Business Studies Chapter 3 Notes NCERT Class 11th – Private, Public and Global Enterprises

3.1 Introduction

• The Indian economy is a mixed economy, comprising both privately owned and government-owned business enterprises.
• Businesses can be small or large, industrial or trading, privately owned or government-owned.
• They affect our daily economic life and are a part of the Indian economy.
• Global enterprises operate in more than one country.

3.2 Private Sector and Public Sector

• Private Sector: Consists of businesses owned by individuals or a group of individuals. Forms include sole proprietorship, partnership, joint Hindu family, cooperative, and company.
• Public Sector: Consists of various organizations owned and managed by the government. These can be partly or wholly owned by central or state governments, or come into existence by a Special Act of Parliament. The government participates in economic activities through these enterprises.
• Industrial Policy Resolutions:
  • 1948: Government of India specified the approach to industrial sector development and clearly defined the roles of private and public sectors.
  • 1956: Laid down objectives for the public sector to accelerate growth and industrialization, emphasizing mutual dependency with the private sector.
  • 1991: Radically different, deliberated disinvestment of the public sector, allowed greater freedom to the private sector, and invited foreign direct investment (multinational corporations/global enterprises).
  • Currently, public sector units, private sector enterprises, and global enterprises coexist in the Indian economy.

3.3 Forms of Organizing Public Sector Enterprises

• Government participation in business requires an organizational framework.
• Public enterprises are formed by the government to participate in economic activities and contribute to economic development.
• They are owned by the public and accountable to the public through Parliament.
• Characterized by public ownership, use of public funds, and public accountability.
• The form of organization depends on the nature of operations and relationship with the government.
• Forms of organization for public enterprises:
  • Departmental undertaking
  • Statutory corporation
  • Government company

3.3.1 Departmental Undertakings

• Oldest and most traditional form of organizing public enterprises.
• Established as departments of a ministry, considered an extension of the ministry.
• Government functions through these departments, and their activities are integral to government functioning.
• Not autonomous or independent legal entities.
• Act through government officers, and employees are government employees.
• Can be under central or state government, with applicable rules.
• Examples: Railways, Post and Telegraph Department.
• Features:
  • Funding comes directly from the Government Treasury as an annual appropriation from the budget; revenue earned is paid into the treasury.
  • Subject to accounting and audit controls like other Government activities.
  • Employees are Government servants, with recruitment and service conditions similar to other government employees. Headed by IAS officers and civil servants who are transferable.
  • Considered a major subdivision of a Government department and under direct control of the ministry.
  • Accountable to the ministry as management is directly under the concerned ministry.
• Merits:
  • Facilitate effective parliamentary control over operations.
  • Ensure a high degree of public accountability.
  • Revenue goes directly to the treasury, serving as a source of government income.
  • Most suitable where national security is concerned due to direct control and supervision by the Ministry.
• Limitations:
  • Lack flexibility essential for smooth business operations.
  • Employees/heads cannot make independent decisions without ministry approval, leading to delays.
  • Unable to take advantage of business opportunities; bureaucratic over-cautiousness prevents risky ventures.
  • Red tapism in day-to-day operations due to strict channels of authority.
  • Significant political interference through the ministry.
  • Usually insensitive to consumer needs and do not provide adequate services.

3.3.2 Statutory Corporations

• Public enterprises created by a Special Act of Parliament.
• The Act defines its powers, functions, rules, regulations for employees, and relationship with government departments.
• A corporate body with defined powers and functions, financially independent, and clear control over a specific area or commercial activity.
• A corporate person that can act in its own name.
• Combines government power with operational flexibility of private enterprises.
• Features:
  • Set up under and governed by an Act of Parliament, which defines its objects, powers, and privileges.
  • Wholly owned by the state; government has ultimate financial responsibility and power to appropriate profits, also bears losses.
  • A body corporate, can sue and be sued, enter into contracts, and acquire property in its own name.
  • Usually independently financed, obtaining funds by borrowings from the government or public through revenues; has authority to use its revenues.
  • Not subject to the same accounting and audit procedures as government departments and not concerned with the central budget.
  • Employees are not government/civil servants and are not governed by government rules; conditions of service are governed by the Act. Some officers may be on deputation from government departments.
• Merits:
  • Enjoy independence in functioning and high operational flexibility, free from undesirable government regulation and control.
  • Government generally does not interfere in financial matters as funds don’t come from the central budget.
  • As autonomous organizations, they frame their own policies and procedures within the Act’s powers.
  • Valuable for economic development, combining government power with private enterprise initiative.
• Limitations:
  • In reality, do not enjoy as much operational flexibility due to many rules and regulations.
  • Government and political interference exists in major decisions or where large funds are involved.
  • Rampant corruption where dealing with the public.
  • Government practice of appointing advisors to the board curbs the corporation’s freedom, leading to delays when disagreements are referred to the government.

3.3.3 Government Company

• Established under The Companies Act, 2013, and registered/governed by its provisions.
• Established for purely business purposes and compete with private sector companies.
• According to Section 2(45) of The Companies Act 2013, a government company is one in which at least 51% of the paid-up capital is held by the central government, state government(s), or partly by both; includes a subsidiary of a government company.
• All provisions of The Companies Act are applicable unless otherwise specified.
• Can be formed as a private limited or public limited company.
• Government controls the paid-up share capital, and shares are purchased in the name of the President of India.
• Known as government companies because the government is the major shareholder and controls management.
• Features:
  • An organization created under The Companies Act, 2013, or any previous Company Law.
  • Can file suits in a court of law against third parties and be sued.
  • Can enter into contracts and acquire property in its own name.
  • Management regulated by The Companies Act provisions, like any other public limited company.
  • Employees appointed according to their own rules and regulations in the Memorandum and Articles of Association.
  • Exempted from standard accounting and audit rules; an auditor is appointed by the Central Government, and the Annual Report is presented in Parliament or State Legislature.
  • Obtains funds from government shareholdings and other private shareholders; permitted to raise funds from the capital market.
• Merits:
  • Can be established by fulfilling Indian Companies Act requirements, without needing a separate Act of Parliament.
  • Has a separate legal entity apart from the Government.
  • Enjoys autonomy in management decisions and acts according to business prudence.
  • Can control the market and curb unhealthy business practices by providing goods and services at reasonable prices.
• Limitations:
  • If the government is the sole shareholder, Companies Act provisions may not have much relevance.
  • Evades constitutional responsibility and is not directly answerable to Parliament.
  • Management and administration rest with the government as the sole shareholder, defeating the purpose of being registered like other companies.

3.4 Changing Role of Public Sector

• At Independence, public sector enterprises (PSEs) were expected to play a crucial role in economic objectives by direct participation or acting as a catalyst.
• They were to build infrastructure and invest in key areas where the private sector was unwilling due to heavy investment and long gestation periods.
• Government took responsibility for developing infrastructure and providing essential goods and services.
• Initial Five Year Plans gave significant importance to the public sector.
• Post-1990s: New economic policies emphasized liberalization, privatization, and globalization, redefining the public sector’s role to actively participate and compete with the private sector.
• PSEs were held accountable for losses and return on investment; sick units were referred to BIFR for overhauling or shutdown.
• Key Objectives and Contributions of Public Sector (Historically):
  • Development of Infrastructure: Prerequisite for industrialization. Government mobilized capital, coordinated industrial construction, and trained workforce to develop essential infrastructure like transport, communication, fuel, energy, and heavy industries. Investments were made in:
    • Core sectors requiring huge capital, complex technology (steel, power, railways, petroleum).
    • Core sectors where the private sector was not functioning as desired (fertilizers, pharmaceuticals).
    • Future investments (hotels, consultancies, textiles).
  • Regional Balance: Government responsible for balanced development and removing regional disparities. After 1951, public sector industries were deliberately set up in backward areas to accelerate economic development and provide employment.
  • Economies of Scale: Public sector stepped in to establish large-scale industries requiring huge capital outlay (e.g., electric power plants, natural gas, telephone industries) to take advantage of economies of scale.
  • Check over Concentration of Economic Power: Acts as a check on the private sector, preventing wealth concentration and monopolistic practices that lead to inequalities. Public sector’s large industries share income and benefits with a large number of employees.
  • Import Substitution: During the Second and Third Five Year Plans, India aimed for self-reliance. Public sector heavy engineering companies were established to help with import substitution, and companies like STC and MMTC expanded exports.
• Government Policy Towards Public Sector Since 1991:
  • Major Reforms: Restructure and revive potentially viable PSUs; close down unrevivable PSUs; bring down government equity in non-strategic PSUs to 26% or lower; fully protect workers’ interests.
  • Reduction in Reserved Industries: Reduced from 17 in 1956 to 8 in 1991 (atomic energy, arms and communication, mining, railways), and then to 3 in 2001 (atomic energy, arms, rail transport). This allowed private sector entry and increased competition for the public sector.
  • Disinvestment of Shares: Sale of equity shares to the private sector and public. Objectives: raise resources, encourage wider participation, improve managerial performance, and ensure financial discipline.
    • Objectives of Privatizing PSEs: Release public resources from non-strategic PSEs for social priority areas (health, education); reduce public debt and interest burden; transfer commercial risk to the private sector; free enterprises from government control and introduce corporate governance; benefit consumers with more choices, lower prices, and better quality in formerly monopolized sectors (e.g., telecom).
  • Policy Regarding Sick Units: Same as for the private sector. All sick PSUs were referred to the Board of Industrial and Financial Reconstruction (BIFR) for restructuring or closure. National Renewal Fund was set up to retrain/redeploy retrenched labor and provide compensation for voluntary retirement.
  • Memorandum of Understanding (MoU): System to improve performance by granting managements greater autonomy while holding them accountable for specified results. PSUs were given clear targets and operational autonomy; MoUs were between the PSU and administrative ministries, defining their relationship and autonomy.

3.5 Global Enterprises

• Also known as Multinational Corporations (MNCs).
• Gigantic corporations with operations in multiple countries.
• Characterized by huge size, large number of products, advanced technology, marketing strategies, and global network.
• Extend industrial and marketing operations through branches in several countries.
• Operate in multiple areas, producing multiple products, with business strategy extending over many countries.
• Aim to spread branches globally rather than maximize profits from one or two products.
• Features:
  • Huge Capital Resources: Possess huge financial resources and can raise funds from various sources (equity, debentures, bonds, financial institutions, international banks). Enjoy credibility in capital markets and can survive under all circumstances due to financial strength.
  • Foreign Collaboration: Often enter agreements with companies in host countries (e.g., Indian companies) for technology sale, product production, use of brand names. May involve restrictive clauses related to technology transfer, pricing, dividend payments, and control by foreign technicians.
  • Advanced Technology: Possess technologically superior production methods, conform to international standards, and optimally exploit local resources. Contributed to computerization and other inventions.
  • Product Innovation: Have sophisticated R&D departments for developing new products and superior designs. Qualitative research requires huge investment only global enterprises can afford.
  • Marketing Strategies: More effective, use aggressive strategies to increase sales quickly. Possess reliable and up-to-date market information systems; advertising and sales promotion are very effective. Their established global brand names facilitate product sales.
  • Expansion of Market Territory: Operations extend beyond their home countries, building international image and expanding market territory. Operate through subsidiaries, branches, and affiliates in host countries. Occupy dominant market position due to giant size.
  • Centralized Control: Headquartered in their home country, exercising control over all branches and subsidiaries, limited to broad policy framework. No interference in day-to-day operations.

3.6 Joint Ventures

• When two businesses agree to join for a common purpose and mutual benefit.
• Organizations can be private, government-owned, or foreign companies.
• Businesses of any size can use joint ventures for long-term relationships or short-term projects.
• Flexible depending on party requirements, with terms clearly stated in an agreement to avoid conflict.
• Can result from agreements between businesses in different countries, adhering to governmental provisions.
• Broadly, it’s the pooling of resources and expertise by two or more businesses to achieve a particular goal, sharing risks and rewards.
• Reasons include business expansion, new product development, or moving into new markets (especially foreign).
• Often involves strategic alliances for complementary capabilities (distribution, technology, finance).
• Parent companies share capital, technology, human resources, risks, and rewards in forming a new entity under shared control.
• In India, joint venture companies are treated the same as domestic companies with no separate laws.
• Must be based on a Memorandum of Understanding (MoU) and a thoroughly discussed joint venture agreement. Negotiations should consider cultural and legal backgrounds.

3.6.1 Types of Joint Ventures

• Contractual Joint Venture (CJV):
  • A new jointly-owned entity is not created; only an agreement to work together.
  • Parties do not share ownership but exercise some control.
  • Example: Franchisee relationship.
  • Key elements: common intention, each party brings inputs, both exercise control, relationship is of longer duration (not transaction-to-transaction).
• Equity-based Joint Venture (EJV):
  • A separate business entity, jointly owned by two or more parties, is formed.
  • Key operative factor is joint ownership.
  • Form of entity can vary (company, partnership, trust, LLP, venture capital funds).
  • Elements: agreement to create new entity or join an existing one, shared ownership, shared management, shared responsibilities for capital/financing, shared profits and losses.

3.6.2 Benefits of Joint Ventures

• Prove beneficial for both parties.
• Increased Resources and Capacity: Adds to existing resources (financial, human) and capacity, enabling faster and more efficient growth and expansion; helps face market challenges and take new opportunities.
• Access to New Markets and Distribution Networks: When collaborating with a foreign partner, it opens up vast growing markets (e.g., Indian market for foreign companies). Allows selling products that may have reached saturation in home markets. Can leverage established distribution channels, avoiding expensive setup costs.
• Access to Technology: Major factor for joint ventures. Provides access to advanced production techniques, leading to superior quality products, saving time, energy, and investment. Adds to efficiency and effectiveness, reducing costs.
• Innovation: Allows businesses to introduce new and creative products to the market. Foreign partners often bring innovative products due to new ideas and technology.
• Low Cost of Production: International corporations investing in India benefit from lower production costs, obtaining quality products for global requirements. Reasons include low cost of raw materials and labor, technically qualified workforce, and management professionals.
• Established Brand Name: One party benefits from the other’s existing goodwill in the market. If with an Indian company, it saves time and money on developing a brand name or distribution system, with a ready market.

3.7 Public Private Partnership (PPP)

• A model that optimally allocates tasks, obligations, and risks between public and private partners.
• Public partners: Government entities (ministries, departments, municipalities, state-owned enterprises).
• Private partners: Local or foreign businesses/investors with technical or financial expertise.
• Also includes NGOs and community-based organizations (stakeholders directly affected).
• Defined as a relationship between public and private entities in the context of infrastructure and other services.
• Role of Public Sector: Ensures social obligations are fulfilled, and sector reforms and public investment are met. Contribution in capital and transfer of assets, plus social responsibility, environmental awareness, and local knowledge.
• Role of Private Sector: Uses expertise in operations, managing tasks, and innovation to run the business efficiently.
• Sectors Worldwide: Power generation/distribution, water/sanitation, refuse disposal, hospitals, school buildings, stadiums, air traffic control, prisons, railways, roads, IT systems, housing.
• PPP Model Features:
  • Contract with the private party to design and build a public facility.
  • Facility 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 requirements.
  • Suited to capital projects where the public sector wishes to retain operating responsibility.
• Strengths:
  • Transfer of design and construction risk.
  • Potential to accelerate projects.
• Weaknesses:
  • Conflict between parties may arise on environmental considerations.
  • Does not attract private finance easily.
• Example: Kundli Manesar Expressway Ltd., where land provided by government and surface laid by company

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Business Studies Chapter 3 Notes NCERT Class 11th – Private, Public and Global Enterprises