Unit 2

A private limited company is an attractive business model as it is a company with a minimum

paid-up share capital of 1 lakh. For incorporation, the company require a minimum of 2
directors. However, the company’s share is held by privately by individuals and cannot be traded
publicly.
What is a Private Limited Company?
A company that is privately held, the liability of the members is limited as compared to other
companies. Such companies need to have a minimum of 2 members and a maximum of 200
members. A private company is based on shares. However, unlike a public company, these
shares are not traded in the stock market. And so, these companies are often referred to as
‘unlisted companies’.
Characteristics of PVT Ltd Company
Treatment of Shares
The shares are privately held by closely knit groups. Most of the people who own the shares in a
private entity tend to be the relatives, friends, angel investors or employees of the founder.
Size
Although most private companies are run as small businesses, there are some large corporations
that continue to run as private entities even though the shares cannot be trade publically.
Raising Money
In case a private company wants to increase its funding, it could raise the same from
its shareholders or listing its debentures or can also attract equity funding which other types of
businesses are unable to do so.
Going Public
A private company can also choose to become a public company by issuing shares to the public. This is called IPO
or Initial Public Offering. Once a company goes public, the stocks are traded in the stock market.
For example, ICICI Prudential Life Insurance changed its private structure and went public in 2016. The insurance
company raised a whopping INR 6057 crores. It became the second largest IPO in the country and was the first
IPO by an Indian company.
Private Limited Company Examples:
Here are a few examples of some well-known brands that operate as private entities:
List of Famous Companies incorporated as Private Limited Company:
• One97 Enterprise Mobile Solutions Private Limited: PayTM
• Life Style International Private Limited
• Google India Private Limited
• American Express (India)Private Limited
• Forbes Marshall Private Limited
 Disadvantages of a Private Limited Company
Many see the paperwork involved with setting up and running a private limited company as a barrier to getting
started. There’s certainly a lot to consider when setting up a private limited company. However, much of the
hassle can be removed when you use a formations agent to help. Considerations include:
• Set up costs
Registering with Companies House, you’ll need to pay a fee. Using a formations agent you’ll probably find this
is cheaper than going direct and costs a lot less than you may think.
• Company accounts
The financial information you need to file is more complex when you’re registered as a private limited company.
However, this information can also help you to keep a keen eye on your company’s productivity and
profitability. And your accounts don’t need to cost the earth to get right.
• Shared profits
The profits of a limited company are distributed among shareholders or channelled back into the business.
Many private limited companies benefit from this and with investment from profits may grow more successfully.
Advantages of a Private Limited Company
Separate Legal Entity: An entity means something which has a real existence; a thing with distinct
existence. A company is a legal entity and a juristic person established under the Act. A juristic person
is a person who is not a natural person or a human being. Therefore a company form of organization
has wide legal capacity and can own property and also incur debts. The members
(Shareholders/Directors) of a company have no liability to the creditors of a company for such debts.
Hence, a Pvt Ltd company is a legal entity separate from that of its members.
• Uninterrupted existence: A company has ‘perpetual succession’, that is continued or uninterrupted
existence until it is legally dissolved. A company, being a separate legal person, is unaffected by the
death or other departure of any member but continues to be in existence irrespective of the changes
in membership. Perpetual succession is one of the most important characteristics of a company.
• Limited Liability: Limited Liability means the status of being legally responsible only to a limited
amount for debts of a company. Unlike proprietorships and partnerships, in a limited liability
company, the liability of the members in respect of the company’s debts is limited. In other words,
the liability of the members of a company is limited only to the extent of the face value of shares
taken up by them. Therefore, where a company is limited by shares, the liability of the members on a
winding-up is limited to the amount unpaid on their shares.
 Free & Easy transferability of shares: Shares of a company limited by shares are transferable by
a shareholder t any other person. The transfer is easy as compared to the transfer of an interest
in a business run as a proprietary concern or a partnership. Filing and signing a share transfer
form and handing over the buyer of the shares along with share certificate can easily transfer
shares.
• Owning Property: A company being a juristic person, can acquire, own, enjoy and alienate
property in its own name. No shareholder can make any claim upon the property of the
company so long as the company is a going concern. The shareholders are not the owners of the
company’s property. The company itself is the true owner.
• Capacity to sue and be sued: To sue means to institute legal proceedings against or to bring a
suit in a court of law. Just as one person can bring legal action in his/her own name against
another in that person’s name, a company being an independent legal entity can sue and also be
sued in its own name.
 Dual Relationship: In the company form of organization it is possible for a company to make a
valid and effective contract with any of its members. It is also possible for a person to be in
control of a company and at the same time be in its employment. Thus, a person can at the
same time be a shareholder, creditor, director and also an employee of the company.
• Borrowing Capacity: A company enjoys better avenues for the borrowing of funds. It can issue
debentures, secured as well as unsecured and can also accept deposits from the public, etc.
Even banking and financial institutions prefer to render large financial assistance to a company
rather than partnership firms or proprietary concerns.
Formation
Step 1: Obtain DSC (Digital Signature) Digital signatures are required to file the forms for company
formation. The registration process is online and the forms require a digital signature. DSC is
mandatory for all subscribers and witnesses in the memorandum and articles of association. You must
obtain the digital signature certificates from government recognized certifying agencies.
Step 2: Apply for DIN (Director Identification Number) DIN is an identification number for a
director. It has to be obtained by anyone who wants to be a director in a company. One DIN is enough
to be a director in any number of companies.
Step 3: Name Approval
To get the name approval, there are following options:
Option 1:Incorporating a Company via RUN (Reserve Unique Name) form: In an attempt to ease
procedures for new as well as existing companies, the Ministry of Corporate Affairs (MCA) has
introduced RUN web service for the incorporation of a company.
Option 2:You can apply for the proposed name through SPICe(INC-32) but only one name can be
applied to this form, which is similar to that of the provision in RUN.
 Step 4: Form SPICe (INC-32) Ministry of Company Affairs has introduced Form SPICe (INC-32). It is a simplified
proforma for incorporating a company electronically. It serves the following purposes with the benefit of a single
application:
• Application for allotment of DIN (Director Identification Number)
• Reservation of company name
• Incorporation of a new company
• Application for PAN and TAN
Step 5: e-MoA(INC-33) and e-AoA (INC-34) e-MoA refers to an electronic Memorandum of Association and eAoA is
electronic Articles of Association. These forms have been introduced to simplify the process of company registration in
India.
Memorandum represents the charter of the company while articles of association contain the internal rules and regulations
of the company.
Earlier memorandum of association and articles of association were required to be filed physically. But now these forms
are filed online on MCA portal as a linked form with SPICe (INC-32). Both these forms must be digitally signed by
subscribers to the Memorandum and Articles of Association.
Step 6: PAN and TAN Application Through this single form SPICe, you can also apply for
company’s PAN and TAN by using forms 49A for PAN and 49B for TAN. The system will auto-
generate these forms after the submission of SPICe form. All you have to do is download it, affix
digital signatures and upload both forms on MCA portal If all the details in the form are duly
filled in along with the required documents, MCA will approve the registration and a CIN
(Corporate Identity Number) will be allocated. You can also track this CIN online on MCA portal.
Public Ltd. Company
Definition: A Public Limited Company (PLC) is a separate legal business entity which
offers its shares to be traded on the stock exchange for the general public. According to
the regulations of the corporate law, a PLC has to compulsorily present its financial stats
and position publicly to maintain transparency.
Example: Barclays Public Limited Company incorporated in the year 1896 is one of
the global financial service company providing investment and banking solution to the
customers (individuals and business entities).
The company is primarily listed on the London Stock Exchange and secondly on the New
York Stock Exchange. The investors can easily buy and sell the shares of Barclays PLC on
these stock exchanges.
Characteristics of Public Limited Company (PLC)

A public limited company is very different from private limited companies; however, both
are there in the business for profit earning. Following are the various features of a PLC:
•Ownership: The ownership of a PLC lies with two or more shareholders who own the shares of
the company.
•Index of Members: A public limited company needs to keep an index of its members with their
names.
•Paid Up Capital: The company needs to have a minimum paid-up capital as decided by the
corporate law of that country. According to the Companies Act, 2013, a PLC in India needs to
keep rupees five lacs as a minimum paid-up capital.
•Perpetual Succession: The company’s existence is independent of the death, bankruptcy or
insolvency of any of the member.
•Formation: A PLC can be formed with the appointment of at least two directors and one
qualified company secretary.
•Directors: A public company needs to have three or more directors for its existence.
•Name: The company has to end its registered name with the word ‘limited’ for making it a PLC.
•Limited Liability: The liability of the shareholders of a public limited company in case of loss or
debts is only limited to the amount of investment they have made in the company. Their assets
cannot be charged liable for any such damages.
•Prospectus: It is mandatory for a public limited company to issue a prospectus which is the
statement of present and plans of the company.
•Abided by Law: A public limited company has to abide by the corporate laws of the country.
Indian PLCs have to follow the regulations of the Companies Act, 2013.
•Minimum Subscription: A PLC needs to acquire at least 90% amount of the shares issued by the
company within a particular period.
Advantages of Public limited companies
Following are the advantages of forming a public limited company:
More capital
Shares are offered to the general public at large i.e. anyone can invest in a public limited company. Hence,
improves capital of the company.
More attention
Being listed on a stock market ensures that mutual funds, hedge funds and other traders take note of
business of the company. This may result in better business opportunities for the Public Limited Company.
Spreading risk
Since the shares are sold to the public at large the unsystematic risk of the market is spread out.
Growth and expansion opportunities
Due to less risk, there is a perfect opportunity for growing and expanding the business by investing in new
projects from the money raised through shares.
Requirements/Process for registration of
Public Limited Companies
There are various rules and regulations prescribed under the companies act, 2013 for the
formation of a public limited company. Here is what you should keep in mind when
registering a public limited company:
•Minimum 7 shareholders are required to form a public limited company
•Minimum of 3 directors is required to form a public limited company
•The minimum share capital of Rs. 5 lakhs is required
•Digital signature certificate (DSC) of one of the directors is needed while submitting self-
attested copies of identity and address proof
•Directors of the proposed company will need a DIN
•An application is required to be made for the selection of the name of the company
•An application comprising the main object clause of the company is to be made. This object
clause will define what a company will pursue after its incorporation
•Submission of the application to ROC along with the required documents like MOA, AOA, duly
filled Form DIR – 12, Form INC – 7 and Form INC – 22 is needed
•Payment of the prescribed registration fees to the ROC is required
•After obtaining an approval from the ROC, the company should apply for the ‘certificate of
business commencement.’
Name Reservation: The company needs to get the company name approved under the Companies
Act, 2013, which is valid up to twenty days from the date of approval.
A company can propose and apply for two names and can go for one resubmission (RSUB) under
Reserving Unique Names (RUN) web service.
Digital Signature Certificate (DSC) of Director: Filing of the online application form for a public
limited company requires signatures supported by the DSC of the directors and the shareholders.
DSC can be taken by submitting a DSC application attached with identity proof, address proof,
photographs of the respective signatory.
Obtain Director Identification Number (DIN): The directors need to file a DIN application
attached with the address proof id proof attested by any CS, CMA or CA.
The Registrar of Companies (ROC) is responsible for issuing a unique identification number known as
Directors Identification Number (DIN) to become the official director in India.
Approval of Other Authorities: The applicant should next take and furnish the approval from the
respective department, appropriate authority, regulatory body or ministry of Central or State
Government depending on the type of business and the work, to the ROC.
Document Submission: An application for incorporation or registration of the PLC
supported by declaration, affidavits, Memorandum and Article of Associations is to be
submitted to the ROC.
Certificate of Incorporation: A registration certificate, also known as a certificate of
incorporation is issued by the ROC after inspecting the application and documents
submitted. The business can be now commenced under the norms of a public limited
company.
PAN & TAN of the Company: Simultaneously with the certificate of incorporation, the
applicant needs to apply for the Permanent Account Number (PAN) and Tax Deduction and
Collection Account Number (TAN). It is issued with and mentioned in the certificate of
incorporation.
Opening of Bank Account: Lastly, the PLC so formed, has to compulsorily open a current
account with any bank, by submitting the registration certificate and the other required
documents.
Disadvantages of Public Limited
Company (PLC)
•More Regulations: A company is abided by the laws and regulations formed by the
corporate houses to function as a public limited company which is a hefty task.
•Loss of Ownership: Ultimately, a company has to go public to work as a PLC, which
leads to giving up of owner’s possession over the company.
•Lack of Control: The loss of ownership leads to the loss of control over the decision
making of the company.
•Disclosure of Company’s Financial Position: A PLC has to disclose the complete
financial health of the company in front of the public to assure a high level of
transparency.
•Profit-Sharing: The profit sharing is done on a vast scale among all the shareholders,
which entitle each one of them a tiny proportion of that profit.
HW
Write The difference between private
limited company and public limited
company
The word ‘co-operation’ stands for the idea of living together and working together. Cooperation
is a form of business organisation the only system of voluntary organisation suitable for poorer
people. It is an organisation wherein persons voluntarily associate together as human beings on
a basis of equality, for the promotion of economic interests of themselves.
A cooperative organisation is an association of persons, usually of limited means, who have
voluntarily joined together to achieve a common economic end through the formation of a
democratically controlled organisation, making equitable distributions to the capital required,
and accepting a fair share of risk and benefits of the undertaking.
The following are the characteristic features of a cooperative organisation as a form of business
organisation:
1. Voluntary Association:
A cooperative society is a voluntary association of persons and not of capital. Any person can
join a cooperative society of his free will and can leave it at any time. When he leaves, he can
withdraw his capital from the society. He cannot transfer his share to another person.
2. Spirit of Cooperation:
The spirit of cooperation works under the motto, ‘each for all and all for each.’ This means that
every member of a cooperative organisation shall work in the general interest of the
organisation as a whole and not for his self-interest. Under cooperation, service is of supreme
importance and self-interest is of secondary importance.
3. Democratic Management:
An individual member is considered not as a capitalist but as a human being and under
cooperation, economic equality is fully ensured by a general rule—one man one vote. Whether
one contributes 50 rupees or 100 rupees as share capital, all enjoy equal rights and equal duties.
A person having only one share can even become the president of cooperative society.
4. Capital:
Capital of a cooperative society is raised from members through share capital. Cooperatives are
formed by relatively poorer sections of society; share capital is usually very limited. Since it is a
part of govt. policy to encourage cooperatives, a cooperative society can increase its capital by
taking loans from the State and Central Cooperative Banks.
5. Fixed Return on Capital:

In a cooperative organisation, we do not have the dividend hunting element. In a consumers’

cooperative store, return on capital is fixed and it is usually not more than 12 p.c. per annum.
The surplus profits are distributed in the form of bonus but it is directly connected with the
amount of purchases by the member in one year.
6. Cash Sale:

In a cooperative organisation “cash and carry system” is a universal feature. In the absence of
adequate capital, grant of credit is not possible. Cash sales also avoided risk of loss due to bad
debts and it could also encourage the habit of thrift among the members.
7. Moral Emphasis:

A cooperative organisation generally originates in the poorer section of population; hence more
emphasis is laid on the development of moral character of the individual member. The absence
of capital is compensated by honesty, integrity and loyalty. Under cooperation, honesty is
regarded as the best security. Thus cooperation prepares a band of honest and selfless workers
for the good of humanity.
8. Corporate Status:
A cooperative association has to be registered under the separate legislation—Cooperative
Societies Act. Every society must have at least 10 members. Registration is desirable. It gives a
separate legal status to all cooperative organisations—just like a company. It also gives ex-
emptions and privileges under the Act.
Types of Cooperatives:
Cooperatives may be formed in all walks of life. Some of them are concerned with the
moral and social uplift of a weak section of the people, while many of them combine
some business activity with service to members.
1. Cooperative Credit Societies:
Cooperative Credit Societies are voluntary associations of people with moderate means
formed with the object of extending short-term financial accommodation to them and
developing the habit of thrift among them.
Germany is the birth place of credit cooperation. Credit cooperation was born in the
middle of the 19th century. Rural credit cooperative societies were started in the villages
to solve the problem of agricultural finance.
2. Consumers’ Cooperative Societies:
28 Rochedale Pioneers in Manchester in UK laid the foundation for the Consumers’
Cooperative Movement in 1844 and paved the way for a peaceful revolution. The
Rochedale Pioneers who were mainly weavers, set an example by collective purchasing
and distribution of consumer goods at bazar rates and for cash price and by declaration
of bonus at the end of the year on the purchase made.
Their example has brought a revolution in the purchase and sale of consumer goods by
eliminating profit motive and introducing in its place service motive. In India,
consumers’ cooperatives have received impetus from the govt, attempts to check rise in
prices of consumer goods.
3. Producers’ Cooperatives:
It is said that the birth of Producers’ Cooperatives took place in France in the middle of 19th
century. But it did not make satisfactory progress.
Producers’ Cooperatives, also known as industrial cooperatives, are voluntary associations of
small producers formed with the object of eliminating the capitalist class from the system of
industrial production. These societies produce goods for meeting the requirements of
consumers. Sometimes their production may be sold to outsiders at a profit.
There are two types of producers’ cooperatives. In the first type, producer-members produce
individually and not as employees of the society. The society supplies raw materials,
chemicals, tools and equipment’s to the members. The members are supposed to sell their
individual products to the society.
In the second type of such societies, the member-producers are treated as employees of the
society and are paid wages for their work.
4. Housing Cooperatives:
Housing cooperatives are formed by persons who are interested in making houses of
their own. Such societies are formed mostly in urban areas. Through these societies
persons who want to have their own houses secure financial assistance.
5. Cooperative Farming Societies:
The cooperative farming societies are basically agricultural cooperatives formed for the
purpose of achieving the benefits of large scale farming and maximizing agricultural
output. Such societies are encouraged in India to overcome the difficulties of subdivision
and fragmentation of holdings in the country.
advantages of a cooperative society are
1. Easy to Form 2. Open Membership 3. Democratic Management 4. Limited Liability 5.
Stability 6. Economical Operations 7. Government Patronage
8. Low Management Cost 9. Mutual Co-Operation 10. No Speculation 11. Economic
Advantages 12. Service Motive 13. Internal Financing 14. Income Tax Exemption
15. Durability 16. Cheaper Goods 17. State Patronage 28. Elimination of Middleman 19.
Equality 20. Perpetual Existence 21. Scope for Self-Government.
1. Easy to Form- A cooperative society is a voluntary association and may be formed with
a minimum of ten adult members. Its registration is very simple and can be done
without much legal formalities.
2. Open Membership- Membership in a cooperative organisation is open to all people
having a common interest. A person can become a member at any time he likes and can
leave the society at any time by returning his shares, without affecting its continuity.
3. Democratic Management- A cooperative society is managed in a democratic manner.
It is based on the principle of ‘one man one vote’. All members have equal rights and can
have a voice in its management.
4. Limited Liability- The liability of the members of a co-operative society is limited to
the extent of capital contributed by them. They do not have to bear personal liability for
the debts of the society.
5. Stability- A co-operative society has a separate legal existence. It is not affected by the
death, insolvency, lunacy or permanent incapacity of any of its members. It has a fairly
stable life and continues to exist for a long period.
6. Economical Operations- The operation of a cooperative society is quite economical
due to elimination of middlemen and the voluntary services provided by its members.
7. Government Patronage- Government gives all kinds of help to co-operatives, such as
loans at lower rates of interest and relief in taxation.
disadvantages of a cooperative society
are:-
1. Limited Capital 2. Inefficient Management 3. Absence of Motivation 4. Differences and
Factionalism among Members 5. Rigid Rules and Regulations 6. Lack of Competition 7.
Cash Trading 8. Lack of Secrecy 9. Weightage to Personal Gains 10. Lack of Incentive
and Initiative
1. Limited Capital- Cooperatives are usually at a disadvantage in raising capital because of the
low rate of return on capital invested by the members.
2. Inefficient Management- The management of a co-operative society is generally inefficient
because the managing committee consists of part-time and inexperienced people. Qualified
managers are not attracted towards a cooperative on account of its limited capacity to pay
adequate remuneration.
3. Absence of Motivation- A cooperative society is formed for mutual benefit and the interest
of individual members is not fully satisfied. There is no direct link between effort and reward.
Hence, members are not inclined to put their best efforts in a cooperative society.
4. Differences and Factionalism among Members- Once the initial enthusiasm about the co-
operative ideal is exhausted, differences and group conflicts arise among members. Then, it
becomes difficult to get full co-operation from the members. The selfish motives of members
begin to dominate and service motive is sometimes forgotten.
5. Rigid Rules and Regulations- Excessive Government regulation and control over co-
operatives affect their functioning. For example, a co-operative society is required to get
its accounts audited by the auditors of the co-operative department and to submit its
accounts regularly to the Registrar. These regulations and control may adversely affect
the flexibility of operations and the efficiency of management in a co-operative society.
6. Lack of Competition- Cooperatives, generally, do not face any stiff competition.
Markets for their goods and services are more or less ready and assured. Hence, there is
possibility of slackening of efforts.
Busines size and location
Size of business refers to the scale of operations
and it is important because it affects the cost
operations and inputs required.
• Total Assets
• Capital Required
• Number of workers employed
• Capacity of plants
• Quantity of materials
Business size refers to the scale of business
operations; which determines the level of
production and consequently the volume of sales.
A business may be carried on a large scale or a
moderate scale or a small scale.
Factors affecting business size could be divided into the following three
categories:
(I) Personal Factors:
Some of the personal factors, which have a bearing on the size of business,
may be:
1. Financial capacity of owners/capacity of promoters to raise funds from the market
2. Managerial capacity of owners/managers i.e. the extent to which they can successfully
and efficiently manage a particular size of business enterprise
3. Risk taking capacity of owners i.e. the type and extent of risk which owners are willing
to assume associated with the scale of business operations.
(II) Commercial Factors:
Some commercial factors determining business size are:
(i) Sales Estimate:
The size of business depends on the size of the market as revealed by judicious sales
estimates; so that the firm can avoid investing in an establishment that is too large and
expensive to be profitable. In short, the size of business is limited by the size of market
(i.e. the size of demand).
(ii) Prospects for Expansion:
Size of business also depends on what are the prospects for expansion in demand, in
near future. A business may be carried on that large a scale as will cope with the
requirements of business expansion, at a later date.
(III) Technical Factors:
(i) Nature of Productive Machinery:
Size of firm will be large where productive machinery is very large e.g. in case of steel making or ship building or air-
craft manufacturing. Again, where productive machinery is small and simple, size of firm tends to be smaller e.g. in
case of manufacture of cutlery, or baking of bread or making of ball pens etc.
(ii) Variety of Production:
More standardized is the product; larger may be the scale of operations. Firms producing less standardized and
fashionable products tend to be smaller in size.
(iii) Availability of Inputs:
Size of business much depends on the availability of necessary inputs for production e.g. raw- materials, labour, power
etc. Where e.g. necessary inputs are not easily available; the size of business cannot be large. In fact, the size of
business is shaped by the availability of required inputs.
(iv) Applicability of Laws of Returns:
Size of business also depends on the applicability of the Laws of Returns, as per the
economist. Whether the industry in question is subject to the Law of Increasing Returns
or Diminishing Returns has an impact on the size of business firms.
(v) Cost of Transport:
Where the finished product is costly to transport; business may be carried on a small
scale, just to meet the demands of local consumers.
Business Location
Location is the place where a firm decides to site
its operations. Location decisions can have a big
impact on costs and revenues. A business needs
to decide on the best location taking into account
factors such as: Customers - is the location
convenient for customers
Importance of Business Location:
The question of an appropriate location of the plant is very significant for
the owners/promoters of business; as an ideal location helps in:
1. Minimisation of costs of production and distribution.
2. Designing an appropriate layout of machinery and equipment.
3. Coping with requirements of expanding business at a future date.
However, there is nothing like an ideal location of the plant. It all depends on the
peculiar circumstances facing the business enterprise. In any case, the owners must give
a serious consideration to the decision about plant location.
Factors Affecting Business Location:
For sake of simplicity and analysis, location factors could be divided into the
following three categories:
(I) Primary factors
(II) Secondary factors
(III) Miscellaneous factors
(I) Primary Factors:
Some of the primary location factors are as follows:
(i) Availability of Raw-Materials:
Availability of raw-materials of the required quantity and quality at economical prices is an important
factor in plant location; as in many industries cost of raw-materials may form more than 50% of the
total cost of the finished product.
(ii) Labour Supply:
Almost all plants require an adequate supply of labour with appropriate skills. According to Weber, a
plant will get attracted to the source of labour supply; if there are substantial savings in labour cost.
However, the importance of this factor is much reduced now-a-days, because of:
1. Easy mobility of labour, and
2. Growing popularity of capital intensive techniques of production
(iii) Proximity to the Market:
A plant tends to be located near the market when the finished product is very expensive
to carry due to bulk, weight or perishability etc. Alfred Weber developed a formula called
‘material-index’ to measure the relative pull of materials and market on plant location.
Industries with a material index more than one tend to be located near the source of
materials; and industries with a material index less than one are attracted towards the
market for location.
(iv) Facilities of Transport and Communication:
Adequate, reliable and economical transport services are required for the carriage of raw-
materials and finished products. Moreover, business firms require efficient and economical
communication facilities to remain in touch with the environment consisting of suppliers,
consumers, financial institutions etc.
That is why junction points of railways, roadways and waterways have a tendency to become
centres of industrial location. Again, promoters of a new business hesitate to start their
business operations in rural areas where transport and communication facilities usually lack
or are totally non-existent.
(v) Power and Fuel:
Availability of power and fuel is an important consideration in plant location. Earlier,
industrial units were located near coal deposits; because coal was the major source of power.
However, this factor has lost significance with the development of new sources of power, like,
electricity oil, gas etc.
(vi) Climate and Topography:
(Topography means the physical features of an area of land i.e. whether it is plain or
hilly). So far as climate is concerned, it influences the capacity to work and certain
industries require particular temperature and humidity. For example, cotton textile mills
require a humid climate and humid climate of Mumbai offered great scope for the
development of cotton textile industry.
However, development of artificial humidification and air-conditioning has reduced the
importance of climate. So far as topography is concerned, entrepreneurs run away from
hilly areas for location of their plants, because of huge transportation costs and other
problems.
(vii) Supply of Capital:
Even though capital is a very mobile factor of production; the availability of adequate
and cheap finance is an important consideration, in plant location. For instance, State
Financial Corporation’s (SFCs) in various states offer loans at very low rates of interest;
if entrepreneurs start their projects in notified backward areas.
(II) Secondary Factors:
Weber has classified secondary factors into two categories viz. agglomerative factors and
deglomerative factors. Agglomerative factors refer to external economies e.g.
development of auxiliary industries, banking, insurance, transport etc. which result from
the fact that production is carried on to some considerable extent at one place. Such
factors encourage concentration of industries at that place.
On the other hand, deglomerative factors are external diseconomies e.g. rise in wage-
rates or rentals or taxes etc.; which result due to excessive localization of industries.
Such factors encourage geographical dispersal of industries.
III) Miscellaneous Factors:
Some miscellaneous factors affecting industrial location are:
(i) Personal Factors:
Preference and prejudice of an entrepreneur may play an important role in plant
location. According to E.A.G. Robinson (The Structure of Competitive Industry), Mr.
Ford started manufacturing motor cars in Detroit; because it was his home town.
(ii) Momentum of an Early Start:
Once an industry gets established in a particular region; many facilities and services
develop there to aid the industry. It is more expensive to set up a new plant at some
other place where such facilities are not available. Localisation of the film industry in
Mumbai is an outstanding example of this factor.
(iii) Political and Social Climate:
Herein we consider factors like, law and order situation, political stability, terrorism etc.,
which also influence location. Entrepreneurs would not like to set up their plants at
place which are subject to riots, political disturbances, terrorism etc.
(iv) Government Policy:
In a planned economy like India, plant location is encouraged/discouraged at particular
places due to government policy. For example, government offers several incentives for
location of plants in backward areas. Again, government has put restrictions on granting
licences to certain industries to be set-up in metropolitan cities with a certain figure of
population.
PLANT LAYOUT AND BUSINESS
COMBINATION
The concept of plant layout may be described as follows:
Plant layout is a plan for effective utilisation of facilities for the manufacture of products;
involving a most efficient and economical arrangement of machines, materials,
personnel, storage space and all supporting services, within available floor space.
More defines plant layout as follows:
“Plant layout is a plan of optimum arrangement of facilities including personnel,
equipment’s, storage space, material handling equipment and all other supporting
services along with the decision of best structure to contain all these facilities.”
Objectives/Advantages of Plant (v) Maintaining high turnover of in-process
Layout: inventory
Following are the (vi) Effective utilisation of men, equipment
objectives/advantages of plant layout: and space
(i) Streamline flow of materials through the (vii) Increase employee morale
plant
(viii) Minimise interference (i.e.
(ii) Minimise material handling interruption) from machines
(iii) Facilitate manufacturing progress by (ix) Reduce hazards affecting employees
maintaining balance in the processes
(x) Hold down investment (i.e. keep
(iv) Maintain flexibility of arrangements investment at a lower level) in equipment.
and of operation
Principles of Plant Layout:
While designing the plant layout, the following principles must be kept in view:
(i) Principle of Minimum Movement:
Materials and labour should be moved over minimum distances; saving cost and time of
transportation and material handling.
(ii) Principle of Space Utilization:
All available cubic space should be effectively utilized – both horizontally and vertically.
(iii) Principle of Flexibility:
Layout should be flexible enough to be adaptable to changes required by expansion or
technological development.
(iv) Principle of Interdependence:
Interdependent operations and processes should be located in close proximity to each
other; to minimize product travel.
(v) Principle of Overall Integration:
All the plant facilities and services should be fully integrated into a single operating unit;
to minimize cost of production.
(vi) Principle of Safety:
There should be in-built provision in the design of layout, to provide for comfort and
safety of workers.
(vii) Principle of Smooth Flow:
The layout should be so designed as to reduce work bottlenecks and facilitate
uninterrupted flow of work throughout the plant.
(viii) Principle of Economy:
The layout should aim at effecting economy in terms of investment in fixed assets.
(ix) Principle of Supervision:
A good layout should facilitate effective supervision over workers.
(x) Principle of Satisfaction:
A good layout should boost up employee morale, by providing them with maximum work
satisfaction.
Types of Plant Layout:
Two basic plans of the arrangement of manufacturing facilities are – product layout and process layout.
The only other alternative is a combination of product and process layouts, in the same plant.
Following is an account of the various types of plant layout:
(a) Product Layout (or Line Layout):
In this type of layout, all the machines are arranged in the sequence, as required to produce a specific
product. It is called line layout because machines are arrange in a straight line. The raw materials are fed
at one end and taken out as finished product to the other end.
Special purpose machines are used which perform the required jobs (i.e. functions) quickly and reliably.
Product layout is depicted below:
ADVANTAGES: DISADVANTAGES:
1. Reduced material handling cost due to 1. Lack of flexibility of operations, as layout cannot
mechanized handling systems and straight flow be adapted to the manufacture of any other type of
product.
2. Perfect line balancing which eliminates
bottlenecks and idle capacity. 2. Large capital investment, because of special
purpose machines.
3. Short manufacturing cycle due to uninterrupted
flow of materials 3. Dependence of whole activity on each part; any
breakdown of one machine in the sequence may
4. Simplified production planning and control; result in stoppage of production.
and simple and effective inspection of work.
4. Same machines duplicated for manufacture of
5. Small amount of work-in-progress inventory different products; leading to high overall
operational costs.
6. Lesser wage cost, as unskilled workers can learn
and manage production. 5. Delicate special purpose machines require
costly maintenance / repairs.
Suitability of product layout:
Product layout is suitable in the following cases:
1. Where one or few standardized products are manufactured.
2. Where a large volume of production of each item has to travel the production process, over
a considerable period of time.
3. Where time and motion studies can be done to determine the rate of work.
4. Where a possibility of a good balance of labour and equipment exists.
5. Where minimum of inspection is required, during sequence of operations.
6. Where materials and products permit bulk or continuous handling by mechanical parts.
7. Where minimum of set-ups are required.
(b) Process Layout (or Functional Layout):
In this type of layout, all machines performing similar type of operations are grouped at
one location i.e. all lathes, milling machines etc. are grouped in the shop and they will be
clustered in like groups.
A typical process layout is depicted below:
ADVANTAGES: DISADVANTAGES:
1. Greater flexibility with regard to work . Backtracking and long movements occur in
distribution to machinery and personnel. Adapted handling of materials. As such, material handling
to frequent changes in sequence of operations. costs are higher.
2. Lower investment due to general purpose 2. Mechanisation of material handling is not
machines; which usually are less costly than possible.
special purpose machines.
3. Production planning and control is difficult
3. Higher utilisation of production facilities; which
can be adapted to a variety of products. 4. More space requirement; as work-in-progress
inventory is high-requiring greater storage space.
4. Variety of jobs makes the work challenging and
interesting. 5. As the work has to pass through different
departments; it is quite difficult to trace the
5. Breakdown of one machine does not result in responsibility for the finished product.
complete stoppage of work.
Suitability of process layout:
Process layout is suitable in the following cases, where:
1. Non-standardised products are manufactured; as the emphasis is on special orders.
2. It is difficult to achieve good labour and equipment balance.
3. Production is not carried on a large scale.
4. It is difficult to undertake adequate time and motion studies.
5. It is frequently necessary to use the same machine or work station for two or more difficult
operations.
6. During the sequence of operations, many inspections are required.
7. Process may have to be brought to work, instead of “vice-versa”; because materials or
products are too large or heavy to permit bulk or continuous handling by mechanical means.
(c) Combination Layout:

In practice, plants are rarely laid out either in product or process layout form. Generally
a combination of the two basic layouts is employed; to derive the advantages of both
systems of layout. For example, refrigerator manufacturing uses a combination layout.

Process layout is used to produce various operations like stamping, welding, heat
treatment being carried out in different work centres as per requirement. The final
assembly of the product is done in a product type layout.
In such cases machinery is arranged
in a process layout but the process
grouping (a group of number of
similar machines) is then arranged in
a sequence to manufacture various
types and sizes of products. The
point to note is that, no matter the
product varies in size and type, the
sequence of operations remain same
or similar. Figure shows a
combination type of layout for
manufacturing different sized gears.
A combination layout is also useful when a number of
items are produced in same sequence but none of the
items are to be produced in bulk and thus no item
justifies for an individual and independent production
line. For example, files, hacksaws, circular metal saws,
wood saws, etc. can be manufactured on a combination
type of layout.
(d) Fixed Position Layout:
It is also called stationary layout. In this type of layout men, materials and machines are
brought to a product that remains in one place owing to its size. Ship-building, air-craft
manufacturing, wagon building, heavy construction of dams, bridges, buildings etc. are
typical examples of such layout.
ADVANTAGES: DISADVANTAGES:

(i) It is possible to assign one or more (i) It is possible to assign one or more
skilled workers to a project from start to skilled workers to a project from start to
finish in order to ensure continuity of finish in order to ensure continuity of
work. work.
(ii) It involves least movement of (ii) It involves least movement of
materials. materials.
(iii) There is maximum flexibility for all (iii) There is maximum flexibility for all
sorts of changes in product and process. sorts of changes in product and process.
(iv) A number of quite different projects (iv) A number of quite different projects
can be taken with the same layout. can be taken with the same layout.
Application:
Layout by fixed position of product is limited to
large items made singly or in very small lots.
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