After reading this article you will learn about:- 1. Characteristics of a Government Company 2. Advantages of a Government Company 3. Limitations.

Characteristics of a Government Company: 

1. A government company is formed and registered under the Companies Act, 1956 as a public company or a private company. Provisions of company law are applicable to government companies also.

2. It has a separate legal entity, perpetual succession and a common seal.

3. It can sue and be sued, enter into contracts and acquire property in its own name.


4. A government company may be owned wholly by the government or partly by the government and partly by the private investors. When these companies are owned by both the government and private investors, not less than 51 per cent of the paid-up share capital of government company is held by the Government.

5. The government company is managed by Board of Directors. The directors are appointed by the government and other shareholders.

6. The auditor of a government company is appointed by the Central Government on the advice of the Comptroller and Auditor-General of India.

7. The annual report of the working of the government company is required to be presented every year to the Parliament or State Legislature as the case may be.

Advantages of a Government Company:


A government company enjoys the following advantages or benefits:

1. A government company is formed easily as no statute is required to be enacted.

2. It has a separate legal entity and so can manage its affairs on its own.

3. These companies are run on sound business lines. They earn surpluses to finance their own expansion plans.


4. This form of management has greater flexibility than the department management. The ‘Memorandum of Association’ and ‘Articles of Association’ of government company can be altered according to the provisions of the Indian Companies Act, 1956 as and when required.

5. It is the only form of management by which the government can make use of managerial skill and technical know-how of the private sector.

6. Tie directors of a government company are free to take decisions. They can take prompt decisions. They will not let an opportunity slip away.

Limitations of a Government Company:

Notwithstanding the above mentioned points of merit there are certain limitations of this form of organisation.


These are summarised as under:

1. The relatively independent character of the Government company has proved to be farce. Government being the sole or the bulk shareholder dictates its terms and the management is conducted by the Board of Directors according to the will of the Government.

2. Ministerial interference in the working of the Government company is found to be frequent and far-reaching. Undefined and unrestricted authority is exercised by the Government department to influence or twist the operational policies of the Government companies according to the whims and fancies of the Ministers and Secretariat officers.

The apparently independent Government companies tend to be either the extension of departmental bureaucracy or the tool of the pet political ideas or policies of the ruling party divorced from the tangible criteria of commercial feasibility, administrative efficiency and integrity.


3. The powers of the Board of Directors are subject to the approval of the concerned Ministry. This is particularly so in regard to the borrowing power, increase in the capital, appointment of top officials, entering into contracts for large orders and restrictions on capital expenditure. Thus the Government company can rarely function with flexibility and independence.

4. The control exercised by the Government over these companies is so vast or all-pervading that they “are reduced to mere adjuncts to the ministries and subjected to the same treatment as given to the subordinate organisation or offices of the Government.”

5. The autonomy of the Government companies is vitiated by the executive orders of the Government issued without reference to the Parliament.

6. The Boards of Management of the Government companies are dominated by officials from the ministerial departments in their ex-officio capacity. These officials do not develop any sense of attachment and do not show any initiative and drive (as they have no direct financial stake in the working of the concerns) essential for increasing productive activity and increasing efficiency.


7. The departmental officers appointed to top posts in the executive control of these companies. They are liable to be transferred back to their original departments. Hence their divided loyalty dilutes their interest in carrying out the responsible tasks assigned to them as managers of the Government companies.

8. It evades the constitutional responsibility to the Government and the Parliament.

9. Parliament has no effective control over State undertakings constituted in the form of Government company.

Only the annual audit reports of such companies are placed before the Parliament. Audit reports contain observations only about finances revealed by the accounting figures. Administrative aspects, personal matters, operational methods etc. cannot be discussed at length by the Parliament (as is the case with Public Corporations).


A former Auditor-General observes, “The practice of constituting State enterprises as Private companies is a fraud on the Companies Act and on the Constitution.”

Shri Moraka said “the moment a company is floated a certain activity and a certain amount of finance is taken away from the purview of the House (Parliament) and the purview of the Comptroller and Auditor General and the Service people employed in that company are taken away from the purview of the Public Service Commission.”


Most of the limitations of the Government company form of State enterprises are based on apprehensions regarding the working of the various Government departments.

Suitable provisions have been made in the Companies Act relating to audit and annual report of the Government companies, which, if applied judiciously, would belie these apprehensions.

A Parliamentary Committee on Public Enterprises including Government companies has been constituted to watch the functioning of these companies. Of course, Parliamentary accountability in respect of Government companies is not as all-pervasive as is the case with public corporations.


Government companies are immune from Parliamentary accountability to a greater extent. The Government more particularly its officers (the bureaucracy) are likely to have easy scope to interfere in the working of such companies. The Government, as the dominant shareholder, is able to get any information and is free to conceal the same from the Parliament.

Its Ministers and top officials are likely to be tempted to exercise more control over these Companies without subjecting them to the detailed scrutiny of the Parliament.

As Hanson said “it is very easy to use company as a screen to protect from the light of publicity and the arrows of justified criticism of the operations of an irresponsible and power-hungry bureaucracy.”

It is therefore necessary to lay down a standard code of conduct for the Government and its undertakings constitute as joint-stock companies. This code of conduct should make it obligatory for the Government that the Parliament would be taken into confidence, particularly in regard to the efficient working of the Government companies.

The executive decisions of the Government relating to the inception, policy-making and operation of the companies should be subjected to Parliamentary review and concurrence.