Report on Corporate Governance of CPSEs Delhi, India

1. Report on Corporate Governance of CPSEsDelhi, India February 2010 Anne E Molyneux Director – CS International

2. Prime Minister, Dr. Manmohan Singh on CG • “Unless Indian firms come to be recognized world wide for good corporate governance, they will not be able to compete globally in an increasingly inter-dependent integrated world”. • “In the era of protectionism few bothered about corporate governance and transparency in accounting and in management. Such laxity, however, is no longer possible”. • At ICAI Diamond Jubilee Celebrations - 1 July 2008

3. CPSE scorecard • 242 CPSEs, 41 listed, 22 sectors • 41= 20% of market cap of BSE • Dominate in utilities, transportation, coal, oil, gas • Significant in steel, fertilizer, aluminium, copper and electricity machinery • Produce 8% of GDP on value added basis • 25% of GDP in gross sales • 2% of GDP in profit terms • Significant control in significant sectors • Employs 1.57 million

4. CPSE scorecard • Top 10 CPSEs • 2006-2007 increased income by 15.2% • 2007-2008 increased income by 12.2% • Net profits fell slightly • Most profitable predominantly in extractives • Bottom 10 -least profitable in deregulated industries, making losses for a number of years • Other CPSEs • 140 profitable, 53 loss making, others marginal

5. What good CG seeks to achieve? • Part of broader economic reforms – apply market discipline as far as possible and show public sector leadership • Performance • increase value for India and Indians • improve performance, competitiveness and efficiency of public sector • achieve strategies and manage risk • Conformance - transparent, accountable decision making in compliance with laws and regulations • Strong oversight and review of decision making (financial and non-financial), reporting, internal control systems, and mechanism for investor grievance attention.

6. Limitations • No perfect structure or model • How to achieve independence of boards – role of controlling shareholders (government or family) • “Independence” of independent directors • Capable directors : supply issue • Checklist approach to compliance (vs. spirit) • To what extent, can regulators regulate greed, dishonesty and unethical behavior…

7. Evolution in private sector • 1998 - Desirable CG Code for listed companies by CII • 2000 – Recommendations of Kumar Mangalam Birla Committee implemented - Clause 49 introduced • 2002 – Naresh Chandra Committee Report and banks ( Dr Ashok Ganguly) • 2003 - Recommendations made by Narayan Murthy Committee (implemented in 2004) • 2005: Irani Committee Report on Company Law constituted by MCA • Various Committees factor in international practices and developments - Narayan Murthy Committee was set up in the aftermath of major corporate developments in US (Enron/WorldCom / SOX) • NFCG set up by MCA – interact with national and international agencies • Comprehensive self assessment in 2007-08

8. Evolution in public sector • Phase 1 - 1991 New Industrial Policy – greater role for private sector – more competition, partial sale of shares (on BSE , then in large lost), disinvestment, deregulation, liberalisation • Phase 2 - Mid 1990s – more decision making to CPSEs, esp. Navratnas (originally 9 now 18); 1997 DPE Guidelines – special status for some cos. • Phase 3 – to 2004, disinvestment and privatisation, esp listing on SX, therefore requirement cos comply with listing rules and CG requirements • Phase 4 – 2004 to today, National Common Minimum Program, reaffirmed commitment to state-owned sector; 2007 DPE CG for all CPSEs

9. Framework for CPSEs Legal • The Companies Act, 1956, s. 617, ‘govt companies’ – 51% o’ship • Listing Agreement (Clause 49) – SEBI Act, 1992 • Mandatory • Voluntary provisions • For listed companies - other SEBI Regs. (not just clause 49) • Other • DPE guidelines • Guidelines on CG for SOEs • Other: • Right to information • Labor • Insolvency • Other acts and regulations – competition, environmental, banking/securities, insurance/sector regs Institutional – shareholder role is complex; oversight and regulation also complex

10. Structure Main features of Clause 49: • Composition of Board • Compensation / Remuneration of non-executive directors • Constitution of Committees • Disclosure norms • CEO / CFO Certification • Reporting requirements • Risk management framework • Whistle blower mechanism – non mandatory

11. Main Report Recommendations • CG reforms - seen as part of the broader reform program • Focus efforts on the profitable companies - navratnas and miniratnas • Deepening CG reforms requires: • Strengthening the state’s ownership role; • Professionalising CPSE boards; • Enhancing transparency and disclosure. • Implementation of reform requires careful management • Future steps • Strategy for CPSE reform • Revision of the CG Guidelines • Monitor compliance with CG Guidelines • Company level reforms • Enhance DPE capacities to do all this

12. Transparency issues re government obligations, relations • Move to more centralised ownership model– to arm’s length ownership/shareholder perspective • Ensure clarity and cost of non-commercial obligations • Apply, as far as possible, private sector CG norms to public sector commercial enterprises.

13. Transparency IssuesBoard appointment process – an independent process, yes but....... • Minimize political interference • CMD • Independent directors • Functional directors • Nomination committee role • Focus on competence and commitment – search criteria • Pilot in few navratnas and transfer to rest • Reduce ACC/PESB role • Reduce focus on appointment of civil servants • Remove preference for functional directors to be internal candidates

14. Audit committees and independent directors • Clause 49 – min 3 dirs (2 independent dirs) • CA requirements in unlisted cos - min 3 dirs (2 independent dirs) • VIP role in getting oversight and compliance right, inc internal controls and risk management • Need: • More independents from private sector • Board and A/C evaluation process • Make it mandatory for all statutory companies to form audit committees • Non-compliant composition re independent directors • No audit c’tee formed, not meet number of 3, not 2/3 independents

15. Transparency re board/director/committee evaluations • Clause 49 – non-mandatory recommends evaluation of non-executive directors, by peer group of rest of board excluding the persons to be evaluated (rarely done) • Need: • Systematic board, board committee and individual director evaluations • Related to performance targets, committee activities and relations with board and management, and • Relate to board/director development programs for CIP • Only requirement is that administrative ministries review performance of directors at end of first year , prior to confirmation of rest of tenure • Clause 49 no evaluation of full-time directors or of independent directors

16. Transparency – enhance disclosures • Regulations re disclosure are well established but... • Limited monitoring • Need to improve: • Submit quality accounts presented according to international accounting standards in a timely manner (not late and require restatements) • Improve disclosures re related party transactions, non-commercial objectives, social obligations, ministerial requests/directions, MOU targets and target areas • DPE and ministry monitoring of disclosures including public reports on this

17. Transparency – strengthen audits and control • Quality statutory audits to international standards by independent firms appointed by CAG • CAG audits: compliance audit, test audit of statutory audit, performance audit • Weakness in audit committee oversight of and implementation of internal controls, internal audit risk management and disclosure processes • Need in each CPSE: • Independent directors on mandatory audit committees • Stronger risk governance and systems • Likely to need improved capacity and guidance in this area

18. Transparency and disclosure - conclusions • Forward plan for reform - DPE, CAG • Clarity re govt obligations, disclosure requirements and requirements re related party transactions • Rationalise supplementary audits and performance audits • Support for CPSEs • Director appointment and development programs, especially re evaluations and audit committee activities • Increased understanding and implementation re risk, control and internal audit and quality disclosure and reporting practices • Increased monitoring by ministries, DPE and CAG and public reporting on this.

19. Transparency and Disclosure - Discussion • Actions • How do we achieve these goals? What changes will be easiest to tackle? • Barriers • What obstacles may we meet? What are the issues? • Solutions • How do we overcome the obstacles?

20. Discussion- specific questions • 1. Do CPSEs have too much reporting and audit requirements? How can these be made more cost effective without reducing disclosure? • 2. How can CPSEs more effectively disclose non-commercial obligations, including those mandated by GOI? Similarly, how should CPSEs disclose transactions with each other and their administrative ministries? • 3. How can DPE and the ministries help CPSEs to implement disclosure requirements? • 4. How can DPE and the ministries better monitor CPSE disclosure? • 5. How can CPSEs introduce and improve performance of audit committees, and internal audit and control systems?