Boardroom gaps: Public-sector undertakings' governance under lens

Last month, 16 PSUs argued director appointments beyond their control

Stock exchanges’ levy of penalties, ranging from ₹3 lakh to ₹12 lakh, on public-sector undertakings (PSUs) for lapses in board composition for the 2024-25 October-December quarter has brought forth issues of governance. 

Last month, 16 PSUs requested bourses to waive these penalties, arguing that these lapses were neither due to negligence nor within their control, as the appointment of directors is managed by the government. 

The violations include failing to meet the minimum requirements for independent directors and women directors on their boards. Additional alleged shortcomings include issues with the quorum of board meetings and the composition of key committees, such as the audit committee, nomination and remuneration committee, and stakeholders relationship committee. 

While such lapses are not new, the latest round of penalties has once again put the limelight on corporate governance standards at listed PSUs. 

Under the Securities and Exchange Board of India (Sebi) regulations, listed companies, including PSUs, must ensure that at least one-third of their board comprises independent directors to maintain impartiality. The rules also mandate the appointment of at least one woman director. 

With many such vacancies persisting for extended periods, regulatory experts have urged a stronger focus on governance within PSUs. 

They have highlighted that PSUs struggle to separate ownership, which is often with the government, from management. “Continuous interference and disproportionate influence being exerted on the functioning of the board will disincentivise and demotivate the board and reduce board members to rubber stamps," said M Damodaran, chairperson of Excellence Enablers, adding that a board with the right members can be trusted to act in the interest of all shareholders. 

Addressing PSU governance concerns at a recent board meeting, Sebi Chairman Tuhin Kanta Pandey emphasised, “We urge the relevant government departments, and through them the PSUs, to comply with these norms and appoint the required independent directors. I am hopeful for improvement.” 

A July 2024 report by Stakeholders Empowerment Services, which analysed 200 listed companies on environmental, social, and governance parameters, revealed that all 20 firms failing to comply with norms on independent directors and board composition were PSUs. 

Sucharita Basu, founding and managing partner of Aquilaw, attributed this non-compliance to “bureaucratic delays and government control over director appointments”. 

She noted, “While Sebi regulations and the Companies Act provide clear legal provisions, enforcement remains inconsistent.” To strengthen governance, Basu recommended fixed timelines for appointments, ensuring true independence of directors, and stricter penalties for violations. 

Another report by Institutional Investor Advisory Services (IiAS) in March 2024, analysing BSE 100 companies, said that all seven non-compliant firms on regulatory requirements for board independence were PSUs, including a bank. 

“The government had an objective when it sold these firms, which was broader than fundraising. It included getting the right processes and governance structures. They are failing in this. If the PSUs don’t get it right, why should the regulators expect the private sector to behave differently?” said Amit Tandon, founder and managing director of IiAS.