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Home / Opinion / Views /  New blood at Kotak revives old questions of governance

The debate over leadership succession in boardrooms is always borderline contentious, and it has now acquired fresh legs, thanks to an announcement made by Uday Kotak, CEO and vice-chairman of Kotak Mahindra Bank. It promises to focus some laser-sharp questions even at regulator Reserve Bank of India (RBI).

The genesis of the kerfuffle is an analysts' conference a few days ago where Kotak introduced his son Jay as the new co-head of the bank’s digital initiatives, aligning the young executive’s three-year experience with the existing head’s 17-year career. Jay’s three-year apprenticeship under the tutelage of Uday’s trusted executive director Shanti Ekambaram is his qualification. And, of course, a management degree from Harvard University.

Predictably, much chatter and gossip-mongering followed Uday’s announcement, especially because the conference witnessed both addressing each other as “my son" and “my father". Defenders of the young man’s promotion say that youth can provide invaluable inputs for the bank’s digital business; challengers are asking whether the appointment process was fair, evaluating Jay’s competence against other equally-qualified contenders, or whether his family name was the only criterion.

To be fair, the ballyhoo might be a bit premature because Jay is still not on the board or part of the core senior management group. Therefore, technically, neither the RBI nor the board’s nomination and remuneration committee have any oversight over his positions, salaries or even place in the management hierarchy. But, this sudden elevation – in which a three-year novitiate is considered eligible to head a business vertical – is being viewed as the harbinger of a future succession strategy, where bloodline will trump expertise, grey hair or even prudence.

Family forms the bedrock for succession planning in corporate India, but is rare in the Indian banking industry. There are exceptions, of course, with the Kumbakonam-based City Union Bank’s N. Kamakodi succeeding his father as the institution’s CEO. There was an unseemly spectacle in Yes Bank when founder and former CEO Rana Kapoor blocked board appointments of the co-founder’s family members. In the end, even Kapoor’s attempts to cling on to his chair ended rather indecorously.

Another exception needs to be mentioned here: EY India, one of the Big Four accounting firms in India, is structured as a partnership firm but the Indian managing partner, Rajiv Memani, succeeded his father Kashi Nath Memani and has been at the firm’s helm since 2004. He has a legitimate alibi though: he is elected by the firm’s other partners.

In the banking sector, though, appointments at the top level and succession depend solely on RBI’s approval. The central bank uses an ambiguous yardstick, called the “fit and proper" criterion, to approve appointments of both CEOs as well as board members. This indistinct and unspecified eligibility norm – enshrined through appropriate legislation – grants RBI unquestionable latitude and discretion.

These discretionary powers allow a better understanding of the leeway afforded to Uday Kotak, whether it was relaxing the maximum shareholding rule for him (his 26% versus the mandated 15% in 12 years) or allowing him an extended tenure as CEO (his 20 years against the norm of 12 years).

This is what informs all the speculation about whether RBI would be willing to suspend, or bend, its “fit and proper" benchmark for Jay Kotak when the decisive moment arrives in the future. However, to be fair, it might be a bit premature to ponder on that possibility now. A lot will also depend on the Kotak Mahindra Bank’s board composition at that moment and its ability to exercise the extant corporate governance norms.

Importantly, RBI is not the only beneficiary of this open-ended fit-and-proper condition. This clause provides an entry point for the political class in Delhi and various state capitals as well. The financial sector is an important conduit for campaign finance, and political capture of key positions within the banking system – whether as chief executives of banks or directors on boards of banks – plays a vital role in India’s electoral politics. This political-economy reality also plays on a key asymmetry in the Indian banking system: the fit-and-proper criteria applies only to private sector banks. In public sector banks, the government as the main shareholder has absolute and indisputable rights over appointments of bank chairmen, CEOs and executive directors. RBI has little or no say in the matter.

With limited autonomy at its disposal, RBI has to choose its battles. Given the government’s ability to influence appointments at the central bank, which includes promotions or term extensions for senior positions, the RBI occasionally succumbs to government pressure on relaxing rules; it is often even forced to ignore acts of indiscretions at commercial banks till it’s too late.

For example, it is well known how RBI was forced to relax its rules for a particular case of merger and restructuring in the banking sector, at the turn of this millennium, due to political pressure from New Delhi. Many cases of past bank failures showcase RBI’s prolonged light-touch approach, till the institutions reach the brink of collapse; this might seem inexplicable initially, but seems perfectly understandable when viewed against the political influence informing either the CEO’s appointment or the nature of the board composition.

Corporate governance norms in India’s banking sector are still a work-in-progress. The banking sector’s ability to move away from many of its past infirmities – such as burdensome loan defaults, or low productivity – will depend a lot on how both RBI and government decide on the future governance model. And that should include succession norms in private banks.

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