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Independent directors hard to come by on boards of central PSEs

business Updated: Nov 14, 2016 15:44 IST
Jyotindra Dubey
Independent directors

An analysis of the top 32 central public sector enterprises (CPSEs), which are part of the BSE 500 companies (excluding public sector banks), shows that as many as 26 companies do not have the mandated number of independent directors on their boards.In another case, as many as seven CPSEs did not have a woman director on board as of March 31, 2016.

New Delhi: If you thought that public sector units always lead by example, think again. There’s at least one area where they are missing the yardsticks by at least a mile — corporate governance.

Sebi regulations and the Companies Act, 2013 have laid down specific rules on corporate governance. But surprisingly, companies where the government still holds majority stake, do not comply with this.

An analysis of the top 32 central public sector enterprises (CPSEs), which are part of the BSE 500 companies (excluding public sector banks), shows that as many as 26 companies do not have the mandated number of independent directors on their boards.In another case, as many as seven CPSEs did not have a woman director on board as of March 31, 2016.

SEBI (LODR) Regulations, 2015 require at least half of the board of directors to be independent, if the chairman is an executive director; according to rules, it is compulsory to have at least one woman director on board.

Sample this.

Public sector major GAIL, which has a board size of 10, has only four independent directors and no woman director as of March 31, 2016. The last woman director had quit the board in January 2016.

GAIL, a CPSE under the petroleum ministry, said in its annual report 2015-16: “Government of India is seized of the matter pertaining to appointment of the requisite number of independent directors including woman director on the board of the company. The Government of India is in process of selecting requisite number of independent directors including woman director.”

NHPC, MMTC, Container Corp and Rashtriya Chemicals & Fertilisers are among the central PSUs, which do not have adequate number of independent directors and woman director on board.

At least 215 independent directors either resigned or were not re-appointed since 2013-14, according to Prime Database.

According to corporate governance experts, the process of appointing a director on the board of a CPSE is an elaborate process. Both the department of personnel and training (DoPT) and the home ministry are involved in the process along with the nodal ministry that governs the concerned company. In case of a vacancy, the nodal ministry recommends at least three people for each post to the DoPT. A search committee headed by the DoPT secretary finally selects the candidate. The panel comprises the DPE (Department of Public Enterprises) secretary, secretary of the nodal ministry (which governs the CPSE) and 2 non-official members.

A top official of the DoPT told HT that there were a quite a few vacancies, and these would be filled very soon.

“We are in the final stages of inter-ministerial consultations and this process would be concluded very soon,” said the official quoted above.

The companies mentioned in this story did not respond to HT’s requests for comments.

During 2015-16 (till November), the search committee had met six times and recommended names for filling up 143 positions of non-official directors on boards of various CPSE, according to the annual report (2015-16) of the Department of Heavy Industries and Public Enterprise.

“The government, being the largest shareholder, is not showing any intent. The ministries and the bureaucracy take inordinate times in appointing directors,” said Shriram Subramanian, managing director of InGovern Research, a proxy advisory firm.

The Ministry of Corporate Affairs exempts CPSEs from various corporate governance disclosures otherwise mandated by the Companies Act, 2013. Some of these exemptions include exemption from pay-ratio and board evaluation disclosures in annual reports and exemption from restricting independent directors from having pecuniary relationships with the said companies.

Sources in the above mentioned companies, on conditions of anonymity, said while most CPSEs are listed companies, in spirit they are dependent mostly on the government for even their day-to-day functioning. Fewer independent directors on boards of listed companies also lead to non-compliance of corporate governance measures, such as independence of crucial committees (see graphic).

12 CPSEs do not have enough independent directors in audit and nomination and remuneration committees; Also, six CPSEs do not have a single independent director on corporate social responsibility (CSR) committee. Both these are against Sebi rules.

Shipping Corporation of India (SCI), for instance, could not constitute these three crucial committees for the entire financial year as independent directors resigned one after the other.

“The audit committee had become non-functional as a result, no audit committee meetings were held in financial year 2015-2016.” according to SCI’s annual report for 2015-16. “Similarly, CSR and nomination and remuneration committees were also not constituted and no meetings were conducted in the whole of last financial year.”

“CPSEs are governed by the ministry, despite being listed companies; the accountability has not really changed for them. The ministry and the listed CPSEs are still accountable to Parliament. Consequently, market expectations and Sebi’s rules become secondary. But CPSEs must appreciate that public shareholders have expectations regarding governance standards, and on this, investors must not be short-changed,” says Amit Tandon, managing director, institutional investor advisory services (IiAS), a proxy advisory firm.

(with inputs from Aloke Tikku and Suchetana Ray)