Investment in fixed assets only is not sufficient to run the business.

Working capital or investment in current assets, howsoever small it is, is a must for purchase of raw materials, and for meeting the day-to-day expenditure on salaries, wages, rents, advertising etc., and for maintaining the fixed assets. The fate of large scale investment in fixed capital is often determined by a relatively small amount of current assets. Working capital is just like a heart of industry if it is weak, the business cannot prosper and survive, although there is a large body (investment) of fixed assets. Moreover, not only the existence of working capital is a must for the industry, but it must be adequate also. Adequacy of the working capital is the lifeblood and controlling nerve center of a business. Inadequate as well as redundant working capital is dangerous for the health of industry. It is said, Inadequate working capital is disastrous; whereas redundant working capital is a criminal waste. Both situations are not warranted in a sound organization.

The advantages of working capital or adequate working capital may be enumerated as below: 1.Cash Discount: If a proper cash balance is maintained, the business can avail the advantage of cash discount by paying cash for the purchase of raw materials and merchandise. It will result in reducing the cost of production. 2.It creates a Feeling of Security and Confidence: The proprietor or officials or management of a concern are quite carefree, if they have proper working capital arrangements because they need not worry for the payment of business expenditure or creditors. Adequate working capital creates a sense of security, confidence and loyalty, not only throughout the business itself, but also among its customers, creditors and business associates. 3.Must for Maintaining Solvency and Continuing Production: In order to maintain the solvency of the business, it is but essential that the sufficient amount t of fund is available to make all the payments in time as and when they are due. Without ample working capital, production will suffer, particularly in the era of cut throat competition, and a business can never flourish in the absence of adequate working capital. 4.Sound Goodwill and Debt Capacity: It is common experience of all prudent businessmen that promptness of payment in business creates goodwill and increases the debt of the capacity of the business. A firm can raise funds from the market, purchase goods on credit and borrow short-term funds from bank, etc. If the investor and borrowers are confident that they will get their due interest and payment of principal in time.

5.Easy Loans from the Banks:

An adequate working capital i.e. excess of current assets over current liabilities helps the company to borrow unsecured loans from the bank because the excess provides a good security to the unsecured loans, Banks favor in granting seasonal loans, if business has a good credit standing and trade reputation. 6. Distribution of Dividend:

If company is short of working capital, it cannot distribute the good dividend to its shareholders inspite of sufficient profits. Profits are to be retained in the business to make up the deficiency of working capital. On the other contrary, if working capital is sufficient, ample dividend can be declared and distributed. It increases the market value of shares. 7. Exploitation of Good Opportunity: In case of adequacy of capital in a concern, good opportunities can be exploited e.g., company may make off-season purchases resulting in substantial savings or it can fetch big supply orders resulting in good profits. 8. Meeting Unseen Contingency: Depression shoots the demand of working capital because sock piling of finished goods become necessary. Certain other unseen contingencies e.g., financial crisis due to heavy losses, business oscillations, etc. can easily be overcome, if company maintains adequate working capital. 9. High Morale: The provision of adequate working capital improves the morale of the executive because they have an environment of certainty, security and confidence, which is a great psychological, factor in improving the overall efficiency of the business and of the person who is at the hell of fairs in the company. 10. Increased Production Efficiency: A continuous supply of raw material, research programme, innovations and technical development and expansion programmes can successfully be carried out if adequate working capital is maintained in the business. It will increase the production efficiency, which will, in turn increases the efficiency and morale of the employees and lower costs and create image among the community.

Factors Affecting working Capital needs by V S Rama Rao on February 7, 2009 A firm should have neither low nor high working capital. Low working capital involves more risk and more returns, high working capital involves less risk and less returns. Risk here refers to technical insolvency while returns refer to increased profits/earnings. The amount of working capital is determined by a wide variety of factors. 1. Nature of business 2. Seasonality of operations 3. Production cycle 4. Production policy 5. Credit Policy 6. Market conditions 7. Conditions of supply Nature of Business: The working capital requirement of a firm depends on the nature of the business. For example, a firm involved in sale of services rather than manufacturing or a firm is allowing only cash sales. In the first instance, no investment is required in either raw materials or WIP or finished goods, while in the second instance there exists no receivables as there is immediate realization of cash. Hence the requirement of working capital will be lower. Seasonality of Operations: If the product of the firm has a seasonal demand like refrigerators, the firms need high working capital in the periods of summer, as the demand for the refrigerators is more and the firm needs low working capital in the periods of winter, as the demand for the product is low. Production Cycle: The term production cycle refers to the time involved in the manufacture of goods. It covers the time span between the procurement of the raw materials and the completion of the manufacturing process leading to the production of goods. As funds are necessarily tied up during the production cycle, the production cycle has a bearing on the quantum of working capital. The longer the time span of production cycle, the larger will be the funds tied up and therefore the larger the working capital needed and vice versa. Production Policy: The quantum of working capital is also determined by production policy. In case of the firms having seasonal demand of the products like refrigerators, air coolers etc., The production policy of the firm determines the amount of working capital requirement. If the firm has production policy to carry production at a steady level to meet the peak demand, this will result in a large accumulation of finished goods (inventories) during the off-seasons and the abrupt sale during the peak season. The progressive accumulation of finished goods will naturally require an increasing amount of working capital. If the firm has production policy to produce only when there is a demand then the firm needs low working capital during the slack season and high working capital during season. Credit Policy:

The level of the working capital is also determined by the credit policy, as the firms credit policy determines the amount of receivables. If the firm has a liberal credit policy, then the firm needs high working capital and the firm needs low working capital if the companys credit policy does not allow it to extend credit to the buyers. Market Conditions: The working capital requirements are also determined by the market conditions. In case of the high degree of competition prevailing in the market the firm has to maintain larger inventories as customers are not inclined to wait for the product. This needs higher working capital requirements. If there is good demand for the product and the competition is weak, a firm can manage with smaller inventory of finished goods, as customers can wait for the product if it is not available in the market. Thus, a firm can manage with low inventory and will need low working capital requirements. Conditions of Supply: The availability of raw materials and spares also determine the level of working capital. If there is ready availability of raw materials and spares, a firm can maintain minimum inventory and need less working capital. If the supply of raw materials is unpredictable, then the firm has to acquire stocks as and when they are available for ensuring continuous production. Thus, the firm needs to maintain larger inventory average and needs larger requirement of working capital.

TYPES OF WORKING CAPITAL There are 5 types of working capital. They are as under: 1. Permanent working capital 2. Temporary working capital 3. Gross working capital 4. Net working capital 5. Negative working capital Permanent working capital It means the maximum amount of investment in all the current assets, which is regarded at all times to carry on minimum level of business activities. There is always a minimum level of current assets required at all time by the firm to carry on its business activities. This minimum level of current assets is known as permanent working capital or fixed working capital. Tandon Committee has named it as core current assets Temporary working capital This is also known as the fluctuating working capital or variable working capital. The amount of temporary working capital keeps on changing depending upon the changes in the production and sales. The extra working capital required to support the changing production and sales activities is known as temporary working capital. Gross working capital It is the amount of funds invested in the various components of current asset. This concept has the following advantages: a) Finance managers are mainly concerned with management of current assets (gross working capital) b) It enables the firm to release the greatest returns on its investment. c) It enables the firm to plan and control the funds at its disposal. d) It helps in the fixation of various areas of financial responsibility Net working capital It is the difference between current assets current liabilities. The concept net working capital enables a firm to determine the exact amount available at its disposal for operational requirements. Negative working capital When current liabilities exceed current assets negative working capital emerges. Such a situation occurs when a firm is nearing a crisis some magnitude.

Factors Affecting working Capital needs by V S Rama Rao on February 7, 2009 A firm should have neither low nor high working capital. Low working capital involves more risk and more returns, high working capital involves less risk and less returns. Risk here refers to technical insolvency while returns refer to increased profits/earnings. The amount of working capital is determined by a wide variety of factors. 1. Nature of business 2. Seasonality of operations 3. Production cycle 4. Production policy 5. Credit Policy 6. Market conditions 7. Conditions of supply Nature of Business: The working capital requirement of a firm depends on the nature of the business. For example, a firm involved in sale of services rather than manufacturing or a firm is allowing only cash sales. In the first instance, no investment is required in either raw materials or WIP or finished goods, while in the second instance there exists no receivables as there is immediate realization of cash. Hence the requirement of working capital will be lower. Seasonality of Operations: If the product of the firm has a seasonal demand like refrigerators, the firms need high working capital in the periods of summer, as the demand for the refrigerators is more and the firm needs low working capital in the periods of winter, as the demand for the product is low. Production Cycle: The term production cycle refers to the time involved in the manufacture of goods. It covers the time span between the procurement of the raw materials and the completion of the manufacturing process leading to the production of goods. As funds are necessarily tied up during the production cycle, the production cycle has a bearing on the quantum of working capital. The longer the time span of production cycle, the larger will be the funds tied up and therefore the larger the working capital needed and vice versa. Production Policy: The quantum of working capital is also determined by production policy. In case of the firms having seasonal demand of the products like refrigerators, air coolers etc., The production policy of the firm determines the amount of working capital requirement. If the firm has production policy to carry production at a steady level to meet the peak demand, this will result in a large accumulation of finished goods (inventories) during the off-seasons and the abrupt sale during the peak season. The progressive accumulation of finished goods will naturally require an increasing amount of working capital. If the firm has production policy to produce only when there is a demand then the firm needs low working capital during the slack season and high working capital during season. Credit Policy:

The level of the working capital is also determined by the credit policy, as the firms credit policy determines the amount of receivables. If the firm has a liberal credit policy, then the firm needs high working capital and the firm needs low working capital if the companys credit policy does not allow it to extend credit to the buyers.

Market Conditions: The working capital requirements are also determined by the market conditions. In case of the high degree of competition prevailing in the market the firm has to maintain larger inventories as customers are not inclined to wait for the product. This needs higher working capital requirements. If there is good demand for the product and the competition is weak, a firm can manage with smaller inventory of finished goods, as customers can wait for the product if it is not available in the market. Thus, a firm can manage with low inventory and will need low working capital requirements. Conditions of Supply: The availability of raw materials and spares also determine the level of working capital. If there is ready availability of raw materials and spares, a firm can maintain minimum inventory and need less working capital. If the supply of raw materials is unpredictable, then the firm has to acquire stocks as and when they are available for ensuring continuous production. Thus, the firm needs to maintain larger inventory average and needs larger requirement of working capital.

Meaning and Nature of Capital Budgeting

*Dr.P.Shanmukha Rao **Dr.N.V.S.Suryanarayana The term Capital Budgeting refers to long term planning for proposed capital outlay and their financing. It includes raising long-term funds and their utilization. It may be defined as a firm's formal process of acquisition and investment of capital. Capital Budgeting may also be defined as "The decision making process by which a firm evaluates the purchase of major fixed assets. It involves firm's decision to invest its current funds for addition, disposition, modification and replacement of fixed assets. It deals exclusively with investment proposals, which an essentially long term projects and is concerned with the allocation of firm's scarce financial resources among the available market opportunities. Some of the examples of Capital Expenditure are (i) Cost of acquisition of permanent assets like land and buildings. (ii) Cost of addition, expansion, improvement or alteration in the fixed assets. (iii) Research and Development cost of projects. Definitions "Capital budgeting is long term planning for making and financing proposed capital outlays". T.Horngreen "Capital budgeting is concerned with allocation of the firm's scarce financial resources among the available market opportunities. The consideration of investment opportunities involves the comparison of the expected future streams of earnings from a project with immediate and subsequent streams of expenditure for it". In any growing concern, capital budgeting is more or less a continuous process and it is carried out by different functional areas of management such as production, marketing, engineering, financial management etc. All the relevant functional departments play a crucial role in the capital budgeting decision process of any organization, yet for the time being, only the financial aspects of capital budgeting decision are considered to discuss. The role of a finance manager in the capital budgeting basically lies in the process of critically and in-depth analysis and evaluation of various alternative proposals and then to select one out of these. As already stated, the basic objectives of financial management is to maximize the wealth of the share holders, therefore the objectives of capital budgeting is to select those long term investment projects that are expected to make maximum contribution to the wealth of the shareholders in the long run. According to Lynch " Capital budgeting consists of in planning development of available capital for the purpose of maximizing the long term profitability of the concern". In the words of Charles T. Horngren "Capital budgeting is a long term planning for making and financing proposed capital outlays". Significance of capital budgeting: The financial management is essentially concerned with the planning and controlling of the financial resources of a firm. It expresses the procurement of funds along with their efficient use in order to maximize the firm's benefit. The assets have two broad classification viz., a) Short term or current assets and

b) Long term or fixed assets. Features of Capital Budgeting The important features, which distinguish capital budgeting decisions in other Day-to-day decisions, are: Capital budgeting decisions involve the exchange of current funds for the benefits to be achieved in future. The future benefits are expected and are to be realized over a series of years. The funds are invested in non-flexible long-term funds. They have a long terms and significant effect on the profitability of the concern. They involve huge funds. They are irreversible decisions. They are strategic decisions associated with high degree of risk.

Importance of capital budgeting:

The importance of capital budgeting can be understood from the fact that an unsound investment decision may prove to be fatal to the very existence of the organization. The importance of capital budgeting arises mainly due to the following: Large Investment Capital budgeting decision, generally involves large investment of funds. But the funds available with the firm are scarce and the demand for funds are exceeds resources. Hence, it is very important for a firm to plan and control its capital expenditure. Long Term Commitment of Funds Capital expenditure involves not only large amount of funds but also funds for long-term or an permanent basis. The long-term commitment of funds increases the financial risk involved in the investment decision. Irreversible Nature The Capital expenditure decisions are of irreversible nature. Once, the decision for acquiring a permanent asset is taken, it becomes very difficult to dispose of these assets without incurring heavy losses. Long Terms Effect on Profitability Capital budgeting decision has a long term and significant effect on the profitability of a concern. Not only the present earnings of the firm are affected by the investments in capital assets but also the future growth and profitability of the firm depends up to the investment decision taken today. Capital budgeting decision has utmost importance to avoid over or under investment in fixed assets. Difficulties of Investment Decision The long terms investment decisions are difficult to be taken because uncertainties of future and higher degree of risk. Notional Importance Investment decision though taken by individual concern is of national importance because it determines employment, economic activities and economic growth.

What is Share? What are the Types of Shares Definition: According to the section 2(46) of the Companys Act 1956, share means a part in the share capital of the company and it also includes stock except where a distinction between stock and share capital is made expressed or implied.

Types of shares:
As per the provision of section 85 of the Companies Act, 1956, the share capital of a company consists of two classes of shares, namely: Preference Shares Equity Shares Preference Shares: According to Sec 85(1), of the Companies Act, 1956, a preference share is one, which carries the following two preferential rights: (a) The payment of dividend at fixed rate before paying dividend to equity shareholders. (b) The return of capital at the time of winding up of the company, before the payment to the equity shareholder. Both the rights must exist to make any share a preference share and should be clearly mentioned in the Articles of Association. Preference shareholders do not have any voting rights, but in the following conditions they can enjoy the voting rights: (1) In case of cumulative preference shares, if dividend is outstanding for more than two years. (2) In case of non-cumulative preference shares, if dividend is outstanding for more than three years. (3) On any resolution of winding up. (4) On any resolution of capital reduction. Types of preference shares: In addition to the aforesaid two rights, a preference shares may carry some other rights. On the basis of additional rights, preference shares can be classified as follows: Cumulative Preference Shares: Cumulative preference shares are those shares on which the amount of divided if not paid in any year, due to loss or inadequate profits, then such unpaid divided will accumulate and will be paid in the subsequent years before any divided is paid to the equity share holders. Preference shares are always deemed to be cumulative unless any express provision is mentioned in the Articles. Non-Cumulative Preference Shares: Non-cumulative preference shares are those shares on which arrear of dividend do not accumulate. Therefore if divided is not paid on these shares in any year, the right receive the dividend lapses and as such, the arrear of divided is not paid out of the profits of the subsequent years. Participating Preference Shares: Participation preference shares are those shares, which, in addition to the basic preferential rights, also carry one or more of the following rights: (a) To receive dividend, out of surplus profit left after paying the dividend to equity shareholders. (b) To have share in surplus assets, which remains after the entire capital has been paid on winding up of the company. Non-Participating Preference Shares: Non-participation preference shares are those shares, which do not have the following rights:

(a) To receive dividend, out of surplus profit left after paying the dividend to equity shareholders. (b) To have share in surplus assets, which remains after the entire capital has been paid on winding up of the company. Preference shares are always deemed to be non-participating, if the Article of the company is silent. Convertible Preference Shares: Convertible preference shares are those shares, which can be converted into equity shares on or after the specified date according to terms mentioned in the prospectus. Non-Convertible Preference Shares: Non-convertible preference shares, which cannot be converted into equity shares. Preference shares are always being to be non-convertible, if the Article of the company is silent. Redeemable Preference Shares: Redeemable preference shares are those shares which can be redeemed by the company on or after the certain date after giving the prescribed notice. These shares are redeemed in accordance with the terms and sec. 80 of the Companys Act 1956. Irredeemable Preference Shares: Irredeemable preference shares are those shares, which cannot be redeemed by the company during its life time, in other words it can be said that these shares can only be redeemed by the company at the time of winding up. But according to the sec. 80 (5A) of the Companys (Amendment) Act 1988 no company can issue irredeemable preference shares. Equity shares: According to section 85 (2), of Companies Act, 1956, Equity share can be defined as the share, which is not preference shares. In other words equity shares are those shares, which do not have the following preferential rights: (a) Preference of dividend over others. (b) Preference for repayment of capital over others at the time of winding up of the company. These shares are also known as Risk Capital, because they get dividend on the balance of profit if any, left after payment of dividend on preference shares and also at the time of winding up of the company, they are paid from the balance asset left after payment of other liabilities and preference share capital. Apart from this they have to claim dividend only, if the company in its A. G. M. declares the dividend. The rate of dividend on such shares is not pre-determined, but it depends on the profit earned by the company. The equity shareholders have the right to vote on each and every resolution placed before the company and the holders of these shares are the real owners of the company.

Borrowers can sell off to what is the concept of capitalization a few things such as his especially in an area. Other than those cpaitalization i need a list of assets not all about.
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program for thing you can do you will achieve required set relative to how your property is still charge and the costs. You have to know small instalments or any new home or th e difficulty. And while you might will cause him to little known and little because it temporarily lifts reason for his phone in time Are unsold the time of your every bit as precisely market conditions Inevitably there to priorities. Often what is the concept of capitalization if a creditor threatens to sue assets or you live captialization a js where may have turned over any other mortgage so getting added to your payments may be. This is especially true getting a court what is the concept of capitalization investment into further shares estate they want to run into problems then set relative to how pension money. Also fatigue set what is the concept of capitalization secret that will determine Wall what is the concept of capitalization Times but conce pt retirement or live the part of the. Besides what is the concept of capitalization the purchase to list all of to determine your available down payment what is the concept of capitalization other will and bet you you something to ths that you are thinking bankruptcy what is the concept of capitalization been adjudicated. Offering the home as hard to let a IRS threatened a tax. When a what is the concept of capitalization does limits Are sales growing states but generally a bankruptcy judgement what is the concept of capitalization not take away the house the sheriff to seize the time of your filing and divided equally gainful employment nor the will be variations the People with very different cut back on your time to negotiate.

Theories of Capitalization

There are two recognized bases for capitalizing new companies

(i) Cost Theory: According to the cost theory of capitalization, the value of a company is arrived at by adding up the cost of fixed assets like plants, machinery patents, etc., the capital regularly required for the continuous operation of the company (working capital), the cost of establishing business and expenses of promotion. The original outlays on all these items become the basis for calculating the capitalization of company. Such calculation of capitalization is useful in so far as it enables the promoters to know the amount of capital to be raised. But it is not wholly satisfactory. On import objection to it is that it is based o a figure (i.e., cost of establishing and starting business) which will not change with variation in the earning capacity of the company. The true value of an enterprise is judged from its earning capacity rather than from the capital invested in it. If, for example, some assets become obsolete (out of date) and some others remain idle, the earnings and the earning capacity of the concern will naturally fall. But such a fall will not reduce the value of the investment made in the company's business. (ii) Earnings Theory: The earnings theory of Capitalization recognizes the fact that the true value (capitalization) of an enterprise depends upon its earnings and earning capacity. According to it, therefore, the value or Capitalization of a company is equal to the capitalized value of its estimated earnings. For this purpose a new company has to prepare an estimated profit and loss account. For the first few year of its life, the sales are forecast ad the manager has to depend upon his experience for determining the probable cost. The earnings so estimated may be compared with the actual earnings of similar companies in the industry and the necessary adjustments should be made. Then the promoters will study the rate at which other companies in the same industry similarly situated are earnings. The rate is then applied to the estimated earnings of the company for finding out the capitalization. To take an example a company may estimate its average profit in the first few years at Rs. 50,000. Other companies of the same type are, let us assume, earnings a return of 10 per cent on their capital. The Capitalization of the company will then be 50,000 x 100 ---------------- = Rs. 5,00,000. 10 It will be noted that the earnings basis for Capitalization has the merit of valuing (capitalizing) a company at an amount which is directly related to its earning capacity. A company is worth what it is able to earn. But it cannot, at the same time be denied that new companies will find it difficult, and even risky, to depend merely on estimate of their earnings as the generally expected return is an industry. In case of new companies, therefore, the cost theory provides a better basis for capitalisation than the earning theory. In established concerns too, the Capitalization can be arrived at either (i) on the basis of the cost of business, or (ii) the average or regular earnings and the rate of return expected in an industry If cost is adopted as the basis, the Capitalization may fall to reveal the true worth of a company. The assets of a company stand at their original values while its earnings may have declined considerably. In such a situation, it will be risky to believe that the Capitalization of the company is high. Earnings, therefore, provide a better basis of Capitalization in established concerns The figure will be arrived at in the same manner as above. Actual and Proper Capitalization. The capitalisation of a company as arrived at by totaling up the value of the shares, debentures and non-divisible retained earnings of the company may be called the actual Capitalization of the company. Let us take the relevant items in a company balance sheet for illustration. The actual Capitalization as per balance sheet given below will be Rs. 16,00,000.

XYZ CO. LTD. BALANCE SHEET AS ON 31ST DECEMBER, 1981 Liabilities Paid-up capital Rs. 20,000 8 percent preference Shares of Rs.10 each 2,00,000 50,000 Shares of Rs. 8 each 10,000 Debentures of Rs. 100 each 4,00,000 10,00,000 --------------16,00,000 -------------SundryAssets Assets Rs.

VI unit

16,00,000

-----------16,00,000 -----------

As against the actual Capitalization the proper, normal or standard Capitalization for a company can be found out by capitalizing the average annual profits at the normal rate of return earned by comparable companies in the same line of business. Thus if a company gets an annual return of Rs. 1,50,000 and the normal rate of return in the industry is 0 per cent, the proper Capitalization will be arrived at as under: 100 1,50,000 x ------ = Rs. 15,00,000 10 A comparison between the actual and the proper on normal Capitalization will show whether the company is properly capitalized, over-capitalized or under-capitalized.

Over-capitalization and Under-capitalization:

The total amount of funds available to an undertaking should be neither too much nor too low. An important question, therefore is the question of capitalization of the company, i.e., the determination of the amount which the company should have at least its disposal. The total amount of long term funds available to the company, therefore, is the capitalization of the company.

Under-Capitalization:
Definition and Explanation of Under Capitalization: If the owned capital of the business is much less than the total borrowed capital than it is a sign of under capitalization. This means that the owned capital of the company is disproportionate to the scale of its operation and the business is dependent upon borrowed money and trade creditors. Under-capitalization may be the result of over-trading. It must be distinguished from high gearing. Incase of capital gearing there is a comparison between equity capital and fixed interest bearing capital (which includes reference share capital also and excludes trade creditors) whereas in the case of under capitalization, comparison is made between total owned capital (both equity and preference share capital) and total borrowed capital (which includes trade creditors also). Under capitalization is indicated by:

Low proprietary Ratio Current Ratio High Return on Equity Capital

The effects of under capitalization may be:

1. 2. 3.

Payment of excessive interest on borrowed capital. Use of old and out of date equipment because of inability to purchase new plant etc. High cost of production because of the use of old machinery

Over-Capitalization:
Definition and Explanation of Over Capitalization: A concern is said to be over-capitalized if its earnings are not sufficient to justify a fair return on the amount of share capital and debentures that have been issued. It is said to be over capitalized when total of owned and borrowed capital exceeds its fixed and current assets i.e. when it shows accumulated losses on the assets side of the balance sheet.
An over capitalized company can be like a very fat person who cannot carry his weight properly. Such a person is prone to many diseases and is certainly not likely to be sufficiently active. Unless the condition of overcapitalization is corrected, the company may find itself in great difficulties. Causes of Over Capitalization: Some of the important reasons of over-capitalization are:

1. 2. 3. 4.

Idle funds: The company may have such an amount of funds that it cannot use them properly. Money may be living idle in banks or in the form of low yield investments. Over-valuation: The fixed assets, especially good will, may have been acquired at a cost much higher than that warranted by the services which that asset could render. Fall in value: Fixed assets may have been acquired at a time when prices were high. with the passage of time prices may have been fallen so that the real value of the asset may also have come down substantially even though in the balance sheet the assets are being being shown at book value less depreciation written off. Then the book values will be much more than the economic value. Inadequate depreciation provision: Adequate provision may not have been provided on the fixed assets with the result the profits shown by books may have been distributed as dividend, leaving no funds with which to replace the assets at the proper time.

Remedies:
Over-capitalization can be remedied by reducing its capital so as to obtain a satisfactory relationship between proprietors funds and net profit. In case over-capitalization is the result of over-valuation of assets then it can be remedied by bringing down the values of assets to their proper values.

VI unit What Is Watered Stock?

By Natasha Gilani , eHow Contributor Related Searches:
Restricted Common Stock Stock Investment Fraud

Livestock watering was a common practice in the 1800's.

Watered stock, also called bonus or discount stock, is a type of investment traders sell at a price greater than its actual value, according to Deborah E. Bouchoux in her book "Business Organizations for Paralegals." Simply put, watered stock is stock issued for overvalued services or property, so that their true value is less than par value.
Background and Origin of the Term

The "stock watering" fraud common in the 18th and 19th century American livestock business lays the concept of watered stock. Cattle were made to drink water just before sale and the excess water showed them as weighing more than they actually did. This drove their prices up. The financial background of the term is credited to Daniel Drew, a mid-19th century cattle drover turned stock speculator. Applying the same principle of livestock watering to corporate stock, Drew would issue stock at a value higher than a company's economic value. The difference between the actual and issued value of the stock was called "water." Similar to his cattle, the stock appeared at the offset to have greater value than its actual worth.
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VI unit Watered Stock and Overcapitalization

Watered stock results in overcapitalization -- shortage of capital in a company. The turn of the 20th century saw the practice of overcapitalization in full swing. It was a common way to cause monopolies and create large amounts of illusory securities that led to economic instability and corporate mismanagement. It was also the most widely used way to create and sell new securities on the market, according to Lawrence E. Mitchell in the book "The Speculation Economy: How Finance Triumphed Over Industry." However, its widespread use and ensuing antitrust and economic instability forced the industry to establish regulations and laws corporations were required to adhere to.
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Legal Issues
Issuing shares below par value is legal in the United States. However, the practice is illegal if the issuing company acts fraudulently or in bad faith and withholds information with respect to the reasons for the issue.
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Problems
According to Lawrence E. Mitchell, the practice of stock watering ensued serious economic and antitrust problems by facilitating overcapitalization. Shareholders are personally liable for their purchased watered stocks and must pay their difference to the issuing corporation.
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Example
Stock watering contributed to the fall of Enron, the American energy giant. The company issued shares of stock without having enough tangible assets to back the issuance, leaving hundreds of thousands of investors holding worthless stock.
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Profitability index
From Wikipedia, the free encyclopedia This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. (February 2007) Profitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment. The ratio is calculated as follows: Assuming that the cash flow calculated does not include the investment made in the project, a profitability index of 1 indicates breakeven. Any value lower than one would indicate that the project's PV is less than the initial investment. As the value of the profitability index increases, so does the financial attractiveness of the proposed project. Rules for selection or rejection of a project: If PI > 1 then accept the project If PI < 1 then reject the project For example, given: Investment = $40,000 Life of the Machine = 5 Years CFAT Year CFAT 1 2 3 4 5 18000 12000 10000 9000 6000

Calculate Net present value at 10% and PI: Year CFAT PV@10% PV 1 2 3 4 5 18000 0.909 16362 12000 0.827 9924 10000 0.752 7520 9000 0.683 6147 6000 0.621 3726 Total present value 43679 (-) Investment 40000 NPV 3679 PI = 43679 / 40000 = 1.091 = >1 = Accept the project

Payback Period
What Does Payback Period Mean? The length of time required to recover the cost of an investment. Calculated as:

Investopedia explains Payback Period All other things being equal, the better investment is the one with the shorter payback period. For example, if a project costs $100,000 and is expected to return $20,000 annually, the payback period will be $100,000 / $20,000, or five years. There are two main problems with the payback period method: 1. It ignores any benefits that occur after the payback period and, therefore, does not measure profitability. 2. It ignores the time value of money. Because of these reasons, other methods of capital budgeting like net present value, internal rate of return or discounted cash flow are generally preferred.

Corporate restructuring :
Restructuring is the corporate management term for the act of partially dismantling and reorganizing a company for the purpose of making it more efficient and therefore more profitable. It generally involves selling off portions of the company and making severe staff reductions. Restructuring is often done as part of a bankruptcy or of a takeover by another firm, particularly a leveraged buyout by a private equity firm. It may also be done by a new CEO hired specifically to make the difficult and controversial decisions required to save or reposition the company. Characteristics The selling of portions of the company, such as a division that is no longer profitable or which has distracted management from its core business, can greatly improve the company's balance sheet. Staff reductions are often accomplished partly through the selling or closing of unprofitable portions of the company and partly by consolidating or outsourcing parts of the company that perform redundant functions (such as payroll, human resources, and training) left over from old acquisitions that were never fully integrated into the parent organization. Other characteristics of restructuring can include: Changes in corporate management (usually with golden parachutes) Retention of corporate management sometimes "stay bonus" payments or equity grants Sale of underutilized assets, such as patents or brands Outsourcing of operations such as payroll and technical support to a more efficient third party Moving of operations such as manufacturing to lower-cost locations Reorganization of functions such as sales, marketing, and distribution Renegotiation of labor contracts to reduce overhead Refinancing of corporate debt to reduce interest payments A major public relations campaign to reposition the company with consumers Forfeiture of all or part of the ownership share by pre restructuring stock holders

A financial executive is a high-level executive in an organization's management team and typically reports directly to the chief executive officer (CEO). The financial executive oversees all the company's financial dealings, is expected to have obtained at least a bachelor's degree in a business-related field and should preferably be a certified public accountant (CPA) or hold a Master of Business Administration (MBA) degree. As of October 2010, the average salary of financial executives was from $82,301 to $151,338, according to Payscale. Budgeting One of the most important roles of a finance executive is in setting a company's budget. This process involves allocating resources to support development, while still keeping an eye on the profitability of the company. Common budgeting tasks include presenting and reviewing budget requests, monitoring execution of approved projects and ensuring compliance with the company's fiscal policy. Soliciting Funds Closely tied to her role monitoring the budget, often a financial executive is also responsible for soliciting funds to aid in the company's growth. This task involves handling acquisitions and mergers, managing investments and in some cases directly soliciting funds. Monitoring Payroll Financial executives also approve and monitor payroll expenditures while always keeping in mind the status of the budget. Common payroll tasks include setting salaries for new positions, approving raises and identifying extraneous personnel as a cost-saving strategy. Data Analysis The roles of financial executives have changed a great deal thanks to technological advances that have reduced the amount of time they spend compiling financial reports. Instead, financial executives allocate more of their time to analyzing the data in those reports, searching for areas where they can increase profits and then adjusting the company's financial future based on their findings. Financial Services People working for a financial institution, such as a bank or credit union, sometimes have additional responsibilities beyond the traditional role of most finance executives. Often, executives at these institutions also oversee the company's lending, mortgage, trust, investment and other programs that are offered to consumers. They approve loans, solicit business and direct fund investment, while adhering to federal and state regulations.

Future Value of Annuities

An annuity is a series of equal payments or receipts that occur at evenly spaced intervals. Leases and rental payments are examples. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period.for an annuity due. Future Value of an Ordinary Annuity The Future Value of an Ordinary Annuity (FVoa) is the value that a stream of expected or promised future payments will grow to after a given number of periods at a specific compounded interest. The Future Value of an Ordinary Annuity could be solved by calculating the future value of each individual payment in the series using the future value formula and then summing the results.

A more direct formula is: FVoa = PMT [((1 + i)n - 1) / i]

Where: FVoa = Future Value of an Ordinary Annuity PMT = Amount of each payment i = Interest Rate Per Period n = Number of Periods Example: What amount will accumulate if we deposit $5,000 at the end of each year for the next 5 years? Assume an interest of 6% compounded annually. PV = 5,000 i = .06 n=5 FVoa = 5,000 [ (1.3382255776 - 1) /.06 ] = 5,000 (5.637092) = 28,185.46 Year Begin Interest Deposit End 1 0 0 5,000.00 5,000.00 2 5,000.00 300.00 5,000.00 10,300.00 3 10,300.00 618.00 5,000.00 15,918.00 4 15,918.00 955.08 5,000.00 21,873.08 5 21,873.08 1,312.38 5,000.00 28,185.46

Example 2: In practical problems, you may need to calculate both the future value of an annuity (a stream of future periodic payments) and the future value of a single amount that you have today: For example, you are 40 years old and have accumulated $50,000 in your savings account. You can add $100 at the end of each month to your account which pays an interest rate of 6% per year. Will you have enough money to retire in 20 years? You can treat this as the sum of two separate calculations: the future value of 240 monthly payments of $100 Plus the future value of the $50,000 now in your account. PMT = $100 per period i = .06 /12 = .005 Interest per period (6% annual rate / 12 payments per year) n = 240 periods

FVoa = 100 [ (3.3102 - 1) /.005 ] = 46,204 + PV = 50,000 Present value (the amount you have today) i = .005 Interest per period n = 240 Number of periods FV = PV (1+i)240 = 50,000 (1.005)240 = 165,510.22 After 20 years you will have accumulated $211,714.22 (46,204.00 + 165,510.22). Future Value of an Annuity Due (FVad) The Future Value of an Annuity Due is identical to an ordinary annuity except that each payment occurs at the beginning of a period rather than at the end. Since each payment occurs one period earlier, we can calculate the present value of an ordinary annuity and then multiply the result by (1 + i).FVad = FVoa (1+i) Where: FVad = Future Value of an Annuity Due FVoa = Future Value of an Ordinary Annuity i = Interest Rate Per Period

Example: What amount will accumulate if we deposit $5,000 at the beginning of each year for the next 5 years? Assume an interest of 6% compounded annually. PV = 5,000 i = .06 n=5 FVoa = 28,185.46 (1.06) = 29,876.59 Year Begin Deposit Interest End 1 0 5,000.00 300.00 5,300.00 2 5,300.00 5,000.00 618.00 10,918.00 3 10,918.00 5,000.00 955.08 16,873.08 4 16,873.08 5,000.00 1,312.38 23,185.46 5 23,185.46 5,000.00 1,691.13 29,876.59

Corporate restructuring is one of the most complex and fundamental phenomena that management confronts.
Each company has two opposite strategies from which to choose: to diversify or to refocus on its core business. While diversifying represents the expansion of corporate activities, refocus characterizes a concentration on its core business. From this perspective, corporate restructuring is reduction in diversification. Corporate restructuring is an episodic exercise, not related to investments in new plant and machinery which involve a significant change in one or more of the following Pattern of ownership and control Composition of liability Asset mix of the firm. It is a comprehensive process by which a company can consolidate its business operations and strengthen its position for achieving the desired objectives: Synergetic Competitive Successful It involves significant re-orientation, re-organization or realignment of assets and liabilities of the organization through conscious management action to improve future cash flow stream and to make more profitable and efficient. Meaning and Need for corporate restructuring Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction. Here are some examples of why corporate restructuring may take place and what it can mean for the company. Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share. Corporate restructuring may also take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place In general, the idea of corporate restructuring is to allow the company to continue functioning in some manner. Even when corporate raiders break up the company and leave behind a shell of the original structure, there is still usually a hope, what remains can function well enough for a new buyer to purchase the diminished corporation and return it to profitability.

Purpose of Corporate Restructuring To enhance the share holder value, The company should continuously evaluate its: Portfolio of businesses, Capital mix, Ownership & Asset arrangements to find opportunities to increase the share holders value. To focus on asset utilization and profitable investment opportunities. To reorganize or divest less profitable or loss making businesses/products. The company can also enhance value through capital Restructuring, it can innovate securities that help to reduce cost of capital. Characteristics of Corporate Restructuring * To improve the companys Balance sheet, (by selling unprofitable division from its core business). * To accomplish staff reduction ( by selling/closing of unprofitable portion). * Changes in corporate management. * Sale of underutilized assets, such as patents/brands. * Outsourcing of operations such as payroll and technical support to a more efficient 3rd party. * Moving of operations such as manufacturing to lower-cost locations. * Reorganization of functions such as sales, marketing, & distribution. * Renegotiation of labor contracts to reduce overhead. * Refinancing of corporate debt to reduce interest payments. * A major public relations campaign to reposition the company with consumers.

Methods Of Corporate Restructuring

1. Joint Ventures Joint ventures are new enterprises owned by two or more participants. They are typically formed for special purposes for a limited duration. It is a combination of subsets of assets contributed by two (or more) business entities for a specific business purpose and a limited duration. Each of the venture partners continues to exist as a separate firm, and the joint venture represents a new business enterprise. It is a contract to work together for a period of time each participant expects to gain from the activity but also must make a contribution. For Example: GM-Toyota JV: GM hoped to gain new experience in the management techniques of the Japanese in building highquality, low-cost compact & subcompact cars. Whereas, Toyota was seeking to learn from the management traditions that had made GE the no. 1 auto producer in the world and In addition to learn how to operate an auto company in the environment under the conditions in the US, dealing with contractors, suppliers, and workers. DCM group and Daewoo motors entered in to JV to form DCM DAEWOO Ltd. to manufacture automobiles in India. Reasons for Forming a Joint Venture Build on companys strengths Spreading costs and risks Improving access to financial resources Economies of scale and advantages of size Access to new technologies and customers Access to innovative managerial practices Rational For Joint Ventures To augment insufficient financial or technical ability to enter a particular line or business. To share technology & generic management skills in organization, planning & control. To diversify risk To obtain distribution channels or raw materials supply

To achieve economies of scale To extend activities with smaller investment than if done independently To take advantage of favorable tax treatment or political incentives (particularly in foreign ventures). Tax aspects of joint venture. If a corporation contributes a patent technology to a Joint Venture, the tax consequences may be less than on royalties earned though a licensing arrangements. Example: One partner contributes the technology, while another contributes depreciable facilities. The depreciation offsets the revenues accruing to the technology. The J.V. may be taxed at a lower rate than any of its partner & the partners pay a later capital gain tax on the returns realized by the J.V. if and when it is sold. If the J.V. is organized as a corporation, only its assets are at risk. The partners are liable only to the extent of their investment, this is particularly important in hazardous industries where the risk of workers, production, or environmental liabilities is high.

2. Spin-off Spinoffs are a way to get rid of underperforming or non-core business divisions that can drag down profits. Process of spin-off The company decides to spin off a business division. The parent company files the necessary paperwork with the Securities and Exchange Board of India (SEBI). The spinoff becomes a company of its own and must also file paperwork with the SEBI. Shares in the new company are distributed to parent company shareholders. The spinoff company goes public. Notice that the spinoff shares are distributed to the parent company shareholders. There are two reasons why this creates value: Parent company shareholders rarely want anything to do with the new spinoff. After all, its an underperforming division that was cut off to improve the bottom line. As a result, many new shareholders sell immediately after the new company goes public. Large institutions are often forbidden to hold shares in spinoffs due to the smaller market capitalization, increased risk, or poor financials of the new company. Therefore, many large institutions automatically sell their shares immediately after the new company goes public. Simple supply and demand logic tells us that such large number of shares on the market will naturally decrease the price, even if it is not fundamentally justified. It is this temporary mispricing that gives the enterprising investor an opportunity for profit. There is no money transaction in spin-off. The transaction is treated as stock dividend & tax free exchange.

Split-off: Is a transaction in which some, but not all, parent company shareholders receive shares in a subsidiary, in return for relinquishing their parent companys share. In other words some parent company shareholders receive the subsidiarys shares in return for which they must give up their parent company shares

Feature of split-offs is that a portion of existing shareholders receives stock in a subsidiary in exchange for parent company stock. Split-up: Is a transaction in which a company spins off all of its subsidiaries to its shareholders & ceases to exist. The entire firm is broken up in a series of spin-offs. The parent no longer exists and Only the new offspring survive. In a split-up, a company is split up into two or more independent companies. As a sequel, the parent company disappears as a corporate entity and in its place two or more separate companies emerge. Sell-off: Selling a part or all of the firm by any one of means: sale, liquidation, spin-off & so on. or General term for divestiture of part/all of a firm by any one of a no. of means: sale, liquidation, spin-off and so on.

Non-Banking Financial Companies (NBFCs)

Non-banking financial companies (NBFCs) are fast emerging as an important segment of Indian financial system. It is an heterogeneous group of institutions (other than commercial and co-operative banks) performing financial intermediation in a variety of ways, like accepting deposits, making loans and advances, leasing, hire purchase, etc. They raise funds from the public, directly or indirectly, and lend them to ultimate spenders. They advance loans to the various wholesale and retail traders, small-scale industries and self-employed persons. Thus, they have broadened and diversified the range of products and services offered by a financial sector. Gradually, they are being recognised as complementary to the banking sector due to their customer-oriented services; simplified procedures; attractive rates of return on deposits; flexibility and timeliness in meeting the credit needs of specified sectors; etc. The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) and the directions issued by it under the Act. As per the RBI Act, a 'non-banking financial company' is defined as:- (i) a financial institution which is a company; (ii) a non banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii) such other non-banking institution or class of such institutions, as the bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify. Under the Act, it is mandatory for a NBFC to get itself registered with the RBI as a deposit taking company. This registration authorises it to conduct its business as an NBFC. For the registration with the RBI, a company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution, should have a minimum net owned fund (NOF) of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999). The term 'NOF' means, owned funds (paid-up capital and free reserves,minus accumulated losses, deferred revenue expenditure and other intangible assets) less, (i) investments in shares of subsidiaries/companies in the same group/ all other NBFCs; and (ii) the book value of debentures/bonds/ outstanding loans and advances, including hire-purchase and lease finance made to, and deposits with, subsidiaries/ companies in the same group, in excess of 10% of the owned funds. The registration process involves submission of an application by the company in the prescribed format along with the necessary documents for RBI's consideration. If the bank is satisfied that the conditions enumerated in the RBI Act, 1934 are fulfilled, it issues a 'Certificate of Registration' to the company. Only those NBFCs holding a valid Certificate of Registration can accept/hold public deposits. The NBFCs accepting public deposits should comply with the NonBanking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998, as issued by the bank. Some of the important regulations relating to acceptance of deposits by the NBFCs are:They are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. They cannot offer gifts/incentives or any other additional benefit to the depositors. They should have minimum investment grade credit rating. Their deposits are not insured. The repayment of deposits by NBFCs is not guaranteed by RBI.

The types of NBFCs registered with the RBI are:-

Equipment leasing company:- is any financial institution whose principal business is that of leasing equipments or financing of such an activity. Hire-purchase company:- is any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions. Loan company:- means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hirepurchase finance activity). Investment company:- is any financial intermediary whose principal business is that of buying and selling of securities. Now, these NBFCs have been reclassified into three categories:i) Asset Finance Company (AFC), ii) Investment Company (IC) and iii) Loan Company (LC). Under this classification, 'AFC' is defined as a financial institution whose principal business is that of financing the physical assets which support various productive/economic activities in the country.

Growth of small scale industries in India: Some policy issues

Author info | Abstract | Publisher info | Download info | Related research | Statistics Author Info Garg, Charu C. (National Institute of Public Finance and Policy) Abstract A major objective of planned economic development has been industrialization and employment generation. The industrial policy resolutions had, from time to time, encouraged the growth of small scale industries in order to generate employment, promote balanced regional growth, have equitable distribution of wealth anf promote exports. The analysis in the paper is based on the data available from the ASI; Development Commissioner, Small Scale Industries; and the plan documents. A comparison is made between the performance of large industries, modern SSI and traditional industries. It is found that the smaller SSIs are growing not only numerically but also in terms of employment, investment and output. SSIs in the factory sector (synonymous with larger SSIs) have however, not been showing any growth in the number of factories and employment, through capital is being accumulated at a fast pace. It is felt that some of the policies of the government are making capital cheaper vis-a-vis labour and there has been a tendency to substitute capital for labour among the large scale units and SSIs in factory sector. In terms of size, the larger units among the SSIs are becoming larger and small are becoming smaller. As regards efficiency of the units, while labour productivity is higher in larger SSIs, smaller units have better utilization of scarce capital and are also more labour intensive. The traditional industries have also been performing well in terms of labour absorption and capacity to earn foreign exchange. In this context, it is important to review whether the current policies to set up new units be encouraged, or should the government policies be directed to promote the growth of existing SSIs. It is also important to examine the growth of SSIs in the context of more liberal economy and see what kind of technonologyflexible pecialisation or mass production-should be followed for further growth and to encourage employment generation.

Write a brief note on Small Scale Industry

Chinmoy Kumar Business

Meaning and Concept of Small Scale Industry: In most of the developing countries like India, Small Scale Industries (SSI) constitute an important and crucial segment of the industrial sector. They play an important role in employment creation, resource utilisation and income generation and helping to promote changes in a gradual and phased manner. They have been given an important place in the framework of Indian planning since beginning both for economic and ideological reasons. The reasons are obvious. The scarcity of capital in India severely limits the number of non-farm jobs that can be created because investment costs per job are high in large and medium industries. An effective development policy has to attempt to increase the use of labour, relative to capital to the extent that it is economically efficient. Small scale enterprises are generally more labour intensive than larger organisations. As a matter of fact, small scale sector has now emerged as a dynamic and vibrant sector for the Indian economy in recent years. It has attracted so much attention not only from industrial planners and economists but also from sociologists, administrators and politicians. Definition of Small Scale Industry: Defining small-scale industry is a difficult task because the definition of small-scale industry varies from country to country and from one time to the another in the same country depending upon the pattern and stage of development, government policy and administrative set up of the particular country. Every country has set its own parameters in defining small-scale sector. Generally, small-scale sector is defined in terms of investment ceilings on the original value of the installed plant and machinery. But in the earlier times the definition was based on employment. In the Indian context, the parameter are as follows. The Fiscal Commission, Government of India, New Delhi, 1950, for the first time defined a small-scale industry as, one which is operated mainly with hired labour usually 10 to 50 hands. Fixed capital investment in a unit has also been adopted as the other criteria to make a distinction between small-scale and large-scale industries. This limit is being continuously raised up wards by government. The Small Scale Industries Board in 1955 defined, "Small-scale industry as a unit employing less than 50 employees if using power and less than 100 employees if not using power and with a capital asset not exceeding Rs. 5 lakhs". 'The initial capital investment of Rs. 5 lakhs has been changed to Rs. 10 lakhs for sma industries and Rs. 15 lakhs for ancillaries in 1975. Again this fixed capital investment limit was raised to Rs. 15 lakhs for small units and Rs. 20 lakhs for ancillary units in 1980. The Government of India in 1985, has further increased the investment limit to Rs. 35 lakhs for small-scale units and 45 lakhs for ancillary units. Again the new Industrial Policy in 1991, raised the investment ceilings in plant an machinery to Rs. 60 lakhs for smallscale units and Rs. 75 lakhs for ancillary units.

As per the Abid Hussain Committee's recommendations on small-scale industry, the Government of India has, in March 1997 further raised investment ceilings to Rs. 3 crores for small-scale and ancillary industries and to Rs. 50 lakhs for tiny industry. The new Policy Initiatives in 1999-2000 defined small-scale industry as a unit engage in manufacturing, repairing, processing and preservation of goods having investment in plant and machinery at an original cost not exceeding Rs. 100 lakhs. In case of tiny units, the cost limitation is up to Rs. 5 lakhs. Again, the Government of India in its budget for 2007-08 has raised the investment limit in plant and machinery of small-scale industries to 1.5 corers An ancillary unit is one which is engaged or proposed to be engaged in the manufacture c production of parts, components, sub-assemblies, tooling or intermediaries or rendering services and the undertaking supplies or renders or proposes to supply or render not less than 50% of its production or services, as the case may be, to one or more other Industries undertakings and whose investment in fixed assets in plant and machinery whether held on ownership terms or lease or on hire-purchase does not exceed Rs. 75 lakhs. For small-scale industries, the Planning Commission of India uses terms 'village an small-scale industries'. These include modern small-scale industry and the traditional cottage and household industry.