State-owned electric utilities firm Powergrid Corporation is facing the heat over validity of appointment of four directors — Ravi P Singh, R P Sasmal, Santosh Saraf and Rita Sinha. According to proxy advisory firm Stakeholders Empowerment Services (SES), the four directors cannot continue since their appointments have not been ratified by the shareholders in the recently-concluded annual general meeting (AGM). “The continuance of these four directors in office is not legally tenable,” said J N Gupta, managing director, SES.
SES had flagged the issue in its report last month ahead of the AGM. “Shareholders should note that four directors have been appointed since the last AGM. Their appointment is not ratified by the shareholders yet. Further, the company has not proposed any resolution in the ensuing AGM for the same,” the report said.
An email sent to Powergrid spokesperson did not elicit any response.
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Powergrid is not alone. While investor scrutiny came as a natural consequence of listing, it has intensified and attained activist proportions ever since the second wave of divestment began in 2009. More and more public sector units (PSUs) are facing closer scrutiny from various sources such as institutional investors, proxy advisory firms and even brokerages.
These ‘activists’ have sensitised the public sector firms to the rights of minority shareholders, environmental, social and governance issues, which were often ignored by the government.
In a recent survey by proxy advisory firm IIAS, top institutional investors rated corporate governance in PSUs at 1.75 on a scale of four. This was close to the score of promoter-owned firms at 1.55. Professionally managed companies and multinationals scored better at 3.17 and 3.67, respectively, pointing at a higher degree of corporate governance.
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As early as 2006, the giant California pension fund CalPERS decided it will not invest in a few Indian companies, including ONGC with operations in African country Sudan “until the government of Sudan halts the genocide that has resulted in egregious human rights violations”.
Three years later, US investment bank Goldman Sachs published a scathing report citing “serious governance issues” at ONGC. Goldman Sachs said: “So far, ONGC’s promoters (the government of India) have taken cash of almost $20 billion from the company without consulting the minority shareholders.” The cash was used to subsidise the losses of oil marketing companies such as Indian Oil, Hindustan Petroleum and Bharat Petroleum, which sell — at the insistence of the government — kerosene, cooking gas and diesel at subsidised rates.
ONGC’s response to these two incidents showed a marked improvement.
In 2006, R S Sharma, then finance director of ONGC, was quoted as saying, “We don’t care if CalPERS will invest with us or not. We have more than 300 FIIs (foreign institutional investors) as our investors. We will continue operations in Sudan.”
In 2009, Sharma, by then elevated to the position of chairman, gave a more benign response: “I shared the concerns of this report. All the directors on the board were with me,” he said. But investors want more than just benign responses as the government prepares to sell more Rs 30,000 crore worth of PSU shares over the next few months.
In fact, even the boards of PSUs have become more conscious of minority shareholder concerns. Recently, Coal India board refused to toe the government line on pricing of coal after UK-based The Children’s Investment Fund (TCI) threatened to sue the directors for breach of fiduciary duty.
The government of India owns 90 per cent in Coal India, while TCI owns a little over 1 per cent. Coal India was listed on the bourses in 2010, after the government sold 10 per cent stake in an initial public offering (IPO) to raise Rs 15,000 crore. SES further pointed out that since the government of India, which is also the promoter, appoints independent directors in the company, the government cannot really be independent .
In the Powergrid case, SES said “Shareholders should note that government of India is the promoter of the company. By allowing the government to nominate all directors on board (including the independent directors), control of the entire board is in the hands of the promoter. We believe that such practices serve to increase the control of the promoter over the company and may lead to oppression of the rights of minority shareholders.”
In Coal India, the government eventually used a provision to invoke the “Presidential directive”, wherein the President of India is authorised to direct a company to act in a particular manner in the interest of public welfare.
According to M S Sahoo, a Mumbai-based advocate and a former Sebi whole-time member, it is the ability of the government to ‘overrule’ boards and regulators — sometime through legislations — that is hampering any progress of PSUs in corporate governance. “If you are able to extract preferential treatment, what is your incentive to comply?” he asks.
State-owned companies already have a lower minimum public shareholding norm of 10 per cent against 25 per cent for private sector firms. Recently, the government got exemption from takeover regulations when it acquired a majority stake in IFCI.
Sahoo says that the regulators are not enforcing the provisions of the listing agreement strictly for the private sector companies as they are afraid of being accused of double standards when the government asks for a preferential treatment.