The Cabinet on Thursday decided that all central public sector enterprises (CPSEs) must compulsorily follow a set of corporate governance norms, similar to market regulator Sebi?s regulations in this regard for listed companies. The move would bring the policy on independent directors and audit committees for unlisted CPSEs almost on par with Sebi norms for listed companies.
Corporate governance norms for CPSEs have been around for the last three years, but they have been voluntary in nature so far. However, compulsory application of these guidelines prepared by the department of public sector enterprises (DPE) alone may not ensure openness in certain areas, such as the government fixing prices of petroleum products by asserting its majority shareholder rights in public sector oil retailers, long after the system of administered pricing was done away with.
The proposed norms require that half of all board members be independent directors if the chairman is executive and one-third if the chairman is non-executive. However, this does not necessarily mean that the decision on pricing is taken by the board or even debated by it. ?Unless guidelines stipulate the manner of appointing directors on the board of state-owned companies and that all decisions are taken by the board by vote, transparency on certain issues may not materialise,? said Prithvi Haldea, chairman and managing director, Prime Database.
The social and political obligations of the government will continue to prevail upon the commercial interests of the state-owned enterprise. ?It is a great step because central public sector undertakings are large organisations and have many stake holders. It prepares the unlisted ones for the divestment programme by boosting public confidence in their good governance. Making the guidelines compulsory for unlisted companies also paves the way for introducing corporate governance to unlisted private companies too, which is essential for their access to credit,? said Priti Malhotra, former president of Institute of Company Secretaries of India. The Companies Bill, 2009 being reviewed by a Parliamentary panel also seeks to introduce corporate governance norms to unlisted private companies.
The DPE guidelines make a serious attempt at enhancing good governance at state-run companies by mandating that even unlisted public sector companies should have independent directors, audit committees, greater disclosure, code of conduct, ethics, risk management and reporting. Listed state-owned companies have to follow the corporate governance norms that Sebi prescribes, as well as the DPE norms which do not conflict with the stock market regulator?s prescription. ?The continued implementation (on mandatory basis from now on) of these guidelines on corporate governance for central public sector enterprises will facilitate protection of the interests of shareholders and other stakeholders and ensure transparency in operations,? said an official statement issued after the cabinet meeting. Besides the requirement of independent directors, the DPE guidelines limit the number of government nominees on state-owned companies to 2. The definition of independent directors is modeled on the basis of Sebi?s definition. While a government nominee cannot be considered independent because he represents the majority shareholder, nominees of public financial institutions are considered independent for the purpose of reserving the required independent directorships. The DPE guidelines also say that two-thirds of audit committees should be independent directors. An independent director on the board of the parent company has to be on the board of its subsidiary too.