Government Companies Definitions, Features, Merits and Demerits

08/01/2022 0 By indiafreenotes

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).

Features of Government Companies

  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) 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.

(ii) Easy Formation:

A Government company can be easily formed under the Companies, Act, just by an executive decision of the government.

(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) Discipline:

The Government Company is subject to provisions of the Companies Act; which keeps the management of the company active, alert and disciplined.

(v) Easy to Alter:

Objectives and powers of the Government Company can be changed by simply altering the Memoranda of Associating of the company, without seeking the approval of the Parliament.

(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.


  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.