 "ONGC cleared GSPC deal without enough independent directors")
State-owned Oil and Natural Gas Corporation (ONGC) did not have enough independent directors on its board while approving the purchase of an 80 per cent interest in the Krishna Godavari basin oil block owned by Gujarat State Petroleum Corporation (GSPC) last week.
Corporate governance experts have questioned the validity of a deal cleared by such an incomplete board, while the company argued that it was a "normal business decision" and did not result in any undue advantage for the majority shareholder.
Well short of the regulatory requirement of 50 per cent independent directors, the 12-member ONGC board had just three such directors namely, Ajai Malhotra, KM Padmanabhan and Shireesh B Kedare. It has seven functional directors including chairman and managing director DK Saraf apart from two government nominees.
According to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements (LODR)) Regulations, 2015, in listed companies which do not have a regular non-executive chairperson, "at least half of the board of directors shall comprise of independent directors."
While the violation of LODR regulations by ONGC has continued for long, this assumes importance given the nature and background of the just cleared deal, which involves a potential conflict of interest and could harm the interest of minority shareholders.
GSPC, fully owned by Gujarat government, made close to Rs 20,000 crore investments in the block during the tenure of Narendra Modi as chief minister. In April, the national auditor had pulled up GSPC for not addressing the risks in the project properly.
Now, the government led by Modi at the centre, which controls the management of ONGC through the ministry of petroleum and natural gas, is pushing through the deal, that is seen as a bailout for debt-ridden GSPC. The $995 million (Rs 6,750 crore) deal has been criticised by the rival congress party as an "attempt to paper over corruption."
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"Safeguarding the interests of all stakeholders, particularly the minority shareholders and balancing the conflicting interest of the stakeholders" are among the duties of independent directors prescribed in Schedule IV of Companies Act, 2013.
In an emailed response, ONGC said the acquisition of the business asset from GSPC was in the overall interest of the Company. "This will not result in any undue advantage to the majority shareholders at the cost of minority shareholders. It is a normal business decision taken by the Board, like any other business item."
Proxy advisory firms are not amused. Amit Tandon, managing director, Institutional Investor Advisory Services (IiAS), said a deal such as this brings this continuing violation to the forefront. "Not just ONGC, it happens across. Once the ministry has approved something all agencies including the management, the board, the stock exchanges and the Sebi align behind it."
Tandon of IiAS said the exchanges and Sebi need to play a more proactive role. "The stock exchanges should say that such (non-compliant) companies would be taken off Sensex/Nifty or degraded from Group A. Sebi should be asking these questions. Unfortunately, Sebi has not been."
Saying that Sebi did not grant special relaxation to any listed company, ONGC added "All the directors on the Board of Central Public Sector Enterprises are appointed by the Government of India. The government of India is seized of the matter and is taking necessary steps to fill up the vacancies on the Board of ONGC."
It argued that "in accordance with the Companies Act, 2013, the present Board of ONGC is empowered to take all business decisions," adding, "the provisions of related party transaction are not applicable to the transactions between two government companies."
JN Gupta, managing director, Stakeholders' Empowerment Services, said the government should set examples and not hide behind exemptions and carve-outs in governance norms. "Ideally such a deal should have been cleared by a committee of independent directors. Since the board does not have enough independent directors, the deal cannot be considered to have been cleared by the board," Gupta added.
Deals such as this are not new in the public sector space. In 2014, IiAS had objected to Coal India taking up interest in a fertiliser business, calling it "an unnecessary distraction.
The central government owns 69 per cent in the company, sister concerns GAIL and Indian Oil hold around 10 per cent between themselves and over 850 institutions and some 550,000 retail shareholders own the rest.
The LODR regulations clearly stated that, "monitoring and managing potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions" was one of the key responsibilities of the board of directors.