When the government of India issued a presidential directive to Coal India Ltd asking it to abide by a decision made by the Prime Minister’s Office, it exercised its right as a majority shareholder albeit with a force of a sovereign authority. In the process, it has set a precedent that has brought back the fears of government control over a company that seeks to compete with global giants and moves shoulder to shoulder with private sector ones on the Sensex ladder.
If, for any reason, a private promoter had asserted its authority in a similar fashion, many perhaps would have called it a breach of corporate governance. So, is it that the standards for corporate governance differ with ownership? “The system is inherently discriminatory but there is both a rough and smooth side for government companies,” says former Cabinet secretary Naresh Chandra, who has authored a report on corporate governance. Though Chandra sees nothing wrong with the issuance of the directive, he acknowledges that any government action in public interest could be good or bad for a minority shareholder.
The situation of conflict arises since there is no clear distinction between the role of government as a promoter and that of a sovereign. In most of Europe, for instance, government is just like any other merchant shareholder unless a company has been specially created through a statute for a specific public goal. By contrast, communist China gives preference to government-owned companies, something akin to what government-owned companies historically enjoyed in India till the time economy opened up to the private sector.
Just last year, the government came to the rescue of its Oil and Natural Gas Corporation, but in the process put Cairn India shareholders at a disadvantage. By deciding to make Cairn India accept cost recovery of royalty and cess payment on crude oil produced from a Barmer block as a pre-condition for approving its takeover by Vedanta Resources, the government sided with ONGC. “Unnecessary damage was done to Cairn India shareholders and ONGC shareholders gained,” points out Chandra.
Similarly, while delay in appointment of independent directors can cause anxiety for private companies, government-owned companies tend to get a leeway. In the event of a legal suit, an independent director of a private company is made liable but a government nominee on the PSU board has no liability.
Even for rating agencies, government ownership does provide a greater degree of comfort even if a company is not doing well. Fitch Ratings, for instance, makes an assessment on a top-down basis in government-owned entities where the linkages are found to be strong, driven largely by the strategic importance of the company and the extent of tangible support provided. “Whereas entities where the assessment of linkage is moderate or weak, they are evaluated on a standalone basis with potential support from government, if applicable, superimposed to arrive at the final rating,” explains Rakesh Valecha, senior director and head, corporate ratings, India.
Sectors like oil and gas and power are considered to be strategic in the larger scheme of socio-economic objectives of the government, whereas sectors like steel and engineering tend to operate in a competitive environment and are perceived to be lower on the strategic importance curve. For instance, in companies like Indian Oil Corporation and Hindustan Petroleum Corporation, government pricing controls and delay in release of subsidy increases their borrowings but their ratings reflect the fact that the government will continue to support them on an ongoing basis to fulfill the socio-economic objectives. In 2008-09, when the subsidy bill shot up substantially, the government compensated the oil marketing companies to the extent of their complete under-recoveries. “While the timing of support may be ad hoc which creates an element of uncertainty, it is invariably provided by using various levers of the government. However, that may not necessarily hold true for entities in the non-strategic space where deterioration due to intervention could be lasting and impact the overall fundamentals of the entity," says Valecha.
The positives of government ownership, however, have a limitation especially if the company boards lack autonomy. With most of the top public sector undertakings now being listed in India, government’s role in their running or rather its interference often comes into conflict with the interest of minority investors. While The Children’s Investment Fund Management is currently in a running feud with the government as well as CIL management over the functioning of the company that it thinks is destroying the company’s value, another big PSU, Oil and Natural Gas Corporation has itself raised the issue of minority shareholder interest in the past. In fact, Goldman Sachs came out with a controversial report in 2009 that said the government has taken away $20 billion from the company in subsidies without consulting minority shareholders.
With ONGC shares sharply reacting to the Goldman Sachs report, the then-ONGC chairman and managing director, RS Sharma had to rush to undo the damage. Nonetheless, he has been vociferous in raising the issue of subsidy burden with the government. Sharma, who has since retired, says that corporate governance standards in government companies are much better than private entities due to better accounting methods and presence of multi-level checks and balances. Sharma is now part of a committee formed by the ministry of corporate affairs under Adi Godrej to prepare corporate governance norms for Indian companies.
On the larger issue of government interference in public sector companies, Sharma says the presidential directive has set a bad precedent for corporate governance. “While the government does have the power to control, if I was an independent director on the Coal India board, I too would have taken the same position of opposing signing of fuel supply agreement if it is not in the company’s interest.” The issue got precipitated because of lack of clarity. “Whatever is happening to CIL has happened to oil companies already. IndianOil, Bharat Petroleum and Hindustan Petroleum are real jewels but have slowly degenerated to a state where their market value is less than their assets due to the government pricing policy,” Sharma added.
As a public sector veteran, Sharma supports the view that government companies that are listed should be treated as commercial entity. The market perception of these companies does not necessarily get impacted due to the nature of ownership. Take the case of CIL, it became the most valued company beating Reliance Industries Ltd last year. “Market does not undervalue them just because they are government companies. Investors factor in issues like pricing control at the time of making investment,” says Richard Rekhy, head of advisory, KPMG.
While making a distinction between big PSUs that are Navratnas and Maharatanas and have higher management standards and smaller ones that are not so well managed, Rekhy says that companies too are to be blamed for any wrong perception on corporate governance. Unlike private companies, they do not do much about creating awareness among investors on issues relating to corporate governance. More than corporate governance, it is autonomy which is important for these companies. “If there is a decision by a company’s board then it should be respected, as in any private company. But an exception can be made when there is an issue of national interest. Coal availability is an issue of national interest where the government has a right to issue directive,” Rekhy maintains.
If the shareholder appoints a company’s management and decides their remuneration while laying down the larger policy framework in which it shall operate, then there is very little flexibility that the board of directors can enjoy. And if that shareholder is a sovereign, rarely will a company stand up against it. What has happened in the case of CIL may be justified in “public interest” but when the definition of public interest is as vague as supplying coal to private power companies, questions can be raised on whether the government has shown the way for corporate governance or is forcing a commercial entity to be just another government department.
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Faced with a shortage of coal, around a dozen private power developers, led by Ratan Tata, Tata group chairman, and Anil Ambani, chairman ADA group, sought the Prime Minister's intervention. Soon afterwards, the government asked its company Coal India to sign fuel supply agreements with them. As the March 31, 2012 deadline, set by the PMO, approached, the CIL board decided not to give 80 per cent supply commitment for 20 years under the FSA. The government responded by issuing a presidential directive under a rarely invoked clause that gives it the power to intervene in the public interest.
Though it's a rare move, the government frequently resorts to pressuring its companies to comply with its orders either through its nominees on the board or indirectly. During Mani Shankar Aiyar's tenure as petroleum minister, Oil and Natural Gas Corporation was under constant pressure from the government. At one point, Aiyar wanted to appoint VK Sibal, then directorate general of hydrocarbons, on the ONGC board which was vehemently opposed by chairman Subir Raha. Though the ministry later beat a retreat, the government invited severe criticism for meddling in the affairs of a listed company.
In 2004, the petroleum ministry had a scrape with GAIL India on use of technology for putting up a pipeline. It issued a presidential directive to the company's management, asking it to cancel a tender for supply of line pipes in Rs 1,800-crore Dahej Uran Pipeline Project. The ministry charged GAIL with favouring the manufacturers of the Longitudinally Submerged Arc Welded technology to the exclusion of rival producers who used the competing Helically Submerged Arc Welded (HSAW) technique to make line pipes. GAIL was asked to come out with a fresh tender in which both types of manufacturers could put forward their bids.
While these may be extreme face-offs, the government has been pushing even its financial institutions like Life Insurance Corporation to play saviour whenever its stake sale in PSUs does not get adequate response. The recent ONGC auction is a case in point. Promoter's rights seem to prevail over management's fiduciary duties.