LIC

We must have full control over our electricity production and performance”, said the French Prime Minister recently, when she informed the Parliament of the government’s decision to increase its equity share from the present 83.76% to 100% in the EDF company, France’s premier nuclear electricity utility and one of the largest producers of nuclear electricity in the world. France has taken such a strategic decision to safeguard its own interests in the face of the energy crisis it is facing as a result of the current Ukraine war (https://www.theguardian.com/world/2022/jul/06/france-to-nationalise-edf-amid-energy-crisis-and-ukraine-war).

In contrast, without rhyme or reason, the present NDA government at the Centre introduced in December, 2021 sweeping changes in its policy, that aim at privatising the Central Public Sector Enterprises (CPSEs) and monetising their “non-core” assets; the entire exercise to be completed at a breakneck speed ,within the next couple of years, cutting across both the strategic and the non-strategic sectors, literally putting the national wealth on a distress sale. Making a mockery of the autonomy of the CPSEs, the new policy has empowered the respective Ministries to remove summarily the CPSE heads, who fail to fall in line with the tight time schedules, replace them with the Ministry’s own officials, to complete the disinvestment exercise as scheduled. The new policy subserves neither the national interest nor the public good.

The Centre’s decision on privatisation of the CPSEs was unilateral, as it neither cared to consult the States who have a stake in them, as it was they who had acquired the lands for the CPSEs when they were set up, nor did the Centre seek the considered views of the Parliament that played a pivotal role when each CPSE was initially set up.

The  Centre has justified the decision on three grounds. First, privatisation would bring additional fiscal resources for the Centre, which in turn could be used to fund its social sector schemes. Second, privatisation would help bring additional capital investments for the undertaking to be able to enlarge its capacity. Third, privatisation would enhance the undertaking’s efficiency and profitability.

If the first few cases of disinvestment were to be considered any indicator, the prospects do not seem to be as rosy as expected. As a result of the deliberate decision of the Finance Ministry, other CPSEs competent to consolidate and run those on sale have been prohibited from bidding, leaving the field open for comparatively less experienced bidders to grab the valuable public assets for a song. Many among the bidders already stand heavily indebted to the PSU banks and are likely to saddle those banks with more liabilities, when they raise additional funds for buying the CPSEs.

The sale of the Central Electronics Ltd. (CEL) was an eye-opener on the casual manner in which the Finance Ministry is handling the disinvestment exercise. But for a public uproar, the sale of the CEL would have been finalised in a hurry in favour of a totally nondescript company for a paltry sum, the bidder having no capability whatsoever of running the CEL as a hard-core electronics company doing pioneering work in solar PV technology  (https://reclaimtherepublic.co/2022/01/10/statement-on-cel-sale/). The sale of another CPSE, Pawan Hans, finalised by the Finance Ministry in an undue haste, had to be put on hold abruptly, when there was a similar uproar on the capability and background of the successful bidder.

The Finance Ministry issued a woefully undervalued LIC IPO in May, 2022, calling it a unique game-changer, ignoring the serious threat it posed to the interests of more than 280 million policy holders of the LIC and an equally serious threat it posed to the very character of the LIC as a social security provider and an important partner in funding the States’ social sector and infrastructure projects. The IPO has eventually turned out to be a damp squib, resulting in underselling it to the speculative stock-market investors at the cost of millions of disadvantaged policy holders.

The argument of the Finance Ministry that privatisation would bring additional resources is a fallacious one, as the disinvestment proceeds come from the same pool of savings in the economy from which the government also borrows but on much better terms. The difference is that the government, going via the disinvestment route, would not only undersell the CPSE in a buyers’ market but also lose control over the CPSE altogether. Instead of selling the valuable CPSEs in a distress, the government ought to have explored other means of raising funds for its social sector programmes, such as, pruning expenditure on unproductive, non-essential items of expenditure, levying redistributive taxes to reduce income inequalities and concentration of wealth as envisaged in the Directive principles and bridging the fiscal gap thus reduced by borrowing from the open market. The same reasoning is applicable to the government’s indiscriminate scheme of monetisation of CPSEs’ assets.

How profitable are the CPSEs?

Though profitability should not be the primary indicator of a CPSE’s performance, out of 366 CPSEs, 171 CPSEs generated Rs 1,45,530 Crores of net profits  during 2019-20. Even after setting off the losses incurred by some CPSEs, CPSEs as a group generated Rs 1,23,857 Crores of net profits. Their contribution to the public exchequer during 2019-20 was Rs 3,76,425 Crores, their foreign exchange earnings were Rs 1,21,756 Crores  and they paid dividends to the extent of Rs 75,830 Crores, the bulk of the same going to the government. During the same year, the CPSEs invested Rs 4037 Crores on R&D and several CPSEs such as RINL and BEML secured patents for innovative technology contributions.  During 2019-20, the CPSEs had an employee strength of 14,73,810, out of whom 49.8% belonged to the SCs/STs/OBCs. 42.7% of the managerial positions in the CPSEs are held by employees belonging to the SCs/STs/OBCs.

Why were CPSEs set up in the first instance?

There were specific reasons that compelled the earlier governments to set up the individual public sector undertakings.

When private electricity utilities in the States were unwilling to expand their electricity network to rural and remote areas, since electricity is a critical intermediary input for the socio-economic development of the country, the then government had to step in and enact the Electricity (Supply) Act in 1948 that resulted in the setting up of public sector utilities both in the States and at the national level. When promoters of private banks, driven exclusively by the profit motive, were reluctant to extend their operations to the rural areas, mobilise households’ savings and channelise the same into providing credit to farmers, small businesses etc., the government felt compelled to nationalise the banking industry and set up large public sector banks like the SBI to promote banking as an important driver of socio-economic development. The same was the case when the private insurance companies were nationalised and the LIC was set up for carrying the idea of life insurance far and wide, not only as the means to extend a vast social security cover for the disadvantaged but also for channelising the households’ savings into nation building activity.

Private coal companies were nationalised and the CIL was set up for introducing scientific coal exploration and development technologies, establish new coal resources across the country and develop coal on a large-scale for fuelling all round economic activity Similar was the case with the CPSEs set up for hydrocarbons exploration and development activity.

When foreign oil companies failed to cooperate with the government in the conflict that led to the creation of Bangladesh, a conscious decision was taken to nationalise them so as to ensure that they work in tune with the national interest.

Many private companies which were mismanaged, posing a threat to the welfare of their workers, the government took over their ownership and management to prevent any possible disruption to the economy in case their operations collapsed abruptly.

These are only a few examples to show that there were compelling reasons for setting up different CPSEs at different times. In most cases, the circumstances that prevailed in the past continue to prevail even today, necessitating public intervention in such activities, raising questions on handing over  the CPSEs to private promoters, who are primarily driven by the profit motive, not necessarily for furthering what is good for the society.

CPSEs vis a vis the Constitution:

CPSEs are entities set up under Article 19(6)(ii) of the Constitution. They are deemed to be an extension of the State in terms of Article 12. As such, they are subject to reservations for the SCs/STs/OBCs mandated under Article 16 and the obligation to promote the ‘welfare” role of the State (Article 38), especially the obligation to “minimise inequalities in income” in the society, to ensure that “the ownership and control of the material resources of the community are so distributed as best to subserve the common good”, that “the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment” and so on, as envisaged in the Directive Principles spelt out in Part IV of the Constitution. Subject to these Constitutional obligations, the CPSEs are usually entities either set up under special legislations (LIC) or companies set up under the Companies Act.

The CPSEs thus are subject to the “welfare” mandate envisaged in the Constitution. Privatising them would amount to the State reneging on that obligation.

It may also be pointed out that the DPE guidelines of December, 2021 also lay down a tight time schedule for “monetising” the non-core lands of the CPSEs. Apparently, the Finance Ministry has not applied its mind to the legal implication of monetisation of the CPSE lands which were originally acquired by the States under the erstwhile land acquisition legislation which provided for such acquisition exclusively for a “public purpose”, a term defined in Section 3(f)(iv) as acquisition for an undertaking wholly owned/ controlled by a government company. Therefore, handing over those lands to a private company would be prima facie illegal.

What should be the basis for evaluating the CPSEs’ performance?

Against the above background, one should note that the performance of a CPSE needs to be evaluated primarily on the basis of its role as an instrumentality of the “welfare” State under the Constitution and, subject to it, in relation to the functional responsibilities stipulated for it, either by a specific legislation or by its Memorandum of Association registered under the Companies Act . The CPSE should no doubt be able to carry on its activities in a financially sustainable manner, either on its own or, if inevitable for valid reasons, with the help of State subsidies. Thus, profitability cannot and should not be viewed as the primary yardstick for measuring a CPSE’s performance.

Subsidies may become necessary when a CPSE undertakes an unremunerative activity for promoting the public welfare, as in the case of the PSU banks required to promote banking in the rural and the remote areas, covering the disadvantaged households, as the banks then would necessarily incur losses which need to be made good by the State.

 DPE’s MOU-based performance evaluation approach- How efficacious is it?

The Department of Public Enterprises (DPE) has developed a comprehensive, but a straight-jacket MOU for evaluating the performance of the CPSEs under its administrative purview. It is designed more from the point of view of the stock-market investors than that of the society at large for whose welfare the CPSEs are primarily required to function. Moreover, considering that each CPSE has a different set of objectives, evaluation on the basis of a straight-jacket MOU cannot be meaningful.

The CPSEs within the purview of the Defence Ministry provide strategic equipment and services (e.g. BEML). CPSEs such as the CIL, the ONGC and the NMDC deal with fast depleting critical minerals, the exploration and mining of which  need to be carried out in a sustainable manner. There are several CPSEs like the CEL, Bharat Electronics Ltd (BEL), HAL which are expected to develop indigenous technologies for promoting the country’s self-reliance. CPSEs like the Food Corporation of India (FCI) are expected to provide a minimum support price to the farmers and provide food-grains at affordable prices to the Sates, for which they need to be compensated with subsidies. The main responsibility of the PSU banks and the LIC is to mobilise household savings across all income groups and channelise the same into nation building activities. They provide the much needed social security cover for the disadvantaged sections.

Thus, the activities of the CPSEs differ from one CPSE to another. It is therefore necessary to develop evaluation criteria in a CPSE-specific manner.

Constraints faced by the CPSEs:

In the normal course, each CPSE should have the necessary freedom, both financial and professional, to be able to function efficiently, to be able to generate sufficient resources for investing on capacity expansion, so as to be adequately equipped to meet the future challenges in a sustainable manner.

For example, the CIL when it was set up in 1975, was visualised to be the dominant institution to explore and develop coal resources across the country for meeting the increasing coal needs of the power and the steel industries, as well as the needs of the other users. While the company has been able to deliver this outcome in an admirable manner, over the years, as a result of its short-sighted policies and fund constraints, the company has shifted its focus from establishing greenfield coal deposits and developing them, more and more towards expanding its activities around its existing sites, as a result of which its ability to enlarge its capacity on a large scale has got severely restricted. As if to to abet this undesirable trend, the government on its part has taken away many of CIL’s greenfield sites and handed them over to comparatively less competent private companies and further compounded the problem by forcing the CIL to give huge dividends to the government, which in turn curtailed CIL’s ability to invest on exploration and development of new coal deposits. During 2017-20, the dividends declared by the CIL were 42% of its gross profits. For no valid reason, the government also failed to fill the CIL’s top managerial positions, weakening its overall management systems

The same has been the case with the ONGC. While many new oil blocks were given away to less competent private companies, ONGC was also forced to declare large dividends, which amounted to 26% of its gross profits during 2017-20. As in the case of the CIL, the government has allowed the ONGC to remain headless since April, 2021 till date (mid-July, 2022).

Both the CIL and the ONGC have been recognised as “Maharatna” companies, a term that implies that they should enjoy a great deal of autonomy but, in reality, the government is treating them as their convenient appendages, the means to generate fiscal resources for the budget, not as premier agencies for exploration and development of coal and hydrocarbons for nation building.

These are only examples of how the government is treating the public sector undertakings.

Ministries’ interference in the functioning of the CPSEs:

The administrative Ministries that oversee the working of the CPSEs, instead of allowing them to conform to their respective Memoranda of Association, are known to interfere in a range of areas such as award of choice and location of projects, project contracts, recruitment of personnel, employee promotions, even occasionally providing indirect support to the rallies organised by the political executive, and so on. Such interference has resulted in tainting their image in the perception of the public and bringing a bad name for the CPSEs in general.

Though the Companies Act has a well thought out system of appointing independent directors to exercise oversight on the management of the CPSEs, in reality, such appointments have largely degenerated into a matter of political patronage, as the so-called independent directors often compromise their independence by seeking undue perquisites from the top management of the CPSEs. Of late, the present government at the Centre has been appointing the spokespersons of the ruling party as nominee directors on the Boards of several CPSEs. Such persons having no adequate domain knowledge and who may have an undue bias in decision making, cannot be expected to add much value to the CPSEs’ management. The government nominee directors, instead of acting in line with the long-term vision of the CPSE, tend to act as the intermediaries of the political executive in forcing the CPSEs to help the latter gain political mileage. While the Ministries are statutorily empowered to issue policy directives to the CPSEs, it is not uncommon for the Ministries to misuse that provision to issue directives that interfere with the day-to-day functioning of the CPSEs.

The latest disinvestment policy guidelines issued in December, 2021 are illustrative of the way the government treats the CPSEs and belittles their autonomy.

Unless these undue constraints are addressed frontally and eliminated, there is no way to strengthen the management of the CPSEs. Considering that the government, despite its wishful thinking, cannot do away with the CPSEs altogether, it is imperative that it gives a serious thought to strengthening them rather than weakening them or privatising them.

How to empower the CPSEs?

As stated above, considering the unique role that the CPSEs are required to play in terms of the Constitutional obligations of the State and the strategic contribution they can make towards self-reliance, there is no other alternative than to strengthen their management, so as to permit them to contribute to nation building in a meaningful manner. Instead of indiscriminately privatising the CPSEs and monetising their assets, as announced in December, 2021, the government should adopt a more constructive approach to revitalise the CPSEs, enhance their accountability to the Parliament and their answerability to the people at large, in terms of the societal welfare they promote.

The first and foremost step that the government should take is to insulate the CPSEs from undue interference from both the political executive and the bureaucracy.

The only way to realise this is by creating a functional distance between them and the ministries. One effective way to achieve this would be by creating a statutory body (Central Public Enterprises Oversight Authority or CPEOA) to oversee the CPSEs centrally, so as to allow them to function at a respectable distance from the administrative Ministries. While it would be necessary for the government to retain the authority to issue directions to the CPSEs, strictly in furtherance of the “welfare” obligation of the State under the Constitution, the role of the concerned Ministries should be restricted to consultation and the final decision should be left to the Union Cabinet, based entirely on the advice of the CPEOA.

The CPEOA should oversee the functioning of each CPSE in terms of the legitimate outcomes it is required to deliver and implementation of the government’s policy directions on welfare. In addressing this, the CPEOA would necessarily review the action taken on each government direction, the investment plan of the CPSE in terms of the objectives set out in its Memorandum of Association (or the specific legislation under which the CPSE has been set up) and so on. By way of an example, the CPEOA can scrutinise project planning by the CIL, the scope for the company for developing new sites, the finances required for it and, on that basis, question its dividend declaration policy. The CPEOA can act suo moto to ensure that no top position of a CPSE remains vacant. It can exercise vigilance over any semblance of undue interference by a Ministry or the political executive and make a mention in its annual report to the legislature.

The government usually leans back on the CPSEs during calamities for providing logistic support to those affected and for providing other kinds of emergency relief. There is no doubt that the CPSEs as an arm of the State need to extend help on such occasions. However, since they may have to incur expenditure for providing such services, CPEOA will ensure transparency in such matters so that the expenditure so incurred may be made good by the government through subventions.

In view of the wide and far reaching responsibilities of the CPEOA, as a statutory body, it should be headed by a former Chief Justice of the Supreme Court and should comprise of eminent experts drawn from different disciplines such as finance, welfare economics, management and so on. CPEOA should have the freedom to coopt those with domain knowledge for overseeing individual CPSEs. CPEOA should not be allowed to become a cosy haven for retired civil servants and others. The selection of the members of the CPEOA should be entrusted to a three-member committee headed by its chairman, the CJI in position and the C&AG.

Another important reform that is urgently called for is in the case of appointment of the independent directors under the Companies Act. The Ministry of Corporate Affairs should be mandated under the Companies Act to consult the CPEOA in that respect and there should be a provision in the Companies Act for the latter to have a role in overseeing the functioning of those discharging their responsibilities as independent directors.

Performance evaluation of each CPSE should be CPSE-specific, based on the methodology determined by the CPEOA. Such performance evaluation should specifically address the extent to which each CPSE has conformed to the “welfare” responsibilities of the State.

CPEOA should place its annual report on the Table of the House, with its observations on the performance of the CPSEs and the constraints faced by them.

An immediate step that is called for from the government is that it should suspend its mindless privatisation programme, pending implementation of the above scheme.

Conclusion:

The government should take note of the fact that the CPSEs are here to stay for a long time to come. To privatise them in an undue haste would hurt the national interest, erode the idea of self-reliance and be detrimental to the public interest. If there are constraints that inhibit the CPSEs from discharging their responsibilities efficiently, instead of ignoring them, the government should identify and address then frontally, so as to permit the CPSEs to become constructive partners in nation building. Sooner the present government realises this, better it would be for the long-term well being of the people at large.

E A S Sarma, Former Secretary to Government of India


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