The market regulator on Tuesday decided to implement the requirement to separate the positions of Chairperson and Managing Director at listed companies on a voluntary basis and not make it mandatory for now. The Uday Kotak committee on corporate governance had recommended that there should be separation roles in listed companies.
Market watchdog Sebi's move to make separation of Chairperson and MD/CEO roles “voluntary” a setback for governance, government-formed corporate governance panel sources told CNBC-TV18 on Wednesday.
Recommended ArticlesView All
Pakistan Economic Crisis | What happens if the country defaults on its debt
Feb 8, 2023 IST5 Min(s) Read
View | Democratising digital markets, the ONDC way
Feb 8, 2023 IST6 Min(s) Read
Worldview | State of the Union Address — Biden knows how to aim the sling
Feb 8, 2023 IST6 Min(s) Read
Considering buying an SUV? Factor in the waiting period
Feb 8, 2023 IST3 Min(s) Read
The market regulator on Tuesday decided to implement the requirement to separate the positions of Chairperson and Managing Director at listed companies on a voluntary basis and not make it mandatory for now. The development also comes against the backdrop of Finance Minister Nirmala Sitharaman recently saying the regulator should hear if Indian companies have a view on the matter even as she made it clear that she was not giving a diktat.
Earlier, companies opposed after Sebi decided that Chairperson and MD/CEO not be 'related'.
Most companies were comfortable with the separation of posts, as long as there was no restriction on chairperson and MD/CEO being “related”.
The Uday Kotak committee on corporate governance had recommended that there should be separation roles in listed companies. The rationale was that separation of powers of the chairperson and MD/CEO would provide a better and more balanced governance structure by enabling more effective and objective supervision of the management.
Sebi had approved Kotak Committee's proposal in March 2018 board meeting. The top-500 listed entities were required to split the roles of Chairperson and Managing Director/Chief Executive Officer before the April 2022 deadline.
Only 54 percent of top 500 listed companies were compliant with rule as of December 31, 2021. Earlier, industry bodies and corporates made representations expressing challenges in compliance.
"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 added.
As the revised deadline for compliance is less than two months away, Sebi said that on a review it is seen that the compliance level, which stood at 50.4 per cent amongst the top 500 listed companies as on September 2019 has progressed to only 54 percent as on December 31, 2021. Thus, there has been barely a four 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, it added.
Sebi also noted that it continues to receive representations from industry bodies and corporates expressing various compelling reasons, difficulties and challenges for not being able to comply with this regulatory mandate. Santosh Kumar, partner at Deloitte India, said that despite the four-year period given by the regulators for India Inc to transition, the pace of implementation has been very slow, with the needle moving only four per cent over the last two years.
While Sebi has relaxed the mandatory condition and it continues to be a voluntary provision, Kumar said India Inc should make earnest efforts and consider the segregation of the chair and CEO roles to elevate the levels of corporate governance. "The case for separating the chair and CEO role is to eliminate conflicts and provide a more balanced governance structure," he said.
"Separation of these roles seeks to increase the effectiveness of the board and reduce concentration of authority in a single individual," he added. Many companies have the post of CMD (chairman-cum-managing director), leading to some overlapping of the board and management, which could lead to conflict of interest. Against this backdrop, Sebi, in May 2018, came out with the norms to split the post.
The norms were part of the series of recommendations given by the Sebi-appointed Uday Kotak committee on corporate governance. The main rationale for the recommendation was that separation of powers of the Chairperson and MD/CEO may provide a better and more balanced governance structure by enabling more effective and objective supervision of the management.
Globally also, this is a keenly debated aspect of governance, with countries like UK and Australia tilting in favour of separation of the Chairperson and CEO roles and Germany and Netherlands going a step ahead to adopt a 2-tier Board structure, separating the roles of board and management. In April last year, Sebi chairman Ajay Tyagi had asked listed companies to work towards splitting the roles of Chairman and MD before the April 2022 deadline, as the new directive was not aimed at weakening the position of promoters.
According to him, the idea for such a separation was not to weaken the position of promoters, but to improve corporate governance. On Tuesday, Sebi board also approved amendments to AIF (Alternative Investment Funds) rules and decided to align the regulatory framework for security cover', disclosure of credit ratings and due diligence certificate.
The regulator has decided to provide flexibility to Category III AIFs to calculate the investment concentration norm based either on investable funds or net asset value of the fund while investing in listed equity of an investee company. This will be subject to certain conditions. To align the regulatory framework for security cover', disclosure of credit ratings and due diligence certificate, the board has approved amendments to Debenture Trustee rules, norms pertaining to issue and listing of non-convertible securities and LODR (Listing Obligations and Disclosure Requirements) Regulation.
-With agency inputs
First Published: Feb 16, 2022 8:39 AM IST
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!