Earlier this week, the Securities and Exchange Board of India (SEBI), changed its earlier stand that required the top 500 listed companies to separate the roles of Chairperson and MD/CEO (SEBI has defined ‘top 500 entities’ as those determined on the basis of market capitalisation, as at the end of the immediate previous financial year). With wordsmithing, this requirement has been diluted or even washed out by changing the term from “mandatory” to “voluntary”.
The norms were a part of the series of recommendations given by the SEBI-appointed Uday Kotak committee on corporate governance in the year 2017. The top 500 listed entities were required to separate the roles of chairperson and MD/CEO from 1 April 2020 onwards. However, based on industry representations, an additional time period of two years
(until 1 April 2022) was given for compliance. According to the SEBI Chairman’s then public statement on this subject, the “separation of the roles will reduce excessive concentration of authority in a single individual.”
The SEBI’s media release stated that “As the revised deadline is less than two months away, on a review of the compliance status, it is seen that the compliance level, which stood at 50.4 percent amongst the top 500 Listed Companies as on September 2019, has progressed to only 54 percent as on December 31, 2021. Thus, there has been barely a 4 percent incremental improvement in compliance by the top 500 companies over the last two years, hence, expecting the remaining about 46 percent of the top 500 listed companies to comply with these norms by the target date would be a tall order
According to the SEBI Chairman’s then public statement on this subject, the “separation of the roles will reduce excessive concentration of authority in a single individual.”
SEBI further added that the “… SEBI Board at this juncture, decided that this provision may not be retained as a mandatory requirement and instead be made applicable to the listed entities on a “voluntary basis
In fact, the hectic industry lobbying
to get this regulation revised, had gone to the extent of describing the regulatory decision to bring in better governance as “regulatory overreach”! It is surprising that the regulator did not see merit in firmly addressing such tone of opposition used by the industry lobby. This is despite having given a long timeline for corporate India to recruit leadership talent to meet the regulations. For a nation that boasts of exporting leadership talent abroad, we seem woefully short of talent for the initial cohort of top 500 listed firms.
It is noteworthy to observe that the 300 of the top 500 companies in India are family businesses
. The industry lobbying has been based on one of the premise that these promoter-executives are responsible for the scale and success of their organisations, and that they have their wealth (in form of equity stakes) invested in their listed organisations. Many of these companies have the role of combined ‘Chairman and Managing Director’. This dual-role-for-single-individual carries the overlapping responsibilities of board governance as well as daily business management; this in turn could lead to conflict of interests at times.
In May 2018, to address this dual-role risk, SEBI amended
its ‘Listing Obligations and Disclosure Requirements’—known popularly as LODR. With this amendment, it required the top 500 listed entities to ensure that the Chairperson of the Board shall be a Non-Executive Director and not related to the Managing Director or the Chief Executive Officer of the entity.
Questions around the true independence of such regulatory bodies emerge, if they are forced to change their policy stance and deadlines merely because the sectoral participants want it to be changed!
Often, market analysts and investors have genuine concerns about weak corporate governance that range from related party transactions to concentration of power and executive authority in promoter-executives. The contemporary investors also have sought establishment of diversity programmes as well as transparently laid down whistle-blower policies.
In addition, the governance style has to reflect the current modern capital market’s needs
. Over the past few years, SEBI has been bringing in tighter regulations aimed to boost the corporate governance standards, including those to address the conduct of related-party transactions
The splitting of the posts is a critical push in nudging the reluctant. However, this dilution of the regulatory push in strengthening corporate governance is putting a damper on India’s ESG journey, especially when we want to attract sufficient foreign capital into the Indian markets.
Is this giving way to industry lobbying a sign of independence of regulators? Questions around the true independence of such regulatory bodies emerge, if they are forced to change their policy stance and deadlines merely because the sectoral participants want it to be changed!
Is it a sign of giving in to corporate India pushback on corporate governance reforms, in lieu of getting them to increasing their investments in developing the economy?
Is it a measure of influence of business families in securing policy framework that they need to maintain their wealth, even at the cost of having almost unbridled power in the public-listed entities that they run? Allowing such concessions is similar to a student asking the education board to shift the exam date, just because the student is unprepared!
If the regulator keeps undermining the importance of a timeline based regulations by constantly shifting their own deadlines, their authority gets undermined. The larger question that begets attention is the intent of the regulator—do they want such firmer regulations in place or is it mere posturing about regulatory developments?
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