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Team Studycafe | Jan 20, 2022 | Views 412966

Defer Regulation Prohibiting Chairman and MD From Being Related: Industry to SEBI

Defer Regulation Prohibiting Chairman and MD From Being Related: Industry to SEBI

Corporate India has reiterated its call for the Securities and Exchange Board of India (Sebi) to postpone the implementation of a rule requiring the chairman and managing director of a big listed firm to be unrelated to one another. It has requested the capital markets regulator to either make this provision ‘recommendatory’ or postpone its implementation for another two years, as it is set to take effect on April 1 this year.

This clause is part of the laws governing the separation of the posts of chairman and managing director (MD) in India’s top 500 firms by market capitalization with identified promoters, as well as the separation of their functions. This rule was supposed to go into effect on April 1, 2020, however it was postponed for two years due to industry opposition.

In a recent letter to Sebi, the Confederation of Indian Industry (CII) repeated its opposition to the proposal, claiming that it would lead to overregulation and be a barrier to a favourable business environment.

“Over-regulation may impair entrepreneurial spirit,” CII president and Tata Steel MD TV Narendran stated.

“Entrepreneurial spirit is a critical aspect in boosting wealth and value creation for stakeholders, and it is especially important given the current difficulty facing the economy owing to the pandemic.” “Given the checks and balances already in place in current regulations to mitigate any potential negative consequences of such a situation, it is critical that such rules do not penalise Indian entrepreneurs.”

The industry group has also requested that Sebi refrain from requiring the chairman of the board to be a non-executive director.

“Because the compliance date is approaching quickly, it is requested to kindly defer the implementation of the provisions relating to the chairperson not being related to the MD & CEO and that the chairperson should be a non-executive director, by two years; if not, withdraw altogether, or the requirements may be recommendatory rather than mandatory, as requested earlier, therefore, a clarification in this regard may be issued soon,” CII said in its submission to Sebi last month.

Family-run enterprises and, to a lesser extent, PSUs that combine the roles of chairman and MD are the companies most affected by the proposed rule governing separation of the roles of chairman and MD.

Business executives expressed their dissatisfaction with these standards.

Chairman and CEO of Bajaj Finserv According to Sanjiv Bajaj, the majority of enterprises in India are family-owned, with expertise and experience passed down from generation to generation. “Chairman and directors are expected to take on more responsibilities, which conflicts with the chairman’s non-executive role. These principles, taken collectively, do not exist in any large country, and we will lose competitiveness as a result, especially at a time when the epidemic is in full swing “he stated.

“Grooming a successor takes years, and in a family-owned/managed business, it’s generally a family member who has been taught by an older. Independent directors will function as a check and balance in publicly traded companies to guarantee the best candidate is chosen. However, the promoters’ interest is also aligned with selecting the best candidate,” said Sangita Reddy, joint MD of Apollo Hospitals.

A request for comment on CII’s letter addressed to Sebi via email did not receive a response as of press time. Industry has been given enough time to follow these rules, according to Sebi Chairman Ajay Tyagi. Tyagi had added, “I can only make a request to the industry to follow it.”

The separation of the roles of chairman and CEO was advocated by the capital market regulator in order to improve corporate governance by providing greater managerial accountability to the board.

The CII has also told Sebi that these revisions go beyond the Uday Kotak Committee’s recommendations, requiring not only that the chairperson be a non-executive director, but also that the individual be unrelated to the MD and CEO. Even in industrialised economies like the United States, the United Kingdom, and France, this requirement is not mandatory. According to the industry association, it puts Indian enterprises at a disadvantage when compared to overseas corporations.

The new criteria would have an impact on succession planning because the MD’s job is generally a stepping stone for the following generation of family members before they become chairman, according to the report.

Last year, Tyagi dismissed the idea of allowing the chairman and MD to be related to one another.

“The argument that it should not be made required is understandable, but implying that both people are linked to one other is unacceptable. What is the point of separating them (MD and chairman) if they are related? “‘I said last September,’ he said.

According to Prime Database, 240 of the 485 big publicly traded businesses that must follow the proposed rules for the roles of chairman and CEO are not following them.

“Despite having four years to comply, nearly half of the enterprises have yet to complete the criterion with only a few months to go. This reminds me of when the mandate for female directors was initially introduced. Companies continued to hope for a reprieve. When no extension was granted, the last week of March was filled with a frenzy of appointments. This time around, you might witness something similar. Last-minute appointments, of course, can only help with the letter of the law, not the spirit of the law “ Pranav Haldea, MD of Prime Database, stated.

Only a few boards, notably Mahindra & Mahindra and Wipro, have stated plans to comply with the regulation, according to IiAS, a corporate governance advice organisation.

“The majority of others have remained mute, which has alarmed investors who like clarity and predictability on these matters,” the business added.

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