Listed State owned Enterprises (SoEs) and the treatment of Minority Shareholders – case studies from Indian SoEs.
Listed State owned Enterprises (SoEs)
and the treatment of Minority Shareholders
– case studies from Indian SoEs.
paper presented by
Santosh Pande Ph. D.
at National Research Workshop II organized by IICA
New Delhi, February 25 , 2015.
Key Governance challenge in SoEs
• The State is likely to have different goals than the classic private
shareholder who primarily seeks private gain .
• The State holds many different levers in an organization – as
controlling shareholder, as present and potential future regulator, and
sometimes as lender and creditor.; potentially, the State has a much
larger role than a regular, controlling shareholder.
The key governance challenge is to find an equitable position between the
two extreme positions – one, where the majority owner (the State) views
the Company’s objective as being to serve the public interest and not
necessarily to maximize its profits and the second, where the minority
owners hold the board members to be in breach of their fiduciary
responsibility when they meekly agree to such decisions of the State (as
the majority owner) which are not in the company’s interest.
*Wong ,Simon C.Y., (2004) Improving Corporate Governance in SOEs: An Integrated Approach:
Corporate Governance International, Volume 7, Issue 2, June 2004.
Multiple Influence Environment under which SoEs operate
Three key difference in SoE governance framework*
• Firstly, unlike a widely held corporation in the private sector, a SoE
generally cannot have its board changed via a takeover or proxy contest
and most cannot go bankrupt - two of the most important checks on
underperformance by an organization are absent in the case of SoEs.
• Secondly, even though a SoE has diffused owners (citizens of the
country, in the final sense) it generally has a higher body or bodies that
oversee its functioning -in the worst case situation these various
authorities may use SoEs to achieve short-term political goals at the cost
of efficiency and longer-term policy objectives.
• Thirdly, given that each relevant part of the government has somewhat
different objectives, each could attempt to influence the SoE accordingly -
so the SoEs also have the problem of common agency which reduces
accountability and weakens the incentives for managers and board
*World Bank (2006), Corporate Governance; Held by the Visible Hand, The Challenge of SOE
Corporate Governance for Emerging Markets ,available at
Select cases of Indian SoEs
• ONGC -adopting a liberal dividend policy in
SoEs to help bridge GoI’s fiscal deficit.
• Coal India - the treatment of minority
• MTNL –gradual erosion in Enterprise Value.
• Oil Marketing Companies – cross
subsidization with the oil production
adopting a liberal dividend policy in SoEs to help
bridge GoI’s fiscal deficit
01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10 - 11 11-12 12-13 13-14
Div Payout %
Plan Exp/Net Profit %
ONGC -adopting a liberal dividend policy in SoEs to help bridge GoI’s fiscal deficit
the treatment of minority shareholders.
Chronology of Events
• In the 2010 IPO offering of Coal India, which till then was owned 100% by the GoI, a UK based
hedge fund -The Children’s International Fund (TCIF) – acquired around 1.8 % of the equity in
• TCIF wrote a letter dated 12.3.2012 to the board of directors of Coal India threatening to take
legal action against their board members unless clear public commitments were made on
several specific governance issues .
• Accusing Coal India’s Board of Directors of “not taking into account its fiduciary duty, TCIF
claimed that the Board of Coal India was effectively destroying significant amount of value
which, given that the government owned 90% of the company, affected the people of India
the most. TCIF threatened Coal India’s individual Board members with legal action.
• On 16th May 2012 TCIF has sent a written notification to the Government of India of a
dispute, raised by it under the 2002 agreement between India and Cyprus, for the mutual
promotion and protection of interest.
• This was followed it up by filing legal cases against Coal India and its Board in Delhi and
Kolkata High Courts
• TCIF gradually started exiting, as a shareholder, from Coal India and fully exited from the
company in Oct 2014., consequently, the various cases filed by TCIF and the disputes raised
by them will die a natural death.
Veiled threat by TCIF to GoI…….
Oscar Veldhuijzen, a Partner at TCIF reportedly told
the Financial Times*,
“Coal India will have to understand that if they mess
around and treat their company like a 100 per cent
government-owned entity, it will have major
implications for the future of Indian capital markets.”,
* Chandrasekhar C.P. (2012, March 14), Mutiny of the minority shareholder, The Hindu, retrieved on
25.12.2014 from, http://www.thehindu.com/opinion/columns/Chandrasekhar/mutiny-of-the-minority-
……….and GoI’s response
“Whoever wants to stay invested in CIL can stay or
otherwise leave. Someone’s notice or threats will not
bend the government. It is CIL’s job to make profit and
to produce coal but only making profit is not its job till it
remains with the government.
If TCI wants to sell out, it will not affect our capital
- response of Shri Sriprakash Jaiswal, Union Minister for Coal on the TCI/Coal
India controversy - available at http://www.firstpost.com/business/54-
(in Rs Million)
PAT as % of
PAT as % of
Bharti Airtel Ltd. 468,503.0 10.88 7.67 540,135.0
Idea Cellular Ltd. 221,569.4 3.69 3.14 140,199.0
Reliance Communications Ltd. 156,860.8 -4.92 -1.1 328,860.0
Tata Teleservices Ltd. 109,580.6 -44.34 -22.12 -18,629.0
Mahanagar Telephone Nigam
37,159.7 -143.2 -50.08 -27,844.1
MTNL –performance versus peers –FY 2012-2013
-160 -140 -120 -100 -80 -60 -40 -20 0 20
Bharti Airtel Ltd.
Idea Cellular Ltd.
Reliance Communications Ltd.
Tata Teleservices Ltd.
Mahanagar Telephone Nigam Ltd.
Mahanagar Telephone Ltd- performance versus peers
PAT as % of capital employed
PAT as % of total income
Oil Marketing Companies
cross subsidization with the oil production companies
Cross subsidization of Petroleum products
• Given that India meets nearly 75 % of its total petroleum requirement through
imports, the State has always played a major role in fixing oil prices. Various
petroleum products have been hugely subsidized and cause significant losses to oil
• Petrol prices have officially been decontrolled since June 2010 while the price for
diesel has been recently decontrolled in October 2014; kerosene and domestic LPG
prices are still fixed by the Government and continue to be subsidized because of
domestic political and policy compulsions.
• The administered prices of the end petroleum products are responsible for the
huge under recoveries for the oil marketing companies – IOC (Indian Oil
Corporation), HPCL (Hindustan Petroleum Corporation) and BPCL (Bharat
Petroleum Corporation Limited) - who end up buying from the upstream
companies and then selling the same at discounted rates and in the process incur
• These losses are subsidized by the government directly in the form of cash subsidy
(grants) and by sharing of the subsidy burden by the upstream oil companies – OIL
(Oil India Limited), ONGC (Oil and Natural Gas Corporation) and GAIL (Gas
Authority of India Limited).
Extent of cross subsidization
• A 2009 report on Oil and Natural Gas Corporation (ONGC), by Goldman Sachs
pointed towards a serious corporate governance issue saying that the
government of India (who owned 74% stake in ONGC) took $20 billion in cash
from 2003-04 onwards from the company, without consulting minority
shareholders, to subsidize loss-making oil marketing companies that had
been hurt by government policies meant to protect consumers from high oil
• In its report Goldman Sachs pointed out that “Despite repeated objections
raised by investors and more recently by independent directors on ONGC's
board, there has not been headway on this issue and the market appears to
have got used to this practice by ONGC promoters, while similar issues in
privately run companies would likely cause serious concern”.
• The report went on to add, “We believe minority shareholders are likely to
suffer in a situation where their interests are poorly protected. Moreover, such
ad-hoc cash withdrawals hurt ONGC even more since it has a poor production
profile and revenues are effectively a function of their oil realization”,
G A I L (India) Ltd. Hindustan
Indian Oil Corpn.
Oil & Natural Gas
Oil India Ltd.
Non Govt Shareholding %
Despite significant non governmental shareholding* in SoEs……..
* as at 31.3.2013
…the Indian State sees SoEs as instruments to implement public policy
“Cash-rich companies like Coal India can lend to the
government whenever the government is in need of funds.
For example, enactment of the food security bill would
require huge funds. Coal India belongs to the people of this
country and an amount of Rs 25,000 crore can easily be
given to the government for implementing social schemes.
We, however, have not discussed anything with the finance
source: The Economic Times; (Oct 19, 2011);Corruption, inefficiency eat 25%
of CIL output: Interview of the Union Minister of Coal Shri Sriprakash Jaiswal.
Possible options when minority shareholder rights are being expropriated
There are at least four possible options* to the option of minority
shareholders exiting in a situation where their rights are being
•The first alternative is the establishment of appropriate,
independent mechanisms or agencies for governance.
• The second alternative is to incentivize the creation of
associations of minority shareholders that is able to exert formal and
informal pressures on the companies’ top management.
•A third possibility would be to, at least, partially improve the
conditions of minorities, by increasing the efficiency of the market for
corporate control, allowing for the mobilization of illiquid assets.
•fourth option could be a sort of joint activism by the minority
*Colli, Andrea (2011); Coping with the Leviathan. Minority shareholders in State-owned enterprises - evidence
from Italy; available at
*Wong ,Simon C.Y., (2004) Improving Corporate Governance in SOEs: An Integrated Approach:
Corporate Governance International, Volume 7, Issue 2, June 2004
Three Pillars of SoE Governance Reform
International Best Practices
• Guidelines for the government's exercise of its shareholder rights in
companies purchased under the Troubled Asset Relief Program (TARP) in
• Transferring State’s ownership in SoEs to a separate legal entity, set up
with specific objectives and which is managed independently, as seen in
the setting up of UK Financial Investments (UKFI).
• Models such as that of Temasek - incorporated under the Singapore
Companies Act in 1974 to hold and manage investments and assets (made
in the first decade of nation building since independence in 1965) and
which were previously held by the Singapore Government
• Approach taken by some countries while setting up Sovereign Funds to
insulate the management of their financial assets from direct political
control; for example the nearly US$ 1 trillion Norwegian Sovereign Fund,
set up in 1990 to invest a portion of the government’s oil revenue in
markets outside Norway to save for future generations and prevent
current oil earnings from overheating the Norwegian economy.
Conclusion…….and next steps
• Anecdotal evidence on the treatment of minority
shareholder shows that the current prescriptive
approach ( to governance in SoEs) has met with
• Improvement of SoE governance in India must be
based on the three pillars of clear objectives,
political insulation, and transparency.
• Improving SoE governance requires not only
structural changes in the way SoEs are managed but
also a political will to implement the changes.