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Published on 10/07/2020 12:03:27 PM | Source: Emkay Global Financial Services Ltd.

Banking Sector Update - Corporate Governance Guidelines May Lead To Management Rejig In Some Private Banks By Emkay Global

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Corporate governance guidelines may lead to management rejig in someprivate banks

Comprehensive and clear corporate governance guidelines is a right step in the wake of recent debacles in the financial sector: The RBI has on June 11, 2020issuedthe long-awaited discussion paper on ‘Corporate governance in Commercial banks in India’, a much needed reform, particularly in the wake of recent failuresinvolving Yes/PMC Bank and earlierICICI/Axis. The key focus of the guidelines is enhancing independence and responsibilities of the board, term of MD & CEOs, conflictsof interest and the overall risk governance framework. The guidelines will applyto private banks,including SFBs, payment banks, foreign banks (theirsubsidiaries), PSBs and RRBs, but not to co-operative banks and NBFCs/HFCs,for whom the RBI must come up with separate guidelines. In the past, the RBI hadissued various guidelines on governance in bank boards,including for PSBs,leading to split of CMD position (based on the P J Nayak committee report), but it seems that this time the RBI intends to release comprehensive guidelines in line with the changing environment.

 

Focus on independence/responsibilities of board/senior management and strengthening the risk management framework: The ultimate responsibility for ensuring accountability ofthe misconduct lies with the board and thus, thefocus has been given on increasing the responsibilities and independence of the board, apart from composition (6-15 directors with majority independent directors) and qualification of board members. The RBI has also recommended havinga formal written ‘conflicts of interest’ policy and regular assessment of –alone or with the assistance of external experts –of the board, its committees and individual board members. The total continuous tenure of an NED onthe board, including the tenure as a Chair shall not exceed 8yrs and max age has been restricted to 70 yrs,with no deviation allowed, thereby putting to rest the debate around this issue (we believe this was also applied without a formal policy in case of Romesh Sobti of IndusInd Bank). To avoid conflict of interest, a functionary in non-revenue generating function shall not be sub-ordinate to a revenue generating functionary, but the head of a non-revenue generating function within first line of defencecan report to the CEO of the bank. We believe that this guideline in terms of reporting of non-revenue generating functionary (eg risk, audit & so on) is positive, which otherwise has been misaligned in some banks in the past resulting in severeconflictsof interest.

Continuous term for MD & CEO either being promoteror majority stake holder restricted at 10 years, else 15 years: The RBI has prescribed a max 10 years continuous term for a wholetime director (WTD) or CEO being either a promoter or major stake holder, while 15 years for others. We believe this is a very important governance measure to separate ownership and management once the reasonable hand holding period of 10 years is over, though may hurt the top management premiums in some of the affected banks. One may argue that promoter-cum management model has worked very well for a few banks/corporates, but the same has led to gross mismanagement in the past (for e.g.: Yes Bank, GTB, BOR) leading to bank failures, which otherwise are trustees of public money. Among the banks, we believe the term cap of 10 yrs may impact the term of Uday Kotak,promoter cum MD & CEO of Kotak Mahindra Bank,ending in Dec-21 and Sanjay Agarwal of AU SFB (recently incorporated in 2017). City Union Bank does not have identifiable promoters, but it will be interesting to see whether current MD & CEO Kamakodi (holding higher stake along with his family/associates) will be subjected to this rule of 10 yrs or not in his next term extension (post May-23). It will be interesting to see how these rules will apply for Bandhan and Equitas SFB,being promoted by NOFHC, but defacto identifiable promoters holding MD & CEO positions. Similarly IDFCFirst Bank’s promoter is IDFC, but the current MD & CEO is the promoter of the erstwhile Capital First and thus, it will be interesting to see whether he will be subject to 10 or 15 yrs term. However, the term limit of 15 yrs for non-promoter/non-major stake holding MD & CEO has for once removed concerns around the term extension of MD & CEOs in DCB, RBL and Federal Bank (term was recently renewed for 1 year till Oct’20 & is under reconsideration by the RBI).

 

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