RBI’s Discussion Paper on Bank Governance

Corporate governance in banks and financial institutions has captured a great deal of attention lately in India. One may attribute this to high profile episodes involving governance issues in banks such as ICICI Bank as well as Yes Bank, both involving the former chief executive officers (CEOs). There is generally a sense that universal corporate governance norms prescribed by the securities regulator, i.e., the Securities and Exchange Board of India, are inadequate when it comes to dealing with governance in banks and financial institutions, which require a different approach altogether. Not only are business requirements more specific, but depositors become an important stakeholder. As the sectoral regulator, the Reserve Bank of India (RBI) has set out a specific governance regime, but recent events have raised doubts regarding the sufficiency of the norms for the required purpose.

In this background, the RBI on 11 June 2020 published a Discussion Paper on Governance in Commercial Banks in India. This is a significant document as it seeks to considerably enhance bank governance in India. It sets out the governance norms for banks by incorporating the international standards in the form of the Basel Committee on Banking Supervision’s (BCBS) Corporate Governance Principles for Banks, and adapting it into the general governance regime in India comprising the Companies Act, 2013 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The discussion paper essentially “Indianizes” the BCBS principles in light of the experience from recent episodes. Several elements of the discussion paper seek to target the lessons the regulator has learnt so far.

The discussion paper focuses substantially on certain issues specific to banks. Here, it largely tracks the BCBS Principles. These include audit, risk management, internal controls, compliance, whistle blowing and vigilance, which all form the bulwark of the board’s oversight on financial matters. There is also explicit recognition of the business culture of banks, which calls for a “tone from the top”. Such measures seek to place emphasis on the manner in which banks carry on their business. While some include concrete plans for implementation through targeted governance measures, several aspects of the discussion paper are aspirational in nature. It is not clear to what extent these intangible matters such as culture are capable of translation into tangible deliverables and outcomes.

There is a strong focus on boards and committees of directors, whose duties and responsibility find specific treatment in the discussion paper. Conflicts of interests of directors and senior managers receive extensive treatment, given they have been at the core of some of the recent governance failures. Board independence takes on a crucial position, with a majority of the board to consist of independent directors, a higher standard than that required under the Companies Act and the SEBI regulations. Moreover, the chairperson of the board must be an independent director, as must the chairpersons of some of the crucial board committees. Given the specialized nature of a bank’s business, board members need to have an appropriate mix of skills and qualifications to ensure they are up to the task.

Perhaps the most debatable and controversial recommendation in the discussion paper relates to tenure caps on directors and senior managers. The total continuous tenure of non-executive directors must be no longer than eight years, after which they can be re-appointed only after a three-year cooling off period. The discussion paper caps the tenure of executive directors (EDs) and CEOs by creating a two-prong structure. If the EDs or CEOs are promoters or major shareholders of the bank, then their tenure is a maximum of 10 years. If they are not promoters or majority shareholders, they enjoy a maximum tenure of 15 years, with eligibility to reappointment only after a three year cooling off period.

There are a number of reasons supporting this stringent requirement. First, and the stated rationale in the discussion paper, the tenure requirements exist to enable promoters and majority shareholders to stabilise the operations of the bank and then transition it to a professional management. Second, familiarity and excessively long tenure would likely affect performance and governance of the bank. A change of guard would not only bring in fresh perspectives and approaches and an added enthusiasm, but excessive reliance on a long-running corporate leader will erode the robustness of the overall monitoring and governance mechanisms in the bank. While such rationales are entirely understandable, it remains open whether such a form of overarching regulation through hard tenure caps would be unduly restrictive in nature. Perhaps the regulation ought to be more targeted through a case-by-case approach rather than to tar all banks with the same brush.

Overall, the discussion paper is laudable as it considerably raises the game for bank governance in India, which has been the subject matter of discontent in recent years. The internationalisation of the governance standards by mapping it against the BCBS Principles will certainly demonstrate RBI’s aims. However, the success of these efforts will lie on the extent to which the regulator effectively enforces these norms. Appropriate enforcement sends a strong signal to the market, even more so than the quality of the substantive norms. Finally, while the discussion paper encompasses both private banks as well as nationalised banks, in the latter case there is an exception for specific statutes applicable to them as also where the Government of India, as a promoter, retains the ability to issue instructions to such banks. Such an approach also creates a chasm to begin with among governance of private banks and nationalised banks, where a level playing field ought to be the order of the day.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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