SEBI makes separation of chairperson and MD, CEO roles voluntary; experts evaluate stance

The Securities and Exchange Board of India (SEBI), has said that separation of positions of chairperson and MD/CEO of the company will be voluntary for companies as opposed to the earlier rule which said that it was going to be mandatory from April 1 of this year.

SEBI’s order comes into light after taking into account that only 54 percent of the top 500 listed companies were complying with this rule so far. Additionally, there were enough representations from industry bodies and corporates expressing challenges in complying with the  said rule.

To understand what this means for corporate governance and also for better management of corporates, CNBC-TV18 spoke to Sandeep Parekh, Founder, Finsec Law Advisors, and Amit Tandon, MD, IiAS.

First up, Parekh hopes that India Inc will slowly get to where SEBI was pushing them. According to him, what’s most important is that the rule doesn’t give a false impression to investors. However, he is of the view that if the rule comes, it should be more stringent on related person.

He said, "A law, which is not enforced at all, is kind of really no law. So SEBI was bound to push it back, given that it was not going to happen anyway. It is best to kind of ensure that it is fulfilled on day one, rather than kind of have a theoretical norm, which is not complied with."

"It is certainly a push back and SEBI has buckled, but at the same time, it will literally come for sure. If the rule comes, it should be more strict in terms of related person. India is 40 percent plus dominated by promoters, and therefore to create this, we have some kind of external person who's acting as a check and balance, whereas that person is not, in fact, acting as check and balance really is giving false comfort to investors," Parekh said.

Parekh also believes that SEBI is finding it hard to create a new concept when it comes to ownership and also getting rid of the word ‘promoter’.

"I think SEBI is finding it hard to get rid of the word 'promoter', which is somewhat unique. I think only two countries in the world have this concept of a promoter. And even if you see all the regulations, which have come after SEBI’s decision to get rid of that concept and move to more factual inquiry, it's, become quite difficult for SEBI to create this new concept. So I think SEBI is battling with the entire concept and nomenclature of promoters," he explained.

Meanwhile, Tandon feels there is a natural separation that takes place in banks, however, it is the family businesses where the challenge arises. According to him, the current thinking of separating roles is better. He is of the view that the chairman should be able to challenge the CEO’s strategy. In fact, he mentioned that these are one of the steps to improve the structure of checks and balances.

"When you think about it, banks, there is a natural separation, which takes place. If you look at the subsidiaries of ICICI Bank or HDFC – there is again a separation. So you already got a separation. The big challenge has been with family. Companies have to realize that there's a difference in the role, the CEO is supposed to make the strategy and execute it. Therefore, when they are kind of presenting the strategy to the board, the chairman needs to be there to ensure that there are sufficient skills to be able to challenge the strategy and figure out whether this is the right thing to do," he said.

"Therefore, while there is a difference between the two roles, they are also supposed to be joined at the hips and the current thinking is that it's better to separate the role. We're just saying that it's one of the steps, which will be there to improve the structure, the checks and balances, which are there on the board and on the CEO," he said.