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Separation of powers?

Requiring separation of the positions of chairman and MD/CEO in a family-run company unfortunately targets the best-performing rather than the badly-run

SEBI adopted the recommendations of the Kotak Committee and further added certain clauses and amended the Listing Regulations,2015, via Government Order No. 9.5.2018.
SEBI adopted the recommendations of the Kotak Committee and further added certain clauses and amended the Listing Regulations,2015, via Government Order No. 9.5.2018.

By Rameesh Kailasam

The Centre is focused on boosting entrepreneurial spirit and ‘Make in India’, and recognises ‘ease of doing business’ as the most important factor for this. It is important to acknowledge that, for India, family-run businesses are an important pillar and are, as is the case globally, the oldest and most common form of enterprise, having existed for centuries and helped build the foundations of many nations.

Family-run businesses have also created significant employment and are key contributors to the GDP of nations, whether emerging or developed. Many nations have understood the important contributions of such risk-taking, entrepreneurial family-run businesses, and give them a special place in the economy as they contribute over 50% of the GDP in most developing and developed countries.

However, come April 1, 2022, we may witness turbulence in India on this front, with relation to listed family-run businesses in India that are doing well. The background to this lies in the recommendations of the Uday Kotak Committee (formed on June 2, 2017) contained in the report submitted to SEBI on October 5, 2017.

There are around 80 recommendations on improving Corporate Governance Standards. Certain proposals were contentious and have faced opposition from industry. SEBI adopted the recommendations of the Kotak Committee and further added certain clauses and amended the Listing Regulations,2015, via Government Order No. 9.5.2018.

This introduced Regulation 17B that was to come into effect from April 2020, but was later deferred toApril 2022. It will be applicable to the top 500 corporate entities as follows: With effect from April 1, 2022, the top 500 listed entities shall ensure that the chairperson of the board shall a) be a non-executive director; and b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013.

Provided that this sub-regulation shall not be applicable to the listed entities which do not have any identifiable promoters as per the shareholding pattern filed with stock exchanges.

Explanation: The top 500 entities shall be determined on the basis of market capitalisation, as at the end of the immediate previous financial year.
Interestingly, the Kotak Committee had also sought the corporate affairs ministry’s views and, in page 105 of its report, the ministry’s concern that the recommendations appeared to extend jurisdiction on matters that are already covered by the Companies Act had been recorded. There is also no provision in the SEBI Act that gives it powers to override provisions of the Companies Act. While the intent was to go after businesses that were badly governed, the casualties, unfortunately, seem to be the best-performing ones.

These provisions also seem to be in direct conflict with the Companies Act’s Section 203(1)(d), which specifically permits single-product companies and those whose articles specifically permit a unified position of chairman & managing director/CEO. Hence, legal experts may also construe this as a case of a subordinate legislation seeking to override a law laid down by Parliament.

PM Modi had applauded the private sector’s critical contribution to the economy in Lok Sabha. A negative perception about private sector and, consequently, promoters being relegated to a position of perennial suspicion, is unfortunate and does not bode well as Indian entrepreneurs are the bedrock of Atmanirbhar Bharat. Even shareholders assess a company by the name and people behind it, in addition to its performance. There are already enough checks and balances in the current regulations to check concentration of power, such as the requirements that independent directors (IDs) comprise at least 50% of the Board, IDs comprise two-thirds of the audit committee, the requirement of special resolutions for several key matters, mandatory participation in voting by institutional investors, mandatory meeting of audit committee with credit rating agencies, non-participation of related parties in approval of related party transactions, evaluation of performance of management by IDs, etc.

Several experts on board structuring acknowledge that separation of the positions of chairman and CEO/MD would increase the distance between the Board and the management. Interestingly, companies that do not have an identified promoter group are exempt from this provision which may sound ironical. Quick decision-making is the need of the hour and family-run businesses have always been the strategic advantage for any country in times of crisis.

Other progressive jurisdictions have already taken steps to protect their family-run businesses by making such provisions merely recommendatory in nature. Any mandatory provisions of such nature can not only affect the smooth running of well-run businesses, but also force them to creatively use means to control, not the objective this effort desires. Founders and their successors have a large proprietary interest in the company, and it is also critical for pinning responsibility on them and have a culture of continuity for such businesses. Hence, ideally, these provisions should be withdrawn, or be made recommendatory and not mandatory.

The author is CEO, Indiatech.org

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