Unless otherwise provided in the Articles of Association of the Company, the Companies Act, 2013 (‘CA, 2013’) and Listing Regulations, 2015 do not explicitly lay down provisions mandating the appointment/election of a permanent Chairperson of the Board. However, section 104 of the CA, 2013 provides that either the Chairperson of the Board, or the one of the directors or one of the directors, as the case may be shall act or be elected as the Chairperson of a general meeting. In view of the same, having a permanent chairman is not mandatory, however, having a chairman for board and general meeting is mandatory.
The chairman of companies are of different types depending upon their requirement. Therefore, in order to understand the importance of chairperson in a Company, we have to first understand the reason of appointing chairman and capacities a chairman holds in a Company. Generally, a chairman may be:
a) Chairman of Board;
b) Chairman of General Meeting;
c) Chairman of Company and;
d) Chairman of Committees;
In most of the cases, they are the same, however, they have a thin line of difference between each one of them which has been discussed in a detailed manner below:
Chairman of Board
Usually, the Chairman of the company becomes the Chairman of the Board. However, if the company does not have a Chairman, the Directors elect one of themselves to be the Chairman of the Board and conducts the Meetings of the Board. Further, if no Chairman is elected by the Board or if the Chairman is unable to attend the Meeting, the Directors present at the Meeting shall elect one of themselves to chair and conduct the Meetings, unless otherwise provided in the Articles. Further, the board committees may elect different chairperson for its meetings. Considering the aforesaid, the listing regulations, 2015, also requires a Company to appoint Chairperson for board meeting and different chairpersons for board committees.
Therefore, on conjoint reading of the above, it can be concluded that every meeting of the Board requires a Chairman, however, the Company may not have a chairman on board. To clarify, please note that the provisions of Act suggests for having a chairman for meeting of board therefore it is the discretion of the Company they may appoint a specific individual as ‘Chairman of the Board’ or appoint randomly any director at every meeting of Board as ‘Chairman of the Meeting’. Further all the provisions of law relates to Chairman of the Board and not Chairman of the Meeting i.e. for instance as per the provisions of SS-1:
“Chairman” means the Chairman of the Board or the Chairman appointed or elected for a Meeting.”
Hence, the chairman of general meeting can be either chairman of board or any member as may be selected by members themselves during the meeting.
Further, the Listing Regulations refers to having a Chairperson with respect to examining the composition of the board and appointment of requisite number of IDs in order to have proper composition as:
“17(1)(b) where the chairperson of the board of directors is a non-executive director, at least one-third of the board of directors shall comprise of independent directors and where the listed entity does not have a regular non-executive chairperson, at least half of the board of directors shall comprise of independent directors”
In this case, the composition of the Board is dependent on the designation of the chairman of the board, however, the same shall be applicable only when the Company has a permanent chairman on the board. Accordingly, if the company has a practice of appointing a chairman at the respective board meetings, the condition of the said regulation shall not apply.
Chairman of General Meeting
As per the provisions of Secretarial Standard 2 on General Meetings issued by ICSI provides:
“Chairman” means the Chairman of the Board or the Chairman appointed or elected for a Meeting.”
As per the SS-2 the Chairman of the Board shall take the Chair and conduct the General Meeting. However, in case the Chairman is not present within fifteen minutes after the time appointed for holding the Meeting, or if he is unwilling to act as Chairman of the Meeting, or if no Director has been so designated, the Directors present at the Meeting shall elect one of themselves to be the Chairman of the Meeting. Further, if no Director is willing to take the Chair, the Members present shall elect, on a show of hands, one of themselves to be the Chairman of the Meeting.
Further, the provisions of Section 104 of the Companies Act, 2013 provides:
“Unless the articles of the company otherwise provide, the members personally present at the meeting shall elect one of themselves to be the Chairman thereof on a show of hands.”
Therefore, this suggests that the chairman of the Board appointed as per the Articles of the Company, may chair the meeting of shareholders. However, in case the Company does not have a chairman on board the members present may elect one of themselves as Chairman for that specific meeting.
Accordingly, one may conclude that having a Chairperson on the Board is required considering the role and responsibility and election of a Chairperson of general meeting is a mandatory as per law.
Chairman of the Company
Referring to our aforesaid discussion, we may say that appointment of permanent chairman is a discretionary power of companies, usually exercised to avoid inconvenience of appointing new chairman for the board and general meetings, respectively.
Chairman of Committees
A member of the Committee appointed by the Board or elected by the Committee acts as Chairman of the Committee, in accordance with the Act or any other law or the Articles, who shall conduct the Meetings of the Committee. However, if no Chairman has been so elected or if the elected Chairman is unable to attend the Meeting, the Committee shall elect one of its members present to chair and conduct the Meeting of the Committee, unless otherwise provided in the Articles.
Further, if no such Chairperson is elected, or if at any meeting the Chairperson is not present within five minutes after the time appointed for holding the meeting, the members present may choose one of their members to be Chairperson of the meeting.
The Listing Regulations specifically provides the eligibility for appointment of chairman in specific committees
Who can be a Chairman?
Considering the aforesaid provisions, it is clear that designating one person as the permanent Chairman of the company is not mandatory. However, the same needs to be elected in every meeting. Therefore, the company has two options:
Separation of role of Chairman and MD
In this regard, we would also like stress upon the fact that the Act, 2013 does not specifically requires companies to appoint a chairman however Section 203 of the Act, 2013 restricts a Managing Director or CEO to be a chairman of the Company. The provisions lays down:
“Provided that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act unless,—
(a) the articles of such a company provide otherwise; or
(b) the company does not carry multiple businesses:
Provided further that nothing contained in the first proviso shall apply to such class of companies engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government”
The provisions explicitly provides that the chairman of the Company cannot be the MD or the CEO considering the power and authority involved in both the spheres. Here, the Act provides that if the AoA of the Company permits so and if the Company is engaged in multiple businesses, then the companies may have the CEO and the chairman as the same individual.
On reading the provisions, we understand that the intent of law is to stress on the fact that the chairman of the Company have been entrusted with great responsibilities and powers which designating to an executive director may affect the independence of the board altogether. Further, Managing Director is a person entrusted with substantial powers of management, which makes an MD the decision maker in the Company. Therefore, designating a person a CMD in the Company may not do justice to both roles i.e. the MD may not be able to discharge his responsibilities completely as an MD or as Chairman. However, where the Company is engaged in multiple businesses with more than one MD/CEO in the Company, then in that situation the Company may rethink to designate a person as CMD.
Where the Companies Act, 2013 provided for separation of role of Chairman and CEO the provisions of SEBI (LODR) Regulations, 2015 remain silent on the topic and provided a discretionary requirement. However, the recommendations of Uday Kotak Committee on Corporate Governance clearly provided for separation of role of CEO/MD from the chairman for better governance. The relevant extract of the recommendation is provided below:
“The separation of powers of the chairperson (i.e. the leader of the board) and CEO/MD (i.e. the leader of the management) is seen to provide a better and more balanced governance structure by enabling better and more effective supervision of the management, by virtue of:
1. providing a structural advantage for the board to act independently;
2. reducing excessive concentration of authority in a single individual;
3. clarifying the respective roles of the chairperson and the CEO/MD;
4. ensuring that board tasks are not neglected by a combined chairperson-CEO/MDdue to lack of time;
5. increasing the possibility that the chairperson and CEO/MD posts will be assumed by individuals possessing the skills and experience appropriate for those positions;
6. creating a board environment that is more egalitarian and conducive to debate”
Considering the aforesaid recommendations of Uday Kotak Committee on Corporate Governance, the provisions of Regulations, 2015 were amended through the SEBI (LODR) (Amendment) Regulations, 2018 (“Amendment Regulations”) brought in force from 9th May, 2018. By virtue of the said regulations a new sub-regulation was inserted in regulation 17 which states:
“(1B). With effect from April 1, 2020, the top 500 listed entities shall ensure that the Chairperson of the board of such listed entity shall –
(a) be a non-executive director;
(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.”