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  • State Exchequer- A treasury, as of a nation or an organization
  • Afm

    1. 1.  Public Enterprise Definition  A business undertaking which is owned, managed and controlled by the State on behalf of the public at large  Public enterprises mean “state ownership of industrial, commercial or financial or agricultural undertakings These enterprises produce diverse products such as steel, coal, aluminum, fertilizers, basic chemicals, minerals, locomotives, aircrafts, ships, etc
    2. 2.  State ownership  A public enterprise is owned by the Central and/or the State Government Service Motive  The primary objective of public enterprises is to serve the nation, along with they may earn profits  There are multiple objectives like provision of essential goods and services, creation of gainful employment, etc  They basically work for public welfare
    3. 3.  Public Accountability  In the establishment of public enterprises, financial resources are provided from the State exchequer  So, public enterprises are accountable or responsible to the public  Such accountability is carried out through parliamentary control on the working of these enterprises Government Control  The management of public enterprises vests in the hands of officers who are appointed by the Government directly or indirectly  Even in the case of autonomous enterprises, the concerned ministry exercises a great deal of control over their functioning
    4. 4.  Thus,public enterprises differ from private enterprises in terms of:  Ownership  Management  Objectives  Financing  Freedom of management  Flexibility of operations
    5. 5.  Divided into 3 categories  Economic Objectives  Social Objectives  Political Objectives
    6. 6.  Economic Objectives  Economic Development  Public enterprises are established to accelerate the rate or economic growth by setting up key and basic industries like iron and steel , petroleum, power generation, chemicals, machine building, etc  The public sector provides an essential base for faster economic growth of the country  Expansion of capital goods industries lead to the development of other industries
    7. 7.  Planned Growth  The private sector neglects the industries with long gestation periods and low rate of returns  Public enterprises step in to fill up gaps in the industrial structure by setting up industries which are economically unattractive but nationally essential  Public sector provides infrastructural facilities for diversified and balanced growth Provide Employment  Public enterprises reduce unemployment by creating employment opportunities
    8. 8.  Generation of Surplus  Public enterprises are expected to generate and distribute surplus for financing five-year plans and other schemes of public welfare Balanced Regional Development  Public sector concerns are designed to facilitate the growth of the backward regions so as to reduce regional disparities in industrial growth
    9. 9.  Social Objectives  Control Monopoly  Public enterprises seek to check private monopoly and restrictive practices and the resulting evils like exploitation  Equitable Distribution of Wealth  Public enterprises are expected to reduce disparities in the distribution of income and wealth  Reduction of economic disparities is one of the objectives of our constitution and public enterprises are helpful in checking concentration of economic power
    10. 10.  Provision of essential goods and services  An important objective of public undertakings is to provide essential goods and services for consumption at reasonable prices  This helps in improving the standard of living of the people  Social control over the industry ensures equitable distribution of commodities and helps to protect the consumer from exploitation by greedy businessmen
    11. 11.  Political Objectives  Public Interest  Public enterprises are established in the interest of the country as a whole  India has become an industrial power because of the development of public sector concerns  They facilitate self-reliance in strategic sectors  National Defense  Public enterprises are set up for the manufacture of arms, ammunition, telecommunications, oil, etc which are very essential for the safety and security of the country
    12. 12.  Role of Financial Adviser  Occupies an important position in all PSUs  Functions as the principal adviser to the chief executive of the enterprises on all financial matters  His concurrence is required regarding all financial implications of the proposals put forward before the Board of Directors  Functions & Responsibilities  Determination of the financial needs of the firm and the way these needs are to be met  Formulation of a programme to provide most effective cost-profit volume relationship
    13. 13.  Analysis of financial results of all operations costs and improve concerning future operations  Conduct of special studies with a view to reduce costs and improve efficiency and profitability Capital Budgeting Decision  In order to ensure proper evaluation and implementation of the capital budgeting decision, following points are to be considered:  Guidelines provided by the Government  Delegation of investment decision-making power  Approval of public investment proposals
    14. 14. (1) Guidelines provided by the Government  Major capital expenditure decisions are to be taken only after an extensive study  Projects are generally formulated by the concerned ministries when five-year plan is being drawn up  Besides, the administrative ministry which takes initiative, the Planning Commission and the Finance Ministry are also vitally concerned with the project details supported by feasibility report  In this connection, the Project Proposal Appraisal Division of the Planning Commission issued in 1975 a detailed manual entitled “Guidelines for Preparation of feasibility reports for industrial projects”
    15. 15.  According to the guidelines, every project should be appraised from technical, commercial, financial and economic angle The project report has to cover the following major points:  General Information: This covers the demand during description of the project and alternatives available  Market Analysis: This covers the demand during the five-year plan period, present and anticipated production, present imports and exports potentials and time phasing of demand  Technical Features of the project: This includes the section of the production process, size of the plant, raw materials, product mix, etc
    16. 16.  Location of the plant: This has to be studied in relation to availability of raw materials, market, water, infrastructure facilities and alternative locations available  Capital Cost Estimates: This includes construction cost, installation cost of the plant and the details of foreign exchange components involved in the capital cost  Operating Estimates: This includes details of the operating costs and working capital requirements  Financial Analysis: This covers preparation of cash flow and funds flow analysis, cost benefit analysis, etc The guidelines suggest the adoption of IRR method for evaluating capital investment proposal
    17. 17. (2) Delegation of investment decision-making power  The Bureau of Public Enterprises issues circulars from time to time authorizing the Board of Directors of PSUs to take a decision in respect of individual capital expenditure items based on the total capital investment in the concerned enterprise(3) Approval of public investment proposal  The Government of India set up in 1972 a high powered Public Investment Board (PIB) to approve speedily public sector projects which are beyond the authority of the boards of public sector undertakings  PIB appraises and recommends all projects which come under the purview of Central Government other than those relating to departmental undertakings viz. Railways, etc
    18. 18.  The Board takes into consideration the following criteria in appraising and recommending projects:  The contribution of the project to the economic and social objectives and adherence to the concerned policies of the Government  The economic benefits of the project as distinct from financial returns  Availability of plan funds, desirability of diversion of plan funds to the new projects from those already in hands  Adequacy of safety and anti-pollution measures and soundness of marketing strategy
    19. 19.  The PIB is assisted by the following agencies in the work:  The Plan Finance Division of the Ministry of Finance which scrutinizes the proposal particularly with reference to budgetary and plan provisions  The Bureau of Public Enterprises which examines capital costs, technical and other financial aspects  The Project Appraisal Division of Planning Commission which makes a social cost benefit analysis and critically examines assumptions underlying the projects  The Concerned Administrative Ministry provides all additional information required by the PIB In case the project is recommended by the PIB, it goes to the cabinet through Ministry of Finance for its approval If the project is approved, a detailed project report is prepared providing sufficient details regarding project costs, project schedule and other necessary information for implementing the project
    20. 20.  Capital Structure Decision  The term capital structure refers to the determination of the debt equity mix  It involves the identification of different sources of long term finances viz. equity shares, preference shares, debentures, bonds, etc and the quantum of finances to be raised from each sources of finance  Role of cost of capital: In PSEs, a large portion of the funds is provided either by the Government or by the institutions controlled by the Government. So, cost of capital does not play an important role in determining the capital structure of a PSE
    21. 21.  Debt-equity Mix:  The debt equity mix is ideal if it is 1:1. However, it will not be appropriate to have uniform debt-equity ratio for all types of PSEs. The Administrative Reforms Commission and the Committee on Public Undertakings also urged the Government to allow variations in the debt-equity ratio from one public sector undertaking to another depending upon whether it is a capital intensive unit or a trading unit.  According to the Committee on PSEs, the firms which have longer gestation period, serve a basic developmental from those who do not have these features  Hence the debt-equity mix in case of PSEs should be based on:  Gestation Period  Degree of business risk  Capital intensity of the project  Availability of freedom as to pricing
    22. 22.  Sources of Finance c Equity Shares:  Major source of finance for PSEs  The equity share capital of PSEs is wither wholly held by the Government itself or by other institutions which are controlled by the Government  Some PSEs have offered a small part of their equity share capital to the public at large  This practice of raising funds from public by offering equity shares has gained momentum after the onset of liberalization process in 1991
    23. 23. (b) Loans: PSEs have been getting substantial loans from the Government to meet their requirements of long-term funds In 1961, the Government of India fixed the debt-equity ratio as 50:50 in case of PSUs(c) Bonds: The raising of funds through bonds or debentures by PSUs is of recent origin The debt-equity ratio applicable to such issues has been fixed at 4:1
    24. 24.  The bonds generally have a maturity period of 7-10 years Some of the bonds also enjoy tax and wealth benefits Eg. SAIL, NTPC, MTNL(d) Retained Earnings: This has not been a major source of long-term finance of PSUs since the performance of most of the PSUs in terms of profitability has been poor The ROCE in PSUs has been poor at 3% Estimated that around 64% of the total capital employed has failed to yield a reasonable return A large share of the profits made by PSUs came only from few undertakings such as ONGC, MTNL, BHEL, NTPC, etc
    25. 25. (e) Disinvestment: The term disinvestment implies sale of the shareholdings to the extent required The motivation for disinvestment may range from ownership, control and management of an enterprise to introducing new partners to improve the operations or moving into another line of business activity In India, the disinvestment in PSUs takes place to correct the budgetary imbalances and achieve the objectives of economic restructuring The onset of liberalization process in 1991 brought a revolutionary change in Government’s policies towards the PSUs It is taking effective steps for reducing its involvement in providing funds to the PSUs through disinvestment of its holdings in the PSUs
    26. 26.  In case of PSUs, profit is not the sole motive like the private business undertaking Profit is important but it cannot be over and above the over all interest of the community at large Even in cases of PSUs having complete monopoly viz. Electricity Boards, Railways, etc, the pricing policy adopted by the undertakings is such which does not result in exploiting its monopolistic situation
    27. 27.  The Bureau of Public Enterprises has laid down the following pricing policy guidelines:  Wherever there are statutory regulations or voluntary arrangements of binding type introduced in the larger interests of the national economy, the enterprises would have to conform to such regulations  For enterprises which operate under monopolistic or semi-monopolistic conditions the following guidelines are useful:  The prices of goods of such enterprises should normally be within the landed cost of comparable imported goods  Within the ceiling of landed cost, prices may be fixed at suitable levels to earn a reasonable rate of return
    28. 28.  If the prices are fixed at a level higher than the landed cost, the differences between such prices and the prices on the basis of landed cost be subsidized by the Government to protect the customer’s interests Government has already taken a decision to accord preference to PSUs in the matter of purchases The PSUs may utilize their capacities to the fullest extent The Bureau of Public Enterprises has also advised various ministries, Government departments and public enterprises that they should purchase their requirements from PSUs to the maximum possible extent (price preference upto 10%)
    29. 29.  There are 2 types of audit conducted in case of PSUs  Statutory Audit  Efficiency-cum-Propriety Audit Statutory Audit  The PSUs like their counterparts in the private sector are also subject to regular audit conducted by professional accountants  For the purpose of audit, PSUs can be classified into 2 catagories:  Audit of Government Companies  Audit of Statutory Corporations
    30. 30.  Audit of Government Companies  According to Section 619 of the Companies Act, the auditor of a government company is to be appointed or reappointed on the advice of the Comptroller and Auditor General of India  The Comptroller and Auditor General of India have the following powers with regard to audit:  He has the power to direct the manner in which the company’s accounts have to be audited by the auditor appointed and give him instructions regarding any matter relating to the performance of his functions  He can conduct a supplementary or test audit of the Government company’s accounts by persons as he may authorize on his behalf. He may also ask a Government company to furnish any additional information as may be required by the auditor appointed for the purpose
    31. 31.  The auditor has to submit a copy of his report to the Comptroller and the Auditor General of India who shall have the right to comment upon the supplementary audit report in such a manner as he may think fit  Such comments to the audit report shall be placed before the annual general meeting of the company at the same time and in the same manner as the audit report Audit of Statutory Corporations  The Comptroller and the Auditor General of India has the power to audit the accounts of statutory corporations in accordance with the provisions of the respective legislations under which such corporations are established  In case of corporations where he is the sole auditor, the responsibility for ensuring that the accounts represent a true and fair view of the corporations activities lies with him
    32. 32.  Efficiency-cum-Propriety Audit  This audit may be conducted by the Comptroller and the Auditor General of India  The report of such audit is presented by CAG every year to the Parliament  It is conducted with the following objectives  Whether the provisions of the law have been adhered to and definite sanctions obtained for purposes of expenditure?  Whether necessary vigilance has been exercised in the use of public money?  Whether due efforts have been made to check waste and inefficiency?  So its scope is wider than Statutory Audit
    33. 33.  The PSUs are subject to severe criticisms from all quarters They were expected to be a model for industry in technology, efficiency, innovation and serving public interests However, they are now considered to be a drain on the natural resources and are placed at top in corruption and inefficiency
    34. 34. , Profit as not the sole motive:  PSUs have not been set up with profit as the main consideration  Aim was to make India a self-reliant economy  But many decisions did not fulfill the aim  Eg: the decision to go ahead with the setting up of Bharat Heavy Electricals Limited at Bhopal was taken even when the feasibility report estimated that the rate of return on the project would be as low as 2% on the capital employed(b) Price Controls:  Many of the products made by the PSUs like steel, power, etc were subject to price controls to meet the social objectives of making the above products available at reasonable prices to the general public
    35. 35.  As a result, conditions never existed for the PSUs to become vibrant and self-sustaining organisations(c) Non-economic Consideration:  Decisions regarding setting up of new projects or diversification of the existing projects in the public sector have been on considerations other than economic  If this would have been done on economic considerations, it would have ensured their viability and competitiveness in the overseas market  Eg. Locational decisions regarding setting up plants of Cement Corporation of India were made without keeping in mind the economic viability of the proposals
    36. 36. (d) Lack of funds:  The PSUs are suffering from lack of funds because of 2 reasons: 2. Most PSUs are making losses and hence do not have sufficient funds for ploughing back 3. The budgetary support from the Government is declining year after year  As a result, may PSUs do not have sufficient funds needed for modernization and upgradation of technology to improve their efficiency and also meet the competition from the private sector enterprises Government is responsible to a great extent for their dismal performance However, PSUs cannot be dismantled or sold off instantly So there is no option but to improve the performance of the PSUs
    37. 37.  They should add to Government revenue by substantial profits They should not add to the internal financial deficits in the form of losses and subsidies They should reduce foreign exchange outflow by indigenization and import substitution They should help in improving the BOP position They should provide quality goods and services at reasonable price and serve as a model for private enterprises
    38. 38. Group Members:Nikhil GiteAnishka NadkarniDeepti TikekarShraddha Yeolekar