This article has been written by Sanjiv Mathur pursuing a Personal Branding Program for Corporate Leaders from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Introduction 

India’s foray into industrialisation happened through the direct intervention of the government post independence as they started building state led enterprises to drive industrial development. 

Since these public enterprises were wholly owned by the government, the management had to be run under its control through an independent governance structure led by a board running its day to day affairs to ensure performance against the stated objectives of the company.

After the wave of liberalisation in 1991, the purpose of PSE’s has evolved over the years from being a vehicle of development to creating wealth. Hence, Government undertakings had to run profitably, stay competitive in the market and demonstrate transparent working with sound business ethics & conduct.

Corporate governance

Implementing corporate governance policy & structure within PSE’s provides the required balance of reasonable autonomy to run efficiently & profitably and ensures transparent and ethical behaviour from the executive management.

Evidently, there could be an opportunity to extract value from the company at the expense of its lenders and investors, especially the minority shareholders.

Corporate governance therefore provides the structure & framework for establishing the relationships of the management, Shareholders and all stakeholders through a set of stated guidelines to ensure the performance and achievement of the company’s objectives and protect the interests of all stakeholders.

It is a set of principles and methods of working accepted by the management and employees of the corporation to work ethically and transparently as trustees of the true owners of the organisation- its shareholders and other stakeholders.

Public sector enterprises

There are 365 PSE’s, either CPSE’s or state owned enterprises or their subsidiaries or JV’s of the centre & state owned enterprises. There are both listed and unlisted entities. Based on their size and performance, they have been classified into Maharatnas, Navratnas, Mini ratnas I &II. Most of the PSE’s are structured as government companies and have, in many cases, performed better than their private counterparts.

The role of PSE’s has evolved over the years, starting from a developmental perspective of essentially mobilising and distributing resources with social and economic objectives to operating as a corporate entity for profitability and wealth creation. Especially after the economic liberalisation in 1991, when they were suddenly pushed out of a protected monopolistic market to a competitive market led economy.

Today, the PSE’s are major contributors to the GDP of the economy. There are many PSE’s that are profitable and their total market capitalization on the national stock exchange is 43 lakh crore or 10% of the market capitalization value of all listed companies as of April 2024, as per the Upstox website.

Evolution of enactments and guidelines for PSE’s

The corporate governance guidelines for PSE’s followed the provisions of the Companies Act 1956 as they evolved through the revisions in 2006 and 2013. The Department of Public Enterprises issued guidelines in 1992 for the composition of the board of directors and further reinforced the governance framework by adding the requirement of independent directors on the board of these public companies in 2001. DPE published a comprehensive guideline institutionalised in 2010 and adopted by most PSE’s in their policy document after voluntary testing between 2008-9.

The Companies Act 2013 made stringent provisions for corporate governance that apply to the PSE’s as well. Extracts of clause 49, as stated in the stock exchange listing agreement issued by the SEBI guidelines, provide the corporate governance norms for listed companies. They were made more stringent in 2014 in alignment with the Companies Act, 2013. All PSE’s fall within the ambit of these laws as corporate entities.

The PSE’s have to not only comply with the different provisions of the Companies Act but also the statutes under which they have been formed and, hence, be accountable to their principal ministries and other governments. Bodies that are required to keep an eye on the functioning of government companies and investments. 

Non-listed PSE’s are required to follow the same guidelines for corporate governance with the objective of getting listed in due course within a reasonable time frame. In the interim, they are bound by the same guidelines on corporate governance as the listed PSE’s.

PSE’s as government companies are ultimately liable to the parliament and the President of India hence, they may sometimes be exempt from some provisions of the Company Act if decreed by the government. 

The Department of Public Enterprises has administrative control to provide policy framework and oversight to the PSE’s. They report to the respective ministries and are also monitored by several government departments, such as the Comptroller & Auditor General (C&AG)- who also carry out audits and keep an eye on their functioning and performance. The Central Vigilance Commission (CVC) deals with matters related to irregularities, corruption or fraud. 

Other nodal ministries-such as Finance, HRD, Industries, Revenue, and Agriculture, or civil supplies, may be investors , collaborating partners or PSE’s that are dealing in areas that relate to them and their performance.  

PSE’s are also covered by the RTI Act 2005 in its provisions and have to provide information as and when required. Central PSE’s are also answerable to parliamentary committees appointed on specific matters, just as  state owned PSE’s may be answerable to state legislative committees.

However, the underlying objective is to drive more accountability and transparency in their work.

Policy guidelines for PSE’s

The guidelines for Corporate governance of listed and Non-listed PSE’s issued by the DPE is provided under the following key topics defining the policy framework:

1. Board of directors
2. Remuneration committee
3. Audit committee
4. Subsidiary companies
5. Disclosures
6. Reports and compliance
7. Schedule of implementation

Evidently, the corporate governance norms as stated by the Department of Public Enterprises and the various enactments are comprehensive, as they aim to put checks and balances in place through the induction of Non-Executive and independent directors through all its governance arms.

Role of independent directors

The role of independent directors is clearly reinforced within the board, remuneration Committee and audit committee to the extent that if the companies do not appoint independent directors, they do not qualify for variable pay or performance bonuses.

The focus of the governance guidelines is to ensure the interests of minority shareholders are protected and the executive management does not misuse the position to syphon off or funnel funds out of the company through related party transactions or transactions of material value through preferred suppliers or customers.

Corporate governance guidelines seek to check the misuse of provisions by appointing board committees that keep oversight of or review of transactions or management decisions.

It also stipulates a major role for the audit committee, chaired by an independent director, to proactively put controls in place and prevent such occurrences. 

The DPE guidelines actually provide a document stating a “model code of conduct” for the board and senior management of the company.

But the PSE still has challenges & issues trying to protect the interests of its primary stakeholders, particularly minority shareholders.

Challenges and limitations of PSE’s

PSE’s are already aligned to the requirements of corporate governance. The CMD is appointed independently as per the prescribed procedure. Statutory audits are also done by C&AG, which is completely independent. There are provisions in the guidelines to challenge arbitrary decisions in a court of law if required. There is a pay commission that fixes and changes the remunerations of key functionaries in senior management.

Though all the key elements of corporate governance are in place, their implementation in many PSE’s may not be proper due to several reasons:

• Several layers of governance make it a complex governance structure to navigate.
• The norms are pretty comprehensive but the implementation is inappropriate
• Compliance rate of clause 49 is lower compared to private sector
• Board experiences frequent political interference.
• Government political goals sometimes override the interest of stakeholders/PSE

Evidently, they are limited by layers of governance structures that limit their ability to act independently and effectively with speed to compete with their private and multinational competitors.

Ways to improve corporate governance in PSE’s

Despite the push for privatisation and profit orientation of PSE’s, they may always have a development role in the economy as the welfare objective of state shall precede commercial considerations, especially for PSE’s involved in sourcing and distribution of natural resources.

Hence, India should look at relevant international models of governance structures for PSE’s to incorporate best practices and balance welfare objectives with wealth creation goals.

In order to address the issues of poor implementation and adoption:

• Provide less complex governance by unifying the holding structures.
• Appoint professionals with a successful track record and experience to lead these PSE’s.
• Provide greater autonomy & empowerment to the board to run these enterprises.
• Streamlining the process of appointing independent directors across all PSE’s.
• Check political interference by realigning reporting to a single holding apex entity.

To improve the implementation of corporate governance norms, there seems to be a need to evaluate alternative models and best practices for PSE’s from other successful countries. Reforms must be done while keeping the local environment in perspective. 

Conclusion

Though there is a strong push by the current dispensation to privatise most of the PSE’s, their developmental role is important for a country like India, where there are constituencies seeking state support at different levels in different forms, especially in the food and civil supplies, Agricultural and energy sectors.

Whatever the shape and size of PSE, whether owned by the government or a private enterprise, the need to have robust corporate governance in order to protect the interests of all stakeholders, especially minority shareholders, shall be critical. There is also a need to have strong internal systems and controls, as well as independent oversight, to de-risk the enterprise and ensure transparent and ethical conduct of business.

References

• https://dpe.gov.in/sites/default/files/R-2.pdf
• https://upstox.com/news/market-news/trading/psu-stocks-market-capitalisation-share-rises-to-10percent-of-overall-market/article-85429/