In the spirit of national interest, the government is right to help the energy sector but what about corporate governance?
Richard Rekhy
Head of advisory, KPMG
“When the PSU is a near-monopoly, any standard of governance will justify a directive in national interest — this is not interference but basic governance”
We see a vibrant public sector in India today, one that has come out with flying colours during the worst phase of the credit crisis on several fronts ranging from financial performance, human capital management to sound risk management. It is important to understand the role of the government in public sector undertakings (PSUs) — it has to strike a delicate balance between stewardship and trusteeship. It has a responsibility to ensure that PSU resources are used effectively and efficiently. The question being raised today is whether the government can issue directives to a publicly-traded PSU. When issues of national interest and strategic matters arise, the government has every right to issue such directives. Matters of national interest will take precedence over any other matter.
The government needs to ensure the country’s vision and needs are met through policy and directives. Especially when the PSU is a near-monopoly, dealing with one of the country’s precious natural resources, any standard of governance will justify a directive in national interest — this is not interference but basic governance. If the government does not act in national interest, it is not performing its role appropriately. This is where the balance between the government’s dual role of stewardship and trusteeship comes in. The government needs to ensure these companies have full autonomy on a day-to-day basis. Government involvement should be limited to broad policy matters and issues of national interest.
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Let us understand the issue at hand; the government encouraged private sector companies to enter the power sector at a time of a huge power deficit and helped create regulatory (Electricity Act, 2003) and other enabling environments for this purpose. This resulted in a significant increase in power generation capacity in the period 2012-17. Many of these private power generation companies have set up power plants and signed long-term power purchase agreements (PPAs) with state distribution companies at the lowest possible tariffs on the assurance of sanctioned fuel linkage supplies from Coal India. However, Coal India has been facing its own challenges for various reasons and has been unable to increase domestic coal production. It has, therefore, been reluctant to enter into fuel supply agreements (FSAs) with power companies. It was in this context that the presidential decree was issued to Coal India.
Is this decree justified? To my mind it is. Power supply and the health of the energy sector in India definitely qualify as an issue of national interest. Coal India is the dominant near-monopoly coal miner and power companies cannot obtain coal from any other domestic source as an alternative. So, power companies are stuck between a rock and a hard place. The government has to play its stewardship role and come to the rescue of the industry. The predicament cannot be blamed on the power companies.
It is not a zero-sum game with the power sector gaining and Coal India losing. The FSAs with incentives and penalties will help focus Coal India and government attention on the actions required to enhance domestic coal availability in the short and long term and fix accountability as well.
The by-product of this directive is that it will help Coal India increase its efficiency and productivity. Coal India will also be able to build an imported coal business with new capabilities in coal trading, managing coal logistics, short- or long-term contractual arrangements, and acquisition of equity coal in overseas coal mines. In a sense, the directive could be a blessing in disguise since it could help catalyse the transformation of Coal India from a leading domestic coal producer to achieve its stated vision to be “global player in the energy sector”.
I would like to conclude by saying the government needs to act in national interest where resources of the country are at stake. We kept crying foul on the valuation of spectrum when it came to the telecom sector since this is a national asset; similarly, coal is a national asset and is owned by the country and needs to be dealt as such. While Coal India has received the directive, it may be pertinent to issue a similar one to the Railways for it to enter into contracts with its freight customers with penalties and incentives.
R S Sharma
Former CMD, Oil and Natural Gas Corporation Limited (ONGC)
“Giving a presidential directive to a listed public sector undertaking on a commercial matter does not conform to sound governance practice”
I am unable to support, per se, the presidential directive on long-term fuel supply agreements (FSAs) to be signed by Coal India with the independent power producers (IPPs). I do not recall such precedence for many years, except about seven or eight years ago in the case of GAIL, where the government’s intent was to generate wider competition in a high-value tender. Situations such as a major foreign institutional investor (a minority shareholder in Coal India) taking legal action against the management, and independent directors not supporting the board resolution for signing FSAs, could have been avoided.
I see three dimensions to the controversy: (i) Energy security; (ii) managing investor relations; and (iii) governance practices.
Energy security is the core of the controversy. The economy is heading towards a major energy crisis in the not-too-distant future. Fossil fuel (coal, oil and gas) accounts for 93 per cent of the prime energy basket. The gap between rising demand and stagnant domestic production is widening alarmingly for all three. On domestic production, producer prices are regulated much lower than import parity prices. As a result, consumers constantly clamour for domestic supplies. The situation is rapidly turning chaotic. There is an urgent need to raise prices nearer to import parity (though actual import parity prices are not feasible in a developing economy like ours).
Also (and more importantly) radical changes are warranted in the fiscal regimes to incentivise massive investments for raising domestic production. Without these measures, the economy can’t achieve the intended compound annual growth rate for GDP of eight per cent-plus. Energy is the prime mover for economic growth, and as of now, our per capita energy consumption is less than a fourth of the global average. Controversies like this one will keep arising in a more precipitate manner if we remain passive.
On the second point, Coal India became a listed company only in 2010. Once a PSU is listed, investor relations have to be much more proactive. For example, ONGC’s first IPO was in March 2004, when I was chief financial officer. The divestment proceeds from the 10 per cent dilution (at over Rs 10,500 crore) was the highest equity sale by the government in a single tranche until Coal India’s 20 per cent divestment in 2010. We had immediately instituted an interactive investor relations cell to respond to concerns from institutional and retail investors. Since then, there has been regular updation and more than adequate disclosures on the functioning of the company. We had also obtained a “Directors and Officers” liability insurance cover, which is renewed every year, to provide protection to senior officers against non-criminal law suits (like the one from The Children’s Investment Fund, or TCI, in Coal India’s). It is relevant to mention that after the Satyam fraud, Goldman Sachs came out with a special report in February 2009 alleging that the majority shareholder had siphoned $20 billion from ONGC. Apprehending a TCI-like action, I issued a detailed press release clarifying, among other things, that ONGC was allotted its producing blocks on a nomination basis, without any production-sharing mechanism. The government, thus, was within its rights to direct ONGC to allow subsidy discounts to oil marketing PSUs, which are required to sell petroleum products at discounted prices. Of course, I was always vocal about projecting minority shareholders’ concerns to the government by recommending a transparent subsidy-sharing mechanism. Balancing the expectations of majority and minority shareholders is the cardinal duty of a responsible PSU management, especially in Maharatnas like ONGC and Coal India, which are big custodians of the country’s primary energy resources.
On governance practices, the government has been emphasising, including at the level of its executive head, sound corporate governance practices in all companies, public or private, listed or unlisted. For PSUs there are specific guidelines on corporate governance issued by the Department of Public Enterprises. Given this, a presidential directive to a public sector undertaking on a commercial matter does not conform to sound governance practice.
