(a) What are the main form of business organisation for medium and large scale enterprises in this economy?

 

In India there are found both, private and public enterprise. The forms of private business found in our country are:

1. Sole proprietorship

2. Joint Hindu Family Firm

3. Partnership Firm

4. Joint Stock Company, and

5. Co-operative Organization

From the above mentioned forms of business 1. & 2. do not fall into the category of either medium or large scale enterprises, except in the rarest of cases.

Partnership-In India as in most other parts of the world, it is seen that as a business grows beyond the capacity of sole proprietorship and joint Hindu family firm, it becomes necessary to form a partnership. The Indian Partnership Act, 1932 provides for the registration of firms with the Registrar of Firms appointed by the Government. The registration of a partnership firm is not compulsory. But an unregistered firm suffers from certain disabilities. Therefore registration of a partnership firm is considered desirable, and at times a requirement of the lenders.

Joint Stock Company-The definition of a joint stock company, in India is similar to that followed in other countries. It is an incorporated and voluntary association with a distinctive name, perpetual succession, limited liability and common seal, and usually having a joint capital divided into transferable shares of a fixed value. The companies can further be classified in to the following kinds of companies on the basis of their mode of incorporation:

1. Chartered Company

2. Statutory Company

3. Registered or Incorporated Company

In India the companies are also classified from the light of public interest or membership:

1. Private Company

2. Public Company

3. Government Company

On the basis of inter-company relationships, companies are of two types:

1. Holding Company

2. Subsidiary Company

From the point of view of nationality, companies may be divided in to two categories:

1. National or domestic Company

2. Multinational or transnational Company

In India companies are governed by the Companies Act, 1956. This Act provides for the standard procedures relating to the affairs of a company such as modes of winding up, liquidation of a company etc.

Co-operative Enterprise-In India Co-operative organization grew as a means of protecting the interests of the relatively weaker sections of society against exploitation by big business operating for the maximization of profits. According to the Co-operative societies Act, 1912, co-operative organization is "a society which has as its objectives the promotion of the interests of its members in accordance with the principles of co-operation." In addition to the above mentioned Act, such societies are also governed by the various state Co-operative Societies Acts. Co-operative organizations are suitable generally for medium and small sized business operations. They do not generally graduate to being a large scale industrial operation.

 

(b) Is there a system of registration for these business organizations? If so, briefly describe.

 

The requirements of registration for the above mentioned forms of business organizations are as follows:

1. Sole Proprietorship-Sole proprietorship is easiest to organize as no legal formalities are required for starting it. No agreement is to be made for constituting such a business entity and registration of the firm is not essential, except for claiming benefits available to small sector units. However, a formal license may be required from the municipal corporation or Health Department in some cases, e.g. liquor, drugs, etc. Although no registration is mandatory under the central acts, yet these corporate bodies may be registered under the local shop and establishment acts, and other laws for licensing requirements.

2. Joint Hindu Family Firm - This is a peculiar form of business found in India. In this form of business ownership, all members of a Hindu undivided family do business jointly under the control of the head of the family who is known as the 'Karta'. No registration is necessary for this form of business. Some kind of statutory control on the working of the HUF can be maintained by following the specific conditions, as laid down in the Income Tax Act. This is a peculiar business entity having its origin in personal law of the Hindus, and is peculiar to the Hindu Trading Community and their families.

3. Partnership Firm- In the case of partnership firm, although statutorily registration is not compulsory, however an unregistered firm suffers from certain limitations. A partnership firm can be registered at any time by filing a statement in the prescribed form. The form should be duly signed by all the partners. It should be sent to the Registrar of Firms along with the prescribed fee. On receipt of the statement and the fees, the Registrar makes an entry in the Register of Firms. The firm is considered to be registered when the entry is made.

4. Joint Stock Company- A Company is an incorporated or registered association of persons. One person cannot constitute a Company under the law. In a public Company, at least seven persons and in a private Company at least two persons are required. A Company can be formed only after fulfilling legal formalities and its incorporation under the Act is essential, before it can commence its business. A Company registered under the Companies Act is called Registered or Incorporated Company. Such Companies are most common in practice.

5. Co-operative Enterprise- No association of persons use the word co-operative in its name without being registered under the Co-operative Societies Act, 1912 or under the Co-operative Societies Act of a State Government. In order to get a co-operative registered, an application in the prescribed form must be submitted to the Registrar of Co operative societies of the state in which the society's registered office is to be situated. Any ten persons above the age of 18 years and having common interest may submit a joint application for being formed in to a co-operative society.

 

(c) Are there any minimal capitalisation requirements for these enterprises?

 

Minimal Capitalization Requirements for these enterprises:

There are no prescribed or statutory capitalization requirements for the small forms of business such as sole proprietorships and the Joint Hindu Family firms. None of the regulating Acts such as the Companies Act or the Partnership Act list any such requirements. Capital adequacy or stipulations are industry specific, and not industry or size specific. The classification of Small Scale Sector unit is now dependant on the total owned capital of the undertaking. A medium scale enterprise will be an undertaking, which has more capital than that of a small scale unit viz. capital in excess of its size.

 

(d) Briefly describe the main features of each type of these business organisations, by reference to public/private/state ownership and management; accounting and auditing responsibilities (particularly the standards which apply to accounting and auditing practices); director and management responsibility (including, if relevant, possible liability for debts); and the role of regulatory authorities regarding these enterprises.

 

Main features of the business organizations:

1. Sole Proprietorship-This is a form of business ownership under which a single person supplies the capital, uses his own skill, receives all the profits and bears all risks of business. He may borrow money and may employ workers but he alone owns and controls the business. The basic feature is that it is owned and controlled by a single individual. He receives all the profits and risks all of his property in the success or failure of the enterprise. The sole proprietor is not only the exclusive owner of the business, but also its founder and controller. In India as in most other countries Sole proprietorship is the simplest and the oldest form of business enterprise. This form of business is free from legal formalities and regulations, relating to incorporation and establishment. Those enterprises which are aided units and which require support from Government, and other sponsored institutions have to comply with conditions specified by such Government bodies granting support to the small scale sector. Such support may be in the form of concessional capital or procurement of controlled commodities or marketing support. Under the Income Tax Act, a sole proprietor must get his/her accounts duly audited, in case, annual sales turnover or gross receipts exceed Rs. 40 lakhs in case of business and Rs. 10 lakhs in case of profession.

2. Joint Hindu Family-The business of a HUF is managed by the senior most male member or father. He is known as the Karta, or Manager. As the head of the joint family, the Karta has full control over the affairs of the family business and serves as the custodian of the firm's assets. Other members of the HUF cannot question his judgement, if the Karta has acted in the name of the family and for its benefit. The only remedy available to them then is to demand partition of the ancestral property. Family business is considered a part and parcel of the ancestral property and, therefore the family business is the subject matter of co-parcenary interest. The rights and liabilities of co-parceners are determined by the general rules and traditional conventions of the Hindu Law.

3. Partnership-The basic features, and how the partnership is formed has been explained above. As far as the management is concerned, there can be different kinds of partnerships such as a partnership at will, Particular Partnership and Joint Ventures. The Law does not permit the formation of a limited partnership or limited liability partnership in India. It is common to appoint a Managing Partner and empower such a person with its powers of day to day management and give such authority to act on the behalf of the firm in terms of the specific authorities and powers conferred upon the Managing Partner. Such a person then binds the firm and other partners on the basic legal principle of mutual agency. The Institute of Chartered Accountants lays down the Standards for accounting and auditing in India. These standards are to be applied, irrespective of the size or type of industry in India.

4. Settlement of Accounts on Dissolution- When a partnership firm is dissolved, its assets are disposed off, and a partner has unlimited liability as in the case for a sole proprietorship and HUF. The proceeds therefrom are utilized in paying the creditors. If the amount realized by sale of assets is not sufficient to discharge the claims of the creditors in full, the deficiency can be recovered proportionately from the personal properties of the partners. If any partner becomes insolvent, the remaining solvent partners will bear the loss in their capital ratio. In case the assets of the firm are more than sufficient to meet the liabilities in full, then the surplus may be utilized to pay off the loans and capitals contributed by the partners.

S.48 of the Partnership Act, 1932 lays down the following procedure for the settlement of accounts between partners after the dissolution of the firm:

1. Losses including deficiencies of capital should be made good out of profits, then out of capital, and if need be, out of personal contributions of partners in their profit sharing ratios in that order.

2. The assets of the firm including any sum contributed by partners to make up deficiencies will be applied for settling the debts of the firm, in the following order, subject to any agreement to the contrary;

a) First, in paying of the debts of the firm due to third parties;

b) Then in paying to each partner rateably any advances or loans given by him in addition to or apart from his capital contribution;

c) If any surplus is available after discharging the above liabilities, the capital contributed by the partners may be returned, if possible, in full or otherwise ratably;

d) The surplus, if any, shall be divided among the partners in their profit-sharing ratios.

3. Joint Stock Companies-In a private company, the minimum number of members is 2 and the maximum is 50. In a public Company minimum number of members is 7 and there is no maximum limit prescribed by law. A Company has to comply with several legal requirements and it must submit reports to the Government. Also every member does not participate in actively in the day to day management. The Company is managed by a Board of Directors consisting of elected representatives/nominees of the members. There is divorce between ownership and management of a Company. A Company must maintain its accounts in the prescribed form and must get them audited by a qualified auditor. The form of accounts of a Company are specified under the Companies Act. The responsibilities of an internal auditor and external auditor are prescribed by law. Manufacturing Companies and other specified notified Companies have compulsory audits and cost audit obligations by law. Tax audits are required to be conducted for Companies having an income over specific limits. The lenders more than the Registrar of Companies or the Department of Company Affairs, stipulate commercial conditions for debt equity ratios and debt service reserve obligations. There are ceilings prescribed for intercorporate investments and loans and strict rules for receiving public deposits and monies. The Companies Act lays down stringent provisions for the regulation of the process of running a Company.

One of the most important developments in this direction was the Constitution of Board of Company Law Administration, by virtue of S.10E which was inserted by section 4 of the Companies (Amendment) Act (LIII of 1963)(w.e.f.1-1-1964). This is also referred to as Company Law Board (CLB). The CLB exercises its powers and functions as under:

a) The Companies Act, 1956

b) Securities Contracts(regulation) Act, 1956

c) MRTP Act, 1969

In addition to this the CLB also exercises powers under Code of Civil Procedure, 1908.

The following sections of the Companies Act, 1956 are important for the statutory regulation of a Company in India:

S.17-Special resolution and confirmation by CLB required for alteration of memorandum.

S.150 to S.158-These sections provide for the maintenance of registers of embers and Debenture-Holders.

S.159 to S.164-Annual Returns to be made by Companies having share capitals.

S.209 to S.223-Accounts, Companies are required to keep at their registered offices books of accounts. These books of accounts can be inspected by the Registrar of Companies (ROC) as well as authorities such as the Reserve Bank of India.

S.224 to S.233-Audits, these sections provide for the appointment and remuneration of auditors, their qualifications, their mode of appointment and other procedural requirements.

S.234-According to this section where, on perusing any document which a company is required to submit to him under this Act, the Registrar is of the opinion that any information or explanation is necessary with respect to any matter to which such document purports to relate, he may, by a written order, call on the Company submitting the document to furnish in writing, such information or explanation, within such time as he may specify in the order. This section along with S.235 is of critical importance in statutory regulation of the running of a Company.

S.235-Investigation of the Company, by virtue of this section the Government can on the report of the ROC under S.234 appoint one or more competent persons as inspectors to investigate the affairs of a Company and to report in such a manner as the Central Government may direct.

S.388B to S.388E-These sections describe the powers of central government to remove managerial personnel from office on the recommendation of the Company Law Board. Lenders required more controlled forms of organization to lend larger amounts, and often stipulate conversion from partnership or limited companies for securing the fund raising and capital market tapping capacity of corporate borrowers.

(a) Are there any relevant observations to make concerning political, social (powerful family), financier (bank equity or involvement) or cultural controls or influences in respect of these types of business organisation?

 

The most important influence on the types of business organization in India is the organization of banking institutions in India. The Banking Institutions have been strongly influenced by social, political and cultural influences, the political influence culminating in the nationalization of all the major banks in 1969.

Historically however, the banker has been an indispensable pillar of Indian society. He may have been miring in the good old days, when self, sufficiency was the law of the land. Money lending has been a traditional activity for several centuries in India, and recovery procedures have been strict, and at times harsh in the agricultural & rural sector in India. However in the present scenario banks and money lenders have to be licensed to carry on the business in India and they are regulated by the usury laws also.

In India, traditionally most modern business organizations, right from a simple company to an imposing conglomerate, have at times had their genesis in the Hindu undivided business. Such businesses being closely held, and fiercely proud, have hesitated to approach the formal institutions for credit. It is this factor that encouraged and sustained in India, an informal system of disbursing credit, in the form of the unregulated money lender. A practice which is still, prevalent in the country. This has also encouraged, in recent times the growth of co-operative banking institutions in India.

The traditional antipathy amongst Indian business to approach the banks may be attributed to the concept of usury or high rate of interest, which was widely prevalent in India. Most experts attribute usury to the state of insecurity in India, and the risk involved on account of the low financial status of the borrowers. It was this factor which prevented the Indian business from approaching the financial institutions for reconstruction and left him to totter on the brink of insolvency and financial ruin.

Although the practice of the indigenous banker is fact dwindling each year as he is unable to adjust to the requirements of modern banking conditions, it must be presumed that the private banker is not yet extinct. His activities have been generally in agriculture, retail trade sectors and is spread amongst the various classes of small borrowers. The co-operative banking institutions are also playing an important role in reducing the role of the indigenous money lender.

With the growth of these co-operative banks, and other institutions such as the IFCI, SFC's ICICI, IDBI etc. There are several banking opportunities available to enterprise in India. The above named institutions are operating various schemes of assistance to industrial units such as Direct Assistance, Indirect Assistance. Another feature, influencing, the way in which business enterprises operate has been the entry of the private banks. This entry has been led by the entry of the foreign banks such as the Bank of America, Hong Kong & Shanghai Bank, Deutsche Bank, Standard Chartered Bank, Citibank etc. These banks have employed specialized techniques of risk evaluation and the monitoring of the financial health of their clients. They have been maintaining entire departments for these feasibility studies and for monitoring domestic enterprises. This in turn has led many Business Enterprises to improve their credit worthiness or to at least work in that direction.

Political influences have affected the corporate environment, and businessmen are requiring Government to be more business sensitive. The large business houses were identified with India's freedom movement and this did influence the business licenses issued to them. However their influence has waned and technology and the introduction of outside competition from foreign sources has diminished their dominance. The nexus or the relationships between the businessmen and the politicians has usually transcended the business of ideology and party affiliations. Political influence is more evident, when large scale unemployment is feared and the Government is known to have inducted labour protection laws to prevent unemployment and closures; both with a view to alleviate poverty and unemployment and with an eye on the "vote banks" of labour. Banks in India can at best invest up to 30% of the capital & free reserves in any company. For prudential norms and capital adequacy purposes, they usually invest less than this amount (usually in the range of 15% to 25%) in any single enterprise or group.

Cultural influences were of great importance in the pre independence days. When business and trade was restricted to certain communities, however with every passing decade since 1947, even this cultural hesitation of the foreign influence is waning.