Sucheta Dalal :Corporate governance and PSUs
Sucheta Dalal

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Corporate governance and PSUs  

Sep 19, 2005

Last week The Indian Express exposed the Petroleum Minister’s plan to pack the boards of powerful Public Sector Undertakings (PSUs) under his command with Congressmen. Mani Shankar Aiyar probably had a wonderful two-stage plan.


The first was to increase the number of government nominees on the boards of public sector oil majors (it is no secret in the industry that the minister has problems with the chairmen of GAIL and ONGC). Secondly, appoint Congressmen as independent directors on these companies. The latter move would please influential people, strengthen his position within the Congress and dispel rumours that he is only holding fort until it is safe to hand over the ministry to Satish Sharma.


Together, these actions would tighten Aiyar’s grip over the most precious ‘‘navratnas’’ under his ministry.


Unfortunately, Plan A went awry because ONGC Chairman Subir Raha was ‘‘immature’’ (the minister’s words) enough to take the dispute public and threaten to resign. And The Indian Express reports may have put paid to Plan B as well.


To be fair, Mani-come-lately wasn’t doing anything unusual. During Indira Gandhi’s time, ONGC had been notoriously abused by a former chairman to curry favour with the powerful Prime Minister. Exactly the same happened under the Bharatiya Janata Party (BJP)-led regime.


Remember how a 29-year old Monica Arora was appointed by then telecom minister Pramod Mahajan to the board of the Rs 6,000 crore MTNL? She resigned after the BJP gave her a ticket to contest the elections from Delhi. Mahajan also persuaded MTNL to invest over Rs 250 crore in the Maharashtra government-owned Maharashtra Krishna Valley Development Corporation Ltd. A CBI investigation that was reportedly ordered seems to have been given a quiet burial. The BJP quickly put this episode behind it and went on to pack the boards of nationalised banks and public sector undertakings with friends, relatives and confidants of party leaders.


In one instance, the son of a BJP minister even traded up from the board of a relatively smaller nationalised bank board to the Big Daddy State Bank of India.


One of the most stunning aspects of the controversy over ONGC’s government nominees and public directors is the silence of the Left parties over the issue. Yes, they did make some noises in the media, but surely they need to do a lot more.


Unlike the Congress and the BJP, it is inconceivable that the Left Front will ever be the dominant party in a ruling political alliance. At best they can wangle a few directorships in exchange for their political support. Hence, they have no vested interest in condoning the destabilisation of PSUs for political gains.


In fact, they are uniquely placed to channel their considerable clout with the government to force the creation of a permanent independent mechanism for appointing government nominees and independent directors to PSU boards. The government has all but abandoned its PSU privatisation programme under pressure from the Communist parties.


But the Left is not satisfied. Bank trade unions affiliated to the Communist parties want an end to the dilution of government holding through follow-on issues as well. It wouldn’t do any harm for the Left parties to abandon such hypocrisy and focus on the benefits of a public listing. The basic tenets of corporate governance and shareholder democracy are not different from what the Communists preach. They say that as co-owners, shareholders have the right to expect that their companies are run efficiently, honestly and transparently and that they are given their due share of the profits, after paying off all stakeholders.


Clause 49 of the Listing Agreement of stock exchanges ensures this by mandating a set of rules regarding continuing disclosures, independent directors and audits. More importantly, retail and institutional investors, driven by the need to protect their investment keep a close watch on management.


And, their performance rating is reflected in the share price every quarter, when their earnings numbers have to be declared. The ugly issue of public disclosure of important corporate developments — for instance, the controversy over ONGC’s gas discovery that was allegedly suppressed by management — are also clearly covered by the disclosure guidelines.


The situation gets murky only when government officials try to muscle into management or try to wangle a board position. Investor scrutiny of the larger companies is always so sharp that even when they fudge results or siphon out funds, the share price reflects the quality of management. That is why an Infosys or a Wipro command a premium over and above their financial performance.


Even if the Left parties want large PSUs to remain in the public, why not push for public listing, increased autonomy and the constant pressure of public scrutiny? Why doesn’t the Left use its clout to convert the large PSUs into genuine jewels? After all there is some merit in the counter-view that the only difference between public and private companies is that politicians and officials exploit the former and promoter-industrialists exploit the latter. And that private company boards are equally packed with friends, relatives, consultants and other yes-persons.


One way of ensuring independence and increased autonomy for PSU undertakings and getting them out of the clutches of individual politicians is to transfer government holding to a Special Purpose Vehicle (SPV) of the type proposed by Vijay Kelkar (former finance secretary) and G.V. Ramakrishna (former Disinvestment Commission chairman).


This would be on the lines of Tamasek of Singapore, which controls the Port of Singapore Authority, Singtel, Singapore Airlines and Changi Airport. It basically means that all government holding in chosen PSUs will be transferred to a SPV and administered through it. It will also oversee dilution of government holding and ensure the utilisation of disinvestment proceeds for the prescribed social purposes.


The danger is that the board of the SPV too can be packed with political nominees rather than independent persons of high integrity. This will still be a better solution than leaving PSUs to the mercies of many individual ministers of dubious integrity and motives. [email protected]






-- Sucheta Dalal