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An independent chairman - Why Corp Gov 101 is so hard for Indian firms

Having an independent non-executive Chairman is considered a best practice globally since it allows the board of directors to be more neutral and act in the best interest of the shareholders of the company. In India however, firms have had a hard time making the switch. In today's post, we look at the details of the SEBI regulation and its deferral, why the move is considered a best practice globally, and why execution is especially hard in India.

What does the SEBI regulation say?

In 2018, SEBI modified the Listing Regulations of 2015 to include a change in the top 500 companies by market cap. The changed regulations required that the Chairman of these top firms be an independent non-executive member, and the regulator gave the firm 2 years to implement the measure. After the two year period almost ending, and the regulators receiving pushback from India Inc, the regulator has pushed the date of implementation of the measure by another two years to 2022.

But why did SEBI want to implement this rule?

To understand this, it would help to understand the role of the board of directors. These directors are elected by the shareholders to look out for their best interests. A firm also has key committees like the Audit Committee or the Nomination and Remuneration Committee that is also comprised of members of this board. Since the board is responsible for overseeing the activities of the management, it helps to have independence in these boards. Global best practices dictate 75%+ independence in boards and 100% independence in audit and nomination committees, but firms adhere to these to the best of their ability.

So why is India Inc. against this, and what are the counter-arguments?

As it turns out, this policy doesn't bode too well with a majority of India's "promoter led" companies, where Promoters continue to hold large positions in the company and are unwilling to cede control. The arguments by some leading industry bodies have been that the shareholders have ultimate discretion in deciding who goes on the board, and that is an area that the regulators shouldn't interfere with. That argument doesn't hold a lot of weight however, when you consider that most of the promoters hold a majority stake in their firms, meaning they effectively decide who goes on the board. In the interest of the minority shareholders (retail/institutional investors in a largely promoter held company), it makes sense for the regulators to step in and try to protect them. There is also, the more important emotional angle - many of India's tallest leaders have built their firms from the ground up occupying both positions. Being asked to let go now, that too by an external regulator, seems largely unjust. But it is what it is.

For the larger markets, as well as ‘multiples’ of these companies, the eventual execution of the regulation will spell good news as it pushes firms towards better corporate governance. The firms and the promoters, however, will have to go through an uncomfortable phase to get there.

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