Splitting of top roles deadline postponed, provides resurgence to India Inc.

A surge of relief washed over India Inc. as the Markets regulator Security Exchange Board of India (SEBI) deferred by two years to April 2022 (through a gazette notification published on January 13, 2020) its directive for listed companies to split the roles of chairman and managing director in view of demand from corporates, and to keep compliance obligation lower in the wake of the current economic scenario.

The SEBI committee led by Uday Kotak was set up in June 2017 to review corporate governance, proposed the recommendation on splitting the role of chairman and managing director and chief executive officers with more than 40% public shareholding initially and subsequently, extending the requirement to all listed entities, and was resolutely supported from corporate governance experts, lawyers, company secretaries and market participants.

SEBI accepted the recommendations and went further on some aspects, saying that separation of the two roles would be necessary to ensure high standards of corporate governance and were aimed at improving corporate governance structure of listed companies. It was in May 2018, Regulation 17 of the Listing Regulations of 2015 was amended by SEBI by inserting a new clause, 1B which stated that the Top 500 listed entities by market capitalization were mandated to comply with the requirement of separation of the roles of chairperson and managing director or chief executive officer with effect from April 1, 2020.

Majority India Inc. did not come to an understanding with SEBI on this recommendation. SEBI has been receiving various representations with respect to the regulatory requirements including from industry bodies like Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industry (CII). The representations highlighted the present levels of unpreparedness of listed entities to comply with the directive. Data from stock exchanges reveal that presently, only around 50 per cent of the top 500 listed entities are in compliance with the regulatory provision.

Currently, many companies have merged the two posts as CMD (chairman-cum-managing director), leading to some coinciding of the board and management, which could lead to conflict of interest and consequently the regulator in May 2018 came out with its norms to split the post. A large number of big companies including Reliance Industries, BPCL, ONGC, Coal India, Wipro and HeroMotoCorp have a single person holding the twin post of chairman and managing director. According to data compiled by nseinfobase.com, the chairperson has an executive role in 213 companies, while the chairman is also MD or CEO in 161 of them, including RIL, Hindustan Unilever, ONGC, Coal India, NTPC, Bharat Petroleum Corp and Power Grid Corp. The chairman is related to either the MD or CEO in 79 companies, including Bajaj Finserv, Bajaj Auto, Adani Port, Shree Cement, UPL and Lupin.

Seemingly, a number of promoters and companies expressed discomfort with the requirement that the chairperson had to be a Non-Executive Director, as being told to significantly thin out their role in the businesses they built, by assuming non-executive positions of oversight, walloped many as unduly harsh. Added to this woe was the requirement to have an MD/CEO who was not a relative. The FICCI body’s President Sangita Reddy said, “This was part of multiple representations made by FICCI and we appreciate that SEBI has extended the deadline as managerial continuity, unified vision and speed of execution are crucial to business success and are facilitated in family businesses.

The reason for the deferral has not clearly been outlined in SEBI’s notification, but it seems to have been pushed from above. The deferral issuing breathing space, the companies to plan concisely and commit their management focus and cogitate over the next two years to succession planning and its spillover effects on the same at the promoter family level before the rule come into effect on April 1, 2022.