private, public and global enterprises

CHAPTER 3

PRIVATE, PUBLIC AND 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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3.1 INTRODUCTION

You must have come across all typesof 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 ownedby more than one person i.e.,partnership firms. These are allprivately owned organisations.Similarly, there are other offices orplaces of business which may be ownedby the government. For example,Railways is an organisation whollyowned and managed by thegovernment. The post office, in yourlocality is owned by the Post andTelegraph Department, Government ofIndia, though our dependence on theirpostal services, particularly in cities

and towns has been greatly reduced.This is because of plenty of privatecourier 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 theglobal enterprises.

3.2 PRIVATE SECTOR AND PUBLIC

SECTOR

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. Forexample, 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.

57PRIVATE, PUBLIC AND GLOBAL ENTERPRISES

country. These organisations affect ourdaily economic life and thereforebecome part of the Indian economy.Since the Indian economy consists ofboth privately owned and governmentowned business enterprises, it isknown as a mixed economy. TheGovernment of India has opted for amixed economy where both private andgovernment enterprises are allowed tooperate. The economy, therefore, maybe 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. Thevarious forms of organisation aresole proprietorship, partnership,joint Hindu family, cooperativeand company.

The public sector consists ofvarious organisations owned andmanaged by the government. Theseorganisations may either be partly orwholly owned by the central or stategovernment. They may also be a partof the ministry or come into existenceby a Special Act of the Parliament. Thegovernment, 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 whichthe 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 throughvarious Acts and Regulations wasoverseeing the economic activities ofboth 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 andindustrialisation. 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 businesshouses 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 PUBLIC

SECTOR ENTERPRISES

Government’s 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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In the public sector, as it grows, animportant question arises in respect ofhow 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 enterpriseswere formed by the government toparticipate in the economic activities ofthe country. They are expected tocontribute to the economic deve-lopment of the country in today’sliberalised, 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 asfollows:(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

DepartmentalUndertakings

StatutoryCorporation

GovernmentCompanies

Private(Ltd.)

SoleProperietorship

Partnership JointHinduFamily

Cooperative

Company

Public(Ltd.)

MultinationalCorporations


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 orindependent 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.

Features

The main 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 accountingand 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 ofpublic accountability;

(iii) The revenue earned by theenterprise 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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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 bureaucrat’sover-cautious and conservativeapproval does not allow them totake risky ventures;

(iv) There is red tapism in day-to-dayoperations 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 independentwith 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 astatutory corporation;

(ii) This type of organisation is whollyowned 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 centralbudget of the Government;

(vi) The employees of these enterprisesare 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


times, some officers are takenfrom government departments,on deputation, to head theseorganisations.

Merits

This form of organisation enjoys certainadvantages in its working, which areas follows:

(i) They enjoy independence in theirfunctioning and a high degree ofoperational flexibility. They are freefrom undesirable governmentregulation and control;

(ii) Since the funds of these organi-sations do not come from thecentral budget, the governmentgenerally does not interfere in theirfinancial matters, including theirincome and receipts;

(iii) Since they are autonomousorganisations they frame their ownpolicies and procedures within thepowers assigned to them by theAct. The Act may, however,provide few issues/matters whichrequire prior approval of aparticular ministry;

(vi) A statutory corporation is avaluable instrument for economicdevelopment. It has the power ofthe government, combined withthe initiative of private enterprises.

Limitations

This type of organisation suffers fromseveral 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 establishedunder the Indian Companies Act, 1956and is registered and governed by theprovisions of the Indian Companies Act.These are established for purelybusiness 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, orby 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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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 themdistinct 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 ofAssociation are the maindocuments 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.

Merits

Government 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 unhealthybusiness practices.

Limitations

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

(i) Since the Government is the onlyshareholder in some of theCompanies, the provisions of theCompanies Act does not havemuch relevance;

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


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 othercompanies, 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 90’s period, the neweconomic policies, emphasisedliberalisation, privatisation andglobalisation. The role of public sectorwas redefined. It was not supposedto play a passive role but to actively

3.4 CHANGING ROLE OF PUBLIC 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 wouldbuild up infrastructure for other sectorsof 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 companiesin 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 completeoverhauling or shut down. Variouscommittees were set up to study theworking of inefficient public sectorunits with reports on how to improvetheir managerial efficiency andprofitability. The role of public sectoris definitely not what was envisagedin the early 60’s or 70’s.

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

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(i) Development of infrastructure:The development of infrastructure is aprerequisite for industrialisation in anycountry. In the pre-Independenceperiod, basic infrastructure was notdeveloped and therefore, industrialisationprogressed at a very slow pace. Theprocess of industrialisation cannotbe sustained without adequatetransportation and communicationfacilities, fuel and energy, and basic andheavy industries. The private sector didnot 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 requirementof the economy.

It was only the government whichcould mobilise huge capital, coordinateindustrial 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 ensuredfuture economic growth. The publicsector enterprises were to operate incertain spheres. Investments were to bemade to:(a) Give infrastructure to the core

sector, which requires huge capitalinvestment, 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 andremoving regional disparties. Most ofthe industrial progress was limited toa few areas like the port towns in thepre-Independence period. After 1951,the government laid down in its FiveYear Plans, that particular attentionwould be paid to those regions whichwere lagging behind and public sectorindustries were deliberately set up.Four major steel plants were set up inthe backward areas to accelerateeconomic development, provideemployment to the workforce anddevelop ancilliary industries. This wasachieved to some extent but there isscope for a lot more. Development ofbackward regions so as to ensure aregional balance in the country is oneof the major objectives of planneddevelopment. Therefore, the govern-ment had to locate new enterprises inbackward areas and at the same timeprevent the mushrooming growth ofprivate sector units in alreadyadvanced areas.(iii) Economies of scale: Where largescale industries are required to be setup with huge capital outlay, the public


sector had to step in to take advantageof economies of scale. Electric powerplants, natural gas, petroleum andtelephone industries are someexamples of the public sector settingup large scale units. These unitsrequired a larger base to functioneconomically which was only possiblewith government resources and massscale production.(iv) Check over concentration ofeconomic power: The public sectoracts as a check over the private sector.In the private sector there are very fewindustrial houses which would bewilling to invest in heavy industrieswith the result that wealth getsconcentrated 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 largeindustries which requires heavyinvestment and thus the income andbenefits that accrue are shared by alarge of number of employees andworkers. This prevents concentrationof 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 inmany spheres. Obtaining foreignexchange was also a problem and itwas difficult to import heavy machineryrequired for a strong industrial base.At that time, public sector companiesinvolved in heavy engineering whichwould help in import substitution wereestablished. Simultaneously, several

public sector companies like STC andMMTC have played an important rolein expanding exports of the country.(vi) Government policy towards thepublic sector since 1991: TheGovernment of India had introducedfour major reforms in the public sectorin its new industrial policy in 1991. Themain elements of the Government policyare as follows:

• Restructure and revive potentiallyviable 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 ofindustries 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 forthe public sector, they were restrictedto atomic energy, arms andcommunication, mining, andrailways. In 2001, only threeindustries were reserved exclusivelyfor the public sector. These areatomic energy, arms and railtransport. This meant that the privatesector could enter all areas (exceptthe three) and the public sectorwould 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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is also quite capable of contributingsubstantially to the nation buildingprocess. Therefore, both the publicsector and the private sector need tobe viewed as mutually complementaryparts of the national sector. Privatesector units also have to assumegreater public responsibilities.Simultaneously, the public sectorneeds 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. Theobjective was to raise resources andencourage wider participation of thegeneral public and workers in theownership of these enterprises. Thegovernment had taken a decision towithdraw 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 ofsuccessful privatisation of a Central Public Sector Undertaking, carried out bythe Government. LJMC is a Calcutta-based company, and manufactures jutemachinery (mainly spinning and drawing frames). It employed around 400employees prior to privatisation. It started incurring losses from 1996-97 onwardand the turnover was on a decline. LJMC’s net worth as on March 1998 wasaround 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 privatisationthrough sale of 74 per cent stake to a strategic partner. The disinvestment processwas handled by LJMC’s holding company, Bharat Bhari Udyog Nigam LImited(BBUNL), under the administrative control and directions of the then Departmentof Heavy Industries (DHI), Ministry of Industry, Government of India.


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 Industrialand 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 providecompensation 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 thegovernment 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 orVoluntary 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 andoperational 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 thelast ten years MNCs have played animportant role in the Indian economy.They have become a common featureof most developing economies in theworld. MNCs as is evident from whatwe see around us, are giganticcorporations which have theiroperations in a number of countries.They are characterised by their hugesize, large number of products,advanced technology, marketingstrategies and network of operations allover the world. Global enterprises thusare huge industrial organisations whichextend their industrial and marketingoperations through a network of theirbranches in several countries. Theirbranches are also called MajorityOwned Foreign Affiliates (MOFA). Theseenterprises operate in several areas

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producing multiple products with theirbusiness strategy extending over anumber of countries. They do not aimat maximising profits from one or twoproducts but instead spread theirbranches all over. They have an impacton the international economy also. Thisis evident from the fact that the sales oftop 200 corporations were equivalentto 28.3 percent of the world’s 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 sellingconsumer 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 orbonds 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 companiespertaining 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 houseswanting to diversify and expand havegained by collaborating with MNCs interms 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 suchcorporations 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


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 globalcompanies 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 tobecome 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 allbranches 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 businessorganisation 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 Bharti’s ventures. Beetel, thetelephone brand under Bharti Teletech, keeps them firmly grounded on thelandline front as well. Additionally, Bharti Telesoft, established in 1999 to providevalue added services and solutions to wireless and wireline carriers across theglobe, today finds presence in 25 countries, with over 100 networks and powerservices to 50 million subscribers. They’re on the outsourcing bandwagon aswell as TeleTech Services India, a collaboration between Bharti and TeleTechholding Inc, which provides standard customer solutions and back-office support.Field Fresh Foods, is Bharti’s venture with ELRO holding to export farm freshagricultural products exclusively to markets in Europe and USA.

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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. Ajoint venture can be flexible dependingupon the party’s requirements. Theseneed to be clearly stated in a jointventure agreement to avoid conflict ata later stage.

A joint venture may also be theresult of an agreement between twobusinesses 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 isthe 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 jointventure often include businessexpansion, development of newproducts or moving into new markets,particularly in another country. It isbecoming increasingly common forcompanies to create joint ventures withother businesses/companies and formstrategic 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 companiesincorporated in India are treated thesame as domestic companies.

A joint venture company can beformed in any of the following ways:

(i) Two parties (individuals orcompanies), incorporate acompany in India. Business of oneparty is transferred to a newcompany. For consideration ofsuch transfer, shares are issued bythe new company and subscribedby the above party. The othersubscribes for the shares in cash;

(ii) The above two parties subscribeto the shares of the joint venturecompany 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 thebusiness of that company. Theother party may be non-residentor resident and may take upshares of the company throughpayment in cash.All joint venturesin 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.


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

3.6.1 Benefits

Business 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 thejoint 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 abusiness enters into a joint venture witha partner from another country, itopens up a vast growing market. Forexample, when foreign companies formjoint venture companies in India theygain 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 bevery expensive.(iii) 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 andinvestment as they do not have todevelop their own technology.Technology also adds to efficiency andeffectiveness, thus leading to reductionin costs.(iv) Innovation: The marketsare increasingly becoming moredemanding in terms of new andinnovative products. Joint venturesallow business to come up withsomething new and creative forthe same market. Specially foreignpartners can come up with innovativeproducts because of new ideas andtechnology.

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(v) Low cost of production: Wheninternational corporations invest inIndia, they benefit immensely due to thelower cost of production. They are ableto get quality products for their globalrequirements. India is becoming animportant global source and extremelycompetitive in many products.

There are many reasons for this, lowcost 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 prevailingin the home country.(vi) Established brand name: Whentwo businesses enter into a joint ventureone of the parties benefits from theother’s goodwill which has already beenestablished in the market. If the jointventure is in India and with an Indiancompany, the Indian company does nothave to spend time or money indeveloping a brand name for theproduct 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 SectorUndertakings

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.


Forms of organising public sector enterprises: Government’s 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 it’s 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 established 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 90’s 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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Regional balance: The government is responsible for developing all regionsand states in a balanced way and removing regional disparties. Developmentof backward regions so as to ensure a regional balance in the country isone of the major objectives of planned development. Therefore, thegovernment had to locate new enterprises in backward areas and at thesame time prevent the mushrooming growth of private sector unit in alreadyadvanced 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 fewindustrial houses which would be willing to invest in heavy industries withthe result that wealth gets concentrated in a few hands and monopolosticpractices 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 wereestablished.

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 inall non-strategic PSUs to 26 per cent or lower if necessary; and fully protectthe interest of workers.(a) Reduction in the number of industries reserved for the public sector from

17 to 8 (and then to 3): This meant that the private sector could enter allareas (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 encouragewider participation of the general public and workers in the ownershipof these enterprises. The government had taken a decision to withdrawfrom 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: Allpublic sector units were referred to the Board of Industrial and FinancialReconstruction to decide whether a sick unit was to be restructured orclosed down.

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


number of products, advanced technology, marketing strategies and networkof operations all over the world. Global enterprises thus are huge industrialorganisations which extend their industrial and marketing operationsthrough a network of their branches in several countries.

Features: These corporations have distinct features which distinguishesthem from other private sector companies, public sector companies and publicsector 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 thepooling of resources and expertise by two or more businesses, to achieve aparticular goal. The risks and rewards of the business are also shared. Thereasons behind the joint venture often include business expansion,development of new products or moving into new markets, particularly inanother country.

Benefits: Business can achieve unexpected gains through joint ventureswith a partner. The major benefits of joint venture are as follows:(i) Increased resources and capacity (ii) Access to new markets anddistribution networks (iii) Access to technology (iv) Innovation (v) Low costof production (vi) Established brand name.

EXERCISES

Multiple Type Questions

1. A government company is any company in which the paid up capitalheld 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 MNC’s implies control exercised by(a) Branches (b) Subsidiaries(c) Headquarters (d) Parliament

3. PSE’s 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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5. Disinvestments of PSE’s implies(a) Sale of equity shares to (b) Closing down

private sector/public operations(c) Investing in new areas (d) Buying shares PSE’s

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 publicsector?

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.

private, public and global enterprises

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