SEBI Notifies Voluntary Norms to Split Chairperson, MD/CEO Posts

Posted by Written by Melissa Cyrill Reading Time: 3 minutes

India’s market regulator Securities and Exchange Board of India (SEBI) had previously made the split between Chairperson and MD/CEO positions at listed companies mandatory by April 1, 2020 and extended to April 1, 2022. It is now a voluntary requirement.

On February 15, market regulator SEBI announced that the decision to split the chairperson and managing director (MD) or chief executive officer (CEO) positions at the 500 top listed companies will not be mandated and will be a voluntary provision (see press release here).

Earlier, the deadline for this separation of posts was set at April 1, 2022, having already been extended from April 2020.  Only 54 percent of the companies had complied with this requirement as of December 2021, from 50.4 percent in September 2019.

In a statement SEBI said: “Owing to rather unsatisfactory level of compliance achieved so far, with respect to this corporate governance reform, (and) various representations received, (as well as) 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’.”

It must be noted that 300 of the top 500 listed Indian companies are family-owned enterprises.

Background

The market regulator had previously amended the SEBI (Listing Obligations and Disclosure Requirements (LODR)) Regulations, 2015 (hereafter, LODR Regulations) based on the recommendations of the 2017 Uday Kotak Committee on Corporate Governance.

The recommendation to separate the powers of the chairperson and MD/ CEO was to enable transparent, effective, and objective supervision of the management. The amendment had also stated that the chairperson and MD/CEO must not be related to each other and that the position of the chairperson be held by a non-executive member.

The Companies Act, 2013 defines relatives with 24 categories. These include members of Hindu Undivided Family, husband-wife, father, mother (including stepmother), son (including stepson), son’s wife, daughter (including stepdaughter), father’s father, father’s mother, mother’s mother, mother’s father, son’s son, son’s son’s wife, son’s daughter, son’s daughter’s husband, daughter’s husband, daughter’s son, daughter’s son’s wife, daughter’s daughter, daughter’s daughter’s husband, brother (including stepbrother), brother’s wife, sister (including stepsister) and sister’s husband.

International practice

Globally, many countries like the UK, large parts of Europe, Japan, Australia, and South Africa, etc. support the practice of separating the two roles. However, the US and France are among countries that continue to contest it. In Europe, more than 90 percent of the Financial Times Stock Exchange (FTSE) 100 companies have distinct roles defined. The US, too, has also witnessed an increasing trend of organizations favoring this split. Germany and Netherlands have a two-tier board structure that separates the roles of the board and management.

Corporate governance provisions in the LODR Regulations and Companies Act, 2013

The SEBI LODR Regulations, 2015 was last amended on March 22, 2022. According to the LODR Regulations, a listed firm can designate distinct individuals to the positions of chairperson and MD/CEO, thereby not making the clause mandatory.

Further, clause 49 of the SEBI Listing Agreement states that entities that seek to be listed require corporate governance standards where the chairperson of the board is a non-executive director, at least one-third of the board is comprised of independent directors, and at least half of the board is comprised of independent directors if the chairperson is an executive director.

Meanwhile, the Companies Act, 2013 prohibits a person from being simultaneously appointed or reappointed as both the chairperson and MD/CEO of a business – at listed companies and public companies with a paid-up share capital of INR 100 million or more. This obligation may be waived if one of the following conditions is met:

  • The company’s articles stipulate otherwise; or
  • The business does not engage in many lines of business; or
  • If public enterprises with a paid-up capital of at least INR 1 billion and annual revenue of at least INR 10 billion are involved in numerous businesses and have nominated a CEO for each of those businesses.

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