PSUs seek more autonomy, less govt interference

Will the Modi administration create an overall holding company?


Jasleen Kaur | June 5, 2014

PSU chiefs too are criticising overt interference by the concerned government departments and demanding a holding company model for the public sector
PSU chiefs too are criticising overt interference by the concerned government departments and demanding a holding company model for the public sector

When I was the CMD, I never appointed anyone just because the minister asked me to,” says the former head of a Mumbai-based PSU.

Employment business in PSUs, she says, is usually at its peak during elections. But whenever the minister gave the list of people be recruited from his/her constituency she would find ways to deal with it. “There have been many situations when I couldn’t say no on his (minister’s) face but I would still not do it. My basic framework of working was to be as transparent as possible.” But, she adds, there were many other CMDs who would give up under pressure. And this is a trend across the central public sector enterprises (PSEs), (there are over 200 functional across the country) which represent a large chunk of India’s corporate sector and operate in vital sectors of the economy. Their combined reserves run into lakhs of crores of rupees. Yet they lack functional autonomy.

While experts and policymakers have long argued about the need to bring in functional autonomy for state-run units, now PSU chiefs too are openly criticising overt interference by the concerned government departments and demanding a holding company model for the public sector. Those, who have sought freedom from day-to-day interference by administrative ministries in the past, have now mooted the idea of setting up a holding company – on the lines of Singapore’s Temasek – to give autonomy and better manage state-owned firms. Addressing a Confederation of Indian Industry (CII) conference recently, SAIL chairman CS Verma said many PSUs would have fared better if they had been allowed to function independently. NTPC chairman Arup Roy Choudhury agreed, saying PSUs are expected to perform and compete with global and private firms, while being controlled by the government owners at every level.

The holding company, if established for all PSUs, will probably be the most powerful entity in the world. According to the Delhi-based Prime Database, which tracks equity and debt offerings, the market value of government holdings in 48 listed central government-owned enterprises was over '7,82,000 crore as of December 31, 2013.

Calling for a step towards proliferating the cost of governance, Reena Ramachandran, a member of the ad-hoc task force in the department of performance management, cabinet secretariat, is all praise for the holding company model to free PSUs from politics. She says holding companies should be set up with the objective to separate ownership from management, and to manage PSUs more professionally.

Though mandated to function on the principles of business, in most cases the political and bureaucratic class does not want to let go of companies they hold. The union government, which is a majority shareholder in most PSUs and in some it owns the entire stake, ensures that they have the decisive say in the functioning of these units. Thus, setting up one such company would be a big challenge, with the PSU giants and bureaucratic and political class having to change their mindset.

Holding company: an idea whose time has come?
The brainstorming over a holding company for PSUs, often advocated for better management, is not a new process. The first major experiment was setting up of Steel Authority of India Limited in 1973. But in 1978, it was dismantled and restructured as an operating company. Back in 1984, while recommending the concept, the Arjun Sengupta committee had also said that the logic was to introduce an intermediate level of management in the board of the holding company. That is, between the ministry concerned and the companies reconstituted as subsidiary units of the broad holding company.

Many industry experts, however, believe the holding company structure would prove useful only if the companies get a higher degree of autonomy and it forms like a strong fence between the companies and the government.

Sudhir Vasudeva, till recently CMD of ONGC, says creation of a holding company can further complicate the hierarchy structure if there is no clear demarcation of responsibilities. “Eminent professionals will run it (holding company) but it would add an extra layer between the government and the PSUs. Instead of reporting to the minister concerned, a PSU chief would report to the CMD of the holding company. But what would be the interface between the two? A more comprehensive proposal is required in this direction.”

But he contends that PSUs are shackled not only by the ministries, under whose jurisdiction these PSUs operate, but the secretary on the company board is also often more powerful than the CMD.

“With independent and government nominee directors, the structure of the board becomes too big. Government directors take their own approval before the board meetings, (and) constitution of the board is not balanced,” Vasudeva says. “CMDs are not even a part of the selection process of independent directors.”

“In a company like ONGC, which is very technical in nature, it becomes difficult at times to explain things to them (government appointees, who are generally bureaucrats). It definitely helps if the board is balanced.”

Contrary to the perception in some quarters, however, Vasudeva says it is a myth that PSU boards are entirely controlled by the administrative ministries in everyday operations and that ministers are not accountable, he adds. “PSUs have autonomy. I hardly faced any intervention during my tenure. Ministers are also answerable to everyone in parliament, and to agencies like CAG (comptroller and auditor general) and CVC. But there are some pitfalls which, if controlled, can have a long-lasting effect on the improvement of the structure,” Vasudeva says. Providing subsidy, which affects the strategic decision making process and control over the board, in the form of independent and government nominee directors are a few things that need to be changed, he says.

Inconsistent policy
The government policy over the creation of a holding company has not been consistent. Several experts feel that at times holding companies have been created and dismantled for political reasons.

Ramachandran says agencies that make a large amount of money should have the freedom to execute ideas. “Right now, too many people are holding each PSU, and central ministries act like the holding company of these PSUs without any accountability.” She says a holding company – as they are operated in Malaysia, Indonesia, Brazil and Norway – should be an umbrella-type commercial entity with adequate accountability. These models are different from that of Singapore’s Temasek model, she says, where the holding company is actually an investment company with a large cross-section of companies under it.

Rejecting the argument that PSEs should have a social objective and thus would require constant monitoring, she says any commercial entity should be handled commercially so that it gets the best investments and works professionally. “The public sector is allowed to work commercially even in China,” she says. “The argument that PSUs have a social objective is wrong. They should do CSR (corporate social responsibility) to fulfill the other objective. Let them make profit and then distribute their wealth (through CSR activities).”

Under a holding company model, all subsidiary companies will pursue common policies and will help build a uniform information and reporting system, says Ramachandran, counting some of the advantages of the model. Its formation would also lead to greater transparency and accountability. Prithvi Haldea, chairman and managing director of Prime Database, agrees that too much interference from the administrative ministries has affected the functioning of PSEs and some of them have suffered a lot over the years. But he sees the model as a distant dream which would not be easily accepted by the political and bureaucratic class.

“PSUs are considered fiefdoms of ministers, from where they earn money,” Haldea says. “There is a huge benefit for the government to keep PSUs under them.”

At present all the agenda of board meetings are approved in advance by the minister concerned and there is no independent director on the board in the real sense, he says. According to Haldea, independent and government nominee directors only act as representatives of ministers, and in the present scenario, the entire board of a PSU is actually a board of the minister concerned.

The idea (holding company model), he says, will get apparent support from PSUs because instead of dealing with bureaucrats or ministers they will deal with people who are working professionally. And only those who are hand in glove with the minister will raise concerns. But the threat will come from politicians: “Bureaucrats and politicians will oppose (the idea of a holding company) tooth and nail. It will hurt them badly.” He says building a holding company model would be asking too much from the government. “When it could not reduce its share to 51 percent in PSUs, how would it lose the entire control over it?”

Like Vasudeva, Haldea too has his fears over the independence of the management of a holding company if it is established. “Who will appoint its members? Will it be independent of the political and bureaucratic class and be able to take sound business decisions? Will there not be lobbying for such positions – the way it happens for PSUs?” he asks.

Surajit Mazumdar, associate professor of economics at the Ambedkar University, also says, “If the holding company is established, it will become accountable to the government.” But, he says, the rationale of a PSU is not to work as a commercial entity. They need to have a wider mandate – and whether in that process they need government administration or not can be debated, he adds.

“We should definitely have a mechanism so that PSUs are accountable to the public and have functional autonomy where all their stakeholders have an equal say in decision-making,” Mazumdar says. “Excessive interface can hurt functioning of a company. There is a public character in PSUs which needs to be maintained. Some oversight of the functioning is required.”

Haldea, on the other hand, recommends some practical solutions like strategic sale of loss-making PSUs after multiple evaluations and compulsory disinvestment for the Narendra Modi government. “There has been no strategic sale in the UPA regime, the way NDA did. Arun Shourie moved a proposal and argued on why government should move out of loss-making companies like ITDC, Balco, etc through strategic sale. But UPA took a total U-turn.”

Haldea says the government must sell all loss-making PSUs, barring those of national security concern, in a time-bound manner and compulsorily divest and reduce their share up to 51 percent through IPOs and OFSs before setting up a holding company for PSEs.

Looking at a behemoth
While there is no doubt that PSEs have seen major growth over the years, the need of the hour is to initiate the next phase of public sector reforms. With the government owning a substantial stake in these companies; the administrative ministries appoint bureaucrats to the boards of these companies, and that, according to experts, dilutes the independence of the board, thereby affecting their business.

The holding company can act as an instrument in bringing major reforms in the administration and management of public enterprises. This can also simplify and reduce the work of the ministries, only if it is created and is designed appropriately keeping in mind all its objectives.



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