The audited annual reports of India’s top 500 listed companies by market capitalisation for FY19 reveal 139 directors who hold the executive post of chairman and managing director (CMD). All of them had time till April 1, 2020 to comply with the order of market regulator Securities and Exchange Board of India (SEBI) to split the role. Given that the data is of FY19, some may have retired and some may have complied.

But it turns out about half of them have not complied. Notable names include Mukesh Ambani of Reliance Industries, Sajjan Jindal JSW Energy and JSW Steel, Venu Srinivasan of TVS Motor Company, and Gautam Hari Singhania of Raymond. Now they have time till April 1, 2022, to comply with the SEBI order with the regulator extending the deadline by two years.

The first order was based on a recommendation titled ‘Separation of the Roles of Non-executive Chairperson and Managing Director/CEO’ by a committee on corporate governance chaired by Uday Kotak, vice-chairman and managing director of Kotak Mahindra published in early October 2017.

The Uday Kotak committee report noted that corporate democracy is built into the interconnected arrangement between the board, the shareholders, and the management, where the board supervises the management and reports to the shareholders. “The issue of whether to separate the roles of the chairperson and the CEO/MD, while not a recent phenomenon, is a growing concern in corporate governance worldwide,” the report said. “The separation of powers of the chairperson (i.e. the leader of the board) and CEO/MD (i.e. the leader of the management) is seen to provide a better and more balanced governance structure by enabling better and more effective supervision of the management,” the report added.

This in the committee’s view could be achieved by providing a structural advantage for the board to act independently, reducing excessive concentration of authority in a single individual, clarifying the respective roles of the chairperson and the CEO/MD, ensuring that board tasks are not neglected by a combined chairperson CEO/MD due to lack of time, increasing the possibility that the chairperson and CEO/MD posts will be assumed by individuals possessing the skills and experience appropriate for those positions, and creating a board environment that is more egalitarian and conducive to debate.

Following deliberations, the committee then believed that the time was right in India to introduce a separation of the roles for listed entities. The committee had observed that such separation, at least at the stage of introduction of the construct, may be more relevant where public shareholders constitute a large portion of the shareholding of a company.

And, in this regard, the committee had considered various thresholds and concluded at least 40% of public shareholding would be an appropriate threshold. “Further, in view of the fact that this would require a significant transition from the existing requirements, the Committee believes that listed entities should be given sufficient time to undertake such a transition,” the committee had noted. Hence, it had recommended that listed entities with more than 40% public shareholding should separate the roles of Chairperson and MD/CEO with effect from April 1, 2020, and after 2020, SEBI could examine extending the requirement to all listed entities with effect from April 1, 2022.

Now, SEBI, in an official gazette notification amending the “listing obligations and disclosure requirements” or LODR, dated January 10, 2020, notified that with effect from April 1, 2022, the top 500 listed entities will ensure that the Chairperson of the board of such listed entity shall be a non-executive director, and not be related to the managing director (MD) or the chief executive officer (CEO) as per the definition of the term “relative” defined under the Companies Act, 2013.

While there was no explanation provided by SEBI for postponing the compliance date by two years, but the rationale was the lack of preparation of India Inc. That corporates had approached the market regulator with a request to alter the deadline is amplified by the fact that the Federation of Indian Chambers of Commerce and Industry (FICCI), on Monday, welcomed SEBI’s decision to extend the deadline. Indian Express quoted FICCI president Sangita Reddy as saying: “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.”

India Inc. heavyweights would be breathing a sigh of relief for the two-year extension, which they can use to plan the transition and succession, especially in family-owned companies where traditionally a family member receives the mantle of leadership from the incumbent.

Venu Srinivasan

CMD role split: India Inc. breathes a sigh of relief