Business Studies Solution for Class 11 Commerce Business Studies Chapter 3 - Private, Public and Global Enterprises
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Business Studies Solution for Class 11 Commerce Business Studies Chapter 3 - Private, Public and Global Enterprises Page/Excercise 75
A government company is any company in which the paid-up capital held by the government is not less than 51 percent.
According to the Indian Companies Act, 1956, a government company is any company in which not less than 51 percent of the paid up capital is held by the central government, or by any state government or partly by the central government and partly by one or more state governments. However, if the shares of the government company fall below 51 percent, then the company cannot be termed a government company according to the regulation of the Act.
Centralised control in MNCs implies control exercised by Headquarters.
MNCs have their headquarters located in their home country from where they exercise control on all their subsidiaries and branches spread all over the world. The control of the headquarters is limited to framing of policies while not interfering in day-to-day operations.
PSEs are organisations owned by the government.
PSEs are public sector enterprises. These are organisations which are owned, controlled and managed by the government. Other options given in the question represent private sector enterprises.
Reconstruction of sick public sector units is taken up by BIFR.
BIFR stands for Board of Industrial and Financial Reconstruction for Rehabilitation. It is responsible for taking care of sick public sector enterprises. These are those enterprises which have continuously made losses and thus are given to BIFR so that they can be rehabilitated, revived or shut down depending on their condition and scope of improvement.
Business Studies Solution for Class 11 Commerce Business Studies Chapter 3 - Private, Public and Global Enterprises Page/Excercise 76
Disinvestment of PSEs implies sale of equity shares to private.
Disinvestment is selling of equity shares of public sector units to the private or public sector. The government initiated disinvestment to improve the managerial efficiency of loss-making public sector units.
Private sector enterprises are owned, controlled and managed by an individual or group of individuals with a sole objective of earning profit. Various types of private enterprises:
Public sector enterprises are businesses which are owned, controlled and managed by the government. These are either partly or wholly owned by the state or central government. Their objective is social welfare. Various types of public enterprises:
Various types of organisations in the private sector:
- Sole proprietorship
- Joint Hindu family
- Cooperative society
- Joint stock company
- Multinational corporation
Various types or organisations which come under the public sector:
- Departmental undertakings
- Statutory corporations
- Government companies
Life Insurance of India
Bharat Heavy Electricals Limited
Food Corporation of India
Steel Authority of India
Post and Telegraph Department
Reserve Bank of India
Gas Authority of India Limited
National Thermal Power Corporation
Reasons for government company form of organisation to be preferred over other types in the public sector:
- Easy Formation: A government company needs no bill to be passed in the Parliament for its formation. It can be formed through a simple procedure under the Indian Companies Act, 1956.
- Separate Entity: It has its own identity which is separate from that of the government. It has properties in its name and has the right to enter into contracts.
- Administrative Autonomy: A government company has minimum interference from the government. It has maximum autonomy in its actions and decision-making processes, while the other companies are controlled in some manner or the other by the government.
- Efficiency: Government companies are efficient in managing their business and hence are more accountable as compared to other public sector enterprises.
- Competition: They provide healthy competition to private sector enterprises by providing goods and services at reasonable prices and help in restricting unhealthy business practices.
The government maintains a regional balance in the country in the following ways:
- Public sector enterprises were purposely set up in rural areas. This created employment opportunities for the rural people and led to the growth and development of rural areas.
- Setting up of four major steel plants helped in accelerating economic development. It also enhanced ancillary industries bringing about balanced development in all areas.
- The government also established infrastructure facilities such as roads, bridges and railways in rural areas. This made rural areas well connected with the other parts of the country, thereby leading to development of all regions in a balanced way.
Major elements of Industrial Policy 1991:
- Restructure and revive potentially viable public sector units (PSUs)
- Shutting down PSUs which cannot be revived
- Bring down the government equity in all non-strategic PSUs to 26% lower if necessary
- Protecting interests of workers fully
Following are the steps taken to achieve the above-mentioned elements:
- Reduction in the number of reserved public sector industries: In the Industrial Policy of 1956, the government stated that there are 17 industries which are reserved only for the public sector, i.e. only they are allowed to do business in these areas. In the Industrial Policy of 1991, an amendment reduced the restriction to 8 industries, which was further reduced to 3 in the 2001 amendment. These three industries are
i. Atomic Energy
iii. Rail Transport
This was done with the intention to bring about improvement in the public sector. The government realised that although the public sector was vital in bringing about economic development in the nation, the private sector too showed their competence. Thus, competition between the public sector and the private sector would force the public sector to perform better.
- Disinvestment: Disinvestment is selling of equity shares of public sector units to the private or public sector. The government initiated disinvestment to improve the managerial efficiency of loss-making public sector units. Objectives of this move:
i. Utilising large amounts of public funds which were released from the units for various social priority projects such as education, health etc.
ii. Reducing the public debt and burden of interest
iii. Discouraging government's monopoly
iv. Bringing down government control
v. Transferring commercial risk from the public sector to the private sector
- Sick PSUs and private sector to have same policies: Board of Industrial and Financial Reconstruction (BIFR) was given the responsibility of deciding the fate of sick (loss-making) public sector units, i.e. to decide what to do with them-whether to revive or close them. There were many units which could not be revived; hence, they were shut down, while the others were rehabilitated and revived. The government faced opposition and resentment from the workers of shut down units. The government then set up a National Renewal Fund to rehabilitate and refund the workers of shut-down units by compensating them or offering them voluntary retirement plans.
- Memorandum of Understanding (MoU): MoUs were signed between the concerned ministries of the government and the management. These MoUs gave the public sector greater freedom. They had to achieve targets for which they were given operational freedom, but they were also held accountable for the results. This was done with the aim to improve performance.
Role of the public sector industries before 1991:
- Infrastructure development: After independence, India lacked various basic infrastructure facilities such as banking, communication, transport and energy supply. For development, establishment of all these facilities was a necessity. However, the private sector did not show much interest to invest in heavy industries which was the need of that time. Thus, it was assigned to the public sector to mobilise huge amount of investment and take responsibility for infrastructure development.
- Regional balance: Before independence, there were few areas (port towns) where industrialisation led to development. However, many areas were underdeveloped. Thus, the government took steps to develop all the regions and states in a well balanced way which would remove regional disparities to a great extent. The government came up with Five Year Plans which helped them to pay attention to those places which required development.
- Economies of Scale: The term economies of scale means benefits derived from some projects are greater when operated on a large scale. After independence, the private sector was not capable of handling large-scale industries which required huge capital. Also, these industries could not be handled in a small scale way as it would have incurred losses. Thus, the public sector had to handle and operate industries such as electric power, petroleum and natural gas.
- Check on the concentration of economic power: The public sector set up large industries with heavy investment. They passed down the benefits generated from these industries to a large number of employees and workers. This prevented economic power going directly into the hands of the private sector.
- Import substitution: After independence, the government came up with Five Year Plans with the objective of being self-sufficient in all spheres. It wanted to restrict imports while increasing exports. Therefore, public sector units were established which manufactured heavy machinery and industrial tools domestically. Industries such as Metals and Minerals Trading Corporation of India (MMTC) and the State Trading Corporation (STC) were established to increase exports.
Although not impossible, it is difficult for public sector companies to compete with the private sector in terms of profit and efficiency. The reasons are
- Objectives: Private organisations are set up with the objective of making profit. For public sector enterprises, social welfare is of primary importance; hence, profit is not the prime objective for public sector units.
- Ownership: Public sector units are solely owned and controlled by the government. Thus, the management part is fully in the hands of the government which may not necessarily make economically sound policies.
- Management: Private sector companies are managed by professional people leading to higher efficiency. Public sector companies are managed by government officials who may or may not have professional expertise.
Global enterprises are known as multi-national companies. These operate on a global scale wherein their industrial and marketing operations take place through a network of branches in various countries. These companies capture the biggest share in the market as compared to others. Thus, they prove to be superior to other business organisations. Reasons for the same:
- Funds Availability: Business operations spread out over the world generate high credibility for global enterprises. This brings them in a position where they use their goodwill to borrow funds from international organisations. Also, they are able to generate huge capital/funds for themselves from different sources such as equity shares, bonds and debentures. This helps them to sustain any financial crisis.
- Risk Diversification: These companies operate in different parts of the world. They operate through a network of branches and subsidiaries in host countries. Thus, they are able to compensate the losses faced in a country with the profits gained in other countries.
- Advanced Technology: Global enterprises invest huge amounts in research and development of technology. This helps them to conform to international standards as they possess superior techniques and methods of production.
- Marketing Strategies: These enterprises use aggressive marketing strategies to increase their sales. They have reliable and up-to-date market information which makes their strategies more effective. Also, their advertising and sales promotions are effectual on consumers.
A joint venture is a business when two or more independent firms with a common goal and mutual benefit come together. They pool their capital, technology and expertise to achieve their set targets. Benefits of such kind of business are
- Increase in resources: In this type of business, as there are two or more firms, resources and capacity increase. This enables them to grow quickly and efficiently.
- Market expansion: Entering a venture with firms of another region helps in the expansion of the market base. Also, advantage can be taken of the well established distribution system of local firms.
- Innovation: As two or more firms come together, it gives them access to new ideas and technology which help in the innovation of new products. These new products enable businesses to sustain in today's competitive market.
- Low cost of production: When international organisations come together with firms in the host country, they are able to benefit from the low cost of raw materials and labour of the country. Thus, they are able to produce products of better quality at cheaper cost.
- Goodwill: When two businesses come together, they tend to profit from the goodwill already established by the other firm. This may give the joint venture an edge when entering a new market.
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