PSU officials: Keep ministries out of selection process for independent directors

Written by Subhash Narayan | Ashish Sinha | New Delhi | Updated: Nov 28 2013, 10:50am hrs
Unless the selection of independent directors (IDs) is transparent and free from the administrative ministry concerned, the additional powers given to them in the new Companies Act would have a negative effect on PSU autonomy, senior executives of some of the country's prominent PSUs say.

Enhancement of powers of IDs is well-intentioned, but in practice many IDs misuse their powers at the behest of the central ministries, which get them appointed, these executives warn, adding, this would lead to further erosion of PSU autonomy. Prime minister Manmohan Singh has recently stressed the need to increase the autonomy of PSUs.

As per Schedule IV of the new company law, independent directors of a company will have to meet at least once in a year (more will be better), without the presence of non-independent directors and members of management, where they will need to review not only the performance of the chairperson of the company but also review the performance of non-independent directors and the board of directors as a whole. It is no secret that most independent directors have strong links with top people in the ministry administering the work of a PSU. In this context, the provisions in the new Company Act will create more roadblocks in the functioning of a PSU than ensuring its autonomy and helping it imbibe good corporate governance norms, said a top executive of a maharatna PSU.

The central PSUs fear these new set of powers for the independent directors may adversely impact the businesses unless the process for the selection and appointment of independent directors is overhauled. As per the current practice, the process of selection and appointment of independent directors on the board of CPSEs needs vetting from the ministry concerned after such a proposal has passed through various stages of time-consuming scrutiny.

The practice of administrative ministries having the final say on selection of IDs also leads to delays in appointments, often stymieing the decision-making in a timely manner. For example, Coal India had to put on hold plans to raise coal prices, sign fuel supply agreement with power companies and initiate a price pooling mechanism as ID posts were vacant. There have been occasions when the IDs appointed by the ministry tend to go against the commercial interests of the company.

For two months to October-end, CIL didn't have any independent directors on its board as all the seven IDs retired between April and August. Important decisions on FSAs could not be taken during the period. Then, on November 1, the company announced the appointment of three independent directors, Alok Perti, R N Trivedi and Kamal Raj Gupta, as proposed by the coal ministry. The public offer of other companies such as NHPC, PowerGrid have also been delayed due to non-appointment of independent directors.

Power generator NTPC has also found certain projects (such as hydroproject Lohari Nagpala) being thrust upon it by administrative ministry with the support of independent directors even though the company's management and functional directors did not approve of these projects. We need to change the process of appointment of independent directors giving this function to a sovereign, independent and impartial committee and removing the role of administrative ministry in their selection. Under the current system such directors are dependable independent directors whose loyalty is clearly towards the ministry, director-general of Standing Conference of Public Enterprises (SCOPE) UD Cho-ubey told FE. SCOPE is an apex body of central government-owned public enterprises.

Experts said the evaluation process of non-directors, chair-person, and the board by the independent directors as per the new provisions has been done with "good intentions". "This has been done to ensure that all directors on the board perform their roles and responsibilities efficiently in the best interest of the company and its shareholders. It is a good provision in law which ensures peer review of the board," said Lalit Kumar, partner in law firm J Sagar and Associates.

However, Kumar points out that while the review by independent directors in a separate meeting is provided, what will happen after the review is not clearly provided in Schedule IV.