Separating Managing Director and Chairperson: An Economically Sound Decision by SEBI?

[Adhip Ray is a 5th year BA.LLB (Hons.) student at Amity Law School, Kolkata and is the founder of the startup consultancy and is a consultant for Patent Professional Corporation (Patent PC), an intellectual property law firm based out of California.]

The Securities and Exchange Board of India (SEBI) had, in its March 2018 board meeting, approved an amendment to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015through which regulation 17(1B) was inserted. This was to ensure that, from April 1, 2020, the chairperson of the board of directors of the top 500 listed companies would have to be a person who is a non-executive director and is not related to the managing director (MD) or chief executive officer (CEO) of the company.

Although the deadline was extended until April 1, 2022, in light of the limited improvement in compliance with the regulation, SEBI in its Board Meeting dated 15 February 2022 declared that it would convert the mandate of splitting the two posts a voluntary one.

Separating the Two Posts – But Why?

Separating the posts of an MD and a chairperson is not a new concept. The main reasoning behind this mandate is to improve corporate governance and to prevent too much concentration of powers in one individual. In fact, several countries like Japan, the UK and Australia already have this practice wherein the roles of MD and chairperson have been separated. A similar argument has been presented in the Harvard Business Review which goes on to state that while the chairperson leads the board in setting strategic goals, the job of a CEO is to create a system comprising values, plans and practices that allows it to achieve the goal. Further, having one-person-two-posts model undermines the company’s risk management ability. Similarly, although the Organization for Economic Co-operation and Development states that the chairperson need not be a non-executive director, it recommends that the chairperson and the CEO should not be the same individual.

Counterarguments in this Regard

Counter to this narrative runs the practice of combining the two positions in US and France. In fact, in A. Zelleke’s 2003 Ph.D. dissertation in Harvard University titled “Freedom and Constraint: The Design of Governance and Leadership Structures in British and American Firms”, it was found that while there certainly were issues with the holding of two positions of chairperson and CEO by a single person, however, dividing the two roles gave rise to other unwarranted problems which caused no improvement in the end results. An analysis by the MIT Management Reviewshowed that dividing the two roles caused for non-executive chairpersons adopting a more executive role, while simultaneously giving rise to weakness in assigning accountability to the top roles.

Similarly, although the National Code of Corporate Governance for Mauritius provides for the board chair to be independent and separate from the CEO, it has led to confusion in the roles and responsibilities of the CEO, which is determined by varying company policies. In fact, the dual role has also caused for lesser supervision and transparency into actions and omissions by CEO’s which has led to incidence of corruption.

Where does the erstwhile Indian Law stand on this regard?

Indian corporate law has, however, been rather pragmatic in its approach to the dual role controversy until now. According to the proviso to section 203(1) of the Companies Act, 2013, the chairperson of the board shall not be the same person as the MD or CEO unless it is provided for by the articles of the company or if the company does not engage in multiple businesses.

This allows for active shareholder participation in allowing businesses to take their own decision as to whether the two roles of chairperson and MD/CEO shall be occupied by the same person or not. In fact, the top 500 listed companies are evenly split in making their decision in this regard, as around 54% of the top 500 listed companies have entrusted the role of chairperson and MD/CEO to more than one individual.***

Considering the difficulty in balancing corporate governance principles and ease of doing business, it is argued that the decision regarding the holding of the two positions be left to the shareholders, considering further that India already has high safeguards to prevent abuse of power by the chair, such as increased disclosures, transparency and compliance reports compared to other countries.

Issues with Differentiating the Two Roles in India

India is unique in the regard that it has several family-owned businesses in the top 500 listed entity rankings. This, however, had caused issues for such businesses to generate compliance with the SEBI mandate of differentiating the two roles of chairperson and CEO or MD. In fact, FICCI communicated industry apprehensions and requested SEBI to consider the concerns that India’s family businesses faced.

According to Indian industry’s concerns, causing these family businesses to lose control over their own companies could bring about an imbalance in competition between Indian and foreign companies. Indian companies would lose out because knowledge and experience gets passed down from one generation to the next in India, taking up several years to prepare the next successor, whereas in foreign countries with dual roles of CEO and chairperson, the top management roles are usually occupied by professional management.

It was also felt that the move to split the two roles would prevent succession planning in family run businesses that were ranked as the top 500 listed companies, wherein the customary practice for the family member of the next generation was to hold the position of MD and become familiar with running the company before she or he took on the mantle of chairperson.


As can be seen, SEBI backed out because the decision given the complications involving, taking into account the unique business environment in India. An analysis by Institutional Investor Advisory Services (IIAS) revealed that while almost half of the top 500 listed companies did not adhere to the SEBI regulations of splitting the roles of Chairperson and MD/CEO, 204 of the top 500 listed companies also had executive chairperson. As such, keeping the poor economic climate due to the COVID-19 pandemic in mind, it seems that SEBI has adopted a pragmatic approach by backing out of forcibly mandating compliance by the Nifty 500 companies.

Adhip Ray

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