New Delhi: Expressing “concern” over persistent vacancies among the board of directors at Bharat Heavy Electricals Limited (BHEL), a parliamentary panel has highlighted the under-representation of independent directors—which represents a failure to comply with rules, adding that it raises questions about the governance practices at the ‘maharatna’ public sector firm.
The Committee on Public Undertakings, in its report on the company tabled in Parliament last week, also highlighted that while BHEL has made a “remarkable turnaround from losses” and is back in black, the profits earned in relation to revenues remain “relatively modest”.
The report noted that while the sanctioned strength of the board of directors (BoD) for BHEL, India’s largest engineering and manufacturing enterprise, is 16 members, the actual strength stood at 10 members as of July 2023. According to the company’s website, its BoD currently has 9 members—the chairman & managing director, two part time official directors, one independent director, and five functional directors.
The panel noted that the “inordinate delays” in filling the vacancies is a matter of concern. According to the report, there were only three part-time non-official (independent) directors as of 6 July, 2023, against a sanctioned strength of eight.
“Notably, there are significant gaps in the representation of part-time non-official (independent) directors, which is critical for ensuring corporate governance and independent decision-making,” the report said, adding that this raises questions about adherence to regulatory norms and governance practices.
It added that this under-representation of independent directors is a regulatory compliance necessity as stipulated by India’s markets regulator Securities and Exchange Board of India (SEBI) and the stock exchanges—BSE and National Stock Exchange (NSE).
Additionally, the violation of these regulations has previously led to the imposition of fines of about Rs 1.7 crore by the stock exchanges and SEBI on BHEL from September 2018 to March 2023.
“Vacant positions in the Board can adversely impact the effective functioning of any Company,” the panel added in its report.
“Therefore, the Committee strongly recommends that the administrative Ministry should take up the matter with DPE (Department of Public Enterprises) for seriously looking into the issue of abnormal delay in appointment of Directors on the Board.”
The Committee further recommended that the controlling ministry—in this case, the Ministry of Heavy Industries (MHI)—and DPE should anticipate the future vacancies for various posts on the board of directors and take the required actions and complete the process of filling up the vacancies “well before the end of the term of the outgoing directors”.
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‘Profit margin relatively modest’
On the business front, the committee noted that BHEL has made a “remarkable turnaround” from losses in 2019-20 (Rs 1,473 crore) and 2020-21 (Rs 2,717 crore) to a profit after tax of Rs 448 crore in 2022-23.
While it termed the recovery as “commendable”, the committee said it was wary of the fact that the company’s profit margin remains relatively modest when compared to total revenue.
In its submission to the committee, a representative of the Ministry of Heavy Industries noted that BHEL is at a critical juncture. It said that if the company is doing business of Rs 25,000 crore and earning profits of Rs 400 crore, it shows that it is in a “touch and go” situation. The representative added that normally if a company is doing business of Rs 20,000 crore, its profit should be around 10 percent of that or about Rs 2,000 crore.
“The Committee, therefore, suggest that BHEL should prioritise strategic sourcing, establish vendor partnerships, explore cost-effective alternatives, collaborate with local suppliers, negotiate bulk discounts, assess its pricing strategy, explore options to improve profit margins, enhance operational efficiency, control overhead costs, adopt lean practices, diversify into higher-margin products/services, explore international markets etc. to mitigate the impact of rising material costs and increasing profit,” the report said.
It further added that to improve its financial stability, BHEL should also actively engage with customers to negotiate more balanced payment terms to ensure a consistent cash flow.
The committee also noted that BHEL has been adversely impacted by the Land Border Sharing and Global Tender Enquiry (GTE) restrictions, which set limitations on procurement from companies from countries sharing a land border with India.
“BHEL is grappling with challenges related to Land Border Sharing and Global Tender Enquiry (GTE) restrictions. These challenges have had a cascading effect on project timelines, causing delays of 5-6 months and, in certain instances, up to 9 months,” the report noted.
“These delays result in adverse consequences for the company, including missed business opportunities, postponed deliveries, project setbacks, and the imposition of liquidated damages (LDs) for tardiness.”
Due to restrictions on procurement from countries sharing land borders with India, BHEL had to incur substantial additional procurement costs for major items.
BHEL has made multiple appeals to the Ministry of Heavy Industries regarding these concerns.
“The proposal was appropriately taken up by MHI at the level of Hon’ble Minister with the Ministry of Finance. However, no favourable response has been found citing national security,” MHI said in a written submission to the panel.
“The Committee therefore desire that MHI should vigorously take up the matter with M/o Finance for removal of restrictions and providing level playing field to BHEL,” the panel recommended, adding that BHEL should also develop a network of local suppliers which will reduce delays, minimise additional procurement costs, and enhance supply chain resilience.
“The Committee are surprised to know that these restrictions are applicable only to public sector entities, not the private sector, however, nothing else has been divulge in support of this condition except national security. Therefore, the Committee urge that both the Ministry of Heavy Industries and BHEL should continue with their efforts to advocate for removal or modification of GTE and land border sharing restrictions that adversely affect its operations,” it added.
(Edited by Sanya Mathur)
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Rightfully covered report with deep analysis. Of late there has been less concentration on the yester year’s star product – transportation sector equipment. Once a major supplier to Indian Railways now have to struggle for orders in this area. BHEL need to upgrade itself for this market which has immense business potential.