Sebi should have opted for a gradual approach
The Securities and Exchange Board of India’s (Sebi’s) decision to convert a mandate to separate the roles of the chairman and managing director/chief executive officer (MD/CEO) in the top 500 listed corporations by market capitalisation into a voluntary exercise defies logic. The mandate was one key recommendation by a Sebi committee on corporate governance, in 2017. The idea was that separation of power between the chairman and MD/CEO will enable better governance structure and provide more effective supervision of the management. This would have helped protect the interest of all stakeholders. Following this, Sebi amended listing regulations in 2018, stipulating that the chairman’s post must be a non-executive one and the chairman and MD must not be related. The original deadline for these changes was April 1, 2020. But by December 2020, it was found that just 53 per cent of companies had made the transition, prompting a postponement to April 1, 2022. With this latest relaxation, Sebi seems to have overlooked the fact that corporations have had ample time to make these changes in corporate governance structures that would have aligned India to global best practices. There can be little doubt that low compliance levels were the result of the manifest reluctance of corporate India’ giant family-owned and -managed groups to alter governing templates that could potentially weaken an owner’s control.
The market regulator’s reason for this unusual relaxation — low compliance levels — is untenable. For one, it makes those companies that have chosen to comply with the new provisions look like dupes. As it is, some 150 companies that continue to have CMDs will enjoy an unfair reprieve, among them Reliance Industries, India’s largest company by market capitalisation, Adani Ports, India’s largest private port operator, and JSW Steel, the country’s second largest private steel producer. For another, this change has set an uncomfortable precedent by raising the possibility of reversing every regulation that companies do not like or decline to follow (in fact, the switch to a “recommendatory” regime came from industry lobbies). The requirement for appointing women on corporate boards, for instance, has been observed in the breach for many years principally because corporations are reluctant to comply. This provision, too, could become voluntary.
One good reason for the failure to enforce this provision is that Sebi did not evaluate all aspects of the issue first. Given the preponderance of family-owned corporations in India and the criticality of this step in corporate governance reform, the regulator should have anticipated owners’ deep-seated reluctance to relinquish a key position in the company and create another power centre. Some punitive measures for non-compliance would have been in order. Things may well have progressed, too, if Sebi had not insisted that the chairman and MD not be related, which was not a requirement in the committee’s recommendations. Though Sebi’s stipulation was unexceptionable in principle, it should have recognised that owners tend to leverage the MD’s position as grooming ground for family successors. A more adroit move would have been to have introduced the relative clause at a later date once the initial separation of posts was complete. In an environment freighted with vested interest, gradual reform works better.