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SEBI makes separation of chairperson and MD, CEO roles voluntary

The decision was taken at a board meeting of the market regulator. The tweaked rule will now fully come into force from April 1, 2022 after multiple delays.

February 15, 2022 / 05:29 PM IST
Representative image

Representative image

Market regulator Securities and Exchange Board of India (SEBI) on February 15 changed the requirement for listed companies to separate posts of chairperson and managing director (MD) or chief executive officer (CEO) to voluntary from mandatory.

The decision was taken at a board meeting of the regulator. The tweaked rule will now fully come into force from April 1, 2022 after multiple delays.

Earlier, the top 500 listed companies by market capitalisation had to mandatorily separate the role of the chairperson and MD/CEO from April this year following the two-year extension given by the capital market regulator in January 2020. The rule was first approved by SEBI's board in 2018.

The market regulator's decision comes nearly a year after SEBI Chairman Ajay Tyagi had urged companies at a Confederation of Indian Industry (CII) event to comply with the proposed new rule before the April 2022 deadline.

SEBI's intention behind the rule was to implement global best practices in terms of corporate governance and to avoid the concentration of power in the hands of one individual in the company.

“The objective is to provide a better and more balanced governance structure by enabling more effective supervision of the management. Separation of the roles will reduce the excessive concentration of authority in a single individual,” Tyagi had said at the CII event, according to a Business Standard report at the time.

According to SEBI, only 54 percent of the top 500 companies have so far complied with its rule. "Considering a rather unsatisfactory level of compliance achieved so far, with respect to this corporate governance reform, SEBI Board at this juncture, decided that this provision may not be retained as a mandatory requirement," the SEBI said in a press statement.

Since the time the market regulator had proposed the new rule in 2018, it has faced reluctance from several heavyweight companies in India's listed universe. The major grievance has come from companies where the promoters have a significant role in the executive decision-making of the company.

"SEBI 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," SEBI said.

On February 5, Finance Minister Nirmala Sitharaman commented that the regulator should listen to the view of the Indian companies on the matter. "...I do agree that the way Indian companies are run and built over the decade and over century also depends so much on the family and related members being on the board," Sitharaman had said.

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SEBI's decision to mandate a separation of the chairperson and MD/CEO roles followed the recommendation of Uday Kotak-led panel on corporate governance in 2017 to separate the two roles to create a more balanced governance structure for effective and objective supervision of the management.

"Existing corporate governance framework is very strong and day by day enforcement is also becoming stronger," said Makarand Joshi, founding partner at MMJC and Associates.

"Hence, separation of MD and Chairman position was not a very burning issue. Making it voluntary reflects that government is reciprocating to changes suggested by Industry," Joshi said.

Moneycontrol News
first published: Feb 15, 2022 04:05 pm