In praise of PSUs

A recent report by the proxy advisory firm Institutional Investor Advisory Services (IIAS) indicates that Public Sector Undertakings (PSUs) lag behind private companies in compliance with corporate governance norms and board structures. An analysis of the BSE 100 companies revealed that 93 complied with regulatory requirements for board independence as
of December 2023, while the seven non-compliant companies were all PSUs, including a bank.

The IIAS report further highlights that the government has exempted PSUs from many corporate governance regulations. As the government controls these entities, there’s potential for interference in decision-making and appointments, undermining independent oversight and accountability. As per IIAS, this lack of urgency in addressing board composition and transparency issues contributes to their governance challenges.

The boards of a few large PSUs have not met the required number of independent directors for listed companies, as mandated by SEBI regulations. These regulations stipulate that at least one-third of the total number of directors in a listed company should be independent directors, in the event that the board is chaired by a non-executive director. At least half of the board should comprise independent directors, where the chairperson of the board is an executive director.

In many private sector companies, the induction of independent directors is only in letter, but not in spirit. They mostly appoint former regulators or top bureaucrats familiar with the workings of the government or friends, distant relatives, or non-controversial public figures with no corporate knowledge, former board members of the Institute of Chartered Accountants of India (who help navigate audit issues, if any), or former top PSU bankers (who can help obtain bank loans or who have already sanctioned loans to the company). With such independent directors, many times corporate governance issues like protection of minority shareholders’ interests, accounting frauds, fund diversion, loan defaults, etc. take a back seat. In many private sector companies, the board oversight is more on paper, while the real control is with the promoter group.

As the grandfathering of previous board tenures of independent directors concludes in 2024, the IIAS report notes: “One risk of the board refresh will be for business groups; if business houses decide to shuffle independent directors across group companies, it will defeat the purpose of the regulations. Therefore, it will be interesting to see if Indian companies truly embrace the need to refresh boards or try harder to maintain the status quo.” The report hints at the reshuffling of independent directors from one group company to another group company and vice versa by private sector companies. This will help dodge the regulation relating to “grandfathering” of independent directors and retain the same tried-and-tested independent directors.

We know most corporate defaults on bank loans have happened only in private sector companies, and certainly not by PSU companies. The list of the top 50 willful defaulters is littered with some of the biggest names in the private sector: Mehul Choksi, Nirav Modi, Vijay Mallay, Sanjay Jhunjhunwal (REI Agro Ltd), Era Infra Engineering Ltd, ABG Shipyard Ltd, Concast Steel and Power Ltd, Jatin Mehta (Winsome Diamonds & Jewellery), Kanpur-based writing instrument giant Rotomac Global Pvt Ltd (which is part of the famed Kothari group), Coastal Projects Ltd, Gwalior-based Zoom Developers Pvt Ltd, IVRCL Ltd, Amtek Auto Ltd, and the list goes on.

Some of the biggest accounting frauds have taken place at marquee private sector companies like Satyam Computers Ltd. The Hindenburg Research report on the Adani Group sparked a heated debate about the business practices of one of India’s largest business groups and raised serious questions of ethics and legality. The scope for accounting fraud in PSU companies is much lesser, as the accounts of the PSU companies are subject to multiple audits, including those
by the CAG.

PSUs straddle the entire spectrum of the Indian economy and have historically played a first-mover role in some of the toughest sectors like oil, gas, defence, space, infrastructure finance, energy, telecom, transport, etc. Stock markets have lately understood the value of PSU shares. The PSU index grew four times as much as the benchmark index in 2023. One in three PSU stocks delivered a 100 per cent return in 2023.

PSU shares have also been a safe sanctuary for passive income seekers like senior citizens. Many PSU shares offer a dividend yield of 5 per cent or more. The central government has received a record equity dividend of Rs 63,056 crore from 67 listed public-sector undertakings in FY23.

Let us celebrate our PSUs.

(The writer is a retired corporate professional)