Performance of any enterprise depends on the capability and independence of the Board of Directors. To ensure effective functioning the structure of the board needs to be representative and have adequate number of independent directors to use outside expertise and to protect the interest of minority shareholders. Corporate Governance is an area of global concern. In India, many initiatives have been taken to promote and raise the standards of corporate governance, leading to clause 49 being incorporated in the Stock Exchange Listing Agreement. An important element of the clause is the role of independent directors. For the Central Public Sector Enterprises (CPSEs) the government introduced guidelines for Corporate Governance in 2007, which are now mandatory for all unlisted PSUs.
Still, there continues to be concerns about effective implementation of the guidelines, autonomy of PSUs, functioning of the PSU boards. Several listed Navratna and Miniratna PSUs have been non-compliant with Clause 49 of the Sebi listing agreement, which deals with reporting on Corporate Governance practices.
Dr UD Choubey, director general, Scope and former CMD,GAIL has said, ?Clearly there is a gap between autonomy granted and autonomy availed. Complete separation of government interference from day to day management of PSUs is an immediate requirement. PSUs should not be considered as an extended arm of the administrative ministries.?
The Coal India controversy magnifies the problem, which needs wider deliberation and a long term solutions for the best interest of Indian business in a globalised economy with global funds being parked in Indian businesses.
The question about fair treatment of the government as the promoter to its minority shareholders in listed PSUs is expected to affect India?s image as an investment destination.
The Coal India Board has rejected the proposal to sign Fuel Supply Agreements (FSAs) with power companies at 80% quantity commitment along with a penalty clause, even after a directive of the PMO (Prime Minister?s Office). To force Coal India Board toe the line, the presidential directive has been given to Coal India. The government has this power reserved to be used in case of an emergency.
This situation reflects conflict of interest between the minority investors and the government holding controlling interest. This action of the government also violates global treaties. British hedge fund threatening to initiate legal action against the board members of state-run CIL for failing to protect the interest of minority shareholders, stating, ?The Republic of India?s recent conduct with respect to CIL has seriously impaired the business activities and operations of CIL and has contravened each of the treaties,? The Children?s Investment Fund (TCI) said in a letter to the finance ministry on March 27. According to the letter, the Indian government?s actions have breached the country?s treaties with Cyprus as well as the UK and Northern Ireland, where the TCI?s funds are domiciled. Among the alleged violations cited in the letter is the government?s direction that CIL price coal under FSAs at a substantial discount to international market rates. However, the power companies are happy that their lobbying has been fruitful and the government has issued a Presidential directive to Coal India. We all know, power is crucial to our progress and coal is a critical input for power generation.
But, from business perspective, both power and coal are major industry segments with huge investments from private and public sources.
The Presidential directive essentially overrides the rights of the minority shareholders of Coal India as well as the independent directors right to perform their role for protecting the minority interest, for failure of which they are threatened with legal action by UK investors.
The problem is now new. The pricing decisions of petro products, keeping the larger public interest do act against the interest of the investors in those companies. In such conflicting situations, when government is in the business of business and also governance, it need to clarify its role as a majority investor?business promoter and also as government to create a transparent environment for the minority investors to operate without confusion and their trust not being betrayed. The Organisation for Economic Cooperation and Development (OECD) states that ?the government should develop and issue an ownership policy that defines the overall objectives of state ownership, the state?s role in corporate governance of state-owned enterprises and how this policy is likely to be implemented.? The ownership policy should be clearly disclosed and communicated. In situations, where a decision has implications from major and minority shareholders? perspective, they need to be deliberated by specialist/expert board committees independently and intensively without replacing the management?s core responsibilities. More importantly, the committees should deliberate on these issues well in advance rather than immediately prior to the board meeting. The recommendations of the board committees should then be used by independent directors and the board to make more informed and transparent decisions on relevant and related issues in board meetings.
Present situation indicates, that government wants make a policy for promoting independent boards, but still have the control, like eating the cake and having it too, which is not practical and sustainable. We need to find a solution, rather fast.
The author is president, Vision Consulting
