Term-End Examination: June, 2013
Note : Attempt both Part - A and Part - B.
1. Distinguish between any two of the following : 5+5
(a) Employment and Profession
1. How to Start?
Getting membership of a professional body
Getting an appointment letter.
2. What is its nature?
Rendering of personalized expert services.
Performing work as
per service contract
3. Who can start?
Requires qualification and training in a specific field.
Requires qualification and training.
4. Return/What will we get?
Professional Fees.
5.  Capital
Requires limited capital.
Not capital required.
6. Risk involved
Less Risk
No Risk

(b) Private limited company and Public limited company

Basis of Difference
Private Company
Public Company
Number of persons
Minimum number of members is 2 and the maximum 50, excluding its present or past employee members.
Minimum number of members is 7 and there is no limit as to maximum numbers.
Transfer of Shares
Transfer of shares is generally restricted by the articles of association of a private limited company.
The shares of a public company are freely transferable.
Paid-up Capital
Minimum paid-up Capital should be Rs. 1, 00,000.
Minimum paid-up Capital should be     Rs. 5, 00,000.
Number of Directors
A Private Company must have at least two directors.
A Public Company must have at least three directors.
The word ‘Private Limited’ must be used as a part of the name.
The word ‘Limited’ must be used as a part of the name.

(c) Bank overdraft and Cash credit
Ans: Bank Overdraft: An overdraft is a fluctuating account wherein the balance sometimes may be in credit and at other times in debit. Overdraft facilities are allowed in current accounts only. Opening of an overdraft account requires that a current account will have to be formally opened, and the usual account opening form completed.
Cash Credit: A cash credit is essentially a drawing account against credit granted by the bank and is operated in the same way as a current account in which an overdraft limit has been sanctioned. The principal advantages of a cash credit account to a borrower are that, unlike the party borrowing on a fixed loan basis, he may operate the account within the stipulated limit as and when required.
(d) Joint life policy and Group insurance
Ans: A Joint Life Policy (JLP) is an insurance policy which is taken out by the partnership firm on the joint lives of all the partners. The amount of policy is payable by the Insurance Company either on the death or on maturity of policy, whichever is earlier. Joint Life Policy will be an asset of the firm
Group insurance' is an insurance that covers a group of people, usually who are the members of societies, employees of a common employer, or professionals in a common group. Group coverage can help reduce the problem of adverse selection by creating a pool of people eligible to purchase insurance that belong to the group for reasons other than for the purposes of obtaining insurance.
2. Write short notes on any two of the following : 5+5
(a) Hypothecation
Ans: Hypothecation is the practice where a borrower pledges collateral to secure a debt or a borrower, as a condition precedent to a loan, or has a third party (usually an affiliate) pledge collateral for the borrower. The borrower retains ownership of the collateral, but the creditor has the right to seize possession if the borrower defaults. A common example occurs when a consumer enters into a mortgage agreement, in which the consumer's house becomes collateral until the mortgage loan is paid off. The detailed practice and rules regulating hypothecation vary depending on context and on the jurisdiction where it takes place.
(b) Leasing
Ans: Leasing: Leasing is an alternative to term loans and, again, generally covers an intermediate (5-10 years) length of time.  Two types of leases exist;  an operating lease is one where the lease period is short in comparison to the life of the equipment and maintenance is generally provided (although oftentimes a separate maintenance contract is required).  A financial lease is where the lease period exceeds 75% of the life of the equipment and generally has a purchase option at the end of the lease period.
(c) Public utility undertaking
Ans: Refer Below
(d) Underwriting
Ans: The underwriting is an agreement between the issuing company and the assuring party through an agreement to take up shares or debentures or other securities to a specified extent in case public subscription does not amount to the expected level. Thus, in case any short-fall, it has to be made good by underwriting arrangements by the underwriter as per the agreement. The underwriter shall not derive any benefit from underwriting the issue than commission as specified in the agreement.
Attempt any three of the following questions :
3. Discuss the role of entrepreneur in business promotion. Outline the basic characteristics of an entrepreneur.
Ans: Role of Entrepreneur in Business Promotion
An entrepreneur frequently has to wear many hats. He has to perceive opportunity, plan, organize resources, and oversee production, marketing, and liaison with officials. Most importantly he has to innovate and bear risk. The main functions of an entrepreneur is business promotion according to Schumpeter. An entrepreneur uses information, knowledge and intuition to come up with new products, new methods of reducing costs of a product, improvement in design or function of a product, discovering new markets or new ways of organization of industry. Through innovation, an entrepreneur converts a material into a resource or combines existing resources into new and more productive configurations. It is the creativity of an entrepreneur that results in invention [creation of new knowledge] and innovation [application of knowledge to create new products, services or processes.] Systematic innovation means monitoring the following for innovative opportunity:
  • The unexpected success or failure or any unexpected outside event, (e.g. when the IT bubble burst the ITES sector started growing.)
  • Innovation based on process need [e.g. plate based cameras, film based cameras, digital cameras]
  • Changes in industry and market structure [e.g. video cassette VCD, DVD, Blue ray disc]
  • Demographics changes (e.g. increasing number of working women and nuclear families in most metropolitan cities)
  • New knowledge (e.g. Pentium chip)

Traits and Qualities (Characteristics) of an Entrepreneur:
  1. Initiative: Initiation of any business activity should come from the entrepreneur. He does things before being asked or forced by the events.

  1. Looking for opportunities: A successful entrepreneur is one who always is on the look for and takes action on opportunities. He must be always in readiness to exploit it in maximizing the interest of the organization.

  1. Persistence: An entrepreneur should take repeated actions to overcome the obstacles that get in the way of reaching goals. He should never be disheartened by failures. He should believe in the Japanese proverb, "Fall seven times, and stand up eight".

  1. Concern for quality products: Successful entrepreneurs always believe in high quality standards of their products with reasonable prices. They believe in excellence. They act to do things that meet or beat existing standards of excellence.

  1. Systematic Planning: Entrepreneurs develop and use logical, step-by-step, realistic and proper plans to accomplish their goals. They believe in systematic planning and its proper execution to reach goals.

  1. Problem solving: Successful entrepreneurs are challenging by nature. They always try to find out ways and means to overcome the problems that come in their way.
  2. Persuasion: A successful entrepreneur must be able to persuade others to do the work the way he wants them to do. He is able to convince others through his knowledge and competence.
4. State the various methods of raising long term funds for a business organization and explain the merits and demerits of any one of these methods. 3, 4, 3
Ans: Long-term finance is required for investment in fixed assets and for financing expansion programmes. Long-term finances are raised for a period of 10 years or more. Main sources for raising long-term funds are shares, debentures, retained earnings and financial institutions providing long term funds. The amount of long term capital depends upon the scale of business and nature of business. The main sources of long term finance are as follows:
1. Capital Market: Capital market denotes an arrangement whereby transactions involving the procurement and supply of long-term funds take place among individuals and various organisations. In the capital market, the companies raise funds by issuing shares and debentures of different types. Individuals and institutions which contribute to the share capital of the company become its shareholders. They are also known as members of the company.
2. Special Financial Institutions: A large number of financial institutions have been established in India for providing long-term financial assistance to industrial enterprises. There are many all-India institutions like IFCI, ICICI, IDBI, SFCs, LIC, UTI, SIDCs etc.
3. Leasing Companies: Manufacturing companies can secure long-term funds from leasing companies. For this purpose a lease agreement is made whereby plant, machinery and fixed assets may be purchased by the leasing company and allowed to be used by the manufacturing concern for a specified period on payment of an annual rental. At the end of the period the manufacturing company may have the option of purchasing the asset at a reduced price. The lease rent includes an element of interest besides expenses and profits of the leasing company.
4. Foreign Sources: Funds can also be collected from foreign sources which usually consist of:
a) Foreign Collaborators: - If approved by the Government of India, the Indian companies may secure capital from abroad through the subscription of foreign collaborator to their share capital or by way of supply of technical knowledge, patents, drawings and designs of plants or supply of machinery.
b) International Financial Institutions:  Like World Bank and International Finance Corporation (IFC) provide long-term funds for the industrial development all over the world. The World Bank grants loans only to the Governments of member countries or private enterprises with guarantee of the concerned Government. IFC was set up to assist the private undertakings without the guarantee of the member countries. It also provides them risk capital.
c) Non-Resident Indians: - persons of Indian origin and nationality living abroad are also permitted to subscribe to the shares and debentures issued by the companies in India.
5. Retained Profits or Reinvestment of Profits: An important source of long-term finance for ongoing profitable companies is the amount of profit which is accumulated as general reserve from year to year. Retained profit is an internal source of finance. Hence it does not involve any cost of floatation which has to be incurred to raise finance from external sources.
Advantages and Disadvantages of Preference Shares (only three points are sufficient)
Advantages of Preference shares
1. Absence of voting rights: The preference shareholders do not possess the voting rights in the personal matters of the company. There is thus no interference in general by the preference shareholders, even though they gain more profits and advantages over the common shareholders.
2. Capital structure flexibility: By means of issuing redeemable preference shares, flexibility in the company’s capital structure can be maintained because redeemable preference shares can be redeemed under the terms of issue.
3. Fixed regular income: The culminative preference share investors even in case of absence of profits for the company get a regular hold of profits. The areas of dividends are generated in the years of profits of the company.
4. Less capital losses: The preference shareholders possess the preference rights of the repayment of their capital as a result of which there are less capital losses.
5. Proper security: Preference shareholders possess proper security in case of their shares in cases when the company fails to generate profits.
The disadvantages of preference shares, from the point of view of the company are as follows:
1. High rate of dividends: The Company has to pay higher rates of dividends to the preference shareholders as compared to the common shareholders. Thus the cost of capital of the company is also increased.
2. Dilution of claim over assets: Because of the very reason that preference shareholders have preferential rights over the company assets in case of winding up of the company, dilution of equity shareholders claim over the assets take place.
3. Tax disadvantages: In case of preference shareholders, the taxable income of the company is not reduced while in case of common shareholders, the taxable income of the company is reduced.
4. Effect on credit worthiness: In case of preference shares, the credit worthiness of a company is definitely reduced because preference shareholders possess the right over the personal assets of the company.
5. Increase in financial burden: Because most of the preference shares issued are culminative, the financial burden on the part of the company increases vehemently.
5. "Advertisement is a waste". Comment on this statement. 10
Ans: Is advertising a social waste?
 It is true to say that, “Advertising is economically beneficial but not socially justifiable”. As the Advertising is economically beneficial, it helps the businessmen to increase the demand of particular goods or services. It can search the new market and target their customers. Advertising also helps in distribution of goods and services and also reduces dependence of customer and businessmen on the middlemen or intermediaries by providing economies of scale. Advertising attracts customers for a new product and increase its sales also.
Several objections have been raised against advertising and some people criticize advertising as a social waste. The main point of criticism is as follows:-
  1. Creates Monopoly in the market
  2. Higher the prices of product
  3. Misleading the consumers
  4. Wasteful consumption by the consumers
  5. Wastage of national resources
  1. Creates Monopoly in the Market: Advertisement leads to promotion and cover mass level of customers at a time. Sometimes it will create a monopoly in the market with the help of advertisement. Large firms can bear the advertisement expenditure but not the small firms, due to that it can eliminate the small firms from the market and creates its monopoly authority in the market. But the monopoly is only for a temporary basis as there is availability of competition in the market.
  2. Higher the Prices of Product: Investment of money in advertisement leads to increase in the price of goods and services for which consumer has to face high prices and pay for it. There is positive relationship between advertisement cost and its product. Hence, more the advertisement cost- more the product cost. Whereas, decrease in advertisement expenditure leads to fall in price of product cost.
  3. Misleading the consumers: Now days, advertisement misleads the consumers on false representation regarding their goods. Consumer attracts to those goods which are not necessary for them. Producers misguide the consumers by giving bogus testimonials and false representation regarding particular commodity. Thus, advertisement misleads the consumer and sale goods to them.
  4. Wasteful Consumption by the Consumers: Advertisement attracts the consumers for wasteful products which are not necessary for consumers. Due to advertisement businessmen takes undue advantage from them. They sale unhealthy and artificial goods to them and exploits consumer emotions. Now days the society has become the society of chocolate, Burger, pizza and cola’s instead of juice, fruits and vegetables just because of advertising.
  5. Wastage of National Resources: There will be wastage of national resources, valuable stationary, time and energy used by the people or is ignored by them. Here, Valuable resources that can be used to create new industries are wasted in the production of needless varieties and designs. Vance Packard, in his book “The Waste Makers”, gives several interesting examples on national resources.

6. Discuss the factors influencing the choice of channels of distribution. 10
Ans: Factors Affecting the Selection of the Channel of Distribution
Every producer, in order to pass on the product to the consumer, is required to select a channel for distribution. The selection of the suitable channel of distribution is one of the important factors of the distribution decisions. The following factors affect the selection of the channel of distribution:
A. Factors Pertaining to the Product: Keeping in view the nature, qualities and peculiarities of the product, could only the channel for distribution be properly made. The following factors concerning the product, affect the selection of the channel of distribution:
(1)   Price of the Product: The products of a lower price have a long chain of distributors. As against it, the products having higher price have a smaller chain. Very often, the producer himself has to sell the products to the consumers directly.
(2)   Perishability: The products which are of a perishable nature need lesser number of the intermediaries or agents for their sale. Under this very rule, most of the eatables (food items), and the bakery items are distributed only by the retail sellers.
(3)   Size and Weight: The size and weight of the products too affect the selection of the middlemen. Generally, heavy industrial goods are distributed by the producers themselves to the industrial consumers.
(4)   Technical Nature: Some products are of the nature that prior to their selling, the consumer is required to be given proper instructions with regard to its consumption. In such a case less of the middlemen arc) required to be used.
(5)   Goods Made to Order: The products that are manufactured as per the orders of the customers could be sold directly and the standardized items could be sold off only by the middlemen.
(6)   After-Sales Service: The products regarding which the after-sales service is to be provided could be sold off either personally or through the authorized agents.
B. Factors pertaining to the Consumer or Market: The following are the main elements concerned with the consumer or the market:
(1)   Number of Customers: If the number of customers is large, definitely the services of the middlemen will have to be sought for. As against it, the products whose customers are less in number are distributed by the manufacturer himself.
(2)   Expansion of the Consumers: The span over which are the customers of any commodity spread over, also affects the selection of the channel of distribution. When the consumers are spread through a small or limited sphere, the product is distributed by the producer himself or his agent. As against it, the goods whose distributors are spread throughout the whole country, for such distributors, services of wholesaler and the retailer are sought.
(3)   Size of the Order: When bulk supply orders are received from the consumers, the producer himself takes up the responsibility for the supply of these goods. If the orders are received piece-meal or in smaller quantities, for it the services of the wholesalers could be sought. In this way, the size of the order also influences the selection of the channel of the distribution.
(4)   Objective of Purchase: If the product is being purchased for the industrial use; its direct sale is proper or justified. As against it, if the products are being purchased for the general consumption, the products reach the consumers after passing innumerable hands.
(5)   Need of the Credit Facilities: If, for the sale of any product, it becomes necessary to grant credit to any customer, it shall be helpful for the producer that for its distribution, the services of the wholesalers and retailer businessmen be sought. In this way, the need of the credit facilities too influences the selection of the channel of distribution.
C. Factors Pertaining to the Middlemen: The following are the main factors concerned with the middlemen:
(1)   Services Provided by Middlemen: The selection of the middlemen is made keeping in view their services. If some product is quite new and there is the need of its publicity and promotion of sales, then instead of adopting the agency system, the work must be entrusted to the representatives.
(2)   Scope or Possibilities of Quantity of Sales: The same channel should be selected by means of which there is the possibility of more sales.
(3)   Attitude of Agents towards the Producers' Policies: The producers generally prefer to select such middlemen who go by their policies. Very often when the distribution and supply policies of the producers being disliked by the middlemen, the selection of middlemen becomes quite limited.
(4)   Cost of Channel of Distribution: While selecting the channel of distribution, the cost of distribution and the services provided by the middlemen or agents too must be kept into consideration. The producers generally select the most economical channel.
D. Factors Pertaining to the Producer Or Company: The following factors, concerning the producer, affect the selection of the channel of distribution:
(1)   Level of Production: The manufacturers who are financially sound and are of a larger category, are able to appoint the sales representatives in a larger number and thug could distribute the commodities (products) in larger quantities. As against it, for the smaller manufacturers, it becomes necessary to procure the services of the wholesalers and the retail traders.
(2)   Financial Resources of the Company: From the financial point of view, the stronger company needs less middlemen.
(3)   Managerial Competence and Experience: If some producer lacks in the necessary managerial experience or proficiency, he will depend more upon the middlemen. The new manufacturers in the beginning remain more dependent upon the middlemen.
E. Other Factors
(1)   Distribution Channel of Competitors:  While determining the channel of distribution, the channels of distribution of the competitors too must be borne in mind.
(2)   Social Viewpoint: What is the attitude of society towards the distribution, this fact too must be kept into consideration while selecting the middlemen. 
(3) Freedom of Altering: While selecting the agents, this fact too must be kept into mind that in case of need, there must be the liberty of changing or replacing the agents (middlemen).

7. Define business risk. What are the various types of business risks? How do you manage them? 2+4+4
Ans: Business Risks: The term ‘business risks’ refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. For example, demand for a particular product may decline due to change in tastes and preferences of consumers or due to increased competition from other producers. Decrease in demand will result in lesser sales and profits.
Types of Business Risk
The Business risk is classified into different 5 main types:
1) Strategic Risk: They are the risks associated with the operations of that particular industry. These kind of risks arise from:
Business Environment: Buyers and sellers interacting to buy and sell goods and services.
Transaction: Assets relocation of mergers and acquisitions, spin-offs, alliances and joint ventures.
Investor Relations: Strategy for communicating with individuals who have invested in the business.
2) Financial Risk: These are the risks associated with the financial structure and transactions of the particular industry.
3) Operational Risk: These are the risks associated with the operational and administrative procedures of the particular industry which are very common in today's generation.
4) Compliance Risk (Legal Risk): These are risks associated with the need to comply with the rules and regulations of the government.
5) Other risks: There would be different risks like natural disaster (floods) and others depend upon the nature and scale of the industry.
There are four ways of dealing with, or managing, each risk that we have identified:
  • Accept it
  • Transfer it
  • Reduce it
  • Eliminate it
For example, we may decide to accept a risk because the cost of eliminating it completely is too high. We might decide to transfer the risk, which is typically done with insurance. Or we may be able to reduce the risk by introducing new safety measures or eliminate it completely by changing the way we produce our product. When we have evaluated and agreed on the actions and procedures to reduce the risk, these measures need to be put in place.
Risk management is not a one-off exercise. Continuous monitoring and reviewing are crucial for the success of our risk management approach. Such monitoring ensures that risks have been correctly identified and assessed and appropriate controls put in place. It is also a way to learn from experience and make improvements to our risk management approach.
8. (a) Explain the characteristics of a government company. 5+5
Ans: Features of a government company:
  1. It is formed under the provisions of the Indian Companies Act, 1956.
  2. The total share capital or 51 percent or more of share capital is held by the government.
  3. It enjoys the status of a legal entity and therefore it can use or be sued by others.
  4. The finance of a government company is obtained from the government and from private share holders.
  5. The employees are governed by the rules prescribed for the company by the board of directors.
  6. It is not subject to budgeting, accounting, and audit rules applicable to a government department.
  7. The directors are nominated by the government depending upon participation of private capital.

(b) Why is government's direct participation in business considered necessary?
Ans: Refer above