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The term 'Public enterprise' refers to such industrial and commercial enterprises which are owned and

controlled by the central and/or State Governments.

According to A.H. Hanson, “Public enterprise means State ownership and operation of industrial,
agricultural, financial and commercial undertaking.” In the words of S.S. Khera, “by State undertakings
is meant the industrial, commercial and economic activities carried on by the Central Government or by
a State Government, and in each case, either solely or in association with private enterprise, so long it
is manged by a self-contained management'. In the Encyclopedia Britannica public enterprise has been
defined as “an undertaking that it is owned by a national, State or local government, supplies services
or goods at price, and is operated on a more or less self-supporting basis.”

(A)Departmental rganisation

Under this form of organisation, a public enterprise is run as a department of the Government. It is
organised, financed and controlled like any other Government department. A departmental undertaking
is self-contained but it is under the overall control of the departmental head and the ministry

It has, however, its own management incharge of and responsible for the undertaking. For example,
Posts and Telegraphs are a department in the Ministry of Communications. Similarly, the Chittranjan
Locomotive Works and the Integral Coach Factory are parts of the Ministry of Railways. The Ordnance
Factory the Gun Carriage Factory, the Delhi Milk Scheme, the Tarapur Atomic Energy Plant, All India
Radio, Doordarshan, the Government Printing Press and Mint are other examples of departmental
Where a public enterprise is of national significance in view of its giant size or nationwide operations. It
may be organised as a separate fullfledged ministry. For instance, the Indian Railways is managed by
the Ministry of Railways through the Railway Board. The Railway Board consisting of a Chairman , three
members and a financial commissioner manges the Indian Railways under the overall direction and
control of the Railway Minister. The Railway Minister is in turn responsible to the parliament. There is no
basic difference between departmental setup and the ministerial set-up and in both the cases, the
undertaking operates as a wing of the government with ultimate control and responsibilities vested in
the Minister concerned.

Salient Features

The essential features of departmental organisation are as follows:

1. Line authority: The ultimate responsibility for management lies with the Minister concerned. The
Minister in turn delegates his authority downward to the various levels, e.g., the departmental head,
the chief executive of each undertaking, etc.

2. Government financing: The undertaking is financed through annual budget appropriations by the
parliament or the State Legislature. The revenues of the undertaking are paid into the treasury.

3. Executive decision : A departmental undertaking is set up by an executive decision of the

Government without any legislation.

4. Accounting and audit: The undertaking is subject to the normal budgeting, accounting and audit
procedures applicable to other government departments.

5. Civil service code: The enterprise is manged by civil servants whose methods of recruitment and
service conditions are the same as for other civil servants of the government.
6. Soverign immunity: Being an integral part of the Government, a departmental undertaking cannot
be sued at law without the consent of the government.


The main advantages of departmental organisation are as follows:

1. Accountability : Departmental organisation ensures maximum degree of parliamentary control. In

the words of Krishna Men on Committee, “accountability of departmental undertakings to Parliament is
complete, their management being under the Ministry concerned”

2. Effective control: The management of the undertaking is under the absolute control of the Minister
concerned. Therefore, there is maximum degree of government control on the enterprise.

3. Financial discipline : Tight budgetary, accounting and audit controls ensure that public funds are
not misused. There is unified and centralized management and any surplus earned by the undertaking
goes to the government treasury.

4. Policy instrument : The Government can realize its social, political and economic objectives
through departmental undertakings.


A departmental undertaking suffers from the following drawbacks:

1. Loss of autonomy: Excessive public accountability and Parliamentary control result in loss of
freedom which is essential for efficient business operations. Frequent investigations by Parliamentary
committees hamper the efficient functioning an growth of departmental undertakings.

2. Political influence: The undertaking is subject to political changes and its fate depends on the
balance of power between the ruling party and the opposition. There is lack of continuity in
management due to frequent changes in the Cabinet. Political considerations affect the policy matters
and long range planning is not possible.

3. Lack of flexibility: Complete centralisation of control and political interference in day-to-day

operations lead to lack of flexibility. There is bureaucracy and red-tape in day-to-day administration. As
a result decisions get delayed. Rigid adherence to time-consuming procedures an formalities make it
difficult to run the undertaking in a business like manner.

4. Lack of professional management: The undertaking is managed by civil servants who do not
often possess managerial knowledge and skill. Frequent transfers and seniority based promotions tend
to lower their motivation and morale. There is lack of initiative because the civil servants are afraid of
breaking new ground due to fear of criticism by the Minister and the Parliament.

5. Inefficiency: Bureaucratic management, undue delays and insensitivity to consumer needs, and
cumbersome regulations result in low efficiency of operations. There is a tendency not to take the
losses seriously as these are borne by the treasury.


In general, the structure and working of a departmental undertaking is incompatible with the financial
and operational requirements of a business enterprise. Departmental organisation is in many ways the
direct negation of the requirements of autonomy and flexibility. A departmental undertaking tends to
raise the power of the government tot the maximum and reduce its initiative and flexibility to the
minimum. It should, therefore, be “the rare exception, and not the general rule”. The exceptional cases
wherein the departmental organisation is suitable are as follows:
1. in defense industries on account of their strategic importance and the need for utmost secrecy

2. for the operation of economic controls like rationing, State trading, etc., which involve exercise of
monopoly power and the use of governmental authority

3. for the operation of public utilities

4. for projects not really ripe for technical and financial sanction because they have not been worked
out in detail, e.g., control body for river valley projects

5. for projects which have reached the stage of technical or financial sanction of which the requisite
financial provision is not assured.

A new development concerning departmental undertakings in India has been the setting up of
corporations to raise loans from the public through the issue of bonds. For example The Railway finance
Corporation has issued railway bonds Mahanagar Telephone Nigam has also issued telephone bonds
and it is coordinating the telephone services in the metropolitan cities

(B) Public Corporation

A public or statutory Corporation is an autonomous corporate body set up under a special Act of
Parliament or State Legislature.

The Act or statute defines its objectives, powers an functions. A public corporation seeks to combine the
flexibility of private enterprise with public ownership and accountability. In the words of the late
President Roosevelt to U.S.A., “a public Corporation is an organisation that is clothed with the power of
the government, but is possessed of th flexibility and initiative of private enterprise.” A public
Corporation is thus a combination of public ownership, public accountability and business management
for public end. Life Insurance Corporation of India, Reserve Bank of India, Employees State Insurance
Corporation, Industrial Development bank of India are examples of public Corporation. It must be
remembered that, an enterprise does not become a public corporation simply by using the word
'corporation' in its name. For example, the Stat Trading Corporation of India is a government company
and not a public corporation.


The essential features of a public corporation are as under:

1. Corporate body: It is a body corporate established through a special Act of Parliament or Stat
Legislature. The Act defines its powers and privileges and its relationship with government departments
and ministries.

2. Legal entity: It enjoys a separate legal entity with perpetual succession and common seal. It can
acquire an own property in its own name. It can sue an be sued and can enter into contracts in its own

3. Government ownership: The public corporation is wholly owned by the Central and/ or State
Government (s).

4. Financial independence: It enjoys financial autonomy. Its initial capital and borrowings are
provided by the government but it is supposed to be self-supporting. It can borrow money from the
public an is empowered to plough back its earnings.
5. Accounting system: The corporation s not subject to the budgetary, accounting and audit
regulations applicable to government departments. It is generally exempt from the rigid rules applicable
to the expenditure of public funds.

6. Management and personnel: A public corporation is manged by a Board of Directors appointed by

the Government. However, its employees need not necessarily be civil servants. They can be employed
on terms and conditions laid down by the corporation itself.

7. Service motive : The primary motive of the corporation is public service rather than private profits.
It is, however, expected to operate in a business-like manner.


A Public corporation offers the following advantages;

1. Operational autonomy : A public corporation enjoys internal autonomy as there is no

Parliamentary interference in its day-to-day working. Therefore, it can be run in a businesslike manner.
There is “a high degree of freedom, boldness and enterprise in the management of undertakings and
circumspection which is considered typical of government departments”

2. Flexibility operations: Being relatively free from bureaucratic control, a public corporation enjoys
flexibility and initiative in business affairs. It can experiment in new lines of activity and decisions can
be taken without undue delay.

3. Continuity: Being a distinct legal entity, it is not affected much by political changes. It can,
therefore, maintain continuity of policy and operations.

4. Special privilege: A public copora ton is often granted special privileges. The special law by which
by which it is created can be tailor made to meet the specific needs of the particular situation.

5. Availability of managerial talent: A public corporation can employ professional managers by

offering them better terms and conditions or service than those available to government servent.


A public corporation suffers from the following drawbacks:

1. Difficult formation: It is very difficult and time-consuming to set up a public corporation because a
special law has to be passed in the Parliament.

2. Inflexibility: It is very difficult to change the objects and powers because the special law has to be
amended by the Parliament or the State legislature.

3. Excessive accountability: There are frequent debates and discussions on the reports and working
of public corporations. Ministerial and political interference in day-to-day working do not allow internal
autonomy in actual practice.

4. Clash of divergent interests: When the Board of Directors is constituted to give representation to
divergent interests, a conflict may arise. This will hamper the smooth and efficient functioning of the
corporation. Emphasis on service motive and lack of incentive may further reduce the profitability of


Despite its weaknesses, the public corporation is generally considered appropriate for public enterprises
of industrial and commercial nature. It represents an appropriate combination of public accountability
and operational autonomy. According to Prof. Robson: “It is destined to play as important a part in the
field of nationalized industry in the 20the century as the privately-owned corporation played in the
realm of capitalist organisation in the 19the century.”

The public corporation is suitable for undertakings requiring monopoly powers,. e.g., public utilities. It
is also useful for undertakings which involve exercise of powers to be conferred by legislature and
enterprises which may not be self-supporting and have to be financed by regular grants by the State.
However, in India, “it would not be wrong to say that for the most part the public corporation has lost
the spirit but retained the form.” Bureaucratic management, financial dependence on the government
and lack of personal motivation are the main reasons for this state of affairs.

(c) Government company

A public enterprise incorporated under the Indian Companies Act, 1956 is called a government company. These
companies are owned and managed by the central or the state government. According to Indian Companies Act,
1956, a government company means "any company in which not less than 51 percent of the paid up share capital is
held by the central or by state government and partly by the central government and include a company which is a
subsidiary of government company". These companies are registered as private limited companies though their
management and their control vest with the government. This is a type of organisation where both the government
and private individuals are shareholders. Sometimes these companies are called as a mixed ownership company.

The following are some of the essential features of a government company:

• It is formed under the provisions of the Indian Companies Act, 1956.

• The total share capital or 51 percent or more of share capital is held by the government.
• It enjoys the status of a legal entity and therefore it can use or be sued by others.
• The finance of a government company is obtained from the government and from private share holders.
• The employees are governed by the rules prescribed for the company by the board of directors.
• It is not subject to budgeting, accounting, and audit rules applicable to a government department.
• The directors are nominated by the government depending upon participation of private