The Sebi regulations on independent directors (ID) have created unique problems for public sector enterprises. Under the administrative control of various ministries, these PSEs not only face delays in appointment of IDs on their boards but it often happens that the quality of such appointments are not in tune with the company?s needs. This has led to crucial decisions by PSEs getting delayed and disagreements between functional directors and IDs. A case in point is Coal India Ltd which had to, in October, delay its results declaration and important decisions on buyback and dividend in the absence of any IDs on its board. In an interview to Subhash Narayan of FE,

UD Choubey, director general, the Standing Conference of Public Enterprises (Scope), an apex body of central PSEs, shares his ideas on the issue and offers some solutions. Excerpts:

What is your view on the role played by independent directors, especially in PSEs?

IDs are key ingredients of corporate governance at the board level. They are supposed to be watchdogs or conscience-keepers sitting at the fence with no accountability and pressure from either the administrative ministry or functional directors. But in practice their loyalty lies with the administrative ministry so much so that we can brand them as ?dependable independent directors?. The fact is that a lot of lobbying goes into their appointment process, which results in a situation where there is a big gap between them and the functional area of an enterprise. The result is that they come to the board meetings unprepared and take interest in only agenda items which suit the interests of their appointing authority. This is a lacuna in the present system.

What is the reason for this

disconnect?

I feel the root cause of the problem is the faulty selection process. The fact that about 200 posts of IDs are vacant in spite of best follow-ups by the enterprises and that even the Sebi

has asked for early appointments speaks volumes about the problems. Though the process of selection of IDs starts with the Public Enterprises Selection Board (PESB), it is seen that most delays happen at the administrative ministry/minister level. Most often than not, decisions are taken

to suit the interest of the administrative ministry.

What needs to be done to address the problem?

Worldwide the trend has changed. In the post-recession period, particularly, in countries like Sweden, Norway, Vietnam, China, even Malaysia, and also in countries where politics and finance are integrated such as the UK and France, the thinking is that the administrative ministry must relinquish their right of ownership and this should instead be vested in a sovereign committee. There is a sovereign body to select IDs. This independent and impartial committee has three broad functions: one, nominate and select IDs; two, monitor the vision and strategy of the company; and three, look at governance-related issues. In New Zealand, there is a crown monitoring committee to perform this role. So the work is not left with the administrative ministry. We need a similar dispensation in India.

Can a separate independent regulator work in the Indian context where the prime role of several ministries is to administer the working of key PSUs under them?

It is very difficult because it will have serious views from the administrative ministries. What is needed is that we should have an independent, impartial, sovereign body of the government as an owner to provide explicit ownership. What is happening is that even after 60 years, we do not have ownership policies. The article of association and memorandum of understanding we sign at the formation of an enterprise are basically broad parameters only. But what is the role and what are the responsibilities of the owners through the administrative ministry are nowhere to be found. Because of this we cannot evaluate the accountability of the administrative ministry.

But this also may take time. What can be done immediately to address the issue?

Because we cannot change the structure overnight, we feel that the power to select IDs should be completely vested in the PESB. To avoid any conflict of interest, the administrative ministry should not be there in the search committee of the PESB nor be a votary to the selection a particular candidate. The PESB should be given the powers of a constitutional body like their appointments committee of the cabinet (ACC) so that its selection of an ID is final. Since this process may need parliamentary approval, we could look at a more easier option where the PESB selects a candidate and sends it to the cabinet secretary for notification, avoiding the administrative ministry. There could be so many models.