Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Listed State owned Enterprises (SoEs) and the treatment of Minority Shareholders – case studies from Indian SoEs.


Published on

Corporate Governance issues in Indian listed State owned enterprises

Published in: Economy & Finance
  • Be the first to comment

Listed State owned Enterprises (SoEs) and the treatment of Minority Shareholders – case studies from Indian SoEs.

  1. 1. 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 TERI University, New Delhi, February 25 , 2015.
  2. 2. 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.
  3. 3. *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
  4. 4. 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 members. *World Bank (2006), Corporate Governance; Held by the Visible Hand, The Challenge of SOE Corporate Governance for Emerging Markets ,available at
  5. 5. 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 shareholders. • MTNL –gradual erosion in Enterprise Value. • Oil Marketing Companies – cross subsidization with the oil production companies
  6. 6. ONGC adopting a liberal dividend policy in SoEs to help bridge GoI’s fiscal deficit
  7. 7. Year Dividend Div Tax Div payout Net Profit Plan Exp Dividend Div Payout Plan Exp/Net Profit 2013-14 81,277 13,807 95,084 220,948 324,695 190% 43.03% 146.96% 2012-13 81,277 13,012 94,289 209,257 295,079 190% 45.06% 141.01% 2011-12 83,416 13,286 96,702 251,229 292,466 195% 38.49% 116.41% 2010 - 11 74,861 12,156 87,017 189,240 282,755 170% 45.98% 149.42% 2009-10 70,583 11,616 82,199 167,676 235,591 330% 49.02% 140.50% 2008-09 68,444 11,632 80,076 161,263 218,201 320% 49.66% 135.31% 2007-08 68,444 11,632 80,076 167,016 176,510 320% 47.95% 105.68% 2006-07 66,305 10,125 76,430 156,429 133,050 310% 48.86% 85.05% 2005-06 64,167 9,000 73,167 144,308 114,210 450% 50.70% 79.14% 2004-05 57,037 7,763 64,800 129,830 106,813 400% 49.91% 82.27% 2003-04 34,222 4,385 38,607 86,444 68,520 240% 44.66% 79.27% 2002-03 42,778 2,375 45,153 105,293 50,890 300% 42.88% 48.33% 2001-02 19,963 19,963 61,979 40,403 140% 32.21% 65.19% All figures in Rs Million ONGC -adopting a liberal dividend policy in SoEs to help bridge GoI’s fiscal deficit
  8. 8. 0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 500% 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 PERCENTAGE(%) YEAR Dividend % Div Payout % Plan Exp/Net Profit % ONGC -adopting a liberal dividend policy in SoEs to help bridge GoI’s fiscal deficit
  9. 9. Coal India the treatment of minority shareholders.
  10. 10. 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 Coal India • 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.
  11. 11. 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, shareholder/article2994991.ece
  12. 12. ……….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 markets.” - response of Shri Sriprakash Jaiswal, Union Minister for Coal on the TCI/Coal India controversy - available at coal-blocks-to-be-auctioned-in-1-2-months-minister-261045.html
  13. 13. MTNL gradual erosion in Enterprise Value.
  14. 14. MTNL –gradual erosion in Enterprise Value Financial Year Closing Price -Rs. Market Capitalisation EPS P/E (Rs. Million) (in Rs) 1994-1995 170 102,000 9.61 17.69 1995-1996 181.35 108,810 10.52 17.24 1996-1997 241.6 144,960 15.55 15.54 1997-1998 262.2 165,186 17.94 14.62 1998-1999 176.55 111,227 20.59 8.57 1999-2000 235.45 148,334 19.63 11.99 2000-2001 132.45 83,444 31.34 4.23 2001-2002 146.75 92,453 23.7 6.19 2002-2003 95.95 60,449 13.92 6.89 2003-2004 128.25 80,798 19.6 6.54 2004-2005 113.85 71,726 15.05 7.56 2005-2006 183.7 115,731 3.57 51.43 2006-2007 146.75 92,453 8.62 17.02 2007-2008 96.6 60,858 6.46 14.96 2008-2009 69 43,470 2.67 25.82 2009-2010 73.2 46,116 -48.63 n.a. 2010-2011 45.35 28,571 -44.05 n.a. 2011-2012 27.4 17,262 -59.41 n.a. 2012-2013 18.4 11,592 -74.76 n.a.
  15. 15. -100 -80 -60 -40 -20 0 20 40 60 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 EPS&P/E YEAR EPS P/E MTNL –gradual erosion in Enterprise Value
  16. 16. Company Name Total Income (in Rs Million) PAT as % of total income PAT as % of capital employed Net worth (in Rs Million) 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 Ltd. 37,159.7 -143.2 -50.08 -27,844.1 MTNL –performance versus peers –FY 2012-2013
  17. 17. -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. Percentage (%) Mahanagar Telephone Ltd- performance versus peers PAT as % of capital employed PAT as % of total income
  18. 18. Oil Marketing Companies cross subsidization with the oil production companies
  19. 19. 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 companies. • 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 huge losses. • 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).
  20. 20. 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 prices. • 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”,
  21. 21. 0 10 20 30 40 50 60 Bharat Petroleum Corpn. Ltd. G A I L (India) Ltd. Hindustan Petroleum Corpn. Ltd. Indian Oil Corpn. Ltd. Oil & Natural Gas Corpn. Ltd. Oil India Ltd. %holding Select SoEs Non Govt Shareholding % Despite significant non governmental shareholding* in SoEs…….. * as at 31.3.2013
  22. 22. …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 ministry yet." source: The Economic Times; (Oct 19, 2011);Corruption, inefficiency eat 25% of CIL output: Interview of the Union Minister of Coal Shri Sriprakash Jaiswal.
  23. 23. The way forward……………
  24. 24. 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 expropriated. •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 institutional investors. *Colli, Andrea (2011); Coping with the Leviathan. Minority shareholders in State-owned enterprises - evidence from Italy; available at
  25. 25. *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
  26. 26. International Best Practices • Guidelines for the government's exercise of its shareholder rights in companies purchased under the Troubled Asset Relief Program (TARP) in the USA. • 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.
  27. 27. 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 limited success. • 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.
  28. 28. THANK YOU