Auditor flags violation in directors' appointment by fertiliser PSUs

CAG says Madras Fertilizers, National Fertilizers and Brahmaputra Valley Fertilizer Corp did not have the required number of independent directors

The Comptroller and Auditor General (CAG) has flagged major discrepancies at fertiliser public sector undertakings, including the lack of a whistleblower mechanism.

In its report “Financial Reporting of central public sector enterprises”, the CAG has said its review of composition of the board of directors revealed Madras Fertilizers Ltd, National Fertilizers Ltd and Brahmaputra Valley Fertilizer Corporation Ltd did not have the required number of independent directors on their boards, which, at least, ought to be a third of the members.

Other CPSEs including Fertilizer Corporation of India Ltd, Hindustan Fertilizer Corporation Ltd, Rashtriya Chemicals and Fertilizers Ltd, Fertilizer and Chemicals Travancore and Projects & Development India Ltd did not have any independent director on their board.

"The board is the most significant instrument of corporate governance. The presence of independent representatives on the board, capable of challenging the decisions of the management, is widely considered as a means of protecting the interests of shareholders and other stakeholders," the CAG said in its report.

DPE guidelines stipulated that government nominee directors should not exceed one-sixth of the actual strength of the Board of Directors and it is preferable to have only one representative on the board. However, in no case, they should exceed two.

Whereas in two fertiliser PSUs FCIL and FACT government nominated directors were more than the required number, the report added.

In another similar violation of guidelines, almost all fertiliser sector PSUs including BVFCL, FCIL, HFCL, MFL, PDIL, NFL, RCF and FACT did not have independent directors on the audit committee.

According to DPE guidelines, there should be an Audit committee with a minimum of three directors as members of which two-thirds shall be independent directors.

The audit committee also reviews functioning of 'Whistle Blower Mechanism' in case it exists in the company.

The listing agreement contemplates that a mechanism is to be establish for employees to report to management the concerns about unethical behaviour, actual or suspected fraud or violation of the company's code of conduct or ethics policy.