Corporate Governance, Psu Style
Corporate governance may have become the latest buzzword in corporate India. But the concept, even if alien to the Indian private sector, has been in practice in the public sector for a while. And surprising though it may seem, the PSUs have been following a model on the lines of that popularised by multinationals across the world.
The model is based on three core principles accountability, maximising shareholder returns and carrying out the wishes of the shareholders. Multinationals have done so because of their single-point agenda to maximise shareholder returns. Accountability is more by design rather than choice. Managements submit to accountability as both the institutional and retail shareholders want it no other way. And both these sets of equity holders are backed by a strong legislative sanction in their respective countries. There is the Securities and Exchange Commission in the US with similar such bodies in the UK, Australia, France and New Zealand.
It was a strong lobby of shareholders that forced the Ford family to give up control in the Ford Motor Corporation. Recent examples include the US-based consumer products conglomerate Procter & Gamble and Metagesselshaft A G. The losses had a direct implication on shareholder returns that created a storm in corporate boardrooms. As a result, both the companies were forced to disclose their activities in derivatives trading. Little wonder then that their chief executives were hauled up.
Such parallels in governance are evident in the Indian public sector units. Like their foreign counterparts, the PSUs are answerable to the single largest body of shareholders, the government. PSUs are accountable in a sense that disclosures have to be made to this body of shareholders. Few can deny that PSUs have done just what their shareholders wanted them to do, be it the core function of industrialisation or providing infrastructure services. The crucial difference was all this was done at the cost of profits because the shareholder preferred it that way. So, in a way, principle number three was compromised for shareholder wishes!
Take for instance the National Thermal Power Corporation (NTPC), which has been a profit making company for the last 10 years. During the entire period, NTPC was never asked to contribute any dividend. Instead, the profits were ploughed back to meet capital expenditure for creation of additional thermal capacity and more support in the form of government equity. The result: NTPC currently has a capacity of 200,000 mega watts (MW), operating at a plant load factor close to 85 per cent.
Another example is the Cement Corporation of India (CCI). It expanded capacity even at the cost of losses. It was a two-pronged strategy. One was to serve localised markets for cement, and reduce import dependence in areas in which the private sector refused to venture.
But since 1993, the governments perspective has undergone a change to controlling fiscal deficits. This change means that the public sector would now have to generate more revenues for the shareholder to meet this objective. NTPC has begun doing just that. NTPC has begun paying dividends for the last two years progressively increasing it from 10 per cent in 1994-95, to 15 per cent 1995-96 on an equity of Rs8,000 crore.
CCI has adopted a different route for generating profits. It has begun a major downsizing exercise selling four plants and using the proceeds to reinvest in creating captive power capacity in some of its existing plants. The strategy behind the downsizing is to exit from markets that are already served by other private sector producers. Once this exercise ends in 1997-98, CCI is expected to be back in the black, after shedding its accumulated liabilities. NTPC with an earnings per share of around Rs 4.5 and CCIs post restructuring EPS of Rs 2 would make both of them excellent candidates for disinvestment.
This focus on appeasing shareholders, conforms to exactly the way transnational companies look at equity holders and investments. The priority is gradually moving towards meeting shareholders demands for a rate of return on investments. This is a shift to principle number two as opposed to principle number three. As the existing shareholder no longer has the funds to meet the capital expenditure requirements of PSUs, the capital dilution is one way of meeting this objective.
The Steel Authority of India (SAIL) is another instance in which this has happened. Last year, SAIL entered the GDR market and managed to raise $125 million to meet this objective. And it managed a price of approximately Rs 31, when the domestic market price for the scrip was quoting below Rs 25.
Few in the domestic private sector can claim to have this system of governance in place. Many times, accountability was violated as some of these companies issued preferential shares at discounted prices in 1994. The reason was to ward off takeovers soon after making euro issues. The second violation took place when these companies, instead of deploying euro issue funds into capital expenditure, parked them in the stock markets. This resulted in losses and depreciation of the net asset values.
The second principle was automatically violated when the shareholders investments depreciated in value. It happened, not because of the condition of the capital markets, but because the promoters had placed funds into areas in which they had little experience. Balance sheets did not specify the decline in the value of the investments in the financial assets. The net result: investors who subscribed to premium priced issues in 1995, saw their portfolios decline. This includes the foreign institutional investors and GDR investors, since the funds were deployed in the capital markets instead of capital expenditure.
As for principle number three, shareholders have been taken for granted. Promoters have virtually consolidated their holdings through a set of mergers and cross holdings at the expense of the share holders.
The Tatas made a rights issue of their holding company at a premium of Rs one lakh per share. This was subscribed to by the group companies. The subscription amount was in turn used to increase its stake in the group companies. It came about without a formal sanction of the equity holders of either of these group companies through separate preferential rights issues.
A fallout of the increase in the equity base of the respective companies has been an increase in expenditure and a depreciation of shareholder wealth. The shareholders have yet to approve the issue of charging royalty by Tata Sons for the use of the Tata name.
Others like the Nandas Escorts and the Chennai-based MAC group opted for a different route. Both adopted merger-based mechanics without involving any fund outflows from the promoters. While this has definitely enhanced promoter control, it has not increased shareholder wealth. And all these companies made substantial euro issues in 1994.
In comparison, transnationals used equity placements only for meeting capital expenditure for revenue generation, which was done either through private placements or public issues. And this is just what the Indian companies have not done. For transnationals, EPS is an issue even on enlarged equity. This is possible only if equity funds are utilised for revenue generating capital expenditure. And this is precisely the strategy that PSUs are also adopting. They are increasing shareholder wealth and even here, capital dilution itself is not an issue as disinvestment is capital dilution.
Yet, with the exception of Larsen & Toubro and ITC, capital dilution is an issue with the private sector. Says an analyst, Most Indian corporates have held back expansion proposals, especially in a situation where promoters have no funds to leverage fearing capital dilution. This group includes even well managed companies like the TVS group. As a result, Indian corporates are not threathened by takeovers or acquisitions as much as being swamped and overwhelmed by professionally managed transnational companies. The result therefore, is the inevitable depreciation of shareholder wealth. What is happening right now, is that PSUs are beginning to focus on increasing the EPS and shareholder wealth. For that is going to be the key to a well-run company.