ECONOMIC ENVIRONMENT AND BUSINESS

Assignment

1

Q1. Present a profile of Public Sector Undertakings (PSU's) in India. What are your comments on the progress of disinvestments in PSU's in India?

ANS)

India’s industrial and economic development policy in the 1950s and 1960s were based on a mild socialist model, with public sector (state-owned and managed) enterprises as engines of industrialization, economic growth and large-scale employment. It was believed that a dominant public sector would reduce the inequality of income and wealth and advance the general prosperity of the nation. Government investment in the public sector is presently Rs. 2,525 billion, almost 94% of the total revenue receipts of the Government of India and half of the total external debt of India.

Under the Industrial Policy Resolution (IPR 1956), public sector (PS) units had a very large purview of operations. In a major shift in economic policy, equity of some Public Sector (PS) units has been sold to mutual funds and the public, though not to the desired levels as proclaimed by successive governments. Since July 1991 Indian industry has undergone considerable changein terms of basic parameters governing its structure and functioning. The major reforms introduced include:

a) Reduction in areas reserved for the public sector. Annexure 3A presents the list of items still reserved for the public sector,

b) Wide spread reduction in scope of Industrial Licensing; Annexure 3B presents list of industries for which industrial licensing is still compulsory.

c) Reduction in areas reserved for PS;

d) Disinvestments of equity of select public sector undertakings;e) Enhancing the limit of foreign equity participation in domestic industrial undertakings,

A public sector unit is one where the government (Central and/or State) holds more than 50pc shareholding. PS Units are of 3 types:

Departmental undertakings like railways, post & telegraphs, electricity boards.

Units created by special statute of parliament like LIC, QIC, STC, MMTC etc Units registered under the Companies Act 1956 e.g. HAL, BEML, ITI and IOC etc. These companies

are by and large structured as Private Limited companies

During 2000 - 2001,107 PSUs signed performance MOUs based on the Department of Public Enterprises (DPE) evaluation of the annual performance of PSEs. The financial performance of the PSEs up to the year 2000 can be seen below.

PROFITABILITY OF CENTRAL PUBLICSECTOR UNDERTAKINGS

Item Year 1994-

1995 1995- 1996

1996- 1997

1997- 1998

1998- 1999

1999- 2000

No. of companies 241 239 238 238 235 232 P U Capital (Rs bn)

582.9 595.9 624.3 657.6 770.7 824.0

Net worth Rs bn 899.5 991.8 1138.9 1324.4 1480.2 1611 Profit after Tax (PAT) 71.9 95.7 99.9 137.2 132.3 146 Ratio of Pre-tax Profit toCapital employed%

6.0 7.8 6.7 7.6 7.2 7.0

Ratio of PATto Net Worth (pc)

8.0 9.6 8.8 10.4 8.9 9

2

In 2000 - 2001, generally, the PSUs performed better than they did in the previous year. The net profit of the 230 operating Central public sector undertakings (CPSUs) went up by 66% during March 2001 -02, to touch Rs 26,045 crore as against Rs 15,653 crore in 2000-01. Simultaneously the increase in investment in the CPSUs during this period amounted to Rs 50,434 crores; from Rs 2,74,198 crore in 2000-01 to Rs 3,24,632 crore in 2001-02, an 18.39% rise.

The combined turnover of all the CPSUs during this period marked an increase of Rs 20,491 crore; from Rs 4,58,237 crore to Rs 4,78,728 crore. The net dividend payout by the companies has recorded a decline of 2.34% during this period from Rs 8,260 crore in 2000-01 to Rs 8,067 crore in 2001 -02. While, on the other hand the net contribution to the Central exchequer by way of excise duty, customs duty, corporate tax and interest on Government loans, dividends and other duties increased by Rs 1,716 crore during this period from Rs 61,037 crore in 2000-01 to Rs 62,753 crore in 2001–02.

Of the total investments of Rs 3,24,632 crore during 2001-02, while the Central Government contributed Rs 1,43,205 crore, the State Governments together gave Rs 1,294 crore, holding companies Rs 26,333 crore, foreign parties Rs 6,844 crore, banks and financial institutions Rs 1,42,047 crore. Besides the share of application money pending allotment stood at Rs 4,709 crore, the survey said. The survey recalled that the investments in public sector enterprises had stood at a mere Rs 29 crore as on April 1, 1951.

A diligent study of the power sector reveals that the disinvestments programme, if achieved in the power sector alone has the potential of doubling the aggregate disinvestment target set by the government for the entire PSUs [Public Sector Undertakings] in India.  The government sector enterprises like NTPC, NHPC, and PGCIL hold the promise of generating these funds through a judicious mix of 26% private placements and 25% fresh placements.  The process of disinvestment combining the sale of equity with dilution of government stake would definitely ensure better valuation for these PSUs.

The disinvestment-planned figure for the last fiscal year was Rs. 10,000 crores and the government of India could not achieve a fourth of that figure. Similar projections in this year's budget has been made which makes it   amply clear that despite its failure in the earlier fiscal year, the government of India is serious to go ahead with the disinvestment agenda.  But the real dampening elements are the challenges posed by coalition politics where different ministries are under the aegis of members of different sections of the ruling alliance and there is a lack of consensus.

The disinvestment of oil sector PSUs is one such glaring instance. There is much to do about some of the Public Sector Undertakings.  The importance of these undertakings have been extolled to an extent that they have been treated as holy cows.  Post liberalization, there has been a marked understanding in industrial sectors and also in the parleys of the governments that this need not be the case.   The rationale of operative economics and the rate of return to the scales is of paramount importance for any operation, leave aside a public sector entity.  Often, it has been witnessed that the rate of return of a majority of the public sector enterprise has not been in common measure to the rate of investment. Understanding precisely this contention, the government of India, belatedly though has embarked upon a selective disinvestment process.  To this effect, the disinvestment commission constituted ad hoc, has also allayed earlier perceptions that the petroleum sector does not carry about itself; such strategic concerns that disinvestment in this sector could result in destabilization or make a negative impact on state control.

The ministry for disinvestment has also suggested that it is open to the idea of paring its shareholding in the public sector oil and gas companies below 50%.  Almost as though to sound apologetic, the government has veered clear of making much of a strait jacket in the approach to disinvestment and seeks to follow a custom built and non-pedantic approach for each unit's disinvestment.

The fears that has been reinforced over the years is that some of the oil multinationals had given a lot of bellyache to the government of India during the contingencies of wars and the oil crunch in the 70s.  Those who had anything to do with the so called strategic sectors especially power, oil & gas, telecom, etc. have

3

been preying on this phobia and reinforcing the misplaced belief alienation of control in this sector goes against national interest.

Involvement of private parties augments a positive structural readjustment in the management.  Much of the PSU woes arise from the lackadaisical bureaucratized set up that wields much more clout than it actually deserves. Instead of an efficient and professional handling of an enterprise, much energy is spent in sustaining the status quo.  Palliating the interest of much flab that does precious little is also something where the PSUs cannot think or act independently.  The labour unrest that many of the PSUs are encountering notably the UPSEB and the ongoing Telecom strike is a case in point.  The government while disinvesting has to take into accounts how well it can accommodate the labour interest together with that of the PSU.

For example, the government of India continues to say that the prices of LPG should be somewhere in the region of Rs.  300+ per each bottle.  But if we look at the issue with a different perspective, the government has also factored in the overall inefficiencies in operation and the prices jack up due to these inefficiencies which is as much as 25%.  Private   entrepreneurs are allowed to import LPG and set up their own handling and marketing facilities. This introduces the element of market-administered prices (MAP) and the PSUs would have to face the competition of efficient managements and operators who would be vending their wares with positive consumer responses backing them. The disinvestment process will bring in contemporary management expertise that would enable to meet the stiff market competition of the emerging market scenario.

The financial contingency of the government of India is such that it needs to think about divesting more than 49%.  It should not bind itself to the fix of keeping a sustained share base.  Rather, the government has not gone ahead with its initial proposal of retaining a Golden Share in the PSUs and involves Indian partners of sufficient financial muscle to act as a countervailing influence on any foreign partners who buy the equity that the government chooses to off-load.  This will ensure that the government still retains statutory powers in these strategic sectors and whenever a contingency arises, can invoke them to guard national challenge.  These practices are quite common in more advanced nations, notably the UK and USA where the governments are encouraged to keep off from enterprise and concentrate on the social development issues.

The existential realities for the government of India are its increasing debt burdens.  The immediate avenue at hand for revenue generation is disinvestment of PSUs.  This will bring in foreign direct investment and better technologies.  On the other hand, the government of India would not have to pump in the independent outlays it has to set apart for these PSUs.  On the contrary, there will be financial liquidity to retire debts in which it is steeped into.

Q2. Write short notes on:(a) Roles of the legislature, judiciary and bureaucracy (b) India-China-a comparison (c) Venture capital

ANS)

(a) Roles of the legislature, judiciary and bureaucracy:

Although legislatures are known primarily as lawmaking bodies, it is important to recognize that these institutions have many other important responsibilities. Despite what the dictionary says, legislatures are not the only governmental bodies that make and implement laws. Those in positions of executive authority, courts of law, and bureaucracies may at times perform these same functions. What is it then that

4

distinguishes legislatures? The first and foremost characteristic of a legislature is its intrinsic link to the citizens of the nation or state—representation. In a representative democracy the legislature acts as the eyes, ears, and voice of the people. In addition to gaining their legitimacy by representing the public will, legislatures have other distinguishing features. For instance, most consist of a rather large group of individuals who come together, at least in theory, as equals. While some members may assume leadership positions or special responsibilities, each member's vote is customarily weighed equally. Thus, legislatures operate under a system of collective decision-making.

Legislatures adopt policies and make laws through the process of deliberation. While usually based on some broad set of principles contained in written and unwritten constitutions, decisions need not proceed from the rule of law or specific legal precedents. In this way legislatures differ from the courts.

In addition to their official lawmaking capacity, most legislatures perform a unique educational role. Individual legislators simplify complicated issues and define policy choices. They use their resources and expertise to filter information from many sources and to resolve conflicting ideological positions, ultimately presenting their constituents with clear-cut options. This educational function has become increasingly important as societies have become more complex, as the scope of government activity has become more extensive, and as the public has gained increased access to legislative proceedings, particularly via television.

Another defining characteristic of most legislatures is the dual role of the legislators. On the one hand, the legislature makes laws that affect the entire nation and are presumably intended to be for the good of the nation as a whole. On the other hand, its individual members, the legislators, have a duty to represent the interests of their individual constituencies. This inherent tension is unique to representative forms of government that have districts.

Bureaucracy is a system that carries out the functions of a government or a private organization. The authority to perform many routine duties is divided among departments called bureaus. In most large bureaucracies, power is controlled by a number of officials instead of by one leader. However, a single leader may be held responsible for the actions of many minor officials and employees. Bureaucracy is fully developed in political and ecclesiastical communities only in the modern state, and, in the private economy, only in the most advanced institutions of capitalism.

The role of the bureaucracy in a democracy can be easily summed up like this. Their role must be to ensure that the government is for the people. This means the bureaucracy must be able to be responsive to the needs of the people and must be effective in implementing government policies especially those, which are meant for the welfare of the people. Bureaucracy plays a more responsive and effective role to make our democracy a meaningful one. In bureaucracy, we are concerned with all major organs of the state, such as police, civil services, the judicial structure and the military.

Judiciary is the branch of government with the power to resolve legal conflicts that arise between citizens, between citizens and governments, or between levels of government. The role of judiciary is to:

Ensure speedy and fair trial Interpret the basic principles of Constitutional republic, and the consistency of laws

Indian judiciary has been opening up its fangs against the rising struggle of the working classes to resist neo-liberal economic offensives. The Kerala High Court’s ruling against bandh and the Supreme Court’s approval subsequently, the Kolkata High Court’s sudden ruling banning processions during the day time, the Supreme Court’s reversal of its earlier judgment on Contract Labour - all these constitute a systematic attempt by one very important organ of the bourgeoisie state to bind the working class hand and foot in order to incapacitate their power of resistance.

5

In fact, globally, when the intensity of economic offensive of imperialist globalization is fast sharpening, world capitalism is also bent upon rendering the working-class resistance powerless by banning or severely curbing their trade union activities. Spain, South Korea, Mexico, some Latin American countries (not to speak of Pakistan or some Middle East countries where traditional democratic rights and workers’ right to strike are severely curtailed by the nature of their state structure) are witnessing this dictatorial offensive on the trade union rights. Of late, in Galicia, Spain, a court sentenced a number of workers to 14 years rigorous imprisonment along with a huge amount of fine for the “crime” of picketing during a strike in June 2002. Spanish workers led by CIG are waging struggles to undo this judicial autocracy. It is in this global context, the onslaught of the judiciary on the working class resistance in India is, in all likelihood, set to intensify if not checkmated in time by the combined might of the working class with the support of the democratic minded intelligentsia and other sections of the people.

(b) India and china- a comparison.

Some comparisons are stark enough to generate a national inferiority complex. In 1980, India had about 687m people, 300m fewer than China. Living standards, as measured by purchasing power per head, were roughly the same. Then, as China embraced modernity with a sometimes ugly but burning passion, it left India behind. In the next 21 years, India outperformed its neighbour in almost nothing but population growth.

By 2001, India had 1,033m people against China's 1,272m. But China's national income per head, according to the World Bank, was $890, nearly double India's $450. Adjusted for purchasing power, the Chinese were still 70% wealthier than Indians were. In the ten years from 1992, India's GDP per head grew at 4.3% a year, China's twice as fast. Some 5% of Chinese now live below the national poverty line, compared with 29% of Indians.

India and China: A Comparison

UNIT INDIA CHINA Population Mn 1'033 1'272 Infant mortality Per 1000 69 32 GDP U.S $ Bn 478 1'159 GDP/Capita U.S $ 474 1'131 Gross Domestic Savings Of GDP 21 40 Growth in industrial productionAve. annual growth for the period 90-2000

Percent 7.0 13.7

Agriculture production cereals (Rice + Wheat)

Mn Tonnes 208 289

Electricity consumption per capita KWH 379 758 Population below poverty line (percent) Percent 44 19 Rail route Kms. 62.5 56.7 Motor vehicles Per 1000 people 7 8 Personal computers Per 1000 people 4.50 15.90 Exports $ Bn 43.90 266.20 Exports as % of world exports Percent 0.70 3.90 Forex reserves (pertains to 2001 value) $ Bn 46.40 217.90 Gross enrolment ratio in primary schools Percent 100 107 Adult literacy Percent 57 84 Physicians Per 1000 population 0.40 1.70

6

(c) Venture Capital

Venture capital is an investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets.

Start-up companies that receive venture capital are perceived to have excellent growth prospects but don't have access to capital markets because they are private companies. In return for venture capital, investors may receive a say in the company's management, as well as some combination of profits, preferred shares or royalties. Sources of venture capital include wealthy individual investors, investment banks, and other financial institutions that pool investments in venture-capital funds or limited partnerships. The risks and rewards of venture capital investing can be extreme

The term venture capital can be applied in a number of ways: to investments, people, or activities. Venture capital is an activity involving the investment of funds. It ordinarily involves investments in illiquid securities, which carry higher degrees of risk (and commensurately higher possibilities of reward) than so-called traditional investments in the publicly traded securities of mature firms. The venture-capital investor ordinarily expects that his participation in the investment (or the participation of one of the investors in the group which he has joined, designated usually as the "lead investor") will add value, meaning that the investors will be able to provide advice and counsel designed to improve the chances of the investment's ultimate success. The investment is made with an extended time horizon, required by the fact that the securities are illiquid. (In this connection, most independent venture funds are partnerships scheduled to liquidate ten to twelve years from inception, in turn suggesting that a venture-capital investment is expected to become liquid somewhere around four to six years from initial investment.)

Since the most celebrated rewards in the past have generally accrued to investments involving advances in science and technology to exploit new markets, traditional venture-capital investment is often thought of as synonymous with high-tech start-ups. However, as stated earlier, that is not an accurate outer boundary, even in the start-up phase. For example, the technology of one of the great venture-capital winners—Federal Express—is as old as the Pony Express, and it would take a great stretch of the imagination to perceive of fast-food chains such as McDonald's as involving additions to our store of scientific learning. But, whether high or low tech, the traditional venture capitalist thrives when the companies in which he invests have an advantage over potential competition in a defined segment of the market, often referred to as a "niche." The product or service is as differentiated as possible, not a "commodity." Exploitation of scientific and technological breakdowns has, historically, been a principal way (but not the only way) for emerging companies to differentiate themselves from their more mature and better-financed competitors.

Q3. What does one mean by "capital market"? What reform markets - both primary and secondary?

Ans)Capital market is the broad term for the market where investment products such as stocks and bonds are bought and sold. It includes all the people and organizations, which support the process.Long-term borrowed funds and equity capital are negotiated on the capital market. Via this market private businesses and public authorities accrue a large part of the capital needed to finance their investments and other expenditure. These parties seeking capital acquire long-term money by taking out long-term loans and non-bonded loans with the banks and through the issue of bonds, shares, debentures, convertibles and option loans. In essence savings feeds the capital market from private households with the banks, but also from the funds of the insurance companies, who can lend their money for longer periods at reduced rates of interest, as well as from foreign investors. A distinction is drawn between the organized capital market of the banks and exchanges, on which shares and fixed-interest securities are traded, and the unorganized,

7

'gray' capital market. Here capital transactions are processed without the involvement of banks and exchanges.

On capital market reforms, the extensive reforms were implemented beginning with the establishment of an independent statutory regulatory authority and the abolition of government’s controlling role. In addition the opening up of the capital market to FII’s in 1993 provided a link between the domestic market and international markets.

However, although the quality of regulation and the institutional and technical structure of the market improved substantially over the 1990s, the volume of resources raised through the capital market was actually lower in the second half of the decade than in the early period. The experience of small investors has been highly discouraging partly because of the collapse of the government run mutual fund organization like UTI necessitating two government bailouts. Reforms in the capital market were initiated with the Securities and Exchange Board of India (SEBI) being given statutory powers in 1992 to regulate the capital markets.

It has since laid down a structure of regulations governing various participants in the capital markets, which include regulations for: -

a) Insider trading,b) Takeovers,c) Management of mutual funds.

PRIMARY MARKET REFORMS

a) The eligibility criteria for issuers have been strengthened. At the same time, SEBI took several measures to provide issuers with more flexibility in the issue process. Stringent and detailed disclosure norms have been prescribed, and greater transparency in the draft prospectus is required. Further, separate criteria for finance companies have been prescribed.

b) Criteria for accessing the securities market have been strengthened. Issuers proposing to make their first offer of equity to the public should have a track record of dividend payments in three years of the immediately preceding five years. This condition is relaxable under specific conditions.

c) Public sector banks (PSB) are, however, permitted to comply with less stringent criteria. The entry criteria applicable to other issuers would not be applicable to the PSB's. Further they have been allowed to price issues at a premium provided they have a 2-year profitability record, as against the 3 years for other issuers.

d) Offer documents need no longer be vetted by SEBI. Merchant Bankers and issuers, however, remain responsible for ensuring compliance with the norms on disclosure and investment protection prescribed by the SEBI.

e) The government of India in end of 1995 permitted IPO's through the "Book building" route. Book building is a process to ascertain the indicative subscription bid's of interested investors to public issue of securities. The advantages of this technique of obtaining advance feedback are that it helps in optimal pricing and removes uncertainties regarding mobilization of funds. Interestingly, the process has been used in India to place debt securities as well.

SECONDARY MARKETS REFORMS

The SEBI took several initiatives to develop and regulate the secondary markets. Some of these are: -

Stock exchanges disallowed from renewing contracts in cash group of shares from one settlement to another.

The Mumbai stock exchange and other stock exchanges with screen based trading systems, allowed to expand trading terminals to locations where no stock exchanges exist.

8

Several restrictions, including limits on the size of issues proposed to be listed on Over The Counter Exchange of India (OTCE1) removed and listing criteria for OTCEI liberalized. Not withstanding this the OICEI has hardly been in operation.

At the end of each day both "long" and "short" sales to be disclosed to the exchange.

A stock lending scheme introduced. Stock lending has been approved in which short sellers could borrow securities through an intermediatory before making such sales. The approved intermediary should have a net worth of minimum Rs.50.00 crores.

Trading modalities have been modernized. The National Stock Exchange introduced on line electronic trading in 1994. The system allows brokers located in 140 cities and towns all over the country to trade in a single unified market, matching buy and sell orders with price priorities. It also ensures transparency for investors and assurance of best prices. Competition, thus led BSE also to introduce an online trading system in 1995, with linkages to brokers all over the country.

Parliament has passed the SEBI amendment Bill 2002, which amongst others provides for empathic steps to be taken to promote demutualization of stock exchanges. This will reduce the vested role of the brokers and make way for fairer operations on the SEs.

Credit rating made mandatory for debt instruments of less than 18 months.

Listed companies must publish unaudited results every three months.

Foreign Institutional Investors (FII's) allowed lending securities.

FII's investing through the equity route permitted to invest upto 30pc of their total portfolio in gilts.

A system of "Rolling Settlement" has been implemented, by virtue of which, a sale / purchase transaction has to be settled within 2 days.

Q4. What are the parameters, which influence quality of life? Write a brief note ON social responsibilities of business?

ANS)

Quality of life of a people depends on the level of its well-being. Deprivation of well-being makes life poor. The concept of poverty is perceived variously based on income, satisfaction of basic needs, and capability to function. In the ‘income’ perspective, an individual is viewed as poor only if his income level is below the defined poverty line. The ‘basic-need’ perspective goes beyond this. Deprivation of material requirements for minimally acceptable human needs including health, education, and essential services is considered here to determine the extent of poverty. In the ‘capability’ perspective, poverty represents the absence of some basic capabilities to function.

Dandekar and Rath first made estimates of poverty in India in 1971. (Dandekar and Rath, 1971). Bardhan (1973) and Ahluwalia (1977) produced their estimates in quick succession. These initial attempts based their concept of poverty on per capita calorie intake or income. Several other factors including necessary items of private and social consumption such as housing, education, and health were not considered in these exercises. Furthermore, even the estimates they made were themselves called into question since it is difficult to fix the minimum calorie requirements for a highly heterogeneous population. This heterogeneity is due to interpersonal variations in age, sex, and activity levels.

The ‘quality of life’ has been defined by the World Health Organization (WHO) as “the condition of life resulting from the combination of the effects of a complete range of factors such as those determining health, happiness, education, social and intellectual attainments, freedom of action, justice, and freedom from oppression”. According to Nagpal and Sell, ‘quality of life’ is a “composite measure of physical, mental, and social well-being as perceived by each individual or by a group of individuals - i.e. to say happiness, satisfaction, and gratification as is experienced in such life concerns as health, marriage, family,

9

work, financial situation, educational opportunities, creativity, belongingness, and trust in others (Nagpal, R and H. Sell, 1985). All these definitions are highly meaningful and comprehensive but are of little practical applicability.

PARAMETERS INFLUENCING QUALITY OF LIFE:

The parameters influencing the quality of life are improvement in health and education of the people. It is important for governments to concentrate more on education and health of the peoples a means of improving the quality of life of the people. There is a need for a major government role in education and health as a part of the programme to empower the underprivileged for a sustained and balanced growth of the country.

All the countries literacy bears a positive co-relation to Per Capita Income (PCI), low population growth as also to longevity. Kerala and Goa are examples of a rise in literacy ushering in a drop in population growth, as much as UP and Bihar prove the reverse. Therefore literacy should be given the highest importance as a basic motivator for improvement in the quality of life.

The following table gives a comparative idea of the government expenditure on health education and social services in different countries.

The government very rightly has a bias towards rural development since 70% of our population is still rural based. Every budget makes provisions for various aspects of rural uplift.

Some of the measures announced in the budget 2003 - 2004 towards rural development and upliftment of our village include:

a) Constitution of a committee headed by the Deputy Chairman of the planning commission to examine all the existing schemes having a bearing on poverty alleviation and rural development and recommends their practical convergence.

b) Additional funds to be provided for rural roads (in addition to Rs. 2325 from the existing cess on diesel) from the proposed cess on diesel of 50 paise per litre. vate Banks to be hereafter encouraged to open branches in rural areas, to service both farm and non-farm sectors.

In an effort to address the deficiencies in the estimation of poverty and the quality of life, the Government of Kerala has experimented with an alternative way of defining poor households for targeting anti-poverty programmes. A Family Poverty Index (FPI) was developed, which allowed local communities themselves to identify the poor households. This index was evolved during the course of implementation of the Urban Basic Service for the Poor (UBSP) and the Programme and Community-Based Nutrition Project (CBNP) in Alappuzha town in Kerala in 1993. FPI was constructed combining nine socio-economic variables, selected and approved by members and representatives of the local community. A poor family is identified as one which

(i) lives in a thatched hut;(ii) has illiterate adults;(iii) has one or no adult employed;(iv) has no access to safe water;(v) has no sanitary latrine;(vi) does not eat more than two meals a day;(vii) has an alcoholic or drug addict;(viii) has children below 5 years; and(ix) belongs to Scheduled Castes and Scheduled Tribes

A poor family may not have all these nine characteristics. If a family had at least four of them, it was treated as poor. This poverty index has explicit limitations. For instance, families with one well-employed adult and other adults either studying or not employed, cannot be considered poor. It is also not clear as to why families with children below five years should be considered disadvantaged.

10

SOCIAL RESPONSIBILITIES OF BUSINESS

The social responsibilities of business cannot be treated in isolation. They are part of a larger picture in terms of the economy and governance. They also relate to certain fundamental principles about the kind of societies that we all seek to build, based on human rights, social justice and democracy.

Though it may be an expression of private enterprise, business is not an activity of isolated individuals. Business owes its existence to society. Whether it’s about the corner store or a gigantic transnational corporation, business is a social practice with implications for the public good. The social responsibility of business is therefore a fundamental element in business ethics.

The view that business has no social responsibility beyond that of making profits for its stockholders has been vigorously proposed by Chicago economist Milton Friedman. For him, "there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud". Friedman is even opposed to businesses contributing to charity or other social causes (unless those actions contribute to the business and its profitability). The basis of his view is that company directors have a fiduciary responsibility to stockholders to maximize profits and to act otherwise is, in effect, stealing which moves away from the free market approach toward socialism. The role of the businessperson is to develop a profitable business, not to be a legislator or a social reformer.

Friedman’s view rests on several half-truths; it overstates the capacity of the free market to correct itself and to work for the wider public good. The business aims to be profitable and it does so only by supplying quality goods and services, while providing employment and relating to its community. Business lives off, and impacts upon, the society in which it operates (and for some corporations that society is global). Because business interacts with society, questions of job creation and fair pricing, for example, are matters of integrity for business. Of course, no issue exemplifies the need for social responsibility by business better than the environment, because, as we know, some business activities have an enormous capacity to damage the life support systems of Earth.

The term "social responsibility" encompasses responsibilities towards all stakeholders with which business has an interface - employees, government, customers and shareholders, society etc. Companies are now increasingly coming forward to help in case of calamities, rural development, tree plantation, family planning etc. In India, donations to the poor or charity for religious causes by business houses are appreciated. Social responsibility requires a different mind set as compared to earning profits, which is the major objective of business. Hence, social responsibility towards public welfare should best be handled by government even if it means additional taxation on industry or business.

Social responsibility is arguably a constituent of business best practice. Business ethics which fail to serve the common good and the public interest is unethical, chiefly because it fails to understand that business, like all human activity, is dependent on life’s interconnectedness.

Q5 Write short notes on:(a) MRTP act (b) Power sector reforms and restructuring (c) Variables of competitiveness

ANS)

(a) MRTP Act

11

The Monopolies and Restrictive Trade Practices Act, 1969, aims to prevent concentration of economic power to the common detriment, provide for control of monopolies and probation of monopolistic, restrictive and unfair trade practice, and protect consumer interest.The MRTP Act has its genesis in the Directive Principles of State Policy embodied in the Constitution of India. Clauses (b) and (c) of Article 39 of the Constitution lay down that the State shall direct its policy towards ensuring:

(i) that the ownership and control of material resources of the community are so distributed as best to sub-serve the common good; and

(ii) that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.

 Provisions Relating to Monopolistic, Restrictive and Unfair Trade Practices

Section 10 of the MRTP Act empowers the MRTP Commission to enquire into Monopolistic or Restrictive Trade Practices upon a reference from the Central Government or upon its own knowledge or on information. The MRTP Act also provides for appointment of a Director General of Investigation and Registration for making investigations for the purpose of enquiries by the MRTP Commission and for maintenance of register of agreements relating to restrictive trade practices.

  The MRTP Commission receives complaints both from registered consumer and trade associations and

also from individuals either directly or through various Government Departments. Complaints regarding Restrictive Trade Practices or Unfair Trade Practices from an association are required to be referred to the Director General of Investigation and Registration for conducting preliminary investigation in terms of Section 11 and 36C of the MRTP Act, and Regulation 119 of the MRTP Commission Regulations, 1974. The Commission can also order a preliminary investigation by the Director General of Investigation and Registration when a reference on a restrictive trade practice is received from the Central/ State Government, or when Commission's own knowledge warrants a preliminary investigation. Enquiries are instituted by the Commission under relevant sections of the MRTP Act after the Director General of Investigation and Registration has completed the preliminary investigation and as a result of the findings, submits an application to the Commission for an enquiry.

 Inquires considered and disposed of by MRTP Commission as on 31.12.2001 

 

12

0

100

200

300

400

500

600

700

No.

of a

pplic

atio

ns

Section

Restrictive Trade Practices

Considered 673 2 487 384

Disposed of 374 0 338 304

10(a)(i) 10(a)(ii) 10(a)(iii) 10(a)(iv)

 

  Monopolistic trade practice: Monopolistic trade practice is that which represents abuse of market power in the production and marketing of goods and services by eliminating potential competitors from market and taking advantage of the control over the market by charging unreasonably high prices, preventing or reducing competition, limiting technical development, deteriorating product quality or by adopting unfair or deceptive trade practices.  Unfair Trade Practice:

Misleading advertisement and False Representation Falsely representing that goods and services are of a particular standard, quality, grade,

composition or style. Falsely representing any second hand renovated or old goods as new. Representing that goods or services, seller or supplier have a sponsorship, approval or affiliation

which they do not have. Making a false or misleading representation concerning need for, or usefulness of goods or

services. Giving to public any warranty, guarantee of performance that is not based on an adequate test or

making to public a representation which purports to be such a guarantee or warranty. False and misleading claims with respect to the price of goods or services. Giving false or misleading facts disparaging the goods, services or trade of another person or

concern.

Restrictive Trade Practice: To maximise profits and market power, traders often attempt to indulge in certain trade practices which tend to obstruct the flow of capital into the stream of production. It may also bring manipulation of prices or conditions of delivery or affect the flow of supplies in the market so as to impose unjustified costs.

13

0

100

200

300

400

500

600

700

800

No.

of a

pplic

atio

ns

Section

Unfair Trade Practices

Considered 784 4 158 499

Disposed of 377 4 100 310

36B(a) 36B(b) 36B(c ) 36B(d)

 

(b) Power Sector Reforms and Restructuring

In 1994, the Government of Orissa initiated power sector reforms and restructuring. Under the provisions of the ERC Act, 1998, the Central Government has since constituted the Central Electricity Regulatory Commission (CERC). The government has transferred the responsibility of fixing tariffs to the CERC.

Haryana, Andhra Pradesh, Uttar Pradesh, Karnataka have enacted their State Reforms Acts which provide inter alia for unbundling / corporatisation of SEBs, setting up of SERCs etc. As many as 13 states have either constituted or notified the constitution of SERCs. The SEBs of Orissa, Haryana, Andhra Pradesh and Karnataka have been unbundled / corporatised. The Government of Uttar Pradesh is unbundling / corporatising its SEB. They propose to privatize distribution of power in Kanpur. The Government of Delhi has commissioned a study on corporatisation of electricity generation and distribution.

The reform programme resulted in vertical unbundling of the state-owned integrated electric utility, corporatization of the resultant entities, and constitution of an autonomous regulatory commission for power sector regulation in the state. One of the key features of the reform programme was the privatization of distribution activity. To make the process successful and obtain more revenues, there was a need for the distribution entities to change the existing culture and approach to management. The Government of Orissa undertook a process of organizational strengthening to develop appropriate organizational structure, systems, and business processes suitable to the new environment.

The financial weakness of the State Electricity Boards (SEBs) has also been one of the major stumbling blocks in achieving financial closure of Independent Power Producers (IPPs). Despite government steps to introduce private sector investment into power generation, as of July 1999, only six independent power plants have come into operation, totaling just over 2000 megawatts-far below what is needed to keep pace with industrial growth. Nationwide, the shortfall in energy supply is conservatively estimated at 11 percent and 18 percent during peak hours* , although among states the variation is substantial. The Government of India, with World Bank assistance, has been encouraging the states to undertake in-depth power sector reforms. This involves distancing the state government from operation of the power sector, establishing an independent regulatory framework for the sector, progressively reducing subsidies and restoring the creditworthiness of the utilities through financial restructuring and cost-recovery based tariffs, and divesting existing distribution assets to private operators.

Moving Towards a National Grid

India's power transmission and system operations are going through an extensive national restructuring program parallel with evolving state-level reforms. The Power Grid Corporation of India (POWERGRID), India's national transmission utility, is the main implementing agency of this program.

Over time, POWERGRID will interconnect its regional systems to a national power grid, which can facilitate power sharing from neighboring states or countries with surplus power. To encourage private investment in the transmission business, the Central Government enacted the Electricity Laws (Amendment) Act in August 1998. This Act provides for state transmission utilities and transmission licensees, and thereby facilitates state power reform and private investment in power transmission.

(c) Variables of competitiveness

In today's world, becoming more fully and dynamically integrated into global markets on the basis of increased competitiveness has become a precondition for achieving sustained growth and meeting the challenges of social equity. Growth at the end of this century requires perseverance in the strategy of forming linkages with international markets and improving the quality of those linkages, with related efforts to disseminate technology and invest in human resources.

14

The concept of competitiveness plays a central role in that proposal, which basically suggests that countries should change their production patterns in order to enhance their international competitiveness, through the deliberate and systematic incorporation of technical progress into the production process and a determined effort to invest in human resources. This implies that increasing productivity should be a prime concern.

The Concept of Competitiveness

The aim of competitiveness is to achieve both a better position in international markets and a better standard of living for the population, within open economies with few restrictions on trade and free markets. The traditional approach to competitiveness focuses on the evolution of labour costs, the real exchange rate, and productivity, which affects unit labour costs. The pillars of export-oriented economic policy are basically trade liberalization (with low, uniform tariffs), the abolition of non-tariff barriers, real devaluation and the reduction of labour costs, by either cutting wages or increasing labour productivity through technical modernization.

The quality of the environment is increasingly becoming a variable of competitiveness, which will take on more importance as countries conclude trade agreements that facilitate their entry into more sophisticated markets.

An analysis of an economy's competitive position cannot stop at indicators on the trade balance. It must go on to consider variables of macroeconomic stability, changes in the production system and competitive performance as such. A preliminary proposal in that regard could include the following elements:

Macro-financial performance concerns: Inflation and output growth rates; fiscal deficit and its financing; exchange rate and current account deficit; and external and internal indebtedness.

Changing production patterns with social equity calls for low and declining inflation, growth in per capita GDP, stable fiscal accounts, a high and stable real exchange rate and a moderate and sustainable current-account deficit. The aim is to achieve consistently stable year-end fiscal balances while limiting access to credit as a financing mechanism, and to achieve external account balances based on stable values of these variables, with emphasis on long-term capital.

Competitive performance concerns: "Competitive position" and "efficiency"; export diversification (products, markets and exporters); education: public spending on education as a percentage of GDP; spending on training as a percentage of GDP and the wage bill; and infrastructure: deterioration and degree of use; spending on research and development as a percentage of GDP; performance indicators: education, training and technology.

Q6. Why did India embark on a process of economic reforms in 1991? How many areas were covered in the reform process? What has been the progress of reforms in each sector?

ANS)

The economic crisis in India in 1991has brought a steep fall in foreign exchange reserves to about $1.00 Bn, which is equivalent to two weeks, imports. It results in a sharp down grading of India's credit rating, and cut-off of foreign private lending. Inflation was high at 12% there was high current account deficit (3 % of GDP) and heavy burden of domestic and foreign debt.

The genesis of the crisis could be traced back to the seventies when world oil prices doubled. This shock changed India's current account position from near balance in 1978 to a deficit of 2% of GDP in 1981 - 30% of exports. From 1985 to 1990 it averaged no less than 40% of exports. These deficits were covered by heavy borrowing from the IMF and from other commercial sources.

15

The fiscal deficit of the central government had also crept up to 8.50% of GDP by 1985/86 and stayed at that level thereafter. This marked deterioration of public finances was responsible, both for the persistence of the current account deficit and the inflationary upsurge at the end of the decade (1980-1990). Though the economy grew rapidly during the 1980's some of the growth was unsustainable being the result of fiscal deficits. The reforms process though initiated in this period was piecemeal and half-hearted. More comprehensive reforms were, therefore, needed in a stable fiscal regime.

Macro-economic policies adopted and results obtained since 1991:

a) In 1991 -92 a credit squeeze was implemented with a devaluation of the Rupee by18% in two stages.

b) Severe import controls were instituted.

c) Standby credits were negotiated from the World Bank and IMF, who stipulated that India should initiate reforms in eight major areas listed below:

i. Reduction in the size of the government,ii. Industrial policy liberalization (licensing, reservations etc.),

iii. Trade policy easing (customs tariffs, Rupee convertibility, currency float, etc.),iv. Monetary policy changes (privatization of banks, freeing of interest rates, exchange rate policy

etc.),v. Fiscal Policy changes (rationalization of tax rates, business practices, simplification of systems,

expansion of MODVAT etc.),vi. Introducing efficiency in and privatization of PSU's,

vii. Labour policy (flexibility in labour laws, flexible labour policy to encourage efficiency etc.),viii. Financial sector changes (deregulation of flow of foreign capital, stock exchange reforms,

banking and insurance sector reforms).

Substantial reforms have been initiated and implemented in the following five sectors:

Industrial policy Trade policy Fiscal policy Monetary policy Financial sector reforms

Progress of economic reforms

The results obtained consequent to the above reforms processes are listed below:

a) Real GDP growth, which had fallen below 1.00% in 1991-92, has reached an average of 6.40% during 92-93 to 99-2000 period; it was 5.30% between 1997-2001; and is now estimated to be 5.6 in 2001-02.

b) Gross domestic savings rate, which was less than 20% of GDP in the 80's, reached 25.10% by 1995-1996. It was 23.40% in 2000 - 2001, and is estimated to be around 24.0% in the year 2001-02.

c) Gross domestic capital formation, too, has increased from below 20% of GDP in 1980's to 27.7% of GDP by 1999-2000, 26.20% in 2001 and is estimated to be 25.6pc in 2001-02.

d) The incremental capital output ratio (ICOR) has declined progressively indicating improved productivity and resource utilization. For the tenth five years plan it has been projected at 3.58.

e) Fiscal, monetary and financial fundamentals have shown progressive improvement. Fiscal deficit of the central government has been brought down to 5.1% of GDP during 2000-01 from a high of 8.4% in 1991-92. It is expected to be 5.30% in 2002-03.

f) Average rate of inflation has declined from 13.6% in 1991 -92 to around 6.50% average in 2000-01. It has been stabilizing between 1.50 - 2.00% during 2001-02.

g) Despite the uncertain foreign exchange markets, the external sector has done remarkably well with a foreign exchange reserve of nearly $ 77 Bn (in June 2003).

16

Areas covered under reforms

The areas from the first generation reforms which need attention:

a) In the 1980's GDP grew at an average of 5.80 pc. During 1992 -1997 it rose to 6.50 average. It is necessary to point out that during this period, India was one of the ten fastest growing economies in the world.

b) Adult literacy has improved from 18.33% in 1951 to 65.38% in 2001.

c) Population growth has slowed down to 1.76% as against the projected value of 1.50 pc. Specifically in the southern states of Kerala, Tamil Nadu, and Goa, it has reached the replacement level.

The overall economic performance in 2002-03 has been satisfactory and this is highlighted by the fact that despite the agricultural GDP decline by an estimated 3.1%, caused entirely by a decline in crop output, the country, registered a real growth of 4.4% in GDP, net of inflation. Growth rates of industry (6.1%) and services (7.1%) accelerated very encouragingly, as did exports by a healthy 20.4%.

The following areas from the first generation reforms need concerted attention to consolidate what has been achieved so far: -

a) Restore fiscal discipline. To achieve this objective to bring down the fiscal deficit to below 3.00% of GDP, it is necessary to:

i. Improve tax administrationii. Downsize the government

iii. Speed up privatizationiv. Fiscal consolidation: through revenue enhancement under a modern tax administration, and

expenditure rationalisation.

b) Deregulate industry. The following sectors need to be deregulated at a faster pace.

i. Sugar Industry: Reserve Bank of India has already issued instructions to Cooperative Banks for the conversion of shortfall in margins into medium-term working capital loans, subject of course, to their furnishing adequate security or State Government guarantees. The Reserve Bank of India has also issued instructions to extend the repayment period of medium-term loans to 9 years. In addition, the Ministry of Food and the Ministry of Finance will jointly address the problems of the sugar industry and propose a comprehensive scheme for this important agro-industry soon.

ii. Mining industry (coal, iron, bauxite)iii. Dereservation of certain products from the SSI sector (e.g. Toys and footwear).

Also some announcements have been made in this connection in the budget 2002-03. More recently the central govt. has made a statement on 24th May 2003 that 75 items are

being further dereserved from the SSI bringing down the reserved list from 749 to 674. It also proposes to increase the ceiling on plant and machinery for SSI from Rs 1 crore to Rs. 5 crore for some stationary products.

c) Reduce customs tariffs have been reduced from 35% to 30% in the budget 2002-03. However, it is necessary to emphasize that fool proof antidumping mechanisms should be operative before we reach the 15% import duty level. Metallurgical coke and nickel that used to previously attract customs duty rates at 15% and 5%, depending upon their usage; is now rationalized to a uniform rate of 10%. The peak rate of customs duty has been reduced from 30% to 25%, excluding agriculture and dairy products.

d) Accelerate financial sector reforms. The Central Government has proposed to make 2003-04 the year when a long-overdue Constitutional amendment to integrate services into the tax net in a

17

comprehensive manner is enacted and implemented. This was later postponed at the behest of the trading community, bulk of which forms the BJP vote constituency.

This will give a boost to revenues, and help implement VAT. There will be major improvements in tax administration through greater application of IT, and a

discretion-free, impersonal system. Excise duties are being rationalized further. The momentum of reducing customs duty is being maintained so as to improve the

competitiveness of Indian industry in international markets. Government shall continue to strive towards fiscal consolidation through expenditure

reprioritization, and revenue augmentation. It is important to ensure that the public sector banks are given freedom and autonomy to compete with international banks.

e) Promote private investment in infrastructure.

Budget 2003-04 undertakes to provide a major thrust to infrastructure, principally to roads, railways, airports, and seaports, through innovative funding mechanisms. This comprehensive initiative will cover the following:

48 new road projects at an estimated cost of around Rs.40, 000 crore; with a quarter of them being made of cement concrete;

National Rail Vikas Yojana projects worth Rs.8, 000 crore; Renovation/modernization of two airports, and two seaports at an estimated cost of

Rs.11, 000 crore; and Establishing two global standard international convention centre at an estimated cost of

Rs. 1, 000 crore.

Given the importance of transmission in the power sector, it is proposed to reduce customs duty on specific equipment for high voltage transmission projects from 25% to 5%.

To further research in solar energy, wind turbines, and hydrogen fuel as alternatives to fossil fuels, the Government is especially allocating Rs.20 crore to the Council for Scientific and Industrial Research, for launching incentive-driven research in these three fields.

f) Speed up the process of disinvestments.

Disinvestment receipts for the current year (2003-04) are estimated at Rs.3360 crore. o The pace of disinvestment will accelerate in the coming year and the details about the

already announced Disinvestment Fund and Asset Management Company, to hold residual shares post disinvestment, shall be finalized early in 2003-04.

o Other than the Lagan Jute Machinery Company Limited and Modern Food Industries (India) Limited, only minority stakes in different PSEs were sold till 2000. The Government has now modified its policy to emphasize on strategic sales. During the last quarter of 2000-01, 51% shares of BALCO have been sold to a strategic investor.

o From the table below it can be seen that the cumulative achievements on this front is hardly 37% of the targets from the time the process was initiated in 1991 - 92 till 2001 - 2002. During March and April 2002 considerable activity was observed in the disinvestments process with the partial / 'in various stages of disinvestment' / disinvestment of BALCO, KRL (CRL) & MRL through strategic sale / acquisition; Strategic sale of CMC: 51%, HTL: 74%, VSNL: 25%, IBP: 33.58%, PPL: 74%, and Other modes: ITDC, HCI, STC, MMTC; Strategic sale of Jessop-72%, HZL-26% MFIL-26%, IPCL-25% and Other modes: HCI, ITDC, Maruti and Nalco.

o Other PSUs that have been referred for disinvestments are: Heavy Engineering Corporation Ltd. HEC, Indian Drugs & Pharmaceuticals Ltd. IDPL, Hindustan Antibiotics Ltd. HAL, Bengal Immunity Ltd. BIL, Smith Stanistreet & Pharmaceuticals Ltd. SSPL, Bengal Chemicals & Pharmaceuticals Ltd. BCPL.

18

DISINVESTMENT IN PUBLIC SECTOR UNDER TAKINGSIn Rs. Crores

Year Target Achievement Cumulative Achievement 1991-92 2,500 3,038 3,038 1992-93 2,500 1,961 4,999 1993-94 3,500 -48 4,951 1994-95 4,000 5.078 10,029 1995-96 7,000 362 10,391 1996-97 5,000 380 10,771 1997-98 4,800 912 11,683 1998-99 5,000 5,874 17,557 1999-2000 10,000 1,724 19,281 2000-01 10,000 2,125 21,406 2001-02 12,000 3,000 24,406 2002-03 12,000 4'590 28,996

2.3.4.2 SECOND GENERATION REFORMS

a) Extend reforms to states:The lack of fiscal consolidation at the State level is revealed by deterioration of their combined fiscal deficit, as a proportion of GDP, from 2.7% in 1996-97 to 4.3% in 2000-01, and further to a revised estimate of 4.6% in 2001 -02. The consolidated fiscal deficit of the Centre and the States was 10.0% of GDP, according to the revised estimates for 2001 -02.While there has been considerable debate about reforms in the central government, parallel reforms at the state level have not received the required attention. Many areas like health, education, agricultural extension, power distribution and urban services are all in the state domain. A couple of states like Andhra Pradesh and Madhya Pradesh have recognized the need for reforms but are proceeding rather slowly.

b) Labour legislation: Employment, especially in the organized sector has witnessed some positive trends. If some rigidity were further reduced, further acceleration would be possible.

The Industrial Disputes Act, 1947, Contract Labour Act, 1970 and Payment of Wages Act, 1936 are some of the legislative acts that the government is considering for amendment.

Under the Minimum Wages Act, in January 2002, wages were raised for workers of mining and construction sectors in respect of scheduled employment in the Central sphere.

Companies in the private sector have however continued to adopt the voluntary retirement scheme (VRS) to reduce the workmen and labour wages. In a study of the labour wages Vs turnover it was found that the wages as a% of cost of production dropped from 11% in 91 -92 to 5.6pc in 2000-01.

In another parallel study of the 100 most profitable companies it was observed that while their turnover multiplied six times the wages level went up only 3 times between 1988-89 and 2000-01. In the public sector SAIL is understood to have shed 6000 of its 2L employees.

Q7. Why is the infrastructure sector so important to the Indian economy? Write a concise note on economic reforms in the infrastructure sector.

ANS)

Infrastructure here means areas like roads, highways, railways, housing, telecommunications, ports, airports, irrigation projects and power. Investment in infrastructure is extremely important for the growth of an economy.

19

Provision of quality infrastructure services at reasonable cost, is a necessary condition for achieving sustained economic growth. In fact, one of the major challenges being faced by the Indian economy, as we enter the new millennium is to enhance infrastructure investment and to improve the delivery system and quality of services. Government recognizes the critical importance of the infrastructure sector and accords high priority to development of various infrastructure services such as power, telecommunications, seaports, airports, railways, roads etc. Investments in these sectors involve high risk, low return, and lumpiness of huge investment, high incremental capital/ output ratio, long payback periods, and superior technology. These prerequisites pose a constraint on the Government’s efficient delivery of quality infrastructure services. Government is moving away from its traditional role as a ‘provider’ of services to one of ‘facilitator’ and ‘regulator’ by ensuring that infrastructure services are actually delivered in a desirable manner. While liberalizing the rules and procedures, it has created an environment conducive for private participation including foreign investment in infrastructure sector. The government however, continues to safeguard the interests of the consumers and needs of the poor by providing appropriate regulatory framework.

The gross capital formation in infrastructure has almost doubled in last 10 years (Rs 459 bn in 1993-94 to Rs 909 bn in year 2003-04) at the current prices. Overall, as compared to the last year, there has been a fall in the gross capital formation in the infrastructure. The ones that have witnessed a growth in gross capital formation are electricity, gas & water and railways. Sectors like communication, storage and other means of transportation (roads, civil aviation, sea ports and inland water) have witnessed a fall of 15%, 10% and 5% respectively.

Power

The generating capacity in India as on 31st March 2004 stood at 112,058 MW and the total power generation figures stood at 558 billion kWh as compared to 534 billion kWh in FY03. The overall PLF (plant load factor or capacity utilization) for FY04 stood at 72.7% as compared to 72.1% during FY03. The increase in FY04 came about due to higher PLF in the private sector (80.4% this year as compared to 78.9% last year). As can be seen from the table below, contribution of hydro-electricity to total power generated increased from 11.9% to 13.2% during the year. However, due to higher increase in the hydropower, the contribution of thermal power to total power generated came down marginally.

  Unit 2002 2003 2004 % changeElectricity generated (utilities only) bn kwh 515.3 534 558 4.5%(a) Hydro-electric bn kwh 74 64 74 15.7%(b) Thermal bn kwh 422 451 467 3.5%(c) Nuclear bn kwh 19.3 19.2 18 -7.8%Plant load factor   69.9% 72.1% 72.7%  

The T&D (transmission and distribution) losses stood at 34% during the year 2001-02 (the recent data available), which is on the higher side. The annual gross subsidy for the agriculture sector on account of sale of electricity stood at Rs 228 bn during the year. Since power to this sector is free of charge in most states, the government shares this burden (central and state). The government has given a higher Rs 240 bn projected subsidy for the next year. This could increase considering the UPA government’s announcement of continuation in free power in select states. In order to control the aggregate technical and commercial losses, the budgetary allocation for the last year stood at Rs 35 bn, which will provide the financial support to state governments to undertake reforms.

Telecom

20

Telecom sector is another sunrise industry with huge growth potential going forward. As mentioned in the table below, the tele-density in India is still on the lower side (7.02 per hundred) as compared to more than 100% in the developed nations of the world. The total number of the telephone connections (both fixed line as well as mobile) has increased by around 40% during the year. Fixed lines grew by less than 3% as compared to 159% in the mobile segment. The growth in customer base has to be viewed in the context of increasing competition, falling cost of handsets and availability of service in new cities.

Countries Tele density (2003)U.K 143.1%Australia 126.2%U.S 116.4%Brazil 42.4%China 42.3%Srilanka 9.6%Indonesia 9.2%India 7.0%

Roads

Roads in India carry around 85% of the passenger traffic and 70% of the freight traffic. Highways account for only 2% of the country’s road network. The government has taken various initiatives to improve the road infrastructure of the country viz. National Highway Development Project (NHDP) and Pradhan Mantri Gram Sadak Yojna (PMGSY). NHDP will be focusing on building better quality highways, where as the other one will address the rural road development. As we go forward, our interaction with corporate like Tata Motors reveals that roadways share of freight traffic will increase over the long-term (like any developing or developed economy).

Ports and Civil Aviation

Sea transportation forms a crucial part of transportation infrastructure of the country. On the back of higher exports by the steel companies, the cargo handled by the major ports increased by around 10% during the year. On the other hand, the domestic air traffic grew by around 9% between January 2003 to December 2003. The private sector participation accounts for around 60% of the domestic air traffic and is likely to grow going forward with the introduction of no-frill flights by private players.

We would like to conclude by saying that the importance of infrastructure sector cannot be ignored by a developing country like India. Be it power, telecom, roads and rails, India lags other emerging markets. If the government wants the economy to grow at faster rate and provide a competitive edge to the manufacturing sector, infrastructure sector needs focus. If the government is not in a shape to fund these projects, private sector has to be provided the necessary impetus. It is not that the government has to be the all and end of it.

Economic Reforms in Infrastructure Sector

The world witnessed the emergence of India as an independent nation in 1947, the year in which the British rule on the subcontinent came to an end. As the country celebrated its fifty-third year of independence, it is proud of what it has achieved since then.

21

A new spirit of economic freedom is stirring in India, bringing sweeping changes in its wake. The liberalization programme has unleashed the vast potential of the Indian economy.

India's process of economic reform is firmly rooted in a consensus spanning a wide political spectrum. As the benefits of reforms have spread, and growth has accelerated accompanied by achievement of macro economic stability, this political consensus has been transformed into a national consensus. Importantly, India has no inherent conflict between its political and economic systems.

The existence of an independent judiciary, a strong legal and accounting system, a free and vibrant press and the use of English as the principal language of business and administration are some of the attractive features of the business environment. India also possesses an abundance of qualified and skilled manpower, which makes it an ideal base for sourcing production both for export and the huge domestic market.

The opening up of the economy, which has resulted in the entry of a large number of foreign companies, together with the increasingly global focus of domestic industry, has resulted in the dynamic growth and increased competitiveness of Indian firms. The continuation of liberalization and introduction of new economic policies have created a sea of new opportunities for domestic and foreign investors, particularly in the infrastructure sector.

INFRASTRUCTURE1992-1993

Oil exploration and refining opened to foreign investment1993-1994 I

Five-year tax holiday for power projects as well as manufacturing units in backward areas. 1995-1996

Telecom Regulatory Authority of India (TRAI) set up.1996-1997

Private sector allowed into (Build, Operate, Transfer) BOT operations in existing ports.Port tariffs, however, continue to be administered by port trusts.

1997-1998 Ordinances to set up Central Electricity Regulatory Commission and State Electricity

Regulatory Commission set up. (CERC & SERC)

1998-1999 Urban Land Ceiling Regulation Act (ULCRA) repealed by ordinance (Selectively). Unrestricted entry into long distance telephony announced.

2001-02 Ten-year tax holiday for core sector of infrastructure. Five-year tax holiday for new units in Telecom sector till March 31,2003. These concessions

to be extended to Internet Service Providers (ISP).2002-03

Ten-year tax holiday for infrastructure projects extended to 15/20 years (depending on sector)2003 - 2004 (Budget announcement)

Power sector attempt to attract more investment and almost all state governments have signed up for Accelerated Power Development and Reform Programme (APDRP), obtaining access to resources contingent upon their meeting performance criteria. APDRP allocation was stepped up to Rs. 3'500 Crores in 2002 - '03.

Reforms in telecommunications sector a spectacular success; foreign equity of up to 49 % was permitted in joint ventures between Indian and foreign firms. Standing Committee on

22

Communications & IT has considered the Communication Bill 2001 and laid its report in the parliament.

"Convergence Bill" pending parliamentary approval will fully integrate telecommunications policy and enable full advantage of the information communication and entertainment services.

The Universal Service Support Policy will use a universal levy of 5 % to enable the financing of community phones in villages.

Electricity Bill passed opening up generation and transmission to private parties with selective / controlled opening of distribution of electricity.

Competition Bill 2001 passed to replace MRTP Act.

Q8. How do politicians overstep their roles in India? What reform measures are necessary in our constitution to ensure a healthy and effective democracy?

ANS)

A stable democracy depends upon a healthy balance between the role of the politician, bureaucrat, judiciary and the media. The role of the politician is essentially to legislate, the bureaucracy to execute, the judiciary to adjudicate and the media to ventilate. As long as the autonomy of these roles are respected it should enable smooth running. Unfortunately our political establishment has hijacked the system and appropriated to themselves a fair amount of executive responsibilities. Politicians tend to exercise extra-constitutional authority over bureaucrats, judiciary and the media. The bureaucrats have been conditioned over the years by the carrot (of post retirement benefit, postings abroad, etc.) and the stick (posting to innocuous assignments, denial of post retirement benefits, denial of promotions, etc.) This has been openly manifested in the recent past in the states and the centre when, with the change of government most of the senior bureaucrats were changed to suit the preference of the political leader/party.

To prevent overuse of such arbitrary power the senior civil services have created a Central Administrative Tribunal (CAT) to which they can appeal against an inordinately unfair deal meted out to them by their bosses. Of late even the courts have given rulings "staying" the action of the politicians as happened recently in the case of the posting of some senior bureaucrats. This notwithstanding the judiciary is also prone to political pressures due to the anticipated or past benefits of promotions and postings.

As things stand the judiciary seems to have provided the sheet anchor against arbitrary actions by the government and has often received accolades in the process. In the ultimate even the judiciary has not exactly been above board as seen from numerous happenings of malpractices by the judiciary, the latest involvement of a judge of Maharashtra state with the under world is a recent example. Even otherwise one hears of numerous stories of bribes and corruption at the level of the judiciary at the state level. It is nonetheless worth note that as per statistics the government is a litigant in nearly 70 pc of civil cases which itself is reason enough for the government to not exercise power in any form over the judiciary.

As for government control of the media, direct control is exercised over the radio while the press is kept under control by the carrot (of government advertisements) and the stick (of raids as happened in the case of Indian Express in 1987 and the hounding of Mr.Ashok Jain - chairman of the Times of India group - on charges of FERA violation). Mercifully such raids have not been heard of for a long time and one hopes fairness in this area will prevail. As for the TV, the opening up of the skies and availability of satellite-transmitted programmes (BBC, Star, etc.) has put pressure on Doordarshan to modernize and improve their programme standards. As of now while the urban audiences do patronize such programmes, Doordarshan continues to have a major audience in rural areas, which forms the bulwark of the Indian

23

MEASURES FOR HEALTHY AND EFFECTIVE DEMOCRACY

Presidential Form of Government

A switch to the presidential form (preferably the French system) with the additional proviso that a member of the council of ministers not be a member of parliament or if it be so he resign his seat in parliament. It is interesting to know that the father of our constitution Dr.B.R.Ambedkar, had also initially desired that we adopt the French presidential form with the Swiss Canton based modification but eventually had to agree to the parliamentary cabinet form.

Area Wise Rotation of President of the Country

It should be provided that the President is rotationally selected from different area groups of the country on the lines of the Swiss Canton system. India is a diverse country with various languages and ethnic divisions. It would be in the fitness of things that the apex post of the country is fairly and equitably rotated between different major areas of the country. Though we have had no major issue on this aspect one does occasionally hear of parochial soundings from some states. Rotational allocation of the post may well pre-empt such problems in the future.

Partial Proportional System

Parliamentary elections on a 50pc FPTP and 50pc proportional representation with the proviso that a party to get any representation secures at least 10pc of the votes are an experiment worth trying. The proportional representation can be by the list system. It is interesting to know that the 10pc cut off system is followed presently by Turkey while Germany and some other countries have a cut off of 5 pc. This will certainly eliminate quite a few splinter parties in which the Indian political system proliferates.

System of a Constructive Vote

As in Germany we should provide that the same meeting of parliament in which a vote of no confidence is passed should also pass a vote of confidence in another leader or party failing which the existing government should continue for the remainder of its term. As of now, the government is expected to resign on a vote of no confidence and two months are allowed to the next majority leader of a political party (of the lower house) to stake his claim to prove his majority. This gives rise to intense backstage haggling, horse-trading and corruption to buy off MPs for a consideration. It is rumoured that in this recent tussle for power to prove a majority following in April 99, the price of a MP was quoted as high as Rs.3 to 5 crores. Even otherwise there have been cases where our MPs have received bribes for favour of voting as directed. Considering the present state of our political system (as also the present government of 18 parties) the potential for no confidence motions exists. In our state of the economy we can ill afford periodic bye - elections, which the above reform will considerably reduce if not preclude. It is therefore worth serious consideration.

Regulation of Political Parties Through Accounts

Functioning of the political parties should be regulated by: -

a) Auditing of their accounts.b) Audited accounts are submitted to the Lok Sabha, through the election commission, for scrutiny.

Negative Votes

Voters should have the right to cast a negative vote against any candidate. Thus every candidate's character and reputation will be judged by the voter. Every negative vote should carry certain weightage and if a

24

candidate gets a certain number of negative votes he may be debarred from being elected or the negative votes be adjusted against the positive votes to decide the results. Giving the voter a right to reject a candidate will force parties to select candidates with clean reputations.

Candidates with Criminal Background

The election commission’s guideline provides that a person convicted and sentenced for 2 years imprisonment should not be allowed to contest an election. This provision is not strong enough and leaves certain loopholes. Hence it should also be provided that: -

a) Persons convicted of offences and awarded 1 year imprisonment should not be allowed more than one appeal in a higher court.

b) A person ineligible to contest an election is debarred from being called upon to become a CM of a state or PM of the country.

Remodel Systems to Highlight Rule of Law

In any democratic organization, ruled by elected representatives, the constitution should ensure that the elected representatives essentially legislate laws, the bureaucracy executes them, the judiciary adjudicates the implementation and the media ventilate the happenings in the country. The elected representatives should at best monitor the correct execution of policy by the bureaucrat and play an appellate role, but in no way interfere with his decisions. Any change an elected representative desires should be through change of law or policy in the elected body and not by imposing on the bureaucrat, the judiciary or the media.

Qualifications To Be Elected To A Legislative Body

With increasing criminalization of politics, we now have legislators who are only there to protect and perpetuate their activities outside the house. Such people either have no interest in or are unable to take serious interest in the legislative business of the house. This situation could be improved by two purposeful measures: -

a) Providing for qualifications for candidate contesting elections in terms of: -o Educationo National recognition in the form of an award for an activity e.g. Painting, music,

dancing etc.o Income tax payment record for a period of say 5 years.o Head or member of the apex body of a recognized NGO for a period of 5 years.

b) All the elected persons should successfully complete a one time educational course tailored to cover the problems of the country / constituency generally for durations as below: -

i. Corporator-3 daysii. Legislator at state level - 1 week

iii. Legislator at National level - 2 weeks

c) Supreme Court has passed a very purposeful judgment aimed at curbing criminalization of politics and creating greater transparency in elections. In an appeal case it has ruled that candidates for Lok Sabha or Legislative assemblies would be required to disclose their antecedents, assets and educational qualifications, to help the electorate in making a more informed choice. The court has asked the Election Commission to form and implement instructions to this effect. As part of the

25

arguments it was reiterated that lawmakers are public servants and the people of a democracy have a right to know every public act that was done in a public way by the public functionaries.

Qualifications to Hold Post of Mayor / Chief Minister / Prime Minister

It should be provided that such a person be formally elected to the lower house (if relevant) of an elected body before holding the post and not be allowed to be elected within the forthcoming six months as presently provided. It could be additionally provided that it should not be compulsory on the part of the governor (of a state) or President (of the country) to invite the leader of the majority party to form the government unless he be an elected member to the lower house of the legislative body.

Q9. Write short notes on:

(a) Banking sector reforms

(b) Ministerial meeting at Doha

(c) Consumer protection in India

ANS)

(a) Banking Sector Reforms 1999-2000

In line with the recommendations of the second Narasimham Committee, the Mid-Term Review of the Monetary and Credit Policy of October 1999 announced a gamut of measures to strengthen the banking system. Important measures on strengthening the health of banks included:

i. Assigning of risk weight of 2.5% to cover market risk in respect of investments in securities outside the SLR by March 31, 2001 (over and above the existing 100% risk weight) in addition to a similar prescription for Government and other approved securities by March 31, 2000, and

ii. Lowering of the exposure ceiling in respect of an individual borrower from 25% of the bank's capital fund to 20%, effective April 1, 2000.

Some of the recommendations made by the Narasimham committee, with respect to the banking sector have been implemented such as: -

a. Deregulation and decontrol of bank interest rates; Mandatory requirements for banks to invest in low interest government securities have been eased.

b. Prudential norms and standards relating to capital adequacy, asset classification and provisioning have been upgraded and have been brought in close alignment with the Basle committee recommendations on capital adequacy ratios (CAR).

c. External supervision of banks has been strengthened,

d. New private sector banks have been given licenses and foreign banks have also been allowed to enter and expand, thereby increasing the competition in the banking sector.

The recent recession and the impact of globalization has given rise to low interest rates in most countries and no less in India. But for the pressure of maintaining deposit rates above a certain minimum to meet the needs pensioners and elderly people the interest rates would have fallen still further. Even the USA had to drop the Federal Reserve interest rates 12 times to a low of 1.25 pc to combat the recession. In Japan the interest rates have dropped to near zero% due to the slow down in the economy. The Reserve bank (India) expects the commercial banks to exercise increased autonomy in their operations. Economic pressures have forced numerous banks to offer voluntary retirement schemes to their employees. Public sector banks are busy implementing reductions in their manpower strengths.

26

The reforms still have a long way to go. The existing prudential norms need to be further tightened and fully aligned with international practice. Banks have to develop much stronger credit appraisal skills, than were called for in the past. Credit appraisal techniques must take account of the uncertainties on account of volatile exchange rates and interest rates. All these will require restructuring of the management systems and massive up-gradation of staff skills. To protect the banks from further deterioration, the Government has brought into effect "The Securitisation and Reconstruction of Financial Assets and enforcement of securities Interest Act".

Under this Act, Debt Recovery Tribunals have been set up to resume the collateral properties and dispose them off; thereby reducing the NPAs of banks and Financial Institutions. The passing and coming into operation of the Act in addition to the general relaxation of controls as a sequel to the reforms has been quite a boon to the erstwhile public sector commercials, most of which have improved their performance notwithstanding their Public lineage. A key issue in banking sector reforms relates to government control over public sector banks. The committee on banking sector reforms has recommended that the government's equity holding should be reduced to 33 pc thereby removing constraints arising from government ownership.

Revival of Weak Banks

The Reserve Bank had set up a Working Group (Chairman: Shri M. S. Verma) to suggest measures for the revival of weak PSBs in February 1999. The Working Group, in its report submitted in October 1999, suggested that an analysis of the performance based on a combination of seven parameters covering three major areas of i) solvency (capital adequacy ratio and coverage ratio), ii) earnings capacity (return on assets and net interest margin) and iii) profitability (operating profit to average working funds, cost to income and staff cost to net interest income plus all other income) could serve as the framework for identifying the weakness of banks. PSBs were, accordingly, classified into three categories depending on whether none, all or some of the seven parameters were met. The Group primarily focussed on restructuring of three banks, viz., Indian Bank, UCO Bank and United Bank of India, identified as weak as they did not satisfy any (or most) of the seven parameters. The Group also suggested a two-stage restructuring process, whereby focus would be on restoring competitive efficiency in stage one, with the options of privatisation and/or merger assuming relevance only in stage two. Deposit Insurance Reforms.

(b) Ministerial meeting at Doha

The first Ministerial Conference of the WTO was convened between November 9, 2001 and November 13, 2001 at Doha, Qatar.

The IBRD or World Bank, a world development bank started after World War II, offers development assistance to third world countries at low interest rates. The International Monetary Fund (IMF) (an international co-operative of 137 members) is essentially a reservoir of currencies and lends to countries in need. Whilst USA, Britain, Germany, France and Japan are the major contributors to the IMF, the major borrowers are Mexico, Argentina, Brazil, India and Chile.

The IBRD and IMF are essentially instruments to help circulate the financial surpluses of the developed world to the third world countries so as to help sustain their exports without which it could well result in unemployment and recession in some of the countries of the developed world.

WTO Ministerial Meeting at DOHA, QATAR

Summary Of Issues Discussed And Decisions Taken

Issue India's Stand Decision Taken

27

1 Investment, competition policy

No negotiations, Study process to continue.

Next ministerial to decide, on modalities by "explicit consensus".

2 Trade facilitation No negotiations, Study process to continue.

Next ministerial to decide, on modalities by "explicit consensus".

3 Transparency in government procurement.

This is not in the interest of developing and less developed countries

Next ministerial to decide, on modalities by "explicit consensus".

4 ‘TRIPS' and public health

Patent waivers in case of emergencies

Declaration adopted. Patent rights for drugs manufacture will be waived in case of epidemics.

5 Agriculture Reduce subsidies....

Address rural development and food security issues.

Reduce and phase out subsidies.

6 Environment Status quo to be maintained – no enlargement of present situation.

Committee on Trade and Environment (CTE) to focus on certain issues.

7 Labour Standards Not to be linked with trade ILO to continue to work on issues connected with labour. WTO not to be involved.

8 Implementation Needs to be addressed immediately.

Some issues have been addressed. Others being looked

9 Industrial tariffs Address peak tariffs Negotiations to begin to address tariff escalations and peak tariffs.

10 Transfer of Technology Work programme needed Working group set up.

NOTE:

The general opinion of leaders in industry and the media is that the outcome is definitely satisfactory. From the above chart it can be observed that on all the issues where India had taken a firm stand India’s concern has been addressed to. On some issues where India perhaps had to give in are investment, competition policy, and transparency in government procurement. These issues will be discussed at the next ministerial meeting-though “explicit consensus”. The Fifth WTO conference, held in Cancun, Mexico, from September 10-14, 2003, represents the midpoint in negotiations set forth at the Doha Ministerial in November 2001. Doha established goals for lowering barriers to global trade and development by 2005. At the Cancun meeting the goal was to seek to specify the negotiating frameworks for attaining the Doha Development Agenda.

(c) Consumer Protection in India

The Consumer Protection Act (CPA) was passed in 1986 in the winter session of Parliament. Following are the important features of the Act along with some shortcomings:

a) It acknowledges six rights of the consumer:

28

i. Right of choiceii. Right to safety

iii. Right to be informediv. Right to be heardv. Right to redress

vi. Right to consumer educationIt however, does not include "Right to a healthy environment."

b) It provides for forums at districts, state and national levels for settlement of consumer disputes. Claims below Rs.5 lakh are to be attended to at the district level up to Rs. 20 lakh at the state level and if the cost of goods or services exceeds Rs.20 lakh, the complaint can be filed at the national level. There is no fee for filing the complaint. It can be sent by the complainant or his authorized agent and can be filed personally or by post.

c) It applies to all business sectors - private, public or co-operative. Public sector units are included under the purview of the Act including government and semi-government agencies, which provide services for a fee or a tax.

d) All three (district, state and national) bodies have power of punishment up to three years.

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

f) The act needs an important change where negligence is proved on the part of employees of public utilities and governmental organizations, and compensation given to the complainant. It is felt that the consumer forum should be authorized to specify that the amount should be paid from the salaries of defaulting employees.

o Pricing Of Packaged Products: A notification of the Ministry of Food and Civil Supplies has indicated that the price on labels of all packaged products should be inclusive of all taxes. Unfortunately the law has turned out to be a shallow and futile exercise that does not tackle the basic issue of the malpractice.

o Consumer Education And Research Society: This body is doing some excellent work in educating various local consumer bodies as also taking up Public Interest litigation on various consumer issues.

Q10. What does one mean by good "corporate governance"? List the various recommendations of the Kumar Mangalam Birla Committee on corporate governance?

ANS)

"Good corporate governance is the key to enhance the long-term value of the company for the benefit of shareholders and other stakeholders. The pillars on which the edifice of corporate governance stands are Fairness and Accountability.”

It is important to have disclosure-based regulations in the interest of investors who invest their money into the Corporate based on the disclosures made. In a dynamic market, which changes at the speed of light, there is a need to have a continuous evaluation of Corporate Governance. Only companies with good corporate governance practices and management quality enjoy favourable valuations and a strong credit profile."

Good corporate governance aligns the actions of executive management with the interests of shareholders. In practical terms, corporate governance is intertwined with decision queries as to whether corporate executive management's formulated strategy and implemented tactics serve the best interests of

29

the equity shareholders. While there is some gray area in what makes good corporate governance, there are certain litmus tests that help distinguish good corporate governance from poor governance. The article discusses the corporate governance mechanism, characteristics, and role of institutional investors in corporate governance.

Of late there has been an ever-increasing emphasis on the need to have good corporate governance in the business world. And, almost all the corporate regulatory bodies, both in India and overseas have been over stressing to introduce mechanisms which will force the business houses to commit to better corporate governance, specially post-Enron debacle and other similar chaotic financial goof-ups.

Good corporate governance has, seemingly, always meant "providing continued value addition to its shareholders and stakeholders while maintaining the integrity, openness, transparency and accountability in its corporate conduct (including statutory financial practices, reporting and audit) and business activities". And, achieving it is always dependent on the right decisions taken at the right time by the right people within the enterprise which, in turn, is based on the availability of the timely information to the these people, in the manner and at a place as may be deemed most appropriate and convenient.

For any business to prosper as per the expectations of its stakeholders, it is imperative that its business objectives and business strategies are realized as per plans. And, among others, few of the crucial objectives of any successful business are-how to reach its service offerings/products to the target audience fastest? How to keep the cost of the product/services offerings optimum and affordable by the customer? How to maintain the right quality of these products and services within the given constraints of time and budget, and above all the other two most important—how to remain profitable at all times by maintaining the healthy bottom-line and at the same time how to continue creating its own "brand" which is for the keeps?

Now to meet these objectives, one would surely need a mechanism and a system, which will enable the timely flow of data, the facts and figures and the related information to and for the concerned people in the enterprise who are responsible for it so that they can act on it appropriately. Be it—collecting the timely feedback from the market on the company’s products/services, its quality and price, procuring the raw material in time from the suppliers, gathering information about the raw material’s price and quality, ensuring that production plans are realized within the company, funds flow information (incoming and outgoing), all this requires a well-maintained and adequately monitored IT infrastructure and environment which will enable the timely delivery of these details most effectively and efficiently to the concerned people within the organization.

Recommendations of The Kumaramangalam Birla Committee On Corporate Governance

The major recommendations of Kumaramangalam Birla Committee on corporate governance are as under:

a) The recommendations should be made applicable to listed companies; their directors, management, employees and professionals associated with such companies and other bodies corporate.

b) The Board of directors of a company should have an optimum combination of executive and non- executive directors with not less than fifty% of the Board consisting of non -- executive directors. In case the company has a non - executive chairman, at least one - third of the board should consist of independent directors.

c) A non-executive chairman should be entitled to maintain a chairman's office at the company's expenses and also allowed reimbursement of expenses incurred in performance of his duties so as to enable him to discharge his responsibilities effectively.

d) A qualified and independent audit committee should be set up by the Board of the company as per the composition and frequency suggested. Powers and functions of audit committee have also been prescribed.

30

e) The Board should set up a remuneration committee to determine on their behalf and on behalf of shareholders with agreed terms of reference, the company's policy on specific remuneration packages for executive directors including pension rights and any compensation payment.

f) Board meetings should be held at least four times in a year with a maximum time gap of four months between any two meetings.

g) A director should not be a member in more than 10 committees or act as chairman of more than five committees or act as chairman of more than five committees across all companies in which he is a director.

h) Companies should be required to give consolidated accounts in respect of all their subsidiaries. Companies should do segmental reporting where a company has multiple lines of business.

i) A management discussion and analysis report should form part of the annual report to the shareholders covering industry structure, opportunities and threats, segment wise or product wise performance, outlook, risks and concerns, internal control system, financial and operational performance and material developments in human resources / industrial relations.

j) The management must make disclosures to the Board relating to all material financial and commercial transactions, where they have personal interest that may have a potential conflict with the interest of the company at large.

k) For appointment of new directors, shareholders must be provided with a brief resume of the candidate, nature of his expertise and his other directorships.

l) Information like quarterly results, balance sheet analysis etc. may be put on its website or on its regional stock exchanges website. A half - yearly financial performance report should be sent to all shareholders.

m) A board committee under the chairmanship of a non - executive director should be formed to specifically look into shareholders complaints.

n) The power of share transfer should be delegated to an officer or a committee or to the registrars and transfer agents. Shares should be transferred once in a fortnight.

o) These recommendations may be implemented through the listing agreement.

p) A company should arrange to obtain a certificate from its auditors regarding compliance of corporate governance provisions. This certificate should be sent to stock exchanges and all shareholders.

31