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Public Sector Undertakings in India

The government-owned corporations are termed as Public Sector Undertakings (PSUs) in India. In a PSU majority (51% or more) of the paid up share capital is held by central government or by any state government or partly by the central governments and partly by one or more state governments. The Comptroller and Auditor General of India (CAG) audits government companies. In respect of government companies, CAG has the power to appoint the Auditor and to direct the manner in which the Auditor shall audit the company's accounts.

Evolution of Public Sector Undertakings Post Independence, India was grappling with grave socio-economic problems, such as inequalities in income and low levels of employment, regional imbalances in economic development and lack of trained manpower, weak industrial base, inadequate investments and infrastructure facilities, etc. Hence, the roadmap for Public Sector was developed as an instrument for selfreliant economic growth. The country adopted the planned economic development polices, which envisaged the development of PSUs. Initially, the public sector was confined to core and strategic industries. The second phase witnessed nationalization of industries, takeover of sick units from the private sector, and entry of the public sector into new fields like manufacturing consumer goods, consultancy, contracting and transportation etc. The Industrial Policy Resolution 1948 outlined the importance of the economy and its continuous growth in production and equitable distribution. In this process, the policy envisaged active engagement of the State in development of industries. The Industrial Policy Resolution 1956 classified industries into three categories with respect to the role played by the State

The first category (Schedule A) included industries whose future development would be the exclusive responsibility of the State The second (Schedule B) category included Enterprises whose initiatives of development would principally be driven by the State but private participation would also be allowed to supplement the efforts of the State And, the third category included the remaining industries, which were

left to the private sector. In 1969, the government nationalized 14 major banks. The Industrial Licensing Policy 1970 placed certain restrictions on undertakings belonging to large industrial houses, defined on the basis of assets exceeding Rs 350 mn. In 1973, the definition of large industrial houses was adopted in conformity with that of the Monopolies and Restrictive Trade Practices Act (MRTP) 1969 - and included companies whose assets exceeded Rs 200 mn. The Statement on Industrial Policy in July 1991 was also significant. It brought in fundamental changes in the MRTP Act as well. The statement revised the priority of the public sector.

Classification of Public Sector Undertakings Public Sector Undertakings (PSUs) can be classified as Public Sector Enterprises (PSEs), Central Public Sector Enterprises (CPSEs) and Public Sector Banks (PSBs). The Central Public Sector Enterprises (CPSEs) are also classified into 'strategic' and 'nonstrategic'. Areas of strategic CPSEs are:

Arms & Ammunition and the allied items of defence equipments, defence air-crafts and warships Atomic Energy (except in the areas related to the operation of nuclear power and applications of radiation and radio-isotopes to agriculture, medicine and non-strategic industries) Railways transport.

All other CPSEs are considered as non-strategic. For detailed information on the classification and categorization of CPSEs,

Section 25 Companies Public Sector Enterprises having objects to promote commerce, art, science, religion, charity or any other useful purpose and not having any profit motive can be registered as non-profit company under section 25 of the Companies Act, 1956.

This section empowers the Central Government to grant a licence directing that such an association may be registered as a company with limited liability, without the addition of the words `Limited' or `Private Limited' to its name. Such companies are also called as the Non-profit or 'No Profit - No Loss' companies.

Maharatna/Navratna/Miniratna Status for Public Sector Undertakings The status of Maharatna, Navratna, Miniratna to CPSEs is conferred by the Department of Public Enterprises - to various Public Sector Undertakings. These prestigious titles provide them greater autonomy to compete in the global market. Maharatna A company qualifying for the Maharatna - status should have an average annual turnover of Rs 20,000 crore during the last three years against Rs 25,000 crore prescribed earlier. The average annual net worth of the company should be Rs 10,000 crore. The Maharatna status empowers mega CPSEs to expand their operations and emerge as global giants. The coveted status empowers the boards of firms to take investment decisions up to Rs 5,000 crore as against the present Rs 1,000 crore limit without seeking government approval. The Maharatna firms would now be free to decide on investments up to 15% of their net worth in a project, limited to an absolute ceiling of Rs 5,000 crore. Navratna The Central Public Sector Enterprises (CPSEs) fulfilling the following criteria are eligible to be considered for grant of Navaratna - status:

Having Schedule 'A' and Miniratna Category-1 status. Having at least three 'Excellent' or 'Very Good' Memorandum of Understanding (MoU) ratings during the last five years.

For detailed information on criteria for Navratna status click The Navratna status empowers PSEs to invest up to Rs. 1000 crore or 15% of their net worth on a single project without seeking government approval. In a year, these companies can spend up to 30% of their net worth not exceeding Rs. 1000 cr. They also enjoy the freedom to enter joint ventures, form alliances and float subsidiaries abroad. Miniratna Category

For Miniratna category I status, the CPSE should have made profit in the last three years continuously, the pre-tax profit should have been Rs. 30 crores or more in at least one of the three years and should have a positive net worth. For category II, the CPSE should have made profit for the last three years continuously and should have a positive net worth. Miniratnas can enter into joint ventures, set subsidiary companies and overseas offices but with certain conditions. This designation applies to PSEs that have made profits continuously for the last three years or earned a net profit of Rs. 30 crore or more in one of the three years. Miniratna Category-II CPSEs Category II miniratnas have autonomy to incurring the capital expenditure without government approval up to Rs. 300 crore or up to 50% of their net worth whichever is lower. Role of Public Sector Undertakings Public Sector Undertakings (PSUs) have laid a strong foundation for the industrial development of the country. The public sector is less concerned with making profits. Hence, they play a key role in nation building activities, which take the economy in the right direction. PSUs provide leverage to the Government (their controlling shareholder) to intervene in the economy directly or indirectly to achieve the desired socioeconomic objectives and maximize long-term goals. As agriculture is the backbone of Indian economy, Public Sector Banks (PSBs) play a crucial role in pushing the agricultural economy on to the progressive pathway and helping develop rural India. Moreover, PSUs play a substantial role in the rural development by providing basic infrastructural services to citizens.

Empowerment of Public Sector Undertakings The Government provides Public Sector Enterprises (PSEs/PSUs) the necessary flexibility and autonomy to operate effectively in a competitive environment. The Boards are entrusted with more powers in order to facilitate further improvement in their performance. The government has also implemented revised salaries for executives of PSEs/PSUs. Moreover, some innovative measures such as Performance Related Pay have been introduced to make them more efficient. These incentives for the employees have been linked to individual, group as well as company performance. For further strengthening, the government is also encouraging the listing of Public Sector Enterprises on the stock markets.

Corporate Governance of Public Sector Undertakings Good corporate governance practices are essential for sustainable business. It generates long term value to all its shareholders and other stakeholders. The Ministry of Corporate Affairs has been working towards strengthening of the corporate governance. The ministry encourages the use of better practices through voluntary adoption. For this purpose, a set of voluntary guidelines has been drafted. The Corporate Governance Voluntary Guidelines serve as a benchmark for the corporate sector and also help them in achieving the highest standard of corporate governance

Corporate Social Responsibility of Public Sector Undertakings Social Obligations of Central Public Enterprises PSUs serve the interest of society by taking responsibility for the impact of their activities on customers, employees, shareholders, communities and the environment in all aspects of their operations. The Government has issued the guidelines on Corporate Social Responsibility for Central Public Sector Enterprises (CPSEs) following the Committee on Public Undertakings (1993-94) recommended a number of measures in its 24th Report on 'Social Responsibilities and Public Accountability of Public Undertakings'. Although the Government believes in making PSEs growth oriented and technically dynamic, its policy is to give greater powers to the boards so that PSEs could function professionally. While the focus is on generating surpluses for self-sustaining growth, the PSEs generally undertake certain amount of non-commercial responsibilities, in furtherance of their commercial objectives. All PSEs cannot be treated on an equal footing for undertaking various types of social activities. It is for the individual PSE to identify and implement social responsibilities keeping in view its financial ability to sustain such activities, operating environment and provisions in its MOA/Statute. It is likely that some social responsibilities may be assigned to PSEs through the issuance of Presidential Directives/guidelines by the concerned administrative Ministries/Departments. While implementation of Presidential Directives is mandatory; the guidelines are also generally to be followed except when the boards of directors of PSEs decide not to adopt them for reasons to be recorded in writing. It is desirable that boards of PSEs have full flexibility in identification and implementation of social responsibilities because as per the Articles of Association they enjoy full autonomy in this regard. PSEs are free to avail the help of State Governments, District Administration and peoples' representatives, wherever necessary.

Jobs & Career The Public Sector Undertakings (PSUs) have their own recruitment procedures. This sector provides job opportunities to both technical and non-technical personnel. The Public Enterprises Selection Board - External website that opens in a new window is responsible for selection and placement of personnel in the posts of Chairman, Managing Director or Chairman-cum-Managing Director (Level-I), and Functional Director (Level-II) in PSEs as well as in posts at any other level as may be specified by the Government.

Governance of Public Sector Undertakings The Department of Public Enterprises - acts as a nodal agency for all Public Sector Enterprises (PSEs). The important roles and tasks of the Department are:

General policy relating to Public Sector. Matters relating to issue of Presidential Directives and guidelines to Public Sector Enterprises. Formulation of policy guidelines pertaining to Public Sector Enterprises in areas like performance improvement and evaluation, financial management, personnel management, board structures, wage settlement, training, industrial relation, vigilance, performance appraisal, etc. Matters relating to reservation of posts in the public sector enterprises for certain classes of citizens. All matters relating to Memorandum of Understanding between the Public Sector Enterprises and the administrative Ministries/Departments. Matters relating to delegation of powers to Board of Directors. To undertake in depth studies in respect of significant areas of functioning of Central PSEs Matters relating to International Centre for Public Enterprises (ICPE) Matters relating to Standing Conference of Public Enterprises (SCOPE) To monitor and evaluate the performance of PSEs and to act as a repository of data and to bring out an Annual Survey for the Parliament. Permanent Machinery of Arbitrators for settlement of disputes among public sector enterprises and Government Departments except disputes relating to tax matters. Appraisal of proposal from different administrative Ministries/Deptt. pertaining to restructuring, revival, joint venture etc.

Problems of the PSU !!

A number of charges are leveled against the public sector in India. Some are lopsided and some are genuine, to a certain extent. Objective and Role: In the history of planning in the country, over the last six decades, there has been a definite shift in the assigned role of public enterprises in the country through various Five Year Plans from 'attaining the commanding heights' in the national economy and 'easing out private sector' to the 'opening up', 'liberalisation' and 'globalisation. It has been a perennial problem for the policy makers to set the role of the public sector in the Indian economy and it would continue to be so. Secondly, the objectives of public sector have been defined and goals being set not very systematically in each case. Even the objectives at the macro level have been mixed-up with a number of propositions, sometimes contradictory in nature. Extent and Coverage: Whether the public sector should extend to wide variety of economic activities or to be confined to a selected few only, is a very crucial decision of great magnitude. Similarly, whether the economy of the country should be open to private sector or be confined only to the public sector monopoly or both should be given a competitive share in open market becomes another crucial political decision. The problem is consistently persisting in the Indian polity, more particularly from the recent past. Organisation and Management: The organisation and management of the public sector enterprises has been on 'trial and error' ever since independence in the country. Initially, the enterprises were organised as departmental undertakings owing to their simplicity of operations and management. Then came a time when the government company form was most prevalent. Following the developments in the international field, particularly in England, corporate form was adopted in India too. And a host of corporation was created, both sectoral and multipurpose as well as development corporations. Lastly, joint ventures came on the scene again taking a cue from the development in the world. The management has all along been a problem to tackle. In the first place, there has been a consistent dearth of managerial skills in the country, both at the initial stages as well in recent past. The constitution of management boards is the other major problem, which merits attention most. Here, the government burdens the governing board with the civil servants, undermining the

principle of autonomy of the enterprises. The management board tilts the balance of decision making on policy matters greatly in government favour and thus reducing the enterprise to, more or less, a department. Personnel Administration: The personnel management of the public sector is beset with a plethora of problems which are mostly responsible for it's inefficient, uneconomic and below standards performance. The recruitment to public enterprises is done by individual enterprises or by a central personnel agency for a group of enterprises in a given sector following general guidelines of the government in matters of reservations, etc. The tendency to second the civil servants to top management is so rampant in the country that it negates the initiative of inbreeding and the insiders are disillusioned, not to talk of their disappointment and disinterestedness. Remuneration or compensation to the employees is another area, which needs prompt attention. While compensation to top managers is usually high in most of the enterprises with innumerable perks and other amenities and benefits, it is progressively lower in the middle and lower level managements. The performance appraisal in most of the public enterprises is done only as the annual recording of character rolls. These results in the low standards of performance and the efficiency of the enterprises go down progressively. Financial Management: The prime requirement of majority of the enterprises is the sound and scientific financial management as they lack financial discipline, consciousness and professionalism. The financial advisor has to play a crucially important role in the management of finances of the public sector enterprises. Budgeting, the most crucial of all the segments of financial management, is not properly practised in the public enterprises in most cases. A number of agencies are involved in the planning and control of financial management of public enterprises in the country, viz., Board of Management, Administrative Ministry, Ministry of Finance, Bureau of Public Enterprises, Planning Commission, Director General of Technical Development and Public Investment Board. Workers' Participation in Management: With a view to ensure increased productivity for the larger benefit of the enterprise, the employees and the community, to give workers' better understanding of their role in the production process and to satisfy their demands for self-expression leading to better industrial relations, worker's participation in management (WPM) was launched.

The process of WPM involves four main steps, viz., information sharing, joint consultations, joint decision-making and self-management. The workers are involved at all these levels to take the decisions in the best interest of enterprise. With regard to workers' participating at various levels including board level, it is beset with a number of problems relating to selection of employees to be represented on the Board of Management. Autonomy and Accountability: 'Autonomy' implies "freedom to act" and is related to "freedom in internal management". Autonomy in the case of public enterprises does not imply 'full freedom' to act as desired by the individual enterprise management. The Public Enterprises are accountable to Parliament through the concerned minister and therefore cannot act freely. At the same time the public enterprises should be accorded sufficient autonomy to run their operations on business lines. It facilitates quick decision-making and encourages initiative. Accountability of the public enterprises implies rendering of accounts to the public - the ultimate owner of these enterprises. According to S.S. Kher, "accountability involves measurement of top management. It must be remembered that the accountability that we are talking of, is accountability, which has a particular purpose - a demonstrably useful purpose. A distinction has to be drawn between accountability and control. Control is active function while accountability is a passive function. Control means directing, restraining, or stimulating an organisation or individual to a certain action. In fact, control facilitates accountability. An accountable individual or organisation has to possess control power to give true account.

Note on Methodology of assessment of implementation of MoUs

(1) Memorandum of Understanding (MoU): MoU is a mutually negotiated agreement between the management of the Central Public Sector Enterprises (CPSEs) and the Government of India. Under this agreement, the CPSE undertakes to achieve the targets set in the agreement at the beginning of the year. MoU is a major policy initiative of the Government of India in facilitating the empowerment and enhancing the performance levels of the CPSEs. It is aimed at providing greater autonomy to public sector enterprises and a level playing field vis--vis the private sector. The Management of the enterprise is made accountable to the government through the promise of a performance contract. The government continues to exercise control as the principal shareholder over these CPSEs in setting MoU targets, and through performance evaluation during and at the end of the year. As per the decision of the High Powered Committee on MoU headed by the Cabinet Secretary, all CPSEs are required to sign MoUs with their administrative Ministries/holding companies. It is expected that signing of MoU would improve the performance of CPSEs and also help the Government in monitoring their performance. (2) MoU Parameters: The Department of Public Enterprises assigned a study to the National Council of Applied Economic Research (NCAER) in 2003 to examine afresh the choice of criteria for performance evaluation and the allocation of weight to different parameters. The recommendations of the NCAER were subsequently accepted by the Government and the new methodology for setting up performance targets has come into force since financial year 200405.

The Principal Components of Parameters for performance evaluation are as under: Weight

I. II

Financial (Static) Parameters Non- financial Parameters (i) Dynamic Parameters (ii) Enterprise-specific Parameters Sector-specific Parameter

50% 50% 30% 10% 10% (iii)

Equal weights (50%) are assigned to both financial and non-financial parameters, which is on the lines of the balanced score card approach of performance evaluation. The non-financial parameters are further sub-divided into dynamic parameters, enterprise-specific parameters and sector-specific parameters. Whereas the static/financial parameters generally relate to profit, size and productivity, the dynamic parameters refer to project implementation, investment in R&D and extent of globalization etc. Similarly, while the sector-specific

parameters refer to macro-economic factors like change in demand and supply, price fluctuations, variation in interest rates etc. beyond the control of the management, the enterprise-specific parameters relate to issues such as safety and pollution etc. As per DPEs guidelines issued for drafting MoUs to be signed between CPSEs and administrative Ministries for the year 2010-11, Corporate Social Responsibility (CSR), R&D & Sustainable Development were included in non-financial parameters with a mandatory 5% weightage each. The choice of individual non-financial parameters constituting 50% of

weightage is left to the combined wisdom of the CPSE, Administrative Ministry and the Task Force. All parameters are required to be SMART (i.e. Specific, Measurable, Attainable, Resultoriented, Tangible) and objectively verifiable. Performance targets for MoUs are framed on a five point scale (Excellent, Very Good, Good, Fair, Poor). The draft MoUs submitted by the CPSEs to Department of Public Enterprises through their administrative Ministries/ holding companies are discussed and finalized at the Task Force meetings arranged by the Department of Public Enterprises. Task Force consists of Ex-Secretaries, Ex-CMD of CPSEs, Management Experts, Domain & Finance Experts, Chartered Accountants, Academicians etc. The rich experience and knowledge of the Task Force

members in different fields provides the necessary technical input and enables fixing of realistic targets. (3) Performance Evaluation under the MoU System: Evaluation of MoU of the CPSE is done at the end of the year on the basis of actual achievements vis--vis the MoU targets. CPSEs are required to submit performance evaluation reports on the basis of audited data alongwith Annual Accounts, Balance Sheet etc. to Department of Public Enterprises through their administrative Ministries/Departments within the target date of 31st August.

The evaluation of the MoU signing CPSEs is done at the end of the year by the Task Force on the basis of actual achievement vis--vis the MoU targets. The weighted score for each parameter in the MoU is worked out by taking into account the actual achievements and the weights assigned to that parameter. The overall MoU composite score is, thus arrived at by adding weight score for all parameters. This system is based on Five-point scale and criteria weight for the calculation of Composite Score, which is index of the performance of the CPSE with reference to its targets. The system of grading CPSEs on the basis of MoU Composite Score is as follows: MoU Composite Score 1.00 1.50 1.51 2.50 2.51 3.50 3.51 4.50 4.51 5.00 Grading Excellent Very Good Good Fair Poor

After completing the evaluation of the performance of the MoU signing CPSEs with the assistance and expertise the Task Force, DPE submits the results to the High Power Committee headed by the Cabinet Secretary for its approval. Once the High Power Committee gives its seal of approval to the evaluation done by the Task Force, the composite score and the ratings of the CPSEs become final. Composite score, thus, facilitates measuring the ability of the CPSEs to

meet their own commitments and to compare and rank various CPSEs even though the commitments of these enterprises are different. (4) Incentives based on MoU ranking: As per the Jagannath Rao Committees (Second Pay Revision Committee) recommendations, MoU performance evaluation is one of the basic criteria for Performance related pay(PRP). The Government has accepted this recommendation. The signing of MoU by the CPSEs with their parent Ministries/ Departments/ Holding Companies has been made mandatory for making them eligible for performance related pay/variable pay. The MoU rating also forms the basis of PRP, with all the key result areas identified in the MoU. The PRP will be payable at 100% eligibility levels in case the CPSE achieves the MoU rating as Excellent. In respect of Very Good, Good and Fair MoU ratings, the eligibility levels for PRP would be 80 %, 60% and 40% respectively. If the MoU performance of a CPSE is rated as Poor, it will not be eligible for PRP irrespective of the profitability of the CPSE. The non-monetary incentive is in the form of MoU Excellence Award. Apart from providing an incentive for the Central Public Sector Enterprises towards achieving excellence in their performance, these MoU awards are an expression of commitment of the policy makers to the CPSEs and the MoU system. (5) MoU Excellence Award: The total number of MoU Excellence Awards are 12 (1 from each of the 10 Syndicate groups, 1 from the listed CPSEs, 1 from amongst the turnaround sick and loss making enterprises). All other Excellent performing CPSEs get MoU Excellence certificates. The following three basic principles for selection of CPSEs for MoU Excellence Certificates from amongst the Syndicate groups are followed: (i) (ii) (iii) The profit of the CPSE in the year should be higher compared to the previous year. It should not be a loss-making enterprise. The composite score of the CPSE should not be more than 1.5 (Excellent rating). Awards and

Compliance of Corporate Governance is one of the criteria for the consideration of MoU Excellence Awards. Award is given to the CPSE meeting the above criteria and having the best MoU

composite score in the concerned Syndicate Group. In case two or more CPSEs score the same MoU composite score in a Syndicate Group, the CPSE recording the highest growth rate of net profit over the previous year is eligible for the Award. Ranking of CPSEs for MoU Excellence Award in the category of listed CPSEs and sick and loss making CPSEs is done by the Department of Public Enterprises. The listed CPSEs with the highest percentage growth in market capitalization are arranged in descending order and the CPSE with the highest growth is selected for the MoU Excellence Award. CPSE is considered sick if it is referred to either BIFR or BRPSE. Out of such CPSEs, those are eligible for award that have earned profit before tax (PBT) for the year the MoU is under consideration as well as during the immediately preceding year. The CPSE having the best MoU composite score is given the MoU Excellence Award. MEMORANDUM OF UNDERSTANDING 1. DPE/Guidelines/V/1 Delegation of Powers to Public Sector Undertakings Signing Memoranda of Understanding with the Government. Government have been considering for quite some time the question of giving greater autonomy to the Public Sector Enterprises consistent with their accountability. As one of the measures to give greater autonomy to Public Sector Enterprises, Government have entered into Memoranda of Understanding with the number of Public Sector Enterprises. For the year 1988-89, MOUs have been signed with eleven Public Sector Undertakings (SAIL, ONGC, BHEL, NLC, Indian Airlines, Air India, HMT, HEC, MMTC, STC, MUL). More PSUs will be signing Memoranda of Understanding from 1989-90 onwards. 2. Government have decided to delegate enhanced financial and administrative powers to MOU signing companies as indicated below: (i) Wage Revision These enterprises can finalize wage revisions within the broad guidelines laid down by the BPE and if any enterprise proposes to give benefits beyond these guidelines prior approval of the Government should be obtained.

(ii) Incentive Schemes Where Productivity Linked Incentive Schemes are in operation and the employees are also paid bonus under the provisions of the Bonus Act, there is a existing ceiling of 32% of both bonus and such incentives. MOU signing companies can evolve incentive schemes within the broad guidelines laid down by BPE subject to the condition that the total of bonus and incentive shall not exceed to the 35% of the wages. (iii) Voluntary Retirement Scheme A Voluntary Retirement Scheme applicable to all Public Sector Enterprises has separately been finalized and communicated to all Public Sector Enterprises. MOU signing companies are authorized to implement schemes of voluntary retirement even departing from the parameters of the model Voluntary Retirement Scheme provided the compensation to be paid can be found from the internal resources of the company. (iv) Transfer of Functional Directors At present Functional Directors are appointed with the approval of ACC against specific posts. MOU Signing companies shall have powers to transfer Functional Directors from one charge to another in consultation with the Secretary of the administrative Ministry and with the prior approval of the Minister. (v) Foreign Tours of Functional Directors At present foreign tours of CMDs as well as Functional Directors require prior approval of the administrative Ministry. It has now been decided that while the CMDs would continue to obtain the approval of Ministries for tours outside the country, the chief executives can authorise business visits abroad of Functional Directors. 3. If any company has already been delegated powers higher than what is mentioned in para 2 above, it will continue to exercise such higher powers. 4. Orders regarding enhanced financial powers to incur capital expenditure and expenditure in foreign exchange will be issued separately.