SEBI’s new requirement for separation of post of Chairman/CEO – cosmetic and harmful

SEBI had recently amended Regulation 17 of the SEBI LODR Regulations 2015 by inserting a new clause (1B). The clause requires that top 500 listed companies in terms of market capitalisation should have a Chairperson who (i) is a non-executive director; and (ii) is not related to the Managing Director or CEO. This was SEBI’s version of the popular western corporate governance good practice of separating the Chairman and CEO’s post. This is to be implemented by the companies latest by 31st March 2020.

This amendment has its genesis in Western shareholding and board structures where public shareholding is usually held quite widely. Thus, danger that one person may have disproportionately high concentrated powers in his hands is real. This gets even more worrisome if the Chairman and CEO is the same. Hence, the accepted norm of good corporate governance is that the post of Chairman and CEO should be separate. This was also largely the basis on which the Kotak Committee on corporate governance recommended a similar requirement in India.

However, the Indian context is different. Companies are largely promoter group driven, typically by a founder and then his family. They usually have large controlling shareholding and dominance on the Board too. The Chairman’s post has largely administrative powers – more functions and duties than any substantial power. But it does have cosmetic value – corporate and business both.

The Indian context requires regulatory focus on countering the concentration of powers in the Promoter Group and not on post of Chairman or even CEO. Separating the post of Chairman and CEO does not serve any real purpose or change any reality but does harm a company’s corporate and business image. Effectively, in most cases, companies will have to find a non-promoter Chairperson.

My more detailed article on this here in Firstpost.