It is crucial that enough control is exercised on the constitution and functioning of the Board and key management. The board, once appointed by all shareholders, gets to manage the affairs of the bank.
The Reserve Bank of India (RBI) recently formed an internal working group to review the ownership and corporate structure for private banks in India. The committee now has been tasked with suggesting appropriate norms, keeping in mind the issue of excessive concentration of ownership and control, and having regard to international practices as well as domestic requirements
The group will also examine and review the eligibility criteria for individuals or entities to apply for a banking licence, and review the promoter shareholding norms at the initial licensing stage.
The move becomes a significant one in the backdrop of a sustained legal battle between itself and Uday Kotak wherein it allowed Kotak, the promoter of Kotak Mahindra Bank, to bring his stake down to 26 percent by August 2020 while capping his voting rights at 15 percent.
RBI licensing guidelines for private sector banks calls for promoters holding to be brought down in phases, first to 40 percent at the end of three years from the date of commencement of the business operations. Subsequently, it needs to be brought down to 20 percent at the end of 10 years and 15 percent at the end of 15 years.
I firmly believe that the review would provide an opportunity to harmonise norms applicable to banks set up at different time periods, irrespective of the date of commencement of business. It is important for the working group to take into account the key developments in the last few years, which have a bearing on the issue of ownership.
The RBI has over the years, brought about a plethora of guidelines relating to ownership of banks, under the belief that diversification of ownership is the primary pillar on which governance of banks can be improved. It is pertinent to note that this bevvy of regulation has at times seen contradicting and ambiguous terms. Nonetheless, implicit in this is the assumption that ownership is synonymous with voting rights.
The committee will also be tasked with suggesting appropriate norms, keeping in mind the issue of excessive concentration of ownership and control, and having regard to international practices as well as domestic requirements.
The guidelines framed over the years has primarily focused upon the diversified ownership for the promoters with a belief that such an ownership structure will lead to better governance at the banks.
It has been recognised widely, including by the RBI, that "banks are Special" as they not only accept and deploy a large amount of uncollateralised public fund in fiduciary, but they also leverage such funds through credit creation.
In an economy like India, banks are to be looked beyond as mere proxies of financial intermediation but they have an equally larger responsibility to lead overall financial sector development along with delivering the social agenda of the government. It is important to understand that the fiduciary responsibilities of running an institution, particularly a bank, is vested primarily with the Board of Directors (and not shareholders), under the regulation and supervision of the banking regulator. Therefore, the role of the bank's management becomes much more critical.
Hence, it is crucial that enough control is exercised on the constitution and functioning of the Board and key management. The board, once appointed by all shareholders, get to manage the affairs of the bank. Hence, it is important to regulate the appointment of Directors and key management. Under Indian corporate law, as with most other countries, it is the shareholders who vote by a majority for a director to be appointed. Hence, the shareholders' role is limited to voting.
Thus, if the control needs to be exercised on who gets appointed, as far as shareholders are concerned, one should ensure there is no "Squatting" by an owner. This is effectively achieved in two forms - one with a cap on voting rights and two with the number of directors such owner can appoint.
One must also learn from the events/happenings around us, be it the case of Yes Bank, or ILFS, wherein the diffused ownership structures with no identified owner has given rise to the management of these institutions going overboard with actions and creating a challenge for the rest of the stakeholders of these corporations. The thought behind the diversified/diffused ownership might be good but it is not serving the desired purpose. There should always be a "Skin in The Game" in the form of an entrepreneur/anchor that would keep the things on the right path under the supervision of the regulator.
The RBI's endeavour should be to create an environment which motivates high-quality Indian entrepreneurs who act as the anchor investor and build great banks while the control on banks should continue to be regulated by appropriate voting caps while RBI approvals for CEO appointment should continue.
The RBI has for long recognised that “control” over the operations of management needs to be monitored, and hence evolving policies and guidelines relating to management and Board structures for banks.
The bank ownership norms of late been subject to scrutiny by courts; therefore, there is a need to review bank ownership and shareholding guidelines in a comprehensive manner.
(The author is Independent Director in companies and former Chairman, BSE)
Follow our coverage of the coronavirus crisis here