CHAPTER - 3 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES

CHAPTER - 3

PRIVATE, PUBLIC AND GLOBAL ENTERPRISES

Private sector and public sector

      The industrial policy resolution of 1948 and 1956 gave emphasis to the state role in the spheres of industrial, commercial and public utility services. Before 1991, there was lot of restrictions to the private sector. These took the shape of licensing, limited on expansion, reserving a good number of sectors to the public sectors and small scale industries etc., various complicated laws and producers also stood in the way of growth of private sector.

        Public sectors enterprises are those enterprises are those enterprises which are owned and controlled by the central or state governments.The industrial policy, 1991 gave more emphasis on the role of private sector in the development of industries. Various policy decisions and reforms were intruded to encourage and help the entrepreneur in the private sector.

Objectives of public sector enterprises

·        To bring about  speedy industrial development

·        To develop certain industries which help the growth of other industries

·        To set right the regional imbalance in the growth of industries

·        To check the growth of monopoly

·        To ensure adequate supply of essential articles at fair and reasonable prices

Features of public sector enterprises

·     State ownership: it is owned by the central government or a state government or jointly by both

·     State control : the control over management fully rests with the government

·     State financing: finance is from the government. Funds are made available either from the treasury or appropriation through budget.

·     Socio- economic activities: they are guided by the objective of deriving social and economic benefits.

·     Public accountability: they are accountable to the public at large for their performance and results.

Forms of organizing public sector enterprises

            The public enterprises are organized in different forms. Since they are oriented differently in terms of ownership, responsibilities and objectives.

1.           Departmental undertaking

2.          Public corporation

3.         Government companies

1.      Departmental Undertakings

     A departmental undertaking is created by the decision of the government. Its activities are organized by the government headed by a minister

a)      It is organized and managed by a minister

b)      Financed t6hrough budget allocation

c)      Rules and procedures for staff selection, appointment and service conditions are the same as that of government servants.

d)      Budgeting, accounting and auditing are as applicable to government departments

e)      It cannot be sued without previous consent of government

Advantages

v Total government control helps implementation of government policies

v Strict audit and legislative control prevent misuse of public funds

v Managed by responsible government servants who keep the secrecy required in strategic and defence industries

v Revenue from these undertaking are remitted in the treasury.

Disadvantages

v Political interferences mar smooth functioning

v Subject o political changes these undertaking cannot follow a long term business policy

v  Red tapism

v Over capitalization

v Lac managerial skill and efficiency

v Political consideration rather than business considerations

v Government control inhibits purchase of raw materials and sale of products

v Absence of competition

Some important departmental undertaking in India

a)      All India radio

b)      Doordarshan

c)      Post and telegraph

d)       Indian railways

e)      Chittaranjan locomotives , Calcutta

f)        Integral coach factory , madras

g)      Silver refinery project, Calcutta

h)      Diesel locomotives , Varanasi

i)        Ordinance factories

j)         Kolar gold mines, Mysore.

2. Public corporations/ statutory corporations

    The defects found in the departmental system made the government to think the creation of , public corporation or statutory corporation,

Some important public corporations are:

Ø Reserve bank of India

Ø The Indian airlines corporation

Ø The life insurance corporation

Ø Air India

Ø Oil and natural gas commission

Ø Industrial finance corporation

Ø State bank of India

Ø Unit trust of India

Ø Kerala state road transportation corporation

Ø Kerala state industrial development corporation

Characteristics

a)      It is created by a special act

b)      Separate legal existence

c)      Wholly owned by the state

d)      Managed by board of directors

e)      It has financial autonomy

f)        Employees are appointed according to the terms and conditions of the corporation

g)      It is not subject to budgeting, accounting and audit laws of the government

h)      It can enter into contracts in its own name

i)        A public corporation work primarily for service, and profits is only secondary

j)        o direct government control

Advantages

ü This autonomous body

ü Combine the advantages of both departmental undertaking and the privately owned companies

ü Not subject to political changes

ü Flexibility of operation

ü Its accountability  to the parliament guarantees government control

ü Better salary and service

ü  Talented persons in the field of business are nominated to the board of directors

ü The primary motive of service rather than profit provides better public service

Disadvantages

üGovernment interference in the day to day working mars autonomy

üAny change in the functions and requires amendment of the act in parliament

üAbsence of competition and profit motive leads to inefficiency

3.    GOVERNMENT COMPANIES

                        A company in which not less than 51 % of share capital is held by the central government or by any state government or government or partly by the central government and partly by one or more state government

Characteristics

a)    Formed by registration under companies Act

b)    Whole or major part of shares held by the government and the rest by private parties

c)    Its own memorandum and articles of association

d)     It is a body corporate with separate legal existence

e)    Directors appointed by government alone or jointly by government

f)     Employees appointed by directors board

g)     Free from budgeting , accounting and audit

Advantages

ü Permits public participation in share capital

ü Easy formation by registration

ü  Flexibility in operation

ü Enjoys better credit facilities

ü Competition and profit motive on business lines

ü No government control

ü Majority of directors appointed by government

ü  Little political interference

ü Attract foreign capital, technical knowhow and foreign investors

ü Enjoys the rights, immunities and benefits of private sector companies.

Disadvantages

1)     Chance of political interference

2)    Minority interest may be overlook since decisions are taken to comply with government wishes

3)    Directors and staff may not take active interest as they have no share in the profits

4)    In reality there is no autonomy

5)   No effective government control on financial matters

Some important govt. companies in India are:

1)     The Hindustan machine tools ltd

2)    The Hindustan steel ltd

3)   The Indian telephone industrial ltd

4)    The state trading corporation

5)   The Hindustan shipyard ltd

6)   The Indian oil corporation

7)    Fertilizers and chemicals ltd

8)   Bharat electronics ltd

9)   Asoka hotels ltd

10) Madras refineries ltd

Changing role of public sector

     Public sector plays an important role in India’s economic development. It has come to occupy such a predominant position by actively performing in the achievement of country’s economic and social goals. Service is the primary objective of public sector enterprise. The main contributions of public sector enterprises to Indian economy are:

1)      Filling gaps in the industrial sector

2)     Employment generation

3)   Balanced regional development

4)    Improving balance of payment position

5)   Promoting and protecting small scale enterprises and ancillary industries

6)   Facilitating research and development and community development

7)    Ensuring equitable distribution of wealth and reducing economic disparities

Public sector enterprises suffer from the following shortcomings

1)     Poor project planning

2)     Over capitalization

3)   Excessive overheads

4)    Over staffing

5)   Under utilization  of available  capacity

6)    Improper price policy

7)    Inefficient management

8)   Poor industrial relations

9)   Lack of co-ordination among various functional activities

10) Poor returns

11)   Slow growth

 Government took certain measures to protecting public sector enterprises

·     Restricting the role of public sector

·     Essential infrastructure goods and services

·     Exploration of oil and mineral resources

·     Technology development in areas which require long term investment and where private sector is hesitant to operate

·     Manufacture of strategic such as defence equipment

·     Strengthening enterprises through  ‘memorandum of understanding’

Government tries to strengthen the enterprises which fall in certain categories like

·     Reserved areas of operation

·     High priority areas

·     Those generating reasonable profits

  Such enterprises are given management freedom through the system of memorandum of understanding (MOU)

1.      Product restructuring

        Product mix of public sector will be revised to make them concentrate on strategic, high technique and essential infrastructure

2.     Privatization of public enterprises

          Of late , there is a move to privatize some of the public sector undertakings. Though the speed of privatization initially is slow, it will gradually pick up and will attain its desired goals.

3.    Revival and rehabilitation through BIFR

       Highly sick public enterprises which are unlikely to be revived will be referred to the board for industrial and financial reconstruction (BIFR) or other specialized agencies, for rehabilitation

4.     Professional  management

       The board of directors of public sector enterprises would be made more accountable to the owner, i.e., shareholders

5.    Provision of national renewal fund

      National relief fund (NRF) was set up to protect the interests of workers in the public sector. Its functions consist of retraining, redeployment and counselling. Provision is made to help the workers who retire voluntarily or are made surplus.

6.     Financial restructuring

To procure amounts of funds and to encourage greater public participation, government would offer a part of its holding to mutual funds, financial institutions, workers and the general public.

GLOBAL ENTERPRISES (MULTINATIONAL COMPANIES)

                  Multinational company means a company that has business operations in many countries. In other words, it is a company which allocates its resources beyond national frontiers but is nationally based in terms of ownership and top management. Basically they are international giant sized companied with production location in more than one country. It may design a product or service with an eye on global market.

                                It is known by different names_ transnational corporation, global enterprise, and world enterprise, global giant or international enterprise.

                 The idea behind multinational firm lies in its owners desire to maximize sales and profits. Its headquarters are located in one country. In addition to that, it carries on business operations in other countries. The major reasons for the growth of multinational companies are as follows:

·      Liberalization of control over international direct investments by various countries.

·     Step taken by developing countries to invite foreign capital to accelerate their industrial development.

Features:

·     Giant size : The assets turnover of several multinational companies is pretty large

·      Centralized control: since the headquarters of a MNC is in the home country, it can exercise better control over the operations of its branches.

·     International operations:

             It has production, marketing and other facilities in various countries. It works through a network of subsidiaries, branches and affiliates in host countries it owns and controls huge amount worth of assets in foreign countries.

·     Oligopoly power :

             Multinational companies are oligopolistic in nature. Due to vast resources at their disposal and giant size, they occupy a predominant position in the market. Through takeovers, they become great economic powers.

·     Sophisticated technology:

             Use of advanced technology at its command can provide world class products and services.

·     Professional management:

             The management of an MNC is highly professionalized. It employees professionally trained personnel to handle huge funds, advanced technology and international business operations.

·     International markets:

             With vast resources and super marketing expertise, a multinational company can have easy access to international markets.

JOINT VENTURES (JV)

            This is a very common mode of entering into international business. Joint venture means starting a firm which is jointly owned by the two or more otherwise independent firms. A joint venture comes into in three major types:

       i.          Foreign investors buying an interest in a local firm.

     ii.          Local firm acquiring an interest in an existing foreign firm

    iii.          Both the firms_ foreign and local_ jointly establishing a new firm.

Formation

a)   Formalities

·     Joint venture company will be a public or a private limited company

·     Place of registered office of the joint venture company

·     Propose a name of the joint venture company and check its availability from the registrar of companies (ROC) where the re4gistrered office of the company is to situated and the company is to be incorporated

·     Choose their subscribed to the memorandum of association which will obviously include the partners to the joint venture and their nominees

·     Prepare the memorandum and articles of association in consultation with the joint venture partners, get them printed and suitably stamped , and submitted the same with required documents

·     On receipt of certificate of incorporation , the new company may start business

b)   Articles

         To avoided contradictions the articles of association should contain the stipulations mentioned in the joint venture agreement and clearly delineate the rights and obligations of the partners.

c)   Non- resident partner

       In case of the partners of the joint venture company is a non-resident, approval of reserve bank of India (RBI) will be required for acquiring shares of the company and establishing place of business in India

Benefits:

·     Access to markets:

         JVs can have increased access to customers

·     Distribution network:

       They can also take advantage of the established distribution channels

·     Capacity:

      JV partners can reap the benefits of increased capacity in terms of production as well as economies of scale and scope.

·     Staff:

    JV can share staff enable ling partners to benefits from specialized staff

·     Purchasing:

    Vast resources available at their disposal JV partners may be able to collectively benefits from favorable conditions while making purchases

·     Technology/ intellectual property:

       As with other resources JV partners can share technology. A JV may also enable increasing research and the development of new innovate ideas.

·     Finance:

    Firms pool their resources for mutual benefit. This eliminates the need to borrow funds or go in search for outside investors.