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Sources from the government’s Corporate Governance Committee said that the Securities and Exchange Board of India (SEBI) move to make separation of chairperson role voluntary is “a setback for governance”, CNBC-TV18 reported on February 16.
According to sources, the step back came after “industry bodies and corporates made representations expressing challenges in compliance” and due to “unsatisfactory level of compliance”.
The representations made included constraints posed by the COVID-19 pandemic, they said. Revised deadline to comply with the rule was to end by March 2022, but only 54 percent of companies were compliant with the rule as of December 31.
CNBC-TV18 reported that most companies were comfortable with separating the posts as long as there was no restriction on the chairperson and MD/CEO being “related”.
What was the rule?
Separation of chairperson and MD/CEO roles in listed entities was proposed by the Uday Kotak-led Corporate Governance Committee. The recommendation was approved by the SEBI board in March 2018. 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.
SEBI had on February 15 made the separation of chairperson and managing director roles voluntary, after companies opposed the regulator’s mandate that the MD and CEO “may not be related”. The move comes after Finance Minister Nirmala Sitharaman recently suggesting that SEBI “hear if Indian companies have a view 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 on February 15.
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, after a two-year extension in January 2020.
“Considering a rather unsatisfactory level of compliance achieved so far, with respect to this corporate governance reform, the SEBI Board at this juncture, decided that this provision may not be retained as a mandatory requirement,” the regulator said in a press statement.
On a difficult path
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.
“Existing corporate governance framework is very strong and day-by-day enforcement is also becoming stronger. Hence, separation of MD and Chairman Posts was not a very burning issue. Making it voluntary reflects that government is reciprocating to changes suggested by Industry,” said Makarand Joshi, founding partner at MMJC and Associates.