Financial Resource

review was undertaken by Audit in respect of all

unlisted government companies in operation with the objective of assessing the compliance

by these companies with the DPE’s guideline relating to non-official directors on the Board.

This review was primarily based on the information and documents obtained from the

Management of the companies concerned. The review of composition of the Board of

unlisted companies as on 30 June 2007 revealed the following:

(i) There was no non-official director on the Board of 48 government companies

 did not have one-third non-official directors as on 30 June 2007.

Thus, the Board of 64 unlisted government companies had not been constituted as per the

Department of Public Enterprises guideline.

Constitution and Composition of Audit Committee in unlisted government

companies

As required by Section 292A of the Companies Act, 1956, every public limited

company having paid up capital of not less than Rs. five crore shall constitute an Audit

Committee at the Board level consisting of minimum of three directors and two thirds of

which shall be directors other than Managing or whole time Directors. A limited review was

undertaken with respect to constitution and composition of Audit Committee, as on 30 June

2007, in unlisted government companies in operation covered by Section 292A based on the

information and documents obtained from the Management of the companies concerned, and

the following instances of non-compliance were noticed:

(a) No Audit Committee was formed by the following companies:

S. No                           Name of the company

1                      Richardson & Cruddas (1972) Ltd.

2                      HMT Machines Tools Ltd.

3                      HMT Watches Ltd.

4                      Spices Trading Corporation Ltd.

5                      Bharat Heavy Plates & Vessels Ltd.

(b) Audit Committee formed by Indian Renewable Energy Development Agency Ltd.

consisted of two directors as against the requirement of minimum three. Further, the

Committee did not consist of two thirds of directors as directors other than Managing or

whole-time directors as there was only one such director.

Constitution of Audit Committee by unlisted government companies not covered

by Section 292A of the Companies Act, 1956

Thirty unlisted government companies had formed Audit

Committees as good governance practice, though these were not required to do so as per

Section 292A of the Companies Act, 1956

CONCLUSION

The corporate governance practices of both public sector and private sector companies are almost similar. We found that the corporate governance practices exert great influence on the performance of the company. Companies which are having good governance practices will have good image among the investors and public as a whole.

Though a lion’s share of the focus in the Satyam episode was on the role of the independent directors, experts believe the role of auditors is now in spotlight.
Experts believe that it is the institutional investors who have the tools, bandwidth and clout to extract information and play an activist role (as had happened in Satyam’s case) in ensuring that managements don’t go off-track. If institutional investors act collectively, they can demand the required changes at companies they have invested in. While the corporate governance framework in the country is seen at par with other developed markets, the same has to be implemented in ‘letter as well as spirit’.

Additionally, shareholders should ensure that the composition of Board of Directors is a balanced mix of independent directors and management appointees. This would help keep a check on the internal processes of the company. With shareholder activism on the rise, the proactive role of institutional investors will also make the company management more accountable. While things have improved substantially over the last five years, experts believe that more needs to be done, which will further improve disclosure levels and make managements accountable.

At the retail shareholder level, one could look at a company’s past track record (including significant events that reflect management excesses), qualitative and quantitative disclosures (vis-a-vis peers) and consistency in delivering on promises. Experts believe that more rigorous vetting is needed when small and medium companies are considered for investment.

Good public sector governance relies on keeping pace with best practice in private sector corporate governance. That is, of harnessing the potential that corporate governance principles and practices can offer. Importantly, however, it also requires an understanding of the tensions and gaps that arise in the transposition of corporate governance from the private to public sector, so that public sector corporate governance can be modified accordingly.

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