CHAPTER 7
PSUs LISTED ON STOCK EXCHANGES

7.1    CORPORATE GOVERNANCE

Corporate Governance is the system by which Companies are directed and controlled in the best interest of the stakeholders and others to ensure greater transparency and better and timely financial reporting. The Board of Directors is responsible for the governance of companies. The Companies Act 1956 was amended in December 2000 by providing, inter alia, Directors’ responsibility statement (Section 217) to be attached to the Director’s report to the Shareholders and formation of Audit Committee by companies having paid up share capital of Rs.5 crore and above (Section 292-A). According to Section 217 (2AA) of the Act, the Board of Directors has to report to the shareholders that they have taken proper and sufficient care for the maintenance of accounting record; for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities. According to Section 292 -A of the Companies Act, 1956 notified in December 2000, every public limited company having paid up capital of not less than Rs. 5 crore shall constitute an Audit Committee at the Board level. The Audit Committee should have a minimum of 3 Directors of which two thirds of the total number of such Directors shall be Directors other than Managing Directors or whole time Directors. It has also been provided in the Act that the statutory auditors, internal auditors, if any, and the Director in charge of Finance should attend and participate in the meetings of the Audit Committee but without any voting rights.

A similar concept has also been introduced through clause 49 of the listing agreements for listed companies as issued by Securities and Exchange Board of India (SEBI). The listing agreement also provides that the Board of Directors of such companies shall have an optimum combination of executive and non-executive Directors with not less than 50 percent of the Board of Directors comprising of non-executive Directors. It also provides that listed companies having paid up capital of Rs.3 crore and above should have a qualified and independent Audit Committee latest by March 2002.

There are 37 Central Public Sector Companies, which have been listed in various stock exchanges of the country. A review undertaken by Audit in some of the listed PSUs revealed as under:

Bharat Heavy Electrical Limited, IBP Company Limited, Chennai Petroleum Corporation Limited, Rashtriya Chemicals and Fertilizers Limited, The Fertilizers and Chemicals Travancore Limited, Neyveli Lignite Corporation Limited and Kochi Refineries Limited being listed Companies have not yet fulfilled the requirement of clause 49 (I) (A) of the listing agreement as they did not have minimum 50 percent independent Directors on their Board exclusive of Government nominee Directors. Government nominees on the Board of PSUs are not to be considered as independent Directors in view of a clarification by SEBI.

Attendance of the Government nominee Directors in the Board meetings of various government companies was not regular. This suggested a weak commitment towards the principles of corporate governance.

1. India Tourism Development Corporation Limited and Indian Petrochemicals Limited did not have a regular CMD from 1 October 1997 and 1 March 2000 respectively. Post of Director (Chemicals) of IBP Company Limited is lying vacant since 1 May 1994.
2. One Post of functional Director of MMTC Limited has been filled up in October 2001 after remaining vacant for more than 5 years. Another post also remained vacant in the company from October 2000 to October 2001.

1. BHEL had formed a Board level Audit Committee way back in July 1998 and reconstituted it in August 2000 after amendment of the Companies Act and as per the listing agreement. It held its last meeting in August 2000. After this, the Committee did not meet as tenure of both the part time members of the Audit Committee expired on 14 December 2000. Consequently, the Audit Committee could not review the annual financial statement of the Company for the year 2000-2001 before submission to the Board of Directors.
2. The Audit Committee of National Fertilizers Limited and IBP Company Limited did not review adequacy of internal control system and the irregularities pointed out by the Government / Statutory / Internal Auditors of the Company.

In respect of Indian Oil Corporation Limited, Rashtriya Chemicals Fertilizers Limited, Hindustan Organic Chemicals Limited, Shipping Corporation of India, Audit Committees have not been specifically mandated to look into fraud and fraud related risks of the Companies.

7.2    Variations between Quarterly Financial Results and audited accounts of listed PSUs

(i)    According to the condition of listing agreement with the Stock Exchange, every listed Company is required to publish its unaudited financial results quarterly. Further, as per guidelines of July 1999 of Securities and Exchange Board of India (SEBI), if a listed company prefers to give audited results within a period of three months of the close of the accounting year, then unaudited results of last quarter need not be published by that company.

(ii)    In 35 (In respect of Project and Development India Limited and Madras Fertilisers Limited information is not available) listed Central Government Companies reviewed by audit, 18 Companies (Dredging Corporation of India, National Mineral Development Corporation Limited, Steel Authority of India Limited, Kochi Refineries Limited, Oil and Natural Gas Corporation Limited, Indian Petrochemicals Company Limited, Bharat Petroleum Corporation Limited, HMT Limited, Hindustan Zinc Limited, Mahanagar Telephone Nigam Limited, Videsh Sanchar Nigam Limited, Gas Authority of India Limited, Shipping Corporation of India Limited, Bharat Heavy Electricals Limited, IBP Company Limited, Indian Oil Corporation Limited, Fertilizers and Travancore Limited, Bongaigaon Refinery and Petrochemicals Limited) have not published the financial results of last quarter ending March 2001 since they have finalised their accounts by June 2001. In respect of remaining 17 PSUs, variations were noticed between the financial results of all the quarters ending March 2001 and their audited accounts for 2000-2001 as detailed in Appendix - XIV.

(iii)    Significant variations in the profit have been noticed in Rashtriya Chemicals and Fertilisers Limited and India Tourism Development Corporation Limited. In the case of Rashtriya Chemicals and Fertilisers Limited, profit went down by Rs. 33.50 crore as per audited accounts as against the figures of quarterly financial statements whereas in the case of India Tourism Development Corporation Limited, the loss went up by Rs. 6.30 crore in the audited accounts. The main reasons for variations reported by Rashtriya Chemicals and Fertilisers Limited were non inclusion of write off of dues receivable and recovery from the company on account of commercial sale of ammonia compensated to some extent by subsidy receivable from the Government. India Tourism Development Corporation Limited attributed the increase in loss to increase in employees remuneration and wage revision, decrease in interest on fixed deposits, interest payable to contractors as per arbitration award.

7.3    Market Capitalisation of Shares

(i)    A review in audit of prices of shares prevailing in the stock market in respect of 28 (Excludes nine companies viz., State Trading Corporation, Fertilizers and Chemicals Travancore Limited, Engineers India Limited, Container Corporation of India Limited, Kochi Refineries Limited, Chennai Petroleum Corporation Limited, Jessop and Company Limited, National Mineral Development Corporation Limited and Hindustan Zinc Limited for which comparable data is not available.\) Government Companies listed in the various stock exchanges for which data was available revealed that the total market value of their equity shares as on 31 March 2001 stood at Rs.86,595.84 crore as compared to the total book value of Rs.1,00,500.55 crore indicating an erosion of Rs.13,904.71 crore in value. The total market value of shares in these companies had came down by Rs.10,461.83 crore as on 31 March 2001 as compared to their prices as prevailing on 31 March 2000. The details are indicated in the Appendix XV.

(ii)    The market value of shares held by the Government of India in these companies stood at Rs. 63,336.44 crore as on 31 March 2001 as compared to the book value of Rs.75,136.23 crore of the Government of India in these companies as on 31 March 2001 indicating an erosion of Rs.11,799.79 crore in the value of investment in these companies.

(iii)    A further analysis indicated that market capitalisation was less than one fourth of the book value in Bharat Earth Movers Limited and less than half in 6 other companies viz., Dredging Corporation of India, Bongaigaon Refineries and Petrochemicals Limited, Rashtriya Chemicals and Fertilisers Limited, Neyveli Lignite Corporation Limited, Indian Petrochemicals Limited and Hindustan Organic Chemicals Limited This was indicative of unfavourable investors perception in these PSUs.

In Summary:

At the end of the financial year 2000-01, the number of Public Sector Undertakings under the audit jurisdiction of the C & AG of India was 368 (including 86 deemed Government Companies). Majority of these had finalised the accounts within the prescribed time schedule. A review of the financial statements of 265 PSUs received and reviewed by audit indicated that overall investment of Government of India in the Public Sector by way of equity (Rs.79,081 crore) had increased. An additional investment of Rs.9,917 crore was made during the year towards equity (Rs.5,740 crore) and loan (Rs.4,177 crore) of the PSUs, despite the fact that the average return from investments in PSUs continued to be as low as 8.53 percent. Besides, the Government also provided an amount of Rs.16,394 crore on account of subsidy to the various PSUs operating under the administered price mechanism. The net burden of these PSUs on the central budget after taking into account the dividend received from some of the profit making PSUs was Rs.19,568 crore.

Profits were reported by only 142 PSUs, out of which merely 26 PSUs operating partially under the administered / regulated prices had contributed 79 percent of the total profit. Losses were reported by as many as 115 PSUs, out of which 93 had eroded their respective equity bases (Rs.12,605 crore) many times over owing to losses accumulating (Rs.54,187 crore as on March 2001) over the years resulting in negative net worth. Sickness had overtaken 61 PSUs and were referred to BIFR.

Inventory control and collection of debts by PSUs continued to be areas of serious concern. Most of the PSUs continued to rely for their survival substantially on Government support including supply orders. In the absence of discernible shift in customer base from Government to non-Government and export sectors, the desired improvement in the competitiveness of the PSUs remains to be achieved.

The apparent financial soundness of insurance sector lacked substance. The profit after tax (2000-01) of Rs.585 crore reported by General Insurance Corporation of India and its four subsidiaries should be viewed along with the fact that during the year these companies had incurred a loss of Rs.1,722 crore on underwriting risks which is their core business. It was the income from investment activities and rent etc. which helped these companies in holding on to their bottom lines.

The market value of shares of 28 listed Government Companies as per prices prevailing in stock markets on 31 March 2001 stood at Rs. 86,595.84 crore. This was not compared favourably with the total book value of their shares Rs.1,00,500.55 crore. Consequently, market value of shares held by Government of India in these companies stood at Rs.63,336.44 crore as on 31 March 2001 as compared with the book value of Rs.75,136.23 crore indicating a decrease of Rs.11,799.79 crore in the value of investment in these companies.