KENDRIYA VIDYALAYA SANGATHAN

ERNAKULAM REGION

STUDENT SUPPORT MATERIAL

TERM - II

CLASS XII

BUSINESS STUDIES
SESSION 2021 - 22
 OUR PATRONS

Shri. R. SENTHIL KUMAR

DEPUTY COMMISSIONER, KVS RO ERNAKULAM

Smt. DEEPTI NAIR Shri. SANTHOSH KUMAR N

ASST. COMMISSIONER ASST. COMMISSIONER
KVS RO ERNAKULAM KVS RO ERNAKULAM

COORDINATOR

Shri. ANIL MOHAN

PRINCIPAL
KENDRIYA VIDYALAYA NO. 1 KOCHI
 4

KENDRIYA VIDYALAYA SANGATHAN

ERNAKULAM REGION

STUDENT SUPPORT MATERIAL

Term – II- BUSINESS STUDIES

2021-2022
CONTENT AND REVIEW TEAM

COORDINATOR : SHRI. ANIL MOHAN, PRINCIPAL, K V NO. 1 KOCHI.

1. Mr. ANOOP K M K V No. 1 CALICUT

2. Mrs. SHEEJA M K K V NAD ALUVA

3. Mrs. SUNITHA C B K V No. 2 KOCHI

4. Mrs. AMBILY K V INS DRONACHARYA

5. Mrs. BIFNA BEERAN K V KANJIKODE

6. Mrs. SOJA K V PAYYANNUR

Content Courtesy:-

1. https://cbseacademic.nic.in/SQP_CLASSXII_2021-22.html

2. https://ncert.nic.in/textbook/pdf/lebs1dd.zip

“This support material for class XII Business Studies is given for revision and
practice. It is to need used as a support material and not as replacement of the
NCERT Text book”
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INDEX

Sl.No CONTENT Page No

TERM WISE CURRICULUM – Term II

1 6- 8

2 Staffing 9-18

3 Directing 19 - 27

4 Controlling 28-32

5 Financial Management 33 -45

6 Financial Markets 46-59

7 Consumer Protection 60-67

8 CBSE Sample Question paper and Marking scheme 68-74

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BUSINESS STUDIES-(CODE-054)
CLASS–XII (2021-22)-TERM WISE CURRICULUM
Units TERM-2 SUBJECTIVE QUESTION PAPER Periods Marks
Theory- 40 Marks DURATION:-2 Hrs.
Part A Principles and Functions of Management
Staffing
6 13
Directing
7 09 20
Controlling
8 07

Total
29 20
Part B Business Finance and Marketing

9 Financial Management
20 15
10 Financial Markets 18
12 Consumer Protection 05 5
Total 43 20
Total 72 40
PROJECT WORK (PART – 2) 10

Term 2: Principles and Functions of Management

Unit 6: Staffing

Staffing: Concept and importance ● Understand the concept of staffing.

● Explain the importance of staffing
Staffing process ● Describe the steps in the process
of staffing
Recruitment process ● Understand the meaning and steps in the
process of recruitment.
● Discuss the sources of
recruitment.
Selection – process ● Understand the meaning of selection.
● Describe the steps involved in the
process of selection.
Training and Development - Concept and importance, Methods ● Understand the concept of training and
of training - on the job and off the job - vestibule training, development.
apprenticeship training and internship training ● Appreciate the importance of training to the
organisation and to the employees.
● Discuss on the job and off the job methods of
training.
● Discuss the meaning of vestibule training,
apprenticeship training and internship training.
● Differentiate between training
and development.
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Unit 7: Directing

Directing: Concept and importance ● Describe the concept of directing.

● Discuss the importance of directing
Elements of Directing ● Describe the various elements of directing

Motivation - concept, Maslow’s hierarchy of needs, ● Understand the concept of motivation.

Financial and non-financial incentives ● Develop an understanding of Maslow’s
Hierarchy of needs.
● Discuss the various financial and
non-financial incentives.

Leadership - concept, styles - authoritative, ● Understand the concept of leadership.

democratic and laissez faire ● Understand the various styles of
leadership.

Communication - concept, formal and informal ● Understand the concept of communication

communication; ● Discuss the concept of formal and
informal communication.

Unit 8: Controlling

Controlling - Concept and importance ● Understand the concept of controlling.

● Explain the importance of controlling.
Steps in process of controlling ● Discuss the steps in the process of controlling.

Part B: Business Finance and Marketing

Unit 9: Financial Management

Financial Management: Concept, role and ● Understand the concept of financial

objectives management.
● Explain the role of financial management in an
organisation.
● Discuss the objectives of financial
management
Financial decisions: investment, financing ● Discuss the three financial decisions and the
and dividend- Meaning and factors factors affecting them.
affecting
Financial Planning - concept and ● Describe the concept of financial planning.
importance ● Explain the importance of financial planning.
Capital Structure – concept and factors ● Understand the concept of capital structure.
affecting capital structure ● Describe the factors determining the choice
of an appropriate capital structure of a
company.
Fixed and Working Capital - Concept and ● Understand the concept of fixed and working
factors affecting their requirements capital.
● Describe the factors determining the
requirements of fixed and working capital.
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Unit 10: Financial Markets

Financial Markets: Concept, Functions and ● Understand the concept of the financial market.
types ● Explain the functions of the financial market.
● Understand capital market and money
market as types of financial markets.

Money market and its instruments ● Understand the concept of the money market.
● Describe the various money market
instruments.

Capital market: Concept, types (primary ● Discuss the concept of capital market.
and secondary), methods of floatation in ● Explain primary and secondary markets as types of
the primary market capital market.
● Differentiate between capital market and money
market.
● Discuss the methods of floating new issues in the
primary market.
● Distinguish between primary and secondary
markets.
Stock Exchange – Meaning, Functions and ● Give the meaning of a stock exchange.
trading procedure ● Explain the functions of a stock exchange.
● Discuss the trading procedure in a stock exchange.
● Give the meaning of depository services and demat
account as used in the trading
procedure of securities.

Securities and Exchange Board of India ● State the objectives of SEBI.

(SEBI) - objectives and functions ● Explain the functions of SEBI.

Unit 12: Consumer Protection

Consumer Protection : Concept ● Understand the concept of consumer

protection.
The Consumer Protection Act, 2019: Understand the concept of a consumer according tothe
Source: Consumer Protection Act, 2019.
http://egazette.nic.in/WriteReadData/2  Explain the consumer rights
019/210422.pdf  Understand the responsibilities of consumers
Meaning of consumer  Understand who can file a complaint and against
Rights and responsibilities of consumers whom?
Who can file a complaint?  Discuss the legal redressal machinery under Consumer
Redressal machinery Protection Act, 2019.
Remedies available  Examine the remedies available to the consumer under
Consumer Protection Act,2019
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CHAPTER 6

STAFFING
Meaning of Staffing
Staffing has been described as the managerial function of filling and keeping filled the positions in the
organisation structure. This is achieved by, first of all, identifying requirement of work force, followed by
recruitment, selection, placement, promotion, appraisal and development of personnel, to fill the roles
designed into the organisation structure.

Staffing Process

(i) Estimating the Manpower Requirements:

For the purpose of understanding the manpower requirements, the organisation has to do two analysis such
as workload analysis and workforce analysis. Workload analysis means the assessment of number and type
of human resources necessary for the performance of various jobs and accomplishment of objectives.
Workforce analysis would reveal the number and type of human resource presently available within the
organisation as well as helps to understand whether the organisation is overstaffed or understaffed. A
situation of overstaffing will make the organisation to for employee removal or transfer whereas a situation
of understaffing would necessitates the organisation to start the recruitment process.
(ii) Recruitment: Recruitment may be defined as the process of searching for prospective employees and
stimulating them to apply for jobs in the organisation. Both internal and external sources of recruitment may
be explored. Internal sources may be used to a limited extent. For fresh talent and wider choice external
sources are used.
(iii) Selection: Selection is the process of choosing from among the pool of the prospective job candidates
developed at the stage of recruitment. Those who are able to successfully negotiate the test and the
interviews are offered an employment contract, a written document containing the offer of employment, the
terms and conditions and the date of joining.
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(iv) Placement and Orientation: Placement refers to the employee occupying the position or post for
which the person has been selected. Orientation is the process introducing the selected employee to other
employees and familiarising him with the rules and policies of the organisation.
(v) Training and Development: Training means act of improving knowledge and skills for doing a specific
job. The employees are imparted training to improve their performance and to update their knowledge to
match the requirement of external environment. Development means growth of a person in all respects. It is
a process by which managers and executives acquire not only skills and competence of present job but also
the capabilities for future tasks of increasing difficulty and scope.
vi) Performance Appraisal:- Performance appraisal means evaluating an employee’s current and/or past
performance as against certain predetermined standards. The employee is expected to know what the
standards are and the superior is to provide the employee feedback on his/her performance. The performance
appraisal process, therefore, will include defining the job, appraising performance and providing feedback.
vii) Promotion and career planning:- It becomes necessary for all organisations to address career related
issues and promotional avenues for their employees. Promotion refers to being placed in positions of
increased responsibility. They usually mean more pay, responsibility and job satisfaction.
(viii) Compensation:- Compensation refers to all forms of pay or rewards going to employees. It may be in
the form of direct financial payments like wages, salaries, incentives, commissions and bonuses and indirect
payments like employer paid insurance and vacations.

RECRUITMENT
Recruitment refers to the process of finding possible candidates for a job or a function. It has been defined as
‘the process of searching for prospective employees and stimulating them to apply for jobs in an
organisation.’
SOURCES OF RECRUITMENT
There are two sources of recruitment – Internal and External.
Internal Sources:-
There are two important sources of internal recruitment, namely, transfers and promotions, which are
discussed below:
(i) Transfers: It involves shifting of an employee from one job to another, one department to another or
from one shift to another, without a substantive change in the responsibilities and status of the employee.
(ii) Promotions: Business enterprises generally follow the practice of filling higher jobs by promoting
employees from lower jobs. Promotion leads to shifting an employee to a higher position, carrying higher
responsibilities, facilities, status and pay. Promotion is a vertical shifting of employees. This practice helps
to improve the motivation, loyalty and satisfaction level of employees.
External Sources:-
An enterprise has to tap external sources for various positions because all the vacancies cannot be filled
through internal recruitment. External recruitment provides wide choice and brings new blood in the
organisation. The commonly used external sources of recruitment are discussed below:
(i) Direct Recruitment: Under the direct recruitment, a notice is placed on the notice-board of the
enterprise specifying the details of the jobs available. Jobseekers assemble outside the premises of the
organisation on the specified date and selection is done on the spot.
(ii) Casual Callers: Many reputed business organisations keep a database of unsolicited applicants in their
offices. Such job-seekers can be a valuable source of manpower. A list of such job-seekers can be prepared
and can be screened to fill the vacancies as they arise.
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iii) Advertisement: Advertisement in newspapers or trade and professional journals is generally used when
a wider choice is required. Advertisement gives the management a wider range of candidates from which to
choose. Advertisements may be placed in leading newspapers.
(iv) Employment Exchange:- Employment exchanges run by the Government are regarded as a good source
of recruitment for unskilled and skilled operative jobs.
(v) Placement Agencies and Management Consultants: In technical and professional areas, private
agencies and professional bodies appear to be doing substantive work. Placement agencies provide a
nationwide service in matching personnel demand and supply.
(vi) Campus Recruitment: Colleges and institutes of management and technology have become a popular
source of recruitment for technical, professional and managerial jobs. Recruitment from educational
institutions is a well-established practice of businesses. This is referred to as campus recruitment.
(vii) Recommendations of Employees: Applicants introduced by present employees, or their friends and
relatives may prove to be a good source of recruitment. Such applicants are likely to be good employees
because their background is sufficiently known.
viii) Labour Contractors: Labour contractors maintain close contacts with labourers and they can provide
the required number of unskilled workers at short notice.
ix) Advertising on Television: The practice of telecasting of vacant posts over Television is a popular
source of recruitment. The detailed requirements of the job and the qualities required to do it are publicised
along with the profile of the organisation where vacancy exists.
(x) Web Publishing: Internet is one of the common source of recruitment these days. There are certain
websites specifically designed and dedicated for the purpose of providing information about both job seekers
and job opening.

Selection
Selection is the process of identifying and choosing the best person out of a number of prospective
candidates for a job.
Process of Selection
The important steps in the process of selection are as follows:
(i) Preliminary Screening: Preliminary screening helps the manager eliminate unqualified or unfit job
seekers based on the information supplied in the application forms.
(ii) Selection Tests: An employment test is a mechanism (either a paper and pencil test or an exercise) that
attempts to measure certain characteristics of individuals. These characteristics range from aptitudes, such as
manual dexterity, to intelligence to personality.
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Important Tests Used for Selection are:

(a) Intelligence Tests, (b) Aptitude Test, (c) Personality Tests, (d) Trade Test and (e) Interest Tests.
(iii) Employment Interview: Interview is a formal, in-depth conversation conducted to evaluate the
applicant’s suitability for the job.
(iv) Reference and Background Checks:- Details, background and additional information about the
candidates can be obtained from the previous employers, known persons, teachers and university professors
can act as references.
v) Selection Decision: The final decision has to be made from among the candidates who pass the tests,
interviews and reference checks.
vi) Medical Examination: After the selection decision and before the job offer is made, the candidate is
required to undergo a medical fitness test. The job offer is given to the candidate being declared fit after the
medical examination.
(vii) Job Offer: The next step in the selection process is job offer to those applicants who have passed all the
previous hurdles. Job offer is made through a letter of appointment/confirm his acceptance
(viii)Contract of Employment: - It is a written document consisting of job title, duties, responsibilities, date
when continuous employment starts and the basis of calculating service, rates of pay, allowances, working
hours, leave rules, grievance procedures, disciplinary procedures etc. It has to be signed by the employee.

Training and Development

Meaning of Training and Development: -

Training is the process of improving the job knowledge and skills of employees so as to enable them to
perform well. It is an organized activity wherein people acquire knowledge and skills for doing a specific
job. Development is the process by which managers and executives acquire not only skills and competence
in their present jobs but also capabilities for future tasks of increasing difficulty and scope. It refers to
overall growth of the employees
Training Methods
There are various methods of training. These are broadly categorised into two groups: On-the-Job and Off-
theJob methods. On-the-Job methods refer to the methods that are applied to the workplace, while the
employee is actually working. Off-the-Job methods are used away from the work place.
On the Job Methods
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(i) Apprenticeship Programmes: Apprenticeship programmes put the trainee under the guidance of a master
worker. These are designed to acquire a higher level of skill.
(ii) Coaching: In this method, the superior guides and instructs the trainee as a coach. The coach or
counsellor sets mutually agreed upon goals, suggests how to achieve these goals, periodically reviews the
trainees progress and suggests changes required in behaviour and performance.
(iii) Internship Training: It is a joint programme of training in which educational institutions and business
firms cooperate. Selected candidates carry on regular studies and work in some factory or office to acquire
practical knowledge and skills.
(iv) Job Rotation: This kind of training involves shifting the trainee from one department to another or from
one job to another. This enables the trainee to gain a broader understanding of all parts of the business and
how the organisation as a whole functions.
Off the Job Methods:-
(i) Class Room Lectures/Conferences: The lecture or conference approach is well adapted to conveying
specific informationrules, procedures or methods.
(ii) Films: They can provide information and explicitly demonstrate skills that are not easily represented by
the other techniques.
(iii) Case Study: Taken from actual experiences of organisations, cases represent attempts to describe, as
accurately as possible real problems that managers have faced.
(iv) Computer Modelling: It simulates the work environment by programming a computer to imitate some of
the realities of the job and allows learning to take place without the risk or high costs that would be incurred
if a mistake were made in real life situation.
(v) Vestibule Training: Employees learn their jobs on the real equipment they will be using, but the training
is conducted away from the actual work floor. This is usually done when employees are required to handle
sophisticated machinery and equipment.
(vi) Programmed Instruction: This method incorporates a prearranged and proposed acquisition of some
specific skills or general knowledge. Information is broken into meaningful units and these units are
arranged in a proper way to form a logical and sequential learning package i.e. from simple to complex. The
trainee goes through these units by answering questions or filling the blanks.
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Questions for practice

I.MCQ s

1.Which of the following is not an external source of recruitment

a. Campus Recruitment
b. Placement agencies
c. Transfer
d. Employment exchange
2. The process of searching for prospective employees and stimulating them to apply for jobs is
a. Manpower Planning
b. Recruitment
c. Selection
d. Staffing
3. Casual or Badli workers are paid remuneration on daily wage basis. Identify the source of recruitment
used here
a. Direct Recruitment
b. Casual callers
c. Advertisement
d .Employment Exchange
4. Linkedin, Job street etc are websites specifically designed and dedicated for recruitment. Identify the
source of Recruitment mentioned here
a. Labor contractors,
b .Direct Recruitment
c .Advertisement
d. Web Publishing.
5.It refers to the employee occupying the position or post for which the person has been selected
a. Recruitment
b. Selection
c. Placement
d. Orientation
6. The aim of this test is to measure an individual’s potential for learning new skills
a. Trade Test
b. Personality Test
c. Intelligence Test
d. Aptitude Test
7.Under this method of training, a trainee is put under the guidance of a master worker
a. Internship Training
b. Vestibule training
c. Apprenticeship Training
d. Induction Training
8. This training is provided to the new employees of the organization to familiarize them with the
organizational rules and policies, their superior and subordinates and so on
a. Internship Training
b. Induction training
c. Apprenticeship Training
d. Vestibule Training
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9.Identify the correct sequence of the steps involved in the staffing process
a. Recruitment, Estimating the manpower Requirements, Placement &Orientation, Selection
b. Estimating the manpower requirements, Selection, Placement &Orientation, Recruitment
c. Selection, Estimating the manpower requirements, Recruitment, Placement & Orientation
d. Estimating the manpower requirements, Recruitment, Selection, Placement and Orientation

10.Nithya was appointed as a worker in a sauce manufacturing unit .She was expected to work on
sophisticated machinery and hence was asked to undergo a special training. Identify the training method
a Internship Training
b. Induction training
c. Apprenticeship Training
d. Vestibule Training
11.It refers to horizontal movement of employees along the organizational structure
a. Transfer
b. Promotion
c. Training
d .Placement
12. This analysis would enable an assessment of the number and types of human resources necessary for the
performance of various jobs and accomplishment of organizational objectives
a. Breakeven analysis
b. Workload analysis
c. Workforce analysis
d. All of the above
13.Workforce analysis would enable to know whether the organization is
a. Understaffed
b. Overstaffed
c. Optimally staffed
d. All of the above
14.Which of the following is not an on the job training method
a. Internship Training
b. Vestibule training
c. Apprenticeship Training
d. Induction Training
15.Which of the following is not a benefit of training and development to an organization
a. Help to avoid wastage of efforts and money
b Enhance employee productivity
c. Lead to better career of the individual
d. Reduce absenteeism and increase employee turnover
II Short Answer Questions (3/4 Marks)
1. Rekha is running a Diagnostic Centre in New Delhi. She has recently taken the franchise of famous brand
in order to expand her business. In order to meet the increased demand manpower she had placed an
advertisement in the local newspaper and also shortlisted some candidates after conducting selection test.
Identify and explain the next four steps that she needs to follow in the related selection

2. A company manufactures very sophisticated switchgears used in Automatic cars. For this the company
uses hi-tech machines. Most of the time the workers of the factory remain idle because of lack of knowledge
 16

regarding the use of these hi-tech machines. The frequent visits by the engineers and constant supervision of
the foreman results into high overhead charges. Explain the way by which this problem can be overcome.
Also state how this helps the employees.

3.Nisha Sethi was working as a Human Resource Manager in a famous consultancy firm, KLI Global
Services. Her job included preparing job descriptions, recruitment, developing compensation and incentive
plans and facilitating employee learning. They had entered into alliances with institutes to ensure continuous
learning of their employees. With the jobs
becoming more and more complex, KLI Global Services invested large amount of money in making the
employees learn the skills necessary to complete the jobs. State by giving any three points, how this
investment is likely to benefit the organization. (3 marks)
4. Mr. Shreyas, a Production Manager in a company using highly sophisticated machines and equipment
wants that every employee should be fully trained before using the machines and equipment. Suggest
anddescribe the best method of training that Manu can use for training of employees
5.Satnam Ltd. are the manufactures of ‘Gents Designer Suits’ with their own trade mark. The company
employed 20 senior technicians to work on machines imported for manufacture of Designer Suits’. They
were put on their respective jobs after one month’s on the job training. Because of the faulty selection
process, the technicians could not perform well. 8 of them left the job on their own and 9 had to be removed
by the company during the probation period. Now the company is in the process of selecting new
technicians.
Advice the company about any three types of selection tests, that maybe used for selecting the desired
technicians.
III. Long Answer Questions (6 Marks)
1A public transport corporation has hired 2000buses for the different routes for the passengers of
metropolitan city. In order to fill vacancies ,it advertised in the newspaper and number of applicants applied
for the same. The company has to now undertake the process of selection to identify and select the best.
Explain the first six steps involved in the process.

2.There were two vacancies for the post of Assistant Manager in ‘Mayur Electrics Private Ltd.’ ‘Renil,’ the
Human Resources Manager identified one suitable candidate ‘Salim’ from within the organization and
promoted him to the post of Assistant Manager. For another post, the Manager Renil took help of a
placement agency and selected ‘Vikas’. After six months, Renil observed that ‘Salim’ performance was
much better than ‘Vikas performance though ‘Salim’ was less qualified than ‘Vikas’. Hence, ‘Renil’ decided
that in future he will not make any appointment with the help of an outside source. Explain any four reasons
on the basis of which ‘Renil’ would have taken the above decision.
3. Training is a life-long necessity, both for the employees as well as for the organisation. Justify the
statement by giving three arguments each in favor of the employees and the organisation.
4.Anita, Sunita and Nimisha are running a handloom unit in the urban area in Bihar, which is involved in the
manufacturing of traditional clothing material. They decided to shift this manufacturing unit to a rural area
with an objective of reducing the cost and providing job opportunities to the locals.
They assessed and analysed the type and number of employees required, keeping in mind that they had to
encourage the people with special needs and women in the rural area.
a. Identify the function of Management highlighted here
b. They assessed and analysed the type and number of employees required. State the step of the function of
management mentioned
 17

c. Identify and explain the next three steps that they will have to undertake, for obtaining a satisfied
workforce for their unit
5. Explain briefly the types of Tests used in Selection Process.

ANSWERS
I. MCQs
1.c 2 .b 3,a 4.d 5.c 6.d 7. c 8.b 9.d 10.d 11. a 12. b 13.d 14.b 15.c
II. Short Answer Questions (3/4 Marks)
1.The next 4 steps in the selection process are:-
(i) Employment Interview:
(ii) Reference and Background Checks:
(iii) Selection Decision:
(iv) Medical Examination
2.This problem can be overcome through training (Vestibule Training).
This will help the employees by: (any two)
(a) Improving their skills and knowledge leading to better career.
(b) Enhancing the earning capacity because of better performance.
(c) Increasing efficiency.
(d) Increasing the satisfaction and morale of employees.
(e) Reducing accidents
3.Ans Benefits of training to the organization:
(i) It avoids wastage of efforts and money as training is systematic
learning, better than hit and trial methods.
(ii) It enhances employee productivity both in terms of quantity and
quality leading to higher profits.
(iii) It equips the future manager to take over in an emergency.
(iv) It reduces employees‟ turnover as it increases employee morale and
reduces absenteeism.
(v) It helps in obtaining effective response in a fast changing
environment.
4. Vestibule training with explanation
5.Types of selection tests that may be used for selecting the desired technicians are :
(i) Trade test : Measures the level of knowledge and proficiency in the area of profession or technical
training already possessed by the applicant.
(ii) Aptitude test : Measures individual’s potential for learning new skills.
(iii) Interest test : Used to know the pattern of interests or involvement of a person.
III. Long Answer Questions (6 Marks)
1. (i) Preliminary Screening
(ii) Selection Tests
(iii) Employment Interview :
(iv) Reference and Background Checks
(v) Selection Decision :
Vi Medical examination
2. Merits of internal sources
3. Benefits of Training to organization & Employees
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4. Ans. a. Staffing
b. Manpower Planning
c. Recruitment, Selection, Placement & Orientation with explanation
5.a.Intelligence Test b Aptitude Test c. Personality Test d. Trade Test e. Interest Test
*****
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CHAPTER 7

DIRECTING
Meaning:- Directing refers to the process of instructing, guiding, counselling, motivating and leading
people in the organisation to achieve its objectives.

Importance:

1. Directing Initiates Action: It helps in initiating action by the people in the organization towards
attainment of desired objectives.
2. Directing Integrates Employee’s Efforts: Coordination of all the activities of an organization is very
necessary.
It ensures that the individuals work for organizational goals
3. Motivation and Leadership: It motivates the subordinates by showing leadership qualities to work
efficiently and to contribute their maximum efforts towards the achievement of organizational goals.
4. Directing Facilitates Change: Employees often resist changes due to fear of adverse effects
ontheiremploymentandpromotion.Effectivedirectingthroughmotivation communication and leadership
help employees to cope with changes in the environment.

5. Directing helps in Stability and Balance in the organization: Effective directing fosters
cooperation and commitment among employees and helps I striking a balance between various
activities and departments.
Elements of Directing;

(i) Supervision: Implies overseeing the work of subordinates by their superiors. It is an act of
watching & directing worker’s activities.
(ii) Motivation: It means the process of making subordinates to act in a desired manner to
achieve certain organizational goals.
(iii) Leadership: Leadership is the process of influencing the behavior of people by making them
strive voluntarily towards achievement of organizational goals.
(iv) Communications: is the process of passing information, experience, opinion etc. from one
person to another.
Motivation:

 Motivation means incitement or inducement to act or move.

 Motivation is the process of stimulating people to action to accomplish desired goals.
Three key terms = motive, motivation, motivators

Motive: Inner state that energizes, activates and directs behavior towards goals. Arises out of
unsatisfied needs and causes restlessness.
Motivation: Process of stimulating people to action to accomplish desired goals.
Motivators: Technique used to motivate people. E.g. = bonus, promotion, recognition etc.
 20

Maslow's Need Hierarchy Theory of Motivation

This theory was given by Abraham Maslow in 1943, and is based on human needs.
Assumptions
 Satisfaction of needs influences people's behaviour.

 Needs are in hierarchical order.

 Once need is satisfied only, the next higher need can motivate individuals.
 Satisfaction of lower-level needs motivates to move to the next level of need.
1. Basic Physiological Needs: These are the most basic need such as food, shelter, sleep etc. In the
organizational context, basic salary helps to satisfy these needs.
2. Safety/ Security Need: Provide security from physical and emotional harm E.g. Job security,
stability Etc.
3. Affiliation/Belonging Need: These needs refer to affection, sense of belongingness, acceptance
and friendship for mental satisfaction.
4. Esteem Needs: These include factors such as self-respect, prestige, autonomy status,
recognition and attention.

5. Self-Actualization Needs: It is the highest level of need in the hierarchy. It refers to the drive
to become what one is capable of becoming.

Financial and Non-Financial Incentives

 Incentives are the means to satisfy an employee's needs and motives. These can be:
 Financial
 Non-Financial

Financial Incentives
 21

Incentives offered to employees which are either in direct monetary form or can be valued in
monetary terms.

Types of Financial Incentives

1. Pay and allowances: These include salary, dearness allowance and other allowances paid to
employees.

2. Productivity linked wage incentives: Wages paid at different rates to increase productivity.
3. Bonus: Incentive offered above the wages or salary.
4. Profit Sharing: Providing a fixed percentage of profit to employees.
5. Co-partnership/ Stock option: Shares offered to employees at a price which is lower than the market
price.
6. Retirement benefits: Benefits offered after retirement such as provident fund, pension, etc.
7. Perquisites: Benefits over and above the salary offered such as car allowance, housing, medical aid,
etc.

Non-Financial Incentives
Incentives which are given to provide psychological and emotional satisfaction rather than monetary
satisfaction.

Types of Non-Financial Incentives

1. Status: It is the level of authority, responsibility and recognition an employee commands in the
organization.
2. Organizational climate: Characteristics influencing an individual's behaviour such as individual
autonomy, reward orientation, consideration to employees, etc.
3. Career advancement opportunity: Opportunities of growth and development in the organization to
the higher level.
4. Job enrichment: It refers to a variety of work offered to challenge the knowledge and skills of highly
motivated employees.
5. Employee recognition programmes: It involves recognising and appreciating the contribution of
employees in public.
6. Job security: It refers to the certainty and stability offered in a job about future income and work.
7. Employee participation: Involvement of employees in the decision making process, seeking their
advice or suggestions.
8. Employee empowerment: Opportunities provided to employees to take decisions independently and
perform jobs assigned to them.

Leadership
Leadership is the process of influencing the behaviour of people in such a way that they voluntarily
work towards the achievement of organizational objectives.

Features of Leadership
 It is the ability of an individual to influence others.
 22

 It tries to transform the behaviour of the subordinates.

 It indicates interpersonal relationship between leader and followers.

 It is exercised to achieve organizational goals.
 It is a continuous process.

Leadership Styles
1. Autocratic leadership: in this style of leadership, a leader takes all the decisions on his own and gives
orders to his or her subordinate to implement them.
2. Democratic leadership: In this style of leadership a leader takes decisions after consulting with
subordinates and encourages them to participate in decision making.
3. Laissez faire leadership: In this style of leadership a leader gives freedom to his subordinate to take
decisions and execute work assigned to them and the leader acts as observer or guide.

Communication
It is the process of exchange of information between two or more people with an aim to create
common understanding.

Elements of Communication Process

1. Sender: The person who conveys his thoughts or ideas.
2. Message: Content intended to be communicated.
3. Encoding: Process of converting message into communication.

4. Media: Path through which an encoded message is transmitted to the receiver.

5. Decoding: It is the process of converting the encoded message in a readable format.
6. Receiver: The person who receives a communication message from the sender.
7. Feedback: It refers to the information or suggestions provided by the receiver to the sender in context
to the communication or message he received.
8. Noise: The hindrances and obstruction to communication.

Formal and Informal Communication

 The process of communication within an organization may be
 Formal or

 Informal.
Formal communication
 It flows through official channels designed in the organization chart to communicate official
information between employees.
 Formal communication is classified as:
 Vertical communication: It is the formal two-way communication between superior and
subordinate and the communication flows upward or downward.
Horizontal communication: It is the formal two-way communication between employees
working at the same level of authority.
Formal Communication Networks
 23

 Single chain: Communication flows from superior to his immediate subordinate.

 Wheel: Superior acts as a hub of information and all subordinates communicate through the superior
only.
 Circular: Employees communicate with his or her adjoining people.
 Free flow: All employees are free to communicate with each other without any restrictions.

 Inverted V: An employee communicates with his or her immediate superior but may also
communicate with his/her superior’s superior.
Informal communication
 Communication between employees who are not officially related to each other is called informal
communication, this type of communication may flow in any direction thus it is also called
'grapevine'.
 The informal communication spreads information rapidly and sometimes generates rumours.
Grapevine Network
Grapevine communication, also known as informal communication, is a communication that develops as a
result of social interaction among employees and spreads without following the formal communication path.
The types of grapevine communication networks are as follows.
 Single Strand Network: An employee communicates with other employees in sequence.

 Gossip Network: In a gossip network, one person spreads information to a large number of people.
 Probability Network: In a probability network, an individual shares information with other people at
random.

 Cluster Network: Information in this network is first shared between two people who trust each
other.

PRACTICE QUESTIONS

1 Mark Questions

1. Explain in one sentence how directing initiates action in management.

2. Give any two elements of directing.
3. State the element of directing which helps in implementing the principle of scalar chain.
4. It means overseeing the subordinates at work. Which element of directing is referred to?
5. It refers to the way in which urges, drives, desires, aspirations, strivings or needs direct
control and explain the behaviour of human beings. Which element of directing is indicated
here?
6. Which need in the hierarchy theory of motivation refers to affection, acceptance and
friendship?
7. It is an incentive offered over and above the wages/salary to the employees. Name the type of
financial incentive referred here.
8. Name the incentive which refers to ‘give more autonomy and powers to subordinates’ and
how are people affected by this incentives?
9. It is defined as a process of influencing other people to work willingly for groupobjectives.
Mention this element of directing.
10. Which element in communication process relates to the process of converting encoded
symbols of the sender?

Short answer type questions (3,4 marks)

 24

1. How directing helps in efficient and effective functioning of the organisation? Explain by giving any
three points. (3)
2. What is meant by financial incentives? State any two financial incentives. (3)
3. Ayasha Ltd. assured their employees that in spite of recession, no worker will be retrenched from the
job.
a. Name and explain the type of incentive offered to the employees.
b. Explain one more incentive of the same category. (3)
4. Define the terms ‘motive’, ‘motivation’ and ‘motivator’. (4)
5. To satisfy the social and physiological needs which type of incentives are needed? Explain any four
types of such incentives. (4)
6. “Managerial functions cannot be carried out without an efficient system of communication.” Do you
agree? Give any three reasons in support of your answer.(4M)

Long Answer type Questions ( 5,6 marks)

7. Describe the concept of Authoritative leadership and state its advantages? (5)
8. What is meant by communication? Explain how communication is an important function of
management. (6)
9. Directing is the heart of the management process. Do you agree? Give any four reasons in support of
your answer.(5)
10. Explain in brief the elements of the communication process.(6)

ANSWERS
1 Mark Questions
Ans.1. Directing initiates action by ordering employees to attain the desired goal of an organisation.
Ans.2 (i) Supervision (ii) leadership.
Ans.3. Communication helps in implementing the principle of scalar chain.
Ans. 4. Supervision.
Ans. 5. Motivation.
Ans.6. Belonging needs
Ans. 7. Bonus
Ans. 8. Employee Empowerment: Due to this incentive people start feeling that their jobs
areimportant and they contribute positively to use their skills and talent in the job performance.
Ans.9. Leadership
Ans.10. Decoding

Short Answer type Questions.

1. (i) It integrates employees Directing integrates employees’ efforts in the organisation in such a
way that every individual’s efforts contributes to the welfare of the organisation. Thus, it ensures that
employees work efficiently for the attainment of
goals. (ii) It improves efficiency Directing guides
employees to fully realise their potentials and capabilities. Through this function, managers utilise the
potential of employees and persuade them to work with the best of their ability and contribute their
maximum efforts towards the achievement of organisational objectives.
(iii) It facilitates change Business environment is changing very frequently, but the people generally
have a tendency to resist change. In this context, directing helps manager to persuade his subordinates to
carry out changes from time to time to cope with changes in the environment as the changes are
necessary to adapt and it is the need of modern business
 25

2. Financial incentives refer to incentives which are in direct monetary form and serves to motivate
people for better performance.
Two financial incentives are:
i. Pay and allowances: Salary is the basic monetary incentive for every employee. It includes basic
pay, dearness allowance and other allowances.
ii. Productivity linked wage incentives: Many wage incentives are linked with the increase in
productivity at individual or group level. For example, a worker is paid 50 rupees per piece if he
produces 50 pieces a day but if he produces more than 50 pieces a day, he is paid 5 rupees extra
per piece. Thus, on the 51st piece, he will be paid 55 rupees.
3
i. The name of the incentive offered is Job security. Employees want their job to be secure. They
want certain stability about future income and work so that they do not feel worried on these
aspect and work with greater zeal.
ii. Employee participation: It means involving employees in decision making if the issues related to
them. In many companies, these programmes are in practice in the form of joint management
committees, work committees, canteen committees etc.
4
i. Motive: A motive is an inner state that energizes, activates or moves and directs behaviour
towards goals. Motives arise out of the needs of individuals. Realisation of a motive causes
restlessness in the individual which prompts some action to reduce such restlessness.
ii. Motivation: Motivation is the process of stimulating people to action to accomplish desired goals.
Motivation depends upon satisfying needs of people.
iii. Motivator: Motivator is the technique used to motivate people in an organisation. Managers use
diverse motivators like pay, bonus, promotion, recognition, praise, responsibility etc., in the
organisation to influence people to contribute their best.
5. Psychological, cognitive and social factors can play a role in what incentives one finds motivating and
to what degree. Incentives can be used to get people to engage in certain behaviours, but they can also be
used to get people to stop performing certain actions. Financial incentives are needed to satisfy the social
and physiological needs. Four types of such incentives are
i. Pay and allowances: Salary is the basic monetary incentive for every employee. It includes basic
pay, dearness allowance and other allowances like House Rent Allowance, Entertainment
allowance etc. Under salary system, employees get regular annual increments and enhancement
of allowances from time to time.
ii. Profit sharing: Sometimes a company or a business firm may share some part of its profit with
the employees. The main purpose of sharing profits with the employees is to improve their
performance so that they can contribute more in increasing the productivity and profits of the
firm.
iii. Productivity linked wage incentives: Employees can be motivated by giving them productivity
linked wage incentives. There are certain wage rate plans which offer higher wage for more
efficient worker for example; different piece wage system allows high wages to efficient workers
as compared to inefficient workers.
iv. Co-partnership/Stock option: Sometimes companies offer their shares to its employees at a set
price which is lower than the market price. The main purpose of allotting shares to the employees
is to create a feeling of ownership among them so that they can contribute more for the growth of
the organization.

6. Yes, I agree with this statement.

Communication is important because of the following reasons.
i. Communication facilitates planning in a number of ways
 26

ii. Communication helps management in arriving at vital decisions

iii .Communication is necessary in creating unity of action of action

7. Autocratic/Authoritarian leadership under this style, leader concentrates all authority in himself,
instructs subordinates as to what to do, when to do it; how to do it, etc. He also exercises close
supervision and control over his subordinates. Subordinates are expected to do what they are told.
The autocratic leader accomplishes the results through the use of authority, fear of deprivation,
punishment and such other negative rewards. As it is negative in character, authoritarian approach
will succeed only in the short run.

Advantages of Autocratic Leadership:

i. It provides for quick decision-making because here only one person i.e., the leader takes
decisions.
ii. Mostly subordinates like to work under centralized authority and strict supervision.
iii. As there is no consultation with subordinates, confidential matters can be kept secretly.
iv. Leadership gives strong motivation and satisfaction to the leader who dictates terms.
v. At lower levels, only less competent subordinates are required.
vi. This style may yield positive outcome if great speed is needed.
8. Communication is a two-way process wherein the message in the form of ideas, thoughts, feelings,
opinions is transmitted between two or more persons with the intent of creating a shared
understanding. Simply, an act of conveying intended information and understanding from one
person to another is called as communication. The term communication is derived from the Latin
word “Communis” which means to share. Effective communication is when the message conveyed
by the sender is understood by the receiver in exactly the same way as it was intended.
Importance of communication is explained as follows:
i. Acts as a basis of coordination: Communication acts as a basis of coordination. It provides
coordination among departments, activities and persons in the organisation. Such coordination is
provided for explaining about organisational goals, the mode to their achievement and inter
relationships between different individuals, etc.
ii. Acts as a basis of decision-making: The decisions made in an organisation depends largely on the
amount and quality of information available On the basis of communication of relevant
information, one can take the right decisions.
iii. Increases managerial efficiency: The employees must know clearly about their responsibilities
and authority, who will report to whom, what part of the total job they are expected to perform
and what are their decision-making powers.
iv. Helps in the process of motivation and morale: Motivation and morale of employees largely
depend upon the effectiveness of communication. Sharing of information with employees helps
management to secure their willing cooperation.
v. Effective leadership: Communication is the basis of leadership. By developing the skills of
communication, a manager can be a real leader of his subordinates. A good system of
communication brings them m close contact with each other and removes misunderstandings.
 27

9. Yes, I do agree with this statement. Directing may be regarded as the heart of the management
process; Its importance may be explained under the following points
(i) Initiates action Directing helps to initiate action by people in the organisation towards
attainment of desired objectives, e.g. if a supervisor guides his subordinates and clarifies their
doubts in performing a task, it will help workers to achieve work targets given to them.
(ii) Integrates employees’ efforts Directing integrates employees’ efforts in the organisation in
such a way that every individual effort contributes to the attainment of organisational objectives.
Thus, it ensures that the individuals work for organisational goals.
(iii)Improves efficiency Directing guides employees to fully realise their potential and capabilities
by motivating and providing effective leadership. A good leader can always identify the potential
of his employees and motivate them to extract work up to their potential.
(iv)Brings balance and stability in the organisation Effective directing helps to bring stability
and balance in the organisation since, it fosters cooperation and commitment among the people and
helps to achieve balance among various group activities and the departments.
10. The elements involved in the communication process are explained below –Sender: Sender means
a person who conveys his thoughts or ideas to the ‘ receiver. The sender represents a source of
communication.
Message: It is the content of ideas, feelings, suggestions, order, etc. intended to be communicated.
Encoding: It is the process of converting the message into communication symbols such as words,
pictures, gestures, etc.
Media: It is The path through which an encoded message is transmitted to the receiver. The
channel may be in written form, face to face, phone call, internet, etc.
Decoding: It is the process of converting encoded symbols of the sender.
Receiver: The person who receives communication from the sender.
Feedback: It includes all those actions of the receiver indicating that he has received and
understood the message of the sender.
Noise: Noise means some obstruction or hindrance to communication.

*****
 28

Chapter 8
CONTROLLING
CONCEPT and DEFINITION:

Controlling function can be defined as comparison of actual performance with the planned
performance. If there is any difference or deviation then finding the reasons for such difference and taking
corrective measures or action to stop those reasons so that in future there is match between actual and
planned performance.
Managerial Control implies the measurement of accomplishment against the standard and
the correction of deviations to assure attainment of objectives according to plans.
Koontz and O’ Donnel

IMPORTANCE OF CONTROLLING:

1. Accomplishing organisational goals: Controlling function ensures that all the activities in the
organisation take place according to plan and if there is any deviation, timely action is taken and
keeps them on the right track so that organisational goals might be achieved.
2. Judging accuracy of standards: Through strategic controlling, we can easily judge whether the
standards or target set are accurate or not. An efficient control system keeps a careful check on the
changes taking place in the organisation and in the environment and helps to review and revise the
standards according to changes.
3. Making effective use of resources: In controlling, each activity is performed in accordance with
predetermined norms. It acts like a traffic signal and guides the organisation and keeps it on the right
track. As a result, wastage and spoilage of resources will be reduced so that effective and efficient
use of resources can be ensured.
4. Improving employee motivation: A good control system ensures that employees know well in
advance what they are expected to do as well as the basis against which their performance will be
appraised. Thus, it motivates them to give better performance.
5. Ensuring order and discipline: Control creates an atmosphere or order and discipline in
organisation. It keeps the employees under check and helps to minimize dishonest and fraud
behaviour of employees. Now-a-days, computer monitoring system is contributing a lot to the
controlling function.
6. Facilitates coordination in action: The activities of each department and employee are governed
and controlled by pre-determined standards which are well coordinated with one another. So, control
provides unity of direction.

CONTROLLING PROCESS

Controlling is a systematic process involving the following steps:

1. Setting performance standards

2. Measurement of actual performance
3. Comparison of actual performance with standards
4. Analyzing deviations
5. Taking corrective action.
The above steps in the process of controlling have been discussed below:

1. Setting performance standards: Standard means the yardstick against which actual performance is
measured. Following points to kept in mind before setting the standard.
 As far as possible standards must be set up in numerical or measurable term, i.e. Standard
sale – Rs.20 lakhs, Standard Profit – Rs.4 lakhs, Reduction in cost by 5%.
 29

 Sometimes standards may also be set in qualitative terms, i.e. improving goodwill and
motivation level of employees.
 Standard must be set up keeping in mind the resources of the organisation and must be
achievable
 Standards should be flexible enough to be modified due to changes taking place in internal
and external environment
2. Measurement of actual performance: In second step, the actual performance should be measured
through personal observation, sample checking, performance reports, calculation of ratios, etc. The
measurement should be objective and reliable. Further, while measuring performance, the
quantitative and qualitative aspect should be kept in mind. Performance must be measured
periodically in short period of time.
3. Comparing actual performance with standard: Comparison becomes easier when the standards
are set in quantitative terms. The comparison of actual with the standard will reveal the deviation if
any. If there is match in both, then the controlling function ends there only. But, if there is mismatch,
then the manager tries to find out the extent of deviation. If the deviation is minor, it should be
ignored. But, if the deviation more, then timely action must be taken.
4. Analyzing deviation: Deviation should be divided in two categories as
 Deviations need to be attended urgently.
 Minor or insignificant deviations
Below mentioned two ways are to be applied during the analyzing of deviations.
(a) Critical point control: It means keeping focus on some Key Result Areas (KRAs) which are
critical to the success of an organisation. If anything goes wrong in these critical points, then it must
be attended urgently.
(b) Management by exception: It means a manager who tries to control everything may end up
controlling nothing. Thus, only significant deviations which go beyond permissible limit should be
brought to the management. Managers should not waste time and energy in finding solutions for minor
deviations.
5. Taking corrective action: The final step in controlling function is to find out the reasons for
deviations which need immediate attention and trying to remove deviation in future. Taking
corrective measures may involve training of employees, assigning of additional workers and
equipment, change in the quality of materials, repair or replace the machinery, improving physical
conditions of work.
 30

MULTIPLE CHOICE QUESTIONS (1 MARK)

1. Which one of the following is not an importance of controlling?
(a) Better coordination
(b) Better use of resources
(c) Better planning
(d) Better grievance handling
2. Prakash has set up a small business unit for the manufacturing of detergent. In order to market the
detergent in the local residential areas, he has appointed a team of ten salesmen. Each salesman is
expected to sell at least 200 units of the detergent within a week’s time. Identify the point of
importance of controlling being highlighted in the above case.
(a) Controlling helps in judging accuracy of standards.
(b) It ensures efficient use of resources.
(c) It helps in improving employee motivation.
(d) It facilitates co-ordination in action.
3. Which one of the following is a step of controlling?
(a) Assessing personnel required
(b) Taking corrective action
(c) Assessing environment
(d) Taking disciplinary action
4. Mr.Sinha runs a logistic company. The Tour In charges of each trip in the company are expected to
submit a report to the Event Manager on the completion of every trip. Identify the step in the
controlling process being described in the above lines.
(a) Setting of standards
(b) Measurement of actual performance
(c) Taking corrective action
(d) Analysing the deviation
5. In a marketing firm, the Financial Manager pays more attention towards an increase of 3% in the
marketing cost as compared to a 15% increase in the courier expenses. Identify the concept being used
by the manager.
(a) Management by exception
(b) Critical point control
(c) Corrective action
(d) None of the above
6. The controlling function is performed by
(a) Top level management
(b) Lower level management
(c) Middle level management
(d) All of the above
7. With the help of controlling function the management can know not only about the deficiency in the
performance but it also helps management to know whether standards or plans are set correctly or not.
The importance of management discussed above is:
(a) Ensure order and discipline
(b) Facilitate coordination in action
(c) Judging accuracy of standard
(d) Making efficient use of resources.
8. To make sure employees focus on work and follow the method of production as per plan the
management of Jai ltd. decided to install CCTV (close circuit television) in the factory for monitoring
the activity of workers.
(a) Planning
(b) Controlling
(c) Staffing
(d) Directing
9. Which one of the following is not the step in the process of controlling?
 31

(a) Measurement of actual performance

(b) Establishing reporting relationship
(c) Setting performance standards
(d) Taking corrective action
10. Ramesh is a senior manager in a software consultancy firm. He regularly prepares performance
reports of his subordinates as part of appraisal. The step of controlling process is :
(a) Measuring of performance
(b) Compare performance against standard
(c) Analyzing deviation
(d) Taking corrective action.
Descriptive Type Questions:
11. Which two steps in the process of controlling are concerned with compelling events to confirm to
plan? Explain.
12. How does dose controlling help in ―Judging accuracy of standards‖ and ―Ensuring order and
discipline?
13. How is critical point control applied in controlling process?
14. Asian Ltd is a large company engaged in assembly of air-conditioner. Recently the company had
conducted the various scientific management studies and concluded that on an average a worker can
assemble eight air- conditioners in a day. The target value of a company in a day is assembling of 800
units. The company is providing attractive allowances to reduce labour turnover and absenteeism. All
the workers are happy. Even then the assembly of air –conditioner per day is 650 units only. To find
out the reason the company compared 50 actual performance of each worker and observed through
C.C.T.V. that some of the worker was busy in gossiping.
a. Identify the function of management discussed above.
b. State those steps in the process of the function identified which are discussed in the above
paragraph.
15. White Enterprises was a renowned name for manufacturing quality washing machines since 1965.
When the profit of the last year declined Mr. Anand, the owner of White Enterprise, asked the
General Manager to prepare a profitability report of the company including Gross Profit Ratio, Net
Profit Ratio etc, besides using other techniques to assess the company‘s performance. Identify the step
taken by Mr Anand which is related to one of the functions of management.
ANSWERS
1. d, 2. c (By making employees aware of the expected performance) 3. b, 4. b 5. b
6. d 7. c, 8. b, 9. b, 10. a.
11
(i)Comparison of actual performance with standards :When actual performance is measured, its
results are compared with standards. By this comparison, deviation between actual performance
and standard performance is derived.
(ii) Taking corrective actions: After the analysis of deviations, corrective action is taken. What
type of corrective action will be taken depends on the factors causing the deviations.
12. Judging Accuracy of Standards. Controlling enables management to verify whether standards set
are accurate and objective.
Ensuring Order and Discipline. Controlling ensures maintenance of order and discipline by
putting checks on undesirable activities of the employees.
13. Ans.Every organization identifies its Key Result Areas/ Critical Points which have significant
effect on the working of business. Any deviation on these points should be attended urgently by
Management.
EXAMPLE: If the expenditure on refreshment goes up by 10% it can be ignored but if cost of
raw material goes up by 5% it requires managerial action.
14. Ans. The process/function of management discussed above is Controlling. The steps of
Controlling are:
1. Setting Performance Standards. As a first step, standards are set for the performance.
Standards are the criteria on the basis of which effectiveness of a performance is considered as
 32

desirable.
2. Measuring Actual Performance. When various actions are undertaken, these produce actual
performance. This performance is measured in the form in which standards have been set.
3. Comparing Actual Performance with Standards. When actual performance is measured, its
results are compared with standards. By this comparison, deviation between actual performance
and standard performance is derived. 4. Analysing Deviations. If deviations are found, these are
analysed. For analysing deviations, two concepts-critical point control and management
byexception-are used to save time. If deviations are beyond the acceptable range, factors
responsible for these are identified.
5. Taking Corrective Action. After the analysis of deviations, corrective action is taken. What
type of corrective action will be taken depends on the factors causing the deviations.
15 Controlling and steps in controlling.

*****
 33

CHAPTER 9

FINANCIAL MANAGEMENT

Financial Management: Definition

Financial Management is concerned with optimal procurement as well as usage of finance.

Objective
The prime objective of financial management is to maximise shareholder’s wealth by maximising the market
price of a company’s shares.

Financial Decisions Involved in Financial Management

 Investment Decision
 Financing Decision
 Dividend Decision

Role of Financial Management

 To determine the capital requirements of business, both long-term and short-term.

 To determine the capital structure of the company and determine the sources from where required
capital will be raised keeping in view the risk and return matrix.
 To decide about the allocation of funds into profitable avenues, keeping in view their safety as well.
 To decide about the appropriation of profits.
 To ensure efficient management of cash in order to ensure both liquidity and profitability.
 To exercise overall financial controls in order to promote safety, profitability and conservation of
funds.

INVESTMENT DECISION

 It seeks to determine as to how the firm’s funds are invested in different assets
 It helps to evaluate new investment proposals and select the best option on the basis of associated
risk and return.
 Investment decision can be long-term or short-term.
 A long-term investment decision is also called a Capital Budgeting decision.

Types of Investment Decision

1. Working Capital/Short-term Investment Decision

o It refers to the amount of capital required to meet day- to-day running of business.
o It relates to decisions about cash, inventory and receivables.
o It affects both liquidity and profitability of business.
2. Capital Budgeting Decision/Fixed Capital/Long-term Investment Decision
o It refers to the amount of capital required for investment in fixed assets or long term projects which
will yield return and influence the earning capacity of business over a period of time.
o It affects the amount of assets, competitiveness and profitability of business.

Factors Affecting Capital Budgeting Decision/Long- term Investment Decision

o The expected cash flows from the proposed project should be carefully analysed.
o The expected rate of return should be carefully studied in terms of risk associated from the proposed
project.
 34

o Different types of ratio analysis should be done to evaluate the feasibility of the proposed project as
compared to similar projects in the same industry.

FINANCING DECISION

Financing Decision: Definition

Financing decision relates to determining the amount of finance to be raised from different sources of
finance. This decision determines the overall cost of capital and the financial risk of the enterprise.

Types of Sources of Raising Finance

1. Owned Sources
o Equity shares
o Preference shares
o Retained earnings
2. Borrowed Sources
o Debentures
o Bonds
o Loan from bank or financial institutions
o Public deposit

Considerations Involved in the Issue of Debt

 Interest on borrowed funds has to be paid regardless of whether or not a business has made a profit.
Likewise, borrowed funds have to be repaid at a fixed time.
 There is some amount of financial risk in debt financing.
 The cost of debt is less than equity as the degree of risk assumed by the investors is less and the
amount of interest paid by the company is tax deductible.

Factors Affecting Financing Decision

 The source of finance which involves the least cost should be chosen.
 The risk involved in raising debt capital is higher than equity.
 The sources involving high flotation cost require special consideration.
 If the cash flow position of a business is good, it should opt for debt else equity.
 If the fixed operating cost of a business is low, it should opt for debt else equity.
 The issue of equity capital dilutes the control of existing shareholders over business whereas
financing through debt does not lead to any such effect
 If there is boom in capital market it is easy for the company to raise equity capital, else it may opt for
debt.

Considerations Involved in the Issue of Equity

 Shareholders do not expect any commitment regarding the payment of returns or repayment of
capital.
 The floatation cost on raising equity capital is high.
 The shareholders expect higher returns in return for assuming higher risks.

DIVIDEND DECISION
Dividend Decision relates to disposal of profit by deciding the proportion of profit which is to be distributed
among shareholders and the proportion of profit which is to be retained in the business for meeting the
investment requirements.
 35

Factors Affecting Dividend Decision

1. Earnings: Companies having high and stable earning could declare high rate of dividends as dividends are
paid out of current and paste earnings.

2. Stability of Dividends: Companies generally follow the policy of stable dividend. The dividend per share
is not altered and changed in case earnings change by small proportion or increase in earnings is temporary
in nature.

3. Growth Prospects: In case there are growth prospects for the company in the near future them it will retain
its earning and thus, no or less dividend will be declared.

4. Cash Flow Positions: Dividends involve an outflow of cash and thus, availability of adequate cash is for
most requirements for declaration of dividends.

5. Preference of Shareholders: While deciding about dividend the preference of shareholders is also taken
into account. In case shareholders desire for dividend then company may go for declaring the same.

6. Taxation Policy: A company is required to pay tax on dividend declared by it. If tax on dividend is higher,
company will prefer to pay less by way of dividends whereas if tax rates are lower then more dividends can
be declared by the company.

7. Issue of bonus shares: Companies with large reserves may also distribute bonus shares to increase their
capital base as it signifies growth of the company and enhances its reputation also.

8. Legal constraints: Under provisions of Companies Act, all earnings can’t be distributed and the company
has to provide for various reserves. This limits the capacity of company to declare dividend.

FINANCIAL PLANNING

Financial Planning: Definition

The process of estimating the funds requirement of a business and specifying the sources of funds is called
financial planning. It basically involves preparation of a financial blueprint of an organisation’s future
operations.

Twin Objectives of Financial Planning

 To ensure availability of funds as per the requirements of business.

 To see that the enterprise does not raise resources needlessly.

Importance of Financial Planning

 It ensures smooth running of a business enterprise by ensuring availability of funds at the right time.
 It helps in anticipating future requirements of funds and evading business shocks and surprises.
 It facilitates co-ordination among various departments of an enterprise, like marketing and
production functions, through well-defined policies and procedures.
 It increases the efficiency of operations by curbing wastage of funds, duplication of efforts, and gaps
in planning. .
 It helps to establish a link between the present and the future.
 It provides a continuous link between investment and financing decisions.
 It facilitates easy performance as evaluation standards are set in clear, specific and measurable terms.
 36

CAPITAL STRUCTURE
Capital Structure: Definition
It refers to the mix between owners and borrowed funds.

Financial Risk: Definition

It refers to a situation when a company is unable to meet its fixed financial charges like payment of interest
on debt capital.

Trading on Equity: Definition

It refers to the increase in the earnings per share by employing the sources of finance carrying fixed financial
charges like debentures (interest is paid at a fixed rate) or preference shares (dividend is paid at fixed rate).

Financial Leverage: Definition

The proportion of debt in the overall capital is called financial leverage. It is computed as D/E or D/D+E,
where D is the Debt and E is the Equity.

Factors Affecting Capital Structure

i. Cash flow position:
a. The size of the projected cash flows must be considered before deciding the capital structure of the firm.
If there is sufficient cash flow, debt cab be used.
b. It must cover fixed payment obligations w r t:
i. Normal business operations ii. Investment in fixed assets iii. Meeting debt service commitments as well as
provide a sufficient buffer.
ii. Interest coverage ratio :
a. Higher the Interest coverage ratio which is calculated as follows: EBIT/ Interest, lower shall be the risk of
the company failing to meet its interest payment obligations.
b. Low Interest coverage ratio => debt ≠ used.
iii. Debt Service Coverage Ratio:
a. Debt service coverage ratio = Profit after tax + Depreciation + Interest + Non Cash exp. Pref. Div +
Interest + Repayment obligation
b. A higher Debt service coverage ratio, in which the cash profits generated by the operations are compared
with the total cash required for the service of debt and the preference share capital, the better will the ability
of the firm to increase debt component in the capital structure.
c. Low Debt service coverage ratio => debt ≠ used.
iv. Return On Investment
a. If return on investment of the company is higher, the company can choose to use trading on equity to
increase its EPS, i.e., its ability to use debt is greater.
v. Cost Of Debt
a. More debt can be used if cost of Debt is low.
vi. Tax Rate
a. A higher tax rate makes debt relatively cheaper and increases its attraction as compared to equity.
vii. Cost Of Equity
a. when the company uses more debt, the financial risk faced by equity holders increase so their desired rate
of return increases.
b. If debt is used beyond a point, cost of equity may go up sharply and share price may decrease in spite of
increased EPS.
viii. Floatation Cost
a. Cost of Public issue is more than the floatation cost of taking a loan.
b. The floatation cost may affect the choice between debt and equity and hence the capital structure
ix. Risk Consideration:
a. The total risk of business depends upon both the business risk and financial risk. If a firm‘s business risk
is lower, its capacity to use debt is higher and vice versa.
 37

x. Flexibility:
a. If the firm uses its debt potential, it loses the flexibility to use more debt.
b. To maintain flexibility the company must maintain some borrowing power to take care of unforeseen
circumstances.
xi. Control:
a. Debt normally does not cause dilution of control whereas a public issue makes the firm vulnerable to
takeovers.
b. To retain control, firm should issue debt.

FIXED CAPITAL
Fixed Capital: Definition
It refers to investment in long-term assets.

Factors Affecting Requirement of Fixed Capital

1. Nature of Business: Manufacturing concerns require huge investment in fixed assets & thus huge fixed
capital is required for them but trading concerns need less fixed capital as they are not required to purchase
plant and machinery etc.
2. Scale of Operations: An organization operating on large scale requires more fixed capital as compared to
an organization operating on small scale.
For Example – A large scale steel enterprise like TISCO requires large investment as compared to a mini
steel plant.
3. Choice of Technique: An organization using capital intensive techniques requires more investment in
plant & machinery as compared to an organization using labour intensive techniques.
4. Technology upgradation: Organizations using assets which become obsolete faster require more fixed
capital as compared to other organizations.
5. Growth Prospects: Companies having more growth plans require more fixed capital. In order to expand
production capacity more plant & machinery are required.
6. Diversification: In case a company goes for diversification then it will require more fixed capital to invest
in fixed assets like plant and machinery.
7. Distribution Channels: The firm which sells its product through wholesalers and retailers requires less
fixed capital.
8. Collaboration: If companies are under collaboration, Joint venture, then they need less fixed capital as
they share plant & machinery with their collaborators.

WORKING CAPITAL
Working Capital: Definition
The funds needed to meet the day-today operations of the business is called working capital.
Following are the factors which affect working capital requirements of an organization:
l. Nature of Business: A trading organization needs a lower amount of working capital as compared to a
manufacturing organization, as trading organization undertakes no processing work.
2. Scale of Operations: An organization operating on large scale will require more inventory and thus, its
working capital requirement will be more as compared to small organization.
3. Business Cycle: In the time of boom more production will be undertaken and so more working capital
will be required during that time as compared to depression.
4. Seasonal Factors: During peak season demand of a product will be high and thus high working capital
will be required as compared to lean season.
5. Credit Allowed: If credit is allowed by a concern to its customers than it will require more working capital
but if goods are sold on cash basis than less working capital is required.
6. Credit Availed: If a firm is able to purchase raw materials on credit from its suppliers than less working
capital will be required.
 38

7. Inflation: Working capital requirement is also determined by price level changes. For example, during
inflation prices of raw material, wages also rise resulting in increase in working capital requirements.
8. Operating Cycle/Turnover of Working Capital: Turnover means speed with which the working capital is
converted into cash by sale of goods. If it is speedier, the amount of working capital required will be less.
 39

MULTIPLE CHOICE QUESTIONS (1 MARK)

1 Which of the following is not an importance of financial planning?

(a) It helps in avoiding business shocks and surprises.
(b) If helps in co-coordinating various business functions.
(c) If helps to reduce waste, duplication of efforts and gaps in planning.
(d) It tries to delink the present with the future.

2 Under which of the following situations a company is not likely to issue equity capital?
(a) When the debt service coverage ratio is high.
(b) When the interest coverage ratio is high.
(c) When the cost of debt capital is low.
(d) All of the above

3 A decision to acquire a new & modern plant to upgrade an old one is known as__________ decision.
a) Financing decision
(b) Working capital decision
(c) Investment decision
(d)Dividend decision.
4 The primary objective financial management is………………………………
(a). to maximize the return
(b). to minimize the risk
(c ). to maximize the wealth of owners
(d) to maximize profit
5 Ensuring………….. availability of funds at the right time is an objective of financial planning
(a) Enough
(b) Excess
(c) Least
(d) Maximum
6 A company is likely to declare higher dividends if
(a) Tax rates are high
(b) Tax rates are relatively lower
(c) Tax rate has no effect on dividend declaration
(d) None of the above

7 Name the decision which affects both the profitability and the financial risk.
(a) Financial planning decision
(b) Capital budgeting decision
(c) Capital structure decision
(d) All of the above

8 Gross working capital represents the total investment in ___________ assets.

(a) Current
(b) Fixed
(c) Tangible
d) Intangible
9 Financial management mainly focuses on:
a) Efficient management of every business
b) Brand dimension
c) Arrangement of funds
d) All elements of acquiring and using means of financial resources for financial activities
 40

10 ___________ is concerned with optimum procurement as well as usage of finance.

(a) Financial Analysis
(b) Financial Planning
(c) Financial Management
(d) Budgeting
11 _____________ involves increasing the proportion of debt and preference shares in total capital.
(a) Trading on equity
(b) Capital Budgeting
(c) Financing decision
(d) Financial Analysis
12 Which of the following factors affect financial decision?
(a) Cost
(b) Risk
(c) Cash flow position
(d) All of the above
13 Investment can be defined as
(a) Person’s dedication to purchasing a house or flat
b) Use of capital on assets to receive returns
c) Usage of money on a production process of products and services
d) Net additions made to the nation’s capital stocks
14 ABC Ltd. has Debt Equity ratio of 3:1 whereas XYZ Ltd. has Debt Equity ratio of 1:1. Name the
advantage ABC Ltd will have over XYZ Ltd, when the rate of interest is lower than the rate of return
on investment of the company.

(a) Trading on equity

(b) Low risk
(c) Low cost of equity
(d) Greater flexibility
15 _____________ is the time span between acquisition of goods and realisation of sale proceeds.
(a) Working capital
(b) Payback Period
(c) Operating Cycle
(d) Account Receivables Period
SHORT ANSWER TYPE QUESTIONS (3/4 MARK)

1 Discuss the two objectives of Financial Planning.

2 Financial management is based on three broad financial decisions. What are these?
3 What is the main objective of financial management? Explain briefly.
4 What is the role and objectives of financial management for this company?
5 ‘Style India’ is India’s second largest manufacturer of branded Lifestyle Clothes. The company now
plans to diversify into personal care segment by launching hair care and skin care products. Moreover,
it is planning to open ten exclusive retail outlets in various cities across the country in next two years.
In context of the above case:

1. Identify the two factors affecting the fixed capital needs of the company by quoting lines from
the paragraph.
2. Why is the management of fixed capital considered to be an important for a business?

6 What is meant by Capital Budgeting? State any three factors which affect the Capital Budgeting
decision.
 41

LONG ANSWER TYPE QUESTIONS (5/6 MARKS)

1 ‘Tie a knot’ is a popular online matrimonial website. It seeks to provide personalized match making
service. The company has 80 offices in India, and is now planning to open offices in Singapore, Dubai
and Canada to cater to its customers beyond the country. The company has decided to opt for the
sources of equity capital to raise the required amount of capital.
In context of the above case:

1. Identify and explain the type of risk which increases with the higher use of debt.
2. Explain briefly any four factors because of which you think the company has decided to opt
for equity capital.

2 Booms Ltd. is a company engaged in production of organic foods. Presently, it sells its products
through indirect channels of distribution. But, considering the sudden surge in the demand for organic
products, the company is now inclined to start its online portal for direct marketing. The financial
managers of the company are planning to use debt in order to take advantage of trading on equity. In
order to finance its expansion plans, it is planning to ‘ raise a debt capital of Rs. 40 lakhs through a
loan @ 10% from an industrial bank. The present capital base of the company comprises of Rs. 9 lakh
equity shares of Rs. 10 each. The rate of tax is 30%.
In the context of the above case:

1. What are the two conditions necessary for taking advantage of trading on equity?
2. Assuming the expected rate of return on investment to be same as it was for the current year
i.e. 15% , do you think the financial managers will be able to meet their goal. Show your
workings clearly.

3 Tata International Ltd. earned a net profit of Rs. 50 crores. Ankit, the finance manager of Tata
International Ltd. wants to decide how to appropriate these profits. Discuss any five factors which will
help him in taking this decision.
4 “A business that doesn’t grow dies”, says Mr. Shah, the owner of Shah Marble Ltd. with glorious 36
months of its grand success having a capital base of RS.80 crores. Within a short span of time, the
company could generate cash flow which not only covered fixed cash payment obligations but also
create sufficient buffer. The company is on the growth path and a new breed of consumers is eager to
buy the Italian marble sold by Shah Marble Ltd. To meet the increasing demand, Mr. Shah decided to
expand his business by acquiring a mine. This required an investment of RS.120 crores. To seek
advice in this matter, he called his financial advisor Mr. Seth who advised him about the judicious
mix of equity (40%) and Debt (60%). Mr. Seth also suggested him to take loan from a financial
institution as the cost of raising funds from financial institutions is low. Though this will increase the
financial risk but will also raise the return to equity shareholders. He also apprised him that issue of
debt will not dilute the control of equity shareholders. At the same time, the interest on loan is a tax-
deductible expense for computation of tax liability. After due deliberations with Mr. Seth, Mr. Shah
decided to raise funds from a financial institution.

1. Identify and explain the concept of Financial Management as advised by Mr. Seth in the above
situation.
2. State the four factors affecting the concept as identified in part (1) above which have been
discussed between Mr. Shah and Mr. Seth.
5 Explain the importance of having a financial plan for this company.

6 Capital structure decision is essentially optimization of risk-return relationship. Comment.

 42

ANSWERS

1 (d) It tries to delink the present with the future.

2 (d) All of the above
3 (c) Investment decision;
4 (c) to maximize the wealth of owners

5 (a)Enough
6 (b) Tax rates are relatively lower
7 (c) Capital structure decision
8 (a) Current

9 d) All elements of acquiring and using means of financial resources for financial activities
10 (c) Financial Management

11 (a) Trading on equity

12 (d) All of the above

13 B) Use of capital on assets to receive returns
14 (a) Trading on equity

15 (c) Operating Cycle

SHORT ANSWER TYPE QUESTIONS (3/4 MARK)

1 Financial Planning strives to achieve the following two objectives

(i) To Ensure Availability of Funds whenever These are Required This includes a proper
estimation of the funds required for different purposes such as for the purchase of long-term
assets or to meet day-to-day expenses of business etc.
(ii) To See That the Firm Does Not Raise Resources Unnecessarily
Excess funding is almost as bad as inadequate funding. Efficient financial planning ensures that
funds are not raised unnecessarily in order to avoid unnecessary addition of cost.

2 Financial management is concerned with the solution of three major issues relating to the
financial operations of a firm corresponding to the three questions of investment, financing and
dividend decision. In a financial context, it means the selection of best financing alternative or
best investment alternative. The finance function therefore, is concerned with three broad
decision which are as follows:-
(i) Investment Decision
The investment decision relates to how the firm’s funds are invested in different assets.
(ii) Financing Decision
This decision is about the quantum of finance to be raised from various long term sources and
short term sources. It involves identification of various available sources of finance.
(iii) Dividend Decision
This decision relates to distribution of dividend. Dividend is that portion of profit which is
distributed to shareholders the decision involved here is how much of the profit earned by
company is to be distributed to the shareholders and how much of it should be retained in the
business for meeting investment requirements.

3 Primary aim of financial management is to maximise shareholder’s wealth, which is referred to

as the wealth maximisation concept. The wealth of owners is reflected in the market value of
shares, wealth maximisation means the maximisation of market price of shares.
 43

According to the wealth maximisation objective, financial management must select those
decisions which result in value addition, that is to say the benefits from a decision exceed the
cost involved. Such value addition I increase the market value of the company’s share and hence
result in maximisation of the shareholder’s wealth.

4 Role of Financial Management Financial management is concerned with the proper

management of funds. It involves:
(i) Managerial decisions relating to procurement of long term and short-term funds.
(ii) Keeping the risk associated with respect to procured funds under control.
(iii) Utilisation of funds in the most productive and effective manner
(iv) Fixed debt equity ratio in capital.

5 1. The factors affecting the fixed capital needs of the company are as follows:
o Diversification: If a business enterprise plans to diversify into new product lines, its
requirement of fixed capital will increase.
o Growth prospects: If a business enterprise plans to expand its current business
operations in the anticipation of higher demand, consequently, more fixed capital will be
needed by it.
2. The management of fixed capital is considered important because:
o It affects the growth and profitability of business in future.
o It involves huge investment outlay in terms of investment in land, building, machinery
etc.
o It influences the overall level of business risk of the organization.
o If these decisions are reversed, they may lead to major losses.

6 A long-term investment decision is also called a capital budgeting decision. It involves

committing the finance on a long-term basis, e.g. making investment in a new machine to
replace an existing one or acquiring a new fixed asset or opening a new branch.
Factors affecting capital budgeting/long-term investment decisions are:
(i) Cash flow of the project Whenever a company is investing huge funds in an investment
proposal, it expects some regular amount of cash to meet day-to-day requirements. The amount
of cash flow of an investment proposal will be assessed properly before investing in the
proposal.
(ii) Return on investment The most important criteria to decide the investment proposal is rate
of return it will bring back for company, e.g. if project A is bringing 10% return and project B is
bringing 15% return then, a businessman would prefer project B.
(iii) Risk involved With every investment proposal, some degree of risk is also involved. The
company must try to calculate the risk involved in every proposal and .should prefer the
investment proposal with moderate degree of risk only.
LONG ANSWER TYPE QUESTIONS (5/6 MARKS)
1 1. Financial risk of the company increases with the higher use of debt. This is because
issue of debt involves fixed commitment in terms of payment of interest and repayment
of capital. Financial risk refers to a situation when a company is unable to meet its
fixed financial charges.
2. The factors because of which the company has decided to opt for equity capital are as
follows:
o Capital market conditions: The state of capital market is bullish, so people are likely to
invest more in equity.
o Fixed operating cost: The fixed operating cost of company is high so it cannot take the
further burden fixed commitment in terms of payment of interest and repayment of
capital by issuing debt.
o Cash flow position: The cash flow position of the company is weak so it cannot meet
 44

the fixed obligations involved in issue of debt.

o Risk: The proportion of debt in its capital structure is already high so it cannot issue
further debt, thereby endangering the solvency of the company.

2 1. The two conditions necessary for taking advantage of trading on equity are :
o The rate of return on investment should be more than the rate of interest.
o The amount of interest paid should be tax deductible.
2.

Situation 1 Situation 2
Sources
Amount (in Rs.) Amount (in Rs.)
Equity shares 90,00,000 90,00,000
10 % Debentures NIL 40,00,000
Total Capital 90,00,000 1,30,00,000
EBIT 13,50,000 19,50,000
Less: Interest — – (4,00,000)
EBT 13,50,000 15,50,000
Less: Tax @ 30% – (4,05,000) – (4,65,000)
EAT 9,45,000 10,85,000
No. of shares of Rs. 10
9,00,000 9,00,000
each
9,45,000/9,00,000 10,85,000/9,00,000
EPS
= 1.05 = 1.21

Yes, the financial managers will be able to meet their goal as the projected EPS, with the issue
of debt, is higher than the present EPS.

3 The five factors which will help Ankit, in taking the dividend decision are described below:

 Earnings: Since the dividends are paid out of current and past earnings, there is a direct
relationship between the amount of earnings of the company and the rate at which it
declares dividend. If the earnings of the company are high, it may declare a higher
dividend or vice-versa.
 Cash flow position: Since the dividends are paid in cash, if the cash flow position of the
company is good it may declare higher dividend or vice-versa.
 Access to capital market: If the company enjoys an easy access to capital market
because of its credit worthiness. It does not feel the need to depend entirely on retained
earnings to meet its financial needs. Hence, it may declare higher dividend or vice-versa.
 Growth prospects: If the company has any forthcoming investment opportunities, it
may like to retain profits to finance its expansion projects. This is because retained
profits is considered to be the cheapest source of finance as it doesn’t involve any
explicit costs. Hence, it may declare lower dividend or vice-versa.
 Preferences of the shareholders: The companies paying stable dividends are always
preferred by small investors primarily if they want regular income in the form of ‘stable
returns’ from their investments. Large shareholders may be willing to forgo their present
dividend in pursuit of higher profits in future. Therefore, the preferences of the
 45

shareholders must be taken into consideration.

4 1. Capital structure is the concept of Financial Management as advised by Mr. Seth in the
above situation. Capital structure refers to the mix between owners funds and borrowed
funds.
2. The four factors affecting capital structure which have been discussed between Mr. Shah
and Mr. Seth are explained below:
o Cash flow position: The issue of debt capital involves a fixed burden on the company in
the form of payment of interest and repayment of capital. Therefore if the cash flow
position of a company is good it may issue debt else equity to raise the required amount
of capital.
o Risk Consideration: Financial risk refers to a situation when a company is unable to
meet its fixed financial charges. Financial risk of the company increases with the higher
use of debt. This is because issue of debt involves fixed commitment in terms of
payment of interest and repayment of capital.
o Tax rate: Considering the fact that amount of interest paid is a deductible expense, cost
of debt is affected by the tax rate. If for example a firm is borrowing @ 10% and the tax
rate is 30%, the after tax cost of debt is only 7%. Therefore, when the tax rate is higher it
makes debt relatively cheaper and increases its attraction vis-a-vis equity.
o Control: The issue of debentures doesn’t affect the control of the equity shareholders
over the business as the debenture holders do not have the right to participate in the
management of the business.

5 Importance of financial plan for the company

(i) Financial Planning ensures provision of adequate funds to meet working capital
requirements.
(ii) It brings about a balance between in flow and out flow of funds and ensures liquidity
throughout the year.
(iii) It solves the problems of shortage and surplus of funds and ensures proper and optimum
utilisation of available resources.
(iv) It ensures increased profitability through cost benefit analysis and by avoiding wasteful
operations.
(v) It seeks to eliminate waste of funds and provides better financial control.
(vi) It seeks to avail the benefits of trading on equity
6 i. Capital structure decision is related to proportion of debt (risk) and equity (return).
ii. ii. Debt is cheaper but is more risky for a business because payment of interest and
the return of principal is obligatory for the business. Any default in meeting these
commitments may force the business to go into liquidation. There is no such
compulsion in case of equity, which is therefore, considered riskless for the
business.
iii. iii. Debt component in the total capital generates higher return for equity
shareholders as interest payable on debt is deductible from earning before tax
payment. iv. Thus, capital structure decision affects risk as well as return. So, it is
true capital structure decision is essentially optimization of risk-return relationship.

*****
 46

CHAPTER 10

FINANCIAL MARKET

CONCEPT OF FINANCIAL MARKET:

A business is a part of an economic system that consists of two main sectors – households which save
funds and business firms which invest these funds. A financial market helps to link the savers and the
investors by mobilizing funds between them.
It allocates funds available for investment into their most productive investment opportunity.
Households can deposit their surplus funds with banks, who in turn could lend these funds to business
firms. Alternately, households can buy the shares and debentures offered by a business using financial
markets. The process by which allocation of funds is done is called financial intermediation.

FUNCTIONS OF FINANCIAL MARKET:

1. Mobilisation of Savings and Channeling them into the most Productive Uses: A financial market
facilitates the transfer of savings from savers to investors.
2. Facilitating Price Discovery: In the financial market, the households are suppliers of funds and
business firms represent the demand. The interaction between them helps to establish a price for the
financial asset.
3. Providing Liquidity to Financial Assets: Financial markets facilitate easy purchase and sale of
financial assets. In doing so they provide liquidity to financial assets, so that they can be easily
converted into cash whenever required.
4. Reducing the Cost of Transactions: Financial markets provide valuable information about securities
being traded in the market. It helps to save time, effort and money that both buyers and sellers of a
financial asset would have to otherwise spend to try and find each other.
5. Financial markets are classified on the basis of the maturity of financial instruments traded in them.
Instruments with a maturity of less than one year are traded in the money market. Instruments with
longer maturity are traded in the capital market.

MONEY MARKET
The money market is a market for short term funds which deals in monetary assets whose period of maturity
is upto one year. It is a market where low risk, unsecured and short term debt instruments that are highly
liquid are issued and actively traded everyday.

The major participants in the market are the Reserve Bank of India ,Commercial Banks, Non-Banking
Finance Companies, State Governments, Large Corporate Houses and Mutual Funds.

MONEY MARKET INSTRUMENTS

1.Treasury Bill: A Treasury bill is basically an instrument of short-term borrowing by the Government of
India maturing in less than one year. They are also known as Zero Coupon Bonds issued by the Reserve
Bank of India on behalf of the Central Government to meet its short-term requirement of funds. They are
 47

issued at a price which is lower than their face value and repaid at par. Treasury bills are available for a
minimum amount of Rs 25,000 and in multiples thereof.

2.Commercial Paper: Commercial paper is a short-term unsecured promissory note, negotiable and
transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy
companies to raise short-term funds at lower rates of interest than market rates. It usually has a maturity
period of 15 days to one year. It is sold at a discount and redeemed at par. The original purpose of
commercial paper was to provide short-terms funds for seasonal and working capital needs. Funds raised
through commercial paper are used to meet the floatation costs. This is known as Bridge Financing.

3.Call Money: Call money is short term finance repayable on demand, with a maturity period of one day to
fifteen days, used for inter-bank transactions. Commercial banks have to maintain a minimum cash balance
known as cash reserve ratio. Call money is a method by which banks borrow from each other to be able to
maintain the cash reserve ratio. The interest rate paid on call money loans is known as the call rate.

4. Certificate of Deposit: Certificates of deposit (CD) are unsecured, negotiable, short-term

instruments in bearer form, issued by commercial banks and development financial institutions. They
can be issued to individuals, corporations and companies during periods of tight liquidity when the
deposit growth of banks is slow but the demand for credit is high.
5. Commercial Bill: A commercial bill is a bill of exchange used to finance the working capital
requirements of business firms. When goods are sold on credit, the buyer becomes liable to make
payment on a specific date in future. The seller could wait till the specified date or make use of a bill
of exchange. The seller (drawer) of the goods draws the bill and the buyer (drawee) accepts it. On
being accepted, the bill becomes a marketable instrument and is called a trade bill. These bills can be
discounted with a bank if the seller needs funds before the bill matures. When a trade bill is accepted
by a commercial bank it is known as a commercial bill.

CAPITAL MARKET

The term capital market refers to facilities and institutional arrangements through which long-term
funds, both debt and equity are raised and invested.

The Capital Market can be divided into two parts:

a. Primary Market
b. Secondary Market

Distinction between Capital Market and Money Market

(i) Participants: The participants in the capital market are financial institutions, banks,
corporate entities, foreign investors and ordinary retail investors from members of the public.
Participation in the money market is by and large undertaken by institutional participants
such as the RBI, banks, financial institutions and finance companies.
(ii) Instruments: The main instruments traded in the capital market are – equity shares,
debentures, bonds, preference shares etc. The main instruments traded in the money market
are short term debt instruments such as T-bills, trade bills reports, commercial paper and
certificates of deposit.
(iii) Investment Outlay: Capital market securities does not necessarily require a huge financial
outlay. In the money market, transactions entail huge sums of money as the instruments are
quite expensive.
 48

(iv) Duration: The capital market deals in medium and long term securities such as equity shares
and debentures. Money market instruments have a maximum tenure of one year, and may
even be issued for a single day.
(v) Liquidity: Capital market securities are considered liquid investments because they are
marketable on the stock exchanges. Money market instruments on the other hand, enjoy a
higher degree of liquidity.
(vi) Safety: Capital market instruments are riskier both with respect to returns and principal
repayment. But the money market is generally much safer with a minimum risk of default.
(vii) Expected return: The investment in capital markets generally yield a higher return for
investors than the money markets.
PRIMARY MARKET : The primary market is also known as the new issues market. It deals with
new securities being issued for the first time. The essential function of a primary market is to
facilitate the transfer of investible funds from savers to entrepreneurs seeking to establish new
enterprises or to expand existing ones through the issue of securities for the first time.

The investors in this market are banks, financial institutions, insurance companies, mutual funds and
individuals. A company can raise capital through the primary market in the form of equity shares,
preference shares, debentures, loans and deposits.

Methods of Floatation:

1. Offer through Prospectus: This involves inviting subscription from the public through issue of
prospectus. A prospectus makes a direct appeal to investors to raise capital, through an
advertisement in newspapers and magazines.
2. Offer for Sale: Under this method securities are not issued directly to the public but are offered
for sale through intermediaries like issuing houses or stock brokers
3. Private Placement: Private placement is the allotment of securities by a company to institutional
investors and some selected individuals
4. Rights Issue: This is a privilege given to existing shareholders. The shareholders are offered the
‘right’ to buy new shares in proportion to the number of shares they already possess.
5. e-IPOs: A company proposing to issue capital to the public through the on-line system of the
stock exchange has to enter into an agreement with the stock exchange. This is called an Initial
Public Offer (IPO). SEBI registered brokers have to be appointed for the purpose of accepting
applications and placing orders with the company.
SECONDARY MARKET:

The secondary market is also known as the stock market or stock exchange. It is a market for the
purchase and sale of existing securities. It helps existing investors to disinvest and fresh investors to
enter the market. It also provides liquidity and marketability to existing securities. It also contributes
to economic growth by channelising funds towards the most productive investments through the
process of disinvestment and reinvestment.

STOCK EXCHANGE: A stock exchange is an institution which provides a platform for buying and
selling of existing securities.

According to Securities Contracts (Regulation) Act 1956, stock exchange means any body of
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or
controlling the business of buying and selling or dealing in securities.
 49

Functions of a Stock Exchange

1. Providing Liquidity and Marketability to Existing Securities: The basic function of a stock exchange
is the creation of a continuous market where securities are bought and sold. This provides both liquidity and
easy marketability to already existing securities in the market.

2. Pricing of Securities: Share prices on a stock exchange are determined by the forces of demand and
supply. A stock exchange is a mechanism of constant valuation through which the prices of securities are
determined. Such a valuation provides important instant information to both buyers and sellers in the
market.

3. Safety of Transaction: The membership of a stock exchange is well regulated and its dealings are well
defined according to the existing legal framework.

4. Contributes to Economic Growth: A stock exchange is a market in which existing securities are resold
or traded. This leads to capital formation and economic growth.

5. Spreading of Equity Cult: The stock exchange can play a vital role in ensuring wider share ownership
by regulating new issues, better trading practices and taking effective steps in educating the public about
investments.

6. Providing Scope for Speculation: The stock exchange provides sufficient scope within the provisions of
law for speculative activity in a restricted and controlled manner.

Trading Procedure on a Stock Exchange:

The Trading procedure involves the following steps:

1. Selection of a broker:
The buying and selling of securities can only be done through SEBI registered brokers who are members of
the Stock Exchange. The broker can be an individual, partnership firms or corporate bodies. So the first step
is to select a broker who will buy/sell securities on behalf of the investor or speculator.
2. Opening Demat Account with Depository:
Demat (Dematerialized) account refer to an account which an Indian citizen must open with the depository
participant (banks or stock brokers) to trade in listed securities in electronic form. Second step in trading
procedure is to open a Demat account.
The securities are held in the electronic form by a depository. Depository is an institution or an organization
which holds securities (e.g. Shares, Debentures, Bonds, Mutual (Funds, etc.) At present in India there are
two depositories: NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.)
There is no direct contact between depository and investor. Depository interacts with investors through
depository participants only.
Depository participant will maintain securities account balances of investor and intimate investor about the
status of their holdings from time to time.
3. Placing the Order:
After opening the Demat Account, the investor can place the order. The order can be placed to the broker
either (DP) personally or through phone, email, etc.
ADVERTISEMENTS:
Investor must place the order very clearly specifying the range of price at which securities can be bought or
sold. e.g. “Buy 100 equity shares of TATA for not more than Rs 500 per share.”
4.Executing the Order:
 50

As per the Instructions of the investor, the broker executes the order i.e. he buys or sells the securities.
Broker prepares a contract note for the order executed. The contract note contains the name and the price of
securities, name of parties and brokerage (commission) charged by him. Contract note is signed by the
broker.
5. Settlement:
This means actual transfer of securities. This is the last stage in the trading of securities done by the broker
on behalf of their clients. There can be two types of settlement.
(a) On the spot settlement:
It means settlement is done immediately and on spot settlement follows. T + 2 rolling settlement. This
means any trade taking place on Monday gets settled by Wednesday.
(b) Forward settlement:
It means settlement will take place on some future date. It can be T + 5 or T + 7, etc. All trading in stock
exchanges takes place between 9.55 am and 3.30 pm. Monday to Friday

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI):

The Securities and Exchange Board of India was established by the Government of India on 12 April 1988
as an interim administrative body to promote orderly and healthy growth of securities market and for
investor protection.

Objectives of SEBI:

The overall objective of SEBI is to protect the interests of investors and to promote the development of, and
regulate the securities market.:
1. To regulate stock exchanges and the securities industry to promote their orderly functioning.
2. To protect the rights and interests of investors and to guide and educate them.
3. To prevent trading malpractices.
4. To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant
bankers etc.
Functions of SEBI:
Regulatory Functions
 51

1. Registration of brokers and sub-brokers and other players in the market.

2. Registration of collective investment schemes and Mutual Funds.
3. Regulation of stock brokers, underwriters and merchant bankers
4. Regulation of takeover bids by companies.
5. Calling for information by undertaking inspection, conducting enquiries and audits of

stock exchanges and intermediaries.

6. Levying fee or other charges for carrying out the purposes of the Act.
7. Performing and exercising such power under Securities Contracts (Regulation) Act 1956, as may be
delegated by the Government of India.
Development Functions:
1. Training of intermediaries of the securities market.
2. Conducting research and publishing information useful to all market participants.
3. Undertaking measures to develop the capital markets by adapting a flexible approach.
Protective Functions:
1. Prohibition of fraudulent and unfair trade practices like making misleading statements, manipulations,
price rigging etc.
2. Controlling insider trading and imposing penalties for such practices.
3. Undertaking steps for investor protection.
4. Promotion of fair practices and code of conduct in securities market.

Questions for Practice

1 It is an instrument of short-term borrowing by the government of India maturing in less than one year.
(a) commercial bill (b) treasury bill
(c) call money (d) none of the above
2 It is used as an alternative to bank borrowing for large and creditworthy companies.
(a) commercial bill (b) commercial papers
(c) call money (d) none of the above
 52

3 It is a market for short-term funds which deals in monetary assets whose period of maturity is up to one
year.
(a) primary market (b) secondary market
(c) capital market (d) money market
4 Who issues a treasury bill?
(a) any nationalized bank (b) any private sector bank
(c) Reserve bank of India (d) all of the above
5 It is a method by which banks borrow from each other to be able to maintain the cash reserve ratio.
(a) commercial bill (b) commercial papers
(c) call money (d) none of the above
6 The capital market consists of
(a) development banks (b) commercial banks
(c) stock exchanges (d) all of the above
7 A company can raise capital through the primary market in the form of
(a) equity shares (b) preference shares
(c) debentures (d) all of the above
8 It is a short-term, negotiable, self-liquidating instrument which is used to finance the credit sales of
firms.
(a) commercial bill (b) commercial papers
(c) call money (d) none of the above
9 Which of the following statements is not true with regard to primary market?
(a) is also known as the old issues market.
(b) it facilitates the transfer of investible funds from savers to entrepreneurs.
(c) it deals with new securities being issued for the first time.
(d) it facilitates the transfer of investible funds from savers to entrepreneurs.
10 Which of the following is not a protective function of stock exchange?
(a) prohibition of fraudulent and unfair trade practices.
(b) controlling insider trading.
(c) regulation of takeover bids by companies.
(d) promotion of fair practices and code of conduct in securities market.
11 Which of the following statements is true with regard to financial markets?
(a) they link the households which save funds and business firms which invest these funds.
(b) they work as an intermediary between the savers and the investors by mobilizing funds between
them.
(c) they allocate funds available for investment into their most productive investment opportunity.
(d) all of the above
12 Which of the following statements is not true with regard to capital market?
(a) the funds are raised for a short period of time.
(b) both debt and equity funds can be raised.
(c) it is classified into two types.
(d) all of the above.
13 Which of the following statements is not true with regard to money market?
(a) it involves low market risk.
(b) it is situated at specific locations.
(c) deals in unsecured and short-term debt instruments.
(d) the instruments traded are highly liquid.
14 Which of the following participants represent capital market?
(a) development banks (b) commercial banks
(c) stock exchanges (d) all of the above
15 Under this method of floatation in primary market, a subscription is invited from general public to
invest in the securities of a company through the issue of advertisement.
(a) private placement (b) offer through prospectus
(c) offer for sale (d) all of the above
 53

16 Jaykant is holding hundred shares of a company. He has been given a privilege offer to subscribe to a
new issue of shares of the same company in proportion of 2:1 to the number of shares already
possessed by him. Identify the method of floatation being described in the above case.
(a) offer through prospectus (b) offer for sale
(c) rights issue (d) private placement
17 Stock exchange works as a mechanism for valuation of securities through the forces of demand and
supply. Identify the related function performed by the stock exchanges.
(a) providing liquidity and marketability to existing securities.
(b) safety of transaction.
(c) pricing of security.
(d) spreading of equity cult
18 Stock exchanges provide an opportunity to the investors to disinvest and invest. Identify the related
function of the stock exchange.
(a) providing scope for speculation.
(b) providing liquidity and marketability to existing securities.
(c) pricing of security.
(d) spreading of equity cult
19 The process of holding shares in electronic form is known as
(a) demutualization (b) dematerialization
(c) speculation (d) none of the above
20 One of the common irregularities noted by the securities and exchange board of India during the
inspection of a stock exchange was that it was dealing with unregistered sub-brokers. Identify the
related function of securities and exchange board of India.
(a) regulatory function (b) protective function
(c) developmental function (d) none of the above
21 It acts like a bank and keeps securities in electronic form on behalf of the investor.
(a) depository participant (b) depository
(c) stock exchange (d) none of the above
22 It is a number assigned to each transaction by the stock exchange and is printed on the contract note.
(a) pan number (b) unique order code
(c) contract note (d) none of the above
23 The mandatory detail that an investor has to provide to the broker at the time of opening a demat
account is
(a) date of birth and address (b) pan number
(c) residential status (Indian/NRI) (d) bank account details
24 When is a trade confirmation slip issued to the investor?
(a) on placing an order (b) on execution of the order
(c) on settlement of the order (d) none of the above
25 After the trade has been executed, the broker issues a contract note to the investor within
(a) 52 hours (b) 24 hours
(c) 48 hours (d) 12 hours
26 Incorporated in 1990, raju diary ltd is one of the leading manufacturers and marketers of diary-based
branded foods in india. In the initial years, its operation were restricted only to collection and
distribution of milk. But, over the years it has gained a reasonable market share by offering a diverse
range of diary based products including fresh milk, flavored yogurt, ice creams, butter milk, cheese,
ghee etc. In order to raise the capital finance its expansion plans, raju diary ltd. Has decided to approach
capital market through a mix of offer for sale of 4 crore shares and a public issue of 2 crores shares.
In context of the above case:
(a) Name and explain the segment of capital being approached by the company
(b) Identify the methods of floatation used by the company to raise the required capital. Give one
difference between them.
27 Financial market plays an important role in the allocation of scarce resources in an economy by
performing various functions” explain any three functions of financial market.
 54

28 What is another name of secondary market? Explain the trading procedure of it.

29 After doing a course in online trading, Arsh started an online portal for stock trading under the name
‘investment guru’. He met his school friend Ajay after a long time in a bank where Ajay had come to
open a d-mat account. Arsh urged Ajay to invest in the forthcoming IPO of a blue chip companies
whereas Ajay was inclined to buy existing securities of the other companies to build his investment
portfolio.
In context of the above case:
(a) Identify the two different types of capital market being referred to by quoting lines from the
para.
(b) State any four differences between the two different types of capital markets as identified in
part (a).
30 Ganesh steel ltd.‟ is a large and credit-worthy company manufacturing steel for the Indian market. It
now wants to enter in to the Asian market and decides to invest in new hi-tech machines. Since the
investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares.
The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost the
company decides to tap the money market.
1. Name and explain the money-market instrument the company can use for the above
purpose.

2. What is the duration for which the company can get funds through this instrument?
State any other purpose for which this instrument can be used.
31 Saqib ltd. Is a large credit worthy company operating in the Kashmir valley. It is an export oriented
unit, dealing in exclusive embroidered shawls. The floods in the valley have created many problems for
the company. Many craftsmen and workers have been dislocated and raw material has been destroyed.
The firm is therefore, unable to get an uninterrupted supply or raw material, and the duration of the
production cycle has also increased. To add to the problems of the organization, the suppliers of raw
material who were earlier selling on credit are asking the company, for advance payment or cash
payment on delivery. The company is facing a liquidity crisis. The CEO of the company feels that
taking a bank loan is the only option with the company to meet its short term shortage of cash.
as a finance manager of the company name and explain the alternative to bank borrowing that the
company can use to resolve the crisis.
32 The directors of a company want to modernize its plant and machinery by making a public issue of
shares. They wish to approach the stock exchange, while the finance manager prefers to approach a
consultant for the new public issue of shares.

advise the directors whether to approach the stock exchange or a consultant for new public issue of
shares and why. Also advise them about different methods which the company may adopt for the new
public issue of shares.

33 Sumita is a professor in a reputed business institute. While explaining the procedure of stock exchange
trading, she shared with her students that many years back she had bought 200 shares of a leading
automobiles company. As per the settlement procedure she paid for the shares and received the share
certificates in physical form. However, when she had sent those certificates to the company to get them
endorsed in her name, she was informed by the company that those certificates were duplicate.
Therefore, in order to protect the investors from many such malpractices, now only screen – based
trading is done and dematerialization is compulsory. In context of the above case:
1. What is screen based trading?
2. Give the meaning of „dematerialization‟. State any two of its advantages.
34 A company require Rs. 2 crore for inventory, payment of wages, salaries, maintaining bank
balance, etc.
1. Suggest which financial market company may approach and why?
 55

2. State the instruments to raise finance in that market.

35 Supriya’s grandmother who was unwell, called her and gave her as gift packet. Supriya opened the
packet and saw many crumpled share certificates inside. Her grandmother told her that they had been
left behind by her late grandfather
As no trading is now trading is done on physical form, Supriya wants to know the process by
adopting which she is in a position to deal with these certificates.
(a) identify and state the process
(b) Also, give two reasons to Supriya why dealing with shares in physical form has been
stopped.
36 The SEBI has imposed a penalty of 7269.5 crore on pearls Agrotech corporation limited (pacl) and its
four directors- Tarlochan Singh, Sukudev Singh , Gurmeet Singh, and Subrata Bhatacharya who had
mobilized funds from the general public through illegal collective investments schemes in the name of
purchase and development of agriculture land. While imposing the penalty, the biggest in its history,
securities and exchange boards of India said the company deserved maximum penalty for duping the
common man. Its prevention of fraudulent and unfair trade practices regulations provides for severe
penalties for dealing with such violation. As per SEBI norms, it can impose penalty of 25 crore or three
times of the profit made by indulging in fraudulent and unfair trade practices of the illicit gains.
in the context of the above case:
State the objectives of setting up SEBI
Identify the type of function performed by SEBI by quoting lines from the above paragraph.

37 Few years ago, there were many malpractices, unfair trade practices and frauds and scams were taking
place in stock exchange. All these affected investor’s confidence, faith and trust in stock exchange. The
government of India decided to set up a separate body for this purpose who was given control of stock
exchange. This separated ownership and control of stock exchange.
Name the concept which separate the ownership and control of stock exchange.
Name the body set up by the government of India to contract the stock exchange.
State the objectives of that regulating body.
38 These days, the development of a country is also judged by its system of transferring finance from the
sector where it is in surplus to the sector where it is needed most. To give strength to the economy,
SEBI is undertaking measures to develop the capital market in which unsecured and short-term debt
instruments are actively traded every day. these markets together help the savers and investors in
directing the available funds into their most productive investment opportunity.
a. Name the function being performed by the market in the above case.
b. Also, explain briefly three other functions performed by this market.
39 A company require RS. 2 crores for inventory, payment of wages, salaries, maintaining bank balance,
etc.
1. Suggest which financial market company may approach and why?
2. State the instruments to raise finance in that market.

40 Veeru works as a waiter in a five-star hotel in Mumbai. while serving the customer he overhears him at
the table saying that the he has made profits higher than expected by investing in securities market. So,
Ragu also decides to make a nominal investment from his saving in the stock market in pursuit of
higher gains:
In context of the above case:
As a financial consultant, apprise him of the steps involved in the working of a demat system.
 56

ANSWERS
1 Treasury bill
2 Commercial papers
3 Money market
4 Reserve bank of India
5 Call money
6 All of the above
7 All of the above
8 Commercial bill
9 Is also known as the old issues market
10 Regulation of takeover bids by companies.
11 All of the above
12 The funds are raised for a short period of time.
13 It is situated at specific locations.
14 All of the above
15 Offer through prospectus
16 Rights issue
17 Pricing of security.
18 Providing liquidity and marketability to existing securities
19 Dematerialization
20 Regulatory function
21 Depository
22 Unique order code
23 Pan number
24 On execution of the order
25 24 hours
26 Primary market is the segment.
a. The two methods of floatation are –issue through prospectus and offer for sale.
b. In case of issue through prospectus, the company approaches the members directly by
issuing a prospectus whereas in offer for sale through intermediaries.
27 1.mobilization of savings and channelling them into the most productive uses: a financial market
facilitates the transfer of savings from savers to investors (industries)
2.facilitates price discovery: in the financial market, the households are suppliers of funds and
business firms represent the demand. The interaction between them helps to establish a price for the
financial asset which is being traded in that particular market.
3. Provide liquidity to financial assets: financial markets facilitate easy purchase and sale of financial
assets. In doing so they provide liquidity to financial assets, so that they can be easily converted into
cash whenever required
28 Trading procedure: -
The procedure for purchase and sale of securities in a stock exchange involves the following steps:

1. Selection of broker -the first step is to select a broker who will buy/sell securities on behalf of
the investor. This is necessary because trading of securities can only be done through sebi registered
brokers who are the members of a stock exchange.
2. Opening demat account -the next step is to open a demat account. Demat (dematerialised)
account refers to an account which an Indian citizen must open with the depository participant
(banks, stock, brokers) to trade in listed securities in electronic form.
3. Placing the order -the next step is to place the order with the broker. The order can be
communicated to the broker either personally or through telephone, cell phone, e-mail etc.
 57

4. Executing the order -according to the instructions of the investor, the broker buys or sells
securities.
5. Settlement -this is the last stage in the trading of securities done by the brokers on behalf of
their clients. The mode of settlement depends upon the nature of the contract.
equity spot market follows a t+2 rolling settlement. This means that any trade taking place on
Monday gets settled by Wednesday.

29 The two different types of capital market being referred to are-

(i) Primary market: -“Arsh urged Ajay…….. Companies.”
(ii) Seondary market: -“ Ajay was inclined……… portfolio.”
(c) Differences between primary market and secondary market:
S. No. Basis Primary market Secondary market
1 Meaning It is the new issue market. It is the market for old securities.
2 Aspects Only buying of securities takes Both buying and selling of
place. securities takes place.
3 Price Prices of the securities are Prices of the securities are
determined by the company. determined by the forces of
demand and supply.
4 Parties It involves dealing between the It involves dealing between the
involved company and investors. two investors.
30 1. Commercial paper
2. 15 days to one year
It can also be used for seasonal and working capital needs.

31 Regulatory function—(any three)

Registration of intermediaries
-notification about rules and regulations
-levying of fees
-regulation of investment schemes
-inspections and enquiries
Development functions-
-training to intermediaries
-promotion of fair trade
-research
Protective functions-
-prevents insider trading
-prohibits unfair trade practices
-promotes fair trade practices
-educates investors
32 The directors should approach a consultant for new public issue of shares. The stock exchanges deal
 58

with sale and purchase of existing securities only, not in new issue of securities. Different methods
which the company may adopt for the new public issue of shares:
1. Offer through prospectus 2. Offer for sale
3. Private placement 4. Rights issue 5. E-ipos.

33 screen – based trading refers to the process of buying or selling securities online.

34 A) commercial paper:

 It is an instrument by large and creditworthy companies to raise short term funds at

lower rates of interest than the market rates.
 It is an unsecured, negotiable promissory note with a fixed maturity period.
(b) Commercial bill:
 The holder of trade bill has the liberty to retain these bill till their maturity or he can
discount these bills with a bank, if is in need of funds, before the maturity date of these
bills.
 When trade bills are accepted by the commercial banks, they are known as commercial
bills.
It is a bill of exchange used to finance working capital requirement of business firms. It is short-term,
negotiable and self-liquidating instrument
35 a. Dematerialization refers to the process of holding securities in electronic form.
b. The two problems of holding shares in physical form as follows:
i. There is a danger of loss or theft.
ii. There is risk of forgery, as the buyer may be delivered fake certificates.
36 a. . The objective of setting up SEBI is
i. To prevent malpractices in securities market.
ii. To protect rights and interests of investors,
iii. To regulate and develop code of conduct between brokers.
iv. To regulate stock market to promote their orderly functioning.
b. Protective function is performed by SEBI
37 1. The concept which separate ownership and control is called as demutualization.
2. The regulatory body set up by government of India is “SEBI” securities exchange board of
India.
3. The objectives of SEBI are:
The overall objectives of SEBI are to protect the interest of investors and to promote the development
of stock exchange and to regulate the activities of stock market.
38 (a) Mobilization of funds is the function being performed by the financial market.
(b) The other functions being performed are outlined below.
i. Price determination.
ii. Liquidity to financial assets
It provides common platform for exchange of securities
39 1. Money market is the market from where it can raise money to fulfil its requirement. The reason is
company require money for working capital i.e. Maximum for 1 year and market for short-term is
money market.

2. The instrument to raise money in money market are:

1. Call money 2. Treasury bill 3. Commercial bill 4. Commercial paper 5. Certificate of deposit.
40 Veerun has to initiate the following steps.
i. Open a demat account with a depository participant who may either be a bank, broker or
financial services company.
 59

ii. If he plans to buy shares through public offer he will have to give details. On allotment
of shares the shares will be credited.
iii. If he wants to buy shares otherwise, he will have to instruct his broker about the
company, no of shares etc.
iv. On contrary, whenever he wants to sell shares, he will have to instruct his broker the
details like name of company, no of shares, at what price etc.

*****
 60

CHAPTER 12

CONSUMER PROTECTION
The Consumer Protection ACT, 2019
 The Consumer Protection Act of 2019 aims to safeguard and promote consumers' interests by
resolving their complaints in a timely and cost-effective manner. It came into force on July 20th
2020.
 It covers the entire country of India, except the State of Jammu and Kashmir.
 It applies to all types of enterprises, whether they are manufacturers or traders, and whether they sell
goods or services, including e-commerce companies.
 The Act gives consumers specific rights in order to empower them and defend their interests.

A ‘consumer’ is generally understood as a person who uses or consumes goods or avails of any service.
Under the Consumer Protection Act 2019, a consumer is a person who buys any goods or avails services for
a consideration, which has been paid or promised, or partly paid and partly promised, or under any scheme
of deferred payment. It includes any user of such goods or beneficiary of services if such use is made with
the approval of the buyer. It applies to both offline and online transactions through electronic means or by
teleshopping or direct selling or multilevel marketing. However, any person who obtains goods or avails
services for resale or commercial purpose is not treated as a consumer and is outside the scope of Consumer
Protection Act 2019.

Consumer Rights
1. Right to Safety: Consumers have the right to be safeguarded against items and services that are
harmful to their health and well-being. The consumers are righteous to get quality products, and they
can also demand quality assurance from the seller for the same. Such as ISI, FPO, AGMARK,
Hallmark etc are quality marks for industrial items, food products, agricultural products, gold
respectively.
2. Right to be Informed: Before purchasing a product, the consumer has the right to get complete
information about it, regarding the quality, quantity, ingredients, purity, price etc.
3. Right to Choose: Consumers have the right to choose any product from the available options based
on their own preferences. Hence no seller has the right to influence the consumer into purchasing a
certain product through unacceptable means.
4. Right to Seek Redressal: If a product or service fails to meet the consumer's expectations or is
dangerous, the consumer has the right to seek redressal. The consumer may be entitled to a
replacement or repair of the problem, as well as reimbursement for any losses.
5. Right to Consumer Education: Consumers have the right to learn and be well-informed throughout
their lives. He should be informed of his rights and remedies in the event that the goods or service
does not meet his expectations. The Indian government has integrated consumer education in school
curriculum and is using the media to educate consumers about their rights. For example, efforts like
Jaago Grahak Jaago is one such measure to educate the consumers
6. Right to be Heard: The consumer has the right to provide his opinion regarding the product and
services, as well as he has the right to be heard in such cases. Hence the consumer has a right to file a
complaint if he thinks that his rights have been violated. Also, various consumer cells have been
opened up in India so as to provide them the right to be heard.
 61

Consumer Responsibilities: In addition to exercising his rights, a consumer should also keep in mind his
responsibilities while purchasing, using and consuming goods and services.

(i)Be aware about various goods and services available in the market so that an intelligent and wise
choice can be made.
(ii) Buy only standardised goods as they provide quality assurance. Thus, look for ISI mark on electrical
goods, FPO mark on food products, Hallmark on jewelry, etc.
(iii) Learn about the risks associated with products and services, follow manufacturer’s instructions and
use the products safely.
(iv) Read labels carefully so as to have information about prices, net weight, manufacturing and expiry
dates, etc.
(v) Assert yourself to ensure that you get a fair deal.

(vi) Be honest in your dealings. Choose only from legal goods and services
and discourage unscrupulous practices like black-marketing, hoarding, etc.
(vii) Ask for a cash memo on purchase of goods or services. This would serve
as a proof of the purchase made.
(viii) File a complaint in an appropriate consumer forum in case of a shortcoming in the quality of goods
purchased or services availed. Do not fail to take an action even when the amount involved is small.
(ix) Form consumer societies which would play an active part in educating
consumers and safeguarding their interests.
(x) Respect the environment. Avoid waste, littering and contributing to
pollution.
 62

Who can file a complaint under CPA, 2019

 a consumer; or
 any voluntary consumer association registered under any law for the time being in force; or
 the Central Government or any State Government; or
 the Central Authority; or
 one or more consumers, where there are numerous consumers having the same interest; or
 in case of death of a consumer, his legal heir or legal representative; or
 in case of a consumer being a minor, his parent or legal guardian.

Redressal Agencies under the Consumer Protection Act: The Consumer Protection Act provides for
setting up of a three-tier enforcement machinery at the District, State, and the National levels. They are
referred to as the ‘District Forum’, ‘State Commission’, and the ‘National Commission’. There are various
reliefs available to a consumer under the Act. The appropriate consumer court may pass an order for
removal of defect in goods, replace a defective product, refund the price of the product, pay compensation
for the loss suffered, etc.

District Commission Complaints up to 1 Crore

State Commission Complaints exceeding 1 Crore but up to 10 crores
National Commission Complaints exceeding 10 Crores

Remedies available to consumer:

(i) To remove the defect in goods or deficiency in service.
(ii) To replace the defective product with a new one, free from any defect.
(iii) To refund the price paid for the product, or the charges paid for the service.
(iv) To pay a reasonable amount of compensation for any loss or injury suffered by
the consumer due to the negligence of the opposite party.
(v) To pay punitive damages in appropriate circumstances.
(vi) To discontinue the unfair/ restrictive trade practice and not to repeat it in the
future.
(vii) Not tooffer hazardous goods for sale.
(viii) To withdraw the hazardous goods from sale.
(ix) To cease manufacture of hazardous goods and to desist from offering hazardous
services.
(x) Compensate for any loss or injury suffered by consumer under product liability action and withdraw
hazardous products from being offered for sale etc.
However, every order of a district commission, the state commission or the national
commission is deemed final if no appeal for such order is made by any of the
parties involved in dispute.

QUESTIONS FOR PRACTICE

MULTIPLE CHOICE QUESTIONS

1. Yash had severe pain in his throat, so he called up the doctor and asked for a telephonic advice. The
doctor prescribed him a sachet of Throat Reliever Hot Sip. He asked his servant to get a sachet from a
local chemist with a cash memo. After consuming the sachet, he started feeling more ill, so he picked
up the empty sachet and started reading the label. To his utter dismay, the sachet had already expired
last month. Which of the following remedies is not available to him any longer as a consumer?
(a) To withdraw the hazardous goods from sale.
 63

(b) To replace the defective product with a new one.

(c) To refund the price paid for the product.
(d) To pay a reasonable amount of compensation for any loss suffered by the consumer due to the
negligence of the opposite party.
2. Due to the negligence of the doctors, Johar passed away within a week’s time after his surgery of the
spine. Which of the following parties can not file a case in this regard?
(a) The consumer
(b) Any registered consumers’ association
(c) A legal heir or representative of a deceased consumer
(d) All of the above
3. When Aaradhya, inspite of paying the full price of the plot as per the terms and conditions of the
allotment letter, was not given the possession of the plot by the builder, she filed a case in the State
Commission. Identify the right of consumers being exercised in the given case.
(a) Right to safety
(b) Right to be heard
(c) Right to seek redressal
(d) Right to consumer education
4. A popular nationalised bank has been fined ₹8 lakh by the country’s highest consumer court, National
Consumer Disputes Redressal Commission (NCDRC), for not sharing complete insurance policy
details with a customer. The bank has been ordered to pay the full amount as compensation to the
customer. Identify the right of consumers being violated in the given case.
(a) Right to be heard
(b) Right to seek redressal
(c) Right to information
(d) Right to safety
5. Naina, her husband and her two minor daughters were travelling from Mumbai to Delhi, availing a
company’s flight services in 2018. The airlines had issued boarding passes to all of them. Naina
claimed in her plea that the airlines left all her family at the Mumbai Airport without informing them,
despite their being in the airport premises. The family had to stay in a hotel and purchase new tickets
the next day. The State Consumer Disputes Redressal Commission (SCDRC). on hearing the plea,
asked an airline company to pay ₹50,000 to Naina and her family. Identify the right of consumers
being exercised in the given case.
(a) Right to safety
(b) Right to be heard
(c) Right to seek redressal
(d) Right to consumer education
6. Which of the following types of cases are filed in the State Commission?
(a) When the value of the goods or services in question, along with the compensation claimed,
exceeds ₹20 lakhs but does not exceed ₹1 crore.
(b) When the value of the goods or services in question, along with the compensation claimed,
exceeds ₹1 crore but does not exceed ₹10 crores.
(c) When the value of the goods or services in question, along with the compensation claimed,
exceeds ₹40 lakhs but does not exceed ₹1 crore.
(d) None of the above
7. Which of the following statements is true with regard to the State Commission?
(a) It consists of a President and not less than two other members, one of whom should be a woman.
(b) The members are appointed by the State Government concerned.
(c) A complaint can be made to the appropriate State Commission when the value of the goods or
services in question, along with the compensation claimed, exceeds ₹1 crore but does not exceed ₹10
crores.
(d) All of the above
 64

8. In case a consumer is not satisfied with the order passed in the State Commission, he can further
make an appeal in the National Commission within a time period of
(a) 10 days
(b) 20 days
(c) 30 days
(d) 45 days
9. If any of the parties are not satisfied by the order of District Commission can appeal against such
order to the State Commission on the grounds of facts or law within a period of ---------- days from
the date of order.
(a) 10 days
(b) (b) 20 days
(c) 30 days
(d) 45 days
Read the following text and answer the following questions on the basis of the same:
Shobha purchased an ISI marked Heater from Highway Appliances. She made Cash Payment. But
failed to get a Cash Memo. While making use of the heater she observed that it was not working
properly. She contacted the shopkeeper immediately and told him the problem. Shopkeeper paid no
heed to her complaint. Rather he marked that the heater was not bought from his shop. Shobha had no
evidence of proving that the heater was purchased from his shop only. She discussed the problem with
her friend Reva who advised her to approach Consumer Forum and lodge the complaint. Shobha was
convinced with the idea of lodging the complaint against the shopkeeper but due to lack of cash memo
it was difficult for her to proceed.
10. Identify the Right of the consumer as referred to in the above paragraph.
A. Right to be Informed
B. Right to Safety
C. Right to be Heard
D. Right to Choose
11. Identify the responsibility of the consumer referred in the above case.
A. Quality Conscious
B. Must Obtain Cash Memo
C. Cautious Consumer
D. Ready to Lodge Complaint
12. Shobha cannot lodge a complaint against the shopkeeper .Why?
A. She do not have the right
B. She was aware of the fact
C. She do not have the Cash Memo
D. She was happy with the product.
Descriptive Type Questions:
13. Manu bought a packet of chips from a local shopkeeper and found that the ingredients given on the
label were not legible. He complained about it to the company. The company sent a written apology
stating that they will make sure that existing packets are withdrawn from the market and new packets
with legible labels are soon made available. Explain the consumer right which Manu exercised.
14. Mahesh always went to a specific shop to buy all consumable and non-consumable goods. In this
shop, a variety of products of different brands were displayed nicely and the sales person available
also gave good sales presentations if required. But this shop was quite far-off from his residence. His
friend Anirudh always wondered why Mahesh wastes so much time in going to that shop whereas
there were many big brand shops situated near his residence having consumable and non-consumable
goods.
Anirudh asked Mahesh the reason of going to that particular shop. Mahesh told that he was exercising
one of his rights which he could not exercise in nearby big brand shops. State the consumer’s right
which Mahesh had exercised and explain it.
15. On Monika’s birthday, her mother gave her a pair of gold earrings. After one month, Monika
 65

observed that the earrings were losing their shine. She checked the mark on the earrings and found
that it was not a proper Hallmark and her mother had been cheated by the shopkeeper. So, she filed a
complaint in the District Forum which rejected it. Not satisfied by the decision of the district Forum,
she was very much disturbed and after two months, she decided to appeal further.
Can Monika appeal against the decision of the district forum? Give reason in support of your answer.
16. Reena purchased one liter of pure ghee from a shopkeeper. After using it, she had doubts that it was
adulterated. She sent it for a laboratory test which confirmed that the ghee was adulterated. State any
four reliefs available to Reena if she complains and the consumer court is satisfied about the
genuineness of the complaint.
17. Vastra Ltd.’ is engaged in the manufacturing of apparel. Over the years, it has became a popular brand
due to its good product quality and exclusive designing. The company plans to open its own retail
showrooms in metropolitan cities in India. In order to meet its financial needs it has offered for
subscription an IPO of Rs. 4 lakh equity shares in the price band of Rs. 430 – Rs. 445 each. As per the
guidelines of SEBI, the company has provided a complete disclosure of the relevant details in its
prospectus.

Identify and explain the right of the consumer being fulfilled by the directives of SEBI in the above
mentioned case.
18. Youth Organisation (YO) organised a visit of its members to an old age home to inculcate the habit of
social work among them. The visit revealed that the living conditions of the inmates of the old age
home were not hygienic. So, the YO members decided to clean the premises. During their cleanliness
drive, they realised that the old age home also required pest control. But some of the inmates of old
age home were reluctant for it because they believed that the pest control may create health problems
for them. YO, therefore decided to provide ethical, safe and odorless pest control. They showed to the
inmates of old age home a pamphlet of the proposed pest control product which promised easy,
inexpensive and long-lasting pest control. The inmates happily agreed and the pest control was carried
out. It worked for a fortnight but to their dismay the effect started wearing off. YO contacted the pest
control company which kept on postponing their visit. After waiting for a month, YO filed a cased in
the consumer court.
The consumer court was satisfied about genuineness of the complaint and issued necessary directions
to the pest control company.

State the six directions that might have been issued by the court.
19. Jagadish purchased a pack of sweets for his son from a shop in the nearby market. After consuming
those sweets, the condition of his son deteriorated and he had to be hospitalized. Later on through a
laboratory test, it was certified that the sweets were adulterated.
1. State any one precaution that he should have taken while purchasing packed sweets.
2. Name the appropriate redressal agency that he can approach in case he decides to file a case
against the shopkeeper.
3. Write any two remedies available to him.
20. Abhishek bought a bottle of disinfectant spray from the nearby market. It had a knob which was to be
opened in a particular way. However, there was no instruction on its package in this regard.
Therefore, when he tried to open the knob in a casual way, some of the spray flew in his eyes. This
affected his vision.
In context of the above case:
1. Explain the rights of consumer being violated by the company.
2. State any two directions which the consumer court can issue to the company after being
satisfied with the genuineness of the complaint.
 66

ANSWERS
1. Answer: b
Explanation:
(b) Because he has already consumed the product
2. Answer: a
Explanation:
(a) Because he is dead
3. (b)
4. (c )
5. (c )
6. (b)
7. (d)
8. (c )
9. (d)
10. (b)
11. (b)
12. (c )
13. Right to be heard has been exercised by Manu.
The consumer has the right to provide his opinion regarding the product and services, as well as he
has the right to be heard in such cases. Hence the consumer has a right to file a complaint if he
thinks that his rights have been violated. Also, various consumer cells have been opened up in
India so as to provide them the right to be heard.
14. Right to choose has been exercised by Mahesh.
Consumers have the right to choose any product from the available options based on their own
preferences. Hence no seller has the right to influence the consumer into purchasing a certain
product through unacceptable means.
15. No, Monika will not be able to appeal further in the State commission. This is because two months
have already passed and the appeal had to be filed within 45 days of the passing of the order by the
District Forum.
16. The six reliefs available to Reena are listed below:
 To withdraw the hazardous goods from sale.
 To provide replacement for the defective product.
 To refund the price paid for the product, or the charges paid for the service.
 To pay a reasonable amount of compensation for any loss or injury suffered by the
consumer due to the negligence of the marketer.
17. The Right to information is being fulfilled by the directives of SEBI in the above mentioned case.
According to the Right to information, the consumer has the right to get complete information
about the product that he/she may propose to buy including its contents, date of manufacture and
expiry, maximum retail price, quantity, directions for use etc. Moreover, as per law, it is mandatory
for the marketers to provide complete information about the product/service to buyers.
18. The six directions that might have been issued by the court are as follows:
Reliefs available to a consumer
a. To remove the deficiency in service.
b. To refund the charges paid for the service.
c. To pay a reasonable amount of compensation for any loss or injury suffered by the
consumer due to the negligence of the opposite party.
d. To discontinue the unfair/restrictive trade practice and not to repeat it in the future.
e. To pay any amount (not less than5% of the value of the d effective goods or
deficient services provided), to be credited to the Consumer Welfare Fund or any
other organisation/person, to be utilised in the prescribed manner.
19. 1. Jagadish should have checked for the quality assurance mark like FPO /FSSAI on
its label while purchasing the food product.
2. District Forum
 67

3. To refund the price paid for the product, or the charges paid for the service.
(iv) To pay a reasonable amount of compensation for any loss or injury suffered by the
consumer due to the negligence of the opposite party.
20. 1. The two rights of consumer being violated in the above case are Right to
information and Right to safety.
Right to Safety: Consumers have the right to be safeguarded against items and services
that are harmful to their health and well-being. The consumers are righteous to get quality
products, and they can also demand quality assurance from the seller for the same. Such as
ISI, FPO, AGMARK, Hallmark etc are quality marks for industrial items, food products,
agricultural products, gold respectively.
Right to be Informed: Before purchasing a product, the consumer has the right to get
complete information about it, regarding the quality, quantity, ingredients, purity, price etc
2.The two directions which the consumer court can issue to the company after being
satisfied with the genuineness of the complaint are as follows:
a) Not to offer hazardous goods for sale.
b) To pay a reasonable amount of compensation for any loss or injury suffered
by the consumer due to the negligence of the marketer.

*****
 68

SAMPLE QUESTION PAPER

BUSINESS STUDIES (054)
TERM II (2021-22)
Class XII
MM: 40 Time: 2 Hours
General Instructions:
This is a Subjective Question Paper containing 12 questions.
This paper contains 4 questions of 2 marks each, 4 questions of 3 marks each and 4 questions
of 5 marks each.
2 marks questions are Short Answer Type Questions and are to be answered in 30-50
words. 3 marks questions are Short Answer Type Questions and are to be answered in 50-
80 words. 5 marks questions are Long Answer Type Questions and are to be answered in
80-120 words. This question paper contains Case/Source Based Questions.
S. QUESTIONS MARK
N S
O
1 Identify and explain the two sources of the source of recruitment which cannot be used when 2
the existing staff is either insufficient or does not fulfill the eligibility criteria of the jobs to be
filled.
2 ‘MYKAA Limited ‘is dealing in all types of cosmetic products. It is enjoying increased 2
demand for its product during the last few years. For the purpose of expansion the company
needs ₹ 100 crores as additional capital. The company decides to raise funds through equity
shares. Chirag Kapoor, the finance manager of the company recommended that the shares may
be sold through issuing houses or brokers. Identify and explain the method recommended by
Mr.Kapoor through which the company can raise additional funds for expansion purposes.
3 Explain the two concepts which are part of the exercise which would reveal whether a 2
company is understaffed, overstaffed or optimally staffed.
4 “Measurement of a company’s progress may involve calculation of certain ratios like gross 2
profit ratio, net profit ratio, and return on investment etc. at periodic intervals”. Identify the
function of management involved in the above context. Also briefly explain the step in the
process of the identified function discussed above.
5 Mr. Pawan Kumar, the CEO of an E-Commerce start up, which was facing the problem of 3
huge employee turnover, decided to hold a meeting with the managers to discuss the issue.
While addressing the managers in the meeting, he advised them to take certain measures which
focus on psychological, social and emotional factors, in order to motivate employees. Explain
any two such measures discussed by him, when he suggested that job should be made
interesting so that the job itself becomes a source of motivation, employees should be
congratulated for good performance, also, stability regarding future income and work should
be provided to employees, in order to develop a positive attitude among the subordinates.
6 State any three points of importance of Directing. 3
OR
Define leadership as an element of Directing? Enumerate any two styles of Leadership.
7 List any three factors affecting the Working Capital requirement of a company. 3
8 3
Priya is a regional manager of XYZ. Ltd. She is a hardworking employee and is trying to
reduce wastage of resources in her company. She has set standards for performance of different
activities and is ensuring that targets are met according to these standards with minimal
wastage of resources. She has set up CCTV cameras which helps her to keep a close check on
the activities of the subordinates and know how the employees are performing. She also
rewards the employees with a bonus when these standards are met. She is trying her best to
ensure a good performance of her team this year through the application of an important
function of management. Explain any two benefits of the function of management highlighted
 69

above.
9 Enumerate any five rights of a consumer under the Consumer Protection Act, 2019. 5
OR
Enumerate any five responsibilities of a Consumer Protection Act, 2019.
10 State any five regulatory functions of the Securities and Exchange Board of India 5
11 In an interview with a leading news channel, Mr. Rakesh Kwatra, CEO of ‘Get My Job” has 5
suggested that the Companies which want more and more people to apply for jobs in their
organisation should make the process of applying for jobs easier and candidate friendly. It is
for this reason, he said, that most progressive companies today have a short application
process. He also said that the application form filled by the candidate is very important as it is
the information supplied in the application forms, which helps the manager in eliminating
unqualified or unfit job seekers. The company can create a mechanism that attempts to measure
certain characteristics of individuals like aptitude, manual dexterity, and intelligence to
personality. The candidate may then be called for an in-depth conversation to evaluate their
suitability for the job.
(a). Name the process and steps in the process of identifying and choosing the best person
out of a number of prospective candidates for a job discussed above.
(b). Also explain the next three steps in the process which can be subsequently performed by
the company.
12 Vansh Limited is a large and reputed company which manufactures ventilators. After the 5
outbreak of ‘COVID-19’ in 2020 the company witnessed an increase in revenue by 40%. It has
plans to further increase its production capacity and also start production of PPE kits, sanitisers
and masks in 2022. The Finance manager of the Company Mr. Rajiv feels confident about the
future of the company and its liquidity position. Discuss the meaning of Dividend Decision and
in the light of the above statement explain any two factors which should be considered by
‘Vansh Limited’ while formulating the dividend policy of the company.
OR
Vedansh Limited has a share capital of ₹10,00,000 divided into shares of ₹100 each .For
expansion purpose ,the company requires additional funds of ₹ 5,00,000 . The management is
considering the following alternatives for raising funds :
Alternative 1: Issue of 5000 Equity shares of ₹100 each Alternative 2: Issue of 10% Debentures
of Rs. 5,00,000

The company’s present Earnings Before Interest and Tax ( EBIT) is ₹4,00,000 p.a. Assuming
that the rate of Return of Investment remains the same after expansion, which alternative
should be used by the company in order to maximise the returns to the equity shareholders. The
Tax rate is 50%. Show the working.
 70

MARKING SCHEME
BUSINESS STUDIES
(054)
Term II (2021-
22)
Class XII
1 Two sources of internal recruitment: ½ mark for
1. Promotion refers to shifting of an employee to a higher position, carrying higher identificatio
responsibilities, facilities, status and pay. n and ½
2. Transfer involves shifting of an employee from one job to another, one department to mark for
another, without substantive change in the responsibilities and status of the employee. explanation
(1+1=2
marks)

2 Offer for Sale: Under this method securities are not issued directly to the public but are offered ½ mark for
for sale through intermediaries like issuing houses or stock brokers. In this case, a company sells identificatio
securities embolic at an agreed price to brokers who, in turn, resell them to the investing public. n and
1.5 marks
for
explanation

3 1. Workload analysis: This would enable an assessment of the number and types of human (1/2 mark
resources necessary for the performance of various jobs and accomplishment of for the
organisational objectives. heading
2. Workforce analysis: This would reveal the number and type available. and ½ mark
for the
explanation
)

1+1=2
marks

4 1 mark
a) Controlling
(1/2 mark
(b) Measurement of actual performance for the
heading
Once performance standards are set, the next step is measurement of actual performance. and ½ mark
Performance should be measured in an objective and reliable manner. There are several for the
techniques for measurement of performance. These include personal observation, sample explanation
checking, performance reports, etc. )

1 mark

5 Non monetary incentives: (Any two) (½ mark for

1. Job enrichment: It is concerned with designing jobs that include greater variety of work the heading
content, require higher level of knowledge and skill, etc,. and 1 mark
2. Employee recognition programmes: Recognition means acknowledgment with a show of for the
appreciation. explanation
3. Job security: Employees want their job to be secure. They want certain stability about )
income and work so that they do not feel worried about these aspects and work with (1.5 x 2=3)
greater zeal.
 71

6 Importance of Directing: (Any three) 1 mark for

1. Directing helps to initiate action by people in the organisation towards attainment of each
desired objectives. correct
2. Directing integrates employees' efforts in the organisation in such a way that every statement.
individual effort contributes to the organisational performance.
3. Directing guides employees to fully realise their potential and capabilities by motivating
and providing effective leadership.
4. Directing facilitates introduction of needed changes in the organisation. (1X3 =
5. Effective directing helps to bring stability and balance in the organisation since it fosters 3marks)
cooperation and commitment among the people and helps to achieve balance among
various groups, activities and the departments.
OR

Leadership indicates the ability of an individual to maintain good interpersonal relations with
followers and motivate them to contribute for achieving organisational objectives. (or any other
1 mark
correct definition)

Styles of leadership (Any two):

(I)Autocratic or Authoritarian leader gives orders and expects his subordinates to obey those orders.
(ii) Democratic or Participative leaders will develop action plans and make decisions in
1x2=2
consultation with their subordinates.
marks
(iii) Laissez faire or Free-rein leader does not believe in the use of power unless it is absolutely
essential.

7
Factors affecting working capital requirement of the company (Any three) : 1x3=3
marks
1. Nature of Business influences working capital requirements in a trading organisation
which usually needs a smaller amount of working capital compared to a manufacturing
organisation, while service industries which usually do not have to maintain inventory
require less working capital.
2. Scale of operations influences working capital requirements in large organisations which
require a large amount of working capital as compared to the organisations which operate
on a lower scale.
3. Business cycle affects the requirement of working capital by a firm, as in case of a boom
a larger amount of working capital is required as compared to the period of depression.
4. Seasonal Factors affect the working capital requirement, as in peak season large amounts
of working capital is required and lower amount is required in the lean season.
5. Production cycle affects the working capital requirement, as it is higher in firms with
longer processing cycles and lower in firms with shorter processing cycles.
6. Credit allowed in a firm with liberal credit policy results in a higher amount of debtors,
increasing the requirement of working capital.
7. Credit availed by a firm, to the extent to which the firm avails the credit on purchases
the working capital requirement is reduced.
8. Operating efficiency may reduce the level of raw materials, finished goods and debtors
resulting in lower requirement of working capital.
9. Availability of raw material influences the working capital requirement as larger the lead
time, larger the quantity of material to be stored and larger shall be the amount of
working capital required.
10. If the growth potential of a concern is perceived to be higher, it will require a larger
amount of working capital.
11. Higher level of competitiveness may necessitate larger stocks and increases working
capital requirement.
12. The working capital requirement of a business becomes higher with higher rate of
inflation
 72
8
Importance of controlling (Any two):

1. Accomplishing organisational goals: The controlling function measures progress

towards the organisational goals and brings to light the deviations, if any, and indicates
corrective action.
2. Ensuring Order and discipline: Controlling creates an atmosphere of order and (½ mark for
discipline in the organisation. It helps to minimise dishonest behaviour by keeping a the heading
close check ontheir activities. and 1
3. Making efficient use of resources: Each activity is performed in accordance with marks for
predetermined standards and norms. This ensures that resources are used in the most the
effective and efficient manner. explanation
4. Improving employee motivation: A good control system ensures that employees know )
well in advance what they are expected to do and what are the standards of performance
on the basis of which they will be appraised. It, thus, motivates them and helps them to 1.5x2=3
give better performance.
marks

9 Rights of a Consumer under the Consumer Protection Act, 2019 (Any five): 1x5=5
1. Right to safety: The consumer has a right to be protected against goods and
services which are hazardous to life, health and property.
2. Right to be informed: The consumer has a right to have complete information about the
product he intends to buy including its ingredients, date of manufacture, price, quantity,
directions for use, etc.
3. Right to be assured: The consumer has the freedom to assess a variety of products at
competitive prices.
4. Right to be heard: The consumer has a right to file a complaint and to be heard in case
of dissatisfaction with a good or a service.
5. Right to seek redressal: The consumer has a right to get relief against unfair trade
practice of restrictive trade practices or unscrupulous exploitation in case the product or
a service falls short of his expectation.
6. Right to consumer education: The consumer has a right to acquire knowledge and to be
a well informed consumer throughout life.
OR
Responsibilities of a Consumer under the Consumer Protection Act, 2019 (Any five):
1. Be aware of various goods and services available in the market so that an intelligent
andwise choice can be made. 1X5=5
2. Buy only standardised goods as they provide quality assurance.
3. Learn about the risks associated with products and services, follow
manufacturer's instructions and use the products safely.
4. Read labels carefully so as to have information about prices, net weight,
manufacturingand expiry dates, etc.
5. Assert yourself to ensure that you get a fair deal.
6. Be honest in your dealings. Choose only from legal goods and services and
discourage unscrupulous practices.
7. Ask for a cash memo on purchase of goods or services.
8. File a complaint in an appropriate consumer forum in case of a shortcoming in
the quality of goods purchased or services availed.
9. Form consumer societies which would play an active part in educating consumers
andsafeguarding their interests.
10. Respect the environment.
 73

10 Regulatory Functions of Securities and Exchange Board of India (Any five) 1 mark for
1. Registration of brokers and sub-brokers and other players in the market. each
2. Registration of collective investment schemes and Mutual Funds. correct
3. Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers and the statement.
business in stock exchanges and any other securities market.
4. Regulation of takeover bids by companies.
5. Calling for information by under- taking inspection, conducting enquiries and audits of stock 1x5 =5
exchanges and intermediaries. marks
6. Levying fee or other charges for carrying out the purposes of the Act.
7. Performing and exercising such power under Securities Contracts (Regulation) Act 1956, as
may be delegated by the Government of India.

11 (a).Selection ½ marks
Steps in the process of selection discussed: X4=2
1. Preliminary Screening.
2. Selection Tests.
3. Employment interview
(b). Next two steps:
1. Reference and background checks - Many employers request names, addresses and
telephone numbers of references for the purpose of verifying information and gaining
additional information on an applicant. Previous employers, known persons, teachers
and university professors can act as references.
2. Selection Decision- The final decision has to be made from among the candidates who
passed the tests, interviews and reference checks. The views of the concerned manager
will be generally considered in the final selection.
3. Medical Examination- After the selection decision and before the job offer is made, the (½ mark for
candidate is required to undergo a medical fitness test. The job offer is given to the the heading
candidate being declared fit after the medical examination. and ½ mark
for the
explanation
)
1X3=3
marks
12
1 Mark
Dividend decision: The decision involved here is how much of the profit earned by the company (1/2 mark
(after paying tax) is to be distributed to the shareholders and how much of it should be retained in for the
the business. heading and
Factors affecting Dividend decision: (Any two) 1.5 marks
for the
1. Amount of Earnings: Dividends are paid out of current and past earnings. Therefore, earnings explanation)
are a major determinant of the decision about dividend. 2x2 = 4
2. Growth Opportunities: Companies having good growth opportunities retain more money out of
their earnings so as to finance the required investment. The dividend in growth companies is,
therefore, smaller, than that in the non– growth companies.
3. Cash Flow Position: The payment of dividend involves an outflow of cash. A company may
be earning profit but may be short on cash. Availability of enough cash in the company is
necessaryfor declaration of dividend.
4. Access to Capital Market: Large and reputed companies generally have easy access to the
capital market and, therefore, may depend less on retained earnings to finance their growth.
These companies tend to pay higher dividends than the smaller companies which have relatively
low access to the market.
OR 4 Marks
Rate of Return of Investment is 4,00,000/10,00,000 X
100=40% EBIT after expansion = 40% X 15,00,000=6,00,000
Calculation of EPS
Plan 1 Plan 2
EBIT 6,00,000 6,00,000
(-)Interest - 50,000
EBT 6,00,000 5,50,000
 74

(-)Tax(50%) 3,00,000 2,75,000

EAT. 3,00,000 2,75,000
No. Of shares. 15000. 10000
EPS. 20 27.5
1 Mark
The company should use Plan 2 in order to increase the return to the equity shareholders.
(1+4 =5
Marks)