about us
  areas of expertise
  our projects
  ideas & resources


  Index of Articles          Index of Perspectives            Next Article


Governance of PSUs

Omkar Goswami


In our parliamentary system of executive governance, cabinet decisions are jointly arrived at by cabinet ministers and reflect the view of the senior-most executive council of the land. Cabinet decisions are sometimes challenged by the legislature or the judiciary; but are rarely rescinded by the government in power or by the leader of the majority party.


That’s what happened with BHEL. The cabinet approved a 10 per cent divestment of the shares of BHEL. Immediately the Left threatened to walk out of the coordinating council of the United Progressive Alliance (UPA). Equally quickly, Mrs Sonia Gandhi acquiesced to their demand for status quo. Thus, while Prime Minister Manmohan Singh was conferring with his G-8 counterparts in Scotland, the UPA agreed to keep the BHEL divestment in “indefinite abeyance”.


I am not going into the politics of appeasement, how and why it happened and which Congressmen were shafting the decision from within. Instead, let me briefly dwell upon the governance of public sector undertakings (PSUs) which are listed on Indian stock exchanges, where the central government owns over 50 per cent shares — such as many public sector banks as well as some large state owned manufacturing corporations, including the ‘navaratnas’.


Even if government owned every share of the state owned banks, the doctrine of exclusive ownership would not have allowed it to do as it pleased. Banks accept deposits and other debt from the public and, therefore, have a minimal fiduciary duty to perform well enough to protect these liabilities and pay the contractual interest dues. The navaratnas are another matter. Had they been owned exclusively by government, they could have done whatever the sarkar wanted — either to grow the business or to ruin it.


The governance problem arises because a company like BHEL is listed, with 33 per cent of its equity being held by mutual funds, institutions and individuals, while 67 per cent is owned by government. The company and its board, therefore, has a fiduciary obligation to do everything that is needed to increase long term shareholder value. That’s where the governance contradiction comes into play.


Anyone who has served as a director on the board of a PSU whose majority shareholder is the government knows the role of the government’s nominee director. Typically a Joint or Additional Secretary, he is the most powerful person on the board, bar none. I don’t know of a single occasion where a PSU board meeting has begun without the worthy babu taking his seat. Date of board meetings of listed PSUs are changed at very short notice because the concerned bureaucrat is suddenly unavailable. Rare is a managing director of a PSU who can pilot any board decision without prior concurrence from his boss at the ministry.


These reflect a more serious problem. Essentially, there is an inherent disconnect between the objectives of government and those of corporations. The government sees PSUs as instruments of its political and socio-economic will. Therefore, the IAS officer will do what is right from the perspective of a political animal called the government — which has little to do with the needs of a corporate creature called the widely held, joint stock limited liability company.


Let me give you two illustrative examples. Consider the appointment of CEOs of PSUs and public sector banks. Since everybody knows when a CEO’s tenure is coming to an end, it should be easy to have smooth succession planning. Yet, these posts are often left vacant — with the PSUs being run by a caretaker — because government has not made the selection in time. The second example is Indian Airlines. Everybody knows that IA needs to rapidly augment its aged fleet, and that this takes time. Yet no decision has been taken.


Divestment of the shares of public sector banks and the navratna PSUs is not about distress sale of the family’s silver. It is about liberating these organisations from the stultifying presence of the bureaucracy and politicians. It is about creating a milieu that allows these companies to progress, invest, grow and increase shareholder value. Its about corporate governance, not revenue. I don’t expect the Left to understand this. But with her body of capable advisors, I thought Mrs. Gandhi would.


Published: Business Standard, September 2005


                 Index of Articles          Index of Perspectives            Next Article