Giving in to lobbying

Deadline extension for splitting CMD post is unfortunate

The Securities and Exchange Board of India (Sebi) has decided to give two more years to comply with its directive to separate the posts of managing director (MD) and chairman of the board in top 500 listed companies by market value. No clear reasons are available for this decision, but it comes after a great deal of lobbying by some of the companies affected. The rules stipulated that the chairman of the board should be a non-executive director and should not be related to the managing director or chief executive officer. It didn’t apply to companies that didn’t have identifiable promoters in accordance with the shareholding pattern. It is possible that powerful people leaned on the market regulator to extend the deadline for compliance, which it has now done till April 2022. 

This is an unfortunate step. Companies should not be able to lobby aggressively for so self-serving an end, and somehow force the regulator into a retreat. Apparently, one of the stated reasons by the companies is the ongoing downturn. However, it is far from clear why improving governance standards must always happen during a boom. In fact, if better governance mechanisms can make companies more efficient, then it is one way of coping with a downturn. The purpose of the requirement was to bring Indian corporate governance practices in line with global standards, where the two roles have distinct responsibilities. The MD has operational control and is accountable to the board, while the chairman of the board has distinct strategic responsibilities and is accountable, along with the board, to the shareholders. The problem in India has always been “promoters” retaining excessive control. In family-run firms in particular, even when the original owners’ stake has been somewhat diluted, the “promoter” continues to have more control than the ownership structure would dictate, in particular, through the office of chairman and MD. Separating the roles is necessary for more effective supervision and breaking promoters’ hold — which is very much in the interests of broader economic efficiency as well as of shareholders in general. It is precisely those interests that the regulator is supposed to be speaking for and, thus, it is disappointing that in this case the regulator has chosen to give in to promoters. 

The signal sent out by Sebi is even more disheartening than the substance of its action. The large companies in question had been given more than enough time to comply with the order, so an extension does not make sense — unless it is just another way of putting a much-needed reform on the back burner. Doing so this late in the day is, like all occasions when the rules of the game are changed in this manner, unfair to those who took the trouble of complying on time. They perhaps didn’t know what the other half knew — after all, almost half the top 500 listed companies were yet to comply with the Sebi rule even though the deadline was just over two months away. Regulators’ authority depends upon being seen as impartial and authoritative. If such measures are withdrawn, thanks to lobbying, then few will take regulators seriously. Given that Sebi has developed a reputation for being among India’s most respected and independent regulators, its action is doubly disappointing.