Business Studies: Class 11 — Chapter 3: Private, Public and Global Enterprises

The private sector consists of businesses owned, managed, and controlled by individuals or a group of individuals. The primary objective of these organizations is profit maximization.

Common forms of private sector organizations include:

• Sole Proprietorship
• Partnership
• Joint Hindu Family Business
• Cooperative Society
• Company (Public Limited and Private Limited)

The public sector consists of organizations owned and managed by the government. These entities may be partly or wholly owned by the Central or State government, and are established to provide goods and services to the public while promoting social welfare.

This is the oldest and most traditional form of organizing public enterprises. They are established as departments of a ministry and are considered an extension of the ministry itself.

Key Features:

• Funded directly from the government treasury through annual budget appropriations.
• Subject to strict government accounting and audit controls.
• Employees are civil servants/government servants, headed by IAS officers.
• Under the direct control of the concerned ministry.

Merits:

• Effective parliamentary control over operations.
• High degree of public accountability.
• Revenue earned goes directly to the government treasury.
• Highly suitable for activities involving national security.

Limitations:

• Lack of operational flexibility.
• Delays in decision-making due to bureaucratic approval processes.
• Inability to take quick advantage of business opportunities.
• Red tapism and political interference in day-to-day operations.

These are public enterprises brought into existence by a Special Act of Parliament. The Act defines their powers, functions, rules, and relationship with government departments.

Key Features:

• Financially independent with the power to borrow and use revenues.
• A corporate body that can sue, be sued, and acquire property in its own name.
• Employees are not civil servants; their terms are governed by the Act itself.
• Not subject to the same budget, accounting, and audit controls as government departments.

Merits:

• High degree of operational flexibility and autonomy.
• Free from undesirable government regulation and budget constraints.
• Can frame independent policies and procedures.

Limitations:

• In practice, operational flexibility is often restricted by government guidelines.
• Political interference remains common in major decisions.
• Potential for corruption in public-dealing operations.

A government company is established under the Companies Act, 2013, where not less than 51% of the paid-up capital is held by the Central Government, State Government(s), or jointly.

Key Features:

• Registered and governed by the provisions of the Companies Act.
• Can file a suit and be sued in a court of law.
• Can enter into contracts and acquire property in its own name.
• Employees are appointed according to the company's own Memorandum and Articles of Association.

Merits:

• Can be established easily without passing a separate Act in Parliament.
• Enjoys separate legal entity status apart from the government.
• Provides managerial autonomy to take quick business decisions.

Limitations:

• Since the government is the major shareholder, the provisions of the Companies Act can lose practical relevance.
• Evades direct constitutional responsibility to the Parliament.
• Management and administration rest primarily in government hands.

Initially, the public sector was expected to build the core infrastructure of the nation. Its key objectives included:

• Development of Infrastructure: Investing in heavy industries, transport, and power where the private sector was unwilling to invest due to high capital requirements and long gestation periods.
• Regional Balance: Setting up industries in backward areas to prevent regional disparities and generate employment.
• Economies of Scale: Operating large-scale industries like electric power and natural gas to optimize resources.
• Import Substitution: Establishing heavy engineering industries to make the country self-reliant and save foreign exchange.

The Industrial Policy of 1991 introduced major reforms to improve the efficiency of public sector undertakings (PSUs):

1. Reduction in Reserved Industries: The number of industries reserved exclusively for the public sector was reduced from 17 to 8, and eventually to 3 (Atomic Energy, Arms, and Rail Transport).
2. Disinvestment: The government began selling equity shares of public sector enterprises to the private sector and the general public to raise resources and encourage wider participation.
3. Policy for Sick Units: Sick public enterprises were referred to the Board for Industrial and Financial Reconstruction (BIFR) for restructuring, rehabilitation, or closure.
4. Memorandum of Understanding (MoU): A system introduced to grant greater operational autonomy to PSU managements while holding them accountable for specific performance targets.

• Huge Capital Resources: Ability to raise massive funds from equity, debentures, and international banks.
• Foreign Collaboration: Entering into agreements with host-country companies for technology transfer, patents, and brand names.
• Advanced Technology: Possessing superior methods of production to conform to international quality standards.
• Product Innovation: Maintaining highly sophisticated R&D departments to develop new products and designs.
• Marketing Strategies: Using aggressive advertising and sales promotion techniques to capture global markets.
• Centralised Control: Headquarters located in the home country exercise broad policy control over all global branches and subsidiaries.

• Contractual Joint Venture (CJV): No new joint entity is created. The parties simply agree to work together, sharing control and inputs without joint ownership (e.g., franchisee relationships).
• Equity-based Joint Venture (EJV): A separate, new business entity is jointly created and owned by the participating parties, who share management, profits, and losses.

• Increased Resources and Capacity: Pooling financial and human resources allows rapid business expansion.
• Access to New Markets: Partnering with a local firm helps foreign companies enter new geographical markets easily.
• Access to Technology: Eliminates the need to develop proprietary technology, reducing production costs and improving quality.
• Innovation: Facilitates the creation of creative products through shared ideas and technology.
• Low Cost of Production: International partners benefit from lower raw material and labor costs in developing nations like India.
• Established Brand Name: One partner can leverage the pre-existing goodwill and brand reputation of the other in the market.

• The private partner brings design, construction, and operational expertise.
• The public sector partner often retains ultimate ownership and ensures social obligations are met.
• Risks (such as design and construction risks) are transferred to the party best suited to manage them.
• Suited for large-scale capital projects like power generation, water sanitation, hospitals, and expressways.