industrial and regulatory perspective of business
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M O D U L E 3
INDUSTRIAL AND REGULATORY PERSPECTIVE OF BUSINESS
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ROLE OF GOVERNMENT IN ECONOMICDEVELOPMENT
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Governments Role
State control is inevitable, but the extent of control vary widely from one country to another dependingupon political philosophy, social attitudes, stage of
economic development and behavior of privatesector.Plight of Underdeveloped nations disparity between their economic condition and that of the
advanced countries.Comprehensive measures by Govt., is necessary
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Necessary Measures by Government
1. Provision of Economic & Social OverheadIncludes transport facilities, means of communication, energy infrastructure, irrigation
facilities, education & training, public health,housing &welfare schemesLeads to external economies to other industriesand lowers the capital co-efficient of private players
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Necessary Measures by Government
2. Provision of Financial FacilitiesFinance is the crux of economic developmentUnderdeveloped countries have very meager
savingsProper Banking system required to channelize thesavingsGovt., plays a important role in setting up financialinstitutions
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Necessary Measures by Government
3. Institutional ChangesLegal & social structure changesLand reforms
Community development projects RuralSocial security schemesProducers co -operatives
Welfare schemes
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Necessary Measures by Government
4. Direct participationLevel playing field alongside private playersSets a model for private players
Profits from these undertakings are used foreconomic developmentConfines itself to basic, heavy and key industries steel plants, heavy electrical & engineering, machinetools, fertilizers, oil refineries & antibiotics
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Necessary Measures by Government
5. Indirect Measures
Monetary policy
Fiscal policy
Commercial policy
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Reasons for Government Intervention
Planned economy wrong priorities will lead to animbalanceOurs is a Socialist society & Govt., is compelled to
enter into industrial & commercial activitiesFailure of markets invites Govt., intervention andavoidance of economic evils like Monopoly compelsGovt., to interfere
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Types of Government Intervention
Formal Vs Informal
Coercive Vs Inducive controls
Direct Vs Indirect controls
Effect on Competition
Promotional controlsRegulatory controls
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Political Environment
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Types of political Systems
Anarchy Dictatorship Autocracy Oligarchy Theocracy Monarchy
Democracy Indirect democracy Plutocracy
Cleptocracy
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Structure of Indian Government
Legislative organDelegated legislationOrdinances
Executive organ
Judicial organSupreme courtHigh court
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Questions.if any???!!!
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Regulatory Role of Government
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Government Regulation
Entry regulation & reservation of industries dominant role of governmentRegulation of the conduct of business ex
promotional activitiesDisposal of surplus & relationshipsIn India regulatory role played by Govt., includes:
1. Control of regulation of prices2. Control of MRTP3. Control of Foreign Exchange Transactions
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1. Control & Regulation of Prices
To fix, control & regulate prices of materials, semi finished &
finished products
Authority given according to the industries development and
regulation act, 1991
Act empowers govt., to order investigation - an unjustifiable
fall in the volume of production, marked deterioration in
quality or increase in prices not justified by proper reasons
Ex Air fare Praful Patels action
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2. Control of MRTP
Monopolies & Restrictive Trade Practices Act, 1969
Aim is to control any monopolistic, restrictive and unfairtrade practices which are prejudicial to public interest
Scope applies to all companies registered under thecompanies act, 1956 except J&K
Monopolistic trade practice : unreasonably preventing orlessening competition in production & supply of any goods or services
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MRTP
Includes,1. Unreasonably increasing the Cost of Prod, supply &
distribution of goods & services2. To unreasonably increase the price of goods or the
profits derived from prod, supply & distribution3. To reduce or limit competition in PS&D4. To prevent or limit unreasonably the supply of
goods & services to consumers5. To result in deterioration in the quality of goods&services
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Competition Act 2002
1. Price fixing:-
If two or more supplier fixes the same price for supply the goods then it will be restricted practice.
2. Bid ragging:-
If two or more supplier exchange sensitive information of bid, then it willalso be restricted practice and against competition.
3. Re-sale price fixation:-
If a producer sells the goods to the distributors on the condition that he willnot sell any other price which is not fixed by producer.
4. Exclusive dealing:-
This is also restricted practice. If a distributor purchases the goods on thecondition that supplier will not supply the goods to any other distributor.
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Competition Commission
Establishment of Competition Commission Under this law
Govt. of India appoints the chairman and other member of competitioncommission. Competition act 2002 gives the rules and regulationregarding establishment and functions of this commission.
Qualification of chairperson of Competition commission:-
He or she should be Judge of high court + 15 years or more experiencein the field of international trade , commerce , economics , law , finance
, business and industry .
Function of Competition commission:-
1. To stop activity and practice which are promoting monopoly.2. To promote the competition.3. To protect the interest of consumers.
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Remedies under CA
Temporary Injunction during enquiry the commission
may restrain an undertaking or person from carrying on
such practice until the conclusion of inquiry or until
further orders
Compensation compensation for any damages toGovernment, traders or consumer as per the
recommendations of the Commission
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Unfair Trade Practices
Misleading advertising
Bait advertising
Offering of pseudo gifts or prizes and conducting of promotional events
Supplying of unsafe & hazardous products
Hoarding or destroying of goods or refusing to sell
goods resulting in a price rise
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Case Study
Emergency Contraceptive pill iPill
Rcom Claiming fastest mobile broadband service
Idea cellular walk while you talk
Elder Pharma Fuel deo
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3. FEMA
The Foreign Exchange Management Act (1999) or in short FEMA has been introduced as a replacement for earlier Foreign ExchangeRegulation Act (FERA).FEMA became an act on the 1st day of June, 2000. FEMA was introduced because the FERA didnt fit the post lib era - alloffenses regarding foreign exchange civil offenses, as opposed tocriminal offenses as dictated by FERA.
The main objective behind the Foreign Exchange Management Act(1999) is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments. It wasalso formulated to promote the orderly development and maintenanceof foreign exchange market in India.
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FEMA
FEMA is applicable to all parts of India. The act is alsoapplicable to all branches, offices and agencies outsideIndia owned or controlled by a person who is a resident of India.
The FEMA head-office, also known as EnforcementDirectorate is situated in New Delhi and is headed by aDirector. The Directorate is further divided into 5 zonaloffices in Delhi, Mumbai, Kolkata, Chennai and Jalandharand each office is headed by a Deputy Director. Each zone isfurther divided into 7 sub-zonal offices headed by the Assistant Directors and 5 field units headed by Chief Enforcement Officers.
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Provisions of FEMA
Dealing in Foreign Exchange
Holding of Foreign Exchange
Current Account Transaction
Capital Account Transaction
Export of Goods & Services
Repatriation of Foreign Accruals
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Questionsif any???!!!
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Public Sector
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PSUs
Wide coverage of Activities
Purpose : public interest & social aspects supersedes
business considerationsPublic accountability through parliament
Politicians have the final say, since decisions of
PSUs regarding establishment & continuance of
enterprise involves political dimension
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Objectives
Help in rapid economic growthEarn ROI and generate resources for developmentPromote redistribution of income & wealth
Create employment opportunitiesPromote balanced regional development Assist the development of SSI & ancillary industriesPut up an effective competition to undertaking in the
private sectorGain control over the commanding heights of theeconomy
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Performance of Public Sector
Growth of PSU 246 cos
Area and Range of operations
Economic contribution 30% of GDP
Foreign Trade 1/4 th revenue to exchequer
Development of Ancillary Industries
Reduction of Regional Disparities in IndustrialDevelopment
Profit Generation
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LIST OF NAVRATNA COs
Maharatna CPSEs Indian Oil Corporation LimitedNTPC LimitedOil & Natural Gas CorporationLimited
Steel Authority of India Limited
Navratna CPSEs Bharat Electronics LimitedBharat Heavy Electricals LimitedBharat Petroleum Corporation LimitedCoal India LimitedGAIL (India) Limited
Hindustan Aeronautics LimitedHindustan Petroleum Corporation LtdMahanagar Telephone Nigam LimitedNational Aluminium Company LimitedNMDC LimitedOil India LimitedPower Finance Corporation LimitedPower Grid Corporation of India LtdRashtriya Ispat Nigam LimitedRural Electrification Corporation LtdShipping Corporation of India Limited
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Problems of Public Sector
Unremunerative Pricing
Dilution of commercial considerations
High losses
Poor project planning & control
Sick unit BurdenOver staffing
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Problems of Public Sector
Management Gap
Over capitalization
Under utilization of capacity
Inadequate Autonomy
Bureaucratic culturePermissive atmosphere
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BRPSE
To address problems relating to strengthening, modernizing, reviving, and
restructuring PSEs.
A company is referred to the BRPSE if it is considered sick and has accumulated
losses in any financial XX year up to 50% or more of its average net worth during
the four years immediately preceding such financial year /or a company that is a
sick company as per the meaning of Sick Industrial Companies (Special Provisions)
Act, 1985.
The proposals for revival of 26 CPSEs and closure of two have been approved. The
total assistance approved by the government up to Dec 2007 in this regard is Rs
82.8 bn including Rs 19.5 bn cash assistance and Rs 63.3 bn non-cash assistance
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Key Highlights of PSUs
In FY07, the public sector, comprising administrativedepartments, departmental enterprises and non-departmental enterprises, constituted 21.4% of the GDP.In domestic savings, on the other hand, the public sector hada share of 9.3%.
CPSEs account for more than 1/3rd of total revenue receiptsof the Central government.The net worth of all enterprises stood at Rs 4,530 bn (FY07)The public sector accounted for 11% of the total merchandiseexports.
Net profits rose from Rs 695 bn in FY06 to Rs 816 bn in FY07.Number of loss-making institutions decreased from 89 inFY04 to 59 in FY07.
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Status Quo
Category No. of CPSEsNavratna 16Miniratna, Category I 41Miniratna, Category II 13Profit making 156Loss making 59Listed Companies 55Non-listed Companies 192Section 25 & Under Construction 32
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Questionsif any???!!
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PRIVATIZATION
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Definition
According to Stuart Butler : Privatization is thetransfer of govt., assets or functions to the privatesector According to Pendse : Any process which reducesthe involvement of the state or the govt., sector in thenations economic affairs is a privatization process
Objectives : improved efficiency, adequatecompetition to the state-run enterprise, for cashgeneration to fund govt., expenses & broad basingownership of economic assets
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Forms of Privatization
DivestitureManagerial PrivatizationCold Privatization
DenationalizationFranchisingLeasing
Contracting outLiquidation
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Forms of Privatization Divestiture
Divestiture : the reduction of some kind of asset foreither financial or ethical objectives or sale of an existing business by a firm. A divestment is the opposite of aninvestment.First, a firm may divest (sell) businesses that are not partof its core operations so that it can focus on what it does best A second motive for divestitures is to obtain funds A third motive to divest a part of a firm may be to createstability A fourth reason to divest could be forced on to the firm by the regulatory authorities, example in order to createcompetition
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Forms of Privatization contd.,
Managerial Privatization while the ownershipremains with the Govt.,
Cold Privatization ownership remains with Govt., -enterprises distance themselves from Govt., -activities attuned to market conditions
Denationalization ownership transferred to Privatesector
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Forms of Privatization contd.,
Franchising to avoid investing in productionfacilities
Leasing ownership rests with Govt., - idle & underutilized assets transferred to private sector
Contracting out many specialized services arecontracted out due to heavy order books
Liquidation
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Arguments in Favor
Improvement in efficiency & performance - decisions
Fixing responsibility is easier
Private units are subject to capital market discipline
Political interference is unavoidable in PSEs
Succession Planning
Remedial measures taken early in private sector
Better service to customers
Profit motive
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Arguments against
Maximizing short term revenue aim of private sector
Exploitation Monopoly possible
Other Macro Environmental factors determine the success no
matter whether its PVT or PSEFinancing the budget deficit motive of divestment but future is
bleak
Crowding in the Financial Markets FIIs role
May lead to rise in unemployment
Social Responsibility
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Case Study
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Questions.if any??!!
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GOVERNMENT & BUSINESS INTERFACE
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Areas for Growth
Agriculture
Infrastructure
Disinvestment
Informatics
Human Resources & Labor Management Relations
Social Responsibility & Consumer Interfacing
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SMEs
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Meaning & Definition
According to GOI 2000 : An undertaking havingan investment in plant & machinery of not more thanRs 1 crore
Scale of Business : Investment in plant & machinery,employment generation, volume & value of production, volume & value of sales
Qualitative aspects : ownership in the hands of few,technology adopted here is normally labor intensiveand SSIs are carried in a limited or local area
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Characteristics of SMEs
Financial AspectsHuman Resource AspectsGeneral Management Aspects :
1. Negligent about safety & pollution aspects2. Infant mortality rate of SSIs 3. Rural SSIs vs Urban SSIs
4. Perennial problems of marketing, loans, paymentsto clients & partnership tussles5. Many SSIs suffer due to lack of work load
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Problems of SMEs
More importance to Luxuries
Lack of able entrepreneurs
Problem of Raw Material & power
Problem of credit
Outdated Technology
Marketing constraints
Competition with Large scale industries
Sick Units
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SME Policy & Development
Definition of Industry includes industry related
service & business enterprise
Equity Participation by Large Scale Industries
Exports SIDO
Modernization
Simplification of Rules
Reservation of Items
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Incentives for SSIs
Establishment of Boards Ex handloom boardFinancial Help state govt., & state finance corp, RBI credit guarantee scheme, co-op & commercial banks &National small industries corp machines on installmentSIDBIMarketing Facilities LSI, Private & Public sectorCommon Production Program
Industrial EstatesDifferential TaxationTechnical Assistance
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Questionsif any???!!!