Joint Sector Company

10/03/2020 1 By indiafreenotes

The joint sector represents a new ideology of economic management geared to sub serve a new economic system.

The term is applied to an under­taking only when both its ownership and control are effectively shared between public sector agen­cies on the one hand and a private group on the other.

The basic idea underlying the concept is com­bination of joint ownership, joint control and pro­fessional management.

The joint sector would include units in which both public and private investments have taken place and where the state takes an active part in direction and control.

According to JRD Tata a joint sector enterprise is intended to form a partnership between the pri­vate sector and the Govt. in which the govt. par­ticipation of the capital will not be less than 26 p.c., the routine management will be normally in the hands of the private sector partner and control and supervision will be duly exercised by a governing board on which Government is adequately repre­sented.

The Tata concept of joint sector is heavily pri­vate sector oriented, whereas the Dutt Committee concept of the joint sector was public sector ori­ented and aimed at curbing concentration of indus­tries in the private sector.

Features of Joint Sector:

Joint sector enterprises may be brought into being by any of the following ways:

(i) The Central Govt. and private entrepre­neurs may jointly set up new enterprises. Sometimes the Central Govt. and one or more State Govts, together may set up enterprises in partnership with the pri­vate sector.

(ii) The State Govt. or their industrial devel­opment corporations may set up new companies jointly with private partners, involving equity participation by both the partners.

(iii) Public financial institutions may, through equity participation or conver­sion of loans or debentures into equity, transform enterprises promoted by pri­vate entrepreneurs into joint sector com­panies.

(iv) The existing private enterprises may be transformed into joint sector enterprises by the govt. or govt. companies acquir­ing a part of the equity or converting debt into equity or by contributing to an increase in the share capital.

(v) The existing public sector companies may be transformed into joint sector en­terprises through the sale of some eq­uity shares to private entrepreneurs or the general public.

The concept of the joint sector is a product of certain evolutionary forces of which two seem to be most important:

(i) A drastic change in the pattern of financ­ing big industries in India with the ad­vent and process of State-owned finan­cial institutions; and

(ii) An increasing demand to nationalize big business in order to curb the concentra­tion of economic power.

The Dutt Committee used the former as a means to achieve the latter objective. It envisaged the concept of joint sector as an important means of curbing the increasing concentration of economic power and to achieve this objective, the Commit­tee recommended the total conversion of the loans to equity by the Central Financial Institutions in their assisted projects.

This measure also provided two other advantages:

(i) It will help obviate the difficulties likely to be faced organising large public sec­tor enterprises from scratch and

(ii) It would also help the Govt. by provid­ing the nuclei for a healthy growth of certain important industries making the best possible use of available technical and managerial experience in the exist­ing enterprises without enabling such growth to add to private concentration of economic power.

Since then, the concept as well as the rationale underlying the concept has undergone a change with the result that today the concept of joint sec­tor refers to a new undertaking in which the State holds 26 p.c. of the equity and controls the man­agement of the company along with the private collaborator.

Problems of the Joint Sector:

Apart from other problems common to all in­dustrial activity, three specific problems to the joint sector have been identified:

  1. While in principle the concept appears ac­ceptable, guidelines in terms of the roles of the Govt. and private partners in managing and controlling joint sector enterprises still remain to be spelt out. From the point of view of private investors, uncer­tainty about their role in management and control has been a major inhibiting factor.
  2. The rationale for setting up joint sector projects was mainly for developing backward areas, reducing concentration of economic power and to accelerate industrial development. But in reality, often the purpose for which the joint sector projects were set up was unrelated to these basic objectives.

The joint sector enabled private entre­preneurs to promote large projects with less of eq­uity participation; it also enables them to obtain cer­tain concessions which were denied to projects in the private sector. Similarly, the main motive for the State in setting up joint sector projects was to

  1. The inter-facing between a purely Govt. agency whose commitment and accountability are vastly different and a private group whose main motivation is likely to be commercial profitability is not always smooth.

There is always the dilemma between “over control” of a unit to satisfy the rig­our of Govt. audit on the one hand which, over time, stifles initiative and makes it difficult to op­erate; on the other, there is a well-recognised ac­countability to the public and legislature where Govt. funds are invested that they are expended wisely.

One, therefore, has to steer clear of these two extremes and ensure that the right “mix” of freedom and interference which will make the unit grow and expand is achieved.

Government Policy:

The Govt. accepted the concept of joint sector in its industrial policy decision in 1970 and 1973. The concept of joint sector became very popu­lar after the Report of the Industrial Licensing Policy Inquiry Committee was submitted in 1969.

How­ever, this is not a new idea. The industrial policy pronouncements even before the Dutt Committee Report had conceived the idea of joint sector. In­deed, the joint sector as a form of business existed in India even before Independence.

The idea of the joint sector was implicit in the Industrial Policy Resolutions of 1948 and 1956. The Industrial Policy Resolution of 1948 indicated the possibility of the state securing the cooperation of private enterprise for the establishment of new units even in the 6 industries where only the state was to have the right to set up new units, subject to such control and regulation as the Central Govt. might prescribe.

The Industrial Policy Resolution of 1956 indicated the possibility of the state securing the cooperation of private enterprises in the establish­ment of new units when the national interest so requires in the industries listed in Schedule A (i.e., industries the future development of which had been exclusively reserved for the state).

When­ever cooperation with private enterprise is neces­sary, the state will ensure, either through majority participation in the capital or otherwise, that it has the requisite power to guide the policy and control the operations of the undertaking.

It was stated that when the state granted financial assistance to the private sector, such assistance will preferably be in the form of participation in equity capital though it may also be, partly, in the form of debenture capi­tal.

The concept of the joint sector received greater attention after the Dutt Committee. The Commit­tee viewed the joint sector as an important means of curbing the increasing concentration of economic power. The Committee also felt that the joint sector is likely to be more effective than licensing for real­ising this objective.

The Dutt Committee recommended that pub­lic financial institutions should have the option to convert their financial assistance to private enter­prises into equity so as to bring such enterprises in the joint sector.

The govt. has accepted the joint sector concept taking into consideration the recommendation of the Dutt Committee. The joint sector was expected to function in two broad areas—the core sector and the heavy investment sector. With investment ex­ceeding Rs. 5 crore joint sector projects will be wel­come in industries from which the private sector has been excluded.

Joint sector offers a middle path between out­right nationalisation and private enterprise. It is an instrument to be used to reduce the evils of mo­nopoly and concentration of industries in large business houses. It can ensure optimum use of scarce financial and other resources. It can assure public control and social accountability.