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Govt orders banks to recast boards

Govt orders banks to recast boards
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First Published: Fri, Mar 16 2007. 12 39 AM IST
Updated: Fri, Mar 16 2007. 12 39 AM IST
In a move that several chief executives view as increasing the government’s grip on public-sector banks, the finance ministry has ordered the recasting of the boards of all listed public-sector banks, cutting down the number of shareholder directors by 50% while raising the number of government-appointed “independent” directors.
A finance ministry official defended the government’s move saying the actual objective was to infuse more professionalism by bringing in experts, albeit government-nominated ones, as directors.
“Anyway, the government is the majority owner of these banks and hence its grip is always strong,” said this official who did not want to be quoted.
In a related development, the government has also withdrawn its own directors as well as the Reserve Bank of India’s directors from the management committees of bank boards. This key board committee is responsible for clearing all big-ticket loans that cannot be cleared by the CEO of a bank. The loan-sanctioning power of the public-sector bank CEO is limited to Rs60 crore at small banks and Rs100 crore at big banks.
“By withdrawing the nominees of the government and the central bank from this committee, the government has demonstrated its resolve to give more freedom to the bank management. It does not want to get involve in the day-to-day functioning of banks,” said a government official familiar with the thinking behind the move.
The Reserve Bank, which is also India’s banking regulator, has also replaced its employees who are acting as bank directors with retired RBI employees. The rationale behind the RBI’s move is to try and limit its involvement in the day-to-day running of banks that it also seeks to regulate.
The Reserve Bank has been in favour of totally withdrawing its nominees from bank boards as it sees a conflict of interest between supervising a bank and monitoring its functions through a board representative. However, the Left parties, a partner in the coalition government at the Centre, have resisted the move.
“Making the retired central bankers directors on bank boards is actually a compromise following the suggestion of a high-level committee of Parliament,” says a person close to the central bank.
Public-sector banks account for a fourth of the Indian banking industry.
The board recast follows an amendment of an Act that governs the banks. Under the banking law, the government’s stake in public-sector banks cannot go down below 51%. Except Punjab & Sind Bank in Delhi, the Central Bank of India in Mumbai and the United Bank of India in Kolkata, all state-owned banks are listed on the stock market, with the government’s stake varying between 51.09% and 80%.
Until the new measure, a listed public-sector bank could have as many as six shareholder-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.
Now, the government will nominate an equal number of additional directors from various “interest groups,” such as agriculture, economy, cooperative sector, law and small-scale industries.
Bank CEOs, in private, say that while such nominees are technically independent professionals, in reality most of them are political appointments and normally belonging to the party in power. For instance, one so-called independent director who is set to join a large Mumbai-based bank is Rani Satish, the former minister of state for Kannada and Culture from the ruling Congress party.
As a result of the order, some public-sector bank heads have found themselves in the difficult position of having to tell shareholder directors, who were brought in by them to help bring outside expertise, to now leave the board.
“On what basis do I remove a shareholders’ nominee?” asks a visibly frustrated chairman of a very large public sector bank, who says the timing of the government decision is unfortunate because public-sector banks need more outside expertise at a time when they are trying to compete more aggressively with private banks that can attract a more diverse board.
As part of the changes, the government has also come 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.
Incidentally, the government decision to recast public sector bank boards does not technically abide by the capital market regulator’s norms on independent directors on the boards of listed entities. In accordance with Clause 49 of the listing norms, all listed corporations should have 50% independent directors on their boards.
“Even though these banks are listed entities, they are not governed by the Companies Act and they have been corporatized by an Act of Parliament. So, the capital-market regulator’s norms are not applicable to their board structure,” says M.R. Umarji, chief legal advisor of the Indian Banks’ Association, the premier bankers’ body in India. Umarji also points out that the shareholders’ rights in a public-sector bank are very different from that of a company. For instance, voting rights in public-sector banks do not reflect the actual stakeholding of an investor.
A bank board consists of the two full-time directors (the chairman-cum-managing director and an executive director); a government nominee and a retired RBI official; two representatives of employees and officers; a chartered accountant; nominees of shareholders and independent directors chosen by the government.
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First Published: Fri, Mar 16 2007. 12 39 AM IST
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