Corporate governance of PSUs: A case for change

Post-independence, the need for rapid economic development, coupled with lack of financial, technological and managerial strength in the private sector, led to a policy for promoting Public Sector Undertakings (PSUs). Laws were enacted to provide them with special protection and privileges. However, their provisions have, by and large, remained static and led to dilution of corporate governance principles. There is relative lack of accountability and transparency compared to the mandate for companies in the private sector. Now, there is a strong case for similar laws and regulatory treatment for all companies —irrespective of whether the majority owner is the government or a set of entrepreneurs from the public.
 
Differential treatment is meted out to PSUs through the following mechanism:

1. Specific provisions in laws passed by Parliament or the rules/guidelines issued by the government under these laws.
2. Special provisions in the regulations framed by regulators or the case by case exemptions routinely granted to PSUs.
3. Condoning or soft-pedalling PSU violations by giving them a special treatment.

We will deal with each of them now. Section 462 of the Companies Act, 2013 (Companies Act) allows the government to exempt certain classes of companies from the application of any provision of the Act in public interest. The provision has been liberally used to grant exemptions to PSUs.
 
Directors of a company are disqualified if the company has failed to repay the depositors, or redeem debentures or interest on the due date or if it has not filed its annual returns or financial reports for a continuous period of three years, but directors of PSUs are exempt from this. The board of a company has a role in the appointment of directors or in their evaluation. But not so for PSUs. It is done by the administrative ministry. PSUs are exempted from disclosing their policy on appointment and remuneration of directors and also the criteria laid down for determining qualification, positive attributes and independence of an independent director. No wonder, then, that in successive governments, office bearers of the party in power end up cornering board positions in PSUs.
 
The general rule that a person should not be allowed to take loans from the company where he is a director, again, has an exemption for PSUs where it is possible to do so with the approval of the administrative ministry. Powers of the board or its committees such as the audit committee, nomination and remuneration committee which are exercised by a company are vastly suppressed in areas like appointment of auditors in case of PSUs where their powers are vested with the government.
 
Independent directors perform a very important function in the current scheme of law. One of the criteria for independence is that independent directors should not have any pecuniary relationship with the company or its associates. However, strangely, this requirement is not applicable to PSUs. The process of appointment of independent directors on the boards of PSUs is another area of improvement that needs to be looked into. Currently, there is an elaborate multi-stage process in the government requiring the approval at the highest level. But this is not in consonance with the philosophy that an independent director is not the nominee of the majority shareholder.
 
One important tool to prevent manipulation in share prices of listed companies is to have a minimum public shareholding (MPS) in these. Rules framed by the government under the Securities Contract (Regulation) Act prescribe MPS at 25 per cent. But the earlier level prescribed was only 10 per cent for PSUs. Reluctantly, when it was enhanced to 25 per cent in 2014, three years’ timeline was given for compliance. Later, it was extended by a year in 2017 and by another two years in 2018. There are reports suggesting that the timelines for public sector banks are likely to be extended beyond 2020. On the one hand the rule is framed by the government using powers under law; on the other hand, government as the majority owner is the sole beneficiary jeopardising the interest of ordinary shareholders of these PSUs.
 
Another example is the corporate governance guidelines issued by the government in 2010 (DPE Guidelines). There are huge gaps between these guidelines and the provisions under the Companies Act and SEBI LODR Regulations. But these guidelines have not been revised and the anomalies continue.
 
It is not our case that the hands of the government remain fettered even if there is a situation of public interest being seriously jeopardised or in matters of national security. In such exceptional situations, there may be a case for providing exemptions. But, unfortunately these are being adopted and used in a routine manner.
 
In part II of this article, we will talk about the other two mechanisms, namely (i) specific exemptions in regulations framed by regulators and, (ii) condoning violations by SOEs. We will also evaluate the implication of these provisions and exemptions.
 
The second and concluding part of this article will appear  tomorrow. Sinha is senior advisor and Sood is an associate with Cyril Amarchand Mangaldas