Wednesday, March 31, 2010

Governance Norms for Central PSUs

In 2007, the Central Government issued the Guidelines on Corporate Governance for Central Public Sector Enterprises (CPSEs). This was a measure introduced to bring corporate governance norms in CPSEs on par with the private sector. However, it was only a voluntary measure.

On March 25, 2010, the Government announced that the Guidelines would now be continued on a mandatory basis. Hence, all CPSEs will now be bound by requirements such as the composition of the board of CPSEs, audit committee, subsidiary companies, disclosures, code of conduct and ethics, risk management and reporting”.

This is a significant measure as public sector companies have often been found to be lacking in compliance with the corporate governance norms for all listed companies prescribed by Clause 49 of the listing agreement. The mandatory nature of the new guidelines may compel CPSEs to comply with higher standards of governance.

However, even with the new announcement, there could be continuing obstacles in ensuring full compliance with norms.

First, these guidelines are applicable only to CPSEs, being held by the Central Government, which constitute only a small proportion of public sector undertakings (PSUs). Those PSUs that are within the ambit of state governments’ authority do not require compliance with these guidelines.

Second, there are differences between the corporate governance norms for CPSEs introduced by these guidelines and the norms for listed companies generally under Clause 49. For instance, and just to take a minor example, the CPSE guidelines require listed CPSEs to have at least 50% of the board as independent directors, while Clause 49 has two thresholds at 33.33% and 50% depending on the identity of the chairperson. It is not clear as to which of the requirements are applicable to CPSEs or whether they are simply to comply with the more onerous of the two requirements.

Third, and as this column in the Financial Express notes, the mandatory guidelines may be of no avail if they continue to perpetuate the dominance of the controlling shareholder, being the Government. Rather, it is argued, that the interests of the public minority shareholders need to be specifically protected.

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