The Hindu Business Line : Government and governance

GIVEN THE SLOW but steady pace of reforms in the financial sector, it was only a matter of time before the winds of change began wafting across one of the most critical issues in the corporate governance of public sector enterprises — the relationship between owners and management. That long dormant issue has now surfaced, surprisingly at the initiative of the Reserve Bank of India, which is, for all practical purposes, the government's executive arm and thus the financial sector's first regulator.

The D.M. Satwelakar Group, set up by the RBI, was given a grand brief — to identify the sources and nature of potential conflicts of interest in the financial sector and possible measures to mitigate them. Its terms of reference, therefore, encompassed the relationship between government-as-owner and management — as in financial public sector enterprises such as scheduled commercial banks and financial institutions — and shareholders-as-owners and management, as in private banks and financial institutions. The potential conflict scenario in the latter has thrown up some interesting solutions, suggesting protection of shareholders' interest in the event that control is exercised through thin holdings, cross-holdings by investment companies and myriad subsidiaries. As for the public sector financial entities, the Group recommends the creation of structures that will act as a hedge between ownership and management. And this is where the implications of the report's terms of reference and recommendations go far beyond the financial sector.

The Group recommends the creation of specialised agencies, which could be trusts or special purpose vehicles, as alternatives to direct control by the government-as-owner. These agencies would create the governing board, oversee its functions and renew its membership with a view to establishing a professional leadership and enterprise. They would also fix executive compensation in keeping with market trends to attract and retain the best managerial talent. Such changes have become necessary because the financial sector operates in an increasingly complex situation and cannot be left to the regulators or the institutions themselves to run.

Welcome as the recommendations for PSEs are, it must be said that the idea of intermediaries between the owner and management could just about replicate some of the problems that need to be addressed. Special purpose vehicles, or similar bodies, could easily be subject to pressures from above and may not necessarily be as responsive to market risks as managements are. Besides, with the RBI overseeing the impact on overall monetary policy, wires could get crossed with another agency, as has happened in the cooperative banking sector or even in the capital market. Having said that, clearly, the group has raised these issues at a time when the question of management autonomy, long buried under the divestment debate, has been surfacing across public sector enterprises. The Satwelakar Group provides an answer to a critical problem that should reverberate across boardrooms and, hopefully, ministries, and inspire changes towards greater professionalism.