CORPORATE GOVERNANCE

IN PSUS- AN INTRODUCTION
Presented by-
Sachin Bhanuse(7)
Rahul Chaudhari(11)
Shrikant Gavimath(27)
Tarang Karangutkar(37)
Bhairav Rokde(78)
Hrishikesh Thosar(99)
 Evolution of PSUs
2
 After independence India adopted the road of planned economic
development.
 In this India opted for dominance of the Public Sector
 It was believed that a dominant public sector would
 reduce the inequality of income and wealth and
 advance the general prosperity of the nation
 The public sector still accounts for
 over 11% of India’s GDP,
 over 27% of industrial output and
 over a third of central government receipts
 In 1951, the total investment in five PSUs was merely 290 crore
 whereas now there are about 246 PSUs with a total investment of
Rs5,28,951 crore.
 Government as the principal shareholder and promoter in Public
Sector Enterprises should be setting the bar on corporate governance
standards and practices
 Perception of corporate governance
3
in the public sector
 While listed PSUs are required to comply with Clause 49 of the
SEBI Listing Agreement, it is now mandatory for all Central
Public Sector Enterprises (CPSEs) to comply with the corporate
governance norms
 PSU CMDs expressed the view that non-executive directors on
their boards have been making a significant contribution to
improving the overall functioning of PSUs
 PSUs and especially those that are unlisted should be
transparently disclosing their corporate governance practices
which has hitherto not been the case
 Also, Maharatna, Navratna and Miniratna PSUs that are listed
should lead the way in implementing the MCA’s voluntary
guidelines on corporate governance
 Trusteeship versus Stewardship
4

In its efforts to balance its trusteeship and stewardship responsibilities,

the government has granted varying levels of autonomy to PSUs.

The tendency of the administrative ministries to interfere results in

unnecessary consultation with these ministries

Due to delays in filling up vacancies in non-executive director positions,

many PSU executives are unable to exercise the autonomy granted

Barring policy matters and matters of national interest, the

government’s involvement should be minimal
 Functioning of the PSU boards
5  PSU board size sometimes unwieldy

 Ministerial diktats take precedence over strategic and

commercial considerations

 The role of the non-executive directors on PSU boards is vital in the

context of achieving good governance.

 CMDs should be actively consulted and engaged in the selection and

appointment of the non-executive directors on PSU

 contribution of non-executive directors should be maximised

 A mechanism to evaluate the board’s overall functioning should be
instituted
 Compliance with the SEBI Listing
6
Agreement
 It is disconcerting to note that the PSUs are falling behind in
complying with minimum requirements envisaged in Clause 49
 The government should act swiftly and take corrective action
failing which wrong signals may go out to India Inc. on the
seriousness of the government’s intentions in raising the overall
standards of corporate governance
 One way of dealing with non-compliance is to make unambiguous
disclosures within the director’s report and the corporate
governance report and thereby hold the PSU boards and
managements accountable
 The corporate governance norms for Central Public Sector
Enterprises (CPSEs) released in 2007 being made mandatory for a
lot of PSUs including unlisted PSUs is a good step, but the
implementation needs to be considered
 Audit and Accounts
7

 When it comes to PSUs there is a perception that in certain areas,

notably audit and accounts, they are over-governed thanks to the
oversight roles being played by the Comptroller and Auditor
General (CAG) and the Central Vigilance Committee (CVC)

 Recent CAG reports have indicted PSUs for deficiencies in

financial reporting including within audit reports and disclosures

 Some of these deficiencies have raised questions with respect to the

quality of audits within PSUs
 Audit and Accounts
8

 Appointment of statutory auditors of PSUs should be the

responsibility of the PSU audit committees. The CAG's role should
be to recommend firms that would fit the bill based on robust
criteria

 the audit committees of PSUs should be involved in many aspects of

the external and internal audit processes – appointment of the
auditors, approval of audit plans, audit fees and performance
reviews

 The audit committee of PSUs should have explicit powers in

monitoring audit quality and ensuring that audit fees are
commensurate with the level of audit risk and effort levels involved
in undertaking the PSU audits
 What PSUs have to say…
9

 The main obstacle for PSUs to comply with the board composition
requirement is that appointments to the board are made by the
government, which takes significant time and bureaucratic clearances

 PSUs believe such corporate governance norms do not allow them a

level playing field with private players and impede their growth and
commercial functioning.

 Since PSUs are already over-regulated and are accountable to various

authorities under several regulations including the Parliament, CAG,
CVC and the Right to Information Act, among others, the corporate
governance norms for them could be relaxed.
 What PSUs have to say…
10

 Their commercial functioning is at times further curtailed due to the

bureaucratic hurdles they need to overcome in order to compete with
their peers in the private sector.

 The state or central government has not appointed independent

directors to the boards of companies is a practical problem faced by
the PSUs.

 In this scenario little can be done by the PSU itself, while its private
counterparts do not have to face similar situations
 Sebi’s say…
11

 SEBI has been unequivocal in ruling out any relaxation of the

norms for PSUs.
 As per the regulator, the fundamental reason for not distinguishing
between private and public sector undertakings is that corporate
governance norms help in boosting the confidence of investors in
corporate India.
 These norms are comparable and in sync with global standards of
governance and relaxing them would not be a solution towards
correcting the inequities between the private and public sectors.
 Indeed, strong governance helps in building investor confidence
and trust in financial reporting and the functioning of companies.
 This being the fundamental requirement of all businesses, there
appears to be a stronger case for a single set of corporate
governance norms being mandated for both public and private
sector entities.
 Corporate Governance watch
12

 In 17 listed government companies, the Board of Directors did not

have required number of independent directors.
 The composition of the Audit Committees in three listed
companies was not as per Clause 49 of the Listing Agreement. The
Audit Committee of these companies were not chaired by the
independent directors.
 The Chairman of the Audit committees of four companies did not
attend Annual General Meeting of the respective companies.
 Further, there was no system of
 preparation of Annual Report on the working of Audit

Committee in seven companies and

 providing training to the members of Audit Committee in ten

companies
 Corporate Governance watch
13

 Management of GAIL had run into trouble with market watchdog

Securities and Exchange Board of India (Sebi) for not appointing
the required number of independent directors on its board
because the proposal had been held up by the ministry.
 GAIL had to furnish its communication with the ministry of
petroleum and natural gas to prove that it was the government
and not the company management that was responsible for the
delay in appointment of independent directors.
 Sebi eventually concluded that it was a case of a “sad travesty of
the law by the government of India and as it’s not the company
but the major shareholder (government), which is the culprit
 Corporate Governance watch
14

 The government plans to exempt state-run firms from a listing

norm that requires companies to have independent directors in half
of the board positions, as it looks to expedite its divestment program
me
 It has proposed to relax this stipulation (50%) to a third of the
board size of the company to reduce pressure for finding adequate
number of independent directors on short notice
 The changes benefited companies such as Hindustan Copper and
MOIL
 One of the main reasons for the delay in the follow-on public offer
of steelmaker SAIL was the inability to find adequate number of
independent directors.
 The company had just four independent directors against the
requirement of 12. .
 Corporate Governance watch
15

 Towards the end of last fiscal, the listing of government-owned

United Bank of India had to be postponed twice since the
government was unable to appoint independent directors on the
board.
 Finance ministry had to intervene on the issue and Sebi gave an
exemption to the bank to list, although it was not Clause 49-
compliant
 The public offer of NHPC was delayed by several months due to
the problem
 Three of the four PSUs which have been given Maharatna status –
ONGC, SAIL and IOC – continue to be deprived of the enhanced
powers the title would bring them, due to of their lack of
compliance with Clause 49. Only NTPC has started enjoying the
enhanced autonomy from Maharatna title
 Recommendations
16

 PSUs that are listed should lead the way in implementing the Ministry
of Corporate Affairs (MCA) voluntary guidelines
 PSU management and boards should have complete autonomy on
matters like senior execs hire, compensation and PMS
 PSU CMDs should be actively consulted and engaged in the selection
and appointment of nonexecutive directors on PSU boards
 nonexecutive directors on PSUs should be drawn from the private
sector and adequately compensated on par with their private sector
counterparts.
 Sitting executive directors in well run PSUs should be encouraged to
assume non-executive director roles in state PSUs and the
smaller/unlisted/not so profitable PSUs
 The government should deal firmly with non-compliance of corporate
governance norms by both listed and unlisted PSUs
17
 What an expert has to say……
18

While the issue of non-compliance is important, it is

equally important to determine where accountability
lies. While a PSU might be technically correct in taking
the position that it is the concerned administrative
ministry that is responsible for the appointment of
Independent Directors, it would be necessary to
consider the levying of penalties on non-compliant PSUs
so that the latter appropriately pressurise the concerned
administrative ministries to make timely appointments
of Independent Directors
-M. Damodaran,
Former Chairman of SEBI
 What an expert has to say……
19

The presence of non-executive directors on the board has

added tremendous value to our overall functioning and
decision making. Besides attendance at board meetings, our
non-executive directors have voluntarily spent time with
management to offer their insights into critical issues and at
times we have even constituted special meetings at short notice
to discuss important issues that requires the board’s collective
input. Without a doubt, we have benefited immensely from
these inputs.
- S. Hajara,
CMD - The Shipping Corporation of India
 Corporate Governance
Requirements
• Optimum number of executive and non executive directors with at least 50% being non-executive.
Composition
If the chairman, has executive powers then 50% of Board comprises of Independent directors.
of the Board
While if chairman has non-executive powers then 1/3 of the Board comprises of Independent
directors.
• Mandatory constitution of Audit Committee with minimum three directors and headed by an
Audit Independent director.
Committee • All members shall be financially literate (should be able to understand financial statements) and at
least one member should have accounting and financial management expertise.

• Shareholder/Investor Grievances Committee to be formed under the chairmanship of a non

Investor
executive director to look into the redressing of shareholder and investor complaints like transfer of
Committee
shares, non-receipt of balance sheet, non-receipt of declared dividends

• At least one director on the Board of the holding company shall be a director on the Board of a
material non listed Indian subsidiary Company
Subsidiary - Material non-listed subsidiary means a subsidiary whose turnover or net worth exceeds 20%
Company of the consolidated turnover or net worth in the preceding accounting year
• Audit committee of the listed holding company shall also review the financial statements, in
particular, the investments by the unlisted subsidiary Company
Report on • A separate section on Corporate Governance to be included in the Annual Reports with
Corp. disclosures on compliance of mandatory and non-mandatory requirements
Governance • Submission of quarterly compliance report to the stock exchanges
CEO/CFO • CEO/CFO to certify the financial statements and cash flow statements
Certification
20