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Karnataka 1st PUC Business Studies Question Bank Chapter 3 Private, Public and Global Enterprises
1st PUC Business Studies Private, Public and Global Enterprises Text Book Questions and Answers
Multiple Choice Questions
A government company is any company in which the paid-up capital held by the government is not less than
(a) 49 percent
(b) 51 percent
(c) 50 percent
(d) 25 percent
(b) 51 percent
Centralised control in MNC’s implies control exercised by
PSE’s are organisations owned by
(a) Joint Hindu family
(c) Foreign Companies
(d) Private entrepreneurs
(c) Foreign Companies
Reconstruction of sick public sector units is taken up by
Disinvestments of PSE’s implies
(a) Sale of equity shares to private sector/publie
(b) Closing down operations
(c) Investing in new areas
(d) Buying shares PSE’s
(a) Sale of equity shares to private sector/publie
Short Answer Questions
Explain the concept of public sector and private sector.
Indian Economy consists of mixed economy. A mixed economy refers to an Economic system where both private and government enterprises co-exist. The economy therefore classified into two sectors viz., private sector and public sector, file private sector consists of business enterprises owned by individuals or a group of individuals.
The various forms of organization are sole proprietorship, partnership, joint Hindu Family. Co-operative and company. The public sector consists of business enterprises owned and managed by the government. These organizations may either be partly or wholly owned by the Central or State Government with an equity stake of at least 51 % with the government.
They may’ also be a part of the ministry or might have come into existence by a special Act of the Parliament. The government participates in the economic activities of the country through public sector. Industrial policy resolutions announced by the government from time – to – time define the area of activities in which the private sector and public sector are allowed to operate.
State the various types of organizations in the private sector.
The various types of organizations in private sector are:
- Sole Proprietorship: It refers to the form of organization where business is owned, managed and controlled by a single individual who bears all the risks and enjoys the whole profit.
- Partnership: It defined as an association of two or more persons who agree to carry the business together and share the profit as well as bear risks collectively.
- Joint Hindu Family: This business is owned and carried on by the member of a Hindu Undivided family which is governed by the Hindu Law.
- Company: It may be defined as an artificial person existing only in the eyes of law with perpetual succession, having a separate legal entity and common seal. It’s of two types – Private and Public.
- Multinational Corporations: They are huge industrial organizations which extend their industrial and marketing operations through a network of their branches in several countries.
What are the different kinds of organisations that come under the public sector?
The forms of organization which a public enterprise may take are as follows:
(i) Departmental Undertaking:
These enterprises are established as departments of the ministry and are considered as part of an extension of the ministry itself. These undertakings may be under the Central or the State Government. Examples: Railways and Post and Telegraph Department.
(ii) Statutory Corporation:
Statutory corporations are public enterprises brought into existence by a Special Act of the Parliament, which defines its powers and functions. It is a financially independent corporate body created by the legislature and has a clear control over a specified area or a particular type of commercial activity.
(iii) Government Company:
According to the Companies Act, 1956, a government company means any company in which not less than 51 per cent of the paid up capital is held by the Central Government, or by any State Government or partly by Central Government and partly by one or more State Governments. These are established purely for business purposes.
List the names of some enterprises under the public sector and classify them.
Some enterprises under the public sector are:
- Indian Railways: Departmental Undertaking
- Indian Post and Telegraph: Departmental Undertaking
- Steel Authority of India Limited (SAIL): Government Company
- Bharat Heavy Electricals Limited (BHEL): Government Company
- Life Insurance Corporation (LlC) of India: Statutory Corporation
- State Trading Corporation: Statutory Corporation
Why is the government company form of organisation preferred to other types in the public sector?
The government company form of organization is preferred to other types in the public sector because of the following advantages it offers:
(i) Simple Procedure of Establishment:
A government company can be easily formed as compared to other public enterprises. There is no need to get a bill passed by the Parliament or State Legislature. It can be formed simply by following the procedure laid down by the Companies Act.
(ii) Working on Business Principles:
The government company works on business priciples. It is independent in financial and administrative matters. Its Board of Directors usually consists of professionals and persons of repute.
(iii) Efficient Management:
The management of a government company ensures efficiency in managing the business as it is more accountable than other forms of public enterprises because the annual report of the government company is placed before both the House of Parliament.
These companies pose a healthy competition to private sector which ensures availability of goods and services at reasonable prices and good quality.
How does the government maintain a regional balance in the country?
One of the major objectives of planning in India has been that of removing regional disparities. During the pre-independence period most of the industrial progress was limited to a few areas like the port towns. After the inception of planning in 1951, the government started paying special attention to those regions which were lagging behind and public sector industries were deliberately set up in those backward regions.
Four major steel plants were set up in the backward areas to accelerate economic development, provide employment to the workforce and develop ancillary industries, e.g., with the establishment of Bhilai Steel Plant in Madhya Pradesh, several new small industries have come up in that state.
The private businessmen hesitate to establish their enterprises in the backward areas due to lack of infrastructure facilities, skilled workforce, etc but these regions cannot be neglected in the public interest, therefore, the government located new enterprises in backward areas and at the same time prevented the mushrooming of private sector units in already advanced ares.
Long Answer Questions
Describe the Industrial Policy 1991, towards the public sector.
The Government of India had introduced four major reforms in the public sector in its new industrial policy in 1991. The main elements of the Government policy are as follows:
- Restructure and revive potentially viable PSUs
- Close down PSUs, which cannot be revived
- Bring down governments equity in all non-strategic PSUs to 26 percent or lower, ifnecessary, and
- Fully protect the interest of workers.
In the 1956, industrial Policy Resolution, 17 industries were reserved for the public sector. In 1991, only 8 industries were reserved for the public sector, they were restricted to the areas of atomic energy, arms and ammunition, defense, mining, and railways. This meant that the private sector could enter all areas excet these eight (now three since 2001) giving competition to public sector.
2. Disinvestment of Public Sector Enterprises:
Disinvestment involves the sale of the equity shares to the private sector and the public. This was done with an aim to raise hinds and encourage wider participation of the general public and workers in the ownership of these enterprises. This was expected to result in-imporived managerial efficiency and financial discipline.
3. Policy regarding sick units:
All public sector units were referred to the Board of Industrial and Financial Reconstruction (BIFR) to decide whether a sick unit was to be restructured or closed down. national Renewal Fund (NRF) was set up by the government to retrain or redeploy labour retrenched from a sick unit and to provide compensation to public sector employees seeking voluntary retirement.
4. Memorandum of Understanding:
Improvement of performance through a MoU (Memorandum of Understanding) system by which managements are to be granted greater autonomy but held accountable for specified results. Under this system, public sector units were given clear targets and operational autonomy for achieving those targets. The MoU was between the particular public sector unit and their administrative ministries defining their relationship and autonomy.
What was the role of the public sector before 1991?
1. Development of infrastructure:
The development of infrastructure is a prerequisite for industrialization in any country. In the pre-Independence period, basic infrastructure was not developed and therefore, industrialisation progressed at a very slow pace. The process of industrialisation cannot be sustained without adequate transportation and communication facilities, fuel and energy, and basic and heavy industries.
The private sector did not show any initiative to invest in heavy industries or develop it in any manner. They did not have trained personnel or finances to immediately establish heavy industries which was the requirement of the economy.
It was only the government which could Rail, road, sea and air transport was the responsibility of the government, and their expansion has contributed to the pace of industrialisation and ensured future economic growth. The public sector enterprises were to operate in certain spheres. Investments were to be made to:
- Give infrastructure to the core sector, which requires huge capital investment, complex and upgraded technology, big and effective organisation structures like steel plants, power generation plants, civil aviation, railways, petroleum, state trading, coal, etc;
- Give a lead in investment to the core sector where private sector enterprises are not
functioning in the desired direction, like fertilizers, pharmaceuticals, petro-chemicals, newsprint, medium and heavy engineering.
- Give direction to future investments like hotels, project management, consultancies, textiles, automobiles, etc.
2. Regional balance:
The government is responsible for developing all regions and states in a balanced way and removing regional disparties. Most of the industrial progress was limited to a few areas like the port towns in the pre-Independence period.
After 1951, the government laid down in its Five Year Plans, that particular attention would be paid to those regions which were lagging behind and public sector industries were deliberately set up. Four major steel plants were set up in the backward areas to accelerate economic development, provide employment to the workforce and develop ancilliary industries.
This was achieved to some extent but there is scope for a lot more. Development of backward regions so as to ensure a regional balance in the country is one of themajor objectives of planned development. Therefore, the government had to locate new enterprises in backward areas and at the same time prevent the mushrooming growth of private sector units in already advanced areas.
3. Economies of scale:
Where large scale industries are required to be set up with huge capital outlay, the public sector had to step in to take advantage of economies of scale. Electric power plants, natural gas, petroleum and telephone industries are some examples of the public sector setting up large scale units. These units required a larger base to function economically which was only possible with government resources and mass scale production.
4. Check over concentration of economic power:
The public, sector acts as a check over the private sector. In the private sector there are very few industrial houses which would be willing to invest in heavy industries with the result that wealth gets concentrated in a few hands and monopolistic practices are encouraged.
This gives rise to inequalities in income, which is detrimental to society. The public sector is able to set large industries which requires heavy investment and thus the income and benefits that accrue are shared by a large of number of employees and workers. This prevents concentration of wealth and economic power in the private sector.
5. Import substitution:
During the second and third Five Year Plan period, India was aiming to be self-reliant in many spheres. Obtaining foreign exchange was also a problem and it was difficult to import heavy machinery required for a strong industrial base.
At that time, public sector companies involved in heavy engineering which would help in import substitution were established. Simultaneously, several public sector companies like STC and MMC have played an important role in expanding exports of the country.
Can the public sector companies compete with the private sector in terms of profits and efficiency? Give reasons for your answer.
It.is difficult though not impossible for the public sector companies to compete with the private sector in terms of profits and efficiency due to following reasons:
- Difference in Objective: Private sector firms operate with the objective of profit maximization while public sector companies have social welfare as the prime objective and hence they cannot completely profit oriented.
- Difference in Ownership: The government is the sole or major shareholder in public sector companies, the management and administration of these companies therefore rest in the hands the government which may not make economically sound policies due to politics considerations.
- Difference in Management: Public secotr companies are managed by government officials who may not be professionally trained while private sector companies are run and managed by professional managers. This leads to higher efficiency in private sector.
- Difference in Area of Operation: Private sector operates in all areas with adequare return on investment while public sector operates mainly in basic and public utility sectors where returns are not very high.
Why are global enterprises considered superior to other business organisations?
Global enterprises are industrial organizations which extend their industrial and marketing opertions through a network of their branches or subsidiaries in several countries, these enterprises are considered superior to other private sector companies and public sector enterprises because of certain features which are as follows:
(i) Availability of Funds:
These enterprises can survive in crises and register higher growth as they possess huge financial resources as they have the ability to raise funds from different sources such as equity shares, debentures or bonds. They are also in a position to borrow from financial institutions and international banks as they have high credibility.
(ii) Diversification of Risk:
Global enterprises usually operate in different countries and enter into joint ventures with domestic firms of the host country. Thus, losses in one country may be compensated by profits in another country. Risk is also shared by-the domestic partner in case of joint venture.
(iii) Advanced Technology:
Global enterprises conform to international standards and quality specifications as they possess superior technologies and methods of production.
(iv) Research and Development (R&D):
High quality research involves huge expenditure which only global enterprises can fiford. Therefore, these enterprises have highly sophisticated research and development departments which regularly come up with product as well as process innovations making these firms globally competitive.
(v) Marketing Strategies:
Global companies use aggressive marketing strategics in order to increse their sales. Th-ir market information systems are reliable and up-to-date leading to effective advertising and sales promotion. They manage their brands effectively as they have global brand equity.
(vi) Wider Market Access:
The operations and marketing of global companies extend to many countries in which they operate through a network of subsidiaries, branches and affiliates. Due to this they enjoy a far wider market access than domestic firms.
What are the benefits of entering into joint ventures?
Business can achieve unexpected gains through joint ventures with a partner. Joint ventures can prove to be extremely beneficial for both parties involved. One party may have strong potential for growth and innovative ideas, but is still likely to benefit from entering into a joint venture because it enhances its capacity, resources and technical expertise.
The major benefits of joint ventures are as follows:
(i) Increased resources and capacity:
Joining hands with another or. teaming up adds to existing resources and capacity enabling the joint venture company to grow and expand more quickly and efficiently. The new business pools in financial and human resources and is able to face market challenges and take advantage of new opportunities.
(ii) Access to new markets and distribution networks:
When a business enters into a joint venture with a partner from another country, it opens up a vast growing market. For example, when foreign companies form joint venture companies in India they gain access to the vast Indian market. Their products which have reached saturation point in their home markets can be easily sold in new markets.
They can also take advantage of the established distribution channels i.e., the retail outlets in different local markets. Otherwise establishing their own retail outlets may prove to be very expensive. .
(iii)Access to technology:
Technology is a major factor for most businesses to enter into joint ventures. Advanced techniques of production leading to superior quality products saves a lot of time, energy and investment as they do not have to develop their own technology. Technology also adds to efficiency and effectiveness, thus leading to reduction in costs.
The markets are increasingly becoming more demanding in terms of new and innovative products. Joint ventures allow business to come up with something new and creative for the same market. Specially foreign partners can come up with innovative products because of new ideas and technology.
(v) Low cost of production:
When international corporations invest in India, they benefit immensely due to the lower cost of production. They are able to get quality products for their global requirements. India is becoming an important global source and extremely competitive in many products.
There are many reasons for this, lowcost of raw materials and labour, technically qualified workforce management professionals, excellent manpower in different cadres like lawyers, chartered accountants, engineers, scientists. The international partner thus, gets the products of required quality Mid specifications at a much lower cost than what is prevailing in the home country.
(vi) Established brand name:
When two businesses enter into ajoint venture one ofthe parties benefits from the other’s goodwill which has already been established in the market. If the joint venture is in India and with an Indian company, the Indian company does not have to spend time or money in developing a brand name for the product or even a distribution system. There is a ready market waiting for the product to be launched. A lot of investment is saved in the process.
1st PUC Business Studies Private, Public and Global Enterprises Additional Questions and Answers
One Mark Questions
Mention any two types of Public enterprises.
- Departmental Undertakings
- Government Companies
Give an example for a departmental undertaking.
Give an example for statutory corporations.
Karnataka state road transport corporation (KSRTC).
Mention any one feature of statutory corporations.
Mention any one feature of Government companies.
Mention any one feature of MNC’s.
Large Scale operations.
Give an example for MNCs.
Give an example for Joint venture.
State any one feature of Joint venture.
State the minimum amount of capital held by the government in government companies.
The minimum amount of capital held by the government is not less than 51% of paid up capital by state or central government.
Two Marks Questions
Briefly explain the features of Department Undertaking
1. Part of government:
The undertaking is organized as a major sub-division of one of the departments or ministries of the Government. It is subject to direct control by the head of department. The ultimate authority lies with the concerned minister who is responsible to the Parliament or State Legislature The undertaking has no separate entity distinct from the Government.
2. Government financing:
The undertaking is financed through annual budget appropriations by the Parliament or the State Legislature. The revenues of the undertaking are paid into the treasury. It is wholly owned by the Government.
3. Executive decision:
A departmental undertaking is set up by an executive decision of the Government without any legislation.
4. Accounting and audit:
The undertaking is subject to the normal budgeting, accounting and audit procedures applicable to other government departments.
5. Civil service control:
The enterprise is managed by civil servants whose methods of recruitment and service conditions are the same as for other civil servants of the government.
Briefly explain the features of Government Companies
The following are the features of a Government Company.
- Organizational format: The organizational format resembles that of a Joint Stock Company incorporated under Companies Act, 1956.
- State ownership: The entire capital or 51% or more of the capital is owned by the Government or Governments.
- Nomination of directors: As in case of Public Corporations, even in a Government company the directors are nominated by the Government (State or Central).
- Ministerial control: As in the case of Departmental organizations, in a Government Company too, the overall control is under the concerned minister under whose ministry the company is formed.
- Government auditors: The auditors are always appointed by the Government to inspect the books of accounts of the Government Companies.
Ten Marks Questions
Briefly explain the features of Statutory Companies.
1. Corporate body:
It is a body corporate established through a special Act of Parliament or State Legislature. The Act defines its powers and privileges and its relationship with government departments and ministries.
2. Legal entity:
It enjoys a separate legal entity with perpetual succession and common seal. It can acquire an own property in its own name. It can sue and be sued and can enter into contracts in its own name.
3. Government ownership:
The public corporation is wholly owned by the Central and/ or State Government (s).
4. Financial independence:
It enjoys financial autonomy. Its initial capital and borrowings are provided by the government but it is supposed to be self-supporting. It can borrow money from the public and is empowered to plough back its earnings.
5. Accounting system:
The Corporation’s not subject to the budgetary, accounting and audit regulations applicable to government departments. It is generally exempt from the rigid rules applicable to the expenditure of public funds.
6. Management and personnel:
A public corporation is managed by a Board of Directors appointed by the Government. However, its employees need not necessarily be civil servants. They can be employed on terms and conditions laid down by the corporation itself.
7. Service motive:
The primary motive of the corporation is public service rather than private profits. It is, however, expected to operate in a business-like manner.
Briefly explain the features of MNCs
- MNCs have managerial headquarters in home countries, while they carry out operations in a number of other (host) countries.
- A large part of capital assets of the parent company is owned by the citizens ofthe company’s home country.
- The absolute majority of the members of the Board of Directors are citizens of the home country.
- Decisions on new investment and the local objectives are taken by the parent company.
- MNCs are predominantly large-sized and exercise a great degree of economic dominance.
- MNCs control production activity with large foreign direct investment in more than one developed and developing countries.
- MNCs are oligopolistic in character. It is sustained by modem technologies, management skill, product differentiation and enormous advertising.
- MNCs contribute significantly to foreign trade.
Briefly explain the features of Joint Ventures .
A temporary business activity carried on by more than on individual with a view to earning profit in a pre-agreed manner without giving a new name to the business is known as joint venture.
The persons who enter into the joint venture agreement are called co-ventures:
- Joint venture is a special partnership Without a firm name.
- Joint venture does not follow the accounting concept ‘going concern’.
- The members of joint venture are known as co-ventures.
- Joint venture is a temporary business activity.
- In joint venture, profits and losses are shared in agreed proportion. If there is no agreement regarding the distribution of profit, they will share profit equally.
- Joint venture is an agreement for polling of capital and business abilities to be employed in some profitable venture.
- At the end of venture, all the assets are liquidated and liabilities are paid off: if necessary the assets and liabilities could be shared by co-ventures.
- Joint venture always follows cash basis of account
Differentiate Between Private and Public Companies: