Government company | Meaning | Features | Merits | Demerits

What are 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.

Example of Government companies

HMT, Hindustan Steel Limited, Hindustan Copper Limited, Hindustan Antibiotics Ltd., Hindustan Shipyard, Hindustan Aeronautics Limited, Steel Authority of India Limited (SAIL), Bharat Heavy Electricals Limited (BHEL), Maruti Udyog Limited, Bharat Earthmovers Limited (BEML), Madras Refineries Limited (MRL), Indian Telephone Industries Limited (ITI) etc are examples of government companies.

Features Government companies

1. It is 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.

Merits of Government companies

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.

Drawbacks of Government companies

1. 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.

3. 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.

4. 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.

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