Improving Corporate Governance in State-Owned Companies

As the Government prepares to sell stakes in Bharat Heavy Electricals Ltd. and Oil India Ltd. in the new fiscal year, it would do well to strengthen corporate governance in state-owned companies..As the Government prepares to sell stakes in Bharat Heavy Electricals Ltd. and Oil India Ltd. in the new fiscal year, it would do well to strengthen corporate governance in state-owned companies..Focusing on a reduction in the fiscal deficit in his budget speech, Finance Minister Pranab Mukherjee noted that he hoped to raise as much as Rs. 30,000 crore by divesting government stake in state-owned companies. The figure is substantially lower than the figure of Rs. 40,000 crore that he proposed in his previous budget speech..It must be noted that the Government barely managed to generate Rs. 14,500 crore in the last fiscal year, of which Rs. 12,733 crore came from the ONGC share auctions. The Government’s divestment target for the current fiscal year is almost 25 per cent less than the previous target, and many, including, Divestment Secretary, Mr. Mohammad Haleem Khan, have claimed it to be a realistic and a credible target. However, recent events suggest that the target may not be as realistic as the Government thinks it to be..Just a few days before Mr. Pranab Mukherjee presented his budget, The Children Investment Fund (TCI), a UK-based hedge fund, issued a legal notice to Coal India Limited (CIL) for failing to protect minority shareholders’ interest. TCI owns 1.01 per cent stake in CIL, making it the second-largest shareholder behind the Government. In the legal notice sent to CIL, TCI complained that the company’s directors were acting against the interests of stakeholders by blindly accepting government instructions to roll back a recent increase in coal prices. According to news reports, TCI supported its complaint by obtaining an official letter under the Right to Information Act (RTI). The letter appended to the legal notice is the one written by the Coal Secretary of India, Mr. Alok Petri, to Mr. NC Jha, outgoing Chairman of CIL, ordering him to reduce coal prices latest by January 31, 2012..It was just in 2010 that the Coal India IPO was the toast of the business world. It had raked in Rs. 2.36 lakh crore, over 15 times its set target. The nationalist sentiment touting a strong endorsement of state-owned companies was difficult to miss. That CIL would now be accused of oppressing minority shareholders’ interests is a distressing development. Moreover, it sends out a wrong signal to international investors at a time when the Government is banking on their support to achieve its current fiscal deficit target. The TCI legal notice follows the ONGC share auctions that attracted little international investor interest, partly because of a lack of clarity on how much of the Government’s fuel subsidy burden it would have to bear..These incidents highlight the precarious situation the Government finds itself in. On the one hand, it seeks to attract investors in its divestment scheme. On the other, it does not want to give up its ability to use state-owned companies like CIL for politically convenient goals. Just recently, Mr. Sri Prakash Jaiswal, Indian Coal Minister, had offered INR 25,000 crores in cash to fund the Food Security Bill. Such an arrangement, if implemented, would again raise an enormous hue and cry from investor groups like TCI..What the Government needs to do is to urgently bolster corporate governance norms for state-owned companies. There is a genuine need to improve the levels of transparency, autonomy and accountability. There should be a well defined strategy for each state-owned company. Clarity and transparency in communicating the strategy from time-to-time to all stakeholders is essential to protect the interest of non-government investors and to ensure effective functioning of the enterprise. The board of directors should use the strategy as a guide post in managing the firm’s resources. It is well established that political and bureaucratic interference adversely affects the performance of an enterprise. Therefore, most importantly, state-owned companies should be immune from political and bureaucratic interference..A lack of a strategy and excessive governmental interference was fairly evident when Life Insurance Corporation (LIC) was forced to buy ONGC shares both before the auction and during the auction to bail out the Government’s divestment programme. Undoubtedly, it can’t be the job of the LIC to bail out the divestment programme by investing in another state-owned company with a proven record of poor corporate governance..No doubt, at times, the Government has to make decisions in the larger public good, which may be detrimental to the interests of certain shareholders. However, these decisions need to be in line with the defined strategy and goals of the state-owned enterprise and need to be unambiguously and transparently explained to the minority shareholders. Unlike the CIL decision to roll back prices, these decisions should not reek of political and bureaucratic interference..The Government needs to take the TCI legal notice and the poor interest in the ONGC auction as worrying indicators of current levels of corporate governance in state-owned companies. This is a decisive year for the Government. It plans to sell 5-10% of its holdings in companies such as Bharat Heavy Electricals Ltd., Oil India Ltd., National Aluminium Co., Steel Authority of India Ltd., Neyveli Lignite Corp., Hindustan Aeronautics Ltd. and Rashtriya Ispat Nigam Ltd in this fiscal year. The Government can ill-afford to repeat the dismal divestment performance of last year..Karan Singh Tyagi is an associate attorney with Gide Loyrette Nouel, Paris. He can be reached at tyagi@gide.com