Resenting the Budget for 2016-17, then finance minister Arun Jaitley had said “public shareholding in government-owned companies is a means of ensuring higher levels of transparency and accountability.” While listing central public sector enterprises (CPSEs) was seen as one way to improve performance and competitiveness, allowing them easier access to the capital markets and making them more transparent and accountable, CPSEs have largely failed to stand up to scrutiny on corporate governance.
Typically, corporate governance norms for PSUs emanate from the Laws, Rules & Regulations of The Companies Act, 2013; SEBI (Listing Obligation and Disclosures Requirement) Regulations, 2015 and CPSE Guidelines issued by the Department of Public Enterprises under the Ministry of Heavy Industries and Public Enterprises. CPSE Guidelines state, “...as listed CPSEs are concerned, they have to follow the SEBI Guidelines on corporate governance. In addition, they shall follow those provisions in these guidelines which do not exist in the SEBI guidelines and also do not contradict any of the provisions of the SEBI Guidelines.” This makes it clear that all listed CPSEs have to follow, at the least, corporate governance norms as prescribed by SEBI.
However, non-compliance continues to persist. According to a report by proxy advisory firm Stakeholders Empowerment Services (SES), only 14 out of 48 PSUs surveyed were found to be fully complaint as on September 2018. While 22 PSUs were non-compliant with laws relating to the composition of their Board of Directors, 17 failed to spend the required amount on CSR activities. Others were non-compliant with rules regarding the composition of audit committees, nomination and remuneration committees and having an adequate number of independent directors. In fact, although the requirement of having at least one woman independent director on the boards of the top 500 listed companies kicked in from April 1, 2019, 27 per cent of the NSE top 500 companies, as on March 2019, failed to comply with this requirement.
But, evaluating data of the last four years based on two important areas — company boards and woman directors (see chart) — indicates that PSUs are moving towards improved compliance over the course of time. Yet, governance challenges still remain and further reforms are needed to build on the gains that have been achieved, SES said.
For instance, there are still critical differences with the private sector that distort competition and market incentives. These include certain legal provisions and financial privileges that favour CPSEs and social obligations and human resource rules that constrain them, found a report by the World Bank.
For example, while there is a general bar on insurers from holding more than 15 per cent in any company under the Insurance and Regulatory Development Authority (Investment) Regulations, 2016, a relaxation was provided by the Insurance Regulatory and Development Authority (IRDAI) to the LIC when it bought out IDBI Bank and its shareholding reached over 51 per cent.
There are many other reporting requirements under various Sebi regulations where PSUs are found wanting, but soft treatment of is another way in which PSUs are meted out special treatment. On the other hand, violations by private firms are more strictly dealt with.
The report highlights that a complex ownership framework combines the conflicting roles of policy-making and ownership in some ministries, allowing political interference in board appointments and commercial decision-making to continue, and weakens board powers.
CPSE boards continue to be oriented to the public sector and are rarely, if ever, evaluated on their performance the report added.
Implementing disclosure requirements, however, is a challenge in light of relatively weak internal audits and control functions, lack of guidance on disclosure for non-listed firms, and potential duplication and delays in the various CPSE audits. Experts say the government should fix these issues since shareholders are willing to pay a premium for companies rated high on corporate governance.
World Bank recommendations
A. Impose market discipline
Tighten budget constraints and establish market relations with state owned companies
Advance CPSE listings on the capital markets
Identify and finance non-commercial obligations directly from the government budget
Make human resource policies more market-based
Allow unviable companies to exit the market
B. Professionalise
CPSE boards
Bring in more private sector candidates as independent directors
Separate the roles of board chairman and managing director
Make board leadership/development programs mandatory
Empower CPSE boards with greater decision-making authority
Strengthen the audit committee of the board
Introduce a professional board evaluation and remuneration process
C. Strengthen the state’s ownership role
Consider moving to a centralized model as a medium to long-term option
Focus the ministries role on core ownership functions and limit their day-to-day role
Improve the Corporate Governance Guidelines to make them more effective
Enhance transparency in the board appointment process
D. Enhance transparency and disclosure
Mandate disclosure of non-commercial obligations and related party transactions
Monitor and disclose compliance with disclosure requirements
Strengthen internal controls and audit
Make supplementary audits timely and carry out compliance audits on a selective basis