The BJP's election manifesto said: "Cutting down of dissavings will be possible only by pruning the public sector and confining it to sensitive areas where the nation's physical or economic security is involved and to residual areas where the presence of public sector is necessary for providing a moderating or counterpoising role to the ill-effects, if any, of an unchecked private sector". This orotund sentence could be read in contradictory ways; but it does represent a cautious commitment to privatisation of most public enterprises. I think it means that public enterprises make losses, that the way to eliminate the losses is to sell off the enterprises unless their ownership by the government is necessary for national security or to provide competition to private monopolies.
The first step towards fulfilling this commitment is the special purpose vehicle (SPV) proposed by Vijay Kelkar, the new finance secretary. He wants to repeat something he tried in the petroleum ministry: there, he set up Petronet and LNG Petronet as enterprises which were technically not owned by the government because its share in their equity was below 50 per cent; equally, they were not privately owned because the rest of their equity was owned by institutions and enterprises under the government's control.
This special purpose vehicle is really a holding company; it will hold the shares of selected public enteprises. It will be technically not in the government's ownership because the government will hold only 49 per cent of its shares. The remaining 51 per cent will be initially held by State Bank of India or some such government-controlled financial institution. Then the shares held by that institution will be sold to the public enterprises whose shares it owns. In effect, therefore, these enterprises will hold shares in themselves. But because this SPV will intervene between them and their shares, they will technically not own their own shares, and will therefore -- it is to be hoped -- not fall afoul of the Companies Act. For Section 77 of the Companies Act reads:
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(1) No company limited by shares and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursua-nce of sections 100 to 104 and of section 402.
(2) No public company, and no private company which is a subsidiary of a public company, shall give, whether directly or indirectly, and whether by means of a loan guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase of subscription made or to be made by any person of or for any shares in the company or in its holding company....
However, I am sure some mischief-maker will charge the government with the breach of Section 77.
Thus this SPV will be owned by the government and by the enterprises whose shares it owns. But since the government's share of the equity both of the SPV and the enterprises will be below 51 per cent, the government will technically not own either the SPV or the enterprises. The enterprises will cease to be government companies as defined in Section 617 of the Companies Act. With this, Section 619 will cease to apply to the enteprises. Section 619 reads:
....(2) The auditor of a Government company shall be appointed or reappointed by the Central Government on the advice of the Comptroller and Auditor-General of India....
(3) The Comptroller and Auditor-General of India shall have power
(a) to direct the manner in which the company's accounts shall be audited by the auditor .... and to give the auditor instructions ....
(b) to conduct a supplementary or test au-dit of the company's accounts by such person or persons as he may authorise in this behalf; and for the purposes of such audit, to require information or additional information....
(4) The auditor aforesaid shall submit a copy of his audit report to the Comptroller and Auditor-General of India who shall have the right to comment upon, or supplement, the audit report in such manner as he may think fit.
(5) Any such comments upon or supplement, to the audit report shall be placed before the annual general meeting of the company at the same time and in the same manner as the audit report.
619-A. Annual reports on Government Companies.
(1) Where the Central Government is a member of a Government Company, the Central Government shall cause an annual report on the working and affairs of that Company to be -
(a) prepared within three months of its annual general meeting before which the audit report is placed under sub-section (5) of section 619; and
(b) as soon as may be after such preparation, laid before both Houses of Parliament together with a copy of the audit report and any comments upon, or supplement to, the audit report, made by the Comptroller and Auditor-General of India....
Once the annual report and the auditor's or the CAG's report are laid before Parliament, it can of course discuss them; in fact, it has for over 40 years scrutinised the performance of public enterprises through its Committee on Public Enterprises. This committee tours public enterprises, questions their executives, and prepares reports which are extremely critical of the enterprises. The criticisms are often based on reports from the CAG.
It is this scrutiny that the selected public enterprises will cease to be subject to once their shares pass to the SPV. If this is all we knew about the subject, we would be shocked; why is the finance ministry promoting a scheme to take the enterprises out of Parliament's purview?
The ministry's answer, though none too explicit, is that doing so will improve the performance, prospects and market valuation of the enterprises: that the government will get better prices for its shares if the CAG and Parliament are taken out of the enterprises' hair.
Why is this so? Because the criticisms the MPs and the CAG make are devoid of commercial sense, and inhibit the decisions that the managers of the enterprises need to take. Running an enterprise involves taking risks. Sometimes decisions will turn out right, sometimes wrong. If a decision turns out to be wrong -- for instance, if it leads to a loss -- the CAG will pounce upon it, it will earn a paragraph in the report of the Committee on Public Undertakings, and the government will have to ask the managers to explain. This procedure makes it much safer not to take decisions; and the lack of timely decisions can do considerable harm to an enterprise in an uncertain word.
If this is the case -- and the record of public enterprises gives numerous such cases -- then the case is not simply for removing enterprises out of government ownership by means of financial manouevres, but for removing Parliamentary control on enterprises, and for reforming the ways of the CAG. Instead of starting a campaign against the SPV, as G V Ramakrishna has done, everyone should tell the members of Parliament how much they are harming the country's interests by their unhealthy interest in public enterprises, and how they can help by eliminating their interference and reforming the Comptroller and Auditor-General.