Advanced Auditing, Assurance and Professional Ethics · Overview of Audit of Public Sector Undertakings

Public Sector Undertakings: Meaning and Types

Updated 5 October 2026 · Fact-checked

A public sector undertaking (PSU) is a business or service entity owned and controlled by the Central or State Government. It takes three main forms: government companies, statutory corporations and departmental undertakings. To answer questions, identify the form from ownership and the governing law, then link it to its audit regime.

Understand Public Sector Undertakings: Meaning and Types

A public sector undertaking is an entity through which the Government carries on commercial, industrial or service activity. The Government owns it wholly or substantially and controls its policy. Examples are power utilities, oil companies, railways and banks owned by the State.

PSUs exist because the Government wants to do things private business may not do on its own. These include building core infrastructure, serving remote areas, keeping essential prices stable, creating jobs and reducing regional imbalance. Profit is usually not the only goal. This is why PSU audit looks beyond the numbers.

There are three main forms. A government company is incorporated under the Companies Act. A statutory corporation is created by a special Act of Parliament or a State Legislature. A departmental undertaking is run by a Government department as part of the Government itself.

The form decides the governing law, how the entity is managed, who audits it and who receives the audit report. So in the exam, always start by naming the form. Then the rest of the answer follows.

Under the Companies Act, 2013, a government company is one in which at least 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments. It also includes a company that is a subsidiary of such a government company.

Key rules to remember

Government company (section 2(45), Companies Act, 2013): Paid-up share capital held by Central Govt and/or State Govt(s) ≥ 51%, or a subsidiary of such a company; The holding can be by the Central Government, by one or more State Governments, or by both together. A subsidiary of a government company is also a government company.
Three forms of PSU: PSU = Government company | Statutory corporation | Departmental undertaking; Learn them in this order: Companies Act body, special Act body, part of a Government department.
Legal status test: Government company and statutory corporation = separate legal entity; departmental undertaking = no separate legal entity; A departmental undertaking is part of the Government. It has no corporate personality of its own.
Source of existence: Government company: Companies Act | Statutory corporation: its own special Act | Departmental undertaking: executive decision of the Government; Use this line to separate the three forms in any comparison question.

How to solve Public Sector Undertakings: Meaning and Types questions

Use this method for definition, classification and comparison questions on PSUs.

1Read the question and find what is asked: meaning, types, features, objectives or a comparison.
2Name the form of PSU involved. Check the source of its existence: Companies Act, a special Act, or a Government department.
3State the definition in plain words. For a government company, quote the 51% shareholding test and the subsidiary rule.
4List features that fit that form: ownership, legal status, management, finance and accountability.
5Add the objectives only if the question asks for them, or if they help the case: infrastructure, social welfare, balanced regional growth, employment, control of key sectors.
6If asked for a comparison, use clear parallel points such as creation, legal status, capital, management and audit, and give one point per line.
7Link the form to its audit regime in one line, and refer the reader to the detailed audit topics.
8Close with a one-line conclusion that applies the rule to the facts given in the case.

Quickest way: Three-question classification check

When to use it: Use this for case-scenario MCQs where you must decide what type of entity is described.

Ask: was it incorporated under the Companies Act? If yes, and Government holds at least 51% of paid-up capital, it is a government company.
Ask: does it exist under its own special Act? If yes, it is a statutory corporation.
Ask: is it run as a Government department with no separate legal identity? If yes, it is a departmental undertaking.
Check for subsidiaries: a subsidiary of a government company is also a government company.
Pick the option that matches, ignoring the entity's name or the activity it carries on.

Common mistakes in Public Sector Undertakings: Meaning and Types

Saying a company with exactly 50% Government holding is a government company.
Students remember 'half' instead of the exact test.
Fix: The test is at least 51% of paid-up share capital. Holding of 50% does not meet it, unless it is a subsidiary of a government company.
Forgetting that a subsidiary of a government company is also a government company.
Students stop reading the definition after the shareholding limb.
Fix: Always state both limbs: the 51% holding and the subsidiary rule.
Treating a statutory corporation as a company under the Companies Act.
Names such as 'Corporation' and 'Limited' are used loosely.
Fix: Check the source of creation. If a special Act created it, it is a statutory corporation whatever its name.
Saying a departmental undertaking is a separate legal entity.
Students confuse it with the other two forms, which are bodies corporate.
Fix: A departmental undertaking is part of the Government and has no separate legal identity.
Listing profit as the only objective of a PSU.
Students apply private-sector logic.
Fix: Include social and economic objectives such as infrastructure, employment, regional balance and control of key sectors, with profit as one among several.
Writing a comparison as long paragraphs.
Students run out of structure under time pressure.
Fix: Write one point per line across the same headings: creation, legal status, capital, management, audit.

Worked examples

Example 1

The Central Government holds 40% and a State Government holds 15% of the paid-up share capital of Rajmarg Infra Ltd, incorporated under the Companies Act, 2013. Is it a government company? Give reasons.

Show the solution

Rule: a government company is one where at least 51% of paid-up share capital is held by the Central Government, one or more State Governments, or partly by each.
Facts: the holdings can be added together. 40% + 15% = 55%.
Test: 55% is at least 51%, so the shareholding limb is met.
The company is incorporated under the Companies Act, so it is a company in the first place.

Answer: Yes. Rajmarg Infra Ltd is a government company because the Central and State Governments together hold 55% of its paid-up share capital, which is at least 51%.

Example 2

Setu Power Ltd is a wholly owned subsidiary of Urja Nigam Ltd, a government company. A student says Setu Power is a private company and not a PSU. Advise whether the student is correct, and state how a government company differs from a statutory corporation.

Show the solution

Rule: under section 2(45), a subsidiary of a government company is itself a government company.
Application: Setu Power is wholly owned by Urja Nigam, a government company, so it is a subsidiary of one. It is therefore a government company, and the student is wrong.
Difference in creation: a government company is incorporated under the Companies Act. A statutory corporation is created by a special Act of Parliament or a State Legislature.
Difference in governing law: a government company follows the Companies Act and its memorandum and articles. A statutory corporation is governed by its own Act, which generally lays down its powers, functions and management.
Difference in capital: a government company's capital is in shares with Government holding at least 51%, unless it is a subsidiary of a government company. A statutory corporation's capital is usually provided by the Government.
Common point: both are separate legal entities, unlike a departmental undertaking.

Answer: The student is not correct. Setu Power is a government company under section 2(45) as a subsidiary of Urja Nigam, and so it is a PSU. A government company is incorporated under the Companies Act, while a statutory corporation is created by its own special Act, which generally lays down its powers, functions and management. The capital of a statutory corporation is usually provided by the Government.

Exam tips

Learn the section 2(45) test word for word: at least 51% of paid-up share capital, Central and/or State Governments, and the subsidiary limb.
In case MCQs, add up the Central and State holdings before deciding. Splitting the holding across governments is a common trap.
For comparison questions, use the same headings for every form: creation, legal status, capital, management and audit.
Keep this topic's answer short and link to the audit topics for detail. Marks come from correct classification first.
Mention objectives such as social welfare and balanced regional development when the question says 'features and objectives'.

Practice questions from Overview of Audit of Public Sector Undertakings

Public Sector Undertakings: Meaning and Types in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Public Sector Undertakings: Meaning and Types: frequently asked questions

What are the types of public sector undertakings?

There are three main types: government companies, statutory corporations and departmental undertakings. They differ in how they are created and in their legal status. Government companies and statutory corporations are separate legal entities, but departmental undertakings are not.

What is a government company under section 2(45)?

It is a company in which at least 51% of the paid-up share capital is held by the Central Government, by one or more State Governments, or partly by each. A subsidiary of such a company is also a government company.

What is the difference between a government company and a statutory corporation?

A government company is incorporated under the Companies Act, while a statutory corporation is created by a special Act of Parliament or a State Legislature. Their governing law, capital structure and management rules follow from this. Both are separate legal entities.

Is a departmental undertaking a separate legal entity?

No. It is run as part of a Government department and has no separate legal identity. The Government acts through it directly.