Coal India case shows the reality of political control over the PSUs - Part II  

April 10, 2012

Can the majority shareholder (the government), trample upon the primary rights of the minority shareholders? This question affects all PSUs. This is the second part of the three-part series on Coal India

EAS Sarma

According to the news reports, it all started with the Prime Minister’s Office (PMO) which, in its usual exuberance, intervened at the instance of the persuasive private power producers and asked the coal ministry to direct Coal India (CIL) to commit legally binding guarantees in supplying coal to the power companies. Goaded by the PMO, the coal ministry tried to direct CIL informally to do what the PMO wanted. Apparently, a few really ‘independent’ directors of CIL resisted the ministry’s direction as it would have exposed the company to undue risks and litigation from its private shareholders.

In order to get over this avoidable ‘irritant’ of dissent in the board, CIL’s managers had apparently hinted the easy way out of the situation, that the government could issue a Presidential directive to the company to silence the dissenting directors. In such situations, the position of the chief executive officer (CEO) of a company would be unenviable. However, in the instant case, the problem got readily resolved as the ministry’s representative on CIL’s board also occupied the position of the CEO, a situation that typically symbolises the lackadaisical way in which PSUs are managed!

Today, the minority shareholders are questioning the majority shareholder’s unilateral interventions in the day-to-day affairs of CIL. Is the Presidential directive issued in the case of CIL tenable at all, since it does not strictly confine itself to a policy matter? Can the majority shareholder, by the fiat of a Presidential directive, trample upon the primary rights of the minority shareholders? Would not such a directive defeat the very spirit of disinvestment and run counter to the norms of good corporate governance? If the government is so adamant on ‘directing’ CIL to continue to play its pre-disinvestment role, should it have, in the first instance, forced CIL to get listed in the stock exchange?

These are not dilemmas faced by CIL alone. These are the generic set of questions that arise in the case of all similar PSUs which either face disinvestment for the first time or have already been subject to disinvestment. In order to appreciate this problem in all its dimensions, it is necessary to understand the genesis and the evolution of the PSUs in the country.

Soon after Independence, largely during the sixties and the seventies, the then political executive led by Jawaharlal Nehru considered it necessary for the state to have a predominant presence in important infrastructure sectors such as oil, coal, electricity, ports, highways, and so on to facilitate all-round economic growth. In line with this, many private companies in the infrastructure sector were nationalised. In some cases, in the name of safeguarding the interests of the workforce, even loss-making private companies were taken over. Further, new PSUs were set up in crucial sectors to provide an impetus to the development of the economy. During the subsequent years, the country witnessed the expansion of the public sector like never before and along with it, a corresponding mushrooming of the supporting bureaucracy to ‘oversee’ the PSUs.

Article 12 of the Constitution of India considers all agencies under the ‘control’ of the state as a part of the state itself. This provision conferred a special status on the PSUs. At the same time, it also gave the political executive and the bureaucracy a handle to exercise excessive control over the affairs of the PSUs.

In the case of both the statutory and the non-statutory PSUs, the government reserves for itself the overarching authority to issue ‘policy’ directives. As in the case of CIL, the authority to issue the Presidential directive is embedded into the Memorandum of Association of each PSU. In the case of the PSUs created under the statute, it is factored into the statute itself. Such directives are meant to be issued in the national interest, more as an exception than a rule. Moreover, a Presidential directive so issued can at best lay down the policy guidelines for the PSU, not spell out the way the PSU should conduct its day-to-day affairs. In practice, however, the policy directives, though issued sparingly, sometimes provided a cover for the ministry overruling the decisions of the PSUs’ boards even in day-to-day commercial matters. In the case of CIL, the Presidential directive given on the FSAs is one such order that impinges on the PSU’s commercial obligations as a listed company.

In addition to the authority of issuing policy directives, the bureaucracy lost no time in also developing a maze of controls over the PSUs, which were so complex that they transformed the PSUs into mere appendages of the government. As a result, the PSUs generally imbibed the same rigidity and risk aversion that characterise the government agencies. The politicians perceived PSUs as convenient vehicles to dole out political patronage and, at times, even earn personal gratification by exercising their clout to manipulate contracts and purchases. This in turn encouraged the civil servants to strengthen their own stranglehold further over the PSUs. The latter provided them remunerative assignments, both in service and post-retirement, apart from day-to-day perquisites.

The PSUs are usually treated like subordinate agencies by their parent ministries. PSUs cannot borrow funds for their expansion or incur expenditure beyond a limit without the ministry’s express approval. The Planning Commission reviews the budgets of many PSUs. The Public Enterprises Selection Board (PESB) selects their top personnel. Government officials sit on their boards, though their presence could pose serious problems of conflict of interest. In the name of “public welfare”, it is the parent ministry that usually decides the PSUs’ pricing policies. In the name of uniform wage policies, it is once again the ministry that should approve the wage agreements of PSUs with their employees’ unions. Often, it is the finance ministry that decides even their dividend policies, as the dividends are used as a source of revenue to bridge the fiscal gap in the government’s budget.

Dr EAS Sarma, IAS, is a post-graduate in Nuclear Physics (Andhra University) and in Public Administration (Harvard University) and a Ph.D from IIT, Delhi. As a Union Secretary he has held the portfolios of Power, Economic Affairs and Expenditure. He quit the government in 2000 over differences regarding policy issues with the National Democratic Alliance government. He is the convener of Forum for Better Visakha (FBV), a civil society group set up in 2004.