LESSON - 1

THE NATURE OF BUSINESS

CONTENTS

1.0 Aims and Objectives

1.1 Introduction
1.2 Characteristics of business
1.3 Objectives of Business
1.4 Qualities of a Successful Businessman
1.5 Components of Business
1.5.1 Industry
1.5.2 Commerce
1.6 Business organisation and Management
1.7 Forms of Legal Ownership
1.8 Factors affecting choice of organisation
1.9 Sole Proprietorship Business
1.10 Joint Hindu Family Business
1.11 Partnership Organisation
1.12 Company form of Organisation
1.13 The Cooperative Organisation
1.14 Public Utilities
1.15 Public Enterprises
1.16 Let us Sum Up
1.17 Lesson-end Activities
1.18 Check your progress- Model Answers
1.19 Reference Books

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1.0 AIMS AND OBJECTIVES
In this unit we discuss about the business and various forms of business
organization. After studying this Unit, you will be able to:
* Understanding the meaning of business and its characteristics
* Describe about the objectives of business
* List out the various forms of organisation and their suitability

1.1 INTRODUCTION
The subject of this book is business enterprise system and how it is
organised and managed. The book also deals with the factors which influence
the operation of the enterprise as an efficient and progressive concern. An
enterprise is also influenced, directly and indirectly, by its environment, for
it cannot function in isolation. There are, however, many forms of enterprise
in India; and economic activities are performed by sole traders, partnerships,
incorporated companies and cooperatives In the earlier portion of the book,
therefore, the enterprise will be studied as a system and the factors which
constitute it.

Economic Activities: Man is a wanting being: he always wants, and

wants more. The journey of an individual through life can take almost infinite
number of paths: yet at every point in the journey-infancy to old age-each
individual seeks to fulfil his unique set of needs and wants: Many of these
desires, such as the biological drives and the instinct for sustaining life are
inherent; there are others which are ever expanding. Man must work, and
work to satisty these wants through the use of scarce resources of production.
Economic activities of man, therefore, deal with the business of living and
making a living. To make a living, every person follows an occupation according
to his living and training. He may follow a profession, or seek employment or
set up a business, which may be organised on personal level or may be
conducted through a joint stock company. A brief description of each type of
human occupation is in point.

Professions: By profession is meant an occupation which renders

specialised, expert and personal service. A lawyer, a doctor, a chartered
accountant or an engineer renders specialised services in respective of his
field in return for payment. For example, a doctor provides health services by
preventing illness from arising and by treating when it has arisen. A doctor’s
or lawyer’s work, is purely and essentially of personal character. He comes
into personal and intimate contact with his patient or client and uses his
expert knowledge to deals with his patients’ or clients’ problems. Since a
doctor or a lawyer or any other practitioner of a profession has to be an
expert in his own special activity, he must possess the minimum academic
and, other qualifications prescribed by law, before he can practise his
profession.

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 Employment: In this type of activity, a person undertakes to work for
another according to the terms of a service agreement in return for a sa1ary
or wage, or even commission. A relation of master and servant is created
under a contract of service, ant the servant acts under the control and
supervision of his master and is, bound to conform to all reasonable orders
given to him in the course of his work. A person may be appointed a manager,
a secretary or even a professionally qualified person, e.g., a chartered
accountant, may be appointed to look after the finances of the company.

Business: Literally, ‘business’ means busyness or the state of being busy-

any activity a man is busy about. Accordingly, a person may become busy in
reading, writing, painting, playing, because any of these activities may bring
him money, prestige, power or any other kinds of satisfaction known only to
him. But in economic sense, the word “Business” means work, efforts and
acts of people which are connected with the production of wealth.

Functionally, by business, we mean those human activities which involve

production or purchase of goods with the object of selling them at a profit. In
the words of Urwick and Hunt, a “Business is any enterprise which makes,
distributes or provides any article or service which other members of the
community need and are able and willing to pay for.” In essence, therefore,
business concerns with producing and selling for profit.

1.2 CHARACTERISTICS OF BUSINESS

The activities termed “Business” possess the following characteristics:

(a) Production or acquisition of goods: Since it is the business of “business”

to provide goods to people for a price, it is necessary that there are goods to
be supplied. They must therefore be either manufactured or produced or they
must be procured so that they can be sold and supplied. .

(b) Sale or transfer of title: Goods which have been produced or procured
for sale in return for price enter the realm of business. This activity of selling
results in the production and acquisition of wealth. Goods produced or acquired
for personal consumption, however, do not fall within the scope of business.

(c) Dealings in goods and services: Business means dealing in goods and
services. The goods may be consumers’ goods, such as cloth, bread, jams,
shoes, watches, etc., or producers’ goods, such as machinery and tools.
Services consist of those items which are not stored by consumers, such as
transport services.

(d) Regularity of dealings: Regularity and recurring nature of buying and

selling which ensures continuity of transactions is a characteristic of
business. A single transaction involving buying and selling does not become
business. For instance, if a person sells his motor car and makes a profit, it
does not amount to business. On the other hand, if he keeps a stock of cars
and sells them to customers, he carries on a business.

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 (e) Profits as reward for service rendered: Business is an activity by which
men make their living, or earn profit. Making profit is an essential
characteristic of business. Profit is the biggest stimulus for maintaining the
continuity of business. In other words. profit is essential for survival and
development. The hope of making a good profit attracts men of ability to
business. In fact, profit is in a sense a reward for the individual ability or
efficiency of the enterpriser and also for the service that he renders to the
community.

(f) Uncertainty or risk about future: Economic activity, because it is activity

focuses on the future; and one thing certain about the future is its uncertainty,
its risk. It is through risk-taking that any businessman earns his profit. The
conduct of industry or business always involves a certain amount of risk and
uncertainty of return to the entrepreneur.

1.3 OBJECTIVES OF BUSINESS

Every human activity has some objective or objectives, and business, as
one of the important human activities, must have objectives.

There is a common belief that money making is the objective of business.

Maximisation of profits is the prevailing norm among businessmen themselves.
Money-chasing to them seems to be the primary economic objective of
business. So a company must earn profit if it is to continue to exist. It is
necessary to make earnings if additional capital is to be attracted and reserves
are to be built up for meeting risk inherent in business activity. But to say
that the sole purpose of any business is to make profit, is like saying that
eating is the sole purpose of living, or that blood circulation is of supreme
importance for human survival and breathing, digestion, or proper functioning
of the nervous system count for nothing.

Obviously, a company must make profit for survival, but for survival it is
also necessary that it produces goods or renders services that customers
want. Its conditions of employment must be so good as to attract competent
employees, and it should be an acceptable firm to the community in which it
operates. Remove any of these essentials and the enterprise collapses. It is
therefore important to recognise the fact that profit is the legitimate reward
for honest endeavour, something the entrepreneur gets for rendering service
to the community.

Viewed in this, light, profit plays a vital role as a measure of efficiency,

and must be watched constantly. After all, profits provide not only the most
accurate test of business efficiency, but also a sure check against failure.
Over a course of time, profits are the measures of how well a company has
met the needs of labour, consumers, shareholders, and the general public.

Besides economic objectives, a business has social objectives. In fact,

the two objectives are intimately’ related. The primary objective of business

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therefore should be satisfaction of human wants through supply of quality
goods at reasonable prices. Another objective is to provide a fair return to the
investor and to have sufficient amount to cover future risks and to ensure
future expansion. The third objective is to ‘create customers’ and meet their
needs and wants, and also provide fair wages to the workers.

A detailed discussion of the subject will be found in the chapter on Social

Responsibilities of Business. Suffice it to state here that business has
economic as well as social objectives. Its economic objectives relate to earning
a satisfactory profit, creating customers and making innovation. Its social
objectives comprise supply of quality goods in sufficient quantity at reasonable
prices, fair deal to workers, fair returns to investors, and fair dealings with
suppliers of materials. The following table gives in a summary form the
objectives of business:

BUSINESS OBJECTIVES
Economic
Social Satisfactory Profits
Creation of Customers
Innovation
Ample supply of quality goods at fair prices for the Community
Fair Deal to workers
Fair return to investors
Fair dealings with suppliers of materials

To sum up, “business” may be said to be any enterprise which makes,

distributes, or provides any article or service, which other members of the
community need. And business transactions are essentially measured in
terms of money. These measurements must show profit to the enterprise, if
it is to remain in business. But money and profit are measuring devices; yet
a measuring device is not a purpose. To realize a profit may be, and usually,
is the motive or purpose of some of the individuals who engage in business.
But “the only valid definition of business purpose is to create a customer”,
that is, to provide goods or services which someone needs.

The Enterprise or Business Firm: Business enterprises are frequently

called “firms”. Romesh Bansal, merchant and sole owner and manager of his
retail store, is the head of his firm. Tata Iron and Steel Company with its
many, ramifications is also a firm. Hindustan Steel Company is a firm with
steel mills in different places. The important characteristic of the business
firm is that it is owned and controlled essentially as a unit, however diverse
its parts. Thus, business enterprise or firm is the unit within which productive
resources are combined to turn out goods and services for sale. It comes into
being when an individual or a body of individuals co-ordinate their efforts
and combine their resources or “agents of production” to conduct business

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activity. The function of making fundamental decisions in an enterprise is
generally called the function of “entrepreneurship” on the part of one or
more persons. Since it is the entrepreneur who combines the productive
resource and makes fundamental policy decisions, a firm is a business unit,
under one co-ordinated “entrepreneurship”

Entrepreneur or Businessman: The businessman is at the centre of all

business activity. As an entrepreneur, he decides as to how productive agents
will be combined, what shall be produced, and how much. He decides how
many employees to hire and how much he is willing to pay them. It is he who
decides how the concern will be financed and the consumer demand met.
The entrepreneur formulates the business plans and sees to their execution.
In short, he is essentially a person who, “through his foresight and ability,
directs the application of human energy in the shape of labour-power and
capital-saving to the exploitation of the opportunities afforded by nature.” As
an entrepreneur, he guarantees wages to his employees and interest to those
who have lent him capital. He undertakes to supply any of the numerous
wants of consumers for goods. But business is a game of skill, and every
player cannot hope to succeed. Ability required, service performed, and the
risk borne are great and go together. Therefore, ability of the highest order is
req uired to make the more successful businessman.

1.4 QUALITIES OF A SUCCESSFUL BUSINESSMAN

To make a success of the enterprise, the business leader should possess,
broadly speaking, the following basic qualities:

1. Accuracy: The first main quality in the businessman is that he knows

what he is talking about, and what he means. Precision in regard to orders
and their execution is imperative. Accurate action depends upon accurate
thinking. The good businessman must be able to grasp his problems by treating
them quantitatively.

2. Time Sense and Foresight: Modern business, subject to fast changes,

requires a businessman to appreciate time. He must always think in terms of
time. There is a chain of actions which must fit in with the rapidly changing
desires of the ultimate consumer. He must be able to forecast with foresight,
and look into the future. Having detected the wants, he must proceed
intelligently to utilise his property to satisfy them. In this way he will have a
well-established business long before others who are still groping in the dark.

3. Alertness: A businessman keen on success must keep in touch with

the world, and not keep himself. He must be up and doing in order not only to
satisfy existing wants but to create fresh wants.

4. Honesty or Business Morality: In order to adequately satisfy consumer

demand, the businessman must be honest. He must use all his ability to
provide precisely what is wanted, if he wishes to make goodwill for himself
and the organisation he conducts. The honesty and optimism which goes

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with it are attributes of the businessman at his best. Honesty with him is not
only the best policy but also the best practice.

5. Ability to Co-operate: Another noteable quality of the business man is

ability to co-operate with a large number of others. He must be able to
compromis, adjust, adapt and be willing to admit that his judgment may on
occasions be wrong. Besides he must be temperamentally fitted to exercise a
divided authority. Understanding others today is viewed as a perquisite par
excellence-as a most expedient stepping stone to success.

6. Consistency and Dependability: The businessman must have consistent

mind so as to be able to exercise firmness in his dealings with others. He
should hold the organisation constant and hence dependable, because it
does not fluctuate from day to day. A dependable businessman has satisfied
co-workers who are inevitably loyal to him and the unit directed by him.
Thus, a businessman who wants results should avoid inconsistency, and its
inevitable result, unfairness.

7. Initiative and Capacity to make Decisions: Success in any human activity

depends in, large measure on initiative and capacity to make decision.
Indecision very often results in missing business opportunities which have a
tendency to wriggle away if not captured promptly. Decision making is the
basic ingredient of executing any task. Therefore, it is but essential for a
successful businessman to make quick and correct decisions.

8. Energy: A bountiful endowment of physical and nervous energy is

another requisite without which other qualities are hardly of any value.
Infinite capacity for taking pains is essential. In addition to abundant energy,
he should possess forcefulness enough to put across his ideas and suggestions
which he believes to be right. .

9. Personal qualities: Additionally, a businessman should possess all or

at least some of the qualities common to all leaders. He should have a better
than average intelligence; or mental alertness, constructive imagination,
knowledge of human nature, enthusiasm, a sense of humour, self-confidence,
self-control, pleasing personality, concentration, tolerance and sympathy.

Requisites of a Successful Business: In order to be successful or to

avoid failure, a business must render a worthwhile service or make a
worthwhile product that can be sold at a profit, and it must sell that product
consistently and continuously. To do this an enterprise must conform to the
following requisites of success in business.

Company Objectives: The most important and fundamental essential of

a successful business is the establishment of definite and clear objectives;
for without purpose no organisation can be effective. To avoid failure, both
long-range and short range objectives should be established. They must be so
definite that they can be clearly described and so realistic that they can be
achieved.

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 Planning: Planning is another corner-stone upon which successful
enterprise depends. Planning is tle analysis of a problem, thinking out the
forward solutions to that problem, and then outlining the steps that must be
taken to reach the objective defined in the solution. To plan is to propose a
forward programme for guiding the future affairs of an enterprise. Planning
assumes that the future will be different from the present, and it attempts to
determine how the enterprise can make use of that difference. It enables
business enterprise to meet the contingencies of the future and thus saves it
from floundering.

Research: In these days of expanding technology, increasing competition,

new methods of buying and selling and of dealing with people, business
success depends on improved methods of production, selling and ability to
manage men by getting along with them. One way of doing all this is by
getting and making use of new and up-to-date facts. Research supplies these
new facts.

Research may be defined as ‘the systematic search for new knowledge.’

If it is conducted solely to probe the unknown, it is called Pure Research,
i.e., an investigation in the quest of knowledge for the sake of knowledge
itself, as in the fields of basic science. If research is made for immediately
practical or commercial purposes, it is known as Applied Research. The
distinction between the two is not sufficiently clear, and applied research is
often the result of pure research. For example, the theories of nuclear fission
have resulted in useful atom powered engines, or experiments with coal, air
and water have led to the manufacture of nylon. We are, however, concerned
more with applied research, as it involves the study of some particular problem,
the solution of which will benefit the business enterprise. Applied research
in industry is designated Industrial Research and is usually concerned with
(1) marketing, (2) materials, (3) product, and (4) equipment and processes.

Market Research is the study of the consumers and the market with a
view to testing consumer acceptance of products and to developing data for
production schedules and prices.

Materials Research is linked with product development. For example,

research in metals, coal, oil and chemicals has played a big part in recent years
in bringing forth new alloys, synthetic rubbers, plastics, resins, fibres, etc.

Product Research involves creation of new product and improvement of

the existing one.

Equipment and Processes Research is usually directed towards the

development of methods of manufacture, tools, and equipment, as well as
handling devices that tend to increase productivity.

In addition to Industrial Research, Industrial Relation Research and

Research in Indusrial Psychology have proved of great advantage to business

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enterprise in man- power management. Industrial relations research may
relate to general social and economic relationships in employment or it may
take up specific problems, such as absenteeism, labour turn-over, employee
grievances and frustrations. Research in industrial psychology attempts to
study individual differences as a basis for selection, placement and promotion.

Sound Organisation: For the success of any business enterprise it is

essential that it has a well defined organisation, manned with competent
personnel, whose duties are delimited. The authority of each man is perfectly
clear as well as his responsibility to his superiors.

Adequate Finance: Finance is said to be the life- blood of a business

enterprise. It is, therefore, imperative for the success of any business that
adequate provision for long-term and short-term finance is made.

Proper location of the Plant, its layout and size also contribute substantially
to the success of a business unit.

Effective and Efficient Management is probilbly the most important

requisite of a successful business; for it is through management that the
economic forces are utilised to the best advantage. It is necessary that the
ship of enterprise is put under the control df intelligent and enlightened
executives or managers. To succeed in their objective to run the business
enterprise successfully they must be endowed with at least some of the
qualities of a businessman alrbdy discussed.

All these essentials of a successful business will be discussed at

appropriate places in the later chapters. Suffice it to say at this stage that
ability to buy right, to maR.ufacture correctly, to keep costs down, to sell, to
keep records, to conserve resources and to get along with others will go a
long way to make a business successful.

CHECK YOUR PROGRESS I

Name the objectives of business
Notes:
[a] Write your answers in the space given below.
[b] Check your answer with the one given at the end of this Unit

1.5 COMPONENTS OF BUSINESS

Being an all-embracing term, business includes trade, commerce and
industry. Business may, therefore, be classified into two broad categories;
(a) Industry, (b) Commerce (including trade). lndustry is concerned with the
production of goods, and commerce with the distribution of what is produced.
A brief description of each is in point.

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 1.5.1 Industry: The processes of extractio n, production, conversion,
processing or fabrication of products are described as industry. These products
of industry are sold either for further transformation into finished goods or
for ultimate consumption. Goods used by final consumers are called
consumers’ goods, and those used in the production of other goods are
described as producers’ goods. An enterprise manufacturing motor cars, cloth,
jams, edible oils produces consumers’ goods. A steel mill may make steel for
further fabrication into variety of articles, such as surgical instruments,
blades, etc., or an engineering concern may manufacture machine tools and
machinery to be used for manufacturing other products. These are producers’
goods or capital goods. , .

Types of Industry: Broadly, an industry is either Primary or Secondary.

Primary industry may be either extractive or genetic, and secondary industry
is either manufacturing or construction.

Extractive Industries: These industries are engaged in supplying

commodites which are extracted or raised from the earth, sea and air with
comparatively little help from man. The products of such industries are
generally used by manufacturing and construction industries for fabricating
finished goods. Fishing, mining, fruit gathering, agriculture and afforestation
are some of the examples of extractive industries.

Genetic Industries: These are industries which, though dependent upon

nature, require a greater application of human skill in their production. The
enterprises engaged in agriculture, forestry and rich culture are examples of
genetic industries. Though agriculture is dependent upon the nature and
quality of the soil and, climatic conditions, yet success in this line will very
much depend upon the application of human skill and knowledge. Intensive
cultivation is possible with greater amount of capital and larger number of
workers. Similarly, cultivation of forests is necessary for securing supply of
timber for various purposes.

Manufacturing Industries: Manufacturing industries are concerned with

the working of raw materials or partly finished materials into finished products.
Manufacturing processes are carried on chiefly in factory enterprises and
constitute a very large part of the total business activities. Among the
manufacturing industries we may mention iron and steel works, spinning
and weaving mills, flour mills, the making of machinery, etc.

Construction Industries: These are concerned with the making or

constructing of buildings, bridges, dams, roads, canals, etc. The process of
laying out, fitting and connecting materials which have been already prepared
is involved in these industries.

Service Enterprises: Business provides not only goods but also services.
At every point in the economic system an infinite variety of services are
furnished, e.g., domestic services, financial and aesthetic services to

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individuals and to business enterprises. When a person goes to a cinema, or
takes out an insurance policy on his life, he receives nothing material in
return for his money but a piece of paper. A cinema house or an insurance
company is nonetheless a business concern. What each of them provides
cannot be classified as goods; they are rather opportunities-an opportunity to
save money and make provision for a wife and family after death. Generally,
such things are termed services. Hotels provide accommodation, railways
and aeroplanes means of getting from one place to another. Shipping companies
also cater for health by means of holiday cruises. All of them provide services.

Classification of Manufacturing Industries: Manufacturing industries

may be either a continuous or an Assembly type. A continuous industry may
be either analytical or synthetic. Assembly industries are also of two types.
One with similar components and the other with dissimilar components. A
brief account of each type is given below.

1. Continuous Industry: It is an industry in which all the material is

received at one point, from which successive operations turn it into a finished
product. Yarn spinning, paper and pottery manufacture are examples.

2. Assembly Industry. In an assembly industry the finished product can

be produced only after various components have been made and then brought
together for final operations, such as manufacture of shoes and automobiles.

3. Analytical Industry: In this type of continuous industry, the basic

material is analysed and separated into several parts so that the final product
emerges separate and distinct from the mass of original material. All refining
industries, such as oil and by-products of coke, are of this nature. The crude
mineral oil is analysed and separated into kerosene, diesel oil, lubricating
oil, and the final product petrol.

4. Synthetical Industry: In this type of continuous industry various

ingredients are brought together and combined in the manufacturing process
to produce a new product. Paper manufacture, yarn spinning, paint making
and soap making are example of this type.

5. Assembly Industries with Similar Components: Here the components are

similar and go through similar operations, as in clothing industry.

6. Assembly Industries with Dissimilar Components: In this type the

components are dissimilar and go through unlike processes, as in automobile
industry.

1.5.2 Commerce: The process of buying and selling, and all those activities
which facilitate trade, such as storing, grading, packaging, financing, insuring,
transporting, are called commerce. The principal function of commerce is to
remove the hindrances of person, place, time, exchange and knowledge, in
connection with the distribution of commodities until they reach the
consumers. By removing these hindrances commerce ensures a free and
smooth flow of goods from producers to consumers. The hindrances referred

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to above are discussed below.

Hindrances of persons: Buyers and sellers of goods are not always situated
at the same place so that contact between them is hindered by distance.
Commerce helps to remove this hindrance between persons by means of
trade. Trade as part of commerce therefore plays a major role in establishing
contact between the producers as sellers of their products and the consumers
as buyers of those goods to satisfy their wants.

Hindrances of exchange: With money as the medium of exchange,

payment for goods and services is made possible through institutions such as
the banks. In this way, banks, as part of commerce, act to remove the
hindrance of exchange and enable buyers to procure goods, especially by
extending their own credit. The banks very often finance trade in various
ways.

Hindrances of place: The goods may be produced at one place and the
demand for them may be the greatest at a different place, because they are
not produced there. This barrier of distance is removed by commerce through
the different means of transport, and goods are carried from one place to
another. Added to the direct movement of goods from the point of production
to the point of consumption or use, are the services of insurance to cover the
risk of loss and packing to protect goods against damage and pilferage.

Hindrances of time: Goods, especially in modetn times, are produced in

anticipation of demand. They must therefore be stored in a safe place to be
released as and when demanded. The function of storing and preservation is
performed by warehouses. In other words, warehouse remove the hindrances
of time by balancing the time lag between production and consumption, and
so create time utility. Insurance comes into play even where goods are stored
in warehouses and removes the risk of loss or damage through theft or fire.

Hindrances of information: Selling of products is today the most important

problem that a manufacturer has to solve. His products may be the best, but
how are the prospective buyers to know about them. This lack of information
about the products and the company is a great hindrance in the way of
consumers buying them. Advertising and salesmanship help to remove the
hindrances of the lack of information by bringing to the notice of the people
the advantages of buying the goods and services offered.

To conclude, commerce may be said to be that branch of business which

facilitates exchange of goods by removing the various hindrances, namely,
those of persons through trade, of exchange through banking, of place through
transport, as well as, insurance and packing, of time through warehousing
as well as insurance, and of lack of information through salesmanship and
advertising. Hence, Stephenson defines commerce as “the sum total of those
processes which are engaged in the removal of the hindrances of persons
(trade), place (transport and insurance) and time (warehousing) in the

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exchange (banking) of commodities.”

Trade: Trade is the final state of business activity and involves sale and
purchase of products. It is to facilitate the transfer of goods from the seller to
the buyer (trade) that all the other activities are undertaken.

Types of Trade: Trade has been classified in many ways. The normal
classification of trade is (a) Internal Trade, and (b) Foreign or International
Trade. Internal trade. in turn, may be either wholesale trade or retail trade;
and foreign trade may be import trade or export trade.

Internal trade, also known as home trade or domestic trade, comprises

buying and selling of goods within the bounds of a country. All transactions
connected with it, such as payment and transporting, are national, and no
external agency is involved.

Foreign or International trade refers to buying goods from, or selling

commodities to, traders doing business in foreign lands. This type of trade
involves payment for goods in the currency of the country of the supplier of
goods and the use of international means of transport.

Wholesale trade relates to purchase of goods in large quantities from

producers and growers and their resales to retailers in small lots. It serves
as a link between the manufacturers or producers and the retailers who sell
them to the ultimate consumers.

Retail trade is the last link in the economic chain whereby human wants
are satisfied. The retailer assembles at a convenient place various types of
products from numerous sources and supplies in small quantities to consumers.

International trade is normally wholesale trade and takes the form of

import or export, or it may be entrepot trade. By import trade is meant buying
goods from suppliers in foreign lands and by export trade selling to buyers in
foreign countries. Entrepot trade consists of importing of foreign produced
goods with the object of re-exporting them.

1.6 BUSINESS ORGANISATION AND MANAGEMENT

Since we are concerned with the organisation and management of a
b,usiness enterprise, we may, with profit, start with working definitions of
the two terms.

Business Organisation: ‘Organisation’ says Sir Ian Harpilton ‘’is the art
of science of building up a systematical whole by a number of parts, just as
the human frame is built up by heart, liver, brain, legs, etc.” J.W. Schulze
defines organisation as “a combination of necessary beings, materials, tools,
equipment, working space and appurtenances brought together in a systematic
and effective correlation, to accomplish some desired object.’’ It is the
systematic arrangement of parts for a defined purpose.

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 A business enterprise consists of manpower, machines, materials, money
and management. Organisation brings these assets into the position of
greatest effectiveness and productivity. It is in effect the harmonious inter-
relation of functions and staff for the attainment of a common purpose.

Management: Management of a business enterprise is a process by which

man attempts to give order, direction and control to the various operations to
achieve its objectives, the most important of the same being the production of
quality goods at the lowest possible cost, and enabling the consumers ta have
them at the lowest possible price and yet earning adequate profits. For
achieving these objectives and others, management makes use of human
and material resources.

To sum up, the purpose of business enterprise is to serve the general

welfare. The function of management is to see that the enterprise fulfils this
objective through meeting the needs of its owners, its customers, its
employees, and the general public. In the following pages effort has been
made to explain the various facets of business, organisation and management.

1.7 FORMS OF LEGAL OWNERSHIP

(Private Sector)

The processes of production and distribution are carried out by lakhs of

establishments at work. These business units differ in form of ownership and
in the way they are organised for operation. A person, who wishes to start a
new business, has many forms of organzation to choose from. From tbe point
of view of ownership, there are in the private sector, four main forms of
rganization to run a business unit.

They are as follows:

(a) Individual or sole proprietorship

(b) Partnership

(c) Joint stock company and

(d) Cooperative undertaking.

To these may be added Joint Hindu Family Firm, although this form is
fast losing ground as a form of business rganization.

In the Public Sector an enterprise may be owned and managed by

Government Department Organisation, Public Corporation, Company or
Commission. The following chart gives the forms of ownership Organization
both in the private and public sectors:
Business/Enterprise

14
 Commercial/Industrial

Private Sector Public Sector

Individual Ownership
Group Ownership Group Ownership
Sole Proprietorship
(1) Partnership (1) Department
(2) Hindu Joint Family Firm (2) Public Corporation
(3) Company (3) Company
(4) Co-operative Society (4) Commission

Chart showing forms of ownership organization

A business enterprise in the private sector may be owned by anyone of

the above, but usually one form is more suitable than others for a particular
enterprise because of its distinguishing characteristics. Therefore, the choice
in this sector will depend to a large measure on the consideration of the
special characteristics of each type of organization. A brief account of these
factors is given on the next page.

1.8 FACTORS AFFECTING CHOICE OF ORGANISATION

(a) Ease of formation: One of the primary considerations in making the
choice of the most suitable form of organisation is the ease with which it can
be set up. Facility of formation, minimum or no legal requirements, freedom
from payment of any fees to the state or attorneys are the ideal conditions
favouring the choice of an ideal form of organisation to own and run a business.

(b) Ease of raising capital: Another important factor ‘that contributes to

the suitability of an organisation is the ease with which the requisite amount
of capital can be raised. Small amount of capital can be invested by the
entrepreneur himself and he would be content to set up his own business,
and individual proprietorship form of organisation would serve his purpose
effectively. If a large business, requiring huge amount of capital, is to be set
up, company form may be necessary which will entail certain formalities to
be followed for raising the necessary amount.

(c) Extent of liability: By liability is meant the extent to which a person

can be made to account at law. He is either fully liable, i.e. he can be made
to pay the full amount of the debts owed or he is liable only to a limited
extent, i.e., he can be made to pay towards those debts only up to a certain
limit, but not beyond it. In the former case his liability is said to be unlimited
and in the latter case it is limited. Since, where the liability of the owner is
unlimited, his personal or private estate will be liable for his business debts,
he will ordinarily prefer a type of organisation where his liability is limited to

15
the capital which he has agreed to contribute. Unlimited liability, on the
other hand, often acts as a stimulus to hard work which may result in good
gain for his own personal use. He may in that case select sole proprietorship
or partnership organisation.

(d) Relative managemenl and control rights of owners pnd managers: The golden
rule of capitalism is that control should be where ownership lies. Where the
owner is also the manager, the degree of control is complete. The direct
relationship between effort and reward acts as a stimulus to maximum
exertion. Paid managers have no direct personal interest in maximizing profits
by working efficiently as there is no relationship between profit and reward.
But an owner manager may hesitate to take risks and be venturesome.

(e) Decision-making opportunities: Some entrepreneurs, particularly those

who place great value upon their rights of personal leadership, would prefer
sole proprictorship as the form of organisation. If a very high level of leadership
is required which he may not possess, he will then be compelled to form a
company in order to attract able leadership to assume responsibility for the
operation of the enterprise.

(f) Flexibility of operation: A good form of organisation lends itself to

maximum flexibility, as changes can be introduced promptly without let and
hindrance. Individual proprietorship, for example, enjoys to the maximum
degree this characteristic of flexibility of operation.

(g) Maintenance of secrecy: Secrecy, especially in the case of small business

concerns, is of supreme importance. For that purpose the entrepreneur would
most probably prefer sole proprietorship. In case, he has to take other persons
as partners, he shall have to exercise great care in choosing his partners.

(h) Continuity of existence: Continuity of existence and stability are factors

which make an organisation superior in status as against those which lack
continuity. Company, as a legal person, may outlive many generations of
individual producers. The life span of a sole proprietorship is often limited to
the life span of the proprietor, and in case of partnership to the life span of
the partners.

(i) Freedom from government regulation: Different forms of organisation are

subject to varying degrees of government regulation and control. In sole
proprietorship the government regulation is minimum but a partnership is
exposed to more legal complications, particularly regarding ownership and
sharing of profits. A company is created by the process of law and the
Government reserves the right to control its actions more closely than of the
other two types of organisation.

(j) Impact of taxation: The basis of taxation is different in case of each of

the forms of organisation. Some of the business taxes affect all forms of
enterprise alike, and need not affect the choice, such as excise duties, sales

16
tax, property tax and customs duties. But individual income tax has an
important bearing upon the choice of the form of business organisation.

Making a choice of proper Form of Organisation: In making the choice

of a suitable form of organisation, the factors mentioned above will have to be
weighed against each other. This will ensure the best realization of the result.
Of the various factors discussed above, facility in formation, ease in raising
the requisite amount of capital are the most important. Limited liability,
especially if the capital requirements are large and relationship between
ownership and management is not direct, is another important factor. There
should also be available flexibility of operation, continuity, secrecy, freedom
from government regulation and minimum tax liability.

These factors are inter- related and cannot be taken into account singly.
The entrepreneur will make his choice after weighing all of them. The capital
will, of course, influence him most and then the limitation of liability. Some
other factors, such as the type of the product to be manufactured and sold,
competitive conditions in the chosen industry and so on. All of these factors
will be considered in relation to each of the forms of organisation. In the
following sections are discussed the distinguishing features of each form of
organisation.

1.9. SOLE PROPRIETORSHIP BUSINESS

Meaning and Leading Features. A sole proprieto~ship or one-man business
is a form of organisation in which an individual produces independently with
his own capital, skill and intelligence and is entitled to receive all the profits
and assumes all the risks of ownership. As this simple definition indicates,
where a business undertaking is owned, and controlled by one man, with or
without the help of his family members or a few employees, we have one-man
business and the owner is commonly called the Sole Proprietor or Sole Trader.
It is also known as Individual Proprietorship or Individual Entrepreneurship.

Historically, this form of organisation is the oldest form of business

ownership. It is also the simplest and the most natural. Its leading feature is
that the individual carries on business exclusively by and for himself. He
invests his own capital and is his own manager. The full control of the business
rests in him. He is the supreme judge of all matters pertaining to it, as he
makes his own decisions. He bears the entire risk and derives the total
benefit. He has almost unlimited freedom of action. He may engage in any
business he chooses without any legal formalities, unless he wishes to engage
in certain types of business requiring licences. For example, if a man wishes
to open a shoes shop, a grocery store, he may do so, ifhe can find a suitable
location and can furnish money to produce a supply of merchandise. On the
other hand, to open a restaurant, he will have to obtain a license from the
Health Department of the Municipal Corporation.

17
 As his capital is limited and his liability unlimited, a sole trader must
confine his activities to small undertakings. It is also difficult, if not impossible,
for him to enter into new enterprise or experiment.

To sum up individual or sole proprietorship form of organisation possesses

the following characteristic features:
1. One-man ownership.
2. Personal control.
3. Total or undivided risk.
4. Unlimited liability.
5. Free from government regulation.
6. Proprietor and the firm identical.

Suitability: Because of its peculiar features, sole proprietorship form of

organisation is suitable for, and is adopted by, enterprises:
(a) which are small in size;
(b) which require little capital;
(c) I which lend themselves readily to control and management byone
man;
(d) where risk involved is not heavy;
(e) where personal attention to customers’ needs and tastes is important.

The main types of businesses that take the form of sole proprietorship
are retailers, hawkers, small grocery stores, bakers, confectioners,
launderers, small printing houses, small machine shops, and thousands of
similar enterprises, and professional firms, such as solicitors, attorneys,
accountants, photographers, hairdressers, etc.

Advantages of Sole Proprietorship: The principal advantage of sole

proprietorship rganizedon are as follows:

1. Ease of formation: An individual enterprise is easy to form and simple

to run. No legal formalities like registration are required to set it up. Any
person can engage in such a business at will. The only restriction is wbere
he wishes to start certain specified types of business. In that case, he will
have to obtain a licence, as where he wants to start a restaurant, or sell
opium or liquor.

2. Direct motivation: The proprietor has a direct personal interest in the

business which makes for efficiency and economy. Indeed, the direct
relationship between effort and reward acts as a stimulus to maximum exertion
for a sole proprietor.

3. Complete degree of control: As the sole proprietor is the sole master of

his business, his control over it complete. He is responsible to no one else.
Actually, no problem of coordination arises; his own decisions will make for

18
reconciliation of the various interests of the firm. As he knows all his employees
personally, he is in a position to encourage team work. This helps to eliminate
waste. The golden rule of capitalism that ‘where the risk lies, control must
lie’, is admirably satisfied in this form of rganizedon.

4. Promptness in decision-making: Promptness in taking decisions makes

for efficiency. A sole trader, being the supreme and sole master, can make a
prompt decision, and thereby take advantage of an opportunity for gain before
it slips away. Since there is no one else to dispute hisjudgment, he can also
maintain a decision made by him.

5. Flexibility in operation: As the proprietor has the full control over his
business and is the supreme judge in all matters, he can introduce changes
as the exigencies of occasion demand, and without any delay. Hence, there
is a great deal of flexibility in policy- making in this type of rganizedon.

6. Maintenance of secrecy: Secrecy is of vital importance for the success

of a small business; and a sole trader is in an eminent position to keep his
affairs to himself. As there is no legal obligation to supply any information
regarding his business to anyone, he can maintain utmost secrecy in all
matters.

7. Catering for individual tastes: A sole trader is in a position to be in close

touch with his customers and to cater for their individual tastes. This helps
him to build up goodwill for himself. The individual owner flourishes in all
enterprises where the “personal element” is important.

8. Credit standing: The fact of large goodwill and wide clientele, coupled
with unlimited liability are likely to prompt creditors to grant him liberal
credit. The assets of the firm along with his resources outside the firm (i.e.,
his private property and investments) will all help to build up his credit-
worthiness with the result that the suppliers and other institutions will readily
extend him credit.

9. Minimum government regulation: The activities of a sole trader are

regulated by government and law to the minimum extent. In fact his rights
and obligations are the same as of any other citizen. It is true that a sole
proprietor has to comply with tax and labour laws, but otherwise interference
is minimum. The organisation and dissolution of the business are not subject
to any government regulation in this form of rganizedon.

Social Advantages of Individual Proprietorship. The sociological

significance of individual proprietorship in the form of a small shop consists
in rendering some important, way, indispensable services to the community
and at the same time providing the basis of an independent livelihood for
many.

1. Independent way of life. This form of organize provides a way of life

for those who take pride in ownership and control of what they own. Such
persons are obviously of independent spirit and would not care to serve under

19
others. It gives him an opportunity to utilize his capacity, to the maximum
and to enjoy freedom of action. The sole proprietor is his own master and
manager, and this fact generates the greatest possible satisfaction.

2. Generation of social virtues: It affords a form of life and work which

permits a high degree of self-determination, the enjoyment of purposeful
work, the warmth of social contact, and a well integrated family and
respectable life. It also develops the qualities of self- reliance, responsibility,
and initiative, which are of great social importance.

3. Diffusion of business ownership: As under this form of organisation, a

very large number of people must own and manage vast number of small
business units, it makes for diffusion of business ownership as against
concentration of power in a few hands offered by a joint stock company.

Disadvantages or Limitations: Despite so many advantages, both

economic and social, one-man business, suffers from some very serious
limitations. The limitations of individual proprietorship are as follows:

1. Limited amount of capital: The first limitation is as to capital. The amount

of capital that a sole proprietor can get together must of necessity be limited.
Save for a few exceptions, no one would be rich enough or even inclined to
supply considerable amount of money for his business. Since the sole trader
determines his business policy, investors cannot readily be induced to give
their funds into his hands. He is therefore limited to such funds as he may
own or raise from friends and relatives. As a result, he cannot expand his
business when it may be found necessary to take advantage of economies of
large-scale operation.

2. Limited managerial ability: An individual, however capable, cannot be

expected to possess full knowledge of all branches of a business and is bound
to fritter away his energies in doing things which could best be left to others
in a partnership or a company. Since, being alone, he must keep his fingers
on everything, he carries a staggering load of responsibility, which may crush
him under its weigllt unless he is a giant in judgment, intelligence and
intellect. He may, therefore, at times make wrong decisions which would
increase the cost of production and decrease his profits. After all, two heads
are better than one, unless the one is the best.

3. Unlimited liability: The liability of the proprietor is unlimited.

Is not only the assets of the business that are liable, but also his enti
personal fortune for the debts of the business. The advantage of person control
is counterbalanced by personal risk which might turn out to, very great.

Limited capital and managerial ability and unlimited liability of the owner
act as brakes to the development and expansion of business.

4. Uncertainty of continuity: Permanence or continuity of business is

difficult to maintain. When the proprietor dies or is no longer able to run the

20
business, the business may come to an end, if there is no on capable enough
to take his place. Very often the heirs lack the rganized ability or inclination
to carryon the business. If it falls into weak hand it will fail causing loss not
only to the owner but also to society. The closure of the business, which has
been rendering a useful service to th community, would be a social loss.

In conclusion, it may be safely stated that one-man control is th, best

from the point of view of efficiency and profitability, provided tha one man is
big enough to manage everything indefinitely.

Scope and Prospects of Sole Proprietorship Business: It is a common

place that single proprietorship businesses are the most numerous in India
as everywhere else, in spite of the fact that large corporations and companies
owning glarit business have entered the field. It is also almost certain that
individual proprietorship is in no danger of being crowded out by large
corporations, because of the opportunities it offers to a vast number of people.

It is true that large corporate enterprises have certain advantages inherent

in large-scale operation, namely, economic viability, operation¬al efficiency
and limited liability of the investors. Yet, a small entrepreneur possesses
advantages which in some circumstances will allow him to compete
successfully against a large manufacturer or trader. The following factors
show that single proprietorship business will continue to hold intact its position
in the business world in face of large corporations:

1. Normally, a business is started as a one-man venture, because of

the. Many advantages it offers. As the proprietor makes a success of it and is
faced with the problem of expansion, he resorts to the formation of a company.
If his capital needs are not vast and he wishes to preserve secrecy and family
character of his business he will form a private company.

2. Because the proprietor is closely in touch with details, and because

results are quickly known, the advantages of economic viability, direct
motivation, personal contact inherent in individual proprietorship sustain
one-man businesses along with giant concerns. As a result, in the field of
distribution in particular this form of organisation continues to flourish all
over the world.

3. In the field of production, too, there are certain industri,es which

can be run successfully only on a small scale. For instance, industries, whose
products cannot be standardized and establishments which attempt to make
products to suit the different tastes of consumers can best be owned and run
by individual proprietors. Such industries produce ‘tailored’ suits, high-grade
furniture, art goods, handicrafts, finely bound books, etc.

4. In India, the government has been encouraging individual owners to

take up small manufacturing activities by setting up industrial estates and
by providing training facilities, as well as by granting financial assistance.

21
The National Small Industries Corporation has been rendering a useful service
in this direction.

5. The vast majority of the service enterprises like transport and

warehousing are normally organised as individual proprietorships.
Professionals, such as chartered accountants, lawyers can function only as
sole proprietors or partnerships.

1.10 JOINT HINDU FAMILY BUSINESS

In India, we have family business in the form of Joint Hindu Family
Firms, which are in essence individual entrepreneurs possessing almost all
the merits and limitations discussed above. A short consideration of this type
of business is called for, although it is not so common now.

There are two schools of Hindu Law: Dayabhaga, which is applicable in

Bengal and Assam, and Mitakshara, which is current in the rest of India.
According to the Mitakshara law, an undivided family is the normal condition
of Hindu society, and the Joint Hindu Family consists of all persons lineally
descended from a common ancestor and includes their wives and unmarried
daughters. Within this joint family there is a narrower body which includes
only those persons who acquire by birth an interest in the joint or coparcenary
property. The business belonging to a joint family is ordinarily managed by
the father or other senior member for the time being of the family. He is
called Karta or manager. The Karta, as head of the family, has control over the
income and expenditure and he is the custodian of the surplus, if any. The
other members cannot question his judgment in running the business: their
only remedy is to demand partition. On the other hand, he is liable to make
good to them their shares of all sums which he has misappropriated or which
he has spent for purposes other than those in which the joint family is
interested. The manager has an implied authority to borrow money for family
business, but the other members will be liable only to the extent of their
share in the joint family property. He has general power to carry on the
business or shut it down as an individual proprietor may do.

1.11 PARTNERSHIP ORGANISATION

In an individual proprietorship, the work is carried on in cramped
circumstances, each man is for himself, and the admini~,.ration of the business
is purely a process of each man minding his own business. The organisation
is nothing more than a mere extension of the proprietor. If he possesses the
various qualities of a good businessman, he makes good profit. But it is not
always possible that an individual is endowed with all the requisite qualities
or even enough capital to run a successful business which must of necessity
grow in size for better results. Therefore, very often men of ability combine
their resources, and from this combination of capital, labour and skill,
partnership rganization results.

22
 Historically, partnership rganization has grown out of the need for more
capital to produce for the ever-growing market, more effective supervision
and control, greater organisation and division of work between proprietors,
and for spreading of risk. It is indeed the simplest method of extending the
size of a business and at the same time relieving the sole proprietor of part of
the burden. Yet partnership organisation is not always free from pitfalls. Its
successful working depends upon mutual confidence and good faith. As each
partner is the agent of the others and binds them to the fullest extent of
their fortunes, it is necessary to be careful when selecting a partner. When
you are considering a partner, do not be in too great a hurry give yourself
time to test him. Choosing a partner is like choosing a wife; marry in haste
and repent at leisure in either case there is need for second thought and
sure knowledge.

Meaning of Partnership: An association of individuals competent to

contract who agree to carry on a lawful business in common with the object
of sharing profit is a partnership. Section 4 or the Partnership Act 1932 defines
Partnership as “The relation between persons who have agreed to share profits
of a business carried on by all or any of them acting for all.” This definition
brings out the following five characteristics of partnership:

1. Contractual relationship: The partnership results only from a contract

between a certain number of persons called partners. As a result only persons
competent to enter into a contract can be partners, so that a minor cannot be
a partner. A Hindu Joint Family firm which results from status is not a
partnership.

2. Plurality of persons: As partnership results from a contract, there must

be at least two partners, although there must not be more than twenty.

3. Existence of business: Partnership implies business, and where there

is no business there is no partnership. Thus, the persons must form an
association by contract to carry on some business.

4. Sharing of profits: The agreement to carry on business must be with

the object of making profit and sharing it among all the partners. A piece of
philanthropy, though it may involve a good deal of business, is not a
partnership.

5. Mutual agency: The business must be carried on by all the partners or

anyone or more of them acting for all the partners. In result, each partner is
both an ageilt and a principal-agent for other partners and principal for himself.

Legal Implications: The definition of partnership, as explained above,

brings out some important legal implications which deserve to be kept in
mind while forming a partnership and conducting partnership business.

1. Legal position: Legally a partnership firm is not a legal entity nor a

person with any separate right distinct from the partners constituting it. It is
only an association of persons who are called individually partners and

23
collectively “a firm”. “Firm” is only a convenient phrase to describle the partners
and has no legal existence apart from them.

2. Extent of liability: The liability of each partner for the debts of the firm
is unlimited. The creditors have a right to recover the firm’s debts from the
private property of any or all partners, where the firm’s assets are insufficient.

3. Nature of partners’ liability: It follows that, while the acts of partnership

are in the name ot the firm, the responsibility created is joint and several
resting upon each of the partners. No agreement between the partners to
limit this liability only to some of them has any validity as against the claims
of any uninformed parties.

4. Utmost good faith: The relation of partners is founded on mutual

confidence and trust. Each partner must, therefore, be just and honest towards
the other partners. In other words, he owes a duty to act towards the other
partners with the utmost good faith. He must not make any secret profits,
and must keep and render true accounts and disclose all facts relating to the
business of the firm.

5. Implied authority: Each partner is an agent able to bind the others

with respect to all regular acts done by him on behalf and in the name of the
firm, such as the buying and selling of stock in trade, the hiring and firing of
employees, the borrowing of money, or the issuing of negotiable instruments.
Such an act of the partner is deemed to be the act of the firm (i.e., the act of
all the partners), and the authority so exercised by a partner is known as the
partner’s implied authority to bind all the partners.

6. Unanimity of consent: In matters of importance and those affecting

policy and nature of the business, or relating to an alteration in the partnership
constitution, unanimous decision by all the partners is necessary. A majority
cannot effect any change. In fact, majority principle does not apply in all
such matters.

7. Non-transferability of share or interest: No partner can assign or transfer

his partnership interest to any other person, so as to make him a partner in
the business. This may, however, he done with the consent of all the other
partners.

8. Dissolution: Unless there is an agreement to the contrary, the death

or insolvency of a partner dissolves the firm. If, however, an the partners, or
all the partners but one are adjudicated as insolvent, or the business of the
firm becomes unlawful, the firm is compulsorily and automatically dissolved.

CHECK YOUR PROGRESS 2

List out the main characteristics of sole proprietary form of organization
Notes:
[a] Write your answers in the space given below.

24
 [b] Check your answer with the one given at the end of this Unit

1. Formation: Although a partnership is constituted by means of a contract

between the partners, no legal formalities are required for its formation. An
oral contract is sufficient to bring it into being. But it is advisable to reduce
the agreement to writing, and prepare a properly drafted Deed of Partnership
or Articles of Partnership laying down the terms and conditions of partnership
and the rights, obligations and duties of partners.

Registration of a partnership firm is not compulsory under our law, nor is

any penalty provided for non-registration. The law, however, introduces certain
disabilities, which make registration necessary at one time or other. In fact,
the law has effectively ensured registration of firms without making it
compulsory. The nrst disability is that an unregistered firm cannot file a
suit, or take other legal proceedings, to enforce a right arising from a contract.
Secondly, a partner cannot sue the the firm or other partners arising under
a contract or conferred by the Partnership Act. But an outsider can sue an
unregistered firm and its partners.

2. Finance: Normally the capital of a partnership firm consists of the

amounts contributed by the various partners. The capital contributions by all
the partners need not be equal, and one or more may not put in any capital at
all. This will happen where such partners bring in special skills and abilities.
The initial capital may be augmented or more for expansion of business may
be obtained, by borrowing on the security of the firm’s property and also on
the strength of the private estates of partners.

3. Control: As partnership results from a contract, the control will depend

upon its terms. Where all the partners take active part in the condu.ct of the
partnership business, the control rests with all of them. All major decisions.
As observed earlier, must be made by the unanimous consent of all the
partners. There may, however, be some partners who do not take active part
in the conduct of the business. They are known as sleeping or dormant or
secret partners. In a word, the control is ordinarily shared by the active or
ostensible partners.

4. Management of Affairs: In law, every partner has a right to take part in

the conduct and management of the business of the firm. In practice,
partnership agreement provides for the division of work among the different
partners according to their experience and knowledge. It is not unusual to
have one of them as the senior partner who would be in the position of the
chief executive, exercising overall supervision.

5. Duration of Partnership: The partners are at liberty to fix the duration

of the partnership or say nothing about it. Where they agree to carry on
business for a definite period of time, it is called a partnership for a fixed
term. When the term is over, the partnership comes to an end; but if the
business is continued after the expiry of the period originally fixed, the

25
renewed partnership will become a partnership at will. Where a partnership
is formed for a particular adventure, it is called Particular partnership which
would presumably last until the business is finished. If the partners say
nothing about the duration, or agree to carryon the business as long as they
wish to do so, the partnership will be one at will. It can dissolved at the will of
any partner, on his giving notice. Where partners cannot agree on the
dissolution of the firm, the court may, on application, order its dissolution.

6. Taxation: A partnership firm is liable to pay income tax and other

taxes. As an individual is liable to pay. But there is a slight difference with
regard to the rate of tax according as whether the firm is registered under
the Income Tax Act or not If it is so registered (apart from registration under
the Partnership Act), the income will be divided among partners and each
partner will be assessed separately. If the firm is not registered, the firm will
be required to pay tax on its total profit as distinct from the incomes of the
individual partners.

7. Joint ownership: Every partner is a joint owner of the partnership

property, and has an equal share in it, unless different shares are provided
by agreement The property of the firm is required to be used exclusively for
the purposes of the partnership.

PARTNERSHIP PROPERTY
It is open to the partners to agree among themselves as to what is to be
treated as the property-of the firm, and what is to be the separate property of
one or more partners, although employed or used for the purposes of the
firm. In the absence of any such agreement, all property, rights and interests
brought by the partners into the common stock, all property acquired in the
course of business with money belonging to the firm, and the goodwill of the
business will be deemed to be firm’s property, and must be used only for the
purposes of the firm.

REQUISITES OF AN IDEAL PARTNERSHIP

Partnership business grows out of the need for combining resources,

both human and material. Some persons may contribute capital, others their
business ability and experience and still others may bring in technical rgan
The faithful contribution by each partner of his gift will make it successful.
An ideal partnership will satisfy the following conditions or requisites:

1. Common purpose: All partners must act with zealous cooperation and
the greatest common advantage. Each partner should make his contribution.
To the success of the business according to one’s capital, skill, knowledge,
influence and personality.

2. Good faith: Honesty of purpose and fairness in dealings are the

fundamental principles of partnership, each partner should create mutual

26
trust and confidence among themselves. For this purpose, care must be
exercised in selecting a partner, as the wrong selection may bring ruin to the
firm. The number of partners should be as small as will bring in the requisite
resources, human as well as material.

3. Sufficient capital: The necessary funds, both for short-term and long-
term use should be available in sufficient amount. Long-term funds would
normally be supplied by the partners as capital, and others may be obtained
by loans. To maintain sound financial position of the firm, drawings by the
partners should be kept as low as possible. Part of the profits should be
ploughed back into the business of the firm for further development.

4. Long duration: The duration of partnership should be long. Only long-

term partnerships can properly set up businesses and consolidate them
effectively for success. Therefore, it should be a constant endeavour of all
the partners to extend firm’s life over a long period by working honestly and
rganizati and by avoiding disputes.

5. Written agreement: In order to avoid misunderstanding and future

disputes it is desirable that the mutual rights and obligations of partners be
incorporated into a partnership deed. It should contain full details about
capital, sharing of profit, extent of the authority of each partner and so on.

6. Registration: The partnership should be registered with the Registrar

of Firms as soon after formation as possible. As indicated earlier, an
unregistered partnership firm cannot sue outsiders, although the outsiders
can sue it. In case it is not registered soon after its formation, the firm can
be registered any time before filing a suit.

PARTNERSHIP DEED

While to constitute a partnership there must be an agreement between

the parties, it need not necessarily be in writing. It may be of the most
informal character, even oral, though the business of partnership may involve
lakhs of rupees, or on the other hand, it may be an elaborate written document
called the Deed of Partnership or Articles of Partnership, and drafted by a
lawyer. Where the partners have decided to enter into a deed of partnership,
it should be stamped according to the provisions of the Stamp Act. The
partnership deed is not a public document like a Memorandum of Association
of a Company and only binds third parties so far as they have notice of it. A
properly drawn up deed of partnership should ordinarily cover the following
points :
1. The name of the firm together with the names of the partners
composing it.
2. The nature of business and the duration of partnership.
3. The amount of capital each partner undertakes to contribute and the
manner of its contribution.

27
 4. The ratio for sharing profits and losses.
5. Salaries, commissions, etc., if any, payable to partners; and also any
drawings which may be allowed.
6. Interest on partners’ capital, partners’ loans, drawings by partners
and interest, if any, to be charged on overdrawn accounts.
7. The division of work among the partners for the management of the
firm.
8. Matters relating to retirement, death and admission of partners, and
valuation of goodwill and share of profits available to such partners;
and any restraint on business by a retiring partner.
9. Settlement of accounts at the dissolution of the firm.
10. Arbitration clause to settle disputes which may arise among the
partners without recourse to a court of law.
11. Any other clause or clauses which may be found necessary in any
particular kind of business.

DISTINCTION BETWEEN PARTNERSHIP AND

JOINT HINDU FAMILY FIRM

The following are the points of distinction between a partnership and a

joint Hindu family firm:

1. A partnership can only arise as a result of a contract between partners,

while a Joint Hindu Family Firm is created by the operation of law.

2. A Joint Hindu Family Firm is not dissolved by the death or insolvency

of a co-partner, but a partnership is ordinarily so dissolved.

3. A co-partner is not entitled, on severing his connection with the

family firm, to ask for accounts of past profits and losses. It is otherwise in
the case of a partner.

4. In a joint family firm it is only the manager, and no other co-partner,

who has an implied authority to contract debts and pledge the credit and
property of the firm for the ordinary purposes of the family business. In the
case of partnership, any partner can bind his co-partners by debts incurred
iri the ordinary course of business.

5. The liability of partners is joint and several, that is, it is not only the
share of each partner in the partnership property which is liable for the
payment of partnership debts, but also the separate property of each partner.
In the case of debts contracted by a Karta, in pursuance of his implied authority
in the ordinary course of the family business, there is a distinction between
the liability of the manager and the liability of his co-partners. The manager
is liable not only to the extent of his share in the joint family property, but,
being a party to the contract, he is liable personally, that is to say, his separate

28
property is also liable. The other co-partners are liable only to the extp.nt of
their interest in the family property unless, in the case of adult co-parceners
the contract was virtually entered into by them also, or subsequently ratified;
and in the case of minors, unless ratified on attaining majority.

6. In a partnership, both males and females can be partners, but in a

Hindu co-parcenary only males are members. No female can be a co-partner
under Mitakshara law, not even a wife, who has interest in it to the extent of
maintenance, but under Dayabhaga law, both males and females can be
members of a co- partnary under certain circumstances.

7. In a partnership, a minor cannot become a partner nor is he one of

the group of persons called firm, though he may be admitted to the benefit of
partnership. In a Joint Hindu Family Firm a minor is a co-parcener.

8. A partnership is expected to be registered in order that partners may

enforce their rights between themselves or against strangers, but no such
registration is necessary in the Joint Hindu Family Firm.

9. Subject to any agreement to the contrary, partners have equal interest

in the partnership property and share its profits equally. A member of the
Joint Hindu Family Firm, on the other hand, cannot predict at any given
moment what his share in the joint business is. His interest is subject to
fluctuations, as it would enlarge by deaths and be curtailed by births, for he
does not inherit through his father but of his own right through birth. His
share becomes defined only when partition takes place. Also, no member is
entitled to any definite share of the profits of the business.

10. When a partner dies, his interest in the partnership devolves on his
heirs, although they cannot demand to become partners if other partners do
not so desire, but where a co-partner dies before partition of the co-partnary
business, his undivided share devolves, not by succession upon his heirs, but
by survivorship upon the surviving co- parceners.

11. A partnership firm, not being a person, cannot (nor can a partner on
behalf of the firm) enter into partnership with a stranger. A partner may in
his own personal right become a member of any number of partnership firms.
The manager of a joint family business, acting on behalf of the family firm, is
competent to enter into partnership with a stranger.

LIMITED PARTNERSHIP

Some of the limitations such as unlimited liability and the limited amount
of capital of an ordinary partnership can be obviated by resorting to the “Limited
Partnership Organisation”. We have seen before that the successful working
of a partnership depends upon mutual, confidence and trust, and that,
therefore, strangers may be wary to invest funds in a partnership. The limited
partnership form of organisation permits of the admission of “special partners”
with limited liability along with the “general partners” whose liability is

29
unlimited. We have no such device in India, but in the Western countries
this form of organisation is quite common. The principle underlying all the
Statutes creating such partnerships being the same, we will outline the
important provisions of the English Limited Partnership Act, 1907.

The object of the Act is to allow some of the partners to be responsible

only for capital actually found by them thus limiting the liability of those
partners, and having the others fully liable for the debts of the firm. The
important features ‘ofa limited partnership are:

1. It must consist of one or more persons called “general partners”, who

shall be liable for all debts and obligations of the firm.

2. It must also contain one or more persons, to be called “limited

partners”, who shall contribute a certain amount of capital and be liable only
to the extent of that capital and no more. The limited partner is in fact in the
nature of a fully paid shareholder, whose capital cannot be returned as long
as the partnership continues.

3. A limited partner cannot take part in the management of the

partnership business, nor can he bind the firm; but he can inspect its books,
etc.

4. If he takes part in the management of the business, he shall be

liable to the full extent for all debts and obligations incurred when he so
acted.

5. A limited partner may, with the consent of the general partners,

assign his share in the partnership, so as to make the assignee a limited
partner in his place.

6. Every limited partnership must be registered.

As compared with the ordinary parfnership, the limited partnership

has certain advantages. While retaining the direct motivation in management,
it furnishes a single direction of management which may act with greater
unity and promptness. Also, it provides impetus to the investing public to
supply funds in large quantities, thus affording an industrial leader with
little capital to put his genius and energy at the service of society. The generall
partner can secure additional capital without any loss of control. The limited
partnership will usually be found advantageous where a highly concentrated
and responsible management is desired at the same time with considerable
capital, especially if incorporation is not desirable either because of expense
or regulatory provisions.

30
 EVALVATION

Partnership rganization is admirably suitable for medium-size

undertakings, where personal efforts of the owners are essential. It possesses
some of the characteristics of the individual proprietorship rganization, and
consequently most of its advantages and limitations.

Advantages: Partnership organisation enjoys the following advantages :

1. Facility of formation: Like individual enterprise partnership can be formed

without legal formality and much expense, and can be dissolved in the same
way. No formal documents are required to be drawn up as in the case of joint
stock companies. Partnership taxes are relatively small.

2. Benefits of larger resources: Partnership enjoys larger resources than

a sole trader, so that the scale of operation can be enlarged to reap the
benefits of important economies. There is always scope for the introduction
of new partners to augment resources

3. Flexibility: The business is abundantly mobile and elastic, being almost

free from legal restrictions on its activities. The partners can introduce any
changes they consider desirable to meet the changed circumstances.

4. Personal element: The personal element in the business and the,

corresponding care, efficiency and-economy are ensured. There is thu~ an
effective motivation to production. The supervision of the staff can also be
carried out effectively, as the partners personally act in the manage¬ment of
the affairs of the firm.

5. Benefits of combined ability: Partnership enjoys the benefits of combined

ability of its partners possessing varying degrees of talent and skills. This is
a distinct advantage over sole proprietorship. Two heads are better than one
is an old saying.

6. Prompt decisions: The partners exercise joint responsibility and meet

frequently. This enables them to make decisions promptly, which is conduci
ve to taking advantage of sudden business opportunities.

7. Sharing of risk: Any losses sustained by the firm will be shared by all
the partners with the result that the burden borne by each partner will be
much less than what a sole proprietor may have to bear.

8. Wholesome effect of unlimited liability: The fact that the liability of the
partners is unlimited and each one is liable to the full extent of his private
fortune acts as a great check agai nst dangerous speculation. This is a great
safeguard against recklessness. Secondly, unlimited liability also enhances
the credit of the firm in the eyes of the lending public and thus enables it to
borrow easily and at low rate of interest.

31
 9. Protection of minority interests: The minority interest in a partnership is
effectively protected by law. In matters of policy all partners must agree; and
even in ordinary affairs of routine nature a dissatisfied partner may withdraw
and dissolve the firm. Thus in all important matters, the minority enjoys the
right of vote. In fact, the law gives each partner the right to be heard and
consulted. In consequence, each partner is as important as the others.

Disadvantages: Despite several advantages, the partnership form of

rganization suffers from the following limitations:

1. Lack of harmony: There is always likelihood of friction within the firm.

Difference of opinion very often results in disharmony and lack of united
management. Generally, differences crop up and each partner tries to vie
with the others in dishonest dealings. This frequently results in disruption
and ultimate dissolution.

2. Limited resources: The limit of 20 on the number of partners, limits

the amount of capital that can be raised. Actually, in order to secure harmony
among the partners, the number has to be kept much smaller than the
maximum allowed by the law. This further limits the resources, with the
result that large- scale business cannot be run by partnership. Though superior
to one-man business in this respect, it is inferior to more highly developed
form of joint stock company.

3. Restricted enterprise: As unlimited liability extends to the entire fortune

of each partner, the partners tend to be overcautious. This restricts enterprise.
In fact, the liability of individual partners may be regarded as excessive for
most purposes. Therefore, the partnership organisation tends to be useful
only for comparatively small businesses, such as retail trade, a moderate-
sized mercantile houses or a very small manufacturing business.

4. Instability: The business may come to an abrupt end on the death or

insolvency of any partner. The business may also be closed where a partner
signifies his intention to dissolve the partnership or gets it dissolved by order
of court on account of a wrongful act of another partner.

5. Social loss: Such an abrupt closure of business is harmful not only to

its owners, but also to society particularly if it has been successful and
contributing to the well-being of the community.

6. Lack of public confidence: The absence of legal regulations, and the

fact that there is no publicity in regard to a partnership’s affairs reduces to
some extent public confidence.

7. Heavy burden through implied authority: Each partner is an agent able

to bind the others by his acts and omissions in the ordinary and usual course
of the business of the firm. When, therefore, one partner is negligent, or
commits a wrong, br is guilty of a fraud, within the scope of his authority, his
partners are equally liable financially and without limit. This may put a very

32
heavy finaj’,cial burden on the partners, which may, in some cases, result in
the ruin of a person.

Conclusion: On balance, partnership form of rganization is most

suitable where the size of the business is relatively small, and so the
capital can be contributed to n’teet its needs by the partners themselves. It
is an rganization that can be usefully adopted by men of eq ual wealth and
ability who combine their resources capital, labour and skill, and run it for
the common advantage of all the partners. But the very success of the business
would create problems relating to expansion for coping with the increased
demand for the goods. In such a case. It would be necessary to convert the
business into a limited company and collect funds from the public and take
advantage of limited liability.

1.12 COMPANY FORM OF ORGANISATION

The power over enterprise having passed to capital, individual
proprietorship or partnership could not supply sufficient capital. Nor could
technology needed by large-scale organisation be handled by either of the
forms of rganization. Therefore it became necessary to have another formof
rganization through which large sums of money could be amassed from large
number of people who are either not capable of running business enterprises
or have no time to do so. They are, however, willing to invest their savings in
a business provided they are assured that their money is safe and they will
not be called upon to pay anything more than what they undertake to invest.
The form suitable to serve these purposes was found to be a limited company.
This form enables the entrepreneurs to get the necessary capital from the
general public, retaining at the same time, the control and management in
their own hands. As a matter of fact, most of the shortcomings of the
partnership form of rganization can be overcome by rganizati a business as a
joint stock company with limited liability.

Fundamental Principle of Company Organisation: The fundamental

principle of joint stock organisation is that the capital of the undertaking is
contributed by a large group of people, the shareholders, who have very
restricted powers and have hardly any voice in the management of the
business. This is entrusted by them to a exercise their control through General
and Departmental Managers. The system of joint stock organisation is very
useful for large undertakipgs for which large capital is required, which can
be obtained from a large number of people, who are certain that whole fortunes
are not expressed to danger as in the case of partnerships. Hence, joint stock
enterprise is today the organisation medium for the supply of capital to trade
and industry, and as a powerful and efficient engine of production.

Company-Its Meariing and Charracteristics: A company is a voluntary

association of persons, organisation by law, having a distinctive name, a
common seal, formed to carry on business for profit, with capital divisible

33
into transferable shares, limited liability, a corporate body an organisation
succession. An analysis of this definition will bring out the distinctive
characteristics of a company.

1. Creature of law: A company is a creation of law, and is sometimes

called artificial person. Let exists only in contemplation of law and therefore
has no physical shape or form. Although invisible and intangible, as a legal
person, it enjoys almost all the rights of natural person. It has a right to
enter into contracts and own property. It can sue and can be sued. The legal
personality is one of its distinctive features.

2. Distinct legal entity: Being a creature of law, a company is a legal entity,

something distinct from the persons who are its members. A shareholder is
not liable for the acts of the company, even though he holds almost all the
shares. Also the shareholders cannot bind the company by their acts. They
are not it’s agents. As the company is an artificial creature of the law, distinct
and separate from its members, a shareholder can both own its shares and
be its creditor. The life of the company is independent of the lives of its
members. Even if all the members die, the company does not come to an end
because of their demise.

3. Limited liability of members: The limited liability is another important

feature of a company. A person, by buying shares in a company, acquires an
interest in the company, and is at liberty to dispose of these shares whenever
he likes. If anything goes wrong with the company, his liability is limited by
the nominal amount of the shares held by him. In other words, while he
stands to lose the money he has invested, he cannot be called upon to pay a
paisa out of his private property in order to help meet the company’s obligations.

4. Perpetual Succession: The incorporation process brings into being a

corporate body distinct and separate from the members who constitute it.
The right given to the shareholders to transfer their shares without in any
manner affecting the position of the company gives the company continuity.
As a natural consequence of incorporation and transferability of shares, the
company has perpetual succession or, uninterrupted existence. As we have
noted above, the life of the company being independent of the lives of its
members, its life expectancy is not limited to that of the various founders.
Members may come and members may go, but the company goes on
uninterrupted (until, of course, wound up according to law). The law creates
the company and the law brings it to an end.

5. Common Seal: The law requires every company to have a seal with its
name engraved on it. As the company has no physical form, it cannot sign its
name on a contract. Therefore, originally all documents and contracts required
the affixirlg of the seal. But now most of the transactions are signed by the
directbrs who act as its agents. When it is affixed on any document, two
directdrs must witness its affixation.

34
 6. Divorce between Ownership and Management: The personality of the
company is separate and distinct from those humans who compose it-the
shareholders. Therefore, the shareholders cannot bind the company by their
acts. Since the investors of capital are a heterogeneous group of people residing
far and wide, they cannot manage the affairs of the company. They leave this
task to their representatives the Board of Directors. This characteristic of a
coinpany militates against the Golden Rule of Capitalism, which will be
discussed later.

The chief implications of the above analytical description of the company

may be summed up as follows:
1. It is a vohmtary association
2. of mutually agreeing persons, natural or legal;
3. It is an autonomous legal unit,
4. Distinct from its associating members
5. In name, in the duration of its life, and its liability to creditors;
6. It exists because the State has by statute enabled it to exist.

In all these respects company organisation differes radically from a

partnership business.

CHIEF FEATURE OF COMPANY FORM OF ORGANISATION

The principal and distinguishing features of a company rganization may

be detailed as follows:

1. Formation: A company is an artificial legal person created by process

of law which makes it an entity separate and distinct from its members that
constitute it. Since corporate life and form cannot exist without the permission
of the State, a company, having corporate personality, can be brought into
being by following certain legal formalities. The formation of a company passes
through two stages: Promotion and Incorporation. Both of these processes
will be discussed in the following section.

2. Financing: Where the capital needs are not vast and it is desired to
preserve secrecy and family character of the business, but enjoy the benefit
of limited liability, a private limited company is formed. A private company
raises its capital by private arrangement from friends and relatives. It cannot
invite the general public to buy its shares. Where huge capital is required for
production and distribution of what has been produced, a public limited company
is formed and the general public is invited to supply the capital. For this
purpose, a prospectus has to be issued inviting the general public to take up
the shares of the company. This is an elaborate document required to disclose
detailed information, the preparation and issue of which involves good deal of
expenditure. But it enables the company to collect funds from far and wide
and in amount which is far beyond the powers of partnerships.

35
 3. Control: In law and theory, the members of the company, who contribute
the share capital, have the ultimate control of company’s affairs. Every company
is required to hold an annual general meeting at which the shareholders are
supposed to exercise their power of control. In practice, the control lies with
the Board of Directors or the ‘inside –group’. But the Board is required to
publish and present to the shareholders at the annual general meeting the
accounts and the results of the working of the company.

4. Management. Since the risk – bearing shareholders are widely

scattered, and do not, in most cases, have the time, or knowledge of business,
especially where they are engaged in their own occupations and professions,
the management of the company has to be entrusted to the Board of Directors.
The Companies Act also states that the Board is entitled to exercise all such
powers as the company is authorized to exercise in general meeting. Thus,
the directors are the exclusive representatives of the company, and are
charged with the administration of its internal affairs and the management
and use of its assets. The shareholders are the risk-bearers, but the directors
are the risk-takers.

5. Duration: A company comes into being by a process other than natural

birth, and so possesses the property of immortality. Its life is not measured
by the lives on its members. It continues to exist even if all the members
constituting it die or are adjudicated insolvent. This capacity of perpetual
succession ensures its continuity. Members may come and members may go,
but the company goes on undisturbed until dissolved by a process of law.
Also, a shareholder cannot get back his money from the company and so be a
cuase of its disintegration. In all these respects the company is superior to
partnership or sole proprietorship.

6. Taxation: In a large number of situations the tax burdens on companies

are heavier than on partnerships. For example a company’s profits are taxed
at a flat rate as against slab rates in case of un-incorporated associations,
e.g., partnerships. This means that the rate of income- tax does not rise with
the rise in profits or fall with the fall in profits; it remains constant regardless
whether the profits are low or high. In the case of a sole proprietor or a
partnership firm the rate is progressive, going up with the increase in the
amount of assessable mcome.

DISTINCTION BETWEEN A COMPANY AND A PARTNERSHIP

FIRM

1. Registration: A company is formed by registration under the Companies

Act. A partnership need not be registered.

2. Legal Person: A company, being a legal entity, is a person distinct

from its members. It acts in its own name. A partnership has no legal existence
apart from the partners. The firm and the partners are one and the same.

36
 3. Limited liability: The liability of shareholders is invariably limited, while
that of partners is unlimited.
4. Number of Members: A private company can have a maximum number
of 50 members and a public company has no limit. A partnership firm cannot
have more than 20 partners.
5. Transferability of shares: The shares in a company are transferable,
with the result that shareholders can go on changing. A partner cannot
transfer his share and interest in the partnership business without the consent
of all the other partners.
6. Continuity of existence: A company has perpetual succession. The death
or insolvency of any or all the shareholders does not affect the life of the
company, as it is distinct and separate from their lives. The partnership
comes to an end by the death or insolvency of a partner.
7. Capital requirements: A company raises its financial resources from
the savings of a large number of people, usually in small amounts. A
partnership has to depend upon the resources of the partners. It may borrow
from banks or organisation, but it cannot issue debentures to the general
public, as can a company.
8. Management: The shareholders, who supply the capital, cannot as
shareholders, manage the affairs of the company. They entrust it to the
Board of Directors. In a partnership, every partner is entitled to take part in
the management of the firm’s business.
9. Compulsory audit: A company is required by law to have its accounts
audited once a year by a Chartered Accountant in practice. No such obligation
is placed upon a partnership firm.
10. Change of objects: A company can change its objects and powers only
with the permission of the Court. The partners can, by mutual agreement,
change them as and when they like.
11. Governnrent control: The Government that creates a company reserves
the right to regulate its actions more closely than, those of partnerships.
12. Majority rule: In a company, the right of the majority to decide is the
cardinal rule. In partnership the majority rule does not apply in all important
matters. Unity in partnership being the rule, all partners must concur in
matters of policy.

CLASSES OF COMPANIES

Companies may be classified from different points of view, namely:

I. From the point of view of incorporation;
2. From the viewpoint of liability;
3. From a functional standpoint.

37
 I. As regards incorporation: There are three ways in which companies
may be incorporated, namely, by Charter, by Statute or by Registration.
(a) Chartered Companies: A company created by, the grant of a charter by
the Crown is called a Chartered Company, and is regulated by that
Charter. The East India Company and the Chartered Bank of India,
Australia and China are examples of this type. Such companies have
no place in India since Independence. Even in England charters are
rarely granted these days.
(b) Statutory Companies: These are created by Special Act of Parliament
or State legislature. A statutory company is governed by the provisions
of the special Act creating it. The Companies Act does not apply to it.
Examples are Reserve Bank of India, State Bank of India, Life
Insurance Corporation of India, ete.
(c) Registered Companies: The companies which are incorporated under
the Companies Acts by registration with the Registrar of Companies,
by far the largest number of companies are incorporated by registration,
and all references to companies in this book are to registered
companies.

2. From the view point of liability: Companies which may be registered under
the Companies Act are: Companies with unlimited liability, companies with
liability by guarantee and companies with liability limited by shares.
(a) Unlimited Companies: In an unlimited company, the members are liable,
each in proportion to the extent of his interest iIi the company, to
contribute the sum necessary to discharge in full the debts and
liabilities of the company if it is wound up. The liability is similar to
the one under individual proprietorship or partnership. Such
companies are now almost non – existent.
(b) Guarantee Companies: A company limited by guarantee is a registered
company having the liability of its members limited by its memorandum
to such an amount as the members may respectively thereby
undertake to contribute to the assets of the company in the event of
its being wound up. The members of a guarantee company are, in
effect, placed in the position, of guarantors of the company’s debts up
to the agreed amount. Guarantee companies are also of rare
occurrence these days.
(c) Companies limited by shares: A company limited by shares is a registered
company having the liability of its members or shareholders limited
by its memorandum to the amount, if any, unpaid on the shares
respectively held by them. Thus, a member can be called upon to pay
only the balance due on the shares held by him. For example, a
shareholder who has paid Rs. 75 on a Rs. 100 share, can be called
upon to pay the balance of Rs. 25, and nothing more. Most of the
companies formed are of this class.

38
 3. Functional Division of Companies: From a functional point of view there
are Private or Public Companies. A public or a private company may be a
Government company.

(a) Private Company: A private company is a company, which by its articles-

(i) restricts the right to transfer its shares;
(ii) limits the number of members to 50, excluding employee
members and ex-employee members;
(iii) prohibits any invitation to the public for subscription to its shares
or debentures.
A private company must always comply with all the three restrictions. If
it fails to comply with any of these restrictions it will be treated as a public
company. Under Section 43A, a private company which employs public money,
though indirectly, to an appreciable extent will be subject to the same
restrictions as apply to a public company even if its articles continue to contain
the restrictions required under the Act. Section 43A states that a private
company will automatically become a public Company as soon as not less
than 25 percent of its paid-up capital is held by one or more bodies corporate.
But it will again become private company, if its paid up capital held by another
body corporate falls below 25 per cent.

The minimum number of members to form a private company is two. By

definition, a company which is not private is public. The minimum for a public
company is seven, but there is no limit to the maximum number.

A private company suits the needs of those who wish to take advantage of
limited liability and at the same time keep the business as private as possible.
It is in some respects like a partnership. The shares are not freely transferable
nor can share warrants be issued, In this way the members of a private
company like partners are in a position to maintain personal contact. A private
company, therefore, combines the advantage of limited liability and the
facilities of the partnership organisation.

Because of the special feature of a private company and many privileges

and exemptions enjoyed by it, it is a common practice with businessmen to
convert their family businesses into private limited companies, and enjoy the
double advantage of retaining privacy as regards internal affairs and limiting
their liabilities. Then, as and when the need arises, they convert the private
company into a public company by simply altering the Articles of Association
by special resolution.

ADVANTAGES THAT A PRIVATE COMPANY ENJOYS OVER A PUBLIC

COMPANY.
These advantages may be listed as follows:
1. A private company is simpler to form than a public company. Only two
signatories are enough to form it, and it need have only two directors.

39
 2. It can commence business immediately after incorporation; no
certificate to commence business, which is compulsory for a public company,
is required to be obtained.
3. Since it collects the requisite capital by private arrangement and
does not invite the general public to buy its shares by the issue of a prospectus,
it may allot shares without following the formalities laid down for a public
company.
4. As no ‘outsiders’ are its shareholders, it is not required to hold a
statutory meeting or file a statutory report.
5. Unlike a public company, it may pay remuneration to directors and
managerial personnel or appoint anyone to an office of profit without any
restrictions.
6. It may grant loans to directors without obtaining consent or approval
of the Central Government.
7. Its balance sheet and profit and loss account are not open to
inspection by the public, although three copies of each are required to be
filed with the Registrar.
8. The control and management is generally in the hands of the owners
of capital which is not the case in a public company.

9. There is greater flexibility in regard to management and conduct of

the business than in the case of a public company.
(b) Public Company: According to the Companies Act, a public company
is one which is not a private company. Since this is a negative
definition and does not tell us much, we may define it as follows:

A public company is a company the membership of which is open to the

general public under the provisions of its Articles. The minimum number
required to form it is seven, but there is no limit to the maximum number. It
offers its shares to the public by advertising such offer in a prospectus. A
public company does not impose any of the restrictions necessary in the case
of a private company, and any person competent to contract can become its
member, no matter whether he is an Indian or a foreigner. It must allot its
shares within 120 days of the issue of the prospectus, but only if the Minimum
Subscription has been subscribed, or applied for. It must have at least three
directors and can commence business only after it receives from the Registrar
a Certificate to Commence Business.

PRIVATE COMPANY BECOMES PUBLIC COMPANY

Section 43A of the Companies Act provides that a private company becomes
public company-
(a) where not less than 25 per cent of its paid up share capital is held by
one or more public companies or deemed public companies; or ,

40
 (b) where the average annual turnover during three preceding years of
a private company, havmg share capital is Rs. 5 cores or more, irrespective of
its paid up capital; or
(c) where not less than 25 per cent of the paid up share capital of a
public company, having share capital, is held by a private company; or,
(d) where a private compan y accepts, after invitation by advertisement,
or renews, deposits from the public, other than members, directors or their
relatives.
However, after a private company has become a deemed public company,
its articles may include provisions relating to matters specified in section
3(i)(1ii) and the number of its members may be less than seven, and it may
have only two directors.
(e) Government Company: A government company is a company in which
not less than 51 per cent of the paid up share capital is held by the Central
Government or by any State Government or Governments or partly by the
Central Government and partly by one or more State Governments. Up to 49
per cent of the paid up share capital may therefore be held by private
individuals or financial institutions. A Government company may be either
private or public company. Most of the government companies in India are
private limited companies and the entire share capital in almost all of them
is held by the government.
The following chart gives the classification of companies:
COMPANY
Chartered Statutory Registered
Unlimited Company Limited Company
Limited by Guarantee Limited by Guarantee and shares
Limited by Shares
Public Company Private Company
Government Company
or Non-Government Company

EVALVATION

The company is the most effective vehicle yet discovered to manage and
control modern business enterprise. Other forms of rganization may outnumber
it, but rhost business is transacted by companies. In fact, the company
pervades the economic and social life all over the world, because of so many
advantages it enjoys over other torms of rganization. Some of the inherent
advantages of company form of rganization have been touched upon while
dealing with its nature and characteristics. The other important merits are
stated below.

41
 Advantages: The principal advantages of the company form of organisation
are as follows:

1. Vast amount of, capital: The outstanding advantage of the company is

that it allows the mobilization for production purposes of a vast amount of
capital that would otherwise have little chance of being used. In a public
company there is no limit to the maximum number of its members. Very
large number of people who are otherwise busy may, by buying shares in a
company, acquire interest in it without giving up their own vocations. As the
shares can be bought in small amounts, investors can divide their savings
amongst a number of companies, and thus reduce the overall risk. The fact
that the shares are readily transferable gives joint stock companies an added
advantage in attracting capital. Thus method of collecting capital from many
people, each of whom may have only a comparatively small amount, gives the
company the use of much larger total than can easily be collected by private
business which must depend on what the proprietors possess or can borrow.
Actually, no business form is so well adapted to raising large amounts of
capital as the joint stock company.

2. Greater scope for expansion: Vast aggregation of capital and ploughing

back of company’s own large earnings contribute to the expansion of its
business. The company offers an excellent scope for self-generating growth.
Availability of managerial talent when coupled with abundant finance makes
for continued expansion and growth.

3. Diffused risk: The risk of loss is spread over a large number of investors
and the possibility of hardship on a few persons as in the case of partnership
or on an individual as in the case of sole trader is organisation. There is no
need now for men who are already wealthy to continue to bear the burden of
business, as .large capital can be collected from far and wide and from rich
and poor, controlled under one management.

4. Democratisation of ownership: The fact that relatively small amounts of

capital can be mobilized and employed collectively results in what Marshall
calls rganizationn of ownership as distinguished from the control of business.
While it enables all types of people, big or small, venture some or cautious, to
become part owners, it permits of the use of skill and initiative of the able
entrepreneur, his expert knowledge and business ability which would
otherwise be lost to the community.

5. Transferability of shares: A shareholder can any time without let or

hindrance transfer his shares to any person who is willing to take them. The
stock exchanges assist in the sale and purchase of the shares. As shares are
ordinarily freely transferable, a shareholder can easily convert his holdings
into cash. The facility coupled with the limited liability has an encouraging
investment by the general public.

6. Stability: The organisation is a legal entity with perpetual succession;

it may outlive many generations of private producers. A private firm without

42
tremendous amount of vigour is sure to die. A large company has many
advantages many of which do not materially dwindle with age. In fact, its
greater endurance, perhaps permanence arising out of incorporation which
makes for stability on account of continuity of succession and unit of action,
is a great advantage, as it encourages experimentation for efficiency. This
continuity of a company is not seriously affected by a change either in the
management or the owners. In fact, enterprises which are really individually
owned are often incorporated as ‘one-man’ companies the owner giving a few
shares to friends and relatives so that business may be organized in such a
manner as to ensure its continuance after his death.

7. Organised intelligence: The power of capital is supplemented by organized

intelligence which makes for increased efficiency of direction and
management. The skill and flexibility of administration is increased as a
result of limited liability and the entity idea. The wisest and the most skilful
directors may be chosen; and anyone found indifferent or inefficient may be
removed. The company being independent of any single man, the rganizat
intelligence of the Board of Directors and other top managers is available;
for sound and boldrolicies.

8. Diminant Financial advantage: The salaries which the company pays to

its managing director and chief managers are much less in the aggregate
than the excess of the profits of successful private business over the mere
interest on its capital, which is required to induce rich people to continue to
shoulder the burden of their business.

9. Definite standing: The company gives a definite standing and facilitates

binding actions through its agents. An outsider is ever willing to deal with a
company because he knows the exact scope of its business and legal limits of
its powers.

10. Limited liability: The liability of the members of a company is limited.

He cannot be called upon to pay anything more than the nominal value of the
shares held by him. When buying shares in a company, he knows the maximum
loss he may suffer if the company fails. This encourages people, even those
with relatively small savings, to invest money in a company, thus providing
ample capital for initial outlay and expansion.

11. Social advantage: The great advantage to society of the company

organisation is to be found in its added encouragement of investment and
the possibility it affords of efficient direction of large-scale industry. The
element of stability is notably well cared for by the company. The compulsory
publicity and other regulations of companies are beneficial to the community,
especially with regard to banking and public utility companies.

12. Tax relief: A company pays income-tax as a separate legal person at a

flat rate fixed by the Finance Act from year to year. In case of higher incomes,
this rate is lower than that charged in the case of sole traders and partners.

43
CHECK YOUR PROGRESS 3
Differentiate between Public Company and Private Company
Notes:
[a] Write your answers in the space given below.
[b] Check your answer with the one given at the end of this Unit

DISADVANTAGES OF COMPANY ORGANISATION

In spite of so many advantages of the company form of organisation, there

are several drawbacks. Of course, most of the advantages are connected with
the people who form and manage companies. The principal disadvantages of
company form of rganization are as follows:

1. Difficulty and cost of formation: The legal formalities and procedures

required in the formation of a company are many and irksome. The cost
involved is quite heavy. It has to approach large number of people for its
capital, and it cannot commence business unless it has obtained a certificate
of incorporation and a certificate to commence business. These will be granted
only after legal formalities have been observed and requisite documents have
been filed with the Registrar.

2. Incapable or fraudulent management: The company form of organisation

can be used by unscrupulous promoters and fraudulent directors to fleece
the ignorant public. The company law has, of course, gone a long way in
curbing the flotation of rganizati companies. But the danger is there.

3. Reckless speculation encouraged: The company form of organisation

encourages reckless speculation on the stock exchange. This is an evil of
great magnitude in our country because in many cases the stock exchanges
act as ‘hush agencies’ rather than an aid to sound investment or stability.

4. Waste and inefficiency associated with indirect management: Lack of

personal interest on the part of salaried managers leads to inefficiency and
waste, there being little individual initiative and personal responsibility.
Motivation is less direct than in sole proprietorship. The spur to zeal and
fidelity is not so sharp as in the case of an owner manager. An individual
producer can act quickly; the joint stock company moves ponderously and
only after the agreement of diverse interests.

5. Clash of interests between members and management: The company form

of organisation does not promote or safeguard the interests of the shareholders.
Because of the separation of management from ownership, it is not the owners
who govern but a few who control and manage a company’s affairs. In other
words, a few govern but let the shareholders believe that they themselves do
it. Thus, in theory, the company is a democracy, but in practice, it is an
oligarchy. The interests of the minority shareholders are often in jeopardy.

44
This lack of identity of interests between the company and its management
encourages manipulation, speculation, and in many cases ruin.

6. Bureaucratic approach: The bureaucratic habit of the company officials

to shirk troublesome initiative because they get no direct benefit from it
often retards growth. It has had social effect, too, for it leads to classification
of the social organism and rganiza down the character. The company
organisation does not enjoy the same flexibility and promptness in decision
making as the sole proprietorship or partnership firms do. Decisions are further
delayed, at least to some extent when they have to be taken at meetings
which are often few and far between.

7. Excessive regulation by law: The state that creates a company regulates

its activities much more closely than those of non-corporate associations. A
company and its management have to function well within the law, and the
provisions of the Companies Act are quite elaborate and complex. At every
step, it is necessary to comply with its provisions lest the company and
management might be rganizat. The penalties are quite heavy, and in several
cases, officers in default can be punished with imprisonment. This often
detracts from the main objectives for which the company has been formed.

8. Social ill-effects of a large company: There are the notable failings of big
business which necessarily flow from company organisation. They may be
summed up as follows:
(a) The absence of responsibility of the shareholder for work done
with his wealth frequently leads to abuse, e.g., sweating,
unsatisfactory working conditions and exploitation of labour.
(b) In a big business, each department must be full and precise which
involves a system of checks and counter-checks. Such a system is
necessarily wasteful of effort and represses elasticity and initiative
and encourages men to do work in a mechanical manner.
(c) There is generally a tendency for company organisation to form
themselves into combinations exercising monopolistic powers which
may react detrimentally to other producers in the same line or to
consumers of the commodity produced.

Conclusion: From the social point of view, the effects of company

organisation upon the distribution of wealth are highly important. It has great
potentialities both for good and evil. On the one hand, it might tend to
diffuse wealth by encouraging widespread investment in small amounts and
the distribution of the profits and interests of industry accordingly. On the
other hand, it might result in vicious and undemocratic concentration of
wealth in the hands of a few industrial dictators. Inequality in wealth
distribution has been encouraged by joint-stock organization. To permit
companies to grow to large sizes and at the same time to ensure the return
to the common people of the benefits so derived seems to be no easy task.

45
 On balance, taking good and bad in the history of business units, no finer
instrument exists with which to meet the complex problems of modern
enterprise. The company is the most effective vehicle yet discovered to manage
and control modern business enterprise. To the large unit it offers an easier
way to finance itself by means of dividing its ownership into many small
portions that can be sold to a wide range of purchasers, including those with
only small savings to invest. In fact, the social wonder, the giant company, is
no longer simply a device for doing business; it is a vast, sprawling
immeasurable force. Its impact has been so great upon us that without the
products and services of corporate bodies it is just, inconceivable to think of
the smooth functioning of the economic life of any country. Other forms may
outnumber it, but most business is transacted by units of this type.

1.13 THE CO-OPERATIVE ORGANISATION

Philosophy of Co-operation: The philosophy of co-operative ulfillment is
to serve the common man and to liberate him from the oppression of the
economically strong people and fulfillment. Mutual assistance and service is
the objective as distinguished from the aim of the other forms of fulfillment
which is primarily making of profit. It aims at encouraging self help on the
part of economically weaker sections of the society by looking after their own
affairs in co-operation with one another. The principal theory of true co-
operative ulfillment is the elimination of profit and provision of goods and
services to members at cost. As a form of fulfillment it is an enterprise
ordinarily set up by ‘economically weak’ individuals to further their common
economic and social interests to eradicate capitalist exploitation, to eliminate
middle men, and to bring the consumer and producer together.

With these objectives in view, the consumers, belonging to working and

lower middle class strata of society, combine either to produce goods
themselves or to purchase them collectively thus retaining for themselves
some of the benefits usually derived from business by capitalists. This joint
effort on the part of economically weak enables them to protect themselves
against the economically strong. In form, co-operative fulfillment is democratic,
because the consumers are at once the owners and managers:

Definition: A co-operative fulfillment is a voluntary association with

unrestricted membership, and collectively owned funds, fulfillment on
democratic principle of equality by persons of moderate means and incomes,
who join together to supply their needs and wants through mutual action, in
which the motive of production and distribution is service rather than profit.

Principles and Characteristics: As a form of business ulfillment, the co-

operative association possesses the following special characteristics:

l. A co-operafive society is a voluntary association: The membership of the

society is toluntary and open to all persons having a common interest. In
other words, there is no compulsion for anyone to become a member, nor can

46
any person be denied the right to become a member of the society. A member
is at liberty, by giving due notice, to leave the society and withdraw his
capital. He may not, however, transfer his shares to another person.

2. Its members enjoy equal voting rights: A co-operative society is a

democratic ulfillment and so all its members have equal voice in the
management of its affairs. The rule is one member, one vote. Therefore each
member has. One vote irrespective of the number of shares held by him. This
rule is based upon the principles of co-operation and equality which states
that a rich man cannot be allowed to exercise control ‘because he is rich ‘and
can easily afford to buy large number of shares.

3. Its management is democratic: As a necessary result of the principle of

equality, the management of a co-operative society is essentially democratic.
In general co-operative societies work on local bases which enable almost all
the members to attend the meetings and elect their managing committees.
Since each member exercises an equal right with others, the managing
committee is in the real sense an elected body and must pay attention to the
wishes of all members and not only a section of them.

4. A co-operative society is ulfillme to render service to its members and not to

make profit: If, for instance, society produces a product, it is mainly to supply
to its members at a reasonable price. A consumer society is expected to
supply goods first to its members and then to outsiders at a profit.

5. Payment of surplus as bonus to members onpurchases made by them: The

surplus at the end of the year is not distributed as dividend among
shareholders in proportion to the share capital provided by them; as is done
in the case of a company. The share capital is virtually treated as loan capital
on which a very moderate rate of interest is allowed out of the net surplus. A
portion of the balance is fulfillment for the general benefit of the members. A
portion may be paid as bonus to employees and workers. The rest of the net
surplus is distributed among the members in proportion to their individual
purchases from the society. The non- members are not usually paid anything
out of the surplus, although there is no bar.

6. Trading on cash basis: As a rule, co-operative societies conduct business

on cash basis, and allow no credit. A member in need of money can get back
part of his capital, and reinvest when he can afford to do so. Since the members
are persons of small means, this principle helps both the member- buyers
and the society. The members do not incur debts and the society does not
face the danger of bad debts.

7. State control and corporate status: A co-operative society is required to

be registered under the Co-operative Societies Act, 1912. On registration, it
becomes a corporate body like an incorporated company enjoying certain
privileges, and subject to control and supervision of the Government.

47
HOW COOPERATIVES AND COMPANIES DIFFER
Although in some respects companies and cooperatives are similar, there
are many points of distinction between the two types of fulfillment. They
differ in the following ways:

1. In the case of cooperatives, the control is vested in the members

equally, as each member has only one vote regardless of his investment in
the enterpnse. In a company, the amount of investment determines the
number of votes.

2. A cooperative is thus an economic democracy, since its members

having equal, right to vote can effectively exercise their power. In a company,
since the votes vary with the capital holding, only a few rich people can
control it.

3. A cooperative society operates within a limited area and so all the

members can attend its meetings and exercise their control. This is not
possible in a company as shareholders are scattered all over the country;
only the inner group is able to control the affairs of company.

4. In a company, the shareholder earns the profit and receives a dividend,

and often at the cost of the consumer. But in a cooperative store the consumer
is the one who is looked after. The major part of the surplus of the cooperative
store is divided among the members in proportion to the amount of their
purchases from the store. The share capital is virtually treated as loan capital
on which a very moderate rate of interest is allowed out of the net surplus. A
company looks after the shareholder, whereas a cooperative society functions
for the benefit of the member-consumer.

5. A shareholder in a company can transfer his shares to another person,

but he cannot take back his capital from the company by surrendering his
shares. A member of a cooperative cannot transfer his shares to another
person, but he can, by giving reasonable notice, withdraw his capital and
cease to be a member at will.

6. In a cooperative society, there is no limit to the number of members

which usually exist in the case of a company by means of a limit to shares. In
fact, in a cooperative, efforts are made to limit the number of shares a person
may hold in order that the number of members should be large.

Furthermore, if in a company, capital is increased, the further shares

must be offered to existing shareholders; while in a cooperative, the capital
is increased mainly for admitting new members.

7. In a joint-stock enterprise there is a great divorce between ownership

and control and often a clash of interests, but the cooperative enterprise
makes for oneness of interest.

48
 8. The joint stock companies are not directly interested in the promotion
of welfare or efficiency of their shareholders; but in the case of cooperatives,
it is a part of their creed to take such interest in their members.

9. In a joint stock enterprise, the dominant, if not the only motive is

profit or gain, while the cooperative functions to meet the needs of the
consumers who are happily the owners and share in the surplus.

10. Cooperatives receive certain special concessions from the law and
the Government, in order to encourage healthy development of cooperatives.
Some of the privileges extended to them are exemption from stamp duty and
registration fees as well as exemption from income tax up to a certain limit.
Companies, which function for profit, do not get such exemptions.

CLASSES OF CO-OPERATIVE SOCIETIES

Cooperatives as a form of business ulfillment may be classified as follows:

1. Producers’ Cooperatives.
2. Marketing or Sales Societies.
3. Consumers’ Cooperative Societies.
4. Housing Cooperative Societies.
5. Cooperative Farming Societies.
6. Cooperative Credit Societies.
7. Others.

Producers’ Cooperatives: Producers’ Cooperative Societies are formed

by small producers with the object of eliminating the capitalist from the
control of production. Here, the workers and consumers participate in the
manufacture of goods and share the management and profits of the enterprise.
These co-operatives are ulfillment for collective production of goods for own
consumption and for sale at a profit, in order to retain the gain which would
otherwise go to the capitalist. Such cooperatives may ,be set up either as
member consumer cooperatives or member-employee cooperatives. In the case
of the first type, each member contributes a certain minimum share of the
capital, agrees to sell his produce to the society and profits are divided in
proportion to the business done. Membership is open to all artisans of the
locality and one man has one vote. In the case of the second type the member
producers are treated as. Employees and are paid wages for their labour. The
society in both cases supplies raw materials, tools and equipment to the
producers and takes up the output for sale or distribution among ulfill or
outsiders. Where workers are employed, part of the profits is divided among
them, and the part is set aside for education and other social amenities.

Marketing or Sales Societies: In the sphere of agriculture, there is great

scope for such societies. They can also be usefully employed to market goods
produced by small producers and artisans. The marketing or sales cooperatives

49
are voluntary associations of small independent producers fulfillment for two-
fold purpose, namely, to secure a remunerative price and to make available a
permanent and ready market for the produce of members. The marketing
society collects the produce of its members, grades them and then sells at
remunerative price to the wholesale market. The proceeds are then distributed
among the mem¬bers according to the quantity pooled.

Consumers’ Cooperative Societies: These societies are set up by

consumers, usually with low incomes, for the distribution of fundamental
consumption goods, primarily among the member-consumers, and sometimes
to outsiders. Normally these stores buy goods from the wholesale market and
sell them at retail market prices. At the end of the working period, normally
a year, a percentage of the surplus is set aside as a reserve, and the balance
is distributed among the members in proportion to the amount of their purchase
from the store during the working period. This is the oldest form of cooperative
ulfillment and the most successful.

Housing Cooperatives: Housing cooperative societies are associations of

the persons who are interested in owning a house. Such societies are normally
formed in urban areas. Intending builders of houses get together and form
such a society. The membership is open to such persons, each member buying
at least one share. The cooperative society can secure for the members the
economies of collective purchase of buildings. Building materials, and loans
at low rates of interest.

Cooperative Farming Societies: These societies are formed by

agriculturists to derive the benefits of large- scale farming for fulfillment
output and gain. Such societies are very useful in countries like India, where
the holdings are rather small as a result of fragmentation. Membership is
usually confined to small holders.

Cooperative Credit Societies: Such societies were the very first

cooperatives. The aim of these societies was to enable farmers to escape
from the clutches of the money-lenders. Thus, a cooperative credit society
may be said to be an association of persons with moderate means formed
with the object of granting short-term loans to them and encouraging the
habit of thrift among its members. The funds of the society consist of the
share capital contributed by the members. The liability of members is normally
unlimited. This enables the society to raise funds from outside agencies and
also encourages members to take keen interest in the working of the society.

Miscellaneous Societies: In addition to the main types of cooperatives

discussed above there are some others, such as Processing Cooperatives,
Labour and Construction Cooperatives, Sugar Cooperatives and so on.

50
 EVALUATION

As a form of business fulfillment, the cooperative society yields the

following advantages:

1. The consumer controls his own supplies, and cuts out the middleman’s
profits.

2. He is saved the loss common to retail trade, on speculative buying.

The ordinary shop has to rely on itself to judge whether there is a market for
an article. The cooperative store knows what is required by the members.

3. There is no need to have surplus stock at hand, as the demand is

constant and regular.

4. Some of the expenses of management are saved by the voluntary

service of the controlling committees. It is possible to get even a paid manager
at a lower salary, as a result of the ideal of cooperation.

1.14 PUBLIC UTILITIES

Meaning and Scope: ‘Public Utilities’ is a general name for those industries
or services, such as the supply of gas, water, electricity, urban passenger
transport, etc., which are ‘’clothed with public interest’’ in as much as they
are ‘necessary’; or ‘indispensable’ monopolies or semi-monopolies on whom is
super imposed public regulation for ‘the common good’, and special privileges
or franchise to facilitate their proper functioning. Legally, public utility is a
distinctive category of industry based upon the common law ‘doctrine of public
interest’. Early in the development of the common law, certain callings or
occupations were singled out and impressed with special rights and duties.
Especially were the duties stressed, which continued to persist even after
the appearance of the laissez-faire philosophy and its emphasis upon non-
regulation of business by government. The doctrine of public interest is so
intimately connected with public utility that the two phrases are usually
treated as synonymous. A public utility firm is readily distinguished from a
non-utility business by the limitation that governments put on its freedom of
treatment of buyers. But the restrictions are not without compensation, for
utility companies are more likely to have exclusive markets for their
commodities or services than the companies that do not have such a status.
Being monopolies, these companies are subject to public regulation of their
accounting, finances, earnings, prices, and service policies. Most of the
regulatory action is directed towards prescriptions of reasonable earnings
and prices. Neither the sellers nor the buyers obtain the prices that please
them most; the sellers are denied full monopoly prices, and the buyers cannot
insist on such tow prices that the seller cannot survive. Output controls are
used alongside the price controls. A utility company is required, for instance,
to serve all buyers indiscriminately at the prescribed prices. Denied free
exercise of its monopolistic power, a utility company is expected to serve up

51
to the limits of its plant capacity, to take customers as they come, and to sell
service at reasonable prices.

ECONOMIC CHARACTERISTICS OF PUBLIC UTILITIES

Public utilities possess certain special characteristic features which

distinguish them from non-utility industries. But it should be remembered
that strict differentiation is not possible, nor is it attempted; for sometimes
the non-utility industries seem to have all or nearly all the economic
characteristics of public utilities. What is intended here is to show that a
public utility usually possesses these characteristics; while the other mayor
may not possess them. There are therefore two fundamental economic
characteristics of public utilities, namely, (1) necessity, and (2) monopoly or
tendency to monopoly or inadequate competition. To these may be added
local nature of their activity, regulation and franchise, and general cost and
demand characteristics.

Necessity: In the first place, public utilities provide necessary or

indispensable product; or services which must have an uninterrupted flow
into the market. Any service or product is necessary or indispensable because
it is regularly required and used by a very large section of the community,
e.g., water, gas, electricity, urban transport.

Monopoly or Inadequate Competition: Public utilities commonly produce

and sell their products and services under monopolistic or only nominally
competitive conditions. There are several types of monopoly.

The first is the natural monopoly, which is the common characteristic of

utility industries. The’ term implies that the control of public utility service
in market is somehow “naturally” or inherently monopolistic, that the rivalry
between unregulated companies is inevitably eliminated by combination and
one company ultimately dominates the market which several companies once
occupied. Monopoly therefore arises because of the grant of special franchise
and the imposition of regulation under the doctrine of public interest. There
is also a monopoly based on natural limitations in service; for example, a
company or municipality controlling the only available source of water for a
community has a monopoly of supply. So also has an electricity authority or
urban transport corporation. Characteristically, the business is conducted in
local plants with a market narrowly limited in area; and duplication of plants
or of delivery service would be wasteful and ultimately burden some to
consumers. Some utilities deal in services that involve a limitation of time,
such as telephones. The matter of speed and lack of time and danger of
confusion arising out of possible competing communication services give each
of them a genuine monopoly. More important than all these causes of monopoly
is the condition of economic monopoly. The cost of construction, the low ratio
of income to investment, the impossibility of ideal load factors, and the legal
necessity of building in advance of needs, all tend together to make the

52
utility operate under conditions of decreasing costs. Such a situation inevitably
makes competition quite unstable and in the end, short of governmental
interference. Leads to combination and monopoly.

Regulation and Franchise: Since a public utility has a public interest

status, and is consequently required to work for the maximum social advantage,
it is subjected to more stringent regulation than a non-utility which may be a
monopoly. On the one hand, public regulation is used to ensure regulary
supply of good quality at reasonable price, and on the other, to regulate their
right to interfere with public amenities, and to safeguard public life and
property.

Another characteristic of a public utility is the special franchise that

must be granted by the governmental authority before it can commence
business, because, for the proper performance of its functions, it must interfere
with public amenities like streets for laying tram lines, or pipelines for water,
or conduit pipes for sewage; or with uninterrupted enjoyment of individual
property. The control of price is made to enable all sections of the community
to use the service, and also to check discrimination and undue preference
which is possible in the case of unregulated utility service the demand for
which is generally inelastic. Profits of public utilities are regulated so that
they conform to specified reasonable return on certain capital figure and the
surplus, if any, is returned to the consumers by reduction in subsequent
prices. As long as a public utility is owned and managed by private enterprise
its regulation . and control in the interest of the community is essential;
when ulfillment it must be democratic in its working and effect.

Cost and Demand: Public utility industries have large fixed investments in
plant and equipment and a low rate of capital turnover. Consequently, utility
companies, like others with large plant investments, have low rates of capital
substitution. Unwise investments are therefore ruinous to them. They have-
indeed, are expected to have-sufficient plant capacity to serve all consumers
who are willing to buy at the existing prices; but more than this they must have
some unused capacity to meet ‘peak demand’ because utility service is non-
storable. Since the demands of utility consumers have significant time
dimensions, there must necessarily be some unused capacity during off-peak
periods. In its very nature, the demand for utility service is both direct and
derived, as it may be both elastic and inelastic. Direct demand means seeking
the service for immediate consumption, e.g., electricity for lighting purposes,
and water for daily use; indirect demand relates to the use of the service for
further production. A derived demand will tend to be both elastic and inelastic.
It will be elastic in so far as power substitutes are available, also where power
costs are a major part of the total costs. The direct demands for utility tend to be
inelastic, both in respect of price of the service and income of the buyers. Being
unwilling to forego consumption of utility services to which they have got used,
the buyers, as the prices rise or their incomes decline, are willing to reduce
their expenditure on other non-essential things.

53
 RIGHTS AND DUTIES OF PUBLIC UTILITIES1

Public utilities, unlike unregulated enterprises, have certain legal duties

and privileges. The fulfillment of contractual obligations and the right to demand.
Performance are generally the duties and rights of a merchant. So long as he
does not deceive or conspire to limit competition, he may charge as little or as
much as he can get, and whether he prospers or- fails ordinarily is of no
concern to society. The utility, however, in addition to those negative
restrictions imposed on all business, has imposed upon it a group of positive
duties and rights.

Duties: The first duty is to serve all who apply for service regardless of
race, econornic and social status, or other differences. Secondly, the utility
or public interest occupation must use all its capacity to produce or service if
the demand warrants. In other words, public utilities must stand ready to
give instantaneous service. Thirdly, they must render safe and adequate
service. With no satisfactory and immediately available substitute, users would
be in a helpless position if utilities were permitted to render inadequate service.
For this reason, there exist regulations of voltage requirements for electricity,
but schedules for urban transport, and speed requirements for telephone
connections, etc. And each of the services must be supplied by means of the
safest equipment. Fourthly, there must not be unjust discrimination or undue
preference. This does not, of course, mean that customer classification for
rate making cannot be made. What it means is that the classification must be
reasonable. Lastly, it may not demand more than a reasonale price for its
service.

Rights: It is only fair that if utilities are bound to perform these duties,
they should enjoy certain special rights not common to other business. Their
first right is to charge a ‘reasonable rate’. A reasonable rate is one that,
under prudent and economical management, covers’all operative expenses
and also yields a fair rate of return on investment. On ethical as well as
economic grounds such be the case, for if utilities cannot acquire monopoly
profits, they must not be denied this minimum of a fair return. Finally, they
enjoy the privilege of serving under reasonable rules and regulations. These
generally include such items as office hours, prompt payment discounts, metre
readings and investigations, service deposits, grant of ‘eminent domain’ with
power to use streets and buildings for fixing appliances. These regulations
are meant to protect the utility service and thus the great majority of its
customers.

54
1.15 PUBLIC ENTERPRISE

GOVERNMENT IN BUSINESS

BASIS OF GOVERNMENTOWNERSHIP
Since the greatest happiness of the greatest number failed to materialise
under ‘free enterprise’, and mere controls were not found sufficient to meet
the needs of economic and social justice, the state was obliged to step in as
the biggest entrepreneur. In almost all democracies, mixed economy is firmly
established. In communist countries the State ownership of productive
resources and of distribution of what is produced is complete. Under fascism
there is a mixed form of controlled capitalism and socialism. Both fascism
and communism are inseparably associated with political and economic
dictatorship. It represents the complete extreme of both government ownership
and government control. Theoretically, no private ownership is permitted.
The wealth belongs to the people. Soviet Russia and China are the outstanding
examples of the specific economic system called ‘Communism’. The state
owns not only the agents of production but also the commodities produced.

Somewhere between the extremes of substantially free enterprise and

complete government regimentation lies another plan, namely, ‘Democratic
Socialism’. Under this system the means of production are controlled or owned
by the State with a view to increasing the national income and distributing it
more equitably. The aim of democratic socialism is to flatten the social
pyramid, insofar as economic possessions are concerned and to reduce the
existing inequality. Both public and private sectors work together for the
common good of the community. The Government policy is democratic, relying
on peaceful persuasion and the growth of social conscience. The wholesale
nationalisation of all economic activity is rarely advocated. Both private and
public sectors are

expected to contribute to the well being of society as a whole. Freedom in

business is curtailed only as a means of enlarging the liberty of the many
and for meeting critical social and economic problems, rather than for
strengthening the coercive power of the State.

Although nowhere in the world is to be found unfettered free enterprise,

and although State ownership of at least some part of the economy will be
found in almost all the countries, the controversy in relation to nationalisation
or public ownership as against free enterprise is not finally settled. It is
pertinent, therefore, to briefly examine the case for and against
nationalisation or public ownership.

CASE FOR PUBLIC OWNERSHIP OR NATIONALISATION.

Some of the more important advantages of public ownership or
nationalisation are:

55
 1. Elimination of private monopolies: Public ownership ot enterprise breaks
private monopolies and takes away, their power to exploit the public to their
own advantage and at the cost of the happiness of the masses.

2. Production for use and not for profit: In private enterprise profit motive
is the prime mover of business life, and individual urge to maximise profits
the prime force in the economy as a whole. Public ownership becomes
necessary to ensure that society gets all the basic necessities of life at
reasonable prices and in reasonable quantities, Welfare of the community is
the main purpose behind public ownership or nationalisation.

3. Saving of consumer interest: Since the supreme aim of the State is to

serve the people in the best possible way, state-run industry will always try
to maintain the quality of its products ata higher standard. As the objective
is to serve and not to fill its coffers with high profits, high quality goods at
reasonable price will be supplied to the consumer. Also’ no artifical shortages
will be created by public enterprises which is a common practice in private
enterprise.

4. Balanced production and equitable distribution: Public enterprises, under

the control of a single authority, can conveniently arrange for balanced
production of goods which are most needed by the people. The surplus earned
by public entreprises can be used, for the well being of the people. The profits
from private industries go to a few people, thus widening the disparity of
income between the haves and havenots. The public entreprise, on the other
hand, narrows the gap, by raising the levels of the poorer people.

5. Economy of operaiion: Public ownership is conducive to greater

coordination among the various industries brought under State control and
ensure their harmonious functioning. This generates economies of unified
control and large scale operation.

6. Balanced regional development: Although the government exercises

control with regard to regional distribution of industries in the private sector,
the task of balanced regional distribution becomes simpler when industries
are set up by the State itself. Before locating a new plant, the government
considers economic as well as social consequences and pays special attention
to balanced development of different parts of the country.

7. Long-term investment can be planned: A public enterprise can plan its

investment over a long period of time and maintain its stability whatever may
temporarily happen to the demand for goods. In times of depression a privately
owned industry will curtail production and investment because in that way it
minimises its risk of incurring losses under the stress of falling prices. Public
enterprise under such circumstances plays a vital role in checking
unemployment and under-employment.

8. Furtherance of economic development: The surplus profits of public

undertakings can be diverted to develop economic schemes of national

56
importance.This has an indirect but welcome effect of keeping down the taxes.
which would be necessary otherwise for development of the country.

9. Nationalisation aids sound rationalisation: Public ownership is one of the

methods of dealing with industries in which inefficiency persists and where
the private owners lack either the will or the capacity to make improvements.

10. Fuller employment possible: According to the late Professor K.T. Shah*,
“only under socialised production will the fullest possible employment to all
adult workers, in accordance with the aptitude and training of each, be
secured”. The State owning a good number of industries can maintain a
great part of its spending and investment programme stable from year to year
and consequently prevent violent fluctuations in employment.

11. Just and equitable deal to labour: The State is essentially interested in
giving a square deal to the workers and assisting them to raise their living
standards. It will obviously not exploit the workers, and will offer just rates of
wages, provide human conditions of work and generally devote itself to labour
welfare.

CASE AGAINST PUBLIC OWNERSHIP 9R NATIONALISATION

The opponents of public ownership or nationalisation usually base their
opposition on the following limitations and shortcomings of public undertakings:

1. Lack of initiative and efficiency: Public enterprises, as a rule, lack

initiative and efficiency. Lack of profit motive is said to lead to inefficiency
and sluggishness. Profit is said to be the key to efficiency, drive and initiative.
A government official, it is argued, being devoid of profit motive, cannot display
the same degree of initiative, drive and promptness in making decisions which
an executive in private enterprise can show. It is also argued that the
bureaucrats who manage public enterprises run them like government
department resulting in red tapism and postponement of decision making. All
these shortcomings lead to higher administrative and other costs.

2. Regimentation: Nationalisation is said to lead to regimentation. Under

monopoly production by the State, the consumer loses his right of selection
and choice of goods. There is some truth in this argument.

3. Political intelference: There is a constant danger of undue, interference

in the working of public enterprises by politicians. Such interference militates
‘against smooth and efficient working of thes.e undertakings.

4. Open to public criticism: Public enterprises, because they are public or

State owned are always, exposed to public criticism, which may not always
be justified. As a result the men who manage public enterprises develop in
them unadventurous and red-tapist frame of mind which is harmful to the
running of business undertakings.

57
 5. Rigidity of public control: Public accountability of public enterprises is
very often stretched too far and the flexibility of private enterprise which is
essential for the successful working of an industrial or commercial
undertaking is denied to them.

Conclusion: In judging the various arguments against public enterprise,

especially with respect to inefficiency and bureaucratic management, one
has to apply the standard of welfare of the community. Both public and private
sector industries must be organised, managed and operated to serve the
widest interests of the community as a whole. A large business owned by a
company in the private sector is bound to be as bureaucratic as any nationalised
unit, and hence nationalisation on this score is not inferior to private
ownership.

When we talk of efficiency, we usually mean ohly ‘engineering’ or ‘physical

efficiency’-’maximum output for minimum input’; and forget about ‘Social
efficiency’. The charge that public undertakings are, as a rule, less efficient
than private undertakings loses its significance when we apply the test of
social efficiency which is such a great in the case of public enterprise than
in private enterprise. In terms of social costs, private enterprise is far inferior
to public enterprise. Therefore, from the point of view of the general public,
real efficiency should be judged by the application of the following criteria
laid down by Professor Sargant Florence in his book: The Logic of British and
American Industry.

1. Satisfaction of man’s needs, wants and spontaneous demands in order

of priority rather than his artificially stimulated demands.

2. Where it is demands that are suppliea at a price, fullest satisfaction

of consumers at lowest margin of pront.

3. Maximum spread of participation and satisfaction of the people, by

the people, for the people. There should be co- ordinated use and direction of
resources in the interest of the nation as a whole.

4. Efficiency measured in minimum cost per given output.

It will be noticed that the foregoing criteria are not all economic. Economic
Welfare does not take into account the ‘needs-first’ criterion nor social costs,
nor the ‘for and by the people’ test of democracy. These fall within ‘general and
total welfare’ of which economic welfare is only a ‘part of a part’.

There is no doubt that in terms of the aforementioned criteria public

ownership scores over private ownership. Yet, it will not be quite true to say
that nationalisation or public ownership is, by itself a cure of all the ills of
enterprise or the saviour of workers and consumers. Public enterprises can
succeed only if they are managed on business principles with sufficient
operational autonomy granted to the managers so that the necessary flexibility
is ensured. ‘Nationalisation’ says Tawney, is not an end but a means to an

58
end and when the question of ownership has been solved the question of
administration remains for solution”.

FORMS OF ORGANISATION

Public enterprise can adopt a variety of forms of organisation for its

administration such as (1) Commissions - Oil & Natural Gas Commission,
Khadi and Village Industries Commission; (2) Commodity Boards - Coffee
Board, Tea Board; (3) Port Trusts-Bombay, Calcutta; (4) Departmental
undertakings - Ordenance Factories, Integral Coach Factory, Railways; (5)
Statutory Corporations - Air Corporations, Central Warehousing Corporations;
(6) Limited Liability Companies - Hindustan Steel Ltd., Heavy Engineering
Corporation.

Among the various types cited above the most preferred forms of
organisation in India are:
1. Departmental Organisation.
2. Statutory or Public Corporation.
3. Government Company.

DEPARTMENTAL ORGANISATION
The oldest form of operating public enterprises is through government
department. No distinction is made between public enterprises and traditional
government functions.

The principal characteristics of departmental form of organisation are as

follows:

1. The enterprise is managed by a government department, with a

Minister at the top responsible to Parliament for its operation.

2. The enterprise is financed by annual appropriations from the Treasury

and all, or major share, of its revenues are paid into the Treasury.

3. It is subject to the budget, accounting and audit controls applicable

to other government activities.

4. Its permanent staff consists of civil servants, and their conditions of

recruitment and service are the same as for other civil servants.

5. As the enterprise is a sub-division of a department of the government,

it can be sued only by following the procedure prescribed for filing suits
against the government.

Evaluation: The departmentally-operated enterprises, particularly

manufacturing undertakings, have nothing much to commend themselves.
In spite of a few merits, it suffers from multifarious disadvantages. The merits
and demerits of this form of organisation are given below.

59
 Merits of departmental organisation: The principal merits of
departmentally-run manufacturing enterprises are:
(a) The accountability of departmental undertakings to Parliament
is complete, their management being under the Ministry concerned,
or it assures the maximum degree of control by politically responsible
officials.
(b) It provides a means of securing absolute government control.
(c) The State can make use of these undertakings as instruments of
its economic and social policy.
(d) From the public point of view the department organisation has
an advantage that if anything goes wrong or if the public is dissatisfied
with the working of an undertaking the matter can be immediately
raised in Parliament.

Shortcomings of departmental organisation: As against the foregoing

merits, the weaknesses of this type of organisation are many and varied.
These are summarised below.

(i) The departmentally-managed undertakings are under the control of

ministers and the political parties to which they belong and who hardly
understand the problems of management of industry and trade. Furthermore
their policies suffer from instability because of the uncertainty attached to
the tenure of political parties and ministers.

(ii) As the public enterprises are run on the same lines as the other
government departments, the business principles necessary for their success
are overlooked. In fact the government forgets that it is running business
undertakings and must therefore deal with the public as a businessman
rather than a sovereign.

(iii) Although it is the consumers who pay for the goods and services
offered and not the tax-payers, the merging of the revenues of the department
in general revenues results in either giving a subsidy to or charging too high
a price from the consumer. Profits are likely to be used not for development
but for giving tax relief, or losses are borne by the tax - payers.

(iv) Government officials who are asked to manage these undertakings

generally lack business acumen. They are selected and trained generally for
a purpose quite different from running industries and services. They are
used to working under a rigid system of set rules, and for every decision they
look for a precedent. This causes delay in decision-making which is harmful
in the case of a business undertaking.

(v) Under this form of organisation, public enterprises very often become
synonymous with red tape, delays, inadequate service and insensitivity to
consumer needs. Thus, government departments are traditionally too involved
in red tape and routine to permit efficient conduct of commercial and industrial
undertakings.

60
 (vi) The department organisation fails to provide flexibility so essential to
effective business operations.

(vii) Frequent transfers of officers and the annual nature of financial

outlook of government departments runs counter to the continuous and long-
term policy on the part of the business enterprise.

(viii) Since the officials of the department have to attend to different

matters besides the problems of the enterprise placed in their charge, they
lack the unity or homogeneity of purpose so essential to efficient working of
an industrial undertaking, and so pronounced in private enterprise.

(ix) As the acts and decisions of the managements of public undertakings

are ever open to public and Parliamentary criticism and questioning, this
type of organisation provides no scope for initiative and skill. Actually this
has the effect of training officials for giving good answers rather than take
quick decisions on important matters.

(x) Some of the following things stand in the way of running pu blic
enterprises efficiently, namely, (a) necessity for obtaining sanctions for
expenditure and other matters in every single case; (b) inability to take out
cash from the government account without prior sanction once cash receipts
have been put into that account; (c) the application of the accounting and
audit procedures; (d) purchase of raw materials and stores and the sale of
products according to departmental system: and (e) the application of rules of
promotion on seniority basis, which militates against promotion on merit or
taking disciplinary action.

Since in many ways the departmental organisation is a negation of the

requirements of autonomy and flexibility, it ‘must be the rare exception, not
the general rule.’

PUBLIC CORPORATION
A public corporation is a corporate body created by the legislature under
a separate statute (hence, sometimes, called statutory corporation), which
sets out its powers, purpose, duties and immunities. It is financially
independent and has a clear-cut jurisdiction over a specified area or a
particular type of industrial or commercial activity. It is administered by a
Board of Directors appointed by the Government, to which it is answerable.

A public corporation is very much like a public company except in two

respects. A company is incorporated by registration under the Companies
Act, while a public corporation is created by an Act of Parliament or any State
Legislature which sets out its powers, duties and functions. Secondly, the
shareholders of a public corporation where there are any, have no equity
interests, no voting rights and no powers to to appoint Directors.

Although the capital is usually provided by the government, in the case of

a public corporation, its capital structure and financial operations are similar

61
to those of a public company.

The leading characteristics of a Public Corporation are summed up as

follows:

1. It is a corporate body created by a special law defining its objects,

powers and privileges, and prescribing the form of management and its
relationship with government departments and ministries.

2. It is owned wholly by the State. It has no shareholders in the ordinary

sense of the term.

3. The Dublic corporation is the combination of public ownership, public

accountability and business management for public ends.

4. It is a body corporate and can sue and be sued, enter into contracts,
and acquire and own property in its own name.

5. Since it is a separate legal entity, the employees of a public corporation

are not government servants and are not governed by Civil Service Rules.
They are employed and remunerated independently by each public corporation.

6. Except for appropriations to provide capital or to cover losses, a public

corporation is usually independently financed. It obtains funds by borrowing
either from the government or, in some cases, from the public and through
revenues derived from the sale of goods and services, and has the authority
to use and re- use its revenue.

7. It is ordinarily not subject to the budget, accounting and audit law

and procedures applicable to government departments.

8. It is generally exempted from most regulatory and prohibitory statutes

applicable to expenditure of public funds.

9. It is, in a large measure, free from parliamentary inquiry into the

internal management of the concern as distinct from its policy. It is, however,
subject to ministerial control.

10. It is not expected to make profit, although it must work efficiently

and show good results in the form of ‘surplus’ which must not be the result of
exploitation. While it must pay its way, a public corporation should function
to render service to the public and not with the motive of making profit.

Therefore said features of the public corporation show that, despite varying
structures of individual corporations, it is an administrative instrument of
governmental functions rather than vesting its functions in government
departments. The objective, of course, is flexibility and independence of
management, subject only to a liberal concept of accountability. It is therefore
‘clothed with the power of government but is possessed of the tlexibility of
private entreprise’, and has been tried over a period by the different countries
as an administrative agency.

62
 Evaluation: The public corporation is an administrative instrument which
follows a middle course between the departmental organisation with its rigidity
on the one side, and privately owned and managed companies on the other
side. It attempts to ensure public accountability and flexibility and autonomy.

The comparative freedom from rigid and persistent control and regulation
by the government is an important point in favour of the public corporation.
As is clear from some of the characteristics enumerated above, it is free from
restrictive laws and is in a position to follow the best commercial practice in
carrying on its business. Unlike the departmental set-up in which all lines of
authority must run to the Ministry’s office in New Delhi, the public corporation
can have in its main office its area of operation and its centre of gravity
within the region it serves. This autonomy lends a great deal of flexibility to
its operation and brings it quite close to urivate enterprise in matter of
efficiency. Its accountability to Parliament ensures that it works to serve
public interest and not merely to maximize profits. The third feature in our
discussion sums it up which describes the public corporation as a ‘combination
of public accountability and business management for public ends’.

In theory, the public corporations possess all the above mentioned

advantages; in practice, however, it has not always been possible to let it
have the full use of its merits. In practice, the autonomy or independence of
management is somewhat limited. The Minister has power to issue instructions
on matters of national interest but sometimes this is stretched further than
its legitimate field, and he meddles with matters concerning internal
management, thereby defeating the fundamental objective - autonomy. It is
essential, therefore, that for the efficient discharge of their duties by the
managers, the government officials and ministers use their rights and powers
judiciously and with restraint.

GOVERNMENT COMPANY
The second form of corporate type of organisation is the limited liability
company registered under the Companies Act, and known as a Government
Company. Section 617 of the Companies Act, 1956, defines a Government
Company as any company in which not less than 51 per cent of the Paid-up
share capital is held by the Central Government, or by any State Government
or Governments, or partly by the Central Government and partly by one or
more State Governments.

The Act contemplates the formation of Government Company either with

total capital furnished by the Government or with mixed capital furnished
partly by the Government and partly by the members of the public. Where the
public also subscribes to the share capital of a company in which the
Government holds not less than 51 per cent of the paid up share capital it is
also called a Mixed Ownership Corporation. The Government companies in
India have mostly been registered as private limited companies though their
control and regulation rests with the Government which is in most cases the

63
sole holder of the share capital. This form of organisation combines the
operating flexibility of privately operated company with the advantages of
State regulation and control in public interest.

The chief characteristics of a Government Company Organisation are as

follows:
1. It has most of the features of a private limited company organised in
private sector.
2. The whole of the share capital, or 51 per cent or more of it, is held by
the government.
3. All the Directors, or a majority of them, are appointed by the
government depending upon the extent to which private capital is participating
in the enterprise.
4. It is a body corporate created under the Companies Act.
5. It can sue and be sued, enter into contracts, and acquire and hold
property in its own name.
6. Unhke the Public Corporation, it is created by an executive decision
of the government without Parliament’s specific approval having been obtained
and its Articles of Association, though conforming to the Companies Act, are
drawn up and can be altered by the government.
7. Its funds are obtained from Government, and in some cases, from
private shareholders, and through revenues derived from the sale of its goods
and services.
8. It is generally exempt from the personnel, budget accounting and
audit laws and procedures applicable to government departments.

9. Its employees, excluding the officers taken from government

departments on deputation, are not civil servants.

Evaluation of Company form: The strongest argument in support of a

government company is its flexibility, which may be operational or functional.
Flexibility may also refer to the case with which the Articles are drawn up
and altered. As the Ministry drafts the Articles, it can provide operational
flexibility, which becomes more difficult in the case of a public corporation
which is set up by an Act passed by the legislature. Similarly any modification
or alteration of Articles can be made very easily by the Ministry, while in the
case of a public corporation the procedure is lengthy and cumbersome.
The setting up of an enterprise takes hardly any time; and as a very large
number of undertakings are being set up, it is very simple to form a company.
To set up so many public corporations would have meant delay in setting up
undertakings. Generally the provisions of the Acts creating public corporations
are more rigid than the Articles of Government Companies and thus they
militate against flexibility.

64
 The advantage of autonomy is also greater in the case of a government
company than with a public corporation.
The company form is very useful where foreign capital and know- how
are invited to assist the setting up of huge public enterprises, such as the
Hindustan Steel Limited, which is government company owning three steel
plants and the assistance given by Great Britain, the U.S.A. and the U.S.S.R.

The company form may be, and is usually, adopted for anyone of 3 reasons,
namely:
1. When the government may have to take over an existing enterprise
in an emergency;
2. Where thl: State wishes to launch an enterprise in association with
private (particularly foreign) capital; or
3. Where government wishes to start an enterprise with a view eventually
to transferring it to private management.

Defects of Company form: The principal defects generally attributed to

the government company are:

(1) It evades the constitutional responsibilities which a State-owned

enterprise should have to Government and Parliament.
This defect is no more present, because Section 639 of the Companies
Act requires the Central Government to place before each House of Parliament
an annual report on the working and affairs of each government company
together with a copy of the audit report. Hence, in India, there is no evasion
of constitutional responsibility, and Parliament is given an opportunity to
discuss the working affairs of the government company as much as
shareholders of a company under private enterprise.

(2) There is an absence of government audit, for it is governed by the

rules as laid down in its own Articles of Association, and so to constitute
State-owned enterprises as private companies is to commit “a fraud on the
Companies Act and on the Constitution”.
After the passing of the Companies Act, 1956, this defect has been
removed. Section 619 of the Act provides that the auditor of a Government
Company shall be appointed by the Central Government on the advice of
Comptroller and Auditor General of India. Further the C.A.G. can direct the
manner in which the audit is to be conducted and may conduct supplementary
or test audit by person authorised by him. The auditor is required to send the
audit report to C.A.G. who may comment upon or supplement the report.
These reports, comments and supplements are placed before the Annual
General Meeting of the Company and also before both Houses of Parliament.

65
 (3) The law regulating limited companies became a mere fiction because
all or most of the functions normally vested in the shareholders and in the
management are reserved to government.
The government company is usually a private limited company and the
President of India holds all the shares except one share which is held by a
government official to complete the formality required by the Companies Act.
There is therefore no meeting of shareholders because that would be
meaningless. The Directors are also appointed by the Government. There is
nothing wrong in this act. If the government is the shareholder, it should
have the rights. In private sector one- man companies are common, and we
tolerate them.

(4) In the case of a company in private sector the Directors are elected
by shareholders who may be innumerable in number and their choice is
made as a result of their joint judgement, while in the case of a governm~nt
company, the government is the only shareholder and the judgment of a
single shareholder is bound to be inferior.
The argument is not only illogical but fallacious. If the government is
incapable of proper assessment and judgment in relation to its companies, it
is not worth the name, it cannot run the country. If it is able to run the
country democratically and generally in public interest, there is no reason
why its judgments in regard to its companies and selection of Directors for
them should not be sound. Moreover, the government is not one man and the
judgment is not of a single person. It is the judgment of people constituting
the government and is maturer and sounder than that of a heterogeneous
body of shareholders.

(5) The extent of autonomy that it provides for can be materially affected
or altered by executive agencies of the government.
This can happen, probably more, in the case of a public corporation, too.

1.16 LET US SUM UP

In this unit, we have discussed about the various forms economic activities
including business and their objectives. The qualities of a successful
businessman and business are elaborated. Then, the components of business
like Industry and commerce and their types are discussed in a nutshell
manner. Elaborately we have highlighted the various forms of organization
like sole proprietary unit, HUF, partnership firms, company form of
organization and public enterprises and public utilities and their merits and
demerits and suitability also discussed.

1.17 LESSON/UNIT AND ACTIVITIES

1. Visit any of the nearby enterprise and observe their function and
find out their suitability and evaluate its merits and limitations.
2. Evaluate the Public utility companies from your experience

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1.18 CHECK YOUR PROGRESS- MODEL ANSWERS
1. Earning profits through the satisfaction human needs and wants

2. Suitable to small size firms with limited capital type of enterprises

3. Main differences between them are transferability of shares and

number of membership.

1.19 REFERENCES
1. Business Organization and Management – C.N.Chabber

2. Business Organization – Y.L. Bhushan

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