[Priankita Das is an undergraduate student pursuing B.A. LL.B. (Business Law Hons.) at Dr. Ram Manohar Lohiya National Law University, Lucknow]
By way of its board meeting on February 15, 2022, the Securities and Exchange Board of India (“SEBI”) amended its mandate on the separation of the roles of chairperson and managing director/chief executive officer (“MD/CEO”) of listed companies to be applicable on a ‘voluntary basis’ as opposed to its previous mandatory nature. This decision was taken on the premise of the constraints posed by the Covid-19 pandemic that caused hindrances in the smooth transition of the separation of roles in listed companies. Against this backdrop, the present post, while taking note of the history of the mandate and its comparison with global counterparts, analyses SEBI’s recent decision and its implications.
Background
In 2017, SEBI set up a Committee on Corporate Governance (“Kotak Committee”) to seek recommendations for the enhancement of corporate governance norms in India. The Committee inter alia recommended the separation of the roles of chairperson and MD/CEO in listed companies with more than 40% public shareholding on account of the benefits and structural advantages it provided, such as the creation of an egalitarian board environment and the reduction of excessive concentration of authority in one individual. It also recommended the extension of this separation to all listed entities from April 1, 2022.
Pursuant to the recommendations made by the Kotak Committee and their approval by the SEBI Board, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 were amended in May 2018. With effect from April 1, 2020, it mandated the top 500 listed entities to ensure that the chairperson and MD/CEO roles in their board of directors were not related as per the definition of ‘relative’ provided under the Companies Act, 2013. This directive was later deferred by two years until April 1, 2022.
SEBI’s Present-Day Stance
With less than two months away from the revised deadline, SEBI reviewed the compliance status of the regulatory mandate. It was found that the compliance level, which stood at 50.4% in September 2019, had seen a barely 4% incremental improvement as of December 2021. To expect the remaining 46% of listed companies to comply with the norms within the next two months would, thus, be erroneous. Parallel to this, SEBI had been in receipt of various representations from industry bodies and corporates citing difficulties and challenges in complying with the regulatory norm. On account of these factors, SEBI resolved to modify the mandatory requirement to now be applicable on a voluntary basis.
Analysis
Comparison with Global Counterparts
The Kotak Committee in its report took note of the global best practices with regard to the separation of the roles of chairperson and MD/CEO in public companies. It observed that in jurisdictions such as the United Kingdom and Australia, a clear demarcation of the roles was accorded precedence. Around 95% of companies among the United Kingdom’s FTSE 350 have separated the roles of chairperson and MD/CEO. Likewise, the European Commission’s recommendations, which were all adopted in 2005, mandate the separation of the roles.
The Kotak Committee also took note of the United Kingdom’s Cadbury Report issued by the Committee on the Financial Aspects of Corporate Governance, which favoured the separation of the roles due to the adverse effect of considerable concentration of power in one individual if the roles were combined. Similarly, in countries with a two-tier board structure, such as Germany and the Netherlands, the top board and top management roles remain segregated. On the other hand, while the United States and France continue to debate the issue, countries such as Japan and China do not mandate the separation. However, according to data compiled for the Wall Street Journal by ISS Analytics, the United States and its S&P 500 companies show a rising trend towards the separation of the roles.
It is, thus, evident that on a global level the separation of the chairperson and MD/CEO roles is favoured. Therefore, to be at par with its global counterparts, India should adopt the approach of making the separation of the roles mandatory. However, while it is convenient to adopt global best practices, it is also pertinent to note the implications of such adoption specifically within the Indian context.
Application in the Indian Context: Dominance of Promoter-Driven Companies
A large number of companies in India are promoter or family-driven, i.e., the shareholdings of the company are majorly held by the promoters of the company and their relatives. Thus, in such companies, the separation of the roles would pose a challenge. The same category of companies had earlier resisted the decision of SEBI to make the provision mandatory on account of the impact it would have on the entrepreneurial spirit and business practices in India, by bringing about major changes to the leadership of companies, which would in turn cause hindrances in their management.
In contrast to the above, SEBI’s recent decision to make the provision voluntary has been welcomed by industry representatives, owing to the flexibility it shall provide to companies in their leadership and management practices and the specific relief it provides to promoter-driven companies. However, such flexibility also has certain repercussions for the corporate governance norms in India.
Implications of SEBI’s Recent Move
One consequence of SEBI’s decision would be the potential non-compliance of entities with SEBI norms in future. SEBI, with less than two months to go for the deadline of compliance, converted the provision’s nature from mandatory to voluntary. This may cause listed companies to defer their future compliance with SEBI regulations in the hopes of a reversion or withdrawal on the regulator’s part, which in turn will make it difficult for SEBI to enforce compliance with future norms and regulations that it may bring about.
Secondly, with the present voluntary nature of the provision, it would be inaccurate to assume that the remaining 46% of the listed companies that were yet to segregate the roles of chairperson and MD/CEO in their board of directors would now enforce the provision. The reasons cited by SEBI in its Press Release for the Board Meeting, i.e., the effect of the pandemic and minimal rise in the compliance level, pave the way for a further extension of the deadline – and not an altogether change in the nature of the provision. Such change has essentially defeated the reasoning behind the Kotak Committee’s recommendation for the separation of the roles. Moreover, the presence of separate roles in a company is becoming an explicit investment rating criterion. Thus, it would be to the benefit of the companies to comply with the voluntary provision.
Concluding Remarks
SEBI norms relating to the separation of the chairperson and MD/CEO roles have been both welcomed and criticised by industry representatives. While on one hand making the provision mandatory would put India at par with its global counterparts and be in accordance with the global corporate governance norms, on the other hand, the flexibility provided by the voluntary nature of the provision is adaptable to the Indian context and would benefit the promoter-driven companies that dominate the Indian market. With no future review date mentioned in the Press Release, it can be assumed that SEBI has ultimately given in to corporate pressure and taken the decision to adopt the latter viewpoint.
– Priankita Das