Political versus Corporate Governance

1. Political versus Corporate Governance In Parastatals Samir K. Barua

2. Political Governance Political governance deals with the manner in which those who occupy political and administrative office design/frame processes, rules, regulations and laws and oversee their observance so as to ensure responsible and fair stewardship towards more progressive levels of human and social development for the present generations as well as generations unborn. (Synthesized from various definitions available on the web) Samir K. Barua

3. Corporate Governance Corporate governance is the method by which a corporation is directed, administered or controlled. It includes the laws and customs affecting that direction, as well as the goals for which it is governed. The principal participants are the shareholders, management and the board of directors. Other participants include regulators, employees, suppliers, partners, customers, constituents (for elected bodies) and the general community. (en.wikipedia.org/wiki/Corporate_governance) Samir K. Barua

4. Corporate Governance "Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society" (Sir Adrian Cadbury in 'Global Corporate Governance Forum', World Bank, 2000) Samir K. Barua

5. Parastatal Corporation wholly or partially government-owned and managed. Although ostensibly managed semi-autonomously, boards of directors are often subject to the political guidelines of the government. (www.photius.com/countries/mexico) A semi-autonomous, quasi-governmental, state-owned enterprise.(countrystudies.us/south-africa) A government owned company.(www.fao.org/docrep) Samir K. Barua

6. Plan of Presentation - Discuss a few issues in the context of dis-investment of government’s stake in PSUs. • Discuss a few more issues in the context of clause-49 of the listing agreement that listed companies have to abide by. The presentation draws on my direct experience of being on the boards of a few parastatals. Samir K. Barua

7. July 6 , 1991 Samir K. Barua

8. 47 tons ofGoldfrom the vaults of RBI air-lifted to London and deposited in the vaults of Bank of England Samir K. Barua

9. Earlier, government had leased 20 tons of gold to State Bank of India to be sold in the international market Samir K. Barua

10. There was acute crisis in the external sector and the inflation rate had climbed to 17% Samir K. Barua

11. The government turned to IMF and the World Bank for assistance … Samir K. Barua

12. … The international agencies were particularly critical of the poor returns on PSU investments and the budgetary support to PSUs Samir K. Barua

13. Letterfrom FM to World Bank Promised • No new PSUs, except in core sector • No further nationalisation of sick units • Initiation of closure of unviable units • Establishment of a time-table for eliminating budgetary support • Granting greater autonomy to PSUs to cope with harder budgetary constraints Samir K. Barua

14. Breath-taking speed of action • Disinvestment of upto 20% of government holding in PSUs (Chandrashekhar Govt) • Narsimha Rao government cleared disinvestment of upto 49% • DCA advised the government that it could think of divesting upto 74% holding • DPE advised the government to divest stakes in profitable companies to create a favourable environment for PSU divestment • The government cleared listing of PSU stocks Samir K. Barua

15. Well begun … • The international funding agencies would not permit adjustment of money raised through divestment against fiscal deficit – they finally relented and permitted 2500 crore to be adjusted • The securities scam gave the much needed ammunition to opposition parties whose opposition till then had been muted • There was dramatic improvement in the external sector … remained half done! Samir K. Barua

16. Violations of market norms and regulations • PSU stocks exempted from norms for shareholding pattern for listing • Exempted from providing the mandatory information for an IPO • Shares sold only to Mutual Funds, Insurance Companies, Banks and Investment Institutions Samir K. Barua

17. The unusual method of bundling of several shares was adopted for selling shares – shares of very good, good and not so good companies comprised the packets that were offered for sale Samir K. Barua

18. What is wrong with “bundling”? Scrip A Scrip B Bidder 1 70 30 Bidder 2 30 70 The price realized would be 50 for both the scrips – while if the shares were to be auctioned individually, the price realized would be 70 for each. Samir K. Barua

19. Record of Divestment (Figs in Rs. Crore) Samir K. Barua

20. Year Target Actual Method 1991-92 2500 3038 Bundling 1992-93 2500 1913 Auction 1993-94 3500 Nil Auction 1994-95 4000 4843 Auction – NRIs allowed 1995-96 7000 362 Auction + Fixed Price 1996-97 5000 380 GDR (VSNL) 1997-98 4800 902 GDR (MTNL) 1998-99 5000 5371 GDR, Domestic Market, Cross-holding 1999-00 10000 1584 GDR + Strategic sale Total 44300 18393 Record of Divestment (Figs in Rs. Crore) Samir K. Barua

21. Record of Divestment – recent years (Figs in Rs. Crore) Samir K. Barua

22. Extent of Budgetary Support (Figs in Rs. Crore) Samir K. Barua

23. Extent of Budgetary Support *(Figs in Rs. Crore) Samir K. Barua

24. Extent of Budgetary Support *(Figs in Rs. Crore) Samir K. Barua

25. Extent of Budgetary Support *(Figs in Rs. Crore) Samir K. Barua

26. The budget constraints have become much harder considering the fact that with the opening up of the economy, PSUs need greater injection of funds to become competitive through technology up-gradation, rightsizing, scaling-up and widening of scope of business Samir K. Barua

27. Disinvestment in the Oil Sector Disinvestment of government stakes in oil companies became a hotly debated issue. The flip-flop by the government over the four and half years, from Jan 1, 1999 to June 30, 2003, resulted in the following: the four days on which the stock of HPCL showed the maximum percentage change in price was following statements relating to disinvestment by the government! Samir K. Barua

28. Disinvestment in the Oil Sector Samir K. Barua

29. Disinvestment – opportunities for insider trading! The pronouncements on stake sale in HPCL provided opportunity for insider trading. Similar incident occurred again later with regard to the pricing of equity of public sector banks being ‘returned’ to the government. Similar incident also occurred in the case of sale of government stakes in NALCO – which finally did not take place. Samir K. Barua

30. In sum, disinvestment has been chraracterized by: • Fickleness of the process • Violation of laws of the land by the government • Disregard for integrity of the market - allowing the process to be used for possible manipulation of the market • Under-pricing of shares • Non-achievement of targets In addition, dis-investment has been seen only as ‘privatization’ and not as ‘corporatization’ of PSUs! Samir K. Barua

31. Could it have been better? To answer the question let me compare the process of government’s stake sale in IBP in India with the sale of government’s stake in Turkey in Tupras Refinery. Samir K. Barua

32. Stake sale in IBP • Heated debate on whether PSUs should be allowed to bid • Bids called for without resolution of the above issue • Stalemate after the bid was won by a PSU • Access to price sensitive information for days before the decision was made known • Provided opportunity for insider trading and showed the government in poor light Samir K. Barua

33. Stake sale in Tupras Refinery • The dis-investment commission was fully empowered to take the decision • The sale effected through an open auction • The process was televised and was therefore completely transparent • The entire process was completed in less than 90 minutes • The value realized from the sale almost doubled in that short span of time Samir K. Barua

34. Clause 49 of the Listing Agreement • Appointment of CEO. • Appointment of directors. • Managerial compensation • Approval of foreign travel. • Raising of resources. • Investment decisions. • Divestment decisions. • Pricing of products and services. Samir K. Barua

35. Clause 49 of the Listing Agreement • The percentage of shares that must be held by public. • The composition of the board (the number of independent directors on the board). • The onerous supervision – audit committee, internal audit, statutory audit, CAG audit, vigilance department, parliamentarians, parliamentary committees. • The micro-management by the concerned ministries. Essentially the board is not in control of the affairs of the company! … and this is the most fundamental requirement of Clause 49! Samir K. Barua

36. Is there a way forward? • Need to focus on the processes so as to create robust processes. • Need for the government to follow the laws of the land without exceptions. • Need to create structures and institutions that are not buffeted by the government of the day. • Need to free the PSUs to chart out their destiny, with full control being transferred to the boards – and holding them accountable for performance. • Need to create public opinion that all the above is effected without compromises. Samir K. Barua