Explained: Why SEBI made splitting CMD roles voluntary for listed companies

The Securities and Exchange Board of India (SEBI) has taken a step back on its earlier stance of having separate individuals for the post of chairpersons, managing directors and chief executive officers (CEOs), making it voluntary for listed companies to split the roles.

The capital markets regulator announced its decision at a board meeting this week. The meeting was also addressed by Finance Minister Nirmala Sitharaman from Delhi.

What exactly was the original SEBI decision?

In 2018, SEBI mandated listed firms to separate the role of CMD. It then provided a two-year extension to the initial roll-out date and allowed the companies to start the exercise from April 1, 2020. SEBI later gave another two-year extension till April 2022.

What was SEBI’s intention behind the rule?

SEBI's intention behind the rule was to implement global best practices in terms of corporate governance and to avoid the concentration of power in the hands of one individual in the company.

Its 2018 decision was based on recommendations put forth by a panel on corporate governance led by noted banker Uday Kotak in 2017 to create a more balanced governance structure for effective and objective supervision of the management.

So, did any company split the roles of chairman and managing director?

Yes, many companies did split the roles. In fact, in the past two years, some companies like Mahindra and Mahindra (M&M), Asian Paints, Sun Pharmaceuticals, and UltraTech Cement complied with the regulatory requirements.

However, many big companies such as Reliance Industries, Bharti Airtel, Bajaj Finance, Adani Ports, and JSW Steel are yet to comply.

Overall, about 54% companies managed to comply with the SEBI requirement in four years’ time.

Why did SEBI take an about-turn on its earlier decision?

It appears that SEBI's requirement faced reluctance from several heavyweight companies in India's listed universe. The major grievance has come from companies where the promoters have a significant role in the executive decision-making of the company.

SEBI said it did not find any incremental improvement in compliance of top 500 listed firms.

“There has been barely a 4% incremental improvement in compliance by the top 500 listed firms in the last two years. Hence, expecting the remaining about 46% to comply by the target date would be a tall order," SEBI said.

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What do the market observers say?

By and large, Indian industry welcomed the SEBI decision to make the split voluntary. Some executives also say it was the most practical outcome as not every company would have been able to separate the two roles.

“In Indian promoter-led companies, the posts of chairman and managing director have been interwoven," says Moin Ladha, partner at law firm Khaitan and Co. “This may work well in other jurisdictions and possibly facilitate better corporate governance, but given majority shareholding and control held by promoter families, the split can impact functioning of business and thereby create uncertainty about future value creation for shareholders.”

Makarand Joshi, founding partner at MMJC and Associates, says existing corporate governance framework is very strong and day by day enforcement is also becoming stronger. "Hence, separation of MD and chairman’s position was not a very burning issue. Making it voluntary reflects that the government is reciprocating to changes suggested by industry," he says.

However, JN Gupta, managing director of Stakeholders Empowerment Services, has a slightly different take. Gupta says that if the board leadership and the management leadership are vested in the hands of the same person, there is a risk of overlap and boundaries can get blurred.

“The move is achievable but not by all companies. Therefore, SEBI had to make it voluntary," he says.

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