Soundarya Institute of Management and Science

ENTREPRENEURSHIP DEVELOPMENT

CHAPTER-2 SMALL SCALE INDUSTRIES

Introduction:

Small scale Industries has occupied an important place in the process of industrialization in the
country, resolving certain issues such as:

 Poor finances

 Problem of unemployment and underemployment

 Over dependence on agriculture

 Transportation difficulty and Lack of modern technology

Small scale industries make use of local raw materials, local skills, local finance and
generally local markets. Small scale industries contribute to socio-economic development of the
country. Small scale industries and business sectors have emerged as a dynamic and vibrant
sector for the Indian economy. SSI’s account to 35% of Indian industrial exports

Meaning of Small scale industries:

Small scale industries are defined in terms of investment on the original Value of the
installed plant and machinery. But in the earlier times it was based on employment.

Definition of Small scale industries:

According to SSI board – 1950, a unit employing less than 50 persons if using power and
less than 100 persons without the use of power and with a capital investment not exceeding Rs.
5lakhs is called as an SSI unit.

Relationship between Small and large units:

 Maintenance and repair services

 Job subcontracting
 Merchandising or commercial trading
 Social benefits
 Complementary
 Purchase subcontracting
 Merchandising
 Initiative

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Difference between Small and Large Industries:

Small scale industry Large scale industry

These industry employ less number of person
and capital
The production is small and the usage of raw
materials are also less
The work is done manually and by using small
machine and tool
These are the industries that has capital less
than 1 crore
Small industries has to be registered as SSI
unit
Government interference is less
Ownership of SSI is sole trading or partnership
firm
The education level of employ is less
Example: rice mill, toys making, sugar
manufacturing, carpentry works, etc.,
These industry employ large number of person
and capital
The production is large so the usage of raw
material is more
The work is performed by only by using large
machinery and tool
These are the industries that has capital more
than 1 crore
The large industry are subjected to licensing
and registration with government
Government interference is more
Large scale industries are generally found in
company form
The education level of the employ is more
Example: iron and steel industries, textile
industries etc.,

Objectives of small scale industries:

 Remove economics backwardness

 Improves standard of living
 Adopt latest technology
 Optimum utilization of resources
 Provide employment opportunities
 Balanced regional development

Features of Small scale industries:

 Flexibility
 Labour intensive
 One man show
 Use of indigenous raw material
 Localized operation
 Less gestation period
 Profit motive
 Educational period
 Technology

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 Dispersal of unit

Products Range of Small scale industries:

1. Food and allied industries

2. Glass and ceramics
3. Textile products
4. Wood and wooden products
5. Paper and leather products
6. Rubber products
7. Plastic products
8. Mechanical Engineering excluding transport equipment

Capital Investment:

A financial plan is a series of steps or goals used by an individual or business of which is

designed to accomplish a financial goal.

Sources of funds:

A company might raise new funds from the following sources:

Deferred ordinary share:

They are a form of ordinary share, which are entitled to a dividend only after a certain
date or if profits rise above a certain amount.

Right Issues:

It provides a way of raising new share capital by means of an offer to existing

shareholders, inviting them to subscribe cash for new shares in proportion to their existing
holdings.

Preference Shares:

They have a fixed percentage dividend before any dividend is paid to the ordinary
shareholders.

Loan Stock:

Loan stock is long-term debt capital raised by a company for which interest is paid
usually half yearly and at a fixed rate. Holders of loan stock are therefore long-term creditors of
the company.

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Debentures with floating rate of interest:

These are debentures for which the coupon rate of interest can be changed by the
issuer, in accordance with changes in market rates of interest.

Security:

Loan stock and debentures will often be secured. Security may take the form of either a
fixed charge or floating charge.

Retained Earnings:

It is the amount of net income left over for the business after it has paid out dividend to
its shareholders. In the other words, amount which is not paid to shareholders counts as
retained earnings.

Bank Lending:

Borrowings from Banks are an important source of finance to companies. Bank lending
is still mainly short term but medium term lending is quite common these days.

Leasing:

A lease is an agreement between two parties, the “lessor” and the “lessee”. Leasing is a
form of rental.

Finance leases:

Finance leases are lease agreements between the user of the leased asset and a
provider of finance.

Hire purchase:

It is an agreement for buying expensive consumer goods, where the buyer makes an
initial down payment and pays the balance plus interest in installments.

Government assistance:

They provide finance to companies in cash grants and other forms of direct assistance,
as part of its policy of helping to develop the national economy.

Venture Capital:

It is a type of financing that investors provide to startup companies and small businesses
that believed to have long-term growth.
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Franchising:

Franchising is a form of marketing and distribution in which the owner of a business

system (franchisor) grants to an individual or group of individuals (franchisee) the right to run a
business selling a products or providing a service using the franchisor’s business system.

OWNERSHIP PATTERNS: An entrepreneur during the time of establishment of his business has
to choose a proper form of ownership which is a crucial factor for the success of the business.

Sole proprietorship Partnership firm Joint stock company Co-operatives

Private limited company Public limited company

SOLE TRADING CONCERN:

Meaning:

Sole Trading concern or sole proprietorship refers to a form of business organization which
is owned and managed and controlled by an individual who is the recipient of all profits and
bearer of all risks.

Features:

 Absolute control
 Lack of business continuity
 No separate entity
 Sole risk bearer and profit recipient
 Unlimited liability
 Easy formation and closure

Merits / advantages:

 Quick decision making

 Easy formation and closure
 Direct incentive
 Confidentiality of information
 Sense of accomplishment

Demerits / Disadvantages:

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 Limited life of business

 Limited managerial skills
 Limited resources
 Unlimited liabilities
 Lack of family support
 Excessive risk

PARTNERSHIP FIRM:

Meaning: According to the Indian partnership act 1932, “partnership is the relationship
between 2 or more partners who have agreed to share profits of the business carried on by all
or anyone of them acting for all”.

Features:

 Maximum members in other business-10

 Maximum members in banking business-20
 Minimum members required is 2
 Mutual agency
 Continuity is ensured
 Equal risk bearing
 Joint decision making

Merits:

 Easy formation and closure

 Secrecy
 Sharing of risk
 More funds
 Balanced decision making

Demerits:

 Unlimited liability
 Instability
 Limited capital
 Non-transferability of shares
 Possibility of conflicts

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JOINT STOCK COMPANY:

Meaning: The term company means an association of a group of persons who have come
together for a common purpose that is to do business and earn profit.

Definition: A joint stock company means a company which is incorporated under 2013
Company act, or under any pervious company Act.

Features:

 Corporate personality
 Joint capital
 Share capital
 Transferability of shares
 Limited liability
 Statutory responsibility
 Number of shareholders
 Independent nature of management
 Democratic norms
 Profits distribution
 Tax benefits

Merits:

 Large resources
 Limited liability
 Continuity of existence
 Benefits of large scale operations
 Liquidity
 Professional management
 Research and development
 Tax benefits

Demerits:

 Difficulty in formation
 Control by a group
 Excessive government control
 Delay in decision making
 Lack of secrecy

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 Social abuses

PUBLIC LIMITED COMPANY:

Meaning: A public limited company is a voluntary association of members those are

incorporated and, therefore has a separate legal existence and the liability of whose members
is limited. Public limited companies are listed on the stock exchange where its share/stocks are
traded publicly.
Minimum members: 7
Maximum members: unlimited
Minimum directors: 3
Minimum capital: 500000

Features:

1. Separate legal entity

2. Governed by rules, norms and regulations.
3. Index of members
4. Perpetual succession
5. Shares are bought and sold on stock exchange
6. Run by a board of directors
7. Name of the business will end with "plc"

Merits:
 Led by board of directors
 Limited liability
 Number of members
 Transferability of shares
 Life span
 Other financial opportunities
 Large capital

Demerits:
 More regulatory requirement
 Higher level of transparency required
 Ownership and control issues
 Short termism
 Initial financial requirement is higher

PRIVATE LIMITED COMPANY:

Meaning: Section 2(68) of Companies Act, 2013 defines private companies. According to
that, private companies are those companies whose articles of association restrict the

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transferability of shares and prevent the public at large from subscribing to them. This is the
basic criterion that differentiates private companies from public companies.

Features:
1. Minimum members: 2
Maximum members: 200
Minimum directors: 2
Minimum capital: 100000
2. Non transferability of shares
3. Shares cannot be issued to public
4. The word “private limited” should be suffix after the name of the company.

Merits:
 Separate legal entity
 Limited liability
 Fund raising
 Uninterrupted existence
 Builds credibility
Demerits:
 Restricts in transferability of shares
 Shareholders cannot exceed 50
 It cannot issue prospectus to public
 Shares cannot be quoted in stock exchanges

Difference between public and private limited company:

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COOPERATIVES:

Meaning: It is an autonomous association of persons who voluntarily cooperate for their

mutual social, economic, and cultural benefits.

Features:

 Voluntary association
 Open membership
 Variable nature of member’s liability
 Democratic control
 Service motive
 Perfect unity
 Legal entity

Merits:

 Easy to form
 No obstruction for membership
 Limited liability
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 Service motive
 Democratic management

Demerits:

 Limited resources
 Inefficient management
 Lack of secrecy
 Cash trading
 Excessive government interference

The choice of the form of business is government by several interrelated and interdependent
factors:

 The nature of business is the most important factor

 Scale of operations
 The degree of control desired by the owners
 Amount of capital required for the establishment and operation of a business
 Risks and liabilities
 Comparative tax liability

Classification of small scale industries:

Traditional industries Modern industries

1. Khadi and village industries 1. Export oriented industries

2. Handicraft industries 2. Ancillary industries

3. Handloom Industries 3. Tiny industries

4. Coir industries 4. Small scale business

5. Sericulture industries

Role played by SSI in the development of Indian Economy:

 Contribution to the development of the economy

 Employment
 Export
 Need for entrepreneurship

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Benefits of SSI:

 Employment generation
 Entrepreneurial skills
 Regional dispersal of industries
 Helps in promoting exports
 Assist in the growth of large industries
 Facilitate entrepreneurial development
 Better industrial relations
 Development of technology

Problems of SSI:

 Inadequate credit assistance

 Problems of skilled manpower
 Irregular supply of raw materials
 No organized marketing
 Lack of good equipment and machinery
 Absence of adequate infrastructure
 Competition from large scale units and imported goods
 Other problems

Remedies of solve the problems of SSI:

 Credit facilities
 Industrial estates
 Testing laboratories
 Supply of designs
 Publicity
 Facility of raw material
 Purchase of SSI products
 Advisory services
 Effective planning

Policies Governing SSI’s:

Industrial policy is the set of standards and measures set by the government to evaluate
the progress of the manufacturing sector that ultimately enhances economic growth
and development of the country.
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1. Industrial Policy Resolution 1948.

 This policy laid down the basic framework of industrial policy

 It is also known as economic constitution of India
 It is classifies into three sectors: Schedule A (covers public sector), Schedule B
(covers both private and public sector) and Schedule C (only private sector)
 This has provisions for public sector, small scale industries and foreign
investment.

2. Industrial Policy Statement 1956.

 Objective of the social and economic policy in India was the establishment of a
socialistic pattern of society
 Encouragement to village and small scale enterprise
 Removing regional disparities
 Need for the provision of amenities for labor

3. Industrial Policy Statement 1977.

 This policy majorly focused on decentralization

 It gave priority to SSI
 It created new unit called “Tiny industries”
 This policy imposed restrictions on MNC’s

4. Industrial Policy statement 1980.

 Need for promoting competition in domestic market, modernization, selective

liberalization and technological up-gradation
 Due to this policy, the MRTP Act and FERA Act were introduced
 Objective was to liberalize the industrial sector to increase industrial
productivity and competitiveness of the industrial sector
 It is export based and encouraged foreign investment in high-technology areas

5. Industrial Policy Statement 1985.

 Foreign investment was further simplified with more industrial areas being open
for their entries
 Promoted the ideas of bigger companies
 The provision of industrial licensing was simplified
 High level attention on the sunrise industries such as telecommunication,
computerization and electronics
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 Industries based on imported raw materials got a boost

6. Industrial Policy Statement 1990.

 It raised the investment ceiling in plant and machinery for SSIs

 It created subsidy for rural and backward areas
 Assistance was granted to women entrepreneurs for widening the
entrepreneurial base
 SIDBI was established to ensure adequate flow of credit to SSIs
 Activities of Khadi and village industries commission and Khadi and village
industrial board were to expand

7. Industrial Policy Statement 1991.

Industrial Licensing

Foreign Investment

Foreign Technology policy

Public Sector Policy

MRTP Act (Monopoly Restricted Trade Practices Act).

8. Comprehensive Policy Package 2000 and Report Policy Measures:

Rising of Investment Limit

Enchasing the Exemption limit

Schemes to address the Problem of collaterals

Schemes for Technological Up gradation

Extension of IID-(Integrated Infrastructure Development)

Market Development assistants.

Credit delivery to SSI sectors

Assignment questions

Section A

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1. Define SSI

2. Give the meaning of Cottage industries

3. Give the meaning of Medium scale industries

4. Expand SSSBE

5. What is the meaning of Export oriented industries

6. Give the meaning of Co-Operatives

7. What is the meaning of Ancillary industries

8. Write any 2 difference between Small and large scale industries

9. Mention any 4 products manufactured by SSI

10. Give the meaning of Registration

11. Mention any 2 clearances to be obtained before starting an SSI

12. Give the meaning of Capital structure

Section B

1. Write the features of SSI

2. Explain the objectives of SSI

3. Write merits and demerits of partnership firms(2016)

4. Explain the problems faced by SSI(2018)

5. Explain the role played by SSI in the development of an Economy(2015,2016,2018,2019)

6. Mention the remedies to overcome the problems of SSI

7. Mention the relationship between small and large scale industries

8. Write the various products manufactured by SSI

9. Write a note on financial requirement of SSI(2017)

Section C

1. Explain in detail the various forms of ownership patterns

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2. Write a note on policies governing SSI

3. Write a factors to be considered while deciding on the forms of ownership

4. What are the measures taken by the government to solve the problems of SSI(2016)

5. Distinguish between Private and Public limited Company(2018)

6. A joint stock company is an improvement over other forms of Business Organizations.

Discuss

7. Discuss briefly the rationale of SSI(importance, merits and demerits).(2015, 2018)

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