Why consolidation of sovereign holding for PSEs makes perfect sense today

With a sovereign holding company structure, popularly known as centralised agency model, the government or the state would be able to ensure non-interference in day-to-day functioning of PSEs

In the past year, the government announced some key decisions of creating consolidated giants in various sectors, to take advantage of economies of scale and greater market penetration, and thereby creating a niche for oneself.
 
The plans for creation of an international oil conglomerate by consolidating existing oil PSEs, the merger of five subsidiaries of SBI within itself along with sporadic reports that the government is considering expanding scope of consolidation of PSEs in various sectors, including defence, construction and consultancy are in coherence with the Organisation for Economic Cooperation and Development (OECD) principle of corporate governance. One of the key guiding principles of the OECD guidelines is that the state or the government should be an active and an informed owner, thereby ensuring professional and effective governance of PSEs in a transparent and accountable manner. This can be achieved by way of developing an ownership policy, and staying within its ambit would enable the government or the state to ensure non-interference in day to day functioning of the PSEs.

 
This is best done by following the sovereign holding company structure, popularly known as centralised agency model, which many countries have already adopted. Singapore identified the need for separating commercial management of SOEs from that of policy decision making in 1974 and hence formed Temasek to undertake management of government stake on a commercial basis. Malaysia incorporated Khazanah in 1993 and began its operations in 1994. As well as investing in strategic and high-technology sectors, it now undertakes an expanded and more active investment approach. China underwent restructuring in 2003 with the formation of SASAC, wherein all PSE-related management is undertaken by it. Indonesia also works on a slight variant of the centralised ownership model. Similarly, South Korea works on a modified form of agency model. Kazakhstan also operates an agency model, wherein the government exerts its ownership role through a centralised fund namely Samruk-Kazyna JSC.

 

At present, India has a coordinated agency model, wherein the Government of India holds (at least) 51% or more of the shareholding in PSEs. In turn, the government entrusts the administrative ministries to coordinate and operationally oversee the PSEs. It is time steps were taken to not only converge the aforesaid heterogeneous structure of conformance into one but also to move towards a flatter structure for PSEs by creating a Sovereign Holding Company, to consolidate multiple synergic PSEs into a single sector – thereby not only making the governance simpler and measurable but also take advantage of economies of scale, greater negotiating powers, higher value of assets, etc.

 
No single model could suit, but a selective mix considering the culture can be explored for Indian Sovereign Holding Company, which, in turn, shall also be custodian of Sovereign Wealth Fund. A probable model for a Sovereign Holding could be drafted as a three-tier structure and a combination of centralised agency and coordinated agency model, wherein at the top is the Apex Sovereign Holding Company functioning through a board comprising experts, professionals, academicians, researchers, government, SCOPE, etc. Five/Six sector-specific sub-holding companies will be the second stage, which entails the responsibility for vision and strategy of related PSEs.
 
The apex Committee shall be the supreme body for all PSEs generally under the prime minster or at least the finance ministry of the country. The Sovereign Wealth Fund under apex committee shall invest in domestic avenues as well as outside the country.

 
Centralising the ownership rights into a singular agency would not only facilitate the PSEs in improving and professionalising their working but would also help the government in diluting the conflicting roles of both a regulator and an administrative ministry. This will also ensure better autonomy to PSEs.
 
Further, it would also help in providing measurable objectivity to the ownership of the government by ensuring that the tasks outlined in the said ownership policy are achieved efficiently, thereby paving the path for PSEs to achieve financial success along with increasing their global presence and competitiveness.   This is high time radical reform was done to structure governance through a consolidated holding company.

 
The author is the director-general of SCOPE. The views expressed here are his own