Corporatization of the Governance in India

Introduction

In recent years, the system of governance in India has gone through massive reforms to keep up with the latest global economic development trends, with the Indian government establishing a new model of ‘maximum governance, minimum government’. Whilst having a federal structure, India is often referred to as ‘quasi-federal’ due to the strong concentration of powers at the national (‘union’) level. There have also been efforts to decentralize powers, functions and democracy down from the state to the local level, through the 73rd and 74th Constitutional Amendments of 1992.

Types of Corporate Governance

There are largely 2 types of corporate governance in India being Public Corporations, commonly known as a Public Sector Undertaking (PSU) and 2) Private Corporations.

The major difference between the private and public sectors is the ownership of organization. In the public sector, member organizations are owned and run by the Government of India or a state government, in which it is possible for the government to have full or partial ownership, control and management. In contrast, private enterprises are of course owned and operated by individuals or private companies.

The main objective of the public state/central owned enterprises are to engage in commercial services, preliminary undertaken for providing services for the good of the public. In the private sector, along with providing services to the public in general, profit and growth are instead the primary goals. Another striking difference between a public sector undertaking and the private sector is that in a public sector undertaking, the government provides funding and financial support, while in private sectors it is usually financial institutions and investors that provide financial aid. Industries such as education, defense, transportation, and infrastructure shall traditionally be suitable for the public sector and industries such as financial services, hospitality, real estate and technology are prevalent in the private sector.

India’s commitment to privatization escalated steadily through the 1990s as the public sector continued to underperform and significantly lagged when compared to the private sector. Accordingly, it would help bring an end to the ongoing subsidies to loss-making PSUs and finance long-term investments. The government’s initiative behind the privatization program began as a disinvestment program to reduce holding up to 20%.

Private ownership was considered more efficient than state ownership and was an important source of government revenue. Accordingly, it would help bring an end to the ongoing subsidies to loss-making PSUs and finance long-term investments.

Example of a PSU Converted to a Private Sector Company

Recently, India’s largest National Carrier “Air India” was put up for auction in October 2021, after remaining nationailised since 1953, controlling a majority of domestic airspace. In April 2021, the Government of India started tendering for financial bids for Air India, with Tata Group and Spice Jet Promoter Ajay Singh both placing bids. Thereafter, the Indian Government announced Tata group as the winning bid of Rs 18,000 crore for Air India.

On January 27th, the Government of India transferred 100% shares in Air India to Tata’s fully-owned subsidiary Talace Pvt Ltd. The new owners now have complete management control over Air India, Air India Express, and a 50% stake in ground handler AI-SATS. It should be noted that the Income Tax Department allows for the new owners of Air India to carry forward losses and set them off against future profits.

Conclusion:

In recent years, the Indian government has made privatization and the corporatization of governance as one of the cornerstones of its reform policy. A mega privatization drive has been lined up by the government for the next fiscal period, amounting to ₹1.75 trillion, after having missed the previous fiscal target of ₹2.1 trillion due to the disruptions caused by the global pandemic. The government is also required to constitute an independent commission endowed with requisite powers and staffed by professionals and researchers (or a separate ministry) in order to formulate and implement the government’s privatization plan.

Bosky Tanmay Gokani Bosky Tanmay Gokani

Bosky Tanmay Gokani

Legal Advisor
Bosky Gokani, a qualified Indian lawyer, is currently based in Shanghai.
Veronica Gianola Veronica Gianola

Veronica Gianola

Senior Associate
Veronica Gianola, an accomplished Italian lawyer, is a member of the Milan Bar Association.

Contact us for a
free consultation

CONTACT US FOR A FREE CONSULTATION

This field is for validation purposes and should be left unchanged.