What type of enforcement is suitable for PSUs?

Public sector undertakings (PSUs) have a terrible record of compliance with the corporate governance norms spelt out by the Securities and Exchange Board of India (Sebi).

 

Since the erstwhile clause 49 of the listing agreement came into existence over a decade ago, instances of non-compliance have been reported.

 

A chronic compliance problem has persisted, even after the listing conditions got the status of regulation, in the area of appointing independent directors. Most public sector enterprises have continued business without an adequate number of independent directors.

 

A reason attributed to this problem is the stringent qualification criteria established by the department of public enterprises (DPE) for appointing “non-official directors”.

 

While Sebi itself has only certain generic qualifications for independent directors, the DPE norms seem to ensure that even the civil services hierarchy does not get disturbed even after retirement. Therefore, nobody below 45 years of age can be appointed as non-official director of a PSU, howsoever qualified he may be. Among retired bureaucrats, only those who have served for at least 10 years at joint secretary level or above are permitted.

 

People who have retired from a PSU are not eligible to be on its board. Serving chief executives and directors of a PSU are debarred from taking up non-official positions on other boards.

 

While, on the one hand, these conditions appear very stringent, there is a clause that allows “eminent people” with a “proven track record” from “industry, business, agriculture or management” to be appointed. Thus, a huge amount discretion is available in this clause to favour people close to the ruling dispensation.

 

What, for example, would be proven track record in agriculture? And, how does this agricultural track record help in providing directions to the boards of multi-billion dollar enterprises is something only bureaucrats could explain.

 

Private company directors can be considered in “exceptional circumstances”.

 

Another area where PSUs have bungled in compliance is the minimum public shareholding norms despite special dispensations and extended timelines. Sebi, being under the administrative control of the finance ministry, has not been able to push the envelope beyond a point.

 

This has made some experts suggest that a carve-out be made for these firms in the regulations rather than them being perennially non-compliant and a blot on the regulatory framework.

 

It appears from the report of the corporate governance committee that these issues were discussed. However, only very limited comments and observations have been made. “PSEs (public sector enterprises) may also have certain structural issues arising due to conflicts of interest that are inherent in cases where the same entity is both the owner and regulator,” the report observed.

 

The Committee debated several mechanisms in addressing these challenges but decided against a separate dispensation for PSUs. It was of “the view that all listed entities, government or private, should be treated at par on governance standards. Therefore, all listed PSEs should be compliant with the Sebi LODR (Listing Obligations and Disclosure Requirements) Regulations”.

 

The committee makes just a passing mention of the enforcement, saying, “The Committee recommends that the listed PSEs fully comply with the provisions of Sebi LODR Regulations and the same be suitably enforced.” It has also suggested that all state-owned companies be moved to a holding company structure by 2020.

 

“Suitably” seems a very weak adverb in comparison to “strictly”, which is often used as a prefix to terms such as “enforced” or “enforce”. “Suitably” is pregnant with possibilities of creative interpretations. Let us hope that this recommendation is not suitably abused to continue the status quo, in which administrative ministries and ruling parties treat PSUs as milch cows.