UPPSC GOVERNMENT DEGREE COLLEGE COMMERCE NOTES UNIT-II

BUSINESS ENVIRONMENT UNIT-2 Business Environment: Concept, nature and significance of business environment, element, techniques of environmental scanning and monitoring, Economic system, Government Policies, Political, legal and Socio-Cultural environment According to Hicks, ‘The firm can adjust to the environment, or if it has the ability, change the environment.’ Environmental Scanning or analysis. The monitoring process of the appropriate environment by an organization to identify the opportunities and threats, that affect the business, is known as environmental scanning or analysis. The techniques used for environmental scanning are as follows: • Environmental Threat and Opportunity (ETOP) Analysis • Quick Environmental Scanning Technique (QUEST) Analysis • Strengths Weaknesses Opportunity and Threats (SWOT) Analysis • Political, Economic, Social and Technological (PEST) Analysis • QUEST Analysis QUEST analysis was proposed by B. Nanus. It is a four-step process that uses scenario writing for environmental scanning. SWOT Analysis SWOT is the heart of strategic analysis. SWOT is also known as TOWS analysis. SWOT is a tool used for auditing the organization. Philip Kotler sums it up neatly when he says that, ‘The micro environment consists of the actors in the company’s immediate environment that affect the performance of the company. These include the suppliers, marketing intermediaries, competitors, customers and the public. William F. Glueck has mentioned the following techniques of environment scanning: (i) Verbal and written information (ii) Search and scanning (iii) Spying (iv) Forecasting and formal studies. The Industrial Policy Resolution of 1948 defined the broad contours of the policy delineating the role of the State in industrial development both as an entrepreneur and authority. This was followed by comprehensive enactment of Industries (Development & Regulation) Act, 1951 (referred as IDR Act). Start-up India Startup India is a flagship initiative of the Government of India (launched January 2016), intended to build a strong eco-system for nurturing innovation and Startups in the country that will drive sustainable economic growth and generate large scale employment opportunities.’ India’s planning strategy is divided in four phases: Phase I: Growth-Oriented Development Strategy (1951-1966) Phase II: Equity-Oriented Development Strategy (1966-1990) Phase III: Post Liberalization Development Strategy (1990-2007) Phase IV: Sustainable Development Strategy (2007 onwards). The term monetary policy is used to denote the policy of the government regarding money matters. Fiscal policy refers to the policy in connection with (a) government spending, (b) taxation, and (c) borrowing. Fiscal measures to achieve full employment or to avoid depression include(1) compensatory tax policy and (2) government expenditure policy. Money Market Money market is a market for short-term financial assets that are close substitutes of money. Short-term here means that the duration is less than one year. This market consists of many sub-markets such as the inter-bank call money, bill discounting, treasury bills, Certificates of deposits (CDs), Commercial papers (CPs), Repurchase Options/Ready Forward (REPO or RF), Inter-Bank Participation Certificates (IBPCs), Securitized Debts, Options, Financial Futures and Forward Rate Agreements (FERA). Capital Market Capital markets are the pathways that help in converting savings into investment. The capital markets are the markets where debt and equity instruments are bought and sold. The capital markets serve as the platform for the investors to channelize their savings into the instruments of their choice. Primary Markets: The Primary markets are where new securities are issued for the first time. The primary markets are also referred to as New Issue Markets (NIM). The primary market is the center for the issue of two types of stocks:— new issue of stocks that are already trading in the markets and the issue of new stocks into the markets. The issue of new stock is called Initial Public Offering. The companies may issue shares or debt instruments in this market. Secondary Markets: In the secondary markets, the investors can buy securities from other investors who own the security but are interested in selling it. The four major legislations that govern the capital market are: The SEBI Act, 1992,which established the SEBI, has four objectives: protecting the interests of investors in securities; developing the securities market; regulating the securities market and other incidental matters connected therewith. The Companies Act, 2012, deals with the issue, allotment and transfer of securities, disclosures to be made in public issue, underwriting, borrowing powers, payment of dividend and winding up of companies. The Securities Contracts (Regulation) Act, 1956, provides for the regulation of securities trading and the management of stock exchanges. The Depositories Act, 1996, provides for the establishment of depositories for the electronic maintenance of demat securities and transfer of their ownership. State Financial Corporations (SFCs) State Financial Corporations were formed by the enactment of the State Financial Corporations Act in 1951 to supplement the work of the Industrial Finance Corporation by providing medium and long-term credit to industrial undertakings, which fall outside the normal activities of commercial banks. Concentric Diversification - It refers to the process of adding new, but relates products or services. Horizontal Diversification - Adding new, unrelated products or services for present customers is called horizontal Diversification. Conglomerate Diversification - It refers to adding new and unrelated products or services. Going international is yet another trend followed by modern business houses. According to Michael Porter’s well known model of structural analysis of industries, the state of competition in an industry depends on five basic competitive forces, viz. 1. Rivalry among existing firms 2. Threat of new entrants 3. Threat of substitutes 4. Bargaining power of suppliers 5. Bargaining power of buyers. William F. Glueck has mentioned the following techniques of environment scanning: (i) Verbal and written information (ii) Search and scanning (iii) Spying (iv) Forecasting and formal studies The three pillars of the government are (i) Legislature (ii) Executive (iii) Judiciary. Stagflation: It is a condition of slow economic growth and relatively high unemployment, or economic stagnation, accompanied by rising prices, or inflation. Beer and Ulam describe political system as ‘a structure that performs a certain function for a society.’ Bureaucratic: It refers to a system of government in which most of the important decisions are taken by state officials rather than by elected representatives. The quest for industrial development started soon after independence in 1947. The Industrial Policy Resolution of 1948 defined the broad contours of the policy delineating the role of the State in industrial development both as an entrepreneur and authority. The main objectives of the Industrial Policy of the Government are (i) to maintain a sustained growth in productivity; (ii) to enhance gainful employment; (iii) to achieve optimal utilisation of human resources; (iv) to attain international competitiveness; and (v) to transform India into a major partner and player in the global arena. Micro, Small & Medium Enterprises Sector Government has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 stepping up the investment limit in Plant & Machinery to 5 crores for small enterprises and 10 crores for medium enterprises, so as to reduce the regulatory interface with the majority of the industrial units. NEIIP With a view to give a further boost to industrialization in the North Eastern Region, the erstwhile North East Industrial Policy (NEIP), 1997 was revised and a new policy, namely North East Industrial & Investment Promotion Policy (NEIIPP) 2007, was notified w.e.f. 1.4.2007 which will remain in force upto 31.03.2017. MSME Act The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The main objective of this Act is to facilitate the promotion and development of and enhancing the competitiveness of micro, small and medium, enterprises and for matters connected therewith or incidental thereto. Ease of Registration Process of MSMEs- Udyog Aadhaar Memorandum. The Ministry has started an MSME internet grievance monitoring system (eSAMADHAN) to track and monitor other grievances and suggestions received in the Ministry. MSME Data Bank: This data bank will enable the Ministry to streamline and monitor the schemes and pass on the benefits directly to MSMEs. It will also provide the real-time information about the status of MSMEs under various parameters. A web-based application module, namely, MyMSME has been launched. This has also been converted into a mobile app. Entrepreneurs will be able to make their applications and track it on their mobile itself. Phase I: Growth-Oriented Development Strategy (1951-1966) Phase II: Equity-Oriented Development Strategy (1966-1990) Phase III: Post Liberalization Development Strategy (1990-2007) Phase IV: Sustainable Development Strategy (2007 onwards) The New Agriculture Strategy (NAS) also created a link between agriculture and industries (1966-69). In the Industrial Policy Statement of 1956, it was emphasised that public enterprise was designed to control the ‘commanding heights’ of the economy. The main objectives of the Industrial Policy of the Government are (i) to maintain a sustained growth in productivity; (ii) to enhance gainful employment; (iii) to achieve optimal utilisation of human resources; (iv) to attain international competitiveness; and (v) to transform India into a major partner and player in the global arena. With a view to give a further boost to industrialization in the North Eastern Region, the erstwhile North East Industrial Policy (NEIP), 1997 was revised and a new policy, namely North East Industrial & Investment Promotion Policy (NEIIPP) 2007, was notified w.e.f. 1.4.2007 which will remain in force upto 31.03.2017. Fiscal policy refers to the policy in connection with (a) government spending, (b) taxation, and (c) borrowing. The total volume of expenditure in the community can be increased by the right type of fiscal policy. Though, the fiscal techniques were discovered and first made use of during the depression of the 1930, the techniques are capable of being applied equally effectively in times of inflation. Fiscal measures to achieve full employment or to avoid depression include (1) Compensatory tax policy and (2) government expenditure policy. The SEBI Act, 1992, which established the SEBI, has four objectives: protecting the interests of investors in securities; developing the securities market; regulating the securities market and other incidental matters connected therewith. The Companies Act, 2012, deals with the issue, allotment and transfer of securities, disclosures to be made in public issue, underwriting, borrowing powers, payment of dividend and winding up of companies. The Securities Contracts (Regulation) Act, 1956, provides for the regulation of securities trading and the management of stock exchanges. The Depositories Act, 1996, provides for the establishment of depositories for the electronic maintenance of demat securities and transfer of their ownership. Types of bonds A mix and match of features can create a new type of bonds. Some important types of bonds are: Zero-coupon bonds, floating rate bonds, reverse floaters, asset-backed bonds, catastrophe bonds, etc. State Financial Corporations (SFCs) State Financial Corporations were formed by the enactment of the State Financial Corporations Act in 1951 to supplement the work of the Industrial Finance Corporation by providing medium and long-term credit to industrial undertakings. Industrial Development Bank of India (IDBI) IDBI was established on 1 July 1964 under the Industrial Development Bank of India Act 1964 as a wholly-owned subsidiary of RBI. With effect from 16 February 1976 the ownership of IDBI was transferred to the Central Government. It is the apex institution in the area of development banking for coordinating in conformity with the national policies, the activities of the institutions engaged in financing, promoting or developing industries. The essential components of a financial system are the following: • Financial institutions • Financial markets • Financial instruments and services Fiscal policy refers to the policy in connection with (a) government spending, (b) taxation, and (c) borrowing. The total volume of expenditure in the community can be increased by the right. Modern fiscal policy involves the process of shaping taxation and public expenditure in order to (1) reduce the fluctuations of trade cycle and (2) to contribute towards the maintenance of a growing, high-employment economy free from excessive inflation or deflation. Money market is a market for short-term financial assets that are close substitutes of money. Short-term here means that the duration is less than one year. A money market instrument is liquid and can be quickly turned into money at a low cost. According to the social security (minimum standards) convention (No. 102) adopted by the ILO in 1952, following are the nine components of social security: • Medical Care • Sickness Benefit • Unemployment Benefit • Old-age Benefit • Employment Injury Benefit • Family Benefit • Maternity Benefit • Invalidity Benefit • Survivor’s Benefit Social Security Legislations in India There are various laws and acts that have been passed since Independence to govern the functioning of a company. These provide social security to the employees of the company. Following are some of the important laws and acts: • The Employees’ State Insurance Act, 1948 • The Employees’ Provident Fund Act, 1952 • The Workmen’s Compensation Act, 1923 • The Maternity Benefit Act, 1961 • The Industrial Disputes Act, 1947 Under the Constitution of India, Labour is a subject in the concurrent list. Worker’s participation in management (WPM) is essentially a step in promoting industrial democracy. IDBI was established on 1 July 1964 under the Industrial Development Bank of India Act 1964 as a wholly-owned subsidiary of RBI. Bank rate has been defined in Section 49 of the Reserve Bank of India Act, 1934 as the standard rate at which (the Bank) is prepared to buy or rediscount bills of exchange or other commercial papers eligible to purchase under the Act. Fiscal Deficit and Inflation The difference between the government’s total expenditure and its total receipts (excluding borrowing) is called fiscal deficit. The elements of the fiscal deficit are as follows: Revenue deficit, which is the difference between the government’s current (or revenue) expenditure and total current receipts (i.e., excluding borrowing) Capital expenditure The fiscal deficit is financed by borrowing from the RBI (which is also called deficit financing or money creation) and market borrowing (i.e., from the money market). The Industrial Policy (1991) announced by the Government accepted the fact that foreign investment is essential for modernization, technology upgradation and industrial growth of India. Fiscal Deficit: The difference between the government’s total expenditure and its total receipts (excluding borrowing) is called fiscal deficit. The technology life cycle has the following four stages: (i) Research and development (ii) Ascent (iii) Maturity (iv) Decline National Science and Technology Entrepreneurship Development Board (NSTEDB) The National Science & Technology Entrepreneurship Development Board (NSTEDB), established in 1982 by the Government of India under the aegis of Department of Science & Technology, is an institutional mechanism to help promote knowledge based and technology driven enterprises. The Board, having representations from socio-economic and scientific Departments and Institutions aims to convert “job-seekers” into “job-generators” through Science & Technology (S&T) interventions. Training programmes • Entrepreneurship Awareness Camp (EAC) • Entrepreneurship Development Programme (EDP) • Faculty Development Programme (FDP) • Open Learning Programme in Entrepreneurship (OLPE) • Technology Based EDP (TEDP) Institutional mechanisms for entrepreneurship development • Entrepreneurship Development Cell (EDC) • Science & Technology Entrepreneurship Development (STED) Project • Science & Technology Entrepreneurs Park (STEP) • Technology Business Incubator (TBI) Department of Industrial Policy & Promotion The DIPP is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector. It monitors the industrial growth and production, in general, and selected industrial sectors, such as cement, paper and pulp, leather, tyre and rubber, light electrical industries, consumer goods, consumer durables, light machine tools, light industrial machinery, light engineering industries etc., in particular. The main objectives of the Industries (Development and Regulation) Act, 1951 (IDRA) is to empower the Government: (i) to take necessary steps for the development of industries; (ii) to regulate the pattern and direction of industrial development; (iii) to control the activities, performance and results of industrial undertakings in the public interest. Based on the recommendations of the Subimal Dutt Committee, the joint sector emerged. The Committee felt the need of having a new sector apart from the public and private sectors in order to ensure the harmonious industrial development of the economy. The gilt-edged market refers to the market for Government and semi government securities, backed by the Reserve Bank of India (RBI). Government securities are trade able debt instruments issued by the Government for meeting its financial requirements. The term gilt-edged means ‘of the best quality’. In India, the capital market is regulated by the Capital Markets Division of the Department of Economic Affairs, Ministry of Finance. The division is responsible for formulating the policies related to the orderly growth and development of the securities markets (i.e., share, debt and derivatives) as well as protecting the interest of the investors. The EPA (Environment Protection Act), 1986 came into force soon after the Bhopal Gas Tragedy and is considered an umbrella legislation as it fills many gaps in the existing laws. • Water (Prevention and Control of Pollution) Act, 1974 • Water (Prevention and Control of Pollution) Act, 1974 • Air (Prevention and Control of Pollution) Act, 1981 • The Wildlife (Protection) Act, 1972, Amendment 1991 • The Forest (Conservation) Act, 1980 • Environment (Protection) Act, 1986 (EPA) • The National Environment Appellate Authority Act, 1997 • Factories Act, 1948 and its Amendment in 1987 • Factories Act, 1948 and its Amendment in 1987 • National Environment Tribunal Act, 1995 • Convention on International Trade in Endangered Species of wild fauna and flora (CITES), 1973. There are also certain important conventions to keep in mind. 1. Basel Convention on Transboundary Movement of Hazardous Wastes, 1989 2. UN Framework Convention on Climate Change (UNFCCC), 1992 3. Convention on Biological Diversity, 1992 4. UN Convention on Desertification, 1994 Carbon footprint is a ‘measure of the impact of human activities leave on the environment in terms of the amount of green house gases (CHGs) produced. The Companies Act 1956, envisages powers of inspection and investigation of company affairs. Forest (Conservation) Act, 1980 was adopted to protect and conserve forests. The Act restricts the powers of the state in respect of de-reservation of forests and use of forestland for non-forest purposes. Secondary market is the market for buying and selling securities of the existing companies. Securities and Exchange Board of India, (SEBI) was established in order to protect the interests of the investors in securities. The department of Environment was established in India in 1980 to ensure a healthy environment for the country. The Ministry of Environment and Forests and the pollution control boards, together form the regulatory and administrative core of the sector. Prevention and Control of Air Pollution Act, 1981, seeks to combat air pollution by prohibiting the use of polluting fuel and substances. The Forest Conservation Act, 1980, was adopted to protect and conserve forests. Appellate Jurisdiction: The State Commission has power to entertain the appeals against the orders of any District Forum within the State, within 30 days from the date of service of the order to the appellant. Foreign Investment Promotion Board (FIPB) was set up to channelise foreign capital investment in India. Small-scale sector was assured all help and accorded due recognition. Concentric Diversification - It refers to the process of adding new, but relates products or services. Horizontal Diversification - Adding new, unrelated products or services for present customers is called horizontal Diversification. Conglomerate Diversification - It refers to adding new and unrelated products or services. Going international is yet another trend followed by modern business houses. Michael Porter’s well known model of structural analysis of industries, the state of competition in an industry depends on five basic competitive forces, viz. 1. Rivalry among existing firms 2. Threat of new entrants 3. Threat of substitutes 4. Bargaining power of suppliers 5. Bargaining power of buyers. Porter has suggested a framework for competitor analysis, consisting of four diagnostic components, viz., future goals, current strategy, assumptions and capabilities. Environmental analysis is the study of the organizational environment to pinpoint environmental factors that can significantly influence organizational operations The analysis consists of four sequential steps: • Scanning • Monitoring • Forecasting • Assessment Free Enterprise Economy This economic system works on the principle of Laissez Faire system, i.e., the least interference by the government or any external force. The primary role of them government, if any, is to ensure free working of the economy by removing obstacles to free competition. The 8 Consumer Rights In order to safeguard consumer interest, 6 consumer rights were initially envisioned by consumer rights activists of the West, namely: • Right to Safety • Right to Information • Right to Choice • Right to be Heard • Right to Redress • The Right to Consumer Education Consequently, two very important rights were added viz.: • The right to a healthy and sustained environment and • The Right to Basic Needs Prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate. A document shall be called a prospectus it satisfies two things: 1. It invites subscriptions to shares or debentures or invites deposits. 2. The aforesaid invitation is made to the public. Underwriting Underwriting, in its simplest form, consists of an undertaking by some person or persons that if the public fails to take up the issue, he or they will do so. In return for this undertaking, the company agrees to pay the underwriter a commission on all shares or debentures, whether taken up by the public or by he underwriters. Companies Act in 2000, public companies were not allowed to issue equity shares with differential rights. Issue of Sweat Equity Shares [Sec. 79A]: ‘Sweat-equity shares’ means equity shares issued by the company to employees or directors at a discount or for consideration other than each. ‘Sweat equity shares’ may be issued for providing know-how or making available intellectual property rights. Bonus Shares: A company may, if the articles so provide, capitalize profits by issuing fully paid-up shares to the members thereby transferring the sums capitalized from the profit and loss account or Reserve Account to the Share Capital [Section 205(3)]. Such shares are known as bonus shares and are issued to the existing members of the company free of charge. The issue of bonus shares is regulated not only by the Companies Act, 1956 but also by the guidelines issued by SEBI in this regard. Right Shares: The existing members of the company have a right to be offered shares, when the company wants to increase its subscribed capital. Such shares are known as “right shares” but they are not issued free of charge. Share capital: It means the capital of a company, or the figure in terms of so many rupees divided into shares of a fixed amount, or the money raised by the issue of shares by a company. Nominal, Authorized or Registered capital: This is the sum stated in the memorandum as the share capital of a company with which it is proposed to be registered. This is the maximum amount of capital which it is authorized to raise by issuing shares, and upon which it pays stamp duty. Issued capital: It is the part of the authorized capital which the company has issued for subscription. The amount of issued capital is either equal to or less than the authorized capital. Subscribed capital: It is that portion of the issued capital which has been subscribed for the purchasers of the company’s shares. The amount of subscribed capital is either equal to or less than the issued capital. Called-up capital: The company may not call up full amount of the face value of the shares. Thus the called-up capital represents the total amount called-up on the shares subscribed. The total amount of called-up capital can be either equal to or less than the subscribed capital. Uncalled capital: represents the total amount not called up on shares subscribed, and the shareholders continue to be liable to pay the amounts as and when called. The company may reserve all or part of the uncalled capital, which can then be called in the event of the company being wound up. It is known as Reserve Capital or Reserve Liability [Section 99]. Paid-up capital: Paid –up capital is the amount of money paid-up on the shares subscribed. Raising of Capital/ Issue of Shares Issue of shares may be made in 3 ways: 1. By private placement of shares; 2. By allotting entire shares to an issue-house, which in turn, offers the shares for sale to the public; and 3. By inviting the public to subscribe for shares in the company through a prospectus. Private Placement of Shares: Shares are issued privately to a small number of persons known to the promoters or related to them by family connections. Share Certificate (Section 113): The share certificate states the name, address, occupation of the holder together with the number of shares and their distinctive number and amount paid-up. It must bear the common seal of the company, must be stamped and bear the signature of one or more directors. Share Warrants (Section 114): A share warrant is a negotiable instrument. It entitles the bearer to the shares specified in it and he can transfer the ownership of shares by merely delivering the share warrant to the transferee. Calls on Shares: The company may ask for some payment at the time of application for shares (but money not less than 5 per cent of the nominal value) and another sum at allotment. The balance may be payable as and when called for. Forfeiture of Shares: Forfeiture of shares means taking theme away from the member. This is absolutely a serious step for not only does it deprive the shareholder of his property but also, unless the shares are re-issued, it involves a reduction of capital. Directors may be removed by: 1. The shareholders, 2. The Central Government 3. The Company Law Board. (1) Removal by Share holders: In certain circumstances, the shareholders may remove the directors. (2) Removal by Central Government: (Sec. 388-B to 388-E): The Central Government may, in certain circumstances, remove managerial personnel from office on the recommendation of the Company Law Board. (3) Removal by Company Law Board (Sec. 402): Where, on an application to the Company Law Board for prevention of oppression (under Sec. 397) or mismanagement (under Sec. 398). Audit Committee [Sec. 292-A as introduced by the Companies (Amendment) Act, 2000]: The Audit Committee shall act in accordance with terms of reference to be specified in writing by the Board. Winding Up by Court: A winding up by the Court, or compulsory winding up, as it is often called, is initiated by an application by way of petition presented to the appropriate Court for winding up order.