Sebi caves in to India Inc: Here’s why extending deadline on splitting CMD job is unfortunate

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Published: January 16, 2020 5:30:42 AM

The Kotak Committee had rightly recommended that companies split the powers between a chairperson and the CEO or MD so that the powers are better distributed.

Sebi, India Inc, CMD job, NPA crisis, Kotak Committee, bank NPA, IL&FS, corporate governance practicesThis is very unfortunate, and whether or not the decision to extend the deadline by two years was Sebi’s alone, it smacks of suit-boot-ki-sarkarism.

Sebi’s decision earlier this week, to allow India’s top 500 companies time till April 2022 to appoint different individuals as chairmen and chief executives, is not just disappointing, it is a huge setback to the process of disciplining corporate India and a disservice to minority shareholders. There are enough instances of Indian corporates diverting funds—the NPA crisis is not just due to the business cycle turning—in violation of the law, so it is not surprising that Sebi’s insistence on a non-executive chairman who is not related to the chief executive was unpalatable. Given the poor corporate governance standards in most of India’s boardrooms and the frequent flouting of rules, however, Sebi should not have caved in, and should have stuck to the April 2020 deadline. The move reflects poorly on the regulator’s ability to reform. It is possible Sebi is going soft because the authorities also weighed in; most big firms in India are family-run and would be loathe to appoint an ‘independent’ chairman. This is very unfortunate, and whether or not the decision to extend the deadline by two years was Sebi’s alone, it smacks of suit-boot-ki-sarkarism. It is a telling comment on how powerful business houses are—or at least some of them—and how effectively they are able to lobby.

The Kotak Committee had rightly recommended that companies split the powers between a chairperson and the CEO or MD so that the powers are better distributed. Indeed, there is much merit in this school of thought even though many may argue that, given most companies are promoter-run, they will try and find a way around this by appointing a chairman who is close to the family, which then defeats the purpose since it is assumed they will act in concert. While that may be the case, Sebi was trying to pave the way for better corporate governance practices by at least empowering a company’s board to act independently if it wants to. This is not possible if all, or overriding powers rest with one individual who is both leading the board and driving the business. Comparisons with practices in other countries are not always relevant; the fact is boards are overthrown and CEOs asked to leave far more frequently in the West than in India. Here, several promoter-run companies, with total power and control, have performed poorly, and far too many have folded up, leaving large unpaid loans and destroying shareholder wealth. Indeed ‘promoters’ have been able to control businesses with very little skin in the game, in effect gaming the system; Rs 10 lakh crore of bank NPAs is testimony to the damage.

There is, however, another key issue that has been neglected by Sebi and other authorities. When little or no action is taken against the board and independent directors for breaking the rules or allowing sharp practices—IL&FS, whose Rs 100,000 crore loans have wrought havoc on India’s financial system, is a great example—then even rules like insisting on a certain proportion of independent directors become irrelevant; similarly, if credit rating firms or auditors are not punished for false ratings or doctored accounts, what purpose does it serve to have rules on independent audits/ratings? Sebi and other regulators need to ponder this as well.

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