March 15, 2007Samir K. Barua 1 Political versus Corporate Governance In Parastatals.

March 15, 2007 Samir K. Barua 1

Political versus Corporate Governance

In Parastatals


Political GovernancePolitical governance deals with the manner in which those who occupy political and administrative office design/frame processes, rules, regulations and laws and oversee their observance so as to ensure responsible and fair stewardship towards more progressive levels of human and social development for the present generations as well as generations unborn.

(Synthesized from various definitions available on the web)


Corporate Governance

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

(en.wikipedia.org/wiki/Corporate_governance)


Corporate Governance

"Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society"

(Sir Adrian Cadbury in 'Global Corporate Governance Forum', World Bank, 2000)


ParastatalCorporation wholly or partially government-owned and managed. Although ostensibly managed semi-autonomously, boards of directors are often subject to the political guidelines of the government.(www.photius.com/countries/mexico)

A semi-autonomous, quasi-governmental, state-owned enterprise.(countrystudies.us/south-africa)

A government owned company.(www.fao.org/docrep)


Plan of Presentation- Discuss a few issues in the context of dis-

investment of government’s stake in PSUs.

- Discuss a few more issues in the context of clause-49 of the listing agreement that listed companies have to abide by.

The presentation draws on my direct experience of being on the boards of a few parastatals.



47 tons of Gold from the vaults of RBI air-lifted to London and deposited in the vaults of Bank of England


Earlier, government had leased 20 tons of gold to State Bank of India to be sold in the international market


There was acute crisis in the external sector and the inflation rate had climbed to 17%


The government turned to IMF and the World Bank for assistance …


… The international agencies were particularly critical of the poor returns on PSU investments and the budgetary support to PSUs


Letter from FM to World Bank Promised

• No new PSUs, except in core sector

• No further nationalisation of sick units

• Initiation of closure of unviable units

• Establishment of a time-table for eliminating budgetary support

• Granting greater autonomy to PSUs to cope with harder budgetary constraints


Breath-taking speed of action • Disinvestment of upto 20% of government

holding in PSUs (Chandrashekhar Govt)• Narsimha Rao government cleared disinvestment

of upto 49%• DCA advised the government that it could think

of divesting upto 74% holding• DPE advised the government to divest stakes in

profitable companies to create a favourable environment for PSU divestment

• The government cleared listing of PSU stocks


Well begun …• The international funding agencies would

not permit adjustment of money raised through divestment against fiscal deficit – they finally relented and permitted 2500 crore to be adjusted

• The securities scam gave the much needed ammunition to opposition parties whose opposition till then had been muted

• There was dramatic improvement in the external sector

… remained half done!


Violations of market norms and regulations • PSU stocks exempted from norms for

shareholding pattern for listing

• Exempted from providing the mandatory information for an IPO

• Shares sold only to Mutual Funds, Insurance Companies, Banks and Investment Institutions


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


What is wrong with “bundling”?

Scrip A Scrip B

Bidder 1 70 30

Bidder 2 30 70

The price realized would be 50 for both the scrips – while if the shares were to be auctioned individually, the price realized would be 70 for each.


Record of Divestment (Figs in Rs. Crore)

Year Target Actual Method1991-92 2500 30381992-93 2500 19131993-94 3500 Nil1994-95 4000 4843 1995-96 7000 3621996-97 5000 3801997-98 4800 9021998-99 5000 53711999-00 10000 15841996-97 5000 3801997-98 4800 9021998-99 5000 53711999-00 10000 1584Total 44300 18393


Record of Divestment (Figs in Rs. Crore)

1839344300Total

GDR + Strategic sale1584100001999-00

GDR, Domestic Market, Cross-holding

537150001998-99

GDR (MTNL)90248001997-98

GDR (VSNL)38050001996-97

Auction + Fixed Price36270001995-96

Auction – NRIs allowed 484340001994-95

AuctionNil35001993-94

Auction191325001992-93

Bundling303825001991-92

MethodActualTargetYear


Record of Divestment – recent years (Figs in Rs. Crore)

Year Target Actual Method1999-00 10,000 1829 GDR, Sale in Domestic Market

2000-01 10,000 1870Strategic sale, Sale through nomination of 3 refineries

2001-02 12,000 5632Strategic sale, Sale of hotels in the public sector (asset sale), Hefty dividends

2002-03 12,000 4748Strategic sale, Sale of control premium (Maruti)

2003-04 13,200 993IPO in domestic market through book-building (Maruti)

Total 44,000 14,079


Extent of Budgetary Support (Figs in Rs. Crore)

Year Support

1990-91 7075

1991-92 5985

1992-93 5241

1993-94 7271

1994-95 7966

1995-96 6452

1996-97 6854

1997-98 7137

1998-99 7230


Extent of Budgetary Support *(Figs in Rs. Crore)

Year *Support % of Budget

1990-91 7075 6.719%

1991-92 5985 5.372%

1992-93 5241 4.274%

1993-94 7271 5.126%

1994-95 7966 4.956%

1995-96 6452 3.834%

1996-97 6854 3.601%

1997-98 7137 3.299%

1998-99 7230 2.835%



Year *Support % of Budget *Real value (90-91)

1990-91 7075 6.719% 7075

1991-92 5985 5.372% 5271

1992-93 5241 4.274% 4312

1993-94 7271 5.126% 5399

1994-95 7966 4.956% 5357

1995-96 6452 3.834% 4132

1996-97 6854 3.601% 4107

1997-98 7137 3.299% 4061

1998-99 7230 2.835% 3925



Year *Support % of Budget *Real Value1999-00 8406 2.82% 43912000-01 8896 2.65% 4405


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


Disinvestment in the Oil Sector

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


Disinvestment in the Oil Sector

Date

HPCL Stock

ReturnIndex Return

News

09-Sep-02 -30.15% -1.66% CCD defers sale of HPCL

06-Dec-02 19.97% 2.34%PM,LK Advani, George Fernandes and Arun Shourie meet and decide to put HPCL for strategic sale

12-Jan-01 14.82% 0.23%FM says that govt stakes in HPCL will be reduced to 26%

07-Oct-02 13.48% 0.76% PM says privatization is 'irreversible'


Disinvestment – opportunities for

insider trading! The pronouncements on stake sale in HPCL provided opportunity for insider trading.

Similar incident occurred again later with regard to the pricing of equity of public sector banks being ‘returned’ to the government.

Similar incident also occurred in the case of sale of government stakes in NALCO – which finally did not take place.


In sum, disinvestment has been chraracterized by:

Fickleness of the process Violation of laws of the land by the

government Disregard for integrity of the market -

allowing the process to be used for possible manipulation of the market

Under-pricing of shares Non-achievement of targets

In addition, dis-investment has been seen only as ‘privatization’ and not as ‘corporatization’ of PSUs!


Could it have been better?

To answer the question let me compare the process of government’s stake sale in IBP in India with the sale of government’s stake in Turkey in Tupras Refinery.


Stake sale in IBP Heated debate on whether PSUs should be

allowed to bidBids called for without resolution of the

above issueStalemate after the bid was won by a PSUAccess to price sensitive information for

days before the decision was made knownProvided opportunity for insider trading and

showed the government in poor light


Stake sale in Tupras Refinery The dis-investment commission was fully

empowered to take the decisionThe sale effected through an open auctionThe process was televised and was

therefore completely transparentThe entire process was completed in less

than 90 minutesThe value realized from the sale almost

doubled in that short span of time


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


Clause 49 of the Listing Agreement The percentage of shares that must be held by

public. The composition of the board (the number of

independent directors on the board). The onerous supervision – audit committee, internal

audit, statutory audit, CAG audit, vigilance department, parliamentarians, parliamentary committees.

The micro-management by the concerned ministries.Essentially the board is not in control of the affairs of the company! … and this is the most fundamental requirement of Clause 49!


Is there a way forward? Need to focus on the processes so as to create robust

processes. Need for the government to follow the laws of the

land without exceptions. Need to create structures and institutions that are

not buffeted by the government of the day. Need to free the PSUs to chart out their destiny, with

full control being transferred to the boards – and holding them accountable for performance.

Need to create public opinion that all the above is effected without compromises.

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March 15, 2007Samir K. Barua 1 Political versus Corporate Governance In Parastatals.

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