19 November 2009

Divestment and governance in Public Sector Companies

The Economist ran a story this week “Stakes and Mistakes” (link requires subscription) on disinvestment by the government of India of public sector companies. It says the government is privatising the companies for the wrong reason i.e. to reduce fiscal deficit. Instead it should do so to improve governance standards in the companies:

Listing even a small stake helps keep managers on their toes, by subjecting them to the scrutiny of the stockmarket. But the bigger the float, the better.

In fact TT Ram Mohan, my colleague has been saying so for a long time and blogged about it just last week (and his piece in the EcoTimes) – which may have been the basis of the Economist piece. I would like to add that in fact the governance and corporate regulations which govern public sector units should be identical to that of the private sector for the benefits to be really visible. Today swathes of regulations are generally waived or specifically relaxed for the public sector, or often even when rules do exist public sector companies simply violate the law without any serious consequence. Witness the disregard to the listing agreement requirement to have half (or a third) independent directors of so many public sector listed companies.

To add a footnote, in line with the ministry of finance proposal to have a minimum public float of 25% (rather than 0.3%) for all listed companies, it would be good to not relax the requirement for government companies.

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