THE LEGAL BRIDGE

Judiciary & Law Notes Series

THE COMPANIES ACT, 2013

CHAPTER XXIII

Government Companies

Sections 394–395

For Judicial Service Aspirants & Law Students

RJS • DJS • PCS-J • HJS • UPJS • BJS • MPCJ

51% Govt Shareholding • CAG Audit • Parliamentary Accountability • Article 12

— Enriched with landmark judgments and illustrative case law —

Chapter XXIII — Government Companies

The government company is the principal vehicle through which the State engages in commercial and industrial enterprise. From the steel mills of SAIL to the power utility of NTPC, from the energy major ONGC to the airline carrier Air India (until its privatisation in 2022), the bulk of the public sector has historically operated through companies in which the Central or State Government holds at least 51% of the paid-up share capital. Chapter XXIII of the Companies Act, 2013 (Sections 394 to 395) is the short but constitutionally significant chapter that governs the special regulatory treatment of such entities.

While the chapter contains only two operative sections, understanding government companies requires looking at the entire Act — because government companies are governed by the general provisions of the Act, subject only to the specific modifications, exemptions, and special reporting obligations flowing from Chapter XXIII and from notifications issued by the Central Government under Section 462. The Comptroller and Auditor-General of India (CAG) — a constitutional authority — plays an important audit role in government companies, and CAG's reports form part of the accountability architecture under Article 151 of the Constitution.

Relevant Definition — Section 2(45) of the Act

A 'Government company' means any company in which not less than fifty-one per cent of the paid-up share capital is held by —

• The Central Government; or
• Any State Government or Governments; or
• Partly by the Central Government and partly by one or more State Governments;

And includes a company which is a subsidiary company of such a Government company.

Three points to note on this definition:

• The 51% threshold is of paid-up share capital — not of voting rights or of effective control. An entity with 49% government equity but with majority voting rights via a shareholders' agreement is not a government company in the statutory sense;
• The term 'paid-up share capital' includes both equity and preference share capital — so the calculation considers the total capital structure;
• Subsidiaries of government companies are themselves deemed government companies — meaning that a company in which a government company holds 51% or more also falls within Section 2(45).

Typology of Public Sector Entities

'Government company' is one form of public sector organisation. It is distinct from — and not to be confused with — other forms of State-run enterprise:

The key distinguishing feature of a government company is that it is incorporated under the Companies Act — it has a MoA and AoA, shareholders, directors, a Registrar of Companies filing record, and an annual return. A statutory corporation, by contrast, is a creature of its specific parent statute and is not registered under the Companies Act.

Section 394 — Annual Reports on Government Companies

(1) Laying Annual Report Before Parliament / State Legislature

Where the Central Government is a member of a Government company, the Central Government shall cause an annual report on the working and affairs of that company to be —

• Prepared within three months of its annual general meeting before which the comments given by the Comptroller and Auditor-General of India and the audit report is placed under the proviso to sub-section (6) of section 143; and
• As soon as may be after such preparation, laid before both Houses of Parliament together with a copy of the audit report and comments upon or supplement to the audit report, made by the Comptroller and Auditor-General of India.

Sub-section (2) provides the parallel State-level obligation — where a State Government is a member of a Government company, the State Government shall similarly cause an annual report to be prepared and laid before the Legislature of that State. Sub-section (3) applies where both the Central and State Governments are members; the report must be laid before both Parliament and the relevant State Legislature(s).

Purpose of Section 394

Section 394 is the legislative accountability mechanism. A government company is owned, ultimately, by the people. The Executive government exercises the shareholder's rights on behalf of the public. The elected Legislature is the appropriate forum to scrutinise how the government has discharged this fiduciary role. The annual report, audited by CAG, laid on the floor of the House, is the primary instrument of parliamentary oversight of public enterprises. It is usually referred to standing committees — the Committee on Public Undertakings (COPU) at the Central level — for detailed examination.

Section 395 — Annual Reports Where One or More State Governments are Members of Companies

Where the Central Government is not a member of a Government company, every State Government which is a member of that company, or where only one State Government is a member of the company, that State Government shall cause an annual report on the working and affairs of the company to be —

• Prepared within the time specified in sub-section (1) of Section 394; and
• As soon as may be after such preparation, laid before the House or both Houses of the State Legislature with a copy of the audit report and the comments upon or supplement to the audit report referred to in sub-section (1) of Section 394.

Section 395 completes the framework by ensuring that even purely State government companies (without any Central government shareholding) are subject to the same parliamentary-accountability regime.

Special Audit Architecture — Interplay with Section 143(6)

Understanding Chapter XXIII requires appreciation of Section 143(5) and (6), which are the audit provisions specific to government companies:

Section 143(5) — CAG Appoints the Auditor

In the case of a government company, the Comptroller and Auditor-General of India (CAG) shall appoint the auditor under Section 139(5) or Section 139(7), and direct such auditor the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the CAG which shall include the directions, if any, issued by the Comptroller and Auditor-General of India, the action taken thereon and its impact on the accounts and financial statement of the company.

Section 143(6) — Supplementary Audit by CAG

The CAG shall within sixty days from the date of receipt of the audit report under sub-section (5) have a right to —

• Conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorise in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General of India may direct; and
• Comment upon or supplement such audit report.

Any comments given by the Comptroller and Auditor-General of India upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements under Section 136 and also placed before the annual general meeting of the company at the same time and in the same manner as the audit report.

Section 143(7) — CAG Test Audit

Without prejudice to the provisions of this Chapter, the CAG may, in case of any company covered under sub-section (5) or sub-section (7) of Section 139, if he considers necessary, by an order, cause test audit to be conducted of the accounts of such company and the provisions of Section 19A of the Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.

Exemptions and Special Treatment for Government Companies

The Central Government has, under Section 462 of the 2013 Act, issued several notifications granting partial exemptions to government companies from general compliance obligations. Notable exemptions include:

• Section 186 (Loan and Investment by Company) — exemption where loans/guarantees are granted with Central Government approval;
• Section 188 (Related Party Transactions) — exempted where the related party transactions are among government companies, or with entities controlled by the same government;
• Section 197 (Overall Managerial Remuneration) — the 11% cap and the managerial remuneration framework does not apply to government companies, which are governed by Department of Public Enterprises (DPE) guidelines instead;
• Section 149 (Independent Directors) — proportionate requirements apply; public sector PSUs comply with DPE guidelines and listed PSUs comply with SEBI LODR;
• Section 203 (KMP) — applicable but with modifications for government-nominated directors;
• Section 170 (Register of Directors and KMPs) — simplified form requirements for government directors;
• Section 164(2)(a) (Disqualification for non-filing) — does not apply to nominee directors of government companies representing the government as a shareholder.

The CAG — A Constitutional Authority

The CAG is a constitutional authority under Article 148 of the Constitution, with an independent position and security of tenure. His duties and powers are set out in the Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971. In the specific context of government companies, the CAG exercises:

• Power to appoint statutory auditors (Section 139(5) of the 2013 Act);
• Power to issue audit directions (Section 143(5));
• Power to conduct supplementary audits (Section 143(6));
• Power to conduct test audits (Section 143(7)) and propriety audits;
• Power to issue reports to the President or Governor for laying before Parliament/State Legislature under Article 151;
• Special reports on particular PSUs where significant irregularities are detected — forming the basis for parliamentary scrutiny and sometimes prosecution.

Distinguishing — State vs 'Other Authority' Status of Government Companies

A question of profound constitutional importance is whether a government company is 'State' within the meaning of Article 12 of the Constitution, thereby attracting writ jurisdiction under Article 32 / Article 226 and the fundamental rights regime under Part III. The jurisprudence is rich and settled —

Listing of Government Companies — Privatisation and Disinvestment

A government company may cease to be a government company if the Central/State Government's shareholding falls below 51%. In recent decades, the Government of India has pursued a policy of 'disinvestment' — selling shares of PSUs on the stock exchanges and to strategic buyers. Well-known disinvestments include Maruti Udyog (2003), VSNL (2002), ONGC (progressively), BPCL (ongoing), LIC (IPO in 2022), and Air India (strategic sale to Tata Group, 2021-22). On the CPSE holding falling below 51%, the character of the company changes — it becomes a non-government listed company subject to ordinary provisions of the 2013 Act and the SEBI LODR Regulations.

A related concept is 'partial privatisation' — where the government retains 51% or more but disinvests a significant portion through an offer for sale or IPO. In such cases, the entity remains a government company under Section 2(45) but becomes subject to SEBI LODR obligations relating to corporate governance, independent directors, and disclosures.

Listed Government Companies — Dual Compliance

Listed government companies face a dual compliance burden —

• Under the Companies Act, 2013 — general company law (with exemptions through Section 462 notifications);
• Under the SEBI (LODR) Regulations, 2015 — continuous listing obligations, independent directors, audit committee, nomination and remuneration committee, etc.;
• Under the Department of Public Enterprises (DPE) Guidelines — policy directions on wages, capex, HR, dividend, etc.;
• Under their 'Public Sector Undertaking' (PSU) Ethics Code — specific integrity and transparency standards mandated by government policy;
• Under the Right to Information Act, 2005 — most government companies are 'public authorities' under Section 2(h) of the RTI Act and must respond to RTI requests.

Key Regulatory and Policy Touchpoints

• Maharatna, Navratna, Miniratna categorisation by the DPE — conferring operational autonomy to well-performing CPSEs with minimal government interference in day-to-day operations;
• DPE guidelines on Board constitution — nomination of independent directors; position of the Chairman-cum-Managing Director (CMD); maximum tenure of chief executives;
• Economic Advisory Council / NITI Aayog policy inputs — particularly on strategic priorities and long-term investment decisions;
• Tribunal jurisdiction — NCLT has full jurisdiction over government companies just as over private companies, subject to specific statutory exemptions (for example, Section 242 provides specific orders in the interest of public);
• Bank dues — most government companies have significant relationships with public sector banks, and their defaulted exposures become NPAs with PSB balance sheet implications.

Litigation Profile of Government Companies

Government companies generate a distinctive litigation profile:

• Writ petitions under Article 32 / Article 226 — challenging tender decisions, employment matters, or pricing policies; regulated under the 'public law' framework;
• Commercial contract disputes — often resolved through arbitration; the Public Sector Enterprises Arbitration Committee (PSEAC) has been supplanted by the Administrative Mechanism for Resolution of CPSEs Disputes (AMRCD);
• Tax disputes — extensive litigation on transfer pricing, GST, customs, and income tax, often up to the Supreme Court;
• Shareholder suits — less common, because government equity dominates; but minority private shareholders of listed PSUs can invoke Sections 241 / 245 of the 2013 Act where appropriate;
• CAG reports leading to CBI/CVC investigations — where CAG flags irregularities, institutional anti-corruption mechanisms frequently take over, generating their own extensive litigation.

Interplay with Other Legal Regimes

• Right to Information Act, 2005 — government companies are 'public authorities' under Section 2(h)(d); must appoint Public Information Officers (PIOs) and comply with disclosure requirements;
• Prevention of Corruption Act, 1988 — directors and employees of government companies are 'public servants' under Section 2(c); subject to criminal liability for bribery and abuse of office;
• Public Procurement (Preference to Make in India) — government companies must follow public procurement guidelines with preference for Indian-made goods;
• Central Vigilance Commission (CVC) — exercises vigilance jurisdiction over government companies;
• FEMA — where government companies have foreign operations or foreign investments, FEMA applies with special allowances for sovereign entities.