2.  Public Enterprise Definition
 A business undertaking which is owned,
managed and controlled by the State on behalf
of the public at large
 Public enterprises mean “state ownership of
industrial, commercial or financial or
agricultural undertakings
 These enterprises produce diverse
products such as steel, coal, aluminum,
fertilizers, basic chemicals, minerals,
locomotives, aircrafts, ships, etc

3.  State ownership
 A public enterprise is owned by the Central
and/or the State Government
 Service Motive
 The primary objective of public enterprises is
to serve the nation, along with they may earn
profits
 There are multiple objectives like provision of
essential goods and services, creation of
gainful employment, etc
 They basically work for public welfare

4.  Public Accountability
 In the establishment of public enterprises, financial
resources are provided from the State exchequer
 So, public enterprises are accountable or responsible to
the public
 Such accountability is carried out through parliamentary
control on the working of these enterprises
 Government Control
 The management of public enterprises vests in the hands
of officers who are appointed by the Government
directly or indirectly
 Even in the case of autonomous enterprises, the
concerned ministry exercises a great deal of control
over their functioning

5.  Thus,public enterprises differ from
private enterprises in terms of:
 Ownership
 Management
 Objectives
 Financing
 Freedom of management
 Flexibility of operations

6.  Divided into 3 categories
 Economic Objectives
 Social Objectives
 Political Objectives

7.  Economic Objectives
 Economic Development
 Public enterprises are established to accelerate the
rate or economic growth by setting up key and basic
industries like iron and steel , petroleum, power
generation, chemicals, machine building, etc
 The public sector provides an essential base for faster
economic growth of the country
 Expansion of capital goods industries lead to the
development of other industries

8.  Planned Growth
 The private sector neglects the industries with long
gestation periods and low rate of returns
 Public enterprises step in to fill up gaps in the
industrial structure by setting up industries which are
economically unattractive but nationally essential
 Public sector provides infrastructural facilities for
diversified and balanced growth
 Provide Employment
 Public enterprises reduce unemployment by creating
employment opportunities

9.  Generation of Surplus
 Public enterprises are expected to generate and
distribute surplus for financing five-year plans and
other schemes of public welfare
 Balanced Regional Development
 Public sector concerns are designed to facilitate the
growth of the backward regions so as to reduce
regional disparities in industrial growth

10.  Social Objectives
 Control Monopoly
 Public enterprises seek to check private monopoly and
restrictive practices and the resulting evils like
exploitation
 Equitable Distribution of Wealth
 Public enterprises are expected to reduce disparities
in the distribution of income and wealth
 Reduction of economic disparities is one of the
objectives of our constitution and public enterprises
are helpful in checking concentration of economic
power

11.  Provision of essential goods and services
 An important objective of public undertakings is to
provide essential goods and services for consumption
at reasonable prices
 This helps in improving the standard of living of the
people
 Social control over the industry ensures equitable
distribution of commodities and helps to protect the
consumer from exploitation by greedy businessmen

12.  Political Objectives
 Public Interest
 Public enterprises are established in the interest of
the country as a whole
 India has become an industrial power because of the
development of public sector concerns
 They facilitate self-reliance in strategic sectors
 National Defense
 Public enterprises are set up for the manufacture of
arms, ammunition, telecommunications, oil, etc which
are very essential for the safety and security of the
country

13.  Role of Financial Adviser
 Occupies an important position in all PSUs
 Functions as the principal adviser to the chief
executive of the enterprises on all financial
matters
 His concurrence is required regarding all
financial implications of the proposals put
forward before the Board of Directors
 Functions & Responsibilities
 Determination of the financial needs of the firm and
the way these needs are to be met
 Formulation of a programme to provide most effective
cost-profit volume relationship

14.  Analysis of financial results of all operations costs and
improve concerning future operations
 Conduct of special studies with a view to reduce costs
and improve efficiency and profitability
 Capital Budgeting Decision
 In order to ensure proper evaluation and
implementation of the capital budgeting
decision, following points are to be considered:
 Guidelines provided by the Government
 Delegation of investment decision-making power
 Approval of public investment proposals

15. (1) Guidelines provided by the Government
 Major capital expenditure decisions are to be taken only
after an extensive study
 Projects are generally formulated by the concerned
ministries when five-year plan is being drawn up
 Besides, the administrative ministry which takes
initiative, the Planning Commission and the Finance
Ministry are also vitally concerned with the project
details supported by feasibility report
 In this connection, the Project Proposal Appraisal
Division of the Planning Commission issued in 1975 a
detailed manual entitled “Guidelines for Preparation of
feasibility reports for industrial projects”

16.  According to the guidelines, every project
should be appraised from technical,
commercial, financial and economic angle
 The project report has to cover the following
major points:
 General Information: This covers the demand during
description of the project and alternatives available
 Market Analysis: This covers the demand during the
five-year plan period, present and anticipated
production, present imports and exports potentials
and time phasing of demand
 Technical Features of the project: This includes the
section of the production process, size of the plant,
raw materials, product mix, etc

17.  Location of the plant: This has to be studied in relation
to availability of raw materials, market, water,
infrastructure facilities and alternative locations
available
 Capital Cost Estimates: This includes construction cost,
installation cost of the plant and the details of foreign
exchange components involved in the capital cost
 Operating Estimates: This includes details of the
operating costs and working capital requirements
 Financial Analysis: This covers preparation of cash flow
and funds flow analysis, cost benefit analysis, etc
 The guidelines suggest the adoption of IRR method
for evaluating capital investment proposal

18. (2) Delegation of investment decision-making
power
 The Bureau of Public Enterprises issues circulars from
time to time authorizing the Board of Directors of PSUs
to take a decision in respect of individual capital
expenditure items based on the total capital investment
in the concerned enterprise
(3) Approval of public investment proposal
 The Government of India set up in 1972 a high powered
Public Investment Board (PIB) to approve speedily public
sector projects which are beyond the authority of the
boards of public sector undertakings
 PIB appraises and recommends all projects which come
under the purview of Central Government other than
those relating to departmental undertakings viz.
Railways, etc

19.  The Board takes into consideration the following criteria
in appraising and recommending projects:
 The contribution of the project to the economic and
social objectives and adherence to the concerned
policies of the Government
 The economic benefits of the project as distinct from
financial returns
 Availability of plan funds, desirability of diversion of
plan funds to the new projects from those already in
hands
 Adequacy of safety and anti-pollution measures and
soundness of marketing strategy

20.  The PIB is assisted by the following agencies in the work:
 The Plan Finance Division of the Ministry of Finance which
scrutinizes the proposal particularly with reference to budgetary
and plan provisions
 The Bureau of Public Enterprises which examines capital costs,
technical and other financial aspects
 The Project Appraisal Division of Planning Commission which makes
a social cost benefit analysis and critically examines assumptions
underlying the projects
 The Concerned Administrative Ministry provides all additional
information required by the PIB
 In case the project is recommended by the PIB, it goes to the
cabinet through Ministry of Finance for its approval
 If the project is approved, a detailed project report is
prepared providing sufficient details regarding project costs,
project schedule and other necessary information for
implementing the project

21.  Capital Structure Decision
 The term capital structure refers to the determination
of the debt equity mix
 It involves the identification of different sources of long
term finances viz. equity shares, preference shares,
debentures, bonds, etc and the quantum of finances to
be raised from each sources of finance
 Role of cost of capital: In PSEs, a large portion of the
funds is provided either by the Government or by the
institutions controlled by the Government. So, cost of
capital does not play an important role in determining
the capital structure of a PSE

22.  Debt-equity Mix:
 The debt equity mix is ideal if it is 1:1. However, it will not
be appropriate to have uniform debt-equity ratio for all
types of PSEs. The Administrative Reforms Commission and
the Committee on Public Undertakings also urged the
Government to allow variations in the debt-equity ratio from
one public sector undertaking to another depending upon
whether it is a capital intensive unit or a trading unit.
 According to the Committee on PSEs, the firms which have
longer gestation period, serve a basic developmental from
those who do not have these features
 Hence the debt-equity mix in case of PSEs should be based
on:
 Gestation Period
 Degree of business risk
 Capital intensity of the project
 Availability of freedom as to pricing

23.  Sources of Finance
c Equity Shares:
 Major source of finance for PSEs
 The equity share capital of PSEs is wither
wholly held by the Government itself or by
other institutions which are controlled by
the Government
 Some PSEs have offered a small part of
their equity share capital to the public at
large
 This practice of raising funds from public by
offering equity shares has gained
momentum after the onset of liberalization
process in 1991

24. (b) Loans:
 PSEs have been getting substantial loans from
the Government to meet their requirements of
long-term funds
 In 1961, the Government of India fixed the
debt-equity ratio as 50:50 in case of PSUs
(c) Bonds:
 The raising of funds through bonds or
debentures by PSUs is of recent origin
 The debt-equity ratio applicable to such issues
has been fixed at 4:1

25.  The bonds generally have a maturity period of 7-10
years
 Some of the bonds also enjoy tax and wealth
benefits
 Eg. SAIL, NTPC, MTNL
(d) Retained Earnings:
 This has not been a major source of long-term
finance of PSUs since the performance of most of
the PSUs in terms of profitability has been poor
 The ROCE in PSUs has been poor at 3%
 Estimated that around 64% of the total capital
employed has failed to yield a reasonable return
 A large share of the profits made by PSUs came only
from few undertakings such as ONGC, MTNL, BHEL,
NTPC, etc

26. (e) Disinvestment:
 The term disinvestment implies sale of the shareholdings to
the extent required
 The motivation for disinvestment may range from ownership,
control and management of an enterprise to introducing new
partners to improve the operations or moving into another line
of business activity
 In India, the disinvestment in PSUs takes place to correct the
budgetary imbalances and achieve the objectives of economic
restructuring
 The onset of liberalization process in 1991 brought a
revolutionary change in Government’s policies towards the
PSUs
 It is taking effective steps for reducing its involvement in
providing funds to the PSUs through disinvestment of its
holdings in the PSUs

27.  In case of PSUs, profit is not the sole motive like
the private business undertaking
 Profit is important but it cannot be over and
above the over all interest of the community at
large
 Even in cases of PSUs having complete monopoly
viz. Electricity Boards, Railways, etc, the pricing
policy adopted by the undertakings is such which
does not result in exploiting its monopolistic
situation

28.  The Bureau of Public Enterprises has laid down
the following pricing policy guidelines:
 Wherever there are statutory regulations or voluntary
arrangements of binding type introduced in the larger
interests of the national economy, the enterprises would
have to conform to such regulations
 For enterprises which operate under monopolistic or
semi-monopolistic conditions the following guidelines
are useful:
 The prices of goods of such enterprises should normally be
within the landed cost of comparable imported goods
 Within the ceiling of landed cost, prices may be fixed at
suitable levels to earn a reasonable rate of return

29.  If the prices are fixed at a level higher than the landed cost, the
differences between such prices and the prices on the basis of
landed cost be subsidized by the Government to protect the
customer’s interests
 Government has already taken a decision to accord
preference to PSUs in the matter of purchases
 The PSUs may utilize their capacities to the fullest extent
 The Bureau of Public Enterprises has also advised various
ministries, Government departments and public
enterprises that they should purchase their requirements
from PSUs to the maximum possible extent (price
preference upto 10%)

30.  There are 2 types of audit conducted in case of
PSUs
 Statutory Audit
 Efficiency-cum-Propriety Audit
 Statutory Audit
 The PSUs like their counterparts in the private sector
are also subject to regular audit conducted by
professional accountants
 For the purpose of audit, PSUs can be classified into 2
catagories:
 Audit of Government Companies
 Audit of Statutory Corporations

31.  Audit of Government Companies
 According to Section 619 of the Companies Act, the
auditor of a government company is to be appointed
or reappointed on the advice of the Comptroller and
Auditor General of India
 The Comptroller and Auditor General of India have the
following powers with regard to audit:
 He has the power to direct the manner in which the
company’s accounts have to be audited by the auditor
appointed and give him instructions regarding any matter
relating to the performance of his functions
 He can conduct a supplementary or test audit of the
Government company’s accounts by persons as he may
authorize on his behalf. He may also ask a Government
company to furnish any additional information as may be
required by the auditor appointed for the purpose

32.  The auditor has to submit a copy of his report to the
Comptroller and the Auditor General of India who shall
have the right to comment upon the supplementary audit
report in such a manner as he may think fit
 Such comments to the audit report shall be placed before
the annual general meeting of the company at the same
time and in the same manner as the audit report
 Audit of Statutory Corporations
 The Comptroller and the Auditor General of India has the
power to audit the accounts of statutory corporations in
accordance with the provisions of the respective legislations
under which such corporations are established
 In case of corporations where he is the sole auditor, the
responsibility for ensuring that the accounts represent a true
and fair view of the corporations activities lies with him

33.  Efficiency-cum-Propriety Audit
 This audit may be conducted by the Comptroller and the
Auditor General of India
 The report of such audit is presented by CAG every year
to the Parliament
 It is conducted with the following objectives
 Whether the provisions of the law have been adhered to and
definite sanctions obtained for purposes of expenditure?
 Whether necessary vigilance has been exercised in the use of
public money?
 Whether due efforts have been made to check waste and
inefficiency?
 So its scope is wider than Statutory Audit

34.  The PSUs are subject to severe criticisms from
all quarters
 They were expected to be a model for industry
in technology, efficiency, innovation and serving
public interests
 However, they are now considered to be a drain
on the natural resources and are placed at top in
corruption and inefficiency

35. , Profit as not the sole motive:
 PSUs have not been set up with profit as the main
consideration
 Aim was to make India a self-reliant economy
 But many decisions did not fulfill the aim
 Eg: the decision to go ahead with the setting up of
Bharat Heavy Electricals Limited at Bhopal was
taken even when the feasibility report estimated
that the rate of return on the project would be as
low as 2% on the capital employed
(b) Price Controls:
 Many of the products made by the PSUs like steel,
power, etc were subject to price controls to meet
the social objectives of making the above products
available at reasonable prices to the general public

36.  As a result, conditions never existed for the PSUs to
become vibrant and self-sustaining organisations
(c) Non-economic Consideration:
 Decisions regarding setting up of new projects or
diversification of the existing projects in the public
sector have been on considerations other than economic
 If this would have been done on economic
considerations, it would have ensured their viability and
competitiveness in the overseas market
 Eg. Locational decisions regarding setting up plants of
Cement Corporation of India were made without keeping
in mind the economic viability of the proposals

37. (d) Lack of funds:
 The PSUs are suffering from lack of funds because of 2
reasons:
2. Most PSUs are making losses and hence do not have sufficient
funds for ploughing back
3. The budgetary support from the Government is declining year
after year
 As a result, may PSUs do not have sufficient funds needed for
modernization and upgradation of technology to improve
their efficiency and also meet the competition from the
private sector enterprises
 Government is responsible to a great extent for their
dismal performance
 However, PSUs cannot be dismantled or sold off instantly
 So there is no option but to improve the performance of
the PSUs

38.  They should add to Government revenue by substantial
profits
 They should not add to the internal financial deficits in the
form of losses and subsidies
 They should reduce foreign exchange outflow by
indigenization and import substitution
 They should help in improving the BOP position
 They should provide quality goods and services at
reasonable price and serve as a model for private
enterprises

39. Group Members:
Nikhil Gite
Anishka Nadkarni
Deepti Tikekar
Shraddha Yeolekar