Private, Public and Global Enterprises

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES

Business Enterprises - Private, Public and Joint Sector Enterprises

The three enterprises are distinguished on the basis of ownership, management and control.

➢ Public Sector Enterprise- This type of enterprise is wholly or partially managed and controlled by the central or
state government.
➢ Private Sector Enterprise- This type of enterprise is managed and controlled by individuals or a group of
individuals.
➢ Joint Sector Enterprise- This type of enterprise is jointly managed and controlled by both individuals and the
government.

➢ Difference between Private and Public Sector Enterprises

Basis of Difference Private Sector Enterprise Public Sector Enterprise
Owned by the state or the
Ownership Owned by private individuals
central government
Prime objective Profit Public welfare
Managed by professional
Management Managed by bureaucrats
managers
Accountability Accountable to owners Accountable to the public
Political interference Less Comparatively more
Decision making Fast Comparatively slow

❖ Forms of Public Sector Enterprises

➢ The following picture depicts the various forms of public sector enterprises:
❖ Departmental Undertaking (DUs)
➢ Meaning: Such enterprises work directly under the ministries of the government, with no separate legal existence.
They have a high degree of accountability towards the public.
➢ Features of Departmental Undertakings
The following are the major features of departmental undertakings:
i. These enterprises are provided funds from the annual budget and the treasury of the Government of India.
ii. The employees in these enterprises are the servants of the government, as directed by the IAS.
iii. These enterprises are regarded as the subdivisions of the government; they are under the direct control of the
concerned ministry.
iv. These enterprises are liable to the ministries that manage and control them.
v. These enterprises are subject to government audit as applicable to other government activities.

➢ Merits of Departmental Undertakings

The following are the merits of departmental undertakings:
i. They are set up under an Act of Parliament and hence are easy to form.
ii. As these enterprises work directly under the ministries of the government, they have a high degree of public
accountability.
iii. The revenue earned by these enterprises directly goes to the government treasury and therefore is a source of
income for the government.
iv. Strict accounting and auditing controls ensure optimum utilisation of resources.
v. These enterprises have maximum degree of control by the Parliament, as they are set under an Act of
Parliament.

➢ Limitations of Departmental Undertakings

 The following are the limitations of departmental undertakings:
i. These enterprises face intervention from the concerned ministries that control and manage them.
ii. The operations of these organisations often involve red tapism in the form of tedious paperwork and excessive
regulations before the actual official action is taken.
iii. Because these enterprises are strictly under the control of ministries, they are not independent in any form of
decision making and therefore lack flexibility in operations.
iv. These enterprises normally avoid undertaking risky projects; thus, they are said to be conservative in their
approach.
v. Because of lack of competition and inefficient management, these undertakings are often considered
unresponsive towards the needs of the general public.

➢ Suitability
⚬ Departments/projects where high secrecy is to be maintained
⚬ Where the government wishes to practise a high degree of control over operations
⚬ In cases where the undertaking has to be established for revenue generation and investment

❖ Statutory Corporation
➢ Meaning: It is formed by passing a special Act of Parliament; it is an initiative of private enterprises having the
powers of the government.

➢ Features of Statutory Corporations

i. These corporations are set up under an Act of Parliament, with the objectives and power as defined by the Act.
ii. They are wholly owned by the state, with ultimate financial responsibility (both profit and loss) on the
government.
iii. These corporations are independently financed; they can either borrow from the government or raise funds from
the general public as per their discretion.
iv. The employees of these corporations are not governed by any rules or regulations of the government.
v. These corporations are independent corporate bodies; they can be sued by others as well as can sue others
and can enter into legal contracts in their own names.
vi. These corporations are not subject to accounting and auditing procedures of the government.

➢ Merits of Statutory Corporations

The following are some of the merits of statutory corporations:
i. These corporations enjoy high operational flexibility independence.
ii. They are free from undesirable control and interference by the government. This is because they are funded
independently.
iii. As these corporations are the initiative of private enterprises with the power of the government, they can be an
important instrument of economic development.
iv. As these corporations are autonomous in nature, they independently make their own policies and rules as per
the powers given to them.
v. They can independently recruit the desired personnel according to their requirements.

➢ Limitations of Statutory Corporations

 The following are the major limitations of statutory corporations:

i. The operational flexibility is false in the sense that they are subject to too many rules and regulations by the
government.
ii. They face high government interference, especially in cases where a huge amount of money is involved.
iii. Corrupt practices while dealing with the public is one of the major problems faced by these corporations.
iv. Necessary appointment of advisors by the corporation board curbs the freedom of these corporations and
leads to delays in the decision-making process.
v. These corporations often enjoy a high degree of monopoly, as a result of which, they may charge high prices.

➢ Suitability
⚬ In cases where the undertaking requires certain powers that are defined under the Act
⚬ In cases where regular grants are required by the undertaking.
⚬ In cases where a combination of public accountability and operational autonomy is required

❖ Government Company
➢ Meaning: It is a company as established under the Indian Companies Act, 1956, with at least 51% of the shares held
either by the central or state government.
➢ Reasons why a government company form of organisation is preferred over other forms in the public sector
a. Maximum autonomy in the managerial actions and decision-making processes
b. No undue interference by the concerned department in its operations
c. Separate legal entity
d. Provides goods and services at reasonable rates and at the same time also ensures fair marketing activities.

➢ Features of Government Company

The following are some of the features of a government company:
i. It is established under the Indian Companies Act, 1956.
ii. It is exempted from the accounting and audit rules and procedures.
iii. It enjoys independent funding; it can generate funds from government shareholders, private shareholders and
even capital markets.
iv. It is a separate legal entity. Accordingly, it can enter into legal contracts and acquire property in its name.
v. The provisions of the Companies Act regulate the management and operations of a government company.
vi. The staffing process of a government company is subject to the rules and regulations mentioned in the MoU
of the company.

➢ Merits of Government Company

The following are the merits of a government company:

i. It enjoys autonomy in the daily business operations and management decisions.

ii. It is a legal entity of its own, separate from the government.
iii. It is free from undesirable interference from the government.
iv. It provides goods and services at reasonable rates, thereby promoting healthy business practices in the
society.
 v. The formation of a government company is easy, as a statute is not required to be enacted for its formation.

➢ Limitations of Government Company

The following are the limitations of a government company:

i. The provisions of the Companies Act do not stand much relevance in case of a government company; the
government is the major shareholder in such companies.
ii. It evades constitutional responsibility despite the fact that it is funded by the government.
iii. The management of a government company largely remains under the government control, as the
government is the sole/major shareholder.

➢ Suitability
⚬ In cases where the government wants to exercise control over a private sector company
⚬ In cases where the government wants to collaborate with a private company
⚬ In cases where the projects are big and require government funding

➢ Difference between Three Forms of Public Sector Enterprises

Basis of Difference Departmental Undertaking Statutory Corporation Government Company

Formed as per the Formed as per the Indian
Formation By the ministry
special Act of Parliament Companies Act, 1956
At least 51 per cent shares
Wholly owned by government
Ownership Wholly owned by the state are owned by the central or
departments
state government
May borrow from the
May borrow from the
Budgetary allocated; cannot government, private
Capital financing government and the
borrow from the public shareholders and the
general public
general public
Higher degree of High degree of
Public Accountability Highest degree of accountability
accountability accountability
Legal status No separate entity Separate entity Separate entity
Commercial and industrial
Commercial and industrial
Suitability Public utilities, defence undertakings that allow
undertakings
private capital participation

❖ Changing Role of the Public Sector

The following points highlight the role of public sector enterprises in India:
i. Infrastructural development: Development of infrastructure facilities involved heavy initial investment and long
 gestation periods; these factors discouraged the private sector from taking initiatives to undertake these
projects. Hence, the public sector came into play.

ii. Balanced regional growth: To bring about regional balance, PSEs were set up in backward and rural areas; they
not only provided employment in these areas but also encouraged the development of ancillary units (or supporting
industries). For this, the following measures were adopted by Government of India.
a. During the 1950s, the Government of India established four major steel plants in rural areas with the basic
rationale of promoting the growth and development of these areas.
b. The steels plants and similar enterprises in rural areas provided employment opportunities, thereby
encouraging the people living in those areas to earn high income and enjoy a better standard of living.
c. The setting up of the industries created various forward and backward linkages.
d. The establishment of industries in rural and backward areas necessitated infrastructure development, which
improved the connectivity of these areas with the rest of the country.

iii. Economies of scale: Large-scale industries, such as natural gas and petroleum, enjoyed economies of scale.
However, they required huge capital investments, which discouraged the private sector to initiate these industries.
Hence, the public sector was required to start and operate these industries.
iv. Import substitution and export promotion: To achieve self-sufficiency, India aimed at restricting imports and
maximising exports. Thus, PSEs were established to manufacture heavy machinery and engineering goods
domestically so as to restrict imports. Simultaneously, PSEs such as the Metals and Minerals Trading
Corporation of India (MMTC) and the State Trading Corporation (STC) were established with the aim of
expanding exports.
v. Checking over concentration of power: Public sector units ensured a check over concentration of power to
minimise the chances of monopoly.

❖ Role of Public Sector since 1991

a. Restricting the role assigned to the public sector: The number of industries exclusively reserved for the
public sector was drastically reduced from 17 in 1956 to just 8 in 1991.
This resulted in an increased competition in the market.
b. Disinvestment of shares of selected public sector enterprises (PSEs): The following were the rationale for the
disinvestment of PSEs:
i. Release of resources by PSEs: Reservation of the industries meant that a large amount of public resources
remained blocked in these PSEs. With disinvestment, these funds could be released and utilised in other
important areas.
ii. Transfer of risk: Disinvestment meant transfer of commercial risk to the private sector, which ensured
availability of funds for other important areas.
iii. Reduction of public debt​: Disinvestment helped in reducing the burden of public debt as well as interest
rate obligations of the PSEs.
iv. Introduction of corporate governance: Disinvestment reduced the control of the government over the PSEs
and corporate governance was set with greater discipline and professionalism.

c. Policy regarding chronically sick units: The Board for Industrial and Financial Reconstruction (BIFR) was set up
for the revival and reconstruction of the sick PSEs. Similarly, the National Renewal Fund was set up in February 1992
to protect the interests of the workers and employees of these industries.
d. Memorandum of Understanding: According to this system, PSEs were given specific targets along with greater
autonomy to achieve those targets. This aimed at improving the performance of PSEs.

➢ Difference between Privatisation and Disinvestment

Basis of Difference Privatisation Disinvestment

Selling off a part of equity or

Transfer of management and
shares of a public sector
Meaning ownership from a state-owned
enterprise to a private sector
enterprise to a private enterprise
enterprise
 Complete transfer of ownership to the Partial transfer of ownership to
Degree of transfer
private sector the private sector

Privatisation does not necessarily imply Disinvestment necessarily

Implication
disinvestment. leads to privatisation

❖ Global Enterprises/MNCs

➢ Meaning:
An MNC or a global enterprise is a business enterprise that has its operations in various countries, with its
headquarters in one of the countries.
➢ Features of Global Corporations
The following are the features of global corporations:

i. They enjoy a huge capital base and resources. In addition, they can also borrow from international banks
owing to their strong standing and goodwill in the market.
ii. Usually, MNCs enter the international market by collaborating with local, public or private companies.
iii. These companies invest a huge amount of money in the research and development of the latest
technology; this helps them to continuously work towards inventing new and superior products, thereby
maintaining a higher market position.
iv. MNCs usually have well-defined research and development centres for the invention and innovation
of new products.
v. Because of the large-scale operations of MNCs in different countries, they enjoy a good image in the
international market.
vi. MNCs generally hire trained and skilled professionals who specialise in working in different areas of
operations.
vii. Marketing strategies used by MNCs are more effective, as they use better technology and information
system.
viii. MNCs have a centralised control in the sense that the management and control of MNCs lie in the hands
of the parent company, i.e., the headquarters.

➢ Benefits of MNCs to Host Countries

 The following are the merits of global corporations to the host countries:
i. MNCs generate numerous employment opportunities in the host countries mainly because of their large-
scale operations.
ii. They bring with them advanced and modern technology to the host countries.
iii. They provide a wider choice to the consumers along with superior quality; this, in turn, helps in improving
the standard of living of the people in the host countries.
iv. MNCS enable the integration of host countries with foreign markets.

➢ Disadvantages of MNCs to Host Countries

The following are the disadvantages of global corporations to the host countries:
i. MNCs may transfer outdated or obsolete technology from their home country to the host countries. This
may hamper the growth and development of the host countries.
ii. In some cases, MNCs collaborate with the leading industries in the host countries; this leads to monopoly
and concentration of the economic power in the hands of a few individuals.
iii. To maximise their profits, MNCs sometimes exploit the natural resources (present in the host countries)
to a large extent. As a result, the non-renewable resources of the host countries deplete over a period of time.
iv. MNCs are giant corporations in terms of the economic and financial resources invested in them. This
gives them the power to influence the political affairs and economic decisions of the host countries.

❖ Joint Ventures
➢ Meaning: This type of organisation is jointly formed by two or more organisations for mutual benefits. Business
organisations engaged in a joint venture share not only their physical, financial and human resources but also the
risks and profits of their businesses.

➢ Ways of Forming Joint Ventures

The following are the ways in which a joint venture can be formed:
a. A foreign company and a local company can join hands to form a new business enterprise.
b. A foreign company can buy a portion of equity shares of a local company.
c. A local company can acquire a portion of equity in another existing local company.

➢ Benefits of Joint Ventures

The following are the benefits that a firm derives by entering into a joint venture:
 i. In a joint venture, the resources and the operational capacities of individual organisations are pooled
together; this enables them to grow and expand.
ii. Entering into a joint venture with units in different regions widens the market base for each enterprise.
iii. Because of lesser amount of investment and effort required at the individual level, new and modern
technology can be easily obtained.
iv. Foreign companies entering into a joint venture with companies in the developing countries can take
advantage of the availability of large and cheap labour.
v. A joint venture, especially with a foreign partner, gives access to new ideas and technology; this, in turn,
promotes the innovation of new products. This further helps the businesses to grow and expand.
vi. With two companies joining hands, one of the companies may benefit from the already established
brand name of the other.

➢Public–Private Partnership
➢ Meaning: It is an enterprise or a project that is jointly run and operated by the government and a private
enterprise.
➢ Features of Public–Private Partnership
i. These partnerships are undertaken in case of high priority projects that are of national importance.
ii. The major capital contribution is done by the private sector enterprise.
iii. It is suitable for the projects that are large in size and are undertaken for the public welfare.

➢ Benefits of Public–Private Partnership

i. It is helpful in attracting huge investments from the private sector.
ii. It facilitates infrastructural development and social welfare.
iii. It helps in generating large employment opportunities.
iv. It contributes to the overall economic development by creating employment opportunities for the people.