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SPECIAL FEATURES OF FINANCIAL MANAGEMENT IN

PUBLIC SECTOR UNDERTAKINGS

Question 1
What are the matters to be considered in the context of working capital management in public
sector undertakings? (6 marks) (November, 1997)
Answer
In the context of working capital management in public sector undertakings the following
should be considered:
(1) Public sector undertakings are often blamed for over inventory resulting in blocking of
capital and space or less often for under inventory upsetting production schedule. Both
are signs of inefficient inventory management.
(2) There is generally no provision for working capital margin at the time of estimating cost of
project. Consequently there is no provision of long-term funds for working capital and the
enterprise has to obtain financing from short-term sources.
(3) Most of the public sector units are capital intensive hence ratio of current assets to fixed
assets is generally low.
(4) Most of the public sector undertakings lack application of working capital management
techniques especially relating to receivables like discount rate, credit period and credit
standards. The reason being that they sell bulk of their output to Government
Departments.
Question 2
Write short note on Special features of Financial Management in a public sector undertaking.
(5 marks) (May, 1999)
Answer
Special features of Financial Management in a public sector undertaking (PSUs):
1. Role of financial advisor: The financial advisor occupies an important position in public
sector undertakings. His concurrence is required on all proposals which have financial
implications.
Management Accounting and Financial Analysis

2. Capital budgeting decisions: The power upto certain limits, in respect of individual capital
expenditure items has been delegated to the board of public sector undertakings. For
making investments beyond the limit the proposal goes to Public Investment Board which
appraises and recommends projects to the Central Government.
3. Capital structure decisions: Such decisions involve the identification of different sources
of finance. Normally PSUs are financed on the basis of half of their capital being in the
shape of equity and the rest in the shape of loans. The funds are also provided to PSUs
directly by the government. The following factors are taken into consideration at the time
of designing capital structure (i) gestation period (ii) level of business risk (iii) capital
intensity of project and (iv) freedom of pricing.
4. Working capital management: The inventory constitutes a major portion of the working
capital of public sector undertakings and hence proper inventory management should be
given top priority by public sector undertakings.
5. Audit: Public sector undertakings in addition to regular audit conducted by professional
accountants, are subject to efficiency-cum-propriety audit by the Comptroller and Auditor
General of India whose reports are presented to Parliament every year.
6. Annual report: The annual reports of public sector units though similar to those of private
sector units, tend to provide more information.
7. Pricing policy: The bureau of public sector undertaking has laid down certain guidelines
for pricing by PSUs with the objective to serve the overall interest of the community at
large.
8. Status of public sector undertaking: PSUs are organized mainly as departmental
enterprise or statutory corporation or companies.
Question 3
Write short note on Role of a Financial Adviser in a Public Sector Undertaking.
(5 marks) (May 2001) & (4 Marks) ( May, 2007)
Answer
Role of a Financial Adviser in a Public Sector Undertaking:
The financial adviser occupies an important position in all public sector undertakings. He
functions as the principal advisor to the chief executive of the enterprise on all financial
matters. The committee on public sector undertakings has specified the following functions
and responsibilities for a financial adviser:
1. Determination of financial needs of the firm and the ways these needs are to be met.
2. Formulation of a programme to provide most effective cost-volume profit relationship.
3. Analysis of financial results of all operations and recommendations concerning future
operations.
4. Examination of feasibility studies and detailed project reports from the point of view of
overall economic viability of the project.

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 Special Features of Financial Management in Public Sector Under Takings

5. Conduct of special studies with a view to reduce costs and improve efficiency and
profitability.
Question 4
Write short note on Strategic Financial Planning in Public Sector. (4 marks) (May 2002)
Answer
Strategic Financial Planning in Public Sector:
An important aspect in the management of public sector enterprises is the relevance of
strategic financial planning technique in dealing with conflicting objectives. It is an effective
mode to optimize the flow of funds required by the overall corporate strategy and to make
adequate provisions to meet contingencies. This requires:
1. The development of adequate financial information system.
2. The existence of clear strategic financial objectives.
3. The co-ordination of plan with the Government’s economic, social, fiscal and monetary
policies.
In fact, the public sector is set for a major change. It is poised for a major face lift. “The
public sector will become selective in the coverage of activities and its investment will be
focused on strategic high-tech and essential infrastructure.” The Government has also
clarified that the public sector has to mend for itself and stop relying on Government’s
budgetary support.
Question 5
Explain reforming the public sector enterprises (PSEs) through Greenfield privatisation.
(8 marks) (November, 2003)( 5 marks, May, 2008)
Answer
Greenfield Privatisation
It is the process of reforming PSEs and aims at reducing involvement of the state or the public
sector in the nation's economic activities by dividing the industries between public sector and
private sector in favour of the latter. The policy of Greenfield Privatisation has made
considerable progress since the introduction of the new economic policy (NEP) in 1991. The
process of re-divide has been mainly through:
(i) De-licensing
(ii) Reduction in budget allocation
(iii) External aid/grant
(iv) Anomaly in duty structure
(v) Decision-making systems.

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Management Accounting and Financial Analysis

Since, October 1999 and with the run-up to Budget 2000, the Government has taken several
steps. These include a full-fledged Ministry of Disinvestments, moving towards leasing out its
international airport assets and the intention to privatise the two national air carriers. It would
appear that the initiatives on selling off state owned enterprises have come of age.
The Government sector encompasses a wide range of activities outside what may be regarded
as Government proper-both commercial and social. A large part of the "Commercial"
component of the state sector has been organised as companies, including the Central and
State Public Sector Enterprises (PSEs). An equally large part is not including the power
sector, railways, department of telecommunications and urban water utilities - although some
states have taken steps to corporatise and unbundle their electricity boards.
Privatisation of public sector enterprises holds the key to getting out of this quick-sand of fiscal
deficit. There is a significant amount of shareholder value locked up in the public sector units
which the Government should encash optimally and use the resulting inflows to pay off its
debts. This requires political will and support from all major political parties whether in power
or not.

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