Exemptions to Government Companies: A Corporate Governance Perspective

[The following post is contributed by Shriya Jain, Fourth year student & Param Pandya, Fifth year student of
Gujarat National Law University, Gandhinagar, Gujarat. The authors can be contacted
at shriyaj11@gnlu.ac.in & paramp10@gnlu.ac.in respectively].
A government company is defined under section 2(45) of the
Companies Act, 2013 (‘2013 Act‘) as
a company in which not less than 51% of the paid-up capital is held by the Central
Government or a State Government or partly by both or one or more state
governments.
Government Companies can be divided into primarily two
categories – Central Public Sector Enterprises (‘CPSEs‘) which are completely owned and managed by the Central
Government and State Level Public Enterprises (‘SLPEs‘) which are completely owned and managed by the State
Government. These may be listed or unlisted. In case of CPSEs, for both listed
and unlisted, the Corporate Governance Guidelines issued by the Department of Public
Enterprises in 2010 are applicable. Listed CPSEs have a higher requirement of
compliance in the form of Clause 49, SEBI Listing Agreement. It is vital to note
that compliance by government companies, including those that are listed, with
corporate governance norms is far from satisfactory. Apart from failure to
comply, board autonomy is seriously compromised. Political interference and
lack of vision and planning on the side of the government are the biggest
hindrances to their growth.[1]
In case of SLPEs, there are no guidelines and compliance with
corporate governance norms is much more uneven. Since 2013 Act is applicable to
these unlisted SLPEs, at least on a few indicators of corporate governance it
could have been effective. Baring a
few exemptions like number of directors, related party transactions which apply
to all, various exemptions are effectively applicable to unlisted CPSE and SLPE.
These would certainly make corporate governance inferior.
By virtue of the powers conferred by section 462 of the 2013
Act on the Central Government, a notification was issued on June 5, 2015
exempting government companies from various provisions of the 2013 Act. A detailed
analysis
has been already posted earlier. This post attempts to examine a
few of the key exemptions from a corporate governance perspective.
Disclosures:
 Section 134
provides for the contents of the Financial Report, Directors Report
etc. Section 134(3)(e) pertains to a statement on the Board’s policy as regards
to the positive attributes of directors, independence of directors and
remuneration of directors and key managerial personnel. Government companies have done away with the
requirement of a remuneration and nomination committee under the 2013 Act, but
disclosures on such vital topics, such as this, which are indicators of
corporate governance should not have been exempted
.
Self-assessment
by the Board
: Section
134(3)(p) 
provides for self-assessment of
directors by the board. However, this evaluation is left to the Central
Government or State Government in case of CPSEs and SLPEs, as the case maybe. When all companies require their board to
assess themselves, allowing a controlling shareholder to evaluate the board not
only appears somewhat strange but could be less protective of the interests of
the minority shareholders. This is because the Government’s evaluation could be
susceptible to a reflection of its own vested interest, which may not
necessarily be consistent with the interests of the company as a whole or the
other shareholders.
Limit
on number of directors
: Section
149(b) and the first proviso
 mandates a cap of 15 directors. An exemption in this case means more than 15
directors can be appointed in a government company which would create board
governance problems.
 More importantly, various ministries appoint
directors and they can have conflicting interests leading to more setbacks in
an already slow system. 
Threshold of managerial remuneration:  A government company is not
required to comply with limits for overall maximum managerial remuneration and
managerial remuneration in case of absence or inadequacy of profits laid down
in section 197. A key managerial person should always have his or her
incentives proportional to their deliverables. Providing security of incentives
even for senior positions would enhance inefficiency in an already inefficient
mechanism.
Absence
of pecuniary interest:
Section
149(6)(c)
provides for the absence of pecuniary interest
in any holding, subsidiary or associate company or its promoters or directors
for two preceding/current financial year as a requisite for being
appointed as an independent director. This
is a very important criterion for selection of an independent director which is
being relaxed. Already, independence is questionable due to political
appointments; this would further dilute it
.  
Safeguards
against inter-corporate loans:
Section
186
 enlists various safeguards regarding
inter-corporate loans. This is also exempted under the guise of a mere
permission from the relevant government (i.e. the concerned ministry). This decision is taken away from the board,
leaving no room of disclosure or dissent by other minority investors. Also in
this case, the board’s duty to act in general interest of the company
cannot be questioned for the decision does not lie in the realm of the board
.
Related
Party Transactions
Section
188(1) and (2)
states that as regards to the
transactions which are enlisted, if they are conducted with a related party, board
approval is required. This includes sale and purchase of goods, availing or
rendering of services, buying, disposing or leasing of properties, appointment
of a related party to a office or place of profit etc. Here, the exemption that is carved out is when a government company
transacts with another such company; on these points they would not require
board approval. This is indirectly stating that since they are exempted, arm’s
length principle shall not apply
Clause 49, SEBI Listing Agreement excludes listed CPSEs & SLPEs from
the obtaining board approvals in case of related party transactions among
government companies. The present exemption shields unlisted CPSEs & SLPEs
from board approval. A approval from the concerned ministry is the only requirement
for clearing related party transactions. 
This
could potentially cause exploitation of minority shareholders because of the
so-called welfare oriented practices which leads to loss of revenue. This could
jeopardize the minority shareholder’s interest just as in the case of
The Children’s Investment Fund (UK) LLP (‘TCIF‘) and Coal India.[2]
The Government of
India is the controlling shareholder in Coal India Limited which entered into
contracts to sell coal which was far lower than the market price. TCIF which
was a 1% investor protested for the said transaction was against the interests of
the company as it lead to a huge loss of revenue. Hence TCIF decided to resort
to a class action suit under common law in Calcutta High Court in 2012.
Also, from an investment point of view it is
not a good move
and is harmful for disinvestment
prospects.
Finally, the notification concludes
with a clause which requires that these changes need to be read in line with
the interests of the shareholders. This is set to further create a conflict as
to whether controlling or minority shareholders’ interest gains precedence.
– Shriya Jain & Param Pandya



[1] See generally, Corporate Governance
in Public Sector – The Road Ahead
,
KPMG,
(June, 2010); Lalita Som, Corporate
Governance of Public Sector Enterprises in India
, ICRA BULLETIN, MONEY
& FINANCE,
(June,2013); Umakanth Varottil, Corporate Governance
in State-Owned Enterprises
,
Quarterly Briefing, National Stock Exchange,
(April, 2015); Over
100 public sector companies fail to give corporate governance reports for
2010-11,
THE
ECONOMIC TIMES,
(September
17, 2012
); Manu Kaushik, BT
500: Most PSUs have lost value over the
past year,
THE BUSINESS TODAY,(October
25, 2013
).
[2] For details, see generally Param Pandya, The Predicament of Corporate Governance in
India: Coal India Limited – A case study
, NIVESHAK, IIM Shillong, (April,
2015).
This analysis is
merely adopted from these allegations available in public domain and is only
undertaken for purely academic purpose. The legal action is withdrawn since TCI
F has exited the investment.     

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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