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RBI Seeks Greater Separation Between Bank Ownership And Management

RBI has proposed greater separation between the owners of a bank and its management.

A sign for the Reserve Bank of India is displayed inside central bank’s headquarters in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)
A sign for the Reserve Bank of India is displayed inside central bank’s headquarters in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

The Reserve Bank of India, in a discussion paper, has proposed greater separation between the owners of a bank and its management. It has also suggested a maximum tenure for a professional chief executive officer.

The suggestions have been put forth in a discussion paper titled “Governance in Commercial Banks in India”, with suggestions and comments sought till July 15.

Promoter-CEOs

Any major shareholder or promoter of a bank, who holds the position of chief executive officer or whole-time director, may continue in that position only for 10 years, the discussion paper said, after which the person should step down and make way for a professional management.

The same principle will apply to whole-time directors as well.

To build a robust culture of sound governance practice, professional management of banks and to adopt the principle of separating ownership from management, it’s desirable to limit the tenure of the whole-time directors or CEOs. 
RBI Discussion Paper ‘Governance In Commercial Banks In India’

Professional CEOs

For professional CEOs or whole time directors, who are not promoters, the person may continue in the position for 15 consecutive years.

Once this tenure is completed, the person would have to step down from the position, for a minimum period of three years. During this period, the person cannot be associated with the bank in any form of management or in any advisory capacity.

Transition Plan

While the proposals are still in discussion stage, the RBI has proposed a transition plan should the suggestions become regulations.

“On the date of issuance of the guideline/directions on the matter by the Reserve Bank (basis this discussion paper), banks with WTDs or CEO who have completed 10 or 15 years shall have two years or up to the expiry of the current tenure, whichever is later, to identify and appoint a successor,” the discussion paper said.

Age Limit Unchanged

The central bank also reiterated that the CEO or whole time director of the bank will be subject to an upper age limit of 70 years. After this, the CEO or whole time director will not be allowed to continue in the position at the bank.

The appointment, re-appointment or termination of whole-time directors or the CEO shall only be permitted with the RBI’s prior approval. Any re-appointment request must be sent at least six months prior to the completion of the current tenure of whole-time directors or the CEO. In case of a new CEO or whole-time director being appointed at the bank, the request must be sent at least four months before completion of the tenure of the current official.

The application of appointment must have names of two persons in the order of preference, the RBI said.

The process for identification of each senior management personnel must be vested with the nomination and remuneration committee of the board with the approval of the board. The identification shall also include assessment of “fit and proper” requirement as carried out for directors of the board, the RBI proposed in its discussion paper.

Focusing On Board Governance

In addition to the suggested changes to management tenures, the RBI has also suggested tweaks to board governance. The overall objective, the RBI says, is to enable boards to set the culture and values of the organization, recognize and manage conflicts of interest, set the appetite for risk and manage risks within that appetite, and improve the supervisory oversight of senior management, said Morgan Stanley in a note.

The suggestions include:

  • The board of a bank shall comprise no fewer than six directors and no more than 15 directors, with the majority being independent directors.
  • The Chairman of the Board should be an independent director.
  • All meetings of the board should have a majority of independent director.
  • The board shall not have more than three directors who are entitled to exercise more than 20% of the total voting rights of all the shareholders of the bank.
  • The total continuous tenure of the non-executive director, including the tenure as a chair, shall not exceed eight years (with potential reappointment after a minimum gap of three years.
The board of a bank has overall responsibility for the bank, including culture, governance framework and approving as well as overseeing management’s implementation of the bank’s strategic objectives. Directors have responsibilities to the bank’s overall interests, regardless of who appoints them.  
RBI Discussion Paper ‘Governance In Commercial Banks In India’