The case for granting autonomy to state-run listed entities. Starting with LIC

For state-run entities that are listed, the government amended the MPS regulation stating that, in public interest, such companies, including banks, won’t need to adhere to the 25% MPS rule even post-privatisation, if the government decides so. 

State-owned Life Insurance Corporation of India, as a publicly listed entity, recently disclosed that the Department of Economic Affairs has granted it a one-time exemption allowing it to reach the 25% MPS mark within 10 years from the listing date, extending until May 2032.

This is where potential conflict of interest arises for the government. As the overseeing authority, it appoints the securities markets regulator and also acts as the promoter/majority shareholder for its entities entering the public domain. 

While the government may prioritise public interest, especially in sectors like banking, financial services, and infrastructure such as railways, it must navigate and balance these interests carefully within the market’s mechanisms to ensure fairness and transparency. By retaining almost the entirety of the stake in an entity like LIC, it sends wrong signals. It looks like the government wants the cake and to eat it too.

Maintaining an absolute majority of shareholding in entities slated for listing or partial divestment is a concern. This practice exposes public shareholders to the uncertainties of government and bureaucratic decisions regarding the destiny of a for-profit listed entity.

Such a scenario raises valid concerns among investors about potential interference from policy or political considerations impacting the business. Ensuring clarity on the business direction during disinvestment can enhance valuations and attract strategic investors, fostering a more attractive investment landscape.

As an alternative, the government could structure its disinvestments and listings with a clause incorporating a designated portion of such businesses to include a public-interest component. However, to ensure transparency and fairness, a hands-off approach is crucial. This includes refraining from undue interference, especially in matters such as appointing the board or key management personnel.

Moreover, it presents an unfair advantage for these entities, exempting them from the quarterly concerns in dealing with a broader investor base, the delicate task of addressing investor queries, and the strategic challenge of fortifying a business moat. 

This situation perpetuates a quasi-governmental ownership without facing sufficient scrutiny from the public. Importantly, the appointment of most independent directors in such boards, either directly or indirectly through the nomination and remuneration committee, remains under government influence, transforming NRCs into unintended rubber stamps in boards controlled by governmental-stake ownership.

The challenges arise when a government-owned listed entity is perceived as aspiring to mirror a private enterprise, hindering its ability to independently formulate long-term strategic plans. 

The reluctance to shed its quasi-governmental image may hinder the development of robust strategies for long-term market competitiveness, posing obstacles to attracting strategic investors and establishing a sustainable market presence. This hesitancy also impedes the cultivation of a dynamic culture aligned with market demands, potentially limiting agility in responding to evolving consumer needs.

Furthermore, such large entities must be able to prioritise the cultivation of a competitive culture to attract and retain top talent, demonstrating a deep commitment to corporate governance principles. In a competitive market, these entities can no longer rely on the shelter of a quasi-governmental identity once listed. They must fully embrace the responsibilities that come with being a listed entity, aligning their business focus to remain significant and relevant in the market segments they serve.

In this instance, LIC stands as a market leader, equipped with competencies and capable talent to fiercely compete in the life insurance segment. However, it is crucial to enable LIC to implement necessary changes to cater to the modern-day insurance consumer and carve out its distinct market niche, free from the sarkari (government) label. This shift is indispensable for fostering the growth and competitiveness of LIC in adapting to the evolving dynamics of the insurance market.

It is imperative for the government to grasp that championing national interests must not overshadow the heightened corporate governance responsibilities that its own entities must undertake. The substantial concerns surrounding these entities revolve precisely around this delicate balance.

Essentially, the government should refrain from assuming the role of a super-regulator, given the existence of an established markets regulator. It is imperative for the government to exercise caution in the regulatory exemptions it offers its own listed entities, steering clear of any perceived space for potential perceived-bias, or unintended market influence. 

It should allow listed large state-owned entities the autonomy to chart their own course and truly stand on their own. It’s time to abandon the practice of excessive oversight and adopt a more hands-off stance, ceasing the mollycoddling or helicopter parenting of these entities.

Dr. Srinath Sridharan is a policy researcher and corporate adviser. (X : @ssmumbai )