Begin with a high-level committee on PSE reforms
The year 2014 proved lacklustre for reforms in the central public sector even as the government pushed PSUs to step up capex to propel the flagging economy. There wasn’t much action on the disinvestment front either. Though the government sold a 5% stake in Sail in early December, big-ticket selloffs planned in ONGC and CIL had to be pushed back to the last quarter. As the new year approaches, UD Choubey, director general, Scope, identifies key reforms that could transform PSUs in 2015.
Though public sector enterprises have undergone reforms in the past, it is now widely accepted that next generation reforms have become overdue. The key elements of reforms should cover the following:
Disinvestment through retail market
PSEs are, by and large, not afraid of equity dilution, but there are related questions: (i) will purchase of equity by public sector financial institutions or cross-holding change the culture and improve governance in PSEs? (ii) Is disinvestment through retail market a better option? (iii) Is disinvestment the sole means for meeting fiscal deficit? (iv) Could the vision of ‘minimum government and maximum governance’ be possible without minimising/ relinquishing the control of administrative ministries on PSEs?
Disinvestment through the retail equity market appears to be a better option than cross-holding of shares by other PSUs or massive share purchases by financial institutions to help the government out. It has one distinct advantage; a large number of domestic shareholders shall be questioning the decisions of the board and the owner. This despite the fact that equity holding by individuals is hardly 2% in India against 42% in the US.
Overregulation comes in the way of faster decision-making. Over and above the Conduct & Service Rules in each enterprise, there are provisions for internal audit and vetting and investigations by CVC, CAG, CBI and CCI to fix accountability in one way or the other. In addition, there are several Parliament committees that look into PSE affairs. The Right to Information Act and regulations from the Securities & Exchange Board of India also aid strict compliance.
India is in a unique position to have such a complex and heterogeneous regulatory mechanism, checks and balances. Therefore, it needs to be examined if each enterprise, which is under the provisions of Conduct & Service Rules, is competent to punish wrong doing as per service rules and the law of the land, how far other agencies are required for the same objective. Public sector organisations as such are prone to ensuring conformance and compliance than growth, value creation and performance. This provides sufficient ground for public policy makers to introduce next generation reforms in the public sector on accountability through a single window by framing improved service rules.
In the absence of well-documented ownership policy, governance will become difficult under the present setting. Absence of an ownership policy results in “passive ownership” by the government, leaving scope for formal, and informal, interference in board decisions. The presence of two government nominee directors (generally at the joint secretary level) on the board may be unique to India. However, government nominee directors should be an exception rather than a rule. The vision of “minimum government and maximum governance” could be realised by keeping out government nominee directors from PSE boards.
Sovereign holding company (SHC)
The concept of a sovereign holding company (SHC) for public sector enterprises is gaining momentum across countries. However, there is a need for caution here, as an outright adoption of the model without considering the customs, traditions and cultures of India may not yield the desired result. A hybrid model of SHC, sector-wise, may be one of the options for reform, to start with.
Such SHCs should be independent of the administrative ministry. The chairman of the SHC would directly report to the Prime Minster.
Obviously this will require a structural change of various ministries. This can’t be decided in haste and would require wide deliberations. An SHC should also have its own sovereign wealth fund (SWF) to ensure the health of the enterprises under its control and should be allowed to invest in domestic and international financial market. The accountability check should also be under the SHC, instead of a heterogeneous system.
Shareholders’ executive council (SEC) is yet another concept which could be thought of for reforms, provided the SEC works as an oversight body to ensure corporate governance.
Public sector companies have been treated differently, be it by the CAG, Companies Act, 2013, Right to Information Act or in the mandatory provision of CSR. While PSEs have adhered to the requirements thereof in letter and spirit, it would be better to apply these rules uniformly to ensure level playing. The hope is high on reform and so is the hype. Let us begin the new year by setting up a high-level committee of experts on next generation reforms in PSEs.
By UD Choubey
(Views are personal. email: email@example.com)