Below 51% stake policy: Firms losing government-company tag not to skirt PSU obligations

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Published: November 23, 2019 1:40:32 AM

Among the most prominent PSUs where the government’s direct stake is only marginally above 51% at this stage and where it could reduce it to boost its non-debt capital receipts are Indian Oil, GAIL (India), Nalco and Engineers India.

According to the Cabinet decision, that followed a Budget announcement to this effect in July, the government can now reduce its paid-up share capital in select CPSEs to below 51%,According to the Cabinet decision, that followed a Budget announcement to this effect in July, the government can now reduce its paid-up share capital in select CPSEs to below 51%,

Any firm in which the government will pare its stake to below 51% under Wednesday’s Cabinet decision will cease to be a ‘government company’ under the Companies Act but may still have to bear all the obligations that come with the tag, including subjecting itself to the Comptroller and Auditor General (CAG) audit. This is because the government has expressed an intent to retain management control in such firms on a case-to-case basis, and it would be practically feasible for it to do so, without any change in laws.

‘Government companies’ are mandated to follow a slew of central policies, including reservation of 49.5% jobs for SC, ST and OBC candidates, 25% of total procurement of goods and services from MSMEs, rules on pay and allowances and Right to Information Act provisions. They also need to follow the process for disputes and complaints resolutions in recruitment and service conditions, besides complying with the prescribed procedures for business processes, including tenders.

Under the Companies Act, control is defined not just in terms of the right to appoint majority directors but in a much broader manner to take into account even instances of exercising controls through sheer influence.

Among the most prominent PSUs where the government’s direct stake is only marginally above 51% at this stage and where it could reduce it to boost its non-debt capital receipts are Indian Oil, GAIL (India), Nalco and Engineers India.

As per the companies Act, “…. in the case of a Government company or any other company owned or controlled, directly or indirectly, by the central government, or by any state government or governments, or partly by the central government and partly by one or more state governments, the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies..” So, not just (majority) ownership, but mere government control on the affairs of firm make it liable to CAG audit.

According to the Cabinet decision, that followed a Budget announcement to this effect in July, the government can now reduce its paid-up share capital in select CPSEs to below 51%, while retaining its management control taking into account direct holdings and holdings via institutions controlled by it in select central public sector undertakings. The stated rationales for the move is to “widen the bandwidth of disinvestment window” and “increase the free float available in the market” for FPIs, domestic institutions and retail investors.

Of course, if one goes by the definition of ‘government company’ under the Companies Act, a firm which will see government stake reduction under the latest policy could fail to qualify as one. The definition is thus: “‘Government company’ means any company in which not less than 51% of the paid-up share capital is held by the central government, or by any state government or governments, or partly by the central government and partly by one or more state governments, and includes a company which is a subsidiary company of such a government company”. Therefore, while practically many of the firms will lose the government company tag, they will continue to be management-controlled by the government and therefore might have to shoulder the stated responsibilities of government companies.

Under the Companies Act, ‘control’ is defined as right to appoint majority of the directors or to control the management or policy decisions individually or by acting in concert, directly or indirectly, including by virtue of shareholder or voting agreements or “in any other manner”.

In all, about 1,500 public commercial enterprises controlled by the Union and state governments, i.e. government companies and corporations are now subjected to the audit of the CAG. These companies are also under the gaze of the Central Vigilance Commission and the Central Bureau of Investigation.

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