Top family led companies breathe easy as SEBI drops mandatory splitting of CMD post

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In a relief to a number of top companies especially family owned businesses, the board of SEBI Board has decided to make the splitting of Chairman and MD position as a voluntary move and will not be a mandatory stipulation.

A SEBI board meeting held on Tuesday decided that 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 and instead be made applicable to the listed entities on a “voluntary basis”.

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 per cent amongst the top 500 Listed Companies as on September 2019, has progressed to only 54 per cent as on December 31, 2021.

Thus there has been barely a 4 per cent incremental improvement in compliance by the top 500 listed companies over the last two years, hence, expecting the remaining about 46 per cent of the top 500 listed companies to comply with these norms by the target date would be a tall order, SEBI board said.

Meanwhile, 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.

Considering that the companies may need more time to prepare themselves for the transition and various other difficulties highlighted by the industry representatives, the deadline for compliance was extended by two years in January 2020. The provision for mandating separation of the role of Chairperson and MD/CEO of listed companies was to be applicable from April 1, 2022 for top 500 Companies.

SEBI had set up a committee on Corporate Governance in June 2017 under the Chairmanship of Uday Kotak (Kotak Committee) with a view to seeking recommendations to further enhance the Corporate Governance norms for the listed companies.

One of the recommendations of the Committee was related to the separation of the role of Chairperson and MD/CEO of listed companies. The main rationale for the recommendation was that separation of powers of the Chairperson and MD/CEO may provide a better and more balanced governance structure by enabling more effective and objective supervision of the management. The SEBI Board, in its meeting of March 2018, had considered and approved the proposals including the one relating to separation of the role of Chairperson and MD/CEO of listed companies.

In pursuance of SEBI Board’s approval, vide SEBI (LODR) were amended in May 2018 mandating, with effect from April 1, 2020, top 500 listed entities to ensure that the Chairperson of the board shall – a. be a non-executive director; b. not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013.

Arun Chawla, Director General, FICCI said the SEBI’s move addresses the concerns of industry especially India’s invaluable family businesses.

He further elaborated that the leadership arrangements that would drive business excellence are best left to the judgement of the shareholders. Indian companies take pride in their superior governance practices and are constantly raising the bar. The Indian Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations have continuously evolved over the past years and kept pace with global practices in many respects, propelling Indian governance standards amongst the world’s best.

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