The Hindu Business Line : Independent directors in PSUs

Recently, the SEBI Chairman, Mr M. Damodaran, once again reiterated that government nominees would not be considered independent for the purposes of compliance with the requirements of Clause 49. This is an issue which has refused to settle ever since SEBI amended Clause 49 in October 2004 making the requirements for independence much more stringent than in the past.

Interestingly, the requirement to have a substantial number of independent directors has always existed since Clause 49 was first introduced in January 2000. However, in the past, government nominees were considered as independent directors for the purpose of compliance with the Clause.

Specific clarification

What changed from January 2006 (the date the revised Clause 49 came into force) was the specific clarification from SEBI that government nominees were no longer considered independent.

The need for independent directors itself is not disputed. The genesis of the requirement to have a statutory minimum number of independent directors on company boards lay in the 1980s and 1990s when the US and UK saw several cases, such as the Savings and Loan scandals and the collapse of companies such as Polly Peck, Robert Maxwell’s Mirror Group, BCCI, etc, all of which were brought upon by the unbridled exercise of management power by dominant shareholders to meet their own ends.

Hence in a situation where a dominant shareholder (the promoter) is also involved in managing the company, the independent director plays a valuable role in making sure that management decisions are taken considering the interests of all stakeholders, and by extension, the small shareholder.

With regard to government nominees on boards of listed public sector companies, SEBI’s perspective is that the nominees represent the government in its capacity as a dominant shareholder and, hence, cannot be considered independent. It contends that the possibility that a particular course of action may be in the best interests of the government but not all public shareholders cannot be ruled out and hence the need to have separate independent directors.

Govt’s view

The government’s argument is that its nominees inherently exist to look after the interests of all stakeholders and hence they should be considered independent. The underlying assumption clearly is that “what’s good for the government must be good for all stakeholders.” But is that really the case?

Let’s take a hypothetical example of a listed PSU in possession of a large amount of surplus real estate. It is obvious that while the government would be indifferent to either a public sale/development of this property or a transfer to another PSU free of cost (which would still retain the value in government hands), public shareholders would clearly lose out in the latter case. Hence the assumption that maximising government’s value is tantamount to maximising value for all shareholders clearly doesn’t hold.

Another tack taken by the government is to argue that the statutory minimum number of independent directors required for PSUs should be less than that for other public companies. Again, the underlying assumption here is that the need for oversight and review of management decisions in PSUs is somehow inherently less than that in other public companies.

A quick look at the Web sites of the Comptroller and Auditor General of India (CAG) and the Central Vigilance Commission (CVC) will show numerous examples of how PSUs are no better than other listed companies. In fact, it could perhaps be argued that the need for independent directors at some of these companies is even greater!

(The author is Partner, Risk Advisory Services, Ernst & Young.)

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