Industry to Sebi: Defer Rule that Bars Chairman, MD from Being Related ‘Over- regulation may Weaken Entrepreneurial Spirit’

Corporate India has renewed its demand that the Securities and Exchange Board of India (Sebi) stay the implementation of the provision that makes it mandatory for the chairman and managing director of a large listed company to not related to each other. It has asked the capital markets regulator to come into force from April 1 this year, ‘recommendatory’ or defer its implementation by another two years.

This provision is part of the rules relating to the splitting of the post of chairman and managing director (MD) and separation of their roles in India’s top 500 companies by market capitalisation, having identifiable promoters. This guideline was the come into effect from April,2020 but was subsequently deferred for the two years, following protest from industry.

In a recent letter to Sebi, industry body Confederation of India Industry (CII) has reiterated its opposition to this amendment, and said this would lead to over-regulation, while acting as an impediment to a conducive business environment.

Over-regulation may weaken entrepreneurial spirit which is a key factor for stimulating wealth and so important in the existing crisis facing the economy due to the pandemic,” CII president and Tata Steel MD TV Narendran told ET. “In light of checks and balances already present in the current laws to country any potential ill-effects of such a situation, it is important that India entrepreneurs are not placed at a disadvantage by imposing such requirement.”

The industry body has also asked Sebi not to insist that the chairman of the board be a non-executive director.

“Since the compliance data is approaching soon, it is requested to kindly defer the implementation of the provision relating to the MD&CEO and that the chairperson should be a non-executive director, by two years; if not withdraw altogether, or the requirements may be recommendatory and not mandatory, as requested earlier, therefore, a clarification in this regard may be issued soon,” CII said in its submission to Sebi last month.

The companies most impacted by the proposed rules regarding separation of role of chairman and MD are family-run businesses and to a lesser extent PSUs which combine the role of chairman and MD.

Business leaders expressed their opposition to these norms to ET.

Bajaj Finserv chairman & MD Sanjiv Bajaj said in India, majority of businesses are family owned, where knowledge and experience is passed from one generation to another. “Chairman and directors are expected to undertake greater responsibility and that’s in conflict with mandating a non-executive role for chairman. These guidelines taken together are not even there in any significant country and we will weaken our competitiveness, especially at a time when the pandemic is on,” he said.

“It takes years to groom a successor and in a family owned/managed company, it is often a family member who has been mentored by an elder. In listed entities, independent directors will act as a counterbalance to ensure the best candidate is chosen. However, promotor interest is also aligned to picking the most suitable candidate,” said Apollo Hospitals joint MD Sangita Reddy.

An email query sent to Sebi asking for a comment on CII’s letter did not elicit any response till press time. Sebi chairman Ajay Tyagi had recently said that enough time has been given to industry to meet these guidelines. “I can only make an appeal to the industry to follow it,” Tyagi had said.

The capital market regulator had proposed the separation of the role of chairman and MD mainly to strengthen corporate governance by management to the board.

CII has also submitted to Sebi that these amendments go beyond the recommendation of the Uday Kotak committee, by not only mandating that the chairperson be a non-executive director, but by also requiring that the person should not be related to the MD and CEO. This requirement is not mandatory even in advanced economies such as the US, UK and France. It places India businesses at a disadvantage when compared with foreign corporations, the industry body said. The new requirement would affect succession planning as the MD’s position is often a preparatory one for the next generation family member before the person becomes the chairman, it said.

Tyagi had last year dismissed the suggestion that the chairman and MD be allowed to be related to each other.

“One can understand the argument that it should not be made mandatory but to suggest that both the persons can be related to each other is not acceptable. If they (MD and chairman) are related, then what is the relevance of separating them.” he had said last September.

According to Prime Database, out of the 485 large listed companies that must comply with the regulation regarding the role of chairman and MD, 240 are non-compliant with the proposed guidelines.

“Nearly half the companies are yet to meet the requirement with just a couple of months to go despite having four years to comply. This reminds me of the time when the woman director requirement had first come in. companies kept on hoping for an extension. When no extension was given, you saw a flurry of appointment taking place in the last week of March. You might see something similar this time around as well. Last –minute appointments, of course, can only help in fulfilling the letter of the regulation, not the spirit,” said Prime Database MD Pranav Haldea.

“It seems like most companies are waiting for the last minute to effect the required change. There is also the chance that the change of guard at Sebi before March 31, 2022 could mean a change in thinking on this crucial requirement that many India companies, including notable promoter-driven companies, haven’t yet adhered to,” said InGovern Research founder & MD Shriram Subramanian.

IiAS, a corporate governance advisory firm, in a recent note said that only a handful of boards including Mahindra & Mahindra and Wipro have announced their plan to comply with the rule.

“Most others continue to remain silent, unnerving investors, who like clarify and predictability on these issues,” the firm said. S-ET

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