Pravin Dhakne

Roll No: 9533

TYPES OF PRGANIZATION
1. Single proprietorship

'Sole' means single and `proprietorship' means ownership. It means only one person or an
individual becomes the owner of the business. Thus, the business organization in which a single
person owns, manages and controls all the activities of the business is known as sole
proprietorship form of business organization. The individual who owns and runs the sole
proprietorship business is called a `sole proprietor' or `sole trader'. A sole proprietor pools and
organizes the resources in a systematic way and controls the activities with the sole objective of
earning profit.

A business enterprise exclusively owned, managed and controlled by a single person with all
authority, responsibility and risk.

Characteristics of Sole Proprietorship

i. Single Ownership: A single individual always owns sole proprietorship form of business
organization. That individual owns all assets and properties of the business. Consequently, he alone
bears all the risk of the business. Thus, the business of the sole proprietor comes to an end at the will
of the owner or upon his death.

ii. No sharing of Profit and Loss: The entire profit arising out of sole proprietorship business goes
to the sole proprietor. If there is any loss it is also to be borne by the sole proprietor alone. Nobody
else shares the profit and loss of the business with the sole proprietor.

iii. One man's Capital: The capital required by a sole proprietorship form of business
organization is totally arranged by the sole proprietor. He provides it either from his personal
resources or by borrowing from friends, relatives, banks or other financial institutions.

iv. One-man Control: The controlling power in a sole proprietorship business always remains with
the owner. The owner or proprietor alone takes all the decisions to run the business. Of course, he is
free to consult anybody as per his liking.

v. Unlimited Liability: The liability of the sole proprietor is unlimited. This implies that, in case of
loss the business assets along with the personal properties of the proprietor shall be used to pay the
business liabilities.

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vi. Less Legal Formalities: The formation and operation of a sole proprietorship form of
business organization requires almost no legal formalities. It also does not require to be
registered. However, for the purpose of the business and depending on the nature of the business, the
sole proprietorship has to have a seal. He may be required to obtain a license from the local
administration or from the health department of the government, whenever necessary.

ADVANTAGES OF A SOLE PROPRIETORSHIP

i. Easy to Form and Wind up: A sole proprietorship form of business is very easy to form.
With a very small amount of capital you can start the business. There is no need to comply with any
legal formalities except for those businesses which required license from local authorities or health
department of government. Just like formation it is also very easy to wind up the business. It is your
sole discretion to form or wind up the business at any time.

ii. Direct Motivation: The profits earned belong to the sole proprietor alone and he bears the
risk of losses as well. Thus, there is a direct link between effort and reward. If he works hard,
then there is a possibility of getting more profit and of course, he will be the sole beneficiary of this
profit. Nobody will share this reward with him. This provides strong motivation for the sole
proprietor to work hard.

iii. Quick Decision and Prompt Action: In a sole proprietorship business the sole proprietor
alone is responsible for all decisions. Of course, he can consult others. But he is free to take any
decision on his own. Since no one else is involved in decision making it becomes quick and prompt
action can be taken on the basis of this decision.

iv. Better Control: In sole proprietorship business the proprietor has full control over each and
every activity of the business. He is the planner as well as the organizer, who co-ordinates every
activity in an efficient manner. Since the proprietor has all authority with him, it is possible to
exercise better control over business.

v. Maintenance of Business Secrets: Business secrecy is an important factor for every business. It
refers to keeping the future plans, technical competencies, business strategies, etc,. secret from
outsiders or competitors. In the case of sole proprietorship business, the proprietor is in a very good
position to keep his plans to himself since management and control are in his hands. There is no need
to disclose any information to others.

vi. Close Personal Relation: The sole proprietor is always in a position to maintain good
personal contact with the customers and employees. Direct contact enables the sole proprietor to know
the individual likes, dislikes and tastes of the customers. Also, it helps in maintaining close and
friendly relations with the employees and thus, business runs smoothly.

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vii. Flexibility in Operation: The sole proprietor is free to change the nature and scope of
business operations as and when required as per his decision. A sole proprietor can expand or
curtail his business according to the requirement. Suppose, as the owner of a bookshop, you have
been selling books for school students. If you want to expand your business you can decide to sell
stationery items like pen, pencil, register, etc. If you are running an STD booth, you can
expand your business by installing a fax machine in your booth.

viii. Encourages Self-employment: Sole proprietorship form of business organization leads to

creation of employment opportunities for people. Not only is the owner self-employed,
sometimes he also creates job opportunities for others. You must have observed in different
shops that there are a number of employees assisting the owner in selling goods to the customers.
Thus, it helps in reducing poverty and unemployment in the country.

DISADVANTAGES OF THE SOLE PROPRIETORSHIP

i. Limited Capital: In sole proprietorship business, it is the owner who arranges the required
capital of the business. It is often difficult for a single individual to raise a huge amount of
capital. The owner's own funds as well as borrowed funds sometimes become insufficient to
meet the requirement of the business for its growth and expansion.

ii. Unlimited Liability: In case the sole proprietor fails to pay the business obligations and debts
arising out of business activities, his personal properties may have to be used to meet those
liabilities. This restricts the sole proprietor from taking risks and he thinks cautiously while
deciding to start or expand the business activities.

iii. Lack of Continuity: The existence of sole proprietorship business is linked to the life of the
proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of
business operation is therefore uncertain.

iv. Limited Size: In sole proprietorship form of business organization there is a limit beyond
which it becomes difficult to expand its activities. It is not always possible for a single person to
supervise and manage the affairs of the business if it grows beyond a certain limit.

v. Lack of Managerial Expertise: A sole proprietor may not be an expert in every aspect of
management. He/she may be an expert in administration, planning, etc., but may be poor in
marketing. Again, because of limited financial resources it is also not possible to employ a
professional manager. Thus, the business lacks benefits of professional management.

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Roll No: 9533

Let Sum Up -

Advantages Dis-advantages
• Eas Limited Capital
y to form and wind up
• Direct Motivation Unlimited Liability
• Quick Decision and Prompt Lack of Continuity
Action Limited Size
• Better Control Lack of Managerial
• Maintenance of Business Secrets Expertise
• Close Personal Relation
• Flexibility in Operations

2. Partnership
It is basically a relation between two or more persons who join hands to form a business
organization with the objective of earning profit. The persons who join hands are individually
known as `Partner' and collectively a `Firm'.
The partners provide the necessary capital, run the business jointly and share the responsibility. There
must be some agreement between the partners before they actually start the business. This agreement
is termed as `Partnership Deed', which lays down certain terms and conditions for starting and
running the partnership firm. This agreement may be oral or written.

A partnership firm is governed by the provisions of the Indian Partnership Act, 1932. Section 4 of the
Indian Partnership Act, 1932, defines partnership as "a relation between persons who have agreed to
share the profits of a business carried on by all or any of them acting for all".

Features of Partnership form of business organization

i. Two or more Members - You know that the members of the partnership firm are called
partners. But do you know how many persons are required to form a partnership firm? At least
two members are required to start a partnership business. But the number of members should not
exceed 10 in case of banking business and 20 in case of other business. If the number of
members exceeds this maximum limit then that business cannot be termed as partnership
business. A new form of business will be formed, the details of which you will learn in your
next lesson.

ii. Agreement: Whenever you think of joining hands with others to start a partnership business, first
of all, there must be an agreement between all of you. This agreement contains-

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Roll No: 9533

• the amount of capital contributed by each partner;

• profit or loss sharing ratio;
• salary or commission payable to the partner, if any;
• duration of business, if any ;
• name and address of the partners and the firm;
• duties and powers of each partner;
• nature and place of business; and
• any other terms and conditions to run the business.

iii. Lawful Business - The partners should always join hands to carry on any kind of lawful
business. To indulge in smuggling, black marketing, etc., cannot be called partnership business in
the eye of the law. Again, doing social or philanthropic work is not termed as partnership
business.

iv. Competence of Partners - Since individuals join hands to become the partners, it is
necessary that they must be competent to enter into a partnership contract. Thus, minors, lunatics and
insolvent persons are not eligible to become the partners. However, a minor can be admitted to the
benefits of partnership i.e., he can have a share in the profits only.

v. Sharing of Profit - The main objective of every partnership firm is sharing of profits of the
business amongst the partners in the agreed proportion. In the absence of any agreement for the
profit sharing, it should be shared equally among the partners.

A. Unlimited Liability - Just like the sole proprietor the liability of partners is also unlimited.
That means, if the assets of the firm are insufficient to meet the liabilities, the personal properties of
the partners, if any, can also be utilized to meet the business liabilities.

vii. Voluntary Registration - It is not compulsory that you register your partnership firm.
However, if you don't get your firm registered, you will be deprived of certain benefits, therefore it is
desirable. The effects of non-registration are:
• Your firm cannot take any action in a court of law against any other parties for settlement
of claims.
• In case there is any dispute among partners, it is not possible to settle the disputes
through a court of law.
• Your firm cannot claim adjustments for amount payable to or receivable from any other
parties.
viii. No Separate Legal Existence - Just like sole proprietorship, partnership firm also has no
separate legal existence from that of it owners. Partnership firm is just a name for the business as a
whole. The firm means the partners and the partners collectively mean the firm.

ix. Restriction on Transfer of Interest - No partner can sell or transfer his interest to any one
without the consent of other partners.

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x. Continuity of Business - A partnership firm comes to an end in the event of death, lunacy or
bankruptcy of any partner. Even otherwise, it can discontinue its business at the will of the
partners. At any time, they may take a decision to end their relationship.

Advantages of a Partnership

a) Easy to form: Like sole proprietorship, the partnership business can be formed easily without any
legal formalities. It is not necessary to get the firm registered. A simple agreement, either oral or in
writing, is sufficient to create a partnership firm.

b) Availability of large resources - Since two or more partners join hand to start partnership
business it may be possible to pool more resources as compared to sole proprietorship. The
partners can contribute more capital, more effort and also more time for the business.

c) Better decisions - The partners are the owners of the business. Each of them has equal right to
participate in the management of the business. In case of any conflict they can sit together to solve
the problems.

d) Flexibility in operations - The partnership firm is a flexible organization. At any time the
partners can decide to change the size or nature of business or area of its operation. There is no need
to follow any legal procedure. Only the consent of all the partners is required.
e) Sharing risks - In a partnership firm all the partners share the business risks.

f) Protection of interest of each partner - In a partnership firm every partner has an equal say in
decision making. If any decision goes against the interest of any partner he can prevent the
decision from being taken. In extreme cases a dissenting partner may withdraw himself from the
business and can dissolve it.
g) Benefits of specialization - Since all the partners are owners of the business they can actively
participate in every aspect of business as per their specialization and knowledge. If you want to start
a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in
criminal cases, another in labour cases and so on as per their specialization. Similarly two or more
doctors of different specialization may start a clinic in partnership.

Disadvantages of a Partnership

a) Unlimited Liability: All the partners are jointly as well as separately liable for the debt of the firm
to an unlimited extent. Thus, they can share the liability among themselves or any one can be asked
to pay all the debts even from his personal properties.

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Roll No: 9533

b) Uncertain Life: The partnership firm has no legal entity separate from its partners. It comes to
an end with the death, insolvency, incapacity or the retirement of any partner. Further, any
dissenting member can also give notice at any time for dissolution of partnership.

c) Lack of Harmony: You know that in partnership firm every partner has an equal right to
participate in the management. Also every partner can place his or her opinion or viewpoint before
the management regarding any matter at any time. Because of this sometimes there is a possibility
of friction and quarrel among the partners. Difference of opinion may lead to closure of the
business on many occasions.

d) Limited Capital: Since the total number of partners cannot exceed 20, the capital to be raised is
always limited. It may not be possible to start a very large business in partnership form.

e) No transferability of share: If you are a partner in any firm you cannot transfer your share of
interest to outsiders without the consent of other partners. This creates inconvenience for the
partner who wants to leave the firm or sell part of his share to others.

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Difference between Partnership and Sole Proprietorship
BaO; of Difference Partnership
1 Formation [t can be Conned only on the ba-
sis of an agreement among the
partners.
Governing Act [t is governed by Indian Part-
nership Act, 193'
,. No. of members Minimum two and maximum
10 in banking and 20 in other
businesses.
4. Capital Capital is provided by partners
in an agreed rat] o.
�. Decision-making It takes time to decide upon im-
portant matters because all the
partners must be consulted for
taking decision.
6. Sharing of profit Profits and losses are shared by
and loss partners as per agreement
O" nership and Owned. controlled and man-
Management aged by partners.
Pravin Dhakne
Roll No: 9533
Sole Proprietorship
No agreement is required to
start the business. It is
formed at any time when-
ever desired by the sole
proprietor.
There is no specific Act
that governs a sole propri-
etorship business.
Only one member.
Capital is arranged by sole
proprietor alone.
Decision-making is very
quick because there is no
need to consult any one
else for taking decision.
The question of sharing of
profits or losses does not
arise. The sole proprietor
alone takes all profits and
bears all losses.
This is completely uvv ned.
controlled and managed
by the sole proprietor.
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Roll No: 9533

3. Joints of Companies
A company form of business organization is known as a Joint Stock Company. It is a voluntary
association of persons who generally contribute capital to carry on a particular type of business,
which is established by law and can be dissolved only by law. Persons who contribute capital
become members of the company. This form of business has a legal existence separate from its
members, which means even if its members die, the company remains in existence. This form of
business organizations generally requires huge capital investment, which is contributed by its
members. The total capital of a joint stock company is called share capital and it is divided into a
number of units called shares. Thus, every member has some shares in the business depending
upon the amount of capital contributed by him. Hence, members are also called shareholders.

The companies in India are governed by the Indian Companies Act, 1956. The Act defines a
company as an artificial person created by law, having a separate legal entity, with perpetual
succession and a common seal.

Types of Companies

i) Private Limited Company

ii) Public Limited Company

i) Private limited company

A private limited company is a voluntary association of not less than two and not more than fifty
members, whose liability is limited, the transfer of whose shares is limited to its members and
who is not allowed to invite the general public to subscribe to its shares or debentures. Its main
features are:-
It has an independent legal existence. The Indian Companies Act, 1956 contains the
provisions regarding the legal formalities for setting up ofaprivate limited company.
Registrars of Companies (ROC) appointed under the Companies Act covering the various
States and UnionTerritories are vested with the primary duty of registering companies f l oated
in the respective states and the Union Territories.

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■ It is relatively less cumbersome to organize and operate it as it has been exempted from
many regulations and restrictions to which public limited company is subjected to. Some
of them are :-
■ It need not file prospectus with the Registrar.
■ It need not obtain the Certificate for Commencement of business.
■ It need not hold the statutory general meeting nor need it file the statutory report.
■ Restrictions placed on the directors of the public limited company do not apply to its
directors.
■ The liability of its members is limited.
■ The shares allotted to its members are also not freely transferable between them. These
companies are not allowed to invite public to subscribe to its shares and debentures.
■ It enjoys continuity of existence i.e. it continues to exist even if all its members die or
desert it. Hence, private company is preferred by those who wish to take the advantage of
limited liability but at the same time desire to keep control over the business
within a limited circle and maintain the privacy of their business.

Advantages
■ Continuity of existence
■ Limited liability
■ Less legal restrictions
Disadvantages
■ Shares are not freely transferable
■ Not allowed to invite public to subscribe to its shares
■ Scope for promotional frauds
■ Undemocratic control

ii) Public Limited Company

A Public Limited Company is a Company limited by shares in which there is no restriction on
the maximum number of shareholders, transfer of shares and acceptance of public deposits. The
liability of each shareholder is limited to the extent of the unpaid amount of the shares face value
and the premium thereon in respect of the shares held by him. However, the liability of a
Director / Manager of such a Company can at times be unlimited. The minimum number of
shareholders is 7.

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Advantages:

0 Members' (the directors and shareholders) financial liability is limited to the amount of
money they have paid for shares.
0 The management structure is clearly defined, which makes it easy to appoint, retire or
remove directors.
0 If extra capital is needed, it can be raised by selling more shares privately.
It is simple to admit more members.
0 The death, bankruptcy or withdrawal of capital by one member does not affect the
company's ability to trade.
0 The disposal of the whole or part of the business is easily arranged.
High status.

Disadvantages:

• Requirement to register the company with the registrar of companies and provide annual
returns and audited statement of accounts. All details of the company are available for
public inspection so there can be no secrecy. There are penalties for failing to make
returns.
• Can be more expensive to set up.
• May need professional help to form.
• As a director, you are treated as an employee and must pay tax.
• The advantages of limited liability status are increasingly being undermined by banks,
finance house, landlords and suppliers who require personal guarantees from the directors
before they will do business.

Approval

An application in Form No. IA needs to be filed with the Registrar of Companies (ROC) of the
state in which the Registered Office of the proposed Company is to be situated. The application
is required to be signed by one of the promoters. The details to be state in the said application are
as follows:

1. Four alternative names for the proposed company. (The name can be coined names from the
objects of the proposed company or the names of the directors, etc. but should definitely be
indicative of the main object of the company. Justification for the name needs to be specified
along with the application)

2. Names and addresses of the promoters (Minimum 7 for a public company while 2 for private
company).

3. Authorized Capital of the proposed company.

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4. Main objects of the proposed company.

5. Names of other group companies. On submitting the application, the ROC scrutinizes the
same and sends the approval / objections in about 10 days to the applicant. On fulfilling of the
objections a formal letter of name approval is issued.

Difference between Private Limited and Public Limited Companies:

Basis Private Limited Company Public Limited Company

Membership Minimum - 02 Minimum - 07
Maximum - 50 Maxirnuin- no restriction
Identification Use a suffix "Private Limited" Use asuffix"Limited" after its
after its name name
Transferability ofRestricted Free
shares
Capital required Not less than Rs. 1 lakh Not less than Rs. 5 lakh
Raisingoffunds Can not give open invitation to the Can raise as much money as
public to subscribe the shares required from publ is

4. Co-operative Society
The term co-operation is derived from the Latin word co-operari, where the word co means
`with' and operari means `to work'. Thus, co-operation means working together. So those who
want to work together with some common economic objective can form a society which is
termed as "co-operative society". It is a voluntary association of persons who work together to
promote their economic interest. It works on the principle of self-help as well as mutual help. The
main objective is to provide support to the members. Nobody joins a cooperative society to earn
profit. People come forward as a group, pool their individual resources, utilize them in the best
possible manner, and derive some common benefit out of it.

Types of Co-operative Societies

Although all types of cooperative societies work on the same principle, they differ with regard to the
nature of activities they perform. Followings are different types of co-operative societies that exist in
our country.

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1. Consumers' Co-operative Society: These societies are formed to protect the interest of
general consumers by making consumer goods available at a reasonable price. They buy goods
directly from the producers or manufacturers and thereby eliminate the middlemen in the process of
distribution. Kendriya Bhandar, Apna Bazar and Sahkari Bhandar are examples of consumers' co-
operative society.

2. Producers' Co-operative Society: These societies are formed to protect the interest of small
producers by making available items of their need for production like raw materials, tools and
equipments, machinery, etc. Handloom societies like APPCO, Bayanika, Haryana Handloom, etc.,
are examples of producers' co-operative society.

3. Co-operative Marketing Society: These societies are formed by small producers and
manufacturers who find it difficult to sell their products individually. The society collects the
products from the individual members and takes the responsibility of selling those products in the
market. Gujarat Co-operative Milk Marketing Federation that sells AMUL milk products is an
example of marketing co-operative society.

4. Co-operative Credit Society: These societies are formed to provide financial support to the
members. The society accepts deposits from members and grants them loans at reasonable rates of
interest in times of need. Village Service Co-operative Society and Urban Cooperative Banks are
examples of co-operative credit society.

5. Co-operative Farming Society: These societies are formed by small farmers to work jointly and
thereby enjoy the benefits of large-scale farming. Lift-irrigation cooperative societies and pani-
panchayats are some of the examples of co-operative farming society.

6. Housing Co-operative Society: These societies are formed to provide residential houses to
members. They purchase land, develop it and construct houses or flats and allot the same to
members. Some societies also provide loans at low rate of interest to members to construct their own
houses. The Employees' Housing Societies and Metropolitan Housing Co-operative Society are
examples of housing co-operative society.

Formation of a Co-operative Society

A Co-operative Society can be formed as per the provisions of the Co-operative Societies Act,
1912. At least ten persons having the capacity to enter into a contract with common economic
objectives, like farming, weaving, consuming, etc. can form a Co-operative Society. A joint
application along with the bye-laws of the society containing the details about the society and its
members has to be submitted to the Registrar of Co-operative Societies of the concerned state.
After scrutiny of the application and the bye-laws, the registrar issues a Certificate of
Registration.

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Requirements for Registration:

1. Application with the signature of all members
2. Bye-laws of the society containing:
(a) Name, address and aims and objectives of the society;
(b) Names, addresses and occupations of members;
(c) Mode of admitting new members;
(d) Share capital and its division.

Advantages of Co-operative Society

i. Easy Formation: Formation of a co-operative society is very easy compared to a joint stock
company. Any ten adults can voluntarily form an association and get it registered with the
Registrar of Co-operative Societies.

ii. Open Membership: Persons having common interest can form a co-operative society. Any
competent person can become a member at any time he/she likes and can leave the society at
will.

iii. Democratic Control: A co-operative society is controlled in a democratic manner. The

members cast their vote to elect their representatives to form a committee that looks after the
day-to-day administration. This committee is accountable to all the members of the society.

iv. Limited Liability: The liability of members of a co-operative society is limited to the extent
of capital contributed by them. Unlike sole proprietors and partners the personal properties of
members of the co-operative societies are free from any kind of risk because of business
liabilities.

v. Elimination of Middlemen's Profit: Through co-operatives the members or consumers

control their own supplies and thus, middlemen's profit is eliminated.

A. State Assistance: Both Central and State governments provide all kinds of help to the
societies. Such help may be provided in the form of capital contribution, loans at low rates of
interest, exemption in tax, subsidies in repayment of loans, etc.

vii. Stable Life: A co-operative society has a fairly stable life and it continues to exist for a long
period of time. Its existence is not affected by the death, insolvency, lunacy or resignation of any of
its members.

Limitations of Co-operative Society

i. Limited Capital: The amount of capital that a cooperative society can raise from its member is
very limited because the membership is generally confined to a particular section of the

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society. Again due to low rate of return the members do not invest more capital. Government's
assistance is often inadequate for most of the co-operative societies.

ii. Problems in Management: Generally it is seen that co-operative societies do not function
efficiently due to lack of managerial talent. The members or their elected representatives are not
experienced enough to manage the society. Again, because of limited capital they are not able to get
the benefits of professional management.

iii. Lack of Motivation: Every co-operative society is formed to render service to its members
rather than to earn profit. This does not provide enough motivation to the members to put in their
best effort and manage the society efficiently.

iv. Lack of Co-operation: The co-operative societies are formed with the idea of mutual co-
operation. But it is often seen that there is a lot of friction between the members because of
personality differences, ego clash, etc. The selfish attitude of members may sometimes bring an
end to the society.

v. Dependence on Government: The inadequacy of capital and various other limitations make
cooperative societies dependant on the government for support and patronage in terms of grants,
loans subsidies, etc. Due to this, the government sometimes directly interferes in the
management of the society and also audits their annual accounts.

Let us now sum up -

Advantages Disadvantages
• Easy formation • Limited Capital

• Open membership • Problems in Management

• Democratic Control • Lack of Motivation
• Limited Liability 49 Lack of Cooperation

• Elimination of Middleman's • Dependence on Government

Profit
• State Assistance
• Stable Life

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PUBLIC SECTOR ENTERPRISES

Traditionally, business activities were left mainly to individual and private organizations, and the
government was taking care of only the essential services such as railways, electricity supply,
postal services etc. But, it was observed that private sector did not take interest in areas where
the gestation period was long, investment was heavy and the profit margin was low; such as
machine building, infrastructure, oil exploration, etc. Not only that, industries were also
concentrated in some regions that had certain natural advantages like availability of raw
materials, skilled labour, nearness to market. This led to regional imbalances. Hence, the
government while regulating the business activities of private enterprises went in for direct
participation in business and set up public enterprises in areas like coal industry, oil industry,
machine building, steel manufacturing, finance and banking, insurance etc. These units are not
only owned by central, state or local government but also managed and controlled by them and
are termed as Public Sector Enterprises.

The business units owned, managed and controlled by the central, state or local government are
termed as public sector enterprises or public enterprises. These are also known as public sector
undertakings.
A public sector enterprise may be defined as any commercial or industrial undertaking owned
and managed by the government with a view to maximize social welfare and uphold the public
interest.
Public enterprises consist of nationalized private sector enterprises, such as, banks, Life
Insurance Corporation of India and the new enterprises set up by the government such as
Hindustan Machine Tools (HMT), Gas Authority of India (GAIL), and State Trading
Corporation (STC) etc.

There are three different forms of organization used for the public sector enterprises in India.
These are
1. Departmental Undertaking form of organization is primarily used for provision of essential
services such as railways, postal services, broadcasting etc. Such organizations function under the
overall control of a ministry of the Government and are financed and controlled in the same way as
any other government department. This form is considered suitable for activities where the
government desires to have control over them in view of the public interest.
2. Statutory Corporation (or public corporation) refers to a corporate body created by the
Parliament or State Legislature by a special Act which defines its powers, functions and pattern of
management. Statutory Corporation is also known As Public Corporation. Its capital is wholly
provided by the government. Examples of such organizations are Life Insurance Corporation of
India, State Trading Corporation etc.
3. Government Company refers to the company in which 51 percent or more of the paid up
capital is held by the government. It is registered under the Companies Act and is fully governed by
the provisions of the Act. Most business units owned and managed by government fall in this
category.

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Roll No: 9533

PUBLIC ENTERPRISES

Departmental
Undertakings
I Statutory Government
Corporations Companies
Example Example Example
1 Posts & Telegraph I Food Corporation of India 1 Hindustan Machine
Railvvavs r 2. IndustrialFinance Tools Limited
3. All India Radio Corporation of India 2. Steel Authority of
(AIR) 3. Life Insurance India Limited
4. DoorDarshan (TV) Corporation of India 3. Hindustan Shipyard
5. Ordnance Factories 4. Unit Trustof India Limited
5. State Trading Corporation

1. Departmental Undertakings
Departmental undertakings are the oldest among the public enterprises. A departmental
undertaking is organized, managed and financed by the Government. It is controlled by a specific
department of the government. Each such department is headed by a minister. All policy matters and
other important decisions are taken by the controlling ministry. The Parliament lays down the general
policy for such undertakings.

FEATURES OF DEPARTMENTAL UNDERTAKINGS

(a) It is established by the government and its overall control rests with the minister.
(b) It is a part of the government and is managed like any other government department. (c)
It is financed through government funds.
(d) It is subject to budgetary, accounting and audit control.
(e) Its policy is laid down by the government and it is accountable to the legislature.

MERITS OF DEPARTMENTAL UNDERTAKINGS

(a) Fulfillment of Social Objectives: The government has total control over these undertakings. As
such it can fulfill its social and economic objectives. For example, opening of post offices in far off
places, broadcasting and telecasting programs, which may lead to the social, economic
and intellectual development of the people, are the social objectives that the departmental
undertakings try to fulfill.

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Roll No: 9533

(b) Responsible to Legislature: Questions may be asked about the working of departmental
undertaking in the parliament and the concerned minister has to satisfy the public with his
replies. As such they cannot take any step, which may harm the interest of any particular group of
public. These undertakings are responsible to the public through the parliament.

(c) Control Over Economic Activities: It helps the government to exercise control over the
specialized economic activities and can act as instrument of making social and economic policy.

(d) Contribution to Government Revenue: The surplus, if any, of the departmental

undertakings belong to the government. This leads to increase in government income. Similarly, if
there is deficiency, it is to be met by the government.

(e) Little Scope for Misuse of Funds: Since such undertakings are subject to budgetary
accounting and audit control, the possibilities of misuse of their funds is considerably reduced.

LIMITATIONS OF DEPARTMENTAL UNDERTAKINGS

(a) The Influence of Bureaucracy: On account of government control, a departmental

undertaking suffers from all the ills of bureaucratic functioning. For instance, government
permission is required for each expenditure, observance of government decisions regarding
appointment and promotion of the employees and so on. Because of these reasons important
decisions get delayed, employees cannot be given instant promotion or punishment. On account
of these reasons some difficulties come in the way of working of departmental undertakings.

(b) Excessive Parliamentary Control: On account of the Parliamentary control difficulties

come in the way of day-to-day administration. This is also because questions are repeatedly
asked in the parliament about the working of the undertaking.

(c) Lack of Professional Expertise: The administrative officers who manage the affairs of the
departmental undertakings do not generally have the business experience as well as expertise.
Hence, these undertakings are not managed in a professional manner and suffer from deficiency
leading to excessive drainage of public funds.

(d) Lack of Flexibility: Flexibility is necessary for a successful business so that the demand of the
changing times may be fulfilled. But departmental undertakings lack flexibility because its policies
cannot be changed instantly.

(e) Inefficient Functioning: Such organizations suffer from inefficiency on account of

incompetent staff and lack of adequate incentives to improve efficiency of the employees.

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Roll No: 9533

Let us now sum up -

Merits
(a) Fulfillment of social objectives
(b) Responsibility to the public
(c) Control Over Ec onomic
Contribution to Government Revenue
Little Scope for Misuse of Funds
Limitations
(a) The Influence of Bureaucracy (b)
Excessive Parliamentary Control (c)
Ac tivi ties (d) Lack of Professional Expertise (d)
(e) Lack of Flexibility
(e) Inefficient Functioning

2. Statutory Corporation (or Public Corporation)

The Statutory Corporation (or Public Corporation) refers to such organizations which are
incorporated under the special Acts of the Parliament/State Legislative Assemblies. Its
management pattern, its powers and functions, the area of activity, rules and regulations for its
employees and its relationship with government departments, etc. are specified in the concerned
Act. Examples of statutory corporations are State Bank of India, Life Insurance Corporation of
India, Industrial Finance Corporation of India, etc. It may be noted that more than one
corporation can also be established under the same Act. State Electricity Boards and State
Financial Corporation fall in this category.

FEATURES OF STATUTORY CORPORATIONS

(a) It is incorporated under a special Act of Parliament or State Legislative Assembly.

(b) It is an autonomous body and is free from government control in respect of its internal
management. However, it is accountable to parliament and state legislature.

(c) It has a separate legal existence. Its capital is wholly provided by the government.

(d) It is managed by Board of Directors, which is composed of individuals who are trained and
experienced in business management. The members of the board of Directors are nominated by the
government.

(e) It is supposed to be self sufficient in financial matters. However, in case of necessity it may
take loan and/or seek assistance from the government.

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Roll No: 9533

(f) The employees of these enterprises are recruited as per their own requirement by following the
terms and conditions of recruitment decided by the Board.

MERITS OF STATUTORY CORPORATIONS

(a) Expert Management: It has the advantages of both the departmental and private
undertakings. These enterprises are run on business principles under the guidance of expert and
experienced Directors.

(b) Internal Autonomy: Government has no direct interference in the day-to-day management of
these corporations. Decisions can be taken promptly without any hindrance.

(c) Responsible to Parliament: Statutory organizations are responsible to Parliament. Their

activities are watched by the press and the public. As such they have to maintain a high level of
efficiency and accountability.

(d) Flexibility: As these are independent in matters of management and finance, they enjoy
adequate flexibility in their operation. This helps in ensuring good performance and operational
results.

(e) Promotion of National Interests: Statutory Corporations protect and promote national
interests. The government is authorised to give policy directions to the statutory corporations
under the provisions of the Acts governing them.

(f) Easy to Raise Funds: Being government owned statutory bodies, they can easily get the
required funds by issuing bonds etc.

LIMITATIONS OF STATUTORY CORPORATIONS

(a) Government Interference: It is true that the greatest advantage of statutory

corporation is its independence and flexibility, but it is found only on paper. In
reality, there is excessive government interference in most of the matters.
(b) Rigidity: The amendments to their activities and rights can be made only by the
Parliament. This results in several impediments in business of the corporations to
respond to the changing conditions and take bold decisions.
(b) Ignoring Commercial Approach: The statutory corporations usually face little
competition and lack motivation for good performance. Hence, they suffer from
ignorance of commercial principles in managing their affairs.

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Roll No: 9533

Let us sum up -

Merits Limitations

(a) Expert Management (a) Government Interference

(b) Internal Autonomy (h) Rigidity
(c) Responsible to Parliament (c) Ignoring Commercial Approach
(d) Flexibility
(e) Promotion of National Interest
(f) Easy to Raise Funds

3. Government Public Ltd. Company

As per the provisions of the Indian Companies Act, a company in which 51% or more of its
capital is held by central and/or state government is regarded as a Government Company. These
companies are registered under Indian Companies Act, 1956 and follow all those rules and
regulations as are applicable to any other registered company. The Government of India has
organized and registered a number of its undertakings as government companies for ensuring
managerial autonomy, operational efficiency and provides competition to private sector.

FEATURES OF GOVERNMENT COMPANIES

(a) It is registered under the Companies Act, 1956.

(b) It has a separate legal entity. It can sue and be sued, and can acquire property in its own
name.

(c) The annual reports of the government companies are required to be presented in parliament.

(d) The capital is wholly or partially provided by the government. In case of partially owned
company the capital is provided both by the government and private investors. But in such a case the
central or state government must own at least 51% shares of the company.

(e) It is managed by the Board of Directors. All the Directors or the majority of Directors are
appointed by the government, depending upon the extent of private participation.
(f) Its accounting and audit practices are more like those of private enterprises and its auditors are
Chartered Accountants appointed by the government.

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Roll No: 9533

(g) Its employees are not civil servants. It regulates its personnel policies according to its articles of
associations.

Merits of Government Public Ltd Companies

(a) Simple Procedure of Establishment: A government company, as compared to other

public enterprises, can be easily formed as there is no need to get a bill passed by the parliament or
state legislature. It can be formed simply by following the procedure laid down by the
Companies Act.

(b) Efficient Working on Business Lines: The government company can be run on business
principles. It is fully independent in financial and administrative matters. Its Board of Directors
usually consists of some professionals and independent persons of repute.

(c) Efficient Management: As the Annual Report of the government company is placed before
both the house of Parliament for discussion; its management is cautious in carrying out its
activities and ensures efficiency in managing the business.

(d) Healthy Competition: These companies usually offer a healthy competition to private sector
and thus, ensure availability of goods and services at reasonable prices without compromising on the
quality.

Limitations of Government Companies

(a) Lack of Initiative: The management of government companies always has the fear of public
accountability. As a result, they lack initiative in taking right decisions at the right time.
Moreover, some directors may not take real interest in business for fear of public criticism.

(b) Lack of Business Experience: In practice, the management of these companies is generally
put into the hands of administrative service officers who often lack experience in managing the
business organization on professional lines. So, in most cases, they fail to achieve the required
efficiency levels.

(c) 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 the business enterprises.

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 Pravin Dhakne

Roll No: 9533

Let us sum up now -

Merits Limitations

(a) Simple procedure of establishment (a) Lack of initiative

(b) Eff icient working on B usiness l ines (b) Lack of b usiness e xper ienc e
(C) Efficient manage ment (C) Change of policies and management
(d) Healthy competition

And overall comparison of Public sector companies

Compatibility view of Public Sector Enterprises

5.No. Departmental Public (oremment
Undertakings Corporations Companies

Fstahlishmc.nt Rya Ministry By the Parl ian:cnt By a\linistry with or

under a special.Act s.ithout private.
parti c i pat i o n

Legal Status No separate entity Separate entity to Separate. corporate

dstinct from the. suc and he sued cxistcncc.

5)%crnn-.cnt

3 Capital Provided out of e d i v o dPrwholly by Part of it may he provided

budgetary appropriation the Government try private entrepreneurs

4. Management Government official from Board of Directors Board of Directors may

the Ministry concerned include private
individuals

Control and Control vests with the Parliament Go vernm ent fMinistrv
Accountability Minister and the concerned
Ministry concerned

b .Autonornv No autonomy. Wtrks as No governmental Some freedom from

apart and parcel interference in day- govcmtnc.ntai
of government to-day affairs interference

Suitability Dcf'encc.,puhlic utilities Heavy indcstrics and Al types of industrial and

sc.n ice pruviding commercial cntcipriscs
enterprises with
ktnE gestation
period.

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