Government Company: Features, Merits and Demerits
After Independence, for the development of the country, it became necessary for the Government to start public sector enterprises. Besides, India adopted a Mixed Economy pattern, under which both the public and private sectors played some role in the economic development. Some kind of organizational framework is needed for the Government’s participation in the business and economic sectors of the country to function. In the Public Sector, Government plays a major role in organizing and formulating the key points related to an organization. These public enterprises are owned by the public and accountable to the public through the parliament. A public enterprise may take any particular form of organization depending upon the nature of its operation and its relationship with the Government.
The forms of public sector enterprises are Departmental Undertaking, Statutory Corporation, and Government Company.
A Government company is established under the Indian Companies Act and is registered and governed by the provisions of the Indian Companies Act. The basic purpose behind the establishment of a Government Company is to run an industrial or commercial undertaking. Government is the major shareholder of a Government Company and hence exercises major control over its management. One can form a Government Company as a Private Limited Company or a Public Limited Company.
According to Section 2(45) of the Indian Companies Act 2013, any company in which not less than fifty-one percent 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 a Government company is called Government Company.
All the provisions mentioned in the Companies Act are applicable to Government companies unless something else is specified. Also, some of the provisions of the Act are applicable to the retirement or appointment of directors and other managerial personnel of the company. Some examples of Government Company are BHEL (Bharat Heavy Electricals Ltd.), ONGC (Oil and Natural Gas Corporation), Indian Oil Corporation Limited, State Bank of India, etc.
Features of Government Company
1. Separate Legal Entity: A Government Company has a separate legal entity independent of the Government. It means that the company can acquire property, enter into a contract, can sue another company by filing a suit against them in a court of law, or can be sued by other companies.
2. Incorporation: A Government Company is registered under the Companies Act, 2013 or any previous Company Law, and is governed by its provisions. It is formed by an executive decision, instead of a legislative decision.
3. Management: The Government nominates the Board of Directors who manage the company and its activities. Also, like any other Public Limited Company, a Government Company’s management is regulated by the provisions of the Companies Act, 2013.
4. Governed by Provisions of Memorandum and Articles of Association: The main documents of a Government Company includes 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.
5. Accounting and Audit Procedures: Unlike Departmental Undertakings, a Government Company is free from audit, budgetary, and accounting controls. However, the auditor appointed by the Central Government has to present an Annual Report in front of the State Legislature or Parliament.
6. Finance: The State or the Central Government contributes at least 51% of the capital of a Government Company, and it can raise the rest of the capital from the capital market.
Merits of Government Company
1. Easy Formation: A Government Company 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.
2. Operational Autonomy: There is no bureaucratic control and political interference of the Government in the management of the Government Company; therefore, a Government Company takes actions according to their own judgement and can manage its activities independently.
3. Independent Status: As a Government Company has a separate legal entity, independent of the Government, it can perform its activities just like any other Private Company.
4. Prevents Unhealthy Business Practices: As a Government Company exercises 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.
Demerits of Government Company
1. Freedom only in name: As at least 51% of the shares of a Government Company are held by the Government, therefore the control over the affairs of the company by the Government is more. Besides, the provisions of the Companies Act, 2013 do not have much relevance in this case.
2. Lack of Accountability: As the major part of the capital of a Government Company is financed by the Government, it should be held accountable to the Government only. However, because of the ineffective control of the Government, a Government Company is not directly answerable to the Parliament.
3. Defeats the main Purpose: Government exercises major control over the functions and management of a Government Company, as it is a major shareholder of the company. However, this feature of the Government Company defeats the whole purpose of registering and establishing it under the Companies Act.
Suitability of Government Company
The establishment of a Government Company is suitable in three cases as follows:
- Where Government’s planning and funding are required in a big project.
- Where the Government of the country wants to have control over a company without its nationalisation in the private sector.
- Lastly, where the Government of the country wants to launch an organization by collaborating with some private organizations.
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