Private Public and Global Enterprises
Private Public and Global Enterprises
Private Public and Global Enterprises
LEARNING OBJECTIVES
Anita, a student of class XI, was going through some newspapers. The headlines
stared at her face, Government plans to disinvest its shares in a few companies.
The next day there was another news item on one public sector company incurring
heavy losses and the proposal for closing the same. In contrast to this, she read
another item on how some of the companies under the private sector were doing
so well. She was actually curious to know what these terms like public sector,
disinvestment, privatisation meant. She realised that in certain areas there
was only the government which operates like the railways and in some areas
both the privately owned and government run business were operating. For
example, in the heavy industry sector SAIL, BHEL and TISCO, Reliance, Birlas
all were there and in the telecom sector, companies like Tata, Reliance, Airtel
operate and in airlines Sahara and Jet have recently gained entry. These
companies along with the Government-owned companies like MTNL, BSNL, Indian
Airlines, Air India. She then started wondering where from companies like Coca
cola, Pepsi, Hyundai came? Were they always here or did they operate somewhere
else, in some other country. She went to the library and was surprised to know
that there was so much information about all these in books, business magazines
and newspapers.
country. These organisations affect our private and public sector were clearly
daily economic life and therefore defined and the government through
become part of the Indian economy. various Acts and Regulations was
Since the Indian economy consists of overseeing the economic activities of
both privately owned and government both the private and public sector. The
owned business enterprises, it is Industrial Policy Resolution, 1956 had
known as a mixed economy. The also laid down certain objectives for the
Government of India has opted for a public sector to follow so as to
mixed economy where both private and accelerate the rate of growth and
government enterprises are allowed to industrialisation. The public sector was
operate. The economy, therefore, may given a lot of importance but at the
be classified into two sectors viz., same time mutual dependency of
private sector and public sector. public and private sectors was
The private sector consists of emphasised. The 1991 industrial
business owned by individuals or a policy was radically different from all
group of individuals, as you have the earlier policies where the
learnt in the previous chapter. The government was deliberating
various forms of organisation are disinvestment of public sector and
sole proprietorship, partnership, allowing greater freedom to the private
joint Hindu family, cooperative sector. At the same time, foreign direct
and company. investment was invited from business
The public sector consists of houses outside India. Thus,
various organisations owned and multinational corporations or global
managed by the government. These enterprises which operate in more than
organisations may either be partly or one country gained entry into the
wholly owned by the central or state Indian economy. Thus, we have public
government. They may also be a part sector units, private sector enterprises
of the ministry or come into existence and global enterprises coexisting in the
by a Special Act of the Parliament. The Indian economy.
government, through these enterprises
participates in the economic activities 3.3 F ORMS OF ORGANISING PUBLIC
of the country. SECTOR ENTERPRISES
The government in its industrial Government’s participation in business
policy resolutions, from time-to-time, and economic sectors of the country
defines the area of activities in which needs some kind of organisational
the private sector and public sector are framework to function. You have
allowed to operate. In the Industrial studied about the forms of business
Policy Resolution 1948, the organisation in the private sector viz.,
Government of India had specified the sole proprietorship, partnership, Hindu
approach towards development of the undivided family, cooperative and
industrial sector. The roles of the company.
58 BUSINESS STUDIES
Indian Economy
Departmental Government
Undertakings Companies Partnership Joint Cooperative Multinational
Hindu Corporations
Statutory Sole Family
Corporation Properietorship Company
Public Private
(Ltd.) (Ltd.)
3.4 CHANGING ROLE OF PUBLIC SECTOR participate and compete in the market
with other private sector companies
At the time of Independence, it was
in the same industry. They were also
expected that the public sector
held accountable for losses and
enterprises would play an important
role in achieving certain objectives of return on investment. If a public
the economy either by direct sector was making losses
participation in business or by acting continuously, it was referred to the
as a catalyst. The public sector would Board for Industrial and Financial
build up infrastructure for other sectors Reconstruction (BIFR) for complete
of the economy and invest in key areas. overhauling or shut down. Various
The private sector was unwilling to committees were set up to study the
invest in projects which required heavy working of inefficient public sector
investment and had long gestation units with reports on how to improve
periods. The government then took it their managerial efficiency and
upon itself to develop infrastructural profitability. The role of public sector
facilities and provide for goods and is definitely not what was envisaged
services essential for the economy. in the early 60’s or 70’s.
64 BUSINESS STUDIES
sector had to step in to take advantage public sector companies like STC and
of economies of scale. Electric power MMTC have played an important role
plants, natural gas, petroleum and in expanding exports of the country.
telephone industries are some (vi) Government policy towards the
examples of the public sector setting public sector since 1991: The
up large scale units. These units Government of India had introduced
required a larger base to function four major reforms in the public sector
economically which was only possible in its new industrial policy in 1991. The
with government resources and mass main elements of the Government policy
scale production. are as follows:
(iv) Check over concentration of • Restructure and revive potentially
economic power: The public sector viable PSUs
acts as a check over the private sector. • Close down PSUs, which cannot
In the private sector there are very few be revived
industrial houses which would be • Bring down governments equity in
willing to invest in heavy industries all non-strategic PSUs to 26 per
with the result that wealth gets cent or lower, if necessary; and
concentrated in a few hands and • Fully protect the interest of
monopolostic practices are encouraged. workers.
This gives rise to inequalities in income, (a) Reduction in the number of
which is detrimental to society. industries reserved for the public
The public sector is able to set large sector from 17 to 8 (and then to 3):
industries which requires heavy In the 1956 resolution on Industrial
investment and thus the income and policy, 17 industries were reserved
benefits that accrue are shared by a for the public sector. In 1991, only
large of number of employees and 8 industries were reserved for
workers. This prevents concentration the public sector, they were restricted
of wealth and economic power in the to atomic energy, arms and
private sector. communication, mining, and
(v) Import substitution: During the railways. In 2001, only three
second and third Five Year Plan period, industries were reserved exclusively
India was aiming to be self-reliant in for the public sector. These are
many spheres. Obtaining foreign atomic energy, arms and rail
exchange was also a problem and it transport. This meant that the private
was difficult to import heavy machinery sector could enter all areas (except
required for a strong industrial base. the three) and the public sector
At that time, public sector companies would have to compete with them.
involved in heavy engineering which The public sector has played a vital
would help in import substitution were role in the development of the
established. Simultaneously, several economy. However, the private sector
66 BUSINESS STUDIES
Privatisation in India
The Lagan Jute Machinery Company Limited (LJMC) was the first case of
successful privatisation of a Central Public Sector Undertaking, carried out by
the Government. LJMC is a Calcutta-based company, and manufactures jute
machinery (mainly spinning and drawing frames). It employed around 400
employees prior to privatisation. It started incurring losses from 1996-97 onward
and the turnover was on a decline. LJMC’s net worth as on March 1998 was
around Rs. 5 crore and its annual turnover was also around Rs. 5 crore at
that time.
In the initial stages of disinvestment, LJMC was approved for privatisation
through sale of 74 per cent stake to a strategic partner. The disinvestment process
was handled by LJMC’s holding company, Bharat Bhari Udyog Nigam LImited
(BBUNL), under the administrative control and directions of the then Department
of Heavy Industries (DHI), Ministry of Industry, Government of India.
PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 67
producing multiple products with their They enjoy credibility in the capital
business strategy extending over a market. Even investors and banks of
number of countries. They do not aim the host country are willing to invest in
at maximising profits from one or two them. Because of their financial
products but instead spread their strength they are able to survive under
branches all over. They have an impact all circumstances.
on the international economy also. This (ii) Foreign collaboration: Global
is evident from the fact that the sales of enterprises usually enter into
top 200 corporations were equivalent agreements with Indian companies
to 28.3 percent of the world’s GDP in pertaining to the sale of technology,
1998. This shows that top 200 MNCs production of goods, use of brand
control over a quarter of the world names for the final products, etc. These
economy. Therefore, MNCs are in a MNCs may collaborate with companies
position to exercise massive control on in the public and private sector. There
the world economy because of their are usually various restrictive clauses
capital resources, latest technology and in the agreement relating to transfer
goodwill. By virtue of this, they are able of technology, pricing, dividend
to sell any product in different payments, tight control by foreign
countries. Some of these corporations technicians, etc. Big industrial houses
may be slightly exploitative in nature wanting to diversify and expand have
and concentrate more on selling gained by collaborating with MNCs in
consumer goods and luxury items terms of patents, resources, foreign
which are not always desirable for exchange etc. But at the same time
developing countries. these foreign collaborations have given
rise to the growth of monopolies and
Features concentration of power in few hands.
(iii) Advanced technology: These
These corporations have distinct
enterprises possess technological
features which distinguish them from
superiorities in their methods of
other private sector companies, public
sector companies and public sector production. They are able to conform
enterprises. These are as follows: to international standards and quality
(i) Huge capital resources: These specifications. This leads to industrial
enterprises are characterised by progress of the country in which such
possessing huge financial resources corporations operate since they are
and the ability to raise funds from able to optimally exploit local resources
different sources. They are able to tap and raw materials. Computerisation
funds from various sources. They may and other inventions have come due to
issue equity shares, debentures or the technological advancements
bonds to the public. They are also in a provided by MNCs.
position to borrow from financial (iv) Product innovation: These
institutions and international banks. enterprises are characterised by having
PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 69
and mutual benefit, it gives rise to a risks and rewards in the formation of a
joint venture. Businesses of any size new entity, under shared control.
can use joint ventures to strengthen In India, joint venture companies
long-term relationships or to are the best way of doing business.
collaborate on short term projects. A There are no separate laws for these
joint venture can be flexible depending joint ventures. The companies
upon the party’s requirements. These incorporated in India are treated the
need to be clearly stated in a joint same as domestic companies.
venture agreement to avoid conflict at A joint venture company can be
a later stage. formed in any of the following ways:
A joint venture may also be the (i) Two parties (individuals or
result of an agreement between two companies), incorporate a
businesses in different countries. In this company in India. Business of one
case, there are certain provisions party is transferred to a new
provided by the governments of the two company. For consideration of
countries, which will have to be such transfer, shares are issued by
adhered to. the new company and subscribed
Thus, we see that joint ventures by the above party. The other
may mean many things, depending subscribes for the shares in cash;
upon the context we are using it in. But (ii) The above two parties subscribe
in a broader sense, a joint venture is to the shares of the joint venture
the pooling of resources and expertise company in agreed proportion, in
by two or more businesses, to achieve cash and start a new business;
a particular goal. The risks and (iii) Promoter shareholder of an
rewards of the business are also existing Indian company and
shared. The reasons behind the joint another party which may be either
venture often include business an individual or a company may
expansion, development of new collaborate to jointly carry on the
products or moving into new markets, business of that company. The
particularly in another country. It is other party may be non-resident
becoming increasingly common for or resident and may take up
companies to create joint ventures with shares of the company through
other businesses/companies and form payment in cash. All joint ventures
strategic alliances with them. The in India require government
reasons for these alliances may be approvals if a foreign partner or a
complementary capabilities and Non-Resident Indian (NRI) is
resources such as distribution involved. The approval can be
channels, technology or finance. In this obtained either from the Reserve
kind of a joint venture, two or more Bank of India or Foreign Investment
(parent) companies agree to share Promotion Board (FIPB), depending
capital, technology, human resources, upon particular circumstances.
PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 71
(a) If the joint venture is covered under face market challenges and take
automatic route, then the approval of advantage of new opportunities.
the Reserve Bank of India is required. (ii) Access to new markets and
(b) In other special cases not covered distribution networks: When a
under the automatic route, a special business enters into a joint venture with
approval of FIPB is required. a partner from another country, it
A joint venture must be based on a opens up a vast growing market. For
memorandum of understanding signed example, when foreign companies form
by both the parties highlighting the joint venture companies in India they
basis of a joint venture agreement. The gain access to the vast Indian market.
terms should be thoroughly discussed Their products which have reached
and negotiated to avoid any legal saturation point in their home markets
complications at a later stage. can be easily sold in new markets.
Negotiations and terms must take into They can also take advantage of the
account the cultural and legal
established distribution channels i.e.,
background of the parties. The joint
the retail outlets in different local
venture agreement must also state that
markets. Otherwise establishing their
all necessary governmental approvals
own retail outlets may prove to be
and licenses will be obtained within a
specified period. very expensive.
(iii) Access to technology:
3.6.1 Benefits Technology is a major factor for most
businesses to enter into joint ventures.
Business can achieve unexpected gains Advanced techniques of production
through joint ventures with a partner. leading to superior quality products
Joint ventures can prove to be saves a lot of time, energy and
extremely beneficial for both parties investment as they do not have to
involved. One party may have strong develop their own technology.
potential for growth and innovative Technology also adds to efficiency and
ideas, but is still likely to benefit from
effectiveness, thus leading to reduction
entering into a joint venture because it
in costs.
enhances its capacity, resources and
technical expertise. The major benefits (iv) Innovation: The markets
of joint ventures are as follows: are increasingly becoming more
(i) Increased resources and demanding in terms of new and
capacity: Joining hands with another innovative products. Joint ventures
or teaming up adds to existing allow business to come up with
resources and capacity enabling the something new and creative for
joint venture company to grow and the same market. Specially foreign
expand more quickly and efficiently. partners can come up with innovative
The new business pools in financial products because of new ideas and
and human resources and is able to technology.
72 BUSINESS STUDIES
Key Terms
Public sector Departmental undertaking Privatisation
Public enterprises Government companies Globalisation
Statutory corporation Disinvestment Global enterprises
Joint ventures Public accountability Public Sector
Undertakings
SUMMARY
Private sector and public sector: There are all kinds of business
organisations — small or large, industrial or trading, privately owned or
government owned existing in our country. These organisations affect our
daily economic life and therefore become part of the Indian economy. The
government of India has opted for a mixed economy where both private and
government enterprises are allowed to operate. The economy therefore may
be classified into two sectors viz., private sector and public sector. The
private sector consists of business owned by individuals or a group of
individuals. Various forms of organisation are sole proprietorship,
partnership, joint Hindu family, cooperative and company. The public sector
consists of various organisations owned and managed by the government.
These organisations may either be partly or wholly owned by the central or
state government.
PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 73
EXERCISES
Projects/Assignments
1. Collect information on companies in the public sector which have been
selected for disinvestment in the last 2-3 years. Also examine the
controversies surrounding these decisions. Prepare a project report.
2. Make a list of Indian companies entering into joint ventures with foreign
companies. Find out the apparent benefits derived out of such ventures.