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SEBI defers the timeline for separation of the roles of non-executive chairperson and MD/CEO by two years

SEBI defers the timeline for separation of the roles

Section 203 of the Companies Act, 2013 (2013 Act) provides that an individual should not be appointed/reappointed as the chairperson of a company, as well as its Managing Director (MD) or Chief Executive officer (CEO), unless allowed by articles of a company or such a company does not undertake multiple businesses.

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Background

Section 203 of the Companies Act, 2013 (2013 Act) provides that an individual should not be appointed/reappointed as the chairperson of a company, as well as its Managing Director (MD) or Chief Executive officer (CEO), unless allowed by articles of a company or such a company does not undertake multiple businesses.

Regulation 17(1B) of the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) specifies that the chairperson of the board of top 5001 equity listed entities would be a non-executive director and not be related to the MD or CEO in accordance with the definition of ‘relative’ as per the 2013 Act. This requirement would not be applicable to listed entities that do not have any identifiable promoters as per the shareholding patterns filed with stock exchanges. This regulation was to be made effective from 1 April 2020.

The above-mentioned provision was introduced by SEBI in May 2018 through an amendment to Listing Regulations. The amendment was based on recommendations of the Committee on Corporate Governance constituted by SEBI under the chairmanship of Uday Kotak (the Kotak Committee) and provisions of the 2013 Act. 

New development

SEBI through its notification dated 10 January 2020, deferred the implementation of the above mentioned provision relating to separation of the roles of non-executive chairperson and MD/CEO by two years i.e. 1 April 2022.

Our comments

Currently, many listed entities have a combined role of chairperson and MD/CEO, while several others have the roles of chairperson and MD/CEO being occupied by individuals who are related to each other. These entities would have to make changes within their board or management leadership positions to be able to comply with the SEBI Listing Regulation requirements.

SEBI’s thought process in mandating the separation of the roles of chairperson (i.e. the leader of the Board) and MD/CEO (i.e. the leader of the management) clearly recognises that the board supervises the management and reports to the shareholders. This separation provides a more balanced governance structure, which eliminated a potential conflict of interest if one person occupies both the CEO and chairperson roles, especially for the larger promoter-led companies. There is an active global debate on this topic, India is one of the few jurisdictions that has mandated this, while many others haven’t, with some others requiring specific disclosures on the board leadership structure and its appropriateness. 

This regulatory requirement would have compelled many companies to start looking at long term succession planning more effectively, especially in promoter run companies. The delay in implementation of the requirement on separation of roles of chairperson and MD/CEO upto 1 April 2022 provides additional time to companies to complete and implement their succession planning for these important positions.

1The top 500 entities would be determined on the basis of market capitalisation, as at the end of the immediate previous financial year.

To access the text of the SEBI notification, please click here.

© 2020 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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