Lax governance norms for state-owned firms leading to lapses: Report

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The significant asymmetry in corporate governance norms for Indian Central Public Sector Enterprises (CPSEs) and their private sector counterparts leads to lapses in governance, says a study by Vidhi Centre for Legal Policy.

The report, which examined corporate governance distortions in cases such as the ONGC-HPCL merger, merger of State Bank of India and its associated banks, and Coal India, notes that an alternate legal framework for corporate governance of CPSEs in the form of the guidelines issued by Department of Public Enterprises does not serve any purpose, especially given the poor enforcement mechanisms under this alternate framework

“Given the enormity of the government’s ambitious divestment programme (targets for the present fiscal year are as high as ₹800 billion [US$11 billion]) the immediacy of corporate governance reforms cannot be understated. Levelling the regulatory framework for CPSEs should figure at the top of the reform agenda,” said co-author of the report Vedika Mittal Kumar, senior research fellow at Vidhi.

The alternative framework applicable to CPSEs lacks teeth, noted Param Pandya, research fellow at Vidhi, and a co-author of the report.

“The mainstream laws, for instance, the Companies Act, 2013, have exempted CPSEs from the full rigour of related party transactions. This, along with Securities and Exchange Board of India’s listing norms for CPSEs, further dilute this requirement. Further, the determination of ‘relevant experience and expertise’ in case of appointment of an independent director to CPSEs is left to the respective ministries in-charge of the CPSE, which, according to a World Bank report, may leave room for political appointments,” Pandya told the India Business Law Journal.

Doing away with exemptions from corporate governance norms under the Companies Act, 2013, granted to CPSEs will test them against a robust legal framework with an effective enforcement mechanism, Kumar said.

A purpose-based classification of the exemptions granted to CPSEs must be conducted to understand if there is a need for the exemptions in the first place. However, exemptions may be retained for sectors that are vital for national security such as defence, space and atomic energy, she said.

The report compared three legal jurisdictions – Singapore and Norway – both considered to be the gold standards for state owned enterprises’ (SOE) governance and Brazil, a comparable jurisdiction to India, where SOEs largely operate in a competitively neutral legal environment.