Corporate Governance dealing with PSU™s in India and its role in ONGC

Author: Gautam Nayak
Co-author: Bhanu Priya
4th year student of National Law University, Jodhpur
Contact details: Mobile No: 09460125691
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Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The 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, UK, Commission Report: Corporate Governance 1992)
Corporate governance refers to the mechanism and processes by which corporations are governed. At the most elementary level, it can be described as the process by which investor™s attempts to minimize the transaction costs and agency cost associated with doing business within firm . Corporate governance facilitates in managing the company well and assists in sharing the returns of profits and investment more equitably. Corporate governance has been the buzz word for long now specially after the collapses of high profile companies, as developing nation India has constantly tried to improve the governance system in lieu of this there were many committee formed ,In light of this, and keeping to the global trend, SEBI introduced clause 49 in the equity listing agreement which imposed corporate governance requirements on all those public companies which wanted to be list on Indian stock exchanges, However despite the law, violations continued

The subject of corporate governance came to global business limelight from relative obscurity after a string of collapses of high profile companies Since Satyam Scandal which is also known as India™s Enron, government has tried and improves the corporate governance standards in corporate India. As the government™s disinvestment strategy gathers momentum there is genuine need to improve the levels of transparency and accountability within public sector units as the first step towards achieving that, the corporate governance norms for central public sector enterprise (CPSEs) introduced in 2007 have now been made mandatory for all unlisted PSU™s.
However after all the regular improvements and up gradation in the corporate governance guidelines there continues to be concern around effective implementation of these norms. Autonomy of PSUs, functioning of the PSU board , failure on the part of many listed PSUs to comply with clause 49 of listing agreement and the vast difference that exist between the governance standards prevalent in central and state PSUs are some of the key issues that need to be tackled on a serious note
In this paper firstly we would look at the present legislatures and then would attempt to explore these issues and challenges and provide suggestion for the same and also do a case study on ONGC

Legislatures related to corporate governance in public sector unit:
As is generally the case in most of the well governed economies, in India to a detailed statutory framework of corporate governance has been defined primarily by the Companies Act. Most of the important requirements set out by the OECD principles in regard to good corporate governance are very well defined in the Companies Act in India. These provisions have been further supplemented by SEBI which has directed all the stock exchanges to amend their listing agreement to incorporate new clauses to make it binding on the listed companies to improve their governance practices. However, the main instrument which is set out by SEBI for corporate governance is listing agreement clause 49, now we will discuss in detail the provision related to corporate governance in public sector unit
According to section 617 of the companies act, all CPSEs and other companies incorporated under 617 and in which the government, directly or indirectly, holds 51 percent or more of the paid-up share capital are incorporated under section 617 of the Companies act as government companies. The principal difference between private firms and PSUs is that in the latter the auditor is appointed by the Comptroller and Auditor General (CAG) instead of the government as shareholder.
There have been number of amendments for improving standards for corporate governance one of the important amendments was introduced in the year 2000 to Sections 217 and 292 of the Companies Act, 1956 which was made applicable from December 13 2000, this amendment set the tone for corporate governance in the country.

The changes which were made are following:

1.Directors™ Responsibility Statement [Section 217 (2AA)]:
With a view to increasing the accountability of Directors, a company is required to include a Directors™ Responsibility Statement in the Report of the Board of Directors which should affirm the following :-
(a)Annual accounts have been prepared in accordance with applicable accounting standards with proper explanation relating to material departures.
(b)The selection and application of Accounting Policies by Directors is consistent and prudent so as to give a true and fair view of the state of affairs of the company;
(c)Proper and sufficient care has been taken by the Directors for the maintenance of adequate accounting records for safeguarding the assets of the company and for preventing and detecting frauds and irregularities; and
(d)The annual accounts of the company are prepared on a ˜going concern basis™.

Annotation: While bringing this amendment the committee was of the view that in addition to the existing requirements, the Responsibility Statement should include that the related party transactions and have been entered into at arm™s length, and if not, the relationships of the directors in such transactions along with the amounts involved have been disclosed as a part of the Director™s Report along with management justification thereof. The existing requirement in Section 217 (2AA) requiring a Director Responsibility statement indicating that the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Act and that the books of accounts comply with the accounting standards and policies should continue.

Guidelines of Department of Public Enterprises on Corporate Governance of Central Public Sector Enterprises. The Department of Public Enterprises (DPE) issued guideline on the composition of Board of Directors of Boards of Central Public Sector Enterprises (CPSEs) in March 1992. The guideline requires at least one-third of the Directors on the Board of a CPSE to be non official Directors. For listed CPSEs, DPE issued guideline in November 2001 on the composition of the Board of Directors. It provided that the number of independent directors should be at least one-third of the Board if the Chairman is non-executive and not less than 50 per cent if the Board has an executive Chairman. The relevant provisions of Clause 49 of the Listing Agreement with Stock Exchanges issued by Securities and Exchange Board of India (SEBI) in 2000 formed a part of the this guideline.

Corporate Governance is beyond the realm of law. It stems from the culture and mindset of management, and cannot be regulated by legislation alone. It is about openness, integrity and accountability. SEBI had constituted a Committee in 1999 under the chairmanship of Shri Kumar Mangalam Birla, then member of the SEBI Board to promote and raise the standards of Corporate Governance. Based on the recommendations of this committee a new clause 49 was incorporated in the Stock Exchange Listing Agreements . The recommendations were implemented through clause 49 of the Listing agreements in a phased manner by SEBI. Clause 49 has both mandatory and voluntary provisions. Mandatory provisions relate to board composition, audit committees, board procedures, management discussion and analysis in the annual reports, certification of financial statements and internal controls, and corporate governance reporting.

The Securities and Exchange Board of India (SEBI) by its Circular dated 21 February 2000 directed Stock Exchanges to amend the Listing Agreement between them (i.e., stock exchange) and entities whose securities were listed and to include a new clause 49 in such Listing Agreement.  This clause was amended in October 2004 and the revised clause has been made effective from 1 January 2006. Clause 49 of the

Listing Agreement specifies among other things, the following:
1.Composition of the Board of Directors of listed government companies: Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he/she is an executive director, at least half of the Board should comprise independent directors.
2.Audit Committee in listed government companies: A qualified and independent Audit Committee shall be set up, giving the terms of reference. The Audit Committee so set up shall have minimum three directors as members and two-thirds of the members of Audit.
3.Committee shall be independent directors. All members of Audit Committee shall be financially literate and at least one member shall have accounting or related financial management expertise.

Independent Directors on the Board of listed government companies.
In an public sector unit the Board is the most significant instrument of Corporate Governance as mostly all the decision are made by them they are the highest authority. The presence of independent representatives on the Board will reduce the power of the board and decisions of the management can be challenged this will protect the interests of shareholders and other stakeholders.
Constitution and composition of Audit Committee in listed government companies
Audit Committee is by far the most important working committee of the Board in the case of a government company with an extensive role in ensuring proper financial reporting and adequacy of internal controls over such reporting. The role of Audit Committees in government companies is closely aligned to C&AG™s constitutional and statutory role in promoting fairness and transparency in financial reporting. A limited review was accordingly undertaken in respect of listed government companies with the objective of assessing the compliance by these companies with various provisions of clause 49 of the Listing Agreement relating to constitution and composition of the Audit Committee. This review was primarily based on the information and documents obtained from the Management of the companies concerned.
As required by Clause 49 of the Listing agreement, the Audit Committee should have minimum three directors as member and two thirds of which should be independent directors. As on 30 June 2007, in listed government companies revealed that an Audit Committee existed in all listed government companies. However, the following non-compliances were made:
There was no independent director in the Audit Committee of nine listed government companies as mentioned in para 3.5.2(i) and also in case of IRCON International Ltd.

Though the Board of Bharat Immunological Biological Corporation Ltd. consisted of required number of independent directors, the Audit Committee did not consist of two thirds independent directors as there was only one independent director out of three directors.
In case of Neyveli Lignite Corporation Limited, there was only one independent director, as on 31 March 2007, on the Audit Committee of four members. The compliance with Clause 49 of the Listing Agreement was made only on 1 June 2007 by induction of three independent directors on the Audit Committee.

There was no Audit Committee during 2006-07 in case of Hindustan Organics Chemicals Ltd. However, the Committee was constituted by the Company on 28 May 2007.

Thus, the Audit Committee of 18 Central Government listed company had not been constituted as per Clause 49 of the Listing Agreement.

Constitution and Composition of Audit Committee in unlisted government companies

As required by Section 292A of the Companies Act, 1956, every public limited company having paid up capital of not less than Rs. five crore shall constitute an Audit Committee at the Board level consisting of minimum of three directors and two thirds of which shall be directors other than Managing or whole time Directors.

Corporate governance in statutory corporations
The Government has also established statutory corporations like Food Corporation of India, Airports Authority of India, National Highways Authority of India and Central Warehousing Corporation by special Acts of the Parliament. The Government by making amendments in the Companies Act, 1956 in 2000 has prescribed good corporate governance practices with a view to promote more transparent, ethical and fair business by all corporate entities. Such good governance prescriptions are a recent development and as such the governing legislations of statutory corporations do not contain provisions relating to the constitution of Audit Committees and preparation of Directors/Members™ Responsibility Statement. Consequently these corporations do not prepare Directors™/Members Responsibility Statement despite substantial public money being involved in them. The Department of Public Enterprises through its guidelines of June 2007 requires all Central Public Sector Enterprises (CPSE) to adopt good governance practices. There is however ambiguity regarding Central Statutory Corporations coming within the definition of CPSE, which needs to be suitability clarified.

Reference to Department of Public Enterprises by Audit.
Since the main problem observed in most of the non-compliant Government companies was the absence of required number of independent directors or non-official directors on their Boards, the matter was referred to DPE in October 2007 indicating the need for the Government to take suitable steps for the induction of independent or non-official directors on the Board of deficient government companies. No response from Department of Public Enterprises was received (December 2007).
Other laws and regulations: Various other laws and regulations impinge on CPSE governance. Main among these is:
1. Right to Information (RTI) Act 2005: RTI is a landmark initiative for enhancing transparency and governance of the public sector as a whole. The Act requires that various CPSE reports and statements be made available to the public. In practice, many CPSEs have established websites linked to that of their administrative ministry to meet the law™s requirements. Documents that are not regularly disclosed to the public may also be demanded from CPSEs.
2. Labor laws: Most of the Acts related to employee relations and protection apply to CPSEs, though there are some special provisions and exemptions. Supreme Court decisions govern employee relations, giving CPSE employees the formal status of Government of India employees, but more recently denying that they had full civil service status.
3. Insolvency laws: CPSEs fall under the same insolvency and liquidation laws as other companies, including:
(a) the Sick Industrial Companies Act which governs restructuring for all industrial companies (public and private);
(b) the Companies Act which covers liquidation;
(c) and the general civil procedure law which contains provisions for the appointment of receivers.
4. Other acts and regulations: The Competition Act 2002 applies to CPSEs, but exempts those carrying out sovereign functions or activities necessary for the discharge of these functions. CPSEs are also subject to other laws and regulations, such as sector regulation and environmental law.

Challenges and recommendations
When it comes to corporate governance, it is also an issue of perception. The governance framework for corporate governance embraces several aspects of international good governance practice. Yet, governance challenges still remain and further reforms are needed to build on the substantial gains that have already been achieved. The nature and extent of these challenges are bound to vary by type of CPSE for example by size and importance of firm, delegation of powers, and listed vs. non-listed firms
There is widespread recognition in India of its importance, and the governance reform process has been well under way for a number of years, need for improving governance practice increase with every step towards industrial and market growth, there have been numerous commissions and expert groups who have studied this issue in-depth and offered recommendations for improvement but there is no dearth of information all the policy and technical solutions are well known. The basic question which arises is what can be done differently to expand and deepen the ongoing reforms? Taking into consideration all the challenges four general observations can be made:
¢First, corporate governance reforms are part and parcel of the broader CPSE reform program rather than a stand-alone or substitute reform. In this regard, broader policy reforms aimed at imposing market discipline are essential to bringing pressure on companies to improve governance and to maximizing and sustaining the gains from such improvements. Substantial progress has been made in removing barriers to competition, reducing government financial support, and listing of CPSEs on the capital markets. But further market-based reforms are needed to cement these achievements and further enhance the competitiveness of CPSEs.
¢Second, how the state organizes and exercises its ownership rights is central to improving the governance of some of India™s most important companies. The present arrangements combine the conflicting roles of policy-making and ownership in some ministries, allow political interference in board appointments and commercial decision-making to continue, and weaken board powers. With this approach the main challenge of GOI which lies in making a complex possession framework more effective in conspicuous the right balance between CPSE self-sufficiency and accountability will be resolved to a very good extend.
¢Third, despite the improvements and advances that have been complete, the board persist to be state-dominated it still lack adequate decision-making authority, and are hardly ever if ever evaluated on their recital. This is the second major challenge and need to be looked into.
¢Fourth, though there have been a lot of work done towards improving disclosure and transparency standards. Implementing them can be a foremost confront for many PSUs, predominantly in light of comparatively feeble internal audit and control functions, lack of guidance on disclosure (particularly for non-listed firms), and latent repetition and delays in the various CPSE audits..

In view of the above, it is suggested that the following next steps be considered:
1.Strengthening and improving the corporate governance guidelines, the current Guidelines are too narrow in scope and may also require making certain provisions mandatory in order to give it more importance and enforcement, the Guidelines should be revised with a view to also making them more comprehensive.
2.Monitor compliance with the CG Guidelines and evaluate how to integrate governance indicators in the MOU system: In developing such a system, DPE could draw from the monitoring requirements established for listed companies and from international experience with performance monitoring systems in general.
3.Consider implementation of company-level governance reforms in 2-3 pilot cases of Miniratnas and profitable companies. A pilot exercise along these lines may help upgrade their status and facilitate listing on the stock exchange. It would also provide tangible improvements and benefits that could create momentum for more widespread implementation across CPSEs.
4.Improving the training exercise and also consider expanding its current director training and other programs to a wider group of CPSEs.
5.There can be more detailed description of DPE™s capacity and the capacity should be further enhance DPE™s capacity to carry out tasks like development of the strategy, revision of the Code, monitoring indicators
6.To help foster that PSU boards are focused on the leading substantive issues, there can be alternative mechanisms such as a two-tier board structure and board performance assessments should be introduced in system and actively considered
7.The government should deal firmly with non-compliance of corporate governance norms by both listed and unlisted PSUs. Further The government should clearly and unambiguously set out its ownership policy and how it may apply in matters that have ramifications for minority shareholders

Good governance is integral to the very existence of a company; it inspires and strengthens the investor™s confidence by ensuring the company™s commitment to higher growth and profits. Corporate Governance must be based upon the principles of transparency in board processes and independence of boards, accountability to stakeholders, fairness to all stakeholders; and social, regulatory and environmental concern.
In this process Government had introduced the Navratna scheme in 1997 and thereafter enhanced the powers delegated to Navratna, Miniratna and other profit making CPSEs in 2005. Nine more CPSEs were granted Navratna status in 2007 and 2008. The issue of corporate governance had also assumed great significance in the context of management of enterprises and corporate governance is even more relevant for CPSEs as large public funds have been invested in them. In this background it was felt that Public Accountability mechanism by the CPSEs should be strengthened.

A draft code of corporate governance for CPSEs was initially circulated. After several round of discussions, revised draft guidelines were prepared and circulated. The committee of secretaries under the chairmanship of cabinet secretary thereafter considered the draft guidelines on corporate governance. Thereafter, the cabinet in its meeting held on 8th March, 2007 approved the implementation of the guidelines on Corporate Governance for CPSEs. CPSEs implemented the guidelines for the full year 2008-09. On the basis of experiences gained, government approved the implementation of corporate governance guidelines on a mandatory basis for all CPSEs.

These guidelines are applicable to listed as well as un-listed CPSEs and cover issues such as Composition of Boards, Audit Committees, Subsidiary Companies, Remuneration Committees, Disclosures, Code of Conduct and Ethics, Risk Management and compliance.
It has also been mandated in the Guidelines that there should be a separate section on Corporate Governance in the Annual Report of all companies with details compliance. CPSEs will have to obtain a certificate from auditors/ company secretaries on compliance with these guidelines. The chairman™s speech in the Annual General Meeting will also carry a section on compliance with corporate governance guidelines and will form a part of the company™s Annual Report. Thus keeping in view the importance of Corporate Governance in State Level Public Enterprises, all states have also been advised to implement these guidelines.

Corporate governance in ONGC is led by strong emphasis on human values, individual dignity and adherence to honest, ethical and professional conduct. The endeavours in this regard are focused on highest level of transparency, openness and accountability and fairness in all areas of operation, meeting the aspirations of all its stakeholders.
¢The Board of Directors
Besides seven functional Directors, ONGC Board has six non-executive Directors; comprising two part-time official nominee Directors (at the level of additional secretaries) and four part-time non official directors nominated by the Government of India. Managing Director, ONGC VideshLimited is a permanent invitee to the meetings of the Board to have the benefit of global experience.

¢Enterprise-wide Risk Management (ERM) framework
ONGC has developed a comprehensive Enterprise-wide risk Management (ERM) framework. Under the framework risk register portfolio has been compiled and an ERM policy has been firmed up. Risk management process on pilot scale has been initiated in six representative locations.

¢Whistle Blower Policy
ONGC has gone the extra mile, beyond mandatory requirement, to implement a Whistle Blower Policy w.e.f. from 1stDecemeber, 2009 to ensure that a genuine Whistle Blower is granted due protection from an victimization.
It is in the process of formulating a fraud prevention policy which will also give further comfort to the CEO/CFO on adequacy of internal controls. All the above, will go a long way enforcing the commitment to adopt best governance practices besides internal controls over financial reporting.

¢Investor™s Relation Cell
ONGC has a dedicated Investors Relation Cell to maintain a close liaison with the investors and to share information through periodic meets. Regular investor meet are organized to keep informed the valued investors about the company activities and plans.
In line with global practices, ONGC makes available all information, required by the various stake holders, including investors, on the Company™s corporate website.

¢Code of Conduct
The code of internal procedures and conduct in dealing with the securities of ONGC is in place. The objective of the code is to prevent insiders trading.

ONGC has also received several recognitions and accolades for its corporate governance practices. ONGC was conferred with ˜SCOPE Meritorious Award for Corporate Governance for 2006-07™ in November 2008 and also with the Golden Peacock Award for Excellence in Corporate Governance for 2009 in October 2009, four times in last five years.

Corporate governance provides the structure and firm foundation through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders, and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently and a good corporate governance mechanism improves the health of the corporate sector, thus increasing national competitiveness.
It has to be keeping in mind that the key elements of good corporate governance principles include honesty, trust, integrity, openness, performance orientation, responsibility along with accountability, mutual respect and commitment to the organization. Most important thing is to recognize the fact that corporate governance has succeeded in attracting a good deal of public interest because of its apparent importance for the economic health of corporations and society in general.
Thus, it would be seen therefore that corporate governance has been assigned considerable importance by government over the last few years. As the public sector is being de-monopolised, de-regulated and de-controlled. Government is clear in its commitment to ensure that public sector enterprises conform to the highest standards of corporate governance. In the recent past, we have also seen more and more CPSEs being listed on the stock exchange and with this much larger exposure to the market forces, the importance of corporate governance is further being underscored. Doubtless, over the next few years, we will see the entire public sector complying in greater and greater measure to the new corporate governance Guidelines which will ensure a robust, ethical, efficient and performance oriented public sector driving the engines of the economy in our country.

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About Gautam Nayak

Gautam Nayak

Corporate Law Referencer

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