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IJCAES SPECIAL ISSUE ON B ASIC,  A PPLIED & SOCIAL SCIENCES,  V OLUME II, OCTOBER 2012

[ISSN: 2231-4946]

Page | 322 

General Study on Public Sector Undertakings:

Growth of PSUs and How Effectively

Financially Managed are our PSUsP. K. Gupta

Unigreen Global Private limited, New Delhi

 Research Scholar, CMJ University, Shillong, Meghalaya

pk_delhimetro@hotmail.com

Abstract  —  Post independence the advent of Public Sector Undertakings was encouraged as the tool for

giving momentum to the growth of Indian Economy. The Government took several policies decisions to

set up Government controlled, Government financed undertakings to bridge the gap between rich and

poor, optimum usage of natural resources, regional inequalities, and absenteeism of private sector in

those business activities which either were totally socially oriented or were driven by very less profit

margins. In the process, government forayed into all business activities thus coming in direct competitionwith the private sector in almost all sectors. When the performance of all such PSUs were adjudged

against the performance of their counterpart in private sector, then it was revealed that either many of

these PSUs were not performing as efficientely as those in private sector or were already in deep red

financially. Analysis of poor performance of these PSUs led to the conclusion that all these PSUs need to

be effectively financially managed to come closer or to surpass the performance private sector

companies. This was also essential to ensure that deployment of public funds should be done in such a

 judicious manner that instead of becoming a constant burden on Government exchequer these PSUs

should contribute to the nation’s growth on self sustained basis

This paper covers brief history with reasons why the concept of commercial organizations as PSUs

emerged, various type of PSUs and what are the ingredients of their financial management.

Keywords  —   Public sector Undertakings ( PSUs), Industry, Economic Development , Financial

Management , Central Public Sector Enterprises (CPSE) , Privatisation 

I. 

ADVENT OF PUBLIC SECTOR AND ITS GROWTH SINCE I NDEPENDENCE 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 wasdeveloped as an instrument for self-reliant economic growth. The country adopted the planned economic

development policies, 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, growth of Public sector undertakings saw a new era with the nationalization of 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

companies whose assets exceeded Rs 200 mn.

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The priorty shown towards establishment and growth of Public Sector undertakings saw reversal in 1991. 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.

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 'non-strategic'. Areas ofstrategic 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.

II.  FINANCIAL MANAGEMENT IN PSUS 

Public sector undertakings are often blamed for bad Financial Management for various reasons. The most

important of the reasons is the lack of accountability. Since, the functioning in the Public Sector Undertakings is not

only influenced by profit motive as is the case for any or most of the private sector companies, rather various other

factors such as social objective, equitable distribution of resources and wealth and addressing the needs of priority

sectors and areas are few of the factors which influence the working of Public Sector Undertakings in India.

III.  SPECIAL FEATURES OF FINANCIAL MANAGEMENT IN A PUBLIC SECTOR UNDERTAKING (PSUS) A.   Role of financial advisor  

The financial advisor occupies an important position in public sector undertakings. His concurrence is required

on all proposals which have financial implications.

 B.  Capital budgeting decisions

The power upto certain limits, in respect of individual capital expenditure items has been delegated to the board

of public sector undertakings. For making investments beyond the limit the proposal goes to Public Investment

Board which appraises and recommends projects to the Central Government.

C.  Capital structure decisions

Such decisions involve the identification of different sources of finance. Normally PSUs are financed on the basis of half of their capital being in the shape of equity and the rest in the shape of loans. The funds are also

 provided to PSUs directly by the government. The following factors are taken into consideration at the time of

designing capital structure (i) gestation period (ii) level of business risk (iii) capital intensity of project and (iv)

freedom of pricing.

 D.  Working capital management

The inventory constitutes a major portion of the working capital of public sector undertakings and hence proper

inventory management should be given top priority by public sector undertakings.

 E.   Audit

Public sector undertakings in addition to regular audit conducted by professional accountants, are subject to

efficiency-cum-propriety audit by the Comptroller and Auditor General of India whose reports are presented to

Parliament every year.

 F.   Annual report

The annual reports of public sector units though similar to those of private sector units, tend to provide more

information.

G.   Pricing policy

The bureau of public sector undertaking has laid down certain guidelines for pricing by PSUs with the objective

to serve the overall interest of the community at large.

IV.  STATUS OF PUBLIC SECTOR UNDERTAKING 

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PSUs are organized mainly as departmental enterprise or statutory corporation or companies.

Short Comings in the Management of Public Sector Undertakings

With the passage of time, the functioning of Government is becoming more and more transparent. With the

commencement of Right to Information Act, every citizen has access to most of the Government information.

Functioning in Public sector undertakings are also now under public scrutiny every moment. With the opening of

most of the sectors to private companies, except for very few strategic sector such as defence and nuclear sectors, performance of public sector companies are compared with the very best private companies in that sector. This

comparison has led to the conclusion that Public Sector Undertakings are often bad managed Companies. There arevarious reasons for such poor management but to a name a few are over capitalization, delayed implementation of

the project, lack of responsibility of the managers, too much dependence on subsidy or grant from the government,

over staffing, poor inventory management etc. While, most of the PSUs are generally deficient on one or the other

 parameter but in Project execution by any PSU, Delhi Metro Rail Corporation Limited has set an example where

two serious factors i.e. cost overruns and delayed execution of the project were largely tamed showing extra

ordinary brilliance in the project execution and its management.

If we restrict our discussion to the financial management then one single largest factor is bad inventory

management. The public Sector undertakings are often blamed for over inventory resulting in blocking of capital

and space or less often for under inventory upsetting production schedule. Both are signs of inefficient inventory

management and consequently for the bad financial management. There is generally no provision for working

capital margin at the time of estimating cost of project. Consequently there is no provision of long-term funds forworking capital and the enterprise has to obtain financing from short-term sources. Most of the public sector units

are capital intensive hence ratio of current assets to fixed assets is generally low. Most of the public sector

undertakings lack application of working capital management techniques especially relating to receivables like

discount rate, credit period and credit standards. The reason being that they sell bulk of their output to Government

Departments.

V.  R OLE OF A FINANCIAL ADVISER IN A PUBLIC SECTOR U NDERTAKING 

The financial adviser occupies an important position in all public sector undertakings. He functions as the

 principal advisor to the chief executive of the enterprise on all financial matters. The committee on public sector

undertakings has specified the following functions and responsibilities for a financial adviser:

a.  Determination of financial needs of the firm and the ways these needs are to be met.

 b.  Formulation of a programme to provide most effective cost-volume profit relationship.

c. 

Analysis of financial results of all operations and recommendations concerning future operations.d.  Examination of feasibility studies and detailed project reports from the point of view of overall

economic viability of the project.

e.  Conduct of special studies with a view to reduce costs and improve efficiency and profitability.

An important role of the financial adviser with respect to the management of public sector enterprises is the

relevance of strategic financial planning technique in dealing with conflicting objectives. It is an effective mode to

optimize the flow of funds required by the overall corporate strategy and to make adequate provisions to meet

contingencies. This requires:

a.  The development of adequate financial information system.

 b.  The existence of clear strategic financial objectives.

c.  The co-ordination of plan with the Government’s economic, social, fiscal and monetary policies.

VI.  CONCLUSION 

In fact, the public sector is set for a major change. It is  poised for a major face lift. “The public sector will

 become selective in the coverage of activities and its investment will be focused on strategic high-tech and essential

infrastructure.” The Government has also clarified that the public sector has to mend for itself and stop relying on

Government’s budgetary support.

Privatisation has come as the greatest tool in the hands of the Government for bringing efficiency in the PublicSector Undertakings. It is the process of reforming PSEs and aims at reducing involvement of the state or the public

sector in the nation's economic activities by dividing the industries between public sector and private sector in

favour of the latter. The policy of Greenfield Privatisation has made considerable progress since the introduction of

the new economic policy (NEP) in 1991. The process of re-divide has been mainly through:

De-licensing

Reduction in budget allocation

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External aid/grant

Anomaly in duty structure

Decision-making systems.

Earlier, Financial Management was limited to accounting of various financial transactions in the Public Sector

Undertakings. Of late, Public Sector Undertakings have understood that efficiency in Financial management is of

utmost importance, if the PSUs are to survive in the competitive environment. The competition is also from withini.e. scarce resources of the Government and from the outside world i.e. competition with private sector.

A lot has been done; still lot needs to be done to bring efficiency in the functioning of Public SectorUndertakings.

R EFERENCES 

[1]  CPSE (Author), From Build up to Break through, leading companies of India Inc. , Department of Public Enterprises, Ministry of Heavy

Industies and Public Enterprises, Govt. of India, First Edition 2009, ISBN 9788175415348, pp 18-47.[2]  Garg A.K, 2010-11 Annual report of Delhi Metro Rail Corporation Ltd., DMRC, Sep. 2011

[3]  Rastogi Atti n and Sharma V.K., Public sector Journal vol. iii, July 2012 issue, pp. 78-81.

[4]  Central Public Sector Enterprises, Quarterly News Letter Issue I Vol. I March-June 2011.