What lessons can Sebi learn from its U-turn on splitting CMD role?

On 15th February 2022, the Securities and Exchange Board of India, or Sebi, made it voluntary for India Inc to separate the post of chairperson from that of the managing director or chief executive officer.

Sebi’s U-turn came weeks ahead of the 1st April 2022 deadline, by which time the top 500 listed firms by market value had been mandated to install two separate, and unrelated, persons as chairman and MD or CEO.

According to Primeinfobase, Sebi’s reprieve will benefit over 150 companies that have the same individual as chairperson and MD or CEO at present.

In its editorial, Business Standard has said that Sebi’s decision to convert the mandate into a voluntary exercise defied logic. One has to unpack the details of the whole affair to understand why such an assessment was made.  

First, a brief timeline.

The mandate was one of the key recommendations by a Sebi committee on corporate governance in 2017. Subsequently, Sebi amended listing regulations in 2018 and stipulated that the chairman’s post must be a non-executive one and, additionally, the chairman and MD must not be related.

The original deadline for complying with this mandate was 1st April 2020. However, by December 2020, only 53% of companies had made the transition. This prompted a postponement to 1st April 2022.  

India Inc showed reluctance in complying with this governance requirement despite the fact that the rule was initially proposed five years ago and approved by Sebi four years ago.

Given the timeframe involved, the market regulator’s reason for this relaxation, which is the low compliance levels by the companies, is untenable. Clearly, the corporations concerned had ample time to make these changes, which is a fact that Sebi seems to have overlooked.

Secondly, we must understand the logic behind splitting the CMD position. Globally, keeping the two offices separate is seen as a key corporate governance requirement. This is because while the chairman of a company is the head of the board, the company’s MD is in-charge of daily operations and has to report to the said board.

Keeping the two offices separate will enable effective supervision of the management and reduce excessive concentration of authority in a single individual.

By splitting these roles, a company can not only secure its own interests and those of its shareholders, but also of the CMD themselves because it embeds clarity with regard to responsibility and accountability across the whole organisation.

At the end of the day, corporate India’ giant family-owned and managed groups seem to have won. The whole affair saw hectic lobbying by industry groups.

In fact, in 2020, many companies had approached the Prime Minister’s Office seeking a review of the regulation. Some of them had even pitched for doing away with the requirement altogether.

There is a lesson for Sebi in all of this. It should have opted for a gradual approach to reforms. Apart from introducing some punitive measures, the market regulator should not have asked the companies to appoint chairman and MD who are not related. The latter was not a requirement in the 2017 committee’s recommendations. Sebi should have been cognizant of the fact that in India, the company’s owners tend to leverage the MD’s position as a grooming ground for family successors.

In trying to get both the provisions through at the same time, Sebi ended up making the perfect the enemy of the good. Instead, Sebi could have introduced the relative clause at a later date, after the initial separation of posts was complete.