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Here is a snapshot of the regulatory exemptions for Central PSEs

A study by the Organisation for Economic Co-operation and Development concluded that jurisdictions, including India, which provide exemptions to PSEs under competition law adversely impact competition

Here is a snapshot of the regulatory exemptions for Central PSEs
Compiled by Sudipto Dey
Last Updated : Oct 14 2018 | 11:48 PM IST
Finance Minister Arun Jaitley recently pitched for a level playing field for the private and the public sectors, pointing out that the latter runs the risk of becoming non-competitive in the face of excessive regulation and outdated legal framework. However, the fact remains that public sector enterprises (PSEs) have over the years enjoyed several regulatory exemptions under company law, securities law, and competition law, among others. A recent study by Vidhi Center for Legal Policy (Competitive Neutrality for Corporate Governance Norms for CPSEs) highlights the impact of these exemptions on corporate governance culture in PSEs. Here is a snapshot of the exemptions and what they mean for the functioning of these companies

Company law

Exemption from Section 149(6)(a)

The Section vests the responsibility with the board to ensure that an independent director is a person of integrity and possesses relevant expertise and experience

Implications

For all government companies, this determination is to be done by the administrative ministry, or department of the government which is in charge of such company

Exemption from Section 149(6)(c) 

According to this Section, for the appointment as an independent director, there should be no pecuniary relationship between the said director and the company, its holding, subsidiary and associate companies, or their promoters or directors for a certain period

Implications

All government companies have been exempted from this requirement. Experts point out that this exemption may leave room for political appointments to the boards

Exemption from Section 186

Section 186 provides various conditions regarding the provision of loans or investments by companies

Implications

This Section does not apply to (a) a government company engaged in defence production; (b) a government company, other than a listed company, that obtains an approval of the ministry or department which is administratively in charge of such company

Securities laws 

Regulation 23, under Listing Obligations and Disclosure Requirements (LODR)

| Prior approval of the audit committee for all related party transactions
| Omnibus approval may be granted by the audit committee based on predetermined criteria
| Material-related party transactions require the approval of shareholders and the related parties shall abstain from voting on such a resolution

Implications

Regulation 23(5) exempts the application of these provisions in relation to transactions between two government companies.
The Kotak Committee was of the view that all listed entities, government or private, should be treated on a par with respect to governance standards

Regulation 38 of the LODR, read with Rule 19A of the Securities Contracts (Regulation) Rules, 1957 (SCR Rules) 

| Rule 19A of the SCR Rules mandates every listed entity to maintain public shareholding of at least 25 per cent (MPF).

| Originally, a public sector company was exempt from this requirement. However, the government removed the exemption in 2014 and mandated state-run firms to comply with the requirement within three years. Last year, the deadline was extended to August 21, 2018 

Implications

According to the BSE website, as of March 31, 2018, 29 CPSEs did not comply with the requirement. A Sebi circular provides for a penalty of  Rs 5,000 per day till the non-compliance of Regulation 38 continues. It remains to be seen if the non-compliant CPSEs will be subjected to such penalties

Competition law

Section 54 of the Competition Act

Section 54 provides that the central government may exempt the following entities from the application of any provision of the Competition Act:

| Any class of enterprises on the grounds of interest of the security of the state or public interest
| Any practice or agreement arising out of and in accordance with any obligation assumed by India under any treaty, agreement or convention with any other country or countries
| Any enterprise which performs a sovereign function on behalf of the central government or a state government 

Implications

A study by the Organisation for Economic Co-operation and Development concluded that jurisdictions, including India, which provide exemptions to PSEs under competition law adversely impact competition vis-à-vis private players. Experts are of the view that clearer definitions or guidance must be provided for terms such as ‘public interest’ and ‘sovereign function’ used in Section 54