Download Note on Analysis of Key issues (IMI)

Performance of Central Public
Sector Enterprises:
Note on Analysis of Key Issues
FINAL REPORT
Sponsored By
Department of Public Enterprises
Government of India
Submitted By
Centre for Corporate Governance & Social Responsibility
International Management Institute
New Delhi
24th December 2012
1
TABLE OF CONTENTS
Topic
Page No
Introduction
04
Team
06
Methodology
08-09
Overview of CPSEs
11-17
Analysis of Issues
19-49
Recommendations with
Responsibility Matrix
51-81
2
INTRODUCTION
3
Award and Scope of the Project
The project is awarded by the Department of Public Enterprises (DPE), Ministry of Heavy
Industries & Public Enterprises, Government of India, as “Note on Analysis of Key issues –
R&D, CSR, Corporate Governance and Sustainable Development, Increase in Profit of Profit
Making CPSEs and Reduction of Loss Making CPSEs’.
The objective of the project to analyse six key issues and submit a report with
recommendations on the issues as follows:
1. Corporate Governance
2. CSR
3. Sustainable Development
4. R & D
5. Increase in profit of profit making CPSEs
6. Reduction of loss of loss making CPSEs
It is also expected that first draft report to be submitted on Dec. 05, 2012 , final draft report
by Dec. 17, 2012and final report by Dec 24,2012.
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TEAM
5
Team for the Project
Name
Designation
Qualification
Professor Arun Kumar Rath
Chairman, Centre for
Corporate Governance &
Social Responsibility
M.Sc. Ph.D
Former Secretary, GoI
Professor Shailendra Nigam
Convenor, Centre for
Corporate Governance &
Social Responsibility
MBA, LL.B & PhD
Associate Professor of Finance
MMS, LL.B & PhD
Professor Prashant Gupta
In addition to above few other members of IMI New Delhi assisted in the completion of
the report
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METHODLOGY
7
Methodology:
Objective of this study involves Analysis of Key issues relating to performance of Central
Public Sector Enterprise (CPSEs) based upon the MoU Documents signed by various CPSEs
with their respective ministries for the year 2010-2011, and other related documents. The
study covers four non financial parameters and two financial parameters related to profit
and loss of CPSEs as follows:
1.
2.
3.
4.
5.
6.
Corporate Governance
CSR
Sustainable Development
R&D
Increase in profit of profit making CPSEs
Reduction of loss of loss making CPSEs
The methodology adopted is detailed as following:
i.
As a first step of the research study, a detailed understanding of the MoU guidelines of the
Dept. of Public Enterprises, GOI for the year 2010-11 and its relevance for the CPSE’s was
ensured, and has been referred to frequently at various places in the overall draft of the
report.
ii.
To discover how CPSEs are performing with regards to their performance on various MoU
parameters, secondary Data analysis of 20 % of CPSE’s from the PE Survey Report for 20102011, their annual reports and 30% of the MoUs signed by the CPSEs for the said year 20102011 was conducted. These 30% representative CPSEs are drawn in a stratified manner with
representation from each of the following categories: Maha ratna, Nav ratna, Mini ratna,
profit making, loss making and sick enterprises.
iii.
Inputs were taken from deliberations in the conference of CPSE board members in the
Director’s Conclave organized on September 28th-29th by IMI at Greater Noida to have an
overall understanding to the key issues of CPSEs.
iv.
We also interviewed Joint Secretaries, Director MoU, other senior officers of DPE and other
ministries, officials of from BRPSE and management division of DPE, heads of divisions of
CPSEs, academic experts, subject experts and senior executives from a number of private
sector companies to understand the practical issues facing organizations today on the key
parameters. The interviews were conducted in a conversational manner in order to gather
meaningful information.
v.
These insights contributed to a richer understanding of the issues and in the development of
recommendations that seek to answers strategic questions.
vi.
Based on the information generated from two Advisory Committee meetings of the Centre
for Corporate Governance and Social Responsibility, IMI New Delhi held on September 7 th
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and November 27th, the study has made an assessment of the strengths and weaknesses of
the key Issues of the six parameters, and has suggested improvements accordingly
vii.
Interactions with representatives of CPSE’s from all the above five categories were held and
specific inputs from the respective CPSEs were gathered to understand the sector specific
dynamics and characteristics.
viii.
A panel discussion of representatives of about 25 CPSEs and representatives of DPE was
organized on 29th November’ 2012 and their perspectives were captured.
ix.
In addition to above, Corporate Governance Voluntary Guidelines 2009, Ministry of
Corporate Affairs, GOI, ISO 26000:2010, Guidance on Social Responsibility of International
Standards Organization, Business strategies for Sustainable Development by International
Institute of Sustainable Development, Corporate Governance, Best Practice Reporting of
Price water house Coopers, KPMG on CSR in India, National Voluntary Guidelines on Social,
Environmental & Economic Responsibilities of Business in India of Global Compact Network
to name few were also referred, to develop the recommendations for the study.
x.
The recommendations have generally emerged out of discussions and deliberations with
representatives of stakeholders including CPSEs, academia, government departments and
other concerned agencies in respect of their relevance and applicability.
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OVERVIEW
10
Overview of Central Public Sector Enterprises
The opportunities available to the corporations in the twenty first century are multifarious
and the advantages tremendous. The modern corporations have been hailed as the future
agents of change, development and social welfare. Recognising the power of the modern
corporation to exert a centripetal attraction to draw wealth together into aggregations of
constantly increasing size, it is predicted that in future, the corporation would dominate over
the State as the dominant form of economic organization.
In view of the enormous power of the modern corporation, good governance of corporate
entities has gained prominence in the last two decades. Proper governance of companies has
become as crucial to the world economy as the proper governing of countries. The
corporation, has become the principal driver of economic growth and improved living
standards. Corporations create jobs, produce a wide array of goods and services and
generate wealth and income for stakeholders.
The state-owned public enterprises have made significant contributions to economic
development and hold great potential for future growth of national economies. It is true
that the processes of liberalisation, privatisation and globalisation have brought about
significant reduction in state control over the commercial enterprises across the world.
Nevertheless, public enterprises continue to remain a dominant feature of the economy in
India.
The state-owned enterprises have to fulfil the twin objectives of commercial efficiency and
social responsibility. The challenge for the enterprises arises out of the need for them to
ensure a reasonable return on investment, while discharging their constitutional and social
obligations. As wings of the welfare state, the enterprises have the mandate to act as
model employers, and conduct their business in a transparent manner. Further, they have
to protect the interests of all stakeholders e.g., the employees, customers, suppliers,
creditors and the community. The environment of competition and globalisation being faced
by the public enterprises makes the tasks all the more challenging.
It is necessary to analyse the issues concerning good governance and profitability of public
enterprises .At the same time it is useful to identify the challenges faced by them in the
twenty first century and suggest policy initiatives to make the public enterprises dynamic,
competitive and performance-oriented.
The Strategic Role of the Board of Directors
The Board of Directors has to play a strategic role for better governance of the corporation.
Experience, expertise and competence of the Directors are critical factors for value addition
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to its business. In agency theory, Board is seen mainly as a control mechanism, regularising
and supervising the managers on behalf of the shareholders.
Boards of directors are a crucial part of the corporate structure. The board’s primary role is
to monitor management on behalf of the shareholders .The law imposes on the board a
strict and absolute fiduciary duty to ensure that a company is run in the long term interests
of the owners, the shareholders.
Independence of Directors will be cornerstone of corporate governance in the twenty first
century. This will ensure that the Board takes independent and objective decision in the
best interests of the corporation and all stakeholders. The board should be able to exercise
objective independent judgement on corporate affairs. Boards should consider assigning a
sufficient number of non-executive board members capable of exercising independent
judgement to tasks where there is a potential for conflict of interest. Examples of such key
responsibilities are ensuring the integrity of financial and non-financial reporting, the review
of related party transactions, nomination of board members and key executives, and board
remuneration.
Public Enterprise Management in India– A Paradigm Shift
Liberalization of the economy in 1991 resulted in a paradigm shift in the policy of the Govt.
of India towards the public sector enterprises. The enterprises lost the monopoly assured by
the government. The regime of commanding heights for the public sector gave way to the
environment of market economy. State protection and budget support available to the
public enterprises in the twentieth century has given place to challenge of competition and
domination of market forces in the twenty first century .The paradigm shift in public sector
policy changed the scenario from controlled economy to market economy, full govt.
ownership to disinvestment, unlimited life to threat of liquidation, employment generation
to manpower rationalization ,liberal budget support to withdrawal of support, departmental
Board to independent Board and limited autonomy to enhanced autonomy.
The public sector has to face competition instead of protection .Public enterprises were
subjected to disinvestment to reduce state ownership. The non-performing and sick public
enterprises faced the prospect of closure due to withdrawal of budgetary grants. At the
same time, the government reduced excessive control over the enterprises and granted
certain measure of autonomy to the PSEs. Boards of the enterprises were given powers to
take objective and informed decisions. Board’s independence was enhanced by minimizing
the presence of government directors and by inducting outside independent directors in the
Board.
In the last half century, the central public sector enterprises have passed through four
phases of growth. The first phase (1956-1991) was marked by commanding heights for the
public sector .The second phase (1991 onwards) was guided by Policy of Economic
Liberalisation with the following elements:
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
Strategic, high-tech and essential infrastructure area to be opened up to the private
sector.

Sick PSEs be referred to BIFR.

Social security mechanism to protect workers.

A part of the government’s share-holding in the public sector would be offered.

Autonomy to Public Sector

Professionalization of public sector Boards .

MOU between Enterprise and Ministry.
Third phase (1999-2004) saw the privatisation of some CPSEs either in full or part under the
Policy of Privatisation of Public Enterprises in force with following policy guidelines:

Restructure & revive potentially viable PSEs.

Close down PSEs, which cannot be revived.

Reduce Government equity in non – strategic PSEs to 26% or lower.

Interest of Employees will be protected.
In the fourth phase, the government policy provided for strong and effective public sector
under the National Common Minimum Programme (June 2004) as :

Strong & effective public sector.

Social objectives to be met by commercial functioning.

Full managerial , commercial autonomy to profit making PSUs

Generally, no privatization of profit making companies.

Existing Navratnas will be retained in the public sector.

To modernize & restructure sick CPSEs.

CPSEs are encouraged to enter capital market.

Chronically sick CPSEs to be sold off/closed.

Economic reforms with human face.
Central PSEs
From a mere five central public enterprises in 1951 with an investment of Rs.29 cr the
Central Public Sector has grown to a size of 249 CPSEs with an investment of Rs.6,66,848 cr
in March 2011. The ten year performance of CPSEs is given in Table 1.The CPSEs play a
critical role in the Indian economy and contributed to the growth in the economy. The
highlights of the performance of CPSEs (2010-11) as per PE Survey are :
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Table 1
14
(i)
Total investment (equity plus long term loans) in all CPSEs stood at Rs.6,66,848 crore as
on 31.3.2011 compared to Rs.5,80,784 crore as on 31.3.2010, recording a growth of
14.82%.
(ii) Total turnover of all CPSEs during 2010-11 was Rs.14,73,319 crore compared to Rs.12,44,805
crore in the previous year showing an increase of 18.36%.
(iii) Profit of profit making CPSEs stood at Rs.1,13,770 crore during 2010-11 compared to
Rs.1,08,434 crore in 2009-10 showing a growth of 4.92%.
(iv) Loss of loss incurring CPSEs stood at Rs.21,693 crore in 2010-11 compared to Rs.16,231 crore
in 2009-10 showing an increase in loss by 33.57%.
(v) Overall net profit of all 220 CPSEs during 2010-11 stood at Rs.92,077 crore compared to
Rs.92,203 crore during 2009-10 showing a reduction of 0.14%.
(vi) Reserves & Surplus of all CPSEs went up from Rs.6,05,637 crore in 2009-10 to Rs.6,55,488
core in 2010-11, showing an increase by 8.23%.
(vii) Net worth of all CPSEs went up from Rs.6,59,437 crore in 2009-10 to Rs.7,23,128 crore in
2010-11 registering a growth of 9.66%.
(viii)
Contribution of CPSEs to Central Exchequer by way of excise duty, customs duty,
corporate tax, interest on Central Government loans, dividend and other duties and
taxes increased from Rs.1,39,918 crore in 2009-10 to Rs.1,56,124 crore in 2010-11,
showing an increase of 11.58%.
(ix) Foreign exchange earnings through exports of goods and services increased from Rs.84,224
crore in 2009-10 to Rs.97,004 crore in 2010-11, showing a growth of 15.17%.
(x) CPSEs employed 14.44 lakh people (excluding casual labours) in 2010-11 compared to 14.90
lakh in 2009-10, showing a decrease in employees by 3.09%.
GOI delegated varying degrees of financial powers to the Boards of CPSEs depending on size,
performance, and profitability of the company. Boards can incur capital expenditure up to
different limits as per category of PSU. Grant of enhanced powers include power of incurring
capital expenditure, joint venture, HR policies, raising capital from domestic and
international markets etc. The categories are:
1. Profit making enterprises,
2. Mini Ratna Enterprises,
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3. Nava Ratna Enterprises
4. Maha Ratna Enterprises
The contributions of CPSEs have been many fold .The product profile of CPSEs has been far
and wide covering every sector of the economy. Central public sector enterprises offer a
wide range of products and services which include manufacturing of steel; heavy machinery,
machine tools, instruments, heavy machine building equipments, heavy electrical
equipments for thermal and hydel stations, transportation equipments, telecommunication
equipment, ships, sub-marines, fertilizers, drugs and pharmaceuticals, petrochemicals,
cement textile, mining of coal and minerals, extraction and refining of crude oil, operation of
air, sea, river and road transport, national and international trade, consultancy, contract and
construction services, inland and overseas telecommunication services, generation and
transmission of power, financial services, a few consumer items such as newsprint, paper
and contraceptives, hotel and tourists services, etc.The CPSEs have played a strategic role in
the national economy and made significant contributions to the economy like :

Building strong Industrial and infrastructure base for India

Major presence in vital sectors like petroleum, power, telecom, steel, aviation, coal,
mining, engineering

Monopoly in defence industries, atomic energy, railways.

Section 25 companies provide welfare services to SCs, STs, backward classes, minorities,
handicapped.

Employment generation (-14.44lakh manpower as on -)

Turnover Rs- lakh as on –Rs 14.73 lac cr

Contribution to Exchequer – Rs. 1,56lac Cr

Competition/cooperation with private sector.

Ensuring price stability of vital and sensitive products ( like oil ,gas steel ,coal ,power ,
aluminium )and protection of consumer interests

India brand promotion
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ANALYSIS
OF
ISSUES
17
CORPORATE
GOVERNANCE
18
CORPORATE GOVERNANCE
With the globalization of business, corporate governance, a term virtually unknown earlier, has now
become a mainstream topic. Every country is critically examining its corporate laws and regulations
and adopting new standards to enhance corporate ethics and accountability.
CPSEs must ensure good governance to be effective in the competitive environment. Emphasis must
be placed as much on performance and delivery as on corporate governance. Corporate governance
deals with the accountability of management of the company to the shareholders, fiduciaries duties
of directors, disclosure of strategic information regarding the company, audit of transactions, control
and direction by the Board and above all, responsibility to the society. There is an increasing
demand from the stakeholders for adoption of socially relevant corporate governance practices.
The Board of Directors, being the fulcrum of the corporate governance structure, has to play a
strategic role in securing sustainable development of the company to safeguard the long – term
interests of shareholders.
DPE have issued corporate governance guidelines and corporate governance (CG) Score for CPSEs. It
is necessary to review the 100 pt format for assessment of CG score for CPSEs, based upon
experience of last one year. It may be appropriate to revise some of the parameters in the format or
to modify the award of the marks to individual parameters.
One of the first endeavours was the Confederation of Indian Industry: Code for Desirable Corporate
Governance, developed by a committee chaired by Rahul Bajaj, a leading industrial magnate. The
committee was formed in 1996 and submitted its code in April 1998. Later the SEBI constituted two
committees to look into the issue of corporate governance; the first chaired by Kumar Mangalam
Birla, and the second by Narayana Murthy. The first Committee submitted its report in early 2000,
and the second three years later. These two committees have been instrumental in bringing about
far reaching changes in corporate governance in India through the formulation of Clause 49 of Listing
Agreement.
Concurrent with these initiatives by the SEBI, the Department of Company Affairs of the Government
of India also began contemplating improvements in corporate governance. These efforts included
the establishment of a study group to operationalize the Birla Committee recommendations in 2000,
the Naresh Chandra Committee on Corporate Audit and Governance in 2002, and the Expert
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Committee on Corporate Law (J.J. Irani Committee) in late 2004. All of these efforts were aimed at
reforming the existing Companies Act of 1956 that still forms the backbone of corporate law in India.
Clause 49 of the Listing Agreements
The SEBI implemented the recommendations of the Birla Committee through the enactment of
Clause 49 of the Listing Agreements. Clause 49 may well be viewed as a milestone in the evolution of
corporate governance practices in India. The key mandatory features of Clause 49 regulations deal
with the following: (i) composition of the board of directors; (ii) the composition and functioning of
the audit committee; (iii) governance and disclosures regarding subsidiary companies; (iv) disclosures
by the company; (vi) CEO/CFO certification of financial results; (vi) reporting on corporate
governance as part of the annual report; and (vii) certification of compliance of a company with the
provisions of Clause 49.
The composition and proper functioning of the board of directors emerges as the key area of focus
for Clause 49. It stipulates that non-executive members should comprise at least half of a board of
directors. It defines an “independent” director and requires that independent directors comprise at
least half of a board of directors if the chairperson is an executive director and at least a third if the
chairperson is a non-executive director. It also lays down rules regarding compensation of board
members, sets caps on committee memberships and chairmanships, lays down the minimum
number and frequency of board meetings, and mandates certain disclosures for board members.
Clause 49 pays special attention to the composition and functioning of the audit committee,
requiring at least three members on it, with an independent Director as Chairman and with twothirds made up of independent directors. The Clause spells out the role and powers of the audit
committee and stipulates minimum number and frequency of and the quorum at the committee
meetings.
With regard to “material” non-listed subsidiary companies (those with turnover/net worth exceeding
20% of a holding company’s turnover/net worth), Clause 49 stipulates that at least one independent
director of the holding company must serve on the board of the subsidiary. The audit committee of
the holding company should review the subsidiary’s financial statements, particularly its investment
plans. The minutes of the subsidiary’s board meetings should be presented at the board meeting of
the holding company, and the board members of the latter should be made aware of all “significant”
(likely to exceed in value 10% of total revenues/expenses/assets/liabilities of the subsidiary)
transactions entered into by the subsidiary.
The areas where Clause 49 stipulates specific corporate disclosures are: (i) related party transactions;
(ii) accounting treatment; (iii) risk management procedures; (iv) proceeds from various kinds of share
issues; (v) remuneration of directors; (vi) a Management Discussion and Analysis section in the
annual report discussing general business conditions and outlook; and (vii) background and
committee memberships of new directors as well as presentations to analysts. In addition, a board
committee with a non-executive chair is required to address shareholder/investor grievances.
Finally, it is mandated that the process of share transfer (that had been a long-standing problem in
India) be expedited by delegating authority to an officer or committee or to the registrar and share
transfer agents.
The CEO and CFO or their equivalents need to sign on the company’s financial statements and
disclosures and accept responsibility for establishing and maintaining effective internal control
systems. The company is also required to provide a separate section of corporate governance in its
annual report, with a detailed compliance report on corporate governance. It is also required to
20
submit a quarterly compliance report to the stock exchange where it is listed. Finally, it needs to get
its compliance with the mandatory specifications of Clause 49 certified by auditors or by practicing
company secretaries. In addition to these mandatory requirements, Clause 49 also mentions nonmandatory requirements concerning the facilities for a non-executive chairman, the remuneration
committee, half-yearly reporting of financial performance to shareholders, moving towards
unqualified financial statements, training and performance evaluation of board members, and
perhaps most notably a clear “whistle blower” policy.
By and large, the provision of Clause 49 with respect to the distinction drawn between boards
headed by executive and non-executive chairmen and the lower required share of independent
directors is special to India—and is also somewhat intriguing, given the prevalence of family-run
business groups. The market reaction to the corporate governance improvements sought by Clause
49 seems to have been quite positive.
Towards better Corporate Governance in Public Enterprises
The share of public enterprises in India represents a substantial part of the GDP, employment and
market capitalisation. They continue to make significant contributions in almost all sectors of the
national economy and earn sizeable revenues for the state. Their overall performance has been
comparable to and sometimes even higher than the corporations in the private and multinational
sectors. In spite of spate of disinvestments and privatisation, the public enterprises continue to
remain a dominant feature of the economy.
Nevertheless, public enterprises face distinct
governance challenges. They may suffer just as much from ownership interference as from totally
passive or distant ownership by the state. Corporate governance problems arise from the fact that
the accountability for the performance of SOEs involves a complex chain of agents like the
management, board, government Directors, the ministries and the government. The principals
(owners) on behalf of the state are not clearly or easily identifiable. In such a situation, there is a
clear dilution of accountability. To comply with such complex web of accountabilities in efficient
decision making and good corporate governance is a challenge for public enterprises.
The main criticisms in the governance of SOEs have been interference by outside sources of power in
the affairs of the enterprises. Interference may take place in the selection, appointment of CMDs
and Directors in the Board and senior management as well as in the decision-making process. Such
interference may also be in respect of investments, raw material purchases, recruitment,
downsizing, transfers, promotions, outsourcing, vendor selection, transport contracts, labour
contracts, civil work and selection of bankers/insurers and the like in one form or the other.
Arjun Sengupta Committee Report (2005) on autonomy and empowerment of CPSEs recommended
inter alia that :

Departments should be custodians of public enterprises on behalf of Government and public
at large.

Ministries to maintain arms-length-distance from the CPSEs

Not more than two Govt. nominees on the Board.
21

In extraordinary situations, Govt. may give instructions to the Company only through
directives as per due procedure.

There should be a negative list of areas which must be kept away from the intervention of the
Government due to their commercial, operational or administrative nature.
Government need to initiate policy measures to improve corporate governance in India’s public
sector. The code for public enterprises should cover their legal and regulatory framework, the
ownership issues of the state, issues of accountability of the principals (owners) and the agents like
the Directors and managers, equitable treatment of shareholders other than the state, protection of
interests of all stakeholders, issues of transparency and disclosures, and finally the authority,
responsibility and accountability of the Board of Directors. Globally accepted codes like the OECD
Code ( 2005 ) may be taken as benchmarks.
Department of Public Enterprise (DPE) also came out with Corporate Governance guidelines for
CPSEs time to time. These guidelines on Corporate Governance are formulated with the objective
that the CPSEs follow the guidelines in their functioning. Proper implementation of these guidelines
would protect the interest of shareholders and relevant stakeholders.
The Department of Public Enterprises (DPE) had issued guidelines on composition of Board of
Directors of Central Public Sector Enterprises (CPSEs) in 1992. According to these guidelines at least
one-third of the Directors on the Board of a CPSE should be non-official Directors. The Maharatna,
Navratna and Miniratna schemes provide that exercise of the enhanced powers delegated to these
CPSEs is subject to the condition that their Boards are professionalised by inducting adequate
number of non-official Directors, with minimum of four in case of Maharatna, Navratnas and
minimum of three in case of Miniratnas. The schemes for Maharatna, Navratna and Miniratna CPSEs
also provide for setting up of Audit Committees.
In November 2001, DPE issued further guidelines on the composition of Board of Directors of listed
CPSEs. It provided that the number of Independent Directors should be at least one-third of the
Board if the Chairman is non-executive, and not less than 50% if the Board has an executive
Chairman. Relevant extracts of Clause 49 of the Listing Agreement with Stock Exchanges issued by
Securities and Exchange Board of India (SEBI) forms part of the said guidelines.
To bring in more transparency and accountability in the functioning of CPSEs, the Government in
June, 2007 introduced, Guidelines on Corporate Governance for CPSEs. These Guidelines were of
voluntary nature. Since the issue of these guidelines, the CPSEs have had the opportunity to
implement them for the whole of the financial year 2008-09. These Guidelines have been modified
and improved upon based on the experience gained during the experimental period of one year. The
Government have felt the need for continuing the adoption of good Corporate Governance
Guidelines by CPSEs for ensuring higher level of transparency and decided to make these Guidelines
mandatory and applicable to all CPSEs.
Apart from these instructions of DPE, the CPSEs are governed by the Companies Act, 1956 and
regulations of various authorities like Comptroller and Auditor General of India (C&AG), Central
Vigilance Commission (CVC), Administrative Ministries, other nodal Ministries, etc. Further, some
principles of Corporate Governance are already in vogue in public sector because (a) the Chairman,
22
Managing Director and Directors are appointed independently through a prescribed procedure; (b)
Statutory auditors are appointed independently by the C&AG; (c) Arbitrary actions, if any, of the
Management can be challenged through writ petitions; (d) Remuneration of Directors, employees,
etc. are determined on the basis of recommendations of Pay Committees constituted for this
purpose; etc.
Effective corporate governance in the public enterprises requires proper balance among the power
tripod of the government, the board and the management. The government as the owner, the
board as the decision-making authority and the managers as the agents of the owners have to play
their mutually supportive roles. They have to observe the rules of distribution of authority and
responsibility among them.
Accountability implies accounting for one’s actions and to report on the achievement (or failure with
explanation) of the objectives and responsibilities assigned to an individual or group: Three main
issues arise in this regard : Accountability for what? To whom? And How? It involves methods and
procedures of assessing accountability. Public enterprise management involves multiple levels of
accountability in respect of their relationship with the government and its ministries, parliament and
its committees, CAG, CVC, Courts (enterprises being wings of welfare state), media , statutory
bodies, society and of course shareholders ( particularly in listed companies).
The government nominee Director in the Board of CPSE enjoys a privileged status in the Board.
Certain decisions cannot be taken in his absence. Board meetings are usually fixed keeping in mind
his availability. On one hand he is the nodal officer in the Ministry for the affairs of the particular
CPSE: on the other he is also a Director in the Board, who has the responsibility of ensuring that the
rules, regulations and policies of the Ministry and the government are complied with while arriving
at decisions in the boardroom. He is also expected to report back to his Ministry on important
aspects regarding deliberations in the boardroom. Further he is also the link between the CPSE and
the government. He is expected to take necessary follow up action in the Ministry. He is to provide
information to the Ministry and look intervention by the Ministry/Government, as necessary.
In view of the above, the duties responsibilities and accountability of government nominee Director
regarding his work in Boardroom needs to be revisited and specified in the contemporary
environment of faster decision making and empowerment of Board for facing emerging challenges.
The contribution of government nominee Directors to the company, should be evaluated
appropriately by the Board / Ministry like other Directors (Functional/Independent).
Duties, responsibilities and accountability of the majority shareholders are vital aspects of corporate
governance architecture. Similarly rights and safeguards of minority shareholders assume
significance with increasing levels of disinvestment of government shareholding in the CPSEs. In this
context the day-to-day working relationship between the owners and the management of the
enterprise needs to be stated clearly and should be well understood without ambiguity. The AGE
(Adhoc Group of Experts) report (2005) submitted under Chairmanship of Arjun Sengupta can be
basis for further refinement of Ministry-CPSE relationship in the emerging competitive environment.
Often there are fears of audit and vigilance investigation in minds of executives while taking
decisions in the company. The enforcement mechanism of vigilance and audit wings may be made
23
more affective; at the same time facility of pre audit or prevention vigilance must be made available
to executives and wings of the enterprise if requested by them in the decision making process.
The following role models for the three entities namely the Shareholders (Govt), Directors and
Managers (forming the tripod of corporate governance) can be considered:
Role of the Government
(1) The government as the majority owner must establish a clear and consistent ownership policy
with ownership functions defined.
(2) Power and responsibility on behalf of the government should be spelt out at appropriate levels
in clear terms with concomitant accountability.
(3) Government must allow full functional autonomy to the public enterprises.
(4) Government must not interfere in the day-to-day management of the enterprises and allow the
Boards to exercise their authority in an independent manner.
(5) The government should establish transparent nomination processes for Board of Directors of
the enterprise. The boards should be appropriately composed to ensure their objective and
independent judgement.
(6) Boards should have the powers to appoint and remove the Directors in the first stage and have
the same authority in respect of the CEO at an appropriate stage in due course.
(7) The enterprises should not be asked to perform duties not mandated by laws or regulations
(8) The government should dilute its shareholding to a level of 75% and even below upto 51% by
offering the shares to general public, mutual funds and financial institutions. This will unleash
the vast potential locked up in the public enterprises.
(9) The government as the majority shareholder should respect the voice of the minority
shareholders and not impose its will on other shareholders. There should be more democracy
for all shareholders.
(10) The government should decide and declare a negative list of items and activities over which
there will be full authority of the Board without any interference from government.
Role of the Board of Director
(1) The Boards of the public enterprises should consist of competent, capable and experienced
professionals who can take independent and informed decisions in the best interest of the
public enterprises.
(2) The Board should be independent of both the owners and the management, in particular, the
Board of public enterprises should maintain arms-length distance from the government.
(3) Directors should act with integrity and be held accountable for their actions. The Board should
assess its own performance.
(4) The independent directors as conscience keepers of the corporations should be selected by the
Board and appointed by the shareholders with clear duties and responsibilities. The
independent directors should be more proactive in initiating board agendas aimed at ethics,
social responsibility and sustainability of the enterprise. The performance of the independent
Directors should be evaluated by the Board based upon their self-assessment.
24
(5) The Directors should ask questions to elicit full information from the management. Passive
acceptance of the views of the management by the Board may not be in the interests of the
company.
(6) The Board should balance the interests of all stakeholders in an objective and judicious manner.
(7) The Board should earmark a certain percentage of its net profits for activities towards corporate
social responsibility. However, while doing so, the Board should commit resources of the
company judiciously keeping in view the long-term interests of the company.
(8) The Board should strive towards continued value addition to the public enterprise and ensure
its long-term sustainability. The Board should have a risk management plan in line with the
strategy of the private sector corporations.
(9) The Board must give adequate information on important activities of the public enterprises to
all shareholders.
(10) The Board should rationalise the internal audit system and internal vigilance mechanism to
build up effective processes and procedures in the corporation.
Role of the Managers
(1) The managers, as the agents of the shareholders and the officers of the Board, should be
professionally competent, responsible and trustworthy.
(2) The managers should devote their fulltime attention for value addition to the enterprise. They
should be loyal and diligent in discharge of their duties.
(3) The managers will have to ensure observance of code of ethics in their work in relation with the
customers, vendors and business partners.
(4) Managers must help the Board reduce agency costs of management.
(5) Every manager must strive to observe utmost economy, cut down cost of production and
eliminate wasteful expenditure in order to make the enterprise competitive.
(6) Every manager should contribute to prevention of malpractices, corruption and abuse of
authority in the enterprises and should act as whistle blower to unearth malpractices and cases
of breach of ethical values in the enterprise.
(7) The advantage of professional competence possessed by the managers in public enterprises
must translate into higher productivity and creativity in the interest of long-term sustainability
of the public enterprises.
Other issues which are relevant for better corporate governance of CPSEs are:
 Non Filling of posts of CMDs, functional directors and independent directors in time:
This
th
th
issue emerged during the Director’s Conclave organised on 28 -29 September’12, wherein
majority of the participants shared it as a key limiting factor in having right Corporate
governance.
 CMD is not associated in the selection of independent directors or functional directors.
(whereas in private sector only CMD appoints them): During the same conclave, it also
25
emerged as a unanimous expectation that not involving CMD in the selection of the IDs or
Functional Directors leads to having members with divergent perspectives, which actually
derails decision making
 Training of functional directors / Independent directors / government directors (In particular
few government directors go for training even though many of them may not have any
experience in corporate governance or public enterprise management: This aspect was
captured during the panel discussion of representatives of CPSEs and DPE being organised
on 29th November’12 at Delhi, wherein number of participants shared, the lack of
understanding of board members about the real issues and challenges faced by CPSEs in
operationalizing their demands. Thus the suggestion of sensitizing them for atleast a week
was proposed.
 Remuneration of independent directors is very low as compared to much higher
compensation in private sector: This aspect of remunerating the board members of CPSEs
was shared by the people who are actually on the board of various companies both in public
and private sector. They put it across as a de-motivating factor and a reason of less
attendance in CPSE board meetings. This was captured from the two Advisory committee
meetings of Centre for Corporate Governance & Social Responsibility, IMI New Delhi and also
the Director’s Conclave.
 Absence of risk management plan as approved by the board: This is one issue of corporate
governance which was pointed out during the MDP on MoU Document attended by senior
executives of CPSEs, interaction with the heads of divisions of CPSEs and also in the panel
discussion held on 29th November’12
26
CORPORATE SOCIAL
RESPONSIBILITY
27
CORPORATE SOCIAL RESPONSIBILITY
Corporate social responsibility (CSR) promotes a vision of business accountability to a wide range of
stakeholders, besides shareholders and investors. Key areas of concern are environmental protection
and the wellbeing of employees, the community and civil society in general, both now and in the
future.
The concept of CSR is underpinned by the idea that corporations can no longer act as isolated
economic entities operating in detachment from broader society. Traditional views about
competitiveness, survival and profitability are being swept away.
Some of the drivers pushing business towards CSR include:
1. The shrinking role of government
In the past, governments have relied on legislation and regulation to deliver social and
environmental objectives in the business sector. Shrinking government resources, coupled with a
distrust of regulations, has led to the exploration of voluntary and non-regulatory initiatives instead.
2. Demands for greater disclosure
There is a growing demand for corporate disclosure from stakeholders, including customers,
suppliers, employees, communities, investors, and activist organizations.
3. Increased customer interest
There is evidence that the ethical conduct of companies exerts a growing influence on the
purchasing decisions of customers. In a recent survey by Environics International, more than one in
five consumers reported having either rewarded or punished companies based on their perceived
social performance.
28
4. Growing investor pressure
Investors are changing the way they assess companies' performance, and are making decisions based
on criteria that include ethical concerns. The Social Investment Forum reports that in the US in 1999,
there was more than $2 trillion worth of assets invested in portfolios that used screens linked to the
environment and social responsibility. A separate survey by Environics International revealed that
more than a quarter of share-owning Americans took into account ethical considerations when
buying and selling stocks.
5. Competitive labour markets
Employees are increasingly looking beyond paychecks and benefits, and seeking out employers
whose philosophies and operating practices match their own principles. In order to hire and retain
skilled employees, companies are being forced to improve working conditions.
6. Supplier relations
As stakeholders are becoming increasingly interested in business affairs, many companies are taking
steps to ensure that their partners conduct themselves in a socially responsible manner. Some are
introducing codes of conduct for their suppliers, to ensure that other companies' policies or practices
do not tarnish their reputation.
Some of the positive outcomes that can arise when businesses adopt a policy of social responsibility
include:
1. Company benefits:










Improved financial performance;
Lower operating costs;
Enhanced brand image and reputation;
Increased sales and customer loyalty;
Greater productivity and quality;
More ability to attract and retain employees;
Reduced regulatory oversight;
Access to capital;
Workforce diversity;
Product safety and decreased liability.
2. Benefits to the community and the general public:




Charitable contributions;
Employee volunteer programmes;
Corporate involvement in community education, employment and homelessness
programmes;
Product safety and quality.
3. Environmental benefits:



Greater material recyclability;
Better product durability and functionality;
Greater use of renewable resources;
29

Integration of environmental management tools into business plans, including life-cycle
assessment and costing, environmental management standards, and eco-labelling.
Nevertheless, many companies continue to overlook CSR in the supply chain - for example by
importing and retailing timber that has been illegally harvested. While governments can impose
embargos and penalties on offending companies, the organizations themselves can make a
commitment to sustainability by being more discerning in their choice of suppliers.
The concept of corporate social responsibility is now firmly rooted on the global business agenda.
But in order to move from theory to concrete action, many obstacles need to be overcome.
A key challenge facing business is the need for more reliable indicators of progress in the field of CSR,
along with the dissemination of CSR strategies. Transparency and dialogue can help to make a
business appear more trustworthy, and push up the standards of other organizations at the same
time.
Commercial viability of a corporate enterprise is vital for survival. Yet profit alone cannot guarantee
its long term sustainability. The non-financial objectives have implications for society and
environment and are becoming increasingly significant for future of business organizations. There is
growing acceptance that it is not enough to just comply with the provisions of law or economics, but
to go beyond compliance and invest more into human capital, the environment and the society. The
concepts of social responsibility & sustainable development are emerging as major issues of
corporate strategy.
Buyers, investors and employees are likely to favour companies that apply CSR principles, when
buying, investing, or deciding to work. Further according to KPMG survey CSR has become
mainstream. The proportion of the world’s 250 largest companies issuing annual reports on CSR
increased from 50% in 2005 to 80% in 2008.
The problem with corporate social responsibility (CSR) is that nobody is very clear about what exactly
it encompasses. The Indian government has been trying to make it mandatory for companies to
spend at least 2% of net profits on CSR. Facing strong criticism, it gave up the effort in 2009 and
made the spending voluntary. But the debate continues.
If the proposed rule had come into play, the government would have had to spell out what
constitutes CSR. That would have gone some way in removing the vagueness that exists about the
term. Today, CSR to some companies means providing lunch to employees. To others, it's about
tackling global warming and environmental issues. Instead of defining CSR, the Indian government
recast it as "responsible business" in a set of voluntary guidelines for firms
Industry has been almost totally against a mandatory clause. The Federation of Indian Chambers of
Commerce & Industry (FICCI) has suggested tax breaks instead for those who meet the voluntary
targets. Rival chamber the Confederation of Indian Industry (CII) says that compulsory corporate
responsibility would be counterproductive. "Companies may resort to camouflaging activities to
meet such regulations, particularly during recessionary periods and economic downturns," argues
the lobbying group.
30
India's philanthropic community is also against compulsory CSR. "It is a crazy idea," says Dhaval
Udani, CEO of non-governmental organization (NGO) GiveIndia. "Once you make it mandatory,
people will find ways and means to get out of it. The rules will be so vague that the reporting will be
even vaguer." Deval Sanghavi, co-founder & CEO of Dasra, a strategic philanthropy foundation,
agrees. "I am not in favor of mandatory CSR. When you make things mandatory, the chances of their
not being done are greater," he notes.
Industrialist Adi Godrej adds, "It's good to say that [CSR] is desirable. Then people should decide
[what to do] on their own." Philanthropist Rohini Nilekani is more critical. "I just don't get it," she
says. "This is outsourcing of governance. This is taking the failure of the state and the corporates and
trying to create a model out of it. If you want, you tax the corporates and put the money into social
programs. But you can't dictate CSR."
The world over, very few countries have a CSR requirement; Saudi Arabia is possibly the only
exception. "The laws in developed countries do not stipulate mandatory CSR contributions,"
according to KPMG partner (development sector practice) Sudhir Singh Dungarpur. "In the recent
past, many European countries have specified that companies must include CSR information in their
annual reports."
India may become the world’s first country to make corporate social responsibility mandatory. Paths
have been cleared for reintroduction of the Companies Bill, 2011, in the ongoing winter session. If
the bill is passed after endorsing all the propositions made by the Parliamentary Standing Committee
on Finance, corporate social responsibility (CSR) would become mandatory for the first time in the
world in any country.
The statement advocates that those companies with net worth above Rs. 500 crore, or an annual
turnover of over Rs. 1,000 crore, shall earmark 2 percent of average net profits of three years
towards CSR. In the draft Companies Bill, 2009, the CSR clause was voluntary, though it was
mandatory for companies to disclose their CSR spending to shareholders. It also suggested that
company boards should have at least one female member.
Another problem of implementation of CSR activities is that there should not be one CSR Hub for the
entire country. Number of CSR monitoring Hubs may be created across the country. They are
supposed to be doing data collection, monitoring, survey & benchmarking, field study, project
formulation and also evaluation. In view of huge volume of work involved, it is advisable that more
agencies be involved.
The MoU guidelines lay stress on the link of Corporate Social Responsibility with sustainable
development and define Corporate Social Responsibility (CSR) as a philosophy wherein organizations
serve the interest of society by taking responsibility for the impact of their activities on customers,
employees, shareholders, communities and the environment in all aspects of their operations.
Decisions of corporations should be based upon social and environmental consequences.
Shareholders and investors prefer investing in companies with high social responsibility. Consumers
are sensitized to CSR policies of companies while buying goods and services. This brings pressure on
corporations to operate in economically, socially and environmentally sustainable manner.
In the context of above background research and the deliberations with all the stakeholders, the
study group developed an unbiased perspective of what CSR is all about?, what are its challenges?
31
And what really is the ailment of CPSEs?, due to which CSR initiatives has remained adhoc, sketchy
and in piece meal. On the basis of evaluation of the MoU documents submitted by CPSEs for the
year 2010-2011, and the above understanding, it can be inferred upon that the following issues need
immediate attention from the respective stakeholders and antidotes be developed for better and
improved performance of the CPSEs. The issues are:
CSR Issues:
 Absence of CSR Plan approved by the board: This aspect was shared by number of
representatives of CPSEs during the panel discussion and in the MDP on MoU for CPSEs that
normally whatever is been implemented is on adhoc basis, onetime affair simply to comply
with financial obligations to secure marks.
 Regular review of CSR activities by the board: In deliberations with various stakeholders,
there was a consensus that the board should have more involvement in CSR activities right
from planning to review of implementation of the plans.
 Rigidity of CSR guidelines: As per the submission of majority representatives of CPSEs in
various interactions the flexibility in CSR guidelines is the need of the hour.
 Over Emphasis on expenditure rather than outcome: On analysing the MoU documents
submitted by various CPSEs for 10-11 the study group found the above as an issue of
concern. This is very well reflected in the type of projects undertaken by the CPSEs in the
name of CSR activities
 Lack of experts / professionals in PSUs to advice on CSR: This aspect has been shared by
almost every CPSE we interacted that CSR is not an important function of the organization,
they are hiring right capabilities and people are given responsibility, simply either as a
punitive measure or at that juncture the CPSE is not in a position to utilise that manpower
 Absence of any organizational structure in CPSEs: This aspect came up in almost all the
different modes of interactions followed, as stated in the methodology that one and all lack
requisite infrastructure.
 Social Responsibility to be part of organizational culture and not be confined only to a
section. Employees to be sensitized on issues of CSR: As stated earlier also the common
concern of all the stakeholders raised in different deliberations is that right from the board
to the last employee sensitization on issues of CSR is a must.
 Absence of CSR guidelines from the company for their operations: During the MDP on MoU
one thing which came out was that there are no clear cut guidelines for operationalizing the
CSR activities. This point was also stressed in the panel discussion with representatives of
CPSEs
 With respect to MoU Document: These are an outcome of the analysis of various MoU
documents submitted by different CPSEs for the year 2010-11
o Most of the CSR Projects are sketchy, half hearted and unscientific
32
o
o
CSR are taken on ad hoc basis
Many CSR projects are getting constituency oriented, instead of having a spread
over provincial / national scale as per requirement
SUSTAINABLE
DEVELOPMENT
33
SUSTAINABLE DEVELOPMENT
Sustainable development “requires the integration of social, environmental, and economic
considerations to make balanced judgments for the long term”. Business must subserve the
economic, social and the environmental concerns in their growth strategy. The continuing
commitment by business to behave ethically and contribute to economic development while
improving the quality of life of the workforce and their families as well as that of the local
community and society at large.
Sustainable Development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs. Sustainable Development
involves an enduring, balanced approach to economic activity, social progress and environmental
responsibility. While conservation of environmental resource is necessary to secure livelihoods and
well-being of all, the most secure basis for conservation is to ensure that people dependent on
particular resources obtain better livelihood from the fact of conservation than from degradation of
the resource.
The term SD came into widespread use in 1987, when the World Commission on Environment and
Development of the United Nations published a report known as ‘‘Brutland Report’’. This report
stated that sustainable development seeks to “meet the needs of the present without compromising
the ability of the future generation to meet their own needs’’ The SD concept gave rise to the triple
bottom line approach for adoption by business corporations .The objectives of business should be
three fold namely profit , people and planet . Business must subserve the economic , social and the
environmental concerns in their growth strategy.
34
For the business community, sustainability is more than mere window-dressing. By adopting
sustainable practices, companies can gain competitive edge, increase their market share, and boost
shareholder value. What's more, the growing demand for 'green' products has created major new
markets in which sharp-eyed eco-entrepreneurs are reaping rewards. Growing environmental
concerns, coupled with public pressure and stricter regulations, are changing the way people do
business across the world. Industry is on a three-stage journey from environmental compliance,
through environmental risk management, to long-term sustainable development strategies.
Companies integrate sustainable development into their business strategies. Sustainable
development is a natural extension of many corporate environmental policies. In the pursuit of
economic, environmental and community benefits, management considers the long-term interests
and needs of the stakeholders.
Sustainable development strategies uncover business opportunities in issues which, in earlier stages
of the journey, might be regarded as costs to be borne or risks to be mitigated. Results include new
business processes with reduced external impacts, improved financial performance, and an
enhanced reputation among communities and stakeholders.
For the business enterprise, sustainable development means adopting strategies and activities that
meet the needs of the enterprise and its stakeholders today while protecting, sustaining and
enhancing the human and natural resources that will be needed in the future.
From the year 2010-2011, Department of Public Enterprises has included Sustainable Development
as a compulsory element for CPSEs under ‘Non Financial parameters’ having a weightage of 5%
(5 Marks) in MoU for CPSEs
After going through the various stages of our methodology explained before, the study group
consolidated the following major issues related to Sustainable Development, which are the
challenges faced by CPSEs by the year 2010-2011 and are in need of immediate response:
S D Issues:
 Overlap between CSR and SD may take place, thus it requires clarity: As per the submission
of majority representatives of CPSEs in various interactions overlap of CSR and SD is a major
point of concern. The operation executives look forward for far better clarity from the
boards.
 At present SD is reduced to implementing few schemes on a scattered basis. Comprehensive
SD plan for an entire company must be drawn, and schemes must be part of the
comprehensive plan: On analysing the MoU documents submitted by various CPSEs for 1011 the study group found the above as an issue of concern. This is very well reflected in the
type of projects undertaken by the CPSEs in the name of SD activities
 SD reporting is not taking place nor a proper format of SD reporting is evolved: It came up
during various interactions that in majority of the CPSEs excluding few Maha & Nava Ratnas
none of them have a standard format for SD reporting.
35
 Review of SD by the boards is not taking place: During the panel discussion with
representatives of CPSEs it was stressed that SD do not get adequate attention from the
boards and thus very few schemes are being implemented on year to year basis.
 Non -availability of expert manpower and Training of executives on SD is minimal: This
aspect was captured during the panel discussion of representatives of CPSEs and DPE where
lack of availability and also training of involved manpower on challenges faced by CPSEs
with respect to SD is negligible.
 Sensitizing entire organization on challenges of SD: The common concern of all the
stakeholders raised in different deliberations is that right from the board to the last
employee sensitization on challenges of SD is not happening.
RESEARCH
&
36
DEVELOPMENT
RESEARCH & DEVELOPMENT
Research and development, often called R&D, is a phrase that means different things in different
applications. In the world of business, research and development is the phase in a product's life.
Research and development is an investment in a company's future - companies that do not spend
sufficiently in R&D are often said to be 'eating the seed corn'; that is, when their current product
lines become outdated and overtaken by their competitors, they will not have viable successors in
the pipeline. So how much is reasonable to spend on research and development? That is highly
dependent both on the technology area and how fast the market is moving. Two percent of company
revenue, not profit, might be enough in a fairly sedate market, but to keep up in rapidly changing
markets,
companies
should
expect
to
spend
fifteen
percent
or
more
in research and development just to keep up with the rest of the pack.
In any well-run company, research and development have strictly commercial functions - to further
the company's business objectives by creating better products, to improve operational processes
and to provide expert advice to the rest of the company and to customers.
Manufacturing companies must overcome significant obstacles in the research and development
arena if they are to maintain a strong market position. By enhancing innovation and speeding timeto-market, companies can win market share and avoid negative product margins.
R&D assumes great value for the business enterprises due to rapid changes in technology,
competitive market and customer demands. In the present MoU format five marks are reserved for
each CPSE irrespective of the type or need for R&D in the enterprises. It is appropriate to examine
37
whether non-manufacturing enterprise or even all manufacturing enterprises need the R&D
expenditure or not.
The basic rationale behind R&D activities is the changed business environment, highly competitive
markets, the rapid pace of change in technology, stringent quality control criteria, heightened
expectations and demands of customers, lack of transfer of technology and know-how from
competitors, etc.
R&D activities by CPSEs results in substantial increase in market share and demonstrable increase in
competitiveness. It leads to greater increase in profitability for manufacturing firms and a greater
reduction in costs for services firms. R&D activities can help strengthen our country’s technological
strength and ensure growth and creation of jobs in the country, and also allow CPSEs to address the
new challenges and opportunities in an increasingly global world.Focused R&D activities, combined
with new international partnerships, can help address pressing global issues such as climate change,
health, food security and poverty.
To take advantage of improvement opportunities, it is important first to identify the R&D-related
barriers to improved innovation:








Lack of alignment between marketing and R&D
Collaboration in a matrix environment
Costs of development
Lack of an innovation culture
Fragmented research efforts for feedback and collaboration
Ineffective Product Lifecycle Management
Insufficient resources and difficulty getting manufacturing and purchasing to play
stronger roles
Pressure to shorten time to product release
Targeting Areas for Improvement
Opportunities to improve management and execution of innovation initiatives include:





Continually monitoring performance of the innovation process by developing and
implementing appropriate metrics for performance measurement
Increasing stakeholder involvement in the innovation process through clear definition of
roles and responsibilities
Viewing suppliers as strategic partners, not just low-cost providers
Developing advanced methods for customer segmentation
Evolving an R&D organizational structure that improves cross-functional collaboration
From the ongoing discussions with various stakeholders and their understanding of the parameter
Research & Development of the MoU Document, the study group while analyzing the actual MoU
documents of CPSEs for the year 2010-2011 ended up with the following outcomes which are an
impediment for a better performance by the CPSEs. The issues thus identified and for which
recommendations are provided at a later part are:
Issues:
38
 Many CPSEs do not have any relevance of R & D, hence they need not be burdened with R&D
activities: This aspect came up in almost all the different modes of interactions with the
representatives of CPSEs and from all stakeholders.
 Manpower, establishment, and administrative cost are drawn from R&D budgets and
credited towards R&D expenditure. There should be a yardstick to limit non research
expenditure as a percent of R&D budget: This aspect of limiting non research expenditure
was captured during the panel discussion of representatives of CPSEs and DPE and also on
analysing the MoU documents submitted by various CPSEs for 10-11
 Only dedicated and committed executives be selected and posted in R&D wings and R&D
units should not be used as a dumping ground: As per the submission of majority
representatives of CPSEs in various interactions it was shared that R&D is used as a non
productive posting.
 R&D should not result in unproductive work and it should be evaluated in terms of
advantages and benefits accruing to the company: On analysing the submitted MoU
documents, it inferred that many a times R&D expenditure is not directly related to the CPSE
and results in no worthwhile contribution
 Synergy may be established among different CPSEs, national research labs, academic
institutions and other scientific bodies for more effective R&D work and also to avoid
duplication: This is one issue which was pointed out during the MDP on MoU Document
attended by senior executives of CPSEs, wherein they stressed the synergy among various
research organizations.
 It is for consideration to establish monitoring organizations for activities of a particular
sector of R&D to channelize and coordinate the resources of different CPSEs working in same
sector. It may be inter PSU coordination body managed by a lead PSU: This aspect was
captured from the interactions with the representatives of CPSEs during the panel discussion
organised by DPE, executives were of the opinion of having a coordinated research under
holding CPSEs or under one CPSE per sector.
39
40
Increasing Profits of
The Profit Making
CPSEs
Increasing Profits of the Profit Making CPSEs
Section 11 (2) of the Indian Companies Act – 1956 says “.......more than 20 persons joining to carry
on any business with the object of profit and gain, must form a company and get registered.”
Since all the PSEs are registered as ‘company’ under the Indian companies Act, it is the responsibility
of all PSEs to earn profits, whatever business they are in to. Sometimes many people argue that
public sector undertaking public money and they must care for social welfare at large but this should
also not been forgotten that all companies are meant to create profit/gain. If a company not
generating profits and using public money, it is more serious matter.
Indian government also has withdrawn budgetary support to the public sector companies. This
support is now available to only some companies as exceptional case and that too for some specific
41
purpose like payment of salary etc or if there is any revival package given to the company. So it has
become rather more important for all PSEs to earn profits for its own survival in future.
To enable PSEs to generate profits, government also has given some flexibilities and autonomy in
certain decision making and also extended some financial powers to use them for their benefits
(refer DPE guidelines). This is important for the CPSEs to use and exercise these powers like Strategic
alliances, Joint Ventures and Mergers & Amalgamations (M&A) etc. as discussed in the DPE-CPSE
joint meeting on Nov. 28, 2012, it is also important to see whether the profitable PSEs are exercising
these autonomy and financial powers for enhancing profits.
First thing that has come up after meeting and discussions with executives of various PSEs, is that
what is the operating level, at what these companies are operating. During analysis of MoU
agreements of selected CPSEs, it is seen that many profitable PSEs are generating profits not largely
because of their operating profits and efficiency but because of the large interest earnings, that is
non-operating income. This is a worrying sign as company’s management don’t think of increasing
operating efficiency/productivity to produce and sale more. Capacity utilisation is vital and
companies should think of increasing productivity, resulting in to higher sales and improving profits.
Working capital management is also essential to improve the efficiency of the companies. Working
capital management has three important pillars; Cash Management, Inventory Management and
Receivables Management. If, managed properly, each of these pillars may contribute significantly to
improve on efficiency in operations, hence enhancement in profitability and absolute profits as well.
Very efficient cash management is must as idle or unutilised cash may result in inefficiency.
However, focus on earning through surplus cash by investing in fixed income generating securities
and not on improving the operations by spending in capital assets to earn better revenues is also not
appreciable.
It is observed that many CPSEs sit on large cash, usually invested somewhere to earn profits but
management of these companies do not plan to utilise it by investing it in new projects/ventures
and/or not identify the further growth areas and new investment avenues for long-term. By doing
this profitable CPSEs will not only increase their profits but also create more employment and
contribute in GDP growth. Proactive management is required to make some bold steps and look
beyond the normal. New technologies or investment in R&D efforts may also be evaluated.
Another important thing came up during the discussions that PSEs of same or related sector may
think of creating a kind of synergy between them, which is mutually beneficial to all the contributors.
This may be done by pooling resources for R&D or creating a common supply chain and or logistics to
reduce the cost of operations and increasing profits for all participating PSEs. Some of the
participating CPSEs may be sick/loss making PSEs, which may also be benefitted with this symbiotic
relationship and may reduce their losses.
It seen generally that listed companies behave in more transparent and ethical manner due to the
listing requirements and regulatory norms related to governance, disclosure, ethical behaviour and
publicly available documents and statements. All profitable PSEs may be considered for the listing in
stock exchanges. This may improve not only their governance and transparency but also operating
efficiency.
42
High risk is a key to high gain. Now time has come that CPSEs must use the risk management tools
effectively and should take calculative risk with informed decisions. Entrepreneurial skills and
approach is needed at the board level as well as at all functional level. Also to face challenges of
increasing global competition, benchmarking with the best in the industry is to be done to find out
real gap and CPSEs to realign themselves as per the requirement. Management needs to change the
mindset and should think out of box and beyond the normal.
Based on the above discussions during the course of time, following are the main issues identified:
 Increase in the operating efficiency to enhance operating profits: As it has come up during
the discussion in the DPE-CPSE joint meeting on Nov. 28, 2012, all CPSEs need to carefully
watch the operating efficiency to enhance the profits. Non-operating profits specially
interest earnings should be supplementary not the major source of income.
 Proper utilisation of autonomy and financial powers given to the PSEs: Though, CPSEs are
given autonomy in taking decision and also some financial flexibility is given in terms of JVs
and M&A, but after analyzing MoU agreements it is observed that CPSEs are not utilizing the
benefits of this autonomy and financial flexibility. CPSEs may create more value to business
by venturing in to profitable and mutually beneficial JVs and M&As.
 Pooling resources for better utilization to save cost and improving profitability: During the
Director’s Conclave, organized by IMI in September 2012 it has come up that many CPSEs
work in same or related industrial domain. These CPSEs may pool/join their resources or
create common facilities/services to save on cost, in turn improving operating efficiency. Like
joint R&D efforts, common supply chain and logistics etc. may be some example of these
activities.
 Effective Working Capital Management: for better efficiency and reducing cost, effective
Working Capital Management is must for any company. CPSEs must emphasize on this
aspect, especially effective cash management. DPE has suggested in its guidelines that
investment may be made in public sector mutual funds. It is observed during the discussion
with various executives of the CPSEs that they rely more on fixed income options and seldom
invest in mutual funds.
 Courage to plan and start long-term investments/projects for better utilization of
profits/surplus cash: for profit making CPSEs, it is important to manage their profits
optimally and reinvest in creating long-term projects for expansion or for new business line
identified by the management, either for backward or forward integration.
 Listing of profitable CPSEs: In all discussions, at Director’s Conclave to DPE-CPSE joint
meeting, this was emphasized. Listing of CPSEs leads to better governance, transparency and
accountability.
 Benchmarking with global standards: to face the increased global competition,
competitiveness of CPSEs to be reassessed and enhanced. As told by various executives,
benchmarking with global standards and processes will help CPSEs to identify the gaps and
43
specific areas of improvements. CPSEs should realign their strategic plans as per the
requirement.
 Pro-active management to look beyond: As quoted by Padamshree Dr. Preetam Singh in the
Director’s conclave in September 2012 and endorsed by many other eminent speakers,
“management needs to look within, look around and look beyond”. A very proactive
management with an entrepreneurial outlook is required to steer the CPSEs who are capable
of becoming global leaders in their area of operations.
44
REDUCING LOSS OF
LOSS MAKING CPSEs
45
Reducing Losses of Loss Making CPSEs
Many CPSEs are running in losses for years. To deal with this situation and to help and theses
companies, Sick Industrial Companies Act (SICA), 1985 was brought which is enforced in 1991 and
effective from 1992. Under the provisions of Sick Industrial Companies (Special Provision) Act
(SICA),1985 the CPSEs have to be referred to Board for Industrial and Financial Reconstruction (BIFR)
on their becoming sick/insolvent. They are referred to the BIFR if the cumulative loss is equal or
more than the net worth of the company. According to PSE survey, 64 companies have been referred
to BIFR, out of which 45 companies are in operation till 31.03.2011. It is seen that the process of
appointment of Official liquidator (OL) for winding up of a company or process of
revival/rehabilitation sanction is very slow.
The Government, furthermore, constituted the Board for Reconstruction of Public Sector Enterprises
(BRPSE) in 2004, as an advisory body to address the task of strengthening, modernizing, reviving and
restructuring sick and loss making CPSE’s. In comparison to BIFR, which sanctioned 14 cases of
revival (between 1992-2007), BRPSE has recommended 159 revival cases (between 2005-2011).
BRPSE considers any company sick if it has accumulated losses in any financial year equal to 50% or
more of its average net worth during 4 years, immediately preceding, such financial year and/or as
per the provisions of the SICA.
There has been significant improvement in the overall condition of these enterprises in recent years.
In comparison to 111 sick CPSEs in March, 2002, there were 45 sick CPSEs in March, 2011
(Source: Public Enterprise Survey, 2010-11)
Reasons for Sickness in CPSEs
There are many reasons for, being loss making or being sick, of many PSEs and these vary from
enterprise to enterprise. In some cases, the cause of sickness is historical; for example, many textile
companies which were taken over from the private sector on soico-economic considerations like
protecting employment of workers in early seventies could not be modernized quickly (British India
Corporation, Bird Jute & Exports and National Textile Corporation etc.). Similarly there have been
other Engineering and Refractory companies that were taken over from the private sector but could
not be modernized (Bharat Wagons & Engineering, Praga Tools, etc.) and many more from many
sectors ranging from drugs and pharmaceuticals to shipping and consumer goods.
Another set of sick companies is green-field companies, which became sick over the years on
account of high input cost, lack of finance, technological obsolescence and competition from the
private sector (like Fertilizer Corporation of India, Indian Drugs & Pharmaceuticals Ltd., Hindustan
Insecticides Ltd., etc.). It is observed that high input cost, large work force and obsolete technology
leads to commercial inefficiency and it makes PSEs less competitive.
Other reason for some of the CPSEs to be in losses was to have macro-economic objectives to serve
such as development of backward areas and providing goods and services to farmers at unremunerative prices etc. (like Nagaland Pulp & Paper Company Ltd., Jute Corporation of India and
Cotton Corporation of India). Social and employee welfare also leads to additional cost as compared
46
to the competitors from private sectors. In some of the cases, product itself became outdated (like
Scooter India).
From the business and operations point of view, PSEs also faced the other problems, common to
most sick and/or loss making CPSEs have been poor debt-equity structure, weak marketing strategies
and slow decision making process and less or virtually no working capital to sustain routine
operations. In general reasons for sickness or being loss making may be classified as under:






Poor Management
Resistance to change with changing business environment
Low or nil technology up gradation
Large work force with generous employee welfare
Increasing input cost
Unviable business line/sector/products
For this project in this chapter of ‘reducing loss of loss making CPSEs’, we have taken both loss
making CPSEs and Sick CPSEs for addressing the issue of reduction of losses, as this leads to
improving operating performance. So many points of discussions may be similar and somewhere
identical also.
Based on the above discussion, following are the issues related to reducing losses of loss making/sick
companies:
 Lack of funding support from banks and other financial institutions leading to inadequate
cash flows: This has been observed during the discussions with different stakeholders
that inadequate financial support, at the time when it is actually needed, is one main
hurdle to revive these CPSEs. Banks and financial institutions, in general, hesitate in
providing financial support considering the higher risk of default.
 Delay in the decision making process: Need for faster decision making is felt after the
discussions. Usually these CPSEs take long in deciding things and don’t act in time bound
manner. Management of these CPSEs to take care of this concern.
 Replacement of BIFR to National Company Law Tribunal (NCLT): Considering the slow
pace of BIFR as discussed above also (sanctioned only 14 revival plans during 19922007), replacement of BIFR to NCTL may be a better step to address this issue and help
to loss making/sick CPSEs.
 Attracting and acquiring new talent pool as well as retaining the good talent also: During
Director’s Conclave, this was dealt at length and most of the participating Directors of
diverse CPSEs endorsed that acquisition of new talent is very important as well as
retaining the existing quality employees. Identifying and developing the proactive
management from this talent pool may be easier.
 Flexibility and autonomy in deciding pay packages and in recruitment: for supplementing
the above point, this flexibility may be a good tool to achieve the purpose. Instead of
47
fixing salary in a particular grade, a comprehensive ‘salary package’ may be offered to
attract new or highly rated retiring professional of other PSEs.
 Exploring the possibilities of pooling resources with profit making CPSEs to create some
kind of synergy: as discussed above for profit making CPSEs, pooling resources/joint
facilities etc. may be planned by loss making/sick units also with the same or related
area’s profit making CPSEs or with any other CPSEs for that matter.
 Improvement in operating efficiency, competitiveness and technology up-gradation: As
discussed with various executives of CPSEs, strong need for efficient and effective
utilisation of all resources (assets, capital and working capital that includes management
of cash, receivable and inventory) is a key to turnaround. Funding is required to upgrade
the old technology/plant. Together, these will enhance the competitiveness and
profitability of loss making CPSEs.
 Reward to the employees of performing loss making/sick undertakings: If a loss making
PSE performs better by posting less loss as compared to the previous year, its work force
should be treated at par with profit making CPSEs, as reduction of loss is done by
improving performance, hence this should be treated same as profit earned.
48
RECOMMENDATIONS
49
Recommendations and Methodology for Implementation:
 Based on the study the group has given elaborate recommendations in six parts for
the six key issues.
 For the implementation of all the recommendations suggested by the group, responsibility
matrix is provided at the end of each key issue recommendations to highlight as to who need
to take action on each recommendation i.e. CPSE, DPE, Administrative ministry of concerned
CPSE or Others (Other Government bodies/agencies, as the case may be).
 We have further categorised all recommendations in three parts for implementation:
o short-term,
o medium-term and
o long-term,
and have shown the same in the responsibility matrix.
 All those recommendations, which are suggested to be implemented in short-term and
action is required, are also shown separately to be suitably incorporated in MoU documents.
 The Responsibility Matrices for all individual key issues are only suggestive in respect of
specific points mentioned for incorporating in MoU documents. However, action needs to be
taken on other points also in the short, medium, or long term perspectives by the concerned
departments/ CPSEs as appropriate.
50
A.
Corporate Governance
1. The Boards should have balanced structure of full time Functional Directors, Independent Directors
and Government Nominee Directors as per clause 49 of SEBI for listed enterprises and as per DPE
guidelines on Corporate Governance for non listed enterprises.
2. The Board must meet regularly, at least once a quarter. Adequate notice of at least one week must
be given to all Directors to enable them to come prepared with agenda points and seek
additional information if any .Placing agendas on table at the time of Board meeting should be
strictly avoided.
3. The Audit Committee must be duly constituted and chaired by an Independent Director who is a
financial expert and with two third members from Independent Directors. Director Finance
should neither be Chairman nor Member of Audit Committee, but may attend as special invitee.
The audit wing of the CPSE must report to the CEO and not Director Finance.
4. The duration of the Audit Committee meetings should be adequate. The audit committee must
interact with the internal and external auditors and must review adequacy of internal financial
systems and controls.
5. The Board sub- committees like audit committee, share holders grievance committee, remuneration
committee, committee on sustainable development, corporate social responsibility, ethics and
others committee (as constituted by the Boards) must meet regularly and for adequate duration.
6.
The working relationship between the owners (government) and the management of the
enterprise needs to be stated clearly and should be well understood without ambiguity There
should be no interference of concerned ministry and other centre’s of power in day to day
functioning of the company. Instructions if any may be issued by administrative ministry to the
CPSE in the form of directives as prescribed in the concerned Article of Association or DPE
guidelines after following due procedure.
7.
Rights and interests of minority shareholders, which assume significance with increasing levels of
disinvestment of government shareholding in the CPSEs, must be safeguarded by due
consideration by the boards of CPSE in their decisions.
8.
The CMD should be associated actively in the process of selection of Directors and Independent
Directors for the Company. This can be facilitated by having a panel of names from CPSE.
9.
All posts of IDs as required by prescribed norms are filled up in time. Nominations of IDs by DPE
for interim period of six months may be considered for continued vacancies.
10.
The duties, responsibilities and accountability of government nominee Director regarding his
work in Boardroom needs to be revisited and specified. Contributions made by Govt Director to
CPSE may be recorded in his ACR. DPE may evolve a procedure in this regard.
51
11.
All Directors (Functional / Independent /Govt. nominee) should be assessed by the Board based
upon self-assessment by the Directors.
12.
The enforcement mechanism of vigilance and audit wings may be strengthened and made more
effective. Boards must also review observance of Code of Conduct & Code of Ethics in the
company.
13.
Facility of pre audit or preventive vigilance advice must be made available for issues and policies
of CPSE to executives and wings of the enterprise if requested by them.
14.
All Directors (Functional / Independent / Govt. nominee) must receive one week institutional
training in relevant fields in one or more spells.
15.
The Company should not be penalized on corporate governance score for non filling of posts of
IDs or Directors.
16.
The subsidiary companies should be granted more autonomy and delegation of process. They
should enjoy full powers as individual companies for the creation and recruitment of
manpower, subject to DPE guidelines.
17.
Categorization of CPSEs into ABCD categories should be scientific and rational. (Categorization
Matrix annexed)
18.
Every Board should put in place Risk mitigation plan/policies for the enterprise and review it
periodically.
Recommendations numbered 1, 2, 3, 4, 5, 11, 14, 15, 16 and 18 may be suitably incorporated in MoU
document
and/or 100 point format of composite Corporate Governance score by
adding/reducing/giving bonus marks (to promote some point) etc. by the DPE in due course of time.
Also where guidelines are in place but CPSEs are not implementing these or/not utilising the
powers/autonomy given to them, DPE may impose some penalty/negative marking.
For recommendations numbered 8, 9 and 10, DPE may take appropriate action as suggested in the
recommendations. For recommendation number 17, DPE may suitably adapt operating guidelines
and matrix as suggested by the group.
52
1. CORPORATE GOVERNANCE
S.
No.
Recommendation
1
The Boards should have balanced
structure of full time Functional
Directors, Independent Directors and
Government Nominee Directors as per
clause 49 of SEBI for listed enterprises
and as per DPE guidelines on
Corporate Governance for non listed
enterprises.
The Board must meet regularly, at
least once a quarter. Adequate notice
of at least one week must be given to
all Directors to enable them to come
prepared with agenda points and seek
additional information if any .Placing
agendas on table at the time of Board
meeting should be strictly avoided.
The Audit Committee must be duly
constituted and chaired by an
Independent Director who is a
financial expert and with two third
members from Independent Directors.
Director Finance should neither be
Chairman nor Member of Audit
Committee, but may attend as special
invitee. The audit wing of the CPSE
must report to the CEO and not
Director Finance.
The duration of the Audit Committee
meetings should be adequate. The
audit committee must interact with
the internal and external auditors and
must review adequacy of internal
financial systems and controls.
The Board sub- committees like audit
committee, share holders grievance
committee, remuneration committee,
committee on sustainable
development, corporate social
responsibility, ethics and others
committee (as constituted by the
Boards) must meet regularly and for
adequate duration
2
3
4
5
Responsibility
CPSE/Boar DPE
d
…………
YES
TERM
Ministry Other
Agency
YES
YES
YES
…………
YES
……………
.
SHORT
TERM
YES
……….
YES
……………
MEDIUM
TERM
YES
…………
…
…………
…
……………
SHORT
TERM
YES
…………
…
…………
…
……………
SHORT
TERM
MEDIUM
TERM
53
6
7
8
9
10
11
12
The working relationship between the YES
owners (government) and the
management of the enterprise needs
to be stated clearly and should be well
understood without ambiguity There
should be no interference of
concerned ministry and other centre’s
of power in day to day functioning of
the company. Instructions if any may
be issued by administrative ministry to
the CPSE in the form of directives as
prescribed in the concerned Article of
Association or DPE guidelines after
following due procedure.
Similarly rights and interests of
YES
minority shareholders, who assume
significance with increasing levels of
disinvestment of government
shareholding in the CPSEs, must be
safeguarded by due consideration by
the boards of CPSE in their decisions.
…………
…
YES
……………
LONG
TERM
………...
YES
……………
LONG
TERM
The CMD should be associated
actively in the process of selection of
Directors and Independent Directors
for the Company. This can be
facilitated by having a panel of names
from CPSE.
All posts of IDs as required by
prescribed norms to be filled up in
time. Nominations of IDs by DPE for
interim period of six months may be
considered for continued vacancies.
The duties, responsibilities and
accountability of government
nominee Director regarding his work
in Boardroom needs to be revisited
and specified. Contributions made by
Govt Director to CPSE may be
recorded in his ACR. DPE may evolve a
procedure in this regard.
All Directors (Functional /
Independent /Govt. nominee) should
be assessed by the Board based upon
self-assessment by the Directors
The enforcement mechanism of
vigilance and audit wings may be
strengthened and made more
effective. Boards must also review
observance of Code of Conduct &
Code of Ethics in the company.
YES
YES
YES
SHORT
TERM
..........
YES
YES
……………
SHORT
TERM
……………
YES
YES
……………
LONG
TERM
YES
…………
…
…………
…
……………
SHORT
TERM
YES
……………
LONG
TERM
YES
54
13
Facility of pre audit or preventive YES
vigilance must be made available for
issues and policies of CPSE to
executives and wings of the enterprise
if requested by them.
…………
…
…………
…
……………
SHORT
TERM
14
All Directors (Functional /
Independent / Govt. nominee) must
receive one week institutional training
in relevant fields in one or more spells
The Company should not be penalized
on corporate governance score for
non filling of posts of IDs or Directors
The subsidiary companies should be
granted more autonomy and
delegation of process. They should
enjoy full powers as individual
companies for the creation and
recruitment of manpower, subject to
DPE guidelines
Categorization of CPSEs into ABCD
categories should be scientific and
rational
Every Board should put in place Risk
mitigation plan/policies for the
enterprise and review it periodically.
DPE may take suitable action in case
of non compliance.
YES
…………
…
…………
…
……………
SHORT
TERM
.........
YES
YES
……………
SHORT
TERM
YES
YES
…………
…
……………
MEDIUM
TERM
……………
YES
…………
…
……………
MEDIUM
TERM
YES
…………
…
…………
…
……………
SHORT
TERM
15
16
17
18
55
Model for categorization of CPSEs
Score
obtained
Categories
A
B
C
D
Parameters
Profit based measures
1. Profit After Tax to Net Worth
2. EBDITA to Capital Employed
3. Net Operating Income to Gross
Revenue
Relative
Performance
Measure
Efficiency
Measures
4. Sales to Capital Employed
5. Value Added to Employee Cost
6. Growth in Sales within the Sector
7. Growth in Operating Profit
within the sector
Composite Score
Average Score (Composite Score ÷ 7)
Overall Category
56
Operating Guidelines:
1. Each one of the CPSE shall be required to report their performance on the seven parameters,
year wise, for the last five years. The average of the last five years performance shall be
computed, parameter-wise, for each one of the CPSEs.
2. Based on the average thus computed the CPSEs will be ranked in the descending order on
each of the seven parameters. All the CPSEs will be put, parameter-wise, into one of the four
categories- A, B, C, & D- and will be given scores as follows:
Rank
Category
Score
Top 35%
A
4
Next 30%
B
3
Next 20%
C
2
Last 15%
D
1
3. The composite score for a CPSE will be computed by summing up the scores obtained by it
on individual parameter. The average score will be computed by dividing the total score by 7.
4. the overall category that a CPSE would fall in will be determined depending on its average
score using uniform scale division of 4-1, as follows:
Average Score
Overall category
3.25 and above
A
2.50 – 3.24
B
1.75 – 2.49
C
1.74 and below
D
57
B. Corporate Social Responsibility
1.
Every CPSE Board must adopt CSR Policy and Plan, both long term and short term. Such
Policy and Plan need to be reviewed by the Board periodically. Board should constitute a Board
level subcommittee for CSR headed by an Independent Director.
2.
Boards generally do not spend enough time and attention to CSR activities. Boards
should review activities in detail at least once a quarter.
3.
Selection of CSR projects should be done by board / board subcommittee and not by
external authorities.
4. Boards should provide clear guidelines to their executives for proper operationalisation of various
CSR activities
5.
CPSE Boards should have full autonomy to decide engagement of NGOs, academic
institutions and voluntary agencies in CSR work. The CPSE boards should draw guidelines for
selection of such agencies for association with CSR activities.
6.
CSR guidelines of DPE should not be too rigid; there should be flexibility in the guidelines
to allow for innovation by the CPSEs and full exercise of delegated power to them in respect of
CSR activities.
7. Over emphasis on expenditure rather than outcomes should be avoided while implementation of
CSR policies and plans. CSR activities should be taken up as a project and the outcomes being
measured though outputs.
8.
9.
CSR activities and spending should not be confined to selected constituencies, or specific
areas only, but should be spread over wider areas, states or in facts for the entire country.
Overlap between CSR and SD be avoided.
10.
CPSEs should develop in house expertise for social development; at present there is
general dearth of such expertise.
11.
CPSEs should not take up activities which are in the ambit of sanctioned schemes of
government departments or public bodies in order to avoid duplication of efforts.
12.
The CSR activities should not remain confined to implementing wings of CPSE. Social
Responsibility should be part of the business culture of the enterprise covering the entire
organization, executives and employees, by organizing awareness programmes.
58
13.
CSR should be integrated in the business strategy of the enterprise. Executives and
employees of the CPSEs need to be sensitized with respect to the issues of CSR. Voluntary social
service by executives and employees should be encouraged to allow CSR spirit in the entire
organization. Board may draw policy to facilitate such voluntary actions by
employees/executives.
14.Absence of any organizational structure in CPSEs is a major bottleneck, which should be addressed
through formal structures being formed to take up CSR activities
15.
In view of the volume of work there should be more CSR Hubs in different parts of the
country.
16.
Same organization should not be deployed for formulation, deployment as well as
evaluation of CSR activities.
17.
The activities should be like projects with clear outcomes and planned timelines. CSR
activities should not be taken on adhoc basis but chosen carefully after due consideration.
Decision making should be left with the CPSE whether to outsource or take up activities through
internal expertise.
18.
Baseline Survey as a prerequisite before taking up any project should not be binding. In
case the projects require baseline survey then only it should be done as per decision of the CPSE.
Available information with Planning Commission and other agencies about backward areas may
be collected in this regard instead of commissioning baseline surveys at the expense of CPSEs.
19.
Grants and donations to various governmental agencies, public bodies, public relief
funds, etc., should be considered as CSR activities if they are in nature of public activity.
20.
Evaluation of CSR activities by board level committees should be sufficient for small
projects.
21.
CSR activities completed in part during the year should also be considered and evaluated
if the prescribed milestones of the project have been achieved.
Recommendations numbered 1, 2, 4, 5, 6, and 16 may be suitably incorporated in MoU document by
adding/reducing/giving bonus marks (to promote some point) etc. by the DPE in due course of time.
Also where guidelines are in place but CPSEs are not implementing these or/not utilising the
powers/autonomy given to them, DPE may impose some penalty/negative marking.
For recommendations numbered 7, 15 and 17-21, DPE may take appropriate action as suggested in
the recommendations.
59
2. CORPORATE SOCIAL RESPONSIBILITY
S.
Recommendation
No.
Responsibility
CPSE/Board
DPE
Ministry
1
YES
……….
……….
Other
Agency
……….
YES
……….
……….
……….
MEDIUM
TERM
YES
……….
……….
……….
SHORT
TERM
YES
……….
……….
……….
SHORT
TERM
……….
YES
……….
……….
SHORT
TERM
……….
YES
YES
……….
LONG
TERM
……….
YES
……….
YES
LONG
TERM
2
3
4
5
6
7
Every CPSE Board must
adopt CSR Policy and Plan,
both long term and short
term. Such Policy and Plan
need to be revised by the
Board periodically.
Boards generally do not
spend enough time and
attention to CSR activities.
Boards should review
activities in detail at least
once a quarter.
Boards should provide clear
guidelines to their
executives for proper
operationalisation of various
CSR activities
CPSE Boards should draw
guidelines for selection of
NGOs for association with
CSR activities.
CSR guidelines of DPE
should not be too rigid;
there should be flexibility in
the guidelines to allow for
innovation by the CPSEs.
It is necessary to reconsider
whether fixed expenditure
on CSR as prescribed at
present be kept mandatory
or made flexible as well as
voluntary, giving choice to
the boards for decision.
Over emphasis on
expenditure rather than
outcomes should be avoided
while implementation of
CSR policies and plans. CSR
activities should be taken up
as a project and the
outcomes being measured
though outputs.
TERM
SHORT
TERM +
LONG
TERM
60
8
9
10
11
12
13
14
CSR activities and spending
should not be confined to
selected constituencies, or
specific areas only, but
should be spread over wider
areas, states or in facts for
the entire country.
Overlap between CSR and
SD be avoided.
CPSEs should develop in
house expertise for social
development; at present
there is general dearth of
such expertise.
CPSEs should not take up
activities which are in the
ambit of sanctioned
schemes of government
departments or public
bodies in order to avoid
duplication of efforts.
The CSR activities should
not remain confined to
implementing wings of
CPSE. Social Responsibility
should be part of the
business culture of the
enterprise covering the
entire organization,
executives and employees,
by organizing awareness
programmes
CSR should be integrated in
the business strategy of the
enterprise, executives and
employees of the CPSEs
need to be sensitized with
respect to the issues of CSR.
Voluntary social service by
executives and employees
should be encouraged to
allow CSR spirit in the entire
organization.
Absence of any
organizational structure in
CPSEs is a major bottleneck,
which should be addressed
through formal structures
being formed to take up CSR
activities
YES
……….
……….
……….
LONG
TERM
YES
……….
……….
……….
YES
……….
……….
……….
SHORT
TERM
LONG
TERM
YES
…….
…….
…….
SHORT
TERM
YES
…….
…….
…….
LONG
TERM
YES
…….
YES
…….
LONG
TERM
YES
YES
…….
…….
LONG
TERM
61
15
16
17
18
19
20
21
In view of the volume of
work there should be more
CSR Hubs in different parts
of the country.
Same organization should
not be deployed for
formulation, deployment
and as well as evaluation of
CSR activities.
Many of the CSR project are
sketchy, half hearted and
taken on adhoc basis. CSR
activities should not be
taken on adhoc basis but
chosen carefully after due
consideration. Decision
making should be left with
the CPSE whether to
outsource or take up
activities through internal
expertise.
Baseline Survey as a
prerequisite before taking
up any project should not be
binding. In case the projects
require benchmarking then
only it should be done as
per decision of the CPSE.
Grants and donations to
various governmental
agencies, public bodies,
relief funds, etc., should be
considered as CSR activities
if they are in nature of
public activity.
Evaluation of CSR activities
by board level committees
should be sufficient, atleast
for certain level of financial
implications. Evaluation to
be done for the group of
projects or for the entire
company by external
agencies instead of taking of
evaluation for individual
project. This is particularly
relevant for small projects.
CSR activities completed in
part during the year should
also be considered and
evaluated if the prescribed
milestones of the project
…….
YES
YES
…….
LONG
TERM
…….
YES
…….
…….
LONG
TERM
YES
YES
…….
…….
SHORT
…….
YES
YES
…….
LONG
TERM
…….
YES
…….
…….
LONG
TERM
…….
YES
…….
…….
LONG
TERM
…….
YES
…….
…….
SHORT
TERM
62
have been achieved.
63
C. Sustainable Development
1. SD policy should be an integral part of the business strategy of the CPSE
2. Comprehensive SD plan and operational guidelines for entire company must be drawn and approved
by the board. SD schemes must be part of the comprehensive plan. Boards / Board
Subcommittee headed by Independent Director must review SD activities periodically
3. Sensitizing entire organization on challenges of SD should be taken up on regular basis.
4. Standard formats may be developed after doing an exhaustive study of all the variants being used
by some of the CPSEs for their internal utilization
5. Periodic time bound reporting should also be ensured
6. Emphasis should be given on outcome rather than only expenditure.
7. Overlapping and duplication of activities under CSR and SD be avoided by identifying the few areas
where they converge.
8. Periodic internal auditing of the activities related to SD should also be taken up in addition to the
annual audit.
9. Although statutory compliances is a necessity, the efforts should be made known to public at large as
it facilitates brand building.
10.Outsourcing of external expertise may be considered to address the shortage and deficiency of
relevant internal expertise.
11.Coordinating synergy among government agencies, public funded bodies and other companies and
the specific CPSEs are encouraged.
12.Needs of the local community must be kept in mind while taking up SD projects.
13.
Evaluation to be done on group of projects or company wide by external agencies
instead of individual project basis.
64
14.The minimum limit of selecting projects from Schedule A and Schedule B should be eliminated
15.The two organizations providing certification at International level stated below should be added to
the present list of references.
a. International Standard on Assurance Engagements (ISAE3000) given by International
Auditing and Assurance Standards Boards (IAASB)
b. International Federation of Accountants (IFAC) and Assurance Standard (AA1000) by
Accountability AA1000AS(2008)
Recommendations numbered 5, 13 and 14 may be suitably incorporated in MoU document by
adding/reducing/giving bonus marks (to promote some point) etc. by the DPE in due course of
time. Also where guidelines are in place but CPSEs are not implementing these or/not utilising
the powers/autonomy given to them, DPE may impose some penalty/negative marking.
For recommendations numbered 4, 7 and 11, DPE may take appropriate action as suggested in
the recommendations.
65
4. SUSTAINABLE DEVELOPMENT
S.
No
Recommendation
1.
2.
3
4
5
6
7
8
9
10
11
12
13
14
15
Responsibility
TERM
CPSE/Board
DPE
Ministry
Other
Agency
SD policy should be an integral part of the
business strategy of the CPSE
YES
……
….
……….
……….
LONG
TERM
Comprehensive SD plan and operational
guidelines for entire company must be drawn
and approved by the board. SD schemes must
be part of the comprehensive plan. Boards /
Board Subcommittee headed by Independent
Director must review SD activities periodically
Sensitizing entire organization on challenges of
SD should be taken up on regular basis.
Standard formats may be developed after
doing an exhaustive study of all the variants
being used by some of the CPSEs for their
internal utilization
Periodic time bound reporting should also be
ensured
Emphasis may be given on outcome rather
than only expenditure.
Overlapping and duplication of activities under
CSR and SD be avoided by identifying the few
areas where they converge.
YES
……
….
YES
……….
SHORT
TERM
YES
YES
YES
……….
……
….
YES
YES
……….
SHORT
TERM
MEDIUM
TERM
YES
YES
……….
……….
……….
YES
YES
……….
……….
YES
YES
……….
Periodic internal auditing of the activities
related to SD should also be taken up in
addition to the annual audit.
Although statutory compliances is a necessity.
The efforts should be made known to public at
large as it facilitates brand building.
YES
……
….
……….
……….
SHORT
TERM
YES
……
….
YES
……….
MEDIUM
TERM
Outsourcing of external expertise may be
considered to address the shortage and
deficiency of relevant internal expertise.
Coordinating synergy among government
agencies, public funded bodies and other
companies and the specific CPSEs are
encouraged.
Needs of the local community must be kept in
mind while taking up SD projects.
Evaluation to be done on group of projects or
companywide by external agencies instead of
individual project basis.
The minimum limit of selecting projects from
Schedule A and Schedule B should be
eliminated
The two organizations providing certification at
International level stated below should be
added to the present list of references.
YES
……
….
……….
YES
SHORT
TERM
YES
YES
YES
YES
SHORT
TERM
YES
YES
……….
YES
……
….
YES
……….
……….
SHORT
TERM
MEDIUM
TERM
……….
YES
……….
……….
SHORT
TERM
……….
YES
YES
……….
LONG
TERM
SHORT
TERM
SHORT
TERM
MEDIUM
TERM
66
D.
Research & Development
1. R&D policy and guidelines be framed by CPSE & approved by its board.
2. There should be a prescribed yard stick to limit non-research expenditure as a percentage of R&D
budget. A beginning may be made by fixing a limit, say 10 percent.
3. Only dedicated and committed executives be selected and posted in R&D wings. Manpower to be
sourced from all the concerned departments of the organization to have better understanding of
R & D efforts and its integration with the operations of the CPSE
4. R&D work to be evaluated in terms of advantages and benefits accruing to the company. Regular
interface of CPSEs with academic and research institutions of excellence and relevant expertise is
a necessity for being updated with latest innovations and discoveries relevant for the CPSE.
Synergy should be established among different CPSEs, National Research Labs, Academic
Institutes & other scientific bodies for more effective R&D work and also to avoid duplication.
5. R & D should be integrated with the production restructuring to make investments in both,
economically viable.
6. Many CPSEs do not have any relevance
of R & D, hence they need not be burdened with R&D
activities.
7. There should be flexibility for CPSEs in assigning weight as per their needs in the overall MoU
evaluation
8. With regards to the expenditure on R & D sectoral characteristics and competitive advantages to the
CPSE concerned should be taken into considerations
9. Standard formats may be developed after doing an exhaustive study of all the variants being used by
some of the CPSEs for their internal utilization. DPE may consult all the stakeholders to develop
the formats.
10.To establish monitoring organizations on sectoral basis for a group of CPSEs in order to channelize &
co-ordinate the resources to be utilized collectively for activities of R&D
67
11. Transparency with respect to R & D should be limited to safeguard the commercial interest of the
concerned CPSE.
12.The minimum limit of R & D with regards to the subsidiary companies should not be assigned
Recommendations numbered 2, 6 and 7 may be suitably incorporated in MoU document by
adding/reducing/giving bonus marks (to promote some point) etc. by the DPE in due course of time.
Also where guidelines are in place but CPSEs are not implementing these or/not utilising the
powers/autonomy given to them, DPE may impose some penalty/negative marking.
For recommendations numbered 9, 10 and 12, DPE may take appropriate action as suggested in the
recommendations.
68
3. RESEARCH & DEVELOPMENT
S.
Recommendation
CPSE/
No.
Board
1
R&D policy and guidelines be framed by CPSE YES
& approved by its board.
2
3
4
5
6
7
8
9
10
There should be a prescribed yard stick to limit
non-research expenditure as a percentage of
R&D budget. A beginning may be made by
fixing a limit, say 10 percent.
Only dedicated and committed executives be
selected and posted in R&D wings. Manpower
to be sourced from concerned departments of
the organization to have better understanding
of R & D efforts and its integration with the
operations of the CPSE
R&D work to be evaluated in terms of
advantages and benefits accruing to the
company. Regular interface of CPSEs with
academic and research institutions of
excellence and relevant expertise is a necessity
for being updated with latest innovations and
discoveries relevant for the CPSE. Synergy
should be established among different CPSEs,
National Research Labs, Academic Institutes &
other scientific bodies for more effective R&D
work and also to avoid duplication.
R & D should be integrated with the
production restructuring to make investments
in both, economically viable.
Many CPSEs do not have any relevance of R &
D, hence they need not be burdened with R&D
activities.
There should be flexibility for CPSEs in
assigning weightage as per their needs in the
overall MoU evaluation
With regards to the expenditure on R & D
sectoral characteristics of the CPSE concerned
should be taken into considerations
Standard formats be developed after doing an
exhaustive study of all the variants being used
by some of the CPSEs for their internal
utilization. DPE may consult all the
stakeholders to develop the formats.
To establish monitoring organizations on
sectoral basis for a group of CPSEs in order to
channelize & co-ordinate the resources to be
utilized collectively for activities of R&D
Responsibility
DPE
Ministry
TERM
.....
........
Other
Agency
..........
YES
YES
…………..
…………..
SHORT
TERM
YES
………
…..
…………..
…………..
SHORT
TERM
YES
YES
…………..
…………..
SHORT
TERM +
MEDIU
M TERM
YES
.......
……..
…………..
SHORT
TERM
………
…..
YES
YES
…………..
LONG
TERM
………
…..
YES
…………..
…………..
SHORT
TERM
………
…..
YES
…………..
…………..
SHORT
TERM
YES
YES
…………..
…………..
SHORT
TERM +
MEDIU
M TERM
………
…..
YES
YES
…………..
SHORT
TERM +
MEDIU
M TERM
69
SHORT
TERM
11
12
Transparency with respect to R & D should be
limited to safeguard the commercial interest
of the concerned CPSE.
The minimum limit of R & D with regards to
the subsidiary companies should not be
assigned
YES
………
…..
…………..
…………..
SHORT
TERM
………
…..
YES
YES
…………..
SHORT
TERM
70
E. Increasing Profits of The Profit Making CPSEs
1. Board and Management should promote entrepreneurial thinking and innovation at all
functional level to take more informed decisions. CPSEs must think out-of-box and should
evaluate new innovative ideas to work upon in the dynamic business environment.
2. Profit making companies should utilize financial powers delegated to them in respect of Joint
Ventures and Mergers & Acquisitions. Reasons for not going into JVs and M&As should be
explored and corrective steps to be taken. In particular, if lack of decision making is due to fear
of vigilance and/or audit, the same should be addressed in a proper manner.
3. Specific and detailed guidelines on JVs and M&A may be adopted by the board of CPSEs
exercising the autonomy in decision making and flexibility in financial powers already given to
them. Strategic partnerships/JVs/M&As to support the loss making /sick CPSEs or with any other
company, by profitable and large CPSEs, may enhance the profitability of profit making CPSEs.
4. CPSEs board must adopt effective and efficient process for sourcing and utilization of working
capital to maintain optimum level of liquidity, receivable and Inventory, Timely payment of
vendors and faster collections from the market.
5. Profit making CPSEs to use better cash management by deploying it in more profitable avenues
like investment in public sector Mutual Funds, which is not very prevalent despite DPE
guidelines.
6. All profit making CPSEs should make long-term plans for capital investment for future growth
and challenges of competition and use available reserves to fund these plans.
7. Pro-active management with innovative business ideas and plans to be globally competitive and
increasing profits for better sustainability in future.
8.
Profit making CPSEs of same or related sectors may increase their profitability by tying up
resources of loss making/sick units/CPSEs or taking properties and other resources of the CPSEs,
sick/loss making or other CPSEs and companies.
9. PSEs of same or related sectors may create shared supply chain and logistics or similar kind
arrangements to improve the operating efficiency by cutting down distribution cost and taking
less time in transportation.
10. All profit making CPSEs must be listed in stock market. This will not only improve the
transparency and efficiency of the PSEs but also result positively in enhancing profitability of
these CPSEs.
11. Disinvestment of shares to bring the government stake in the range of 51%-75% i.e. minimum
25% shares to be disinvested and maximum up to 49% to retain its government status.
71
12. Profitable CPSEs (Maharatna, Navratna or Miniratna) may plan expansion or forward /backward
integration of their business by taking over or acquiring sick/loss making CPSE or other
companies, if financially viable and to the advantage of the former.
13. 10% executives who are disqualified under bell curve approach may also be considered for PRP
at a reduced rate since they also participate in the overall performance profitability of the CPSE
14. Physical parameters should be given more weight vis a vis financial parameters in overall MOU
finalization.
15. There should not be cap on training budget in the name of austerity measures, as it affects the
productivity in long run.
16. Board of directors should focus on ‘Value creation’ and not merely on compliances. This may be
done by aligning business strategy and plans to the fast changing markets and competition.
Hence dynamic and responsive business models would be more appropriate to increase value of
enterprises.
17. Companies should be awarded more marks for improving productivity and efficiency in
operations and hence improving operating profits rather than giving weight to overall earnings,
which may result from non operating incomes like sale of assets and more often, interest
income, in particular.
18. Benchmarking with the best companies will set standards high and will help in identifying
relative position of the PSE in market to design and plan accordingly to improve the
competitiveness in market.
19. Business plans, operations and strategies must address consumer demand and customer
satisfaction.
Recommendations numbered 2, 3, 4, 5, 6, 14, 16, 17, 18 and 19 may be suitably incorporated in MoU
document by adding/reducing/giving bonus marks (to promote some point) etc. by the DPE in due
course of time. Also where guidelines are in place but CPSEs are not implementing these or/not
utilising the powers/autonomy given to them, DPE may impose some penalty/negative marking.
72
5. INCREASING PROFITS FOR PROFIT MAKING CPSEs
S.
Recommendation
No.
1
2
3
4.
5
6
Responsibility
CPSE/Board
Board and Management should promote
YES
entrepreneurial thinking and innovation
at all functional level to take more
informed decisions. CPSEs must think outof-box and should evaluate new
innovative ideas to work upon in the
dynamic business environment.
Profit making companies should utilize
YES
financial powers delegated to them in
respect of Joint Ventures and Mergers &
Acquisitions. Reasons for not going into
JVs and M&As should be explored and
corrective steps to be taken. In particular,
if lack of decision making is due to fear of
vigilance and/or audit, the same should
be addressed in a proper manner.
Specific and detailed guidelines on JVs YES
and M&A may be adopted by the board
of CPSEs exercising the autonomy in
decision making and flexibility in financial
powers already given to them. Strategic
partnerships/JVs/M&As to support the
loss making /sick CPSEs or with any other
company, by profitable and large CPSEs,
may enhance the profitability of profit
making CPSEs.
CPSEs board must adopt effective and YES
efficient process for sourcing and
utilization of working capital to maintain
optimum level of liquidity, receivable and
Inventory, Timely payment of vendors
and faster collections from the market.
Profit making CPSEs to use better cash YES
management by deploying it in more
profitable avenues like investment in
public sector Mutual Funds, which is not
very prevalent despite DPE guidelines.
All profit making CPSEs should make long- YES
term plans for capital investment for
future growth and challenges of
competition and use available reserves to
TERM
DPE
Ministry
Other
Agency
……..
……..
LONG
TERM
YES
YES
……..
MEDIUM
TERM
……..
……..
……..
MEDIUM
TERM
SHORT
TERM
YES
……..
……..
SHORT
TERM
……..
……..
……..
MEDIUM
TERM +
LONG
TERM
73
fund these plans.
7
8
9
10
11
12
13
14
15
16
Pro-active management with innovative
business ideas and plans to be globally
competitive and increase profits for
better sustainability in future.
Profit making CPSEs of same or related
sectors may increase their profitability by
tying up resources of loss making/sick
units/CPSEs or taking properties and
other resources of the CPSEs, sick/loss
making or other CPSEs and companies.
PSEs of same or related sectors may
create shared supply chain and logistics
to improve the efficiency in the system by
cutting down distribution cost and taking
less time in transportation.
All profit making CPSEs must be listed in
stock market. This will not only improve
the transparency and efficiency of the
PSEs but also result positively in
enhancing profitability of these CPSEs.
Disinvestment of shares to bring the
government stake in the range of 51%75% i.e. minimum 25% shares to be
disinvested and maximum up to 49% to
retain its government status.
Profitable CPSEs (Maharatna, Navratna or
miniratna) may plan expansion or forward
/backward integration of their business
by taking over or acquiring sick/loss
making PSE or other companies, if
financially viable and to the advantage of
the former.
10% executives who are disqualified
under bell curve approach may also be
considered for PRP at a reduced rate
since they also participate in the overall
performance profitability of the CPSE
Physical parameters should be given
more weight vis a vis financial parameters
in overall MOU finalization.
There should not be cap on training
budget in the name of austerity
measures, as it affects the productivity in
long run.
Board of Directors should focus on ‘Value
creation’ and not merely on compliances.
This may be done by aligning business
strategy and plans to the fast changing
YES
……..
……..
……..
LONG
TERM
YES
……..
YES
……..
LONG
TERM
YES
……..
YES
……..
LONG
TERM
YES
……..
YES
YES
MEDIUM
TERM
YES
……..
YES
YES
LONG
TERM
YES
……..
YES
……..
LONG
TERM
YES
.......
YES
……..
SHORT
TERM
……..
YES
……..
……..
SHORT
TERM
........
……..
YES
……..
SHORT
TERM
YES
……..
YES
……..
MEDIUM
TERM
74
17
18
19
markets and competition. Hence dynamic
and responsive business models would be
more appropriate to increase value of
enterprises.
Companies should be awarded more
……..
marks for improving productivity and
efficiency in operations and hence
improving operating profits rather than
giving weight to overall earnings, which
may result from non operating incomes
like sale of assets and more often,
interest income, in particular.
Benchmarking with best companies will
……..
set standards high and will give relative
position of the PSE in market to improve
the competitiveness
Business plans, operations and strategies YES
must address consumer demand and
customer satisfaction.
YES
.........
……..
SHORT
TERM
YES
YES
……..
MEDIUM
TERM
........
YES
……..
MEDIUM
TERM
75
F.
(a) Reducing Losses of Loss Making CPSEs
1. In those CPSES, where poor management i.e. CPSE performing below the industry average is the
reason of failure, new fresh management should be taken from the available talent pool from
inside and/or outside the enterprise by offering better terms.
2. The management of loss making enterprise should be given more flexibility and autonomy in
functioning and decision making as part of the approved revival plan.
3. Those CPSEs, where either business itself is not viable or Companies are in redundant
sectors/business line disinvestment or outright sale should be done.
4. Resources of loss making enterprises may be utilized by other profit making CPSEs of same or
related sectors to improve the performance or let-out properties and other resources to
profitable CPSEs for their better and enhanced performance.
5. Loss making CPSEs may revive themselves by some strategic partnerships/Joint ventures/support
by the profitable and large CPSEs.
Recommendation numbered 5 may be suitably incorporated in MoU document by adding /reducing /
giving bonus marks (to promote some point) etc. by the DPE in due course of time. Also where
guidelines are in place but CPSEs are not implementing these or/not utilising the powers/autonomy
given to them, DPE may impose some penalty/negative marking.
76
6. (A) RECOMMENDATION FOR LOSS MAKING CPSEs
S.
No
.
Recommendations
1
In those CPSEs, where poor management
i.e. CPSE performing below industry average
is the reason of failure, new fresh
management should be taken from the
available talent pool from inside and/or
outside the enterprise by offering better
terms.
The management of loss making enterprise
should be given more flexibility and
autonomy in functioning and decision
making as part of the approved revival plan.
Those CPSEs, where either business itself is
not viable or Companies are in redundant
sectors/business line disinvestment or
outright sale should be done.
Resources of loss making may be utilized by
other profit making CPSEs of same or
related sectors to improve the performance
or let-out properties and other resources to
profitable CPSEs for their better and
enhanced performance.
Loss making may revive themselves by some
strategic partnerships/Joint
ventures/support by the profitable and
large CPSEs.
2
3
4
5
Responsibility
Term
CPSE/Board
DPE
Ministry
Other
Agency
YES
……..
YES
……..
……..
.......
YES
……..
……..
YES
YES
SHORT
TERM
YES
……..
YES
……..
LONG
TERM
YES
……..
YES
……..
LONG
TERM
MEDIUM
TERM
SHORT TO
MEDIUM
TERM
77
(b) Recommendations for Sick CPSEs
1. Decision making process in BIFR/BRPSE should be fast in deciding revival plan of the
enterprise.
2. Those loss making/sick enterprises, which cannot be revived or rehabilitated, should be
wind-up or closed
3. Process of revival or rehabilitation or closure or winding up of a company should be done in
a time bound manner, and decided at the beginning of the process.
No specific action required by DPE in Mou document.
6. (B)RECOMMENDATIONS FOR SICK CPSEs
S.
Recommendations
No.
Responsibility
CPSE/Board
DPE
Ministry
Other
Agency
1
……..
……..
YES
YES
……..
……..
YES
YES
……..
……..
YES
YES
2
3
Decision making process in BIFR / BRPSE
should be fast in deciding its revival plan
Those loss making/sick enterprises, which
cannot be revived or rehabilitated, should
be wind-up or closed
Process of revival or rehabilitation or
closure or winding up of a company
should be done in a time bound manner,
and decided at the beginning of the
process.
Term
MEDIUM
TERM
MEDIUM
TERM
MEDIUM
TERM
78
(c) Recommendations for both Loss Making and Sick CPSEs
1. Board and Management should promote entrepreneurial thinking and innovation at all
functional level to take more informed decisions. This will help in early revival and reducing
losses and enhance the ownership and accountability at all level.
2. More flexibility may be provided to attract good talent and experts by offering better terms
of salary to the outsiders and/or to retain the good, efficient existing manpower. Instead of
offering scales of pay, management should get flexibility to decide attractive compensation
package. Autonomy may also be given for recruitments.
3. Some non-financial flexibility like increasing the retirement age of key personnel of loss
making may be provided to attract dynamic officers/staff of large and profitable PSEs and to
retain similar quality manpower of the existing sick/loss making PSE.
4. Merger of two same or related sector loss making PSEs to create the synergy by pooling
resources may result in revival or turnaround in some cases.
5. Profitable CPSEs (Maharatna, Navratna or Miniratna) may plan expansion or forward
/backward integration of their business by taking over or acquiring loss making/sick PSE.
6. In case of loss making and sick PSUs, the executives need to be rewarded through PRP if they
achieve reduction in loss to motivate these executives.
7. Appropriate policies by funding institutions may help loss making/sick PSEs to borrow for
working capital requirements as many of these companies may revive if required funds are
available to these.
8. Effective and efficient working capital management is essential for loss making PSEs as large
chunk of investment is tied up in working capital. Maintaining liquidity, timely payment to
vendors, thin inventory and faster collections from the market is must for these CPSEs.
9. Focus should be on ‘Value creation’ and not merely on compliances and audits. Decisions
should not be challenged, rather procedure/processes to be checked and judged to identify
the outcome of the results. If the due process is followed and decision goes wrong,
executives should not be held responsible and not to be penalized.
Recommendations numbered 1, 2, 5 and 8 may be suitably incorporated in MoU document by
adding/reducing/giving bonus marks (to promote some point) etc. by the DPE in due course of time.
Also where guidelines are in place but CPSEs are not implementing these or/not utilising the
powers/autonomy given to them, DPE may impose some penalty/negative marking.
79
6. (C) REDUCING LOSS OF LOSS MAKING & SICK CPSEs
S.
Recommendations
Responsibility
No.
CPSE/Board DPE Ministry
1
2
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More flexibility may be
provided to attract good talent
and experts by offering better
terms of salary to the
outsiders and/or to retain the
good, efficient existing
manpower. Instead of offering
scales of pay, management
should get flexibility to decide
attractive compensation
package. Autonomy may also
be given for recruitments.
Some non-financial flexibility
like increasing the retirement
age of key personnel of loss
making may be provided to
attract dynamic officers/staff
of large and profitable PSEs
and to retain similar quality
manpower of the existing
sick/loss making PSE.
Merger of two same or related
sector loss making PSEs to
create the synergy by pooling
resources may result in revival
or turnaround in some cases.
Profitable CPSEs (Maharatna,
Navratna or Miniratna) may
plan expansion or forward
/backward integration of their
business by taking over or
acquiring loss making/sick PSE.
In case of loss making and sick
PSUs, the executives need to
be rewarded through PRP if
they achieve reduction in loss
to motivate these executives.
Appropriate policies by
funding institutions may help
loss making/sick PSEs to
Term
……..
YES
YES
Other
Agency
……..
……..
YES
YES
……..
SHORT
TERM
YES
……..
YES
……..
LONG
TERM
YES
……..
YES
……..
LONG
TERM
........
YES
YES
……..
SHORT
TERM
……..
……..
YES
YES
LONG
TERM
SHORT
TERM
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borrow for working capital
requirements as many of these
companies may revive if
required funds are available to
these.
Effective and efficient working YES
capital management is
essential for loss making PSEs
as large chunk of investment is
tied up in working capital.
Maintaining liquidity, timely
payment to vendors, thin
inventory and faster
collections from the market is
must for these CPSEs.
Focus should be on ‘Value
YES
creation’ and not merely on
compliances and audits.
Decisions should not be
challenged, rather
procedure/processes to be
checked and judged to identify
the outcome of the results. If
the due process is followed
and decision goes wrong,
executives should not be held
responsible and not to be
penalized.
Board and management
YES
should promote
entrepreneurial thinking and
innovation at all functional
levels to take more informed
decisions. This will help in
early revival, reducing losses,
enhancing ownership and
accountability at all levels.
……..
......
……..
……..
SHORT
TERM
YES
……..
LONG
TERM
YES
……..
LONG
TERM
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