Sebi panel suggests splitting of CMD roles
Royalty paid by Indian MNCs to their parents under scanner
The Securities and Exchange Board of India (Sebi) is considering splitting the roles of chairman and managing director (CMD) at listed companies to prevent a potential conflict of interest arising out of the same person playing the two roles.
The capital markets regulator is also considering greater scrutiny of royalty payments by Indian arms of multinational companies (MNCs) to their foreign parents.
Both these issues came up for discussion at a meeting held by a Sebi-appointed expert panel to improve corporate governance standards at India Inc, said sources. The 21-member panel, led by Uday Kotak, executive vice-chairman and managing director of Kotak Mahindra Bank, is expected to submit its recommendations to Sebi next month.
Several companies, including state-owned enterprises, have executives holding the position of CMD. Some of them are Reliance Industries, Oil and Natural Gas Corporation, Coal India, Wipro, NTPC, Bharat Petroleum, Nestlé India and JSW Steel. Internationally, especially in several European countries, the positions are considered distinct and held by different people.
“The MD should be responsible for running the company, while the chairman should manage and oversee the board. Separating the roles will ensure that the company is run more professionally and power is not concentrated in the hands of one individual,” said Shriram Subramanian, managing director, In Govern Research Services, a proxy advisory firm.
Splitting the role of CMD has come up for discussion several times in the past. In 2010, Sebi’s Primary Market Advisory Committee considered the proposal. In 2014, Sebi stated that listed companies could consider voluntarily separating the posts of chairman and MD as a good governance practice.
In January 2015, the government had separated the post of chairman and MD or chief executive officer of public sector banks. The previous year the Reserve Bank of India had asked the finance ministry to look into the issue, as it felt CMDs could dominate board proceedings.
Royalty paid by Indian MNCs
The Sebi committee is in favour of more checks and balances being put in place to arrive at royalty payments made by Indian MNCs to their parents and wants the company boards to be more thoughtful while approving royalty agreements. It also wants shareholders to be kept in the loop regarding the amount of payments, and its impact on shareholder returns.
In 2015-16, aggregate royalty payments of 32 MNCs in the BSE 500 amounted to ~7,100 crore, up from ~6,300 crore in 2014-15, the data collated from proxy advisory firm Institutional Investor Advisory Services (IiAS) show.
Five of these 32 MNCs — Maruti Suzuki India, Hindustan Unilever, ABB, Nestlé India and Bosch — accounted for over 70 per cent of the royalty payments over the past four years. These five companies paid royalty of ~5,540 crore in 2015-16, which was 78 per cent of the total ~7,100 crore paid by the 32 MNCs. Their share of royalty is higher than their share of profits — these five companies accounted for 61.6 per cent of the aggregate pre-royalty pre-tax profits.
According to IiAS, royalty is a legitimate payment, but its value must be evidenced in sales growth or higher pricing power (and therefore higher margins). “The parent company needs to be compensated for brand and technical know-how. While the brands that these MNCs bring, carry value – faster revenues at comparable margins to other S&P BSE 200 companies – the question remains on what is the appropriate level of royalty,” IiAS observed. The advisory firm added that royalty payouts remained high, resulting in average post-royalty margins being lower by over 7 per cent, compared to the BSE 200 universe in recent times.
“Shareholders need to be informed about the course that royalty expenses will follow going forward. We continue to believe that shareholders must be able to approve royalty payments as well as have some understanding about both the quantum and duration of the royalty contracts,” IiAS added. After the committee submits its report, Sebi could make public the recommendations for feedback, before taking a final decision.
Among other things, the committee will advise on improving of safeguards and disclosures pertaining to related party transactions. It will also deliberate on issues in accounting and auditing practices at listed companies, and improving the effectiveness of board evaluation practices. Infosys chief executive Vishal Sikka’s resignation last month and the removal of Cyrus Mistry as Tata Sons chairman late last year has also put the spotlight on corporate governance standards and role of independent directors at listed firms.