Unit-1

Business Definition
The business is an activity
• ‘Business’ refers to human activities
which is primarily pursued
which involve production or exchange with the object of earning
of goods and services regularly with profits.
the object of earning profit. A business activity involves
• Business may be defined as an
production, exchange of
activity involving regular production or goods & services to earn
purchase of goods and services for profits or earn a living. The
sale, transfer and exchange with an word business means a state
object of earning profit. of being busy.
“Business may be defined as
an activity in which different
persons exchange something
of value, whether goods or
services, for mutual gain or
benefit” – Peterson and
Plowman is an enterprise
“Business
engaged in the production and
distribution of goods for sale
in the market or rendering
service for a price.” – R. N.
Successful persons in business
Before starting a business
 What skills do you have?
 Where does your passion lie?
 Where is your area of expertise?
 How much can you afford to spend, knowing

that most businesses fail?

 How much capital do you need?
 What sort of lifestyle do you want to live?
 Are you even ready to be an entrepreneur?
 Characteristics

Human Activity

Continous
Creation of Economic
Utility activity

Entrepreneurshi
Profit Motive
p
Human Activity : Business is a human activity which
makes available goods and services to the society. It is
not only dependent on making available the goods and
services or the mere production of these but also
depends on the exchange of value which is provided in
return because if you are engaged in giving gifts to
somebody then it will not be treated as business.
Continuous Economic Activity: In business an
economic activity must be repeated again and again
because if an entrepreneur does not do that it will not
be treated as business. For example, if a person sells
his own house, this activity does not come under the
framework of business.
Profit Motive: Any economic activity which leads to
generation of profit is considered as business.
Therefore, intension should be to earn profit otherwise if
a person is engaged in social service or preaching about
the religion cannot be treated as business.

Entrepreneurship: One cannot run any sort of business without

the element of entrepreneurship irrespective of the size of the
business. Business can only be run by a daring person who has
the ability to face risk of loss. Because no business is there where
the element of risk is missing. Involvement of element of risk of
loss makes the business world more challenging and to face
financial challenge is not everybody’s cup of tea.
Creation of Utility: A man does not produce anything in a way,
he only converts the form of resources which are provided by the
nature. The business changes the form, place and possession
utility of goods and makes them available in usable form. The
business creates the utility of the things so that these can be
consumed.
Business Objectives
 A business objective may be defined as the purpose or
the reason for the existence of the business in the
society.
 If we analyse the objective of a business, it will
provide answer to the question, namely, what is it for?
The objective provides the direction towards which all
business activities will be directed.
 Though profit motive constitutes the primary objective
of business activities, it should not lead us to conclude
that profit is the sole objective of a business.
 The objectives of the business are to be laid down
keeping in view the prevailing social, economic and
political environment.
 Objectives of a business are multi-dimensional in
nature.
 Earning of Profits –
Profits are needed to Satisfaction of
provide adequate reward to Customers – The
the entrepreneur and to
provide funds for future
survival of the business
depends upon the Innovation Effective Utilisation of
growth. Entrepreneurship is satisfaction
customers. Thus, the
of – Innovation Resources – Business
requires the use of men,
one of the important means developing machines and materials
factors of production. Just business must aim at which are considered
as other factors get their winning and satisfying new technology,
scarce resources. Every
rewards, the entrepreneur the customers. Peter F. new products and business is expected to
must get reward for his Drucker has rightly their multiple uses. make the best possible use
efforts and taking of risk. said, “There is only one Business cannot of these resources. This
Moreover, every valid definition of objective can be achieved
succeed without by employing efficient
businessman will like to see business purpose, i.e.,
that the business he is to create a customer.”
designing new personnel, making full
products and utilisation of machines and
managing should grow. This Customers are created reducing wastage of raw
is possible only if the through advertisement finding their new materials.
business earns sufficient and sales promotion uses.
profits for investing them and delivering them
into the business. ‘want satisfaction’.
expansion.

Economic Objectives
 Service
munity Protection – Modern
Employees’ business
of Environment
Welfare –
– organisations Supply Price
Adoption of
Generation of Fair TradeofPractices
Employment
Quality–Goods
The business
Opportunities
at Fairshould
age in community service to fulfil their social
It is an important responsibility of follow fair business practices at all times. It should avoid
the business to promote
ponsibility and thereby enhance their
Everypublic image.
business expand its operations to
se the welfare
ensure safety of its employees. Besides
the local anti-social
should practices
grow and like
providing fair wages,
The hoarding,
business mustblack-marketing,
supply quality over-
produ
munity
shouldservice may be carried out by
create running
new jobs for the society. Further, a business should
e protection of business should also
neighbourhood provide charging the
good working buyers, etc.
conditions, It
the customers. should
Thealso not
productsindulge in unf
ensaries andthe
schools, encouraging
employ social activities
suitable people and
without any discrimination based on should be d
uld take canteen facility, housing, transport
adequate measures to check air, trade practices
and medicallike
(notspurious
facilities,
duplicate) products or misleading
The prices char
ting up training centres for the unemployed youths in the caste, creed, sexandorsafe.
religion.
advertisements.should also be reasonable.
kward
tion. areas.etc., to the employees.
Social Objectives
Human Objectives:
 A business is directly linked with two important

groups, namely, – (a) customers, and (b)

employees. Both these groups must have a feeling
of having been treated as human beings by the
business enterprise.
 As human beings, customers expect courteous
service and fair dealings from the business.
 The employees look forward to the business

enterprise for the following objectives:

 (i) The employees are treated as partners in the

business and not as inferior lot; they should get

fair wages and healthy working conditions;
 (ii) They are able to acquire and develop new skills

in the process of employment; and

 (iii) They derive job satisfaction.
 National Objectives

 These objectives are concerned with the goals of

the nation.
 Every business enterprise must contribute
to the national goals such as:
 (i) Achievement of self-sufficiency in production of
goods and services,
 (ii) Import substitution and export promotion,
 (iii) Development of small scale and ancillary
industries,
 (iv) Development of backward regions,
 (v) Economic development of the nation.
IMPORTANCE OF BUSINESS
 Business is an integral part of modern society.
 It is an organized and systematic activity for earning

profit.
 It is concerned with activities of people working

towards a common economic goal

 Modern society cannot exist without business.

 The importance of business can be described as

follows
(a) Business improves the standard of living of the
people by providing better quality and large variety
of goods and services at the right time and at the
right place.
(b) It provides opportunities to work and earn a
livelihood. Thus, it generates employment in the
country, which in turn reduces poverty
 IMPORTANCE OF BUSINESS

It utilizes the scarce resources of the nation and facilitates mass

production of goods and services.

It improves national image by producing and exporting quality goods and services to
foreign countries. By participating in international trade fairs and exhibitions it also
demonstrates the progress and achievements of its own country to the outside world.

It enables the people of a country to use quality goods of international standard. This
is possible by way of importing goods from foreign countries or by producing quality
goods in the country by applying modern methods of production.

It gives better return to the investors on their capital investment and also
provides opportunities to grow and expand the business
 It promotes social interest by providing tourist
services, sponsoring cultural programmes, trade
shows etc. in the country, which enable people of
different parts of the country to exchange their
culture, traditions and practices. Thus, it promotes
national integration.

It also facilitates exchange of culture among the

people of different nations and thus, maintains
international harmony and peace.

It helps in the development of science and

technology. It spends large amount of money on
research and development in search of new
products and services. Hence a number of
innovative products and services are developed
through industrial research.
 FORMS OF BUSINESS ORGANISATION

 Who brings the required capital, takes the responsibility of

arranging other resources, puts them into action, and
coordinates and controls the activities to earn the desired
profits?
 If you look around, you will find that a small grocery shop is
owned and run by a single individual who performs all these
activities.
 But, in big businesses, it may not be possible for a single
person to perform all these activities. So in such cases two or
more persons join hands to finance and manage the business
properly and share its profit as per their agreement.
 Thus, business organizations may be owned and managed by
a single individual or group of individuals who may form a
partnership firm or a joint stock company.
 Such arrangement of ownership and management is termed
as a form of business organisation.
 A business organisation usually takes the
following forms in India:
 A. PRIVATE SECTOR
 (1) Sole proprietorship
 (2) Partnership
 (3) Joint Stock Company
 (4) Cooperative Organizations
 B. PUBLIC SECTOR
 1.Public corporations
 2.Government companies
 C. JOINT SECTOR
SOLE PROPRIETORSHIP
 Gopal runs a grocery shop in the local market. He buys goods
from the wholesale market and sells it to the customers as per
their requirement. By doing so he earns some profit. He had
started his business two years ago by investing Rs. 1 lakh, which
he had borrowed from his friend. Today, he is running his
business successfully, earning a good profit, and has been able
to pay back the borrowed money. He has also employed two
persons to help him in the shop. Gopal says, he is the owner of a
sole proprietor concern
 The term ‘sole’ means single and ‘proprietorship’ means
‘ownership’. So, only one person is the owner of the business
organisation. This means, that a form of business
organization in which a single individual owns and
manages the business, takes the profits and bears the
losses, is known as sole proprietorship form of business
organisation.
Definition of Sole Proprietorship

 J.L. Hanson: “A type of business unit where

one person is solely responsible for
providing the capital and bearing the risk of
the enterprise, and for the management of
the business.”
 ‘Sole Proprietorship’ from of business
organisation refers to a business enterprise
exclusively owned, managed and controlled
by a single person with all authority,
responsibility and risk.
CHARACTERISTICS OF SOLE PROPRIETORSHIP FORM OF
BUSINESS ORGANISATION

 (a) Single Ownership: The sole proprietorship form of

business organisation has a single owner who
himself/herself starts the business by bringing together
all the resources.
 (b) No Separation of Ownership and
Management: The owner himself/herself manages the
business as per his/her own skill and intelligence. There
is no separation of ownership and management as is
the case with company form of business organization
 Less Legal Formalities: The formation and operation
of a sole proprietorship form of business organisation
does not involve any legal formalities. Thus, its
formation is quite easy and simple.
 (d) No Separate Entity: The business unit does not have
an entity separate from the owner. The businessman and
the business enterprise are one and the same, and the
businessman is responsible for everything that happens in
his business unit.
 (e) No Sharing of Profit and Loss: The sole proprietor
enjoys the profits alone. At the same time, the entire loss is
also borne by him. No other person is there to share the
profits and losses of the business. He alone bears the risks
and reaps the profits.
 (f) Unlimited Liability: The liability of the sole proprietor
is unlimited. In case of loss, if his business assets are not
enough to pay the business liabilities, his personal property
can also be utilised to pay off the liabilities of the business.
 (g) One-man Control: The controlling power of the sole
proprietorship business always remains with the owner.
He/she runs the business as per his/her own will.
MERITS OF SOLE PROPRIETORSHIP FORM OF BUSINESS
ORGANISATION


(a) Easy to Form and Wind Up: It is very easy and
simple to form a sole proprietorship form of business
organisation. No legal formalities are required to be
observed. Similarly,the business can be wind up any
time if the proprietor so decides.
 (b) Quick Decision and Prompt Action: As stated
earlier, nobody interferes in the affairs of the sole
proprietary organisation. So he/she can take quick
decisions on the various issues relating to business
and accordingly prompt action can be taken.
 (c) Direct Motivation: In sole proprietorship form of
business organisations. the entire profit of the
business goes to the owner. This motivates the
proprietor to work hard and run the business
efficiently
 (d) Flexibility in Operation: It is very easy to effect
changes as per the requirements of the business. The
expansion or curtailment of business activities does not
require many formalities as in the case of other forms of
business organisation.
 (e) Maintenance of Business Secrets: The business
secrets are known only to the proprietor. He is not required
to disclose any information to others unless and until
hehimself so decides. He is also not bound to publish his
business accounts.
 (f) Personal Touch: Since the proprietor himself handles
everything relating to business, it is easy to maintain a
good personal contact with the customers and employees.
By knowing the likes, dislikes and tastes of the customers,
the proprietor can adjust his operations accordingly.
Similarly, as the employees are few and work directly under
the proprietor, it helps in maintaining a harmonious
relationship with them, and run the business smoothly.
LIMITATIONS OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION

 (a) Limited Resources: The resources of a sole proprietor are

always limited. Being the single owner it is not always possible
to arrange sufficient funds from his own sources. Again
borrowing funds from friends and relatives or from banks has
its own implications. So, the proprietor has a limited capacity
to raise funds for his business.
 (b) Lack of Continuity: The continuity of the business is
linked with the life of the proprietor. Illness, death or
insolvency of the proprietor can lead to closure of the
business. Thus, the continuity of business is uncertain.
 (c) Unlimited Liability: You have already learnt that there is
no separate entity of the business from its owner. In the eyes
of law the proprietor and the business are one and the same.
So personal properties of the owner can also be used to meet
the business obligations and debts.
 (d) Not Suitable for Large Scale Operations :
Since the resources and the managerial ability is
limited, sole proprietorship form of business
organisation is not suitable for large-scale business.
 (e) Limited Managerial Expertise: A sole
proprietorship from of business organisation always
suffers from lack of managerial expertise. A single
person may not be an expert in all fields like,
purchasing, selling, financing etc. Again, because of
limited financial resources, and the size of the
business it is also not possible to engage the
professionalmanagers in sole proprietorship form of
business organizations
 SUITABILITY OF SOLE PROPRIETORSHIP FORM OF BUSINESS ORGANISATION

 Areas in which sole proprietorship form of

business organisation is most suitable. It can be
stated that the sole proprietorship is suitable
where the market is limited, localised and the
customers give importance to personal
attention. It is also considered suitable where
the capital requirement is small and risk
involved is limited. It is also considered suitable
for the production of goods and services which
involve manual skill e.g., handicrafts, filigree
work, jewelry, tailoring, haircutting etc.
 PARTNERSHIP
 A textile factory is going to be started in the nearby area where
Gopal is carrying on his business. As a businessman, he is now in
a jubilant mood. He is thinking that once the textile factory is set
up, he will get more customers; the sales will increase and he will
earn more profit. But, for all these, he will have to expand his
business, and for this he needs more money. The major problem is
how to arrange the additional funds. He has the option of getting
loans from the banks. But the fear of loss comes to his mind again
and again. He does not want to take that risk. Another option is
that he may join hands with some other person. By doing so, more
resources can be raised, Work can be shared, and business can be
run in a better way. The risk of loss will also be shared. But this
involves a new form of business organisation known as
Partnership organisation. Gopal has to gain clarity on the exact
nature of this form of business organisation, its pros and cons
before he goes in for it.
 Partnership’ is an association of two or more persons who
pool their financial and managerial resources and agree to
carry on a business, and share its profit. The persons who
form a partnership are individually known as partners and
collectively a firm or partnership firm
 Let’s assume that Gopal joins hand with Rahim to start a big
grocery shop. Here both Gopal and Rahim are called partners who
are running the partnership firm jointly. Both of them will pool
their resources and carry on business by applying their expertise.
They will share the profits and losses in the agreed ratio. In fact,
for all terms and conditions of their working, they have to sit
together to decide about all aspects. There must be an agreement
between them. The agreement may be in oral, written or implied.
When the agreement is in writing it is termed as partnership deed.
However, in the absence of an agreement, the provisions of the
Indian Partnership Act 1932 shall apply
 Partnership form of business
organisation in India is governed by
the Indian Partnership Act, 1932
which defines partnership as “the
relation between persons who have
agreed to share the profits of the
business carried on by all or any of
them acting for all”.
CHARACTERISTICS OF PARTNERSHIP FORM OF BUSINESS
ORGANISATION
 Based on the definition of partnership as given above, the various
characteristics of partnership form of business organisation, can
be summarised as follows:
 (a) Two or More Persons: To form a partnership firm atleast two
persons are required. The maximum limit on the number of
persons is ten for banking business and 20 for other businesses. If
the number exceeds the above limit, the partnership becomes
illegal and the relationship among them cannot be called
partnership.
 (b) Contractual Relationship: Partnership is created by an
agreement among the persons who have agreed to join hands.
Such persons must be competent to 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 firm i.e., he can have share in the profits without any
obligation for losses.
 (c) Sharing Profits and Business: There must be an agreement
among the partners to share the profits and losses of the business
of the partnership firm. If two or more persons share the income of
 (d) Existence of Lawful Business: The business of which
the persons have agreed to share the profit must be lawful.
Any agreement to indulge in smuggling, black marketing
etc. cannot be called partnership business in the eyes of
law.
 (e) Principal Agent Relationship: There must be an
agency relationship between the partners. Every partner is
the principal as well as the agent of the firm. When a
partner deals with other parties he/she acts as an agent of
other partners, and at the same time the other partners
become the principal.
 f. Unlimited Liability: The partners of the firm have
unlimited liability. They are jointly as well as individually
liable for the debts and obligations of the firms. If the
assets of the firm are insufficient to meet the firm’s
liabilities, the personal properties of the partners can also
be utilised for this purpose. However, the liability of a minor
partner is limited to the extent of his share in the profits.
 (g) Voluntary Registration: The registration of
partnership firm is not compulsory. But an
unregistered firm suffers from some limitations
which makes it virtually compulsory to be registered.
Following are the limitations of an unregistered firm.
 (i) The firm cannot sue outsiders, although the
outsiders can sue it.
 (ii) In case of any dispute among the partners, it is
not possible to settle the dispute through court of
law.
 (iii) The firm cannot claim adjustments for amount
payable to, or receivable from, any other parties.
 MERITS OF PARTNERSHIP FORM OF BUSINESS
ORGANISATION
 a) Easy to Form: A partnership can be formed easily without many
legal formalities. Since it is not compulsory to get the firm registered,
a simple agreement, either in oral, writing or implied is sufficient to
create a partnership firm.
 (b) Availability of Larger Resources: Since two or more partners
join hands to start partnership firm it may be possible to pool more
resources as compared to sole proprietorship form of business
organisation.
 (c) Better Decisions: In partnership firm each partner has a right to
take part in the management of the business. All major decisions are
taken in consultation with and with the consent of all partners. Thus,
collective wisdom prevails and there is less scope for reckless and
hasty decisions.
 (d) Flexibility: The partnership firm is a flexible organisation. At any
time the partners can decide to change the size or nature of business
or area of its operation after taking the necessary consent of all the
partners.
 (e) Sharing of Risks: The losses of the firm are shared
by all the partners equally or as per the agreed ratio.
 (f) Keen Interest: Since partners share the profit and
bear the losses, they take keen interest in the affairs of
the business
 (g) Benefits of Specialization: All partners actively
participate in the business as per their specialisation
and knowledge. In a partnership firm providing legal
consultancy to people, one partner may deal with civil
cases, one in criminal cases, another in labour cases
and so on as per their area of specialisation. Similarly
two or more doctors of different specialisation may
start a clinic in partnership
 (h) Protection of Interest: In partnership
form of business organisation, the rights of
each partner and his/her interests are fully
protected. If a partner is dissatisfied with any
decision, he can ask for dissolution of the firm
or can withdraw from the partnership.
 (i) Secrecy: Business secrets of the firm are
only known to the partners. It is not required
to disclose any information to the outsiders. It
is also not mandatory to publish the annual
accounts of the firm.
LIMITATIONS OF PARTNERSHIP
FORM OF BUSINESS ORGANISATION
 A partnership firm also suffers from certain limitations.
These are as follows:
 (a) Unlimited Liability: The most important drawback of
partnership firm is that the liability of the partners is
unlimited i.e., the partners are personally liable for the debt
and obligations of the firm. In other words, their personal
property can also be utilised for payment of firm’s
liabilities.
 (b) Instability: Every partnership firm has uncertain life.
The death, insolvency, incapacity for the retirement of any
partner brings the firm to an end. Not only that any
dissenting partner can give notice at any time for
dissolution of partnership.
 (c) Limited Capital: Since the total number of partners
cannot exceed 20, the capacity to raise funds remains
limited as compared to a joint stock company where there
is no limit on the number of share holders
 (d) Non-transferability of share: The share of
interest of any partner cannot be transferred to other
partners or to the outsiders. So it creates inconvenience
for the partner who wants to transfer his share to
others fully and partly. The only alternative is
dissolution of the firm.
 (e) Possibility of Conflicts: 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 friction and quarrel
among the partners. Difference of opinion may give rise
to quarrels and lead to dissolution of the firm
SUITABILITY OF PARTNERSHIP FORM OF BUSINESS
ORGANISATION
 Persons having different ability, skill or
expertise can join hands to form a partnership
firm to carry on the business. Business activities
like construction,providing legal services,
medical services etc. can be successfully run
under this form of business organisation. It is
also considered suitable where capital
requirement is of a medium size. Thus, business
like a wholesale trade, professional services,
mercantile houses and small manufacturing
units can be successfully run by partnership
firms.
FORMATION OF PARTNERSHIP FORM OF BUSINESS
ORGANISATION

 The following steps are to be taken in order to form a

partnership firm:
 (a) Minimum two members are required to form a
partnership. The maximum limit is ten in banking
and 20 in other businesses.
 (b) Select the like-minded persons keeping in view
the nature and objectives of the business.
 (c) There must be an agreement among the partners
to carry on the business and share the profits and
losses. This agreement must preferably be in writing
and duly signed by the all the partners. The
agreement, i.e., the partnership deed must contain
the following:
 (i) Name of the firm
 (ii) Nature of the business
 (iii) Names and addresses of partners
 (iv) Location of business
 (v) Duration of partnership, if decided
 (vi) Amount of capital to be contributed by each partner
 (vii) Profit and loss sharing ratio
 (viii) Duties, powers and obligations of partners.
 (ix) Salaries and withdrawals of the partners
 (x) Preparation of accounts and their auditing.
 (xi) Procedure for dissolution of the firm etc.
 (xii) Procedure for settlement of disputes
 (d) The partners should get their firm registered with the Registrar
of Firms of the concerned state. Although registration is not
compulsory, but to avoid the consequences of non registration, it is
advisable to get it registered when it is setup or at any time during
its existence. The procedure for registration of a firm is as follows.
 (i) The firm will have to apply to the Registrar of Firms of the
concerned state in the prescribed form.
 (ii) The duly filled in form must be signed by
all the partners.
 (iii)The filled in form along with prescribed
registration fee must be deposited in the
office of the Registrar of Firms.
 (iv) The Registrar will scrutinise the
application, and if he is satisfied that all
formalities relating to registration have been
duly complied with, he will put the name of
the firm in his register and issue the
Certificate of Registration
TYPES OF PARTNERS
Joint Stock Company
 A Joint Stock Company or simply a company is a
voluntary association of persons generally formed for
undertaking some big business activity. It is
established by law and can be dissolved by law. The
company has a separate legal existence so that even
if its members die, the company remains in existence.
Its members contribute money for some common
purpose. The money so contributed constitutes the
capital of the company. The capital of the company is
divided into small units called shares. Since members
invest their money by purchasing the shares of the
company, they are known as shareholders and the
capital of the company is known as share capital
Joint Stock Company
 In India, the joint stock companies are
governed by the Companies Act, 1956.
According to the Act, a company means ‘a
company formed and registered under this
Act or an existing company’. An existing
company means a company formed and
registered under any of the previous
Companies Acts.
PPUBLIC LIMITED
COMPANY
 It is in organization in which membership is
open to public. The minimum number
required to form such a company is seven,
but there is no upper limit.
 Such companies can advertize to offer its
shares to general public through a
prospectus. These public limited companies
are subjected to greater control and
supervision of the government
 Shares are transferable in part or full with out
requiring prior approval
 It is a voluntary association of persons who work
together to promote their economic interest. It works
on the principle of self-help and mutual help. The
primary objective is to provide support to the
members. People come forward as a group, pool their
individual resources, utilise them in the best possible
manner and derive some common benefits out of it.

 The Section 4 of the Indian Cooperative Societies Act

1912 defines Cooperative Society as “a society, which
has its objectives for the promotion of economic
interests of its members in accordance with
cooperative principles.”
 The affairs of the company are managed by an
elected body known as board of Directors”. The
number of members in the board of directors is
limited to seven.
 Liquidation
 Rising Finance for joint stock company
 1. issue of shares
 2. issue of debentures
 3. loan advances from banks
 4. state loans from industrial corporation,state
finance cooperation or industrial development
cooperation
ADVANTAGES OF JOINT STOCK
COMPANY
 Large Resources: A joint stock company can raise
large financial resources because of its large number
of members and it can raise funds through
debentures, public deposits, loans from financial
institutions without much difficulty

 Limited Liability: In a joint stock company the liability

of its members is limited to the extent of shares held
by them. This attracts a large number of small
investors to invest in the company. It helps the
company to raise huge capital. Because of limited
liability, a company is also able to take larger risks.
This helps in making investment decisions easily
ADVANTAGES
 Professional Management: Companies, because of
the complex nature of their activities and large
volume of business, require professional managers
at every level of organisation. Because of the size
of their business and the financial strength they
can afford to appoint such managers. This leads to
efficiency in management of their affairs
 Continuity of Existence: A company is an artificial
person created by law and possesses independent
legal status. It is not affected by the death,
insolvency etc. of its members. Thus, it has a
perpetual existence
ADVANTAGES
 Liquidity: The transferability of shares acts as an
added incentive to investors as the shares of a
public company can be traded easily in the stock
exchange. The public can buy shares when they
have money to invest and convert shares into cash
when they need money
 Benefits of Large-scale Operation: The joint stock
company is the only form of business organisation
which can provide capital for large-scale operations.
It results in large-scale production consequently
leading to increase in efficiency and reduction in the
cost of operation. It further opens the scope for
expansion
ADVANTAGES
Research and Development: A company
generally invests a lot of money on research
and development for improved processes of
production, designing and innovating new
products, improving quality of product, new
ways of training its staff, etc.
 Tax Benefits: Although the companies are

required to pay tax at a high rate, in effect

their tax burden is low as they enjoy many
tax exemptions under Income Tax Act.
LIMITATIONS OF JOINT STOCK COMPANY

 Difficult to Form: The formation of a

company involves compliance with a
number of legal formalities under the
companies Act and compliance with several
other rules and regulations framed by the
government from time to time
 Excessive Government Control: A company

is expected to comply with the provisions of

several Acts. Non-compliance with these,
invites heavy penalty. This affects the
smooth functioning of the companies
LIMITATIONS
 Control by a Group: Theoretically a company is
supposed to be managed by trained and
experienced Directors. But practically this is not
so in many cases. Most of the companies are
managed by the Directors belonging to the
same family. Since most of the shareholders are
widely dispersed, they have indifferent attitude
towards the management of the company. The
shareholders holding majority of the shares take
all decisions on behalf of the company. Thus, the
democratic virtues of a company do not really
exist in practice
LIMITATIONS
 Delay in Decision Making: A company has to
fulfill certain procedural formalities before
making certain decisions, as they require the
approval of the Board of Directors and /or the
General Body of shareholders. Such formalities
are time consuming and therefore, some
important decisions may be delayed.
 Lack of Secrecy: It is difficult to maintain
secrecy in many matters as they may require
approval of board of directors and/or general
body whose proceedings are usually open to
public
LIMITATIONS
 Lack of personnel interest on the part of
salaried managers as there is no relation
between effort and income

 Since directors have intimate knowledge of

the financial condition of the company they
can purchase or sell the shares accordingly.
COOPERATIVE SOCIETY
 Although they also earn some amount of
profit, but their main intention is to look
after some common interest of its
members. They pool available resources
from the members, utilise the same in the
best possible manner and share the
benefits. These organisations are known as
Cooperative Societies So those who want
to work together with some common
economic objectives can form a
society, which is termed as cooperative
CHARACTERISTICS OF COOPERATIVE SOCIETY

 (a) Voluntary Association: Members join the cooperative

society voluntarily i.e., by their own choice. Persons having
common economic objective can join the society as and
when they like, continue as long as they like and leave the
society and when they want.
 (b) Open Membership: The membership is open to all
those having a common economic interest. Any person can
become a member irrespective of his/her caste, creed,
religion, colour, sex etc.
 (c) Number of Members: A minimum of 10 members are
required to form a cooperative society. In case of multi-state
cooperative societies the minimum number of members
should be 50 from each state in case the members are
individuals. The Cooperative Society Act does not specify
the maximum number of members for any cooperative
society. However, after the formation of the society, the
member may specify the maximum member of members.
 Registration of the Society: In India, cooperative
societies are registered under the Cooperative Societies
Act 1912 or under the State Cooperative Societies Act.
The Multi-state Cooperative Societies are registered
under the Multi-state Cooperative
 Societies Act 2002. Once registered, the society
becomes a separate legal entity and attain certain
characteristics. These are as follows.
 (i) The society enjoys perpetual succession
 (ii) It has its own common seal
 (iii) It can enter into agreements with others
 (iv) It can sue others in a court of law
 (v) It can own properties in its name
 (e) State Control: Since registration of
cooperative societies is compulsory, every
cooperative society comes under the control
and supervision of the government. The
cooperative department keeps a watch on the
functioning of the societies. Every society has
to get its accounts audited from the
cooperative department of the government.
 (f) Capital: The capital of the cooperative
society is contributed by its members. Since,
the members contribution is very limited, it
often depends on the loan from
government.and apex cooperative institutions
or by way of grants and assistance from state
and
 (g) Democratic Set Up: The cooperative
societies are managed in a democratic manner.
Every member has a right to take part in the
management of the society. However, the
society elects a managing committee for its
effective management. The members of the
managing committee are elected on the basis
of one-man one-vote irrespective of the number
of shares held by any member. It is the general
body of the society which lays down the broad
framework within which the managing
committee functions.
 (h) Service Motive: The primary objective of
all cooperative societies is to provide services
to its members.
 Return on Capital Investment: The
members get return on their capital investment
in the form of dividend.
 (j) Distribution of Surplus: After giving a
limited dividend to the members of the society,
the surplus profit is distributed in the form of
bonus, keeping aside a certain percentage as
reserve and for general welfare of the society.
TYPES OF COOPERATIVE
SOCIETIES
 (a) Consumers’ Cooperative Societies: These
societies are formed to protect the interest of
consumers by making available consumer goods of
high quality at reasonable price.
 (b) Producer’s Cooperative Societies: These
societies are formed to protect the interest of small
producers and artisans by making available items of
their need for production, like raw materials, tools and
equipments etc.
 (c) Marketing Cooperative Societies: To solve the
problem of marketing the products,
 small producers join hand to form marketing
cooperative societies
 (d) Housing Cooperative Societies: To provide
residential houses to the members, housing
cooperative societies are formed generally in
urban areas.
 (e) Farming Cooperative Societies: These
societies are formed by the small farmers to get
the benefit of large-scale farming.
 Credit Cooperative Societies: These societies
are started by persons who are in
 need of credit. They accept deposits from the
members and grant them loans at
 reasonable rate of interest.
MERITS OF COOPERATIVE
SOCIETY
 The cooperative society is the only form of business organisation
which gives utmost importance to its members rather than
maximising its own profits. After studying its characteristics and
different types, we may now study the merits of this form of
business organisation.
 Easy to Form: Any ten adult members can voluntarily form
an association get it registered with the Registrar of
Cooperative Societies. The registration is very simple and it does
not require much legal formalities.
 (b) Limited Liability: The liability of the members of the
cooperative societies is limited upto their capital contribution.
They are not personally liable for the debt of the society.
 (c) Open Membership: Any competent like-minded person
can join the cooperative society any time he likes. There is no
restriction on the grounds of caste, creed, gender, colour etc. The
time of entry and exit is also generally kept open.
 State Assistance: The need for country’s growth has
necessitated the growth of the economic status of the
weaker sections. Therefore, cooperative societies always
get assistance in the forms of loans, grants, subsidies etc.
from the state as well as Central Government.
 (e) Stable Life: The cooperative society enjoys the
benefit of perpetual succession. The death, resignation,
insolvency of any member does not affect the existence of
the society because of its separate legal entity.
 (f) Tax Concession: To encourage people to form co-
operative societies the government generally provides
tax concessions and exemptions, which keep on changing
from time to time.
 (g) Democratic Management: The
cooperative societies are managed by
the Managing
 Committee, which is elected by the

members. The members decide their own

rules
 and regulations within the limits set by the

law.
LIMITATIONS OF COOPERATIVE SOCIETY

 Although the basic aim of forming a cooperative society is to

develop a system of mutual help and cooperation among its
members, yet the feeling of cooperation does not remain for
long. Cooperative societies usually suffer from the following
limitations
 (a) Limited Capital: Most of the cooperative societies
suffer from lack of capital. Since the members of the society
come from a limited area or class and usually have limited
means, it is not possible to collect huge capital from them.
Again, government’s
 assistance is often inadequate for them.
 (b) Lack of Managerial Expertise: The Managing
Committee of a cooperative society is not always able to
manage the society in an effective and efficient way due to lack
of managerial expertise. Again due to lack of funds they are also
not able to derive the benefits of professional management.
 (c) Less Motivation: Since the rate of return on
capital investment is less, the members do not
always feel involved in the affairs of the society.
 (d) Lack of Interest: Once the first wave of
enthusiasm to start and run the business is
 exhausted, intrigue and factionalism arise among
members. This makes the cooperative lifeless and
inactive.
 (e) Corruption: Inspite of government’s
regulation and periodical audit of the accounts
 of the cooperative society, the corrupt practices in
the management cannot be completely ignored.
Public Sector Organizations

 The Public Sector is usually comprised of

organizations that are owned and operated by the
government and exist to provide services for its
citizens. Similar to the voluntary sector,
organizations in the public sector do not seek to
generate a profit.
 Public Sector Organizations
Public sector organizations are formed in three
different forms:
 Departmental undertakings
 Public corporations/statutory corporations
 Government company
 1.Departmental Undertakings
 This is the oldest form of public sector enterprises.

The departmental undertaking is considered as

one of the departments of government. It has no
separate existence than the government. It
functions under the overall control of one ministry
or department of government.
 For example, Railways, post & telegraph,
broadcasting, telephone service etc.
 The main characteristics of departmental
undertakings are:-
 They operate under the overall control of one
of the ministries of central or state
government.
 They are a part of government only, there is
no separate entity.
 The revenue of departmental undertakings is
deposited in the treasury of government.
 They are financed from the annual budgets of
the government.
 Merits of departmental undertakings:
 It is very easy to form a departmental
undertaking as no registration is compulsory.
 There is direct parliamentary control. The
performance of departmental undertakings
can be discussed in parliament. So there is
public accountability.
 The revenue of departmental undertaking is
deposited in the treasury of the government.
So these undertakings help to increase the
government revenue.
Departmental organization
 Departmental organization is the oldest form of
business organization and is common in many
countries. In those days, no distinction was
made between the routine functions of the
Government and that of the public enterprises.
Therefore, most of the early state owned
enterprises were organized in the same way as
any other Government department.
 One of the best examples of the departmental
form of organization is the post office. In India,
Railways, Defence Industries, Radio,
Public Utility services etc. are being run on
departmental basis.
FEATURES OF THE DEPARTMENTAL
ORGANIZATION

 The enterprise is managed by a Government

department with a Minister at the top
responsible to the Parliament for its operations.
 2. The downward delegation of authority is
effected from the top executive to every part of
the organization i.e. it represents the line type
of authority relationship between the
executives at various levels.
 3. It is financed through annual budget
appropriations made by the legislature and its
revenues are directly paid to the treasury.
 4. For procedures as to budgeting,
accounting and auditing, it is treated at par
with other Government departments.
 5. Since it is an integral part of the

Government, the staff of the enterprise is

treated at par with other civil servants for
all purposes.
 6. It enjoys the sovereign immunity of the

state. Hence, it can be used only by

following the specified procedure.
MERITS OF DEPARTMENTAL ORGANIZATION

 1. Control over the enterprise is direct and

absolute in departmental organization..
 2. The revenues of the enterprise directly go
to the Government in a Departmental
Organization..
 3. The personnel are generally low salaried.
Hence, the administrative overhead charges
are less in a departmental organization..
 4. Since these undertakings are subject to
strict control, chances for misuse of funds are
remote in departmental organization..
DEMERITS OF DEPARTMENTAL ORGANIZATION

 1. Excessive centralization of control leads to

delay in action. Red tapism and bureaucracy
have become the illuminating features of these
organizations.
 2. The Government officials who are in the helm
of affairs generally lacks business acumen. They
run the departments in their own fashion
without considering the sovereignty of the
consumers.
 3. There is no scope for the initiative and skill as
the procedures and policies are subject to
criticism in the Parliament.
 4. It lacks flexibility, which is fundamental for
the success of any business.
 5. Treasury holds the financial strings of the
concern. The profits, if any, are mostly used
to give relief to the taxpayers rather than the
consumers. Similarly, the losses are also not
viewed with any seriousness.
 6. For each and everything, the sanction of
the Minister or the top executive is essential.
The executives at the lower level cannot take
any decision.
WHEN IS THE DEPARTMENTAL
ORGANIZATION SUITABLE
 1. If the Government must have strict and
close control.
 2. If the industry requires absolute secrecy

(defence production).
 3. If the basic objective is to procure funds

for the Government.

 4. If the projects are in the beginning stage

and requires continuous flow of funds

 Indian Revenue Service.
 Department of Disinvestment.
 Department of Economic Affairs.
 Department of Revenue.
 Ministry of Agriculture
 Ministry of Civil Aviation
 Ministry of Coal
Public Corporations
 They are also known as statutory corporations.
 Basically, a public corporation is an extended idea
of the form of joint stock companies. A public
corporation can be defined as a corporate body
specially created by a legislative enactment
with clearly defined powers and functions and
enjoying considerable financial and administrative
autonomy.
 a corporation has the power of the Government but
possessed with flexibility and initiative of a private
enterprise
Public sector companies in India

 Air India Ltd.

 Airports Authority of India.
 Artificial Limbs

Manufacturing Corporation of India.

 Bharat Coking coal ltd.
 Bharat Earth Movers Limited.
 Bharat Electronics Limited.
 Bharat Heavy Electricals Limited
FEATURES OR CHARACTERISTICS OF PUBLIC
CORPORATION

 1. PUBLIC CORPORATION IS CREATED BY

LAW
A public corporation is created by a special
legislative enactment, defining its objectives,
powers, privileges and the form of management
and its relationship with the Government.
 2. PUBLIC CORPORATION IS A BODY
CORPORATE
It is considered as a person in the contemplation
of law. As such, it can acquire, hold and sell
properties in its own name. It can sue or may be
sued by others.
 3. PUBLIC CORPORATION IS WHOLLY
OWNED BY THE STATE
 The Government generally provides the

capital of the public corporation. Other

Governmental agencies and financial
institutions can also contribute to the
capital of the corporation. But individual
investors are generally deprived from
acquiring the shares of such corporations
 4. PUBLIC CORPORATION IS FREE FROM
GOVERNMENT CONTROLS
Public corporations are relatively free from
political, parliamentary and departmental
interference in the exercise of the powers vested in
them under the Act.

 5. PUBLIC CORPORATION ENJOYS FINANCIAL

AUTONOMY
Public corporation not only enjoys administrative
autonomy but also financial autonomy. They
prepare their own budgets and have the power to
retain their earnings. They can also borrow funds
from the public or from the Government or other
financial institutions.
 6. SERVICE MOTIVE
The management of the corporation generally
rests with the Board of Directors nominated by the
Government. The directors may be Government
officials or non-officials.
 7. MANAGEMENT
A corporation is expected to behave commercially
in the same manner as a private enterprise i.e.
they are supposed to function efficiently on sound
commercial principles. This does not mean that
the corporations are expected to make profits.
They can make profit but not at the expense of the
consumers. Thus, the public corporations primarily
work for service, and profit is only a secondary
consideration.
 8. PUBLIC ACCOUNTABILITY
Public accountability is another important feature of a
public corporation. Though it enjoys complete autonomy in
its administrative areas, it is accountable to the legislature.
Its accounts are audited by the corporation and the Auditor
General, and its annual report must be placed before the
legislature.
 9. STATUS OF STAFF
The employees of the corporation are not the servants of
the Government and are not governed by Civil Service
Rules. They are employed and paid out of the funds of the
corporation.
The above-referred characteristics of the corporation
reveal that it is a combination of public accountability
and business management. It thus gives us the best of
both public ownership and private enterprise
ADVANTAGES OF THE PUBLIC CORPORATION

 1. EFFECTIVE FORM OF ORGANIZATION

 The public corporation is considered as an effective
administrative instrument, which follows a middle
course between the departmental organizations on
the one side and privately owned and managed
companies on the other side.
 2. PUBLIC CORPORATIONS ARE FLEXIBLE IN
NATURE
 The public corporation enjoys maximum autonomy
in dealing with its affairs. It is almost free from the
rigid and persistent control of the Government.
Therefore, it can manage its affairs with initiative
and flexibility.
 3. PUBLIC CORPORATIONS ARE FREE
FROM RED TAPISM
 Since the Board of Directors is entrusted

with powers to make important decision,

quick decisions are possibly. It can also
adjust its policies according to the changing
business conditions and take prompt
actions. Thus it is free from the evils of red
tapism associated with the departmental
organization
 4. INITIATIVE
 Being an autonomous body, it can experiment new
lines and exercise initiative in the business affairs.
 5. SERVICE MOTIVE
 The evils generally associated with private
enterprise such as profiteering, exploitation,
illegitimate speculation are absolutely absent in the
workings of the corporation. Its principal motive is
service. Hence, the interests of the consumers are
well protected.
 6. EASY FINANCING
 The public corporations can raise funds very easily
from various sources. The investing public also
readily subscribes to the loans floated by them as
they consider the loan bonds more safe and sound.
 7. NO EXPLOITATION OF THE WORKERS
 The employees of the public corporations are
generally well paid. Since their aim is not to
maximize profits, they are in a position to pay
higher wages and bonus to their employees. They
are acting as model-employers.
 8. EXPERTISE MANAGEMENT
 The Government can appoint even an outsider as
the managing director of the corporation. By
appointing business experts, the corporation can
avail their valuable and expertise services. It can
also appoint the representatives of the various
interests like labour, consumers etc. Therefore,
there is no possibility for exploitation of any
section of the society.
 9. ECONOMIES OF LARGE SCALE
OPERATIONS
 Public corporations are considered as a

viable form of organization for launching

enterprises on large scale. Besides,
businesses, which do not produce enough
profits during the initial stages can be
organized only as corporations. Only this
form of organization can do justice where
public utilities and social services are
involved.
DEMERITS OF PUBLIC CORPORATION
 1. PUBLIC CORPORATIONS HAS LIMITED
AUTONOMY
 The corporations, in practice, enjoy neither complete
autonomy nor flexibility. Their autonomy is somewhat
limited.
 2. POLITICAL INTERFERENCE
 The Ministers and the politicians frequently interfere
with the workings of the corporations and influence
their policies. In many cases, politicians are appointed
as the Chairman or Managing Directors of such
corporations. They possess no sufficient experience in
the business lines of the corporations. Thus, the
management of the corporations is also very poor.
 3. PUBLIC CORPORATIONS ARE EVILS
OF BIG BUSINESS
As large undertakings are generally
organized as public corporations, the evils
of big business are bound to exist in all the
activities of the corporations.
 4. LABOUR PROBLEMS
 Bridging the gulf between the labour and
management really poses a difficult problem to the
management which is already inefficient. In reality,
the experiences are more bitter and painful in
public corporations.
 The workers generally demand abnormal increase
in their wages even if the corporation is working at
a loss. Increased wages will further increase the
volume of losses, which are to be made good out of
the Government funds. In India, we can hardly find
one or two public corporations like BHEL, Neyveli
Lignite Corporation, which are making profits.
Government company
 A Government company is one in which not less than 51%
of the paid-up share capital is held by the Central
Government or a State Government or jointly by both.
 A Government company may either by wholly owned by
the Government, in which case 100% capital is provided
by Government; or may be owned by the Government
(holding minimum of 51% share-capital) and private
concerns/individuals (holding maximum of 49% share
capital).
 In the latter case, a government company is known as a
mixed ownership company. Hindustan Machine Tools,
State Trading Corporation, Hindustan Steel Ltd.,
Hindustan Aeronautics etc. are some examples of
Government companies.
 If Central or any State Government holds
majority of paid up share capital (not less
than 51%) in any company, it is called a
Government Company. Government
companies are created by executive action.
They are incorporated under the Companies
Act, 1956. They are better than
Departmental organizations because they
enjoy more flexibility.
 HMT, Hindustan Steel Limited, Hindustan
Copper Limited, Hindustan Antibiotics Ltd.,
Hindustan Shipyard, Hindustan Aeronautics
Limited, Maruti Udyog Limited, Bharat
Earthmovers Limited (BEML), Madras
Refineries Limited (MRL), Indian Telephone
Industries Limited (ITI) etc are examples of
government companies.
Features of a Government
Company
 (i) Registration Under the Companies Act:
 A Government company is formed through
registration under the Companies Act, 1956; and is
subject to the provisions of this Act, like any other
company. However, the Central Government may
direct that any of the provisions of the Companies
Act shall not apply to a Government company or
shall apply with certain modifications.
 (ii) Executive Decision of Government:
 A Government company is created by an executive
decision of the Government, without seeking the
approval of the Parliament or the State Legislature.
 (iii) Separate Legal Entity:
 A Government company is a legal entity
separate from the Government. It can acquire
property; can make contracts and can file
suits, in its own name.
 (iv) Whole or Majority Capital Provided by
Government:
 The whole or majority (at least 51%) of the
capital of a Government company is provided
by the Government; but the revenues of the
company are not deposited into the treasury
 (v) Majority of Government Directors:
 Being in possession of a majority of share

capital, the Government has authority to

appoint majority of directors, on the Board
of Directors of a government company.
 (vi) Own Staff:
 A Government company has its own staff;

except Government officials who are sent to

it on deputation. Its employees are not
governed by civil service rules.
 (vii) Free from Procedural Controls:
 A Government company is free from
budgetary, accounting and audit controls,
applicable to Government undertakings.
 (viii) Accountability to the
Parliament/State Legislature:
 The Annual Report of a Government
company is placed before the Parliament or
the State Legislature.
 1. Government companies are governed by
the provisions of the Companies Act, 1956.
 2. The whole of the capital or 51% or more is
owned by the government.
 3. Its employees excluding those on
deputation are not civil servants.
 4. The Government Company employs its
own staff, and they do not become the
employees of the government
 5. Its personnel policies are subject to its
Articles of Association.
 6. In case it is fully owned by the
government, government provides the
funding and it derives income from sales of
its goods and services.
 7. In case it is partly funded by the

government, it derives funds from the

government as well as its shareholders.
 8. All or a majority of directors are
appointed by the Government depending on
the shareholding pattern.
 9. It is a body corporate and can enter into
contracts in its own name.
 10. It can sue and be sued in its own name.
 11. The Memorandum and
Articles of Association lays down its
objectives, scope of activities and rules of
internal management. These are prepared
by the Government, and once prepared they
cannot be changed without proper
permission from the Company Law
authorities.
 12. It is generally exempt from many of the
accounts and audit laws. Constant
parliamentary scrutiny, budgetary,
administrative and legislative controls are
absent.
Advantages of Government
Company
 (i) Easy Formation:
 A Government company can be easily

formed under the Companies, Act, just by

an executive decision of the government.
 (ii) Internal Autonomy:
 A government company can manage its

affairs independently. It is relatively free

from ministerial control and political
interference, in its day-to-day functioning.
 (iii) Private Participation:
 Through Government company device, the government
can avail of the management skills, technical know-
how and expertise of the private sector and foreign
countries. For example, the Hindustan Steel Limited
has obtained technical and financial assistance from
the U.S.S.R., West Germany and the U.K. for its steel
plants at Bhilai, Rourkela and Durgapur.
 (iv) Easy to Alter:
 Objectives and powers of the Government Company
can be changed by simply altering the Memoran of
Associating of the company, without seeking the
approval of the Parliament.
 (v) Discipline:
 The Government Company is subject to provisions of
the Companies Act; which keeps the management of
the company active, alert and disciplined.
 (vi) Professional Management:
 A Government company can employ professionally
qualified managers; because it has its own
personnel policies.
 (vii) Public Accountability:
 The Annual Report of a Government company is
presented to the Parliament/ State Legislature.
These reports can be discussed and debated there.
 1. It is easier to form a government company.
 2. Government Companies are free to raise
finance from private investors, financial
institutions and other companies apart from
government funding. So they enjoy the
capacity to raise capital according to their
requirements.
 3. It enjoys flexibility and autonomy in
functioning. It is run with a commercial
outlook and can take decisions to suit the
changing needs of the business.
 4. It can attract foreign capital and
investment, e.g. HMT, BHEL etc.,
 5. It is suitable for private and foreign

collaboration. Private investors in the

government company can get shares out of
the share capital.
 6. The Articles can be easily altered when

compared to alteration of statutes of a

corporation.
 7. It is relatively free from bureaucratic
control.
 8. Formation is not as difficult as a statutory

corporation which requires a special statute

of Parliament or State legislature.
Limitations of Government
Company
 (i) Board of Directors Packed with ‘Yes-Men’:
On the Board of Directors of a government
company, there are Government appointed directors
(Government being the major share­holder); who are
‘yes-men’ of the Government. They are unable to
run the company, in a businesslike manner.
 (ii) Autonomy Only in Name:
Independent character of a Government company
exists only in name. In reality, politicians, ministers,
Government officials, interfere excessively in the
day-to-day working of the government company.
 (iii) A Fraud on Companies Act and Constitutions:
A Government company is criticized as being a ‘fraud on
the Companies Act and on the Constitution. This criticism is
valid on the ground that the Government can exempt a
Government company from application of several provisions
of the Companies Act. Again, the Parliament is not taken
into confidence, while creating a Government company.
 (iv) Fear of Exposure:
The annual report of the government company is placed
before the Parliament/State Legislature. The working of the
company is exposed to Press criticism: Therefore,
management of the Government Company often gets
demoralized and may not take initiative to come out with
and implement something innovative.
 (v) Lack of Expertise in Deputationists:
The key personnel of a Government company are
often deputed from Government departments.
These deputatiosnists generally lack expertise
and commitment; leading to lower operational
efficiency of the government company.
 (vi) Selfish Functioning:
The Government Company works neither for the
government nor for the public at large. It serves
the personal interests of people who work in the
company and who dictate policies of the
company.
 Lack of autonomy is a serious drawback of
government companies. It is subject to the
interference of the Minister and bureaucrats
who run the department.
 2. There is less freedom and flexibility. It

cannot modify its business or change its

policies and practices in tune with the
changes in the environment.
 There is no incentive for individual interest
and initiative. Employees who run the
company are paid a fixed salary. They are
not going to benefit if the company does
well nor is their pay and benefits affected if
the company incurs losses. Therefore
employees do not display drive and
enthusiasm to make the company
successful.
 Since employees enjoy job security there is
no serious attempt to increase efficiency of
operations. Further, the top management
might be transferred if a new government
comes to power. Therefore there is not
much interest is putting in dedicated efforts.
 5. Due to red-tapism, decisions are delayed.

It would not be able to capitalize on new

opportunities. Sometimes decisions are
de1ayed for fear of making mistakes.
 6. Government companies are free from
parliamentary scrutiny, budgets audits etc.
Therefore there might be a tendency to
conduct its business in an inefficient and
reckless manner. This might eventually lead
the company to losses.