Political versus Corporate
Governance
In Parastatals
March 15, 2007
Samir K. Barua
1
Political Governance
Political 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)
March 15, 2007
Samir K. Barua
2
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)
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Samir K. Barua
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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)
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Samir K. Barua
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Parastatal
Corporation wholly or partially governmentowned 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, stateowned enterprise.
(countrystudies.us/south-africa)
A government owned company.
(www.fao.org/docrep)
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Plan of Presentation
- Discuss a few issues in the context of disinvestment 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.
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March 15, 2007
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47 tons of Gold from the
vaults of RBI air-lifted to
London and deposited in the
vaults of Bank of England
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Samir K. Barua
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Earlier, government had
leased 20 tons of gold to
State Bank of India to be
sold in the international
market
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Samir K. Barua
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There was acute crisis in
the external sector and
the inflation rate had
climbed to 17%
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The government turned
to IMF and the World
Bank for assistance …
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… The international agencies were
particularly critical of the poor
returns on PSU investments and
the budgetary support to PSUs
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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
March 15, 2007
Samir K. Barua
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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
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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!
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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
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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
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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.
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Record of Divestment (Figs in Rs. Crore)
Year
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
1996-97
1997-98
1998-99
1999-00
Total
March 15, 2007
Target
2500
2500
3500
4000
7000
5000
4800
5000
10000
5000
4800
5000
10000
44300
Actual Method
3038
1913
Nil
4843
362
380
902
5371
1584
380
902
5371
1584
18393
Samir K. Barua
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Record of Divestment (Figs in Rs. Crore)
Year
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
Target
2500
2500
3500
4000
7000
5000
4800
5000
Actual
3038
1913
Nil
4843
362
380
902
5371
Method
Bundling
Auction
Auction
Auction – NRIs allowed
Auction + Fixed Price
GDR (VSNL)
GDR (MTNL)
1999-00
Total
10000
44300
1584
18393
GDR + Strategic sale
March 15, 2007
GDR, Domestic Market, Crossholding
Samir K. Barua
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Record of Divestment – recent years
(Figs in Rs. Crore)
Year
1999-00
Target
10,000
Actual
1829
2000-01
10,000
1870
2001-02
12,000
5632
2002-03
12,000
4748
2003-04
13,200
993
Total
44,000
14,079
March 15, 2007
Method
GDR, Sale in Domestic Market
Strategic sale, Sale through
nomination of 3 refineries
Strategic sale, Sale of hotels in the
public sector (asset sale), Hefty
dividends
Strategic sale, Sale of control
premium (Maruti)
IPO in domestic market through bookbuilding (Maruti)
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Extent of Budgetary Support
(Figs in Rs. Crore)
Year
1990-91
Support
7075
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
5985
5241
7271
7966
6452
6854
7137
7230
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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%
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Extent of Budgetary Support
*(Figs in Rs. Crore)
Year
*Support % of Budget *Real value (9091)
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
March 15, 2007
Samir
K. Barua
1998-99
7230
2.835%
3925 24
Extent of Budgetary Support
*(Figs in Rs. Crore)
Year *Support % of Budget *Real Value
1999-00 8406 2.82% 4391
2000-01 8896 2.65% 4405
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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
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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!
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Disinvestment in the Oil Sector
Date
09-Sep-02
06-Dec-02
HPCL
Stock
Return
-30.15%
19.97%
12-Jan-01
14.82%
07-Oct-02
13.48%
March 15, 2007
Index
News
Return
-1.66% CCD defers sale of HPCL
PM,LK Advani, George Fernandes
2.34% and Arun Shourie meet and decide to
put HPCL for strategic sale
FM says that govt stakes in HPCL
0.23%
will be reduced to 26%
0.76% PM says privatization is 'irreversible'
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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.
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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!
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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.
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Stake sale in IBP
Heated debate on whether PSUs should be
allowed to bid
Bids called for without resolution of the
above issue
Stalemate after the bid was won by a PSU
Access to price sensitive information for
days before the decision was made known
Provided opportunity for insider trading
and showed the government in poor light
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Stake sale in Tupras Refinery
The dis-investment commission was fully
empowered to take the decision
The sale effected through an open auction
The process was televised and was
therefore completely transparent
The entire process was completed in less
than 90 minutes
The value realized from the sale almost
doubled in that short span of time
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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.
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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!
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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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