Will Sebi ever book a joint secretary?

The government's corporate empire is a big threat to corporate governance in the country

You know the answer to that question very well, don’t you? Suddenly, India finds itself among the most well-governed corporate environments in the world. It is also deemed to be one of the safer markets for the minority investors. The advent of proxy advisory firms, beneficial changes in the companies law, securities market regulations and widening of shareholding bases have all played their role in pushing India up on such rankings. 

 

But, most of these surveys and rankings seem to be ignoring the elephants in the room: the companies owned by the government, which are known as public sector undertakings or PSUs. The administration of these companies are still directly with the government, despite their corporate structure. The chairman may be there to run the day-to-day affairs, the board may be there to clear strategic moves, but it is often the secretary or joint secretary in the administrative ministry that calls the shots.  

 

This is not very different from a family owned promoter running his empire with puppet boards and sucking up chief executives. But the government and the joint secretary have an additional advantage of indirect control over the regulator itself. Now, when corporate governance norms are drafted (often imported from the West), are such realities taken into account? Indian business media is now even bored of writing how big PSUs flout clause 49 recommendations. 

 

When this clause in the listing agreement, which deals with corporate governance norms for companies was first introduced, I remember the then Sebi chairman going around making public statements to get the companies fall in line. 

 

Yet many PSUs could not comply with one easily verifiable parameter of minimum number of independent directors in the board. More farcical events have surfaced in the media where a particular company complied with the clause 49 norms only for a limited window when its prospectus for a share sale was pending Sebi approval. Once it was cleared, it happily went back to non-compliance. 

 

A more recent instance was how the independent directors of some large firms were removed summarily after the new government took over. Heard some protests but who will bell the cat? The call could have been made by the political establishment. But, it was for the bureaucrats who executed this to advise that these do not fit in with the established corporate norms. A promoter shareholder cannot summarily change independent directors duly appointed by shareholders.

 

When the clause 49 rules were amended by Sebi, the government played even worse. They went to the extent of arm twisting the regulator to allow special exemption for companies it owns. I bet there was some joint secretary behind this. 

 

One of the key areas of the new clause 49 announced by Sebi in April was the related party transactions (RPT). In line with global move towards preventing ‘abusive ‘ RPTs, which promoters of companies use to swindle money in which minority investors have a legitimate claim over, Sebi had said all such RPTs would need approval of ‘majority of minority’ investors.

 

I had in one of my weekly Street FOOD columns for Business Standard pointed out how this will derail the RPT of state owned explorer ONGC making good subsidy losses of its sister concerns IOC and BPCL.

  

Guess what the government did? Weeks before the new regulations took effect in October, it got Sebi to amend the provisions relating to the RPT to exempt ‘government companies’ from such position. Are you getting an image of the police commissioner reporting to the drug lord? No…no...brush off such evil imagery from your brains. it is slightly better than that. Our drug lord is well meaning you know. He is doing what he does for greater common good.

 

Yesterday, a channel was flashing quoting sources that potential investors of ONGC are asking for a steep discount on its share sale because of the subsidy issue. 
 

What is the joint secretary going to do? He might fight it with more ‘source-based’ reports on papers and TV. In the process what is the joint secretary doing? He is handling and peddling ‘unpublished price sensitive information (UPSI)’. Is it possible such information can be utilized to make market gains? 

 

Off late, there is a slight improvement in that exchanges have now begun to ask clarification from PSU management for media reports with UPSI. In one case, the exchange waited for a month to get some response. When the reponses came, some of these were hilarious.  A PSU in a clarification actually agreed its chief was discussing UPSI with ‘an interaction with the Press’. But, he declined making a definitive statement, which the news report alluded to. Another PSU clarified when asked by the exchange that a particular proposal reported by the papers was actually placed before the board.

  

Do these instances call for application of Sebi’s new improved insider trading norms? 

 

Will the regulator issue show cause notice to the joint secretary? Will the regulator find him guilty? If it finds him guilty, will it initiate adjudication proceedings? 

 

Or, it will let him go because he is … 

 

He is what?

 

He is working for the government.  He is part of the system.

 

You mean an insider?