• +91 11 43595444-445
  • solutions@excellenceenablers.in

Issues of Corporate Governance in Public Sector Undertakings

  1. Blog
  2. Issues of Corporate Governance in Public Sector Undertakings
Issues of Corporate Governance in Public Sector Undertakings

Public Sector Undertakings (PSUs) or Public Sector Enterprises (PSEs) have played, and continue to play, an integral part in the development of India’s economy. They are majority owned by the Union or State Governments. PSUs were initially set up to provide industrial and regional development. They have been present in sectors where private sector might not want to be present. In some key sectors, they have prevented the monopoly of the private sector. They have also played a very integral part in generating employment. Given their importance, it is imperative that PSUs should be governed properly. 

To begin with, PSUs were almost entirely owned by the Government. As a result, all important decisions, such as appointment of the members of the Board and key persons, as well as policies etc were decided by the Government. Post their listing, Government is not the sole owner. However, in most cases, Government continues to take key decisions relating to the day-to-day affairs of those companies. This has come under criticism from time to time. Firstly, the Government should appreciate the difference between sole owner and majority owner. Secondly, the Government should recognise the difference between ownership and management, and it should only perform the ownership function. Addressing these issues is necessary to strengthen the Corporate Governance practices in PSUs. 

Corporate Governance framework in PSUs

Like other listed companies, PSUs also have to comply with 

  • The Companies Act 2013, which is applicable to all companies, irrespective of ownership and listing status. 
  • SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations), which is applicable to all listed entities, including listed PSUs.


In addition to these, 

  • Department of Public Enterprises, Ministry of Finance, had published the Guidelines on Corporate Governance for Central Public-Sector Enterprises (DPE Guidelines) in 2007. They have been revised from time to time. These guidelines are applicable to all listed and unlisted PSUs.


Issues of Corporate Governance in PSUs

Given the Government’s ownership, there are some issues relating to Corporate Governance which are unique to PSUs. These include:  

Appointment of all Directors by the Government: The Executive Directors, Nominee Directors and Independent Directors (IDs) are all appointed by the Government. As a result, other shareholders have no role in approving their appointment. 

Independence of Board is open to question: Since all the Directors are appointed by the Government, the true independence of the Directors, and in turn the Board as a whole, is questionable. 

Skillset of Directors: The decision of whom to appoint as a Director is driven by Government orders, and as a result, instead of making a need assessment for the skillset required on the Board, the Board gets Directors who the Government considers appropriate.

Delay in appointment of Independent Directors: LODR Regulations and DPE Guidelines state a minimum percent of Board should comprise independent and non-executive Directors. However, since appointments of Directors are decided by Government in the concerned Ministry, there is often a delay in appointment of IDs. As a result, it is often seen that the Boards of PSUs have an inadequate number of IDs. This not only affects the decision-making at the Board level, but also results in non-compliance with respect to composition of both Board and committees. 

Diversity: The Boards of PSUs often lack diversity, not only with respect to gender, but also age and geography. Many PSUs do not have a woman ID, although this is mandated by law and regulations. The number of PSUs with women Chairpersons is abysmally low. Maharatnas and Navratnas do not have foreign Directors, even though many of them have an international presence. 

Compliance burden: Apart from the provisions of the Companies Act 2013, LODR Regulations and DPE Guidelines, PSUs are also subject to oversight by other authorities like the Comptroller & Auditor General of India (CAG), Central Vigilance Commission (CVC) etc. This increases the compliance burden on PSUs. At times, PSUs also suffer from confusion relating to which provision would prevail, in case there is inconsistency in the provisions and ambiguity in interpretation of the statute. 

Lack of Succession Planning: In most PSUs, at different points in time, one or more functional Directors hold additional charge(s), including of the post of Chairman and Managing Director (CMD). This increases the workload of the functional Director. The main reason for this is that even though the date of superannuation of Executive Directors is known, the Government does not appoint/promote persons in time. At times this also results in extension of tenure being given to Directors. Similar issues persist in the case of IDs too, where the last date of the term is known, but appointment of the new Director is not made in time. 

Separation of posts of Chair and MD: Most PSUs have persons designated as CMDs. This leads to concentration of power in the hands of one individual. The Chairperson is the Chair of the Board, and the MD is the head of the management. The Board is expected to hold the management accountable for its actions. Having the same person hold both positions is the negation of Corporate Governance since it strikes at the root of accountability. 

Exemption from performance evaluation: The Companies Act 2013 mandates that every listed public company should conduct a performance evaluation of the Board, its committees, the Directors and the Chairperson. However, MCA vide a notification dated July 5, 2017, has exempted Government companies from undergoing any performance evaluation by the Board. As per the notification, if the Ministry is conducting such an evaluation, the Board does not have to undertake the process. Most PSUs mention that their Ministry conducts the evaluation process. However, the Ministry is unlikely to be aware of the performance of each ID. Therefore, it is only right that the Board undertakes this process. Further, LODR Regulations, which also provide for a Board evaluation, have not exempted any company from this exercise. As a result, most PSUs are found to be non-compliant with this provision. If value is to be extracted from this exercise, the Board should conduct it. 

Non-compliance: It is disquieting to note that many of the PSUs are non-compliant with the provisions of the Companies Act, LODR Regulations and DPE Guidelines. For example, most PSUs do not have adequate number of Directors on their Boards. Committee composition too is non-compliant in almost all these companies. Continuing non-compliance also results in a number of fines and penalties being imposed on PSUs by Stock Exchanges. This could translate to reputational risk, if it has not already happened. 

Website not being updated: LODR Regulations provide for some disclosures to be made on the website of the company. However, the websites of many PSUs are not updated. Sometimes the basic details, such as updated Board and committee composition, is also not available on the website. Further, some mandatory policies are not available on the websites. The websites of many PSUs are also not user friendly.  

Attendance in Annual General Meetings (AGMs): The attendance of Government nominee Directors in AGMs is very low. Given the importance of AGMs, nominee Directors should make it a point to attend them. 

Role of Nomination and Remuneration Committees (NRCs): Given most of the functions of NRCs, viz. appointment of Directors and key personnel, their remuneration, their evaluation, and succession planning are all performed by the Government, the role of NRCs in PSUs is very limited. 


Measures to improve Corporate Governance in PSUs

If the Government draws a distinction between its ownership and management function, and recognises that it should perform only the ownership function, it will help PSUs. Boards will be able to function as Boards of a listed company should function, with due empowerment and accountability. Until then, with them being required to compete with private sector entities, they will resemble boxers entering the ring with their hands tied behind their back. 

Shikha Shah

For more insights on Corporate Governance in PSUs, click here