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Last month, when BJP national spokesperson Sambit Patra was appointed as an independent director on the ONGC board for three years, it caused a furore. Such appointments are not new. In August 2014, a few months after the Narendra Modi government came into power, independent directors on the boards of a slew of public sector enterprises (PSEs) were changed.
There are several reasons for the growing rumblings on board appointments now, within PSEs and in the private sector. These range from whether the person is a right fit to political interference to how the candidates are decided.
The issue has come in for heated debate as a SEBI panel led by Uday Kotak has just submitted its report on corporate governance and there’s heated debate on the issue. Railway Minister Piyush Goyal at the recently held India Economic Summit of the World Economic Forum (WEF) said the panel was “completely off the mark”.
Rs. Sharma, former ONGC Chairman, and chairman, FICCI Hydrocarbons Committee, believes a transparent mechanism for the functioning of the PSE boards and appointment of independent directors is needed.
In 2015, Sharma had written to Prime Minister Modi raising the issue of corporate governance. He questioned the ‘unceremonious’ removal of independent directors and the government’s policy of not extending PSE chiefs’ terms even though they may have several years of service left beyond the first five years.
At present, the Companies Act requires every listed company to have at least one-third of its directors as independent directors. SEBI regulations are even stricter, requiring at least half of the total directors of the board of a listed entity to be independent directors.
The public sector’s case
In a PSE, the process of appointing an independent director is similar to how a functional director is chosen. The nodal ministry picks names from a Department of Public Enterprises database and sends it to the search committee for its opinion. The ministry then approaches the Appointments Committee of the Cabinet (ACC), chaired by the Prime Minister, for the final notification. The ACC’s only other member is the Home Minister.
An example of how this plays out is Sharma himself, who was nominated as an independent director of Steel Authority of India in 2014 by the UPA government. However, he was informally told that his name would not be considered and that he need not attend the annual general meeting. It can be argued that the government, as promoter has the right to nominate, but there is the issue of the value such appointees offer.
Pavan Kumar Vijay, Founder of corporate legal advisory firm Corporate Professionals, and a Fellow Member of the Institute of Company Secretaries of India (ICSI), believes in a holistic approach to choosing candidates. “Create a portal which will have names of those individuals that can be nominated as independent directors on boards of companies,” he suggests.
To be fair, such a mechanism was put in place and a database created. But, says Vijay, the task of creating the list was given to various entities such as the ICSI, CAs and industry chambers, each’s choice skewing towards their ilk.
Corporate experts and lawyers agree it is very difficult to draw a line between the concerned ministry and the PSE boards. Some suggest creating a sovereign holding company, under which the boards of PSEs will work. This raises the question: Who will hold the reins of this holding company – the Prime Minister or the Finance Minister?
Separation of roles
Another question that will soon hit the PSEs is a proposal by the SEBI-Kotak panel to separate the roles of non-executive Chairperson and Managing Director/CEO.
This may work for private sector, but for PSEs it can cause havoc. “You may have politicians holding positions of non-executive Chairperson,” says a corporate lawyer.
Last Friday, UD Choubey, Director General, SCOPE, and a Kotak panel member, wrote to the Department of Public Enterprises, MCA, and PSE chiefs that thorough discussion was necessary before any decision on the proposal was taken. According to him, work culture in PSEs and private sector vary vastly.
PSEs are largely opposed to splitting the post as it might create two power blocks in the same organisation. As a result decision-making may be delayed, said Choubey.
Altogether there are 320 Central PSEs, of which about 244 are operational. The total investments in them are about ?11.71 lakh crore. In the last 10 years alone their contribution to the exchequer was about ?18 lakh crore. Given their size and the investments, the onus is on the government to create a clean environment of functioning.