Government Companies

According to Section 2(45) of the Indian Companies Act, 2013, Government company means any company in which not less than fifty-one per cent. of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary company of such a Government Company.

A Subsidiary of Government Company shall also be treated as a Government Company. These Companies are registered as Private Limited Companies through their management and their control vest with the Government. This is a type of organization where both the Government and Private individuals are shareholders. Sometimes these Companies are called as Mixed Ownership Company. Government Company subject to all provisions of the Act unless specified otherwise: A Government Company may be formed as a Private Limited Company or Public Limited Company. The name of all Government Companies shall end with the word “Limited”, be it Public or a Private Company.

Objects of Formation of Government Company:

The public sector companies in India were incorporated into two main objectives:

• To achieve more equity in the distribution of wealth and income amongst the citizens of the country.
• To gain the momentum in the growth of the nation.

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Characteristics of a Government Company:

• Government Companies are legally registered under the Companies Act 2013, under section 2(45).
• The provisions of the Companies Act 2013, are applicable to these type of Companies as like any other company. However, the Central Government may direct that any of the provisions of the Companies Act shall not apply to a Government company or shall apply with certain modifications.
• They are created by an executive decision of the Government, without seeking the approval of the Parliament or the State Legislature.
• Like all other companies, Government Companies too have a separate legal entity, that is to be sued and can sue in legal matters. They can also hold properties in their name.
• The main documents of a Government Companies include the Memorandum of Association and Articles of Association. These documents contain information like rules and regulations of the company related to the appointment of employees, objects of the company, etc.
• They are managed by the directors who are appointed by the government itself.
• They have its own staff; except Government officials who are sent to it on deputation. The employees are not civil servants. They regulate their own personal policy following the Articles of Associations.
• The annual reports, are prepared at the end of the financial year. This report is placed before the Parliament or the State Legislature.
• The capital of the company is to be held wholly or partially by the state government and the central government together or individually.
• Accounting and Audit Practices are done by Chartered Accountants appointed by the government.
• They are free from budgetary, accounting and audit controls, applicable to Government undertakings.

Advantages of Government Companies:

The merits of government companies:

• Ease of Formation:It can be easily established by just fulfilling the requirements of the Indian Companies Act. It means that one does not have to acquire separate legislation from the Parliament for the formation of a Government Company.
• Independent Status: It has its own legal entity separate from the government. As a Government Company has a separate legal entity, independent of the Government, it can perform its activities just like any other Private Company.
• Autonomy: It is relatively free from ministerial control and political interference, in its day-to-day functioning. Thus, there is no bureaucratic control and political interference of the Government in the management of the Government Company. A government company has full autonomy in doing its business operations and in all business decisions. It can take any decisions which is favourable for the company for its effective growth. Thus, it takes actions according to their own judgement and can manage its activities independently.
• Good Market Control: These companies exercise major control of Government on its management, the goods offered by these companies are of good quality and are sold at reasonable prices. This merit of a Government Company helps in controlling the market and reducing unhealthy business practices.
• Private Participation: They can avail of the management skills, technical know-how and expertise of the private sector and foreign countries.
• Accountability: The Annual Report of a Government company is presented to the Parliament/ State Legislature. These reports can be discussed and debated there.

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Disadvantages of Government Companies:

• Lack of Initiative: The annual report of the government companies must be placed before the Parliament/State Legislature. The working of the company is exposed to Press criticism. The management of government companies always has a fear of public accountability. As a result, they lack initiative in taking the right decisions at the right time. Due to this the directors get demoralized and may not take initiative to come out with and implement something innovative.
• Autonomy Only in Name: As at least 51% of the shares of Government Companies are held by the Government, therefore the control over the affairs of the company by the Government is more. Independent character of a Government company exists only in name. In reality, politicians, ministers, Government officials, interfere excessively in the day-to-day working of the government company.
• Lack of Business Experience: The key personnel of a government companies are often deputed from Government departments. In practice, the management of the companies is generally put into the hands of administrative service officers on deputation who often lack experience in managing the business organization on professional lines.:
• Change in Policies and Management: The policies and management of these companies generally keep on changing with the change of government. Frequent change of rules, policies, and procedures leads to an unhealthy situation of business enterprises.
• A Fraud on Companies Act and Constitution: This criticism is valid on the ground that the Government can exempt a Government Company from application of several provisions of the Companies Act. At the same time, the Parliament is not taken into confidence, while creating a Government Company.

Importance of Government Company:

• Economies of Scale: There are some sectors like, electric power plants, natural gas, petroleum, steel, ship building etc. which require very heavy investment and also has a long gestation period, then private investors avoid investing in such sectors. Hence in initial stages after the independence in this sectors Government companies were established.
• Regional Balance: Ours is a welfare state. All the regions of the country developed equally under nationalization. Regional and social factors a reconsidered preferential while the government decides regarding the location of a new plant. Generally private sector avoids backward areas for setting their industry. Mainly the development was done near port areas and interior parts of the country were never accessed. To have a balanced growth of the whole nation, public sector companies take the charge and do the development in underprivileged areas.
• Development of the Infrastructure:The most of the Government Companies were set in the Sectors like electric power plants, natural gas, petroleum, steel, ship building etc. These industries created infrastructure required for rapid growth of the nation.
• Control on Monopoly and Restrictive Trade Practices: Ours is a welfare state. The Object of the welfare state is to prevent monopolies in essential products and services. Public sector companies keep a check on guidelines of Monopolistic and Restrictive Trade Practices.
• Import Substitution: Public enterprises are also engaged in manufacturing and production of capital equipment which was earlier imported from other countries. Companies like MMTC have played a very crucial and vital role in expanding Indian markets for exports and other trades.

• Welfare of People:There was optimum utilization of the natural resources available. The government improves the working conditions of the workers in nationalized industries. Unhealthy competition among the industrialists injures the interest of the public, which can be measured and mitigated by state ownership. It tends to increase the economic activities of the country, which greatly influences the standard of living of the people. The government’s position to modernize the industry, communications, and transport for the best interest of the nation. So, the rapid growth of Industries causes economic prosperity in the country.

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Conclusion:

According to Section 2(45) of the Indian Companies Act, 2013, Government company means any company in which not less than fifty-one per cent. of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary company of such a Government Company. Objects of formation of government companies are to achieve more equity in the distribution of wealth and income amongst the citizens of the country and to gain the momentum in the growth of the nation.

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