As per the regulation released four years ago, all listed entities should have the separate roles of MD and chairperson from April 1, 2020, onwards.
On Saturday, finance minister Nirmala Sitharaman has asked the regulator SEBI to hear the opinions of the companies and their view about the new norm.
By this, posts of MD and chairperson should be separate starting from April 2020, with a deadline for compliance in April 2022.
The RBI have issued this in the banking sector a few years ago and, SEBI added two years for implementation. The finance minister asked the regulator to hear their voice and, it is strictly her opinion, not her diktat.
Up to 53% of the 500 listed companies have followed this norm. This norm was issued for the companies to raise towards international standards (as it is a global practice) and also with an added aim, to make their run professional and smooth.
The reason for her opinion was because of the nature of Indian companies. Most of these listed companies were established over decades or centuries ago. Boards of most of these companies consist of members of a single extended family.
In these family businesses, an MD’s position is often a preparatory one for the next generation family member before he or she becomes the chairman.
The new norm will affect their succession pattern. Certain PSUs will be affected by this new norm.
She further added that this would bring relief for the rest of the companies, as they have asked for more time for compliance.
Till the release of the norms, the role of chairperson and MD was one. This led to the overlapping of board and management, which is a potential recipe for conflict of interests, which would affect the management of the company itself.
SEBI introduced it in 2018 to avoid this potential threat.
This would also lead to a better and more balanced governing structure, enabling more effective supervision of the company’s management by reducing the excessive concentration of authority in a single individual.
The regulator has also clarified that this will not weaken the position of the promoters.
But many companies have come forward in opposition to the move. They argue that this will weaken the entrepreneurial spirit and hamper the business environment of the country.
The supporters of the norm say that it can act as a counterbalance where independent directors will be more inclined towards choosing the best candidate, much in line with the company interest.
This norm is based on a series of recommendations given by the Sebi-appointed Uday Kotak committee on corporate governance.
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