class11 businessstudies unit03 ncert textbook englishedition

7/31/2019 Class11 BusinessStudies Unit03 NCERT TextBook EnglishEdition

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CHAPTER3

PRIVATE, PUBLICAND 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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56 BUSINESS STUDIES

3.1 INTRODUCTION

You must have come across all types

of business organisations in your dailylife. In your neighbourhood market,there are shops owned by soleproprietors or big retail organisationsrun by a company. Then there arepeople providing you services like legalservices, medical services, being owned

by more than one person i.e.,partnership firms. These are allprivately owned organisations.Similarly, there are other offices orplaces of business which may be owned

by the government. For example,Railways is an organisation whollyowned and managed by thegovernment. The post office, in yourlocality is owned by the Post and

Telegraph Department, Government ofIndia, though our dependence on theirpostal services, particularly in cities

and towns has been greatly reduced.This is because of plenty of private

courier services firms operating inbigger towns. Then there are businesseswhich operate in more than one countryknown as global enterprises. Therefore,

you may have observed that all typesof organisations are doing business inthe country whether they are public,private or global. In this chapter weshall be studying how the economy isdivided into two sectors, public andprivate, the different types of publicenterprises, their role and that of the

global enterprises.

3.2 PRIVATE SECTORAND PUBLICSECTOR

There are all kinds of businessorganisations small or large,industrial or trading, privately ownedor government owned existing in our

Anita, a student of class XI, was going through some newspapers. The headlinesstared 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 incurringheavy losses and the proposal for closing the same. In contrast to this, she readanother item on how some of the companies under the private sector were doingso well. She was actually curious to know what these terms like public sector,disinvestment, privatisation meant. She realised that in certain areas therewas only the government which operates like the railways and in some areasboth the privately owned and government run business were operating. For

example, in the heavy industry sector SAIL, BHEL and TISCO, Reliance, Birlasall were there and in the telecom sector, companies like Tata, Reliance, Airteloperate and in airlines Sahara and Jet have recently gained entry. Thesecompanies along with the Government-owned companies like MTNL, BSNL, IndianAirlines, Air India. She then started wondering where from companies like Cocacola, Pepsi, Hyundai came? Were they always here or did they operate somewhereelse, in some other country. She went to the library and was surprised to knowthat there was so much information about all these in books, business magazinesand newspapers.


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57PRIVATE, PUBLIC AND GLOBAL ENTERPRISES

country. These organisations affect ourdaily economic life and therefore

become part of the Indian economy.Since the Indian economy consists of

both privately owned and governmentowned business enterprises, it isknown as a mixed economy. TheGovernment of India has opted for amixed economy where both private and

government enterprises are allowed tooperate. The economy, therefore, may

be classified into two sectors viz.,private sector and public sector.

The private sector consists ofbusiness owned by individuals or agroup of individuals, as you havelearnt in the previous chapter. The

various forms of organisation aresole proprietorship, partnership,

joint Hindu fami ly, cooperativeand company.

The publ ic sector cons ists ofvarious organisations owned andmanaged by the government. Theseorganisations may either be partly or

wholly owned by the central or state

government. They may also be a partof the ministry or come into existence

by a Special Act of the Parliament. The

government, through these enterprisesparticipates in the economic activitiesof the country.

The government in its industrialpolicy resolutions, from time-to-time,defines the area of activities in which

the private sector and public sector areallowed to operate. In the IndustrialPolicy Resolution 1948, theGovernment of India had specified theapproach towards development of theindustrial sector. The roles of the

private and public sector were clearlydefined and the government through

various Acts and Regulations wasoverseeing the economic activities of

both the private and public sector. TheIndustrial Policy Resolution, 1956 hadalso laid down certain objectives for thepublic sector to follow so as toaccelerate the rate of growth and

industrialisation. The public sector wasgiven a lot of importance but at thesame time mutual dependency ofpublic and private sectors wasemphasised. The 1991 industrialpolicy was radically different from allthe earlier policies where thegovernment was deliberatingdisinvestment of public sector andallowing greater freedom to the privatesector. At the same time, foreign directinvestment was invited from business

houses outside India. Thus,multinational corporations or globalenterprises which operate in more thanone country gained entry into theIndian economy. Thus, we have publicsector units, private sector enterprisesand global enterprises coexisting in theIndian economy.

3.3 FORMS OF ORGANISING PUBLICSECTOR ENTERPRISES

Governments participation in businessand economic sectors of the countryneeds some kind of organisationalframework to function. You havestudied about the forms of businessorganisation in the private sector viz.,sole proprietorship, partnership, Hinduundivided family, cooperative andcompany.


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58 BUSINESS STUDIES

In the public sector, as it grows, animportant question arises in respect of

how it is to be organised or what formof organisation it should take. Thegovernment has a major role to play inthe formation of the public sector. Butthe government acts through its people,its offices, employees and they takedecisions on behalf of the government.For this purpose, public enterprises

were formed by the government toparticipate in the economic activities ofthe country. They are expected tocontribute to the economic deve-

lopment of the country in todaysliberalised, competitive world. Thesepublic enterprises are owned by thepublic and are accountable to thepublic through the Parliament. Theyare characterised by public ownership,

public funds being used for its activitiesand public accountability.

A public enterprise may take anyparticular form of organisationdepending upon the nature of itsoperations and their relationship withthe government. The suitability of aparticular form of organisation woulddepend upon its requirements. At thesame time, in accordance with generalprinciples, any organisation in thepublic sector should ensure organisationalperformance productivity and qualitystandards.

The forms of organisation which apublic enterprise may take are as

follows:(i) Departmental undertaking(ii) Statutory corporation(iii) Government company

3.3.1 Departmental Undertakings

This is the oldest and most traditionalform of organising public enterprises.

Indian Economy

Public Sector Private Sector

Departmental

Undertakings

StatutoryCorporation

Government

Companies

Private(Ltd.)

SoleProperietorship

Partnership JointHinduFamily

Cooperative

Company

Public(Ltd.)

MultinationalCorporations


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These enterprises are established asdepartments of the ministry and areconsidered part or an extension of theministry itself. The Governmentfunctions through these departmentsand the activities performed by themare an integral part of the functioningof the government. They have not beenconstituted as autonomous or

independent institutions and as suchare not independent legal entities. Theyact through the officers of theGovernment and its employees areGovernment employees. Theseundertakings may be under the centralor the state government and the rulesof central/state government areapplicable. Examples of theseundertakings are railways and postand telegraph department.

FeaturesThe ma in characteristics ofDepartmental undertakings are asfollows:

(i) The funding of these enterprisescome directly from the Govern-ment Treasury and are an annualappropriation from the budget ofthe Government. The revenueearned by these is also paid intothe treasury;

(ii) They are subject to accounting

and audit controls applicable toother Government activities;

(iii) The employees of the enterprise areGovernment servants and theirrecruitment and conditions ofservice are the same as that ofother employees directly under theGovernment. They are headed by

Indian Administrative Service (IAS)officers and civil servants who aretransferable from one ministry toanother;

(iv) It is generally considered to bea major subdivision of theGovernment department and issubject to direct control of theministry;

(v) They are accountable to theministry since their managementis directly under the concernedministry.

Merits

Departmental undertakings havecertain advantages which are as follows:

(i) These undertakings facilitate theParliament to exercise effectivecontrol over their operations;

(ii) These ensure a high degree of

public accountability;(iii) The revenue earned by the

enterprise goes directly to thetreasury and hence is a source ofincome for the Government;

(iv) Where national security isconcerned, this form is mostsuitable since it is under the directcontrol and supervision of theconcerned Ministry.

Limitations

This form of organisation suffers fromserious drawbacks, some of which areas follows:

(i) Departmental undertakings fail toprovide flexibility, which is essentialfor the smooth operation of business;

(ii) The employees or heads of depart-ments of such undertakings are


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60 BUSINESS STUDIES

not allowed to take independentdecisions, without the approval ofthe ministry concerned. This leadsto delays, in matters whereprompt decisions are required;

(iii) These enterprises are unable totake advantage of businessopportunities. The bureaucratsover-cautious and conservative

approval does not allow them totake risky ventures;(iv) There is red tapism in day-to-day

operations and no action can betaken unless it goes through theproper channels of authority;

(v) There is a lot of political inter-ference through the ministry;

(vi) These organisations are usuallyinsensitive to consumer needs anddo not provide adequate servicesto them.

3.3.2 Statutory Corporations

Statutory corporations are publicenterprises brought into existence bya Special Act of the Parliament. The Actdefines its powers and functions, rulesand regulations governing itsemployees and its relationship withgovernment departments.

This is a corporate body created bythe legislature with defined powers andfunctions and is financially independent

with a clear control over a specifiedarea or a particular type of commercialactivity. It is a corporate person andhas the capacity of acting in its ownname. Statutory corporations thereforehave the power of the government andconsiderable amount of operatingflexibility of private enterprises.

Features

Statutory corporations have certaindistinct features, which are discussedas below:

(i) Statutory corporations are set upunder an Act of Parliament andare governed by the provisions ofthe Act. The Act defines the objects,powers and privileges of a

statutory corporation;(ii) This type of organisation is wholly

owned by the state. Thegovernment has the ultimatefinancial responsibility and hasthe power to appropriate itsprofits. At the same time, the statealso has to bear the losses, if any;

(iii) A statutory corporation is a bodycorporate and can sue and besued, enter into contract andacquire property in its own name;

(iv) This type of enterprise is usuallyindependently financed. It obtainsfunds by borrowings from thegovernment or from the publicthrough revenues, derived fromsale of goods and services. It hasthe authority to use its revenues;

(v) A statutory corporation is notsubject to the same accountingand audit procedures applicableto government departments. It isalso not concerned with the central

budget of the Government;(vi) The employees of these enterprises

are not government or civilservants and are not governed bygovernment rules and regulations.

The conditions of service of theemployees are governed by theprovisions of the Act itself. At


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times, some officers are takenfrom government departments,

on deputation, to head these

organisations.

Merits

This form of organisation enjoys certainadvantages in its working, which are

as follows:(i) They enjoy independence in theirfunctioning and a high degree ofoperational flexibility. They are free

from undesirable government

regulation and control;(ii) Since the funds of these organi-

sations do not come from thecentral budget, the government

generally does not interfere in their

financial matters, including theirincome and receipts;

(iii) Since they are autonomousorganisations they frame their own

policies and procedures within thepowers assigned to them by the

Act. The Act may, however,provide few issues/matters whichrequire prior approval of a

particular ministry;(vi) A statutory corporation is a

valuable instrument for economic

development. It has the power of

the government, combined withthe initiative of private enterprises.

Limitations

This type of organisation suffers from

several limitations, which are as follows:

(i) In reality, a statutory corporationdoes not enjoy as much operational

flexibility as stated above. Allactions are subject to many rulesand regulations;

(ii) Government and political inter-ference has always been there inmajor decisions or where hugefunds are involved;

(iii) Where there is dealing with public,rampant corruption exists;

(iv) The government has a practice ofappointing advisors to theCorporation Board. This curbs thefreedom of the corporation inentering into contracts andother decisions. If there is anydisagreement, the matter isreferred to the government for finaldecisions. This further delays action.

3.3.3 Government Company

A Government company is established

under the Indian Companies Act, 1956and is registered and governed by theprovisions of the Indian Companies Act.

These are establ ished for pure lybusiness purposes and in true spiritcompete with companies in the privatesector.

According to the Indian CompaniesAct 1956, a government companymeans any company in which not lessthan 51 percent of the paid up capitalis held by the central government, or

by any state government or partly bycentral government and partly by oneor more state governments.

From the above definition, it is clearthat the government exercises controlover the paid up share capital of thecompany. The shares of the companyare purchased in the name of the


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62 BUSINESS STUDIES

President of India. Since thegovernment is the major shareholderand exercises control over themanagement of these companies, theyare known as government companies.

Features

Government companies have certaincharacteristics which makes them

distinct from other forms oforganisations. These are discussed asfollows:

(i) It is an organisation created by theIndian Companies Act, 1956;

(ii) The company can file a suit in acourt of law against any thirdparty and be sued;

(iii) The company can enter into acontract and can acquire propertyin its own name;

(iv) The management of the companyis regulated by the provisions ofthe Companies Act, like any otherpublic limited company;

(v) The employees of the company areappointed according to their ownrules and regulations as containedin the Memorandum and Articlesof Association of the company.

The Memorandum and Articles ofAssociat ion are the ma indocuments of the company,

containing the objects of thecompany and its rules andregulations;

(vi) These companies are exemptedfrom the accounting and auditrules and procedures. An auditoris appointed by the CentralGovernment and the Annual

Report is to be presented in theparliament or the state legislature;

(vii) The government company obtainsits funds from governmentshareholdings and other privateshareholders. It is also permittedto raise funds from the capitalmarket.

MeritsGovernment companies enjoy severaladvantages, which are as follows:

(i) A government company can beestablished by fulfilling therequirements of the IndianCompanies Act. A separate Act inthe Parliament is not required;

(ii) It has a separate legal entity, apartfrom the Government;

(iii) It enjoys autonomy in allmanagement decisions and takesactions according to businessprudence;

(iv) These companies by providinggoods and services at reasonableprices are able to control themarket and curb unhealthy

business practices.

Limitations

Despite the autonomy given to thesecompanies, they have certain dis-

advantages:(i) Since the Government is the only

shareholder in some of theCompanies, the provisions of theCompanies Act does not havemuch relevance;

(ii) It evades constitutional res-ponsibility, which a company


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financed by the governmentshould have. It is not answerabledirectly to the Parliament;

(iii) The government being the soleshareholder, the management andadministration rests in the handsof the government. The mainpurpose of a government com-pany, registered like other

companies, is defeated.

The Indian economy is in a stageof transition. The Five Year Plans inthe initial stages of development gavelot of importance to the public sector.In the post 90s period, the neweconomic policies, emphasisedliberalisation, privatisation and

globalisation. The role of public sectorwas redefined. It was not supposed

to play a passive role but to actively

3.4 CHANGING ROLEOFPUBLIC SECTOR

At the time of Independence, it wasexpected that the public sectorenterprises would play an importantrole in achieving certain objectives ofthe economy either by directparticipation in business or by actingas a catalyst. The public sector would

build up infrastructure for other sectors

of the economy and invest in key areas.The private sector was unwilling toinvest in projects which required heavyinvestment and had long gestationperiods. The government then took itupon itself to develop infrastructuralfacilities and provide for goods andservices essential for the economy.

participate and compete in the marketwith other private sector companies

in the same industry. They were alsoheld accountable for losses andreturn on investment. If a publicsector was making lossescontinuously, it was referred to theBoard for Industrial and FinancialReconstruction (BIFR) for complete

overhauling or shut down. Variouscommittees were set up to study the

working of inefficient public sectorunits with reports on how to improvetheir managerial efficiency andprofitability. The role of public sectoris definitely not what was envisaged

in the early 60s or 70s.

State Bank of India

Which bank has the most number of ATMs across India? Which bank has thelargest coverage network across India? State Bank of India is one such bank. Itspenetration, particularly in the rural sectors, and its sheer tonnage of customershas been well documented in the past. SBI undertook an enormous imageoverhauling effort in 2005. SBI has revamped its operations to make itself morecontemporary, tech-savy and customer friendly, shedding the slipshod style ofworking that has been the bane of PSU banks growing at an annual rate of 16percent, indicating that all is well for the time being. If SBI is able to sustain thisrate of growth, modernise its operations and increase its visibility among the

urban populace, the image of public sector banks will definitely improve.


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64 BUSINESS STUDIES

(i) Development of infrastructure:The development of infrastructure is a

prerequisite for industrialisation in any

country. In the pre-Independenceperiod, basic infrastructure was notdeveloped and therefore, industrialisationprogressed at a very slow pace. The

process of industrialisation cannot

be sustained without adequate

transportation and communicationfacilities, fuel and energy, and basic andheavy industries. The private sector did

not show any initiative to invest in heavyindustries or develop it in any manner.

They did not have trained personnel orfinances to immediately establish heavyindustries which was the requirement

of the economy.It was only the government which

could mobilise huge capital, coordinate

industrial construction and traintechnicians and workforce. Rail, road,

sea and air transport was theresponsibility of the government, andtheir expansion has contributed to thepace of industrialisation and ensured

future economic growth. The public

sector enterprises were to operate incertain spheres. Investments were to bemade to:(a) Give infrastructure to the core

sector, which requires huge capital

investment, complex and upgradedtechnology, big and effectiveorganisation structures like steelplants, power generation plants,

civil aviation, railways, petroleum,state trading, coal, etc;

(b) Give a lead in investment to the coresector where private sector

enterprises are not functioning inthe desired direction, like fertilizers,

pharmaceuticals, petro-chemicals,

newsprint, medium and heavyengineering;

(c) Give direction to future investmentslike hotels, project management,

consultancies, textiles, auto-

mobiles, etc.

(ii) Regional balance: The governmentis responsible for developing all regionsand states in a balanced way and

removing regional disparties. Most ofthe industrial progress was limited to

a few areas like the port towns in thepre-Independence period. After 1951,the government laid down in its Five

Year Plans, that particular attentionwould be paid to those regions whichwere lagging behind and public sector

industries were deliberately set up.Four major steel plants were set up in

the backward areas to accelerateeconomic development, provideemployment to the workforce anddevelop ancilliary industries. This was

achieved to some extent but there is

scope for a lot more. Development ofbackward regions so as to ensure aregional balance in the country is oneof the major objectives of planned

development. Therefore, the govern-

ment had to locate new enterprises inbackward areas and at the same timeprevent the mushrooming growth ofprivate sector units in already

advanced areas.(iii) Economies of scale: Where large

scale industries are required to be setup with huge capital outlay, the public


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sector had to step in to take advantageof economies of scale. Electric power

plants, natural gas, petroleum and

telephone industries are someexamples of the public sector settingup large scale units. These unitsrequired a larger base to function

economically which was only possible

with government resources and mass

scale production.(iv) Check over concentration ofeconomic power: The public sector

acts as a check over the private sector.In the private sector there are very few

industrial houses which would bewilling to invest in heavy industrieswi th the resul t that weal th gets

concentrated in a few hands andmonopolostic practices are encouraged.

This gives rise to inequalities in income,

which is detrimental to society.The public sector is able to set large

industries which requires heavyinvestment and thus the income and

benefits that accrue are shared by alarge of number of employees and

workers. This prevents concentration

of wealth and economic power in theprivate sector.(v) Import substitution: During thesecond and third Five Year Plan period,

India was aiming to be self-reliant in

many spheres. Obtaining foreignexchange was also a problem and it

was difficult to import heavy machineryrequired for a strong industrial base.

At that time, public sector companiesinvolved in heavy engineering which

would help in import substitution wereestablished. Simultaneously, several

public sector companies like STC andMMTC have played an important role

in expanding exports of the country.(vi) Government policy towards the

public sector since 1991: TheGovernment of India had introducedfour major reforms in the public sector

in its new industrial policy in 1991. The

main elements of the Government policy

are as follows: Restructure and revive potentially

viable PSUs

Close down PSUs, which cannotbe revived

Bring down governments equity inall non-strategic PSUs to 26 percent or lower, if necessary; and

Fully protect the interest ofworkers.

(a) Reduction in the number of

industries reserved for the publicsector from 17 to 8 (and then to 3):

In the 1956 resolution on Industrialpolicy, 17 industries were reservedfor the public sector. In 1991, only8 industries were reserved for

the public sector, they were restricted

to atomic energy, arms andcommunication, mining, andrailways. In 2001, only threeindustries were reserved exclusively

for the public sector. These are

atomic energy, arms and railtransport. This meant that the privatesector could enter all areas (exceptthe three) and the public sector

would have to compete with them.The public sector has played a vital

role in the development of theeconomy. However, the private sector


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66 BUSINESS STUDIES

is also quite capable of contributingsubstantially to the nation building

process. Therefore, both the publicsector and the private sector need to

be viewed as mutually complementary

parts of the national sector. Privatesector units also have to assumegreater public responsibilities.Simultaneously, the public sector

needs to focus on achieving more in ahighly competitive market.(b) Disinvestment of shares of

a select set of public sectorenterprises:Disinvestment involvesthe sale of the equity shares to theprivate sector and the public. The

objective was to raise resources andencourage wider participation of thegeneral public and workers in theownership of these enterprises. Thegovernment had taken a decision to

withdraw from the industrial sectorand reduce its equity in allundertakings. It was expected that

this would lead to improvingmanagerial performance andensuring financial discipline. Butthere remains a lot to be done inthis area.

The primary objectives of privatisingpublic sector enterprises are:

Releasing the large amount ofpublic resources locked up in non-

strategic Public Sector Enterprises(PSEs), so that they may be utilisedon other social priority areas suchas basic health, family welfare andprimary education.

Reducing the huge amount ofpublic debt and interest burden;

Transferring the commercial riskto the private sector so that thefunds are invested in able projects;

Freeing these enterprises fromgovernment control andintroduction of corporategovernance; and

In many areas where the public

Privatisation in India

The Lagan Jute Machinery Company Limited (LJMC) was the first case of

successful privatisation of a Central Public Sector Undertaking, carried out by

the Government. LJMC is a Calcutta-based company, and manufactures jute

machinery (mainly spinning and drawing frames). It employed around 400

employees prior to privatisation. It started incurring losses from 1996-97 onward

and the turnover was on a decline. LJMCs net worth as on March 1998 was

around Rs. 5 crore and its annual turnover was also around Rs. 5 crore atthat time.

In the initial stages of disinvestment, LJMC was approved for privatisation

through sale of 74 per cent stake to a strategic partner. The disinvestment process

was handled by LJMCs holding company, Bharat Bhari Udyog Nigam LImited

(BBUNL), under the administrative control and directions of the then Department

of Heavy Industries (DHI), Ministry of Industry, Government of India.


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sector had a monopoly, forexample, telecom sector theconsumers have benefitted by morechoices, lower prices and betterquality of products and services.

(c) Policy regarding sick units to bethe same as that for the privatesector: All public sector units werereferred to the Board of Industrial

and Financial Reconstruction todecide whether a sick unit was tobe restructured or closed down. TheBoard has reconsidered revival andrehabilitation schemes for somecases and winding up for a numberof units. There is a lot of resentmentamongst workers of the units whichare to be closed down. A NationalRenewal Fund was set up by thegovernment to retrain or redeployretrenched labour and to provide

compensation to public sectoremployees seeking voluntaryretirement.

There are many enterpriseswhich are sick and not capable ofbeing revived as they haveaccumulated huge losses. Withpublic finances under intensepressure, both central and stategovernment are just not able tosustain them much longer. Theonly option available to the

government in such cases is to closedown these undertakings afterproviding a safety net for theemployees and workers. Resourcesunder the National Renewal Fundhave not been sufficient to meet the costof Voluntary Separation Scheme or

Voluntary Retirement Scheme.

(d) Memorandum of Understanding:Improvement of performancethrough a MoU (Memorandum ofUnderstanding) system by whichmanagements are to be grantedgreater autonomy but heldaccountable for specified results.Under this system, public sectorunits were given clear targets and

operational autonomy for achievingthose targets. The MoU was betweenthe particular public sector unit andtheir administrative ministriesdefining their relationship andautonomy.

3.5 GLOBAL ENTERPRISES

At some time you must have comeacross products produced by MultiNational Corporations (MNCs). In the

last ten years MNCs have played animportant role in the Indian economy.

They have become a common feature

of most developing economies in theworld. MNCs as is evident from whatwe see around us , are gigantic

corporations which have theiroperations in a number of countries.

They are characterised by their huge

size, large number of products,advanced technology, marketingstrategies and network of operations all

over the world. Global enterprises thusare huge industrial organisations whichextend their industrial and marketingoperations through a network of their

branches in several countries. Theirbranches are also called MajorityOwned Foreign Affiliates (MOFA). Theseenterprises operate in several areas


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68 BUSINESS STUDIES

producing multiple products with theirbusiness strategy extending over anumber of countries. They do not aimat maximising profits from one or twoproducts but instead spread their

branches all over. They have an impacton the international economy also. Thisis evident from the fact that the sales oftop 200 corporations were equivalent

to 28.3 percent of the worlds GDP in1998. This shows that top 200 MNCscontrol over a quarter of the worldeconomy. Therefore, MNCs are in aposition to exercise massive control onthe world economy because of theircapital resources, latest technology andgoodwill. By virtue of this, they are ableto sell any product in differentcountries. Some of these corporationsmay be slightly exploitative in natureand concentrate more on selling

consumer goods and luxury itemswhich are not always desirable fordeveloping countries.

Features

These corporations have distinctfeatures which distinguish them fromother private sector companies, publicsector companies and public sectorenterprises. These are as follows:(i) Huge capital resources:Theseenterprises are characterised bypossessing huge financial resourcesand the ability to raise funds fromdifferent sources. They are able to tapfunds from various sources. They mayissue equity shares, debentures or

bonds to the public. They are also in aposition to borrow from financialinstitutions and international banks.

They enjoy credibility in the capitalmarket. Even investors and banks ofthe host country are willing to invest inthem. Because of their financialstrength they are able to survive underall circumstances.(ii) Foreign collaboration: Globalenterprises usually enter intoagreements with Indian companies

pertaining to the sale of technology,production of goods, use of brandnames for the final products, etc. TheseMNCs may collaborate with companiesin the public and private sector. Thereare usually various restrictive clausesin the agreement relating to transferof technology, pricing, dividendpayments, tight control by foreigntechnicians, etc. Big industrial houses

wanting to diversify and expand havegained by collaborating with MNCs in

terms of patents, resources, foreignexchange etc. But at the same timethese foreign collaborations have givenrise to the growth of monopolies andconcentration of power in few hands.(iii) Advanced technology:Theseenterprises possess technologicalsuperiorities in their methods ofproduction. They are able to conformto international standards and qualityspecifications. This leads to industrialprogress of the country in which such

corporations operate since they areable to optimally exploit local resourcesand raw materials. Computerisationand other inventions have come due tothe technological advancementsprovided by MNCs.

( iv) Product innovation:Theseenterprises are characterised by having


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highly sophisticated research anddevelopment departments engaged inthe task of developing new productsand superior designs of existingproducts. Qualitative research requireshuge investment which only globalenterprises can afford.(v) Marketing strategies: Themarketing strategies of global

companies are far more effective thanother companies. They use aggressivemarketing strategies in order to increasetheir sales in a short period. They possesa more reliable and up-to-date marketinformation system. Their advertisingand sales promotion techniques arenormally very effective. Since theyalready have carved out a place forthemselves in the global market, andtheir brands are well-known, sellingtheir products is not a problem.

(vi) Expansion of market territory:Their operations and activities extendbeyond the physical boundaries of theirown countries. Their internationalimage also builds up and their marketterritory expands enabling them to

become international brands. They

operate through a network ofsubsidiaries, branches and affiliates inhost countries. Due to their giant sizethey occupy a dominant position in themarket.(vii) Centralised control: They havetheir headquaters in their homecountry and exercise control over all

branches and subsidiaries. However,

this control is limited to the broadpolicy framework of the parentcompany. There is no interference inday-to-day operations.

3.6 JOINT VENTURES

Meaning

Business organisations as you havestudied earlier can be of various typesprivate or government owned or globalenterprises. Now, any business

organisation if it so desires canjoin hands with another businessorganisation for mutual benefit. Thesetwo organisations may be private,government-owned or a foreigncompany. When two businesses agreeto join together for a common purpose

Joint Venture Bharti and Airtel

Bharti and Airtel entered 2005 as the biggest players in the telecom sector.

Airtel, with 15 million customers, is only one of Bhartis ventures. Beetel, the

telephone brand under Bharti Teletech, keeps them firmly grounded on the

landline front as well. Additionally, Bharti Telesoft, established in 1999 to provide

value added services and solutions to wireless and wireline carriers across the

globe, today finds presence in 25 countries, with over 100 networks and power

services to 50 million subscribers. Theyre on the outsourcing bandwagon as

well as TeleTech Services India, a collaboration between Bharti and TeleTech

holding Inc, which provides standard customer solutions and back-office support.

Field Fresh Foods, is Bhartis venture with ELRO holding to export farm fresh

agricultural products exclusively to markets in Europe and USA.


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70 BUSINESS STUDIES

and mutual benefit, it gives rise to ajoint venture. Businesses of any sizecan use joint ventures to strengthenlong-term relationships or tocollaborate on short term projects. A

joint venture can be flexible dependingupon the partys requirements. Theseneed to be clearly stated in a joint

venture agreement to avoid conflict at

a later stage.A joint venture may also be theresult of an agreement between two

businesses in different countries. In thiscase, there are certain provisionsprovided by the governments of the twocountries, which will have to beadhered to.

Thus, we see that joint venturesmay mean many things, dependingupon the context we are using it in. Butin a broader sense, a joint venture is

the pooling of resources and expertiseby two or more businesses, to achievea particular goal. The risks andrewards of the business are alsoshared. The reasons behind the joint

venture often include businessexpansion, development of newproducts or moving into new markets,particularly in another country. It is

becoming increasingly common forcompanies to create joint ventures withother businesses/companies and form

strategic alliances with them. Thereasons for these alliances may becomplementary capabilities andresources such as distributionchannels, technology or finance. In thiskind of a joint venture, two or more(parent) companies agree to sharecapital, technology, human resources,

risks and rewards in the formation of anew entity, under shared control.

In India, joint venture companiesare the best way of doing business.

There are no separate laws for thesejoint ventures. The compan iesincorporated in India are treated thesame as domestic companies.

A joint venture company can be

formed in any of the following ways:(i) Two parties (individuals or

companies), incorporate acompany in India. Business of oneparty is transferred to a newcompany. For consideration ofsuch transfer, shares are issued bythe new company and subscribed

by the above party. The othersubscribes for the shares in cash;

(ii) The above two parties subscribeto the shares of the joint venture

company in agreed proportion, incash and start a new business;

(iii) Promoter shareholder of anexisting Indian company andanother party which may be eitheran individual or a company maycollaborate to jointly carry on the

business of that company. Theother party may be non-residentor resident and may take upshares of the company throughpayment in cash.All joint ventures

in India require governmentapprovals if a foreign partner or aNon-Resident Indian (NRI) isinvolved. The approval can beobtained either from the ReserveBank of India or Foreign InvestmentPromotion Board (FIPB), dependingupon particular circumstances.


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(a) If the joint venture is covered underautomatic route, then the approval ofthe Reserve Bank of India is required.

(b) In other special cases not coveredunder the automatic route, a specialapproval of FIPB is required.A joint venture must be based on a

memorandum of understanding signedby both the parties highlighting the

basis of a joint venture agreement. Theterms should be thoroughly discussedand negotiated to avoid any legalcomplications at a later stage.Negotiations and terms must take intoaccount the cultural and legal

background of the parties. The jointventure agreement must also state thatall necessary governmental approvalsand licenses will be obtained within aspecified period.

3.6.1 BenefitsBusiness can achieve unexpected gainsthrough joint ventures with a partner.

Joint ventures can prove to beextremely beneficial for both partiesinvolved. One party may have strongpotential for growth and innovativeideas, but is still likely to benefit fromentering into a joint venture because itenhances its capacity, resources andtechnical expertise. The major benefitsof joint ventures are as follows:

( i ) Increased resources andcapacity: Joining hands with anotheror teaming up adds to existingresources and capacity enabling the

joint venture company to grow andexpand more quickly and efficiently.

The new business pools in financialand human resources and is able to

face market challenges and takeadvantage of new opportunities.(ii) Access to new markets anddistribution networks: When a

business enters into a joint venture witha partner from another country, itopens up a vast growing market. For

example, when foreign companies formjoint venture companies in India they

gain access to the vast Indian market.Their products which have reachedsaturation point in their home marketscan be easily sold in new markets.

They can also take advantage of theestablished distribution channels i.e.,the retail outlets in different localmarkets. Otherwise establishing theirown retail outlets may prove to be

very expensive.( i ii ) Access to technology:

Technology is a major factor for mostbusinesses to enter into joint ventures.Advanced techniques of productionleading to superior quality productssaves a lot of time, energy and

investment as they do not have todevelop their own technology.

Technology also adds to efficiency andeffectiveness, thus leading to reduction

in costs.

( iv ) Innovation: The marketsare increasingly becoming more

demanding in terms of new andinnovative products. Joint ventures

allow business to come up withsomething new and creative forthe same market. Specially foreign

partners can come up with innovativeproducts because of new ideas andtechnology.


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72 BUSINESS STUDIES

(v) Low cost of production: Wheninternational corporations invest inIndia, they benefit immensely due to the

lower cost of production. They are ableto get quality products for their globalrequirements. India is becoming an

important global source and extremelycompetitive in many products.

There are many reasons for this, low

cost of raw materials and labour,technically qualified workforce;management professionals, excellentmanpower in different cadres likelawyers, chartered accountants,engineers, scientists. The internationalpartner thus, gets the products of

required quality and specifications at amuch lower cost than what is prevailing

in the home country.(vi) Established brand name: Whentwo businesses enter into a joint venture

one of the parties benefits from theothers goodwill which has already beenestablished in the market. If the joint

venture is in India and with an Indian

company, the Indian company does nothave to spend time or money indeveloping a brand name for the

product or even a distribution system.There is a ready market waiting for theproduct to be launched. A lot ofinvestment is saved in the process.

Key Terms

Public sector Departmental undertaking Privatisation

Public enterprises Government companies Globalisation

Statutory corporation Disinvestment Global enterprises

Joint ventures Public accountability Public Sector

Undertakings

SUMMARY

Private sector and public sector: There are all kinds of businessorganisations small or large, industrial or trading, privately owned orgovernment owned existing in our country. These organisations affect ourdaily economic life and therefore become part of the Indian economy. Thegovernment of India has opted for a mixed economy where both private andgovernment enterprises are allowed to operate. The economy therefore maybe classified into two sectors viz., private sector and public sector. Theprivate sector consists of business owned by individuals or a group ofindividuals. Various forms of organisation are sole proprietorship,partnership, joint Hindu family, cooperative and company. The public sectorconsists of various organisations owned and managed by the government.These organisations may either be partly or wholly owned by the central orstate government.


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Forms of organising public sector enterprises:Governments participationin business and economic sectors of the country needs some kind oforganisational framework to function. A public enterprise may take anyparticular form of organisation depending upon the nature of its operationsand their relationship with the government. The suitability of a particularform of organisation would depend upon its requirements. The forms oforganisation which a public enterprise may take are as follows:(i) Departmental undertaking(ii) Statutory corporation(iii) Government company

Departmental undertakings:These enterprises are establ ished asdepartments of the ministry and are considered part or an extension of theministry itself. The Government functions through these departments andthe activities performed by them are an integral part of the functioning ofthe government.

Statutory corporations: Statutory corporations are public enterprisesbrought into existence by a Special Act of the Parliament. The Act definesits powers and functions, rules and regulations governing its employeesand its relationship with Government departments. This is a corporate bodycreated by legislature with defined powers and functions and financiallyindependent with a clear control over a specified area or a particular typeof commercial activity.

Government company: These companies are established under the IndianCompanies Act, 1956. These are Government companies and like all othercompanies in the private sector are registered and governed by theprovisions of the Indian companies Act. According to the Indian CompaniesAct 1956, a government company means any company in which not lessthan 51 percent of the paid up capital is held by the central government, orby any state Governments or Government or partly by central Governmentand partly by one or more state Governments.

Changing role of public sector: At the time of Independence, it was expectedthat the public sector enterprises would play an important role in achievingcertain objectives of the economy either by direct participation in businessor by acting as a catalyst. The Indian economy is in a stage of transition.In the post 90s 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 participateand compete in the market with other private sector companies in thesame industry.

Development of infrastructure: The process of industrialisation cannotbe sustained without adequate transportation and communication facilities,fuel and energy, and basic and heavy industries. It is only the governmentwhich could mobilise huge capital, coordinate industrial construction andtrain technicians and workforce.


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74 BUSINESS STUDIES

Regional balance:The government is responsible for developing all regionsand 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 thesame 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 upwith huge capital outlay, the public sector had to step in to take advantageof economies of scale.

Check over concentration of economic power:The public sector acts asa check over the private sector. In the private sector there are very few

industrial houses which would be willing to invest in heavy industries withthe 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 companiesinvolved in heavy engineering which would help in import substitution were

established.

Government policy towards public sector since 1991. Itsmain elements are:Restructure and revive potentially viable PSUs, Closedown 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 from17 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 sectorand 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 FinancialReconstruction to decide whether a sick unit was to be restructured or

closed down.

Memorandum of Understanding: Improvement of performance through aMoU (Memorandum of Understanding) system by which managements are

to be granted greater autonomy but held accountable for specified results.

Global enterprises: In the last ten years MNCs have played an importantrole in the Indian economy. They are characterised by their huge size, large


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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.

Features: 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 uponthe 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.

Benefits: Business can achieve unexpected gains through joint ventures

wi th a partner. The major bene fi ts of jo int ventur e are as fo llows:

(i) Increased resources and capacity (ii) Access to new markets and

distribution networks (iii) Access to technology (iv) Innovation (v) Low cost

of production (vi) Established brand name.

EXERCISES

Multiple Type Questions

1. A government company is any company in which the paid up capital

held by the government is not less than

(a) 49 per cent (b) 51 per cent

(c) 50 per cent (d) 25 per cent

2. Centralised control in MNCs implies control exercised by

(a) Branches (b) Subsidiaries

(c) Headquarters (d) Parliament

3. PSEs are organisations owned by

(a) Joint Hindu family (b) Government

(c) Foreign Companies (d) Private entrepreneurs

4. Reconstruction of sick public sector units is taken up by

(a) MOFA (b) MoU

(c) BIFR (d) NRF


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76 BUSINESS STUDIES

5. Disinvestments of PSEs implies(a) Sale of equity shares to (b) Closing down

private sector/public operations(c) Investing in new areas (d) Buying shares PSEs

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 classifythem.

5. Why is the government company form of organisation preferred to othertypes in the public sector?

6. How does the government maintain a regional balance in the country?

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 interms of profits and efficiency? Give reasons for your answer.

4. Why are global enterprises considered superior to other businessorganisations?

5. What are the benefits of entering into joint ventures?

Projects/Assignments

1. Collect information on companies in the public sector which have beenselected for disinvestment in the last 2-3 years. Also examine thecontroversies surrounding these decisions. Prepare a project report.

2. Make a list of Indian companies entering into joint ventures with foreigncompanies. Find out the apparent benefits derived out of such ventures.

class11 businessstudies unit03 ncert textbook englishedition

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