Legal Compliance By Public Sector Listed Companies (PSLCs) – Indications Of A ‘Good Governance’ Approach ?

The FE(Financial Express) of December 27, 2023 says – ‘for Public Sector Undertaking (PSU) indices, (calendar year) 2023 has been the best year in a decade. …the BSE CPSE rose 71.7% – more than thrice the gain in the Sensex (17.3%) and the Nifty (18.4%)….Of the 84 listed stocks, 24 gave returns over 100%, while another 25 between 50-100%.’ As the largest shareholder in these companies, Government of India (GOI) has been a big beneficiary.

Now that PSLCs are doing well on the bourses, we looked at the compliance record of the 49 ‘ratna’ class PSLCs – Maharatna (13), Navratna (14) and Mini-ratna (22). All information was sourced from published Annual statements of these companies for the year 2022-23.Maharatnas all have annual revenues exceeding Rs 100,000 crores for FY 2023-24, as indicated by their disclosures for September 30, 2023. These companies are not resource-poor and should not, therefore, find it difficult to comply with these regulations. The situation is unlikely to be significantly different for the other PSLCs.

The Corporate Governance Support team at Axar, studied just 3 compliances required under the Companies Act 2013 (the Act), and SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015(the Regulations), as follows:

1: Number of Women Directors (WDs).In accordance with Sec. 149(1) of the Act and Reg. 17(1)(a) of the Regulations, there must be at least one Woman Director on the board of every listed company and as per proviso to Reg. 17(1)(a) of the Regulations, top 1,000 market-cap entities shall have at least one Independent Woman Director.

2: Number of Independent Directors (IDs). In accordance with Sec. 149(4) of the Act and Reg. 17(1)(b) of the Regulations, at least one-third of the total board strength must be IDs. Where the Chairperson is an Executive Director, or a member of the Promoter group, at least half the board must be IDs.

3: Annual board evaluation. In accordance with Sec. 134(3)(p) of the Act, every listed company and other public company with paid-up capital equal to or more than Rs 25 crores must conduct annual board evaluation. Also, Reg. 17(10) of the Regulations states that every listed company, without regard to the quantum of paid-up capital, must conduct an evaluation of Independent Directors by the entire Board of Directors, annually. Most PSU companies are exempted from conducting such an evaluation since their operating ministries are supposed to be doing so. Some PSU shave applied to SEBI for exemption from this requirement.

Now, let us look at the compliance statistics of the ‘Ratnas’ for the year ended on March 31, 2023:

Sr. No.	Category of Listed CPSEs	Total No.	Woman Director Compliance		Independent Director Composition Compliance		Board Evaluation Compliance
			No. of Compliant Companies	Percentage	No. of Compliant Companies	Percentage	No. of Compliant Companies*	Percentage
1	Maharatna	13	12	92.31	2	15.38	1	7.69
2	Navratna	14	12	85.71	3	21.43	3	21.43
3	Miniratna	^$22	18	81.82	8	36.36	^@3	13.64
	Total	49	42	85.71	13	26.53	7	14.29

*Ministry of Corporate Affairs (MCA), through General Circular dated 5^thJune,2015, has exempted Government Companies from the provisions of Section 178(2) and 134(3)(p) of the Act. However, no such exemption is granted under the Regulations.

^$Miniratna also includes a company which got listed on 29/11/2023. Hence, Board evaluation is not yet applicable for that Company.

^@This includes a Company which has been granted exemption by SEBI from compliance with the Board Evaluation requirement.

Looking at the above numbers there is a distinct feeling of relief. PSLCs appear to be moving in the ‘Ram Rajya’ direction. The conclusions we can draw are:

The board diversity requirement – appointing of at least 1 Woman Director – is met by more than 85% ‘Ratna’ companies. This is heartening, and leaves room for assuming that the remaining will soon be compliant.
The Independent Director requirement is complied with, by more than 26% ‘Ratna’ companies. While this is less than ideal, it can be swiftly rectified. Surely, we can look forward to seeing it remedied in 2024.
Finally, the Board Evaluation requirement. This is a relatively less compelling requirement for PSLCs to comply with. However, even here, 1 out of 8 companies has clearly chosen to voluntarily comply with the requirement, having recognized it as an activity designed to help boards improve their own effectiveness and efficiency. This FY and the next, there is good reason to expect many more such voluntary board evaluations.

Summary – PSLCs appear to be recognising that the ‘Ram Rajya’ standard is more applicable to government companies than to others. Resultantly, fuller compliance with legal requirements is becoming a voluntary activity. By the end of FY 2023-24, we believe it is very likely that compliance with all 3 requirements will be far more than in the last year.

The bourses are evidently reposing more faith in PSUs. While exemption from Evaluation of Executive and/or Independent Directors does require the relevant Ministry to conduct the evaluation, there has been no record of this being done, and published for the knowledge of retail shareholders. Hence, PSLCs should initiate board evaluations as a good governance practice. This will strengthen the attractiveness of their commercial paper in the market.

Also, neither SEBI nor MCA should exempt PSLCs from oversight or scrutiny applicable to other listed entities. It is best that PSLCs are also measured by the same yardstick. It reduces the effectiveness of SEBI’s attempts to protect retail shareholders from improper behaviour by promoters, if companies where government is a promoter are exempted from such attention.

If the immediate past is an indication, there is good reason to expect that PSLCs will conduct board evaluations, and where possible, involve external facilitators of appropriate expertise and experience to assist in the evaluation process. Proxy advisors and retail shareholders will keenly watch for this kind of activity.

About Author

D B Modak is MD, Axar Digital Services Pvt Ltd([email protected]). He is a CA (1981), and PGDM from IIMA,1984. He regularly writes /blogs on corporate governance and legalcompliance issues at www.axardigital.com and is published in businessnewspapers and journals.

Axar is the leading provider of software solutions for regulatory compliance (viz., Insider Lens for SEBI PIT Regulations) and Corporate Governance support (Board Eye for board meetings related activities, and Board Gauge to support annually mandatory Board Evaluations).