Business organisations are broadly classifieds into Private sector, Public sector and Joint sector. We are already discussed about forms of different private sector business enterprises in the previous chapter. In this chapter we are going to discuss about public sector business enterprises and its different forms.
Private Sector Enterprises:-
Private sector consists of business organisations owned and controlled by individuals and group of individuals. Different forms of private sector enterprises are sole proprietorship, partnership, JHF business, co-operative societies and Joint Stock Companies.
Public Enterprises or State Enterprises:-
Public enterprises can be defined as Business undertaking owned and managed by the government for the benefit of the public. Such enterprises are organised for the public welfare and not with a profit motive as in the case of private organisation.
Characteristics of Public Sector:-
- Government Control: – They are directly under the control of the government.
- Centralised Management: – Their management is vested in Board of Directors constituted by govt.
- Service Motive:- The primary motive of them is to serve the nation
- Public Accountability: – Public enterprises are accountable to the general public.
- Government financing
Rationale or Importance of Public enterprises:-
- It gain control over the economy
- It prevent concentration of wealth and economic power in the hand of few persons
- It reduces income disparities
- It checks the growth of monopolies.
- It considers the development of back ward areas.
- It develop more employment opportunities
- It accelerates the economic development of the economy
- It promote welfare of the economy
- It promote infrastructure development
- It remove regional imbalances
- It avoid wasteful competition
- It is the way of socialistic pattern of the society.
Forms of Public Sector Enterprises:-
Public sector enterprises are generally organised in any one of the following forms:-
- Departmental Undertakings
- Public Corporations or Statutory Corporations
- Government Companies
Departmental form of organization is the oldest and most common public enterprises. Under this form the enterprise is managed by the government officials as one of the government department. It is directly under the control of the ministry concerned. They have no separate legal existence separate from government.
For e.g. Indian Railways, Posts and Telegraphs, All India Radio, Doordarshan, KSEB, Kerala Water Authority, Kerala Housing Board etc….
Features of Departmental Undertakings:-
- It is run by the ministry of the government
- The minister in charge have the direct control on it
- The undertaking is financed by annual appropriation from the government budget.
- Its revenue is paid to treasury.
- It is subject to strict government audit
- The permanent staff of the enterprise are civil servants
- It cannot be sued without the prior consent of the government
- The entire investment is made by the government
Advantages of Departmental Undertakings:-
- It is under direct control of the government
- The misuse of fund is comparatively less
- It is managed by responsible government officers
- These are accountable to parliament or state assembly.
- All the incomes are paid into treasury
- It maintain secrecy
Disadvantages of Departmental Undertakings:-
- It cannot function in a business line
- It cannot take long term financial decisions
- The smooth functioning is usually disturbed by ministerial interference.
- Red Tapism and delay are common in departmental undertaking
- Chance of shortage of competent managerial personnel in government service
- It has excessive parliamentary control.
Statutory Corporation or Public Corporation:-
Statutory Corporation is that public sector organisation which is created as autonomous institution by passing a Special Act in the Parliament or State Legislature. As a body corporate, it is a separate entity for legal purpose. Corporations conducting business in their own name have been generally given greater freedom in its operation.
For e.g. RBI, SBI, LIC, ONGC, UTI, Air India, etc……
Features of Statutory Corporation:-
- It is wholly owned by government
- It is created by a Special Act of Parliament
- It is a body corporate having separate legal existence.
- Its entire capital is held in the name of the government
- It follow independent financial policy
- The employees of public corporation are not civil servants
- It is free from political, parliamental and departmental interference
- It is fully accountable to Parliament
- It is ordinarily not subject to the budget.
Advantages of Statutory Corporation:-
- It enjoys the benefit of both the departmental undertakings and privately owned companies.
- It is managed independently by the board of directors
- It can take quick and prompt action
- Its primary object is to render service than making profit
- It can employ experts and professional
- It protect public interest
Disadvantages of Statutory Corporation:-
- Autonomy is not a reality. There is always interference by the government.
- Board of Directors is appointed on political consideration, it reduces the efficiency of management
- Special Act is required to be amended in order to bring any changes
- Generally they are unable to face competition
Public enterprises can be formed as Joint Stock Companies registered under the Companies Act. Like private individuals Government can register companies under prevailing Company Law. Such company is known as Government Company. Government takes not less than 51% shares from such companies.
For e.g.:- BSNL, Steel Authority of India Ltd, Bharath Heavy Electrical Ltd. Etc….
Features of Government Company:-
- It is a body corporate registered under Indian Companies Act
- It has most of the features of a limited company
- Like a Joint Stock Company it is governed by its Memorandum and Article
- Like a Public corporation, it enjoys autonomy and financial freedom
- Major portion of the share capital is contributed by government
- Most of the directors are nominated by government
- The annual report on its working is required to be presented in Parliament or state Assembly.
Advantages of Government Company:-
- The formation of government is comparatively easy as compared to other forms of public enterprises
- It enjoys greater degree of flexibility than any other form of public enterprises
- It is a separate legal entity
- It can be operated on commercial principles.
- It has little scope of political interference
- It enjoys better credit facilities on account of government participation.
Disadvantages of Government Company:-
- Its directors may not take much interest in management of the company
- It cannot follow sound business principles
- Its autonomous is meaningless. It has to get approval of the government for various matters
CHANGING ROLE OF PUBLIC SECTOR
Public sector in India was created to achieve two types of objective – (1) to speed up the economic growth of the country and (2) to achieve a more equitable distribution of income and wealth among people. The role and importance of public sector changed with time. Its role over a period of time can be summarised as following:-
- Development of Infrastructure :- At the time of independence, India suffered from acute shortage of heavy industries such as engineering, iron and steel, oil refineries, heavy machinery etc. Because of huge investment requirement and long gestation period, private sector was not willing to enter these areas. The duty of development of basic infrastructure was assigned to public sector which it discharged quite efficiently.
- Regional balance: – Earlier, most of the development was limited to few areas like port towns. For providing employment to the people and for accelerating the economic development of backward areas many industries were set up by public sector in those areas.
- Economies of scale – In certain industries (like Electric power plants, natural gas, petroleum etc) huge capital and large base are required to function economically. Such areas were taken up by public sector.
- Control of Monopoly and Restrictive trade Practices – These enterprises were also established to provide competition to Pvt. Sector and to check their monopolies and restrictive trade practices.
- Import Substitution – Public enterprises were also engaged in production of capital equipments which were earlier imported from other countries. At the same time public sector Companies like STC and MMTC have played an important role in expanding exports of the country.
Very important role was assigned to public sector but its performance was far from satisfactory which forced govt. to do rethinking on public enterprises. Performance of the Public Sector was poor due to unorganized plants, out dated technology, underutilization of capacity, over staffing, trade unionism, political interference etc… So the government, in the Industrial Policy 1991, introduced the following reforms in the public sector.
- The number of industries reserved for the public sector was reduced from 17 to 3industries namely atomic energy, arms and rail transport.
- The Memorandum of Understanding signed between a public sector and its administrative ministry defines its autonomy and the targets to be achieved.
- Equity shares of public sector units are sold to private sector and the public which is known as Disinvestment.
- Loss making public sectors which are potentially viable will be restructured and revived through the Board of Industrial and Financial Reconstruction (BIFR). Public sector units which cannot be revived will be closed down.
- A National Renewal Fund was created to retrain and redeploy retrenched labor and to compensate employees seeking voluntary retirement
Multinational Companies or Global Enterprises:-
A multinational company is one which has its headquarters in one country, but spreads its operations all over the world. Such companies are also called as transnational companies. They operate on a very large scale and have a very wide marketing network
For e.g.:- Pepsi, Coca-Cola, General Motors, Nokia, Samsung, Sony, Suzuki. Etc…
Features of Multinational Companies:-
- They are giant in size
- They have international operations
- They have centralized control from their head office
- The growth of MNC may leads to concentration of economic power in few
- They apply most sophisticated technology in production and marketing
- They have international market
- They have professional management
When two or more independent firms together establish a new enterprise by pooling their capital, technology and expertise, it is known as a joint venture. For e.g. Hero Cycle of India and Honda Motors Co. of Japan jointly established Hero Honda. Similarly Suzuki Motors of Japan and Govt. of India come together to form Maruti Udyog.
- Capital is provided jointly by the Government and Private Sector Entrepreneurs.
- Management may be entrusted to the private entrepreneurs.
- It combines both social and profit objectives.
- It is responsible to the Government and the private investors.
- Greater resources and Capacity – In a joint venture the resources and capacity of two or more firms are combined which enables it to grow quickly and efficiently.
- Access to advanced technology – It provides access to advanced techniques of production which increases efficiency and then helps in reduction in cost and improvement in quality of product.
- Access to New Markets and distribution network – A foreign co. gain access to the vast Indian market by entering into a joint venture with Indian Co. It can also take advantage of the well established distribution system of local firms.
- Innovation – Foreign partners in joint ventures have the ideas and technology to develop innovative products and services. They have an advantage in highly competitive and demanding markets.
- Low Cost of production – Raw material and labour are comparatively cheap in developing countries so if one partner is from developing country they can be benefitted by the low cost of production.
- Well known Brand Names: – When one party has well established brands & goodwill, the other party gets its benefits. Products of such brand names can be easily launched in the market.
Types of Joint Ventures:-
A joint venture company can be formed in any of the following ways:-
- Two parties (individuals or companies), incorporate a company in India. Business of one party is transferred to new company. For consideration of such transfer, shares are issued by the new company and subscribed by the above party. The other party subscribe shares in cash
- The above two parties subscribe to the shares of the joint venture company in agreed proportion in cash and start new business
- Promoter shareholder of an existing Indian company and another party which may be either an individual or a company may collaborate to jointly carry on the business of that company.