Types of Organization

Types of Organization

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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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Let Sum Up –

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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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.

vi. 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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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


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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

floated 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:

Members' (the directors and shareholders) financial liability is limited to the amount of

money they have paid for shares.

The management structure is clearly defined, which makes it easy to appoint, retire or

remove directors.

If extra capital is needed, it can be raised by selling more shares privately.

It is simple to admit more members.

The death, bankruptcy or withdrawal of capital by one member does not affect the

company's ability to trade.

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. 1A 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.

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.

vi. 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 –


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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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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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(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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Let us now sum up –

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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(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

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Let us sum up –

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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(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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Let us sum up now –

And overall comparison of Public sector companies

Compatibility view of Public Sector Enterprises

Documents

Types of Organization