Posted in Polity

Public Enterprises

Read it later

Public Enterprises

In News 

  • Government is planning to change the definition of Public Enterprises.
  • Right now the government need to have more than 50% stake in the enterprises.
  • But the new proposal is 40% for strategic enterprises and 25% for non-strategic.
  • This is only a proposal, but a win-win situation for the government . 
  • The government can raise money by disinvestment while keeping its control in its hands.

 

[wordads]

Public enterprises are those which are owned wholly or partially by the Central Government or a state government or jointly by Central and state governments, and which are engaged in the industrial, agricultural, commercial, or financial activities having self-management.

Public enterprises in India are organized into four major patterns (principal forms)–Departmental Undertakings, Public Corporations, Government Companies, and Holding Companies. Besides, there are various other forms viz. Commissions, Control Boards, Cooperative Societies, Public Trusts, and Commodity Boards.

Departmental Undertaking

It is the traditional and oldest form of public enterprise. The Railways and the Posts and Telegraphs are the two major departmental undertakings. Besides, All-India Radio, Doordarshan, Defence Production Units, Atomic Power Projects, Government Printing Press are also organized as departmental undertakings. This pattern is usually used when the principal objective of an enterprise is to provide revenue.

The characteristics of a departmental undertaking form of organization are:

(i) Its aggregate investment is wholly made by the Government. A private party is debarred from investing in it.
(ii) It is financed by annual appropriations from the treasury. Also, all its revenues or a major part of it are paid into the treasury.
(iii) It is subject to budget, accounting, and audit controls, which are applicable to other
government departments.
(iv) Its permanent staff consists of civil servants. Also, their methods of recruitment and service conditions are ordinarily the same as other civil servants (i.e. government staff).
(v) It is generally organized as a major sub-division of one of the departments of the Government and is subject to direct control of the head of the department.
(vi) It possesses sovereign immunity of the state and cannot be sued without the consent of the government.
(vii) It is accountable to the Parliament through the concerned minister.
(viii) It is created by an executive resolution, prior approval of the Parliament is not required to create it.

The advantages of a departmental undertaking form of organization are:

(i) It provides for a maximum degree of control by a minister who is politically responsible to the Parliament.
(ii) It facilitates a clear relationship with other parts of the governmental structure.
(iii) It enables the Government to have better control over its funds. Thus it prevents the public money from being misappropriated and misused.
(iv) It is a well-known form of organization, having fixed rules and standard patterns.
(v) It is most suitable for those enterprises which are set up for special reasons like defense, strategic importance, national security, economic control, financial control, safeguarding public interest, and so on.

The disadvantages of a departmental undertaking form of organization are:

(i) It directly negates the requirements of autonomy due to excessive control.
(ii) It militates against the initiative and flexibility of the enterprise.
(iii) It leads to rigid financial and budgetary control.
(iv) It has the rigidity of rules and regulations and red tape leading to delays.
(v) It does not facilitate sufficient delegation of authority due to over-centralization.

Therefore, this form of organization is not used for economic and financial enterprises in recent times because of its inherent characteristics of rigidity and delays.

Public Corporation

A public corporation as a form of public enterprise developed in the second half of the 20th century. W.A. Robson said, “Public Corporation is the most important invention of the twentieth century in the sphere of government institutions.”

Some important public corporations of Central Government are:

(i) Reserve Bank of India (1935)
(ii) Damodar Valley Corporation (1948)
(iii) Industrial Finance Corporation of India (1948)
(iv) Indian Airlines Corporation (1953)
(v) Air India International (1953)
(vi) State Bank of India (1955)
(vii) Life Insurance Corporation of India (1956)
(viii) Central Warehousing Corporation (1957)
(ix) Oil and Natural Gas Commission (1959)
(x) Food Corporation of India (1964)

Some important public corporations of state governments are:

(i) State Road Transport Corporations
(ii) State Financial Corporations
(iii) State Electricity Boards
(iv) State Land Mortgage Banks

The characteristics of a public corporation form of organisation are:

(i) It is wholly owned by the state, that is, its entire capital is provided by the government.
(ii) It is created by (or pursuant to) a special law of legislature (either Central or state). This special statute defines its objectives, powers, duties, and privileges and also prescribes the form of management and its relationship to the government departments.
(iii) It (as a corporate body) has a separate entity for legal purposes and can sue and be sued, enter into contracts and acquire property in its name.
(iv) It is usually independently financed except for appropriations to provide capital or to cover losses. It obtains its funds from borrowing (either from the treasury or the public) and from revenues derived from the sale of its goods and services. It is authorized to use and reuse its revenues.
(v) It is generally exempted from most regulatory and prohibitory statutes applicable to the expenditure of public funds.
(vi) It is ordinarily not subject to budget, accounting and audit laws, and procedures which are applicable to non-corporate agencies (government departments).
(vii) Its employees (in the majority of cases) are not civil servants and are recruited and remunerated under terms and conditions which are determined by the corporation itself.
(viii) It enjoys functional autonomy and is not subject to direct control of the head of the department (the minister) in its normal operations. Except for the formal policy directions issued to it by a minister, it is guided (in its functioning) by the statute which created it. It is managed by a Board of Directors appointed by the Government. One of the directors is appointed as the Chairman of the Board.

The advantages of a public corporation form of organization are:

(i) It facilitates autonomy in its day-to-day administration
(ii) It provides freedom from political influences and partisan considerations.
(iii) It provides for a healthy synthesis of commercial efficiency of a private enterprise with public accountability of a government department.
(iv) It provides freedom from unsuitable rules, regulations, and controls of the government.
(v) It facilitates a high degree of financial flexibility and personal autonomy.
(vi) It is a valuable instrument for social control of economic life.

The disadvantages of a public corporation form of organization are:
(i) It is inherently rigid and ill-suited to meet the requirements of changing times. This means that a change in its structure or procedure or other aspects can be effected only by a statutory amendment (by the legislature).
(ii) It gives rise to the problems of reconciling administrative autonomy with public
accountability.
(iii) It does not facilitate clear distinction between the “matters of policy” and “matters of day-to-day administration.”
(iv) It places significant political power in the hands of a small unrepresentative, and in extreme cases, a self-perpetuating group which controls and manages it.
(v) It, in practice, does not facilitate flexibility and autonomy in both financial and administrative aspects. The ministries look upon the corporations as their wings or branches and issue orders and directions in a similar way.

Government Company

A government company is the most popular and extensively used form of organization for the management of public enterprises (both industrial as well as commercial) in India. It is registered under the Indian Companies Act of 1956. This Act defines a government company as one in which not less than 51% of the share capital is held either by the Central Government or the state government(s) or partly by the Central Government and partly by the state government(s). A government company can be wholly owned by the Government (i.e. the total share capital is invested by the Government) or can be partially owned by the Government (i.e. 51 percent of the share capital is invested by the Government and the remaining capital furnished by private enterprises). Thus, the latter type of government company is also known as a mixed-ownership company as it comprises a joint enterprise in which the share capital is shared between the Government and the private interests, which can be either national or foreign. By acquiring 51 percent or above of the share capital, the Government becomes the de facto (real) controller of the affairs of the mixed ownership company. This is why it is called a government company.

The Indian Companies Act of 1956 recognizes two forms of companies—private limited company and public limited company. The differences between these two forms are mentioned below in Table.

Private Limited vs Public Limited Companies

Private Limited Company Public Limited Company
1. Its formation requires a minimum of two
shareholders.
1. Its formation requires a minimum of seven
shareholders.
2. Its shareholder’s right to transfer his shares is restricted. 2. Its shareholder’s right to transfer his shares
is not restricted.
3. Its maximum number of shareholders cannot be more than fifty. 3. Its maximum number of shareholders is not restricted.

The above points of distinction make it very clear that a private limited company is more suitable than the public limited company for organizing a public enterprise. Hence, the governments in India have preferred a private limited company.

Some important Government companies are:

(i) Bharat Heavy Electricals (Private) Limited
(ii) Hindustan Antibiotics Limited
(iii) Bharat Electronics (Private) Limited
(iv) Rashtriya Fertilizers and Chemicals (Private) Limited
(v) Hindustan Machine Tools (Private) Limited
(vi) Hindustan Cable (Private) Limited
(vii) Hindustan Housing Factory (Private) Limited
(viii) Fertilizer Corporation of India Limited
(ix) Hindustan Insecticides (Private) Limited
(x) Shipping Corporation of India Limited
(xi) Hindustan Shipyard Limited
(xii) Maruti Udyog Limited
(xiii) Indian Telephone Industries Limited
(xiv) National Coal Development Corporation
(xv) Heavy Engineering Corporation
(xvi) India Tourism Development Corporation
(xvii) Indian Oil Corporation

It should be noted here that some of the Government companies use the word ‘corporation,’ but they are actually organized as Government companies. For example, Fertilizer Corporation of India, Indian Oil Corporation.

The characteristics of a Government company form of organization are:

(i) It has most of the features of a private limited company.
(ii) It is either wholly owned by the government or 51 percent (or above) of the capital stock is owned by the Government.
(iii) It is created by an executive resolution under the general law, that is, the Indian Companies Act of 1956. The executive need not seek the approval of the legislature.
(iv) It is a body corporate and has a separate entity for legal purposes and can sue and be sued, enter into contracts and acquire property in its name.

(v) Its Articles of Association (which lays down the rules of internal management) are drawn up and revisable by the Government.
(vi) Its funds are obtained from the Government and, in some cases, from private shareholders, and through revenues derived from the sale of its goods and services.
(vii) It is ordinarily not subject to budget, accounting and audit laws, and procedures which are applicable to Government departments.
(viii) Its employees (excluding the deputationists) are not civil servants and are recruited and remunerated under terms and conditions which are determined by the company itself.
(ix) All the directors or a majority of them are appointed by the Government depending upon the extent to which private capital is participating in the enterprises.

The advantages of a government company form of organization or the reasons for its popularity in India are:

(i) It facilitates ease and convenience in forming an enterprise. This is so because it can be created by an executive decision without Parliamentary approval. This is the principal reason for its popularity.
(ii) It provides for sufficient government control.
(iii) It enables an association with private enterprise.
(iv) It facilitates autonomy in day-to-day administration.
(v) It provides for a high degree of financial flexibility and personal autonomy.
(vi) It provides for easy expansion and extension.

The disadvantages of a government company form of organization are:

(i) It evades constitutional responsibilities which a state-controlled enterprise has in a
democratic society towards the government and to the Parliament. This is the reason why it was described by a former Comptroller and Auditor General of India as “a fraud on the Company’s Act and on the Constitution of India.” Lanka Sundaram described it as “imperium in imperio” (a small kingdom within a kingdom).
(ii) The use of the company form and of the law regulating commercial companies usually becomes a mere fiction because all or most of the functions normally vested in the shareholders and in the management are reserved to the government by the statute setting up the company.
(iii) It, in practice, does not facilitate flexibility and autonomy in both financial and administrative aspects. The Estimates Committee of Lok Sabha said, “the companies are more or fewer extensions of departments … and are run almost on the same pattern, with minor changes here and there.”

The question of suitability of the forms of the public enterprise was examined by various committees and commissions. The following points can be noted in this regard.

(i) A.D. Gorwala in his Report on the Efficient Conduct of State Enterprises (1951) considered the government company form superior to public corporation form because of its flexibility.
(ii) The First Five-Year Plan document supported the adoption of Government Company form.
(iii) The Estimates Committee of Lok Sabha (1960) recommended in favor of public corporation form for organizing public enterprises.
(iv) The Krishna Menon Committee suggested the adoption of public corporation form.
(v) The Administrative Reforms Commission favored the adoption of public corporation form in general in organizing public enterprises.

Holding Company

A holding company form of the organisation involves the integration of all the companies which are operating in the same field or which have strong technical and commercial affinities with each other under common management. Thus, such companies called as subsidiaries are brought under the common management of a holding company. A holding company is one which has acquired a majority share in the ownership capital and which, by virtue of its share ownership, is able to control the management of subsidiary companies. Some examples of holding companies are:

(i) Steel Authority of India Limited (1973)
(ii) Coal Authority of India Limited
(iii) Ashoka Group of Hotels
(iv) State Trading Corporation of India
(v) General Insurance Corporation of India
(vi) Gas Authority of India Limited

A ‘sector corporation’ form of organization recommended in 1967 by the Administrative Reforms Commission is similar to the holding company form of organizations. In 1986, the Arjun Sengupta Committee recommended the establishment of holding companies or sector corporations in main areas of the economy.

Other Forms

In addition to the above mentioned four major forms, there are other forms of public enterprises. They are:

Control Board These are established for the management of multi-purpose river valley projects. They are created by an executive resolution of either the Central Government or a state government. There are various control boards in the country like Nagarjunsagar Control Board, Kosi Control Board, Bhakra–Beas Management Board and so on.

Public Trust These are established for managing service enterprises or for regulating those activities which affect the society in general. They are created by special acts of Parliament. The examples of such enterprises are Port Trusts, Unit Trust of India and so on.

Commission These are established to undertake development work in their fields. They are created by special acts of Parliament. The examples of such enterprises are Tariff Commission, Khadi and Village Industries Commission, Forward Markets Commission and so on.

Commodity Board These are established to promote industrial development. They are created by special acts of Parliament. The examples of such enterprises are Small-Scale Industries Board, Coffee Board, Rubber Board, and so on.

Cooperative Society These are established to undertake developmental and promotional activities. They are registered under the Societies Registration Act. The examples of such enterprises are Indian National Research Development Corporation, Trade Fair Authority of India, Indian Dairy Development Corporation.

Test your preparation of polity in this fun filled test 
How to Prepare Polity for UPSC?

Help us by contributing and making this site better by commenting below or mailing us at discussanswer@gmail.com . You can send us articles and suggestions .

Read it later

Add Value by comment