NCERT Class 11 Business Studies Chapter 3 PDF

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.,...

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. 2019-20 60 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 realised that in certain areas there was only the government which operates like the railways and in some areas both the privately owned and government run business were operating. For example, in the heavy industry sector SAIL, BHEL and TISCO, Reliance, Birlas all were there and in the telecom sector, companies like Tata, Reliance, Airtel operate and in airlines Sahara and Jet have recently gained entry. These companies along with the Government-owned companies like MTNL, BSNL, Indian Airlines, Air India. She then started wondering where from companies like Coca cola, Pepsi, Hyundai came? Were they always here or did they operate somewhere else, in some other country. She went to the library and was surprised to know that there was so much information about all these in books, business magazines and newspapers. 3.1 INTRODUCTION and towns has been greatly reduced. This is because of plenty of private You must have come across all types courier services firms operating in of business organisations in your daily bigger towns. Then there are businesses life. In your neighbourhood market, which operate in more than one country there are shops owned by sole known as global enterprises. Therefore, proprietors or big retail organisations you may have observed that all types run by a company. Then there are of organisations are doing business in people providing you services like legal the country whether they are public, services, medical services, being owned private or global. In this chapter we by more than one person i.e., shall be studying how the economy is partnership firms. These are all divided into two sectors, public and privately owned organisations. private, the different types of public Similarly, there are other offices or enterprises, their role and that of the places of business which may be owned global enterprises. by the government. For example, Railways is an organisation wholly 3.2 P RIVATE S ECTOR AND PU B L I C owned and managed by the S ECTOR government. The post office, in your locality is owned by the Post and There are all kinds of business Telegraph Department, Government of organisations — small or large, India, though our dependence on their industrial or trading, privately owned postal services, particularly in cities or government owned existing in our 2019-20 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 61 country. These organisations affect our private and public sector were clearly daily economic life and therefore defined and the government through become part of the Indian economy. various Acts and Regulations was Since the Indian economy consists of overseeing the economic activities of both privately owned and government both the private and public sector. The owned business enterprises, it is Industrial Policy Resolution, 1956 had known as a mixed economy. The also laid down certain objectives for the Government of India has opted for a public sector to follow so as to mixed economy where both private and accelerate the rate of growth and government enterprises are allowed to industrialisation. The public sector was operate. The economy, therefore, may given a lot of importance but at the be classified into two sectors viz., same time mutual dependency of private sector and public sector. public and private sectors was The private sector consists of emphasised. The 1991 industrial business owned by individuals or a policy was radically different from all group of individuals, as you have the earlier policies where the learnt in the previous chapter. The government was deliberating various forms of organisation are disinvestment of public sector and sole proprietorship, partnership, allowing greater freedom to the private joint Hindu family, cooperative sector. At the same time, foreign direct and company. investment was invited from business The public sector consists of houses outside India. Thus, various organisations owned and multinational corporations or global managed by the government. These enterprises which operate in more than organisations may either be partly or one country gained entry into the wholly owned by the central or state Indian economy. Thus, we have public government. They may also be a part sector units, private sector enterprises of the ministry or come into existence and 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 FORMS OF O RGANISING P UBLIC of the country. S ECTOR ENTERPRISES The government in its industrial Government’s participation in business policy resolutions, from time-to-time, and economic sectors of the country defines the area of activities in which needs some kind of organisational the private sector and public sector are framework to function. You have allowed to operate. In the Industrial studied about the forms of business Policy Resolution 1948, the organisation in the private sector viz., Government of India had specified the sole proprietorship, partnership, Hindu approach towards development of the undivided family, cooperative and industrial sector. The roles of the company. 2019-20 62 BUSINESS STUDIES Indian Economy Public Sector Private Sector Departmental Government Undertakings Companies Partnership Joint Cooperative Multinational Hindu Corporations Statutory Sole Family Corporation Properietorship Company Public Private (Ltd.) (Ltd.) In the public sector, as it grows, an A public enterprise may take any important question arises in respect of particular form of organisation how it is to be organised or what form depending upon the nature of its of organisation it should take. The operations and their relationship with government has a major role to play in the government. The suitability of a the formation of the public sector. But particular form of organisation would the government acts through its people, depend upon its requirements. At the its offices, employees and they take same time, in accordance with general decisions on behalf of the government. principles, any organisation in the For this purpose, public enterprises public sector should ensure organisational were formed by the government to performance productivity and quality participate in the economic activities of standards. the country. They are expected to The forms of organisation which a contribute to the economic deve- public enterprise may take are as lopment of the country in today’s follows: liberalised, competitive world. These (i) Departmental undertaking public enterprises are owned by the (ii) Statutory corporation public and are accountable to the (iii) Government company public through the Parliament. They 3.3.1 Departmental Undertakings are characterised by public ownership, public funds being used for its activities This is the oldest and most traditional and public accountability. form of organising public enterprises. 2019-20 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 63 These enterprises are established as Indian Administrative Service (IAS) departments of the ministry and are officers and civil servants who are considered part or an extension of the transferable from one ministry to ministry itself. The Government another; functions through these departments (iv) It is generally considered to be and the activities performed by them a major subdivision of the are an integral part of the functioning Government department and is of the government. They have not been subject to direct control of the constituted as autonomous or ministry; independent institutions and as such (v) They are accountable to the are not independent legal entities. They ministry since their management act through the officers of the is directly under the concerned Government and its employees are ministry. Government employees. These undertakings may be under the central Merits or the state government and the rules Departmental undertakings have of central/state government are certain advantages which are as follows: applicable. Examples of these (i) These undertakings facilitate the undertakings are railways and post Parliament to exercise effective and telegraph department. control over their operations; (ii) These ensure a high degree of Features public accountability; The main characteristics of (iii) The revenue earned by the Departmental undertakings are as enterprise goes directly to the follows: treasury and hence is a source of (i) The funding of these enterprises income for the Government; come directly from the Govern- (iv) Where national security is ment Treasury and are an annual concerned, this form is most appropriation from the budget of suitable since it is under the direct the Government. The revenue control and supervision of the earned by these is also paid into concerned Ministry. the treasury; (ii) They are subject to accounting Limitations and audit controls applicable to This form of organisation suffers from other Government activities; serious drawbacks, some of which are (iii) The employees of the enterprise are as follows: Government servants and their (i) Departmental undertakings fail to recruitment and conditions of provide flexibility, which is essential service are the same as that of for the smooth operation of business; other employees directly under the (ii) The employees or heads of depart- Government. They are headed by ments of such undertakings are 2019-20 64 BUSINESS STUDIES not allowed to take independent Features decisions, without the approval of Statutory corporations have certain the ministry concerned. This leads distinct features, which are discussed to delays, in matters where as below: prompt decisions are required; (i) Statutory corporations are set up (iii) These enterprises are unable to under an Act of Parliament and take advantage of business are governed by the provisions of opportunities. The bureaucrat’s the Act. The Act defines the objects, over-cautious and conservative powers and privileges of a approval does not allow them to statutory corporation; take risky ventures; (ii) This type of organisation is wholly (iv) There is red tapism in day-to-day owned by the state. The operations and no action can be government has the ultimate taken unless it goes through the financial responsibility and has proper channels of authority; the power to appropriate its (v) There is a lot of political inter- profits. At the same time, the state ference through the ministry; also has to bear the losses, if any; (vi) These organisations are usually (iii) A statutory corporation is a body insensitive to consumer needs and corporate and can sue and be do not provide adequate services sued, enter into contract and to them. acquire property in its own name; (iv) This type of enterprise is usually 3.3.2 Statutory Corporations independently financed. It obtains Statutory corporations are public funds by borrowings from the enterprises brought into existence by government or from the public a Special Act of the Parliament. The Act through revenues, derived from defines its powers and functions, rules sale of goods and services. It has and regulations governing its the authority to use its revenues; employees and its relationship with (v) A statutory corporation is not government departments. subject to the same accounting This is a corporate body created by and audit procedures applicable the legislature with defined powers and to government departments. It is functions and is financially independent also not concerned with the central with a clear control over a specified budget of the Government; area or a particular type of commercial (vi) The employees of these enterprises activity. It is a corporate person and are not government or civil has the capacity of acting in its own servants and are not governed by name. Statutory corporations therefore government rules and regulations. have the power of the government and The conditions of service of the considerable amount of operating employees are governed by the flexibility of private enterprises. provisions of the Act itself. At 2019-20 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 65 times, some officers are taken (ii) Government and political from government departments, interference has always been there on deputation, to head these in major decisions or where huge organisations. funds are involved; (iii) Where there is dealing with public, Merits rampant corruption exists; This form of organisation enjoys certain (iv) The Government has a practice of advantages in its working, which are appointing advisors to the as follows: Corporation Board. This curbs the (i) They enjoy independence in their freedom of the corporation in functioning and a high degree of entering into contracts and operational flexibility. They are free other decisions. If there is any from undesirable government disagreement, the matter is regulation and control; referred to the government for final (ii) Since the funds of these organi- decisions. This further delays action. sations do not come from the central budget, the government 3.3.3 Government Company generally does not interfere in their A government company is established financial matters, including their under The Companies Act, 2013 and income and receipts; is registered and governed by the (iii) Since they are autonomous provisions of The Act. These are organisations they frame their own established for purely business policies and procedures within the purposes and in true spirit compete powers assigned to them by the with companies in the private sector. Act. The Act may, however, According to the section 2(45) of the provide few issues/matters which Companies Act 2013, a government require prior approval of a company means any company in which not less than 51 per cent of the paid particular ministry; up capital is held by the central (iv) A statutory corporation is a government, or by any state valuable instrument for economic government or partly by Central development. It has the power of government and partly by one or more the government, combined with State governments and includes a the initiative of private enterprises. company which is a subsidiary of a government company. Under the Limitations Companies Act 2013, there is no This type of organisation suffers from change in the definition of a company. several limitations, which are as follows: All provisions of the Act are applicable (i) In reality, a statutory corporation to government companies unless does not enjoy as much operational otherwise specified. A government flexibility as stated above. All company may be formed as a private actions are subject to many rules limited company or a public limited and regulations; company. There are certain provisions 2019-20 66 BUSINESS STUDIES which are applicable to the (vi) These companies are exempted appointment/retirement of directors from the accounting and audit and other managerial personnel. rules and procedures. An auditor From the above it is clear that the is appointed by the Central government exercises control over the Government and the Annual paid up share capital of the company. Report is to be presented in the The shares of the company are Parliament or the State Legislature; purchased in the name of the President (vii) The government company obtains of India. Since the government is the its funds from government major shareholder and exercises shareholdings and other private control over the management of these shareholders. It is also permitted to companies, they are known as raise funds from the capital market. government companies. Merits Government companies enjoy several Features advantages, which are as follows: Government companies have certain (i) A government company can be characteristics which makes them established by fulfilling the distinct from other forms of organisations. requirements of the Indian These are discussed as follows: Companies Act. A separate Act in (i) It is an organisation created under the Parliament is not required; the Companies Act, 2013 or any (ii) It has a separate legal entity, apart other previous Company Law. from the Government; (ii) The company can file a suit in a (iii) It enjoys autonomy in all court of law against any third management decisions and takes party and be sued; actions according to business (iii) The company can enter into a prudence; contract and can acquire property (iv) These companies by providing in its own name; goods and services at reasonable (iv) The management of the company prices are able to control the is regulated by the provisions of market and curb unhealthy the Companies Act, like any other business practices. public limited company; Limitations (v) The employees of the company are Despite the autonomy given to these appointed according to their own companies, they have certain rules and regulations as contained disadvantages: in the Memorandum and Articles of (i) Since the Government is the only Association of the company. The shareholder in some of the Memorandum and Articles of companies, the provisions of the Association are the main documents Companies Act does not have of the company, containing the much relevance; objects of the company and its rules (ii) It evades constitutional and regulations; responsibility, which a company 2019-20 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 67 financed by the government should private sector companies in the same have. It is not answerable directly industry. They were also held to the Parliament; accountable for losses and return on (iii) The government being the sole investment. If a public sector was shareholder, the management and making losses continuously, it was administration rests in the hands referred to the Board for Industrial of the government. The main and Financial Reconstruction (BIFR) for purpose of a government complete overhauling or shut down. company, registered like other Various committees were set up to companies, is defeated. study the working of inefficient public sector units with reports on how to 3.4 C H A N G I N G R O L E OF PU B L I C improve their managerial efficiency 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 development of infrastructure is a the economy either by direct prerequisite for industrialisation in any participation in business or by acting country. In the pre-Independence as a catalyst. The public sector would build up infrastructure for other sectors period, basic infrastructure was not of the economy and invest in key areas. developed and therefore, industrialisation The private sector was unwilling to progressed at a very slow pace. The invest in projects which required heavy process of industrialisation cannot investment and had long gestation be sustained without adequate periods. The government then took it transportation and communication upon itself to develop infrastructural facilities, fuel and energy, and basic and facilities and provide for goods and heavy industries. The private sector did services essential for the economy. not show any initiative to invest in heavy The Indian economy is in a stage industries or develop it in any manner. of transition. The Five Year Plans in They did not have trained personnel or the initial stages of development gave finances to immediately establish heavy lot of importance to the public sector. industries which was the requirement In the post–1990s, the new economic of the economy. policies, emphasised on liberalisation, It was only the government which privatisation and globalisation. The could mobilise huge capital, coordinate role of public sector was redefined. It industrial construction and train was not supposed to play a passive technicians and workforce. Rail, road, role but to actively participate and sea and air transport was the compete in the market with other responsibility of the government, and 2019-20 68 BUSINESS STUDIES 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 of certain spheres. Investments were to be backward regions so as to ensure a made to: regional balance in the country is one (a) Give infrastructure to the core of the major objectives of planned sector, which requires huge capital development. Therefore, the govern- investment, complex and upgraded ment had to locate new enterprises in technology, big and effective backward areas and at the same time organisation structures like steel prevent the mushrooming growth of plants, power generation plants, private sector units in already civil aviation, railways, petroleum, advanced areas. state trading, coal, etc; (iii) Economies of scale: Where large (b) Give a lead in investment to the core scale industries are required to be set sector where private sector up with huge capital outlay, the public enterprises are not functioning in sector had to step in to take advantage the desired direction, like fertilizers, of economies of scale. Electric power pharmaceuticals, petro-chemicals, plants, natural gas, petroleum and newsprint, medium and heavy telephone industries are some engineering; examples of the public sector setting (c) Give direction to future investments up large scale units. These units like hotels, project management, required a larger base to function consultancies, textiles, auto- economically which was only possible mobiles, etc. with government resources and mass (ii) Regional balance: The government scale production. is responsible for developing all regions (iv) Check over concentration of and states in a balanced way and economic power: The public sector removing regional disparties. Most of acts as a check over the private sector. the industrial progress was limited to In the private sector there are very few a few areas like the port towns in the industrial houses which would be pre-Independence period. After 1951, willing to invest in heavy industries the government laid down in its Five with the result that wealth gets Year Plans, that particular attention concentrated in a few hands and would be paid to those regions which monopolostic practices are encouraged. were lagging behind and public sector This gives rise to inequalities in income, industries were deliberately set up. which is detrimental to society. Four major steel plants were set up in The public sector is able to set large the backward areas to accelerate industries which requires heavy economic development, provide investment and thus the income and 2019-20 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 69 benefits that accrue are shared by a for the public sector. In 1991, only large of number of employees and 8 industries were reserved for workers. This prevents concentration the public sector, they were restricted of wealth and economic power in the to atomic energy, arms and private sector. communication, mining, and (v) Import substitution: During the railways. In 2001, only three second and third Five Year Plan period, industries were reserved exclusively India was aiming to be self-reliant in for the public sector. These are many spheres. Obtaining foreign atomic energy, arms and rail exchange was also a problem and it transport. This meant that the private was difficult to import heavy machinery sector could enter all areas (except required for a strong industrial base. the three) and the public sector At that time, public sector companies would have to compete with them. involved in heavy engineering which The public sector has played a vital would help in import substitution were role in the development of the established. Simultaneously, several economy. However, the private sector public sector companies like STC and is also quite capable of contributing MMTC have played an important role substantially to the nation building in expanding exports of the country. process. Therefore, both the public (vi) Government policy towards the sector and the private sector need to public sector since 1991: The be viewed as mutually complementary Government of India had introduced parts of the national sector. Private four major reforms in the public sector sector units also have to assume in its new industrial policy in 1991. The greater public responsibilities. main elements of the Government policy Simultaneously, the public sector are as follows: needs to focus on achieving more in a Restructure and revive potentially highly competitive market. viable PSUs (b) Disinvestment of shares of Close down PSUs, which cannot a select set of public sector be revived enterprises: Disinvestment involves Bring down governments equity in the sale of the equity shares to the all non-strategic PSUs to 26 per private sector and the public. The cent or lower, if necessary; and objective was to raise resources and Fully protect the interest of encourage wider participation of the workers. general public and workers in the (a) Reduction in the number of ownership of these enterprises. The industries reserved for the public government had taken a decision to sector from 17 to 8 (and then to 3): withdraw from the industrial sector In the 1956 resolution on Industrial and reduce its equity in all policy, 17 industries were reserved undertakings. It was expected that 2019-20 70 BUSINESS STUDIES this would lead to improving amongst workers of the units which managerial performance and are to be closed down. A National ensuring financial discipline. But Renewal Fund was set up by the there remains a lot to be done in government to retrain or redeploy this area. retrenched labour and to provide The primary objectives of privatising compensation to public sector public sector enterprises are: employees seeking voluntary Releasing the large amount of retirement. public resources locked up in non- There are many enterprises strategic Public Sector Enterprises which are sick and not capable of (PSEs), so that they may be utilised being revived as they have on other social priority areas such accumulated huge losses. With as basic health, family welfare and public finances under intense primary education. pressure, both central and state Reducing the huge amount of government are just not able to public debt and interest burden; sustain them much longer. The only Transferring the commercial risk option available to the government to the private sector so that the in such cases is to close down these funds are invested in able projects; undertakings after providing a safety Freeing these enterprises from net for the employees and workers. government control and Resources under the National introduction of corporate Renewal Fund have not been governance; and sufficient to meet the cost of In many areas where the public Voluntary Separation Scheme or sector had a monopoly, for Voluntary Retirement Scheme. example, telecom sector the (d) Memorandum of Understanding: consumers have benefitted by more Improvement of performance choices, lower prices and better through a MoU (Memorandum of quality of products and services. Understanding) system by which (c) Policy regarding sick units to be managements are to be granted the same as that for the private greater autonomy but held sector: All public sector units were accountable for specified results. referred to the Board of Industrial Under this system, public sector and Financial Reconstruction to units were given clear targets and decide whether a sick unit was to operational autonomy for achieving be restructured or closed down. The those targets. The MoU was between Board has reconsidered revival and the particular public sector unit and rehabilitation schemes for some their administrative ministries cases and winding up for a number defining their relationship and of units. There is a lot of resentment autonomy. 2019-20 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 71 3.5 G LOBAL ENTERPRISES to sell any product in different countries. Some of these corporations At some time you must have come may be slightly exploitative in nature across products produced by Multi and concentrate more on selling National Corporations (MNCs). In the consumer goods and luxury items last ten years MNCs have played an which are not always desirable for important role in the Indian economy. developing countries. They have become a common feature of most developing economies in the Features world. MNCs as is evident from what we see around us, are gigantic These corporations have distinct corporations which have their features which distinguish them from operations in a number of countries. other private sector companies, public They are characterised by their huge sector companies and public sector size, large number of products, enterprises. These are as follows: advanced technology, marketing (i) Huge capital resources: These strategies and network of operations all enterprises are characterised by over the world. Global enterprises thus possessing huge financial resources are huge industrial organisations which and the ability to raise funds from extend their industrial and marketing different sources. They are able to tap operations through a network of their funds from various sources. They may branches in several countries. Their issue equity shares, debentures or branches are also called Majority bonds to the public. They are also in a Owned Foreign Affiliates (MOFA). These position to borrow from financial enterprises operate in several areas institutions and international banks. producing multiple products with their They enjoy credibility in the capital business strategy extending over a market. Even investors and banks of number of countries. They do not aim the host country are willing to invest in at maximising profits from one or two them. Because of their financial products but instead spread their strength they are able to survive under branches all over. They have an impact all circumstances. on the international economy also. This (ii) Foreign collaboration: Global is evident from the fact that the sales of enterprises usually enter into top 200 corporations were equivalent agreements with Indian companies to 28.3 percent of the world’s GDP in pertaining to the sale of technology, 1998. This shows that top 200 MNCs production of goods, use of brand control over a quarter of the world names for the final products, etc. These economy. Therefore, MNCs are in a MNCs may collaborate with companies position to exercise massive control on in the public and private sector. There the world economy because of their are usually various restrictive clauses capital resources, latest technology and in the agreement relating to transfer goodwill. By virtue of this, they are able of technology, pricing, dividend 2019-20 72 BUSINESS STUDIES payments, tight control by foreign already have carved out a place for technicians, etc. Big industrial houses themselves in the global market, and wanting to diversify and expand have their brands are well-known, selling gained by collaborating with MNCs in their products is not a problem. terms of patents, resources, foreign (vi) Expansion of market territory: exchange etc. But at the same time Their operations and activities extend these foreign collaborations have given beyond the physical boundaries of their rise to the growth of monopolies and own countries. Their international concentration of power in few hands. image also builds up and their market (iii) Advanced technology: These territory expands enabling them to enterprises possess technological become international brands. They superiorities in their methods of operate through a network of production. They are able to conform subsidiaries, branches and affiliates in to international standards and quality host countries. Due to their giant size specifications. This leads to industrial they occupy a dominant position in the progress of the country in which such market. corporations operate since they are (vii) Centralised control: They have able to optimally exploit local resources their headquaters in their home and raw materials. Computerisation country and exercise control over all and other inventions have come due to branches and subsidiaries. However, the technological advancements this control is limited to the broad provided by MNCs. policy framework of the parent (iv) Product innovation: These company. There is no interference in enterprises are characterised by having day-to-day operations. highly sophisticated research and development departments engaged in 3.6 JOINT VENTURES the task of developing new products Meaning and superior designs of existing products. Qualitative research requires Business organisations as you have huge investment which only global studied earlier can be of various types enterprises can afford. private or government owned or global (v) Marketing strategies: The enterprises. Now, any business marketing strategies of global organisation if it so desires can companies are far more effective than join hands with another business other companies. They use aggressive organisation for mutual benefit. These marketing strategies in order to increase two organisations may be private, their sales in a short period. They posses government-owned or a foreign a more reliable and up-to-date market company. When two businesses agree information system. Their advertising to join together for a common purpose and sales promotion techniques are and mutual benefit, it gives rise to a normally very effective. Since they joint venture. Businesses of any size 2019-20 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 73 can use joint ventures to strengthen products or moving into new markets, long-term relationships or to particularly in another country. It is collaborate on short term projects. A becoming increasingly common for joint venture can be flexible depending companies to create joint ventures with upon the party’s requirements. These other businesses/companies and form need to be clearly stated in a joint strategic alliances with them. The venture agreement to avoid conflict at reasons for these alliances may be a later stage. complementary capabilities and A joint venture may also be the result resources such as distribution of an agreement between two businesses channels, technology or finance. In this in different countries. In this case, there kind of a joint venture, two or more are certain provisions provided by the (parent) companies agree to share governments of the two countries, which capital, technology, human resources, will have to be adhered to. risks and rewards in the formation of a Thus, we see that joint ventures new entity, under shared control. may mean many things, depending In India, joint venture companies upon the context we are using it in. But are the best way of doing business. in a broader sense, a joint venture is There are no separate laws for these the pooling of resources and expertise joint ventures. The companies by two or more businesses, to achieve incorporated in India are treated the a particular goal. The risks and same as domestic companies. rewards of the business are also shared. The reasons behind the joint Joint Ventures are of two types — venture often include business Contractual joint venture expansion, development of new Equity-based joint venture 2019-20 74 BUSINESS STUDIES 3.6.1 Types of Joint Ventures (b) Shared ownership by the parties involved; (i) Contractual Joint Venture (CJV): In a contractual joint venture, a new (c) Shared management of the jointly-owned entity is not created. jointly owned entity; There is only an agreement to work (d) Shared responsibilities regarding together. The parties do not share capital investment and other ownership of the business but exercise financing arrangements; and some elements of control in the joint (e) Shared profits and losses venture. A typical example of a according to the agreement. contractual joint venture is a franchisee A joint venture must be based on a relationship. In such a relationship the memorandum of understanding signed key elements are: by both the parties, highlighting the (a) Two or more parties have a basis of a joint venture agreement. The common intention – of running terms should be thoroughly discussed a business venture; and negotiated to avoid any legal (b) Each party brings some inputs; complications at a later stage. (c) Both parties exercise some control Negotiations and terms must take into on the business venture; and account the cultural and legal (d) The relationship is not a background of the parties. The joint venture agreement must also state that transaction-to-transaction all necessary governmental approvals relationship but has a character and licences will be obtained within a of relatively longer duration. specified period. (ii) Equity-based Joint Venture (EJV): Examples of Joint Ventures: An equity joint venture agreement is one in which a separate business entity, 1. AVI Oil India Pvt. Ltd. jointly owned by two or more parties, Date of establishment: 4 is formed in accordance with the November, 1993 agreement of the parties. The key Joint Venture Holders: Balmer operative factor in such case is joint Lawrie & Co. Ltd., NYCO SA, ownership by two or more parties. The France. form of business entity may vary — Areas of operation: Mineral- company, partnership firm, trusts, based lubricating oil, defence limited liability partnership firms, and civil aviation uses, greases. venture capital funds, etc. 2. Green Gas Ltd. (a) There is an agreement to either Date of establishment: 7 create a new entity or for one of October, 2005 the parties to join into Joint Venture Holders: GAIL ownership of an existing entity; (India) Ltd. and IOCL 2019-20 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 75 Areas of operations: Providing and human resources and is able to safe and reliable natural gas to face market challenges and take customers. advantage of new opportunities. (ii) Access to new markets and 3. Delhi Aviation Fuel Facility Pvt. distribution networks: When a Ltd. business enters into a joint venture with Date of establishment: 28 a partner from another country, it March, 2010 opens up a vast growing market. For Joint Venture Holders: BPCL example, when foreign companies form and DIAL joint venture companies in India they Areas of operations: gain access to the vast Indian market. Construction, management, Their products which have reached maintenance, developing, saturation point in their home markets designing. The company is can be easily sold in new markets. formed with a joint venture They can also take advantage of the between Delhi International established distribution channels i.e., Airport Ltd. and Airport the retail outlets in different local Authority of India with the view markets. Otherwise, establishing their of maintenance, designing and own retail outlets may prove to be modernisation. very expensive. (iii) Access to technology: 3.6.2 Benefits Technology is a major factor for most businesses to enter into joint ventures. Business can achieve unexpected gains Advanced techniques of production through joint ventures with a partner. leading to superior quality products Joint ventures can prove to be saves a lot of time, energy and extremely beneficial for both parties investment as they do not have to involved. One party may have strong develop their own technology. potential for growth and innovative Technology also adds to efficiency and ideas, but is still likely to benefit from effectiveness, thus leading to reduction entering into a joint venture because it in costs. enhances its capacity, resources and (iv) Innovation: The markets technical expertise. The major benefits are increasingly becoming more of joint ventures are as follows: demanding in terms of new and (i) Increased resources and innovative products. Joint ventures capacity: Joining hands with another allow business to come up with or teaming up adds to existing something new and creative for resources and capacity enabling the the same market. Specially foreign joint venture company to grow and partners can come up with innovative expand more quickly and efficiently. products because of new ideas and The new business pools in financial technology. 2019-20 76 BUSINESS STUDIES (v) Low cost of production: When partners in PPP are Government international corporations invest in entities, i.e., ministries, government India, they benefit immensely due to the departments, municipalities or state- lower cost of production. They are able owned enterprises. The private partners to get quality products for their global can be local or foreign (international) requirements. India is becoming an and include businesses or investors important global source and extremely with technical or financial expertise competitive in many products. relevant to the project. PPP also There are many reasons for this, low includes NGOs and/or community- cost of raw materials and labour, based organisations who are the technically qualified workforce; stakeholders directly affected by the management professionals, excellent project. PPP is, therefore, defined as a manpower in different cadres, like relationship between public and lawyers, chartered accountants, private entities in the context of engineers, scientists. The international infrastructure and other services. partner thus, gets the products of Under the PPP model, public sector required quality and specifications at a plays an important role and ensures much lower cost than what is prevailing that the social obligations are fulfilled in the home country. and sector reforms and public (vi) Established brand name: When investment are successfully met. The two businesses enter into a joint government’s contribution to PPP is in venture, one of the parties benefits from the form of capital for investment and the other’s goodwill which has already transfer of assets that support the been established in the market. If the partnership in addition to social joint venture is in India and with an responsibility, environmental awareness Indian company, the Indian company and local knowledge. The private does not have to spend time or money sector’s role in the partnership is to in developing a brand name for the make use of its expertise in operations, product or even a distribution system. managing tasks and innovation to run There is a ready market waiting for the the business efficiently. product to be launched. A lot of Sectors in which PPPs have been investment is saved in the process. completed worldwide include power generation and distribution, water 3.7 PUBLIC PRIVATE PARTNERSHIP (PPP) a n d sanitation, refuse disposal, pipelines, hospitals, school buildings The Public Private Partnership model and teaching facilities, stadiums, air allocates tasks, obligations and risks traffic control, prisons, railways, among the public and private partners roads, billing and other information in an optimal manner. The public technology systems, and housing. 2019-20 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 77 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. 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 ar e 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. 2019-20 78 BUSINESS STUDIES 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 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. 2019-20 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 79 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. 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 ten years 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 2019-20 80 BUSINESS STUDIES of operations all over the world. Global enterprises thus are huge industrial organisations which extend their industrial and marketing operations through a network of their branches in several countries. Features: These corporations have distinct features which distinguishes them from other private sector companies, public sector companies and public sector enterprises i.e., (i) Huge capital resources, (ii) Foreign collaboration, (iii) Advanced Technology, (iv) Product innovation, (v) Marketing strategies, (vi) Expansion of market territory, (vii) Centralised control. Joint ventures: Joint ventures may mean many things, depending 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. Benefits: Business can achieve unexpected gains through joint ventures with a partner. The major benefits of joint venture are as follows: (i) Increased resources and capacity (ii) Access to new markets and distribution networks (iii) Access to technology (iv) Innovation (v) Low cost of production (vi) Established brand name. Public Private Partnership: It is a relationship among public sector and private sector for allocation and completion of development projects. EXERCISES Multiple Type Questions 1. A government company is any company in which the paid up capital held by the government is not less than (a) 49 per cent (b) 51 per cent (c) 50 per cent (d) 25 per cent 2. Centralised control in 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 2019-20 PRIVATE, PUBLIC AND GLOBAL ENTERPRISES 81 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 6. The equity-based joint venture does not include (a) Cooperative development (b) Company (c) Partnership (d) Limited liability partnership 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. 2019-20