Investors have traditionally believed that it is companies controlled by private promoters that are most prone to mismanagement and poor governance. But events unfolding at the government-backed Power Trading Corporation (PTC) and its subsidiary PTC India Financial Services (PFS) have shown that State backing and dispersed institutional holdings are no proof against slipshod governance.

In the past year, PFS has been embroiled in one controversy after another — with its independent directors (IDs) quitting en masse citing governance failures, SEBI hauling up the company for non-compliance with its LODR (Listing and Disclosure Obligation Regulations) and a forensic audit flagging possible evergreening of loans. This has resulted in significant curbs on its lending operations, impacting the parent as well. But if one thought the PFS case was the exception, a recently published CAG (Comptroller and Auditor General of India) compliance audit of PSUs suggests that lax governance is a pervasive problem.  

CAG’s review of 72 listed PSUs, to assess if they followed corporate governance rules laid down by the Companies Act, SEBI and Department of Public Enterprises, showed wide-ranging violations which would have certainly created a furore at private sector companies. As many as 59 of the 72 PSUs did not have the required number of IDs on their Boards, with giants like NMDC, Bharat Dynamics, IRCTC, REC and Coal India failing to appoint even a single ID. Thirty-two PSUs including some big names like ONGC, IOC, SAIL, NMDC, Coal India and Bharat Electronics did not have the required number of non-executive directors on their Boards. SEBI regulations require a minimum Board strength of six directors, but 15 PSUs failed to fulfil even this. Where PSUs did have IDs, the latter had a poor track record of attending meetings. Indian regulations rely on the audit committee to approve CFO appointments, review internal controls and related party deals, and address auditor comments on the company’s financials. But three PSUs had not even constituted an audit committee, 31 failed to staff it with a sufficient number of IDs, and a dozen saw audit committees not performing their role. Listed central PSUs openly flouting the governance rules put in place by SEBI and the Corporate Affairs Ministry certainly set a poor example for private companies.

Such instances of poor governance buttress the entrenched perception that PSU stocks can never be great wealth creators. If disinvestment offers often require bailouts and listed PSUs struggle to match the valuation of their private peers, it is mainly due to the investor perception that PSUs are subject to government intervention in their commercial decisions. If the Centre is keen to unlock dormant value in PSUs, the first step would be to empower them with credible and autonomous Boards that uphold governance rules and put minority shareholders at the centre of their decisions.