BUSINESS STUDIES PRIVATE, PUBLIC AND GLOBAL ENTERPRISES

Private, Public and Global Enterprises

Topics Covered
Departmental Undertakings
Statutory Corporation
Government Company
Changing Role of the Public Sector
Global Enterprises
Joint Venture

Business Organisation

An entity or enterprise involved in the production, purchase, sale and supply of goods with the motive
of earning profit is called a business organisation. There are of two forms of organisation.

 Public sector enterprises are businesses which are owned, controlled and managed by the
government. These are either partly or wholly owned by the state or central government. Their
objective is social welfare. The various types of public enterprises are
 Departmental undertakings
 Statuary corporations
 Government companies

 Private sector enterprises are owned, controlled and managed by an individual or a group of
individuals with the sole objective of earning profit. The various types of private enterprises are
 Sole proprietorship
 Partnership
 Joint Hindu Family
 Cooperative society
 Joint stock company
 Multinational corporations

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Departmental Undertaking

Departmental undertakings are the oldest public sector enterprises. They are the departments of the
ministry. These enterprises do not have a separate legal identity, and the government functions through
these departments.

Railways Post and Telegraph Defence

Features of Departmental Undertakings

1) Departmental undertakings receive funding from the government treasury and revenues earned
are deposited in the government treasury.
2) Employees of these enterprises are government employees who report to Indian Administrative
Service (IAS) officers and civil servants.
3) They are under direct control of the ministry.
4) Accounting and auditing are done in these enterprises.
5) The management of the enterprises are under the ministry; thus, they are accountable to the
ministry.
6) They are not independent institutions; they are a part of the government only.

Merits of Departmental Undertakings

1) Operations of these enterprises are easily and effectively controlled by the Parliament.
2) These enterprises are under direct control of the Parliament leading to discussion of performance in
the Parliament. This ensures public accountability.
3) Revenues from these enterprises increase government income as revenues earned by
departmental undertakings are deposited in the government treasury.
4) As far as national security is concerned, departmental undertakings are best as sensitive information
can be kept confidential.
5) They can be easily formed as registration is not compulsory.

Demerits of Departmental Undertakings

1) There is lack of flexibility in these enterprises as ministers and government officials interfere in their day-
to-day operations.
2) Decision making in these enterprises is slow as heads are not allowed to take decisions without
government approval.
3) There is political interference in these enterprises.
4) They do not provide any incentive or motivation to employees as profits are deposited in the
government treasury. Also, employees are promoted based on seniority and not on performance.

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5) Red tapism or bureaucracy is present in departmental undertakings. There is a lot of paper work and
formalities which lead to delay in decisions.
6) They lack financial autonomy due to payment of revenue into the treasury. Hence, they cannot plan
any long-term investment projects.

Statutory Corporations

A statutory corporation is formed by a Special Act of Parliament. Powers, functions, rules and regulations
for employees of a statutory corporation are defined by this Act. A statutory corporation is a separate legal
identity.

Reserve Bank of India Life Insurance Corporation Food Corporation of India

Features of Statutory Corporations

1) Statutory corporations are formed by a Special Act of Parliament which defines their objectives,
powers and limitations.
2) They are under the control of the central or state government. Thus, the government enjoys the
profits and bears the losses of a statutory corporation.
3) It is a separate legal entity. Thus, it can sue or can be sued, enter into contract and can purchase
property in its own name.
4) It manages finance on its own by borrowing from the government or from the public. It has the
authority to use its own revenues in case of low sale of goods and services.
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5) It is not subject to accounting and audit controls.
6) Employees of statutory corporations are not government employees. They follow the terms of
service provided under the Act.
7) The objective of these enterprises is to serve the public.
8) The Board of Directors manages these organisations who are nominated by the government.
9) Political and parliamentary interference is not present in these enterprises.

Merits of Statutory Corporations

1) They are able to set their own policies without government control and intervention which gives them
freedom and operational flexibility.
2) These organisations face minimal or no interference from the government because they do not
receive funding from the central budget.
3) They help in economic development as they are the combination of public (i.e. having power of
government) and private enterprises (i.e. have the initiative of private enterprises).
4) Decision making is quick because red tapism is not present in these enterprises.
5) Employees of these enterprises are efficient as they are provided with better salaries and a good
working environment.

Demerits of Statutory Corporations

1) In reality, these organisations do not enjoy much flexibility as there are many rules and regulations
which are to be followed.
2) The government interferes in the decisions where huge funds are involved.
3) Corruption is present in situations where officials have to deal with the public.
4) There is lack of initiative in these organisations as competition is not present, and employees do not
put their efforts in increasing the profit.

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Government Company

According to the Indian Companies Act, 1956, a government company is 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 the central government and partly by one or more state governments. However, if the shares of
the government company fall below 51 percent, then the company cannot be termed a government
company according to the regulation of the Act.

Bharat Heavy Electricals Ltd. (BHEL) Steel Authority of India Ltd. (SAIL)

State Trading Corporation (STC) Maruti Udyog Ltd.

Features of a Government Company

1) It is formed by the Indian Companies Act, 1956.

2) It can sue and can be sued by others.
3) It has a separate legal entity. That is, it can enter into contracts and can also buy and sell property in
its own name.
4) The provisions of the Act regulate the management of the company.
5) The Memorandum of Association and Articles of Association of the company contain the rules
and regulations of the company. Employees are appointed in the company according to the rules
and regulations mentioned in these documents.
6) The funds of a government company are obtained from government and private shareholders. It
can also raise capital by issuing securities in the capital market.
7) It is free from accounting rules and procedures.

Merits of a Government Company

1) A government company needs no bill to be passed in the Parliament for its formation. It can be
formed through a simple procedure under the Indian Companies Act, 1956.
2) It has its own identity which is separate from that of the government. It has properties in its name
and has the right to enter into contracts.
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3) A government company has minimum interference from the government. It has maximum
autonomy in its actions and decision-making processes, while the other companies are controlled in
some manner or the other by the government.
4) Government companies are efficient in managing their business and hence are more accountable
as compared to other public sector enterprises.
5) They provide healthy competition to private sector enterprises by providing goods and services at
reasonable prices and help in restricting unhealthy business practices.

Demerits of a Government Company

1) The government company loses its autonomy where the government is the only shareholder. In
such cases, the government imposes its own rules and regulations.
2) The government appoints the Board of Directors of the company; thus, directors focus on pleasing
the government rather than focusing on increasing the efficiency of the company.
3) There is a lot of political interference in the company.

Comparison among different forms of public sector enterprises

Basis Departmental Undertaking Statutory Corporation Government Company

Formation By the ministry By a Special Act of By registration under

Parliament Companies Act, 1956

Legal status No separate legal status Separate legal identity Separate legal identity

Finance Through budgetary Get funds from Separate financing, can

allocations, can’t borrow government, but can borrow, private
borrow participation possible

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Control Government officials from Board of Directors, Board of Directors

concerned ministry parliamentary control may include private
individuals

Autonomy No autonomy Administrative Some freedom

autonomy from government
interference

Ownership Wholly owned by government Wholly owned by At least 50%

government shares owned by
government

Public Highest as directly controlled by Higher as accountable High as

accountability ministry to parliament accountable to
ministry concerned

Changing Role of the Public Sector

Role of public sector industries before 1991:

1) Infrastructure development: After Independence, India lacked various basic infrastructure facilities
such as banking, communication, transport and energy supply. For development, establishment of all
these facilities was a necessity. However, the private sector did not show much interest to invest in
heavy industries which was the need of that time. Thus, it was assigned to the public sector to
mobilise huge amount of investment and take responsibility for infrastructure development.
2) Regional balance: Before Independence, there were few areas (port towns) where industrialisation
led to development. However, many areas were underdeveloped. Thus, the government took steps to
develop all the regions and states in a well balanced way which would remove regional disparities to a
great extent. The government came up with Five Year Plans which helped them to pay attention to
those places which required development.
3) Economies of scale: The term economies of scale means benefits derived from some projects are
greater when operated on a large scale. After Independence, the private sector was not capable of
handling large-scale industries which required huge capital. Also, these industries could not be
handled in a small scale way as it would have incurred losses. Thus, the public sector had to handle
and operate industries such as electric power, petroleum and natural gas.
4) Check on the concentration of economic power: The public sector set up large industries with
heavy investment. They passed down the benefits generated from these industries to a large number
of employees and workers. This prevented economic power going directly into the hands of the private
sector.
5) Import substitution: After Independence, the government came up with Five Year Plans with the
objective of being self-sufficient in all spheres. It wanted to restrict imports while increasing exports.
Therefore, public sector units were established which manufactured heavy machinery and industrial
tools domestically. Industries such as Metals and Minerals Trading Corporation of India (MMTC) and
the State Trading Corporation (STC) were established to increase exports.

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Government policy towards the public sector since 1991

The government adopted New Industrial Policy, 1991. Major elements of this policy:
1) Restructure and revive potentially viable public sector units (PSUs)
2) Shutting down PSUs which cannot be revived
3) Bring down the government equity in all non-strategic PSUs to 26% lower if necessary
4) Protecting interests of workers fully

Steps taken to achieve the above-mentioned elements:

a. Reduction in the number of reserved public sector industries: In the Industrial Policy of 1956, the
government stated that there are 17 industries which are reserved only for the public sector, i.e. only
they are allowed to do business in these areas. In the Industrial Policy of 1991, an amendment
reduced the restriction to 8 industries, which was further reduced to 3 in the 2001 amendment. These
three industries are
i. Atomic Energy
ii. Arms
iii. Rail Transport
This was done with the intention to bring about improvement in the public sector. The government
realised that although the public sector was vital in bringing about economic development in the
nation, the private sector was also competent. Thus, competition between the public sector and the
private sector would force the public sector to perform better.

b. Disinvestment: Disinvestment is selling of equity shares of public sector units to the private or public
sector. The government initiated disinvestment to improve the managerial efficiency of loss-making
public sector units. Objectives of this move:
i. Utilising large amounts of public funds which were released from the units for various social
priority projects such as education, health etc.
ii. Reducing public debt and burden of interest
iii. Discouraging government’s monopoly
iv. Bringing down government control
v. Transferring commercial risk from the public sector to the private sector

c. Sick PSUs and private sector to have same policies: Board of Industrial and Financial
Reconstruction (BIFR) was given the responsibility of deciding the fate of sick (loss-making) public
sector units, i.e. to decide what to do with them—whether to revive or close them. Many units could
not be revived; hence, they were shut down. Others were rehabilitated and revived. The government
faced opposition and resentment from the workers of shut-down units. The government then set up a
National Renewal Fund to rehabilitate and refund the workers of shut-down units by compensating
them or offering them voluntary retirement plans.

d. Memorandum of Understanding (MoU): MoUs were signed between the concerned ministries of the
government and the management. These MoUs gave the public sector greater freedom. They had to
achieve targets for which they were given operational freedom, but they were also held accountable
for the results. This was done with the aim to improve performance.

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Global Enterprises or Multinational Companies

Global enterprises also known as multinational companies operate on a global scale wherein their
industrial and marketing operations take place through a network of branches in various countries. These
companies capture the biggest share in the market as compared to others.

Features
1) Huge funds available: Business operations spread out over the world generate high credibility for
global enterprises. This brings them in a position where they use their goodwill to borrow funds from
international organisations. Also, they are able to generate huge capital/funds for themselves from
different sources such as equity shares, bonds and debentures. This helps them to sustain any
financial crisis.
2) Risk diversification: These companies operate in different parts of the world. They operate through a
network of branches and subsidiaries in host countries. Thus, they are able to compensate the losses
faced in a country with the profits gained in other countries.
3) Advanced technology: Global enterprises invest huge amounts in research and development of
technology. This helps them to conform to international standards as they possess superior
techniques and methods of production.
4) Marketing strategies: These enterprises use aggressive marketing strategies to increase their sales.
They have reliable and up-to-date market information which makes their strategies more effective.
Also, their advertising and sales promotions are effectual on consumers.
5) Product innovation: These enterprises have research and development departments which
continuously work towards innovating new products and making developments to existing products.

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6) Centralised control: MNCs have their headquarters located in their home country from where they
exercise control on all their subsidiaries and branches spread all over the world. The control of the
headquarters is limited to framing of policies while not interfering in day-to-day operations.
7) International market: These enterprises are able to access the international market because of
goodwill, huge resources and advanced technology.

Joint Ventures

A joint venture is a business when two or more independent firms with a common goal and mutual benefit
come together. They pool their capital, technology and expertise to achieve their set targets.

Benefits
1) Increase in resources: In this type of business, as there are two or more firms, resources and
capacity increase. This enables them to grow quickly and efficiently.
2) Market expansion: Entering a venture with firms of another region helps in the expansion of the
market base. Also, advantage can be taken of the well-established distribution system of local firms.
3) Innovation: As two or more firms come together, it gives them access to new ideas and technology
which help in the innovation of new products. These new products enable businesses to sustain in
today's competitive market.
4) Low cost of production: When international organisations come together with firms in the host
country, they are able to benefit from the low cost of raw materials and labour of the country. Thus,
they are able to produce products of better quality at cheaper cost.
5) Goodwill: When two businesses come together, they tend to profit from the goodwill already
established by the other firm. This may give the joint venture an edge when entering a new market.
6) Advanced technology: In this type of business, firms join hands so that they can benefit from
advanced technology. This leads to production of better quality products, thereby reducing cost of
production.

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Public–Private Partnership (PPP)

Public–private partnership is an agreement between a public sector enterprise and a private party wherein
the skills and assets of both are shared so as to deliver a service to the public of the country.

Features
1) Contract between public sector and private party: PPP is a contractual agreement between a
public sector undertaking and a private party. The private party provides a public service and in turn
bears risks related to finance, operations and technical aspects.
2) Cost of using service: The cost of using this service is usually paid by service users and not by
taxpayers. In some scenarios, the government pays for the service wholly or partially.
3) Provision of capital subsidy: Capital subsidy is provided by the government in the form of a one-
time grant to the private party. This is purposely done by the government to entice the private sector to
take up projects for public good.
4) Suitability: PPP is suitable for big projects, high priority projects (especially in the infrastructure
sector) and for public welfare projects (e.g. Delhi Metro Rail Corporation).
5) Revenue sharing: Government and private enterprises share the revenue in the agreed ratio.

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