Governance

• There is a lot of controversy on ‘governance’ in public sector companies. The Children’s Investment Fund of the U.K. — TCI — is an investor in Coal India and has raised issues regarding the role of government and independent directors on the Board of Coal India. TCI has threatened legal action against independent directors and if I am not wrong has retained a leading legal firm of Delhi to question the decisions and directives of the Government of India and the decisions of the Board. The controversy is regarding pricing of coal and long-term supply agreements with power plants. The issue was resolved by the Government by issuing a ‘Presidential Directive’ to the Board of Coal India Limited to sign the supply agreements. However, since the controversy has arisen it appears from newspaper reports that the independent directors of Coal India have been active and have been adding safety clauses in the supply agreements. View defending the action of the Government is based on that: President holds the shares on behalf of the people of India.

•  Government represents the people of India.

• Presidential directive is in the interest of the people of India.

• TCI was aware of the risk of government control on Coal India’s policy at the time of investing.

Hence, there exists no reason for TCI to object to the decisions and directions of the Government. This controversy raises three issues:

• Firstly, can this concept be extended to the decisions of the majority shareholder in a non-public sector company? The answer is an emphatic: no. This is so because the promoters once having accepted outside shareholders are accountable to the minority shareholders. The whole concept of ‘independent directors’ is to protect the interest of minority shareholders. Even otherwise the promoters or majority shareholders and the Board are accountable to stakeholders other than shareholders. Further the argument of decision in the interest of ‘people of India’ does not apply.

• Secondly, should there be different guidelines for governance of public sector units? The answer is: yes. This would avoid confusion and clearly define the role and responsibilities of the socalled independent directors who are in effect nominated directors.

• Thirdly, should foreign institutions and individuals be barred from investing in public sector units and only Indian nationals, Indian institutions and persons of Indian origin should be allowed to invest in public sector units? The answer is again: yes. Because this would avoid all controversy as whether through the President of India or directly or indirectly it is ‘People of India’ who are shareholders. In conclusion I would repeat: Governance — nay — good governance is a difficult issue and it can and must be resolved. Besides the solutions suggested I am sure there would be other alternatives. These need to be explored — explained and implemented to bring in clarity both in the interest of governance and the investors.

The second limb of governance is being ‘fair’. This is based on the commandment ‘Do unto others as you wish them do unto you’. Let us test the retrospective amendment by the Finance Bill, 2012 of taxing gain arising on transfer of Indian assets held indirectly by a non-resident individual or a legal entity through a corporation in a tax haven. Newspapers report Vodafone has already sent a notice to the Government of India seeking a legal solution. The Finance Minister of the U.K., though not apparently, has met the Indian Prime Minister and the Finance Minister on this issue. The newspapers report that there exists an assurance of our Prime Minister that ‘law will prevail’. This retrospective amendment has also been criticised by many leading foreign investors.

The issues of ‘governance’ are: Is retrospective amendment fair? Does it represent ‘good governance’?

Let me at the outset mention that the Parliament is supreme and laws can be amended retrospectively. Retrospective amendments are welcome where they are made to clarify and/or implement ‘legislative intent’ — but retrospective amendment should not be used to fasten a liability which did not exist or the issue has been the subject-matter of public knowledge and debate and judicial interpretation. The use of ‘tax havens’ to legally avoid or reduce tax liability is public knowledge. The Government of India for the last many years has been unsuccessfully negotiating with the Government of Mauritius for amending the tax treaty for taxing capital gains without success. I repeat the issue is: To achieve the objective of taxing gain on transfer of Indian assets indirectly held through an legal entity in a tax haven — does retrospective amendment represent ‘good governance’ and is it fair? The answer is: No. Amend it but amend it prospectively. Those in-charge of governance have to realise the import of the age-old command of:

‘Yatha raja tatha praja’.

The tax gatherer has to realise that so far as business is concerned, ‘tax’ is a ‘cost’ and it is duty of every business man to reduce ‘cost’ and thereby increase profit. However, the reduction in cost has to be achieved within the framework of law. This right has been recognised by judicial pronouncements and is known as the ‘Westminster Principle’. As a matter of fact, many multinational and large corporations have a dedicated department — personnel — for seeking and devising means of legally reducing tax liability under national and international tax laws. Treaty shopping — a means of reducing tax liability in international operations has been practised for decades. Further, sometime back, business newspapers had reported that a public sector company — desiring to invest abroad or acquire assets abroad was exploring the possibility of making the investment through a subsidiary in a tax haven. This is certainly against the principle of fairness ‘Do unto others as you wish them do unto you’. It is judicially recognised that there is a difference between ‘tax evasion’ and ‘tax avoidance’. Tax evasion is a crime, whereas tax avoidance is a right and negating this right by a retrospective amendment is neither fair, nor does it represent ‘good governance’.

The second issue under ‘fairness’ which is disturbing is cancellation of telecom licences because of corruption. Cancellation is justified where both the giver and taker are involved in the act. Even where the investor is indirectly involved in corruption, cancellation is justified.

The issue is: Is it fair to cancel the licence where an investor has acquired interest in the licence holder after he had obtained the licence and was not involved in the act of bribing. The author is of the view that under such circumstances the licence holder should be punished — the gain the licence holder made be confiscated and the government should acquire the licence holder’s interest in the joint venture without any compensation. An investor who was not involved in corruption should not be penalised. The principle should be and is: ‘Penalise the guilty’.

Above all there is no logic in penalising an investor who is not part of the management group. Let the Government nationalise the corporation without compensation to the promoter, but not penalise you and me who are just investors.

The third limb of governance is ‘transparency’. The issue I would like to discuss is: Life Insurance Corporation acquiring 84% of shares of ONGC offered by the Government in auction. The issue failed as investors perceived that the share of ONGC was probably over -priced. The Government directed LIC to acquire the shares. It is reported that the investment by LIC in ONGC probably exceeded the limit prescribed by the Regulator. I am aware that LIC carries a ‘sovereign guarantee’. Did the Government at the time of announcing the auction declare that if the auction failed or the issue is not fully subscribed, LIC would acquire the unsubscribed shares? The issues are: can — should the ‘sovereign guarantor’ dictate investment policy of LIC and does LIC’s action or gov-ernments’ directive meet the test of transparency.

Let us not forget the old instance of LIC investing in Mundra companies. Chagla Committee was appointed to investigate the investment. The fall out of the findings of the committee was that both the Finance Minister and the Finance Secretary resigned.

The difference between two instances is that in Mundra’s case a private sector entity was involved and in ONGC’s case a public sector entity is involved. It can be argued that in both LIC and ONGC the people of India are involved. The argument in the author’s opinion is fallacious. In case of LIC — it is only the policy-holders who are involved and invest-ments have to be — no must be in the interest of the policy-holders, a class distinct from the rest of people of India. Related issue is: Is this investment in line with the mission statement of LIC which reads as under:

‘Enhancing the quality of life of people through financial security by providing products and services of aspired attributes with competitive returns and by rendering resources for economic development’.

‘Swami Saran Sharma in Outlook Money of 2 May 2012 commented: ‘LIC’s investment in several PSUs is like deliberately chasing bad money.’

The Times of India of 15 May 2012 reports that Mody’s have downgraded LIC. The comment reads as under:

‘LIC’s downgrade comes in the wake of the government dipping into LIC’s resources to recapitalise banks and to bail out the government in its divestment programme.’

The standing Committee on Finance has questioned the Government — regarding LIC’s acquisition of ONGC shares and asked the Insurance Regulatory and Development Authority (IRDA) to inquire if the company had breached investment norms while buying the shares during the Government stake auction. It is reported in Business Standard dated 25-4-2012:

“The committee cannot but conclude that the objec-tive of disinvestments has been reduced to merely deficit-bridging,” goes its rap on one state-run firm’s equity being bought by the other. The report says it regrets the government using central public sector enterprises (CPSEs) as a ‘milching cow’.”

The directive of the Government, on the touchstone of ‘governance’, is not a transparent act. It does not meet both the criterion of ‘fairness’ and ‘transparency’.