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Public Sector Enterprises or Undertakings in India

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The government has a major role to play in the formation of the public sector. However, the government acts through its people. These public enterprises are owned by the public and are accountable to the public through the Parliament.

Departmental undertaking is the oldest and traditional form of organising public sector enterprises. A departmental undertaking is organised, financed and controlled in much the same way as any other Government department.

The Public Corporation is an organisation created by a special Act passed by the Central or State Legislature. The Act, creating a public corpora­tion prescribes its aims, objectives and its relationship to departments and ministries.

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The government company is defined as an enterprise set up under the Companies Act in which the government owns at least 51% of the share capital. It is a convenient method of setting up a public enterprise. Such a company is established by an administrative decision of the government. It does not require any special Act to be passed by the Parliament, as required in the case of public corporations.


Public Sector Enterprises  /Undertakings in India: Departmental Undertakings, Public Corporations and Government Companies (with Features, Comparison, Merits and Limitations)

Public Sector Enterprises – Departmental Undertakings, Public Corporations and Government Companies (With Features, Merits and Demerits)

There are three types of business organisation in the Public Sector:

1. Departmental Undertakings

2. Public Corporations

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3. Government Companies

1. Departmental Undertakings:

Departmental undertaking is the oldest and traditional form of organising public sector enterprises. A departmental undertaking is organised, financed and controlled in much the same way as any other Government department.

It may be run either by the Central Government or by a state government. It is managed by government officials under the supervision of the head of the department concerned.

The undertaking is under the direct and ultimate control of a minister who is responsible to the Parliament. Some examples of departmental undertakings are- Indian Railways, Post and Telegraph, All India Radio, Doordarshan, etc.

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Features of Departmental Undertakings:

The main features of departmental undertakings are described below:

1. Part of Government:

The departmental undertaking is established as a major subdivision of one of the departments or one of the ministries of the Government. It is controlled directly by the head of department. However, the absolute authority lies with the concerned minister who is answerable to the Parliament or the State Legislature. The undertaking has no separate legal entity distinct from the Government.

2. Government Financing:

The undertaking is wholly owned by the Government. Its source of finance is the annual budget allotment provided in the Parliament or the State Legislature. The revenues of the undertaking are transferred to the official treasury.

3. Executive Decision:

A departmental undertaking is established by an executive decision of the Government without any legislative procedure or Act of Parliament.

4. Accounting and Audit:

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

5. Civil Service Code:

The undertaking is managed and run by civil servants whose methods of recruitment and service conditions are the same as for other civil servants of the government.

6. Sovereign Immunity:

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A departmental undertaking being a fundamental constituent of Government cannot be sued without the approval of the government.

Merits of Departmental Undertakings:

Departmental undertakings have the following advantages:

1. Easy Formation:

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It is very easy to establish a departmental undertaking due to the absence of legal formalities and paper work. The undertaking is created by the administrative decision of the Government and no legal formalities are involved during the process of its formation.

2. Direct Government Control:

The undertaking is under the direct and complete control of the State. Therefore, it is more effective in achieving the objectives laid down by the Government.

3. Public Accountability:

There is maximum degree of Parliamentary control on the undertaking. Such control keeps the management alert. Accountability of departmental undertakings to Parliament is complete as their management is under the ministry concerned.

4. Proper Use of Money:

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The possibility of misuse of public funds is controlled due to strict budget, accounting and audit controls. There is proper financial discipline over public funds.

5. Secrecy:

It is easy to maintain secrecy of policy because the Government has the authority to avoid disclosure on the plea of public interest.

6. Aid to Public Revenue:

Departmental undertakings help to increase Government revenue because their earnings are deposited in the Government treasury. These undertakings help to reduce the burden of tax on the public.

7. Instrument of Social Change:

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Economic and social justice can be advocated by the Government through departmental undertakings. It can also exercise proper control over the production and distribution of essential goods and services. Departmental undertakings serve as an instrument of public policy.

8. Public Interest:

Departmental undertakings have genuine intentions of serving public interest. They are very useful for public utility services and defence industries.

Limitations of Departmental Undertakings:

A departmental undertaking suffers from the following drawbacks:

1. Lack of Flexibility:

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A departmental undertaking functions under strict Parliamentary control. The minister and top officials also interfere frequently in its workings. The undertaking is reduced to a mere adjunct of the ministry and treated just like a government office. There is little delegation of powers. As a result, the staff of the undertaking gets little opportunities to exercise initiative. Lack of autonomy reduces the flexibility and efficiency of operations.

2. Lack of Motivation:

In the absence of competition and profit motive, there is little incentive for hard work and efficiency. There is hardly any link between reward and performance, and even promotions are based on the level of seniority. This leads to complacency and the employees embrace “who cares” attitude. As the consequent losses are borne by the Government treasury and tax payers, these defects are not taken seriously. Employees make shallow attempts to evade duties and pass the buck on each other.

3. Red Tapism:

The practice of requiring excessive paperwork and tedious procedures before official action can be considered or completed is called Red Tapism. In public sector enterprises, there is unreasonable centralisation of control which results in red tapism . Decision-making is delayed due to bureaucratic procedures and political interference. All these hurdles make it difficult to run the organisation in an efficient manner. It fails to adapt itself to changes in technology and market conditions. Too much rigidity with rules and strict adherence to procedures results in loss of business opportunities.

4. Financial Dependence:

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A departmental undertaking is not financially independent because all its income is deposited into the Government treasury. It is unable to take long-term investment decisions as it is dependent on the mercy of budgetary allotment of the Government.

5. Inefficient Management:

A departmental undertaking is managed by Government officials and civil servants who are sent on deputation. They are overburdened with paper work and cannot pay undivided attention to management. The major portion of their time is spent in preparing answers to parliamentary enquiries.

These officials lack the necessary expertise and experience in business management. Moreover, their tenure is unstable and they can be transferred to some other place at any time. Therefore, they often become indifferent and irresponsible towards their official duties.

6. Insensitive to Needs of Consumers:

A departmental undertaking is often careless towards the needs and likes of consumers. The bureaucrats, who exercise control, have a very archaic style of working. Bureaucratic control and dearth of incentive on part of officials make the undertaking inefficient and irresponsive to consumer needs.

2. Statutory or Public Corporations:

A Public Corporation is a profit-making business whose ownership is widely distributed among the public. It is a form of public enterprise which is created as an autonomous unit, by a special Act of the Parliament or the State Legislature. Since a public corporation is created by a statute or law it is also known as a Statutory Corporation.

The statute lays down the objectives, powers and functions of the public corporation. Public corporations have the power of the government combined with public ownership and public accountability. In India, the well-known Statutory or Public Corporations are the Life Insurance Corporation of India, the Indian Airlines, the Air India International and Oil and Natural Gas Commission.

Features of Statutory or Public Corporations:

The following are the distinguished features of Public Corporations:

1. Incorporation:

These organisations are created by means of special statute passed in the Parliament or State Legislature.

2. Separate Legal Entity:

These units have separate legal existence with perpetual succession and common seal. It has an existence, independent of the Government. It can own property, can enter into legal contracts and file suits, in its own name. The wrong acts of the members of the organisations would not affect the existence of the organisations.

3. State Control:

Though public corporations have separate legal entities and are created by law, they are completely owned by State and are under Government control.

4. Nominated Directors:

The Directors of these organisations are nominated by the government and are not elected by the members. The government does not interfere in the day-to-day workings of the Public Corporations.

5. Service Motive:

The primary objective of the corporations is to provide distinguished service to the public; though it is also supposed to earn sufficient profits to carry on its operations.

6. Financial Independence:

A public corporation is financially autonomous. It prepares its own budget and has authority to retain and deploy its money for its business.

7. Employment Conditions:

The employees of the public corporations are not Government servants thereby their service conditions are fixed by the corporations.

Merits of Statutory or Public Corporations:

The public corporations enjoy the following merits:

1. Autonomy:

These corporations enjoy autonomy of operation due to the absence of Government regulations and restrictions. They are quite free to adapt the changing situations because of its independent nature.

2. Absence of Political Interference:

Since the units are independent, they may be free from political influences and interference in their operations and developmental activities.

3. Quick Decision-Making:

Prompt decisions can be taken as the decision making authority is a nominated head of the Government.

4. No Exploitation of Workers:

The workers may not be exploited by way of work or working conditions. They enjoy all the benefits as the government workers would enjoy, despite not being Government employees themselves.

5. Ease of Raising Capital:

The corporations would find it easy to raise large amounts of capital, if needed, at low rates of interest.

6. Higher Living Standards:

The general public gains access to better standard of living with provision of essential services like electricity, telecommunications, water supply, etc.

7. Tailor-Made Statute:

The special Act, by which a public corporation is created, can be adapted to meet the special needs of the organisation. By doing so, the corporation can work properly in achieving its objectives.

Demerits of Statutory or Public Corporations:

Public or Statutory corporations suffer from the following demerits:

1. Lack of Competition:

Public corporations are monopolies because they have no other competing companies, which provide the same kind of service. This nurtures poor work ethics among workers, nonchalance and indiscipline, which further leads to wastage of company resources.

2. Misuse of Power:

Public corporations often have monopoly in their field of operation. So, on one hand, they may be apathetic to consumer needs and problems; and on the other hand, they often don’t hesitate to exploit consumers. Also, there are greater chances of misuse of power and authority by the superiors. Managers and other personnel may use their power to fill their own pockets by misappropriation of company funds.

3. Lack of Efficiency:

Often, the managerial staff appointed to perform various roles in public corporations is incompetent and lacks the requisite skills. They may be hired on the basis of political connections. Such corporations hardly provide any incentives to their employees; hence the feeling of health competition and enthusiasm to excel at work is almost non-existent. In such a scenario, it is obvious to expect inefficiency in operations.

4. Not Easy to Alter Activities:

The constitution of a public corporation is very rigid. It cannot be changed, without amending the statute or law behind its formation. Hence, a public corporation cannot be flexible in its operations.

5. Political Interference:

In Public corporations, people are appointed at higher positions not for their merits, but owing to their influential background. Contracts may also be given on the basis of political connections. Very often, ministers, government officers and other politicians keep interfering in the working of the organisation. Such practices not only lead to impractical deployment and wastage of resources, but it only also proves that there is a lot of political interference in the functioning of public corporations.

3. Government Company:

A Government company is one in which not less than 51% of the paid-up share capital is held by the Central Government or a State Government or jointly by both. 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 includes a company which is a subsidiary of Government Company.”

A Government company may either be fully owned by the Government. In such case, 100% capital is provided by Government; or it may be owned by the Government (holding minimum of 51% share-capital) and private concerns/individuals (holding maximum of 49% share capital).

In this case, a government company is known as a Mixed Ownership Company. These companies are registered as private limited companies even though the government controls the management and other affairs of the enterprise. HMT Ltd., State Trading Corporation, Hindustan Steel Ltd., Hindustan Aeronautics and Madras Refineries Limited (MRL) are some popular Government companies in India.

Features of a Government Company:

Following are the salient features of a Government company:

1. Registration under the Companies Act:

A Government company is formed through registration under the Companies Act, 1956; and is subject to the provisions of this Act, like any other company. However, the Central Government may direct that any of the provisions of the Companies Act shall not apply to a Government company or shall apply with certain modifications.

2. Executive Decision of Government:

A Government company is formed by an executive decision of the Government, without seeking approval of the Parliament or the State Legislature.

3. Separate Legal Entity:

A Government company is a legal entity separated from the Government. It can acquire property in its own name, enter into deals and file suits.

4. Whole or Majority Capital Provided by Government:

The whole or majority (at least 51%) of the share capital of a Government company is provided by the Government; but the earnings of the company are not deposited into the official treasury.

5. Majority of Government Directors:

Since the government is in possession of a majority of share capital, it has the authority to appoint majority of directors, on the Board of Director’s panel of a government company.

6. Free from Procedural Controls:

A Government company is absolved of budgetary, accounting and audit controls that are otherwise fitting to all Government undertakings.

7. Accountability to the Parliament/State Legislature:

The Annual Report of a Government company is placed before the Parliament or the State Legislature.

8. Ownership:

It may be partly or wholly owned by the government. The State Government or Central Government, or both, may own a government Company. If it is partly owned by the government, then at least 51% of the share capital must be possessed by the government.

9. Management:

A government company is managed by a Board of Directors. The Directors are appointed by the government and other shareholders. It can formulate its own policies, rules and regulations to suit the changing business environment.

10. Exemptions:

The government company is not subject to accounting and audit laws as well as procedures applicable to non-corporate entities of the government. However, government companies are governed by the provisions of the Companies Act and other relevant Acts.

11. Financial Freedom:

To satisfy its requirement for huge capital, a government company can get funds from government shareholdings and other private shareholders. It can also obtain funds from the capital market.

12. Employees:

The employees and other officials in a government company are appointed by the company itself. The employees are neither government servants nor they work under civil servants. However, the government may, in exceptional cases, nominate some executives for the top management.

Merits of Government Company:

The merits of a Government company are defined as under:

1. Easy Formation:

It is easy to form a government company because no separate statute is to be passed in the Parliament or legislature. It can be formed by an executive decision of the Government and can be registered under the Companies Act.

2. Internal Autonomy:

A government company can manage its affairs independently. It is free from ministerial control and political interference, in its day-to- day functioning.

3. Aiding Private Participation:

With the help of a Government company, the government can make use of management skills, technical know-how and expertise of the private sector and developed nations for national developmental projects. For example, the Hindustan Steel Limited has obtained technical and financial assistance from the U.S.S.R., West Germany and the UK for its steel plants at Bhilai, Rourkela and Durgapur respectively.

4. Easy Alteration:

The objectives and powers of a Government Company can be altered to suit the changing business environment. This can be done by altering the Memorandum of Association of the company, without seeking the approval of the Parliament.

5. Discipline:

The Government Company is subject to provisions laid down in the Companies Act; which keeps the management of the company active, alert and disciplined.

6. Professional Management:

A Government company has its own policies and procedures in place; therefore, it can employ professionally qualified managers. These employees are neither government servants nor they work under civil servants. It can also independently employ top managerial personnel in exceptional cases.

7. Greater Efficiency:

Since the directors are nominated by the Government, the managerial efficiency of the directors is assured. The work done by the staff is also satisfactory as the selection procedure of staff is competitive and based on merit.

8. Public Accountability:

The annual report, progress and functioning of a government company are placed before the Parliament. Therefore, their working comes under the scanner of public and press. The government companies are accountable to the public, and hence, have to work cautiously.

9. Remote Reach:

Government companies often facilitate all-round industrial development by taking up projects in the remote and ignored areas where private sectors hesitate to invest.

Demerits of Government Company:

A Government Company has the following demerits:

1. Board of directors packed with spineless men:

The Government appointed directors (Government being the major shareholder) comprising the Board of Directors of the company are mere puppets in the hands of the Government. They lack the professionalism to run a company efficiently.

2. Autonomy in Paper Only:

A Government company is considered autonomous on the paper only. In reality, politicians, ministers, government officials, interfere unreasonably in the day-to-day working of the government company.

3. Violation of Companies Act and Constitution:

A Government company is criticised of being a fraudulent institution. This criticism is valid on the grounds that the Government can authoritatively exempt a Government company from abiding by several provisions laid down in the Companies Act. Additionally, the Parliament is not taken into confidence, during the formation of a Government company.

4. Fear of Exposure:

The annual report of the Government Company is placed before the Parliament/State Legislature for assessment. The functioning of the company may thus be exposed to press and public criticism/judgment. Therefore, the management of the Government Company often gets de-motivated and may not take due measures to execute innovative ideas for achieving business objectives.

5. Lack of expertise in Deputationists:

The top level employees of a Government company are often deputed from Government departments. These Deputationists generally lack expertise and commitment; leading to lower operational efficiency and wastage of resources.

6. Political Hindrances:

In India, the politicians and bureaucrats are often seen interfering in the operations of government organisations. The functioning of a government company is subject to the whims and fancies of the ministers and bureaucrats who run the concerned department. Ministerial control affects autonomy of operations of a government company.

7. Red Tapism:

Red Tapism can be defined as the practice of requiring excessive paperwork and tedious procedures before official action can be considered or completed. Red tape generally includes filling out paperwork, obtaining licenses, having multiple people or committees approve a decision and various low-level rules that make conducting one’s affairs slower, difficult, or both.

Due to red tapism, decisions in a government organisation are delayed. Sometimes decisions are delayed for fear of making mistakes. As a result, the company may fail to capitalize on new opportunities.

8. Inefficiency in Management:

Most of the government companies are staffed with officers who lack essential qualities like ownership, self-motivation, diligence and commitment towards their assigned official duties. Such people often resort to government service for the sake of job security. Due to lack of proper accountability, the government companies have inefficient business operations.

The causes for such issues in management are:

(i) Faulty selection and promotion.

(ii) Lack of training and development.

(iii) Poor performance appraisal.

(iv) Faulty placement and forced transfer, etc.

9. Poor Labour-Management Relations:

The government companies suffer from issue of poor labour-management relations. This is due to inefficient management and also due to selfish and militant trade unions. In addition, owing to the lack of proper work culture in Indian government companies, workers often take to strikes. The management is equally responsible as sincere and well-thought efforts on the part of management are often lacking to improve the rapport between the labour and management.

10. Wastage of Resources:

In government companies, the staff is apathetic towards optimum utilisation of resources. Often, the raw materials remain unused. Corrupt officials recklessly place huge orders for raw materials and inputs because of bribes and commission, even though such things are not needed in large quantities.


Public Sector Enterprises/Undertakings – Departmental Undertaking, Public Corporation and Government Company

The forms of public sector enterprise are as follows:

1. Departmental Undertaking

2. Public Corporation

3. Government Company

1. Departmental Undertakings:

This is the oldest and traditional form of organis­ing public enterprises. Under this form, a Departmental Undertaking is organised, controlled and financed by the government. It is run on the same lines as any other government department. All the policy matters and other important decisions related to the undertaking are taken by the controlling ministry. Parliament lays down the general policy of such undertakings.

Enterprises such as Railways, Public Works Department (PWD), Post and Telegraphs, Ordinance factories, Delhi Milk Scheme are organised under this type of organisation.

2. Public Corporation:

The Public Corporation is an organisation created by a special Act passed by the Central or State Legislature. The Act, creating a public corpora­tion prescribes its aims, objectives and its relationship to departments and ministries.

A public corporation is managed generally by a Board of Governors/Directors appointed by the government. Once it is set up, the corporation has a separate legal entity. Being an autonomous body, they prepare their own budget. Its financial powers are laid down in its rules. Although, initial capital of these corporations is contributed by the government, they are also permitted to raise loans from the public in the form of bonds.

In present days, many commercial and industrial activities of the government are conducted through public corporations. Some of the well-known public corporations are Industrial Finance Corporation of India (IFCI), Food Corporation of India (FCI), National Thermal Power Corporation (NTPC), Oil and Natural Gas Commission (ONGC), Air India, Indian Airlines, Life Insurance Corporation etc.

3. Government Company:

The government company is defined as an enterprise set up under the Companies Act in which the government owns at least 51% of the share capital. It is a convenient method of setting up a public enterprise. Such a company is established by an administrative decision of the government. It does not require any special Act to be passed by the Parliament, as required in the case of public corporations.

It enjoys the necessary freedom in raising capital from the public. Further, the management of a company is free from direct government control. However, it is subject to control by the government through review by Parliamentary Committees. The majority of Public Enterprises are set up as government companies.

Some of the examples are- Hindustan Machine Tools (HMT), State Trading Corporation (STC), Maruti Udyog Ltd., Steel Authority of India Limited (SAIL), Coal India Limited, etc.


Public Sector Enterprises/Undertakings – With Features, Comparison, Merits and Limitations

The government has a major role to play in the formation of the public sector. However, the government acts through its people. 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.

2. Statutory Corporation.

3. Government Company.

1. Departmental Undertaking:

This is the oldest and traditional form of public enterprises. It is managed by government officials as one of the government departments. It is under the control of concerned Minister of the department, who is answerable to government through parliament. For example, Railway Minister is ultimately responsible for all the activities of the Railways.

Departmental undertaking is financed by the Government budget and all activities performed by it are an integral part of government functioning. These undertakings may be under the central or the state government and the rules of central/state government are applicable.

Departmental undertaking is suitable for public utility services and strategic industries. In India, railways and post and telegraph are working as government departments. Similarly, strategic industries like defence and atomic power also work as departmental undertaking.

Features of Departmental Undertaking:

The main characteristics of departmental undertakings are as follows:

(i) Finance – It is financed by the government through allocation of funds in the Annual General Budget of Parliament. Government Treasury provides finances and revenue earned is also paid into the treasury.

(ii) Accounting System – This organisation is also subject to accounting and audit controls as applicable to other Government activities.

(iii) Management – It is managed and controlled by a government department and is subject to direct control of the ministry.

(iv) Appointment of Employees – As the undertaking does not have separate legal existence, its employees are Government employees and terms and conditions of their appointment, remuneration, promotion, etc., are determined by Government. They are headed by Indian Administrative Service (IAS) officers and civil servants who are transferable from one ministry to another.

(v) Accountability – The employees of the enterprise are accountable to the concerned Minister, who is ultimately responsible to the parliament.

Merits of Departmental Undertaking:

The departmental undertakings have following advantages:

(i) Complete Government Control – It is completely owned, managed and controlled by a government ministry. It facilitates the Parliament to exercise effective control over their operations.

(ii) Answerable to Parliament – All the departmental undertakings are accountable to parliament for their performances. So, they have to be careful about their progress and performance.

(iii) Source of Income – The revenue earned by the enterprise is a source of income for the Government as it goes directly to the treasury.

(iv) 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 of Departmental Undertaking:

Departmental undertakings suffer from the following limitations:

(i) Lack of Flexibility -There is little scope for exercising initiative and making improvements. Due to lack of autonomy, it fails to provide flexibility in operations.

(ii) Delay in Decision-Making – The employees or heads of the departments have to take approval of the concerned ministry before taking any decision. This leads to delays in matters where prompt decisions are required.

(iii) Bureaucracy and Conservative Approach – Departmental undertakings are unable to take benefits of business opportunities because they are not allowed to take risky ventures due to bureaucrat’s over-cautious and conservative approach.

(iv) Red Tapism – Even for routine matters and day-to-day operations, prior sanction of the relevant authority is necessary. The enterprise is bound by bureaucratic procedures and rules. This creates unavoidable problems in functioning of the organisation.

(v) Undue Government Interference – There is a lot of political interference through the ministry.

(vi) Indifferent to Consumers’ Needs – These enterprises are somewhat insensitive to consumer needs and do not provide adequate services to them.

2. Statutory Corporation:

Statutory Corporation is a corporate body with a separate legal existence, set up under a special Act of parliament or of the state legislature. Statutory Corporation is also known as Public Corporation.

The Act defines its objects, powers and functions, rules and regulations governing its employees and its relationship with government departments. It is managed and controlled by a Board of Directors appointed by the government.

It is financially independent with a clear control over a specified area or a particular type of commercial activity. 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 (subject to provisions of the governing Act).

In India, Reserve Bank of India (RBI), Food Corporation of India (FCI), Life Insurance Corporation (LIC) and Air India are some important examples of statutory corporations.

Features of Statutory Corporation:

Statutory corporations are characterised by the following features:

(i) Formation – It is established under a special Act of the Parliament, which lays down the objects, powers and functions of the Corporation.

(ii) Ownership – It is wholly owned by the state. Government has the power to appropriate its profits and also has to bear the losses, if any.

(iii) Corporate Existence – A statutory corporation is a body corporate, which has a separate legal existence independent of the Government. It can sue and be sued, enter into contract and acquire property in its own name.

(iv) Financial Autonomy – This type of enterprise is usually independently financed. It obtains funds by borrowings from the government or through revenues derived from sale of goods and services to public. It has authority to retain its earnings and utilize them for its business.

(v) Accounting and audit procedures – It is not subject to the government rules and regulations in the matter of accounting, budgeting and audit as applicable to departmental undertakings.

(vi) Staffing and Terms of Service – The employees of these enterprises are not government or civil servants and are not governed by government rules and regulations. However, at times, some officers are taken from government departments on deputation, to head these organisations.

Merits of Statutory Corporation:

This form of organisation enjoys the following advantages in its working:

(i) Operational Flexibility – They enjoy independence in their functioning and there is sufficient scope for flexibility and initiative. They are free from undesirable government regulation and control.

(ii) Freedom from Interference – As funds of these organisations do not come from the central budget, it is free from interference of the government in its day-to-day working, which ensures better and efficient working.

(iii) Autonomous Set-up – As these enterprises are autonomous organisations, they frame their own policies and procedures within the powers assigned to them by the Act. However, the Act may require prior approval of a particular ministry on certain issues.

(iv) Facilitates Economic Growth – Such enterprises contribute to the economic development as they have the power of the government along with the initiative of private enterprises.

Limitations of Statutory Corporation:

This type of organisation suffers from several limitations, which are as follows:

(i) Theoretical Autonomy – The autonomy and flexibility of such enterprises exist on paper only. In reality, a statutory corporation is subject to many rules and regulations and does not enjoy as much operational flexibility in its working.

(ii) Government Interference – The working of public corporations is subject to interference from bureaucrats and politicians, especially in case of major decisions or where huge funds are involved.

(iii) Undesirable Practices – In statuary corporations, officials may misuse their autonomy and indulge in unfair practices (like corruption), that are against the objectives of such enterprises.

(iv) Delay in Action – Government often appoints advisors to the Corporation Board. It adversely affects the freedom in entering into contracts and other decisions. In case of any disagreement, the matter is referred to the government, which further delays action.

3. Government Company:

A Government Company is established under the Companies Act, 2013 or any previous Company Law. It is registered and governed by the provisions of the Companies Act. It is established for the purpose of running an industrial or commercial undertaking.

According to the Companies Act, 2013, 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 any state government or partly by central government and partly by one or more state governments.

The shares of the company are purchased in the name of the President of India. Such enterprises are known as Government companies because government is the major shareholder and exercises major control over its management.

In India, Steel Authority of India Ltd. (SAIL), Bharat Heavy Electricals Ltd. (BHEL) and Bharat Earth Movers Ltd. (BEML) are the leading examples of government companies.

Features of Government Company:

(i) Incorporation – The government company is registered under the Companies Act, 2013 or any previous Company Law. It is formed by an executive rather than a legislative decision.

(ii) Separate Legal Entity – It has a separate legal existence independent of the government. The company can enter into a contract, acquire property, can file a suit and can be sued by the third party.

(iii) Management – It is managed by a board of directors nominated by the government. The management is regulated by the provisions of the Companies Act, like any other public limited company.

(iv) Governed by Provisions of Memorandum and Articles of Association – The Memorandum and Articles of Association are the main documents of the company, containing the objects of the company and rules and regulations relating to appointment of employees of the company.

(v) Accounting and Audit Procedures – It is free from budgetary, accounting and audit controls applied to departmental undertakings. However, an Annual Report is to be presented in the parliament or the state legislature by the auditor appointed by the Central Government.

(vi) Finance – At least 51% of the capital of the company is contributed by the state or the central government while the rest can be raised from the capital market.

Merits of Government Company:

The advantages enjoyed by a Government company are as follows:

(i) Easy Formation – There is no need for separate legislation of the parliament for its formation. It can be established by fulfilling the requirements of the Indian Companies Act.

(ii) Operational Autonomy – It enjoys autonomy in all management decisions and takes actions according to business prudence. It is free from bureaucratic control and political interference of the government.

(iii) Independent Status – It has a separate legal entity, apart from the Government. So, it carries on business activities like any other private company.

(iv) Prevents Unhealthy Business Practices – These companies provide good quality products at reasonable prices. It helps to control the market and reduce unhealthy business practices.

Limitations of Government Company:

The government company suffers from the following limitations:

(i) Freedom only in name – As Government is the majority shareholder, it exercises control over affairs of the company and provisions of the Companies Act does not have much relevance.

(ii) Lack of Accountability – As it is financed by the government; it should be accountable to the Government. However, it is not answerable directly to the Parliament due to ineffective government control.

(iii) 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:

Departmental Undertaking:

i. Formation – It is created by order of the government and is attached to a particular ministry.

ii. Legal Status – No separate legal entity.

iii. Management – Managed by government officials of the concerned ministry.

iv. Finance – 100% financed by government out of funds allocated in budget.

v. Staff – Government Employees.

vi. Ownership – Wholly owned by the government.

vii. Flexibility – No flexibility

viii. Degree of Autonomy – No autonomy as there is strict control of the government.

ix. Public Accountability – Fully accountable to the public and concerned ministry.

Statutory Corporation:

i. Formation – It is created by a Special Act of the Parliament.

ii. Legal Status – Separate legal entity.

iii. Management – Managed by Board of Director appointed by the government.

iv. Finance – Funds through borrowings from government or through revenue from sale of goods.

v. Staff – No Government employee. All employees are appointed under contract of service.

vi. Ownership – Wholly owned by the government.

vii. Flexibility – Considerable scope for flexibility and initiative.

viii. Degree of Autonomy – Considerable degree of autonomy as no interference by government in day-to-day affairs.

ix. Public Accountability – Accountable to the parliament.

Government Company:

i. Formation – It is created in accordance with the Companies Act.

ii. Legal Status – Separate legal entity.

iii. Management – Managed by a board of directors nominated by the government.

iv. Finance – Atleast 51 % of share capital is provided by the government.

v. Staff – No Government employee. All employees are appointed under contract of service.

vi. Ownership – Atleast 51% of the company is owned by the government.

vii. Flexibility – Significant flexibility as it can frame its own rules and regulations.

viii. Degree of Autonomy – Substantial degree of autonomy.

ix. Public Accountability – Accountable to the concerned Ministry.


Public Sector Enterprises/Undertakings – Departmental Organization, Statutory Corporations and Government Company (With Meaning, Features, Merits and Demerits)

1. Departmental Organization:

Departmental organizations are owned, controlled and managed by Government departments. They are the oldest and the most traditional form of public sector organization. These organizations do not have any separate legal status as they directly come under the control of the respective Government department. The Minister of the concerned department is the head and the final decision making authority.

Such businesses cannot be separated from the government, as they are an integral part of the government. Their day-to-day operations are run by government officers who are called government employees. Examples of such organizations are Indian Railways, Post and Telegraph, Water Supply etc.

Features:

The features of departmental organizations are as follows:

i. Departmental organizations do not have any separate legal status / entity. They are a part of the concerned ministry.

ii. They are fully owned and are under the direct control of the ministry.

iii. The overall management of departmental organizations lies in the hands of the government officials and the minister.

iv. Funds required by the departmental organizations are provided directly through the Government treasury.

v. For any financial decision like borrowing etc., they need to take Government approval. In other words, they can’t borrow funds without the consent of government.

vi. The employees of such organizations are treated as government employees and hence they get all the necessary benefits (such as – dearness allowance etc.)

vii. The recruitment procedure, service conditions, etc., are same as those provided to Government staff.

viii. Such undertakings are essential as they undertake services for nation like post and telegraphs, public distribution system, etc.

ix. Wherever confidentiality is of utmost importance (such as – defence, atomic energy, etc.,) these types of organizations are very helpful as these are controlled directly by the Government.

x. All the audit and accounting procedures applicable to any Government department or to the concerned ministry are applicable to these organizations as well.

xi. If one intends to file a suit/case on departmental organization, he/she can’t do so without the prior consent of government.

xii. Departmental organizations are treated as a sub-division of the public sector.

xiii. The Minister of the concerned department is responsible for such organizations.

xiv. Employee of Indian Administration Services can be appointed and transferred from one department to another department in this sector.

xv. An I.A.S., (Indian Administrative Services) Officer is the administrative head of departmental organization and can be transferred from one organization to another. The IAS officers directly report to the concerned minister.

Merits:

The merits of departmental organizations are as follows:

i. Departmental organizations do not require any special act or legislation. Hence, they are easy to establish.

ii. These organizations are controlled by Ministers who are accountable to the Parliament and in turn to the public. Hence, they are under constant pressure to work efficiently.

iii. The profits earned by such organizations contribute towards government treasury. Thus/they help in economic development of the nation.

iv. Since, the main objective is to provide services to the people at large, the departmental organizations manage to fulfill their economic as well as social objectives.

v. These organizations maintain secrecy on critical matters such as – defence, research, atomic station etc., which are essential to protect the interests of the country.

vi. These organizations provide all the basic and essential services such as – food grains, water, education, health etc. Since, the departmental organization is directly under the control of the government; people are assured of the uninterrupted supply of such goods / services.

vii. These organizations are administered by I.A.S., officers and qualified professional government officials.

viii. As these organizations are not separate legal entities, but a part of the government itself, the government ensures that sufficient funds are allocated through budgets in order to meet their objectives effectively.

Demerits:

The demerits of departmental organizations are as follows:

i. The centralized control of the Ministry makes the process of decision making slow in such organizations.

ii. Interference from the government officers and ministers is a problem constantly faced by such organizations.

iii. Departmental organizations do not have any financial freedom.

iv. The Ministers and civil servants heading such organizations are not professionals.

v. If the Government changes, there is a possibility of change in the policies which affects the functioning of such enterprises.

vi. Due to the strict bureaucratic control by Government, there is total absence of flexibility in the operations.

vii. These organizations sometimes tend to show lack of sensitivity towards the needs of the consumers and fail to provide required services.

viii. Factors such as- frequent transfer of staff from one department to another, absence of professional staff, fear of public criticism etc., affect the efficiency of such organizations.

ix. The organization has no power to utilize the revenue and hence there is little motivation among staff.

x. In case of countries like India, where there is heavy corruption among Government Officers, there are high chances of misuse of funds of such departments. Here, the citizens’ have to suffer as their funds are being misused.

2. Statutory Corporations:

Statutory Corporation, also known as public corporation, is a company which comes into existence through a Special Act of the Parliament /State Legislature. The act defines the powers, rules and regulations, functions, funding structure etc., of such a company. Therefore, it enjoys financial independence unlike Departmental Undertakings. It can own and dispose property and it can sue or be sued by others.

It has a separate legal status, a common seal and has perpetual succession (continuous life). Examples of such organizations are Reserve Bank of India (RBI), State Bank of India (SBI), Air India, Food Corporation of India (FCI), Life Insurance Corporation (LIC) etc.

Definition of Statutory Corporation:

According to Earnest Davis, “Statutory Corporation is a body with a separate existence which can sue and be sued and is responsible for its own finance. It is a corporate body, created by public authority with defined powers and functions and financial liberty. It is administered by a “board appointed by public authority to which it is answerable”.

Statutory Corporation, also known as public corporation, is a company which comes into existence through a Special Act of the Parliament / State Legislature.

Features:

The features of Statutory Corporation are as follows:

i. Statutory Corporations are autonomous in their functioning.

ii. They are established under a Special Act passed by Parliament or State Legislature. The act defines the powers, duties, functions etc., of such a company.

iii. They are independent in their functioning and enjoy operational flexibility.

iv. They are not dependent on budget allocations by Government and thus, enjoy financial freedom.

v. Their financial reports are placed before parliament or state legislature for discussions. However, they have their own independent accounting system.

vi. They recruit their own staff and the employees are not considered as Government Staff.

vii. The liability of the members is limited.

viii. The statute i.e., the Act itself is a governing document for such organizations. Hence, they need not have a separate Memorandum or Articles of Association.

ix. Their primary objective is to render services to the society. Making profit is their secondary objective.

x. As they enjoy autonomy awarded by a special Act, there is little interference by Government in their financial matters and day-to-day operations.

xi. They draft their own policies and procedures within the overall powers granted by the Act.

xii. A statutory corporation is managed by the Board of Directors, appointed by Government.

Merits:

The merits of a statutory organization are as follows:

i. Statutory corporations enjoy complete autonomy and freedom in terms of administration as well as finance.

ii. They are entrusted with the responsibility of providing certain important services to the society (such as – banking, insurance etc.,) and thus hold an important position in the economy.

iii. As their primary aim is to render services, they provide the services at reasonable prices.

iv. Due to the autonomy that they enjoy, the decision making process is fast and flexible.

v. The employees are motivated, well trained and developed in this type of an organization.

vi. Statutory corporations are financially independent. They do not depend on Government to satisfy their financial needs.

vii. The large scale of operations granted by the act, allow them to enjoy economies of scale resulting in reduced cost of operations.

viii. As statutory corporations have liberty in recruiting their own staff, they recruit well trained professionals which increase the operational efficiency.

ix. Due to the monopolistic or semi-monopoly conditions created by the statute, these organizations enjoy a greater degree of freedom. Therefore, they can cut down wasteful expenditure such as advertisement, publicity etc.

x. Though they enjoy the autonomy, their accounts are audited by the Comptroller and Auditor General of India (CAG) and their annual reports are placed in Parliament or State Legislature for discussion. Thus, there is public accountability.

Demerits:

The demerits of statutory corporations are as follows:

i. The process of formation of statutory corporation is time consuming as it is formed by a special statute formed by Parliament or State Legislature.

ii. As their governance is strictly as per the statute, they face lot of restrictions. This reduces the flexibility in their operations. However, they enjoy greater autonomy as compared to Departmental Undertakings.

iii. There is a possibility of corruption in such organizations as there is no public ownership and the board is controlled by Government.

iv. Statutory corporations are interfered by political parties and government as it involves huge amount.

v. Due to absence of competition, there is no benchmark for the best performance in front of such organizations. Due to which, many-a-times, they fail to understand consumers’ needs.

vi. Statutory corporations are not suitable for small scale operations. It is not a viable proposition to pass an act for something which is to be carried out on a very small scale.

vii. Statutory corporations are formed through a Special Act and hence any change intended as per the business conditions, is difficult. The change intended can be incorporated by the Parliament only, which is a time consuming process.

viii. Unprofessional management and indifferent employees result in inefficient performance of the organization. This in turn, results in losses.

3. Government Company:

Government Company is a company where 51% or more of the paid up capital is held by the Central or State Government jointly or individually. Since, the Government has majority stake, it controls the management of such companies. The capital is held by Government in the name of the President of India. A Government company is established under the Indian Companies Act, 1956 and is expected to follow the rules and regulations prescribed in the Act.

Thus, it is like any other company form of organization. Government companies exist along with other private companies and also compete with them. Government Company is purely a commercial enterprise. Its primary aim is to earn profit. Examples of Government Companies are – Gas Authority of India Limited (GAIL), Bharat Petroleum, Coal India Limited, Bharat Heavy Electricals Ltd. (BHEL), Hindustan Machine Tools Ltd., (HMTL), Oil and Natural Gas Commission (ONGC), etc.

Government Company is a company where 51% or more of the paid up capital is held by the Central or State Government jointly or individually.

Features:

The features of Government Company are as follows:

i. Government companies are incorporated under the Indian Companies Act, 1956.

ii. The formation, working and winding up of these companies is as per the rules and regulations provided under Indian Companies Act, 1956 only. Hence, they do not require any special statute unlike Statutory Corporations.

iii. Such companies are either totally or partially (majority) owned by Central or State Government individually or jointly.

iv. They are managed by the Board of Directors that are appointed by the Government and private investors (based on their shareholding).

v. They enjoy full financial freedom in terms of raising and utilizing funds for operations.

vi. Government companies enjoy full autonomy in their operations as there is no political interference.

vii. Since Government holds the majority stake, the accounts of a government company are audited by a Government Auditor.

viii. Government Company is purely a commercial enterprise. Its primary aim is to earn profit.

ix. Recruitment of the staff is as per the rules set by each company and is fully under its own control.

x. Memorandum and Articles of Association are the governing documents of such companies which state the objectives and definition of powers of the company.

xi. The Annual Accounts of such companies are kept in Parliament or State Legislature for review.

xii. Having separate legal existence, such companies can enter into contracts in their own name. They can sue or be sued.

xiii. These companies are suitable for conducting manufacturing and marketing activities.

Merits:

The merits of a Government company are as stated below:

i. Government companies are formed under the Indian Companies Act, 1956. Hence, the procedure for formation of the company is simpler.

ii. They don’t need any special act for formation unlike Statutory Corporations.

iii. Government Companies enjoys financial and administrative freedom.

iv. Their main motive is to earn profit. At the same time, they serve the nation in certain critical areas. Thus, they enjoy private as well as public objective.

v. Since such companies can recruit their own employees who are professional and skilled, they can improve the overall efficiency of their companies.

vi. The audit is done by Government Auditor and its accounts are placed before Parliament or State Legislature. Thus, there is public accountability.

vii. Such companies face competition with private sector enterprises. Hence, they have to maintain efficiency.

viii. They provide the goods and/or services at reasonable prices thereby controlling the market and fulfilling the social objective.

ix. As these companies have their own Memorandum or Articles of Association, altering the objectives or mode of operations is relatively simpler as compared to Statutory Corporations.

x. These companies can enter into mergers and acquisitions of other companies (especially the sick units) by purchasing 51% of the share capital.

Demerits:

The demerits of Government Company are as follows:

i. Though the government companies enjoy administrative autonomy, Government is still the majority owner. Due to this, they face a lot of interference from the government while appointing directors or key employees.

ii. They have a weak public accountability. Their accountability to the public is not direct but remote as compared to other public sector enterprises where there is greater control of Government.

iii. They do not have complete freedom to decide on important matters. It depends upon the extent of Government ownership, structure of the Board of Directors, etc.

iv. Many-a-times, directors are appointed by the Government not based on their professional skills but based on political considerations or relations with politicians etc.

v. Absence of stringent monitoring, corruption induced by Politicians, etc., may lead to wastage of country’s resources.

vi. If social objectives are given importance over profit motive, these companies may not run with professional competency.

vii. Overall non-professional attitude of the Board of Directors or political interference may result in lack of motivation among the employees which adversely affects the future for such companies.

Role of Government Companies in Economic Development:

Government Company is a company where 51% or more of the paid up capital is held by the Central or State Government jointly or individually.

Such type of companies plays a crucial role in the economic development of the country like India due to following reasons:

i. Government Companies has both, profit motive as well as social objective.

ii. India has adopted mixed economy model where, Private as well as Public sector work simultaneously.

iii. Government Companies can operate where large scale investment is required which sometimes private ownership cannot provide. For e.g., Railways, etc.

iv. Sometimes because of critical nature, law allows only Public sector organizations to function in a particular sector. In such cases, setting up Government Companies is inevitable.

v. In private sector enterprises, the profits earned by owners may not reach all the sections of society. This situation can be avoided with the help of Government companies.

vi. Parliaments and State Legislature can discuss and review whether the resources are optimally utilized in government companies. Even Government Auditor can provide useful insight. This is possible only because there is public accountability.


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