In the year 2017, the Securities and Exchange Board of India (SEBI) constituted a committee under the chairmanship of Shri Uday Kotak, for making necessary recommendations to SEBI to improve the standards of corporate governance in the listed entities of India. While the Kotak Committee made a lot of recommendations to SEBI one major and important recommendation made was titled ‘Separation of the Roles of Non-executive Chairperson and Managing Director/CEO’ in listed entities and was said that Chairperson and CEO/MD (Chief Executive Officer/ Managing Director) should not be related to each other and fall under the definition of relative as defined under the Companies Act, 2013. The main reason for this was the separation of powers between Chairperson who is the leader of the board and the CEO/MD who is the leader of the management to provide a better corporate governance structure and independent board as a result of which the management of the company will be more effectively supervised. The committee noted that corporate democracy is based on the interconnected arrangement amongst the board, the shareholders and the management, in this setup the board supervises the management and the management reports to the shareholders, the committee stated that this issue of separation of CEO/MD and Chairperson is not a recent phenomenon rather it is a growing corporate governance concern globally, separate roles for CEO/MD and Chairperson will give rise to efficient and effective corporate governance in listed companies as in this way the board can work more independently.
The recommendation would have had a very notable impact on listed companies and it was proposed that listed entities with 40% of public shareholding should separate the roles of Chairperson and CEO/MD with effect from 1st April 2020 and after 2020 SEBI could examine and extend the requirements to all listed entities with effect from 1st April 2022 and SEBI accepted the recommendation as it ensured high standards of corporate governance. The SEBI on 10th January 2020 amended the Securities And Exchange Board Of India (Listing Obligations And Disclosure Requirements) Regulations by introducing a new clause 1B and notified that the top 500 listed entities will have to ensure that a Chairperson (who shall be a non-executive director) should not be related to the CEO/MD of the company as per the definition of relative under the Companies Act 2013. The SEBI did not provide with any explanation for extending the compliance date by two years but it was considered that India Inc. was not prepared and the corporate players also approached the market regulator for altering the deadline.
The directive from SEBI was a major step in ensuring better corporate governance structure in listed companies but this decision was not welcomed by majority of India Inc. The FICCI (Federation of Indian Chambers of Commerce and Industry) and CII (Confederation of Indian Industry) on behalf of industrialists made a number of representations to SEBI and claimed that such decision should be taken by the shareholders as the shareholders own the company and it will be their capital that will be at risk. As per records approximately 291 or 58.2% companies amongst the top 500 listed companies have related Chairperson and CEO/MD. Many promoters and companies expressed their disappointment with the directive which required that the Chairperson has to be a non-executive director as most of the Chairpersons are established personalities who also happen to be the largest shareholders of the companies, and to takeaway that position overnight was perceived to be harsh and on top of that having a CEO/MD who is not related is uncomfortable and emotional and for family run companies the company is their legacy. It was claimed that a 2 years transition period is less as such a change decides the future of Chairpersons in their companies and also the future of the next generation.
In India, the identity of business has most of the times been influenced by its family name, when one suffers the other is affected too which at times led to corporate governance failure and this issue was being held up by the committee. The committee addressed such a setup as the Raja Praja model where the promoter is the king and his company is his kingdom, the directive thus had a custodian approach protecting the shareholders and other unrelated persons on the board. Therefore, one of the main reasons for SEBI’s deferral could be that India Inc. was not unprepared, unaware, and unready still many companies have voluntarily implemented this requirement. . Thus, this deferral of 2 years can be a relief to certain companies that will come into effect from 1st April 2022 and companies should embrace this opportunity which might give rise to new corporate governance horizons.