Public Sector Undertakings (PSUs) : Definition, History, and Types

Public Sector Undertakings, or PSUs as they are popularly known, play an important role in India's industrial and economic landscape. Spread over sectors and industries, from steel manufacturing, heavy engineering, food security to defence and financial institutions, PSUs have played a crucial role in the nation's development since their establishment.  Let’s understand what Public Sector Undertakings are, their definition, and history, and explore types of PSUs through this blog.

What is a Public Sector Undertaking (PSU)?

A Public Sector Undertaking refers to a company or corporation where the government holds a majority stake (51% or more) in ownership. The ownership can lie either with the Central Government or the State Government or be jointly owned by both. Due to the shareholding pattern, major decisions like expansions, investments, etc, are taken by the governments in PSUs.

For instance, BHEL (Bharat Heavy Electricals Limited), where the government owns 63.17% of shares, operates as a PSU in the heavy electrical equipment sector. These organizations operate under the administrative control of various government ministries and departments, combining public service objectives with commercial operations.

History of PSUs in India

The story of PSUs in India began during the pre-independence era, with the HAL being the first PSU to be established in 1940.  After independence in 1947, India adopted a mixed economy model under Prime Minister Jawaharlal Nehru's leadership. A mixed economy looks at ensuring social and economic development at the same time. Hence, the government looked at establishing industries owned by government that could spur economic growth and at the same time offer employment.

The Industrial Policy Resolution of 1956 marked a watershed moment, reserving key industries like defense, atomic energy, and railways exclusively for the public sector.

Through the 1960s and 1970s, the government established numerous PSUs in strategic sectors. Coal India Limited, Steel Authority of India Limited (SAIL) in steel production, and Oil and Natural Gas Corporation (ONGC) for petroleum exploration, Cochin Shipyard were some of the PSUs established during this period of rapid PSU expansion.

After beginning with industries like metals, fertilizers, and heavy industries,  the government started nationalizing banks and instituting companies in other sectors like communication (BSNL) and consumer services.

However, a few years down the line,  the mismanagement of the PSUs incurred huge losses for the government. Since the 1990s, every government has looked to divest the government stakes in PSUs to reduce government holding in PSUs to lessen the burden on the government and improve public finances. 

A recent example of divestment in a Public Sector Undertaking (PSU) is the Indian government selling its stake in Air India to the Tata Group. It privatised the national carrier due to significant losses and operational issues.

Role of Public Sector Undertakings in India

PSUs serve multiple crucial functions in India's economic framework. They promote industrial development in remote areas, creating job opportunities, building infrastructure, and maintaining national defence security.

For example, NTPC (National Thermal Power Corporation) has established power plants in various rural locations, spurring regional development.

These enterprises also help maintain price stability in essential commodities. Food Corporation of India (FCI) plays a vital role in food security by maintaining buffer stocks and ensuring stable grain prices.

Additionally, PSUs generate significant revenue for the government through dividends and taxes, contributing to the national exchequer and the GDP of the country.

The 56 listed PSUs generated a record profit of over Rs 5 lakh crore for FY 2024 as per ACE Equity. As per estimates present during Budget 2025, the government expects to receive a dividend of Rs 55000 crore from PSU in FY 25 and Rs 69000 crore in FY 26. 

Advantages of Public Sector Undertakings

• Ensures Uniform Regional Development

One of the main reasons for the introduction of PSUs was to develop better levels of industrialisation and ensure economic development. PSUs are often established in underdeveloped areas to bridge gaps in socio-economic development.

For example, the Bhilai Steel Plant (an unit of Steel Authority of India)  in Chhattisgarh has transformed a relatively underdeveloped region into an industrial hub, creating thousands of direct and indirect employment opportunities.

• Employment Generation and Job Security

PSUs are among India's largest employers, providing stable employment and other benefits. Beyond direct employment, they create a ripple effect in local economies by supporting ancillary industries and services.

The Indian Railways, for instance, employs over 12 lakh people directly and supports millions more through its extensive supply chain.

• Strategic Sector Development

PSUs play an important role in crucial sectors like national security and economic sovereignity. Organizations like the Defence Research and Development Organisation (DRDO), Hindustan Aeronautics Limited (HAL), and Bharat Electronics Limited (BEL) ensure India's strategic independence in defence technology, while companies like Coal India help secure energy resources.

• Maintains Price Stability

PSUs help maintain price stability in essential commodities and services. The Food Corporation of India prevents extreme price fluctuations in food grains, while oil marketing companies like Indian Oil help manage fuel prices through price moderation mechanisms to a certain extent.

• Focus on Social Welfare

Unlike private enterprises that prioritize profit maximisation, PSUs balance commercial objectives with social welfare. They often provide services in remote areas where private companies might find operations commercially unviable.

For instance, Alliance Air operates routes to remote regions despite their low profitability.

Different Types of PSUs Based on Ownership

Based on the ownership structure of the PSUs, they are categorised as follows:

Central Public Sector Enterprises (CPSEs)

These organisations are directly owned by the central government, which holds a majority stake. They operate across multiple states and often in strategic sectors. CPSEs are typically larger in scale and have nationwide operations.
Notable examples include HAL in defence technology, NTPC in power generation, and SAIL in steel production. 

State Public Sector Undertakings

These PSUs are owned and operated by individual state governments; these enterprises focus on state-specific development needs.

Examples include Maharashtra State Road Development Corporation, Karnataka Soaps and Detergents Limited, and West Bengal State Electricity Distribution Company. These companies often address local requirements and contribute to state-level economic development.

Joint Sector Companies

These represent a hybrid model where ownership is shared between government entities and private sector partners. This structure aims to combine public-sector stability with efficiencies seen in private sector.

For instance, Maruti Suzuki (originally started as a joint venture) and Oil India Limited (with both government and public shareholding).

Types of PSUs Based on Their Level of Autonomy

Though PSUs are controlled by either the central or the state government, certain PSUs have autonomy in decision-making based on pre-determined financial parameters. According to the Department of Public Enterprises, the criteria for categorisation of PSUs based on their levels of autonomy are:

Maharatna PSUs

These PSUs must meet specific criteria, including: 

• Should have achieved Navratna PSU status

• Be listed on the stock exchange

• Have an average annual turnover of over Rs 25,000 crores

• Net worth exceeding ₹15,000 crores, and 

• Net profit after tax of more than ₹5,000 crores in the last three years

These PSUs enjoy more autonomy and need not seek government approval for decision-making and investments. They can invest up to 15% of their net worth in any single project, and are allowed to form joint ventures without express permission from the government.

Current Maharatna companies include NTPC, ONGC, Indian Oil, SAIL, Coal India, BHEL, and GAIL.

Navratna PSUs

The criteria to grant Navratna status are

The company should have a Miniratna Category – I status and be classified under Schedule ‘A’ CPSEs, which have obtained an ‘excellent’ or ‘very good’ rating under the Memorandum of Understanding system in three of the last five years.

Have a composite score of 60 or above in the six selected performance parameters, namely,

• Net profit to net worth,

• Manpower cost to total cost of production/services,

• Profit before depreciation, interest, and taxes to capital employed

• Profit before interest and taxes to turnover,

• Earning per share and

• Inter-sectoral performance.

Companies like Hindustan Aeronautics Limited and Bharat Electronics Limited fall under this category.

Miniratna PSUs

PSUs in this category are further divided into two categories based on their financial performance.

The conditions that Category 1 Miniratna PSUs must meet are 

• Show three consecutive years of profits

• Profit Before Tax (PBT) of at least ₹30 crores in one of these years. 

Conditions that Category II Miniratna PSUs must meet are
      Three consecutive profitable years and positive net worth.

Both categories must maintain financial independence from government support and demonstrate strong debt management.

Conclusion

PSUs are continuing to evolve while maintaining their fundamental role in India's economic development. Their ability to balance social objectives with commercial viability makes them unique instruments of national growth and development. Although listed PSU companies may come across as safe investments due to government backing, it is important that due diligence is carried out before investing in such companies.