PUBLIC CORPORATION AND LIABILITIES

ARMY INSTITUTE OF LAW, MOHALI

PROJECT ON “PUBLIC CORPORATION AND LIABILITIES.”

Submitted to: Submitted by:

Ms. Jasleen Deepak Kumar

Roll No. 1642

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ACKNOWLEDGEMENT

I take this opportunity to express my humble gratitude and personal regards to Ms.
JASLEEN CHAHAL for inspiring me and guiding me during the course of this project work
and also for her cooperation and guidance from time to time during the course of this project
work on the topic “PUBLIC CORPORATION AND LIABILITIES.”

Mohali

22nd November2018

DEEPAK KUMAR

B.A. LL.B. Vth SEMESTER

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I. INTRODUCTION

The government-owned corporations are termed as Public Sector Undertakings (PSUs) in

India. In a PSU majority (51% or more) of the paid up share capital is held by central
government or by any state government or partly by the central governments and partly by
one or more state governments.

The Comptroller and Auditor General of India (CAG) audits government companies. In
respect of government companies, CAG has the power to appoint the Auditor and to direct
the manner in which the Auditor shall audit the company's accounts.

 Comptroller and Auditor General of India (CAG)

 The Companies Act 1956

EVOLUTION OF PUBLIC SECTOR UNDERTAKING

Post Independence, India was grappling with grave socio-economic problems, such as
inequalities in income and low levels of employment, regional imbalances in economic
development and lack of trained manpower, weak industrial base, inadequate investments and
infrastructure facilities, etc.

Hence, the roadmap for Public Sector was developed as an instrument for self-reliant
economic growth. The country adopted the planned economic development polices, which
envisaged the development of PSUs.

Initially, the public sector was confined to core and strategic industries. The second phase
witnessed nationalization of industries, takeover of sick units from the private sector, and
entry of the public sector into new fields like manufacturing consumer goods, consultancy,
contracting and transportation etc.

The Industrial Policy Resolution 1948 outlined the importance of the economy and its
continuous growth in production and equitable distribution. In this process, the policy
envisaged active engagement of the State in development of industries.

The Industrial Policy Resolution 1956 classified industries into three categories with respect
to the role played by the State -

 The first category (Schedule A) included industries whose future development would
be the exclusive responsibility of the State

 The second (Schedule B) category included Enterprises whose initiatives of

development would principally be driven by the State but private participation would
also be allowed to supplement the efforts of the State

 And, the third category included the remaining industries, which were left to the
private sector.

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In 1969, the government nationalized 14 major banks.

The Industrial Licensing Policy 1970 placed certain restrictions on undertakings belonging to
large industrial houses, defined on the basis of assets exceeding Rs 350 mn.

In 1973, the definition of large industrial houses was adopted in conformity with that of the
Monopolies and Restrictive Trade Practices Act (MRTP) 1969- External website that opens
in a new window and included companies whose assets exceeded Rs 200 mn.

The Statement on Industrial Policy in July 1991 was also significant. It brought in

fundamental changes in the MRTP Act as well. The statement revised the priority of the
public sector.

CLASSIFICATION OF PUBLIC SECTOR UNDERTAKING

Public Sector Undertakings (PSUs) can be classified as Public Sector Enterprises (PSEs),
Central Public Sector Enterprises (CPSEs) and Public Sector Banks (PSBs).

The Central Public Sector Enterprises (CPSEs) are also classified into 'strategic' and 'non-
strategic'. Areas of strategic CPSEs are:

 Arms & Ammunition and the allied items of defence equipments, defence air-crafts
and warships

 Atomic Energy (except in the areas related to the operation of nuclear power and
applications of radiation and radio-isotopes to agriculture, medicine and non-strategic
industries)

 Railways transport.

All other CPSEs are considered as non-strategic.

SECTION 25 COMPANIES

Public Sector Enterprises having objects to promote commerce, art, science, religion, charity
or any other useful purpose and not having any profit motive can be registered as non-profit
company under section 25 of the Companies Act, 1956.

This section empowers the Central Government to grant a licence directing that such an
association may be registered as a company with limited liability, without the addition of the
words `Limited' or `Private Limited' to its name.

Such companies are also called as the Non-profit or 'No Profit - No Loss' companies.

MAHARATNA/NAVRATNA/MINIRATNA STATUS FOR PUBLIC SECTOR

UNDERTAKINGS

The status of Maharatna, Navratna, Miniratna to CPSEs is conferred by the Department of

Public Enterprises- External website that opens in a new window to various Public Sector

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Undertakings. These prestigious titles provide them greater autonomy to compete in the
global market.

Maharatna

A company qualifying for the Maharatna- External website that opens in a new

window status should have an average annual turnover of Rs 20,000 crore during the last
three years against Rs 25,000 crore prescribed earlier. The average annual net worth of the
company should be Rs 10,000 crore.

The Maharatna status empowers mega CPSEs to expand their operations and emerge as
global giants. The coveted status empowers the boards of firms to take investment decisions
up to Rs 5,000 crore as against the present Rs 1,000 crore limit without seeking government
approval. The Maharatna firms would now be free to decide on investments up to 15% of
their net worth in a project, limited to an absolute ceiling of Rs 5,000 crore.

Navratna

The Central Public Sector Enterprises (CPSEs) fulfilling the following criteria are eligible to
be considered for grant of Navaratna- External website that opens in a new window status:

 Having Schedule 'A' and Miniratna Category-1 status.

 Having at least three 'Excellent' or 'Very Good' Memorandum of Understanding

(MoU) ratings during the last five years.

For detailed information on criteria for Navratna status click here- External website that
opens in a new window.

The Navratna status empowers PSEs to invest up to Rs. 1000 crore or 15% of their net worth
on a single project without seeking government approval. In a year, these companies can
spend up to 30% of their net worth not exceeding Rs. 1000 cr. They also enjoy the freedom to
enter joint ventures, form alliances and float subsidiaries abroad.

Miniratna Category

For Miniratna category I status, the CPSE should have made profit in the last three years
continuously, the pre-tax profit should have been Rs. 30 crores or more in at least one of the
three years and should have a positive net worth. For category II, the CPSE should have made
profit for the last three years continuously and should have a positive net worth.

Miniratnas can enter into joint ventures, set subsidiary companies and overseas offices but
with certain conditions. This designation applies to PSEs that have made profits continuously
for the last three years or earned a net profit of Rs. 30 crore or more in one of the three years.

ROLE OF PUBLIC SECTOR UNDERTAKING

Public Sector Undertakings (PSUs) have laid a strong foundation for the industrial
development of the country. The public sector is less concerned with making profits. Hence,

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they play a key role in nation building activities, which take the economy in the right
direction.

PSUs provide leverage to the Government (their controlling shareholder) to intervene in the
economy directly or indirectly to achieve the desired socio-economic objectives and
maximize long-term goals.

As agriculture is the backbone of Indian economy, Public Sector Banks (PSBs) play a crucial
role in pushing the agricultural economy on to the progressive pathway and helping develop
rural India. Moreover, PSUs play a substantial role in the rural development by providing
basic infrastructural services to citizens.

EMPOWERMENT OF PUBLIC SECTOR UNDERTAKINGS

The Government provides Public Sector Enterprises (PSEs/PSUs) the necessary flexibility
and autonomy to operate effectively in a competitive environment. The Boards of Navratna
and Miniratna companies- External website that opens in a new window are entrusted with
more powers in order to facilitate further improvement in their performance.

The government has also implemented revised salaries for executives of PSEs/PSUs.
Moreover, some innovative measures such as Performance Related Pay have been introduced
to make them more efficient. These incentives for the employees have been linked to
individual, group as well as company performance.

CORPORATE GOVERNANCE OF PUBLIC SECTOR UNDERTAKING

Good corporate governance practices are essential for sustainable business. It generates long
term value to all its shareholders and other stakeholders. The Ministry of Corporate Affairs
has been working towards strengthening of the corporate governance.

The ministry encourages the use of better practices through voluntary adoption. For this
purpose, a set of voluntary guidelines has been drafted. The Corporate Governance Voluntary
Guidelines serve as a benchmark for the corporate sector and also help them in achieving the
highest standard of corporate governance.

CORPORATE SOCIAL RESPONSIBILITY OF PUBLIC SECTOR

UNDERTAKINGS

Social Obligations of Central Public Enterprises

PSUs serve the interest of society by taking responsibility for the impact of their activities on
customers, employees, shareholders, communities and the environment in all aspects of their
operations.

The Government has issued the guidelines on Corporate Social Responsibility for Central
Public Sector Enterprises (CPSEs) following the Committee on Public Undertakings (1993-
94) recommended a number of measures in its 24th Report on 'Social Responsibilities and
Public Accountability of Public Undertakings'.

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Although the Government believes in making PSEs growth oriented and technically dynamic,
its policy is to give greater powers to the boards so that PSEs could function professionally.
While the focus is on generating surpluses for self-sustaining growth, the PSEs generally
undertake certain amount of non-commercial responsibilities, in furtherance of their
commercial objectives. All PSEs cannot be treated on an equal footing for undertaking
various types of social activities. It is for the individual PSE to identify and implement social
responsibilities keeping in view its financial ability to sustain such activities, operating
environment and provisions in its MOA/Statute.

It is likely that some social responsibilities may be assigned to PSEs through the issuance of
Presidential Directives/guidelines by the concerned administrative Ministries/Departments.
While implementation of Presidential Directives is mandatory; the guidelines are also
generally to be followed except when the boards of directors of PSEs decide not to adopt
them for reasons to be recorded in writing. It is desirable that boards of PSEs have full
flexibility in identification and implementation of social responsibilities because as per the
Articles of Association they enjoy full autonomy in this regard. PSEs are free to avail the
help of State Governments, District Administration and peoples' representatives, wherever
necessary.

GOVERNANCE OF PUBLIC SECTOR UNDERTAKINGS

The Department of Public Enterprises- External website that opens in a new window acts as a

nodal agency for all Public Sector Enterprises (PSEs).

The important roles and tasks of the Department are:

 General policy relating to Public Sector.

 Matters relating to issue of Presidential Directives and guidelines to Public Sector

Enterprises.

 Formulation of policy guidelines pertaining to Public Sector Enterprises in areas like

performance improvement and evaluation, financial management, personnel
management, board structures, wage settlement, training, industrial relation, vigilance,
performance appraisal, etc.

 Matters relating to reservation of posts in the public sector enterprises for certain
classes of citizens.

 All matters relating to Memorandum of Understanding between the Public Sector

Enterprises and the administrative Ministries/Departments.

 Matters relating to delegation of powers to Board of Directors.

 To undertake in depth studies in respect of significant areas of functioning of Central

PSEs

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 Matters relating to International Centre for Public Enterprises (ICPE)- External

website that opens in a new window

 Matters relating to Standing Conference of Public Enterprises (SCOPE)- External

website that opens in a new window

 To monitor and evaluate the performance of PSEs and to act as a repository of data
and to bring out an Annual Survey for the Parliament.

 Permanent Machinery of Arbitrators for settlement of disputes among public sector

enterprises and Government Departments except disputes relating to tax matters.

 Appraisal of proposal from different administrative Ministries/Deptt. Pertaining to

restructuring, revival, joint venture etc.

LIABILITIES OF PUBLIC CORPORATION

a) Liability in Contracts
A public corporation can enter into contract. It can sue and be sued for breach of
contract. Since a public corporation is a statutory public undertaking, it can do only
those acts which are authorized by the statute either expressly or by necessary
implication. It acts which are authorized by the statute either expressly or by
necessary implication. If any requirement has been laid down in the constituent statute
or in the rules, regulations or bye-laws of the corporation, it must be complied with.
Whatever is not expressly or impliedly authorised by the constituent statute can be
said to be prohibited and must be held to be ultra vires. The contract which is ultra
vires is void ab intion and cannot be ratified. No rights can be said to have accrued in
favor of a private individual and no corresponding duty of a corporation arises for
breach of a contract, which is void. Accordingly the Corporation incurs no liability.
Since a corporation is neither an agency nor a department of the Government, the
requirements of a valid government contract is laid down in Article 299 of the
constitution do not apply to Corporation contracts.
The requirement of a statutory notice of two monts as laid down under Section 80 of
Civil Procedure Code before filing a suit against the government does not apply in
case of a suit against a public corporation.

b) Liability in Torts
A public corporation can be used for the torts committed by its servants provided the
act is within the powers of the Corporation and that it would be actionable if
committed by a private individual. But the corporation would not be liable if the act of
the servant is ultra vires the power of the Corporation or is such that it could under no
circumstances have authorised its servant to commit it. For acts which are ultra vires,
the servant would personally liable.
In M.C Mehta v. Union of India Olegon gas has escaped from Shriram chemical and
Fertilizer Company, Delhi causing injury to people. The Supreme Court held that the

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liabilities of industries engaged in hazardous or dangerous activities are absolute even

when the injury occurs on account of an accident in such activities.

c) Liability for crimes

A Public Corporation may also incur liability for offences committed by its servants
in the course of employment. However, since it is an artificial person having
corporate identity, it cannot be punished with death or imprisonment. It follows that a
Corporation cannot be found guilty of an offence for which the punishment is death or
imprisonment. A corporation can also not be held liable for an offence which can only
be committed by a natural person, e.g bigamy

But a public Corporation can be held vicariously liable for offences committed by its
agents, servants and employees, e.g libel, fraud, and public nuisance.

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REFRENCES
1.  Original govt. announcement about the Navratnas 1997 Archived 9 February 2012
at the Wayback Machine.
2.  "Maharatna status for mega PSUs gets nod". The Times of India. 25 December
2009. Retrieved 29 December 2009.
3. "Disinvestments-A Historical Perspective". Bombay Stock Exchange. Retrieved 19
September 2015.
4.  Sankar, T.L., Mishra, R.K., Lateef Syed Mohammed, A. (1994). "Divestments in
Public Enterprises: The Indian Experience"
5. Ghose, Shankar. Jawaharlal Nehru. Allied Publishers. p. 243. ISBN 978-
8170233695.

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