The Memorandum of Understading (MoU) as applicable to public sector enterprises is a negotiated document between the government and the management of the enterprise specifying clearly the objectives of the agreement and the obligations of both the parties. The main purpose of the MoU system is to ensure a level playing field to the public sector enterprises vis-à-vis the private corporate sector .
MoU system in India was first introduced in 1986 as result of the recommendations of the Arjun Sengupta Committee Report (1984). The Committee laid emphasis on medium term contract between the Government and the Central Public Sector Enterprises (CPSEs) and recommended a five-year agreement that may be reviewed annually. Since the CPSEs have been set up as part of the national/central plan, the Committee favored MoU especially in CPSEs operating in the core sectors of steel, power, petroleum, fertilizer and petro-chemicals.