Chapter 3

Private, Public and Global Enterprises

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

• explain the concept and characteristics of business;

• explain the features of different forms of public enterprises viz.,

departmental, statutory corporations and government companies;

• critically examine the changing role of the public sector;

• explain the features of global enterprises; and

• appreciate the benefits of joint ventures.

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 58 BUSINESS  STUDIES

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 learnt there are all kinds of business organisation-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. Since the Indian economy consists of both privately owned and
government owned business enterprises, it is known as a mixed 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.
Then there are businesses which operate in more than one country known as
global enterprises. Therefore, you may have observed that all types of organisations
are doing business in the country whether they are public, private or global.

3.1 Introduction cities and towns has been greatly

reduced. This is because of plenty of
You must have come across all types private courier services firms operating
of business organisations in your in bigger towns. Then there are
daily life. In your neighbourhood businesses which operate in more
market, there are shops owned by sole than one country known as global
proprietors or big retail organisations enterprises. Therefore, you may have
run by a company. Then there are observed that all types of organisations
people providing you services like are doing business in the country
legal services, medical services, being whether they are public, private or
owned by more than one person global.
i.e., partnership firms. These are
all privately owned organisations.
3.2 P rivate S ector and P ublic
Similarly, there are other offices
or places of business which may
Sector
be owned by the government. For The private sector consists of
example, Railways is an organisation business owned by individuals or
wholly owned and managed by the a group of individuals, as you have
government. The post office, in your learnt in the previous chapter. The
locality is owned by the Post and various forms of organisation are
Telegraph Department, Government sole proprietorship, partnership,
of India, though our dependence on joint Hindu family, cooperative
their postal services, particularly in and company.

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 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 59

The public sector consists of outside India. Thus, multinational

various organisations owned and corporations or global enterprises
managed by the government. These which operate in more than one
organisations may either be partly or country gained entry into the Indian
wholly owned by the central or state economy. Thus, we have public sector
government. They may also be a part units, private sector enterprises and
of the ministry or come into existence 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 O rganising P ublic
of the country. Sector Enterprises
The government in its industrial
policy resolutions, from time-to- Government’s participation in business
time, defines the area of activities in and economic sectors of the country
which the private sector and public needs some kind of organisational
sector are allowed to operate. In the framework to function. You have
Industrial Policy Resolution 1948, studied about the forms of business
the Government of India had specified organisation in the private sector
the approach towards development of viz., sole proprietorship, partnership,
the industrial sector. The roles of the Hindu undivided family, cooperative
private and public sector were clearly and company.
defined and the government through In the public sector, as it grows, an
various Acts and Regulations was important question arises in respect of
overseeing the economic activities of how it is to be organised or what form
both the private and public sector. of organisation it should take. The
The Industrial Policy Resolution, 1956 government has a major role to play in
had also laid down certain objectives the formation of the public sector. But
for the public sector to follow so as the government acts through its people,
to accelerate the rate of growth and its offices, employees and they take
industrialisation. The public sector decisions on behalf of the government.
was given a lot of importance but at For this purpose, public enterprises
the same time mutual dependency were formed by the government to
of public and private sectors was participate in the economic activities
emphasised. The 1991 industrial policy of the country. They are expected
was radically different from all the to contribute to the economic deve-
earlier policies where the government lopment of the country in today’s
was deliberating disinvestment of liberalised, competitive world. These
public sector and allowing greater public enterprises are owned by
freedom to the private sector. At the the public and are accountable to
same time, foreign direct investment the public through the Parliament.
was invited from business houses They are characterised by public

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 60 BUSINESS  STUDIES

Indian Economy

Public Sector Private Sector

Departmental Government
Undertakings Companies Partnership Joint Cooperative Multinational
Hindu Corporations
Statutory Sole Family
Properietorship Company
Corporation

Public Private
(Ltd.) (Ltd.)

ownership, public funds being used for 3.3.1 Departmental Undertakings

its activities and public accountability.
This is the oldest and most traditional
A public enterprise may take
form of organising public enterprises.
any particular form of organisation
These enterprises are established as
depending upon the nature of its
departments of the ministry and are
operations and their relationship with
considered part or an extension of
the government. The suitability of a the ministry itself. The Government
particular form of organisation would functions through these departments
depend upon its requirements. At the and the activities performed by them
same time, in accordance with general are an integral part of the functioning
principles, any organisation in the public of the government. They have not
sector should ensure organisational been constituted as autonomous or
performance productivity and quality independent institutions and as such
standards. are not independent legal entities.
The forms of organisation which They act through the officers of
a public enterprise may take are as the Government and its employees
follows: are Government employees. These
(i) Departmental undertaking undertakings may be under the
central or the state government and
(ii) Statutory corporation the rules of central/state government
(iii) Government company are applicable. Examples of these

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undertakings are railways and post (i) These undertakings facilitate the
and telegraph department. Parliament to exercise effective
control over their operations;
Features (ii) These ensure a high degree of
The main characteristics of public accountability;
Departmental undertakings are as (iii) The revenue earned by the
follows: enterprise goes directly to the
(i) The funding of these enterprises treasury and hence is a source of
come directly from the Govern- income for the Government;
ment Treasury and are an annual (iv) W h e r e n a t i o n a l s e c u r i t y i s
appropriation from the budget concerned, this form is most
of the Government. The revenue suitable since it is under the
earned by these is also paid into direct control and supervision of
the treasury; the concerned Ministry.
(ii) They are subject to accounting
and audit controls applicable to Limitations
other Government activities; This form of organisation suffers from
(iii) The employees of the enterprise serious drawbacks, some of which are
are Government servants and as follows:
their recruitment and conditions (i) Departmental undertakings fail
of service are the same as that of
to provide flexibility, which is
other employees directly under
essential for the smooth operation
the Government. They are headed
of business;
by Indian Administrative Service
(ii) The employees or heads of depart-
(IAS) officers and civil servants
ments of such undertakings are
who are transferable from one
not allowed to take independent
ministry to another;
decisions, without the approval
(iv) It is generally considered to be
a major sub division of th e of the ministry concerned. This
Government department and is leads to delays, in matters where
subject to direct control of the prompt decisions are required;
ministry; (iii) These enterprises are unable
(v) They are accountable to the to take advantage of business
ministry since their management opportunities. The bureaucrat’s
is directly under the concerned over-cautious and conservative
ministry. approval does not allow them to
take risky ventures;
Merits (iv) There is red tapism in day-to-day
Departmental undertakings have operations and no action can be
certain advantages which are as taken unless it goes through the
follows: proper channels of authority;

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 62 BUSINESS  STUDIES

(v) There is a lot of political inter- government has the ultimate

ference through the ministry; financial responsibility and has
(vi) These organisations are usually the power to appropriate its
insensitive to consumer needs profits. At the same time, the state
and do not provide adequate also has to bear the losses, if any;
services to them. (iii) A statutory corporation is a body
corporate and can sue and be
3.3.2 Statutory Corporations sued, enter into contract and
Statutory corporations are public acquire property in its own name;
enterprises brought into existence by (iv) This type of enterprise is usually
a Special Act of the Parliament. The independently financed. It obtains
Act defines its powers and functions, funds by borrowings from the
rules and regulations governing its government or from the public
employees and its relationship with through revenues, derived from
government departments. sale of goods and services. It has
This is a corporate body created the authority to use its revenues;
by the legislature with defined powers (v) A statutory corporation is not
and functions and is financially subject to the same accounting
independent with a clear control and audit procedures applicable
over a specified area or a particular to government departments. It
type of commercial activity. It is a is also not concerned with the
corporate person and has the capacity central budget of the Government;
of acting in its own name. Statutory (vi) The employees of these enterprises
corporations therefore have the power are not government or civil
of the government and considerable servants and are not governed by
amount of operating flexibility of government rules and regulations.
private enterprises. The conditions of service of the
employees are governed by the
Features provisions of the Act itself. At
times, some officers are taken
Statutory corporations have certain
from government departments,
distinct features, which are discussed
on deputation, to head these
as below:
organisations.
(i) Statutory corporations are set up
under an Act of Parliament and
Merits
are governed by the provisions
of the Act. The Act defines the This form of organisation enjoys
objects, powers and privileges of certain advantages in its working,
a statutory corporation; which are as follows:
(ii) This type of organisation is (i) They enjoy independence in their
wholly owned by the state. The functioning and a high degree of

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 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 63

operational flexibility. They are (iv) The Government has a practice

free from undesirable government of appointing advisors to the
regulation and control; Corporation Board. This curbs
(ii) Since the funds of these organi- the freedom of the corporation
sations do not come from the in entering into contracts and
central budget, the government other decisions. If there is any
generally does not interfere in disagreement, the matter is
their financial matters, including referred to the government for
their income and receipts; final decisions. This further
(iii) Since they are autonomous delays action.
organisations they frame their
own policies and procedures 3.3.3 Government Company
within the powers assigned to A government company is established
them by the Act. The Act may, under The Companies Act, 2013
however, provide few issues/ and is registered and governed by
matters which require prior the provisions of The Act. These
approval of a particular ministry; are established for purely business
(iv) A statutory corporation is a purposes and in true spirit compete
valuable instrument for economic with companies in the private sector.
development. It has the power According to the section 2(45) of the
of the government, combined Companies Act 2013, a government
with the initiative of private company means any company in
enterprises. which not less than 51 per cent of the
paid up capital is held by the central
Limitations government, or by any state government
or partly by Central government
This type of organisation suffers from and partly by one or more State
several limitations, which are as governments and includes a company
follows: which is a subsidiary of a government
(i) In reality, a statutory corporation company. Under the Companies
does not enjoy as much operational Act 2013, there is no change in the
flexibility as stated above. All definition of a company. All provisions
actions are subject to many rules of the Act are applicable to government
and regulations; companies unless otherwise specified.
(ii) G o v e r n m e n t a n d p o l i t i c a l A government company may be formed
interference has always been as a private limited company or a public
there in major decisions or where limited company. There are certain
huge funds are involved; provisions which are applicable to the
(iii) Where there is dealing with public, appointment/retirement of directors
rampant corruption exists; and other managerial personnel.

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 64 BUSINESS  STUDIES

From the above it is clear that the (vi) These companies are exempted
government exercises control over the from the accounting and audit
paid up share capital of the company. rules and procedures. An auditor
The shares of the company are is appointed by the Central
purchased in the name of the President Government and the Annual
of India. Since the government is Report is to be presented in
the major shareholder and exercises the Parliament or the State
control over the management of Legislature;
these companies, they are known as (vii) The government company obtains
government companies. its funds from government
shareholdings and other private
Features shareholders. It is also permitted
to raise funds from the capital
Government companies have market.
certain characteristics which makes
them distinct from other forms of Merits
organisations. These are discussed
as follows: Government companies enjoy several
(i) It is an organisation created under advantages, which are as follows:
the Companies Act, 2013 or any (i) A government company can
other previous Company Law. be established by fulfilling the
(ii) The company can file a suit in requirements of the Indian
a court of law against any third Companies Act. A separate Act
party and be sued; in the Parliament is not required;
(iii) The company can enter into a (ii) It has a separate legal entity,
apart from the Government;
contract and can acquire property
(iii) I t e n j o y s a u t o n o m y i n a l l
in its own name;
management decisions and takes
(iv) The management of the company
actions according to business
is regulated by the provisions of
prudence;
the Companies Act, like any other
(iv) These companies by providing
public limited company;
goods and services at reasonable
(v) The employees of the company prices are able to control the
are appointed according to their market and curb unhealthy
own rules and regulations as business practices.
contained in the Memorandum
and Articles of Association of Limitations
the company. The Memorandum
and Articles of Association are Despite the autonomy given to
the main documents of the these companies, they have certain
company, containing the objects disadvantages:
of the company and its rules and (i) Since the Government is the
regulations; only shareholder in some of the

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 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 65

companies, the provisions of the role of public sector was redefined. It

Companies Act does not have was not supposed to play a passive role
much relevance; but to actively participate and compete
(ii) I t e v a d e s c o n s t i t u t i o n a l in the market with other private sector
responsibility, which a company companies in the same industry.
financed by the government They were also held accountable for
should have. It is not answerable losses and return on investment. If
directly to the Parliament; a public sector was making losses
(iii) The government being the sole continuously, it was referred to the
shareholder, the management Board for Industrial and Financial
and administration rests in the Reconstruction (BIFR) for complete
hands of the government. The overhauling or shut down. Various
main purpose of a government committees were set up to study
company, registered like other the working of inefficient public
companies, is defeated. sector units with reports on how to
improve their managerial efficiency
3.4 Changing Role of Public Sector and profitability. The role of public
sector is definitely not what was
At the time of Independence, it was
envisaged in the early 1960s or 70s.
expected that the public sector
enterprises would play an important (i) Development of infrastructure:
role in achieving certain objectives of the The development of infrastructure is a
economy either by direct participation prerequisite for industrialisation in any
in business or by acting as a catalyst. country. In the pre-Independence period,
The public sector would build up basic infrastructure was not developed
infrastructure for other sectors of the and therefore, industrialisation
economy and invest in key areas. The progressed at a very slow pace. The
private sector was unwilling to invest process of industrialisation cannot
in projects which required heavy be sustained without adequate
investment and had long gestation transportation and communication
periods. The government then took it facilities, fuel and energy, and basic
upon itself to develop infrastructural and heavy industries. The private
facilities and provide for goods and sector did not show any initiative to
services essential for the economy. invest in heavy industries or develop
The Indian economy is in a stage it in any manner. They did not have
of transition. The Five Year Plans in trained personnel or finances to
the initial stages of development gave immediately establish heavy industries
lot of importance to the public sector. which was the requirement of the
In the post–1990s, the new economic economy.
policies, emphasised on liberalisation, It was only the government which
privatisation and globalisation. The could mobilise huge capital, coordinate

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 66 BUSINESS  STUDIES

industrial construction and train industries were deliberately set up.

technicians and workforce. Rail, Four major steel plants were set up
road, sea and air transport was the in the backward areas to accelerate
responsibility of the government, and economic development, provide
their expansion has contributed to the employment to the workforce and
pace of industrialisation and ensured develop ancilliary industries. This was
future economic growth. The public achieved to some extent but there is
sector enterprises were to operate in scope for a lot more. Development
certain spheres. Investments were to of backward regions so as to ensure
be made to: a regional balance in the country is
(a) Give infrastructure to the core one of the major objectives of planned
sector, which requires huge development. Therefore, the govern-
capital investment, complex and ment had to locate new enterprises
upgraded technology, big and in backward areas and at the same
effective organisation structures time prevent the mushrooming growth
like steel plants, power generation of private sector units in already
plants, civil aviation, railways, advanced areas.
petroleum, state trading, coal, (iii) Economies of scale: Where
etc; large scale industries are required to
(b) Give a lead in investment to the be set up with huge capital outlay,
core sector where private sector the public sector had to step in to
enterprises are not functioning take advantage of economies of scale.
in the desired direction, like Electric power plants, natural gas,
fertilizers, pharmaceuticals, petroleum and telephone industries
petro-chemicals, newsprint, are some examples of the public sector
medium and heavy engineering; setting up large scale units. These
(c) G i v e d i r e c t i o n t o f u t u r e units required a larger base to function
investments like hotels, project economically which was only possible
management, consultancies, with government resources and mass
textiles, auto-mobiles, etc. scale production.
(ii)  Regional balance: The government (iv) Check over concentration of
is responsible for developing all regions economic power: The public sector
and states in a balanced way and acts as a check over the private
removing regional disparties. Most of sector. In the private sector there
the industrial progress was limited to are very few industrial houses which
a few areas like the port towns in the would be willing to invest in heavy
pre-Independence period. After 1951, industries with the result that wealth
the government laid down in its Five gets concentrated in a few hands and
Year Plans, that particular attention monopolostic practices are encouraged.
would be paid to those regions which This gives rise to inequalities in income,
were lagging behind and public sector which is detrimental to society.

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 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 67

The public sector is able to set public sector from 17 to 8

large industries which requires heavy (and then to 3): In the 1956
investment and thus the income and resolution on Industrial policy,
benefits that accrue are shared by 17 industries were reserved for
a large of number of employees and the public sector. In 1991, only
workers. This prevents concentration 8 industries were reserved for
of wealth and economic power in the the public sector, they were
private sector. restricted to atomic energy, arms
(v) Import substitution: During the and communication, mining,
second and third Five Year Plan period, and railways. In 2001, only
India was aiming to be self-reliant three industries were reserved
in many spheres. Obtaining foreign exclusively for the public sector.
exchange was also a problem and it These are atomic energy, arms
was difficult to import heavy machinery and rail transport. This meant
required for a strong industrial base. that the private sector could enter
At that time, public sector companies all areas (except the three) and
involved in heavy engineering which the public sector would have to
would help in import substitution were compete with them.
established. Simultaneously, several The public sector has played a
public sector companies like STC and vital role in the development of the
MMTC have played an important role economy. However, the private sector
in expanding exports of the country. is also quite capable of contributing
(vi) Government policy towards substantially to the nation building
the public sector since 1991: The process. Therefore, both the public
Government of India had introduced sector and the private sector need to
four major reforms in the public sector be viewed as mutually complementary
in its new industrial policy in 1991. parts of the national sector. Private
The main elements of the Government sector units also have to assume
policy are as follows: g re a te r p u b lic re s p o n s ib ilitie s .
• Restructure and revive potentially Simultaneously, the public sector
viable PSUs needs to focus on achieving more in a
• Close down PSUs, which cannot highly competitive market.
be revived (b) Disinvestment of shares of
• Bring down governments equity in a select set of public sector
all non-strategic PSUs to 26 per enterprises: Disinvestment
cent or lower, if necessary; and involves the sale of the equity
• Fully protect the interest of shares to the private sector and
workers. the public. The objective was to
(a) Reduction in the number of raise resources and encourage
industries reserved for the wider participation of the general

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 68 BUSINESS  STUDIES

public and workers in the the private sector: All public

ownership of these enterprises. sector units were referred to the
The government had taken a Board of Industrial and Financial
decision to withdraw from the Reconstruction to decide
industrial sector and reduce whether a sick unit was to be
its equity in all undertakings. restructured or closed down. The
It was expected that this would Board has reconsidered revival
lead to improving managerial and rehabilitation schemes for
performance and ensuring some cases and winding up
financial discipline. But there for a number of units. There
remains a lot to be done in is a lot of resentment amongst
this area. workers of the units which are
The primary objectives of privatising to be closed down. A National
public sector enterprises are: Renewal Fund was set up by the
• Releasing the large amount government to retrain or redeploy
of public resources locked up retrenched labour and to provide
in non-strategic Public Sector compensation to public sector
Enterprises (PSEs), so that they employees seeking voluntary
may be utilised on other social retirement.
priority areas such as basic There are many enterprises
health, family welfare and primary which are sick and not capable
education.
of being revived as they have
• Reducing the huge amount of
accumulated huge losses. With
public debt and interest burden;
public finances under intense
• Transferring the commercial
pressure, both central and state
risk to the private sector so that
government are just not able
the funds are invested in able
to sustain them much longer.
projects;
• F r e e i n g t h e s e e n t e r p r i s e s The only option available to the
from government control and government in such cases is to
introduction of corporate close down these undertakings
governance; and after providing a safety net for the
• In many areas where the public employees and workers. Resources
sector had a monopoly, for under the National Renewal Fund
example, telecom sector the have not been sufficient to meet
consumers have benefitted by the cost of Voluntary Separation
more choices, lower prices and Scheme or Voluntary Retirement
better quality of products and Scheme.
services. (d) Memorandum of Understanding:
(c) Policy regarding sick units Improvement of performance
to be the same as that for through a MoU (Memorandum

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 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 69

of Understanding) system by Features

which managements are to be
These corporations have distinct
granted greater autonomy but
features which distinguish them from
held accountable for specified other private sector companies, public
results. Under this system, public sector companies and public sector
sector units were given clear enterprises. These are as follows:
targets and operational autonomy (i) Huge capital resources: These
for achieving those targets. The enterprises are characterised by
MoU was between the particular possessing huge financial resources
public sector unit and their and the ability to raise funds from
administrative ministries defining different sources. They are able to
their relationship and autonomy. tap funds from various sources. They
may issue equity shares, debentures
3.5 Global Enterprises or bonds to the public. They are also
At some time you must have come in a position to borrow from financial
institutions and international banks.
across products produced by Multi
They enjoy credibility in the capital
National Corporations (MNCs). In
market. Even investors and banks of
the last 2 decades or so. MNCs have
the host country are willing to invest
played an important role in the Indian
in them. Because of their financial
economy. They have become a common strength they are able to survive under
feature of most developing economies all circumstances.
in the world. MNCs as is evident (ii) Foreign collaboration: Global
from what we see around us, are enterprises usually enter into
gigantic corporations which have their agreements with Indian companies
operations in a number of countries. pertaining to the sale of technology,
They are characterised by their huge production of goods, use of brand
size, large number of products, names for the final products, etc. These
advanced technology, marketing MNCs may collaborate with companies
strategies and network of operations in the public and private sector. There
all over the world. Global enterprises are usually various restrictive clauses
thus are huge industrial organisations in the agreement relating to transfer
which extend their industrial and of technology, pricing, dividend
marketing operations through a payments, tight control by foreign
network of their branches in several technicians, etc. Big industrial houses
countries. These enterprises operate wanting to diversify and expand have
in several areas producing multiple gained by collaborating with MNCs in
products with their business strategy terms of patents, resources, foreign
extending over a number of countries. exchange etc. But at the same time
They do not aim at maximising profits these foreign collaborations have given
from one or two products but instead rise to the growth of monopolies and
spread their branches all over. concentration of power in few hands.

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 70 BUSINESS  STUDIES

(iii) Advanced technology: These image also builds up and their market

enterprises possess technological territory expands enabling them
superiorities in their methods of to become international brands.
production. They are able to conform They operate through a network of
to international standards and quality subsidiaries, branches and affiliates
specifications. This leads to industrial in host countries. Due to their giant
progress of the country in which such size they occupy a dominant position
corporations operate since they are in the market.
able to optimally exploit local resources (vii)  Centralised control: They have
and raw materials. Computerisation their headquaters in their home
and other inventions have come due country and exercise control over all
to the technological advancements branches and subsidiaries. However,
provided by MNCs. this control is limited to the broad policy
(iv) Product innovation: These framework of the parent company.
enterprises are characterised by There is no interference in day-to-day
having highly sophisticated research operations.
and development departments
engaged in the task of developing 3.6 Joint Ventures
new products and superior designs of
Meaning
existing products. Qualitative research
requires huge investment which only Business organisations as you have
global enterprises can afford. studied earlier can be of various
( v )   M a r k e t i n g s t r a t e g i e s : The types private or government owned or
marketing strategies of global global enterprises. Now, any business
companies are far more effective than organisation if it so desires can
other companies. They use aggressive join hands with another business
marketing strategies in order to organisation for mutual benefit.
increase their sales in a short period. These two organisations may be
They posses a more reliable and up- private, government-owned or a foreign
to-date market information system. company. When two businesses
Their advertising and sales promotion agree to join together for a common
techniques are normally very effective. purpose and mutual benefit, it gives
Since they already have carved out rise to a joint venture. Businesses
a place for themselves in the global of any size can use joint ventures to
market, and their brands are well- strengthen long-term relationships or
known, selling their products is not a to collaborate on short term projects. A
problem. joint venture can be flexible depending
(vi) Expansion of market territory: upon the party’s requirements. These
Their operations and activities extend need to be clearly stated in a joint
beyond the physical boundaries of their venture agreement to avoid conflict at
own countries. Their international a later stage.

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 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 71

A joint venture may also be the channels, technology or finance. In

result of an agreement between two this kind of a joint venture, two or more
businesses in different countries. In (parent) companies agree to share
this case, there are certain provisions capital, technology, human resources,
provided by the governments of the risks and rewards in the formation of
two countries, which will have to be a new entity, under shared control.
adhered to. In India, joint venture companies
Thus, we see that joint ventures are the best way of doing business.
may mean many things, depending There are no separate laws for
upon the context we are using it these joint ventures. The companies
in. But in a broader sense, a joint incorporated in India are treated the
venture is the pooling of resources and same as domestic companies.
expertise by two or more businesses,
to achieve a particular goal. The risks Joint Ventures are of two types —
and rewards of the business are Contractual joint venture
also shared. The reasons behind the Equity-based joint venture
joint venture often include business
expansion, development of new 3.6.1 Types of Joint Ventures
products or moving into new markets, (i) Contractual Joint Venture (CJV):
particularly in another country. It is In a contractual joint venture, a new
becoming increasingly common for jointly-owned entity is not created.
companies to create joint ventures There is only an agreement to work
with other businesses/companies together. The parties do not share
and form strategic alliances with ownership of the business but exercise
them. The reasons for these alliances some elements of control in the
may be complementary capabilities joint venture. A typical example
and resources such as distribution of a contractual joint venture is a

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 72 BUSINESS  STUDIES

franchisee relationship. In such a (e) S h a r e d p r o f i t s a n d l o s s e s

relationship the key elements are: according to the agreement.
(a) Two or more parties have a A joint venture must be based on a
common intention – of running memorandum of understanding signed
a business venture; by both the parties, highlighting the
basis of a joint venture agreement.
(b) Each party brings some inputs;
The terms should be thoroughly
(c) Both parties exercise some discussed and negotiated to avoid
control on the business venture; any legal complications at a later
and stage. Negotiations and terms must
(d) T h e r e l a t i o n s h i p i s n o t a take into account the cultural and
transaction-to-transaction legal background of the parties. The
relationship but has a character joint venture agreement must also
of relatively longer duration. state that all necessary governmental
approvals and licences will be obtained
(ii) Equity-based Joint Venture (EJV): within a specified period.
An equity joint venture agreement
is one in which a separate business 3.6.2 Benefits
entity, jointly owned by two or more
parties, is formed in accordance with Business can achieve unexpected
the agreement of the parties. The key gains through joint ventures with a
operative factor in such case is joint partner. Joint ventures can prove to
ownership by two or more parties. be extremely beneficial for both parties
The form of business entity may vary involved. One party may have strong
— company, partnership firm, trusts, potential for growth and innovative
limited liability partnership firms, ideas, but is still likely to benefit from
venture capital funds, etc. entering into a joint venture because it
enhances its capacity, resources and
(a) There is an agreement to either
technical expertise. The major benefits
create a new entity or for one of
of joint ventures are as follows:
the parties to join into ownership
of an existing entity; (i)  Increased resources and capacity:
Joining hands with another or teaming
(b) Shared ownership by the parties up adds to existing resources and
involved; capacity enabling the joint venture
company to grow and expand more
(c) Shared management of the jointly
quickly and efficiently. The new
owned entity;
business pools in financial and human
(d) Shared responsibilities regarding resources and is able to face market
capital investment and other challenges and take advantage of new
financing arrangements; and opportunities.

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(ii) Access to new markets and to get quality products for their global
distribution networks: When a requirements. India is becoming an
business enters into a joint venture important global source and extremely
with a partner from another country, competitive in many products.
it opens up a vast growing market. For There are many reasons for this,
example, when foreign companies form low cost of raw materials and labour,
joint venture companies in India they technically qualified workforce;
gain access to the vast Indian market. management professionals, excellent
Their products which have reached manpower in different cadres, like
saturation point in their home markets
lawyers, chartered accountants,
can be easily sold in new markets.
engineers, scientists. The international
They can also take advantage of
partner thus, gets the products of
the established distribution channels
required quality and specifications
i.e., the retail outlets in different local
markets. Otherwise, establishing their at a much lower cost than what is
own retail outlets may prove to be prevailing in the home country.
very expensive. (vi) Established brand name: When
(iii)  Access to technology: Technology two businesses enter into a joint
is a major factor for most businesses venture, one of the parties benefits from
to enter into joint ventures. Advanced the other’s goodwill which has already
techniques of production leading to been established in the market. If the
superior quality products saves a lot joint venture is in India and with an
of time, energy and investment as Indian company, the Indian company
they do not have to develop their own does not have to spend time or money
technology. Technology also adds in developing a brand name for the
to efficiency and effectiveness, thus product or even a distribution system.
leading to reduction in costs. There is a ready market waiting for
(iv) Innovation: The markets the product to be launched. A lot of
are increasingly becoming more investment is saved in the process.
demanding in terms of new and
innovative products. Joint ventures 3.7 Public Private Partnership (PPP)
allow business to come up with
something new and creative for The Public Private Partnership model
the same market. Specially foreign allocates tasks, obligations and risks
partners can come up with innovative among the public and private partners
products because of new ideas and in an optimal manner. The public
technology. partners in PPP are Government
(v) Low cost of production: When entities, i.e., ministries, government
international corporations invest in departments, municipalities or
India, they benefit immensely due to the state-owned enterprises. The private
lower cost of production. They are able partners can be local or foreign

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 74 BUSINESS  STUDIES

(international) and include businesses investment and transfer of assets that

or investors with technical or financial support the partnership in addition
expertise relevant to the project. to social responsibility, environmental
PPP also includes NGOs and/or awareness and local knowledge. The
community-based organisations who private sector’s role in the partnership
are the stakeholders directly affected is to make use of its expertise in
by the project. PPP is, therefore, operations, managing tasks and
defined as a relationship between innovation to run the business
public and private entities in the efficiently.
context of infrastructure and other Sectors in which PPPs have
been completed worldwide include
services. Under the PPP model, public
power generation and distribution,
sector plays an important role and
water and sanitation, refuse disposal,
ensures that the social obligations pipelines, hospitals, school buildings
are fulfilled and sector reforms and and teaching facilities, stadiums,
public investment are successfully air traffic control, prisons, railways,
met. The government’s contribution roads, billing and other information
to PPP is in the form of capital for technology systems, and housing.

PPP Model
Features
• Contract with the private party to design and build public facility.
• Facility is financed and owned by the public sector.
• Key driver is the transfer of design and construction risk.
Application
• Suited to capital projects with small operating requirement.
• Suited to capital projects where the public sector wishes to retain the operating
responsibility.
Strengths
• Transfer of design and construction risk.
• Potential to accelerate project.
Weaknesses
• Conflict between parties may arise on environmental considerations
• Does not attract private finance easily.
Example
• Kundli Manesar Expressway Ltd.: In this 135 km expressway, land has been
provided by the government and surface has been laid out by the company.

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Key Terms

Public sector Departmental undertaking Globalisation

Public enterprises Government companies Global enterprises
Statutory corporation Disinvestment Public Sector Undertakings
Joint ventures Public accountability
Public Private Partnership Privatisation

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.
Forms of organising public sector enterprises: Government’s participation
in business and economic sectors of the country needs some kind of
organisational framework to function. A public enterprise may take any
particular form of organisation depending upon the nature of it’s operations
and their relationship with the government. The suitability of a particular form
of organisation would depend upon its requirements. The forms of organisation
which a public enterprise may take are as follows:
(i) Departmental undertaking
(ii) Statutory corporation
(iii) Government company
Departmental undertakings: These enterprises are established as
departments of the ministry and are considered part or an extension of the
ministry itself. The Government functions through these departments and the
activities performed by them are an integral part of the functioning of the
government.
Statutory corporations: Statutory corporations are public enterprises
brought into existence by a Special Act of the Parliament. The Act defines its
powers and functions, rules and regulations governing its employees and its

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 76 BUSINESS  STUDIES

relationship with Government departments. This is a corporate body created

by legislature with defined powers and functions and financially independent
with a clear control over a specified area or a particular type of commercial
activity.
Government company: A Government company means any company in
which not less than 51 percent of the paid up capital is held by the central
government, or by any state governments or government or partly by central
government and partly by one or more state governments and includes a
company which is a subsidiary company of such a government company.
Changing role of public sector: At the time of Independence, it was expected
that the public sector enterprises would play an important role in achieving
certain objectives of the economy either by direct participation in business
or by acting as a catalyst. The Indian economy is in a stage of transition.
In the post 90’s period, the new economic policies emphasised liberalisation,
privatisation and globalisation. The role of the public sector was redefined.
It was not supposed to play a passive role but to actively participate
and compete in the market with other private sector companies in the
same industry.
Development of infrastructure: The process of industrialisation cannot be
sustained without adequate transportation and communication facilities, fuel
and energy, and basic and heavy industries. It is only the government which
could mobilise huge capital, coordinate industrial construction and train
technicians and workforce.
Regional balance: The government is responsible for developing all regions
and states in a balanced way and removing regional disparties. Development
of backward regions so as to ensure a regional balance in the country is one of
the major objectives of planned development. Therefore, the government had
to locate new enterprises in backward areas and at the same time prevent the
mushrooming growth of private sector unit in already advanced areas.
Economies of scale: Where large scale industries are required to be set up
with huge capital outlay, the public sector had to step in to take advantage of
economies of scale.
Check over concentration of economic power: The public sector acts as a
check over the private sector. In the private sector there are very few industrial
houses which would be willing to invest in heavy industries with the result
that wealth gets concentrated in a few hands and monopolostic practices are
encouraged.
Import substitution: During the second and third Five Year Plan period,
India was aiming to be self-reliant in many spheres. Public sector companies
involved in heavy engineering which would help in import substitution were
established.

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Government policy towards public sector since 1991. Its

main elements are: Restructure and revive potentially viable PSUs, Close
down PSUs, which cannot be revived. Bring down governments equity in all
non-strategic PSUs to 26 per cent or lower if necessary; and fully protect the
interest of workers.
(a) Reduction in the number of industries reserved for the public sector from 17
to 8 (and then to 3): This meant that the private sector could enter all areas
(except 3) and the public sector would have to compete with them.
(b) Disinvestment of shares of a select set of public sector enterprises:
Disinvestment involves the sale of the equity shares to the private sector
and the public. The objective was to raise resources and encourage wider
participation of the general public and workers in the ownership of these
enterprises. The government had taken a decision to withdraw from the
industrial sector and reduce its equity in all undertakings.
(c) Policy regarding sick units to be the same as that for the private sector: All
public sector units were referred to the Board of Industrial and Financial
Reconstruction to decide whether a sick unit was to be restructured or
closed down.
Memorandum of Understanding: Improvement of performance through a
MoU (Memorandum of Understanding) system by which managements are to
be granted greater autonomy but held accountable for specified results.
Global enterprises: In the last 2 decades MNCs have played an important
role in the Indian economy. They are characterised by their huge size, large
number of products, advanced technology, marketing strategies and network
of operations all over the world. Global enterprises thus are huge industrial
organisations which extend their industrial and marketing operations through
a network of their branches in several countries. These corporations have
distinct features which distinguishes them from other private sector companies,
public sector companies and public sector enterprises i.e., (i) Huge capital
resources, (ii) Foreign collaboration, (iii) Advanced Technology, (iv) Product
innovation, (v) Marketing strategies, (vi) Expansion of market territory, (vii)
Centralised control.
Joint ventures: Joint ventures may mean many things, depending upon the
context we are using it in. But in a broader sense, a joint venture is the pooling
of resources and expertise by two or more businesses, to achieve a particular
goal. The risks and rewards of the business are also shared. The reasons
behind the joint venture often include business expansion, development of
new products or moving into new markets, particularly in another country.
Public Private Partnership: It is a relationship among public sector and
private sector for allocation and completion of development projects.

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 78 BUSINESS  STUDIES

EXERCISES

Short Answer Questions

1. Explain the concept of public sector and private sector.
2. State the various types of organisations in the private sector.
3. What are the different kinds of organisations that come under the public
sector?
4. List the names of some enterprises under the public sector and classify
them.
5. Why is the government company form of organisation preferred to other
types in the public sector?
6. How does the government maintain a regional balance in the country?
7. State the meaning of public private partnership.

Long Answer Questions

1. Describe the Industrial Policy 1991, towards the public sector.
2. What was the role of the public sector before 1991?
3. Can the public sector companies compete with the private sector in terms
of profits and efficiency? Give reasons for your answer.
4. Why are global enterprises considered superior to other business
organisations?
5. What are the benefits of entering into joint ventures and public private
partnership?

Projects/Assignments
1. Make a list of Indian companies entering into joint ventures with foreign
companies. Find out the apparent benefits derived out of such ventures.

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