Improve governance before divesting

News: In the last few decades, the government has realised that the public sector enterprises (PSEs) should not be present in many of the sectors of the economy. Therefore, they need to exit.

What are the issues in the functioning of the PSEs?

The listed PSEs perform worse than their sectoral peers on the stock market.

– For instance, during FY17 to FY22, the PSE index return (Nifty PSE) was less than 2% compared to Nifty 50 return of over 90% and Nifty 500 return of over 85%.

Investors do not have full faith in the PSEs. They are sceptical whether their operations are based only on market considerations, whether PSEs will keep shareholders´ interest as supreme and whether their boards are actually independent.

Investors expect that the structural/operational issues of the PSEs should be resolved before they are listed/or if already listed, to resolve them without any delay.

In the last few decades, the corporate governance norms and standards in India have evolved. The recommendations of Kumar Mangalam Birla Committee 1999 led to the clause 49 requirement in the listing agreement of companies with stock exchanges.

Listed PSEs routinely seek various regulatory dispensations or exemptions. They cite various reasons like serving a public purpose, historical reasons, strategic consideration, PSE´s incorporation under special act, and so on. Therefore, they have put little effort to align their structures, operations and work culture in line with the other listed companies in the private sector.

In India, the rule-making on the subject of minimum public float norms for listed companies is in the government´s domain.  However, world over this is in the realm of market regulators and stock exchanges.

The PSEs often disregard the rule whether they don’t have relaxations. For instance, 55 listed PSEs didn´t have the requisite number of independent directors and 28 didn´t have even one-woman directors (independent or otherwise) on their board.

There is constant pressure to achieve the annual target of the disinvestment amount. The government does little to improve the corporate governance of PSEs.

Way Forward

It is important for the PSE to improve the corporate governance norms before initiating any divestment/privatisation process.

The PSEs should follow the same regulatory norms and framework like their peer firms which are listed on the stock market.

The Uday Kotak Committee has taken into account the changing scenario, the experience gained, and reviewed the corporate governance norms.

Instead of announcing the disinvestment amount target, the government should announce the annual targets like the number of PSEs to achieve minimum public float in that year; meeting the norms of independent directors and a woman director in their board; etc.

The new approache will benefit the investors in PSEs and will fetches better price to the government during divestment or privatisation.

Source: The post is based on an article “Improve governance before divesting’ published in the Business Standard on 02^nd June 2022.