For private firms, long road to a level playing field

The government wants the special treatment extended to PSUs to continue

The Securities and Exchange Board of India (Sebi) is keen to level the playing field for public and private sector companies listed on the stock exchanges. Earlier this month, in an interaction with senior officials of public sector undertakings, Sebi Chairman Ajay Tyagi said having different norms for the two might be “perceived wrongly”. The Sebi chief went on to say the regulator will have a dialogue with the government on compliance of these companies with certain regulations.
 
But, Tyagi faces a tough road ahead. Take, for instance, the issue of minimum public shareholding norms. Listed companies are required to have at least 25 per cent public shareholding. The rule was first put in place in 2010 for private companies. They were given three years to comply. In 2013, when the deadline ended, Sebi had issued stringent orders against companies that weren’t in compliance, including freezing of excess voting rights.
 
However, PSUs were required to divest only 10 per cent. Some PSUs were not even compliant of this. Only in 2014, Sebi decided to extend the 25 per cent shareholding norm to state-owned firms as well. The three-year deadline for compliance is due to end on August 21. At the start of this year, there were 18 public sector enterprises, including banks, that weren’t still meeting the norms.
 
Furthermore, the government last week announced its decision to amend the Securities Contract (Regulations) Rules to extend the deadline by a year. Separately, the ministry of corporate affairs reduced the time allowed to fill up vacancies of independent directors in unlisted companies to 90 days, from 180 days, but exempted government companies from this rule.
 
Experts say these decisions show the government wants the special treatment to continue. “The government wants to treat public sector companies as a holy cow. This (level playing field) will not happen,” says S N Ananthasubramanian, a senior practicing company secretary.
 
The differential treatment doesn’t end there.

Sebi Chief Ajay Tyagi (above) earlier this month said the regulator will have a dialogue with the government on compliance of public sector companies with certain regulations

 
Board composition
 
Several public sector companies have been non-compliant on other rules as well.
 
According to data from Prime Database, only six of the 42 state-owned companies surveyed had the required number of independent directors. 
 
Three of them — Oil India, Madras Fertilisers and HMT— did not have a single independent director. Among the other companies that do not have enough independents on their boards are ONGC, BHEL, NTPC and Coal India, with vacancies ranging between one and three.
 
Sebi mandates at least half the board must be independent, and if there is a non-executive chairman, at least one-third of the board should be independent.
 
Public sector companies have also been non-compliant of the requirement to have at least one woman director on their boards. Nine public sector companies have been in violation of this rule. Of these, three have never had a woman director since the rule came into force in April 2015. Bharat Petroleum, Chennai Petroleum, GAIL, Indian Oil, ONGC and PowerGrid are among the companies that did not have a female board member as on July 17, according to Prime Database.
 
According to the procedure laid down by the government for appointment of “non-official” directors, the process is initiated by the company by recommending three eligible names. Then a search panel headed by the secretary of department of personnel and training chooses the candidate. There is a detailed eligibility criteria in terms of age, education and experience for various categories of candidates such as retired bureaucrats, former PSU executives, academicians and professionals. This elaborate process, say experts, comes in the way of quick replacements when vacancy arises.
 
In a written reply to a question in the Lok Sabha in 2015, Finance and Corporate Affairs Minister Arun Jaitley said, the panel had recommended 516 names for filling up 457 positions of non-official directors in 212 Central Public Sector Enterprises (CPSEs). These included 172 ex-government servants, 136 ex-CMDs/directors of CPSEs, 87 professors/academicians and 114 professionals.
 
Pranav Haldea, managing director, Prime Database says, “There is no point in having a regulation and having so many non-compliant companies.” “A better option might be to exempt public sector companies from these rules, given the complicated process involved in appointing the directors.”

 
Bank capitalisation
 
As public sector banks have been in bad financial health, the government has had to infuse capital into many of them over the past few years. Given the tepid interest from shareholders, in many cases such capital infusion has resulted in the government stakes in these banks crossing the upper limit of 75 per cent mark. While Sebi has had to look the other way in the larger interest (action against banks could hurt millions), it has also been granting exemptions from the takeover code requirements of making open offers to the shareholders. Sebi has been helpful to the government by making several changes to the Offer for Sale mechanism to suit the demands of the divestment programme.
 
Public sector executives have raised the issue of related party transactions between state-owned firms before Tyagi. The new companies law had mandated that such transactions have to be approved by a special resolution and interested parties could not vote on these. However, the government later amended the companies law to exempt transactions between government companies from the stringent norms that apply to private companies. PSUs want further relaxations from the Sebi norms in this regard from requirements such as audit committee clearances.