SEBI Chairman Ajay Tyagi
SEBI Chairman Ajay Tyagi
Reuters

Capital markets regulator Sebi on Tuesday asked listed companies to work towards splitting the roles of chairman and managing director before the April 2022 deadline, as the new directive is not aimed at weakening the position of promoters.

Listed entities were initially required to separate the roles of chairperson and MD/CEO from April 1, 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 1, 2022.

"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," Sebi chairman Ajay Tyagi said at a virtual event organised by industry chamber CII on corporate governance.

He, further, said the idea for such a separation is not to weaken the position of promoters, but to improve corporate governance.

The objective of such a separation is to provide a better and more balanced governance structure by enabling more effective supervision of the management, Tyagi said.

"Separation of the roles will reduce excessive concentration of authority in a single individual. Having the same person as chairman and MD brings in conflict of interest," he added.

Currently, many companies have merged the two posts as CMD (chairman-cum-managing director), leading to some overlapping of the board and management, which could lead to conflict of interest and consequently the regulator in May 2018, came out with its norms to split the post.

The norms were part of the series of recommendations given by the Sebi-appointed Kotak committee on corporate governance.

Globally too, Sebi chief said that the needle seems to be moving more towards the separation of chairperson and MD/CEO roles.

In the 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 the management.

The OECD, the international standard setter for corporate governance, also recommends that the two posts should be separated as a good governance practice.

Tyagi noted that some articles have opined that there is a tendency to portray the promoters in a bad light and that there is too much focus on only one set of stakeholders -- minority shareholders.

He clarified that Sebi acknowledges the very important role played by the promoters and entrepreneurs in wealth creation. In fact, the regulator has, over the period, taken a number of steps to improve the ease of compliance by promoters.

In addition, Tyagi stressed on the need to have a fine balance between the role and responsibilities of controlling shareholders and minority shareholders, so that the latter do not misuse the power given to them for protection of their rights.

On independent directors, Sebi chief said it's the regulator's endeavour to bring in greater balance, transparency and quality in the selection of independent directors and functioning of corporate boards.

The market regulator, which recently came out with a consultation paper on independent directors, 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".

With regard to disclosure by listed entities, Tyagi said companies' boards should ensure that adequate disclosures are provided timely to stakeholders and there is no asymmetry of information.

Such disclosures should include the impact of COVID-19 on business, performance and financials, he added.

Sebi had issued an advisory last year, providing an illustrative list of information that should be disclosed relating to the impact of the COVID-19 crisis.

"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 added.

Tyagi said that listed corporates, which raise funds from the public, having a credible and robust corporate governance framework are "sacrosanct to ensure transparency, remove asymmetry of information and enhance investors' trust".

On gender diversity on the corporate boards, Tyagi said the regulatory push from the Ministry of Corporate Affairs (MCA) and Sebi has definitely improved women representation on corporate Boards in India.

From around 5-6 per cent women on boards in 2014, the number increased to 12 per cent within just a year in 2015 for top 500 companies. The number has been steadily increasing year-on-year and stands at around 17 per cent for top 500 companies at present. At an overall level, the figure stands at around 19 per cent.

In the OECD and developed countries, the figure is more than 25 per cent.

While there has been an improvement in gender diversity at the board level, the data shows that representation of women in key board committees such as the audit committee and nomination and remuneration committee remains quite low at around 7 per cent, Tyagi said.

Sebi chief also highlighted the importance of Stewardship Code for institutional investors and ESG (environmental, social and governance) framework for companies.

At the same event, Keki Mistry, Vice Chairman and CEO, HDFC requested 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.

He, further, said the whistleblower policy is a critical element of internal control in companies, and there is a need to place a mechanism to penalise dishonest complainants.

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