India - Chairman Or Managing Director? – Eenie Meenie Miney Mo.

Legal News & Analysis - Asia Pacific - India - Regulatory & Compliance

17 January, 2020

 

Section 203(1) of the Companies Act states that an individual shall not be appointed or reappointed as the chairperson, of the company as well as the managing director (MD) or the chief executive officer (CEO) at the same time, unless the articles of the company provides otherwise or the company does not carry on multiple businesses. Further, this restriction is not applicable to certain specified class of companies engaged in multiple businesses and which have appointed one or more CEOs for each such business.

 

The Kotak Committee on Corporate Governance in October, 2017, recommended that with regard to companies in which the public holds more than 40% stake, the chairperson of the board should be a non-executive director. The intent behind this recommendation was separation of powers of the Chairperson and the MD/ CEO in listed companies, to provide a more balanced governance structure and effective supervision of the management by the board. The report articulates the advantages of such separation of roles to include – (a) providing a structural advantage for the board to act independently; (b) reducing excessive concentration of authority in a single individual; (c) clarifying the respective roles of the chairperson and the CEO/MD; (d) ensuring that board tasks are not neglected by a combined chairperson-CEO/MD due to lack of time; (e) increasing the possibility that the chairperson and CEO/MD posts will be assumed by individuals possessing the appropriate skills and experience; and (f) creating a board environment that is more egalitarian and conducive to debate.

 

Regulation 17(1B) of the SEBI (LODR) Regulations, which was introduced on April 1, 2019, states that with effect from April 1, 2020, the top 500 listed entities shall ensure that the Chairperson of the board shall be a non-executive director and shall not be related to the MD or CEO (as per the definition of the term relative defined under the Companies Act, 2013). This requirement is not applicable to listed entities that do not have any identifiable promoters as per the shareholding pattern filed with the stock exchanges. SEBI has recently extended the timeline to meet this requirement to April 1, 2022.

 

Regulation 17(1B) goes one step beyond the recommendations of the Kotak Committee, by not only mandating that the Chairperson should be a non-executive director, but by also requiring that the person should not be related to the MD / CEO.

 

In the absence of any further relief from SEBI, several of the individuals in the top 500 listed companies, who are currently both the Chairperson of the board and also the MD/ CEO, will have to make a choice between the two in the next two years. In this context, whilst the role of an MD/ CEO of a company is fairly clear, it is necessary to examine the role of a Chairperson.

 

The statutory role of the Chairperson as provided in the Companies Act is fairly limited. He presides over the meetings of the board and shareholders of the company; and could be made a signatory to the statements and reports filed by the company. He has absolute discretion with respect to the inclusion or non-inclusion of any matter in the minutes of a board or shareholders meeting.

 

Whilst he does have certain suo-moto powers in the conduct or proceedings of meetings, the Companies Act by itself does not treat him as first-amongst-equals in the board of directors. However, articles of association in general (including Table F of the Companies Act) provides certain specific powers in favour of the Chairperson – such as, determination of procedural compliance of the proceedings of the meeting, including sufficiency of quorum, adjournment etc., decision on the qualifications of a voter at a general meeting, and a casting vote in case of equality of votes at a board meeting. Therefore, the shareholders of a company, pursuant to its articles of association, could further enhance the role of the Chairperson.

 

Given that SEBI has directed this requirement to promoter-controlled (as opposed to professionally managed) entities, it will be interesting to examine if the spirit of the SEBI requirement will be met if the existing promoter individuals who hold dual positions choose to become non-executive chairpersons. Based on the Kotak Committee Recommendations, the intention behind SEBI’s directive is to reduce concentration of power in the hands of one individual and have an independent Chairperson, who could represent the board in effectively supervising the management. By virtue of being a promoter, such individuals are in effective control of the management (albeit through a third person MD/ CEO). It is arguable if the intended effective supervision over the management will be achieved if the promoter individual (who has a substantial say in the appointment of the MD/ CEO) chooses to become a non-executive Chairperson of the board.

 

 

For further information, please contact:

 

Akila Agrawal, Partner, Cyril Amarchand Mangaldas

akila.agrawal@cyrilshroff.com