Module 4 Notes

4 - Setting up of Industrial Units

Environment for Entrepreneurship – Criteria for selecting particular project- Generating project ideas-
Market and demand analysis Feasibility study- Scope of technical feasibility- Financial feasibility-
Social cost benefit analysis-Government regulations for project clearance-Import of capital goods-
approval of foreign collaboration-Pollution control clearances- Setting up of micro small and medium
enterprises-Location decision- Significance. (18 Hours, 20 marks)
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The entrepreneur has to follow a lot of formalities in setting up a business or industrial unit. He or she
is required to consider how the environment affects his or her entrepreneurial decisions.

Environment for Entrepreneurship

Entrepreneurs are not born; they are made right from childhood. The environment around the
entrepreneur makes an entrepreneur.

Meaning of Entrepreneurial Environment

Entrepreneurship does not grow without environmental support. Therefore, entrepreneurship emerges
within the environmental context in every society of the world. Entrepreneurship environment refers
to the various facets within which enterprises have to operate. The environment, therefore, influences
the enterprise. By and large, an environment created by political, social, economic, national, legal
forces, etc. influences entrepreneurship. Entrepreneurial environment is a combination of factors that
play a role in the development of entrepreneurship. It refers to the overall economic, socio-cultural,
and political factors that influence people's willingness and ability to undertake entrepreneurial
activities) In short/entrepreneurial environment refers to the various constraints within which
enterprises are required to operate.

Entrepreneurial Environmental Factors

Entrepreneurial environment is broadly classified into six important segments, namely, (1) Political
environment, (2) Economic environment, (3) Social environment, (4) Technological environment, (5)
Legal environment, and (6) Cultural environment.

1. Political Environment: Political environment is concerned with the general stability of the country
in which an enterprise is expected to perform and the political philosophy is expected to perform and
the political philosophy of the party in power towards business. Main factors related to the political
environment are: (a) Political philosophy, (b) Political atmosphere, and (c) Quality of leadership.

2. Economic Environment: Economic environment includes all those actions which make the
economic activities possible in the country. Resources, economic conditions, economic policies,
incentives, subsidies etc. are some of the important factors which constitute the environment.

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3. Social Environment: Social environment prepares background for entrepreneurial activities.
Today, business is regarded as a social institution. Social structure, social values and conventions,
consumerism, labour attitude etc. constitute the social environment.

4. Technological Environment: Technological forces constitute the technological environment.

Technological forces include expertise, procedures, and systems used by enterprises to make changes
in the transformation forces and in goods and services.

5. Legal Environment: It is the government which regulates business activities. Govt. policies will
influence all the decisions of the entrepreneurs regarding what to produce, how much to produce, what
quality to produce, where to produce and for whom to produce. The entrepreneurs have to operate
within the constraints and limits set by the Government.

6. Cultural Environment: Generally it is said that entrepreneurship is based on cultural and ethical
values. Cultural structure, lifestyles and education levels are important parts of the entrepreneurial
environment.

Entrepreneurial Ecosystem

An entrepreneurial ecosystem may be described as a set of entrepreneurial organisations (e.g., firms,

venture capitalists, business angels, banks), institutions (universities, public sector agencies, financial
bodies) and entrepreneurial processes which interact with one another in the environment.

Generation of Project Ideas or Opportunities

The first and foremost problem of an entrepreneur is to find a suitable business/ project which can give
him a reasonable profit. He is primarily an investor. So naturally, he will aim at earning reasonable
profit from his investment or enterprise. Therefore, he has to first search for a business idea, or
opportunity and give a practical shape to his idea. Emergence of project ideas from different sources
is called generation of project ideas) The idea should be sound and workable, so that it may be
exploited. Further, the idea can be converted into a business. The entrepreneur has to be imaginative
and foresighted to discover a business/project idea. Good project idea is the key to success. Look at
the words of Subhash Chandra Bose, "In this world everything perishes and will perish but ideas, ideals
and dreams do not". Generation of project ideas is a part of identification of projects.

Sources of the Project Ideas

The business idea arises from an opportunity in the market. It originates from any need or wants for
any product or service that an entrepreneur can identify. Entrepreneurs should have a keen and open
mind to look for opportunities and generate business ideas. Thomas J. Watson says, "Opportunity never
knocks on the door. You have to knock on opportunity's door of opportunity and they are all around".

The entrepreneur sees opportunities all around and knows which are the best to go for. It is not a matter
of analysis but of instinct. Bernie Ecclestone believes "You have an instinct. You can't learn business".
His first business move came at nine when he exploited war time food shortages. He sold Chelsea buns
to his school friends in the lunch breaks. He saw the opportunity.

Ideas come from many sources. Some of the sources of ideas are as follows:

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1. Our own needs: Our own needs often provide the business opportunity. In 1984, Tom Hunter was
an unemployed graduate in marketing and economics living in Ayrshire, Scotland. He liked to wear
training shoes and found that there was no shop around where he could see a good selection. "I noticed
a growing demand for training shoes. I thought maybe I could do something in this area of business".
He borrowed money from his father and the bank to buy stock and rented space from a retail group
that had stores in Aberdeen, Leeds and Sunderland. Soon he had 50 such outlets. He then set up his
own shops and by 1995 he had 45 with annual sales of 36 million pounds.

2. Market characteristics: Careful observation of markets can reveal a business idea. Observation is
one of the most important sources of project ideas. Market surveys can also reveal the demand and
supply position for various products. It is necessary to estimate future demand to consider anticipated
changes in fas0hion, income level, technology etc. In this connection it will be useful to ascertain
whether the demand is low or high. Study of the price trend of various products may give an idea about
the relationship between demand and price. Further, attempts should be made to determine the trend
of demand and the composition and pattern of potential users of the product. The success of Kellogs
as breakfast as quick and nutritious food is an example of success of a new idea.

3. Success stories of friends and relatives: A person may meet people who are successful in their
ventures. Their success stories may inspire others. This inspiration/motive may drive them to start
ventures or take up projects.

4. Project profiles: Various government and private agencies publish periodic profiles of various
projects and industries. These profiles describe in detail technical, financial and market requirements.
A careful scrutiny of such profiles is helpful in choosing the line of business.

5. Trade fairs and exhibitions: Trade fairs and exhibitions are organised by the Industries Department
of Central and State Government and Trade Organisations. These trade fairs and exhibitions are a very
good source of business ideas. At these fairs, different products are displayed/sold. A visit to these
fairs provides information about new products/machines and professional journals: Trade and
professional journals/magazines are also sources of ideas. These journals/magazines give information
relating to products manufactured or components required by other industrial units.

7. Prospective consumers: The consumer is the foundation of all the business. It is the consumer who
keeps a business going. Therefore, it is essential for an entrepreneur to contact prospective consumers.
The entrepreneur should conduct an analysis of the product and its market from the point of view of
the customers. The data on consumer preference and needs will have to be collected. This enables the
entrepreneurs to manufacture products according to the customer's satisfaction.

8. Developments in other nations: People in under- developed countries generally follow the fashion
trends of advanced countries. A person can discover good business ideas by keeping in touch with
developments in advanced countries. Sometimes, he visits foreign countries in search of new ideas for
new products/processes.

9. Government organisations: Many government organisations/agencies help entrepreneurs in

discovering and evaluating business ideas. Development banks, state industrial corporations, technical

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consultancy organisations, investment centres, export promotion councils, district industrial centres,
etc., provide advice and assistance in technical, financial, marketing and other areas of business.

10. Research organisation: Study of new products/processes developed by research laboratories etc.,
gives project ideas to prospective entrepreneurs.

11. Items reserved for small scale units: The list of industries reserved exclusively for development
of the small scale sector will also give an indication of the potential available.

12. Study of Government policy: Study of Government policies regarding industrialisation, exports,
imports, development of backward areas etc., provide a source of business ideas.

13. Utilisation of waste materials: Industries can be established to utilise the waste products of some
industries. Similarly, ancillaries may be set up to supply components to large units.

14. Brainstorming: Brainstorming is a creative group problem-solving technique that involves

generating a large number of fresh ideas. Under brainstorming a group of persons sit together and
generate as many project / business ideas as possible. One idea leads to another. Brainstorming was
first developed by Alex F. Osborn in 1941, and gained acceptance by the business world in 1950.

15. Hobbies: Some people are interested in doing something or the other as a hobby or for use in the
house only. It is possible to use such skills to set up an enterprise. Hobbies like photography, interior
decoration, fashion designing etc. are often developed as ventures. It was computer hobbyists in the
USA that created the personal computer industry. Bill Gates's hobby was writing software. The Wright
Brothers got the idea to make an aeroplane when they flew kites just as every boy had done.

Screening of Project Ideas

When business ideas are discovered, screening of these ideas is done. The need for screening of the
ideas arises because all the ideas generated may not be promising. Some ideas are bad or unprofitable.
They are to be dropped or eliminated. Only the most promising or most profitable ideas are to be
selected for further study. Such a process of evaluating the project ideas with a view to select the best
and promising idea after eliminating the unprofitable ideas is called screening of project ideas.
Screening of ideas is not a detailed evaluation. But it is an attempt to select the more worthwhile ideas
from the list of ideas generated. This is done only after taking into consideration the following factors
(criteria used in screening project ideas):

1. Compatibility with the entrepreneur. The idea must suit the interest, personality and resources of the
entrepreneur. It must be accessible to him. It must offer him the prospect of rapid growth and high
return on invested capital. Again, it should not be beyond his capacity.

2. Consistency with Government regulations and priorities: Before selecting the project, the
entrepreneur must take into account the government's policy regarding investments and reservation of
certain items for the small scale units. The project should not violate government regulations and
control. It should be consistent with national goals.

3. Availability of inputs: In selecting the project, it is necessary to consider the availability of inputs
like raw material, labour, capital, power etc,. The resources and inputs required for the project must be

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reasonably assured. If the raw materials are scarce, there will be interruption in the production. If the
raw materials have to be imported, the entrepreneur has to ensure that there are no problems in this
regard. Further, the availability of skilled workers is to be ensured before launching an enterprise. He
has to make sure that the required material and technical know-how are readily available. He has to
ensure that the capital requirements of the project are within manageable limits. Again, he has to ensure
that there is no problem in obtaining power supply for the project.

4. Marketing facilities: Another important factor to be taken into consideration is the marketing
facilities available. The size of the present market must offer the prospect of adequate sales volume.
There should be a potential for growth and a reasonable return on investment. Existing and potential
demand in the domestic and export market, nature of competition, sales and distribution system,
consumption trends, availability of substitutes etc. should be assessed and evaluated before taking the
final decision,

5. Profitability: This is another important factor which influences the selection process. The project
yielding higher return must be selected.

6. Cost of the project: The cost of the project should be reasonable. This means that the desired rate of
return can be realised from a competitive price. A study of the cost structure under material cost, labour
cost, factory overheads, general and administration overheads, selling cost, distribution cost, service
costs, economies of scale etc., will give a good idea regarding different types of costs.

7. Level of risks: While selecting the project, it becomes essential on the part of the entrepreneur to
assess the level of risk involved in the project. Every project is subject to risks such as change in
demand, technological development, emergence of substitutes, competition, cyclical and seasonal
variation etc. These risks have to be assessed before selecting the project.

8. Other factors: Other criteria used in screening project ideas include: (a) payback, (b) expected life,
(c) environmental impact, etc.

Thus, project identification includes generation of project ideas and their screening with a view to
select few good ideas for further analysis. Mere ideas cannot be called opportunities Ideas become
business opportunities if they have the possibility of success.

Selection of Project

Selection of projects is the most critical decision to make. After gathering a large number of project
profiles, the entrepreneur should consider the following criteria for selecting a particular project.

1. Investment: First of all, an entrepreneur should ensure his position to what extent he is ready to
invest in the project as well as to maintain liquidity of the business. Then he can select a particular
project.

2. Location: Location of the project is an important factor. There are certain projects which can be
started only in free trade zones, export promotion zones etc. Government also provides export
incentives, tax concessions etc. to these units. So it would be better for the entrepreneur to select such
projects. Availability of a big consumer market in nearby areas also affects the selection of a project.

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3. Technical knowledge: Availability of technical knowledge of entrepreneurs helps him in selecting
a project in that particular field. Similarly, if an entrepreneur himself has gained a substantial amount
of experience in a particular project, then the selection of such a project would be helpful to him.

4. Profitability: The most commonly used criterion to select projects is their profitability Some
entrepreneurs would like to use the rate of return or the discounted cash flows as their criteria of choice.
Many others prefer to use the payback period as the criterion to compare projects.

5. Risk: Some projects are riskier than others. This needs to be taken into account during project
selection.

6. Availability of market: Market also plays a crucial role in the selection of the project. A wide market
creates more demand for the product. Market risk will also be reduced. The entrepreneur should have
a clear cut answer about the market - how to sell and where to sell?

7. Competition: Project performance in a market is also governed by the level of competition available
in that particular market. Hence competition should also be considered while selecting the project.

8. Government policy: Project selection process should also be analysed in terms of government policy
and its impact. If the Government policy is favourable to a particular project, then selection of that
particular project will prove helpful to the entrepreneur.

Market and Demand Analysis

After a business idea is generated, market and demand analysis is conducted to find out the feasibility
of the idea. The success of any enterprise depends upon its ability to market its products/services. The
survival of any business depends upon its earning capacity. Earning capacity depends on the volume
of sales. Marketing is the only activity which brings revenue while all other activities involve
expenditure. Hence a detailed market and demand analysis should be undertaken.

Meaning of Market and Demand Analysis

Before the production actually starts, the entrepreneur needs to analyse the demand and market for the
proposed product. He or she has to anticipate who will be the possible customers for his or her product
and where and when the product will be sold. It may be noted that production has no value for the
producer unless it is sold. Hence it is quite essential to study and analyse the market and demand for
the product. Market and demand analysis simply means analysing the future demand potential. It is the
study of the market for the product and estimate the total demand.

How to Conduct Market and Demand Analysis?

First of all, the entrepreneur should determine the objectives for the market feasibility. Then, a
preliminary discussion with customers, retailers, distributors, competitors, suppliers etc. is carried out
to understand the consumer preferences, existing and potential demand, strategy of competitors,
practices of distributors, retailers etc. The study should be such that it generates answers to the
following questions:

(a) Who are the consumers (or customers) present and prospective?

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(b) What is the present and future demand?

(c) How is the demand distributed seasonally?

(d) How is the demand distributed geographically?

(e) How much price consumers are willing to pay?

(f) What is the marketing mix of competitors?

(g) What marketing mix would the consumers accept (or expect)?

Research is required to obtain information to answer the above questions. Information obtained from
the market survey shall help the entrepreneur in assessing the demand for his product. It is also helpful
in understanding the nature and the extent of competition and the prevailing trade practices in the
market. Depending upon several factors like the availability of resources, the scale of operation, and
the impact on profitability, the entrepreneur should decide the customer group, which is called the
market segment. The entrepreneur can put all of his or her efforts on the market segment determined
(i.e., target market).

Steps Involved in Market and Demand Analysis

Market and Demand analysis involves the following steps:

1. Analysing Market Demand and Forecasting Demand

2. Understanding the Competitive Situation
3. Understanding the Trade Practices
4. Estimating future changes in the volume and pattern of demand and supply.

These may be briefly explained as below:

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1. Analysis of Market Demand and Demand Forecasting

The potential entrepreneur has to assess market demand for the product/service. Detailed study of the
market for determining the size of the demand for the product is known as demand analysis. Demand
analysis refers to assessment of the willingness and ability of the customers to buy products or services.
The important factors determining demand are price, nature of product/service, income of consumers,
competition, tastes and preferences of consumers etc.

As already stated, market demand analysis is done on the basis of market survey. The information to
be collected from market survey should include:

(a) Total demand of the product

(b) Segment-wise break up of the demand

(c) Income elasticity of the demand

(d) Information relating to consumers (e.g., tastes and preferences)

For demand analysis, necessary information is to be collected. Two sources are commonly used to
collect information for, analysing demand.

(i) Primary data collection: Primary data collection is undertaken through a market survey. Market
survey can be either a census survey (by taking complete population) or a sample survey (by taking
sample from the population). In case a product has a small market and a limited number of buyers, a
census survey may be undertaken. In case the product has a large market and a diversified group of
buyers, it is better to undertake a sample survey.

Market survey or market research provides valuable information to entrepreneurs. The more he knows
about his market, the greater is his chance of creating customers at a profit.

(ii) Secondary data collection: Secondary data are collected from the information already available.
The sources of secondary data include census of India, National Sample Survey reports, Planning
Commission reports, UNDP reports, information supplied by CSO, Economic Survey, Annual
publications of industrial departments etc. After gathering the primary and secondary data relating to
market and demand, future demand is estimated. The process of estimating future demand is known
as demand forecasting.

Methods or Techniques of Demand Forecasting: All methods of demand forecasting are broadly
classified into three-qualitative methods, quantitative methods and casual methods.

A. Qualitative Methods: These are judgemental methods in which experts translate the information
collected from the primary and secondary data into qualitative estimates. The following are the
important qualitative methods.

1. Jury of executive method: Under this method, a group of experts give their views on expected
future demand. On the basis of their views, demand is estimated.

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 2. Delphi method: This method involves collecting information/opinion from a group of experts
who don't interact face-to-face. A questionnaire for demand estimation is prepared and mailed
to them and they are asked to express their views. Responses received from them are
summarised and sent back to each of the experts along with questions to probe further the
reasons for views expressed in the first round. This is repeated until all experts arrive at a
common demand estimate.
3. Survey method: This method involves asking the customers' intention to buy the product for
the period for which forecast is desired.

B. Quantitative Methods: These methods are based on the historical time series which is the past trend
of the demand. The following are the important quantitative methods:

1. Trend projection method: This method is very popular. This involves extrapolating the past
trend to the future. This way demand can be predicted.
2. Moving average method: Under this method, the forecasts for the next period represent a simple
average or weighted arithmetic average.
3. Exponential smoothing method: In this method, forecasts are modified in the light of observed
errors.

C. Casual Methods: In these methods, the forecasts are developed on the basis of cause- effect
relationship specified in an explicit quantitative manner. The important methods are:

1. Chain ratio method: In this method, a series of factors are used to develop demand estimates.
2. Consumption level method: In this case demand is estimated on the basis of consumption level.
The consumption level is estimated on the basis of elasticity coefficient like income elasticity,
price elasticity etc.
3. Leading indicator method: Leading indicators are variables which change ahead of other
Variables (the lagging variables). Hence observed changes in leading indicators may be used
to predict the changes in lagging variables.

2. Understanding the Competitive Situation

Competitive situation requires special attention in the whole exercise of market analysis. To understand
it in respect of a given product/service, an entrepreneur is required to answer questions such as:

(a) How many firms are offering the same or similar goods/services?

(b) What are their market shares?

(c) What are the strengths and weaknesses of their products?

(d) What kind of consumer image does each project enjoy?

(e) What trade practices do the competitors employ?

(f) Who are the major customers of each brand?

The answers to the above questions may be tabulated for understanding the degree of competition.

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3. Understanding Trade Practices

Trade practices reveal the mode, means and modalities of serving customers with products/services.
Due to the spread of customers, or their buying habits or even the nature of the products, it is not
feasible for an entrepreneur to reach customers directly. A host of middlemen like distributors,
wholesalers, retailers, commission agents, supermarkets and export houses are employed to provide
various types of services. A study of the prevailing trade practices (distribution channels, advertising
media etc.) would enable entrepreneurs to prepare a more realistic plan for marketing the products or
services.

4. Estimating the Future Changes in the Volume and Pattern of Demand and Supply

Possible future changes in the volume and pattern of supply and demand should also be estimated to
assess the long run prospects of the unit.

On the demand side, the following factors should be taken into account:

(i) the potentialities of the export market

(ii) the likely changes in income and price levels

(iii) the probable expansion of the industries using the goods to be produced

(iv) the multiple use of the product

(v) the consequent effect of globalisation

(vi) the impact of technology

(vii) the probable market share of the product

(viii) the effect of advertisement and sales promotion measures to be launched,etc

On the supply side also, the following factors should be taken into account:

(i) competitive position of the proposed unit

(ii) existing and potential competitors

(iii) the extent of capacity utilisation

(iv) possibility of substitute products due to technological innovations and structural changes.

(v) the type of distribution channel proposed

(vi) unit's cost advantages and disadvantages

(vii) provision for after-sales-service

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 (viii) the proposed designing and packaging.

Feasibility Study

Project feasibility analysis or feasibility study is the first stage in the process of project formulation or
project development. The purpose of this analysis is to examine the desirability of making an
investment. For this, it is essential to examine the project idea in the light of the available internal and
external constraints.

Meaning of Feasibility Study

Feasibility study simply refers to an assessment of the practicability of a proposed plan or method. Just
as the name implies, you're asking, "Is this feasible?"

Feasibility study is the indepth study of the different aspects of a project to determine the viability of
an idea. It is a study to ensure whether the proposed project is legally and technically feasible as well
as economically justifiable. It tells whether the project is worth to Invest funds. In short, feasibility
study evaluates the project's potential for success.

Importance of Feasibility Study

The importance of a feasibility study is based on organisational desire to "get it right" before
committing resources, time, or budget. Conducting a feasibility study is always beneficial to the project
as it gives a clear picture of the proposed project. Below are some key benefits of conducting a
feasibility study:

i) Improves project teams' focus

ii) Identifies new opportunities

iii) Provides valuable information for a "go/no-go" decision

iv). Narrows the business alternatives

v) Identifies a valid reason to undertake the project

vi) Enhances the success rate by evaluating multiple parameters

vii). Helps decision-making on the project

viii) Identifies reasons not to proceed

Types of Feasibility Study

There are six types of feasibility study. These are described below:

1. Technical Feasibility: This assessment focuses on the technical resources available to the
organisation. It helps organisations determine whether the technical resources meet capacity and
whether the technical team is capable of converting the ideas into working systems.

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2. Economic Feasibility: This assessment typically involves a cost/benefit analysis of the project. This
helps organisations determine the viability, cost, and benefits associated with a project before financial
resources are allocated. This helps decision-makers determine the positive economic benefits to the
organisation that the proposed project will provide.

3. Legal Feasibility: This assessment investigates whether any aspect of the proposed project conflicts
with legal requirements like data protection acts or social media laws. Let's say an organisation wants
to construct a new office building in a specific location. A feasibility study might reveal the
organisation's ideal location is not zoned for that type of business. That organisation has just saved
considerable time and effort by learning that their project was not feasible right from the beginning.

4. Operational Feasibility: This assessment involves undertaking a study to analyse and determine
whether and how well the organisation's needs can be met by completing the project.

5. Scheduling Feasibility: This assessment is the most important for project success. After all, a project
will fail if not completed on time. In scheduling feasibility, an organisation estimates how much time
the project will take to complete.

6. Social Feasibility: It is not enough to be feasible from a marketing, technical and financial point of
view. A project should also be acceptable from the social point of view. In other words, the social
benefits and costs have to be assessed (social benefits and costs are different from monetary benefits
and costs). Therefore, a social feasibility study is carried out.

We discuss technical feasibility, financial feasibility, and social feasibility in detail..

Technical Feasibility (or Technical Analysis)

Technical analysis of a project is essential to ensure that necessary physical facilities required for
production will be available and the best possible alternative is selected to procure them. Other types
of analysis are dependent and closely related with technical analysis.

Meaning of Technical Feasibility (or Technical Analysis)

Technical analysis is the examination of the technical aspects of the project. The object of technical
analysis is to assess the technical soundness of the project. This means technical analysis is carried out
to ascertain whether the project is technically sound and viable one. This is considered essential for
the long-term success of the project. Most technical features of the product are non-reversible.
Therefore, any error of judgement at this stage regarding technical parameters may have far reaching
consequences on the project.

Scope of Technical Feasibility or Technical Analysis

Technical feasibility or analysis includes the study of the following.

1. Material Inputs and Utilities

Material inputs are required for production of goods/services. Hence it is essential to assess the
availability of materials, inputs and utilities. The availability of facilities, services and other resources

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required for a project during the execution period and during the operation stage right from
manufacturing to marketing should be considered. Utilities include power, water, steam, fuel, material
handling, waste removal, inspecting and testing facilities, storage, communication facilities, transport
facilities etc.

The feasibility study of material should include the following variables:

(a) The availability of quality and quantity of raw materials

(b) The factors on which the availability of raw material is depended

(c) Price elasticity of raw material

(d) Perishable time of raw material

The entrepreneur is required to plan the material requirement. Material requirement planning is
undertaken to analyse the quality of material that would be required to ensure smooth running of
production. It would be dependent on material availability variables mentioned above.

2. Manufacturing Process/Technology

Technology refers to the art of production or the skill required to manufacture a product in a factory
by using machineries, tools and equipments. It is the knowledge to do new or old tasks in a better way.
Technology simply refers to the manner in which a company's inputs are transformed into its output.
It refers to the tools, devices and knowledge that help in the transformation of inputs into outputs. For
example, an automobile company uses technology to convert its raw materials into vehicles. Take
another example. Steel can be made either by Bessemer process or the open hearth process. Cement
can be made either by the dry process or the wet process.

The choice of technology is influenced by the following considerations:

a) Plant capacity

b) Inputs

c) Investment outlay

d) Use by other units

e) Product mix

f) Latest developments

g) Ease of absorption

h) Cost

The technical know-how can be procured from the following sources:

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1. Foreign Collaborators

2. Consultancy Organisations

3. Machinery Suppliers

4. Promoter's knowledge and experience

5. Recruitment of suitable technical personnel

6. CSIR Laboratories and National Research and Development Corporation (NRDC)

7. Consultants (organisations and individuals)

3. Plant Capacity

Plant capacity refers to the volume or number of units that can be manufactured during a given period.
Plant capacity is also called production capacity.

While deciding the plant capacity, the following factors should be taken into consideration:

a) Technological requirement

b) Input constraints

c) Investment cost

d) Market conditions

e) Resources of the firm

f) Government policy

4. Plant Location

Plant location refers to a fairly broad area where the enterprise is to be established like a city, industrial
zone or coastal area. The location of the project has to be decided judiciously and objectively. A wrong
selection of location may cause difficulties in input requirements, non-availability of competent
technical personnel and the like. In fact, the success of a project depends on the location, to a certain
extent. Hence greater care should be taken while selecting the location.

5. Selection of Site

The terms 'location' and 'site' are different. Location refers to a fairly broad area like a city, an industrial
zone, or a coastal area. But, site refers to a specific piece of land where the project would be set up.

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Once the broad location is selected, attention should be given to the selection of a specific site. Two
or three alternative sites must be considered and evaluated with respect to cost of land and cost of site
preparation and development.

6. Size of the Plant

The efficiency and profitability of a project are very much influenced by its size. Size of the plant
depends on the manufacturing process, availability of raw materials, capital investment needed and the
size of the market. Generally, a large sized unit is more economical than a small sized unit. But if the
establishment of a large unit needs heavy capital investment or the market demand is not sufficient for
production at such level or sufficient raw material is not available for a large unit, it may be better to
set up a plant of small size.

The size of the plant should be decided keeping in view the following factors:

(i) Availability of raw materials and power

(ii) Technology/process to be adopted

(iii) Size of the market

(iv) Size of the plant and machinery

(v) The location of the project

(vi) The product mix

(vii) Capital investment required

7. Product Mix

Product mix or product range is decided according to market requirements. Product mix refers to the
set of all the products offered by a firm for sale. It is the total number of products in all product lines.
Product line is the number of brands or related products in each product type.

Production of certain items will have to be done in different sizes and quality to suit different
customers. For example, production of shoes, readymade garments etc. will have to be done in different
sizes and quality. Sometimes a slight difference in quality may help not only in increasing the sales
but also in raising profits by having higher margin of profit on higher quality goods.

Selection of a potentially profitable product is the first step towards a successful venture. The product
should: (i) serve the immediate need, (ii) serve the existing market in which demand exceeds supply,
(iii) compete with similar products regarding design, price and utility.

The factors affecting the choice of the product mix are: (a) profits and sales growth potential, (b)
stability in sales, (c) better customer service, (d) utilisation of available know- how, (e) cost reduction,
(f) better capacity utilisation.

15
8. Factory Design

Once an entrepreneur has made a decision to set up a factory and selected the location and site for it,
the next step is to plan and organise the facilities to be used in the factory.

The term factory design refers to the plan for a particular type of building, arrangement of machinery
and equipment and provision of service facilities, lighting, heating, ventilation etc. in the building.
Factory design comprises layout of building (building design) and layout of factory.

While designing a factory, the following factors should be considered.

a) Location

b) Nature of the manufacturing process

c) Plant layout

d) Smoothness in operation

e) Service facilities

f) Material handling

g) Cost of construction of building

h) Future expansion

i) Nature of product

j) Appearance

9. Types of Factory Building

The factory building should be designed and built to protect the property and workers. It should provide
for efficient operation of the plant so that the cost of operation can be minimised. The factory building
should provide a pleasant and comfortable working environment. It should be designed in such a way
as it helps in effective and efficient operation of the plant.

While designing and constructing the factory building, the following factors should be taken into
consideration:

a) Plant location

b) Plant layout

c) Material handling

d) Product and equipment

e) Provision of expansion

16
 f) Lighting and ventilation

g) Safety and security

h) Employee facilities

i) Flexibility

The other factors include power supply, internal transportation and communication facilities, control
to be exercised on men and materials etc.

10. Machineries and Equipments

The requirement of machinery and equipment is dependent on production technology and plant
capacity. It is also influenced by the type of project. For a process oriented industry, like a
petrochemical unit, machineries and equipment should be such that the various stages are matched
well.

11. Plant Layout (Factory Layout)

The efficiency of a manufacturing operation also depends on the layout of the plant and machinery.
Proper plant layout can reduce manufacturing cost by saving money and time. Plant layout refers to
the arrangement of the machines, equipment and other physical facilities within the factory premises.
Plant layout may be defined as "a technique of locating machines, processes and plant services within
the factory in order to secure the greatest possible output of high quality at the lowest possible total
cost of production".

While deciding the layout, the following factors should be considered:

a) Nature of industry

b) Volume of production

c) Type of product

d) Location

e) Material handling

f) Type of equipment

g) Factory building

h) Service facilities

i) Lighting and ventilation

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Financial Feasibility or Financial Analysis

Once it becomes clear after initial feasibility tests that the project is sound, it becomes. essential to
determine the requirements of finance for the project. It is also required to identify the sources from
which the finance can be procured.

Meaning of Financial Feasibility or Financial Analysis.

Financial analysis may be defined as the process of obtaining relevant information about a project in
order to ascertain its financial viability. The preliminary steps involved in the financial analysis
include: (i) Estimation of total capital outlay (investment outlay) involved in the project; (ii) Estimation
of operating costs; and (iii) Estimation of operating revenue(sales). These estimates are used to prepare
the proforma balance sheet, the pro forma income statement and cash flow statement of the project.
The purpose of financial analysis is to find out whether the project is attractive enough to secure funds
needed for its various activities and whether the project will be able to generate enough income to
achieve the objective for which it is undertaken. Financial analysis deals not only with the financial
aspects of a project but also with operational aspects.

In order to complete the financial analysis, it is also necessary to evaluate the operational strategy and
investment strategy of the project. The Break Even Analysis is used to explain the operational
characteristics of a project. Financial strategy is evaluated in terms of financial leverage. Investment
strategy is evaluated in terms of investment criteria such as IRR, NPV etc. (which will be discussed in
the chapter-Project Appraisal).

Scope of Financial Feasibility Analysis

Financial feasibility analysis covers the following aspects:

1. Cost analysis: This is concerned with estimation and evaluation of the expected cost of production.
It covers analysis of future costs, opportunity cost, incremental cost, imputed cost, interest cost,
depreciation, taxes etc. Cost analysis provides a relevant base to cost structure.

2. Pricing: This is concerned with price determination strategy. The estimated or determined price
gives the expected demand for the product. So price should be determined judiciously. The price
should be competitive as well. The price is determined after considering relevant factors including
elasticity of demand.

3. Financing: Financial feasibility includes determination of requirements of funds and the sources of
funds. It also includes the determination of ways to utilise the funds. After calculating the expected
rate of return, it should be compared with cost of capital in order to make an optimum debt-equity mix.

4. Income and expenditure: This is concerned with estimation of income and expenditure relating to
the projects under consideration. This gives the entrepreneur an idea about cost of production and
expected profit.

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5. Capital budgeting: Capital budgeting is concerned with allocation of funds among the available
investment opportunities. Before allocating funds, it is necessary to estimate cash inflows (benefits)
and outflows (costs) of the projects. After determining cash flows the entrepreneur can find out whether
it is profitable or not to invest funds in projects by applying certain appraisal criteria.

Techniques of Financial Analysis

After preparing the projected financial statements, the next step is to find out the economic facts about
the project on the basis of such projected financial data. This process is called financial analysis.
Financial analysis is a continuous process used to analyse the past and/or future financial position of a
firm. In other words, it is used to interpret the past and/ or projected financial data. The object of the
financial analysis is to find out whether the project is attractive enough to secure funds and the project
will generate the benefits to realise the objectives for which it is undertaken. A number of techniques
are available for financial analysis. Important techniques are:

1. Fund flow analysis

2. Cash flow analysis

3. Ratio analysis

The operational strategy can be evaluated by employing the following techniques:

1. Break-even analysis

2. Sensitivity analysis

3. Risk analysis

Fund Flow Analysis: A balance sheet is only a snapshot picture of the financial position of a firm. It
shows the financial position at a particular point of time. Similarly, an income statement shows the
operating result during that period. Thus, these statements are static. They do not reveal the major
financial transactions behind the balance sheet changes. They do not indicate the causes of change or
the movement of funds between two periods. Hence, a fund flow statement is prepared to show the
change in assets, liabilities and networth between two balance sheet dates. It is prepared to ascertain
how much funds have been generated and how these funds were put to use. This will assist minimising
cost of finance and avoiding idle fund situations.

Cash Flow Analysis: Cash is a critical asset. It acts as a fuel on which a project runs and it has to be
kept ready all the time. Capital is needed for acquiring fixed assets, while cash is needed for acquiring
current assets or payment of current liabilities.

Cash flow statement is prepared to ensure that the business unit will have necessary cash with it and it
will not face a liquidity problem. It shows the movements of cash into and out of the firm and its net
effect on the cash balance with the firm. It shows sources of cash and their uses. By preparing a cash
flow statement, the entrepreneur can:

19
(1) determine the amount of cash needed to start the enterprise.

(2) plan for timing of loan funds.

(3) ensure that if projected cash flows are met, cash will be available to meet payments as they become
due.

Ratio Analysis: Simply stated, a ratio is a mathematical relationship between two figures taken from
financial statements. Ratio analysis is one of the well established methods employed to analyse about
the financial health of an organisation. It is used to have an in-depth examination of the strength and
potential pitfalls of the organisation. Ratio analysis helps to compare current performance with the past
and also in measuring effectiveness and efficiency of the organisation in the light of norms of
performances. Ratio serves as a guiding force in analysing the performance of an organisation. They
help the management in the discharge of its key functions such as forecasting, planning, co-ordinating,
controlling and communicating.

Break-Even Analysis: The break-even analysis is the most widely used technique of cost volume
profit analysis. It can be interpreted in two ways-narrow sense and broad sense. Used in its narrow
sense, it is concerned with the calculation of break even point. It is the point at which the project neither
earns profit nor total sales. In other words, it is the point that incurs loss. At this point, the total costs
equal the t at which losses cease and profits begin. point is an equilibrium point or value between costs,
prices and profits. Indeed it is a balancing point-a point of no profit no loss. It is the Bread Earning
Point because it is at this point the project/concern starts earning its bread (i.e., profit). Once a unit
crosses its BEP, it generates a surplus. In a broad sense, it refers to the probable profit at any level of
is a tool of financial analysis whereby the impact on profit position of the changes volume, price, costs
and mix can be estimated definitely and accurately. Break-even analysis is a technique commonly used
to assess expected product profitability. Break-even described w

Sensitivity Analysis : The technique of sensitivity analysis helps in studying the impact of crucial
variables like raw material, sales volume, sales price, degree of capacity utilisation etc over the
economic viability of an enterprise.

Under this approach the value of different key variables is changed in a systematic manner. In other
words, change is effected in one variable and the values of other variables are assumed constant and
the results are analysed to find out sensitivity of various variables with respect to their impact on profit
margin. For example, if it is felt that cost of raw materials may go up by 10% without any increase in
sale price, separate profitability estimates should be prepared with 10% increase in the cost of raw
materials to find out whether the project will be viable even after the increase in cost of raw materials.

Risk Analysis: The risk analysis helps in identifying the sources of risks such as rise in prices of raw
material, taxes and duties, product price etc, which have great bearing in determining the future returns
for the project. Accordingly, risk analysis offers an opportunity to the investor to redesign his proposed
project.

Social Cost Benefit Analysis

20
Every project has an impact on society. The impact may be positive or negative. If there are certain
positive effects, there will be some negative effects also. For example, a project may give employment
to many people. This is a positive (good) effect. As against this, there may be pollution, congestion
etc. This is a negative (bad) effect. The positive effect on the society is called social benefit and the
negative effect on the society is called social cost. If any activity leads to depletion of a certain
resource, it is called social cost. Before making the final selection of projects, it becomes essential to
analyse the social costs and benefits associated with the projects. Such an analysis is known as Social
Cost-Benefit Analysis (SCBA).

The theory of Cost Benefit Analysis can be traced during the 19th century when Jules Dupuit, a French
Engineer in 1844 for the first time, set the welfare foundations in his Paper "On the Measurement of
the Utility of Public Works".

Meaning of Social-Cost Benefit Analysis

Social cost-benefit analysis is based on the belief that a project is a resource investment proposition
where not merely the entrepreneur but the nation as a whole gets involved. Therefore, the project
should also be looked at from the point of view of society or economy. This means the social costs and
social benefits associated with the project should be analysed before implementing the projects. This
process is called social cost benefit analysis. It is a process of evaluating a project from the point of
view of the total impact which the project shall have on the economy of the nation. In social cost
benefit analysis the benefits and costs accruing to the society as a whole are considered. What is a
profit and loss account to an entrepreneur, that is social cost benefit analysis to society. In SCBA the
focus is on social costs and benefits of a project. It can be applied to both private and public
investments. But it is primarily used for evaluating public projects like roads, railway, bridge,
transport, power projects, irrigation projects etc. These projects have social implications. These may
not have commercial benefits.

Thus, SCBA is the technique of evaluation of social benefits (project's contribution towards overall
growth and welfare of society) and social costs (project's bad effects on the society). In short, social
cost-benefit analysis is the appraisal of projects from a social point of view. Social Costs and Social
Benefits

A project is generally acceptable when the social benefits exceed the social costs. The excess of social
benefits over social costs is called net economic benefits. In SCBA we mainly consider non-monetary
costs and non-monetary benefits. The non-monetary social costs from a project are the bad effects
caused through: (a) pollution, (b) congestion and crowd, (c) wastes, (d) monopoly and other
malpractices, (e) ecological imbalances due to over usage of resources, (f) global warming, etc.
Similarly non-monetary benefits from a project include the project's contribution towards the increased
welfare of society. These include: (a) development of backward regions, (b) increased employment,
(c) increased welfare of labour, (d) balanced regional development, (e) earning of foreign exchange,
(f) taxes, (g) subsidies, (h) usage of foreign exchange, etc.

Objectives of SCBA

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The primary objective of SCBA is to secure and achieve the value of money in economic life by simply
evaluating the costs and benefits of alternative economic choices and selecting an alternative which
offers the largest net benefits. The following are the important objectives of SCBA:

1. Contributing from the project to the GDP of the economy.

2. Contributing from the project to improve the benefits to the poorer section of the society and
reducing the regional imbalance in growth and development.

3. Contributing from the project to protect/improve the environment conditions.

4. Justifying the use of scarce resources of the economy by the project.

Thus the ultimate objective of SCBA is to enhance contribution to society by the entrepreneurs.

Steps in SCBA (Mechanics of SCBA)

The basic steps involved in the operation of SCBA are as follows:

1. Identification and estimation of costs and benefits which will accrue to the project implementing
body.

2. Identification and estimation of the costs and benefits which will accrue to individual members
of society as consumers or as suppliers of factor inputs.

3. Identification and estimation of the costs and benefits which will accrue to the community.

4. Identification and estimation of the costs and benefits which will accrue to the national exchequer.

5. Determination of a suitable discount rate (i.e., social discount rate).

6. Discounting the costs and benefits which accrue over a period of time to determine the present
worth of projects.

7. Selection of project(s) by using suitable investment criteria.

Significance of SCBA (Importance of SCBA)

The importance of Social Cost Benefit Analysis may be understood from the following points:

1. There are non-monetary costs and non-monetary benefits associated with the project. These are
hidden. These have an impact on the society or economy. Therefore, these should be considered for
ascertaining the viability of the project. In SCBA, these social costs and benefits are considered.

2. Market prices form the basis for computing the monetary costs and benefits from the point of view
of an entrepreneur. These reflect social values only under conditions of perfect competition. But the
conditions of perfect competition prevail very rarely in developing countries. When there are
imperfections, market prices do not reflect social values. Hence, SCBA becomes important.

22
In SCBA, shadow prices are used for the valuation of inputs and outputs of goods and services because
the market prices in many cases do not represent their real cost. Shadow prices reflect economic or
real value of inputs and outputs. The market price of both inputs and outputs of a project should be
corrected suitably if they do not represent the real prices of inputs/outputs. Such corrected price of
input/output is known as shadow price. In other words, shadow prices are economic prices in a perfect
market.

3. The division of benefits between consumption and savings leads to investment. This is relevant from
a social point of view. A rupee of benefits saved is deemed more valuable than a rupee of benefits
consumed. This is considered in SCBA wherein a higher valuation is placed on savings. Similarly, the
redistribution of benefits is important from the social point of view. A rupee of benefit going to a poor
section is considered more valuable than a rupee of benefit going to an affluent section. This is also
considered in SCBA. Thus, the real value of a project can be ascertained only after social cost benefit
analysis.

4. SCBA is used for land reclamation, formation of towns, health and educational programmes,
research and development, defence projects, roads, railways, canals, airports and other transport
projects, water projects etc.

5. Now-a-days, business enterprises are concerned about social responsibility. For such business
enterprises, social cost benefit analysis is a must.

Basic Approaches to SCBA

Mainly there are two approaches to SCBA. They are: UNIDO approach and Little-Mirrlees approach.

Difference between Financial Analysis and SCBA

In financial analysis, only financial costs and benefits are considered for the appraisal of a project. The
aim of financial analysis is to determine the financial viability. Social impact is ignored in financial
analysis. But in SCBA, not only financial costs and benefits but also social costs and benefits are
considered.

Financial analysis uses mainly market prices for the computation of costs and benefits. But SCBA uses
shadow prices for the computation of social costs and benefits.

Financial analysis is undertaken for attaining financial objectives such as maximisation of owner's
wealth, sales maximisation etc. But SCBA is carried out to achieve certain social objectives such as
development of backward areas, employment generation, foreign exchange earning etc.

Financial analysis ignores externalities. But SCBA takes into consideration, the externalities. It
determines the worth of the project from society's point of view.

Practical Problems and Limitations of SCBA

There are a variety of problems and limitations in SCBA. Some of them may be discussed here:

23
1. Basic assumptions: SCBA assumes market economy and full employment. But these do not prevail
in developing countries. Thus, assumptions of perfect market conditions do not apply to these
countries. Due to market imperfection, in developing countries, market prices do not reflect social
values or real values.

2. Govt. policy: The govt. in developing countries use tariff policy to promote exports and restrict
imports. This tends to raise the domestic prices. Protection to home products also tends to raise their
prices. Taxation policy also may raise domestic prices. Subsidies, on the other hand, are used to keep
the prices down.

3. Linkages and externalities: Setting up a new project may at times produce reaction and change in
related economic activities. These linkage effects can be negative as well as positive. The negative
linkage effects create social costs, while positive linkage effects generate new economic activity and
additional benefits. A deep analysis of such externalities is not possible. It is difficult to quantify and
determine the monetary values of non-monetary social costs and benefits.

4. The cost of CBA: The cost of cost benefit analysis at times may not justify any such exercise,
particularly in case of small projects. It is difficult to say clearly what the optimal size of a project for
which CBA should be undertaken. This can be done according to the principle that maximum net
benefit arises when the MC = MB (Marginal Benefit). But in real life, it is difficult to establish any
such relationship.

5. Depth of analysis: It is difficult to state how elaborate or restricted the cost benefit analysis should
be. Any such decision depends upon the perception of the management. Government Regulations for
Project Clearance

After the Industrial Revolution all over the world people actually stopped caring about the environment
in order to protect and secure their own personal interests and benefits. We can also say that the advent
of industrialisation has brought about many changes in our lifestyle as well as in our environment. Due
to this, the awareness towards the environment and concern for the protection of the environment has
decreased over the years. This is the main reason why many laws and acts have been enacted through
the Indian Constitution to enforce this matter.

The first Act related to the environment in India was The Shore Nuisance (Bombay and Kolaba) Act,
1853. The two decades after that have seen a huge number of enactments within the country's
Environmental Laws. One of them was related to Environmental Clearance Regulation. Environmental
Clearance Regulation is one such process by which public activity is hampered, in order to protect the
environment.

Environment Clearance is solely regulated by governments all over the world, whether in India or
abroad. In this particular direction, a beginning in our country was made with the Environmental
Impact Assessment of river valley projects, in 1978-79. The scope of the legal framework has
completely been enhanced to cover all other sectors as well, apart from what was already covered.
These developmental sectors include thermal power projects, mining schemes, industries, etc.

24
What is the Environmental Clearance Regulation?

Environmental Clearance is referred to as a procedure that involves obtaining government clearance

for certain projects to be developed, or even to modify or to install various projects. It is mandatory to
first get government clearance for projects that can cause high damage to the environment, or cause
high environmental pollution of any type. This clearance is completely mandatory for areas that are
ecologically fragile, regardless of what type of a project it is.

In India, it is mandatory for Environmental Clearance to go through the Environmental Impact

Assessment (EIA) for various different developmental projects. The Government has also made a list
of projects that have to mandatorily go through environmental clearance as they are highly polluting
in nature. The Central Government, as well as State Governments, have full authority and power and
completely regulate this process.

Environmental Impact Assessment (EIA)

Environmental Impact Assessment is said to be a tool that integrates all environmental concerns into
the process of development, from the grassroots level. It makes sure that development is being done
keeping in mind the environment and causes no or minimal damage to the environment in the process
of development. EIA exists in the initial stages of planning of the project and makes sure that all
strategies are induced to save the environment from the beginning stages of industrialisation, etc. In
short, we can say that EIA completely refers to the assessment and study of all environmental impacts
and consequences that are going to arise from any upcoming project.

Important Acts to Restrict Environmental Damage

There are also many Acts that restrict all environmental damages and control them. They fully protect
the interests of the environment. Some of the General Environmental Acts are-

1. The Environment (Protection) Act, 1986.

2. The Biological Diversity Act, 2002

3. The National Environmental Tribunal Act, 1995

4. National Green Tribunal Act, 2010

5. The National Environment Appellate Authority Act, 1997

6. Types and Categories of Environmental Clearance Regulation

Firstly, there are about 39 types of industrial projects that require mandatory environmental screening.
The main purpose of this is solely to assess the impacts of the upcoming project, that it would have on
the environment, and how polluting it will be. After assessing the impacts and consequences, it is made
sure that it is ensured to minimise the same.

Classification of projects for the purpose of environmental clearance

25
1. Category A: These projects require mandatory environmental clearance in order for them to be
developed and operated. These projects do not even go through the screening process mostly, as
environmental clearance is necessary. Projects falling under this category go to the Ministry of
Environment, Forest and Climate Change for clearance.

2. Category B: These upcoming projects undergo a mandatory screening process. They go to the State
Government for clearance. Projects falling under this category get further categorised into two types
B1 & 82. The only difference between these two also is that B2 Type of projects does not heed to carry
out preparation of the EIA Report. But depending upon the project, the Appraisal Committee can even
ask for an EIA study.

The Industrial projects that are located in any of the following geographical areas require
environmental clearance irrespective of the type of project that they are:

a) Archaeological monuments

b) Scenic areas

c) Religious and Historic places

d) Beach resorts

e) Hill resorts

f) Coastal areas that are highly rich in mangroves, breeding grounds of specific species.

g) Gulf areas

h) Estuaries

i) Biosphere reserves

j) National lakes and swamps

k) National Parks and sanctuaries

l) Seismic Zones

m) Areas of scientific and geological interests

n) Tribal Settlements

o) Defence installations

p) Border areas

q) Airports

26
These areas are zones that mandatorily need Environmental Clearance as they are ecologically fragile
or sensitive areas.

Environmental Restriction for SSI Sector

Entrepreneurs are required to obtain Statutory clearances relating to Pollution Control and
Environment for setting up an industrial project. A Notification (SO 60(E) dated 27.1.94) issued under
the Environment Protection Act 1986 has listed 29 projects in respect of which environmental
clearance needs to be obtained from the Ministry of Environment, Government of India. This list
includes industries, like petro-chemical complexes, petroleum refineries, cement, thermal power
plants, bulk drugs, fertilisers, dyes, paper etc. However, if investment is less than 500 million, such
clearance is not necessary, unless it is for pesticides, bulk drugs and pharmaceuticals, asbestos and
asbestos products, integrated paint complexes, mining projects, tourism projects of certain parameters,
tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating industries. Further, any
item reserved for the small-scale sector with investment of less than 10 million is also exempt from
obtaining environmental clearance from the Central Government under the Notification. Powers have
been delegated to the State Governments for grant of environmental clearance for certain categories of
thermal power plants. Setting up industries in certain locations considered ecologically fragile (e.g..
Aravalli Range, coastal areas, Doon valley, Dahanu etc.) are guided by separate guidelines issued by
the Ministry of Environment of the Government of India.

The Government of India has rationalised and simplified environmental clearances procedure for
small-scale industries except in the case of 17 hazardous industries. Now a mere acknowledgment of
the application by the State Environment Board would be sufficient for SSIs. The seventeen hazardous
items are:

1. Fertiliser (Nitrogen/Phosphate)
2. Sugar
3. Cement
4. Fermentation of Distillery
5. Aluminium
6. Petro-chemicals
7. Thermal power
8. Oil refinery
9. Sulphuric acid
10. Tanneries
11. Copper Smelter
12. Zinc Smelter
13. Iron and Steel
14. Pulp and paper
15. Dye and Dye intermediary
16. Pesticides manufacturing and formulation

27
 17. Basic drugs and Pharmaceuticals.

Procedure for Environmental Clearance

The following steps are to be followed mandatorily in order to get Environmental Clearance for a
proposed project:

1. Identification of the Location: The location for the proposed project should always be selected
according to which it should comply with the existing guidelines. If the project site, anyhow, does not
comply with the existing guidelines, then the proponent for the site has to choose another site that has
to adhere to the guidelines.

2. Screening: The project proponent should then assess which category of projects the proposed or
upcoming project actually falls in. Then the proponent has to decide whether or not the project requires
an environmental clearance, whether or not it requires Environment Impact Assessment (EIA) and by
whom, according to the category of the project. If it is mentioned in the schedule of the notification,
the proponent conducts an EIA study either directly or through a consultant. If the project falls in B
category, the project goes to the State Government for clearance which further categorises it into B1
and B2 projects. B2 projects do not require preparation of EIA reports.

3. Assessment: After the EIA report is ready, the investor approaches the concerned State Pollution
Control Board (SPCB) and the State Forest Department (if the location involves use of forestland).
The SPCB evaluates and assesses the quantity and quality of effluents likely to be generated by the
proposed unit as well as the efficacy of the control measures proposed by the investor to meet the
prescribed standards. If the SPCB is satisfied that the proposed unit will meet all the prescribed effluent
and emissions standards, it issues consent to establish (popularly known as NOC), which is valid for
15 years.

4. Public Hearing: For certain projects, this is a mandatory step in the process of environmental
clearance. This is a part of the EIA process. This provides a legal space for people of an area to come
face-to-face with the project proponent and the government and express their concerns and views with
respect to the proposed project.

The process of public hearing is conducted prior to the issue of NOC from SPCB. The District
Collector is the chairperson of the public hearing committee. Other members of the committee include
the officials from the district development body, SPCB, Department of Environment and-Forest, Taluk
and Gram Panchayat representatives, and senior citizens of the district, etc. The hearing committee
hears the objections/suggestions from the public and after inserting certain clauses it is passed onto the
next stage of approval (Ministry of Forest and Environment).

5. Application: The project proponent submits an application for environmental clearance with the
MoEF if it falls under Project A category or the State Government if it falls under project B category.
The application form is submitted with EIA report, EMP, details of public hearing and NOC granted
by the state regulators. There is an online application procedure that has to be completed by the
proponent. The proponent has to submit an application, online, for environmental clearance.

28
6. Environmental Appraisal: The documents submitted by an investor are first scrutinised by a multi-
disciplinary staff functioning in the Ministry of Environment and Forests. A site visit may also be
conducted if it is required. After this preliminary scrutiny, the proposals are placed before specially
constituted committees of experts whose composition is specified in the EIA Notification. Such
committees, known as Environmental Appraisal Committees have. been constituted for each sector
such as River Valley, Industries, Mining etc. These committees meet regularly to appraise the
proposals received in the Ministry. In case of certain very special/controversial projects, which have
aroused considerable public interest, the committee may also decide to arrange for public hearings on
those projects to ensure public participation in developmental decisions. Announcements for such
public hearing shall be made at least 30 days before through newspapers. On the basis of the exercise
described in the foregoing paragraphs, the Appraisal Committees make their recommendations for
approval or rejection of particular projects. The recommendations of the Committees are then
processed in the Ministry of Environment and Forests for approval or rejection.

7. Issues of clearance or rejection letter: When a project requires both environmental clearance as well
as approval under the Forest (Conservation) Act, 1980, proposals for both are required to be given
simultaneously to the concerned divisions of the ministry. The processing is done simultaneously for
clearance/rejection, although separate letters may be issued. If the project does not involve diversion
of forest land, the case is processed only for environmental clearance.

Once all the requisite documents and data from the project authorities are received and public hearings
(where required) have been held, assessment and evaluation of the project from the environment angle
is completed within 90 days and the decision of the ministry shall be conveyed within 30 days
thereafter. The clearance granted shall be valid for a period of five years for commencements of the
construction or operation of the project.

Objectives of Environmental Clearance

Following are the important objectives of environmental clearance:

i) The main objective of environmental clearance is to reduce the environmental damages that have
been taking place for years due to industrialisation, as people do not care for the environment.

ii) It is also necessary to safeguard the environment in all possible ways through environmental laws
and precautions.

iii) One main purpose of Environmental Clearance is also to assess the impacts that the planned
development will have on the environment and people.

iv) Through the EIA Report, it also tries to minimise the negative impacts of the upcoming project
with alternatives and preventive measures.

v) Environmental Clearance solely monitors and restricts all public and environmental damages that
may be caused due to upcoming projects.

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Import of Capital Goods

Capital goods are required to start manufacturing industries. Capital goods are those goods which are
used in the production of goods. Examples include machineries, equipment etc. Sometimes
entrepreneurs import capital goods from foreign countries.

Import Procedures

The steps involved in importing of capital goods may be briefly discussed as below:

1. Obtain IEC: Prior to importing, every business must first obtain an Import Export Code (IEC)
number from the regional joint Director General of Foreign Trade (DGFT). The IEC is a pan-based
registration of traders with lifetime validity and is required for clearing customs, sending shipments,
as well as for sending or receiving money in foreign currency. The process to obtain the IEC
registration takes about 10-15 days.

2. Ensure legal compliance under different trade laws: Once an IEC is allotted, businesses may
import goods that are compliant with Section 11 of the Customs Act (1962), Foreign Trade
(Development & Regulation) Act (1992), and the Foreign Trade Policy, 2015-20.

However, certain items restricted, canalised, or prohibited, as declared and notified by the Government
require additional permission and licences from the DGFT and the Central Government.

3. Procure import licences: To determine whether a licence is needed to import a particular product
or service, an importer must first classify the item by identifying its Indian Trading Clarification based
on a Harmonized System of Coding or ITC (HS) classification.

ITC (HS) is India's chief method of classifying items for trade and import-export operations. The ITC-
HS code, issued by the DGFT, is an 8-digit alphanumeric code representing a certain class or category
of goods, which allows the importer to follow regulations concerned with those goods.

An import licence may be either a general licence or specific licence. Under a general licence, goods
can be imported from any country, whereas a specific or individual licence authorises import only from
specific countries.

4. File Bill of Entry and other documents to complete customs clearing formalities: After
obtaining import licences, importers are required to furnish import declaration in the prescribed Bill
of Entry along with permanent account number (PAN) based Business Identification Number (BIN),
as per Section 46 of the Customs Act (1962).

A Bill of Entry gives information on the exact nature, precise quantity, and value of goods that have
landed or entered inwards in the country

If the goods are cleared through the Electronic Data Interchange (EDI) system, no formal Bill of Entry
is filed as it is generated in the computer system. However, the importer must file a cargo declaration
after prescribing particulars required for processing of the entry for customs clearance.

30
If the Bill of Entry is filed without using the EDI system, the importer is required to submit supporting
documents that include certificate of origin, certificate of inspection, bill of exchange, commercial
invoice cum packing list, among others.

Once the goods are shipped, the customs officials examine and assess the information furnished in the
bill of entry and match it with the imported items. If there are no irregularities, the officials issue a
'pass out order' that allows the imported goods to be replaced from the customs.

5. Determine import duty rate for clearance of goods : India levies basic customs duty on imported
goods, as specified in the first schedule of the Customs tariff Act, 1975, along with goods-specific
duties such as anti-dumping duty, safeguard duty, and social welfare surcharge.

In addition to these, the government levies an integrated goods and services tax (IGST) under the new
GST system. The IGST rates depend on the classification of imported goods as specified in Schedules
notified under Section 5 of the IGST Act (2017).

Foreign Collaboration

Every country requires foreign capital or investment for its development. There are different forms of
foreign capital or investment. One form is foreign collaboration. Similarly, when a company does not
have necessary technical know-how in a particular line of business, it needs to go for the acquisition
of technical know-how from outside. The possible sources of collaboration and the choice for any
specific source needs to be elaborated in the project report. In this connection, a company may either:

(a) Opt for outright purchase of proposed technology, if supplier/manufacturer so agrees,

or

(b) Enter into an agreement with the supplier of technology who agrees for technical and financial
participation in the proposed venture.

Meaning of Foreign Collaboration

Foreign collaboration means an agreement between two or more different companies from different
countries to carry out some types of business operations. It is an alliance of resident and nonresident
entities to carry on the agreed task (work) collectively. Thus, foreign collaboration is a strategic
alliance (or a mutual cooperation)between one or more resident and non-resident entities. In short,
foreign collaboration is an agreement or contract between two or more companies from different
countries for mutual benefit.

The major types of collaborations are technical collaboration, marketing collaboration, financial
collaboration, and consultancy collaboration. Before initiation of foreign collaboration, it requires an
approval from the government of a domestic country. During a process of seeking permission, the
collaborating entities prepare a preliminary agreement. After seeking govt's permission, resident and
non-resident entities sign a preliminary agreement and a contract is executed to form a foreign
collaboration. After establishing foreign collaboration, resident and non-resident entities start business

31
together in the domestic country. Collaborating entities share their profits according to the profit-
sharing ratio mentioned in their executed contract. Tenure (term) is specified in the written contract.

What is the EPCG Scheme (Export Promotion Capital Goods Scheme)?

This is a Scheme which enables an importer (being an export-oriented business) to import capital goods
at zero rates of customs duty. However the scheme is subject to an export value equivalent to 6 times
of duty saved on the importation of such capital goods within 6 years from the date of issuance of the
authorization.)n simple words, there is a compulsion on the business to bring in foreign currency which
is equal to 600 percent of duty saved on such importation measured in domestic currency. This is to
be done within six years from availing the Export Promotion Capital Goods scheme.)

How to obtain an EPCG License?

In order to obtain a Licence under EPCG scheme, it is a primary requirement to file an application
with the licensing authority of the Director General of Foreign Trade. The application shall be attached
with the required documents along with the company and personal details

Documents required for EPCG License

The issuing authority is the licensing authority, Director General of Foreign Trade (DGFT).

ANF 5B is to be filled along with Self-certified copies of the following:

i) Import Export Code (IEC)

ii) Registration cum Membership Certificate (RCMC)

iii) Digital signature

iv) Registration certificate from Tourism Department

v) Pan Card

vi) Excise Registration (if registered)

vii) GST Registration Certificate

viii) Proforma Invoice

ix) Brochure

x) Self-Certified Copy + Original of Certificate of Chartered Accountant

xi) Self-Certified Copy + Original of Certificate of Chartered Engineer

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Procedure of Getting Approval for Foreign Collaboration

1. Check Eligibility: Ensure the proposed foreign collaboration falls under permissible categories.
Automatic approval is available for up to 51% foreign equity in 36 high-priority industries. In some
cases, 100% foreign investment is allowed.

2. Prepare Application:

Foreign companies can apply directly in their own name without an Indian partner.

If approved, a letter of "In Principle" approval is issued, which must later be transferred to an Indian-
incorporated entity.

3. Fill the Application Form:

Part A: For approval of foreign collaboration.

Part B: If an industrial license or letter of intent is also required.

Both Parts A & B are needed for proposals involving foreign collaboration and industrial licensing.

4. Attach Required Documents & Fees:

General information about the business must be provided.

If an industrial license is required, attach a ₹2,500 demand draft payable to the "Pay and Accounts
Officer, Department of Industrial Development, Ministry of Industry, New Delhi."

No application fee is required for foreign collaboration alone.

5. Submit the Application

Send 9 copies of the application and forwarding letter to the Secretariat for Industrial Assistance,
Department of Industrial Policy & Promotion, Ministry of Industry, Udyog Bhavan, New Delhi.

6. Await Approval:

If all conditions are met, approval is granted.

If additional information is required, the applicant will be notified.

The following conditions are required to be fulfilled by the applicant:

a) The location of the industrial projects will be subject to Central or State Environment laws or
regulations including local zoning and land use laws and regulations.

33
b) Adequate steps shall be taken to the satisfaction of the Government to prevent air, water and solid
pollution measures to be installed should conform to the effluent and emission standards prescribed by
the State Government in which the factory or the industrial undertaking is located.

c) Items reserved for the Small Scale Sector shall not be manufactured without prior approval of the
Government as per the prescribed policy and procedure.

d) For undertaking the export obligation, if any, specified in the approval letter, the requisite guarantee,
i.e., legal undertaking/bank guarantee, as may be required, should be furnished according to the
detailed instructions issued by the Directorate General of Foreign Trade (E.O. Cell), Ministry of
Commence (EP Divison) and the Administrative Ministry, who may be contacted in the matter.

e) Import of capital equipment, components and raw materials will be allowed as per the import policy
prevailing from time to time.

f) The approval is valid for a period of two years from the date of issue. Within this period, the
collaboration agreement is required to be filed with the Reserve Bank of India / Authorised Foreign
Exchange Dealer.

g) The foreign collaboration agreement shall be subject to Indian laws.

h) Foreign Investment Remittance (FIRC) is required to be sent to the Regional Office, Reserve Bank
of India, immediately on receipt of foreign remittance.

i) All remittances to the foreign collaborator shall be made as per the exchange rates prevailing on the
day of remittance...

j) A copy of the collaboration agreement signed by both the parties may be furnished to the following
authorities:

(i) Administrative Ministry/Department as mentioned in the Approval to be issued by SIA,

(ii) Secretariat for Industrial Assistance, (Foreign Collaboration-II Section) Department of

Industrial Policy & Promotion, Udyog Bhavan, New Delhi-110011.

(iii) Department of Scientific and Industrial Research, Technology Bhawan, New Mehrauli Road,
New Delhi-110016.

As already stated, prescribed application (FORM FC (SIA)) for approval of such foreign investment
proposals setting out relevant details, is to be submitted in a form without payment of any fee to the
Foreign Investment Promotion Board, Secretariat for Industrial Assistance, Ministry of Industry,
Udyog Bhavan, New Delhi. Applications are also received by all Indian missions abroad and
forwarded to the SIA for further processing. Approvals are normally available within 4 to 6 weeks of
filing the application.

The following Guidelines are laid-down to enable the Foreign Investment Promotion Board (FIPB) to
consider the proposals for Foreign Direct Investment (FDI) and formulate its recommendations.

34
1. All applications should be put up before FIPB by the SIA (Secretariat of Industrial Assistance)
within 15 days and it should be ensured that the comments of the administrative ministries are placed
before the Board either prior to/or in the meeting of the Board.

2. Proposals should be considered by the Board keeping in view the time frame of 30 days for
communicating the government decision (i.e., approval of C&IM/CCEA or rejection as the case may
be).

3. In cases in which either the proposal is not cleared or further information is required, in order to
avoid delays in presentation by applicants in the meeting of the FIPB should be resorted to.

4. FIPB would consider each proposal in totality (i.e., if it includes apart from foreign investment,
technical collaboration/industrial licence) for composite approval or otherwise. However, the FIPB's
recommendation would relate only to the approval for foreign financial and technical collaboration
and the foreign investor will need to take other prescribed clearances separately.

5. The Board should examine the following while considering proposals submitted to it for
consideration:

(i) Whether the items of activity involve industrial licence or not and if so the considerations for
grant of industrial licence must be gone into.

(ii) Whether the proposal involves technical collaboration and if so: (a) the source and nature of
technology sought to be transferred, (b) the terms of payment (payment of royalty by 100%
subsidiaries is not permitted);

(iii) Whether the proposal involves any mandatory requirement for exports and if so whether the
applicant is prepared to undertake such obligation (this is for items reserved for small scale sector
as also for dividend balancing, and for 100% EOUS/ EPZ units);

(iv) Whether the proposal involves any export projection and if so the items of export and the
projected destinations;

(v) In the case of Export Oriented Units (EOUs) whether the prescribed minimum value addition
norms and the minimum turnover of exports are met or not.

(vi) Whether the proposal has any strategic or defence related considerations, and

(vii) Whether the proposal has any previous joint venture or technology transfer/ trademark
agreement in the same or allied field in India, the detailed circumstances in which it is considered
necessary to set-up a new joint venture/enter into new technology transfer (including trade mark),
and proof that the new proposal would not in any way jeopardise the interest of the existing joint
venture or technology/ trademark partner of other stake/holders.

6. While considering proposals the following may be prioritised.

(a) Items/activities covered under automatic route (i.e., those which do not qualify for automatic
approval).

35
(b) Items failing in the infrastructure sector.

(c) Items which have an export potential.

(d) Items which have large scale employment potential

(e) Items which have a direct or backward linkage with the agribusiness/farm sector.

(f) Items which have greater social relevance such as hospitals, human resource development,
lifesaving drugs and equipment.

(g) Proposals which result in induction of technology or infusion of capital

7. The following should be especially considered during the scrutiny and consideration of proposals:

(a) The extent of foreign equity proposed to be held (keeping in view sectoral caps if Thy-eg, 24%
for Sl units, 40% for air taxi/airlines operators, 49% in basic/cellular/

(b) paging etc. in the telecom sector. Whether the proposed foreign equity is for setting up a new
project (joint venture or otherwise) or whether it is for enlargement of foreign/NRI equity or
whether it is for fresh induction of foreign equity/NRI equity in an existing Indian company.

(c) In the case of fresh induction of foreign/NRI equity and/or cases of enlargement of foreign/NRI
equity in existing Indian companies whether there is a resolution of the Board of Directors
supporting the said induction/enlargement of foreign/NRI equity and whether there is a
shareholder's agreement or not.

(d) Issue/transfer/pricing of shares will be as per SEBI/RBI guidelines

(e) Whether the activity is an industrial or a service activity or a combination of both.

(f) Whether the proposal involves import of items which are either hazardous, banned or detrimental
to environment (eg. import of plastic scrap or recycled plastics).

8. In respect of other industries/activities, the Board may consider recommending 51 percent foreign
equity on examination of each individual proposal. For higher levels of equity up to 74 percent, the
Board may consider such proposals keeping in view considerations such as the extent of capital needed
for the project, the nature and quality of technology, the requirements of marketing and management,
skills and commitment of exports.

9. FIPB may consider recommending proposals for 100 percent foreign owned holding/ subsidiary
companies based on the following criteria:

(a) Where only "holding" operation is involved and all subsequent/downstream investments to be
carried out would require prior approval of the Government.

(b) Where proprietary technology is sought to be protected or sophisticated technology is proposed

to be brought in.

36
 (c) Where at least 50% of production is to be exported.

(d) Proposals for consultancy, and

(e) Proposals for industrial model towns/industrial parks or estates.

10. In respect of trading companies, 100% foreign equity may be permitted in the case of the activities
involving the following: (i) export; (ii) bulk Imports with export/expanded warehouse sales; (ii) cash
and carry wholesale trading; (iv) other imports of goods or services provided at least 75% is for
procurement and sale of goods and services among the companies of the same group.

Foreign technology collaborations are permitted either through the automatic route under delegated
powers exercised by the RBI, or by the Government.

Automatic Approval: The Reserve Bank of India, through its regional offices accords automatic
approval to all industries for foreign technology collaboration agreements subject to (i) the Jump-sum
payments not exceeding US $2 Million; (ii) royalty payable being limited to 5% for domestic sales
and 8% for exports, subject to a total payment of 8% on sales over a 10 year period; and (iii) the period
of payment of royalty not exceeding 7 years from the date of commencement of commercial
production, or 10 years from the date of agreement whichever is earlier.

In short, automatic permission must be given by the regional offices of the RBI for foreign
collaboration in high priority industries.

Government Approval: For the following categories, government approval would be necessary:

(a) proposals attracting compulsory licensing; (b) Items of manufacture reserved for the small scale
sector; (c) Proposals involving any previous joint venture, or technology transfer/ trademark agreement
in the same or allied field in India; (d) Extension of foreign technology collaboration agreements.

Foreign Investment Promotion Board (FIPB)

The Foreign Investment Promotion Board (FIPB) has been constituted by the Government with a view
to promote and attract foreign investment in India. The FIPB is a high powered committee comprising
the Principal Secretary to the Prime Minister (Chairman), Finance Secretary and Commerce Secretary,
and is located at the Ministry of Industry.

The FIPB is empowered to consider proposals for investment in India which do not fall within the
parameters of the existing policy.

The functions of the Board include:

(a) Expeditious clearance of proposals;

(b) Establishment of contacts with and inviting select international companies for investment in the
country in appropriate ventures and to periodically review the implementation of the projects cleared;

37
(c) The Board's programmes of investment include a variety of activities such as marketing, designing
and export promotion, energy conservation, technology upgradation and modernisation, infrastructure
development, better utilisation of raw materials and natural resources and substantial increase in
employment.

The Indian Government has allowed foreign investment in the areas of transport, communications,
electronics, energy, oil and gas exploration, chemicals, fertilizers, biotechnology, telecommunication,
civil aviation, industrial, agricultural and electrical machinery. Pollution Control Clearance

No Objection Certificate (NOC) should be obtained from the Kerala State Pollution Control Board
(SPCB) before starting an industrial unit. In case the industry falls in the highly polluting category, a
full-fledged or rapid EIA has to be carried out and submitted to which use machineryshould obtain
NOC from the SPCB. the SPCB.

Procedure of Getting Clearance from the SPCB

1 Application

After taking the printout of the completed application form, the same should be submitted to the
Concerned District Office of SPCB. The following supporting documents should be attached with the
application:

i) Document indicating remittance of consent fee (fee shall be remitted through the online fee
payment option available in OCMMS using credit card/debit card/net banking/NEFT /RTGS).

ii) Affidavit in 100 stamp paper or chartered accountant's certificate as evidence on gross fixed
capital investment. (The gross fixed capital investment shall include the cost of land, buildings,
plant, machinery, etc. without depreciation up to the date of application. If the land is on lease 20
times of the annual lease amount shall be taken as cost of land.)

iii) Layout plan showing location of effluent treatment plant, outlets and emission sources, in A3/A4
size.

iv) Process flow diagram and proposal for effluent treatment plant with design details.

v) Details of air pollution control measures proposed

vi) Copy of land tax receipt and/or Possession Certificate Now application for clearance is made
online. The procedure is stated below:

Step 1: Login to Kerala State Pollution Control Board's Online Consent Management and. Monitoring
System (OCMMS) (http://krocmms.nic.in/KSPCB/). First time registrants may register using the
"New Industry Registration" link in the same URL.

38
Step 2: Fill the application form for the types of industry for which consent is sought-Industrial
Establishments, Hospitals & Healthcare Institutions and Hotels, Offices, Residential Apartments &
Commercial Establishments. Select "Complete Remit application fee through the online payment
option available in OCMMS and submit the application.

Step 3: Take a printout of the completed application form and submit the same at the concerned District
Office of Kerala State Pollution Control Board.

Step 4: Scrutiny of application and supporting documents by the Board.

Step 5: Site inspection by the authorised Officer.

Step 6: Disposal of consent application by the Board based on predefined criteria (Copy of the Consent
to Establish, if granted, can be downloaded by the occupier from the OCMMS website)

2 Inspection Procedure

A. Pre-Inspection

1. A scrutiny shall be conducted of the documents submitted by the applicant in terms of completeness
and correctness of the information furnished with respect to the type of industry.

2. The Environmental Engineer shall raise inspection activity in OCMMS and assign the file to the
concerned inspecting Officer.

3. The Inspecting Officer shall collect background information and previous compliance history (if
available) of the applicant. This will enable the Inspecting Officer to be familiar with the nature of
operations of the industry and note down specific areas that may require more detailed investigation
or verification during the inspection process.

The Inspecting Officer shall obtain the following information about the industry:

i) Location of the industry

ii) Past consents issued to the industry

iii) Previous inspection reports

iv) Notices issued to the industry for non-compliance and track record of the industry with respect to
implementation of directions issued from the Board

v) Line of activity of the industry

vi) Manufacturing process of the industry.

B. Inspection

39
1. At the beginning of the inspection, the Inspecting Officer shall locate the occupier/his
representative/person in charge of the industry and inform the purpose of the proposed inspection. The
occupier of the industry shall extent all possible help to the inspecting Officer.

2. The inspecting officer shall verify the following:

i) Correctness of the details mentioned in the application with regard to location of industry and
boundaries of the site, raw materials, production process, products/by-products.

ii) Effluent generating sources and control systems

iii) Effluent collection, treatment and disposal measures.

iv) Sources of air pollution and control systems

v) Sources of solid and hazardous wastes generation, storage and disposal methods.

vi) Operation and maintenance records of effluent treatment plant

vii) Operation and maintenance records of equipment installed to control air and noise pollution

viii) Compliance of previous consent conditions.

(x) The inspecting Officer shall verify the records of the establishment with regard to production
capacity, control mechanisms taken to keep water and air pollution within permissible levels and
mechanism for management of solid wastes.

The Inspecting officer may seek information / clarifications or documentary evidence from the
representative or occupier to ascertain the correctness of the application.

C. Post Inspection

1. Inspection report should be submitted within 5 working days of completion of the inspection through
close inspection activity in OCMMS.

2. A brief description shall be given and observations of the inspection should be included as a detailed
report which shall be attached along with the above description while closing Inspection.

3. Noncompliance areas should be listed in the report along with additional measures that need to be
taken by the applicant to ensure compliance.

4. The Environmental Engineer based on the inspection report shall dispose of the application (grant
or refuse consent) or forward the online file to Regional Officer or Head office if District Officer is
not the consent Issuing Authority.

Setting up of MSME

40
For setting up a MSME, a number of steps should be taken carefully after considering several factors.
Following are the steps involved in setting up of MSME:

1. Selection of the Product: The primary decision to be made by a prospective entrepreneur is choosing
the right product or line of activity. The very success of his venture will depend on the rationality of
his decision in this regard. He may design a new product. Or, he may improve upon an existing product.
The economic viability of a product can be ascertained by considering certain demand aspects such as
volume of demand in the domestic market, volume of demand in the export market, volume of potential
demand, a degree of substitution of an existing product, volume of demand by big units for ancillary
products etc. The relevant information relating to these aspects can be obtained from various technical
publications, development agencies, industrial houses, developing ancillary units etc. In short, the
prospective entrepreneur has to identify or select the product on the basis of market research or market
survey.

Small enterprises in our country produce most of the products required for daily use such as ready
made garments, foot wear, detergent soaps, plastic items, jams, pickles, squashes, super white etc.
More than five thousand products are being produced by the small-scale sector in our country.

An entrepreneur before deciding about the product should find answers for the following important
questions:

(a) Who will buy the product?

(b) When will they buy?

(c) How much will they buy?

(d) At what price they will buy?

(e) From where they will buy?

(f) What are their expectations from our product?

(g) Who are our competitors and how are they performing?

(h) How to advertise and sell?

2. Selection of Form of Ownership: One of the most important decisions to be taken by the entrepreneur
when he proposes to start his unit is to decide about the form of ownership of the industry. He has to
select sole proprietorship, or family ownership or partnership or private limited company as the form
of the ownership.

3. Selection of Location and Site: Decision about the location of a unit is very important. Location
determines the success or failure of the enterprise. Location is selected after considering certain factors
such as nearness to market, sources of material and labour, modern infrastructural facilities etc. Before
locating his plant in a particular area, he should ascertain whether the area is declared as an industrial
area or not. In this regard a detailed information can be had from District Industrial Centres.

41
After selecting the location, the entrepreneur has to choose a suitable plot for a factory or shed. He
may purchase land directly. Or he can choose a land from an industrial area developed by State
Development Corporations like SIDCO, or Directorate of Industries. Or he may choose factory sheds
in industrial estate constructed by the State Development Agency. Or he may choose from plots/sheds
developed by private industrial estates.

4. Designing Capital Structure: The entrepreneur has to decide the capital structure and the sources
through which the total capital is procured. Apart from the own capital, he may secure finance from
friends and relatives, term loans from banks and financial institutions.

5. Acquiring Manufacturing Know-how or Technology: There are certain projects wherein

sophisticated manufacturing know-how is required. Many institutions of government, research
laboratories, research and development divisions of big industries and certain consultancy agencies
provide the manufacturing know-how.

6.No Objection Certificate(NOC) from Local Body / Panchaya / Municipality/ Corporation:

While promoting a new venture, the entrepreneur has to obtain a No Objection Certificate from the
local body/panchayat or municipality as well as the requisite permission to start the SSI. This is done
for the purpose of construction of industrial sheds and for land utilisation as well as for the benefit
which may be given to the enterprise in course of its operation by the government.

7. Statutory Licence: It is necessary to obtain statutory licence should obtain intending to start an
industry in the state irrespective of the nature of activity should obtain the following licences and
certificates before starting the industry:

(a) Licence from the Local Bodies for: (1) Construction of the building (ii) installation of plant and
machinery (It is legal requirement under section 97 of Kerala Panchayat Act 1960 and section 285 of
the Kerala Municipalities Act. 1960).

(b) Licence from the Directorate of Factories and Boilers for (i) Approval of factory building (ii)
registration under section 6,7 and 85 of Factories Act.

8. Registration with SIDCO: If the industry wants scarce indigenous raw materials, it is required to
register the unit with SIDCO. The application (2 copies) should be sent to the GM, SIDCO, Raw
material Division, Kadavanthara, Cochin, and one copy to the G.M of the concerned DIC.

9. Application for Allotment/Transfer/Sublease of plot/shed, Execution of Lease Agreements: The

most critical thing to start a manufacturing unit is land. If the land is within a notified industrial area,
then there is a procedure for allotment of land by the Industrial Development Corporations (IDCs).
Legal documentation for a new business is a long drawn manual process, wherein after the application
form is submitted with the IDC, it is reviewed by the Screening Committee which reviews the Project
Report and the supporting documents. Thereafter, the application is placed before the multi-member
Scrutiny Committee which decides on the matter and thereafter the Corporation issues the Allotment
Letter and starts the process for execution of Deed of Lease.

42
10. Application for Grant of Connection for Water & Power for Construction: The process for water
& power connection for construction of manufacturing facility is again manual and after various
inspections, these are granted.

Approvals of the Building Plans from various concerned authorities and Occupancy Certificate after
the completion of the construction. It is necessary to submit copies of the Building Plans to various
statutory authorities such as Industries Development Corporation, Fire Department, Town & Country
Planning, Inspectorate of Factories, Pollution Control Boards etc to seek approval of the Building Plans
before construction and after construction, for obtaining Occupancy Certificate.

11. Consent to Establish (CTE) and Consent to Operate (CTO) from the State Pollution Control
Boards: Depending upon the type of industry, the business entity needs to apply for and obtain Consent
to Establish (CTE) and Consent to Operate (CTO) from the State Pollution Control Boards. The
process is online but takes a comparatively long time since the site is required to be inspected and the
process needs to be understood in detail.

12. NOC from the Department of Fire & Emergency Services: All factory buildings require fire safety
measures to some extent, especially fire extinguishers, Presence of first aid fire fighting arrangement
helps checking fire at its initial stage till the fire brigade arrives. For this reason it is mandatory for a
manufacturing business unit to obtain NOC from the Department of Fire & Emergency Services.
Process is claimed to be online but it is still being handled manually.

13. Factory License from the Inspectorate of Factories/Shop & Establishment Registration: This is a
mandatory requirement wherein the Inspectorate not only approves the factory layout plans but also
lists out the conditions subject to which the factory can be set up. Various conditions prescribing the
factory buildings, workmen safety and working conditions are required to be followed by the business
entity.

14. Registration with Employees Provident Fund Organisation and Employees State Insurance
Corporation, under Contract Labour (Regulation And Abolition) Act, 1970: Registration with EPFO
and ESIC are mandatory registrations required for business units to provide Social Security benefits
to the working class. The process is online and still being simplified.

15 Availing Importer Exporter Code from Directorate General of Foreign Trade (DGFT): The first
requirement before any business starts an import/export business, it is required to obtain an Importer
Exporter Code (IEC) from the Directorate General of Foreign Trade. An IEC is necessary for
import/export of goods. If the entrepreneur wishes to export his goods, he is required to obtain an
export licence from the concerned authority.

16. Preparation of Project Report: It is necessary to prepare a project report according to the format of
loan application of the concerned financial institution. An entrepreneur may get these reports done by
a consultant or technical consultancy organisation. The report usually covers important items like
sources of finance, availability of machinery and technical know- how, sources of raw material and
labour, market potential and overall profitability.

43
17. Registration as a MSME: As per MSME Act of 2006, all enterprises are expected to register with
District Industries Centre (DIC) of their area and file Entrepreneurs Memorandum (EM) 1 for intention
to start business in manufacturing or service and file EM 2 after starting production.

18. Apply for Power Connection: There are two categories of power, namely, the Low Tension (LT)
and High Tension (HT). A consumer can avail LT only if the connected load is 75 HP and below. If
the connected load is between 75 HP and 130 HP, the consumer has the option to avail either LT supply
or HT supply. Most of the SSI units fall under the LT category. Prospective consumers are required to
contact the local electrical distribution section office of Board and furnish the details as per the
application for supply of electricity in a prescribed form, obtainable free of cost from the section office.

19. Arrangement of Finance: To start an industry an entrepreneur needs to acquire assets of two kinds-
fixed and current assets. Long term finance is needed to acquire fixed assets like land, building, plant
and machinery and for security deposits. Short term funds are required for acquiring current assets.
Current assets are essential for the day to day working of the industry.

Sources of long term funds include owner's capital, subsidy from central/state govt, seed capital
assistance from the government, personal borrowings from friends and relatives and long term loans
from financial institutions. The important financial institutions engaged in term lending are KFC and
KSIDC.

20. Registration under the GST Act: Business enterprises are subject to two important taxes -Income
Tax and Goods and Service Tax. Income tax is the tax levied on income as defined under the IT Act
of 1961. It is a revenue of the Central Government. Goods and Service Tax (GST) is the tax levied on
the supply of goods or services or both. Every business whose taxable supply of goods or services
under GST and whose turnover exceeds 20 lakhs will be required to register under GST. A person
without GST registration can neither collect GST from his customers nor claim any input tax credit
(refund) of GST paid by him. The application for registration should be submitted online. The
application for registration should be submitted within 30 days from the date on which the person
becomes liable to registration (i.e., when the turnover exceeds 20 lakhs).

Any supplier who carries on any business at any place in India and whose aggregate turnover exceeds
20 lakhs in a year is liable to get himself registered. However, certain categories of persons mentioned
in Schedule II of MGL are liable to be registered irrespective of this limit. After a few days of
submitting the application for registration, the applicant shall be allotted the GST Identification
Number (GSTIN). It is a 15 digit identification number which is allotted to each applicant who applied
for GST Registration. GST Number is completely based on the Pan Number and State Code).

Registration under GST regime offers the following advantages to the business:

a) It legally recognises the firm as supplier of goods or services

b) It facilitates proper accounting of taxes paid on the input goods or services. This can be utilised for
payment of GST due on supply of goods or services or both by the business.

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c) It legally authorises the firm to collect tax from its buyers and pass on the credit of the taxes paid
on the goods or services supplied to buyers or recipients.

When the entrepreneur wants to start a hotel or restaurant, it becomes necessary to obtain a licence
from the health department of the Municipal Corporation or Panchayat as the case may be. For getting
the licence an application should be made in prescribed form along with required fees. Location
Decision

Every entrepreneur has to keep in mind the necessity of the most careful choice of the area where a
business unit is to be located. Proper decision regarding the location of the plant helps the firm to
operate smoothly with minimum costs and maximum efficiency. The main object of an industrial unit
is to maximise profit through the minimisation of cost of production. This is possible when the firm is
located at the right place.

Meaning of Location Decision

Business location means deciding a suitable location, area or place where the business starts
functioning. According to R.C. Davis " the function of determining where the plant should be located
for maximum operating economy and effectiveness is called plant location".

Steps to be followed in Selecting Location

Selection of location involves the following steps:

(1) Selection of the region

(2) Selection of a particular locality

(3). Selection of the exact site

(4) Optimum selection of site

(1) Selection of Region: Selection of the region depends greatly on the Government licensing
regulations. The following factors will influence the selection of a region.

(a) Availability of raw materials

(b) Proximity to markets

(c) Supply of power

(d) Transport facilities

(e) Favourable climate

(f) Government attitude

(g) Proper communication system

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2. Selection of Locality:- The factors affecting selection of a particular community depends upon the
following factors :-

(a) Supply of cheap labour

(b) Convenient housing and medical facilities for workers

(c) Banking and finance

(d) Research and development

(e) Availability of water and fire

(f) Local taxes and concessions

(g) Personal factors

3. Selection of Exact Site: The factors to be considered while selecting exact site include the
following:-

(a) The stability and load bearing ability of the ground.

(b) Level of ground

(c) Availability of land for future expansion

(d) Drainage and sewage facilities.

(e) Accessibility of the site from the point of view of road, rail or water transport.

(f) Facilities for supply of gas, electricity.

(g) Post and telegraph facilities.

(h) Facilities for dumping of waste materials.

(i) Local rates and taxes

(j) Repair facilities

(k) Availability of social amenities

(l) Legal aspect regarding clear title of the site.

4. Optimum selection of site: Optimum site is selected on the basis of a comparative economic survey
of the alternate sites in question. Optimum site is one which satisfies all necessary conditions or
maximum facilities and with minimum cost. According to Kimball and Kimball," the most
advantageous location is that at which the cost of gathering material and fabricating it plus the cost of
distributing the finished product to the customer will be a minimum".

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Factors Governing Location (Factors to be considered in Location Decision)

The choice of location is influenced by a variety of consideration of factors. They are discussed as
follows:

1. Proximity to raw materials:- An important consideration for location is the proximity to sources of
raw materials. Generally, the optimum location is one where the total cost is minimum/If raw materials
are bulky and difficult to transport, it is better to locate the plant near the source of raw material. For
example, steel and paper plant are located near the sources of their main raw materials. Similarly, if
the quality of the raw material is likely to deteriorate in transportation, it is better to locate the plant
near the source of raw material. For example, sugar factories are located in sugarcane growing areas.
A project based on imported material may be located near a port.

Regular supply of raw materials is very necessary for the successful operation of the plant. The
requirement of total raw materials at full capacity should be ascertained and it should be ensured that
necessary raw materials will be available at reasonable prices. If imported raw materials are required
for the project, the government policy in this regard and the prospects for its production within the
country should be studied.

2. Nearness to market: While deciding location of a project, comparative study regarding transportation
cost of raw materials and finished product should be done. If transportation of finished products is
more difficult than its raw materials, it may be better to set up such projects near the market. For
example, units manufacturing food products (cakes, pastries), soft drinks etc., should be located near
the market. An ancillary unit should be located near the main unit which will purchase its products.

3. Availability of infrastructural facilities: Availability of power, water, fuel, education and training
institutes, hospitals etc., should be carefully assessed before a location decision is made.

The water requirement for the project should be assessed. As regards water supply, it is necessary to
examine the source of flow of water (wells, river, lake, etc.), its proximity to the project, the quantity
available, the water charges and so on. Quality of water may have to be tested in certain cases like, ice
plant, soft drinks plant etc.

4. Transport and communication facilities: For transporting the inputs of the project and distributing
the outputs of the project, adequate transport connections-whether by rail, road, sea, inland water or
air-are required. The availability, reliability and cost of transportation for various alternative locations
should be assessed. If a unit has to export its heavy production to a large extent, it is better to locate it
near a port. In addition to transporting facilities, the project should have adequate communication
facilities like telephone and telex.

5. Effluent disposal:-The problem of effluent disposal differs from industry to industry depending on
the nature and quantity of effluents. For example, disposal of effluents may have to be given due
considerations for a chemical plant, cement plant, paper plant etc. However, it may not be a serious
problem for a light engineering unit or a ready-made garment manufacturing unit.

6. Labour: Labour in terms of unemployed people is available in plenty in our country. But skilled
labour may not be available at a particular place. For example, factories engaged in carpet weaving

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and manufacture of sports goods, fireworks etc., require skilled workers. If a plant is to be set up in an
area where skilled labour is not available, necessary arrangements should be made to get labour from
outside and training facilities for the local labour should be provided.

7. Government policies: Government policies have a bearing on location. In the case of public sector
projects, location is directly decided by the government, It may be decided on a wider policy for
regional dispersion of industries. In case of private sector projects, location is influenced by certain
governmental restrictions and inducements. The government may prohibit the setting up of industrial
projects in certain areas (At the same time the government offers inducements for establishing
industries in backward areas. The Planning Commission has appointed two Committees-Pandey
Committee and Wanchoo Committee to identify industrially backward areas and to suggest incentives
to attract entrepreneurs to locate their units in such areas. At present, both the Central and State
Governments provide a package of incentives to induce entrepreneurs in taking up new ventures in
backward areas. These inducements consist of subsidies, concessional finance, tax reliefs and other
benefits.

8. Climatic condition:-Selection of location has to be made taking into consideration the various
climatic factors such as temperature, humidity, sunshine etc. Some projects require cool and dry
locations and in such cases these factors have an added advantage in selection of location.

9. Environmental considerations :- The rapid advancement of modernisation and technological

revolution in all spheres of economic activities has brought severe problems of environmental effects
of a project on the community as a whole. The gas leakage tragedy both at Bhopal and New Delhi are
the living examples. It is for this reason that at the time of project formulation, it is essential to consider
how environmental pollution arising out of the project can be controlled. The location study should
analyse the cost of minimising environmental pollution at alternative locations.

10. Other factors: General living conditions judged in terms of cost of living, housing situation and
facilities for education, and medical care need to be assessed at alternative locations.

According to Dr. Visvesvariaya, the decision regarding the establishment of any industrial unit may
be taken on nine 'Ms' as below:

1. Money

2. Material

3. Men

4. Market

5. Motive Power

6. Management

7. Machinery

8. Means of Transport

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9. Momentum of early start

Ideal Location

Different areas or regions have different advantages in some respects. But a particular area may have
disadvantages in one aspect or the other. For example, an area may be well served with the supply of
power but it may be disadvantageously placed in regard to transportation facilities. Hence the selection
of a particular region and the exact site is determined by the compromise between the pulls of various
locational factors.

Ideal location is selected after evaluating each alternate location. Ideal or best location is one which
has maximum facilities at minimum cost. An ideal location is one" where unit costs of production and
distribution are at a minimum and where the prices and volume of sales will bring the maximum profit".
(In the words of Shubin, "ideal location is one that permits the lowest unit cost in the production and
distribution of a product or service Following are the main factors which together make ideal location:

1. Easy availability of raw materials and other factors of production

2. Minimum cost of transporting the materials and products
3. Easy accessibility to markets
4. Availability of adequate space for the site
5. Sufficient scope for future expansion
6. Integration of the enterprise with the economic, social and cultural traits of the community of
the region

Costs Associated with Plant Location

In location theory, main emphasis is usually given to the cost side. The most favourable plant location
is the place where the unit cost of gathering materials, processing them and delivering the finished
product is the lowest.

According to Alfred Weber there are two types of costs associated with plant location:

They are: (i) Transportation costs, and (ii) labour costs.

Transportation costs: Transportation costs are required for bringing raw materials and other equipment
for the plant and also for sending the finished products to the markets. Plant is located where the
transportation cost is the minimum. If the raw material is more expensive to carry than the finished
product, it is better to locate the plant near the source of raw material. If the finished product is more
expensive to carry (e.g., it is bulky, perishable or fragile), it is desirable to set up the plant near the
market. Weight losing materials will attract plant location near the source of raw material.

Labour cost: Wage rate may be different at different locations. Therefore, labour costs cause deviation
of the location of the plant from the point of minimum transport cost. The location of the industry will
be moved from the point of minimum transport cost to the location of cheap labour if the saving in
labour cost is more than the corresponding increase in the transport cost. Thus plants may be moved
in the centres of cheap labour.

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Significance Location Decision

Location decision is very significant because an ideal location helps in:

a) minimisation of costs of production and distribution

b) designing an appropriate layout of machinery and equipment

c) coping with requirements of expanding business at a future date

d) establishing the size and quality of the workforce available to entrepreneur

e) improving the profitability and/or productivity of a plant

f) determining operating and capital cost

g) determining the nature of investment

h) increasing sales

To conclude, location decision is important because it determines the performance of an organisation.

Location selection decisions play a very important role in both manufacturing units and assembly units.
In short, the location decision determines the success or failure of a business unit.

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