CHAPTER 3

PRIVATE , PUBLIC AND GLOBAL ENTERPRISES

India adopted a pattern of mixed economy , where both the public sector and the private sector
are allotted their respective roles for the economic development of the country .

Indian economy is classified into two sectors :

1. PRIVATE SECTOR
Private sector includes all those enterprises which are managed and owned by individuals
or group of individuals . The various forms of organisation under private sector are Sole
proprietorship , Partnership , Joint Hindu Family business , cooperative society and
company .
2. PUBLIC SECTOR
It includes all those enterprises which are managed and owned partly or wholly by the
Central or State Government . The various forms of Public Sector are Departmental
Undertaking , Statutory Corporation , Government Company .

FORMS OF PUBLIC SECTOR ENTERPRISES

These public enterprises are owned by the public and are accountable to the public through the
Parliament . For the control and management of the day to day business of public enterprises , they
can be classified into three categories .

1. Departmental undertaking
It is the oldest and traditional form of public enterprises . It is under the control of
concerned Minister of the department , who is answerable to government through
parliament . For example Railway Minister is responsible for all the activities of the
railways .
FEATURES
1. FINANCE
Government Treasury provides finances and revenue earned is also paid into the
treasury .
2. ACCOUNTING SYSTEM
This organisation is also subject to accounting and audit controls .
3. MANAGEMENT
It is managed and control by a government .
4. APPOINTMENT OF EMPLOYEES
It does not have any separate legal existence, its employees are government
employees .
5. ACCOUNTABILITY
The employees of the enterprise are accountable to the concerned minister , who is
ultimately responsible to the parliament .

MERITS
1. COMPLETE GOVERNMENT CONTROL
It is completely owned , managed and controlled by a government ministry .
2. ANSWERABLE TO PARLIAMENT
They are accountable to parliament for their performance .
3. SOURCES OF INCOME
Income goes directly to the Government treasury .
4. SUITABLE FOR NATIONAL SECURITY
This enterprise is most suitable when national security is concerned as it is under the
direct control and supervision of the concerned Ministry .

LIMITATIONS
1. LACK OF FLEXIBILITY
There is a little scope for exercising initiative and making improvements .
2. DELAY IN DECISION MAKING
The employees or heads of the departments have to take approval of the concerned
ministry before taking any decision .
3. BUREAUCRACY AND CONSERVATVE APPROACH
Departmental undertakings are not allowed to take risky ventures due to bureaucrat’s
over-cautious and conservative approach .
4. RED TAPISM
The enterprise is bound by bureaucratic procedures and rules . This creates lot of
problem .
5. UNDUE GOVERNMENT INTERFERENCE
There is lot of political interference through the ministry .
6. INDEFFERENT TO CONSUMERS’ NEEDS
These enterprises are insensitive to consumer needs and do not provide adequate
services to them .

STATUTORY CORPORATION

Statutory Corporation is a corporate body with a separate legal existence , set up under

up under a special act of parliament or of the state legislature . It is also known as

Public Corporation .

• The Act defines its objects , powers and functions , rules and regulations governing
its employees .
• Managed and controlled by a board of directors appointed by the government .
• It is financially independent .
• It is a corporate entity having perpetual succession and common seal with power to
acquire, hold , dispose of property and sue and be sued by its name .
• For Example : RBI , FCI , LIC , AIR INDIA .

FEATURES

1. FORMATION
 Established under a Special Act of the parliament , that lays down the objects ,
powers and functions of the corporations .
2. OWNERSHIP
It is wholly owned by the State .

3. CORPORATE EXISTENCE
It has a separate legal existence and can sue and be sued .
4. FINANCIAL AUTONOMY
It is independently financed . It obtains funds by borrowings from government or
through revenues derived from sale of goods and services to public .
5. ACCOUNTING AND AUDIT PROCEDURE
It is not subject to the government rules and regulations .
6. STAFFING AND TERMS OF SERVICE
The employees of these enterprises are not government employees .

MERITS
1. OPERATIONAL FLEXIBILITY
Enjoy independence in their functioning and has sufficient scope for flexibility and
initiative .
2. FREEDOM FROM INTERFERENCE
It is free from interference of the government in its day to day working , which ensures
better and efficient working .
3. AUTONOMUS SET –UP
They frame their own policies and procedures .
4. FACILITATES ECONOMIC GROWTH
They have the power of the government along with the initiative of private enterprises

LIMITATIONS
1. THEORATICAL AUTONOMY
In reality , a statutory corporation is subject to many rules and regulations and does
not enjoy operational flexibility .
2. GOVERNMENT INTERFERENCE
The working of public corporations is subject to interference from bureaucrats and
politicians .
3. UNDESIRABLE PRACTICE
Officials may misuse their autonomy and indulge in unfair trade practices .
4. DELAY IN ACTION
Government often appoints advisors to the Corporation Board . In case of any
disagreement , the matter is referred to the government , which further delays
action.

GOVERNMENT COMPANY

A Government Company means any Company in which not less than 51 percent of the
paid up capital is held by the central government or by the state government .
 • All provisions of the act are applicable to government companies .
• It can be formed as a private limited or a public limited company .
• Certain provisions are applicable regarding appointment / retirement of directors .
• The shares of the company are purchased in the names of President of India .
• Government is the major shareholder and exercises major control over its
management .
• For Example : SAIL , BHEL , BEML .

FEATURES
1. INCORPORATION
Company is registered under the Companies Act, 2013 or any previous Company Law .
2. SEPARATE LEGAL ENTITY
It has a separate legal existence independent of the government .
3. MANAGEMENT
Managed by the board of directors nominated by the government .
4. GOVERNED BY PROVISIONS OF MEMORANDUM AND ARTICLES OF ASSOCIATION
Memorandum and Articles of Association are the main documents of the company .
5. ACCOUNTING AND AUDIT PROCEDURES
It is free from budgetary , accounting and audit controls applied to departmental
undertakings .
6. FINANCE
At least 51% of the capital of the company is contributed by the state or the central
government .

Merits

1. EASY FORMATION
No need for separate legislation of the parliament for its formation .
2. OPERATIONAL AUTONOMY
It enjoys autonomy in all management decisions and takes actions according to
business prudence .
3. INDEPENDENT STATUS
It has a separate legal entity , apart from the government .
4. PREVENTS UNHEALTHY BUSINESS PRACTICES
It provides good quality product at reasonable prices .

LIMITATIONS
1. FREEDOM ONLY IN NAME
As Government is the majority shareholder, it exercises control over affairs of the
company and provisions of the Companies Act
2. LACK OF ACCOUNTABILITY
It is financed by the government , it should be accountable to the government .
3. DEFEAT OF MAIN PURPOSE
Being a major shareholder , the government controls the whole management and
administration of the company . It defeats the main purpose of registering it under
the Companies Act .

Comparison Between Forms of Public Sector Enterprises

Basis Departmental Statutory Government
Undertaking Corporation Company

Formation It is created by It is created by a It is created in

order of the Special Act of the accordance with
government and is parliament the Companies Act
attached to a .
particular ministry .
Legal Status No separate legal Separate legal Separate legal
entity . entity entity .
Management Managed by Managed by board Managed by a
government of director board of directors
officials of the appointed by the nominated by the
concerned ministry government government .
Finance 100 % financed by Funds through At least 51 % of
government out of borrowings from share capital is
funds allocated in government or provided by the
budget . through revenue government .
from sale of goods
Staff Government No Government No Government
Employees employee. All employee. All
employees are employees are
appointed under appointed under
contract of service contract of service
. .
Ownership Wholly owned by Wholly owned by At least 51% of the
the government the government . company is owned
by the government
Flexibility No flexibility Considerable Significant
scope for flexibility flexibility as it can
and initiative . frame its own
rules and
regulations.
Degree of No autonomy as Considerable Substantial degree
Autonomy there is strict degree of of autonomy
control of the autonomy as no
government . interference by
government in
day- to- day affairs
.
Public Fully accountable Accountable to the Accountable to the
Accountability to the public and parliament concerned
concerned Ministry
ministry.
Changing Role of Public Sector

1. DEVELOPMENT OF INFRASTRUCTURE
It includes all activities such as Financial institutions, banks , modes of transportation ,
communication facilities , etc . The government established various public sector
enterprises to develop infrastructural facilities in the economy .
2. REGIONAL BALANCE
Backward regions lack infrastructural facilities and private sector is not keen to set up
industries in such regions . The government is responsible for developing all regions and
states in a balanced way and removing regional disparities .
3. ECONOMIES OF SCALE
These units need huge capital outlay to take advantage of economies of scale, which is
possible only with government resources and mass scale production .
4. CHECK OVER CONCENTRATION OF ECONOMIC POWER
Private monopolies give rise to inequalities in income, which is detrimental to society . As
a result of public ownership and control of large- scale business enterprises , the income
and benefits that accrue are shared by a large of number of employees and workers . This
prevent concentration of wealth and economic power in the private sector .
5. IMPORT SUBSTITUTION
Every economy aims to be self reliant in all aspects . For this it is very important to have
sufficient foreign exchange reserves . Public sector started manufacturing capital goods ( like
heavy machinery ), which were imported earlier .
6. Government Policy towards the Public Sector since 1991 :
The Government of India introduced four major reforms in the public sector in its new
‘Industrial Policy ‘ in 1991 .
1. Restructure and revive potentially viable PSUs .
2. Close down PSUs , which cannot be revived .
3. Bring down governments equity in all non- strategic PSUs to 26 percent or lower , if
necessary .
4. Fully protect the interest of workers .

In order to achieve these elements , the government took following steps :

1. REDUCTION IN NUMBER OF INDUSTRIES RESERVED FOR THE PUBLIC SECTOR

The government reduced from 17 to 8 in 1991 and then to 3 in 2001 . Only 3 industries (
atomic energy, arms and rail transport ) are reserved for the public sector .
2. DISINVESTMENT OF SHARES
Disinvestment refers to selling a part or the whole of shares of public sector enterprises
( PSEs ) to the private sector . The aim was to raise resources and to involve general public
and workers in the ownership of theses enterprises.
3. SAME POLICY FOR SICK UNITS AS THAT FOR THE PRIVATE SECTOR
 All the sick public sector units were referred to the board of Industrial and Financial
Reconstitution ( BIFR ) to decide whether it has to be reconstructed or closed down .
4. MEMORANDUM OF UNDERSTANDING
Public sector units were given clear targets and operational autonomy to achieve them
and they will be held accountable for the specified results .