Oil Price Rise: Shareholders vs. Consumers

The spike in the price of oil has created a peculiar situation for the Indian oil companies that are in the public sector. These public sector undertakings (PSUs) are predominantly owned by the Government, with a portion of the shares (usually a minority) held by public shareholders. The shares of these entities are listed on stock exchanges, which subject them to norms of corporate governance prescribed by SEBI.

However, despite the global spurt in prices, the Government has contained the prices of oil in India, which has resulted in considerable losses to oil PSUs (that extend to hundreds of millions of dollars on a daily basis.). Hence, while consumers (irrespective of their ability to pay) are benefiting from this move, the minority shareholders in these companies are suffering a massive blow. Does this strategy adopted augur well in the light of existing corporate governance norms? That is the key question. PSUs are in any case have never been at the forefront of taking on board corporate governance norms prescribed in Clause 49 of the listing agreement – for example, several PSUs are still yet to restructure their boards to maintain the minimum number of independent directors.

In this background, the Economic Times carries a column by U R Bhat that analyses this dichotomy and proffers some solutions:

“This is particularly galling in the light of the fact that the oil companies that are made to bleed are not wholly-owned by the government but are listed entities with a significant minority shareholding by the public. It is indeed possible for free market principles to co-exist with the just concerns for the welfare of the vulnerable sections of society. The role of a government that is concerned with the welfare of its citizens needs to be segregated from its role as the majority owner of listed commercial enterprises.

As a majority shareholder, the government needs to ensure that the listed companies function on sound commercial principles while it has to meet its social objectives by direct subsidies to the needy or by indirect subsidies through the oil marketing companies. However, they need to be used only as distributors of the subsidies and not as the providers of subsidies. We now have a situation where even the affluent sections of society get the same subsidy on petroleum products as the poor, even as the majority shareholder is severely compromising the tenets of good corporate governance by forcing the oil companies to run commercially-unviable businesses.

The government’s lack of concern to the basic principles of corporate governance that have been laid out through the listing agreement is not restricted to just the oil companies. Mandatory adherence to Clause 49 of the listing agreement, especially in relation to appointment of independent directors continues to be violated by the listed majority government-owned companies.

From a capital market viewpoint, the appropriate course of action for the government if it indeed wants to continue this way is to transparently make an open offer to the minority shareholders and proceed to delist these companies through the reverse book-building methodology.

Though this would amount to backdoor nationalisation — making a mockery of the gains achieved in the course of more than a decade-and-a-half of economic reforms — it is possibly a better option than destroying the trust of minority shareholders. It is about time the government takes the lead in setting high standards of corporate governance for India Inc., to follow.”

This situation presents a classic conflict between the interests of consumers and the shareholders of a company – the type we have been considering earlier in the context of Dodge v. Ford Motor Company.