Splitting Posts of Chairman and MD/CEO Now Voluntary: SEBI

UPDATE: SEBI made the separation of MD/CEO roles voluntary given “unsatisfactory level of compliance” as of February 2022. There was barely four percent incremental improvement in compliance among the top 500 listed companies in India over the last two years, as noted by SEBI.

Based on the recommendations of the Uday Kotak Committee on Corporate Governance, the Securities and Exchange Board of India (SEBI) amended the SEBI (Listing Obligations and Disclosure Requirements (LODR)) Regulations, 2015. The amendment had split the positions of the chairman and managing director (MD) or chief executive officer (CEO). Additionally, the chairman and MD/CEO must not be related to each other. At the same time, the amendment required that the position of chairman be held by a non-executive member. This regulation was to be applicable to the top 500 listed entities by market capitalization and effective from April 1, 2022.

India’s private sector had requested the deferment of this rule by another two years. It also demanded that this provision be made recommendatory, in case their deferment request is not accepted. Ultimately, SEBI decided to make the rule voluntary.

What is the legal position of this separation provision?

Section 203 of the Companies Act, 2013 provides that an individual shall not be appointed as the chairperson of a company as well as the MD/CEO at the same time unless the articles of such company provide otherwise or the company does not undertake multiple businesses. The Organization for Economic Co-operation and Development (OECD) also recommends that the two posts should be separated as a good corporate governance practice.

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In 2017, the Kotak Committee on Corporate Governance made a similar recommendation to SEBI to amend provisions under its LODR Regulations. Complying with the suggestion, SEBI issued a notification in May 2018 introducing specific norms to split the post with effect from April 1, 2020.

However, by the end of December 2020, only 53 percent of the top 500 listed entities had complied with this provision. Therefore, responding to industry demand, this requirement was deferred for another two years, to April 1, 2022, to give ample time for compliance – to little avail.

As of December 31, 2021, only 54 percent of the top 500 listed companies in India were in compliance of the MD/CEO split – a marginal increase from 50.4 percent in September 2019.

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.” – SEBI Press Release

Why does SEBI want to separate the role of chairman and MD/CEO?

The rationale behind the move to separate the roles of chairman and MD/CEO is to improve corporate governance. Currently, there are many companies that have merged the two posts as CMD (chairman-cum-managing director), leading to an overlap of the board and management, and giving rise to conflict of interests.

The idea behind this separation is to provide a better and more balanced governance structure by enabling more effective supervision of the company’s management by reducing excessive concentration of authority in a single individual. SEBI has clarified that this provision does not aim to weaken the position of promoters.

International practice

Globally, too, many countries like the UK, large parts of Europe, Japan, Australia, and South Africa, etc. support the practice of separating the two roles. However, some countries like the US and France continue to contest it. In Europe, more than 90 percent of the Financial Times Stock Exchange (FTSE) 100 companies have distinct roles defined. The US, too, has also witnessed an increasing trend of organizations favoring this split. Germany and Netherlands have a two-tier board structure that separates the roles of the board and management.

Where does corporate India stand on this provision?

The Confederation of Indian Industry (CII), in its recent letter to SEBI, has reiterated its opposition to this amendment, citing concerns of over-regulation. Various industry stakeholders have expressed apprehensions that such a move might weaken entrepreneurial spirit and hamper the business environment of the country. They have also requested SEBI to scrap the requirement of having the chairman be a non-executive member.

Family businesses among entities most impacted by SEBI’s proposed MD/chairman split

It must be noted that the companies most impacted by the proposed split are family-run businesses. Making such a move mandatory would affect succession planning in India as the MD’s position is often a preparatory one for the next generation family member before the person becomes the chairman. Certain public sector undertakings (PSUs) are also likely to be impacted with this amended provision.

Many business entities too have shown reservations against this provision, as reported in The Economic Times. According to Bajaj Finserv chairman and MD, Sanjiv Bajaj, these new guidelines will weaken India’s competitiveness, especially during the pandemic. Bajaj stated that most businesses in India are family owned, where knowledge and experience is passed from one generation to another. On the other hand, Apollo Hospitals joint MD, Sangita Reddy, opined that such a move can act as counterbalance where independent directors will be more inclined towards choosing the best candidate, much in line with the company promoter’s interest.

This article was first published on January 20, 2022. It was last updated in December 2022.

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