PSUs Lag in Corporate Governance, All Non-Compliant Firms in BSE100 are Public Entities

As of December 2023, a report by Institutional Investor Advisory Services (IiAS) unveils a concerning trend among Public Sector Undertakings (PSUs) in India. Despite efforts to elevate corporate governance standards, all seven non-compliant entities within the BSE100 index are PSUs, including a notable bank. This revelation underscores a persistent issue of weak board structures and regulatory leniency towards public entities.

Corporate Governance in the Spotlight

The regulatory norms for listed companies demand a board composition with at least half being independent directors if the Chairperson is an executive or represents the promoter group. For other entities, the threshold is 33 percent. This requirement aims to ensure a degree of independence and objectivity in the board's decision-making process. However, IiAS's assessment indicates that PSUs have consistently fallen short of these benchmarks, highlighting a systemic issue within the governance structures of public entities. In stark contrast, the broader corporate landscape in India has shown signs of improvement, with 64 companies scoring in the 'Good' and 'Leadership' category of the Corporate Governance Score report, marking the best performance since the inception of the assessments in 2016.

Regulatory Challenges and Exceptions

One of the critical hurdles in addressing the governance lapses among PSUs is the regulatory environment itself. IiAS points out that the government has carved out exceptions for PSUs within the regulatory framework, effectively diluting the governance standards for these entities. This approach has led to a scenario where PSUs continue to operate with weak board structures, undermining efforts to enhance transparency and accountability across the board. The report also sheds light on an upcoming board refresh mandate set to take effect from April 2024, which will end the grandfathering of previous board tenures for independent directors. This move is expected to pose a significant challenge, especially for business groups that might attempt to circumvent the spirit of the regulation by rotating independent directors across group companies.

Looking Ahead: The Road to Compliance

The current state of affairs presents a critical juncture for PSUs and regulatory bodies in India. As the deadline for the board refresh approaches, the focus will intensify on how these entities and the wider corporate ecosystem respond to the call for higher governance standards. The IiAS report underscores the need for a concerted effort to address the governance deficiencies within PSUs, urging for a stricter enforcement of regulatory standards. The implications of these governance issues extend beyond the individual entities, potentially impacting investor confidence and the broader perception of India's commitment to corporate governance.

This moment serves as a crucial reminder of the importance of robust governance structures, not only for the health of individual companies but also for the integrity and attractiveness of India's corporate sector on the global stage. As stakeholders await the implementation of the board refresh mandate, the actions taken by PSUs and their regulatory overseers will be closely watched, with the hope that this challenge can be transformed into an opportunity for substantial governance reforms.