Government Company, Definition, Features, Formation, Types, Advantages, Limitations

Government Company is a type of company in which the government holds a significant portion of the ownership. These companies play a crucial role in various sectors of the economy, acting as both commercial entities and instruments for public policy. They are generally formed to carry out business ventures in industries that require significant investment or have strategic importance, such as energy, infrastructure, defense, and transportation.

Definition of a Government Company:

Under Section 2(45) of the Companies Act, 2013, a Government Company is defined as any company in which not less than 51% of the paid-up share capital is held by:

• The Central Government, or
• Any State Government(s), or
• Partly by the Central Government and partly by one or more State Governments.

The term “Government Company” includes a company that is a subsidiary of a government company as well. This means that even if a subsidiary has private shareholders, it is considered a government company if the holding company is government-owned.

Features of a Government Company:

1. Government Ownership

The most distinctive feature of a government company is that the government holds at least 51% of its paid-up capital. This ownership can be held solely by the central government, a state government, or a combination of both. The government’s majority stake ensures that it retains control over the company’s policies, management, and decision-making processes.

2. Separate Legal Entity

A government company, like any other company, is a separate legal entity. This means that the company has its own legal identity, separate from the government. It can own property, enter into contracts, sue, and be sued in its own name. The company’s status as a separate legal entity allows it to operate independently, even though the government is its primary shareholder.

3. Limited Liability

The liability of the shareholders in a government company is limited to the amount unpaid on their shares. Even though the government holds the majority stake, it is not personally liable for the company’s debts or obligations beyond its investment. Similarly, minority shareholders are also protected from liability beyond their investment in the company’s shares.

4. Appointment of Directors

In a government company, the board of directors usually includes a mix of government-appointed officials and professional directors. The government has the power to appoint the directors, including the chairman and managing director, ensuring that the company operates in line with government policies and objectives. The board plays a key role in overseeing the management and governance of the company.

5. Accountability to the Government

Although a government company operates as an independent commercial entity, it remains accountable to the government. Government companies are subject to audits by the Comptroller and Auditor General of India (CAG), which ensures transparency and accountability in their operations. Additionally, these companies are required to submit annual reports to the government.

6. Commercial Objectives

Unlike purely government-run departments or public enterprises, government companies are established with commercial objectives. While they may also have social or public welfare goals, they are expected to operate on commercial lines, earning profits and competing with private companies in the market.

7. Exemption from Certain Provisions of the Companies Act

Government companies enjoy certain exemptions and privileges under the Companies Act, 2013. For example, government companies are not required to follow the same rules regarding contracts between directors and the company that apply to private companies. However, these exemptions are granted with the understanding that the government exercises oversight and control over the company’s activities.

Formation of a Government Company:

The formation of a government company follows the same legal procedures as the formation of any other company under the Companies Act, 2013. However, there are some key differences due to the government’s involvement.

1. Incorporation Process

To form a government company, the government or its nominated representatives must follow the standard process of company incorporation. This involves:

• Filing the Memorandum of Association (MOA) and Articles of Association (AOA) with the Registrar of Companies (ROC).
• Submitting the details of the company’s directors, shareholders, and registered office.
• The company must have at least two shareholders and two directors (for a private company) or seven shareholders and three directors (for a public company).

2. Government Shareholding

Once the company is incorporated, the Central Government, State Government, or both will subscribe to at least 51% of the company’s share capital. The government may also invite private participation, but its ownership must remain at 51% or higher to maintain control of the company.

3. Appointment of Directors and Management

The government, as the majority shareholder, has the authority to appoint directors to the board of the company. These directors are typically government officials or individuals appointed by the government based on their expertise. The board oversees the company’s operations and ensures that it aligns with both commercial objectives and the government’s broader policy goals.

4. Registration and Certificate of Incorporation

Once all documents are filed and approved by the Registrar of Companies, the government company is issued a Certificate of Incorporation. This certificate confirms the legal formation of the company and includes details such as the company’s name, registration number, and the date of incorporation.

5. Capital Structure

The capital structure of a government company can be equity shares, preference shares, or a mix of both. The government’s investment in the company usually takes the form of equity shares, while private investors may hold a smaller portion of the equity.

6. Compliance and Governance

After incorporation, the company must comply with the governance norms and regulatory requirements under the Companies Act, 2013. This includes holding annual general meetings (AGMs), submitting financial statements to the ROC, and ensuring that its accounts are audited by the CAG.

7. Public Sector Undertakings (PSUs)

Government companies are often classified as Public Sector Undertakings (PSUs). PSUs can be further categorized based on the level of government ownership:

• Maharatna PSUs: Large companies with vast revenues and significant market presence (e.g., Indian Oil Corporation).
• Navratna PSUs: Companies with considerable operational freedom to make investment decisions (e.g., Oil India Limited).
• Miniratna PSUs: Smaller companies with moderate operational freedom (e.g., Air India).

Types of Government Companies:

1. Fully-Owned Government Company

Fully-Owned Government Company is a company in which the entire shareholding (100%) is held by the government, whether central or state. These companies are entirely managed and controlled by the government, with no private sector involvement. Examples include Coal India Ltd and Indian Railways.

2. Partly-Owned Government Company

In a Partly-Owned Government Company, 51% or more of the shareholding is held by the government, but the remaining shares are held by private individuals or institutions. These companies allow for some level of private sector involvement while ensuring that the government retains majority control. An example is Bharat Heavy Electricals Limited (BHEL), which is a listed company with shares traded on the stock market but with the government as the majority shareholder.

3. Government-Controlled Subsidiaries

Subsidiary of a government company is also considered a government company if the parent company holds a controlling stake. For example, ONGC Videsh Ltd is a subsidiary of Oil and Natural Gas Corporation (ONGC), and since ONGC is a government company, its subsidiaries also fall under the same category.

Advantages of Government Company

1. Easy Formation

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

2. 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.

3. 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.

4. Easy to Alter

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

5. Discipline

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

6. Professional Management

A Government company can employ professionally qualified managers; because it has its own personnel policies.

7. Public Accountability

The Annual Report of a Government company is presented to the Parliament/ State Legislature. These reports can be discussed and debated there.

Limitations of Government Company

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.