 | K I R A N . A . S
RATES OF SURCHARGE A.Y. 2019-20
• Individual/HUF/AOP/ BOI/AJP
If TI ≤ Rs. 50 lakhs Nil
If TI > Rs. 50 lakhs but bellow Rs. 1 crore 10%
If TI > Rs. 1 crore 15%

• Co-operative Society/ Local Authority/Firm/LLP

If TI ≤ Rs.1 crore Nil
If TI > Rs.1 crore 12%

• Domestic Company
If TI ≤ Rs.1 crore Nil
If TI > Rs. 1 crore but ≤ Rs. 10 crores 7%
If TI > Rs. 10 crores 12%

• Foreign Company
If TI ≤ Rs.1 crore Nil
If TI > Rs. 1 crore but ≤ Rs. 10 crores 2%
If TI > Rs. 10 crores 5%

MAXIMUM MARGINAL RATE (MMR) [SECTION 2(29C)]

• MMR is the rate of income tax (including surcharge, if any) applicable in relation to the
highest slab of income, specified in the Finance Act for the relevant year, in the case of
the following persons:
o An individual
o An Association of person or body of individuals.
• Example MMR for Assessment year 2019-20 is 35.88% [being Tax @ 30% + 15%
surcharge (assuming total income > 1 crore) + 4% cess on income tax]

11 | K I R A N . A . S
RESIDENTIAL STATUS
• The term residential status has been coined under the income tax laws of India and must
not be confused with an individual’s citizenship in India.
• Determination of Residential Status of a taxpayer is very important at the time of filing
of income
• tax return as income tax is levied based on the Residential status of the taxpayer.
• For the purpose of income tax in India, the income tax laws in India classifies taxable
persons as:
o A resident
1. Ordinary resident (OR)
2. Not ordinarily resident (NOR)
o A non-resident (NR)
• Conditions of the Residential Status:
o Basic conditions
1. Stay in India for a year is 182 days or more OR
2. Stay in India for the immediately 4 preceding years is 365 days or more and
60 days or more in the relevant financial year
o Additional Conditions
1. Has been a resident of India in at least 2 out of 10 years immediately
previous years AND
2. Has stayed in India for at least 730 days in 7 immediately preceding years
• Resident: A taxpayer would qualify as a resident of India if he satisfies at least one basic
condition
o Ordinarily Resident: If he meets Any one of the basic conditions and If he meets
both of the Additional conditions
o Not ordinary Resident: If he meets any one of the basic conditions and If he fails
to satisfy even one of the additional conditions, he would be a Not ordinary
resident
• Non-resident: An individual not satisfying basic conditions is called Non – resident

12 | K I R A N . A . S
 • There are 2 exceptions to the basic rule of classification of Residential Status:
o In case of an individual, who is a citizen of India and who leaves India in any
financial year for the purpose of employment outside India, the 2nd condition
stated above shall not be applicable and only the 1st condition of 182 days or more
would be applicable
o In case of an individual, who is a citizen of India or is a person of Indian origin and
who being outside India comes on a visit to India in any financial year, the 2nd
conditions stated above shall not be applicable and only the 1st condition of 182
days or more would be applicable
• The 60-day period mentioned above will be substituted for 182 days in case of the
following persons:
o A citizen of India who leaves the country as a crew member of an Indian ship or
for the purposes of employment outside India only the 1st condition of 182 days
or more would be applicable
o A Citizen of India or PIO who visits India in any previous year only the 1st
condition of 182 days or more would be applicable

13 | K I R A N . A . S
 • Residential Status of HUF – Sec 6(2)
o A HUF is said to be resident in India when during that year control and
management is situated wholly or partly in India.
o In other words, it will be non-resident in India if no part of the control and
management of affairs is situated in India.
o A resident HUF is said to be resident and ordinarily resident in India if the Karta of
the HUF satisfies both the following conditions:
▪ He has been resident in India for at least 2 out of 10 previous years
immediately preceding the relevant previous year AND
▪ He has been in India for 730 days or more during 7 previous years
immediately preceding the relevant previous year.
o If the Karta of HUF does not satisfy any or both of the above conditions, then HUF
shall be resident but not ordinarily resident in India.
• Residential Status of Companies – Sec 6(3)
o Indian Company is always resident in India
o Foreign Company is resident in India if control and management of its affairs are
situated wholly in India during relevant previous year i.e. if all the board meetings
of the foreign company are held in India, then it shall be resident, otherwise non-
resident.
PASSIVE INCOME
• “Passive income” of a company shall be aggregate of, income from the transactions
where both the purchase and sale of goods is from / to its associated enterprises; and
income by way of royalty, dividend, capital gains, interest or rental income
• Any income by way of interest shall not be considered to be passive income in case of a
company which is engaged in the business of banking or is a public financial institution,
and its activities are regulated as such under the applicable laws of the country of
incorporation
• POEM – Place of Effective Management

14 | K I R A N . A . S
TAX INCIDENCE
• The relation between residential status and the incidence of tax [Section 5]
• Under the Act, the incidence of tax on a taxpayer depends on his residential status and
also on the place and time of accrual of receipt of income:
o Indian Income: Any of the following three is an Indian income:
▪ If income is received (or deemed to be received) in India during the previous
year and at the same time it accrues (or arises or is deemed to accrue or
arise) in India during the previous year;
▪ If income is received (or deemed to be received) in India during the previous
year but it accrues (or arises) outside India during the previous year;
▪ If income is received outside India during the previous year but it accrues (or
arises or is deemed to accrue or arise) in India during the previous year;
o Foreign income: If the following conditions are satisfied, then such income is
foreign income:
▪ Income is not received (or not deemed to be received) in India; and
▪ Income does not accrue or arise (or does not deemed to accrue or arise) in
India.
• The provisions of residential status are tabulated as below:
Whether income is received Whether income accrues (or Status of Income
(or deemed to be received) in arises is deemed to accrue or
India during the relevant years arise) in India during the
relevant years.
Yes Yes Indian Income
Yes No Indian Income
No Yes Indian Income
No No Foreign Income

15 | K I R A N . A . S
 • Incidence of tax for different taxpayers is as follows:
Incidence of tax in India for Individuals and Hindu Undivided Family (HUF):

Tax incidence for company, firm, AOP, HUF & every other person (other than an
individual & HUF)

16 | K I R A N . A . S
 • Indian Income:
o Indian income is always taxable in India irrespective of the residential status of the
taxpayer
• Foreign Income:
o Foreign income is taxable in the hands of resident in case of a firm, co-operative
society, an association of persons, a body of individuals or resident and ordinarily
resident in case of individuals and HUFs in India.
o Foreign income is not taxable in the hands of non-resident in India.
o In the hands of resident but ordinarily resident taxpayer, foreign income is taxable
only if it is
▪ Business income and business is controlled wholly or partly in from India
▪ Income from a profession which is set up in India
EXEMPTED INCOMES
Section -10 of Income Tax Act lay down income which is totally or partially exempted from
tax:
1. EXEMPTED INCOME FOR ALL ASSESSES
• Agricultural Income Sec. 10(1)
• Share of income from partnership firm Sec. 10 (2A)
• Share of HUF Income Sec. 10(2)
• Scholarships – Sec.10(16)
• Income as divided Sec. 10 (34 & 35)
• Capital gain on transfer of u/s 64 (Sec. 10 (33)
• Allowance of M.P./MLA Sec. 10 (17)
• Award / reward Sec. 10 (17A)
• Pension to gallantry award winner Sec. 10(18)
• Family Pension received by the family members of armed forces Sec. 10(19).
• Capital gain on compulsory acquision of urban Agriculture land Sec. 10(37)
• Interest on notified Government Securities Sec. 10(15)
• Income of minor child which is clubbed Sec. 10(32) [Up to 1,500/- per child]
• Compensation under Bhopal Gas Leak Disaster Sec. 10(10BB)
• Income of subsidy from Tea Board Sec. 10(30) 16. Income of schedule Tribe
members Sec. 10(26)
• Amount received under a life Insurance Policy Sec. 10(26)
• Income of subsidy from Rubber Board/Coffee Board /spices board / any other
notified Board Sec. 10(31)
• Income from Sukanya Samriddhi Account – Sec. 10(11) A.

17 | K I R A N . A . S
 2. EXEMPTED INCOME FOR EMPLOYEES
• House Rent Exempted up to a certain limit Sec.10(13A)
• a) Gratuity, Commuted pension, leave encashment to Government employees is
fully exempted Sec. 10(10)
• b) Gratuity, leave encashment, commuted pension to non-government,
employees are exempted up to a certain limit.
• a) Commutation of pension received by an employee’s pension for government
employees, fully exempted Sec. 10(10A)
• b) Pension for non-government employee exempted up to certain limit.
• Leave travel concession in India Sec. 10(5)
▪ Actual Amount Received or Amount Prescribed or Amount Actual Spent
(Whichever is less)
• Amount received as leave encashment on retirement Sec.-10 (10AA)
▪ Central/State Government Employee – Fully Exempted
▪ Other Employee exempted up to certain limit
• Compensation on retrenchment Exempted up to certain limit.Sec.10(10 B)
• Allowance or perquisite outside India Sec 10(7)
• Allowance/perquisite paid outside India by Indian Government is exempted.
• Provident fund Sec. 10(11)
▪ P.F. received from Recognised P.F. fully exempted
▪ P.F. received from unrecognised P.F. Taxable
• Superannuation fund Sec. 10(13)
• Voluntary retirement Scheme Sec. 10(10c) (Amount received by this scheme is
exempted up to 5 lakhs)
• Tax on perquisite paid by the employer is exempted Sec. 10 (10 CC)

18 | K I R A N . A . S
 • Special Allowance Sec. 10 (14) (performing duty & compensatory allow)
Travel/Tour Allowance Actual or Actual Expanses (Whichever is less)
Education Allowance 100/- Per month Per Child (for 2 child)
Hostel Allowance 300/- Per month Per Child (for 2 child)
Transfer Allowance 70% of Allowance Or 6,000 Rs. Per month
(Whichever is less)
Conveyance Allowance Up to 800/- Per month
Uniform Allowance Tax Free
Helper Allowance Actual Expenditure exempted
Tribal Area Allowance Up to 200 Rs. Per month
Field Area Allowance Rs. 2,600 Per month
Composite Hill Compensatory Allowance From 300 Rs. to 7000 Rs. Per month.
according to place
Border/Remote area allowance 200 to Rs. 1,300 Per month. according to
place
Allowance to workers of coal mines Rs. 500 Per month
High Attitude allowance Rs. 1060 to Rs. 1600 Per month
Highly Active field area allowance Rs. 4,200 Per month
Modified field area allowance Rs. 1,000 per month
Counter Insurgency Allowance Rs. 3,900 per month
Transport Allowance Rs. 800 per month (Rs. 1600 per month in the
case of handicapped, blind or disabled
employee) w.e.f. 01.04.15 Rs. 1,600 and Rs.
3,200 respectively.
Island (Duty) Allowance Rs. 3,250 per month

3. EXEMPTED INCOME FOR INSTITUTIONS

• Income of scientific research association Sec. 10(21)
• Income of employee’s welfare fund Sec. 10 (23AAA)
• Venture capital fund/Company Sec. 10 (23F)
• Income of news Agency Sec. 10 (22B)
• Income of Professional institutions Sec. 10 (23A)
• Income of Regimental Fund of the Armed forces Sec. 10(23AA)
• Income of Khadi/Village industrial Sec. 10(23B)
• Income of Khadi Board Sec. 10(23BB)
• Income of the European Economic Community Sec. 10 (23BBB)
• Income of statutory bodies Sec. 10 (23 BBA)
• Income of pension fund (Set up by LIC) Sec. 10 (23AAB)
• Income from mutual fund Sec. 10 (23D)
• Income of Registered Trade unions Sec. 10 (24)
19 | K I R A N . A . S
 •
Income of local authorities Sec. 10(20)
•
Income of Co-operative Societies for Scheduled castes/Tribes Sec. 10 (27)
•
Income of political party Sec. 13 (A)
•
Income of the SAARC fund for regional Project Sec. 10(23BBC)
•
Income of a corporation promoting the interest of a minority community Sec. 10
(26BB)
• Income of certain national funds Sec. 23 (c)
• Income of Hospitals and Educational Institution association Sec. 10 (23C)
• Exemption of income of Investor Protection Fund – Sec. 10 (23EA)
• Income of Swachh Bharat Kosh and Clean Ganga Fund – Sec. 10 (23C)
4. EXEMPTIONS FOR NON-RESIDENT /FOREIGN CITIZEN
• Interest received on securities.
• Interest received by “non-resident (External) Account”
• Interest from notified central Government if such certificates are subscribed in
foreign currency.
• Remuneration received by foreign diplomats.
• Salary received by foreign citizen in India/by non-resident foreign citizen/by an
employee being a foreign national.
• Tax paid by Government/Indian concern in case of non-resident/Foreign company.
• Income arising to notified foreign companies projects connected with security of
India.
• Foreign allowance granted by the Indian government to its employee posted
abroad.
• Remuneration received from foreign government by an individual who is in India
in connection with any sponsored Co-operative technical assistance programme.
• Remuneration received by non-resident consultants and their foreign employers
5. EXEMPTIONS FOR OTHERS
• Exemptions for newly established industrial undertaking in free trade zones Sec.
10 (A)
• Exemptions for newly established industrial undertaking in special Economic Zone
Sec. 10 (AA) after 31st March, 2005
• Exemptions for newly established industrial undertaking Hundred percent export-
oriented undertakings Sec. 10(B)
• Deduction in respect of export of artistic handmade wooden articles section 10
(BA)
• Income exempted of charitable/Religions trusts Sec.-11

20 | K I R A N . A . S
AGRICULTURAL INCOME
• In India, agricultural income refers to income earned or revenue derived from sources
that include farming land, buildings on or identified with an agricultural land and
commercial produce from a horticultural land
• Agricultural income is defined under section 2(1A) of the Income Tax Act, 1961.
According to this Section, agricultural income generally means:
o Any rent or revenue derived from land which is situated in India and is used for
agricultural purposes.
o Any income derived from such land by agriculture operations including processing
of agricultural produce so as to render it fit for the market or sale of such produce.
o Any income attributable to a farm house subject to satisfaction of certain
conditions specified in this regard in section 2(1A).
o Any income derived from saplings or seedlings grown in a nursery shall be deemed
to be agricultural income.
• Section 2 (1A) of the Income Tax Act, 1961 defines “agricultural income” as an income
under the following three sources:
1. Rent or revenue got from agricultural land situated in India:
▪ Rent is the consideration for the right to use the land.
▪ The scope of the possible sources of income that can be derived from land
is many.
▪ An example would be fees received for renewal of grant of land on lease.
▪ However, revenue from land does not include consideration received on
sale of land.
2. Income derived from agricultural land in the following ways:
▪ Agriculture: Raja Benoy Kumar Sahas Roy where agriculture has been
explained to consist of two types of operations
o The basic operations would include cultivation of the land and
consequently tilling of the land, sowing of seeds, planting and all such
operations that require the human skill and effort directly on the land
itself.
o The subsequent operations would include operations that are carried
out for growth and preservation of the produce like weeding, digging
soil around the crops grown etc and also those operations which
would make the produce fit for use in the market like tending, pruning,
cutting, harvesting, etc. Income derived from saplings or seedlings
grown in a nursery would also be considered to be agricultural income
whether or not the basic operations were carried out on land.

21 | K I R A N . A . S
 ▪ Through performance of a process by the cultivator or the receiver of rent
in kind that results in the agricultural produce being fit to be taken to the
market: Such processes involve manual or mechanical operations that are
ordinarily employed to make the agricultural produce fit for the market and
the original character of such produce is retained.
▪ Through sale of such agricultural produce: Where the produce does not
undergo ordinary processes employed to become marketable, the income
arising on sale would generally be partly agricultural (exempt) income and
part of it will be non-agricultural (taxable) income. The Income Tax has
prescribed rules to make this bifurcation regarding agricultural and non-
agricultural produce for products like tea, coffee, rubber, etc.
3. Income derived from farm building required for agricultural operations: The
conditions for classifying income derived from farm building as agricultural income
are as follows:
▪ The building should be on or in immediate vicinity of the agricultural land
and is one which the receiver of rent or revenue or the cultivator, by reason
of his connection with the land, requires the building as a house to stay or
as a storehouse, or uses it for these kind of situations
▪ Either of the two conditions should be satisfied:
o The land is assessed by either land revenue or a local rate assessed
and collected by government officers; OR
o If the above condition is not satisfied, the land should not be located
within the following region:

Aerial distance from municipality* Population as per last preceding census.

Within 2 kms 10,000 to 1,00,000

Within 6 kms 1,00,000 to 10,00,000

Within 8 kms > Rs. 10,00,000

22 | K I R A N . A . S
TAXATION OF AGRICULTURAL INCOME
• As discussed above, agricultural income is exempt from income tax. However, the
Income-tax Act has laid down a method to indirectly tax such income. This method or
concept may be called as the partial integration of agricultural income with non-
agricultural income. It aims at taxing the non-agricultural income at higher rates of tax.
• This method is applicable when the following conditions are met:
o Individuals, HUFs, AOPs, BOIs and artificial juridical persons have to compulsorily
calculate their taxable income using this method. Thus Company, firm/LLP, co-
operative society and local authority are excluded from using this method.
o Net agricultural income is greater than Rs. 5,000 during the year; and
o Non-agricultural income is:
▪ Greater than Rs. 2,50,000 for individuals below 60 years of age and all other
applicable persons
▪ Greater than Rs. 3,00,000 for individuals between 60 – 80 years of age
▪ Greater than Rs. 5,00,000 for individuals above 80 years of age
In simple terms, the non-agricultural income should be greater than the maximum amount
not chargeable to tax (as per the slab rates).
HEADS OF INCOME

23 | K I R A N . A . S
Relevance of method of accounting for heads of income:
Heads of Income Chapter Section Relevance of Method of Accounting
Salaries Chapter IV-A Sec.15 - 17 1. Taxable on due basis or on receipt
basis, whichever is earlier.
2. Method of accounting is irrelevant
House Property Chapter IV-C Sec. 22-27 1. Income from house property is
taxable only on accrual basis.
2. Method of accounting is not
relevant
Business or Chapter IV-D Sec. 2844DB 1. U/s 145 assessee may follow either
Profession Cash or Mercantile system of
accounting regularly employed by
the assessee.
2. Exceptions: Certain payments are
allowable only on actual payment
basis. Accrual concept does not
hold good:
• Employer’s contribution to PF, ESI,
Tax, Duty, Cess, leave encashment,
commission etc.
• Telecommunication Licence Fee is
allowable in instalments only from
the year of payment.
• Preliminary Expenses distributed
over five years.
• Amalgamation/Demerger
Expenses distributed over five
years.
• Amount paid in connection with
Voluntary Retirement Scheme
distributed over five years.
Capital Gains Chapter IV-E Sec. 45 - 55A 1. Income from Capital Gains shall be
taxable during the Previous Year
Capital Gains in which the Capital
Asset is transferred (year of
accrual).
2. The method of accounting is not
relevant for taxing the income
under the head Capital Gains.
Other Sources Chapter IV-F Sec. 56 - 59 1. U/s145 assessee may follow either
on Cash or Mercantile System of
accounting regularly employed by
the assessee

24 | K I R A N . A . S
COMPUTATION OF TAXABLE INCOME UNDER VARIOUS HEADS
INCOME FROM SALARY
• Section 17(1), defined the term “Salary”. It is an inclusive definition and includes
monetary as well as nonmonetary items
• An employee may be entitled to receive Salary in grade system
• Arrears of salary: Taxable in the year of receipt, if not taxed on due basis earlier.
• Definition of ‘Salary’ [u/s 17] In accordance with the provisions of Sec. 17(1) of Income
Tax Act,1961, the term Salary includes:
o Wages
o Any annuity or pension
o Any gratuity
o Any fees, commission, perquisite or profits in lieu of or in addition to any salary or
wages
o Any advance salary
o Encashment of leave-not-availed
o Interest earned in excess of 9.5% on Recognized Provident Fund (RPF)
o Amount transferred in excess of 12% of Salary to RPF
o Contribution made by Central Government or any other employer (w.e.f. A.Y.
2008-09) in the Previous Year to the account of an employee under Pension
Scheme u/s 80CCD
o Money embezzled by an employee constitutes his income.
• Fully taxable components of “Salary”:

25 | K I R A N . A . S
 Allowances
Fully Taxable Allowance Fully Tax-free allowance Partly Taxable allowance
• City compensatory • Conveyance allowance • Education allowance
allowance • Travelling allowance • Hostel allowance
• Dearness Allowance • Tour allowance • Tribal area allowance
• Deputation Allowance • Helper or assistant • Transport allowance
• Entertainment allowance • Composite hill
Allowance • Academic and research compensatory
• Family allowance allowance allowance
• High cost of living • Uniform allowance • Running allowance to
allowance • Special allowance for the employees of
• Medical Allowance performing duty. transport undertakings
• Non-practicing Above allowances will be • House rent allowance
allowance fully exempted if: • Under Ground
• Overtime allowance • Whole amount is spent Allowance
• Project allowance • Amount is spent for
• Rural area allowance office use only
• Servant allowance
• Tiffin allowance
• Warden and proctor
allowance

HOUSE RENT ALLOWANCE [Sec.10(13A) Rule 2A]

• The exemption shall be calculated on the basis of where the accommodation is situated
• Computation of Taxable House Rent Allowance (HRA)

26 | K I R A N . A . S
DEATH-CUM-RETIREMENT BENEFITS
1. GRATUITY U/S 10(10)
For Non-Government Employee – Covered by Payment of Gratuity Act, 1972 Computation
of Taxable Gratuity

For Non-Government Employee – Not-covered by Payment of Gratuity Act, 1972

Computation of Taxable Gratuity

27 | K I R A N . A . S
 2. PENSION
o Pension is chargeable to tax on "accrual" basis whether it is received voluntarily
or under a contract.

Tax treatment of pension in different cases

28 | K I R A N . A . S
 A. Taxability of Uncommuted Pension or Monthly Pension:
o Pension is received periodically by the retired employee
o It may be received by Government or non-government employees
o Amount received shall be fully taxable under the head “Salaries”
B. Taxability of Commuted Pension:
a. Pension is received in lumpsum as per the terms of the employment on
retirement or superannuation.
b. Full Value of Commuted Pension = Amount received on
commutation/percentage of commutation.
c. Taxability:

3. LEAVE ENCASHMENT

29 | K I R A N . A . S
 Computation of exemption from Leave Encashment

Note:
• If the individual receives leave encashment from more than one employer, the quantum of
exemption will be computed independently in respect of each employer.
• The total amount of exemption should not exceed ` 3,00,000 during his life time

4. RETRENCHMENT COMPENSATION [SEC.10(10B)]

o Received by any scheme approved by government – Fully exempt
o Received by any other scheme – Taxable subject to exemption u/s 10(10B)
Computation of Taxable Retrenchment Compensation

DEDUCTIONS AGAINST SALARY

1) Entertainment Allowance: Applicable only for Government Employees [ Sec.16(ii)] Least
of the following will be allowed as a deduction:
• Actual amount of entertainment allowance received;
• 20% of basic salary of the individual
• Rs. 5,000
2) Professional Tax [Sec.16(iii)]
• Professional tax or tax on employment paid by an employee, levied under a State
Act shall be allowed as deduction;
• such deduction is available only on actual payment;

30 | K I R A N . A . S
 • If an employer pays professional tax on behalf of his employee, then it will first be
included in the Salary as a perquisite and then, allowed as a deduction.
Under Ground Allowance: Exempted up to Rs. 800 Per Month Perquisites
Tax free perquisites Taxable perquisites
For all class of employers For Specified employers
• Refreshment facility • Rent free house • Servant facility
• Telephone facility • Concessional rent • Gas, Water &
• Medicinal facility • Liabilities of employee electricity facility
• Expenses on Training paid • Free education facility
• Sale of goods as • Interest free or (exceeding Rs. 1000
concessional rate concessional loan P.M. Per child)
• Issue of shares / exceeding Rs. 20,000
debentures at • Use of movable assets
concessional rate [10% of cost will be
• Free Conveyance Taxable]
facility • Transfer of movable
• Free Accommodation assets [W.D.V. –
for employees Transfer price]
• Scholarship to children • Medical
of employee reimbursement
• Leave travel (exceeding Rs. 15000)
concession or
assistance
• Loan facility up to
20000
• Free use of computers
• Free Education facility
up to Rs. 1000 P.M.
per child
• Health club and sport
facilities
• Tax paid on perquisites
• Group insurance and
accidental insurance
premium paid by
employer
• Transfer of 10-year-old
movable assets
• Free meal up to Rs. 50

31 | K I R A N . A . S
INCOME FROM HOUSE PROPERTY
CHARGEABILITY [SECTION 22]
• The basis of chargeability under the head income from house property is Annual Value.
• The property must consist of Building or Lands Appurtenant thereto.
• The assessee must be the owner of such property.
• The property may be used for any purpose other than the assesses business or
profession.
DEEMED OWNER [SECTION 27]
• Owner: An Individual shall be considered as owner of a property when the document of
title to the property is registered in his name.
• Deemed Owner: Under the following circumstances, Income from House Property is
taxable in the hands of the Individual, even if the property is not registered in his name:
o Where the Property has been transferred to spouse for inadequate consideration
other than in pursuance of an agreement to live apart.
o Where the Property is transferred to a minor child for inadequate consideration
(except a transfer to minor married daughter)
o Where the Individual holds an impartible estate.
o Where the Individual is a member of Co-operative Society, Company, or other
Association and has been allotted a house property by virtue of his being a
member, even though the property is registered in the name of the Society /
Company / Association.
o Where the property has been transferred to the individual’s name as part-
performance of a contract u/s 53A of the Transfer of Property Act, 1882. (i.e.
Possession of the Property has been transferred to Individual, but the Title Deeds
have not yet been transferred)
o Where the Individual is a holder of a Power of Attorney enabling the right of
possession or enjoyment of the property.
o Where the property has been constructed on a leasehold land.
o Where the ownership of the Property is under dispute.
o Where the property is taken on a lease for a period of not less than 12 years, then
the lessee shall be deemed as the owner of the property.

32 | K I R A N . A . S
PROPERTY INCOME IS EXEMPT FROM TAX TO CERTAIN PERSONS

33 | K I R A N . A . S
34 | K I R A N . A . S
CLUBBING OF INCOME
• Normally, a person is taxed in respect of income earned by him only. However, in certain
special cases income of other person is included (i.e. clubbed) in the taxable income of
the taxpayer and in such a case he will be liable to pay tax in respect of his income (if
any) as well as income of other person too. The situation in which income of other
person is included in the income of the taxpayer is called as clubbing of income
• Example: Income of minor child is clubbed with the income of his/her parent.
• Section 60 to 64 contains various provisions relating to clubbing of income.
TRANSFER OF INCOME [SECTION 60]
• Section 60 of Income Tax Act, 1961 provides the provisions relating to clubbing of
income where transfer of income is done without transferring the assets
• Where a person transfers to any other person, income (whether revocable or not) from
an asset without transferring that asset, the income shall be included in the total income
of the transferor.
• “Transfer” includes any settlement, trust, covenant, agreement or arrangement.
• The transfer also includes a lease for inadequate consideration
• These are applicable if the following conditions are satisfied:
o The taxpayer owns an asset
o The ownership of asset is not transferred by him.
o The income from the asset is transferred to any person under a settlement, or
agreement
• If the above conditions are satisfied, the income from the asset would be taxable in the
hands of the transferor.
• ‘Revocable transfer’ means the transferor of asset assumes a right to re-acquire asset
or income from such an asset, either whole or in parts at any time in future, during the
lifetime of transferee
• ‘Revocable transfer’ also includes a transfer which gives a right to re-assume power of
the income from asset or asset during the lifetime of transferee
• If a settlement is made by a Hindu undivided family and there is a re-transfer to one
member of the family in his capacity as an individual

35 | K I R A N . A . S
INCOME FROM HOUSE PROPERTY
Income Computation and Disclosure Standards (ICDS)

• Income Computation and Disclosure Standards (ICDS) were issued by the Government
of India in exercise of powers conferred to it under section 145(2) of The Income Tax
Act, 1961.
• Notified by the government on 31 March 2015.
Conditions for Claiming Depreciation
• The assets must be owned, wholly or partly, by the assessee.
• They must be in use for the business or profession of the taxpayer. If the assets are not
used exclusively for the business, but for other purposes as well, depreciation allowable
would be proportionate to the use of business purpose.
• Co-owners can claim depreciation to the extent of the value of the assets owned by each
co-owner.
• You cannot claim depreciation on the cost of land.

36 | K I R A N . A . S
 • Depreciation is mandatory from A.Y. 2002-03 and shall be allowed or deemed to have
been allowed as a deduction irrespective of a claim made by a taxpayer in the profit &
loss account.
Depreciation rates Under Income Tax Law %
1 Buildings which are used mainly for residential purposes except for hotels and 5
Boarding House
2 Buildings which are not used mainly for residential purposes and other than 10
mentioned in a & c
3 Buildings acquired on or after 1-9-2002 for installing P&M forming part of water 40
supply project;
4 Purely temporary erections such as wooden structures 40
5 Furniture and fittings including electrical fittings 10
6 Machinery & plant 15
7 Motor-cars (other than those used in the business of running them on hire) 15
acquired or put to use on or after 1st April 1990
8 Motor-cars (other than those used in the business of running them on hire) 30
acquired on or after 23rd August 2019 but before 1st April 2020 and is put to
use before 1st April 2020
9 Aeroplane-Aeroengines 40
10 Motor buses, Motor lorries, and Motor used in a business of running them on 30
hire
11 Motor buses, Motor lorries, and Motor used in a business of running them on 45
hire acquired on or after 23rd August 2019 but before 1st April 2020 and is put
to use before 1st April 2020
12 “Commercial vehicle” 40
13 Moulds used in rubber and plastic goods factories 30
14 Air, Water, Solid pollution control equipment 40
15 Lifesaving medical equipment 40
16 Computers (including computer software) 40
17 Ship 20
18 Intangible Assets 25

• Methods of depreciation as per Companies Act, 1956 (Based on Specified Rates):

o Straight Line Method
o Written Down Value Method
• Methods of depreciation as per Companies Act, 2013 (Based on Useful Life of assets):
o Straight Line Method
o Written Down Value Method
o Unit of Production Method
• Methods of depreciation as per Income Tax Act, 1961 (Based on Specified Rates):
o Written Down Value Method (Block wise)
37 | K I R A N . A . S
 o Straight Line Method for Power Generating Units

38 | K I R A N . A . S