Public enterprises in India are classified into three main categories. The first category consists of departmental undertakings that operate directly under government control. The second category comprises statutory corporations that are financed by the government and established through specific legislative acts. The third category consists of government companies formed under the Companies Act, 2013, which are commonly referred to as public sector undertakings. This discussion focuses exclusively on corporate governance in public sector undertakings.
Contribution of Public Sector Units
Public sector undertakings have played a pivotal role in India’s economic development since independence. They were designed as vehicles for industrial growth, regional development, building essential infrastructure networks, and creating employment opportunities. Over the decades, PSUs have remained integral to the nation’s economy.
Their contribution can be measured through various performance indicators. In the financial year 2015–16, there were 320 PSUs in India, consisting of 244 operating enterprises and 76 under construction. They had a combined investment of ₹ 11,71,844 crore and achieved a net profit of ₹ 1,15,767 crore. They employed approximately 12.34 lakh individuals. Among these, 46 PSUs were listed on stock exchanges, and their market capitalization accounted for 11.68 percent of the total market capitalization on the Bombay Stock Exchange. PSUs also contributed ₹ 2,78,075 crore to the central exchequer through dividends, taxes, and other payments.
In addition to financial performance, PSUs have undertaken substantial corporate social responsibility initiatives. They have supported the upliftment of local communities by addressing basic needs such as education, clean drinking water, healthcare, and environmental protection.
The Government of India has consistently introduced reforms to enhance the performance of PSUs, with a strong emphasis on strengthening corporate governance. The history of public sector reforms since liberalization in 1991 illustrates the changing approach towards PSU management.
Public Sector Reforms Since Liberalization
The development of public sector undertakings in the liberalized economy can be divided into four distinct phases.
Phase One: New Industrial Policy (July 1991 – May 1996)
The introduction of the New Industrial Policy marked the beginning of significant reforms in the PSU sector. This phase saw the de-reservation of sectors previously monopolized by the state, allowing private sector participation. It also marked the start of disinvestment, which involved the partial sale of government shares in PSUs. Sick PSUs were referred to the Board for Industrial and Financial Reconstruction for potential revival or closure.
Phase Two: Empowerment of Public Sector Undertakings (June 1996 – March 1998)
This phase was characterized by operational autonomy for large PSUs, enabling them to function more independently. Efforts were made to professionalize the boards of directors and improve decision-making. A disinvestment commission was set up to guide the divestment process, and government compliance requirements were reduced significantly to improve efficiency.
Phase Three: Open Privatization (April 1998 – May 2004)
During this phase, PSUs were allowed to buy back their shares, giving them greater control over their capital structure. Downsizing, restructuring, and the professionalization of boards became priorities. Several sick PSUs were shut down to prevent further financial losses, and governance structures were further strengthened.
Phase Four: Better Governed Public Sector Units (May 2004 – Present)
This ongoing phase has focused on introducing corporate governance guidelines for PSUs to align them with international best practices. Transparency, accountability, and efficiency have become central goals, with continuous refinement of policies to ensure effective governance.
Corporate Governance Framework for Public Sector Units
The corporate governance framework for listed PSUs in India is guided by the Companies Act, 2013, SEBI guidelines on corporate governance, and Department of Public Enterprises (DPE) guidelines for central public sector enterprises. SEBI guidelines do not apply to PSUs that are not listed on recognized stock exchanges.
Provisions in the Companies Act, 2013
The Companies Act, 2013, replaced the Companies Act, 195,6 and was enacted on 29 August 2013. The Ministry of Corporate Affairs issued the Companies Rules, 2014, which outline management practices, qualifications and appointment of directors, procedures for board meetings, powers of the board, and accounting requirements. Together, the Act and the Rules provide a comprehensive corporate governance framework for all companies, including PSUs.
The Act specifies the qualifications and duties of independent directors along with guidelines for their professional conduct. It mandates the appointment of at least one woman director on the board of listed companies. It also requires the formation of specific committees, including the Corporate Social Responsibility Committee, Audit Committee, Nomination and Remuneration Committee, and Stakeholders Relationship Committee. Additionally, it mandates holding a minimum of four board meetings annually, with no more than 120 days between meetings.
SEBI Guidelines on Corporate Governance
The Securities and Exchange Board of India serves as the regulator of capital markets. In 2014, it amended Clause 49 of the Listing Agreement to align with the corporate governance provisions of the Companies Act, 2013. These guidelines apply to all listed companies, including PSUs, subject to certain exemptions. Clause 49 covers aspects such as board composition, audit committee functions, and disclosure requirements.
Department of Public Enterprises Guidelines on Corporate Governance
The Department of Public Enterprises first issued corporate governance guidelines for PSUs in November 1992, which were voluntary. These guidelines have been revised over the years, with the latest comprehensive update issued in May 2010. The current guidelines are mandatory and apply to both listed and unlisted PSUs. They address board composition, the role and structure of board committees, disclosure requirements, and timelines for implementation.
Corporate governance performance is now included as a key parameter in the evaluation of PSUs under the Memorandum of Understanding framework. In 2014, the DPE introduced revised grading guidelines for assessing corporate governance. From the financial year 2015–16 onwards, deviations from the guidelines result in negative scoring during performance evaluations.
Issues in Corporate Governance of Public Sector Units
Since the introduction of the New Industrial Policy, many Indian PSUs have expanded their operations both domestically and internationally. To maintain competitiveness and investor confidence, these enterprises must adopt robust corporate governance standards. However, several key issues hinder the achievement of high governance standards and need immediate attention.
Limited Autonomy of the Board
A strong and independent board of directors is essential for the success of any enterprise. In PSUs, however, ministerial directions can sometimes dictate the board’s agenda, often taking precedence over commercial and strategic considerations. PSUs generally have little to no role in selecting their independent directors. This lack of operational and financial autonomy makes it difficult to establish structured performance evaluation systems for board members and to hold them accountable for their actions.
Absence of an Ownership Policy
India does not currently have a clearly defined ownership policy for public sector undertakings. An ownership policy is necessary to clearly define the role and responsibilities of the government as the majority shareholder, particularly concerning minority shareholders and other stakeholders such as employees, suppliers, customers, and communities. The Organisation for Economic Co-operation and Development recommends that governments develop and disclose such policies to establish clear objectives for state ownership, the government’s role in governance, and the methods for implementing the policy.
Gaps in Board Composition and Diversity
Both legal provisions and guidelines from SEBI and the DPE prescribe requirements for the composition of PSU boards to ensure independence and gender diversity. However, many PSUs fail to meet these requirements. A study of the top 27 PSUs revealed that about one-fourth do not meet the criteria for board independence, and nearly the same proportion do not have a woman director. This lack of compliance weakens the objectivity of board decisions and reduces the effectiveness of oversight functions.
Non-Compliance with Governance Guidelines
Many prominent PSUs fall short of meeting the minimum governance requirements set out in Clause 49 of the SEBI guidelines and the DPE’s corporate governance framework. Reports from the Comptroller and Auditor General of India have also highlighted instances of non-compliance. This failure undermines the credibility of governance structures and reduces investor confidence.
Excessive Regulation and Overlapping Oversight
PSUs are accountable not only to Parliament but also to multiple regulatory bodies such as the Comptroller and Auditor General of India, the Central Vigilance Commission, the Competition Commission of India, and authorities under the Right to Information Act. While oversight is essential, excessive regulation and overlapping jurisdiction can create operational bottlenecks, slow decision-making, and stifle innovation. The result is often a compliance-driven culture that prioritizes procedural requirements over strategic outcomes.
The Governance Deficit Challenge
The governance deficit in PSUs is a significant concern. For these enterprises to succeed in the global market, they must be managed not merely as government bodies but as commercially driven entities with efficient use of resources. Historical perspectives, such as the observation by Prime Minister Jawaharlal Nehru during the Second Five-Year Plan debate, highlight this challenge. Nehru stated that applying normal government procedures to public enterprises would lead to their failure and that a balance must be found between adequate checks and the operational freedom necessary for efficient functioning.
Strategies to Improve Corporate Governance in PSUs
Public sector undertakings are among the most valuable assets of the nation. While the government has taken steps to improve its governance, it has yet to fully shift its role from day-to-day management to a more strategic ownership role. Several measures can be taken to strengthen corporate governance in PSUs.
Enhancing Board Autonomy
Granting greater operational and financial independence to PSU boards would allow them to make strategic decisions without unnecessary interference. This includes giving boards a more active role in the selection and appointment of independent directors to ensure diverse and competent leadership.
Developing a Comprehensive Ownership Policy
A formal ownership policy would define the government’s objectives in retaining ownership of PSUs and clarify its role in corporate governance. Such a policy should be transparent, publicly accessible, and aligned with best practices in state ownership as recommended by global governance bodies.
Ensuring Compliance with Diversity and Independence Requirements
PSUs must comply fully with legal and regulatory requirements regarding board composition. Appointing independent directors with relevant expertise and ensuring gender diversity can improve decision-making quality and enhance corporate credibility.
Strengthening Enforcement of Governance Standards
Compliance with SEBI and DPE guidelines should be strictly monitored, and deviations should result in measurable consequences. Strengthened enforcement mechanisms would ensure that governance reforms are not just procedural but also impactful.
Streamlining Oversight Mechanisms
Oversight should focus on strategic outcomes rather than excessive procedural checks. Rationalizing the roles of various regulatory bodies can reduce duplication of work and allow PSUs to focus more on innovation, competitiveness, and market growth.
Ethical Concerns in Corporate Political Funding
Corporate political funding in India has raised significant ethical concerns. The practice of companies contributing funds to political parties can create conflicts of interest, especially when these companies receive government contracts, licenses, or regulatory approvals. This can lead to a perception that political support is being exchanged for financial or regulatory favours, undermining trust in democratic processes. The lack of transparency in the system further fuels concerns, as the public often has little insight into which corporate entities are funding which political parties, and for what purpose. Ethical governance demands that corporate political contributions be transparent, disclosed promptly, and subject to reasonable limits to prevent undue influence on policymaking.
Corporate Governance and Political Neutrality
Good corporate governance requires companies, especially those in the public sector, to maintain political neutrality to protect the interests of all stakeholders. Political contributions can create alignment with particular political parties, potentially alienating employees, shareholders, or customers who have differing political views. Public sector units, funded by taxpayers and accountable to the public, have a heightened responsibility to avoid political bias. Political neutrality in corporate governance helps ensure that business decisions are made based on economic merit rather than political affiliation, which fosters investor confidence and supports long-term sustainability.
International Practices and Lessons for India
Globally, countries adopt varying approaches to corporate political funding. Some nations, such as the UK, impose strict disclosure requirements, while others, like Canada, have outright bans on corporate contributions to political parties. The United States allows corporate contributions through Political Action Committees (PACs) but under strict regulatory oversight. These models highlight that transparency and accountability are essential to prevent the misuse of corporate funds for political purposes. India can learn from these practices by enhancing disclosure norms, introducing caps on corporate donations, and ensuring that regulatory bodies monitor compliance effectively.
Judicial Perspectives on Corporate Political Contributions
The judiciary has occasionally weighed in on matters related to corporate political funding, especially about transparency and the public’s right to know. For instance, challenges to the constitutionality of schemes like electoral bonds have focused on whether they infringe upon citizens’ rights to information. Courts have acknowledged that while corporate entities have a right to participate in the democratic process, this right must be balanced with the need for transparency and prevention of corruption. Judicial interpretations continue to shape the legal environment for corporate political funding in India.
Transparency Mechanisms in Corporate Political Funding
Ensuring transparency in corporate political donations is a key step towards ethical governance. Mechanisms such as mandatory disclosure in annual financial statements, regular reporting to regulatory authorities, and making data publicly accessible can deter undue influence and corruption. The introduction of electoral bonds in India aimed to reform political funding, but critics argue that it has instead reduced transparency by allowing anonymous donations. A robust framework should balance the need for privacy with the public’s right to know, ensuring that political funding does not compromise governance integrity.
Corporate Social Responsibility and Political Engagement
Corporate Social Responsibility (CSR) is intended to direct corporate resources toward social welfare and sustainable development. Mixing CSR objectives with political contributions can divert resources away from intended beneficiaries. Ethical governance principles dictate that CSR funds should not be used for political purposes, as this could undermine both corporate credibility and public trust. Companies that maintain a clear distinction between CSR activities and political engagement demonstrate stronger governance standards and accountability.
Role of Stakeholders in Monitoring Political Funding
Stakeholders, including shareholders, employees, and the general public, play a crucial role in holding companies accountable for their political contributions. Shareholders, in particular, can demand transparency in corporate political spending and seek assurances that such contributions align with the company’s values and long-term goals. Independent audits and third-party reviews can further strengthen oversight mechanisms, ensuring that political funding decisions are in the best interests of all stakeholders.
International Perspectives on Governance in State-Owned Enterprises
Globally, state-owned enterprises play a significant role in economic development, public welfare, and the delivery of strategic services. Their governance standards vary depending on political systems, legal structures, and cultural contexts. Countries such as Norway, Singapore, and New Zealand are often highlighted for their transparent, efficient, and well-monitored state-owned enterprise governance frameworks. These nations adopt clear ownership policies, well-defined performance metrics, and independent boards to ensure that these enterprises operate on par with private corporations in terms of efficiency and accountability. In contrast, some developing countries struggle with weak oversight, political interference, and a lack of performance accountability. International experience demonstrates that successful governance in public sector enterprises depends on clearly separating ownership from management, ensuring professional board appointments, and enforcing transparent reporting standards. In addition, regular performance reviews, citizen feedback mechanisms, and the adoption of global best practices strengthen the efficiency and public trust in state-owned enterprises.
Challenges in Implementing Governance Reforms in PSUs
Implementing governance reforms in public sector undertakings is a complex process. The primary challenge lies in balancing commercial objectives with social and developmental mandates. Many PSUs are expected to operate profitably while also delivering services to underserved regions or maintaining employment levels. Political influence in board appointments and operational decisions often undermines independence. Bureaucratic control can lead to slow decision-making, reduced innovation, and an inability to adapt to market competition. Resistance from employee unions, fear of job losses, and lack of incentives for performance improvements can slow the pace of reform. Moreover, outdated legal frameworks and weak enforcement mechanisms contribute to governance inefficiencies. While policy changes can address structural weaknesses, actual reform depends on consistent political will, transparency, and capacity-building at all levels of PSU management.
Corporate Funding of Political Parties in the Indian Context
In India, corporate funding of political parties has been a subject of intense debate due to its implications for democracy, governance, and economic fairness. Historically, companies were restricted in the amount they could contribute to political parties. However, with the introduction of electoral bonds in 2018, the funding process became more opaque, as donors could contribute without public disclosure. Proponents argue that this protects donor privacy and reduces the risk of political retribution, while critics highlight that the lack of transparency increases the risk of quid pro quo arrangements, policy capture, and unequal political influence. Political funding from corporations can create conflicts of interest, especially when companies with substantial government contracts or regulatory dependencies contribute heavily to ruling parties. To address these issues, experts have called for reforms that increase transparency, such as mandatory disclosure of contributions, caps on political donations, and the establishment of independent oversight bodies.
Legal and Regulatory Framework for Political Funding
Political funding in India is regulated under the Companies Act, the Representation of the People Act, and the Income Tax Act. The Companies Act earlier limited corporate donations to a percentage of average net profits over the preceding three years, but these restrictions were removed in 2017, allowing even loss-making companies to make unlimited contributions. The Representation of the People Act governs disclosures, while the electoral bonds scheme has altered the landscape by routing donations through the banking system while maintaining donor anonymity. Critics argue that such provisions weaken transparency and make it harder for citizens to track financial influence in politics. Comparative studies show that countries like the United States and the United Kingdom maintain stringent disclosure norms for political funding, with public databases tracking corporate contributions. In contrast, India’s current framework provides less public visibility, raising concerns about potential misuse of funds for political favoritism.
Ethical Considerations in Corporate Political Contributions
Corporate funding of political parties raises several ethical concerns. At the core is the potential erosion of democratic principles when economic power disproportionately influences political outcomes. When corporations donate large sums to parties, there is a risk that policy decisions will be skewed toward corporate interests rather than the broader public good. This undermines fairness in policymaking and can lead to regulatory capture, where laws and policies favor donors. Ethical corporate governance demands that companies operate with integrity, transparency, and accountability to shareholders, employees, customers, and the broader society. From an ethical standpoint, corporate donations should be subject to clear policies, board-level approvals, and disclosure to stakeholders. Public trust in both corporations and political institutions depends on eliminating the perception of backdoor deals and ensuring that political funding aligns with democratic values.
International Approaches to Political Funding Transparency
Around the world, approaches to political funding transparency vary widely. In the United States, the Federal Election Commission mandates public disclosure of political contributions above certain thresholds, though loopholes through political action committees and nonprofit organizations still exist. In the United Kingdom, donations over a specific amount must be disclosed to the Electoral Commission, and anonymous donations are prohibited. Many European countries impose strict caps on contributions and limit corporate donations altogether. Countries such as Canada and Germany combine public funding for political parties with strict transparency requirements to reduce dependence on large private donors. These international examples highlight that while no system is perfect, strong disclosure norms, contribution limits, and independent oversight are essential to preventing undue influence in politics.
Balancing the Role of Corporations in Politics
Corporations play a legitimate role in public life, and their perspectives can contribute to policy development, especially in economic and regulatory matters. However, the challenge lies in ensuring that this influence does not undermine democratic accountability. Corporate political engagement should be based on transparent advocacy, participation in industry associations, and constructive dialogue with policymakers, rather than opaque financial contributions. One approach is to limit corporate political donations while encouraging public funding of parties to ensure a level playing field. Another is to require corporations to disclose their political spending in annual reports and sustainability disclosures, allowing shareholders and the public to assess alignment with corporate values and societal interests.
Recommendations for Strengthening Governance and Transparency
To improve governance in PSUs and ensure responsible corporate funding of political parties, several measures can be considered. First, PSU boards should be professionalized, with independent directors selected through transparent processes and insulated from political interference. Performance contracts, regular audits, and public disclosure of operational and financial performance can enhance accountability. For corporate political funding, reforms could include reinstating donation caps, mandating real-time disclosure of contributions, and abolishing anonymous electoral bonds. Independent oversight agencies, such as an empowered Election Commission, could monitor compliance and investigate irregularities. Encouraging corporate social responsibility spending in non-political areas such as education, healthcare, and environmental protection can redirect corporate funds toward public benefit rather than partisan purposes.
The Way Forward for Ethical Corporate Governance
The future of ethical corporate governance in India requires both systemic reform and a cultural shift. For PSUs, this means transitioning from state-controlled bureaucratic models to agile, commercially competitive enterprises with a clear public service mandate. For corporate political funding, it means moving from opacity to transparency, ensuring that financial contributions do not distort the democratic process. Collaboration between policymakers, regulators, civil society, and the business community will be essential to create frameworks that balance economic growth with democratic integrity. By adopting best practices from global models, India can strengthen both its public enterprises and its political financing systems, thereby enhancing public trust and long-term sustainability.
Conclusion
Corporate governance in Public Sector Units (PSUs) and the corporate funding of political parties are deeply interconnected areas that significantly influence economic integrity, democratic values, and public trust. In PSUs, governance frameworks must go beyond mere compliance with legal provisions; they should embed principles of transparency, accountability, and efficiency to ensure that public resources are managed in the best interest of stakeholders. Effective governance in PSUs demands independent boards, professional management, stringent disclosure norms, and mechanisms to prevent political interference while still allowing for necessary policy alignment with national priorities.
On the other side, corporate funding of political parties raises complex issues related to transparency, influence, and fairness in the political process. While corporate contributions can support democratic engagement and the functioning of political institutions, they also carry the risk of fostering policy bias, favoritism, or undue corporate influence if not properly regulated. The introduction of mechanisms such as mandatory disclosures, caps on contributions, and transparent electoral bonds aims to balance corporate participation in democracy with safeguards against corruption.