Why Sebi is right on new rule separating corporate board chairperson, CEO roles

The rule is based on a report from a committee headed by banker Uday Kotak that was submitted four years ago. Promoter-led companies have had adequate time to prepare for the change but remain reluctant to separate operational responsibilities between family and professionals. They have petitioned Sebi again, demanding it reconsiders the need for such a rule. The Confederation of Indian Industry (CII), in submission to Sebi, has reiterated its opposition to the rule, calling it a case of “over-regulation", which, it argues, will act as an impediment to a conducive business environment.

Corporate governance experts, however, endorse Sebi’s rule. According to one analysis by Institutional Investor Advisory Services, the move will force promoter families to make early succession choices. The separation of roles at the top would enhance boards’ oversight of management. Another survey conducted by the Chartered Financial Analysts, or CFA Institute, in 2020 of its 3,200 members saw overwhelming support for Sebi’s rule.

The reason is simple. Indian corporate history is replete with incidents involving abuse of power to influence decisions by heads of the board. The collapse of Satyam, the fraud-bedevilled IT services company, in 2008 is a classic example. The company’s board had approved investments into real estate firms owned by Satyam’s promoters and their relatives, ignoring strong opposition from the minority investors.

Sebi's mandate and the raison d'ê tre of its new rule is to protect minority shareholder interests. In the Indian context, pension funds and other long-term institutional investors are the only voice that speaks—although not often enough—for minority shareholders in corporate boardrooms. Even these investors, while not exactly activist shareholders, usually go along with the preferred positions of the promoter shareholders, exerting their influence sparingly on critical corporate governance-related decisions like the board's composition, and the choice of independent directors, the CEOs and chairman titles and also the compensations for top-level executives.

It’s against this backdrop that the Uday Kotak Committee’s recommendation was that all listed companies with more than 40% public shareholding should separate the roles of chairperson and MD/CEO from 1 April 2020. Sebi accepted the recommendation for the top 500 listed entities by market capitalization instead of the ‘40% public shareholding’ suggestion. The board's chairperson of such listed entities would be a non-executive director not related to the managing director or the chief executive of the company. Sebi also extended the date for implementing that rule to April 2022.