Merits and Demerits of Government Company

What is Government Company?

A government company is a business entity owned and operated by the government at either the central or state level. It is established under the Indian Companies Act and is registered and governed by the provisions of the Indian Companies Act. The basic purpose behind the establishment of a Government Company is to run an industrial or commercial undertaking. The government is the major shareholder of a Government Company and hence exercises major control over its management. One can form a Government Company as a Private Limited Company or a Public Limited Company.

Examples of Government Companies include Life Insurance Corporation of India (LIC), Bharat Heavy Electricals Limited (BHEL), and Indian Oil Corporation (IOC).

Geeky Takeaways:

• Government Companies are entities that are owned and run by either the federal or state governments. They are bound by certain laws and are subject to government control and regulations.
• Government-owned Companies operate as legal entities separate from the government, with their own rights, liabilities, and obligations.
• Government companies often operate in sectors deemed critical to national development, security, or public welfare. They may engage in industries such as infrastructure, defense, energy, telecommunications, and healthcare, where government intervention is necessary to ensure stability and equitable access.
• Government companies may receive financial support from the government in the form of equity investments, subsidies, grants, or loans.

Merits of Government Company

1. Easy Formation: A Government Company can be easily established by just fulfilling the requirements of the Indian Companies Act. It means that one does not have to acquire separate legislation from the Parliament for the formation of a Government Company.

2. Operational Autonomy: There is no bureaucratic control and political interference of the Government in the management of the Government Company; therefore, a Government Company takes actions according to their own judgement and can manage its activities independently.

3. Independent Status: As a Government Company has a separate legal entity, independent of the Government, it can perform its activities just like any other Private Company.

4. Prevents Unhealthy Business Practices: As a Government Company exercises major control of Government on its management, the goods offered by these companies are of good quality and are sold at reasonable prices. This merit of a Government Company helps in controlling the market and reducing unhealthy business practices.

5. Social Wellbeing: Government Companies frequently put social wellbeing ahead of maximizing profits. They might give priority to creating jobs, offer basic services at reduced costs, or make investments in initiatives that benefit society as a whole as opposed to simply shareholders.

6. Infrastructure Development: Because of their huge initial investments or prolonged gestation periods, government-owned enterprises are able to lead large-scale infrastructure projects that may not be financially feasible for private organizations. These initiatives may support development and economic expansion.

Demerits of Government Company

1. Freedom only in Name: As at least 51% of the shares of a Government Company are held by the Government, therefore the control over the affairs of the company by the Government is more. Besides, the provisions of the Companies Act, 2013 do not have much relevance in this case.

2. Lack of Accountability: As the major part of the capital of a Government Company is financed by the Government, it should be held accountable to the Government only. However, because of the ineffective control of the Government, a Government Company is not directly answerable to the Parliament.

3. Defeats the main Purpose: Government exercises major control over the functions and management of a Government Company, as it is a major shareholder of the company. However, this feature of the Government Company defeats the whole purpose of registering and establishing it under the Companies Act.

4. Political Interference: Decisions made by government companies may be influenced by politics rather than by economic considerations. The company’s performance and future survival may suffer as a result of this interferance.

5. Financial Burden on Government: Government Companies frequently need significant financial assistance from the government, either in the form of bailouts, direct subsidies, or implicit guarantees. This may put a burden on public coffers and take funds away from other necessary programs or infrastructure improvements.

6. Possibility of Monopoly: Government Companies occasionally might hold a monopoly or a dominant position in their respective sectors. Inefficiencies, lack of competition, and higher consumer costs may result from this.

Merits and Demerits of Government Company – FAQs

What sectors do government companies operate in?

Government companies operate in various sectors such as finance, infrastructure, energy, manufacturing, telecommunications, healthcare, and utilities. They may also be involved in sectors like defense, transportation, and social welfare programs.

How are government companies different from private companies?

Government companies are owned and controlled by the government, while private companies are owned by private individuals or entities. Government companies often prioritize public interest over profit maximization and may receive financial support or subsidies from the government.

What happens if a business that is owned by the government falters or loses money?

The government may take a number of actions to intervene if a government-owned business falters or suffers large losses, including financial support, restructuring, privatization, or liquidation.

How are government companies regulated?

Government companies are regulated by government agencies, sector-specific regulators, and financial authorities. They are subject to laws, regulations, and standards governing corporate governance, financial reporting, transparency, and accountability.

How do government companies contribute to public welfare?

Government companies contribute to public welfare by providing essential services such as healthcare, education, transportation, utilities, and social welfare programs. They also undertake infrastructure development projects and create employment opportunities, thereby enhancing the overall well-being of society.

Also refer to What is a Government Company? | Meaning, Features, and Suitability