1.

1.1.

SMALL SCALE ENTERPRISES (SSE)

Meaning and Definition of Small Scale Enterprises (SSE)

Small Scale Enterprises (SSE) is companies whose headcount or turnover falls below certain limits. The abbreviation SSE occurs commonly in the European Union and in international organizations, such as the World Bank, the United Nations, and the WTO. The term small scale enterprises, small and medium businesses or SMBs is predominantly used in the U.S.A. EU Member States traditionally have their own definition of what constitutes an SME, for example, the traditional definition in Germany had a limit of 250 employees, while in Belgium it could have been 100. But now the EU has started to standardize the concept. Its current definition categorizes companies with fewer than 10 employees as micro, those with fewer than 50 employees as small, and those with fewer than 250 as medium. By contrast, in the United States, when small business is defined by the number of employees, it often refers to those with fewer than 100 employees, while medium-sized business often refers to those with fewer than 500 employees. In India, the SME is generally referred to as small scale industry including the tiny sector and the Small Scale Services and Business Enterprises (SSSBE). SMEs have always represented the model of socio economic policies of the Government of India, which emphasized judicious use of foreign exchange for import of capital goods and inputs; labor intensive mode of production, employment generation; non-concentration and diffusion of economic power in the hands of a few (as in the case of the big business houses); discouraging monopolies practices of production and marketing; and finally effective contribution to foreign exchange earnings of the nation with low import-intensive operations. Recognizing the importance and contribution of small scale industry, the government under notification dated 9th May 2007 has amended the Government of India (Allocation of Business) Rules, 1961. Pursuant to this amendment, Ministry of Agro and Rural Industries (Krishi Evam Gramin Udyog Mantralaya) and Ministry of Small Scale Industries (Laghu Udyog Mantralaya) have been merged into a single Ministry, namely, Ministry of Micro, Small and Medium Enterprises (Sukshma Laghu Aur Madhyam Udyam Mantralaya). Now all the activity related to small scale industry are directed by this Ministry. In accordance with the provision of Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006 the Micro, Small, and Medium Enterprises (MSME) are classified in two classes, which are as follows: 1) Manufacturing Enterprises: The enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the industries (Development and Regulation Act, 1951). The manufacturing enterprises are defined in terms of investment in plant and machinery. i) A micro enterprise is where the investment in plant and machinery does not exceed ` 25 lakh. ii) A medium enterprise is where the investment in plant and machinery is more than ` 5 crore but does not exceed ` 10 crore. iii) A small enterprise is where the investment in plant and machinery is more than ` 25 lakh but does not exceed ` 5 crore. 2) Service Enterprises: The enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment. i) A micro enterprise is where the investment in equipment does not exceed ` 10 lakh. ii) A small enterprise is, where the investment in equipment is more than ` 10 lakh but does not exceed ` 2 crore. iii) A medium enterprise is, where the investment in equipment is more than ` 2 crore but does not exceed ` 5 crore.

1.2.

Importance of SSE

The small-scale sector promotes entrepreneurship and helps earn foreign exchange and is very important to the Indian economy. The following enunciation will highlight the importance of small-scale enterprises:

1) Small is Beautiful: E.F. Schumacher maintains that giant organizations with increased specialization have resulted in gross inefficiency, environmental pollution, greed for profit and inhuman working conditions. He emphasizes small working units, communal ownership, and regional workplaces utilizing local labor and resources. He believes that emphasis should be on person and not on product. 2) Innovation and Productivity: It is the small-scale enterprises which lead to innovation and productivity although they do not maintain their own research and development wings. 3) Individual Tastes, Fashions and Personalized Service: Small-scale firms are receptive to changes in tastes and fashions of consumers and in adjusting the production process accordingly. 4) Symbols of National Identity: They are locally owned and controlled. They can strengthen the social system and cultural traditions of India. They are perceived as valuable symbols of national identity. 5) Tendency of Dispersal Over Wide Area: Small-scale enterprises have a tendency to disperse over wider areas. More than 62.19 per cent of the units are located in the backward areas. 6) Potential for Generating Employment Increases: Immense potential for generating employment increases the significance of the small-scale industries to a considerable extent. The countries that face an extreme problem of unemployment particularly put a lot of emphasis on the growth and development of these Industries. The primary advantage of these industries is that they specialize to produce the consumer commodities. They follow the labor intensive approach for producing the commodities. Due to a lack of the capital, these industries primarily depend on the labor for producing the commodities. 7) Absorption of Unused Labor: This process is that it involves the absorption of any unused labor in the economy. This utilization of unemployed labor helps in scaling down the poverty and unemployment. 8) Equal Distribution of National Income: These industries are more efficient in equally distributing the national income among all the contributors. They also offer help to promote a balanced development of the industries in a country.

1.3.

Role Played by SSE in Development of Indian Economy

India is largely an agricultural country and major part of the population lives in villages. SSE are small in size but play a big role in economic development of a developing country like India. India has adopted the ideal of a socialistic pattern of society with full employment, balanced regional development and self-reliance as the major objectives. Small scale firms are helpful in the achievement of these goals in the following ways: 1) Employment: Small-scale firms use labor intensive techniques and, therefore they have high potential to provide employment to a larger number of people per unit of capital. For every worker employed in large scale industries about three workers are engaged in small scale and cottage industries. Next to agriculture small business constitutes the most popular occupation of people in India. Small firms promote selfemployment particularly among the educated and professional class. They also provide employment to agriculturists who remain idle during a part of the year. In fact, the healthy growth of small-scale industries can be an effective approach to the pressing problem of unemployment in the country. Several empirical studies have revealed that the employment generating capacity of small-scale industries in about in times more than that of the large-scale industries. 2) Balanced Regional Development: Small scale industries promote decentralized development and help to remove regional disparities in industrialization. Decentralized development contributes to the process of self-sustained growth and avoids concentration of industries in particular areas. By providing employment in rural areas they help to check migration and overcrowding in urban areas. Small-scale firms can be a useful means of rural re-construction and development. Development of decentralized sector also improves the standard of living of people in backward regions. 3) Optimization of Capital: Small scale firms require less capital per unit of output and, therefore, greater output can be obtained with small investment. The Annual Survey of Industries revealed that fixed capital per employee in case of small scale industry was ` 3,706 as compared to ` 27,757 in case of large scale industry. Small firms also provide quick returns after their establishment on account of short gestation period. In India, where the rate of capital formation is low, small scale industries are very suitable. 4) Mobilization of Local Resources: Small scale industries facilitate mobilization and utilization of local resources and skills which might otherwise remain latent or unutilized. Small business promotes a new cadre of small entrepreneurs, self-employed and encourages local talent. The growth of small enterprises helps in tapping latent resources like entrepreneurial skills and small savings especially in rural areas. Small

scale industries account for ninety five per cent of the industrial units in India and contribute almost forty per cent of the gross industrial value added. 5) Exchange Earnings: Small scale industries help in reducing pressure on the countrys balance of payments in two ways: i) They do not require imports of sophisticated machinery and equipment. ii) They earn valuable foreign exchange through exports of non-traditional items and substitutions of imports through domestic production. Small scale industries account for forty five per cent of total exports from India. 6) Feeder to Large Industries: Small scale sector is complementary to the large scale industries. Small scale industries manufacture various types of components, spare parts, tools and accessories which are required by the large scale sector. Small firms also distribute the goods produced by large scale firms. 7) Opportunity for Artisan: In villages, artisan/specialist/artist having expertise in different fields are found. Because of lack of opportunities their skills do not come into limelight. Small businesses provide opportunities to such people. This provides an impetus to their talent. 8) Increase Standard of Living: With the establishment of small businesses in rural or near by regions, villages get many types of facilities, foe example, employment, electricity, water, roads, education, banks, modes of transportation, etc. In such a situation, promotion of standard of living is inevitable. 9) Less Pressure of Population on Agriculture: As more population depends upon land for survival the land is further divided into small pieces. It no longer remains beneficial to do farming on such small fields. Every year there is a further increase of approximately. Thirty lakh people who depend on agriculture. So, this has become necessary to reduce this burden on land. This is possible only when people will establish small businesses. 10) Equitable Distribution of Income: With the establishment of these businesses the income of the country is not just concentrated with some handful of city industrialists but is also distributed among many small rural industrialists. This helps to reduce the gap between the rich and the poor in the country. 11) Social Advantage: Small-scale units offer opportunity for an independent way of life to people with small means. They offer savings in social overheads like education, housing, and medical facilities by taking industry nearer to the people. They help to raise per capita income and standard of living in the country. A system of widely diffused ownership permits wider participation of people in the process of economic development. Small-scale sector provides a base for democracy, socialism, and self-government.

1.4.

Policies Governing SSEs

India has built up perhaps one of the most elaborate development policy framework and program for the smallscale sector. The main objectives of such policy framework are: 1) To encourage and facilitate the entry of new entrepreneurs in small sector. 2) To support the growth of small-scale units. 3) To protect small firms from acute competition from large sector. 4) To solve the problems faced by the small-scale industries. 5) To encourage technology up gradation, productivity improvement and export production in the small-scale sector.

1.4.1.

Industrial Policy Resolutions for Small Scale Industries

1) Industrial Policy Resolution, 1948: Industrial Policy Resolution 1948 attributed an important role to the SSI sector. The Karve Committee (1955) and the International Perspective Planning Team (1953-54) also emphasized the need to develop small scale and village industries to meet the following objectives: i) To create large-scale employment at relatively small capital costs. ii) To mobilize unused resources of capital and skills. iii) To ensure a more equitable distribution of national income including regional dispersal of industries. iv) To counter the tendencies towards concentration of economic power by widening opportunities for new entrants and medium and small sized units.

2) Industrial Policy Resolution, 1956: It stated that besides continuing the policy of supporting cottage, village and small industries by differential taxation or direct-subsidies, the aim of the State policy would be to ensure that decentralized sector acquires sufficient vitality to be self-supporting and its development is integrated with that of large scale industry. The State will, therefore, concentrate on measures desired to improve the competitive strength of the small-scale producer. To achieve these objectives 128 items were reserved for exclusive production in the small-scale sector. The policy also reserved 166 items for exclusive purchase by Government from the small sector. 3) Industrial Policy Resolution, 1977: The policy stressed that its main thrust will be on effective promotion of cottage and small industries widely dispersed in rural areas and small towns. It is the policy of the government that whatever can be produced by small and cottage industries must only be so produced. The policy classified small sector into three categories: i) Cottage and household industries which provide self-employment on a large scale. ii) Tiny sector incorporating investment in industrial units in machinery and equipments up to ` 1 lakh and situated in towns with a population of less than 50,000 according to 1971 census. iii) Small scale industries comprising industrial units with an investment of up to ` 10 lakhs and in case of ancillary units with an investment up to ` 15 lakhs. All the three categories were to be developed simultaneously through specific policy measures for each category. The policy specified the following measures: i) Reservation of 504 items for exclusive production in the small-scale sector ii) Establishing of District Industries Centers to serve as focal point for development of small and cottage industries. iii) Special assistance to tiny sector and cottage and household industries. iv) Special marketing arrangements through the provision of services like product standardization, quality control, market survey, etc. v) Encouragement for technological upgradation in the traditional sector. vi) Promotion of Khadi and village industries and the handloom sector. 4) Industrial Policy Resolution, 1980: This policy emphasized the need for intensifying the need for promotion of small industries through integrated industrial development and fostering complementarily between large and small sectors. Its features were: i) Definition of small scale, tiny units and ancillaries units was redefined; ii) The District Industries Centers (DICs) were replaced by nucleus plants in each industrially backward district to promote cottage and small industries. The nucleus plants were to concentrate on assembling the products of ancillary units and to produce inputs needed by large number of small units; iii) Reservations of items continued; iv) Financial support to small units was strengthened; v) Village industries including handloom, handicrafts, khadi etc. received greater attention; vi) The policy also measured to build up buffer stocks of critical inputs. Other than these salient features, the policy also ensured the balanced growth of large, medium, small and cottage industries. The Policy also had primary objective to optimally utilize the installed capacity, higher employment generation, removal of regional balances, consumer protection against high price and bad quality, prevention of sickness of units, merger of sick units with healthy ones etc. 5) Industrial Policy Resolution, 1990: The industrial policy 1990 was announced during June 1990. As to the small-scale sector, the resolution continued to give increasing importance to small-scale enterprises to serve the objective of employment generation. The important elements included in the resolution to boost the development of small-scale sector were as follows: i) The investment ceiling in plant and machinery for small-scale industries (fixed in 1985) was raised from ` 35 lakhs to ` 60 lakhs and correspondingly, for ancillary units from ` 45 lakhs to ` 75 lakhs. ii) Investment ceiling for tiny units had been increased from ` 2 lakhs to ` 5 lakhs provided the unit is located in an area having a population of 50,000 as per 1981 Census. iii) As many as 836 items were reserved for exclusive manufacture in small-scale sector.

iv) A new scheme of Central Investment Subsidy exclusively for small-scale sector in rural and backward areas capable of generating more employment at lower cost of capital had been mooted and implemented. v) With a view to improve the competitiveness of the products manufactured in the small-scale sector, programs of technology upgradation will be implemented under the umbrella of an apex Technology Development Centre in Small Industries Development Organization (SIDO). vi) To ensure both adequate and timely flow of credit facilities for the small-scale industries, a new apex bank known as Small Industries Development Bank of India (SIDBI) was established in 1990. vii) Greater emphasis on training of women and youth under Entrepreneurship Development Program (EDP) and to establish a special cell in SIDO for this purpose. viii) Implementation of de-licensing of all new units with investment of ` 25 crore in fixed assets in nonbackward areas and ` 75 crore in centrally notified backward areas. Similarly, de-licensing shall be implemented in the case of 100% Export-Oriented Units (EOU) set up in Export Processing Zones (EPZ) up to an investment ceiling of ` 75 lakhs. 6) Industrial Policy Resolution, 1991: The basic thrust of this resolution is to ensure Indias development as part of the world economy. Government will continue to pursue a sound policy framework comprising encouragement to entrepreneurship, development of indigenous technology, dismantling of regulatory system, development of capital markets and increasing competitiveness for the benefit of the common man. The spread of industrialization to backward areas will be actively promoted through appropriate incentives, institutions and infrastructure investments. Government has undertaken to provide enhanced support to small sector so that it flourishes in an environment of economic efficiency and continuous technology upgradation. The salient features of the new policy are: i) De-regulation, de-bureaucratization and simplification on status, regulations and procedures. ii) Increase in the investment limit in plant and machinery of tiny enterprise from ` 21 lakh to ` 50 lakh irrespective of the location of the unit. iii) Inclusion of industry related services and business enterprises, irrespective of their location, as small scale industries. iv) Ensuring both adequate flow of credit on a normative basis and quality of its delivery for viable operation on the SSI sector. v) Setting up a special monitoring agency to oversee the genuine credit needs of the small scale sector. vi) Introduction of suitable legislation to ensure prompt payment of small industries bills. vii) Introduction of a scheme of Integrated Infrastructural Development (including technological back up services) for small scale industries. viii) Setting up a Technology Developed Cell in the Small Industries development Organization. ix) Market promotion of SSI products through co-operative/public sector institutions other specialized professional/marketing agencies and the consortia approach. x) Setting up of an Export Development Center in the Small Industries Development Organization.

1.4.2.

Small Scale Industries during Plan Period

Planning Commission treats small scale industries as an integral part of the Village and Small Industries (VSI) sector. This sector comprises modern and traditional segments of industry. The modern segment includes smallscale industries (SSI) and power looms which use modern technology in the manufacturing process. Traditional segment consists of handlooms, sericulture, khadi and village industries, coir industries, handicrafts and wool development (unorganized sector). Provision with regard to small scale industries during different plans has been given below: 1) First Five-Year Plan (1951-1956): During this period. All India Small Industries Board was established to formulate plans for the development of small scale sector industries. Besides, provision for reservation of certain items for exclusive production in this sector was also made during this plan period. 2) Second Five-Year Plan (1956-1961): The second plan was aimed at dispersal of industries throughout the country. About 60 industrial estates were set up and certain large industries were prohibited from undertaking expansion in the areas meant for Small Scale Sector.

3) Third Five-Year Plan (1961-1965): The third plan stressed on improvement in the techniques of production without affecting, employment. Out of ` 264 crore ear-marked for the development of small scale and cottage industries only ` 240.76 crore could be utilized, 346 industrial estates were developed during this plan period. 4) Fourth Five-Year Plan (1969-1974): It has focused on the following issues: i) Administration of credit facilities under the State Aid to Industries Act, ii) Training and common service facilities and quality marketing services to small industries and iii) Consolidation of Industrial Estates program. 5) Fifth Five-Year Plan (1974-78): It was aimed at the following: i) Development of different small industries so as to facilitate the attainment of the goal of removal of poverty. ii) Removal of inequality in consumption standards through the creation of large scale opportunities for fuller and additional productive employment and improvement of skills. 6) Sixth Five-Year Plan (1980-85): The goals of sixth five-year plan related with small scale sector comprise the creation of additional employment opportunities, fuller utilization of existing capacities, development of entrepreneurial skills and expanded efforts on export promotion. Thus, the program for village and small industries was designed so as to achieve the following objectives: i) Improvement in the levels of production and earnings. Particularly of the artisans, through measures like upgrading of skills and technologies and production oriented marketing etc. ii) Creation of additional employment opportunities on a dispersal and decentralized basis. iii) Significant contributions to growth in manufacturing sector through inter alias, fuller utilization of existing installed capacities. iv) Establishment of a wider entrepreneurial base through appropriate training and package of incentives. v) Creation of a viable structure of village and small industries sector so as to progressively reduce the role of subsidies and vi) Concerted efforts in export promotion. 7) Seventh Five-Year Plan (1985-90): The seventh plan contributed towards improvement of economical and occupational profile or rural, semi-urban and weaker sections of rural communities as well as regional dispersal and structural diversification. Special emphasis was laid on upgradation of technology to improve competitiveness, ancillarization, provisions of design development and testing facilities and comprehensive marketing support. The guiding principles of the Seventh Plan for the small scale sector were as follows: i) To ensure adequate supply of wage goods and consumer articles of mass consumption at reasonable prices and acceptable quality; ii) To maximize the utilization of the existing facilities through restructuring, improved productivity and upgradation of technology; iii) To concentrate on development of industries with large domestic market and export potential; iv) To user in sunrise industries with high growth potential and relevance to the needs; v) To evolve integrated policy towards self reliance in strategic fields and opening up avenues of employment for skilled and trained manpower. 8) Eighth Five-Year Plan (1990-1995): The Eighth Plan has envisaged the following plan of action for the growth of small and village industries: i) Provision of incentives for the development of village/household enterprises including khadi and village establishments, handlooms, handicrafts, sericulture. ii) Exploring avenues for securing proper integration of small industries with larger ones. iii) Integrated application of industrial policy with technology policy and fiscal policy. iv) Induction of a measure of technological dynamism so that production efficiency of small sector is improved and its products can find a place in the market on a competitive basis. In this way, overall endeavor of the plan is to ensure that small sector should not only act as a source of productive employment and livelihood to millions of people but that is must also in generation of an entrepreneurial revolution in the country as a whole.

9) Ninth Five-Year Plan (1997-2002): The small scale sector has shown considerable resilience and inbuilt strength. After the opening of the economy, its growth rate has been about two to three percentage points higher than that of large and medium industries. The sector has matured and is in a position to make a much greater contribution to the national economy as well as to meet the competition from large industry including multi-nationals. The highlights of the provisions already made in Ninth Plan for small sector are given below: i) The SSI sector will be provided with necessary incentives and support including making available credit to facilitate its growth and development leading to increased contribution to output, exports and employment generation. ii) The definition of small scale sector will be broadened from small scale industries to small scale enterprises (SSE) which will include not only industrial enterprises but also business enterprises. iii) Incentive credit and promotional facilities would be made available to all SSEs. This would promote entrepreneurship, rapid growth of industrial and business ventures in small scale sector and thus additional employment. iv) The list of products reserved for small scale sector will have to be continually reviewed upwards periodically to take account of inflation and to enable the small scale sector to reap the economies of scale and effect upgradation of technology to withstand the emerging competition, particularly in the export market, v) The financial institutions will be motivated to offer factoring services on a large scale to the small scale sector in addition to the present system of discounting bills. The non-banking financial companies (NBFCs) would need to be encouraged through suitable financial incentives to provide/earmark enhanced loans/lending to the SSI units. vi) Friends and relatives of SSI entrepreneurs could be given fiscal incentives at par with those investing in large units/public limited companies to lend to SSI units. vii) The financial and management base of SFCs and SIDCs may be suitably strengthened to enable them to provide better services to the SSI sector. Banks/financial institutions may concentrate upon cluster approach and set up specialized branches in such clusters of SSI concentrations. Setting up Local Area Banks (LAB) by financially strong and better managed SSI associations would also help in making available adequate credit to the SSI units, viii) Technology upgradation, transfer and acquisition of appropriate technology would be encouraged through enhanced flow of credit from Financial Institutions (FIs) and encouragement would also be given for adoption of higher quality parameters and quality consciousness amongst the SSI units. 10) Tenth Five Year Plan (2002-2007): The broad objectives and targets of the tenth five year plan can be described as achieving an average rate of growth of GDP of 8 per cent, alongwith specific focus on a few key measures of human development. The aggregate growth target should ensure a broad based development which meets the objectives of equity and sustainability. The Plan also specifies states specific growth and development targets which take into account the constraints operating in individual states. Package announced by the Prime Minister for the SSI Sector under the tenth five year plan is as under: i) Enhancement of excise duty exemption limit for SSI units from ` 50 lakh to ` 100 lakh. ii) Increase in composite loan limit to ` 25 lakh. iii) Coverage of loans upto ` 25 lakh under the Credit Guarantee Fund scheme. iv) Increase in project cost limit under the National Equity Fund scheme to ` 50 lakh. v) Credit linked capital subsidy at 12 per cent of the cost of technological upgradation of SSI. vi) Units for modernization of SSI units. vii) The service and business related small scale units with a maximum investment limit of ` 10 lakh would also be covered under priority lending. viii) Enhancements of investment limit to ` 500 lakh for hi-tech and export oriented sectors. ix) Technology Bank would be set-up for SSI sector by strengthening the existing Technology Bureau for Small Enterprises (TBSE) of SIDBI. x) One time capital grant of 50 per cent to SSI associations for setting-up international level.

xi) Testing laboratories for SSI units. xii) Preference to be given to tiny units while organizing buyer-seller meets, vendor development programmes and exhibitions. xiii) Conduction of Third Census on SSI. xiv)Integrated Infrastructure Development Centers (IIDC) scheme extended to all areas. Presently, 10 Tool Rooms are functioning at Kolkata, Ludhiana, Jalandhar, Nagpur, Hyderabad, Bhubaneshwar, Jamshedpur, Ahmedabad, Indore and Aurangabad. A new Tool Room and Training Centre has been set-up at Guwahati. Mini Tool Rooms would be set-up in various States to help in creating localized training and production facilities. The Technology Upgradation and Management Programme (UPTECH) were launched in 1998 to take care of the modernization and technological needs of the SSI clusters. Six clusters have been identified and diagnostic studies for these have been taken-up. A major cluster development programme would be takenup during the Tenth Plan period through the UPTECH Scheme. There are about 350 important SSI clusters in the country identified by the Office of the Development Commissioner (SSI) and a few new clusters would be taken-up for development each year. 11) Eleventh Five Year Plan (2007-2012): Micro and Small Scale Enterprises, and Agro and Rural Industries and Medium-Scale Enterprises (SMEs) occupy an important and strategic place in economic growth and equitable development in all countries. Constituting as high as 90% of enterprises in most countries worldwide, SMEs are the driving force behind a large number of innovations and contribute to the growth of the national economy through employment creation, investments and exports. Their contribution to poverty reduction and wider distribution of wealth in developing economies cannot be under rated. According to the newly enacted Micro, Small and Medium Enterprises Development Act 2006, which will come into effect from October 2, 2006, enterprises are classified into Micro, Small and Medium according to the following criteria:
Type of Enterprise Engaged in Manufacture or Production of Goods Investment in Plant and Machinery Does not exceed ` 25 lakh. More than ` 25 lakh, but does not exceed ` 5 crore. More than ` 5 crore but does not exceed ` 10 crore. Engaged in Providing or Rendering of Services Investment in Equipment Does not exceed ` 10 lakh. More than ` 10 lakh, but does not exceed ` 2 crore. More than ` 2 crore but does not exceed ` 5 crore.

Micro Enterprise Small Enterprise Medium Enterprise

In the context of the preparation of eleventh five year plan (2007-2012), a working group has been set-up on Micro and Small Enterprises (MSE) sector, consisting of the traditionally defined small scale industries and small scale service and business entities, on the one hand and khadi, village and coir industries, on the other. Terms of Reference The terms of reference and composition of the Working Group are as follows: i) To deliberate on the basic aspects of the approach to the Eleventh Plan (2007-2012) relating to development and growth of SSE and tiny sector as well as conceptual issues, keeping in view the ongoing process of economic liberalization, WTO regime, Regional Trade Agreements and other comparable large countries impact on Indian economy. ii) To critically appraise the policies, programmes and achievements of SSI sector, including small scale, khadi, village and coir industries, in relation to production, employment (both direct and indirect) and exports during the Tenth Plan period and to analyze the reasons for shortfalls, if any, and suggest appropriate remedial measures.

iii) To suggest a policy framework and corresponding measures (schemes/ programmes) for the micro and small (manufacturing) enterprises, consistent with social and economic objectives of the eleventh plan for the sector with particular reference to employment generation, technology upgradation (for modernization, productivity improvement, higher competitiveness) exports, supportive credit policies and practices, marketing support, training need of entrepreneurs, etc. Monitorable annual targets for each area may be suggested for the eleventh plan. Attention may also be given, to policies and measures (schemes/programmes) for MSEs engaged in provision of services and expansion of selfemployment opportunities through them, incentives for both manufacturing and service MSEs to graduate to medium enterprises, and enhancing competitiveness of MSEs to enable them to face the challenges of globalization, regional free trade agreements, etc. iv) To suggest measures (schemes/programmes) for increasing the productivity of individual workers/artisans/entrepreneurs as well as their groups/clusters through training, better access to improved tools, equipment and processes, provision of common facilities, facilitating compliance with prescribed quality standards, etc. v) To suggest measures for dispersal of small scale industrial activities, particularly in relatively backward states/areas, hill areas, rural areas and effective reduction of regional imbalances in industrial growth. vi) To suggest a policy framework and corresponding measures (schemes/programmes), for MSEs in the khadi, village and coir industry sectors. vii) In the light of the physical targets suggested for the Eleventh Plan period for production, employment and exports, to make estimates of plan outlays required for promotional/developmental schemes and the investment required in the sector to achieve. viii)To assess the extent of synergy between Government (central as well as state-level) agencies, on the one hand, and voluntary and other organizations, particularly MSE associations, on the other and recommend strategies and measures for strengthening the latter and improving their interface with the former on a collaborative, participative and sustainable basis. ix) To assess the requirements of institutional finance/credit(term loan as well as working capital) for projected growth of the entire MSE sector and meeting the Sub-Sectoral targets, suggest measures for ensuring actual delivery of credit accordingly and also recommend innovative financial instruments and corresponding legislative and implementation mechanism to encourage and enable the MSEs to acquire corporate and/or limited liability partnership status and access capital markets, venture capital funds, etc. x) To review the existing central and state-level facilities for training and entrepreneurship development for both first generation and operating MSE entrepreneurs, estimate the gaps noticed during the Tenth Plan period and suggest measures to meet the requirements in quantitative and qualitative terms for the Eleventh Plan. xi) To recommend effective marketing strategies and corresponding measures (schemes/programmes) with a view to addressing the issues of: a) Regular availability of critical/scarce raw materials, b) Expanding markets of MSEs (both SSI and ARI segments) products and services within the country and outside, particularly the latter (i.e., exports), c) The role of consortia, State Small Industrial Development Corporations, NSIC, Khadi Commission, State Khadi and Village Industries Board, large trading houses, etc., d) More accurately quantifying the direct and indirect exports by the sector, e) Suggesting annual targets of exports by the sector during the Eleventh Plan, and f) Corresponding support measures. xii) To review the existing mechanisms for data collection, planning and monitoring at the central, state and local levels and recommend measures to improve them with a view to building-up and regularly updating a comprehensive database for the entire MSE sector. xiii) To review the working of the existing R&D institutions and suggest: a) Measures for their re-organization, re-vitalization and linkages with counterpart/corresponding R&D establishments in defense, electronics, material sciences, nanotechnology, etc., on the one hand and universities, colleges, IITs, TIFAC, etc., on the other. b) Suggests appropriate time-bound R&D programmes and technology missions and mechanisms for their dissemination, delivery, commercial application and patenting to/by the user MSE.

xiv)To review the existing strategies and measures for commercial linkages of MSE with medium and large enterprises and recommend appropriate strategy and mechanism for incentive to medium and large enterprises as well as the MSEs to build sustainable vendor development and quality upgradation networks. xv) To examine the feasibility and desirability of bringing all MSE products under quality certification by upgradation of quality standards, testing facilities, etc. xvi)To identify key areas and explore ways for implementing Public-Private Partnership model in identified areas for sustainable development of sector. xvii) To review the existing coverage of developmental schemes/programmes for SC/ST/Minorities/Women engaged in the sector and to suggest specific measures for their upliftment and promotion. xviii) To make such other recommendations as are considered appropriate.

1.5.

Types of Small Scale Business

A small scale industry is an industry that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. In India small business is categorized into following groups: 1) Small Scale Industries 2) Tiny Units 3) Ancillary Units 4) Cottage Industries 5) Export-Oriented Units 6) Small Scale Industries Owned and Managed by Women Entrepreneurs 7) Micro Business Enterprises 8) Small Scale Service and Business Enterprises 9) Village Industries

1.5.1.

Small Scale Industries

A business enterprise will be called small-scale business undertaking if investment in fixed assets, in plant and machinery, whether held on ownership basis or on lease or on hire purchase does not exceed `10 million and it is in no way owned, controlled or subsidiary of any other industrial undertaking. Here it should be explained that if two or more enterprises are set-up by a same person as a sole proprietor, each such enterprise shall be considered to be controlled by the other industrial undertaking or undertakings. If two or more undertakings are set-up as partnership firms and one or more partners are common, then each enterprise shall be considered as controlled by other industrial undertakings. In such cases none of these business enterprises will be graded as small-scale industrial undertaking even if investment is below 10 million. Here it should also be mentioned that investment in Plant and Machinery includes cost of tools, dies, spare parts for maintenance, R&D equipments, pollution control equipments, generator sets, fire-fighting equipments, cost of installation of plant and machinery, cost of transportation of machinery and cost of import duty, sales tax, shipping charges in case of imported machinery. The Small-Scale Industrial Sector has emerged as a dynamic and vibrant sector of the economy during the eighties. At the end of the Seventh Plan period, it accounted for nearly 35 per cent of the gross value of output in the manufacturing sector and over 40 per cent of the total exports from the country. It also provided employment opportunities to around 12 million people. The primary objective of the Small-Scale Industrial Policy during the nineties would be to impart more vitality and growth-impetus to the sector to enable it to contribute its mite fully to the economy, particularly in terms of growth of output, employment and exports. The sector has been substantially de-licensed. Further efforts would be made to deregulate and de-bureaucratize the sector with a view to remove all fetters on its growth potential, reposing greater faith in small and young entrepreneurs.

All statutes, regulations and procedures would be reviewed and modified, wherever necessary, to ensure that their operations do not militate against the interests of the small and village enterprises.

1.5.2.

A unit with an investment in plant and machinery of not more than ` 25 lakhs. Government have already announced increase in the investment limits in plant and machinery of small-scale industries, ancillary units, and export-oriented units to `6 million, `7.5 million, and `200 thousand respectively. Such limits in respect of tiny enterprises would now be increased from the present `200 thousand to `500 thousand, irrespective of location of the unit. Limit in plant and machinery for determining the status of SSI/Ancillary units as on date is `10 million. For tiny, it `2.5 million and for SSSBE `500 thousand. Service sub-sector is a fast growing area and there is need to provide support to it in view of its recognized potential for generating employment. Hence all Industry-related service and business enterprises, recognized as small-scale industries and their investment ceilings would correspond to those of Tiny Enterprises. A separate package for the promotion of tiny enterprises is now being introduced. This constitutes the main thrust of governments new policy. While the small-scale sector (other than Tiny Enterprises) would be mainly entitled to one-time benefits (like preference in land allocation/power connection, access to facilities for skill/technology upgradation), the tiny enterprises would also be eligible for additional support on a continuing basis, including easier access to institutional finance, priority in the government purchase program and relaxation from certain provisions of labor laws. It has also been decided to widen the scope of the National Equity Fund Scheme to cover projects upto `1 million for equity support (upto 15 per cent). Single Window Loan Scheme has also been enlarged to cover projects upto `2 million with working capital margin upto `1 million. Composite loans under Single Window Scheme, now available only through State Financial Corporations (SFCs) and twin function State-Small Industries Development Corporation (SSIDCs), would also be channelized through commercial banks. This would facilitate access to a larger number of entrepreneurs.

Tiny Industries

1.5.3.

Ancillary Industries

Ancillary industries are those which manufacture parts and components to be used by larger industries. For example, Companies like GE (ancillary) produce engines for the aircraft industry. An industrial undertaking which is engaged or is proposed to be engaged in the manufacture or production of parts, components, sub-assemblies, tooling or intermediates, or the rendering of services and the undertaking supplies or renders or proposes to supply or render not less than 50 per cent of its production or services, as the case may be, to one or more other industrial undertakings and whose investment in fixed assets in plant and machinery whether held on ownership terms or on lease or on hire-purchase, does not exceed `10 million. The ancillary industries were producing standardized goods of high precision to suit the requirements of big and reputed large-scale units and installation of costly testing equipments was also necessary. The relaxation of limit on capital investment was, therefore, a genuine necessity. However, it was considered that major portion of governmental assistance should be availed of by relatively smaller units and the limit of investment should be relaxed exclusively for ancillary industrial units, manufacturing components in the specified nine industries. In 1967, six more industries were included in this category. Realizing the duality in definition, the small-scale industries board appointed a sub-committee in 1962 to make the list of ancillary industries eligible for assistance under the small-scale industries program and to review the definition of small-scale industries and make recommendation on the following questions:

To what extent the present definition of `5 lac for general and `10 lac for ancillary industries should be modified? The committee should consider if the present difference in definition between ancillary and nonancillary industries should be abolished, making one definition applicable to all. Objectives of Ancillary Units 1) Development of employment opportunities. 2) Help the medium and large scale industries with, specialized functions. 3) Increase the production of SSIs. 4) Develop single or multi-discipline expertise in different fields. 5) Provide an effective solution to the marketing problems of SSI during their initial stage. 6) Growth of low cost economy. Advantages of Ancillary Units The following are some of the advantages in setting up ancillary units: 1) Indirect development of business activities in areas where ancillary industries have been set up. 2) Creating cadres of single disciplined experts. 3) Providing an effective solution to the marketing problems of SSIs. 4) Complementary with regard to output and enable reduction in the production cost. 5) Employment generation and utilization of money in untapped hands. 6) Reduction in the gestation period of production.

1.5.4.

Cottage Industries

Cottage industry is a specialized form of small-scale industry where the production of the commodity takes place in the homes and the labor is supplied by the family members only. The machineries or means utilized for the production of the commodities generally are the common ones used at homes. The basic characteristic feature of cottage industry is that it is basically unorganized in nature and come under the group of small-scale industry type. The commodities that are being produced by these industries are basically consumable ones and are produced through the utilization of the traditional techniques. Cottage industry especially started its function in the country sides of a country where unemployment alongwith under-employment are prevalent. Thus, this industry helps the economy by absorbing a huge amount of surplus labor of the rural economy. Another glaring feature of cottage industry is that it is not a mass producer of commodities. The main risk that is being faced by this industry is from the factory based medium or large industries which are again capital intensive in nature. This is because of the fact that these large industries utilize all sorts of costeffective technologies which enable them to supply the products at low price. On the other hand, the cottage industry is basically labor intensive and utilizes traditional techniques in production process which are generally not cost-effective in nature which escalates the price of their product. The products supplied by the cottage industry thus face risk of extinction if they do not receive enough financial or other form of support from the government. Cottage industry is often characterized by its enormous potential for employment generation and the person getting employed is basically regarded as a self-employed one. It has been empirically found-out that cottage industry has given economic independence to the women in the developing as well as developed countries. The most common form of support extended by the governments towards this industry is through forwarding of capital subsidies. These are also known as rural industries or traditional industries. These are not defined by capital investment criteria as in the case of other small scale industries. The features of cottage industries are as under: 1) These are organized by individuals, with private resources. 2) Normally use family labor and locally available talent.

3) The equipment used is simple. 4) Capital investment is small. 5) Produce simple products normally in their own premises. Problems in Cottage Industry 1) China, one of the top growing economies of the world is a tough competition for the cottage industry in India. As a result of this, many products from India do not even find customers buying products of their own countrys manufacture. The higher prices of the items or because of availability of better items produced by other nations at a reasonable price may be one of the reasons of not buying products of its own soil. Such situations lead to the decline in profits of the cottage industry. 2) International brands have made a large impact on the minds of todays generation and these may lead to a negative effect in the growth of the Indian Textile Industry. Many items like Khadi, etc., are not that favored except by some particular class of people, e.g., the politicians. 3) Todays generation is more health conscious and they prefer eating olive oil rather than fried items. 4) The number of buyers for herbal medicines and other food items has decreased. Allopathy is more popular among people rather than Ayurveda.

1.5.5.

Export-Oriented Units

A unit with an obligation to export atleast 30 per cent of its annual production by the end of the third year of commencement of production and having an investment ceiling upto `10 million (`1 crore) in plant and machinery is termed as an export-oriented SSI unit. The Union Government has decided to exempt units in Special Economic Zones (SEZs), Export Processing Zones (EPZs), and Export-Oriented Units (EOUs) from the requirement of an industrial license to set-up industrial units to manufacture items reserved for Small-Scale Sector (SSI). This step is expected to facilitate expeditious clearance of proposals for setting-up of units under SEZs, EPZs, and EOUs schemes at the level of development commissioner under the automatic route, said an official statement in New Delhi on 08.12.2000. It is part of the governments endeavor to provide a simple operating regime for units in these zones.

1.5.6.

Small Scale Industries Owned and Managed by Women Entrepreneurs

An enterprise promoted by women entrepreneurs is a small scale industrial unit in which, individually or jointly have share capital of not less than 51 per cent. Such units can avail the special concessions offered by the government, like low interest rates on loan, etc. If a small business enterprise is operated by one or more women entrepreneurs or if there is women proprietorship or if women have individually or jointly not less than 51% capital investment as partners or shareholders, then the business enterprise will be graded as enterprise by women entrepreneurs. The contribution of Small-Scale Business to the country is enormous. Its contributions to the different genres of the economy are: 1) Production Contribution: The small-scale sector has really grown over the years revealing a highly impressive growth rate in every plan period. The small-scale businesses altogether produce almost 40% of gross manufacture of Indian Economy. 2) Employment Generation Contribution: Next to agriculture, small-scale industries sector in India generates largest number of employments, which is very crucial for an overpopulated country like India. 3) Export Contribution: Small-scale businesses in India play a vital role as far as the export of the economy is concerned.45% to 50% of total export of the economy is generated by small-scale enterprises. Among these almost 35% is direct export and nearly 15% is indirect export. This indirect export happens through merchant exporters, trading houses or in the form of export order from large business houses, which use intermediary goods made by small-scale industries in manufacturing finished products.

1.5.7.

Micro Business Enterprises

Within the tiny and small business sector, micro enterprises are those whose investment in plant and machinery does not exceed ` 25 lakhs. Micro enterprises add value to a countrys economy by creating jobs, enhancing income, strengthening purchasing power, lowering costs and adding business convenience.

Because micro-enterprises typically have little to no access to the commercial banking sector, they often rely on micro-loans or micro-credit in order to be financed. Microfinance institutions often finance these small loans. Those who found micro-enterprises are usually referred to as entrepreneurs. The terms micro-enterprise and micro-business have the same meaning, though traditionally when referring to a small business financed by micro-credit the term micro-enterprise is used. Similarly when referring to a small, usually legal business that is not financed by micro-credit, the term micro-business is used.

1.5.8.

Small Scale Service and Business (Industry Related) Enterprises

A small scale service and business enterprise is one whose investment in fixed assets of plant and machinery excluding land and building does not exceed ` 10 lakhs. A few examples of such enterprises include advertising agencies, marketing consultancy, equipment rental and leasing, photocopying centers, desktop publishing, industrial testing labs, laundry and dry-cleaning, X-ray clinics, tailoring, beauty parlors, and so on. As Small-scale businesses are less capital intensive and highly labor intensive, there are huge opportunities for this sector in a labor-abundant capital-scarce economy like India. The other factors that are cater to the fast growth of this sector are Extensive Promotion and Support by the government available grants and subsidies, raw material procurement, rising export demand for Indian products and rising domestic demand which is the result of overall economic growth. But, the growth rates can increase further if more development measures are taken to improve the technology and marketing side of small-scale business and thus small-scale businesses can construct the most dynamic and vibrant sector of the economy. An industry related service/business enterprise with investment upto `05 million (5lac) in fixed assets, excluding land and building, is treated as an SSSBE. For example, advertising agencies, marketing consultancy, auto repair, services and garages, tailoring, desktop printing, etc. The service sector has emerged as the major segment of the economy.

1.5.9.

Village Industries

Village Industry has been defined as any industry located in a rural area which produces any goods, renders any service with or without the use of power and in which the fixed capital investment per head or artisan or worker does not exceed `50,000 or such other sum as may be specified by the central government, from time-to-time. Handloom Sector 1) Handloom sector contributes about 30 per cent of the total textile production in the country. It is the policy of government to promote handlooms to sustain employment in rural areas and to improve the quality of life for handloom weavers. 2) Schemes for the handloom sector will be re-designed keeping in mind the local and regional needs. Constraints of coverage will be removed so as to include bulk of the weavers who are outside the corporate/cooperative fold. 3) Existing schemes will be re-drawn and suitably revised under three major heads: i) Project Package Scheme: Under this scheme, area-based projects for product development, upgradation of technology, improvement of marketing facilities will be drawn-up. ii) Welfare Package Scheme: Number of welfare schemes and quantum of funds earmarked for them will be substantially augmented. iii) Organization Development Package: Schemes for participation in the share capital will be re-drawn under organizational development scheme for imparting a better management system in the existing state agencies. 4) Janta cloth scheme which sustains weavers often on a minimum level of livelihood will be phased-out by the terminal year of the VIII Plan ad replaced by the omnibus project package scheme under which substantial funds will be provided for modernization of looms, training, provision of better designs, provision of better dyes and chemicals, and marketing assistance.

5) A vastly expanded role for the National Handloom Development Corporation (NHDC) is envisaged. NHDC would be the nodal agency for increasing the supply of hank yarn and of dyes and chemicals. Spinning capacity in the cooperative sector will be increased. National Cooperative Development Corporation will provide more assistance for this in the form of Seed Money, both for cotton growers spinning mills and weavers spinning mills. 6) For improving marketing of handloom products, a more intensive implementation of schemes for design and product improvement by national level publicity, exhibitions, and design exercise will be undertaken. A special scheme will be drawn-up to graduate the handloom production, which is often of low value items, to high value products suitable for export markets. This will be done by better design inputs, upgradation of technology, diversion of weavers from cotton to silk and tassar weaving. Special projects for modernization of looms for products suitable for export markets will be drawn-up. Handicrafts Sector 1) The key areas in handicrafts that could contribute towards a faster pace of rural industrialization are production and marketing. Schemes for training and design development and for production and marketing assistance will be given encouragement. 2) Considering the importance of this sector from the point-of-view of employment and exports, it is proposed to provide an integrated development thrust to this sector with a view to enlarging the production base, thus enhancing the opportunities for employment and income through crafts as an economic activity and to giving it necessary inputs for quality improvement and effective marketing support both internal and overseas. Efforts will be made not only to preserve the traditional richness of the crafts but to engage the hereditary skills of the craftspersons to suit modern requirements. 3) Emphasis will be given to the following: i) Extension of services like supply of raw materials, design and technical guidance, market support, training and procuring of related materials/inputs in an integrated and area-based manner through the setting-up of craft development centers in identified clusters of villages. ii) Market development support in the form of a package of assistance through expansion of marketing infrastructure, exhibitions, publicity, etc., through Central and State Handicrafts Corporations, voluntary organizations and support to direct marketing activity by craftspersons. iii) Expansion of training activities by greater involvement of State Handicrafts Development Corporations, Cooperatives and voluntary organizations. iv) Measures to sustain an increased exports of handicrafts through new marketing channels like trading companies, departmental stores, etc. Other Village Industries 1) Government recognize the need to enhance the spread of rural and cottage industries towards stepping-up non-farm employment opportunities. 2) The activities of the Khadi and Village Industries Commission and the State Khadi and Village Industries Boards will be expanded and the organizations strengthened to discharge their responsibilities more effectively. 3) There will be greater emphasis on improving the quality and marketability of the products pari passu with consumer preferences instead of merely depending on rebates and subsidies. 4) While the plan allocation for rural industries will be augmented, effective steps will also be taken to ensure better flow of credit from the financial institutions and a more coordinated and optimal utilization of different development schemes and agencies operating in the rural sector. Bankability of projects undertaken in this sector would be stressed. 5) The programs of intensive development of KVI through area approach with tie-up with DRDA, TRYSEM and ongoing developmental programs relating to weaker sections like Scheduled Castes, Scheduled Tribes, and Women would be extended throughout the country. 6) The traditional village industries would be given greater thrust. Involvement of traditional and reputed voluntary organizations will be encouraged. 7) Agro processing and food processing industries in KVI sector using appropriate technologies would be promoted with a view to utilize locally available agricultural produce and promote employment/resource generation in the countryside.

8) Functional industrial estates would be established in areas with concentration of agricultural/horticultural produce. 9) R&D in KVI sector would be strengthened through greater linkages with CSIR and other research institutions in the areas of production, finishing/packaging, processes and development of new tools and implements. 10) The training programs would be upgraded and augmented to cover the expanded list of industries under the purview of the KVIC.

1.6.

Growth and Performance of SSE Sector

Worldwide, the Micro, Small, and Medium Enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development. The major advantage of the sector is its employment potential at low capital cost. The labor intensity of the MSME sector is much higher than that of the large enterprises. The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports. In India too, the MSMEs play a pivotal role in the overall industrial economy of the country. In recent years, the MSME sector has consistently registered higher growth rate compared to the overall industrial sector. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive the recent economic downturn and recession. In India, the majority of people living in rural areas are drawing their livelihood from agriculture and allied sectors. However, the growth and balanced development of other sectors such as industry and services are also necessary to sustain the growth of Indian economy in an inclusive manner. The Government of India is striving to improve the economic and social conditions of rural population and non-farm sector through a host of measures including creation of productive employment opportunities based on optimal use of local raw materials and skills as well as undertaking interventions aimed at improving supply chain; enhancing skills; upgrading technology; expanding markets; and capacity building of the entrepreneurs/artisans and their groups/collectives. The Micro, Small, and Medium Enterprises (MSME) sector contributes significantly to the manufacturing output, employment, and exports of the country. It is estimated that in terms of value, the sector accounts for about 45 per cent of the manufacturing output and 40 per cent of the total exports of the country. The sector is estimated to employ about 42 million persons in over 13 million units throughout the country. Further, this sector has consistently registered a higher growth rate than the rest of the industrial sector. There are over 6000 products ranging from traditional to high-tech items, which are being manufactured by the MSMEs in India. It is well-known that the MSMEs provide the maximum opportunities for both self-employment and jobs after agriculture. Food Products
1 2 3 4 5 6 7

1 2 3 4 5 6 7

Others 36%

22%
1 2 3 4 5 6 7
1 2 3 4 5 6 7

1 2 3 4 5 6 7

Rubber and Plastic Products 6%

Basic Metal Electrical and Metal Industry Machinery Products 10% Parts 8% 6% Figure 3.1: Products of MSMEs (More than 6000 Products)
1 2 3 4 5 6 7
1 2 3 4 5 6 7

1 2 3 4 5 6 7

Chemical and Chemical Products 12%

Recognizing the contribution and potential of the sector, the definitions and coverage of the Small-Scale Industry (SSI) sector were broadened significantly under the Micro, Small, and Medium Enterprises

Development (MSMED) Act, 2006 which recognized the concept of enterprise to include both manufacturing and services sector, besides defining the medium enterprises. Performance of MSEs The office of the Development Commissioner (MSME) provides estimates in respect of various performance parameters relating to the sector. The time series data in respect of the sector on various economic parameters is incorporated in the following table 3.1:
Table 3.1: MSEs Performance Units, Investment, Production, Employment, and Exports S. No. Year Total MSEs (Lac numbers) 67.87 70.63 (4.07)* 73.51 (4.07) 76.49 (4.07) 79.60 (4.07) 82.84 (4.07) 86.21 (4.07) 89.71 (4.07) 93.36 (4.07) 97.15 (4.07) 101.1 (4.07) 105.21 (4.07) 109.49 (4.07) 113.95 (4.07) 118.59 (4.07) 123.42 (4.07) 128.44 (4.07) 133.68 (4.08) Fixed Investment (`Crore) Production (`Crore) Current Constant Prices Prices (1993-94) 93,555 78,802 84,728 1,00,351 80,615 87,355 (7.26) (2.30) (3.1) 1,09,623 84,413 92,246 (9.24) (4.71) (5.6) 1,15,795 98,796 98,796 (5.63) (17.04) (7.1) 1,23,790 1,22,154 1,08,774 (6.9) (23.64) (10.1) 1,25,750 1,47,712 1,21,175 (1.58) (20.92) (11.40) 1,30,560 1,67,805 1,34,892 (3.82) (13.60) (11.32) 1,33,242 1,87,217 1,46,262.9 (2.05) (11.57) (8.43) 1,35,482 2,10,454 1,57,525.1 (1.68) (12.41) (7.7) 1,39,982 2,33,760 1,70,379.2 (3.32) (11.07) (8.16) 1,46,845 2,61,297 1,84,401.4 (4.90) (11.78) (8.23) 1,54,349 2,82,270 1,95,613 (5.11) (8.03) (6.06) At 2001-02 Prices 1,62,317 3,14,850 3,06,771 (5.16) (11.54) (8.68) 1,70,219 3,64,547 3,36,344 (4.87) (15.78) (9.64) 1,78,699 4,29,796 3,72,938 (4.98) (17.90) (10.88) 1,88,113 4,97,886 4,18,884 (5.27) (15.83) (12.32) 2,13,219 5,85,112 4,71,663 (8.68) (17.53) (12.60) 2,38,975 6,95,126 5,32,979 (12.08) (18.80) (13.00) Employment (Lac person) 158.34 165.99 (4.83) 174.84 (5.33) 182.64 (4.46) 191.40 (4.79) 197.93 (3.42) 205.86 (4.00) 213.16 (3.55) 220.55 (3.46) 229.10 (3.88) 238.73 (4.21) 249.33 (4.44) 260.21 (4.36) 271.42 (4.31) 282.57 (4.11) 299.85 (4.44) 312.52 (4.23) 322.28 (3.12) Export (`Crore) 9,664 13,883 (43.66) 17,784 (28.10) 25,307 (42.30) 29,068 (14.86) 36,470 (25.46) 39,248 (7.62) 44,442 (13.23) 48,979 (10.21) 5,45,200 (10.66) 69,797 (28.78) 71,244 (2.07) 86,013 (20.73) 97,644 (13.52) 1,24,417 (27.42) 1,50,242 20.76 1,77,600 (24.54) NA

1 2 3 4 5 6 7 8 9 10 11 12

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

13 14 15 16 17 18

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08**

*The figures in brackets show the % growth over the previous year. **Projected Comparison of the MSE Sector with the Overall Industrial Sector

The MSE sector has maintained a higher rate of growth vis a vis the overall industrial sector as would be clear from the comparative growth rates of production for both the sectors during last five years as incorporated in the table 3.2 given below:
Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08* Table 3.2: Comparative Growth Rates Growth Rate of MSE Sector (%) 8.68 9.64 10.88 12.32 12.60 13.00* Overall Industrial Sector (%) 5.70 6.90 8.40 8.10 11.5 8.00

*Projected Contribution of MSEs in the Gross Domestic Product (GDP)

Table 3.3: Contribution of MSEs in GDP Contribution of MSE (%) at 1999-2000 Prices in Total Industrial Production Gross Domestic Product (GDP) 39.74 5.86 39.71 6.04 39.12 5.77 38.89 5.91 38.74 5.79 38.62 5.84 38.56 5.83 38.57 5.94

Year 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Employment in MSE Sector The total employment from the MSE sector (including SSSBEs) in the country as per the Third All India Census of MSEs with reference Year 2001-02 was 249.33 lac numbers. The units operating with fixed premises are treated as MSEs. As per the estimates compiled for the year 2007-08, the employment was 322.28 lac persons in the sector. The share of MSEs in the total employment among units engaged in manufacturing and services is around 34.93%.
Employment (in Lac)

350.00 300.00 250.00 200.00 150.00 100.00 50.00 00.00 2003-04 2004-05 2005-06 2006-07 2007-08 Regd. Unregd. Total

Figure 3.2: Employment in MSE Sector

1.7.

Product Range Offered by SSE

A small-scale unit has limited risk bearing capacity, where it does not have products diversification. It cannot withstand credit sales for a very long time because of the small amount of financial capability of the small entrepreneur. As such speedy and economic disposal of the finished products plays a decisive role in the success of a project. Therefore, it is very essential that a considerable study should be made for the selection of product as it has a decisive role in the success if the unit. A very detailed study of new units that are already in the market and of such other units that are likely to come-up in the same field in the future, the end use of the products and the present use of the products and the present and likely future demand should also be made. In so far as good quality product can be manufactured in the small-scale, consumer goods for local need stands a better weightage as the money turn over is rapid and does not block the working capital for a long period compared to government supplies. But government supply items does have price preference and purchase protection and there is very less chance of bad-debt. The availability of the basic raw materials requirement, their regular supply, etc., should also be considered. As far as practicable a unit should not depend on imported or indigenous scarce raw materials, which ultimately will put a constrain on the functioning of the unit. Therefore a unit may select items of manufacture which can be manufactured from the locally available raw materials, have consumers demand and very few competitions. Government have initiated several measure for providing institutional support and services at the central and state levels for accelerating development of small industries all over the country particularly in the backward areas. One of the measure of policy support for promoting small-scale Industries in the policy if reservation of economically viable and technically feasible items for exclusive manufacture in small-scale sector. Under this policy, once an item is reserved for manufacture in the small-scale sector no unit in the large- or medium-scale sector is licensed to undertake manufacture of that item such cases where the large units undertake to export atleast 75 per cent of their total production. The capacity of the existing large- and medium-scale units is pegged on the basis of their best annual production in any of the three years ending with the specified date as notified by the government from time-to-time. By preventing fresh entry of large and medium units and also be prohibiting further expansion of existing units in the large- and medium-scale, all expansions of capacity is reserved for small-scale sector. This is how reservation affords protection to the small-scale against competition from the large and medium units. The rational of the Government Stores Purchase Programs, lies in the fact that: 1) The government is the largest single purchasers of variety of products. 2) The direction of its purchases in favor of small industries will give a tremendous boost to the marketing of their products, and 3) They will in the process, be oriented to produce goods in conformity with the standards laid-down by the purchasing. The traditional small-scale industries clearly differ from their modern counterparts in many respects. The traditional units are highly labor consuming with their age-old machineries and conventional techniques of production resulting in poor productivity rate whereas the modern small-scale units are much more productive with less manpower and more sophisticated equipments. Khadi and handloom, sericulture, handicrafts, village industries, coir, Bell metal are some of the traditional small-scale industries in India. The modern small industries offer a wide range of products starting from simple items like hosiery products, garments, leather products, fishing hook, etc., to more sophisticated items like television sets, electronics control system, various engineering products especially as ancillaries to large industrial undertakings.

Nowadays Indian Small-Scale Industries (SSIs) are mostly modern small-scale industries. Modernization has widened the list of products offered by this industry. The items manufactured in modern small-scale service and business enterprises in India now include rubber products, plastic products, chemical products, glass and ceramics, mechanical engineering items, hardware, electrical items, transport equipment, electronic components and equipments, automobile parts, bicycle parts, instruments, sports goods, stationery items and clocks and watches.

1.8.

Problems Faced by SSEs

The micro, small and medium enterprises face problems at every stage of their operation, whether it is buying of raw materials, manufacture of products, marketing of goods or raising of finance. These industries are therefore not in a position to secure the internal and external economies of scale. The major problems confronting the sector are as follows: 1) Technology Obsolescence: Majority of the small scale units use old techniques of production and outdated machinery and equipment. Up-gradation of the technology and achieving economies of scale is one of the major problems facing the sector. They cannot afford new machines and equipments and are therefore not in a position to use the latest techniques of production. They do not find it possible to conduct research and development on a continuing basis. Therefore, productivity and quality in small scale firms tends to be low while unit cost of production is generally high. But with liberalization of the economy, the MSMEs are facing stiff competition from imports and need technological up-gradation in order to produce better quality products at cheap rates. As far as sourcing technology is concerned, small businesses face the following three essential problems: i) Lack of Technological Knowledge: Obtaining information about technology is the first important issue. For most of them, information about available technology options is through word-of-mouth or from a visit to an advanced unit. Few have access to technical literature, professional journals or information about new product launches. But with the advent of internet, new vistas are opening up through electronic journals, catalogue downloads and advanced search facilities. ii) Barriers in Implementation: Actual procurement of the technology is the next important issue because even if information is obtained, there are barriers to import of technology and other problems relating to technology transfer, vendor capability, after sales support, import procedures, etc., which impede procurement. iii) Funding Problem: Acquiring finance for technology up-gradation is also a problem. Small enterprises generally look to external sources of funding for upgrading technology as withdrawing money from business entails its own costs. 2) Managerial Inadequacies: The managerial skills required for the management of small/medium firms are not very much different from those necessary in large scale business. The managerial functions of planning, organizing, staffing, directing and controlling are common to both. But, the scale on which various functions are performed by owner and manager are different and in small scale, the degree of complexity is lower. The organizational structure of latter firms is simple due to presence of few employees. The owner himself acts as the manager and can exercise personal control. However as the business grows, owner/manager finds it difficult to manage even small business effectively. For this, it becomes necessary to increase the amount of manpower in the enterprise. 3) Credit and Finance: All kinds of business enterprises require sufficient funds in order to meet their fixed as well as working capital requirements. Finance is one of the critical inputs for growth and development of the micro, small and medium enterprises. They need credit support not only for running the enterprise and operational requirements but also for diversification, modernization/up-gradation of facilities, capacity expansion, etc. Inadequate access to credit is a major problem facing micro, small and medium enterprises. Generally, such enterprises operate on tight budgets, often financed through owners own contribution, loans from friends and relatives and some bank credit. They are often unable to procure adequate financial resources for the purchase of machinery, equipment and raw materials as well as for meeting day-to-day expenses. This is

because, on account of their low goodwill and little fixed investment, they find it difficult to borrow at reasonable interest rates. As a result, they have to depend largely on internal resources. In respect of MSMEs, the problem of credit becomes all the more serious whenever any difficult situation occurs such as a large order, rejection of consignment, inordinate delay in payment, etc. Sometimes they have to close down their operations due to shortage of funds. Also, there is little or no scope for expansion and growth due to dearth of capital. Hence, economies of scale are not available. 4) Managerial and Organizational: Small scale firms are generally managed by the owners who very often do not possess the skills required for the efficient management of the enterprise. There is lack of proper division of work and benefits of specialization are not available. Some owner-managers are reluctant to adopt modern methods of organization and management. There is instability in business because the sickness and dearth of the owner manager directly affects the survival and growth of the small firm. 5) Raw Materials and Products: Non-availability of quality raw materials on a timely basis in an adequate quantity is one of the main problems faced by micro, small and medium enterprises. There is acute shortage of even the basic raw materials required by small scale units. These units are under a handicap in obtaining raw materials of requisite quality at reasonable prices. They do not get the benefits of bulk buying. For example, the handloom industry is facing shortage of yarn. Small scale industries also face shortage of power due to which they are unable to make full utilization of plant capacity. Majority of them cannot afford to install their own power generating plants to ensure uninterrupted operations. 6) Marketing and Export: Out of several problems faced by small and medium scale entrepreneurs, the absence of adequate marketing and export facilities is one of their main concerns. Almost all types of business enterprises face marketing problems, but the small and medium scale enterprises face greater difficulty in the marketing and distribution of their products. Some of these are: i) Competition from Large Firms: Small and medium entrepreneurs tend to face tough competition from the products and sales/marketing strategies of large scale firms entrepreneurs. They, at times, find it very difficult to cope with large scale entrepreneurs in terms of cost, quality, standards, popularity, meeting ever-changing demands/preferences of consumers, etc. ii) Lack of Marketing Networks: Most of them do not have their own marketing network. So, they ultimately have to rely on outside sources for distributing their products. This also tends to raise the cost of their products and services. iii) Lack of Marketing Concepts: Most of them do not have good knowledge and/or experience of various marketing concepts and strategies. As a result, they are unable to understand quickly and accurately the prevailing as well as constantly changing market trends. Furthermore, inspite of having huge potentialities of extensive market for their products, they are mainly unwilling to opt for efficient marketing techniques. iv) Lack of Resources: They also lack the resources and funds needed for effective sales promotion. Many of such enterprises cannot afford to spend much on advertising, sales promotion, market research, etc. v) High Cost of Production: They find it difficult to sell their output at remunerative prices because of higher cost of production and non-standardized quality of products. vi) Low Negotiating Power: They also have to sell their products at throwaway prices due to their weak bargaining power (especially in dealing with big buyers) and urgent needs of funds. Thus, it is right to say that most of small and medium entrepreneurs do not correctly understand as to what kind of products are actually needed by the market, how big/small is the market, when the products are needed and how to deliver such products. All these problems keep them mainly isolated from the market trends and conditions and, thus, tend to restrict their operations. 7) Infrastructure: Infrastructure needed by entrepreneurs include all types of transportation facilities like railways, waterways, roadways and airways (depending on the type of small and medium scale firm running by these entrepreneurs) as per the suitability of the business, as well as proper established channels of telecommunication and adequate supply of power. Lack of any of these facility can cause serious damages to the firms value chain process, i.e., to the production, consumption and distribution of the products of small and medium entrepreneurs, who already face problems of lack of finance, inadequate marketing facilities, technological obsolescence, etc. Some of the major problems faced by small scale entrepreneurs with respect to infrastructure are:

Inadequate infrastructural facilities creates the problem of acute shortage of basic raw materials, especially those which are scarce and need to be imported from distant places, needed by small and medium scale enterprises. ii) Small and medium scale entrepreneurs find it difficult to distribute their products to the markets which are located at far-off places because of incomplete construction or non-existence of basic roads/highways. iii) Lack of proper airways and waterways facilities also restricts the growth prospects of those medium/small scale firms whose target market is located abroad. iv) Small and Medium scale enterprises face shortage of power supply, due to which they are unable to make full utilization of plant capacity. Most of them find it difficult to install their own power generating plants, so as to ensure their uninterrupted operations, due to lack of required funds. v) Most of them are located in rural areas or remote areas of the country, due to which they find it difficult to communicate with people outside the region. This is because of non-existence of proper telecom network. 8) Increasing Competition: An entrepreneur faces several managerial problems in relation to production, marketing, infrastructure, financing, etc. The basic cause for many of such issues is the existence of intense competition in the market scenario. Large scale firms/industries that have huge production and distribution network, or enterprises that have goodwill in the market or have intellectual property rights/standardization for their products or produces large range of products, etc., are more likely to dominate the business environment in the country. In contrast, small and medium scale enterprises mainly deal in one specialized line of products, have very small production and distribution network, and generally have no protection for their products. As a result, inspite of having useful and good quality products or having products similar to those produced by large scale firms, they are largely not able to create/hold demand for their products and tend to lose customers to large scale enterprises owing to cut-throat competition.

i)

1.9.

Steps Taken to Solve the Problems of SSE

The small-scale industries occupy a very important position in any economy. Traditionally, they produce certain specialized items over which they enjoy virtual monopoly because of the skill and expertise developed over the years. Many items produced in the small-scale sector are also used as raw materials in the large-scale industry. Thus, small-scale industries contribute to large-scale production in no small measure. They will have to take effective measures in the following areas: 1) Quality Control: The products of large-scale industries are of high quality and precision. In a free economy, the products of the small-scale industry can compete with those of the large-scale sector only if the high quality is maintained. To meet the competition from the large-scale sector, small-scale industries should get a good share of the export market where high-quality products are essential. 2) Marketing Arrangements: Many small-scale units have perished because of their inability to sell what they produced. This happened because of lack of proper marketing arrangements. In a free economy, inadequate marketing arrangements would only accelerate the downfall of small-scale units, as they would have to counter competition from the large-scale sector, which enjoys a ready market for its products. The small-scale units need to conduct systematic and continuous market research and arrange to tie-up with prospective buyers in order that their products may be readily sold. 3) Advertisement: The products of the large-scale sector are widely advertised on TV, radio, and newspapers and are well-known. Since, small-scale industrial units suffer from resource inadequacy; most of them cannot advertise their products on the mass media. As a result, the products of the small-scale units remain largely unfamiliar to the public and the units find it very difficult to attain their sales goals. 4) Recovery of Receivables: The funds of many small-scale industrial units are blocked in receivables. As a result, recycling of funds is affected and production suffers. In a competitive environment, it must be ensured that receivable dues are realized without delay. The small-scale units will have to make special effort to collect their dues for their growth. They may have to utilize the services of factoring companies for the purpose. 5) Professionalism in Management: Many small-scale industrial units have suffered an account of proprietary management. Barring very tiny and small units, management of small-scale industries has become complex. Hence, small-scale industrial units must be managed by professional managers in order to compete successfully with the large-scale sector, which is professionally managed.

6) Inventory Control: Proper inventory control is an essential prerequisite for optimum production of an industrial unit. Yet, a large number of small-scale units remain unaware of this requirement. As a result, they have to remain content with a sub-optimal level of production that affects their profitability adversely. It is, therefore, imperative that small-scale units familiarize themselves with inventory control techniques and introduce them at work, particularly in the context of competition in a free economy. 7) Opportunities: By its less capital intensive and high labor absorption nature, the SSI sector has made significant contributions to employment generation and also to rural industrialization. This sector is ideally suited to build on the strengths of Indias traditional skills and knowledge, by an infusion of technology, capital, and innovative marketing practices. This is the opportune time to set-up projects in the small-scale sector. It may be said that the outlook is positive, indeed promising, given some safeguards. This expectation is based on an essential feature of the Indian industry and demand structure.

2.
2.1.

CAPITAL INVESTMENT
Introduction

Capital investment is defined as spending on capital goods such as new machinery, buildings and technology so that the economy can produce more consumer goods in the future. Investment would encompass spending on improving the human capital of the workforce e.g., extra investment in training and education to improve the skills and competences of workers. Most economists agree that investment is vital to promoting long-run economic growth through improvements in productivity and a countrys productive capacity. Firms often invest in new capital goods to exploit internal economies of scale. This, together with technological advances that are often built into new machinery, is vital to improving the competitiveness and to causing an outward shift in the countrys production possibility frontier. The amount of capital equipment available for each worker to use and whether this capital is up-to-date has a bearing on the productivity of the laborforce. The quality of business training also matters to make the most of investment in new capital and technology. The term capital investment has two usages in business: 1) Capital investment refers to money used by a business to purchase fixed assets, such as land, machinery, or buildings. 2) Capital investment refers to money invested in a business with the understanding that the money will be used to purchase fixed assets, rather than used to cover the business day-to-day operating expenses. A capital investment is the acquisition of a fixed asset that is anticipated to have a long life of use before it has to be replaced or repaired. Two of the most easily recognizable examples of capital investments are land and buildings. However, a capital investment is made any time that a company purchases goods that will be benefit the operation of the business, but will not be used to cover the operational costs of the business. Capital investment includes gross and net investment. Gross investment spending includes an estimate for capital depreciation since some investment is needed to replace technologically obsolete plant and machinery. Providing that net investment is positive, businesses are expanding their capital stock giving them a higher productive capacity and therefore meet a higher level of demand in the future. Of course, a capital investment does not have to be an asset that is along the lines of equipment or land. A capital investment can be something as simple as an amount of money that is set aside in some sort of interest bearing account. Since the resource is not being used to cover business expenses, capital assets of this type is free to be used for the purpose of generating additional revenue by accruing interest. Thus, it would be proper to consider an initial amount of money that is used to open a standard savings account as a capital asset, with the fact that a rate of interest will be realized from the principal each year turning the asset into a capital investment. Capital investment in SSIs assumed an increasingly important role as a scientific tool for appraising. The real worth of an enterprise, its performance during a period of time and its pitfalls, analysis of capital structure will

provide a ground to understand the size of SSI in terms of capital investment in the enterprise and also the intricacies involved in developing a sound financial plan for SSIs. Analysis of capital structure or financial analysis of a small manufacturing or service unit reveals certain information about the capital cost operations cost and operating revenue. Therefore, capital investment or requirement of capital to start and run a SSI can be estimated by the scientific analysis of financial aspects involved in the process. Finance is the life-blood of any size of business. It is a prerequisite for accelerating the process of industrial development. In postindependent era and after the introduction of New Economic Policy in 1991 (popularly known as LGP policy), central and state governments have build-up a network of specialized financial institutions, with a fairly big capital base to provide financial assistance to all types of industries, including small-scale industries. Any capital structure of any enterprise has three vital financial components or variables. They are: 1) Fixed cost including preliminary expense, 2) Variable cost, and 3) Revenue or receipts.

2.2.

Financial Plan

Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan and then comparing future performance against that plan. According to J.H. Bouneville, The financial plan of a corporation has two-fold aspects; it refers not only to the capital structure of the corporation but also to the financial policies which the corporation has adopted or intends to adopt. According to Walker and Baughn, Financial planning pertains to the function of finance and includes the determination of the firms financial objectives, financial policies and financial procedures. Usually, a company creates a financial plan immediately after the vision and objectives have been set. The Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved. Financial Planning is the task of determining how a business will afford to achieve its strategic goals and objectives. The Financial Planning activity involves the following tasks: 1) Assess the business environment, 2) Confirm the business vision and objectives, 3) Identify the types of resources needed to achieve these objectives, 4) Quantify the amount of resource (labor, equipment, materials), 5) Calculate the total cost to create a budget, 6) Identify any risks and issues with the budget set. Performing Financial Planning is critical to the success of any organization. It provides the business plan with rigor, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization and reward staff for meeting objectives within the budget set.

2.2.1.

Characteristics of Sound Financial Planning

A financial plan of the firm must have the following characteristics: 1) Simplicity: It should always be one of the guiding principles while formulating a financial plan. A simple finance plan is always easy to implement. However, for simplicity, efficiency should not be compromised. 2) Foresight: Vision and foresight are also required in planning. The scope and scale of operations should also be accurately determined as the efficiency of financial plan is greatly based on accurate estimation. 3) Flexibility: It is also one of the important considerations. In a financing plan, flexibility for the future should also be provided. A rigid financial plan can never be helpful in realizing the goals of business. Under such circumstances, the financial plan becomes a burden rather than a tool. Therefore, the element of

elasticity is quite indispensable in a dynamic financial plan to cope with expansion and alternation requirements. 4) Liquidity: A proper cash ratio should always be maintain which can be determined by the size of the firm, its age, credit standing, state of business cycle, and the nature of its operations. 5) Utility: A sound financial plan should be directed towards efficient utilization of the available resources. A proper balance between fixed and working capital should be struck-out for using the capital effectively. Seasonal fluctuations for funds are to be financed by internal generations, and intermediate sources and by increasing current liabilities. 6) Completeness: A financial plan will be useful only if it is complete in all the respects and capable of facing future contingencies. Promoters are advised to make adequate provisions for unforeseen event, either from internal resources or by rising additional capital, so that they may be taken care of.

2.2.2.

Elements of Financial Planning

Most corporate financial plans have certain common elements. 1) Economic Assumptions: The financial plan is based on certain assumptions about the economic environment (interest rate, inflation rate, growth rate, exchange rate and so on). 2) Sales Forecast: The sales forecast is typically the starting point of the financial forecasting exercise. Most financial variables are related to the sales figure. 3) Proforma Statements: The hearts of a financial plan are the proforma (forecast) profit and loss accounts and balance sheets. 4) Asset Requirements: Firms need to invest in plant and equipment and working capital. The financial plan spells out the projected capital investments and working capital requirements over time. 5) Financing Plan: Suitable sources of financing have to be thought of for supporting the investment in capital expenditure and working capital. The financing plan delineates the proposed means of financing. 6) Cash Budget: The cash budget shows the cash inflows and outflows expected in the budget period.

2.2.3.

Benefits of Financial Planning

1) Better Promotion: Effective financial planning ensures successful promotion of the business which is only possible through well thought-out flexible financial plan drafted in anticipation of the establishment of the business. 2) Better Direction: Business operations require funds. Successful operation of business depends on adequate and timely availability of finance for the promotion of business, purchase of assets and raw materials, production and marketing of goods. Thus the success or failure of a firm is closely linked with financial planning. 3) Better Conservation of Capital: Sound financial planning is necessary for the effective utilization of capital. Plant and machinery acquired by an enterprise become obsolete soon after the arrival of new machinery in the market with improved technology. Thus, sound financial planning is inevitable for conservation of capital investment in assets. 4) Better Expansion and Development: The objective of a business enterprise is profit-maximization. This requires the expansion and development of the business unit for achieving its optimum operational efficiency. Efficient financial planning eliminates financial difficulties in the future expansion and development of the business. 5) More Liquidity: Efficient financial planning makes the firm capable of maintaining adequate liquid funds to meet its obligations to the creditors. Availability of adequate liquid funds prevents the firm from the situation of over-trading and strengthens its repayment capacity. 6) Higher Return on Capital Employed: Sound financial planning leads to effective utilization of capital by avoiding both under-capitalization and over-capitalization both of which are harmful to the financial interests of a corporation. Thus, efficient financial planning leads to higher return on capital employed by the firms.

7) Optimal Capital Structure at Minimum Cost: Efficient financial planning leads to the optimal capital structure of the firm at minimum cost. In deciding the ratio of different forms of capital in total capital of the firm, the financial manager ensures that the firms pay the least cost and incurs less risk. After analyzing the costs and risks involved in different forms of capital, he finally selects those which involve the least cost without much risk. 8) Better Unity Coordination: Financial planning leads to the most effective utilization of the firms capital by establishing effective coordination in different operative function and unity in action by all executives at different levels. Thus, it serves as a guide to effective coordination among various operative functions and unity in action. At different levels the executives follow financial policies, procedures, and objectives as set-out in the financial plan. 9) Replacement of Obsolete Assets: In the present dynamic economic world price levels keep on changing fast rendering the replacement cost of the firms assets much higher than its acquisition cost. Replacement of obsolete assets is possible only through financial planning. 10) Faster Growth of Public Sector: Today growth of public sector has intensified the need for effective financial planning for the private sector. The public sector enterprises procure borrowed capital from commercial banks and specialized financial institutions. Hence the private enterprises find it difficult to obtain the necessary funds from these institutions for financing their plans. Therefore, the business enterprises should forecast their financial requirements well in advance by means of effective financial planning.

2.2.4.

Limitations of Financial Planning

Although financial planning is very important for the success of a business, yet it has some limitations, which can be outlined as under: 1) Based on Forecasts: Financial plan is based on forecasts. Forecasts are based on certain assumptions. Future is uncertain and, therefore, these forecasts can be wrong. The financial plan based on the wrong forecasts cant be much useful. This uncertainty is higher in case of long-term financial plan than the short-term financial plan. To overcome this limitation to some extent, financial plans should be revised and they should be prepared on the basis of flexible budget. 2) Rigid Attitude of Management: Changing circumstances make it necessary to change the financial plan. But managers hesitate to change the financial plan and try to implement the pre-determined plan strictly. This has several reasons. Firstly, the amount of capital expenditure in the financial plan is high and changes in them become difficult. Secondly, the payment for raw material and machinery, etc., is arranged in advance, changes in them can increase the complexities. Thirdly, due to psychological reasons also, managers do not want to change plans prepared by them. 3) Lack of Co-ordination: For the success of financial plan, there should be co-ordination between the finance department and other departments. But in actual practice, due to lack of co-ordination, the financial plan cannot be implemented effectively.

2.3.

Capital Structure

The term capital means the total investment in the form of money, tangible assets like land building plant and machinery, etc., and even the goodwill of a firm or company. The composition of equity and debt in overall capital of an enterprise is called capital structure. Thus, capital structure of an enterprise involves the ratio of capital invested by the owner from his own sources to the credit capital between short-term and long-term capital and the ratio among different sources of finance for capital which includes loans, bonds, share issues, and reserves. The maintenance of proper ratios between different types of securities is known as capital gearing. Capital structure represents the relationship among different kinds of long term capital. Normally, a firm raises long term capital through the issue of shares-common shares, sometimes accompanied by preference shares. The share capital is often supplemented by debenture capital and others long-term borrowed capital.

Optional capital structure depends upon the overall business condition of an enterprise. As a rule, for a successful enterprise, debt capital may be twice or even more than equity capital. But for a business incurring loss and not in a healthy condition, the proportion of debt capitalized should be as low as possible. This is because due to unfavorable conditions, the enterprise may not be in position to pay-off the interest and the amount of loan. Optical capital structure may be defined as a financing mix increasing the least cost but yielding the maximum returns. It is obtained when the market value for equity share is the maximum. However, capital structure depends upon the following factors: 1) Tracing on equity, 2) Nature of an enterprise, 3) Retaining contrast of a company, 4) Size of the enterprise, 5) Cashflows, 6) Purpose of financing, 7) Provision for future. An optimum capital structure bears the following important features: 1) The optimum capital structure should involve the minimum costs and the maximum yield. 2) Adopted capital should be flexible. 3) The use of debts should be within the repaying capital of the enterprise. 4) The capital structure should ensure the effective control over the affairs of the enterprise. Types of Capital Structure The capital structure of any concern may be simple, compound or complex. 1) Simple Capital Structure: A single capital structure consists of single security base as a source of fund to finance the activities of a concern, e.g., equity share capital issued by a concern. It is safe to use such type of capital structure when the prospects of earnings are unpredictable and uncertain. 2) Compound Capital Structure: In compound capital structure a combination of two security bases in the form of equity and preference capital or equity share capital and debentures are used as a source of funds. It is advisable to use such type of capital structure when annual earnings of a concern are uncertain but average earnings are rather good. 3) Complex Capital Structure: A complex capital structure is made up of multi-security base, consisting of equity share capital, preference share capital, debentures and loans from financial institutions. This type of capital structure is advisable where there is certainty of stable and adequate income to pay-off fixed financial charges.

2.4.

Capitalization

Capitalization refers to the sum total of all long-term securities issued by a firm or enterprises and the surplus not meant for distribution, it covers only term loans and retained profits. In a broad sense, capitalization means the determination of the quantity of finance and also the quality of finance. Capitalization is one of the most important constituents of financial plan. The term Capitalization has been derived from the word capital and in common practice it refers to the total amount of capital employed in a business. It is an extension of the term capital; but is somewhat different from it. Capitalization refers to the total amount of funds obtained by a company from long-term sources. Specifically, capitalization is the sumtotal of the face value of all long-term securities issued by a company, viz., equity shares, preference shares, debentures/bonds (plus other long-term loans) not redeemed so far; and includes surpluses which are not meant for distribution, by way of dividends. According to Bonneville and Deway, capitalization is, The balance sheet values of stocks and bonds outstanding. According to Gerstenberg, Capitalization comprises of a companys ownership capital which includes capital stock and surplus in whatever form it may appear and borrowed capital which consists of bonds or similar evidences of long-term debt.

According to this definition, the term capitalization includes only the par value of share capital and debentures. It does not include reserves and surplus. However, in actual practice, it is found that reserves and surplus are frequently resorted to by firms to meet their long-term capital requirements. The definition, therefore, seems to be illogical. In case an enterprise raises more capital than that warranted by the proper figure of capitalization or its earning power, it is called over-capitalization. If it is lower than the actual earning power, it is said to be undercapitalization. Following are the types of capitalization: 1) Over-Capitalization: Over-capitalization portrays a situation when an enterprise possesses excess of capital that warranted. In this case, the actual earnings are lower than the expected ones. The following are the evil effect caused by over-capitalization: i) There is a significant fall in the rate of dividend on equity shares. ii) Due to the decline of market value of shares, investors lose confidence upon the enterprise. iii) Over-capitalized enterprises often come to societal rejection. iv) Company or the enterprise loses its goodwill. 2) Under-Capitalization: Under-capitalization portrays a situation when capital utilized by an enterprises lower than that warranted by its earning capacity. In case of under-capitalization the market value of shares is higher than that of shares of similar enterprise. The effects of under-capitalization can be depicted as under: i) It leads to cut-throat competition in the market. ii) Higher rate of dividend given to the shareholder encourages the workers to demand for higher wages. iii) It encourages the management to maneuvre the value of shares. iv) Higher taxation is charged by the government.

3.
3.1.

OWNERSHIP PATTERNS
Introduction

Entrepreneurs have a number of legal forms of business to choose from, such as sole proprietorships, Ccorporations, partnerships, or Limited Liability Companies (LLCs). Entrepreneurs should determine which business form is best for them based on their short- and long-term needs. Because there are significant tax and non-tax differences among the forms, entrepreneurs should carefully consider the results and requirements of each form to ensure that the business form they choose best meets their requirements. In choosing a form of ownership, entrepreneurs must remember that there is no single best form, what is best depends on the businesss particular circumstances. Ownership can be classified into two categories, as shown in figure 1.4:
Business Ownership

Individual Ownership

Collective Ownership

Sole Proprietorship

Family Business

Partnership Cooperative Enterprise

Joint Stock Company

Figure 1.4: Forms of Ownership

3.2.

Sole Trading/Sole Proprietorship

Sole proprietorship is a one-man business. It is the simplest, the oldest, and in some respects the most natural form of business in the private sector. In this form of business, a single individual is solely responsible for providing the capital, for bearing the risks, and for the control of the enterprise. It is a one-man show.

Sole proprietorship means a business owned, financed, and controlled by a single person. The owner, called the proprietor, alone is responsible for the profits and losses of the business. If entrepreneurs plan to start a business under a name other their own, they must register the name, called DBA (Doing Business As). If the business has a trade name, a Certificate of Doing Business under an Assumed Name can be obtained from the state in which the business will operate. According to L.H. Haney, The individual proprietorship is the form of business organization at the head of which stands an individual as one who is responsible, who directs its operations, and who alone runs the risk of failure. According to James Stephenson, A sole proprietor is a person who carries-on business exclusively by and for himself. He is not only the owner of the capital of the undertaking but is usually the organizer and manager and takes all the profits or responsibility for losses. According to J.L. Hansen, Sole trader business is a type of business unit where one person is solely responsible for providing the capital, for bearing the risk of the enterprise, and for the management of business.

3.2.1.

Characteristics/Features of Sole Proprietorship

The distinguishing characteristics of sole proprietorship are as follows: 1) Single Ownership: A sole proprietorship is wholly-owned by one individual. The individual supplies the total capital from his own wealth or from borrowed funds. 2) One-Man Control: The proprietor alone takes all the decisions pertaining to the business. He is not required to consult anybody. Ownership and management are vested in the same person. Some persons may be employed to help the owner but ultimate control lies with him. 3) No Separate Legal Entity: A sole proprietorship has no legal identity separate from that of its owner. The law makes no distinction between the proprietor and his business. The business and the owner exist together. If the owner dies or becomes insolvent the business is dissolved. The proprietor and his business are one and the same. 4) Unlimited Liability: The proprietor is personally liable for all the debts of the business. In case the assets are insufficient to meet its debts, the personal property of the proprietor can be attached. 5) No-Profit Sharing: The sole proprietor alone is entitled to all the profits and losses of business. He bears the complete risk and there is nobody to share the profits or losses. 6) Small Size: The scale of operations carried-on by a sole proprietorship is generally small. A sole trader can arrange limited funds and managerial ability. Therefore, the area of operations is generally local and limited. 7) No Legal Formalities: No legal formalities are required to start, manage, and dissolve sole trader business. Only a license is necessary in certain types of business.

3.2.2.

Advantages of Sole Proprietorship

The system of Sole Proprietorship has the following advantages: 1) Low Cost of Production: Since the business is exclusively his own, the single entrepreneur works day and night for the success of his enterprise. He allows no wastage of materials and keeps a strict, vigil on the activities of his workers. All this results in very low cost of production. 2) Promptness in Decisions: A single entrepreneur does and holds any consultations with anyone on important issues facing him. He, therefore, takes decisions promptly on the spur of the moment 3) Personal Contact: As the sole proprietorship is a very small form of business organization, its owner, single entrepreneur, maintain close contact with his customers and attempts to provide maximum satisfaction to them. Since he comes in contact with his workers daily, there is little possibility of any misunderstanding arising among them, with the result that the labor management relations remain quite happy and cordial. 4) Easy to Start and Wind-up: The individual proprietorship is the easiest form of business organization. For starting it, there are no legal formalities or government sections to be required. Even if one wants to start a

hotel or a dairy farm, the only formality he as to undergo is to take a license from the Health Department of the Municipal Board or Corporation. This kind of business can be dissolved or wound-up also very easily. It is because the individual proprietor is the whole sole owner of the business and he does not have to consult any body. In case he finds it unprofitable or he wants to take up some new kind of job, he can dissolve that business without any type of complication. 5) Incentive for Hard Work: As the individual proprietor is the whole sole owner of his business, he works vary hard and with full interest in order to get the best possible results of his endeavor. He does not care for the hours of leisure or rest. This kind of hard and sincere work enables him to earn good results. A shopkeeper or a hotel owner, e.g., works very hard to increase his profit. 6) Business Secrecy: In every business, there are certain secrets. They may be regarding the manufacture of some particular variety of products or regarding the purchase of the equipment or raw material or the sale of the products. In this form of business organization, as the individual proprietor is the only man who knows these secrets, he has no risk of their being disclosed to outsiders. 7) Flexibility in Business: This type of occupation can be promptly adjusted to the new circumstances. The sole proprietor can adjust the quantity and quality of his products promptly and without any delay according to the changes in demand and supply of goods; it is because there is no one to interfere or obstruct in his decision. 8) Independence: Since the sole proprietor is the whole sole owner of his business, he enjoys full independence in his business affairs.

3.2.3.

Disadvantages of Sole Proprietorship

The sole proprietorship business is also subject to certain disadvantages. Some of these are as follows: 1) Limited Means of Production: The firm has very limited resources. The single person cannot raise the entire capital requirement that is needed for expanding his business. As a result of this his business unit can be expanded only within the limits of his financial standing. 2) Limited Skills: The sole proprietor has only small business, where he uses his own limited managerial or technical skills. Beside, because of the limited funds, he cannot think of employing highly paid manager, technical experts, legal adviser and accountants. He also cannot manage for modern methods of marketing, sales and advertisement. Thus, the sole trader remains incapable of making the use of highly specialized and technically advanced processes in his small business unit. 3) No Economies of Large-scale Production: The sole proprietor has only a small-scale unit where the land, capital investment, machines, raw materials, etc., are required only in meager quantities. As such, he is unable to reap the benefits of internal and external economies like that of large-scale units. Consequently, the costs of production of his products are comparatively much more than those of the same type of products of the large-scale units. Thus, the sole proprietor cannot compete in the market, where there are similar products of large-scale units. 4) No Division of Labor: In the sole proprietary business, the production is only of small size, and the proprietor does every thing single-handed or with the help of only a few workers. As such, there is no possibility of modern type of complex division of labor. The result is that one-man productive unit does not get any benefit accruing from the modern system of division of labor. 5) Small Income: With the limited resources at his disposal, the sole trader cannot think of many profitable large-scale ventures. Consequently, his business remains of small size that brings him only a small earning. 6) Instability: The sole proprietorship continues till the good health or the life of the proprietor. In the case of the illness or death of the proprietor, the one-man business comes to an end. Thus, the sole proprietary business has no stability for its continuance. 7) Unlimited Liability: The sole proprietor has unlimited liability, which checks him from expanding his business further. In case there is loss in the business, than he has to pay-off all debts and loans of the business not only from the assets of the business but also from his private property.

8) Keeps a Country Economically Backward: If a country has only such units of business organization, then she can never advance in economic and industrial fields; she will rather remain backward. Big basic industries, like iron and steel plants, oil refineries, coal mining, railways, etc., which play a key role in the economic and industrial development of a country, cannot be started by the sole proprietor.

3.3.

Family Business

A family business is a business in which one or more members of one or more families have a significant ownership interest and significant commitments toward the business overall well-being. A firm is said to be family-owned if a person is the controlling shareholder; that is, a person (rather than a state, corporation, management trust, or mutual fund) can garner enough shares to assure at least 20% of the voting rights and the highest percentage of voting rights in comparison to other shareholders.

3.3.1.
1) 2) 3) 4) 5) 6) 7) 8) 9) 10)

Characteristics/Features of Family Business

Clearly separate management and ownership. Have a clearly defined vision. Take time to understand the familys concerns and the needs of individuals. Have a common language of trust inside and outside the family business. Speak with one voice. Live their values as well as espouse them Have defined roles and responsibilities for family members, shareholders, and employees. Have high staff loyalty and low staff turnover. Consider appointing non-executive directors to help bring objectivity. It also considers the family business members who arent involved in the business.

3.3.2.

Advantages of Family Business

1) Commitment: People who set-up a business can become very passionate about it it is their creation, they nurtured it, built it up and for many such entrepreneurs their business is their life. This very deep affection translates naturally into dedication and commitment, which extends to all the family members who come to have a stake in the success of the business. They feel they have a family responsibility to pull together and, provided there are no conflicts, everyone is happy to put in far more time and energy working for the companys success than they would dream of devoting to a normal job. Family enthusiasm develops added commitment and loyalty from their workforces people care more and feel they are part of a team, all contributing to the common purpose. 2) Knowledge: Family businesses often have particular ways of doing things special technological or commercial know-how not possessed by their competitors; knowledge that would soon become general in a normal commercial environment, but which can be coveted and protected within the family. This idea of knowledge is also relevant in relation to the founders sons or daughters joining the business. Children grow-up learning about the business, infected by the founders enthusiasm, and when the time comes for them to consider joining they may already have a very deep understanding of what the business is all about. 3) Flexibility in Work, Time and Money: Essentially, this factor boils-down to put the work and time into the business that is necessary and taking-out money when you can afford to. A further aspect of commitment is that if work needs to be done and time spent in developing the business, then the family puts in the time and does the work there is no negotiating of overtime rates or special bonuses for a rushed job. The same flexibility applies concerning money, and here lies another important distinction between entrepreneurial and non-business families. Most families have a set income derived from wages or salaries paid by an employer, and the only decisions the family take concern how this income is to be spent. But for families in business, income is not a fixed element in the domestic equation. They must decide how much money they can safely take from the business for their own needs while at the same time preserving the firms financial flexibility and its scope for investment.

The privately held family business is the only entity that can truly build for the long-run. 4) Long-Range Thinking: But although families are good at thinking long-term, they are not so good at formalizing their plans writing them down, analyzing the assumptions they are making, testing past results against earlier predictions in short, the strength means that the long-range thinking is there, while the weakness is that this thinking is undisciplined. If the right environment exists for a family to build on its vision of the future and to focus on and get behind the type of long-term to focus on and get behind the type of long-term strategic intent that has characterized Japanese business, then the possibilities are immense. 5) Stable Culture: For a variety of reasons, family businesses tend to be stable structures. The Chairman or Managing Director has usually been around for many years and the key management personnel are all committed to the success of the business and they too are there for the long-term. Relationships within the company have usually had ample time to develop and stabilize, as have the companys procedural ethics and working practices everybody knows how things are done. Like some of the other factors working in favor of family businesses, however, a strong, stable culture can be a two-edged sword. 6) Speedy Decisions: In a family controlled business, responsibilities are usually very clearly defined and the decision-making process is deliberately restricted to one or two key individuals. In many cases, this means that if you want the company to do something you go and ask the boss and the boss will either say yes or no. The contrast with this process is at its most stark if one looks at the example of a public company deciding to shift its operations into new trading areas. If the decision is likely to change the shape of the business significantly then it will involve rather more than a yes or no from the boss. Typically, the process will begin with an in principle board decision to investigate the move, feasibility studies will be undertaken which will then be examined by specially appointed board committees, the companys banking, accounting and legal advisers will all become involved in the process, a board decision will be taken to approve the move, but even then shareholder approval may have to be sought via a lengthy and elaborately detailed circular designed to summarize the arguments and quantify the financial impact of the change. Of course, this is not to say that advice from outsiders on important decisions is a waste of time, or that the consequences of such a major move should not be extremely carefully evaluated. But speed does have a commercial value and, in this example, if a lot rested on the speed with which a decision could be taken and implemented, then the family business would definitely have the edge. 7) Reliability and Pride: Commitment and a stable culture lie behind the fact that family businesses are generally very solid and reliable structures and are perceived as such in the marketplace. Many customers prefer doing business with a firm that has been established for a long time, and they will have tended to build-up relationships with a management and staff that are not constantly changing jobs within the firm or being replaced by outsiders. Also, the commitment within the family business, discussed earlier, is not just a hidden force it reveals itself to customers all the time in the form of a friendlier, more knowledgeable, more skillful and generally much higher standard of service and customer care. Closely connected with reliability is the notion of pride; the people who run family businesses, proud of their achievement in having established and build it and their staff are proud to be associated with the family and what they are doing. This pride, which in some circumstances can tend to almost institutionalize the business, is often translated into a powerful marketing tool.

3.3.3.

Disadvantages of Family Business

1) Rigidity: Walking through the doors of some family businesses can be like entering a time tunnel. Sentiments such as, Things are done this way because Dad did them this way and You cannot teach an old dog new tricks, reflect the ways in which behavior patterns can become ingrained and family businesses become tradition-bound and unwilling to change. It is all too easy to find ourselves doing the same thing, in the same way, for too long, and in a family business it is easier still: change not only carries with it the usual disruption and an array of commercial risks, but it can also involve overturning philosophies and upsetting practices established by relatives.

2) Business Challenges: The business challenges that particularly affect family firms can be divided into three categories: i) Modernizing Outdated Skills: Very often the skills possessed by a family business are a product of history and, as a result of developments in technology or a change in the marketplace; these skills can quickly become obsolete. Problems in this area are not necessarily triggered by drastic changes such as the effect of word-processing technology on typewriter manufacturers. They can also arise from subtle changes of emphasis in product manufacture or marketing that can be just as damaging if they catch an unresponsive, tradition-conscious family business off-balance. ii) Managing Transitions: It represents another major challenge for family businesses it can often be the make or break for a family firm. In summary, the challenge to the business is typified by a situation in many companies where the founder is getting-on in years and his son, the heir apparent, is convinced that things need to be done differently. The merest hint of this potential conflict can be disruptive, causing enormous uncertainty among staff, suppliers and customers. In many cases, the damage becomes even more serious when the son actually begins introducing his program of radical change. So, managing transitions is a difficult challenge to the business and, because of the added dimension of possible intrafamily upset and conflict, it is a much bigger challenge for a family business than it is for other kinds. iii) Raising Capital: In comparison with the wide range of funding alternatives open to publicly held companies with a diversified shareholder base, family businesses obviously have much more limited options when it comes to raising capital. But over and above these family businesses commonly have a problem with the very concept of raising money from outside sources. This tends to occur most frequently in relation to longer-term capital for significant projects, like opening a new plant or creating a new division of the business, but it also shows itself in a reluctance to go to outsiders for bank overdrafts or other short-term funding that would help the firm through quite minor cashflow owned secret ambitions or succeeding when their father rears; and the father himself is often ambivalent about succession because he is worried about the ability of his children and how he is to approach favoring one at the expense of the others. But, more fundamentally as far as the business is concerned, almost always the change is not simply a move from one generation to the next it is a revolution in which the culture of the organization is re-constructed by the young people who bring with them new ideas about how the business should be run, how it is to develop, new loyalties, new staff, and so on.

3.4.

Partnership

Partnership is a business relation between two or more persons who have agreed to share the profits of a business carried-out by all or any one of them acting for all. In simple words, when by means of a contractual agreement several individuals associate with common ownership and management of a venture, such a business relationship is termed as partnership. A partnership venture can be set-up with minimum 2 and maximum 10 members in banking business and 20 in other cases. This restriction on upper limit is due to the provision contained under Section 11 of the Indian Companies Act 1956, which stipulates that an unregistered company, association or partnership having more than 20 members (10 in case of banking) must be registered under the said Indian Companies Act. According to Section 4 of the Indian Partnership Act, 1932, The relation between persons who have agreed to share profits of a business carried-on by all or any of them acting for all. According to J.L. Hauson, A partnership is a form of business organization in which two or more persons upto a maximum of twenty join together to undertake some form of activity. According to Kimball, A partnership or firm as it is often called is, then a group of men who have joined capital or services for the prosecuting of some enterprise. According to Haney, Partnership is the relation between persons competent to make contract, who agree to carry-on a lawful business in common with a view to private gain. The persons who enter into partnership are individually called partners and collectively a firm and the name under which they carry-on their business is called firm name. A firm is not recognized by law as a legal entity

except for the purposes of income tax. A firm cannot become a partner of another firm though its partners can join any other firm as partners.

3.4.1.

Features of Partnership

The following are the main characteristics of a partnership firm: 1) Two or More Persons: There must be atleast two persons to form a partnership. A person cannot enter into partnership with himself. The maximum number of persons is 10 in case of banking business and 20 in other types of business. If the number of partners exceeds the prescribed maximum, it would become an illegal association of persons. 2) Contract or Agreement: A partnership firm is an agreement between two or more persons for running a business and earning profits. The maximum limit of the numbers of partners is twenty, if the business is of general type and ten partners if it is a banking concern. Generally, there are no legal problems involved in such a kind of contract or agreement, though mostly partnership agreements are registered under terms. 3) Lawful Business: The purpose of the partnership agreement must be to run a business, which is legally allowed by the government to earn profits. A partnership to carry on some charitable or social works or some unlawful activity, e.g., black marketing or smuggling is not included in it. 4) Sharing of Profits: In the partnership organization, the partners share the profits according to the proportion written in the Agreement. In case the business faces a loss, even then they will share it proportionately. 5) Control is Shared by All the Partners: In a partnership, the decisions are taken unanimously. Some partners may be dormant or sleeping partners and may not take active part in the management, but they have the right to control the functioning of the business. The business is carried on by all or any of them acting for all. 6) Mutual Agency: The relations between the partners are based upon mutual trust, confidence, and good faith. Mutual agency is an essential characteristic of partnership. 7) Unlimited Liability: In the partnership business, the liability of every partner is unlimited. This means that every partner is responsible for the acts of all the partners. This can be explained with the help of an example. Suppose, a partner enters into an agreement with some other firm or the government for some debt. Then the agreement of that one partner will bind all the partners of that firm. By that each partner will be responsible to pay-off the debt not only to the extent of his share in the business but to full extent of even his private resources. If some of the partners are not in a position to meet their share of loss, then all other partners will have to pay the entire debt.

3.4.2.

Advantages of Partnership

The partnership has the following important advantages: 1) Easy to Form: A partnership firm can be started very easily, as there is no need of taking any special permission from the government. The only thing required is that the partners should draw up the agreement and get the firm registered. Registration of a partnership firm is not compulsory; it is on the discretion of the partners to get it registered or not. 2) Commands Larger Resources: Since, in the partnership firm, each partner contributes his share of capital investment, the financial resources become much larger than in the sole proprietary business. Moreover, because of its characteristic of unlimited liability, they can easily borrow sufficient money from banks and other financial institutions. Hence, the partnership firms command larger financial resources. 3) Prompt and Correct Decisions: As the partners are only few in numbers, they remain in continuous and intimate touch with one another. As such, any kind of decision regarding the business activity can be taken promptly. Moreover, as every problem is examined by all the members of the firm, there is less possibility of wrong decision or judgment. The decisions of the partnership organization are, therefore, more useful and profitable than those in the sole proprietorship. 4) Use of Diverse Skills and Talents: In a partnership, the partners are of diverse talent and skill, and so it provides opportunity for division of work among partners. One partner can look after the work of production,

another looks after store, the third is in charge of office, the fourth deals with sales and the fifth supervises the labor and so on. The kind of division of labor increases the total efficiency of the business organization. 5) Business Secrecy: For a partnership firm there is no need to publish its annual account of investment, expenditure, profit or loss, etc., as such, its business position can be kept secret. 6) Highly Adaptable to Changes: A partnership firm responds promptly to the changes in business conditions. In case, there is possibility of losses, a line of business can easily be changed. This kind of change can be made very conveniently so no legal permission is needed for it. 7) Personal Contacts: Since a partnership concern is only of medium size, it is possible to establish wider personal contacts with the workers and customers. This helps in supervision of workers and in removing the problems and difficulties of workers and customers. 8) Personal Interest and Initiative: In a partnership concern, the partners are personally liable to profit or loss; as such, they show keen interest and initiative to avoid wastage and to make the firm efficient and successful in its working. 9) Scope of Large-Scale Production: In a partnership firm, because the management is better and more efficient and there is scope of larger capital resources by admitting more partners, there is possibility of making it a large-sale unit. Large-scale production helps in reaping all its advantages. 10) Sharing of the Risks: In the sole proprietary firm, the owner has to bear all the risks of the business himself. But in the case of partnership concern, since there are several partners, the risks are shared by all the partners. In case, the firm fails or suffers losses, then the debts and losses will be shared by all the partners. 11) Benefits of Unlimited Liability: The partnership concern runs on the principal of unlimited liability. This prevents the partners from the launching of rash and risky enterprises. At the same time, it enables the partnership firm to borrow sufficient capital very easily from banks and other financial institutions. It is because the creditors know that they can recover their due even from the private property of the partners. The above mentioned advantages of partnership indicate clearly that a partnership concern is definitely superior in many ways to a sole proprietary firm.

3.4.3.

Disadvantages of Partnership

No doubt, partnership is far superior to an individual ownership; still it suffers from many defects. The following are some of its main disadvantages: 1) Uncertain Existence: The greatest defect of partnership is that its existence is not permanent. In the event of a partners retirement, death or insanity of any partner, the partnership has to be dissolved. There is, thus, no continuity co-existence of partnership firm. 2) Disharmony among Partners: The partnership firm can run successfully only when there is harmony and cordial co-operation among the partners. Sometimes, because of misunderstanding and disagreements on any issue, a conflict or any clash may develop and may reach a breaking point and may often lead to the dissolution of the firm. 3) Not Suitable for very Large-Scale Business: A partnership concern has limited capital resources and managerial ability, as there is limit to the number of partners. As such, it is incapable of undertaking very large industrial units and businesses like banks, steel plants, shipping, insurance, etc. This is because these businesses require hundreds of crore of rupees, which cannot be arranged by a partnership firm. 4) Weak Management: Very often some partners, who also act as in charge of some kind of work in the concern, behave in a selfish manner. They want to do the minimum and try to get the maximum out of the business. This weakens the solidarity of the concern and may lead to serious consequences-it may even ruin the business, making others liable to risks. 5) Non-Transferability of Partnership Shares: In partnership, a partner cannot transfer or sell his share to any outsider without the consent of all other partners. Thus, he remains locked-up in the concern for ever.

6) Unlimited Liability: It is the greatest handicap of partnership. The principle of unlimited liability often makes all the partners suffer great losses because of the foolish and irresponsible action of anyone of the partners. Due to unlimited liability, those who have ability but no capital cannot join a partnership concern. Besides, it has been found that, owing to unlimited liability, a partnership follows a play safe policy; the result is that the business progress remains very slow.

3.5.

Joint Stock Company

The Joint Stock Company is legal business owned by the shareholders having limited liability, and managed by an elected Board of Directors. The most important type of business organization today is the joint stock company. Infact, a business on respectable scale can be organized only in this manner. It has been defined, A company is an artificial person having an independent legal entity and a perpetual succession with a distinctive name and a common seal having a common capital divided into shares of fixed value which are transferable and carry limited liability. According to Prof. Haney, Joint Stock Company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership. According to Chief-Justice Marshall, A joint stock company is an artificial person invisible, intangible, and existing only in the eyes of law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. According to Justice Lindley, By a company is meant associations of many persons who contribute money or moneys worth to a common stock and employ it for some common purpose. The common stock so contributed is denoted in money, and is the capital of the company. The persons who contribute it or to whom it belongs are the members. The portion of capital to which each member is entitled is his share. Shares are always transferable, although the right to transfer them is often more or less restricted. Thus, a joint stock company is a voluntary association of persons having a separate legal existence, perpetual succession and common seal. Its capital is generally divided into shares which are transferable, subject to certain conditions.

3.5.1.

Features of Joint Stock Company

1) Artificial Person with a Separate Legal Entity: A Joint Stock Company is an artificial person (Since it has no physical existence) with a separate legal entity. It can own properties, and can purchase and sell them under its own seal. It can conduct a bank account or any other business, and can enter into contract with others. It can file a suit in court against other and others can file a suit against it. Thus, it is just like a distinct individual, though it has no physical existence. 2) Voluntary Association: A Joint Stock Company is totally a voluntary association. It is created and formed by the people on own. There is no kind of compulsion by the law of the government to form it. 3) Legal Sanction: A Joint Stock Company has to be incorporated with due process of law. In our country, the Companies Act of 1956 lays down the procedure and basic conditions which have to be fulfilled to start a company. When these conditions are fulfilled, the company must be registered under the Act. (The Registration of the Company is done by the Registrar, Joint Stock Companies). 4) Perpetual Character: The existence of a company is of perpetual nature. It goes on forever until it is wound-up. Shareholders may come and go, and may change hand any number of times, but the company goes on forever. 5) Shares are Freely Transferable: The shareholders of a Joint Stock Company are free to sell or transfer their shares. No shareholder is permanently or necessarily tied for life to the fortunes of a company. 6) Common Seal: A company is only an artificial person. It has no physical existence. As such, it cannot sign any document. A common seal with the name of the company engraved on it, therefore, serves the purpose of signature. Whenever this seal is affixed or used by the company on any document, as a substitute for its signature, it has to be witnessed by two directors. The common seal is always kept in safe custody.

7) Limited Liability: In a company form of organization, the liability of owners (shareholders) is limited up to the amount of capital they invest in the business individually. 8) Management by Elected Representatives: Since a company is only an artificial person, and has no physical existence, it cannot manage its business by itself. So (it is managed by a Board of Directors. The members of this Board are elected by the shareholders. The elected members are generally the men wellknown in business and industrial circles. All the important decisions and day-to-day working are carried on by management or the Board of Directors. 9) Business: A company can conduct only such business as stated in its memorandum of association. 10) Ownership: Ownership of a company is in the hands of a large number of people. Unlike partnership, in which case, membership of members is limited to 10 in case of banking and 20 in case of other business, a company can have large number of members. In case of Private Ltd. Company, the upper limit is put to 50, though in actual practice there can be much larger number than this. In case of a Public Ltd. Company, there is no upper limit to the number of members.

3.5.2.

Advantages of Joint Stock Company

In modern times, the company form of business organization has become very popular. It is because it commands many advantages. Its main advantages are as follows: 1) Perpetual Existence: A Joint Stock Company is permanent in character. It is a legal person, and has an existence of its own. It is unaffected by its shareholders and the directors. It can sue, and can be sued in the court of law. The shareholders and directors, due to transferability of shares, may change any numbers of times, but the company remains in existence perpetually. 2) Large Funds: A Joint Stock Company can raise plenty of funds by issuing various types of shares or through the sale of debentures or bonds. A company can secure funds from; other countries also of its shares or bonds are subscribed by foreign nationals. 3) Transferability of Shares: A shareholder of a Joint Stock Company can sell his shares whenever he likes. He can also buy additional shares, if he so wishes. The buying and selling of shares can be done very conveniently in a special market known as the Stock Exchange, because of this convenience of transferability of shares, the shareholders are not tied permanently to the fortunes of a company. 4) Limited Liability: Unlike individual proprietorship and partnership organizations, the shareholders of a Joint Stock Company have limited liability. Because of limited liability, a shareholder is liable only to the face value of his shares. This merit of the company form of organization attracts and induces all sorts of people to purchase shares; and thus, helps industrial investment and growth. 5) Suitable to all Pockets: The shares of a Joint Stock Company are, generally, of low denominations; so, even the smallest saver can purchase the shares of many new companies. Thus, this type of organization affords opportunities of investment to men of small means. This encourages the habit of thrift and saving among the people of the country. Further, because of the principle of limited liability, the rich are also very much interested in buying shares of various companies. 6) Spreading Out of Risk: Since this type of organization enables people to buy shares of different companies, their risk is spread out. The laws of a company of which a person is a shareholder, does not make him totally bankrupt. It is because he holds shares of those companies also which are earning great profits. 7) Democratic Organization: In a company form of organization the directors are elected by the shareholders. It is, therefore, a democratic organization. If the policies and administration of the directors are not found beneficial to the company, they can be removed by the shareholders. Such matters are decided every year in the annual meeting of the General Body. 8) Efficient and Economical Management: The management of a Joint Stock Company is carried on by the directors, who are elected representatives of the shareholders. The directors are generally, the persons of wider vision, outstanding administrative ability and business acumen. They are not to be paid high salaries. Only they get nominal fee for attending the Boards meetings. Thus, the management of a company form of organization is efficient as well as economical.

9) Suitable for Large Enterprise: A Joint Stock Company can raise plenty of capital by selling shares and debentures or bonds, and can provide very efficient and economical management. These two things are very essential for running a large-scale concern. As such, the company form of business organization is best suited of run large-scale enterprises. Individual proprietorship and partnership firms, which have limited funds, cannot run large-scale concerns. 10) Effective Control by the Government: A Joint Stock Company is run according to the rules and regulations of the government. It has to submit its accounts and balance sheet to the government every year. Thus, it remains in effective control of the government. If it is found that a company is not functioning properly, the government may cancel the certificate of corporation of the company, and may take over its control in her own hands.

3.5.3.

Disadvantages of Joint Stock Company

The company form of business organization has no doubt a numbers of advantages, but it has several defects too. Main defects/disadvantages are as follows: 1) Complication in Formation: The formation of a Joint Stock Company involves several long and complicated legal formalities. Thus, a considerable cost is to be incurred before the company starts its business. 2) Democratic only in Theory: The management of a company is democratic only in theory. It is because only a small group of powerful shareholders get control of the company, and their nominees get themselves re-elected as the directors every time. The ordinary shareholders have little voice at the time of election. The company management is actually oligarchic and not democratic. 3) Lack of Motivation: In the company form of organization, there is a separation between ownership and management. The ownership is with the shareholders, who do practically nothing in the management of the company. The management is in the hands of directors and paid managers, who, generally, do not watch the interest of the shareholders. Besides, the paid managers may lack, in motivation, since they have not to get any share in the profits. Nowadays, the bonus facilities have been implemented in Joint Stock Companies in order to motivate the salaried managers and other employees to work hard and produce large profits for the company. 4) Limited Liability: The Joint Stock Company is based on the principle of limited liability. Because of this, the shareholders may not take as much interest as they should. The directors may become irresponsible. They may also be tempted to undertake risky enterprises at the cost of shareholders. 5) Delay in Decision: The company organization is too ponderous and weighty. It cannot take any kind of quick decision. It is, therefore, fit to a business where changing conditions require constant changes in the policy of production. 6) No Personal Touch with Employees: In this form of business organization, the owners of the organization have any personal touch with their employees. The owners, i.e., the shareholders are concerned only with their profits, and they hardly show any concern for the welfare of employees. The paid managers work only to satisfy their directors and express their helplessness in matters relating to the employees welfare. Thus, the welfare of the employees is totally neglected. This attitude often leads to labor troubles. 7) Lack of Secrecy: In the company form of organization all kinds of decisions are taken by the Board of Directors; as such, it is difficult to maintain any kind of secrecy. A public company publishes its balance sheet every year, showing the details of its financial position and also the position of profits and losses. In that way, also the secrecy of a Joint Stock Company cannot be maintained. 8) Concentration of Wealth and Power in Few Hands: The company form of business organization is responsible for concentration of wealth and power in the hands of a few persons only. This has serious disadvantages from the point of view of the countrys economy as a whole. In this form of organization, a few rich capitalists, who can afford to purchase a large number of the companys shares, become all in all. In the U.S.A. and many countries of Western Europe few rich financiers control the majority of the banks, insurance companies and industrial concerns because of this form of business organization. In

India too, a large number of industrial concerns are under the control of only a few rich families and industrial houses.

3.6.

Co-operative Sector Enterprises/ Organizations/Society

Co-operation is a form of organization, wherein persons, irrespective of caste, creed and religion, voluntarily associate together, as human beings, on the basis of equality for the fulfillment of their common economic interests. Co-operative society is a voluntary association of people registered under the provisions of the Cooperative Societies Act, 1912. It is a legal entity distinct and independent of its members. It has a perpetual succession with limited liability of the members. It is managed on democratic lines by the elected representatives of the members. According to Indian Co-operative Societies Act, 1912, A cooperative society has its objective, the promotion of economic interests of its members in accordance with cooperative principles. According to T.M. Herrick, Cooperation is the act of persons, voluntarily united, for utilizing reciprocally their own forces, resources, or both, under their mutual management to their common profit. According to E.H. Caluest, Cooperation is a form of organization wherein persons voluntarily associate together as human beings on the basis of equality, for the promotion of economic interests of themselves. According to the International Labor Organization, A co-operative organization is an association of persons, usually of limited means, who have voluntarily joined together to achieve a common economic end through the formation of a democratically controlled organization, making equitable contributions to the capital required, and accepting a fair share of risks and benefits of the undertaking. According to Mr. N. Barrow, A voluntary organization of persons with unrestricted membership and collectively own funds consisting of wage-earners and small producers, united on democratic basis for the establishment of enterprises, under joint management for the purpose of improving their household or business economy. Mutual trust, mutual supervision, self-reliance, spontaneity and equality are the five pillars of a co-operative organization and co-operative spirit is the backbone.

3.6.1.

Characteristics of Co-operative Organization

Co-operatives are based on the principle of self help through mutual aid; thus, they have a moral and human touch to commercial activities. In this way, they are a bit different from other forms of business organizations. The following are the main characteristics: 1) Voluntary Association: A co-operative organization is totally based on voluntary membership. There is no compulsion either to become its member. 2) Legal Entity: A cooperative society after registration acquires a corporate personality with perpetual succession and common seal. It acquires an identity quite distinct and independent of its members. It begins to function as an artificial man created by law and is very much placed in a position quite similar to a joint stock company. It is an autonomous, self-governing, and self-controlling organization. 3) Equal Voting Right: The organization of a cooperative society is completely democratic as each member has only one vote irrespective of the number of shares held by him. This ensures that nobody is allowed to dictate his terms simply because he is rich and holds more shares. 4) Service Motive: A cooperative society is formed primarily with the object of rendering maximum service to its members. Service and not profit is the main aim of a cooperative society. However, such societies can earn profits by extending their services to non-members. 5) Disposal of Profits: Unlike a commercial concern which distributes its profits among the owners in the ratio of their capital or in some other agreed ratio, a cooperative society does not distribute its entire surplus in the form of dividend on shares held by its members. Rather it gives them in the form of a bonus which need not be in proportion to the capital contributed by the members. In case of consumers cooperatives, the

bonus is generally paid to the members in proportion to the purchases made by them during the year, while in case of producers cooperative stores; the goods delivered for sale may form the basis of distributing bonus. In fact, the whole of the surplus is not distributed among the members, but a portion of this is usually utilized in extending amenities and facilities to the members. Law, however, requires that each society must transfer atleast one-fourth of its profits to a general reserve and provides that it may utilize a portion of the profit, not exceeding 10 per cent, for the welfare of the locality in which the society is functioning. 6) Other Membership: There is no restriction of any kind to become a member of co-operative enterprise. This means the membership is open to all irrespective of their caste, creed, religion and political affiliations. The membership fee or the value of share in the capital of the co-operative society is kept quite low, so that even the ordinary persons may become its members. 7) Economic Motive: Co-operative organization is always formed with some economic motive, e.g., for the arrangement of cheap credit facilities, distribution of improved seeds, fertilizers, etc., providing marketing facilities, making available land for construction houses, providing consumer goods on proportionate, etc. 8) Distributive Justice: In the co-operative form of organization, capital is not given any undue preference. The rate of interest payable on the capital, contributed by the members, is normally of restricted nature, and the profits are distributed equitably amongst its members to the extent of the business transacted with it by the respective members. 9) Mutual Help and Welfare: The co-operative form of organization is based on the principle of mutual help a welfare. Each for all, all and all for each, is the famous slogan of co-operatives. The co-operative organization does not function totally on the profit-making motive.

3.6.2.

Advantages of Co-operative Organization

A co-operative form of business organization has the following advantages: 1) Easy Formation: Formation of a co-operative society is very easy compared to a joint stock company. Any ten adults can voluntarily form an association and get it registered with the Registrar of Co-operative Societies. 2) Open Membership: Persons having common interest can form a co-operative society. Any competent person can become a member at any time he/she likes and can leave the society at will. 3) Democratic Control: A co-operative society is controlled in a democratic manner. The members cast their vote to elect their representatives to form a committee that looks after the day-to-day administration. This committee is accountable to all the members of the society. 4) Limited Liability: The liability of members of a co-operative society is limited to the extent of capital contributed by them. Unlike sole proprietors and partners, the personal properties of members of the cooperative societies are free from any kind of risk because of business liabilities. 5) Elimination of Middlemens Profit: Through co-operatives the members or consumers control their own supplies and thus, middlemens profit is eliminated. 6) State Assistance: Both Central and State governments provide all kinds of help to the societies. Such help may be provided in the form of capital contribution, loans at low rates of interest, exemption in tax, subsidies in repayment of loans, etc. 7) Stable Life: A co-operative society has a fairly stable life and it continues to exist for a long period of time. Its existence is not affected by the death, insolvency, lunacy or resignation of any of its members.

3.6.3.

Disadvantages of Co-operative Organization

Besides the above advantages, the co-operative form of business organization also suffers from various disadvantages such as: 1) Limited Capital: The amount of capital that a co-operative society can raise from its member is very limited because the membership is generally confined to a particular section of the society. Again due to low rate of return the members do not invest more capital. Governments assistance is often inadequate for most of the co-operative societies.

2) Problems in Management: Generally it is seen that co-operative societies do not function efficiently due to lack of managerial talent. The members of their elected representatives are not experienced enough to manage the society. Again, because of limited capital they are not able to get the benefits of professional management. 3) Lack of Motivation: Every co-operative society is formed to render service to its members rather than to earn profit. This does not provide enough motivation to the members to put in their best effort and manage the society efficiently. 4) Lack of Co-operation: The co-operative societies are formed with the idea of mutual co-operation. But it is often seen that there is a lot of friction between the members because of personality differences, ego clash, etc. The selfish attitude of members may sometimes bring an end to the society. 5) Dependence on Government: The inadequacy of capital and various other limitations make co-operative societies dependant on the government for support and patronage in terms of grants, loans subsidies, etc. Due to this, the government sometimes directly interferes in the management of the society and also audits their annual accounts.

4.
4.1.

SICKNESS IN SSE
Introduction

Sickness is a universal phenomenon. It is a major problem of SSE (Small Scale Enterprise or SSI or SME) in all countries of the world, may it be developed or developing countries. SSE sickness is a matter of serious concern because besides affecting the owners, employees, creditors, and suppliers, it causes wastage of national resources and social unrest. Growing incidence of sickness has been one of the major problems faced by the industrial sector of the country. Substantial amount of loan able funds of financial institutions is blocked-up in sick industrial units causing not only wastage of resources but also affecting the healthy growth of the Indian economy. Not only some of the traditional industries like cotton textiles, jute, and sugar have been of afflicted with sickness, but even some other modern industries like engineering, chemicals, rubber, cement, electrical, and paper have been affected. Therefore, it has been considered very essential to detect industrial sickness at an early stage and taking measures to prevent sickness.

4.2.

Meaning and Definition of Sick Industry/Unit

The prevalence of sickness in SSI sector is a cause of concern. The definition of sickness in SSI sector has been undergoing changes. The Reserve Bank of India (RBI) was instrumental in appointing committees from timeto-time to look into the issue of the sickness affecting the Sector. The latest definition of sickness given by the Working Group on Rehabilitation of Sick Units set-up by the RBI (Kohli Committee) is given below: A small-scale industrial unit is considered sick when: 1) If any of the borrowal accounts of the unit remains sub-standard for more than six months, i.e., principal or interest, in respect of any of its borrowal accounts has remained overdue for a period exceeding one year will remain unchanged even if the present period for classification of an account as sub-standard is reduced in due course; 2) There is erosion in the net worth due to accumulated losses to the extent of 50 per cent of its net worth during the previous accounting year; and 3) The unit has been in commercial production for atleast two years. According to State Bank of India, A sick unit is that unit which fails to generate an internal surplus on a continuous basis and depends for its survival upon frequent infusion of external funds. There are different perceptions of the symptoms and characteristics of SSI sickness. Sickness is a relative concept. To a layman, a sick unit is one which is not healthy. To an investor, it is one which skips dividends. To an industrialist, it is a unit which is making losses. To a banker, it is a unit which is not repaying its loan or interest on loan on due dates.

According to the Sick Industrial Companies Act, 1985, A sick industrial company indicates an industrial unit (registered for not less than seven years) which is showing accumulated losses equal to or exceeding its present net worth at the end of any financial year, and has also suffered cash losses during that financial year and in the immediate preceding year. Here cash means loss computed without making provision for depreciation and net worth means the total amount of capital and free reserves. Thus an industrial unit was defined as sick if: 1) It was registered for atleast seven years, 2) It incurred cash losses for the current and the preceding year, and 3) Its net worth has eroded. A company which had eroded 50 per cent or more of its peak net worth during any of preceding five financial years is called incipiently sick unit. Initially, only private sector companies were covered under the Sick Industrial Companies Act. In December 1991, public sector companies were also brought under the purview of this Act. The 1992 amendment (introduced in February 1994) has altered the criterion somewhat; firms only need to be registered for five years, instead of earlier seven years, while other criterion will remain same. As far as small-scale sector is concerned, small-scale industrial unit is considered to be sick that has: 1) Incurred a cash loss in the previous accounting year and is likely to incur cash losses in the current accounting year. 2) Erosions on account of cumulative cash losses to the extent of 50 per cent or more of its peak net worth during the last five years. 3) Continuously defaulted in meeting four consecutive half-yearly installments of interest or two half-yearly installments of principal on term loan.

4.3.

Criteria to Identify Sickness/ Incipient Sickness

The necessary information on sickness and incipient sickness among the Units in the Sector was collected during the All India Third Census of Small Scale Industry 2001-2002. In order to measure incipient sickness, the continuous decline in gross output for three consecutive years was identified as a suitable indicator, whereas for measuring sickness, the latest definition given by the Kohli Committee was adopted. Thus, the following criteria were adapted to identify sick/incipient sick units in the Third Census: 1) Continuous decline in gross output compared to the previous two financial years; 2) Delay by more than 12 months in repayment of loan taken from institutional sources; and 3) Erosion in the net worth to the extent of 50 per cent of the net worth during the previous accounting year. Magnitude of Sickness It is of utmost importance to take measures to ensure that sickness is arrested at the incipient stage itself. The branch officials should keep a close watch on the operations in the account and take adequate measures to achieve this objective. The managements of the units financed should be advised about their primary responsibility to inform the banks if they face problems which could lead to sickness and to restore the units to normal health. The organizational arrangements at branch level should also be fully geared for early detection of sickness and prompt remedial action. Banks/financial institutions will have to identify the units showing symptoms of sickness by effective monitoring and provide additional finance, if warranted, so as to bring back the units to a healthy track. An illustrative list of warning signals of incipient sickness that are thrown-up during the scrutiny of borrowal accounts and other related records, e.g., periodical financial data, stock statements, reports on inspection of factory premises and godowns, etc., which will serve as a useful guide to the operating personnel. Further, the system of asset classification introduced in banks will be useful for detecting advances, which are deteriorating in quality, well in time. When an advance slips into the sub-standard category, as per norms, the branch should make full enquiry into the financial health of the unit, its operations, etc., and take remedial action. The branch officials who are familiar with the day-to-day operations in the borrowal accounts should be under obligation to identify the early warning signals and initiate corrective steps promptly. Such steps may include providing timely financial assistance depending on established need, if it is within the powers of the branch manager, and an early reference to the controlling office where the relief required are beyond his delegated powers. The branch manager may also help the unit, in sorting out difficulties which are non-financial in nature and require assistance from outside agencies like Government departments/undertakings, electricity

boards, etc. He should also keep the term lending institutions informed about the position of the units wherever they are also involved.

4.4.

Causes of Industrial Sickness

Some industries are born sick; sickness is thrust upon some, while others become sick due to a number of causes. The general belief is that the incidence of sickness results from the changing economic factors and the external influence, which tilt the economic viability. The causes of sickness may vary from one unit to another. But the most common causes of sickness can be grouped under two heads i.e., internal and external. 1) Internal Causes for Sickness: It consist those factors which are within the control of management. This sickness arises due to internal disorder in the areas justified as following: i) Lack of Finance: This including weak equity base, poor utilization of assets, inefficient working capital management, absence of costing and pricing, absence of planning and budgeting and inappropriate utilization or diversion of funds. ii) Bad Production Policies: The another very important reason for sickness is wrong selection of site which is related to production, inappropriate plant and machinery, bad maintenance of plant and machinery, lack of quality control, lack of standard research and development, and so on. iii) Marketing and Sickness: This is another part which always affects the health of any sector as well as SSI. This including wrong demand forecasting, selection of inappropriate product mix, absence of product planning, wrong market research methods, and bad sales promotions. iv) Inappropriate Personnel Management: The another internal reason for the sickness of SSIs is inappropriate personnel management policies which includes bad wages and salary administration, bad labor relations, lack of behavioral approach causes dissatisfaction among the employees and workers. v) Ineffective Corporate Management: Another reason for the sickness of SSIs is ineffective or bad corporate management which includes improper corporate planning, lack of integrity in top management, lack of coordination and control, etc. 2) External Causes for Sickness: It consist those factors which are outside the organization, management has no or little control over it. It consist following: i) Personnel Constraint: The first most important reason for the sickness of small-scale industries is non-availability of skilled labor or manpower wages disparity in similar industry and general labor invested in the area. ii) Marketing Constraints: The second cause for the sickness is related to marketing. The sickness arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes in global marketing scenario, excessive tax policies by government, and market recession. iii) Production Constraints: This is another reason for the sickness which comes under external cause of sickness. This arises due to shortage of raw material, shortage of power, fuel and high prices, importexport restrictions. iv) Finance Constraints: Another external cause for the sickness of SSIs is lack of finance. This arises due to credit restrains policy, delay in disbursement of loan by government, unfavorable investments, fear of nationalization.

4.5.

Symptoms for Sickness

The Tiwari Committee identified certain symptoms which would be quite helpful in the detection of industrial sickness at the beginning or incipient stage. These symptoms are: 1) Continuous irregularity in cash credit accounts; 2) Low capacity utilization; 3) Profit fluctuations, downward trends in sales and stagnation, or fall in profits followed by contraction in the share of the market; 4) Higher rate of rejection of goods manufactured; 5) Reduction in credit summations whenever the companies are in financial difficulty, they open a separate account with another bank and deposit all collections therein;

6) Failure to pay statutory liabilities; 7) Larger and longer outstanding in the bill accounts; 8) Longer period of credit allowed on sale documents negotiated through the bank and frequent returns by customers of the same; 9) Constant utilization of cash credit facilities to the maximum and failure to pay timely installment of principal and interest on term loans and installment credits; 10) Non-submission of periodical financial data/stock statement, etc., in time; 11) Financing capital expenditure out of funds provided for working capital purposes; 12) Decrease in working capital on account of: i) Increase in debtors and particularly dues from selling agents, ii) Increase in creditors, and iii) Increase in inventories which may include large number of slow or non-moving items. 13) A general decline in that particular industry combined with many failures; 14) Rapid turnover of key personnel; 15) Existence of a large number of law suits against the company; 16) Rapid expansion and too much diversification within a short time; 17) Sudden/frequent changes in management whether professional or otherwise and/or dominated by one man/few individuals; 18) Diversion of funds for purposes other than running the unit; 19) Any major changes in the shareholdings.

4.6.

Process of Sickness in SSI

Following are the steps involved in the process of Sickness: 1) Normal Unit: Functional areas, viz., production, marketing, finance, and personnel are normal and efficient. Generating profits, current ratio is more than one. Net-worth is positive. Debt equity ratio is satisfactory. 2) Tending Towards Sickness: Initial deviation in some of the functional areas mentioned above. Decline in profit during last year. Losses anticipated in current year. 3) Incipient Sickness: Deterioration in the above functional areas continues. Cash losses incurred in last year are expected in current year. Deterioration anticipated in current year. Although current ratio is more than one during last year.

4.7.

Consequences/Effects of Industrial Sickness

The problem of industrial sickness is assuming serious dimensions. The Planning Commission, commenting on the consequences of sickness state that sickness will increase the problem of unemployment and also render scarce capital resources waste. It will create on adverse climate for further industrial growth. The workers are the worst victims of industrial sickness. Industrial sickness can have serious consequences which are as follows: 1) Set-Back to Employment Prospects: Closure of an industrial unit is likely to render workers unemployment. The implications are likely to be serious if the sick industrial unit is a large one, employing large number of people. For example, if a huge cotton textile mill becomes sick it will adversely affect the large number of workers. 2) Wastage of Resources: In a capital scarce economy like India, if an industrial unit turns sick and is closed down, resources invested in that unit are wasted. This problem is particularly serious for large-scale sick units where substantial investments have been made in plant and machinery. 3) Adverse Effect on Related Units: Often an industrial unit is linked with a number of other industrial units through backward and forward connections. Hence, sickness in one unit is likely to adversely affect such related units. For example, a textile unit is connected to other units for procuring raw materials and other inputs. Similarly, it is connected to other units to whom it supplies its finished products. So, sickness in such textile unit is likely to have adverse effects on related units.

4) Industrial Unrest: Closure of a large sick industrial unit causes widespread labor unrest and strikes. The peace of industrial environmental will be threatened resulting in losses and loss of production in a number of units. 5) Adverse Effect on Investors and Entrepreneurs: Closure of a large sick unit creates dissatisfaction among the investors as money invested by these investors is lost. It will demoralize the present and potential investors. Failure of a unit acts as disincentive to other entrepreneurs who are planning to set-up new industrial units. 6) Losses to Banks and Financial Institutions: Closure of industrial unit causes substantial financial losses to banks and financial institutions which have given loans to these units. Some of the prominent financial institution like IFCI, IDBI, ICICI are incurring huge losses on account of non-recovery of advances from industrial units which are declared as sick or going to be sick. It will also adversely affect the future lending program of banks and financial institution, as shortage of resources emerges on account of locking-up of funds in the sick units. 7) Low of Revenue to Government: The center, state and local governments raise substantial revenue from industrial units by way of various duties and taxes. Sickness in industrial units results in decreased revenue collection in the form of lesser taxes and duties.

4.8.

Preventive Measures for Sick Industries

Experience indicates that small industrial units fall sick much to the occurrence of external causes while medium and large industries get exposed to sickness largely due to internal causes. Though it would be hardly impossible to eliminate the causes altogether, attempts should be made to undertake measures that would reduce the magnitude of ailment in the industrial units for healthy survival and growth. Viewed in this context, the following measures may be suggested to prevent industrial sickness: 1) Macro-Economic Policy Changes: The industrial entrepreneurs should make their own appraisal within a predictable macro-economic environment. For this, policy changes should not be abrupt, have to be preannounced and gradual. 2) Sub-Sector-Wise Long Term Policy: For each sub-sector, the long-term policy (e.g., for a period of 5 years) should be announced by the government so that entrepreneurs appraisal of the policy implications do take a near-accurate shape. 3) Implementation of the Announced Polices: There should be effective coordination amongst the various ministries, government departments, and relevant agencies involved for proper implementation of policies related to industrialization. 4) Development of Small Industry Sector: The small industry sector is characterized by low-level of technology, low equity base, traditional management practices, poor marketing outlets, and undeveloped sub-contracting arrangement. The small industries should not be left to the market forces only. 5) Rationalization of Tariff: In cases where deemed necessary, some protective measures should be taken by restricting import of the locally-produced finished goods so that fiscal anomalies could be removed. 6) Improvement of Infrastructural Facilities: Infrastructural facilities including utilities should be made available to the entrepreneurs at low cost and at the appropriate time. 7) Monitoring of Saturation in Particular Industry Sub-Sector: There should be some agency entrusted with the task of monitoring the establishment of too many units in the same sub-sector so that overcrowding could be prevented. 8) Development of Linkage Industries: In order to mitigate the problem of non-availability/scarcity of rawmaterial as well as marketing of finished goods, backward and forward linkage industries should be set-up in a planned way. Moreover, close linkage of industry with agriculture will help ease problem of scarcity of raw-material. 9) Active Support of Banks and Financial Institutions i) In case of industrial units where term loan is needed, the availability of working capital should be ensured as part of the financial package. ii) Banks should provide due attention to process the working capital needs of the industrial units without any delay.

iii) BMRE Loan should be actively considered by the banks and financial institutions for the existing industrial units undergoing the reality of rapid change in technology so that productive capacities are not rendered idle/under-utilized. iv) Interest rate on loan should be made lower by improving operational efficiency of the banks. This will help to reduce financial costs of the industrial units and thus gain access to competitiveness. v) Bank-client relationship should be based on understanding of the mutual problems and prospects for greater interest of survival of both the entities. vi) Banks should improve the quality of project appraisal in order to prevent the growth of born-sick projects and for that, availability of adequate and accurate data and skilled manpower have to be ensured. vii) Banks could fix-up a time limit for sanction and disbursement of loan limits for helping timely implementation of the projects/utilization of capacity of the borrowing industrial units. viii) Monitoring system of the projects financed by the banks should be thoroughly intensive and for this, both off-site and on-site mechanisms should be used in conjunction with each other in order to take timely steps for prevention of sickness. ix) Educated entrepreneurs with technical know-how should be encouraged to set up industrial units. They should be provided with all possible support, both financial and non-financial without emphasis on collateral. 10) Expansion of Market Base through Increased Exports: Domestic market is gradually getting squeezed due to the influx of officially imported foreign goods and smuggled goods. On the one hand, export market should be expanded by increasing the number of exportable products. On the other, anti-smuggling drive should be strengthened. For this, import policy should be re-structured in a way that discourages smuggling to a great extent. 11) Use of Predictive Models: Banks and entrepreneurs should follow some predictive models for early detection of sickness on the basis of evaluation of financial health of the industrial units. 12) Facilitation of Enabling Environment: Deterioration of law and order, extortion, harassment, etc., should be checked at any cost. In case of natural calamities, special assistance should be provided for resilience.

4.9.

Remedial Measures for Sick Industries

SSEs are holding a very important place in the industrial system of the country. Thus, suitable measures are necessary to remove these bottlenecks in the optimum operation of SSEs. These remedial measures are as follows: 1) Effective Planning: SSEs are required to conduct detailed survey of the existing situations prevailing in small-scale sector and draw productive programs for them. Study suggests that very few small entrepreneurs launch their operations on the basis of a careful plan. A detailed feasibility study or detailed project report is highly essential for small entrepreneurs to start their units. Without proper planning, they may be affected by improper location, inexperienced consultancy services, improper technology, underestimation of costs, etc. So, SSIs are required to initiate effective action plan for their survival. 2) Improvement in Techniques of Production and Proper Technology: SSEs should try to improve their techniques of product and adopt modern technology. Government consultancy organizations and laboratories have an important role to play in this context. They have to arrange viable and modern techniques of production to them as they are unable to expend money on this count. Besides, SSIs should keep themselves abreast of development in technology. They should also try to give a lead if possible financially, in research and development efforts. They should also believe in continuous innovation and then they can remain in their business. 3) Training and Development: SSEs should make concerted efforts in imparting proper education and training to workers engaged in this sector as they are valuable asset of industry. Expenditure on training and development activities should be treated as an investment. Small Industries Associations should also involve themselves in providing knowledge and skills required for them in the changing environment. Workers should be encouraged to innovate themselves in the production process as it would enable the SSIs to compete with their medium and large-scale counterparts. For this purpose, effective motivation and reward system is highly desirable. 4) Provision of Infrastructural Facilities: Development-finance, power arrangement, water supply, etc., are necessary for the smooth functioning of SSIs. State Development Corporation, small industries corporation,

state technical consultancy organizations are engaged in provision of these facilities. But their support system needs further improvement. Development of industrial estates has solved this problem to a certain extent but efforts are needed to develop more industrial estates to accommodate more small units. 5) Regular Supply of Raw Materials: Small Industries Development Corporations and other canalizing agencies responsible for the supply of raw materials to small-scale sector should take necessary action to maintain a continuous but proper supply of raw materials to SSEs. They should also ensure that bogus firms are to be excluded from this type of support. Government should also intervene from time-to-time in arranging cheaper imports of raw materials for them. 6) Adequate Credit Arrangement: For SSEs, traditional sources of financing offer little scope for expansion and alternative means like venture capital are yet to be developed for them. SEBI has formulated guidelines for venture capital and there is hope for better finance facility for this sector. Besides, priority sector lending scheme should be made more broad-based and credit limit is to be enhanced. The SSEs depend more on their own funds and loaned fund from non-banking sector as they are unable to get proper support from banks and other funding agencies. The SIDBI is trying to provide these facilities but intermediaries involved in the system are creating problems for them. So, SIDBI should try to bring transparency and effectiveness in its functioning. 7) Effective Marketing Arrangements: SSIs should focus on brand, product, and market development. They should try to remain in the market and special thrust should be given on quality improvement program. Products at low costs and passing on the benefits to consumers would go in long way to improve their marketing performance. The large companies earn handsome profits from marketing the products of small units by charging a much higher price from the customers. The reason is they have brands. So, SSIs should try to popularize their products in the market which will provide them separate product and brand identity. This strategy will benefit them in the long-run. However, efforts should be made to maintain standards and quality of the output then they will get positive support from their potential customers. 8) Development of Suitable Machinery: SSIs should try to develop separate suitable machineries for taking initiative with regard to problems faced by them. SSIs have different typical problems and that have to overcome by taking offensive strategies. SSIs Association should be offensive and objectively clear in their goals in pleading their cases with the government. Associations like FICCI, Assocham, and CII are more powerful in maintaining their relations with the government. They should also involve themselves in focusing attention on the problems being faced by their members through seminar, conferences, etc. So, similar strategies should be adopted by the small industries associations to protect their members interest with the government.

4.10.

Board for Industrial and Financial Reconstruction (BIFR)

The Board for Industrial and Financial Reconstruction [BIFR) was set up in January 1987 under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). It has been established with a view to revive potentially viable sick industrial companies or recommend the closure of totally non-viable companies. The BIFR became operational from 15th May, 1987. Earlier, only sick units in private sector could be referred to it but after amendment in the SICA in December, 1991, public enterprises have also been brought under its purview.

4.10.1.

Objectives of BIFR

The principal objectives of BIFR are as follows: 1) To evaluate the techno-economic viability of sick industrial companies with a view to either rehabilitating them or to closing them down 2) To stop continued drain of public and private resources 3) To protect employment, as far as it is practicable

4.10.2.

Operational Procedure

When a sick industrial company is registered with the BIFR, it is dealt with by the BIFR in the following manner: 1) In the first stage, an enquiry has to be held to determine whether the company is sick,

2) If so determined, the BIFR has to determine whether the company can make its net worth positive through its own efforts, 3) If that is not possible, a finding has to be recorded as to whether it is in the public interest to attempt to rehabilitate the company. The measures which the BIFR can take are outlined in SICA, 4) The rehabilitation effort commences by commissioning an Operating Agency to prepare techno-economic viability report. Operating Agencies comprise the all India financial institutions and selected Banks the latter on the basis of RBIs advice, 5) Based on the viability report and such other measures (such as merger, change of management) as may be appropriate, BIFR can proceed to draw a draft scheme of rehabilitation. Such scheme has to be agreed by the parties which are called upon to give reliefs and concessions in respect of past liabilities and to give fresh funds by way of long-term capital or working capital, 6) It is advertised inviting comments and objections. Therefore, the scheme can be sanctioned with or without modifications by the BIFR. Ultimately, the BIFR may recommend for rehabilitation of sick unit or its taking over by the workers cooperative or its sale or its closure.

4.10.3.

Role of BIFR

1) The BIFR has been vested with powers to institute the necessary enquiries to determine whether the unit is sick or not. 2) If the Board concludes that the unit has become sick unit it can give reasonable time to the unit to make its net worth positive or it can devise suitable measures like change of management, internal reconstruction of capital structure or merger with a healthy unit. 3) The Board may decide on the winding up of the company or sale or lease of a part or whole undertaking of sick industrial company. 4) The Board is also empowered to suggest other preventive, ameliorative and remedial measures as may be appropriate.

4.10.4.

Constraints and Problems of BIFR

The BIFR has listed the following constraints and problems which inhibits its smooth functioning: 1) Delay in submission of reports by operating agencies. 2) Lack of prompt and final response from the concerned governments and their agencies in the matter of reliefs and concessions and further infusion of funds for rehabilitation of potentially viable units in the public sector. 3) Greater reluctance on the part of banks and FIs to support sick companies in the wake of the RBI guidelines on provisioning against NPA (non-performing assets) and delays in the release of working capital. 4) Prolonged delays on the part of promoters in a large number of cases to bring in promoters contribution in time and according to the prescribed percentage. 5) Several cases of appeal against BIFR decisions have been made to High Courts, where they linger on for fairly long periods.

4.10.5.

Suggestions to Make BIFR More Effective

Key strategic changes required to make BIFR more effective are as follows: 1) A marked preference for one time settlement of existing dues by all concerned. 2) Managerial change to be effected in most cases, substituting financially and/or managerially weak promoters by strong and resourceful promoters. 3) Concessional interest rates, in cases where time settlements are not resorted to only for 2-3 years and not for 8-10 years. 4) Test of liability to be made more vigorous. A variety of financial concessions from banks. FIs and government implies hidden (unjustifiable) subsidies over a long period. This practice has become inconsistent with the stricter standards applicable to performing funds of banks and FIs.

5) Sale of units by BIFR instead of passing winding up orders to be implemented by High Courts. The elimination of liabilities will make most sick units attractive Investment propositions and lead to continuity of production and employment. 6) In an industrial group, no new units should be supported by banks/FIs until sick ones are either closed after due scrutiny by BIFR or rehabilitated. 7) Concurrence of majority of workers to be availed trade unions with minority membership should not be allowed to hold up sanction of sickness.