Market regulator Securities and Exchange Board of India (Sebi) on Tuesday made it voluntary for India Inc to have a separate chairperson and managing director/chief executive officer (MD & CEO). The move comes weeks ahead of the April 1, 2022 deadline where top 500 listed firms by market value had to install two separate—and unrelated —persons for these posts.
“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 press release issued after its board meeting held in New Delhi.
Sebi’s reprieve will benefit more than 150 companies, which currently have the same individual as both chairperson and MD/CEO, according to Primeinfobase, a firm that maintains corporate information database.
Some of the top companies that will benefit from the move are Reliance Industries (where Mukesh Ambani holds both posts), Hindustan Unilever (Sanjiv Mehta), Bajaj Finserv (Sanjiv Bajaj) and Adani Ports (Gautam Adani).
The corporate sector has shown reluctance to comply with this governance requirement despite the rule being initially proposed five years ago and approved by Sebi four years ago. The market regulator introduced the separation rule in March 2018 and gave India Inc time until April 2020 to comply. In 2020, the regulator had extended the deadline by another two years.
“There has been barely a 4 per cent incremental improvement in compliance by the top 500 listed companies over the last two years, hence, expecting the remaining about 46 per cent of the top 500 listed companies to comply with these norms by the target date would be a tall order,” Sebi said.
Earlier this month, Finance Minister Nirmala Sitharaman had urged Sebi to hear India Inc’s concerns over complying with the norm. Her comments came after Sanjiv Bajaj, CMD of Bajaj Finserv urged the government to “intervene” on the issue and described it as “regulatory overreach” by Sebi, which would create problems for corporate India.
Incidentally, Sitharaman addressed the Sebi board on Tuesday, a post-Budget custom.
A chairperson is the head of the board, while the MD/CEO is the head of management, who is supposed to report to the board. The rationale behind separation of CMD post was to have “a better and more balanced governance structure,” the regulator said.
Gaurav Mistry, Associate Partner, DSK Legal said on one hand the rule would have ensured more effective and objective supervision of the management on the other hand I would have led to duplication of work, some confusion in terms of authority.
Numerous studies have shown companies with better corporate governance standards tend to perform better at the bourses.
“It will be interesting to see if listed and IPO bound companies choose to comply with this higher, albeit voluntary governance benchmark, going forward, and the consequent impact on their valuations and performance,” said Abhiroop Lahiri, Partner, IndusLaw.
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