10 Mark Questions and Answers Explain five merits and five demerits of partnership firm A partnership firm is an organization which consists of at least two or more owners of business. As a business it has the following advantages and disadvantages: 1. Ease of formation: Partnership is simple to form, inexpensive to establish and easy to operate. No legal formalities are involved and no formal documents are to be prepared. Only an agreement is required. Even the registration of the firm is not compulsory. Si milarly, a partnership can be dissolved easily at any time. 2. Larger financial resources: It is possible to collect a large amount of capital due to a number of partners. New partners can be admitted to raise further capital whenever necessary. Creditworthiness is also high because every partner is jointly and severally liable for all the debts of the firm. 3. Combined abilities and judgment: The skill and experience of all the partners are pooled together. Combined judgment of several persons helps reduce errors of judgment. The partners may be assigned duties according to their talent. Therefore, benefits of specialization are available. Partners meet frequently and can take prompt decisions. 4. Direct motivation: Ownership and management of business are vested i n the same persons. There is direct relationship between effort and reward. Every partner is moti-vated to work hard and to ensure the success of the firm. 5. Close supervision: Every partner is expected to take personal interest in the affairs of the business. Different partners can maintain personal contacts with employees and customers. Fears of unlimited liability make the partners cautious and avoid reckless dealings. Management of partnership is cheaper when expert managers are not employed. 6. Flexibility of operations: Partnership business is free from legal restrictions and gov-ernment control. Partners can make changes in the size of business, capital and mana-gerial structure without any approval. The activities of partnership business can be adapted easily to changing conditions in the market. Demerits of Partnership 1. Unlimited liability: Every partner is jointly and severally liable for the entire debts of the firm. He has to suffer not only for his own mistakes but also for the lapses and dishonesty of other partners. This may curb entrepreneurial spirit as partners may hesi-tate to venture into new lines of business for fear of losses. Private property of partners is not safe against the risks of business. 2. Limited resources: The amount of financial resources in partnership is limited to the contributions made by the partners. The number of partners cannot exceed 10 in bank-ing business and 20 in other types of businesses. 3. Risk of implied agency: The acts of a partner are binding on the firm as well as on other partners. An incompetent or dishonest partner may bring disaster for all due to his acts of omission or commission. That is why the saying is that choosing a business partner is as important as choosing a life partner. 4. Lack of harmony: The success of partnership depends upon mutual understanding and cooperation among the partners. Continued disagreement and bickering among the partners may paralyze the business or may result in its untimely death. 5. Lack of continuity: A partnership comes to an end with the retirement, incapacity, insolvency and death of a partner. The firm may be carried on by the remaining part-ners by admitting new partner. But it is not always possible to replace a partner enjoy-ing trust and confidence of all. Therefore, the life of a partnership firm is uncertain, though it has a longer life than soleproprietorship. 6. Non-transferability of interest No partner can transfer his share in the firm to an outsider without the unanimous consent of all the partners. This makes investment in a partnership firm non-liquid and fixed. An individual's capital is blocked. Types of Partners 1. Active Partner: Partner who takes an active part in the management of the business is called active partner. He may also be called 'actual' or 'ostensible' partner. He is an agent of the other partners in the ordinary course of business of the firm and considered a full-fledged partner in the real sense of the term. 2. Sleeping or Dormant Partner: A sleeping or dormant partner is one who does not take any active part in the management of the business. He contributes capital and shares the profits which is usually less than that of the active partners. He is liable for all the de of the firm but his relationship with the firm is not disclosed to the general publi c. 3. Nominal Partner: A partner who simply lends his name to the firm is called nominal partner. He neither contributes any capital nor shares in the profits or take part the management of the business. But he is liable to third parties like other partners. A nominal partner must be distinguished from the sleeping partner. While the nominal partner is known to the outsiders and does not share in the profits, the sleeping partner shares in the profit as his relationship is kept secret. 4. Partner in Profits: A partner who shares in the profits only without being liable of the losses is known as partner in profits. He does not take part in the management of the business but he is liable to third parties for all the debts of the firm. 5. Minor Partner: Partnership arises from contract and a minor is not competent to enter into contract. Therefore, strictly speaking, a minor cannot be a full -fledged partner. But with the consent of all the partners he can be admitted into partnership for be nefits only. He is not personally liable to third parties for the debts of the firm, on attaining majority, if he continues as a partner, his liability will become unlimited with effect from the date of hi original admission into the firm. 6. Partner by estoppels: If a person falsely represents himself as a partner of any firm or behaves in a way that somebody can have an impression that such person is a partner and on the basis of this impression transacts with that firm then that person is held liable to the third party. The person who falsely represents himself as a partner is known as partner by estoppels Take an example. Suppose in Ram Hari & Co firm there are two partners. One is Ram, the other is Hari. If Giri- an outsider represents himself as a partner of Ram Hari & Co and transacts with Madhu then Giri will be held liable for any loss arising to Madhu. Here Giri is partner by estoppel. 7. Partner by holding out - In the above example, if either Ram or Hari declares that Gopal is a partner of their firm and knowing this declaration Gopal remains silent then Gopal will be liable to those parties who suffer losses by transacting with Ram Hari & Co with a belief that Gopal is a partner of that firm. Here Gopal is liable to those parties who suffer losses and Gopal will be known as partner by holding out. 8. Sub Partner: A person who shares the profits of a particular partner of the firm is called a sub partner. There will be an agreement between the partner and sub partner which is not binding on the firm. The sub partner is not accountable to the firm as it is a private arrangement between a partner and sub partner. Partnership Deed and Its Contents A pernterhsip is a voluntary association of pepple who come together to achieve a common objective. In order to enter a partnership a clear agreement with terms and conditions relating to the business and the partners is essential to avoid any misunderstanding. This agreement can be written or oral. Even though it isn’t mandatory to have a written agreement as it constitutes as evidence in case of disputes. These written terms and conditions or guidelines that govern the partnership are called a partnership deed. The deed contains the following: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Name of the firm Names, addresses, occupation of partners Amount of capital contributed by partners Ratio of sharing profits and losses Nature of the business to be carried on Duration of the agreed partnership Amount of drawings that can be made by each partner Rate of interest on capital payable to partners Salary, Commission or Bonus payable to partners Division of work among partners Accounts maintenance Rights, duties and obligations of partners Introduction of additional capital by partners Arbitration clause for settling disputes Types of Cooperative Societies The main types of cooperative societies are given below: 1. Consumers cooperative societies: Consumers' cooperatives are formed by the consum-ers to obtain their daily requirements at reasonable prices. Such a society buys goods directly from manufacturers and wholesalers to eliminate the profits of middlemen. These societies protect lower and middle class people from the exploitation of profit hungry businessmen. The profits of the society are distributed among members in the ratio of purchases made by them during th e year. 2. Producers cooperatives: Producers or industrial cooperatives are voluntary associations of small producers and artisans who join hands to face competition and increase production. These societies are of two types. (a) Industrial service cooperatives: In this type, the producers work independently and sell their industrial output to the cooperative society. The society undertakes to supply raw materials, tools and machinery to the members. The output of members is marketed by the society. (b) Manufacturing cooperatives: In this type, producer members are treated as employees of the society and are paid wages for their work. The society provides raw material and equipment to every member. 3. Marketing Cooperatives: These are voluntary associations of independent producers who want to sell their output at remunerative prices. The output of different members is pooled and sold through a centralised agency to eliminate middlemen. The sale proceeds are distributed among the members in the ratio of their outputs. Marketing societies are set up generally by farmers, artisans and small producers who find it difficult to face competition in the market and to perform necessary marketing functions individually. The National Agricul-tural Cooperative Marketing Federation ( NAFED) is an example of marketing cooperative in India. 4. Cooperative Farming Societies: These are voluntary associations of small farmers who join together to obtain the economies of large scale farming. In India farmers are economically weak and their land-holdings are small. In their individual capacity, they are unable to use modern tools, seeds, fertilizers, etc. They pool their lands and do farming collectively with the help of modern technology to maximum agricultural output. 5. Housing Cooperatives: These societies are formed by low and middle income group people in urban areas to have a house of their own. Housing cooperatives are of different types. Some societies acquire land and give the plots to the members for constructing their own houses. They also arrange loans from financial institutions and Government agencies. Other societies themselves construct houses and allot them to the members who make payment in instalments. 6. Credit Cooperatives: These societies are formed by poor people to provide f inancial help and to develop the habit of savings among members. They help to protect members from exploitation of money lenders who charge exorbitant interest from borrowers. Credit cooperatives are found in both urban and rural areas. In rural areas, agricultural credit societies provide loans to members mainly for agricultural activities. In urban areas, non-agricultural societies or urban banks offer credit facilities to the members for household needs. Advantages and Disadvantages of Sole Proprietorship The sole proprietorship form of business is the most simple and common in our country. It has the following advantages: a) Easy to Form and Wind up: A sole proprietorship form of business is very easy to form. With a very small amount of capital you can start the business. There is no need to comply with any legal formalities except for those businesses which required licence from local authorities or health department of government. Just like formation it is also very easy to wind up the business. It is your sole discretion to form or wind up the business at any time. b) Direct Motivation: The profits earned belong to the sole proprietor alone and he bears the risk of losses as well. Thus, there is a direct link between effort and reward. If he works hard, t hen there is a possibility of getting more profit and of course, he will be the sole beneficiary of this profit. Nobody will share this reward with him. This provides strong motivation for the sole proprietor to work hard. c) Quick Decision and Prompt Action: In a sole proprietorship business the sole proprietor alone is responsible for all decisions. Of course, he can consult others. But he is free to take any decision on his own. Since no one else is involved in decision making it becomes quick and prompt action can be taken on the basis of this decision. d) Better Control: In sole proprietorship business the proprietor has full control over each and every activity of the business. He is the planner as well as the organiser, who co -ordinates every activity in an efficient manner. Since the proprietor has all authority with him, it is possible to exercise better control over business. e) Maintenance of Business Secrets: Business secrecy is an important factor for every business. It refers to keeping the future plans, technical competencies, business strategies, etc,. secret from outsiders or competitors. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands. The re is no need to disclose any information to others. f) Close Personal Relation: The sole proprietor is always in a position to maintain good personal contact with the customers and employees. Direct contact enables the sole proprietor to know the individual likes, dislikes and tastes of the customers. Also, it helps in maintaining close and friendly relations with the employees and thus, business runs smoothly. g) Flexibility in Operation: The sole proprietor is free to change the nature and scope of business operations as and when required as per his decision. A sole proprietor can expand or curtail his business according to the requirement. Suppose, as the owner of a bookshop, you have been selling books for school students. If you want to expand your business you can decide to sell stationery items like pen, pencil, register, etc. If you are running an STD booth, you can expand your business by installing a fax machine in your booth. h) Encourages Self-employment: Sole proprietorship form of business organisation leads to creation of employment opportunities for people. Not only is the owner self-employed, sometimes he also creates job opportunities for others. You must have observed in different shops that there are a number of employees assisting the owner in sel ling goods to the customers. Thus, it helps in reducing poverty and unemployment in the country. Disadvantages of Sole Trading Concern a) Limited Capital: In sole proprietorship business, it is the owner who arranges the required capital of the business. It is often difficult for a single individual to raise a huge amount of capital. The owner’s own funds as well as borrowed funds sometimes become insufficient to meet the requirement of the business for its growth and expansion. b) Unlimited Liability: In case the sole proprietor fails to pay the business obligations and debts arising out of business activities, his personal properties may have to be used to meet those liabilities. This restricts the sole proprietor from taking risks and he thinks cautiously while deciding to start or expand the business activities. c) Lack of Continuity: The existence of sole proprietorship business is linked to the life of the proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of business operation is therefore uncertain. d) Limited Size: In sole proprietorship form of business organisation there is a limit beyond which it becomes difficult to expand its activities. It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit. e) Lack of Managerial Expertise: A sole proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but may be poor in marketing. Again, because of limited financial resources it is also not possible to employ a professional manager. Thus, the business lacks benefits of professional management. Advantages and Disadvantages of Cooperative Societies Advantages of Cooperative Societies A Co-operative form of business organisation has the following advantages: a) Easy Formation: Formation of a co-operative society is very easy compared to a joint stock company. Any ten adults can voluntarily form an association and get it registered with the Registrar of Co-operative Societies. b) Open Membership: Persons having common interest can form a co-operative society. Any competent person can become a member at any time he/she likes and can leave the society at will. c) Democratic Control: A co-operative society is controlled in a democratic manner. The members cast their vote to elect their representatives to form a committee that looks after the day -to-day administration. This committee is accountable to all the members of the society. d) Limited Liability: The liability of members of a co-operative society is limited to the extent of capital contributed by them. Unlike sole proprietors and partners the personal properties of members of the co-operative societies are free from any kind of risk because of business liabilities. e) Elimination of Middlemen’s Profit: Through co-operatives the members or consumers control their own supplies and thus, middlemen’s profit is eliminated. f) State Assistance: Both Central and State governments provide all kinds of help to the societies. Such help may be provided in the form of capital contribution, loans at low rates of interest, exemption in tax, subsidies in repayment of loans, etc. g) Stable Life: A co-operative society has a fairly stable life and it continues to exist for a long period of time. Its existence is not affected by the death, insolvency, lunacy or resignation of any of its members. Disadvantages of Cooperative Societies a) Limited Capital: The amount of capital that a cooperative society can raise from its member is very limited because the membership is generally confined to a particular section of the society. Again due to low rate of return the members do not invest more capital. Government’s assistance is often inadequate for most of the co-operative societies. b) Problems in Management: Generally it is seen that co-operative societies do not function efficiently due to lack of managerial talent. The members or their elected representatives are not experienced enough to manage the society. Again, because of limited capital they are not able to get the benefits of professional management. c) Lack of Motivation: Every co-operative society is formed to render service to its members rather than to earn profit. This does not provide enough motivation to the members to put in their best effort and manage the society efficiently. d) Lack of Co-operation: The co-operative societies are formed with the idea of mutual cooperation. But it is often seen that there is a lot of friction between the members because of personality differences, ego clash, etc. The selfish attitude of members may sometimes bring an end to the society. e) Dependence on Government: The inadequacy of capital and various other limitations make cooperative societies dependent on the government for support and patronage in terms of grants, loans subsidies, etc. Due to this, the government sometimes directly interferes in the management of the society and also audit their annual accounts. Steps in Company Formation The steps in promotion are: 1. Discovery of a Business Idea: The process of business promotion begins with conception of an idea of business opportunity. The idea may come from non-availability of any product to satisfy the existing need of people or inability of an existing product to satisfy the changing need of t he people or a new invention that can create a new product. 2. Investigation and Verification: Once the idea has been conceived, a thorough investigation is made to establish the soundness of the proposition, taking into consideration its technical feasibility and commercial viability. 3. Assembling: Once the promoter is convinced of the feasibility and profitability of the proposition, he takes steps in assembling or making arrangements for all the necessary requirements such as land, building, machinery, tools, capital, etc. 4. Financing the Proposition: At this stage, financial plans are prepared with respect to the amount of capital required, the nature of capital structure i.e., the proportion of capital to be raised from owners fund and that from borrowing from banks and others, and how and when to raise the share capital from the general public. Stage 2 – Incorporation A company cannot be formed or permitted to run its business without registration. Infact, a company comes into existence only when it is registered with the Registrar of Companies. For this purpose the promoter has to take the following steps: 1. Approval of Name: It has to be ensured that the name selected for the company does not match with the name of any other company. For this, the promoter has to fill in a “Name Availability Form” and submit it to the Registrar of Companies along with necessary fees. The name must include the words(s) ‘Limited’ or ‘Private limited’ at the end. Once it is approved, the promoter can proceed with other formalities for the incorporation of the Company. 2. Filing of Documents: After getting the name approved the promoter makes an application to the Registrar of Companies of the State in which the Registered Office of the company is to be situated for registration of the company. The application for registration must be accompanied by the following documents. a) Memorandum of Association (MOA): It defines the objectives of the company and states about the range of activities or operation. It must be duly stamped, signed and witnessed. The clauses in the memorandum are: i. Name Clause: It contains the name by which the company will be established. As you know, the approval of the proposed name is taken in advance from the Registrar of the companies. ii. Situation Clause: It contains the name of the state in which the registered office of the company is or will be situated. iii. Objects Clause: It contains detailed description of the objects and rights of the company, for which it is being established. A company can undertake only those activities which are mentioned in the objects clause of its memorandum. iv. Liability Clause: It contains financial limit up to which the shareholders are liable to pay off to the outsiders on the event of the company be ing dissolved or closed down. v. Capital Clause: It contains the proposed authorised capital of the company. It gives the classification of the authorised capital into various types of shares, (like equity and preference shares) with their numbers and nominal value. vi. Subscription Clause: It contains the name and address of at least seven members in case of public limited company and two members in case of a private limited company, b) Articles of Association (AOA). It contains the rules and regulations regarding the internal management of the company. It must be properly stamped, duly signed by the signatories to the Memorandum of Association and witnessed. i. ii. iii. iv. v. Preliminary contracts Use and custody of common seal Allotment, calls and lien on shares Transfer and transmission of shares Forfeiture and re-issue of shares Stage 3 – Raising of Capital After the company is incorporated, the next stage is to raise the necessary capital. In case of a private limited company, funds are raised from the members or through arrangement from banks and other sources. In case of a public limited company the share capital has to be raised from the public. This involves the following: a) Preparation of a draft prospectus and get it inspected (vetted) by SEBI to ensure that all information given in the prospectus fully complies with the guidelines laid down by SEBI in this regard. b) Filing a copy of the prospectus with the Registrar of Companies. c) Issue of prospectus to the public by notifying in a newspaper and inviting the public to apply for shares as prescribed in the prospectus. d) If the minimum subscription has been received, shares should be allotted to the applicants as per SEBI guidelines and file a return of allotment with the Registrar of Companies. e) Listing of shares in a recognised stock exchange so that the shares can be traded there. Preferably, consent of a stock exchange for listing should be obtained before issue of the prospectus to the public. Stage 4 – Business Commencement Stage In case of a private limited company, it can immediately start its business as soon as it is registered. However, in case of public limited company a certificate, known as ‘certificate of commencement of businesses, must be obtained from the Registrar of Companies before starting its operation. Promotion and Incorporation Stage The steps in promotion are: 1. Discovery of a Business Idea: The process of business promotion begins with conception of an idea of business opportunity. The idea may come from non-availability of any product to satisfy the existing need of people or inability of an existing product to satisfy the changing need of the people or a new invention that can create a new product. 2. Investigation and Verification: Once the idea has been conceived, a thorough investigation is made to establish the soundness of the proposition, taking into consideration its technical feasibility and commercial viability. All these investigations on technical feasibility, commercial viability and profitability are presented in a report called “project report” or “feasibility report”. This feasibility report is the primary or basic document that helps in procuring licenses and arranges the necessary finance from financial institutions and other investors. 3. Assembling: Once the promoter is convinced of the feasibility and profitability of the proposition, he takes steps in assembling or making arrangements for all the necessary requirements such as land, building, machinery, tools, capital, etc. Decision is also to be made regarding size, location and layout etc. for the plant, and make contracts with suppliers for raw materials, enter into agreement with the dealers to purchase equipments, make agreement with bankers to finance and take initial steps for the setting up of a Company. 4. Financing the Proposition: At this stage, financial plans are prepared with respect to the amount of capital required, the nature of capital structure i.e., the proportion of capital to be raised from owners fund and that from borrowing from banks and others, and how and when to raise the share capital from the general public. Agreements are made with merchant bankers, underwriters and stock brokers who are to assist the capital issue and so on. Stage 2 – Incorporation A company cannot be formed or permitted to run its business without registration. Infact, a comp any comes into existence only when it is registered with the Registrar of Companies. For this purpose the promoter has to take the following steps: 3. Approval of Name: It has to be ensured that the name selected for the company does not match with the name of any other company. For this, the promoter has to fill in a “Name Availability Form” and submit it to the Registrar of Companies along with necessary fees. The name must include the words(s) ‘Limited’ or ‘Private limited’ at the end. Once it is approved, the promoter can proceed with other formalities for the incorporation of the Company. 4. Filing of Documents: After getting the name approved the promoter makes an application to the Registrar of Companies of the State in which the Registered Office of the company is to be situated for registration of the company. The application for registration must be accompanied by the following documents. c) Memorandum of Association (MOA): It defines the objectives of the company and states about the range of activities or operation. It must be duly stamped, signed and witnessed. The clauses in the memorandum are: vii. Name Clause: It contains the name by which the company will be established. As you know, the approval of the proposed name is taken in advance from the Registrar of the companies. viii. Situation Clause: It contains the name of the state in which the registered office of the company is or will be situated. The exact address of the company's registered office may be communicated within 30 days of its incorporation to the Registrar of Companies. ix. Objects Clause: It contains detailed description of the objects and rights of the company, for which it is being established. A company can undertake only those activities which are mentioned in the objects clause of its memorandum. x. Liability Clause: It contains financial limit up to which the shareholders are liable to pay off to the outsiders on the event of the company being dissolved or closed down. xi. Capital Clause: It contains the proposed authorised capital of the company. It gives the classification of the authorised capital into various types of shares, (like equity and preference shares) with their numbers and nominal value. xii. Subscription Clause: It contains the name and address of at least seven members in case of public limited company and two members in case of a private limited company, who agree to associate or join hands to get the undertaking registered as a company. d) Articles of Association (AOA). It contains the rules and regulations regarding the internal management of the company. It must be properly stamped, duly signed by the signatories to the Memorandum of Association and witnessed. i. ii. iii. iv. v. Preliminary contracts Use and custody of common seal Allotment, calls and lien on shares Transfer and transmission of shares Forfeiture and re-issue of shares Capital Subscription and Its Steps in Detail After going through the incorporation formalities, the next stage will be to raise funds. A private company and a public company without share capital can start business immediately. A public company cannot commence business unless minimum subscription as stated in the prospectus has been subscribed. The amount stated for allotment should be duly received in cash and allotment has been made properly. Following steps are required to raise funds from the public: 1. SEBI approval: SEBI (Securities Exchange Board of India) is a regulatory body to control capital markets in India. A public company is required to submit relevant information with the SEBI before issuing securities in the capital market. The companies are required to give information according to ‘guidelines for disclosure and investor protection 2000’. So, prior permission of SEBI is required before raising funds from the public. 2. Filing of prospectus: A prospectus or a ‘statement in lieu of prospectus’ has to be filed with the registrar of companies. A prospectus is a document inviting general public to subscribe to the shares or debentures of the company. The investor’s make -up their mind about investments on the basis of information contained in the prospectus. 3. Appointment of bankers, brokers, underwriters: The Bankers are appointed to receive application money from the public. The application money goes to the bank account of the company. The brokers encourage public to subscribe to the shares offered by the company. If the company is not sure of selling the whole lot of shares, it may appoint underwriters. The brokers purchase unsold shares themselves and charge commission for this service. 4. Minimum subscription: In order to prevent companies to start business with inadequate funds, a minimum subscription is fixed. A company must sell a minimum number of shares before starting the next process. This minimum number is called ‘minimum subscription’. As per the rules of SEBI, a company must receive 90 per cent of the issued amount within a period of 120 days from the issue of prospectus. In case the company does not receive the minimum subscription, then it must return the application money within the next 10 days. 5. Application to Stock Exchange: A company must get itself listed in a stock exchange before selling the securities to general public. The company must make application to at-least one stock exchange for a permission to deal in its stocks. The stock exchange authorities verify the financial soundness and other aspects of the company. 6. Allotment of shares: After getting the shares listed, the company makes allotment of shares. A list is prepared giving details about names and addresses of all the shareholders, and the number of shares allotted etc. The company has to submit a return of allotment with the registrar giving details of shares allotted to each shareholder. Features of a Joint Stock Company A Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership. 1. An artificial person: The Company enjoys all the rights as a citizen of a country would enjoy. It 'can own properties, enter into contracts etc. 2. Legal formation: The formation of a Joint Stock Company is governed by the rules and regulations laid down in the Companies Act, 1956. 3. Voluntary organization: It is formed by members voluntarily joining the organization and contributing money or money's worth for the business. 4. Separate legal entity: The Company has a separate legal existence. The owners are different from the people who manage the business. The management is however headed by owners who are elected directors. The company is separate from the persons who own it. The company cannot be held responsible for any misdeeds of the members. 5. Perpetual succession: Unlike Sole proprietorship and Partnership, the Company has continuous existence. The continuity of the business is not affected by the death, insolvency or insanity of any member. "Men may come and men may go, but a company will go until it is wound up." 6. Limit to liability: The liability of the members of a company is restricted to the extent of the unpaid value of the shares held by him. The personal asset of a shareholder cannot be used to pay the company's liabilities. 7. Large capital: A Joint Stock Company can generate huge amount of money towards capital, because the number of persons contributing towards capital are more in number when compared to Sole Proprietorship or Partnership organization. 8. Large scale operation: Since huge amounts are collected as capital, the operation of the business will generally be on a large scale basis. 9. Transferability of shares: The shares of a Joint Stock Company are easily transferable from one person to another, since it is a Public Limited Company. The shares of a Private Limited Company or Government Company are not transferable. 10. Common seal: The company, being an artificial being, cannot affix its signature on the documents on its own. The common seal is used in place of a signature. Difference Between Private and Public Companies Difference Minimum number of members Public Company The minimum number of person required to form a public company is seven, There is no limit on the maximum number of member of a public company, Private Company Whereas in a private company their number is only two. Commencement of Business A private company can commence its business as soon as it is incorporated. But a public company shall not commence its business immediately unless it has been granted the certificate of commencement of business. Invitation to public A public company by issuing a prospectus may invite public to subscribe to its shares Whereas a private company cannot extend such invitation to the public. Transferability of shares There is no restriction on the transfer of share In the case of public company Whereas a private company by its articles must restrict the right of members to transfer the share. Number of Directors A public company must have at least three directors Whereas a private company may have two directors. Statutory Meeting public company must hold a statutory meeting and file with the register a statutory report A director of a public company shall file with the register a consent to act as such. He shall sign the memorandum and enter into a contact for qualification shares. He cannot vote or take part in the discussion on a contract in which he is interested. Two-thirds of the directors of a public company must retire by rotation. But in a private company there are no such obligations. Maximum number of members Restrictions on the appointment of Directors But a private company cannot have more than fifty members excluding past and present employees. These restrictions do not apply to a private company. Managerial Remuneration Further Issue of Capital Total managerial remuneration in the case of public company cannot exceed 11% of net profits, but in the case of inadequacy of profit a minimum of Rs. 50, 000 can be paid. A public company proposing further issue of shares must offer them to the existing members. These restrictions do not apply to a private company. A private company is free to allot new issue to outsiders. Insurance – Principles of Insurance Insurance is a contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured. 1. Principle of Utmost Good Faith: The Principle of Utmost Good Faith, is a very basic and first primary principle of insurance. According to this principle, the insurance contract must be signed by both parties (i.e insurer and insured) in an absolute good faith or belief or trust. The person getting insured must willingly disclose and surrender to the insurer his complete true information regarding the subject matter of insurance. The insurer's liability gets void (i.e legally revoked or cancelled) if any facts, about the subject matter of insurance are either omitted, hidden, falsified or presented in a wrong manner by the insured. 2. Principle of Insurable Interest: The principle of insurable interest states that the person getting insured must have insurable interest in the object of insurance. A person has an insurable interest when the physical existence of the insured object gives him some gain but its non existence will give him a loss. In simple words, the insured person must suffer some financial loss by the damage of the insured object. 3. Principle of Indemnity: Indemnity means security, protection and compensation given against damage, loss or injury. According to the principle of indemnity, an insurance contract is signed only for getting protection against unpredicted financial losses arising due to future uncertainties. Insurance contract is not made for making profit else its sole purpose is to give compensation in case of any damage or loss. However, in case of life insurance, the principle of indemnity does not apply because the value of human life cannot be measured in terms of money. 4. Principle of Contribution: Principle of Contribution is a corollary of the principle of indemnity. It applies to all contracts of indemnity, if the insured has taken out more than one policy on the same subject matter. According to this principle, the insured can claim the compensation only to the extent of actual loss either from all insurers or from any one insure r. If one insurer pays full compensation then that insurer can claim proportionate claim from the other insurers. 5. Principle of Subrogation: Subrogation means substituting one creditor for another. Principle of Subrogation is an extension and another corollary of the principle of indemnity. It also applies to all contracts of indemnity. According to the principle of subrogation, when the insured is compensated for the losses due to damage to his insured property, then the ownership right of such property shifts to the insurer. 6. Principle of Loss Minimization: According to the Principle of Loss Minimization, insured must always try his level best to minimize the loss of his insured property, in case of uncertain events like a fire outbreak or blast, etc. The insured must take all possible measures and necessary steps to control and reduce the losses in such a scenario. The insured must not neglect and behave irresponsibly during such events just because the property is insured. Hence it is a responsibility of the insured to protect his insured property and avoid further losses. 7. Principle of Causa Proxima (Nearest Cause): Principle of Causa Proxima (a Latin phrase), or in simple English words, the Principle of Proximate (i.e Nearest) Cause, means when a loss is caused by more than one causes, the proximate or the nearest or the closest cause should be taken into consideration to decide the liability of the insurer. The principle states that to find out whether the insurer is liable for the loss or not, the proximate (closest) and not the remote (farthest) must be looked into. Telecom Services Available In telecommunication, a telecommunications service is a service provided by a telecommu nications provider, or a specified set of user-information transfer capabilities provided to a group of users by a telecommunications system. The telecommunications service user is responsible for the information content of the message. The telecommunications service provider has the responsibility for the acceptance, transmission, and delivery of the message. 1. Cellular Mobile Services: India is currently the 2nd largest Mobile Market in the world after China, adding nearly 10-12 million subscribers on average monthly. At the end of 2014, Indian Mobile subscriber base was pegged at 800.66 million, as per recent TRAI number. Most of the Metro’s and big cities have nearly come to a saturation point, however, the current phase of growth in Indian Mobile Market is in Rural areas that is now accounting for majority of growth in mobile space. 2. Radio Paging Services: A pager is a wireless telecommunications device that receives and displays numeric or text messages, or receives and announces voice messages. One -way pagers can only receive messages, while response pagers and two-way pagers can also acknowledge, reply to, and originate messages using an internal transmitter. 3. Fixed Line Services: A landline telephone (also known as land line, land-line, main line, homephone, landline, fixed-line, and wireline) refers to a phone which uses a solid medium telephone line such as a metal wire or fiber optic cable for transmission as distinguished from a mobile cellular line which uses radio waves for transmission. 4. Cable Services: Cable television is a system of distributing television programs to subscribers via radio frequency (RF) signals transmitted through coaxial cables or light pulses through fiberoptic cables. This contrasts with traditional broadcast television (terrestrial television) in which the television signal is transmitted over the air by radio waves and received by a television antenna attached to the television. FM radio programming, high-speed Internet, telephone service, and similar non-television services may also be provided through these cables. 5. VSAT: A very small aperture terminal (VSAT), is a two-way satellite ground station or a stabilized maritime VSAT antenna with a dish antenna that is smaller than 3 meters. It is a type of two-way satellite that transmits both narrow and broadband data to satellites in orbit. The data is then redirected to other remote terminals or hubs around the planet. VSATs are mainly used for wireless transmission of real-time data. 6. DTH: Direct broadcast satellite (DBS) is a term used to refer to satellite television broadcasts intended for home reception. A designation broader than DBS would be direct-to-home signals, or DTH. This has initially distinguished the transmissions directly intended for home viewers from cable television distribution services that sometimes carried on the same satellite. The term DTH predates DBS and is often used in reference to services carried by lower power satellites which required larger dishes (1.7m diameter or greater) for reception. Postal Services Indian postal services are mainly concerned with collection, sorting, and distribution of letters, parcels, packets, etc. Besides, a number of other services are also provided to the general public as well as business enterprises. 1) Speed Post: Sometimes because of some urgency or to avoid delay we want that our mail should reach the addressee at the earliest. Here post office provides time-bound as well as guaranteed mail delivery through its Speed Post Service. Under this service, letters, documents and parcels are delivered faster i.e., within a fixed time frame. This facility is available at specific post offices. The post office charges relatively more postage for speed post than that of ordinary mail and it varies according to distance. 2) Registered Post: Sometimes we want to ensure that our mail is definitely delivered to the addressee otherwise it should come back to us. In such situations, the post office offers registered post facility through which we can send our letters and parcels. These mai ls are handed over to the post office after affixing additional postage as registration charge. On receiving the mail the post office immediately issues a receipt to the sender, which also serves as a proof that the mail has been posted. 3) Value Payable Post (VPP): The value payable system is designed to meet the requirements of persons who wish to pay for articles sent to them at the time of receipt of the articles or of the bills or railway receipts relating to them, and also to meet the requirements of traders and others who wish to recover, through the agency of the Post Office the value of article supplied by them. 4) Electronic Money Order (EMO): EMO is the Money Order issued by the computerized Post Office for the payment of a sum of money to the “Payee” by the “Remitter” electronically. 18 digit PNR number is generated while booking an EMO. Data is transmitted electronically to the destination Post Office. Money is paid at the doorstep of the Payee by cash. 5) Instant Money Order (IMO): IMO is an instant web based money transfer service through Post Offices (IMO Centre) in India between two resident individuals in Indian Territory. You can transfer money from INR 1,000/- to INR 50,000/- from designated IMO Post Offices. It is simple to send and receive money. 6) E-Post: This portal will provide electronic money order (EMO), instant money order (IMO), sale of philatelic stamps, postal information, tracking of express and international shipments, PIN code search and registration of feedback and complaints online. Bank Accounts Banks are such places where people can deposit their savings with the assurance that they will be able to withdraw money from the deposits whenever required. People who wish to borrow money for business and other purposes can also get loans from the banks at reasonable rate of interest. The Banking Regulation Act defines the business of banking by stating the essential functions of abanker. It also states the various other businesses a banking company may be engaged in and prohibi ts certain businesses to be performed by it. The term ‘Banking’ is defined as “accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawals by cheque, draft, and order of otherwise” a) Savings Bank Account i. If a person has limited income and wants to save money for future needs, the SavingBank Account is most suited for his purpose. ii. This type of account can be opened with a minimum initial deposit that varies from bank to bank. Money can be deposited any time in this account. Withdrawals can be made either by signing a withdrawal form or by issuing a cheque or by using ATM card. iii. Normally banks put some restriction on the number of withdrawal from this account. iv. Interest is allowed on the balance of deposit in the account. The rate of interestonsavings bank account varies from bank to bank and also changes from time to time. v. A minimum balance has to be maintained in the account as prescribed by the bank. b) Current Deposit Account i. Big businessmen, companies and institutions such as schools, colleges, and hospitalshave to make payment through their bank accounts. ii. Since there are restrictions on number of withdrawals from savings bank account, that type of account is not suitable for them. They need to have an account from which withdrawal can be made any number of times. iii. Banks open current account for them. Like savings bank account, this account also requires certain minimum amount of deposit while opening the account. iv. On this deposit bank does not pay any interest on the balances. Rather the accountholder pays certain amount each year as operational charge. For the convenience of the accountholders banks also allow withdrawal of amounts in excess of the balance of deposit. v. This facility is known as overdraft facility. It is allowed to some specific customers andup to a certain limit subject to previous agreement with the bank concerned. c) Fixed Deposit Account (also known as Term Deposit Account) i. Many a time people want to save money for long period. ii. If money is deposited in savings bank account, banks allow a lower rate of interest. iii. Therefore, money is deposited in a fixed deposit account to earn a interest at a higher rate. iv. This type of deposit account allows deposit to be made of an amount for a specified period. This period of deposit may range from 15 days to three years or more duringwhich no withdrawal is allowed. v. However, on request, the depositors can en-cash the amount before its maturity. In that case banks give lower interest than what was agreed upon. vi. The interest on fixed deposit account can be withdrawn at certain intervals of time. vii. At the end of the period, the deposit may be withdrawn or renewed for a furthe r period. Banks also grant loan on the security of fixed deposit receipt. d) Recurring Deposit Account i. This type of account is suitable for those who can save regularly and expect to earn a fair return on the deposits over a period of time. ii. While opening the account a person has to agree to deposit a fixed amount once in a month for a certain period. iii. The total deposit along with the interest therein is payable on maturity. However, the depositor can also be allowed to close the account before its maturity and get back the money along with the interest till that period. iv. The account can be opened by a person individually or jointly with another, or by the guardian in the name of a minor. v. The rate of interest allowed on the deposits is higher than that on a savings bank deposit but lower than the rate allowed on a fixed deposit for the same period. e) Multi Option Deposit Scheme: i. Is a term deposit which is not fixed at all and comes with a unique break-up facility which provides full liquidity as well as benefit of higher rate of interest, through the savings bank account. ii. One can also keep that deposit intact by availing an overdraft facility, to meet occasional temporary funds requirements. iii. Individual banks have their own deposit schemes to suit the current as well as future needs of the people. iv. You may visit nearby branches of the banks and collect information about different types of deposit accounts to ascertain the comparative advantages and limitations of the different types of deposit schemes. Banking Services 1. Issuing Bank Draft: A bank draft or banker's draft is a check that it guaranteed by the bank that issues it. In most cases, it lists the bank's main office or branch as the issuer, and the person or company that is receiving the money as the payee; the name of the person who requested the draft is often not included. Unlike a personal check, which could bounce if the account holder doesn't have enough Issued by the Bank to customers for making local payments like payment of telephone / electricity bills, payments to other accounts in other banks etc. 2. Banker's Cheques: these are negotiable instruments payable to order and attract all provisions applicable to an order cheque and are valid for six months from the date of issue. There is virtually no chance that a legitimate bank draft will not be honored and paid in full. 3. RTGS and NEFT: Here the words 'Real Time' refers to the process of instructions that are executed at the time they are received, rather than at some later time. On the other hand "Gross Settlement" means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). The settlement of funds actually takes place in the books of RBI and thus the payments are considered as final and irrevocable. The full form of NEFT is "National Electronic Funds Transfer (NEFT). The NEFT is a nationwide payment system facilitating one-to-one funds transfer. Under this system, individuals, firms and companies can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the system. 4. Bank Overdraft: When a business' bank account has a negative balance it is said to be running a bank overdraft (more precisely an actual bank overdraft). It is a form of financing in which the bank honors presented checks even when there is no balance in the business account which results in negative balance in the bank account. 5. Cash Credits: banks offer cash credit accounts to businesses to finance their "working capital" requirements (requirements to buy raw materials or "current assets", as opposed to machinery or buildings, which would be called "fixed assets"). The cash credit account is similar to current accounts as it is a running account (i.e., payable on demand) with cheque book facility. But unlike ordinary current accounts, which are supposed to be overdrawn only occasionally, the cash credit account is supposed to be overdrawn almost continuously 6. SMS Alerts: SMS banking is a type of mobile banking, a technology-enabled service offering from banks to its customers, permitting them to operate selected banking services over their mobile phones using SMS messaging. 7. MICR and IFSC: IFSC code means Indian Financial System Code. IFSC code is being used as the address code in one user to another user. RTGS and NEFT payment system of Reserve Bank of India (RBI) use these codes. IFSC code consists of 11 Characters. MICR code means Magnetic Ink Character Recognition code which contains 9 digits, like 380002006 appearing at the bottom of the cheque, following the cheque number. Each Bank Branch has a unique MICR code. Methods of Raising Finance 1. Equity Shares: Equity shares is the most important source of raising long term capital by a company. Equity shares represent the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital or owner’s funds. Equi ty share capital is a prerequisite to the creation of a company. 2. Preference Shares: The capital raised by issue of preference shares is called preference share capital. The preference shareholders enjoy a preferential position over equity shareholders in two ways: (i) receiving a fixed rate of dividend, out of the net profits of the company, before any dividend is declared for equity shareholders and (ii) receiving their capital after the claims of the company’s creditors have been settled, at the time of liquidation. In other words, as compared to the equity shareholders, the preference shareholders have a preferential claim over dividend and repayment of capital. Preference shares resemble debentures as they bear fixed rate of return. 3. Debentures are an important instrument for raising long term debt capital. A company can raise funds through issue of debentures, which bear a fixed rate of interest. The debenture issued by a company is an acknowledgment that the company has borrowed a certain amount of money, which it promises to repay at a future date. Debenture holders are, therefore, termed as creditors of the company. Debenture holders are paid a fixed stated amount of interest at specified 4. Commercial Banks: Commercial banks occupy a vital position as they provide funds for different purposes as well as for different time periods. Banks extend loans to firms of all sizes and in many ways, like, cash credits, overdrafts, term loans, purchase/discounting of bills, and issue of letter of credit. The rate of interest charged by banks depends on various factors such as the characteristics of the firm and the level of interest rates in the economy. The loan is repaid either in lump sum or in installments. 5. Financial Institutions: The government has established a number of financial institutions all over the country to provide finance to business organizations. These institutions are established by the central as well as state governments. They provide both owned capital and loan capital for long and medium term requirements and supplement the traditional financial agencies like commercial banks. As these institutions aim at promoting the industrial development of a country, these are also called ‘development banks’ 6. Global Depository Receipt (GDR), and American Depository Receipt (ADR): Every public company issues shares. These shares are listed and traded on various share markets. Companies in India issue shares which are traded on Indian share markets like BSE ( Bombay Stock Exchange) and NSE (National Stock Exchange) etc. Preference Shares and The Types As the name indicates, these shares have certain privileges and preferential rights distinct from those attaching to equity shares. The shares which carry following preferential rights are termed as preference shares. (a) A preferential right as to the payment of dividend during the life time of the company. (b) A preferential right as to the return of capital in the event of winding up of the company. Holder of these shares have a prior right to receive the fixed rate of dividend before any dividend is paid to equity shares. The rate of dividend is prescribed in the issue. 1. Cumulative preference shares: Cumulative preference shares are those shares on which dividend goes on accumulating until it is fully paid. This means, if the dividend is not paid in one or more years due to inadequate profit, then such unpaid di vidend gets accumulated. The accumulated dividend is paid when company performs well. The arrears of dividend are paid before making payment to equity shareholders. The preference shares are always cumulative unless otherwise stated in the Articles of Association. It means that if dividend is not paid in any year or falls short of prescribed rate, the unpaid amount is carried forward to next year and so on; until all arrears have been paid. 2. Non-cumulative preference shares - Dividend on these shares does not accumulate. This means, the dividend on shares can be paid only out of profits of that year. The right to claim dividend will lapse, if company does not make profit in that particular year. If dividend is not paid in any year, it is lost. 3. Participating preference shares: The holders of these shares are entitled to participate in surplus profit besides preferential dividend. The surplus profit which remains after the dividend has been paid to equity shareholders up to certain limit, is distributed to prefe rence shareholders. 4. Non-participating preference shares: The preference shares are deemed to be non-participating, if there is no clear provision in Articles of Association. These shareholders are entitled only to fixed rate of dividend prescribed in the issue. 5. Convertible preference shares: These shareholders have a right to convert their preference shares into equity shares. The conversion takes place within a certain fixed period. 6. Non-convertible preference shares: These shares cannot be converted into equity shares. 7. Redeemable preference shares: Shares which can be redeemed after a certain fixed period are called redeemable preference shares. A company limited by shares, if authorized by Articles of Association, issues redeemable preference shares. Such shares must be fully paid. These shares are redeemed out of divisible profit only or out of fresh issue of shares made for this purpose. 8. Irredeemable preference shares: Shares which are not redeemable i.e. payable only on the winding up of the company are called irredeemable preference shares. As per Companies Act (Amendment made in 1988) the company cannot issue irredeemable preference shares. Debentures and Types of Debentures Debentures have occupied a. significant position in the financial structure of the companies. It is one of the main sources of raising debt capital to meet long term financial needs. Debentures represent borrowed capital. The debenture holders are creditors of the company. The debenture holder gets a fixed rate of interest as return on his investment. Board of Directors has the power to issue debentures. The debentures can be of different kinds according to their terms of issue, conversion, provision of security, repayment etc. Let us discuss them in detail. 1. Secured debentures: The debentures can be secured. The property of company may be charged as security for loan. The security may be for some particular asset (fixed charge) or it may be the asset in general (floating charge). The debentures are secured through `Trust Deed' 2. Unsecured debentures: These are the debentures that have no security. The issue of unsecured debenture is now prohibited by Companies (Amendment) Act, 2000. 3. Registered debentures: Registered debentures are those on which the name of holders are recorded. A company maintains a register of debenture holders in which the names, addresses and particulars of holdings of debenture holders are entered. The transfer of debentures in this case requires the execution of regular transfer deed. 4. Bearer debenture: Name of holders are not recorded on the bearer debentures. Their names do not appear on the register of debenture holders. Such debentures are transferable by mere delivery. Payment of interest is made by means of coupons attached to debenture certificate. 5. Redeemable debentures: Debentures are mostly redeemabl e i.e. payable at the end of some fixed period, as mentioned on the debenture certificate. Repayment can be made at fixed date at the end of specific period or by instalments during the life time of the company. The provision of repayment is normally made in a trust deed. 6. Irredeemable debentures: These kind of debentures are not repayable during life time of the, company. They are repayable only after the liquidation of the company or when there is breach of any condition or when some contingency arises. 7. Convertible debentures: Convertible debentures give the right to the holder to convert them into equity shares after a specific period. Such right is mentioned in the debenture certificate. The issue of convertible debenture must be approved by special" resolution in general meeting before they are issued to public. 8. Non-convertible debentures: Non-convertible debentures are not convertible into equity shares on maturity. These debentures are normally redeemed on maturity date. These debentures suffer from the disadvantage that there is no appreciation in value. Financial Institutions Industrial Finance Corporation of India (IFCI) The IFCI is the first Development Financial Institution in India. It is a pioneer in development banking in India. It was established in 1948 under an Act of Parliament. The main objective of IFCI is to render financial assistance to large scale industrial un its, particularly at a time when the ordinary banks are not forth coming to assist these concerns. Its activities include project financing, financial services, merchant banking and investment. State Financial Corp (SFC) The Govt. after independence realized the need of creating a financial corporation at the state level for catering to the needs of industrial entrepreneurs. As a result, the Govt. of India after consultation with the State governments and the Reserve Bank of India, introduced State Finance Corporations bill in the Parliament in 1951. SFC Act came into existence with effect from August 1, 1952. Industrial Credit and Investment Corporation (ICICI) ICICI was set up in 1955 as a public limited company. It was to be a private sector development bank in so far as there was no participation by the Government in its share capital. It is a diversified long term financial institution and provides a comprehensive range of financial products and services including project and equipment financing, underwriting and direct subscription to capital issues, leasing, deferred credit, trusteeship and custodial services, advisory services and business consultancy. Industrial Development Bank of India (IDBI) The IDBI was established on July 1, 1964 under an Act of Parliament. It was set up as the central coordinating agency, leader of development banks and principal financing institution for industrial finance in the country. IDBI is an apex institution to coordinate, supplement and integrate the activities of all existing specialized financial institutions. It is a refinancing and rediscounting institution operating in the capital market to refinance term loans and export credits. Life Insurance Corporation of India The Life Insurance Corporation of India was set up under the LIC Act, 1956. It is basically an investment institution, in as much as the funds of policy holders are invested and dispersed over different classes of securities, industries and regions, to safeguard their maximum interest on long term basis. Life Insurance Corporation of India is required to invest not less than 75% of its funds in Central and State Government securities, the government guaranteed marketable securities and in the socially oriented sectors. Unit Trust of India (UTI) The Unit Trust of India was set up in February 1964 under the Unit Trust of India Act of 1963, in the public sector. It plays an important role in mobilizing savings of investors through sale of units and channelizing them into corporate investments. Merits and Demerits of Equity Shares Advantages of company: The advantages of issuing equity shares may be summarized as below: a) Long-tern and Permanent Capital: It is a good source of long-term finance. A company is not required to pay-back the equity capital during its life-time and so, it is a permanent sources of capital. b) No Fixed Burden: Unlike preference shares, equity shares suppose no fixed burden on the company’s resources, because the dividend on these shares are subject to availability of profits and the intention of the board of directors. They may not get the dividend even when company has profits. Thus they provide a cushion of safety against unfavorable development c) Credit worthiness: Issuance of equity share capital creates no change on the assets of the company. A company can raise further finance on the security of its fixed assets. d) Risk Capital: Equity capital is said to be the risk capital. A company can trade on equity in bad periods on the risk of equity capital. e) Dividend Policy: A company may follow an elastic and rational dividend policy and may create huge reserves for its developmental programmes. Advantages to Investors: Investors or equity shareholders may enjoy the following advantages: a) More Income: Equity shareholders are the residual claimant of the profits after meeting all the fixed commitments. The company may add to the profits by trading on equity. Thus equity capital may get dividend at high in boom period. b) Right to Participate in the Control and Management: Equity shareholders have voting ri ghts and elect competent persons as directors to control and manage the affairs of the company. c) Capital profits: The market value of equity shares fluctuates directly with the profits of the company and their real value based on the net worth of the assets of the company. an appreciation in the net worth of the company’s assets will increase the market value of equity shares. It brings capital appreciation in their investments. d) An Attraction of Persons having Limited Income: Equity shares are mostl y of lower denomination and persons of limited recourses can purchase these shares. e) Other Advantages: It appeals most to the speculators. Their prices in security market are more fluctuating. Disadvantages of equity shares: Disadvantages to company: Equity shares have the following disadvantages to the company: a) Dilution in control: Each sale of equity shares dilutes the voting power of the existing equity shareholders and extends the voting or controlling power to the new shareholders. Equity shares are transferable and may bring about centralization of power in few hands. Certain groups of equity shareholders may manipulate control and management of company by controlling the majority holdings which may be detrimental to the interest of the company . b) Trading on equity not possible: If equity shares alone are issued, the company cannot trade on equity. c) Over-capitalization: Excessive issue of equity shares may result in over-capitalization. Dividend per share is low in that condition which adversely affects the psychology of the investors. It is difficult to cure. d) No flexibility in capital structure: Equity shares cannot be paid back during the lifetime of the company. This characteristic creates inflexibility in capital structure of the company. e) High cost: It costs more to finance with equity shares than with other securities as the selling costs and underwriting commission are paid at a higher rate on the issue of these shares. f) Speculation: Equity shares of good companies are subject to hectic speculation in the stock market. Their prices fluctuate frequently which are not in the interest of the company. Disadvantages to investors: Equity shares have the following disadvantages to the investors: a) Uncertain and Irregular Income: The dividend on equity shares is subject to availability of profits and intention of the Board of Directors and hence the income is quite irregular and uncertain. They may get no dividend even three are sufficient profits. b) Capital loss During Depression Period: During recession or depression periods, the profits of the company come down and consequently the rate of dividend also comes down. Due to low rate of dividend and certain other factors the market value of equity shares goes down resulting in a capital loss to the investors. c) Loss on Liquidation: In case, the company goes into liquidation, equity shareholders are the worst suffers. They are paid in the last only if any surplus is available after every other claim including the claim of preference shareholders is settled. Import Procedure 1. Obtaining import license and quota: In all countries there are many government regulations to be followed. Sanction of government is necessary. Importer has to apply to the controller of imports for getting necessary permission. Importer has to attach the following documents to his application form: Receipt which shows that import license fee has been paid. Certificate from a Chartered Accountant showing the total value of goods to be imported. Verification Certificate for income tax. An import license may be general or specific. A general license allows imports from any country. But specific license allows imports from specific country only. The importer also has to obtain import quota certificate from the concerned authority. It mentions the maximum quantity of goods which can be imported. 2. Obtaining foreign exchange: Before placing any order, the importer must apply to the Exchange Control Department (ECD) of RBI (India's Central Bank) for the release of requisite foreign exchange. The importer should forward the application through his bank. The ECD verifies the application of the importer, and if found valid, sanctions the foreign exchange for the particular transaction. 3. Placing an order: The importer may either place the order directly or through the indent house (Agent). In case of canalized items, he obtains the imports through the canalizing agency. (Canalization means channelization of goods through a government agency like MMTC). The importer cannot directly import such canalized items. They have to place an order with the canalizing agency that shall import and supply the same. 4. Dispatching letter of credit: After getting the confirmation from the supplier regarding the supply of goods, the importer requests his bank to issue a Letter of credit in favor of supplier. It can be defined as "an undertaking by importer's bank stating that payment will be made to the exporter if the required documents are presented to the bank". 5. Appointing clearing and forwarding agents: The importer makes arrangement to appoint clearing and forwarding agents to clear the goods from the customs. Since clearing of goods is a specialized job, it is better to appoint C & F agents. 6. Receipt of shipment advice: The importer receives the shipment advice from the exporter. The shipment advice states the date on which the goods are loaded on the ship. The shipment advice helps the importer to make arrangement for clearance of goods. 7. Receipts of documents: The importer's bank receives the documents from the exporter's bank. The documents include bill of exchange, a copy of bill of lading, certificate of origin, commercial invoice, consular invoice, packing list, and other relevant documents. The importer makes payment to the bank (if not paid earlier) and collects the documents. 8. Bill of entry: This is a document required in case of import of goods . It is like shipping bill in case of exports. A Bill of Entry is the document testifying the fact that goods of the stated value and description in specified quantity are entering into the country from abroad. 9. Delivery order: The clearing agents obtain the delivery order from the office of the shipping company. The shipping company gives the delivery order only after payment of freight, if any. 10. Clearing of goods: The clearing agent pays the necessary dock or port trust dues and obtains the port Trust Receipt in two copies. He then approaches the Customs House and presents one copy of Port Trust Receipt and two copies of Bill of Entry to the customs authorities. 11. Payment to clearing and forwarding agent: The importer then makes the necessary payment to the clearing agent for his various expenses and fees. 12. Payment to exporter: The importer has to make payment to exporter. Usually, the exporter draws a bill of exchange. The importer has to accept the bill and make payment. 13. Follow up: The importer then informs the exporter about the receipt of goods. If there are any discrepancies or damages to the goods, he should inform the exporter. Export Procedure The procedure generally adopted for exporting goods to a foreign country is as follows: 1. Receipt of enquiry and sending quotations: The importer of goods first sends an enquiry to different exporters requesting them to send information about price, quality, terms of payment etc. 2. Receipt of an indent or export order: If the prospective importer finds the terms and conditions acceptable, then he places an order for export of goods which is known as indent. 3. Credit Enquiry: The exporter must ensure that there is no risk of default in payment. He should verify the credit worthiness of the importer. For this purpose he may ask the importer to send a letter of credit, bank guarantee or any other guarantee. 4. Obtaining export license: Each and every country has its own import and export policy for free goods and restricted goods. An exporter in India has to complete various formalities and apply for export license to the appropriate authority. If the authority is satisfied it will issue the export license. To get an export license, the exporter must have (i) an IEC (Importer Exporter Code) number (ii) RCMC from appropriate export promotion council and (iii) Registration with Export Credit and Guarantee Corporation (ECGC). The registration with ECGC safeguards against risk of non-payments. 5. Production or Procurement of goods: The exporter has to produce the goods or buy them from the market. The goods must be in accordance with the instructions given in the indent regarding the quality, quantity, price, etc. 6. Pre-shipment Inspection: To ensure that only good quality products are exported from our country, the Government of India has made compulsory pre-shipment inspection of goods by certain authorized agencies. 7. Excise Clearance: In India, manufactured products are subject to excise duty under the Central Excise Act. Therefore excise clearance certificate is a must for the goods to be exported. It may be noted here that the Government of India has exempted excise duty in many cases if the goods are manufactured exclusively for the purpose of export. 8. Packing and marking of the goods: Packing should be done strictly according to the instructions given in the indent. If loss arises due to defective packing, the exporter may have to bear it. 9. Appointment of forwarding agent: Packed goods may be dispatched to the port directly by the exporter or through a forwarding agent. If the goods are stored in any location, the exporter may appoint a forwarding agent who will perform all the formalities on behalf of the exporter before shipping the goods. The forwarding agent will charge commission for this work. 10. Dispatch of goods by rail/road: The exporter has to dispatch the goods by rail/ road to the port town. He will send the R/R (railway receipt) to the forwarding agent along with other instructions. The agent will take delivery of the goods and complete other formalities before shipping them to the importer. 11. Formalities to be completed by Forwarding agent: a) Obtaining the custom permit: The agent has to apply to the custom office giving full details of the goods and also their destination in order to receive the custom permit. b) Obtaining shipping order: The agent has to secure adequate space in the ship for loading of goods. c) Completion of shipping bill and payment of export duty: The Agent has to fill in three copies of shipping bill and submit them to the custom-house. d) Payment of dock dues: The agent has to make arrangement for carrying the goods to the dock. For this purpose, two copies of properly completed ‘Dock Challan’ are submitted to the dock authorities. e) Custom’s verification before loading of goods: As soon as the ship touches the port, the dock authorities start loading the goods on it. Before the goods are actually loaded, custom officials verify them to know if there is anything on which duty remains to be paid or which is not mentioned in the shipping bill. f) Mate’s receipt: The captain or mate will issue a receipt known as “mates receipt” after the goods have been loaded. This receipt contains particulars like quantity of goods, number of packets, condition of packing, etc. g) Bill of lading: The forwarding agent has to present the mate’s receipt at the office of the shipping company and in exchange will get a document known as Bill of Lading. h) Insurance of cargo: As a safeguard against marine risks, it is necessary to insure the goods. Insurance must be done strictly according to the instructions, if any, of the importer as given in the indent. i) Advice to the exporter: The agent then informs the exporter about the shipment of goods and other related matters. 12. Preparation of export invoice and consular invoice: Having received the advice from the forwarding agent, the exporter prepares an export invoice known as foreign invoice. This invoice states the quantity of goods sent and amount due from the importer. 13. Securing Payment: There are two alternative methods by which payment can be received by the exporter. a) Letter of credit: The exporter can get immediate payment on the strength of the letter of credit which is issued by the importer’s bank in favor of the exporter. The exporter has to draw the bill in order to get the payment from the local branch of the bank (in home country), which has issued the letter of credit on behalf of the importer. b) Letter of hypothecation: If the exporter wants to receive payment immediately, he can get the bill (accepted by the importer) discounted with his bank. Documents for Export A. Documents related to goods 1. Export invoice: Export invoice is a sellers’ bill for merchandise and contains information about goods such as quantity, total value, number of packages, marks on packing, port of destination, name of ship, bill of lading number, terms of delivery and payments, etc. 2. Packing list: A packing list is a statement of the number of cases or packs and the details of the goods contained in these packs. It gives details of the nature of goods which are being exported and the form in which these are being sent. 3. Certificate of origin: This is a certificate which specifies the country in which the goods are being produced. This certificate entitles the importer to claim tariff concessions or other exemptions such as non-applicability of quota restrictions on goods originating from certain pre-specified countries. 4. Certificate of inspection: For ensuring quality, the government has made it compulsory for certain products that these be inspected by some authorised agency. B. Documents related to shipment 1. Mate’s receipt: This receipt is given by the commanding officer of the ship to the exporter after the cargo is loaded on the ship. The mate’s receipt indicates the name of the vessel, berth, date of shipment, description of packages, marks and numbers, condition of the cargo at the time of receipt on board the ship, etc. 2. Shipping Bill: The shipping bill is the main document on the basis of which customs office grants permission for the export. The shipping bill contains particulars of the goods being exported. 3. Bill of lading: Bill of lading is a document wherein a shipping company gives its official receipt of the goods put on board its vessel and at the same time gives an undertaking to carry them to the port of destination. 4. Marine insurance policy: It is a certificate of insurance contract whereby the insurance company agrees in consideration of a payment called premium to indemnify the insured against loss incurred by the latter in respect of goods exposed to perils of the sea. C. Documents related to payment 1. Letter of credit: A letter of credit is a guarantee issued by the importer’s bank that it will honour up to a certain amount the payment of export bills to the bank of the exporter. Letter of credit is the most appropriate and secure method of payment adopted to settle international transactions 2. Bill of exchange: It is a written instrument whereby the person issuing the instrument directs the other party to pay a specified amount to a certain person or the bearer of the instrument. In the context of an export-import transaction, bill of exchange is drawn by exporter on the importer asking the latter to pay a certain amount to a certain person or the bearer of the bill of exchange. Documents for Import 1. Trade enquiry: A trade enquiry is a written request by an importing firm to the exporter for supply of information regarding the price and various terms and conditions on which the latter exports goods. 2. Proforma invoice: A proforma invoice is a document that contains details as to the quality, grade, design, size, weight and price of the export product, and the terms and conditions on which their export will take place. 3. Import order or indent: It is a document in which the buyer (importer) orders for supply of requisite goods to the supplier (exporter). The order or indent contains the information such as quantity and quality of goods to be imported, price to be charged, method of forwarding the goods, nature of packing, mode of payment, etc. 4. Letter of credit: It is document that contains a guarantee from the importer bank to the exporter’s bank that it is undertaking to honour the payment up to a certain amount of the bills issued by the exporter for exports of the goods to the importer. 5. Shipment advice: The shipment advice is a document that the exporter sends to the importer informing him that the shipment of goods has been made. Shipment of advice contains invoice number, bill of lading/airways bill number and date, name of the ve ssel with date, the port of export, description of goods and quantity, and the date of sailing of the vessel. 6. Bill of lading: It is a document prepared and signed by the master of the ship acknowledging the receipt of goods on board. It contains terms and conditions on which the goods are to be taken to the port of destination. 7. Airway Bill: Like a bill of lading, an airway bill is a document wherein an airline/ shipping company gives its official receipt of the goods on board its aircraft and at the same time gives an undertaking to carry them to the port of destination. It is also a document of title to the goods and as such is freely transferable by the endorsement and delivery. 8. Bill of entry: Bill of entry is a form supplied by the customs office to the importer. It is to be filled in by the importer at the time of receiving the goods. It has to be in triplicate and is to be submitted to the customs office. 9. Bill of exchange: It is a written instrument whereby the person issuing the instrument directs the other party to pay a specified amount to a certain person or the bearer of the instrument. Organizational Support For Exports Export Promotion Councils (EPCs): Export Promotion Councils are nonprofit organizations registered under the Companies Act or the Societies Registration Act, as the case may be. The basic objective of the export promotion councils is to promote and develop the country’s exports of particular products falling under their jurisdiction. At present there are 21 EPC’s dealing with different commodities. Commodity Boards: Commodity Boards are the boards which have been specially established by the Government of India for the development of production of traditional commodities and their exports. These boards are supplementary to the EPCs. The functions of commodity boards are similar to those of EPCs. Indian Trade Promotion Organization (ITPO): Indian Trade Promotion Organization was setup on 1st January 1992 under the Companies Act 1956 by the Ministry of Commerce, Government of India. Its headquarters is at New Delhi. ITPO was formed by merging the two erstwhile agencies viz., Trade Development Authority and Trade Fair Authority of India Indian Institute of Foreign Trade (IIFT): Indian Institute of Foreign Trade is an institution that was setup in 1963 by the Government of India as an autonomous body registered under the Societies Registration Act with the prime objective of professionalizing the country’s foreign trade management. Indian Institute of Packaging (IIP): The Indian Institute of Packaging was set up as a national institute jointly by the Ministry of Commerce, Government of India, and the Indian Packaging industry and allied interests in 1966. Its headquarters and principal laboratory is situated at Mumbai and three regional laboratories are located at Kolkata, Delhi and Chennai. State Trading Organizations: A large number of domestic firms in India found it very difficult to compete in the world market. At the same time, the existing trade channels were unsuitable for promotion of exports and bringing about diversification of trade with countries other than European countries.