A company whose paid-up capital is more than 50% owned by the Central or the State Government or both is called a government company. It is incorporated and registered under the Companies Act 2013. Such a company is governed by the Companies Act and the rules and regulations made by the government. However, the issue of whether a government company can also be regarded as a state under Article 12 of the Constitution of India, which defines the term state, is debatable. In this blog, we analyse the status of government companies under the Companies Act and the Constitution and examine the criteria and whether a government company comes within the scope of Article 12 or not.
Government company: meaning, definition and features
As per Section 2(45) of the Companies Act, a government company means a company whose more than fifty per cent of the equity capital is owned by the government, which may be either the central government, one or more state governments or by both and includes a subsidiary company of such a government company. Hence, where a company that has more than half of its shares with voting rights owned by the government, and any other company that is controlled by such a company, is known as a government company.
A government company is a corporate entity that is registered and incorporated under the Companies Act, 2013. The government owns more than half of its shares and has control over it. However, the company still has to follow the rules and regulations of the Act as well as its articles of association. The accounts of these companies are audited by the Comptroller General of India and their annual reports are laid before the Parliament. They have a separate legal entity and have the power to hold assets in their name, have operational flexibility and can raise funds on their own from the market. However, they are also subject to certain restrictions and regulations, such as the requirement to obtain government approval for certain decisions.
Positional analysis of Government Company
The status of a government-owned company is different under both, the Companies Act and the Indian Constitution. Section 2(45) of the Companies Act defines a government company as a company whose majority of ownership or control is vested with the government. It is incorporated in the same manner and has the same features as that of a normal company, but most of the ownership and control is with the government. Such a company has to follow all the provisions enshrined in the Act, where it may be exempt from following some of the regulations of the Act, while some of the provisions may be different from those of a normal company. It may also need to follow a separate set of rules made by the government for its efficient functioning.
On the other hand, as per Article 12 of the Constitution, the term State refers to the central and state governments and legislatures in India, as well as any local or other authorities that are in India or subject to the control of the Indian government. Thus, it means that any authority which is under the control of the Indian Government is a state.
Because the government company is owned and controlled by the government, questions about whether a company owned and controlled by the government is a state as per Article 12 of the Constitution or not.
Whether a government company comes under the ambit of Article 12 or not, was decided in two landmark cases:
Som Prakash vs. Union of India: This case was a significant one for Indian Constitutional Law as it dealt with the issue of whether the provisions of the Indian Constitution applied to companies owned by the Indian government. The case was filed by Som Prakash, who was employed as a clerk by Burmah Shell oil storage ltd. and the question was whether a government company was included in the scope of ‘other authorities under Article 12. The Supreme Court ruled that Bharat Petroleum Corporation, a government company, was covered by the term “other authorities” under Article 12. The court determined that government companies are organs and agents of the government, having sovereign powers, and are therefore bound by Part III of the Constitution.
R.D. Shetty vs. IAAI: In this case, the Supreme Court had to decide if the International Airport Authority of India was a “State” as per the provisions of the Constitution and whether the respondents had acted lawfully in awarding a contract. The petitioner alleged that the respondents had ignored the highest bids and favoured lower bidders. The Supreme Court ruled that the International Airport Authority was an instrumentality or agency of the government and thus came under the scope of “other authorities” in Article 12. The court also ruled that government companies are instrumentalities of the government, exercising sovereign powers, and are therefore given the status of a state.
Hence, the verdicts of both significant cases established that a company owned by the government is a governmental agency and falls within the scope of Article 12 of the Indian Constitution. Therefore, a government company qualifies as a State according to Article 12.
Challenges faced by a government company
As per Article 12 of the Constitution and judgements passed by the Supreme Court in landmark cases, a government company is a state and is under the obligation to follow all laws made for the state. Because it is regarded as a state, there are various challenges that a government company has to face. These challenges are as follows:
- Governance: Government companies are often run by bureaucrats who may not have the knowledge or expertise to run a business enterprise, leading to inefficiencies and poor performance. Also, government companies lack freedom and flexibility and are subject to the control of politicians and bureaucrats, and delayed decisions can negatively impact their performance leading to missed opportunities and inefficiencies, resulting in heavy losses and the need for regular capital infusion by the government.
- Accountability and transparency: Government companies also often suffer from issues such as difficulties related to accountability, lack of transparency, political interference, and inadequate monitoring. Companies are often subject to political interference, which can lead to a lack of accountability and transparency in decision-making. Also, government companies may not have adequate monitoring and evaluation mechanisms in place to ensure that they are fulfilling their mandate effectively which can lead to inefficiencies and poor performance, as well as a lack of accountability to stakeholders. Add to that, the level of scrutiny and accountability of these companies is lower than that of private companies. These challenges can make it difficult for government companies to achieve the required level of accountability and transparency.
- Efficiency and performance: Because of several factors such as lack of freedom and flexibility, political interference, delayed decision-making, bureaucratic management, inefficient management and lack of profitability, the overall efficiency and performance of government companies are lower than that of private companies. Also, frequent changes in rules, policies, procedures and agenda of the government hamper the efficiency of performance. These factors lead to the inability to have a competitive edge over private companies and lost business opportunities.
Suggestions for Improving the Functioning and Performance
There are many difficulties faced by government companies related to accountability, transparency and performance. Here are some suggestions for solving these problems:
- The government should appoint professionals having the necessary expertise instead of appointing ineligible bureaucrats to handle the daily affairs of the company. Also, Government companies should provide professional training to their employees to improve their skills and knowledge.
- The government should lower political interference and give greater autonomy and freedom to operate.
- There is a need to increase scrutiny and set up a monitoring system for these companies to ensure increased accountability and transparency.
- The government shall also ensure that these companies comply with all the required rules and regulations.
- Government companies should adopt new technologies in their system to improve their efficiency and reduce costs.
The term government company is used for such a company in which most of the paid-up equity capital is owned by the government. It is formed and regulated according to the Companies Act. According to various judicial decisions, government companies are considered as ‘other authorities’ under Article 12 of the Constitution and are treated as the state. There are various challenges that government companies face in terms of governance, accountability and performance as they are treated as a State, which can be overcome by modifying and enforcing new regulations.
Author(s) Name: Aditya Nisal (Savitribai Phule Pune University, Pune)