Jul 30, 2019

State-owned companies may be treated on par with private peers, lose certain exemptions

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The government is considering withdrawing several exemptions from provisions of the Companies Act, 2013, given to state-owned companies in an attempt to strengthen the corporate governance framework of such firms and treat them on par with private sector companies.

“This exercise is relevant in the context of strengthening corporate governance framework in the government companies to bring them at par with private sector companies to the extent possible,” the Department of Public Enterprises (DPE) said in a letter dated July 18 circulated to various departments for comment. Hindustan Times has reviewed a copy of the letter.

The plan is part of the department’s 100-day plan; after the Narendra Modi-led National Democratic Alliance (NDA) returned to power in May, it asked all departments to come up with a significant and impactful 100-day plan.

State-owned companies enjoy several exemptions related to disclosures, the assessment of the board, the limit on the strength of the board, limits on remuneration (although this is unlikely to be breached by a state-run firm), related party transactions, and norms for appointing independent directors.

According to two government officials with direct knowledge of the matter, the consultative process on this issue has begun and a preliminary discussion took place with representatives of DPE, the ministry of corporate affairs (MCA) and company secretaries of some central public sector enterprises (CPSEs).

The government has sought views of stakeholders, ministries and government departments by August 5 as the matter has been market as urgent, the officials added on condition of anonymity.

While a senior DPE official declined comment, queries sent to MCA elicited no immediate response.

“It is still a work in progress. There are 31 exemptions for government companies. We did a consultative exercise and we also met the directors of these PSEs [public sector enterprises]. We felt that a number of these exemptions should go because increasingly more and more companies are being listed,” said one of the officials quoted above.

The official said that even unlisted government companies should meet all compliance requirements. “So we’ve identified quite a few exemptions which should go.”

According to this person, a final call will, however, be taken by the ministry of corporate affairs after which Parliament’s nod may be needed.

In addition to the more significant exemptions listed above, there are also a few that are “quite routine and have outlived their utility,” this official said.

According to the first official, there are 31 exemptions that are being reviewed and the government is expecting to do away with at least a dozen. “We want to make state-owned companies face the same kind of challenges and competition that the private sector faces.”

According to the second official, DPE has suggested that state-owned and private companies should follow the same procedure for appointment of directors, paying dividends, and filing financial statements and annual returns.

Pavan Kumar Vijay, founder, Corporate Professionals Group, said the move is in right direction. “The exercise will help more in resolution of practical issues rather than [addressing] the governance [issues]. The move to rationalise legislative processes will bring ease,” he said.

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