Private, Public and Global Enterprises PDF

Chapter 3 Private, Public and Global Enterprises LEARNING OBJECTIVES After studying this chapter, you should be able to: explain...

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. 2024-25 Chapter 3.indd 57 31-12-2020 11:54:45  58 BUSINESS  STUDIES Anita, a student of Class XI, was going through some newspapers. The headlines stared 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 incurring heavy losses and the proposal for closing the same. In contrast to this, she read another item on how some of the companies under the private sector were doing so well. She was actually curious to know what these terms like public sector, disinvestment, privatisation meant. She learnt there are all kinds of business organisation-small or large, industrial or trading, privately owned or government owned existing in our country. These organisations affect our daily economic life and therefore become part of the Indian economy. Since the Indian economy consists of both privately owned and government owned business enterprises, it is known as a mixed economy. The Government of India has opted for a mixed economy where both private and government enterprises are allowed to operate. The economy, therefore, may be classified into two sectors, viz., private sector and public sector. Then there are businesses which operate in more than one country known as global enterprises. Therefore, you may have observed that all types of organisations are doing business in the country whether they are public, private or global. 3.1 Introduction cities and towns has been greatly reduced. This is because of plenty of You must have come across all types private courier services firms operating of business organisations in your in bigger towns. Then there are daily life. In your neighbourhood businesses which operate in more market, there are shops owned by sole than one country known as global proprietors or big retail organisations enterprises. Therefore, you may have run by a company. Then there are observed that all types of organisations people providing you services like are doing business in the country legal services, medical services, being whether they are public, private or owned by more than one person global. i.e., partnership firms. These are all privately owned organisations. 3.2 P rivate S ector and P ublic Similarly, there are other offices or places of business which may Sector be owned by the government. For The private sector consists of example, Railways is an organisation business owned by individuals or wholly owned and managed by the a group of individuals, as you have government. The post office, in your learnt in the previous chapter. The locality is owned by the Post and various forms of organisation are Telegraph Department, Government sole proprietorship, partnership, of India, though our dependence on joint Hindu family, cooperative their postal services, particularly in and company. 2024-25 Chapter 3.indd 58 13-01-2021 11:15:54  PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 59 The public sector consists of outside India. Thus, multinational various organisations owned and corporations or global enterprises managed by the government. These which operate in more than one organisations may either be partly or country gained entry into the Indian wholly owned by the central or state economy. Thus, we have public sector government. They may also be a part units, private sector enterprises and of the ministry or come into existence global enterprises coexisting in the by a Special Act of the Parliament. The Indian economy. government, through these enterprises participates in the economic activities 3.3 F orms of O rganising P ublic of the country. Sector Enterprises The government in its industrial policy resolutions, from time-to- Government’s participation in business time, defines the area of activities in and economic sectors of the country which the private sector and public needs some kind of organisational sector are allowed to operate. In the framework to function. You have Industrial Policy Resolution 1948, studied about the forms of business the Government of India had specified organisation in the private sector the approach towards development of viz., sole proprietorship, partnership, the industrial sector. The roles of the Hindu undivided family, cooperative private and public sector were clearly and company. defined and the government through In the public sector, as it grows, an various Acts and Regulations was important question arises in respect of overseeing the economic activities of how it is to be organised or what form both the private and public sector. of organisation it should take. The The Industrial Policy Resolution, 1956 government has a major role to play in had also laid down certain objectives the formation of the public sector. But for the public sector to follow so as the government acts through its people, to accelerate the rate of growth and its offices, employees and they take industrialisation. The public sector decisions on behalf of the government. was given a lot of importance but at For this purpose, public enterprises the same time mutual dependency were formed by the government to of public and private sectors was participate in the economic activities emphasised. The 1991 industrial policy of the country. They are expected was radically different from all the to contribute to the economic deve- earlier policies where the government lopment of the country in today’s was deliberating disinvestment of liberalised, competitive world. These public sector and allowing greater public enterprises are owned by freedom to the private sector. At the the public and are accountable to same time, foreign direct investment the public through the Parliament. was invited from business houses They are characterised by public 2024-25 Chapter 3.indd 59 31-12-2020 11:54:45  60 BUSINESS  STUDIES Indian Economy Public Sector Private Sector Departmental Government Undertakings Companies Partnership Joint Cooperative Multinational Hindu Corporations Statutory Sole Family Properietorship Company Corporation Public Private (Ltd.) (Ltd.) ownership, public funds being used for 3.3.1 Departmental Undertakings its activities and public accountability. This is the oldest and most traditional A public enterprise may take form of organising public enterprises. any particular form of organisation These enterprises are established as depending upon the nature of its departments of the ministry and are operations and their relationship with considered part or an extension of the government. The suitability of a the ministry itself. The Government particular form of organisation would functions through these departments depend upon its requirements. At the and the activities performed by them same time, in accordance with general are an integral part of the functioning principles, any organisation in the public of the government. They have not sector should ensure organisational been constituted as autonomous or performance productivity and quality independent institutions and as such standards. are not independent legal entities. The forms of organisation which They act through the officers of a public enterprise may take are as the Government and its employees follows: are Government employees. These (i) Departmental undertaking undertakings may be under the central or the state government and (ii) Statutory corporation the rules of central/state government (iii) Government company are applicable. Examples of these 2024-25 Chapter 3.indd 60 31-12-2020 11:54:45  PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 61 undertakings are railways and post (i) These undertakings facilitate the and telegraph department. Parliament to exercise effective control over their operations; Features (ii) These ensure a high degree of The main characteristics of public accountability; Departmental undertakings are as (iii) The revenue earned by the follows: enterprise goes directly to the (i) The funding of these enterprises treasury and hence is a source of come directly from the Govern- income for the Government; ment Treasury and are an annual (iv) W h e r e n a t i o n a l s e c u r i t y i s appropriation from the budget concerned, this form is most of the Government. The revenue suitable since it is under the earned by these is also paid into direct control and supervision of the treasury; the concerned Ministry. (ii) They are subject to accounting and audit controls applicable to Limitations other Government activities; This form of organisation suffers from (iii) The employees of the enterprise serious drawbacks, some of which are are Government servants and as follows: their recruitment and conditions (i) Departmental undertakings fail of service are the same as that of to provide flexibility, which is other employees directly under essential for the smooth operation the Government. They are headed of business; by Indian Administrative Service (ii) The employees or heads of depart- (IAS) officers and civil servants ments of such undertakings are who are transferable from one not allowed to take independent ministry to another; decisions, without the approval (iv) It is generally considered to be a major sub division of th e of the ministry concerned. This Government department and is leads to delays, in matters where subject to direct control of the prompt decisions are required; ministry; (iii) These enterprises are unable (v) They are accountable to the to take advantage of business ministry since their management opportunities. The bureaucrat’s is directly under the concerned over-cautious and conservative ministry. approval does not allow them to take risky ventures; Merits (iv) There is red tapism in day-to-day Departmental undertakings have operations and no action can be certain advantages which are as taken unless it goes through the follows: proper channels of authority; 2024-25 Chapter 3.indd 61 31-12-2020 11:54:45  62 BUSINESS  STUDIES (v) There is a lot of political inter- government has the ultimate ference through the ministry; financial responsibility and has (vi) These organisations are usually the power to appropriate its insensitive to consumer needs profits. At the same time, the state and do not provide adequate also has to bear the losses, if any; services to them. (iii) A statutory corporation is a body corporate and can sue and be 3.3.2 Statutory Corporations sued, enter into contract and Statutory corporations are public acquire property in its own name; enterprises brought into existence by (iv) This type of enterprise is usually a Special Act of the Parliament. The independently financed. It obtains Act defines its powers and functions, funds by borrowings from the rules and regulations governing its government or from the public employees and its relationship with through revenues, derived from government departments. sale of goods and services. It has This is a corporate body created the authority to use its revenues; by the legislature with defined powers (v) A statutory corporation is not and functions and is financially subject to the same accounting independent with a clear control and audit procedures applicable over a specified area or a particular to government departments. It type of commercial activity. It is a is also not concerned with the corporate person and has the capacity central budget of the Government; of acting in its own name. Statutory (vi) The employees of these enterprises corporations therefore have the power are not government or civil of the government and considerable servants and are not governed by amount of operating flexibility of government rules and regulations. private enterprises. The conditions of service of the employees are governed by the Features provisions of the Act itself. At times, some officers are taken Statutory corporations have certain from government departments, distinct features, which are discussed on deputation, to head these as below: organisations. (i) Statutory corporations are set up under an Act of Parliament and Merits are governed by the provisions of the Act. The Act defines the This form of organisation enjoys objects, powers and privileges of certain advantages in its working, a statutory corporation; which are as follows: (ii) This type of organisation is (i) They enjoy independence in their wholly owned by the state. The functioning and a high degree of 2024-25 Chapter 3.indd 62 31-12-2020 11:54:45  PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 63 operational flexibility. They are (iv) The Government has a practice free from undesirable government of appointing advisors to the regulation and control; Corporation Board. This curbs (ii) Since the funds of these organi- the freedom of the corporation sations do not come from the in entering into contracts and central budget, the government other decisions. If there is any generally does not interfere in disagreement, the matter is their financial matters, including referred to the government for their income and receipts; final decisions. This further (iii) Since they are autonomous delays action. organisations they frame their own policies and procedures 3.3.3 Government Company within the powers assigned to A government company is established them by the Act. The Act may, under The Companies Act, 2013 however, provide few issues/ and is registered and governed by matters which require prior the provisions of The Act. These approval of a particular ministry; are established for purely business (iv) A statutory corporation is a purposes and in true spirit compete valuable instrument for economic with companies in the private sector. development. It has the power According to the section 2(45) of the of the government, combined Companies Act 2013, a government with the initiative of private company means any company in enterprises. which not less than 51 per cent of the paid up capital is held by the central Limitations government, or by any state government or partly by Central government This type of organisation suffers from and partly by one or more State several limitations, which are as governments and includes a company follows: which is a subsidiary of a government (i) In reality, a statutory corporation company. Under the Companies does not enjoy as much operational Act 2013, there is no change in the flexibility as stated above. All definition of a company. All provisions actions are subject to many rules of the Act are applicable to government and regulations; companies unless otherwise specified. (ii) G o v e r n m e n t a n d p o l i t i c a l A government company may be formed interference has always been as a private limited company or a public there in major decisions or where limited company. There are certain huge funds are involved; provisions which are applicable to the (iii) Where there is dealing with public, appointment/retirement of directors rampant corruption exists; and other managerial personnel. 2024-25 Chapter 3.indd 63 31-12-2020 11:54:45  64 BUSINESS  STUDIES From the above it is clear that the (vi) These companies are exempted government exercises control over the from the accounting and audit paid up share capital of the company. rules and procedures. An auditor The shares of the company are is appointed by the Central purchased in the name of the President Government and the Annual of India. Since the government is Report is to be presented in the major shareholder and exercises the Parliament or the State control over the management of Legislature; these companies, they are known as (vii) The government company obtains government companies. its funds from government shareholdings and other private Features shareholders. It is also permitted to raise funds from the capital Government companies have market. certain characteristics which makes them distinct from other forms of Merits organisations. These are discussed as follows: Government companies enjoy several (i) It is an organisation created under advantages, which are as follows: the Companies Act, 2013 or any (i) A government company can other previous Company Law. be established by fulfilling the (ii) The company can file a suit in requirements of the Indian a court of law against any third Companies Act. A separate Act party and be sued; in the Parliament is not required; (iii) The company can enter into a (ii) It has a separate legal entity, apart from the Government; contract and can acquire property (iii) I t e n j o y s a u t o n o m y i n a l l in its own name; management decisions and takes (iv) The management of the company actions according to business is regulated by the provisions of prudence; the Companies Act, like any other (iv) These companies by providing public limited company; goods and services at reasonable (v) The employees of the company prices are able to control the are appointed according to their market and curb unhealthy own rules and regulations as business practices. contained in the Memorandum and Articles of Association of Limitations the company. The Memorandum and Articles of Association are Despite the autonomy given to the main documents of the these companies, they have certain company, containing the objects disadvantages: of the company and its rules and (i) Since the Government is the regulations; only shareholder in some of the 2024-25 Chapter 3.indd 64 31-12-2020 11:54:46  PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 65 companies, the provisions of the role of public sector was redefined. It Companies Act does not have was not supposed to play a passive role much relevance; but to actively participate and compete (ii) I t e v a d e s c o n s t i t u t i o n a l in the market with other private sector responsibility, which a company companies in the same industry. financed by the government They were also held accountable for should have. It is not answerable losses and return on investment. If directly to the Parliament; a public sector was making losses (iii) The government being the sole continuously, it was referred to the shareholder, the management Board for Industrial and Financial and administration rests in the Reconstruction (BIFR) for complete hands of the government. The overhauling or shut down. Various main purpose of a government committees were set up to study company, registered like other the working of inefficient public companies, is defeated. sector units with reports on how to improve their managerial efficiency 3.4 Changing Role of Public Sector and profitability. The role of public sector is definitely not what was At the time of Independence, it was envisaged in the early 1960s or 70s. expected that the public sector enterprises would play an important (i) Development of infrastructure: role in achieving certain objectives of the The development of infrastructure is a economy either by direct participation prerequisite for industrialisation in any in business or by acting as a catalyst. country. In the pre-Independence period, The public sector would build up basic infrastructure was not developed infrastructure for other sectors of the and therefore, industrialisation economy and invest in key areas. The progressed at a very slow pace. The private sector was unwilling to invest process of industrialisation cannot in projects which required heavy be sustained without adequate investment and had long gestation transportation and communication periods. The government then took it facilities, fuel and energy, and basic upon itself to develop infrastructural and heavy industries. The private facilities and provide for goods and sector did not show any initiative to services essential for the economy. invest in heavy industries or develop The Indian economy is in a stage it in any manner. They did not have of transition. The Five Year Plans in trained personnel or finances to the initial stages of development gave immediately establish heavy industries lot of importance to the public sector. which was the requirement of the In the post–1990s, the new economic economy. policies, emphasised on liberalisation, It was only the government which privatisation and globalisation. The could mobilise huge capital, coordinate 2024-25 Chapter 3.indd 65 31-12-2020 11:54:46  66 BUSINESS  STUDIES industrial construction and train industries were deliberately set up. technicians and workforce. Rail, Four major steel plants were set up road, sea and air transport was the in the backward areas to accelerate responsibility of the government, and economic development, provide their expansion has contributed to the employment to the workforce and pace of industrialisation and ensured develop ancilliary industries. This was future economic growth. The public achieved to some extent but there is sector enterprises were to operate in scope for a lot more. Development certain spheres. Investments were to of backward regions so as to ensure be made to: a regional balance in the country is (a) Give infrastructure to the core one of the major objectives of planned sector, which requires huge development. Therefore, the govern- capital investment, complex and ment had to locate new enterprises upgraded technology, big and in backward areas and at the same effective organisation structures time prevent the mushrooming growth like steel plants, power generation of private sector units in already plants, civil aviation, railways, advanced areas. petroleum, state trading, coal, (iii) Economies of scale: Where etc; large scale industries are required to (b) Give a lead in investment to the be set up with huge capital outlay, core sector where private sector the public sector had to step in to enterprises are not functioning take advantage of economies of scale. in the desired direction, like Electric power plants, natural gas, fertilizers, pharmaceuticals, petroleum and telephone industries petro-chemicals, newsprint, are some examples of the public sector medium and heavy engineering; setting up large scale units. These (c) G i v e d i r e c t i o n t o f u t u r e units required a larger base to function investments like hotels, project economically which was only possible management, consultancies, with government resources and mass textiles, auto-mobiles, etc. scale production. (ii) Regional balance: The government (iv) Check over concentration of is responsible for developing all regions economic power: The public sector and states in a balanced way and acts as a check over the private removing regional disparties. Most of sector. In the private sector there the industrial progress was limited to are very few industrial houses which a few areas like the port towns in the would be willing to invest in heavy pre-Independence period. After 1951, industries with the result that wealth the government laid down in its Five gets concentrated in a few hands and Year Plans, that particular attention monopolostic practices are encouraged. would be paid to those regions which This gives rise to inequalities in income, were lagging behind and public sector which is detrimental to society. 2024-25 Chapter 3.indd 66 31-12-2020 11:54:46  PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 67 The public sector is able to set public sector from 17 to 8 large industries which requires heavy (and then to 3): In the 1956 investment and thus the income and resolution on Industrial policy, benefits that accrue are shared by 17 industries were reserved for a large of number of employees and the public sector. In 1991, only workers. This prevents concentration 8 industries were reserved for of wealth and economic power in the the public sector, they were private sector. restricted to atomic energy, arms (v) Import substitution: During the and communication, mining, second and third Five Year Plan period, and railways. In 2001, only India was aiming to be self-reliant three industries were reserved in many spheres. Obtaining foreign exclusively for the public sector. exchange was also a problem and it These are atomic energy, arms was difficult to import heavy machinery and rail transport. This meant required for a strong industrial base. that the private sector could enter At that time, public sector companies all areas (except the three) and involved in heavy engineering which the public sector would have to would help in import substitution were compete with them. established. Simultaneously, several The public sector has played a public sector companies like STC and vital role in the development of the MMTC have played an important role economy. However, the private sector in expanding exports of the country. is also quite capable of contributing (vi) Government policy towards substantially to the nation building the public sector since 1991: The process. Therefore, both the public Government of India had introduced sector and the private sector need to four major reforms in the public sector be viewed as mutually complementary in its new industrial policy in 1991. parts of the national sector. Private The main elements of the Government sector units also have to assume policy are as follows: g re a te r p u b lic re s p o n s ib ilitie s. Restructure and revive potentially Simultaneously, the public sector viable PSUs needs to focus on achieving more in a Close down PSUs, which cannot highly competitive market. be revived (b) Disinvestment of shares of Bring down governments equity in a select set of public sector all non-strategic PSUs to 26 per enterprises: Disinvestment cent or lower, if necessary; and involves the sale of the equity Fully protect the interest of shares to the private sector and workers. the public. The objective was to (a) Reduction in the number of raise resources and encourage industries reserved for the wider participation of the general 2024-25 Chapter 3.indd 67 31-12-2020 11:54:46  68 BUSINESS  STUDIES public and workers in the the private sector: All public ownership of these enterprises. sector units were referred to the The government had taken a Board of Industrial and Financial decision to withdraw from the Reconstruction to decide industrial sector and reduce whether a sick unit was to be its equity in all undertakings. restructured or closed down. The It was expected that this would Board has reconsidered revival lead to improving managerial and rehabilitation schemes for performance and ensuring some cases and winding up financial discipline. But there for a number of units. There remains a lot to be done in is a lot of resentment amongst this area. workers of the units which are The primary objectives of privatising to be closed down. A National public sector enterprises are: Renewal Fund was set up by the Releasing the large amount government to retrain or redeploy of public resources locked up retrenched labour and to provide in non-strategic Public Sector compensation to public sector Enterprises (PSEs), so that they employees seeking voluntary may be utilised on other social retirement. priority areas such as basic There are many enterprises health, family welfare and primary which are sick and not capable education. of being revived as they have Reducing the huge amount of accumulated huge losses. With public debt and interest burden; public finances under intense Transferring the commercial pressure, both central and state risk to the private sector so that government are just not able the funds are invested in able to sustain them much longer. projects; Freeing these enterprises The only option available to the from government control and government in such cases is to introduction of corporate close down these undertakings governance; and after providing a safety net for the In many areas where the public employees and workers. Resources sector had a monopoly, for under the National Renewal Fund example, telecom sector the have not been sufficient to meet consumers have benefitted by the cost of Voluntary Separation more choices, lower prices and Scheme or Voluntary Retirement better quality of products and Scheme. services. (d) Memorandum of Understanding: (c) Policy regarding sick units Improvement of performance to be the same as that for through a MoU (Memorandum 2024-25 Chapter 3.indd 68 31-12-2020 11:54:46  PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 69 of Understanding) system by Features which managements are to be These corporations have distinct granted greater autonomy but features which distinguish them from held accountable for specified other private sector companies, public results. Under this system, public sector companies and public sector sector units were given clear enterprises. These are as follows: targets and operational autonomy (i) Huge capital resources: These for achieving those targets. The enterprises are characterised by MoU was between the particular possessing huge financial resources public sector unit and their and the ability to raise funds from administrative ministries defining different sources. They are able to their relationship and autonomy. tap funds from various sources. They may issue equity shares, debentures 3.5 Global Enterprises or bonds to the public. They are also At some time you must have come in a position to borrow from financial institutions and international banks. across products produced by Multi They enjoy credibility in the capital National Corporations (MNCs). In market. Even investors and banks of the last 2 decades or so. MNCs have the host country are willing to invest played an important role in the Indian in them. Because of their financial economy. They have become a common strength they are able to survive under feature of most developing economies all circumstances. in the world. MNCs as is evident (ii) Foreign collaboration: Global from what we see around us, are enterprises usually enter into gigantic corporations which have their agreements with Indian companies operations in a number of countries. pertaining to the sale of technology, They are characterised by their huge production of goods, use of brand size, large number of products, names for the final products, etc. These advanced technology, marketing MNCs may collaborate with companies strategies and network of operations in the public and private sector. There all over the world. Global enterprises are usually various restrictive clauses thus are huge industrial organisations in the agreement relating to transfer which extend their industrial and of technology, pricing, dividend marketing operations through a payments, tight control by foreign network of their branches in several technicians, etc. Big industrial houses countries. These enterprises operate wanting to diversify and expand have in several areas producing multiple gained by collaborating with MNCs in products with their business strategy terms of patents, resources, foreign extending over a number of countries. exchange etc. But at the same time They do not aim at maximising profits these foreign collaborations have given from one or two products but instead rise to the growth of monopolies and spread their branches all over. concentration of power in few hands. 2024-25 Chapter 3.indd 69 31-12-2020 11:54:46  70 BUSINESS  STUDIES (iii) Advanced technology: These image also builds up and their market enterprises possess technological territory expands enabling them superiorities in their methods of to become international brands. production. They are able to conform They operate through a network of to international standards and quality subsidiaries, branches and affiliates specifications. This leads to industrial in host countries. Due to their giant progress of the country in which such size they occupy a dominant position corporations operate since they are in the market. able to optimally exploit local resources (vii) Centralised control: They have and raw materials. Computerisation their headquaters in their home and other inventions have come due country and exercise control over all to the technological advancements branches and subsidiaries. However, provided by MNCs. this control is limited to the broad policy (iv) Product innovation: These framework of the parent company. enterprises are characterised by There is no interference in day-to-day having highly sophisticated research operations. and development departments engaged in the task of developing 3.6 Joint Ventures new products and superior designs of Meaning existing products. Qualitative research requires huge investment which only Business organisations as you have global enterprises can afford. studied earlier can be of various ( v ) M a r k e t i n g s t r a t e g i e s : The types private or government owned or marketing strategies of global global enterprises. Now, any business companies are far more effective than organisation if it so desires can other companies. They use aggressive join hands with another business marketing strategies in order to organisation for mutual benefit. increase their sales in a short period. These two organisations may be They posses a more reliable and up- private, government-owned or a foreign to-date market information system. company. When two businesses Their advertising and sales promotion agree to join together for a common techniques are normally very effective. purpose and mutual benefit, it gives Since they already have carved out rise to a joint venture. Businesses a place for themselves in the global of any size can use joint ventures to market, and their brands are well- strengthen long-term relationships or known, selling their products is not a to collaborate on short term projects. A problem. joint venture can be flexible depending (vi) Expansion of market territory: upon the party’s requirements. These Their operations and activities extend need to be clearly stated in a joint beyond the physical boundaries of their venture agreement to avoid conflict at own countries. Their international a later stage. 2024-25 Chapter 3.indd 70 31-12-2020 11:54:46  PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 71 A joint venture may also be the channels, technology or finance. In result of an agreement between two this kind of a joint venture, two or more businesses in different countries. In (parent) companies agree to share this case, there are certain provisions capital, technology, human resources, provided by the governments of the risks and rewards in the formation of two countries, which will have to be a new entity, under shared control. adhered to. In India, joint venture companies Thus, we see that joint ventures are the best way of doing business. may mean many things, depending There are no separate laws for upon the context we are using it these joint ventures. The companies in. But in a broader sense, a joint incorporated in India are treated the venture is the pooling of resources and same as domestic companies. expertise by two or more businesses, to achieve a particular goal. The risks Joint Ventures are of two types — and rewards of the business are Contractual joint venture also shared. The reasons behind the Equity-based joint venture joint venture often include business expansion, development of new 3.6.1 Types of Joint Ventures products or moving into new markets, (i) Contractual Joint Venture (CJV): particularly in another country. It is In a contractual joint venture, a new becoming increasingly common for jointly-owned entity is not created. companies to create joint ventures There is only an agreement to work with other businesses/companies together. The parties do not share and form strategic alliances with ownership of the business but exercise them. The reasons for these alliances some elements of control in the may be complementary capabilities joint venture. A typical example and resources such as distribution of a contractual joint venture is a 2024-25 Chapter 3.indd 71 31-12-2020 11:54:46  72 BUSINESS  STUDIES franchisee relationship. In such a (e) S h a r e d p r o f i t s a n d l o s s e s relationship the key elements are: according to the agreement. (a) Two or more parties have a A joint venture must be based on a common intention – of running memorandum of understanding signed a business venture; by both the parties, highlighting the basis of a joint venture agreement. (b) Each party brings some inputs; The terms should be thoroughly (c) Both parties exercise some discussed and negotiated to avoid control on the business venture; any legal complications at a later and stage. Negotiations and terms must (d) T h e r e l a t i o n s h i p i s n o t a take into account the cultural and transaction-to-transaction legal background of the parties. The relationship but has a character joint venture agreement must also of relatively longer duration. state that all necessary governmental approvals and licences will be obtained (ii) Equity-based Joint Venture (EJV): within a specified period. An equity joint venture agreement is one in which a separate business 3.6.2 Benefits entity, jointly owned by two or more parties, is formed in accordance with Business can achieve unexpected the agreement of the parties. The key gains through joint ventures with a operative factor in such case is joint partner. Joint ventures can prove to ownership by two or more parties. be extremely beneficial for both parties The form of business entity may vary involved. One party may have strong — company, partnership firm, trusts, potential for growth and innovative limited liability partnership firms, ideas, but is still likely to benefit from venture capital funds, etc. entering into a joint venture because it enhances its capacity, resources and (a) There is an agreement to either technical expertise. The major benefits create a new entity or for one of of joint ventures are as follows: the parties to join into ownership of an existing entity; (i) Increased resources and capacity: Joining hands with another or teaming (b) Shared ownership by the parties up adds to existing resources and involved; capacity enabling the joint venture company to grow and expand more (c) Shared management of the jointly quickly and efficiently. The new owned entity; business pools in financial and human (d) Shared responsibilities regarding resources and is able to face market capital investment and other challenges and take advantage of new financing arrangements; and opportunities. 2024-25 Chapter 3.indd 72 31-12-2020 11:54:46  PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 73 (ii) Access to new markets and to get quality products for their global distribution networks: When a requirements. India is becoming an business enters into a joint venture important global source and extremely with a partner from another country, competitive in many products. it opens up a vast growing market. For There are many reasons for this, example, when foreign companies form low cost of raw materials and labour, joint venture companies in India they technically qualified workforce; gain access to the vast Indian market. management professionals, excellent Their products which have reached manpower in different cadres, like saturation point in their home markets lawyers, chartered accountants, can be easily sold in new markets. engineers, scientists. The international They can also take advantage of partner thus, gets the products of the established distribution channels required quality and specifications i.e., the retail outlets in different local markets. Otherwise, establishing their at a much lower cost than what is own retail outlets may prove to be prevailing in the home country. very expensive. (vi) Established brand name: When (iii) Access to technology: Technology two businesses enter into a joint is a major factor for most businesses venture, one of the parties benefits from to enter into joint ventures. Advanced the other’s goodwill which has already techniques of production leading to been established in the market. If the superior quality products saves a lot joint venture is in India and with an of time, energy and investment as Indian company, the Indian company they do not have to develop their own does not have to spend time or money technology. Technology also adds in developing a brand name for the to efficiency and effectiveness, thus product or even a distribution system. leading to reduction in costs. There is a ready market waiting for (iv) Innovation: The markets the product to be launched. A lot of are increasingly becoming more investment is saved in the process. demanding in terms of new and innovative products. Joint ventures 3.7 Public Private Partnership (PPP) allow business to come up with something new and creative for The Public Private Partnership model the same market. Specially foreign allocates tasks, obligations and risks partners can come up with innovative among the public and private partners products because of new ideas and in an optimal manner. The public technology. partners in PPP are Government (v) Low cost of production: When entities, i.e., ministries, government international corporations invest in departments, municipalities or India, they benefit immensely due to the state-owned enterprises. The private lower cost of production. They are able partners can be local or foreign 2024-25 Chapter 3.indd 73 13-01-2021 12:30:04  74 BUSINESS  STUDIES (international) and include businesses investment and transfer of assets that or investors with technical or financial support the partnership in addition expertise relevant to the project. to social responsibility, environmental PPP also includes NGOs and/or awareness and local knowledge. The community-based organisations who private sector’s role in the partnership are the stakeholders directly affected is to make use of its expertise in by the project. PPP is, therefore, operations, managing tasks and defined as a relationship between innovation to run the business public and private entities in the efficiently. context of infrastructure and other Sectors in which PPPs have been completed worldwide include services. Under the PPP model, public power generation and distribution, sector plays an important role and water and sanitation, refuse disposal, ensures that the social obligations pipelines, hospitals, school buildings are fulfilled and sector reforms and and teaching facilities, stadiums, public investment are successfully air traffic control, prisons, railways, met. The government’s contribution roads, billing and other information to PPP is in the form of capital for technology systems, and housing. PPP Model Features Contract with the private party to design and build public facility. Facility is financed and owned by the public sector. Key driver is the transfer of design and construction risk. Application Suited to capital projects with small operating requirement. Suited to capital projects where the public sector wishes to retain the operating responsibility. Strengths Transfer of design and construction risk. Potential to accelerate project. Weaknesses Conflict between parties may arise on environmental considerations Does not attract private finance easily. Example Kundli Manesar Expressway Ltd.: In this 135 km expressway, land has been provided by the government and surface has been laid out by the company. 2024-25 Chapter 3.indd 74 31-12-2020 11:54:46  PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 75 Key Terms Public sector Departmental undertaking Globalisation Public enterprises Government companies Global enterprises Statutory corporation Disinvestment Public Sector Undertakings Joint ventures Public accountability Public Private Partnership Privatisation SUMMARY Private sector and public sector: There are all kinds of business organisations — small or large, industrial or trading, privately owned or government owned existing in our country. These organisations affect our daily economic life and therefore, become part of the Indian economy. The government of India has opted for a mixed economy, where both private and government enterprises are allowed to operate. The economy, therefore, may be classified into two sectors viz., private sector and public sector. The private sector consists of business owned by individuals or a group of individuals. Various forms of organisation are sole proprietorship, partnership, joint Hindu family, cooperative and company. The public sector consists of various organisations owned and managed by the government. These organisations may either be partly or wholly owned by the central or state government. Forms of organising public sector enterprises: Government’s participation in business and economic sectors of the country needs some kind of organisational framework to function. A public enterprise may take any particular form of organisation depending upon the nature of it’s operations and their relationship with the government. The suitability of a particular form of organisation would depend upon its requirements. The forms of organisation which a public enterprise may take are as follows: (i) Departmental undertaking (ii) Statutory corporation (iii) Government company Departmental undertakings: These enterprises are established as departments of the ministry and are considered part or an extension of the ministry itself. The Government functions through these departments and the activities performed by them are an integral part of the functioning of the government. Statutory corporations: Statutory corporations are public enterprises brought into existence by a Special Act of the Parliament. The Act defines its powers and functions, rules and regulations governing its employees and its 2024-25 Chapter 3.indd 75 13-01-2021 09:41:21  76 BUSINESS  STUDIES relationship with Government departments. This is a corporate body created by legislature with defined powers and functions and financially independent with a clear control over a specified area or a particular type of commercial activity. Government company: A Government company means any company in which not less than 51 percent of the paid up capital is held by the central government, or by any state governments or government or partly by central government and partly by one or more state governments and includes a company which is a subsidiary company of such a government company. Changing role of public sector: At the time of Independence, it was expected that the public sector enterprises would play an important role in achieving certain objectives of the economy either by direct participation in business or 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 participate and compete in the market with other private sector companies in the same industry. Development of infrastructure: The process of industrialisation cannot be sustained without adequate transportation and communication facilities, fuel and energy, and basic and heavy industries. It is only the government which could mobilise huge capital, coordinate industrial construction and train technicians and workforce. Regional balance: The government is responsible for developing all regions and 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 the same 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 up with huge capital outlay, the public sector had to step in to take advantage of economies of scale. Check over concentration of economic power: The public sector acts as a check over the private sector. In the private sector there are very few industrial houses which would be willing to invest in heavy industries with the 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 companies involved in heavy engineering which would help in import substitution were established. 2024-25 Chapter 3.indd 76 31-12-2020 11:54:46  PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 77 Government policy towards public sector since 1991. Its main elements are: Restructure and revive potentially viable PSUs, Close down 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 from 17 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 sector and 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 Financial Reconstruction to decide whether a sick unit was to be restructured or closed down. Memorandum of Understanding: Improvement of performance through a MoU (Memorandum of Understanding) system by which managements are to be granted greater autonomy but held accountable for specified results. Global enterprises: In the last 2 decades MNCs have played an important role in the Indian economy. They are characterised by their huge size, large 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. 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 upon the 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. Public Private Partnership: It is a relationship among public sector and private sector for allocation and completion of development projects. 2024-25 Chapter 3.indd 77 31-12-2020 11:54:46  78 BUSINESS  STUDIES EXERCISES 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 classify them. 5. Why is the government company form of organisation preferred to other types in the public sector? 6. How does the government maintain a regional balance in the country? 7. State the meaning of public private partnership. 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 in terms of profits and efficiency? Give reasons for your answer. 4. Why are global enterprises considered superior to other business organisations? 5. What are the benefits of entering into joint ventures and public private partnership? Projects/Assignments 1. Make a list of Indian companies entering into joint ventures with foreign companies. Find out the apparent benefits derived out of such ventures. 2024-25 Chapter 3.indd 78 31-12-2020 11:54:46