corporate governnance

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Republic o india

Corporate Governanceof Central Public SectorEnterprises

June 2010


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ContentsAcknoledgements ...................................................................................... v

Glossary ........................................................................................................vi

Executive Summary .......................................................................................1

01. Objectives and Methodology...................................................................5

02. Context or CPSE Governance ................................................................. 7

A. Brie History o CPSE Reorm .............................................................. 7

B. Role and Perormance o CPSEs .........................................................9

C. Overvie o Corporate Governance Frameork .............................. 13

D. Challenges and Benets o Governance Reorm ............................... 18

03. Imposing Market Discipline ..................................................................20

04. Improving the States Onership Role ................................................... 26

A. Strengthening Onership Arrangements .........................................26

B. Exercising Key Shareholder Functions ...............................................34

05. Proessionalizing CPSE Boards ..............................................................42

A. Strengthening Board Composition and Structure .............................. 42

B. Empoering CPSE Boards ................................................................45C. Strengthening Audit Committees ..................................................... 48

D. Introducing Board Remuneration and Evaluation Systems ................. 49

06. Enhancing Disclosure and Transparency ................................................. 52

A. Enhancing Disclosure .......................................................................52

B. Strengthening CPSE Audits ..............................................................55

07. Next Steps ............................................................................................57

Annex 1: Understanding the Impact o Policy Measures on the

Perormance o CPSEs ................................................................................. 59

A. The Financial Perormance o CPSEs .................................................59

B. Determinants o the Financial Perormance o CPSEs ........................ 63

C. Onership and Perormance ............................................................64

D. Deregulation, Competition and Financial Perormance .....................66

E. Firm Specic Factors and Perormance .............................................. 66

F. The MOU System and Perormance ................................................... 68


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Tables and FiguresTable 1: Main Recommendations...................................................................3

Table 2: Top Ten Companies by Income ....................................................... 10

Table 3: Top Ten Prot-Making CPSEs .......................................................... 10

Table 4: Brie History o Public Sector Reorms in India since

Liberalization in 1991..................................................................................11

Table 5: Top Ten Loss Making CPSEs ............................................................ 12

Table 6: Breakdon o CPSEs by Ministry .................................................... 16

Table 7: Board Selection and Appointment Process .....................................37

Table 8: Coverage o MOU System .............................................................. 39

Table 9: Brie history o Memoranda o Understanding System .................... 40

Table 10: CPSEs in the Sample o 25 Companies used in Figures Belo ....... 60

Table 11: Companies by Onership in the Dataset ......................................65

Figure 1: Structure o CPSE Oversight .......................................................... 15

Figure 2: Distribution o SOEs by Sector ......................................................59

Figure 3: Sales to National GDP: 1997-2005 ................................................ 60

Figure 4: Annual Sales Groth Rate o all SOEs: 1998-2005 ........................ 60

Figure 5: Prot o CPSEs to National GDP: 1997-2005 ................................. 61

Figure 6: Loss o CPSEs to National GDP: 1997-2005 .................................. 61

Figure 7: Business Costs o Private Companies,1992-2005 ..........................61

Figure 8: Business Costs o CPSEs, Sample o 25, 1992-2005 ...................... 61

Figure 9: Business Costs o Private Companies, 1992-2005 ......................... 62

Figure 10: Business Costs o CPSEs, 1992-2005

Figure 11: Return on Assets o Private Firms and SOEs, 1992-2005 ............. 62

Figure 12: Eciency o Private Firms and SOEs, 1992-2005 ......................... 62

Figure 13: Return on Sales o Private Firms and SOEs, 1992-2005 ...............62


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Acknowledgements

Tis report was prepared by David Robinett, Varsha Marathe, andSunita Kikeri o the World Bank. Te report is based on a template/

questionnaire completed by Sumant Batra, and additional inputs

provided by Pavithra Suryanarayan, and Pratip Kar, consultants.

Te Review refects technical discussions with the Ministry o

Heavy Industries and Public Enterprises, Ministry o Chemicals &

Fertilizers, Comptroller and Auditor General, Standing Committeeon Public Enterprises, Bombay Stock Exchange, Conederation

o India Industry, Public Enterprise Selection Board, Board orReconstruction o Public Sector Enterprises, and CMDs, directors,and company secretaries o central public sector enterprises. Alexander

Berg, Parminder Brar, Manoj Jain, Dhruba Purkayastha, Vijay ata/Yesha Yadav, and Chunlin Zhang provided advice and comments.

Te report incorporates comments received at the Workshop on

Developing an Agenda or Corporate Governance organized by the

Department o Public Enterprises (DPE) in Delhi, February 15-16,2010. It has been updated to refect all changes through June 2010.

Te report has been discussed with the Government o India but doesnot necessarily bear their approval or all its contents, especially where

the Bank has stated its judgment/opinion/policy recommendations.


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GlossaRy

acc: Appointments Committee o Cabinet

biR: Board or Industrial and FinancialReconstruction

bpe: Bureau o Public Enterprises

bRpse: Board or Reconstruction o PublicSector Enterprises

ca: Companies Act

c&aG: Comptroller and Auditor Generalo India

cbi: Central Bureau o Investigation

cG G: Corporate GovernanceGuidelines issued by the DPE

cpse: Central Public Sector Enterprise

cVc: Central Vigilance Commissioner

dpe: Department o Public Enterprises

ci: Food Corporation o India

Gi: Government o India

GRi: Global Reporting Initiative

Hpc: High Poer Committee

icai: Institute o Chartered Accountantso India

iRs: International Financial ReportingStandards

ipo: Initial Public Oering

Mca: Ministry o Company Aairs

MHi&pe: Ministry o Heavy Industry andPublic Enterprises

M: Ministry o Finance

Mu: Memorandum o Understanding

ncMp: National Common MinimumProgramme

ni: National Investment Fund

pesb: Public Enterprises Selection Board

pib: Public Investment Board

pMa: Permanent Machinery o Arbitration

psu: Public Sector Undertaking

Ria: Right to Inormation Act

scope: Standing Conerence o PublicEnterprises

sc/sT: Scheduled casts/scheduled tribes

sebi: Securities Exchange Board o India

sica: Sick Industrial Companies (SpecialProvisions) Act, 1985

cpse: State Oned Enterprise

unGc: United Nations Global Compact

VRs: Voluntary Retirement Scheme


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execuTiVe suMMaRy

T Govrmt o Ia (GOI) ha tak a mbr o tp ovr th yar to mprov th ccya prormac o t Ctra Pbc Sctor Etrpr (CPSE). Corporat govrac ha b amportat part o GOI broar CPSE a coomc rorm, am at mprovg th prormaca compttv o om o Ia mot mportat atoa at, aowg compa ar accto th capta markt, a makg compa mor trapart a accotab. T ryg goa to rort th tat ro away rom a markt payr to a markt rgator a away rom ay-to-aymaagmt o CPSE towar xrcg t cor owrhp rght ba o o corporat govracprcp.

o th , th Dpartmt o Ecoomc Aay (Mtry o Fac) a th Dpartmt o

Pbc Etrpr (Mtry o Havy Itry a Pbc Etrpr) rqt Wor Bak pport ag CPSE corporat govrac ght o goo practc ba o th OECD Guidelines onCorporate Governance o State-Owned Enterprises, a ght o Ia ow Guidelines on CorporateGovernance o State-Owned Enterprises 2007. T rport carr ot th rvw a orrcommato or mprovg CPSE govrac. It ba o a rvw o th ga a rgatoryramwork, th fg a rport carr ot by varo govrmt commo a xprt gropo CPSE, backgro rarch o CPSE prormac, co wth ky takhor, a cat o two ag CPSEth O a Natra Ga Corporato a th Natoa Trma PowrCorporato.

T govrac ramwork or CPSE cott wth vra apct o tratoa goo practc.Sbtata progr ha b ma rmovg barrr to comptto, rcg govrmt faca

pport, a tg o CPSE o th capta markt. Amot a CPSE ar corporatz a com rth am aw a prvat ctor compa. Ky co makg powr hav b gat to agtrpr a othr proftab CPSE. Mmoram o Urtag (MOU) hav b g bymot CPSE a hav mrg a a ky too motorg a motvatg prormac. Ca 49 oth Ltg Agrmt ha hp pt t CPSE o th am ootg a prvat compa a th2007 Corporat Govrac G hav hp to xt th practc to o-t CPSE. CPSEboar ar rqr to hav pt mmbr a ar ow brgg rctor wth prvat ctor x-prc. Extv ormato prov o CPSE to th pbc, at both th ctor a trpr v.

Yt govrac chag t rma a rthr rorm ar to b o th btata gathat hav aray b achv. Tr ar t crtca rc wth th prvat ctor that tortcomptto a markt ctv. T c crta ga a faca prvg that avor CPSEo th o ha a oca obgato a hma rorc r that cotra thm o th othr.

A compx owrhp ramwork comb th coctg ro o pocy-makg a owrhp om mtr, aow potca trrc boar appotmt a commrca co-makgto cot, a wak boar powr. CPSE boar cot to b ort to th pbc ctor aar rary vr vaat o thr prormac. Impmtg cor rqrmt a chag

Corporate Governance o Central Public Sector Enterprises


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CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISES | 2executive summary

or may CPSE, partcary ght o ratvy wak tra at a cotro cto, ack ogac o cor or o-t frm, a potta pcato a ay th varo CPSEat. T rport ar th chag. T ma fg a rcommato o th rport armmarz bow.

rt, rrt gvr rrm r h rt r th rr cpse

rrm rgrm rthr th t- r ttt rrm. Rorm am at mprovggovrac a crag CPSE atoomych a boar appotmt a mpowrmt, paratoo owrhp rom pocy ctoca actat broar pocy rorm am at crag marktcp throgh xpor to comptto, tghtg o bgt cotrat, tg o CPSE o thtock xchag, a brgg prvat ctor partcpato. Markt cp tr pt prr oCPSE to aopt rthr govrac rorm a r traparcy a accotabty. It ao hp

maxmza tath ga rom mprov govrac.

s, Goi h trgt rrt gvr rt t nvrt, Mrt, thr

rft m. I tam wth othr pocy rorm, th wo hp achv v hghr vo prormac o om o Ia mot mportat compa. It wo aow compa to graat tohghr catgor, gvg thm gratr gato o powr a mor atoomy wh rqrg hghrv o traparcy a accotabty. It wo ao hp actat tg o ch compa o thcapta markt. For cotty o-makg or vab compa, th oc ho b o rtrctrgthrogh rg p a or mor proctv whr th coomy, mpmtato o VRS artrag program, a cor or qato.

Thr, g g rrt gvr rrm rqr t thr m

rt. T ar a oow (ta rcommato ar prov ab 1):

>Strengthening the states ownership role:How th tat orgaz a xrc t owrhp rght ctra to mprovg CPSE govrac. T ma chag makg a compx a cotro-ort owrhp ramwork mor ctv trkg th rght baac btw CPSE atoomya accotabty. T ca b achv by: () rormg owrhp arragmt wth a vw toocg th ro o amtratv mtr o pocy-makg a mtg thr ay-to-ay ro commrca co-makg, gvg boar gratr co-makg powr practc, acorg movg to a mor ctraz owrhp mo th ogr-trm; () mprovg th way whch GOI xrc t ky owrhp cto, partcar hacg traparcy th boarappotmt proc a mprovg prormac motorg; () hacg th ro a capactyo th Dpartmt o Pbc Etrpr a a oa agcy to mak t a mor actv promotr o thgovrac aga; a (v) mprovg th Corporat Govrac G o that thy bcom a

mor ctv govrac too.

>Proessionalizing CPSE boards:Wh boar hav com a og way bcomg mor prooaovr th yar, thr t btata room or mprovmt. Partcary th ca o Navrata,Mrata, a othr proft-makg compa, boar co b ma mor ctv by brgg pt rctor rom th prvat ctor, mpowrg boar wth gratr co-makgathorty wh rg ar a rpob bhavor throgh tgrty a accotabtymcham, trgthg at commtt, trocg prormac-ba boar vaato armrato practc, a makg boar vopmt a arhp program maatory.


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3 | CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISESexecutive summary

> Enhancing transparency and disclosure:CPSE cor taar ar comparab to may OECDcotr wh th Rght to Iormato Act ha ph th rotr v rthr o traparcy aaccotabty. Impmtato th ma chag. T rqr mprovg compay rportga cor, trgthg tra at cto, a cot to tram th at ytm toavo pcato a r tm.

Table 1: M Rmmt

a. impose market discipline c. proessionalize cpse boards

Tighten budget constraints and establish

market relations ith state oned banks Advance CPSE listings on the capital markets

Identiy and nance non-commercialobligations directly rom the governmentbudget

Make human resource policies more market-based

Allo unviable companies to exit the market

Bring in more private sector candidates as

independent directors Reduce board size

Separate the roles o board chairman andmanaging director

Make board leadership/development programsmandatory

Empoer CPSE boards ith greater decision-making authority

Strengthen the audit committee o the board

Introduce a proessional board evaluation andremuneration process

b. strengthen the statesownership role

d. enhance transparencyand disclosure

Consider moving to a centralized model as amedium to long-term option

Target corporate governance eorts onNavratnas, Miniratnas, and protablecompanies

Focus the ministries role on core onershipunctions and limit their day-to-day role

Enhance the role and capacity o theDepartment o Public Enterprises

Improve the Corporate Governance Guidelinesto make them more eective

Enhance transparency in the boardappointment process

Improve the perormance monitoring or MOUsystem

Mandate disclosure o non-commercialobligations and related party transactions

Provide implementation support to CPSEs

Monitor and disclose compliance ithdisclosure requirements

Strengthen internal controls and audit

Make supplementary audits timely and carryout compliance audits on a selective basis


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CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISES | 4 CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISES |4

executive summary

rth, mmtt rqr r mgmt th rrt gvr

rrm r.A mbr o commo a xprt grop hav t CPSE govrac ptha hav or rcommato or mprovmt. I, mch o th rport raw rom a rcto th fg o th t. I hort, th pocy a tchca oto ar kow. T chaggog orwar ta o o mpmtato. Etrch grop may oppo or f othr way tort govrac rorm. Impmtato rqr amta chag orgazato, ctv, abhavor that ca b ct to achv. A govrac rorm ar ogog proc that vov ao ovr tm. Maagg th chag w thror rqr attto to th rorm proc t, partcar to th or: () potca arhp a commtmt; () phag or qcg o rormba o th potca a tttoa abty o rorm; () crato o trog ttto wthcat rorm tam to maag a ta th proc; (v) bg o pbc pport to ovrcomtakhor rtac to rorm; a (v) vopmt o motorg ytm ary th proc to vaat

mpact, r traparcy a accotabty, a prov a back oop to ajt cor a .

th, th wg t r ggt r tkg th cpse rrt gvr g

rwr. T c:

>Development o a strategy or implementing the CPSE reorm agenda:A qc or phatratgy co b cor, ba o potca a tttoa abty. Ba o rthr potcacoomy aay, rcommato a acto ca b catgorz to two grop: () ow-haggrt or a t o rcommato that ar ot partcary cotrovra a ca b ratvy ayoor xamp, brgg mor pt rctor rom th prvat ctor, mprovg MOUcator, hacg cor; a () th mor ct t o rcommato that may rqrtm a a chag mt, or xamp, vopmt o a mor ctraz approach to maaggth tat owrhp cto, vtmt o tat har, a xt o vab compa.

>Revision o the CG Guidelines:A c th rport, th crrt G ar too arrow cop a may ao rqr makg crta provo maatory orr to gv t tth a orcmpmtato. DPE ho tak tock o CPSE compac wth th G to at a bao th fg th G ho b rv wth a vw to ao makg thm mor comprhv.

>Monitoring o compliance with the CG Guidelines:I vopg ch a motorg ytm, DPEco raw rom th motorg rqrmt tabh or t compa a rom tratoaxprc wth prormac motorg ytm gra.

> Implementation o company-level governance reorms in 2-3 pilot cases o Miniratnas and

proftable companies.A pot xrc aog th may hp pgra thr tat a actat

tg o th tock xchag. It wo ao prov tagb mprovmt a bft that cocrat momtm or mor wpra mpmtato acro CPSE.

> Enhance DPEs capacity to carry out the above steps. Som o th abov actvt (.g. vopmto th tratgy, rvo o th Co, motorg cator) may rqr pt rom pcaz xprtor cotat to hp wth g a mpmtato a/or xpor o DPE ta to trag atratoa goo practc. Door agc co hp pport th proc.


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5 | CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISES5 | CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISESobJectives|methodology

01. Objectives and MethodologyCtra pbc ctor trpr (CPSE) a othr pbc ctor rtakg hav og pay amportat ro th Ia coomy. Pot-pc, thy wr crat a vhc or traa rgoa vopmt, crato o bac ratrctr twork, a mpoymt grato. Aarg mbr o CPSE wr tay t p a gr f projct. Othr, may ck compa,wr tak ovr rom th prvat ctor. CPSE a othr pbc ctor rtakg rma mportatcotrbtor to th coomy, cotrbtg ary a qartr o Ia atoa GDP trm o gro aa aro 2 prct o th GDP trm o proft 2005-06. Trogh CPSE, th govrmt owor cotro gfcat trt ky ctor wth gfcat coomc mpact, cg ratrctr,o a ga a mg, a maactrg.

Ovr th ca, th Govrmt o Ia (GOI) ha tak a mbr o tp to mprov CPSEprormac, cg throgh bttr corporat govrac. Rorm rg th 1990 oc o

brazato a rgato o mot ctor, vtmt o govrmt har, gratr atoomythrogh gato o co-makg powr to ag compa, a th vopmt o aprormac motorg ytm to r accotabty. T a othr tp to trgth CPSEboar a hac traparcy vov to a mor comprhv govrac approach, cmatgwth th G o Corporat Govrac o Stat-Ow Etrpr 2007. Govracrorm ga promc or vra rao: cra prr o CPSE to mprov rthr thrcompttv a a rt o xpor to comptto a har bgt cotrat; tg o CPSE oth capta markt; a a owow vtmt. Uryg a o th actor a r to htth govrmt ro rom a markt payr to a markt rgator a to rort t away rom ay-to-ay maagmt o CPSE towar xrcg t cor owrhp or harhor rght ba o ocorporat govrac prcp.

I th cotxt, th Dpartmt o Ecoomc Aay (Mtry o Fac) a th Dpartmt o

Pbc Etrpr (Mtry o Havy Itry a Pbc Etrpr) rqt Wor Bak pportto carry ot a rvw o CPSE corporat govrac. T rport mmarz th ma fg o thrvw. It ma goa ar to: () xam crrt CPSE govrac ramwork a practc ghto goo practc ba o th OECD Guidelines on Corporate Governance o State-Owned Enterprises,a ght o th2007Guidelines on Corporate Governance o State-Owned Enterprises 2007;a () or rcommato or mprovg govrac. I og o, th rport xpct to hpt gratr markt cp a achv hghr v o CPSE prormac, aow CPSE acc tofacg rom th capta markt, a brg hghr v o traparcy a accotabty to thctor a a who. A bttr ctog CPSE ctor tr ho hp mprov trpr ccy,hac vtmt, r vry o ky pbc rvc, a boot coomc growth.

T rport cop mt to CPSE whch ar f a o-faca trpr wth a corporat

orm whch th atoa govrmt ho, rcty or throgh othr CPSE, 51 prct or moro owrhp. It o ot c othr tat-ow trpr ch a partmta trpr (.g.raway, pot a tgraph), tat-ow faca ttto (bak a rac compa), acompa whch th ctra govrmt ha tha 51 prct owrhp. Wh th ar prtyxc, may o th rport fg a rcommato may appy to th trpra w ato th may tat-ow trpr at th tat v. Ty may ao hp catayz pport or mprovggovrac o th broar tat-ow ctor a a who.


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CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISES | 6obJectives|methodology

T rport ba o: () a agotc rvw o th ga a rgatory ramwork or CPSE govrac;() th fg a rcommato o varo commo a xprt grop appot by GOI oCPSE govrac; () backgro rarch o th faca prormac o CPSE; (v) cowth ky takhor ch a th mtr, govrmt avory bo, compa, Scrt aExchag Boar o Ia, Stag Corc o Pbc Etrpr, th Bombay Stock Exchag, thCorato o Ia Itry; a (v) a aay o corporat govrac practc two pcfcCPSE, th O a Natra Ga Corporato o Ia (ONGC) a Natoa Trma Powr Corporato(NPC), two o Ia argt a bt prormg CPSE. Ay rvw o corporat govrac ha tmt wthot ag th qatatv apct o how govrac rorm work practc. Wh cha rvw ct to o o a arg a rprtatv ca a wa ot part o th xrc, th twoca may bg to hp f th gap rtag practc.

T rport orgaz to x ma cto. Scto II prov th ovra ratoa a cotxt orCPSE corporat govrac, cg a br htory o CPSE rorm, a ovrvw o th ro aprormac o CPSE, a th chag a bft o rormg th xtg govrac ramwork.Scto III oc o broar markt cp orc that hp rv a ta govrac rorm.Scto IV covr th ro o th tat a a owr, partcar th way whch th tat orgazowrhp arragmt a xrc t ky owrhp cto. Scto V covr th boar orctor, ocg o thr trctr a compoto, gato opowr, a boar rmratoa vaato poc. Scto VI ook at o traparcy a cor. Scto VII cocwth xt tp takg th CPSE corporat govrac aga orwar.


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7 | CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISEScontext

02. Context or CPSE Governancea. br Htr cpse Rrm

CPSE rorm ha b a crtca compot o Ia broar coomc pocy or mor tha fvca. A ary a 1956 th Itra Pocy Roto ca or CPSE to b gv gratr atoomya b orgaz o b . I 1965 th Bra o Pbc Etrpr, atr th Dpartmt oPbc Etrpr (DPE), wa tabh to rport o CPSE prormac. A th m 1980 thMmoram o Urtag (MOU) ytm wa troc to cra trpr accotabty.

T 1991 Nw Itra Pocy cmt a xpa th rorm o th prvo ca. Itvo a gratr ro or th prvat ctor, op p ctor to comptto, a hghght th or CPSE to ovat a a ara o tratgc mportac. o ra rorc a coragpbc partcpato, th pocy ao ca or th parta a o har o CPSE a othr tat-owtrpr to faca ttto a th pbc throgh th vtmt program. Boar wr

to bcom mor prooa, a mpha wa pac o th MOU ytm to gv maagr gratratoomy wh hog thm accotab. T pocy ca or th rtrctrg o poory prormgor ck trpr wh vopg oca crty mcham to protct act workr.

Varo pocy mar wr mpmt ovr th xt vra yar (able 2). Pha 1, rom th aryto m-1990, oc o rgato a brazato whch am to rc th mbr o tratgcctor rrv or CPSE. Ovr tm th mbr o rrv ctor wa rc to jt thr: mtaryqpmt; atomc rgy; a raway traport. Dvtmt ao bga, abt owy, wth th ao morty har o th tock xchag (Box 1).

box 1: dvtmt i

Disinvestment o GOI equity in CPSEs began in 1991-92. Initially the disinvestment as primarily

through sale o minority shares in small lots. Later, the emphasis o disinvestment changed in

avor o strategic sale. At present, the emphasis is to list large and protable CPSEs on domestic

stock exchanges and to selectively sell small portions o equity in listed, protable CPSEs (other

than the Navratna). It has been decided not to privatize prot-making CPSEs; make all eorts

to modernize and restructure sick public sector companies and revive sick industry; sell or close

the chronically loss-making companies, ater all the orkers have got their legitimate dues

and compensation; and induct private industry to turn around companies that have potential

or revival. A National Investment Fund as set up in 2005 into hich the proceeds rom

disinvestment o government equity in CPSEs are to be channelized. The und is maintained

outside the Consolidated Fund o India and managed by selected public sector mutual unds

or providing sustainable returns ithout depleting the corpus. As much as 75 per cent o theannual income o the und is to be used to nance selected social sector schemes to promote

education, health and employment. The residual 25 per cent is to be used to meet the capital

investment requirements o protable and revivable CPSEs. The proceeds rom disinvestment

rom April 1991 to November 2005 amounted to Rs.47, 671.62 crore (US$ 10.5 billion).


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CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISES | 8

Pha 2, th m to at 1990, oc o th gato o btata co-makg powr to thboar o ag CPSE, tartg wth th gm or Navrata compa. T 1997 DPE ggav arg a mportat compa pca tat a gratr ctoa atoomy co abotvtmt, capta xptr, jot vtr, mrgr a acqto, a th rag o bt romth capta markt. Importat prcoto wr tabh or th gato o powr, partcarthat: () th boar b rtrctr to c at at or o-oca or pt rctor; a ()thr b o faca pport or cotgt abty vov o th part o th govrmt.1 T cocpto Mrata wa bqty troc or mar trpr that mt crta prormac crtra.Tr ma gat powr rat to jot vtr a bar, vopmt o hma rorc,b tor abroa, tchoogy jot vtr, a crato/vtmt bar. At prtthr ar a tota o 45 Mrata. T mbr o Navrata compa cra rom th orga to 18 a o March 2008, rtg rom pgraato o Mrata to Navrata tat. 2

Pha 3, rom th at 1990 to 2004, oc o vtmt a prvatzato. Wh morty hara va th tock markt cot, GOI ao pport a mor op prvatzato program vovgtratgc a va op tr. T Votary Rtrmt Schm (VRS) that ha b tat thfrt pha or o-makg compa wa xt to proftab compa rgog prvatzato.Drg th pro, GOI ra proc worth R. 51.9 bo throgh a a vtmt.3 Ltgo CPSE o th tock xchag cot, whch rqr that compa compy wth th corporatgovrac a othr provo o Ca 49 o th Ltg Agrmt, by th Scrt aExchag Boar o Ia (SEBI) 2000 a bqty mof 2003-04.

Pha 4, rom 2004 to th prt, rv rom th Natoa Commo Mmm Program (NCMP)o th th wy ct coato govrmt whch rarm GOI commtmt to th tat owctor a aopt a mor cato approach to prvatzato. T NCMP: () pg that proftabCPSE wo ot b prvatz a that ay prvatzato wo b cor o a trapart acotatv ca-by-ca ba wth th objctv o crag comptto, protctg workr, amtg oca ; () corag CPSE to ra rorc throgh th capta markt, a ca orGOI to vov maagra a commrca atoomy to proft makg compa compttvctor; a () commtt th govrmt to mak vry ort to rvv ck trpr. T ocht to rtrctrg a morzg ck compa wh rthrg th gato o powr tocompa. Proft makg compa (othr tha Navrata a Mrata) wr ao mpowr tomak crta vtmt a othr co wthot GOI approva. A th rport wa bg faz,a w Maharata catgory wa troc to aow or rthr gato o powr ag CPSE.

o rthr avac th govrac ort, Jy 2007 th DPE th G o CorporatGovrac or CPSE. Pattr o Ca 49, th G am to mprov boar practc a

othr mt o corporat govrac a CPSE, cg o-t trpr.: T Gar votary atr, athogh compac motor.

1 Other preconditions included the need or: unanimous or majority approal o the board or proposals, the presence o goernment and unctional directors inboard meetings, and preparation o proposals or inestment and capital expenditure by experts.

2 Te Miniratna I, Schedule A CPSEs which hae obtained excellent or ery good rating under MoU system in three o the last e years become eligible to beupgraded to Naratna status.

3 A National Inestment Fund or disinestment proceeds was constituted in 2005, with 75 percent o its annual income used or nancial social schemes and theremaining 25 percent or capital inestment requirements o protable and reiable companies.

context


15/76

9 | CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISES

I hort, ovr th ca, a pcay c 1991, a mbr o tatv hav b rtak tomprov CPSE govrac wth a vw to brgg abot hghr v o CPSE ccy, vtmt,a coomc growth. Rgar o th potca part powr, rorm cot ovr th yar,thogh om govrmt mphaz crta rorm poc ovr othr. I rct yar rormha mov rom th pat oc o prvatzato a brazato to c broar tatv cha corporat govrac a cot pport or prormac motorg a rtrctrg, whmatag a commtmt to a promt ro or th tat th Ia coomy a both owr argator o CPSE.

oay, corporat govrac qary o th CPSE rorm aga. Itrt corporat govrac rv by rcogto o:

>T mportat ro that CPSE cot to pay th Ia coomy a th gfcat room orrthr mprovmt prormac;

>T to tack th btata govrac chag that t rma; a

>T bft o mprov govrac trm o achvg hghr v o prormac, gratr accto capta markt, a cra traparcy a accotabty.

b. R prrm cpse

CPSE cot to pay a actv ro th Ia coomy. A o March 2009, thr wr 246 CPSE,o whch 213 wr oprato a 33 r cotrcto. Opratg acro 22 ctor, thy omatky ctor ch a pbc tt, traportato, a coa a o a ga. CPSE ar ao gfcat

payr th procto o t, rtzr, amm, coppr a ctrca machry. Ty procjt ovr 8 prct o GDP o a va a ba 2007, a 6.5 prct 2008 (avaab ataggt a ght rbo 2009). Faca vtmt amot to R. 528951 cror (US$ 117bo), a 14 prct cra ovr th prvo yar. CPSE mpoy 1.53 mo tm mpoy(xcg caa a cotract workr), a c rom 1.9 mo 2001-02. Nary o orth ompoy compr maagra a prvory car.

CPSE ar mportat capta markt payr. 40 CPSES ar t a tra o th varo tock xchaga c om o th argt t compa. Tr tota markt captazato March 2009 waR. 813530 cror (US$ 180 bo) a accot or ovr 25 prct o th markt captazato oth Bombay Stock Exchag.

Ovra CPSE prormac mprov ovr th yar a a rt o varo rorm mar a gramprovmt th coomy. A a grop thy grw thr a at ob gt rat or mot o th patca a cotrbt ary a qartr o th cotry atoa GDP trm o gro a. T topt compa by com ar gv ab 3. ota trovr 2008-09 grw by 15.4 prct, atrcrag by 12 prct th prvo yar. Proft o proft makg compa grw 7.7 prct 2008-2009 to R. 98652 (US$ 22 bo).

context


16/76


T mbr o proftab compa rach 158 2009. Bt jt t compa accot or arytwo thr o th tota proft (able 4). T am t compa ao accot or aro 40 prct oaa trovr ovr th prvo fv yar. T compa wr promaty xtractv trch a ptrom, mra a mta a t, tr that cot to b havy rgat. Othrarg payr c powr grato a tcommcato frm.

context

Table 2: T T cm im (Mrh 2008)

nm cmavrg im

(R. cr.)avrg im

us$ mnmr em

c i l. 330,228 73,384 438,103

i o c l. 205,508 45,668 35,314

b p c l. 84,790 18,842 14,690

o & n g c l. 79,916 17,759 34,929

c i 45,308 10,068 41,358

b s n l. 38,661 8,591 320,506

s a i l. 2,186 7,152 132,973

ntpc l. 30,792 6,843 24,162

m rf & p l. 24,382 5,418 1,046

c p c l. 20,488 4,553 1,651

Table 3: T T prft-Mkg cpse (Mrh 2009)

nm th cpse nt rft(R. cr.)

nt prftus$ M

% g hr

o & n g c l. 16041.00 3564.67 19.2

ntpc l. 8309.62 1846.58 9.9

s a i l. 6171.03 1371.34 7.4

nmdc l. 4371.86 971.52 5.2

c i l. 3290.03 731.12 3.9

b h e l. 3126.32 694.74 3.7

gail(i) l 2814.09 625.35 3.3

i o c l. 2569.89 571.09 3.0

o i l 2166.31 481.40 2.6

s e cf 2014.81 447.74 2.4

total 50874.96 11305.55 61.0


17/76


Table 4: br Htr p str Rrm i lrzt 1991

p etrrRrm pr

Tmpr

K Rrm Rt

Phase 1:Nw IndutrilPolicy

J 1991-m 1996

d-

d

m , ,

s cpse b i r

n 17

s r195 d 1991 n 1995

f

Phase 2:empowrmntof entrpri

J 1996-m 1998

o cpse

p b d pse

d c

d

n 11 cpse m 97 pse

g 695 cpse, 105 f 25

Phase 3:

OpnPrivtiztion

a 1998-

m 2004

m

: t -

d, pse

s- cpse

o

i r51.90 pse.

v r s f f

e

a i a

Phase 4 m 2004-p

c

c g cpse

r

d

i

l


18/76


Wh thr wr 54 o makg frm, compar to 63 2005-06 a ovr 100 at th tart o thca, thr o grw rom R. 6845 cror (US$ 1.5 bo) 2005-06 to R. 14424 cror (US$ 3.2bo) 2008-09. o-makr accot or ovr thr qartr o th tota t o o a o-makg trpr (able 5). Som o th hav b og moy or a mbr o yar.

A rag o actor act th prormac o CPSE. Ax 1 xam CPSE prormac gratrta. Ba o a aay o aggrgat CPSE prormac th 1997-2005 pro, t how thatproftab a o-makg frm wr ctr a w tr, rvag trog kag btwprormac a ctor charactrtc ch a comptto, v o rgato a atr o thb actvty. Frm v actor ao pay a ro, ragg rom obot tchoogy, hgh pta ovrha cot, ow capacty tzato a maagra co-makg, a maagmt agovrac cotrat. I ato, k prvat frm, CPSE ar ao a wth o-commrcagoa, cg mpoymt grato, atg aggar tr, tchoogy vopmt, a prc

cotro that compt wth proft maxmzato goa a act thr faca prormac.

Notwthtag rct mprovmt th prormac o th CPSE ctor a a who, arg thcotrat throgh mprov govrac a othr mar co hp ra th v o prormacv hghr th ca o Navrata, Mrata a proftab frm wh rcg th o o o-makg frm.

context

Table 5: T T l Mkg cpse (Mrh 2009)

nm cpsent l(R. cr.)

nt lus$ M

% ag shr

n a c. i l. () 5442.58 ()1209.46 37.7

e cf l. () 2106.31 () 468.07 14.6

h p m c. l. () 875.61 () 194.58 6.0

c. i l. () 752.58 () 167.24 5.2

iti l. () 645.65 () 143.48 4.4

n j m l. () 551.77 () 122.62 3.8

b c c l. () 527.99 () 117.3 3.6

h c. l. () 516.01 () 114.67 3.5

h c l. () 444.75 () 98.83 3.0

c p c l. () 406.05 () 90.23 2.8

total (-) 12269.3 () 2726.51 85%


19/76


c. ovrvw crrt Gvr rmwrk

CPSE ar govr by a compx ga a tttoa ramwork. T ramwork crb bow,oow th xt cto by a co o th ma chag that t crat or CPSE govrac.

Lgl Frmwork

CPSE gray a r th am ga ramwork a th prvat ctor, athogh om aw cotapca provo or xmpto or tat-ow compa.4 Ty ar may govr by th CompaAct, Ca 49 o th Ltg Agrmt, a varo DPE g ovr th yar. I atoCPSE ar bjct to varo othr aw a rgato. T ma aw c:

>Companies Act 1956 (CA): CPSE a othr compa whch th govrmt, rcty or

rcty, ho 51 prct or mor o th pa-p har capta ar corporat r cto 617o th CA a govrmt compa. Tr govrac orm a trctr ar prcrb by th Acta th compa artc o aocato. T prcpa rc btw prvat frm a CPSE that th attr th ator appot by th Comptror a Ator Gra (CAG) tao th govrmt a harhor. A othr proc ar mor or th am xcpt or mrgr aamagamato o CPSE whr th am procr ar oow bt whr th powr o th HghCort xrc by th govrmt.5

>Securities regulation/Clause 49 o the Listing Agreement: Lt CPSE a r crtrgato a th tg agrmt by th Scrt a Exchag Boar o Ia (SEBI). Tc bac cor rqrmt a Ca 49, whch cota mportat corporat govracorm. Itroc 2000 a rv 2003-04, Ca 49 ha both maatory a votaryprovo. Maatory provo rat to boar compoto, at commtt, boar procr,maagmt co a aay th aa rport, crtfcato o faca tatmt atra cotro, a corporat govrac rportg.

>DPE guidelines: I ato to th 1997 Crcar o gato o powr, DPE g trmmay o th practc a procr o CPSE, cg tho rat to fac, hma rorcvopmt, oprato o CPSE, ctog o boar o rctor, a th prormac motorgytm. Hr o ch g hav b ovr th yar. I th m to at-1990, wtha vw to tramg, GOI aboh ary 700 g, wh rtag 105 a moygaothr 25. Som g ar bg, wh othr ar votary.

4 Te ounding acts o the three statutory corporations proide or goernance structures that are somewhat dierent om the CA. Teir rules and regulations areamed with the sanction o Parliament and cannot be easily changed. Directors are immune om any law suits or legal proceeding or loss or damage caused by anyact done in good aith and in pursuance o the objects o the ounding statute. Statutory corporations can only be liquidated by the passage o a law by Parliament.SICA does not apply to such corporations.

5 Te CA contains some special modications or goernment companies that make them distinct om other companies (or example, more exibility on time andenue o the AGM and on certain accounting proisions), or exemptions om certain sections o the Act (e.g. declaration o benami share holdings, requirement

or board sanction o contracts entered into with other goernment companies). A new company bill has been introduced to parliament which might scale back oreliminate these and other such proisions.


20/76


>Guidelines on Corporate Governance or State-Owned Enterprises (CG Guidelines): I byDPE 2007, th g ar votary a ar appcab to a CPSE (t ot car whthra how tattory corporato ca aopt thm gv thr pca ga orm). T ma oc o thCG G o th boar o rctor a at commtt bt thy ao toch o cora bary compa. Wh th CG G ar votary, CPSE ar xpct to ot thrcompac a xpa ara o o-compac (compy or xpa).

>Other laws and regulations: Varo othr aw a rgato mpg o CPSE govrac. Maamog th ar:

Right to Inormation (RTI) Act 2005:RI a amark tatv or hacg traparcya govrac o th pbc ctor a a who. T Act rqr that varo CPSE rport a

tatmt b ma avaab to th pbc. I practc, may CPSE hav tabh wbtk to that o thr amtratv mtry to mt th aw rqrmt. Docmt that arot rgary co to th pbc may ao b ma rom CPSE.

Labor laws:Mot o th Act rat to mpoy rato a protcto appy to CPSE, thoghthr ar om pca provo a xmpto.6 Sprm Cort co govr mpoyrato, gvg CPSE mpoy th orma tat o GOI mpoy, bt mor rcty ygthat thy ha cv rvc tat.

Insolvency laws:CPSE a r th am ovcy a qato aw a othr compa,cg: th Sck Itra Compa Act whch govr rtrctrg or a tra compa(pbc a prvat);7 th CA whch covr qato; a th gra cv procr aw whch

cota provo or th appotmt o rcvr.

Other acts and regulations: T Comptto Act 2002 app to CPSE, bt xmpt thocarryg ot ovrg cto or actvt cary or th charg o th cto. CPSEar ao bjct to othr aw a rgato, ch a ctor rgato a vromta aw.

Intitutionl Frmwork

Itttoa arragmt or xrcg th tat owrhp rght ar compx compar totratoa practc. GOI harhog CPSE h by th Prt o Ia, x-oco. Hpowr a a harhor ar gat to 38 amtratv mtr, ach wth t ow portoo oCPSE. DPE rv a th oa agcy. I ato, a mbr o othr govrmta bo havovrght, rgatory, a rcommatory ro. Fgr 1 bow hghght th compxty o th CPSE

owrhp arragmt.

6 Te Factories Act 1948, Apprentices Act 1961, Equal Remuneration Act 1976, Industrial Disputes Act 1947, and the Industrial Employment (Standing Orders)Act 1946 all contain special proisions or SOEs. Certain SOEs are exempted om proisions o the Employment Proident Funds and Miscellaneous Proisions Act1952 and the Employees State Insurance Act 1948.

7 SICA does not apply to statutory corporations.

context


21/76


iGuRe 1: strtr cpse ovrght

context

T pcfc ro o th major bo ar a oow:

>Administrative ministries:A gat owr, amtratv mtr rprt GOI th AGM,partcpat boar cto, approv major co, motor prormac, a rtrctr ck oro-makg t. Crrty 38 mtr a partmt amtr th 244 opratoa CPSE(able 6). Ty cot othr mtr a partmt o varo mattr a obta Cabtapprova a .

>DPE: Locat th Mtry o Havy Itr a Pbc Etrpr, DPE th oa agcyor a CPSE. Etabh 1965 a th Bra o Pbc Etrpr, t bcam a partmt 1990 a ha by a crtary rportg to th Cabt Mtr a Mtr o Stat. DPE hafv vofaca pocy, maagmt pocy, MOU vo, amtrato a coorato,a th prmat machry o arbtrato (PMA)wth 121 poto, o whch 90 ar f.DPE t poc a g or CPSE a act a a trac btw amtratv mtr

a CPSE. It ao maag th MOU ytm, pport th boar appotmt proc, coct aaa rvy o CPSE, a prov rport to paramt a th pbc.

>Cabinet: T Cabt approv a rag o major co throgh th Hgh-Powr Commttchar by th Prm Mtr, a faz th choc o CPSE boar rctor throgh thAppotmt Commtt o Cabt (ACC).

>Ministry o Finance (MOF): It rvw may CPSE fac a vtmt co, a o thPbc Ivtmt Boar (PIB) or vtmt pa ovr R. 100 cror (US$2.3 mo).

am

mhi & pea

mm

cpse cpsecpsecpsecpse

c

p

pesb

pib

brspe

p

mca

sr

cbicvc c&ag

dbe


22/76

CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISES | 16context

amtrtv Mtrn.

cmn.

emim

us$ mim(R. cr.)

Mtr agrtr 2 2,695 4 185

Mtr chm & rtzr

d c & p

d

11

10

6,540

15,807

225

2,184

1,012

9,828

Mtr cv avt 9 37,850 3,558 16,012

Mtr c 10 457,218 7587 34143

Mtr cmmr & itr 8 4,950 7,903 35,564

Mtr cmmt & iT

d t

d i t

5

1

383,587

39

10,418

10

46,880

43

Mtr cmr ar 3 47,671 10,205 45,921

Mtr d 10 74,802 3,547 15,962

Mtr dvmt ne Rg 2 179 4 19

Mtr evrmt & rt 1 1,607 1 5

Mtr

d e a 2 17,690 362 1,629

Mtr Hth & m Wr

d a

d h & w

1

2

346

2,050

4

59

16

264

Mtr H. itr & pe

d h i 42 121,048 5,221 23,495

Mtr Hg & ur pvrt 2 1,515 572 2,576

Mtr Hm Rr dv. 1 84 8 35

Table 6: brkw cpse Mtr


23/76


amtrtv Mtrn.

cmn.

emim

us$ mim(R. cr.)

Mtr irmt & brtg 2 229 14 62

Mtr Mr & sMe 1 860 83 372

Mtr M 3 14,998 1,428 6,428

Mtr Mrt ar 1 34 1 3

Mtr nw Rw erg 1 111 51 230

Mtr ptrm & ntr G 21 116,197 129,134 581,106

Mtr pwr 38 68,452 11,504 51,768

Mtr s Thg

d b

d sf & i r

2

2

135

778

6

36

26

163

Mtr shg, R Trrt 8 13,383 1,299 5,844

Mtr s Jt 5 660 34 153

Mtr st 13 170,936 11,270 50,715

Mtr Tt 10 26,036 932 4,194

Mtr Trm 9 3,767 104 470

Mtr Tr ar 1 60 2 11

Mtr ur dvmt 1 2,444 269 1,210

Mtr Wtr Rr 2 2,838 146 658

d a e 5 23,798 1,227 5,521

d s 1 12 107 482


24/76


>Oversight and control bodies: CPSE ar accotab to a mbr o rt bo, cg:

Parliament:A th ma ovrght boy, a mbr o paramtary commtt roty rvwCPSE prormac a rat .

Comptroller and Auditor General (CAG): CPSE wth mor tha 50 prct o owrhp arbjct to CAG ovrght. A pt boy tabh by th Cottto o Ia, CAG:() appot th tattory ator a ovr a ppmt thr work; () coct rgartraacto at o CPSE; () coct prormac at o CPSE that oc o partcartopc a ctor; a (v) rport th fg to paramt.

Central Vigilance Commission (CVC):CVC ha a maat to tr corrpto a mapractc

CPSE throgh obrvac o procrmt mattr a carac or a boar poto.

Judiciary:CPSE ar bjct to jca rvw by th Sprm Cort o Ia a th Hgh Cort.

>Regulatory bodies: T bo ovr CPSE mch th am way thy ovr prvat ctorcompa. Ty c: () SEBI, whch orc crt r or t CPSE; () Mtryo Compay Aar (MCA), whch ovr compac wth th Compa Act; a () ctorrgator, k th com Rgatory Athorty, whch rgat prcg a othr ctor pcfc or rvat CPSE.

>Recommendatory bodies: T c: () th Pbc Etrpr Scto Boar (PESB), whchmaag th proc or ctg boar mmbr, cg tr a avrtg, trvw pa,

a prparato o hort-t. T PESB ovr by a pt boar a pport by thMtry o Pro. ACC approv th fa cto; () BRPSE, whch wa t p 2004 a apt boy that av th govrmt o th rtrctrg a rvva o poory prormgCPSE; a () SCOPE, a mmbrhp boy or CPSE a othr tat compa. It act a atrac btw GOI a CPSE, a orgaz corc a trag, cg o corporatgovrac, or t mmbr.

d. chg bft Gvr Rrm

T abov govrac ramwork oow vra apct o tratoa goo practc. A rom thtattory corporato, CPSE ar corporatz a a r th provo o th CA. DPE ghav gat co makg powr to th ag frm a othr proftab compa amprov CPSE govrac throgh th cto o pt rctor a mprovmt to th

prormac motorg ytm. Ca 49 o th Ltg Agrmt ha b trmta pttgt CPSE o th am ootg a prvat compa. T 2007 CG G ar gar to ragrthr awar a compac wth boar, cor a othr govrac practc.

Yt, govrac chag t rma a rthr rorm ar to b o th btata gathat hav aray b achv. T atr a xtt o th chag ar bo to vary by typ oCPSEor xamp by z a mportac o frm, gato o powr, a t v. o-t frm.For gra obrvato ca t b ma:

context


25/76


>Frt, corporat govrac rorm ar part a parc o th broar CPSE rorm program rathrtha a ta-ao or bttt rorm. I th rgar, broar pocy rorm am at mpogmarkt cp ar ta to brgg prr o compa to mprov govraca tomaxmzg a tag th ga rom ch mprovmt. Sbtata progr ha b ma rmovg barrr to comptto, rcg govrmt faca pport, a tg o CPSE oth capta markt. Bt rthr markt-ba rorm ar to cmt th achvmt arthr hac th compttv o CPSE. T ar covr Scto III o th rport.

>Sco, how th tat orgaz a xrc t owrhp rght ctra to mprovg thgovrac o om o Ia mot mportat compa. T ma chag or GOI makga compx owrhp ramwork mor ctv trkg th rght baac btw CPSE atoomya accotabty. T prt arragmt comb th coctg ro o pocy-makg a

owrhp om mtr, aow potca trrc boar appotmt a commrcaco-makg to cot, a wak boar powr. Strgthg th owrhp arragmtto mmz th probm wh rthr mprovg th MOU ytm to hac accotabty th a ky chag gog orwar a c Scto IV o th rport.

>Tr, pt th avac that hav b ma, CPSE boar cot to b tat-omat,t ack ct co-makg athorty practc, a ar rary vr vaat o thrprormac. Prooazg a mpowrg CPSE boar th a co major chag a c Scto V o th rport.

>Forth, CPSE cor taar ar comparab to may OECD cotr a th RI Act haph th rotr v rthr o traparcy a accotabty. Impmtg th corrqrmt howvr ca b a major chag or may CPSE, partcary ght o ratvywak tra at a cotro cto, ack o gac o cor (partcary or o-tfrm), a potta pcato a ay th varo CPSE at. Ehacg traparcy acor th th thr ma chag a c Scto VI o th rport.

Arg th abov chag a mprovg CPSE govrac wo mak th tat a mor ctvowr o CPSE, achv hghr v o CPSE prormac a cra th va o mportat atoaat, brg capta markt cp, a achv hghr v o traparcy a accotabty. A atgra part o b tratgy a thca va crato, mprov corporat govrac ho hpmprov coomc ccy, cra vtmt, a achv coomc growth.

context


26/76


03. Imposing Market Discipline

OECD Guideline: Te legal and regulatory ramework or state-owned enterprises should ensure alevel-playing eld in markets where state-owned enterprises and private sector companies compete in orderto avoid market distortions. Te ramework should build on and be ully compatible with the OECDPrinciples o Corporate Governance.

Corporat govrac rorm ar bt a part a parc o a broar pocy rorm program amat mpog markt cp o CPSE, rathr tha a a ta ao rorm or bttt or othrrorm. Sch a pocy program typcay am to r that CPSE compt ary wth th prvat ctorthrogh har bgt cotrat, tg o compa o th tock xchag a othr orm o prvatctor partcpato, a rmova o try a xt barrr. T rorm ar ta to cratg thrght ctv trctr or prr or compa to mprov govraca to maxmzg atag th ga rom govrac rorm.

Sc brazato bga th ary 1990, GOI ha tak a mbr o tp to brg markt cpto tat compa. CPSE hav ac rct comptto rom th prvat ctor throgh th opgp o ctor to w prvat try. Drct bgtary pport to frm ha b gfcaty rc.I throgh th paymt o tax a v, th CPSE ctor a a who ha bcom a major tcotrbtor to th atoa bgt. GOI harhog th compa ha b rc throgh tgo compa o th tock markt. Lga tcto btw CPSE a prvat ctor compa havb graay ro. A procrmt prrc that oc avor CPSE, a that ha b pac c 1971 a bqty mof ovr th yar, wr fay rmov March 2008. 8 aktogthr, th tp hav CPSE to compt mor ary wth th prvat ctor a hav hp brggratr markt cp to th compa.

Bt cot rorm ar to b o th progr that ha aray b ma wth th goa omakg CPSE v mor commrcay ort. T wo rqr cot ort to:

>ght bgt cotrat a tabh markt rato wth tat-ow bak;

>Avac CPSE tg o th capta markt a brg prvat ctor partcpato throgh othrma;

>Ity a fac o-commrca obgato rcty rom th govrmt bgt;

>Mak hma rorc poc mor markt-ba;

>Aow vab compa to xt th markt.

Tighten budget constraints and establish market relations with state-owned banks.

May cotr rqr thr tat-ow compa to borrow o commrca trm a mt xpcta mpct govrmt garat or ch borrowg. Smary, Ia, th atr o pbc facg

8 Howeer, under DPE guidelines, administratie ministries still hae leeway to deelop purchasing policies or CPSEs under their superision, and some hae doneso, giing CPSEs a competitie edge in terms o a leel playing eld.

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to CPSE ha rgo a gfcat traormato rom pc o th ctra govrmt thorm o grat to bgtary pport o th ba o projct jtfcato. Morovr, a CPSE cragytr to th capta markt to mobz rorc, bgtary pport to CPSE c rom a hgho 50.6 prct o th tota rorc mobzato a pa vtmt o CPSE 1985-86 to 12.8prct 2004-05. T actor hav hp mak CPSE mor cp thr borrowg.

Yt CPSE cot to bft rom vb orm o govrmt faca pport. Pbc ctorbak rma major r to CPSE, whch tr ca borrow mor ay rom tat bak thaothr compa a bak may hav hghr comort g to compa that ar tat-ow. WhCPSE ar r to approach prvat bak or fac, practc thy ar corag to mata thraccot wth pbc ctor bak. (I, MOF rcty rct CPSE to pot at at 60 prcto thr rp tat bak to hor p bak rg th cr, rrpctv o ay avr

faca mpcato or CPSE.) Morovr, om, abt wr, ca, CPSE borrowg ar txpcty garat by GOI (ba o th pbc prpo to b rv, th crt worth o thcompay a trm o borrowg),9 wh GOI ao prov both oa a qty fac throgh thamtratv mtr. A, ca whr thr o xpct govrmt garat, vtor ar bv that a mpct garat xt.

Eg th orm o pport ca b ct gv th pbc ctor atr o CPSE, bt rcga matg thm ovr tm wo hp pt CPSE o a qa ootg wth th prvat ctor, orcthm to bcom mor aggrv tappg atratv orc o facg throgh capta markt (bow), a coqty rqr thm to rtak th cary govrac rorm. I partcar:

>CPSE ho b r to gag bakg ratohp that ar y markt-ba;

>Ivtmt by th mtr qty a oa ho b ba o car crtra a a car pocyo wh ch vtmt ar approprat, a b bjct to MOF a Cabt crty a rqr;

>Sch vtmt ho oy b a a at rort wh othr opto ar avaab, or tomata th tat targt v o owrhp, or xamp cojcto wth g har to o-tat harhor; a

>A thorogh rvw o th GOI vtmt approva proc may b orr to r that ayvtmt rt optma otcom.

Advance CPSE listings on the stock markets.

A pr th 2004 NCMP, o-t proftab CPSE (othr tha Navrata) ca go or tg o thtock markt to ra , a t CPSE ca w qty to th markt a og a thy rcvth approva o th amtratv mtry a mata th pbc ctor charactr o th trpr (51prct or mor pbc ctor owrhp).10 Howvr, 2006, GOI pt a ch w tg a ao govrmt qty o ho, to b rvw o a ca by ca ba. Sc th, jt o CPSE (Powr

9 DPE guidelines stipulate that a CPSE in need o a guarantee must rst approach a bank to proide it. I the bank is unable to proide such guarantee, then theGoI may be approached. Consultation with the administratie ministry is required and it in turn must consult the MoF. GoI guarantees may be gien or repaymento loans or share capital, payment o minimum annual diidends, and contracted payments to suppliers.

10 Listing may not always raise signicant unds or the enterprise: new listings are usually diided between shares sold by the by GoI, with the reenue going to thebudget and NIF, and esh equity, which nances the CPSE.

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Fac Corporato) wa ab to t a ra rh qty, 2007. A mbr o CPSE hav rcvttatv approva to o th am, bt hav ot yt com to th markt.

Avacg th tg o CPSE ho hp ra capta, rqr corporat govrac mprovmt,a brg gratr crty a traparcy to CPSE by vovg othr harhor a pacg thcompa r SEBI ovrght. Nw tg o CPSE ho ao hp rthr xpa a p thcapta markt. A ch:

>GOI pa or tg ho avac a CPSE ho b gv gratr rom to tap th captamarkt a har to th pbc;

>GOI ho tat th proc o co a co bg o aowg t harhog

to go bow 51 prct wh xrcg pcfc owrhp rght o a ctv ba throgh othrmcham. Carryg ot rthr aay a ca t o compa whch GOI harhog tha 51 prct wo b hp carryg ot th co;

>Ovr tm, othr orm o prvat ctor partcpato may ao b cor, cg tratgc a,maagmt cotract, coco, a othr orm o pbc-prvat partrhp. Improvg thgovrac o compa wo hp actat prvat partcpato, whch tr wo aow oracc to vtmt capta a mprovmt ccy a rvc vry.

Identiy and nance non-commercial obligations directly rom the budget.

wty-fv CPSE, cg th tattory corporato a tho corporat r Scto 25 o th

Compa Act, ar xpcty charg wth mpmtg GOI program pcfc ctor or rvcgpcfc GOI partmt a th o ot oprat o trct commrca .11Bt CPSE corporata compa that ho b opratg a commrca tt may ato hav oca or pocyobgato whch ar, a pr DPE g, pcf th mmoram o aocato or thcompay tatt. Som oca rpobt may ao b ag throgh Prta rctv ororr by th amtratv mtry. T ca b opaq a orma or o-xpct atr,a c a a hoc mar. (A tcto to b ma btw o-commrca or ocaobgato a th corporat oca rpobty or CSR program carr ot by may CPSE.12)Maagg th mtp objctv ct a po a rct chag to ct maagmt aaccotabty.

O o th ma oca obgato or may CPSE to thr otpt at a prc fx by GOI. Prcar cotro to mt markt powr, prov crta proct at or bow cot, a mt th mpact

that commoty prc cra hav o th ovra cot o vg. For may yar, th AmtrPrcg Mcham (APM) wa to t prc or a rag o CPSE. T ytm ha b graay

1 For example, the Food Corporation o India proides price support or armers, operates a nationwide public distribution system or ood grains, and maintainssucient buer stocks to ensure ood security. It also proides subsidized ood. Te dierence is paid by the concerned ministry, which also reimburses the carryingcharges o the buer stocks o the corporation. State Farms Corporation Ltd has been established to manage mechanized arms; National Inormatics Centre Serices

Incorporated to proide network backbone and e-goernance support to GOI; and the amil Nadu rade Promotion Organization has been incorporated to pro-mote, organize and participate in industrial trade airs and enhance the global competitieness o Indian industry and trade.

12 Awareness o CSR is relatiely high in India, and many large and/or listed CPSEs hae CSR programs. Tese equently include health, education, and housingprograms or employees and others in the communities where the CPSE is most actie. 47 CPSEs hae joined the UNs Global Compact (UNGC), 23 o which areconsidered actie members. UNGC signatories commit to honoring the 10 principles o the compactwhich coer human rights, employee rights, the enironment,

and anti-corruption, and proide regular reports on their compliance.

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mat, bt prc cotro rma mportat crta ctor, or xamp coa, ctrca powr,ptrom proct, rtzr, a pharmactca. T ma by whch prc ar t var acro thrvat ctor a CPSE.13 I rct yar prc hav ao b fx bow cot or othr ptromproct, omtm at a btata o to th CPSE. T CPSE hav b compat wth obo, o-bgt govrmt bt that th trpr ca th ho or to thr part. Wh ta coa wr rmov rom th APM mcham yar ago, coa prc rma fx, a t prchav b trogy c by th Mtry o St.

No-commrca obgato ca pt CPSE at a ro avatag compar to th prvat ctor.DPE g thmv rcogz that th capabt o CPSE to rtaka facchobgato w vary a that t or th va CPSE to ty a mpmt oca rpobtkpg vw t faca abty to ta ch actvt, opratg vromt a provo t

(artc). Yt thr o xpct pocy or tyg a facg th cot o th obgato. Ita,wh th compay xpct to prov oca rvc or or a by, part o th cot may b borot o th govrmt bgt bt mch o th cot ot bor by th CPSE ow rorc, whchact thr prormac a cotrbt to cc a o. I hort, o-commrca obgatoar ot away trapart a thy mpo hgh, a varab, cot o th CPSE.

Wh t caot b xpct that CPSE w b r rom th oca objctv o thr prcpaharhor, ch objctv ho b maag wth a vw to vg th payg f, brgg abotgratr traparcy a ccy, a makg t ar or GOI to a th tr faca prormaco CPSE. T wo rqr:

> Ityg pcfc obgato a maatg thm throgh car rctv a rgato;

>Dtrmg th cot o th obgato a ay b, gvg corato to th voatty othat cot. T pcay rvat or prc cotro, whch ca a to arg a varyg o;

>Facg th cot throgh rct govrmt pport that cof a targt; a

>Dcog ay oca obgato a part o CPSE cor rqrmt (c rthr ta Scto VI).

Make human resource policies more market-based.

CPSE mpoy tat rma ambgo. Wh cort r hav cofrm that CPSE a thrmpoy ar part o th pbc ctor, a 2003 Sprm Cort co rjct th oto that CPSE

mpoy ar cv rvat a ho atomatcay joy comparab bft. For a practcaprpo, howvr, CPSE mpoy ar trat a pbc ctor mpoy, a a ch joy a mbro rght a bft, cg job crty a oca bft. T oc ma, a t mak, CPSEmpoymt hghy rab, bt rap growth o th prvat ctor ha crat w opportt ork workr a maagr. Attractg a rtag tat CPSE co bcom a major chag.

13 In electrical power and pharmaceuticals, or example, sector regulators set prices or both priate and public enterprises based on national policies. For ertilizers,kerosene and cooking gas, GOI has long xed the price below cost and proided subsidies, which may not coer the ull cost o production.

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Hma rorc poc hr CPSE a rc thr compttv. St by GOI throgh DPEg, poc gray oow cv rvc orm. Dta gac prov o pay a bftor or a prvory mpoy. Dgato o powr to Navrata a Mrata ha provom xbty, bt gato o ot xt to r or pay a bft a practc t tob mt by th amtratv mtr a DPE. DPE g t th aary or th CMD actoa rctor ba o th catgory o th compay, wth rctor Catgory A compamakg th mot a Catgory D compa th at, wh pay ca or xctv a o-ozprvor ar th am or a catgor o compa. Pay compro rma a probm: th pay ojor ta cor compttv wth a om ca v bttr tha th prvat ctor, whmpoy at m-maagmt a abov ag gfcaty. T va o prqt a aowac mt to 50 prct o ba pay. Prormac-ba pay capp at 5 prct o proft. Mot CPSEo ot yt hav prormac maagmt ytm that wo aow or ctv prormac-ba pay

at th tam or va v.

T Sco Pay Commtt Rport rcogz th to morz hma rorc poc orr tohac CPSE compttv. It mak a mbr o rcommato, cg gratr xbty pay to arrow th gap wth th prvat ctor a gratr o prormac-ba pay wh vopga mpmtg prormac vaato a bchmarkg ytm at th compay v. A thrport wa bg faz, ky rport rcommato wr bg mpmt, cg gratrcop or prormac ba pay a om xbty pay a bft. Howvr, th ovra trctro th ytm rma argy pac.

I th ogr trm, corato ho b gv to aowg CPSE th xbty to trmcompato a othr hma rorc poc or mpoy bow th v o rctor or topmaagmt. T wo rthr hac th compttv o CPSE a brg thm wthcotr that hav pha ot pca r o SOE compato a hma rorc pocy.

Allow unviable loss-making companies to exit the market.

SICA prov or th rhabtato o ck (pottay bakrpt or ovt) tra compa both th prvat a pbc ctor a rr compa to th Boar or Itra a FacaRtrctrg (BIFR). Bt SICA cota pca provo or CPSE (tattory corporato may oyb ht ow by a act o paramt). A ck CPSE rqr pror GOI approva to approach BIFR wtha rvva pa, a GOI, a a cr crtor, ao ha th rght to vot o th rvva pa. TGOI poto a both a owr a, may ca, a gfcat crtor, gv t way to rtrctrCPSE bor gog to th BIFR or th cort. BRPSE wa ao t p a a hortr a mor ormaajcatg orm or th prpo. Accorg to th aw, cotato o oprato wh rvva

mar ar bg cor p o th crto o th cort a o th act o ach ca. Ith ca o CPSE, th poto tak by th govrmt ay to b th trmg actor, awhr GOI xpr pport or rhabtato t appar th cort gray o ot rort to cor oth compa.

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25 | CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISESmarket discipline

For vab compa, rtrctrg ca b a oto a BRPSE, whch wa t p a a pcaorm or th prpo,14 ho oc o ch ca. Bt vab o-makg compa ar art ca. May ch compa appar to hav b throgh vra cyc o rtrctrga hav ma arg aa o rom th tm thy wr corporat aro 50 yar ago.A ch compa ar amtay coomc t; th co to kp thm gog apotca o, ot a coomc o. Kpg av compa whch mpoy a ma prctago th orma abor orc a whr th ma va ra tat com at a hgh coomccot. A ch, th oc ho b o rg p th at or mor proctv whr th coomy throgh:

>VRS a rtrag/rpoymt program to mmz th oca mpact;

>At a va a trapart proc;

>Mrgr a cooato wth othr compa whr approprat; a

>Cor a qato.

14 Trough 2007, it had made recommendations on 47 CPSEs, with GoI approal o 28 proposals, including two or closure. Te total restructuring costamounted to Rs. 8285 crore (1.8 billion USD), including cash assistance o Rs. 1955 crore (434 million USD) and non-cash assistance, primarily debt

orgieness, o Rs. 6330 crore (1.4 billion USD).


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04. Improving the States Onership RoleHow th tat orgaz a xrc t owrhp rght ctra to mprovg CPSE govrac.T ma chag makg a compx owrhp ramwork mor ctv trkg th rghtbaac btw CPSE atoomy a accotabty. T ca b achv by: () rormg owrhparragmt to mt th ay-to-ay ro o mtr wh movg to a mor ctraz mo thogr-trm; a () mprovg th way whch GOI xrc t ky owrhp cto, partcary

trm o boar appotmt a prormac motorg.

a. strgthg owrh arrgmt

OECD Guideline: Te state should act as an inormed and active owner and establish a clear andconsistent ownership policy, ensuring that the governance o state owned enterprises is carried out in atransparent and accountable manner, with the necessary degree o proessionalism and eectiveness.

Itratoa xprc ggt that th way whch th tat orgaz a xrc t owrhprght ctra to mprovg tat trpr govrac. Tr o o mo or og o. Owrhparragmt ca gray b catgorz to thr broa mo:

>T a ytm, whr owrhp a pocy-makg cto ar ay xrc by mtr bt whr a pcaz boy or oa agcy ha b crat to t th r or both howth tat act a owr a how compa ho bhav. Cotr ch a th UK, Braz, a SothArca varato o th a ytm, wth thr th mtry o fac or a pcaz boy rvga th oa agcy;

>

T ctraz ytm, whr pocy-makg a owrhp cto hav b xpcty parata a g ttya hog compay, mtry, or pcaz boyha b crat to carryot th owrhp ro, wh pocy cto ar t to th rpctv mtr. May OECD amrgg markt cotr ch a Sgapor, Ch a Ioa ch a ytm; a

>T ctraz ytm, whr rt mtr ach hav a portoo o tat trpr a acta owr a pocy makr or th compa. Wy th pat, ctraz ytm havowy vov towar th a or ctraz mo.

Ia approach to orgazg th tat owrhp arragmt cor to th a mo, rctgt potca ytm o chck a baac, a trog amtratv a tttoa ctr, a a arga vr tat trpr portoo. A crb Scto II abov, owrhp rght ar gatto th amtratv mtr wh DPE rv a a oa agcy or prparg g, actatg

th MOU proc a rvg a a orc o ormato to paramt a th pbc. By tratoataar, thogh, t v mor compcat tha th typca a mo, that a pthora o othragc ao pay mportat ro: vtmt co may hav to b approv by PIB a Cabt,whch ao approv crta boar v appotmt; CAG appot th ator a ao coctvaro atoa at; CVC ovr th coct o CPSE mpoy a ha rat powr; abo ch a th PESB a BRSPE prov avc o varo mattr.

T ytm ha t avatag, that t o ot coctrat powr ay o agcy() abrg th ctora xprt o mtr to bar. Bt t ao ha t rawback (a c gratr

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ta para 59 bow). It o ot aow or th parato o owrhp a pocy cto whchmay crat coct o trt. Havg 38 rt mtr charg mak t ct to rv,maag a motor govrac mprovmt. Dpro o CPSE may ao hac th cop orpotca trrc. Morovr, to b ctv, th oa agcy or cooratg boy, DPE th ca,mt po th cary k, rorc, a potca backg to a wth th mtr, compa,a varo othr ttto vov.

T chag thror how to mak th owrhp arragmt mor ctv o that thy achva approprat baac btw CPSE atoomy a accotabty. T promat vw appar tob that, at prt, th baac tt havy towar ovrrgato o CPSE throgh th vovmt oamtratv mtr ay-to-ay mattr a throgh othr chck a baac whch togthrtrag th compa a mmz trprra or commrca co-makg.

Consider moving to a centralized model in the medium to long-term.

T OECD G t to avor th ctraz mo whr a g hgh-powr owrhptty (or grop o tt) crat to carry ot th tat owrhp cto. Cotr hav cratch a tty to: () parat pocy makg a rgato rom owrhp, thrby avog aypotta coct btw th two cto; () mak t ar or th tty() to prooazth owrhp cto a vop ct capacty a cotcy a a owr vr pragrpobt amog may rt mtr; a () at bttr CPSE rom potcatrrc. I a ctraz arragmt, th ro o th mtr to oc o ctora pocy-makg,wh th owrhp tty() xrc th tat cor owrhp rght, cg: partcpatg thAGM, appotg rctor, a motorg prormac (th cto ar c paraty Scto C bow).

Wh orgazatoa ta r rom o cotry to th xt, ch tt har crta commoatr:

>Ty ar corporat r th Compa Act, thrby pttg thm o a v payg f wth thprvat ctor;

>Tr portoo typcay c commrca or or-proft SOE that ar arg a oprat mportator tratgc ctor o th coomy;

>A harhor thr ma ro to maag th Stat har th portoo throgh ovrght/motorg o th compa, rathr tha ay-to-ay maagmt o th compa. Ivtmt a

b co ar tak by th boar a maagmt o th compa ba o commrcacorato, wth mma vovmt o th govrmt a harhor;

>T tat harhor ro xrc throgh aa harhor mtg, boar appotmt,a motorg th prormac o SOE. It ay ha o athorty to vot th Stat har at thAGM;

>Tr boar cot argy o pt rctor wth rqt comptc a k;



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>May oprat wth a trog commrca or prvat ctor ctr, wth a -tm prooa ta aavor pa at markt rat to attract a rta th cary k a xprt;

>A major goa o th tt to promot goo corporat govrac o th portoo compa,cg throgh th o prormac cotract, trgthg o boar a maagmt, atakhor maagmt;

>Ty oprat wth broa athorty a atoomy to prorm th owrhp cto ba o targta g t by th Stat;

>Ty rport rcty to th Prm Mtr or om tac to th Mtr charg o th portoo,whch tr hav acc to pt xprt to xrc ovrght o th tt. raparcy

a accotabty o th owrhp tty ao maag throgh ovrght by Paramt, atttto, pbc cor, a aa rvw.

Movg to ch a mo th Ia cotxt may b a raca chag a a compx avor thhort-trm, tag gfcat potca, tttoa a ga ramfcato that wo to bmor coy a. Coctratg powr ch a tty(), pcay gv a arg a mportatCPSE ctor, may ra oppoto. Cocr abot t traparcy a accotabty wo to b cor. For th a othr rao, ctrazato, thogh t rov may o th probmaocat wth th xtg arragmt, may ot b a workab or ab opto or Ia CPSE th ar-trm. It ca a ho, howvr, b cor a a mm or ogr-trm opto a a whmor compa ar t, a a wh thy bcom mor pt wth xpor to capta marktcp a SEBI ovrght, a a a wh th z o th CPSE ctor rc.

I th trm, xtg arragmt ca b ma mor ctv by takg th oowg tp whchho ao hp pt rorm o a path towar ctrazato. T c tp to:

>argt govrac ort o Navrata, Mrata, a proftab compa;

>Foc amtratv mtr o xrcg cor owrhp cto ( Scto C bow) whratcay crtag ay-to-ay trrc th compa a movg to a boar-maag mo;

>Ehac DPE ro a capacty to mak t a mor ctv oa agcy;

>Improv th CG G to mak thm a mor ctv govrac too.

Target governance eforts on Navratnas, Miniratnas, and protable companies.

Impmtg govrac rorm acro a grop o 244 compa pra acro 38 mtr amag tak a ky to a to a ow a v proc. Ita, prorty ho b gv tomprovg th govrac o Navrata, Mrata a proftab compa. I tam wth marktcp rorm, th wo hp achv v hghr v o prormac a aow compato graat rom o catgory to th xt, wth gratr gato o powr a mor atoomyaccompa by traparcy a accotabty. It wo ao hp actat w a rthr tg och compa o th capta markt, a ao prpar or othr orm o prvat ctor partcpato



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a a wh opportt ar. I th ca o o-makg or vab compa, th oc ho bo rtrctrg throgh BRPSE, cg rtrctrg o th baac ht, rg p a or morproctv whr th coomy, mpmtato o VRS a rtrag program, a coror qato.

Focus the role o the administrative ministries and curtail day-to-day intererence.

Amtratv mtr ar rpob or both ttg ctor poc a rgato a, a gatowr, or xrcg harhor rght. I a w ctor, th two cto hav b parat apt rgator hav b tabh to rgat both th pbc a prvat ctor, a orxamp ctrcty, tcom, a ptrom.15 I othr ctor, amtratv mtr cot tob vov both pocy-makg a owrhp cto. T Mtry o Chmca a Frtzr,

or xamp, c th rtzr pocy or a frm, pbc a prvat, wh at th am tm owg ambr o CPSE opratg th ctor. I ch ca, wh mtr hav a gtmat ro pocy-makg, combg th cto wth th owrhp cto ca crat coct o trt a aorv to t th owrhp ro.

A gat owr, amtratv mtr ho b rpob or xrcg ky owrhpcto. T c: votg at AGM mtg; ovrg boar appotmt; a motorgCPSE prormac (th owrhp cto ar c ta Scto C bow). Formay,th mtr ar xpct to xrc thr ro th ara mch th am way ay owr wor th CA, that throgh th partcpato o thr rprtatv th AGM a throgh thtwo om rctor that rv o CPSE boar (boar ar c gratr ta cto IVbow). o r compac wth th CA, th mtr ao rv crta powr o motCPSE artc, partcar a artc rqrg a Prta rctv or aowg th GOI to mak axtraorary rqt o th CPSE. DPE g, howvr, gv boar ade jurerght to rjct crtarqt by th GOI, wh ao gatg crta powr to Navrata, Mrata, a othr proftmakg CPSE (Box 2).

I practc, howvr, th mot rqty ct cocr rat to th prvav a orma ay-to-aytrvto by mtr th commrca oma whch vry mt CPSE atoomy co-makg. Sch trvto ar th ca o Navrata a Mrata whch hav b gatgfcat co-makg powr. Bt v ch compa, DPE gor xamp ovtmt, o rp , v, compac a tra cotro, a acqto a ,a hma rorc rat appar to prov cop or vovmt. I othr CPSE, mtrxrt rct a rct c o th maagmt, makg maagmt pat o th mtror takg mot co. Wh mtr hav crta rght a owr, thr trvto ar ot

away trapart a may ot away b cott wth th CA or wth tatmt by th GOI o th to cra maagmt atoomy a boar powr. Etrch trt a opportt orrt-kg may ao work to prptat th tat qo a rc ctv or pg back or ttggo. Itrvto ao com rom varo othr mtr, partmt a ttto ch a MOF,PIB, CVC a othr. T t rt bypag a wakg o CPSE boar (c gratrta Scto IV bow).

15 Issues related to the independence or corporate goernance o the regulatory bodies are outside the scope o this particular report.



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CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISES | 30states ownership role

box 2: dgt pwr

DPE guidelines ormally delegate certain poers to Navratnas, Miniratnas, and prot making

CPSEs, and have tended to increase delegated poers in recent years. Delegation is contingent

on the CPSE not receiving nancial support rom the government and having at least 4

nonocial directors (though until recently this included government directors). Decisions

made by the board regarding delegated poers should include the government directors and

relevant unctional director, and should, i possible, be made unanimously.

ivtmt: Depending on the category o the enterprise, capital expenditures can be made

ithout GoI approval up to limits set in DPE guidelines as provided belo. These must be in-

cluded in the annual and 5 year plans o the enterprise.

Investments that exceed the limit must be approved by the administrative ministry and, i they

are large enough, the Public Investment Board and the Economic Aairs Committee o Cabinet

(hich is chaired by the Prime Minister). In practice, non-navratnas that ish to undertake ma-

jor investments may need to ait months or nal approval.

: Prot making CPSEs are generally ree to borro rom private and state-oned banks.As discussed in IIA, there is preerence or using state-oned banks, and equity nance rom

non-state sources is limited.

Joint Ventures and Subsidiaries: Navratnas and miniratnas have also been delegated the poer to

create joint ventures and subsidiaries in India, subject to prescribed limits (table). The combined

value o such ventures cannot exceed 30 percent o the net orth o the CPSE. Navratnas may

also create oreign joint ventures, but must inorm the Economic Aairs Committee o Cabinet.

ctgr Thrh

capital expenditures

n n

m (c i) r 500 c (usd 110 ) 100%

m (c ii) r 250 c (usd 55 ) 50%

o f cpse r 150 c (usd 33 ) 50%

o cpse n f

Joint ventures, subsidiaries, and mergers & acquisitions

n r 1000 c (usd 220 ) 15%

m (c i) r 500 c (usd 110 ) 15%

m (c ii) r 250 c (usd 55 ) 15%

o f cpse n f

o cpse n f


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31 | CORPORATE GOVERNANCE OF CENTRAL PUBLIC SECTOR ENTERPRISES states ownership role

Lmtg amtratv mtr to prormg ky owrhp cto chagg bt crtca torcg th cop or crtoary c a crag CPSE atoomy commrca co-makg. T ma objctv ho b to brg gratr carty to th tat owrhp ro, partcarto distinguish between commercial decisions which should be let to the board and management and policydecisions which require governmental intervention. Achvg th objctv wo rqr ort to:

>Foc a trgth th ro o th mtr o pocy-makg a tabh pt rgatoryathort whr rqr;

>Lmt th owrhp ro o mtr to cor owrhp cto: partcpato th AGM;

appotmt o rctor, a motorg prormac (c Scto C bow);

>Er that, a othr mattr, mtr xrc thr owrhp rght throgh th govrmtom o th boar o rctor;

>Eorc th rqrmt or Prta rctv to mt orma trvto ay to ay aar;

>Kp vopg corporat govrac ytm a proc at th compay v to rc th copor potca trrc;

Navratnas and miniratnas may also transer assets, issue ne equity, and divest shareholdings in

these subsidiaries, as long as the public sector character (51 percent or more state onership)

o the CPSE or subsidiary is not aected. The rules or navratna and miniratna mergers and

acquisitions are similar, ith the same thresholds and the requirement that the public sector

character o the enterprise is not aected. Non-ratnas have not been delegated the ability

to enter such arrangements, and there is some ambiguity on the approval process or joint

ventures and subsidiaries.

dv: Delegation does not extend to dividends. Under MoF guidelines, all prot making

CPSEs are required to pay a minimum dividend o 20 percent o equity or 20 percent o ater-tax

prots, hichever is higher. Companies in the oil, petroleum, chemical, and other inrastructure

sectors are required to pay at least 30 percent o post-tax prots in dividends. Dividends are paidto the central exchequer, they are not retained by the administrative ministry or department.

In practice, hile some CPSEs do exceed the required minimums, others may nd that the

requirement limits their ability to reinvest, and increases dependence on external debt.

Hm Rr: There are currently 250 DPE guidelines dealing ith pay and other HR

matters. Navratnas and miniratnas have been delegated some poers in this area, but certain

controls still remain.

Mhrt: As this report as being nalized, a ne category, Maharatna had been

introduced to allo or greater delegation to leading CPSEs. These ill be delegated somehat

more poer than Navratnas, including a Rs. 5000 Crore (vs. 1000 Crore) limit on joint ventures

and subsidiaries.


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>Mov towar a y boar-maag mo a th ro o th mtr bcom mor mt,tartg wth th mor mportat t compa that hav aray bg movg that rcto(c gratr ta Scto IV). Gvg boar gratr atoomy w tr rqr hghv o accotabty throgh xpor o CPSE to markt cp a mpmtato o thothr corporat govrac rcommato mto th rport; a

>Dvop a ytm to motor a bchmark th prormac o mtr a owr.

Enhance the role and capacity o DPE.

A th oa agcy, DPE ha pay a cot to pay a mportat ro CPSE. I cotatowth varo othr mtr a avory bo ch a SCOPE, o o t ma ro to pocy

g or rt catgor o CPSE. It othr ma ro to actat th MOU ytm aprpar a aa rvy a rport o CPSE prormac. I ato, DPE vov th procor appotg CPSE rctor ( Scto C bow). It othr ro ar to hp tt pt btwCPSE throgh th Prmat Machry or Arbtrato a to prov trag opportt ormmbr o ch cat a trb. Mot o DPE cor cto ar typca o tho carr ot byoa agc whr.

DPE ha a arg mbr o g ovr th yar a w rag o ara covrg a apcto CPSE oprato ( para 24 abov). T g hp t poc a ma rvc cotomar acro CPSE. Ty pay a trog ro arr yar wh CPSE wr xpo tocomptto, vtmt, gato o powr, a tg. Bt th rorm a th catgorzatoo compa may hav rc th roa th or ch g. Compa compathat thr ar too may g. Wh om 700 g wr cac btw 1997 a 2002,aro 350 t rma orc. May o th may hav b partay or y ovrr by bqto, wthot a car cato o what rma rvat. Compa ao compa that, vw oxpor to markt orc, may o th g ar ovry prcrptv a rv to rc, rathr thahac, th compttv o th frm. Cag p th g a ocg DPE ro o thmot mportat pocy ara (.g. prormac-ba compato) o gog orwar.

DPE ctra ro actatg th MOU proc wy ackowg a apprcat. It provogtca pport to th MOU proc, act a br btw th ak Forc that approv a vaat thMOU a th gator (th CPSE a th mtr), vop a ormato ataba, motorth progr o MOU, prov co to th gator, a coorat rarch a trag ovaro apct o th MOU mcham. Ba o a rvw that wa carr ot at yar, DPE ha bgto trgth th proc o gotatg a ttg targt, rfg prormac cator, a o

vaatg prormac. It ro th ara may rqr pcaz tchca a faca kowga k that DPE crrty ack.

DPE ha o ar tak mot tp to actvy mat, promot, a motor compac wth thCG G. T G wr jt two yar ago a DPE t th ta tag oth proc. Howvr, promoto o goo corporat govrac practc a ky cto o oaagc a DPE ro a prof promotg a motorg govrac compac to bbtatay vat.


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Gog orwar, thror, DPE ro a capacty to b hac wth a vw to traormgt to a mor prooa a actvt boy am at promotg a oowg p o th govracaga. T wo rqr:

>Cooatg xtg DPE g to a mor accb a r-ry ocmt. Rata otat g to b rmov. Crta g, pcay tho that may b ovryprcrptv, may ao to b rvt;

>Hrg tchca a faca xprt capab o mprovg a ovrg th MOU ytm, ta oryg oy o ak Forc otr. Gratr xpor o DPE to tratoa tr prormacmarmt practc throgh th vopmt o a orm or th rgar xchag o xprc atrag/ty tor or DPE ta wo ao b hp;

>Ehacg DPE ro promotg a oowg p o th govrac aga, by workg wth thamtratv mtr to mpmt a motor compac wth th CG G (c gratr ta bow). Ehacg t ro th ara may ao rqr pcaz k a kowgabot govrac practc. Door tchca atac a cooprato wth owrhp tt oroa agc othr cotr may b bg th k a capacty.

Improve the CG Guidelines to make them a more efective tool.

Ia o o th w vopg cotr to hav a corporat govrac co or t CPSEa og o ha tak a bg tp orwar promotg th govrac aga. T CG Gwr J 2007 a votary g, mo argy aog th o Ca 49. Togh

votary atr, compac wth th G rqr to b rct th Drctor rport, th aa rport, a th Charma pch at th AGM. DPE wo ao gra CPSE ocompac. T G wr or a o yar xprmta pha whch a CPSEta o-two mpmt th G a bmt progr rport to DPE. I ght o thxprc, tab mprovmt wo b ma. T G covr th ky ara o boar orctor, at commtt, a cor. Sv ta ax go to gratr pth ach o thara a ao prov mo co o coct.

Now that two yar hav pa, ct xprc ho hav b ga or DPE to carry ota ytmatc amt o compac wth th CG G a a what pcfc chag ormprovmt may b rqr. Sch a amt co tart wth t compa a vtaycovr o-t compa. Comparo btw th a othr grop o compa (.g Navrata,Mrata, othr proft-makg compa) wo ao b o . I th abc o ch a vaato

t ct to hav a orm vw abot compac (pcay o o-t CPSE) or th pcfcchag that may b .

Nvrth, a w ta obrvato ar or or trgthg th G to mak thm a morctv too or promotg th govrac aga. Frt, th cop a covrag o th CG Gco b xpa to mak t a ta-ao ocmt that covr a apct o corporat govracwth th cotxt o GOI broar pocy ramwork or CPSE. T wo ta:


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>Expag th troctory cto to c th ma mt o GOI poc towar CPSE aay ot th broar cotxt a ratoa or CPSE govrac a th G;

>Ag a co o th ro o th amtratv mtr a owr, a th prcp govrgth ratohp btw th mtr, othr ky bo, a CPSE; a

>Ag cto o two othr mportat govrac ara: morty harhor protcto, whch ky to grow mportac a CPSE ar t o th tock xchag (Box 3), a takhorprotcto.

Sco, th G ho cary tgh a cary what maatory a what votary. TCG G ar votary atr, yt thy cota pcfc rctv rqrg a compa

cg o-t compato compy wth th tat govrac practc, wh ao cag oDPE to motor compac. Compac wth th G o a or t compagovr by Ca 49, a mor o a chag or o-t compa whr amtratv mtra compa thmv may ot ac prr or obg to compy, pcay c motorg yt to tak pac a compac ot yt actor to th MOU ytm. Makg crta corrqrmt maatory a tghg th rom th votary apct wo rv to rcompac, pcay th ca o o-t compa.

Tr, a rat to th abov, DPE ho vop a pt to pac a ytm to motor compacwth th G a r that th mmm maatory rqrmt, or compac wth thG gra, c a a paramtr th MOU ytm ( Scto C bow). T hohp gv CPSE a trog ctv to compy. I th am v, corato ho ao b gv tovopg a motorg a bchmarkg ytm to vaat th amtratv mtr agataopto a mpmtato o th CG G.

b. erg K shrhr t

A th o or omat harhor o CPSE, GOIthrogh th amtratv mtr a gatowr, k ay othr harhor, xpct to carry ot thr ky harhor cto: ()partcpato th AGM; () appotmt o CPSE rctor; a () prormac motorg. Whth frt o th cto covr varo part o th rport, th attr two ar c paraty gratr ta bow, am at hacg traparcy th boar cto proc a at mprovgth MOU prormac motorg ytm.

Enhance transparency in the board appointment process.

Appotg CPSE boar a ky owrhp cto gv th ctra ro o boar achvg goocorporat govrac. Uk may othr cotr, Ia ha a w tabh proc or og o or thrt catgor o rctor. A pr th provo o DPE g a Ca 49, boar typcaycot o a -tm Charma-cm-Maagg Drctor (CMD) a thr catgor o rctor:

> Government directors:Rprtg GOI a th harhor, th pot ar rtrct to a maxmmo two a ar gray f by th Atoa or Jot Scrtary o th cocr mtry, or bythr g. Fac mtry rprtatv may b appot to major CPSE (compa wtho fac rprtatv mt aga papr a mt o boar mtg to th mtry);


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> Full-time unctional directors:Comprg a maxmm o 50 prct o th boar, thy ar typcayor maagmt o th compay (.g. rctor o fac, marktg, hma rorc) who rvor a fv yar trm or t th ag o praato, whchvr com arr, a o a cotract bawth th opto or govrmt to trmat rvc wth thr moth otc. A prormac rvw

coct atr th frt yar pror to cofrmato; a

> Part-time non-ofcial or independent directors:Ty mt b pt rom th compay amt th crtra a ot DPE g16 Ipt rctor mt compr at at o-thr o

16 An independent director is dened as someone who has no pecuniary relationships or transactions with the company, its directors or senior management, orholding companies and subsidiaries; is not related to persons occupying management positions at the board leel or one leel below; has not been a senior executieor manager o the company in the prior three years; is not a partner or an executie in the preious three years o the statutory audit, internal audit or tax rm orlegal or consulting rms that hae a material association with the company; is not a material supplier, serice proider or customer or lessee o the company; is not a

substantial shareholder o the company owning two percent or more o the block o voting shares. Candidates must be between 45-65 years o age (eminent personscan be up to 70 years), hae a graduate degree om a recognized uniersity, and hae at least ten years experience at a senior leel (joint secretary or aboe in the

government, CMD or MD in the corporate or public sector, in academia, or in the eld o chartered accountancy).

box 3: ig Mrt shrhr prtt th cG G

The 44 listed CPSEs have large numbers o minority shareholders, some more than 100,000

each. These shareholders are protected by the relevant provisions in the CA and SEBI regulation,

including disclosure requirements, the right to receive notice o and participate in the general

shareholders meeting, and transer their shares and receive dividends. Like other shareholders,

they can appeal to the MCA or SEBI i their rights are violated.

while the CA, Clause 49 and other regulations cover protection o minority shareholders,

the special status o CPSEs limits the role that outside investors play in the governance o the

company. DPE guidelines and 51+ percent state onership ensure that key decisions, including

board selection and major transactions, are made by GOI or the directors. In many cases direct

and indirect state onership is greater than 76 percent, so that changes to the articles and otherdecisions requiring qualied majorities can be made ithout the consent o other shareholders.

Special provisions in the CA or government companies urther limit non-state shareholders and

reinorce the role o the GOI. This includes a prohibition on proportional representation, hich

ould allo non-state shareholders to be represented on the board, and other provisions that

make it easier or GOI to choose the entire slate o directors. This contrasts ith the OECD

Guidelines, hich call or equal treatment o all shareholders and consultation ith and

participation o minority shareholders in the AGM and board elections. A groing number o

countries allo or minority shareholders to be represented on the board and provide other

rights to minority shareholders.

DPE guidelines should cover the participation o minority shareholders in listed companies. The

CG Guidelines should encourage CPSEs to nominate at least one representative o minority

shareholders to the board o directors. Minority shareholders should be consulted on majortransactions, even hen the government has enough votes to ensure passage. In addition,

the CG Guidelines should elaborate on duty o the CPSE and its board to act in the interest

o shareholders, including minority shareholders, and treat all shareholders equally. A number

o other recommendations in this report ould also serve to protect the interest o minority

shareholders, including foating larger stakes in CPSEs and improving CPSE reporting.


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tota boar trgth o-t compa a t compa wth a o-xctv charma;a at at ha o th boar o t compa wth a xctv charma. Navrata a Mrataboar mt hav at at or a thr pt rctor rpctvy orr to xrc thrgat powr.

I a compa, govrmt rctor ar appot by th cocr mtr. For th othr twocatgor, th appotmt proc compx, varyg by catgory o rctor a by typ o CPSE(ab 7). Fctoa rctor ar hort-t (ba o prtrm gbty crtra) by thPbc Etrpr Scto Boar (PESB) a trvw by th PESB boar cotato wth thcocr crtary (or jot/atoa crtary) a CEO o th compay. T hortt t to thmtry a to CVC or vgac carac. For th mor mportat compa, th fa cto ma by th Appotmt Commtt o Cabt (ACC). For mar compa, appotmt powr

ar gat to th cocr mtr, wth ay vato rom th rcommato bmtt toACC or approva. For pt rctor poto, th cocr mtry propo th am othr caat to PESB, rawg rom th DPE atabak o caat. For Navrata a Mrata,th cto ma by a Sarch Commtt char by th PESB charma a cotg o th DPEcrtary, th crtary o th cocr mtry, th CEO o th cocr compay, a or o-oca mmbr. For othr CPSE, th cto ma by PESB. I both ca, th fa t t toth mtry a th to ACC or fa approva.

T boar appotmt proc ratvy pt a prooa compar to may othrcotr, maag argy by PESB who boar compr pt or o-oca mmbr.Ipt mmbr ar ao c th Sarch Commtt or pt rctor. Tproc o ctg ctoa rctor bg w avac (abot two yar) a kow vacac artf. Uk th pat, th pot ar ow op to xtra caat, a bg tp orwar towaropg p th proc a brgg otr wth th cary k, xprc, a pc.DPE ha t p a atabak wth ary 350 caat or pt rctor poto. A gratrort ar bg ma to brg ch rctor wth prvat ctor backgro.

Yt thr room or rthr mprovmt. T proc or ctg ctoa rctor t opygv prrc to caat rom wth th compay (wth th objctv o vopg a car omaagmt prooa), rom

corporate governnance

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