If RBI is right about Axis Bank, it’s not just the CEO that needs to go
In October 2017, under fire from investors for the large divergence between its own bad loan count and that of its regulator, Axis Bank Ltd’s chief executive officer (CEO) Shikha Sharma told The Economic Times, “We are obedient children. They (RBI) told us do it (make additional provisions). We did it.”
Ironically, less than six months later, the central bank has expressed its displeasure with the lender’s decision to continue with Sharma as CEO, according to reports. And like obedient children, Sharma and the bank’s board have fallen in line.
If the Reserve Bank of India (RBI) needs to step in and guide a bank on its accounting policies and key appointments, it gives rise to the suspicion that things at the bank are not what they seem. To start with, these events call to question the role of the bank’s board.
“Members of Axis Bank’s nomination and remuneration committee need to be really thick skinned to take the insult from RBI lying down. They should justify their stance or resign,” an executive at a foreign institutional investor said, requesting anonymity. The reference is to Sharma’s appointment, which was approved by the board less than a year ago.
Are we are making a mountain out of a molehill? That’s really a question for the central bank to answer. It may be feeling smug after delaying a hefty bonus Axis Bank had approved for Sharma last year, and now playing a role in her ouster; but it will be irresponsible on its part to not articulate what drove its decision. Surely, if RBI has serious concerns about the running of the bank, it can’t be content with just the resignation of its CEO. And if it doesn’t have serious enough concerns, then Sharma may well be justified in thinking she’s being made a scapegoat.
But that’s unlikely. Soon after Axis Bank announced Sharma’s decision to cut short her tenure, its shares rose by 5.5%. Investors were evidently relieved by the decision.
“We hope the new person is an outsider, allowing fresh thoughts and strategy, and rebuild credibility with investors. Across our investor meetings in the past few years, the one thing that was common was that a large percentage of investors were a little hesitant to be optimistic on Axis Bank—the inherent fear being that NPL (non-performing loan) ratios could increase sharply,” analysts at Jefferies India Pvt. Ltd said in a note to clients on Tuesday.
Indeed, it’s troubling that through the upheaval at Axis Bank in the past year, investors were more or less mute spectators. They have no one else to blame but themselves for tolerating the underperformance at Axis Bank. It’s easy to blame the board, but investors need to take equal blame for not engaging enough with independent directors. As the chart above shows, shares of Kotak Mahindra Bank Ltd, which is rumoured to be in merger talks with Axis Bank, have risen sharply in the past year. In the event of a merger, Axis Bank shareholders will now have to settle for a much lower swap ratio compared to, say, a year ago.
In short, none of the actors in the Axis Bank drama come out smelling of roses. We will be fooling ourselves in thinking that a resignation by the CEO makes everything right.
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