As per the provisions of the Companies Act, a company in which 51% or more of its capital is held by central or state government is regarded as a Government Company. These companies are registered under Companies Act, 1956 and follow all those rules and regulations as are applicable to any other registered company.

The Government of India has organised and registered a number of its undertakings as government companies for ensuring managerial autonomy, operational efficiency and provide competition to private sector.

Features of Government Companies

The main features of Government companies are:

  1. It is registered under the Companies Act, 1956.

  2. It has a separate legal entity. It can sue and be sued, and can acquire property in its own name.

  3. The annual reports of the government companies are required to be presented in parliament.

  4. The capital is wholly or partially provided by the government. In case of partially owned company the capital is provided both by the government and private investors. But in such a case the central or state government must own at least 51% shares of the company.

  5. It is managed by the Board of Directors. All the Directors or the majority of Directors are appointed by the government, depending upon the extent of private participation.

  6. Its accounting and audit practices are more like those of private enterprises and its auditors are Chartered Accountants appointed by the government.

  7. Its employees are not civil servants. It regulates its personnel policies according to its articles of associations.

Merits of Government Companies

The merits of government company form of organising a public enterprise are:

  1. Simple Procedure of Establishment: A government company, as compared to other public enterprises, can be easily formed as 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.

  2. Efficient Working on Business Lines: The government company can be run on business principles. It is fully independent in financial and administrative matters. Its Board of Directors usually consists of some professionals and independent persons of repute.

  3. Efficient Management: As the Annual Report of the government company is placed before both the houses of Parliament for discussion, its management is cautious in carrying out its activities and ensures efficiency in managing the business.

  4. Healthy Competition: These companies usually offer a healthy competition to private sector and thus, ensure availability of goods and services at reasonable prices without compromising on the quality.

Limitations of Government Companies

The government companies suffer from the following limitations:

  1. Lack of Initiative: The management of government companies always have the fear of public accountability. As a result, they lack initiative in taking right decisions at the right time. Moreover, some directors may not take real interest in business for fear of public criticism.

  2. Lack of Business Experience: In practice, the management of these companies is generally put into the hands of administrative service officers who often lack experience in managing the business organisation on professional lines. So, in most cases, they fail to achieve the required efficiency levels.

  3. Change in Policies and Management: The policies and management of these companies generally keep on changing with the change of government. Frequent change of rules, policies and procedures leads to an unhealthy situation of the business enterprises.