This article is written by Gitika Jain, from Amity University, Kolkata. This article deals with the ownership and control of government companies and the legal status of the government as a “state.”
The word ‘company’ has no strict or legal definition. This word is basically derived from the Latin word ‘Com’ which means together and ‘Panis’ which means meal. Thus, all together it means a group of people having meals together and discussing certain matters. Now companies can be of various types, one of them being a government company. This is exactly what we will be discussing in this article with a special focus on the ownership and control of government companies. This article will also deal with the legal status of the government as a ‘State’ under the Constitution of India.
Definition of government company (Companies Act, 2013)
The Companies Act, 2013 gives the definition of a government company under Section 2(45) as “Government company means any company in which not less than 51% of the paid-up share capital is held by the:
- Central government; or
- State government or governments; or
- Partly by the central government and partly by one or more governments.
A company that is a subsidiary of a government company will also be considered as a government company.
Though the management and control is vested in the hand of the government, these companies are registered as private limited companies. The shareholders of this organisation are both private individuals and the government. It is because of this feature that they are defined as mixed ownership companies.
The definition of ‘government company’ according to the Company Act, 1956 was covered under Section 617 which defined it as any company and the term company is defined in the same Act under Section 3 as one that is formed and registered under the same Act. It was because of this fact that government companies enjoyed certain exemptions and reliefs. With the introduction of the new Act of 2013, it became a challenge for the government companies because many provisions in the same Act were kind of difficult in their practical applications, for example, the appointment of independent directors, etc.
Features of a government company
- A Government company is a separate legal entity.
- The appointment of the employees of a government company is governed by a memorandum of association and article of association.
- The audit of a government company is generally done by an agency that is appointed by the central government. Comptroller and auditor general of India is the agency.
- Government companies manage to get their fund from private shareholding and Government shareholding and also from the capital market.
Government company: a state
In the case of Ajay Hasia v. Khalid Majit, it was stated by Justice Bhagwati that the government company may symbolise the State. Being an authority, a government company shall be equivalent to a state and must also accept all the obligations of the state. It was held that if the company is an agency of the government, then it would be an authority within the meaning of Article 12 of the Indian Constitution.
The question as to whether an entity shall be considered as a state under Article 12 depends upon the fact that whether such an entity or body is financially, functionally and administratively controlled by the government.
To decide if an entity is an instrument or agency of the government is not straight away possible by applying a certain formula to classify the entity as an agency of the government. This was held by Justice Bhagwati and in the case of Ramana Dayaram Shetty v. International Airports Authority of India, there was an attempt to lay down certain tests in this regard:
- An entity is called an agency or instrumentality of the government when the entire share capital of it is held by the government.
- The deep and pervasive existence of state control can lead to an entity being called an instrument of the government.
- Entity or corporation having monopoly status which is state protected can also be considered with a government company.
- If the entity has functions that are mainly related to government functions then it can be an agency of government.
Government company as a public or private company
A government company can both be a public company or a private company. Since the requirement of a public company is a minimum of two members, one member can be the President or the Governor and the other can be an officer of the government. But generally, government companies are considered as public sector companies.
Government has indirect control over the functioning of private sector business by way of budgetary and monetary policies but also direct administrative and physical controls by way of which the government guarantees private investment and production in the industry along with the use of scarce resources so that it can conform to the basic socio-economic objectives of the government.
Government’s regulatory function regarding business, trade and industry aims at laying down the limits of private enterprise. These functions include:
- Limitation on private enterprise.
- Control of monopoly and big business.
- Public enterprise development, as a substitute for private enterprises to guarantee competitive dualism.
- Maintenance of proper socio-economic infrastructure.
Government plays a promotional role in relation to industries by providing finance to industry, giving various incentives and building infrastructure facilities for growth and investment of industries. For instance, the government has classified some backward regions as “No Industry Districts. Through this, the government helped the process of balanced development by removing regional disparities. The Government is also helping small scale industries. The government is actively responsible for the industrial development of the country by providing finance to them by way of development banks.
Audits in a government company
For any company, be it public or private accountability to the public is an essential thing. Regular government audits bring the attention of the public to unique problems and challenges faced by that sector in a certain span of time. That is the reason why companies have a separate service that provides audits to different sectors.
Generally, the audit includes social audit, internal audit, financial statement audit, compliance audit, etc. These audits are performed by an independent constitutional authority which is known as the Comptroller and Auditor General of India and are appointed by the President of India. The Comptroller and Auditor General of India have the power to direct the operations through which the accounts are to be audited. The audit report has to be submitted to the Comptroller and Auditor General of India who makes a comment upon such a report before the annual general meeting at the same time and in the same manner.
An annual report must be placed before both the houses of the Parliament in case of government companies and it is done by the Central Government. The report is basically on the working and the affairs of the government companies within 3 months of its annual general meetings.
Important provisions (the Companies Act, 1956)
- Memorandum (name clause): Government company under Section 13 of the Companies Act, 1956 has been exempted from using the word private after its name as it states that private companies shall use the words ‘Private limited’. Whenever a company decides to convert into a government company, the board of directors of that company shall omit the use of the word ‘private’ from its name.
- Annual general meeting (extension of time): Extension of time can be granted by the Registrar of companies under Section 166(1) of the Companies Act, 1956 only for special reasons for a period not exceeding 3 months.
- Cognizance of offences: According to Section 621 (1) of the Companies Act, 1956, no court can take cognizance of any offence unless and until the complaint is made by a person who is authorised by the central government. This Section shall only be applicable to Government companies or with the omission of the word registrar of a company.
- Approval of the court: The central government must be approached by the government company for any consent or approval required under the Companies Act, 1956.
- Venue of meeting: Annual general meeting every year must be held only at a registered office of the company or within the city within which that registered office is situated. For any annual general meeting to be held at other places apart from the above listed, the central government must approve them.
- Exemption: The government companies can be granted exemptions from time to time from any provisions under the Act by the central government.
Legal status of government company with relevant case laws
- There have been a plethora of cases that state that once a company is established under the Companies Act, 2013. It has a separate existence and is distinct from its members. The same thing has been stated in the case of Solomon vs. Solomon and company Limited. The rights and duties of shareholders are different from their company. This boils down to a conclusion that the fact that the share capital of a government company is contributed by the central government and all its shares are held by the President of India or the Governor of the State and nominated officers of the government does not affect the legal status of the government company.
- The legal position of the government company has been stated in the case of River Steam Navigation Company Limited by Justice P.L. Mukherjee. According to him, the government is giving a tough competition to private trade and businesses. So when the government engages itself in some trade, the position of the government is not that of a political State or political government but it is in the position of a company.
- To support the above statements there are some cases laid down in this article. In the case of Andhra Pradesh State Road Transport Corporation v. ITO, the former claimed exemption from tax under Article 289 of the Constitution of India which states that the property in income of the states is exempted from Union Tax. To this, the Supreme Court rejected its claim and held that the corporation was wholly controlled by the state government and having a separate entity, its income cannot be the income of the state government.
- In another case of Western coalfields Limited v. Special Area Development Authority, the petitioner’s Western Coalfields Limited and Bharat aluminium Company Limited contended that they were wholly owned by the government of India and therefore, could not be subjected to any property tax. This contention was outrightly rejected by the Supreme Court stating that even though the companies have been subscribed by the Government of India they cannot be said to be owned by the Government of India.
Advantages and disadvantages of a government company
- Easy formation- Government companies are easily formed and registered either as a public company or a private company under the Companies Act, 2013 since it does not require any special provision.
- Flexibility- Government companies are free to exercise their powers and conduct any operations. They can change their policies according to the changing business environments.
- Exemption- Government companies have been exempted from certain provisions under the previous Companies Act, 1956.
- Huge capital- The company has enough sources to collect its capital because it requires huge capital for its business operations.
- Private participation- By way of government company devices, the government can use the management and technical skills of private sectors and foreign countries. For instance, Hindustan Steel Limited has obtained technical and financial assistance from the U.S.S.R, West Germany and U.K for its steel plants.
- Easy to alter- Objectives and powers of a government company can be changed easily by changing the memorandum of association of the company without the approval of parliament.
- Public accountability- The annual report of the government company can be discussed and debated by presenting them to the parliament and state legislature.
- Theoretically speaking, government companies are autonomous in nature but practically it is not autonomous because of the interference in the day-to-day operations of political people in the company.
- Since government companies do not have technical persons, they require the assistance of civil servants, without them we cannot function better.
- Under the garb of public services, government companies experience slackness in management and operations.
- Fraud on the Companies Act and Constitution- A government company is criticized as, “Fraud on the Companies Act and Constitution” because the government can exempt a government company from the application of several provisions of the Companies Act. It is to be noted, parliament is not taken into confidence at the time of the creation of a government company.
- Fear of exposure- As the annual reports of the government company are presented to the parliament and state legislature they are exposed to press criticism. This is one of the reasons that the management of the company gets demoralized and resists taking the initiative to implement or do something innovative.
- Lack of expertise- These key personnel are deputed from government departments. This is the reason behind the key personnel lacking expertise and commitment which in turn leads to the lower operational efficiency of the government company.
- Selfish functioning- The government company works for the interest of people who work in the company and who dictate the policies of the company. They do not work for the government or the public at large.
There are so many different kinds of companies each having different functions. Each of them is important in its own ways. The introduction of the Companies Act, 2013 is indeed very important to various kinds of companies. The existence of indirect ownership and control of the government over government companies becomes all the way more important considering the above discussions.
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