Sucheta Dalal :Lessons from the ONGC-Aiyar episode
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » Column Topics » Financial Express » Lessons from the ONGC-Aiyar episode
                       Previous           Next

Lessons from the ONGC-Aiyar episode  

Sep 26, 2005

At ONGC’s annual general meeting last week, chairman Subir Raha took his battle for autonomy to shareholders and to the people of India, who are the real owners of the company. Said he: “A public sector company is owned by the people and not by an individual in a given office for a given tenure... Companies are not departments.” Yet, in the government scheme of things, “the distinction between a company and a department gets diffused in the public sector domain.”


Raha’s courageous stand and his willingness to put his job on the line has temporarily warded off an ugly situation created by petroleum minister Mani Shankar Aiyar’s attempt to foist extra government nominees on the boards of oil companies and to also pack the slots for independent directors with Congress politicians and trade unionists.


It will be a pity if the controversy dies without leading to systemic change and a revision of the selection process for director appointments. If that happens, it will only be a matter of time before politicians shift their attention to softer targets and more amenable PSUs to park friends and followers.


Raha correctly told ONGC shareholders the fiduciary responsibility of a member of the board is not waived if the company is in the public sector, this being the law of the land. Administrative instructions cannot override the law. M Damodaran, chairman of the Securities and Exchange Board of India (Sebi), has also declared that public sector companies will have to follow the provisions of clause 49 (regarding appointment of independent directors) of the listing agreement of stock exchanges in letter and spirit.


These statements suggest the regulations or guidelines of the department of public enterprises (DPE) do not cover key issues, such as the extent of government interference in PSUs or the appointment of directors. In fact, this is not true. DPE guidelines are explicit about the extent to which the government can breathe down the necks of PSU chairmen and interfere with their work. For instance, PSE guidelines on the composition of the board (DPE OM No. 18(6)/2000-GM dated November 26, 2001) prescribe not more than one-sixth of the PSU board should comprise government directors. This, too, is subject to the condition that in no case should the number of such directors exceed two.


DPE provides further protection to PSUs through two other circulars, dated November 13, 1995 and March 16, 1992, which deal with professionalisation of their boards. Their substance is that it is preferable to have only one government director from the administrative ministry concerned on each board. Even if considered necessary to give representation to other government agencies, state governments or ministries, only one representative from the entire group should be appointed. There is an additional protection for PSU management in terms of seniority of the government nominee. Way back in 1972 (BPE No. 2 (158) / 70-BPE (GM) dated October 13, 1972), DPE declared that appointment of government representatives on the boards be ordinarily restricted to the dealing joint secretary/director. It had, probably, so hoped to protect the power and position of the PSU chairman.


• Aiyar’s try at packing the ONGC board should lead to systemic change

• Especially as independents must now comprise half the board in listed cos

• As NSE and NSDL show, an end to state meddling enables dynamic institutions


In practice, the opposite is true. On a majority of PSU boards, the joint secretary or the director, backed by the enormous power of government, becomes the cynosure of attention. Instead of protecting the chairman’s position, it often reduces him to the level of a director of government. Especially, as the PSU chairman is also required to deal with the same director/joint secretary for processing various permissions, including overseas travel. But then, government blithely ignores DPE guidelines to suit its convenience. It often appoints senior bureaucrats to PSU boards, especially the large and profitable PSUs. After all, these directorships carry several perks. On top of the list are board meetings at exotic locations, such as the super-luxury Ananda Spa at Rishikesh (frequented by Hollywood stars) where the invitation includes directors’ spouses.


If the appointment process for nominee directors (to represent government shareholding) is messy, then it only gets worse when it comes to the appointment of independent directors (or non-official directors) mandated by new stock exchange rules. These require that half the board comprise independent directors, who are supposed to be people of proven competence, who will have a fiduciary obligation to safeguard investor interest. These directors are selected by a search committee, made up of the Public Enterprises Selection Board chairman and the secretary, DPE, on specified procedure and criteria.


The committee is hardly independent. But it usually ensures a balance of political nominees and eminent persons to avoid outrage and controversy. Mr Aiyar, however, pushed the whole business into the public domain by rejecting a list of qualified professionals in favour of a list of B-grade politicians.


That the committee has rejected the petroleum minister’s nominees is hardly a satisfying solution. We need a better system to select independent directors and a process that gives some say to the PSU chairman. The Sebi chairman must initiate the process of change on behalf of public shareholders, by writing to the government to de-politicise the selection process. This will increase PSU autonomy and improve public confidence. The National Stock Exchange and the National Securities Depository Ltd are two good examples of institutions promoted by a clutch of public sector institutions, where the absence of government meddling has enabled the creation of dynamic institutions that have done path-breaking work. This pattern can easily be replicated at the listed PSUs by allowing more independence.


-- Sucheta Dalal