Independent Directors: Three-fourths central public sector undertakings flout norm

A large number of PSUs are going to be up for grabs in the coming years, with the Budget for FY22 unveiling a new policy in this regard and the prime minister himself lending no-holds-barred support to the policy shift.

AS many as 55 among the 72 listed central public sector undertakings (CPSEs), which are part of the NIFTY 500 Index do not have the stipulated number of independent directors (IDs) on their boards, despite the renewed policy emphasis on compliance with this key corporate governance norm in recent years. Among the state-owned companies that remain lax about the norm include biggies like ONGC and Indian Oil Corporation, and even top public sector banks such as State Bank of India, Punjab National Bank and Bank of India.

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Ten of these firms including Coal India, Nalco, REC, Hudco and Cochin Shipyard did not even have a single ID on their boards, as on December 31, 2020. In all, these 72 firms were required to have a total of 325 IDs, at the end of 2020, given their aggregate board strength of 601. However, according to an analysis by Institutional Investor Advisory Services (IiAS), these firms had only 184 IDs at that time, leaving a big shortfall of 141.

The compliance with the relevant, much lenient ID norms — at least 2 independent directors on the board — among around 180 unlisted CPSEs is even more abysmal.

As per the Regulation 17(1) of Sebi’s Listing Obligations and Disclosure Requirements, at least 50% of the Board should comprise independent directors if a company has an executive chairperson; 33% of the board should be IDs if the chairperson is non-executive. Among the 72 firms mentioned above, only one — Bank of Baroda — has a non-executive chairman, meaning all others are required to meet the 50% norm.

Most of the companies reviewed also do not have independent woman directors, even though Sebi made it mandatory in April 2019.

The continued sheer negligence of the governance standard among large sections of CPSEs is even as the government continues to suffer from a steady decline in its gains from capital investments in these firms. It also lays bare the lack of regulatory rigour.

The consolidated returns on government investment in 53 of the listed CPSEs fell from 190.24% in 2016-17 to 182.53% in 2017-18 to 159.31% in 2018-19, the CAG observed in a report tabled in Parliament recently. In fact, the consolidated ROI (annual average rate) had been declining from 469% since 2007-08, the final year of the economic boon in early 2000s.

While this largely reflects the overall economic conditions, it seems that the CPSEs also have specific infirmities, compared with the private sector. An analysis by CAG showed that, when 35 listed CPSEs were compared with the private companies with similar nature of business over the five years to 2018-19, the state-owned firms’ performance was on the lower side in parameters like earnings per share and P/E ratio. Of course, in other parameters like return on equity, and interest coverage ratio, no marked contrast was seen among the two classes of companies.

While S&P BSE 500 Index rose 43.7% over the past five years, S&P BSE PSU Index fell 32.9% during the period.

The non-official independent directors are appointed on the Boards of CPSEs by the administrative ministries concerned.

Inherent inefficiencies of CPSEs have led to low productivity in these firms; their high-cost structure and strained public finances prompted the Centre to adopt a policy to selectively privatise them in 1991. The privatisation process was however slow and was halted since FY04.

The Narendra Modi 2.0 government has revisited the privatisation policy. A large number of PSUs are going to be up for grabs in the coming years, with the Budget for FY22 unveiling a new policy in this regard and the prime minister himself lending no-holds-barred support to the policy shift.

It is being felt that along with privatisation, there is also a need to strengthen the CPSEs that would be retained in their respective sectors so as to enable them to be not a drain on the exchequer. “An important step in this direction would be to completely revamp the Boards of the central public sector enterprises to reorganise their structure, enhance their operational autonomy coupled with strong corporate governance norms including listing on stock exchanges for greater transparency,” Economic Survey for 2020-21 noted.

The combined salary bill of around 250 CPSEs (including unlisted but excluding banks and insurance companies) stood at Rs 1.53 lakh crore in FY19; these firms employ over 15 lakh people.

These CPSEs’ aggregate return on net worth (net profit as % of net worth), which was 13.87% in FY14 came down to 12.11% in FY19. Return on capital employed (operating profit as % of total capital employed) has fallen to 10.76% in FY19 from 12.93% in FY14. Similarly, the assets turnover ratio (total income to total assets) reduced from 0.76 in FY14 to 0.61 in FY19.

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