On
RBI has recently relooked at the corporate governance guidelines for banks in
The Circular revises provisions related to appointment of a bank's chairperson, tenure of directors, and constitution of committees in relation to private sector banks, small finance banks and wholly owned subsidiaries of foreign banks. Banks have time till
Appointment of chairperson of the Board of Directors (Board)
The Circular aims to enhance the independence of the Board by emphasizing the role of independent non-executive directors. The ability of an independent Board to 'stand apart' from inappropriate influences, to be free of managerial manipulations, and to be able to make correct and unbiased decision on a given issue, are key governance measures to protect stakeholders from frauds and scams. Building on this, banks will now be required to ensure that the chairperson of the Board is an independent director. If a bank does not have a designated chairperson then all meetings of the Board will be presided over by an independent director.
Banks such as
Banks, in comparison to other companies, need to provide protection to a much broader pool of stakeholders, particularly depositors who do not usually have the possibility to influence the banks' business decisions. This requires a much deeper involvement of the Board in strategic issues and risk oversight, as it must fully understand the risks the bank is exposed to and be able to monitor them effectively. This can be done through committees which provide necessary and effective support to the Board on matters related to audit, risk management, nomination and renumeration, stakeholder relationship, etc.
The Circular provides for mandatory three specialized board committees viz the audit committee, the risk management committee, and the nomination and renumeration committee, and also specifies the composition of these committees as well the qualification of its members. Under the Listing Regulations a listed bank is required to constitute audit committee, the risk management committee, and the nomination and renumeration committee and these committees are required to convene meetings once each year. The Circular mandates that all banks will be required to constitute an audit committee and the risk management committee (with meetings at least once every quarter) and nomination and renumeration committee (with meetings as required).
The Circular also calls for a distinct chairperson of each committee to prevent any interference of one chairperson into the chairmanship of other committees. This will decentralize the functions of audit, risk management, and nomination of directors, thereby preventing one-sided decisions of an autocratic management.
Age, tenure, and remunerations of non-executive directors
Under the Listing Regulations, no person can be appointed or continue as a non-executive director of a listed company after attaining the age of seventy-five years, unless a special resolution is passed justifying the reason for such appointment. The Circular now caps the age of non-executive directors of banks to seventy-five years post which no person will be allowed to continue in such position. Also, the total tenure of a non-executive director has been confined to eight years with an option of reappointment after a cooling period of three years. During the cooling period, the person can be appointed as a director in another bank.
At present, banks in private sector pay only sitting fees to non-executive directors, and no other remuneration is paid to them. To enable the banks to attract and retain professional and qualified non-executive directors to the Board, it is necessary that the non-executive directors are appropriately compensated. The Circular allows banks to pay renumeration to a non-executive director (other than the chairperson of the Board) to a maximum of INR 2,000,000 (Indian Rupees Two Million) per annum.
Tenure of managing director, whole-time directors and CEO
The Banking Regulation Act, 1949 allows for appointment of managing director or whole-time directors of banks for a maximum tenure of five years at a time. Banks may reappoint such individuals for another term not exceeding five years on each occasion, but not earlier than two years before expiry of their current term.
The Circular now reins back the total term of the managing director and CEO and whole-time directors by providing that such an office cannot be held for more than fifteen years. Thereafter, the individual will be eligible for reappointment as managing director and CEO or whole-term director in the same bank, if considered necessary and desirable by the Board, after a cooling period of three years. During this three-year cooling period, the individual shall not be appointed or associated with the bank or its group entities in any capacity, either directly or indirectly.
Managing director and CEO or whole-time director who is also a promoter/ major shareholder cannot hold these posts for more than twelve years. However, RBI may allow such individuals to continue up to fifteen years in extraordinary circumstances and at RBI's sole discretion. The Circular clarifies that those banks where the managing director and CEOs or whole-time directors have already completed their twelve / fifteen years tenure as on date of issuance of the Circular and had their terms extended, such managing director and CEOs or whole-time directors will be allowed to complete the remainder of their current term.
The new guidelines under the Circular will impact the current heads of several banks like
Our thoughts
The intent of the Circular is for banks to have a Board which is independent of the management and enriched with appropriate balance of skill, experience, and knowledge. The independent directors will be given the power to monitor and guide the Board committees relating to audit, risk management and nomination of other able and qualified directors, thereby improving corporate credibility and accountability.
The Circular also places several checks and balances when it comes to the term of directors and managing directors of the banks, especially when such managing directors are also promoters of the bank. It can be argued that an excessively long tenure of the executive directors may likely result in governance issues and the banks will be better benefited from changes at a regular interval for induction of new energy with a fresh perspective. Overall, the Circular seeks to enhance bank governance standards in
The information contained in this article is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes.
Mr
Acuity Law
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