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Q1. Identify the objectives behind setting up of Public Sector Enterprises. Explain how the objectives have been classified. Examine the role of State Level Public Undertakings.

Ans. The objectives behind the establishment of Public Sector Enterprises (PSEs) are multifaceted, spanning from economic development to social justice. These objectives have evolved over time with the changing needs of the country. Objectives of Setting up PSEs:

• To accelerate economic development: PSEs were established to invest in basic and heavy industries such as steel, heavy engineering, and machine tools, where large-scale capital investment and long gestation periods were required, and the private sector was unable or unwilling to invest.
• To control the commanding heights of the economy: The government used PSEs to establish control over the ‘commanding heights’ of the economy to steer it along the path of planned development.
• To promote balanced regional development: By locating industrial activities in backward regions, PSEs aimed to reduce regional disparities and foster growth in all parts of the country.
• To generate employment: PSEs were seen as a significant instrument for creating large-scale employment opportunities, thereby addressing the problem of unemployment.
• To generate resources for reinvestment: It was expected that PSEs would earn profits and generate surpluses that could be reinvested for further development and expansion.
• To prevent the concentration of wealth and economic power: The establishment of PSEs was intended to check the growth of private monopolies and ensure a more equitable distribution of wealth.

Classification of Objectives:

The objectives of PSEs can be broadly classified into the following categories:

1. National Objectives: These are the broad, macro-level goals such as achieving self-reliance, promoting planned development, and strengthening national security.
2. Sectoral Objectives: These relate to the development of specific sectors like infrastructure (power, transport), heavy industry, and financial services.
3. Enterprise-level Objectives: These are specific to each PSE and include goals like professionalism, productivity, efficiency, and profitability. These are also known as Commercial Objectives .
4. Social Objectives: These include employment generation, balanced regional development, employee welfare, and development of ancillary industries.

Role of State Level Public Undertakings (SLPUs):

State Level Public Undertakings are important instruments of the economic and social policies of state governments. Their role includes:

• Regional development within the state: They promote industry and commerce in backward regions within the state’s boundaries.
• Development of infrastructure: SLPUs like State Electricity Boards, State Road Transport Corporations, and Water Supply Boards provide critical infrastructure for the state.
• Public utility services: They provide essential services such as urban transport, housing, and civic amenities.
• Local employment: SLPUs are significant sources of employment for the local population.
• Policy implementation: They act as an agency to implement specific development plans and policies of the state government.

However, many SLPUs are plagued by financial mismanagement, political interference, and inefficiency, which hampers the fulfillment of their objectives.

Q2. Examine the various forms of management of non-departmental undertakings. Explain how they can be differentiated on the basis of their nature of business.

Ans. Non-departmental undertakings are a form of public enterprise that operates outside the direct control of a government department. They are created for greater autonomy and operational flexibility. The main forms of their management are as follows: Forms of Management of Non-departmental Undertakings:

1. Statutory or Public Corporations:
   • These are established by a special Act of Parliament or a State Legislature.
   • The Act defines their objectives, powers, and functions. Examples: Life Insurance Corporation of India (LIC), Reserve Bank of India (RBI), Damodar Valley Corporation (DVC).
   • They have a separate legal entity, and can enter into contracts and sue in their own name.
   • They are not funded directly from the government budget but have the autonomy to earn their own income and receive loans or equity from the government.
   • Their board is appointed by the government, and they are accountable to the Parliament or Legislature.
2. Government Companies:
   • These are companies registered under the Companies Act (currently, the Companies Act, 2013).
   • The government holds at least 51% of the paid-up share capital in these companies. Examples: Steel Authority of India Ltd. (SAIL), Bharat Heavy Electricals Ltd. (BHEL), Hindustan Machine Tools (HMT).
   • They possess operational flexibility and autonomy similar to a private limited company.
   • They are managed by a Board of Directors, with most directors appointed by the government.
   • They operate on commercial principles and can compete with private sector companies.
3. Holding Companies:
   • This is a form of government company that controls one or more other companies (subsidiaries).
   • The holding company structure allows for coordination and policy integration among different units within a particular sector.
   • It helps in maintaining overall strategic control while giving substantial operational autonomy to the subsidiary companies. Example: Coal India Limited (CIL), which has several subsidiary companies operating in different coalfields.

Differentiation based on Nature of Business:

The choice of these forms often depends on the nature of the enterprise’s business:

• Industrial and Manufacturing Undertakings: These enterprises are usually organised as Government Companies . This format gives them the commercial flexibility, quick decision-making, and ability to respond to market conditions that are essential in a competitive industrial environment (e.g., SAIL, BHEL).
• Financial and Insurance Institutions: These are often set up as Statutory Corporations . This structure helps them gain public trust and provides them a degree of autonomy from government interference, which is crucial for financial stability and prudent management (e.g., LIC, RBI).
• Public Utilities and Services: Public utilities like power, transport, and water supply can be either statutory corporations (e.g., State Electricity Boards) or government companies. The corporation form is used when service provision is the main objective, while the company form is used when commercial viability is emphasized.
• Promotional and Developmental Bodies: Enterprises engaged in promotional and developmental functions, like the National Small Industries Corporation, are often set up as government companies to give them the flexibility needed to promote specific sectors.

Q3. Explain the ways through which Parliament exercises control over Public Enterprises.

Ans. Public Enterprises (PEs) are financed by public money and are expected to work in the public interest. Therefore, in a democracy, the legislature, i.e., the Parliament, exercises control over their functioning to ensure their accountability. Parliament exercises control over Public Enterprises in the following ways:

1. Questions in Parliament:
   • Members of Parliament (MPs) can ask questions to the concerned minister about the working of PEs.
   • These can be Starred (requiring an oral answer), Unstarred (requiring a written answer), or Short Notice Questions . This keeps the ministers and the enterprise management on their toes.
2. Debates and Discussions:
   • The performance, policies, and problems of PEs can be discussed during debates on the President’s address, discussions on demands for grants for ministries, or on specific motions.
   • This provides an opportunity for a broader review of the functioning of PEs.
3. Parliamentary Committees: This is the most effective mechanism of control.
   • Committee on Public Undertakings (COPU): This committee is specially created to examine PEs. It examines the reports and accounts of PEs, checks if they are being managed according to prudent business principles, and examines the reports of the Comptroller and Auditor General of India (CAG).
   • Public Accounts Committee (PAC): This committee scrutinizes the audit reports of the CAG relating to PEs and ensures that money has been spent for the purpose for which it was sanctioned.
   • Estimates Committee: This committee examines whether the money is well laid out within the limits of the policy implied in the estimates and suggests alternative policies for efficiency and economy in PEs.
4. Submission of Annual Reports and Accounts:
   • Every PE is required to table its annual report and audited accounts in both Houses of Parliament.
   • This provides a basis for MPs to evaluate the performance of the enterprise and raise questions on it.
5. Control through Audit:
   • The Comptroller and Auditor General of India (CAG) has the power to audit the accounts of government companies and corporations.
   • The CAG’s audit reports are submitted to Parliament and are examined by the parliamentary committees, bringing financial irregularities and inefficiencies to light.
6. Approval of Budgets and Grants:
   • Parliamentary approval is needed for providing funds to PEs in the form of equity or loans. During the budget debate, MPs can review the performance of the concerned enterprise.

Through these mechanisms, Parliament ensures that PEs work according to their stated objectives, are financially prudent, and are accountable to the public at large.

Q4. How can the need and importance of social responsibility of business be determined? Analyse how business fulfills its responsibilities towards various groups.

Ans. Social Responsibility of Business, or Corporate Social Responsibility (CSR), refers to the idea that businesses should contribute to the well-being of society, in addition to just making profits. Its need and importance can be determined from several perspectives. Determining the Need and Importance of Social Responsibility:

• Ethical Argument: Business uses society’s resources (human, natural), so it has a moral duty to contribute to solving society’s problems, such as poverty, pollution, and illiteracy.
• Long-term Self-interest: A healthy, educated, and stable society creates a better business environment. Socially responsible companies enjoy a better brand image and customer loyalty, which ultimately leads to long-term profitability.
• Public Image and Reputation: Social responsibility initiatives enhance a company’s reputation, making it more attractive to customers, investors, and talented employees.
• Avoidance of Government Regulation: If businesses voluntarily adopt social responsibilities, they can avoid stricter government regulations and interference.
• Stakeholder Expectations: In modern society, customers, employees, investors, and the community expect businesses to not just provide good products and services, but also to behave ethically and in a socially responsible manner.
• Availability of Resources: Businesses have financial and managerial resources that can be effectively used to solve social problems.

How Business Fulfills Responsibilities Towards Various Groups:

A business fulfills its responsibilities towards its various stakeholders:

1. Towards Shareholders or Owners:
   • Ensuring a fair and stable return on investment.
   • Ensuring the safety of their capital and its efficient utilization.
   • Providing accurate and regular information about the company’s working.
2. Towards Employees:
   • Providing fair wages and allowances.
   • Ensuring a safe and healthy work environment.
   • Providing opportunities for skill development and career advancement.
   • Respecting their right to form unions.
3. Towards Customers:
   • Supplying good quality products and services at fair prices.
   • Avoiding misleading advertisements and unfair trade practices.
   • Providing after-sales service and prompt redressal of grievances.
4. Towards Suppliers:
   • Making prompt and fair payments.
   • Establishing fair trade terms and long-term relationships.
5. Towards the Government:
   • Paying taxes honestly.
   • Complying with all applicable laws and regulations.
   • Avoiding corruption and unfair means.
6. Towards the Community and Society:
   • Protecting the environment and minimizing pollution.
   • Contributing to the development of the local community, e.g., by building schools, hospitals.
   • Creating employment opportunities for local people.
   • Helping in the upliftment of weaker sections of society.

By fulfilling these responsibilities, a business not only makes a positive contribution to society but also ensures its own sustainability and long-term success.

Q5. Explain what is the need for setting up of State Level Public Enterprises. Analyse how the objective behind setting them is fulfilled.

Ans. State Level Public Enterprises (SLPEs) are business organizations established and managed by state governments. The need for their establishment arises from the specific economic, social, and developmental needs of a state, which are often outside the scope of central public sector undertakings. Need for Setting up SLPEs:

1. As an Instrument of State Policy: SLPEs serve as a crucial tool for implementing the economic and social policies of the state government. They allow the state to directly influence its development priorities.
2. Balanced Regional Development: Central PSEs are often concentrated in locations of national importance. SLPEs help in addressing intra-state regional imbalances by locating investments and industries in backward and underdeveloped areas within the state.
3. Development of Infrastructure: The development and management of critical infrastructure like power generation and distribution (State Electricity Boards), road transport (State Road Transport Corporations), and water supply are primarily a state responsibility, often fulfilled through SLPEs.
4. Providing Public Utility Services: These enterprises provide essential public utility services like urban transport, housing, and dairy development that are vital for the quality of life of citizens.
5. Generation of Local Employment: SLPEs create significant employment opportunities for the local population within the state, thus boosting the local economy.
6. Mobilization of Resources: Certain SLPEs, especially in sectors like mining and mineral development, can be a source of revenue generation for the state government.

Analysis of the Fulfillment of Objectives:

The success of SLPEs in meeting their objectives presents a mixed picture.

• Successes:
  • Infrastructure Creation: Despite many challenges, State Transport Corporations and Electricity Boards have played a significant role in expanding connectivity and electrification in states.
  • Industrial Development: State Industrial Development Corporations (SIDCs) have helped in setting up industrial estates and promoting small and medium enterprises in many states.
  • Social Objectives: They have certainly contributed to creating local employment and bringing some degree of development to backward areas.
• Failures and Challenges:
  • Financial Performance: A majority of SLPEs are running into heavy losses and have become a major drain on the state exchequer. Poor financial performance limits their ability to expand and modernize.
  • Political Interference: SLPEs often suffer from excessive political interference in appointments, pricing, and investment decisions, which undermines their commercial functioning.
  • Lack of Professional Management: They often lack professional management and are affected by bureaucratic red tape.
  • Overstaffing: Many SLPEs are overstaffed due to recruitment done for political reasons, which increases their operational costs.

Conclusion:

In summary, while SLPEs have played a role in fulfilling state-specific infrastructure and some social objectives, their performance in meeting commercial objectives has been largely unsuccessful. Their continued viability requires significant reforms, professionalization, and a reduction in political interference.

Q6. Describe the types and composition of the Governing Boards of Public Enterprises. Explain their functions.

Ans. The Governing Board of a Public Enterprise (PE) is the apex management body responsible for the direction, supervision, and control of the enterprise. The structure and type of the board significantly influence the effectiveness and autonomy of the enterprise. Types and Composition of Governing Boards: Mainly, three types of boards are found in public enterprises:

1. Policy Board:
   • Its composition mainly consists of part-time members , including government officials, experts, and representatives of various interest groups.
   • This board does not interfere in day-to-day management but focuses on broad policy matters and strategic direction. Its aim is to provide external expertise and a wider perspective to the enterprise.
2. Functional or Executive Board:
   • It predominantly consists of full-time functional directors , such as Director (Finance), Director (Technical), Director (HR), etc.
   • The Chairman and Managing Director (CMD) usually heads the board. This board is directly responsible for the day-to-day operations and management of the enterprise.
3. Mixed Board:
   • This is the most common model for public enterprises in India. It is a combination of the features of both policy and functional boards.
   • Composition: It includes:
     • Chairman and Managing Director (CMD): The chief executive of the enterprise.
     • Functional Directors: Full-time heads of major functional areas.
     • Government Directors: Representatives from the administrative ministry and the Ministry of Finance, who represent the government’s interests. They are usually part-time.
     • Independent Directors: Non-executive directors from outside the government and the company, appointed for their experience and expertise. They help ensure corporate governance and fairness.
     • Worker/Employee Directors (in some cases): To represent the interests of the employees.

Functions of the Board:

The key functions of the board of a public enterprise are as follows:

• Trusteeship Function: The board acts as a trustee of the shareholder (the government). Its primary duty is to protect the shareholder’s investment and enhance its value.
• Statutory Functions: The board ensures that the enterprise complies with the Companies Act, the concerned Act (in case of a statutory corporation), and all other applicable laws.
• Policy-making Function: The board sets the company’s vision, mission, long-term objectives, and strategies. It approves the annual budget, capital expenditure, and major expansion plans.
• Supervisory and Control Function: The board monitors the performance of the top management and evaluates results against set targets. It appoints key executives and reviews their performance.
• Accountability Function: The board ensures the enterprise’s accountability to the government, Parliament, and the public. It finalizes the annual reports and accounts and presents them to the government.
• Corporate Governance: It is responsible for setting the highest standards of good corporate governance by ensuring ethical conduct, transparency, and fairness towards all stakeholders.

Q7. What are the responsibilities related to financial functions of Public Enterprises? How are the capital expenditure relating to new projects examined by a relevant Finance Department?

Ans. The financial functions of Public Enterprises (PEs) are critical for their survival, growth, and efficiency. These responsibilities ensure that public funds are used prudently and effectively. Responsibilities related to Financial Functions of PEs:

1. Financial Planning and Forecasting: Estimating the short-term and long-term financial needs of the enterprise. This includes forecasting cash flows and planning for future capital requirements.
2. Capital Structure Management: Determining the optimal mix of equity and debt. Arranging funds from various sources such as equity from the government, loans from banks and financial institutions, issuance of bonds, and public issues.
3. Working Capital Management: Efficient management of current assets (like inventory, receivables) and current liabilities to ensure liquidity and avoid blocking of unnecessary funds.
4. Investment Decisions (Capital Budgeting): Evaluating long-term investment proposals like new projects, expansion, or modernization schemes. This involves using techniques like Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period.
5. Financial Control and Reporting: Establishing budgets to monitor performance, controlling costs, conducting internal audits, and preparing financial statements for management, government, and Parliament.
6. Dividend Policy: Recommending the rate of dividend to be paid to the government (shareholder), which strikes a balance between profitability and future investment needs.
7. Pricing Policy: Determining the prices for products and services that take into account both social obligations and commercial viability.

Examination of Capital Expenditure on New Projects:

Capital expenditure proposals for new projects in PEs are examined through a rigorous process to ensure they are technically feasible, financially viable, and in line with national priorities. This examination is done by the relevant Finance Department (Ministry of Finance) and other government bodies. The process is as follows:

1. Preparation of Detailed Project Report (DPR): First, the PSE itself prepares a DPR. It includes a techno-economic evaluation of the project, cost estimates, financing plan, and financial viability analysis (NPV, IRR).
2. Scrutiny by Administrative Ministry: The DPR is sent to the concerned administrative ministry (e.g., SAIL under the Ministry of Steel), which conducts a preliminary examination.
3. Appraisal by the Public Investment Board (PIB):
   • All projects above a certain financial threshold (e.g., ₹200 crores) are sent to the PIB.
   • The PIB is a high-level inter-ministerial body chaired by the Secretary (Expenditure) in the Ministry of Finance.
   • The PIB appraises the project’s financial and economic viability, availability of resources, and its impact on the national economy in depth.
4. Approval by the Cabinet Committee on Economic Affairs (CCEA):
   • Projects that are even larger than the PIB’s limit or are of strategic importance are sent to the CCEA for final approval.
   • The CCEA is chaired by the Prime Minister. This is the highest level of approval by the government.
5. Appraisal by NITI Aayog: Large infrastructure projects may also be vetted by the NITI Aayog for their long-term strategic implications and alignment with national development goals.

This multi-level scrutiny process ensures that public funds are invested only in projects that are economically and socially beneficial for the country.

Q8. List out the strategic issues which arise out of disinvestment.

Ans. Disinvestment means the sale of the government’s shareholding or assets in Public Sector Enterprises (PSEs). While it is a significant economic reform measure, it also gives rise to several complex strategic issues. The major strategic issues arising out of disinvestment are listed below:

• Valuation of Shares:
  • This is the most critical and controversial issue. Determining the correct price of the shares to be sold is a major challenge.
  • Under-valuation leads to a loss to the exchequer and undue gains for private buyers, leading to allegations of corruption.
  • Over-valuation can lead to the failure of the issue as investors will not be attracted.
• Selection of Strategic Partner:
  • In a Strategic Sale, where management control is also transferred, the selection of the right private partner is crucial.
  • It is essential to ensure that the partner brings in technology, capital, and better management skills, and is not just interested in asset stripping.
• Employee Concerns:
  • Disinvestment often creates fear among employees regarding job losses, changes in service conditions, and loss of social security.
  • This often results in strong resistance, strikes, and protests by trade unions, which can stall the process. Protecting employee interests is a key strategic challenge.
• Loss of Public Control:
  • Especially in strategic sectors like defence, oil, or telecommunications, disinvestment means losing government control over a critical asset.
  • This can have implications for national security, pricing, and availability of services, which may be against the public interest.
• Use of Disinvestment Proceeds:
  • There is a constant debate on how the funds raised should be utilized.
  • Options include: bridging the fiscal deficit, financing social sector schemes (like health, education), or using the funds to restructure other sick PSEs. The prudent use of this income is a strategic decision.
• Impact on Market Structure:
  • Disinvestment can lead to the creation of a private monopoly if a dominant private player acquires the PSE.
  • This could reduce competition and lead to higher prices for consumers, which is contrary to the objective of disinvestment.
• Timing of Disinvestment:
  • The timing of the sale is critical to get the best price. A sale during a market downturn can result in poor realization.
  • Choosing the right time based on political and market conditions is a strategic challenge.
• Political Opposition:
  • Disinvestment is often a politically sensitive issue. It faces opposition from political parties, trade unions, and sometimes the public, which can derail the entire process.