Why perpetuate differential treatment?

In the concluding part, the authors explain why, in spite of strong performance by many PSUs, they are generally getting a "governance discount" instead of a "governance premium" in their share prices

In part I of this article, we discussed how the mechanism of having special provisions in laws/rules/circulars was used by the government to perpetuate differential treatment to public sector undertakings (PSUs) in corporate governance norms. We will now discuss the other two mechanisms. The first is through special provisions in the regulations framed by regulators or the case by case exemptions routinely granted to PSUs.

Under the Substantial Acquisition of Shares and Takeover Regulations, 2011, an acquirer is required to make an open offer to acquire shares or voting rights to public shareholders of the target company. There are strong protection tools for minority shareholders of these companies. Arguably, these should be uniformly applied and there should be no exception. But, the regulations also empower the Securities and exchange Board of India (Sebi) with a general power to exempt certain entities from the open offer requirement. The Sebi frequently uses this power to exempt PSUs from the open offer requirement. The ONGC buyout of HPCL and the Port Trusts-Dredging Corporation deals are examples. 

Related party transactions are also worth mentioning. Regulation 23 of the Sebi LODR Regulations requires such transactions to be approved by the audit committee and in case the transactions are material, the majority shareholders are not allowed to vote in favour of it. The idea is that the minority shareholders should be able to apply their independent judgment, but PSUs are exempt from these requirements. As such, the audit committee or the non-interested shareholders cannot evaluate these proposals objectively. No doubt, it provides an easy route for the management to escape accountability.

There are other examples of exemptions from various requirements. In IDBI’s acquisition by LIC — where the stake of LIC in IDBI Bank rose up to 51 per cent —  relaxation was provided by the Insurance Regulatory and Development Authority from the general bar on insurance companies from holding more than 15 per cent in any company under the Insurance and Regulatory Development Authority (Investment) Regulations, 2016.

Soft treatment of governance violations is another way in which PSUs are meted out special treatment. Listed companies have a requirement of minimum 50 per cent independent directors if the chairperson is an executive director or minimum one-third, if the chairperson is a non-executive director. Even today, there are a number of PSUs that do not meet this criteria. The requirement of having at least one woman director with effect from December 1, 2015, has not been followed by more than one-third of PSUs. This is in spite of the government’s proclaimed policy of taking measures to encourage women participation in decision making. From April 1, 2019, the requirement of having at least one woman independent director on the boards of the top 500 listed companies has kicked in. Proxy advisory firm Stakeholders Empowerment Services (SES) has stated in its report that 27 per cent of the PSUs in the NSE top 500 companies as on March 31, 2019, failed to comply with this requirement.

There are several reporting requirements under various Sebi regulations where PSUs are found wanting but hardly any action has been taken against any PSUs so far. Violations by privately owned listed companies are strictly dealt with, but PSUs are often treated differently. 

The government has to realise that there are several advantages in ensuring that laws are same for all and there is no discrimination based on ownership of companies. First, it is an important message about commitment towards protecting the interest of the smallest shareholder in a company. Second, these protections and special privileges lead to lack of accountability and tendency to hide inefficiency and avoid evaluation in comparison to competitors. Third, uniform laws and uniform treatment to all companies by the government as well as the regulators give a clear signal to institutional investors in India and abroad that as a nation we respect ‘rule of law’.

Another reason for following higher corporate governance principles in PSUs is that it is becoming increasingly clear that large investors are willing to pay a “governance premium” in buying shares of companies rated high on governance. Globally, in the last two decades a strong shift has taken place towards more institutional money getting into companies, rather than large number of smaller shareholders taking a punt. Such shareholders are demanding more accountability and better governance practices. The example of the UK based fund, The Children’s Investment Fund Management’ selling their shares in Coal India Limited (CIL) and suing CIL and the government is fresh in the mind. Unfortunately, the current scenario in India does not invite those sentiments for the PSUs. It is not a surprise that in spite of strong operational performance by many PSUs, they are generally getting a “governance discount” instead of a “governance premium” in their share prices. The ultimate losers are the government and the people of this country. 

(Concluded)
 

Sinha is senior advisor and Sood is an associate with Cyril Amarchand Mangaldas