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Challenges of Corporatization of Governance

What is meant by Governance?

The term Governance encompasses an inherent system by which an organizational setting gets controlled and operated, and the mechanisms by which it, and its people, are held similarly accountable.

What is a Corporate?

Commonly recognized as a legal entity, possessing rights and responsibilities, unlike an individual. It may be created by an individual or a group of individuals with a shared goal.

What is meant by the Corporatisation of Governance?

Governance comes from the government sector, however, changing the government sector into a corporate reflects that this corporate would now ensure governance. Corporatization occurs wherein a government attempt to legally recognize the structural aspect of a government-owned entity as one that closely resembles a private entity. In basic words, the government which has been shaped out of a corporate setting is what calls for the corporatization of governance.

India formulated major reforms to introduce the liberalization of the economy

The onset of Economic liberalization and privatization

There has been the acceptance of privatization that otherwise aimed for enthusiastic enforcement of the process, something that has failed over the years.
Tracing back to the discussion it's clear that disinvestments have been categorized into three main phrases:
  • Phase I 1991-92 to 1998-99
  • Phase II 1999-00 to 2003-04
  • Phase III 2004-05 onwards

Phase - I: 1991-92 to 1998-99:

Stepping towards economic reforms and restructuring, the government shareholding pattern observed in public enterprises had been disinvested over the following years. It began in 1991-92 as a fractional equity sale in certain selected public enterprises with ownership or control remaining unchanged. The period observed 'passive disinvestment or privatization'.

Phase - II: 1999-00 to 2003-04:

Various factors lead to the emergence of privatization. Firstly, there were changes in ownership and control. Reliance was placed more on strategic sales wherein control was transferred to the private investors with or without actual change in ownership.

Phase 111- 2004-05 onwards:

The government aimed at formulating a strong public sector. It was of the view that the profit-making companies would not be privatized. Disinvestment would take place concerning only a fractional equity holding with no transfer of ownership or control.

Examples of the corporatization of governance include:

  • Public Corporations and
  • Private Corporations

Public Corporations: Centrally Owned PSUs

Tracing back to the pre-independence period, the public sector offered a bare minimum role. At the commencement of the First Five Year Plan formulated in 1951, there were only five public sector undertakings that required a total investment of Rs 29 crores. It was envisaged that these PSUs would promote economic and industrial development thereby building the required infrastructure under the presumption that the private sector lacked resources and a long-term investment perspective. The PSUs alone accounted for 85% of the total assets in the public sector. The public sector experienced rapid growth thereby accounting for about one-fourth of the GDP.

During the pre-independence period, the public sector offered a minimum role. At the commencement of the First Five Year Plan formulated in 1951, there were only five public sector undertakings that required a total investment of Rs 29 crores. It was envisaged that these PSUs would promote economic and industrial development thereby building the required infrastructure under the presumption that the private sector lacked resources and a long-term investment perspective.

The PSUs alone accounted for 85% of the total assets in the public sector. The public sector experienced rapid growth thereby accounting for about one-fourth of the GDP. Furthermore, the banks were nationalized under the Banking Companies (Acquisition and Transfer of Undertakings) Act, of 1970. Coal mines were nationalized under the Coal Mines (Nationalisation) Act, of 1973.

Private Corporations:

Why privatization was needed?
The question as to why there was disinvestment in public sector enterprises is majorly due to two broad reasons:
  1. Firstly, the external debt crises stirred the initial economic reforms with growing debt problems and fiscal crises that continued to increase the opportunity costs of state-owned enterprises.
     
  2. Secondly, it is the passage of time that has resulted in such changes.

India's commitment to privatization escalated steadily through the 1990s. The program of deregulation increased the scope of the private sector. The government's initiative behind the privatization program began as a disinvestment program to reduce its holding up to 20%. Finance Minister Yashwant Singh described privatization as a program that aimed at reforming SOEs. Initially, the auction of shares that were initially restricted to public financial institutions was expanded to private investors.

The potential buyers of Air India included Singapore Airlines which partnered with the Tatas, Air India which partnered with a local Indian group, and finally the foreigners who owned portions of VSNL and MTNL. Furthermore, there was the sale of Maruti to Suzuki in May 2002.

Despite all the effective efforts undertaken by the government, the PSUs failed to meet the expectations. They continued to underperform and significantly lagged when compared to the private sector. Private ownership was considered more efficient than state ownership and was considered an important source of government revenue. Accordingly, it would help bring an end to the ongoing subsidies to loss-making PSUs and finance long-term investments.

India's commitment to privatization escalated steadily through the 1990s. They continued to underperform and significantly lagged when compared to the private sector. Accordingly, it would help bring an end to the ongoing subsidies to loss-making PSUs and finance long-term investments. The government's initiative behind the privatization program began as a disinvestment program to reduce it holding up to 20%.

The potential buyers of Air India included Singapore Airlines which partnered with the Tatas, Air India which partnered with a local Indian group, and finally the foreigners who owned portions of VSNL and MTNL. Furthermore, there was the sale of Maruti to Suzuki in May 2002.

Now that we are aware of the rationale as to why these public corporations came into being or why was the scope of the public sector enhanced. Accordingly, the governance pattern brought about corporatization within the economy. Every corporate consists of a Director and a BOD (Board of Directors).

The question as to why these Public Sector Undertakings were made in place of a government department can be explained. Government departments consist of bureaucrats who are placed under direct governmental control. Whereas the PSUs are operated by the BOD meaning there is no direct interference by the government. The Directors in their capacity have the power to decide what is good and bad for the company and how it is to be governed.

How did the Public Corporations ensure the welfare of the common public?

It is an agency created by an Act of Legislature and independently operates thereby providing services on behalf of the government. Wherein 70% of the individual's income is spent on consumable and non-consumable items, the corporates ensured public welfare by contributing towards CSR. Welfare measures involved feeding the hungry and providing opportunities to the marginalized. Additionally, the sick were taken care of and ventures provided aid and support to the destitute.

Overall, these effective undertakings added actual meaning to the people's Fundamental Rights enshrined in the Constitution and the DPSPs. The rights include Article 14 (Right to Equality), Article 21 (Protection of Life and Personal Liberty), Article 21-A (Right to Education), etc.


How has privatization ensured public welfare?

The maximum control and authority were transferred to private owners. The private companies performed a dual role- on one hand, they contributed to the economy and on the other, they enhanced the rights of individuals. The private corporates established educational institutes, and medical healthcare services thereby promoting public welfare.

The corporates implemented various policies that would benefit their employees and officials. Two of the most important rights that were upheld include Article 42 which guarantees maternity benefits and Article 39 which talks about certain principles of the policy followed by the State.

Challenges
The negative influx of economic crises accompanied by high inflation failed to bring any progress through privatization. The primary disadvantage associated with a slow rate of privatization is that it gives opponents ample time to organize their resistance which slows the progress even further. The labor unions, civil servants, ministers, and opposition party members have had roles in this.

The scope of job security had drastically fallen. Missteps on part of the government derail such a gradual process. For instance- the Harshad Menta Scam wherein the first block shares of SOEs were sold to government mutual funds.

In the United Kingdom, the performance of SOEs brought the country's position at par with privatization whereas the Indian experience seemed worse. Herein, policy-making couldn't mandate what was to be accomplished through privatization. The government divested minority equity by undertaking pseudo-privatization in the companies so that it continues retaining a voice in place of control.

A body that becomes a corporate is aware of the OECD Guidelines and follows the same. But what if the corporate isn't aware of such guidelines? In case a public company has changed itself to a private company as in a department, hospital, or educational institute what principles should be followed? What principles should be undertaken that would be different from the government sector but at the same time ensure more service to society?

Conclusion
The OECD Working Group assists policymakers and public officials on how to ensure better privatization of the SOEs. The government is faced with two choices- either reforming the corporate governance of the enterprises or transferring them entirely to the private sector. The process involves the transfer of corporate assets to the private sector. The government shall ensure high standards of accountability and transparency while privatizing the SOEs. Such an established legal framework shall establish a maximum degree of public disclosure requirements.

A proper regulatory framework has to be established before the privatization of SOEs takes place. Existing laws and regulations shall accordingly follow. In case of exemptions, the same should be disclosed in advance. The inherent objectives shall be stated to the public. Measures to safeguard the integrity of the established procedures and conflicts involving minority interests should be avoided.

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