Importance of Private Companies in a mixed economy

Introduction

Business is the key to survival and prosperity of every nation. Even before India was
constituted as a nation after its independence from the British, India had a rich, cultural and
economic history. The territory had vast amount of valuable natural resources such as gold,
silver. Indians had mastered the art of seaborne trade and sold their products in Europe, Asia
and Africa. The skill of the Indians in the production of delicate woven fabrics, in the mixing
of colours, the working of metals and precious stones, the preparation of essences and in all
manner of technical art, has from early times enjoyed a world-wide celebrity. 1 Merchants
gained their vast amount by the spice trade through the silk route. The enormous amount of
wealth in India attracted many foreign traders. India was also introduced to the concept of
company through the trade practices between India and Europe. This also brought the first
company in India. The East India Company as it was popularly known, was originally
established through a royal charter, had was headquartered at London and established its first
factory at Surat in Gujarat. The company started to rule India by the power it gained through
business and after a century the administration of India was taken by the crown. The colonial
rule, dilapidated the economic situation in the country. After independence, India had the task
of rebuilding its political and economic structure. The population of the country was poor due
to the colonial oppression. All the delegations responsible to determine the administrative
structure of the company deduced to allowing both private and public companies. The LPG
scheme i.e. Liberalisation, Privatisation and Globalisation policy under finance minister Dr.
Manmohan Singh that was implemented in the country was also helpful in giving rise to
development of private companies in the country and brought interest of many investors from
different countries.

1
Albrecht Weber, History of Indian Literature 275 (2014).
History of Company Legislation

The earliest associations for the purposes of conducting business and earning profit are in
England were the ‘Merchant Guilds’. Some of the merchant guilds were called regulated
companies because their accounts and activities were monitored by the royal charter. A Royal
Charter established the East India Company in the year 1600. Establishing a company with
the help of a charter was both slow and expensive. Legislations were passed to make
incorporating a company efficient. The company legislation in India has closely followed the
Company legislation in England.2 In England the Joint Stock Companies Act was passed for
the first time in 1844 and accordingly India, under the British rule was introduced to the
Companies Act, 1850. After this the Joint Stock Companies Act was passed in India in the
year 1857 following the British Act of 1855 which introduced and allowed companies to be
formed with limited liability. The most important statute came in Britain in 1862. Sir Francis
Palmer marked this statute to be the magna carta of co-operative enterprises. In this, the
Memorandum of Association and Articles of Association were made an integral part of the
formation of the company and these documents could also be amended, the liability of the
members was allowed to be limited by guarantee and the provisions for winding up of the
company was also introduced. Thereafter the Companies Act was passed in the year 1866.
The Act consolidated and amended the law relating to incorporation, regulation and

winding-up of trading companies and other associations. Other statutes were also enacted
in India which were followed in India.

However, after independence, the Government appointed a Committee under the

chairmanship of Shri H.C. Bhaba in the year 1950 to revise the Indian Companies Act of
1913. The committee submitted its report in the year 1952. Based on the recommendation of
the committee and the provisions of the English Companies Act 1948, the Companies Act
1956 was introduced in the parliament.

The Companies Act 1956 came into force on 1st April, 1956. The Companies Act has been
amended from time to time. The act was amended in 1960, 62, 63, 64, 65, 66, 67, 69, 71, 77,
85, 88, 91, 96, 98, 99 in which FIIs and FDI, buy back of shares, investments and loans,
sweat equity shares were introduced, 2000 corporate governance was made a part of the

2
G. K. Kapoor, Company Law 1 (18th ed. 2016).
statute, 2001. In 2002 two amendments including the provision for producer companies and
the winding up expedited NCLT was proposed), 2006 (DIN and e-filing).

Companies Act, 2013

The act of 1956 which was framed by the lawmakers after independence when they had
several tasks in hand which were equally if not more important. The previous Act as an
enactment was obsolete both in structure and provisions in the context of the prevailing
trends of the global business environment. The Act of 1956 was an enactment in the context
of a closed economy and a system of permits and licenses which often lead to red-tapism.
The implementation of major reforms ushered in liberalization, privatization and
globalization (“LPG”) necessitated proportional reforms in Company Law, which have only
been introduced now under new the New Statute.

After half a century it was decided that the Company Law is in radical need of reforms in
order for it to be in accordance with contemporary economic realities. The Companies Bill,
2011 received the Presidential Assent on August 29, 2013. This was the foundation of the
establishment of a more comprehensive and dynamic legal framework for corporate
governance.

Companies in India are presently governed by the Companies Act, 2013. It was necessary to
enact a new statute for companies to meet national and international economic environment
and to accelerate the expansion and growth of economy. The law was framed to include the
concept of e-governance, corporate social responsibility (CSR), and it enhanced the
accountability on part of company due to the wide responsibility of modern companies,
disclosure norms were also modified, the process of raising of capital by company was also
modified. These changes were brought about to bring India at par with the world and
accessorize its resources to be used in full capacity to enable speedy development. The New
Act promotes an effective regime of corporate governance based on enhanced self-regulation
and corporate democracy. It also seeks to insure stricter enforcement and investor/creditor
protection.

One of the major changes brought by the new act is that the number of maximum members in
a private company was increased to 200. This gave a boost to the capital of private
companies.
Indian Economy
On the eve of independence, India’s economy was underdeveloped. It was caught up in the
vicious circle of poverty and was characterised to be one of the lowest per capita income and
consumption countries in the world. The economy was stagnant and had a grievous lack of
infrastructure. Indian economy had a deficiency of basic and heavy industries. The
exploitation of natural resources by the British had left the economy in such situation.
Quoting the First Five Year Plan, “This is primarily because the basic conditions in which an
economy can continuously expand has been lacking”. The production of machines which
would have helped in the devolvement after independence of the country was negligible. In
1947, total production of iron & steel was only 9 lakh tonnes. Social overhead capital or
infrastructure as it is now called, includes such industries like railways and other means of
transport, electricity and other sources of energy, communication, banking etc. Unfortunately,
not much attention was paid to this during the British rule and consequently the development
of industries in India remained slow and tardy. There were several other problems which
were a huge barrier to the development of the country such as income disparities, wide scale
unemployment, absence of enterprise and initiative among others.

Due to these reasons the economy had to accumulate and optimally use all of its resources.
Therefore, both the sectors had to be allowed to own resources so that it could result in rapid
growth of the country. Mixed economy is an economic system in which both the state and
private sector direct the economy, reflecting characteristics of both market economies and
planned economies.3 The term mixed economy arose in the context of political debate in the
United Kingdom in the post-war period, although the set of policies later associated with the
term had been advocated from at least the 1930s. 4 The mixed economy is not entirely free. In
general a mixed economy is distinguished by the private ownership of the means of
production, with profit-seeking enterprise and the accumulation of capital remaining the
fundamental driving force behind economic activity. The government plays the role of a
regulating body using tools such as taxation and other monetary policies to curb any chances
of recession. Unlike a free-market economy, the government wields indirect macroeconomic
influence over the economy through fiscal and monetary policies designed to counteract
capitalism's history of boom/bust cycles, unemployment, and growing income and wealth

3
Schiller, Bradley, The Micro Economy Today 15, McGraw-Hill/Irwin, 2010.
4
Reisman, David A. Theories of the Mixed Economy (Theories of the mixed economy). Pickering & Chatto
Ltd.
disparities, along with playing a role in interventions and civic institutions that promote social
welfare.5

Private Companies
Individuals earn income from various sources. Modern society provides a person with
numerous methods to earn a living and raise and support a family. Some individual apply for
jobs and some indulge in trade hoping that they can earn a profit from it. People accumulate
and join their resources so that they can trade on a large scale. Several people are required to
trade on a large scale. The relationship between these people ae monetary and to protect one
from any kind of financial fraud an association has to be formed. These associations are
recognized by law and are called companies. The word ‘Company’ comes from the Latin
words of ‘com’ which means together or with and ‘panies’ which means bread. The purposes
for which people may associate themselves with each other are numerous and may also be
said for non – economic purposes.

The definition of a company in the act of 2013 is not elaborate. It gives a conservative
definition which shall be open to interpretations by the justices. It denotes what association is
a company. Section 2(20) of the Companies Act, 2013 defines a company to be a company
incorporated under this company law or any other previous company law. The meaning of
what is or what can be a company is best described by Lord Justice Lindley who states that “a
company is an association of persons who contribute money or monies worth to a common
stock and employed in some trade or business and who share the profit and loss arising
therefrom.” The common stock so contributed is denoted in terms of money and is the capital
of the company. This definition is one of the most prominent definitions of a company and is
used over the world as it also revels important factors for an association to be a company
such as association of persons who are called members and sharing of profit and losses.

There are two broad categories of companies which can be incorporate under the companies
act. They are public and private companies.

A private company is defined under Section 2(68). A company is said to be a private

company if that company by its articles:

5
Andrew Glyn, Capitalism Unleashed: Finance, Globalization and Welfare 234, Oxford University Press:
Oxford 2006.
 a) restricts the right to transfer its shares, if any;
b) except in case of One Person Company, limits the number of its members to two
hundred:

Provided that where two or more persons hold one or more shares in a
company jointly, they shall, for the purposes of this clause, be treated as a
single member:

Provided further that—

i) persons who are in the employment of the company; and
ii) persons who, having been formerly in the employment of the company,
were members of the company while in that employment and have continued
to be members after the employment ceased, shall not be included in the
number of members; and
c) prohibits any invitation to the public to subscribe for any securities of the company.

If a company, imposes these conditions on itself through its articles, it is a private company.

Role of Private Sector

Private sector comprises of the enterprises which are privately owned. During independence,
private sector was comparatively smaller than the public sector. There was lack of
industrialization in India. The colonial rule had left Indian economy stagnant and in lack of
any infrastructure which would have been necessary for sustainable growth or development.
Various resources of the country such as men, cloth, meat, etc. were used by the British in the
Second World War and the repercussions from the separation of country into different
countries also caused a huge impact on the economy. Due to the division of the western
territory into West Pakistan and some of the eastern territory into East Pakistan, India had to
spend huge amount of money on refugee camps, illiteracy and many other economic
problems. In consideration of these problems the government decided a socialist approach for
the development of the country. India approached a method of planning which was
determined by the private sector. The government invested huge amount of money into
Public Sector Undertakings (PSUs) such as mining, steel, heavy electrical, and other goods
which are necessary for the development of the country. This policy was adopted by the
government because these industries required initial investments which was not capable by
private sector enterprises. The Five Year Plans which successfully transformed erstwhile
USSR were made a tool for development. First five year plan for the development of Indian
economy came into implementation in 1952. Being largely a agrarian economy, investments
were made in creation of irrigation facilities, construction of dams and laying infrastructure.
Due importance was given to establishment of modern industries, modern scientific and
technological institutes, development of space and nuclear programmes. However, despite all
efforts on economic front, the country did not develop at rapid pace largely due to lack of
capital formation, cold war politics, defence expenditure, and rise in population and
inadequate infrastructure.
The GDP of India has grown from a just 93.7 billion rupees in 1950 to about 410006.4 billion
rupees in 2006. Right from 2003, India is growing at a rate more than 8 per cent. Today, India
is recognized for its quality of high technology software services capability throughout the
world. In 2005-06, the software industry grew by 33 per cent and the BPO industry grew by
37 per cent. India has good foreign exchange reserves and fiscal deficit is under control. BSE
Sensex, which is the barometer of Indian economy, is soaring at about 15,000 points a growth
of about 700 per cent from 2002 to 2007. Foreign Institutional Investors (FIIs) are
consistently pumping in several billion dollars into the Indian equity market. Foreign Direct
Investment (FDI) is a record high in India after the economy was opened up during 1990s.

Employment Generation
Private sector plays a dominant role for generating employment opportunities inside the
country. A huge number of large scale, small scale, cottage scale units are under the control
of private sector. It proves that small scale and cottage scale industries contribute four times
more employment in compare to large scale industries. According to 2001-02 statistics, as far
as employment is concerned, the share of private sector was 51.2% against 44.3% of the
public sector.

According to Schumpeter, private sector plays a dominant role in economic development. It

enhances the process of industrialisation and makes income for the family. All the private
entrepreneurs work for profit motive. Profit promotes entrepreneurship among the individuals
which ensures optimum use of resources available in the country. They play a leading role for
the introduction of new commodities, new techniques of production, new plants equipment’s
and machineries. Private entrepreneur has innovative ideas and always modifies the total
method of production. After the liberalization policy of 19901 India started receiving
considerably huge amounts of foreign direct investment (FDI) which was one of the most
important reasons behind the success of the private companies in the country. Prior to this the
Indian economy was ruled mostly by the public sector enterprises which were known for their
strict rules and regulations and bureaucratization which resulted from red-tapism.

The private companies of India prioritized customer's need and speedy service, which further
fuelled competition amongst same industry players. This healthy competition has benefited
the end consumers, since the cost of service or products has come down substantially.

Over the last few years the country has witnessed a sea change in its economy and this is
mostly due to some of the finest private sector BPOs, software companies, private banks and
financial companies. India's manufacturing sector is also flooded with a number of private
Indian companies that dominate the Indian industry and have also made a mark in the global
forefront. The manufacturing companies in the country encompass sectors such as chemicals,
textiles, petrochemical products, automobile, agri-foods, telecommunication equipment, and
computer hardware.

Growth of Private Sector

In 1957 the number of companies under private ownership was a mere 29,283 and it
increased to 5,41,051 in the year 2000. Private sector has witnessed a tremendous growth
since the attraction of foreign investment from the liberalisation policy of 1991. There was
sufficient infrastructure in the company which mainly came from public sector companies.
The government allocated huge amount of resources for investment in public sector
companies in the five-year plans. Many villages got electricity, steel plants and many other
heavy industries were established. These industries enabled private players to utilise their
products and manufacture different commodities from them.
Conclusion
The government policy has enabled India to lay a foundation of industrialisation in the
country. Private sector has been the major producer of consumer goods. They have played an
important role in the development of the country. They have accumulated enough wealth to
acquire heavy industries and as the income as arson and the purchasing power of the people
has also increased tremendously, heavy industries in the form of private companies can also
be established.