This article throws light upon the financial needs of public sector enterprise. The financial needs are: 1. Equity Capital 2. Loans 3. Internal Resources 4. Capital Market 5. Arranging Working Capital.

Public Sector Enterprise: Financial Need # 1. Equity Capital:

Public enterprises have large equity base. Since they are owned by the government, the initial capital is also provided by it. In case of nationalised undertakings, private capital has also been allowed to exist. When Imperial Bank of India was nationlised then is shareholders were compensated by giving them shares of State Bank of India. In 1990-91 public enterprises were having Rs. 101,797 crores as capital employed.

The projects having longer gestation periods mainly rely on equity capital because it does not involve any liability.

Government of India has now changed its policy of financing public enterprises. It constituted a Committee in Nov., 1992 under the chairmanship of Dr. C. Rangarajan to suggest disinvestment in public enterprises. Government wants to sell shares of public enterprises to the public.


The exercise will help in raising funds for the government. The Committee suggested a disinvestment of 49 percent of equity in industries reserved for public sector and 74 per cent in other cases.

The government raised Rs. 3,038 crores in 1991-92 and Rs. 1,912 crores in 1992-93 by disinvesting shares of 31 public sector enterprises. During 2001-02 disinvestment in public sector undertakings amounted to Rs. 5678 crore and the target for 2002-03 is Rs. 12,000 crore.

Public Sector Enterprise: Financial Need # 2. Loans:

Public enterprise is allowed to raise loans from government and financial institutions. Normally they can raise loans equivalent to the equity capital. The interest burden of enterprises which was Rs. 1,399 crores in 1980-81 increased to Rs. 7,539 crores in 1990-91. The burden of interest is certainly large.

The enterprises with longer gestation periods face more difficulties in meeting their interest liability. The government has allowed these enterprises to raise loans by way of public deposits at 12% to 14% interest and debentures at 14% or 10% per annum along with tax concessions.

Public Sector Enterprise: Financial Need # 3. Internal Resources:


The best source of finance for any enterprise is its own resources. The public sector enterprises are expected to generate sufficient funds from internal sources to finance expansion and diversification. The government has also given a directive to PE for financing expansions through internal sources only.

The creation of internal sources is given due importance by PSU. In 1980-81 these units had Rs. 1,225 crores as internal sources and this figure reached Rs. 11,372 crores in 1990-91. An increase of over 9 times in ten years period is quite significant.

Public Sector Enterprise: Financial Need # 4. Capital Market:

Public sector undertakings can raise funds from capital market by getting prior permission from the government. In the last a few years the government is adopting a liberal policy in this regard. In 1992, the government appointed a committee under Dr. Rangarajan to frame a policy for disinvesting PSE shares through capital market.

The Committee has recommended that 49 percent of equity should be distinvested in industries reserved for public sector and 74 percent in other cases. The government has accepted these recommendations and a process of disinvestment have already started.


The government has decided to disinvest equity of 5 to 20 percent in phases in selected units. During 1991-92 total shares disinvested comprised 8 percent of the total government share holding in 31 PSE’s. In 1992-93 disinvestment targets was at Rs. 3,500 crores but it realised only Rs. 1,912 crores from selling scripts of 16 PSE’s.

This process slowed down due to security scam probe. In 1994-95 it raised Rs. 4,483 crores by way of disinvestment in public sector scam probe. In 1994-95 it raised Rs. 4,483 crores by at Rs. 5,687 crore. The target for 2002-03 was Rs. 12,000 crore but actual disinvestment till 31-1-2003 amounted to Rs. 3,342 crore only.

Public Sector Enterprise: Financial Need # 5. Arranging Working Capital:

Public sector undertakings arrange working capital funds from SBI and commercial banks. These undertakings also offer securities to the banks as other customers do. These funds are arranged against hypothecation of current assets. PSU’s can also approach government for short-term loans.