India Inc must separate CMD post, deadline won't be extended: Sebi

The Securities and Exchange Board of India (Sebi) has asked Indian companies to work towards separating the roles of chairperson and managing director (MD).

The deadline is a year away, but the market regulator is hinting that it won’t extend it.

“Listed entities were initially required to separate the roles of chairperson and MD/ CEO from April 01, 2020 onwards. However, based on industry representations, an additional time period of two years was given for compliance. The regulation will now be applicable to the top 500 listed entities by market capitalization, with effect from April 01, 2022. As at the end of December 2020, only 53 per cent of the top 500 listed entities had complied with this provision. I urge the eligible listed entities to be prepared for this change in advance of the deadline,” said Ajay Tyagi, chairman of Sebi, in a speech at the CII Corporate Governance Summit.

He said the rule is not to weaken the position of promoters but to improve corporate governance.

“The objective is to provide a better and more balanced governance structure by enabling more effective supervision of the management. Separation of the roles will reduce excessive concentration of authority in a single individual,” he said.

Other countries, too, have implemented a similar rule to avoid conflict of interest.

“Globally also, the needle seems to be moving more towards the separation of Chairperson and MD/CEO. In UK and Australia, the debate has tilted in favour of separating the two posts. Germany and Netherlands have a two-tier board structure, separating the roles of board and management,” he said.

Tyagi told listed companies to keep their minority shareholders informed about impact of the covid-19 pandemic on business.

“Disclosures should include the impact of Covid-19 on business, performance and financials. It is important to ensure that when listed entities disclose material information related to the impact of CoVID-19, they should not resort to selective disclosures, keeping in mind the principles governing disclosures,” he said.

Tyagi said it is Sebi’s our endeavour to bring in greater balance, transparency and quality in the selection of independent directors and functioning of the corporate boards. The market regulator has recently floated a discussion paper in this regard.

The proposals in the discussion paper revolve around appointment, removal and remuneration of independent directors, considered to be the flag-bearers of minority shareholders.

Tyagi said the paper tries to “strike a balance between the majority shareholders’ right to the final decision and the minority shareholders’ ability to influence the same.”

Speaking at the same event, Keki Mistry, Vice Chairman and CEO, HDFC urged Sebi to allow companies to grant stock options to independent directors.

“There should be no legal or regulatory bar in providing stock options to independent directors in addition to cash compensation so long as it falls within the overall remuneration limit prescribed under the Companies Act. The final decision whether to grant stock options or not, should be left with each company. MCA and Sebi might wish to look at this at some point,” he said.

In the discussion paper, Sebi has sought public feedback on the remuneration of independent directors, particularly on the debate of linking their payouts to profits. “The concern with this approach -- that profit or performance-linked commission may encourage short-termism and lead to conflicts,” the regulator has said in the discussion paper. It has made a case for permitting stock options to independent directors with a long vesting period.