Mumbai: Just weeks after the finance ministry ordered the recast of boards at public-sector banks, the forced exodus has meant the departure of several independent—and shareholder-elected—directors, several of whom are highly accomplished in their respective fields.
A Hindustan Times review of 10 public-sector banks shows that 17 shareholder-elected directors have been asked to leave the boards in the last few weeks.
Prominent among those forced out of the boards include former director of Indian Institute of Management Ahmedabad, Pradip N. Khandwalla; former Nabard chairman P. Kotaiah and well-known management consultant Tarun Sheth.
“Globally, more independent directors is the norm, not less,” says Khandwalla, who was a director at Bank of Baroda. “The minority shareholders should have more directors who can speak up for them... the independence of the board is compromised.”
Adds Sheth, who was a director with Bank of India: “It is not in good taste, after contesting against 10 others and winning the election for the post.”
Mint, which is also published by HT Media Ltd, the owner of Hindustan Times, first reported on 16 March that the government, the majority owner of public-sector banks, which account for one-fourth of India’s banking industry, had ordered the banks to cut down the number of shareholder directors by 50% while raising the number of government-appointed “independent” directors. A finance ministry official told Mint that the government’s objective in doing so was to infuse “more” professionalism by bringing in experts, albeit government-nominated ones, as directors. There are 16 listed public-sector banks.
Until the amendment in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, a listed public-sector bank could have as many as six shareholder-elected directors. This has been reduced to a maximum of three such directors, depending on the extent of public shareholding in the bank, but the overall board size is to remain unchanged.
The idea being the government will now nominate an equal number of additional directors from various “interest groups”, such as agriculture, economy, cooperative sector, law and small-scale industries.
In its directive to the banks, the government also came up with the procedure that banks ought to follow in removing shareholder directors, starting with those directors who have spent the most time on the board. In the case of two such directors joining on the same date, the one who is older will be axed, the government said. The amended Act has expressly barred these directors from claiming compensation for any remaining tenure.
Incidentally, the government move to recast public-sector bank boards does not technically abide by the capital market regulator’s norms on independent directors on boards of listed entities. Clause 49 of the listing norms says that all listed companies should have 50% independent directors on their boards.
“These amendments ensure that it is impossible for listed public-sector banks to comply with Clause 49,” says S.N. Ananthasubramanian, a practising company secretary.
But the banks are unlikely to run afoul of the Securities & Exchange Board of India (Sebi) because, even though they are listed entities, they are not governed by the Companies Act and have been corporatized by an Act of Parliament. Even shareholder rights in public-sector banks are different from other listed companies. For instance, voting rights in public-sector banks do not reflect the actual stakeholding of an investor.
Responding to a written question about the differential treatment, the Reserve Bank of India, which is India’s banking regulator, wrote: “The provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, are statutory in nature, which have overriding effect over the rules/regulations/guidelines issued by any other authority. The banks have to comply with this requirement.” A Sebi official also concurred with that view regarding the applicability of its own rules on listed entities to public-sector banks.
“I don’t know whether the government has the right to remove (shareholder-elected directors),” says Sheth. “But I do not see any logic in retiring the senior-most of the elected directors first.”
Heads of the public-sector banks say they have no choice. “We are complying with the extraordinary gazette notification issued on 19 February on the issue,” was all that Allahabad Bank CMD A.C. Mahajan would say.
Shyam Bahadur Kunwar, a chartered accountant who was on the bank’s board, is however not mincing his words. “The move is unilateral, illegal and unconstitutional,” he insists. “You have no provision in the constitution to reduce the numbers in a body by age. Either you can dissolve the body or assembly or continue with it. An elected representative cannot be removed by the criterion of age, but by the number of votes they have garnered,” he adds.
Privately, some public-sector bank heads say they are very frustrated by the government’s diktat because it will further handicap their ability to tap outside talent at the board level at a time when their private-sector peers can attract directors from a variety of industries.
They are also concerned about the signal it sends in terms of corporate governance.
“I am not bothered about the directorship,” says Kotaiah, who was on the board of Bank of India. “But is it appropriate when seen from the shareholders’ perspective... and from the corporate governance angle?”