CSR in Public Sector Enterprises

The provisions relating to corporate social responsibility (CSR) in the Companies Bill, 2011 have garnered sufficient attention on the topic. Those provisions are largely in the nature of CSR spending. While the Bill is pending in Parliament, the Department of Public Enterpriseshas proceeded to issue a revised set of “Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector Enterprises” that would become effective from April 1, 2013.

Unlike the Companies Bill and also the previous version of the guidelines applicable to central public sector enterprises (CPSEs) which focused largely on external stakeholders and CSR spending, the new version of the guidelines emphasizes CSR as a way of life and as an integral part of the operations and business of the company. While the current debate in India equates CSR with corporate philanthropy, the new guidelines for CPSEs does more than that and requires companies to follow ethical systems and sustainable management practices.

The guidelines contain detailed provisions on the manner in which CPSEs can carry out their CSR practices, which also mandate every CPSE to carry out a minimum number of external projects “for development of a backward district” that “has the potential of contributing significantly in the long run to socio-economic growth in all the backward regions of the country”.

It is not clear whether there is adequate data to determine the success of implementation of these efforts by CPSEs in the past, but by imposing higher standards of social responsibility and sustainability on public enterprises, the Government is sending a strong signal to the private sector regarding the importance of CSR in India.

Governments as Issuers of Securities

As we have been constantly focusing on this Blog (here, here and here), public sector enterprises (PSEs) in India that are substantially owned by the Government often take advantage of relaxations and special dispensations from the applicability of securities laws and corporate governance norms that otherwise apply in their entirety to their private sector counterparts. Even where actions have been initiated by regulators, they have been dropped. For instance, about two years ago when SEBI required PSEs to comply with minimum requirements for appointment of independent directors, the action was not pursued because the PSEs argued that the appointment was beyond their control as it required (under their respective articles of association) the approval of the President of India, which was not forthcoming.

An interesting contrast emerges from a recent U.S. experience where the SEC has charged the State of New Jersey for violating federal securities laws by not disclosing in various state bond offerings that two of its public employee pension funds were underfunded. The Conglomerate Blog observes that this might be the beginning of a wave of legal actions against state and municipal authorities that may have violated securities laws. More interestingly, it points to several political compulsions that may drive state agencies away from ensuring full compliance with securities laws, such as fair disclosure.

For a start, if even a single instance of non-compliance by governments or public enterprises is pursued to its logical conclusion, it may at least motivate others to move towards greater compliance.

Relaxation of Free Float Requirement

Earlier, on June 4, 2010, the Ministry of Finance introduced a requirement that all listed companies must have a public shareholding of 25%. This was to bring about uniformity and create a level playing field for all listed companies, and was the result of detailed deliberations that spanned several years. Although the rule was met with consternation by industry due to the ensuing possibility of a liquidity overkill, the laudable objectives of uniformity and level playing field appear to have been diluted within a matter of only two months as the Ministry announced two relaxations to these free float norms.

First, the 25% public shareholding may be achieved over a three year time period, without requiring an annual addition of 5% public holding.

Second, and more significantly, the public shareholding requirement for public sector enterprises (PSEs) has been dropped from 25% to 10%. PSEs are said to deserve such relaxations as they generally tend to have large equity bases and may turn out to be the largest victims of the 25% rule. However, it is not clear why the relaxation has been made available only to PSEs and not to other companies that may have larger equity bases. As an editorial in the Hindu Business Line observes:

It is never a good idea for the regulator to also be a participant. The government's latest flip-flop over public shareholding norms for listed companies shows why. … The reversal appears to be a reaction to feedback received from PSUs that the norm will lead to a spate of follow-on public offers (FPOs) affecting valuations. Maybe yes, but the listed private companies expressed the same fear and that is precisely why the government has relaxed the norms for them now by dropping the mandatory 5 per cent minimum annual dilution. There is no reason why this relaxation should not be extended to PSUs as well while retaining the minimum public shareholding at 25 per cent. The original basis for this rule was that common investors should benefit from the growth of these companies. What happened to that lofty ideal now? Besides, a higher public holding was also supposed to prevent price manipulation.

Prithvi Haldea highlights similar issues and more in this CNBC interview.

Not only does this raise the risk of opening the floodgates to more exemptions and relaxations thereby defeating the purpose of a uniform 25%, but it also points to a larger signaling problem. Whenever it comes to implementation of norms pertaining to corporate law or corporate governance, it is the public sector that seeks more beneficial treatment from compliance with various norms, which then makes the task of ensuring private sector compliance more onerous (at least morally).