Improve governance before divesting

A fixation on the target amount, without improving the corporate governance of public sector enterprises, is misplaced

It is not easy to disconnect oneself from the past and get rid of the old baggage. For decades now, there has been a realisation that there is no case for public sector enterprises (PSEs) to be present in many of the sectors of the economy and that they need to exit. However, for them to gracefully exit from commercial operations has proven to be the proverbial “easier said than done”.

The Government of India’s (GoI’s) efforts towards divestment and privatisation of PSEs are well documented, and have often been critically commented on in the media and other literature. Whether to divest a portion of government’s shareholding in a PSE or to privatise it, with change in control, has also been the subject matter of debate.

This article focusses on the need for improvement in corporate governance in PSEs, whether they are going in for divestment/privatisation or not, and more importantly making them meet the corporate governance norms before initiating any divestment/privatisation process.

It is no secret that, in general, listed PSEs perform worse than their sectoral peers on the stock market. For instance, during the five-year period (FY17 to FY22), PSE index return (Nifty PSE) was less than 2 per cent compared to Nifty 50 return of over 90 per cent and Nifty 500 return of over 85 per cent. On a sectoral basis, PSU Bank index return of (-) 23 per cent during the same period was the worst among all sectoral indices; in comparison, Nifty Bank Index and Nifty Financial Services index gave a return of 70 per cent and 96 per cent, respectively, during this period.

Among other factors, the problem with PSEs is that the investors are not sure whether the PSEs will always operate only on market considerations; whether they will keep shareholders’ interest as supreme and whether their boards are actually independent.

Listed PSEs routinely seek various regulatory dispensations. Such requests to regulators increase manifold when a PSE is slated for divestment/privatisation. These relaxations are sought citing various reasons like serving a public purpose, historical reasons, strategic consideration, PSE’s incorporation under special act, and so on.

Illustration: Binay Sinha

The basic underlying market discipline principle is that once listed, a company, whether in the private or public sector, should follow the same regulatory norms and framework. Looking for special treatment doesn’t help PSEs’ case. Investors are not interested in structural or operational problems of PSEs; notwithstanding that some of these, for whatever reasons, could be relatively genuine. Investors expect these issues to be resolved before PSEs come for listing/or if already listed, to resolve them without any delay.

The corporate governance norms in India have evolved over time. The first expert committee set up on the subject by the Securities and Exchange Board of India was way back in 1999 under the chairmanship of industrialist Kumar Mangalam Birla. The committee’s recommendations led to the clause 49 requirement in the listing agreement of companies with stock exchanges. Since then, taking into account the changing scenario and the experience gained, several expert committees/groups have examined the matter from time to time, with the last one being in 2017 under the chairmanship of Uday Kotak.

Notably, whenever such an exercise to review the corporate governance norms is undertaken, the PSEs come up with their own arguments justifying the need for special dispensations for them. This is when they have put in rather little effort in the past to align their structures, operations and work culture in line with the other listed companies in the private sector.

Take, for example, the need for having a minimum public float for companies listed on stock exchanges. No one can argue against this requirement and meeting the same should be non-negotiable. The absence of such a float impedes price discovery and leads to market manipulation. The GoI came out in 2013 with the norm for listed entities to have a minimum public shareholding of 25 per cent. The PSEs were given time till 2016-17 to meet this requirement. Unfortunately, this date was extended by the government time and again. As of  end March 2022, out of the total 87 listed PSEs, 32 still do not have a public shareholding of 25 per cent.  Even worse, the latest rule position, as stated in the 2021 amendment notification, is that the government may relax the requirement of minimum public shareholding for any listed PSE; now there isn’t even any sunset date to meet this norm. Whether rule-making on this subject should be in the government’s domain is yet another issue. World over, setting the minimum public float norms for listed companies is in the realm of market regulators and stock exchanges.

Even with regard to the regulatory requirements for which no dispensation exists, PSEs show disregard with impunity. For instance, the requirements of having a minimum number of independent directors and at least one independent woman director on the board. As of end March 2022, 55 listed PSEs didn’t have the requisite number of independent directors and 28 didn’t have even one woman director (independent or otherwise) on their board.

Naturally, the investors don’t take such infractions lightly. In fact, between the two routes of disinvestment or privatisation of PSEs, the investors are likely to be more enthusiastic in participating in the privatisation process, as after privatisation, the entity will be forced to follow the prescribed corporate governance norms.

Currently, the actual divestment amount realised by the government constitutes a small portion of the overall revenue receipts in a year. However, there is constant pressure to achieve the annual target. Having a fixation on the divestment amount target alone without improving the corporate governance of PSEs is not a good idea. Thus, perhaps, the annual target could include the number of PSEs achieving minimum public float in that year; meeting the norms of independent directors and a woman director in their board; and not seeking any regulatory dispensation while going for divestment. Following this approach will not only benefit the investors in PSEs but will also fetch a better price to the government — whether through their divestment or privatisation. 

The writer is a retired IAS officer and former chairman, Sebi