MC EXCLUSIVE Centre weighs a downgrade clause in PSU Ratna status if state-run firms fail to perform for three years

Maharatna is the highest category

The government is examining the feasibility of introducing a downgrade clause in the Maharatna-Navratna-Miniratna classification framework for Central Public Sector Enterprises (CPSEs), which would enable a mechanism that may see PSUs failing to perform over a three-year period lose their special status, people familiar with the development have told Moneycontrol.

At present, there is a well-defined process to upgrade CPSEs to higher categories based on performance, but no formal mechanism to strip companies off their status if financial or strategic benchmarks are breached on the downside. The proposal is part of a wider review of the Ratna categorisation framework being steered by the Cabinet Secretary.

“The government is revisiting the Ratna schemes. All the Ratna companies are Schedule A companies. There is a mechanism of upward classification. But if a company is not maintaining performance for any reason, why should they continue to enjoy the status of performance not progressing, even after giving them a three-year average window. However, there may be implications in the open market and in global scenarios,” a senior government source told Moneycontrol.

Downgrade Mechanism

Under the proposed framework, companies could face downgrade if they fail to meet prescribed benchmarks over a defined period.

“If a Maharatna fails to keep up the prescribed performance standards, it will fall to a lower level of being a Navratna. And if a Navratna fails to maintain performance for three years, it will fall to being a Miniratna. If a Miniratna is not able to keep up the performance, it will be stripped of that category. Currently, classification only goes one way – upwards. We are examining whether companies that do not meet performance benchmarks consistently over three years should face a downgrade,” the source said.

If cleared, this may be the first time that the PSU Ratna classification will include a downward accountability mechanism, a significant shift from the current model.

Balancing Accountability

Officials said the government is also weighing the potential flip side of such downgrades, including how a lower classification could affect a PSU’s market valuation, investor confidence and the ability to raise funds.

“The repercussions could be huge. Once we take a decision ignoring market forces, the repercussions will be on market value. A downgrade has implications in the open market and could affect fund-raising plans. These aspects have to be carefully studied before finalising the mechanism,” the official added.

The discussions are currently weighing the operational, financial and market consequences of such a downgrade.

Financial Threshold

The review will also include updating financial criteria – such as turnover, net worth and profitability thresholds – that determine Ratna status. These benchmarks, set years ago, no longer reflect current business scales and inflation.

“The criteria for turnover, net profit and capital expenditure were laid down some time ago. Costs have changed, the nature of business has changed. To an extent, we can edit the framework to keep with the needs of the time. These thresholds need to be updated,” the source said.

Sources said a preliminary assessment has shown that many CPSEs may fall by one or two nothces if the benchmarks are revised, underscoring the scale of the exercise.

“The classification criteria are old, costs have changed, and the nature of business has changed. During Covid or wartime, net profits dipped for many companies. We need to interpret many ifs and buts, which makes the scheme complicated. The government needs to be cautious, as such changes will impact rankings, grading, and market perceptions,” the source added.

Maharatna status is the highest category, reserved for top-performing CPSEs. One step below Maharatna is the Navratna, while Miniratna are the smaller but financially stable CPSEs.

Why revisit Ratna Classification Now?

The criteria were set years ago and no longer reflect current business realities. Rising inflation, changing sectoral dynamics, and stagnant performance in some CPSEs have likely prompted a comprehensive review of the mechanism.

What’s the Proposed Downgrade Clause

If a PSU fails to maintain performance benchmarks over three years, it could be downgraded to a lower category or lose its Ratna status altogether – a first for the scheme.

New Financial Benchmarks

Turnover, net worth and profitability thresholds are likely to be revised upwards to reflect inflation and contemporary scales. This could result in some CPSEs losing their existing classification if they fail to qualify under the new thresholds.