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(c) Digital India

AIM is the Government of India’s endeavour to promote culture of innovation and entrepreneurship.

Management is a global and universal concept.

If I am a manager of a company, I need to perform the following functions:

(a) Planning – mapping out exactly how to achieve a particular goal; creating a structure for daily tasks. 

(b) Organizing – arranging the narrow goals from their broadest to most intricate form; assigning work as well as the required material to the team. 

(c) Staffing – beefing up the team by recruiting, selecting, training, and developing employees. 

(d) Leading – motivating, communicating, guiding, encouraging as well as assisting the team members. 

(e) Controlling: Continuously checking results against goals and taking any corrective actions necessary to ensure success of the plan.

Nagbhatt I was the founder of Gurjar Pratihar dynasty of Jalore, Avanti and Kannauj.

A business needs finance because: 

1. Business is concerned with production and distribution of goods and services for the satisfaction of needs of society. There are four factors required for any production: land, labour, capital and entrepreneur. All these factors need to be paid for their services. 

2. No business can be carried without availability of adequate funds. 

3. As soon as a decision is taken to start a business, requirement of funds initiates. 

4. Finance is called ‘life blood of a business’. 

5. It is very important to assess financial needs of the organization and the identification of various sources of finance.

Correct option is (D) None of these

Correct option is (D) Trade credit

Bank credit refers to credit, financial accommodation or advance taken from commercial banks. Bank credit is, generally, given for a period not exceeding one year. Bank credit is common to all types of business. The amount of bank credit depends upon the nature and size of the business, and the credit-standing of the concern. Bank credit may be unsecured or against guarantee or against hypothecation, pledge or mortgage of assets. An interest of 15% to 18% is, usually, charged on bank credit.

Warranty represents a stipulation which is collateral to the main purpose of the contract. It is of secondary importance to the contract.

Sale of Goods Act was passed in the year 1930.

(c) Delivery to the carrier

Contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property (ownership) of the goods to the buyer for a price.

The main special features off long-term finance are:

1. Long-term finance is usually raised through the issue of shares and debentures, through term loans from financial institutions and ploughing-back of profits. 

2. Long-term finance is costlier than short-term finance and medium-term finance. 

3. Long-term loans are, generally, raised against securities. 

4. Long-term finance is the finance required for a long -period exceeding five year. 

5. It is required for financing the fixed capital of an undertaking. 

6. It is required not only for the establishment of new undertaking, but also for the expansion and development of an existing undertaking.

Trade credit refers to credit obtained from the suppliers of goods in the normal course of trade. In other words, it means the goods purchased from suppliers on credit. The duration of trade credit is, usually, 15 days to 90 days. It is granted without any security except the credit standing of the concern. The amount of trade credit that can be enjoyed by concern depends upon its creditstanding and the volume of business it carries on the supplier of goods.

There are three types of trade credit. They are: 

1. Open accounts or accounts payable or Bills payable 

2. Notes payable 

3. Trade acceptances.

Bank credit refers to credit, financial accommodation or advance taken from commercial banks. Bank credit is, generally, given for a period not exceeding one year. Bank credit is common to all types of business. The amount of bank credit depends upon the nature and size of the business, and the credit-standing of the concern. Bank credit may be unsecured or against guarantee or against hypothecation, pledge or mortgage of assets. An interest of 15% to 18% is, usually, charged on bank credit.

Bank credit takes various forms. They are:

1. Short-term loan 

2. Overdraft 

3. Cash Credit. 

4. Discounting of bills of exchange 

5. Commercial letter of credit.

(a) Becomes insolvent

Public Deposits The deposits that are raised by organizations directly from the public are known as public deposits. Rates of interest offered on public deposits are usually higher than that offered on bank deposits. The amount raised from public deposits is generally used by the company for meeting the requirement of working capital. It can take care of both medium and short term financial requirements.

Merits of Public Deposits

1. The procedure of obtaining deposits is simple and does not contain restrictive conditions as in case of a loan agreement. 

2. Cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions. 

3. Public deposits do not usually create any charge on the assets of the company and hence the assets can be used as security for raising loans from other sources. 

4. The control of the company is not diluted as the depositors do not have voting . rights.

Limitations of Public Deposits.

1. New companies generally find it difficult to raise fund;; through public deposits due to lack of goodwill. 

2. It is an unreliable source of finance as the public may not respond when the company needs money. 

3. Collection of public deposits may prove difficult, particularly when the size of deposits required is large.

Retained Earnings The portion of the net earnings which is not distributed amongst the shareholders as dividends and is retained in the business for use in the future is known as retained earnings. It is a source of internal financing and is also termed as accumulated earning.

Merits of Retained Earnings

1. etained earnings is a permanent source of funds available to an organization. 

2. It does not involve any explicit cost in the form of interest, or floatation cost. 

3. There is a greater degree of operational freedom and flexibility as the funds are generated internally. 

4. It enhances the capacity of the business to absorb unexpected losses. 

5. It may lead to increase in the market price of the equity shares of a company.

Limitations of Retained Earnings

1. High retention ratio may cause dissatisfaction amongst the shareholders as they would get lower dividends. 

2. It is an uncertain source of funds as the profits of business keep fluctuating. 

3. If the opportunity cost associated with these funds is high it may lead to sub¬’ optimal use of the funds.

Public Deposits: Deposits accepted from public directly by the companies are called public deposits. These deposits generally carry a rate of interest higher than the deposits in commercial banks.

Merits of Public Deposits

The procedure of obtaining deposits is simple and does not contain restrictive conditions. 

Cost of public deposits is generally lower than the cost of borrowings from banks and financial institutions. 

Public company usually does not create a charge on the assets of the company. 

As the depositors do not have voting rights, it does not dilute control in the company.

Demerits of Public Deposits

• It is difficult for a newly established company to be able to get funds from public deposits. 
• It is dependent on public response and can’t be relied on if financial needs are urgent. 
• It is difficult especially when size of deposits is large.

Retained Earnings: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. Profit re-invested as retained earnings is profit that could have been paid as a dividend.

Merits of Retained Earnings:

• The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. However, it is true that the use of retained earnings as a source of funds does not lead to the payment of cash.
• The dividend policy of the company is in practice determined by the directors. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders
• The use of retained earnings as opposed to new shares or debentures avoids issue costs.
• The use of retained earnings avoids the possibility of a change in control resulting from an issue of new shares.
• Another factor that may be of importance is the financial and taxation position of the company’s shareholders. For example, because of taxation considerations, they would rather make a capital profit (which will only be taxed when shares are sold) than receive current income, then finance through retained earnings would be preferred to other methods.

Demerits of Retained Earnings:

• A company must restrict its self-financing through retained profits because shareholders should be paid a reasonable dividend, in line with realistic expectations, even if the directors would rather keep the funds for re-investing.
• At the same time, a company that is looking for extra funds will not be expected by investors (such as banks) to pay generous dividends, nor over-generous salaries to owner-directors.
• Scope of retained earnings is limited by amount of profits. A loss incurring firm has no source called retained earnings.

1. They get dividend at a fixed rate and dividend is given on these shares before any dividend on equity shares. 

2. When company winds up, preference shares are paid before equity shares. 

3. Preference shares also have a right to participate in excess profits left after payment being made to equity shares. 

4. They also have a right to participate in the premium at the time of redemption.

A lease is a contractual agreement, in which the owner of the asset grants the other party the right to use the asset in return for a periodic payment, but retains the title over the property. The owner of the asset is called lessor and the party who uses the assets is called lessee. 

Lessee pays a fixed periodic amount to the lessor. It is called lease rent. When period of lease expires, the asset is returned to the lessor. It is used more frequently with items like computers and electronic items which become obsolete soon. Leasing company (lessor) owns the equipment and hires it out to the customers (lessee pays rental income to hire assets). It is a medium term fund. New companies need expensive equipments to run the business: office, equipment leasing from larger companies like Apple.

Merits of Lease financing

• It allows the lessee to acquire the asset with lesser investment.
• Simple documentations makes it easier to finance assets.
• Lease rentals get tax advantage as they are deductible for computing taxable profits.
• It reduces initial capital for (new) businesses.
• It provides added service: maintenance and upgrading.
• It makes funds available without diluting the ownership of business.
• The lease agreement does not bring any change in raising capacity of an organization.

• The risk of obsolesce is borne by the lessor.

Demerits of Lease Financing

• A lessee agreement imposes restrictions on usage of assets. For example, alternation and modification in assets may not be allowed.
• The normal business operations may be affected if lease is not renewed.
• It may result in higher payout obligations in case the equipment is not found useful and
• the lessee chooses for premature termination of the lease contact.

• It never makes lessee the owner of the asset.

Yes, we agree. Retained earnings are better than other sources of finance because:

• Retained earnings is a permanent source of funds which an organization can avail of.
• It enhances capacity of the business to absorb unexpected losses.
• It does not involve any explicit cost in the form of interest, dividend or flotation cost.
• It may increase the process of equity shares of a company.
• There is a greater degree of operational freedom and flexibility as the funds are generated internally.

Following preferential rights are enjoyed by the preference shareholders: 

• They get dividend at a fixed rate and dividend is given on these shares before any dividend on equity shares. 
• When company winds up, preference shares are paid before equity shares. 
• Preference shares also have a right to participate in excess profits left after payment being made to equity shares. 
• They also have a right to participate in the premium at the time of redemption. In lieu of these preferential rights, their voting rights are taken i.e. they are not eligible for voting

The following preferential rights are enjoyed by preference shareholders

1. Receiving a fixed rate of dividend, out of the net profits of the company, before any dividend is declared for equity shareholders. 

2. Preference over equity shareholders in receiving their capital after the claims of the company’s creditors have been settled, at the time of liquidation. 

3. In case of dissolution of the company preference share capital is refunded prior to the refund of equity share capital.

A large industrial enterprise can raise capital from the following sources. 

1. Equity Shares: Equity shares are the most important source of raising long-term capital by a company. They represent the ownership of a company and therefore, the capital raised by the issue of these shares is called the owner’s funds. These shareholders do not get a fixed dividend. They get according to the earnings of the company. They receive what is left after all other claims on the company’s income and assets have been settled. They enjoy the reward and also bear the risk of ownership. They have voting rights. Using their voting rights, they get participation in management of the company. 

2. Preference Shares: Preference shareholders are called so because they enjoy some preferential rights over equity shares. They get dividend at a fixed rate and dividend is given on these shares before any dividend on equity shares. When the company winds up, preference shares are paid before equity shares. Preference shares also have a right to participate in excess profits left after payment being made to equity shares. They also have a right to participate in the premium at the time of redemption. In lieu of these preferential rights, their voting rights are taken i.e. they are not eligible for voting. Preference shares have some characteristics of equity shares as well as debentures. They are a safer investment with stable return from investor’s point of view and free from control from owner’s point of view. 

3. Debentures: Debenture is an acknowledgement by a company that the company has borrowed certain amount from the debenture holder which it promises to pay on a specific date. It is an important source for raising long-term debt capital. Debentures bear a fixed rate of interest. In recent times, issue of zero interest debentures has also become popular which do not carry any explicit rate of interest. But they are issued at discount and redeemed at a premium or at par. It is the return on the debenture. Public issue of debentures requires that issue of debentures should be rated by a credit rating agency like CRISIL (Credit rating and Information Services of India Limited). 

4. Loans from Financial Institutions: The government has established many financial institutions like LIC, IDBI, ICICI etc all over the country to provide finance to these organizations. These institutions are established by central and state government both. These institutions provide owned capital as well as borrowed capital for the long-term and short-term requirements. They provide financial and technical advice and consultancy to business firms. Obtaining loan from a financial institution increases the goodwill of a company. These sources are available even during the depression. Loans can be repaid in easy instalments. 

5. Loans from Commercial Banks: Borrowings from banks are an important source of finance to companies. Bank lending is still mainly short term, although medium-term lending is quite common these days. The rate of interest charged on medium-term bank lending to large companies will be a set margin, with the size of the margin depending on the credit standing and risk of the borrower. A loan may have a fixed rate of interest or a variable interest rate so that the rate of interest charged will be adjusted every three, six, nine or twelve months in line with recent movements in the Base Lending Rate. Short-term lending may be in the form of: 

(i) An overdraft, which a company should keep within a limit set by the bank. Interest is charged (at a variable rate) on the amount by which the company is overdrawn from day to day. 

(ii) A short-term loan, for up to three years. 

(iii) Medium-term loans are loans for a period of three to ten years.

6. Retained Earnings: For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. Profit re-invested as retained earnings is profit that could have been paid as a dividend. The management of many companies believes that retained earnings are funds which do not cost anything, although this is not true. However, it is true that the use of retained earnings as a source of funds does not lead to a payment of cash. In practice, the dividend policy of the company is determined by the directors. From their standpoint, retained earnings are an attractive source of finance because investment projects can be undertaken without involving either the shareholders or any outsiders. The use of retained earnings as opposed to new shares or debentures avoids issue costs. The use of retained earnings avoids the possibility of a change in control resulting from an issue of new shares. Another factor that may be of importance is the financial and taxation position of the company’s shareholders. For example, because of taxation considerations, they would rather make a capital profit (which will only be taxed when shares are sold) than receive current income, then finance through retained earnings would be preferred to other methods.

Financial institutions established by the central as well as State Governments all over the country to provide finance to business organizations are considered the most suitable source of financing when large funds for longer duration are required for expansion, reorganization and modernization of an enterprise. These institutions provide both owned capital and loan capital for long and medium term requirements and supplement the traditional financial agencies like commercial banks. In addition to providing financial assistance, these institutions also conduct market surveys and provide technical assistance and managerial services to people who run the enterprises. 

The various Special Financial Institutions in India are as under.

(i) Industrial Finance Corporation of India (IFCI) It was established in July, 1948 as a statutory corporation under the Industrial Finance Corporation Act, 1948. Its objectives include assistance towards balanced regional development and encouraging new entrepreneurs to enter into the priority sectors of the economy. IFCI has also contributed to the development of management education in the country.

(ii) State Financial Corporation’s (SFCs) State Financial Corporations are established by the State Governments under the State Financial Corporations Act, 1951 for providing medium and short term finance to industries which are outside the scope of the IFCI. Its scope is wider than IFCI as it covers not only public limited companies but also private limited companies, partnership firms and proprietary concerns.

(iii) Life Insurance Corporation of India (LIC) LIC was set up in 1956 under the LIC Act, 1956 after nationalizing 245 existing insurance companies. It mobilizes savings in the form of insurance premium and makes it available to industrial concerns in the form of direct loans and underwriting of and subscription to shares and debentures.

(iv) Industrial Credit and Investment Corporation of India (ICICI) It was established in 1955 as a public limited company under the Companies Act. ICICI assists the creation, expansion and modernization of industrial enterprises exclusively in the private sector. The corporation has also encouraged the participation of foreign capital in the country.

(v) Industrial Development Bank of India (IDBI) It was established in 1964 under the Industrial Development Bank of India Act, 1964 . with an objective to coordinate the activities of other financial institutions including commercial banks. The bank performs throe types of functions, namely, assistance to other financial institutions, direct assistance to industrial concerns, and promotion and coordination of financial-technical services.

(vi) State Industrial Development Corporations (SIDC) Many State Governments have set up State Industrial Development Corporations for the purpose of promoting industrial development in their respective states. The objectives of the SIDCs differ from one state to another.

(vii) Unit Trust of India (UTI) It was established by the Government of India in 1964 under the Unit Trust of India Act, 1963. The basic objective of UTI is to mobilize the savings into productive ventures. It sanctions direct assistance to industrial concerns, invests in their shares and debentures, and participates with other financial institutions.

(viii) Industrial Investment Bank of India Limited Industrial Investment Bank of India assists sick units in the reorganization of their share capital, improvement in management system, and provision of finance at liberal terms.

(b) Sole Trader

(d) All of the above

The process of translating an idea or invention into goods or services that create value or for which customers will pay.

1. Sole trade – That form of business in which a single person is the owner and controller of the business. 

2. Hindu undivided family – It refers to a form of organization wherein the business is owned and carried on by the members of the Hindu undivided family (HUF). 

3. Partnership – Type of business organization in which two or more people join hands to form a business and they all are risk-takers and profit takers. 

4. Joint Capital Company – It was included under the Indian Company Act 1956. 

5. Co-operative Institutions – It came in existence under the Cooperative Institute Act of 1912.

Public Sector: 

The public sector was considered as an engine for self – reliant economic growth with distributive justice.

(c) Hindu Undivided Family

Hindu Undivided Family and Family Business/Joint Hindu Family Business: Joint Hindu family business is a specific form of business organisation found in India only. It is one of the oldest forms of business organisation. It refers to a form of organisation, wherein the business is owned and carried on by the members of the Hindu Undivided Family (HUF). The basis of membership is taking birth in HUF and three successive generations can be members in the business. It is governed by Hindu Law.

The business is controlled by the head of the family, who is the eldest member and is called KARTA. All members have equal ownership right over the ancestral property and they are known as ‘COPARCENERS’.

Four Features of HUF: 1. Formation – To form this organisation, at least two members in a family and ancestral property inherited by them is required. The business does not require any agreement, as membership is guaranteed by birth. 2. Liability – The liability of all members except Karta is limited to their share of the co-parcenary property of the business. The Karta, however, has unlimited liability. 3. Control – Karta has full control of the business. He is the one who takes all the decisions. 4. Continuity – In case of death of Karta, the next eldest member becomes Karta of the business. Therefore, the business continues in any case. The closure can be done by any member of the family. 

Four Advantages of HUF: 

1. Effective Control – 

The Karta has an absolute decision – making power, which leads to prompt and flexible decision – making, resulting in effective control. 

2. Continued Business Existence – 

The business continues to run and death, lunacy, illness of Karta does not threaten the existence of the business. Unless all the members of the family decide to wind it up, it continues. 

3. Limited liability – 

The liability of all the coparceners except the Karta is limited to their share in the business and risk is well – defined and precise. 

4. Increased loyalty and cooperation – 

Since the business is run by the family members having an equal share, the business is run smoothly with the cooperation of all.

(1) Limited resources – The capital of the business is limited to the ancestral property. This limits the scope for expansion of the business. 

(2) Unlimited Liability of Karta – The Karta is bound not only with the responsibility of decision making and management of the business, but also suffers from the risk of unlimited liability. His personal property can be used to meet business obligations 

(3) The dominance of Karta – The Karta individually manages the business, which may, at times, not be acceptable to other members, resulting in conflicts among them. This may lead to a breakdown of the family unit. 

(4) Limited managerial skills – Since Karta may not be able to manage every aspect of business with equal efficiency, this may result in poor profits or even loss for the organisation.

On 1 April 2009.

A child enters into business directly after taking birth in HUF.

Co-operative societies have the following merits: 

1. Equality in Voting Status – 

Every member, despite his/her capital investment. has equal voting rights. 

2. Limited Liability – 

Every member has a limited amount of liability on the basis of his/her capital investment. The loan cannot be repaid from his/her own property. 

3. Stable Existence – 

Due to its stable existence, there is no effect of death, retirement or insolvency of any partner. 

4. The economy in operation – 

The members of the committee provide common and unpaid services, in fact, most of the members are in the committee only. This prevents bad loans too. 

Limitations of Co-operative movement: 

1. Limited Resources – 

Every member of the Co-operative movement has a limited number of, and thus has a limited amount of resources. 

2. Inefficiency in management – 

Cooperative committee works on lesser salary and therefore they do not get good managers and the ones who provide their time to them are not professionals. 

3. Lack of Secrecy – 

According to the co-operative Movement Act, Section 7 every subject is discussed in open and the committee has the right to make its ideas public. Therefore the secrecy is breached. 

4. Government Control – 

Co-operative societies are provided with facilities by the government. And in return, they have to follow all the government rules. It is thus controlled by state Co-operative society. This results in a negative effect on their activities. 

5. The difference of opinion – 

The difference of opinion in the members sometimes makes it impossible for them to come to a conclusion. Some members pay attention only to their personal Interest.

(c)  In 1932

(b)  West Bengal

On 14 October 1953.

(c)  Unlimited

(b)  Provision 4

(d) All of the above

• Transport and use of innovative means. 
• Advertisement.

A minimum number of members, in a partnership firm, is 2.

(d) All of the above

The business continues to run in case of death of Karta or any other member of the family. The next eldest member takes up the position of Karta, making the business stable. The business can, however, be terminated with the mutual consent of the members on their declaration that they are no longer a part of Joint Hindu family business.

Following are four features of Joint Hindu family business: 

• The HUF business is governed by the Hindu Succession Act of 1956. 
• The business is controlled by the eldest member of the family, known as Karta. 
• The liability of Karta is unlimited.
• There is no maximum limit to the number of members.

Hindu Succession Act, 1956.

The inclusion of an individual in the business occurs due to birth in a Hindu Individual family. Therefore, a minor is also a part of such business since his/her birth. The partnership is a contract, whereas a minor cannot enter into a contract legally. Therefore, he cannot be a partner in a partnership firm. But, he can have access to a part of the profit earned with the consent of all the partners. In this case, the minor’s right would be restricted to their capital investment only.

To provide long – term loans to the farmers.