10.

2 STRUCTURE OF COMPANY MANAGEMENT By virtue of ownership, the ultimate authority to conduct the business lies with the shareholders. All shareholders cannot take active part in the management and running of the company. Hence shareholders elect their representatives, known as Directors Directors manage and run the company on behalf of shareholders. The position of shareholders in a company is that of sleeping partners and leaves the management of company to Directors. The Directors collectively are known as Board of Directors which acts as the top management in a company. All directors are not the employees of the company. They meet periodically and lay down basic objectives, polices and rules for smooth running and management of the company. The board appoints one member to act as the chief executive officer required to look after day to day administration and activities by Board of Directors. He is responsible for the overall management of the company. He is supported by Functional Heads, etc. The general structure of company management is as under, which can be varied according to the need of a specified company. 10.3 DEFINITION Sec. (13) defines a director as any person occupying the position of a director, by whatever name he is called. Any person as per this definition, who performs the duties of directors, will be known as a director. A director is a person who is responsible for direction, control and

management of the affairs of a company. Sec. 303 provides that any person with whose directions or instructions the Board of Directors is accustomed to act is also deemed to be director. A manager or any other managerial person is however not considered as director of a company. Sec. 253 of the act provides that only an individual can be appointed as director. That means nobody corporate, association appointed as director of a company. A director may be described as an individual who guides, directs, manages or superintends the policy and working of a company. Number of directors minimum and maximum: Sec.252 of the act provides that every public company shall have at least three directors and every private company must have at least two directors. The act is silent so far as the maximum number is concerned. According to companies (amendment) Act 2000, wef 13-12-2000, a public company having (a) a paid up capital of five crore rupees, or more (b) One thousand or more small shareholders, may have a director elected by such small shareholders in the manner as may be prescribed. The small shareholders means a shareholder holding shares of nominal value of twenty thousand rupees or less (i.e., Rs. 20000/- or less) in a public company. or firm can be

According to Section 253 no body corporate, association or firm shall be appointed as director of a company, and only an individual shall be so appointed. According to Section 254, in default of and subject to any regulations in the articles of a company subscribers of the memorandum who are individuals, shall be deemed to be the directors of the company until the directors are duly appointed in accordance with Sec. 255. The directors of a company collectively are referred to in this Act as the Board of Directors or Board. All members of a company may be appointed directors, subject to the provision of the act. The articles of a company may fix minimum and maximum number of directors. Within the limit prescribed by the articles, the company may increase or decrease the number by an ordinary resolution passed in general meeting. For the purpose of maximum limit fixed by the articles, directors appointed by the Central Government under Sec. 408 of the Act or by the company under Sec. 397 or 398 of the Act are not being taken into consideration. Similarly nominee directors appointed by the public financial institutions are also not to be included. Table A provides that if the number of directors is reduced below the quorum fixed by the Act for a meeting of the Board, the continuing director or directors may act for the purpose of increasing the number of

directors to that fixed for the quorum or of summoning a general meeting of the company but not for any other purpose. In case, the increase in number of directors is beyond the maximum permitted by articles the approval of the central government is necessary. If increase in number does not make the total of directors more than 12, then no approval of the central government is required. 10.4 Number of Directorships: As per Sec. 275 of the Act a person cannot hold office at the same time as a director in more than fifteen companies (including deemed public company as per Amendments, 2000). In computing this number of fifteen the directorship of the followings are not taken in to account: (i) (ii) (iii) (iv) Private companies (not being subsidiaries or holding companies of public company (ies), Unlimited companies Associated not for profit. Alternative directorship

If a person holds office of directors in more than fifteen companies and is appointed as director in any other company, the appointment will be effective provided within fifteen days thereafter, the director has vacated his office in any of the company in which he was already a director so as to keep the number within the maximum allowed. The new appointment will not be effective if such choice is not made within fifteen days.

Any person, who holds office, or acts, as director of more than fifteen companies in contravention of the foregoing provisions, shall be punishable with fine which may extend to Rs. 50000 in respect of each of those companies after the first fifteen. 10.5 LEGAL POSITION OF DIRECTORS The position of the directors is not defined by the Act. The directors are referred to as trustees or agents or managing partners. In the words of Justice Bower L.J., Directors are described sometimes as agents, sometimes as trustees and sometimes as managing partners. But each of these expressions is used not as exhaustive of their powers and responsibilities, but as indicating useful points of view which they may, for the moment and for particular purpose, be considered. (1) Directors as trustees A trustees is a person who holds property on trust for other person. The directors are in charge of the properties and money of the company and as such are in the position of trustees. They are bound to deal with the capital under their control as a trust. They must act in good faith and exercise their powers in the interest of the company. They should not make secret profit. The directors are regarded as trustees for a particular shareholder. They are also not trustees for each and every act or mission for which they are responsible. They are mainly confined to certain matters.

(2) Directors as agents: As discussed earlier, company is created by law and has no physical existence and it has to act through its directors. The directors of the company act for and on behalf of the company. They represent the company to outsiders and can enter into contracts with the outsiders, which are binding to the company. But the directors do not incur any personal business, formulate policies and take decisions. In this sense, the relationship between the company and its directors is that of principal and his agents. As agents, they must conduct the business with reasonable care and diligence and abide by articles and memorandum of association. There acts within the scope of their powers, are acts of the company itself, and the company is liable for them.

(3) Directors are managing partners: Directors are elected representatives of the shareholders. Like partners, they hold interest in the companys capital. They also contribute to the share capital of the company along with other shareholders and are thus called partners. Like the managing partners the directors are authorized to manage the business of the company where other shareholders merely act as dormant partners, the directors do all the proprietorial functions. But the directors have no authority to bind other directors and shareholders like the partners in a firm. The directors are subject to retirement unlike the partners. Thus it is clear that, though the directors are regarded as agents, trustees or managing partners in relation to the company legally speaking they do

not, hold any of such positions. But they are construed to hold such positions in regard to the circumstances of the cases. In the words of Justice Kessel M..R. It does not matter what you call them trustees for agents so long as you understand what their position is that they are merely commercial men, managing a trading concern, for the benefit to themselves and all other shareholders in it. 10.6 APPOINTMENT OF DIRECTORS Any individual competent to contract and who is not disqualified under Sec 274 and who holds necessary qualification shares, if any, may be appointed as director of a company. Directors may be appointed in any of the following ways: 1) First directors 2) Appointment at general meeting 3) Appointment of directors by the board 4) Appointment of directors by third parties 5) Appointment of directors by proportional voting 6) Appointment by the Central Government 1) First Directors The subscribers to the memorandum appoint the first directors and their names be mentioned in the articles. Otherwise the articles may prescribe the method of appointing them. If the articles neither contains the names of the first directors nor any provision for appointing them, the subscribers to the memorandum, who are individuals shall be deemed to

be the first directors. Such directors can hold office until the directors are duly appointed at a general meeting of the company. 2) Appointment at General Meeting Sec. 255 provides that not less than two thirds of the total number of directors of a public company must be appointed by a company or of a private company which is a subsidiary of the public company in every general meeting. It means at least two thirds of the total number of directors shall be those who shall retire by rotation. Such directors are called rotational directors and shall be appointed by the shareholders in general meeting. Thus only one third of the total directors can be permanent directors. This is statutory requirement and cannot be avoided. The articles of a company (such as chamber of commerce) may provide for the annual retirement of all the directors. At the annual general meeting of the company one third of the rotational directors shall retire from the office. Example : A Ltd. has 12 directors of whom three are non rotational directors. The remaining nine directors shall be liable to retire by rotation. Three directors (one third of nine directors) shall retire in each of the three years. The directors longest in the office shall retire in the first place. The retiring director shall be eligible for re-election. A new person may fill up the place of retiring director. For that purpose a notice in writing must be given at least fourteen days before the meeting. The notice must be given by the person seeking appointment as director along with a deposit of Rs.

500. The deposit is refunded in case that person is elected as a director. The company is then required to inform the members at least seven days before the annual general meeting about the candidature. The vacancies created on retirement of directors must be filled up at the same meeting, but if the company fails to do this the meeting shall be deemed to have been adjourned for a week. If in the adjourned meeting the vacancies are not filled up the retiring directors shall be deemed to have been automatically re-appointed provided. (i) (ii) (iii) (iv) It is resolved not to fill up the vacancy or A resolution for re-appointment is lost, or The retiring director has expressed unwillingness to continue, or He is disqualified.

Appointment of directors of a public company shall be done individually by a separate resolution passed by simple majority. The appointment of a director who is a retiring director will not be valid unless written consent to act as director is filed with registrar within thirty days of appointment. 3) Appointment of the directors by the board: The board of directors may appoint directors in the following circumstances. (i) Additional director : If the articles so permit, the board may appoint additional directors subject to maximum number fixed in the articles. Additional directors shall hold office only upto the end of the next annual general meeting. (ii) Casual vacancies: If the office of a director falls vacant for some reason before his term expires, the same may subject to any regulations in the articles, be filled by the Board of Directors. The

persons so appointed would hold office only upto the time his predecessor would have continued. (iii) Alternate directors: The articles may empower the board to appoint alternate director during the absence of a director for more than three months, for the state in which the meetings of the Board are ordinarily held. The alternate director will not hold office longer than that permissible to the original returns to the state in which meetings of the board are held. 4) Appointment of directors by third parties: The articles under certain circumstances give power to vendors, banking companies, financing corporations or debenture holders to appoint directors. Such persons may appoint nominee on the Board. The number of directors so appointed shall not exceed one third of the total number of directors and they are not liable to retire by rotation. 5) Appointment of directors by proportional voting: The directors may be appointed either by a system of straight majority of votes or by a system of proportional representation. In a system of straight majority of votes those who get the maximum number of votes are declared elected. The proportional system applies where all or atlest two thirds of the directors are to be appointed according to the principle of proportional representation, whether by a system of cumulative voting or by system of single transferable vote or otherwise.

But where this principle is adopted appointments are to be made only once in every three years and interim casual vacancies shall be filled in the manner as provided in the articles. In the case of cumulative voting, a shareholder, for each share held, has as many votes as the number of directors to be elected. Suppose, 2 directors are to be elected, each share will carry two votes. A shareholder holding 20 shares will have 40 votes and he can cast 40 votes in favour of one candidate or may distribute his vote over some candidates. In the case of single transferable vote a quota of votes is fixed. A person is declared elected in case he gets required number of first preference votes fixed as quota. The quota is obtained by dividing the total number of votes cast by total number of seats plus one and adding one to the result. For example in an election 10000 votes are cast and there are nine seats, the quota in this case will be. 10000 Quota = -------------- + 1 = 1001 votes 9+1 6) Appointment of directors by the Central Government: In case of mismanagement, the Central Government may appoint any number of directors to safeguard interest. The appointment will be for a period not exceeding three years on any one occasion.

Any director appointed by the Central Government shall not be required to hold any qualification shares nor shall his period of office be liable to termination by retirement of directors by rotation. Any such director may be removed from his office by the Central Government and another person may be appointed in his place. As per amendment 2000, a public company having a paid up capital of five crore ruppes or more and one thousand or more small shareholders (holding shares of nominal value of Rs. 20000 or less) on the board of the said company. 10.7 QUALIFICATIONS OF DIRECTORS The companies act does not lay any academic or shareholding qualification for a director. A director must be an individual and competent to contract. The articles of a company may require every director to hold specified number of shares known as Qualification Shares. Table A provides the qualification of a director shall be holding of atlest one share in the company. If articles provide for share qualification the director must obtain such qualification shares within two months of his appointment. The nominal value of qualification shares must not exceed Rs. 5000 or the nominal value of one share warrants will not count for the purpose of qualification shares. If a director fails to obtain his qualification shares within two months of appointment, he shall be punishable with fine that may extend to Rs. 50

for every day between such expiry and the last day on, which he acted as a director. 10.8 DISQUALIFICATION OF DIRECTORS Sec. 274 lays down that the following person cannot be appointed as director. 1) A person of unsound mind 2) An undischraged insolvent 3) A person who has applied to be adjudicated as 4) A person who has been convicted by a court of any office involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the last day of expiry of sentence, 5) A person whose calls in respect of shares of the company held for more than six months have been in arrears. 6) An order disqualifying him for appointment as a director has been passed by a court in pursuance of Sec. 203 and is in force, unless the leave of the court has been obtained for his appointment in pursuance of that section. 7) As per amendment, 2000 no person can hold office of directorship in more than 15 companies (Excluding private companies) at a time. 8) See, 274 amended to the effect that a director accounts and annual returns for any continuous three years on or after 1 st April, 1999 or has failed to repay its deposits or interest thereon on due date or redeem its debenture on due pay divid end and such failure continues for one year or more, will not be eligible to be appointed as a director of a public company for a period of 5 years.

The central government by notification in official gazette may remove the disqualification mentioned in sub clauses (iv) and (v). 10.9 POWERS OF DIRECTORS Subject to restrictions contained in the Act, Memorandum and Articles, the directors of a company have the power of directors is not authorized to exercise the powers reserved for the shareholders in general meetings. Powers of directors can be discussed under the following headings 1) Powers to be exercised by a resolution passed at the Board meetings 2) Powers to be exercised with the consent of general meetings. (1) Powers to be exercised by a resolution passed at the Board meetings. The board of directors shall exercise the following powers by means of resolution passed at the board meetings. The powers are (i) (ii) (iii) (iv) To make calls To issue debentures To invest the funds of the company and To make loans

The board may, by a resolution passed at a meeting, delegate its above mentioned powers (except to make call and issue debentures) to a committee of directors or the manager or any other principal officer of the company. But the resolution must specify the limits of such delegation. Other Powers:

Board of directors can exercise the following powers only at the meetings of the board. (a) To fill casual vacancies (b) To enter into contracts (c) To receive notice of disclosure of directors interest in any contract (d) To receive notice of disclosure of shareholdings of directors, (e) To appoint as managing director or manager a person who is already a managing director or manager of another company, (f) To make investments in companies in the same group (g) To recommend dividends. (2) Powers to be exercised with consent of general meetings

The Board of directors of a public company shall exercise the following powers only with the consent of the company in general meeting: (h) To sell, lease or otherwise dispose off the whole or substantially whole undertaking of the company. (i) To sell, lease or otherwise dispose off the whole or substantially whole undertaking of the company. (ii) To remit or give time for repayment of any debt due by a director except in case of an advance made by banking companies to its directors in the ordinary course of business. (iii) To invest the amount of compensation received by the company in respect of compulsory acquisition of companys property or business other than trust securities. (iv) To borrow money in excess of the aggregate of the paid up capital of the company and its free reserve.

(v)

To contribute to the charitable or other funds not directly relating to the business of the company, or welfare of its employees, any amount the aggregate of which in any financial year exceeds Rs. 50000 or five percent of its average net profits of the three preceding financial years, which ever is greater.

(vi)

To contribute money to any political parties or to any persons for political purposes.

10.10 DUTIES OF DIRECTORS Duties of directors may be divided under two heads. (1) Statutory duties Statutory duties are duties and obligations imposed by the companies act which begin with incorporation of the company. Important duties are (i) To convene statutory annual general meeting and also Extra Ordinary General Meeting. (ii) To prepare and place at annual general meeting along with the balance sheet and profit and loss account, a report on the companys affairs including the report of Board of directors. (iii) (iv) (v) (vi) To authenticate and approve annual financial statements To appoint the first auditor of the company. To appoint the cost auditor of the company. To make declaration of solvency in the case of a members voluntary winding up. (vii) To file return of allotments (viii) Not to issue irredeemable preference shares or shares redeemable after twenty years. (ix) To disclose interest in the transactions of the company

(x) (xi)

To attend Board meetings. To take and pay for qualification shares crores of rupees shall constitute Audit Committee of the Board.

(xii) Every public company having paid up capital of not less than five (xiii) To make disclosure of shareholding (2) General Duties General duties are as follows i. Duty of good faith : The first and the most obvious obligation of directors is to act with honest in the discharge of their duties. ii. Duty with reasonable care: In discharging duties, a director must exercise some degree of skill and diligence iii. Duty to attend meetings: Directors are not bound to attend all the meetings of the Board, although they are under obligation to attend whenever they are reasonably able to do so. iv. To work in the capacity as agents, trustees and organ of the company. v. Not to delegate duty unless permitted by the companies act or articles of the company. 10.11 LIABILITIES OF DIRECTORS The directors do not incur any personal liability so long as they act intra vires. By virtue of the office they hold, the directors incur three types of liabilities. (1) Liability towards the company (2) Liability to third parties. (3) Criminal liability.

(1) Liability towards the company: The directors towards the company: The directors are liable to the company in the following ways. i. For ultra vires acts: If the directors act in contraventions to Memorandum or Articles, they will be liable for any damage. ii. For breach of trust: If the directors make secret liable for breach of trust. iii. For gross negligence: Where the directors fail to exercise reasonable case, skill and diligence, they shall be liable for any loss or damage resulting there from. iv. Will full misconduct: Where the directors misapply or misappropriate money or properties of the company or have been guilty of breach of trust or misfeasance, the court may order him to repay the money or restore the property or to pay compensation. (2) Liability to third parties The directors may also incur personal liability towards third parties. i. For misstatements in the prospectus: The directors, are personally liable for damages to the third parties for misstatements or concealments in the prospectus. ii. For acting in their own name: Directors are personally liable for acting in their own name. E.g. signing a negotiable instrument without mentioning the name of the company. iii. For breach of warranty: If the directors enter into any contract which is ultra vires the company or ultra vires their powers they may be profits or use companys funds for their personal purposes, they shall be held

proceeded against personally for any loss sustained by any third party. iv. Unlimited liability: If the liability of directors is made unlimited they will be held personally liable. v. Fraudulent trading: Where the directors are found guilty of fraudulent trading, the court may, by an order, hold them personally liable for the debts or liabilities of the company. vi. Board of Directors Responsibility statement. (As per amendment 2000). (3) Criminal Liability The directors also incur criminal liability for fraud and non compliance of the various provisions of the Act, as well as under common law. For such liability they are punishable with fine or imprisonment or both under various sections of the Act. For example they will be liable under the following sections of the act. i. Under sec. 63 for misstatements in the prospectus. ii. Under sec 75 for failure to file return as to allotments with the registrar. iii. Under Sec. 150 for not keeping registers of members and debenture holders. iv. Under section 168 for failure to lay before the company at every annual general meeting annual accounts and balance sheet. v. Under sec 274 for holding office as director in more than fifteen companies in contravention of the provisions of the act. 10.12 Vacation of Office of Director and Removal of Directors :

The office of director generally falls vacant in the event of death, resignation, and retirement by rotation or under age limit, removal and disqualification. Vacation of office of director (sec.283). The office of a director shall become vacant if any one of the following contingencies arise: a) He fails to obtain within the prescribed period the share qualification, if any, required of him by the articles of the company. b) He is found to be of unsound mind by a court of competent jurisdiction. c) He has applied to be adjudicated an insolvent d) He is adjudicated an insolvent e) He is sentenced to imprisonment for not less than six months for an offence involving moral turpitude. f) He fails to pay any call on his shares g) He absents himself from meetings of the Board of directors without leave of absence from the Board of directors for three consecutive meetings or for a continuous period of three months, whichever is longer. h) He or a person for his benefit or a firm in which he is a partner or a private company of which he is a director, accepts a loan, or any guarantee or security for a loan from the company without obtaining the previous approval of Central Government (as provided in sec. 295 act.) i) He fails to disclose to the Board his interest in any contract or arrangement of the company as provided in sec. 299 of the act.

j) He is restrained by court from being a director for committing fraud or misfeasance in relation to the company under Sec. 203. k) He is removed by ordinary resolution of the shareholders in pursuance of Sec. 284. l) He is nominee and his connection with authority who nominated him, has ceased. A private company which is not a subsidiary of a public company may, by its articles, provide that the office of directors shall be vacated on any grounds in addition to those specified in Sec. 283. 10.13 REMOVAL OF DIRECTORS A director can be removed from office (1) by the shareholders of a company (2) by the Central Government and (3) by the court. These are discussed below. (1) Removal of director by shareholders (sec. 284) A company may remove a director by ordinary resolution before the expiry of his period of office. Exception: There are three exceptions to the above principle, which are as follows i. A director appointed by the Central Government in pursuance of the section 408 of the Companies Act, 1950 cannot be removed in his matter. ii. A private company is not authorized in this manner to remove a director who holds office for the life on April 1, 1952 whether or not he is subject to retirement under an age limit by virtue of the articles or otherwise.

iii. This principle shall not apply where a company has availed itself of the option given to it under section 265 of the Act to appoint not less than two thirds of the total number of directors according to the principle of proportional representation. (2) Removal of director by the Company Law Board (Sec. 388 B and 388 E). The Central Government may state a case to the company law board to remove a director or any managerial personnel on ground of fraud, misfeasance, persistent negligence or default in carrying out his legal obligation and function under the law or breach of trust. The National Company Law Tribunal (NCLT) may on the application of the Central Government or on its own motion, by an order (a) direct that a director or managerial personnel (respondent) shall not discharge any of the business of his office until further orders of the National Company Law Tribunal (NCLT) and (b) appoint a suitable person in place of the respondent to discharge the duties of the office held by the respondent subject to such terms and conditions as the National Company Law Tribunal (NCLT) may specify in the order. The person so appointed shall be deemed to be a public servant within the meaning of section 21 of the Indian Penal Code.

10.14 Remuneration to Directors (Managerial Remuneration) The directors are officers and agents of the company. They are elected representatives of the company and are not servants of the company, and

have no right to remuneration unless there is specific provision to that effect in the articles or shareholders resolve for the same in the general meeting. To understand the legal provisions relating to the remuneration of directors study of the provisions concerning managerial remuneration as a whole is essential. Managerial remuneration may take the form of monthly payments, say salary or specified percentage of net profits or a commission and / or by way of fee for each meeting of the Board called as sitting fees. It also includes perquisites (in cash or kind) given to the managerial personnel. For example rent free accommodation, expenditure incurred by the company in providing any benefit, expenditure paid by the company on behalf of such persons are added to the total of remuneration. See 309 lays down the manner by which remuneration may be paid to the managerial personnel. A director who is either in the whole time employment of the company or managing director may be paid remuneration either by way of a monthly payment or at specified percentage of the net profits of the company or partly by one way and partly by other. A director who is neither in the whole time employment nor a managing director may be paid remuneration either by way of monthly, quarterly or annual payment with the approval of the Central Government or by way of commission, if the company by special resolution authorizes such payment. Such a resolution shall remain in force for not more than five years and can be renewed from time to time by special resolution.

A director may receive sitting fee for attending meetings. This is not to be taken into account for computing overall managerial remuneration. A manager may receive remuneration either by way of a monthly payment or by way of specified percentage of the net profits or partly by one way and partly by the other. Provided that any remuneration for services rendered by any such director in any other capacity shall not be so included if a) The services rendered are of a professional nature, and b) In the opinion of the Central Government, the director possess the requisite qualifications for the practice of the profession. Overall limits to managerial remuneration: Sec 198 provides that the total managerial remuneration payable by a public company which is subsidiary of a public company to its director or manager in respect of any financial year must not exceed eleven percent of the net profits remuneration to directors and sitting fees payable to directors). A director who is neither in the whole time employment of the company nor a managing director may be paid remuneration subjection to the following: i. One percent of the net profits of the company if the company has a managing director or a whole time director or manager. ii. Three percent of the net profits of the company in any other case.

In case a company has more than one such director, then the remuneration payable to all such directors shall not exceed the aforesaid limits. However, the company in general meeting may, with the approval of the Central Government authorize the payment of such remuneration at a rate exceeding one percent as the case may be, three percent of its net profits. A whole time director of a managing director may be paid remuneration by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other. However except with the approval of the Central Government such remuneration shall not exceed five percent of the net profits for one such director, and if there is more than one such director ten percent of the net profits for all of them taken together. If without prior approval of the Central Government the director draws excess remuneration, he shall refund such sums to the company. The company shall not waive the recovery of any sum refundable by the director. According to Sec. 200, no company shall pay remuneration free of any tax. The provisions relating to managerial remuneration shall not apply to a private company, unless it is a subsidiary of any public company or it is a deemed public company under Sec. 43 A. Section 43 A is deleted vide Companies Amendment Act, 2000.

An amendment dated 16th Jan., 2002. (A) Provides that the ceiling limits specified under this subparagraph shall apply, ifi. Payment of remuneration is approved by a resolution passed by the remuneration committee. ii. The company has not made any default in repayment of its debts (including public deposits) or debentures or interest payable thereon for a continuous period the date of appointment of such managerial person. According to Part II of Schedule XIII: Where in any financial year a company has no profits or its profits are inadequate, it may pay remuneration to a managerial person by way of salary, dearness allowance, perquisites and any other allowance not exceeding the ceiling limit of Rs. 2400000 per annum or Rs. 200000 per month calculated on the following scale: Where the effective capital of company is Monthly remuneration

payable shall not exceed. (i) Less than one crore Rs. 75000 (ii) Rs. one crore or more but less than Rs. Rs. 100000 five crores (iii) Rs. five crores or more but less than Rs. 125000 Rs. twenty five crores (iv) Rs. twenty five crores or more but Rs. fifty crores (v) Rs. fifty crores or more but less than Rs. Rs. 175000 one hundred crores (vi) Rs. one hundred crores or more Rs. 200000

(B) Not exceeding the ceiling limit of Rs. 4800000 per annum or Rs. 400000 per month calculated on the following scale: Where effective capital of company is Monthly remuneration payable shall not exceed. 1. Less than Rs. 1 cr Rs. 150000 2. Rs. 1 crore or more but less than Rs. 5 crores Rs. 200000 3. Rs. 5 crores or more but less than Rs. 25 cores Rs. 250000 4. Rs. 25 crores or more but less than Rs. 50 crores Rs. 3000000 5. Rs. 50 crores or more but less than Rs. 10 crores Rs. 350000 6. Rs. 100 crores or more Rs. 400000 Provided that the ceiling limits under this sub paragraph shall apply, it (1) Payment of remuneration is approved by a resolution passed by the Remuneration committee. (2) The company has not made any default in repayment of any its debts (includes public deposits) or debentures or interest payable thereon for a continuous period of thirty days in the preceding financial year before the date of appointment of such managerial person. (3) A special resolution has been passed at the general meeting of the company for payment of remuneration for a period not exceeding three years. (4) A statement along with a notice called the general meeting is given to the shareholders containing all necessary information.

(C) Not exceeding Rs. 240 lakh per annum or Rs. 20 lakh per month in respect of companies in special economic zones as noticed by Department of committee from time to time, provided that (1) (2) These companies have not raised any money by public issue of shares or debentures in India. Such companies have not made any default in India in repayment of any of its debts (including public deposits) or debentures or interest payable there on for a continuous period of thirty days in any financial year. Besides a managerial person shall also be eligible to perquisites for example, contribution to provident fund gratuity etc. 10.15 THE MANAGING DIRECTION Definition : (Section 2(26)] The expression managing director means a director who by virtue of (a) and agreement with the company or (b) a resolution passed (I) by the company in general meeting or (ii) by its board of directors or (c) by the memorandum and / for the articles of association is entrusted with substantial powers of management of the company. These powers cannot be exercised otherwise than under authority derived from any of the above sources. This expression also includes a director occupying the position of a managing director though he may be called by some other name. Appointment: (Section 268) A management director is an employee of the company. A managing director is appointed with the approval of the Central Government.

In case of a public company or a private company which is subsidiary of a public company incorporated after the commencement of the Companies (AMENTMENT) Act 1988, the appointment of a person as a managing or whole time director cannot be made except with the approval of the Central Government. A public company or a private company can appoint Managing Director or Manager provided the person is no M.D. / Manager in more than one company. Term of Office (section 317(1) and 317 (3)]: A managing director cannot be appointed for more than five years at a time. On the expiry of each term of five years, he is entitled to be reappointed. Remuneration of a managing director or a whole time director (Section 30 a (3)]. Except with the prior approval of the Central Government the remuneration to a managing director or to a whole time director shall not exceed five per cent of the net profit for one such director and if there are more than one such directors, ten percent for all of them together. No increase in remuneration without sanction of the central government (Sections 310 and 311). No remuneration can be increased without the section of the Central Government. But where schedule XIII is applicable, unless such increase is in accordance with the conditions specified in that schedule and in

other cases unless it is approved by the Central Government, the appointment of managing director or whole time director shall not have any effect. Position of managing director: In the words of Lord Normand J. Anderson V James Sutherland 1941 [Sec. 203], the managing director has two functions and two capacities. A managing director is a party to a contract of employment. More specifically, I am of opinion that this is a contract of service and not a contract for service. There is nothing anomalous in this. Indeed it is a common place of law that the same individual may have two or more capacities, each including special rights and duties in relation to the same thing or matter or in relation to the same persons. 10.16 MANAGER Definition : [Section 2 (24)] A manager is a natural person who conducts the actual management of the company. The word manager is defined as individual (not being the managing director, who subject to the superintendence, control and direction has the management of the whole or substantially the whole of the affairs of the company, and includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not. A firm, any body corporate (a company or any association) cannot be appointed as manager (section 384). Since the function of manager or of a managing director is basically the same a company cannot have both of them at a time.

Disqualification [section 385 (1)]. A person shall not be appointed a manager of a company, if he suffers from any of the following disqualifications i. ii. He is an undercharged insolvent or has at any time within the preceding five years been adjudged an insolvent. He suspends or has at any time within the preceding five years, suspended payment to his creditors or makes or has at any time made within the preceding five years a composition with them. iii. He is or has at any time within the preceding five years been convicted by a court in India of any offence involving moral turpitude. The Central Government is empowered to exempt a person from any of the above disqualifications provided it is published in a notification in the official gazette either generally or in relation to any company or companies specified in the notification.

Remuneration: The manager of a company may receive remuneration either by way of a monthly payment or by way of specific percentage of the net profit of the company. Except with the approval of the Central. Government such remuneration shall not exceed in the aggregate five percent of the net profits. Restrictions on the appointment of manager (Section 388). The following are the restrictions relating to a manager of a public company or a private company, which is a subsidiary of a public company. i. A company cannot employ a person as its manager if he is already the manager of any other company. A company may appoint a person as its manager if he is the manager of one and not more than one other company and such appointment or employment is approved by a resolution of the board of directors. Exception : The Central Government may by order permit any person to be appointed as a manager of more than two companies, if the Central Government is satisfied that such appointment will be necessary for the proper working and functioning of the companies. ii. A person cannot be appointed as manager for the first time in a public company without prior approval of the Central Government [Section 269(1) for more than three months from the date of such incorporation. iii. A manager cannot assign his office. (section 388 and 312)

iv. A person cannot be appointed as a manager of a company for more than five years at a time (section 317). This section shall not apply to a private company.

---THE CONCEPT OF INDUSTRIALISATION Definition 1.1 Definitions It is not easy to give a precise definition of the term industrialization. It has various meanings. Hence there is a lot of ambiguity. Following are some of the definitions of industrialization. (1) Industrialisation may be defined as the growth of production based on manufacturing industry. It is method of production based upon the application of scientific knowledge (also known as technology) to the production process. Industrialization in this sense, has narrow perception. (2) Industrialization is defined as a process in which changes of a series of strategical production functions are taking place. It involves those basic changes that accompany the mechanization of an enterprise, the building of a new industry, the opening of zero markets and exploitation of new territory. This is in a way a process of deepening as well as widening of capital. Deepening process of capital means more capital is used per unit of output, whereas the windening of capital means the increase of capital formation, with the increase in the total output. (3) Paul Sweezy defined industrialization as the establishment of new industries or building means of production.

The above mentioned definitions cover the following features of industrialization. (1) Industrialization is a system of production process, in which the application of scientific knowledge is progressively adopted. It is a continuous process of improvement in technology, which, inturn, is applied in the production process. (2) By the application of new and improved technology there is a shift in production function. As a result, the real per unit cost of output decreases. (3) At a lower cost, most output is obtained. Hence prices decreases in the market not it is possible to sell the output to a wider range of consumers. (4) Instead of manual power, mechanical, electrical and nuclear power is applied in the manufacturing of products. Modern technology is mechanical, electrical and nuclear power driven. In a short period, output can be produced on a large scale at a lower cost. It is made possible by the blessings of technology. (5) In industrialization, the large scale production of output at lower cost and with uniform quality has widened the size of markets, both domestic and foreign. It has increased the competitiveness of the products.

(6)

The gain in industrial progress is in the form of increasing returns. It may be obtained either by internal economies or external economies. It is a continuous process.

(7)

Industrialization is a complex phenomena. It is the outcome of many factors historical, social, political etc. hence the term industrialization cannot be defined precisely in a single statement.

Classification of industries Industry is defined as a group of firms, producing identical or similar goods. Industries may be classified with respect to (1) nature (2) ownership and (3) size. (1) (i) Nature: Industries, under this head, are classified as to the nature of output. There are three kinds of industries. Capital goods industries which produce durable goods that inturn are used in production. Industries producing iron and steel, machinery, transport equipment, power installation (plants) etc. are known as capital goods industries. (ii) Industries producing goods that have undergone some manufacturing or processing but have not yet reached the stage of becoming final products, are known as intermediate industries e.g., industries manufacturing iron and steel bars, cement, cotton yarn. Etc. (iii) Consumption goods industries are those industries which produce the goods meant for final consumption. Again these industries are of two kinds.

(a) The industries which produce goods, which can be used for a number of times, over a period e.g. furniture, car, T.V. set ready made garments, shoes etc. which can be used for a number of times. These industries are known as durable goods industries. (b) Non-durable or perishable consumption goods industries are those industries, which produce the goods, which can be used only once. These goods cannot be used again and again. They use utilities, bread, milk, vegetables, beverages are the goods known as perishable goods. The industries producing them, are known as non durable consumption goods industries. (2) Ownership: The classification of industries can be made with respect to ownership. Who owns and manages the industry is the basis of such classification. The following chart shows the pattern of industries based upon ownership.
Industries

Private Sector Individual Properitorship Collective Propeitorship

Public Sector Statutory Corporation Government Companies

Joint Sector

Partnership

Joint Joint Stock Hindu Companies Family

Co-opeartives

Multinational corporations

Public Ltd. Companies

Private Ltd. Companies

As shown in the above chart, privately owned industrial enterprise has four basic forms of organization. Let us discuss each of them. (i) (a) Private Sector Individual Properitorship is the oldest and simplest form of industrial enterprise. The enterprise is owned and managed by a single individual. It has many advantages. i) ii) iii) The establishment process is very simple There is great incentive to develop the business because the owner will receive all the profits. The owner enjoys the freedom to take initiative. He is free to take any decision pertaining to his business. He needs no advice. iv) v) vi) There is no problem of coordination, because the decision is taken by a single person. He is able to develop intimate contact with the customers and can know the habits and attitudes of the customers. In this form of enterprise business secret can well be preserved.

Though it has many advantages, yet the individual properitorship suffers from many short comings. A few of the shortcomings are: (i) (ii) It is difficult to raise the capital on large scale. There is unlimited liability of the owner. Hence he is under constant fear that he will lose every thing, if his enterprise fails.

(iii) (iv) (v)

Since enterprise is on small scale, benefits of division of labour and technology cannot be availed of on a proper scale. It is not ideal for large scale enterprise. There is no scope of innovation, because enterprise operates on small scale.

(b)

Partnership: As we discussed earlier, the individual properitorship has many shortcomings. It becomes difficult for a single owner to handle the affairs of an enterprise, as the enterprise grows. So he would like to associate with him, the persons having capital or management skills and technical know how. Hence the formation of a partnership.

Partnership : A partnership is a group of persons who join with capital or services to prosecute some enterprise. These are: (i) (ii) (iii) It enables the enterprise to divide the management areas for mutual benefits It improves the changes of raising finances. Partnership enterprise increases the marketing potentials. Partners will use their contacts to promote sale of their products. Partnership has also several disadvantages: (i) (ii) The liability is unlimited. Partners are responsible for the acts or misdeeds of each and every partner. Since partnership is unable to raise capital on large scale, it cannot expand the business and industrial activity.

(iii)

This form of organization is unable to adopt modern technology, which requires huge amount of capital investment.

(c)

Joint Hindu Family: It is peculiar form of business organization in India. It is now becoming a matter of past because with the passage of time, the joint families are breaking up. The co-owners of a Hindu undivided family own it. It has come into existence because of the operation of the Hindu Law. It can be formed in certain states of India where the Mitakshara system of inheritance prevails. But it cannot be formed in West Bengal and Assam which are under the Dayabhaga system of inheritance. Only those persons who have co-parcenary interests can participate in the Joint Hindu Family business. Such interests enable three successive generations in the male line to inherit the ancestral property from the time of their birth in the family. Subsequently the devolution of interest is regulated by the principle of survivorship. Such business is normally managed by the father or for the time being some other senior member known as Karta. In such a business, the rights and liabilities of coparceners are determined by the general rules of Hindu Law. It is also known as Hindu Undivided Family Business or Hindu Undivided Family.

Merits or advantages of the Joint Hindu Family Firm: (1) Equitable distribution of profits and property: All the co-parceners are entitled to a share in the profit and properties of the family

business irrespective of their contribution to the success of the firm. (2) Sharing of knowledge and experience : The younger members of the family get the benefit of the knowledge and experience of senior members. Similarly the youngers knowledge, skill and competence can also be fruitfully used in running the business. (3) Freedom of action: The Karta enjoys full freedom of action. Hence quick decisions are facilitated, resulting into unity of direction. Business secrecy can also be maintained. (4) Limited Liability: The liability of all co-parceners except the Karta is limited. The unlimited liability of the Karta induces him to try his level best for the success of the family business. (5) Mutual co-operation: The entire work can be allotted to different co-parceners according to their individual knowledge, skill, competency and capability. This helps to obtain benefits of specialization and mutual co-operation. (6) (7) Creditworthiness: The creditworthiness of a firm is higher than that of a sole proprietor. Stability: It has the benefits of continuity of operations since its existence is not subject to the death or insolvency of a coopercener or Karta. (8) Inculcation of Finer values of life: Members of such a family work unitedly as one unit for the overall welfare of the entire family. Therefore, they possess the qualities of sacrifice, discipline, duty etc. (9) Number of members: such a firm only can have the desired number of members. No restrictions are imposed in this case as are

under the Indian Partnership Act, 1932 or the Indian Companies Act, 1956. Demerits or disadvantages: (1) Limited Resources: The firms financial and managerial resources are limited. Hence the growth and diversification of the business is restricted. (2) Lack of Motivation: The profits of the firm are shared by all coparceners irrespective of their contribution. Hence there is no inducement to the Karta to work hard. It also results into idleness on the part of the other members. (3) Scope of misuse: The Karta has unchallenged and unlimited authority to manage the business. This is likely to be misused by him for his personal benefits. (4) Unfair to co-parceners: Since the Karta has the entire control over the management of the business, the co-parceners cannot suggest alternative decisions for running the firm more efficiently. (5) Fear of disintegration: The differences, disputes and quarrels among the co-parceners on different matters including family matters including family matters, may lead to the break up of the family business. (6) Relative instability: It is claimed that such a firm has the relative stability due to its continuous existence, but since the undivided Hindu family itself may not continue for long, the firm cannot be called a stable firm. (d) Joint Stock Enterprise: Joint stock enterprise popularly known as joint stock company is the most important and popular form of

industrial organization. Industrial revolution that took place in UK in the second half of the 18th century and the first half of the 19th century completely changed the nature and pace of industrialization. Domestic type of production, on small scale was replaced by factory type of production. Now it was made possible to produce output on a large scale, at lower cost and within shorter time. But it requires new kind of managerial skills and huge amount of capital investment. Partnership enterprise could not do that. Hence the new system completely demanded the new set of ownership and management. This was made possible by joint stock enterprise or joint stock companies. A joint stock company can be formed by an entrepreneur who conceives the idea of a manufacturing firm. He prepares the scheme and presents the blue print to other interested persons. He seeks the co-operation of other persons. They draft the memorandum of association. Which contains every detailed information of the enterprise. The concept of Industrialisation (i) (ii) (iii) (iv) (v) (vi) Location of the proposed industrial unit Location of the head office Aims and objectives of the company The amount of share capital The nature and the value of the shares and The nature and extent of liabilities etc.

Articles of Association, containing Rules and Regulations are drafted. These two documents are presented before the registrar of Joint Stock Companies. If he is satisfied, he will issue a certificate of incorporation. Now the company comes into existence by the due process of law. Then joint stock company floats the shares in the stock market. Public purchase the shares, if they have faith and confidence in the entrepreneur and his enterprise. Thus company raises a part of capital investment from stock market and a part of it is self financed by the company. Joint stock companies or enterprise are classified into (a) Public Limited Companies (b) Private Limited Companies Following table shows the differences between Public Limited Companies and Private Limited Companies. 1. 2 Nature Membership Number of members Public Ltd. Co. Public Private Ltd. Co. Family members of

friends Minimum seven and Minimum two and no limit for maximum fifty Minimum two Limited Not allowed Private limited company (Ptv.Ltd.Co.) maximum Minimum three Limited Allowed Public limited company

3 4 5 6

Number of directors Liabilities Transfer of shares Nomenclature

a)

Public Limited Company: A public limited company is an enterprise, whose membership is open to general public. Anybody

can purchase the shares and become the shareholder. The minimum members required to form an enterprise is seven, but there is no limit to the maximum number. Capital is raised by selling to the public the shares and debentures in the stock market. It advertises such offer in a prospectus. The liability of the shareholders is limited to the face value of the share. It is obligatory that the nomniclature Public Ltd. Company should be suffixed. b) Private Limited Company: A private Limited Company is an organization formed by the members of a family or a group of friends. Its membership is not open to the general public. The minimum number of members required to form an enterprise is two but it should not exceed fifty. The number of directors, in this form of organization, is minimum two. It is obligatory that the suffix Private Limited Company (Pvt. Ltd. Co.) Should be put after the name of the company. Transfer of shares are not allowed and the liability of the members is limited to the face value of the shares. This form of organization has many advantages. Some of them are: (i) (ii) The liability of the shareholders is limited to the face value of the shares. Joint stock companies can raise adequate amount of capital from the stock markets. If the successful enterprise (like Tata Reliance etc.) floats a new company, the public readily purchases the shares. Hence in this type of organization, capital can be easily raised.

(iii) (iv)

Investment made in shares can be sold at any time in stock market. Therefore, investment remains liquid. Joint stock enterprises helps in mobilizing the scattered savings in small amount into fruitful investment. It makes it profitable. It makes it possible for investment on large scale. Hence it is a vehicle of industrial growth and development.

(v) (vi)

This type of organization is able to avail the services of the experts at various levels of production process. Joint stock enterprise is able to set aside a sizeable amount for R & D (Research and Development) which is not possible for other forms of organization, which operate on small scale.

(vii) This type of enterprise is able to contribute significantly in increasing the export of the economy. It is an important source of earning foreign exchange. (viii) Joint stock enterprise has many advantages, but it suffers from many drawbacks. Some of them are: (i) This type of enterprise provides opportunities to some unscrupulous persons to deceive the public. Such persons collect capital fund and may use it for their own personal gain. (ii) Shareholders are scattered for and wide. Hence the enterprise is controlled by few directors, who may use the enterprise for their own personal benefits. (iii) Sometime fraudulent directors present the fake balance sheets to deceive the shareholders.

c)

Co-operative Industrial Society:

A co-operative society may be defined as a voluntary organization of eleven of more members residing or working in the same locality and carrying on business in the same locality, not for commercial purpose but for purpose of improving their household or business economy or for creating facility of work. The main features of co-operative organizations are:(i) (ii) It is a voluntary organization of eleven persons The aim of this organization is to pursue the commercial or industrial activities, not for the sake of profit but to safeguard the interests of the members against exploitation by the factory owners and the middlemen. This type of organization has done yeomans services in the development of sugar industry in Maharashtra. (ii) Public Sector Enterprise: Public Sector enterprise may be defined as industrial, commercial or economic activity owned and managed by central or state governments or jointly by both. There are two kinds of public sector units. (a) Government Departmental Organization is the oldest and traditional form of public sector organization. Post and telegraph, railway, water supply units, highways, bridges, public utilities, education and defence establishments are the examples of government departmental enterprise.

Following are the main features of this organization: (i) (ii) (iii) (iv) The government department manages the affairs of the enterprise. The enterprise is fully financed by the government treasury. Enterprise is subjected to the budget appropriation and audit control as applicable to other government departments. Permanent staff of the enterprise are the civil servants who enjoy all the benefits of being the civil servants. The departmental form of organization suffers from a number of defects. Some of them are: (i) It functions like a government department. Hence it lacks flexibility, which is very important for the smooth and efficient working of an industrial enterprise. (ii) Since employees are confident that their jobs are secured (like government servants), the elements of initiative and incentive are lacking in them. This results in inefficiency and financial losses. (iii) Red tapism and inefficient management are the major drawbacks of this type of organization. (b) Public Sector Corporations: During the planning period in India (1950-2000), the participation of government in industrial development increased. Now it became essential that new organization should be developed. This organization should be under the control of government but possess the flexibility of private enterprise. The solution was to establish by law, the statutory organization or large scale, known as public sector

corporation. It is not under any government department. The main features are: (i) (ii) (iii) (iv) It is established by law It is wholly owned by the government It is a separate independent and autonomous body. It can purchase and sell the assets. It has its own managing Director, though he is nominated by the government. It has its own Board of Management. The benefits of the public corporations are: (i) (ii) The organization is free from government control. Hence there is a degree of flexibility in management and financial matters. The organization functions almost on the same pattern as private sector. Hence there is an element of accountability on the part of its management. (iii) Generally the employees are not civil servants. They are recruited under the terms and conditions, which are determined by the public corporations. The public corporation enterprise has its own limitations. Persons, having affiliation with the ruling party, are generally appointed as the chairman of the public corporation. Now, it has become the sanctuary of politicians defeated in the elections to parliament and legislative chamber of the states.

(iii)

Joint Sector: It is also known as mixed enterprise. It includes various forms of joint enterprise, shred between state and private interest. The main features of joint sector are:

(i)

the capital stock of the enterprise is owned jointly by the state and the shareholders. The extent of government participation varies from 1% to 99% of the total stock.

(ii) (iii) (iv)

Generally government owns more than 55% Most of the features of the joint sector resemble those of the private limited company. Directors are nominated both by the government and private shareholders.

This form of organization has several advantages. Some of them are: (i) (ii) (iii) It provides great deal of flexibility and freedom of action in management. It functions more as a private enterprise than a government departmental unit. It enables the management to act and deal with sound commercial practices, that would increase the prospects to earn profit. Sometimes the drawbacks of both private enterprise and government departmental units are found in joint sector. This is the main limitation. Multinational Corporation (MNC):

A company which has gone global is called multinational (MNC) or transnational (TNC). A MNC is therefore one that by operating in more than one country, gains R & D production, marketing and financial advantages in its cost and reputation which are not available to purely domestic competitors. The global company views the world as a single market, minimize the importance of national boundaries, raises capital and markets wherever it can do the job best. The above description of multinational corporation has been given by Philip Kotler in his well known book. Principles of Marketing. The MNC has the following main features: (i) MNC operates in more than one country. General Motors. Mobile oil, Coca Cola, United Tech, Apple, Unisys, Avon are the examples of MNC (ii) (iii) It draws upon a common pool of resources financial, information, trade names, patent rights etc. Units are located in various parts of the world and have some common strategy in business. There are many benefits a host country can have. Some of them are: (i) (ii) (iii) (iv) (v) Transfer of technology, capital and managerial skill are available to the host country. Creation of local employment and career opportunities in the host country. Better utilization of local resources Greater availability of products for local consumption It saves the foreign exchange by curtailing the imports.

(4)

Size: The classification on the basis of size is identified in terms of capital investment. There are various kinds of industries. (i) Small scale (ii) medium scale and (iii) large scale industries.

(i)

Small Scale Industries: All industrial units whose capital investment on plant and machinery is upto 3 crores of Rupees (1998-99) are known as small scale industries. For ancillary units (units supplying spare parts and other components to the medium and large scale industries), the limit is also Rs. 3 crores. Capital investment covers only investment in plant and machinery. Land and factory building are excluded, because there are wide variations of land prices at different places. i) ii) iii) The capital requirement to start the small scale unit is lower in comparision to medium and large scale unit. Less capital is required per unit of labour. Hence small scale units can generate large volume of employment. Small scale industries utilize local materials and resources. Therefore it does not require foreign exchange to import materials and resources. iv) It caters to the local needs in a better way as per the local customs and traditions.

(ii)

Medium Scale Industries : Generally all the industrial units with the capital investment of more than Rs. 3 crores and upto about rs. 100 crores are classified as medium scale industries. Usually industries producing durable consumption and intermediate goods fall in this category. Textiles, cosmetics and pharmaceuticals, oil

extracting, sugar, cement industries etc. are classified as intermediate industries. This kind of industry grows with the development of the economy. Rising level of income generates the demand for durable consumer goods. This has a multiplier effect on intermediate and small scale industries. (iii) Large Scale Industries: Where the capital requirement to start an industrial unit is enormous, and where labour laws are applicable, it is known as large scale industry. Iron and steel, automobile, petroleum, ship building, aeronautic, heavy engineering, heavy chemicals, machine tools, nuclear power etc. industries are known as large scale industries. In the long run the economic prosperity of a nation depends upon the development of large scale and basic industries. This industrial sector provides essential inputs to the intermediate and small scale industries in the form of machinery and equipment. In all the developed countries, large scale industries contribute a significant portion in gross domestic product. During and after second five year plan and in every successive plan, the large scale industries have been rightly assigned an important role in economic development. It has made possible to place India on the industrial map of the world. It is a great achievement.

MULTINATIONAL CORPORATIONS 1.1 1) Definition: A company which has gone global is called a multinational (MNC) or a transnational (TNC) company, international or global corporation, though all them are not exactly the same. A MNC is, therefore one that by operating in more than one country gains R & D, production, marketing and financial advantages in its cost and reputation that are not available to purely domestic competitors. The global company views the world as one market, minimizes the importance of national boundaries in economic matters, invests capital and markets its products wherever it can do the job best. (Philip Kotler: Principles of Marketing). 2) The essential nature of the multinational enterprise lies in the fact that its managerial headquarters are located in one country (referred to for convenience as home country) while the enterprise carries out operations in a number of other countries as well (host countries) (I.L.O. Multinational Enterprises and Social Policy Geneva: ILO 1973 P..) 3) A company that attempts to carry out its activities on an international scale as though there were no national boundaries, on the basis of a common strategy directed from a common culture. Affliates are lcoked together in an integrated process and their policies are determined by the corporate centre in terms of decision relating to production, plant location, product mix, marketing, financing etc. (Prof. Raymond Verman of Harvard University U.S. Dept. of Commerce: The multinational Corporation, studies on U.S. Foreign Investment, Vol. I 1972).

4)

A company (a) which has a direct investment base in several countries and (b) which generally derives from 20% to 50% or more of its net profits from foreign operations, and (c) whose management makes policy decisions based on the alternative available anywhere in the world. (James C. Baker cited by L.S. Walsh. International Marketing Bristol: MocDonald and Evans, 1978 P.5-6).

5) i) ii) iii) iv) v)

Jacques Maisonrouge, president of IBM World Trade Corporation defines an MNC as a company that meets five criteria: It operates in many countries at different levels of economic development Its local subsidiaries are managed by nationals. It maintains complete industrial organizations, including R & D and manufacturing facilities in several countries. It has a multitional central management It has multinational stock ownership

The definitions These definitions vividly brings out the following main features of a MNC. (I) International operations: Manufacturing units of the MNC are located in various parts of the world. For instance, Coco Cola, General Motors, Apple etc. have manufacturing units in many countries. They produce the products in several diversified areas. (II) Ownership : These plants, located in different parts of the world, have single ownership.

(III) Collective pool of resources: These plants draw on the common pool of resources, such as money, credit, information, technology, patent and trade, marks, management control etc. (IV) Management : All units are controlled by single management and have common strategy for the spheres of its activities. (V) Competition: Units are obliged to compete (in domestic markets) with foreign competitors too. (VI) Giant Size : The assets and turnover of MNCs are in billions of dollars. Their profits are also supernormal e.g. General Motors, IBM. The ITT is the biggest MNC which accounts for USAs one third balance of payments. (VII) Oligopolistic structure : With the passage of time, a MNC assumes awesome power as a consequence of mergers, take overs etc. (VIII) Spontaneous evolution: Normally MNCs develop in a manner which is spontaneous and unconscious. Many a times, there growth is through creeping instrumentalism. This may be either merely accidental or due to wage differentials etc.

1.2

Why do companies go global?

There are many reasons for a company going global. Some of the major reasons are given below: (1) In developed countries, capital deepening in industrial sector has reached a stage where return on capital investment tends to decline steadily. The law of diminishing returns has already set in. So the companies try to find out the new avenues for profitable

investment. MNC bait the developing countries, which are in short supply of capital. Hence, primary motive for going global is that there is potentiality in earning profit in the overseas markets. The percentage sales receipt is lower in comparison to the percentage profit from the foreign markets. It means that on per unit sale, the rate of profit is higher in overseas markets. Hence globalization has opened the flood gates of profits for MNCs. (2) The development of electronic systems Fax, website etc. has made possible the shrinkage of economy of time and space in conducting operations. The world has been turned into a small village. Information can be transmitted within few seconds across the continents. This has induced the companies to go global. (3) In developed countries, the domestic markets have reached a saturation point, beyond which there is little possibility of increase in demand, for many commodities produced at home. Hence, the developing countries provide fertile markets for such commodities, Ciba Geigy could not survive in Switzerland, where population is only 6 million. It has to go global. (4) Relatively cheap factor prices in developing countries prompt companies to go global.

a)

Developing countries have abundance of natural resources which are not fully exploited, due to lack of capital investment within the country.

b)

Developing countries have large unemployed labour force which is cheap and in abundance.

Both these vital factors are in contrast with developed countries. Multinationals employ these cheap factors at lower cost and produce the goods. The output is then sold at higher prices. Thus MNCs reap higher profits. 1.3 Benefits From MNC:

The benefits that a country may receive from MNC can be examined under two categories 1) 2) (1) Benefits to the host country, where in a MNC undertakes manufacturing operations. Benefits to the home country, where the MNC is incorporated. Following are the benefits attributed to the host countries, where MNCs undertake manufacturing operations: (i) Developing countries like India are short of technological know how. They could not cope up with the advancement and growth of technology in the world. Due to paucity of finance, they could not develop even their own technology, which can compete or substitute the developed counties technology. MNCs are the source to solve this problem. There is transfer of technology from the parent country to

the country of its operations. For instance, India gained automobile technology through MNCs. Many joint ventures were launched with MNCs power sector, automobile industries, food processing etc. the transfer of technology has enabled up to up date technological know how and to increase out productivity. (ii) Core industries, power sector and infrastructure require huge amount of capital investment from home country. The development of power sector, infra-structure and industries take place, which has multiplier effects on the growth of the economy. This is helpful in breaking the vicious circle of poverty, which has set in due to the paucity of capital in developing counties. (iii) Then there is also the scarcity of entrepreneurial and managerial talent in developing countries. MNCs provide this vital input of production. The host countries get opportunities in training and learning the art of modern management. This will have positive effect on the efficiency and productivity of the industrial units. (iv) MNCs create new avenues of jobs and career opportunities. In the host country, MNC accelerates the process of industrialization. This has multiple effects. Ancillary industries develop and supply spare parts and look after the repair and maintenance. Thus job and careers opportunities expand. (v) The development of core industries like steel, chemicals, cement, information technology, boosts up the productivities

in other sectors. The core sector provides intermediate goods to the industries engaged in the manufacturing of consumer durables. Thus all round industrial activities are accelerated by the MNCs, which invest capital in the core industries. (vi) MNCs offer wide variety of goods to the consumers. The standardized foreign commodities are made available in the domestic markets by the MNCs. The consumers, now have wide variety of choice within the country itself. The entry of Mac Donald in Indian market has offered Indian consumers a wide variety of fast food items like pizza, berger, hotdog etc. these names were unheard in the past. (vii) With the advent of MNCs in the host countries, the scope of competitiveness increases in the local markets. It has two benefits (a) the resources are better utilized, and (b) the prices becomes competitive and tend to decline. These twin effects benefit the consumers get in terms of low price and better quality of goods. (viii) MNCs cater to the foreign demand. MNCs export and reexport the commodities manufactured in the host countries. Thus the foreign exchange earning increases. It helps in the improvement of the host countrys balance of payments position. (ix) The MNCs exploit the untapped natural resources of the host countries. Due to lack of indigenous capital for the exploitation of these resources. Thus it helps in the development of the host economy.

(x)

MNCs are operating in a number of countries all over the world. Their units are located in various countries. This encourages world economic unity and through that political cultural and economic integration of the world which is very necessary for intra state harmonious relationship.

(2)

Benefits to the Home Country:

There are number of benefits for the home country from the MNCs which are as follows: (i) Most of the developing countries are blessed with abundant natural resources of one type or the other. They remain untapped due to the scarcity of capital. MNCs invest capital and have access to natural resources. These resources are not available domestically and import of these resources will cost more. Hence at lower prices the MNCs acquire such inputs which, in turn, decrease the prices of finished goods. (ii) (iii) (iv) MMCs get the benefit of uninterrupted supply of raw materials. This benefit is not available for developing country at home. MNCs get benefit with respect to the export of components and finished goods for distribution in foreign markets. There is steady flow of income from overseas markets. Profits, royalties, licensing fees, management contract commission, insurance etc. are sources of income, which a home country gets regularly. (v) The employment and career opportunities in the home countries increase due to the expansion of MNCs business in overseas

markets. Technical and managerial personnel of home country get lucrative jobs in MNC. (vi) MNC faces stiff competition in global markets. So it acquires technological competence, and managerial expertise, to face competition. (vii) Labour is the cheapest factor in developing countries. Extensive unemployment compels labour to accept wages at lower rates. Hence MNCs have the benefit of checap labour, which reduces significantly the cost of production. The above mentioned benefits from MNCs are probably exaggerated. Entrance of MNCs in the host country may create and sometimes aggravate the economic problems which they face. Many economists have pointed out the dangers on relying too much on MNCs. Some of the dangers are as follows. (i) It is said that MNCs bring foreign capital and resolve the problem of capital scarcity of developing countries. It is not completely true. MNCs have used the local finance in many countries and have absorbed the capital that might have been indigenously employed to start the local industries. (ii) The MNCs undertake aggressive advertisement to promote the sale of their goods. They spend lavishly on electronic and print media to promote their sales. It would drive away that local product from the domestic markets. So the local labour and artisans would become unemployed. With the advent of Mac Donald, the local

food processing industries of Jodhpur and Bikaner have been hard hit. (iii) There is also the fear that the host country may lose its economic freedom or even political sovereignty. MNCs are so powerful both financially and politically that they are beyond the controls of host countries. Aram co is a state by itself within Saudi Arabia. International Telephone and Telegraph (ITT) of USA overthrew the marxist president Salvador allende in the seventies. There are woven noting indicents for developing countries. (iv) MNCs usually have an eye on the power sector, IT and other sensitive sectors of the economy. Through these MNCs tend to control the host countrys economy and can create economic and political crisis, when the host country does not toe their line and do not support the wishes of MNCs. (v) It is a mirage that MNC will help to correct the balance of payments. Actually it may create deficit in the balance of payment, when MNCs import raw materials, spare parts and sensitive devices or transfer funds to the home country. (vi) It is considered that the host country would develop as an export base. Indias export import ratio was 66% in 1990-91. It increased to 82%. Developed countries and oil producing countries have more than 100% export import ratio, while developing countries have less than 100%. The MNCs could not bring out the miracle change in the balance of payments of the host country. (vii) It is expected that MNCs would develop the infrastructure and core sector of the economy. But the Indian experience is quite different. The major portion of the investment have been challenged in

consumer goods like coco-cola, corn flakes, dried chicken, pizza, berger, hotdog etc. The following table gives us the dismal picture of foreign direct investment from 1994-96. Out of total investment 25.4% was undertaken in consumer goods industry. It has the highest share in investment, followed by service sector 21.1%. Total Flow of Direct Investments 1991-96 Rs. crores Basic goods 1235.24 Capital goods 1928.21 Intermediate goods 1248.48 Consumer goods 2549.31 Service sector 2111.33 Miscellaneous 244.95 Automobile 711.06 Total 1002858 Source: The Hindu July 29, 1996 Percentage of total 12.3 19.2 12.5 25.4 21.1 2.4 7.1 100.0

(viii) To create additional manufacturing capacities It was expected that MNCs would set up new plants. The experience is not so favourable. A significant amount of foreign capital was used for purchasing the local enterprise. The benefit of new manufacturing capacity was not realized by the host country. 1.4 Government Policy Towards Multinational Corporations (MNCs):

Before 1991, the scope for foreign capital and MNCs was very limited in India. The industries, which required sophisticated technology and had considerable export potentials were not also opened for MNCs. The procedures for approval of MNC projects were too cumbersome. It

would take a long time to clear the project and meanwhile the project may have become outdated. The project cost could also have increased. In most of the cases, the decisions were heavily influenced by the beauracracy. Hence India was not considered a safe heaven for foreign capital. With the advent of the New Economic Policy in July 1991, the industrial scenario has radically changed with regard to MNCs. The globalization has ushered in the regime of liberalization. With the result that Indias economy is rapidly becoming market friendly. Following are the main features of the government policy towards multinational corporations: 1) The New Economic Policy 1991, has assigned an important role to private foreign capital. The MNCs have been given due importance of Indias industrial sector. Prior to 1991, the foreign equity holding was limited to 40% only. In the New Economic Policy of 1991, the foreign equity holding has been raised to 51%. To avoid unnecessary and lengthy procedures for approval, the government announced a list of high technology and priority industries in Annexure III of the New Economic Policy (1991). The industries listed in Annexure III were granted automatic permission for direct foreign investment upto 51% foreign equity holding. Till December 1996 the government allowed automatic approval of foreign direct investment up to 74% in nine categories of industry. At present 48 industries are made eligible for automatic approval upto 51% foreign equity holdings. 2) The industries, which were granted automatic approval for foreign equity, have large export potential. These industries include capital

goods, metallurgical units electronics, food processing and the service sector. 3) The industries which are important for rapid growth of the economy, were given the benefits of foreign equity holdings. Power, telecommunication, transport sector etc. are listed in this category. 4) To mitigate the scarcity of power supply, the government announced a new policy decision on July 31, 1991. The government has allowed 100% foreign equity participation for setting up power plants. It has also allowed free repatriation of profit and other incentives. This will encourage MNCs to set up power plants without delay. It will not alter the cost. Which earlier was the result of the delay in granting approval of the projects. The provision will also enable the MNCs to meet the total cost arising out of exchange rate functions. 5) The provisions of Foreign exchange regulation act (FERA) have been liberalized through an ordinance dated 9th January, 1993. The MNCs with more than 40% of foreign equity holding are now treated on par with fully Indian owned companies. 6) 7) MNCs have been permitted to use their trade marks on sales in local Indian markets from May 14, 1992. Disinvestment of foreign capital will not require the prices to be determined by the Reserve Bank of India. It would be determined at market rate on the stock exchange from 15th September, 1992. 8) In January 1997, the government of India announced the guidelines for foreign direct investment (FDI) to expedite the approval of foreign investment in areas not covered under the category of

automatic approval. These included infrastructure, potential export sector, large scale employment potential sector, particularly for rural areas, social sector projects like hospitals, health care and medicines and the proposals that lead to induction of technology and infusion of capital. 9) Foreign direct investment approval will be subjected to the sectorial ceiling of 20% (40% NRI) in banking 51% in non banking financial companies, 100% in roads, power, ports, tourism and venture capital, 49% in telecommunication, 40% (100% NRI) in domestic airways, 24% in small scale industries, 51% in drugs industry, 100% in petroleum and 50% in mining except for gold, silver, diamond and precious stones. 10) The new guidelines also allow foreign companies to set up 100% equity holding subject to the following conditions : (a) where sophisticated technology is proposed to be brought in (b) where 05% of the output is likely to be exported, and (c) where proposals pertaining to power projects, roads, ports and industrial estates and towns are concerned. The trends of liberalization that were started during the 80s gave a substantial influx of foreign collaboration agreements with MNCs. It is estimated that between 1948 1988, 12,760 foreign collaboration agreements were approved, while during the period 1981-88, 6165 agreements were approved. As a result of the New Economic Policy of 1991, there has been a further increase in foreign collaboration. During this period the government approved. 5874 foreign technology collaboration agreements and

8396 foreign direct investment projects, involving Rs. 175032 crores, although the actual inflow was Rs. 51558 crores (About 30% of the agreement). Out of the total investment as much as 57.9% was in infrastructure and core sector. The share of consumer goods was 13.2%, service sector 9.9% and capital goods sector 9.7%. Evaluation of the government policy: As the facts and figures mentioned above suggest, considerable amount of investment was made by MNCs in infrastructure and core sectors. None the less, the government policy with regard to MNCs is being criticized on the following grounds. (i) Due to the weak bargaining power on the part of the Indian government, it is alleged that the terms of agreements were more favourable to the MNCs that to India. Moreover, governments excessive eagerness for foreign participation also resulted in unfavourable terms of agreement for India. The terms of payments were concluded in such a way that MNCs were able to siphon out maximum profits from India. (ii) A large number of agreements were concluded to manufacture such products which can be manufactured with the help of indigenous technology at low cost. These products include readymade garments, biscuits, dry batteries, lipsticks, tooth paste, fast food, cosmetics, toilet soap, shampoo, ice-cream, vaccum flask etc. (iii) As per the terms of agreement, the supplies of machinery, tools, equipments etc. were entrusted to MNCs. So there was price mark

up and excessive import of equipment. This resulted into heavy financial burden for the economy of India. (iv) The government gave permission for multiple collaborations. This resulted in import of the same technology again and again. Hence multiple payments were made, without enhancing or increasing the new technological know how. (v) Some of the clauses of the agreement are detrimental to our national interests. Technology cannot be transferred by us to other country, even after the term of agreements expires. (vi) MNCs will manufacture the commodities as per the terms and conditions laid down in the articles of agreement. It could not be changed, even if the circumstances change. Generally, these terms and conditions are more favourable to MNCs. If change is required and it is against the interests of the introduced. (vii) MNCs exercise their control over the overseas purchases and sales, as per the terms of agreements which are favourable to the MNCs. (viii) Foreign technicians of MNCs control and regulate production. They take decisions regarding the quantity, quality and nature of output. All these decisions are taken, keeping in the view of interests of the MNCs rather than that of India. (ix) Control over marketing and pricing policy are exercised by MNCs. As per the agreements, it is required that a part of output is to sold to the MNCs, subsidiary in India at a fixed commission. The MNCs may appoint a sole selling agent in India. Thus also management and marketing aspects are, taken over by the MNCs. It is detrimental to our national interests. MNCs, it could not be

(x)

MNCs have helped the growth and expansion of monopoly. MNCs bestow certain advantages like patent rights, resources, foreign exchange facilities to the local business houses etc. This enables the big business houses to diversify production. It helps them to develop the enterprise. Such expansion of business leads to monopoly.

(xi)

Right to export the output of corporation is vested in the MNCs. The output manufactured by MNCs could only be exported to the countries of their choice. The MNCs would fix up the terms and conditions of such exports. Thus, the government policy towards MNCs on the whole is titled more towards the interests of the MNCs rather than towards the interests of India.