Public Sector Undertakings/Enterprises
The term public sector undertaking or Enterprise refers to a Government Company. “Government Company” is defined under Section 2 (45) of the Companies Act, 2013 as Any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company. The term is not intended to mean a public company (where shares are freely transferable and has a shareholder base of more than 200 people) though public sector enterprises are mostly public companies.
Public Sector undertakings refer to commercial ventures of the Government where user fees are charged for services rendered. The tariff/fees may be market based or subsidised. They are usually fully owned and managed by the Government such as Railways, Posts, Defence Undertakings, Banks etc. Public sector enterprises on the other hand refer to those companies registered under the Companies Act, 1956,which are predominantly owned by Government and which are managed by a Government appointed Chairman and Managing Director. Government nominees represent the interests of the Government on the board of Public sector enterprises. Public sector companies usually compete with private sector enterprises in the domestic as well as international market.
Investment decisions of PSUs are passed by the respective boards and then appraised and approved by the adminsitrative ministry to which they are accountable (e.g. Shipping Corporation of India is under the Department of Shipping in the Union Ministry of Surface Transport) or the Public Investment Board under the Department of Expenditure, Union Ministry of Finance and if the investment is beyond a certain threshold level or if a new public sector company is being created, then the proposal has to be approved by Cabinet. Central public sector enterprises are classified as “mahratnas” “mini-ratnas” and other enterprises depending on their track record based on guidelines approved by the Government from time to time.
Sub national governments also own and manage public sector undertakings and in most cases they are loss making and require considerable budgetary support.
The audit of public sector undertakings is done by the Comptroller and Auditor General of India while that of public sector enterprises is done first by Chartered Accountants and the supplementary audit is done by the Comptroller and Auditor General of India.
Evolution of Public Sector enterprises
At the time of independence in 1947, Indian industry was ill-developed and required considerable policy thrust. The Second Five year Plan (1956-61) and the Industrial Policy Resolution of 1956 provided the framework for public sector undertakings/enterprises in India, which were expected to play a substantial role in preventing the concentration of economic power, reducing regional disparities and ensuring that planned development serves the common good. A list of 17 industrial sectors was reserved for the public sector in Schedule A of the 1956 Resolution and no new units in the private sector in these categories would be permitted. Another list of industries was included in Schedule B where the Government actively encouraged public ownership. The Union Government and various sub-national governments made considerable investment on setting up and running public sector undertakings/enterprises.
Initially, the public sector was confined to core and strategic industries such as irrigation projects (e.g. the Damodar Valley Corporation), Fertilizers and Chemicals (e.g. Fertilizers and Chemicals, Travancore Limited) Communication Infrastructure (e.g. Indian Telephone Industries), Heavy Industries (e.g. Bhilai Steel Plant, Hindustan Machine Tools, Bharat Heavy Electricals, Oil and Natural Gas Commission etc.). Subsequently, however, the Government nationalized several banks (starting with nationalization of the Imperial Bank of India which was renamed State Bank of India in 1955) and foreign companies (Jessop & Co, Braithwaite & Co, Burn & Co.).Later Public Sector companies started manufacturing consumer goods (e.g. Modern Foods, National Textile Corporation etc) and providing consultancy, contracting, and transportation services.
The internal (profits) and extra-budgetary resources (borrowed funds) of public sector undertakings are factored into the preparation of the Annual Financial Statement (Budget) of the Government. However, poor productivity, poor project management, over-manning, lack of continuous technological upgradation, and inadequate attention to R&D and human resource development resulted in a large number of public enterprises showing a very low rate of return on the capital invested and the need for budgetary support for day to day running. Several of them accumulated huge losses and ran up huge debts which had to be written off /settled from time to time by the Government.
Reviewing the role of the public sector, the Industrial Policy Resolution 1991 reduced the number of industrial undertakings exclusively reduced to the public sector to just six areas which included strategic industries like atomic energy, defence, coal, mineral oils etc. as well as railway transport. Efforts were made to divest non strategic public sector industries and to increase private participation in the equity of profitable public sector industries. At the same time a Board for Reconstruction of Public Sector Enterprises has been set up to suggest ways to turn around sick and loss making public sector enterprises.