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Introduction
Every business exits in society. So every business has to adapt itself according to the
changes. For example, change in technology can hit the customers by providing better
facilities e.g. the LED has made the television out of fashion & change in fashion or taste of
customer can shift the demand curve. Similarly if govt makes any change in any policy then
business has to adapt itself according to this change. All these are external factors, so the
business must have to change itself according to changes in order to survive & successes.
So is very important to understand the concept of business environment,
Definition:
Business environment refers to all those internal & external factors that affect the business
operations in directly or indirectly way. These factors includes govt policies, competitors,
customers, suppliers, socio-economic factors, substitutes & technological up gradation.
On the basis of above definition we can classify two major types one internal and second
external environment which further can be divided into macro & micro environment.
BUSINESS ENVIRONMENT
The present figure gives you a more clear and comprehensive picture about the different
factors.
Business Environment
Internal environment
• Human Resources &
Internal Relationships
• Company Image
• Physical Assets
• R & D & Technological
• Management Structure

External environment
Micro Environment
• Consumers

Macro Environment
• Economic Factors

• Suppliers
• Competitors
• Middlemen
• Publics

• Political & Govt. Factors
• Demographic Factors
• Socio-cultural Factors
• International Factors

•Marketing Resources
• Financial Factors

Internal environment
Internal environment factors are events that occur within organization. Generally speaking,
internal environment factors are easier to control than external factors. Some examples of
internal environmental factors are as follows:
(a) Human Resources : It involves the planning, acquisition, and development of human
resources necessary for organizational success. It points out that people are valuable
resources requiring careful attention and nurturing. Progressive and successful
organizations treat all employees as valuable human resources. The organization’s
strengths and weaknesses is also determined by the skill, quality, morale, commitment and
attitudes of the employees. Organizations face difficulties while carrying out modernizations
or restructuring process by the resistance of employees. So, the issues related to morale

and attitudes should seriously be considered by the management. Moreover, global
competitive pressures have made the skilful management of human resources more
important than ever. The support from the different levels of employees support the
management in the different decisions and their implementations.
(b) Company Image : One company issues shares and debentures to the public to raise
money and its instruments are over subscribed while the other company seeks the help of
different intermediaries like underwriters to generate finance from the public. This difference
underlies the distinction between the images of the two companies. The image of the
company also matters in certain other decisions as well like forming joint ventures, entering
contracts with the other company or launching of new products etc. Therefore, building
company image should also be a major consideration for the managers.
(c) Management Structure : Gone are the days when business was carried out by the
single entrepreneur or in the formation of partnerships. Now it has reshaped itself into the
formation of company where it is run and controlled by the board of directors who influence
almost every decision. Therefore, the composition of board of directors and nominees of
different financial institutions could be very decisive in several critical decisions. The extent
of professionalization is also a crucial factor while taking business decisions.
(d) Physical Assets : To enjoy economies of scale, smooth supply of produced materials,
and efficient production capacity are some of the important factors of business which
depends upon the physical assets of an organization. These factors should always be kept
in mind by the managers because these play a vital role in determining the competitive
status of a firm or an organization.
(e) R & D and Technological Capabilities : Technology is the application of organized
knowledge to help solve problems in our society. The organizations which are using
appropriate technologies enjoy a better competitive advantage than that of their
competitors. The organizations which do not possess strong Research and development
departments always lag behind in innovations which seems to be a prerequisite for success
in today’s business. Therefore, R & D and technological capabilities of an organization
determine a firm’s ability to innovate and compete.
(f) Marketing Resources : The organizations which possess a strong base of marketing
resources like talented marketing men, strong brand image, smart sales persons,
identifiable products, wider and smooth distribution network and high quality of different
services, make an effortless inroads in the target market. The companies which are having
so strong basis can also enjoy the fruits of brand extension, form extension and new
product introduction etc. in the market.
(g) Financial Factors : The performance of the organization is also affected by the certain
financial factors like capital structure, financial position etc. Certain strategies and decisions
are determined on the basis of such factors. The ultimate survival of organizations in both
the public and private sectors is dictated largely by how proficiently available funds are
managed. So, these were some of factors related to the internal environment of an
organization. These factors are generally regarded as controllable factors because the
organization commands control over these factors and can modify or alter as per the
requirement of the organization.

External Environment

Companies operate in the external environment that forces and shape opportunities as well
as threats. These forces represent “no controllable”, which the company must monitor and
respond to. SWOT (Strengths, weaknesses, opportunities and threats) analysis is very
much essential for the business policy formulation which one could do only after
examination of external environment. The external business environment consists of macro
environment and micro environment. Micro environment: The company’s immediate
environment where routine activities are affected by the certain actors. Suppliers, marketing
intermediaries, competitors, customers and the publics operate within this environment. It is
not necessary that the micro factors affect all the firms. Some of the factors may affect a
particular firm and do not disturb to the other ones. So, it depends that to what type of
industry a firm belongs. Now let’s discuss in brief some of the micro environmental factors.
(a) Suppliers : The supplier to a firm can alter its competitive position and marketing
capabilities. These can be raw material suppliers, energy suppliers, suppliers of labour and
capital. The relationship between suppliers and the firm epitomizes a power equation
between them. This equation is based on the industry conditions and the extent to which
each of them is dependent on the other. For the smooth functioning of business, reliable
source of supply is a prerequisite. If any kind of uncertainties prevail regarding the supply of
the raw materials, it often compels to a firm to maintain a high inventory which ultimately
leads to the higher cost of production. Therefore, dependence on a single supplier is a risky
venture. Because of the sensitivity of the issue, firm should go to develop relations among
the different suppliers otherwise it could lead to a chaotic situation. Simultaneously firms
should reduce the stock so as to reduce the costs.
(b) Customers : According to Peter F. Drucker “the motive of the business is to create
customers”, because a business survives only due to its customers. Successful companies
recognize and respond to the unmet needs of the consumers profitably and in continuous
manner. Because unmet needs always exist, companies could make a fortune if they meet
those needs. For example it is the era when we could witness the increasing participation of
women in the different jobs which has already given birth to the child care business,
increased consumption of different durable items like microwave ovens, washing machines
and food processors etc. A firm should also target the different segments on the basis of
their tastes and references because to depend upon a single customer is often risky. So,
monitoring the customer sensitivity is a pre condition for the success of business.
(c) Competitors : A firm’s products/services are also affected by the nature and intensity of
competition in an industry. A firm should extend its competitive analysis to include
substitutes also besides scanning direct competitors. The objective of such an analysis is to
assess and predict each competitors response to changes in the firm’s strategy and
industry conditions. This kind of analysis not only ensures the firm’s competitive position in
the market but also able to pick up as its major rival in the industry. Besides the existing
competitors, it is also necessary to have an eye on the potential competitors who may join
the industry although forecasting of such competitors is a difficult task. Thus an analysis of
competition is critical for not only evolving competitive strategy but also for strengthening a
firm’s capabilities.
(d) Marketing Intermediaries : Marketing intermediaries provide a vital links between the
organization and the consumers. These people include middlemen such as agents or
brokers who help the firm to find out its customers. Physical distribution firms such as
stockiest or warehouse providers or transporters ensure the smooth supply of the goods
from their origin to the final destination. There are certain marketing research agencies
which assist the organization in finding out the consumers so that they can target and

promote their products to the right consumers. Financial middlemen are also there who
carry out to finance the marketing activities such as transportation and advertising etc. A
firm should ensure that the link between organization and intermediaries is appropriate and
smooth because a wrong choice of the link may cost the organization heavily. Therefore, a
continuous vigil of all the intermediaries is a must.
(e) Publics : an organization has to confront with many types of publics during its life time.
According to Cherrunilam “A public is any group that has an actual or potential interest in or
impact on an organization’s ability to achieve its interests”. The public includes local publics,
media publics and action groups etc. The organizations are affected by the certain acts of
these publics depending upon the circumstances. For example if a business unit is
establishment in a particular locality then it has to provide employment to the localites at
least to the unskilled labour otherwise local group may harm to that very business or they
will interrupt the functioning of the business. The media public has also to be taken into
confidence because some time they tarnish the image of the organization unnecessarily.
Simultaneously media public may disseminate vital information to the target audience.
Action groups can also create hindrances in the name of exploitation of consumers or on
the issue of environmental pollution. The business suffers due to their activities. Therefore,
their concern should also be kept in mind. Albeit, it is wrong to think that all publics are
threats to the business yet their concerns should be considered up to a certain level.
Macro Environment : With the rapidly changing scenario, the firm must monitor the major
forces like demographic, economic, technological, political/legal and social/cultural forces.
The business must pay attention to their casual interactions since these factors set the
stage for certain opportunities as well as threats. These macro factors are, generally, more
uncontrollable than the micro factors. A brief discussion on the important macro
environmental factors are given below:
(a) Demographic Environment : The first macro environmental factor that businessmen
monitor is population because business is people and they create markets. Business
people are keenly interested in the size and growth rate of population across the different
regions, age distribution, educational levels, household patterns, mixture of different racial
groups and regional characteristics. For determining the success of the business and to
sustain in the market, incessant watching of these demographic factors is a prerequisite. To
enter into a particular segment, a marketer needs to understand the age composition in that
very segment so as to decide the optimal marketing mix and also take certain strategic
decisions related to it. For example, if the youth form a large proportion of the population, it
is but natural for firms to develop their products according to the requirement of this group.
Besides the age, it is also necessary to break up population according to sex-wise and also
the role of women. Today we can observe that more and more women have taken to work
and professions and hence it can be seen that many time saving appliances are available in
the market. Each gender group has different range of product and service needs and media
and retail preferences, which helps marketers fine-tune their market offers. There is yet
another dimension of population changes which a businessman needs to address. For
example, occupation and literacy profile of the targeted segment. The higher literacy level
will imply a more demanding consumer as he is in the touch of the various media which
acquaint him with many information on the other hand low literacy make the marketers look
for other method of communication. The occupation of the population also affects the choice
of the products range and media habits. Any significant moves of the population from one
area to another, rural to urban, is another important environmental factor which determines
the marketing attention. For example, the movement from north-India to South-India will
reduce the demand for warm clothing and home heating equipment on the one hand and

will increase the demand for air conditioning on the other hand. So, the companies that
carefully analyze their markets can find major opportunities.
(b) Economic Environment : Besides people, markets require purchasing power and that
depends upon current income, savings, prices, debt and credit facilities etc. The economic
environment affects the demand structure of any industry or product. The following factors
should always be kept in mind by the business people to determine the success of the
business.
(i) Per capita income
(ii) Gross national product
(iii) Fiscal and monitory policies
(iv) Ratio of interest changed by different financial institutions
(v) Industry life cycle and current phase
(vi) Trends of inflation or deflation
Each of the above factors can pose an opportunity as well as threat to a firm. For example,
in a developing economy, the low demand for the product is due to the low income level of
the people. In such a situation a firm or company can not generate the purchasing power of
the people so as to generate the demand of the products. But it can develop a low priced
product to suit the low income market otherwise it will be slipped out from the market.
Similarly, an industry gets a number of incentives and support from the government if it
comes under the purview of priority sector whereas some industries face tough task if they
are regarded as inessential ones. In the industry life cycle, timing is every thing when it
comes to making good cycle-sensitive decisions. The managers need to make appropriate
cutbacks prior to the onslaught of recession because at that time sales is bound to decline
which leads to increasing inventories and idle resources and that is costly situation. On the
other hand, business people cannot afford to get caught short during a period of rapid
expansion. This is where accurate economic forecasts are a necessity and therefore, a
manager must pay careful attention to the major economic changes.
(c) Technological Environment : Technology is a term that ignites passionate debates in
many circles these days. According to some people technology have been instrumental for
environmental destruction and cultural fragmentation whereas some others view that it has
been the main cause to economic and social progress.But no doubt it has released
wonders to world such as penicillin, open-heart surgery, family planning devices and some
other blessings like automobile, cellular phones and internet services etc. It has also been
responsible for hydrogen bomb and nerve gas. But the businesses that ignored
technological developments, had to go from the world map. For example, in India, cars like
Ambassador and Premier had to go from the scene because of obsolete technology.
Likewise, containerized movement of goods, deep freezers, trawlers fitted with freezers etc.
have affected the operations of all firms including those involved in seafood industry. Now it
has been ensured that perishable goods can be transported in a safer manner. Explosion in
information technology have made the position of some firms vulnerable. The life cycle of
the products have reduced and expectations of the consumers are becoming higher and
higher due to all these technological changes. But to cope up with this kind of scenario, a
continuous vigil of the happenings and adequate investment on R & D department is to be
earmarked by the marketer. Marketers must also be aware of certain government

regulations while developing and launching new products with latest technological
innovations.
(d) Political/Legal Environment : Business decisions are strongly affected by
developments in the political and legal environment. This environment is consists of laws,
regulations and policies that influence and limit various organizations. Sometimes these
laws create opportunities for the business but these also pose certain odds or threats at the
other time. For example, if the government specifies that certain products need mandatory
packaging then it will boost the cardboard and packaging companies but it will add to the
cost of the product. Regulations in advertising, like a ban on advertisement of certain
products like liquor, cigarettes and pan masalas and hoarding of food products, gas and
kerosene are the reality of today’s business. Business legislations ensure specific purposes
to protect business itself and the society as well like unfair competitions, to protect
consumers from unfair business practices and to protect the interest of the society from
unbridled business behaviour. In India business is regulated through certain laws like
Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act), Foreign Exchange and
Regulation Act, 1973 (FERA), Partnership Act 1932, Consumer Protection Act, 1986 (CPA),
and Companies Act, 1956 etc. A businessman needs to understand the various policies and
political ideologies because these things have a profound impact on the functioning and
success of the business.
(e) Social-cultural Environment : Society shapes the beliefs, values,norms, attitudes,
education and ethics of the people in which they grow up and these factors exercise a great
influence on the businesses which by far are beyond the company’s control. All these
factors are classified as social-cultural factors of the business. The buying and consumption
pattern of the people are very much determined by these factors and cost of ignoring the
customs, tastes and preferences etc. of the people could be very high for a business.
Consumers depend on cultural prescriptions to guide their behaviour, and they assume that
others will behave in ways that are consistent with their culture. Culture unites a group of
people in a unique way and support the group’s unity. As consumers, people expect that
businessman will deliver according to the values, customs and rituals of the existing culture.
As the business is going global day by day and the world is at the verge of ‘global village’
the need for developing understanding cultural differences has become an essential
element to survive in such a scenario. Therefore, the marketers who wish to be the part of
the ongoing process need to understand the process of acculturation so that they can
develop ways to handle the consumers of different cultures. People’s attitudes toward
business is also determined by the culture. What is right and what is wrong are basic to all
businesses and for doing or not doing a particular work is judged on the basis of prevalent
culture and also determines certain ethical code of conduct. Despite the pervasive nature of
culture, not all the people within a society think, feel, and act the same way. Every society
has subcultures- group of people that share values but exhibit them in different ways. Within
a society such as the India, there are the different tastes and preferences of the different
starta like a Punjabi or a north Indian has altogether different preferences then that of a
South Indian in the name of certain products especially in case of food and clothing and the
shrewd marketers have always capitalized on this kind of opportunities. Hence, a thorough
understanding of social-cultural environment is imperative to be successful.

Conclusion

Business environment refers to all factors that have a direct or indirect bearing on the
functioning of the business. Business environment can be classified into two major
categories: the economic environment and the non-economic environment. The economic
environment consists of factors like the fiscal policy, the monetary policy, the industrial
policy, the physical political, legal, technological factors, etc.

Globalisation
The IMF defines globalisation as “the growing economic interdependence of countries
worldwide through increasing volume and variety of cross border transactions in goods and
services and of international capital flows, and also through the more rapid and widespread
diffusion of technology.”
Global Entry System or Strategies
Exporting
Direct exporting is that the market entry strategy chosen by most small companies. The
reason for this is quite straightforward. Direct exporting is the most basic entry into
international markets. Direct exporting involves the use of agents or distributors. It is
important to understand the difference between an agent and a distributor. An agent
works on your behalf to sell your product into the country market you have chosen, for a
commission. A distributor buys your product and then resells it in the market at a markup. In other words an agent is your salesperson and a distributor is your customer.
When deciding on either an agent or a distributor it is important to remember that your
final price in the market will be higher than if you just sold it directly in the market.
Another drawback to direct exporting is that, because the firm makes few if any
marketing investments in the new country, market share may be below potential.
Licensing
Licensing, as a market entry strategy, is best used by those companies that have a
component of intellectual property in their product although it can be used by any type of
company depending on what they are wanting to license. You can license technology, a
manufacturing process or the rights to market your product. While licensing can be
complicated and intricate and as such it is important to have legal assistance in
developing a licensing agreement, there are three distinct components of all licensing
agreements. The first is that the agreement must be for a certain period of time that is
negotiated by the licensor and the licensee. The more technologically advanced your
product is and the degree of intellectual property buried in your product the shorter the
time period of the license as advances in technology have changed the curve of the
product life cycle. The second component of any licensing agreement revolves around
the price of the agreement. The price is composed of two factors; the purchase price
and the percentage you as the licensor will receive for each unit sold over the term of
the agreement. The third component is that the agreement needs to be for a specific
technology, manufacturing process or marketing activity.
Franchising
Franchising is becoming a more popular market entry strategy given the world wide
branding of various products as a result of the internet. International franchise
agreements are the same as domestic ones with the obvious exception that they must
meet the commercial laws of the country you are franchising too. Franchising is not a

strongly recommended market entry strategy if you do not have solid brand recognition
in your own country or your product is culturally based. Franchising presents a couple of
distinct issues for small firms using this strategy to gain market access. The first is that
you are potentially creating your own competition by teaching the franchisee how to
operate your type of business in their market. The second is that franchises often require
a fair degree of hands-on management and this can be difficult and costly particularly
when your franchise(s) are long distances away.
Joint Ventures/Partnerships/Strategic Alliances
Perhaps the most appropriate and valuable strategy for entering a foreign market is to
work with a local partner, if you can find a good one. Local partners provide "on the
ground" knowledge and this can be immensely important in foreign markets.
However, there are different types of "partners" and each need to be evaluated
depending on your firm's particular requirements and capabilities. Partner selection,
whichever mode you use, is critical. At the very least they should have the same type of
corporate vision as your firm, have a strong market presence in their own country and
provide your firm with skills and expertise that you do not already have. In short they
need to complement you.
Joint Ventures
Joint ventures, or JV's, as they are commonly referred to is the most sophisticated of the
partnership trio. A JV is the formation of a third independent company owned, but not
necessarily, managed by the partners. It is an independent corporate entity on its own.
The most famous JV is the one between Sony and Ericsson with the creation of
Sony/Ericcson Cell Phones. The Sony/Ericsson JV is a classic example of this type of
partnership. Both companies brought an expertise to the partnership; Sony marketing,
Ericsson manufacturing. Rather than compete in an already competitive market, the cell
phone market, they decided to join forces using their complementary advantages. JV's
require a financial, time and resources commitment.
Partnerships
Partnerships can be formal or informal. An informal arrangement is one where your firm
agrees with a local firm to work together to market or produce your product or service. A
formal partnership is when you have a legal agreement to market or produce your
service or product with detailed objectives and targets defined.
Partnerships require a long term commitment and thus should not be rushed into.
Undertake detailed due diligence of potential partners to ensure they are the right "fit" for
your firm.
Strategic Alliances
Strategic alliances are simply a business-to-business collaboration. Strategic alliances
can be formed for all a range of purposes from joint marketing to joint production to
collaborative design or distribution. The value in them is that you do not have to engage

in a formal agreement, commit to a long term contract and they provide you with
immediate market access and knowledge.
Foreign Direct Investment
Foreign direct investment (FDI) is when a firm either purchases a local firm of builds its
operations "from scratch" in the foreign market by setting up an office or factory. In short
you become a local firm by doing this and have the advantage of being treated as a
local company, having complete control of your operations and there is a shorter curve
in learning about the local market. However, you will need to make the largest
investment in accessing the market if this is the strategy you choose. Over and above
your own company capability to take on this resource commitment you need to be fully
aware of how the government of the country views foreign direct investment.
Undertaking political risk analysis should be a key component of your market research.
Within the gambit of FDI you can merge with a local company, acquire a local company
outright or undertake a greenfield investment which is building a firm from the ground
up.
Turnkey Projects
Turnkey projects are as the name implies. You build something, a factory, a hydro
facility, a pulp mill to start up condition and hand over the "key" to the owner. Turnkey
projects have become a popular market entry strategy for firms that have a particular
expertise that can be transferred. Engineering firms are very likely candidates to use the
turnkey project option as a market entry strategy. The firm uses the knowledge and
expertise it has gained in its domestic market to sell to a buyer in another country. Often
the buyer is a government and is often financed or paid for with assistance from an
international aid agency such as the World Bank. It is important to market the
appropriate type of turnkey project which will be defined by the level of economic
development, culture, legal environment and degree of infrastructure in the target
market.
Piggybacking
Piggybacking is the process of supplying a good or service to a larger company in your
domestic market that will then in turn sell its finished product internationally. While
piggybacking may not provide you with direct entry into a foreign market it does allow
you to expand your sales to the international market without having to accept the risk or
the cost of establishing a foreign market presence.
It is of course an option to provide an input, be a supplier, to a foreign firm in an
international market. Large international firms, such as IKEA, are constantly looking for
product suppliers. This "market entry" strategy is somewhat different as you are not
marketing within a certain country but to large international firms. They always have
strict quality and quantity requirements that you will need to meet so capacity issues for
small firms will be an issue that will need to be addressed before you pursue this
avenue.

Globalisation of World Economy
*The world economy has been emerging as global or transnational economy. A global or
transnational economy is one which transcends the national borders unhindered by artificial
restrictions like Government restrictions on trade and factor movements.
*The Transnational economy is different from the international economy. The international
economy is characterised by the existence of different national economies the economic
relations between them being regulated by the national governments. The transnational
economy is a border less world economy characterised by free flow of trade and factors of
production across national borders.
*According to Drucker, the transnational economy is characterised by, inter alia the
following features:
1.The transnational economy is shaped mainly by money flows rather than by trade in
goods and services. These money flows have their own dynamics. The monetary and fiscal
policies of sovereign governments increasingly react to events in the international money
and capital markets rather than actively shape them.
2In the transnational economy management has emerged as the decisive factor of
production and the traditional factors of production, land and labour, have increasingly
become secondary. Money and capital markets too have been increasingly becoming
transnational and universally obtainable.
3In the transnational economy the goal is market maximisation and not profit maximisation.
4Trade, which increasingly follows investment, is becoming a function of investment.
5The decision making power is shifting from the national state to the region. (e.g., European
Union, NAFTA, etc.)
6There is a genuine – and almost autonomous – world economy of money, credit and
investment flows. It is organised by information which no longer knows national boundaries.
7Finally, there is a growing pervasiveness of the transnational corporations which see the
entire world as a single market for production and marketing of goods and services.
Drivers of Globalisation
In general, globalisation represents the increasing integration of the world economy, based
on five interrelated drivers of change:
*International trade (lower trade barriers and more competition)
*Financial flows (foreign direct investment, technology transfers/licensing, portfolio
investment, and debt)
*Communications (traditional media and the Internet)
Technological advances in transportation, electronics, bioengineering and related fields
*Population mobility, especially of labour
Globalisation of Business

Globalisation is an attitude of mind – it is a mind-set which views the entire world as a single
market so that the corporate strategy is based on the dynamics of the global business
environment.
Globalisation encompasses the following:
*Doing or planning to expand business globally.
*Giving up the distinction between the domestic market and foreign market and developing
a global outlook of the business.
Locating the production and other physical facilities on a consideration of the global
business dynamics, irrespective of national considerations.
*Basic product development and production planning on the global market considerations.
*Global sourcing of factors of production, i.e., raw materials, components,
machinery/technology, finance etc., are obtained from the best source anywhere in the
world.
*Global orientation of the organisational structure and management culture.
Features of current globalisation
The period 1870 to 1913 experienced a growing trend towards globalisation. The new
phase of globalisation which started around the mid 20th century became very widespread,
more pronounced and overcharging since the late 1980s by gathering more momentum
from the political and economic changes that swept across the communist countries, the
economic reforms in other countries, the latest multilateral trade agreement which seeks to
substantially liberalise international trend and investment and the te
conditions for globalisation chnological and communication revolutions.
Essential
1 Business Freedom: There should not be unnecessary government restrictions which
come in way of globalisation, like import restriction, restrictions on sourcing finance or other
factors from abroad, foreign investments etc.
2Facilities: The extent to which an enterprise can develop globally from home country base
depends on the facilities available like the infrastructural facilities.
3Government Support: Although unnecessary government interference is a hindrance to
globalisation, government support can encourage Globalisation. Government support may
take the form of policy and procedural reforms, development of common facilities like
infrastructural facilities, R&D support, financial market reforms and so on.
4Resources: Resources is one of the important factors which often decides the ability of a
firm to globalise. Resourceful companies may find it easier to thrust ahead in the global
market. Resources include finance, technology, R&D capabilities, managerial expertise,
company and brand image, human resource etc.
5Competitiveness: The competitive advantage of the company is very important
determinant of success in global business. A firm may derive competitive advantage from
any one or more of the factors such as low costs and price, product quality, product
differentiation, technological superiority, after sales service, marketing strength etc.

6Orientation: A global orientation on the part of the business firms and suitable globalisation
strategies are essential for globalisation
Globalisation of Indian Business
India’s economic integration with the rest of the world was very limited because of the
restrictive economic policies followed until 1991. Indian firms confined themselves, by and
large, to the home market. Foreign investment by Indian firms was very insignificant.
With the new economic policy ushered in 1991, there has, however, been a change.
Globalisation has in fact become a buzz-word with Indian firms now, and many are
expanding their overseas business by different strategies.
Obstacles to Globalisation
1Government policy and procedures: Government policy and procedures in India are
among the most complex, confusing and cumbersome in the world. Even after the much
publicised liberalisation, they do not present a very conducive situation. One prerequisite for
success in globalisation is swift and efficient action. Government policy and the
bureaucratic culture in India in this respect are not that encouraging.
2High Cost: High cost of many vital inputs and other factors like raw materials and
intermediates, power, finance infrastructural facilities like port etc., tend to reduce the
international competitiveness of the Indian Business.
3Poor Infrastructure: Infrastructure in India is generally inadequate and inefficient and
therefore very costly. This is a serious problem affecting the growth as well as
competitiveness.
4Obsolescence: The technology employed, mode and style of operations etc., are, in
general, obsolete and these seriously affect the competitiveness.
5Resistance to Change: There are several socio-political factors which resist change and
this comes in the way of modernisation, rationalisation and efficiency improvement.
Technological modernisation is resisted due to fear of unemployment. The extent of excess
labour employed by the Indian industry is alarming. Because of this labour productivity is
very low and this in some cases more than offsets the advantages of cheap labour.
6Poor Quality Image: Due to various reasons, the quality of many India products is poor.
Even when the quality is good, the poor quality image India has becomes a handicap.
7Supply Problems: Due to various reasons like low production capacity, shortages of raw
materials and infrastructures like power and port facilities, Indian companies in many
instances are not able to accept large orders or to keep up delivery schedules.
8Small Size: Because of the small size and the low level of resources, in many cases Indian
firms are not able to compete with the giants of other countries. Even the largest of the
Indian companies are small compared to the multinational giants.
9Lack of Experience: The general lack of experience in managing international business is
another important problem.
10Limited R&D and Marketing Research: Marketing Research and R&D in other areas are
vital inputs of development of international business. However, these are poor in Indian
Business. Expenditure on R&D in India is less than one per cent of GNP while it is two to
three per cent in most of the developed countries.

11Growing Competition: The competition is growing not only from the firs in the developed
countries but also from the developing country firms. Indeed, the growing competition from
the developing country firms is a serious challenge to India’s international business.
12Trade Barriers: Although the tariff barriers to trade have been progressively reduced
thanks to the GATT/WTO, the non-tariff barriers have been increasing, particularly in the
developed countries. Further, the trading blocs like the NAFTA, EC etc., could also
adversely affect India’s business.
Factors Favouring Globalisation
Human Resources: Apart from the low cost of labour, there are several other aspects of
human resources to India’s favour. India has one of the largest pool of scientific and
technical manpower. The number of management graduates is also surging. It is widely
recognised that given the right environment, Indian scientists and technical personnel can
do excellently. Similarly, although the labour productivity in India is generally low, given the
right environment it will be good. While several countries are facing labour shortage and
may face diminishing labour supply, India presents the opposite picture. Cheap labour has
particular attraction for several industries.
Wide Base: India has a very broad resource and industrial base which can support a
variety of business.
Growing Entrepreneurship: Many of the established industries are planning to go
international in a big way. Added to this is the considerable growth or new and dynamic
entrepreneurs who could make a significant contribution to the globalisation of Indian
business.
Growing Domestic Market: The growing domestic market enables the Indian companies
to consolidate their position and to gain more strength to make foray into the foreign market
or to expand their foreign business.
Niche Markets: There are many marketing opportunities abroad present in the form of
market niches.
Expanding Markets: The growing population and disposable income and the resultant
expanding internal market provides enormous business opportunities.
Transnationalisation of World Economy: Transnationalisation of the world economy. i.e.,
the integration of the national economies into a single world economy as evinced by the
growing interdependence and globalisation of markets is an external factor encouraging
globalisation of India Business.
NRIs: The large number of non-resident Indians who are resourceful – in terms of capital,
skill, experience, exposure, ideas etc.– is an assed which can contribute to the globalisation
of Indian Business. The contribution of the overseas Chinese to the recent impressive
industrial development of China may be noted here.
Economic Liberalisation: The economic liberalisation in India is an encouraging factor of
globalisation. The delicensing of industries, removal of restrictions on growth, opening up of
industries earlier reserved for the public sector, import liberalisations, liberalisation of policy
towards foreign capital and technology etc., could encourage globalisation of Indian
Business.

Competition: The growing competition, both from within the country and abroad, provokes
many Indian companies to look to foreign markets seriously to improve their competitive
position and to increase the business.

MONETARY POLICY
Meaning of Monetary Policy
Monetary policy, generally, refers to those policy measures of the central bank which are
adopted to control and regulate the supply of money, the cost and availability of credit in a
country. Monetary policy consists of those monetary decisions and measures the aim of
which is to influence the monetary limits on output, the price and income equation, nature of
the economic system, the pace of the economic development, etc. The non-economic
environment refers to social, cultural and system.
Broadly speaking, by monetary policy is meant the policy pursued by the central bank of a
country for administering and controlling country’s money supply including currency and
demand deposits and managing the foreign exchange rates. The central bank of a country
through its monetary policy manipulates the money supply, credit, government expenditure,
and rates of interest in such a manner so that the monetary system may be benefited to the
maximum extent.
Objectives of Monetary Policy
following are the main objectives of monetary policy
1. Stability of Exchange Rates; International trade transactions take place on the basis of a
fixed rate of exchange. Any change in the equilibrium rate of exchange will have deep
repercussions on the balance of payments of a country. It is, therefore, essential to maintain
stability in the exchange rates.
2. Price Stability Domestic price stability should be the main objective of central bank’s
monetary policy. Violent fluctuations in prices create the problem of inflation and deflation
which cause enormous hardships to consumers, wage-earners and other factor-owners.
Full Employment: Full employment refers to a situation in which all those who are able and
willing to work at he prevailing rates of wages get employment opportunities. Full
employment, however, does not mean complete or total employment. Even at full
employment level 2% to 5% resources may remain unemployed. Various forms of
unemployment like involuntary unemployment, seasonal unemployment, frictional
unemployment and structural unemployment may exist at full employment level. It may not
be very difficult for most countries to achieve the level of full employment but the real
problem is how to maintain it in the long run. Periodical fluctuations in the business activities
may cause unemployment in the economic system. The monetary policy, therefore, should
be directed to ensure that current investment exceeds current saving and this can be done
by creation of credit money or by the creation of additional bank deposits or by higher

velocity of circulation. When full employment is achieved, efforts should be made to
maintain equality between saving and investment at the full employment level. According to
Crowther, “the obvious objective of the monetary policy of a country should be to attain
equilibrium between saving and investment at the point of full employment.”
The following are the main objectives of monetary policy in a developing economy.

1. Inducement to Saving. Capital formation which is a prerequisite to economic growth
depends upon saving. Monetary policy in an underdeveloped country helps in promoting
savings, their mobilization, and their investment in productive activities. Monetary authority
has to provide adequate banking institutions, which may later on be utilized for investment
purposes. In order to induce savings, the monetary authrotiy has to offer various incentives
to the savers in the form of high rate of interest, safety of deposits, etc.
Investment of Savings. According to Prof. Meier and Prof. Baldwin, “the problem of
inadequate savings cannot be solved merely by creating new institutions, but the problem
can be solved only by saving profitable investment of savings.” The objective of economic
growth cannot be achieved unless and until the savings are utilized in productive
investment activities. The rate of investment is very low in underdeveloped countries on
account of the absence of profitable productive activities, lack of entrepreneurial ability and
low marginal efficiency of capital. The central bank in such a situation can resort to cheap
money policy to promote investment activities.

Appropriate Policy as regard to Rate of Interest. The structure of the rate of interest is
generally not conductive to economic growth in underdeveloped countries— the rates of
interest do not only differ according to different time-schedules but these also differ in
different regions and business activities. High rate of interest, as they are generally
witnessed in underdeveloped countries, discourage both public and private investment. The
monetary authority, therefore, is required to formulate such a policy as regards the rate of
interest which may induce the investors to go in for more loans and advances from the
commercial banks and other financial institutions.
Maintenance and Monetary Equilibrium. Monetary policy in an underdeveloped country
should be directed towards achieving equality between demand for money and supply of
money. In the initial stages of economic development there is need to expand credit
facilities but once a certain level of growth is achieved credit restrictions of various kinds
must be imposed by the central bank. In practice, however, it is very difficult to say as to
when the monetary authority should impose credit restrictions to control the supply of
money.
To make Balance of Payment Favourable. Most of the underdeveloped countries have to
import capital goods, machinery, equipments, technical know-how, etc. in the initial stage of
their development. Consequently, their imports exceed the exports and balance of
payments becomes unfavourable. Monetary policy should be directed towards maintaining
stability in exchange rates and removing disequilibrium in the balance of payments.
Instruments of Monetary Policy
Instruments of Monetary Policy used by the RBI
Direct regulation:

Cash Reserve Ratio (CRR): Commercial Banks are required to hold a certain proportion
of their deposits in the form of cash with RBI. CRR is the minimum amount of cash that
commercial banks have to keep with the RBI at any given point in time. RBI uses CRR
either to drain excess liquidity from the economy or to release additional funds needed for
the growth of the economy.
For example, if the RBI reduces the CRR from 5% to 4%, it means that commercial banks
will now have to keep a lesser proportion of their total deposits with the RBI making more
money available for business. Similarly, if RBI decides to increase the CRR, the amount
available with the banks goes down.
Statutory Liquidity Ratio (SLR): SLR is the amount that commercial banks are required to
maintain in the form of gold or government approved securities before providing credit to
the customers. SLR is stated in terms of a percentage of total deposits available with a
commercial bank and is determined and maintained by the RBI in order to control the
expansion of bank credit. For example, currently, commercial banks have to keep gold or
government approved securities of a value equal to 23% of their total deposits.
Indirect regulation:
Repo Rate: The rate at which the RBI is willing to lend to commercial banks is called Repo
Rate. Whenever commercial banks have any shortage of funds they can borrow from the
RBI, against securities. If the RBI increases the Repo Rate, it makes borrowing expensive
for commercial banks and vice versa. As a tool to control inflation, RBI increases the Repo
Rate, making it more expensive for the banks to borrow from the RBI with a view to restrict
the availability of money. The RBI will do the exact opposite in a deflationary environment
when it wants to encourage growth.
Reverse Repo Rate: The rate at which the RBI is willing to borrow from the commercial
banks is called reverse repo rate. If the RBI increases the reverse repo rate, it means that
the RBI is willing to offer lucrative interest rate to commercial banks to park their money with
the RBI. This results in a reduction in the amount of money available for the bank’s
customers as banks prefer to park their money with the RBI as it involves higher safety.
This naturally leads to a higher rate of interest which the banks will demand from their
customers for lending money to them.
The RBI issues annual and quarterly policy review statements to control the availability and
the supply of money in the economy. The Repo Rate has traditionally been the
key instrument of monetary policy used by the RBI to fight inflation and to stimulate
growth.
Open Market Operation
Open Market Operation=when RBI starts buying/selling government securities to control
money supply.


Government securities= piece of paper. It says something like this “give me Rs.100,
I’ll give you 8% interest rate for next ten years and after that I’ll repay the principle of
Rs.100.” This is how government borrows from others.



Situation: Economy has inflationary trend. Prices of goods and services increasing
every day.



Solution: RBI starts selling government securities in open market.



Result: SBI buys them and thus SBI’s lending money is reduced. Wait. How?

Imagine Rajan is selling “sabzi” (vegetables). If SBI’s chairman Arundhati Madam goes to
buy vegetables. Obviously madam’s money will decrease when she buys vegetables.

Then same as usual:
1.

SBI left with less money to lend.

2.

SBI raises its loan interest rate (to keep profit margin same)

3.

Businessmen borrow less money from SBI.

4.

Businessmen don’t start new business. Don’t expand existing business

5.

Less jobs

6.

Less income

7.

Less demand

8.

Ultimately shopkeeper will bring down the prices to attract people into buying more
things.

Thus inflation is reduced.

QUALTITATIVE CONTROL TECHNIQUES
Margin requirements: Mallya wants to borrow from SBI. He pledges his company’s
shares worth Rs.100 crores as collateral.


For such loans, Rajan can prescribe margin, say 65%.



In that case even if Mallya pledges 100 crores worth shares, SBI can give him 10065=only 35 Crore rupees as loan.



Using this tool, Rajan can control money supply. e.g. during inflation, he should
increase margin requirement, so Mallya can borrow less=> less job=>less
income=>less demand=>prices reduced.



But if Rajan changes margin requirements, then SBI and all other banks must obey
it. In other words, this tool has direct impact on money supply.
Consumer credit regulation:



Suppose Nano car sells @1 lakh and Rajan has made rule that downpayment
cannot be less than 30%.



It means customer must bring Rs.30,000 from his pocket and bank can only give him
maximum 70000 as loan.

Selective credit control


Under this, Rajan can specifically instruct bankers not to give loans to traders of
certain commodities e.g. sugar, gur, edible oil etc.



even if the said trader is ready to mortgage his shares/bonds/factory/machine/vehicle
anything.
Moral Suasion

Here Rajan tries to persuade the bankers to do xyz thing. Example
1.
2.

Please reduce giving automobile loans- instead park your money in government
securities. (above the SLR requirements.)
I’ve reduced my repo rate, now you also reduce your base rate.

Rajan will try to influence those bankers via- direct meetings, conference, giving media
statements, giving speeches @public seminars, university convocations etc. (even where
bankers are not present.) He’ll do so, to build a public opinion, media opinion and influence
those bankers by making them feel ‘guilty’ .
Limitations of Monetary Policy in Developing Countries

Monetary policy can play a very crucial and significant role in the economic development of
developing countries. However, the success of the monetary policy is limited by certain
factors, the more important amongst these are as follows:

Underdeveloped Monetary and Capital Market. Most of the developing countries do not
have a well-developed and fully-organised money and capital market. In the absence of
such developed money markets it is not possible to effectively implement the various credit
control policies by the central bank.
Lack of Integrated Structure of Rate of Interest. In the developing countries a sizable
proportion of the total financial resources comes from the unorganized banking sector. In
the absence of an integrated and well-organised structure of rate of interest the central
bank fails to influence the market rate of interest through changes in the bank rate. In fact,
any increase or decrease in the bank rate must be reflected in the form of increased or
decreased market rate of interest, but it does not happen in the developing countries.

Banking Habits of the People. In the developing countries most of the exchange
transactions are conducted with the help of money. People very seldom use credit
instruments to perform exchange transactions. It is for this reason that the credit control
policy of the central bank does not have desired effect on the business activities.

Lack of Co-operation by the Commercial Bank. Commercial banks are the institutions which
help in the implementation of the monetary policy pursued b ythe central bank. In
developing countries, however, the commercial banks fail to provide sufficient co-operation
to the central bank and in some cases they also flout the directives given by the central
bank. Monetary policy cannot succeed unless and until there exists a proper coordination
and co-operation between the central bank and commercial banks.

Literacy and Social Obstacles. Most of the developing countries suffer from mass illiteracy,
superstitions, dogmatism and other social evils. People do not understand the significance
of banking institutions. Neither they keep their deposits with the banks nor do they avail the
opportunities of loans and advances from the banks. The success of monetary policy
depends upon the widespread banking institutions, banking habits of the people, adequate
development of credit facilities, adequate quantity of bank deposits, entrepreneurial ability,
etc.
In brief, the monetary policy in a developing country suffer from several limitations. The
monetary authority on the one hand, has to create conditions whereby the banking and
financial institutions may flourish, and, on the other hand, it has to exercise various
restrictions and controls to regulate the supply of current and credit in economy. The
monetary authority has also to manipulate the credit policy in such a way as to step up
saving and investment activities for accelerating the rate of economic growth.

Fiscal Policy
Meaning

of

Fiscal

Policy

The fiscal policy is concerned with the raising of government revenue and incurring of
government expenditure. To generate revenue and to incur expenditure, the government
frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned
with government expenditure and government revenue.
Components of Fiscal Policy
The government has two primary fiscal tools to influence the economy. They are revenue
tools and spending tools. Let’s look at each of these tools.
Revenue tools
Revenue tools refer to the taxes collected by the government in various forms. The taxes
can be direct or indirect. Direct taxes are taxes levied on the income or wealth individuals
and firms. This includes income tax, wealth tax, estate tax, corporate tax, capital gains tax,
social security tax, etc.
Indirect taxes are taxes levied on goods and services. This includes sales tax, value added
tax, excise duty, etc.
Spending Tools

Spending tools refer to increasing or decreasing government spending/expenditure to
influence the economy. Government spending can be in the form of transfer payments,
current spending and capital spending.
Current spending includes expenditure on essential goods and services such as health,
education, defense, etc.
Capital spending is the public investment in infrastructure such as roads, hospitals, schools,
etc.
The above two also include subsidy or direct provision of merit goods and public goods,
which would otherwise be underprovided.
Transfer payments are the redistribution of income from taxpayers to those requiring
support, for example, unemployment benefits. It also includes interest payments on
government debt.
Fiscal policy tools have several advantages.
Spending tools enable services such as defense to benefit everyone in the country and
build infrastructure that propels growth. Spending tools also ensure a minimum standard of
living for the residents. Subsidies in research and development also help in future economic
growth.
Taxes help government in meeting their fiscal needs. By levying high indirect taxes, the
government can also discourage use of items such as tobacco, and alcohol.
Types of Fiscal Policy
Expansionary Fiscal Policy
When an economy is in a recession, expansionary fiscal policy is in order. Typically this
type of fiscal policy results in increased government spending and/orlower taxes. A
recession results in a recessionary gap – meaning that aggregate demand (ie, GDP) is at a
level lower than it would be in a full employment situation. In order to close this gap, a
government will typically increase their spending which will directly increase the aggregate
demand curve (since government spending creates demand for goods and services). At the
same time, the government may choose to cut taxes, which will indirectly affect the
aggregate demand curve by allowing for consumers to have more money at their disposal
to consume and invest. The actions of this expansionary fiscal policy would result in a shift
of the aggregate demand curve to the right, which would result closing the recessionary gap
and helping an economy grow.
Contractionary Fiscal Policy
Contractionary fiscal policy is essentially the opposite of expansionary fiscal policy. When
an economy is in a state where growth is at a rate that is getting out of control (causing
inflation and asset bubbles), contractionary fiscal policy can be used to rein it in to a more
sustainable level. If an economy is growing too fast or for example, if unemployment is too
low, an inflationary gap will form. In order to eliminate this inflationary gap a government
may reduce government spending and increase taxes. A decrease in spending by the

government will directly decrease aggregate demand curve by reducing government
demand for goods and services. Increases in tax levels will also slow growth, as consumers
will have less money to consume and invest, thereby indirectly reducing the aggregate
demand curve.

Objectives of Fiscal Policy
1.

Development

by

effective

Mobilisation

of

Resources

The principal objective of fiscal policy is to ensure rapid economic growth and development.
This objective of economic growth and development can be achieved by Mobilisation of
Financial
Resources.
The central and the state governments in India have used fiscal policy to mobilise
resources.
The
financial
resources
can
be
mobilised
by
:Taxation : Through effective fiscal policies, the government aims to mobilise resources by
way of direct taxes as well as indirect taxes because most important source of resource
mobilisation
in
India
is
taxation.
Public Savings : The resources can be mobilised through public savings by reducing
government expenditure and increasing surpluses of public sector enterprises.
Private Savings : Through effective fiscal measures such as tax benefits, the government
can raise resources from private sector and households. Resources can be mobilised
through government borrowings by ways of treasury bills, issue of government bonds, etc.,
loans
from
domestic
and
foreign
parties
and
by
deficit
financing.
2.
Efficient
allocation
of
Financial
Resources
The central and state governments have tried to make efficient allocation of financial
resources. These resources are allocated for Development Activities which includes
expenditure on railways, infrastructure, etc. While Non-development Activities includes
expenditure
on
defence,
interest
payments,
subsidies,
etc.
But generally the fiscal policy should ensure that the resources are allocated for generation
of goods and services which are socially desirable. Therefore, India's fiscal policy is
designed in such a manner so as to encourage production of desirable goods and
discourage
those
goods
which
are
socially
undesirable.
3.

Reduction

in

inequalities

of

Income

and

Wealth

Fiscal policy aims at achieving equity or social justice by reducing income inequalities
among different sections of the society. The direct taxes such as income tax are charged
more on the rich people as compared to lower income groups. Indirect taxes are also more
in the case of semi-luxury and luxury items, which are mostly consumed by the upper
middle class and the upper class. The government invests a significant proportion of its tax
revenue in the implementation of Poverty Alleviation Programmes to improve the conditions
of
poor
people
in
society.
4.

Price

Stability

and

Control

of

Inflation

One of the main objective of fiscal policy is to control inflation and stabilize price. Therefore,
the government always aims to control the inflation by Reducing fiscal deficits, introducing

tax

savings

schemes,

5.

Productive

use

of

financial

resources,

Employment

etc.

Generation

The government is making every possible effort to increase employment in the country
through effective fiscal measure. Investment in infrastructure has resulted in direct and
indirect employment. Lower taxes and duties on small-scale industrial (SSI) units
encourage more investment and consequently generates more employment. Various rural
employment programmes have been undertaken by the Government of India to solve
problems in rural areas. Similarly, self employment scheme is taken to provide employment
to
technically
qualified
persons
in
the
urban
areas.
6.

Balanced

Regional

Development

Another main objective of the fiscal policy is to bring about a balanced regional
development. There are various incentives from the government for setting up projects in
backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax
holidays,
Finance
at
concessional
interest
rates,
etc.
7.

Reducing

the

Deficit

in

the

Balance

of

Payment

Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption
of income tax on export earnings, Exemption of central excise duties and customs,
Exemption
of
sales
tax
and
octroi,
etc.
The foreign exchange is also conserved by Providing fiscal benefits to import substitute
industries,
Imposing
customs
duties
on
imports,
etc.
The foreign exchange earned by way of exports and saved by way of import substitutes
helps to solve balance of payments problem. In this way adverse balance of payment can
be corrected either by imposing duties on imports or by giving subsidies to export.

8.

Capital

Formation

The objective of fiscal policy in India is also to increase the rate of capital formation so as to
accelerate the rate of economic growth. An underdeveloped country is trapped in vicious
(danger) circle of poverty mainly on account of capital deficiency. In order to increase the
rate of capital formation, the fiscal policy must be efficiently designed to encourage savings
and
discourage
and
reduce
spending.
9.increasing

National

Income

The fiscal policy aims to increase the national income of a country. This is because fiscal
policy facilitates the capital formation. This results in economic growth, which in turn
increases the GDP, per capita income and national income of the country.
10.

Development

of

Infrastructure

Government has placed emphasis on the infrastructure development for the purpose of
achieving economic growth. The fiscal policy measure such as taxation generates revenue
to the government. A part of the government's revenue is invested in the infrastructure
development. Due to this, all sectors of the economy get a boost.

11.

Foreign

Exchange

Earnings

Fiscal policy attempts to encourage more exports by way of Fiscal Measures like,
exemption of income tax on export earnings, exemption of sales tax and octroi, etc. Foreign
exchange provides fiscal benefits to import substitute industries. The foreign exchange
earned by way of exports and saved by way of import substitutes helps to solve balance of
payments
problem.
Conclusion

On

Fiscal

Policy

The objectives of fiscal policy such as economic development, price stability, social justice,
etc. can be achieved only if the tools of policy like Public Expenditure, Taxation, Borrowing
and
deficit
financing
are
effectively
used.
Though there are gaps in India's fiscal policy, there is also an urgent need for making
India's
fiscal
policy
a
rationalised
and
growth
oriented
one.
The success of fiscal policy depends upon taking timely measures and their effective
administration during implementation.
Limitations
In developed countries, Fiscal Policy has achieved great success. But in case of less
developed countries, it suffers from several limitations. In fact, the nature and fundamental
characteristics of the developing countries are responsible for partial success of the fiscal
policy.
The rigid and narrow tax structure in the developing countries is a major limitation to the
successful implementation of the fiscal policy. There is complete absence of conditions
conducive to the growth of well-knit and integrated tax policy.
A sizable portion of the less developed countries is non-monetised. Due to the Presence of
Non- monetised sector, the fiscal measures pursued by the government do not prove to be
very effective and fruitful.
Inadequate statistical information as regard to the income, expenditure, saving, investment,
employment etc. makes it difficult for the public authorities to formulate a rational and
effective fiscal policy.
Lack of appreciation and comprehension of the fiscal policy by the general public is another
major obstacle in the way of successful fulfilment and implementation of fiscal policy.
Unless the people understand the implications of the fiscal policy and fully cooperate with
the government in its implementation, it cannot succeed. In developing countries, majority
of the people are illiterate and fail to understand the implications of fiscal policy.
Tax Evasion is yet another hindrance. People are not conscious about their responsibilities
and role in the developmental programmes. There are cases of large-scale tax evasion with
their negative impact on the fiscal policy as well. In the event of tax evasion, the
government fails to collect the stipulated amount from the taxes.

Weak Administrative Machinery in less developed countries is a major limitation. Fiscal
Policy or for that matter any other policy requires an efficient administrative machinery to
formulate and successfully implement the policy.
In less developed countries, different political groups and parties work on different lines and
in different directions to achieve their political ends without bothering about the welfare of
the people at large. There is political instability and whatever administration is there, it is
corrupt and inefficient and is incapable to execute the fiscal policy honestly and effectively.
PRIVIATIZATION
Definition of Privatization
This is a process of transferring the control of an enterprise from the government sector to
the private sector. Generally, but not always, this also means transferring ownership of the
Public Sector Enterprise as well as control. By privatization, I mean that a service that is
being provided by government is sold, partly or wholly to the public who then become the
shareholders or stakeholders. Privatization is the most common forms of alternative service
delivery for-profits and non-profits-oriented enterprises.

Privatization can be accomplished by sale or lease. It can be accomplished by the
government selling 100% of an enterprise, or selling 51%, or even by selling a minority
stake - so long as the private sector is given full managerial control. Without transferring
control to the private sector, the government can raise revenue by selling a smaller share,
but that is not privatization as such.
types and Techniques of Privatization
A variety of alternatives service delivery techniques can be employed to maximize efficiency
and increase service quality. Some methods will me more appropriate than others,
depending on the service. In searching for ways of cutting costs and increasing service
delivery, one or a combination of these techniques can be safely considered:
1.

Contracting Out ( or Outsourcing)

The government competitively contracts with private organizations for profit or non-profit to
provide a service or part of a service. In other words, the government hires the private
sector firms or non-profit organizations to provide goods or services for the government.
Under this approach, the government remains the financial, and has managerial and policy
control over the type and quality of goods or services to be provided. Thus, the government
can replace contractors that do not perform creditably well.
2.

Management Contracts

The operation of a facility is contracted out to a private company. Facilities where the
management is frequently contracted out include: airports, wastewater plant, arena and
convention centres.

3.

Public-Private Competition(or market testing or managed competition)

When public services are opened up to competition, in-house public organizations are
allowed to participate in the bidding process.
4.

Franchising

A private firm is given the exclusive right to provide a service within geographical area.
Franchising is of two types:( i ) Franchising external services- here, the government
grants a concession or privilege to a private sector entity to conduct business in a particular
market or geographical area, for example, operating concession stands, hotels, and other
services provided in certain parks. The government may regulate the service level or price,
but users of the service pay the provider directly. (ii) Franchising internal services –here,
the government agencies provide administrative services to other government agencies on
a reimbursable basis. Franchising gives agencies the opportunity to obtain administrative
services from another governmental entity, instead of providing them for themselves.
5.

Internal Market

Departments are allowed to purchase support services such as printing, maintenance,
computer repairs and printing from in-house providers or outside suppliers. In-house
providers of support services are required to operate as independent business units
competing against outside contractors for departments’ business. Under Such a system,
market forces are brought t bear with an organization. Internal customers can reject the
offerings of internal service providers if they do not like their quality or if they cost too much.
6.

Vouchers

Government pays for the service; however, individuals are given are given redeemable
certificates to purchase the service on the open market. These subsidize the consumer of
the service, but services are provided by the private sector. In addition to providing greater
freedom of choicer, vouchers bring consumers pressure to bear, creating incentives for
consumers to shop around for services and for service providers to supply high-quality, lowcost services.
7.

Commercialization (or service shedding)

Government stops providing a service and lets the private sector assume the function.
8.

Self-help (or transfer to non-profit organization)

Community groups and neighbourhood organizations take over a service or government
asset such as local park. The new providers of the service are also directly benefitting from
the service. Government increasingly are discovering that by turning some non-core
services- such as zoos, museums, fairs, remote parks, and some recreational programmesover to non-profit organizations, they are able to ensure that these institutions do not drain
the budget.

9.

Volunteers

Volunteers are used to provide all or part of a government’s service. Volunteers activities
are conducted through a government volunteer programme or through a non-profit
organization.
10.

Corporatization

Government organizations are reorganized along business lines. Typically, they are
required to pay taxes, raise capital on the market (with no government backing-explicit or
implicit) and operate according to commercial principles. Government corporations focus on
maximizing profits and achieving a favourable return on investment. They are freed from
government procurement, personnel and budget systems.
11.

Asset sale (or Long-Term Lease)

Government sells or enters into long term leases for assets such as airports, gas utilities or
real estate to private firms, thus turning physical capital into financial capital. In a sale
lease-back arrangement, government sells the asset to a private sector entity and the then
leases it back. Another asset sale technique is the employee buy-out. Existing public
managers and employees take the public unit private, typically purchasing the company
through an Employee Stock Ownership Plan (ESOP).
12.

Private Infrastructure Development and Operation

The private sector builds, finances and operates public infrastructures such as roads, and
airports, recovering costs through user charges. Several techniques commonly are used for
privately

built

and

operated

infrastructure.

With

Build-Operate-Transfer

(BOT)

arrangements, the private sector designs, finances, builds and operates the facility over the
life of the contract. At the end of this period, ownership reverts to the government. A
variation of BTO model, under which title transfers to the government at the time
construction is completed. Finally, with Build-Own-Operate (BOO) arrangements, the
private sector retains permanent ownership and operates the facility on contract.
13.

Divestiture

This involves the sale of government-owned assets or commercial-type functions or
enterprises. After divestiture, the government generally has no role in the financial support,
management, regulation or oversight of the divested activity.
Potential Benefits of Privatisation
1. Improved Efficiency.
The main argument for privatisation is that private companies have a profit incentive to cut
costs and be more efficient. If you work for a government run industry, managers do not
usually share in any profits. However, a private firm is interested in making profit and so it is
more likely to cut costs and be efficient. Since privatisation, companies such as BT, and
British Airways have shown degrees of improved efficiency and higher profitability.
2. Lack of Political Interference.
It is argued governments make poor economic managers. They are motivated by political
pressures rather than sound economic and business sense. For example a state enterprise
may employ surplus workers which is inefficient. The government may be reluctant to get rid
of the workers because of the negative publicity involved in job losses. Therefore, state
owned enterprises often employ too many workers increasing inefficiency.
3. Short Term view.
A government many think only in terms of next election. Therefore, they may be unwilling to
invest in infrastructure improvements which will benefit the firm in the long term because
they are more concerned about projects that give a benefit before the election.
4. Shareholders
It is argued that a private firm has pressure from shareholders to perform efficiently. If the
firm is inefficient then the firm could be subject to a takeover. A state owned firm doesn’t
have this pressure and so it is easier for them to be inefficient.
5. Increased Competition.
Often privatisation of state owned monopolies occurs alongside deregulation – i.e. policies
to allow more firms to enter the industry and increase the competitiveness of the market. It
is this increase in competition that can be the greatest spur to improvements in efficiency.
For example, there is now more competition in telecoms and distribution of gas and
electricity.

However, privatisation doesn’t necessarily increase competition, it depends on the nature of
the market. E.g. there is no competition in tap water. There is very little competition within
the rail industry.
6. Government will raise revenue from the sale
Selling state owned assets to the private sector raised significant sums for the UK
government in the 1980s. However, this is a one off benefit. It also means we lose out on
future dividends from the profits of public companies.
Some other benefits


It stops loss-making public sector enterprises from adding to government debts;



It depoliticizes public sector enterprises remove, governmental pressures for overmanning and the sub-optimal use of resources;



It gives new owners a strong incentive to turn around failing public sector enterprises
into successful businesses;



It gives new businesses access to investment capital that government cannot
provide;



It raises more money for government through taxing former public sector enterprises;



Government can raise funds to pay off other debts fast because of relieve from
financial burden of the public sector enterprises being privatized;



Profit incentive may deliver better outcomes, for example, staff down-sizing to
increase efficiency, more staff motivation, and cheaper prices to be competitive.



If floated on the stock exchange at a good price, investors can make a lot of money
through increased business revenue, efficiency and profitability.



It removes government’s monopolistic status and inability to be responsive to
citizens' needs, resulting in inefficient, one-size-fits-all services.



In practice, all levels of government, seeking to reduce costs, have begun turning to
the private sector to provide some of the services that are ordinarily provided by
government. The spread of the privatization movement is grounded in the fundamental
belief that market competition in the private sector is a more efficient way to provide these
services and allows for greater citizen choice.



With privatization solidly on ground, costs will be reduced at the long run.



Public sector workers are not harmed by privatization. Displaced workers can be
hired by contractors or transferred to other government positions.

Disadvantages of Privatisation
1.

Natural

Monopoly

A natural monopoly occurs when the most efficient number of firms in an industry is one.
For example tap water has very significant fixed costs, therefore there is no scope for
having competition amongst several firms. Therefore, in this case, privatisation would just
create a private monopoly which might seek to set higher prices which exploit consumers.
Therefore it is better to have a public monopoly rather than a private monopoly which can
exploit the consumer.
2. Public Interest
There are many industries which perform an important public service, e.g health care,
education and public transport. In these industries, the profit motive shouldn’t be the
primary objective of firms and the industry. For example, in the case of health care, it is
feared privatising health care would mean a greater priority is given to profit rather than
patient care. Also, in an industry like health care, arguably we don’t need a profit motive to
improve standards. When doctors treat patients they are unlikely to try harder if they get a
bonus.
3. Government loses out on potential dividends.
Many of the privatised companies in the UK are quite profitable. This means the
government misses out on their dividends, instead going to wealthy shareholders.
4. Problem of regulating private monopolies.
Privatisation creates private monopolies, such as the water companies and rail companies.
These need regulating to prevent abuse of monopoly power. Therefore, there is still need
for government regulation, similar to under state ownership.
5. Fragmentation of industries.
In the UK, rail privatisation led to breaking up the rail network into infrastructure and train
operating companies. This led to areas where it was unclear who had responsibility. For
example, the Hatfield rail crash was blamed on no one taking responsibility for safety.
Different rail companies has increased the complexity of rail tickets.
6. Short-Termism of Firms.

As well as the government being motivated by short term pressures, this is something
private firms may do as well. To please shareholders they may seek to increase short term
profits and avoid investing in long term projects. For example, the UK is suffering from a
lack of investment in new energy sources; the privatised companies are trying to make use
of existing plants rather than invest in new ones.


Some

other

disadvantages

Government no longer receives profits (if it was previously profitable), therefore, the
revenue accruing to the government from public sector enterprises becomes shortened as a
result of privatization.


Privatization may decrease safety due to greater profit incentives.



In extremely unavoidable cases, staff down-sizing could result to workers lay-off, and
then unemployment rises. This aptly results to more crimes and social vices because ‘an
idle hand is a devil’s workshop’.



Prices may actually rise if the service was previously subsidized by the government.
This is a common experience after a successful privatization process. This becomes
imperative in a bid to provide qualitative service, improve efficiency and profitability.



Privatization alone may not lead to better quality or cost reduction in public service
delivery.



The standard economic measures used to make privatization decisions fail to
accurately assess the real costs and benefits of care.



A major concern to the organized labour is the impact of privatization on job security
and employment. Workers layoffs, erosion of wages and benefits, and decreased levels of
union membership could be parts of labour’s setbacks for embracing privatization.




There are concerns that constitutional protections of citizens may suffer a setback
as a result of privatization which may threaten citizens’ constitutional rights.
One of the disadvantages is that the privatized company will no longer operate in the
public interest. While a state-owned company primarily serves the citizens of the state, the
primary goal of a privately operated company is to make profit. It may make these profits at
the expense of its customers without serving them properly. For example, it may choose the
market which is most profitable to operate in and leave less wealthy customers without a
service.

Conclusion
The conclusion is straightforward: privatization, when done right, works well.
Privatization is not a blanket solution for the problems of poorly performing public sector
enterprises. It cannot in and of itself make up totally for lack of competition, for weak capital
markets, or for the absence of an appropriate regulatory framework. But where the market

is basically competitive, or when a modicum of regulatory capacity is present, private
ownership yields substantial benefits. The success of any privatization arrangement,
whichever technique is adopted, will be dependent on the sincerity of government to pursue
it with unblemished policy implementation, support, co-operation and understanding of the
citizenry. At the onset, privatization bites very hard, but at the long run, the benefits are
multifarious and immeasurable.
DISINVESTMENT
Divestment is a form of retrenchment strategy used by businesses when they downsize the
scope of their business activities. Divestment usually involves eliminating a portion of a
business. Firms may elect to sell, close, or spin-off a strategic business unit, major
operating division, or product line. This move often is the final decision to eliminate
unrelated, unprofitable, or unmanageable operations.
Divestment is commonly the consequence of a growth strategy. Much of the
corporate downsizing of the 1990s has been the result of acquisitions and takeovers that
were the rage in the 1970s and early 80s. Firms often acquired other businesses with
operations in areas with which the acquiring firm had little experience. After trying for a
number of years to integrate the new activities into the existing organization, many firms
have elected to divest themselves of portions of the business in order to concentrate on
those activities in which they had a competitive advantage.
REASONS TO DIVEST
In most cases it is not immediately obvious that a unit should be divested. Many times
management will attempt to increase investment as a means of giving the unit an
opportunity to turn its performance around. Portfolio models such as the Boston Consulting
Group (BCG) Model or General Electric's Business Screen can be used to identify
operations in need of divestment. For example, products or business operations identified
as "dogs" in the BCG Model are prime candidates for divestment.
Decisions to divest may be made for a number of reasons:
MARKET SHARE TOO SMALL.
Firms may divest when their market share is too small for them to be competitive or when
the market is too small to provide the expected rates of return.

AVAILABILITY OF BETTER ALTERNATIVES.
Firms may also decide to divest because they see better investment opportunities.
Organizations have limited resources. They are often able to divert resources from a
marginally profitable line of business to one where the same resources can be used to
achieve a greater rate of return.
NEED FOR INCREASED INVESTMENT.
Firms sometimes reach a point where continuing to maintain an operation is going to
require large investments in equipment, advertising, research and development, and so
forth to remain viable. Rather than invest the monetary and management resources, firms
may elect to divest that portion of the business.
LACK OF STRATEGIC FIT.
A common reason for divesting is that the acquired business is not consistent with the
image and strategies of the firm. This can be the result of acquiring a diversified business. It
may also result from decisions to restructure and refocus the existing business.
LEGAL PRESSURES TO DIVEST.
Firms may be forced to divest operations to avoid penalties for restraint of trade. Service
Corporation Inc., a large funeral home chain acquired so many of its competitors in some
areas that it created a regional monopoly. The Federal Trade Commission required the firm
to divest some of its operations to avoid charges of restraint of trade.
Methods of Disinvestment
Different Approaches to Disinvestments
There are primarily three different approaches to disinvestments (from the sellers’ i.e.
Government’s perspective)
Minority Disinvestment
A minority disinvestment is one such that, at the end of it, the government retains a majority
stake in the company, typically greater than 51%, thus ensuring management control.
Historically, minority stakes have been either auctioned off to institutions (financial) or
offloaded to the public by way of an Offer for Sale. The present government has made a
policy statement that all disinvestments would only be minority disinvestments via Public
Offers.
Examples of minority sales via auctioning to institutions go back into the early and mid 90s.
Some of them were Andrew Yule & Co. Ltd., CMC Ltd. etc. Examples of minority sales via

Offer for Sale include recent issues of Power Grid Corp. of India Ltd., Rural Electrification
Corp. Ltd., NTPC Ltd., NHPC Ltd. etc.
Majority Disinvestment
A majority disinvestment is one in which the government, post disinvestment, retains a
minority stake in the company i.e. it sells off a majority stake.
Historically, majority disinvestments have been typically made to strategic partners. These
partners could be other CPSEs themselves, a few examples being BRPL to IOC, MRL to
IOC, and KRL to BPCL. Alternatively, these can be private entities, like the sale of Modern
Foods to Hindustan Lever, BALCO to Sterlite, CMC to TCS etc.
Again, like in the case of minority disinvestment, the stake can also be offloaded by way of
an Offer for Sale, separately or in conjunction with a sale to a strategic partner.
Complete Privatisation
Complete privatisation is a form of majority disinvestment wherein 100% control of the
company is passed on to a buyer. Examples of this include 18 hotel properties of ITDC and
3 hotel properties of HCI.
Disinvestment and Privatisation are often loosely used interchangeably. There is, however,
a vital difference between the two. Disinvestment may or may not result in Privatisation.
When the Government retains 26% of the shares carrying voting powers while selling the
remaining to a strategic buyer, it would have disinvested, but would not have ‘privatised’,
because with 26%, it can still stall vital decisions for which generally a special resolution
(three-fourths majority) is required.

Merits of Disinvestment:
1. To obtain release of the large amount of public resources locked up in non-strategic
Public sector units for re-employment in areas that are much higher on the social priority
e.g. health, family, welfare etc. and to reduce the public debt that is assuming threatening
proportions.
2. Privatization would help stemming further outflows of the scarce public resources of
sustaining the unviable non-strategic public sector unit.
3. Privatisation would facilitate transferring the commercial risk to which the tax payer’s
money locked up in the public sector is exposed to the private sector wherever the private
sector is willing to step in.
4. Privatisation would release tangible and intangible resources such as large manpower
locked up in managing PSU’s and release them for deployment in high priority social sector.
5. Disinvestment would expose privatized companies to market disciplines and help them
become self reliant.

6. Disinvestment would result in wider distribution of wealth by offering shares of privatized
companies to small investors and employees.
7. Disinvestment would have a beneficial effect on the capital market. The increase in
floating stock would give the market more depth and liquidity, give investors early exit
options, help establish more accurate benchmarks for valuation and raising of funds by
privatized companies for their projects and expansion.
8. Opening up the public sector to private investment will increase economic activity and
have an overall beneficial effect on economy, employment and tax revenues in the medium
to long term.
9. Bring relief to consumers by way of more choices and better quality of products and
services, e.g. Telecom sector.
Demerits of Disinvestment:
1. The amount raised through disinvestment from 1991-2001 was Rs. 2051 crores per year
which is too meagre. Further, the way money released by disinvestment is being used,
remaining undisclosed.
2. The loss of PSU’s is rising. It was 9305 crore in 1998 and 10060 crore in 2000.
3. This is welcome but disinvestment of profit making public sector units will rob the
government of good returns. Further, if department of disinvestment wants to get away with
commercial risks, why should it retain equity in disinvested PSU’s, e.g. Balco (49%),
Modern Foods (26%) etc.
4. The growth in social sector is not in any way hindered by non availability of manpower.
5. This is true but only when the govt, ensures that the market system regulates and
disciplines privatized firms taking care of public’s interest.
6. Privatization programme is generally not been affected through the public sales of
shares. Earlier, sale of shares (1991-96) attracted the employees to a limited extent and
was not friendly to small investors and employees.
7. In most cases, shares of disinvested PSU’s are by and large in the hands of institutions
with little floating stock. The present policy of privatization through the strategic partner
route would also not achieve these objectives.
8. Hindustan Lever has categorically stated that it has no plans for any capital infusion in
Modern food industries acquired by it in January, 2002. The supporter of disinvestment had
thought that tax payer’s money would be saved through private sector investment.
9. No monopoly is good. Only fair and full competition can bring relief to consumers.

Competition Act
AN OVERVIEW OF THE COMPETITION LAW IN INDIA
After India became a party to the WTO agreement, a perceptible change was noticed in
India’s foreign trade policy which had been earlier highly restrictive. Recognizing the
important linkages between trade and economic growth, the Government of India, in the
early 90s took step to integrate the Indian economy with the global economy. Thus, finally
enhancing its thrust on globalization and opening up its economy removing controls and
resorting to liberalization. Consequently, India enacted its first anti-competitive legislation in
1969, known as the Monopolies and Restrictive Trade Practices Act, and made it an integral
part of the economic life of the country. Finding the ambit of MRTP Act inadequate for
fostering competition in the market and eliminating anti-competitive practices in the national
and international trade, the Government of India in October 1999 appointed a high level
committee on Competition Policy and Law (the Raghavan Committee) to advise on the
competition law consonant with international developments. Acting on the report of the
committee, the Government enacted the new Competition Act, 2002 which has replaced the
earlier MRTP Act, 1969.
The
Genesis
of
the
Competition
Act,
2002:
The
MRTP
Act.
The MRTP Act is still the extant competition law in India, as The Competition Act has not yet
been fully implemented. The MRTP Act was designed to ensure that the operation of
economic system doesn’t result in the concentration of economic power to the common
detriment and to prohibit such monopolistic and restrictive trade practices prejudicial to
public interest. A scrutiny of the MRTP Act also shows that there was neither a definition nor
a mention of certain offending trade practices which are restrictive in character. For
example, abuse of dominance, cartels, collusion and price fixing, bid rigging, boycotts and
refusal to deal and predatory pricing were not covered under the Act.
Thus, the MRTP Act has become obsolete in the light of the economic developments
relating more particularly to competition laws and the need was felt to shift the focus from
curbing monopolies to promoting competition. To address these lacunas the government
drafted a new legislation on the subject which resulted as the Competition Act, 2002.the
competition Act, 2002 which passed on 13 th January, 2003 is a laudable step towards
harmonizing international trade policy.

Objective
The main objective of The Competition Act is highlighted in its preamble, wherein it
envisages the establishment of a commission, keeping in view the economic development
of the country, to ensure the following:
(a)

To prevent practices having adverse effect on competition.

(b)

To promote and sustain competition in markets.

(c)

To protect the interests of consumers.

(d)

To ensure freedom of trade carried on by other participants in markets in India, and

(e)

For matters connected therewith or incidental thereto.

Thus, main purpose of the Act is to ensure free and fair competition in market by prohibiting
anti-competitive agreements, abuse of dominant position and by regulating competition.
Salient Features of the New Competition Regime
The Competition Act has been designed as an omnibus code to deal with matters relating to
the existence and regulation of competition and monopolies. Its objects are lofty, and
include the promotion and sustenance of competition in markets, protection of consumer
interests and ensuring freedom of trade of other participants in the market, all against the
backdrop of the economic development of the country.
Anti-Competition Agreements
Firms enter into agreements, which may have the potential of restricting competition. A scan
of the competition laws in the world will show that they make a distinction between
horizontal and vertical agreements between firms. The former, namely the horizontal
agreements are those among competitors and the latter, namely the vertical agreements
are those relating to an actual or potential relationship of purchasing or selling to each
other. Particularly pernicious types of horizontal agreements are the cartel. Vertical
agreements are pernicious, if they are between firms in a position of dominance. Most
competition laws view vertical agreements generally more leniently than horizontal
agreements, as; prima facie, horizontal agreements are more likely to reduce competition
than agreements between firms in a purchaser – seller relationship. An obvious example
that comes to mind is an agreement between enterprises dealing in the same product or
products. Such horizontal agreements, which include membership of cartels, are presumed
to lead to unreasonable restrictions of competition and are therefore presumed to have an
appreciable adverse effect on competition. In other words, they are per se illegal. The
underlying principle in such presumption of illegality is that the agreements in question have
an appreciable anti-competitive effect. Barring the aforesaid four types of agreements, all
the others will be subject to the rule of reason test in the Act.
Abuse of Dominance
Dominant Position has been appropriately defined in the Act in terms of the position of
strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to (i)
operate independently of competitive forces prevailing in the relevant market; or (ii) affect its
competitors or consumers or the relevant market, in its favour.
Section 4 enjoins, “No enterprise shall abuse its dominant position”. Dominant position is
the position of strength enjoyed by an enterprise in the relevant market which enables it to
operate independently of competitive forces prevailing in the market or affects its
competitors or consumers or the relevant market in its favour. Dominant position is abused
when an enterprise imposes unfair or discriminatory conditions in purchase or sale of goods
or services or in the price in purchase or sale of goods or services. Again, the philosophy of
the Competition Act is reflected in this provision, where it is clarified that a situation of
monopoly per se is not against public policy but, rather, the use of the monopoly status such
that it operates to the detriment of potential and actual competitors.

At this point it is worth mentioning that the Act does not prohibit or restrict enterprises from
coming into dominance. There is no control whatsoever to prevent enterprises from coming
into or acquiring position of dominance. All that the Act prohibits is the abuse of that
dominant position. The Act therefore targets the abuse of dominance and not dominance
per se. This is indeed a welcome step, a step towards a truly global and liberal economy.
The Act on Combinations Regulation
The Competition Act also is designed to regulate the operation and activities of
combinations, a term, which contemplates acquisitions, mergers or amalgamations. Thus,
the operation of the Competition Act is not confined to transactions strictly within the
boundaries of India but also such transactions involving entities existing and/or established
overseas.
Herein again lays the explanation to understanding the Competition Act. The intent of the
legislation is not to prevent the existence of a monopoly across the board. There is a
realisation in policy-making circles that in certain industries, the nature of their operations
and economies of scale indeed dictate the creation of a monopoly in order to be able to
operate and remain viable and profitable. This is in significant contrast to the philosophy,
which propelled the operation and application of the MRTP Act, the trigger for which was the
existence or impending creation of a monopoly situation in a sector of industry.
The Act has made the pre-notification of combinations voluntary for the parties concerned.
However, if the parties to the combination choose not to notify the CCI, as it is not
mandatory to notify, they run the risk of a post-combination action by the CCI, if it is
discovered subsequently, that the combination has an appreciable adverse effect on
competition. There is a rider that the CCI shall not initiate an inquiry into a combination after
the expiry of one year from the date on which the combination has taken effect.

Competition Advocacy
In line with the High Level Committee’s recommendation, the Act extends the mandate of
the Competition Commission of India beyond merely enforcing the law (High Level
Committee, 2000). Competition advocacy creates a culture of competition. There are many
possible valuable roles for competition advocacy, depending on a country’s legal and
economic
circumstances.
The Regulatory Authority under the Act, namely, Competition Commission of India (CCI), in
terms of the advocacy provisions in the Act, is enabled to participate in the formulation of
the country’s economic policies and to participate in the reviewing of laws related to
competition at the instance of the Central Government. The Central Government can make
a reference to the CCI for its opinion on the possible effect of a policy under formulation or
of an existing law related to competition. The Commission will therefore be assuming the
role of competition advocate, acting pro-actively to bring about Government policies that
lower barriers to entry, that promote deregulation and trade liberalisation and that promote
competition in the market place. Perhaps one of the most crucial components of the
Competition Act is contained in a single section under the chapter entitled competition
advocacy

The Competition Commission of India

The apex body under the Competition Act which has been vested with the responsibility of
eliminating practices having adverse effect on competition, promoting and sustaining
competition, protecting the interest of the consumers, and ensuring freedom of trade carried
on by other participants in India, is known as the Competition Commission of India (CCI) —
the successor to the MRTP Commission. The CCI is to consist of a chairman, who is to be
assisted by a minimum of two and a maximum of ten other members to be appointed by the
Central government. The CCI is not merely a law enforcement agency, but would be
actively involved in the formulation of the country’s economic policies, advise the
government on competition policy, take suitable measures for the promotion of competition
advocacy and create awareness and imparting training about competition issues.
Extra-territorial Jurisdiction
The mandate of the Competition Commission extends beyond the boundaries of India. In
case any agreement that has been entered outside India and is anti-competitive in terms of
sec. 3 of the Act ; or any party to such an agreement is outside India; or any enterprise
abusing the dominant position is outside India; or a combination has taken place outside
India; or any other matter or practice or action arising out of such agreement or dominant
position or combination is outside India, if such agreement, combination or abuse of
dominant position has or are likely to have an adverse effect on competition in the Indian
market, the CCI shall have the power to inquire into such agreement or dominant position or
combination if have or are likely to have an appreciable adverse effect on competition in the
relevant market in India
Lacunas in the Competition Act, 2002
An examination of the powers of the CCI would suggest that the commission is fully
equipped to counter and set right the vagaries of the market place. However, while
seemingly enjoying carte blanche, there appear to be certain glaring lacunae which would
militate against the efficacy of the provisions of the Competition Act it would be remembered
that the Commission would initiate action upon complaints of anti-competitive agreements
abuse of dominant position either suo moto, or on the voluntary motion of a person seeking
an opinion of the Commission. Here, two aspects may be kept in mind — the lack of a
mandatory provision compelling persons or entities, whether public or private, to approach
the Commission and the corresponding logistical limitations of the Commission to be able to
take cognizance on its own motion of every malpractice in the economy. If there is no inbuilt
principle that statutory authorities and private persons are required to approach the
Commission to determine whether an anti-competitive agreement is in force, or whether
there is an abuse of dominant position or whether a combination is detrimental to public
interest, can we actually rely upon the parties to approach the Commission of their own
accord? The Central Government also enjoys unbridled power in the matters of policy
framing and issues direction on questions of policy which shall be binding on the CCI. The
government also has the power to supersede the CCI, against which the CCI can make a
representation to the government. Such provisions seriously affect the independence and
efficacy of the CCI. In fact consultation by the Central Government in evolving competition
policy with the CCI should be made mandatory, instead of discretionary, as contemplated in
the Act. Moreover, the Act does not address the abuses of Intellectual Property Rights,
which are monopoly rights for limited period of time.

CONCLUSION

Competition is vital for the survival of the market economy. It spurs innovation and higher
productivity. Competition brings about enhanced efficiency, in both a static and dynamic
sense, by disciplining firms to produce at the lowest possible cost and pass these cost
savings on to consumers, as also motivating firms to undertake research and development
to meet customer needs.
The value of freeing entrepreneurial energies and allowing competition to drive growth has
become all the more important for India in its aim to emerge as a dominant player in the
world economy. Competition law is a complex piece of legislation which must be carefully
applied and reviewed periodically by the Central Government and the Competition
Commission, keeping in view the special needs and requirements of the Indian economy. It
should be understood that healthy competition would spur growth and development;
however, in this unequal world system where the capitalist west dominate the world
economy, and when there is no level playing field, it would be unwise to have same set of
rules for completion between unequal players. Only time will tell whether the Competition
Act addresses the ground realities that exist today of the Indian economy, which can be
best described as a mixed economy. However, the Act is definitely a step in the right
direction by harmonizing the competition policy with international trade and policy.

Information Technology Act
The Information Technology Act, 2000, came into force with effect from 17th October, 2000.
It has been amended in 2008 and the Amended Act is effective from February 5, 2009. The
Rules under the Amended Act have also been framed, which became effective from
October 27, 2009.

Salient features of the Information Technology (Amendment) Act, 2008
i. The term 'digital signature' has been replaced with 'electronic signature' to make the Act
more technology neutral.
ii. A new section has been inserted to define 'communication device' to mean cell
phones, personal digital assistance or combination of both or any other device used to
communicate, send or transmit any text video, audio or image.
iii. A new section has been added to define cyber cafe as any facility from where the access
to the internet is offered by any person in the ordinary course of business to the members of
the public.
iv. A new definition has been inserted for intermediary.
v. A new section 10A has been inserted to the effect that contracts concluded electronically
shall not be deemed to be unenforceable solely on the ground that electronic form or means
was used.
vi. The damages of Rs. One Crore prescribed under section 43 of the earlier Act of 2000 for
damage to computer, computer system etc. has been deleted and the relevant parts of the
section have been substituted by the words, 'he shall be liable to pay damages by way of
compensation to the person so affected'.
vii. A new section 43A has been inserted to protect sensitive personal data or information
possessed, dealt or handled by a body corporate in a computer resource which such body
corporate owns, controls or operates. If such body corporate is negligent in implementing
and maintaining reasonable security practices and procedures and thereby causes wrongful
loss or wrongful gain to any person, it shall be liable to pay damages by way of
compensation to the person so affected.
viii. Sections 66A to 66F has been added to Section 66 prescribing punishment for offences
such as obscene electronic message transmissions, identity theft, cheating by
impersonation using computer resource, violation of privacy and cyber terrorism.
ix. Section 67 of the IT Act, 2000 has been amended to reduce the term of imprisonment for
publishing or transmitting obscene material in electronic form to three years from five years
and increase the fine thereof from Rs.100,000 to Rs. 500,000. Sections 67A to 67C have
also been inserted. While Sections 67A and B deals with penal provisions in respect of
offences of publishing or transmitting of material containing sexually explicit act and child
pornography in electronic form, Section 67C deals with the obligation of an intermediary to
preserve and retain such information as may be specified for such duration and in such
manner and format as the central government may prescribe.
x. In view of the increasing threat of terrorism in the country, the new amendments include

an amended section 69 giving power to the state to issue directions for interception or
monitoring of decryption of any information through any computer resource. Further,
sections 69A and B, two new sections, grant power to the state to issue directions for
blocking for public access of any information through any computer resource and to
authorize to monitor and collect traffic data or information through any computer resource
for cyber security.
xi. Section 79 of the Act which exempted intermediaries has been modified to the effect that
an intermediary shall not be liable for any third party information data or communication link
made available or hosted by him if;

(a) The function of the intermediary is limited to providing access to a communication
system over which information made available by third parties is transmitted or temporarily
stored or hosted;
(b) The intermediary does not initiate the transmission or select the receiver of the
transmission and select or modify the information contained in the transmission;

(c) The intermediary observes due diligence while discharging his duties. However, section
79 will not apply to an intermediary if the intermediary has conspired or abetted or aided or
induced whether by threats or promise or otherwise in the commission of the unlawful act or
upon receiving actual knowledge or on being notified that any information, data or
communication link residing in or connected to a computer resource controlled by it is being
used to commit an unlawful act, the intermediary fails to expeditiously remove or disable
access to that material on that resource without vitiating the evidence in any manner.
xii. A proviso has been added to Section 81 which states that the provisions of the Act shall
have overriding effect. The proviso states that nothing contained in the Act shall restrict any
person from exercising any right conferred under the Copyright Act, 1957.
OR
The salient features of the Information Technology Act, 2000 may briefly be stated as
follows:—
1. The Act provides legal recognition to e-commerce, which facilitates commercial etransactions.
2. It recognises records kept in electronic form like any other documentary record. In this
way, at brings electronic transactions at par with paper transactions in documentary form.
3. The Act also provides legal recognition to digital signatures which need to be duly
authenticated by the certifying authorities.

4. Cyber Law Appellate tribunal has been set up to hear appeal against adjudicating
authorities.
5. The provisions of the I.T. Act have no application to negotiable instruments, power of
attorney, trust, will and any contract for sale or conveyance of immovable property.
6. The Act applies to any cyber offence or contravention committed outside India by a
person irrespective of his/her nationality.
7. As provided under Section 90 of the Act, the State Government may, by notification in
‘Official Gazette’ make rules to carry out the provisions of the Act.
8. Consequent to the passing of this Act, the SEBI had announced that trading of securities
on the internet will be valid in India, but initially there was no specific provision for protection
of confidentiality and net trading. This lacuna has been removed by the IT (Amendment)
Act, 2008.
FEMA 2000
Introduction
The Foreign Exchange Management Act, 1999 (FEMA) replaces the Foreign
Exchange Regulation Act (FERA). FERA was introduced in 1974 to consolidate and amend
the then existing law relating to foreign exchange. FERA was amended in 1993 to bring
about certain changes, as a result of introduction of economic reforms and liberalization of
Indian Economy. But it was soon realized that FERA had by and large outlived its utility in
the changed economic scenario and therefore replaced by FEMA in 1999.
Meaning
FEMA was introduced by the Finance Minister in Lok Sabha on August 4, 1998. The Bill
aims “to consolidate and amend the law relating to foreign exchange with the objective of
facilitating external trade and payments and for promoting the orderly development and
maintenance of foreign exchange market India.” It was adopted by the parliament in 1999
and is known as the Foreign Exchange Management Act, 1999. This Act extends to the
whole of India and shall also apply to all branches, offices and agencies outside India
owned or by a person resident in India.
Scope
Applicability of the Act
The act extends to the whole of India. Also, it applies to all the branches, offices and
agencies outside agencies outside India owned or controlled by a person resident in India
and also to any contravention there under committed outside India by person to whom this
act appeals. The act has come into force with effect from June 1, 2000.
Important Definitions under Section 2 defines certain terms used in the act.

1. Authorized person: It means an authorized dealer, money changer, offshore banking unit or
any other person for the time being authorized under the Act to deal in foreign exchange
and foreign securities.
2. Capital account transactions: It means a transaction which alters the assets or liabilities,
including contingent liabilities, outside India or assets or liabilities in India of persons
resident outside India and includes transactions referred to in sec 6.(3).
3. Currency: This expression includes all currency notes, postal notes, postal orders, money
orders, cheques, drafts, travelers, letters of credit, bills of exchange and promissory notes,
credit cards, or such other similar as may be notified by the reserve bank. Vide Notification
No. FEMA15/2000/RB dated May 3,2000 , RBI has notified ‘debit card’, ‘ATM’, cards or any
other instruments by whatever name called that can be used to create a financial liability, as
‘currency’.
4. Currency Notes: It means and includes cash in the form of coins and bank notes.
5. Person: ‘A person’ includes (1) an individual, (2) a Hindu undivided family, (3) a
company, (4) a firm, (5) an association of persons or a body of individuals, whether
incorporated or not, (6) every artificial juridical person, not falling within any of the preceding
sub-clauses, and (7) any agency, office or branch owned or controlled by such persons.
Person resident in India: it means
(1) A person residing in India for more than on hundred and eighty two days during the course of
the preceding financial year but does not include:
(A) A person who has gone out of India or who stays outside India, in either case- (a) for or an
taking up employment outside India, or (b) for carrying on outside India a business or
vacation outside India or, (c) for any other purpose, in such circumstances as would indicate
his intension to stay outside India for an uncertain period.
(B) A person who has come to or stays in India, in either case, otherwise than(a) For or on taking up employment in India or, (b) for carrying on in India a business or vocation in
India or, (c) for any other purpose, in such circumstances as would indicate his intention to
stay in India for an uncertain period.
(2) Any person or body corporate registered or incorporated in India,
(3) An office, branch or agency in India owned or controlled by a person resident outside India.
(4) An office, branch or agency outside India owned or controlled by a person resident in India.
Person resident outside India: It means the person who is not resident in India.
Transfer: The expression transfer includes sale, purchase, exchange, mortgage, pledge,
gift, loan or any other form of transfer of right, title, possession or lien.
Definitions of certain other terms used in FEMA Regulations are:
Non-Resident Indian(NRI): It means a person resident outside India who is a citizen of
India or person of Indian origin.
Overseas Corporate Body(OCB): The expression means a company, partnership firm,
society and other corporate body owned directly or indirectly to the extent of at least 60% by
non-resident Indians. Further, the expression includes overseas trusts in which not less than
60% beneficial interest is held by non-resident Indians directly or indirectly but irrevocably.

Person of Indian Origin(PIO): It means a citizen of any country other than Bangladesh or
Pakistan, if
i. He at any time held Indian passport; or
ii. He or either of his parents or any of his grand parents was a citizen of India by virtue of the
Constitution of India or citizenship Act of 1955; or
iii. The person is spouse of the Indian citizen or a person referred in (i) and (ii)
Convertible Currency/ Hard Currency: Certain currencies are freely convertible i.e., one can
exchange these currencies with any other currency without any restrictions. Major among
these are: Dollars, Pound Sterling, Euro, Deustsche Mark-DM, Yen, Franc, Lira etc… this is
called ‘hard currency’.
REGULATIONS AND MANAGEMENT OF FOREIGN EXCHANGE (chapter II, Sec 3 to 9)
Dealings in foreign exchange (Sec 3):
Prohibition of dealings in foreign exchange. Save as otherwise provided in the act, rules or
regulations made thereunder, or with the general or special permission of the Reserve
Bank, no person shall—
a) Deal in or transfer any foreign exchange or foreign security to any person not being an
authorized person.
b) Make any payment to or for the credit of any person resident outside India in any manner
Meaning of ‘payment’. The word ‘payment’ has to be understood in its ordinary sense of
meaning, namely, the action or act of paying. It covers the cases of the money which may
be received by an agent whose duty is to pass on the money to others on the direction of
the person who is the owner of the money.
c) Receive otherwise through an authorized person, any payment by order or on behalf of any
person resident outside India in any manner.
d) Enter into any financial transaction in India as consideration for or transfer of a right to
acquire any assets outside India by any person.
Holding of foreign exchange (Sec 4)
Save as otherwise provided in this act, no person resident in india shall acquire, own, hold ,
possess or transfer any foreign exchange , foreign exchange or any immovable property
situated outside India.
Current account transaction (Sec 5)
Any person my sell or draw foreign exchange to or from an authorized person if such sale or
drawl is a current account transaction. However the central government may, in public
interest and in consultation, with the Reserve Bank impose such reasonable restriction for
current account transaction as may be prescribed.
Capital account transaction (Sec 6)
Foreign exchange transaction through authorized person. Any person may sell or draw
foreign exchange to or from an authorized person from a capital account transaction.

Specification of capital account transaction and limit :
The Reserve Bank may in consultation with the central government specifya) Any class or classes of capital account transactions which are permissible.
b) The limit upto which foreign exchange may be admissible for such transaction.
Prohibition of certain transactions
The reserve bank may by regulations, prohibit, restrict or regulate the following
a) Transfer or Issue of any foreign security by a person resident in India
b) Transfer or Issue of any security by a person resident outside India
c) Transfer or Issue of any security or foreign security by any branch, office or agency in India
of a person resident outside India.
d) Any borrowing or lending in foreign exchange in whatever form or by whatever name called
e) Any borrowing or lending in Rupees in whatever form or by whatever name called between
person resident in India and a person resident outside India
f) Deposits between persons resident in India and persons resident outside India
g) Export , Import or holding of currency or currency notes
h) Transfer of immovable property outside India, other than a lease not exceeding 5 years by a
person resident in India.
i) Acquisition or Transfer of immovable property in India other than lease not exceeding 5 years
by a person resident in India
j) Giving of guarantee or surety in respect of any debt, obligation or liability incurred::
I) By a person resident in India and owed to a person resident outside India
II) By a person resident outside India
Holding by a person resident outside India:
A person resident outside India may hold, own , transfer or invest in Indian currency,
securities ,or any immovable property situated in India if such currency, security, property
was acquired , held or owned by such person when he was resident in India or inherited
from a person who was resident in India. [Sec. 6(5)]
Holding by a person resident in India:
A person resident in India may hold, own, transfer or invest in foreign currency, foreign
security or any immoveable property situated outside India if such currency, security,
property was acquired, held or owned by such person when he was resident outside India
or inherited from a person who was resident outside India. [Sec 6(4)]
Prohibition of establishment in India of a branch, office or other place of business by
a person resident outside India
The Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of
a branch, office or other place of business by a person resident outside India, for carrying
on any activity relating to such branch, office or other place of business[Sec 6(6)]
Export of goods and services (sec7)
Furnishing of declaration. Every exporter of goods shall

a) Furnish to the Reserve Bank or to such other authority a declaration in such form and in
such manner as may be specified containing:
i) True and correct material particulars, include representing the full export value, or
ii) If the full export value of the goods is not ascertainable at the time of export, the value
which the exporter, having regard to the prevailing market conditions, expects to receive on
the sale of the goods in a market outside India.
Declaration to be true.
Every declaration made under sec.7 must be a true declaration and not the declaration
which is known to the maker to be untrue or which the maker has reason to believe to be
false or untrue in any material.
Reserve Banks powers to issue directions
Directions to authorized persons
The Reserve Bank may, for the purpose of securing compliance with the provisions of this
Act, give to the authorized person any direction in regard to making of payment or the doing
or desisting from doing any Act relating to foreign exchange or foreign security.
Direction to an authorized person to furnish information
The Reserve Bank may, for the purpose of ensuring the compliance with the provisions of
this Act, direct any authorized person to furnish such information.
Penalty for contravention
Where any authorized person contravenes any direction given by the Reserve Bank under
this Act or fails to file any return as directed by the Reserve Bank, the Reserve Bank may
impose on the authorized person a penalty which may extend to Rs 10,000. In the case of
continuing contravention, the Reserve Bank may impose an additional penalty which may
extend to Rs 2000, for every day during which such contravention continues. However,
before imposing the penalty, the Reserve Bank shall give reasonable opportunity of being
heard to the authorized person.

Power of Reserve Bank to inspect authorized person
Inspection
The Reserve bank may, at any time, cause an inspection to be made, of the business of any
authorized person as may appear to it to be necessary or expedient for the purpose of –
a) Verifying the correctness of any statement, information or particulars furnished to the
Reserve bank.
b) Obtaining any information or particulars which such authorized person has failed to furnish
on being called upon to do so.

c) Securing compliance with the provisions of this Act or of any rules, regulations, directions or
orders made there under.
The inspection shall be made by any officer of the Reserve Bank specially authorized in
writing by the Reserve Bank in this behalf.
CONTRAVENTION AND PENALTIES ( Chapter IV, Secs 13 to 15)
Penalties(Sec. 13)
Contravention. The following contraventions by any person are liable to a penalty, i.e.,
contravention ofa) Any provision of this act, or
b) Any rule, regulation, notification, direction or order issued in exercise of the powers under
this act, or
c) Any condition subject to which an authorization is issued by the Reserve Bank.
The penalty shall be levied upon adjudication(i.e., after hearing and determining judicially by
the Adjudicating Authority).
Amount of penalty: where the amount is quantifiable, the penalty can be up to thrice the
sum involved in the contravention. Where the amount is not quantifiable, the penalty may be
upto Rs. 2,00,000. Where contravention is a continuing one, further penalty which may
extend to Rs. 5000 may be levied for every day after the first day during which the
contravention continues.
Power to compound contravention (Sec 15)
Any contravention under Sec. 13 may, on an application made by the person committing
such contravention, be compounded within 180 days from the date of receipt of application
by the Director of Enforcement and officers of the Reserve Bank as may be authorized in
this behalf by the Central Government[ Sec 15 (1)]. Where a contravention has been
compounded, no proceeding shall be initiated or continued against the person committing
such contravention in respect of the contravention so compounded [sec 15(2)].
Adjudicating Authority (Sec. 16)
Appointment. For the purpose of adjudication, the Central Government may appoint officers
of the Central Government as the Adjudicating Authorities. The appointment shall be made
by an order published in the official Gazette, for holding an enquiry in the manner prescribed
after giving the person alleged to have committed contravention, against whom a complaint
has been made (referred to as the said person) a reasonable opportunity of being heard for
the purpose of imposing any penalty, if levied, it may direct the said person to furnish a bond
or guarantee for such amount [Sec. 16(1)]
Jurisdiction. The Central Government shall, while appointing the Adjudicating
Authorities, also specify in the order published in the official Gazette their respective
jurisdiction [Sec. 16(2)].

Procedure of inquiry. The Adjudicating Authority shall hold an enquiry only upon a complaint
in writing made by an officer authorized by a general or special order by the Central
Government [Sec. 16(3)]. The said person may appear either or person or take the
assistance of a legal practitioner or a chartered accountant of his choice for presenting his
case before the Adjudicating Authority [Sec. 16(4)]
Powers of Adjudicating Authority. The Adjudicating Authority shall have the same powers a
civil court which are conferred on the Appellate tribunal under sec. 28(2) anda) All proceedings before I shall be deemed to be judicial proceedings within the meanings of
secs. 193 and 228 of the Indian Penal Code, 1860;
b) Shall be deemed to be a civil court for the purposes of Secs. 345 and 346 of the code of
Criminal Procedure, 1973.
Appeal to Special Director (Appeals) (Sec. 17)
Appointment. The central government shall, by notification, appoint one or more
Special Directors (Appeals) to hear appeals against the orders of the Adjudicating
Authorities. It should also specify in the said notification the matter and places in relation to
which the Director (Appeals) may exercise jurisdiction [Sec. 17(1)].
Appeal. Any person aggrieved by an order made by the Adjudicating Authority (being an
Assistant Director of Enforcement or a Deputy Director of Enforcement) may prefer an
appeal to the special Director (Appeals) [Sec. 17(2)]. The appeal shall be filed within 45
days from the date on which the copy of the order made by the Adjudicating Authority is
received [Sec. 17(3)].
On receipt of an appeal, the Special Director (Appeals) may pass such order thereon as h
thinks fit confirming, modifying or setting aside the order appealed against. But before he
passes any such order he shall give the parties to the appeal an opportunity of being heard
[Sec. 17 (4)]. The opportunity of being heard is an offshoot of the requirement of compliance
of the principles of natural justice.
Again, the order refusing the permission must be supported by valid reasons. If the order of
refusal does not give any reason or contains reasons which are not valid or the reasons
have no rational nexus to the object, or the reasons are colored by policy or expediency, the
applicant will be entitled for the judicial relief [ Appejay Pvt. Ltd. V. Union of India,(1979) 49
Comp. Cas. 602 (call.)].
Copy of the order to be sent to the parties and the Adjudicating Authority . The Special
Director (Appeals) shall send a copy of every order made by him to the parties to appeal
and to the concerned Adjudicating Authority [Sec. 17(5)].
Establishment of Appellate Tribunal (Sec. 18)
The Central Government shall, by notification, establish an Appellate Tribunal to be known
as the Appellate Tribunal for the Foreign Exchange to hear appeals against the orders of the
adjudicating authorities and the Special Director (Appeals) under this Act.
Appeal to Appellate Tribunal (Sec. 19)

The Central Government or any person aggrieved by an order made by an Adjudicating
Authority or the Special Director (Appeals) may prefer an appeal to the Appellate Tribunal.
The person appealing against the order of the Adjudicating Authority or the Special Director
(Appeals) levying any penalty, shall while filing the appeal, deposit the amount of such
penalty with such authority as may be notified by the Central Government. Where in any
particular case, the Appellate tribunal is of a opinion that the deposit of such penalty would
cause undue hardship to such person, it may dispense with such deposit [Sec. 19(1)].
Appeal to b filed within 45 days.
Orders by the Appellate Tribunal. On receipt of an appeal under Sec. 19(1), the Appellate
Tribunal may, after giving the parties to the appeal an opportunities of being heard, pass
such orders thereon as it think fit, confirming, modifying and setting aside the order
appealed against [Sec. 19(3)]. It shall send a copy of every order made by it to the parties to
the appeal and to the concerned Adjudicating Authority or the Special Director (Appeals)
[Sec.19 (4)].
Expeditious Disposal of Appeal. The appeal filed before the Appellate Tribunal under Sec.
19 (1) shall be dealt with by it as expeditiously as possible and endeavor shall be made by it
to dispose of the appeal finally within 180 days from the date of receipt of the appeal. Where
the appeal could not be disposed of within the period of 180 days, the Appellate Tribunal
shall record its reasons in writing for not disposing of the appeal within the said period [Sec.
19 (5)].
Requisition of records of the proceedings. The Appellate Tribunal may, for the purpose of
the examining the legality, propriety or corrections of any order made by the Adjudicating
Authority under Sec. 16, call for the records of such proceedings and make such order in
the case as it thinks fit. The record may be called for by the Appellate Tribunal on its own
motion or otherwise [Sec. 19(6)].
Composition of Appellate Tribunal (Sec. 20)
Composition. The Appellate Tribunal shall consist of a Chairperson and such number of
Members as the Central Government may deem fit [Sec. 20(1)].
Jurisdiction.
a) The jurisdiction of the Appellate Tribunal may be exercised by Benches thereof.
b) A Bench may be constituted by the Chairperson with one or more Members as the
chairperson may deem fit.
c) The benches of the Appellate Tribunal shall ordinarily sit at New Delhi. These may also sit at
such other places as the Central Government may, in consultation with the chairperson,
notify.
d) The Central Government shall notify the areas in relation to which each bench of the
appellate tribunal may exercise jurisdiction [Sec. 20(2)].
Transfer of the Members. The Chairperson may transfer a Member from one Bench to
another Bench [Sec. 20(3)].

Qualifications for appointment (Sec. 21)
Qualification of Chairperson and member. A person shall not be qualified for appointment as
the Chairperson or a Member unless hea) In the case of Chairperson, is or has been, or is qualified to be, a judge of a High Court, and
b) In the case of the Member, is or has been, or is qualified to be, a District Judge [Sec.21 (1)].
Qualification of Special Director (Appeals). A person shall not be qualified for appointment
as a Special Director (Appeals) unless hea) Has been a member of the Indian Legal Service and has held a post in Grade I of that
service, or
b) Has been a Member of the Indian Revenue Service and has held a post equivalent to a Joint
Secretary to the Government of India [Sec. 21(2)].
Term of office, Conditions of service, vacancies, etc. (Sec. 22 to 25)
Term of Office (Sec.22). The Chairperson and every other Member shall hold office as
such for a term of 5 years from the date on which he enters upon his office. Further the
chairperson or other member shall not hold office as such after he has attaineda) In the case of the Chairperson, the age of 65 years;
b) In the case of any other Member, the age of 62 years.
Terms and Conditions of Service (Sec.23). The salary and allowances payable to and the
other terms and conditions of service of Chairpersons, other Member and the Special
Director (Appeals) shall be such as may be prescribed. Further, these terms and conditions
shall not be varied to his disadvantage after appointment.
Vacancies (Sec. 24). If any vacancy occurs in the office of the Chairperson or a Member,
the Central Government shall appoint another person to fill the vacancy. Thereafter, the
proceedings may be continued before the Appellate tribunal from the stage at which the
vacancy is filled.
Right of appellate to take assistance (Sec.32)
Assistance of a legal practitioner or a chartered accountant. A person preferring an appeal
to the Appellate tribunal or the special Director (Appeals) may either appear in person or
take the assistance of a legal practitioner or a chartered accountant of his choice to present
his case before the Appellate tribunal or the Special Director (Appeals), as the case may be
[Sec. 32(1)].
Authorization by Central Government. The Central Government may authorize one or more
legal practitioners or chartered accountants or any of its officers to act as presenting
officers. The person so authorized may present the case with respect to any appeal before
the Appellate Tribunal or the Special Director (Appeals) [Sec. 32 (2)].
Appeal to High Court (Sec. 35)

Any person aggrieved by any decision or order of the Appellate tribunal may file an appeal
to the High Court within 60 days from the date of communication of the decision or order of
the Appellate tribunal on any question of law arising out of such order. The High Court may,
if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal
within 60 days, allow it to be filed within a further period not exceeding 60 days.
DIRECTORATE OF ENFORCEMENT ( Chapter VI, Secs, 36 to 38)
Directorate of Enforcement (Sec.36)
Establishment: The Central Government shall establish a Directorate of Enforcement with a
Director and such other officers or class of officers as it thinks fit, for the purposes of this
Act[ Sec. 36(1)]. These officers shall be called Officers of Enforcement. The Central
Government may authorize the Director of Enforcement or an Additional Director of
Enforcement or Special Director of Enforcement or a Deputy Director of Enforcement to
appoint officers of Enforcement below the rank of an Assistant Director of Enforcement
[Sec. 36 (2)].
Exercise of powers and discharge of duties: Subject to such conditions and limitations as
the Central Government may impose an Officer of Enforcement may exercise the powers
and discharge the duties conferred or imposed on him under this act. [Sec. 36 (3)].
Power of Central Government to give directions
For the purposes of this Act, the Central Government may, from time to time, give to the
Reserve Bank such general or special directions as it thinks fit .The Reserve Bank shall, in
the discharge of its functions under this Act, comply with any such directions.
Contravention by companies
A person committing contravention of any of the provisions of this Act or any rule, direction
or order made there under may be a company. In such case, every person who, at the
contravention was committed, was in charge of, and was responsible to the company for the
conduct of the business of the company as well as the company, shall be deemed to be
guilty of the contravention took place without his knowledge or that he exercised due to
diligence to prevent such contravention.
Bar of legal proceedings
No suit, prosecution or other legal proceeding shall lie against the central Government or
the Reserve Bank or any officer of the Central Government or of the Reserve Bank or any
other person exercising any power or discharging any functions or performing any duties
under this Act for anything in good faith done or intended to be done under this act or any
rule, regulation, notification, direction or order made thereunder.
Rules and regulations to be laid before Parliament
Every Rule and Regulation made under this Act shall be laid, as soon as may be after, it is
made, before each House of Parliament, while it is in session for a total period of 30 days
may be comprised in one session or in two or more successive sessions. If both Houses
agree in making any modification in the Rule or Regulation, the Rule and Regulation shall

have effect only in such modified form. If both Houses agree that Rule or Regulation should
not be made, the Rule or Regulation shall thereafter be of no effect. However, any such
modification or annulment shall be without prejudice to the validity of anything previously
done under that Rule or Regulation.

MONEY MARKET
Money market is a market for short term loans or financial assets. It is a market for the
lending and borrowing of short term funds. It actually deals with near substitutes for money or
near money like trade bills, promissory note and government papers drawn for a short period
not exceeding one year. These short term instruments can be converted into cash readily
without any loss and at a low transaction cost.
Money market is the center for dealing mainly in short term money assets. It meets the short
term requirements of borrowers and provides liquidity or cash to lenders. It is the place where
short term surplus funds at the disposal of financial institutions and individuals are borrowed
by individuals, institutions and also, government.
DEF INITION
The RBI defines “a money market for short term financial substitutes for money, facilitates the
exchange of money for new financial clients in the primary market as also for financial clients,
already issue in the secondary market.”
Characteristic Features of a Developed Money Market
In order to fulfill the above objectives, the money market should be fully developed and
efficient. In every country of the world, some type of money market exists. Some of them are
highly developed while others are not well developed. Prof. S.N. Sen has described certain
essential features of a developed money market. They are as follows:
(i). Highly Organized Banking System
The commercial banks are the nerve centre of the whole money market. They are the
principal suppliers of short-term funds. Their policies regarding loans and advances have
impact on the entire money market. The commercial banks serve as vital link between the
central bank and the various segments of the money market. Consequently, a well developed
money market and a highly organized banking system co-exist
(ii). Presence of a Central Bank
The Central Bank acts as the banker’s bank. It keeps their cash reserves and provides them
financial accommodation in difficulties by discounting their eligible securities. Through its
open market operations, the central bank absorbs surplus cash during off-seasons and
provides additional liquidity in the busy seasons.
(iii). Availability of Proper Credit Instruments
It is necessary for the existence of developed money market a continuous availability of
readily acceptable negotiable securities such a bills of exchange, treasury bills etc. in the

market. There should be a number of dealers in the money market to transact in these
securities.
(iv). Existence of Sub-markets
The number of sub-markets determines the development of a money market. The larger the
number of sub-markets, the broader and more developed will be the structure of money
market. The several sub-markets together make a coherent money market. In an
underdeveloped money market, the various sub-markets, particularly the bill market, are
absent. Even if sub-markets exist, there is no co-ordination between them. Consequently,
different money rates prevail in the sub-markets and they remain unconnected with one
another.
(v). Ample Resources
There must be availability of sufficient funds to finance transactions in the sub-markets.
These funds may come from within the country and also from foreign countries.
The London, New York and Paris money markets attract funds from all over the world. The
underdeveloped money markets are starved of funds.
(vi). Existence of Secondary Market
There should be an active secondary market in these instruments.
(vii). Demand and Supply of Funds
There should be a large demand and supply of short-term funds. It presupposes the
existence of a large domestic and foreign trade. Besides, it should have adequate amount of
liquidity in the form of large amounts maturing within a short period.
Functions of Money Market
The money market performs the following functions:
1. Facilitate Liquidity: The basic function of money market is to facilitate adjustment of
liquidity position of commercial banks, business corporations & other non-bank financial
institutions.
2. Short-Term Surplus Funds: It provides outlets to commercial banks, business
corporations, non-bank financial concerns & other investors for their short-term surplus
funds.
3. Creation of Credit: The money market constitutes a highly efficient mechanism for credit
control. It serves as a medium through which the Central bank of the country exercises
control on the creation of credit.
4. Increase Investment: It enables businessmen to invest their temporary surplus for a
short-period.
5. Economic Development: It plays a vital role in the flow of funds to the most important
uses like capital formation.
COMPOSITION OF MONEY MARKET
It consists of a number of sub-markets which collectively constitute the money market. There
are other over should be competition within each sub-market as well as between different
sub-markets.the following are the main sub-markets of a money market:
1. Call money market
2. Commercial bills market or discount market

3. Acceptance market
4. Treasury bill market
CALL MONEY MARKET
The call money market refers to the market for extremely short period loans; say one day to
fourteen days. These loans are repayable on demand at the option of either the lender or the
borrower. As stated earlier, these loans are given to brokers and dealers in stock exchange.
Similarly with ‘surplus funds’ lend to other banks with ‘deficit funds’ in the call money market.
Thus, it provides an equilibrating mechanism for evening out short term surpluses and
deficits. Moreover, commercial banks can quickly borrow from the call market to meet their
statutory liquidity requirements.
OPERATIONS IN CALL MARKET
Borrowers and lenders in a call market contact each other over telephone. Hence, it is
basically over-the-telephone market. After negotiations over the phone, borrowers and
lenders arrive at a deal specifying the amount of loan and rate of interest After the deal is
over, the lender issues FBL cheque in favour of the borrower. The borrower in turn issues call
money borrowing receipt when the loan is repaid with interest, the lender returns the duly
discharged receipt.
ADVANTAGES
1. HIGH LIQUIDITY
Money lent in the call market can be called back at any time when needed. So, it is highly
liquid. It enables commercial banks to meet large sudden payments and remittances by
making a call on the market
2. HIGH PROFITABILITY
Banks can earn high profits by lending their surplus funds to the call market when call rates
are high and volatile. It offers a profitable parking place for employing the surplus funds of
banks temporarily.
3. MAINTENANCE OF SLR
Call market enables commercial banks to maintain their statutory reserve requirements.
Generally banks borrow on a large scale every reporting maintain idle cash to meet reserve
requirements. It will tell upon their profitability.
4. SAFE AND CHEAP
Though call loans are not secured, they are safe since the participants have a strong
financial standing .It is cheap in the sense brokers have been prohibited from operating in the
call market. Hence, banks need not pay brokerage on call money transactions.

5. ASSISTANCE TO CENTRAL BANK OPERATIONS
Call money market is the most sensitive part of any financial system. Changes in demand
and supply of funds are quickly reflected in call money rates and it gives indication to the
central bank to adopt appropriate monetary policy. Moreover, the existence of an efficient call
market helps the central bank to carry out its open market operations effectively and
successful.
DRAWBACKS
1. UNEVEN DEVELOPMENT
The call money market in India is confined to only big industrial and commercial centers like
Mumbai, Kolkata, Chennai, Delhi, Bangalore and Ahmadabad. Generally call market are
associated with stock exchange. Hence the market is not evenly developed.
2. LACK OF INTEGRATION
The call markets in different centers are not fully integrated. Besides, a large number of local
call markets exist without any integration
3. VOLATILITY IN CALL MONEY RATES
Another drawback is the volatile nature of the call money rates. Call rates vary to greater
extent in different seasons in different ways within a fortnight. The rates vary between 12%
and 85%.one cannot believe 85% being changed on call loans.
COMMERCIAL BILLS MARKET OR DISCOUNT MARKET
A commercial bill is one which arises out of a genuine trade transaction, i.e., credit
transaction. As soon as goods are sold on credit, the seller draws a bill on the buyer for the
amount due. The buyer accepts it immediately agreeing to pay the amount mentioned therein
after a certain specified date. Thus, a bill of exchange contains a written order from the
creditor to the debtor, to pay a certain sum, to a certain person, after a certain period. A bill of
exchange is a ‘self-liquidating’ paper and negotiable. It is drawn always for a short period
ranging between 3 months and 6 months.
Definition
Section 5 of the Negotiable Instruments Act defines a bill of exchange as follows:
“An instrument in writing containing a n unconditional order, signed by the maker, directing a
certain person to pay a certain sum of money only to, or to the order of a certain person or to
the bearer of the instrument”.
Types of Bills
Many types of bills are in circulation in a bill market. They can be broadly classified as
follows:
1. Demand and usance bills
2. Clean bills and documentary bills
3. Inland and foreign bills
4. Export bills and import bills
5. Indigenous bills

6. Accommodation bills and supply bills.
Demand and Usance Bills
Demand bills are otherwise called sight bills. These bills are payable immediately as soon as
they are presented to the drawee. No time of payment is specified and hence they are
payable at sight.
Usance bills are called time bills. These bills are payable immediately after the expiry of time
period mentioned in the bills. The period varies according to the established trade custom or
usage prevailing in the country.
Clean Bills and Documentary Bills
When bills have to be accompanied by documents of title to goods like Railway receipt, Lorry
receipt, Bill of Lading etc., the bills are called documentary bills. These bills can be further
classified into D/A bills and D/P bills. In the case of D/A bills, the documents accompanying
bills have to be delivered to the drawee immediately after his acceptance of the bill.
On the other hand, the documents have to be handed over to the drawee only against
payment in the case of D/P bills. The document will be retained by the banker till the payment
of such bills. When bills are drawn without accompanying any document they are called
clean bills. In such a case, documents will be directly sent to the drawee.
Inland and Foreign Bills
Inland bills are those drawn upon a person resident in India and are payable in India. Foreign
bills are drawn outside India and they may be payable either in India or outside India. They
must be drawn upon a person resident in India also. Foreign bills have their origin
outside India. They also include bills drawn in India but made payable outside India.
Export Bills and Import Bills
Export bills are also drawn by Indian exporters on importers outside India and import bills are
drawn on Indian importers in India by exporters outside India.
Indigenous Bills
Indigenous bills are also drawn and accepted according to native custom or usage of trade.
These bills are popular among indigenous bankers only. In India, they are called ‘hundis’.
The hundis are known by various names such as ‘Shahjog’, ‘Namjog’, ‘Jokhani’, ‘Termainjog’,
‘Darshani’, ‘Dhanijog’ and so on.
Accommodation Bills and Supply Bills
If bills do not arise out of genuine trade transactions, they are called accommodation bills.
They are known as ‘kite bills’ or ‘wind bills’. Two parties draw bills on each other purely for the
purpose of mutual financial accommodation. These bills are discounted with bankers and the
proceeds are shared among themselves. On the due dates, they are paid.
Supply bills are those drawn by suppliers or contractors on the Government departments for
the goods supplied by them. These bills are neither accepted by the departments nor
accompanied by documents of title to goods. So, they are not considered as negotiable
instruments. These bills are useful only for the purpose of getting advances from commercial
banks by creating a charge on these bills.
ACCEPTANCE MARKET
The acceptance market refers to the market where short-term genuine trade bills are
accepted by financial intermediaries. All trade bills cannot be discounted easily because the
parties to the bills may not be financially sound. In case such bills are accepted by financial
intermediaries like banks, the bills can earn a good name & reputation & such bills can be
readily discounted anywhere.

Advantages or Importance:
In India, commercial banks play a significant role in this market due to the following
advantages:
(i). Liquidity
Bills are highly liquid assets. In times of necessity, bills can be converted into cash readily by
rediscounting them with the central bank.
(ii). Self-Liquidating & Negotiable Asset
Bills are self-liquidating in character since they have a fixed tenure. Moreover, they are
negotiable instruments & hence they can be transferred freely by a mere delivery or by
endorsement & delivery.
(iii). Certainty of Payment
Bills are drawn & accepted by business people. Generally, business people are used to
keeping their words & the use of bills imposes a strict financial discipline on them. Hence,
bills would be honored on the due date.
(iv). Ideal Investment
Bills are for periods not exceeding 6 months. They represent advances for a definite period.
This enables financial institutions to invest their surplus funds profitably by selecting bills of
different maturities.
(v). Simple Legal Remedy
In case the bills are dishonored, the legal remedy is simple. Such dishonoured bills have to
be simply noted and protested and the whole amount should be debited to the customer’s
accounts.
(vi). High and Quick Yield
The financial institutions earn a high and quick yield. The discount is deducted at the time of
discounting itself whereas in the case of other loans and advances, interest is payable only
when it is due.
(vii). Central Bank Control
The central bank can easily influence the money market by manipulating the Bank rate or the
rediscounting rate.
Drawbacks
The reasons for the slow growth are the following:
(i). Absence of Bill Culture
Business people in India prefer O.D. and the cash credit to bill financing. Therefore, banks
usually accept bills for the conversion of cash credits and overdrafts of their customers.
(ii). Absence of Rediscounting among Banks
There is no practice of re-discounting of bills among banks who need funds and those who
have surplus funds. In order to enlarge the rediscounting facility, the RBI has permitted
financial institutions like LIC, UTI, GIC and ICICI to rediscount genuine eligible trade bills of
commercial banks.
(iii). Stamp Duty
Stamp duty discourages the use of bills. Moreover, stamp papers of required denomination
are not available.
(iv). Absence of Secondary Market
There is no active secondary market for bills. Rediscounting facility is available in important
centers and that too is restricted to the apex level financial institutions. Hence, the size of the
bill market has been curtailed to a large extent.

(v). Difficulty in Ascertaining Genuine Trade Bills
The financial institutions have to verify the bills so as to ascertain whether they are genuine
trade bills and not accommodation bills. For this purpose, invoices have to be scrutinized
carefully. It involves additional work.
(vi). Limited Foreign Trade
In many developed countries, bill markets have been established mainly for financing foreign
trade. Unfortunately, in India, foreign trade as a percentage to national income remains small
and it is reflected in the bill market also.
(vii). Absence of Acceptance Services
There are no discount houses or acceptance houses in India. Hence specialized services are
not available in the field of discounting or acceptance.
(viii). Attitude of Banks
Banks are shy of rediscounting bills even with the central bank. They have tendency to hold
the bills till maturity and hence it affects the velocity of circulation of bills. Again, banks prefer
to purchase bill instead of discounting them.

TREASURY BILL MARKET
Just like commercial bills which represents commercial debt, treasury bills represents shortterm borrowing of the government. Treasury bill market refers to the market where treasury
bills are bought and sold. Treasury bills are very popular and enjoy a higher degree of
liquidity since they are issued by the government.
Meaning and features
A treasury bill is nothing but a promissory note issued by the government under discount for
a specified period stated therein. The government promises to pay the specified amount
mentioned therein to the bearer of the instrument on the due date. The period does not
exceed a period of one year. It is a purely a finance bill since it does not arise out of any
trade transaction. It does not require any ‘grading’ or ‘endorsement’ or ‘acceptance’ since it is
a claim against the government.
Treasury bills are issued only by the RBI on behalf of the government. Treasury bills are
issued for meeting temporary government deficits. The treasury bill rate or the rate of
discount is fixed by the RBI from time-to-time. It is the lowest one in the entire structure of
interest rates in the country because of short-term maturity and high degree of liquidity and
security.
Types of treasury bills
In India there are two types of treasury bills viz, (i) ordinary or regular and (ii) ‘ad hoc’ known
as ‘ad hocs’. Ordinary treasury bills are issued to the public and other financial institutions for
meeting the short-term financial requirements of the central government. These bills are

freely marketable and they can be bought and sold at any time and they have secondary
market also.
On the other hand ‘ad hocs’ are always issued in favour of the RBI only. They are not sold
through tender or auction. They are purchased by the RBI on tap and the RBI is authorized to
issue currency notes against them.
On the basis of periodicity, treasury bills may be classified into three. They are:
i. 91days treasury bills,
ii. 182 days treasury bills, and
iii. 364 days treasury bills.

Importance or Merits
(i) Safety
Investments in TBs are highly safe since the payment of interest and repayment of principal
are assured by the Government. They carry zero default risk since they are issued by the
RBI for and on behalf of the Central Government.
(ii) Liquidity
Investments in TBs are also highly liquid because they can be covered into cash at any time
at the option of the investors. The DFHI announces daily buying the selling rates for TBs.
they can be discounted with the RBI and further refinance facility is available from the RBI
against TBs. Hence there is a ready market for TBs.
(iii) Ideal Short-Term Investment
Idle cash can be profitably invested for a very short period in TBs. TBs are available on tap
throughout the week at specified rates. Financial institutions can employ their surplus funds
on any day. The yield on TBs is also assured.
(iv) Ideal Fund Management
TBs are available on tap as well as through periodical auctions. They are also available in the
secondary market. Fund managers of financial institutions build up a portfolio of TBs in such
a way that the dates of maturities of TBs may be matched with the dates of payment of their
liabilities like deposits of short term maturities. Thus, TBs help financial managers to manage
the funds effectively and profitability.
(v) Statutory Liquidity Requirement

As per the RBI directives, commercial banks have to maintain SLR (Statutory Liquidity Ratio)
and for measuring this ratio investments in TBs are taken into account. TBs are eligible
securities for SLR purposes. Moreover, to maintain CRR (Cash Reserve Ratio). TBs are very
helpful. They can be readily converted into cash and thereby CRR can be maintained.
(vi) Source of Short-Term funds
The government can raise short term funds for meetings it temporary budget deficits through
the issue of TBs. it is a source of cheap finance to the Government since the discount rates
are very low.
(vii) Non-Inflationary Monetary tool
TBs enable the Central Government to support its monetary policy in the economy. For
instant excess liquidity, if any, in the economy can be absorbed through the issue of TBs.
Moreover, TBs are subscribed by investors other than the RBI. Hence they can not be
monetized and their issue does not lead to any inflationary pressure at all.
(viii) Hedging Facility
TBs can be used as a hedge against heavy interest rate fluctuations in the call loan market.
When the call rate are very high, money can be raised quickly against TBs and invested in
the call money market and vice-versa. TBs can be used in ready forward transactions.
Defects
(i) Poor Yield
The yield from TBs is the lowest. Long term Government securities fetch more interest and
hence subscriptions for TBs are on the decline in recent times.
(ii) Absence of Competitive Bids
Though TBs are sold through auction in order to ensure market rates for the investors, in
actual practice, competitive bids are conspicuously absent. The RBI is compelled to accept
these non-competitive bids. Hence adequate return is not available. It makes TBs unpopular.
(iii) Absence of Active Trading
Generally, the investors hold TBs till maturity and they do not come for circulation. Hence,
active trading in TBs is adversely affected.
STRUCTURE OF MONEY MARKET:
Organized sector:
The segment of money market which is under the control of RBI is known as organized
market. It includes:

1. Reserve bank of India: the reserve bank of India is the highest institution of the Indian
money market. This is the central bank of the country. The reserve bank of India plays a
dominant role in controlling the money market.
2. Public sector banks: the public sector banks are those banks whose ownership lies with
the government. The government controls them. In India, in1969, 14th and in 1980, 6 banks
were nationalized all these banks are in the public sector. Their chief aim is social service.
After the merger of the new bank of India with the Punjab national bank in 1993, their number
now stands at 19. In addition to this the state bank of India and its subsidiaries are also
included in the same category. Their number is 8. In this way, a total number of 27 banks are
working in the public sector.
3. Private sector banks: private sector banks are those banks which are owned by private
individuals. They run them. Such banks include the Jammu and Kashmir bank ltd.
The Punjab bank ltd., etc. an individual has control over the bank to the extent of the shares
he holds in it. Their main aim is to earn profit.
4. Co-operative banks: co-operative banks are organized collectively by some individuals.
These people alone run these banks. The aim of these banks is to help their own members.
They include the state co-operative bank, the central district co-operative bank and primary
loan committees.
UNORGANISED SECTOR
The segment of money market which is not under control of RBI is known as the unorganized
segment of Indian money market. It consists of:
1. Moneylenders: money lenders are of three types:
 Professional moneylenders
 Itinerant moneylenders
 Non-professional moneylenders.
Professional money lenders are those whose main activity is money lending. Pathans and
kabulls are itinerant money lenders charge very high rate of interest; they do not receive
deposits from people. Their lending activities are based on their own funds and interest
receipts. Mainly economically weaker section of people goes to these moneylenders for
consumption and production loans.
2. Indigenous bankers: since commercial banks do not provide unsecured loans, the credit
needs of a large section of small traders remain unfulfilled. Indigenous bankers to some
extent bridge this gap, since their operation and establishment costs are lower. Although they
do some important activity, they do not care about the end use of these loans and they are
not regulated by RBI. There are mainly four types of indigenous bankers, viz., Guajarati
shroffs, multani or shikarpuri shroffs, south Indian chettiars and Marwari kayas. Indigenous
bankers accept deposits and provide loans to individuals or organizations.

3. Unregulated non-bank financial intermediaries: most notable unregulated non-bank
financial intermediaries are chit funds and Nidhis. Chit funds have regular members making
periodical subscriptions to the funds. Some members of the funds, selected by some
previously agreed criteria are then allotted the fund. Nidhis are also like chit funds, as their
principal source of capital base is provided by its members and some of its members receive
the loan. Both chit funds and Nidhis operate mainly in south India and RBI has no control on
them.
Recently changes in money market:
1.

Deregulation of the interest rate: govt. Has adopted an interest rate policy of liberal nature.
it lifted the ceiling rates of the call money market,short term deposits ,treasury bills
etc.currently interest rates are determined by working of market forces except few
regulations.

2.

Money Market Mutual Fund:MMMFs are allowed to sell units to corporate & individuals. the
upper limit of 50 crore has been lifted.

3.

Establishment of the DFI: IT WAS SET UP IN APRIL 1988 to impart liquidity in the market.

4.

Liquidity Adjustment Facility: through the LAF,RBI remains in the money market on a
continuous basis through repo transactions. LAF adjusts the liquidity in the market trough
absorption or injection of financial resources.

5.

Electronic truncations:

6.

Establishment of the CCIL: the Clearing Corporation of India was set up in april 2001. CCIL
clears all the transactions regarding govt. Securities & repose reported on the Negotiated
Dealing System.

7.

Development of new market instruments: treasury bills of various durations, commercials
papers, certification of deposits ,MMMFs etc.
Conclusion: These are major reforms in Indian money market system. Except these reforms,
stamp duty reforms, floating rate bonds etc. Are other prominent reforms in money market.
Thus we can say Indian Money Market is developing with a good speed.

Capital Market
CAPITAL MARKET :Capital market deals with medium term and long term funds. It refers to all facilities
and the institutional arrangements for borrowing and lending term funds (medium term and
long term). The demand for long term funds comes from private business corporations,
public corporations and the government. The supply of funds comes largely from individual
and institutional investors, banks and special industrial financial institutions and
Government.
STRUCTURE / CLASSIFICATION OF CAPITAL MARKET :Capital market is classified in two ways

1)

CAPITAL MARKET IN INDIA

a)

Gilt - Edged Market :-

b)

c)

d)

2)

Gilt - Edged market refers to the market for government and semi-government
securities, which carry fixed rates of interest. RBI plays an important role in this market.
Industrial Securities Market :It deals with equities and debentures in which shares and debentures of existing
companies are traded and shares and debentures of new companies are bought and sold.
Development Financial Institutions :Development financial institutions were set up to meet the medium and long-term
requirements of industry, trade and agriculture. These are IFCI, ICICI, IDBI, SIDBI, IRBI,
UTI, LIC, GIC etc. All These institutions have been called Public Sector Financial
Institutions.
Financial Intermediaries :Financial Intermediaries include merchant banks, Mutual Fund, Leasing companies
etc. they help in mobilizing savings and supplying funds to capital market.
The Second way in which capital market is classified is as follows :CAPITAL MARKET IN INDIA
Primary market
Secondary market
a)
Primary Market :Primary market is the new issue market of shares, preference shares and debentures
of non-government public limited companies and issue of public sector bonds.
b)
Secondary Market
This refers to old or already issued securities. It is composed of industrial security
market or stock exchange market and gilt-edged market.
ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA :Capital market has a crucial significance to capital formation. For a speedy economic
development adequate capital formation is necessary. The significance of capital market in
economic development is explained below :1.
Mobilisation Of Savings And Acceleration Of Capital Formation :In developing countries like India the importance of capital market is self evident. In this
market, various types of securities helps to mobilise savings from various sectors of
population. The twin features of reasonable return and liquidity in stock exchange are
definite incentives to the people to invest in securities. This accelerates the capital
formation in the country.
2.
Raising Long - Term Capital :The existence of a stock exchange enables companies to raise permanent capital. The
investors cannot commit their funds for a permanent period but companies require funds
permanently. The stock exchange resolves this dash of interests by offering an opportunity
to investors to buy or sell their securities, while permanent capital with the company
remains unaffected.
3.
Promotion Of Industrial Growth :The stock exchange is a central market through which resources are transferred to the
industrial sector of the economy. The existence of such an institution encourages people to
invest in productive channels. Thus it stimulates industrial growth and economic
development of the country by mobilising funds for investment in the corporate securities.
4.
Ready And Continuous Market :-

The stock exchange provides a central convenient place where buyers and sellers can
easily purchase and sell securities. Easy marketability makes investment in securities more
liquid as compared to other assets.
5.
Technical Assistance :An important shortage faced by entrepreneurs in developing countries is technical
assistance. By offering advisory services relating to preparation of feasibility reports,
identifying growth potential and training entrepreneurs in project management, the financial
intermediaries in capital market play an important role.
6.
Reliable Guide To Performance :The capital market serves as a reliable guide to the performance and financial position of
corporates, and thereby promotes efficiency.
7.

Proper Channelisation Of Funds :-

The prevailing market price of a security and relative yield are the guiding factors for the
people to channelise their funds in a particular company. This ensures effective utilisation of
funds in the public interest.
8.
Provision Of Variety Of Services :The financial institutions functioning in the capital market provide a variety of services such
as grant of long term and medium term loans to entrepreneurs, provision of underwriting
facilities, assistance in promotion of companies, participation in equity capital, giving expert
advice etc.
9.
Development Of Backward Areas :Capital Markets provide funds for projects in backward areas. This facilitates economic
development of backward areas. Long term funds are also provided for development
projects in backward and rural areas.
10.
Foreign Capital :Capital markets makes possible to generate foreign capital. Indian firms are able to
generate capital funds from overseas markets by way of bonds and other securities.
Government has liberalised Foreign Direct Investment (FDI) in the country. This not only
brings in foreign capital but also foreign technology which is important for economic
development of the country.
11.
Easy Liquidity :With the help of secondary market investors can sell off their holdings and convert them into
liquid cash. Commercial banks also allow investors to withdraw their deposits, as and when
they are in need of funds.
12.
Revival Of Sick Units :The Commercial and Financial Institutions provide timely financial assistance to viable sick
units to overcome their industrial sickness. To help the weak units to overcome their
financial industrial sickness banks and FIs may write off a part of their loan.
FACTORS CONTRIBUTING TO THE GROWTH AND DEVELOPMENT OF CAPITAL
MARKET :1)
Growth Of Development Banks And Financial Institutions :For providing long term funds to industry, the government set up Industrial Finance
Corporation in India (IFCI) in 1948. This was followed by a number of other development
banks and institutions like the Industrial Credit and Investment Corporation of India (ICICI)
in 1955, Industrial Development Bank of India (IDBI) in 1964, Industrial Reconstruction
Corporation of India (IRCI) in 1971, Foreign Investment Promotion Board in 1991, Over the
Counter Exchange of India (OTCEI) in 1992 etc. In 1969, 14 major commercial banks were
nationalised. Another 6 banks were nationalised in 1980. These financial institutions and
banks have contributed in widening and strengthening of capital market in India.

2)
Setting Up Of SEBI :The Securities Exchange Board of India (SEBI) was set up in 1988 and was given statutory
recognition in 1992.
3)
Credit Rating Agencies :Credit rating agencies provide guidance to investors / creditors for determining the credit
risk. The Credit Rating Information Services of India Limited (CRISIL) was set up in 1988
and Investment Information and Credit Rating Agency of India Ltd. (ICRA) was set up in
1991. These agencies are likely to help the development of capital market in future.
4)
Growth Of Mutual Funds :The mutual funds collects funds from public and other investors and channelise them into
corporate investment in the primary and secondary markets. The first mutual fund to be set
up in India was Unit Trust of India in 1964. In 2007-08 resources mobilised by mutual funds
were Rs. 1,53,802 crores.
5)
Increasing Awareness :During the last few years there have been increasing awareness of investment
opportunities among the public. Business newspapers and financial journals (The Economic
Times, The Financial Express, Business India, Money etc.) have made the people aware of
new long-term investment opportunities in the security market.
6)
Growing Public Confidence
A large number of big corporations have shown impressive growth. This has helped in
building up the confidence of the public. The small investors who were not interested to buy
securities from the market are now showing preference in favour of shares and debentures.
As a result, public issues of most of the good companies are now over-subscribed many
times.
7)
Legislative Measures :The government passed the companies Act in 1956. The Act gave powers to government to
control and direct the development of the corporate enterprises in the country. The capital
Issues (control) Act was passed in 1947 to regulate investment in different enterprises,
prevent diversion of funds to non-essential activities and to protect the interest of investors.
The Act was replaced in 1992.
8)
Growth Of Underwriting Business :The growing underwriting business has contributed significantly to the development of
capital market.
9)
Development Of Venture Capital Funds :Venture capital represents financial investment in highly risky projects with a hope of
earning high returns After 1991, economic liberalisation has made possible to provide
medium and long term funds to those firms, which find it difficult to raise funds from primary
markets and by way of loans from FIs and banks.
10) Growth Of Multinationals (MNCs) :The MNCs require medium and long term funds for setting up new projects or for expansion
and modernisation. For this purpose, MNCs raise funds through loans from banks and FIs.
Due to the presence of MNCs, the capital market get a boost.
11) Growth Of Entrepreneurs :Since 1980s, there has been a remarkable growth in the number of entrepreneurs. This
created more demand for short term and long term funds. FIs, banks and stock markets
enable the entrepreneurs to raise the required funds. This has led to the growth of capital
market in India.
12) Growth Of Merchant Banking :The credit for initiating merchant banking services in India goes to Grindlays Bank in
1967,followed by Citibank in 1970. Apart from capital issue management, merchant banking
divisions provide a number of other services including provision of consultancy services
relating to promotion of projects, corporate restructuring etc.

REFORMS I DEVELOPMENTS IN CAPITAL MARKET SINCE 1991:The government has taken several measures to develop capital market in post-reform
period, with which the capital market reached new heights. Some of the important
measures are
1) Securities And Exchange Board Of India (SEBI) :SEBI became operational since 1992. It was set with necessary powers to regulate the
activities connected with marketing of securities and investments in the stock exchanges,
merchant banking, portfolio management, stock brokers and others in India. The objective
of SEBI is to protect the interest of investors in primary and secondary stock markets in the
country.
2) National Stock Exchange (NSE) :The setting up to NSE is a landmark in Indian capital markets. At present, NSE is the
largest stock market in the country. Trading on NSE can be done throughout the country
through the network of satellite terminals. NSE has introduced inter-regional clearing
facilities.
3) Dematerialisation Of Shares :Demat of shares has been introduced in all the shares traded on the secondary stock
markets as well as those issued to the public in the primary markets. Even bonds
and debentures are allowed in demat form. The advantage of demat trade is that it involves
Paperless trading.
4) Screen Based Trading :The Indian stock exchanges were modernised in 90s, with Computerised Screen Based
Trading System (SBTS), It cuts down time, cost, risk of error and fraud and there by leads
to improved operational efficiency. The trading system also provides complete online market
information through various inquiry facilities.
5) Investor Protection :The Central Government notified the establishment of Investor Education and Protection
Fund (IEPF) with effect from 1st Oct. 2001: The IEPF shall be credited with amounts in
unpaid dividend accounts of companies, application moneys received by companies for
allotment of any securities and due for refund, matured deposits and debentures with
companies and interest accrued there on, if they have remained unclaimed and unpaid for a
period of seven years from the due date of payment. The IEPF will be utilised for promotion
of awareness amongst investors and protection of their interests.
6) Rolling Settlement :Rolling settlement is an important measure to enhance the efficiency and integrity of the
securities market. Under rolling settlement all trades executed on a trading day (T) are
settled after certain days (N). This is called T + N rolling settlement. Since April 1, 2002
trades are settled' under T + 3 rolling settlement. In April 2003, the trading cycle has been
reduced to T + 2 days. The shortening of trading cycle has reduced undue speculation on
stock markets.
?
7) The Clearing Corporation Of India Limited (CCIL) :The CCIL was registered in 2001, under the Companies Act, 1956 with the State Bank of
India as the Chief Promoter. The CCIL clears all transactions in government securities and
repos and also Rupee / US $ forex spot and forward deals All trades in government
securities below Rs. 20 crores would be mandatorily settled through CCIL, white those
above Rs. 20 crores would have the option for settlement through the RBI or CCIL.
8) The National Securities Clearing Corporation Limited (NSCL) :The NSCL was set up in 1996. It has started guaranteeing all trades in NSE since July
1996. The NSCL is responsible for post-trade activities of NSE. It has put in place a
comprehensive risk management system, which is constantly monitored and upgraded to
pre-expect market failures.
9) Trading In Central Government Securities :-

In order to encourage wider participation of all classes of investors, Including retail
investors, across the country, trading in government securities has been introduced from
January 2003. Trading in government securities can be carried out through a nation wide,
anonymous, order-driver, screen-based trading system of stock exchanges in the same way
in which trading takes place in equities.
10) Credit Rating Agencies :Various credit rating agencies such as Credit Rating Information services of India Ltd.
(CRISIL – 1988), Investment Information and credit Rating Agency of India Ltd. (ICRA –
1991), etc. were set up to meet the emerging needs of capital market. They also help
merchant bankers, brokers, regulatory authorities, etc. in discharging their functions related
to debt issues.
11) Accessing Global Funds Market :Indian companies are allowed to access global finance market and benefit from the lower
cost of funds. They have been permitted to raise resources through issue of American
Depository Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Currency
Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs). Further Indian
financial system is opened up for investments of foreign funds through Non-Resident
Indians (NRIs), Foreign Institutional investors (FIls), and Overseas Corporate Bodies
(OCBs).
12) Mutual Funds :Mutual Funds are an important avenue through which households participate in the
securities market. As an investment intermediary, mutual funds offer a variety of services /
advantages to small investors. SEBI has the authority to lay down guidelines and supervise
and regulate the working of mutual funds.
13) Internet Trading :Trading on stock exchanges is allowed through internet, investors can place orders with
registered stock brokers through internet. This enables the stock brokers to execute the
orders at a greater pace.
14) Buy Back Of Shares :Since 1999, companies are allowed to buy back of shares. Through buy back, promoters
reduce the floating equity stock in market. Buy back of shares help companies to overcome
the problem of hostile takeover by rival firms and others.
15)
Derivatives Trading :Derivatives trading in equities started in June 2000. At present, there are four equity
derivative products in India Stock Futures, Stock Options, Index Futures, Index Options.
Derivative trading is permitted on two stock exchanges in India i.e. NSE and BSE. At
present in India, derivatives market turnover is more than cash market.
16)
PAN Made Mandatory :In order to strengthen the “Know your client" norms and to have sound audit trail of
transactions in securities market, PAN has been made mandatory with effect from January
1, 2007.

2)
3)
1.
2.

. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
SEBI was established as a non-statutory board in 1988 and in January 1992 it was made a
Statutory body. The main objectives of SEBI are
1) To protect the interest of investors.
To bring professionalism in the working of intermediaries in capital markets (brokers,
mutual funds, stock exchanges, demat depositories etc.).
To create a good financial climate, so that companies can raise long term funds through
issue of securities (shares and debentures).
In 2002, SEBI is further empowered to do the following:To file complaints in courts and to notify its regulations without prior approval of
government.
To regulate issue of capital and transfer of securities.

3.

To impose monetary penalties on various intermediaries and other participants for a
specified range of violations.
4. To issue direction to and to call for documents from all intermediaries.
B.
ROLE I POWERS AND FUNCTIONS OF SEBI :1.

Protection Of Investor's Interest :SEBI frames rules and regulations to protect the interest of investors.
It monitors whether the rules and regulations are being followed by the concerned parties
i.e., issuing companies, mutual funds, brokers and others. It handles investor grievances or
complaints against brokers, securities issuing companies and others.

2.

Restriction On Insider Trading :SEBI restricts insider trading activity. It prohibits dealing, communication or counselling on
matters relating to insider trading. SEBI’s regulation states that no insider (connected with
the company) shall - either on his own behalf or on behalf of any other person, deal in
securities of a company listed on any stock exchange on the basis of any unpublished price
sensitive information.

3.

Regulates Stock Brokers Activities :SEBI has also laid down regulations in respect of brokers and sub-broker. No brokers or
sub-broker can buy, sell or deal in securities without being a registered member of SEBI. It
has also made compulsory for brokers to maintain separate accounts for their clients and
for themselves. They must also have their books audited and audit reports filed with SEBI.

4.

Regulates Merchant Banking :SEBI has laid down regulations in respect of merchant banking activities in India. The
regulations are in respect of registration, code of conduct to be followed, submission of halfyearly results and so on

5.

Dematerialisation Of Shares :Demat of shares has been introduced in all the shares traded on secondary stock markets
as well as those issued to public in prirriary markets. Even bonds and debentures are
allowed in demat form.

6.

Guidelines On Capital Issues :SEBI has framed necessary guidelines in connection with capital issues. The guidelines are
applicable to :- First Public Issue of New Companies, First Public Issue by Existing Private /
Closely held Companies, Public Issue by Existing Listed Companies.

7.

Regulates Working Of Mutual Funds :SEBI regulates the working of mutual funds. SEBI has laid down rules and regulations that
are to be followed by mutual funds. SEBI may cancel the registration of a mutual fund, if it
fails to comply with the regulations.

8.

Monitoring Of Stock Exchanges:To improve the working of stock markets, SEBI plays an important role in monitoring stock
exchanges. Every recognised stock exchange has to furnish to SEBI annually with a report
about its activities during the previous year.

9.

Secondary Market Policy :SEBI is responsible for all policy and regulatory issues for secondary market and new
investments products. It is responsible for registration and monitoring of members of stock
exchanges, administration of some of stock exchanges and monitoring of price movements
and insider trading.

10. Investors Grievances Redressal :SEBI has introduced an automated complaints handling system to deal with investor
complaints. It assist investors who want to make complaints to SEBI against listed
companies.

11.

Institutional Investment Policy :SEBI looks after institutional investment policy with respect to domestic mutual funds and
Foreign Institutional Investors (FIIs). It also looks after registration, regulation and
monitoring of FIls and domestic mutual funds.

12.

Takeovers And Mergers :To protect the interest of investors in case of takeovers and mergers SEBI has issued a set
of guidelines. These guidelines are to be followed by corporations at the time of takeovers
and mergers.

13. Reforms In Capital Market :SEBI has introduced many reforms in Capital Market. Some of them are :a) Demat of shares
b) PAN made compulsory.
c) Buy back of shares allowed.
d) Corporate Governance introduced
e) Transparency rules in Brokers Transactions.
14. Other Functions :a) It promotes investor’s education, and also training of intermediaries in securities market.
b) It performs functions and exercise powers under provisions of Capital Issues (Control) Act
1947, Securities Contracts Act 1956 etc.
c) It promotes and regulates self-regulatory organisations.
d) It prohibits fraudulent and unfair trade practices in securities Market
e) It promotes investors education and training in securities market.
APPRAISAL OF SEBI'S WORK
1)

Large Number Of Rules :There are large .number of rules prescribed by SEBI. These have also been changing from
time to time. This has created a high level of uncertainty and confusion. It is very difficult to
determine what rules are currently in operation.
2) Less Protection To Small Investors :SEBI is not really serious about reforming the system and protecting the individual and
small investors. It has failed to penalise the people responsible for causing abnormal price
fluctuations on stock market.
3) False Claim On High Success Rate :SEBI’s Annual Report, in 1995-96 claims, a very high success rale in resolving investor
complaints. But in reality it is not so.
4)

Insufficient Power :SEBI has often complained of having insufficient authority and power. It should become
more effective, efficient, socially-accountable and small - investor - friendly.
working is quite good. Liquidity in market has improved various segments have also
become interlinked. It provides a world class trading and’ settlement system.

5)

Corporate – Friendly regulation :The regulatory ineffectiveness of SEBI in certain areas has been due to its concentration on
symptoms rather than the root causes.
POLICY MEASURES BY SEBI

1)

2)

Entry Norms :SEBI has issued various guidelines for tightening the entry norms for companies accessing
capital market.
Norms For Share Transfer :-

SEBI has tightened the norms for transfer of shares among group companies and takeover
of companies.
3)

Penal Margins :SEBI has introduced imposition of penal margin on net undelivered portion at the end of
settlement.
4) Screen Based Trading :SEBI allowed stock exchanges to expand their online screen based trading terminals tolocations outside their jurisdiction subject to conditions.
5)

Intermediaries :SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer
agents, trustee of trust funds, registrars to an issue, merchant banks, underwriters and
other intermediaries who may be associated with securities market.
6) Prohibition Of Fraudulent And Unfair Practices :SEBI regulates prohibition of Fraudulent and unfair trade practices which have imposed
prohibition against market manipulators and unfair practices relating to securities.
7)

Steps To Improve Corporate Governance :Sufficient disclosures are made mandatory for companies at the stage of public issue.
Listed companies are required to make disclosures on continuing basis on dividend, bonus
etc.

8)

Comprehensive Risk Management And Improvement In Disclosure :-

In July 2002, SEB| set up a system EDIFAR (Electronic Data Information Filing And
Retrieval) through which firms would electronically file mandatory disclosures to SEBI and
these documents would be available to individuals across the country over the Internet, with
a near-zero delay.
9) Raising Funds From Abroad :Indian companies are allowed to raise funds from abroad, through American / Global
Depository Receipts, Foreign Currency Convertible Bonds.and External Commercial
Borrowings.
10)
Norms For Custodian Of Securities And Depositories :SEBI notified two regulations namely, Custodian of Securities Regulation, and Depositories
and Participant Regulations.
Introduction - Types Of Financial Institutions And Their Roles
A financial institution is an establishment that conducts financial transactions such as
investments, loans and deposits. Almost everyone deals with financial institutions on a
regular basis. Everything from depositing money to taking out loans and exchanging
currencies must be done through financial institutions. Here is an overview of some of the
major categories of financial institutions and their roles in the financial system.

Commercial Banks
Commercial banks accept deposits and provide security and convenience to their
customers. Part of the original purpose of banks was to offer customers safe keeping for
their money
Commercial banks also make loans that individuals and businesses use to buy goods or

expand business operations, which in turn leads to more deposited funds that make their
way to banks. If banks can lend money at a higher interest rate than they have to pay for
funds and operating costs, they make money.
Banks also serve often under-appreciated roles as payment agents within a country and
between nations. Not only do banks issue debit cards that allow account holders to pay for
goods with the swipe of a card, they can also arrange wire transfers with other institutions.
Banks essentially underwrite financial transactions by lending their reputation and credibility
to the transaction; a check is basically just a promissory note between two people, but
without a bank's name and information on that note, no merchant would accept it. As
payment agents, banks make commercial transactions much more convenient; it is not
necessary to carry around large amounts of physical currency when merchants will accept
the checks, debit cards or credit cards that banks provide.

Investment Banks
An investment bank is a financial intermediary that performs a variety of services for
businesses and some governments. These services include underwriting debt and equity
offerings, acting as an intermediary between an issuer of securities and the investing
public, making markets, facilitating mergers and other corporate reorganizations, and acting
as a broker for institutional clients. They may also provide research and financial advisory
services to companies. As a general rule, investment banks focus on initial public
offerings (IPOs) and large public and private
Generally speaking, investment banks are subject to less regulation than commercial
banks. While investment banks operate under the supervision of regulatory bodies, like
the Securities and Exchange Commission, FINRA, and the U.S. Treasury, there are
typically fewer restrictions when it comes to maintaining capital ratios or introducing new
products.

Insurance Companies
Insurance companies pool risk by collecting premiums from a large group of people who
want to protect themselves and/or their loved ones against a particular loss, such as a fire,
car accident, illness, lawsuit, disability or death. Insurance helps individuals and companies
manage risk and preserve wealth. By insuring a large number of people, insurance
companies can operate profitably and at the same time pay for claims that may arise.
Insurance companies use statistical analysis to project what their actual losses will be within
a given class. They know that not all insured individuals will suffer losses at the same time

or at all.

Brokerages
A brokerage acts as an intermediary between buyers and sellers to facilitate securities
transactions. Brokerage companies are compensated via commission after the transaction
has been successfully completed. For example, when a trade order for a stock is carried
out, an individual often pays a transaction fee for the brokerage company's efforts to
execute the trade.
A brokerage can be either full service or discount. A full service brokerage provides
investment advice, portfolio management and trade execution. In exchange for this high
level of service, customers pay significant commissions on each trade. Discount brokers
allow investors to perform their own investment research and make their own decisions.
The brokerage still executes the investor's trades, but since it doesn't provide the other
services of a full-service brokerage, its trade commissions are much smaller.
Investment Companies
An investment company is a corporation or a trust through which individuals invest in
diversified, professionally managed portfolios of securities by pooling their funds with those
of other investors. Rather than purchasing combinations of individual stocks and bonds for
a portfolio, an investor can purchase securities indirectly through a package product like a
mutual fund.

There are three fundamental types of investment companies: unit investment trusts (UITs),
face amount certificate companies and managed investment companies. All three types
have the following things in common:


An undivided interest in the fund proportional to the number of shares held



Diversification in a large number of securities



Professional management



Specific investment objectives

Let's take a closer look at each type of investment company.

Unit Investment Trusts (UITs)

A unit investment trust, or UIT, is a company established under an indenture or similar
agreement. It has the following characteristics:


The management of the trust is supervised by a trustee.



Unit investment trusts sell a fixed number of shares to unit holders, who receive a
proportionate share of net income from the underlying trust.



The UIT security is redeemable and represents an undivided interest in a specific
portfolio of securities.



The portfolio is merely supervised, not managed, as it remains fixed for the life of the
trust. In other words, there is no day-to-day management of the portfolio.

Face Amount Certificates
A face amount certificate company issues debt certificates at a predetermined rate of
interest. Additional characteristics include:


Certificate holders may redeem their certificates for a fixed amount on a specified
date, or for a specific surrender value, before maturity.



Certificates can be purchased either in periodic installments or all at once with a
lump-sum payment.



Face amount certificate companies are almost nonexistent today.

Management Investment Companies
The most common type of investment company is the management investment company,
which actively manages a portfolio of securities to achieve its investment objective. There
are two types of management investment company:closed-end and open-end. The primary
differences between the two come down to where investors buy and sell their shares - in
the primary or secondary markets - and the type of securities the investment company sells.


Closed-End Investment Companies: A closed-end investment company issues
shares in a one-time public offering. It does not continually offer new shares, nor
does it redeem its shares like an open-end investment company. Once shares are
issued, an investor may purchase them on the open market and sell them in the
same way. The market value of the closed-end fund's shares will be based on supply

and demand, much like other securities. Instead of selling at net asset value, the
shares can sell at a premium or at a discount to the net asset value.


Open-End Investment Companies: Open-end investment companies, also known
as mutual funds, continuously issue new shares. These shares may only be
purchased from the investment company and sold back to the investment company.
Mutual funds are discussed in more detail in the Variable Contracts section.

Nonbank Financial Institutions
The following institutions are not technically banks but provide some of the same services
as banks.

Savings and Loans
Savings and loan associations, also known as S&Ls or thrifts, resemble banks in many
respects. Most consumers don't know the differences between commercial banks and
S&Ls. By law, savings and loan companies must have 65% or more of their lending in
residential mortgages, though other types of lending is allowed.

S&Ls emerged largely in response to the exclusivity of commercial banks. There was a time
when banks would only accept deposits from people of relatively high wealth, with
references, and would not lend to ordinary workers. Savings and loans typically offered
lower borrowing rates than commercial banks and higher interest rates on deposits; the
narrower profit margin was a by product of the fact that such S&Ls were privately or
mutually owned.

Credit Unions
Credit unions are another alternative to regular commercial banks. Credit unions are almost
always organized as not-for-profit cooperatives. Like banks and S&Ls, credit unions can be
chartered at the federal or state level. Like S&Ls, credit unions typically offer higher rates on
deposits and charge lower rates on loans in comparison to commercial banks.

In exchange for a little added freedom, there is one particular restriction on credit unions;
membership is not open to the public, but rather restricted to a particular membership
group. In the past, this has meant that employees of certain companies, members of certain
churches, and so on, were the only ones allowed to join a credit union. In recent years,

though, these restrictions have been eased considerably, very much over the objections of
banks.

Shadow Banks
The housing bubble and subsequent credit crisis brought attention to what is commonly
called "the shadow banking system." This is a collection of investment banks, hedge funds,
insurers and other non-bank financial institutions that replicate some of the activities of
regulated banks, but do not operate in the same regulatory environment.

The shadow banking system funnelled a great deal of money into the U.S.residential
mortgage market during the bubble. Insurance companies would buy mortgage bonds from
investment banks, which would then use the proceeds to buy more mortgages, so that they
could issue more mortgage bonds. The banks would use the money obtained from selling
mortgages to write still more mortgages.

Many estimates of the size of the shadow banking system suggest that it had grown to
match the size of the traditional U.S. banking system by 2008.

Consumer Rights under the Consumer Protection Act, India
Introduction: The Consumer Protection Act seeks to provide better protection of the
interests of consumers. It aims to provide a speedy and simple redressal to consumer
grievances. The Consumer Protection Act offers for the setting up of three-tier quasi-judicial
machinery. This machinery has been empowered to give relief of a specific nature and to
award compensation to consumers. The Consumer Protection Act applies both to goods
and services. It protects not only buyer but user in the case of goods and any beneficiary in
case of services.
The Consumer Protection Act, 1986
Several laws had been passed to protect consumers. The Contract Act, 1872, The Sale of
Goods Act, 1930, The Agricultural Produce/Trading and Marking Act, 1937, The Drugs and
Cosmetics Act, 1940, The Essential Commodities Act, 1955, The Preventions of Food
Adulteration Act, 1954, The Monopolies and Restrictive Trade Practices Act, 1969, The
Standards of Weights and Measures Act, 1976, etc., are examples of these laws.

It was; however, felt that there was need for a specific law for consumer protection.
Therefore, The Consumer Protection Act, 1986 was passed.

Consumer Rights under the Consumer Protection Act, India!
Although businessman is aware of his social responsibilities even then we come across
many cases of consumer exploitation.That is why government of India provided following
rights to all the consumers under the Consumer Protection Act:

1. Right to Safety:
According to this right the consumers have the right to be protected against the marketing
of goods and services which are hazardous to life and property, this right is important for
safe and secure life. This right includes concern for consumer’s long term interest as well as
for their present requirement.
Sometimes the manufacturing defects in pressure cookers, gas cylinders and other
electrical appliances may cause loss to life, health and property of customers. This right to
safety protects the consumer from sale of such hazardous goods or services.

2. Right to Information:
According to this right the consumer has the right to get information about the quality,
quantity, purity, standard and price of goods or service so as to protect himself against the
abusive and unfair practices. The producer must supply all the relevant information at a
suitable place.
3. Right to Choice:
According to this right every consumer has the right to choose the goods or services of his
or her likings. The right to choose means an assurance of availability, ability and access to a

variety of products and services at competitive price and competitive price means just or fair
price.
The producer or supplier or retailer should not force the customer to buy a particular brand
only. Consumer should be free to choose the most suitable product from his point of view.
4. Right to be Heard or Right to Representation:
According to this right the consumer has the right to represent him or to be heard or right to
advocate his interest. In case a consumer has been exploited or has any complaint against
the product or service then he has the right to be heard and be assured that his/her interest
would receive due consideration.
This right includes the right to representation in the government and in other policy making
bodies. Under this right the companies must have complaint cells to attend the complaints
of customers.
5. Right to Seek Redressal:
According to this right the consumer has the right to get compensation or seek redressal
against unfair trade practices or any other exploitation. This right assures justice to
consumer against exploitation.
The right to redressal includes compensation in the form of money or replacement of goods
or repair of defect in the goods as per the satisfaction of consumer. Various redressal
forums are set up by the government at national level and state level.
6. Right to Consumer Education:
According to this right it is the right of consumer to acquire the knowledge and skills to be
informed to customers. It is easier for literate consumers to know their rights and take
actions but this right assures that illiterate consumer can seek information about the existing
acts and agencies are set up for their protection.

The government of India has included consumer education in the school curriculum and in
various university courses. Government is also making use of media to make the
consumers aware of their rights and make wise use of their money.

Authorities
Three Tier Consumer Grievances Machinery under the Consumer Protection Act!
1. District Forum:
District forum consists of a president and two other members. The president can be a
retired or working judge of District Court. They are appointed by state government. The
complaints for goods or services worth Rs 20 lakhs or less can be filed in this agency.
The agency sends the goods for testing in laboratory if required and gives decisions on the
basis of facts and laboratory report. If the aggrieved party is not satisfied by the jurisdiction
of the district forum then they can file an appeal against the judgment in State Commission
within 30 days by depositing Rs 25000 or 50% of the penalty amount whichever is less.
2. State Commission:
It consists of a president and two other members. The president must be a retired or
working judge of high court. They all are appointed by state government. The complaints for
the goods worth more than Rs 20 lakhs and less than Rs 1 crore can be filed in State
Commission on receiving complaint the State commission contacts the party against whom
the complaint is filed and sends the goods for testing in laboratory if required.
In case the aggrieved party is not satisfied with the judgment then they can file an appeal in
National Commission within 30 days by depositing Rs 3500 or 50% of penalty amount
whichever is less.
3. National Commission:
The national commission consists of a president and four members one of whom shall be a
woman. They are appointed by Central Government. The complaint can be filed in National

Commission if the value of goods exceeds Rs 1 crore. On receiving the complaint the
National Commission informs the party against whom complaint is filed and sends the
goods for testing if required and gives judgment?
If aggrieved party is not satisfied with the judgment then they can file a complaint in
Supreme Court within 30 days.
NGOs and Consumer Organizations in India: Definition and Role!
Non-governmental Organizations (NGOs) are those organizations which aim at promoting
the welfare of the people, and are non-profit making. They have voluntary decision-making
structure, and are free from the interference of the government. They may be fully or
partially financed by the government or any other agency.
Non-government organisations dealing with the consumers’ grievances are also known as
consumer organisations or associations. The first association to be set up was the Indian
Association of Consumers. In 1963, the National Consumer Association was set up.
It was a wing of a social organisation, the Bharat Sevak Samaj. The main aims of this NGO
were to study the trend of prices in the market and publish them for the information of
consumers and to agitate against the malpractices of traders.
Food crisis gave rise to rampant black-marketing in the 1960s. In 1964, the National
Consumer Association started the movement against the price rise caused due to the
drought of the 1960s. It held meetings to protest against the price rise and formed social
squads to keep a watch on the price trends in different cities of India. Slowly and gradually,
several other associations were organised to seek redressal for consumers’ grievances.
Types of NGOs
1. Trusts
The public charitable trust is a possible form of not-for-profit entity in India. Typically, public
charitable trusts can be established for a number of purposes, including the relief of poverty,
education, medical relief, provision of facilities for recreation, and any other object of
general public utility. Indian public trusts are generally irrevocable. No national law governs
public charitable trusts in India, although many states (particularly Maharashtra, Gujarat,
Rajasthan, and Madhya Pradesh) have Public Trusts Acts.

2. Societies
Societies are membership organizations that may be registered for charitable purposes.
Societies are usually managed by a governing council or a managing committee. Societies
are governed by the Societies Registration Act 1860, which has been adapted by various
states. Unlike trusts, societies may be dissolved.
3. Companies
The Indian Companies Act, 1956, which principally governs for-profit entities, permits
certain companies to obtain not-for-profit status as "section 25 companies." A section 25
company may be formed for "promoting commerce, art, science, religion, charity or any
other useful object." A section 25 company must apply its profits, if any, or other income to
the promotion of its objects, and may not pay a dividend to its members. At least three
individuals are required to form a section 25 company. The founders or promoters of a
section 25 company must submit application materials to the Regional Director of the
Company Law Board. The application must include copies of the memorandum and articles
of association of the proposed company, as well as a number of other documents, including
a statement of assets and a brief description of the work proposed to be done upon
registration.
Role of Consumer Organizations and NGOs:
In India, several NGOs and consumer organisations have come up. Some of the
prominent organisations are as under:
(i) Voice, New Delhi.
(ii) Common Cause, New Delhi.
(iii) Consumer Guidance Society of India, Mumbai.
(iv) Akhil Bharatiya Grahak Panchayat, Mumbai.
(v) Karnataka Consumer Service Society, Bangalore.
(vi) Consumers Association, Kolkata.
Most of these organisations are NGOs (Non-Government Organisations) which have been
created for the protection of consumers.

They play the following roles:
(i) They organise campaigns on various consumer issues to create social awareness.
(ii) They organise training programmes for the consumers and make them conscious of
their rights and modes of redressal of their grievances.
(iii) They bring out periodicals and other publications to enlighten the consumers about
various consumer related developments. For instance, VOICE publishes a bimonthly
magazine called “Consumer Voice” which covers a wide variety of subjects of importance
for the consumers.
(iv) They provide free legal advice to their members on matters of consumer interest and
help them to take up their grievances with the District Forum, State Commission and
National Commission set up under the Consumer Protection Act.
(v) They interact with businessmen and Chambers of Commerce and Industry for ensuring
a better deal for consumers.
(vi) They launch Public Interest Litigation (PIL) on important consumer issues. Public
Interest Litigation means a legal action initiated in a court of law regarding a matter of
general public interest such as ban on a product injurious to public health.