The Hindu Business Line : Enforcing Clause 49

THE SECURITIES AND Exchange Board of India's commitment to the December 31 deadline on compliance of Clause 49 by listed companies was forcefully reiterated by its chairman, Mr M. Damodaran, recently. He made it clear that companies had had enough time, since March, to make the necessary adjustments to adhere to the demands of the Clause. According to this Clause, a listed company with an executive chairman must have half its board constituted with independent directors. For companies headed by a non-executive director, it would have to be a third of the board. Mr Damodaran made it clear that non-compliance would attract penalties effective from the day after the deadline. Significantly, he did not rule out suspending trading of the securities of the errant companies.

The SEBI chief's message should sound loud and clear in the Ministries that control listed public sector undertakings, especially the navratnas. Clause 49 is a step in the direction of professional governance, a goal that the Government and Ministers seem to ignore when it comes to PSUs under their charge. So far, most Ministers, including those vociferous about disinvestment, have tip-toed around this issue of professional management of PSUs as have the Opposition, the coalition partners and the public, preferring to join battle over divestment of government equity. Underlying this debate over equity dilution is an assumption shared by parties across the political spectrum that PSUs must not only remain the property of government but also be run by it. The fact that of the nine listed PSUs only one, BHEL, has complied with Clause 49 is evidence of this premise. The recent public quarrel between the Petroleum Ministry and the ONGC chairman over the appointment of government directors on the company's board is a more vivid expression of the belief that governments must also run PSUs.

Clause 49 as part of the Listing Agreement, in an indirect way, forces a wedge between ownership and management of PSUs. It is a part of measures that have evolved to enforce good governance in markets. The onus of instilling that concept in the case of he PSUs falls on the government, as owner, a responsibility that it has so far shied away from. SEBI's insistence forces it to consider the problem of boards packed with government nominees. That problem afflicts ONGC, HPCL, BPCL among others. In such boards, Clause 49 would require the government to recall some of its nominees to make way for independent directors. It would be tempting for the Government to get SEBI to extend the deadline once again. Remember that companies had already been given one extension with the March deadline pushed to December. But a government like Dr Manmohan Singh's that believes in sound management of the economy cannot afford to take the soft option again.

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