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Institutional EYE

Commentary on Corporate Governance Issues

Listed PSU's: Explaining the governance gap

The uproar in parliament and the media frenzy regarding the Vijay Mallya case is clear proof that government banks are answerable not just to their shareholders, but a far wider constituency. This broader accountability explains why PSU’s in general and listed PSU’s in particular find it difficult to adhere to market regulations.

Presenting the budget for 2016-17, the finance minister said “public shareholding in Government-owned companies is a means of ensuring higher levels of transparency and accountability. To promote this objective, the general insurance companies owned by the Government will be listed in the stock exchanges.”

Do listings really achieve this objective for public sector undertakings (PSU’s)? Let us look at the ground realities answer this and begin by looking at boards.

It was decided that all listed entities must have a women director. Even after an extended deadline was over last March, half the PSU’s did not have a women director. The PSU’s defended themselves saying that the parent ministry had just not signed up to fill the vacancies.

A study from just six months ago, showed that 31 out 46 listed PSU boards did not have an adequate representation of independent directors. A consequence of not having the full board, is not being in a position to constitute the audit committee or the remuneration committee. Needless to say PSU’s are not compliant here either.

Turn next to Corporate Social Responsibility CSR). Under the Companies Act 2013, companies must spend 2% % of their average profit before tax of the preceding three years on CSR. As per the Department of Public Enterprises guidelines, PSUs have been required to spend on CSR since 2010. Yet, of the CSR spend by S&P BSE 100 companies in FY13, ‘non-PSUs’ spent 1.0% of their requisite profits while PSUs spent just 0.6%.

This trend has continued in FY15. CSR spends by the S&P BSE 100 companies aggregated 1.5% of the requisite profits. Non-PSUs spent 1.6% and the 21 PSUs spent 1.3% of their requisite profit, respectively. Given that PSUs had a head start, they should have been in a better position to scale up their CSR activities. Buy-backs, cross holdings, placements without committing to lock-up’s.… I can go on, but most actions show apathy to what markets value.

Markets have their own rhythms and practices, rewards and retributions, with all this getting baked into the share price. Consequently for a PSU, the act of listing can be particularly challenging. The focus shifts from a five year view to a quarterly one with expectations about performance changing overnight. Performance is now measured against domestic and global peers. These listed companies are also expected to comply with the same listing rules that apply to other listed companies. Not being in control over what most view as routine processes, is difficult to understand. PSU’s needing to seek guidance/ approval from its parent ministry i.e. government, to comply with a law which the government itself has enacted, just does not add-up.

But while the market may see listing as a great divide that should change behaviour, from those steering the PSU from the ministry, accountability has not really changed. The ministry and the listed PSU’s are still accountable to parliament, with the ministry remaining in the direct line of fire. Consequently market expectations and SEBI’s rules are a distraction compared to taking political heat from parliament. If parliament holds the ministry accountable, the ministry sees it as their job to provide oversight and guidance to the management. Thus, the national policy agenda often supersedes the need for investor returns.

To those in the ministry then, PSU boards can at best serve only as a sounding board. They need to appoint a CEO who will not rock the boat and because remuneration is set according the Government pay scales, the appointments and remuneration committee is not really needed. And if the focus has to be on the CAG audit not on the audit committees findings, surely the audit committee can be done away with. From their perspective, why this fuss?

A story that I once heard – and although I am not sure how true it is, will risk repeating. DBS started life as a government owned development bank. It was partially privatized and set on a path of commercialization. But Lee Kwan Yew was not satisfied. Later in life he was invited onto some boards, including a US bank, and found it an eye-opening experience. He realized that Singapore’s banks were too small and too parochial in their management and governance. He wasn’t satisfied with Singapore being second or third rate and wanted them – led by DBS – to become world class. So he pushed for more foreign bankers on the board and in senior management positions to bring in the expertise that DBS needed.

This brings me back to listing the general insurance companies.

The act of listing can be transformative. To do so successfully, government as shareholder and the companies, both must be clear about the objectives and expectations. Only then must they make this leap. But even if both accept that listing is a euphemism for fund-raising, they must appreciate that public shareholders have expectations regarding governance standards. On this investors must not be short-changed.

A modified version of this article by Amit Tandon was published in Business Standard. You can view the article by clicking this link.

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