In a detour from its earlier decision, the Securities and Exchange Board of India (SEBI), on February 15, made compliance with the requirement of splitting the roles of Chairperson and Managing Director (MD)/Chief Executive Officer (CEO) voluntary for listed companies.

Earlier, SEBI had mandated the top 500 listed companies by market capitalisation value to separate the CEO and MD. The initial April 2020 deadline was postponed to April 2022 in light of several industry representations and low level compliance by the listed entities.

SEBI's decision to split the roles was based on the Kotak Committee Recommendations, which was formed on June 2, 2017, under the Chairmanship of Uday Kotak.

The committee comprised various government stakeholders, stock exchanges, industries, and legal and professional academia. The committee was required to provide its recommendations for improving the standards of corporate governance, and it suggested a couple of amendments and additions to the existing provisions.

Key recommendations

Some essential suggestions included raising the minimum number of directors on the board, one woman director mandate, higher quorum requisite, increase in the minimum number of independent directors and their eligibility, splitting key roles, and increasing meetings and governing related party transactions. These suggestions aimed to address tedious compliance issues, ensure inclusive decision making, protection of minority interests, inspire accountability, and provide a balanced governance structure.

It is pertinent to note that the recommendation of splitting the roles was inspired from the Cadbury Report (The Financial Aspects of Corporate Governance), 1992, presented before the European Corporate Governance Institute. It is based on the principle of apply-and-explain rather than comply-or-explain.

Corporations like Mahindra & Mahindra, Sun Pharma, Ultratech and Asian paints did follow SEBI’s mandate of splitting key managerial roles. The intent behind this proposal was to provide a structural advantage for the board to act independently of the management and the shareholders. The overlap of board and management leadership risks overlaps and blurring of boundaries.

However, the execution of the mandate might have disrupted the functioning and governance of established corporate houses. Major companies like Bajaj, Adani Ports, Reliance, Bharti Airtel and JSW steel did not follow the mandate. Given the majority shareholding and promoter family control, splitting these roles could create uncertainty about future value creation for stakeholders. Thus, most Indian promoter-controlled businesses require the posts of chairman and managing director to be interwoven.

SEBI changed its mind after reviewing the compliance status of the top 500 listed companies, where it observed that from 50.4 per cent of the companies in September 2019, the level of compliance had gone up to 54 per cent by December 31, 2021.

According to SEBI, a mere 4 percentage point rise in compliance over two years made it difficult to expect the remaining 46 per cent of the companies to comply in the next two months.

However, there does not seem to be compelling evidence that the role separation results in effective board leadership, improved governance, or shareholder value. On the other side, it would supersede shareholders' participation and supplant their ability to select how their company's leadership should be formed. Furthermore, enforcing this extra hurdle undermines the ease of doing business by interfering with the internal operations of the corporation.

In furtherance of this principle, the Companies Act, 2013 also defers to the shareholders' resolution and allows the Chairman to serve as MD/CEO, if the company's articles provide for it. At this point, it is also worth noting that this clause would have a detrimental effect on domestic, family-owned enterprises, which account for 300 of the top 500 publicly traded corporations.

To conclude, SEBI ought to foster entrepreneurialism and eliminate any barriers to progress. There are currently enough checks and balances in place under the Companies Act and SEBI (Listing Obligations and Disclosure Requirements) Regulations to ensure that corporate boards make independent decisions and maintain a balance of power.

SEBI's move to make the separation of the role voluntary prioritises shareholder affirmative action and emphasises competent board leadership instead of adopting a unitary approach.

The writers are legal professionals