Industry bodies hail the move; analysts warn of conflict of interest.
Capital markets regulator Sebi on Tuesday did away with the mandatory requirement for listed companies to separate the role of chairperson and managing director (MD) or chief executive officer (CEO). It will now be a voluntary practice.
The U-turn, forced by ‘unsatisfactory level of compliance’, came almost four years after the regulator had stipulated the rule to improve corporate governance and less than two months before the deadline (April 1) to do so was to end.
According to Sebi, only 54% of the top 500 listed firms complied with its rule by December 2021. In fact, over the past two years, the rule hasn’t found many takers (50.4% of the companies had already complied by September 2019). “…hence, expecting the remaining about 46% of the top 500 listed companies to comply with these norms by the target date would be a tall order,” the regulator said after its board meeting in New Delhi on Tuesday.
Many well-known companies, including RIL, JSW Steel, Bharat Forge, TVS Motors and Raymond, haven’t yet complied with the Sebi stipulation.
“Considering rather unsatisfactory level of compliance achieved so far with respect to this corporate governance reform, various representations received, constraints posed by the prevailing pandemic situation and with a view to enabling the companies to plan for a smoother transition, as a way forward, Sebi board at this juncture, decided that this provision may not be retained as a mandatory requirement and instead be made applicable to the listed entities on a ‘voluntary basis’,” Sebi said in a statement.
Sebi had amended the Listing Obligations and Disclosure Requirements in May 2018 to stipulate the separation of the role of the chairman and the MD/CEO to enable a “more effective and objective supervision of the management”, in sync with the recommendations of the Uday Kotak panel. It had asked the top 500 listed firms to adhere to the rule by April 1, 2020. In January 2020, it extended the deadline by two years to April 1, 2022, to give the companies more time to comply. Still, the progress on this front remained far from satisfactory.
Earlier this month, finance minister Nirmala Sitharaman said the regulator should listen to the view of Indian companies on the matter. “…I do agree that the way Indian companies are run and built over the decade and over century also depends so much on the family and related members being on the board,” the minister had said.
Industry bodies hailed the latest Sebi move. CII director general Chandrajit Banerjee said it will “strengthen the entrepreneurial spirit”. The separation of the role would have been “onerous”, especially in the “light of sufficient checks and balances present in the existing regulations”. The decision may be best left to the discretion of company boards and to the will of shareholders, he added.
Ficci director general Arun Chawla said: “Sebi board’s decision to permit listed companies to structure their board leadership in alignment with the respective company’s strategic environment, its strengths and weaknesses is commendable.” Leadership arrangements that would drive business excellence are best left to the judgement of the shareholders, he added.
However, analysts say the earlier move to separate the roles would have reduced the instances of conflict of interests in companies and paved the way for a better oversight of the management’s actions.
Santosh Kumar, partner at Deloitte India, said the separation would have “reduced concentration of authority in a single individual”. Countries like the UK and Australia have already favoured the separation of the roles of chairman and the MD/CEO. Germany and the Netherlands have gone a step further to adopt a 2-tier board structure, separating the roles of board and management. “India Inc should, therefore, make earnest efforts and consider the segregation of the chair and the CEO roles to elevate the levels of corporate governance (despite the latest relaxation),” Kumar said.
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