Low corporate governance in PSUs could hit govt's disinvestment plan

As per data released by DPE on Monday, of the 249 central public sector undertakings in the country, 109 entities did not provide self-evaluation reports on their corporate governance practices for 2010-11

The perception of poor corporate governance in public sector enterprises can be a dampener for the government’s divestment programme. The government is hoping to raise Rs 30,000 crore by share sales in companies such as Steel Authority of India Ltd, Bharat Heavy Electricals Ltd, NMDC Ltd, National Aluminium Co Ltd, Oil India Ltd, Rashtriya Ispat Nigam Ltd and MMTC Ltd.

In a new low, the recently released government data showed many state-owned firms are not even keen to self-evaluate their governance standards. As per data released by the Department of Public Enterprises (DPE) on Monday, out of the 249 central public sector undertakings in the country, 109 entities did not provide self-evaluation reports on their corporate governance practices for 2010-11.

DPE sets the corporate governance guidelines for the Central government-owned firms. DPE measures corporate governance on different parameters such as the number of independent directors, quarterly board meetings and review of audited accounts, etc.

While the share prices have improved considerably riding on a series of government decisions and cheap and easy money around the globe, the government’s lack of concern for governance issues, including protection of minority investor rights, are seen as key risks by institutional investors.

“You can’t do a huge amount of disinvestment without looking at the governance issues,” said Amit Tandon, founder of Institutional Investors Advisory Services (IIAS), a proxy advisory firm.

According to a recent survey by the Confederation of Indian Industry and Institutional Investors Advisory Services, investors rated the governance in state-owned companies at 1.75 on a scale of four, much below 3.67 for multinational corporations and 3.17 for professionally-run companies.

This low perception of governance in turn resulted in poor return expectations. Public sector undertakings (PSUs) came last among the four categories of companies in terms of perceived shareholder returns. At the score of 1.36, PSUs were behind even promoter-run companies, which had a lower governance score.

The government is often accused of treating listed PSUs as its hand maidens using their balance sheets to fund populist schemes. In 2009, Goldman Sachs had slammed the government for using Oil and Natural Gas Corp’s balance sheet to subisidise fuel prices.

At present, the UK based hedge fund TCI is in the middle of a messy public spat with the government for allegedly following pricing policies that are detrimental to shareholder interests.

The CII-IIAS survey showed investors have very low tolerance levels for corporate governance issues in the investee companies. “About 33 per cent of the investors expect corporate governance issues to be resolved within one month, while 42 per cent expect corporate governance issues to be resolved within three months. In other words, institutional investors have a very low tolerance for bad corporate governance, and may respond by exiting the company,” it said.

Although PSUs received a very low rating in terms of perceived shareholder returns (rated 1.36), they have fared better when investors have been asked to rate their likelihood of investing in them (rated 2.33). “In the current environment it implies investors expect some favourable policy changes,” the IIAS report said.