Performance of Central Public Sector Enterprises:

Note on Analysis of Key Issues

FINAL REPORT

Sponsored By

Department of Public Enterprises

Government of India

Submitted By

Centre for Corporate Governance & Social Responsibility

International Management Institute

New Delhi

24thDecember 2012

TABLE OF CONTENTS

TopicPage No

Introduction04

Team06

Methodology08-09

Overview of CPSEs11-17

Analysis of Issues19-49

Recommendations with

Responsibility Matrix51-81

INTRODUCTION

Award and Scope of the Project

The project is awarded by the Department of Public Enterprises (DPE), Ministry of Heavy Industries & Public Enterprises, Government of India, as“Note on Analysis of Key issues – R&D, CSR, Corporate Governance and Sustainable Development, Increase in Profit of Profit Making CPSEs and Reduction of Loss Making CPSEs’.

The objective of the project to analyse six key issues and submit a report with recommendations on the issues as follows:

  1. Corporate Governance
  2. CSR
  3. Sustainable Development
  4. R & D
  5. Increase in profit of profit making CPSEs
  6. Reduction of loss of loss making CPSEs

It is also expected that first draft report to be submitted on Dec. 05, 2012 , final draft report by Dec. 17, 2012and final report by Dec 24,2012.

TEAM

Team for the Project

Name / Designation / Qualification
Professor Arun Kumar Rath / Chairman, Centre for Corporate Governance & Social Responsibility / M.Sc. Ph.D
Former Secretary, GoI
Professor Shailendra Nigam / Convenor, Centre for Corporate Governance & Social Responsibility / MBA, LL.B & PhD
Professor Prashant Gupta / Associate Professor of Finance / MMS, LL.B & PhD

In addition to above few other members of IMI New Delhi assisted in the completion of the report

METHODLOGY

Methodology:

Objective of this study involves Analysis of Key issues relating to performance of Central Public Sector Enterprise (CPSEs) based upon the MoU Documents signed by various CPSEs with their respective ministries for the year 2010-2011, and other related documents. The study covers four non financial parameters and two financial parameters related to profit and loss of CPSEs as follows:

  1. Corporate Governance
  2. CSR
  3. Sustainable Development
  4. R & D
  5. Increase in profit of profit making CPSEs
  6. Reduction of loss of loss making CPSEs

The methodology adopted is detailed as following:

  1. As a first step of the research study, a detailed understanding of the MoU guidelines of the Dept. of Public Enterprises, GOI for the year 2010-11 and its relevance for the CPSE’s was ensured, and has been referred to frequently at various places in the overall draft of the report.
  1. To discover how CPSEs are performing with regards to their performance on various MoU parameters, secondary Data analysis of 20 % of CPSE’s from the PE Survey Report for 2010-2011, their annual reports and 30% of the MoUs signed by the CPSEs for the said year 2010-2011 was conducted. These 30% representative CPSEs are drawn in a stratified manner with representation from each of the following categories: Maha ratna, Nav ratna, Mini ratna, profit making, loss making and sick enterprises.
  1. Inputs were taken from deliberations in the conference of CPSE board members in the Director’s Conclave organized on September 28th-29th by IMI at Greater Noida to have an overall understanding to the key issues of CPSEs.
  1. We also interviewed Joint Secretaries, Director MoU, other senior officers of DPE and other ministries, officials of from BRPSE and management division of DPE, heads of divisions of CPSEs, academic experts, subject experts and senior executives from a number of private sector companies to understand the practical issues facing organizations today on the key parameters. The interviews were conducted in a conversational manner in order to gather meaningful information.
  1. These insights contributed to a richer understanding of the issues and in the development of recommendations that seek to answers strategic questions.
  1. Based on the information generated from two Advisory Committee meetings of the Centre for Corporate Governance and Social Responsibility, IMI New Delhi held on September 7th and November 27th, the study has made an assessment of the strengths and weaknesses of the key Issues of the six parameters, and has suggested improvements accordingly
  1. Interactions with representatives of CPSE’s from all the above five categories were held and specific inputs from the respective CPSEs were gathered to understand the sector specific dynamics and characteristics.
  1. A panel discussion of representatives of about 25 CPSEs and representatives of DPE was organized on 29thNovember’ 2012 and their perspectives were captured.
  1. In addition to above, Corporate Governance Voluntary Guidelines 2009, Ministry of Corporate Affairs, GOI, ISO 26000:2010, Guidance on Social Responsibility of International Standards Organization, Business strategies for Sustainable Development by International Institute of Sustainable Development, Corporate Governance, Best Practice Reporting of Pricewaterhouse Coopers, KPMG on CSR in India,National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business in India of Global Compact Network to name few werealso referred, to develop the recommendations for the study.
  1. The recommendations have generally emerged out of discussions and deliberations with representatives of stakeholders including CPSEs, academia, government departments and other concerned agencies in respect of their relevance and applicability.

OVERVIEW

Overview of Central Public Sector Enterprises

The opportunities available to the corporations in the twenty first century are multifarious and the advantages tremendous. The modern corporations have been hailed as the future agents of change, development and social welfare. Recognising the power of the modern corporation to exert a centripetal attraction to draw wealth together into aggregations of constantly increasing size, it is predicted that in future, the corporation would dominate over the State as the dominant form of economic organization.

In view of the enormous power of the modern corporation,good governance of corporate entities has gained prominence in the last two decades. Proper governance of companies has become as crucial to the world economy as the proper governing of countries.The corporation, has become the principal driver of economic growth and improved living standards.Corporations create jobs, produce a wide array of goods and services and generate wealth and income for stakeholders.

The state-owned public enterprises have made significant contributions to economic development and hold great potential for future growthof national economies. It is true that the processes of liberalisation, privatisation and globalisation have brought about significant reduction in state control over the commercial enterprises across the world. Nevertheless, public enterprises continue to remain a dominant feature of the economy in India.

The state-owned enterprises have to fulfil the twin objectives of commercial efficiency and social responsibility. The challenge for the enterprises arises out of the need for them to ensure a reasonable return on investment, while discharging their constitutional andsocial obligations. As wings of the welfare state, the enterprises have the mandate to act as model employers, and conduct their business in a transparent manner. Further, they have to protect the interests of all stakeholders e.g., the employees, customers, suppliers, creditors and the community. The environment of competition and globalisation being faced by the public enterprises makes the tasks all the more challenging.

It is necessary to analyse the issues concerninggoodgovernance and profitability of public enterprises .At the same time it is useful to identify the challenges faced by them in the twenty first century and suggest policy initiatives to make the public enterprises dynamic, competitive and performance-oriented.

The Strategic Role of the Board of Directors

The Board of Directors has to play a strategic role for better governanceof the corporation. Experience, expertise and competence of the Directors are critical factors for value addition to its business. In agency theory, Board is seen mainly as a control mechanism, regularising and supervising the managers on behalf of the shareholders.

Boards of directors are a crucial part of the corporate structure. The board’s primary role is to monitor management on behalf of the shareholders .The law imposes on the board a strict and absolute fiduciary duty to ensure that a company is run in the long term interests of the owners, the shareholders.

Independence of Directors will be cornerstone of corporate governance in the twenty first century. This will ensure that the Board takes independent and objective decision in the best interests of the corporation and all stakeholders. The board should be able to exercise objective independent judgement on corporate affairs. Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgement to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are ensuring the integrity of financial and non-financial reporting, the review of related party transactions, nomination of board members and key executives, and board remuneration.

Public Enterprise Management in India– A Paradigm Shift

Liberalization of the economy in 1991 resulted in a paradigm shift in the policy of the Govt. of India towards the public sector enterprises. The enterprises lost the monopoly assured by the government. The regime of commanding heights for the public sector gave way to the environment of market economy. State protection and budget support available to the public enterprises in the twentieth century has given place to challenge of competition and domination of market forces in the twenty first century .The paradigm shift in public sector policy changed the scenario from controlled economy to market economy, full govt. ownership to disinvestment, unlimited life to threat of liquidation,employment generation to manpower rationalization ,liberal budget support to withdrawal of support,departmental Board to independent Board and limited autonomy to enhanced autonomy.

The public sector has to face competition instead of protection .Public enterprises were subjected to disinvestment to reduce state ownership. The non-performing and sick public enterprises faced the prospect of closure due to withdrawal of budgetary grants. At the same time, the government reduced excessive control over the enterprises and granted certain measure of autonomy to the PSEs. Boards of the enterprises were given powers to take objective and informed decisions. Board’s independence was enhanced by minimizing the presence of government directors and by inducting outside independent directors in the Board.

In the last half century, the central public sector enterprises have passed through four phases of growth. The first phase (1956-1991) was marked by commanding heights for the public sector .The second phase (1991 onwards) was guided by Policy of Economic Liberalisation with the following elements:

  • Strategic, high-tech and essential infrastructure area to be opened up to the private sector.
  • Sick PSEs be referred to BIFR.
  • Social security mechanism to protect workers.
  • A part of the government’s share-holding in the public sector would be offered.
  • Autonomy to Public Sector
  • Professionalization of public sector Boards .
  • MOU between Enterprise and Ministry.

Third phase (1999-2004) saw the privatisation of some CPSEs either in full or part under the Policy of Privatisation of Public Enterprises in force with following policy guidelines:

  • Restructure & revive potentially viable PSEs.
  • Close down PSEs, which cannot be revived.
  • Reduce Government equity in non – strategic PSEs to 26% or lower.
  • Interest of Employees will be protected.

In the fourth phase, the government policy provided for strong and effective public sector under the National Common Minimum Programme (June 2004) as :

  • Strong & effective public sector.
  • Social objectives to be met by commercial functioning.
  • Full managerial , commercial autonomy to profit makingPSUs
  • Generally, no privatization of profit making companies.
  • Existing Navratnas will be retained in the public sector.
  • To modernize & restructure sick CPSEs.
  • CPSEs are encouraged to enter capital market.
  • Chronically sick CPSEs to be sold off/closed.
  • Economic reforms with human face.

Central PSEs

From a mere five central public enterprises in 1951 with an investment of Rs.29 cr the Central Public Sector has grown to a size of 249 CPSEs with an investment of Rs.6,66,848 cr in March 2011. The ten year performance of CPSEs is given in Table 1.The CPSEs play a critical role in the Indian economy and contributed to the growth in the economy. The highlights of the performance of CPSEs (2010-11) as per PE Survey are :

Table 1

(i)Total investment (equity plus long term loans) in all CPSEs stood at Rs.6,66,848 crore as on 31.3.2011 compared to Rs.5,80,784 crore as on 31.3.2010, recording a growth of 14.82%.

(ii)Total turnover of all CPSEs during 2010-11 was Rs.14,73,319 crore compared to Rs.12,44,805 crore in the previous year showing an increase of 18.36%.

(iii)Profit of profit making CPSEs stood at Rs.1,13,770 crore during 2010-11 compared to Rs.1,08,434 crore in 2009-10 showing a growth of 4.92%.

(iv)Loss of loss incurring CPSEs stood at Rs.21,693 crore in 2010-11 compared to Rs.16,231 crore in 2009-10 showing an increase in loss by 33.57%.

(v)Overall net profit of all 220 CPSEs during 2010-11 stood at Rs.92,077 crore compared to Rs.92,203 crore during 2009-10 showing a reduction of 0.14%.

(vi)Reserves & Surplus of all CPSEs went up from Rs.6,05,637 crore in 2009-10 to Rs.6,55,488 core in 2010-11, showing an increase by 8.23%.

(vii)Net worth of all CPSEs went up from Rs.6,59,437 crore in 2009-10 to Rs.7,23,128 crore in 2010-11 registering a growth of 9.66%.

(viii)Contribution of CPSEs to Central Exchequer by way of excise duty, customs duty, corporate tax, interest on Central Government loans, dividend and other duties and taxes increased from Rs.1,39,918 crore in 2009-10 to Rs.1,56,124 crore in 2010-11, showing an increase of 11.58%.

(ix)Foreign exchange earnings through exports of goods and services increased from Rs.84,224 crore in 2009-10 to Rs.97,004 crore in 2010-11, showing a growth of 15.17%.

(x)CPSEsemployed 14.44 lakh people (excluding casual labours) in 2010-11 compared to 14.90 lakh in 2009-10, showing a decrease in employees by 3.09%.

GOI delegated varying degrees of financial powers to the Boards of CPSEs depending on size, performance, and profitability of the company. Boards can incur capital expenditure up to different limits as per category of PSU. Grant of enhanced powers include power of incurring capital expenditure, joint venture, HR policies, raising capital from domestic and international markets etc.The categories are:

1.Profit making enterprises,

2. Mini Ratna Enterprises,

3. Nava Ratna Enterprises

4.Maha Ratna Enterprises

The contributions of CPSEs have been many fold .The product profile of CPSEs has been far and wide covering every sector of the economy. Central public sector enterprises offer a wide range of products and services which include manufacturing of steel; heavy machinery, machine tools, instruments, heavy machine building equipments, heavy electrical equipments for thermal and hydel stations, transportation equipments, telecommunication equipment, ships, sub-marines, fertilizers, drugs and pharmaceuticals, petrochemicals, cement textile, mining of coal and minerals, extraction and refining of crude oil, operation of air, sea, river and road transport, national and international trade, consultancy, contract and construction services, inland and overseas telecommunication services, generation and transmission of power, financial services, a few consumer items such as newsprint, paper and contraceptives, hotel and tourists services, etc.The CPSEs have played a strategic role in the national economy and made significant contributions to the economy like :

  • Building strong Industrial and infrastructure base for India
  • Major presence in vital sectors like petroleum, power, telecom, steel, aviation, coal, mining, engineering
  • Monopoly in defence industries, atomic energy, railways.
  • Section 25 companies provide welfare services to SCs, STs, backward classes, minorities, handicapped.
  • Employment generation (-14.44lakh manpower as on -)
  • Turnover Rs- lakh as on –Rs 14.73 lac cr
  • Contribution to Exchequer – Rs. 1,56lac Cr
  • Competition/cooperation with private sector.
  • Ensuring price stability of vital and sensitive products ( like oil ,gas steel ,coal ,power , aluminium )and protection of consumer interests
  • India brand promotion

ANALYSIS

OF

ISSUES

CORPORATE GOVERNANCE

CORPORATE GOVERNANCE

With the globalization of business, corporate governance, a term virtually unknown earlier, has now become a mainstream topic. Every country is critically examining its corporate laws and regulations and adopting new standards to enhance corporate ethics and accountability.

CPSEs must ensure good governance to be effective in the competitive environment. Emphasis must be placed as much on performance and delivery as on corporate governance. Corporate governance deals with the accountability of management of the company to the shareholders, fiduciaries duties of directors, disclosure of strategic information regarding the company, audit of transactions, control and direction by the Board and above all, responsibility to the society. There is an increasing demand from the stakeholders for adoption of socially relevant corporate governance practices.

The Board of Directors, being the fulcrum of the corporate governance structure, has to play a strategic role in securing sustainable development of the company to safeguard the long – term interests of shareholders.

DPE have issued corporate governance guidelines and corporate governance (CG) Score for CPSEs. It is necessary to review the 100 pt format for assessment of CG score for CPSEs, based upon experience of last one year. It may be appropriate to revise some of the parameters in the format or to modify the award of the marks to individual parameters.

One of the firstendeavours was the Confederationof Indian Industry: Code for Desirable Corporate Governance, developed by a committee chaired by Rahul Bajaj, a leading industrial magnate. The committee was formed in 1996 and submitted its code in April 1998. Later the SEBI constituted two committees to look into the issue of corporate governance; the first chaired by Kumar Mangalam Birla, and the second by Narayana Murthy. The first Committee submitted its report in early 2000, and the second three years later. These two committees have been instrumental in bringing about far reaching changes in corporate governance in India through the formulation of Clause 49 of Listing Agreement.

Concurrent with these initiatives by the SEBI, the Department of Company Affairs of the Government of India also began contemplating improvements in corporate governance. These efforts included the establishment of a study group to operationalize the Birla Committee recommendations in 2000, the Naresh Chandra Committee on Corporate Audit and Governance in 2002, and the Expert Committee on Corporate Law (J.J. Irani Committee) in late 2004. All of these efforts were aimed at reforming the existing Companies Act of 1956 that still forms the backbone of corporate law in India.