A recent opinion of SEBI in the form of an ‘informal guidance’ has once again brought to the forefront the desires of listed public sector units (PSUs) to be treated differently. Though the question that the Bank of Baroda (BOB) raised was narrow, I think it effectively also threw up the larger issue whether PSUs were also required to comply with provisions relating to corporate governance as other companies with private promoters are. Or are PSUs to be given exceptions, even if they have raised monies by the issue of shares to the public and have substantial public share ownership?
Specifically, BOB asked SEBI whether it was required to obtain approval of shareholders at general meeting for appointment of its directors. This is what Regulation 17(1C) of the SEBI LODR Regulations required. BOB pointed out that it was not like another ordinary listed company. It was a PSU subject to special laws where not only the Government of India held substantial share ownership, but such laws also enabled the government to appoint several nominees to its Board. Requiring approval of shareholders for even such nominees could, according to BOB, create a legal conflict. This would be more so if the shareholders reject such appointments. BOB also asked whether the Government of India could vote on such an appointment.
Effectively, and to simplify, the problem was that BOB was governed by special law for Public Sector Banks which already contained provisions relating to appointment of directors by the government. Such an appointment did not require the approval of shareholders under that law, but SEBI’s Regulations did place such a requirement. Therefore, to go to the root of the question, since it was subject to a special law, should not the general SEBI law applicable to all listed companies not apply to it?
The matter is not as simple as it may sound and BOB — and many other PSUs — have a point to make. Their governance is subject to special laws. There is also substantial government involvement. There are inevitable additional procedures, audits, bureaucracy, etc. Indeed, in the past, this issue has come up in various contexts for other PSUs and there have been numerous cases of non-compliance which has been a cause for concern by exchanges and SEBI both. In some cases, while an exception has not been provided, relief has been given in the form of lower penalties. Yet, on record, they are seen as non-compliant which is a stigma.
In an interesting case of NHAI, it was pointed out that the government had appointed 11 members to its Board. These included senior government functionaries. Under its governing regulations, its Board meetings could be held to be valid only if approved by two-thirds of its members. These requirements, coupled with it having more than 200 accounting units and the need to make a common schedule for such busy senior government officials, made it difficult to comply well in time with the requirement of filing unaudited results. Hence, NHAI had sought an extension of time from SEBI under the LODR Regulations. This was rejected. For the delays, SEBI levied a penalty of Rs 700,000. SAT, however, set the penalty aside considering these special requirements which the NHAI was subject to. Thus, recognition was given to the special situation the PSU fell in.
There are other considerations too. It is not as if, by giving an exception to PSUs, there will be private benefits. After all, the monies for PSUs come from the government coffers — i.e., from the public itself. So, if an exception is to be given to PSUs, it is more of a question of balancing the public interest itself, albeit from a different angle.
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To be clear, there is near unanimity that, as far as listed PSUs are concerned, SEBI’s requirements of corporate governance should be applicable. This has been accepted for Central PSEs in 2010. The Kotak Committee for corporate governance also reiterated in 2017 and recommended that SEBI’s requirements should be applicable and this was accepted by SEBI too. The delicate area, however, was where the requirements provided for conflicting provisions. This is an area where it has been accepted, at least in principle, that there should be harmonisation. However, what is also relevant, even if unsaid, is the reality of close government involvement in which PSUs operate.
In BOB’s case, SEBI gave a legal answer to the issue and said that the two laws could work together and, therefore, BOB should comply with both. There was nothing in the special law that prevented BOB from complying with the SEBI provisions. Hence, SEBI opined that BOB should take shareholders’ approval also for government-nominated directors as so required by the SEBI provisions. By implication and taking the matter further to broader terms, PSUs would be required to comply with other corporate governance provisions too so long as there was not any express conflict in the requirement.
SEBI’s opinion, thus, resolved the legal issue. However, the broader issue of the difficulties that PSUs face is up for debate and, in all fairness, it is not resolvable by SEBI either.
It is true that many PSUs have adopted the path of at least partial privatisation and raised monies from the public by issuing shares. From the public shareholder’s point of view, there would be fair expectations of functioning like any other listed company with private promoters. Indeed, if PSUs are expecting to move eventually to non-majority, or even zero, government ownership, they need to comply with the discipline of SEBI upfront and even conflicting provisions in their parent laws be removed. However, this is easier said than done while they are in the path towards total privatisation and hence neither at this end nor the other.
The resolution may be legally impeccable but substantially dissatisfactory. The debate on the larger issues will continue even more vigorously till a happy solution is found considering the ground realities.
(Jayant Thakur is a chartered accountant.)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.