Time's Running Out For India Inc. To Split The CEO And Chairperson Roles

With less than four months to the deadline, almost half of Nifty 500 firms are yet to make any move on meeting the SEBI mandate.

Tug of War (Source: BloombergQuint)
Tug of War (Source: BloombergQuint)

Almost half of India's top 500 listed firms are yet to comply with a regulation that mandates separating the role of chief executive officer and chairperson. That's despite being given an extra two years to do so.

Data of the Nifty 500 firms shows that 244 companies have still not complied with the proposed regulation as on Oct. 30, 2021, according to the Institutional Investors' Advisory Services. This includes some prominent bluechip stocks like Reliance Industries Ltd., State Bank of India, Bharti Airtel Ltd., ONGC Ltd. and JSW Steel Ltd., among others.

The Securities and Exchange Board of India's regulation, notified in 2018, had originally mandated separating the roles from 2020 onwards. Additionally, the people occupying the two roles must also not be related to each other.

The objective was to improve corporate governance by creating a clear demarcation of two posts—one that manages the operations and the other that heads the board of directors. SEBI expects that it would bring more balance to decision making.

However after industry consultations, the deadline was extended till April 2022.

Now with less than four months to go, companies are yet to start making any changes. IiAS' data showed that among the non-compliant entities, only a handful of boards, including Mahindra & Mahindra Ltd. and Wipro Ltd., have announced plans to meet the new mandate.

SEBI, on its part, has taken cognisance of the lack of compliance and said it will not further extend the deadline. "Sufficient time has already been given," its Chairman Ajay Tyagi said at a press conference on Tuesday. "By extending again, it would only mean that those companies do not want to do it (comply with the rules)."

Circumventing The Rules

IiAS' analysis shows that of the 244 non-compliant companies, 204 have an executive chairperson. These are primarily family-owned or public sector undertakings. 33 others have a non-executive chairperson who is related to the managing director.

In the remaining 7, however, the managing director is related to the executive vice-chairperson.

This, IiAS said, could be one way companies could try to side step the regulation. "By appointing an Executive Vice-Chairperson companies will argue compliance with the regulation, but this was unlikely to have been the regulatory intent."

Another way could be in the "fine reading" of how the Companies Act, 2013, defines "relatives". Under the Act, a person is deemed a relative if:

  • They're members of a Hindu Undivided Family.

  • They're husband and wife.

  • They are related in a prescribed manner.

A relative would, hence, also include a father, a mother, son, son's wife, daughter, daughter's husband, brother and sister. This would be applicable even if it is a stepparent or a stepchild.

Since Indian family structures are complex, there may well be situations where extended family members chair the board while promoters continue in executive capacities, IiAS said. "The depth of relationships rather than distance is important, it but cannot be measured. Investors will need to live with this."

As two-thirds of corporate India is family-controlled, SEBI's mandate of not letting the chair and CEO be related is testing companies' succession planning and forcing promoters to make unpopular choices, IiAS said.

Unintended Consequences

One big potential fallout of the regulation could be lower number of independent directors on board.

SEBI's Listing Obligations and Disclosure Requirements say that if the chairperson is a promoter or executive director, then the board needs to consist of 50% indepdent directors. Otherwise, the board may comprise of one-third independent directors.

IiAS noted that promoters may decide to retain their executive capacities and appoint an independent director as the chairperson. "If a large proportion of companies go down this path, there's a risk that these companies will have only a third of their board as independents."

"Boards should resist the temptation to regress on this aspect of ‘independence’ once the regulation to separate the roles becomes effective," the report said. "It will be a shame if they gain on the roundabout, only to lose it on the swing."