A section of corporate lawyers and top auditors were left disappointed by the Securities and Exchange Board of India’s (Sebi) move to virtually allow the top listed companies to vest the powers of both the chairperson and MD/CEO in the same person. It went against the global grain of stricter corporate governance rules, they feel.
Large sections of Corporate India, however, felt the regulator’s ‘pragmatic decision’ could impart the much-needed flexibility to India’s corporate managements to take key investment and business decisions in a more agile manner.
The regulatory relaxation would come in handy especially for promoter-led listed companies, say industry representatives, a view that had found resonance in finance minister Nirmala Sitharaman’s recent statement, that the way Indian companies are run and built over decades depended a lot on the family and related members being on the boards.
A moral question that would arise is whether the companies that have complied with Sebi’s May 2018 rule that made separation of the roles of chairperson and the executive head (MD/CEO) mandatory wouldn’t feel shortchanged by the regulator’s U-turn. Also, the effective withdrawal of the rule might make it even more difficult for it to force compliance in the future.
Many experts, however, reckon that the advent of shareholder activism and proxy advisories have anyway brought in the much-needed transparency and a culture of corporate democracy in a large number of listed companies. Ultimately, the Indian market would ‘punish’ the laggards on governance standards and reward the performers, they feel.
According to Sebi, 54% of the top 500 listed firms complied with its rule by December 2021.
Moin Ladha, partner at Khaitan & Co, said: “India has a large number of companies that are promoter-driven, and in their case, the segregation of power would be a challenge. This would have required a change in how we conduct business. This (mandatory separation of chairperson/MD roles) would have created a leadership and management issue.” He added that since promoters have dominant shareholding in many companies, this model (combining the roles) has worked successfully in letting the businesses grow consistently.
Wishing not to be identified, a corporate law expert, who had held a key regulatory post earlier, said: “There is some merit in the argument that making it mandatory for listed companies to separate the role of chairperson and MD/CEO will weaken the entrepreneurial spirit. There would be a very few takers for such a practice globally. But at the same time, making it a voluntary practice just weeks before the deadline to comply with the rule was to lapse, can potentially encourage companies not to take Sebi norms seriously.”
He added that where firms find a rule uncomfortable to adhere to, they may be tempted to wait until the very last moment hoping that lack of adequate compliance will force the regulator to retreat.
Institute of Company Secretaries of India (ICSI) president Devendra V Deshpande said: “Institutional investors, proxy advisory firms, HNIs and other stakeholders look for transparency in terms of disclosure norms and good corporate governance. Better-governed organisations attract more investors. Companies, which have already adopted this regulation, may gain a better stakeholders’ perspective. Gradually others may also follow suit as the separation of role of CEO and chairperson is believed to enhance the overall governance culture of an organsiation.” He too, however, felt that the relaxation of the Sebi rule might help the companies ‘to plan for a smoother transition’ into stricter corporate governance regime.
Debashis Mitra, president of the Institute of Chartered Accountants of India (ICAI), was categorical. “Sebi’s intention behind the earlier rule was to implement global best practices and to avoid the concentration of power in the hands of one individual in the company. ICAI is also of the view that to ensure better corporate governance and to align with the global best practices, these two positions may be different as the chairperson shall be independent from the day to day functioning of the company as CEO has the executive responsibility for running the company’s business.”
According to CKG Nair, director at National Institute of Securities Markets, enhancing corporate governance standards is a continuous, multi-dimensional process involving modification of behaviour and practices. While splitting the top corporate positions was one measure to minimise concentration of power, Sebi has already implemented several steps to improve the composition of the boards of listed entities, like half the board members be independent directors, audit committee comprising independent directors and so on. Also, there are several other regulatory provisions on disclosures and codes of conduct, Nair noted.
According to him, mandated regulatory provisions and compulsory separation of positions could also be outwitted by the “alter ego” of companies by making just paper compliance. “Sebi’s proposal has generated a lot of discussion and greater awareness on the need for further strengthening corporate democracy. This in itself will bring in real changes.”
Shriram Subramanian, MD and founder of InGovern Research, a corporate governance advisory firm, said: “Sebi has again buckled to corporate pressure. The rationale behind the segregation of the roles was that too much power should not be concentrated in the hands of one individual in the Board as companies are getting larger. Sebi could have consulted industry before coming out with the regulation.”
Suhail Nathani, managing partner at Economic Laws Practice, said that though splitting the positions of chairman and MD is a desirable objective, the timing (of Sebi’s rule) was not right. “Given that most companies in India are helmed by promoters who are still active as wealth creators this was resisted by many. Best practices on governance from more mature markets are good to emulate, but several factors need to be considered while applying them in the Indian context.”
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, but withdrew the rule on Tuesday.
Financial Express is now on Telegram. 
