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ContentsContentsContentsContentsContents

Chapter IChapter IChapter IChapter IChapter I

NaturNaturNaturNaturNature and stre and stre and stre and stre and structuructuructuructuructure of the economye of the economye of the economye of the economye of the economy ........................................................................ 11.1 Nature and Structure of the Economy .................................................................... 11.2 Functions of the State and the Economic Role of the Government ................... 31.3 The Legal and Constitutional Environment ........................................................... 5

1.3.1 Company Laws ................................................................................................... 61.3.2 Foreign Exchange Regulation Act .................................................................. 71.3.3 The Sick Industrial Companies (Special Provisions) Act, 1985 ............... 71.3.4 The Monopolies and Restrictive Trade Practices Act(MRTP),1969 ........ 81.3.5 The Consumer Protection Act, 1986 .............................................................. 81.3.6 The Environment Protection Act, 1986 .......................................................... 9

1.4 Demographic Facts ..................................................................................................... 10Summing UpSumming UpSumming UpSumming UpSumming Up ....................................................................................................................... 10Self -assessmentSelf -assessmentSelf -assessmentSelf -assessmentSelf -assessment ................................................................................................................ 11

Chapter IIChapter IIChapter IIChapter IIChapter II

The social environment and its influences on businessThe social environment and its influences on businessThe social environment and its influences on businessThe social environment and its influences on businessThe social environment and its influences on business ...................................... 122.1 Parameters of Quality of Life .................................................................................... 12

2.1.1 The Physical Quality of Life Index ................................................................. 142.1.2 Introduction to the Human Development Index .......................................... 14

2.2 Socio Economic Protective Legislations .................................................................. 152.2.1 Prevention Of Food Adulteration Act (1954) ................................................ 152.2.2 The Drugs And Cosmetics Act (1940) .......................................................... 162.2.3 Standards of Weights And Measures Act (1956) ......................................... 162.2.4 Public Liability Insurance Act ......................................................................... 16

2.3 Consumer Protection Overview ............................................................................... 162.3.1 Shortcomings of the CP Act, 1986 .................................................................. 172.3.2 Other Dimensions of the CP Act, 1986 .......................................................... 17

Summing UpSumming UpSumming UpSumming UpSumming Up ....................................................................................................................... 17Self-assessmentSelf-assessmentSelf-assessmentSelf-assessmentSelf-assessment .................................................................................................................. 18

Chapter IIIIndustryIndustryIndustryIndustryIndustry ............................................................................................................................... 193.1 Privatisation .................................................................................................................. 19

3.1.1 Ownership Measures ........................................................................................ 203.1.2 Organisational Measures ................................................................................. 203.1.3 Operational Measures ...................................................................................... 21

3.2 Disinvestment .............................................................................................................. 213.2.1 The Rangarajan Committee on Disinvestment ............................................ 21

3.3 Privatisation in India and the World: .......................................................................A comparison of Political dynamics ......................................................................... 223.3.1 Privatisation or Disinvestment? ...................................................................... 243.3.2 Privatisation in India: A Balance Sheet ......................................................... 24

3.4 Competition Policy and Law ...................................................................................... 263.4.1 The MRTP: A redundant Act? ......................................................................... 263.4.2 The New Competition Law: an advance over MRTP.................................. 27

3.5 Industrial Reforms ...................................................................................................... 27Summing UpSumming UpSumming UpSumming UpSumming Up ....................................................................................................................... 29Self -assessmentSelf -assessmentSelf -assessmentSelf -assessmentSelf -assessment ................................................................................................................ 29

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Business, Government, and Society

Chapter IVChapter IVChapter IVChapter IVChapter IV

The Financial SystemThe Financial SystemThe Financial SystemThe Financial SystemThe Financial System ....................................................................................................... 304.1 Money Market ............................................................................................................. 30

4.1.1 Money Market in India .................................................................................... 314.1.2 Instruments traded in the Money Market .................................................... 31

4.2 Gilt Edged Market or Government Securities Market ........................................ 344.2.1 Zero Coupon Bonds ........................................................................................... 354.2.2 Floating Rate Bond ............................................................................................ 354.2.3 Tap Stock ............................................................................................................. 354.2.4 Partly Paid Stock ............................................................................................... 354.2.5 Capital Indexed Bonds ..................................................................................... 35

4.3 Capital Market Reforms .............................................................................................. 364.3.1 Primary Market Reforms ................................................................................. 364.3.2 Secondary Market Reforms ............................................................................ 36

4.4 Buy back Ordinance .................................................................................................. 374.4.1 Buy back and experience with MNCs........................................................... 38

4.5 Banking Sector Reforms ............................................................................................ 384.6 An Introduction to Fiscal, Monetary and Credit Policy ....................................... 41

4.6.1 Fiscal Policy ........................................................................................................ 414.6.2 Monetary and Credit Policy ............................................................................ 44

Summing UpSumming UpSumming UpSumming UpSumming Up ....................................................................................................................... 46Self -assessmentSelf -assessmentSelf -assessmentSelf -assessmentSelf -assessment ................................................................................................................ 46

Chapter VChapter VChapter VChapter VChapter V

The Political SystemThe Political SystemThe Political SystemThe Political SystemThe Political System ......................................................................................................... 305.1 Evolution and History of Democracy ...................................................................... 475.2 Parliamentary and Presidential Forms of Democracies ...................................... 485.3 Direct and Indirect Forms of Democracies ........................................................... 495.4 Direct Democracy: An Experience .......................................................................... 495.5 Constitutional Reforms ............................................................................................... 50

5.5.1 Controversy Regarding Constitutional Reforms .......................................... 505.6 Judicial Reforms in India ........................................................................................... 53Summing UpSumming UpSumming UpSumming UpSumming Up ....................................................................................................................... 53Self -assessmentSelf -assessmentSelf -assessmentSelf -assessmentSelf -assessment ................................................................................................................ 54

Chapter VIChapter VIChapter VIChapter VIChapter VI

InterInterInterInterInternational Linkagesnational Linkagesnational Linkagesnational Linkagesnational Linkages ..................................................................................................... 556.1 GATT and WTO .......................................................................................................... 56

6.1.1 WTO: A negotiating Forum ............................................................................. 566.1.2 WTO: A system of rules ................................................................................... 566.1.3 WTO: A dispute settlement body .................................................................... 566.1.4 Principles of WTO ............................................................................................. 566.1.5 Agreements under WTO .................................................................................. 57

6.2 Agriculture and WTO ................................................................................................ 586.3 Agreement on Sanitary and Phytosanitary Measures ......................................... 596.4 Agreement on Technical Barriers to Trade .......................................................... 596.5 Agreement on Textiles and Clothing ....................................................................... 606.6 General Agreement on Trade in Services ............................................................. 606.7 General Agreement on Trade Related Aspects of Intellectual Property Rights .... 60

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6.7.1 Enforcement of TRIPS ...................................................................................... 606.8 Agreement on Subsidies and Countervailing Measures ..................................... 616.9 Agreement on Safeguards from Imports ................................................................ 616.10 Agreement on Trade Related Investment Measures ............................................ 626.11 Agreement on Government Procurement .............................................................. 626.12 Settlement of Disputes ................................................................................................ 636.13 Imposition of Penalties ................................................................................................ 636.14 Foreign Exchange Management Act ....................................................................... 646.15 Global Competitive Index ........................................................................................... 676.16 Corruption Perception Index..................................................................................... 706.17 Index of Economic Freedom ..................................................................................... 71Summing UpSumming UpSumming UpSumming UpSumming Up ....................................................................................................................... 72Self -assessmentSelf -assessmentSelf -assessmentSelf -assessmentSelf -assessment ................................................................................................................ 72

Chapter VIIChapter VIIChapter VIIChapter VIIChapter VII

Corporate ResponsibilityCorporate ResponsibilityCorporate ResponsibilityCorporate ResponsibilityCorporate Responsibility ................................................................................................. 737.1 Need for Sound Corporate Governance ................................................................. 737.2 Trend in Corporate Governance .............................................................................. 747.3 Recommendations of the Committee on Corporate Governance ....................... 76

7.3.1 Key Constituents of Corporate Governance ................................................. 767.3.2 Key Aspects of Corporate Governance .......................................................... 767.3.3 Mandatory and Non Mandatory Recommendations .................................. 767.3.4 Schedule of Implementation ............................................................................ 777.3.5 Composition of Board of Directors ................................................................. 777.3.6 Chairman of the Board ..................................................................................... 787.3.7 Composition of the Audit Committee ............................................................. 787.3.8 Frequency of Meetings and Quorum Requirements of

The Audit Committee ........................................................................................ 797.3.9 Powers of the Audit Committee ....................................................................... 797.3.10 Disclosure of Remuneration Package ......................................................... 797.3.11 Accounting Standards and Financial Reporting ....................................... 797.3.12 Disclosures Related to Management ........................................................... 807.3.13 Complaints of the Shareholders .................................................................... 807.3.14 Government's push to Corporate Governance ........................................... 80

7.4 Corporate Social Responsibility ................................................................................ 817.4.1 Evolution ............................................................................................................. 817.4.2 The Pyramid of Corporate Social Responsibility ......................................... 82

Summing UpSumming UpSumming UpSumming UpSumming Up ....................................................................................................................... 83Self -assessmentSelf -assessmentSelf -assessmentSelf -assessmentSelf -assessment ................................................................................................................ 84

Chapter VIIIChapter VIIIChapter VIIIChapter VIIIChapter VIII

Business ethicsBusiness ethicsBusiness ethicsBusiness ethicsBusiness ethics ............................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................. 85Overview of issues in business ethics ....................................................................... 868.1. General business ethics .................................................................................. 86

8.1.1 Ethics of accounting information ...................................................... 868.1.2 Ethics of human resource management .......................................... 868.1.3 Ethics of sales and marketing ........................................................... 878.1.4 Ethics of production ........................................................................... 878.1.5 Ethics of intellectual property, knowledge and skills ................... 88

8.2 International business ethics and ethics of economic systems .............. 888.2.1 International business ethics ............................................................ 88

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8.2.2 Ethics of economic systems .............................................................. 89Theoretical issues in business ethics ........................................................................ 89

8.2.3 Conflicting interests ............................................................................. 898.2.4 Ethical issues and approaches .......................................................... 89

8.3 Business ethics in the field ............................................................................. 908.3.1 Corporate ethics policies .................................................................... 908.3.2 Ethics officers ....................................................................................... 95

Summing upSumming upSumming upSumming upSumming up ................................................................................................................. 96Self AssessmentSelf AssessmentSelf AssessmentSelf AssessmentSelf Assessment ........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................ 96

ChapterIXChapterIXChapterIXChapterIXChapterIX

GlobalizationGlobalizationGlobalizationGlobalizationGlobalization ...................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 979.1 Globalization – Definition, History ............................................................... 979.2 Modern Globalization ...................................................................................... 999.3 Measuring globalization .................................................................................. 999.4 Effects of globalization .................................................................................... 1009.5 Pro-globalization (globalism) ........................................................................ 1049.6 Anti-globalization.............................................................................................. 105Summing upSumming upSumming upSumming upSumming up ................................................................................................................. 105Self AssessmentSelf AssessmentSelf AssessmentSelf AssessmentSelf Assessment ........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................ 106

Chapter XChapter XChapter XChapter XChapter X

Industrial Growth and Environmental degradationIndustrial Growth and Environmental degradationIndustrial Growth and Environmental degradationIndustrial Growth and Environmental degradationIndustrial Growth and Environmental degradation ......................................................................................................................................................................................... 10710.1 Causes of pollution ........................................................................................... 10810.2 Type of industries and type of pollution ...................................................... 108

10.2.1 Causes of industrial pollution waste ............................................... 10910.2.1.1 Water Pollution Industries ................................................... 11010.2.1.2 Oil .............................................................................................. 110

10.2.2 Causes of Air Pollution ...................................................................... 11110.2.2.1 Industries ................................................................................. 11110.2.2.2 Transport ................................................................................. 11210.2.2.3 Dwelling ................................................................................... 112

10.3 Environmental law .......................................................................................... 11410.3.1 Environmental governance and regulation .................................... 114

10.3.1.1 Environmental protection .................................................... 114 • Environment and rehabilitation .................................................. 115 • Environmental Governance and regulation in India................ 11510.3.1.2. Legislative efforts ................................................................. 115 • Role of the Judiciary ...................................................................... 116 • Working of Environmental regulation ........................................ 116 • Enforcement .................................................................................... 118 • Monitoring....................................................................................... 118

Summing upSumming upSumming upSumming upSumming up ................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................ 120Self AssessmentSelf AssessmentSelf AssessmentSelf AssessmentSelf Assessment ........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................ 120

Answer to Answer to Answer to Answer to Answer to Self -assessmentSelf -assessmentSelf -assessmentSelf -assessmentSelf -assessment ............................................................................................................................................................................................................................................................................................................................................................................................................................................................. 121

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Chapter IChapter IChapter IChapter IChapter INaturNaturNaturNaturNature and Stre and Stre and Stre and Stre and Structuructuructuructuructure of the Economye of the Economye of the Economye of the Economye of the Economy

LearLearLearLearLearning Objectivesning Objectivesning Objectivesning Objectivesning ObjectivesReading this chapter would enable you to understand• Different kinds of economic structures• Performance of an economy based on its nature• The importance of population and its dynamics• Understanding of law and constitution• Different laws applicable under Indian conditions

ContentsContentsContentsContentsContents1.1 Nature and Structure of the Economy1.2 Functions of the State and the Economic Role of the Government1.3 The Legal and Constitutional Environment

1.3.1 Company Laws1.3.2 Foreign Exchange Regulation Act1.3.3 The Sick Industrial Companies (Special Provisions) Act, 19851.3.4 The Monopolies and Restrictive Trade Practices Act (MRTP), 19691.3.5 The Consumer Protection Act, 19861.3.6 The Environment Protection Act, 1986

1.4 Demographic FactsSumming UpSumming UpSumming UpSumming UpSumming UpSelf-assessmentSelf-assessmentSelf-assessmentSelf-assessmentSelf-assessment

1.1 Natur1.1 Natur1.1 Natur1.1 Natur1.1 Nature and Stre and Stre and Stre and Stre and Str ucturucturucturucturucture of the Economye of the Economye of the Economye of the Economye of the Economy

The purpose of business is to create wealth for all the agents involved in theprocess of business. The method of creating wealth and the extent to whichit can be created depends on the nature and structure of the economy in whichbusiness is being carried out. Economic policy dimensions influence businessfortunes and strategies. The economic policy in turn is influenced by the natureof the economy and the nature of the economy is influenced by the dominantpolitical and cultural thought.

Over the last 100 years or so, the world has seen three kinds of politico-economic structures of the economy.

• Free Market Systems• Command Systems• Mixed Economy Systems

The three above-mentioned structures represent three different levels ofgovernmental control.

a) A free market system allocates resources according to the price system.This depends upon the forces of supply and demand. The motive tosupply is the prospect of profit. The motive to demand is utility orsatisfaction. Such market systems are sometimes called laissez-faire,

Nature and Structureof the Economy


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since there is no external interference, or capitalist, because in theirmost advanced state they tend to be dominated by the owners of capital.In these systems, efficiency means achieving the maximum satisfactionof effective demand with the limited resources, or, looked at anotherway, producing all output as cheaply as possible. Since effective demandmeans the capacity to pay, an efficient free market economy will be aslarge as possible when measured in money, that is to say, nationalincome will be maximised.

b) In Command Systems the determination of need priorities is usuallyundertaken by the state, and such economies are called centrally plannedor command economies. In a centrally planned system there is no singlecriterion for efficiency, and political choices will be very influential ineconomic activity. Since market prices are fixed and supply regulatedby the state, one cannot measure efficiency in terms of maximisednational income. Indeed it becomes problematic to value the nationaloutput in any way that can be meaningfully compared with the nationalincomes of free market economies. By definition, efficiency still meansmaximising output from limited input, but now we do not consider themarket value of that output, rather a more subjective evaluation of theneeds satisfied.

c) Mixed economies are intended to combine the best of both the extremesystems and to avoid the worst to some extent they succeed. For examplesocial security is often provided as a command style safety net to avoidstarvation of the poor, (a negative externality,) and free education andhealth care, (merit goods,) are provided because left to itself, the marketwould under produce these goods.

It is a general belief that the free market system creates the urge for hardwork and innovation. However, it also has its attendant problems. Antagonistssay that the ownership of resources determines the structure and the extentof freedom of the economy. In such an economy, ownership is concentratedin the hands of a few and state control is replaced by control by an oligopoly.Whereas, under the ownership of the state social goals are pursued, the natureof social goals may depend on the value system of the politburo butnevertheless society benefits at large.

The experience, however of erstwhile communist countries having a commandsystem of economy has been very dismal. There has only been equality ofpoverty and that too amongst the masses. The ruling elite became richer andricher in these systems.

Looking at these experiences, the World Bank Report on Good Governancereleased in the year 1997 talked about the hazards of extremes of governanceand too little governance. It argued that erstwhile European countries haveseen too much governance, which has resulted in a market that lacks anentrepreneurial spirit. Whereas, countries like Somalia, Congo, etc. haveseen too little governance resulting in the creation of anti market conditions.The World Bank Report therefore talked about the right dose of governancethat acts as a facilitator for the smooth conduct of market functions. It isnot government's business to be in business.

The job of the government is to create conditions for enterprise rather thanrunning the enterprises themselves.

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1.2 Functions of the State and The Economic Role of the Gover1.2 Functions of the State and The Economic Role of the Gover1.2 Functions of the State and The Economic Role of the Gover1.2 Functions of the State and The Economic Role of the Gover1.2 Functions of the State and The Economic Role of the Governmentnmentnmentnmentnment

The STATE, in its wider sense, refers to a set of institutions that possess themeans for legitimate coercion, exercised over a defined territory and itspopulation referred to as society. The STATE monopolises rule making withinits territory through the medium of an organised government.

As per the rulings of the Supreme Court of India, even semi autonomousbodies receiving grants from the government will be categorised as state.Government, on the other hand refers to the process of governing. Theprocess of governing requires a set structure, which exercises power.Because of this, the terms state and government are used interchangeably.

The STATE, primarily consists of three broad kinds of institutions, with threedistinct sets of powers with their assigned roles. These are:

• LegislaturLegislaturLegislaturLegislaturLegislatureeeee, whose role is to make the law: This role is performed bythe parliament in democracies while the King or the monarch does thesame in autocracies.

• ExecutiveExecutiveExecutiveExecutiveExecutive, which is responsible for implementing the law: They arealso sometimes referred to as the ‘government'.

• JudiciaryJudiciaryJudiciaryJudiciaryJudiciary, which is responsible for interpreting and applying the law.

These three institutions are woven in different ways to give different forms ofgovernment. The different forms of government decide the way economicmatters are conducted and handled by the state.

In an autocratic state all the above institutions are combined into one and allthe powers are vested in the monarch or the king. In a theocratic state, likethe Vatican City, all the powers are vested in the Church or whatever thehighest religious body of the land is. In a democracy these powers aredistributed according to the form of democracy, which can be

• A Presidential form in which, the president is elected by the direct voteof the electorate and he, in turn, chooses his council of ministers, whoowe allegiance to him. In this form, the Parliament exercises controlthrough laws and enactments and by budgetary allocations for differentlimbs of the government after discussions on the floor of the house.

• In the Parliamentary cabinet form, the majority party in the parliamentelects its leader as the Prime Minister who then forms a council ofMinisters mostly from amongst the elected representatives of his party.In such a system a president, if existent, is largely a figurehead.

It will be seen that the Presidential form of government offers greater stabilitythan the parliamentary cabinet form, particularly if the largest party does nothave an absolute majority.

Fiscal Decisions: Fiscal Decisions: Fiscal Decisions: Fiscal Decisions: Fiscal Decisions: (related to taxation, expenditure, etc.) are taken muchfaster in a presidential form than in a parliamentary form of government.However, the danger is that the presidential form can drift into a dictatorship



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in the absence of well conceived checks and controls.

The argument regarding the role of the government has always been changingwith times. Mercantilists argued for a strong economic role of the governmentwhereas free trade protagonists wanted to limit the role of the government.The World Development Report on Good Governance talks about matchingthe role of the government to its capability and then in the course of timeincreasing that capability.

As per this report, the State (read government) can travel in the spectrumfrom one of performing only basic functions to somewhat advanced functionsand then on to activist functions. In somewhat more detail these would be:• Basic functions include pure public goods such as the provision of

property rights, macroeconomic stability, control of infectious diseases,safe water, roads and protection for destitutes. These are the essentialfunctions of the state. Without the provision of these, the state is boundto wither as it would be entirely incapable of providing an environmentin which markets could function.

• Somewhat advanced functions include things like management ofexternalities (pollution, for example), regulation of monopolies, and theprovision of social insurance (pensions, unemployment benefits). Theprovision of these services would depend on the enhanced capability ofthe government to do so. However, they also contribute towardsbettering the business and market environment. For example, byproviding financial regulation and consumer protection, the stateovercomes the problem of imperfect information.

• Activist Functions can be taken up by states with strong capabilities.They can help private activity in market research, information on macrolevel and on canalising activities (grouping non-economic individualefforts and making them an economic group effort.)

Accordingly, the economic roles of the government can be under the followingfour heads:

1 .1 .1 .1 .1 . Regulatory Role:Regulatory Role:Regulatory Role:Regulatory Role:Regulatory Role: The government may regulate the economy throughdirect and indirect controls. Indirect controls are exercised throughvarious fiscal and monetary incentives and disincentives or penalties.Certain activities may be encouraged or discouraged through monetaryand fiscal incentives and disincentives. For instance, a high import dutymay discourage imports. Direct Controls on the other hand can beapplied selectively from firm to firm and industry to industry, at thediscretion of the State. Regulation may cover a wide spectrum fromentry into business to the final results of the business and also exitfrom business. Regulation is very important for the proper functioningof the market economy.

2 .2 .2 .2 .2 . EntrEntrEntrEntrEntrepreprepreprepreneurial Role: eneurial Role: eneurial Role: eneurial Role: eneurial Role: Due to ideological reasons and dearth of privateenterprise and capital, the direct participation of government was verycommon in the socialist and developing countries. However, since the1980s a belief has gathered momentum that ‘government has no businessto be in business'. However, in underdeveloped countries, where theinfrastructures for development are inadequate and entrepreneurialactivities are scarce, this role of the government assumes special

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significance. Development of certain priority sectors and protecting infantindustry are still desired roles of the government in these countries.

3 .3 .3 .3 .3 . Planning Role:Planning Role:Planning Role:Planning Role:Planning Role: How to use the limited resources to the best advantageis a question that every underdeveloped country faces. The role ofgovernment as a planner becomes important here. However, somecountries have argued for indicative planning (just giving signals to theeconomy through tools of taxation and government expenditure) ratherthan involving the government in production and allocation duties.

4 .4 .4 .4 .4 . Promotional Role:Promotional Role:Promotional Role:Promotional Role:Promotional Role: The State needs to assume direct responsibility tobuild up and strengthen the necessary development infrastructures, suchas power, transport, finance, marketing, institutions for training andguidance, etc. The promotional role of the State also encompasses theprovision of various fiscal, monetary and other incentives, includingmeasures to cover certain risks, for the development of certain prioritysectors and activities.

1.3 The Legal and Constitutional Environment1.3 The Legal and Constitutional Environment1.3 The Legal and Constitutional Environment1.3 The Legal and Constitutional Environment1.3 The Legal and Constitutional Environment

One major Reliance Oil project in Gujarat faced a legal hurdle and incurredtremendous amount of extra expenditure because the person in charge wasnot aware of certain ecological laws. Similarly, another company in Delhi facedthe wrath of the executive because it wanted to put up the Indian flag on itspremises all throughout the year without being aware that it is illegal to doso.

Instances such as these impress upon us the importance of knowing thelegal and constitutional environment.

• The constitution is a politico legal institution in itself. It is also thesuper law, a reference frame for other laws to be made. It is thus themost important part of the non-economic environment of business. Itgives structure to the legislative, executive and judiciary. All theseorgans run through organisations and institutions. For example, thejudiciary runs through the Supreme Court, the High Court and theLower court. An understanding of these and the consequent directionof business it entails is critical. The constitution in itself is avoluminous document. Yet, all readers are advised to go through it atleast once.

• To describe and analyse the legal environment of business in India,we present here briefly an overview of some specific socio-economiclegislations. Some of these legislations will be taken up for a detaileddiscussion in subsequent chapters. In this chapter, you should beinterested in a broad overview rather than details. We may list theselegislations, which define the legal environment of business in India.

• Company Laws• Laws relating to Capital Markets• MRTP (Monopolies and Restrictive Trade Practices Act)• FERA (Foreign Exchange Regulation Act)• IDRA (Industrial Development and Regulation Act)• Trade Unions Act



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• Bonus Ordinance• Factory Legislations• Social Security Enactments• Laws for Consumer Protection

1.3.1 Company Laws1.3.1 Company Laws1.3.1 Company Laws1.3.1 Company Laws1.3.1 Company Laws

Company Laws represent the principal laws affecting the organisation andmanagement of corporate business. Originally, this law used to be concernedonly with joint stock companies, but today its scope has increased. It coversdifferent types of companies - their incorporation, their constitution, theirmanagement and also the manner of their dissolution.

Based on the recommendations of the Bhabha Committee (1950), thecompanies act was thoroughly amended in 1956. The main objectives of theCompanies Act 1956 are listed as follows:

• Minimum standard of business integrity and conduct in the promotionand management of companies.

• Full and fair disclosure of all reasonable information relating to the affairsof the company.

• Effective participation and control by shareholders and the protectionof their interests.

• Enforcement of proper performance of their duties by the companymanagement.

• The state's power of intervention and investigation into the affairs ofcompanies with regard to interests of the shareholders and the public.

A. Capital MarketA. Capital MarketA. Capital MarketA. Capital MarketA. Capital Market

Every Stock Exchange must have rules approved by the Central Governmentor the SEBI.

Securities and Exchange Board of India Act, (SEBI) 1992Securities and Exchange Board of India Act, (SEBI) 1992Securities and Exchange Board of India Act, (SEBI) 1992Securities and Exchange Board of India Act, (SEBI) 1992Securities and Exchange Board of India Act, (SEBI) 1992

Promulgated as an ordinance on January 30, 1992, the SEBI Bill was passedby both Houses of Parliament and became effective on April 4, 1992.

The objects of the SEBI Act are to develop the securities market on healthyand orderly lines and to provide adequate protection to investors. To this end,it is necessary to promote a market, which ensures:

1. Fairness - The market must promote integrity in dealings, a highstandard of conduct and good business practices.

2. Efficiency - The market should be professionalised and well informed,offering high standards of service at reasonable costs.

3. Confidence - The markets must inspire confidence in both investorsand issuers to actively participate in and rely more on the security market.

4. Flexibility - The market should be resilient, innovative and continuouslyresponsive to the needs of all market participants.

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The Capital Market in India has witnessed tremendous growth in the recentpast. There is increasing participation by the investing public. It is, therefore,imperative to sustain the confidence of the investors by protecting theirinterests. The Government has vested SEBI with the necessary statutorypowers to deal effectively with all matters relating to the capital market. SEBIhas been established on the pattern of the Securities and ExchangeCommission (SEC) of the USA.

1.3.2 Foreign Exchange Regulation Act (FERA)1.3.2 Foreign Exchange Regulation Act (FERA)1.3.2 Foreign Exchange Regulation Act (FERA)1.3.2 Foreign Exchange Regulation Act (FERA)1.3.2 Foreign Exchange Regulation Act (FERA)

The FERA Act of 1973 reflected the requirements for a highly regulatorysystem. The main features of this act were:1. If the activities of a foreign company account for not less than 75 percent

of its total annual turnover, such a company will be allowed to continueits activities subject to the condition that it will increase Indianparticipation, within a specified period, to not less than 26 percent ofthe equity capital of the company.

2. If the same accounts for not less than 60 percent of its total annualturnover, it will be required to increase the Indian participation to notless than 49 percent of the equity of the capital. In such cases, a conditionwill be stipulated that the company concerned should undertake toexport a minimum of 10 percent of its total annual turnover within aperiod of two years commencing from the date of approval by the ReserveBank of India.

3. If the exports of a company account for more than 40 percent of thetotal annual turnover, such a company will be allowed to continue itsactivities subject to the condition that it will increase, within a specifiedperiod, Indian participation to not less than 49 percent of the equity ofthe company.

4. Cases of companies coming with proposals for substantial exports couldbe considered on merits for a higher level of equity participation providedsuch participation is in the overall interest of the economy of the country.

5. The limit of Rs. 5 crores for permissible trading activity by multi-activitycompanies will be applicable only in the case of trading activities.

6. The ceiling of 25 percent of the ex-factory value of the annual productionfor permissible trading activity by multi-activity companies will be raisedto 40 percent and 60 percent respectively in the types of cases mentionedin (2) and (3) above.

1 . 3 . 31 . 3 . 31 . 3 . 31 . 3 . 31 . 3 . 3 The Sick Industrial Companies (Special Provisions) Act 1985The Sick Industrial Companies (Special Provisions) Act 1985The Sick Industrial Companies (Special Provisions) Act 1985The Sick Industrial Companies (Special Provisions) Act 1985The Sick Industrial Companies (Special Provisions) Act 1985(SICA, 1985)(SICA, 1985)(SICA, 1985)(SICA, 1985)(SICA, 1985)

This act was enacted to address the problem of Industrial sickness. Theobjectives of SICA are:

1. Securing timely detection of sick and potentially sick industrialundertakings;

2. Speedy determination, by a panel of experts, of the preventive,ameliorative, remedial and other measures which need to be taken withrespect to such companies;

3. Expeditious enforcement of the measures so determined.



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4. Providing for matters connected with or incidental to the abovementioned objectives.

BIFR and its functionsBIFR and its functionsBIFR and its functionsBIFR and its functionsBIFR and its functions

The Board for Industrial and Financial Reconstruction was constituted onJanuary 12, 1987. It is a quasi judicial body vested with powers to institute thenecessary enquiries to determine if or not the company is sick. If the BIFRcomes to the conclusion that the company has become sick, it can either givereasonable time to the company concerned to make its net worth positive orit can devise suitable measures, including change of managements, reductionof share capital, sale or leasing out of a part or whole of the undertaking or itsmerger with a healthy unit. By way of warning to unscrupulous managements,the Act also contains a provision that if the BIFR is satisfied that a person hasbeen responsible for the diversion of funds or for managing the affairs of thecompany in a manner detrimental to the interests of the company, then theBIFR can direct banks and financial institutions not to extend any financialassistance for a period of ten years to such a person or to a firm in whichsuch a person is a partner or to a company in which such a person is a director.

1.3.4 The Monopolies and Restrictive T1.3.4 The Monopolies and Restrictive T1.3.4 The Monopolies and Restrictive T1.3.4 The Monopolies and Restrictive T1.3.4 The Monopolies and Restrictive Trade Practices (MRrade Practices (MRrade Practices (MRrade Practices (MRrade Practices (MR TP) ActTP) ActTP) ActTP) ActTP) Act1 9 6 91 9 6 91 9 6 91 9 6 91 9 6 9

The Monopolies and Restrictive Trade Practices (MRTP) Act has its genesisin the Directive Principles of State Policy embodied in the Constitution ofIndia. Article 39 (b) and (c) thereof lay down that the state shall direct itspolicy towards ensuring.

i) that the ownership and control of material resources of the communityare so distributed as best to subserve the common good, and

ii) that the operation of the economic system does not result in theconcentration of wealth and means of production to the commondetriment.

The objectives of the MRTP Act are:a) To prevent concentration of economic power to the common detriment

and the control of monopolies;b) To prohibit monopolistic trade practices; andc) To prohibit restrictive trade practices and unfair trade practices.

1.3.5 The Consumer Protection Act, 19861.3.5 The Consumer Protection Act, 19861.3.5 The Consumer Protection Act, 19861.3.5 The Consumer Protection Act, 19861.3.5 The Consumer Protection Act, 1986

For the first time in the history of consumer legislation in India, the ConsumerProtection Act, 1986, extends statutory recognition to the rights of consumers.The Act recognises the following six rights of consumers.

1. Right to safety, i.e., the right to be protected against the marketing ofgoods and services which are hazardous to life and property.

2. Right to be informed, i.e., the right to be informed about the quality,quantity, potency, purity, standard and price of goods or services, as thecase may be, so as to protect the consumer against unfair trade practices.

3. Right to choose, i.e., the right of access to a variety of goods and services

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at competitive prices. In case of monopolies, say, railways, telephones,etc., it means the right to be assured of satisfactory quality and serviceat a fair price.

4. Right to be heard, i.e., the consumers' interests will receive dueconsideration at appropriate forums. It also includes the right to berepresented in various forums formed to consider consumers' welfare.

5. Right to seek redressal i.e., the right to seek redressal against unfairpractices or restrictive trade practices or unscrupulous exploitation ofconsumers. It also includes the right to a fair settlement of the genuinegrievances of consumers.

6. Right to consumer education, i.e., the right to acquire the knowledgeand skills to be an informed consumer.

1.3.6 The Environment Protection Act, 19861.3.6 The Environment Protection Act, 19861.3.6 The Environment Protection Act, 19861.3.6 The Environment Protection Act, 19861.3.6 The Environment Protection Act, 1986

The Directive Principles of State Policy contained in the Constitution directthe state to endeavour to protect and improve the environment and to safeguardthe forests and wild life of the country.

The Environment Protection Act, 1986, came into effect in November 1986and is in addition to the two allied acts, viz, Water (Prevention and Control ofPollution) Act, 1974, and Air (Prevention and Control of Pollution) Act, 1981.

The objective of the Act is to provide for the protection and improvement ofthe environment and matters connected therewith. The law covers not onlyland and water or air but all aspects of the environment.

1.4 Demographic Factors1.4 Demographic Factors1.4 Demographic Factors1.4 Demographic Factors1.4 Demographic Factors

Demographic factors such as size of the population, population growth rates,age composition, ethnic composition, density of population, rural-urbandistribution, family size, nature of the family, income levels, etc. have verysignificant implications for business.

• One of the important objectives of the formation of the European Union(EU) was to bring about a single market that compares, in terms of thenumber of consumers, to that of USA and Japan.

• A high population growth rate also implies an enormous increase inthe labour supply. When western countries experienced industrialrevolution, the population growth was comparatively slow resulting inlabour shortage and rising wages. Thus, cheap labour and a growingmarket have encouraged many multinationals to invest in developingcountries.

• The falling birth rate and rising longevity will significantly alter agedistribution within the population. The proportion of the aged in thepopulation would go up. By 2025, India will be the country with thehighest population of young people. However, other developed countrieswill have a predominantly older population, in some cases more thanone third of the population would be more than 65 years of age.

Implications of demography:Implications of demography:Implications of demography:Implications of demography:Implications of demography:



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1. India is the second largest market in terms of the number of consumers.In March 2001, the estimated Indian population was about 102 crorescompared to about 130 crores for China. By 2045, the Indian populationis expected to surpass that of China.

2. Because of the diversity of the demographic environment, companiesare sometimes compelled to adopt different strategies within the ‘samemarket'.

3. As population around the world ages, it is said that the centre of gravityin the older population shifts from manual workers to people who havenever worked with their hands, and especially to knowledge workers, ashift that will begin in the United States around the year 2010 when thebabies of the “baby boom” which began in 1948 reach traditionalretirement age.

4. With migration all around, a truly heterogeneous population would arise.A highly heterogeneous population with its varied tastes, preferences,beliefs, temperaments, etc. gives rise to differing demand patterns andcalls for differing market strategies.

5. In such a scenario, personnel management is likely to become a morecomplex task.

Summing UpSumming UpSumming UpSumming UpSumming Up

Over the last 100 years or so, the world has seen three kinds of politico-economic structures. The free market economy, the commanding heightsand the mixed kind of economy. The Fiscal role of the government is largelydetermined by the above politico-economic structures. Accordingly the roleof the government expresses itself into either a regulatory one, or anentrepreneurial one or one of planning or still a combination of all three. Theconstitution of governance becomes the prime factor which directs the roleof the government. Also the laws that are passed by the government affectthe economic environment in their capacity to effect business decisions. Lastly,the demographic profile of an economy and the dynamism of the same affectsthe economic environment to a great extent.

Self -assessmentSelf -assessmentSelf -assessmentSelf -assessmentSelf -assessment

1. A free market system works because of the forces of ___________and___________.

2. The three institutions of a STATE are ___________, ___________ and__________.

3. ____________ argued for a strong economic role for the governmentwhile the free trade protagonists asked for a limited role.

4. The four economic roles of the government are ___________ role,____________ role, _____________ role and _____________role.

5. The Companies Act, 1956 was based on the recommendations of the

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_________ committee, 1950.

6. Article 39(b) of the Indian constitution is a precursor to the ___________ACT, 1969.

7. The Environment Protection Act was passed in the year ___________.

8. The BIFR is a _______ judicial body to look into the problems of sicknessof companies.

9. India is the ________ largest market in the world in terms of the numberof consumers.

10. By the year _______, Indian population is expected to surpass that ofChina.



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Chapter IIChapter IIChapter IIChapter IIChapter IIThe social environment and its influences onThe social environment and its influences onThe social environment and its influences onThe social environment and its influences onThe social environment and its influences onbusinessbusinessbusinessbusinessbusiness

LearLearLearLearLearning Objectivesning Objectivesning Objectivesning Objectivesning ObjectivesReading this chapter would enable you to understand:• The concept of quality of life as distinct from quantity• The index measuring physical quality of life.• The Mechanism for developing the Human Development Index• Enumeration of different socio-economic protective legislations and their

applicability in Indian conditions.

ContentsContentsContentsContentsContents2.1 Parameters of Quality of Life

2.1.1 The Physical Quality of Life Index2.1.2 Introduction to the Human Development Index

2.2 Socio Economic Protective Legislations2.2.1 Prevention of Food Adulteration Act (1954)2.2.2 The Drugs and Cosmetics Act (1940)2.2.3 Standards of Weights and Measures Act (1956)2.2.4 Public Liability Insurance Act

2.3 Consumer Protection Overview2.3.1 Shortcomings of the CP Act, 19862.3.2 Other Dimensions of the CP Act, 1986

Summing UpSumming UpSumming UpSumming UpSumming UpSelf-assessmentSelf-assessmentSelf-assessmentSelf-assessmentSelf-assessment

2.1 Parameters of Quality of Life2.1 Parameters of Quality of Life2.1 Parameters of Quality of Life2.1 Parameters of Quality of Life2.1 Parameters of Quality of Life

While the income of a nation is just capable of indicating obliquely the standardof living, the quality of life is indicated by a host of other parameters likehealth, safety of the citizens, access to drinking water and environment, etc.Nobel laureate Amartya Sen has urged the government to concentrate moreon health and education of the people as a means of improving the quality oflife. He emphasised the need for a major government role in education andhealth as a part of the programme to empower the underprivileged for asustained and balanced growth of the country.

The well-being or quality of life of a population is an important concern ineconomics and political science. There are many components to well-being. Alarge part is the standard of living, the amount of money and access to goodsand services that a person has; these numbers are fairly easily measured.Others like freedom, happiness, art, environmental health, and innovationare far dif ficult to measure. This has created an inevitable imbalance asprogrammes and policies are created to fit the easily available economicnumbers while ignoring the other measures, that are very difficult to planfor.

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The debate over what best maximises the quality of life is millennia old withAristotle giving it much thought and eventually settling on the notion ofeudemonia as central.

The term has often been used, since the 1980s, in connection with thepresence or absence of so-called victimless crimes, its users in this senseciting the incidence of these to gauge the inherent level of disorder in asociety at a particular time. Users of the term in this application who tendto be political and/or social conservatives often refer to victimless crimesby the alternate name of "quality-of-life crimes." In conjunction with this,American sociologist James Q. Wilson has articulated what he calls theBroken Window Theory, which asserts that relatively minor problems leftunattended (such as public urination by homeless individuals) send asubliminal message that disorder in general is being tolerated, and as aresult, more serious crimes as well end up being committed (the analogybeing that a broken window left unrepaired exudes an image of generaliseddilapidation). Wilson's observations have propelled the political agendaof many prominent American mayors, most notably Rudolph Giuliani inNew York City and Gavin Newsom in San Francisco.

Understanding the quality of life is today most important in health care, wheremonetary measures do not readily apply. Decisions on what research ortreatments to invest the most in are closely related to their effect on a patient'squality of life.

One method for measuring the quality of life is subtracting the standardsof living. An example of this would be, people in rural areas and smalltowns are generally reluctant to move to cities, even if it would mean asubstantial increase in their standard of living. One can thus see that thequality of life of living in a rural area is of enough value to offset a higherstandard of living. Similarly people must be paid more to accept jobs thatwill lower their quality of life, night jobs, ones with extensive travel paymore and dif ference in salaries can also give a measure of the value ofquality of life. One attempt to take quality of life more into account ingovernment decisions is the notion of a seventh generation standard, whichargues that the ef fect of any decision today should be judged by its effectin six generations. These measures are often associated in the United Stateswith the proposed Seventh Generation Amendment proposal to the U.S.Constitution, and in Canada with the Canada Well-Being Measurement Actco-authored by Mike Nickerson of the Green Party of Ontario and JoeJordan, a Liberal Party of Canada Member of Parliament. This strategystill would be very difficult to implement as predicting the future is nevereasy. Decision makers seven generations ago in the early mid-nineteenthcentury would have great dif ficulty comprehending today's realities.

Several First Nations in both Canada and U.S. seem to have independentlyoriginated this standard, prior to European contact, which seems to representthe age ratio between the longest-lived elders and newborns expressed interms of generations, i.e. humans live at most 100-115 years, and reproduce inmost tribal cultures at about 15-17 years old, a ratio of about seven to one. So,according to the standard, any child born as a decision was being made wouldbe able to assess its impact over its entire life as an elder.

The social environment andits influences on business


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2.1.1 The Physical Quality of Life Index (PQLI)2.1.1 The Physical Quality of Life Index (PQLI)2.1.1 The Physical Quality of Life Index (PQLI)2.1.1 The Physical Quality of Life Index (PQLI)2.1.1 The Physical Quality of Life Index (PQLI)

The physical quality of life index (PQLI) is an attempt to measure the qualityof life or well-being of a country. The value is a single number derived fromthe basic literacy rate, infant mortality, and life expectancy at age one, allequally weighted on a 0 to 100 scale.

It was developed for the Overseas Development Council in 1979 by MorrisDavis Morris, as one of a number of measures created due to dissatisfactionwith the use of GNP as an indicator of development.

PQLI might be regarded as an improvement but shares the general problemsof measuring the quality of life in a quantitative way. It has also been criticisedbecause there is considerable overlap between infant mortality and lifeexpectancy.

2.1.2 Introduction to the Human Development Index (HDI)2.1.2 Introduction to the Human Development Index (HDI)2.1.2 Introduction to the Human Development Index (HDI)2.1.2 Introduction to the Human Development Index (HDI)2.1.2 Introduction to the Human Development Index (HDI)

The Human Development Index (HDI) is a summary composite index thatmeasures a country's average achievements in three basic aspects of humandevelopment: longevity, knowledge, and a decent standard of living. Longevityis measured by life expectancy at birth; knowledge is measured by acombination of the adult literacy rate and the combined primary, secondary,and tertiary gross enrolment ratio; and standard of living by GDP per capita(Purchase Power Parity US$)

Before the HDI itself is calculated, an index needs to be created for each ofthese dimensions. To calculate these dimension indices the life expectancy,education and GDP indices minimum and maximum values (goalposts) arechosen for each underlying indicator.

Calculating the HDICalculating the HDICalculating the HDICalculating the HDICalculating the HDI

This illustration of the calculation of the HDI uses data for Costa Rica.

1. Calculating the life expectancy index1. Calculating the life expectancy index1. Calculating the life expectancy index1. Calculating the life expectancy index1. Calculating the life expectancy index

The life expectancy index measures the relative achievement of a country inlife expectancy at birth. For Costa Rica, with a life expectancy of 78.0 years in2002, the life expectancy index is 0.884.Life expectancy index = 78.0 25/85 25 = 0.884

2. Calculating the education index2. Calculating the education index2. Calculating the education index2. Calculating the education index2. Calculating the education index

The education index measures a country's relative achievement in both adultliteracy and combined primary, secondary and tertiary gross enrolment.First, an index for adult literacy and one for combined gross enrolment arecalculated.

Then these two indices are combined to create the education index, with two-third weight given to adult literacy and one-third weight to combined gross

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enrolment.

For Costa Rica, with an adult literacy rate of 95.8 percent in 2002 and a combinedgross enrolment ratio of 69 percent in the school year 2001/02, the educationindex is 0.870.

Adult literacy index = 95.8 - 0/100 - 0= 0.958

Gross enrolment index = 69 - 0/100 - 0= 0.690

Education index = 2/3 (adult literacy index) + 1/3 (gross enrolment index)= 2/3 (0.958) + 1/3 (0.690) = 0.870

3. Calculating the GDP index3. Calculating the GDP index3. Calculating the GDP index3. Calculating the GDP index3. Calculating the GDP index

The GDP index is calculated using adjusted GDP per capita (PPP US$). In theHDI income serves as a surrogate for all the dimensions of humandevelopment not reflected in a long and healthy life and in knowledge. Incomeis adjusted because achieving a respectable level of human development doesnot require unlimited income. Accordingly, the logarithm of income is used.For Costa Rica, with a GDP per capita of $8,840 (PPP US$) in 2002, the GDPindex is 0.748.

GDP index = log (8,840) log (100)/ log (40,000) log (100)= 0.748

4. Calculating the HDI4. Calculating the HDI4. Calculating the HDI4. Calculating the HDI4. Calculating the HDI

Once the dimension indices have been calculated, determining the HDI isstraightforward. It is a simple average of the three dimension indices.HDI = 1/3 (life expectancy index) + 1/3 (education index) + 1/3 (GDP index)= 1/3 (0.884) + 1/3 (0.870) + 1/3 (0.748)= 0.834

2.2 Socio Economic Protective Legislations2.2 Socio Economic Protective Legislations2.2 Socio Economic Protective Legislations2.2 Socio Economic Protective Legislations2.2 Socio Economic Protective Legislations

Numerous legislations have been passed in the interest of the consumer andthe public. Some of the important ones are:

a) Prevention of Food Adulteration Act, 1954b) The Drugs and Cosmetics Act, 1940c) Standards of Weights and Measures Act, 1956d) Public Liability Insurance Act, 1990

2 . 2 . 12 . 2 . 12 . 2 . 12 . 2 . 12 . 2 . 1 Prevention of Food Adulteration Act (1954) (amended inPrevention of Food Adulteration Act (1954) (amended inPrevention of Food Adulteration Act (1954) (amended inPrevention of Food Adulteration Act (1954) (amended inPrevention of Food Adulteration Act (1954) (amended in1964 and 1971)1964 and 1971)1964 and 1971)1964 and 1971)1964 and 1971)

Under this Act, manufacture and sale of adulterated or misbranded orsubstandard food is prohibited. It provides for food inspectors who can takesamples of any article of food for analysis. The penalty for adulteration isimprisonment for up to six years and a fine of not less than Rs 1000.2 . 2 . 22 . 2 . 22 . 2 . 22 . 2 . 22 . 2 . 2 The DrThe DrThe DrThe DrThe Dr ugs and Cosmetics Act (1940)ugs and Cosmetics Act (1940)ugs and Cosmetics Act (1940)ugs and Cosmetics Act (1940)ugs and Cosmetics Act (1940)



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This Act provides for the uniform control of manufacture, distribution andsale of drugs. It also covers the import of drugs and provides for themaintenance of uniformity in standards. This is essential in the light ofcontinuous research and development and the use of various organic synthetics.Manufacture and sale of misbranded or spurious drugs attracts a maximumpenalty of imprisonment for ten years and confiscation of all property, etc.used for such manufacture.

2 . 2 . 32 . 2 . 32 . 2 . 32 . 2 . 32 . 2 . 3 StandarStandarStandarStandarStandards of Wds of Wds of Wds of Wds of Weights and Measureights and Measureights and Measureights and Measureights and Measures Act (1956) (Amended ines Act (1956) (Amended ines Act (1956) (Amended ines Act (1956) (Amended ines Act (1956) (Amended in1 9 7 6 )1 9 7 6 )1 9 7 6 )1 9 7 6 )1 9 7 6 )

Uniform standards of weights and measures based on the metric systemwere established by this act. The central government has set thespecifications for any weight and measure in accordance with therecommendations made by the International Organisation of LegalMetrology.

2 . 2 . 42 . 2 . 42 . 2 . 42 . 2 . 42 . 2 . 4 Public Liability Insurance ActPublic Liability Insurance ActPublic Liability Insurance ActPublic Liability Insurance ActPublic Liability Insurance Act

The first Act of its kind in the world was passed in December 1990 to provideimmediate cash to registered and non-registered companies, to meetunforeseen liabilities arising out of accidents.

2.3 Consumer Pr2.3 Consumer Pr2.3 Consumer Pr2.3 Consumer Pr2.3 Consumer Protection Overviewotection Overviewotection Overviewotection Overviewotection Overview

There has virtually been a tradition of exploitation of consumers in India dueto shortages and a sellers' market. Consumers as buyers always had poorbargaining power. Manufacturers and traders often follow unfair and unethicalpractices. Though many legislations have been enacted, they have failed toprovide any ef fective protection to consumers due to lack of ef fectiveimplementation. It is common knowledge that a number of deaths take placeevery year due to food adulteration, spurious liquor, and contaminated /substandard medicines, etc. Many manufacturers and traders, includingmultinationals, indulge in unethical practices. They make tall claims for theirproducts which turn out to be false. The service sector is no exception tounethical practices and allurements.

To check the onslaught on consumers, a host of legislations have beenenacted from time to time. These include Sale of Goods Act, 1930; EssentialCommodities Act, 1955; the prevention of food adulteration act, 1954;Prevention of Black Marketing and Maintenance of Supplies of EssentialCommodities Act, 1980; Standards of Weights and Measures Act, 1956;Agricultural Products Grading and Marketing Act (AGMARK), 1937; IndianStandards Institution Certification Act, 1952; MRTP Act, 1969, etc.

The MRTP Act acquired the elements of consumer protection legislation withamendments in 1984 when unfair trade practices were brought in its fold.However, in spite of these changes in the MRTP Act, need was felt for a morecomprehensive consumer protection legislation. As a consequence, theConsumer Protection Act, 1986 was born. It is described as a unique legislationof its kind in India to offer protection to consumers. The Act was designedafter an in-depth study of consumer protection laws and arrangements in the

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U.K., the U.S.A., Australia and New Zealand. The main objective of the Act isto promote better protection to consumers. Unlike other laws, which arepunitive or preventive in nature, the provisions of this act are compensatoryin nature. The Act intends to provide simple, speedy and inexpensive redressalto consumers' grievances.

2.3.1 Shortcomings of the CP Act, 19862.3.1 Shortcomings of the CP Act, 19862.3.1 Shortcomings of the CP Act, 19862.3.1 Shortcomings of the CP Act, 19862.3.1 Shortcomings of the CP Act, 1986

• An important shortcoming is that penalty to a defaulter is limited to 20times the value of the commodity, while the damage, his act or productcould have caused may be much more.

• The Act needs an important change where negligence is proved on thepart of the employees of public utilities and governmental organisations,and compensation given to the complainant. It is felt that the consumerforum should be authorised to specify that the amount should be paidfrom the salaries of defaulting employees.

2.3.2 Other Dimensions of the CP Act, 19862.3.2 Other Dimensions of the CP Act, 19862.3.2 Other Dimensions of the CP Act, 19862.3.2 Other Dimensions of the CP Act, 19862.3.2 Other Dimensions of the CP Act, 1986

• Consumer protection by advertising bodies - The Advertising StandardsCouncil of India (ASCI) set up by numerous advertising agencies hasformulated a code to ensure the truthfulness and honesty ofrepresentations and claims made by advertisements to safeguardconsumers against offensive and misleading advertisements.

• Pricing of Packaged Products - A notification of the Ministry of Foodand Civil Supplies has indicated that the price on labels of all packagedproducts should be inclusive of all taxes.

• Consumer Education and Research Society - This body is doing someexcellent work in educating various local consumer bodies as also takingup public interest litigation on various consumer issues.

• Doctors liable under the Consumer Protection Act - In the mid-ninetiesthe Supreme Court decreed that medical practitioners like any otherprofessionals, were liable under the CPA 1986. The ruling keepsgovernment hospitals out of the purview of the CPA on the groundsthat these hospitals provide free services.


The debate on the economic welfare of people which always centred aroundthe level of income gave rise to a lot of discontent amongst scholars becauseof its inadequacy to compare dif ferent economies. Quality of life wasconsidered to be a better comparable parameter than income. Efforts weremade to explain this parameter through PQLI and HDI. Preservation ofquality of life resulted in many legal measures which aimed at giving higherand better consumption standards. Various socio-political legislations werepassed towards this end. The Consumer Protection Act was one of the most



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important acts which looked at consumer protection in a holistic way.


1. The Broken Window theory was articulated by the Americansociologist ___________________.

2. The Physical Quality of Life Index was developed by ______________.

3. The parameters in the PQLI Index are _________ , ______________ and________________.

4. The Human Development Index is a composite summary index thatmeasures a country's average achievements in three basic aspects:___________, ____________ and __________________.

5. In calculating the GDP Index, logarithm of Income is used becauseachieving a respectable level of human development does not require______________ income.

6. Prevention of Food Adulteration Act was amended twice in the years_________ and ____________.

7. The Public Liability Insurance Act was passed in the year ___________.

8. There has been a traditional environment of exploitation of consumersin India because of the prevalence of a _________ market.

9. Under the CP Act, 1986, the penalty to a defaulter was limited to_________ times the value of the commodity.

10. A Supreme Court ruling on the CP Act has kept government hospitalsout of the purview of the CPA on the grounds that these hospitals provide________ services.

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Chapter IIIChapter IIIChapter IIIChapter IIIChapter IIIIndustryIndustryIndustryIndustryIndustry

LearLearLearLearLearning Objectivesning Objectivesning Objectivesning Objectivesning ObjectivesReading this chapter would enable you to understand:• Concept of Privatisation• Methods of Privatisation• Privatisation as distinct from investments• Privatisation experience of India as compared to experiences of the world• A balance sheet of privatisation in India• Concept of Competition Policy and Law• Applicability of Competition Policy in India• An introduction to Industrial reforms in India

ContentsContentsContentsContentsContents3.1 Privatisation

3.1.1 Ownership Measures3.1.2 Organisational Measures3.1.3 Operational Measures

3.2 Disinvestment3.2.1 The Rangarajan Committee on Disinvestment

3.3 Privatisation in India and the World: a comparison of political dynamics3.3.1 Privatisation or Disinvestment?3.3.2 Privatisation in India: a balance sheet

3.4 Competition Policy and Law3.4.1 The MRTP: a redundant Act?3.4.2 The New Competition Law: an advance over MRTP

3.5 Industrial Reforms


3.1 Privatisation3.1 Privatisation3.1 Privatisation3.1 Privatisation3.1 Privatisation

Privatisation deals with the transfer of businesses from the state to the privatesector. This commonly involves complex contractual structures to be put inplace, and the industries concerned are usually closely regulated.

Privatisation in a narrow sense indicates transfer of ownership of a publicsector undertaking to private sector, either wholly or partially. But in anothersense, it implies the opening up of the private sector to areas, which werehitherto reserved for the public sector. Such deliberate encouragement ofinvestment in the private sector in the economy, will over a period of timeincrease the overall share of the private sector of the economy. This is thebroader view in which privatisation of the economy can be effected. The basicpurpose is to limit the areas of the public sector and to extend the areas ofprivate sector operation including heavy industries and infrastructure.

Industry


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Privatisation is therefore, a process of involving the private sector in theownership or operation of state owned or public sector undertakings. It cantake three forms:

1. Ownership measures2. Organisational measures3. Operational measures

3 . 1 . 13 . 1 . 13 . 1 . 13 . 1 . 13 . 1 . 1 Ownership MeasuresOwnership MeasuresOwnership MeasuresOwnership MeasuresOwnership Measures

The Degree of privatisation is judged by the extent of ownership transferredfrom public enterprises to the private sector. Ownership may be transferredto an individual, co-operative or corporate sector. This can have three forms:

a) Total decentralisation: Total decentralisation: Total decentralisation: Total decentralisation: Total decentralisation: implies 100 percent transfer of ownership ofa public enterprise to the private sector.

b) Joint venturJoint venturJoint venturJoint venturJoint venture:e:e:e:e: implies partial transfer of a public enterprise to theprivate sector. It can have several variants, 25 percent transfer to privatesector in a joint venture implies that majority ownership and controlremains with the public sector. 51 percent transfer of ownership to theprivate sector shifts the balance in favour of the private sector, thoughthe public sector retains a substantial stake in the undertaking. 74 percenttransfer of ownership to the private sector implies a dominant sharebeing transferred to the private sector. In such a situation, the privatesector is in a better position to change the character of an enterprise.

c) Liquidation Liquidation Liquidation Liquidation Liquidation implies the sale of assets to a person who may use themfor the same purpose or some other purpose. This solely depends onthe preference of the buyer.

d) WWWWWorkers' co-operativeorkers' co-operativeorkers' co-operativeorkers' co-operativeorkers' co-operative is a special form of decentralisation. In thisform, ownership of the enterprise is transferred to workers who mayform a co-operative to run the enterprise. In such a situation, appropriateprovision of bank loans is made to enable workers to buy the shares ofthe enterprise. The burden of running the enterprise rests on the workersin a workers' Co-operative. The workers become entitled to ownershipdividend besides earning wages for their services.

3.1.2 Organisational Measur3.1.2 Organisational Measur3.1.2 Organisational Measur3.1.2 Organisational Measur3.1.2 Organisational Measureseseseses

Include a variety of measures to a limited state control. They include:

a)a)a)a)a) A holding company A holding company A holding company A holding company A holding company may be designed to take top-level major decisionswith a sufficient degree of autonomy for the operating companies in itshold in their day to day operations. A big company like the Oil andNatural Gas Commission (ONGC), Steel Authority of India (SAIL) orBharat Heavy Electricals Limited (BHEL) may acquire a holding status,thereby transferring a number of functions to its smaller units. In thisway, a decentralised pattern of management emerges.

b)b)b)b)b) LeasingLeasingLeasingLeasingLeasing In this arrangement, the government agrees to transfer theuse of assets of a public enterprise to a private bidder for a specifiedperiod, say for 5 years. While entering into a lease, the bidder is requiredto give an assurance of the quantum of profits that would be madeavailable to the state. This is a kind of tenure ownership. The government

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reserves the right to review the lease to the same person or to grantthe lease to another bidder depending upon the circumstances of thecase.

c)c)c)c)c) RestrRestrRestrRestrRestructuring ucturing ucturing ucturing ucturing is of two types: financial restructuring and basicrestructuring.

1 .1 .1 .1 .1 . Financial RestrFinancial RestrFinancial RestrFinancial RestrFinancial Restructuringucturingucturingucturingucturing implies the writing off of accumulated lossesand rationalisation of capital composition in respect of debt-equity ratio.The main purpose of this restructuring is to improve the financial healthof the enterprise.

2 .2 .2 .2 .2 . Basic RestrBasic RestrBasic RestrBasic RestrBasic Restr ucturing ucturing ucturing ucturing ucturing is said to occur when the public enterprisedecides to shed some of its activities to be taken up by ancillaries orsmall-scale units.

3.1.3 Operational Measures3.1.3 Operational Measures3.1.3 Operational Measures3.1.3 Operational Measures3.1.3 Operational Measures

The efficiency of public sector enterprises depends upon the organisationalstructure. Unless this structure grants a sufficient degree of autonomy to theoperators of the enterprise or develops a system of incentives, it cannot raiseits efficiency and productivity. These measures include:

a. grant of autonomy to public enterprises in decision making,b. provision of incentives for workers and executives consistent with

increase in efficiency and productivity,c. freedom to acquire certain inputs from the markets with a view to

reducing costs,d. development of a proper criterion for investment planning, ande. permission to public enterprises to raise resources from the capital

market to execute plans for diversification/expansion.

The basic purpose of operational measures is to infuse the spirit of privateenterprise.

3.2 Disinvestment3.2 Disinvestment3.2 Disinvestment3.2 Disinvestment3.2 Disinvestment

Disinvestment is an important component of efforts towards privatisation. Itsimply implies privatisation of public sector units. Countries like the U.K.have shown as to how disinvestment could solve the fiscal crisis of the stateand usher in a new industrial democracy.

3.2.1 The Rangarajan Committee on Disinvestment3.2.1 The Rangarajan Committee on Disinvestment3.2.1 The Rangarajan Committee on Disinvestment3.2.1 The Rangarajan Committee on Disinvestment3.2.1 The Rangarajan Committee on Disinvestment

The Committee on disinvestment in Public Sector enterprises set up by theGovernment of India, under the chairmanship of C. Rangarajan, in 1993 hasin its report made a number of recommendations. Importantrecommendations of the Committee include the following:

1. The best method for disinvestment is offering shares to the generalpublic at fixed price through a general prospecting. However, since theseshares have not been traded so far on the stock markets, it would bedifficult to decide the ‘fixed rate' at which they should be offered to thepublic. Once a reasonable time has elapsed and a normal tradingatmosphere established in the market, this indeed would be the best

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method. Till then, the auction method with wide participation may beadopted.

2. The target level of disinvestment should be decided on the basis of thedesirable level of public ownership in an activity or unit consistent withindustrial policy. In all those units, which are reserved for the publicsector, the percentage of equity disinvested should be 49 percent sothat the government, by holding the majority of the shares, retainscontrol over the management. In other cases, the percentage of equityto be divested should be 74 percent.

3. Instead of yearwise targets for disinvestment, a clear action plan shouldbe evolved.

4. Disinvestment shall be in stages and sales shall be staggered so as toget the best possible price.

5. A number of steps need to be undertaken for efficiently carrying outprivatisation. These may include corporatisation of public enterprises,restructuring of finance with a proper debt-equity gearing and oneIndependent Regulatory Commission for the concerned sector, ifnecessary.

6. A scheme of preferential offer of shares to workers and employees maybe devised.

7. Ten percent of the proceeds of privatisation may be set apart for lendingto public enterprises on concessional terms for meeting their expansionand rationalisation needs.

3 . 33 . 33 . 33 . 33 . 3 Privatisation in India and the WPrivatisation in India and the WPrivatisation in India and the WPrivatisation in India and the WPrivatisation in India and the World: a comparison of politicalorld: a comparison of politicalorld: a comparison of politicalorld: a comparison of politicalorld: a comparison of politicaldynamicsdynamicsdynamicsdynamicsdynamics

One dimension on which countries' privatisation programmes can be comparedis the speed with which they are implemented. Some countries, like Argentinaor the Czech Republic, implemented privatisation programmes rapidly, withlarge chunks divested within 3-5 years of launching the effort. But the vastmajority of countries, including India, have implemented privatisation muchmore gradually, in fits and starts. Although many observers have complainedabout India's slow privatisation, in fact gradual privatisation is the internationalnorm and rapid privatisation is the exception.

To begin with, India was not a likely candidate for rapid privatisation, becauseit did not satisfy two necessary conditions for rapid privatisation: severemacroeconomic crisis, including high inflation, and a strong executive thatcould ram policies through. Many developing countries satisfied one of thesecriteria, e.g. Brazil and Turkey experienced several bouts of macroeconomicinstability, yet these countries did not privatise rapidly. Even countries thatsatisfied both criteria, e.g. sub-Saharan Africa, privatised gradually or not atall. Only a handful of countries in Latin America and the transitional economiesmet both criteria and also privatised deeply and quickly (e.g. Argentina, Chile,Peru, Czech Republic, Estonia, etc.).

To be sure, in 1991, when serious economic reform began in India, thecountry was in the midst of a balance of payments crisis and sought IMFassistance. But that crisis quickly gave way to a decade of good economic

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performance by Indian standards. From 1992-93 to 2000-2001, India's GDPgrew at an average rate of 6.1 percent, inflation averaged 7.1 percent, andalthough imports exceeded exports every year, remittances and serviceexports grew to limit the current account deficit to average 1.1 percent ofGDP . Rising capital inflows saw the country's foreign exchange reservesclimb to $145 billion by September 2005.

While these results were not spectacular compared to the high-growth Asianeconomies in their heyday, they were certainly better than India's previousrecord as well as the record of most other LDCs in the 1990s. Given thatreality, politicians had little incentive to push through structural reforms likeprivatisation that would run into fierce resistance from powerful interestgroups.

Countries that privatised rapidly either did so under such severemacroeconomic conditions that included hyperinflation, shrinking GDP, anda severe balance of payments crisis or a sharp political discontinuity leadingto a regime change (such as the ouster of a military dictatorship or the fall ofcommunism).

Under these circumstances, the hard economic medicine was acceptable. Aspart of that package of policies, privatisation was a way to rein in inflation byreducing the fiscal deficit (thereby limiting the monetisation of the deficit),and a convenient way to both raise foreign exchange, e.g. by selling stateenterprises to foreign investors and increase FDI. The severe macroeconomicconditions were also the culmination of a long period of poor economicperformance.

In Argentina, for instance, the state was thoroughly discredited by the timePresident Menem came into office and pursued economic reforms, includingdeep privatisation.

In countries like the Czech Republic, central planning and state ownershipwere so discredited that sweeping privatisation was politically very popular.The Indian economy, on the other hand, experienced mediocre economicperformance for decades but never experienced very high inflation or prolongedperiods of economic stagnation. At the same time, in India, the executivebranch was weak throughout the 1990s.

Through the 1990s, governments either had bare majorities or were coalitiongovernments in which the leading party never had a majority on its own. InArgentina, Menem had much greater powers to push policies through,including relying on presidential decrees for some of the most important steps.In the Czech Republic too, President Havel and Prime Minister Klaus had avery broad mandate. Equally importantly they were ideologically committedto privatisation.

On the other hand, in India's democratic setting with multiple institutionalconstraints, progress was understandably slow. Moreover, the liberalisationagenda was only grudgingly accepted across a wide swathe of the Indianpolitical spectrum. The Congress Government headed by Narasimha Raowhich initiated the radical changes, continued its ritualistic genuflection to

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the Nehruvian legacy of planning and SOEs.

The Swadeshi Jagaran Manch and other elements of the BJP from the rightand the CPM from the left had more in common with regard to economicpolicies on openness than differences.

The caste-based parties the BSP, SP and RJD concerned that economicliberalisation would mean the unwinding of the hard won gains of reservationsfor their supporters in particular, were less than happy.

Consequently, despite the many changes in policies and regulations, and aless adversarial relationship between business and government, there was areluctance to overtly criticise earlier policies or explain with conviction andclarity why changes were needed.

A lack of conviction translated into a lack of “marketing” reforms to the voter.Individual bureaucrats and ministers might have done so, but no PrimeMinister has been willing to go to the people and say this is what we aregoing to do and these are the reasons why we need to do this. Thus, India'sprivatisation was of the gradual type.

3.3.1 Privatisation or Disinvestment?3.3.1 Privatisation or Disinvestment?3.3.1 Privatisation or Disinvestment?3.3.1 Privatisation or Disinvestment?3.3.1 Privatisation or Disinvestment?

The government's privatisation programme began as a divestment programme,whose aim seemed to be merely to reduce the government's holdings by upto 20 percent, principally to raise resources to plug the budget deficit.Accordingly, the programme was labelled “disinvestment” and the term“privatisation” assiduously avoided.

The next stage of escalation was raising the amount that would be divested to49 percent. Since this would still leave the government with majorityownership, the fundamental character of the enterprise would be unchanged,while on the other hand even more resources could be mobilised to plug thebudget deficit, which at the onset of the reforms exceeded 9 percent of GDP.

In the next stage, the government decided that it would sell up to 74 percentof the equity, since that would leave it with 26 percent, a level high enough togive it a strong voice in the enterprise, though not a controlling voice.

Finally, outright divestment became acceptable, initially for loss makingenterprises and later even for profitable enterprises. Thus, the governmentescalated its commitment from merely privatising ownership to privatisingcontrol, and during the 2000-01 budget debate, Finance Minister YashwantSinha actually used the term “privatisation” to describe the government'sprogramme for reforming SOEs(State Owned Enterprises).

3.3.2 Privatisation in India: a balance sheet3.3.2 Privatisation in India: a balance sheet3.3.2 Privatisation in India: a balance sheet3.3.2 Privatisation in India: a balance sheet3.3.2 Privatisation in India: a balance sheet

1. Whenever the Government tried to privatise any public sectorundertaking, the opposition to the movement was so strong that thegovernment did not succeed. The government under the provisions ofSick Industrial Companies Act (SICA) referred the cases of sick PSUs

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to the Bureau for Industrial and Financial Reconstruction. Upto 31stMarch 1995, 53 Central Public Sector Undertakings were registered withthe BIFR. The BIFR has taken a decision for the revival of Indian Drugsand Pharmaceuticals Ltd., Orissa Drugs and Chemicals Ltd., SmithStainstreet and Pharmaceuticals Ltd. Bharat Brakes and Valves Ltd.,Biecco Lawrie Ltd., and Bengal Immunity Ltd. It has also decided towind up some PSUs. They are: National Bicycles Corporation of IndiaLtd., Elgin Mills Co. Ltd., British Indian Corporation Limited.,Cawnpore Textile Limited and Tannery and Footwear Corporation Ltd..The cases of other registered Public Sector Enterprises are still underenquiry. But BIFR did not by and large result in any significantrehabilitation.

2. The Government also decided to sign Memoranda of Understanding(MOU's) with various public sector enterprises. The main goal of theMOU policy is to reduce the ‘quality of control' and increase the ‘qualityof accountability'. The MOU's grant greater operational autonomy ofPSU's to pursue their objectives. Out of the 99 PSU's which signed theMOU with their administrative ministries, 46 were rated as ‘Excellent'and 28 as ‘very good'.

3. The Disinvestment Commission was set up by the Government of Indiain August, 1996, to suggest the modalities for undertaking disinvestmentof equities for select PSUs. The Commission has recommendeddisinvestment at varying levels for a number of PSU's like MFIL, GAIL,MTNL, CONCOR, PHL, ET&T, HVOC, HCIL, RICL, R-ASHOK AND U-ASHOK and NALCO.

4. The Disinvestment Commission suggested strategic sales in variousproportions for many enterprises like, BALCO, ITI, HTL, KIOCL, ITDC,BRPL, MFL,HCL, SCI, EPIL, HPL, IBP, NEPA, HZL, PPCL, FACT, IPCL,NFL and SAIL.

5. The term “strategic” was frequently used to describe those state-ownedenterprises (SOEs) that the government intended to retain control overthe long term. But the definition of “strategic” became progressivelytighter, so that the number of SOEs that could be divested expanded.Initially, for instance, the Ministry of Petroleum argued that oilcompanies were strategic, but by 2000 the cabinet committee ondisinvestment had classified them as non-strategic. Eventually, onlynuclear power, defence and railroads were left in the strategic category,and everything else was eligible for privatisation, and even in the lasttwo, greater deregulation and outsourcing of activities is increasing therole of the private sector. To be sure, the debates on which sectorswere strategic were contentious, but they ended with progressivelynarrower definitions, even though the party in power changed thrice.Although there has been a noticeable increase in the commitment toprivatisation after the BJP-led governments came to power, there hasbeen more continuity than discontinuity in the privatisation programme.

6. Critics describe the disinvestments as deficit privatisation, because theproceeds of the disinvestments are being used to reduce the budgetdeficit. The Common Minimum Programme of the United ProgressiveAlliance Government stipulated that the proceeds of the disinvestmentswould be used in the two vital areas-health and education. A part of theproceeds of disinvestment will be earmarked to create an investmentfund, which will be used to strengthen other public sector enterprises.

7. The restrictions on the buyers also progressively declined. Initially the

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auction of shares was restricted to public financial institutions that overtime were expected to offload them to private investors. By 1996 equitywas being offered to foreign institutional investors. This followed threeconcomitant trends the willingness of the government to sell SOEs to“strategic investors,” that is, to private investors who would own a largeblock of shares (not necessarily 51 percent) and would enjoy managementcontrol, the liberalisation of rules governing foreign direct investment,and the opportunity to list Indian firms on foreign stock exchangesthrough ADRs and GDRs. Thus, potential buyers of Air India includedSingapore Airlines in partnership with the Tatas, and Air France inpartnership with a local Indian group, while foreigners owned portionsof VSNL and MTNL through ADRs traded on the New York StockExchange.

3.4 Competition Policy and Law3.4 Competition Policy and Law3.4 Competition Policy and Law3.4 Competition Policy and Law3.4 Competition Policy and Law

A high level committee on Competition Policy and Law recommended that anew Competition Act may be enacted on the lines recommended in the reportof the committee and the MRTP Act, 1969, may be repealed and the MRTPCommission wound up. The provisions relating to the Unfair Trade PracticesAct need not figure in the Indian Competition Act as they are presently coveredby the Consumer Protection Act, 1986.

A Competition Law Authority christened Competition Commission of Indiamay be established to implement the Indian Competition Act. It will hearcompetition cases and also play the role of competition advocacy.

The Competition Commission should be a multi-member body comprised ofeminent and erudite persons of integrity and objectivity from the fields ofJudiciary, Economics, Law, International Trade, Commerce, Industry,Accountancy, Public Af fairs and Administration. The investigative,prosecutorial and adjudicative functions will be separate.

The Union Cabinet on 26th June 2001 cleared a diluted bill on competition lawand policies named Trade Related Competition Commission of India (TRCCI)to replace the existing Monopolies and Restrictive Trade PracticesCommission. (MRTPC).

3.4.1 MR3.4.1 MR3.4.1 MR3.4.1 MR3.4.1 MR TP : a rTP : a rTP : a rTP : a rTP : a redundant Act?edundant Act?edundant Act?edundant Act?edundant Act?

The Primary objective of the MRTP Act was to control the concentration ofeconomic power and control monopolies. With the initiation of the marketeconomy and consequent liberalisation since 1991, this objective has beensubstantially diluted. The MRTP (Amendment) Act, 1991, has omittedprovisions regarding the Central Government's permission for substantialexpansion, establishment of new undertakings, mergers, takeovers, etc.

Establishments, however big or small are now free to expand, or establishnew undertakings, or effect mergers.Consequently, the strategic alliance between Godrej Soap and Proctor andGamble could not be questioned. Likewise, the merger of Hindustan Leverand TOMCO, though objected to by certain quarters including the employeesof TOMCO, was allowed by the Supreme Court.

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The MRTP Act was designed to prevent monopoly, however, it restrictedcompetition. It in fact helped in protecting the market position of the largehouses by restricting competition between the large houses. This has hadmany adverse ef fects, they have retarded competition, decelerated growthin the industrial and consequently in other sectors, and contributed to theforeign trade gap. For example, in the early seventies, having failed tomake any headway within India, the only alternative left for the Birlas wasto set up firms in other countries and it put up several successful companiesin all the ASEAN countries. Thus, Birlas set up a viscose stable fibre plantin Thailand and exported fibre back to India.

3.4.2 The New Competition Law: an advance over MR3.4.2 The New Competition Law: an advance over MR3.4.2 The New Competition Law: an advance over MR3.4.2 The New Competition Law: an advance over MR3.4.2 The New Competition Law: an advance over MR TPTPTPTPTP

Thus, the New Competition Law (NCL) is much an advance over the archaicMRTP Act. It takes into account the post reform realities of a liberalisedeconomic environment. Whereas, the MRTP act was based on size as a factor,the NCL is based on structure as a factor. It defines competition offencesclearly and explicitly, with the language being simple and easilycomprehensible. Whereas, the MRTP Act discouraged dominance, the NCLonly frowns upon the abuse of dominance. The TRCCI has much moreautonomy and is selected by a collegium.

3.5 Industrial Refor3.5 Industrial Refor3.5 Industrial Refor3.5 Industrial Refor3.5 Industrial Reformsmsmsmsms

Industrial licensing was a major instrument of control under which thecentral government's permission was needed for both investment in newunits (beyond a relatively low threshold) and for substantial expansion ofcapacity in existing units.

Licensing was undoubtedly responsible for many of the inefficiencies plaguingIndian Industry.

In a series of steps, licensing was abolished for all except seven industriesviz.,

1. alcoholic beverages,2. sugar,3. cigars and cigarettes,4. electronics,5. aerospace and defence products,6. hazardous chemicals and7. pharmaceuticals.

The special permission needed under the MRTP Act for any investment bythe so called “large houses” which was an additional instrument of controlover large houses, in addition to Industrial licensing was also abolished. Itsstated objective was to prevent “concentration of economic power” but inpractice it only served as another barrier to entry, reducing potentialcompetition in the system.

Abolition of these controls have given Indian Industry much greater freedom

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and flexibility to expand existing, or to set up new units in a location of theirchoice, thus increasing the pressure of competition as well as the ability toface competition.

With the opening up of the Indian economy, the country's informationtechnology Industry has been the biggest beneficiary. Between 1995 and 2000,the Indian IT Industry recorded a CAGR (Compounded Annual Growth Rate)of more than 42.4 percent.

Software continues to contribute a major portion of the Indian IT Industry'srevenues. India's exports of computer software beat global recession in 2001-2002 (April-March) to grow by a healthy 31.4 percent. In absolute terms,software and services exports went up to $ 7.875 billion in 2001-02 as against$5.978 billion in 2000-01.

The steady growth in exports of software is a combined effect of softwaregiants setting up bases in India to meet their global software requirements inthe aftermath of 9/11, gradual market penetration that India is making in thenon - traditional markets like the EU, Australia, Japan and China, and theincreased receivables from IT enabled services like back office operations.India's exports of electronics hardware grew by 13.6 percent in 2001-02 to $1.183 billion from $ 1.041 billion in 2000-01.

The IT manufacturing Industry has over 150 major hardware players supportedby over 800 ancillary units and small time vendors engaged in sub - assembliesand equipment manufacturing. The combined export of software and services,and electronic hardware registered a growth of 28.7percent in 2001-02.

In absolute terms, India's overall IT exports grew to $ 9.04 billion in 2001-02from $ 7.019 billion in 2000-01. In 1999-00, more than 185 of the Fortune 500companies outsourced their software requirements to Indian software houses.

India's software industries show the clustering of the software companies inthree distinct areas:

• Southern states, specifically Tamilnadu (Chennai, Madurai, Coimbatoreand Trichy), Karnataka (essentially confined to Bangalore) and AndhraPradesh (essentially confined to Hyderabad)

• In the west, Maharashtra (Mumbai and Pune),• And in the North, Delhi, Noida and Gurgaon.

Software companies located in these regions account for almost the entiresoftware and services exports of the country, highest number of firms andemployment in the sector.


It is not the business of government to be in business. This has been themantra around the world especially since the decade of 80s. India has tried itsown brand of privatisation which gathered speed after 1991. MRTP laws inthis context became archaic and a new legislation called competition lawacquired its space. This gave more importance to competition than to control.

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We have also witnessed numerous debates for and against privatisation, themost important argument against privatisation is that it is a tool for deficitmanagement. A lot has depended on the political ideologies of the time alongwith practical realities facing the world today. The liberalisation wave inparticular has seen the software segment in India expanding to phenomenalproportions.


1. The three forms privatisation can take are ____________ measures,____________ measures and ______________ measures.

2. As per the Rangarajan committee on disinvestment, those units whichare reserved for the public sector, disinvestment should be to the tuneof ____________ percent.

3. India was not a likely candidate for rapid privatisation, because it didnot satisfy two necessary conditions for rapid privatisation: severe_________ crisis, including high inflation, and a strong___________ that could ram policies through.

4. The government's privatisation programme began as a divestmentprogramme, whose aim seemed to be merely to reduce the government'sholdings by up to _________ percent, principally to raise resources toplug the _________ deficit.

5. During the 2000-01 budget debate, Finance Minister Yashwant Sinhaused the term “____________” to describe the government's programmefor reforming SOEs.

6. The term “__________” was frequently used to describe those state-ownedenterprises (SOEs) that the government intended to retain control overthe long term.

7. A Union Cabinet on 26th June 2001 cleared a diluted bill on competitionlaw and policies named _________________ to replace the existingMonopolies and Restrictive Trade Practices Commission. (MRTPC).

8. Whereas, the MRTP act was based on size as a factor, the NCL is basedon ____________ as a factor.

9. Between 1995- 2000, the Indian IT Industry recorded a CAGR of morethan ________ percent.

10. Critics describe the dis-investments as deficit privatisation, because theproceeds of the dis-investments are being used to reduce the _________deficit.

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Chapter IVChapter IVChapter IVChapter IVChapter IVThe Financial SystemThe Financial SystemThe Financial SystemThe Financial SystemThe Financial System

LearLearLearLearLearning Objectivesning Objectivesning Objectivesning Objectivesning ObjectivesReading this chapter would enable you to understand• The concept of Money Market• The development of the money market in India• Instruments traded in the Indian Money Market• Introduction to the Government Securities Market and instruments traded therein• Reforms in the Indian capital markets• Understanding of the Buy back law of India• Reforms in the Banking sector• Understanding of fiscal, monetary and credit policies• Reforms of the fiscal environment in India

ContentsContentsContentsContentsContents4.1 Money Market

4.1.1 Money Market in India4.1.2 Instruments Traded in the Money Market

4.2 Gilt Edged Market or Government Securities Market4.2.1 Zero Coupon Bonds4.2.2 Floating Rate Bond4.2.3 Tap Stock4.2.4 Partly Paid Stock4.2.5 Capital Indexed Bonds

4.3 Capital Market Reforms4.3.1 Primary Market Reforms4.3.2 Secondary Market Reforms

4.4 Buy back Ordinance4.4.1 Buy back and experience with MNCs

4.5 Banking Sector Reforms4.6 An Introduction to Fiscal, Monetary and Credit Policy

4.6.1 Fiscal Policy4.6.2 Monetary and Credit Policy


The fundamental function of any monetary and financial system, no matterhow simple or complex, is to promote efficiency in the process of exchangeor trade in real goods and services, and thus to contribute to economic welfare.Around this objective is woven the entire gamut of financial institutions whichinterlinked, forms the financial system.

4.1 Money Market4.1 Money Market4.1 Money Market4.1 Money Market4.1 Money Market

Money Market is the market for short term funds, as distinct from the CapitalMarket which deals in long term funds. The Reserve Bank of India defines theMoney Market as a “centre for dealings, mainly of a short term character, in

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monetary assets; it meets the short term requirements of the borrowers andprovides liquidity or cash to lenders. It is the place where short term surplusinvestible funds at the disposal of the financial and other institutions andindividuals are bid by borrowers, again comprising institutions and individualsand also by the government.”

4.1.1 Money Market in India4.1.1 Money Market in India4.1.1 Money Market in India4.1.1 Money Market in India4.1.1 Money Market in India

The Money Market structure has undergone a change over the years,particularly under the impetus of economic reforms. Unlike in developedeconomies where Money Markets are promoted by financial intermediariesout of efficiency considerations, in India, as in many other developing countries,the evolution of the money market and its structure has been integrated intothe overall deregulation process of the financial sector.

The Reserve Bank has gradually developed the Money Market through a fivepronged effort.

1. Interest rate ceilings on inter bank call/notice money, inter bank termmoney, rediscounting of commercial bills and inter bank participationwithout risk were withdrawn effective May 1, 1989.

2. Several financial innovations in terms of money market instruments,such as, auctions of Treasury Bills, certificates of deposits, commercialpaper and RBI repos were introduced.

3. Barriers to entry were gradually eased by

i) increasing the number of players (beginning with the Discount andFinance House of India in April 1988 followed by primary and satellitedealers and money market mutual funds),

ii) relaxing both issuance restrictions and subscription norms inrespect of money market instruments and allowing determinationof yields based on the demand and supply of such paper, and

iii) enabling market evaluation of associated risks, by withdrawingregulatory restrictions, such as, bank guarantees in respect of CPs.

4. The development of markets for short term funds at market determinedinterest rates has been fostered by a gradual switch from a cash creditsystem to a loan based system, shifting the onus of cash managementfrom banks to borrowers and phasing out the 4.6 percent 91-day tapTreasury Bills, which in the past provided an avenue for investing inshort term funds.

5. Institutional development has been carried out to facilitate inter linkagesbetween the money market and the foreign exchange market, especiallyafter a market based exchange rate system was put in place in March1993.

4.1.2 Instr4.1.2 Instr4.1.2 Instr4.1.2 Instr4.1.2 Instr uments Tuments Tuments Tuments Tuments Traded in the Money Marketraded in the Money Marketraded in the Money Marketraded in the Money Marketraded in the Money Market

Call/Notice Money MarketCall/Notice Money MarketCall/Notice Money MarketCall/Notice Money MarketCall/Notice Money Market

The most active segment of the monetary market segment has been the callmoney market where imbalances in the fund positions mostly of the banks

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are evened out. The Call/Notice money market has graduated into a broadand a vibrant market from a restricted and narrow one, consequent on thesteps initiated with the onset of the process of liberalisation and deregulation.Presently Banks and PD (Primary Dealers) operate as both lenders andborrowers with a large number of financial institutions and mutual fundsoperating only as lenders. Corporate entities who have lendable surplus arepermitted to lend through Primary Dealers.

Since the withdrawal of the ceiling on the call rates, the call money rate hasshown a tendency to fluctuate significantly on occasions. The sharp imbalancesthat arise in demand supply of money due to the combination of several factorshave led to the volatile behaviour of call money rate. The most important ofthese has been the bunching of banks needs for short term funds in order tomeet CRR compliance. Another factor has been the withdrawal of substantialliquidity from the system at one time to take care of Government needs. Thevolatility in the call money rates has also been the result of the asset liabilitymismatches of some large banks and their over reliance on call money marketfor liquidity management. There have been a variety of other reasons as well,like bunching of payment of tax at specific periods, slow off -take of credit,etc.

With the deregulation of the interest rate and widening of the market througha large number of participants, the call money market has been playing anincreasingly important role in equilibrating the banking system demand andsupply of short term funds. However, despite widening of the call moneymarket and DFHI's attempt to smoothen liquidity needs as mentioned earlier,there had been a relatively high degree of volatility in the call money marketin the post 1991 period. In order to reduce the instability in the call moneymarket, RBI has taken several steps in the past few years. Since December1992, initially it had injected liquidity through DFHI and STCI. In thesubsequent years, RBI has been moderating liquidity and volatilities in thecall money market, through continuous use of repos and refinance operationsand change in procedure for maintenance of CRR requirements.

In pursuance of the recommendation of the Narasimhan Committee II, RBIhas taken a decision to restrict the call, notice, term money market as purelyan interbank market with additional access only to PDs. Steps have been takento phase out non-bank participants from the call/notice/money market withthe development of an active repo market and market for other money marketinstruments.

TTTTTerererererm Moneym Moneym Moneym Moneym Money

Inter bank market for deposits of maturity beyond 14 days and upto threemonths is referred to as term money market. The entry restrictions are thesame as those for Call/Notice Money except that, as per existing regulations,the specified entities are not allowed to lend below 14 days .The market inthis segment is presently not very deep. The declining spread in lendingoperations, the volatility in the call money market with accompanying risksin running asset/liability mismatches, the growing desire for fixed interestrate borrowing by corporates, the move towards fuller integration betweenforex and money markets, etc. are all the driving forces for the development

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of the term money market. These, coupled with the proposals for rationlisationof reserve requirements and stringent guidelines by regulators/managementsof institutions, in the asset/liability and interest rate risk management, shouldstimulate the evolution of the term money market sooner than later.

Ready ForwarReady ForwarReady ForwarReady ForwarReady Forward Operations (Repo)d Operations (Repo)d Operations (Repo)d Operations (Repo)d Operations (Repo)

Repo is a money market instrument, which enables collateralised shortterm borrowing and lending through sale purchase operations in debtinstruments. Under a repo transaction, a holder of securities sells themto an investor, with an agreement to repurchase at a predetermined dateand rate. In the case of a repo, the forward clean price of the bonds is setin advance at a level which is dif ferent from the spot clean price by adjustingthe dif ference between repo interest and coupon earned on the security.

In the money market, this transaction is nothing but collateralised lendingas the terms of the transaction are structured to compensate for the fundslent and the cost of the transaction is the ‘repo rate'. In other words, theinflow of cash from the transaction can be used to meet temporary liquidityrequirement in the short term money market at comparable cost.

Repo rate is nothing but an annualised interest rate for the funds transferredby the lender to the borrower. Generally, the rate at which it is possible toborrow through a repo is lower than the same offered on unsecured (or clean)inter bank loan for the reason that it is a collateralised transaction and thecredit worthiness of the issuer of the security is often higher than the seller.Other factors affecting the repo rate include, the credit worthiness of theborrower, liquidity of the collateral and comparable rates of other moneymarket instruments.

Commercial Paper (CP)Commercial Paper (CP)Commercial Paper (CP)Commercial Paper (CP)Commercial Paper (CP)

The introduction of Commercial Paper (CP) in January 1990 as an additionalmoney market instrument was the first step towards securitisation ofcommercial bank's advance into marketable instruments.

Commercial Papers are unsecured debts of corporates. They are issued in theform of promissory notes, redeemable at par to the holder at maturity. Onlycorporates who get an investment grade rating can issue CPs, as per RBIrules. Though CPs are issued by corporates, they could be good investmentsif proper caution is exercised.

The market is generally segmented into the PSU CPs i.e., those issued bypublic sector and departmental undertakings and the private sector CPs. CPsissued by top rated corporates are considered sound investments. CPs aremostly issued to finance current transactions and seasonal needs for fundsand are not tied to any specific transaction.

The instrument provides banks and other institutions an opportunity to investtheir short term surpluses in high earning securities. It is an unsecured andnegotiable instrument, and is usually issued in a bearer form and on discountto face value basis. Market forces freely determine the discount rate. The CPyield is slightly lower than the prime lending rate and is higher than comparable



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bank deposit rates.

Certificate of Deposits (CDs)Certificate of Deposits (CDs)Certificate of Deposits (CDs)Certificate of Deposits (CDs)Certificate of Deposits (CDs)

A certificate of deposit (CD) is a document of title to a time deposit. Certificatesof Deposits are unsecured promissory notes issued by banks with specificmaturity similar in nature to the commonly available fixed deposits of thebanks, with the dif ference between the two being that CDs are freelytransferable from one party to another by endorsement and delivery.CDs are issued at a discount to the face value and the market determines therate of discount.

CDs are always traded at a spread over a T - Bill of the same maturity. This isbecause investors bank paper carry some credit risk, which treasuries do notand also the CDs are less liquid than treasury papers. Along with scheduledcommercial banks, all India Financial Institutions like IDBI, ICICI, IFCI, IRBI,SIDBI and EXIM Bank have also been permitted to issue CDs.Commercial Bills

Bills of exchange are negotiable instruments drawn by the seller (drawer) onthe buyer (drawee) for the value of the goods delivered to him. Such bills arecalled trade bills. When trade bills are accepted by commercial banks they arecalled commercial bills.

If the seller wishes to give some period for payment, the bill would be payableat a future date (Usance bill).

During the currency of the bill, if the seller is in need of funds, he mayapproach his bank for discounting his bill. One of the methods forproviding credit to customers by bank is by discounting commercial billsat a prescribed discount rate. The bank will receive the maturity proceeds(face value) of the discounted bill from the drawee. In the meanwhile, ifthe bank is in need of funds, it can rediscount the bill already discountedby it in the commercial bill rediscount market at the market related discountrate. (The RBI introduced the Bill Market Scheme in 1952 and a new schemecalled the Bill Rediscounting Scheme in November 1970.).

4.2 Gilt Edged Market or Gover4.2 Gilt Edged Market or Gover4.2 Gilt Edged Market or Gover4.2 Gilt Edged Market or Gover4.2 Gilt Edged Market or Government Securities Marketnment Securities Marketnment Securities Marketnment Securities Marketnment Securities Market

The Government resorts to the market for its borrowing programme. Thegovernment borrows from the market by issuing loan stock of variousmaturities. Banks, FIs, Mutual Funds, Provident Funds, Primary Dealers,NBFCs are the various categories of institutions who normally invest ingovernment securities. Individuals also do invest in the government securities,but not in large quantum.

In the case of government dated securities, coupon rates were declared andmaturities shortened to bring these securities to market terms. The maximummaturity was reduced from 20 years to 10 years. Since April 1992, the entirecentral government borrowing programme in dated government security isconducted through auctions. But of late, the Government has resorted toprivate placement of government securities with RBI and later the same are

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sold through ‘on tap'.

Some other kinds of Gilt edged securities are:

4.2.1 Zero Coupon Bonds4.2.1 Zero Coupon Bonds4.2.1 Zero Coupon Bonds4.2.1 Zero Coupon Bonds4.2.1 Zero Coupon Bonds

Bonds issued at discount and repaid at face value. The difference between theissue price and redemption price represents the return to the investor. Noperiodic interest payment is made.

Zero coupon bonds bear no reinvestment risk but they are prone to interestrate risk making their prices highly volatile. The buyer of Zero coupon bondsreceives one and only one payment, at maturity of the bond. In contrast couponbonds make a series of periodic coupon payments to the buyer as well aspaying face value at maturity. Zero Coupon bonds on auction basis wereintroduced by GOI in January 1994.

4.2.2 Floating Rate Bond4.2.2 Floating Rate Bond4.2.2 Floating Rate Bond4.2.2 Floating Rate Bond4.2.2 Floating Rate Bond

Floating Rate Bond is an instrument whose periodic interest or dividendrates are indexed to some reference index such as Treasury Bills etc.These instruments give a variable rate, a characteristic that allows boththe issuer and investor to share the risk inherent in changing interestrates. The volatility of interest rates have led to the creation of theseinstruments designed to of fer some protection to the players. Thus,floating rate bonds enable investors to take advantage of movements ininterest rates. Floating rate bonds were introduced by the GOI onSeptember 29, 1995 linking them to the 364 day treasury bills.

4.2.3 Tap Stock4.2.3 Tap Stock4.2.3 Tap Stock4.2.3 Tap Stock4.2.3 Tap Stock

A gilt edged security from an issue that has not been fully subscribed and isreleased into the market slowly when its market price reaches predeterminedlevels. Short taps are short dated securities and long taps are long datedstocks. These stocks were introduced by GOI on July 29, 1994.

4.2.4 Partly Paid Stock4.2.4 Partly Paid Stock4.2.4 Partly Paid Stock4.2.4 Partly Paid Stock4.2.4 Partly Paid Stock

An innovative instrument for which payment is made in instalments. It isdesigned for institutions with a regular flow of investable resources requiringinvestment outlets. The instrument has attracted good market response andis being traded actively.

4.2.5 Capital Indexed Bonds4.2.5 Capital Indexed Bonds4.2.5 Capital Indexed Bonds4.2.5 Capital Indexed Bonds4.2.5 Capital Indexed Bonds

These bonds were floated on December 29, 1997 on tap basis. The tap waskept open up to 28th January 1998 and an amount of Rs 704 crore was mobilised.These bonds are of four year maturity and carry a coupon rate of 6 percent.The objective of the capital indexed bonds was to provide a complete hedgeagainst inflation for the principal amount of the investment.



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4.3 Capital Market Refor4.3 Capital Market Refor4.3 Capital Market Refor4.3 Capital Market Refor4.3 Capital Market Reformsmsmsmsms

4.3.1 Primary Market Refor4.3.1 Primary Market Refor4.3.1 Primary Market Refor4.3.1 Primary Market Refor4.3.1 Primary Market Reformsmsmsmsms

1. The eligibility criterion for issuers has been strengthened. At the sametime SEBI took several measures to provide issuers with more flexibilityin the issue process. Stringent and detailed disclosure norms have beenprescribed, and greater transparency in the draft prospectus is required.Further, separate criteria for finance companies have been prescribed.

2. A criterion for accessing the securities market has been strengthened.Issuers proposing to make their first offer of equity to the public shouldhave a track record of dividend payments in three years of theimmediately preceding five years. This condition is relaxable underspecific conditions.

3. In October 1993, regulations for underwriters of capital issues and capitaladequacy norms for stock brokers in the stock exchanges wereannounced.

4. SEBI notified regulations for bankers to issues in July 1994. Theregulations make registration of bankers to issues with SEBIcompulsory. They stipulate the general obligation and responsibilitiesof the bankers to issues and contain a code of conduct. Under theregulations, inspection of bankers to an issue will be done by the ReserveBank on request from the SEBI.

5. Offer documents need no longer be vetted by SEBI. Merchant Bankersand Issuers, however, remain responsible for ensuring compliance withthe norms on disclosure and investment protection prescribed by theSEBI.

6. The government of India at the end of 1995 permitted IPO's throughthe ‘Book Building' route. Book building is a process to ascertain theindicative subscription bids of interested investors to the public issueof securities. The advantages of this technique of obtaining advancefeedback are that it helps in optimal pricing and removes uncertaintiesregarding mobilisation of funds.

4.3.2 Secondary Market Refor4.3.2 Secondary Market Refor4.3.2 Secondary Market Refor4.3.2 Secondary Market Refor4.3.2 Secondary Market Reformsmsmsmsms

1. The stock exchanges have been directed to broad base their governingboards and change the composition of their arbitration, default anddisciplinary committee.

2. The government has allowed foreign institutional investors (FIIS) suchas pension funds, mutual funds, investment trusts, asset or portfoliomanagement companies, etc. to invest in the Indian Capital marketprovided they register with SEBI.

3. Trading modalities have been modernised. The National Stock Exchangeintroduced on-line electronic trading in 1994. The system allows brokerslocated in 140 cities and towns all over the country to trade in a singleunified market, matching buy and sell orders with price priorities. Italso ensures transparency for investors and assurance of best prices.Competition, thus led BSE also to introduce an on-line trading systemin 1995, with linkages to brokers all over the country.

4. Dematerialisation of stocks, introduced in 1996, eliminated delays anduncertainties in transfer of ownership. The process of demat and tradingthrough depositories has helped to push the volume of business rapidly.

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5. The SEBI has made it compulsory for credit rating of debentures andbonds of more than 18 months' maturity.

6. The maximum debt equity ratio of banks is 2:1 and the minimum debtservice coverage ratio required is 1:2.

4.4 Buy back Ordinance4.4 Buy back Ordinance4.4 Buy back Ordinance4.4 Buy back Ordinance4.4 Buy back Ordinance

The buy back ordinance was introduced by the Government of India (GOI) onOctober 31, 1998. The major objective of the buy back ordinance was to revivethe capital markets and protect companies from hostile takeover bids. Thebuy- back of shares was governed by the Securities and Exchange Board ofIndia's (SEBI) Buy Back of Securities Regulation, 1998, and Securities andExchange Board of India's (SEBI) Substantial Acquisition of Shares andTakeover Regulations, 1997.

The ordinance was issued along with a set of conditions intended to preventits misuse by companies and protect the interests of investors. According toguidelines issued under SEBI's Buy Back of Securities Regulation, 1998, acompany could buy back its shares from existing shareholders on aproportionate basis through tender offer.

• From the open market, through the book building process or the stockexchange.

• From odd lot holders.

The ordinance allowed companies to buy back shares to the extent of 25 percent of their paid up capital and free reserves in a financial year. The buy backhad to be financed only out of the company's free reserves, securities premiumaccount, or proceeds of any earlier issue specifically made with the purposeof buying back shares. The ordinance also prevented a company that haddefaulted in the repayment of deposits, redemption of debentures or preferenceshares, and repayment to financial institutions from buying back its shares.Moreover, a company was not allowed to buy back its shares from any personthrough a negotiated deal, whether through a stock exchange, spottransactions, or any private arrangement.

It also allowed the promoters of a company to make an open offer (similar toacquisition of shares) to purchase the shares of its subsidiary. This allowedforeign promoters to utilise their surplus funds and make an open offer toacquire a 100% stake in their Indian subsidiaries.

The buy back of shares was allowed only if the Articles of Association of thecompany permitted it to do so. The ordinance also required the company topass a special resolution at a general meeting and obtain the shareholders'approval for the buy back. In addition, companies were not allowed to make apublic or rights issue of equity shares within a period of 24 months from theday of completing the buy back, except by way of bonus issues and conversionof warrants, preference shares or debentures.4.4.1 Buy back and experience with MNCs4.4.1 Buy back and experience with MNCs4.4.1 Buy back and experience with MNCs4.4.1 Buy back and experience with MNCs4.4.1 Buy back and experience with MNCs

In October 2000, Royal Philips Electronics of Netherlands (Philips), the Dutchparent of Philips India Limited, announced its first offer to buy back the sharesof its Indian subsidiary. The open offer was initially made for 23 percent of the



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outstanding shares held by institutional investors, private bodies and thegeneral public. The offer was made at Rs.105, a premium of 46 percent overthe then prevailing stock market price. With this, Philips became one of thefirst multinational (MNCs) companies in India to offer the buy back option toits shareholders.

Soon after, the buy back option was offered by several multinational companies(MNCs) to increase their stake in their Indian ventures. Some of thesecompanies were Cadbury India, Otis Elevators, Carrier Aircon, ReckittBenkiser, etc.

Fund managers who held these companies' stocks felt that allowing buy backof shares was one of most favourable developments in the Indian stockmarkets. It provided a much needed exit option for shareholders in depressedmarket conditions.

Buy back by the company usually indicated that the management felt that itsstock was undervalued. This resulted in an increase in the price, bringing itcloser to the intrinsic value and providing investors with a higher price fortheir investment in the company.

However, critics of the buy back option claimed that large multinationals hadutilised the buy back option to repurchase the entire floating stock from themarket with the objective of delisting from the stock exchange and eliminatingan investment opportunity for investors. Moreover, most MNCs that offeredthe buy back option reported a steep decline in the trading volumes of theshares of their Indian ventures. The declining liquidity of these sharesprompted critics to say that the Government of India's attempt to revive capitalmarkets by allowing buy back of shares had failed.

4.5 Banking Sector Refor4.5 Banking Sector Refor4.5 Banking Sector Refor4.5 Banking Sector Refor4.5 Banking Sector Reformsmsmsmsms

The Indian financial system in the pre-reform period (i.e., prior to the Gulfcrisis of 1991), essentially catered to the needs of planned development in amixed-economy framework where the public sector had a dominant role ineconomic activity. The strategy of planned economic development requiredhuge development expenditure, which was met through the Government'sdominance of ownership of banks, automatic monetisation of the fiscal deficitand subjecting the banking sector to large pre-emptions both in terms of thestatutory holding of Government securities (statutory liquidity ratio, or SLR)and cash reserve ratio (CRR). Besides, there was a complex structure ofadministered interest rates guided by social concerns, resulting in cross-subsidisation. These not only distorted the interest rate mechanism but alsoadversely affected the viability and profitability of banks by the end of 1980s.There is perhaps an element of commonality of such a ‘repressed' regime inthe financial sector of many emerging market economies. It follows that theprocess of reform of the financial sector in most emerging economies alsohas significant commonalities while being specific to the circumstances ofeach country. A narration of the broad contours of reform in India would behelpful in appreciating both the commonalities and the differences in the pathsof reform.1. Reform measures were initiated and sequenced to create an enabling

environment for banks to overcome external constraints. These were

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related to the administered structure of interest rates, high levels ofpre-emption in the form of reserve requirements, and credit allocationto certain sectors. Sequencing of interest rate deregulation has been animportant component of the reform process which has imparted greaterefficiency to resource allocation. The process has been gradual andpredicated upon the institution of prudential regulation for the bankingsystem, market behaviour, financial opening and, above all, the underlyingmacroeconomic conditions. Interest rates in the banking system havebeen largely deregulated except for certain specific classes; these are:savings deposit accounts, non-resident Indian (NRI) deposits, small loansup to Rs.2 lakh and export credit. The need for continuance of theseprescriptions as well as those relating to priority sector lending havebeen flagged for wider debate in the latest annual policy of the RBI.However, administered interest rates still prevail in the small savingschemes of the government.

2. As regards the policy environment of public ownership, it must berecognised that the lion's share of financial intermediation was accountedfor by the public sector during the pre-reform period. As part of thereforms programme, initially, there was infusion of capital by theGovernment in public sector banks, which was followed by expandingthe capital base with equity participation by the private investors. Theshare of the public sector banks in the aggregate assets of the bankingsector has come down from 90 percent in 1991 to around 75 percent in2004. The share of wholly Government-owned public sector banks (i.e.,where no diversification of ownership has taken place) sharply declinedfrom about 90 percent to 10 percent of aggregate assets of all scheduledcommercial banks during the same period. Diversification of ownershiphas led to greater market accountability and improved efficiency. Sincethe initiation of reforms, infusion of funds by the Government into thepublic sector banks for the purpose of recapitalisation amounted, on acumulative basis, to less than one per cent of India's GDP, a figure muchlower than that for many other countries. Even after accounting for thereduction in the Government's shareholding on account of losses setoff, the current market value of the share capital of the Government inpublic sector banks has increased manifold and as such what wasperceived to be a bail-out of public sector banks by the Governmentseems to be turning out to be a profitable investment for the Government.

3. One of the major objectives of the banking sector reforms has been toenhance efficiency and productivity through competition. Guidelineshave been laid down for the establishment of new banks in the privatesector and foreign banks have been allowed more liberal entry. Since1993, twelve new private sector banks have been set up. As alreadymentioned, an element of private shareholding in public sector bankshas been injected by enabling a reduction in the Governmentshareholding in public sector banks to 51 percent. As a major steptowards enhancing competition in the banking sector, foreign directinvestment in private sector banks is now allowed up to 74 percent,subject to conformity with the guidelines issued from time to time.

4. Consolidation in the banking sector has been another feature of thereform process. This also encompassed the Development FinancialInstitutions (DFIs), which have been providers of long-term financewhile the distinction between short-term and long-term finance providerhas increasingly become blurred over time. The complexities involved



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in harmonising the role and operations of the DFIs were examined andthe RBI enabled the reverse-merger of a large DFI with its commercialbanking subsidiary which is a major initiative towards universal banking.Recently, another large term-lending institution has been converted toa bank. While guidelines for mergers between non-banking financialcompanies and banks were issued some time ago, guidelines for mergersbetween private sector banks have been issued a few days ago. Theprinciples underlying these guidelines would be applicable, asappropriate, to public sector banks also, subject to the provisions ofthe relevant legislation.

5. Impressive institutional and legal reforms have been undertaken inrelation to the banking sector. In 1994, a Board for Financial Supervision(BFS) was constituted comprising select members of the RBI Boardwith a variety of professional expertise to exercise ‘undivided attentionto supervision'. The BFS, which generally meets once a month, providesdirection on a continuing basis on regulatory policies includinggovernance issues and supervisory practices. It also provides directionon supervisory actions in specific cases. The BFS also ensures anintegrated approach to supervision of commercial banks, developmentfinance institutions, non-banking finance companies, urban co-operativebanks and primary dealers. A Board for Regulation and Supervision ofPayment and Settlement Systems (BPSS) has also been recentlyconstituted to prescribe policies relating to the regulation andsupervision of all types of payment and settlement systems, set standardsfor existing and future systems, authorise the payment and settlementsystems and determine criteria for membership to these systems. TheCredit Information Companies (Regulation) Bill, 2004 has been passedby both the Houses of the Parliament while the Government SecuritiesBills, 2004 is under process. Certain amendments are being consideredby the Parliament to enhance the Reserve Bank's regulatory andsupervisory powers. Major amendments relate to the requirement ofprior approval of the RBI for acquisition of five percent or more of sharesof a banking company with a view to ensuring ‘fit and proper' status ofthe significant shareholders, aligning the voting rights with the economicholding and empowering the RBI to supersede the Board of a bankingcompany.

6. There have been a number of measures for enhancing the transparencyand disclosure standards. Illustratively, with a view to enhancing furthertransparency, all cases of penalty imposed by the RBI on banks as alsodirections issued on specific matters, including those arising out ofinspection, are to be placed in the public domain.

7. While the regulatory framework and supervisory practices have almostconverged with the best practices elsewhere in the world, two pointsare noteworthy. First, the minimum capital to risk assets ratio (CRAR)has been kept at nine percent i.e., one percentage point above theinternational norm; and second, the banks are required to maintain aseparate Investment Fluctuation Reserve (IFR) out of profits, towardsinterest rate risk, at five percent of their investment portfolio under thecategories ‘held for trading' and ‘available for sale'. This was prescribedat a time when interest rates were falling and banks were realising largegains out of their treasury activities. Simultaneously, the conservativeaccounting norms did not allow banks to recognise the unrealised gains.Such unrealised gains coupled with the creation of IFR helped in

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cushioning the valuation losses required to be booked when interestrates in the longer tenors have moved up in the last one year or so.

8. The regulatory framework in India, in addition to prescribing prudentialguidelines and encouraging market discipline, is increasingly focusingon ensuring good governance through "fit and proper" owners, directorsand senior managers of the banks. The transfer of a shareholding of fivepercent and above requires acknowledgment from the RBI and suchsignificant shareholders are put through a ‘fit and proper' test. Bankshave also been asked to ensure that the nominated and elected directorsare screened by a nomination committee to satisfy ‘fit and proper' criteria.Directors are also required to sign a covenant indicating their roles andresponsibilities. The RBI has recently issued detailed guidelines onownership and governance in private sector banks emphasisingdiversified ownership.

4.6 An Intr4.6 An Intr4.6 An Intr4.6 An Intr4.6 An Introduction to Fiscal, Monetary and Croduction to Fiscal, Monetary and Croduction to Fiscal, Monetary and Croduction to Fiscal, Monetary and Croduction to Fiscal, Monetary and Credit Policyedit Policyedit Policyedit Policyedit Policy

4.6.1 Fiscal Policy4.6.1 Fiscal Policy4.6.1 Fiscal Policy4.6.1 Fiscal Policy4.6.1 Fiscal Policy

There are three major functions of a fiscal policy:

i) The allocation function of budget policy, that is, the provision for socialgoods. It is a process by which the total resources are divided betweenprivate and social goods and by which the mix of social goods is chosen.

ii) The distribution function of budget policy, that is, distribution of incomeand wealth in accordance with what society considers as ‘fair' or ‘just'distribution.

iii) The stabilisation function of budget policy, that is maintaining highemployment, a reasonable degree of price stability and an appropriaterate of economic growth, with due consideration of its effects on tradeand the balance of payments.

Fiscal ReforFiscal ReforFiscal ReforFiscal ReforFiscal Reforms in Indiams in Indiams in Indiams in Indiams in India

While the move towards fiscal adjustment was discernible in thepronouncements made as a part of long term fiscal policy announced in themid 1980s, a comprehensive fiscal reform programme at the CentralGovernment level was initiated only at the beginning of the 1990s as part ofthe economic adjustment programme initiated in 1991-92.

On the other hand, in the case of states, efforts towards fiscal adjustmentsbegan only in the late 1990s. Fiscal reforms in the States were, inter alia,necessitated by:• Growing fiscal imbalances

• Sluggishness in central transfers resulting in falling tax to GDP ratio.

• Introduction of reform-linked assistance as a part of Medium term Fiscalreform programme on the basis of the recommendations of the EleventhFinance Commission.

• Adjustment programme taken in some of the states, which was linkedto borrowing from multilateral agencies.



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Fiscal reforms at the Centre covered tax reforms, expenditure pruning,restructuring of PSUs and better co-ordination between monetary and fiscalpolicies.

1 .1 .1 .1 .1 . TTTTTax Reforax Reforax Reforax Reforax Reformsmsmsmsms

The blueprint for tax reforms in India was provided by the Tax ReformsCommittee (TRC)(1994) headed by R.J. Chelliah. The following goals wereenunciated by the committee.

i) reduction of rates of all major taxes, viz, customs, income tax, and centralexcise;

ii) widening of bases of all taxes by removing or curtailing exemptions andconcessions, drastic simplifications of the laws and procedures;

iii) Replacement of the existing taxes on domestic production and trade bya Value Added Tax (VAT);

iv) a thorough revamping and modernisation of the administration;

PrPrPrPrProgrogrogrogrogress chart on tax ress chart on tax ress chart on tax ress chart on tax ress chart on tax reforeforeforeforeformsmsmsmsms

In 2002-03, the GOI had set up another committee to review fiscal reformsand suggest an appropriate framework under the chairmanship of Mr. VijayKelkar, Chief Economic Advisor. Regarding the revenue objective, thecommittee postulated that the reforms should be fully or at least, nearlyrevenue neutral in their totality; however, the system should become moreincome elastic. Several of the recommendations of the TRC have beenimplemented while action on some, especially on the administration front, isunder way.

Rationalisation attempted has widened the tax base and improved tax revenuessubstantially during the year 2003-04. The current thinking is of widening theService Tax in the indirect tax portfolio to make a significant contribution tothe revenue stream.

While progress has been made in the area of tax reforms, the tax structurein India still remains very complicated with high rates of taxation withregard to both direct and indirect taxes. In the area of personal incometax, reforms have succeeded in establishing a regime of moderate tax rates,which compare well with other countries. The maximum rate of personalincome tax has come down from 56 percent at the start of the reform to 30percent. The rate of corporation tax on Indian companies, which variedfrom 51.75 percent to 57.5 percent in 1991-92, depending upon the natureof the company, has been unified and reduced to 35 percent.

However, Corporate tax rates are still quite high in India despite the reductionsannounced in the Union budget for foreign companies. As per the GCR 2001-02, India ranked 50th out of a total of 75 countries ranked in the GCR oncorporate income tax rates in 2001.

Experience in other countries shows that a shift to VAT would help improverevenue generation but this is not possible in India due to federal pressures.

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2. Public Expenditure2. Public Expenditure2. Public Expenditure2. Public Expenditure2. Public Expenditure

There are four broad categories of public expenditure in India. These aredefence, education, health, employment and wages, and subsidies.

In the four and a half decades of economic planning in India, the share ofGovernment expenditure in GDP has increased from 10 percent to about 35percent. The growth has been more or less uniform in all decades. In theeighties, in fact, there was no noticeable acceleration. Between developmentand non-development expenditure, the former has increased relatively fasterthan the latter. However the distinction between development and non-development expenditure as used in of ficial publications has no specialsignificance in economics, except in a broad sense. The share of Governmentexpenditure in GDP in India is five percentage points above the average of thelow income countries.

i) Defence expenditure: Since Independence the defence budget of Indiahas accounted between 1 to 4 percent of GDP and between 10 to 16percent of total government expenditure. However, the total defenceexpenditure in India as a proportion of either GDP or total Governmentexpenditure would be much lower than that of some of our principaladversaries like Pakistan and China.

ii) Education and Health expenditure: The government in India spendsrelatively more on education than on health. Expenditures on educationand health vary widely between the states with southern states likeKerala spending relatively more on education.

iii) Subsidy: Unfortunately, the volume of subsidies given has beenaccelerating with time mainly because of vested political interests.Overprotection through subsidies has prevented the potentialcompetitiveness of the system from being realised. Beyond a point,however, the fiscal system cannot absorb such subsidies.

iv) Internal public debt: Privatisation of public enterprises could raisesignificant funds as a percent of GDP, which could be used to buy downthe public debt. Not only would the stock of debt itself be reduced, butalso the interest costs of servicing the debt would surely decline as thedebt stock itself was brought under control. Interest payments aloneaccounted for as high as 4.9 percent of GDP in 2001-02.

Balance sheet of public expenditureBalance sheet of public expenditureBalance sheet of public expenditureBalance sheet of public expenditureBalance sheet of public expenditure

i) While presenting the Budget for 1999-2000, the Hon'ble Minister forFinance had observed that the high rate of growth of non-developmentalexpenditure by the Government is a growing and critical source ofconcern. He had further observed that the most effective and lastingsolution to this problem is to begin the process of downsizing theGovernment. While proposing certain initiatives in this regard, he hadalso indicated that in order to carry out the process of downsizing in asystematic way towards reducing the role and the administrativestructure of the Government, an Expenditure Reforms Commissionheaded by an eminent and experienced person would be constituted.



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Accordingly, an ERC was constituted and by now it has given ten reportson rationalising government expenditure.

ii) While it will be necessary to reduce government expenditure by cuttingnon-essential expenditure, at the same time, it is important to increasegovernment expenditure in important areas. The government needs togive greater attention to, and provide greater resources for, educationand health. In the sphere of raising literacy levels and providing greateraccess to basic health services, the state governments are required toplay a much more enlarged role.

4.6.2 Monetary and Cr4.6.2 Monetary and Cr4.6.2 Monetary and Cr4.6.2 Monetary and Cr4.6.2 Monetary and Credit Policyedit Policyedit Policyedit Policyedit Policy

The major instruments of a country's monetary policy are:a) Bank Rateb) Liquidity Reserve Ratio,c) Open Market Operations

By operating on these three parameters, the central Bank of a country controlsthe money supply and thereby stability of prices. Liquidity ratios in particular,Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) help in providingfunds to the IDBI and its downstream development financial institutions (IFCI,ICICI, SFCs, etc.) at lower rates of interest for term lending.

Outlook of the Monetary and Credit Policy for 2005

Projected Real GDP Growth Rate Of 6.5 To 7 Percent.Projected Real GDP Growth Rate Of 6.5 To 7 Percent.Projected Real GDP Growth Rate Of 6.5 To 7 Percent.Projected Real GDP Growth Rate Of 6.5 To 7 Percent.Projected Real GDP Growth Rate Of 6.5 To 7 Percent.

The RBI has an optimistic outlook on the Indian economy and expects toachieve 6.5-7.0 percent real GDP growth during FY05 on account of sustainedgrowth in the industrial sector, normal monsoon and good performance ofexports. It has also revised the GDP growth for the FY04 at 8.1 percent asagainst 4 percent in FY03.

The target seems achievable in the current scenario considering the growthrates that have been witnessed across various sectors and industries. Withthe global demand for commodities picking up, experts expect strong growthto continue in the industry and services sector. The targeted GDP growthseems to be achievable.

InflationInflationInflationInflationInflation

The RBI plans to keep inflation stable at around 5 percent in FY05. The RBIforesees rising global crude oil prices and large liquidity in markets as majorconcerns.

The global crude oil prices are at their historic highs. This will have asignificant impact on inflation. The recent development on the political frontindicates stable fuel prices in the country. But this is unlikely to continue forlong because the subsidy provided by the Government of India will increasethe fiscal deficit. It is believed that inflation will spur once fuel prices arehiked in the country.

Interest RatesInterest RatesInterest RatesInterest RatesInterest Rates

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The RBI has indicated stable interest rates in the current scenario. Benchmarkinterest rate such as Bank Rate, Cash Reserve Ratio (CRR) and Repo Rate arekept unchanged at 6 percent, 4.5 percent and 4.5 percent respectively. Clearly,the policy expects to maintain the growth momentum, stability in prices andmacroeconomic activities.

The RBI's stance has changed from a soft bias to neutral in the currentcredit policy. This could be an indicator for higher interest rate goingforward. Globally, interest rates are on a rising spree, which is likely tohave a significant impact on Indian interest rates. Developing Asiancountries like Philippines and Indonesia have a much higher interest ratevis-a-vis India. Even the chairman of the US Federal Reserve, Mr. AllanGreenspan has stressed strongly on hardening of the US interest rate.These global forces will also have a significant impact on Indian interestrates in the long-term.

ForForForForForex Reservesex Reservesex Reservesex Reservesex Reserves

The RBI has maintained that, “building a higher level of foreign exchangereserves taking into account anticipated current account deficit and ‘liquidityat risk' arising from capital movement has been a top priority”. The currentaccount of balance of payments remained in surplus consecutively duringFY03 and FY04 and expects a similar trend in FY05 as well.

Emergence of the Left Parties as a strong group in the new government isexpected to annoy overseas investors and may cap Foreign Direct Investmentin India. However, the country is sitting comfortably on a huge foreign kittythat currently stands at a whopping US$145 bn. as on September 2005. Theplight of foreign money going out of Indian shores will have a negative impacton rupee value.

CrCrCrCrCredit Ofedit Ofedit Ofedit Ofedit Of ftakeftakeftakeftakeftake

The RBI has estimated a strong credit growth of 16-16.5 percent during FY05.

Non-food credit accounts for 90 percent of bank credit. The current Monetaryand Credit Policy has pegged non-food credit growth at 17.6 percent duringFY04, piggybacking a strong 18.6 percent increase in housing and retail sectorlending. The surge in retail growth was mainly on account of lower prices andavailability of cheap money.


The wave of financial reforms introduced many new kinds of instruments inthe money and capital markets. This gave a lot of momentum to funds transferand hence impacted the profitability of enterprises. Along with this, reformswere carried out in the primary and secondary markets. The buy backordinance was one major step to give a boost and also the required security toprimary and secondary markets. Banking sector reforms were carried out inorder to improve the profitability of banks and also to tune them towardstheir new found role of competing in an atmosphere of competition.



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Fiscal reforms were carried out to remove impediments to business andimprove the efficiency of governance. Taxation was sought to be revamped ina major way along with rationalisation of expenditure. Thus a two prongedstrategy aiming at both fiscal and monetary policy tools sought to stabiliseinflation, improve the accountability of public expenditure and increase growthwas adopted.


1. The fundamental function of any monetary and financial system, nomatter how simple or complex, is to promote efficiency in the processof ___________ in real goods and services.

2. The volatility in the call money rates has also been the result of the_________ mismatches of some large banks and their over reliance oncall money market for liquidity management.

3. Under a repo transaction, a holder of securities sells them to an investor,with an agreement to _______ at a predetermined __________ and rate.

4. The introduction of Commercial Paper (CP) in January 1990 as anadditional money market instrument was the first step towards_____ of commercial banks advance into marketable instruments.

5. ___ Bond is an instrument whose periodic interest /dividend rates areindexed to some reference index such as Treasury Bills etc.

6. The major objective of the buyback ordinance was to _____the capitalmarkets and protect companies from _____takeover bids.

7. The blueprint for tax reforms in India was provided by the Tax ReformsCommittee (1994) headed by __________.

8. Since Independence the _____________ budget of India has accountedbetween 1 to 4 percent of GDP and between 10 to 16 percent of totalgovernment expenditure.

9. The RBI has an optimistic outlook on the Indian economy and expectsto achieve 6.5-7.0 percent real GDP growth during FY05 on account ofsustained growth in the __________ sector, normal monsoon and goodperformance of exports.

10. In the four and a half decades of economic planning in India, the shareof Government expenditure in GDP has increased from ________ percentto about _______ percent.

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Chapter VChapter VChapter VChapter VChapter VThe Political SystemThe Political SystemThe Political SystemThe Political SystemThe Political System

LearLearLearLearLearning Objectivesning Objectivesning Objectivesning Objectivesning ObjectivesReading this chapter would enable you to understand

• The origin of democracy in the world• Parliamentary and presidential forms of democracy• Direct and Indirect forms of democracies• A peep into the constitutional reforms of India• A peep into judicial reforms in India

ContentsContentsContentsContentsContents5.1 Evolution and History of Democracy5.2 Parliamentary and Presidential Forms of Democracies5.3 Direct and Indirect Forms of Democracies5.4 Direct Democracy: An Experience5.5 Constitutional Reforms

5.5.1 Controversy Regarding Constitutional Reforms5.6 Judicial Reforms in India


5.1 Evolution and History of Democracy5.1 Evolution and History of Democracy5.1 Evolution and History of Democracy5.1 Evolution and History of Democracy5.1 Evolution and History of Democracy

The word democracy was invented in Athens, to describe the revolutionarysystem of government. The Athenian democracy provides an example of thefirst democracy, and one of the most important in ancient times. By virtue ofthe fact that democracy has evolved over time (and is still continuing to insome respects), there are a few key dif ferences between the Atheniandemocracy and democracies which exist today.

First, the Athenian democracy's principle was selection by lot. An assemblyof all male citizens in Athens participated in decision-making directly (comparedirect democracy). Elected officials did not determine decisions, the ancientsdid not consider such a system a democracy but an oligarchy. Democracyhad (and for some people still has) the meaning of equality in decisions andof elections in decisions, not the election of persons charged to decide (seerepresentative democracy).

One of the reasons why this system was feasible was because of the relativelysmall population of Athens-only 300,000 people. Additionally, there were severerestrictions that dictated who had the right to participate as a citizen, whichexcluded over half of the total population. Citizenship rights were limitedstrictly to male adult citizens of Athens. Therefore, women, children, slaves,foreigners, resident alien groups that together made up a majority of the city'spopulation had no rights to participate in the assembly. On the other hand,modern democracy has its own limitations in comparison to the ancient model,as for most citizens, participation is limited to voting. Voting itself is usually

The Political System


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limited to once every several years, and voters merely get to choose theirrepresentatives in the legislative or executive branches (with the exceptionof occasional referendums).

After the fall of Athens, the Periclean democracy was restored in less than ayear. However, even though Athens had previously encouraged democracy inher allies and dependent states; she was no longer in a position to do so.Democracy declined.

In comparison, although the Roman republic elected its leaders, and passedits laws by popular assemblies, the system had been effectively gerrymanderedin the interest of the rich and well-born. The Romans favoured similar systemsin the states they controlled.

5.2 Parliamentary and Pr5.2 Parliamentary and Pr5.2 Parliamentary and Pr5.2 Parliamentary and Pr5.2 Parliamentary and Presidential Foresidential Foresidential Foresidential Foresidential Forms of Democraciesms of Democraciesms of Democraciesms of Democraciesms of Democracies

People do not exercise power directly in representative forms of democracysuch as the parliamentary and presidential systems of government. Instead,power is transferred to state bodies, which, in turn, perform the acts of statein the name of the people. The British parliament in London is regarded asthe home of the most common type of constitutional system - theparliamentary system of government. While most other western Europeancountries have this form of political system, democracy in the United Statesis based on a presidential system.

When making a comparison between the presidential and parliamentarysystems of government, the following formal differences can be noted:

• The American president and the members of Congress are elected duringseparate elections. In a parliamentary system of government, however,the government and members of parliament are elected in a singleelection, even when the possibility of differing coalitions exists.

• Parliament elects the government in a parliamentary system; theparliament also has the power to vote the government out of office.Under normal circumstances the American Congress does not havethe power to remove the president from office. The Congress cannotforce the president out of office, for instance, because it holds a differentopinion or because the ruling majority in Congress has changed. Onlyif the president commits a criminal of fence, can the House ofRepresentatives and Congress force the president out of office followinga vote on impeachment and a two-thirds-majority vote respectively.

• This means, however, that the president lacks an important means ofkeeping discipline in Congress. The president is unable - unlike theBritish prime minister - to dissolve parliament and order new elections.

• While the British prime minister - in the the classic parliamentarysystem of government - is also a member of parliament, the Americanconstitution demands incompatibility between the government officeand parliamentary mandate. The president and the members of his/her government - with the exception of the vice-president, who is alsothe chairman of Congress - cannot be members of Congress.

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• The job of the executive is split in a parliamentary system of government.Representative duties of state are performed by the state president ormonarch. The real power of government is reserved for the head ofgovernment, that is, the prime minister, chancellor or premier. In theUnited States, in contrast, the president is both head of state and headof government.

• The president of the United States is formally - but not in constitutionalreality - prevented from introducing legislative initiatives. The presidentis only permitted to veto legislative initiatives from the Congress. Thepresident's veto, however, can be overruled with a two-thirds-majorityvote in both houses of Congress. In a parliamentary system thegovernment may introduce legislation and sometimes has an absoluteright to veto expenditure laws.

5.3 Dir5.3 Dir5.3 Dir5.3 Dir5.3 Direct and Indirect and Indirect and Indirect and Indirect and Indirect Forect Forect Forect Forect Forms of Democraciesms of Democraciesms of Democraciesms of Democraciesms of Democracies

A Direct democracy is one which gives provisions for recall and plebiscite. Itmeans that the elected representative can be recalled any time the electoratefeels that he or she is not up to the mark. Also, all important issues aresettled through the process of plebiscite or referendum. However, this is acostly approach and not possible in large economies or countries. Most ofthe countries have the Indirect kind of democracy. India, though has introducedthe system of recall at its Panchayati raj level.

5.4 Direct Democracy: An Experience5.4 Direct Democracy: An Experience5.4 Direct Democracy: An Experience5.4 Direct Democracy: An Experience5.4 Direct Democracy: An Experience

Switzerland is often seen as an example of direct democracy. On taking acloser look, however, this claim cannot be maintained; and this despitethe fact that direct democracy does play a large role, especially in theform of the canton referendums. The constitution of the SwissConfederation was written in 1848 (revised in 1874) and recognises theFederal Assembly as the highest-ranking state body. The Assembly is madeup of the National Assembly (lower house) and the Council of States(representatives of the cantons). The Federal Council (Budesrat) - thegovernment - is elected by the Federal Assembly for a four-year term. Itsposition vis-à-vis the Federal Assembly is not very strong. The Swissconstitution awards the greatest importance to parliament. In constitutionalreality, however, and mirroring other democratic systems closely, thegovernment has developed into the most important of the three statepowers. Because the Federal Council has no powers to dissolve the FederalAssembly and the Federal Assembly cannot vote the government out ofof fice, the Federal Council, whose members remain in of fice for anextended period, actually has a strong position in constitutional reality.Control over both parliament and the government is the job of thoseentitled to vote. The electorate not only chooses its representatives butalso decides important issues by means of referenda, an integral part ofthe Swiss government. Constitutional amendments may be initiated by apetition of 50,000 voters and must be ratified by referenda. Federal legislationmay also be made subject to referenda. If the representative elements ofthe Swiss constitution are strong, the plebiscite elements are only slightlyweaker.



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Unlike Germany's experience with direct democracy between 1918 and 1933during a period referred to as the Weimar Republic, elements of directdemocracy in the Swiss constitution have proved sustainable. These directelements in the Swiss constitution have become long-lasting rather thanleading to revolution or chaos. The belief that all democratic power is derivedfrom the people - "pouvoir constituant" - has been realised most sharply inSwitzerland. The Swiss electorate has more direct political influence and morepossibilities open to it for controlling government than any other democracy.Nonetheless, in order for the government and political system to workproperly, representative bodies are essential.

5.5 Constitutional Refor5.5 Constitutional Refor5.5 Constitutional Refor5.5 Constitutional Refor5.5 Constitutional Reformsmsmsmsms

In February 2000, the Union government of India created a NationalCommission to review the working of its Constitution, which has seen seventy-six amendments in five decades of its life compared to twenty-one amendmentsof the American Constitution since 1787. The objective was to review theConstitution “in the light of the experience of the past 50 years” and to developrecommendations for changes that can meet the requirements of an “efficient,smooth and effective system of governance and socioeconomic developmentof a modern India.”

The commission was supposed to review the working of the constitution inthe following areas:1. Parliamentary democracy2. Electoral reforms3. Centre-state relations4. Enlargement of Fundamental rights5. Effectuation of fundamental duties of citizens6. Directive Principles of State Policy, and7. Socio-economic Development

5.5.1 Contr5.5.1 Contr5.5.1 Contr5.5.1 Contr5.5.1 Controversy Regaroversy Regaroversy Regaroversy Regaroversy Regarding Constitutional Refording Constitutional Refording Constitutional Refording Constitutional Refording Constitutional Reformsmsmsmsms

• For more than a decade, the BJP has been advocating radical changesin India's constitutional framework with Lal Krishna Advani, the thenUnion Home Minister, leading the campaign for a switch-over to apresidential system of governance. According to him, the Americantype of Presidency would be more ef ficient in India's political milieuthan the Westminster model of parliamentary democracy, which thecountry has been following since it became independent in 1947.Advani points out that while free and fair elections are fundamentalto democracy, the doctrine of “basic structure” of the Constitutiondoes not bind India to the existing parliamentary scheme.

• Advani was vocal in demanding a fixed term of five years for Parliamentto offset the legacy of rickety coalitions. He also wanted that Parliamentshould admit a motion of no confidence against an existing governmentonly if the mover, as in Germany, can demonstrate the legislative strengthto provide an alternative.

• The 1991 election manifesto of his party also promised to abrogate

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Article 370 of the Constitution that confers limited autonomy to Jammuand Kashmir, and to modify Article 30, which permits India's minoritycommunities to run their own educational and cultural institutions.

As is evident , the aforementioned reforms are reflections of the idealsof a particular political party. As such they have created a controversyof sorts. In fact, the need for reforms is felt only by a few political partiesand the essence of this need is not all pervasive. The Congress is of theopinion that there is no need for reviewing the constitution as the processof amendment allows much flexibility to the executive and the legislature.

Some of the other suggestions made for reforms are:• Electoral reforms are urgent. India should switch over to at least a partial

proportional representation in Parliament. That would ensure stability,also a more genuine political representation. At least 20 percent of thelegislators should be elected indirectly from universities and otherprofessional bodies to improve the quality of legislative work. TheConstitution should be amended to permit the leader of the governmentto take Ministers on his Council from outside Parliament, as in Japan,without impairing the principle of collective responsibility to thelegislature. The legislators, on nomination to the Council of Ministers,should resign from the houses to which they are elected, as in France,so that they do not waste their time and resources on politicking andpandering to local constituencies.

• Article 356 allows the President of India to assume all the powers of theState governments through the office of the Governor, and to placetheir legislatures under the authority of Parliament. This he can do onthe satisfaction that a State government is unable to function inaccordance with the provisions of the Constitution.

• In 1951, Punjab became the first victim. The Chief Minister Bhargavadid not favour Nehru's policy to suppress the Sikh agitation for alinguistic reorganisation of Punjab. He was forced to resign. President'srule was proclaimed to keep the State Legislative Assembly in suspendedanimation, while the Union government groomed an alternative leader.President Rajinder Prasad was unhappy. He told Nehru that the situationin Punjab did not justify the use of Article 356 and the intervention set“a very bad and a very wrong precedent…”Nehru was not impressed.

The next State to suffer the abuse was Kerala in 1959, when it cameunder the Communist Party's government with EMS Namboodaripadas the Chief Minister. The pretext was the “deterioration of publicorder”, a deterioration engineered by the Union government.

From 1967 to 1969, seven State governments run by political partiesinimical to the Congress government at the Centre were dismissed.Between 1970 and 1974, nineteen State governments were so subverted.During Indira Gandhi's experiment with dictatorship from June 1975 toMarch 1977, the State government of Tamil Nadu was toppled on theground that it did not implement the Central directive to censure thepress and to detain members of the opposition political parties. In all,the Union has used Article 356 more than 120 times to interfere in theaffairs of the States.

Because of such abuse of the aforementioned article, nearly all the states feelthat Article 356 be scrapped.



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In Part XII of the Constitution, the Centre reserved for itself the power toimpose the most remunerative and elastic of taxes by arguing that it neededfinances to fulfil its responsibilities for defence, foreign relations, etc.Moribund resources, like land revenue, were left to the provinces. Inevitably,their tax base began to shrink rapidly. Of the combined aggregate resourcesduring the period 1951-85, the Union government raised 71.5 per cent andthe States only 28.5 percent. The Union's resources were squandered ondefence, interest payments and discharging other non-productive liabilities.With all its talk about planning and the efficiency of central control, nearlyall public sector enterprises continuously incurred staggering losses.Economic development in the States was further stunted by the Centralmonopoly of key industries although Entry 24 in the States' List of theConstitution placed industry as a State Subject. Through the IndustrialPolicy Resolution of 1948, the Union assumed monopoly over key defenceindustries. A revision in the Industrial Policy Resolution of 1955 transferredthe remaining important sectors including oil, electricity, machine tools,fertilisers and dr ugs from the States to the Centre. The IndustriesDevelopment and Regulation Act 1951 took further 37 items away. Thismeant that the Union alone could grant licences, regulate production anddistribution of these items. The Act, amended ten times since then, places171 items divided into 38 different categories, under Central control. Allthis has created much heartburn among federal units and therefore all ofthem feel that there is need for reforms in this area.

ConclusionConclusionConclusionConclusionConclusion

Today, India's economy seems to have moved irreversibly in the direction ofglobalisation and open market even as the vast masses of people remain trappedin abysmal levels of poverty, illiteracy, disparities of regional development,the regime of controls, and the absence of accountability. It is widelyacknowledged that globalisation is a double-edged process. It has the potentialto provide opportunities to the local democracy of citizenship, throughdecentralisation of information and technology, and by creating local units ofhuman associations to link up with planetary processes. But for this to happen,the arrangements of governance have to harmonise with the heterogeneousand autonomous character of the initiatives. The structures of authority haveto give way, vertically and horizontally, to the sovereignty of politicalengagement that alone can make the community of experts conscious of localneeds. Decentralisation of political power downwards, consolidation ofinternational networks for co-operation in the fields of knowledge and diffusionof responsibility to the civil society are the preconditions for the process ofglobalisation to be beneficial to all. International competitiveness that doesnot care for the strengthening of community infrastructure, local employmentand environment will destroy what little meaning to democracy there remainsin a country that has joined the race very late.

5.6 Judicial Refor5.6 Judicial Refor5.6 Judicial Refor5.6 Judicial Refor5.6 Judicial Reforms in Indiams in Indiams in Indiams in Indiams in India

The Indian Judicial system is badly in need of reforms. The statutes, laws andby- laws are archaic and based on ancient principles of law. It is commonbelief that law has not kept pace with the changes in society the last century.

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Urgent Judicial reforms are warranted in the following areas:

1. Judicial appointments and accountability mechanisms - the prevailingprocess for judicial appointments and regulations in India should beevaluated in the light of the experience over the past 50 years. Particularemphasis should be on countries such as UK, US, Germany, Franceand newly emerging democracies such as South Africa. Experiences ineach of these countries and the pros and cons of their systems shouldbe critically analysed.

2. The Speedy Justice Mechanism and local justice models - The bestpractices in speedy justice models (such as the small claims courts inthe US) in various countries should be studied, compared, criticallyanalysed and documented. Based on the outcome of the study, a set ofbest practices suitable to Indian conditions should be recommended.

3. Crime Investigation Mechanisms - mechanisms to reform the crimeinvestigation machinery in India in order to insulate them from politicalcontrol and restore public faith in the criminal justice system and ruleof law.

4. Justice Systems : In reviewing Justice systems, particular emphasisshould be given to contrasting the two leading judicial schools of practicei.e. Adversorial vs. Inquisitorial systems of justice. The pros and consof the various judicial systems should be critically analysed. Keeping inview global practices and the Indian experience of the past 50 years, thereview should also come up with recommendations to make appropriatechanges to the law in India.


Democracy is a form of government which belongs to the people, being electedby the people and for the people. USA is an example of the presidential formof democracy whereas UK is an example of the parliamentary form ofdemocracy. Direct democracy is one which has a system of recall. Switzerlandis an example of Direct Democracy. India is basically an indirect andparliamentary form of democracy. In India, what is supreme is the constitution.Unlike UK where parliament is the supreme or USA where Judiciary is thesupreme, Indian constitution makers thought it was better to keep theconstitution the supreme.

This Indian constitution is in dire need of reforms. There have beencontroversies regarding different aspects of reforms. There has been anadvocacy to move towards a presidential system of governance. Also, certainarticles and provisions like article 356 have been sought to be changed.Concomitant to constitution reforms are the judicial reforms which are yetmuch warranted in India.


1. The word democracy was invented in _______, to describe therevolutionary system of government used. The Athenian democracyprovides an example of the first democracy.



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2. The British parliament in London is regarded as the home of the mostcommon type of constitutional system - the __________ system ofgovernment.

3. A Direct democracy is one which gives provisions for _________ and_________.

4. Article 356 allows the President of India to assume all the powers of theState governments through the office of the Governor, and to placetheir legislatures under the authority of __________.

5. In all, the Union has used Article 356 more than _________ times tointerfere in the affairs of the States.

6. In Part ________ of the Constitution, the Centre reserved for itself thepower to impose the most remunerative and elastic of taxes by arguingthat it needed finances to fulfil its responsibilities for defence, foreignrelations, etc.

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Chapter VIChapter VIChapter VIChapter VIChapter VIInterInterInterInterInternational Linkagesnational Linkagesnational Linkagesnational Linkagesnational Linkages

LearLearLearLearLearning Objectivesning Objectivesning Objectivesning Objectivesning ObjectivesReading this chapter would enable you to understand• Transformation of GATT into WTO• Nature of WTO• Principles of WTO• Agreements under WTO• Agriculture and WTO• TRIPS• TRIMS• Subsidies• Government Procurement• Dispute settlement• An understanding of the Foreign Exchange Management Act• An understanding of the Global Competitive Index• An understanding of the Corruption Perception Index• An understanding of the Index of Economic Freedom

ContentsContentsContentsContentsContents6.1 GATT and WTO

6.1.1 WTO: A negotiating Forum6.1.2 WTO: A system of rules6.1.3 WTO: A dispute settlement body6.1.4 Principles of WTO6.1.5 Agreements under WTO

6.2 Agriculture and WTO6.3 Agreement on Sanitary and Phytosanitary Measures6.4 Agreement on Technical Barriers to Trade6.5 Agreement on Textiles and Clothing6.6 General Agreement on Trade in Services6.7 General Agreement on Trade Related Aspects of Intellectual Property Rights

6.7.1 Enforcement of TRIPS6.8 Agreement on Subsidies and Countervailing Measures6.9 Agreement on Safeguards from Imports6.10 Agreement on Trade Related Investment Measures6.11 Agreement on Government Procurement6.12 Settlement of Disputes6.13 Imposition of Penalties6.14 Foreign Exchange Management Act6.15 Global Competitive Index6.16 Corruption Perception Index6.17 Index of Economic Freedom


International Linkages


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6.1 GATT and WTO6.1 GATT and WTO6.1 GATT and WTO6.1 GATT and WTO6.1 GATT and WTO

GATT(General Agreement on Tariffs and Trade) was an agreement on tariffsand its primary concern had been negotiations on matters related to tradepolicy and tariff restrictions. The Eighth Round, i.e., the Uruguay Round, wasa break from the past with widening scope for negotiations. Four new areaswere included; Intellectual Property rights, Foreign Investment Policies,Agriculture and Services. The latest Uruguay Round of Multilateral negotiationsbrought in some major trade reforms. The General Agreement on Trade andTariff has culminated into the World Trade Organisation.

The WTO (World Trade Organisation) came into being as a result of theUruguay round of negotiations (1986-94) on 1st January 1995 and its headoffice is located at Geneva. As of 4th April, 2003, 146 countries were members.

6.1.1 WTO: A negotiating For6.1.1 WTO: A negotiating For6.1.1 WTO: A negotiating For6.1.1 WTO: A negotiating For6.1.1 WTO: A negotiating For umumumumum

Essentially, the WTO is a place where member governments try to sort outthe trade problems they face with each other. The first step is to talk. TheWTO was born out of negotiations, and everything the WTO does is the resultof negotiations.

6.1.2 WTO: A system of r6.1.2 WTO: A system of r6.1.2 WTO: A system of r6.1.2 WTO: A system of r6.1.2 WTO: A system of r ulesulesulesulesules

The system's overriding purpose is to help trade flow as freely as possible solong as there are no undesirable side-effects. That partly means removingobstacles. It also means ensuring that individuals, companies and governmentsknow what the trade rules are around the world, and giving them the confidencethat there will be no sudden changes of policy. In other words, the rules haveto be “transparent” and predictable.

6.1.3 WTO: A dispute settlement body6.1.3 WTO: A dispute settlement body6.1.3 WTO: A dispute settlement body6.1.3 WTO: A dispute settlement body6.1.3 WTO: A dispute settlement body

Trade relations often involve conflicting interests. Agreements, including thosepainstakingly negotiated in the WTO system, often need interpreting. Themost harmonious way to settle these differences is through some neutralprocedure based on an agreed legal foundation. That is the purpose behindthe dispute settlement process written in the WTO agreements.

6.1.4 Principles of WTO6.1.4 Principles of WTO6.1.4 Principles of WTO6.1.4 Principles of WTO6.1.4 Principles of WTO

1 .1 .1 .1 .1 . Most-favoured-nation (MFN): Most-favoured-nation (MFN): Most-favoured-nation (MFN): Most-favoured-nation (MFN): Most-favoured-nation (MFN): treating other people equally - UnderWTO agreements, countries cannot normally discriminate between theirtrading partners. Grant someone a special favour (such as a lowercustoms duty rate for one of their products) and you have to do thesame for all other WTO members.

2 .2 .2 .2 .2 . National trNational trNational trNational trNational treatment: eatment: eatment: eatment: eatment: Treating foreigners and locals equally- Importedand locally-produced goods should be treated equally at least after theforeign goods have entered the market. The same should apply to foreignand domestic services, and to foreign and local trademarks, copyrightsand patents.

3 .3 .3 .3 .3 . FrFrFrFrFreer Teer Teer Teer Teer Trade thrrade thrrade thrrade thrrade through negotiations: ough negotiations: ough negotiations: ough negotiations: ough negotiations: Lowering trade barriers is one

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of the most obvious means of encouraging trade. The barriers concernedinclude customs duties (or tariffs) and measures such as import bansor quotas that restrict quantities selectively. From time to time otherissues such as red tape and exchange rate policies have also beendiscussed.

4 .4 .4 .4 .4 . Predictability through commitment and transparency: Predictability through commitment and transparency: Predictability through commitment and transparency: Predictability through commitment and transparency: Predictability through commitment and transparency: Sometimes,promising not to raise a trade barrier can be as important as loweringone, because the promise gives businesses a clearer view of their futureopportunities. With stability and predictability, investment is encouraged,jobs are created and consumers can fully enjoy the benefits of competitionchoice and lower prices. The multilateral trading system is an attemptby governments to make the business environment stable andpredictable.

5 .5 .5 .5 .5 . Encouraging development and economic rEncouraging development and economic rEncouraging development and economic rEncouraging development and economic rEncouraging development and economic reforeforeforeforeform: m: m: m: m: Over threequarters of WTO members are developing countries and countries intransition to market economies. During the seven and a half years ofthe Uruguay Round, over 60 of these countries implemented tradeliberalisation programmes autonomously. At the same time, developingcountries and transition economies were much more active andinfluential in the Uruguay Round negotiations than in any previous round,and they are even more so in the current Doha Development Agenda.

6.1.5 Agreements under WTO6.1.5 Agreements under WTO6.1.5 Agreements under WTO6.1.5 Agreements under WTO6.1.5 Agreements under WTO

The table of contents of “The Results of the Uruguay Round of MultilateralTrade Negotiations: The Legal Texts” is a daunting list of about 60 agreements,annexes, decisions and understandings. In fact, the agreements fall into asimple structure with six main parts: an umbrella agreement (the AgreementEstablishing the WTO); agreements for each of the three broad areas of tradethat the WTO covers (goods, services and intellectual property); disputesettlement; and reviews of governments' trade policies.

• They start with brThey start with brThey start with brThey start with brThey start with broad principles:oad principles:oad principles:oad principles:oad principles: the General Agreement on Tariffsand Trade (GATT) (for goods), and the General Agreement on Trade inServices (GATS). (The third area, Trade-Related Aspects of IntellectualProperty Rights (TRIPS), also falls into this category although at presentit has no additional parts.)

• extra agreements and annexes dealing with the special requirements ofspecific sectors or issues.

• schedules (or lists) of commitments made by individual countriesallowing specific foreign products or service-providers access to theirmarkets. For GATT, these take the form of binding commitments ontariffs for goods in general, and combinations of tariffs and quotas forsome agricultural goods. For GATT, the commitments state how muchaccess foreign service providers are allowed for specific sectors, andthey include lists of types of services where individual countries saythey are not applying the “most-favoured-nation” principle of non-discrimination.

6.2 Agriculture and WTO6.2 Agriculture and WTO6.2 Agriculture and WTO6.2 Agriculture and WTO6.2 Agriculture and WTO



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The original GATT did apply to agricultural trade, but it contained loopholes.For example, it allowed countries to use some non-tariff measures such asimport quotas, and to subsidise. Agricultural trade became highly distorted,especially with the use of export subsidies which would not normally havebeen allowed for industrial products. The Uruguay Round produced the firstmultilateral agreement dedicated to the sector. These were launched in 2000,as required by the Agriculture Agreement.

The new rules and commitments under the Agriculture Agreement are:

• Market Access -Market Access -Market Access -Market Access -Market Access - The new rule for market access in agriculturalproducts is “tariffs only”. Before the Uruguay Round, some agriculturalimports were restricted by quotas and other non-tariff measures. Thesehave been replaced by tariffs that provide more-or-less equivalent levelsof protection if the previous policy meant domestic prices were 75percent higher than world prices, then the new tariff could be around75 percent.

• Domestic Support - Domestic Support - Domestic Support - Domestic Support - Domestic Support - Green, Amber and Blue Box categoriesi) Amber box - i) Amber box - i) Amber box - i) Amber box - i) Amber box - Domestic policies that do have a direct ef fect onproduction and trade have to be cut back. WTO members calculatedhow much support of this kind they were providing per year to theagricultural sector (using calculations known as “total aggregatemeasurement of support” or “Total AMS”) in the base years of 1986-88.Developed countries agreed to reduce these figures by 20 percent oversix years starting in 1995. Developing countries agreed to make 13 percentcuts over 10 years. Least-developed countries do not need to make anycuts. This category of domestic support is sometimes called the “amberbox”, a reference to the amber colour of traffic lights, which means“slow down”.ii) Green box -ii) Green box -ii) Green box -ii) Green box -ii) Green box - Measures with minimal impact on trade can be usedfreely they are in a “green box”. They include government servicessuch as research, disease control, infrastructure and food security. Theyalso include payments made directly to farmers that do not stimulateproduction, such as certain forms of direct income support, assistanceto help farmers restructure agriculture, and direct payments underenvironmental and regional assistance programmes.iii) Blue box -iii) Blue box -iii) Blue box -iii) Blue box -iii) Blue box - Also permitted, are certain direct payments to farmerswhere the farmers are required to limit production (called “blue box”measures), certain government assistance programmes to encourageagricultural and rural development in developing countries, and othersupport on a small scale when compared with the total value of theproduct or products supported (5 percent or less in the case of developedcountries and 10 percent or less for developing countries).

• Export SubsidiesExport SubsidiesExport SubsidiesExport SubsidiesExport SubsidiesThe Agriculture Agreement prohibits export subsidies on agriculturalproducts unless the subsidies are specified in a member's lists ofcommitments. Where they are listed, the agreement requires WTOmembers to cut both the amount of money they spend on exportsubsidies and the quantities of exports that receive subsidies. Takingaverages for 1986-90 as the base level, developed countries agreed to cutthe value of export subsidies by 36 percent over the six years starting in1995 (24 percent over 10 years for developing countries). Developed

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countries also agreed to reduce the quantities of subsidised exports by21percent over six years (14 percent over 10 years for developingcountries). Least-developed countries do not need to make any cuts.

• Least Developed Countries dependant on food importsLeast Developed Countries dependant on food importsLeast Developed Countries dependant on food importsLeast Developed Countries dependant on food importsLeast Developed Countries dependant on food importsUnder the Agriculture Agreement, WTO members have to reduce theirsubsidised exports. But some importing countries depend on suppliesof cheap, subsidised food from major industrialised nations. They includesome of the poorest countries, and although their farming sectors mightreceive a boost from higher prices due to reduced export subsidies,they might need temporary assistance to make the necessaryadjustments to deal with higher priced imports, and eventually to export.A special ministerial decision sets out objectives, and certain measures,for the provision of food aid and aid for agricultural development. It alsorefers to the possibility of assistance from the International MonetaryFund and the World Bank to finance commercial food imports.

6.3 Agr6.3 Agr6.3 Agr6.3 Agr6.3 Agreement on Sanitary and Phytosanitary Measureement on Sanitary and Phytosanitary Measureement on Sanitary and Phytosanitary Measureement on Sanitary and Phytosanitary Measureement on Sanitary and Phytosanitary Measureseseseses

This is a separate agreement on food safety and animal and plant healthstandards. It allows countries to set their own standards. But it also saysregulations must be based on science. They should be applied only to theextent necessary to protect human, animal or plant life or health, and theyshould not arbitrarily or unjustifiably discriminate between countries whereidentical or similar conditions prevail.

Member countries are encouraged to use international standards, guidelinesand recommendations where they exist. However, members may use measureswhich result in higher standards if there is scientific justification. They canalso set higher standards based on appropriate assessment of risks so longas the approach is consistent, not arbitrary. They can to some extent applythe “precautionary principle”, a kind of “safety first” approach to deal withscientific uncertainty. Article 5.7 of the SPS Agreement allows temporary“precautionary” measures.

6.4 Agr6.4 Agr6.4 Agr6.4 Agr6.4 Agreement on Teement on Teement on Teement on Teement on Technical Barechnical Barechnical Barechnical Barechnical Barriers to Triers to Triers to Triers to Triers to Traderaderaderaderade

The Technical Barriers to Trade Agreement (TBT) tries to ensure thatregulations, standards, testing and certification procedures do not createunnecessary obstacles.

The agreement recognises countries' rights to adopt the standards theyconsider appropriate, for example, for human, animal or plant life or health,for the protection of the environment or to meet other consumer interests.Moreover, members are not prevented from taking measures necessary toensure their standards are met. In order to prevent too much diversity, theagreement encourages countries to use international standards where theseare appropriate, but it does not require them to change their levels of protectionas a result.

6.5 Agreement on Textiles and Clothing6.5 Agreement on Textiles and Clothing6.5 Agreement on Textiles and Clothing6.5 Agreement on Textiles and Clothing6.5 Agreement on Textiles and Clothing

Since 1995, the WTO Agreement on Textiles and Clothing (ATC) has takenover from the Multifibre Arrangement. By 1 January 2005, the sector was to



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be fully integrated into normal GATT rules. In particular, the quotas wouldcome to an end, and importing countries would no longer be able todiscriminate between exporters. The Agreement on Textiles and Clothingwould itself no longer exist: it's the only WTO agreement that has self-destruction built in.

6.6 General Agr6.6 General Agr6.6 General Agr6.6 General Agr6.6 General Agreement on Teement on Teement on Teement on Teement on Trade in Servicesrade in Servicesrade in Servicesrade in Servicesrade in Services

The agreement covers all internationally-traded services, for example, banking,telecommunications, tourism, professional services, etc. It also defines fourways (or “modes”) of trading services:

• CrCrCrCrCross Boross Boross Boross Boross Border Supply or Mode 1 - der Supply or Mode 1 - der Supply or Mode 1 - der Supply or Mode 1 - der Supply or Mode 1 - services supplied from one countryto another (e.g. international telephone calls)

• Consumption abroad or Mode 2 -Consumption abroad or Mode 2 -Consumption abroad or Mode 2 -Consumption abroad or Mode 2 -Consumption abroad or Mode 2 - consumers or firms making useof a service in another country (e.g. tourism)

• Commercial Presence or Mode 3 - Commercial Presence or Mode 3 - Commercial Presence or Mode 3 - Commercial Presence or Mode 3 - Commercial Presence or Mode 3 - a foreign company setting upsubsidiaries or branches to provide services in another country (e.g.foreign banks setting up operations in a country)

• Presence of Natural Persons or Mode 4 -Presence of Natural Persons or Mode 4 -Presence of Natural Persons or Mode 4 -Presence of Natural Persons or Mode 4 -Presence of Natural Persons or Mode 4 - individuals travellingfrom their own country to supply services in another (e.g. fashionmodels or consultants)

6 . 76 . 76 . 76 . 76 . 7 General Agreement on Trade Related Aspects of IntellectualGeneral Agreement on Trade Related Aspects of IntellectualGeneral Agreement on Trade Related Aspects of IntellectualGeneral Agreement on Trade Related Aspects of IntellectualGeneral Agreement on Trade Related Aspects of IntellectualPrPrPrPrProperty Rightsoperty Rightsoperty Rightsoperty Rightsoperty Rights

The WTO's Agreement on Trade-Related Aspects of Intellectual PropertyRights (TRIPS), negotiated in the 1986-94 Uruguay Round, introducedintellectual property rules into the multilateral trading system for the firsttime. The areas covered by the TRIPS Agreement are:

• Copyright and Related Rights• Trade marks including service marks• Geographical indicators• Industrial Designs• Patents• Layout designs (topographies) of integrated circuits• Undisclosed Information including trade secrets

6.7.1 Enforcement of TRIPS6.7.1 Enforcement of TRIPS6.7.1 Enforcement of TRIPS6.7.1 Enforcement of TRIPS6.7.1 Enforcement of TRIPS

The agreement describes in some detail how enforcement should be handled,including rules for obtaining evidence, provisional measures, injunctions,damages and other penalties. It says courts should have the right, undercertain conditions, to order the disposal or destruction of pirated or counterfeitgoods. Wilful trademark counterfeiting or copyright piracy on a commercialscale should be criminal of fences. Governments should make sure thatintellectual property rights owners receive the assistance of customsauthorities to prevent imports of counterfeit and pirated goods.

6.8 Agr6.8 Agr6.8 Agr6.8 Agr6.8 Agreement on Subsidies and Countervailing Measureement on Subsidies and Countervailing Measureement on Subsidies and Countervailing Measureement on Subsidies and Countervailing Measureement on Subsidies and Countervailing Measureseseseses

This agreement does two things: it disciplines the use of subsidies, and it

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regulates the actions countries can take to counter the effects of subsidies. Itsays a country can use the WTO's dispute settlement procedure to seek thewithdrawal of subsidy or the removal of its adverse effects. Or the countrycan launch its own investigation and ultimately charge extra duty (known as“countervailing duty”) on subsidised imports that are found to be hurtingdomestic producers.

The agreement defines two categories of subsidies: prohibited and actionable.It originally contained a third category: non-actionable subsidies. This categoryexisted for five years, ending on 31 of December 1999, and was not extended.The agreement applies to agricultural goods as well as industrial products,except when the subsidies are exempt under the Agriculture Agreement's“peace clause”, which expired at the end of 2003.

••••• PrPrPrPrProhibited subsidies:ohibited subsidies:ohibited subsidies:ohibited subsidies:ohibited subsidies: subsidies that require recipients to meet certainexport targets, or to use domestic goods instead of imported goods.They are prohibited because they are specifically designed to distortinternational trade, and are therefore likely to hurt other countries' trade.They can be challenged in the WTO dispute settlement procedure wherethey are handled under an accelerated timetable. If the dispute settlementprocedure confirms that the subsidy is prohibited, it must be withdrawnimmediately. Otherwise, the complaining country can take countermeasures. If domestic producers are hurt by imports of subsidisedproducts, a countervailing duty can be imposed.

••••• Actionable subsidies: Actionable subsidies: Actionable subsidies: Actionable subsidies: Actionable subsidies: in this category the complaining country hasto show that the subsidy has an adverse effect on its interests. Otherwisethe subsidy is permitted. The agreement defines three types of damagethey can cause. One country's subsidies can hurt a domestic industryin an importing country. They can hurt rival exporters from anothercountry when the two compete in third markets, and domesticsubsidies in one country can hurt exporters trying to compete in thesubsidising country's domestic market. If the Dispute Settlement Bodyrules that the subsidy does have an adverse effect, the subsidy must bewithdrawn or its adverse effect must be removed. Again, if domesticproducers are hurt by imports of subsidised products, a countervailingduty can be imposed.

6.9 Agr6.9 Agr6.9 Agr6.9 Agr6.9 Agreement on Safeguareement on Safeguareement on Safeguareement on Safeguareement on Safeguards frds frds frds frds from Importsom Importsom Importsom Importsom Imports

A WTO member may restrict imports of a product temporarily (take“safeguard” actions) if its domestic industry is injured or threatened withinjury caused by a surge in imports. Here, the injury has to be serious.

An import “surge” justifying safeguard action can be a real increase in imports(an absolute increase); or it can be an increase in the importers' share of ashrinking market, even if the import quantity has not increased (relativeincrease).

When a country restricts imports in order to safeguard its domestic producers,in principle it must give something in return. The agreement says theexporting country (or exporting countries) can seek compensation throughconsultations. If no agreement is reached the exporting country can retaliate



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by taking equivalent action, for instance, it can raise tariffs on exports fromthe country that is enforcing the safeguard measure. In some circumstances,the exporting country has to wait for three years after the safeguard measureis introduced before it can retaliate in this manner, i.e. if the measure conformswith the provisions of the agreement and if it is taken as a result of an increasein the quantity of imports from the exporting country.

To some extent developing countries' exports are shielded from safeguardactions. An importing country can only apply a safeguard measure to aproduct from a developing country if the developing country is supplyingmore than 3 percent of the imports of that product, or if developing countrymembers with less than 3 percent import share collectively account formore than 9 percent of total imports of the product concerned.

6.10 Agreement on Trade Related Investment Measures6.10 Agreement on Trade Related Investment Measures6.10 Agreement on Trade Related Investment Measures6.10 Agreement on Trade Related Investment Measures6.10 Agreement on Trade Related Investment Measures

The Trade-Related Investment Measures (TRIMs) Agreement applies only tomeasures that affect trade in goods. It recognises that certain measures canrestrict and distort trade, and states that no member shall apply any measurethat discriminates against foreigners or foreign products (i.e. violates “nationaltreatment” principles in GATT).

It also outlaws investment measures that lead to restrictions in quantities(violating another principle in GATT).

It includes measures which require particular levels of local procurement byan enterprise (“local content requirements”). It also discourages measureswhich limit a company's imports or set targets for the company to export(“trade balancing requirements”).

Under the agreement, countries must inform fellow-members through theWTO of all investment measures that do not conform with the agreement.

6 . 1 16 . 1 16 . 1 16 . 1 16 . 1 1 Agr Agr Agr Agr Agreement on Govereement on Govereement on Govereement on Govereement on Government Prnment Prnment Prnment Prnment Procurocurocurocurocurementementementementement

In most countries the government, and the agencies it controls, are togetherthe biggest purchasers of goods of all kinds, ranging from basic commoditiesto high-technology equipment. At the same time, the political pressure tofavour domestic suppliers over their foreign competitors can be very strong.

An Agreement on Government Procurement was first negotiated during theTokyo Round and entered into force on 1 January 1981. Its purpose is toopen up as much of this business as possible to international competition.It is designed to make laws, regulations, procedures and practices regardinggovernment procurement more transparent and to ensure they do not protectdomestic products or suppliers or discriminate against foreign products orsuppliers.

The agreement applies to contracts worth more than the specified thresholdvalues. For central government purchases of goods and services, the thresholdis SDR (Special Drawing Rights ) 130,000 (some $185,000 in June 2003). Forpurchases of goods and services by sub-central government entities, the

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threshold varies but is generally in the region of SDR 200,000. For utilities,thresholds for goods and services are generally in the area of SDR 400,000and for construction contracts, in general the threshold value is SDR 5,000,000.

6.12 Settlement of Disputes6.12 Settlement of Disputes6.12 Settlement of Disputes6.12 Settlement of Disputes6.12 Settlement of Disputes

Settling disputes is the responsibility of the Dispute Settlement Body, whichconsists of all WTO members. The Dispute Settlement Body has the soleauthority to establish “panels” of experts to consider the case, and to acceptor reject the panels' findings or the results of an appeal. It monitors theimplementation of the rulings and recommendations, and has the power toauthorise retaliation when a country does not comply with a ruling.

• First stage: First stage: First stage: First stage: First stage: consultation (up to 60 days). Before taking any otheractions, the countries in dispute have to talk to each other to see if theycan settle their differences by themselves. If that fails, they can also askthe WTO director-general to mediate or try to help in any other way.

• Second stage: Second stage: Second stage: Second stage: Second stage: the panel (up to 45 days for a panel to be appointed,plus 6 months for the panel to conclude). If consultations fail, thecomplaining country can ask for a panel to be appointed. The country“in the dock” can block the creation of a panel once, but when the DisputeSettlement Body meets for a second time, the appointment can no longerbe blocked (unless there is a consensus against appointing the panel).

6.13 Imposition of Penalties6.13 Imposition of Penalties6.13 Imposition of Penalties6.13 Imposition of Penalties6.13 Imposition of Penalties

If the country that is the target of the complaint loses, it must follow therecommendations of the panel report or the appeals report. It must state itsintention to do so at a Dispute Settlement Body meeting held within 30 daysof the report's adoption. If complying with the recommendation immediatelyproves impractical, the member will be given a “reasonable period of time” todo so. If it fails to act within this period, it has to enter into negotiations withthe complaining country (or countries) in order to determine the mutually-acceptable compensation, for instance, tariff reductions in areas of particularinterest to the complaining side.

If after 20 days, no satisfactory compensation is agreed to, the complainingside may ask the Dispute Settlement Body for permission to impose limitedtrade sanctions (“suspend concessions or obligations”) against the other side.The Dispute Settlement Body must grant this authorisation within 30 days ofthe expiry of the “reasonable period of time” unless there is a consensusagainst the request. On 23 January 1995, Venezuela complained to the DisputeSettlement Body that the United States was applying rules that discriminatedagainst gasoline imports, and formally requested consultations with the UnitedStates. Just over a year later (on 29 January 1996) the dispute panel completedits final report. (By then, Brazil had joined the case, lodging its own complaintin April 1996. The same panel considered both complaints.) The United Statesappealed. The Appellate Body completed its report, and the Dispute SettlementBody adopted the report on 20 May 1996, one year and four months after thecomplaint was first lodged.

The United States and Venezuela then took six and a half months to agree on



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what the United States should do. The agreed period for implementing thesolution was 15 months from the date the appeal was concluded (20 May 1996to 20 August 1997).

The case arose because the United States applied stricter rules on thechemical characteristics of imported gasoline than it did for domestically-refined gasoline. Venezuela (and later Brazil) said this was unfair becauseUS gasoline did not have to meet the same standards, It violated the“national treatment” principle and could not be justified under exceptionsto normal WTO rules for health and environmental conservation measures.The dispute panel agreed with Venezuela and Brazil. The appeal reportupheld the panel's conclusions making some changes to the panel's legalinterpretation. The United States agreed with Venezuela that it would amendits regulations within 15 months and on 26 August 1997 it reported to theDispute Settlement Body that a new regulation had been signed on 19August.

6.14 Foreign Exchange Management Act6.14 Foreign Exchange Management Act6.14 Foreign Exchange Management Act6.14 Foreign Exchange Management Act6.14 Foreign Exchange Management Act

The Foreign Exchange Management Act (FEMA) is a law to replace thedraconian Foreign Exchange Regulation Act, 1973. Any offence under FERAwas a criminal of fence liable to imprisonment, whereas FEMA seeks tomake of fences relating to foreign exchange, civil offences. Unlike otherlaws where everything is permitted unless specifically prohibited, underFERA nothing was permitted unless specifically permitted. Hence the tenorand tone of the Act was very drastic. It provided for imprisonment of evena very minor offence. Under FERA, a person was presumed guilty unlesshe proved himself innocent whereas under other laws, a person ispresumed innocent unless he is proven guilty.

With liberalisation, a need was felt to remove the drastic measures of FERAand replace them by a set of liberal foreign exchange management regulations.Therefore FEMA was enacted to replace FERA.

FEMA extends all over India. It applies to all branches, offices and agenciesoutside India owned or controlled by a person resident in India and also toany contravention thereunder committed outside India by any person to whomthis Act applies.

Regulation and management of foreign exchange

Except with the general or special permission of the Reserve Bank, no personcan :-

a. deal in or transfer any foreign exchange or foreign security to any personnot being an authorised person;

b. make any payment to or for the credit of any person resident outsideIndia in any manner;

c. receive otherwise through an authorised person, any payment by orderor on behalf of any person resident outside India in any manner;

d. Where any person in, or resident in India receives any payment by orderor on behalf of any person resident outside India through any other

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person (including an authorised person) without a corresponding inwardremittance from any place outside India, then, such a person shall bedeemed to have received such payment otherwise than through anauthorised person.

e. enter into any financial transaction in India as consideration for or inassociation with acquisition or creation or transfer of a right to acquire,any asset outside India by any person.

Financial transaction means making any payment to, or for the credit of anyperson, or receiving any payment for, by order or on behalf of any person, ordrawing, issuing or negotiating any bill of exchange or promissory note, ortransferring any security or acknowledging any debt.

No person resident in India can acquire, hold, own, possess or transfer anyforeign exchange, foreign security or any immovable property situated outsideIndia except with the general or special permission of the Reserve Bank.

Any person may sell or draw foreign exchange to or from an authorised personif such sale or drawal is a current account transaction. However, the CentralGovernment may, in public interest and in consultation with the Reserve Bank,impose such reasonable restrictions for current account transactions as maybe prescribed.

Any person may sell or draw foreign exchange to or from an authorised personfor a capital account transaction. The Reserve Bank may, in consultation withthe Central Government, specify :-

• any class or classes of capital account transactions which arepermissible;

• the limit up to which foreign exchange shall be admissible for suchtransactions:

However, the Reserve Bank cannot impose any restrictions on the drawal offoreign exchange for payments due on account of amortisation of loans or fordepreciation of direct investments in the ordinary course of business.

The Reserve Bank can, by regulations, prohibit, restrict or regulate thefollowing :-

transfer or issue of any foreign security by a person resident in India;transfer or issue of any security by a person resident outside India;transfer or issue of any security or foreign security by any branch, officeor agency in India of a person resident outside India;any borrowing or lending in foreign exchange in whatever form or bywhatever name called;any borrowing or lending in rupees in whatever form or by whatevername called between a person resident in India and a person residentoutside India;deposits between persons resident in India and persons resident outsideIndia;export, import or holding of currency or currency notes;transfer of immovable property outside India, other than a lease notexceeding five years, by a person resident in India;



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acquisition or transfer of immovable property in India, other than alease not exceeding five years, by a person resident outside India;giving of a guarantee or surety in respect of any debt, obligation orother liability incurred (i) by a person resident in India and owed to aperson resident outside India or (ii) by a person resident outside India.

A person resident in India may hold, own, transfer or invest in foreign currency,foreign security or any immovable property situated outside India if suchcurrency, security or property was acquired, held or owned by such personwhen he was resident outside India or inherited from a person who wasresident outside India.

A person resident outside India may hold, own, transfer or invest in Indiancurrency, security or any immovable property situated in India if such currency,security or property was acquired, held or owned by such person when hewas resident in India or inherited from a person who was resident in India.

The Reserve Bank may, by regulation, prohibit, restrict, or regulateestablishment in India of a branch, office or other place of business by a personresident outside India, for carrying on any activity relating to such branch,office or other place of business.

Every exporter of goods must :-

a. furnish to the Reserve Bank or to such other authority a declaration insuch form and in such manner as may be specified, containing true andcorrect material particulars, including the amount representing the fullexport value or, if the full export value of the goods is not ascertainableat the time of export, the value which the exporter, having regard tothe prevailing market conditions, expects to receive on the sale of thegoods in a market outside India;

b. furnish to the Reserve Bank such other information as may be requiredby the Reserve Bank for the purpose of ensuring the realisation of theexport proceeds by such exporter.

The Reserve Bank may, for the purpose of ensuring that the full export valueof the goods or such reduced value of the goods as the Reserve Bankdetermines, having regard to the prevailing market-conditions, is receivedwithout any delay, direct any exporter to comply with such requirements as itdeems fit.

Every exporter of services shall furnish to the Reserve Bank or to such otherauthorities a declaration in such form and in such manner as may be specified,containing the true and correct material particulars in relation to paymentfor such services.

Where any amount of foreign exchange is due or has accrued to any personresident in India, such person shall take all reasonable steps to realise andrepatriate to India such foreign exchange within such period and in suchmanner as may be specified by the Reserve Bank.

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The Reserve Bank of India under the FEMA issues notifications on separateissues concerning foreign exchange from time to time. Till date it has issued25 notifications related to the following areas:

1. Borrowing or Lending in Forex2. Borrowing or Lending in Rupees3. Branch or Office in India4. Capital account transactions5. Currency6. Deposits7. Derivative contracts8. Export - import in forex9. Export of goods and services10. Forex accounts by resident persons11. Guarantees12. Immovable property in India13. Immovable property14. Insurance15. Investment in firm or proprietorship in India16. Possession and retention of forex17. Postal order and money orders18. Realisation, repatriation or surrender of forex19. Receipt and payment20. Receipt from or payment to non-resident21. Remittance of assets22 Rupee transactions with Nepalese and Bhutanese23. Security Issue by person resident outside India24. Transfer or issue by non-resident25. Transfer or issue of foreign security

6.15 Global Competitive Index6.15 Global Competitive Index6.15 Global Competitive Index6.15 Global Competitive Index6.15 Global Competitive Index

For well over two decades the World Economic Forum has been trying toshed light on the question of why some countries are able to grow on asustained basis for prolonged periods of time, in the process pulling largesegments of the population out of poverty, while others remain stagnant or,worse, actually see an erosion of living standards. Through its flagshippublication, The Global Competitiveness Report, the World Economic Forumhas led the way in assessing the competitiveness of nations.

It brings key representatives from the private sector and the corporate worldtogether with a broad spectrum of senior policymakers in government, creatingopportunities for the thoughtful exchange of ideas and experiences on bestpractices. This exchange may be an important catalyst in identifying the mostcritical factors in the development process.

The role of corruption in delaying the development process, the centralimportance of women's education for boosting per capita incomes, the interplaybetween political and civil rights and the willingness of the public to engagein economic activity, the role of a free press, and the type of safety net



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arrangements that governments put in place to enhance the ability of economicagents to participate in the life of the nation, are but some of the topics thathave been at the centre of the agenda in many of the summits and otherinteractions organised by the World Economic Forum.

The Forum has developed a vehicle, the Executive Opinion Survey (EOS),which annually conveys a wealth of information about the obstacles to growthin more than 100 countries, accounting for the lion's share of global GNP.Through the Survey, business executives in these countries assess theimportance of a broad range of factors central to creating a healthy businessenvironment in support of successful and productive economic activity.

The tax and regulatory environment, labour market legislation, the overallmacroeconomic environment, the prevalence of corruption and other irregularpractices in the economy at large, the quality of the country's infrastructureand education are but a few of the areas covered by the EOS. Over the years,the Survey has continued to deliver a treasure trove of information aboutboth country- specific strengths and weaknesses, and the challenges faced bythe business community. On the basis of the information provided by theEOS, the Country Profiles prepared by the Forum offer extremely valuableinformation for policymakers, aid agencies and others, working to improveeconomic performance and the quality of people's lives.

Composition of the Growth Competitive IndexComposition of the Growth Competitive IndexComposition of the Growth Competitive IndexComposition of the Growth Competitive IndexComposition of the Growth Competitive Index

The Growth Competitiveness Index is composed of three component indexes:

• the technology index,• the public institutions index, and• the macroeconomic environment index.

These indexes are calculated on the basis of both “hard data” and “Surveydata.” The responses to the Executive Opinion Survey are what is referred toas Survey data, with responses ranging from 1 to 7.

The sample of countries is divided into two groups: the core innovators andthe non-core innovators.

Core innovators are countries with more than 15 US utility patents registeredper million population in 2003; non-core innovators are all other countries.For the core innovators, extra emphasis is placed on the role of innovationand technology.

The weightings for the core innovators are as follows:

Growth Competitive Index for Core Innovators= � Technology Index

+ � Public Institutions Index

+ � MacroeconomicEnvironment Index

For the non-core innovators, it calculates the Growth Competitiveness Index

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values as a simple average of the three component indexes:Growth Competitive Index for Non Core Innovators= 1/3 Technology Index+ 1/3 Public Institutions Index+ 1/3 Macroeconomic Environment Index

Technology IndexTechnology IndexTechnology IndexTechnology IndexTechnology Index

Technology Index comprehensively looks at the following questions.• Country's position in technology relative to world leaders• Companies in the Country not interested/aggressive in absorbing new

technology.• How much do companies in the country spend on R&D relative to other

countries.• Extent of business collaboration in R&D with local universities.

Public Institutions IndexPublic Institutions IndexPublic Institutions IndexPublic Institutions IndexPublic Institutions Index

It looks comprehensively at the following questions:• Is the judiciary in your country independent from political influences of

members of government, citizens or firms?• Property rights, including over financial assets, are clearly defined and

well protected by law?• Is the government neutral among bidders when deciding among public

contracts?• Does organised crime impose significant costs on business?• How commonly are bribes paid in connection with import and export

permits?• How commonly are bribes paid when being connected with public

utilities?• How commonly are bribes paid in connection with annual tax payments?

Macroeconomic Environment IndexMacroeconomic Environment IndexMacroeconomic Environment IndexMacroeconomic Environment IndexMacroeconomic Environment Index

It looks comprehensively at the following questions:• Is the country's economy likely to be in a recession next year?• Has obtaining credit for a company become easier or more difficult over

the past year?• Government surplus/deficit• National savings rate• Inflation• Real effective exchange rate• Lending borrowing interest rate spread• Is the composition of public spending in the country wasteful, or does

it provide necessary goods and services not provided by the market?

GCI Rankings in 2004GCI Rankings in 2004GCI Rankings in 2004GCI Rankings in 2004GCI Rankings in 2004

Finland was ranked number 1 with a score of 5.95 and USA was ranked number2 with a score of 5.82. India improved its ranking from 56 to 55 with a score of4.07. While China slipped down from 44 to 46 with a score of 4.29. At the



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bottom was Chad with rank 104 and a score of 2.50. Bangladesh ranked 102with a score of 2.84. Pakistan was ranked 91 with a score of 3.17.

6.16 Cor6.16 Cor6.16 Cor6.16 Cor6.16 Corrrrrr uption Peruption Peruption Peruption Peruption Perception Indexception Indexception Indexception Indexception Index

The goal of the CPI is to provide data on extensive perceptions of corruptionwithin countries. The CPI is a composite index, making use of surveys ofbusiness people and assessments by country analysts. It consists of crediblesources using diverse sampling frames and different methodologies. Theseperceptions enhance our understanding of real levels of corruption from onecountry to another.

Methodology:Methodology:Methodology:Methodology:Methodology:

1. The CPI gathers data from sources that span the last three years (forthe CPI 2004, this includes surveys from 2002, 2003 and 2004).

2. All sources provide a ranking of countries, i.e., include an assessmentof multiple countries.

3. All sources measure the overall extent of corruption (frequency and/oramount of corruption) in the public and political sectors.

4. Evaluation of the extent of corruption in countries is done by non-resident experts (in the CPI 2004, this includes the following sources:CU (the State Capacity Survey by the Centre for International EarthScience Information Network (CIESIN) at Columbia University), EIU(The Economist Intelligence Unit) , MIG (Grey Area DynamicsRatings by the Merchant International Group)and WMRC (The WorldMarkets Research Centre); non-resident business leaders fromdeveloping countries (in the CPI 2004, this includes the followingsources: TI/GI (Gallup International on behalf of TransparencyInternational, Bribe Payers Index Survey), II(InformationInternational, Beirut, Lebanon and MDB (a multilateral developmentbank) ; and resident business leaders evaluating their own country(in the CPI 2004, this includes the following sources: BEEPS TheBusiness Environment and Enterprise Performance Survey), IMD(The International Institute for Management Development, Lausanne,PERC (The Political and Economic Risk Consultancy, Hong Kong)and WEF (World Economic Forum.

CorCorCorCorCor rrrrr uption Peruption Peruption Peruption Peruption Perception Index 2001ception Index 2001ception Index 2001ception Index 2001ception Index 2001

Finland ranks first with a score of 10. Singapore is ranked 5th, Hongkong is16th while USA is 19th. India stands at 71 out of the 90 countries while Nigeriais at the bottom with the last ranking of 90.

6.17 Index of Economic Freedom6.17 Index of Economic Freedom6.17 Index of Economic Freedom6.17 Index of Economic Freedom6.17 Index of Economic Freedom

Since 1995, the Index of Economic Freedom has offered the internationalcommunity an annual in-depth examination of the factors that contribute mostdirectly to economic freedom and prosperity. As the first comprehensive studyof economic freedom ever published, the 1995 Index defined the method bywhich economic freedom can be measured in such vastly different places asHong Kong and North Korea. Since then, other studies have joined the effort,analysing such issues as trade or government intervention in the economy.

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There is overlapping coverage among these indices, but the Index of EconomicFreedom includes the broadest array of institutional factors determiningeconomic freedom:

••••• CorCorCorCorCorrrrrruption in the judiciaryuption in the judiciaryuption in the judiciaryuption in the judiciaryuption in the judiciary, , , , , customs service, and governmentbureaucracy;

••••• Non-tarifNon-tarifNon-tarifNon-tarifNon-tarif f barf barf barf barf barriers to trade,riers to trade,riers to trade,riers to trade,riers to trade, such as import bans and quotas as wellas strict labelling and licensing requirements;

••••• The fiscal burThe fiscal burThe fiscal burThe fiscal burThe fiscal burden of goverden of goverden of goverden of goverden of government,nment,nment,nment,nment, which encompasses income taxrates, corporate tax rates, and trends in government expenditures as apercent of output;

••••• The rThe rThe rThe rThe rule of lawule of lawule of lawule of lawule of law, ef, ef, ef, ef, ef ficiency within the judiciaryficiency within the judiciaryficiency within the judiciaryficiency within the judiciaryficiency within the judiciary,,,,, and the ability toenforce contracts;

••••• Regulatory burRegulatory burRegulatory burRegulatory burRegulatory burdens on business,dens on business,dens on business,dens on business,dens on business, including health, safety, andenvironmental regulation;

••••• Restrictions on banks rRestrictions on banks rRestrictions on banks rRestrictions on banks rRestrictions on banks regaregaregaregaregarding financial services,ding financial services,ding financial services,ding financial services,ding financial services, such as sellingsecurities and insurance;

••••• Labour market regulations, Labour market regulations, Labour market regulations, Labour market regulations, Labour market regulations, such as established work weeks andmandatory separation pay; and

••••• InforInforInforInforInformal market activities, mal market activities, mal market activities, mal market activities, mal market activities, including corruption, smuggling, piracyof intellectual property rights, and the underground provision of labourand other services.

Index of Economic Freedom 1996 rankingsIndex of Economic Freedom 1996 rankingsIndex of Economic Freedom 1996 rankingsIndex of Economic Freedom 1996 rankingsIndex of Economic Freedom 1996 rankings

Hong Kong tops the list with Myanmar at the bottom ranked 123rd. Indiadoes poorly at rank 85 just a notch above China which is at 86. USA is ranked8th while Pakistan is at rank 89.


The attempts at the Global level to integrate business around the world hasseen the culmination of WTO in 1995. It has been a negotiating forum for allcountries and has brought the bargaining strength of different country groupsto prominence. It has succeeded in attending to a majority of issues throughconsensus and has set up a dispute settlement body in case any issue requiresarbitration and judgment. No doubt it has largely succeeded in bringing aboutuniformity and greater opportunities for transparent business.

There have been several indices to compare different economies on the basisof their accomplishments and present conditions. Index of freedom, corruptionindex, and global competitive index are a few of them.

Also the flow of funds in and out of India have been set into a new legislationrecognising the needs of a changed time. The RBI till date has issued 25notifications regarding the FEMA act.



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1. The WTO came into being as a result of _______ round of negotiations(1986-94) on 1st January _____ and its head office is located at ______.As of 4th April, 2003, ___ countries were members.

2. Domestic policies that do have a direct effect on production and tradeare put under the ________ box category.

3. Taking averages for 1986-90 as the base level, developed countries agreedto cut the value of export subsidies by ______ percent over six yearsstarting in 1995.

4. Agreement on _________ and _________ measures is a separateagreement on food safety and animal and plant health standards.

5. The ____________ Agreement (TBT) tries to ensure that regulations,standards, testing and certification procedures do not create unnecessaryobstacles.

6. The agreement on Government procurement applies to contracts worthmore than specified threshold values. For central government purchasesof goods and services, the threshold is SDR ____________.

7. The Foreign Exchange Management Act (FEMA) is a law to replacethe draconian _____________ Act, 1973.

8. The Growth Competitiveness Index is composed of three componentindexes ________________, ______________ and __________.

9. __________ ranks first with a score of 10 as per the Corruption perceptionindex 2001.

10. The 1995 Index defined the method by which ___________ freedom canbe measured in such vastly different places as Hong Kong and NorthKorea.

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Chapter VIIChapter VIIChapter VIIChapter VIIChapter VIICorporate ResponsibilityCorporate ResponsibilityCorporate ResponsibilityCorporate ResponsibilityCorporate Responsibility

LearLearLearLearLearning Objectivesning Objectivesning Objectivesning Objectivesning ObjectivesReading this chapter would enable you to understand:• Need and Trend of Corporate Governance• Recommendations of the committee on corporate governance• Understanding of the concept of corporate social responsibility

ContentsContentsContentsContentsContents7.1 Need for Sound Corporate Governance7.2 Trend in Corporate Governance7.3 Recommendations of the Committee on Corporate Governance

7.3.1 Key Constituents of Corporate Governance7.3.2 Key Aspects of Corporate Governance7.3.3 Mandatory and Non Mandatory Recommendations7.3.4 Schedule of Implementation7.3.5 Composition of Board of Directors7.3.6 Chairman of the Board7.3.7 Composition of the Audit Committee7.3.8 Frequency of Meetings and Quorum Requirements of The Audit Committee7.3.9 Powers of the Audit Committee7.3.10 Disclosure of Remuneration Package7.3.11 Accounting Standards and Financial Reporting7.3.12 Disclosures Related to Management7.3.13 Complaints of the Shareholders7.3.14 Government's push to Corporate Governance

7.4 Corporate Social Responsibility7.4.1 Evolution7.4.2 The Pyramid of Corporate Social Responsibility


7.1 Need for Sound Corporate Gover7.1 Need for Sound Corporate Gover7.1 Need for Sound Corporate Gover7.1 Need for Sound Corporate Gover7.1 Need for Sound Corporate Governancenancenancenancenance

The concept of corporate governance has been attracting public attentionfor quite some time in India. The topic is no longer confined to the halls ofacademia and is increasingly finding acceptance for its relevance andunderlying importance in the industry and capital markets. Progressivefirms in India have voluntarily put in place systems of good corporategovernance. Internationally too, while this topic has been accepted for along time, the financial crisis in emerging markets has led to reneweddiscussions and inevitably focussed them on the lack of corporate as wellas governmental oversight.

In an age where capital flows worldwide, just as quickly as information, acompany that does not promote a culture of strong, independent oversight,risks its very stability and future health. As a result, the link between a

Corporate Responsibility


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company's management, directors and its financial reporting system has neverbeen more crucial. As the boards provide stewardship of companies, theyplay a significant role in their efficient functioning.Studies of firms in India and abroad have shown that markets and investorstake notice of well-managed companies, respond positively to them, and rewardsuch companies, with higher valuations. A common feature of such companiesis that they have systems in place, which allow sufficient freedom to theboards and management to take decisions towards the progress of theircompanies and to innovate, while remaining within a framework of effectiveaccountability. In other words they have a system of good corporategovernance.

7.2 T7.2 T7.2 T7.2 T7.2 Trrrrrend in Corporate Goverend in Corporate Goverend in Corporate Goverend in Corporate Goverend in Corporate Gover nancenancenancenancenance

1. It is important that insiders do not use their position of knowledge andacces to inside information about the company, and take unfair advantageof the resulting information asymmetry. To prevent this from happening,corporates are expected to disseminate the material price sensitiveinformation in a timely and proper manner and also ensure that till suchinformation is made public, insiders abstain from transacting in thesecurities of the company. The principle should be ‘disclose or desist'.This therefore calls for companies to devise an internal procedure foradequate and timely disclosures, reporting requirements, confidentialitynorms, code of conduct and specific rules for the conduct of its directorsand employees and other insiders.

2. The issue of corporate governance involves besides shareholders, allother stakeholders, and in particular the shareholders and investors.The control and reporting functions of boards, the roles of the variouscommittees of the board, the role of management, all assume specialsignificance when viewed from this perspective.

3. The other way of looking at corporate governance is from thecontribution that good corporate governance makes to the efficiency ofa business enterprise, to the creation of wealth and to the country'seconomy.

4. There are some Indian companies, which have voluntarily establishedhigh standards of corporate governance, but there are many more, whosepractices are a matter of concern. There is also an increasing concernabout standards of financial reporting and accountability, especially afterlosses suffered by investors and lenders in the recent past, which couldhave been avoided, with better and more transparent reportingpractices. Investors have suf fered on account of unscrupulousmanagement of companies, which have raised capital from the marketat high valuations and have performed much worse than the pastreported figures, leave alone the future projections at the time of raisingmoney.

5. Another example of bad governance has been the allotment ofpromoter's shares, on preferential basis at preferential prices,disproportionate to market valuation of shares, leading to further dilutionof wealth of minority shareholders. This practice has however sincebeen contained.

6. There are also many companies, which are not paying adequate attention

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to the basic procedures for shareholders' service; for example, manyof these companies do not pay adequate attention to redress investors'grievances such as delay in transfer of shares, delay in despatch of sharecertificates and dividend warrants and non-receipt of dividend warrants;companies also do not pay sufficient attention to timely disseminationof information to investors as also to the quality of such information.The SEBI has been regularly receiving a large number of investorcomplaints on these matters. While enough laws exist to take care ofmany of these investor grievances, the implementation and inadequacyof penal provisions have left a lot to be desired.

7. Corporate governance is considered an important instrument forinvestor protection, and it is therefore a priority on SEBI's agenda. Tofurther improve the level of corporate governance, need was felt for acomprehensive approach at this stage of development of the capitalmarket, to accelerate the adoption of globally acceptable practices ofcorporate governance. This would ensure that Indian investors are inno way less informed and protected as compared to their counterpartsin the best-developed capital markets and economies of the world.

8. Securities market regulators in almost all developed and emergingmarkets have for some time been concerned about the importance ofthe subject and of the need to raise the standards of corporategovernance. The financial crises in the Asian markets in the recent pasthave highlighted the need for an improved level of corporate governanceand the lack of it in certain countries has been mentioned as one of thecauses of the crises.

9. Indeed corporate governance has been a widely discussed topic at recentmeetings of the International Organisation of Securities Commissions(IOSCO). Besides in an environment in which emerging marketsincreasingly compete for global capital, it is evident that global capitalwill flow to markets which are better regulated and observe higherstandards of transparency, efficiency and integrity. Raising standards ofcorporate governance is therefore also extremely relevant in this context.

SEBI took many steps before the constitution of the Committee on corporategovernance to raise the standards of corporate probity. Some of these stepswere:

• strengthening of disclosure norms for Initial Public Offers followingthe recommendations of the Committee set up by SEBI under theChairmanship of Shri Y H Malegam;

• providing information in directors' reports for utilisation of funds andvariation between projected and actual use of funds according to therequirements of the Companies Act; inclusion of cash flow and fundsflow statements in annual reports;

• declaration of quarterly results;

• mandatory appointment of a compliance officer for monitoring the sharetransfer process and ensuring compliance with various rules andregulations;

• timely disclosures of material and price sensitive information includingdetails of all material events having a bearing on the performance of the



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company;

• despatch of one copy of the complete balance sheet to every householdand abridged balance sheet to all shareholders;

• issue of guidelines for preferential allotment at market related prices;and

• issue of regulations providing for a fair and transparent framework fortakeovers and substantial acquisitions.

7.3 Recommendations of the Committee on Corporate Gover7.3 Recommendations of the Committee on Corporate Gover7.3 Recommendations of the Committee on Corporate Gover7.3 Recommendations of the Committee on Corporate Gover7.3 Recommendations of the Committee on Corporate Governancenancenancenancenance

The Securities and Exchange Board of India (SEBI) appointed the Committeeon Corporate Governance on May 7, 1999 under the Chairmanship of ShriKumar Mangalam Birla, member SEBI Board, to promote and raise thestandards of Corporate Governance. It's terms of reference were the following:• to suggest suitable amendments to the listing agreement executed by

the stock exchanges with the companies and any other measures• to improve the standards of corporate governance in the listed

companies, in areas such as continuous disclosure of materialinformation, both financial and non-financial, manner and frequency ofsuch disclosures, responsibilities of independent and outside directors;

• to draft a code of corporate best practices; and• to suggest safeguards to be instituted within the companies to deal

with insider information and insider trading.

7.3.1 Key Constituents of Corporate Gover7.3.1 Key Constituents of Corporate Gover7.3.1 Key Constituents of Corporate Gover7.3.1 Key Constituents of Corporate Gover7.3.1 Key Constituents of Corporate Governancenancenancenancenance

The Committee has identified the three key constituents of corporategovernance as.• the Shareholders,• the Board of Directors and• the Management

7.3.2 Key Aspects of Corporate Gover7.3.2 Key Aspects of Corporate Gover7.3.2 Key Aspects of Corporate Gover7.3.2 Key Aspects of Corporate Gover7.3.2 Key Aspects of Corporate Governancenancenancenancenance

It has attempted to identify in respect of each of these constituents, theirroles and responsibilities as also their rights in the context of good corporategovernance. Fundamental to this examination and permeating throughoutthis exercise is the recognition of the three key aspects of corporategovernance, namely;• accountability,• transparency and• equality of treatment for all stakeholders.

7.3.3 Mandatory and Non-mandatory Recommendations7.3.3 Mandatory and Non-mandatory Recommendations7.3.3 Mandatory and Non-mandatory Recommendations7.3.3 Mandatory and Non-mandatory Recommendations7.3.3 Mandatory and Non-mandatory Recommendations

The Committee felt that some of the recommendations are absolutely essentialfor the framework of corporate governance and virtually form its core, whileothers could be considered desirable. Besides, some recommendations mayalso need change of statute, such as the Companies Act, for their enforcement.

In the case of others, enforcement would be possible by amending the

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Securities Contracts (Regulation) Rules, 1957 and by amending the listingagreement of the stock exchanges under the direction of SEBI. The latter,would be less time consuming and would ensure speedier implementation ofcorporate governance.

The Committee therefore felt that the recommendations should be dividedinto mandatory and non- mandatory categories

• Those recommendations which are absolutely essential for corporategovernance, can be defined with precision and which can be enforcedthrough the amendment of the listing agreement could be classified asmandatory.

• Others, which are either desirable or which may require change of laws,may, for the time being, be classified as non-mandatory.

7.3.4 Schedule of Implementation7.3.4 Schedule of Implementation7.3.4 Schedule of Implementation7.3.4 Schedule of Implementation7.3.4 Schedule of Implementation

The Committee recommends that while the recommendations should beapplicable to all the listed companies or entities, there is a need for phasingout the implementation as follows:

• By all entities seeking listing for the first time, at the time of listing.• Within the financial year 2000-2001,but not later than March 31, 2001 by

all entities, which are included either in Group ‘A'of the BSE or in S&PCNX Nifty index as on January 1, 2000. However to comply with therecommendations, these companies may have to begin the process ofimplementation as early as possible. These companies would cover morethan 80 percent of the market capitalisation.

• Within the financial year 2001-2002,but not later than March 31, 2002 byall the entities which are presently listed, with paid up share capital ofRs. 10 crore and above, or net worth of Rs 25 crore or more any time inthe history of the company.

• Within the financial year 2002-2003,but not later than March 31, 2003 byall the entities which are presently listed, with paid up share capital ofRs 3 crore and above.

This is a mandatory recommendation.

7.3.5 Composition of Board of Directors7.3.5 Composition of Board of Directors7.3.5 Composition of Board of Directors7.3.5 Composition of Board of Directors7.3.5 Composition of Board of Directors

The composition of the board is important in as much as it determines theability of the board to collectively provide leadership and ensures that no oneindividual or group is able to dominate the board.

• The executive directors (like director-finance, director-personnel) areinvolved in the day to day management of the companies;

• the non-executive directors bring external and wider perspective andindependence to the decision making.

Till recently, it has been the practice of most of the companies in India to fillthe board with representatives of the promoters of the company, andindependent directors if chosen were also handpicked thereby ceasing to beindependent.



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This has undergone a change and increasingly the boards comprise ofthe following groups of directors• promoter director, (promoters being defined by the erstwhile MalegamCommittee),

• executive and non executive directors, a part of whom areindependent.

A conscious distinction has been made by the Committee between two classesof non-executive directors, namely, those who are independent and those whoare not.

The Committee recommended that the board of a company have an optimumcombination of executive and non-executive directors with not less than fiftypercent of the board comprising the non-executive directors. The number ofindependent directors (directors who apart from receiving director'sremuneration do not have any other material pecuniary relationship ortransactions with the company, its promoters, its management or itssubsidiaries, which in the judgement of the board may affect their independenceof judgement) would depend on the nature of the chairman of the board. Incase a company has a non-executive chairman, at least one-third of the boardshould comprise of independent directors and in case a company has anexecutive chairman, at least half of the board should be independent.


7.3.6 Chair7.3.6 Chair7.3.6 Chair7.3.6 Chair7.3.6 Chairman of the Boarman of the Boarman of the Boarman of the Boarman of the Boarddddd

Given the importance of the Chairman's role, the Committee recommendedthat a non-executive Chairman should be entitled to maintain a Chairman'soffice at the company's expense and also allowed reimbursement of expensesincurred in the performance of his duties. This will enable him to dischargeresponsibilities effectively.This is a non-mandatory recommendation.

7.3.7 Composition of the Audit Committee7.3.7 Composition of the Audit Committee7.3.7 Composition of the Audit Committee7.3.7 Composition of the Audit Committee7.3.7 Composition of the Audit Committee

• the audit committee should have minimum three members, allbeing non executive directors, with the majority being independent,and with at least one director having financial and accountingknowledge;

• the chairman of the committee should be an independent director;• the chairman should be present at the Annual General Meeting to

answer shareholder queries;• the audit committee should invite such of the executives, as it

considers appropriate (and particularly the head of the financefunction) to be present at the meetings of the Committee but onoccasions it may also meet without the presence of any executivesof the company. Finance director and head of internal audit andwhen required, a representative of the external auditor should bepresent as an invitee for the meetings of the audit committee;

• the Company Secretary should act as the secretary to thecommittee

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These are mandatory recommendations.

7.3.8 Fr7.3.8 Fr7.3.8 Fr7.3.8 Fr7.3.8 Frequency of Meetings and Quorequency of Meetings and Quorequency of Meetings and Quorequency of Meetings and Quorequency of Meetings and Quor um Requirum Requirum Requirum Requirum Requirements of theements of theements of theements of theements of theAudit CommitteeAudit CommitteeAudit CommitteeAudit CommitteeAudit Committee

• To begin with the audit committee should meet at least thrice ayear. One meeting must be held before finalisation of annualaccounts and one necessarily every six months.

• The quorum should be either two members or one-third of themembers of the audit committee, whichever is higher and thereshould be a minimum of two independent directors.

Both the above are mandatory recommendations.

7.3.9 Powers of the Audit Committee7.3.9 Powers of the Audit Committee7.3.9 Powers of the Audit Committee7.3.9 Powers of the Audit Committee7.3.9 Powers of the Audit Committee

• To investigate any activity within its terms of reference.• To seek information from any employee.• To obtain outside legal or other professional advice.• To secure attendance of outsiders with relevant expertise, if it

considers necessary.

These are mandatory recommendations.

7.3.10 Disclosure of Remuneration Package7.3.10 Disclosure of Remuneration Package7.3.10 Disclosure of Remuneration Package7.3.10 Disclosure of Remuneration Package7.3.10 Disclosure of Remuneration Package

It is important for the shareholders to be informed of the remuneration of thedirectors of the company. The Committee therefore recommends that thefollowing disclosures should be made in the section on corporate governanceof the annual report:

• All elements of remuneration packages of all the directors i.e.salaries, benefits, bonuses, stock options, pensions, etc.

• Details of fixed component and performance linked incentives, alongwith performance criteria.

• Service contracts, notice period, severance fees.

• Stock option details, if any and whether issued at a discount aswell as the period over which accrued and over which exercisable.


7.3.11 Accounting Standar7.3.11 Accounting Standar7.3.11 Accounting Standar7.3.11 Accounting Standar7.3.11 Accounting Standards and Financial Reportingds and Financial Reportingds and Financial Reportingds and Financial Reportingds and Financial Reporting

Over time financial reporting and accounting standards in India have beenupgraded. This however is an ongoing process and we have to move speedilytowards the adoption of international standards. This is particularly importantfrom the angle of corporate governance. The Committee took note of thediscussions of the SEBI Committee on Accounting Standards referred to earlierand made recommendations regarding the following aspects of financialreporting.

• Consolidation of accounts of subsidiaries.

• Segmented reporting where a company has multiple lines of business.



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• Disclosure and Treatment of related party transactions.

• Treatment of deferred taxation.

7.3.12 Disclosures Related to Management7.3.12 Disclosures Related to Management7.3.12 Disclosures Related to Management7.3.12 Disclosures Related to Management7.3.12 Disclosures Related to Management

As a part of the disclosures related to Management, the Committeerecommended that as part of the directors' report or as an addition thereto, aManagement Discussion and Analysis report should form part of the annualreport to the shareholders. This Management Discussion and Analysis shouldinclude discussion on the following matters within the limits set by thecompany's competitive position:

• Industry structure and developments.• Opportunities and Threats• Segment-wise or product-wise performance.• Outlook.• Risks and concerns• Internal control systems and their adequacy.• Discussion on financial per formance with respect to operational

performance.• Material developments in Human Resources /Industrial Relations front,

including number of people employed.


7.3.13 Complaints of the Shareholders7.3.13 Complaints of the Shareholders7.3.13 Complaints of the Shareholders7.3.13 Complaints of the Shareholders7.3.13 Complaints of the Shareholders

The Committee recommended that a board committee under thechairmanship of a non-executive director should be formed to specificallylook into the redressing of shareholder complaints like transfer of shares,non-receipt of balance sheet, non-receipt of declared dividends etc. TheCommittee believes that the formation of such a committee will help focusthe attention of the company on shareholders' grievances and sensitisethe management to redressal of their grievances.

This is a mandatory recommendation

7.3.14 Gover7.3.14 Gover7.3.14 Gover7.3.14 Gover7.3.14 Government's push to Corporate Government's push to Corporate Government's push to Corporate Government's push to Corporate Government's push to Corporate Governancenancenancenancenance

While presenting the Union Budget for 1999-2000, the finance ministerannounced the institution of a national award for excellence in corporategovernance.

The award, instituted by the Union Finance ministry and sponsored by theUnit Trust of India (UTI), is aimed at strengthening investor confidence inthe capital markets by encouraging Indian companies to follow internationallyaccepted practices of corporate governance.

The first award was won by Infosys technology. Tata Steel won the award for2000.

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7.4 Corporate Social Responsibility7.4 Corporate Social Responsibility7.4 Corporate Social Responsibility7.4 Corporate Social Responsibility7.4 Corporate Social Responsibility

This term indicates the doings of corporates over and above the statutoryrequirements for the benefit of the society.

According to N R Narayanmoorthy, Chief Mentor of Infosys Technology, acorporate's foremost social responsibility is to create maximum share holdervalue working under the circumstances where it is fair to all its stake holdersworkers, consumers, the community, government and the environment. Hepoints out that by living in harmony with the community and environmentaround us and not cheating our customers and workers, we might not gainanything in the short run, but in the long run it means greater profits andshareholder value.

7.4.1 Evolution7.4.1 Evolution7.4.1 Evolution7.4.1 Evolution7.4.1 Evolution

What does it mean for a corporation to be socially responsible? Academicsand practitioners have been striving to establish an agreed-upon definition ofthis concept for 30 years. In 1960, Keith Davis suggested that socialresponsibility refers to businesses' "decisions and actions taken for reasonsat least partially beyond the firm's direct economic or technical interest." Atabout the same time, Eells and Walton (1961) argued that CSR refers to the"problems that arise when corporate enterprise casts its shadow on the socialscene, and the ethical principles that ought to govern the relationship betweenthe corporation and society."

In 1971 the Committee for Economic Development in USA used a "threeconcentric circles" approach to depicting CSR.

• The inner circle included basic economic functions - growth, products,jobs.

• The intermediate circle suggested that economic functions must beexercised with a sensitive awareness of changing social values andpriorities.

• The outer circle outlined newly emerging and still amorphousresponsibilities that business should assume to become more activelyinvolved in improving the social environment.

From social responsibility to social responsivenessFrom social responsibility to social responsivenessFrom social responsibility to social responsivenessFrom social responsibility to social responsivenessFrom social responsibility to social responsiveness

Attention was shifted from social responsibility to social responsiveness byseveral other writers. Their basic argument was that the emphasis onresponsibility focused exclusively on the notion of business obligation andmotivation and that action or performance were being overlooked. The socialresponsiveness movement, therefore, emphasised corporate action, pro-action,and implementation of a social role. This was indeed a necessary reorientation.The question still remained, however, of reconciling the firm's economicorientation with its social orientation. A step in this direction was taken whena comprehensive definition of CSR was set forth. in this view, a four-partconceptualisation of CSR included the idea that the corporation has not onlyeconomic and legal obligations, but ethical and discretionary (philanthropic)responsibilities as well (Carroll 1979). The point here was that CSR, to be



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accepted as legitimate, had to address the entire spectrum of obligationsbusiness has to society, including the most fundamental-economic. It is uponthis four-part perspective that our pyramid is based.

In recent years, the term corporate social performance (CSP) has emergedas an inclusive and global concept to embrace corporate social responsibility,responsiveness, and the entire spectrum of socially beneficial activities ofbusinesses. The focus on social performance emphasises the concern forcorporate action and accomplishment in the social sphere. With a performanceperspective, it is clear that firms must formulate and implement social goalsand programmes as well as integrate ethical sensitivity into all decision making,policies, and actions. With a results focus, CSP suggests an all-encompassingorientation towards normal criteria by which we assess business performanceto include quantity, quality, effectiveness, and efficiency.

7.4.2 The Pyramid of Corporate Social Responsibility7.4.2 The Pyramid of Corporate Social Responsibility7.4.2 The Pyramid of Corporate Social Responsibility7.4.2 The Pyramid of Corporate Social Responsibility7.4.2 The Pyramid of Corporate Social Responsibility

For CSR to be accepted by a conscientious business person, it should beframed in such a way that the entire range of business responsibilities areembraced. It is suggested here that four kinds of social responsibilitiesconstitute total CSR: economic, legal, ethical, and philanthropic.Furthermore, these four categories or components of CSR might bedepicted as a pyramid. To be sure, all of these kinds of responsibilitieshave always existed to some extent, but it has only been in recent yearsthat ethical and philanthropic functions have taken a significant place. Eachof these four categories deserves a closer consideration.

Economic ResponsibilitiesEconomic ResponsibilitiesEconomic ResponsibilitiesEconomic ResponsibilitiesEconomic Responsibilities

Historically, business organisations were created as economic entities designedto provide goods and services to societal members. The profit motive wasestablished as the primary incentive for entrepreneurship. Before it wasanything else, the business organisation was the basic economic unit in oursociety. As such, its principal role was to produce goods and services thatconsumers needed and wanted and to make an acceptable profit in the process.At some point the idea of the profit motive was transformed into a notion ofmaximum profits, and this has been an enduring value ever since. All otherbusiness responsibilities are predicated upon the economic responsibility ofthe firm, because without it the others become moot considerations.

Legal ResponsibilitiesLegal ResponsibilitiesLegal ResponsibilitiesLegal ResponsibilitiesLegal Responsibilities

Society has not only sanctioned business to operate according to the profitmotive; at the same time business is expected to comply with the lawsand regulations promulgated by federal, state, and local governments asthe ground rules under which business must operate. As a partial fulfilmentof the "social contract" between business and society, firms are expectedto pursue their economic missions within the framework of the law. Legalresponsibilities reflect a view of "codified ethics" in the sense that theyembody basic notions of fair operations as established by our lawmakers.They are depicted as the next layer on the pyramid to portray theirhistorical development, but they are appropriately seen as co-existing with

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economic responsibilities as fundamental precepts of the free enterprisesystem.

Ethical ResponsibilitiesEthical ResponsibilitiesEthical ResponsibilitiesEthical ResponsibilitiesEthical Responsibilities

Although economic and legal responsibilities embody ethical norms aboutfairness and justice, ethical responsibilities embrace those activities andpractices that are expected or prohibited by societal members even thoughthey are not codified into law. Ethical responsibilities embody thosestandards, norms, or expectations that reflect a concern for whatconsumers, employees, shareholders, and the community regard as fair,just, or in keeping with the respect or protection of stakeholders' moralrights.

Philanthropic ResponsibilitiesPhilanthropic ResponsibilitiesPhilanthropic ResponsibilitiesPhilanthropic ResponsibilitiesPhilanthropic Responsibilities

Philanthropy encompasses those corporate actions that are in response tosociety's expectation that businesses be good corporate citizens. This includesactively engaging in acts or programmes to promote human welfare orgoodwill. Examples of philanthropy include business contributions of financialresources or executive time, such as contributions to the arts, education, orthe community. A loaned-executive programme that provides leadership fora community's United Way campaign is one illustration of philanthropy.

The distinguishing feature between philanthropic and ethical responsibilitiesis that the former are not expected in an ethical or moral sense. Communitiesdesire firms to contribute their money, facilities, and employee time tohumanitarian programmes or purposes, but they do not regard the firms asunethical if they do not provide the desired level. Therefore, philanthropy ismore discretionary or voluntary on the part of businesses even though thereis always the societal expectation that businesses provide it.


In an age where capital flows worldwide, just as quickly as information, acompany that does not promote a culture of strong, independent outlook,risks its very stability and future health. As a result, the link between acompany's management, directors and its financial reporting system has neverbeen more crucial. As the boards provide stewardship of companies, theyplay a significant role in their efficient functioning. The Kumarmangalam Birlacommittee on corporate governance was appointed because of theaforementioned concern. It has given a comprehensive list of recommendationsto improve the fabric of corporate governance in India.At the same time, corporates are also working towards their socialresponsibility. They are becoming increasingly aware of their role in this regardto sustain business on a long term basis.


1. The issue of corporate governance involves besides shareholders, allother stakeholders, and in particular shareholders and ____________.



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2. The Securities and Exchange Board of India (SEBI) appointed theCommittee on Corporate Governance on May 7, 1999 under theChairmanship of _____________.

3. The Committee has identified the three key constituents of corporategovernance as _________, ___________and ______________.

4. The three key aspects of corporate governance as per this committeeare __________, ___________ and _________.

5. The Committee recommended that the board of a company have anoptimum combination of executive and non-executive directors withnot less than __________ percent of the board comprising the non-executive directors.

6. The award, instituted by the Union Finance ministry and sponsored bythe Unit Trust of India (UTI), is aimed at strengthening ___________confidence in the capital markets by encouraging Indian companies tofollow internationally accepted practices of corporate governance.

7. In 1971 the Committee for Economic Development in USA used a"________ __________ _________" approach to depicting CSR.

8. A four-part conceptualisation of CSR included the idea that thecorporation has not only economic and legal obligations, but _____ and____________ responsibilities as well (Carroll 1979).

9. In recent years, the term ________ has emerged as an inclusive andglobal concept to embrace corporate social responsibility,responsiveness, and the entire spectrum of socially beneficial activitiesof businesses.

10. Ethical responsibilities embody those standards, norms, or expectationsthat reflect a concern for what ________, _________, ____________, andthe community regard as fair, just, or in keeping with the respect forthe protection of stakeholders' moral rights.

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Chapter VIIIChapter VIIIChapter VIIIChapter VIIIChapter VIIIBusiness ethicsBusiness ethicsBusiness ethicsBusiness ethicsBusiness ethics

Business ethics is a form of applied ethics that examines ethical principlesand moral or ethical problems that arise in a business environment. It appliesto all aspects of business conduct and is relevant to the conduct of individualsand business organizations as a whole. Applied ethics is a field of ethics thatdeals with ethical questions in many fields such as medical, technical, legaland business ethics.

In the increasingly conscience-focused marketplaces of the 21st century, thedemand for more ethical business processes and actions is increasing.Simultaneously, pressure is applied on industry to improve business ethicsthrough new public initiatives and laws. Businesses can often attain short-term gains by acting in an unethical fashion; however, such behaviours tendto undermine the economy over time.

Business ethics can be both a normative and a descriptive discipline. As acorporate practice and a career specialization, the field is primarily normative.In academia descriptive approaches are also taken. The range and quantity ofbusiness ethical issues reflects the degree to which business is perceived tobe at odds with non-economic social values. Historically, interest in businessethics accelerated dramatically during the 1980s and 1990s, both within majorcorporations and within academia. For example, today most major corporatewebsites lay emphasis on commitment to promoting non-economic socialvalues under a variety of headings.

LearLearLearLearLearning Objectivesning Objectivesning Objectivesning Objectivesning Objectives1. To understand the emphasis which companies are giving on

commitment to promoting non-economic social values?2. To understand the benefits of being ethical greatly outweigh being non-

ethical in business.3. To understand the ethical issues in business.4. To understand that taking decisions which based on ethics helps

businesses in surviving many ups and downs.

ContentsContentsContentsContentsContentsOverview of issues in business ethics8.1. General business ethics

8.1.1Ethics of accounting information8.1.2Ethics of human resource management8.1.3 Ethics of sales and marketing8.1.4 Ethics of production8.1.5 Ethics of intellectual property, knowledge and skills

8.2 International business ethics and ethics of economic systems8.2.1 International business ethics8.2.2 Ethics of economic systems

Theoretical issues in business ethics8.2.3 Conflicting interests8.2.4 Ethical issues and approaches

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8.3 Business ethics in the field8.3.1 Corporate ethics policies8.3.2 Ethics officers

Summing upSumming upSumming upSumming upSumming upSelf AssessmentSelf AssessmentSelf AssessmentSelf AssessmentSelf Assessment

Overview of issues in business ethicsOverview of issues in business ethicsOverview of issues in business ethicsOverview of issues in business ethicsOverview of issues in business ethics

88888.1 General business ethics.1 General business ethics.1 General business ethics.1 General business ethics.1 General business ethics

• This part of business ethics overlaps with the philosophy of business,one of the aims of which is to determine the fundamental purposes of acompany. If a company's main purpose is to maximize the returns to itsshareholders, then it should be seen as unethical for a company toconsider the interests and rights of anyone else.

• Corporate social responsibility or CSR: an umbrella term under whichthe ethical rights and duties existing between companies and society isdebated.

• Issues regarding the moral rights and duties between a company andits shareholders: fiduciary responsibility, stakeholder concept v.shareholder concept.

• Ethical issues concerning relations between different companies: e.g.hostile take-overs, industrial espionage.

• Leadership issues: corporate governance.• Political contributions made by corporations.• Law reform, such as the ethical debate over introducing a crime of

corporate manslaughter.• The misuse of corporate ethics policies as marketing instruments.

8 . 1 . 1 .8 . 1 . 1 .8 . 1 . 1 .8 . 1 . 1 .8 . 1 . 1 . Ethics of accounting inforEthics of accounting inforEthics of accounting inforEthics of accounting inforEthics of accounting informationmationmationmationmation

1. Creative accounting, earnings management, misleading financialanalysis.

2. Insider trading, securities fraud, bucket shops, forex scams: concerns(criminal) manipulation of the financial markets.

3. Executive compensation: concerns excessive payments made tocorporate CEO's and top management.

4. Bribery, kickbacks, and facilitation payments: while these may be inthe (short-term) interests of the company and its shareholders, thesepractices may be anti-competitive or offend against the values of society.

8 . 1 . 28 . 1 . 28 . 1 . 28 . 1 . 28 . 1 . 2 Ethics of human resource managementEthics of human resource managementEthics of human resource managementEthics of human resource managementEthics of human resource management

The ethics of human resource management (HRM) covers those ethical issuesarising around the employer-employee relationship, such as the rights andduties owed between employer and employee.1. Discrimination issues include discrimination on the bases of age

(ageism), gender, race, religion, disabilities, weight and attractiveness.See also: affirmative action, sexual harassment.

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2. Issues arising from the traditional view of relationships betweenemployers and employees, also known as At-will employment.

3. Issues surrounding the representation of employees and thedemocratization of the workplace: union busting, strike breaking.

4. Issues affecting the privacy of the employee: workplace surveillance, .See also: privacy.

5. Issues affecting the privacy of the employer: whistle-blowing.6. Issues relating to the fairness of the employment contract and the balance

of power between employer and employee: slavery, indentured servitude,employment law.

7. Occupational safety and health.

The entire above are also related to the hiring and firing of employees. Anemployee or future employee can not be hired or fired based on race, age,gender, religion, or any other discriminatory act.

8 . 1 . 38 . 1 . 38 . 1 . 38 . 1 . 38 . 1 . 3 Ethics of sales and marketingEthics of sales and marketingEthics of sales and marketingEthics of sales and marketingEthics of sales and marketing

Marketing, which goes beyond the mere provision of information about (andaccess to) a product, may seek to manipulate our values and behavior. Tosome extent society regards this as acceptable, but where is the ethical lineto be drawn? Marketing ethics overlaps strongly with media ethics, becausemarketing makes heavy use of media. However, media ethics is a much largertopic and extends outside business ethics.• Pricing: price fixing, price discrimination, price skimming.• Anti-competitive practices: these include but go beyond pricing tactics

to cover issues such as manipulation of loyalty and supply chains. See:anti-competitive practices, antitrust law.

• Specific marketing strategies: green wash, bait and switch, shill, viralmarketing, spam (electronic), pyramid scheme, planned obsolescence.

• Content of advertisements: attack ads, subliminal messages, sex inadvertising, products regarded as immoral or harmful

• Children and marketing: marketing in schools.• Black markets, grey markets.

8 . 1 . 48 . 1 . 48 . 1 . 48 . 1 . 48 . 1 . 4 Ethics of productionEthics of productionEthics of productionEthics of productionEthics of production

This area of business ethics usually deals with the duties of a company toensure that products and production processes do not cause harm. Some ofthe more acute dilemmas in this area arise out of the fact that there is usuallya degree of danger in any product or production process and it is difficult todefine a degree of permissibility, or the degree of permissibility may dependon the changing state of preventative technologies or changing socialperceptions of acceptable risk.• Defective, addictive and inherently dangerous products and services (e.g.

tobacco, alcohol, weapons, motor vehicles, chemical manufacturing,bungee jumping).

• Ethical relations between the company and the environment: pollution,environmental ethics, carbon emissions trading

• Ethical problems arising out of new technologies: , mobile phoneradiation and health.

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• Product testing ethics: animal rights and animal testing, use ofeconomically disadvantaged groups (such as students) as test objects.

8 . 1 . 58 . 1 . 58 . 1 . 58 . 1 . 58 . 1 . 5 Ethics of intellectual prEthics of intellectual prEthics of intellectual prEthics of intellectual prEthics of intellectual propertyopertyopertyopertyoperty, knowledge and skills, knowledge and skills, knowledge and skills, knowledge and skills, knowledge and skills

Knowledge and skills are valuable but not easily "ownable" as objects. Nor isit obvious that has the greater rights to an idea: the company who trained theemployee or the employee themselves? The country in which the plant grewor the company which discovered and developed the plant's medicinalpotential? As a result, attempts to assert ownership and ethical disputes overownership arise.• Patent infringement, copyright infringement, trademark infringement.• Misuse of the intellectual property systems to stifle competition: patent

misuse, copyright misuse, patent troll, submarine patent.• Even the notion of intellectual property itself has been criticized on

ethical grounds: see intellectual property.• Employee raiding: the practice of attracting key employees away from a

competitor to take unfair advantage of the knowledge or skills they maypossess.

• The practice of employing all the most talented people in a specific field,regardless of need, in order to prevent any competitors employing them.

• Business intelligence and industrial espionage.

Ethics and Technology The computer and the World Wide Web are two of themost significant inventions of the twentieth century. There are many ethicalissues that arise from this technology. It is easy to gain access to information.This leads to data mining, workplace monitoring, and privacy invasion.[5]Medical technology has improved as well. Pharmaceutical companies havethe technology to produce life saving drugs. These drugs are protected bypatents and there are no generic drugs available. This raises many ethicalquestions.

8.2 Inter8.2 Inter8.2 Inter8.2 Inter8.2 International business ethics and ethics of economic systemsnational business ethics and ethics of economic systemsnational business ethics and ethics of economic systemsnational business ethics and ethics of economic systemsnational business ethics and ethics of economic systems

The issues here are grouped together because they involve a much wider,global view on business ethical matters.

8 . 2 . 18 . 2 . 18 . 2 . 18 . 2 . 18 . 2 . 1 InterInterInterInterInternational business ethicsnational business ethicsnational business ethicsnational business ethicsnational business ethics

While business ethics emerged as a field in the 1970s, international businessethics did not emerge until the late 1990s, looking back on the internationaldevelopments of that decade.[6] Many new practical issues arose out of theinternational context of business. Theoretical issues such as cultural relativityof ethical values receive more emphasis in this field. Other, older issues canbe grouped here as well. Issues and subfields include:• The search for universal values as a basis for international commercial

behaviour.• Comparison of business ethical traditions in different countries. Also

on the basis of their respective GDP and [Corruption rankings].• Comparison of business ethical traditions from various religious

perspectives.

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• Ethical issues arising out of international business transactions; e.g.bioprospecting and biopiracy in the pharmaceutical industry; the fairtrade movement; transfer pricing.

• Issues such as globalization and cultural imperialism.• Varying global standards - e.g. the use of child labor.• The way in which multinationals take advantage of international

differences, such as outsourcing production (e.g. clothes) and services(e.g. call centres) to low-wage countries.

• The permissibility of international commerce with pariah states.

Foreign countries often use dumping as a competitive threat, selling productsat prices lower than their normal value. This can lead to problems in domesticmarkets. It becomes difficult for these markets to compete with the pricingset by foreign markets. In 2009, the International Trade Commission has beenresearching anti-dumping laws. Dumping is often seen as an ethical issue, aslarger companies are taking advantage of other less economically advancedcompanies.

8 . 2 . 28 . 2 . 28 . 2 . 28 . 2 . 28 . 2 . 2 Ethics of economic systemsEthics of economic systemsEthics of economic systemsEthics of economic systemsEthics of economic systems

Ethics is a matter of doing justice to the human without twisting the factsand ignoring the constraints. The study introduces seven criteria of humanjustice that fundamentally relate to the Christian revelation and, at the sametime, establish a humanistic and universal approach. Subsequently it focuseson the concrete economic systems and their problems. It describes andanalyses various models of market and centrally planned economies, andevaluates them in the light of middle-level principles, which are informed byboth ethical criteria and economic knowledge.

Theoretical issues in business ethicsTheoretical issues in business ethicsTheoretical issues in business ethicsTheoretical issues in business ethicsTheoretical issues in business ethics

8.2.3 Conflicting interests8.2.3 Conflicting interests8.2.3 Conflicting interests8.2.3 Conflicting interests8.2.3 Conflicting interests

Business ethics can be examined from various new perspectives, includingthe perspective of the employee, the commercial enterprise, and society as awhole. Very often, situations arise in which there is conflict between one andmore of the parties, such that serving the interest of one party is a detrimentto the other(s). For example, a particular outcome might be good for theemployee, whereas, it would be bad for the company, society, or vice versa.Some ethicists see the principal role of ethics as the harmonization andreconciliation of conflicting interests.

8 . 2 . 48 . 2 . 48 . 2 . 48 . 2 . 48 . 2 . 4 Ethical issues and approaches Ethical issues and approaches Ethical issues and approaches Ethical issues and approaches Ethical issues and approaches

Philosophers and others disagree about the purpose of a business ethic insociety. For example, some suggest that the principal purpose of a businessis to maximize returns to its owners, or in the case of a publicly-tradedconcern, its shareholders. Thus, under this view, only those activities thatincrease profitability and shareholder value should be encouraged, becauseany others function as a tax on profits. Some believe that the only companiesthat are likely to survive in a competitive marketplace are those that placeprofit maximization above everything else. However, some point out that self-

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interest would still require a business to obey the law and adhere to basicmoral rules, because the consequences of failing to do so could be very costlyin fines, loss of licensure, or company reputation.

Some take the position that organizations are not capable of moral agency.Under this, ethical behavior is required of individual human beings, but notof the business or corporation.

Other theorists contend that a business has moral duties that extend wellbeyond serving the interests of its owners or stockholders, and that theseduties consist of more than simply obeying the law. They believe a businesshas moral responsibilities to so-called stakeholders, people who have aninterest in the conduct of the business, which might include employees,customers, vendors, the local community, or even society as a whole.Stakeholders can also be broken down into primary and secondarystakeholders. Primary stakeholders are people that are affected directly suchas stockholders, where secondary stakeholders are people who are notaffected directly such as the government. They would say that stakeholdershave certain rights with regard to how the business operates, and some wouldsuggest that this includes even rights of governance.

Ethical issues can arise when companies must comply with multiple andsometimes conflicting legal or cultural standards, as in the case of multinationalcompanies that operate in countries with varying practices. The questionarises, for example, ought a company to obey the laws of its home country, orshould it follow the less stringent laws of the developing country in which itdoes business? It is claimed that in a competitive business environment, thosecompanies that survive are the ones that recognize that their only role is tomaximize profits.

8.3 Business ethics in the field8.3 Business ethics in the field8.3 Business ethics in the field8.3 Business ethics in the field8.3 Business ethics in the field

8.8.8.8.8.3.1 Corporate Ethics Policy3.1 Corporate Ethics Policy3.1 Corporate Ethics Policy3.1 Corporate Ethics Policy3.1 Corporate Ethics Policy

As part of more comprehensive compliance and ethics programs, manycompanies have formulated internal policies pertaining to the ethical conductof employees. These policies can be simple exhortations in broad, highly-generalized language (typically called a corporate ethics statement), or theycan be more detailed policies, containing specific behavioral requirements(typically called corporate ethics codes). They are generally meant to identifythe company's expectations of workers and to offer guidance on handlingsome of the more common ethical problems that might arise in the course ofdoing business. It is hoped that having such a policy will lead to greater ethicalawareness, consistency in application, and the avoidance of ethical disasters.An increasing number of companies also require employees to attend seminarsregarding business conduct, which often include discussion of the company'spolicies, specific case studies, and legal requirements. Some companies evenrequire their employees to sign agreements stating that they will abide by thecompany's rules of conduct.

Many companies are assessing the environmental factors that can lead employeesto engage in unethical conduct. A competitive business environment may callfor unethical behavior. Lying has become expected in fields such as trading.

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Not everyone supports corporate policies that govern ethical conduct. Someclaim that ethical problems are better dealt with by depending upon employeesto use their own judgment.

Others believe that corporate ethics policies are primarily rooted in utilitarianconcerns, and that they are mainly to limit the company's legal liability, or tocurry public favor by giving the appearance of being a good corporate citizen.Ideally, the company will avoid a lawsuit because its employees will followthe rules. Should a lawsuit occur, the company can claim that the problemwould not have arisen if the employee had only followed the code properly?Sometimes there is disconnection between the company's code of ethics andthe company's actual practices. Thus, whether or not such conduct is explicitlysanctioned by management, at worst, this makes the policy duplicitous, and,at best, it is merely a marketing tool.

To be successful, most ethicists would suggest that an ethics policy should be:• Given the unequivocal support of top management, by both word and

example.• Explained in writing and orally, with periodic reinforcement.• Doable....something employees can both understand and perform.• Monitored by top management, with routine inspections for compliance

and improvement.• Backed up by clearly stated consequences in the case of disobedience.• Remain neutral and nonsexist.

Importance of Ethics in BusinessImportance of Ethics in BusinessImportance of Ethics in BusinessImportance of Ethics in BusinessImportance of Ethics in Business• Ethics is important not only in business but in all aspects of life because

it is the vital part and the foundation on which the society is build. Abusiness/society that lacks ethical principles is bound to fail sooner orlater. According to International Ethical Business Registry, "there hasbeen a dramatic increase in the ethical expectation of businesses andprofessionals over the past 10 years. Increasingly, customers, clientsand employees are deliberately seeking out those who define the basicground, rules of their operations on a day today...."

• Ethics refers to a code of conduct that guides an individual in dealingwith others. Business Ethics is a form of the art of applied ethics thatexamines ethical principles and moral or ethical problems that can arisein business environment. It deals with issues regarding the moral andethical rights, duties and corporate governance between a company andits shareholders, employees, customers, media, government, suppliersand dealers. Henry Ford said, "Business that makes noting but moneyis a poor kind of business".

• Ethics is related to all disciplines of management like accountinginformation, human resource management, sales and marketing,production, intellectual property knowledge and skill, internationalbusiness and economic system. In business world the organization'sculture sets standards for determining the difference between good orbad, right or wrong, fair or unfair.

• "It is perfectly possible to make a decent living without compromisingthe integrity of the company or the individual, wrote business executiveR. Holland, "Quite apart from the issues of rightness and wrongness,the fact is that ethical behavior in business serves the individual andthe enterprise much better in long run.", he added.

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• Some management guru stressed that ethical companies have anadvantage over their competitors. Said Cohen and Greenfield,"Consumers are used to buying products despite how they feel aboutthe company that sells them. But a valued company earned a kind ofcustomer loyalty most corporations only dream of because it appeals toits customers more than a product".

• The ethical issues in business have become more complicated becauseof the global and diversified nature of many large corporation and becauseof the complexity of economic, social, global, natural, political, legaland government regulations and environment, hence the company mustdecide whether to adhere to constant ethical principles or to adjust todomestic standards and culture.

• Managers have to remember that leading by example is the first step infostering a culture of ethical behavior in the companies as rightly saidby Robert Noyce, "If ethics are poor at the top, that behavior is copieddown through the organization", however the other methods can becreating a common interest by favorable corporate culture, setting highstandards, norms, framing attitudes for acceptable behavior, makingwritten code of ethics implacable at all levels from top to bottom,deciding the policies for recruiting, selecting, training, induction,promotion, monetary / non-monetary motivation, remuneration andretention of employees. "Price is what you pay. Value is what you get" -Warren Buffet

• Thus, a manager should treat his employees, customers, shareholders,government, media and society in an honest and fair way by knowingthe difference between right or wrong and choosing what is right, thisis the foundation of ethical decision making. REMEMBER: GOODETHICS IS GOOD BUSINESS. "Non-corporation with the evil is as mucha duty as is co-operation with good" - Mahatma Gandhi.

Business and EthicsBusiness and EthicsBusiness and EthicsBusiness and EthicsBusiness and Ethics• As an entrepreneur, sometimes, you may be forced adopt austerity

measures for managing the finances of the company or there may be somany allurements that you may be tempted to make compromises onthe quality of the products you manufacture or to terminate the servicesof some of the existing employees so as to increase profits.

• The situation may demand your immediate decision and the easy andsimple way out may be to make such compromises. But if you aresteadfast in observing ethics in your business, you may be equippedwith the far-sightedness to foresee such eventualities and may havetaken the appropriate steps that may free you from such trickysituations.

• Some people may argue that business and ethics cannot go together.This is not true. If you respect values in life, you will definitely understandthat ethical business will definitely give you the leverage of peace ofmind in doing your business. To understand the situations in the rightperspective and consider ethical decisions for implementation, you mayhave to know the approaches that are available to you.1. You take a stand that would be beneficial to all, keeping in mind

your success in the business, your goals in the business, and yourresponsibilities to your customers, your responsibilities to the

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society at large and also to your employees. This is otherwise calledthe Utilitarian approach.

2. You may opt to stick to ethics, come what may. You do not worryabout the consequences of your decisions and you possess thecourage of conviction and conventions to assert that ethicaldecisions are supreme in business. Even if it may entail closingdown of your business, you stick to that stand. This approach maynot appeal to all entrepreneurs and very rarely, we come acrossentrepreneurs of this kind.

3. The third approach is based on the golden rule. You clearly andunambiguously opt for decisions you know to be right. If you donot feel good taking a decision, then it is wrong. But, if you have agood feeling, then you believe it is the right decision.

4. In certain situations, you will be forced to weigh the cost of thedecisions as against the benefits derived from them. If theconsequences of the decisions are going to cost you more than thebenefits that you may derive, then you may not opt for it and if thebenefits outweigh the cost, you may go ahead with those decisions.

• Experience shows that taking decisions based on ethics helps businessesin surviving many ups and downs. Business history clearly shows thatadopting unethical means to run a business always leads to reversal offortunes. Hence while taking decisions during such situations, the over-riding consideration should be "Commerce with ethics", to quoteMahatma Gandhi's words.

Can Ethics and a Healthy Bottom Line For Companies Co-Exist?Can Ethics and a Healthy Bottom Line For Companies Co-Exist?Can Ethics and a Healthy Bottom Line For Companies Co-Exist?Can Ethics and a Healthy Bottom Line For Companies Co-Exist?Can Ethics and a Healthy Bottom Line For Companies Co-Exist?• There's a view that soaring profits and ethics are mutually exclusive

concepts, however, the two can co-exist. The world of business isgenerally perceived as jungle where the bottom line takes precedenceover all other matters. While it is certainly true that profits are the truemeasure of success, commercial ruthlessness doesn't necessarily leadto unethical practices. There sometimes arises an inevitable conflict inthe company between their moral obligations and improving the bottomlines. But ultimately companies following the path of ethical value systemsucceed in long run as sooner or later consumers learn to separate factfrom fiction.

• Nowadays Money and Ethics are seen to be diametrically opposed toeach other but it turns out money and ethics do have much in common.Any corporation large or small ultimately lives by its reputation. Ethicsmust sit at the top of the mountain for any successful company thatwants the trust of the consumers and investors. There are very fewsecond acts once the public perceives the organization flawed bydishonesty or inferior quality. As is very rightly said by Henry Ford - Abusiness that makes nothing but money is a poor kind of business.

• Ethical decision-making gets especially interesting when organizationsmust reconcile their core values and show a healthy bottom line whichend up in conflict with one another. The company and its managementmight get diversified to malpractices. Enron, WorldCom, Satyam, Xeroxand other scandals shook public confidence in ethical value system oforganizations. But it must understood very clearly Relativity applies tophysics, not ethics (Albert Einstein)

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• Profits and ethics are in reality part of the same equation. A corporationthat wishes to grow and increase its financial return to its owners mustbalance ethics and operations. This is a complex journey especiallyduring tremendous economic pressures. The drive for success in themarketplace and to maximize return of capital can lead a company astraywith disastrous results. Successful businesses fail, profitably runningbusinesses suf fer from a downfall and some seemingly ef fectivecorporate receive a great fall in their profits and popularity all due to thelack of business ethics. There are companies that have crossed ethicallines in the pursuit of profit, and momentarily gained fame and fortunebut what was the end result??

• Many companies strive for and achieve ethical behavior. Looking atnames like Tata group, Ford India, Rockwell Automation, InfosysTechnologies, Hindustan Unilever, ITC, ONGC it is inferred that Ethicsremain being important in business and strong ethical values takes thebusiness a long way. Ethics are important not only in business but in allaspects of life because it is an essential part of the foundation on whichcivilized society is build. A business that lacks ethical principles is boundto fail sooner or later.

• "If you have integrity, nothing else matters. If you don't have integrity,nothing else matters." -- Alan K. Simpson

Why Ethics ArWhy Ethics ArWhy Ethics ArWhy Ethics ArWhy Ethics Are Important in Businesse Important in Businesse Important in Businesse Important in Businesse Important in Business

• When working in the business world, it is a necessity to encompassmoral ethics. Ethics is also especially important when working withfinancial information. It is very difficult to trust someone handling lotsof money. Companies in the past have distorted their financialstatements in order to look better to stockholders, without thinking ofthe consequences that may follow if they get caught. If a company doesnot promote good ethical behavior within the organization, it is hard totrust the financial statements.

• Auditors, or "independent third parties", must be truthful and honestwhen auditing a company's financial information. If honesty is notinvolved in the auditing process, it will be very hard for a shareholderto trust the company. In other words, if a company is caught alteringtheir financial information, it is tremendously hard to have confidencethe business, therefore putting the company in a bad situation. No onewill want to buy their stocks anymore and many people will lose theirfaith in the company. Most likely, the company will collapse and it willbe that much harder for people to put their trust into another companysimilar to the one that has collapsed.

· In order to prevent fraud in companies, it is a great idea to let theaccountants have vacation days lined up and have other accountants fillin for the job. This way, fraud will be detected before any of the financialstatements are sent out to the shareholders, and the employee creatingthe financials can be fired. Similarly, separation of duties also comesinto play when dealing with important financials. Just like allowingaccountants to take time off, there should be separation of responsibilitywithin each department. For example, one employee can balance thebooks, and another employee can "audit" the financials and make sure

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that everything is balanced and in the right place. This may becometime consuming; however, it is essential that the financials are accurateand completed with ethical precision. Most companies would want tomake sure that the financials are correct and save the hassle of havingruined financials.

• There are also personal reasons as to keep financials accurate, such ashaving an honest and truthful reputation. Accountants must have strongmoral values, or else there would be more fraudulent financials. It ishard to prove honesty to new people, especially to co-workers and newbosses. However, it is possible. Sincerely wanting the company to dowell and succeed is a key factor in helping to prove trustworthiness.Arriving to work on time, getting projects completed, and having a goodrelationship with associates within the company are ways to prove tobe a trustworthy person as well.

• In addition to shareholders having confidence in the company, partnersand suppliers need to be able to trust the company. Personal relationshipsare based upon trust, as are corporate relationships. Companies thriveon networking in order to be successful. Employee performance alsoimproves while working in an ethical environment. If employeeperformance improves, the company will thrive, and as a result, everyonewins.

• By making ethics mandatory within a company, success will beestablished. There is a chain reaction when ethical behavior occurs andwhen non-ethical behavior occurs. Non-ethical behavior can scorn thecompany and create bad publicity. Shareholders and corporate partnerswill lose their confidence in the company and give their support, money,and business to a similar company. Being non-ethical can lead to failureand the fall of the business. By being honest with the financials,shareholders can see the true potential the company has and base theirdecisions off of honesty. Corporate partners can count on the companywhen making business decisions. This would prevent any bad publicityfor the company and keep them out of negative spotlights.

• The benefits of being ethical greatly outweigh being non-ethical inbusiness. There are plenty of reasons why being honest and truthful isthe better decision to make when creating financials for otherbusinesspeople to see and use to make conclusions. Although it can besaid that ethics is a given when working for a business, companiesshould enforce being ethical and ultimately become more successfulbecause of it.

8.3.2 Ethics of8.3.2 Ethics of8.3.2 Ethics of8.3.2 Ethics of8.3.2 Ethics of ficersficersficersficersficers

Ethics officers (sometimes called "compliance" or "business conduct officers")have been appointed formally by organizations since the mid-1980s.

The ef fectiveness of ethics officers in the marketplace is not clear. If theappointment is made primarily as a reaction to legislative requirements, onemight expect the efficacy to be minimal, at least, over the short term. In part,this is because ethical business practices result from a corporate culture thatconsistently places value on ethical behavior, a culture and climate that usuallyemanates from the top of the organization. The mere establishment of a

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position to oversee ethics will most likely be insufficient to inculcate ethicalbehaviour: a more systemic programme with consistent support from generalmanagement will be necessary.

The foundation for ethical behavior goes well beyond corporate culture andthe policies of any given company, for it also depends greatly upon anindividual's early moral training, the other institutions that affect an individual,the competitive business environment the company is in and, indeed, societyas a whole.

Summing upSumming upSumming upSumming upSumming up

• A code of ethics or conduct is a statement of ethical practices orguidelines to which an enterprise adheres. There are many such codes,some related to industry at large and others related directly to corporateconduct. These codes cover a multitude of subjects, ranging from misuseof corporate assets, conflict of interest, and use of inside information, toequal employment practices, falsification of books and records, andantitrust violations. These codes of ethics can promote positive behavioramong corporations in a variety of ways.

• Recognizing and trying to solve the problems involving equality, theenvironment, and consumerism represent the major part of the socialresponsibility of business.

• Business ethics are standards that govern business behavior. Many havefound that they believed that a code of ethics was the most effectiveway to encourage ethical business behavior. Sometimes these codesare written down or a code of ethics is communicated orally or eventhrough the overall climate or cultural values of the organization

Self AssessmentSelf AssessmentSelf AssessmentSelf AssessmentSelf Assessment

1. Explain ethics of accounting information2. Explain ethics of human resource management3. Ethics of sales and marketing4. Ethics of production5. Ethics of intellectual property, knowledge and skills6. What are the suggestions about ethics policy?7. Who are Ethics officers?8. Why Ethics Are Important in Business9. What is the importance of Ethics in Business10. Explain few approaches of business and Ethics.11. Can Ethics and a Healthy Bottom Line For Companies Co-Exist?

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Chapter IXChapter IXChapter IXChapter IXChapter IXGlobalizationGlobalizationGlobalizationGlobalizationGlobalization

Globalization has had an impact on dif ferent cultures around the world.Globalization describes an ongoing process by which regional economies,societies, and cultures have become integrated through a globe-spanningnetwork of communication and exchange. The term is sometimes used torefer specifically to economic globalization: the integration of nationaleconomies into the international economy through trade, foreign directinvestment, capital flows, migration, and the spread of technology. However,globalization is usually recognized as being driven by a combination ofeconomic, technological, socio-cultural, political, and biological factors. Theterm can also refer to the transnational circulation of ideas, languages, orpopular culture.

LearLearLearLearLearning Objectivesning Objectivesning Objectivesning Objectivesning Objectives1. To define globalization and international business and show how they

affect each other2. To understand why companies engage in international business and

why international business growth has accelerated3. To discuss the major criticisms of globalization4. To become familiar with dif ferent ways in which a company can

accomplish its global objectives5. To apply social science disciplines to understanding the differences

between international and domestic business

ContentsContentsContentsContentsContents9.1 Globalization – Definition, History9.2 Modern Globalization9.3 Measuring globalization9.4 Effects of globalization9.5 Pro-globalization (globalism)9.6 Anti-globalization

9.1 Definition9.1 Definition9.1 Definition9.1 Definition9.1 Definition

An early description of globalization was penned by the American entrepreneur-turned-minister Charles Taze Russell who coined the term 'corporate giants'in 1897. However, it was not until the 1960s that the term began to be widelyused by economists and other social scientists. It had achieved widespreaduse in the mainstream press by the later half of the 1980s. Since its inception,the concept of globalization has inspired numerous competing definitions andinterpretations.

The United Nations ESCWA has written that globalization "is a widely-usedterm that can be defined in a number of different ways. When used in aneconomic context, it refers to the reduction and removal of barriers betweennational borders in order to facilitate the flow of goods, capital, and servicesand labour... although considerable barriers remain to the flow of labour...”

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Globalization is not a new phenomenon. It began in the late nineteenth century,but its spread slowed during the period from the start of the First World Waruntil the third quarter of the twentieth century. This slowdown can beattributed to the inward looking policies pursued by a number of countries inorder to protect their respective industries. However, the pace of globalizationpicked up rapidly during the fourth quarter of the twentieth century.

HistoryHistoryHistoryHistoryHistory

The historical origins of globalization are the subject of on-going debate.Though some scholars situate the origins of globalization in the modern era,others regard it as a phenomenon with a long history.

Great Britain grew rich in the 19th century as the first global economicsuperpower, because of its superior manufacturing technology and improvedglobal communications such as steamships and railroads.

The 19th century witnessed the advent of globalization approaching its modernform. Industrialization allowed cheap production of household items usingeconomies of scale, while rapid population growth created sustained demandfor commodities. Globalization in this period was decisively shaped bynineteenth-century imperialism. After the Opium Wars and the completion ofBritish conquest of India, vast populations of these regions became readyconsumers of European exports. It was in this period that areas of sub-SaharanAfrica and the Pacific islands were incorporated into the world system.Meanwhile, the conquest of new parts of the globe, notably sub-Saharan Africa,by Europeans yielded valuable natural resources such as rubber, diamondsand coal and helped fuel trade and investment between the European imperialpowers, their colonies, and the United States. Said John Maynard Keynes.

The first phase of "modern globalization" began to break down at the beginningof the 20th century, with the first World War. The novelist VM Yeates criticizedthe financial forces of globalization as a factor in creating World War I. Thefinal death knell for this phase came during the gold standard crisis and GreatDepression in the late 1920s and early 1930s.

In the middle decades of the twentieth century globalization was largely drivenby the global expansion of multinational corporations based in the UnitedStates and Europe, and worldwide exchange of new developments in science,technology and products, with most significant inventions of this time havingtheir origins in the Western world according to Encyclopedia Britannica.Worldwide export of western culture went through the new mass media:film, radio and television and recorded music. Development and growth ofinternational transport and telecommunication played a decisive role in modernglobalization.

In late 2000s, much of the industrialized world entered into a deep . Someanalysts say the world is going through a period of delocalization after yearsof increasing economic integration. Up to 45% of global wealth had beendestroyed by the global financial crisis in little less than a year and a half.China has recently become the world's largest exporter surpassing Germany.

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9.2 Moder9.2 Moder9.2 Moder9.2 Moder9.2 Moder n Globalizationn Globalizationn Globalizationn Globalizationn Globalization

Globalization, since World War II, is largely the result of planning by politicians tobreak down borders hampering trade to increase prosperity and interdependencethereby decreasing the chance of future war. Their work led to the Bretton Woodsconference, an agreement by the world's leading politicians to lay down theframework for international commerce and finance, and the founding of severalinternational institutions intended to oversee the processes of globalization.

These institutions include the International Bank for Reconstruction andDevelopment (the World Bank), and the International Monetary Fund.Globalization has been facilitated by advances in technology which havereduced the costs of trade, and trade negotiation rounds, originally under theauspices of the General Agreement on Tariffs and Trade (GATT), which ledto a series of agreements to remove restrictions on free trade.

Since World War II, barriers to international trade have been considerablylowered through international agreements — GATT. Particular initiativescarried out as a result of GATT and the (WTO), for which GATT is thefoundation, has included:• Promotion of free trade: elimination of tariffs; creation of free trade zones

with small or no tariffs• Reduced transportation costs, especially resulting from development of

containerization for ocean shipping.• Reduction or elimination of capital controls• Reduction, elimination, or harmonization of subsidies for local businesses• Creation of subsidies for global corporations• Harmonization of intellectual property laws across the majority of states,

with more restrictions• Supranational recognition of intellectual property restrictions (e.g.

patents granted by China would be recognized in the United States)

Cultural globalization, driven by communication technology and the worldwidemarketing of Western cultural industries, was understood at first as a processof homogenization, as the global domination of American culture at the expenseof traditional diversity. However, a contrasting trend soon became evident inthe emergence of movements protesting against globalization and giving newmomentum to the defense of local uniqueness, individuality, and identity, butlargely without success.

9.3 Measuring globalization9.3 Measuring globalization9.3 Measuring globalization9.3 Measuring globalization9.3 Measuring globalization

Looking specifically at economic globalization, demonstrates that it can bemeasured in different ways. This center around the four main economic flowsthat characterize globalization:• Goods and services, e.g., exports plus imports as a proportion of national

income or per capita of population• Labor/people, e.g., net migration rates; inward or outward migration

flows, weighted by population• Capital, e.g., inward or outward direct investment as a proportion of

national income or per head of population

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• Technology, e.g., international research & development flows;proportion of populations (and rates of change thereof) using particularinventions (especially 'factor-neutral' technological advances such asthe telephone, motorcar, broadband)

As globalization is not only an economic phenomenon, a multivariate approachto measuring globalization is the recent index calculated by the Swiss thinktank KOF.

The KOF Index of Globalization measures the three main dimensions ofglobalization:• economic• social• And political.

In addition to three indices measuring these dimensions, we calculate an overallindex of globalization and sub-indices referring to• actual economic flows• economic restrictions• data on information flows• data on personal contact• And data on cultural proximity.

The index measures the three main dimensions of globalization: economic,social, and political. In addition to three indices measuring these dimensions,an overall index of globalization and sub-indices referring to actual economicflows, economic restrictions, and data on personal contact, data on informationflows, and data on cultural proximity is calculated. Data is available on a yearlybasis for 122 countries, as detailed in Dreher, Gaston and Martens (2008).According to the index, the world's most globalized country is Belgium,followed by , Sweden, the United Kingdom and the Netherlands. The leastglobalized countries according to the KOF-index are Haiti, Myanmar, theCentral African Republic and Burundi.

9.4 Ef9.4 Ef9.4 Ef9.4 Ef9.4 Ef fects of globalizationfects of globalizationfects of globalizationfects of globalizationfects of globalization

Globalization has various aspects which affect the world in several differentways such as:Industrial -Industrial -Industrial -Industrial -Industrial - emergence of worldwide production markets and broader accessto a range of foreign products for consumers and companies. Particularlymovement of material and goods between and within national boundaries.International trade in manufactured goods increased more than 100 times inthe 50 years since 1955. China's trade with Africa rose seven-fold during 2000-07 alone.

Financial -Financial -Financial -Financial -Financial - emergence of worldwide financial markets and better access toexternal financing for borrowers. By the early part of the 21st century morethan $1.5 trillion in national currencies were traded daily to support theexpanded levels of trade and investment. As these worldwide structures grewmore quickly than any transnational regulatory regime, the instability of theglobal financial infrastructure dramatically increased, as evidenced by thefinancial crisis of 2007–2009.

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As of 2005-2007, the Port of Shanghai holds the title as the World's busiest port.

Economic -Economic -Economic -Economic -Economic - realization of a global common market, based on the freedom ofexchange of goods and capital. The interconnectedness of these markets,however meant that an economic collapse in any one given country could notbe contained.

Political -Political -Political -Political -Political - some use "globalization" to mean the creation of a worldgovernment which regulates the relationships among governments andguarantees the rights arising from social and economic globalization.Politically, the United States has enjoyed a position of power among the worldpowers, in part because of its strong and wealthy economy. With the influenceof globalization and with the help of The United States' own economy, thePeople's Republic of China has experienced some tremendous growth withinthe past decade. If China continues to grow at the rate projected by the trends,then it is very likely that in the next twenty years, there will be a majorreallocation of power among the world leaders. China will have enoughwealth, industry, and technology to rival the United States for the position ofleading world power.

InforInforInforInforInformational -mational -mational -mational -mational - increase in information flows between geographically remotelocations. Arguably this is a technological change with the advent of fiber opticcommunications, satellites, and increased availability of telephone and Internet.

Language -Language -Language -Language -Language - the most popular language is Mandarin (845 million speakers)followed by Spanish (329 million speakers) and English (328 million speakers).About 35% of the world's mail, telexes, and cables are in English.Approximately 40% of the world's radio programs are in English. About 50%of all Internet traffic uses English.

Competition -Competition -Competition -Competition -Competition - Survival in the new global business market calls for improvedproductivity and increased competition. Due to the market becomingworldwide, companies in various industries have to upgrade their productsand use technology skillfully in order to face increased competition.

Ecological -Ecological -Ecological -Ecological -Ecological - the advent of global environmental challenges that might besolved with international cooperation, such as climate change, cross-boundarywater and air pollution, over-fishing of the ocean, and the spread of invasivespecies. Since many factories are built in developing countries with lessenvironmental regulation, globalism and free trade may increase pollution.On the other hand, economic development historically required a "dirty"industrial stage, and it is argued that developing countries should not, viaregulation, be prohibited from increasing their standard of living.

The construction of continental hotels is a major consequence of globalizationprocess in affiliation with tourism and travel industry, Dariush Grand Hotel,Kish, Iran

Cultural -Cultural -Cultural -Cultural -Cultural - growth of cross-cultural contacts; advent of new categories ofconsciousness and identities which embodies cultural diffusion, the desire toincrease one's standard of living and enjoy foreign products and ideas, adoptnew technology and practices, and participate in a "world culture". Somebemoan the resulting consumerism and loss of languages.

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Spreading of multiculturalism, and better individual access to cultural diversity(e.g. through the export of Hollywood and, to a lesser extent, Bollywoodmovies). Some consider such "imported" culture a danger, since it maysupplant the local culture, causing reduction in diversity or even assimilation.Others consider multiculturalism to promote peace and understanding betweenpeoples.

Greater international travel and tourism. WHO estimates that up to 500,000people are on planes at any one time? In 2008, there were over 922 millioninternational tourist arrivals, with a growth of 1.9% as compared to 2007.

Greater immigration, including illegal immigration. The IOM estimates thereare more than 200 million migrants around the world today. Newly availabledata show that remittance flows to developing countries reached $328 billionin 2008.

Spread of local consumer products (e.g., food) to other countries (often adaptedto their culture).

Worldwide fads and pop culture such as Pokémon, Sudoku, Numa Numa,Origami, Idol series, YouTube, Orkut, Facebook, and MySpace. Accessible tothose who have Internet or Television, leaving out a substantial segment ofthe Earth's population.

Worldwide sporting events such as FIFA World Cup and the Olympic Games.Incorporation of multinational corporations in to new media. As the sponsorsof the All-Blacks rugby team, Adidas had created a parallel website with adownloadable interactive rugby game for its fans to play and compete.

Social -Social -Social -Social -Social - development of the system of non-governmental organizations asmain agents of global public policy, including humanitarian aid anddevelopmental efforts.

TechnicalTechnicalTechnicalTechnicalTechnical Development of a Global Information System, globaltelecommunications infrastructure, data flow, using such technologies as theInternet, communication satellites, submarine fiber optic cable, and wirelesstelephones.

Increase in the number of standards applied globally; e.g., copyright laws,patents and world trade agreements.

Legal/EthicalLegal/EthicalLegal/EthicalLegal/EthicalLegal/EthicalThe creation of the international criminal court and international justicemovements. Crime importation and raising awareness of global crime-fightingefforts and cooperation. The emergence of Global administrative law.

ReligiousReligiousReligiousReligiousReligiousThe spread and increased interrelations of various religious groups, ideas,and practices and their ideas of the meanings and values of particular spaces.

Cultural efCultural efCultural efCultural efCultural ef fectsfectsfectsfectsfectsJapanese McDonald's fast food as an evidence of international integration.

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Culture is defined as patterns of human activity and the symbols that givethese activities significance. Culture is what people eat, how they dress, beliefsthey hold, and activities they practice. Globalization has joined dif ferentcultures and made it into something different. As Erla Zwingle, from theNational Geographic article titled “Globalization” states, “When culturesreceive outside influences, they ignore some and adopt others, and then almostimmediately start to transform them.”

One classic culture aspect is food. Someone in America can be eatingJapanese noodles for lunch while someone in Sydney, Australia is eatingclassic Italian meatballs. India is known for its curry and exotic spices.France is known for its cheeses. America is known for its burgers andfries. McDonalds is an American company which is now a global enterprisewith 31,000 locations worldwide. Those locations include Kuwait, Egypt,and Malta. This company is just one example of food causing culturalinfluence on the global scale.

Meditation has been a sacred practice for centuries in Indian culture. It calmsthe body and helps one connect to their inner being while shying away fromtheir conditioned self. There are more Americans meditating and practicingyoga now. Some people are even traveling to India to get the full experiencethemselves.

Another common practice brought about by globalization is Chinese symboltattoos. These tattoos are popular with today's younger generation despitethe fact that, in China, tattoos are not thought of as cool. Also, the Westernerswho get these tattoos often don't know what they mean, making this an exampleof cultural appropriation.

The internet breaks down cultural boundaries across the world by enablingeasy, near-instantaneous communication between people anywhere in a varietyof digital forms and media. The Internet is associated with the process ofcultural globalization because it allows interaction and communication betweenpeople with very different lifestyles and from very different cultures. Photosharing websites allow interaction even where language would otherwise bea barrier.

Negative efNegative efNegative efNegative efNegative ef fectsfectsfectsfectsfects

Globalization has been one of the most hotly debated topics in internationaleconomics over the past few years. Globalization has also generated significantinternational opposition over concerns that it has increased inequality andenvironmental degradation. In the Midwestern United States, globalizationhas eaten away at its competitive edge in industry and agriculture, loweringthe quality of life in locations that have not adapted to the change.

Globalization, the flow of information, goods, capital and people across politicaland geographic boundaries, has also helped to spread some of the deadliestinfectious diseases known to humans. Modern modes of transportation allowmore people and products to travel around the world at a faster pace; theyalso open the airways to the transcontinental movement of infectious diseasevectors. One example of this occurring is AIDS/HIV.

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Opportunities in richer countries drive talent away, leading to brain drains.Brain drain has cost the African continent over $4 billion in the employment of150,000 expatriate professionals annually. Indian students going abroad for theirhigher studies costs India a foreign exchange outflow of $10 billion annually.

The head of the International Food Policy Research Institute stated in 2008that the gradual change in diet among newly prosperous populations is themost important factor underpinning the rise in global food prices. From 1950to 1984, as the Green Revolution transformed agriculture around the world,grain production increased by over 250%. The world population has grown byabout 4 billion since the beginning of the Green Revolution and most believethat, without the Revolution, there would be greater famine and malnutritionthan the UN presently documents (approximately 850 million people sufferingfrom chronic malnutrition in 2005).

It is becoming increasingly difficult to maintain food security in a world besetby a confluence of "peak" phenomena, namely peak oil, peak water, peakphosphorus, peak grain and peak fish. Growing populations, falling energysources and food shortages will create the "perfect storm" by 2030, accordingto the UK government chief scientist. He said food reserves are at a 50-yearlow but the world requires 50% more energy, food and water by 2030. Theworld will have to produce 70% more food by 2050 to feed a projected extra 2.3billion people and as incomes rise, the United Nations' Food and AgricultureOrganization (FAO) warned.

The United Nations Office on Drugs and Crime (UNODC) issued a reportthat the global drug trade generates more than $320 billion a year in revenues.Worldwide, the UN estimates there are more than 50 million regular users ofheroin, cocaine and synthetic drugs. The international trade of endangeredspecies is second only to drug trafficking. Traditional Chinese medicine oftenincorporates ingredients from all parts of plants, the leaf, stem, flower, root,and also ingredients from animals and minerals.

9.5 Pro-globalization (globalism)9.5 Pro-globalization (globalism)9.5 Pro-globalization (globalism)9.5 Pro-globalization (globalism)9.5 Pro-globalization (globalism)

Supporters of free trade claim that it increases economic prosperity as wellas opportunity, especially among developing nations, enhances civil libertiesand leads to a more efficient allocation of resources. Economic theories ofcomparative advantage suggest that free trade leads to a more efficientallocation of resources, with all countries involved in the trade benefiting. Ingeneral, this leads to lower prices, more employment, higher output and ahigher standard of living for those in developing countries.

Dr. Francesco Stipo, Director of the USA Club of Rome suggests that “theworld government should reflect the political and economic balances of worldnations. A world confederation would not supersede the authority of the Stategovernments but rather complement it, as both the States and the worldauthority would have power within their sphere of competence".

Proponents of laissez-faire capitalism, and some libertarians, say that higherdegrees of political and economic freedom in the form of democracy andcapitalism in the developed world are ends in themselves and also producehigher levels of material wealth. They see globalization as the beneficial spreadof liberty and capitalism.

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Supporters of democratic globalization are sometimes called pro-globalists.They believe that the first phase of globalization, which was market-oriented,should be followed by a phase of building global political institutionsrepresenting the will of world citizens.

9.6 Anti-globalization9.6 Anti-globalization9.6 Anti-globalization9.6 Anti-globalization9.6 Anti-globalization

The "anti-globalization movement" is a term used to describe the politicalgroup who oppose the neoliberal version of globalization, while criticisms ofglobalization are some of the reasons used to justify this group's stance."Anti-globalization" may also involve the process or actions taken by a statein order to demonstrate its sovereignty and practice democratic decision-making. Anti-globalization may occur in order to maintain barriers to theinternational transfer of people, goods and beliefs, particularly free marketderegulation, encouraged by organizations such as the International MonetaryFund or the World Trade Organization.

Joseph Stiglitz and Andrew Charlton write:“The anti-globalization movement developed in opposition to the perceivednegative aspects of globalization. The term 'anti-globalization' is in many waysa misnomer, since the group represents a wide range of interests and issuesand many of the people involved in the anti-globalization movement do supportcloser ties between the various peoples and cultures of the world through, forexample, aid, assistance for refugees, and global environmental issues.”


The Impact of Globalization on Business:The Impact of Globalization on Business:The Impact of Globalization on Business:The Impact of Globalization on Business:The Impact of Globalization on Business:

Expanding the geographic footprint of any business in the era of globalizationis not at all a perilous and costly job as it has been in the past. To remaincompetitive in today's scenario aggressive measures should be implementedto expand business. Starting business internationally is as defensive as anoffensive play. Going by the global demands and considering the total size ofinternational economies would reveal that in comparison with the size ofnational market the potential buyers generally reside in international markets.

In comparison, if a business does not aim international market and theinternational customers then the company will not only be lagging behindtaking the first mover's benefit of preserving customer dependability, but wouldalso lose on collaborations with key partners and distribution pacts. Withincrease in consumers' demands and flattening of global market theinternational business is expected to assist several markets in a faultlessmanner. Changing slowly to economic alterations in today's world couldultimately harm the business.

Examining the alleviating factor that globalization had on the world businesswould reveal that trade shortage, petroleum costing, dip in equity markets,housing calamity, restricted influx of funds, and total cost of living is defyingus than ever before. With so many negative traits in world economy,conservative economic theory recommends that the interest rate today holdsimilarity with that of 1980 than the low interest rates we are witnessing today.

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In comparison with the financial scenario of 1980, the contemporary marketis the outcome of a worldwide economy which is performing the role of analleviating factor.

By considering the following, it is estimated that by 2015, the developingeconomies will account for 50% of world GDP.

• Growing economies –Growing economies –Growing economies –Growing economies –Growing economies – Over the last few years China and India haswitnessed 9% and 7% of annual growth respectively. Demographics –Economies now characterize younger populations, increasing numberof well-qualified population, growing middle class populations, elevatingincomes and urbanization.

• Commercial need –Commercial need –Commercial need –Commercial need –Commercial need – The financial growth, as well as the existence ofworldwide firms that accompanies job opportunities focused aroundintellectual capital is generating need for marketable real estateinfrastructure. Infrastructure development – Communications, utilities,and well-organized transportation has steadily improved over the pastfew years as compared to what it was few decades ago.

• Opening up of closed market strOpening up of closed market strOpening up of closed market strOpening up of closed market strOpening up of closed market str uctuructuructuructuructures –es –es –es –es – Most flourishingdeveloping economies have been occupied in methodical reorganizationof basic community norms ignored in the developed economies. Thefactors which trigger growth and monetary infusions incorporateproperty privileges, legal procedure, published guideline, privatizationof state owned firms, removal of capital management, and liberalizationof norms related foreign direct investment.

Self AssessmentSelf AssessmentSelf AssessmentSelf AssessmentSelf Assessment

• Definition of Globalization?• What is KOF Index of Globalization• What is GATT?• What are the effects of Globalization?• Explain four main economic flows that characterize globalization:

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Chapter XChapter XChapter XChapter XChapter XIndustrial Growth and Environmental degradationIndustrial Growth and Environmental degradationIndustrial Growth and Environmental degradationIndustrial Growth and Environmental degradationIndustrial Growth and Environmental degradation

The rapid economic growth achieved after globalization by some of thedeveloping countries, has adversely affected the quality of the environment,imposed considerable social costs and livelihood impacts and has become amajor threat to sustainable development. Since environment regulation tendsto be weak in developing countries some of these countries have begun tospecialize in pollution intensive manufacturing, particularly in products whichhave good export potential. However it is also extremely important fordeveloping countries to achieve a high level of economic growth to mitigatetheir socio-economic problems. But the major challenge here is: how to ensuredevelopment in a sustainable manner by a proper trade-of f betweenenvironment and development.

LearLearLearLearLearning Objectivesning Objectivesning Objectivesning Objectivesning Objectives• Students learn the causes of pollution like water, air, noise pollution,

solid waste etc. with special reference to industries.• Students learn about the environmental governance and regulation in

terms of protection and rehabilitation• Students learn to appreciate social and economic solutions for problems

of water supply, sanitation and health

ContentsContentsContentsContentsContents10.1 Causes of pollution10.2 Type of industries and type of pollution

10.2.1 Causes of industrial pollution waste10.2.1.1 Water Pollution Industries10.2.1.2 Oil10.2.1.3 Soil10.2.1.4 Air

10.2.2 Causes of Air Pollution -10.2.2.1 Industries10.2.2.2 Transport10.2.2.3 Dwelling

10.3 Environmental law10.3.1 Environmental governance and regulation

10.3.1.1 Environmental protection –• Environment and rehabilitation• Environmental Governance and regulation in India

10.3.1.2. Legislative efforts• Role of the Judiciary• Working of Environmental regulation• Enforcement• Monitoring

Summing upSumming upSumming upSumming upSumming upSelf AssessmentSelf AssessmentSelf AssessmentSelf AssessmentSelf Assessment

Industrial Growth andEnvironmental degradation


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10.1 10.1 10.1 10.1 10.1 Causes of PollutionCauses of PollutionCauses of PollutionCauses of PollutionCauses of Pollution

The ultimate cause of pollution is human activity itself. Pollution is a humancontribution to nature. Science has evolved technologies and technologieshave helped the human welfare. In the process, the pollution has been a partof technology and therefore a part of human miseries.

Human activities mainly include industries for various human needs – directlyand indirectly

10.2 Industries10.2 Industries10.2 Industries10.2 Industries10.2 Industries

A vast array of industries can cause pollution contrary to popular perceptionthat only a chemical industry can cause pollution. The nature and intensity ofpollution may be different in different industry. In some industries, the pollutionis out rightly visible and substantial. In others, it may be invisible, indirect ornegligible. In such a broad sense, no industry is free of pollution. Classifiedlist of industries causing different types of pollution is presented in table.

Type of industriesType of industriesType of industriesType of industriesType of industries Type of pollutionType of pollutionType of pollutionType of pollutionType of pollution

Manufacture of chemicals, Water pollution, air pollutionpesticides, medicines

Manufacture of gases Air pollution

Cement, steel and other mine Air pollution and solid wastes,based industries noise pollution

Textile industries and their Water pollution, air pollution,ancillaries noise pollution

Transport vehicle Solid wastes, noise pollution, airmanufacturing pollution

Petroleum based industries Water pollution, air pollution

Forest dependent industries Air pollution, solid wastes andsound pollution

Food industries Water pollution, air pollution,food pollution

Paper industries Water pollution, air pollution,solid wastes, sound pollution

Sugar industry Water pollution, air pollution,solid wastes

Brick industry Air pollution, water pollution

Aircraft industry Solid wastes, water pollution,air pollution

Electrical appliances and Solid wastes, air pollutionelectric goods industries

IT based industries Air pollution

Telecom industries Solid wastes and air pollution

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Although all these industries have potentiality to generate pollutants in theenvironment. Some of them cause serious pollution then others. They are• Chemicals, pesticides, medicines manufacturing industries• Cement, steel industries• Textile manufacturing and processing industries• Paper industries• Sugar industries• Food industries

All industries other than above cause relatively lesser pollution and are lessdangerous than above industries. Most of these industries are established ascore industries for progress of human society. Hence, it is undisputable thatthey have to exist for human existence and development. The only disputablepoint is how they have to be managed to make them free of pollution. Thecause of pollution - in many situations - is not the industry itself, but thetechnology adopted by such industry. As the scientific research progresses,new technologies for industries are added. New technologies to minimize thepollution are also generated in every industry. How far these technologies areadopted will decide the nature and extent of pollution.

10.2.1 Causes of industrial pollution waste10.2.1 Causes of industrial pollution waste10.2.1 Causes of industrial pollution waste10.2.1 Causes of industrial pollution waste10.2.1 Causes of industrial pollution waste

Pollution from thermal power plants due to chemical fertilizers, food, pesticideand pharmaceutical industries due to cement, steel, paper, sugar industriesdue to textile and textile related industries due to petroleum and other…..

Radioactive Waste -Waste products from nuclear power stations etc. arebecoming a serious problem. They should be put where the radiation can dono harm. Unfortunately, there is no way of stopping a radioactive nucleusfrom emitting radiation. Nuclear energy has some advantages over fossil fuelsuch as coal...

Accumulation of wastes due to its improper disposal is a major problem inour country. The recent Surat plague epidemic is an indication. Population inIndia has been growing at the rate of 1.7%. With this increase, there has alsobeen an increase in the amount of wastes.

Waste Management - The garbage should be segregated at the source - home,office, shops, etc. This should be followed by door to door collection. Therecyclable material can automatically be sent to recycling plants. Many non-biodegradable materials are recyclable. For example, plastic, polythene, glass,metallic.

Classification of Wastes - The wastes include kitchen waste, papers,construction materials, old tyres, medical wastes, etc. In order to understandthe severity of the problem and to work towards a solution, one mustunderstand the types of wastes being generated.

Toxic Elements Commonly Present in Municipal and Industrial Waste WatersIndustrial wastes. Causes bone damage, mottled teeth. Lead Plumbing, miningcoal, gasoline. Causes anemia, kidney malfunction and nervous disorder.



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10.2.1.1 W10.2.1.1 W10.2.1.1 W10.2.1.1 W10.2.1.1 Water Pollutionater Pollutionater Pollutionater Pollutionater Pollution

Sewage that includes organic matter, animal and human excreta-one of themajor pollutants of water in the urban and rural areas is the sewage. Thesewage most often contains the organic matter that encourages the growthof microorganisms. These organisms besides spreading diseases alsoconsume the oxygen present in water. This is called oxygen depletion. Theaquatic organisms like the fish cannot then survive in such waters. Thiscreates an imbalance in the aquatic ecosystems.

IndustriesIndustriesIndustriesIndustriesIndustries

The industries are mostly situated along the riverbanks for easy availability ofwater and also disposal of the wastes. But these wastes include various acids,alkalis, dyes and other chemicals. They change the pH of water. There arealso detergents that create a mass of white foam in the river waters. All thesechemicals are quite harmful or even fatally toxic to fish and other aquaticpopulations.

The industrial wastes include toxic metals like lead, mercury, cadmium, etc,and other chemicals like the fluorides, ammonia, etc.

Certain industries such as power plants, refineries, nuclear reactors release alot of hot water from their cooling plants. This hot water is let into the waterbodies without the temperature being reduced. This results in heating up ofthe water and thereby killing the aquatic life. The oxygen content of water alsobecomes less due to increase in the temperature. This is called thermal pollution.

10.2.1.2 Oil10.2.1.2 Oil10.2.1.2 Oil10.2.1.2 Oil10.2.1.2 Oil

Oil spill is a major problem in the oceans and seas. The oil tankers and offshorepetroleum refineries cause oil leakage into the waters. This pollutes the waters.Oil floats on the water surface and prevents the atmospheric oxygen frommixing in the water. The oil enters the body of the organisms. It also coatsthe body of the aquatic animals and birds which may also kill them.

PollutantPollutantPollutantPollutantPollutant Source/Cause Source/Cause Source/Cause Source/Cause Source/Cause Ef Ef Ef Ef Effectfectfectfectfect

Sewage that includes Sewerage of rural Oxygen depletion Spread ofdomestic wastes, and urban areas. diseases/ epidemicshospital wastes,excreta, etc.

Metals-Mercury Industrial wastes Minamata disease (resulted fromthe contaminated waters of theMinamata bay in Japan in 1953)causes numbness of limbs, lipsand tongue, blurred vision,deafness and mentalderangement.

Lead Industrial wastes Absorbed into blood and affectsPBCs, liver, kidney, bone, brainand the penpheral nervous Leadpoisoning can even lead to coma.

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EfEfEfEfEf fects and Causes of Soil Pollutionfects and Causes of Soil Pollutionfects and Causes of Soil Pollutionfects and Causes of Soil Pollutionfects and Causes of Soil Pollution• Industrial• Dangerous chemicals entering underground water• Ecological imbalance• Release of pollutant gases• Release of radioactive rays causing health problems• Increased salinity• Reduced vegetation

10.2.2 Causes of Air Pollution10.2.2 Causes of Air Pollution10.2.2 Causes of Air Pollution10.2.2 Causes of Air Pollution10.2.2 Causes of Air Pollution

10.2.2.1 Industries10.2.2.1 Industries10.2.2.1 Industries10.2.2.1 Industries10.2.2.1 IndustriesIndustries are responsible for large scale air pollution as compared to othercauses because: the extent of gaseous pollution from industries is very highas compared to any other cause number of industries being established areregarded as yard stick of progress.

Not all industries can lead to air pollution. Following type of industries areresponsible for air pollution.

• Thermal power plants - CO2, CO• Fertilizer industries - NH3, CH4, SO2, H2S, NO3• Food industries - Cl, NO3, CO2• Pesticide industries - HCN, CN2, NH3, CH4, SO2, H2S, NO3,

Cl, CO2, CO• Pharmaceutical industries - Cl2, H2S, SO2, CH4, NH3• Cement industries - Cl2, NH3, SO2, NO2,• Steel industries - CO2, CO• Paper industries - CO, Cl2, CO2, H2S, SO2, NH3• Sugar industries - CO2, CO, Cl2, SO2, NH3, NO2• Textile industries - CO2, Cl2, NO2, SO2, NH3,• Petroleum industries - CO2, CO, SO2• Atomic energy units - radioactive gases


Cadmium Cadmium Deposited in organs like theFertilizers kidney, pancreas, liver, intestinal

mucosa, etc. Cadmiumpoisoning causes headache,vomiting, bronchial pneumonia,kidney necrosis, etc.

Arsenic Fertilizers Arsenic poisoning causes renalfailure and death, It can causenerve disorder, kidney and liverdisorders, muscular atrophy, etc.

Agrochemicals Pesticides Accumulates in the bodies oflike DDT fishes, birds, mammals

including man. Adversely affectsthe nervous system, fertility.Causes thinning of egg shells inbirds.


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These industries release the pollutant gases in their normal course offunctioning as a part of manufacturing process. Although some industrieshave modified their manufacturing process and brought some structuralchanges to reduce the pollution - the total air pollution due to industries isincreasing.

Most of industrially active areas in our country are highly polluted changingthe composition of air. The dominant gases and pollutants due to industrialactivities are SO2, NO2, Cl, CH3, CO2, CO. Each one of them has dangerousef fect on human health, animal health as well as ef fect on the wholeecosystem.

10.2.2.2 T10.2.2.2 T10.2.2.2 T10.2.2.2 T10.2.2.2 TransportransportransportransportransportBurning the petroleum products to run automotive transport vehicles is themain cause of air pollution. The main pollutants like SO2, CO, CO2 are maingases being released into air due to transport vehicles.

But, the extent of pollution due to transport vehicles is directly dependentupon the level of urbanization density of vehicles

As the urban development increases, the necessity of transport vehiclesbecomes inevitable. As the dependence on vehicle increases, the density ofvehicle increases.

Cities with very high population have recorded high level of air pollution dueto vehicles. Vehicular pollution in many agglomerates like Delhi, Bombay,Calcutta, Bangalore, Pune is so high that a natural air with its naturalcomposition has become rare.

Some socially relevant issues related to vehicular pollution have been recentlyraised in public debates:

Although vehicular transport is inevitable in cities, is it possible that individualownership of vehicle could be avoided and public transport system could bemore efficiently used.

Is it necessary that a single travelling person use a four wheeler?

Can we not partially replace the transport needs by electrically operated publictransport systems than present petroleum dependent vehicles?

Is there any possibility using electricity operated vehicles?

10.2.2.3 Dwelling10.2.2.3 Dwelling10.2.2.3 Dwelling10.2.2.3 Dwelling10.2.2.3 DwellingAir pollution due to dwelling of human population is caused by three reasons.Chlorofluorocarbon

Refrigerators, air coolers, and some electronic equipments release a group ofchlorinated chemicals called Chlorofluorocarbon. They are potential pollutants.Due to large number of such equipments in a smaller geographical area (likein city) large amount of Chlorofluorocarbon are released to atmosphere.

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High Density PopulationHigh Density PopulationHigh Density PopulationHigh Density PopulationHigh Density PopulationDensity of population in many cities and urban centers is so high that theirrespiration has caused imbalance in air composition. Their constant intake ofoxygen and release of carbon dioxide has the potentiality to change thecomposition of air.

Environmental degradation is one of the ten threats officially cautioned bythe High Level Threat Panel of the United Nations. WRI (the World ResourcesInstitute), UNEP (the United Nations Environment Programme), UNDP (theUnited Nations Development Programme) and the World Bank have madepublic an important report on health and the environment worldwide on May1, 1998.

Environmental Change and Human Health, a special section of World Resources1998-99 in this report describes how preventable illnesses and prematuredeaths are still occurring in very large numbers. If vast improvements aremade in human health, millions of people will be living longer, healthier livesthan ever before. In these poorest regions of the world an estimated one infive children will not live to see their fifth birthday, primarily because ofenvironment-related diseases. Eleven million children die worldwide annually,equal to the combined populations of Norway and Switzerland, and mostlydue to malaria, acute respiratory infections or diarrhea — illnesses that arelargely preventable.

When the environment becomes less valuable or damaged, environmentaldegradation is said to occur.

There are many forms of environmental degradation. When habitats aredestroyed, biodiversity is lost, or natural resources are depleted, theenvironment is hurt.

Environmental degradation can occur naturally, or through human processes.The largest areas of concern at present are the loss of rain forests, air pollutionand smog, ozone depletion, and the destruction of the marine environment.

Pollution is occurring all over the world and poisoning the planet's oceans.Even in remote areas, the effects of marine degradation are obvious.

In some areas, the natural environment has been exposed to hazardous waste.In other places, major disasters such as oil spills have ruined the localenvironment.

CFCs, or chlorofluorocarbons, are the primary cause of ozone depletion. Whenindustrial processes release these chemicals, they rise into the stratosphereand degrade the ozone.

Acid rain, smog and poor air quality have been the result of air pollution.Both industrial operations and automobiles have released gigantic amountsof emissions that have intensified these problems.

Deforestation and the logging industry have destroyed many tropical rainforests around the world. This has destroyed many natural habitats, and theplants and animals native to the areas.



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Environmentalists are working hard to combat environmental degradation.There are countless organizations located all over the world that are dedicatedto preventing the global destruction of the environment.

10.3 Environmental law10.3 Environmental law10.3 Environmental law10.3 Environmental law10.3 Environmental law

Environmental law is a complex and interlocking body of statutes, commonlaw, treaties, conventions, regulations and policies which, very broadly, operateto regulate the interaction of humanity and the rest of the biophysical ornatural environment, toward the purpose of reducing or minimizing theimpacts of human activity, both on the natural environment and on humanityitself. Environmental law draws from and is influenced by principles ofenvironmentalism, including ecology, , stewardship, responsibility andsustainability. From an economic perspective it can be understood as concernedwith the prevention of present and future externalities.

Areas of concern in environmental law include air quality, water quality, globalclimate change, agriculture, biodiversity, species protection, pesticides andhazardous chemicals, waste management, remediation of contaminated land andbrown fields, smart growth, sustainable development, impact review, andconservation, stewardship and management of public lands and natural resources.

While many countries worldwide have accumulated impressive sets ofenvironmental laws, their implementation has often been woeful. In recentyears, environmental law has become seen as a critical means of promotingsustainable development (or "sustainability"). Policy concepts such as theprecautionary principle, public participation, environmental justice, and thepolluter pays principle have informed many environmental law reforms inthis respect (see further Richardson and Wood, 2006). There has beenconsiderable experimentation in the search for more effective methods ofenvironmental control beyond traditional "command-and-control" styleregulation. , emission trading, voluntary standards such as ISO 14000 andnegotiated agreements are some of these innovations.

10.3.1 ENVIRONMENTAL GOVERNANCE AND REGULATION10.3.1 ENVIRONMENTAL GOVERNANCE AND REGULATION10.3.1 ENVIRONMENTAL GOVERNANCE AND REGULATION10.3.1 ENVIRONMENTAL GOVERNANCE AND REGULATION10.3.1 ENVIRONMENTAL GOVERNANCE AND REGULATION

10.3.1.1 ENVIRONMENT PROTECTION –10.3.1.1 ENVIRONMENT PROTECTION –10.3.1.1 ENVIRONMENT PROTECTION –10.3.1.1 ENVIRONMENT PROTECTION –10.3.1.1 ENVIRONMENT PROTECTION –

a) The State's responsibility with regard to environmental protection hasbeen laid down under Article 48-A of our Constitution, which reads asfollows: "The State shall Endeavour to protect and improve theenvironment and to safeguard the forests and wildlife of the country".

b) Environmental protection is a fundamental duty of every citizen of thiscountry under Article 51-A (g) of our Constitution which reads asfollows: "It shall be the duty of every citizen of India to protect andimprove the natural environment including forests, lakes, rivers andwildlife and to have compassion for living creatures."

c) Article 21 of the Constitution is a fundamental right which reads asfollows: "No person shall be deprived of his life or personal liberty exceptaccording to procedure established by law."

D) Article 48-A of the Constitution comes under Directive Principles ofState Policy and Article 51 A (g) of the Constitution comes underFundamental Duties.

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e) The State's responsibility with regard to raising the level of nutritionand the standard of living and to improve public health has been laiddown under Article 47 of the Constitution which reads as follows: "TheState shall regard the raising of the level of nutrition and the standardof living of its people and the improvement of public health as amongits primary duties and, in particular, the State shall Endeavour to bringabout prohibition of the consumption except for medicinal purposes ofintoxicating drinks and of drugs which are injurious to health."

h) The 42nd amendment to the Constitution was brought about in theyear 1974 makes it the responsibility of the State Government to protectand improve the environment and to safeguard the forests and wildlifeof the country. The latter, under Fundamental Duties, makes it thefundamental duty of every citizen to protect and improve the naturalenvironment including forests, lakes, rivers and wildlife and to havecompassion for living creatures.

ENVIRONMENTS AND REHABILITATIONENVIRONMENTS AND REHABILITATIONENVIRONMENTS AND REHABILITATIONENVIRONMENTS AND REHABILITATIONENVIRONMENTS AND REHABILITATION

ENVIRONMENTAL GOVERNANCE AND REGULATION IN INDIAENVIRONMENTAL GOVERNANCE AND REGULATION IN INDIAENVIRONMENTAL GOVERNANCE AND REGULATION IN INDIAENVIRONMENTAL GOVERNANCE AND REGULATION IN INDIAENVIRONMENTAL GOVERNANCE AND REGULATION IN INDIA

10.3.1.2 10.3.1.2 10.3.1.2 10.3.1.2 10.3.1.2 LEGISLATIVE EFFORLEGISLATIVE EFFORLEGISLATIVE EFFORLEGISLATIVE EFFORLEGISLATIVE EFFOR TSTSTSTSTS

Legislative efforts at pollution control in India date back to the mid-nineteenthcentury.1 many of these Acts dealt with environmental regulation in a piecemealmanner and proved ineffective at reducing the levels of pollution. Action againstpolluters had necessarily to be initiated in courts by those affected. Pollutionand environmental degradation were addressed very generally in terms ofnuisance, negligence, liability, and a few principles of tort law. The spate oflegislations2 in the post-independence period also dealt only incidentally withpollution. Both air and water pollution continued to increase.

Perhaps inspired by the Stockholm Declaration of 1972, the Water (Preventionand Control of Pollution) Act, 1974 (the Water Act), provided for theinstitutionalization of pollution control machinery by establishing Boardsfor prevention and control of pollution of water. These Boards were entitledto initiate proceedings against infringement of environmental law, withoutwaiting for the affected people to launch legal action. The Water Cess Act,1977, supplemented the Water Act by requiring specified industries to paycess on their water consumption. With the passing of the Air (Preventionand Control of Pollution) Act, 1981 (the Air Act), the need was felt for anintegrated approach to pollution control. The Water Pollution Control Boardswere authorized to deal with air pollution as well, and became the CentralPollution Control Board (CPCB) and the State Pollution Control Boards(SPCBs). The Bhopal Gas leak disaster of December 1984 precipitated thetightening of environmental regulation. In 1985, the Department ofEnvironment was changed to the Ministry of Environment and Forests(MoEF) and given greater powers. The Environment (Protection) Act, 1986(EPA), was passed, to act as an umbrella legislation. The Act also vestedpowers with the central government to take all measures to control pollutionand protect the environment.



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The Environment (Protection) Rules, 1986 were subsequently notified tofacilitate exercise of the powers conferred on the Boards by the Act. The EPAidentifies the MoEF as the apex policy making body in the field of environmentprotection. The MoEF acts through the CPCB and the SPCBs. The CPCB isa statutory organization and the nodal agency for pollution control. The EPAin 1986 and the amendments to the Air and Water Acts in 1987 and 1988furthered the ambit of the Boards' functions. Constitutional Directives In termsof constitutional provisions, the 42nd Amendment of 1976 for the first timeimposed an obligation on the part of the state (Article 48A) and the citizens(Article 51A (g)) to endeavour to protect and improve the environment and tosafeguard the forests and wildlife of the country. The economic reforms of1991, the Rio Conference of 1992,1. The Shore Nuisance Act, 1853, the Indian Penal Act, 1860, the Indian

Easement Act, 1882, the Bengal Smoke Nuisance Act, 1905, the BombaySmoke Nuisance Act, 1912, and the Motor Vehicles Act, 1939 were someof the pioneering legislative attempts.

2. These included the Factories Act, 1948, the Industries (Developmentand Regulation) Act, 1951, the River Boards Act, 1956, the Atomic EnergyAct, 1962, the Insecticides Act, 1968, the Merchant Shipping(Amendment) Act, 1970, and the Radiation Protection Rules, 1971.Environment and Rehabilitation 97 and growing environmentalawareness all resulted in further amendments to the constitution.

Role of the JudiciaryRole of the JudiciaryRole of the JudiciaryRole of the JudiciaryRole of the Judiciary

The Supreme Court and High Courts have played an active role in theenforcement of constitutional provisions and legislations relating toenvironmental protection. The fundamental right to life and personal libertyenshrined in Article 21 of the Constitution has been interpreted by the courtsto include the right to pollution-free air and water.

3 . Also, relaxing the enforcement of strict rules of proof and modification ofthe traditional rule of standing so as to facilitate public interest litigations hasserved, more or less, to remove the difficulty in individuals approaching courtsfor redressal. The backdrop of all this has been the growing environmentalawareness among the public. This has been demonstrated by publicdemonstrations and protests throughout the 1970s and 1980s4, growth inenvironment and development oriented non-governmental organizations(NGOs), citizen groups, and pressure groups in India (today, roughly 20 timesthe size in 1985), and the increase in the frequency of public interest litigations.

WWWWWorking of Envirorking of Envirorking of Envirorking of Envirorking of Environmental Regulationonmental Regulationonmental Regulationonmental Regulationonmental Regulation

An analysis of the principal pollution control legislations, the Air and WaterActs, reveals that these legislations are mostly punitive in nature. The PollutionControl Boards (PCBs) have thus restricted their approach to pollution controlto 'Command and Control' (CAC). This implies

That the state agencies are to function as watchdogs to keep an eye on theexisting industries. All new industries, before they start to function, would inthis approach require prior permission to do so. The agency responsible thenpermits them to carry out industrial activity, subject to certain terms andconditions.

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While the basic functions of the CPCB remain prevention, control, andabatement of air and water pollution, with the various SPCBs assuming thesefunctions, the role of the CPCB is restricted to providing technical or scientificassistance. The CPCB has maintained the major role of prescribing thestandard limits for various pollutants. While the SPCBs may prescribe stricterlimits if they choose, they may not dilute the standards stipulated by theCPCB.

The SPCBs employ three instruments, namely, consent to establish producingunits, consent to operate, and standards for air and water pollution. Underthe Water Act, consent is necessary for an industry to 'discharge effluent intoa stream'. Under the Air Act, consent is necessary to 'Establish or operate anindustrial plant in an air pollution control area'. The other functions of theSPCBs are advising the state governments, formulation of preventive methods,technology development, and regulation of location of industries, disposal ofhazardous wastes, and collection and dissemination of information on theprevention and control of pollution.

The PCBs also have the power to move court for 'restraining apprehendedpollution' as a preventive measure (Section 33 of the Water Act and Section22A of the Air Act). In an extreme case, a PCB can give 'directions to anyperson, officer or authority' in the interest of pollution control, which 'includesthe power to direct closure, prohibition or regulation of any industry or process,or stoppage or regulation of supply of electricity, water or any other service'(Section 33A of the Water Act and Section 31A of the Air Act).

Failure to obtain consent and violation of consent conditions makes theoccupier of an industrial unit liable for punishment under both Acts. Thepunishment prescribed is imprisonment with unlimited fine. For minorviolations of the Acts, such as failure to provide information, obstructingpersonnel of the Board from discharging their duties, and so forth, the penaltyprescribed is imprisonment up to three months or fine of Rs 10,000 or both.More severe punishments are provided under both Acts for continued violationafter the first conviction (Section 41 to 45A of the Water Act and Section 37 to39 of the Air Act).

Thus, the role of the Boards is mostly that of an enforcer, and the primaryfunctional tool employed by them for controlling industrial pollution isinspection of polluting units. The Water Act prohibits the discharge ofpollutants into water bodies beyond established standards (Section 24), andrequires that generators of all new and existing sources of discharge intowater bodies get the prior consent of the PCBs (Section 25 and 26 respectively).It also lays down penalties, such as fines and imprisonment, for not complyingwith these (and other) regulations of the Act. Prior to 1988, enforcement wasthrough criminal prosecution initiated by State Boards and by seekinginjunctions to restrain polluters. After amendments to the Act in 1988, theBoards were given more teeth—they can now close errant factories or cut offtheir water or electricity by an administrative order. The 'command' thereforeis the stipulation of certain upper limits of parameters, while the 'control' isthe power to withdraw the power supply, water supply, and the imposition ofthe penalty (fines, imprisonment).



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Pollution control laws have neither kept pace with constitutional directives,nor have they operationalized the space that exists for popular participationif these directives are truly understood. Environmental legislations, such asthe Air and Water Acts, on the contrary, have a strong centralizing tendency,with the state and Central government as the exclusive decision makers.Further, none of these laws provide for co-ordinated functioning of the variousenforcement agencies with the third tier of governance— panchayats andmunicipalities. There is nothing at all to involve local communities.

EnforcementEnforcementEnforcementEnforcementEnforcement

The primary functional tool employed by the PCBs for controlling industrialpollution is inspection of polluting units. Given the penalties in force for non-compliance in India and keeping in mind the extent of the SPCBs' powers, theimpact of inspections on compliance is only as strong as the threat ofenforcement and punishment faced by the industrial units. Studies conductedreveal that there appears to be no impact of inspections on emissions. Thereality is that environmental management often degenerates into crisismanagement. Inspections are undertaken at the time that operating consentis granted and thereafter usually only in response to complaints, accidents, orother emergencies. Enforcement by the PCBs, as a result, is woefully inadequate.Further, a study conducted by the Planning Commission found that they donot have a complete inventory of polluting and potentially polluting industries.Small industries (capable of high levels of pollution) have been left out of thepurview, further undermining efforts at pollution control. Small industriesare known to contribute as much as 40 per cent of air and water pollution.

MonitoringMonitoringMonitoringMonitoringMonitoring

Monitoring conducted by the PCBs is also far from ef fective. Pollutingindustries may make a one-time investment and set up Effluent TreatmentPlants (ETPs). Around 2–5 per cent of its capital investment may be so spenton pollution control. The costs of operating these facilities are anywherebetween 15–30 per cent of the investment made, annually.13 As operating costsare high, industries are often reluctant to run these plants. Poor monitoringalmost always allows units to get away without operating these plants properly.The PCBs claim that inadequate manpower limits their monitoring.

Poorly StafPoorly StafPoorly StafPoorly StafPoorly Staf fedfedfedfedfed

The Planning Commission study revealed that the PCBs are very poorly staffed.The study highlighted the predominance of non-technical members in mostof the Boards, the lack of professionals in the composition of the Boards, andalso the tendency to not fill vacancies of members representing local bodies.Thus, both motivationally and in ability, the PCBs are ill-structured.

Lack Technical SkillsLack Technical SkillsLack Technical SkillsLack Technical SkillsLack Technical Skills

One of the reasons for ineffective monitoring is the lack of technical skills ofthe PCBs. For instance, the Biomedical Waste (Management and Handling)Rules, 1998 specify the working of incinerators so as to reduce emissions oftoxins like furans and dioxins. However, neither the CPCB nor the SPCBshave the capacity to even collect samples, let alone analyze these toxins.

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Inadequate FundingInadequate FundingInadequate FundingInadequate FundingInadequate Funding

The principal sources of funding for PCBs are government grants and revenuecollected under the Water Cess Act. In actual fact, PCBs are starved for funds.The result is inadequate infrastructure in terms of laboratories, monitoringequipment, and regional of fices, inadequate staf f, both technical andadministrative, and an inability to discharge their primary functions. Forexample, the Bihar Pollution Control Board (BPCB), which administerspollution laws in the second most populous state of the country, hascontinuously been deprived of funds. For several years, the state governmentwithheld funding, restricting BPCB expenditure to less than a third of itsmodest requisition.

Even ten years after the enactment of the Water Act, the BPCB did not have asingle laboratory or analyst to test effluent samples.14

A subset of the issue of inadequate funding is the manner in which the SPCBshave made expenses. An analysis of the expenditure incurred by the SPCBsduring the Eighth Five Year Plan shows that the primary expenditure was onadministration amounting to 57 per cent. The ratio of capital expenditure tototal expenditure was about 14 per cent. Maintenance, depreciation, and otherexpenses constituted the major chunk of the remaining part. It follows thatexpenditure on pollution prevention activities, training, and research anddevelopment was for all practical purposes negligible.

Political InterPolitical InterPolitical InterPolitical InterPolitical Inter ferferferferferenceenceenceenceence

However, the argument is made that PCBs are, sometimes, not able to exercisepowers to force compliance because of interference from powerful interestand pressure groups. Such interference is sometimes based on the argumentthat strict compliance with standards will lead to closure of industrial units,which in turn may result in unemployment and protests. This interference ishardly surprising given that often the Boards are represented by vestedinterests responsible for pollution. With the position of the Chairman of theBoards invariably being a political appointee, political interference is rampant,and internal sabotage of most cases is then almost inevitable.

VVVVVariations in Enforariations in Enforariations in Enforariations in Enforariations in Enforcementcementcementcementcement

The high degree of political interference may be one of the factors responsiblefor wide variations in enforcement across states. It has been argued thatalthough states cannot compete by lowering environmental standards in orderto attract new investment, they can get around this by lax enforcement.16This could be the outcome of a so-called 'race to the bottom' for environmentalquality in which states invariably sacrifice the environment in the competitionfor jobs and economic growth. For example, there exists no uniform procedurefor the grant of consents under the Air and Water Acts. Some SPCBs grantconsents for a fixed period, usually between 1 and 3 years while the othersmay issue open-ended consents.

The consent fee structure and industry classifications also differ widely acrossStates, suggesting inequitable horizontal treatment of industrial units. Forinstance, if an industrial unit falling in the investment limit between Rs 50



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lakhs and Rs 100 lakhs applies for consent from the Madhya Pradesh PollutionControl Board, it is bound to pay Rs 7500 as fees whereas if the same unitapplied for consent from the Kerala Pollution Control Board, the fee would beRs 2000. Nonfilling of the sanctioned strength is one of the factors behindwidely varying per unit staff ratios across SPCBs. In Andhra Pradesh, onetechnical person has to monitor 100 units whereas Kerala and HimachalPradesh have 14 and 12 persons respectively for the same task. The normsfor determining the staffing pattern of the boards have not been prescribed,leading to wide differences in the per polluting unit availability of staff formonitoring.


No industry is out of pollution. Most of these industries are established ascore industries for progress of human society. Hence, it is undisputable thatthey have to exist for human existence and development. The only disputablepoint is how they have to be managed to make them free of pollution. Thecause of pollution - in many situations - is not the industry itself, but thetechnology adopted by such industry. New technologies to minimize thepollution are also generated in every industry. How far these technologies areadopted will decide the nature and extent of pollution. It is also extremelyimportant for developing countries to achieve a high level of economic growthto mitigate their socio-economic problems. Major challenge is: how to ensuredevelopment in a sustainable manner by a proper trade-of f betweenenvironment and development.

Self assessmentSelf assessmentSelf assessmentSelf assessmentSelf assessment

1. The ultimate cause of pollution is ___________________human activityitself.

2. The oxygen content of water also becomes less due to increase in thetemperature. This is called ______________________thermal pollution.

3. ____________Oil spill is a major pollution problem in the oceans andseas.

4. Areas of concern in environmental law include____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________air quality, water quality, global climate change,agriculture, biodiversity, species protection, pesticides and hazardouschemicals, waste management, remediation of contaminated land andbrown fields, smart growth, impact review, and conservation,stewardship and management of public lands and natural resources.

5. "It shall be the duty of every citizen of India to protect and improve thenatural environment including

forests, lakes, rivers and wildlife and to have compassion for livingcreatures."

Answers

Chapter I: Nature and Structure of the Economy

1. Supply, demand 2. Legislature, executive, judiciary 3. Mercantilists 4. Regulatory, entrepreurial, planning, promotional 5. Bhabha 6. Monopolies & Restrictive Trade Practices 7. 1986 8. quasi 9. second 10. 2045

Chapter II: The Social Environment and its influences on business

1. James Q Wilson 2. Morris Davis Morris 3. basic literacy, infant mortality, life expectancy 4. longevity, knowledge, decent standard of living 5. unlimited 6. 1964, 1971 7. 1990 8. sellers' 9. twenty 10. free

Chapter III: Industry

1. ownership, organisational, operational 2. 49 3. macroeconomic, executive 4. 20, budget 5. privatisation 6. strategic 7. Trade Related Competition Commission of India (TRCCI) 8. Structure 9. 42.4 10. budget

Chapter VI: The Financial System

1. Exchange or trade 2. asset-liability 3. repurchase, date 4. securitisation 5. floating rate 6. revive, hostile 7. R.J. Chellieh 8. defence 9. industrial 10. 10, 35

Chapter V: The Political System

1. Athens 2. parliamentary 3. recall, plebiscite 4. parliament 5. 120 6. XII

Chapter VI: International Linkages

1. The Uruguay, 1995, Geneva, 146 2. amber 3. 36 4. sanitary, phytosanitary 5. technical barriers to trade 6. 130,000 7. Foreign Exchange Regulation Act 8. technology, public institutions, macroeconomic environment 9. Finland 10. economic

Chapter VII: Corporate Responsibility

1. investors 2. Kumarmangalam Birla 3. shareholders, Board of directors, The management 4. accountability, transparency, equality of treatment for all shareholders 5. fifty 6. investor 7. Three Concentric Circles 8. ethical, discretionary 9. corporate social performance 10. consumers, employees, shareholders

Chapter VIII: Business ethics

1. The ethics of accounting information are as under: a. Creative accounting, earnings management, misleading financial analysis. b. Insider trading, securities fraud, bucket shops, forex scams: concerns (criminal)

manipulation of the financial markets. c. Executive compensation: concerns excessive payments made to corporate CEO's and

top management. d. Bribery, kickbacks, and facilitation payments: while these may be in the (short-term)

interests of the company and its shareholders, these practices may be anti-competitive or offend against the values of society.

2. The ethics of human resource management are as under: a. Discrimination issues include discrimination on the bases of age (ageism), gender,

race, religion, disabilities, weight and attractiveness. b. Issues arising from the traditional view of relationships between employers and

employees, also known as At-will employment. c. Issues surrounding the representation of employees and the democratization of the

workplace: union busting, strike breaking. d. Issues affecting the privacy of the employee: workplace surveillance e. Issues affecting the privacy of the employer: whistle-blowing. f. Issues relating to the fairness of the employment contract and the balance of power

between employer and employee: slavery, indentured servitude, employment law. g. Occupational safety and health.

3. Ethics of sales and marketing are as under: • Pricing • Anti-competitive practices • Specific marketing strategies • Content of advertisements • Children and marketing • Black markets and grey markets

4. Ethics of production are: • Defective, addictive and inherently dangerous products and services • Ethical relations between the company and the environment • Ethical problems arising out of new technologies • Product testing ethics

5. Ethics of intellectual property, knowledge and skills are as under: • Patent infringement, copyright infringement, trademark infringement. • Misuse of the intellectual property systems to stifle competition. • Even the notion of intellectual property itself has been criticized on ethical

grounds. • Employee raiding • The practice of employing all the most talented people in a specific field,

regardless of need, in order to prevent any competitors employing them. • Business intelligence and industrial espionage.

6. Suggestions about the ethic policy are: • Given the unequivocal support of top management, by both word and example. • Explained in writing and orally, with periodic reinforcement. • Doable: something employees can both understand and perform. • Monitored by top management, with routine inspections for compliance and

improvement. • Backed up by clearly stated consequences in the case of disobedience. • Remain neutral and nonsexist.

7. Ethics officers (sometimes called "compliance" or "business conduct officers") have been appointed formally by organizations since the mid-1980s.

It is this person's responsibly to handle communication breakdowns and unethical conduct. When an employee gives notice that they are intending to quit their job, it would be up to the ethics office to investigate why they are quitting and take measures to attempt to resolve any issues surrounding that decision.

8. Ethics are important in business because of the following reasons: • When working in the business world, it is a necessity to encompass moral ethics.

Ethics is also especially important when working with financial information. • Auditors, or "independent third parties", must be truthful and honest when auditing a

company's financial information. • Most companies would want to make sure that the financials are correct and save the

hassle of having ruined financials. • In addition to shareholders having confidence in the company, partners and suppliers

need to be able to trust the company. • By making ethics mandatory within a company, success will be established. • The benefits of being ethical greatly outweigh being non-ethical in business.

9. Importance of ethics in business: • Ethics is important not only in business but in all aspects of life because it is the vital

part and the foundation on which the society is build. • Ethics refers to a code of conduct that guides an individual in dealing with others. • Ethics is related to all disciplines of management like accounting information, human

resource management, sales and marketing, production, intellectual property knowledge and skill, international business and economic system.

• The ethical issues in business have become more complicated because of the global and diversified nature of many large corporation

10. Approaches of business and Ethics are:

Philosophers and others disagree about the purpose of a business ethic in society. Thus, under this view, only those activities that increase profitability and shareholder value should be encouraged, because any others function as a tax on profits. Some believe that the only companies that are likely to survive in a competitive marketplace are those that place profit maximization above everything else. However, some point out that self-interest would still require a business to obey the law and adhere to basic moral rules, because the consequences of failing to do so could be very costly in fines, loss of licensure, or company reputation.

Some take the position that organizations are not capable of moral agency. Under this, ethical behavior is required of individual human beings, but not of the business or corporation.

Other theorists contend that a business has moral duties that extend well beyond serving the interests of its owners or stockholders, and that these duties consist of more than simply obeying the law. They believe a business has moral responsibilities to so-called stakeholders, people who have an interest in the conduct of the business, which might include employees, customers, vendors, the local community, or even society as a whole.

11. Ethics and healthy bottom line for companies co-exist because of the following reasons: • Companies following the path of ethical value system succeed in long run as

sooner or later consumers learn to separate fact from fiction. • Nowadays Money and Ethics are seen to be diametrically opposed to each other

but it turns out money and ethics do have much in common. • Ethical decision-making gets especially interesting when organizations must

reconcile their core values and show a healthy bottom line which end up in conflict with one another.

• Profits and ethics are in reality part of the same equation. • Ethics are important not only in business but in all aspects of life because it is an

essential part of the foundation on which civilized society is build. A business that lacks ethical principles is bound to fail sooner or later.

Chapter IX: Globalization

1. Globalization is process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world.

2. The KOF Index of Globalization measures the three main dimensions of globalization: • economic • social • political

3. GATT(General Agreement on Tariffs and Trade) is an agreement on tariffs and its

primary concern has been negotiations on matters related to trade policy and tariff restrictions.

4. Globalization has various aspects which affect the world in several different ways such as: • Industrial • Financial • Economic • Political • Informational • Ecological • Cultural • Social • Technical • Legal/ethical • Regional

5. The four main economic flows that characterize globalization are: • Goods and services: (e.g., exports plus imports as a proportion of national income

or per capita of population) • Labor/people: (e.g., net migration rates; inward or outward migration flows,

weighted by population) • Capital: (e.g., inward or outward direct investment as a proportion of national

income or per head of population) • Technology: (e.g., international research & development flows; proportion of

populations using particular inventions)

Chapter X: Industrial Growth and Environmental degradation

1. human activity 2. Thermal pollution. 3. Oil spill 4. air quality, water quality, global climate change, agriculture, biodiversity, species

protection, pesticides and hazardous chemicals, waste management, remediation of contaminated land and brown fields, smart growth, sustainable development, impact review, and conservation, stewardship and management of public lands and natural resources.

5. Forests, lakes, rivers and wildlife and to have compassion for living creatures."