Under this system Government undertakings are registered as Government companies under the general Companies Act under which the private companies have also to be registered. The share capital is contributed by the Government. Management is conducted by a Board of Directors appointed by the Government either from among the Government officials or from outside. In India this form of Public Undertakings has been used extensively. Some of Government companies are – Hindustan Machine Tools (Private) Limited, Hindustan Insecticides (Private) Limited; Bharat Heavy Electricals (Private) Limited, Bharat Electronics (Private) Limited etc.
Advantages of the System are:
- It is very suitable for making arrangements for foreign financial and technical assistance. Being a familiar form of organisation in other countries, it is easier for them to come to terms with foreign private companies.
- In Indian conditions, a number of sick units have got to be nationalised. Since these units are already working as joint stock companies (although private ones) it is much easier to convert them into Government companies after nationalisation.
- It is very flexible form of organisation and is very convenient for working.
Criticisms
However, the system has been criticised at various national and international fora. Some of these criticisms are indicated below:
- The ECAFE seminar on Organisation and Administration of Public Enterprises held in Rangoon, called it as a ‘vague and extremely difficult form of organisation to control’.
- Mr. P. K. Wattal, a retired Accountant General, remarked that such industrial undertakings whittle away Parliamentary control over public money.
- Dr Lanka Sundram, M. P. in the first Lok Sabha said that it is sort of Kingdom within a kingdom which was absolutely impervious to public control and public criticism.
- The 1948 ECAFE Seminar found that the system of joint stock companies suffered from the following defects:
- It evades constitutional responsibility which a State enterprise has to the Government and Parliament.
- The company form becomes a camouflage because all the functions of shareholders and the management come to the Government as the sole shareholder.
The Seminar had, therefore, recommended that all Government owned enterprises should be set up either as public corporations or as Departmental undertakings. However, A. H. Hansan has said that there is not much to choose between a corporation and a company. There may be some difference in the legal status due to different methods of setting them up, but there is very little difference in actual operation. In both cases, Government remains the effective owner and the controller of the enterprise. The Companies Act and the Memorandum and the Articles of Association of the company provide for the relationship of the company with the Government whereas the statute does this in case of the corporation. Both are usually drafted to the same effect. Special provisions for audit of Government Companies takes care of the financial control and provisions in the Memorandum & Articles of Association often provide for laying the annual report of the company before the legislature.
Main features of the Government Companies
According to the report of the study team on Public sector undertakings (of Administrative Reforms Commission) the main characteristics of this form are:
- It has most of the features of a private company.
- The whole of the capital stock or at least 51% is provided by the Government.
- The relationship of the company with the Government is governed by the Companies Act and the Memorandum and Articles of Association of the company.
- All or at least a majority of the Directors are appointed by the Government, depending upon the composition of capital.
- It is a body corporate set up under Companies Act.
- It can sue and be sued; enter into contract and hold property in its name.
- Its finances come from the share capital contributed by the Government, loans given by banks and the profits and income generated by the business.
- It is exempt from budget, audit, accounting and personnel policies and laws and rules applicable to Government Departments.
- Its employees are not Civil servants, except a few on deputation. The company can frame its own personnel policies subject of course to its Memorandum and Articles of Association and general policy direction of the Government given under those articles.
- Unlike Public Corporation, it is created by an executive decision of the Government without the specific approval of the legislature. Its Articles of Association can be revised by the Government subject of course to the provisions of the Companies Act.