Government Company

This Article is Written by Nawvi K, pursuing B.A. LL.B from Alliance University, Bangalore during her internship at Le Droit India

Keywords

Government companies, Public Sector Undertakings, Profit, Corporations, features, role, nature, legality, Act

Abstract

A government company is incorporated and regulated as per the Companies Act, of 1956 and was latest amended in the year 2013 keeping in mind the focus on obtaining economic growth, building a nation, and obtaining profits by reducing unhealthy market practices. Section 2(45) of the Act defines government companies and the provisions must adhere to smooth functioning and regulation of the same. Public sector undertakings are also referred to under government companies, however, it is important to note that subsidiary companies are different from the latter. It is also established that 51% of the major stakeholders are the government either central or state and thus they involve in major activities of the companies. The government companies are bound to take their own decisions not relying on the government but the crux lies in understanding the crucial role played by the government in indirectly influencing the opinions.

A government company is also referred to as a Public Sector Undertaking (PSU) (Hereinafter referred to as the PSU). The major objectives kept in the minds of the lawmakers regarding the PSU are to earn more profit by raising equity and distribution of the wealth which is accumulated in the few hands and to contribute to the signification growth of the economy and nation-building.

Section 2(45) of the Companies Act, of 2013 defines a “Government Company” as a company that holds not less than fifty-one percent of the share capital and that shall be held by the central government or by the respective state government or any government; or partly by the central government or any state government that includes one or more states and a company which is subsidiary of a government company.[1]

An extended part of the government company is the subsidiary company which in a literal sense means to subsidize the government company, and the board is under the control of the PSU. More than half of the votes shall be vested in the hands of the government company.

As one can interpret from the definition of a government company, these are started and established by the Indian Companies Act, of 2013 (hereinafter referred to as the Act) which is further registered and controlled by the provisions of the Act. As it could be interpreted from the definition provided under the Act the government shall be the major shareholder and has control over all areas including management. However, it is necessary to note that a government company need not necessarily be of government, in its literal sense, it can also be a Public Limited Company or a Private Limited Company.

The nature, Role, and Significance of the PSU are as follows:

1. Development of infrastructure: since India’s republic which is about 73 years, infrastructure has been a keen element that has been paid attention to, and many plans were formulated to sustain and develop the same. And since then steel, iron, heavy goods machinery, construction, and petroleum and gas were the constant players contributing to the growth of the economy.
2. Monopoly of business: restrictive trade practices and monopoly control are influencing PSU in a critical aspect.
3. Act as an alternative solution to reduce imports, which cost hefty. This also provides a chance to increase sales within the country which indirectly contributes to empowering more labor force, which provides employment opportunities.
4. Regional equilibrium is attained by government companies because they are established in balance with the number of private players to regularise the undisturbed motion country’s development. Most of the PSUs are built and led in underserved areas as the majority of the non-government companies started to develop near the banks or ports to attain complete and cheap utilization of resources.

It is predominantly important to understand the features of a government company to appreciate its nature, legality, and functions of the same.

1. Registration of the government companies: they are incorporated and regulated under the Companies Act, of 2013 and except in the cases mentioned or otherwise, a government company shall be governed by the Act. The incorporation and other decisions are executive in nature and not legislative.
2. Management of the government companies: the Board of Directors are responsible for the management of the companies and they are generally nominated and selected by the shareholders and the government.
3. Ownership of the government companies: these are either wholly or partly owned by the government and the division is also a division of ownership that may lie between the central government or one or more state governments.
4. Accountability of the government companies: an auditor shall be appointed by the government of India and an annual report on accounts shall be submitted which shall be later presented and discussed in the state assembly or parliament. Substantially these companies are exempted from the audit rules, budgetary, and accounting procedures.

Section 619 of the Act predominantly provides the auditor to be appointed or to be reappointed as a Controller and Auditor General of India (CAG). The CAG has the power to direct the auditor to perform certain functions according to his instructions.

• Appointment and salaries of the staff by the government company: the employment and remuneration are decided by the company itself as per their terms and conditions and they are not governed by the Civil Service Rules but the departmental staffs are government servants and are directed under the Civil Service Rules.
• Government companies are separate legal entities: the literal meaning is that these companies can enter into a contract as per their wish under the name of the government company, by the way through which they can either sell or buy any property under the same name. These are legal entities that are not dependent on the government and can make independent informed decisions, which could be to an extent of suing other companies or being sued in a court of law.
• The role of Memorandum and Articles of Association: a government company is bound to follow the aforementioned as they are the main documents that adhere to the provisions of the Act to provide with rules and regulations of that particular company.
• Financial aspect of the government companies: the central or the state government shall contribute to at least 51% of the capital of the company and the rest can be raised from the capital markets. The minority of the shares are held by the public.
• The main goal of establishing such government companies is solely to earn profits and for commercial purposes.

The legal status of the government company is such that it is considered a juristic person separated and distinctive from the other members. The person who is entering the company, such as the members or subscribing to the memorandum or article of the association shall be incorporated as a corporate aggregate. The rights and obligations of the company and the shareholders are different from each other.

Finally one must examine the merits and demerits before evaluating the need of incorporating a government company, few of them may include, the government organization having the sole power to direct and exercise control as the autonomy in flexibility and management decisions are made by them. The government companies also keep their hands in the local markets to eradicate unhealthy market practices and prevent the monopoly of the business.

The absolute hurdle lies in dealing with governmental interference as they are mostly involved in every decision-making as a result of holding major stock even though a government company is free to make its own decision, this could be understood as indirect interference. There is a high probability that they eradicate the need to answer the parliament and dodge constitutional responsibilities governed by the Act.

A few government companies that are major contributors to the growth of the economy and the GDP are Indian Oil Corporation Limited, Coal India Limited, Hindustan Petroleum Corporation Limited, Power Grid Corporation of India Limited, Bharat Petroleum Limited, Oil and Natural Gases Corporation Limited, etc.

[1] https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf