11 - Chapter 5

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CHAPTER — V
Directors in Public Sector Undertakings
5.1. Introduction
.A discussion of Corpomte Boards of Public Sector Enterprises in India assumes a

great degree of importance in view of the tremendous amount of economic as well
as social responsibilities vested in them. In the mixed economy framework of
economic development, the public sector is entrusted with an important task — the task
of providing the economic infrastructure for industrial development as well as direct
participation in industries, especially in the core sector. The Industrial Policy
Resolution of 1948 has emphasized the role of the State in the creation of economic
infrastructure. The pivotal role assigned to the State sector is more clearly spell out
in the Industrial Policy Resolution of 1956. Consistent with the policy spelt out, a
sizable share of the national resources has gone into the public sector.
5.1.1. Meaning of Public Sector Undertakings e SUs) or

Public Sectors Enterprises (PSEs): ‘“
A public sector undertaking is an industrial or commercial undertaking owned

managed and controlled by the Government to produce and supply goods and services
to society. According to Encyclopedia Britannica, a public sector Undertaking is “an
nude Eng that is owned by national, state or local government, supplies services or
goods at a price and is operated on a more or less self-supporting basis.” S.S. Khera has
defined public undertakings as ‘the industrial, commercial and economic activities
carried on by the Central Government or by State Government(s) and in either case
solely or in association with private enterprise, so long as it is managed by a self-
contained management.”
483. Gupts Dr.C.B, ‘Mnagemont-Theory & Practice’, Sultan Chandñ Sons, New Delhi, at pp.42.4
From these definitions, the following features of P5Us become clear:
1. State Ownership: A public sector undertaking is owned either by the Central

Government or State Government(s) or jointly by two or more of them. In case private
individuals also hold share, State owns 5 I per cent or more of the paid-up equity
capital of the undertaking.
2. Government Control: The ultimate control of a PSU vests with the State. The
Board of Directors and the top management personnel of the undertaking are appointed
or nominated by the Government.
3. State Funding: Whole or the bulk of the finance of the undertaking is provided by
the Government.
4. Service Motive: The main aim of a PSU is to provide service to society. However,
in modern times, PSUs strive to earn surplus for the benefit of the society.
5. Public Accountability: PSUs are responsible to the elected representatives of the
public, i.e., Parliament or State Legislature.
Public sector has been developed in India in order to fulfill the following objectives:
1. To stimulate eGonomic growth.
2. To mobilize public savings.
3. To generate employment.
4. To prevent private monopolies.
5. To conserve national resources.
6. To ensure balanced regional development.
7. To provide essential commodities.
8. To ensure national defence.
9. To establish industrial infrastructure.
10. To develop an egalitarian society.
Thus, several economic, social, and political objectives have spearheaded the evolution
and growth of public sector in India.
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5.1.2. Evolution of Public Sector in India:

Public sector has grown in India very fast as can be seen from the Table as shown
below:
Plan-wise Growth of Investment in Central Public Enterprises 4“
Plan No. of Total Investment
Enterprises (Rs.in crores)
1. At the commencement of 1" 5yr.plan 29

(1.4.1951)
2. At the commencement of 2nd 5yr.plan 21 81
(1.4.1956)
3. At the commencement 47 948
(1.4.1961)
At the commencement of 3rd 5yr.plan 73 2410
(31.3.1966)
4. At the commencement of 4° 5yr.plan 84 3897
(1.4.1969)
^. At the commencement of 5“ 5yr.plan 122 6233
(1.4.1974)
6. At the commencement of 6 5yr.plan 179 18150
(1.4.1980)
(1.4.1985)
8. At the commencement of 8^ 5yr.plan 246 135445
(1.4.1992)
(1.4.1997)
10. At the commencement of 10 5yr.plan 233 274114
(1 .4.2002)
484. Source: I.C.Dhingra, Indian Economy, p.415

5.1 d. Reasons for Growth of PSUs:
Public sector undertakings have been established for the following objectives:\
1. Basic infrastructure: PSUs have been established to develop railways, road

transport, electricity generation, telecommunications, fertilizers, steels, river
valley projects, financial institutions, and other facilities necessary for rapid
industrialization of the country. Such industries require huge capital investment
and involve long gestation periods. Private sector alone cannot develop
these infrastructural facilities. PSUs also manufacture articles of strategic
importance such as aircraft, ships, locomotives, atomic energy, and defence
equipment.
2. Planned Economic development: In India, PSUs have been set up to achieve

the goals of Five Year Plans. Key and basic undertakings have been
established in the public sector for creating a sound industrial base. For
instance, First Five Year Plan stated that there is need for the public sector
to develop those industries in which private enterprise is unable or unwilling
to put up the resources required and to run the risk involved.
3. Balanced Regional Development: Pb“Us have been established in

economically backward regions of the country to bring prosperity in such
regions. Private sector was not willing to pay attention to these areas and as
a result there has been concentration of industries in some regions.
4. Generation of Employment: As a welfare State, the government is responsible

for creating employment opportunities. PSUs have been created to provide
jobs to millions people in the country. The Government of India has taken
over seveml sick industrial units in the private sector to protect employment
of large number of persons. The establishment of National Textile
Corporation is an example. Moreover, PSUs provide labour welfare facilities
(townships, schools, medical services etc.) to set an example for the private
industrialists.
5. Reducing Economic Disparities: PSUs also seek to minimize inequalities in
the distribution of income and wealth. Large-scale participation by the
Government in business increases the national income which goes into the
common pool and is available for redistribution. Such redistribution helps in
achieving the goal of socialistic pattern of society as stated in our
Constitution. PSUs also provide essential goods and services to the public at
reasonable prices. The surplus generated by these undertakings is reinvested
for the benefits of the whole nation.
6. Control of monopoly: PSUs are also established and used as a means of

social control. Their aim is to prevent the growth of monopolies and
restrictive trade practices in the private sector.
7. Capital Formation: Many PSUs like the Unit’ Trust of India, Life
Insurance Corporation of India have been established to mobilize public
savings and to channelize them for industrial development, rural
development etc.
A part of the mobilized savings is used for social purposes like housing‘and
drinl0ng water facilities. Commercial banks were nationalized in India for
making funds available to priority sectors and unprivileged sections of society.
To sum up, PSUs have been established for both economic as well as sccial
ob{lectives.
5. 1.4. Forms of Organization in PSUs:
The forms have been adopted for organization and management of PSUs.
1. Departmental Undertakings.
2. Pubic or Statutory Corporations.
3. Government Companies.
4. Control Boards.
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A Comparative view of Forms of Public Sector Undertakings
Factor of Departmental Public Government Control

Comparison Undertakings Corporations Companies Boards
1. Establish By a ministry By a Special Act By incorporation By a ministry

2. Legal No separate entity Separate entity Separate entity No separate
status distinct from the distinct from the distinct from the entity distinct
Government Government Government from the GovL
3. Capital Annual Budget By the Govt.

By the Govt. Annual Budget
Appropriations
Appropriations
4. Borrowing Cannot borrow Can borrow Can borrow Cannot borrow

Power from the public from the public from the public from the public
5.Management Govt. officials Board of directors Board of directors Govt officials

of the ministry of the ministry
concerned concerned
6. Control
Minister concerned Parliament Government and Minister
shareholders concerned
7. Staff
Govt. servants Recruited Recruited Govt. servants
independently independently
8. Terms of Civil Service Gontractof Contract of Civil Service

service Rules service service Rules
9. Autonomy None Considerable Considerable Little
10. Flexibility Little Considemble Enough Little
11. Suitability Defence & Industrial & Industrial & River Vally
Public Utility Commercial Commercial Projects
Undertakings Undertakings Undertaking
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5.1.4.1. Departmental Undertakings:
Departmental organization is the oldest form of Public Sector Undertaking. It is

organized, financed and managed in the same way as any other department of the
Government. In India, Post & Telegraphs, Railways, Ports and Harbours and
Defence factories are examples of departmental organization.
The undertaking is a department of a Ministry in the Central or State
Government.
The undertaking is under the direct control of the departmental head wb.o is
accountable to the minister concerned.
It is financed by annual appropriations from the treasury.
s.1.4.2. Public or Statutory Corporation:
.X public corporation is an autonomous undertaking created by law to carry on the

activities assigned to it. It is a body corporate set up under a special Act passed by
the Central or State Legislature. The Act or Statute defines the objectives, powers
and ñinctions of the corporation. There are several public corporations in India such as
LI'C of India, RBI, UTI, DVC, ONGC, ESIC etc.
It has a separate legal entity distinct from the Government.
It capital is wholly owned and subscribed by the Government.
Its management is vested upon the Board of Directors appointed by the
Government.
It is directly accountable to Parliament or the State Legislature.
It has independent financial policy. It can borrow from the public and can reinvent
its earnings.
5.1.4.3. Gox'ernment Company:
A Government company is a in which not less than 51% of the paid-up share
capital is held by the Central Government and partly by one or more State
Government. Some prominent Government companies in India are BHEL, HSL,
IOC, NTC, IFCI etc.
It is registered and incorporated under the Companies Act, 1956.
Its management is vested in a Board of Directors appointed by the
government and other shareholders.
It is governed by the provisions of the Companies Act. However, the Central
Government may direct by notification in the official gazette that any of the
provisions of the Companies Act as may be specified therein shall not apply to
any government company or shall apply with certain exceptions, modifications
and adaptations.
o.1.4.4. Management Control Boards:
.S management control board is a special form of organization adopted in India for

the overall management of river-valley projects. It is set by the Central Government
in association with the State Government(s) concerned. Control boards are set up by
resolutions of the government. It consists of representatives of the Central and State
governments. Some important control boards constituted to manage river-valley projects
are Bhakam Control Board, Hirakud Control Board, Ramganga Control Board etc.
5.1.5. Achievements of PSUs in India:
During the last five decades, PSU has achieved commanding heights in large areas
of economic activity. It has played a vital role to ensure steady and balanced growth
of the country. PSEs have built up a heavy industrial base for self-reliant and rapid
development.
These enterprises have served as a powerful instrument for bringing about socio-
economic transformation of the country. The main achievements of PSUs in India, inter
alia, include:
• Development Ref backwards regions;
• Creating employment opportunities;
• Contribution to exchequer;
• Import substitution;
• Foreign exchange earnings;
• Development of ancill ' industries;
• Checking concentration of economic power.
5.1.6. Managerial problems of PSU:
Public sector has come to occupy such a key role in Indian economy that its
performance will largely determine the rate of economic and social progress. PSUs
were established with multiple objectives and the nation expects much from them.
Unfortunately, the performance of PSUs has been far from satisfactory. The main
reasons for the unsatisfactory performance of PSUs, inter alia, include:
• Lack of professional management;
• Lack of autonomy;
• Faulty finamial planning;
• Underutilization of capaci/';
• Poor labor relaticns;
• Heavy overheads;
• No definite policy;
• Long gestation period.
5.1.7. Suggestions to improve performance:
The following steps may be taken to improve the performance of PSUs in India:
t• Proper planning: First of all, the objectives of every PSE should be defined,
clearly and precisely. Detailed project' feasibility reports and implementation
programmes should be prepared at the inception stage. Proper and adec,uate
planning will help to check time and costs overruns in the commissioning of
projects.
4• Professional JYIanagement: Innovative and enterprising management is
essential for the efficient operation of PSEs. Top executives should be
appointed from industry. Persons having professional knowledge and
experience of management should be appointed as chief executives.
•t• Operational Autonomy: PSEs should not be treated as organs of the
government. The government and the Parliament should lay down the broad
objectives and major policies. Within this regulatory framework, the managers of
PSEs should be given the freedom for day-to-day administration.
•z Other sugges’twe steps could include:- Sound Manpower
Management; Clear-cut Pricing Policy and Adequate Controls through
Proper Management Information System.
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5.2. Are Independent Directors in PSEs relevant‘ “
There is a general feeling that Corporate Governance (CG) is not quite relevant for
Public Sector Enterprises (PSEs), even after Satyam scam. Most of the debate
focused on the fact that the CG is more relevant to the Private Sectors.
It is generally said that since all stmtegic decisions are taken by Government, as a
dominant shareholder, the Board of PSE is more into "managing" rather than
"directing". Although there is some merit in this argument, higher standards of CG
would go a long way to enhance long-term shareholders’ value and protect the
interest of the relevant stakeholders.
lt is now well recognized worldwide that nothing will be a more powerful signal to the
corporate sector than if the government itself chooses to adopt the higher standards of
CG in respect of PSEs. However, many public sector chefs privately view the CG
norms as another irritant "C" to add to the existing three, viz., Comptroller &
Auditor General (CAG), Central Bureau of Investigation (CBI) and Central Vigilance
Commission (CVC), impinging on their autonomy. It is clear that such an attitude
among the top echelons has to change in case the public sector is to realize its
potential and contribute effectively to economic growth.
In respect of the PSEs listed in the Stock Exchange, they are governed by the
provisions of Clause 49 of the Listing Agreement, as laid down by the Securities &
Exchange Board of India (SEBI). Voluntary guidelines on CG for all Central
PSEs have also been issued by the Department of Public Enterprises (DPE) in
June, 2007. These guidelines cover issues like: Composition of Board of
Directors; Appointment of Independent Directors (lDs); Role & Powers of Audit
Committees; Issues relating to subsidiary companies, disclosures, accounting
standards, risk management etc.
The expression ‘independent directors’ means directors who apart from receiving
director’s remuneration, do not have any other material pecimiary relationship or
transactions with the company in the immediately preceding three financial years, which
may affect independence ofjudgment of the directors.
486.The tarm "Cla(ise 49" refers to clause number 49 of the Listing Agreorr›ent between a company and the stock exchanges on
which it is listed. lt has been formulated for the improvement of corpomte governance in all listed companies. It lays doc
guidelines with regard to independent directors, strengthening the responsibilities of audit commidem, improving quality of
financial disclosures, requiring BoanJs to adopt formal code ofconducC
It is often said that the concept of ID is not relevant for PSEs as a majority of
them are politically appointees, masquerading as independents who need to be
tolerated for the sake of compliance with corporate governance regulations. IDs, if
appointed to boards in true spirit of the concept, would single handedly boost the
levels of corporate governance several notches higher. Besides the usual benefits
which accrue to any corporate entity in terms of strengthening the oversight
mechanism, IDs chosen b• the government for their expertise and independent
disposition, serve yet another crucial purpose in PSEs.
Presence of IDs also assists the CEOs to withstand the extraneous pressures which
are quite usual in PSEs. In case the board was to consist of only functional directors
and government nominees, the writ of the go zernment, written or even conveyed
over telephone, would run even when it may not be appropriate. There are instances
in PSEs where the CEO is informally advised by senior functionaries in the Government
to decide a crucial issue in a particular manner which may not be in the best interest
of the corporation. Such recommendations often lead to sub-optimal decisions being
taken by a board which does not have any independent opinion expressed during
deliberations on the particular issue.
In case the board is having representation of IDs, the CEO may find it expedient
to place the matter before the board for a suitable decision. This would usually
ensure that a holistic view is taken on the subject which may not be in line with
the ‘advice’ given to the CEO. Later, the CEO may ascribe his inability to heed
the ‘advice’ in view of the board decision. Of course, such a dispensation
presumes that the top leadership of the government is convinced of the utility of lDs
and would not allow any ‘inconvenient’ IDs to be dislodged. In some PSEs with
lDs, there were occasions when a written directive from the government was
referred back for reconsideration. All this would be well nigh impossible in the
absence of IDs. What matter, however, is the caliber of the IDs and whether they
are truly independent.
In another PSE, where the IDs en bloc were championing the cause of a pM.cular
defaulter industrial unit for fresh credit, and the Chief Executive refused to yield to
the pressure, the politically appointed Chairman of the PSE desired that the matter be
placed in the Board. The Chief Executive had to personally meet all the government
officials nominated to the board and ensure their attendance and support in the
board meeting to checkmate the designs of the so-called IDs.
5.3. Reform of selection process and functioning of the Board of PSEs
It is needed to emphasize that the concept of IDs in PSEs would work only in case
the selection process erisures that the persons best suited for assignment are
selected. At present, the selection is undertaken by the Public Enterprises Selection
Board (PESB). This process is not only time consuming but also subject to usual
pulls and pressures The guidelines of Central Government of the Department of
Public Enterprises do not touch upon the procedure to make the selection process of
IDs more transparent and better suited to the requirement of PSEs. As a result, they
are unable to address situations where directorships of PSEs are offered as largesse
by the politicians. We are all aware of such cases in recent past, particularly with
regard to MTNL and ONGC. In order to improve the selection process of IDs and
enable the board of PSEs to satisfy the expectations of stakeholders, the following
suggestions could be considered:
(a) At present, the proposals for appointment of lDs are initiated by the concerned
7
Administrative Ministries / Departments. In so far as Navratna and Maniratna “
F'SUs are concerned, the selection of IDs is made by a Search Committee consisting
of Chairman, Public Enterprises Selection Board (PESB), Secretary (DPE), Secretary of
the
.Administrative Ministry / Department of the PSU and Chief Executive of the concerned
Central PSE. In the case of other PSEs, PSEB makes the selection of IDs.
487. Navratna and Manirama PSES are the well performing public enterprises which have been granted higher levels of
operational end financial autonomy by he government to enabk them to p-form effectively in a competitive etivironment
339
The concerned Administmtive Minis@' / Department appoints the IDs on the basis
of recommendations of Search Committee / PSEB after obtaining the approval of
competent authority, i.e. Appointment Committee of Cabinet (ACC).The PSEB
comprises a Chairman and three members; most of whom are retired government
officials and may not necessarily have direct experience of managing PSEs.
As such, the first step must be to ensure that the PESB itself has independent
members on board. The present practice of appointing retired bureaucrats as
a member of the PESB immediately upon superannuation does not lend itself to
creating an independent stature for the PSEB.
In fact the definition of ID in the DPE guidelines must mutatis mutandis apply to
the independent members of the PESB. Half the members of the PESB must be
independent comprising eminent people with impeccable credentials.
The interim board of directors put in charge of Satyam by government after supersession
of the earlier board inspired trust of all the stakeholders and the public. This, in no
small measure, facilitated the tusk of handing over the company to a new credible
owner within four months of the scam becoming public.
In case people of similar standing were to be included in the PESB and given
charge of identifying IDs, the salutary impact it would have on the board-rooms
of PSEs can be well imagined.
i@) To infuse greater standards of CG, it is imperative that the posts of

Chairman and MD must be separated. It is the board’s and chairman’s job to
monitor and evaluate a company’s performance. A CEO, on the other hand,
represents the management team. If the two roles are performed by the same person,
it is akin to an individual evaluating himself. The separation of positions avoids
concentratiofi of power and authority in one individual and clearly differentiates
leadership of the board from the one running the business.
(c) It is seen that subsequent to the Satyam scam, many qualified professionals are
wary of becoming an ID and it is also reported that between 15° December 2008
and l‘ March 2009, as many as 195 individuals have already resigned from ID
positions.
This development has to be seen in light of the demand for legal immunity to IDs.
Although there is some merit in the proposal, the IDs do need to be accountable for
any decision that they were a party to, with negligence being treated as
convenience. Thus, there is an impera‘trve need to put in place a mechanism
whereby the IDs can have a reasonable level of comfort that all the extent laws and
regulations are ring complied with by the PSE. As such a Compliance Committee of
the Board to review such matters must be set up in all PSEs which will comprise
only IDs with the Company Secretary acting as Secretary to the Committee.
(d) There is also an urgent need for introducing peer review of the IDs so that the
non-performers can be weeded out. In spite of best efforts of the government, we
may end up with a situation where the ID is more or less playing an ornamental
role. In such cases, a peer review at the year end may provide clues to the
concerned Ministry about the need for a replacement. Once a vacancy of ID is
created in a PSE, it must be filed up within 90 days.
(e) It is also a fact that government being the majority shareholder in companies
listed on the stock exchange tends to take decisions which may not enhance value
of the corporation for stakelnlders.
Administered pricing of oil and the recent diktat to oil PSEs to spend 5% of their
net profit on corporate social responsibility (CSR) just go to illustrate the point.
Hence each proposal placed before the board of a listed PSE must have an attached
note on impact analysis on minority shareholders. It will not only make the
government think twice before issuing directives not in general interest of all
shareholders but also provide sufficient ammunition to the board to refer it to the
government for reconsideration.
5.4. Conclusion
To conclude, inclusion of IDs on Boards of PSEs will definitely aid in improving

the standards of CG. Besides, the apparent benefits, the presents of IDs will
strengthen the hands of the CEO in resisting the usual pulls and pressures to which
the PSEs are subject to. However, it needs to be ensure that the selection process is
such that it enables identification of persons with the required expertise, skills and
independent disposition. As such, reform of the present selection procedure of lDs,
undertaken by the PESB needs to be undertaken on a priority.
5.5. Corporate Governance in Public Sector Undertakings "'

Much has been said about corporate governance in Indian corporates over the last
one decade. Corporate Governance has been sought to be codified based on various
Committee recommendations including those of the Kumar Mangalam Birla Committee
and initially introduced by SEBI in the year 2000 with a new clause 49 in the
Listing Agreement for compliance by listed entities.
Of course, the rules of corporate governance are built on the foundation of honesty
in managing corporates through a healthy and transparent set of rules with adequate
disclosures, in order to build the confidence of its stake holders while dealing with
these business entities.
Today, such rules have been made virtually mandatory for companies which have
tapped the capital markets to raise resources and ent•red into Listing Agreements with
the Stock Exchanges. This leaves out a whole set of corpomtes which have not got
into the capital market bandwagon and restricted their resource generations to sources
like Bank finance, Institutional Finance and other resources.
488. Chartered Secretary Issue: June, 2008; Article by Mr. U, Jagad ish Nayak, FCS, Company Secretary, HMT Limited, galom.
It is a fact that these entities also depend on public funding and cannot be left out cf
the scheme of things when it comes to implementing these new set of rules of
governance by incorporated entities in the count'.
There are yet another set of companies incorporated by the Central or State
Governments under the Companies Act, 1956. There are several hundreds of such
entities presently operating in the count under the special category called
'Government Company' under the Companies Act. While these entities were till some
time back operated under a tctally different set of rules with several exemptions
provided under the Companies Act, over the last decade and half, these companies
have also been made to fall in line with the other entities formed under the
Companies Act in regard to the compliances under various enactments.
To make this possible, the Central Government embarked upon a policy initiative to
liquidate their holdings in a set of Government Companies (hereafter referred as
'PSUs' for short) to partly raise the much needed resources by unlocking the wealth
and partly to create level playing field in order to foster healthy competition among
all commercial entities.
During this period, many of the enactments regulating industri& enterprise were
amended to do away with the exemptions enjoyed by the Govmunent Companies.
Starting from the early nineties, the equity of these PSUs also came to be listed at
the Stock Exchanges and they started creating value to their owners, which was
hitherto unknown and unavailable within the public domain.
Even without a public issue (IPO) is being made, the equity of these divested PSUs
were listed at various Stock Exchanges by providing necessary amendments to the
Securities Contract (Regulation) Act and the Rules thereof.
5.5.1. Listing of PSU equity
The exercise which started primarily to raise resources and provide avenue to the
geneml public to share in the wealth created by these PSU monoliths, set into
motion a bum of activity at the bourses and trading in the PSU Counters helped
contribute to sustained higher levels and volumes of activity resulting in raising of the
Indices of the major Stock Exchanges like BSE and NSE to new heights, thereby
generating considerable interest in PSU stock and bringing in enormous gains to the
investor community including the Government of India. The PSUs were necessarily
required to comply with the listing agreements signed by them with the respective
Stock Exchanges, as applicable to all listed entities without any exemption.
Over the years, these listed PSUs also tapped the capital markets to raise the
resources required by them through fresh equity issue (IPOs) and issue of
convertible debt instruments.
However, many of the other listed PSUs stayed away from the capital markets and
the percentage of their public holding in their equity capital came down over a
period of time on account of fresh equity issue made by them to the Government. Many
such PSUs have public holding at levels less than 10% as stipulated by the listing
agreements, which requirement has since been waived in respect of listed PSUs.
Coming back to the main theme of - Corporate Governance, the PSUs have
invariably followed a different set of rules of management unlike their listed
brethren from the private sector. A PSU is primarily regulated and administered by
its Administrative Ministry in the Central or the State Government and is also
required to follow and comply with all the Guidelines issued by the Department set
up for regulating Public Enterprises by the respective Government. The regulating
Departments have framed rules and regulations covering every aspect of man ment of
PSUs.
To cap it up, audit of PSUs is done through a multi layer of audit, covering Internal
Audit, Statutory Audit by auditors appointed by the C&AG and Government Audit
conducted through the Commercial Audit wing of the C&AG. Thus, the set of rules
and guidelines for management of PSUs, issued by the concerned Department and
the concurrent audit by the Government Audit makes the management of PSUs
more transparent and susceptible to multi level scrutiny unlike other listed entities.
5.5.2. Corporate Governance & PSUs
With the introduction of Clause 49 in the Listing Agreement by SEBI in the year
2000 and its subsequent amendments requiring various levels of compliances by listed
entities covering issues like appointment of specified number of Independent
Directors, formation of Audit Committees and other Committees comprising of
Independent Directors, Disclosures with regard to compliance of Accounting
Standards, Risk Management Mechanism, disclosures regarding utilization of
Proceeds from issue of equity, remimemtion paid to Directors etc.
These listing requirements became mandatorily applicable to listed PSUs as well

without any exception. This prompted the concerned Administmtive Ministry of the
PSUs also to sit up and take notice of this new requirement for management of listed
PSUs.
The Department of Public Enterprises (DPE) also realized the need to come out
with new set of guidelines covering both the listed as well as unlisted PSUs on the
lines of Clause 49 of the listing agreement. Accordingly, the DPE published a fresh
set of guidelines for compliance on voluntary basis by unlisted PSUs but decided to
leave it to the SEBI and Stock Exchanges to regulate the same with regard to the
listed PSUs. Even here, there are several grey areas where there are contradictions
between the DPE guidelines and the listing regulations.
5.5.3. Corporate Governance and Government Guidelines
Under a PSU set up in most of the cases, all Directors have to be appointed b• the
Government in the name of the President of India. Invariably all PSUs have a
standard clause in their Articles of Association granting such powers of appointment of
Directors to the President of India.
The Government has also set up a Selection Board to identify and select PSU
executives for appointment to Board level positions. These and other non full time
Directors have to be selected and appointed by Government in compliance with the
Corporate Governance guidelines with regard to having a specified number of
independent directors. Since most of PSUs have a full time Chairman, the ratio of
Independent Directors to be appointed on the Board of Directors of listed PSUs go
up substantially. It is here that the concerned Administrative Ministry and the other
wings of the Government involved in the selection process encounter difficulty in
identifying suitable qualified persons to be appointed as Independent Directors in
both listed as well as unlisted PSUs.
While the DPE makes out a list of names for consideration for appointment as
Independent Directors, the task is left to the individual PSUs to locate suitable
candidates fulfilling these guidelines and recommend their name to the concerned
Administrative Ministry, for appointment as Independent Directors.
This task is easier said than done. It is becoming a Herculean task to locate suitable
names for appointment as independent directors as there are several criteria which go
into both the identification as well as obtaining the willingness of these persons to
accept the appointment as Independent Directors of PSUs. This was not at all
anticipated by the Government while formulating the guidéiines on corporate
governance for unlisted PSUs.
34d
Having identified and appointed the independent directors who more or less meet the
criteria, the setting up of Committees within the PSUs in compliance with the
guidelines is also not fully compatible, as many of the Independent Directors selected
and appointed by the Government happen to be former bureaucrats who did not fully
meet the criteria set out in the Corporate Governance guidelines for becoming
members of such Board level Committees.
There are other Committees of the Board like the Remuneration/Compensation

Committee comprising of Independent Directors who do not have any major role in
PSUs to decide on compensation package as these are primarily regulated by the
Government through notifications based on the pay and compensation of Central
Government employees.
Yet another aspect of the Corporate Governance guidelines is the setting up of Code of
Conduct for Directors and Senior Management of the listed Companies. It is a well
known fact that the PSUs in geneml have their own elaborate Code of Conduct
regulating their employees at all levels including the Directors. Hence, formulating a
separate code of conduct did not gel with the scheme of things concerning management
of PSUs and hence become a ritual and repetition of the existtng Rules rather than a
system of self regulation as envisaged in the Corporate Governance guidelines.
Another issue is that of the whistle blower mechanism to be adopted in listed
Companies. As regards PSUs, they are open to scrutiny at all levels.
Every action of a PSU is treated akin to Government action and is subject to

challenge by way of Writ Petitions in High Courts and the Supreme Court.
Moreover, with the Right to Information Act, 2005 coming into force, every piece
of information concerning PSUs (except for those commercially confident
information) are also more and more within the Public Domain and such
requirements only add to the burden of listed PSUs.
347
5.5.4. Conclusion
In conclusion, it may be stated that the concept of corporate governance in PSUs, make
them alive to the need for better transparency in their dealings not only for their rightful
owner viz. the Government and its various arms, but also to its public shareholders, the
large Investor community who have their stake in PSU Stocks and the large body of
stakeholders who depend on these PSUs directly or indirectly for their livelihood.
Having said this, the Government companies have a totally different and some kind of a
special role to play, with a fine balance between its commercial interest with profit
motive and the different kinds of social obligations that i1 has to discharge, in so far as
perpetuating the policies of the Government as a responsible Citizen of the Country
with vast resources under its command. One cannot forget or brush aside this important
duty towards the public merely because of its objective of sub-serving the interests of
investors/shareholders.
Thus, a PSU has to play an important role in perpetuating the importance of

corporate governance in its management as it hitherto played as a model
employer. However, the task is daunting and unless the PSUs are able to garner its
resources especially its vast human resource to espouse this cause despite all hurdles
that they face in ensuring compliances of various Government policies, rules and
guidelines, the entire structure should not crumble under the weight of over governance
and missing its primary objective of remaining commercially competitive to face the
realities of doing business in the most profitable manner.
In other words, the PSUs also cannot use its Government tag to cover its inefficiencies
and expect investor interest in contributing to its fortunes and growth. After all, the
rules are the same and a PSU has also to dmw up its balance sheet and profit and loss
account like its private sector brethren. It is no doubt a tight rope walk and the one
wbo can walk till the end, succeeds at the end of the day.
348
5.6. Accountability of Public Enterprises 4"
ACCOUNTABILITY is one of the most difficult and controversial problems in the

economic philosophy of public enterprises. The problem arises largely because there
is an elaborate system of parliamentary and executive control over governmental
funds which have been dispensed with in case of public enterprises so that they may
enjoy a degree of operational freedom consistent with their character as business
ventures.
The Indian Constitution lays down an elaborate system of controls both before
financial allocation and after the expenditure is incurred. There is a four-stage review
and approval of financial proposals in Parliament, namely—ba) general discussion
on budget; QJ discussion and voting of demands for grants; and (c) consideration
and passing of Finance Bill and Appropriation Bill (Articles 112 to 115 of the
Constitution of India).
With the passing of the Finance and Appropriation Act, curtain is drawn on the
financial estimates and the Government and Executive takes charge of the country's
finances for the year. The Executive regulates spending of the money through
statutory and non- statutory rules and instructions framed by the Finance and
Administrative ministries and incorporated in various codes of the Government like
general financial rules, treasury and public works manual, etc. However, Parliament is
not satisfied merely with voting of the funds and wants to know whether the funds
granted by it have been put to the intended use and administered prudently. Thus,
Parliament ensures through the instrument of the Comptroller and Auditor General
(CAG), whose independent position is guaranteed under the Constitution. Cases of
waste, misuse and excess utilization of public funds are reported by the CAG to the
House through the Audit Report and Appropriation Accounts. These reports form the
basis for the Public Accounts Committee to conduct its examination of public
finances and complete the circle of Parliamentary financial controls.
489. Chartered Secretary lsaie: January, 1990, By ER B.P, MATHUR, Member, Audit Board, New Delhi .
349
In contrast, public enterprises enjoy considerable freedom from traditional

governmental financial practice and control, the prime elements of which arm)
freedom from the annual appropriation process, at least for operating expenses; (ii)
freedom to receive and retain operating revenues; (iii) freedom to apply operating
revenues to operating expense*; ( ) freedom from general governmental restrictions,
particularly in the field of expenditure: vJ freedom from normal government
appropriation accounting; (vi) freedom from normal government audit of operation; (vii)
freedom from central purchasing and contracting requirements; (viii) freedom to control
its long-term planning; and (ix) other related freedoms like borrowing money, hiring and
firing of staff and fixation of pay and salaries at the discretion of the enterprise.
Having given such a large measure of freedom in the interests of autonomy of
the public
enterprises, Parliament and the Government are naturally anxious that they should
be accountable for their working and for the huge investments made in them
Moreover, it is here that the problem arises of striking a harmonious balance

between "control" and "delegation" and evolution of the right kind of "checks" and
"balances" so that while the public enterprises maintain their accountability, their
operational efficiency does not suffer.
Parliament financial control over public enterprises is largely post facto. The
budget estimate of public enterprises do not form part of the national budget and,
hence, they are not discussed on the floor of the House nor are they subjected to the
usual Parliamentary procedure of cut motions, annual appropriation and vote on
account.
However, almost all the government companies and statutory corporations are
financed initially out of grants from the Consolidated Fund of India. When a new
company is formed, a "demand for grant" of its financial requirements is placed
before the House, thus, affording it an opportunity to examine the quantum of
investment and the form in which it is proposed to be made.
490. UN: Some problem in the Organization and Administration of Public Enterprises in Industrial Field (Technical A distance
Administration, New York 1954.)
But once the amount is voted out of the Consolidated Fund and a company is
incorporated, Parliament has no further opportunity to discuss the affairs of the
company, unless in a particular year, it is seeking capital or loans from the
Government arid a provision to that extent in its budget estimates has been made.
5.6.1. Committee on Public Undertakings
During the fifties, the Indian Parliament was considerably exercised over the
problem of adequate Parliamentary control over public enterprises and on seveml
occasions animated debates took place on the floor of the House. With a view to
examining the problem in depth, a Sub-committee 4” of the ruling party in
Parliament was appointed under the chairmanship of Shri V.K. Krishna Menon. The
Sub-committee suggested that a separate Committee of Parliament be comtituted
for public undertakings. The Sub-committee observed: "We look forward to the
situation where this Committee, while by no means being an expert committee
(such is not the intention), would be a well-informed commmee, informed of all the
circumstances in which the concern functions. The purpose of our recommendation
would be adversely affected if either the Committee or Parliament becomes imbued
with the feeling that it is a fault- finding body or that it is a super board of
management."
As a result of the Krishna Menon Sub-committee's recommendations, a Committee

on Public Undertakings (COPU) was constituted from l May, 1964. The functions
of the Committee are to examin a) the reports and accounts of public undertakings;
Q2 the reports of the Comptroller and Auditor General on the public undertakings;
and (c) in the context of the autonomy and efficiency of public undertakings,
whether the affairs of the public undertakings are being managed in accordance
with sound business principles and prudent commercial practices. The
Committee was not charged with the responsibilities of examining matters of major
government and matters of day-to-day administmtion.
The COPU primarily took over the functions of the Public Accounts Committee and
the Estimates Committee and has at its disposal the technical expertise of the
Auditor General.
5.6.2. Comptroller and Auditor General
It is a condition of auditor's duty that he should be independent of the Executive.

Article
148 of the Indian Constitution guarantees independence of Comptroller and Auditor
General (CAG) who is the administrative head of the Indian Audit & Accounts
Department. CAG is appointed by the President of India under his hand and seal
and can 6e removed from Office only in the same manner as a Supreme Court
Judge. The Comptroller and Auditor General's Act, 1971 lays down duties and
powers of CAG. The Indian Audit & Accounts Department is responsible for
auditing all transactions of the Central Government including Railways, Defence
and Posts & Telegraph. This covers audit of departments connected with Government
receipts like income-tax, central excise and customs.
5.6.3. Audit Board
Barring exceptions like Railways and Posts & Telegraph, the Government’s commercial
activities have been organized either in corporation or company form. The Oil and
Natural Gas Commission, Air India, State Electricity Boards are organized in
corpomtion form and the Act governing them provides for sole audit by CAG (there
are some corpomtions like LIC and banks which are not subject to CAG's audit).
Most of the Government's commercial undertakings are organized in company

form, which means that they are incorporated under the Companies Act with at
least 51 per cent shareholding by Central or State Government. They fall within the
purview of CAG's aud‘it under section 619 of the Companies Act.
The Indian Audit & Accounts Department recognizes the special nature of the
functioning of Government companies and corporations, where decisions have to be
taken on business considerations unlike Government Departments which lay greater
emphasis on conforming to well established rules and procedures. Accordingly,
during the last fifteen years the Audit Department has shifted its emphasis from
'regularity audit' to what may be called 'value for money audit' or 'efficiency-cum-
performance audit'. Efficiency-cum-performarce audit is a comprehensive appmisal
of the progress and efficiency of the execution of various developmental programmes.
An attempt is made to assess and appraise to what extent social and economic
objectives sought to be achieved have actually been achieved and at what cost, and
to examine how far the agency is adequately discharging its financial
responsibilities and ascertain whether the schemes are being executed and their
operations conducted economically.
5.6.4. The Chartered Accountants’ Audit
Government companies are subject to two kinds of audit, efficiency-cum-

performance audit and the audit of annual accounts and balance sheet. The annual
accounts of the company are first audited by a team of chartered accountants and
subsequently, subject to test check by Government audit. Sometimes views are
expressed that supplementary audit by Government auditors is superfluous and
could be dispensed with.
These views are expressed due to inadequate understanding of the fact that
Government companies are an extended arm of the Government. It is felt that
efficiency-cum- performance audit and balance sheet audit are part of one
integrated 'audit system' and it is not possible to do justice With efficiency audit
without conducting audit of annual accounts. Government auditors understand the
ethos in which public undertakings function. Profitability of many State enterprises
show much rosier picture than the actual one due to numerous factors like subsidy
they get on account of administered prices; loan is converted into equity from back
date; income is taken as having 'accrued’ by merely putting a demand on
Government without firm commitment.
Sometimes, these enterprises camouflage their financial health by giving qualifying
notes to the balance sheet. It is the duty of Government Audit to bring the impact of
such camouflaging on the profitability ot the company for the benefit of
Government/Parliament, a job which chartered accountants cannot perform as
effectively as Government auditors can, because of their relatively lesser exposure
to the manner in which government transactions are carried on.
5.6.5. Audit provision in other countries
It should be mentioned here that audit by supreme audit institutions are expressly
provided in the Acts 4’ 2
governing State enterprises in most of the democratic
countries of the world with the possible exception of Great Britain.
In U.S.A., auditing is carried out by Comptraller General‘who is not only an auditor

but a critic of policy. In Australia, the audit is generally made by the Comptroller &
Auditor General. In the systems which have continental type of administrative law;
the public control follows as a matter of course from public law statutes of public
corporations. In France, they are audited by Court de Comptes (Court of Accounts)
and in Italy, by Corte de Conti, an independent Abunal. In Britain, it was for some
very special reasons that Lord Atlee's Labour government which had nationalized key
industries did not entrust the audit of these industries to Auditor General.
Lately in Britain, the Public Accounts Committee is repeatedly recommending

audit of nationalized industries to be brought under Auditor General's purview.
492.Red Friedmann & Garner (ED): Government Enterprises' A comparafive study {Stevens, London 1970)
5.6.6. Audit: An aid to management
Audit is at times looked with ance and fear and more often than not, as an
encroachment on executive function and should at best be avoided. Fortunately,
however, informed top management of public sector as well as Government regards
audit as a useful aid to management. Over years Audit Department has shifted its
emphasis towards 'systems review' and 'Value-for-money audit' and its basic objecti
ce is coincidental with organizations objective of efficiency, integrity and economy.
For example, while appraising the performance of Richardson & Cruddas, it emerged
that the company has a chance to succeed only if its past losses, mainly due to heavy
debt repayment liability, are written off. Taking this cut, Government subsequently
wrote-off the losses and worked out a reorganization package with. a view to make
it a viable unit. Similarly, examination by Committee on Public Undertakings
helps the public enterprises to re-orient some of their basic policies. To cite an
example, sometimes back General Insurance Corporation came up for COPU's
review. As a result of its recommendation, the Corporation has started placing greater
emphasis on rural insurance and better service to its clients in settling claims.
Examination by Parliamentary Committee has one more advantage. Public sector
chiefs and representatives of the Government get a chance to present their
viewpoint in a cool, dispassionate manner before the Parliamentarians, free from the
passions of a debate on the floor of the House, which is invariably on party lines.
5.6.7. Conclusion
To conclude, inclusion of IDs on the boards of PSEs will definitely aid in

improving the standards of VG. Besides the apparent benefits, the presence of
IDs will strengthen the hands of the CEO in resisting the usual pulls and pressures
to which the PSEB are subject to.
Rowever, it needs to be ensured that the selection process is such that it enables
identification of persons with the required expertise, skllls and independent
dispos’ition. As such, reform of the presence selection procedure of IDs, undertaken by
the PESB need to be undertaken on a priority.
5.7. Board Dynamics in Indian Public Enterprises 493
The board of directors of a corporate enterprise is not merely a legal enfity created
to fulfill a legal requirement but is a living organ and much depends on how it is
constituted and allowed to function. Government, through Public Sector Enterprises
(PSUs), performs the role of entrepreneur, planner, investor and developmental banker,
regulator and accountable to the nation through Parliament. PSUs are expected to
function u'ithin the framework of National Planning and are used by the Government as
a key-instrument for the realization of plan objectives. There are complex sectoral,
inter-sectoral and circular relationships and linkages in PSU functioning. PSUs are,
therefore, no islands into themselves and decisions taken by one may affect the fortunes
of others. For instance any unilateral change in the price of coal will affect power,
stéel, railway which, in turn, will have chain impact on other sectors.
5.7.1. Controls
Considering the diversity of PSUs and the magnitude of public investment, monitoring
and control functions are exercised by the Government by making enabling
provisions in the articles of association v check on composition of the board of
directors, nominating Government officials on the board, placing restrictions on
the powers of the board, making approvals of the Government in certain cases
mandatory and vesting the power to issue directives with the Government etc.
493. Chartered Secretary issue: May, 1997, Article by O.K. Bebber, Executive Director (Law) & Secretary, NTPC, Ltd.
The PSUs are placed under the administrative control of Ministry Departmem of the
Government, which overviews the enterprise; takes periodical reviews of managerial
and operational performance and sanctions capital schemes and issues formal and
informal instructions to be carried out by the enterprises. Other Agencies viz.
Parliament, Parliamentary Committee on Public Undertaking (COPU), C&AG, PIB,
Planning Commission, Consultative Committee etc. also keep watch over these
enterprises. In addition, there are plethora of legislations which govern the
functioning of these enterprises.
The definition of a government company, permits equity participation by the

Government in these companies ranging from little over 50 per cent to 100 per cent.
Accordingly, there are Government Companies fully or partly owned by the Central
and/or State Government(s); subsidiary and holding companies, having participation
of foreign/domestic collaborator or public at large, etc. Fully owned Government
Companies are generally in core sectors like coal, power, steel, petroleum, fertilizer, etc.
Centml Government enterprises have been categorized as Schedule "A", "B", "C and
"D" Companies on the basis of certain specified parameters which, inter alia,
include capital employed, size of the company, man-power, production/services,
importance to the national economy complexlty Of operations etc.
5.7.2. Composition of Board of Directors
The composition of the board of directors of the public enterprises differs

widely from enterprise to enterprise depending upon the nature of business
activity, participation in equity capital, location etc. In the case of wholly owned
government companies, the right to constitute the board of directors vests in the
President. The President of India appoints functional directors including chief
executive and Government officials of the various Ministries/Departments
depending upsn their involvement in the enterprise.
Government officials include two officials of the Ministry / Department
administratively in charge of the enterprise one of which represents associated finance.
In case of nartly owned public enterprises, the right of representation on the board of
directors depends upon the share in equity participation and/or mutual
understanding/arrangement with the co-partner. The board of directors of the subsidiary
companies is constituted either by the holding companies or by the Government
depending upon the provisions in the articles of association of the enterprise.
Sometimes chief executive/functional directors of the associated/allied industries in the
public sector are also nominated on the board of directors of inter-related companies in
order to have effective coordination between the two enterprises. In order to broad-base
the board, the Government in recent time.s, has been appointing academicians,
professionals, workers' nominees (genemlly trade union leaders) on the board of some
selected public enterprises. Sometimes, MPs / MLAs also find place on the board. The
Central Government has set up Public Enterprises Selection Board (PESB) for the
selection / recniitment of technical/ professionally competent people to shoulder the
responsibilities as full-time chief executives (Chairman/CMD.MD) and functional
directors in the public enterprises. PSEB recommends the names of the incumbent to
the respective Administrative Ministry who after taking approval of the Appointment
Committee of the Cabinet (ACC) issues the order for appointment off MD/FDs. PESB
selection procedure does not apply for part- time Government official / non-official
directors.
5.7.3. Power of Board of Directors
The board of directors of PSUs, like pri•zate sector companies, has all powers of
management except in respect of those matters which have been specifically reserved
under the Companies Act, 1956 for approval of the company in general meeting.
Arocles of Association of public enterprises also provide for certain further restrictions
on the power of the board.
These generally relate to composition of the board appointment / reappointment /
retirement and termination of directors (whole-Eme or part-time), to incur expenditure
on capital schemes. foreign collaboration, winding up and matters involving
national security or of substantial public interest. The Government delegates to the
board certain powers essential for smooth functioning of the enterprise. These powers
generally depend upon the size, nature and gross block of the company. Out of these
delegated powers, the board delegates either full or partial powers to the chief
executive of the enterprise. Thé delegation of powers to the chief executive of large
public enterprises are now quite often made by exception (negative powers) i.e.
except on certain specified matters which will need approval of the board of
directors / Gox4. of India, he can exercise full powers of the board on all other
matters.
5.7.4. Part-time Chairman vs. Full-time Managing Director
In public sector enterprises, the two posts, i.e., the chairman and the managing
directors are sometimes combined in one i.e., chairman and managing director
(CMD) and sometimes these two posts are kept separate. There have been cases
where part-time chairman have been a.npointed in addition to full-time managing
director (MD).This situation has considerable bearing on the effectiveness of
management. It is undoubtedly the function of a chairman to preside over the
meetings of the board of directors and shareholders' meetings. As a director, in
addition to being chairman, he equally shares the responsibility which the Companies
Act, 1956, has placed on all directors. Though a part- time chairman has no executive
functions to perform, the position is one which vests it with certain degree of
influence in the affairs of the enterprises and his advice has a greater weight than that
of MD in the board meetings. While some part-time chairman are content to restrict
their activities and their interest to board meetings, others may go well beyond the
board projecting themselves as authorities parallel or even superior to The
latter instances have given rise to possibilities of conflict but even in former cases
the MDs have found themselves at a handicap.
359
While executive responsibilities are vested in MDs, they have found themselves,
unless they have perfect understanding wnth their chairman, faced with rival centers of
influence at board meetings. The confidence which a h4D has a right to expect of his
board may not exist in such situation. This divorces power from responsibility and
has, in it, the seeds of friction. To the extent possible, this situation should not be
allowed to take place or to continue for long in the overall interest of the enterprise.
The responsibility for management must necessarily vest in MD who is chief
executive. This situation is different from where the Government appoints a whole-
time chairman in addition to one or more managing directors and functional directors.
The chairman in such situations is the chief executive and accountable to the board
for the ovemll performance of the corporation.
5.7.5. Chairman Vs. Functional Directors
Though the relationship among all the directors on the board is envisaged to
be that of equals under the provisions of the Companies Act, 1956, it does not
appear to be so in public sector enterprises. Firstly, the chairman is one level
higher in pay scale than that of functional directors. Secondly, the chairman being
the chief executive, irrespective of his scale of pay, is the organizational head
accountable to the board for overall performance of the enterprise unlike a
functional director whose authority is confined within his functional area only. The
authority of the chief executive travels all over the enterprise. The chief executive
generally is delegated with substantial powers of management and in emergency, with
full powers of the board between two board meetings. He is the fountain head from
where powers flow to other functionaries. The functional directors too get their
powers from the chief executive who has the authority to restrict, curtail or even
revoke these powers depending upon the circumstance and trust he has in his
directors. This, to some extent, is necessary to demonstrate his supremacy and to
arm him with powers to control and coordinate various functions. Thirdly, chief
executives of MOU signing companies have been authorized to make transfer or
reallocate the areas of responsibilities of functional directors of their enterprises.
All these factors have reduced the position of functional directors to a high profile
employee accountable directly to the chief executive and have caused virtual loss of his
entity as a part of the group, namely the board. He prefers ordinarily to keep silent rather
than to speak or oppose or give his free and frank views. He is always in dilemma If he
being one among the equals takes a stand against the chief executive on an important
issue, the authority and wisdom of the chief executive is subjected to question which may
not be in the interest of the enterprise. On the other hand, if he simply submits to the chief
executive, the company would be denied of its rights of collective wisdom and the very
purpose of keeping a functional director on the board is frustrated which would, again,
not be in the interest of the company. The board meeting would get reduced to iriter-
face between the chief executive on one side and external directors on the other side;
functional directors merely providing information / assistance to the CEO. The solution
to this state of affairs can not be found in legal framework. To be an effective and
efficient team, healthy culture and sound conventions need to be built up where both
frankness and restrain will have to be appreciated. This would depend squarely upon
the management style of the chief executive and the functional directors and also
squarely on the Ministry/Department on the type of interface they expect from the
enterprise.
5.7.6. Government Representatives on the Board of PSUs
Among the numerous links and mechanisms which bring the Government and PSUs
closer together and narrow the "arm's length" distance, one is via Government officials
nominated on the boards of directors of PSUs. This link is formalized by articles of
association of the PSUs. Keeping in view the multiplicity of objectives and the
importance of many of these from the point of view of Government policies,
nomination of Government officials on the board of directors of PSUs provides very
useful link between PSUs and the Government. It is also desirable particularly because
of the complexities of modem industry and business, that the Government officials with
responsibilities for dealings with such matters should have first -hand knowledge and
experience of the actual problems, needs and requirement of the PSUs which may be
obtained through participation in board meefings. The responsibility of such officiala
while sitting on the board of PSUs is that of a director of the PSUs and not solely
as a representative of the Governmem. One of the main responsibilities of
Government directors is to act as watchman of Government interest but so are the
responsibilities of all other directors. This function, therefore, should not to be over
emphasized to the extent of creating adversary relationship between them and other
directors. The ideal situation would be to avoid, as far as possible, the paradox of taking
one position cn the Board and another at their desk in the Government. At some
quarters, it is felt that Government officials adopt a superior attitude of an owner and
try to see every proposal at the board from that angle. They tend, sometimes, to run the
PSUs under their administration at even sidelining the ground realities of various
complex issues confronting the day-to-day functioning of a large industrial
organization. Absen=w of standard pattern of directions by the Government to its
officials on the PSU board appears to be at the root of this paradoxical situation. It is
necessary for healthy growth of public enterprise that Government officials should
clearly understand that as long as they are on PSU board, they are functioning partly as
members of the top coijx›rate management and their role is to steer the PSL towards
desired national goal.
5.7.7. holding / Apex Companies
In accordance with the provisions of section 4 of the Companies Act, 1956, legal
relationship between two companies, as holding and subsidiary company is established
if one company is in a position to control the composition of the board of directors or
holds majority of paid-up share capital of other company. Purely from this legal angle,
ther* are many public sector companies having one or more subsidiary companies viz.
GITC, MMTC, STC, CIL, SAIL, etc. Though legal compliance is necessary to establish
holding-subsidiary company relationship, the holding company concept, as envisaged
for public sector has different connotations and expectations than mere legal
relationship.
Under the holding company concept, the holding company acts as a buffer between the
Government (Owner) and its subsidiary(s) companies. The holding company sets the
long term plans and objectives, both financial as well as physical, closely monitors
them and lays down broad guidelines for its functioning in consistent with plan
objective. In other matters, the holding companies and their subsidiaries would be
subject to the same control and procedure as in the case of private sector units. The
relationship between the holding company or the apex company and the subsidiary
companies or divisions would be based on the principles of centralized policy making
and decentralized operation or administration. The subsidiary companies or divisions
concerned would be delegated all the authority needed for ensuring the fulfillment of
target, and operational efficiency. The board of the apex or holding company will
coordinate the operations of subsidiary companies or divisions under their charge and
supervises their functioning as well as employment, recruitment, wages, financial and
pricing policies. Under this arrangement, the interface between tlie Government and the
subsidiary companies would be minimum without sacrificing the essential needs for
coordination of the operations of the companies. This concept is based on the
organizational structure widely practised in many European Countries such as Frarce.
5.7.8. Memorandum of understanding
MOU is an old wine in a new bottle. Under MOU public enterprise undertakes to
accomplish certain targets and the Government agrees to give necessary authority,
autonomy and assistance to the enterprise. The performance of the enterprise is
assessed on the basis of these commitments.
Different systems of performance evaluation of public enterprises are followed in

different countries depending upon the Government-enterprise relationship. In U.Kp
the concept of targeted rate of return is followed. The system of performance evaluation
in Pakistan is known as the Pakistan signaling z<ystem and has its origin in Prof.
Leroyjone's concept of private and public profitability.
Under French System, agreements are entered into in terms of which the public
enterprise binds itself to do its bit in the form of compensation for non-commercial
obligations, investment authorization, subsidization at the agreed level (where this is
envisaged as part of the agreement) Government's intervention is limited as indicated
in the agreanent.
The idea of MOU originated in India from the Aijun Sengupta Committee's
recommendations which stated that "the holding company or apex company would
specify its plan for investment, production capacity utilization, profits, dividend etc. for
a 5-year period and enter into MOU with the Government on mutually agreed basis.
Certain obligations would also be cast on the Ministry or Departments. This MOU
would be reviewed each year and updated and the performance of the holding/apex
company judged on this basis making due allowance for the failure or otherwise of the
Ministry or Department to fulfill its part of the MOL. The Government, after studying
various systems practised abroad, adopted modified version of French System of
Performance Contract Agreement.
The MOU in India have broadly been divided into three sections. Section-1 lays down the
broad goals and objectives of the enterprise. Section- If contains the commitments of the
public enterprise in terms of target for a particular year viz. turnover, value added, and
profit before tax, internal resource generation, contribution to exchequer, capital
expenditure plan, physical targets in regard to major products, targets in respect of
various productivity growth indicators and financial mtio etc. In Section-Ill assistance
expected by the PSU from the Government is mentioned. MOU signing companies
have been granted certain relaxations/powers. These are as follows:
1. The board of directors can approve the capital scheme of replacement modernization
etc. up to Rs. 100 crores and on other programmes up to Rs.50 crores. This is likely to be
enhanced further in case of “Rav Ratna“ PSUs.
2 Chief executive would be empowered to transfer functions and responsibilities as
between the full-time directors, in consultation with Secretary of the concerned
Administrative Ministry and with the prior approval of the Minister-in-Charge.
3. Chief executive would be authorized to approve official tour abroad of the full-
time directors. This power in case of non-MOU companies vests with the
Administrative Ministry. However, the chief executive would undertake such tours
only with the prior approval of the Administrative Ministry.
4. Company would be authorized to clear and release Foreign Exchange in all
cases of committed Foreign Exchange.
5. The board of directors would be authorized to sanction advance (preliminary)
expenditure on new projects to the extent of Rs. 5 crores on a scheme identified by
the Planning Commission and included in the Feasibility Report submitted to the
Government for approval.
6. In case of committed foreign assistance through bilateral or multi-lateral agencies,
enterprise would be permitted to incur expenditure upto Rs. 5 crores in foreign
exchange in each case including for obtaining consultancy services. & would also
be permitted to incur expenditure of upto Rs. one crore in each case in its
requirements of free foreign exchange.
5.7.9. Priva‘tization
The expression “Privatization” is not defined in the Companies Act, 1956. This
expression, in common parlance means diluting or off-loading the Goverment
equity holding in a PSU to private party (s), mutual funds or general public to
gradually reduce the Government's equity holding to less than 51 per cent of the
paid-up share capital. This percentage determines the controlling interest in an
enterprise i.e., control of ownership as well as management. Sometimes the
expression "privatization" is also used for privatization of management of PSU
without resorting to privatization of its ownership l.e., "private sector board” or
appointing chairman or chief executive from private sector. The State utilizes the
services of the well managed and reputed private sector white retaining ownership
control over the enterprise with itself. Once the enterprise gains health, the
management is passed back to Government.
The other possibility is like in Japan, that Government sets up the PSU and when it
is at the take-of stage, it is offered to the public. Investment is withdrawn and
utilized elsewhere where there is need for it.
The meaning of the expression "privatization" as is broadly understood in PSU

parlance is to give private sector companies, workers and other sectoral interest, a
stake in PSUs through equity sale keeping the controlling interest with the Govt.
This is precisely what Government has been doing in many cases by off-loading
PSU's equity to the financial institutions/others by lots and also to employees
keeping the controlling interest with itself.
In some cases, PSUs have allowed to raise resources through Public Issue. Shedding less
than 51 per cent equity will keep the controlling interest with the Government. This
type of equity shedding is not in legal parlance "privatization". It is in fact "publicizing"
PSUs. Irrespective of the nomenclature, participation in the equity by private parties
including employees exposes PSUs to public gaze and criticism. To that extent, it is
privatized.
The public sector has of late entered numerous other areas of activity where its
presence is not necessary to promote self sustained growth of the economy or to
serve any essential social purpose. Such areas should be left to the private sector
which has lately shown both the entrepreneurial ability and the capacity to mobilize the
financial resources on a large scale. Indeed there may be situations where greater private
sector tnvolvement or participation in areas hitherto largely retained with the public
sector could be considered on a selective basis.
The offering of shares of public enterprises to the workers and the public, while
retaining Government control, could be considered as a measure of raising
resources and improving performance.
5.7.10. Corporate Governance
Many new corporate concepts like ISO-9000, total quality management and now latest
in the series, "corporal governance" have either arrived or are knocking at the door. The
measures initiated by the Government to globalize' the Indian industry have added
impetus to these movements. With the incoming of foreign money through JV partners
of FH route, the corporate governance is assuming new importance. It is becoming
more important that companies should be made more accountable to shareholders, and
follows certain ground rules especially after moving from “permit mj to “open
economy". There is a need to have a re-look into the role of directors so that based on
professionalism and ethical standards the working of the board of directors is made
more accountable, transparent, honest and less vulnerable to manipulation to avoid
repetition of ITC and MS Shoes Fiasco and many other corporate scams, witnessed by
innocent shareholders in the recent years. These developments have put a question
mark on the composition of the board of directors and their role in the board
meeting. For the past few years, number of mergers and acquisitions are also
taking place. The Government is contemplating to issue code/rules for take over,
merger and acquisition, public issue and mtionalization of Companies Act.
The task force of Confederation of Indian Industries (CII) comprising Rahul Bajaj,
Subodh Bhargava Jameshyad N. Godre’ Dr. IJ. Irani, Tapan Mitra, Dhruv M.
Sawhney,
R.C. Bhargava, C.K. Birla, Dr. Omkar Goswami, Rajiv Kaul, K.N. Shenoy and
Shailendra Swaroop has prepared a report titled “Desirable Corporate Governance in
India-A code” which is a first Indian paper of its kind on the subject. Some of the
major recommendations of the code acid Exit of Fts from the management of
companies where, their shareholding is less than 10 per cent, (ii) Withdrawal of FI
nominees from Board of Companies which are not defaulting in loan repayment, (iii)
Transparency in credit rating of financial instruments,(iv) Removal of restrictions on
takeover of companies,(v) Debarring defaulting companies for accepting further
deposits (Government has already modifed deposit rules to this effect from March,
1997). The
Task Force has also dealt with the role of directors both executive and non-
executive dlfectors and reduction in the number of directorship one can hold. The
code has recommended transparent corporate disclosure norms for all companies
beyond a specified ceiling of the paid up share capital and has emphasized that the
quality and quantity of disclosure that accompanies of GDR issue should be the
norms for any domestic issue. It is not credible to present one set of account to
investors in New York and a completely different one to shareholders in Mumbai
and Delhi. There should be uniform disclosure norms for domestic and GDR
investors. With the changing scenario where PSUs are moving from “fully owned” to
"partly owned" and from "partly owned" to "out of the net of Government
companies" in due course of time, sharing of board composition with private
parties/financial institations/foreign partners, protection of the interest of the
shareholders, adherence to the code of conduct of corporate governance and
professionalism of corporate management will become necessary to put up a clean face.
Decade old practices of adherence to the bureaucratic control and procedures,
following unquestioningly the formal and informal instruction of the controlling
Ministries, will have to be replaced with well laid down code/rules, management
accountability, transparency in information sharing, business norms, ethics, rules,
accountability of the board including Government nominees. Over the past two
decades, there has been a sea-change in the top management of our public sector
units and thmugh concerted efforts on the part of the Government, top management
of these units have been considerably professionalized. They are committed to the
national objectives. To make the board more effective Govt. should address itself to
-
•t• What role the Government wants the Board and the Ministry to play?
•t• What should be collective and individual responsibility of a director for the
decisions taken at the Board Meeting?
What should be the role and responsibility of the Government directors
appointed on the Board?
What decisions should be left totally to the Board and to the Ministry†
* 368
The Board of directors is not merely a legal entity created to fulfill a legal
requirement. It is a living organ and much depen& on how it is constituted
and allowed to function. In the absence of role clarity, the board of directors of
PSUs cannot be expected to be performance oriented. It is on the dynamism,
professionalism expertise and strength of the directors that the future of a PSU rests.
5.8. Board of Directors in State Level Public Enterprises 4’4
In this part of the Chapter we have tried to analyze the issues coming before the
Boards of State level PEs with referee to the State like Andhra Pradesh, Tamil
Nadu, Assam
5.8.1. Legal forms of enterprise:

THE role of board of directors of Public Enterprises (PEs) in Andhra Pradesh is
defined by the geneml provisions of the statute under which the company is
incorporated, the articles of association of the company, and the directions issued by
the Government from time to time. Of the 60 PEs in Andhra Pradesh, 38 are
incorporated under the Companies Act, 1956, 5 under specific statutes, 15 have been
registered under the Co-opemtives Act, one under the Societies Act, and one is an
autonomous agency. Though there are "discussions among scholars on the suitability
of a particular form of organization for particular Public Enterprise, the general view
now held is that for certain enterprises providing public utilities which are primarily
intended to develop the basic infrastructure facilities, the statutory form of management
is preferable. For other enterprises, including some operating in the monopolistic field,
but where the commercial aspect is predominant—a company formed under the
Companies Act may be more appropriate. Where the clientele for an enterprise is
well defined and they are generally from the economically weaker sections, a co-
operative form of organization is considered more appropriate. Under all
organizational forms, the top management responsibility at the organization level
rests with the board of directors, of which two office bearers, namely, the chairman
and the chief executive, are the principal persons.

494. Chanered Secretary, Issue: January, 1990, R.NANDACOPAL, Faculty Member. I nniute of Public Enterprises, Hyderabad.
369
5.8.2. Appointment of Boards
Under the Complies Act, the board is essentially a representative body of shareholders
of owners of the company. In public sector undertakings, the total, or almost the major
share of the ownership. rests with the Government. The Government retains the right to
appoint the board of directors, and most of the articles of association of 100 per cent
Government-owned companies provide for a direct nomination of the board of
Governors. The articles also provide for the nomination to these organizations of
representatives of finance lending institutions. In the case of statutory corpomtions’
viz., the Electricity Board, t?ae Transport Corporation, the Warehousing Corporation
and the State Finance Corporation, the Acts specify the method of nominating the board
and its composition.
5.8.3. Role of Board of Directors
The issues relating to the boards formed under the .Companies Act are discussed herein
below. They apply almcst in toto to the companies under the Companies Act. Under the
Companies Act, the board has a fiduciary and managerial responsibility and is
responsible for the fulfillment of ae objectives. Its management responsibility in law is
total. It is accountable for the performance of the company and has to own full
responsibility for the success or failure of an enterprise. Generally, the board is
supposed to be answerable only to the shareholders and as such, its functions have to be
those of policy-making coupled with overall superintendence and not that of a mere
advisory body. Under the Companies Act, the board of directors is entitled to exercise
all such powers and to do all such acts and things as the company is authorized to
exercise and do. In the exercise of their powers. the board is subject to the provisions of
the Companies Act, the memorandum and the articles and any regulations, not
inconsistent with them, made by the company in general meeting.
However, under the articles of association of different companies in the public sector,
the board's powers for decisions can be limited by specific provisions in the articles.
This has been resorted to in ae PEs of A.P.
The Companies Act provides full powers to the board of directors to define and
delegate the functions of the chief executive (managing director). The managing
director is responsible for day-to-day managemem of the organization and is one of
the principal officers to shoulder the responsibility for omissions and commissions.
In the PEs owned and managed by the State, there is a three-tier managerial
responsibility for the funoioning of die PEs:
1. The minister, aided by his secretary in the administrative department in the

Government represents the topmost level of broad-policy control.
2. The board of directors of the company which has to shoulder the overall
managerial responsibility for the proper fulfillment of the objectives of the
company.
3. The chief executive assisted by the entire hierarchy of executives and workers,
who has to implement the tasks assigned, with a view to bring out the optimum
results according to different criteria on which the performance of the organization
is to be evaluated.
In Andhra Pradesh, the Public Enterprise Management Board (PEMB) has suggested
that over and above the provisions regarding the powers of the chairmen of the
boards of Directors, director and the board of directors under the Companies Act or
the other statutes, every company may constitute sub-committees to be presided
over by the chairman, for major decisions of management like purchases, recruitment,
promotions, corporate plan, etc.
Depending upon the turnover of the respective enterprises, the board of directors
may also delegate power to the managing director to sanction schemes, etc.
On the other hand in Tamil Nadu, the board of directors is given unfettered powefs
by the articles of association in all matters—some financial and recruitment powers
like the following in respect of’which prior approval of the Government has to be
obtained:
1. Capital expenditure exceeding Rs. 10 lakhs at a time (This limit will not apply
to operators of financial institutions).
2. For creation of any post in the State Public Sector undertakings if the maximum
of time scale of pay for the post is Rs.4050/- per month or more and for
appointment of any person in any post if the maximum of time scale of pay for the
post is Rs.3090/- per month or more. In Andrea Pradesh as in many other States, in
recent years, the chairman of the board of directors has been assigned a special role,
much beyond what is contemplated for the chairman under the Companies Act. This
has introduced, to some extent, a new element in the power equations of public
enterprise management.
A study of the literature on the functioning of the board of directors suggests the
following as the more a ropriate function for the different levels:
4 Minister and Secretary
They define the Government policy which has to be implemented by the enterprise
by determining the level of resources to be made available to the enterprise. They
broadly define the scope or extent of operations of the enterprise. Along with providing
resources, they fix the targets or goals to be achieved by the organization in the
short run, and in some cases, in the long run. Targets may be physical, financial or
both.
4 Board of Directors
Under the guidance of the chairman, with his newly defined powers in Andhra
Pmdesh, the board should examine the alternative ways in which the mission given
to the enterprise could be achieved and the different methods by which cost
minimization and benefit maximization could be achieved.
In other words, the board decides the principles on which the enterprises would act
so as to achieve the targets set for the organizations. In this, the full-time chairman
would have a maximum role as such persons have been selected by virtue of their
understanding the policies of the Government, or by virtue of their experience in the
particular field in which the enterprise operates.
4 Chief Executive
By virtue of his administrative experience, and the legal and administrative

responsibilities cast on him, the chief executive would have to help the board and
chairman in arriving at the correct course to be followed by the organization in the
achievement of the goals. However, the decision as to what the company should be
doing rests with the board The board, however, cannot do anything contrary to the
explicit directives given by the Government. As the enterprise form of organization
has been chosen by the Government with a view to cut the normal red tape
associated with the Government agencies, and to give a contemporary outlook to
the organization, the chief executive should have the full powers in all day-to-day
matters. His work would be subjected to periodic review by the beard.
4 Size of the Board
Under the Companies Act, every public company should have at least 3 directors
and every other company should have at least 2 (section 252), subject to this
statutory minimum limit, the articles may prescribe the maximum and minimum
number of directors for its board. The number so fixed may be increased or reduced
within the limits prescribed by the articles. Any increase beyond the maximum
omitted by the articles must be approved by the Central Government but where the
increase in the number does not make the total number of directors more than 12, no
approval of the Central Government is needed (section 259)*.
• Section 259 does not apply to a Go'zerrunent company by vitue Notification No. OSR 236 dated 31.1.1978.
373
An analysis of the articles of association of PEs in the State indicates that the
minimum number is two in most organizations, and three in others. The maximum
number varies between 9 and 15. Sorr.etime back, the Government of Andhra
Pradesh on the advice of the PEMB had issued orders dividing the PEs of the State
into companies which have essentially a clearly defined executive function and
those which have certain policy- oriented roles. In the former, the limit was to be 7
members and in the latter 12 members.
4 Tenure
One of the factors which tend to limit the eff•ctiveness of the boards of PEs is the
tenure of the board members and the discontinuity that this leads to. In most cases,
the board is fully in existence only for a part of the year. Each year, after the general
body meeting the board has to be constituted afresk Some months are lost in this
process and by the time the full board is assembled, half of the year is over, so that
the new board has barely a few months in which to function before the next annual
general meeting. The Jha Commission has recommended that the practice of all
part-time non-official directors retiring at the end of each annual general meeting
should be discontinued; that part-time non-official director should be given a spell
of three years at a time and that by means of rotational retirement, a degree of
continuity in the board should be nominated. The tenure of the board of directors has
been restricted tD one year in the State of Andhra Pmdesh, with the idea of
evaluating the performance of the members of the board and then granting extension
in deserving cases. There has been no fixed tenure for the board of directors in
Assam. In some cases, the board continues for a reasonable period of five years but
in other cases, the boards have been reconstituted frequently.The articles of
association of the companies provide for the composition of the board of directors.
The board normally consists of full-time and part-time directors. The full-time
directors include the managing director and functional directors. The part-time directors
represent the sister concerns, industries in similar-fields, professionals, nominees of
financial institutions and representatives of the Government.
In general, the boards of public enterprises consist of full-time functional directors.
Government directors who belong to different ministries and part-time directors usually
non-officials. Within the broad patter there seems to be no uniformity of practice of
principles determining the compositiotl Of individual boards.
In 1958, the Krishna Menon Committee observed that “A board should consist of
financial talent, technical skill, representatives of labour and personnel
management”. Even in 1980, there was little improvement in the composition of
boards even though the Government policy with the passage of time had undergone
a drastic change basing on the recommendation of various commmees and
commissions.
The Jha Commission (Economic Administration Reform Commission on Government

and Public Enterprise) recommended a composite body which will include a certain
number of full-time functional directors; one or two persons with experience m the
relevant industrv or business; academic or research men in the related disciplines; a
management expert; and one or two representative directors, their number being
kept to the minimum. For the sake of comparison, it may be stated that the
composition of the board is generally of the following pattern in the State of
Assam:
a. One representative of the administrative department.
b. One from the finance department.
c. A few members from other related Government departments and directorates.
d. A few MLAs, men in public service having knowledge and interest’in the
fields of the concerned State Level Public Enterprises (SLPEs).
e. Some experts in the field of the concerned SLPEs.
f. One or two representatives from concerned agencies of the Government of India.
g. The managing director of the SLPE.
With this pattern, variations occur. For example, in some boards, the politicians
may preponderate while in some others the officials may constitute the majority.
In Tamil Nadu, the board generally consists of the following members in addition to
the managing director:
a. One senior official in the rank of deputy secretary or above from finance
department as finance director.
b. One representative of the concerned administmtive department who is also in the
rank of deputy secretary or above.
c. One representative of the head of the department concerned.
d. One technical director.
e. Some eminent entrepreneurs with practical background and business experience are
also appointed as non-official director and chairman.
The source, from which chairmen are appointed, can also vary with time. Currently,
24 out of the 27 enterprises are headed by Government officers. Twenty out of
these 24 part- time chairmen are also the administrative secretaries concerned. More
than 50 per cent of the directors belong to Government service. During the period of
elected Government, MLAs and other political supporters were appointed as
chairmen and directors. In fact, during the last elected Government in Punjab, 18 of
the chairmen were either sitting MLAs or party functiomries.
5.8.4. SOME ISSUES
• Functional Directors
In many Central public enterprises, there is normally a finance director in addition

to the managing director. Some enterprises have full-time directors for diverse
funotions, such as personnel, marketing, production, technical, projects, etc. These
variations do not seem to be the result of a conscious attempt to evolve a pattern or
adopt meaningful criteria for such appointments. In the case of State level public
enterprises, only very few have a functional director on th* board.
• Government Servants on the Board
There has been a bitter controversy regarding the usefulness of having Government
servants representing the administrative ministry, the Finance Ministry and other
related ministries on the boards of PEs. The argument for their presence is that they
would have the latest details regarding the Government policies and would be able to
appropriately advise the boards. Furthermore, they can be a link between the
Government and the public enterprise and would be in a position to explain the
rationale for proposals which come from the board for government’s approval and
would be able to pilot these expeditiously within the Government machinery in
addition, it provided a good opportunity to train civil servants in enterprise
management and prepare them for executive responsibilities in the PEs at a larger date.
The arguments against the civil servants being on the board are that they tend to
exercise powers beyond those due to other directors. They often serve as the means by
which somewhat irregular suggestions from any level in the Government get
commmicated to the board.
They tend to exercise authority without responsibility. Recently, the Government of

India decided to have only one Government servant on the board of some companies
and in many others nore at all.
Considering the fact that in the PEs in Andhra Ptadesh a very large number of chief
executives are drawn from the civil service, there appears to be a need for continuing
this armngement but with a clear understanding that they would function with no
higher responsibility or powers than other directors.
A recent survey suggests that over 50 per cent of all the directors come from the
Government sector. This is fast changing and we should keep the number of Government
officials on the board at a level of not more than one-third of the total number of
directors.
• Dual Role of Government Directors
While the Government director's responsibility and obligations are those of the other
directors, he is expected to function in the interests of the company and of the
Government. As the deo-isions of the board to which a Government director is a party,
are not necessarily binding on the Government, the directors should act responsibly so
as to “bring the policy of the Government to the notice of the other directors. If the
decisions taken at the meeting are turned down or rejected by the Government, often the
Government director will soon lose his credibility. The Government directors should,
therefore, seek instructions of the Government before they come to the meeting or they
may ask for the deferment of consideration of the item, if they have any doubt or are not
clear of the policy of the Government on the subject.
• Part-time Directors
The question of the kind of part-time directors to be provided for is to ensure that the
functioning of the board is professional, managerial and decisive. Directors should be
the people who can contribute with their knowledge or experience to the efficient
management of the enterprise.
• Nature of issues coming before the Board
An analysis of the issues coming before the boards of State level PEs during a specified
period showed that the majority of matters discussed by the board pertained to
personnel and administration (35.2 %), followed by labour and industrial relations (25.6
%), planning and financial matters (20 %). Thus. only 14 % of matters relating to
production and marketing come to the board. This- situation needs immediate
correction. The board should have a clear understanding of the targets to be achieved
by the organization, fix a series of indicators for proper performance of the
organization, and most of their work should relate to a review of the achievements
against the specified indicators of performance.
378
The main reason for a very large number of personnel and industrial matters coming
before the board is the absence of manuals or handbooks of operation for the
organization which define the rules governing recruitment, training, promotion,
salaries, etc., of officials and workers. In the absence of such guidelines, every
matter becomes a subject
for the board to discuss.
Subsequently, it has also been suggested that compliance with statutory requirement
should also be reported in the agenda items of the board of directors. The State
Government has advised that for each meeting, the board of directors should discuss
certain important aspects like performance during the last intervening period, target
in terms of physical and financial for the next intervening period. This ensures that
the board reviews the performance of the enterprise at every board meeting.
Under these guidelines, amongst other things, it has been suggested that the agenda
items of any meeting of the board of any public enterprise should begin with the following
items:
1. Confirmation of minutes of the previous meeting;
2. Leave of absence;
3. Action taken on the previous minutes;
4. The production and sales targets and achievements;
5. The financial targets and achievements;
6. Manpower position, indicating the number of people in position in different grades at
the time of the last meeting and the current position with explanations for the variations;
and
7. Reporting the Government guidelines or suggestions issued to the enterprise in
particular or to all the public enterprises.
5.9. Securities Exchange Board (SEBI) in PSUs 4“
Much has been said about corporate governance in Indian corporates over the last
one decade. Corporate Governance has been sought to be codified based on various
Committee recommendations including those of the Kumar Mangalam Birla Committee
and initially introduced by SEBI in the year 2000 with a new clause 49 in the
Listing Agreement for compliance by listed entities.
Of course, the rules of corporate governance are built on the foundation of honesty
in managing corporates through a healthy and transparent set of rules with adequate
disclosures, in order to build the confidence of its stake holders while dealing with
these business entities. Today, such rules have been made virtually mandatory for
companies which have tapped the capital markets to raise resources and entered into
Listing Agreements with the Stock Exchanges. This leaves out a whole set of
corporates which have not got into the capital market bandwagon and restricted their
resource generations to sources like Bank finance, Institutional Finance and other
resources. It is a fact that these entities also depend on public funding and cannot be
left out of the scheme of things when it comes to implementing these new set of
rules of governance by incorporated entities in the country.
There are yet another set of companies incorpomted by the Central or State
Governments under the Companies Act, 1956. There are several hundreds of such
entities presently operating in the country under the special category called
'Government Company' under the Companies Act. While these entities were till some
time back operated under a totally different set of rules with several exemptions
provided under the Companies Act, over the last decade and half, these companies
have also been made to fall in line with the other entities formed under the
Companies Act in regard to the compliances under various enactments.
495. A RTICLES - ICSI Chartered Secretary Issie: June, 2008 at pg.762 By.Mr. U, J•8 ^*1Sh Nayak, FCS, Company Secretary,
HMT
To make this possible, the Central Government embarked upon a policy initiative to
liquidate their holdings in a set of Government Companies (hereafter referred as
'PSUs' for short) to partly raise the much needed resources by unlocking the wealth
and partly to create level playing field in order to foster healthy competition among
all commercial entities. During this period, many of the enactments regulating industrial
enterprise were amended to do away with the exemptions enjoyed by the
Government Companies. Starting from the early nineties, the equity of these PSUs
also came to be listed at the Stock Exchanges and they started creating value to their
owners, which was hitherto unknown and unavailable within the public domain.
Even without a public issue (IPO) is being made, the equity of these divested PSUs
were listed at various Stock Exchanges by providing necessary amendments to the
Securities Contract (Regulation) Act and the Rules thereof.
5.9.1. Listing of PSU Equity
The exercise which started primarily to raise resources and provide avenue to the
general public to share in the wealth created by these PSU monoliths, set into
motion a buzz of activity at the bourses and trading in the PSU Counters helped
contribute to sustained higher levels and volumes of activity resulting in raising of
the Indices of the major Stock Exchanges like BSE and NSE to new heights, thereby
generating considerable interest in PSU stock and bringing in enormous gains to the
investor community including the Government of India. The PSUs were necessarily
required to comply with the listing agreements signed by them with the respective
Stock Exchanges, as applicable to all listed entities without any exemption.
Over the years, these listed PSUs also tapped the capital markets to mise the
resources required by them through fresh equity issue (IPOs) and issue of
convertible debt instruments.
However, many of the other listed PSUs stayed away from the capital markets and
the percentage of their public holding in their equity capital came down over a
period of time on account of fresh equity issue made by them to the Government.
Many such PSUs have public holding ai levels less than 10% as stipulated by the
listing agreements, which requirement has since been waived in respect of listed
PSUs.
Coming back to the main theme of - Corporate Governance, the PSUs have
invariably followed a different set of rules of management unlike their listed
brethren from the private sector. A PSU is primarily regulated and administered by
its Administrative Ministry in the Central or the State Government and is also
required to follow and comply with all the Guidelines issued by the Department set
up for regulating Public Enterprises by the respective Government. The regulating
Departments have framed rules and regulations covering every aspect of man ment of
PSUs.
To cap it up, audit of PSUs is done through a multi layer of audit, covering Internal
Audit, Statutory Audit by auditors appointed by the C&AG and Government Audit
conducted through the Commercial Audit wing of the C&AG. Thus, the set of rules
and guidelines for management of PSUs, issued by the concerned Department and
the concurrent audit by the Government ‘Audit makes the management of PSUs
more transparent and susceptible to multi level scrutiny unlike other listed entities.
5.9.2. Clause 49 of Listing Agreement & PSU
With the introduction of Clause 49 in the Listing Agreement by SEBI in the year
2000 and its subsequent amendments requiring various levels of compliances by listed
entities covering issues like appointment of specified number of Independent
Directors, formation of Audit Committees and other Committees comprising of
Independent Directors, Disclosures with regard to compliance of Accounting
Standards, Risk Management Mechanism, disclosures regarding utilization of
Proceeds from issue of equity, remimeration paid to Directors etc.
These listing requirements became mandatorily applicable to listed PSUs as well without
any exception. This prompted the concerned Administrative Ministry of the PSUs fiso to
sit up and take notice of this new requirement for management of listed PSUs. The
Department of Public Enterprises (DPE) also realized the need to come out with
new set of guidelines covering both the listed as well as unlisted PSUs on the lines
of Clause 49 of the listing agreement. Accordingly, the DPE published a fresh set of
guidelines for compliance on voluntary basis by unlisted PSUs but decided to leave
it to the SEBI and Stock Exchanges to regulate the same with regard to the listed
PSUs. Even here, there are several grey areas where there are contradictions
between the DPE guidelines and the listing regulations.
5.9.3. Government Guidelines and Corporate Governance
Under a PSU set up in most of the cases, all Directors have to be appointed b;‹ the
Government in the name of the President of India. Invariably all PSUs have a
standard clause in their Articles of Association granting such powers of
appointment of Directors to the President of India. The Government has also set up
a Selection Board to identify and select PSU executives for appointment to Board level
positions. These and other non full time Directors have to be selected and appointed
by.Government in compliance with the Corporate Governance guidelines with regard
to having a specified number of independent directors. Since most of PSUs have a
full time Chairman, the mtio of Independent Directors tn be appointed on the Board
of Directors of listed PSUs go up substantially. It is here that the concerned
Administrative Ministry and the other wings of the Government involved in the
selection process encounter difficulty in identifying suitable qualified persons to be
appointed as Independent Directors in both listed as well as unlisted PSUs.
While the DPE makes out a list of names for consideration for appointment as
Independent Directors, the task is left to the individual PSUs to locate suitable
candidates fulfilling these guidelines and recommend th•ir name to the concerned
Administrative Ministry, for appointment as Independent Directors.
This task is easier said than done. It is becoming a Herculean task to locate suitable
names for appointment as independent directors as there are several criteria which go
into both the identification as well as obtaining the willingness of these persons to
accept the appointment as Independent Directors of PSUs. This was not at all
anticipated by the Government while formulating the guiddines on corporate
governance for unlisted PSUs.
Having identified and appointed the independent directors who more or less meet
the criteria, the setting up of Committees within the PSUs in compliance with the
guidelines is also not fully compatible, as many of the Independent Directors selected
and appointed by the Government happen to be former bureaucrats who did not fully
meet the criteria set out in the Corporate Governance guidelines for becoming
members of such Board level Committees. There are other Committees of. the
Board like the Remuneration/Compensation Committee comprising of Independent
Directors who do not have any major role in PSUs to decide on compensation
package as these are primarily regulated by the Government through notifications
based on the pay and compensation of Central Government employees.
Yet another aspect of the Corporate Governance guidelines is the setting up of

Code of Conduct for Directors and Senior Management of the listed Companies. It
is a well known fact that the PSUs in general have their own elaborate Code of Conduct
regulating their employees at all levels including the Directors. Hence, formulating a
separate code of conduct did not gel with the scheme of things concerning
management of PSUs and hence become a ritual and repetition of the existing Rules
rather than a system of self regulation as envisaged in the Corporate Governance
guidelines.
Another issue is that of the whistle blower mechanism to be adopted in listed
Companies. As regards PSUs, they are open to scrutiny at all levels. Every action of a
PSU is treated akin to Government action and is subject to challenge by way of
Writ Petitions in High Courts and the Supreme Court. Moreover, with the Right
to Information Act, 2005 coming into force, every piece of information concerning
PSUs (except for those commercially confident information) are also more and
more within the Public Domain and such requirements only add to the burden of
listed PSUs.
5.9.4. Conclusion
In conclusion, it may be stated that the concept of corporate governance in PSUs,

make them alive to the need for better transparency in their dealings not only for
their rightful owner viz. the Government and its various arms, but also to its public
shareholders, the large Investor community who have their stake in PSU Stocks and
the large body of stakeholders who depend on these PSUs directly or indirectly for
their livelihood.
Having said this, the Government companies have a totally different and some kind
of a special role to play, with a fine balance between its commercial interest with
profit motive and the different kinds of social obligations that it has to discharge, in
so far as perpetuating the policies of the Government as a responsible Citizen of the
Country with last resources under its command.
One cannot forget or brush aside this important duty towards the public merely
because of its objective of sub-serving the interests of investors/shareholders.
Thus, a PSU has to play an important role in perpetuating the importance of

corporate governance in its management as it hitherto played as a model
employer.
385
However, the task is daunting and unless the PSUs are able to garner its resources
especially its vast human resource to espouse this cause despite all hurdles that they
face in ensuring compliances of various Government policies, rules and guidelines, the
entire structure should not crumble under the u'eight of over governance and missing its
primary objective of remaining commercially competitive to face the realities of doing
business in the. most profitable manner.
In other words, the PSCs also cannot use its Government tag to cover its inefficiencies
and expect investor inteyest in contributing to its fortunes and growth. After all, the
rules are the same and a PSU has also to draw up its balance sheet and profit and loss
account like its private sector brethren. It is no doubt a ’tight rope walk and the one
who can walk till the end, succeeds at the eel of the day.

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1

Directors in Public Sector Undertakings

.A discussion of Corpomte Boards of Public Sector Enterprises in India assumes a

5.1.1. Meaning of Public Sector Undertakings e SUs) or

A public sector undertaking is an industrial or commercial undertaking owned

1. State Ownership: A public sector undertaking is owned either by the Central

5.1.2. Evolution of Public Sector in India:

1. At the commencement of 1" 5yr.plan 29

484. Source: I.C.Dhingra, Indian Economy, p.415

1. Basic infrastructure: PSUs have been established to develop railways, road

2. Planned Economic development: In India, PSUs have been set up to achieve

3. Balanced Regional Development: Pb“Us have been established in

4. Generation of Employment: As a welfare State, the government is responsible

6. Control of monopoly: PSUs are also established and used as a means of

5. 1.4. Forms of Organization in PSUs:

A Comparative view of Forms of Public Sector Undertakings

Factor of Departmental Public Government Control

1. Establish By a ministry By a Special Act By incorporation By a ministry

3. Capital Annual Budget By the Govt.

4. Borrowing Cannot borrow Can borrow Can borrow Cannot borrow

5.Management Govt. officials Board of directors Board of directors Govt officials

8. Terms of Civil Service Gontractof Contract of Civil Service

9. Autonomy None Considerable Considerable Little

10. Flexibility Little Considemble Enough Little

5.1.4.1. Departmental Undertakings:

Departmental organization is the oldest form of Public Sector Undertaking. It is

s.1.4.2. Public or Statutory Corporation:

.X public corporation is an autonomous undertaking created by law to carry on the

o.1.4.4. Management Control Boards:

.S management control board is a special form of organization adopted in India for

5.1.5. Achievements of PSUs in India:

5.1.6. Managerial problems of PSU:

5.3. Reform of selection process and functioning of the Board of PSEs

i@) To infuse greater standards of CG, it is imperative that the posts of

To conclude, inclusion of IDs on Boards of PSEs will definitely aid in improving

5.5. Corporate Governance in Public Sector Undertakings "'

5.5.2. Corporate Governance & PSUs

These listing requirements became mandatorily applicable to listed PSUs as well

There are other Committees of the Board like the Remuneration/Compensation

Every action of a PSU is treated akin to Government action and is subject to

Thus, a PSU has to play an important role in perpetuating the importance of

5.6. Accountability of Public Enterprises 4"

ACCOUNTABILITY is one of the most difficult and controversial problems in the

In contrast, public enterprises enjoy considerable freedom from traditional

Moreover, it is here that the problem arises of striking a harmonious balance

5.6.1. Committee on Public Undertakings

As a result of the Krishna Menon Sub-committee's recommendations, a Committee

5.6.2. Comptroller and Auditor General

It is a condition of auditor's duty that he should be independent of the Executive.

5.6.3. Audit Board

Most of the Government's commercial undertakings are organized in company

5.6.4. The Chartered Accountants’ Audit

Government companies are subject to two kinds of audit, efficiency-cum-

5.6.5. Audit provision in other countries

In U.S.A., auditing is carried out by Comptraller General‘who is not only an auditor

Lately in Britain, the Public Accounts Committee is repeatedly recommending

To conclude, inclusion of IDs on the boards of PSEs will definitely aid in

5.7. Board Dynamics in Indian Public Enterprises 493

The definition of a government company, permits equity participation by the

5.7.2. Composition of Board of Directors

The composition of the board of directors of the public enterprises differs

5.7.3. Power of Board of Directors

5.7.4. Part-time Chairman vs. Full-time Managing Director