NEW DELHI :
The Securities and Exchange Board of India (Sebi) is considering three options to implement new rules on the separation of the roles of chairman and managing director. However, the final choice will depend on the next chief of the market regulator, said two people with direct knowledge of the matter.
Ajay Tyagi’s stint as Sebi chairman ends on 1 March and though he is up for an extension for two more years, the chairman and managing director (CMD) issue is likely to get a fresh twist if there is a new Sebi chief.
However, there is nothing yet to indicate that the new chief of the markets regulator, if at all there is one, will overturn the regulation. Also, even if there is a new chairman, the issue is unlikely to be first on the list of priorities. But even the slim prospect of a new chief adds some uncertainty to the mix.
One of the three options that Sebi is considering, amid a pushback from India Inc, is extending the deadline for top 100 companies according to market capitalization by one year and for top 500 companies by two years.
Sebi is also considering going back to the original Kotak committee recommendation, which had allowed the chairman to be related to the managing director.
The third option is to ensure that the promoter-driven companies have succession planning in place, the people cited above added on condition of anonymity.
“Sebi is against a complete roll-back, but is willing to tweak the norms to make it easier for companies to comply. These include giving an extension or allowing the chairperson and the managing director to be related. Sebi will make its decision public soon once a final call has been taken," said the one of the two people mentioned above.
Such a development would be a big relief for companies racing against the clock to comply with the Sebi directive effective 1 April 2020, which mandates that the chairperson of the top 500 companies need to be non-executive.
The bigger worry for promoter-driven businesses was the second directive that the chairperson cannot be related to the managing director or the chief executive officer (CEO). Sebi relies on the definition of a relative as given in the Companies Act, 2013. This would have effectively prevented sons, daughters and close relatives from taking over the management of the company when the family patriarch is chairman.
According to data compiled by Nseinfobase.com (run by Prime Database), of the top 500 companies, 162 have the same person as the chairperson, managing director and CEO. In another 52 companies, the chairperson and MD/CEO are related.
Only two big companies— Mahindra & Mahindra and Wipro Ltd—have yet moved to implement the guideline on the top posts.
Managements of many other large companies, including Reliance Industries Ltd and Bharti Airtel Ltd, are yet to make any moves towards restructuring to comply with Sebi rules.
In case the regulator does not extend the timeline for implementation, it could start penal proceedings against the companies, including restricting the roles of CMDs and monetary penalties, said the second of the two people quoted above.
The companies have been consulting with lawyers on how best to implement the Sebi directive, which is, in a way, a forced succession planning—something missing at times at promoter-run companies.
“Sebi’s thought process in mandating the separation of the roles of chairman and MD/CEO clearly recognizes that the board supervises the management and reports to the shareholders, and this separation provides a more balanced governance structure, which eliminated a potential conflict of interest if one person occupies both the CEO and chairman roles, especially for the larger promoter-led companies. While there is active global debate on this topic, India is one of the few jurisdictions that has mandated this, while many others haven’t with some others requiring specific disclosures on the board leadership structure and its appropriateness," said Sai Venkateshwaran, partner and head of CFO Advisory, KPMG in India.