Governments need to empower major listed state-owned corporations with the freedom to navigate their own path. It’s essential to shift away from intense regulation and embrace a policy of minimal intervention, putting an end to the overprotectiveness and micro-management of such enterprises.
Securities listing rules mandate a 25% minimum public shareholding (MPS) for companies going public. The Securities and Exchange Board of India (SEBI) grants a 5-year grace period to large-cap firms to comply with this MPS threshold, although a 10% public shareholding is required within 2 years, reaching 25% by year 5 post-listing.
For government-owned listed companies, the government has the power to waive the 25% MPS requirement for these entities, including banks, even after privatization, if deemed in the public interest.
The state-run Life Insurance Corporation of India (LIC), now a publicly listed company, announced that the Department of Economic Affairs allowed a special exemption, giving it 10 years from its listing date to meet the 25% MPS standard, extending the deadline to May 2032.
This raises questions of government conflict of interest. As the regulator’s appointer and promoter/shareholder of its public sector companies, the government’s dual role is complex.
The government’s balance between public interest and market fairness is crucial, particularly in industries like banking, financial services, and key infrastructure. However, holding a near-total stake in a company such as LIC could be interpreted as the government wanting to control the enterprise fully while benefiting from its listing, raising concerns over equity and transparency in the market.
Holding the majority stake in companies poised for public listing or partial sale is increasingly under scrutiny. The dominance of the government as a majority shareholder subjects minority investors to the vagaries of state and bureaucratic decisions that may influence the trajectory of listed, profit-driven companies.
Investors legitimately worry about the possibility of business decisions being swayed by government policy or political agendas. Clear communication of the company’s strategic direction amid divestiture can boost its market value and draw in serious investors, thereby improving the overall appeal of the investment environment.
The government has the option to draft its divestment and listing strategies to include provisions that reserve a portion of such enterprises for serving the public good. However, it’s imperative to uphold transparency and impartiality, steering clear of unnecessary meddling, especially concerning the selection of board members or top executives.
In addition, this creates an unequal playing field, as these companies are not burdened with the pressures of satisfying a wide range of investors on a quarterly basis, addressing investor inquiries, or the strategic effort required to build a competitive edge.
Such a framework prolongs a hemi-governmental type of ownership, which eludes rigorous public examination. Notably, the selection of the majority of independent directors on these boards, whether directly or through the nomination and remuneration committee, is influenced by the government, effectively relegating NRCs to mere formalities in boards dominated by state ownership.
The issue becomes more pronounced when a government-held listed company seeks to emulate the efficiency and innovation of a private entity but is obstructed from crafting independent, long-term strategic visions due to its ownership structure.
The hesitance of entities with government ties to let go of their semi-official status may impede the crafting of effective strategies for long-standing market success. Such reluctance poses challenges in drawing strategic investors and achieving a lasting market footing. It also hinders the fostering of a vibrant culture that resonates with market requirements, potentially curtailing flexibility in meeting changing customer needs.
Moreover, these organizations need to focus on nurturing a competitive environment that lures and keeps top talent, showing a strong adherence to corporate governance. Upon entering the stock market, they can’t depend on their semi-governmental shelter anymore. They must wholly adopt the duties that come with being a public company, fine-tuning their business to stay pertinent in their market segments.
For example, LIC is an industry behemoth with the expertise and workforce to excel in the life insurance market. Yet, it’s vital for LIC to undergo transformative changes to appeal to today’s consumers and establish a unique standing in the market, shedding the “government” tag. Such a transformation is critical for LIC’s growth and competitive edge in the rapidly changing insurance industry.
The government must realize that promoting national interests shouldn’t eclipse the need for stringent corporate governance by its enterprises. The core of the issue concerning these firms lies in this delicate equilibrium.
In essence, with a regulatory body already in place, the government should avoid acting as an overarching supervisor. It needs to be mindful of the regulatory leeway it grants its listed companies, avoiding any apparent bias or unintentional market disruption.
It’s essential to grant state-owned giants the freedom to navigate their paths and stand independently. Moving away from overbearing surveillance and embracing a more liberating approach is overdue—halting the overprotective handling of these entities is crucial.
