Types of Public Sector Undertakings

Everything you need to know about the types of public sector undertaking. Public sector organizations are those organizations that are owned, controlled and financed by the Government of the country.

These organizations are controlled either by State or Central Government or Local Authorities. They play a crucial role in the economic development of the nation.

The public sector was given the responsibility to fabricate the infrastructure for other sectors of the economy, focus on the key and provide for goods and services essential for the economy.

The Five Year Plans gave lot of importance to the public sector in the initial stages of development.

Some of the types of public sector are:- 1. Departmental Undertakings 2. Statutory Corporations 3. Government Companies.

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Types of Public Sector: Departmental Undertakings, Statutory Corporations and Government Companies

Types of Public Sector Enterprises – Departmental Undertakings, Statutory Corporations and Government Companies

1. Departmental Undertakings,

2. Statutory Corporations, and

3. Government Companies.

Type # 1. Departmental Undertakings:

A Departmental Undertaking is a public sector enterprise which is run as a part of a government department and under the direction of the Minister concerned.

These include the following:

(a) The Indian Post and Telegraph Department

(b) All India Radio

(c) The Doordarshan

(d) The Indian Railways

(e) Defence

(f) Atomic Energy etc.

Features of Departmental Undertakings:

1. Formation – These form a part of government and are associated with a particular ministry.

2. Control – These are considered as a major sub-division of a ministry of Government and are under direct control of the minister.

3. Appointments – These undertakings act through government officers. Their employees are appointed through Union Public Service Commission and Staff Selection Boards.

4. Management – These are managed by IAS (Indian Administrative Services) officers and civil servants.

5. Audit – The accounts of these undertakings are audited by the Comptroller and Auditor General of India (CAG).

6. Finance – The funds of these enterprises come directly from Government Treasury. The revenue earned by these is also paid into the Government Treasury.

7. Administrative Autonomy – These do not have any administrative autonomy, from government department. There is a lot of political interference.

8. Accountability – These are accountable to the concerned ministry as their management is directly under the control of the concerned minister.

Merits of Departmental Undertakings:

1. Easy Formation – These are established just by the administrative orders of Government.

2. Effective Control – Parliament can exercise effective control over them as the control is centralised in the hands of government.

3. Source of Revenue for Government – Revenue earned by these undertakings goes directly into Government Treasury.

4. Proper Utilisation of Funds – All actions are approved by the Government. There can’t be any misutilisation of funds.

5. Decrease in Tax Burden on Public – The departmental undertakings earn profit for Government. The Government gets enough funds and there is little need for taxes. The tax burden on public is reduced.

6. Accountability – These are accountable to public through the parliament as these are established for public benefit.

Demerits of Departmental Undertakings:

Some of the drawbacks of departmental undertakings are as below:

1. Rigidity – These are not flexible due to strict government rules and regulations. Operations must be flexible for the smooth functioning of business.

2. Red-Tapism – There is a lot of red-tapism and excessive and slow paper work leads to heaps of files moving at slow speed and no work is done on time.

3. Delay in Decision Making – Officers of such departmental undertakings are not allowed to take independent decision without the approval of concerned ministers. It delays the decision making.

4. Lots of Political Interference – These undertakings are under the supervision of a minister who is politically active and gives priority to political party over the country.

5. Insensitive to Consumer Needs – These undertakings don’t provide adequate services to the consumers directly because there is a lack of competition and profit motive.

6. Unable to Take Advantage of Opportunities – Sometimes good opportunities slip away because of the overcautious and conservative attitude of officials who don’t allow these undertakings to go in for risky business ventures.

Type # 2. Statutory Corporations or Public Corporations:

Statutory Corporations are created by a special Act of Parliament or State Legislature. The Act defines their powers, functions, rules and regulations of governing them. These have a separate legal existence and have to act in their own name. These are backed by the power of government and have considerable flexibility as these are corporate bodies.

The entire capital of statutory corporation is financed by Government and these also have right to borrow from public.

The following are major statutory corporations:

i. Life Insurance Corporation of India (LIC)

ii. Reserve Bank of India (RBI)

iii. Unit Trust of India (UTI)

iv. Industrial Development Bank of India (IDBI)

v. Oil & Natural Gas Commission (ONGC)

vi. Employee State Insurance Corporation (ESIC)

vii. Food Corporation of India (FCI)

Features of Statutory Corporations:

1. Ownership – These are owned and controlled by Central or State governments. The government has a complete authority to appropriate profits and also to bear losses. These are completely accountable to the Government.

2. Formation – These are set up by the Special Act of the Parliament or State Legislatures. The Act defines the objects and privileges of these statutory corporations.

3. Body Corporate – These have a separate legal entity. These can sue and be sued. These can purchase property in their own name and enter into contracts with third parties, and the contracts will be legally bound.

4. Freedom from Government Budgetary Provision – These are not concerned with budget of the government. These have a financial autonomy and prepare their own budgets.

5. No Interference – These are autonomous bodies. Government does not interfere in day to day working of these corporations. Directors are appointed according to the provisions of the Acts.

6. Appointments of Employees – These have their own rules regarding appointment and fixing of the remunerations of employees. The service conditions are framed by Board of Directors. The employees of such organisations are not government employees. The service conditions are also given in the specific Acts under which they are set up.

7. Audit – Their audit is conducted by the Comptroller and Auditor General (CAG) departments. It is done by professional chartered accountants as in other commercial establishments.

8. Financing – Financing is done mostly by Government. These also have a right to borrow from public. These have full authority to manage their profits earned from the sale of goods and services.

Merits of Statutory Corporations:

1. Financial Independence – These do not get funds from central budget. The government does not interfere in their financial matters. These have complete financial autonomy.

2. Autonomous Organisations – These have their own policies and procedures within the powers and duties assigned to them under Act. However, the Act provides for a few issues that require the prior approval of the particular ministry. These are autonomous and independent in their functioning. There is no interference of government. These are free from unnecessary and undesirable government interference and regulations.

3. Social Service Motive – Their main aim is social service and their secondary objective is earning profit. Profit earned by such corporation is used for providing services to the society.

4. Protection of Public Interest – These are accountable to the Parliament. Thus, it is ensured that the public money is properly utilised.

5. An Instrument for Economic Development – These have the backing of government power along with private sector initiative. Thus, the economic development is ensured.

Demerits of Statutory Corporations:

1. Political Interference – Politicians have their own benefit in mind wherever huge funds are involved. They interfere in the working of these corporations for personal and party gains.

2. Ignoring Service Motive – The directors utilise their influence and powers for their own benefit instead of the social service.

3. Lack of Competition – This has led to carelessness and lethargy in their activities. There is always a fear of loss due to slackness.

4. Misuse of Financial Autonomy – These take loans at high rate of interest to meet urgent requirements due to delay in projects. This leads to increase in cost of projects. It becomes difficult to pay back these loans.

5. Corruption – In public dealings there is bound to be corruption. These corporations are no exception.

6. Incomplete Operational Autonomy – The fact is that the operational autonomy which they have is only theoretical. Actually there is government interference and the management is not free to take decisions.

7. Delay in Decision Making – The Government generally seeks professional advice which hinders the freedom of these corporations to enter into new contracts. The disagreement with the professionals further delays decision making.

Type # 3. Government Companies:

The Companies Act, 2013 defines a Government Company thus- “A Government Company means any company in which not less than 51% of the paid-up capital is held by Central Government or by any State Government or partly by Central Government and partly by one or more State Governments.”

It is established under the Indian Companies Act, and is managed by provisions of this act. These companies are established for business purpose and these can compete with companies in private sector. The government is the majority shareholder in these enterprises and it exercises full control over paid up capital of the company. Its shares are purchased in the name of President of India.

Government companies are of two types:

(i) Wholly owned government companies where entire capital is held by the government.

(ii) Partly owned government companies where government and public are joint owners but major part of the capital is provided by the government.

Examples of government companies are:

(i) Steel Authority of India Ltd. (SAIL)

(ii) Hindustan Machine Tools Ltd (HMT)

(iii) Bharat Heavy Electricals Ltd (BHEL)

(iv) Gas Authority of India Ltd (GAIL)

(v) State Trading Corporation (STC) etc.

Features of Government Companies:

1. Formation – It is formed according to the provisions of Indian Companies Act, 2013.

2. Ownership – Minimum 51% of their paid-up capital is in the name of Central Government or State Government or partly in the name of Central Government and partly in the name of a State Government. It can be a wholly owned Government Company where all shares are held by the Government.

3. Management – It is managed by a Board of Directors who are appointed by shareholders or nominated by the Government.

4. Separate Legal Entity – It has a separate legal entity. It can sue and can be sued. It can enter into contracts with third parties. It can hold property in its own name.

5. Appointments of Employees – Its employees are appointed according to its own rules and regulations as contained in its Memorandum and Articles of Association which contain objective and internal rules and regulations of company respectively.

6. Audit Procedure – These companies are also subject to accounting and audit procedures. An auditor is appointed by the Central Government on the recommendation of the CAG and annual report is presented to the Parliament.

7. Financing – Capital of such companies comes from government shareholdings and private shareholders. It is allowed to raise funds from share market.

8. Annual Reports – The annual reports are presented to the Parliament.

9. Relaxation – Relaxations from the rules under Companies Act can be given to them provided it is authorised by the Parliament.

10. Registration – It is registered like any other Joint-Stock Company with the Registrar of Companies.

Merits of Government Companies:

1. Easy Formation – The government companies can be established by following the provisions of the Companies Act 2013. No separate Act of parliament is required.

2. Separate Legal Entity – It has a separate legal entity. It can hold property in its own name. It can enter into contracts with third parties. It can sue and be sued by others.

3. Autonomy in Operations – They are free to conduct their activities. There is no departmental interference by bureaucrats. So they can take prompt decisions according to business needs as and when required.

4. Control Unhealthy Competition – These companies can control unhealthy competition by providing goods and services at reasonable prices to consumers.

5. Easy Financing – Their financial needs are met by the Government and these can also go to capital market as and when they like.

6. Benefits of Private Participation – Since private sector can have a share in such companies, professional managers from private sector can be included in Board of Directors. They can improve operational efficiency.

Demerits of Government Companies:

1. Parliament Interference – The directors are nominated by the government. They work under the political pressure of the party in power. The directors who are chosen from various ministries, interfere in the operation of company.

2. Lack of Continuity in Policies – The chairman and senior officers of government companies are frequently changed. The new persons try to run company according to their own will. Political parties in power keep on changing, resulting in lack of continuity as the officers are changed with these changes.

3. Lack of Professional and Managerial Efficiency – Professional managers are required to run a company. Such proficiency and initiative are not found in bureaucratic directors of a government company. It works almost like a government department with the help of officers from the Indian Administrative Services (IAS).

4. No Say of Minority Private Shareholders – The private shareholders are in minority. They have no say in financial and administrative matters.

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Types of Public Sector Enterprises – 3 Important Types: Departmental Undertakings, Statutory Corporations and Government Companies (With Merits and Limitations)

The various forms of public sector enterprises are described below:

Type # 1. Departmental Undertakings:

Departmental Undertakings is the oldest and most traditional form of organising public sector enterprises and are established as departments of the ministry and are considered part or an extension of the ministry itself. The activities performed by these departments are an essential part of the functioning of the government because the Government functions through these departments.

They do not have any independent legal entity or have been established as autonomous or independent institutions. These undertakings may be under the central or the state government and the rules of central/state government are applicable and conduct their activities through officers of the Government. The employees of these undertakings are considered to Government employee. A few of examples of these undertakings are railways, post and telegraph department etc.

Features of Departmental Undertakings:

The various features of a departmental undertaking are described below:

i. Financed through government treasury – An annual appropriation from the budget of the Government is made and the funding of these enterprises come directly from the Government Treasury. The revenue earned by these is also paid into the treasury

ii. Audit and control – They are subject to accounting and audit controls applicable to other Government activities.

iii. Government employees – The employees of the enterprise are Government servants and are headed by Indian Administrative Service (IAS) officers and civil servants who are transferable from one ministry to another.

iv. Control – It is subject to direct control of the ministry as it is generally considered to be a major subdivision of the Government department.

v. Accountability – Since their management is directly under the concerned ministry and are accountable to the ministry.

Merits of Departmental Undertakings:

The various merits of a departmental undertaking are explained below:

i. Centralised control – These are subject to effective control by the Parliament over their operations.

ii. Public accountability – They are subject to high degree of public accountability.

iii. Source of revenue – They serve as a source of income for the Government as the revenue earned by the enterprise goes directly to the treasury.

iv. Suitable form – It is the most suitable form of organisation where national security is concerned since it is under the direct control and supervision of the concerned Ministry.

Limitations of Departmental Undertakings:

The various limitations of a department and undertaking are discussed below:

i. Lack flexibility – The operations of a Departmental undertakings may not be smooth due to lack of flexibility

ii. Delay in decision making – There may be delays in matters where prompt decisions are required as the decisions cannot be taken by the employees or heads of departments independently without the approval of the ministry concerned.

iii. Limited scope – As the bureaucrat’s over­cautious and conservative approval does not allow them to take risky ventures these enterprises are unable to take advantage of business opportunities.

iv. Red tapism – Since no action can be taken unless it goes through the proper channels of authority there working propagates red tapism in day-to-day operations.

v. Political interference – There is a lot of political interference through the ministry.

vi. Insensitive – These enterprises do not provide adequate services to consumer as they are usually insensitive to their needs.

Type # 2. Statutory Corporations:

Statutory Corporations are public sector enterprises brought into existence by a Special Act of the Parliament which defines its powers and functions, rules and regulations governing its employees and its relationship with government departments.

It is a corporate body has the capacity of acting in its own name is financially independent with a clear control over a specified area or a particular type of commercial activity. It offers the twin benefits, as it has power of the government and considerable amount of operating flexibility of private enterprises.

Features of Statutory Corporations:

The key features of a statutory undertaking are stated below:

i. Governed by Act – Statutory corporations are set up under an Act of Parliament and are governed by the provisions of the Act which defines the objects, powers and privileges of a statutory corporation.

ii. Owned by government – This type of organisation is wholly owned by the state and the government has the ultimate financial responsibility and has the power to appropriate its profits or to bear the losses, if any.

iii. Legal entity – A statutory corporation is a body corporate and can sue and be sued, enter into contract and acquire property in its own name.

iv. Financial independence – This type of enterprise is usually independently financed. It obtains funds by borrowings from the government or from the public through revenues, derived from sale of goods and services. It has the authority to use its revenues

v. Flexibility – Unlike, government departments a statutory corporation is neither subject to the accounting and audit procedures nor is concerned with the central budget of the Government.

vi. Self-governance of employees – The conditions of service of the employees of these enterprises are governed by the provisions of the Act itself. They are not government or civil servants and are not governed by government rules and regulations but some of the officers of these enterprises are taken from government departments, on deputation, to head these organisations.

Merits of Statutory Corporations:

The various merits of a statutory corporation are explained below:

i. Operational freedom – They are free from undesirable government regulation and control of government and enjoy independence in their functioning and a high degree of operational flexibility.

ii. Financial independence – The government generally does not interfere in their financial matters, including their income and receipts as the funds of these organisations do not come from the central budget.

iii. Autonomous entity – Except for a few issues/matters which require prior approval of a particular ministry as per the Act, these are autonomous organisations and frame their own policies and procedures within the powers assigned to them by the Act.

iv. Facilitates economic growth – Since a statutory corporation has the power of the government, combined with the initiative of private enterprises it serves as a valuable instrument for economic development.

Limitations of Statutory Corporations:

The various limitations of a statutory corporation are explained below:

i. Limited operational flexibility – In reality, all actions a statutory corporation are subject to many rules and regulations and does not enjoy as much operational flexibility as stated above.

ii. Political interference – In all the major decisions or where huge funds are involved the Government and political interference has always been there.

iii. Corruption – Rampant corruption exists is where dealing with public is involved.

iv. Delayed decisions – Due to the practice of appointing advisors to the Corporation Board by the government the freedom of the corporation in entering into contracts and other decisions is curbed. At times due to disagreement the matters are referred to the government for final decisions leading to delayed action.

Type # 3. Government Companies:

According to the section 2(45) of the Companies Act 2013, a government company means any company in which not less than 51 per cent 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 and includes a company which is a subsidiary of a government company.

A Government company is established under The Companies Act, 2013 and is registered and governed by the provisions of the Indian Companies Act. The government exercises control over the paid up share capital of the company. As the shares of the company are purchased in the name of the President of India and the government is the major shareholder and exercises control over the management of these companies, they are known as government companies.

These are created for merely business purposes and may be formed as a private limited company or a public limited company. There are certain provisions which are applicable to the appointment/retirement of directors and other managerial personnel.

Features of Government Companies:

The important features of the government companies are stated below:

i. Registration – A government company is created under the Indian Companies Act, 1956. Like, any other public limited company the management of the company is regulated by the provisions of the companies act.

ii. Separate legal entity – The company can file a suit in a court of law against any third party and be sued. The company can enter into a contract and can acquire property in its own name.

iii. Main documents – The Memorandum and Articles of Association are the main documents of the company. Memorandum of Association contains the objects of the company and Articles of Association contains its rules and regulations. The employees of the company are appointed according to their own rules and regulations as contained in the Memorandum and Articles of Association of the company.

iv. Accounting and audit – An auditor is appointed by the Central Government and the Annual Report is to be presented in the parliament or the state legislature however these companies are exempted from the accounting and audit rules and procedures.

vi. Finance – The government company obtains its funds from government shareholdings and other private shareholders. It is also permitted to raise funds from the capital market.

Merits of Government Companies:

The various merits of the government companies are described below:

i. Registration – There is no need to pass a separate Act in the Parliament as a government company can be established by fulfilling the requirements of the Indian Companies Act.

ii. Separate legal entity – A government company has a separate legal entity, apart from the Government.

iii. Operational autonomy – It takes independent actions according to business prudence as it enjoys autonomy.

iv. Promote healthy business practices – These companies curb unhealthy business practices by providing goods and services at reasonable prices.

Limitations of Government Companies:

The government companies suffer from some limitations as discussed below:

i. Limited freedom – The provisions of the Companies Act does not have much relevance since the Government is the only shareholder in some of the Companies.

ii. Evades constitutional responsibility – It evades constitutional responsibility, which a company financed by the government should have. It is not answerable directly to the Parliament.

iii. Government control – The main purpose of a government company being registered like other companies, is defeated as the management and administration rests in the hands of the government since government is the sole shareholder.

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Types of Public Sector Enterprises – Top 3 Types: Departmental Undertakings, Statutory Corporations and Government Companies

There are three forms of organisations which are undertaking, statutory corporation and relevant to public sector enterprises – departmental Government company.

Type # 1. Departmental Undertaking:

Departmental undertaking is an undertaking which is financed and managed on the pattern of a Government department.

Finance for a departmental undertaking comes through Government budget. It is managed in the same way as a Government department is managed. Such an undertaking is not an autonomous entity. Examples of departmental undertakings are All India Radio, Doordarshan, Department of Posts, etc.

Features of Departmental Undertaking:

The essential features or characteristics of a departmental undertaking are as follows:

1. Part of Government – A departmental undertaking is a part of the government and is organised as a unit of the concerned ministry. For example, Diesel Locomotive Works (DLW) located at Varanasi (Uttar Pradesh) is a unit of Ministry of Railways. The Ministry of Railways is accountable for the working of DLW.

2. Government Financing – Since the Government fully owns a departmental undertaking, the concerned Government is responsible for financing it from the budget of the concerned ministry. Its surpluses are also part of the concerned budget.

3. Executive Decision – A departmental undertaking is established by an executive decision as it is just like opening a new department under the Government.

4. Accounting and Audit – Accounting and audit functions of a departmental undertaking are undertaken on the same pattern which is relevant to other Government departments.

5. Civil Service Code – A departmental undertaking is managed by civil servants whose methods of recruitment and service conditions are the same as for other civil servants.

6. Sovereign Immunity – Being a part of the Government, a departmental undertaking enjoys sovereign immunity. Therefore, it cannot be sued without the consent of the Government.

Merits of Departmental Undertaking:

Merits of a departmental undertaking are as follows:

1. Easy Formation:

Formation of a departmental undertaking is quite easy because it is set up by an administrative decision of the Government. There is no need for registration and completion of legal formalities.

2. Direct Government Control:

There is direct control of the Government on the working of a departmental undertaking. Therefore, it is in a better position to work according to the prescriptions set by the Government.

3. Public Accountability:

Public accountability in a departmental undertaking is high because it works like a Government department and the Government is accountable to the Parliament or State Legislature.

4. Proper Use of Financial Resources:

Financial resources of a departmental undertaking are allocated through budgeting process of the Government. Therefore, these resources are allocated based on actual needs, and budgetary control is exercised to ensure that the money is used for the same purpose for which it is allocated.

5. Secrecy of Information:

There is high secrecy of information related to the working of a departmental undertaking because it is not necessary to share the information with the public. This merit makes departmental undertakings suitable for activities having strategic importance too.

6. Aid to Government Revenues:

A departmental undertaking generates revenue for the Government because any surplus of the undertaking is treated as budget revenue.

7. Serving Public Interest:

A departmental undertaking serves public interest by undertaking those activities which are in the interest of the public, for example, post and telegraph, communication and other public utilities.

Limitations of Departmental Undertaking:

There are certain limitations or demerits of a departmental undertaking which are as follows:

1. Inflexibility:

A departmental undertaking has no autonomy. It has to function according to the rules and regulations of the Government. To comply with these rules and regulations strictly is ensured by the Government. As a result, personnel of the undertaking have very little scope for initiative and making changes according to the changing conditions of the environment.

2. Red-Tapism:

Red-tapism means the practice of excessive paperwork and tedious procedures before official action may be considered or completed. This is a fundamental feature of the bureaucracy which the Governments adopt. As a result, there is unnecessary delay in work performance. Thus, many business opportunities may be lost.

3. Lack of Motivation:

Personnel of a departmental undertaking have no motivation to put their maximum efforts in performing their jobs because of total control from above. Promotions are generally based on seniority and not on the basis of performance.

4. Financial Dependence:

A departmental undertaking is highly dependent on Government financing because it is the only source of financing. Most of the Governments have deficit financing leaving much lower scope for allocating funds to departmental undertakings. This results in unsatisfactory services provided by these undertakings.

5. Inefficient Management:

For managing a business undertaking, professionally competent managers are required while departmental undertakings are managed by civil servants. This results in inefficient management.

6. Insensitive to the Needs of People:

Personnel of a departmental undertaking tend to develop the feeling that they are responsible for adhering to rules and regulations. Needs of the people for whom the undertaking has been established become secondary. Thus, in many cases, departmental undertakings fail to achieve their objectives effectively.

Suitability of Departmental Undertaking:

A departmental undertaking is suitable in the following situations:

1. Where utmost secrecy is required, for example, defence production, atomic energy, etc.

2. Where absolute Government control is required because of the strategic nature of activities, for example, communication, broadcasting, public utilities, etc.

3. Where economic control is necessary, for example, state trading in essential commodities, rationing, etc.

4. Where a departmental undertaking is to be used as a source of revenue, for example, Indian Railways.

Type # 2. Statutory Corporation:

A statutory corporation (also known as public corporation) is defined as follows:

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

The Act (also known as statute) defines the objectives, powers and functions of the corporation. Examples of statutory corporations are Reserve Bank of India, Life Insurance Corporation of India, Food Corporation of India, etc. A statutory corporation seeks to combine the flexibility of a private enterprise with State ownership and public accountability. In the words of the late President Roosevelt of the US, “A public corporation is an organisation which is clothed with the powers of the Government, but is possessed of flexibility and initiative of a private enterprise.”

Features of Statutory Corporation:

Features of a statutory corporation are as follows:

1. Corporate Body:

A statutory corporation is a corporate body established through an Act of Parliament or State Legislature. The Act defines the objectives, powers and functions of the corporation. For example, Life Insurance Corporation of India was established under Life Insurance Corporation Act, 1956.

2. Legal Entity:

A statutory corporation is a separate legal entity with perpetual succession and a common seal. It can sue or be sued and can enter into contracts under its own name.

3. Government Ownership:

A statutory corporation is fully owned by the Central Government or State Government.

4. Financial Independence:

A statutory corporation has financial independence. The initial capital is provided by the concerned Government. Afterwards, the corporation may raise funds through loans from the Government and financial institutions. It is free to utilise its profit in the way provided by the relevant Act.

5. Independent Management:

A statutory corporation has an independent management and is managed by a Board of Directors. Though key personnel at the top management level are appointed by the concerned Government, the internal management process is designed by the corporation itself.

6. Independent Accounting System:

A statutory corporation has an independent accounting system and is not subject to budgetary, accounting and audit applicable to Government departments. It is generally exempted from the rigid rules applicable to the expenditure of public funds.

7. Service Motive:

A statutory corporation has a service motive and not a profit motive, though in the process of doing business it may earn profit.

8. Public Accountability:

A statutory corporation has public accountability because it is set up with public money. Its accounts are audited by a statutory auditor, for example, Comptroller and Auditor General of India in the case of Central Government’s statutory corporations.

Merits of Statutory Corporation:

Merits of a statutory corporation are as follows:

1. Operational Autonomy:

A statutory corporation enjoys operational autonomy as there is no interference in its working from the Government. This leads to adoption of those strategies and policies which are relevant to the given business environment. For example, Reserve Bank of India is free to decide bank rate, cash reserve ratio, etc., according to the needs of business environment.

2. Special Privileges:

A statutory corporation has some special privileges in terms of its working. These are provided in the Act according to the specific needs of the corporation. These privileges lead to design the working of the corporation in a way which is most suitable to it.

3. Quick Decision-Making:

There is quick decision-making in a statutory corporation because it is free from red-tapism. As a result, decisions are made in accordance with the needs of the business environment.

4. Efficient Management:

A statutory corporation has efficient management because it is free to choose all its managerial personnel except those who are appointed by the Government. For selecting managerial and other personnel, statutory corporations generally prescribe professional qualifications.

5. Motivation for Employees:

A statutory corporation is free to decide its service conditions. Therefore, these conditions are designed in such a way that they become competitive. As a result, service conditions of a statutory corporation tend to be better than those of Government departments and motivate the employees.

6. Economies of Scale:

Usually, a statutory corporation undertakes business on a large scale. This results in economies of scale because of spread of overheads on a large volume which leads to lower per unit cost. For example, Life Insurance Corporation of India has undertaken life insurance activity on a large scale which has resulted in an operational economy.

7. Indirect Statutory Control:

There is statutory control on a statutory corporation though it is not direct because of autonomy of the corporation. The control is exercised in two forms- audit of accounts of the corporation by an auditor appointed by the Government and discussion of its performance in the Parliament or State Legislature.

Limitations of Statutory Corporation:

Limitations or demerits of a statutory corporation are as follows:

1. Difficult Formation:

Formation of a statutory corporation is quite difficult and involves a lengthy process. It is established under a specific Act. Passing of this Act by the Parliament or State Legislature is a lengthy process.

2. Nominated Board:

Directors of a statutory corporation are nominated by the concerned Government. Nominating these Directors sometimes becomes a political process. As a result, incompetent persons sometimes find a place on the Board of Directors.

3. Rigid Structure:

Usually, a statutory corporation has to work under a rigid structure because its objectives, powers and functions are prescribed by the Act. Whenever any change is required in any of these, an amendment to the concerned Act is required which is very time-consuming.

4. Abuse of Monopoly:

In many cases, statutory corporations enjoy monopoly, for example, Food Corporation of India. This monopoly may be abused and may result in poor service to the public.

5. Clash of Different Interest Groups:

Very often, the Board of Directors of a statutory corporation is constituted to represent various interest groups. This may affect the working of the corporation adversely.

Suitability of Statutory Corporation:

A statutory corporation is suitable in the following situations:

1. When specialised activities are required to be performed with considerable flexibility and autonomy.

2. When the activities are of national importance with a centralised control.

3. When some kind of monopoly is required in performing the activities.

Type # 3. Government Company:

A Government company is a company in which more than 50 per cent of the paid-up capital is held by the Central Government, the State Government or jointly by the Central and the State Governments.

A Government company is formed and registered under the Companies Act, 2013 which contains provisions relating to Government companies. Examples of Government companies are- Indian Oil Corporation Limited, Bharat Sanchar Nigam Limited, Gas Authority of India Limited, etc. A Government company may be either a public limited company in which shares may be held by the Government and investing public or a private limited company in which public participation in share capital is not allowed.

After economic liberalisation, the number of Government companies with public participation in shareholding has increased substantially. Further, a Government company may also be formed as a joint venture in which the Government holds majority of shares while the other part of share capital is subscribed by one or more than one joint venture partners.

Examples of pattern of shareholding of two prominent Central Government companies are given here, Indian Oil Corporation Limited—Central Government 58.28 per cent and public shareholding 41.72 per cent; Bharat Heavy Electricals Limited—Central Government 63.06 per cent and public shareholding 36.94 per cent; both as on December 31, 2016.

Features of Government Company:

Features of a government company are:

1. Separate Legal Entity – A Government company is incorporated under the Companies Act, 2013 and has a separate legal entity independent of the Government. It can hold assets in its own name and can sue others and can be sued by others in a court of law.

2. Ownership – A company is owned by a Government either fully or partially. When it is partially held by the Government, there is more than 50 per cent shareholding of the Government.

3. Management – A Government company is managed by a Board of Directors nominated by the Government and other shareholders. For designing its management process, the company is free to do so.

4. Own Staff – The company has its own staff. Staff members are appointed by the company and their service conditions are decided by the company.

5. Financial Autonomy – The company enjoys financial autonomy. The initial share capital is provided by the Government. Finances through loans and other means of financing are arranged by the company.

6. Public Accountability – A Government company has public accountability. Its financial performance is subject to discussion in the Parliament or State Legislature as the case may be.

Merits of Government Company:

Merits of a government company are as follows:

1. Easy Formation – Formation of a Government company is much easier as compared to a public corporation because the company is formed under the Companies Act. This process is easier.

2. Operational Autonomy – A Government Company is relatively free from Government control in its management process. Therefore, it may adopt a professional approach in managing its affairs.

3. Flexibility of Operations – There is considerable flexibility in the operations of a Government company. Therefore, it may change its strategies and policies as required by the changing business environment.

4. Better Management – A Government company may have better management because it is free to appoint managerial personnel. These personnel may be experts in their respective fields.

5. Prompt Decision-making – In a Government company, there is ample scope for prompt decision-making because the usual process of decision-making in Government, which is quite slow because of bureaucratic structure, is not followed here.

6. Collaboration – It is the only form of public sector enterprises which may form a collaboration with another party, either foreign or Indian. As a result, a suitable collaboration may be formed for technology and finances.

7. Public Accountability – Performance of a Government company is subject to review by the Parliament or State Legislature. This ensures public accountability of the company.

8. Statutory Discipline – The management of a Government company is governed by statutory provisions of the Companies Act. Thus, there is automatic discipline in the working of the company.

9. Protection of Public Interest – A Government company often works in a competitive environment. Therefore, it may be more sensitive to the changing needs, tastes, etc., of the public.

Limitations of Government Company:

Limitations or demerits of a Government company are as follows:

1. Lack of Accountability:

A Government company is exempt from various provisions of the Companies Act and, therefore, lacks accountability. Further, the accounts of Government companies are not subject to audit by Comptroller and Auditor General of India. On this pattern, a former Comptroller and Auditor General of India has commented, “A Government Company is a fraud on the Companies Act and on the Constitution.”

2. Autonomy in Name:

On paper, a Government company has autonomy. However, in actual practice, this autonomy does not exist because the management pattern of a Government company may be influenced by the Government through the Board of Directors as it is a majority shareholder.

3. Ineffective Board of Directors:

In many cases, the Directors of a Government company are selected not on the basis of competence but on other criteria. As a result, many politicians and civil servants find place in the Board of Directors. These persons may not be relevant to the business operations.

4. Fear of Exposure:

The annual reports of the Government companies are placed before the Parliament or State Legislature. This leads to wide publicity of the working of these companies. As a result, the opposition and the media may blow the negative aspects of the working of a company out of proportion. Therefore, the top management of Government companies becomes overcautious and avoids taking risky decisions even though they may be quite relevant to the changing business environment.

Suitability of Government Company:

Suitability of a Government company is in the following situations:

1. When the Government wants to launch a business in collaboration with a private sector partner, either foreign or Indian. Hindustan Machine Tools, Hindustan Steel and Hindustan Cables were set on this pattern.

2. Where the Government wants to start a new business with high operational flexibility and make it self-supporting.

3. Where the Government wishes to undertake a business having wider importance, for example, State Trading Corporation of India Limited.

4. Where the Government acquires a private sector company because of its mismanagement to protect the interests of the minority shareholders.

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